ECON FINAL
When trade in wool is not allowed, consumer surplus in Scotland is a. $112.50. b. $225. c. $80.25. d. $67.50. e. $187.50
. E. Consumer surplus with trade is the triangular area below the demand curve and above the world price line. The quantity (base of the triangle) at the equilibrium without trade is 15. The height of this triangle is 70 (where demand curve hits the y-axis) - 45 (equilibrium price without trade) =25. The triangle is 0.5*base*height = 0.5*15*25 =$187.50
Without internalizing the externality, the market equilibrium is a. Price $16 and quantity 160. b. Price $22 and quantity 160. c. Price $18 and quantity 120. d. Price $16 and quantity 120
A. Again, the market equilibrium without internalizing the externality is the intersection of the supply and demand curves.
With trade, Scotland will a. export 11 units of wool. b. export 5 units of wool. c. import 11 units of wool. d. import 6 units of wool.
A. At the world price, domestic quantity demanded is 9 units and domestic quantity supplied is 20 units. Since quantity supplied is greater than quantity demanded, the leftover production will be exported. 20 - 9 = 11.
Given the cost and revenue data, this market is a. not in a long-run equilibrium. More businesses will enter the hair salon market in the long-run. b. not in a short-run equilibrium. c. not in a long-run equilibrium. Some businesses currently in the hair salon market will exit the market in the long-run. d. in a long-run equilibrium
A. If there are positive profits we are not at the long run equilibrium. With positive profits, more firms will enter in the long run. This will put downward pressure on the price, reducing profits. The long run equilibrium is one where profits = 0.
In this market, a price ceiling of $2.75 is a. binding and creates a shortage. b. binding and creates surplus. c. nonbinding and creates a shortage. d. nonbinding and creates neither a shortage nor a surplus.
A. The price is not allowed to rise above the price ceiling. Since the equilibrium is above a $2.75 price ceiling, the price ceiling is binding. A binding price ceiling results in a shortage or excess demand, since quantity supplied is less than quantity demanded at the price ceiling.
Which of the following might cause the supply curve for a good to shift to the left? a. An increase in input prices. b. A decrease in consumer income. c. An improvement in production technology that makes production of the good cheaper. d. An increase in the number of sellers in the market.
A; An increase in the number of sellers and an improvement in technology will both increase supply, shifting the curve to the right. A change in consumer income influences demand, not supply
What is the equilibrium outcome in this market? a. Acme produces 300 units; Pinnacle produces 400 units. b. Acme produces 400 units; Pinnacle produces 200 units. c. Acme produces 200 units; Pinnacle produces 700 units. d. Acme produces 200 units; Pinnacle produces 400 units
B. If Acme is producing 400 units, Pinnacle will produce 200 units. You can see this by looking at the value in the Pinnacle column when the value in the far left column ("Quantity produced by the other firm") is 400. This is an equilibrium outcome only if Acme's response to Pinnacle producing 200 units is to produce 400 units. When the far left column is 200, Acme's column is 400, so this is an equilibrium outcome (To examine a situation that is not an equilibrium outcome, let's consider choice A, Acme produces 300 units and Pinnacle produces 400 units. When the far left column is 300, Pinnacle produces 400 units (so far so good). This is an equilibrium outcome only if Acme's response to Pinnacle producing 400 units is to produce 300 units. When the far left column is 400, Acme's column is 200. Since it is not 300, this is not an equilibrium.)
Suppose a tax is imposed on this market. How large is the tax if the new equilibrium quantity in the market is 50 units? a. $3 b. $4 c. $5 d. $7
B. If the equilibrium is 50 units, the distance between the price buyers pay ($7) and the price sellers receive ($3) at 50 units is the size of the tax. 7-3=4, so the tax is $4.
Which of the following statements is false? a. Firms are more likely to avoid the Prisoner's Dilemma and successfully collude if they are able to use the threat of punishment for parties that cheat. b. Oligopoly markets must have large barriers to entry and differentiated products. c. The Price Leadership model applies to markets with one large firm and several smaller firms. d. Collusion is difficult to maintain because firms have an incentive to cheat on their deal, but if everyone cheats the collusion falls apart.
B. Oligopoly markets must have large barriers to entry, but they may have differentiated or identical products. The car market is an example of an oligopoly with a differentiated product and the copper market is an example of an oligopoly with an identical product.
Allowing for international trade, the country for which the figure is drawn will be a. a net exporter of cars. b. a net importer of cars.
B. The world price is below the domestic price, which means this country does not have a comparative advantage in the production of cars. They will import them.
In the country for which the figure is drawn, which statement is true? a. Relative to autarky (no trade), allowing international trade in cars will increase consumer surplus by the area B. b. Relative to autarky (no trade), allowing international trade in cars will increase consumer surplus by the area B+D. c. Relative to autarky (no trade), allowing international trade in cars will increase total surplus by the area B+D. d. Relative to autarky (no trade), allowing international trade in cars will increase producer surplus by the area B.
B. Without trade, CS (consumer surplus) is A, PS (producer surplus) is B+C, and TS (total surplus) is A+B+C. With trade, CS is A+B+D (increases by B+D), PS is C (decreases by B), and TS is A+B+C+D (increases by D)
When economists make normative statements, they are (a. speaking as scientists. b. speaking as policy advisers. c. making claims about how the world is. d. making claims that can be either confirmed or refuted.)
B; All other answers describe positive statements.
Consider the market for oranges. If the number of orange sellers increases and the price of apples falls (assuming apples and oranges are substitutes), what will be the change in equilibrium price and quantity? (a. Equilibrium price will increase. It is not clear whether equilibrium quantity will increase or decrease. b. Equilibrium price will decrease. It is not clear whether equilibrium quantity will increase or decrease. c. Equilibrium quantity will increase. It is not clear whether equilibrium price will increase or decrease. d. Equilibrium quantity will decrease. It is not clear whether equilibrium price will increase or decrease.)
B; More sellers means supply will increase, which will increase equilibrium quantity and decrease equilibrium price. Cheaper apples will decrease demand, which will decrease equilibrium quantity and decrease equilibrium price. Since both changes decrease price, we know that price will fall. Both changes push quantity in opposite directions, so the total change in quantity is unclear without knowing the relative size of the supply and demand shifts.
If the firm has a constant marginal cost of $8 per unit (meaning every unit of output has a marginal cost of $8), how many units should the firm produce to maximize profit? a. 2 units b. 3 units c. 5 units d. 6 units
C. Again, the rule of thumb is to produce at the quantity where MR=MC. Total revenue for 4 units is 4*18=$72 and total revenue for 5 units is 5*16=$80; marginal revenue for the 5th unit is 80-72 = $8. The question tells us that the marginal cost for each unit is $8, so Q=5 is the quantity where MR=MC.
For which price is the effective quantity demanded for the larger firm equal to 30 units of output? a. $2 b. $3 c. $4 d. $5 e. $6
C. In the Price Leadership Model, the effective quantity demanded for the larger firm is equal to the market quantity minus the quantity supplied by the smaller firms at that price. When the price is $4, market quantity demanded is 60 and the quantity supplied by the smaller firms is 30. 60-30=30, so the effective quantity demanded for the larger firm is 30 when the price is $4.
Suppose a tax of $2 per unit is imposed on this market. What will be the new equilibrium quantity in this market? a. less than 50 units b. 50 units c. between 50 units and 100 units d. greater than 100 units
C. The equilibrium quantity with no tax is 100 units and the equilibrium quantity with a $4 tax is 50 units. This tells us that a tax of $2 will have an equilibrium quantity somewhere between 50 and 100 units.
Suppose a $4 tax is imposed on the market. The incidence of the tax on buyers is ____ and the incidence of the tax on sellers is ____. a. $1; $3 b. $1.50; $2.50 c. $2; $2 d. $3; $1
C. The incidence on buyers is the price buyers pay with the tax (in this case, $7) minus the price they would pay if there was no tax (the equilibrium price without a tax is $5). This means the incidence for buyers is $2. For sellers, the incidence is the difference between what they received without the tax ($5) and what they receive with the tax ($3). This means the incidence for sellers is $2 as well. As a rule of thumb, the incidence to buyers and the incidence to sellers combined must equal the total size of the tax.
When maximizing profit, what price does Traci's charge for a haircut? a. $20 b. $25 c. $30 d. $35
C. The rule of thumb is to produce where MR=MC, or equivalently to produce all units for which MR > MC and avoid producing units where MR < MC. At quantity 4, marginal revenue is $15 and marginal cost is $8. At quantity 5, marginal revenue is $5 and marginal cost is $9. This tells us that the firm should produce 4 units, and the price that corresponds to 4 units is $30.
Paul has the opportunity to buy traditional wind damage insurance and wind damage index insurance. Traditional wind damage insurance pays Paul if Paul's house is damaged by winds. Wind damage index insurance pays Paul if wind speeds exceed 100 mph, regardless of whether his house is damaged. Which of the following statements is true? a. Traditional insurance suffers from moral hazard and index insurance suffers from adverse selection. b. Both types of insurance suffer from moral hazard, but only traditional insurance suffers from adverse selection. c. Index insurance does not suffer from adverse selection, but it does not completely insure people. d. Any time traditional insurance would pay Paul, index insurance would also pay Paul.
C. Traditional insurance suffers from both adverse selection and moral hazard. Index insurance avoids both of these problems. However, index insurance does not completely insure people from bad outcomes. As an example, Paul wants his insurance to pay any time he has wind damage to his house. This is true with traditional insurance, but not with index insurance. If Paul's house suffers wind damage but winds never exceed 100 mph, Paul's index insurance does not pay him.
Which of the following is an example of adverse selection? a. Once Paul buys car insurance, he begins taking more risks driving. b. An owner of a Toyota Prius would rather sell his car for a higher price than a lower price. c. A farmer with a low quality apple orchard is more likely to sell his land for a given price than a farmer with a productive apple orchard. d. Universities are more likely to admit students when their family members make large contributions.
C. With adverse selection, an information asymmetry causes only the least appealing people to opt into the market. This means the people selling low quality items in a goods market or people with a high risk of using insurance in the insurance market.
Using the midpoint method, what is the price elasticity of supply between $16 and $40? a. 0.125 b. 0.86 c. 1.0 d. 2.5 e. -1.0 f. -2.5
C; (end value - start value)/midpoint MP=(start value-end value)/2 (%Qs/P)=Elasticity
Which of the following will not shift the supply curve for cat food? (a. Input prices rise. b. The number of sellers in the cat food market increases. c. The price of cat food rises. d. All of the above will shift the supply curve for cat food.)
C; A change in the price of cat food will cause movement along the curve and a change in quantity supplied. It will not shift the entire supply curve.
Which of the following events would cause an increase in the supply of ceiling fans? a. The number of sellers of ceiling fans decreases. b. There is an increase in the price of air conditioners, and consumers regard air conditioners and ceiling fans as substitutes. c. There is a decrease in the price of the motor that powers ceiling fans. d. All of the above will cause an increase in the supply of ceiling fans
C; A decrease in the number of sellers will decrease supply. A change in the price of air conditioners will shift demand, but not supply
Consider the market for Coca-Cola. Which of the following events will increase the equilibrium quantity of Coca-Cola produced? (a. Wages rise for workers at Coca-Cola. b. Buyers expect that the price of Coca-Cola will fall in the near future. c. The price of Pepsi increases, and Pepsi is a substitute for Coca-Cola. d. Incomes rise, and Coca-Cola is an inferior good.)
C; An increase in wages will decrease supply, which decreases equilibrium quantity. If buyers expect the price to fall in the future, they will buy less today, decreasing demand. Similarly, if Coke is an inferior good, increasing income will also decrease demand. Decreasing demand will decrease equilibrium quantity.
Which of these statements best represents the law of demand? (a. When buyers' tastes for a good increase, they purchase more of the good. b. When income levels increase, buyers purchase more of most goods. c. When the price of a good increases, buyers purchase less of the good. d. When the price of a good increases, buyers purchase more of the good.)
C; Answers a. and b. describe an increase in demand, while the law of demand refers to how price influences quantity demanded. Answer d. is backwards.
Using the midpoint method, what is the price elasticity of supply between $100 and $220? a. -1.73 b. -0.58 c. -0.67 d. 0.58 e. 0.67 f. 1.73
D. (end value - start value)/midpoint MP=(start value-end value)/2 (%Qs/P)=Elasticity
When trade in wool is allowed, consumer surplus in Scotland is a. $112.50. b. $225. c. $80.25. d. $67.50. e. $187.50
D. Consumer surplus with trade is the triangular area below the demand curve and above the world price line. The quantity demanded (base of the triangle) at the world price is 9. The height of this triangle is 70 (where demand curve hits the y-axis) - 55 (world price) =15. The triangle is 0.5*base*height = 0.5*9*15 = $67.50
Which of the following steps does not lessen or eliminate the problem of moral hazard? a. The use of copays and deductibles in insurance plans. b. Using index insurance instead of traditional insurance. c. With car insurance, developing a plan that does not pay out if the insured was engaging in risky behaviors (texting while driving, for instance). d. With health insurance, collecting more information on the insured (blood pressure and medical history, for example) so that plan premiums can vary by person.
D. Options a-c limit moral hazard. Option d limits adverse selection, not moral hazard.
At the profit-maximizing quantity, what is Traci's total profit? a. $30 b. $59 c. $77 d. $84
D. Profit is total revenue minus total cost. At Q=4, total revenue equals $120 and total cost equals $36. Total profit is 120-36 = $84.
Between $100 and $220, the supply curve is a. perfectly elastic b. elastic c. unit elastic d. inelastic e. perfectly inelastic
D. The elasticity is 0.58; any value between 0 and 1 is inelastic, 1 is unit elastic, and values greater than 1 but less than infinity are elastic.
Each unit of output creates a. an external benefit of $4. b. an external benefit of $6. c. an external cost of $4. d. an external cost of $6.
D. The externality is an external cost. The size of the externality is equal to the vertical distance from the supply curve to the social cost curve. This is equal to 22-16=$6.
By internalizing the externality, the market equilibrium price will change a. from $22 to $18. b. from $16 to $22. c. from $18 to $22. d. from $16 to $18.
D. The market equilibrium occurs where supply and demand intersect. This has a price of $16. When the externality is internalized, the new equilibrium occurs where the social benefit and social cost curves intersect. Since there is no positive externality, the social benefit curve is the same as the demand curve. The social benefit and social cost curves intersect at $18.
In this market, a price ceiling of $7.25 is a. binding and creates a shortage. b. binding and creates a surplus. c. nonbinding and creates a shortage. d. nonbinding and creates neither a shortage nor a surplus.
D. The price is not allowed to rise above the price ceiling. Since the equilibrium is below a $7.75 price ceiling, the price ceiling is not binding. Whenever the price control is not binding, the market will be at equilibrium and there will be no shortage or surplus.
Paula loves economics and hates engineering. Stanley loves engineering and hates economics. Consider the following allocations: i: Paula gets a book on economics, Stanley gets a book on engineering. ii: Paula gets a book on engineering, Stanley gets a book on economics. iii: Paula gets both books, Stanley gets neither book. iv: Paula gets neither book, Stanley gets both books. How many of the above allocations are Pareto Efficient? (a. 0 b. 1 c. 2 d. 3 e. 4)
D; The only allocation that is not Pareto Efficient is allocation ii.
A monopolistically competitive market and an oligopoly market both have a. many producers b. a small number of producers c. no barriers to entry d. large barriers to entry e. firms with market power, meaning they are not price takers f. firms without market power, meaning they are price takers
E. Firms in both markets have market power. In monopolistic competition, it is because of product differentiation. In oligopoly, it is because there are only a few firms.
Which of the following statements is true? (a. If there is excess demand at the current price, the price will fall as it moves to equilibrium. b. If there is excess supply at the current price, the price will fall as it moves to equilibrium. c. When the price is set above equilibrium, there will be excess supply in the market. d. Excess supply is the same thing as a shortage, and excess demand is the same thing as a surplus. e. Both a. and c. are true. f. Both b. and c. are true. g. Both b. and d. are true. h. b., c., and d. are all true. i. a., c., and d. are all true.)
F; Answer a. is incorrect because excess demand will put upward pressure on prices. Answer d. is incorrect because excess demand is the same as a shortage while excess supply is the same thing as a surplus.
What is the total government revenue generated by a $4 tax in this market? What is the deadweight loss from a $4 tax in this market?
Total government revenue is equal to the tax per unit (the height of green rectangle, 7 - 3 =4) multiplied by the total units sold (the width of the green rectangle, 50). 4*50=$200. Deadweight loss is given by the red region in the above figure. It is the loss in total surplus that results from the tax. The height of the triangle is 7 - 3 = 4 and the length is 100 - 50 = 50, so the deadweight loss is ½ *4*50=$100.
