A Firm Has Invented a New Beverage Called Slops

question 1

Multiple Choice

A firm has invented a new beverage called Slops. It doesn't taste very good, but it gives people a craving for Lawrence Welk's music and Professor Johnson's jokes. Some people are willing to pay money for this effect, so the demand for Slops is given by the equation q = 18 - p. Slops can be made at zero marginal cost from old-fashioned macroeconomics books dissolved in bathwater. But before any Slops can be produced, the firm must undertake a fixed cost of $86. Since the inventor has a patent on Slops, it can be a monopolist in this new industry.

• A) The firm will produce 9 units of Slops.
• B) From the point of view of social efficiency, it is best that no Slops be produced.
• C) A Pareto improvement could be achieved by having the government pay the firm a subsidy of $91 and insisting that the firm offer Slops at zero price.
• D) The firm will produce 18 units of Slops.
• E) None of the above.

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Definitions:

Economic Theories

Systematic frameworks for analyzing economic phenomena, developed to explain and predict economic patterns and behaviors.

Normative Statement

An assertion that expresses a value judgment or opinion about what ought to be, rather than what is empirically verifiable.

Post Hoc

A logical fallacy that assumes a cause-and-effect relationship simply because one event follows another in time.

Causality

The relationship between cause and effect, where one event (the cause) leads to the outcome of another event (the effect).