ECO 1001 Final Review 2018

Each firm below can produce only 1 pound of cookies. Firm Production Costs Becca $10 Rob 7.50 Trisha 6 Mike 5.25 Steve 5 Suppose this is the market for cookies and that demand is perfectly elastic. Let the market clearing price be $6 per pound of cookies. Suppose also that there is a $0.50 negative externality associated with the consumption of a pound of cookies by the market. What is the producer surplus in this market? A. $1.75 B. $4 C. $5.50 D. $6

A. $1.75 PS = $ Received - $ Paid 6 - 6 = 0 6 - 5.25 = 0.75 6 - 5 = 1 1 + 0.75 = $1.75 Firm Production Costs PS Becca $10 Rob 7.50 Trisha 6 0 Mike 5.25 .75 Steve 5 1

Suppose an airline determines that its customers traveling for business have inelastic demand and its customers traveling for vacations have an elastic demand. If the airline's objective is to increase total revenue, it should: A. Decrease the price charged to vacationers and increase the price charged to business travelers. B. Increase the price charged to vacationers and decrease the price charged to business travelers. C. Decrease the price to both groups of customers. D. Increase the price for both groups of customers.

A. Decrease the price charged to vacationers and increase the price charged to business travelers.

Four roommates are planning to spend the weekend in their dorm room watching old movies, and they are debating how many to watch. Here is their willingness to pay for each film: Shen Antonio Dimitri Jake 1st Film 10 9 6 3 2nd Film 9 7 4 2 3rd Film 8 5 2 1 4th Film 7 3 0 0 5th Film 6 1 0 0 If it costs $8 to rent a movie, how many movies should the roommates rent in order to maximize the total surplus? A. 3 movies which creates a surplus of $42 B. 4 movies which creates a surplus of $44 C. 3 movies which creates a surplus of $58 D. 4 movies which creates a surplus of $68

B. 4 movies which creates a surplus of $44 Willingness To Pay: Film 1 10 + 9 + 6 + 3 = 28 28 - $8 = 20 Film 2 22 - $8 = 14 Film 3 16 - $8 = 8 Film 4 10 - $8 = 2 Film 5 7 - $8 = -1 Surplus -> 20 + 14 + 8 + 2 = $44

Syrup Honey Company A 30 50 Company B 60 120 Which statement makes no false assertions? A. Company A has a comparative advantage in syrup, an absolute advantage in honey, and should specialize in syrup. B. Company B has a comparative advantage in honey, an absolute advantage in syrup, and should specialize in honey. C. Company A has a comparative advantage in honey, has no absolute advantage, and should specialize in honey D. Company B has a comparative advantage in syrup, an absolute advantage in honey, and should specialize in honey.

B. Company B has a comparative advantage in honey, an absolute advantage in syrup, and should specialize in honey. For Company A OC(S): 50 ÷ 30 = 1.67 honey OC(H): 30 ÷ 50 = 0.6 syrup For Company B OC(S): 120 ÷ 60 = 2 honey OC(H): 60 ÷ 120 = 0.5 syrup

Income Quantity Demanded $40 100 $80 120 Which statement is true? A. This good is inelastic. B. This good is normal. C. This good is a substitute. D. This good is inferior.

B. This good is normal.

Pairs Bought/Sold PV PC 1 $46 $21 2 $44 $24 3 $42 $27 4 $40 $30 5 $38 $33 6 $36 $36 7 $34 $39 If producing each pair of shoes has an external cost of $6, then total surplus would be: A. $30 without the external cost and $24 with the external cost. B. $30 without the external cost and $0 with the external cost. C. $75 without the external cost and $45 with the external cost. D. $75 without the external cost and $39 with the external cost.

C. $75 without the external cost and $39 with the external cost. *Need Total Surplus* TS = PV - PC Pairs PV PC TS 1 $46 $21 $25 2 $44 $24 $20 3 $42 $27 $15 4 $40 $30 $10 5 $38 $33 $ 5 6 $36* $36* $ 0 7 $34 $39 WITHOUT EXTRA COST TS = 25 + 20 + 15 + 10 + 5 TS = $75 WITH EXTRA COST 75 - 36 = $39

Suppose the total cost (in dollars) facing a firm is represented by the equation: TC(Q) = 100 + 10Q + 2Q². If the firm is operating in a competitive market in which the market price is $24 and stays at $24 in the long-run, then the firm will: A. Shut down in the short-run and exit in the long-run. B. Shut down in the short-run, but does not exit in the long-run. C. Produce 4 units in the short-run, and exit in the long-run. D. Produce 4 units in the short-run and does not exit in the long-run.

C. Produce 4 units in the short-run, and exit in the long-run. MR = $24 MC = 10 + 4Q 10 + 4Q = 24

If cocaine were legalized, it is likely that there would be an increase in the demand for cocaine. If demand for cocaine is inelastic and the supply of cocaine is perfectly elastic, this will result in... A. Higher prices and higher total revenue from cocaine sales. B. Higher prices, but lower total revenue from cocaine sales. C. The same price and higher total revenue from cocaine sales. D. The same price, but lower total revenue from cocaine sales.

C. The same price and higher total revenue from cocaine sales.

Suppose the total cost (in dollars) facing a firm is represented by the equation: TC(Q) = 100 + 10Q + 2Q². What is the average variable cost of producing 10 units of output and the marginal cost of producing the second unit of output? A. $40 ; $40 B. $30 ; $30 C. $40 ; $16 D. $30 ; $16

D. $30 ; $16 TC(Q) = 100 + 10Q + 2Q² AVC = (10Q + 2Q²) ÷ Q AVC = 10 + 2Q AVC = 10 + 2(10) AVC = $30 TC₂ - TC₁ TC₁ = 100 + 10(1) + 2(1)² = 112 TC₂ = 100 + 10(2) + 2(2)² = 128 128 - 112 = $16

Quantity Total Cost 0 $ 4 1 $10 2 $16 3 $21 4 $24 5 $35 6 $48 What is the lowest price at which this firm would operate in the short-run and long-run in a competitive market? A. $6 in short run and $5 in long run at which firm earns a positive economic profit. B. $6 in short run and $5 in long run at which firm earns a zero economic profit. C. $5 in short run and $6 in long run at which firm earns a positive economic profit. D. $5 in short run and $6 in long run at which firm earns a zero economic profit.

D. $5 in the short run and $6 in the long run at which firm earns a zero economic profit. *Need VC ; ATC ; AVC* AVC = VC ÷ Q ATC = TC ÷ Q VC = ∆TC ÷ ∆Q Q TC VC ATC AVC 0 $ 4 0 - - 1 $10 6 10 6 2 $16 12 8 6 3 $21 17 7 5.6 4 $24 20 6 5** 5 $35 31 7 6.2 6 $48 44 8 7.3 Short-Run Lowest AVC = $5 Long-Run Lowest ATC = $6

Katia has the following demand curve for selling coffee. Assume that Katia has a marginal cost of $3 per unit. Price Quantity $10 1 $ 9 2 $ 8 3 $ 7 4 $ 6 5 What is Katia's profit-maximizing level of output? A. 1 B. 2 C. 3 D. 4

D. 4 *Need TR and MR* TR = P x Q MR = ∆TR ÷ ∆Q P Q TR MR MC 10 1 10 10 3 10>3 9 2 18 8 3 8>3 8 3 24 6 3 6>3 7 4 28 4 3 4>3 6 5 30 2 3

Suppose a 6% increase in the price of iPhones results in a 4% decrease in the quantity of iPhones demanded. The price elasticity of demand is: a. 0.67 b. 1 c. 1.5 d. 2

a. 0.67 PEoD = %∆Q/%∆P PEoD = 4/6 PEoD = 0.67

Which of the following is a public good? a. An outer space missile defense system protecting the planet Earth b. Mail delivery by the United States Postal Service c. Education d. Healthcare

a. An outer space missile defense system protecting the planet Earth.

If a competitive firm is producing at a point where marginal cost is less than marginal revenue then it should: a. Increase production b. Decrease production c. Keep production the same d. Shut down

a. Increase production. MC > MR 2 > 3

Mary and Cathy are roommates. Mary assigns a $50 value to smoking cigarettes. Cathy values smoke-free air at $35. Cathy has the legal right to a smoke free apartment. Which is one possible efficient private market outcome? a. Cathy offers Mary $30 not to smoke. Mary accepts and does not smoke. b. Mary pays Cathy $36 so that Mary can smoke. c. Mary pays Cathy $34 so that Mary can smoke. d. Cathy offers Mary $35 not to smoke. Mary accepts and does not smoke.

b. Mary pays Cathy $36 so that Mary can smoke.

A primary factor contributing to the issue in the previous question is: a. The existence of free riders b. The absence of property rights c. The concentration of market power d. The presence of excess capacity

b. The absence of property rights.

Suppose that the producers of copper are permitted to emit harmful pollutants, free fo charge, into the air. How will the price and output of copper products in the competitive market compare with their values under conditions of ideal economic efficiency? a. The price will be too high, and the output will be too large. b. The price will be too low, and the output will be too large. c. The price will be too low, and the output will be too small. d. The price will be too high, and the output will be too small.

b. The price will be too low, and the output will be too large.

A tax of $4 per unit is imposed on cigarettes. The tax reduces the equilibrium quantity from 620 to 500. The deadweight loss is: a. $1,000 b. $480 c. $240 d. $120

c. $240 DW = 1/2(4)(620 - 500) DW = 1/2(4)(120) DW = 240

Consider that the market for haircuts in a midsized city is described by the following demand equation: P = 30 - 1/5Q, and the following supply equation: P = 2 + 1/5Q. At the equilibrium price, the absolute value of the point price elasticity of demand is: a. 0.05 b. 0.88 c. 1.14 d. 21.88

c. 1.14 30 - 1/5Q = 2 + 1/5Q 2/3Q = 28 Q = 70 30 - 1/5Q | Q = 70 30 - 1/5(70) = 16 (P/Q)(∆Q/∆P) (16/70)(-5) 1.14

When adding another unit of labor leads to an increase in output that is smaller than the increases in output that resulted from adding previous units of labor, the firm exhibits... a. diminishing labor. b. diminishing output. c. diminishing marginal product. d. negative marginal product.

c. Diminishing marginal product. 1st worker -> 10 shirts 2nd worker -> 9 shirts

Which of the following is most true of the free-rider problem? a. It is not a typical problem for club goods, which are optimally produced by markets because they are rival and excludable. b. It is a typical problem for common goods, which are underproduced by markets because they are excludable and non-rival. c. It is a typical problem for public goods, which are underproduced by markets because they are non-excludable and non-rival. d. It is not a typical problem for goods with positive externalities, which are optimally produced by markets because of the benefits they provide society.

c. It is a typical problem for public goods, which are underproduced by markets because they are non-excludable and non-rival.

Economic profits are NOT possible in the long run in which of the following markets? a. Monopoly b. Oligopoly c. Monopolistic Competition d. Duopoly

c. Monopolistic Competition

For a monopolist that charges the same price to all customers, what is the relationship between price, MR and MC? a. P = MR and MR = MC b. P = MR and MR > MC c. P > MR and MR = MC d. P > MR and MR > MC

c. P > MR and MR = MC

Suppose the total cost (in dollars) facing a firm is represented by the equation: TC(Q)=100+10Q+2Q² If the firm is operating in a competitive market in which the market price is $24 and stays at $24 in the long run, then firm will: a. Shut down in the short run and exit in the long run b. Shut down in the short run but does not exit in the long run c. Produce 4 units in the short run and exit in the long run d. Produce 4 units in the short run and does not exit in the long run

c. Produce 4 units in the short run and exit in the long run. MR=24 MC=10+4Q+24 Q=35

Suppose the total cost (in dollars) facing a firm is represented by the equation: TC(Q)=100+10Q+2Q² What is the average variable cost of producing 10 units of output and the marginal cost of producing the second unit of output? a. $40 ; $40 b. $30 ; $30 c. $40 ; $16 d. $30 ; $16

d. $30 ; $16 AVC=(10Q+2Q²)/Q AVC=10+2(10)=30 TC₁=100+10(1)+2(1)³ TC₁=112 TC₂=100(2)+10(2)+2(2)³ TC₂=128 128-112=$16

Your sister is thinking about opening a hardware store. She estimates that it would cost $400,000 per year to rent the location, buy the stock, and pay the interest on the loan she uses to open the business. In addition, she would have to quit her $50,000 per year job as an accountant. Suppose your sister thought she could sell $420,000 worth of merchandise in a year. Her economic cost of running a hardware store for a year is...? a. $400,000 and she should open the store because accounting profit is positive. b. $400,000 and she should not open the store because economic profit is negative. c. $450,000 and she should open the store because accounting profit is positive. d. $450,000 and she should not open the store because economic profit is negative.

d. $450,000 and she should not open the store because economic profit is negative. Eco Cost = Explicit + Implicit Cost

Which of the following is most likely to face depletion? a. Public goods b. Private goods c. Club goods d. Common Resources

d. Common Resources

Consider the market for automobiles is currently in equilibrium. Which of the following would cause the price of automobiles to rise? a. A decrease in the wage of workers. b. A reduction in the price of business travel. c. An increase in the price of gasoline. d. Fire destroys a major auto-production facility.

d. Fire destroys a major auto-production facility.