Question 1

Why is it the case in a long-run monopolistically competitive equilibrium that the firm's demand curve is tangent to its average cost curve? Why could it not be a long-run equilibrium if the demand curve "cut through" the average cost curve?

Question 2.

a) Explain why cigarette smoking is often described as a good with negativeexternalities. (1m)

b) Why might a tax on cigarettes induce the market for cigarettes to perform more efficiently? (2m)

c) How would you evaluate a proposal to ban cigarette smoking? Would a ban on smoking necessarily be economically efficient? (2m)