Final for Econ

14.Assume that the supply curve for paintings by Artemis Gordon is vertical. (Note that this means that the supply curve does not obey the Law of Supply.) Also, assume that paintings by Artemis Gordon are a normal good. There is an increase in the incomes of potential buyers of Artemis Gordon paintings. As a result, what will happen to the equilibrium price and equilibrium quantity of Artemis Gordon paintings? a.Price will increase; quantity will stay the same. b. Price will decrease; quantity will stay the same. c. Price will stay the same; quantity will increase. d. Price will stay the same; quantity will decrease. e. Price will stay the same; quantity will stay the same.

Answer: a. For a normal good, an increase in income will lead to an increase in demand (i.e., the demand curve will shift to the right). As we have seen in earlier questions, if the supply curve obeys the Law of Supply, a rightward shift in the demand curve will lead to an increase in the equilibrium price, and an increase in the equilibrium quantity. However, in this case, the supply curve does not obey the Law of Supply. Instead, the supply curve is vertical, which means that the quantity supplied remains thesame, regardless of what happens to the price. As a result, in this case, the rightward shift in demand will lead to an increase in the equilibrium price, but the equilibrium quantity will stay the s

1. The demand curve for personal computer mice shifts to the right (i.e., there is an increase in the demand for mice). As a result, what will happen to the equilibrium price and equilibrium quantity of computer mice? a.Price will increase; quantity will increase. b.Price will increase; quantity will decrease. c.Price will decrease; quantity will increase. d.Price will decrease; quantity will decrease. e.Not enough information has been given to answer the question.

Answer: a. A rightward shift in the demand curve means that, at any given price, buyers are willing and able to buy a larger quantity than they were previously willing and able to buy. If the supply curve obeys the Law of Supply, then a rightward shift in the demand curve will cause the market to move upward and to the right along the existing supply curve. The result will be a new equilibrium, with a higher equilibrium price and higher equilibrium quantity.

10. Because of an increase in the size of the elderly population and an increase in the number of extremely obese people, there is an increase in the number of potential buyers of walkers. As a result, what will happen to the equilibrium price and equilibrium quantity of walkers? a.Price will increase; quantity will increase. b.Price will increase; quantity will decrease. c.Price will decrease; quantity will increase. d.Price will decrease; quantity will decrease. e.There is simply no way even to begin to understand this question.

Answer: a. An increase in the number of buyers will lead to an increase in market demand (i.e., the market demand curve will shift to the right). As long as the supply curve obeys the Law of Supply, an increase in demand will lead to an increase in the equilibrium price, and an increase in the equilibrium quantity.

9. The price of good A increases. As a result of the price increase, there is a decrease inthe total revenue received by sellers of good A. What does this imply about the own-price elasticity of demand for good A? a. Demand is elastic. b. Demand is unit elastic. c. Demand is inelastic, but not perfectly inelastic. d. Demand is perfectly inelastic. e. Not enough information has been given to answer the question.

Answer: a. By itself, the increase in price will lead to an increase in total revenue. But the increase in price will also lead to a decrease in quantity demanded. By itself, the decrease in quantity demanded will lead to a decrease in total revenue. Thus the change in price and the change in quantity demanded have effects on total revenue that go in opposite directions. The net effect on total revenue will depend on whether the change in price or the change in quantity demanded is relatively larger. If the change in price is relatively larger than the change in quantity demanded, then an increase in price will lead to an increase in total revenue. However, in this question, the increase in price leads to a decrease in total revenue. For this to occur, it must be true that the change in quantity demanded is relatively larger than the change in price. In other words, it must be true that the percentage change in quantity demanded is larger than thepercentage change in price. When the percentage change in quantity demanded is larger than thepercentage change in price, the own-price elasticity of demand is greater than one. In this case, we say that demand is elastic.

5. Luxury automobiles are a normal good. There is an increase in the incomes of people who are potential buyers of luxury automobiles. As a result, what will happen to the equilibrium price andequilibrium quantity of luxury automobiles? a. Price will increase; quantity will increase. b. Price will increase; quantity will decrease. c. Price will decrease; quantity will increase. d. Price will decrease; quantity will decrease. e. All of the above!!! Amazingly, price will both increase and decrease, and quantity will both increase and decrease, all at the same time!!!

Answer: a. For a normal good, an increase in the incomes of potential buyers will lead to an increase in demand (i.e., the demand curve will shift to the right). As long as the supply curve obeys the Law of Supply, a rightward shift in the demand curve will lead to an increase in the equilibrium price, and an increase in the equilibrium quantity

11. Buyers come to believe that the price of kumquats will increase one week from today. What will this do to the market for kumquats this week? a. Demand will increase (i.e., the demand curve will shift to the right). b. Demand will decrease (i.e., the demand curve will shift to the left). c. Supply will increase (i.e., the supply curve will shift to the right). d. Supply will decrease (i.e., the supply curve will shift to the left). e. Nobody has any idea.

Answer: a. For most goods, a purchase today is a reasonably close substitute for a purchase in the near future. Thus when buyers come to believe that future prices will be higher than they had previously expected, the demand curve shifts to the right, just as it would when the price of any substitute good increases. Buyers substitute away from future purchases (which they believe will be more expensive), and increase their current demand

1. For any firm for which price is greater than or equal to average variable cost, regardless of market structure, profits are maximized by producing and selling the quantity at which a. marginal revenue is equal to marginal cost. b. price is equal to marginal cost. c. average total cost is minimized. d. all of the above are true. e. (a) and (b) only are true.

Answer: a. If marginal revenue is greater than marginal cost, then the firm is not at its profit-maximizing quantity, because it can increase profit by increasing its output. If marginal revenue is less than marginal cost, then the firm is not at its profit-maximizing quantity, because it can increase profit by decreasing its output. Thus if the firm is not maximizing profit when marginal revenue is greater than marginal cost, and if it is not maximizing profit when marginal revenue is less than marginal cost, there is only one other possibility: The profit-maximizing quantity is the quantity at which marginal revenue is equal to marginal cost. Choice (b) is correct for a perfectly competitive firm, but it is not correct for any other type of firm, and this question refers toany type of firm, regardless of market structure. Choice (c) is also incorrect: Perfectly competitive firms will minimize average total cost when entry and exit have pushed the industry to zero economic profit, but in general, firms will not always necessarily minimize average total cost.

14. Michelangelo's "Pieta" is in St. Peter's Basilica in Rome. The Roman Catholic Church is unlikely to offer this sculpture for sale. However, if they were to put it on the market, its supply curve would be a vertical line, since the sculpture cannot be reproduced. In a case like this, what is the elasticity of supply? a. Zero b. 0.5 c. 1.0 d.2.0 e. As we approach a vertical supply curve, the limit of the supply elasticity is infinity.

Answer: a. The (own-price) elasticity of supply is the proportional change in quantity supplied, divided by the proportional change in price: eS = (ΔQs/Qs) / (ΔP/P). If the supply curve is vertical, then the quantity supplied does not change, regardless of what happens to price. Thus ΔQs = 0, which means that (ΔQs/Qs) is zero, which means that eS = (ΔQs/Qs) / (ΔP/P) = 0.7

11 .The income elasticity of demand for good B is 0.5. Based on this information, whichof the following is true? a. Good B is a normal good. b. Good B is an inferior good. c. The demand for good B is inelastic. d. (a) and (c). e. Not enough information has been given to answer the question.

Answer: a. The income elasticity of demand is equal to the percentage change in quantity, divided by the percentage change in income: eI = %ΔQ / %ΔI. For a normal good, an increase inincome leads to an increase in demand (i.e., a rightward shift in the demand curve). Thus, for a normal good, if %ΔI is positive, %ΔQ will also be positive, and if %ΔI is negative, %ΔQ will also be negative. Therefore, if a good is a normal good, and if we divide %ΔQ by %ΔI, we will have a positive number. In this question, the income elasticity of demand is 0.5, which is indeed positive. Thus good B is a normal good. If the income elasticity of demand had been a negative number, the good in question would have been an inferior good. Choice (c) is incorrect. Choice (c) refers to the own-price elasticity of demand. The own-price elasticity and the income elasticity are separate concepts. Information about the income elasticity does not necessarily imply anything in particular about the own-price elasticity.

3. The own-price elasticity of demand for motor oil is 0.4. The quantity of motor oil demanded decreases by 8%. What must have happened to the price of motor oil, to lead to this decrease in quantity demanded? a. Price increased by 20%. b. Price increased by 8%. c. Price increased by 4%. d. Price increased by 10%. e. Not enough information has been given to answer the question.

Answer: a. The own-price elasticity of demand is equal to the percentage change in quantity demanded, divided by the percentage change in price: e = %ΔQd /%ΔP. In this problem, we havee = 0.4 and %ΔQd = 8%. If we substitute these facts into the elasticity equation, we have 0.4 = 8% / %ΔP. Multiplying both sides of the equation by %ΔP, we have (0.4)(%ΔP) = 8%. We then divide both sides of the equation by 0.4, to get %ΔP= 8% / 0.4. Thus the percentage increase in price must have been 8% / 0.4 = 20%.4.The own-price elasticity of demand for toothpicks is 0.6.

1. Angela has already decided to buy one pound of apples. Her marginal utility from consuming a second pound of apples is $3. The price of apples is $2 per pound. On the basis of this information, what can we say? a. Angela should buy at least one more pound of apples, and maybe more. b. Angela should buy exactly one more pound of apples, and no more. c. Angela should not buy any more apples.d.None of the above is true.e.Not enough information has been given to answer the question.

Answer: a. We define marginal utility as the maximum amount that an individual is willing to pay for one additional unit of a good. If marginal utility is greater than price, the consumer should buy. In this case, since marginal utility is $3 and price is $2, the consumer should buy at least one more pound of apples. On the basis of the information given here, we can tell that this consumer should buy at least one more pound of apples, but we cannot tell exactly how many more she should buy. In order to determine exactly how many more she should buy, we would have to have a complete schedule for marginal utility, and not merely the marginal utility of the second pound of apples.

14. The price of good X increases. As a result, the supply for good Y decreases (i.e., the supply curve for good Y shifts to the left). On the basis of this information, what can we say about good X and good Y? a. Good X is an input in the production of good Y. b. Good X is a normal good, and good Y is an inferior good. c. Good X is an inferior good, and good Y is a normal good. d. Good X and good Y are complements. e. Good X and good Y are substitutes.

Answer: a. When the price of an input goes down, the supply curve will shift to the right. When the price of an input goes up, the supply curve will shift to the left. For example, oil is an input in the production of gasoline. When the price of oil increases, the supply curve for gasoline will shift to the left.

11. Assume that hot dogs and mustard are complements. There is a decrease in the price of mustard. As a result, what will happen to the equilibrium price and equilibrium quantity of hot dogs? a. Price will increase; quantity will increase. b. Price will increase; quantity will decrease. c. Price will decrease; quantity will increase. d. Price will decrease; quantity will decrease. e. Rubeus Hagrid would really like to help us out on this one, but he is not very knowledgeable abterm-34out economics, so he doesn't know the answer.

Answer: a. When the price of one complement goes down, the demand for the other complement goes up. Thus in this case, when the price of mustard falls, the demand for hot dogs will increase (i.e., the demand curve will shift to the right). As long as the supply curve obeys the Law of Supply, an increase in demand will lead to an increase in the equilibrium price, and an increase in the equilibrium quantity

5.Assume that peanut butter and jelly are complements. The price of peanut butter decreases. As a result of the decrease in the price of peanut butter, what will happen in the market for jelly? a. The demand for jelly will increase (i.e., the demand curve for jelly will shift to the right). b. The supply of jelly will increase (i.e., the supply curve for jelly will shift to the right). c. The demand for jelly will decrease (i.e., the demand curve for jelly will shift to the left). d. The supply of jelly will decrease (i.e., the supply curve for jelly will shift to the left). e. The market for jelly will not be affected by a change in the price of peanut butter.

Answer: a. 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 one. Also, when two goods are complements, a decrease inthe price of one of the goods will lead to an increase in the demand for the other

16. A profit-maximizing perfectly competitive firm will choose to produce and sell the quantity at which price is equal to marginal cost: P=MC. Also, the tendency in a perfectly competitive industry is toward zero economic profit, which means that price is equal to average total cost: P = ATC. If P = MC, and if P = ATC, then MC = ATC. Thus, when an industry of profit-maximizing perfectly competitive firms is experiencing zero economic profit, marginal cost is equal to average total cost. In this situation, a. The average-total-cost curve is upward sloping as we go from left to right on the diagram. b. The average-total-cost curve is at its minimum. c. The average-total-cost curve is downward sloping as we go from left to right on the diagram. d. The average-fixed-cost curve is upward sloping as we go from left to right on the diagram. e. The average-variable-cost curve goes around and around in cute little curlicues.

Answer: b. For any variable, if the marginal value is greater than the average of the previous units, the average will increase. If the marginal is less than the average of the previous units, the average will decrease. If the marginal is equal to the average of the previous units, the average will be unchanged. In this case, MC = ATC, which means that ATC is unchanged. In this case, the ATC curve is at its minimum.

6. Smith Company is a perfectly competitive firm. The market price of its output is $10. The firm is currently producing 100 units of output. At this level of output, the firm's average total cost is $10per unit, its average variable cost is $9 per unit, and its marginal cost is $10 per unit. On the basis of this information, what can we say? a. Smith Company is maximizing its profit, and should stay in business. b. Smith Company is not maximizing profit; it can increase profit by increasing output. c. Smith Company is not maximizing profit; it can increase profit by decreasing output. d. Smith Company is suffering a loss, but it should stay in business in the short run. e. Smith Company should go out of business in the short run.

Answer: a. Any firm (regardless of market structure) will maximize profit by producing and selling the quantity at which marginal revenue is equal to marginal cost. In the special case of a perfectly competitive firm, marginal revenue is equal to price. (This is not true for firms in market structures other than perfect competition.) Thus in the special case of a perfectly competitive firm, profit is maximized by producing and selling the quantity at which price is equal to marginal cost. This firm's price of $10 is equal to its marginal cost, which is also $10. Thus if the firm is to be in business at all, it is at its profit-maximizing level of output. Profit per unit is equal to price minus average total cost. Since this is a perfectly competitive firm, it takes the market price as given; thus the firm's price is $10 per unit. At its current level of output, this firm's average total cost is also $10 per unit. Thus this firm is earning zero economic profit. We define economic profit to be net of the opportunity cost of being in business. Thus a firm that is earning zero economic profit is doing well enough to stay in business.

7. The demand for good Y is inelastic. Due to an earthquake, there is a decrease in the supply of good Y (i.e., the supply curve shifts to the left). What will happen to the total revenues of sellers of good Y? a. Total revenue will increase. b. Total revenue will decrease. c. Total revenue will stay the same. d. None of the above!!!! e. Not enough information has been given to answer the question.

Answer: a. As a result of the leftward shift in the supply curve, the equilibrium quantity will decrease, and the equilibrium price will increase. By itself, the increase in price will lead to an increase in total revenue. But the increase in price will also lead to a decrease in quantity demanded. By itself, the decrease in quantity demanded will lead to a decrease in total revenue. However, when demand is inelastic, the percentage change in quantity demanded is less than the percentage change in price. Thus the increase in price will have a larger effect on total revenue than the decrease in quantity demanded; as a result, total revenue will increase.

15. When a firm is earning positive economic profit, a. price is greater than average total cost. b. price is less than average total cost. c. price is equal to average total cost. d. price and average total cost do not bear any relationship to each other. e. all of the above are true!!!

Answer: a. Economic profit is equal to price minus average total cost. Thus, when economic profit is positive, it must be that price minus average total cost is positive: P - ATC > 0. If we add ATC to both sides of this inequality, we see that P > ATC.

5. Why does monopoly lead to deadweight loss? a. The loss in consumer surplus is greater than the monopoly profits. b. The monopoly is more efficient than a group of competitive firms would be. c. The monopoly produces a quantity at which marginal revenue is negative. d. The monopoly charges a price that is equal to marginal cost. e. All of the above.

Answer: a. In a perfectly competitive industry, the tendency is toward zero economic profit. In a monopoly, however, barriers to entry make it possible for the firm to have economic profits. Thus producers are better off when the industry is monopolized. We measure the extent to which producers are better off under monopoly by the economic profits of the monopoly. However, consumers will be worse off under monopoly, because the monopoly will produce a smaller output than would be produced by a perfectly competitive industry, and the monopoly will charge a higher price. We measure the extent to which consumers are worse off under monopolyby the loss of consumer surplus. It turns out that the lost consumer surplus is greater than the monopoly profit. As a result, the society as a whole is worse off. Choices (b), (c), and (d) are all incorrect. The monopoly will not generally be more efficient than competitive firms would be. The monopoly produces a quantity at which marginal revenue is positive, and it charges a price that is greater than marginal cost.

14. Total fixed cost is represented graphically by a. a horizontal line. b.a vertical line. c. a line that always slopes downward as we go from left to right. d. a line that decreases at first, and then increases. e.a chartreuse monkey.

Answer: a. Total fixed cost does not change as quantity of output changes. Therefore, in the type of graph that we have used repeatedly in this portion of the course, with quantity on the horizontal axis, total fixed cost is represented by a horizontal line.

5.Ezekiel's Bar and Grill sells onion rings. In an attempt to increase the total revenue that it receives from selling onion rings, Ezekiel's decreases the price of onion rings. What does this imply about Ezekiel's beliefs, regarding the own-price elasticity of demand for its onion rings? a. Demand is elastic. b. Demand is unit elastic. c. Demand is inelastic, but not perfectly inelastic. d. Demand is perfectly inelastic. e. The own-price elasticity of demand has nothing to do with whether Ezekiel's revenues will increase as a result of a change in the price.

Answer: a. By itself, the decrease in price will lead to an increase in total revenue. But the decrease in price will also lead to an increase in quantity demanded. By itself, the increase in quantity demanded will lead to an increase in total revenue. Thus the change in price and the change in quantity demanded have effects on total revenue that go in opposite directions. The net effect on total revenue will depend on whether the change in price or the change in quantity demanded is relatively larger. If the change in price is relatively larger than the change in quantity demanded, then a decrease in price will lead to a decrease in total revenue. However, inthis question, the company wants to increase total revenue. For total revenue to increase as a result of a decrease in price, it must be true that the change in quantity demanded is relatively larger than the change in price. In other words, it must be true that the percentage change in quantity demanded is larger than the percentage change in price. When the percentage change inquantity demanded is larger than the percentage change in price, the own-price elasticity of demand is greater than one. In this case, we say that demand is elastic.

There is a decrease in the price of a pair of blue jeans. What effect would this have on the demandcurve for blue jeans? a. A rightward shift in the demand curve, without any movement along the existing demand curve. (In other words, an increase in demand.) b. A movement downward and to the right along the existing demand curve, without any shift to a new demand curve. (In other words, an increase in quantity demanded.) c. BOTH a rightward shift in the demand curve, AND a movement downward and to the right along theexisting demand curve. (In other words, both an increase in demand and an increase in quantity demanded.) d. NEITHER a shift in the demand curve NOR a movement along the existing demand curve. e.Not enough information has been given to answer the question.

Answer: b. It is very important to distinguish between a movement along an existing demand curve and a shift to a new demand curve. When we construct a demand curve, we allow the price to vary, while holding constant every other possible influence on buyers. Thus if the price changes, we move along the existing demand curve. In order to shift to a new demand curve, it is necessary for something else (other than the price) to change. The demand shifters are the influences on buyers that are held constant when we construct a particular demand curve. These include tastes or preferences, buyers' incomes, the prices of complements and substitutes, buyers'expectations about future prices and incomes, and the number of buy

The price of toothpicks falls by 10%. As a result, what will happen to the total revenue received by sellers oftoothpicks? a. Total revenue will increase. b. Total revenue will decrease. c. Total revenue will stay the same. d. All of the above will occur, at the same time! e. Not enough information has been given to answer the question.

Answer: b. If the own-price elasticity of demand is less than 1.0, we say that demand is inelastic.In this case, the elasticity is 0.6, which is indeed less than 1.0, so we have inelastic demand. By itself, the decrease in price will lead to a decrease in total revenue. But the decrease in price will also lead to an increase in quantity demanded. By itself, the increase in quantity demanded will lead to an increase in total revenue. However, when demand is inelastic, the percentage change in quantity demanded is less than the percentage change in price. Thus the decrease in price will have a larger effect on total revenue than the increase in quantity demanded; as a result, total revenue will decrease.2

8. The price of tarfsnods increases by 20%. As a result of the price increase, the quantity of tarfsnods demanded falls by 20%. Which of the following is true? a. Demand is inelastic; the price increase will lead to an increase in total revenue. b. Demand is unit elastic; total revenue will be unchanged. c. Demand is elastic; the price increase will lead to a decrease in total revenue. d. Demand is unit elastic; the price increase will lead to an increase in total revenue. e. Demand is unit elastic; the price increase will lead to a decrease in total revenue.

Answer: b. The own-price elasticity of demand is equal to the percentage change in quantity demanded, divided by the percentage change in price: e = %ΔQd /%ΔP. In this problem, %ΔQd = 20% and %ΔP = 20%. Thus e = 20%/20% = 1. When the demand elasticity is 1.0, we say that demand is unit elastic. By itself, the increase in price will lead to an increase in total revenue. By itself, the decrease in quantity demanded will lead to a decrease in total revenue. When demand is unit elastic, these two influences on total revenue will exactly cancel each otherout, and total revenue will be unchanged.

4. Which of the following will lead to an increase in the demand for ibuprofen (i.e., a rightward shift in the demand for ibuprofen)? a. A decrease in the price of ibuprofen. b. A decrease in the price of boxing gloves, which are a complement for ibuprofen. c. A decrease in incomes, assuming that ibuprofen is a normal good. d. A decrease in the price of the equipment that is used in producing ibuprofen. e. Both (a) and (b) will lead to an increase in the demand for ibuprofen.

Answer: 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 one. Also, when two goods are complements, a decrease inthe price of one of the goods will lead to an increase in the demand for the other one.One of the choices for this question was "A decrease in the price of ibuprofen." If the price of ibuprofen decreases, we move downward and to the right along the existing demand curve, but we do not shift to a different demand curve.

7. Silk is an important input in the production of silk neckties. There is an increase in the price of silk. As a result of the increase in the price of silk, what happens in the market for silk neckties? a. Supply will increase (i.e., the supply curve will shift to the right). b. Supply will decrease (i.e., the supply curve will shift to the left). c. Demand will increase (i.e., the demand curve will shift to the right). d. Demand will decrease (i.e., the demand curve will shift to the left). e. Both (b) and (c) will occur.

Answer: b. When we construct a supply curve, we allow the price to vary, while holding constant every other possible influence on sellers. Thus if the price changes, we move along the existing supply curve. In order to shift to a new supply curve, it is necessary for something else (other than the price) to change. The supply shifters are the influences on sellers that are held constant when weconstruct a particular supply curve. These include the prices of inputs, the technology of production,and the number of sellers. If the price of an input increases, the supply curve will shift to the left.

7. There is a decrease in the number of sellers of bib overalls. As a result, what will happen to the equilibrium price and equilibrium quantity of bib overalls? a. Price will increase; quantity will increase. b. Price will increase; quantity will decrease. c. Price will decrease; quantity will increase. d. Price will decrease; quantity will decrease. e. None of the above. The decrease in the number of sellers will not have any effect on either the equilibrium price or the equilibrium quantity.

Answer: b. A decrease in the number of sellers will lead to a decrease in market supply (i.e., the market supply curve will shift to the left). As long as the demand curve obeys the Law of Demand, a leftward shift in the supply curve will lead to an increase in the equilibrium price, and a decrease in the equilibrium quantity.

6. Low-fat milk is an input in the production of skinny lattes. There is an increase in the price of low-fat milk. As a result, what will happen to the equilibrium price and equilibrium quantity of skinny lattes? a. Price will increase; quantity will increase. b. Price will increase; quantity will decrease. c. Price will decrease; quantity will increase. d. Price will decrease; quantity will decrease. e. Both (a) and (c) are correct.

Answer: b. An increase in the price of an input will lead to a decrease in supply (i.e., the supply curve will shift to the left). As long as the demand curve obeys the Law of Demand, a leftward shift in the supply curve will lead to an increase in the equilibrium price, and a decrease in the equilibrium quantity.

4. Industry X is perfectly competitive. At the market equilibrium, consumer surplus is $100 million, and firms earn zero economic profit. Then an evil sorcerer gets control of all of the firms, and turns the industry into a monopoly. The monopoly is able to earn economic profit of $50 million, and consumer surplus decreases to $25 million. What is the deadweight loss of this monopoly? a. Zero: there is no deadweight loss. b. $25 million. c. $50 million. d. $75 million. e. $100 million.

Answer: b. In an industry that could potentially be organized either as a monopoly or as a competitive industry, producer profits will be higher under monopoly, but consumer surplus will be higher under perfect competition. Thus the net effect of monopoly on society depends on the relative size of the increased profit under monopoly and the decreased consumer surplus. It turns out that the loss of consumer surplus is larger than the increased profit, so that monopoly generates a deadweight loss for society. In this question, economic profit is zero under perfect competition, but it is $50 million under monopoly. Thus the gain for producers as a result of monopoly is $50 million. However, consumer surplus is $100 million under perfect competition, but it is only $25 millionunder monopoly. Thus the lost consumer surplus as a result of monopoly is $(100 million - 25 million) = $75 million. If we subtract the producer's gain of $50 million from the consumer's loss of $75 million, we have a deadweight loss of $25 million.

12. Which of the following industries comes closest to fitting the definition of a perfectly competitive industry? a. Automobile manufacturing b. Soybean farming c. Electric-power utilities d. Personal-computer operating systems e. Commercial aircraft manufacturing

Answer: b. Many of the best examples of perfectly competitive industries are in agriculture. For many agricultural products, there are a large number of sellers, each of which is very small relative to the market. Also, agricultural markets are usually characterized by free entry and exit.

9. The szczyff industry is perfectly competitive. The firms in the industry are currently earning positive economic profits. What do we expect will happen in the future in this industry? a. Nothing will change. b. New firms will enter the industry, and the market price will fall until zero economic profits are restored. c. New firms will enter the industry, and the market price will fall until the existing firms are suffering economic losses. d. Some firms will exit the industry, and the market price will increase until zero economic profits are restored. e. Not enough information has been given to answer the question.

Answer: b. One of the characteristics of perfect competition is free entry into the industry and free exit from the industry. If the existing firms are earning positive economic profits, new firms will enter the industry. Since themarket supply curve is the horizontal sum of the supply curves of the individual firms, the entry of new firms will cause an increase in market supply. In other words, the market supply curve will shift to the right. A rightward shift in the market supply curve will cause the market equilibrium price to fall. As price falls, economic profits will decrease. This process will continue until all of the economic profits have been competedaway. In other words, entry into the industry will continue until the industry gets to a point at which the firms are earning zero economic profits. At that point, there will no longer be an incentive for new firms to enter the market, and the process will stop.

5. Jones Company is a perfectly competitive firm. The market price of its output is $10. The firm is currently producing 50 units of output. At this level of output, the firm's average total cost is $8 per unit, its average variable cost is $6 per unit, and its marginal cost is $8. On the basis of this information, what can we say? a. Jones Company is maximizing its profit, and should stay in business. b. Jones Company is not maximizing profit; it can increase profit by increasing output. c. Jones Company is not maximizing profit; it can increase profit by decreasing output. d. Jones Company is suffering a loss, but it should stay in business in the short run. e. Jones Company should go out of business in the short run.

Answer: b. Profit per unit is equal to price minus average total cost. Since this is a perfectly competitive firm, ittakes the market price as given; thus the firm's price is $10 per unit. At its current level of output, this firm's average total cost is $8 per unit. Thus the firm is able to earn positive economic profit, so the firm should not even be considering going out of business. Any firm (regardless of market structure) will maximize profit by producing and selling the quantity at which marginal revenue is equal to marginal cost. In the special case of a perfectly competitive firm, marginal revenue is equal to price. (This is not true for firms in market structures other than perfect competition.) Thus in the special case of a perfectly competitive firm, profit is maximized by producing and selling the quantity at which price is equal to marginal cost. This firm's price of $10 is greater than its marginal cost of $8. Thus if the firm were to produce and sell one additional unit of output, it would increase its profit. This means that the firm is not at its profit-maximizing quantity. The firm is already making positive profits at its current level of output, and it can increase profit further by increasing output.

4. There is a leftward shift in the supply curve for swimsuits (i.e., there is a decrease in the supply of swimsuits). As a result, what will happen to the equilibrium price and equilibrium quantity of swimsuits? a. Price will increase; quantity will increase. b. Price will increase; quantity will decrease. c. Price will decrease; quantity will increase. d. Price will decrease; quantity will decrease. e. Draco Malfoy may or may not know the answer to this question. But even if he did know, hewouldn't tell you.

Answer: b. A leftward shift in the supply curve means that, at any given price, sellers are willing andable to sell a smaller quantity than they were previously willing and able to sell. If the demand curveobeys the Law of Demand, then a leftward shift in the supply curve will cause the market to move upward and to the left along the existing demand curve. The result will be a new equilibrium, with ahigher equilibrium price and lower equilibrium quantity.

11.For Company X, total fixed cost is $20. When Q=0, total variable cost (TVC) is $zero. When Q=1, TVC=$4. When Q=2, TVC=$10. When Q=3, TVC=$19. What is the marginal cost of thesecond unit of output (i.e., the additional cost associated with increasing the quantity of output from Q=1 to Q=2)? a.Zero b.$4 c.$6 d.$9 e.Not enough information has been given to answer the question.

Answer: c. Marginal cost is the additional cost associated with producing one additional unit of output. Thus marginal cost is the change in total cost from one additional unit: MC = ΔTC/ΔQ. However, remember that total cost is equal to the sum of total fixed cost and total variable cost: TC = TFC + TVC. It follows that any change in TC has to be accounted for by changes in TFC or TVC: ΔTC = ΔTFC + ΔTVC. But by definition, TFC does not change, i.e, ΔTFC = 0. Therefore the change in total cost is identical to the change in total variable cost. Thus MC = ΔTVC/ΔQ. In this question, we are given the levels of TVC for various levels of Q. When Q increases from 1 to 2, TVC increases from $4 to $10. Thus the marginal cost of the second unit of output is the change in TVC, which is $(10 - 4) = $6.

9. A monopolist maximizes profit by producing the quantity at which marginal revenue is equal to marginal cost. Since its marginal costs are positive, this means that the monopolist will produce a quantity at which marginal revenue is positive. What does this imply about the elasticity of demand for its output, when the firm is producing its profit-maximizing quantity? a. Demand is inelastic. b. Demand is elastic. c. Demand is unit-elastic. d. All of the above. e.None of the above, because it is not possible to calculate elasticity of demand for a monopolist.

Answer: b. Marginal revenue is the extra revenue that the firm receives, as a result of producing one extra unit of output: MR = ∆TR/∆Q. If MR is to be positive, it must be that ∆TR and ∆Q have the same sign. Since we are considering "one extra unit of output", ∆Q must be positive. The change in quantity is greater than zero when we move from left to right across the diagram. Thus if MR>0 and ∆Q>0, it must be true that ∆TR>0. This means that we are in a region of the demand curve in which an increase in quantity is associated with an increase in total revenue. Since TR = (P)(Q), the change in total revenue is determined by two influences as we move along a demand curve—the change in price and the change in quantity demanded. By itself, the increase in quantity demanded will increase total revenue. However, by the Law of Demand, the increase in quantity demanded is associated with a decrease in price. By itself, the decrease in price will decrease total revenue. Thus if total revenue increases, it has to be that the increase in quantity demanded is relatively larger than the decrease in price. In other words, it must be that the percentage change in quantity demanded is larger than the percentage change in price. This is true when the own-price elasticity of demand is greater than one, which means that demand is elastic.

3. There is a rightward shift in the supply curve for printer paper (i.e., there is an increase in the supply of printer paper). As a result, what will happen to the equilibrium price and equilibrium quantity of printer paper? a. Price will increase; quantity will increase. b. Price will increase; quantity will decrease. c. Price will decrease; quantity will increase. d. Price will decrease; quantity will decrease. e. Draco Malfoy knows the answer to this question, but he isn't telling.

Answer: c A rightward shift in the supply curve means that, at any given price, sellers are willing and able to sell a larger quantity than they were previously willing and able to sell. If the demand curve obeys the Law of Demand, then a rightward shift in the supply curve will cause the market to move downward and to the right along the existing demand curve. The result will be a new equilibrium, with a lower equilibrium price and higher equilibrium quantity.

11. The deadweight loss from monopoly is represented graphically by the area of ____, and the monopoly's profit 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

Answer: c.

15.A new technology makes it possible to produce more flat-screen televisions, without using any more inputs. As a result of this technological improvement, what will happen in the market for flat-screen televisions? a. Demand will increase (i.e., the demand curve will shift to the right). b. Demand will decrease (i.e., the demand curve will shift to the left). c. Supply will increase (i.e., the supply curve will shift to the right). d. Supply will decrease (i.e., the supply curve will shift to the left). e. Not enough information has been given to answer the question.

Answer: c. A deterioration of technology will shift the supply curve to the left. An improvement in technology will shift the supply curve to the right

9. A new technology makes it possible to produce more flash drives, without using any additional resources. As a result, what will happen to the equilibrium price and equilibrium quantity of flashdrives? a.Price will increase; quantity will increase. b.Price will increase; quantity will decrease. c.Price will decrease; quantity will increase. d.Price will decrease; quantity will decrease. e.Choices (b), (c), and (d) are correct, but (a) is incorrect.

Answer: c. An improvement in technology will lead to an increase in supply (i.e., the supply curve will shift to the right). As long as the demand curve obeys the Law of Demand, an increase in supply will lead to a decrease in the equilibrium price, and an increase in the equilibrium quantity.

2.Industry A could be organized as a monopoly, or it could be organized competitively. If it is organized as a monopoly, its output will be _____ than if it were competitive, and the price will be _______ than if it were competitive. a. larger, larger. b. larger, smaller. c. smaller, larger. d. smaller, smaller. e. both larger and smaller, both larger and smaller!!!

Answer: c. Because a monopoly faces a downward-sloping demand curve, its marginal-revenue curve is below its demand curve. Thus when a monopoly maximizes profit by producing and selling the quantity at which marginal revenue is equal to marginal cost, it will charge a price that is greater than marginal cost. On the other hand, a perfectly competitive firm will charge a price that is equal to marginal cost. Since the monopoly charges a higher price, by the Law of Demand, the monopoly will produce a lower quantity.

15.The demand curve for kumquats shifts to the right (i.e., there is an increase in demand for kumquats). At the same time, the supply curve for kumquats shifts to the left (i.e., there is a decrease in the supply of kumquats). As a result, what will happen to the equilibrium price and equilibrium quantity of kumquats? a. Price will increase; quantity will increase. b. Price will increase; quantity will decrease. c. Price will increase; quantity could increase, decrease, or stay the same, so that we cannot determine the direction of change in quantity without more precise information. d. Price will decrease; quantity could increase, decrease, or stay the same, so that we cannot determine the direction of change in quantity without more precise information. e. Price could increase, decrease, or stay the same, so that we cannot determine the directionof change in price without more precise information; quantity will increase.

Answer: c. By itself, the rightward shift in the demand curve will lead to an increase in both the equilibrium price and the equilibrium quantity. By itself, the leftward shift in the supply curve will lead to an increase in the equilibrium price, but a decrease in the equilibrium quantity. Thus both of the shifts will push the equilibrium price upward, which means that the net effect will definitely include an increase in the equilibrium price. However, the two shifts push the equilibrium quantity in opposite directions. The net effect on the equilibrium quantity will depend on the relative sizes of the two shifts, as well as on the shapes of the demand and supply curves.

15. Apples and bananas are substitutes. On the basis of this information, what can we say? a. Apples and bananas are both normal goods. b. The own-price elasticity of demand for apples is greater than 1, and the own-price elasticity of demand for bananas is also greater than 1. c. The cross-price elasticity of demand for apples with respect to the price of bananas is greater than zero. d. All of the above are correct. e. Only (a) and (c) are correct.

Answer: c. The cross-price elasticity of demand for apples with respect to the price of bananas is equal to the percentage change in quantity of apples, divided by the percentage change in the price of bananas: eAB = %ΔQA / %ΔPB. When two goods are substitutes, an increase in the price of one good will lead to an increase in the demand for the other good. In this case, if apples and bananas are substitutes, an increase in the price of bananas will lead to an increase in demand forapples. If we insert this information into the formula for the cross-price elasticity, we see that the numerator and the denominator will have the same sign. If the numerator is positive and the denominator is also positive, then the quotient will be positive. In other words, when two goods are substitutes, their cross-price elasticity will be positive, i.e., greater than zero.

13. Assume that the demand curve for good E is a straight line. As we move downward and to the right along the demand curve, what happens to the own-price elasticity of demand? a. The elasticity increases. b. The elasticity stays the same. c. The elasticity decreases. d. The elasticity increases at first, and then decreases.e.It's impossible to answer this question, unless more information is given.

Answer: c. The own-price elasticity of demand is the proportional change in quantity demanded, divided by the proportional change in price: e = (ΔQd/Qd) / (ΔP/P). Along a straight-line demandcurve, the slope of the curve is always the same. The slope is ΔP/ ΔQd. Thus we can assume that, as we move downward and to the right along the demand curve, we are always considering the same small ΔP, and the same small ΔQd. Let's first consider a point that is far up and to the left, near the vertical axis. At such a point, the reference level of P is relatively large, and the reference level of Qd is relatively small. Thus (ΔP/P) is relatively small, and (ΔQd/Qd) is relatively large. If we then divide (ΔQd/Qd) by (ΔP/P), we are dividing something relatively large by something relatively small, and the result is relatively large. However, as we move downward and to the right along the demand curve, the reference level of P will get smaller and smaller. Thus (ΔP/P) will get larger and larger. Also, the reference level of Qd will get larger andlarger, so that (ΔQd/Qd) will get smaller and smaller. If we then divide (ΔQd/Qd) by (ΔP/P), we are dividing something that is getting smaller and smaller by something that is getting larger and larger, and the resulting elasticity will decrease in size.

16. The price of flibboos goes down from $4.50 to $3.50. As a result, the quantity demanded increases from 95 to 105. What is the own-price elasticity of demand? a. Zero b. 0.2 c. 0.4 d. 0.8 e. 1.6

Answer: c. The own-price elasticity of demand is the proportional change in quantity demanded, divided by the proportional change in price: e = (ΔQd/Qd) / (ΔP/P). Quantity demanded increasesfrom 95 to 105. Thus the change in quantity demanded, ΔQd, is (105 - 95) = 10. To get the proportional change in quantity demanded, we have to divide ΔQd by the reference level of Qd. Our rule is to use the average of the beginning and ending values as the reference level. Thus Qdis the average of 95 and 105, which is 100. If we then divide ΔQd by Qd, we have 10/100 = 0.1. Price decreases from $4.50 to $3.50. This is actually a negative change, but our rule is to use absolute value. Thus the change in price, ΔP, is $(4.50 - 3.50) = $1.00. For price, as for quantitydemanded, we use the average of the beginning value and the ending value as the reference level.Thus P is the average of $4.50 and $3.50, which is $4.00. If we then divide ΔP by P, we have $1.00/$4.00 = 0.25. Now we are ready to find the elasticity, by dividing the proportional change in quantity demanded by the proportional change in price: 0.1/0.25 = 0

9. If the marginal cost of the next unit is greater than the average total cost of all previous units, what can be said about average total cost? a. Average total cost will decrease. b. Average total cost will stay the same. c. Average total cost will increase. d. All of the above will occur. e. Not enough information has been given to answer the question.4

Answer: c. The relationships between "marginal" values and "average" values are the same, regardless of whether we are considering marginal cost and average total cost, or marginal cost and average variable cost, or marginal anything else and average anything else. If the marginal value is less than the average of the previous units, the average will decrease. If the marginal value is equal to the average of the previous units, the average will stay the same. If, as in this question, the marginal is greater than the average of the previous units, the average will increase.

6. Assume that diamond earrings are a normal good. There is an increase in consumer incomes. As a result of the increase in incomes, what will happen in the market for diamond earrings? a. Supply will increase (i.e., the supply curve will shift to the right). b. Supply will decrease (i.e., the supply curve will shift to the left). c. Demand will increase (i.e., the demand curve will shift to the right). d. Demand will decrease (i.e., the demand curve will shift to the left). e. Not enough information has been given to answer the question.

Answer: c. When we construct a demand curve, we allow the price of the good to vary, while holding constant all other possible influences on buyers. One of those possible influences is buyers' incomes. For a normal good, an increase in incomes will lead to a rightward shift in the demand curve. Also, for a normal good, a decrease in incomes will lead to a leftward shift in the demand curve.

12. Assume that oranges and grapefruit are substitutes. There is a decrease in the price of oranges. As a result, what will happen to the equilibrium price and equilibrium quantity of grapefruit? a. Price will increase; quantity will increase. b. Price will increase; quantity will decrease. c. Price will decrease; quantity will increase. d. Price will decrease; quantity will decrease. e. Nobody knows.

Answer: d. When the price of one substitute goes down, the demand for the other substitute will also go down. Thus in this case, when the price of oranges falls, consumers will substitute toward oranges and away from grapefruit. As a result, the demand for grapefruit will decrease (i.e., the demand curve will shift to the left). As long as the supply curve obeys the Law of Supply, a decrease in demand will lead toa decrease in the equilibrium price, and a decrease in the equilibrium quantity.

3. Assume that apples and bananas are substitutes. There is an increase in the price of apples. As a result, what will happen in the market for bananas? a. The supply curve for bananas will shift to the right (i.e., there will be an increase in the supply of bananas). b. The supply curve for bananas will shift to the left (i.e., there will be a decrease in the supply of bananas). c. The demand curve for bananas will shift to the right (i.e., there will be an increase in the demand for bananas). d. The demand curve for bananas will shift to the left (i.e., there will be a decrease in the demand for bananas). e. There will be an increase in both the supply and demand for bananas (i.e., both the supply curve for bananas and the demand curve for bananas will shift to the right).

Answer: c. The prices of substitutes and complements are demand shifters. When there is a change in the price of one of these related goods, we shift to a different demand curve. The direction of the shift will depend on whether the related good is a complement or substitute, and on whether the priceof the related good goes up or down. When two goods are substitutes, an increase in the price of oneof the goods will lead to an increase in the demand for the other one. Also, when two goods are substitutes, a decrease in the price of one of the goods will lead to a decrease in the demand for the other one.

7. Garcia Company is a perfectly competitive firm. The market price of its output is $10. The firm is currently producing 100 units of output. At this level of output, the firm's average total cost is $8 per unit, its average variable cost is $6 per unit, and its marginal cost is $10 per unit. What is the firm's profit? a. Zero b. $100 c. $200 d. $400 e. Not enough information has been given to answer the question.

Answer: c. Any firm (regardless of market structure) will maximize profit by producing and selling the quantity at which marginal revenue is equal to marginal cost. In the special case of a perfectly competitive firm, marginal revenue is equal to price. (This is not true for firms in market structures other than perfect competition.) Thus in the special case of a perfectly competitive firm, profit is maximized by producing and selling the quantity at which price is equal to marginal cost. This firm's price of $10 is equal to its marginal cost, which is also $10. Thus if the firm is to be in business at all, it is at its profit-maximizing level of output. Profit per unit is equal to price minus average total cost. Since this is a perfectly competitive firm, it takes the market price as given; thus the firm's price is $10 per unit. At its current level of output, this firm's average total cost is $8 per unit. Thus this firm's profit per unit is $(10 - 8) = $2 per unit. If we multiply the profit per unit of $2 by the number of units, which is 100, we find that the firm's profit is ($2)(100) = $2

10. As quantity increases, average fixed cost a. increases. b. stays the same. c. decreases. d. decreases at first, and then increases. e. bounces around wildly in a completely chaotic fashion.

Answer: c. Average fixed cost, or fixed cost per unit, is equal to total fixed cost divided by the quantity of output: AFC = TFC/Q. Total fixed cost does not change. Thus, as quantity increases, the numerator of the AFCequation stays the same, while the denominator increases. Thus the quotient (AFC) will decrease.

14.Which of these characteristics is the reason why a perfectly competitive industry has a tendency to move toward zero economic profit? a. The industry has many firms, each of which is small relative to the market. b. The firms produce output that is homogeneous, or standardized, or undifferentiated. c. The industry is characterized by free entry and exit. d. All of the above are reasons why perfectly competitive industries tend toward zero economic profit. e. Only (a) and (b) are reasons for the tendency toward zero economic profit.

Answer: c. Choices (a) and (b) are characteristics of perfectly competitive markets. However, they are not the reason why perfectly competitive markets tend toward zero economic profit. Instead, (a) and (b) are the reasonswhy a perfectly competitive firm takes the market price as given. The reason why perfectly competitive markets tend toward zero economic profit is that they have free entry and exit. If the existing firms are experiencing economic profits, free entry will allow new firms to enter the market. This will increase the market supply, which will push down the price until the market gets back to zero economic profit. If the existing firms are experiencing economic losses, free exit means that some of the firms will eventually go out ofbusiness. This will reduce the market supply, which will increase the price until the market gets back to zero economic profit.

There is a decrease in consumer incomes. As a result of this decrease in consumer incomes, the demand curve for smart phones shifts to the left. In other words, there is a decrease in the demand for smart phones. On the basis of this information, what can we say about the market forsmart phones? a. Smart phones are an inferior good. b. The demand curve for smart phones does not obey the Law of Demand. c. Smart phones are a normal good. d. Smart phones are neither normal nor inferior. e. Not enough information has been given to answer the question.

Answer: c. Consumer income is one of the demand shifters. When there is a change in consumer incomes, we shift to a different demand curve. The direction of the shift will depend on whether incomes go up or down, and on whether the good is a normal good or an inferior good. For a normalgood, an increase in income leads to a rightward shift in the demand curve. Also, for a normal good,a decrease in income leads to a leftward shift in the demand cu

3. Profit per unit is equal to a. price. b. marginal cost. c. price minus average total cost. d. total revenue minus total cost. e. price minus marginal cost.

Answer: c. Profit is equal to the difference between total revenue and total cost: Profit = TR - TC. Profit per unit, or average profit, is calculated by dividing profit by the number of units of output that are produced and sold. Thus if we divide both sides of the profit equation by the quantity of output, we will have an expression for profit per unit: Profit per unit = average revenue - average total cost = (TR/Q) - (TC/Q). TC/Q is average total cost. To understand TR/Q, we can first recall that total revenue is equal to price multiplied by quantity: TR= (P)(Q). If we then divide TR by Q to get average revenue, we have TR/Q = PQ/Q = P. Average revenue, or revenue per unit, is just equal to the price. Thus profit per unit is equal to price minus average total cost.

12. The cross-price elasticity of demand for good C with respect to the price of good D is-0.2. On the basis of this information, which of the following is true? a. Good C and good D are both inferior goods. b. Good C and good D are substitutes. c. Good C and good D are complements. d. Good C and good D both have a supply curve that does not obey the Law of Supply. e. Without knowing whether C stands for "cashews" or "cummerbunds," it is impossibleto figure out the answer to this question.

Answer: c. The cross-price elasticity of demand for good C with respect to the price of good D is equal to the percentage change in quantity of good C, divided by the percentage change in the price of good D: eCD = %ΔQC / %ΔPD. When two goods are complements, an increase in the price of one good will lead to a decrease in demand (i.e., a leftward shift in the demand curve) for the other good. Thus for complements, if %ΔP is positive for one good, then %ΔQ will be negative for the other good, and if %ΔP is negative for one good, then %ΔQ will be positive for the other good. Therefore, if two goods are complements, and if we divide %ΔQ for one good by %ΔP for the other good, we will have a negative number. In this question, the cross-price elasticity is -0.2, which is indeed negative. Thus good C and D are complements. Choice (a) is incorrect. Choice (a) refers to the income elasticity of demand. The income elasticity and the cross-price elasticity are separate concepts. Information about the income elasticity does not necessarily imply anything in particular about the cross-price elasticity.

1. If the market demand curve is a downward-sloping straight line, what can we say about the marginal-revenue curve (MR)? a. The MR curve is a horizontal line, given by the current price. b. The MR curve is the same as the demand curve. c. The MR curve is also a straight line, and the slope of the MR curve is twice as large as the slope of the demand curve. d. The MR curve wobbles about in a bizarre way. e. Not enough information has been given to answer the question.

Answer: c. The demand curve is the average-revenue curve. For revenue, or cost, or anything else, if marginal is less than average, average will fall. Turning this around, we can say that for revenue, or cost, or anything else, if average is falling, marginal will be less than average. In this case, the average-revenue curve (i.e., the demand curve) is falling, and that means that the marginal-revenue curve must be below the demand curve. That relationship is true for any downward-sloping demand curve. However, in the case of a straight-line demand curve, the marginal-revenue curve will also be a straight line, and its slope will be twice as great as the slope of the demand curve. In class, we went over numerical examples for which the demand curve is a straightline, and the MR curve is indeed a straight line with a slope twice as large as the slope of the demand curve. To prove this, however, it is necessary to use calculus. As I said in class, calculus is not a prerequisite for this course, which means that students are not responsible for the details of the demonstration about the relationship between the slope of the demand curve and the slope of the marginal-revenue curve. However, everyone is responsible for the result, which is given in choice (c). For those of you who have had calculus, here is the demonstration: If a demand curve is a straight line, it can be described by an equation with only two parameters—the intercept and the slope. Thus a straight-line demand curve can be described by P = a - bQ, where a is the vertical intercept and the slope is -b. Total revenue is price multiplied by quantity: TR = (P)(Q). Thus if we multiply price (given by the demand curve) by quantity, we get total revenue: TR = (a - bQ)(Q) = aQ - bQ2. Sofar, we have not used any calculus. But now we use calculus to find marginal revenue, which is the derivative of total revenue with respect to quantity: MR = δTR/δQ = a - 2bQ. Thus the slope of the demand curve is -b, and the slope of marginal-revenue curve is -2b.

6. In Lower Slobbovia, the government imposes a price floor in the market for zbisznys. The price floor is above the equilibrium price of zbisnys, and the law is enforced. As a result, the quantity that is actually bought and sold will decrease. The decrease in the quantity bought and sold will be larger if a.the elasticity of supply is larger. b.the elasticity of supply is smaller. c.the elasticity of demand is larger. d.the elasticity of demand is smaller. e.zbisnys are an inferior good.

Answer: c. When a price floor is enforced at a level that is higher than the equilibrium price, the market will not be able to go to equilibrium. Instead, the market will be forced into disequilibrium. The quantity supplied will be greater than the equilibrium quantity, and the quantity demanded will be smaller than the equilibrium quantity. Thus, at the price floor, the quantity supplied will be greater than the quantity demanded, and we will have a surplus. However, the quantity that is actually bought and sold will be determined by the demand curve. (The difference between quantity supplied and quantity demanded involves surplus units that no one is willing to buy.) The decrease in the quantity bought and sold will be larger if the quantity demanded has a greater response to the increase in price. In other words, the decrease in the quantity bought and sold will be larger if the own-price elasticity of demand is larger.

12. Milk is an important input in the production of butter. There is a decrease in the price of milk. Asa result of the decrease in the price of milk, what will happen in the market for butter? a. Demand will increase (i.e., the demand curve will shift to the right). b. Demand will decrease (i.e., the demand curve will shift to the left). c. Supply will increase (i.e., the supply curve will shift to the right). d. Supply will decrease (i.e., the supply curve will shift to the left). e. Not enough information has been given to answer the question.

Answer: c. When the price of an input increases, the supply curve will shift to the left. When the price of an input decreases, the supply curve will shift to the right.

Titanium is an input in the production of dental implants. There is a decrease in the price of titanium. As a result, what will happen to the equilibrium price and equilibrium quantity of dental implants? a. Price will increase; quantity will increase. b. Price will increase; quantity will decrease. c. Price will decrease; quantity will increase. d. Price will decrease; quantity will decrease. e. Most people just can't relate to this question.

Answer: c. A decrease in the price of an input will lead to an increase in supply (i.e., the supply curve will shift to the right). As long as the demand curve obeys the Law of Demand, a rightward shift in the supply curve will lead to a decrease in the equilibrium price, and an increase in the equilibrium quantity.

10. As a result of a hurricane, several refineries are damaged, and are temporarily unable to produce gasoline. Thus it could be said that the technology of producing gasoline has deteriorated. This could be characterized as a. a leftward shift in the demand curve for gasoline. b. a rightward shift in the demand curve for gasoline. c. a leftward shift in the supply curve for gasoline. d. a rightward shift in the supply curve for gasoline. e. Neither a shift in the demand curve nor a shift in the supply curve.

Answer: c. An improvement in technology leads to a rightward shift in the supply curve. A deterioration of technology leads to a leftward shift in the supply curve.

2.The demand curve for soccer balls shifts to the left (i.e., there is a decrease in the demand for soccer balls). As a result, what will happen to the equilibrium price and equilibrium quantity of soccer balls? a.Price will increase; quantity will increase. b.Price will increase; quantity will decrease. c.Price will decrease; quantity will increase. d.Price will decrease; quantity will decrease. e.The answer is beyond human comprehension.

Answer: d. A leftward shift in the demand curve means that, at any given price, buyers are willing and able to buy a smaller quantity than they were previously willing and able to buy. If the supply curve obeys the Law of Supply, then a leftward shift in the demand curve will cause the market to move downward and to the left along the existing supply curve. The result will be a new equilibrium, with a lower equilibrium price and lower equilibrium quantity.

4. The short-run supply curve of a perfectly competitive firm is given by a. the average-total-cost curve. b. the marginal-cost curve. c. the marginal-cost curve if price is equal to or greater than average total cost; for prices less than average total cost, quantity supplied is zero. d. the marginal-cost curve if price is equal to or greater than average variable cost; for prices less than average variable cost, quantity supplied is zero. e. the marginal-cost curve if price is equal to or greater than average fixed cost; for price less than average fixed cost, quantity supplied is zero.

Answer: d. Any firm, regardless of market structure, will maximize profit by producing and selling the quantity at which marginal revenue is equal to marginal cost. In the special case of a perfectly competitive firm, marginal revenue is equal to price. (This is not true for firms in market structures other than perfect competition.) Thus in the special case of a perfectly competitive firm, profit is maximized by producing and selling the quantity at which price is equal to marginal cost. At any price, we can find the quantity supplied by going to the marginal-cost curve, as long as the firm is in business at all. However, if prices are low enough, thefirm will be forced to go out of business, and its quantity supplied will be zero. In the short run, the firm will shut down if price is less than average variable cost.

6. The demand curve for gwickdoops is given by P = 20 - Qd. Another way to write exactly the same demand curve for gwickdoops is Qd = 20 - P. Because of a leftward shift in the supply curve for gwickdoops, the price of a gwickdoop increases from $10 to $16. As a result of this increase in price, what happens to the consumer surplus of consumers of gwickdoops? (Hint: To solve this problem, you may find it useful to draw a diagram with a straight-line demand curve, and draw a price line at $10 and another price line at $16, and then calculate the areas of some triangles.) a. Consumer surplus does not change. b. Consumer surplus decreases by $4. c. Consumer surplus decreases by $16. d. Consumer surplus decreases by $42. e. Consumer surplus decreases by $100.

Answer: d. At first P=$10. If we insert this into the demand equation, Qd = 20 - P, we find that quantity demanded is Qd = 20 - 10 = 10. Consumer surplus is the area of the triangle that is below the demand curve but above the price line. The base of this triangle is the quantity, which is 10 gwickdoops. The height of the triangle is the difference between the vertical intercept of the demand curve and the price of $10. The vertical intercept of the demand curve is $20. Thus the height of the triangle is $(20 - 10) = $10. Next, we need to calculate the area of this triangle, with height of $10 per gwickdoop and base of 10 gwickdoops. The formula for the area of a triangle is 1/2 bh, where b = base and h = height. Thus the area of the triangle is ½ (10)($10) = ½ ($100) = $50. Now, the price increases from $10 to $16. If we insert this into the demand equation, we find that the new quantity demanded is Qd = 20 - 16 = 4. This is the base of the new consumer-surplus triangle. Theheight of the new triangle is the difference between the vertical intercept of the demand curve (which is still $20) and the new price of $16. This difference is $4. Thus the new consumer surplus, after the price increase, is ½ (4)($4) = 1/2 ($16) = $8. To find the change in consumer surplus, we subtract the new consumer surplus from the old consumer surplus: $50 - $8 = $42.3

8.Which of the following will lead to a decrease in the demand for print cartridges (i.e., a leftward shift in the demand curve for print cartridges)? a. An increase in the price of printers, which are a complement for print cartridges. b. A decrease in the incomes of buyers of print cartridges, assuming that print cartridges are a normal good. c. A change in beliefs about the future price of print cartridges, so that buyers of print cartridges come to believe that the price will be much lower in the future. d. All of the above. e. (a) and (c) only.

Answer: d. Choice (a) is correct. An increase in the price of a complement good will lead to a decrease in demand for the other good. Choice (b) is also correct. If a good is normal, a decrease in income will lead to a decrease in demand. Choice (c) is also correct. If buyers come to believe the price will be lower in the future, their current demand will decrease

10. Which of the following is true for BOTH the own-price elasticity of demand and the elasticity of supply? a. If the demand curve or supply curve is vertical, we say that demand or supply is perfectly inelastic. b. If the demand curve or supply curve is horizontal, we say that demand or supply is perfectly elastic. c. Both demand and supply are likely to have a larger elasticity, if there is more time for people to adjust to a change in price. d. All of the above. e. (a) and (c) only.

Answer: d. Choices (a), (b), and (c) are all correct. In the case of choice (a), with a vertical curve, demand or supply is perfectly inelastic, and the demand or supply elasticity is zero. For choice (b), demand or supply is perfectly elastic, and the limit of the elasticity as the curve becomes horizontal is infinity. Choice (c) is also correct—often, it is costly to make large changes in behavior over a very short time period. However, when economic agents are given a longer period of time over which to adjust their behavior, they can make larger changes.

8. Assume that pink slime is an inferior good. There is an increase in the incomes of potential buyersof pink slime. As a result, what will happen to the equilibrium price and equilibrium quantity of pink slime? a. Price will increase; quantity will increase. b. Price will increase; quantity will decrease. c. Price will decrease; quantity will increase. d. Price will decrease; quantity will decrease. e. Not enough information has been given to answer the question.

Answer: d. For an inferior good, an increase in incomes will lead to a decrease in demand (i.e., the demand curve will shift to the left). As long as the supply curve obeys the Law of Supply, a decrease in demand will lead to a decrease in the equilibrium price, and a decrease in the equilibrium quantity.

13.Average total cost is equal to a.total cost divided by the quantity of output. b.average fixed cost plus average variable cost. c.marginal cost. d.marginal cost divided by the quantity of output. e.(a) and (b).

Answer: e. As we have seen in the previous question, ATC = TC/Q. Thus choice (a) is correct. Also, TC = TFC+ TVC, and if we divide both sides of this equation by Q, the equation will still hold. This gives us TC/Q = TFC/Q + TVC/Q, which means ATC = AFC + AVC. Thus choice (b) is also correct. However, choice (c) is notcorrect. Average total cost is equal to marginal cost at the quantity at which average total cost is minimized. However, at other quantities, average total cost may be either greater than marginal cost or less than marginal cost. Choice (d) is meaningless.

13. XYZ Corporation is a monopoly. If XYZ sells one more unit of output, its total revenue will decrease. This implies that a. the firm's marginal revenue is negative. b. the firm cannot be maximizing profit; to increase profit, the firm should sell a smaller quantity at a higher price. c. the firm is facing inelastic demand. d. all of the above are true. e. (a) and (c) only are true.

Answer: d. In the answer to question #9, above, we saw that when a monopoly is maximizing profit, it is in the elastic region of its demand curve, in which marginal revenue is positive. If marginal revenue is positive, total revenue will increase when the firm sells one more unit of output. In this question, however, total revenue decreases when the firm sells one more unit of output. Thus, applying the same logic as in question #9, marginal revenue is negative and the firm is in the inelastic region, so that choices (a) and (c) are correct. Since the monopoly maximizes profit by producing and selling in the elastic region, it must be that the firm is notmaximizing profit when it finds itself in the inelastic region. In the inelastic region, if the firm reduces output, its total costs will go down and its total revenues will go up. Thus if a monopoly were to find itself in the inelastic region, it could increase profit by reducing quantity and increasing price

2. This table includes Jason's total utility from tacos gigantes: Quantity Total Utility 0$ 01$ 52 $93 $124 $14 What is the marginal utility of the second taco gigante (i.e., the marginal utility of going from Q=1 to Q=2)? a. $1 b. $2 c. $3 d. $4 e. $5

Answer: d. Marginal utility is the extra amount that the consumer is willing to pay for one extra unit. In other words, marginal utility is the change in total utility associated with increasing quantity by one unit. In this question, as quantity increases from 1 to 2, total utility increases from $5 to $9. Thus the marginal utility of the second taco gigante is $(9 - 5) = $4.1

3. This table includes Jason's total utility from tacos gigantes:QuantityTotal Utility 0$ 01$ 52$ 93$124$14The price of a taco gigante is $3. How many tacos gigantes should Jason buy? a. zero b.1 c.2 d.3 e.4

Answer: d. The consumer's optimal purchase rule is to buy and consume the quantity at which marginal utility is equal to price. If the price of a taco gigante is $3, then the optimal choice is to buy and consume the number of tacos gigantes, such that the marginal utility of the last one is $3. As we have seen, marginal utility is the change in total utility associated with increasing quantity by one unit. In this case, when quantity increases from 2 to 3, total utility increases from $9 to $12. Thus the marginal utility of the third taco gigante is $(12-9) =$3, so that Q = 3 is the optimal quantity, at which marginal utility is equal to price.

10. 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 increase price and leave quantity of output unchanged. b. Malfoy will increase price and increase quantity of output. c. Malfoy will increase price and reduce quantity of output. d. Malfoy will reduce price and increase quantity of output. e. Malfoy will reduce price and decrease quantity of output.

Answer: d. The firm maximizes 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 intersection of the MR curveand the MC curve will be at a smaller value of MR and MC. Since the MR curve slopes downward as we movefrom left to right across the diagram, a smaller value of MR is associated with a larger value of quantity. Thus the firm will increase output. And, since the demand curve slopes downward as we move from left to right, an increase in output is associated with a decrease in price.

The price of Belgian endive increases by 10%. As a result of the increase in price, what will happen to quantity demanded? a. Quantity demanded will fall by 1.5%. b. Quantity demanded will fall by 6.666%. c. Quantity demanded will fall by 10%. d. Quantity demanded will fall by 15%. e. Quantity demanded will remain unchanged.

Answer: d. The own-price elasticity of demand is equal to the percentage change in quantity demanded, divided by the percentage change in price: e = %ΔQd /%ΔP. In this problem, we havee = 1.5, and %ΔP=10. If we substitute these facts into the elasticity equation, we have 1.5 = %ΔQd / 10%. If we then multiply each side of the equation by 10%, we have (1.5)(10%) = %ΔQd. Thus the percentage change in quantity demanded is (1.5)(10%) = 15%.1

15. For a monopoly for which the demand curve is a downward-sloping straight line, the total revenue curve is a.an upward-sloping straight line. b.a horizontal line. c.a vertical line. d. a line that increases, eventually reaches a maximum, and then decreases. e. a spiral line that will make you dizzy if you stare at it for too long.

Answer: d. We have seen that, as we move from left to right on a demand curve that is a downward-sloping straight line, we move from the elastic region (in which marginal revenue is positive) to the unit-elastic region (in which marginal revenue is zero) to the inelastic region (in which marginal revenue is negative). Since marginal revenue is the slope of the total-revenue curve, a movement from positive MR to zero MR to negative MR is the same as a movement from upward-sloping TR to maximum TR to downward-sloping TR.

13. The price of good A decreases. As a result, the demand for good B increases (i.e., the demand curve for good B shifts to the right). On the basis of this information, what can we say about good A and good B? a. Good A is an input in the production of good B. b. Good A is a normal good, and good B is an inferior good. c. Good A is an inferior good, and good B is a normal good. d. Good A and good B are complements.e.Good A and good B are substitutes.

Answer: d. When the price of a complement good increases, the demand for its complement will fall. When the price of a complement good goes down, the demand for its complement will increase.

12.For Company X, total fixed cost is $20. When Q=0, total variable cost (TVC) is $zero. When Q=1, TVC=$4. When Q=2, TVC=$10. When Q=3, TVC=$19. When the quantity of output is 3 units, what is average total cost? a.Zero b.Infinity c.$8 d.$15 e.$13

Answer: e. Average total cost, or total cost per unit, is calculated by dividing total cost by the quantity of output:ATC = TC/Q. In turn, total cost is the sum of total fixed cost and total variable cost: TC = TFC + TVC. Thus the first step in answering this question is to calculate TC when Q=3. Total fixed cost is always $20, and total 5 variable cost is $19 when Q=3. Thus when Q=3, TC = $20 + $19 = $39. When we divide this value by the quantity of 3, we get ATC = $39/3 = $13.

8. Lee Company is a perfectly competitive firm. The market price of its output is $10. The firm is currently producing 100 units of output. At this level of output, the firm's average total cost is $12 per unit, its average variable cost is $9 per unit, and its marginal cost is $10 per unit. On the basis of this information, what can we say? a. Lee Company is maximizing its profit, and should stay in business. b. Lee Company is not maximizing profit; it can increase profit by increasing output. c. Lee Company is not maximizing profit; it can increase profit by decreasing output. d. Lee Company is suffering a loss, but it should stay in business in the short run. e. Lee Company should go out of business in the short run.

Answer: d. Any firm (regardless of market structure) will maximize profit by producing and selling the quantity at which marginal revenue is equal to marginal cost. In the special case of a perfectly competitive firm, marginal revenue is equal to price. (This is not true for firms in market structures other than perfect competition.) Thus in the special case of a perfectly competitive firm, profit is maximized by producing and selling the quantity at which price is equal to marginal cost. This firm's price of $10 is equal to its marginal cost, which is also $10. Thus if the firm is to be in business at all, it is at its profit-maximizing level of output. Profit per unit is equal to price minus average total cost. Since this is a perfectly competitive firm, it takes the market price as given; thus the firm's price is $10 per unit. At its current level of output, this firm's average total cost is $12 per unit. Thus the firm is suffering an economic loss of $(10 - 12) = $2 per unit. This will leadthe firm to consider whether it should shut down in the short run. The short-run shut-down decision turns on whether the firm can cover its variable costs: If price is less than average variable cost, the firm should shut down, but if price is equal to or greater than average variable cost, the firm should stay in business (at least in the short run). In this case, price is $10 and average variable cost is $9. Thus the firm should stay in business inthe short run.

16. There is a leftward shift in the demand curve for edible fruit arrangements (i.e., there is a decreasein demand for edible fruit arrangements). At the same time, there is a leftward shift in the supply curve for edible fruit arrangements (i.e., there is a decrease in the supply of edible fruit arrangements). As a result, what will happen to the equilibrium price and equilibrium quantity ofedible fruit arrangements? a. Price will decrease; quantity will decrease. b. Price will increase; quantity will decrease. c. Price will decrease; quantity could increase, decrease, or stay the same, so that we cannot determine the direction of change in quantity without more precise information. d. Price could increase, decrease, or stay the same, so that we cannot determine the direction of change in price without more precise information;quantity will decrease. e. Price could increase, decrease, or stay the same, so that we cannot determine the direction of change in price without more precise information; quantity will increase.

Answer: d. By itself, the leftward shift in the demand curve will lead to a decrease in both the equilibrium price and the equilibrium quantity. By itself, the leftward shift in the supply curve will lead to an increase in equilibrium price, but a decrease in equilibrium quantity. Thus both of the shifts will push the equilibrium quantity downward, which means that the net effect will definitely include a decrease in the equilibrium quantity. However, the two shifts push the equilibrium price in opposite directions. The net effect on the equilibrium price will depend on the relative sizes of the two shifts, as well as on the shapes of the demand and supply curve

6. The demand curve facing Colossal Corporation is a downward-sloping straight line. On the basis of this information, we can say that a. the firm is not a perfectly competitive firm. b. the MR curve is also downward sloping, and it is twice as steep as the demand curve. c. Colossal Corporation will charge a price that is greater than marginal cost. d. all of the above are true. e. (a) and (b) only.

Answer: d. Choice (a) is correct. The demand curve facing a perfectly competitive firm is a horizontal line, not a downward-sloping one. Choice (b) is also correct. As discussed above in regard to question #1, when the demand curve is a downward-sloping straight line, the slope of the marginal-revenue curve is twice the slope of the demand curve. Choice (c) is also correct. A perfectly competitive firm (with a horizontal demand curve andmarginal-revenue curve) will charge a price that is equal to marginal cost. However, when a firm faces a downward-sloping demand curve, it is able to charge a price that is greater than marginal cost.

5. Consumer surplus is a. the difference between the maximum amount that consumers are willing to pay and the total amount that they actually pay. b. the difference between total utility and total expenditure. c. represented graphically by the area under the demand curve, but above the price line. d. all of the above.e.none of the above.

Answer: d. Consumer surplus is the difference between total utility and total expenditure. The total amount thatthe consumer is willing to pay is total utility, and the total amount that the consumer actually has to pay is total expenditure. Thus (a) and (b) are just different ways of saying the same thing, and both are correct. Choice (c) is also correct. The maximum amount that consumers are willing to pay (i.e., total utility) is represented graphically by the area under the demand curve. The amount that consumers actually pay (i.e., total expenditure) is represented graphically by the area under the price line. Thus if consumer surplus is the difference between total utility and total expenditure, it will be represented graphically by the area between the demand curve and the price line.

13. Economic cost is _________ accounting cost, and economic profit is ________ accounting profit. a. less than, greater than. b. less than, less than. c. greater than, greater than. d. greater than, less than. e. all of the above!!!!

Answer: d. Economic cost includes accounting cost, but economic cost also includes the opportunity cost of being in business. Economic profit is equal to total revenue minus economic cost, while accounting profit is equal to total revenue minus accounting cost. Thus economic profit is less than accounting

4. The consumer's optimal purchase rule is to buy and consume the quantity at which a. the difference between total utility and total expenditure is maximized. b. marginal utility is equal to price. c. consumer surplus is maximized. d. all of the above. e. (a) and (c) only.

Answer: d. The consumer's goal is to do as well as possible. This involves choosing to buy and consume the quantity that maximizes the difference between (i) the total amount that the consumer is willing to pay, and (ii) the total amount that the consumer actually has to pay. The total amount that the consumer is willing to pay is total utility, and the total amount that the consumer actually has to pay is total expenditure; thus choice (a) is correct. Consumer surplus is the difference between total utility and total expenditure. Thus choice (c) is also correct, since (c) is just a restatement of (a). Choice (b) is also correct. Marginal utility is the change in total utility associated with increasing quantity by one unit. Price is the change in total expenditure associated with increasing quantity by one unit. If we are to maximize the difference between total utility and total expenditure,we do so by choosing the quantity at which the change in total utility is equal to the change in total expenditure.2

1. The price of Good X decreases from $1.10 per unit to $0.90 per unit. As a result, thequantity demanded increases from 800 units per week to 1200 units per week. Whatis the own-price elasticity of demand for Good X? a. Zero b. 0.5 c. 1.0 d. 2.0 e. 2.75

Answer: d. The own-price elasticity of demand is the proportional change in quantity demanded, divided by the proportional change in price: e = (ΔQd/Qd) / (ΔP/P). Quantity demanded increasesfrom 800 to 1200. Thus the change in quantity demanded, ΔQd, is (1200 - 800) = 400. To get the proportional change in quantity demanded, we have to divide ΔQd by the reference level of Qd. Our rule is to use the average of the beginning and ending values as the reference level. Thus Qd is the average of 1200 and 800, which is 1000. If we then divide ΔQd by Qd, we have 400/1000 = 0.4. Price decreases from $1.10 to $0.90. This is actually a negative change, but ourrule is to use absolute value. Thus the change in price, ΔP, is $(1.10 - 0.90) = $0.20. For price, as for quantity demanded, we use the average of the beginning value and the ending value as the reference level. Thus P is the average of $1.10 and $0.90, which is $1.00. If we then divide ΔP by P, we have $0.20/$1.00 = 0.2. Now we are ready to find the elasticity, by dividing the proportional change in quantity demanded by the proportional change in price: 0.4/0.2 = 2.0.2.The own-price elasticity of demand for Belgian endive is 1.5.

8. The deadweight loss of monopoly is a. the difference between (i) the consumers' loss when going from perfect competition to monopoly, and (ii) the producers' gain when going from perfect competition to monopoly. b. represented graphically by the area of a triangle. c. A dollar measure of society's loss from having an industry organized as a monopoly, instead of under competition. d.all of the above. e.(a) and (b) only.

Answer: d.Choice (c) is a definition of deadweight loss. Choice (a) tells us more about how the deadweight loss is measured. Choice (b) is also correct: The consumers' loss from monopoly is measured by the loss of consumer surplus, which is represented graphically by the area of a trapezoid. The producers' gain from monopoly is the monopoly profit, which is represented graphically by the area of a rectangle. When we subtractthe rectangle from the trapezoid, we get the graphical representation of the deadweight loss, which is the area ofa triangle.

9. Which of the following would be expected to shift the supply curve for hand sanitizer to the right? a. A decrease in the prices of inputs used in production of hand sanitizer. b. An increase in the price of hand sanitizer. c. Discovery of a new technology that makes it possible to produce more hand sanitizer without using more inputs. d. All of the above. e. (a) and (c) only. .

Answer: e. Choice (a) is "A decrease in the prices of inputs used in production of hand sanitizer." This will indeed lead to a rightward shift in the supply curve. Choice (c) is "Discovery of a new technology that makes it possible to produce more hand sanitizer without using more inputs." This will also lead to a rightward shift in the supply curve. However, choice (b) is "An increase in the price of hand sanitizer." This will not shift the supply curve. Instead, if the price increases, we move upward and to the right along the existing supply curve, but we do not shift to a different curve.

12. Which of the following is a difference between a monopoly and a perfectly competitive firm? a. The demand curve for the output of a perfectly competitive firm is perfectly elastic, whereas the demand curve for the output of a monopolist is downward sloping. b. For the perfectly competitive firm, marginal revenue is equal to price, whereas for the monopoly firm, marginal revenue is less than price. c. A perfectly competitive firm will charge a price equal to marginal cost, whereas a monopoly will charge a price that is greater than marginal cost. d. A perfectly competitive firm will not be able to earn positive economic profits for a long time, because new firms will enter, whereas a monopoly is protected by barriers to entry, and thus may beable to have positive economic profits for a long time. e. All of the above.

Answer: e. Choice (a) is correct: The perfectly competitive firm takes the market price as given. Thus, when wegraph the relationship between price and quantity demanded for the individual perfectly competitive firm, the resulting demand curve is a horizontal line. In other words, the demand curve for the output of the individual perfectly competitive firm is perfectly elastic. However, the demand for the monopolist's output is the same as the market demand curve, which slopes downward as we move from left to right across the diagram. Choice (b)is also correct: The demand curve is a price curve, and it is the same as the average-revenue curve. Because of the relationships between marginal things and average things, when the average-revenue curve is a horizontal line, the marginal-revenue-curve is the same as the average-revenue curve. However, when the average-revenue curve (the price curve) is downward sloping, the marginal-revenue curve will be below the average-revenue curve (the price curve). Choice (c) is also correct, and it follows from (b). Any firm will maximize profit by producing and selling the quantity at which marginal revenue is equal to marginal cost. For the perfectly competitive firm, MR = P, so profit maximization involves P = MC. For the monopolist, MR<P, so profit maximization involves P>MC. Choice (d) is correct; it is one of the characteristics of monopoly.

7. For good A, the demand curve is given by Qd = 40 - P. The supply curve is given by Qs = P. When the market is at equilibrium, what is the value of consumer surplus? (Hint: To solvethis problem, you will need to calculate the area of a triangle.) a. $10 b. $20 c. $50 d. $100 e. $200

Answer: e. To answer this question, it is first necessary to find the equilibrium price and quantity. At the equilibrium Qs = Qd. To find the equilibrium, we substitute the demand equation and supply equation into the equilibrium equation: 40 - P = P. Adding P to both sides of the equation gives us 40 = 2P. Dividing both sides of the equation by 2, we have (40/2) = 2P/2. Thus P = $20 per unit. If we then substitute the price of $20 per unit into the demand equation, we have Qd = 40 - 20 = 20 units. If we substitute the price into the supply equation, we get Qs = 20, which confirms that we are indeed at equilibrium. At this equilibrium, the consumer surplus is the area of the triangle under the demand curve but above the price line. The base of this triangle is the quantity, which is 20 units of good A. The height of the triangle is the difference between the vertical intercept of the demand curve and the price of $20 per unit. The vertical intercept of the demand curve is $40. Thus the height of the triangle is $(40 - 20) = $20. Next, we need to calculate the area of this triangle, with height of $10 per unit and base of 10 units. The formula for the area of a triangle is 1/2 bh, where b = base and h = height. Thus the area of the triangle is ½ (20)($20) = ½ ($400) = $200.

10. The demand curve for the output of an individual perfectly competitive firm is a. perfectly inelastic. b. inelastic, but not perfectly inelastic. c. unit elastic. d. elastic, but not perfectly elastic. e. perfectly elastic.

Answer: e. A perfectly competitive firm is a price taker; the firm takes the market price as given. In other words, the firm can sell any quantity it wants to sell, as long as it sells at the market price. This means that the demand curve for the individual perfectly competitive firm is a horizontal line, so that the demand for the firm'soutput is perfectly elastic.

In Lower Slobbovia, the price of a zizwomp is $10. But then the government of Lower Slobbovia issues a law saying that it is illegal to buy or sell zizwomps for more than $5. The government of Lower Slobbovia is well known for its brutality, and it is generally believed that anyone caught violating the law will be shot. As a result of this price control, what will happen in the market for zizwomps in Lower Slobbovia? a. Buyers will move down and to the right along their existing demand curves. b. Sellers will move down and to the left along their existing supply curves. c. The demand curve will shift to the right.d.The demand curve will shift to the left. e.(a) and (b).

Answer: e. Choice (a) is "Buyers will move down and to the right along their existing demand curves. Choice (b) is "Sellers will move down and to the left along their existing supply curves." Both of these are correct. Demand curves and supply curves are constructed by allowing the current price of the good to vary, while holding constant all other potential influences on buyers or sellers. This question refers to a change in the price. It does not refer to a change in any of the variables thatare held constant when we construct the curves. Thus this question does not refer to anything that would lead to a shift in one of the curves

11. Average revenue, or revenue per unit, is equal to a. total revenue divided by the number of units of output. b. price. c. profit. d. all of the above. e. (a) and (b) only.

Answer: e. Choice (a) is correct by definition. Just as average total cost is total cost divided by the number of units of output, and average variable cost is total variable cost divided by the number of units of output, so average revenue is total revenue divided by the number of units of output. Choice (b) is also correct: Since average revenue is total revenue divided by the number of units of output, we have AR = TR/Q. But total revenue is equal to price multiplied by quantity: TR = (P)(Q). Thus AR = (P)(Q)/Q. With Q in both the numerator and the denominator, the Q's cancel each other out, and we have AR = P. Average revenue is equal to price.

2. Perfectly competitive firms are "price takers." In other words, perfectly competitive firms take the market price as given. Which of these characteristics of perfect competition is necessary for firms to be price takers? a. There are many firms, each of which is small relative to the market. b. The firms produce output that is homogeneous, or standardized, or undifferentiated. c. There is free entry into the industry and free exit from the industry. d. All of the above are necessary for firms to be price takers. e. (a) and (b) only are necessary for firms to be price takers.

Answer: e. Choice (a) is necessary for price-taking behavior. If firms are large relative to the market, their size will give them the ability to manipulate the price to their advantage. (The extreme case is the monopoly, which controls 100% of the market.) Choice (b) is also necessary for price-taking behavior. Earlier in the course, we saw that when two goods are close substitutes, their prices will always be fairly similar. If all of the firms in an industry produce the same homogeneous output, then their outputs are perfect substitutes for each other. In this situation, they will all have to take the same price as given. If one firm were to try to sell its product for a higher price than the other firms, the firm with the higher price would lose all of its customers. However, if a firm produces a product that is somewhat different from the outputs of the other firms in the market, the firm will not be a price taker. A firm that produces a differentiated product will have some market power, because itsoutput is not a perfect substitute for the outputs of the other firms. Thus a producer of a differentiated product could raise its price somewhat, without losing all of its customers. This means that a firm that produces a differentiated product will face a demand curve for its product that is downward sloping. Choice (c) is not correct. Free entry and exit is indeed a characteristic of a perfectly competitive industry, but it does not play a role in causing the firms to be price takers. Instead, free entry and exit are the reason why a perfectly competitive industry will tend toward zero economic profit

8. A business firm's marginal cost is a. the additional cost that the firm must incur to produce one additional unit of output. b. the increase in total variable cost associated with producing one additional unit of output. c. average variable cost. d. all of the above. e. (a) and (b) only.

Answer: e. Choices (a) and (b) fit with the definition of marginal cost. However, choice (c) is incorrect. AVC isequal to MC at the quantity at which AVC is minimized. However, for the AVC curve with the usual U shape, atother quantities, AVC may be greater than or less than MC.

7. The short-run supply curve for a monopoly firm is a. the marginal-cost curve. b. the average-variable-cost curve. c. the marginal-cost curve for prices equal to or greater than average total cost. If price is less than average total cost, the quantity supplied is zero. d. the marginal-cost curve for prices equal to or greater than average variable cost. If price is less than average variable cost, the quantity supplied is zero. e. none of the above. The monopoly firm does not have a unique, well-defined supply curve.

Answer: e. For a perfectly competitive firm, we are able to derive a supply curve. For any price, this supply curve tells us exactly what the quantity supplied will be. (In fact, the supply curve for the perfectly competitive firm is given by choice (d).) However, the monopoly firm does not necessarily have a unique relationship between price and quantity supplied.

16. Marginal cost is a. the change in total cost from producing one additional unit of output. b. the change in total variable cost from producing one additional unit of output. c. the change in total fixed cost from producing one additional unit of output. d. all of the above. e. (a) and (b) only.

Answer: e. Marginal cost is the additional cost associated with producing one additional unit of output. Thus marginal cost is the change in total cost from one additional unit: MC = ΔTC/ΔQ. Thus choice (a) is correct. However, remember that total cost is equal to the sum of total fixed cost and total variable cost: TC = TFC + TVC. It follows that any change in TC has to be accounted for by changes in TFC or TVC: ΔTC = ΔTFC + ΔTVC. But by definition, TFC does not change, i.e, ΔTFC = 0. Therefore the change in total cost is identical to the change in total variable cost. Thus MC = ΔTVC/ΔQ, which means that choice (b) is also correct. However, choice (c) is not correct. By definition, total fixed cost does not change when output chan

3. Humongous Corporation is a monopoly. At a quantity of 1 million units, its total-revenue curve is at its maximum. What else will be true at this quantity? a. Marginal revenue is equal to zero. b. Marginal revenue is equal to average revenue. c. Demand is unit elastic. d. Demand is elastic. e. (a) and (c) are both correct.

Answer: e. Marginal revenue is the change in total revenue from selling one additional unit of output. If total revenue is at its maximum, the additional revenue from selling one additional unit of output is zero. Thus choice (a) is correct. Since the monopolist faces a downward-sloping demand curve, an increase in quantity demanded is associated with a decrease in price. By itself, the increase in quantity demanded would increase total revenue. However, by itself, the decrease in price would decrease total revenue. The net effect on total revenue depends on the own-price elasticity of demand. If demand is unit elastic, the percentage change in quantity demanded is exactly the same as the percentage change in price. Thus the two effects offset each other,and total revenue is unchanged. Therefore, when demand is unit elastic, total revenue is unchanged, and this means that choice (c) is also correct. However, choice (b) is not correct. For a monopoly, marginal revenue is less than average revenue.

14. Waytoobig Corporation is a monopolist. If it charges a price of $7, the firm is able to sell 3 units of output. If the firm wants to sell a fourth unit of output, it must decrease the price to $6. What is the marginal revenue of the fourth unit of output? a. $7 b. $6 c. $5 d. $4 e. $3

Answer: e. Marginal revenue is the extra revenue that a firm receives, when it sells one extra unit of output. When this firm sells 3 units of output, its total revenue is ($7 per unit)(3 units) = $21. When the firm sells 4 units of output, its total revenue is ($6 per unit)(4 units) = $24. Thus the marginal revenue of the fourth unit is $(24 - 21) = $3.

15. In class and in the textbook, you have seen average-total-cost and average-variable-cost curves that are "U-shaped" (i.e., the curves slope downward, reach a minimum, and then slope upward). Each of these curves reaches its minimum point at the quantity at which a. it is intersected by the average-fixed-cost curve. b.it is intersected by the total-fixed-cost curve. c.it is intersected by the total-variable-cost curve. d.it is intersected by the total-cost curve. e.it is intersected by the marginal-cost curve.

Answer: e. When MC is greater than ATC, ATC will increase. Similarly, when MC is greater than AVC, AVC will increase. When MC is less than ATC, ATC will decrease. Similarly, when MC is less than AVC, AVC will decrease. When MC is equal to ATC, ATC will not change. This means that ATC must be either at a minimum or a maximum. In the context of a "U-shaped" ATC curve, we are at a minimum. Similarly, when MC is equal to AVC, AVC will not change. This means that AVC must be either at a minimum or a maximum. In the context of a "U-shaped" AVC curve, we are at a minimum.