(a) Demand. It slopes down because marginal benefit, marginal utility, or willingness to pay falls as quantity rises. More is better, but at a decreasing rate.

(b) +10% price, −5% quantity, so ε_D = −5/10 = −0.5. Relatively inelastic — smaller than 1 in magnitude.

(c) A lower P_c raises mu_c/P_c. Buy more clothing, which reduces mu_c through diminishing marginal utility until the ratios are equal again.

(d) Chris fishes, Bill gathers coconuts. Chris's opportunity cost of a coconut is 4 fish; Bill's is 1 fish. Equivalently Bill's opportunity cost of fishing is higher than Chris's.

(e) Nothing qualitatively. Bill: 2 fish or 1 coconut. Chris: 16 fish or 2 coconuts. A coconut now costs Bill 2 fish and Chris 8 fish — Chris still comparatively much better at fishing. Both are richer, and if they tire of fish Chris may fish somewhat less, but Bill always specializes in coconuts.

(f) Tuition and fees plus forgone earnings — with average earnings near $60,000, forgone earnings likely exceed tuition except at private colleges. Room, board and books are secondary. Full credit requires forgone earnings.

(g) Yes, and it is generally not zero. If a polluting activity raises social marginal cost by a quantifiable amount, the socially optimal quantity sits where SMC = SMB, typically nonzero and finite. It could be zero, but there is no reason to expect it must be.

(h) Producers to the left of equilibrium receive the market price while paying only marginal cost, and the area under MC is total variable cost. The gap on each unit is the surplus. MC is also the reservation price below which they would never sell.

(a) Demand is inelastic — relatively vertical, at least short run — because there is no single 1:1 substitute. Cooks need eggs for many dishes, so willingness to pay is potentially very high.

(b) Marginal cost is low. It is the cost of keeping one more laying hen — feed, water, henhouse, some fencing or a guard dog. It still rises with production, but from a low base.

(c) A large fixed cost and a big short-run barrier. A California farm needs substantial land, and California land is expensive even inland. Over 5 years it is a much smaller barrier, essentially by definition — fixed costs are only fixed in the short run.

(d) Supply slopes upward, since marginal cost rises for most physical goods, but sits low.

(e) Axes P ($/dozen) and Q (billions of dozens). Steep demand (inelastic, no substitutes), upward but relatively flat supply starting low (low marginal cost). They cross at P = $2, Q = 10 billion. Mark both coordinates explicitly.

(f) Supply shock. Wild birds migrate in fall and spring, spreading avian flu, and prices peaked around January — right after the fall migration. There is no plausible reason bakers would demand far more eggs in January 2023, then not again until January 2025.

(g) Same diagram, then supply shifts sharply in as avian flu kills laying hens. Because demand is steep, the new equilibrium is a large price rise and a small quantity fall. Mark both equilibria.

(h) The answer is about how much of each firm's marginal cost curve eggs actually drive.

• Trader Joe's sells vast quantities of products containing no eggs — beer, liquor, produce, packaged goods. The egg shock barely moves its overall marginal cost, so it can absorb the increase, hold prices below market and ration at one dozen per visit.
• Denny's is a breakfast diner. Eggs are in most of what it sells, so the shock shifts its marginal cost curve up substantially and cannot feasibly be weathered.

Both feared accusations of price gouging; only one could afford to act on that fear.

(a) $2bn / 10m = $200.

(b) Reasoned answers get full credit. The benchmark: an average hourly wage near $36 makes three hours worth about $108, so $200 is high relative to the opportunity cost of time — though a concert is not the same good as three hours of anything else.

(c) One. Live shows especially are unique. That is perfect product differentiation and an absolute barrier to entering the market for Taylor Swift products.

(d) She has market power, emphatically. There is no other producer in the market for her concerts. Some demanders may see other artists as substitutes, but nobody else can produce the good.

(e) Downward-sloping demand; MR with the same intercept and twice the slope; upward-sloping MC as given. Q_m = 10 million where MR = MC; P = $200 read up on demand. Mark the competitive point where MC meets demand.

(f) Profits are not zero. With zero fixed costs, total cost is the area under MC — a right triangle with base 10 million and height $100:

Edwards notes he got this wrong at first by using the rectangle ($1bn). Full credit was given for $1 billion too — but the triangle is right.

(g) No — too few tickets. Efficiency requires demand = MC, at about 15 million tickets. Monopoly pricing at MR = MC cut that to 10 million, a reduction of one third. Profit maximization pushes the equilibrium below the point where willingness to pay equals marginal cost. A lot of unfulfilled Swifties.