Midterm 2

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FRQ: Using the graph shown, assume that the government imposes a tariff on saddles. Answer the following questions given this information. 1. What is the domestic price and quantity demanded of saddles after the tariff is imposed? 2. What is the quantity of saddles imported before the tariff? 3. What is the quantity of saddles imported after the tariff? 4. What area represents the amount of consumer surplus before the tariff? 5. What area represents the amount of consumer surplus after the tariff? 6. What area represents the amount of producer surplus before the tariff? 7. What area represents the amount of producer surplus after the tariff? 8. What area represents the amount of government revenue because of the tariff? 9. What area represents the total amount of deadweight loss due to the tariff?

1. The domestic price is P2, and the quantity demanded is Q3. 2. The quantity of saddles imported before the tariff is Q4 - Q1. 3. The quantity of saddles imported after the tariff is Q3 - Q2. 4. Consumer surplus before the tariff is represented with the area of A, B, C, D, E, and F. 5. Consumer surplus after the tariff is represented with the area of A and B. 6. Producer surplus before the tariff is represented with the area of G. 7. Producer surplus after the tariff is represented with the area of C and G. 8. Government revenue is represented with the area of E. 9. Total deadweight loss is represented with the area of D and F.

Figure 2 represents production data for a perfectly competitive firm. Based on that data, the marginal physical product of the 6th worker is a. 2 b. 4 c. 6 d. 8 e. 60

a. 2 The output rises from 29 to 31 for the sixth worker.

According to the graph, after the tax was levied, consumer surplus, producer surplus, tax revenue and dead weight loss are represented by areas a. Consumer surplus = A; Producer surplus = F; Tax revenue = B+D; Deadweight loss = C+E b. Consumer surplus = A+B+C; Producer surplus = D+E+F; Tax revenue = B+D; Deadweight loss = C+E c. Consumer surplus = A; Producer surplus = F; Tax revenue = C+E; Deadweight loss = B+D d. Consumer surplus = F; Producer surplus = A; Tax revenue = B+C; Deadweight loss = D+E

a. Consumer surplus = A; Producer surplus = F; Tax revenue = B+D; Deadweight loss = C+E After the tax is applied, the price paid by consumers rises to P3 and quantity falls to Q2. This means that consumer surplus is impacted through the loss of areas B and C, leaving only A as the area above the price and below the demand curve. Producer surplus is similarly affected: while the consumer pays price P3, only price P2 is kept by the producer. Above the supply curve and below price P2 is area F. The tax - as indicated by the diagram - is the difference between the price paid by the consumer and the price received by the producer. Multiply this tax times the quantity sold (Q2) to find total area of the tax, which is reflected in areas B and D. Finally, the loss of gains from trade is the remaining areas C and E which represent deadweight loss.

Each of the following would definitely decrease the equilibrium price with the single exception of: a. Increased cost of raw materials and increased popularity of the product b. Lowered cost of raw materials and increased popularity of the product c. Increase in the number of producers and increased numbers of consumers d. Increase in the number of producers and an increase in the price of a substitute good e. An increase in a government subsidy placed on a good and an decrease in popularity of the good in question

a. Increased cost of raw materials and increased popularity of the product A contraction in supply and an expansion in demand both raise price.

Which of the following would contribute to a reduction in consumer surplus? a. imposition of an effective price floor b. imposition of an effective price ceiling c. an increase in supply d. a decrease in equilibrium price e. all of the above would contribute to a reduction in consumer surplus

a. imposition of an effective price floor Consumer surplus decreases when the price goes up. An effective (or "binding") price floor raises price.

A tax on the producer will do which of the following a. increase price, decrease quantity b. decrease price, increase quantity c. decrease price, decrease quantity d. increase price, increase quantity e. indeterminate price, increase quantity

a. increase price, decrease quantity A tax shifts supply to the left, increasing price and reducing quantity.

Refer to the table below. The total cost of producing 5 units of output is: a. 200 b. 400 c. 500 d. 900 e. 80

b. 400 Average total cost = 80 for the 5 units of production. 80*5=$400.

If your insurance company informed you that your insurance premium (a fixed cost) had been increased, what effect would this have on your business? a. Average variable cost = no change; Average fixed cost = no change; Marginal cost = no change b. Average variable cost = no change; Average fixed cost = increase; marginal cost = no change c. Average variable cost = increase; Average fixed cost = increase; Marginal cost = no change d. Average variable cost = increase; Average fixed cost = increase; Marginal cost = increase e. Average variable cost = no change; Average fixed cost = increase; Marginal cost = increase

b. Average variable cost = no change; Average fixed cost = increase; marginal cost = no change

If a legal price floor is established on a good below the existing equilibrium price, the effect would be to: a. Raise the price of the good and lower the quantity purchased b. Have no effect on the price or quantity of the good c. Lower the price of the good and lower the quantity purchased d. Raise the price of the good and raise the quantity purchased e. Lower the price of the good and increase the quantity purchased

b. Have no effect on the price or quantity of the good A price floor prevents the price from lowering, so if it's below equilibrium that price will hold.

The graph shows short run and long run average total cost curves. Section A, B, and C respectively demonstrate: a. economies of scale, diseconomies of scale, constant returns to scale b. economies of scale, constant returns to scale, diseconomies of scale c. diseconomies of scale, constant returns to scale, economies of scale d. diseconomies of scale, economies of scale, constant returns to scale e. constant returns to scale, economies of scale, diseconomies of scale

b. economies of scale, constant returns to scale, diseconomies of scale Section A shows falling costs, B shows constant costs, and C shows rising costs.

If demand is more elastic than supply, the a. smaller the portion of the tax that will be paid by producers b. smaller the portion of the tax that will be paid by consumers c. more likely it is that the tax will be spread equally between producers and consumers d. more likely it will be subject to tax evasion by those in the underground economy e. larger the portion of the tax that will be paid by consumers

b. smaller the portion of the tax that will be paid by consumers Consumers who are more elastic will shift their consumption in ways to avoid the tax. Producers will bear a larger portion of the burden of the tax (they have a "higher incidence".

In Figure 2, the "law of diminishing returns" sets in with the addition of the _____ worker. a. 1 b. 2 c. 4 d. 7 e. 8

c. 4 The fourth worker adds marginal product of +6, compared to the third which adds +8.

Refer to to the table below. The average fixed cost of producing 4 units of output is: a. 35 b. 40 c. 50 d. 90 e. 200

c. 50 The difference between Average Variable Cost and Average Total cost is $200 when quantity is one. This means that Average Fixed Cost = 200 / 1 = 200. At quantity of 4, AFC = 200/4 = $50.

In the image below, which panel(s) best represent(s) a binding/effective rent control in the long run? a. A b. B c. C d. none of the panels e. all of the panels

c. C In the long run, supply can increase slowly over time, but a binding control means that it must be set at a lower price point than the market would prefer.

The total revenue curve below was derived from the demand for product x. Which of the following statements is true of the demand curve when equilibrium quantity is 10? a. Demand is elastic. b. Demand is inelastic. c. Demand is unit elastic. d. We cannot tell anything about elasticity of demand because this is a total revenue curve. e. Demand is perfectly elastic.

c. Demand is unit elastic. This is definitional. When total revenue is maximized, marginal revenue equals zero and demand is unit elastic.

A production possibility curve might be shifted rightward/outward by each of the following EXCEPT a. Increase in immigration b. Improvements in technology c. The reallocation of existing resources d. Increase in educational levels of the general population e. Discovery of additional natural resources

c. The reallocation of existing resources Reallocating existing resources moves along the PPC without shifting it.

With respect to the average cost curves, the marginal cost curve a. intersects average total cost, average fixed cost, and average variable cost at their minimum points b. intersects average total cost, average fixed cost, and average variable cost at their maximum points c. intersects both average total cost and average variable cost at their minimum points d. intersects average total cost where it is increasing and average variable cost where it is decreasing e. intersects only average total cost at its minimum point

c. intersects both average total cost and average variable cost at their minimum points Marginal cost intersects average total and variable costs, as they are U-shaped and respond to the changes on the margin. Average fixed cost is a straight line.

Caren's Karmel Korn produces a type of caramel corn candy. Caramel, an ingredient in caramel corn, increases in price by 10%. Which of the following correctly describes the effect that this increase will have on the cost of production? a. only marginal cost will increase b. only marginal cost and average total cost will increase c. marginal cost, average variable cost, average total cost will increase d. marginal cost, average total cost, and average fixed cost will increase e. marginal cost, average variable cost, average total cost, and average fixed cost will increase

c. marginal cost, average variable cost, average total cost will increase An increase in variable costs does not affect fixed costs.

If the manufacturer of a drug were to announce that they discovered that their drug doubled your chance of having a heart attack a. the firm's supply curve will shift to the right b. the firm's demand curve will shift to the right c. the firm's demand curve will shift to the left d. the firm's supply curve will shift to the left e. Neither curve will shift, but instead movement will be along each curve

c. the firm's demand curve will shift to the left Higher risk of heart attack would decrease demand for a good.

In the graph below, if S1 represents supply before the imposition of an excise tax and S2 represents supply after the tax is imposed, the burden (or incidence) of the $30 tax in the graph would be borne as follows a. Producer pays all $30 of tax b. Consumers pays all $30 of tax c. Each pays $15 of tax d. Consumer pays $10, Producer pays $20 e. Consumer pays $20, Producer pays $10

d. Consumer pays $10, Producer pays $20 As demand is more elastic than supply, producers will pay more. It appears from this diagram that at the new equilibrium quantity, producers would receive approximately $40 while the consumers will pay $70. Previously the producer received $60 for the good, so they pay $20.

According to the graph, before the tax was levied, consumer and producer surplus are represented by areas a. Consumer surplus = A; Producer surplus = F b. Consumer surplus = D+E+F; Producer surplus = A+B+C c. Consumer surplus = F; Producer surplus = A d. Consumer surplus = A+B+C; Producer surplus = D+E+F

d. Consumer surplus = A+B+C; Producer surplus = D+E+F Consumer Surplus is the area below the demand curve and above price. This encompasses areas A, B and C (from the demand curve down to P1 and out to Q1. Producer Surplus is the area above the supply curve out to Q1 and below the price P1. In this diagram D, E and F are the area of producer surplus.

Which of the graphs in Figure 1 indicate that a firm can sell any or all of its output at the prevailing market price? a. A b. B c. C d. D e. It is impossible to determine the correct answer to the question from the information given.

d. D Regardless of price, if supply is perfectly elastic they can offer as much as possible.

If production cost increases and income decreases (the good is normal), we can correctly conclude that I. Equilibrium price will decrease II. Equilibrium price is indeterminate III. Equilibrium quantity will fall IV. Equilibrium quantity is indeterminate a. I only b. I and III only c. II and IV only d. II and III only e. I and IV only

d. II and III only A decrease in supply raises price and lowers quantity. A decrease in demand lowers price and quantity. Both decrease quantity, but price may rise or fall depending on which shift is larger.

If a decrease in the price of one good increases the demand for another good, then these two goods are a. regular goods b. substitute goods c. public goods d. complementary goods e. independent goods

d. complementary goods When the price of peanut butter falls, I buy more peanut butter. Ceteris paribus, this increases the demand for jam, bread, celery, coconut curry sauce, and other things that are delicious with peanut butter.

Which of the following is true about the distances between average variable cost and average total cost when graphed? a. As output increases the difference between them gets smaller b. As output increases the difference between them gets larger c. Is equal to average fixed cost at all levels of output d. Is zero at all levels of output e. A and C are both correct

e. A and C are both correct This is by definition. Fixed costs + variable costs = total costs, so the difference between ATC and AVC is always AFC. Additionally, as output increases, the quantity of AFC decreases, so the two curves get closer.

The graph below depicts the milk market. The horizontal line, P, represents a price ceiling imposed by the government. Which of the following is true? a. At equilibrium, the quantity demanded is 800 gallons. b. At the price ceiling, there is a surplus. c. The quantity demanded at the price ceiling will equal the quantity supplied. d. The equilibrium price would be $1 without the price ceiling. e. The quantity supplied at the price ceiling will be the quantity actually sold.

e. The quantity supplied at the price ceiling will be the quantity actually sold. None of the other response are accurate in this graph. The quantity supplied at equilibrium is defined by the price ceiling, which appears to be 500 in this problem.


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