Questions: 1A) If MU Café, which is a monopolistically competitive firm, is making a positive profit in the short run, why might this profit become zero in the long run? 1B) If MU Café wants to keep the profit positive in the long run, what can it do? Provide ONE suggestion and briefly explain. 1C) What externality problem do you expect in the market for plastic bags? How does the government correct the inefficiency of the market? Explain in detail and diagram.

1. There are two brands of cigarettes X, Y. The demand for each is as follows: Qx = 80 - 2p   Qy = 60 - 0.5p Assume that the marginal cost of producing cigarette X is $10, the marginal cost of producing cigarette Y is $8, and that the market for both cigarettes is perfectly competitive. Assume that each pack of cigarette X smoked does $5 worth of health damage to the smoker, and a total of $4 worth of health damage to the smoker’s neighbors via second-hand smoke. Each pack of cigarette Y smoked does $6 worth of health damage to the smoker, and $5 health damage to the smoker’s neighbors. (a) Explain why the public supply curves differ from the private supply curves, and how this represents the externality from second-hand smoke. Highlight the area(s) of your diagram that represents a social loss. (b) Calculate the social loss for both. (c) Suppose the government decides to pursue a Pigouvian solution to eliminate social loss. What's amount of tax or subsidy would the government…

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7. Comparing monopoly and perfect competition Consider the daily market for hot dogs in a small city. Suppose that this market is in long-run competitive equilibrium, with many hot dog stands in the city, each one selling the same kind of hot dogs. Therefore, each vendor is a price taker and possesses no market power. The following graph shows the demand (D) and supply curves (S= MC) in the market for hot dogs. Place the black point (plus symbol) on the graph to indicate the market price and quantity that will result from perfect competition. PRICE AND COSTS (Dollars per hot dog) 0.5 བྷྲ ༷ ྴ་ཤཱ་བྷ་ཛྙྰ་བླླ་ཤཱ་བ། 5.0 4.5 4.0 3.5 3.0 2.5 2.0 1.0 0 0 30 60 90 Perfect Competition S=MC D 120 150 180 210 240 270 300 QUANTITY (Hot dogs) PC Outcome Assume that one of the hot dog vendors successfully lobbies the city council to obtain the exclusive right to sell hot dogs within the city limits. This firm buys up all the rest of the hot dog vendors in the city and operates as a monopoly. Assume…