1. What is total producer surplus
\nin the market depicted below?
\nA. $100
\nB.$125
\nC. $200
\nD. $625<\/p>\n
2. In the absence of market
\nfailures (e.g. externalities or imperfect competition) the market equilibrium
\nis considered efficient because:
\nA. prices are low.
\nB. the price consumers pay equals
\nthe profit producers receive.
\nC.no more trades
\nremain that benefit some without harming others.
\nD. it assures that both the buyer
\nand seller earn equal surplus.
\n3. The market equilibrium is only
\nefficient when
\nA. buyers and sellers each earn
\nequal surplus from the transaction.
\nB. consumer surplus and producer
\nsurplus are both zero.
\nC.all relevant
\ncosts, including those imposed on others, are accounted for.
\nD. income is distributed
\nequitably.
\n4. Which of the following statements
\nexpresses the justification for making efficiency the first goal of economic interaction?
\nA. Efficiency gives the poor an
\nincentive to improve their economic status.
\nB. Efficiency guarantees that the
\npoor are always made better off.
\nC. People are not really
\nconcerned about the problems of the poor.
\nD.Efficiency
\nmaximizes total economic surplus and thereby allows other social goals to be
\nmore fully achieved.<\/p>\n
5. Suppose that jeans initially
\nsell for $60 in the market depicted above. If sellers lower their price to $40,
\nit
\nwould create an extra __ of
\neconomic surplus. Thus, selling jeans for $60 is __.
\nA.$160;
\ninefficient
\nB. $80; efficient
\nC. $80; the equilibrium price
\nD. $160; efficient
\nSuppose that a firm uses water
\nfrom a nearby river to cool its machinery and returns the water to the river
\nseveral degrees warmer, leading
\nto a decline in the fish population downstream from the firm.
\n6. The damage to the downstream
\nfish is a(n)
\nA.relevant cost of
\nproduction to society.
\nB. relevant cost of production only
\nif the firm is charged a fine for the damage done.
\nC. relevant cost of production
\nonly if there are commercial fishing activities downstream.
\nD. implicit cost of production
\nwhich the firm will take into account in determining profit maximizing output.
\n7. If the firm does not have to
\npay for the damage to the downstream fish population, the equilibrium quantity
\nin the market for the firm\u00e2\u0080\u0099s
\noutput will be:
\nA. efficient
\nB. inefficiently low
\nC.inefficiently
\nhigh
\nD. profitable
\n8. Suppose that the government
\nfines the firm an amount equal to the damage imposed on the fish for each
\ndegree increase in the
\ntemperature of water in the river. This government action
\nA. reduces efficiency in the
\nmarket.
\nB. increases dead weight loss.
\nC.increases
\nefficiency in the market.
\nD. violates the definition of
\nefficiency.
\n9. The cumulative difference
\nbetween the price producers actually receive for their output and their
\nreservation
\nprice (i.e. their marginal cost
\nof production) is:
\nA.producer surplus.
\nB. deadweight loss.
\nC. total economics surplus.
\nD. consumer surplus.
\n10. Compared to the first come,
\nfirst served allocation scheme airlines used in the past, the voluntary
\ncompensation scheme now in place
\nA. discriminates against the
\npoor.
\nB. improves efficiency for only
\nthe wealthy.
\nC. tricks the poor into
\nunnecessarily delaying their travel.
\nD.improves
\nefficiency for all travelers.
\n11. Except in the extreme cases
\nof perfectly inelastic or perfectly elastic demand and\/or supply curves, where
\nwill the burden of a per unit (ad
\nvalorem) taximposed on sellersfall?
\nA. Equally on consumers and
\nproducers.
\nB.Partially on
\nconsumers and partially on producers.
\nC. Entirely on producers.
\nD. Entirely on consumers.
\n12. Except in the extreme cases
\nof perfectly inelastic or perfectly elastic demand and\/or supply curves, where
\nwill the burden of a per unit (ad
\nvalorem) taximposed on consumersfall?
\nA. Equally on consumers and
\nproducers.
\nB.Partially on
\nconsumers and partially on producers.
\nC. Entirely on producers.
\nD. Entirely on consumers.
\n13. The more inelastic is demand,
\nthe ______ the burden of the tax borne by ______.
\nA. smaller; consumers
\nB.larger;
\nconsumers
\nC. larger; producers
\nD. smaller; consumers and
\nproducers
\n14. If a per unit tax is imposed,
\nthe more inelastic is demand, the
\nA.smaller the
\ndeadweight loss.
\nB. larger the deadweight loss to
\nproducers.
\nC. less likely the deadweight
\nloss will be affected.
\nD. larger the deadweight loss.
\nSuppose that the Pennsylvania
\nstate legislature is considering increasing the sales tax on two different
\ncommodities: prescription drugs
\nand restaurant meals. The price elasticity of demand for prescription drugs is
\nestimated to be -0.08 and the
\nprice elasticity of demand for restaurant meals is estimated to be -0.95.
\n15. If the legislature’s primary
\ngoal in increasing taxes is to raise money most efficiently, it should tax
\nA. both prescription drugs and
\nrestaurant meals equally.
\nB.prescription
\ndrugs because demand is relatively more price inelastic than for meals.
\nC. restaurant meals because they
\nare not a necessity.
\nD. only those prescription drugs
\nthat are not life-saving.
\n16. In a perfectly competitive
\nindustry, economic profits
\nA. include only explicit costs.
\nB. equal accounting profits plus
\nimplicit costs.
\nC.serve to
\nmotivate entry or exit.
\nD. are always greater than
\naccounting profits.<\/p>\n
17. Refer to the figure above. If
\na tax of one dollar per unit were imposed on the producers of this commodity,
\nwhat would happen to the price
\nconsumers would pay in the market?
\nA. increase by exactly one dollar
\nB.increase by less
\nthan one dollar
\nC. increase by more than one
\ndollar
\nD. remain the same as the price
\nbefore the tax
\n18. Refer to the figure above.
\nThe reason that the tax burden is _____________ is because _____________.
\nA. borne mostly by the producers;
\nit is imposed by law on producers
\nB. borne mostly by consumers;
\nconsumer demand is relatively more elastic at the market price
\nC.borne mostly by
\nconsumers; consumer demand is relatively less elastic at the market price
\nD. shared approximately equally;
\nsupply and demand are equally elastic at the market price
\n19. Suppose that instead of
\ntaxing the producers, a tax of an equal dollar amount per unit were imposed on
\nconsumers in the market shown
\nabove. Relative to the tax on producers,
\nA. the tax on consumers would
\ngenerate more deadweight loss.
\nB. the burden of the tax on
\nconsumers would be more equally shared between consumers and producers.
\nC. consumers would bear a greater
\nshare of the tax burden.
\nD.the effect on
\ndeadweight loss and tax burdens would be the same.
\n20. Demand for cigarettes is
\nrelatively price inelastic among adults, but relatively price elastic for
\nteenagers.
\nTherefore, a tax on cigarettes
\nwill:
\nA. not raise very much tax
\nrevenue.
\nB.generate more
\ntax revenue from adults and have a greater effect on reducing the number of
\ncigarettes smoked
\nby teenagers.
\nC. have a greater effect on the
\nnumber of cigarettes smoked by adults than by teenagers.
\nD. generate more tax revenue from
\nteenagers than from adults.
\n21. Refer to the figure above. A
\ntax on Commodity A will generate _________ deadweight loss relative to an
\nequivalent tax on Commodity B.
\nA. more
\nB.less
\nC. equal
\nD. zero
\n22. If a firm is earning zero
\neconomic profits
\nA. its revenues are sufficient to
\npay explicit costs, but not implicit costs.
\nB. the owner will not be able to
\npay himself or herself a salary.
\nC. it will shut down in the long
\nrun, but will continue to operate in the short run.
\nD.the owners are
\nearning a return on their time and investment that is equal to the opportunity
\ncosts of that time
\nand investment.
\n23. If all firms in a perfectly
\ncompetitive industry are earning positive economic profits, one would expect
\nthat,
\nover time, the number of firms
\nwill _______ and the market price will _____.
\nA.rise; fall
\nB. fall; rise
\nC. rise; rise
\nD. rise; stay the same
\n24. In a perfectly competitive
\nindustry over the long run,
\nA. economic profits tend to
\npersist.
\nB. the number of firms in an industry
\ngrows.
\nC. economic losses tend to
\npersist.
\nD.economic profits
\nand losses are driven towards zero by entry and exit.
\n25. An implication of entry and
\nexit in response to the profit incentive is that, for perfectly competitive
\nfirms,
\nA. no firm accepts zero economic
\nprofits in the long run.
\nB. firms produce the quantity
\nthat minimizes average variable costs in the short run.
\nC.firms produce
\nthe quantity that minimizes average total costs in the long run.
\nD. demand is completely inelastic
\n26. Mary Jane is willing to
\nbaby-sit for $6 an hour. Her neighbor called and asked her to baby-sit for $8
\nan
\nhour. Mary Jane will earn
\nA. consumer surplus of $2.
\nB.economic rent of
\n$2
\nC. economic profit of $8.
\nD. accounting profit of $8, but
\neconomic profit of 0.
\nAssume that all firms in the
\nindustry depicted below have identical cost functions.
\n27. What is roughly the long-run
\nequilibrium price in this industry?
\nA. $15
\nB.$10.
\nC. $5.
\nD. $5 for some firms and $10 for
\nothers.
\nThe following graphs depict a perfectly
\ncompetitive firm and its market. Assume that all firms in this industry
\nhave identical cost functions.
\n28. What is the long run
\nequilibrium quantity in this industry, and how many firms will there be?
\nA. 300 units; 10 firms
\nB.500 units; 20
\nfirms
\nC. 700 units; 10 firms
\nD. 25 units; 300 firms
\n29. You have just won the
\nlottery! You may take your winnings in either a single immediate payment of
\n$1,000,000 or in annual payments
\nof $25,000 forever into the future. At what interest rate would you be
\nindifferent between these two
\nchoices?
\nA. 4%
\nB. 25%
\nC.2.5%
\nD. 0.25%
\nSuppose that the city of Austin,
\nTX chooses to regulate the number of street vendors operating near the
\nUniversity of Texas by requiring
\neach vendor to own a permit in order to operate. The city gives permits to all
\nexisting vendors and announces
\nthat no new permits will ever be issued. Prior to regulation, the costs
\n(including
\nimplicit costs) of operating were
\n$85,000 and revenues were $150,000, and these costs and revenues are
\nexpected to persist indefinitely
\nfor all vendors. Once distributed, the city ordinance allows the permits to be
\nbought and sold without
\nrestriction. The permits have no expiration date. The interest rate for the
\nindefinite
\nfuture is 10 percent.
\n30. Prior to this ordinance, how
\nmuch were street vendors earning?
\nA. Economic profits of zero.
\nB. Accounting profits of $65,000.
\nC. A normal profit.
\nD.Economic profits
\nof $65,000.
\n31. At what price will existing
\nstreet vendors be willing to sell their permits?
\nA.$650,000.
\nB. $150,000.
\nC. $65,000.
\nD. $6,500.
\n32. Generic Brands is expected to
\nearn a profit of $1 million each year forever into the future. If the interest
\nrate
\nis 5%, and there are 20,000
\nshares of company stock outstanding, how much will investors be willing to pay
\nfor
\na single share of Generic Brands
\nstock?
\nA. $50
\nB. $100
\nC. $500
\nD.$1000
\n33. The efficient-markets
\nhypothesis states that
\nA. all markets produce an
\nefficient outcome.
\nB. production is always
\ntechnically efficient.
\nC.all relevant
\ninformation about a company’s current and future earnings prospects is embodied
\nin its stock
\nprice.
\nD. most of the relevant information
\nabout a company’s current and future earnings prospects is embodied in its
\nstock price.
\n34. The existence of a negative
\nexternality will result in
\nA. a less than optimal level of
\nproduction.
\nB.a greater than
\noptimal level of production.
\nC. prices that are artificially
\nhigh.
\nD. elimination of deadweight
\nloss.
\nTaylor lives in a residential
\nneighborhood that prides itself on well-groomed lawns. Taylor’s neighbors find
\nthat
\nthe collective marginal benefit
\nof someone else’s well-groomed lawn is $10. Taylor, however, dislikes yard
\nwork and receives zero net
\nbenefit from an unkempt lawn and a net benefit of -$1 for a well-groomed lawn \u00e2\u0080\u0093
\nthe cost of maintaining the lawn
\nis a dollar more than the benefit of having a well-groomed lawn.
\n35. If Taylor acts independently,
\nTaylor’s lawn will be __________ and total economic surplus to the
\nneighborhood will be __________.
\nA. well groomed; $10
\nB. well groomed; $5
\nC.unkempt; 0
\nD. unkempt; $5
\n36. Provided that bargaining is
\ncostless, the Coase Theorem suggests that:
\nA. the rest of the neighborhood
\nwill have to tolerate Taylor’s unkempt lawn.
\nB. Taylor could pay the neighbors
\nto stop complaining about the lawn, making everyone in the neighborhood
\nbetter off.
\nC.Taylor’s
\nneighbors could pay Taylor to have a well-groomed lawn, making Taylor and the
\nneighbors better
\noff.
\nD. Taylor’s neighbors could pay
\nTaylor to have a well-groomed lawn, making Taylor better off and the
\nneighbors worse off.
\nCurly and Moe are considering
\nliving alone or being roommates and splitting the rent for the next twelve
\nmonths. A one bedroom, one bath
\napartment is $500 per month while a two bedroom, one bath apartment is
\n$800. The one difficulty they
\nhave is that Moe snores very loudly. Curly estimates the cost of poor sleep due
\nto
\nMoe’s snoring at $150 per month.
\nMoe could obtain a snore-eliminating device for $50 per month.
\n37. The least costly solution to
\nthe externality present in this situation is for
\nA. Curly to endure Moe’s snoring.
\nB. both to live alone.
\nC.Moe to eliminate
\nhis snoring.
\nD. Moe to pay Curly for his
\ndiscomfort.
\nSuppose that the EPA has proposed
\nstrict controls on the amount of sulfur that diesel fuel can contain. These
\ncontrols are designed to fully
\noffset the cost of pollution generated by diesel fuel vehicles. The effect of
\nthe
\nregulation is estimated to
\nincrease the equilibrium price paid by consumers for a gallon of diesel fuel by
\n10
\ncents.
\n38. Assuming that the supply of
\ndiesel fuel is upward sloping and demand is downward sloping, then one can
\ninfer that
\nA. the external benefit of using
\ndiesel fuel is less than 10 cents.
\nB.the external
\ncost of using diesel fuel is greater than 10 cents.
\nC. the external cost of using
\ndiesel fuel is less than 10 cents.
\nD. the external cost of using
\ndiesel fuel is equal to 10 cents.
\n39. Refer to the figure above.
\nFrom this graph, you can infer that paper production
\nA. generates no externalities at
\nquantities less than 300 tons per day.
\nB.generates negative
\nexternalities equal to approximately $50 per ton per day.
\nC. generates negative
\nexternalities equal to approximately $25 per ton per day.
\nD. should be prohibited.
\n40. Refer to the figure above.
\nAssume that Coasian bargaining is impractical for solving the externality
\nproblem
\nillustrated. The efficient
\nequilibrium could be achieved by
\nA. banning production of the
\ngood.
\nB. compensating those injured by
\nthe externality.
\nC.taxing the good
\nby an amount equal to the external cost.
\nD. subsidizing the good by an
\namount equal to the external benefit.
\n41. Refer to the figure above. If
\nthe firm were forced to pay the external cost, the firm would
\nA. increase the price of paper by
\nthe full amount of the external cost.
\nB. be unable to increase the
\nprice of paper, and so would bear the entire burden of the increased cost.
\nC. produce more paper than it
\ndoes at the private market equilibrium
\nD.share the burden
\nof the higher cost with paper consumers.
\n42. An imperfectly competitive
\nfirm is one
\nA. that attempts but fails to
\ncompete perfectly.
\nB. with the ability to set price
\nat any level it wishes.
\nC.that possesses
\nsome degree of control over its price.
\nD. that faces perfectly inelastic
\ndemand.
\n43. Patents and copyrights, which
\nact as barriers to entry and confer market power upon their owners, exist to
\nA. protect consumers from
\nimitations.
\nB. ensure excessive profits to
\nthe holders.
\nC.protect
\nresearch, development and creative expression.
\nD. magnify the dominance of large
\nfirms.
\n44. A firm is most likely to
\nexperience economies of scale if it has _____ start up costs and ______
\nmarginal
\ncosts.
\nA. high; increasing
\nB.high; low
\nC. high; high
\nD. low; decreasing
\n45. When a perfectly competitive
\nfirm sells additional output, __________, and when a monopolist sells
\nadditional output, ___________
\nA.total revenues
\nalways rise; total revenues may rise, fall, or remain unchanged.
\nB. total revenues remain
\nunchanged; total revenues always rise.
\nC. marginal revenues stay the
\nsame; marginal revenues rise.
\nD. total revenues always rise;
\ntotal revenues always fall.
\n46. Refer to the figure above. At
\na price of $8\/unit, total revenue for a monopolist would be ____, while
\nmarginal revenue earned from the
\nlast whole unit sold would be ____.
\nA. $8; 8
\nB. $24; 8
\nC. $32; 4
\nD.$40; 0
\n47. If the demand curve facing a
\nmonopolist is P = 50 – 10*Q, at what quantity are marginal revenues zero?
\nA. 50
\nB. 10
\nC. 5
\nD.2.5
\n48. The reason that economists
\nconsider monopoly to be socially undesirable is that monopolists
\nA. always earn excessive profits.
\nB. can charge any price they
\nwant.
\nC. exploit the inelastic nature
\nof demand.
\nD.produce less
\nthan the socially efficient amount.
\n49. The profit maximizing rule MR
\n= MC applies to
\nA.all firms.
\nB. monopolists only.
\nC. perfect competitors only.
\nD. all firm types except perfect
\ncompetitors.
\n50. Compared to a monopolist
\ncharging a single price to everyone, perfect price discrimination makes
\nA. the monopolist better off and
\nall consumers worse off.
\nB. society worse off.
\nC. the monopolist worse off and
\nconsumers better off.
\nD.the monopolist
\nand some consumers better off.
\nSHORT ANSWER QUESTIONS
\n1. The figure below depicts the
\ndomestic market for sugar\u00e2\u0080\u0094a competitively-produced commodity\u00e2\u0080\u0094with and without
\nthe provision of a subsidy for each unit sold. In the absence of the subsidy,
\nthe domestic market price is determined on the global market.
\na. Without the subsidy, what is
\nthe amount of consumer and producer surplus?
\nb. With the subsidy, what is the
\namount of consumer and producer surplus, and what is the cost to the government
\nof providing the subsidy?
\nc. What effect does the subsidy
\nhave on total economic surplus?
\n2. The figure below depicts a
\nmarket before and after the introduction of a per unit (ad valorem) tax.
\na. In the absence of a tax, what
\nis the amount of total economic surplus in this market?
\nb. If a $1 per unit (ad
\nvalorem) tax is imposed on sellers, what will be the new equilibrium price
\npaid by consumers and the new after-tax price received by producers? How is the
\nburden of the tax shared?
\nc. How much revenue is collected
\nby this tax, and what is the deadweight loss in the market?
\nd. Suppose you learn that production
\nin this market generates an external cost of $1 per unit produced.
\nWhat is the deadweight loss from
\nthe $1 tax in that case?
\n3. A village has five residents,
\neach of whom has accumulated savings of $50. Each villager can use the money to
\nbuy a government bond that pays 10% interest per year or to buy a year-old
\ngoat, send it onto the common to graz e, and sell it after one year. The price
\nof the goat that the villager will get at the end of the year depends on the
\namount of weight it gains while grazing on the common, which in turn depends on
\nthe number of goats sent onto the common, as shown in table below.
\na. If the villagers each behave
\non the basis of their own private incentives, how many goats will villagers send
\nonto the commons?
\nb. Suppose that instead of each
\nvillager deciding what to do independently, a village elder decides the total number
\nof goats and bonds to invest in with the goal of maximizing total village
\nincome. How many goats will the village elder choose to send onto the common?
\n.
\n4. The figure below represents
\nthe demand and marginal revenue curves facing a single firm operating as a natural
\nmonopoly along with the firm\u00e2\u0080\u0099s cost curves.
\na. How much output will this
\nmonopolist produce in order to maximize profits, what will be the market price,
\nand what will be the firm\u00e2\u0080\u0099s profits at that point?
\nb. What would be the monopolist\u00e2\u0080\u0099s
\nprofits if it were instead required to produce at the socially optimal level?
\nc. What is the deadweight loss in
\nthis market resulting from monopoly pricing?<\/p>\n","protected":false},"excerpt":{"rendered":"
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