ECON Exam #3

The market demand curve for a popular teen magazine is given by Q = 80 - 10P where P is the magazine price in dollars per issue and Q is the weekly magazine circulation in units of 10,000. If the circulation is 400,000 per week at the current price, what is the consumer surplus for a teen reader with maximum willingness to pay of $3 per issue?

-1.00

Consider a good whose own price elasticity of demand is -0.5 and price elasticity of supply is 1.5. The fraction of a specific tax that will be passed through to consumers is ________.

.75

Following Example 8.8 in the book, the long-run supply of rental housing in most U.S. communities is more inelastic than the long-run supply of owner-occupied housing. Why? A. Local rental housing regulations B. Limited demand for rental housing C. Limitations on the urban land available for rental housing D. A and C above are correct

D. A and C above are correct The long-run supply of rental housing in most U.S. communities is more inelastic than the long-run supply of owner-occupied housing because of local rental housing regulations and limitations on the urban land available for rental housing.

Under a binding price ceiling, what does the change in consumer surplus represent? A. The gain in surplus for those buyers who can still purchase the product at the lower price. B. The loss in surplus for those buyers who previously purchased some units of the good at the higher price, but these units are no longer produced at the lower price. C. The loss in surplus for those buyers who would like the purchase the excess demand created by the price ceiling policy. D. Both A and B are correct.

D. Both A and B are correct.

If price is between AVC and ATC, the best and most practical thing for a perfectly competitive firm to do is

continue operating, but plan to go out of business.

Scenario 10.3: The demand curve and marginal revenue curve for red herrings are given as follows: Q = 250 - 5P MR = 50 - 0.4Q Refer to Scenario 10.3. Suppose that a tax of $5 per unit of output is imposed on red herring producers. The price of red herring will

increase by less than $5

A firm maximizes profit by operating at the level of output where

marginal revenue equals marginal cost.

Owners and managers

may be different people with different goals, but in the long run firms that do best are those in which the managers pursue the goals of the owners.

Figure 9.2 Refer to Figure 9.2. At price 0E and quantity Q*, the deadweight loss is 0ECQ*. B. 0ACQ*. C. 0FCQ*. D. EFC. E. none of the above

none of the above

The cartel of oil-producing nations (OPEC) once controlled about 80% of the world petroleum market, but OPEC's market share has declined to about half of its former level. This outcome is a good example of how firms may have:

relatively high short-run monopoly power that declines in the long run. This outcome is a good example of how firms may have relatively high short-run monopoly power that declines in the long run.

If a graph of a perfectly competitive firm shows that the MR = MC point occurs where MR is above AVC but below ATC,

the firm is earning negative profit, but will continue to produce where MR = MC in the short run.

If a monopolist sets her output such that marginal revenue, marginal cost and average total cost are equal, economic profit must be:

postive

A price support may be pictured by

shifting the demand curve to the right by the amount of the government purchase.

Figure 9.9 Refer to Figure 9.9. At free trade, domestic producer surplus would be

$1,250,000.

Figure 9.3 Refer to Figure 9.3. If the government establishes a price ceiling of $1.00, total consumer and producer surplus will be

$450

Scenario 10.2: A monopolist faces the following demand curve, marginal revenue curve, total cost curve and marginal cost curve for its product: Q = 200 - 2P MR = 100 - Q TC = 5Q MC = 5 Refer to Scenario 10.2. How much profit does the monopolist earn?

$4512.50

Scenario 10.1: Barbara is a producer in a monopoly industry. Her demand curve, total revenue curve, marginal revenue curve and total cost curve are given as follows: Q = 160 - 4P TR = 40Q - 0.25Q2 MR = 40 - 0.5Q TC = 4Q MC = 4 Refer to Scenario 10.1. How much output will Barbara produce?

$72

The market supply curve for music downloads is Q = 135(P-1) where Q is millions of downloads and P is the price in dollars per track. If the current price is $1.20 per download, what is the change in producer surplus if the price increases by $0.20 per track?

$8.1 million

Figure 9.8 Refer to Figure 9.8. In order to gain the equivalent imports as a $50 tariff, the government would have to impose a quota of

100 tons of sugar.

Consider the following diagram where a perfectly competitive firm faces a price of $40. Figure 8.1 Refer to Figure 8.1. The firm earns zero profit at what output?

34 and 79.

Scenario 10.3: The demand curve and marginal revenue curve for red herrings are given as follows: Q = 250 - 5P MR = 50 - 0.4Q Refer to Scenario 10.3. The marginal cost of red herrings is given as: MC = 0.6Q. What is the profit-maximizing level of output?

50

Which of the following cases are examples of industries that have potentially increasing costs due to scarce inputs? A. Legal services B. Medical care C. Petroleum production D. all of the above

All the above

Consider the following diagram where a perfectly competitive firm faces a price of $40. Figure 8.1 Refer to Figure 8.1. At the profit-maximizing level of output, total profit is

At the profit-maximizing level of output, total profit is $603

What is the maximum value of the Lerner index?

One

Imposition of an output tax on all firms in a competitive industry will result in

a leftward shift in the market supply curve.

In long-run competitive equilibrium, a firm that owns factors of production will have an

economic profit = $0 and accounting profit > $0.

A monopolist has equated marginal revenue to zero. The firm has:

maximized revenue.

A monopolist has determined that at the current level of output the price elasticity of demand is -0.15. Which of the following statements is true?

The firm should cut output.

Suppose a government imposes an import tariff that is too large and exceeds the tax required to completely shut down foreign imports. What is the impact of this mistake on the market outcome?

The impact is the same as intended --- there are no imports and the domestic market clears at the domestic equilibrium price

Suppose the market demand curve is perfectly elastic in an increasing-cost industry. If an output tax of t per unit is imposed on all producers of the good, what happens to the market equilibrium outcome?

The price paid by buyers does not change and output decrease

The total and marginal cost functions for a typical soft coal producer are: TC = 75,000 + 0.1Q2 and MC = 0.2Q where Q is measured in railroad cars per year. The industry consists of 55 identical producers. The market demand curve is: QD = 140,000 - 425P, where P is the price per carload. The market can be regarded as competitive. a. Calculate the short run equilibrium price and quantity in the market. Calculate the quantity that each firm would produce. Calculate producer surplus, consumer surplus, and total surplus at the equilibrium values. Calculate the firm's profit (or loss). b. The Federal government is considering the imposition of a $15 per carload tax on soft coal. Calculate the short-run equilibrium price and quantity that would exist under the tax. What portion of the tax would be paid by producers and what portion by consumers? Calculate the producer and consumer surplus under the tax and analyze the efficiency consequences of the tax. Calculate the firm's profit (or loss) under the tax. Could the tax be justified despite its efficiency implications?

To find market supply curve begin by finding firm's supply curve. Firm's supply curve is MC curve (in this case all of MC lies above AVC): Solve for Q in terms of MC = P: MC = 0.2Q Q = 5P Market short-run supply is the horizontal sum of firm supply. There are 55 firms in the market, so market supply is 55 times the individual firm's supply. QS = 275P Equate QD and QS to determine P and Q. 275P = 140,000 - 425P 700P = 140,000 P = $200 Q = 275(200) Q = 55,000 Individual firm equates P to MC: 200 = 0.2Q Q = 1,000 π = TR - TC TR = (200)(1000) TR = 200,000 TC = 75,000 + 0.1(1000)2 TC = 175,000 π = 25,000 Producer and consumer surplus: Solve for P in terms of Q. QS = 275P P = 0.0036Q QD = 140,000 - 425P P = 329.41 - 0.0024Q Producer surplus = 0.5(55,000)(200) = 5,500,000 Consumer surplus = 0.5(55,000)(329.41 - 200) = 3,558,775 Total of producer and consumer surplus is 3,558,775 + 5,550,000 = 9,058,775 b. Pb = buyer's price Ps = seller's price (net of tax) Pb - Ps = 15 = tax QD = 140,000 - 425 Pb is market demand QS = 275 Ps is market supply Set supply equal to demand: 140,000 - 425 Pb = 275 Ps Pb = Ps + 15 140,000 - 425 (Ps + 15) = 275 Ps 140,000 - 425 Ps - 6,375 = 275 Ps Ps = 190.89 Pb = Ps + 15 = 205.89 Consumers pay: Pb - Po = 205.89 - 200 = 5.89 Producers pay: Po - Ps = 200 - 190.89 = 9.11 Plug Ps into the supply equation to get quantity: Q = Qs = 275 Ps = 275(190.89) = 52,495 (If you plug into the demand equation instead your answer will differ slightly due to rounding.) Individual firm equates P to MC: 205.89 = 0.2Q + 15 Q = 954.5 π = TR - TC TR = 205.89(954.50) TR = 196,522 TC = 75,000 + 0.1Q2 + 15Q TC = 180,424.53 π = 16,097.48 Profit fell from 25,000 to 16,097.48. Producer and Consumer Surplus: Demand curve remains: P = 329.41 - 0.0024Q Solve for P in terms of QS. QS = -4125 + 275P 275P = QS + 4,125 P = 15 + 0.0036 Q Producer surplus = 0.5(52,497)(205.89) = 5,404,303.67 Consumer surplus = 0.5(52,497)(329.41 - 205.89) = 3,242,214.72 Total of Producer and Consumer Surplus: = 5,404,303.67 + 3,242,214.72 = 8,646,518.39 Total surplus fell from 9,058,775 to 8,646,518.39. There is a welfare loss as indicated by the loss in total surplus. The tax could be justified by known externalities of soft coal

Hawkins MicroBrewery has a monopoly on Oatmeal Stout in the local market. The demand is: The resulting marginal revenue function is Hawkins marginal cost of producing Oatmeal Stout is Calculate Hawkins profit maximizing output. Calculate the social cost of Hawkins monopoly power.

Hawkins will set marginal revenue equal to marginal cost to find optimal output. At this output level, Hawkins charges $35 per unit. The choke price is $50 while Hawkins reservation price is $5. Consumer surplus is Producer surplus is Total surplus in the local Oatmeal Stout market is $900 when Hawkins has monopoly power. If Hawkins did not have monopoly power, the price of Oatmeal Stout would equal Hawkins marginal cost. We can find this output level by setting consumer's price as a function of output equal to Hawkins marginal cost. At this output level, the price of Oatmeal Stout is $27.50. Consumer surplus is Producer surplus is Total surplus when Hawkins does not have monopoly power would be $1,012.50. Thus, society loses 112.50 of surplus due to Hawkins' monopoly power in the local Oatmeal Stout market.

Use the following statements to answer this question: I. An increase in the firm's fixed costs will also shift the firm's short-run supply curve to the left. II. An increase in the firm's fixed costs will not shift the firm's short-run supply curve to the right or left, but it may alter how much of the marginal cost curve is used to form the short-run supply curve. Identify if the statements are True or False.

I and II are false.

When the demand curve is downward sloping, marginal revenue is

Less than price When the demand curve is downward sloping, marginal revenue is less than price.

What is the welfare impact of a subsidy policy?

Producer and consumer surplus increase, and these gains are smaller than the government cost.

For a monopolist, changes in demand will lead to changes in a. both price and quantity. B. output with no change in price. C. price with no change in output. D. any of the above can be true.

any of the above can be true

When the federal government installs a price support program that requires the government to purchase all of a good not bought in the private economy at the support price, changes in producer surplus

are positive, but more than offset by the cost to consumers and the government When the federal government installs a price support program that requires the government to purchase all of a good not bought in the private economy at the support price, changes in producer surplus are positive, but more than offset by the cost to consumers and the government.