EC 201 Practice Exam Questions
42. The demand for pedicures increases (i.e., the demand curve for pedicures shifts to the right). As a result, what will happen to the equilibrium price and quantity of pedicures? a. Equilibrium price will increase, equilibrium quantity will increase. b. Equilibrium price will increase, equilibrium quantity will decrease. c. Equilibrium price will decrease, equilibrium quantity will increase. d. Equilibrium price will decrease, equilibrium quantity will decrease. e. Nothing will happen.
a 42. a. As long as the supply curve slopes upward, a rightward shift in the demand curve will lead to an increase in both the equilibrium price and the equilibrium quantity.
22. In the Empire of Lumpiness, every person pays $1000 per year of tax, regardless of his or her income. This tax system is a. regressive. b. proportional. c. progressive. d. perfectly elastic. e. only comprehensible to Ginny Weasley.
a . A regressive tax is one for which, as we move up the income scale, there is a decrease in the percentage of income paid in tax. If the number of dollars paid in tax is a constant $1000, then a person with $10,000 of income pays an average tax rate of 10%. A person with $20,000 of income pays an average tax rate of 5%. As we continue to higher incomes, we get lower percentage tax rates.
1. A price ceiling is imposed in the market for licorice. The price ceiling is below the equilibrium price, and this leads to shortages. We say that a shortage is larger if the difference between quantity demanded and quantity supplied is larger. All else equal, which of the following statements is/are true, regarding the relationship between the size of the shortage and the own-price elasticity of demand? a. The shortage will be larger if the elasticity is larger. b. The shortage will be larger if the elasticity is smaller. c. The elasticity will have no effect on the size of the shortage. d. If the elasticity is larger, the shortage will be larger on days of the week that begin with the letters T, W, or F, but smaller on days that begin with M or S. e. Not enough information has been given to answer the question.
a 1. a. The price ceiling will force the price to be lower than its equilibrium price. As a result, the quantity demanded will be larger when the price ceiling is in place than it would be at the equilibrium price. Also, the quantity supplied will be smaller when the price ceiling is in place than it would be at the equilibrium price. Because the quantity demanded is larger than at equilibrium, and the quantity supplied is smaller than at equilibrium, there will be a shortage. How large will the increase in quantity demanded be? The answer will depend on the own-price elasticity of demand. If the elasticity is larger, the increase in quantity demanded will be larger, and thus the shortage will be larger.
15. Malfoy Corporation is a monopolist. Its marginal costs decrease (i.e., its entire marginal-cost curve shifts downward). How will the firm change its price and quantity as a result? a. Malfoy will reduce price and increase quantity of output. b. Malfoy will reduce price and decrease quantity of output. c. Malfoy will increase price and leave quantity of output unchanged. d. Malfoy will increase price and increase quantity of output. e. Malfoy will increase price and reduce quantity of output.
a 15. a. The monopoly firm will maximize profits by producing and selling the quantity at which marginal revenue is equal to marginal cost. If the entire marginal-cost curve shifts downward, then the marginal-cost curve will intersect the marginal-revenue curve at a larger quantity. The larger quantity will be associated with a lower price. The monopolist will end up producing and selling a larger quantity than before, and it will charge a lower price than before.
42. Two markets have exactly the same net-of-tax supply curve. They also have exactly the same equilibrium price and quantity when there is no tax. Then each of the markets is subjected to exactly the same tax. The only difference between the two markets is that the demand for good X is more elastic than the demand for good Y. On the basis of this information, what can we say? a. The tax in market Y will generate more revenue. b. The tax in market Y will generate more excess burden. c. Both (a) and (b) are true. d. Neither (a) nor (b) is true. e. Lord Voldemort is the only one who knows the answer to this question, and we're too afraid to ask him.
a The demand for X is more elastic than the demand for Y. This means that, when the tax is imposed, the reduction in quantity will be larger in the market for X than in the market for Y. Tax revenue is equal to the tax per unit multiplied by the number of units. Since the tax is the same in each market, and since the quantity is larger in Y, the tax revenue will be larger in Y. However, the excess burden is smaller in Y.
61. As quantity increases, average fixed cost a. always decreases. b. is a horizontal line. c. always increases. d. decreases at first, then reaches a minimum, and then increases. e. caroms about wildly, in a completely chaotic way. 62. The supply curve for beef shifts to the right. Assuming that the demand for beef is inelastic, what will happen to the total revenue received by cattle ranchers? a. Revenue will increase. b. Revenue will decrease. c. Revenue will remain constant. d. We need more information to answer the question. e. All of the above! Amazingly, revenue will increase, and decrease, and remain constant, and we need more information to answer the question, all at the same time.
a b 61. a. Average fixed cost is equal to total fixed cost, divided by the quantity of output: AFC = TFC/Q. Total fixed cost is a constant. Thus as Q increases, AFC gets smaller and smaller, because we are dividing a constant by something that is getting larger and larger. 62. b. When the supply curve shifts to the right, the equilibrium quantity will increase, and the equilibrium price will fall. Total revenue for the sellers is the product of price and quantity: TR = (P)(Q). By itself, the increase in quantity will tend to increase total revenue. However, by itself, the decrease in price will tend to decrease total revenue. Thus the change in quantity and the change in price have effects on total revenue that push in opposite directions. Total revenue could increase, or stay the same, or decrease, depending on the relative strength of the change in quantity and the change in price. In this case, we assume that demand is inelastic. This means that the percentage change in quantity is less than the percentage change in price. As a result, the increase in quantity will be smaller than the decrease in price, and total revenue will decrease.
47. The Lorenz Curve in country A is closer to the horizontal axis than the Lorenz Curve for country B. In other words, the Lorenz Curve for country A is always below the Lorenz Curve for country B. This means that a. the Gini Ratio for country A is greater than the Gini Ratio for country B. b. the Gini Ratio for country A is less than the Gini Ratio for country B. c. the distribution of income is more equal in country A than in country B. d. (a) and (c). e. none of the above. 48. The marginal revenue product of labor is a. the change in the wage rate as a result of hiring one additional worker. b. the quantity of output, divided by the number of workers. c. the marginal product of labor, multiplied by the firm's marginal revenue. d. an upward-sloping curve. e. All of the above.
a c 47. a. The numerator of the Gini Ratio is the area that is beneath the Line of Equality, but above the Lorenz Curve. If the Lorenz Curve is closer to the horizontal axis, this area will be larger, so that the Gini Ratio is larger. Therefore, if the Lorenz Curve for country A is below the Lorenz Curve for country B, the Gini Ratio will be larger for country A. Thus choice (a) is correct. A larger Gini Ratio is associated with more inequality, so that choice (c) is incorrect. 48. c. The marginal revenue product of labor is the benefit for the firm from selling the additional output produced by one additional worker. The additional output is called the marginal product, and the additional revenue from selling that additional output is called the marginal revenue.
44. Perfect competition and monopolistic competition are similar in some ways, and different in other ways. Which of these is a way in which perfect competition and monopolistic competition are similar? a. Firms in each of these market structures will charge P=MC. b. In each of these market structures, the tendency will be toward zero economic profit. c. For firms in each of these market structures, the firm's demand curve is perfectly elastic. d. All of the above. e. (a) and (b) only.
b 44. b. The demand curve for the output of a perfectly competitive firm is horizontal, or perfectly elastic. This means that price is equal to marginal revenue, which in turn means that the firm will maximize profit by producing and selling the quantity at which price is equal to marginal cost. However, the demand curve for the output of a monopolistically competitive firm is downward sloping. (It may be very elastic, but it is not perfectly elastic.) Thus choice (a) is incorrect. Since the monopolistically competitive firm's demand curve is downward sloping, its marginal-revenue curve is below its demand curve. As a result, the monopolistically competitive firm will charge a price that exceeds marginal cost. Thus choice (a) is incorrect. However, choice (b) is correct: Both perfect competition and monopolistic competition are characterized by free entry and exit, and this means that the tendency in both cases is for the market to move toward zero economic profit.
52. The income elasticity of demand for good Z is negative. This indicates that good Z is a. a normal good. b. an inferior good. c. an input in the production of slide guitars. d. inelastic. e. a good with negative marginal revenue.
b 52. b. For an inferior good, an increase in income will lead to a decrease in demand (i.e., a leftward shift in the demand curve). The income elasticity of demand is equal to the percentage change in demand, divided by the percentage change in income. In the case of an inferior good, if the percentage change in income is positive, the percentage change in demand will be negative. If we divide a negative by a positive, we get a negative. Thus the income elasticity of demand is negative for an inferior good.
11. Assume that the elasticity of labor supply is smaller than the elasticity of labor demand. A payroll tax is levied on employers. Who will bear the largest share of the burden of the tax? a. Employers. b. Workers. c. The tax will be borne equally by employers and workers. d. Not enough information has been given. e. All of the above! Astonishingly, the tax will be borne mostly by employers, and borne mostly by workers, and evenly split between employers and workers, and we can't tell!
b 11. b. When the labor-demand curve is downward sloping and the labor-supply curve is upward sloping, a payroll tax will lead to a decrease in the net-of-tax wage received by the workers, and it will also lead to an increase in the gross-of-tax wage paid by employers. Thus both workers and employers will bear a part of the burden of the tax. If the labor-supply elasticity is smaller than the labor-demand elasticity, the decrease in the net wage received by the workers will be larger than the increase in the gross wage paid by the employers. Thus the workers will bear a larger part of the burden of the tax.
20. If a natural monopoly were to charge a price equal to marginal cost, a. the firm would earn positive economic profits. b. the firm would suffer economic losses. c. the firm would earn zero economic profits. d. the firm's marginal cost would be greater than its average total cost. e. the firm would turn into a giant banana slug.
b For a natural monopoly, average total cost is decreasing throughout the entire relevant range of output. This means that marginal cost is always less than average total cost. Thus, if a natural monopoly were to set its price equal to its marginal cost, the price would be less than average total cost. Profit per unit is equal to price minus average total cost, so that a firm whose price is less than its average total cost would suffer economic losses.
19. The Gini coefficient for annual income is than the Gini coefficient for wealth, and the Gini coefficient for annual income is the Gini coefficient for lifetime income. a. larger than, larger than. b. smaller than, larger than. c. larger than, smaller than. d. smaller than, smaller than. e. about the same as, identical to.
b In the United States, the Gini Coefficient for annual income is about 0.47, while the Gini Coefficient for wealth is about 0.85. In other words, wealth is distributed much more unequally than income. On the other hand, the Gini Coefficient for lifetime income is substantially lower than the Gini Coefficient for annual income. Some of the inequalities that show up in annual data are smoothed out when we consider lifetime data. Thus, lifetime income is distributed more equally than annual income.
17. Which of the following is a graph of the relationship between the cumulative proportion of the population and the cumulative proportion of income? a. A Pigou curve b. A Lorenz curve c. A Gini curve d. A Smith curve e. A Keynes curve
b The graph line that represents the income distribution is the Lorenz curve. On the basis of the Lorenz curve, we can calculate the Gini coefficient.
28. Assume that the elasticity of labor supply is smaller than the elasticity of labor demand. A payroll tax is levied at exactly the same rate on employers and workers. Who will bear the economic burden of the tax? a. Employers will bear most of the burden. b. Workers will bear most of the burden. c. The tax will be borne equally by employers and workers. d. Not enough information has been given. e. All of the above! Astonishingly, the tax will be borne mostly by employers, and it will be borne mostly by workers, and it will be evenly split between employers and workers, and we can't tell, all at the same time!
b The true economic incidence of a tax depends on the elasticities of supply and demand, and not on the statutory incidence. The more inelastic side of the market will bear relatively more of the burden of a tax. Thus, if the elasticity of labor supply is less than the elasticity of labor demand, the suppliers of labor (the workers) will bear relatively more of the tax burden, through lower net-of-tax wages.
65. The income tax in Koblenzia has an exemption, such that those with low incomes pay no tax. It also has graduated marginal rates. For a taxpayer whose income is greater than the exemption level, a. the average tax rate is greater than the marginal tax rate. b. the marginal tax rate is greater than the average tax rate. c. the marginal tax rate is equal to the average tax rate. d. not enough information has been given to answer the question. e. it's time for a nap.
b When a taxpayer is exactly at the maximum amount of the exemption, his/her marginal and average tax rates are both zero. However, the next dollar of income is taxed at a positive marginal rate. But when that first dollar above the exemption has been taxed, the average tax rate will be the average of (1) zero for all of the dollars covered by the exemption, and (2) the positive marginal tax rate for the one dollar that has been taxed at the positive rate. Thus, the average tax rate will be very, very small. As the individual earns more income, an increasing portion of income will be taxed at the positive rate, and the average tax rate will gradually rise. However, under the tax system described in this question, the average tax rate will always be below the marginal tax rate.
15. When the price of champagne goes up, the demand curve for zabaglione shifts to the left. This means that a. champagne and zabaglione are substitutes. b. champagne and zabaglione are complements. c. the cross-price elasticity of demand for zabaglione with respect to the price of champagne is positive. d. (a) and (c) are both correct. e. None of the above is true.
b When an increase in the price of one good leads to a decrease in the demand for another good, we say that the two goods are complements. When two goods are complements, the cross-price elasticity of demand is negative.
The next four questions refer to the information in this table: Quantity Price TR MR TFC TVC TC ATC MC Profit 0 $3 $2 0 1 3 2 1 2 3 2 3 3 3 2 6 4 3 2 10 37. What is the marginal cost of the second unit (i.e., the marginal cost of going from Q=1 to Q=2)? a. $1 b. $2 c. $3 d. $4 e. $5 38. What is the average total cost when Q=4? a. $1 b. $2 c. $3 d. $4 e. $5 39. What type of firm could this be? a. A perfectly competitive firm. b. A monopoly firm. c. A monopolistically competitive firm. d. Any of the above. e. (b) or (c). 40. What is the firm's profit-maximizing quantity of output? a. 0 b. 1 c. 2 d. 3 e. 4 41. Which of the following is/are consistent with the Law of Demand? a. The price of A goes up. As a result, and the quantity demanded of A goes down. b. A and B are complements. The price of A goes up. As a result, there is a decrease in the demand for B. c. A and B are substitutes. The price of A goes up. As a result, there is an increase in the demand for B. d. All of the above. e. (a) and (b) only.
b c a d a 37. b. Marginal cost is the change in total cost associated with producing one additional unit of output. Marginal cost is also the change in total variable cost associated with producing one additional unit of output. In this question, when Q=1, TVC=$1. When Q=2, TVC=$3. Thus, the change in TVC associated with producing the second unit of output is $(3 -1) = $2. The marginal cost of the second unit of output is $2. 38. c. Average total cost is total cost divided by the number of units of output. Total cost is equal to the sum of total fixed cost plus total variable cost. At a quantity of 4, TFC = $2 and TVC = $10. Thus, total cost is $2 + $10 = $12. If we divide by the quantity of 4, we see that average total cost is $12/4 = $3 when quantity is 4. 39. a. The demand schedule indicates that the price does not change when the firm's output changes. Therefore, this firm is taking price as given, which is a characteristic of a perfectly competitive firm. 40. d. Any firm will maximize profit by producing the quantity at which marginal revenue is equal to marginal cost. In this particular case, we have a perfectly competitive firm. For the perfectly competitive firm, price is equal to marginal revenue. Thus, for the perfectly competitive firm, the profit-maximizing condition is that the firm will choose the quantity at which price is equal to marginal cost. Since price is $3, we need to find the quantity at which marginal cost is $3. Following the same procedure described in the discussion of #37, above, we see that marginal cost is $3 for the third unit of output. Thus, the profit-maximizing quantity of output is 3. 41. a. The Law of Demand refers to movements along an existing demand curve. Choices (b) and (c) refer to shifts to a new demand curve.
31. The price of good A increases. As a result, there is a decrease in the demand for good B. This means that a. good A and good B are substitutes. b. good A and good B are complements. c. the demand for good A and the demand for good B are both elastic. d. good A and good B are both normal goods. e. None of the above. 32. The price of geegaws falls from $18 to $14. As a result, the quantity demanded rises from 300 to 500. What is the elasticity of demand? a. 0.25 b. 0.5 c. 1.0 d. 2.0 e. 7.8901234567890123456.
b d 31. b. When two goods are complements, an increase in the price of one of the goods will lead to a decrease in the demand for the other good. For example, computer printers and print cartridges are probably complements. An increase in the price of printers would lead to a decrease in the demand for print cartridges. 32. d. The own-price elasticity of demand is equal to the proportional change in quantity demanded, divided by the proportional change in price: e = (ΔQd/Qd) / (ΔP/P). In this question, the quantity demanded increases from 300 to 500, so that ΔQd = (500 - 300) = 200. For Qd , the reference level of quantity demanded, we use the average of the beginning and ending values. The average of 300 and 500 is 400. Thus the proportional change in quantity demanded is ΔQd/Qd = 200/400 = ½. The price decreases from $18 to $14, so that ΔP = ($18 - $14) = $4. (Actually, since the price falls, the change in price is negative. However, our convention is to use the absolute value, so that we end up with a positive number for the change in price.) The reference level of price is the average of the beginning value ($18) and the ending value ($14), which is $16. Thus the proportional change in price is $4/$16 = ¼. If we divide the proportional change in quantity demanded by the proportional change in price, we have ½ / ¼ = 2.
56. The Law of Supply states that a. the supply curve will shift to the right when there is a decrease in the price of one of the inputs. b. the supply curve will shift to the right when there is an improvement in technology. c. when the price increases, there will be an increase in the quantity supplied. d. All of the above. e. None of the above.
c 56. c. The Law of Supply refers to movements along an existing supply curve, as a result of a change in the price of the good. Choices (a) and (b) refer to shifts to a different supply curve, as a result of changes in things other than the price of the good.
58. In the diagram at right, the net-of-tax supply curve is at $5, and the gross-of-tax supply curve $/Q is at $8. The demand curve is the downward- sloping line with a horizontal intercept of 15. What is the deadweight loss of the tax? a. $3 8 b. $5 c. $6 5 d. $10 e. $12
c 58. c. The deadweight loss of a tax is represented graphically by the area of a triangle. The base of the triangle is the difference between (i) the quantity bought and sold before the tax is imposed, and (ii) the quantity bought and sold after the tax is imposed. In this case, the quantity bought and sold falls from 10 before the tax is imposed to 6 after the tax is imposed. Thus the change in quantity is (10 - 6) = 4. The height of the triangle is the amount of the tax per unit. In this case, the gross-of-tax price is $8 per unit, and the net-of-tax price is $5 per unit, so that the tax per unit is $(8 - 5) = $3. The area of the triangle is 0.5(base)(height). Thus is in this case, the area of the deadweight-loss triangle is 0.5(4 units)($3/unit) = $6.
25. What will be the effect of a price ceiling that is enforced above the equilibrium price? a. A surplus will occur. b. A shortage will occur. c. There will be no effect. d. There will be shortages on alternate Tuesdays, and surpluses on Sunday mornings between the hours of 2 and 5. e. All of the above.
c A price ceiling is a maximum legal price. In other words, it is unlawful for the price to exceed the ceiling. If the ceiling price is above the equilibrium price, then the equilibrium price is legal. As a result, buyers and sellers can trade at the equilibrium price without breaking the law, and the law will not have any effect on economic behavior.
21. The price of a cotton handkerchief increases from $1.80 to $2.20. As a result, the quantity demanded decreases from 1100 per day to 900 per day. What is the own-price elasticity of demand? a. 0.0 b. 0.5 c. 1.0 d. 2.0 e. 10.0
c In this question, quantity demanded decreases from 1100 to 900. Thus, the change in quantity demanded is 200 units. The reference level of quantity demanded is the average of 1100 and 900, which is 1000. Therefore, the proportional change in quantity demanded is 200/1000 = 0.2. The price increased from $1.80 to $2.20, so that the change in price is $(2.20 - 1.80) = $0.40. The reference level of price is the average of $1.80 and $2.20, which is $2.00. Therefore, the proportional change in price is $0.40/$2.00 = 0.2. The own-price elasticity of demand is equal to the proportional change in quantity demanded, divided by the proportional change in price, which is 0.2/0.2 = 1.0.
31. Which of the following policy issues would be classified as having to do with macroeconomics, rather than microeconomics? a. The effect of tariffs on the volume of exports. b. The effect of a minimum-wage law on the employment of low-skill workers. c. The effect of the Federal Reserve's monetary policy on the rate of inflation. d. The effect of education on earnings. e. The effect of a drought on the price of corn.
c Macroeconomics is concerned with the overall rate of inflation, the overall rate of unemployment, and the overall rate of economic growth.
11. The payroll tax is a flat rate of labor earnings, but only up to a ceiling, above which the rate drops substantially. Also, the payroll tax does not apply to capital income. As a result, the payroll tax is a. progressive at all income ranges. b. regressive at all income ranges. c. about proportional over much of the income range, but regressive at high incomes. d. progressive over much of the income range, but about proportional at high incomes. e. about proportional over much of the income range, but progressive at high incomes.
c Most households get most of their income from labor-market earnings, and most workers face a flat rate of payroll tax, because the earnings of most workers are below the ceiling of the payroll tax. As a result, the payroll tax is proportional over much of the income range. However, the payroll tax is regressive at higher incomes, for two reasons. First, once a worker gets above the payroll-tax ceiling, the tax rate drops from 15.3% to 2.9%. Second, the payroll tax does not apply to capital income. A disproportionate amount of capital income is received by high-income people. Since the payroll tax does not apply to an income source that is concentrated among high-among people, this is an added source of regressivity.
27. Hezekiah is considering taking out a loan to make a new capital investment. The cost is $100. Exactly one year later, the project will generate revenue of $105, and the project will then self-destruct. The interest rate is 10%. Which of the following is true? a. The project has positive net present discounted value (PDV); Hezekiah should do it. b. The project has zero net PDV; Hezekiah should do it. c. The project has negative net PDV; Hezekiah should not do it. d. The project has positive net PDV; Hezekiah should not do it. e. The project has negative net PDV; Hezekiah should do it.
c The net present discounted value of the project is equal to the present discounted value of the revenues, minus the present discounted value of the costs. The cost is $100, and since the cost occurs at the beginning of the project, it does not have to be discounted; its present discounted value is $100. The revenues are $105, but they happen one year into the future. With an interest rate of 10%, the present discounted value of the revenues is $105/(1.1), which is about $95.45. Thus, the present discounted value of the revenues is less than the present discounted value of the costs, which means that the net present discounted value of the project is negative. In this situation, it does not make economic sense to undertake the project.
24. The supply curve for good X is given by Qs = P. The demand curve is given by Qd = 20 - 3P. What is the equilibrium price of good X? a. 2 b. 4 c. 5 d. 10 e. 20
c The supply curve is given by Qs = P. The demand curve is given by Qd = 20 - 3P. At the equilibrium quantity supplied is equal to quantity demanded: Qs = Qd. If we substitute the supply equation and the demand equation into the equilibrium equation, we have P = 20 - 3P. Adding 3P to each side of the equation, we have 4P = 20. Dividing both sides by 4, we have P=5.
9. Which of the following is an example of the "Tragedy of the Commons"? a. A lot of hot air comes out of the House of Commons in London. b. A monopoly will produce less than the socially optimal quantity. c. When there is free access to a fishing ground, the stock of fish will be depleted. d. In a monopsony labor market, workers will be paid less than their marginal revenue product. e. A tax on an elastically demanded good will generate a large excess burden.
c There is a tendency to overuse those resources for which property rights are not well established.
50. The market supply curve for beef jerky shifts to the right. At the same time, the market demand curve for beef jerky shifts to the left. As a result of these two changes, what will happen to the equilibrium price and quantity of beef jerky? a. Price will rise; quantity will rise. b. Price will rise; the effect on quantity can't be determined without more information. c. Price will fall; the effect on quantity can't be determined without more information. d. Quantity will rise; the effect on price can't be determined without more information. e. Quantity will fall; the effect on price can't be determined without more information. 51. In your textbook, the Prisoners' Dilemma is used to study a. the deadweight loss of a sales tax. b. monopsonistic exploitation of labor. c. the effects of price ceilings. d. how to saw through thick iron bars. e. the interaction between firms in a duopoly.
c e 50. c. By itself, the rightward shift in the supply curve will reduce the equilibrium price and increase the equilibrium quantity. By itself, the leftward shift in the demand curve will reduce both the equilibrium price and quantity. Thus, each of these influences will reduce the equilibrium price, but their effects on the equilibrium quantity go in opposite directions. Without more precise information about the shape of the supply curve, the shape of the demand curve, and the size of the two shifts in the curves, we can't say for sure whether the equilibrium quantity will increase or decrease. 51. e. The Prisoners' Dilemma model can be used to show how, under certain circumstances, the members of a duopoly will be unable to sustain a cartel, even though the firms would both earn more profit if they could sustain a cartel.
18. For Hezekiah, total utility and marginal utility can be measured in dollars of willingness to pay. Hezekiah's total-utility schedule for trips to the movie theater is given by: Quantity Total Utility Marginal Utility 0 $0 -- 1 8 2 15 3 21 4 26 5 30 The current market price of a movie ticket is $5. How many movie tickets will Hezekiah buy? a. 1 b. 2 c. 3 d. 4 e. 5
d 18. d. The consumer's optimal purchase decision involves buying and consuming the quantity at which marginal utility is equal to price. In this question, the price is $5. Thus it will be optimal for this consumer to purchase the quantity at which marginal utility is equal to $5. When quantity increases from 3 to 4, total utility increases from $21 to $26. Thus the marginal utility of the fourth unit is $(26 - 21) = $5. Therefore, the consumer's best choice is to buy and consume four units.
27. Which of the following is true regarding nonrival consumption? a. Nonrival consumption is one of the characteristics of a public good. b. Nonrival consumption means that one person can enjoy the good without diminishing anyone else's enjoyment of the good. c. Nonrival consumption is the reason why we add individual willingness-to-pay curves vertically, in constructing the social willingness-to-pay curve. d. All of the above are true. e. Only (a) and (b) are true.
d 27. d. Choices (a), (b), and (c) are all characteristics or definitions of nonrivalry. In particular, in constructing the market demand curve for a private good, we add across the diagram horizontally, because consumers can choose different quantities demanded. However, in constructing the social willingnesss-to-pay curve for a public good, we add vertically, because all consumers have the same quantity, but they can have different amounts of willingness to pay.
29. Which of the following could lead to higher prices for the consumers in the importing country? a. A tariff. b. An import quota. c. A voluntary export restraint. d. All of the above. e. None of the above.
d 29. d. A tariff is a tax on imports. Thus a tariff increases the price of imports directly. In the case of an import quota or a voluntary export restraint, the quantity is restricted. Since the demand curve for imports is downward sloping, the smaller quantity of imports is associated with a higher price.
9. In the Duchy of Gutereise, the economy is on its production-possibilities frontier in 2011. Then, by one year later (in 2012), the economy produces more of every good than it had produced in 2011. How could this occur? a. By reducing waste, so that the available resources are used more efficiently. b. By moving downward and to the right along the existing production-possibilities frontier. c. By moving upward and to the left along the existing production-possibilities frontier. d. By adopting new technologies and increasing the size of the labor force. e. All of the above.
d 9. d. A production-possibilities frontier is a graph of the combinations of outputs that can be produced, when the available resources are used as well as possible. When an economy is on its p.p.f., there is no waste. Thus choice (a) is incorrect, since it is not possible to reduce waste when there is no waste. When an economy is on its frontier, it is possible to move downward and to the right, or upward and to the left, but this will lead to an increase in one good and a decrease in the other good. Thus choices (b) and (c) are incorrect. The only way to increase production of both goods is to push the p.p.f. outward, which could be done by adopting new technologies, or by capital investment, or by increasing the size and/or quality of the labor force.
45. The evidence suggests that the elasticity of men's labor supply with respect to the net wage rate is , while the elasticity of women's labor supply with respect to the net wage rate is . a. 1.56, 3.12 b. positive, negative c. strongly negative, positive d. close to zero, positive e. positive, close to zero
d Many studies have found that men's labor supply is very inelastic (i.e., the income effect and the substitution effect are of about the same size). Most studies of women's labor supply find a positive labor-supply elasticity (i.e., the substitution effect outweighs the income effect).
10. The elasticity of demand for thingamabobs is 1.0. The quantity demanded goes up from 30 per day to 50 per day. Assume that a change in price was the only reason for the change in quantity demanded. What must have happened to the price, in order to have caused quantity demanded to change in this way? a. Price was unchanged. b. Price went down by 25%. c. Price went down by 40%. d. Price went down by 50%. e. Price went down by 100%.
d Quantity demanded increases from 30 to 50. Thus, the change in quantity demanded is (50-30) = 20. The reference level of quantity demanded is the average of 30 and 50, which is 40. Thus, the proportionate change in quantity demanded is 20/40 = 0.5, or 50%. Also, the elasticity of demand is 1.0. The elasticity of demand is equal to the percentage change in quantity demanded, divided by the percentage change in quantity supplied: e = %Qd / %P. If we substitute into the elasticity equation, we have 1.0 = 50 / %P. Solving this equation, we find that the percentage change in price is 50. In other words, price must have gone down by 50%.
35. Huge Corporation is a monopolist. Its marginal costs decrease (i.e., its entire marginal-cost curve shifts downward). How will the firm change its price and quantity as a result? a. Huge will increase price and leave quantity of output unchanged. b. Huge will increase price and increase quantity of output. c. Huge will increase price and reduce quantity of output. d. Huge will reduce price and increase quantity of output. e. Huge will reduce price and decrease quantity of output.
d The monopolist (like any firm) will maximize profit by choosing to produce the quantity at which marginal revenue is equal to marginal cost. The monopolist's marginal-revenue curve is downward sloping. Thus, if marginal cost decreases, the marginal-revenue curve will intersect the marginal-cost curve at a larger quantity than before. Because the firm faces the downward sloping market demand curve, a larger quantity is associated with a lower price.
34. When the price of champagne goes up, the demand curve for zabaglione shifts to the right. This means that a. champagne and zabaglione are substitutes. b. champagne and zabaglione are complements. c. the cross-price elasticity of demand for zabaglione with respect to the price of champagne is positive. d. (a) and (c) are both correct. e. None of the above is true. 35. Two markets have exactly the same net-of-tax supply curve. They also have exactly the same equilibrium price and quantity when there is no tax. Then each of the markets is subjected to exactly the same tax. The only difference between the two markets is that the demand for good X is more elastic than the demand for good Y. On the basis of this information, what can we say? a. The tax in market Y will generate more revenue. b. The tax in market Y will generate more excess burden. c. Both (a) and (b) are true. d. Neither (a) nor (b) is true. e. Louie the Icepick is the only one who knows the answer to this question, and we're too afraid to ask him. 36. If the net wage rate decreases, the income effect would move the individual toward ____ work, and the substitution effect would move the individual toward work. a. more, more b. more, less c. less, more d. less, less e. about the same amount of, about the same amount of 37. Which of the following is restricted by the antitrust laws? a. Attempting to monopolize. b. Price fixing. c. Interlocking directorates. d. Tie-in sales. e. All of the above.
d a b e 34. d. When an increase in the price of one good leads to an increase in the demand for another good (i.e., the demand curve for the other good shifts to the right), we say that the two goods are substitutes. Thus choice (a) is correct. Choice (c) is also correct: The cross-price elasticity of demand for zabaglione with respect to the price of champagne is equal to the percentage change in demand for zabaglione, divided by the percentage change in the price of champagne. If the price of champagne increases, and the demand for zabaglione also increases, then both of the changes are positive. Dividing a positive by a positive gives us a positive, so that the cross-price elasticity is positive when two goods are substitutes. 35. a. In this question, the situation in the market for good X is identical to the situation in the market for good Y, with one exception, and that is that the elasticity of demand for X is larger than the elasticity of demand for Y. When the tax is imposed, it raises the gross-of-tax price of the good. Since the demand for X is more elastic than the demand for Y, the reduction in quantity demanded will be larger in X than in Y. Thus the quantity of X that will be bought and sold after the tax is imposed will be less than the quantity of Y that will be bought and sold. Since each market is subject to the same tax, the tax revenue will be less in X, and greater in Y, which means that choice (a) is correct. The excess burden of the tax is proportional to the reduction in the quantity that is bought and sold. Since the reduction is larger in X, it follows that the excess burden is larger in X, and smaller in Y, so that choice (b) is incorrect. 36. b. When the wage rate decreases, the consumer/worker is "poorer", i.e., the opportunities available to the consumer/worker are less than before. Leisure is a normal good. Thus when the consumer/worker is poorer, the demand for leisure will decrease, which means that the consumer/worker will want to work more. However, the substitution effect goes in the opposite direction. The wage rate is the opportunity cost of leisure. When the wage rate falls, the opportunity cost of leisure goes down. Thus leisure is "cheaper" when the wage rate falls. The consumer/worker will substitute toward more of the thing that has become cheaper. Thus the substitution effect of the wage-rate decrease will move toward more leisure, and less work. 37. e.
56. Which of the following will occur as a result of a tariff? a. The gross price paid by buyers in the importing country will increase. b. The net price received by sellers in the exporting country will decrease. c. The quantity of imports will be reduced. d. All of the above. e. (a) and (c) only. 57. The Lorenz Curve in country A is closer to the horizontal axis than the Lorenz Curve for country B. In other words, the Lorenz Curve for country A is always below the Lorenz Curve for country B. This means that a. the Gini Ratio for country A is greater than the Gini Ratio for country B. b. the Gini Ratio for country A is less than the Gini Ratio for country B. c. the distribution of income is more equal in country A than in country B. d. (a) and (c). e. none of the above. 58. Which of the following is a characteristic of a pure public good? a. Nonrival consumption, i.e., many people can enjoy the good at the same time. b. Nonexcludability, i.e., it is difficult or impossible to exclude those who don't pay. c. Inelastic demand. d. All of the above. e. (a) and (b) only. 59. Which of the following is widely considered to be a violation of horizontal equity? a. The federal individual income tax is not neutral with respect to marital status, i.e., single persons sometimes experience a marriage penalty or marriage bonus. b. The federal individual income tax has graduated marginal rates. c. The federal individual income tax is associated with excess burden. d. Sales taxes are regressive. e. Telephone poles are vertical, not horizontal.
d a e a 56. d. As long as the import demand curve slopes downward and the export supply curve slopes upward, a tariff will lead to a reduction in the quantity of imports, and it will lead to an increase in the gross-of-tariff price, and a decrease in the net-of-tariff price. 57. a. The Lorenz curve in country A is always below the Lorenz curve for country B. This means that the distribution of income is more unequal in country A than in country B. The Gini coefficient increases as the Lorenz curve gets farther away from the 45-degree line. Thus, the Gini coefficient is larger for country A than for country B. 58. e. 59. a. Horizontal equity is the notion that similar taxpayers should pay similar amounts of tax. Under the federal individual income tax, the total tax payments by two people can change (in either direction) if they get married. This is widely viewed as a violation of horizontal equity. Vertical equity is the notion that people with higher incomes have greater ability to pay taxes, and that they should pay higher taxes. Choices (b) and (d) have to do with considerations of vertical equity, but not horizontal equity.
The next four questions refer to the information in this table: Quantity Price TR MR TFC TVC TC ATC MC Profit 0 $11 $3 0 1 10 3 3 2 9 3 6 3 8 3 9 4 7 3 13 5 6 3 18 6 5 3 25 21. What kind of firm could this be? a. A monopoly. b. A monopolistically competitive firm. c. An oligopoly firm. d. Any of the above. e. Not enough information has been given to answer the question. 22. What is average total cost when Q=4? a. $1 b. $2 c. $3 d. $4 e. $5 23. What is the marginal revenue of the fifth unit (i.e., the marginal revenue associated with going from Q=4 to Q=5)? a. $5 b. $4 c. $3 d. $2 e. $1 24. What is the firm's profit-maximizing quantity of output? a. 1 b. 2 c. 3 d. 4 e. 5 25. Which of the following would be an example of the "Tragedy of the Commons"? a. A lot of hot air comes out of the House of Commons in London. b. A monopoly will produce less than the socially optimal quantity. c. When there is free access to a fishing ground, the stock of fish will be depleted. d. In a monopsony labor market, workers will be paid less than their marginal revenue product. e. A tax on an elastically demanded good will generate a large excess burden.
d d d d c 21. d. The demand schedule indicates that an increase in the firm's quantity is associated with a decrease in its price. In other words, the firm has some control over price. This means that the firm could be a monopoly, or a member of an oligopoly, or a monopolistically competitive firm. However, this could not be a perfectly competitive firm, because perfectly competitive firms merely take the market price as given. 22. d. Average total cost is equal to total cost divided by quantity: ATC = TC/Q. Thus to find the average total cost when Q = 4, we must first find total cost. Total cost is equal to total fixed cost plus total variable cost: TC = TFC + TVC. In this question, when Q = 4, TFC = $3 and TVC = $13. Adding TFC and TVC, we find that total cost is $16. If we then divide by the quantity of 4, we have ATC = $16 / 4 = $4. 23. d. Marginal revenue is the change in the firm's total revenue associated with selling one additional unit of output. Total revenue is equal to price multiplied by quantity: TR = (P)(Q). In this question, when Q = 4, P = $7, so total revenue is (4)($7) = $28. When Q = 5, P = $6, so total revenue is (5)($6) = $30. Thus, when Q increases from 4 to 5, total revenue increases from $28 to $30, which means that the marginal revenue of the fifth unit is $(30 - 28) = $2. 24. d. The firm will maximize profits by producing and selling the quantity at which marginal revenue is equal to marginal cost. Following the same procedure described in the preceding question, the marginal revenue of the fourth unit is $(28 - 24) = $4. Marginal cost is the change in total cost associated with producing one additional unit. Since total cost is equal to total fixed cost plus total variable cost, and since total fixed cost does not change, marginal cost is also the change in total variable cost associated with producing one additional unit of output. In this question, the marginal cost of the fourth unit is $(13 - 9) = $4. Thus for the fourth unit, marginal revenue and marginal cost are both equal to $4. Since MR = MC when Q = 4, it follows that the profit-maximizing quantity of output is 4. 25. c. The Tragedy of the Commons occurs in the case of common-property resources, for which it is difficult to control access to the resource, because property rights are not well established. In this situation, the resource in question tends to be overused. Since it is difficult to establish ownership in the open sea, fishing grounds have often been plagued by the Tragedy of the Commons.
64. Which of the following could lead to higher prices for the consumers in the importing country? a. A tariff. b. An import quota that is enforced at a level below the equilibrium quantity. c. A voluntary export restraint that is enforced at a level below the equilibrium quantity. d. All of the above. e. None of the above. 65. Which of the following is/are a characteristic of a perfectly competitive industry, but not a characteristic of any other kind of industry? (That is, we are looking for characteristics that do not apply to either a monopoly or an oligopoly or a monopolistically competitive industry.) a. Price is equal to marginal cost at the profit-maximizing quantity. b. Firms take the market price as given. c. As a result of entry and exit, the industry will tend toward zero economic profit. d. All of the above. e. (a) and (b) only.
d e 64. d. Tariffs, import quotas, and voluntary export restraints operate in different ways, but they all lead to a decrease in the quantity of imports, and an increase in the price of those imports. 65. e. A perfectly competitive firm is the only kind of firm that takes the market price as given. Thus choice (b) is correct. Since the perfectly competitive firm takes the market price as given, the demand for the firm's output is represented by a horizontal line—the firm can sell as many units as it wants to sell, as long as it sells them at the market price. The perfectly competitive firm's marginal-revenue curve is exactly the same as the firm's demand curve. Thus when the firm maximizes profit by producing and selling the quantity at which MR=MC, it will also be setting P=MC. For any other type of firm, P>MC. Thus choice (a) is also correct. However, choice (c) is incorrect. Free entry and exit will push toward zero economic profit for perfectly competitive firms, but free entry and exit will also push toward zero economic profit for monopolistically competitive firms.
41. Which of the following policy issues could be studied with the tools of microeconomics? a. The effects of tariffs on the price of belts. b. The effects of the payroll tax on the net-of-tax wages received by workers. c. The effects of rent controls on the quantity of apartments. d. The effects of unions on the wages of non-union workers. e. All of the above.
e 41. e. The effects of tariffs, taxes, rent controls, and unions can all be studied using the tools of microeconomic analysis. In fact, we studied each of these in EC 201, Introduction to Microeconomics
17. If a Pigouvian tax is designed in the socially optimal way, it will a. lead to equality between social marginal costs and private marginal costs. b. solve the problem caused by an externality. c. eliminate pollution. d. All of the above. e. (a) and (b) only.
e 17. e. The private-market competitive equilibrium will occur where private marginal costs (i.e., the supply curve) are the same as marginal benefits (i.e., the demand curve). In the absence of a Pigouvian tax, a negative externality will mean that social marginal costs will be greater than private marginal costs. But the socially optimal quantity is the quantity at which social marginal costs are equal to marginal benefits. Thus in the absence of a Pigouvian tax, the market will not produce the socially optimal quantity. The idea of a Pigouvian tax is to increase private marginal costs until, at the socially optimal quantity, they are the same as social marginal costs, so that the market will generate the socially optimal quantity. This will solve the problem caused by the externality. However, it will not eliminate pollution. The idea of the Pigouvian tax is to find the correct balance between social marginal benefits and marginal costs. The correct balance will involve some pollution, because complete elimination of pollution would mean an end to most industrial processes.
30. If the equilibrium interest rate is 10% and a usury ceiling is enforced at 5%, a. a shortage of credit will occur. b. a surplus will occur in the credit market. c. the quantity of credit demanded will be larger than it would have been at the equilibrium. d. there will be no effect. e. (a) and (c).
e If a usury ceiling is enforced below the equilibrium interest rate, then the equilibrium interest rate is illegal. Borrowers will slide down and to the right along their demand curves, and the quantity of credit demanded will be greater than it would have been at the equilibrium interest rate. Lenders will slide down and to the left along their supply curves, and the quantity of credit supplied will be less than it would have been at the equilibrium interest rate. Since the quantity demanded is greater than the quantity supplied, we will have a shortage of credit.
46. The deadweight loss from monopoly is represented graphically by the area of ____, and the excess burden of a tax is represented graphically by the area of _____. a. a rectangle, a rectangle b. a trapezoid, a triangle c. a triangle, a rectangle d. a rectangle, a trapezoid e. a triangle, a triangle
e The deadweight loss of monopoly and the excess burden of a tax are very similar. In each case, the market is caused to move away from the quantity at which the marginal utility of consumers is equal to the marginal cost of producers. In each case, the market is forced to a quantity that is less than the optimal quantity. And each is represented graphically by the area of a triangle.
61. In one day, Abner can fix 6 bicycles, or he can sharpen 6 axes. In one day, Zebediah can fix 12 bicycles, or he can sharpen 8 axes. Between these endpoints, each person has a straight-line production possibilities frontier. Which of the following statements is true? a. The earth is flat. b. Zebediah has comparative advantage in both activities. c. Abner has comparative advantage in fixing bicycles. d. Neither person has comparative advantage in either activity. e. Zebediah has absolute advantage in both activities. 62. There is an increase in the demand for billiard balls (i.e., the demand curve for billiard balls shifts to the right). As a result, a. the equilibrium price will increase; the equilibrium quantity will increase. b. the equilibrium price will increase; the equilibrium quantity will decrease. c. the equilibrium price will decrease; the equilibrium quantity will increase. d. the equilibrium price will decrease; the equilibrium quantity will decrease. e. nothing will happen. 63. Job A and Job B are identical in every way except one. The only difference between the two jobs is that the working conditions of Job A are pleasant, whereas the working conditions of Job B are unpleasant. As a result, the equilibrium wage rate for Job B will be higher than the equilibrium wage rate for Job A. Why does the wage difference occur? a. The demand curve for A labor is to the right of the demand curve for B labor. b. The demand curve for A labor is to the left of the demand curve for B labor. c. The supply curve for A labor is to the right of the supply curve for B labor. d. The supply curve for A labor is to the left of the supply curve for B labor. e. A union has succeeded in pushing the B wage rate above its equilibrium level.
E A c 61. e. For Abner, the opportunity cost of six fixed bicycles is six sharpened axes. Thus, 6B=6A. Dividing both sides by 6, we see that Abner's opportunity cost of one additional fixed bicycle is one additional sharpened axe. For Zebediah, the opportunity cost of 12 fixed bicycles is 8 sharpened axes. Thus, 12B=8A. Dividing both sides by 12, we see that Zebediah's opportunity cost of one additional fixed bicycle is 2/3 of a sharpened axe. Therefore, Zebediah has a lower opportunity cost of fixing bicycles than Abner, which means that fixing axes is Zebediah's comparative advantage. By similar reasoning, sharpening axes is Abner's comparative advantage. However, if we consider each of the activities separately, we see that Zebediah has absolute advantage over Abner in each activity. 62. a. As long as the supply curve slopes upward, an increase in demand will lead to an increase in both the equilibrium price and the equilibrium quantity. 63. c. All else equal, the supply curve for pleasant jobs is farther to the right than the supply curve for unpleasant jobs. As a result, all else equal, the wage rate for an unpleasant job will be higher than the wage rate for an otherwise comparable pleasant job. This is called a compensating wage-rate differential.
Which of the following would be expected to shift the supply curve for tomatoes to the left? a. An increase in the prices of inputs used in production of tomatoes. b. An increase in the price of tomatoes. c. Flooding in tomato-growing regions, which leads to crop damage. d. All of the above. e. (a) and (c) only.
E Choice (a) refers to an increase in the price of an input, and choice (c) refers to a deterioration of the technology of production. Each of these is associated with a leftward shift in the supply curve. However, an increase in price will lead to a movement upward and to the right, along the existing supply curve.
