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EC201 Lab Homework 3 – Fall 2010
1. Suppose you manufacture speed boats, and your economist tells you that speed boats are
a normal good. Now suppose you read the following headline in the Wall Street Journal:
“Economy begins to rebound from recession-Incomes are expected to increase this quarter
at a 3.5% annual rate.” Ceteris paribus, it follows that, as a result of the economy growing
and incomes increasing, the price of speed boats will ______; while the quantities you sell
will _____.
A. Decrease; decrease
B. Decrease; increase
C. Increase; decrease
D. Increase; increase
2. Suppose that North Carolina is the world’s largest producer of raw cotton. Further
suppose there is a hurricane in eastern North Carolina, which destroys much of the 2009
cotton crop. If cotton and wool are substitutes, ceteris paribus, it follows that:
A. The equilibrium price of wool will increase
B. The equilibrium price of wool will decrease
C. The equilibrium quantity exchanged of cotton and wool will decrease
D. The equilibrium quantity exchanged of cotton and wool will increase
3. Which of the following will most likely cause the equilibrium price of wheat bread to
decrease and the equilibrium quantity exchanged of wheat bread to increase?
A. An increase in the price of flour
B. A decrease in the price of flour
C. An increase in the price of rye bread, a substitute for wheat bread
D. An increase in the price of butter, a complement for wheat bread
4. Assume that wheat toast and marmalade are complements. Suppose further that a fungus
destroys much of the wheat crop. As a result, ceteris paribus:
A. The supply of marmalade will increase, as will its price
B. The demand for toast will increase
C. The equilibrium price of wheat toast will increase
D. The equilibrium price of marmalade will increase
Use the following information to answer questions 5 and 6. Assume that widgets are
produced in a competitive market. Assume further that the market supply and demand
functions for widgets are as follow:
Supply: Px=5+3X
Demand: Px=20-2X,
where X is the quantity of widgets per month; and Px is the per unit price of widgets.
5. Ceteris paribus, the consumer surplus in this market is _____.
A. 60
B. 42
C. 18
D. 9
6. Suppose the government imposes a price floor of $20 per unit. Ceteris paribus. It follows
that there will be a _____ of _____ units.
A. Shortage, 3
B. Surplus, 5
C. Surplus, 3
D. Shortage, 5
7. Suppose the price elasticity of demand for Chevrolets is -3.3. It follows that a 1.0%
decrease in the price of Chevrolets will result in:
A. A 3.3% decrease in the quantity demanded of Chevrolets.
B. A 0.33% increase in the quantity demanded of Chevrolets.
C. A 3.3% increase in the quantity demanded of Chevrolets.
D. A 0.033% decrease in the quantity demanded of Chevrolets.
The diagram below illustrates the market for sugar. Use it to answer question 8 and 9.
8. Suppose the market is perfectly competitive and initially in equilibrium at a price of P2
and a quantity of Q2. It follows that the consumer surplus is _____, and the producer
surplus is _____.
A. B+E; C+F
B. A+B; C+D
C. A; D
D. A+B+E; C+D+F
9. Now suppose the government applies a price floor of P3. It follows that, after the floor is
imposed, the consumer surplus is _____, and the producer surplus is _____.
A. B+E; C+F
B. A; D
C. A+B+E; C+D+F
D. A; B+C+D
10. Suppose the price elasticity of demand for North Carolina cabernet franc is -1.25. Now
suppose that a fungus destroys much of the North Carolina grape harvest, and thus the
amount of cabernet franc exchanged in the market decreases by 5%. It follows that North
Carolina wine producers will see:
A. A 4% increase in the price of cabernet franc.
B. A 4% decrease in the price of cabernet franc.
C. A 6.25% decrease in the price of cabernet franc.
D. A 6.25% increase in the price of cabernet franc.
11. Refer back to the previous question. Ceteris paribus, it follows that, as a result of the
change in the wine market, the total revenue of North Carolina cabernet franc suppliers will
_____.
A. Increase
B. Decrease
C. Remain unchanged
D. Create a parallel universe in which pigs can fly
12. Suppose you produce X, the demand for which is perfectly inelastic. Now suppose the
price of X doubles. What will happen to the total revenue you receive from X?
A. Revenue increases, and the new revenue is two times the original revenue
B. Revenue increases, but the new revenue is less than two times the original revenue
C. Revenue decreases, and the new revenue is half the amount of the original revenue
D. Revenue decreases, but the new revenue is less than half the amount of the original
revenue.
13. Which of the following most accurately describes a key difference between the
corporate form of ownership and sole proprietorships?
A. Sole proprietorships have limited liability; whereas corporations have unlimited liability
B. Corporations are able to raise funds by selling debt (e.g. bonds); whereas sole
proprietorships only issue stock
C. Sole proprietors are subject to “double” taxation; whereas corporations only pay taxes
on dividends.
D. Sole proprietorships have unlimited liability; whereas corporations have limited liability
14. Suppose you have been hired as a financial consultant, and your job is to price two
bonds, A and B. the bonds are identical in every way (e.g. they have the same coupon
payment, maturity date, etc.), except that A is “riskier” than B- i.e. you think the probability
of full payment of principal and interest is lower for A than it is for B. Ceteris paribus, it
follows that the discount rate you employ for pricing bond A will be _____ than that of
bond B, and the price of bond A will be _____ than that of bond B.
A. Greater than; greater than
B. Less than; less than
C. Less than; greater than
D. Greater than; less than
15. What price would you expect to see in the market for a stock that currently pays a $1.00
annual dividend; is discounted at a rate of 4.0 percent; and the dividend is expected to
decrease at 1.0 percent annually.
A. $33.33=$1.00/(0.04-0.01)
B. $25.00=$1.00/0.04
C. $20.00=$1.00/(0.04+0.01)
D. $0.25=$1.00/(0.04/0.01)
16. Which of the following would most likely give you the best indication of a firm’s
current profitability?
A. Its balance sheet
B. Its income statement
C. The market value of its principal-agent contracts
D. Q*(100-the firm’s deadweight loss), where Q= the quantity of output the firm produces
17. Bob owns a factory that produces guitars. Bob’s only variable input in the short run is
labor. According to the law of diminishing marginal returns, which of the following
statements about the production of guitars in Bob’s factory is true?
A. The average product of labor will eventually decline as more labor is employed in Bob’s
factory
B. The marginal product of labor will stay constant as more labor is employed in Bob’s
factory
C. The marginal product of labor will rise continually as more labor is employed in Bob’s
factory
D. The average product of labor will rise continually as more labor is employed in Bob’s
factory
Use the following information to answer questions 18 and 19.
You own the Wolfpack Surfboard Company, which sells surfboards in a competitive
market. At your current (short run) profit-maximizing (or loss-minimizing) level of
production, you produce 500 surfboards a month. Electricity and plastic are the only
variable inputs in the production. The electricity cost per surfboard is $4.00 per surfboard,
and plastic cost per surfboard is $20.00. The monthly total fixed cost of your firm is
$50,000.
18. At the current production level, which of the following statement is corrent?
A. Your firm is making an economic profit greater than zero
B. Average total cost is $1,240.00
C. Total variable cost is greater than total fixed cost
D. Average variable cost is $24.00
19. Suppose the market price for surfboards is $1,120.00, then, ceteris paribus, it follows
that:
A. You’re making an economic loss, but should continue to produce in the short run.
B. You’re making an economic profit greater than zero
C. You’re making an economic loss and should shut down
D. Some firms, including yours, should exit this industry
20. A farmer producing soybeans sells her product in a perfectly competitive market. The
current market price of soybean is $4.25 a bushel. At her current level of output, the
marginal cost of producing soybeans is $4.25 per bushel; the average variable cost of
producing soybeans is $3.95 per bushel; and the average fixed cost is $1.00. It follows that,
ceteris paribus, to maximize profits in the short run the farmer should:
A. Increase her price to at least $4.95
B. Increase her price to a figure above $4.95
C. Continue to produce at the current level of output
D. Shutdown
21. Suppose the ACME widget company produces widgets and sell them in a perfectly
competitive market. In order to maximize its profits in the short run, ceteris paribus, ACME
will decrease its output of widgets if:
A. Price is less than marginal cost
B. Price equals marginal cost, and price is greater than average total cost
C. Price exceeds the marginal cost
D. Price equals marginal cost, but price is greater than average variable cost
22. Suppose LMN Company produces and sells bottled water in a competitive market, and
suppose that water sells for $1.35 a bottle. Further suppose that at the current level of
production the marginal cost of producing water is $1.25; the average variable cost is $0.90;
and the average fixed cost is $0.05. Ceteris paribus, to maximize profits or minimize losses
in the short run, it follows that the firm should:
A. Reduce its price
B. Decrease output, but not shut down
C. Increase output
D. Continue to produce at its current level of output.
23. ABCFLEECE, sells fleece vests in a competitive market at a price of $112.95 per vest.
At the current profit-maximizing level of production, ABCFLEECE produces 15,000 vests
per month. Labor and wool are the only variable inputs used in the production process. The
labor cost per vest is $89.95 and the fleece cost is $15.00. The fixed costs of the firm are
$15,000 per month. Ceteris paribus, it follows that at this leverl of output the firm is:
A. Earning an economic profit, but should increase price to increase its profit
B. Making an economic loss, and should raise its price to cover all of its costs
C. Making an economic loss, and should shut down in the short run
D. Earning an economic profit, and should continue at its current level of production
To answer question #24 through #26, use the following diagram, which shows the costs of
a competitive firm.
24. At a market price of $30 per unit, it follows that the firm would be _____ and _____.
A. Making an economic profit; should produce 1,000 units of output.
B. Making an economic loss, should produce 1,000 units of output.
C. Making an economic profit; should produce more than 1,000 units of output.
D. Making an economic loss, should shut down.
25. At a market price of $14 per unit, it follows that the firm would be _____ and _____.
A. Making an economic loss; should shut down
B. Making an economic loss; should produce 1,000 units of output.
C. Making an economic profit; should produce 1,000 units of output.
D. Making an economic profit; should produce more than 1,000 units of output.
26. The firm’s total fixed cost is:
A. $1,000
B. $5,000
C. $10,000
D. $100,000
27. Suppose that in a perfectly competitive market, in the short run a profit-maximizing
firm produces a quantity such that average total cost (ATC) equals the price (P); price
equals marginal cost (MC); marginal cost is greater than average variable cost (AVC)-i.e.
ATC=P=MC>AVC. Ceteris paribus, we may conclude that:
A. The firm is earning an economic profit, and if this condition persists, new firm will be
attracted to this market.
B. Total variable cost exceeds total revenue.
C. The firm will earn a “normal” profit, and investors will receive the “normal” rate of
return.
D. If this condition persists, some firms will leave this market.
28. Governments typically grant patents and copyrights. The primary objective of these
laws and regulations is to encourage:
A. Firms to form government-owned enterprises
B. Low prices for consumers.
C. Research and development on new projects
D. Competition
29. Microsoft hires marketing and sales specialists to decide what prices it should set for its
products; whereas an Illinois corn farmer, who sells her output in the world commodity
market, does not. This is so, because:
A. Microsoft is a price searcher (or “price maker” as your text has it); whereas the corn
farmer is a price taker.
B. Unlike Microsoft, the corn farmer has monopoly power.
C. The corn farmer chooses her output independently of the market price; whereas
Microsoft’s output is a function of the price it selects.
D. Unlike the corn farmer, Microsoft is a price taker.
30. Which of the following statements applies to a monopolist but not to a perfectly
competitive firm at its profit maximizing output?
A. Marginal revenue equals marginal cost
B. Average revenue equals average cost
C. Price equals marginal cost
D. Marginal revenue is less than price
31. A monopolist with constant marginal and average costs sells economic textbooks at
NCSU. Suppose the monopolist is maximizing profits by charging a price of $115 per book.
It follows that the monopolist’s marginal cost is _____; while the monopolist’s marginal
revenue for a textbook is _____.
A. Greater than $115, less than $115
B. Greater than $115, equal to $115
C. Less than $115, less than $115
D. Less than $115, greater than $115
32. Section 2 of the Sherman Antitrust Act of 1890 prohibits _____. The first successful
prosecution was _____:
A. The cartelization of an industry; United States v. Jellico Mountain Coal et al.
B. The monopolization of an industry; United States v. American Tobacco
C. The cartelization of an industry; U.S. Steel v. United States
D. The monopolization of an industry; Northern Securities Co. v. United States
To answer questions #33 through 35, use the following diagram, which shows the costs and
revenues of a monopoly.
33. The monopolist in the diagram would maximize profits or minimize losses by
producing:
A. Between zero and 50 units of output
B. 100 units of output
C. Between 50 and 100 units of output
D. 50 units of output
34. At the profit-maximizing level of output, the actual profit or loss would be:
A. An economic profit of $150
B. An economic loss of $50
C. An economic loss of $100
D. An economic profit of $50
35. Assume this industry were to become competitive, and assume that the monopolist has
no inherent cost advantage over competitive firms. Ceteris paribus, it follows that that
competitive level of output would be _____, and the total profits of the competitive firms in
the industry would be _____.
A. 100; $0
B. 50; $100
C. 0; $0
D. 50; $0
36. Employing all of its productive resources efficiently, and facing a linear production
possibilities frontier, Ireland can produce 10 units of potatoes and zero units of oatmeal, or
12 units of oatmeal and zero units of potatoes; whereas, Scotland can produce 7 units of
potatoes and zero units of oatmeal, or 6 units of oatmeal and zero units of potatoes.
Assuming that each country wants to maximize the consumption by its citizens, ceteris
paribus, _____ should export _____, and _____ should export _____.
A. Ireland; potatoes; Ireland; oatmeal
B. Scotland; potatoes; Ireland; oatmeal
C. Scotland; potatoes; Scotland; oatmeal
D. Scotland; oatmeal; Ireland; potatoes
Answer Sheet
Lab Section: ____________
Name: _________________
Student ID: _____________
Note: 1. only turn in the answer sheet.
2. The homework is due on the lab of the last week of this semester (Dec 1
if on Wed, Dec 2 if on Thursday)
3. Absolutely no late homework will be accepted.
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