Economics Questions

Answer the following questions. Responses should be congruent with Microeconomic theories.

1) Through visual light-beam signals, “Light Houses” are used to facilitate safe passage and navigation in coastal communities. Last year, the local government of a Northeastern coastal community built five new Light Houses. Alexander, the Mayor of the city, being a staunch proponent of free market principles, decided to privatize these Light Houses. As such, he put them up for bids by private sector. To his surprise, after one year, no bids came in. Disappointed, Mayor Alexander comes to you for advise. How would you explain this phenomenon to him and what would you recommend?


2) S-Jighil Optic Inc. is a seller of digital camera in the US market. The company’s management is very confident about the quality of the camera and in fact knows that their camera is superior to all others in the market. The public, however, does not fully share their confidence in the product and accordingly the sales figures are far short of expected targets. An economic consultant informs the management that this is not an unexpected result, and suggests that the company should offer a policy of “three year, no-questions-asked replacement of any defective camera.” Based on the consultant’s recommendation, what does he believe to be the cause of low sales and how his recommendation can remedy the situation?


3) Currently, “Only Bridge Company” is operating as a monopoly in a small town. The bridge is over the main river in the city and connects the two sides. The current tool charge is $5 per trip, while the marginal cost of a car passing the bridge is estimated to be only 10 cents. In the last meeting of the City Council, some members argued that the bridge is very important for the city’s economic life and the current toll is unreasonably high and exploitative. That is, a private company must not be allowed to take advantage of the citizens. Other members, however, argue that in the first place, the price is the outcome of a free market and as such fair and reasonable. Secondly, the nature of the industry such that it is best served by a single provider. After all, “how many bridges a small town needs or can support?” Take a position on this issue and present an economic explanation and a solution to the present problem.


4) Heva is a physician who has her practice in a newly built duplex. Last week, she found out that Bijoux has signed a lease for the adjacent unit and plans to open a Tae Kwon Do School there. The two practices, of course, are not compatible due to the noise from the Tae Kwon Do School. Soundproofing her office will cost Heva $20,000, and relocation is not feasible for her. Bijoux on the other hand, can lease an almost identical building across the street at the same cost as the one he already leased. Moving across the street will cost Bijoux $3,000 in moving expenses and penalty for breaking the lease. There will be no other adverse effect, financially or otherwise, on Bijoux’s business. Heva approaches Bijoux and offers him to pay the $3,000 costs plus $3,000 in bonus in exchange for him to move his Tae Kwon Do School across the street where it will have no adverse effect on Heva’s practice. Bijoux recognizing Heva’s predicament turns down this offer and asks for $15,000 total compensation for him to break the lease and move across the street. Not able to reach an agreement, Heva files a lawsuit to force Bijoux to comply with her request.
A) What is this situation called?      
B) If you were the judge, how would you rule? Why?
C) To avoid this situation from happening in the future, what would you recommend?

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1. In this case, light houses represent public goods since they are non-rival and non-excludable in consumption. This creates the free-rider problem as people can benefit from the good without paying for it. Lighthouses indicate the locations along the coastline so that the ships which pass through those points can sail safely. Therefore, the ship captain can pass without paying anything due to the non-excludability nature of the public good. Therefore, private ownership of lighthouses becomes difficult as these do not appear profitable and the Government has to provide for these public goods....