Econ 101 ? Principles of Microeconomics Review Questions for the Final Exam Professor Korinna K. Hansen 1) The _____ broadly a market is defined; the more difficult it becomes to find _________. a) less/goods that are independent. b) less/ substitutes. c) more/substitutes. d) more/complements. 2) Which of the following is LEAST likely to be considered a firm in an imperfectly competitive industry: a) Madison Gas and Electric. b) A corn farm in Fitchburg Wisconsin. c) The Noodles restaurant on University Avenue. d) The only locally owned and operating bank in Cooper Wisconsin. 3) An important distinction between perfect competition and monopoly is that a) in perfect competition, the market demand faces the firm. b) in monopoly the firm produces less than the total quantity supplied. c) in perfect competition there is no distinction between the firm and the industry. d) in monopoly the market demand faces the firm. 4) Market power refers to a firm?s ability to a) charge any price it wants. b) raise price without losing all demand for its product c) monopolize a market completely. d) sell any quantity of output it desires at the market-determined price 5) Health Economics research has shown that the price of most brand name drugs tends to increase after the patent expires and generic drugs flood the market. So, although there is a lot more competition after the introduction of all the generic drugs (same chemical entity, not original manufacturer) the price of the brand name drug tends to increase and not decrease. This must be occurring because: a) all customers still want to buy the brand name drug and are too scared of all the generics. b) the brand name company acts like a price leader and sets up an even higher price than before the expiration of the patent law. c) the brand name company is left with fewer, loyal consumers who have a more inelastic demand for the brand name product and are willing to pay the higher price. d) that?s the only thing the brand name company can still do to maintain market power. 6) A candle maker raises the price of candles by 5% and the quantity demanded of candles falls by about 3%. This firm has a) a monopoly power in the output market b) some output power c) some market power d) is not able to able the prevent the rival firms from competing with it on price. 7) A coffee producer raises the price of its coffee by 10%, and the quantity demanded of its coffee falls by 8%. This firm a) is not able to prevent other firms from competing in price b) has a lot of output power c) is acting like a perfectly competitive firm d) has some market power 8) For a monopolist to sell one more unit, it must __________. a) lower the price of the last as well as all previous units produced. b) lower the price of only the last unit produced. c) raise the price of the last as well as all previous units produced. d) raise the price of only the last unit produced. 9) A monopolist maximizes total revenue when its marginal revenue is ________. a) zero b) equal to marginal cost c) equal to price d) positive 10) A monopolist?s price equals his marginal revenue only when a) total revenue is maximized b) marginal revenue is marginal cost c) output is zero d) the monopolist?s demand schedule intersects the horizontal (quantity) axis. 11) For the monopolist, if total revenue increases as output decreases, then the marginal revenue is _____________. a) equal to price. b) negative. c) positive. d) zero. 12) A monopolist will not produce a) if marginal revenue is declining b) if price is less than average total cost but greater than the average variable cost c) in the inelastic portion of its demand curve, where marginal revenue is negative. d) if price is greater than the average total cost. 13) If a monopolist?s marginal profit is negative, then it must be that a) MR >AR b) MR >MC c) MR = MC d) MR < MC 14) A monopolist is currently maximizing profits and also experiences P > AC > MC. Then this monopolist _________________. a) just breaks even. b) is covering total variable costs but not total fixed costs. c) is covering total fixed costs but not total variable costs. d) earns positive economic profits. 15) When a monopolist earns positive economic profits, _______________. a) entry barriers to entry prevent new firm entry. b) the monopolist expands production. c) new firms enter the market and increase pressure to lower market price. d) the industry supply curve shifts to the right. 16) The monopolist?s supply curve is a) the portion of the monopolist?s marginal cost curve that lies above the average variable cost curve. b) the portion of the monopolist?s marginal cost curve that lies above the average total cost curve. c) dependent on the monopolist?s demand curve. d) independent of the monopolist?s demand curve. 17) When the demand is a downward sloping straight line, the slope of the marginal revenue curve is ______________. a) always equal to one. b) the same as the slope of the demand curve c) half as steep as the demand curve d) twice as steep as the demand curve 18) A monopolist who experiences a loss will a) produce as long as total revenue is sufficient to cover fixed costs. b) produce as long as total revenue is sufficient to cover variable costs. c) always shut down. d) always produce where marginal cost equals marginal revenue. 19) A monopolist experiencing a loss in the long run will a) go out of business. b) will not go out of business. c) will increase the price it charges. d) will increase the quantity produced. Use the information below for the next four questions: 20) A monopolist of a new computer software is facing demand: P = 100 ?2Q (where P is the unit price for this software and Q is its quantity) and MC = 20. This monopolist will produce _______ units and sell them at a price of ________. a) 35 / 30 b) 35 / 60 c) 20 / 30 d) 20 / 60 21) In this market there is a consumer surplus of a) 400. b) 225. c) 800. d) 500. 22) In this market there is a deadweight loss of a) 400. b) 225 c) 800 d) 500 23) This monopolist?s revenue is a) 1200 b) 600 c) 1050 d) 800 24) A profit maximizing monopolist has the average cost function AC = 4 + 5/Q. Demand in this market is given by the equation Q D = 10 ? P/2. This monopolist will set a price of: a) $2 b) $6 c) $8 d) $12 25) To maximize its profit, the monopolist produces on the ___________ portion of its demand, where ____________ . a) elastic / P = MC b) elastic/MR = MC c) inelastic/ P = MC d) inelastic / MR = MC 26) In a monopoly market the market demand curve is known to be P = 16 - 2Q. Then, which of the following statements is always TRUE about the market price and quantity demanded? a) The equilibrium price is greater than 8. b) The equilibrium price is less than 8. c) The equilibrium quantity demanded is less than 2. d) The equilibrium quantity demanded is greater than 4. 27) Assume that you are investigating the market of Bucky?s T-shirts. You know only that demand is given by P = 100 ? 2Q and the cost function is given by TC = 20 + 12Q, marginal cost is given by MC= 12. Find the false report among the following: a) If Bucky?s is a monopoly, the quantity sold in the market will be 22, with the price 56. b) If Bucky?s is a monopolisticly competitive firm, profit will be the same as in (a), in the short run. c) If Bucky?s is a monopolisticly competitive firm, other firms will enter the market and the demand curve for each firm will shift toward the origin d) If the market is operated by monopolistic competition, in the long run the marginal cost will be tangent to the demand curve at the equilibrium quantity, and firm will have less but still positive economic profit. Use the graph below to answer the following question: Price A E B C F G MC M D MR Demand H K L Quantity 28) The difference in consumer surplus between having a monopoly or many perfectly competitive firms operating in the market above can be represented by the area: a) BE FC b) BEGD c) CFGD d) EHGL 29) A monopolist with a horizontal ATC schedule who perfectly price discriminates a) does not change the amount of consumer surplus that buyers had before the monopolist perfectly price discriminated. b) leaves consumers with a decreased but still positive amount of consumer surplus. c) increases the amount of consumer surplus that is lost to the buyers and not gained by the monopolist. d) appropriates all consumer surplus as profit. 30) Which of the following is not an example of price discrimination? a) back to school sales. b) airlines charging lower prices to travelers who stay over a Saturday night. c) student discounts at movie theaters. d) discount prices for senior citizens in department stores. 31) Chuck E. Cheese?s is offering discounted prices to customers who use coupons while purchasing pizza or tokens for games, and offers full price to all remaining customers. Chuck E. Cheese is applying ____________________. a) price leadership. It sets a high price because it can dominate the market. b) monopoly power since there are no close substitutes. c) Cournot pricing, since it can control the number of coupons it makes available to the public through the newspapers. d) price discrimination since it charges different consumers different prices for reasons other than differential cost in production. Use the information below to answer the next three questions: A local theater is a monopolist who sells its product to the general public that has demand: P = 100 ? 4Q, and students who have demand P = 24 ? 5Q. Assume that the marginal and average cost for this monopolist is MC = AC = 4. 32) The monopolist in this market will produce the aggregate quantity ________ and collect total revenue of _____________. a) 12 / 624. b) 2 / 28. c) 14 / 652. d) 124 / 500. 33) The monopolist in this market will enjoy total profit of: a) 56. b) 596. c) 652. d) zero. 34) This monopolist is generating a deadweight loss of: a) 596 b) 298 c) 56 d) zero 35) The Sherman Antitrust Act of 1890 a) made illegal every conspiracy in restraint of trade or commerce. b) made tying contracts illegal and banned price discrimination. c) limited mergers that would substantially lessen competition or tend to create a monopoly. d) All of the above. 36) The biggest problem with the Sherman Antitrust Act of 1890 was that it was unclear what a) ?tying contracts? were. b) price discrimination was. c) specific acts were to be considered ?restraints of trade?. d) ?substantially lessen competition? meant. 37) The classic examples of natural monopolies over the years have been a) in agriculture b) in auto manufacturers c) public utilities d) in retail trade. 38) Monopolistically competitive firms are a) price takers. b) large relative to the industry. c) able to block entry of other firms. d) able to differentiate their product. 39) A profit-maximizing firm in a monopolistically competitive market behaves much like a _______in the short run. Unlike a monopolistic firm?s product, a monopolistically competitive firm?s product ___________. Compared to a perfectly competitive firm, the demand schedule a monopolistically competitive firm faces is ___________. a) monopolist/has close substitutes/more price elastic b) Cournot duopolist/has no close substitutes/perfectly price elastic. c) monopolist/has close substitutes/less price elastic. d) Dominant firm/is homogenous/less price elastic. 40) A monopolistically competitive firm ___________. It maximizes profits if ______________. If P>AC then the profit maximizing, monopolistically competitive firm earns ______________ economic profit. a) must lower price to sell more output/MR>MC/positive b) sells a fixed amount of output regardless of price/MC>MR/either positive or negative c) can sell infinite amounts of output at the market-determined price/P=MC/zero d) must lower price to sell more output/MR=MC/positive 41) For a monopolistically competitive firm, there can ______________profits or losses in the short run equilibrium and will be _________________profits in the long run equilibrium. As the firm moves from the short run to the long run equilibrium the ____________________. a) not be any/positive/ cost curves shift downward. b) be/zero economic/demand curve shifts inward. c) be/zero economic/average cost curve shifts inward. d) not be any/negative/average cost curve shifts inward. 42) If firms in the monopolistically competitive industry are earning economic profits, then in the long run, a) these firms can continue earning economic profits because entry into the industry is blocked. b) new firms producing the exact same product will enter the industry and this entry will continue until profits are eliminated. c) new firms producing close substitutes will enter the industry and this entry will continue until profits are eliminated. d) the government will most likely regulate firms in this industry to reduce these economic profits. 43) When the monopolistically competitive firm is in long run equilibrium, a) the demand curve must intersect the total average cost curve at its minimum. b) the demand curve must be tangent to the total average cost curve at its minimum. c) the demand curve must intersect the total average total cost curve at the profit maximizing quantity. d) the demand curve must be tangent to the total average total cost curve at the profit maximizing quantity. 44) The condition(s) for long-run equilibrium in a monopolistically competitive industry is: a) MR = MC b) P = MC c) P = MR, and MR = MC d) P = AC and MR = MC 45) The monopolistically competitive firm prevents the efficient use of resources because it produces where a) P>ATC b) P>MC c) P=ATC d) MC = MR Use the information in the following information to answer the next three questions: A monopolistically competitive firm is facing this demand for its product: P = 120 ?1/4Q And a marginal cost equal to average cost: MC = AC = 40. 46) This monopolistically competitive firm will produce quantity _______ at a unit price of ________ per unit. a) 40 / 110 b) 40 / 100 c) 80 / 80 d) 160 / 80 47) This monopolistically competitive firm is in a __________ equilibrium and is experiencing ________________. a) short run / 6400 of profits. b) short run / 1400 or profits. c) long run / zero economic profits. d) Short run / 2800 of losses. 48) This monopolistically competitive firm has total costs of ________ while producing the equilibrium quantity. a) 2800 b) 6400 c) 1600 d) 800 Use the graph below to answer the following question. Prices are expressed in thousands of dollars and quantities in thousands of units. MC AR MR MC 150 AC 140 130 80 AR MR 10 25 70 85 90 Q 49) The monopolistically competitive firm above will produce quantity ________ price the good at __________ and end up with __________________ in this __________ equilibrium. a) 70/130/140,000 losses/long run equilibrium b) 70/130/140, 000 losses/short run equilibrium c) 90/140/zero profits or losses/long run equilibrium d) 70/150/zero profits of losses/long run equilibrium 50) A(n) ________________ industry is characterized by strategic behavior. a) oligopolistic b) monopolistic c) monopolistically competitive d) perfectly competitive 51) The following is true in oligopoly models: a) There are inefficiencies because price is above marginal cost and the output level is lower than the socially optimal level of output. b) Firms can produce a homogeneous or differentiated product. c) An Oligopoly market will produce an output level that is greater than would be produced by a monopoly firm. d) All of the above. 52) In the collusion model, a) the firms jointly decide on the market price of the good they produce to maximize profits. b) The firms pick the maxmin level of profits to avoid large losses. c) The firms pick the level of output that maximizes their joint profits. d) The firms have no incentive to cheat because that would decrease their profits. 53) You just learned that 25 firms that grow and export peanuts to the US have decided to form a cartel. The objectives of the cartel are to reduce output to raise the price of peanuts and increase profits for the peanut growers. You predict that this cartel will probably a) not be successful because the number of firms in unmanageable and there are a number of good substitutes for peanuts. b) not be successful because there are too few firms that are trying to organize the cartel. c) be successful because the demand for peanuts is very elastic. d) be successful because it will be very easy to enforce the rules among only 25 firms. 54) ______________ occurs when price and quantity fixing agreements among producers are implicit. a) Tacit collusion b) A Cournot model c) A price-leadership model d) None of the above makes a correct statement. 55) In the price leadership model, the dominant firm a) Sets up the price that maximizes its profits and dictates this price to the smaller firms. b) Picks the quantity that maximizes its profits and charges the price its consumers are willing to pay for that quantity. c) Picks the quantity that maximizes its profits and charges the price all consumers (dominant firm and all small firm consumers) are willing to pay for that quantity. d) Produces the largest possible quantity to dominate the market and drive small firms out of the industry. Use the following information to solve the next three questions: You are given the market demand in a price leadership model: P = 600 ? Q. You are also given the aggregate supply for all small firms in this industry P = 60 + Q and the marginal cost for the dominant firm: MC = 130. 56) What is the equilibrium quantity the dominant firm will produce in the industry? a) 170 b) 130 c) 100 d) 200 57) What is the price the dominant firm and the small firms will choose in this industry? a) 130 b) 230 c) 100 d) 170 58) What is the aggregate quantity all small firms will produce jointly in this industry in equilibrium? a) 170 b) 200 c) higher than 200 d) indeterminate given the information in this problem. 59) In the Cournot duopoly model (with two identical firms) each firm ______________. The aggregate quantity produced in a Cournot duopoly is always___________________. a) follows the pricing policy of the other firm/in between the monopolist quantity and the competitive quantity. b) has an incentive to cheat/twice the monopolist quantity. c) faces a demand equal to the other firm?s supply minus the market demand/the monopolist quantity. d) faces a demand equal to the aggregate market demand minus the other firm?s supply/ in between the monopolist quantity and the competitive quantity. Use the information below to answer the next two questions: Firms A and B are two identical firms in a Cournot Duopoly. If the market demand in this industry is given by: P = 100 ? (1/2) Q and marginal cost: MC = 50. 60) Firm A would produce zero quantity of this product if firm B were to produce _____. a) 50 units. b) 100 units. c) 0 units. d) 33.33 units. 61) The best response equilibrium in this Cournot duopoly is for firms A and B to produce quantities ___________ respectively. a) 50 and 50 b) 100 and 100 c) 33.33 and 33.33 d) 50 and 33.33 Use the information below to answer the next two questions: The matrix below shows the payoff for two advertising strategies for two firms, Firm X and Firm Y. Strategies for Firm X Advertise Don?t Advertise X?s Profit = $15,000 X?s Profit = $10,000 Advertise Y?s Profit = $15,000 Y?s Profit = $20,000 Strategies For Firm Y Don?t X?s Profit = $20,000 X?s profit = $12,000 Advertise Y?s Profit = $10,000 Y?s profit = $12,000 62) Given the information right above which of the following statements is correct: a) Firm X has a dominant strategy, but Firm Y does not have a dominant strategy. b) Firm Y has a dominant strategy, but Firm X does not have a dominant strategy. c) Both firms have dominant strategies. d) Neither firm has a dominant strategy. 63) Given the information in the payoff matrix above, a) Firm X should advertise and firm Y should advertise b) Firm X should not advertise and firm Y should not advertise c) Firm Y should advertise and firm X should not advertise d) Firm X should advertise and firm Y should not advertise Use the information below to answer the next two questions: Fred and Bill are arrested and charged with a bank robbery. The district attorney separates them and offers them the deal given in the payoff matrix below. Assume that Fred and Bill are guilty and the penalty is imprisonment. Strategies for Fred Confess Remain Silent Fred gets 10 years Fred gets 20 years Confess Bill gets 10 years Bill gets 1 year Bill Remain Fred gets 1 year Fred gets 6 months Silent Bill gets 10 years Bill gets 6 months 64) Given the payoff matrix above which of the following statements is correct, a) Bill has a dominant strategy, but Fred does not have a dominant strategy. b) Fred has a dominant strategy, but Bill does not have a dominant strategy. c) both have dominant strategies. d) neither has a dominant strategy. 65) Given the information in the payoff matrix above, a) Bill and Fred will remain silent. b) Bill and Fred will confess. c) Bill will confess and Fred will remain silent. d) we cannot predict the outcome of this game. Use the information in the payoff matrix below to answer the next two questions: Strategies for B Raise Price Don?t Raise Price Raise A?s profit: $3,000 A?s profit: $10,000 Price B?s profit: $3,000 B?s profit: $15,000 A?s Strategies Don?t A?s profit $15,000 A?s profit $5,000 Raise B?s profit $10,000 B?s profit $5,000 66) Firm A?s optimal strategy is a) dependent on what firm B does b) sometimes to raise and sometimes to not raise the price c) raise price d) don?t raise price 67) If firms A and B where to follow a maxmin strategy they would a) both not raise prices. b) both raise prices. c) only one of them would raise the price. d) the outcome of the game would be unpredictable. 68) The dominant strategy a) can never be a maxmin strategy b) can always be found for both players in a game c) can always be found for at least one player in a game d) is a strategy a player would always follow no matter what the other player does. 69) A maxmin strategy a) can never give a Nash equilibrium. b) can never lead to an equilibrium. c) can be a dominant strategy also. d) can never be a dominant strategy. 70) If only one player in the game has a dominant strategy and the other player does not a) outcome of the game is not predictable b) outcome of the game can be predictable c) then the player with the dominant strategy will never play it d) then we can never have a Nash equilibrium 71) There is a Nash equilibrium in a game always if both players a) play their dominant strategies. b) play the maxmin strategies. c) play the maxmin or dominant strategy. d) play neither a maxmin or a dominant strategy. Use the information below to answer the next two questions: The following is the payoff matrix for firm A and firm B when they produce ?Low Quantity? or ?High Quantity? For example, if Firm A executes strategy ?Low Q? and Firm B executes strategy ?Low Q?, then Firm A?s profits will be 4 million dollars and Firm B?s profits will be 3 million dollars. B Low Q High Q A Low Q 4, 3 2, 7 High Q 7, 1 1, 2 72) What is the maxmin strategy for firm A and firm B, respectively? a) Low Q, Low Q b) Low Q, High Q c) High Q, Low Q d) High Q, High Q 73) What is the Nash Equilibrium for this game? a) Low Q, Low Q b) High Q, Low Q c) Low Q, High Q d) High Q, High Q Use the information in the payoff matrix below to answer the following two questions: B Left Right A Up 1,7 4,6 Down 9,3 X, Y 74) Find for what value of x is ?Down? a dominant strategy for A, and for what value of y is ?Left? a dominant strategy for B. a) X<1 / Y>3 b) X>1 / Y<3 c) X>4 / Y>3 d) X>4 / Y<3 75) Assume that there are only two people in a society, person A and person B. Person A is willing to pay $70 to have one unit of a public good produced and person B is willing to pay $80 to have one unit produced and $70 to have two units produced. Therefore a point on the market demand curve for this public good would be a price of _____ and quantity demand of _______. a) 1 / $150 b) 3 / $100 c) 1 / $100 d) 3 / $80 76) Once a public good is produced, everyone a) can consume a different amount depending on their willingness to buy the good. b) consumes the same amount and everyone?s willingness to pay is the same. c) consumes the same amount, but the willingness to pay will be different for different individuals. d) can consume a different amount and pay different prices for the product. 77) The optimal level of provision of public goods is where society?s total willingness to pay per unit is equal to the a) total cost of producing the good. b) average cost of producing the good. c) variable cost of producing the good. d) marginal cost of producing the good. 78) If the marginal cost of producing a public good is greater than society?s total willingness to pay per unit, then a) the optimal amount of the public good is being produced. b) less than the optimal amount of the public good is being produced. c) more than the optimal amount of the public good is being produced. d) the amount of output being produced could be either greater than or less than the optimal amount. 79) Excludable goods include a) natural monopolies and public goods. b) public goods and private goods. c) private goods and natural monopolies. d) all of the above The table below gives you information on the willingness to pay for a public good, police officers, by John and Tim: Number of John?s willingness Tim?s willingness Police officers to pay to pay 1 $100 $60 2 80 20 3 50 0 80) If the marginal cost of hiring a police officer is $100, and John and Tim are the only people in the society, the optimal number of police officers is a) indeterminate from this information b) 1 c) 2 d) 3 Use the information below to answer the next 2 questions: You are given the demand for a public good for person A and person B. P A = 20 ? ½ Q A And P B = 15 - Q B. 81) If A and B are the only people in this society and 10 units are produced from this good what is the aggregate demand for this public good for quantities smaller than 15? a) Q = 70/3 ? 2/3 P b) P = 35 ? Q c) P = 35 ? ½ Q d) Q = 70/3 ? 3/2 P 82) If A and B are the only people in this society and 10 units are produced from this good how much are A and B going to pay for this public good? a) A pays 5 and B pays 15 b) A pays 15 and B pays 5 c) Both A and B pay 25 d) Both A and B pay 15 83) You cause an automobile liability insurance company to face a moral hazard problem when you take __________ driving precautions ___________ you buy automobile liability insurance from the company. a) less / after b) more / after c) less / before d) the same / before and after 84) A lender faces a(n) _____________ problem if borrowers with a greater chance of defaulting on their loans get loans for this lender. a) adverse selection b) moral hazard c) external cost d) free rider 85) Everyone wants to help the poor, but no one will take action on their own. This is a good example of a) a positive externality b) adverse selection c) moral hazard d) drop in the bucket problem 86) A doctor tells you that you need an emergency operation to correct a deviated septum, and there is no time for a second opinion. This is a good example of a(n) a) moral hazard problem b) adverse selection problem c) market power problem d) tacit collusion 87) ______________ do not necessarily cause a market to fail. a) Externalities b) A public good c) Imperfect information d) Economies of scale 88) Someone refuses to stop talking during a committee meeting. This is a good example of: a) market power b) moral hazard c) negative externality d) adverse selection 89) If there are external costs of production and firms do not account for these costs, at the equilibrium level of output a) P = MC = MSC. b) P = MC and PMSC. d) P>MC and P = MSC. 90) If a tax is imposed on an externality-producing firm so that it is producing the efficient level or output, then a) P = MSC and MDC = 0 b) P = MSC and MDC > 0 c) P = MC and MDC = 0 d) P = MC and MDC > 0 91) An external cost is a) MSC + MPC. b) MSC ? MPC. c) MSC. d) MSC/MPC. 92) The Coase theorem states that a) the private sector will fail to produce the efficient amount of a public good because of the free rider problem. b) in there are external costs in production, the government must intervene in the market to assure that the efficient level of output is produced. c) public goods should be produced up to the point where the additional benefit received by society equals the additional cost of producing the good. d) under certain conditions, private parties can arrive at the efficient solution without government involvement. 93) Education generates external benefits. When these external benefits are not considered, the market will produce a) an efficient level of education. b) more than the efficient level of education c) less than the efficient level of education d) zero units of education. 94) The marginal private cost to a firm of producing the 10 th unit of output is $100. The marginal social cost of the 10 th unit of output is $150. The marginal damage cost of the tenth unit of output is a) $5.0 b) $25.0 c) $50.0 d) $1.50 Use this information for the next two questions. The demand for garden gnomes is given by P=100-(1/2)Q and supply is given by P=(3/2)Q. Garden gnomes, however, generate a positive externality when purchased and displayed. Each garden gnome provides a benefit to the general public that is valued at $20. 95) How many gnomes will be purchased and at what price will they be sold? a) 50; 75 b) 60; 75 c) 50; 70 d) 40; 80 96) How many more gnomes would be purchased if the socially optimal quantity were traded? a) 5 b) 10 c) 15 d) 30 Use this information in the next three questions. A chemical plant?s production process creates pollution in the river, next to which it is located. The monetary equivalent of this damage is estimated to be $50 per unit of chemical production. Assume that this chemical company is perfectly competitive and has a marginal cost function of the form, MC=10Q. 97) If the price of chemicals is $2000 per unit, how many units will this self-interested company produce? a) 75 b) 100 c) 195 d) 200 98) What is the socially optimal quantity of production? a) 75 b) 100 c) 195 d) 200 99) Suppose the government decided to place an excise tax on this company. How high should the tax be to achieve the socially optimal quantity? a) 0 b) 50 c) 150 d) 200 Use the graph below to answer the next two questions: MSC MSC MPC 15 MPC P = 10 P 50 60 Q Bags of fertilizer 100) Given the information above about the market for fertilizer the efficient amount of fertilizer is a) zero bags because any level of production involves an external cost. b) 50 bags. c) 60 bags. d) indeterminate from this information. 101) The marginal damage cost imposed as a result of producing fertilizer is a) $5 per bag of fertilizer b) $10 per bag of fertilizer c) $15 per bag of fertilizer d) indeterminate from this information. Use the graph below for the next four questions: MSC MB MSC 5 MDC 4.5 4 3.5 3 MB 2 MPC 1 3 4 6 Hours of saxophone playing a day 102) When Bill plays the saxophone he imposes a cost on his wife. If Bill does not take these costs into consideration he will play his saxophone for ___ hours a day. If Bill is forced to take into consideration the costs he imposes on his wife by playing the saxophone, he will play his saxophone for _____ hours per day. a) six / three b) four / three c) three / zero d) six / four 103) If Bill has the right to play his saxophone for as many hours a day as he wishes, his wife would be willing to pay him up to ______ to not play his saxophone for more than three hours. a) $1.00 b) $2.00 c) $3.50 d) $4.50 104) If Bill?s wife has the right to silence for as many hours a day as she would like, would be willing to pay his wife _______ so that he could play the saxophone for _________ hours per day. a) $4.50 / 3 b) $3.50 / 3 c) $4.00 / 4 d) $5.00 / 4 105) In a perfectly competitive industry the current market price of the good produces is $10. Assume that the representative firm?s marginal cost if given by MC = 2/5 Q ? 22, and this firm?s marginal social cost is given by MSC = 2/5 Q ?18. This firm will produces the socially optimal level of output if it were to decrease production by: a) 2 units b) 4 units c) 8 units d) 10 units 106) In a perfectly competitive market air fresheners the demand is given by: P = 20 ? 5Q and the marginal cost MC = 10. The production of air fresheners is creating positive spill over effects to other local businesses and residents that are not currently internalized by this industry. The marginal social cost curve is MSB = 30 ? 5Q. The socially optimal level of output will only be produced if we were to increase production or air fresheners by: a) 10 units b) 8 units c) 4 units d) 2 units 107) If a tax is imposed on suppliers in a market in which the demand is perfectly inelastic, then a) the consumer and producer surplus both decrease. b) the consumer surplus is equal to the producer surplus. c) there is no deadweight loss. d) there is an increase in deadweight loss 108) If a tax is imposed on consumers in a market in which the supply is perfectly inelastic, then a) all of the incidence of the tax falls into the producers. b) There is a decrease in deadweight loss. c) The consumer surplus decreases. d) The producer surplus increases. 109) If a tax is imposed on consumers in a market in which the supply is perfectly inelastic, then a) all of the incidence of the tax falls into the consumers. b) The consumer surplus does not change. c) The deadweight loss increases. d) The producer surplus increases. Use the information in the graph below to answer the next two questions: Price S + tax 15 13 S 10 8 6 D 3 5 8 Quantity 110) The government has imposed a sales tax of ______$ per unit in this market. a) 7 b) 5 c) 9 d) 2 111) The government is collecting ____$ in tax revenue from this market. a) 56 b) 35 c) 25 d) zero Use the following information to answer the next 3 questions: The demand for state fair visits in the state of Wisconsin is P = 30 ? 2 Q. The supply for them is given by P = Q. The state government decides to impose an excise tax of $3 on the sales of state fair tickets. 112) What is the net equilibrium price that producers will receive from a state fair ticket after the tax is imposed? a) $12 b) $9 c) $10 d) $6 113) How much is the deadweight loss due to the imposition of this excise tax? a) $1 b) $1.5 c) $ 2 d) 3 114) What is the tax revenue from this tax? a) $10 b) $6 c) $27 d) $9 115) A good has a perfectly inelastic supply and a typical downward sloping demand curve. Imposing a sales tax of $1 a) Raises the price paid by consumers by more than $1.00. b) Raises the price paid by consumers by $1.00. c) Raises the price paid by consumers by less than $1.00. d) Does not change the price paid by consumers. 116) The DVD player market is perfectly competitive. The demand is given by P=21-Q, while the aggregate supply function is P=1+Q. Now the government imposes a $4 tax to each unit this good sold by the firm in this market. Answer the following questions: The consumer?s tax burden is ___ per DVD player. a) $0 b) $1 c) $2 d) $3 117) Consider a good like coffee that has an elastic supply. If the government were to levy an excise tax on an elastically supplied good like coffee, the deadweight loss after this tax a) is not important because consumers only spend a small fraction of their income on coffee. b) is larger than it would be for a similar, inelastically supplied good. c) only depends on the elasticity of the demand for coffee. d) none of the above. Bruce Hansen Microsoft Word - finalreview problems.doc
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