Download - Catalyst

ECON
300
Practice
Problems
for
Test
3
Multiple Choice
1) You enter a store and buy a bottle of soda. Do you usually receive consumer surplus?
A) Yes, because you wouldn’t buy the soda if your willingness to pay would be less than the price.
B) Yes, because the you are thirsty.
C) No, because you value other drinks more.
D) No, because you have less money after the transaction.
2) Joe’s demand for spring water can be represented as p = 10 - Q (where p is measured in
$/gallon and Q is measured in gallons). He recently discovered a spring where water can be obtained free of
charge. His consumer surplus from this water is
A) $0.
B) $50.
C) $100.
D) unknown based upon the information provided.
"#!!$%%&'(!)!*+,%&'(-!.)%!)!.+-/0+,1)2!3('),3!*&-4(!5+-!)!6-+3&*17!8/%!*+,%&'(-!%&-62&%!
3)Assume a consumer has a horizontal demand curve for a product. His
5-+'!9&:/,;!1.(!6-+3&*1!
product
$#!!/%!')</'/0(37!
A) =#!!
is*),"1!9(!*)2*&2)1(37!
maximized.
(?&)2%!0(-+7!
B) >#!!
can’t
be calculated.
A((3!'+-(!/,5+-')1/+,7!
C) @#!!
equals
zero.
$,%B(-C!!!>!
consumer surplus from buying the
D)
Need more information.
!"#$%&!!!'"()*+,-!.,/01-,!
2*,)3$"(!4313*)&!!!5-,6$"*)!78$3$"(!
Questions 4-7 refer to the diagram below
!
!
4.The
above figure shows the market demand curve for telecommunication while driving
D#!!
E.(!)9+4(!5/;&-(!%.+B%!1.(!')-F(1!3('),3!*&-4(!5+-!1(2(*+''&,/*)1/+,!B./2(!3-/4/,;!
+,("%!*)-!G1/'(!%6(,1!+,!1.(!*)-!6.+,(#7!E.(!*&--(,1!6-/*(!/%!HI7J"!6(-!'/,&1(7!K5!1.(!6-/*(!
one’s
car (time spent on the car phone). The current price is $0.35 per minute. If the price
B(-(!1+!/,*-()%(!9:!1(,!*(,1%!6(-!'/,&1(L!*+,%&'(-!%&-62&%!B+&23!
were
to increase by ten cents per minute, consumer surplus would
$#!!5)22!1+!HM!I7!
A) =#!!
fall
to $820.
5)22!9:!HMN7!
B) >#!!
fall
by
$84.
5)22!9:!H"M7!
C) @#!!
fall
by $58.
5)22!1+!HJDO7!
$,%B(-C!!!
=! $369.
D)
fall to
!"#$%&!!!'"()*+,-!.,/01-,!
2*,)3$"(!4313*)&!!!5-,6$"*)!78$3$"(!
5. The above figure shows the market demand curve for telecommunication while driving
minute, consumer
P#!!E.(!)9+4(!5/;&-(!%.+B%!1.(!')-F(1!3('),3!*&-4(!5+-!1(2(*+''&,/*)1/+,!B./2(!3-/4/,;!
one’s
car (time spent on the car phone). At the current price of $0.35 per
+,("%!*)-!G1/'(!%6(,1!+,!1.(!*)-!6.+,(#7!$1!1.(!*&--(,1!6-/*(!+5!HI7J"!6(-!'/,&1(L!*+,%&'(-!
surplus
equals
%&-62&%!(?&)2%!
$#!!HJIQ7II7!
=#!!HO!N7"I7!
>#!!HQL!!"7"I7!
@#!!HQL!"I7II7!
$,%B(-C!!!=!
!"#$%&!!!'"()*+,-!.,/01-,!
2*,)3$"(!4313*)&!!!5-,6$"*)!78$3$"(!
A)
B)
C)
D)
$301.00.
$924.50.
$1,225.50.
$1,250.00.
6) The above figure shows the market demand curve for telecommunication while driving
one’s car (time spent on the car phone). If the price were zero, consumer surplus equals
A) $301.00.
B) $924.50.
C) $1,225.50.
D) $1,250.00.
7) The above figure shows the market demand curve for telecommunication while driving
one’s car (time spent on the car phone). If the price were $2.50, consumer surplus equals
A) $301.00.
B) $924.50.
C) $1,225.50.
D) $0
8). Sarah and David both have linear demand curves for lemonade. Sarah’s demand curve for
lemonade intersects David’s demand curve at a price of 50 cents per glass. Sarah’s demand
curve is more inelastic than David’s. A change in the price of lemonade from 50 cents to 25
cents per glass will
A) decrease Sarah’s consumer surplus more than David’s.
B) decrease David’s consumer surplus more than Sarah’s.
C) increase Sarah’s consumer surplus more than David’s.
D) increase David’s consumer surplus more than Sarah’s.
9). Producer surplus equals
A) total revenue minus total variable cost.
B) total revenue minus the sum of all marginal cost.
C) profit plus fixed cost.
D) All of the above.
10. Suppose the market supply curve is p = 5 + Q. At a price of 10, producer surplus equals
A) 50.
B) 25.
C) 12.50.
D) 10.
11. In the short run, if a firm operates, it earns a profit of $500. The fixed costs of the firm are
$100. This firm has a producer surplus of
A) $500.
B) $100.
C) $400.
D) $600.
12. Assume government policy increases the demand for corn.
A) The consumer surplus of corn buyers will increase.
B) The producer surplus of corn growers will decrease.
C) The producer surplus of corn growers will increase.
D) The producer surplus of corn growers will not change.
13. If in a market the last unit of output was sold at a price higher than marginal cost
A) producer is better off producing less.
#$%!!!!&'()*)+,!-./0!12+/0+!/!3+45+!6+07++8!9:;;(<!/84!=+>/84!
!?!!-.+!0'0/(!7+(@/2+!/,,'*)/0+4!7)0.!/!>/2A+0!0./0!)8*(:4+,!/!5'B+28>+80!,/(+,!0/C!+D:/(,!
E?!!*'8,:>+2!,:2;(:,!;(:,!;2'4:*+2!,:2;(:,$!
B) consumers
are better off if less of the product is sold.
C) social
welfare is not maximized.
6?!!*'8,:>+2!,:2;(:,!;(:,!;2'4:*+2!,:2;(:,!>)8:,!5'B+28>+80!0/C!2+B+8:+$!
D) the
unit
increased total profit.
1?!!
*'8,:>+2!,:2;(:,!;(:,!;2'4:*+2!,:2;(:,!;(:,!5'B+28>+80!0/C!2+B+8:+$!
=?!!0.+!5'B+28>+80!0/C!2+B+8:+$!
14. If a city decides to restrict the number of pizza parlors
E8,7+2F!!!1!
A) the price of pizza will increase.
"($%$)*!+,-+!./)-+)!-!0)12)!
B) !"#$%&!!!
pizza 'parlors
will make higher profits.
34)*+$"5!6+-+4*&!!!
'/)7$"4*!81$+$"5!
C) total welfare will
decrease.
D) All of the above.
G?!!H@!/!*)0<!5'B+28>+80!+8/*0,!/!>/C)>:>!;2)*+!'8!2+80!
!
15. InE?!!
2007,
the National Collegiate Athletic Association put a moratorium on new Football
D:/80)0<!,:;;()+4!7)((!4+*2+/,+$!
Bowl 6?!!
Series
(formerly Division IA) teams. This policy will
D:/80)0<!4+>/84+4!7)((!)8*2+/,+$!
A) protect
the producer surplus of existing football programs.
1?!!/(('*/0)'8/(!;2'I(+>,!4+B+(';$!
B) ensure that when entry occurs, producer surplus will not be zero.
=?!!E((!'@!0.+!/I'B+$!
C) ensure that when entry occurs, producer surplus will be positive.
E8,7+2F!!!
=!consumer surplus is greater in the future.
D) ensure that
!"#$%&!!!'"($%$)*!+,-+!./)-+)!-!0)12)!
34)*+$"5!6+-+4*&!!!9)7$*)1!
Questions 15-24 refer to the following diagram:
!
!
J?!!
.+!/I'B+!@)5:2+!,.'7,!,:;;(<!/84!4+>/84!*:2B+,!@'2!/;/20>+80!:8)0,!)8!/!(/25+!*)0<$!H@!0.+!
16.-The
above figure shows supply and demand curves for apartment units in a large city. If the
city*)0<!5'B+28>+80!;/,,+,!/!(/7!0./0!+,0/I(),.+,!KJ%L!;+2!>'80.!/,!0.+!(+5/(!>/C)>:>!2+80M!0.+!
government passes a law that establishes $350 per month as the legal maximum rent, the
loss(',,!)8!,'*)/(!7+(@/2+!+D:/(,!
in social welfare equals
A) b + c.
E?!!I!"!*$!
B) f.
C) a. 6?!!@$!
1?!!
D) f +
g./$!
=?!!@!"!5$!
17)E8,7+2F!!!
The above
=! figure shows supply and demand curves for apartment units in a large city. If the
city!"#$%&!!!
government
passes a law that establishes $350 per month as the legal maximum rent,
'"($%$)*!+,-+!./)-+)!-!0)12)!
deadweight
loss
occurs
because
34)*+$"5!6+-+4*&!!!'/)7$"4*!81$+$"5!
A) consumers place a greater value on the last apartment unit than the cost to supply it.
!"!
B) the supplier of the last apartment unit receives a rental price that is less than the
marginal cost of supplying it.
C) the quantity of apartments supplied has decreased.
D) All of the above.
18) The above figure shows supply and demand curves for apartment units in a large city. If the
city government passes a law that establishes $350 per month as the legal maximum rent, the
consumer’s net gain in surplus equals
A) c - f.
B) b - f.
C) d - f.
D) The answer cannot be determined from the information given.
19) The above figure shows supply and demand curves for apartment units in a large city. If the
city government passes a law that establishes $350 per month as the legal maximum rent,
producer surplus
A) increases.
B) decreases.
C) stays the same.
D) changes in a direction that cannot be determined from the information given.
20). The above figure shows supply and demand curves for apartment units in a large city. If the
city government passes a law that establishes $350 per month as the legal maximum rent,
producer surplus decreases by
A) d.
B) b + f.
C) c + g.
D) i.
21) The above figure shows supply and demand curves for apartment units in a large city. If the
city government passes a law that establishes $350 per month as the legal maximum rent,
producer surplus will be
A) d.
B) d + e.
C) d + g.
D) d + c + g.
22) The above figure shows supply and demand curves for apartment units in a large city. At
the unregulated equilibrium, producer surplus will be
A) d.
B) d + e.
C) d + g.
D) d + c + g.
23) The above figure shows supply and demand curves for apartment units in a large city. The
area ʺeʺ represents
A) the loss in producer surplus if a rent ceiling of $350 is imposed.
B) the total variable cost of supplying Q1 units.
C) the marginal cost of supplying Q1 units.
D) the total revenue received by supplying Q1 units.
24) The above figure shows supply and demand curves for apartment units in a large city. The
area ʺcʺ represents
A) the loss in consumer surplus if a rent ceiling of $350 is imposed.
B) a transfer from producers to consumers if a rent ceiling of $350 is imposed.
C) a transfer from consumers to producers if a rent ceiling of $350 is imposed.
D) the total revenue received by supplying Q1 units.
25). The larger the U.S. imposed per unit import tariff on a good imported and produced in the
U.S.
A) the smaller the U..S consumer surplus.
B) the larger the U.S. producer surplus.
C) the larger the government revenue.
D) All of the above.
26). If firms are producing efficiently, but consumers can reallocate goods amongst themselves?
A) The equilibrium is not efficient.
B) The equilibrium is efficient.
C) The consumers are behaving irrationally.
D) The firms are too greedy.
27). Joe and Rita each have some cookies and milk. Joe is willing to trade 2 cookies for an
additional ounce of milk. Rita is willing to trade 4 cookies for an additional ounce of milk. If
trading is possible, which of the following is most likely to occur?
A) Joe will give some milk to Rita in exchange for cookies.
B) Rita will give some milk to Joe in exchange for cookies.
C) No trade will take place since they both prefer to have more milk and fewer cookies.
D) There is not enough information to make any predictions.
28). Moving away from the contract curve will
A) harm both parties.
B) harm only one of the parties.
C) harm at least one of the parties.
D) harm neither of the parties.
For questions 29 - , refer to the following diagram
!
!
!"!!#$%!&'()%!*+,-.%!/%0+123!2$%!4/,%5(.2$!'(6!*(.!25(!+7/+)+/-&839!:8!&7/!;.-1%<!#$%!1(72.&12!
29.1-.)%!1&7!'%!*(-7/!'=!1(77%12+7,!0(+723!
The above figure depicts the Edgeworth box for two individuals, Al and Bruce. The contract
curve:"!!can
be found by connecting points
&!&7/!'<!
A) a;"!!
and
b.
&!&7/!1<!
'!&7/!/<!
B) a>"!!
and
c.
?"!!1!&7/!/<!
C) b and d.
:735%.@!!!?!
D)!"#$%&!!!
c and
d.
!'()$*+!,-./--*!!/"!0-"#1-!
23-4.$"*!5.(.34&!!!6-7$4-)!
30) The above figure depicts the Edgeworth box for two individuals, Al and Bruce. Points a and b
A"!!#$%!&'()%!*+,-.%!/%0+123!2$%!4/,%5(.2$!'(6!*(.!25(!+7/+)+/-&839!:8!&7/!;.-1%<!B(+723!&!&7/!
'!
:"!!&.%!C(32!8+D%8=!2(!.%*8%12!2$%!*+7&8!%7/(5C%723!&*2%.!2.&/+7,<!
;"!!&.%!8%&32!8+D%8=!2(!.%*8%12!2$%!*+7&8!%7/(5C%723!&*2%.!2.&/+7,<!
>"!!&.%!%E-&88=!8+D%8=!2(!.%*8%12!2$%!*+7&8!%7/(5C%723!&*2%.!2.&/+7,!2$&7!(2$%.!0(+723!(7!2$%!
1(72.&12!1-.)%<!
?"!!&.%!/%*+7+2%8=!7(2!2$%!*+7&8!%7/(5C%723!&*2%.!2.&/+7,<!
:735%.@!!!;!
!"#$%&!!!!'()$*+!,-./--*!!/"!0-"#1-!
A) are most likely to reflect the final endowments after trading.
B) are least likely to reflect the final endowments after trading.
C) are equally likely to reflect the final endowments after trading than other points on the
contract curve.
D) are definitely not the final endowments after trading.
31) The above figure depicts the Edgeworth box for two individuals, Al and Bruce. If the
endowment is at point a and trade is possible, which of the following points are possible equilibria?
A) a and b
B) a and c
C) b and d
D) c and d
32) The above figure depicts the Edgeworth box for two individuals, Al and Bruce. Considering
only the labeled points, point c is a possible equilibrium
A) only if it is the endowment.
B) only if point a is the endowment.
C) if either point a or b is the endowment.
D) only if point d is the endowment.
33) The above figure depicts the Edgeworth box for two individuals, Al and Bruce. If the
endowment is at point a, and Al has no ability to bargain, the final allocation will be at point
A) a.
B) b.
C) c.
D) d.
34) The above figure depicts the Edgeworth box for two individuals, Al and Bruce. Point a is not
Pareto efficient because
A) Al’s MRS exceeds Bruce’s MRS.
B) the point is not near the center of the box.
C) Al’s indifference curve is not far enough away from the origin.
D) All of the above.
35) The above figure depicts the Edgeworth box for two individuals, Al and Bruce. Point c is
Pareto efficient because
A) the MRS’s are equal.
B) the indifference curves are tangent.
C) no mutual gains from trade exist.
D) All of the above.
36. Marginal Revenue is
A) the increase in total revenue from selling one more unit of output.
B) equal to P(1+1/e)
C) equal to P when the price elasticity of demand is infinite.
D) All of the above
37. One difference between a monopoly and a competitive firm is that
A) a monopoly is a price taker.
B) a monopoly maximizes profit by setting marginal revenue equal to marginal cost.
C) a monopoly faces a downward sloping demand curve.
D) None of the above.
38. If the inverse demand function for a monopolyʹs product is p = 100 - 2Q, then the firmʹs
marginal revenue function is
A)
B)
C)
D)
-2.
100 - 4Q.
200 - 4Q.
200 - 2Q.
39. If the inverse demand curve a monopoly faces is p = 100 - 2Q, and MC is constant at 16, then
profit maximization is achieved when the monopoly sets price equal to
A) 16.
B) 21.
C) 25.
D) 58.
40). A profit-maximizing monopolist will never operate in the portion of the demand curve with
price elasticity equal to
A) -3.
B) -1.
C) -1/3.
D) None of the above--the price elasticity does not matter.
41) The ability of a monopoly to charge a price that exceeds marginal cost depends on
A) the price elasticity of supply.
B) price elasticity of demand.
C) slope of the demand curve.
D) shape of the marginal cost curve.
42). If the demand for a firmʹs output is perfectly elastic, then the firm’s Lerner Index equals
A) zero.
B) one.
C) infinity.
D) one-half.
#$!!%&'!()*+'!,-./0'!1&*21!3&'!4'5(64!(64!7*13!7/0+'1!,(7-6.!(!5*6*8*9:;!<,!(!=!>>!8'0!/6-3!
43)
A monopoly incurs a marginal cost of $1 for each unit produced. If the price
3(?!-1!7&(0.'4@!3&'!9*11!-6!2'9,(0'!0'1/93-6.!,0*5!3&'!3(?!-1!
demand
equals -2.0, the monopoly maximizes profit by charging a price of
A$!!=B#>;!
=D!B;#>;!
A) C$!!
$1.00.
=!@B#>;!
B) E$!!
$1.50.
=!@#GB;#>;!
C) F$!!
$2.00.
A612'0H!!!C!
D)
$3.00.
!"#$%&!!!'()*+,(!-**(%./!"*!+!0"1"#")2!
34(/.$"1!5.+.4/&!!!6,(7$"4/!-8$.$"1!
Questions 44 - 45 apply to the below diagram:
!
!
G$!!%&'!()*+'!,-./0'!1&*21!3&'!4'5(64!(64!5(0.-6(9!7*13!7/0+'1!,*0!(!5*6*8*9:;!%&'!
4'(42'-.&3!9*11!*,!3&-1!5*6*8*9:!'I/(91!
A$!!&;!
C$!!7;!
E$!!7!!!,;!
F$!!7!!!4!!!'!!!,;!
A612'0H!!!E!
elasticity of
44. The above figure shows the demand and marginal cost curves for a monopoly. The
deadweight loss of this monopoly equals
A) h.
B) c.
C) c + f.
D) c + d + e + f.
45. The above figure shows the demand and marginal cost curves for a monopoly. Under
monopoly, consumer surplus equals
A) a + b.
B) a + b + c.
C) a + b + c + d + e + f.
D) None of the above.
46. If the inverse demand curve a monopoly faces is p = 100 - 2Q, and MC is constant at 16, then
the deadweight loss from monopoly equals
A) $21.
B) $441.
C) $882.
D) $1,764.
47. Which of the following total cost functions suggests the presence of a natural monopoly?
A) TC = 2Q
B) TC = 100 + 2Q
C) TC = 100 + 2Q2
D) All of the above.
48. A justification for patents is that without patents consumer surplus would be
A) larger than with the patent.
B) zero since the product would not be invented.
C) only slightly smaller than with the patent.
D) zero since the monopoly would be a revenue maximizer.
49. If the government attempts to force a natural monopoly to charge a price equal to marginal cost
A) the natural monopoly will shut down.
B) the natural monopoly will still make high profits.
C) the natural monopoly’s marginal cost curve will shift up.
D) total welfare is maximized.
50. The situation in which a person places greater value on a good as fewer and fewer people
possess it is called
A) Bandwagon Effect.
B) Greater Value Effect.
C) Snob Effect.
D) Behavioral Effect.
51. The use of “introductory prices” suggests
A) firms engaged in multi-period decision making.
B) firms engaged in price gouging.
C) firms engaged in anti-competitive behavior.
D) firms engaged in single-period decision making.
52. Which of the following conditions must be true so that a firm can price discriminate?
A) There are no other firms in the market.
B) The good is a non-durable.
"#!!$!%&&'!()*+,-(!&.!,(/.(01!,/20(!'230/2+24*12&4!23!
!
C) The
cannot be easily resold.
$#!!3good
(--24%!0&40(/1!1205(13!1&!24'262'7*-3!&4!18(!31/((1!0&/4(/9!
D) All
the above.
:#!!of
;7<24%!0&40(/1!1205(13!*1!18(!1205(1!=24'&=9!
>#!!3(--24%!0&40(/1!1205(13!*1!18(!1205(1!=24'&=9!
53. When firms price discriminate they turn ________ into ________.
?#!!
;7<24%!*!0&40(/1!1205(1!&4!18(!31/((1!0&/4(/9!
A) producer
surplus, revenue
B)$43=(/@!!!
consumer>!surplus, profit
()*(%+!')$%(!,$-%)$.$/0+$"/!
C)!"#$%&!!!
total '
cost,
profit
')(4$"2-!56$+$"/!
D)12(-+$"/!3+0+2-&!!!
producer surplus,
consumer surplus
A#!!
8(4!*!.2/+!8*3!*!+&4&,&-<!24!*!+*/5(1!*4'!*-3&!,(/.(01-<!,/20(!'230/2+24*1(3C!1&1*-!=(-.*/(!
54.BTheatres
charge lower prices for a matinee and usually donʹt accept coupons for the night
showing
of movies because
$#!!23!+*)2+2D('9!
A) consumers
that attend the matinee have a higher price elasticity of demand.
:#!!23!-&=(/!18*4!24!*!,(/.(01-<!0&+,(12126(!+*/5(19!
B) consumers that attend the night show have a lower price elasticity of demand.
>#!!23!82%8(/!18*4!24!*!,(/.(01-<!0&+,(12126(!+*/5(19!
C) it increases profits compared to charging a single price.
?#!!
23!+242+2D('9!
D) All of
the above.
$43=(/@!!!$!
'()*(%+!')$%(!,$-%)$.$/0+$"/!
55.!"#$%&!!!
A perfect
price discriminator
')(4$"2-!56$+$"/!
A)12(-+$"/!3+0+2-&!!!
charges each buyer
her reservation price.
B) charges different prices to each customer based upon different costs of delivery.
C)F.!*!+*/5(1!23!0&41/&--('!;<!*!,(/.(01",/20("'230/2+24*124%!+&4&,&-<C!18(4!
generates a deadweight loss to society.
E#!!
D) charges
lower prices to customers who buy greater quantities.
$#!!*!'(*'=(2%81!-&33!23!%(4(/*1('9!
:#!!18(/(!23!4&!0&437+(/!37/,-739!
56. A perfect price discriminating equilibrium maximizes
>#!!
0&437+(/!37/,-73!23!18(!3*+(!*3!74'(/!,(/.(01!0&+,(1212&49!
A) consumer
surplus.
?#!!
&71,71!23!-(33!18*4!18*1!&.!*!324%-(",/20(!+&4&,&-<9!
B) the
associated
deadweight loss.
:! inefficiency.
C)$43=(/@!!!
the market
D)!"#$%&!!!
total 'welfare.
()*(%+!')$%(!,$-%)$.$/0+$"/!
12(-+$"/!3+0+2-&!!!')(4$"2-!56$+$"/!
For questions 57-58, refer to the diagram below:
!
!
57.H8(!*;&6(!.2%7/(!38&=3!18(!+*/5(1!.&/!*!,*/1207-*/!%&&'9!F.!18(!+*/5(1!23!0&41/&--('!;<!*!
The above figure shows the market for a particular good. If the market is controlled by a
G#!!
perfect-price-discriminating monopoly, consumer surplus equals
,(/.(01",/20("'230/2+24*124%!+&4&,&-<C!0&437+(/!37/,-73!(I7*-3!
A) A.
B) A$#!!
+$
B 9!+ C.
C) C.:#!!$!#!:!#!>9!
D) zero.
>#!!>9!
?#!!D(/&9!
58.$43=(/@!!!
The above
?! figure shows the market for a particular good. If the market is controlled by a
perfect-price-discriminating monopoly, producer surplus equals
!"#$%&!!!'()*(%+!')$%(!,$-%)$.$/0+$"/!
12(-+$"/!3+0+2-&!!!')(4$"2-!56$+$"/!
!!
A)
B)
C)
D)
A + B + C + D + E.
D + E.
E.
zero.
59. Which of the following is an example for multi-market price discrimination?
A) A BMW selling for more than a VW.
B) Local residents receiving a discount at the local golf course.
C) The fact that a razor is cheap and blades are expensive.
D) A hotel charging more for a room if the customers bring pets.
60. A multimarket price discriminator sells its product in Florida for three times the price it sets
in New York. Assuming the firm faces the same constant marginal cost in each market and
the price elasticity of demand in New York is -2.0, the demand in Florida
A) has an elasticity of -6.0.
B) is more price elastic than the demand in New York.
C) has an elasticity of -1.2.
D) has an elasticity of -0.67.
(HINT: see equation 12.2)
61. If the demand for air travel were to change so that business travelers and vacationers have
the same price elasticity of demand for air travel,
A) airlines would charge the same price to each type of flyer.
B) airlines would still charge business flyers a higher fare since the travelerʹs employer
pays anyway.
C) airlines would be driven out of business.
D) airlines would counter by charging vacationers a higher fare.
62. Perfect competition and monopolistic competition are similar in that both market structures
include
A) price-taking behavior by firms.
B) a homogeneous product.
C) no barriers to entry.
D) very few firms.
63. A competitive market structure differs from the monopoly, oligopoly, and monopolistic
competition structures in the
A) producersʹ ability to set price.
B) profit maximization condition.
C) amount of long run profit.
D) entry conditions.
64) Oligopoly differs from monopolistic competition in that an oligopoly includes
A) product differentiation.
B) barriers to entry.
C) no barriers to entry.
D) downward-sloping demand curves facing the firm.
65) If a cartel is unable to monitor its members and punish those firms that violate the
agreement, then
A) the member firms will each act as price setters.
B) the cartel will prosper in the long run.
C) the market will become a monopoly.
D) the cartel will fail.
66) Compared to a cartel, firms in a Cournot Oligopoly
A) make more joint profit.
B) sell less output.
C) make less joint profit.
D) act independently.
!
!"#!$%&!'"((")*+,-!.(&/0&!/+0)&#!"1#2&"!"#!"!/(0&"!/+3!&4.(/*+!)%56!
!
!#$!!%&'()*+&!,)&-.),!/,!01+!,)2!'3!01+!-&'3/0,!+4&5+(!67!4..!3/&2,!/5!4!24&8+09!
:5,;+&<!!!=4.,+9!>1/,!(+3/5/0/'5!/?5'&+,!3/@+(!*',0,9!%&'()*+&!,)&-.),!2/5),!3/@+(!*',0,!+A)4.,!
67. The-&'3/0,9!
above figure shows the reaction functions for two pizza shops
in a small isolated town.
!
1".*78!!!9#"327&#!:&('/#&!
The
Cournot
equilibrium
is
at
point
!"!!#;2&0$*"+!<$/$208!!!
$%!&'()%!*+,-.%!/$(0/!1$%!.%&21+(3!*-321+(3/!*(.!10(!4+55&!/$(4/!+3!&!/6&77!+/(7&1%8!1(039!
9#&=*"20!>3*$*"+!
A) a.
#$%!:(-.3(1!%;-+7+'.+-6!+/!&1!4(+31!
!B$!!B)
%&'()*+&!,)&-.),!+A)4.,!0'04.!&+C+5)+!2/5),!01+!,)2!'3!4..!24&?/54.!*',09!
b.
:5,;+&<!!!
<"!!&>&)+9!>1+!,)2!'3!4..!24&?/54.!*',0!+A)4.,!0'04.!C4&/46.+!*',09!>'04.!&+C+5)+!2/5),!0'04.!
9!
C) c. C4&/46.+!*',0!+A)4.,!-&'()*+&!,)&-.),9!
="!!
'
1".*78!!!
9
#"327&#!:&('/#&!
D) d. 9!
;2&0$*"+!<$/$208!!!9#&=*"20!>3*$*"+!
:"!!29!
!D$!!E1+5!/,!01+!-&'3/0!4!3/&2!+4&5,!+A)4.!0'!01+!-&'()*+&!,)&-.),[email protected]/59!
>"!!89!
:5,;+&<!!!%&'3/0!+A)4.,!-&'()*+&!,)&-.),!;1+5!01+!3/&2!14,!5'!3/@+(!*',0,9!%&'()*+&!,)&-.),!*45!
<3/0%.?!!!
=!
Short6+!01')?10!'3!4,!01+!?4/5,!3&'2!0&4(+9!H5!01+!,1'&0!&)5I!/3!01+!3/&2!-&'()*+,!457!
answer
!"#$%&!!!
'')0-)0I!/0!+4&5,!-&'3/0!+A)4.!0'!&+C+5)+!2/5),!C4&/46.+!*',0,!2/5),!3/@+(!*',0,9!H3!01+!
"()*"+!,"-./!
1. Ann
and
Bill each spend $30 per month on cigarettes when the price is $1 per pack. Draw a
3/&2!,1)0,!(';5I!/0!.',+,!01+!3/@+(!*',0,9!>1+!-&'()*+&!,)&-.),!+A)4.,!01+!-&'3/0!3&'2!
0(.1+$"*!2+3+(1&!!!
4).5$"(1!6-$+$"*!
graph to
illustrate
that the consumer with the less elastic demand will suffer the greater loss
0&4(/5?!2/5),!01+!-&'3/0!'&!.',,!3&'2!5'0!0&4(/5?I!&+C+5)+!2/5),!C4&/46.+!*',0,9!H3!5'!
3/@+(!*',0,!+@/,0I!01+5!-&'3/0!;/..!+A)4.!01+!-&'()*+&!,)&-.),9!
of consumer
surplus when the price of cigarettes increases. Explain and label the figure.
1".*78!!!9#"327&#!:&('/#&!
9#&=*"20!>3*$*"+!
@"!!#;2&0$*"+!<$/$208!!!
$%!&'()%!*+,-.%!/$(0/!1$%!.%&21+(3!*-321+(3/!*(.!10(!4+55&!/$(4/!+3!&!/6&77!+/(7&1%8!1(039!
2.
:(77-/+(3!0(-78!.%/-71!+3!
<"!!%&2$!*+.6!4.(8-2+3,!A!!4+55&/9!
="!!%&2$!*+.6!4.(8-2+3,!BC!4+55&/9!
:"!!1$%!*+.6/!/47+11+3,!1$%!4.(8-21+(3!(*!DCC!!C!4+55&/9!
>"!!*+.6!<!6(3(4(7+5+3,!1$%!6&.E%1!'F!/%77+3,!!C!4+55&/9!
<3/0%.?!!!:!
!"#$%&!!!'"()*"+!,"-./!
0(.1+$"*!2+3+(1&!!!7.5$1.-!
!
G"!!#$%!&'()%!*+,-.%!/$(0/!1$%!.%&21+(3!*-321+(3/!*(.!10(!4+55&!/$(4/!+3!&!/6&77!+/(7&1%8!1(039!
#$%!4%.*%21!2(64%1+1+)%!(-12(6%!+/!1$&1!
<"!!%&2$!*+.6!4.(8-2%/!BC!4+55&/9!
="!!%&2$!*+.6!4.(8-2%/!!C!4+55&/9!
!
:"!!1$%!*+.6/!/47+1!1$%!4.(8-21+(3!(*!ACC!4+55&/9!
Suppose
the market supply curve for wheat
is shown in the above figure. Calculate the
!J$!!K)--',+!01+!24&8+0!,)--.7!*)&C+!3'&!;1+40!/,!,1';5!/5!01+!46'C+!3/?)&+9!L4.*).40+!01+!
producer
surplus when price is $2 per bushel. If legislation mandates that the price be $1 per
-&'()*+&!,)&-.),!;1+5!-&/*+!/,!M#!-+&!6),1+.9!H3!.+?/,.40/'5!245(40+,!0140!01+!-&/*+!6+!M!!-+&!
>"!!%&2$!*+.6!4.(8-2%/!ACC!4+55&/9!
6),1+.I!;140!/,!01+!&+,).0/5?!.',,!/5!-&'()*+&!,)&-.),F!
bushel,
what
<3/0%.?!!!
:! is the resulting loss in producer surplus?
:5,;+&<!!!:0!4!-&/*+!'3!M#I!-&'()*+&!,)&-.),!+A)4.,!NM!9J"!!!!#""$O#!!!MP""9!:0!4!-&/*+!'3!M!I!
!"#$%&!!!'-&'()*+&!,)&-.),!+A)4.,!NM"9J"!!!J""$O#!!!M!#J9!>1+!M!!(+*&+4,+!/5!-&/*+,!&+,).0,!/5!4!
"()*"+!,"-./!
MQQJ!(+*&+4,+!/5!-&'()*+&!,)&-.),9!
3. Explain
why the competitive output maximizes welfare.
0(.1+$"*!2+3+(1&!!!
1".*78!!!9#"327&#!:&('/#&! 7.5$1.-!
;2&0$*"+!<$/$208!!!9#&=*"20!>3*$*"+!
4. Suppose anyone with a driver’s license is capable of supplying one trip from the airport to
!"!
50)*+$"6!.+-+0*&!!!'3)4$"0*!78$+$"6!
!B$!!C=88/.-!'2+/2-!4)*3!'!,1)?-1".!0)(-2.-!).!('8'70-!/&!.=880+)2@!/2-!*1)8!&1/5!*3-!')18/1*!*/!
*3-!,/42*/42!7=.)2-..!(-2*-1!/2!'2+!@)?-2!,'+9!<3-!0/2@!1=2!.=880+!(=1?-!/&!.=(3!*1)8.!).!
3/1)D/2*'0!'*!8!"!EFGA!43)(3!).!*3-!'?-1'@-!(/.*!/&!.=(3!*1)8.9!C=88/.-!,')0+!,-5'2,!).!H!"!
!GGG!!!!G89!I'0(=0'*-!*3-!(3'2@-!)2!(/2.=5-1!.=180=.A!81/,=(-1!.=180=.!'2,!./()'0!4-0&'1-!)&!
*3-!()*+!@/?-125-2*!1-J=)1-.!*3/.-!8-/80-!.=880+)2@!.=(3!*1)8.!*/!8/..-..!'!.8-()'0!0)(-2.-A!
the'2,!*3-!@/?-125-2*!4)00!)..=-!/20+!BGG!0)(-2.-.9!
downtown business center on any given day. The long-run supply curve of such trips is
:2.4-1;!!!<3-!(/58-*)*)?-!-J=)0)71)=5!).!H!"!!GGG!!!K!G!!!FG$!"!FGG9!L)*3!*3-!.=880+!1-.*1)(*)/2!
horizontal
at p = $50, which is the average cost of such trips. Suppose daily demand is Q =
/&!BGGA!81)(-!7-(/5-.!E"G9!<3-!0/..!)2!./()'0!4-0&'1-!).!MK"G!!!FG$!!!KFGG!!!BGG$NO#!"!
1000 - 10p.
Calculate the change in consumer surplus, producer surplus and social welfare if
E#AGGG9!P1/,=(-1.!@')2!K"G!!!FG$!!!BGG!"!EQAGGG9!I/2.=5-1.!0/.-!EQAGGG!#!E#AGGG!"!
the city government requires those people supplying such trips to possess a special license,
ERAGGG9!
and
the'government
will issue only 300 licenses.
!"#$%&!!!
"($%$)*!+,-+!.,$/+!.0##(1!2034)*!
50)*+$"6!.+-+0*&!!!'3)4$"0*!78$+$"6!
5.
!
!
The
above figure shows the demand and supply curves in the market for milk.
!S$!!
<3-!'7/?-!&)@=1-!.3/4.!*3-!,-5'2,!'2,!.=880+!(=1?-.!)2!*3-!5'1T-*!&/1!5)0T9!%&!*3-!
government
imposes a quota at 500 gallons, calculate the deadweight loss.
@/?-125-2*!)58/.-.!'!J=/*'!'*!FGG!@'00/2.A!('0(=0'*-!*3-!,-',4-)@3*!0/..9!
:2.4-1;!!!ULV!"!9FKS!!!#$K!GGG!!!FGG$!"!FGG!
6.
If the
!"#$%&!!!'"($%$)*!+,-+!.,$/+!.0##(1!2034)*!
50)*+$"6!.+-+0*&!!!'3)4$"0*!78$+$"6!
!"!
!
#$%!!&'(!)*+(,-./!)(+01)!/234(5!)*+(,-./!,26678!/234(5!01)!9*37)!,26678!/234(,!:*3!0!;**)!
03(!;.4(1!.1!-'(!0<*4(!:.;23(=!>77!-'(!/234(,!03(!7.1(03=!?1.-.07785!-'(!/*21-38!077*9,!.+6*3-,=!
The domestic
demand curve, domestic supply curve, and world supply curves for a good
&'(1!.+6*3-,!03(!<011()=!@07/270-(!'*9!/*1,2+(3!01)!63*)2/(3!,23672,!/'01;(!<(/02,(!*:!
are given
in the above figure. All the curves are linear. Initially, the country allows imports.
-'(!<01=!?,!-'(!/*21-38!<(--(3!*::!9.-'!-'(!<01!*1!.+6*3-,A!B'8A!
>1,9(3C!!!@*1,2+(3!,23672,!<(:*3(!-'(!<01!(D207,!=E!!!FE!!!FE!!!GH$#H=E=!I3*)2/(3!,23672,!
Then imports
are banned. Calculate how consumer and producer surplus change because of
<(:*3(!-'(!<01!(D207,!=E!!!HE!!!HE!!!G!#H=E=!&*-07!,*/.07!9(7:03(!(D207,!G!#HE=!&'(!
the ban. Is the/*1,2+(3!,23672,!0:-(3!-'(!<01!(D207,!=E!!!E"!!!E"!!!G#HE"=!I3*)2/(3!,23672,!(D207,!=E!
country better off with the ban on imports? Why?
!!E"!!!E"!!!G#HE"!0:-(3!-'(!<01=!&*-07!,*/.07!9(7:03(!(D207,!GHE""=!@*1,2+(3!,23672,!
'0,!)(/3(0,()!<8!G#EJH=E!01)!63*)2/(3!,23672,!'0,!.1/3(0,()!<8!GK!F=E!<(/02,(!*:!-'(!
7. Explain why
a government would impose an import tariff when domestic consumers suffer
<01=!&*-07!,*/.07!9(7:03(!'0,!)(/3(0,()!<8!GJ!E=!&'(!/*21-38!.,!9*3,(!*::!<(/02,(!-'(!
more than producers
gain?
-*-07!,*/.07!9(7:03(!'0,!)(/3(0,()=!
!"#$%&!!!'"(#)*$+,!-"./!!0#12!"3!4"5$%$12!
6712.$"+!8.).72&!!!
4*19$"72!:;$.$"+!
8. Explain
why having
different marginal rates of substitution is necessary for trade to occur.
#K%!!LM670.1!9'8!0!;*4(31+(1-!9*27)!.+6*,(!01!.+6*3-!-03.::!9'(1!)*+(,-./!/*1,2+(3,!,2::(3!
9. In a +*3(!-'01!63*)2/(3,!;0.1A!
recent court case, an expert witness defined a monopoly as a firm that can ʺraise price
>1,9(3C!!!&'(!-03.::!+08!<(!0!63*)2/-!*:!63*)2/(3!3(1-!,((N.1;=!L0/'!63*)2/(3!9.77!;0.1!0!
without reducing
its total revenue.ʺ What does this imply about the elasticity of demand?
3(70-.4(78!703;(!0+*21-!/*+603()!-*!-'(!7*,,!*:!(0/'!/*1,2+(3=!&'(!63*)2/(3,!+08!<(!
0<7(!-*!/**3).10-(!-'(.3!3(1-!,((N.1;!0/-.4.-.(,=!L0/'!/*1,2+(3!9.77!*178!7*,(!0!
Would this definition
hold for a profit-maximizing monopoly? Explain.
3(70-.4(78!,+077!0+*21-!,*!.-!.,!217.N(78!-'0-!/*1,2+(3,!9.77!/**3).10-(!0!63*-(,-!-*!-'(!
-03.::=!
!"#$%&!!!'"(#)*$+,!-"./!!0#12!"3!4"5$%$12!
6712.$"+!8.).72&!!!4*19$"72!:;$.$"+!
10. The average cost for a typical electric-power-production firm is AC = 100 - 10Q + Q2 where
Q is measured in billion kilowatt hours per day. At the current regulated price, consumers
demand 4 billion kilowatt hours per day. Is this market a natural monopoly? If demand
increases to 10 billion kilowatt hours, is this market a natural monopoly? Explain.
11. Suppose the demand for pizza in a small isolated town is p = 10 - Q. There are only two
firms, A and B, and each has a cost function TC = 2 + q. Determine the Cournot equilibrium.
Answers
Multiple choice
1. A
2. B
3. C
4. B
5. B
6. D
7. D
8. D
9. D
10. C
11. D
12. C
13. C
14. D
15. A
16. D
17. A
18. A
19. B
20. C
21. A
22. D
23. B
24. B
25. D
26. A
27. A
28. C
29. D
30. B
31. D
32. C
33. C
34. A
35. D
36. D
37. C
38. B
39. D
40. C
41. B
42. A
43. C
44. C
45. D
46.
47.
48.
49.
50.
51.
52.
53.
54.
55.
56.
57.
58.
59.
60.
61.
62.
63.
64.
65.
66.
67.
B
B
B
A
C
A
C
B
D
A
D
D
A
B (D isn’t price discrimination b/c there are actual price differences)
C
A
C
A
B
D
C
B
Short answer
1. See the above figure. The curve labeled LE is the less elastic demand curve, and the
curve labeled ME is the more elastic demand curve. When price increases from $1 to
pn, the person with demand curve ME suffers a loss of a + c + e. The person with
demand curve LE suffers a loss of a + b + c + d + e. Thus, the person with the less
elastic demand suffers the greater loss of consumer surplus.
2. At a price of $2, producer surplus equals ($1.50 ∗ 1200)/2 = $900. At a price of $1,
producer surplus equals ($0.50 ∗ 500)/2 = $125. The $1 decrease in prices results in a
$775 decrease in producer surplus.
3. If less output is produced, then the last unit that is consumed will be valued by
consumers more than the cost of producing it. If output is increased to the competitive
level, consumers will value those additional goods more than the cost of producing
them, and welfare will increase. If output is greater than the competitive output level,
then the cost of producing the units beyond the competitive level is greater than the
value. At output levels greater than the competitive level, welfare is decreased. Thus,
the competitive output level maximizes welfare, because consumers value the last unit
of output at exactly the amount that it costs to produce it.
4. The competitive equilibrium is Q = 1000 - (10 ∗ 50) = 500. With the supply restriction
of 300, price becomes $70. The loss in social welfare is [(70 - 50) ∗ (500 - 300)]/2 =
$2,000. Producers gain (70 - 50) ∗ 300 = $6,000. Consumers lose $6,000 + $2,000 =
$8,000.
5. DWL = .5(4 - 2)(1000 - 500) = 500
6. Consumer surplus before the ban equals .5 ∗ 75 ∗ 75 = $2812.5. Producer surplus
before the ban equals .5 ∗ 25 ∗ 25 = $312.5. Total social welfare equals $3125. The
consumer surplus after the ban equals .5 ∗ 50 ∗ 50 = $1250. Producer surplus equals .5
∗ 50 ∗ 50 = $1250 after the ban. Total social welfare equals $2500. Consumer surplus
has decreased by $1562.5 and producer surplus has increased by $937.5 because of the
ban. Total social welfare has decreased by $635. The country is worse off because the
total social welfare has decreased.
7. The tariff may be a product of producer rent seeking. Each producer will gain a
relatively large amount compared to the loss of each consumer. The producers may be
able to coordinate their rent seeking activities. Each consumer will only lose a
relatively small amount so it is unlikely that consumers will coordinate a protest to the tariff.
8. The marginal rate of substitution is the rate at which a person is willing to trade one
good for another. If these rates are not equal for all people, trade can occur. With
different marginal rates of substitution at least one person gains by trading. When the
marginal rates of substitution are the same for everyone, everyone is willing to trade
goods at the same rate, so no one can gain by trading.
9. If the firm raises price, the quantity sold will decrease. If total revenue is not reduced
by this, then marginal revenue is not positive. This implies demand either is price
inelastic or has unitary elasticity. This would not hold for a profit-maximizing
monopoly. A profit maximizer sets MR = MC. This definition implies that MR is zero
or negative, and MC cannot be negative.
10. The firm enjoys economies of scale up to 5 billion kilowatt hours (kwhr) per day
(Minimum AC). So, at 4 billion kwhr per day, the firm is a natural monopoly. At 10
billion kwhr per day, this firm is no longer a natural monopoly.
11. Firm Aʹs profit is π = [10 - (qA + qB)] qA - 2 - qA. Maximizing with respect to its own
output yields qA = 4.5 - qB /2. Similarly, firm Bʹs best response is qB = 4.5 - qA /2. The
equilibrium occurs when both firms produce 3 units. Price is 10 - 3 - 3 = 4.