0 · Exam Blueprintread first

Final exam = 50% of the subject mark, 2 hours, and a HURDLE — you must score ≥ 50% on the exam itself to pass the subject, no matter your assignment marks.

This is the whole subject on two pages, with the real worked numbers. The prize isn't recall — it's recognising which model and which formula instantly, so revise by re-deriving each diagram until it's reflex.

Format: roughly half MCQ (one-correct / "which is wrong" / select-all-areas), half structured calc + graph, multi-part (a)–(e) with mark splits.

1 · FoundationsW2

Scarcity · wants > resources ⇒ choice. Cost–benefit · act iff MB ≥ MC; think at the margin. Opp cost · value of next-best forgone alternative. Sunk cost · already spent & unrecoverable ⇒ opp cost 0 ⇒ ignore.

Fixed ≠ sunk: fixed cost is avoidable by stopping production (positive opp cost, matters); sunk cannot be recovered (irrelevant). R&D = fixed + sunk; marketing = fixed not sunk.

4 thinking pitfalls

1. Absolute $ vs %
2. Ignoring opp cost (esp. time)
3. Sunk-cost fallacy
4. Failing to think at the margin

Positive vs normative

Positive · descriptive, testable. Normative · prescriptive, value-laden.

PPF

Max output combos given resources & tech. Slope = −MRT = opp cost in y-units. Bowed-out ⇒ increasing opp cost; linear ⇒ constant. Inside = inefficient · on = efficient · outside = unattainable. Growth/tech shifts PPF out.

Read slope as opp costgive up 20 Y to gain 10 X
⇒ opp cost of 1 X = 2 Y

Economic vs accounting cost

Economic cost = accounting cost + opportunity cost of resources used. Economic profit nets out opp cost; zero economic profit = a normal return (the resource just covers its best alternative use). Exam loves the gap between the two.

Short run vs long run

SR · at least one input fixed (not a fixed length of time). LR · all inputs variable, free entry/exit. Definitions, not calendar time.

Quick definitions

Marginal · one-more-unit. Average · per-unit. Ceteris paribus · all else equal. Endogenous · set in the model · Exogenous · given. Stock · level at a point · Flow · per period. Real · inflation-adjusted · Nominal · current $.

Marginal decision · worked

Act while MB ≥ MCstudy hr: MB=$8 > MC=$5 ⇒ do it
next hr: MB=$4 < MC=$5 ⇒ stop · optimum where MB = MC

Decisions are made at the margin, never on totals or averages — the classic "should I do one more?" test.

2 · Comparative AdvantageRicardo 1817

Specialise in the good with lower opp cost, then trade ⇒ both consume beyond their PPF. Driven by comparative, not absolute, advantage.

Worked · Australia vs NZ

Output per worker-hour:

Aus has absolute advantage in both (6>1, 3>2). But OC(wheat): Aus ½ < NZ 2 ⇒ Aus → wheat. OC(cloth): NZ ½ < Aus 2 ⇒ NZ → cloth.

Gains live between the two opp costs: trade ratio between ½ and 2 wheat per cloth (e.g. 1:1) ⇒ both consume beyond their PPF.

3 · Demand & SupplyW3

Law of demand P↑⇒Q_d↓ (sub + income effects). Law of supply P↑⇒Q_s↑ (rising MC).

Demand shifters · 6

• Income: normal D↑ / inferior D↓
• Related P: subs (P_S↑⇒D↑) · compl. (P_C↑⇒D↓)
• Tastes · preferences
• Expected P (P^e↑⇒D_now↑)
• # buyers · demographics
• Information / quality signals

Supply shifters · 6

• Input prices · Technology (S→right)
• Taxes (S left) / subsidies (S right)
• # sellers · entry/exit
• Expected P (P^e↑⇒S_now↓)
• Natural events · regulation

Equilibrium & comparative statics

P*,Q* solve Q_d(P)=Q_s(P). P<P* ⇒ shortage (P bid up); P>P* ⇒ surplus (P falls).

Worked · equilibrium from equations

Q_s = 2P · Q_d = 100 − 2P
2P = 100 − 2P ⇒ 4P = 100
⇒ P* = 25, Q* = 50

Always set Q_d = Q_s, solve for P*, back-substitute for Q*. The linear-equation setup is the spine of nearly every calc question.

Substitutes vs complements

Substitutes · P of one ↑ ⇒ D for the other ↑ (Coke/Pepsi). Complements · P of one ↑ ⇒ D for the other ↓ (cars/petrol). Test via the sign of cross-price elasticity (col 3).

How a shortage clears

1. P<P* ⇒ Q_d > Q_s (shortage)
2. Buyers bid up P
3. Q_d↓ along D, Q_s↑ along S
4. Stops at P* where Q_d = Q_s

4 · ElasticityW4

PED · midpoint (arc)PED = %ΔQ_d / %ΔP
%Δ = (X₂−X₁) ÷ ((X₁+X₂)/2)
point: PED = (dQ/dP)·(P/Q)

Worked · AFL tickets

Q_d = 200,000 − 10,000P.

• P=$10 ⇒ Q=100k ⇒ PED ≈ −1 (unit) ⇒ TR-maximising; any price move cuts TR.
• P=$15 ⇒ Q=50k ⇒ PED ≈ −3 (elastic) ⇒ raising P cuts TR.

Determinants · 5

• Substitutes availability
• Time (LR > SR)
• Necessity vs luxury · share of income
• Definition breadth (Coke < soft drink < beverage)

YED%ΔQ/%ΔY · >1 luxury · 0–1 nec · <0 inferior

XED%ΔQ_A/%ΔP_B · >0 sub · <0 compl · =0 unrelated

PES%ΔQ_s/%ΔP · input mobility, time, spare capacity

Elasticity along a linear D

On a straight-line demand curve PED varies: elastic at the top (high P, low Q), unit-elastic at the midpoint, inelastic at the bottom. So slope ≠ elasticity. TR peaks exactly at the unit-elastic midpoint.

Cross-price matrix · reading it

Own-price (diagonal): |E|>1 elastic, <1 inelastic. Off-diagonal: XED>0 ⇒ substitutes, XED<0 ⇒ complements. E.g. cats |−3| elastic; kittens |−0.8| & dogs |−0.5| inelastic.

Total-revenue rule

To raise revenue: cut price if elastic, raise price if inelastic.

Applications

Bumper-harvest paradox: D inelastic ⇒ a big harvest (S→right) drops P a lot, Q little ⇒ farm revenue falls. Tax design: tax inelastic goods (tobacco, fuel) ⇒ revenue with small DWL. Time: petrol inelastic SR, elastic LR (substitutes appear).

The hinge to policy: the less-elastic side bears more of a tax (col 5); DWL is larger when both curves are elastic. Elasticity links the demand model to every welfare result.

5 · Consumer ChoiceW4

Utility U(x,y) ranks bundles. MU_x=∂U/∂x. Diminishing MU: each extra unit adds less.

Indifference curves

• Same-U combos; downward sloping
• MRS_xy = −slope = MU_x/MU_y
• Convex ⇒ diminishing MRS · ICs never cross

Budget lineP_xx + P_yy = I · slope = −P_x/P_y

Optimum (tangency)MRS_xy = P_x/P_y
⇔ MU_x/P_x = MU_y/P_y

"Equal bang per buck" across all goods at the optimum.

Income & substitution effects

P_x↓: (i) sub effect — x cheaper rel. y, buy more x; (ii) income effect — real income ↑.

• Normal: both ↑ ⇒ D_x↑
• Inferior: sub ↑, income ↓
• Giffen: inferior + income dominates ⇒ D upward-sloping

6 · Welfare & SurplusW4

CS · area under D, above P. PS · area above S, below P. TS = CS + PS + GovRev.

Linear D&S surplusCS = ½·Q*·(P_max−P*)
PS = ½·Q*·(P*−P_min)

Worked · P*=18, Q*=36

Linear D & S meeting at P*=18, Q*=36 with D-intercept 36 & S-intercept 0:

CS = ½·36·(36−18) = 324
PS = ½·36·(18−0) = 324
TS = 648

Efficiency ≠ equity. Competitive eq. is Pareto-efficient but may be inequitable.

Surplus from a schedule

CS = Σ (marginal value − P) over units bought; PS = Σ (P − marginal cost) over units sold. Worked: at P=$4 a buyer values units at $7,$5 ⇒ CS = 3+1 = $4; a seller's costs are $1,$3 ⇒ PS = 3+1 = $4.

DWL sources · 5

• Per-unit tax · binding ceiling/floor
• Quota · tariff
• Monopoly / market power (P>MC)
• Externalities (private ≠ social)
• Under-provision of public goods

Every DWL is a triangle of mutually-beneficial trades that don't happen — width = ΔQ, height = the wedge.

Worked · surplus after a demand fall

from P*=18, Q*=36 (CS=PS=324)
demand falls 12 units ⇒ P*=15, Q*=30
⇒ CS = PS = 225 · TS = 450

Fewer trades ⇒ surplus shrinks on both sides; the drop in TS is the gains-from-trade no longer realised.

Demand = marginal benefit; supply = marginal cost. The height gap D−S on each unit is its surplus; sum to Q*. Beyond Q*, MC > MB ⇒ extra trades destroy value — the source of every DWL.

7 · The Signature Chain★ exam favourite

The single most-repeated exam problem: solve eq. → elasticities → CS/PS → tax → DWL.

GivenQ_D = 100 − 5P · Q_S = 5P

• Eq: 100−5P = 5P ⇒ P*=10, Q*=50
• Elasticity: E_d=(−5)(10/50)=−1 · E_s=(5)(10/50)=1
• Surplus: D-intercept P=20 ⇒ CS=(20−10)·50/2=250; PS=10·50/2=250
• Tax t=$2/unit: 100−5(P+2)=5P ⇒ seller gets P_s=9, buyer pays P_b=11, Q=45
• Gov rev = 2·45 = 90
• DWL = ½·t·ΔQ = ½·2·(50−45) = 5

Tax DWLDWL = ½·t·(Q*−Q_t) · grows ∝ t²

8 · Govt InterventionW5

Per-unit tax · t

Tax on sellers ⇒ S up by t; on buyers ⇒ D down by t. Outcome identical — incidence is independent of the statutory side.

Incidence sharebuyer = PES/(PES+|PED|)
seller = |PED|/(PES+|PED|)

Burden falls on the less-elastic side. Perfectly inelastic D ⇒ buyers bear all of t.

Subsidy · s

Mirror of tax: lowers P_b, raises P_s, raises Q. The more-elastic side captures more of the subsidy. Creates DWL via over-production — unless correcting a positive externality.

Price controls

• Ceiling < P* ⇒ shortage, queues, black market, quality erosion
• Floor > P* ⇒ surplus (min wage ⇒ unemployment)
• Binding only if ceiling < P* or floor > P*

Worked · subsidy incidence

Q_d=700−100P, Q_s=400+50P ⇒ P*=2, Q*=500
$1 subsidy to producers ⇒ buyer price $1.67
buyer share = 2−1.67 = $0.33 (⅓)
gov cost = $1 × 533 ≈ $533

Demand here is more elastic (ε_d=0.4 > ε_s=0.2) so buyers capture more of the subsidy.

Govt tools · classify

*unless correcting an externality.

Worked · binding price floor

Q_d=700−100P, Q_s=400+50P ⇒ P*=2, Q*=500
floor at $3 ⇒ Q_d=400, Q_s=550 ⇒ surplus 150

A floor binds only above P*; a ceiling only below. Quantity traded = the short side of the market.

9 · Quota · Tariff · TradeW6

Quota Q̄ < Q*: raises P, transfers surplus to quota holders, DWL, no gov revenue.

Small open economy: face world price P_w. P_w<P_aut ⇒ import; P_w>P_aut ⇒ export. Trade ⇒ TS rises, distribution shifts.

Tariff τ on imports: P_d=P_w+τ ⇒ CS↓, PS↑, gov rev↑, net DWL = production △ + consumption △.

Tariff vs production subsidy (raise domestic Q by the same amount): tariff DWL = B+E (distorts production and consumption); subsidy DWL = B only ⇒ subsidy is the more efficient tool.

Worked · small open economy

Q_D=12−3P, Q_s=P
P_w=1 ⇒ Q_s=1, Q_d=9 ⇒ import 8, CS=13.5
P_w=4 ⇒ Q_s=4, Q_d=0 ⇒ export 4, CS=0

Higher world price helps domestic producers, prices out domestic consumers.

10 · Worked · Min WageW4–5

L_D=2000−50W, L_S=1000+50W.

• Free eq: W*=10, L*=1500
• Min wage $15 ⇒ L_D=1250, L_S=1750 ⇒ employment = 1250 (500 unemployed)
• Own-wage E_d at W=15: (−50)(15/1250)=−0.6
• Workers +$5625 · employers −$6875 · DWL = −$1250

Employment fall is larger when labour demand is elastic.

11 · Costs & ProductionW8

IdentitiesTC=FC+VC · ATC=TC/Q · AVC=VC/Q
AFC=FC/Q (→0) · MC=dTC/dQ=dVC/dQ

• MC cuts AVC & ATC at their minima (MC<AC pulls AC down; MC>AC pulls up)
• ATC = AVC + AFC ⇒ converge as Q↑ · U-shaped from diminishing MP

MP_L=ΔQ/ΔL · MP cuts AP at AP max. Diminishing MP (SR, K fixed). Returns to scale (LR, scale all inputs): IRS⇒AC↓ · CRS⇒AC flat · DRS⇒AC↑. RTS (LR) ≠ diminishing MP (SR).

Worked · cubic TCTC=10+5Q−Q²+0.2Q³ ⇒ MC=5−2Q+0.6Q²
min AVC at Q=2.5 ⇒ AVC=3.75

12 · Side 1 Take-aways

1. Spot which model + formula instantly
2. Shifts ≠ movements along
3. Opp cost per unit; rank by it, not raw output
4. Tax/DWL uses ΔQ; burden on less-elastic side
5. MC cuts ATC at min; P=MC ⇒ allocative efficiency

13 · Side-1 formula belt

opp cost(X) = ΔY/ΔX · PED = (dQ/dP)(P/Q)
MRS = MU_x/MU_y · opt MU_x/P_x = MU_y/P_y
CS = ½Q*(P_max−P*) · PS = ½Q*(P*−P_min)
MC = dTC/dQ · ATC_min ⇔ MC = ATC
DWL_tax = ½·t·(Q*−Q_t) · incidence = PES/(PES+|PED|)

Recipe: set Q_d=Q_s ⇒ P*,Q* → elasticity → CS/PS → impose policy → recompute Q → DWL. Same chain, fresh numbers.

13 · Profit Max & ShutdownW9

Universal ruleChoose Q where MR = MC
π = TR − TC = (P − ATC)·Q

Shutdown vs exit: SR shutdown still pays FC (reversible); LR exit permanent (π=0 at Q=0). Worked: ATC=12, MC=10, AVC=9, P=10 ⇒ P=MC and P>AVC ⇒ keep producing (loss $2×Q is less than shutting).

14 · Perfect CompetitionW9

4 assumptions ⇒ price-taker

1. Many small buyers & sellers
2. Homogeneous product
3. Free entry & exit
4. Perfect information

D = MR = AR = P (horizontal). SR: firm Q* where P = MC (rising arm); SR supply = MC above min AVC; π can be +, 0, −.

Long-run equilibrium (LRCE)

• Entry/exit drives π → 0 (normal return)
• P = MC = min ATC
• Each firm at efficient scale; productively & allocatively efficient

Worked · # firmsMkt D: Q=1000−P · LR P=min ATC=$5
each firm q=5 ⇒ Q=995 ⇒ N = 995/5 = 199 firms

LR industry supply: constant-cost ⇒ flat; increasing-cost (input P↑) ⇒ upward; decreasing-cost ⇒ downward (rare).

SR → LR adjustment

• π > 0 ⇒ entry ⇒ S→right ⇒ P↓ to min ATC
• π < 0 ⇒ exit ⇒ S→left ⇒ P↑ to min ATC
• LRCE: P = MC = min ATC, π = 0

A cost-saving technology adopted in SR: P stays, firm count fixed ⇒ profits rise; only in LR does entry push P down to the new min ATC.

Choosing a production method

High-FC / low-MC methods win at high output; low-FC / high-MC win at low output. Compare total cost at the relevant Q; the ATC curves cross. (Pillow makers, taxi vs Uber.)

PC firm diagram cheats

Shade the profit/loss rectangle between P and ATC at Q*. SR supply = the MC curve above min AVC.

14b · Efficiency at a glance

Two efficienciesProductive: P = min ATC
Allocative: P = MC = MSB = MSC
PC long run hits both; monopoly neither

Invisible hand (Smith): self-interest + the price signal push Q to where MSB = MSC ⇒ total surplus maximised. Any wedge — tax, market power, externality — opens a DWL triangle.

15 · MonopolyW9–10

Sources of power · 4

1. Legal barriers · patents, licences
2. Natural monopoly · IRS / large FC
3. Exclusive resource control
4. Network effects

Faces the market D (downward) ⇒ to sell more must lower P on all units ⇒ MR < P for Q>0.

Linear MR ruleP = a − bQ ⇒ MR = a − 2bQ
(same intercept, twice the slope)

Choose Q* where MR = MC; charge P off the demand curve at Q*.

Worked · P = 16 − Q, TC = Q²

MR = 16−2Q · MC = 2Q
16−2Q = 2Q ⇒ Q*=4, P*=12
TR=48, TC=16 ⇒ π = 32

Lerner mark-up(P − MC)/P = 1/|PED|
μ = P − MC · less elastic ⇒ bigger mark-up

vs competition: P_m>P_c, Q_m<Q_c, π_m>0. Allocatively inefficient (P>MC).

16 · Monopoly Welfare & DWL

Monopolist has no supply curve; PS = area above MC, below P. DWL = lost trades where WTP > MC over Q_m→Q_c.

Worked · P = 12 − ½Q, TC = Q²

MR=12−Q · MC=2Q
Monopoly: 12−Q=2Q ⇒ Q=4, P=10, π=24
Competitive (P=MC): 12−½Q=2Q ⇒ Q_c=4.8, P_c=9.6
ΔCS=−1.76 · ΔPS=+0.96
DWL = ½·(4.8−4)·(10−8) = 0.80

Natural monopoly regulation

• P=MC ⇒ allocatively best but firm loss (P<ATC)
• P=ATC ⇒ break-even, small residual DWL
• Two-part tariff: fixed fee + per-unit MC

Strong natural monopoly (AC & MC both declining): P=MC sits below ATC ⇒ loss ⇒ infeasible. Optimal regulated price = P_R = ATC (break-even, mark-up minimised). Order on the axis: Q_m < Q_R < Q_c.

MR table intuition

As the monopolist cuts P to sell one more unit, the price effect (lower P on all prior units) drags MR below P; MR can even go negative once the price effect beats the output effect — that's the inelastic region of demand, where the firm never operates.

Welfare summary

• CS shrinks; part transfers to PS, part becomes DWL
• Q_m < Q_c · P_m > P_c
• Mark-up μ = P − MC measures market power
• Productively efficient only if Q* sits at min ATC

16b · Structures vs the optimum

Mark-up (P−MC)/P rises as |PED| falls ⇒ more power, more DWL. Only perfect competition is allocatively efficient (P = MC, in the long run also P = min ATC).

17 · Price DiscriminationPigou 1920

1st-degree (perfect): firm captures all surplus, Q = Q_comp ⇒ no DWL but CS=0. 3rd-degree: (P_i−MC)/P_i = 1/|PED_i| ⇒ higher P to the less-elastic group.

18 · Monopolistic CompetitionW10

• Many firms · differentiated product
• Free entry & exit · each has slight market power

SR like monopoly (Q* at MR=MC, P off D). LR: entry shifts each firm's D inward until tangent to ATC ⇒ π=0.

• P > MC ⇒ allocatively inefficient
• P > min ATC ⇒ excess capacity
• Trade-off: variety gained, efficiency lost

Ex: restaurants, hairdressers, clothing, cafés.

19 · Market Structures

Oligopoly = few firms, strategic interaction, entry barriers ⇒ analyse with game theory (col 4). Cartels mimic monopoly Q but each member's MR>MC ⇒ incentive to cheat ⇒ unstable without enforcement (OPEC).

Concentration: CR₄ = combined share of the top 4 firms; HHI = Σ s_i² (×10,000), higher ⇒ more concentrated.

Efficiency check

• Productive: produce at min ATC
• Allocative: P = MC (= MSB = MSC)

Only perfect competition's LR equilibrium achieves both. Every form of market power has P>MC ⇒ allocative loss.

19b · Cost Curves Recap

SRATC U-shaped (diminishing MP). LRAC is the lower envelope of all SRACs. LRAC↓ ⇒ economies of scale (EoS); flat ⇒ CRS; ↑ ⇒ diseconomies. MES = smallest Q at min LRAC; MES large vs market ⇒ few firms / natural-monopoly tendency.

Worked · cubic ACTC=32+Q²/16 ⇒ ATC=32/Q+Q/16
MC=Q/8 · MC cuts ATC at its minimum

19c · Spot the structure

"Identify the market structure" Qs: ask three things — # of firms, product (identical / differentiated), entry barriers.

Wheat ⇒ perfect comp · cafés/clothing ⇒ monop. comp · banks/airlines ⇒ oligopoly · tap water ⇒ monopoly. Examiners reward the unambiguous call — don't overthink.

20 · Game TheoryW10–11

• Strategy · complete plan of action
• Dominant strategy · best regardless of rival
• Nash eq. · each best-responds; no profitable unilateral deviation
• Best-response method · underline each player's best reply; cell with both underlined = Nash

Nash = (Defect, Defect); Defect dominant for both. Collectively worse than (Coop, Coop) — the core of cartel instability & free-riding.

Sustaining cooperation

• Repeated games: finite known end ⇒ unravels by backward induction; indefinite ⇒ cooperation sustainable
• Tit-for-tat · reputation · contracts · regulation

Public-good free-rider is a PD: if Zheng (MB 30) produces knowledge at cost 25 he nets $5 while Danielle free-rides for $40 ⇒ each waits ⇒ good not produced.

Key distinctions

• Dominant strategy ⇒ always Nash; Nash needn't be dominant
• Nash can be Pareto-inefficient (PD: both defect)
• Multiple Nash possible; or none in pure strategies

Entry deterrence: an incumbent uses limit pricing or excess capacity to threaten a price war — credible only if the commitment is costly to reverse. First-mover advantage appears in sequential games (solve by backward induction).

21 · ExternalitiesW7

Externality · uncompensated 3rd-party effect ⇒ private ≠ social.

• Neg. production: SMC=PMC+MEC ⇒ over-produce
• Pos. consumption: SMB=PMB+MEB ⇒ under-produce

Pigouvian ruletax = MEC at Q* (neg.)
subsidy = MEB at Q* (pos.)

DWL = triangle between MSC and MSB over the over/under-produced range. Other tools: cap-and-trade · regulation (cap Q) · property rights.

Mini · land-clearingPMB=120−2Q, PMC=Q, MEC=30 ⇒ SMC=Q+30
market Q=40 → efficient Q=30
DWL=½·30·10=150 · tax=$30

A corrective tax is most effective (big consumption cut, small price rise) when demand is elastic.

4 types · which curve moves

Worked (kindergarten, pos. consumption): PMB=100−2Q, PMC=3Q, SMB=120−2Q ⇒ market Q=20, efficient Q=24 ⇒ optimal subsidy = $20/child.

Internalising the externality

The fix forces the decision-maker to face the full social cost/benefit. Where the market is already efficient (Q*=Q**), any intervention lowers welfare — only intervene where there's a genuine wedge.

22 · Worked · Pigouvian Tax★

Steel pollution. PMB=110−Q, PMC=10+Q, SMC=50+Q (MEC=$40).

• Market: 110−Q=10+Q ⇒ Q=50, P=60
• Efficient: 110−Q=50+Q ⇒ Q=30, P=80
• DWL = ½·(50−30)·(100−60) = 400
• Pigouvian tax = MEC = $40 (= P_D−P_S at Q=30)

River variant: D=100−Q, SMC=Q+20, MEC=20. Market Q=50 → efficient Q=40; tax = $20. Direct regulation: cap output at Q=40.

Solving recipe: (1) market Q from PMB=PMC; (2) efficient Q from SMB=SMC; (3) tax = MEC = vertical gap; (4) DWL = ½ × MEC × (Q_mkt − Q_eff). Same four steps every time, neg. or pos.

23 · Coase TheoremCoase 1960

Fails when: high transaction costs · many parties (assignment/holdout) · asymmetric info · weak enforcement. Best for small, localised externalities; global problems ⇒ government (e.g. EU ETS).

Polluter has the rights ⇒ victim pays them to abate; victim has the rights ⇒ polluter compensates. Same efficient Q either way — only the distribution differs.

24 · Public Goods & CommonsW7

Public good: non-rival + non-excl ⇒ free-riding ⇒ market under-provides. Optimum: Σ MB_i = MC (sum WTP vertically, not P_i=MC). Fund via tax; Lindahl tax = each pays a share = their share of total WTP.

Commons (rival + non-excl): Tragedy of the commons (Hardin 1968) ⇒ overuse. Fixes: privatise · quota · communal governance (Ostrom) · tax.

Worked · Lindahl: bridge costs $150; WTP A $20, B $30, C $50 (Σ=$100). Each pays cost × (own WTP / Σ WTP). Public-good optimum sums WTP vertically because the good is non-rival — everyone consumes the same Q.

Free-riding is why the market under-provides: everyone hopes someone else pays, so private provision falls short of the efficient Σ MB = MC level. Govt provision financed by tax is the standard fix.

Classify any good

Ask two yes/no questions — excludable? and rival? — and drop it into the 2×2. Uncongested public roads are non-rival (the classic "which is wrong" trap calls them rival).

24b · Positive externality · worked

Education: PMB=100−2Q, PMC=3Q, SMB=120−2Q (MEB=$20). Market 100−2Q=3Q ⇒ Q=20; efficient 120−2Q=3Q ⇒ Q=24. Corrective subsidy = MEB = $20 lifts Q to the optimum.

Negative externality ⇒ over-produce ⇒ tax; positive ⇒ under-produce ⇒ subsidy. The corrective amount always equals the external effect at Q*.

25 · Asymmetric InfoW7

Moral hazard (post-trade): insured party takes more risk when others bear the cost. Fixes: deductibles · co-pays · monitoring.

Signalling (informed party acts): education as a signal — credible only if the cost is lower for the high type ⇒ separating equilibrium. Screening (uninformed party offers a menu): insurance deductible-vs-premium options that make types self-select. Both are responses to the same asymmetry from opposite sides.

Risk (1-line): risk-averse ⇒ U concave ⇒ EU(gamble) < U(EV) ⇒ buys insurance; risk premium = EV − certainty equivalent.

26 · Master Diagrams · 5★ bankable marks

1. S/D + tax · shade CS, PS, Gov, DWL
2. PC firm · D=MR=P, MC & ATC, locate π/loss
3. Monopoly · D, MR (twice slope), MC, ATC; Q*, P* off D, DWL
4. Externality · PMC vs SMC, Q_m vs Q*, DWL, Pigouvian tax
5. Trade + tariff · domestic S/D, P_w, P_w+τ; shade 4 areas

Always label axes, curves & shifts; shade CS/PS/DWL. Practise each twice, pen on paper, pre-exam.

For the monopoly & externality diagrams the slip is always the same: students locate Q* correctly but then read the price off the wrong line. Monopoly P sits on demand above Q*; the efficient externality P sits where SMB meets SMC.

27 · Formula Belt

PED = (dQ/dP)(P/Q) · midpoint for arc
YED = %ΔQ/%ΔY · XED = %ΔQ_A/%ΔP_B
MRS = MU_x/MU_y · opt: MU_x/P_x=MU_y/P_y
CS=½Q*(P_max−P*) · PS=½Q*(P*−P_min)
MC=dTC/dQ · ATC_min ⇔ MC=ATC
DWL_tax=½·t·(Q*−Q_t)
incidence: buyer = PES/(PES+|PED|)
MR = a − 2bQ (from P=a−bQ)
π = (P−ATC)·Q · Lerner: (P−MC)/P = 1/|PED|
Public good Q*: Σ MB_i = MC
Pigouvian tax = MEC at Q* · HHI = Σ s_i²

28 · Exam Discipline

• Revise by re-deriving each diagram, not re-reading
• Diagram first, label axes & curves, shade regions
• Show working — partial method = partial marks
• ≈1 min per mark; bank graph + definition marks first
• Stuck multi-part Q ⇒ move on, return fresh
• Multi-part calc: a wrong early number still earns later marks if your method is right — carry it through
• "Which is wrong / which is true" MCQ: test each option against the rule, don't pattern-match

29 · Final-week drill

Work this sheet section by section. The exam reuses the same five master diagrams and the equilibrium → elasticity → surplus → tax → DWL chain on fresh numbers — drill the template until plugging in new numbers is automatic, and practise labelling every curve and shading every area by hand.