Name: ________________________ Class: ___________________ Date: __________ ID: A 1 Sample questions and answers: Exam 1 True/False Indicate whether the sentence or statement is true or false. ____ 1. If the price and quantity exchanged of a good simultaneously rise, then the law of demand has been violated. ____ 2. The most efficient typist is the one who can type the greatest number of words per minute. ____ 3. Firms are so diverse in size and organization that it is not possible to make any general statements about their behavior. ____ 4. A change in a variable cost causes a parallel upward shift in the marginal cost curve. ____ 5. For a competitive firm, marginal revenue is constant and equal to the market price. ____ 6. If a tax and a price control have the same effect on the price paid by consumers, then the two policies will create the same deadweight loss. ____ 7. The value of a good is ultimately determined by the amount of labor needed to produce the good. ____ 8. The competition among firms to acquire the rights to legal barriers to entry helps to reduce the welfare costs of monopoly. Multiple Choice Identify the letter of the choice that best completes the statement or answers the question. ____ 9. When the price of a barrel of crude oil rises, what will be the immediate effect on the market for home heating fuel produced from crude oil? a. The demand for the fuel will fall. b. The quantity demanded of fuel will rise. c. The supply of fuel will fall. d. The quantity supplied of fuel will fall. ____ 10. If the supply of oil falls and all other relevant factors remain unchanged, then, a. the demand for oil will fall. b. the quantity demanded of oil will fall. c. the demand for oil will rise. d. the quantity demanded of oil will rise. ____ 11. According to the law of demand, if other relevant factors remain unchanged, then a rise in the price of a commodity will cause a. a reduction in the equilibrium quantity. b. excess supply. c. suppliers to reduce their production in reaction to the lower demand. d. a fall in the quantity demanded. ____ 12. The term demand refers to a. a collection of numbers, listing the quantities demanded at a variety of hypothetical prices. b. the information on tastes, incomes, and prices needed to determine people's desired purchases of a commodity. c. the amount of a commodity that is being purchased under current market conditions. d. the quantity purchased at each and every possible level of income. Name: ________________________ ID: A 2 ____ 13. Which of the following would cause the demand curve for peanuts to shift to the left? a. A rise in the price of peanuts. b. A blight that destroyed 75% of the peanut harvest. c. A report claiming that the high fat content of peanuts causes heart disease. d. A tariff that doubles the price of imported pistachio nuts. ____ 14. Surveys show that a small increase in the price of fresh tomatoes will cause most people to switch to other alternatives such as canned tomatoes. This finding suggests that the demand curve for fresh tomatoes is a. relatively steep. b. relatively flat. c. upward sloping. d. vertical. ____ 15. If the demand curve for cigarettes is relatively steep, then a. higher cigarette prices would cause a large number of people to quit smoking. b. the law of demand does not hold for cigarettes. c. shifts in the supply curve for cigarettes will have relatively little effect on the price of cigarettes. d. the price of cigarettes has relatively little effect on smokers' decision to buy cigarettes. ____ 16. Consider a demand curve for reckless driving, for which the "price of reckless driving" is interpreted as the probability of having a fatal accident. When could safer cars lead to an increase in total number of driver fatalities? a. Always. b. Never. c. When the demand curve is relatively flat. d. When the demand curve is relatively steep. ____ 17. In a supply-demand diagram, the law of supply is illustrated by a. shifting the supply curve to the right as suppliers expand production and to the left as they contract production. b. drawing the supply curve so that it slopes upward. c. showing how the equilibrium point changes as the supply curve shifts. d. drawing a vertical line at the quantity that producers choose to supply. ____ 18. Which of the following would shift the supply curve for coffee to the right? a. An innovation in agricultural techniques that allows growers to produce coffee less expensively. b. A late frost in Brazil that destroys 75% of its coffee bean crop. c. An increase in the wages paid to coffee bean pickers. d. A rise in the popularity of espresso, cappuccino, and other exotic coffee drinks. ____ 19. A fall in supply is illustrated by a. a downward shift in the supply curve. b. moving the equilibrium point down and to the left along the supply curve. c. drawing the supply curve flatter. d. shifting the supply curve to the left. ____ 20. At the equilibrium point of a market, a. supply equals demand. b. neither demanders nor suppliers are satisfied. c. the quantities supplied and demanded are equal. d. suppliers will refuse any price increases offered by demanders. Name: ________________________ ID: A 3 ____ 21. Suppose the price of a commodity is $15 per unit. At that price, consumers wish to purchase 6,000 units weekly and producers wish to sell 4,000 units weekly. In this situation, a. unsatisfied consumers will bid up the market price. b. the market price will fall because producers are unsatisfied. c. the price will rise and the demand will fall to bring the market to equilibrium. d. supply will increase by 2,000 units in order to satisfy consumers. ____ 22. When are demanders satisfied and suppliers unsatisfied? a. Never-neither suppliers nor demanders are ever completely happy with the market price. b. Whenever the market price is above its equilibrium level. c. When the market price is relatively low, because then demanders can buy all they want but suppliers cannot make a profit. d. When rises in supply cause a fall in the equilibrium price of the good. ____ 23. Which of the following would cause a fall in the price of video tape rentals? a. A new nationwide video rental chain opens. b. Movie theaters raise their prices. c. The royalties paid to movie actors increase. d. The price of video cassette recorders (VCRs) falls. ____ 24. A fear that consumption of beef may be related to a life threatening disease spreads rapidly through France. The market result will be: a. the demand falls, price decreases and therefore French consumers buy more beef. b. the demand falls, price decreases and the quantity supplied therefore falls. c. a fall in demand followed by a fall in supply. d. the equilibrium quantity falls, but the price does not change. ____ 25. New safety regulations increase manufacturers' costs of producing signs. What happens in the market for signs? a. The demand falls as buyers refuse to bear the higher production costs. b. The supply falls, resulting in a higher equilibrium price and lower equilibrium quantity. c. Both supply and demand fall, resulting in fewer signs being bought and sold. d. The supply rises as manufacturers attempt to use higher sales to offset their lower profit margins. ____ 26. Which of the following could decrease the equilibrium price but increase the equilibrium quantity of oranges? a. Higher wages are paid to the agricultural workers who harvest the oranges. b. A rise in the cost of treating pests destroying oranges. c. Many new orange groves are planted. d. An increase in the market supply of grapefruit. ____ 27. Which of the following is the most likely to cause the price of air travel to rise? a. Lower prices and improved service in Amtrak (the nation's passenger railroad). b. Improved productive efficiency resulting from airline mergers. c. Higher airplane fuel costs. d. Reports that air travel safety is deteriorating. Name: ________________________ ID: A 4 ____ 28. The accompanying supply-demand diagram shows the market for calculators. The initial price of calculators is P0, and the initial quantity exchanged is Q0. Which of the following situations could be correctly illustrated by the diagram? a. Graphing capabilities and other new features lead people to buy more calculators. b. The cost of memory chips used in calculators falls, lowering the price of calculators. c. Personal computerized notepads with substantial computing power are introduced, reducing people's need for calculators. d. A heavy tariff is placed on calculators imported from overseas. ____ 29. Which of the following would lead to a rise in demand for recordable compact discs by students? a. An increase in the number of disc manufacturers. b. A decrease in the price of CD recording devices. c. A decrease in the price of the disc making machinery. d. A cut in the number of student workers hired by the university, lowering student incomes. ____ 30. Consider the market for restaurant meals. Statistics show that wealthier families spend a greater proportion of their income on restaurant meals than do poorer families. If households' incomes rise substantially during an economic recovery, then we can expect a. an increased demand for restaurant meals. b. an increased supply of restaurant meals. c. a lower price for restaurant meals. d. the demand curve for restaurant meals to shift to the left. ____ 31. Suppose we observe that the price of gasoline has been rising, even though the quantity of gasoline sold has been falling. We can conclude that a. the law of supply does not hold for gasoline. b. the law of demand does not hold for gasoline. c. the demand for gasoline must have fallen. d. the supply of gasoline must have fallen. ____ 32. A simultaneous increase in both the demand for computers and the supply of computers must increase a. the number of computers bought and sold. b. the price of computers. c. both the equilibrium price and quantity of computers. d. the shortage of computers in the market. Name: ________________________ ID: A 5 ____ 33. Assume that the demand curve for apples is downward-sloping and the supply curve for apples is upward-sloping. If the government imposes an excise tax of 10¢ per apple, then the total price (including the tax) that demanders must pay for an apple a. remains unchanged. b. rises by less than 10¢ per apple. c. rises by exactly 10¢ per apple. d. rises by more than 10¢ per apple. ____ 34. Suppose a sales tax of $1 is imposed on recordable compact discs. Suppose the tax causes the price received by suppliers of the discs to fall by 60 cents. In this situation, the economic incidence of the sales tax a. falls more heavily on the demanders of the discs. b. falls more heavily on the suppliers of the discs. c. is evenly split between the demanders and suppliers of the discs. d. is the same as the legal incidence of the tax. ____ 35. Consider a $4 excise tax that has been levied on suppliers of automobile tires. Legislators, in the interest of fairness, change the law so that the tax is evenly split between suppliers and demanders, with each group legally required to pay $2 per tire. In this situation, we can predict that a. suppliers will be made better off and demanders will be made worse off. b. the change will have no economic effect on suppliers and demanders. c. demanders will "pass back" their share of the tax to the suppliers, so that suppliers continue to pay $4 per tire. d. the economic incidence of the tax will be evenly split between suppliers and demanders. ____ 36. To make child daycare more affordable, government advisors are debating two possible options. Plan A is to give daycare centers a $100 subsidy per month per child. Plan B is to give the parents $100 reduction in taxes per month per child in daycare. Which plan benefits parents more? a. Plan A because it will increase the supply of childcare and decrease the price. b. Plan B because the $100 goes directly to the parents. c. The plans are equivalent in terms of their impact on the price minus subsidy paid by parents. d. Plan A because the price will fall, while under Plan B the price will rise. ____ 37. The observation that consumer purchases of oranges decline as the price rises reflects: a. a decrease in demand. b. the law of demand. c. an increase in demand. d. the law of supply. ____ 38. Which of the following would result in a decrease in the demand for coffee? a. A frost in Brazil that damages coffee plants. b. The proliferation of coffee shops in an area. c. A 10 cent tax on the sale of a doughnut. d. Colder than normal temperatures in winter. ____ 39. The imposition of a sales tax on eggs will: a. Cause a parallel shift downward in demand for eggs. b. Cause a parallel shift upward in demand for eggs. c. Lead to an increase in the slope of the demand curve for eggs. d. Have no effect in demand or sales of eggs since they are a small part of any family's budget. Name: ________________________ ID: A 6 ____ 40. Techniques for estimating demand curves using direct observations from the marketplace are part of a family of statistical techniques referred to as: a. legal studies. b. Econometrics. c. policy analysis. d. the expanding realm of Economics. ____ 41. A movement up along a supply curve indicates: a. a rise in supply. b. an increase in the quantity supplied. c. an increase in the sales tax on a good. d. a reaction by suppliers to a decrease in demand. ____ 42. If the wages of loggers went up, the supply of logs would: a. fall, thereby shifting to the right. b. fall, thereby shifting to the left. c. rise, thereby shifting to the right. d. rise, thereby shifting to the left. ____ 43. The simultaneous imposition of a 3 cent sales tax and a 5 cent excise tax on the sale of a cup of coffee would have the same effect on coffee sales as: a. a 2 cent subsidy. b. a 2 cent excise tax . c. a 3 cent excise tax . d. an 8 cent excise tax. ____ 44. The prices typically studied in microeconomics are a. relative prices. b. absolute prices. c. money prices. d. retail prices. ____ 45. The absolute price of a commodity is the amount of a. other goods that must be sacrificed in order to purchase one unit of the commodity. b. resources required to produce one unit of the commodity. c. currency needed to purchase one unit of the commodity. d. time and effort used to develop a market for the buying and selling of the commodity. ____ 46. The difference between an absolute price and a relative price is that: a. absolute prices are based on costs of production, relative prices are based on market exchange. b. absolute prices are in terms of currency, relative prices are in terms of another good. c. absolute prices are in terms of another good, relative prices are in terms of currency. d. absolute prices never change, relative prices change with inflation. ____ 47. Suppose that there are only two goods in Spain, chocolate and bottled water. The absolute price of a 100-gram bar of chocolate is 200 pesetas, and the absolute price of a liter of bottled water is 100 pesetas. What is the relative price of bottled water in terms of chocolate? a. 100 grams per liter. b. 200 grams per liter. c. 50 grams per liter. d. 400 grams per liter. Name: ________________________ ID: A 7 ____ 48. Suppose there are only two goods: bread and wine. In Mexico, the absolute price of wine is 30 pesos per bottle. If the relative price of wine in terms of bread is 5 loaves per bottle, then the absolute price of bread is a. 5 pesos per loaf. b. 6 pesos per loaf. c. 25 pesos per loaf. d. 150 pesos per loaf. ____ 49. Suppose there are only two goods: milk and honey. If the relative price of milk falls, then the relative price of honey a. must also fall. b. must rise. c. is unaffected. d. could rise, fall, or remain unchanged. ____ 50. If inflation causes the absolute prices of all commodities to double, then the relative prices a. will also double. b. will be halved. c. will be unchanged. d. may rise, fall, or remain unchanged. ____ 51. When inflation causes the absolute prices of all commodities to rise, what happens to the relative prices of those commodities? a. The relative prices also rise. b. When absolute prices rise, the corresponding relative prices fall. c. The relative prices are unaffected by changes in absolute prices. d. No prediction can be made about changes in relative prices. ____ 52. The price of silver increases from $10 per ounce to $15 per ounce while the price of gold increases from $300 per ounce to $310. In this situation, the price of silver relative to the price of gold has a. fallen. b. risen. c. remained the same. d. cannot be determined given the information provided. ____ 53. Suppose that because of inflation, the absolute price of a gallon of gasoline increases by 20% and the absolute price of a gallon of milk increases by 10%. In this situation, the price of gasoline relative to the price of milk a. falls. b. rises. c. remains the same. d. changes unpredictably. ____ 54. Suppose that the due to technological innovations, the absolute price of a recordable CD declines by 25% while the absolute price of a recordable cassette tape declines by 10%. In this situation, the price of the CD relative to the price of a tape a. falls. b. rises. c. remains the same. d. changes unpredictably. ____ 55. Prices are commonly measured in "dollars per unit." In this context, the term dollar as used by the microeconomist a. is another term for currency. b. refers to a representative basket of goods in the economy. c. represents the resources used in the production of the good being considered. d. means that the price has been adjusted for inflation. Name: ________________________ ID: A 8 ____ 56. Suppose there are only two goods: lettuce and grapes. In California, a head of lettuce sells for 50¢ and a bunch of grapes sells for $1. In Nebraska, 25¢ must be added to these absolute prices to cover transportation costs. How do these transportation costs affect the relative prices of lettuce and grapes? a. The transportation costs do not affect the relative prices of lettuce and grapes. b. The relative prices of lettuce and grapes are both higher when transportation costs are added. c. The addition of transportation costs makes the relative price of grapes higher and the relative price of lettuce lower. d. The transportation costs raise the relative price of lettuce but lower the relative price of grapes. ____ 57. In France, two qualities of wines are produced - table wine sold in bulk (bring your own bottle) and a higher quality of wine. Suppose that the English import all their wine from France. Then, we would we expect to find, on average that a. the English drink more of the higher quality of wine, because transportation costs will lower the relative price of high-quality wine relative to table quality wine. b. the English will drink more table quality wine, because transportation costs will raise the relative price of table quality wine to high-quality wine. c. the French will drink more of the high quality wine because transportation costs reduce demand for wine in England. d. the French will drink more of the high quality wine because the wine is produced there. ____ 58. Assume furniture is produced using only labor and wood. Which of the following best describes the cost of producing furniture? a. The number of dollars that the laborer spends to purchase the wood. b. The amounts of labor and wood used in the production process. c. The alternative uses that could be found for the labor and wood. d. The monetary value of the labor and wood used. ____ 59. Kelly has received a $50 check from her Grandparents to help with her expenses at college. She has narrowed her choices of how to spend the money to three: a new backpack, a dinner out with a friend, a fleece vest. Of these she likes the vest best and the backpack least. What is her cost of buying the fleece vest? a. $50. b. A new backpack. c. A dinner out with a friend. d. Nothing since the money was a gift to her. ____ 60. Suppose that in Paraguay, one of the poorest countries in the Americas, only two of the goods that are produced can compete in world markets, tea and DVD players. Given this success in exporting, Paraguay a. should specialize only in DVD players since tea production is an old industry. b. should specialize in the production of tea, since its people are probably too poor to buy DVD players. c. should stop exporting both goods and produce more food products for its people. d. is better off producing both goods in which it has a comparative advantage, relative to all other goods. ____ 61. Suppose there are only two goods: food and clothing. What does it mean for the U.S. to have a comparative advantage in food production? a. The U.S. needs fewer resources to grow a given amount of food than do other nations. b. The U.S. sacrifices less clothing production to grow a given amount of food than do other nations. c. In the U.S., food production needs fewer resources than does a comparable amount of clothing production. d. In the U.S., food production costs less than does clothing production. Name: ________________________ ID: A 9 ____ 62. In 1 hour, Robinson Crusoe can either shoot 4 birds or catch 4 fish. A typical native on a nearby island can either shoot 5 birds or catch 10 fish in an hour's time. Which of the following is true according to the doctrine of comparative advantage? a. Crusoe will be better off if he specializes in either activity and then trades with the natives. b. The natives have a comparative advantage in both shooting birds and catching fish, so Crusoe cannot make himself better off by trading with the natives. c. Crusoe should concentrate on shooting birds and then trade with the natives to obtain fish. d. Crusoe should spend his time catching fish, and he should trade with the natives to obtain birds. ____ 63. To be as well off as possible, a nation should produce a. only those goods that its populace desires. b. the good within its productive capabilities that commands the highest price in the world market. c. the good that requires the fewest resources to produce. d. whatever good it can produce at a cost lower than that incurred by other nations. ____ 64. Farmer Ken in Kentucky can raise either 80 pounds of tobacco or 40 bushels of cotton on an acre. Farmer Calvin in California can raise either 150 pounds of tobacco or 50 bushels of cotton on an acre. Which farmer can produce tobacco more efficiently? a. Farmer Ken in Kentucky. b. Farmer Calvin in California. c. The two farmers are equally efficient at growing wheat. d. More information is needed to determine comparative advantage. Canada and Thailand The following questions refer to the following table which shows the abilities of Canada and Thailand to produce food and cloth. Food and cloth are the only two commodities in the world and their production requires only labor. The amounts of labor required to produce one unit of each of these commodities in the two countries are shown in the table below. Canada Thailand One Bushel of Food 3 hours 9 hours One Bolt of Cloth 6 hours 12 hours ____ 65. Refer to Canada and Thailand. What is the cost of producing 1 bushel of food in Canada? a. 3 hours of labor. b. 1/2 bolt of cloth. c. 1/3 bushel of imported Thai food. d. 1/4 bolt of imported Thai cloth. ____ 66. Refer to Canada and Thailand. What is the cost of producing cloth in Thailand? a. 1/2 bushel of food per bolt of cloth. b. 3/4 bushel of food per bolt of cloth. c. 1/3 bushels of food per bolt of cloth. d. 3 bushels of food per bolt of cloth. Name: ________________________ ID: A 10 ____ 67. Refer to Canada and Thailand. Which country is the more efficient food producer, and which country is the more efficient cloth producer? a. Canada is the more efficient food producer, and Thailand is the more efficient cloth producer. b. Thailand is the more efficient food producer, and Canada is the more efficient cloth producer. c. Canada is the more efficient producer of both goods. d. Thailand is the more efficient producer of both goods. ____ 68. Refer to Canada and Thailand. Can trade in food and cloth benefit Canada and Thailand? a. It cannot benefit Thailand, because Thailand cannot successfully compete with Canada. b. It cannot benefit Canada, because Thailand is too small to be an effective trading partner. c. It can benefit both only if the people in Canada and Thailand have different tastes. d. It can benefit both if Canada specializes in food and Thailand specializes in cloth. ____ 69. Amanda can prepare a Thai meal for a group in 2 hours and can type a 10 page paper in the same amount of time. Morgan can prepare the meal in 3 hours. Morgan will be the more efficient typist as long as she can type the a paper in less than a. 4 hours. b. 3 hours. c. 2 hours. d. 1 hour. ____ 70. A man can rewire a house in 12 hours and can panel a room in 15 hours, and his teenage son can rewire a house in 18 hours and can panel a room in 16 hours. Who is more efficient in rewiring a house, and who is more efficient in paneling a room? a. The father is more efficient at both activities. b. The father is more efficient at rewiring a house, and the son is more efficient at paneling a room. c. The father is more efficient at paneling a room, and the son is more efficient at rewiring a house. d. The two are equally efficient at both activities. ____ 71. Maki is a potter who can make 2 decorative bowls per day. She can sell as many bowls as she can produce, earning a net income of $24 per bowl. Every Wednesday, instead of making bowls, she spends $12 on gasoline delivering bowls to the stores that carry her work. When would Maki and her customers benefit from her hiring of a middleman to do the deliveries? a. Never-the middleman would only increase Maki's costs and her customers' prices. b. When the middleman uses less than $12 of gasoline to deliver the bowls. c. When the middleman's cost of delivery is less than $48. d. When the middleman's cost of delivery is less than $60. ____ 72. If people have the same abilities, then a. they cannot gain from trade. b. they can still gain from trade if they have different tastes. c. they can still gain from trade as long as they specialize in different activities. d. they can still gain from trade only if they are facing different absolute prices. ____ 73. If people stand to produce at lower cost when specializing and producing in larger quantities a. they cannot gain from trade because each one is just as potentially productive as another. b. they cannot gain from trade because most people's wants can be easily satisfied with what they can produce themselves. c. they cannot gain from trade if they have similar tastes. d. they can gain from trade by specializing and increasing productivity. Name: ________________________ ID: A 11 ____ 74. Economists generally assume that the firm's goal is to a. minimize its costs. b. maximize its profit. c. make its market share as large as possible. d. maximize its production. ____ 75. Marginal cost is defined as a. the additional cost attributable to the last unit produced. b. the change in fixed costs associated with the production of one more unit of output. c. the difference between total revenue and total cost. d. price times quantity. ____ 76. Costs that are independent of the firm's level of output are called a. fixed costs. b. marginal costs. c. opportunity costs. d. sunk costs. ____ 77. As increasing amounts of a good are produced, the marginal cost of production tends to a. rise. b. fall. c. remain constant. d. change unpredictably. ____ 78. If an activity is worth pursuing at all, then the only information the decision maker needs to make a choice is a. total benefits. b. marginal benefits and marginal costs. c. total costs. d. fixed costs. ____ 79. If an activity is worth pursuing at all, then it should be pursued up to the point where a. total cost equals total benefit. b. average cost equals average benefit. c. marginal cost equals marginal benefit. d. sunk costs equal zero. ____ 80. When should a firm increase its production? a. When it is earning a positive profit. b. When its revenues are too low to cover the firm's fixed costs. c. When there is a fall in the price of its product. d. When its marginal revenue exceeds its marginal cost. ____ 81. If a firm's marginal cost exceeds its marginal revenue, then a. the firm's profit is negative (i.e., the firm is suffering losses). b. the firm should shut down its operations. c. cutting back production will increase the firm's profit. d. the firm should reduce its per-unit cost by increasing its output. ____ 82. Mike, of Mike's Machines has hired a consultant who informs Mike that since the total revenue from current operations exceeds total cost, he should consider increasing production of machines. Mike would be best off if he a. increases production of machines until total revenue is equal to total cost. b. increases production until net gains are equal to zero. c. maintains his current level of production so long as marginal revenue is equal to marginal cost. d. decreases his current level of production if marginal revenue is only equal to marginal cost. Name: ________________________ ID: A 12 ____ 83. A firm would find it profitable to increase its production when a. its marginal revenue exceeds its marginal cost. b. its fixed costs fall. c. higher resource costs raise its marginal costs. d. new competitors reduce the demand for the firm's product. Demand and Total Cost of Production The following questions refer to the following tables which show the demand for a firm's product and the firm's total cost of production. Demand Total Cost Quantity Price Quantity Dollars 0 units $35 per unit 0 units $ 0 1 30 1 4 2 25 2 11 3 20 3 21 4 15 4 34 5 10 5 50 ____ 84. Refer to Demand and Total Cost of Production. The marginal cost of producing the third unit is a. $21 per unit. b. $20 per unit. c. $10 per unit. d. $7 per unit. ____ 85. Refer to Demand and Total Cost of Production. The marginal revenue received from selling the fifth unit is a. $50 per unit. b. $10 per unit. c. $2 per unit. d. -$10 per unit. ____ 86. Refer to Demand and Total Cost of Production. The profit from selling two units would be a. $50. b. $39. c. $14. d. $11. ____ 87. Refer to Demand and Total Cost of Production. According to the equimarginal principle, how many units should the firm produce in order to maximize its profit? a. 2 units. b. 3 units. c. 4 units. d. 5 units. Name: ________________________ ID: A 13 Marginal Cost of Production The following questions refer to the following table which shows a firm's marginal cost of production. Quantity (number of units) 1 2 3 4 5 6 7 8 Marginal Cost (dollars per unit) 3 4 6 9 13 18 24 31 ____ 88. Refer to Marginal Cost of Production. Suppose the firm has $20 in fixed costs. Its total cost of producing 4 units of output is a. $29. b. $33. c. $56. d. $42. ____ 89. Refer to Marginal Cost of Production. Suppose demand for the firm's product is horizontal at a price of $18 per unit. How much output should the firm produce in order to maximize its profit? a. 3 units. b. 4 units. c. 6 units. d. 7 units. ____ 90. Refer to Marginal Cost of Production. Suppose the firm has $20 in fixed costs, and demand for the firm's product is horizontal at a price of $18 per unit. What is the firm's maximum profit? a. $33. b. $35. c. $73. d. $88. ____ 91. Refer to Marginal Cost of Production. Suppose the firm's fixed costs increase to $60, and demand for the firm's product remains horizontal at a price of $18 per unit. What is the firm's maximum profit? a. $-7. b. $-5. c. $33. d. $48. ____ 92. Caterpillar has spent $5 million to date on a new plant, and another $2 million is needed to complete the plant. When construction was started, it was projected that production at the new plant would add $12 million to Cat's profit, but new projections show the additional profit will be only $6 million. Assuming the incomplete plant is worthless, should Cat complete the new plant or abandon it? a. Cat should complete the plant because it would create a net profit of $4 million. b. Cat should complete the plant because it would create a net profit of $1 million. c. Cat should abandon the plant because a $5 million loss is better than a $6 million loss. d. Cat should abandon the plant because the plant costs $6 million more than the expected profit. Name: ________________________ ID: A 14 ____ 93. The government authorized $10 million to build a new missile system. After $8 million were spent, serious flaws in the system were discovered. At that point, experts testified that the government must authorize another $10 million in funding to make the system operational, bringing the project's total cost to $20 million. The government should authorize the additional funding as long as the benefits from the completed missile system exceed a. $10 million. b. $12 million. c. $18 million. d. $20 million. ____ 94. An increase in fixed costs will lower a firm's a. total cost. b. output. c. prices. d. profit. ____ 95. Consider a firm that produces peanut butter. An increase in the price of peanuts will cause the firm to lower its output because a. fixed costs will rise. b. marginal cost will rise. c. the price of peanut butter will rise. d. marginal revenue will fall. ____ 96. Suppose the government increases the annual cost of the liquor permit that a tavern needs to serve alcohol. What effect will this increased cost have on the tavern's production and pricing decisions? a. None-the tavern will maintain its current prices. b. The tavern will raise its prices to cover the higher cost. c. The tavern will scale back its operations. d. The tavern will cut its prices to increase its sales. ____ 97. Suppose that the price of labor, the only variable input needed to produce a good, increases from $100 day to $120 day. The effect on costs will be a. a parallel shift in the total cost curve. b. a parallel shift in the fixed cost curve. c. a parallel shift in the marginal cost curve. d. a shift in total cost by different amounts for different quantities. ____ 98. You are deciding whether or not to take your car on a 1,500 mile highway trip. Which of the following is the least likely to affect your decision? a. The price of gasoline. b. The cost of oil changes. c. Your annual insurance payment. d. Highway tolls. ____ 99. Which of the following would not increase the price of books? a. A new literacy program that encourages reading. b. A $10,000 permission fee paid for the right to reprint an author's work. c. An increase in the price of the ink used to print the books. d. Higher costs for the glycerin used to make the glue with which the books are bound. ____ 100. A firm will increase its production when a. its marginal revenue rises. b. its marginal cost rises. c. its fixed costs fall. d. the demand for its product falls. Name: ________________________ ID: A 15 ____ 101. Which of the following is a good example of a firm that is not likely to be perfectly competitive? a. Farmer Jane's sunflower seeds. b. Coyote Sam's sheep ranch. c. Captain Bob's codfish corporation. d. Aviator Al's nonstop airline service from Seattle to Nome. ____ 102. The marginal revenue curve of a competitive firm is a. U-shaped. b. a ray from the origin. c. a horizontal line at the market price. d. downward sloping. ____ 103. The demand curve faced by a competitive firm is a. perfectly elastic at the established market price. b. downward sloping, with the same elasticity as the industry demand curve. c. more inelastic than the demand curve faced by its competitors. d. nonexistent. ____ 104. Any firm, competitive or not, desiring to maximize profits, will choose its quantity according to the rule, produce that quantity at which a. marginal revenue = price. b. marginal revenue = marginal cost. c. average variable cost is at its minimum. d. marginal cost is at its minimum. ____ 105. Suppose all firms in an industry are identical. In the long run, entry and exit guarantee that all firms will have zero a. marginal cost. b. average cost. c. economic profit. d. accounting profit. ____ 106. Farmer Jane grows sunflowers for seed on land that is bought and paid for. She figures her profit per acre is $60 because each she puts $30 of purchased inputs onto each acre, $10 worth of her time into working on each acre, and the harvested seed sells for $100. Farmer Jane a. has correctly calculated her economic profit. b. has forgotten to include the opportunity cost of the land in her calculation of profit. c. should not have included the value of her time in calculating profits. d. should sell her seed only for a price that would bring a higher profit. ____ 107. Assume dental care is provided by a competitive industry. A new government regulation requires each dentist to have a newly-developed ultrasound machine for sterilizing dental instruments. What happens to the price of dental care? a. The price of dental care rises in the short run and rises further in the long run. b. The regulation will cause higher prices in the short run, but it will have no long-run impact. c. There is no change in the short run, but dentists will exit and prices will rise in the long run. d. The machine is a sunk cost, so the price of dental care does not change in either the short run or the long run. ____ 108. The marginal value that a consumer places on the last unit can be read off of the a. demand curve. b. supply curve. c. contract curve. d. production possibility curve. Name: ________________________ ID: A 16 ____ 109. If the marginal value to Sue of a fourth slice of pizza is $1.00, then a. Sue would be willing to pay no more than $4.00 for four slices of pizza. b. Sue places a total value of less than $4.00 on four slices of pizza. c. Sue would pay no more than $1.00 for an additional slice of pizza when she has already consumed 3 slices. d. Sue would pay no more than $1.00 for any slice of pizza. ____ 110. The area beneath a consumer's demand curve out to the quantity purchased represents a. consumer's surplus. b. the region of mutual advantage. c. the total value of the consumer's purchases. d. the marginal value placed on the last unit consumed. 2 Sales Tax The following questions refer to the accompanying diagram which shows the effects of a sales tax imposed on consumers. The initial price and quantity are P0 and Q0, respectively. After the tax is imposed, the equilibrium quantity is Q1, firms receive the price Ps, and consumers pay the price Pd. ____ 111. Refer to Sales Tax. After the tax is imposed, consumers' surplus is equal to a. area A + B. b. area B. c. area B + C. d. area A + B + C + D + E. ____ 112. Refer to Sales Tax. Area C + D + F + G a. the total value that consumers receive from their purchases. b. the tax revenue collected by the government. c. the fall in producers' surplus. d. the deadweight loss due to the tax. ____ 113. Refer to Sales Tax. After the tax is imposed, social gain is equal to a. area A + D + E + G + H + J. b. area B + C + F + I - J. c. area A + B + C + D + E + F + G + H + I. d. area A + B + C + D + F + G + I. Name: ________________________ ID: A 17 ____ 114. A result of selling concert tickets cheaply, that is below the equilibrium price, will be that a. only those with nothing else to do will wait in line to buy a ticket. b. ticket buyers' benefits increase, at the expense of the performers. c. the costs associated with competition among buyers for the limited number of tickets will create deadweight losses. d. more tickets will be sold than if the price were at the market equilibrium. Price Ceiling The following questions refer to the accompanying diagram which shows the effects of a price ceiling. The initial price and quantity are P0 and Q0, respectively, and the price ceiling is imposed at the price P1. Assume that none of the potential deadweight loss can be avoided. ____ 115. Refer to Price Ceiling. Area B + D represents a. the deadweight loss due to the price ceiling. b. the fall in consumers' surplus caused by the imposition of the price ceiling. c. the value of the time and resources spent by consumers to acquire the limited supply. d. the post-ceiling profits earned by the producers of the good. ____ 116. Refer to Price Ceiling. After the price ceiling is imposed, consumers' surplus is equal to a. area A. b. area A + B. c. area A + B + D. d. area A + B + C + D + E + F + G. ____ 117. Refer to Price Ceiling. The price ceiling creates a deadweight loss equal to a. area A + H. b. area B + C + D + E. c. area B + D. d. area C + E. Name: ________________________ ID: A 18 Excise Subsidy The following questions refer to the accompanying diagram which shows the effects of an excise subsidy given to firms. The initial price and quantity are P0 and Q0, respectively. After the subsidy is granted, the equilibrium quantity is Q1, firms receive the price Ps, and consumers pay the price Pd. ____ 118. Refer to Excise Subsidy. After the subsidy is granted, producers' surplus equals a. area A + B + E + H. b. area E + H + F + I. c. area B + C + E + H. d. area H. ____ 119. Refer to Excise Subsidy. The amount of the subsidy paid to firms is given by a. area A + B + E + H. b. area B + C + D + E + F + G. c. area D. d. area F + G + I + J. ____ 120. Refer to Excise Subsidy. The deadweight loss created by the subsidy is represented by a. area F + G. b. area D + G + J. c. area C. d. area D. ____ 121. Refer to Excise Subsidy. Which areas count as part of the measure for both consumer's surplus and producer's surplus? a. areas A, B, E and H. b. areas B, E and F. c. areas B and E. d. no areas can count as part of the measure for both. Name: ________________________ ID: A 19 ____ 122. Only under which circumstances would it be possible for a tariff to increase the welfare of residents of the importing country? a. The supply curve is upward sloping. b. The supply curve is upward sloping and the loss of consumer's surplus is less than the loss of producer's surplus, which is borne by non-residents. c. The supply curve is flat. d. There are domestic producers competing with the importers. ____ 123. Which of the following would not be an example of a nonproductive activity creating social losses? a. Accountants seeking methods of tax avoidance for their clients. b. Lawyers engaged in litigation that would transfer money from one group to another. c. Lawyers hired to assist two parties in writing a contract. d. Lobbyists seeking laws that would transfer public lands to private parties without any payment. ____ 124. An explanation for how the price of water can be less than the price of diamonds, even though water is more valuable, is that a. price is a poor guide to value. b. markets for water and diamonds are not competitive. c. price reflects marginal value, not total value. d. diamond production requires more labor, and value is based on labor. ____ 125. Suppose that the average baseball player earns $1 million per year and that there are 500 players. The average school teacher earns $25,000 per year and there are 1 million teachers. From this we can say that a. baseball players are paid too much. b. teachers are paid too little. c. the group of baseball players must be more valuable than teachers as a group. d. teachers as a group are more valuable than the group of baseball players. ____ 126. To fully analyze the effects of a tariff on imports of potatoes, an economist needs a. only to know the supply and demand curves in the market for potatoes. b. only to know about supply and demand in the market for potatoes and in markets for other products potato farmers grow. c. to use general equilibrium analysis. d. to use a production possibilities curve. ____ 127. A firm is a monopoly if a. it faces a downward-sloping demand curve for its product. b. it is a very large firm. c. it takes its rivals' actions into account when choosing its price and output levels. d. its production decisions do not affect the price of its product. ____ 128. A simple monopoly will maximize its profit by producing the quantity where a. price and marginal cost are equal. b. the demand curve crosses the average cost curve. c. marginal cost reaches its minimum. d. marginal revenue equals marginal cost. ____ 129. A monopoly will set price a. at the highest price along its demand curve. b. equal to the value at which marginal cost intersects the demand curve. c. so that it can sell the quantity at which marginal revenue is equal to marginal cost. d. so that it can sell the quantity at which marginal revenue is equal to zero. Name: ________________________ ID: A 20 ____ 130. When a simple monopolist chooses to sell an additional unit of a good or service a. marginal revenue will be equal to the going market price. b. marginal revenue will always be negative. c. it will only have to lower its price on the additional unit. d. it will have to lower its price on the additional unit and on all other units. ____ 131. What can, in general, be said about a monopoly's supply curve? a. A monopoly's supply curve, like that for a competitive firm, coincides with its marginal cost curve. b. A profit-maximizing monopoly will operate only on the elastic portion of its supply curve. c. The monopoly's supply curve is more inelastic than if the firm were competitive. d. The concept of a supply curve is meaningless in the context of the monopoly problem. ____ 132. Using ( to represent price elasticity of demand, a simple monopolist will find that its marginal revenue at any point along its demand curve is equal to price at that point multiplied by a. (1 - 1/η) b. 1/η c. η d. η*MC ____ 133. A monopolist will always end up choosing to operate a. even if its profits are negative. b. on the elastic portion of its demand curve. c. until such time as a new competitor enters its market. d. only if it can capture the entire consumer surplus. Name: ________________________ ID: A 21 Market Diagram The following questions refer to the accompanying market diagram. PC and QC are the equilibrium price and quantity if the firm behaves competitively, and PM and QM are the equilibrium price and quantity if the firm is a simple monopoly. ____ 134. Refer to Market Diagram. What area represents the producer's surplus earned in the monopoly equilibrium? a. Area A + C + F. b. Area C + F. c. Area C + D + F + G. d. Area C + D + E. ____ 135. Refer to Market Diagram. Suppose this firm initially acted competitively. If the firm switched to the monopoly equilibrium, how much deadweight loss would be created? a. Area E + H. b. Area G + H. c. Area B + D + E + G + H. d. Area D + E + G + H. ____ 136. Refer to Market Diagram. The difference between producer's surplus as a monopolist and producer's surplus when setting price at what would exist in a competitive market is a. Area C + D + E - G - H. b. Area C + D - H. c. Area C + D + E - A - B. d. Area E + H. ____ 137. How does a per-unit subsidy affect the simple monopoly equilibrium? a. The subsidy does not affect marginal cost and thus does not affect the monopoly equilibrium. b. The subsidy lowers the price charged by the monopoly, but it also lowers social gain. c. The subsidy increases the monopoly's profit but does not improve social gain. d. The subsidy causes both monopoly output and social gain to increase. Name: ________________________ ID: A 22 ____ 138. An economic problem with using subsidies or price ceilings to move a monopoly toward the competitive equilibrium is that a. it may increase monopoly profits. b. it may decrease monopoly profits. c. policy makers may not be able to determine what the competitive equilibrium is. d. policy makers always need to be lobbied before taking any actions. ____ 139. Consider a price ceiling imposed on a monopoly. For what quantities will the monopoly's new marginal revenue curve be horizontal at the ceiling price? a. For quantities where the demand curve lies above the ceiling price. b. For quantities where demand is elastic. c. For quantities where marginal cost is rising. d. Marginal revenue will be constant and equal to the ceiling price for all quantities. ____ 140. Suppose regulators impose a price ceiling on a monopoly. If the price ceiling is set below the monopoly price but above the competitive price, then the monopoly will a. reduce its output. b. increase its production. c. produce the same output at a lower price. d. earn zero profit. ____ 141. In rate-of-return regulation, a monopoly is required to have zero a. profit. b. rent. c. producer's surplus. d. deadweight loss. ____ 142. If regulators require a monopoly to earn zero economic profit, the monopoly will produce the quantity where a. the marginal cost curve crosses the average cost curve. b. the marginal cost curve crosses the demand curve. c. the average cost curve crosses the demand curve. d. the marginal cost curve crosses the marginal revenue curve. ____ 143. Rate of return regulation will a. always result in the firm producing the quantity that would be produced if the market were competitive. b. always result in the firm producing less than the quantity that would be produced if the market were competitive. c. always result in the firm producing more than the quantity that would be produced in a competitive industry. d. result in a new equilibrium with either more or loss produced in comparison to a competitive market. ____ 144. A natural monopoly exists when a firm a. owns all of the world's known reserves of a natural resource. b. has an average cost curve that is decreasing at the point where it crosses demand. c. has obtained a patent on a new genetically modified organism. d. is able to practice price discrimination in the sale of a natural resource. ____ 145. If a natural monopolist were to sell at the price where marginal cost equals demand, then it would be earning a. zero economic profits, like a competitive firm in the long-run. b. negative profits and would not be able to survive. c. positive profits but not would not need to worry about government intervention to regulate it. d. positive profits but would still need to worry about possible government intervention to regulate it. Name: ________________________ ID: A 23 ____ 146. In order to practice any form of price discrimination, a monopoly must be able to a. identify the maximum price that each customer is willing to pay. b. separate its customers into distinct groups. c. prevent resale of its product. d. establish a legal barrier to entry. ____ 147. Legal restrictions on entry into an industry a. are strongly opposed by those already in an industry. b. are promoted through lobbying efforts by those already in the industry, thereby further increasing the social costs of monopoly. c. are promoted by those who wish to enter the industry, thereby potentially increasing the social welfare generated by the industry. d. are always instituted to protect the public's health and welfare. ____ 148. Universities tend to set tuition high and then, through financial aid, effectively charge each student a different price for education. Financial aid statements allow the university to determine the student's financial status and set an appropriate price to charge the student. This situation is an example of a. first-degree price discrimination. b. second-degree price discrimination. c. third-degree price discrimination. d. a two-part tariff. ____ 149. When first-degree price discrimination is perfectly implemented a. social gain is maximized, with all gains going to the monopoly. b. consumers' surplus and producer's surplus are both larger than in the case of simple monopoly. c. the resulting deadweight loss is larger than if the monopoly did not price discriminate. d. the consumers' and producer's gains from trade are identical to those in a competitive market. ____ 150. Second-degree price discrimination generally takes the form of a. special prices for students and seniors. b. membership clubs. c. quantity discounts. d. "extras" like free delivery and free customer service. ____ 151. Which of the following is the best example of second-degree price discrimination? a. A car salesperson's attempts to discover and charge the highest price that the customer is willing to pay. b. A sub shop that gives you a half-price sandwich on every sixth visit. c. Manufacturers' use of discount coupons printed in Sunday newspapers. d. Polaroid cameras and film. ____ 152. When a firm with market power practices third-degree price discrimination, it charges the highest price to the group that a. has the most elastic demand. b. has the most inelastic demand. c. purchases the highest quantity. d. purchases the lowest quantity. ____ 153. Third-degree price discrimination occurs when a monopoly a. separates its customers into distinct markets, charging a different price to each group. b. charges different prices for the same good sold to the same customer. c. requires the consumer to pay a separate fee simply for the right to purchase the good. d. charges each customer the maximum that he is willing to pay for each item purchased. Name: ________________________ ID: A 24 ____ 154. In third-degree price discrimination, the monpolist will choose quantities so that each market has the same a. price. b. total revenue. c. marginal revenue. d. elasticity. ____ 155. In order to practice third degree price discrimination all of the following conditions must hold except that the firm a. has monopoly power. b. is able to exercise control over resales. c. is willing to sell more to each customer at lower prices. d. charges a lower price to groups with more elastic demand. ____ 156. A country club charges a membership fee. Members pay competitive prices for the club's recreation and restaurant services. This situation is an example of a. first-degree price discrimination. b. second-degree price discrimination. c. third-degree price discrimination. d. a two-part tariff. ____ 157. What price does a monopoly charge when it perfectly implements a two-part tariff? a. The simple monopoly price. b. The competitive price. c. A price higher than that charged by a simple monopoly. d. A price between the monopoly and competitive prices. ____ 158. When will setting a relatively high entry fee and a low competitive price be the best strategy for a two-part tariff monopolist? a. When the customers are nearly identical. b. When the customers have inelastic demand for the product. c. When the customers place a relatively low value on their time. d. When the customers can be separated into a number of diverse groups. ____ 159. At a fast food restaurant, a large drink is twice as big as a small drink, but the restaurant charges 79¢ for the small drink and only 99¢ for the large drink. This situation is probably not a case of price discrimination because a. the restaurant cannot easily prevent resale. b. people who buy large drinks order more food than people who buy small drinks. c. the cost of serving a large drink is not twice the cost of serving a small drink. d. the fast food restaurant has no monopoly power. Essay 160. What is the difference between the quantity supplied of corn and the supply of corn? What could cause a rise in the quantity supplied of corn, and what could cause a rise in the supply of corn? How would these changes be shown graphically using a supply curve? 161. A person argues that if the prison sentences for all crimes were doubled, this would worsen the problem of overcrowded prisons, all other things being equal. Use the concept of demand to explain why this argument is incorrect. 162. What can be said about the market price when a good is in surplus (i.e., when the quantity supplied exceeds the quantity demanded)? How will demanders and suppliers respond to a surplus, and what will happen to the market price? Name: ________________________ ID: A 25 163. Define the terms legal incidence and economic incidence. When the legal incidence of a tax is changed, how does this affect the economic incidence of the tax? Why does this result occur? 164. Suppose that a city law requires taxi drivers to wear tuxedos. The drivers must pay $10 per week for the tuxedos. Taxicab companies pay their drivers $210 per week. After paying for the tuxedos, taxi drivers earn $200 per week. (i) If the law were revised so that taxicab companies, not the drivers, must pay for the tuxedos, what would happen to the taxi drivers' earnings? (ii) If the law were repealed, what would happen to the taxi drivers' earnings? Be as specific as possible. 165. Suppose the demand curve for a good is given by the equation P = 200 - 1/2 Q and the supply curve is given by the equation P = 50 + 1/4 Q, where P represents the price of the good (measured in dollars per unit) and Q represents the quantity of the good (measured in units per week). (i) Find the equilibrium price and quantity for this market. (ii) Suppose the government imposes a sales tax of $9 per unit on this good. Find the new formula for the demand curve, the new equilibrium quantity, the post-tax price received by suppliers, and the post-tax price paid by demanders. (iii) What fraction of the economic burden of this tax is borne by demanders and what fraction is borne by suppliers? 166. Suppose the price of coffee is $6 per pound. If this price is an absolute price, what is meant by the phrase "$6 per pound"? If this price is a relative price, what is meant by the phrase "$6 per pound"? 167. Will people, on average, tend to eat more grapefruit in Florida or in Illinois? In which state will the people, on average, tend to eat better quality grapefruit? Explain, using the concept of relative price. 168. The towns of Mattoon and Charleston can produce one of two goods: books and bagels. In Charleston factories, 12 laborers can produce 100 books in an hour, while 6 laborers can produce 400 bagels in an hour. (i) What is the cost of producing books in Charleston? (ii) Suppose the cost of producing books in Mattoon is 10 bagels per book. Which town should specialize in bagel production and which town should specialize in book production? 169. Suppose there are only two goods (bread and wine) and only two countries (England and Portugal). In England, the cost of producing 1 bottle of wine is 3 loaves of bread. What is the cost of producing 1 loaf of bread in England? Under what circumstances will England specialize in bread production and purchase its wine from Portugal? Explain. 170. Land in California is quite fertile and capable of growing large amounts of tobacco, while the land in New England is relatively rocky, of poorer quality, and capable of growing only smaller tobacco crops. Nevertheless, New England is a larger producer of tobacco than is California. Use the concepts of cost and comparative advantage to resolve this apparent contradiction. Name: ________________________ ID: A 26 171. North Dakota has 300 acres of farmland; each acre can produce either 20 bushels of wheat or 10 bushels of corn. Iowa has 200 acres of farmland; each acre can produce either 20 bushels of wheat or 30 bushels of corn. (i) What is the cost of growing a bushel of wheat in each state? What is the cost of growing a bushel of corn in each state? (ii) Suppose each state is self-sufficient and there is no trade. If each state chooses to produce equal amounts of the two crops, how much wheat and corn will each state produce? (iii) If the two states begin to trade, with each specializing in its area of comparative advantage, which state will produce wheat and which state will produce corn? How will the total production between the two states compare to the situation where each was self-sufficient? 172. Define the terms marginal revenue and marginal cost. What action should a firm take if its marginal revenue exceeds its marginal cost? Explain. 173. Describe the effect that a surplus of tobacco will have on a cigarette producer's pricing and production decisions. 174. A comic book company pays an annual licensing fee of $10,000 for the rights to an artist's character. Which would have the bigger effect on the readers of that character's comic: an increase in printing costs or an increase in the artist's licensing fee? Explain. 175. Explain why a rent increase at Tony's Pizza Parlor would not cause Tony to raise his prices, but a rent increase at Tony's competitors may cause him to raise prices. 176. A firm's total cost schedule and the demand for its product are summarized in the table below. Costs Revenues Quantity Produced Total Cost Marginal Cost Quantity Demanded Price Total Revenue Marginal Revenue 0 units $ 0 - 0 units $155 per unit - 1 70 150 2 142 2 145 3 217 3 140 4 297 4 135 5 385 5 130 6 485 6 125 7 603 7 120 (i) Complete the table and use the equimarginal principle to determine the level of output that maximizes the firm's profit. Also determine the price charged by the firm and its maximum profit level. (ii) What would happen to your answers from part i if the firm's total costs rose by $40? (iii) What would happen to your answers from part i if its costs rose by $40 per unit produced? Name: ________________________ ID: A 27 177. The diagram below shows Shontel's annual demand for videos. Shontel currently rents videos from Blockpopper's, which charges $2.50 per rental. (i) How many videos does Shontel rent each year? How much consumer's surplus does Shontel receive from renting videos? (ii) Blockpopper's starts a "frequent viewers" club. For a membership fee of $35 per year, club members can rent as many videos as they wish at the discounted price of $2 per rental. Should Shontel join the "frequent viewers" club? If yes, how much surplus value would Shontel receive as a club member? If no, what membership fee would Shontel be willing to pay to join the club? Name: ________________________ ID: A 28 178. Consider the following: (i) The accompanying diagram shows the effects of a tariff. Initially, the price is P0, domestic firms produce Q0 units, and Q1 - Q0 units are imported from foreign firms. When the tariff is imposed, the price increases to P0 + t. How does the tariff affect consumers' surplus and producers' surplus? How much tariff revenue is collected by the government? Does imposing the tariff cause the country's social gain to rise or fall? (ii) The situation in part i is known as the "small country" case-the country has no market power, so its tariff does not affect the world price P0. Now consider the "large country" case shown in the accompanying diagram-in this case, the country has market power, and the tariff (by reducing the demand for imports) causes the world price to fall from P0 to P1. So after the tariff is imposed, the domestic price is P1 + t. Name: ________________________ ID: A 29 How does the tariff affect consumers' surplus and producers' surplus in this situation? How much tariff revenue is collected by the government? When a "large country" imposes a tariff, will its social gain rise or fall? 179. Define the term deadweight loss. Will there be a deadweight loss if a good's marginal cost exceeds its marginal value? Explain. 180. What relationship exists between marginal revenue and the elasticity of demand? Use this relationship to explain how a monopoly can increase its profit if demand is inelastic. 181. Standard graphical analysis shows that monopoly creates a deadweight loss. (i) How and why must this welfare analysis be modified when the firm is a natural monopoly? (ii) How and why must this welfare analysis be modified when the firm's market power is acquired from a legal barrier to entry? 182. Consider a price ceiling imposed on a monopoly that is set below the competitive price. Design a diagram showing the monopoly equilibrium in this case. Use your diagram to show that a price ceiling set this low will create a shortage. 183. Define the term price discrimination. What conditions must hold for a firm to be able to practice price discrimination? How are consumers affected by price discrimination? 184. Suppose a monopolist sells in two distinct markets. The demand and marginal revenue for the first market are given by P1 = 240 - 2Q1 and MR1 = 240 - 4Q1, respectively, where Q1 is the quantity demanded and P1 is the price paid by the first group. The demand and marginal revenue for the second market are given by P2 = 120 - Q2 and MR2 = 120 - 2Q2, respectively, where Q2 is the quantity demanded and P2 is the price paid by the second group. The monopoly's marginal cost is given by MC = 4/9 Q, where Q is the total output produced by the monopoly. (i) How much does the monopoly supply in each market and what price does it charge? (ii) What is the common equilibrium value of marginal revenue and marginal cost? (iii) Use your answers to parts i and ii to calculate the elasticity of demand for each market. 185. Suppose you are the monopoly owner of a movie theatre. You can allow people to enter the theatre at zero marginal cost, and you can provide popcorn at a constant marginal cost of $0.50 per bag. You have two customers, Leksis and Trebe, who are identical twins. Leksis never buys popcorn under any circumstances. If you charge the monopoly price of $1.00 per bag for popcorn, Trebe will buy 2 bags of popcorn and earn $0.50 in consumer's surplus, and you will earn $1.00 in profit from popcorn sales. If you charge the competitive price of $0.50 per bag for popcorn, Trebe will buy 4 bags of popcorn and earn $2.00 in consumer's surplus, and you will earn no profit from popcorn sales. (i) Suppose that Leksis is willing to pay up to $8.00 to see the movie and Trebe is willing to pay up to $5.00 to see the movie. How much should you charge for admission to the theatre and how much should you charge for popcorn? (ii) Suppose that Leksis is willing to pay up to $4.00 to see the movie and Trebe is willing to pay up to $5.00 to see the movie. How much should you charge for admission to the theatre and how much should you charge for popcorn? ID: A 1 Sample questions and answers: Exam 1 Answer Section TRUE/FALSE 1. F 2. F 3. F 4. F 5. T 6. F 7. F 8. F MULTIPLE CHOICE 9. C 10. B 11. D 12. A 13. C 14. B 15. D 16. C 17. B 18. A 19. D 20. C 21. A 22. B 23. A 24. B 25. B 26. C 27. C 28. B 29. B 30. A 31. D 32. A 33. B 34. B 35. B 36. C 37. B ID: A 2 38. C 39. A 40. B 41. B 42. B 43. D 44. A 45. C 46. B 47. C 48. B 49. B 50. C 51. D 52. B 53. B 54. A 55. B 56. D 57. A 58. C 59. C 60. D 61. B 62. C 63. D 64. A 65. B 66. C 67. A 68. D 69. B 70. B 71. D 72. B 73. D 74. B 75. A 76. A 77. A 78. B 79. C 80. D 81. C 82. C 83. A ID: A 3 84. C 85. D 86. B 87. B 88. C 89. C 90. B 91. B 92. A 93. B 94. D 95. B 96. A 97. D 98. C 99. B 100. A 101. D 102. C 103. A 104. B 105. C 106. B 107. C 108. A 109. C 110. C 111. A 112. B 113. D 114. C 115. C 116. A 117. B 118. C 119. B 120. D 121. C 122. B 123. C 124. C 125. D 126. C 127. A 128. D 129. C ID: A 4 130. D 131. D 132. A 133. B 134. C 135. A 136. B 137. D 138. C 139. A 140. B 141. A 142. C 143. D 144. B 145. B 146. C 147. B 148. A 149. A 150. C 151. B 152. B 153. A 154. C 155. C 156. D 157. B 158. A 159. C ESSAY 160. The quantity supplied of corn is the number of bushels that corn farmers want to sell under the current market conditions, while the supply of corn is a set of price-quantity pairs showing the amounts that farmers wish to sell at various hypothetical prices. According to the law of supply, a rise in the price of corn will cause a rise in the quantity supplied of corn. Non-price factors that positively affect corn growers (such as improved weather conditions, better agricultural technology, and lower costs of fertilizer, seed, labor, and other inputs) would cause a rise in the supply of corn. A rise in quantity supplied is shown by moving up and to the right along the supply curve, and a rise in supply is shown by shifting the supply curve down and to the right. 161. When the prison sentences for all crimes are doubled, the "price" of criminal behavior is higher, and by the law of demand, the amount of criminal behavior will fall. Whether or not the prisons would become more overcrowded depends on whether the "demand" for criminal behavior is relatively flat or steep. If the demand for criminal behavior is relatively flat, then the doubling of prison sentences could sufficiently reduce the amount of criminal behavior so that less total prison time would be served. On the other hand, if the demand for criminal behavior is relatively steep, then the doubling of prison sentences would result in only a minor reduction in criminal behavior, an increase in the total prison time served, and worse overcrowding in prisons. ID: A 5 162. When there is a surplus, the market price must be higher than the equilibrium price. Demanders will be satisfied in this situation, but suppliers will not. Competition among suppliers will cause the market price to be bid down until it reaches the equilibrium price. 163. Legal incidence refers to the division of a tax burden according to who is required by law to pay the tax, while economic incidence refers to the division of a tax burden according to who actually pays the tax after all price adjustments are taken into account. A change in the legal incidence of a tax will have no effect on the economic incidence. If the legal incidence of a per-unit tax is entirely on suppliers, the supply curve will shift up by the amount of the tax. On the other hand, if the legal incidence is entirely on demanders, the demand curve will shift down by the amount of the tax. In both situations, the equilibrium quantity will fall, suppliers will receive a lower post-tax price, and demanders will pay a higher post-tax price. Simple geometry shows that the magnitudes of these effects are the same in the two cases. 164. (i) The change in the legal incidence has no effect on the economic incidence. Taxicab companies will pay their drivers $200 per week, and when the cost of the tuxedos is added, their total cost of a driver will still be $210 per week. Taxi drivers will continue to earn $200 per week. (ii) The $10 per week windfall from the repeal of the law will be shared by taxi drivers and taxicab companies. Taxi drivers will now earn more than $200 per week but less than $210 per week. 165. (i) Q = 200 units per week and P = $100 per unit. (ii) The new demand curve is P = 191 - 1/2 Q. The new equilibrium quantity is Q = 188 units per week, and the new equilibrium price is P = $97 per unit. Since the legal incidence is on demanders, the post-tax price received by suppliers is $97 per unit and the post-tax price paid by demanders is $97 + $9 or $106 per unit. (iii) Demanders bear 2/3 of the tax burden, while suppliers bear the other 1/3. 166. When absolute prices are used, the term dollar simply means the green pieces of paper used for currency in the U.S. If the absolute price of coffee is $6 per pound, this means that the buyer must sacrifice $6 in currency to purchase 1 pound of coffee. When relative prices are used, the term dollar is a convenient shorthand for a representative collection of other goods available in the economy. If the relative price of coffee is $6 per pound, this means that the buyer can trade 6 units of other goods in exchange for 1 pound of coffee. 167. Grapefruit are grown in Florida but not in Illinois, so transportation costs will make the price of grapefruit (relative to other foods such as corn) lower in Florida than in Illinois. Thus people in Florida will tend to eat more grapefruit than people in Illinois. However, the transportation costs will also lower the price of high-quality grapefruit relative to low-quality grapefruit. Thus the people in Illinois will on average be eating better quality grapefruit than will the people in Florida. 168. (i) In Charleston, 12 laborers can produce either 100 books or 800 bagels in one hour. Therefore, 1 book costs 8 bagels. (ii) If 1 book costs 10 bagels in Mattoon, then Charleston is the low-cost book producer. Charleston should specialize in book production, and Mattoon should specialize in bagel production. 169. If 1 bottle of wine costs 3 loaves of bread in England, then 1 loaf of bread must cost 1/3 bottle of wine. For England to specialize in bread production, England must be a more efficient bread producer than Portugal, which means that England's cost of producing bread must be less than Portugal's cost. Thus if producing 1 loaf of bread in Portugal costs more than 1/3 bottle of wine (or, equivalently, if producing 1 bottle of wine in Portugal costs less than 3 loaves of bread), then England will specialize in bread production and Portugal will specialize in wine production. ID: A 6 170. If land in California is used to grow tobacco, the opportunity to grow lettuce, grapes, oranges, and other valuable crops is sacrificed. On the other hand, the land in New England, while it can support tobacco, cannot support these other crops. Thus the opportunity cost of growing tobacco is higher in California than in New England, which gives New England a comparative advantage in tobacco production. As a consequence, New England will grow more tobacco than California, while California will grow more lettuce, grapes, and oranges than New England. 171. (i) One bushel of wheat costs 1/2 bushel of corn in North Dakota and costs 1 1/2 bushels of corn in Iowa. One bushel of corn costs 2 bushels of wheat in North Dakota and costs 2/3 bushel of wheat in Iowa. (ii) To get equal amounts of the two crops, North Dakota must use 1/3 of its farmland to grow wheat and the other 2/3 to grow corn, giving it 2,000 bushels of wheat and 2,000 bushels of corn. Iowa must use 3/5 of its farmland to grow wheat and the other 2/5 to grow corn, giving it 2,400 bushels of wheat and 2,400 bushels of corn. (iii) North Dakota is the low-cost wheat producer and Iowa is the low-cost corn producer, so North Dakota will produce 6,000 bushels of wheat and Iowa will produce 6,000 bushels of corn. Total production has increased by 1,600 bushels of each crop over the situation where the two states were self-sufficient. 172. Marginal revenue is the change in total revenue attributable to the last unit of a good produced. Marginal cost is the additional cost incurred from producing the last unit. A firm should increase its production if marginal revenue is greater than marginal cost. In this case, the last unit is continuing to add to the firm's profit, signaling that the firm's profits are still rising. 173. A surplus of tobacco will, in the absence of barriers, cause the price of tobacco to fall. This lower cost will affect the cost of producing each and every cigarette, thus marginal cost will fall. Lower marginal cost causes the profit-maximizing quantity to rise and, if demand is downward sloping, the price charged to fall. 174. Higher printing costs would increase marginal cost, which would lower the profit-maximizing quantity and (assuming demand for the character's comic is downward sloping) raise the price of comic books. The artist's licensing fee is a fixed cost, so an increase in it will not affect marginal cost, quantity produced, or the price charged (unless the increase is so large that it drives the company out of business). As long as the increase in the licensing fee is not excessive, higher printing costs will have the bigger effect because it will raise the price paid by the readers. 175. Tony's rent is not affected by the number of pizzas produced, so it is a fixed cost. Changes in fixed cost do not affect marginal cost, so a rent increase does not affect the profit-maximizing price and quantity, as long as the rent increase is not too large. Tony would simply shut down his operations in that case. Therefore, Tony's higher rent will not affect the price he charges as long as Tony does not shut down. However, if the competitors' higher rents do cause some of them to shut down, this would increase the demand and (in most cases) increase the marginal revenue for Tony's product. (Note-marginal revenue could fall when demand increases if demand becomes sufficiently less elastic.) The increase in marginal revenue will increase the profit-maximizing quantity, and the higher demand will (in most cases) allow Tony to raise his prices. ID: A 7 176. (i) Marginal cost, total revenue, and marginal revenue are summarized in the accompanying table. The firm will choose to produce 6 units of output at a price of $125 per unit for a profit of $265. Costs Revenues Quantity Produced Total Cost Marginal Cost Quantity Demanded Price Total Revenue Marginal Revenue 0 units $ 0 - 0 units $155/unit $ 0 - 1 70 $ 70/unit 1 150 150 $150/unit 2 142 72 2 145 290 140 3 217 75 3 140 420 130 4 297 80 4 135 540 120 5 385 88 5 130 650 110 6 485 100 6 125 750 100 7 603 118 7 120 840 90 (ii) A $40 cost increase is a rise in fixed cost, so all entries in the total cost column rise by $40 (to $40, $110, $182, and so forth). No other entries change, so quantity produced remains at 6 units and the price remains at $125 per unit, while profit falls to $225. (iii) A cost increase of $40 per unit is a rise in marginal cost, so all entries in the marginal cost column rise by $40 per unit (to $110 per unit, $112 per unit, and so forth). The profit-maximizing quantity falls to 4 units, where both marginal cost and marginal revenue equal $120 per unit. The price rises to $135, and profits fall to $83. 177. (i) Shontel rents 60 videos each year. Shontel receives $15 in consumer's surplus (1/2 × 60 rentals × $0.50 per rental). (ii) Shontel would rent 120 videos per year at the discounted price of $2 per rental. Without the membership fee, Shontel would receive $60 in consumer's surplus (1/2 × 120 rentals × $1.00 per rental). Paying the $35 annual membership fee leaves Shontel with $25 of surplus value. Yes, Shontel should join the "frequent viewers" club because doing so adds an additional $10 of surplus value. 178. (i) The tariff causes consumers' surplus to fall from area A + B + C + D + E + F to area A + B. Producers' surplus rises from area G to area C + G, and area E is collected in tariff revenue. Social gain falls by area D + F. (ii) The tariff causes consumers' surplus to fall from area A + B + C + D + E + F to area A + B. Producers' surplus rises from area G + M to area C + G + M. Area E + J is collected in tariff revenue. In the large country case, social gain may either rise or fall; it will fall only if area D + F outweighs area J. 179. A deadweight loss occurs when social gain is not as large as possible; it represents potential gains from trade that were not created. If the marginal cost of a good exceeds its marginal value, then the last unit produced costs more than what consumers are willing to pay for it. In this case, the last unit represents a net loss and unnecessarily lowers social gain, so cutting back production of the good will increase social gain. Therefore, social gain is not as large as possible and a deadweight loss exists. ID: A 8 180. The formula MR = P · (1 - 1/η) shows that marginal revenue is positive when demand is elastic (i.e., η > 1) and that marginal revenue is negative when demand is inelastic (i.e., η < 1). If demand is inelastic, then marginal revenue is negative and thus the last unit produced lowers the monopoly's total revenue. Moreover, marginal cost is positive, so the last unit produced also adds to the monopoly's total cost. By cutting back production, total revenue will rise and total cost will fall, increasing the monopoly's profit. 181. (i) The traditional deadweight loss area is not valid in the case of natural monopoly. Competition cannot survive under the conditions of natural monopoly, because firms will earn negative profits when they receive the competitive price. Thus the social gain under natural monopoly cannot be compared with the social gain under competition, because competition is not a viable alternative in this case. (ii) The traditional deadweight loss area underestimates the welfare cost of a monopoly with a legal barrier to entry. Firms will compete with each other in an attempt to earn the monopoly rights offered by the government's legal barrier. This competition will result in lobbying and other forms of political pressure which use valuable resources without producing any offsetting social gains. These costs must be added to the traditional deadweight loss. 182. The competitive price occurs where the marginal cost curve crosses the demand curve. If a price ceiling is set below this level, then the marginal cost curve will cross the new marginal revenue curve on its horizontal segment, beneath the demand curve. This makes the quantity supplied less than the quantity demanded, causing a shortage. This situation is illustrated in the accompanying diagram. 183. Price discrimination occurs whenever a firm charges different prices for identical items. For a firm to price discriminate, it must have some monopoly power and must be able to control resale of its product. Moreover, the firm must be able to separate its customers into different groups in the case of third-degree price discrimination. Price discrimination can make consumers either better off or worse off. First-degree price discrimination drives consumers' surplus to zero and makes consumers worse off. On the other hand, second-degree price discrimination increases consumers' surplus and makes consumers better off. Third-degree price discrimination tends to benefit those consumers with more elastic demand, to the detriment of those consumers with less elastic demand.