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Sample Practice Questions, Final Exam, Prof. Kalchev, Microeconomics
1.If an economy is operating at a point inside the production possibilities curve,
Xa. its resources are being wasted.
b. the curve will begin to shift inward.
c. the curve will begin to shift outward.
d. This is a trick question because an economy cannot produce at a point inside the curve.
2. Which of the following is not a factor of production?
a. labour
b. land
xc. money
d. capital
e. All of these answers are factors of production.
3.Points on the production possibilities frontier are
a. inefficient.
b. normative.
c. unattainable.
xd. efficient.
e. none of these answers.
4. Which of the following will not shift a country's production possibilities frontier outward?
a. an advance in technology
b. an increase in the labour force
c. an increase in the capital stock
xd. a reduction in unemployment
5. Economic growth is depicted by
xa. a shift in the production possibilities frontier outward.
b. a movement from inside the curve toward the curve.
c. a shift in the production possibilities frontier inward.
d. a movement along a production possibilities frontier toward capital goods.
6. Refer to Exhibit 6. If the economy is operating at point C, the opportunity cost of producing
an additional 15 units of bacon is
a. 40 units of eggs.
b. 10 units of eggs.
xc. 20 units of eggs.
d. 30 units of eggs.
e. 50 units of eggs.
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7. Refer to Exhibit 6. If the economy were operating at point E,
a. the opportunity cost of 20 additional units of eggs is 10 units of bacon.
b. the opportunity cost of 20 additional units of eggs is 20 units of bacon.
c. the opportunity cost of 20 additional units of eggs is 30 units of bacon.
xd. 20 additional units of eggs can be produced with no impact on bacon production.
8. Refer to Exhibit 6. As we move from point A to point D,
a. the opportunity cost of eggs in terms of bacon falls.
xb. the opportunity cost of eggs in terms of bacon rises.
c. the opportunity cost of eggs in terms of bacon is constant.
d. the economy becomes less efficient.
e. the economy becomes more efficient
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9. Which of the following issues is related to microeconomics?
xa.the impact of oil prices on car production
b. the impact of money on inflation
c. the impact of technology on economic growth
d. the impact of the deficit on saving
10. Which of the following statements is normative?
a. Large government deficits cause an economy to grow more slowly.
b. People work harder if the wage is higher.
xc.The unemployment rate should be lower.
d. Printing too much money causes inflation.
11. Which of the following would most likely increase the demand for peanut butter?
xa. a decrease in the price of bread, a good that is often used with peanut butter
b. a discovery that the average daily consumption of peanut butter decreases one's life span
by 15 years
c. crop failures that raise the price of peanuts
d. a decrease in the price of all substitute protein products
12. Economic profit is best defined as
a. a company's net income as indicated by its accounting statement. b. the difference between
the price of a product and the monetary cost of the raw materials used to produce it.
xc. the difference between the revenue from the sale of a product and the opportunity cost of
the resources used to produce it.
d. income paid by a business to its owners.
13. The number of persons wanting tickets to Super Bowl games is invariably greater than
the number of tickets (and seats) available. This is evidence that the price of the tickets is
a. higher than the competitive equilibrium price.
b. equal to the competitive equilibrium price since the number of tickets bought equals the
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number sold.
xc. lower than the competitive equilibrium price.
d. higher than the competitive equilibrium price when the demand is inelastic but lower when
the demand is elastic.
14. "A reduction in gasoline prices caused the demand for cars to increase. The lower prices
led to an increase in demand for large cars, causing their prices to rise." These statements
xa. are essentially correct.
b. contain one error; the lower gasoline prices would cause a reduction in demand for large
cars, not an increase.
c. contain one error; the lower gasoline prices would increase the quantity of gasoline
demanded by consumers, not the demand for large cars.
d. contain two errors; the lower gasoline prices would cause the quantity of gasoline
demanded (rather than demand for large cars) to increase, and the lower gasoline price would
reduce (rather than increase) the demand for large cars.
15. A cold spell in Florida extensively reduced the orange crop, and, as a result, California
oranges commanded a higher price. Which of the following statements best explains the
situation?
a. The supply of Florida oranges fell, causing the supply of California oranges to increase as
well as their price.
b. The supply of Florida oranges fell, causing the supply of California oranges to decrease
and their price to increase.
xc. The supply of Florida oranges fell, causing their price to increase and the demand for
California oranges to increase.
d. The demand for Florida oranges was reduced by the freeze, causing an increase in the
price of California oranges and a greater demand for them.
16. When a price floor is above the equilibrium price,
xa. quantity demanded will exceed quantity supplied.
b. quantity supplied will exceed quantity demanded.
c. the market will be in equilibrium.
d. This is a trick question because price floors generally exist below the equilibrium price.
17. The price of chicken increases as the result of higher beef prices. This indicates that
xa. chicken and beef are substitutes.
b. chicken and beef are complements.
c. the market demand for beef is inelastic.
d. the market demand for chicken is elastic.
18. If a small percentage increase in the price of a good greatly reduces the quantity demanded
for that good, the demand for that good is
a. income inelastic.
xb. price inelastic.
c. price elastic.
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d. unit price elastic.
e. income elastic.
19. In general, a flatter demand curve is more likely to be
xa. price elastic.
b. unit price elastic.
c. none of these answers.
d. price inelastic.
20. In general, a steeper supply curve is more likely to be
a. price elastic.
b. none of these answers.
c. unit price elastic.
xd. price inelastic.
21. Which of the following would cause a demand curve for a good to be price inelastic?
a. The good is a luxury.
b. There are a great number of substitutes for the good.
xc. The good is a necessity.
d. The good is an inferior good.
22. If the cross-price elasticity between two goods is negative, the two goods are likely to be
a. substitutes.
xb. complements.
c. necessities.
d. luxuries.
23. If a supply curve for a good is price elastic, then
xa. the quantity supplied is sensitive to changes in the price of that good.
b. the quantity demanded is insensitive to changes in the price of that good.
c. the quantity demanded is sensitive to changes in the price of that good.
d. the quantity supplied is insensitive to changes in the price of that good.
e. none of these answers.
24. If an increase in the price of a good has no impact on the total revenue in that market,
demand must be
a. all of these answers.
b. price inelastic.
xc. unit price elastic.
d. price elastic.
25. Suppose that at a price of €30 per month, there are 30,000 subscribers to cable television in
Small Town. If Small Town Cablevision raises its price to €40 per month, the number of
subscribers will fall to 20,000. Using the midpoint method for calculating the elasticity, what
is the price elasticity of demand for cable TV in Small Town?
a. 1.4
b. 0.66
c. 0.75
d. 2.0
e. 1.0
26. Suppose that at a price of €30 per month, there are 30,000 subscribers to cable television in
Small Town. If Small Town Cablevision raises its price to €40 per month, the number of
subscribers will fall to 20,000. At which of the following prices does Small Town
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Cablevision earn the greatest total revenue?
a. €0 per month
Xb.€30 per month
c. €40 per month
d. Either €30 or €40 per month because the price elasticity of demand is 1.0.
27. If the income elasticity of demand for a good is negative, it must be
a. an elastic good.
Xb.an inferior good.
c. a normal good.
d. a luxury good.
28. If consumers think that there are very few substitutes for a good, then
a. supply would tend to be price elastic.
b. none of these answers.
Xc.demand would tend to be price inelastic.
d. demand would tend to be price elastic.
e. supply would tend to be price inelastic.
29. Rent control applies to about two-thirds of the private rental housing in New York City.
Economic theory suggests that the below-equilibrium prices established by rent controls would
a. redistribute income from tenants to landlords.
b. promote a rapid increase in the future supply of housing.
Xc. result in poor service and quality deterioration of many rental units.
d. lead to a reduction in housing discrimination against minorities.
30. Which of the following is the most likely result of an increase in the minimum wage?
a. an increase in the employment of unskilled workers
b. a decrease in the unemployment rate of unskilled workers
c. an increase in the demand for unskilled workers
Xd. a decrease in the employment of unskilled workers
31. The limit on the consumption bundles that a consumer can afford is known as
a. an indifference curve.
Xb.the budget constraint.
c. the marginal rate of substitution.
d. the consumption limit.
32. Indifference curves for perfect substitutes are
a. right angles.
b. bowed outward.
Xc.straight lines.
d. nonexistent.
e. bowed inward.
33. Suppose a consumer must choose between the consumption of sandwiches and pizza. If we
measure the quantity of pizza on the horizontal axis and the quantity of sandwiches on the
vertical axis, and if the price of a pizza is €10 and the price of a sandwich is €5, then the
slope of the budget constraint is
Xa.2
b. 10
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c. 1/2
d. 5
34. The slope at any point on an indifference curve is known as
Xa.the marginal rate of substitution.
b. the marginal rate of trade-off.
c. the trade-off rate.
d. the marginal rate of indifference.
35. Which of the following statements is not true with regard to the standard properties of
indifference curves?
a. Indifference curves are downward sloping.
Xb.Indifference curves are bowed outward.
c. Indifference curves do not cross each other.
d. Higher indifference curves are preferred to lower ones.
36. The consumer's optimal purchase of any two goods is the point where
a. the budget constraint crosses the indifference curve.
b. the two highest indifference curves cross.
Xc.the consumer reaches the highest indifference curve subject to remaining on the
budget constraint.
d. the consumer has reached the highest indifference curve.
37. Which of the following is true about the consumer's optimum consumption bundle? At the
optimum,
a. the slope of the indifference curve equals the slope of the budget constraint.
b. the indifference curve is tangent to the budget constraint.
c. the relative prices of the two goods equals the marginal rate of substitution.
d. none of these answers are true.
Xe.all of these answers are true.
38. Suppose we measure the quantity of good X on the horizontal axis and the quantity of good
Y on the vertical axis. If indifference curves are bowed inward, as we move from having an
abundance of good X to having an abundance of good Y, the marginal rate of substitution of
good Y for good X (the slope of the indifference curve)
Xa.rises.
b. stays the same.
c. could rise or fall depending on the relative prices of the two goods.
d. falls.
39. If an increase in a consumer's income causes the consumer to increase his quantity demanded
of a good, then the good is
a. a complementary good.
b. an inferior good.
Xc.a normal good.
d. a substitute good.
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40.Refer to Exhibit 4. Suppose that the consumer must choose between buying socks and belts.
Also, suppose that the consumer's income is €100. If the price of a belt is €10 and the price of a
pair of socks is €5, the consumer will choose to buy the commodity bundle represented by point
Xa. Z
b. X
c. Y
d. the optimal point cannot be determined from this graph.
41.Refer to Exhibit 4. Suppose that the consumer must choose between buying socks and belts.
Also, suppose that the consumer's income is €100. Suppose that the price of a pair of socks falls
from €5 to €2. The substitution effect is represented by the movement from point
Xa. Z to point X.
b. X to point Y.
c. X to point Z.
d. Y to point X.
42.Refer to Exhibit 4. Suppose that the consumer must choose between buying socks and belts.
Also, suppose that the consumer's income is €100. Suppose that the price of a pair of socks has
falls from €5 to €2. The income effect is represented by the movement from point
Xa. X to point Y.
b. X to point Z.
c. Y to point X.
d. Z to point X
43. Which one of the following would most likely increase the demand for coffee?
a. a decrease in consumer income
b. a decrease in the price of coffee
Xc. an increase in the price of tea, a close substitute
d. a drought in the coffee-producing regions of Brazil
44. If the price of gasoline fell, the market demand curve for automobile tires, a complement,
would
Xa. shift to the right.
b. shift to the left.
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c. remain stationary.
d. become more elastic.
45. When economists say the demand for a product has increased, they mean that the
a. demand curve for the product has shifted to the left.
b. price of the product has fallen, and consequently consumers are buying more of the product.
c. cost of producing the product has increased.
Xd. amount of the product that consumers are willing to purchase at various prices has
increased.
46. Which of the following items is most likely to be an implicit cost of production?
a. property taxes on a building owned by the firm
b. transportation costs paid to a trucking supplier
c. rental payments for a building utilized by the company and rented from another
party
Xd. interest income foregone on funds invested in the firm by the owners
47. In the short run, the marginal cost curve crosses the average total cost curve at
a. a point just below the average fixed cost curve.
X b. the minimum point on the average total cost curve.
c. the maximum point of the average variable cost curve.
d. All of the above are correct.
48. When costs that do not change with the level of output are divided by the output
level, you have calculated
a. total cost.
b. average total cost.
Xc. average fixed cost.
d. marginal cost.
49. What kind of costs are irrelevant when making decisions?
Xa. sunk costs
b. marginal costs
c. fixed costs
d. variable costs
50. Which of the following would shift a firm's short-run cost curves upward?
a. an advance in technology
Xb. an increase in employees' wages
c. a decrease in the demand for the firm's product
d. a reduction in excise taxes levied on the firm's product
51. If there are implicit costs of production,
Xa.accounting profit will exceed economic profit.
b. economic profit will always be zero.
c. economic profit will exceed accounting profit.
d. accounting profit will always be zero.
e. economic profit and accounting profit will be equal.
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52. The short-run supply curve is more inelastic than the long-run supply curve
because
a. resources are generally cheaper in the short run.
b. in the short run new firms will enter the industry, driving up the prices of
resources.
c. consumers are willing to pay higher prices to obtain the commodity now, rather
than wait until prices fall.
X d. firms have less time to plan and vary all of their productive inputs in the
short run; thus, per-unit costs will be higher.
53. In competitive price-taker markets, firms are assumed to be producing
X a. identical products.
b. small products.
c. large products.
d. differentiated products.
54. When we say that a firm is a price taker, we are indicating that
a. the firm takes the price established in the market then tries to increase that
price through advertising.
Xb. the firm can increase or decrease its rate of production and sales without
having any significant effect on the price of the product it sells.
c. the demand curve faced by the firm is perfectly inelastic.
d. the firm will have to take a lower price if it wants to increase the number of
units that it sells.
55. In price-taker markets, individual firms have no control over price. Therefore,
the firm's marginal revenue curve is
a. indeterminate.
b. a downward-sloping curve.
Xc. constant at the market price of the product.
d. precisely the same as the firm's total revenue curve.
56. If marginal cost exceeds marginal revenue, a price-taker firm should
a. expand output.
Xb. reduce output.
c. lower its price.
d. Both a and c are correct.
57. When firms in a price-taker market are temporarily charging prices that exceed
their production costs, the firms
a. will earn long-run economic profit.
X b. will expand the scale of their operation and additional firms will enter the
industry until price falls to the level of per-unit production cost.
c. will earn short-run economic profits that will be offset by long-run economic
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losses.
d. must be colluding or rigging the market, or otherwise they would be unable to
charge such high prices.
58. When market conditions in a price-taker market are such that firms cannot cover
their TOTAL production costs, then
a. the firms will suffer long-run economic losses.
b. the firms will suffer short-run economic losses that will be exactly offset by
long-run economic profits.
xc. some firms will go out of business, causing prices to rise until the remaining
firms can cover their production costs.
d. all firms will go out of business, since consumers will not pay prices that
enable firms to cover their production costs.
59. When the price of a product rises, the increase in quantity supplied will
generally be greater in the long run than the short run because
a. producers maximize short-run, but not long-run, profits.
Xb. over time, new firms will enter the industry and old firms will expand their
operations in response to the price increase.
c. consumers are less resistant to higher prices in the long run than in the short
run.
d. consumer income will expand in the long run, causing resource prices to rise,
which will induce producers to increase output.
60. If occupational safety laws were changed so that firms no longer had to take
expensive steps to meet regulatory requirements, we would expect that
a. the demand for the products of this industry would increase.
b. the market price of the products of this industry would decrease in the short
run but not in the long run.
c. the firms in the industry would make long-run economic profit.
Xd. competition would force producers to pass the lower production costs on to
consumers in the long run.
61. "Our marginal revenue exceeds our marginal costs at current factor prices." This
statement indicates that
X a. an expansion in output will increase revenues more than costs.
b. the firm is maximizing its profit.
c. a larger output will reduce the firm's profit.
d. the firm is better at marketing its goods than it is at producing efficiently.
1. In a competitive MARKET, the firms will
a. be able to choose their price and the entry barriers into the market will be
low.
b. be able to choose their price and the entry barriers into the market will be
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high.
Xc. have to accept the market price for their product and the entry barriers into
the market will be low/non-existent.
d. have to accept the market price for their product and the entry barriers into
the market will be high.
62. If firms in a competitive price searcher market are currently experiencing
positive economic profits, in the long run
X a. new firms will enter the market, and the current firms will experience a
decrease in demand for their products until zero economic profit is again
restored.
b. new firms will enter the market, and the current firms will experience an
increase in demand for their products until zero economic profit is again
restored.
c. some existing firms will exit the market, and the remaining firms will
experience an increase in demand for their products until zero economic profit
is again restored.
d. some existing firms will exit the market, and the remaining firms will
experience a decrease in demand for their products until zero economic profit
is again restored.
63. When economies of scale are important and an industry tends toward natural
monopoly, splitting the industry into small, rival firms will
a. lead to lower prices in the short run.
b. cause prices to rise when demand is inelastic but fall when it is elastic.
c. cause prices to fall because of the decline in producer profits.
Xd. increase per-unit costs of production.
64. A monopolist will maximize profits by
a. setting his price as high as possible.
b. setting his price at the level that will maximize per-unit profit.
Xc. producing the output where marginal revenue equals marginal cost and charging a
price along the demand curve.
d. producing the output where price equals marginal cost.
65. Which one of the following is the most accurate description of a monopolist?
a. a firm that produces a single product
b. a firm that is the sole producer of a narrowly defined product class, such as
yellow, grade A, butter produced in Jackson County, Wisconsin
X c. a firm that is the sole producer of a product for which there are no good
substitutes in a market with high barriers to entry
d. a firm that is large relative to its competitors
66. Assuming that firms maximize profits, how will the price and output policy
of an unregulated monopolist compare with ideal market efficiency?
a. The output of the monopolist will be too large and its price too high.
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b. The output of the monopolist will be too large and its price too low.
Xc. The output of the monopolist will be too small and its price too high.
d. The output of the monopolist will be too small and its price too low.
67. An oligopolistic market
a. has a small number of rival firms, and each is large relative to the market.
b. makes the demand for each firm dependent on the actions of its rivals.
c. has high entry barriers facing firms that could otherwise enter the market.
Xd. all of the above answers are correct.
68. Oligopolistic agreements on price tend to be unstable because
a. although the monopoly price is the best price for all firms, oligopolists are
unaware of this.
Xb. although the monopoly price maximizes the joint profits of the firms, a secret
price cut by any individual firm will increase the profits of that firm; hence,
collusive agreements tend to break down.
c. the demand for the products of oligopolistic industries is inherently unstable
relative to the demand for the products of non-oligopolistic industries.
d. firms in oligopolistic industries have more concern for consumers than do firms
in competitive industries.
69. The price charged by oligopolists
a. will equal the equilibrium price in a price takers market if the oligopolists
collude.
b. will equal the monopoly price if the oligopolists do not collude.
X c. will generally lay between the monopoly and competitive market equilibrium
prices.
d. will be the same whether the oligopolists cooperate with one another or not.
70. When firms use resources in an attempt to secure and maintain grants of market
protection from the government, it is called
X a. rent-seeking.
b. collusion.
c. franchising.
d. resource investment.
71. The incentive for the managers of a government-operated firm (for example, a state
university) to promote internal efficiency and keep costs low will be
X a. weak, because it will be difficult for voters and their representatives to
monitor and eliminate the inefficiency of such firms.
b. strong, because public officials will have little concern for personal gain.
c. strong, because voters can easily recognize inefficiency and penalize the
public-sector managers who are responsible.
d. weak, because government employees are less competent than those who work in
the private sector.
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72. When natural monopoly is present in an industry, the per-unit costs of production
will be
a. lowest when there are a large number of producers in the industry.
X b. lowest when a single firm generates the entire output of the industry.
c. lower for small firms than for large firms.
d. minimized at the output that maximizes the industry's profitability.
73. Which of the following is not a barrier to entry in a monopolized market?
Xa.A single firm is very large.
b. The government gives a single firm the exclusive right to produce some good.
c. The costs of production make a single producer more efficient than a large number
of producers.
d. A key resource is owned by a single firm.
74. When a monopolist produces an additional unit, the marginal revenue generated by that unit
must be
Xa.below the price because the price effect outweighs the output effect.
b. above the price because the output effect outweighs the price effect.
c. above the price because the price effect outweighs the output effect.
d. below the price because the output effect outweighs the price effect.
75. Which of the following statements about price and marginal cost in competitive and
monopolized markets is true?
Xa.In competitive markets, price equals marginal cost; in monopolized markets, price
exceeds marginal cost.
b. In competitive markets, price equals marginal cost; in monopolized markets, price
equals marginal cost.
c. In competitive markets, price exceeds marginal cost; in monopolized markets, price
exceeds marginal cost.
d. In competitive markets, price exceeds marginal cost; in monopolized markets, price
equals marginal cost.
76. Thomson is a monopolist in the production of your textbook because
Xa.Thomson has a legally protected exclusive right to produce this textbook.
b. Thomson owns a key resource in the production of textbooks.
c. Thomson is a natural monopoly.
d. Thomson is a very large company.
77. State governments often use licensing to limit the entry of potential competitors
into the retail liquor industry. To the extent the licensing procedures limit
supply, push up prices, and lead to long-run economic profit, business
entrepreneurs
Xa. have an incentive to use both economic and political means in attempting to
obtain the valuable licenses.
b. have little incentive to enter the licensed industry.
c. would enter the industry only if the licenses were free.
d. would use economic, but not political, methods in attempting to obtain the
valuable licenses.
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79. Economic theory indicates that regulations requiring automobile manufacturers to
produce cars with air bags, stronger bumpers, and higher gasoline mileage
a. increase the supply of automobiles and lead to lower automobile prices.
xb. decrease the supply of automobiles and lead to higher automobile prices.
c. increase demand and lead to a lower market price of automobiles.
d. leave the market price of automobiles unchanged, since competition will force
manufacturers to bear the burden of these regulatory costs.
80. Which one of the following statements best summarizes U.S. public policy toward
competitive markets?
a. Public policy has consistently promoted competition.
b. Public policy has consistently promoted monopoly, even when competitive markets
have been a realistic alternative.
c. Public policy has been contradictory, sometimes attempting to promote
competition and other times adopting regulatory policies that have stifled
competition.
Xd. Public policy has consistently promoted domestic competition while protecting
domestic producers from foreign competitors when they are receiving
governmental subsidies.
would
81.Suppose that ABC Publishing sells an economics textbook and accompanying study guide.
Roberto is willing to pay €75 for the text and €15 for the study guide. Marie is willing to spend
€60 for the text and €25 for the study guide. Suppose both the book and study guide have a zero
marginal cost of production. If ABC Publishing engages in tying the two products, its best
strategy is to charge a combined price of
a. €60.
b. €90.
Xc. €85.
d. €75.
e. €80
T/F:
82. T The unique feature of an oligopoly market is that the actions of one seller have a
significant impact on the profits of all of the other sellers in the market.
83. F When oligopolists collude and form a cartel, the outcome in the market is similar to
that generated by a perfectly competitive market.
84.T The price and quantity generated by a Nash equilibrium is closer to the competitive
solution than the price and quantity generated by a cartel.
85.F Cooperation is easily maintained in an oligopoly because cooperation maximizes
each individual firm's profits.
86.T The prisoners' dilemma demonstrates why it is difficult to maintain cooperation
even when cooperation is mutually beneficial.
87.Which of the following companies most closely approximates a monopolistic competitor?
(a)
(b)
X Subway (sandwiches).
Northern Indiana Public Service Company (NIPSCO) – natural gas and electric utility.
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(c)
(d)
Ford Motor Company.
Microsoft.
Figure 1
Marginal
$/Q
Average
Total
Cost
Cost
19
Average
16
Variable
13
Cost
Marginal
Rev
10
Demand
Quantity (Q)
110
88.Figure 1 refers to a monopolistic competitive firm in short run equilibrium. The firm's profit maximizing or loss
minimizing price will be:
(a)
(b)
(c)
(d)
$10
$13
$16
$19
0
89.The firm in Figure 1 will realize an economic:
(a)
Xloss of $330
(b)
loss of $990
(c)
profit of $330
(d)
profit of $660
90.Which of the following is an illustration of differentiated oligopoly?
(a)
(b)
(c)
(d)
the aluminium industry.
the steel industry.
the cement industry.
xthe soft drink industry.
91. Suppose the equilibrium price for apartments is €500 per month and the government
imposes rent controls of €250. Which of the following is unlikely to occur as a result of
the rent controls?
a. There may be long lines of buyers waiting for apartments.
b. Landlords may discriminate among apartment renters.
c. Landlords may be offered bribes to rent apartments.
d. There will be a shortage of housing.
Xe.The quality of apartments will improve.
92. A price floor
a. always determines the price at which a good must be sold.
b. sets a legal maximum on the price at which a good can be sold.
c. is not a binding constraint if it is set above the equilibrium price.
Xd.sets a legal minimum on the price at which a good can be sold.
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93. The surplus caused by a binding price floor will be greatest if
a. demand is inelastic and supply is elastic.
b. supply is inelastic and demand is elastic.
Xc.both supply and demand are elastic.
d. both supply and demand are inelastic.
94. Which of the following is an example of a price floor?
Xa.the minimum wage
b. rent controls
c. restricting petrol prices to €1.00 per litre when the equilibrium price is €1.50 per
litre
d. All of these answers are price floors.
95. Within the supply and demand model, a tax collected from the buyers of a good shifts the
a. supply curve downward by the size of the tax per unit.
b. supply curve upward by the size of the tax per unit.
c. demand curve upward by the size of the tax per unit.
Xd.demand curve downward by the size of the tax per unit.
96. Within the supply and demand model, a tax collected from the sellers of a good shifts the
a. demand curve downward by the size of the tax per unit.
b. supply curve downward by the size of the tax per unit.
c. demand curve upward by the size of the tax per unit.
Xd.supply curve upward by the size of the tax per unit.
97. When a tax is collected from the buyers in a market,
a. the tax burden falls most heavily on the buyers.
b. the buyers bear the burden of the tax.
c. the sellers bear the burden of the tax.
Xd.the tax burden on the buyers and sellers is the same as an equivalent tax collected
from the sellers.
98. The burden of a tax falls more heavily on the sellers in a market when
a. both supply and demand are elastic.
b. both supply and demand are inelastic.
c. demand is inelastic and supply is elastic.
Xd.demand is elastic and supply is inelastic.
99. A tax placed on a good that is a necessity for consumers will likely generate a tax burden
that
a. falls more heavily on sellers.
b. falls entirely on sellers.
Xc.falls more heavily on buyers.
d. is evenly distributed between buyers and sellers.
100. Which of the following statements about the burden of a tax is correct?
a. The tax burden generated from a tax placed on a good consumers perceive to be a
necessity will fall most heavily on the sellers of the good.
b. The burden of a tax falls on the side of the market (buyers or sellers) from which it
is collected.
Xc.The distribution of the burden of a tax is determined by the relative elasticities of
supply and demand and is not determined by legislation.
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d. The tax burden falls most heavily on the side of the market (buyers or sellers) that is
most willing to leave the market when price movements are unfavourable to them.
1.. Textbook
Pricing. Consider the problem of setting a price for a book. The marginal cost of
production is constant at $21 per book. The publisher knows that the slope of the demand curve
is -$0.20 per textbook: starting with a price of 44, a price cut of .20 will increase quantity
demanded by one book.
P
44
43
42
41
40
Q
80
TR
a. What price will the publisher choose?
b. Suppose the author receives a royalty payment equal to 10% of total sales revenue. If the
author could choose a price, what would it be?
c. Redo a. assuming that not the slope, but the elasticity of D is -.20.
2.Mr. Pencho consumes two goods: celery and cucumbers. The price of celery is 1 lv. per kg.
and the price of cucumbers is 3 lv. per kg. His income for the purpose is 10 lv. The data for
utility from the goods are shown below, where Q=quantity consumed, TU=total utility and
MU=marginal utility.
Celery
Cucumbers
Q
1
2
3
4
5
TU
MU
Q
TU
MU
20
1
38
38
2
74
53
3
104
65
4
124
70
5
129
a) complete the table and fill in the missing values for MU. (One formula is sufficient.)
b) How many units (kilograms) of each good will Mr. Pencho consume, e.g., what is the
combination that will maximize his utility? Why? Show your work.
3. Suppose a firm has a patent on a special process to make a unique
smoked salmon. The following table provides information about the
demand facing this firm for this unique product.
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a. Complete the table above.
b. Suppose that there are no fixed costs and that the marginal cost of
production of smoked salmon is constant at €6 per kilogram. (Thus, the
average total cost is also constant at €6 per kilogram.) What is the
quantity and price chosen by the monopolist? What is the profit earned
by the monopolist?
c. Compare the monopoly solution and the efficient solution (perfect competition). That
is, is the monopolist's price too high or too low? Is the monopolist's quantity
too high or too low? Why? How much would be the perfect competitor’s price and
quantity in this case?
d. Is there a deadweight loss in this market if the monopolist charges the
monopoly price? How much is it? Explain.
h. If the monopolist is able to costlessly and perfectly price discriminate, is
the outcome efficient? Explain. What is the value of consumer surplus and
producer profit then?
Problems from ppt ch. 6