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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$"(1!6-$+$"*! graph to illustrate that the consumer with the less elastic demand will suffer the greater loss 0&4(/5?!2/5),!01+!-&'3/0!'&!.',,!3&'2!5'0!0&4(/5?I!&+C+5)+!2/5),!C4&/46.+!*',0,9!H3!5'! 3/@+(!*',0,!+@/,0I!01+5!-&'3/0!;/..!+A)4.!01+!-&'()*+&!,)&-.),9! of consumer surplus when the price of cigarettes increases. Explain and label the figure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uppose the market supply curve for wheat is shown in the above figure. Calculate the !J$!!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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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.