Problem Set 3 Eco 112, Spring 2011 Chapters covered: Ch. 6 and Ch. 7 Due date: March 3, 2011

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1 Problem Set 3 Eco 112, Spring 2011 Chapters covered: Ch. 6 and Ch. 7 Due date: March 3, 2011 There are 30 multiple choice questions in this problem set. Answer these questions by the beginning of the class on Thursday March 3, John is trying to decide how to divide his time between his job as a stocker in the local grocery store, which pays $7/hr for as many hours as he chooses to work, and cleaning windows for the businesses in downtown. He makes $2 for every window he cleans. John is indifferent between the two tasks, and the number of windows he can clean depends on how many hours he cleans a day, as shown in the table below: 1. What is John's hourly opportunity cost of cleaning windows? A. $14 B. $8 C. $7 D. $2 2. Does the 3 rd hour cleaning satisfy the cost-benefit principle? A. yes, since he makes $28 B. yes, since the additional amount earned is $14 C. no, since the additional amount earned is $6 D. yes, since the additional amount earned is $6. 3. What is John's reservation price for 4 th and 5 th hours of cleaning windows? A. $7 and $7.5 respectively B. $2 and $3.5 respectively C. $3.5 and $7 respectively D. $11 and $14 respectively 4. An individual's supply curve shows that person's A. willingness to pay at each quantity. B. opportunity cost of producing at each quantity C. hourly wage for producing at each quantity D. profit from producing at each quantity 5. In which of the following markets do all firms sell the same standardized product? A. four-door cars B. 2% milk C. desktop computers D. sandwiches 1

2 6. The lemonade stands are perfectly competitive because A. the kids get their ingredients from home and don't have to pay for them. B. it is easy to open a stand and easy to close it down. C. the table, cups and lemonade pitchers used in the stands are productive resources that are only useful for lemonade stands. D. the kids do not have regular jobs, so their opportunity costs are zero. 7. Which of the following factors of production is likely to be fixed in the short run? A. The location of the firm. B. The number of employee-hours. C. The amount of electricity consumed. D. The amount of paper used. This phone center uses only equipment and workers to provide service. 8. Refer to the figure above. Suppose that one unit of equipment costs $10 and each worker earns $5. What is the total cost of producing 3 units of output? A. $25 B. $30 C. $35 D. $40 9. Refer to the figure above. For this firm, Marginal Cost A. equals Average Variable Cost at Average Variable Cost's minimum point. B. equals Average Total Cost at Average Total Cost's maximum point. C. is always greater than Average Variable Cost. D. is always less than Average Variable Cost. 10. Assume that a firm uses 13 employee-hours and an office to produce 100 units of output. The price of output is $5, the wage rate is $10, and rent is $200. The firm will earn a of. A. profit; $370 B. loss; $200 C. profit; $170 D. loss; $ If a perfectly competitive firm produces an output level where price is greater than marginal costs, then the firm should A. pay more to its variable factors of production. B. contract output to earn greater profits or smaller losses. C. expand output to earn greater profits or smaller losses. D. leave its output decision unchanged. 2

3 12. In the short run, if a firm chooses to operate and produce output, it must be the case that A. it earns a profit. B. it avoids a loss. C. total revenues are greater than or equal to the cost of fixed factors of production. D. total revenues are greater than or equal to the cost of variable factors of production. 13. The shutdown condition applies A. in the long run and in the short run B. only in the short run C. only to firms that are just breaking even D. to all firms, all the time 14. Refer to the figure above. When the demand is P 1 = $30, what is the total cost? A. $ 960 B. $ 1200 C. $ 1600 D. $ Refer to the figure above. When the demand is P 1 = $30, how much profit is this producer earning? A. $ 500 B. $ 800 C. $ 1200 D. $ Refer to the figure above. When the demand is P 2 = $15, this firm should A. continue to operate in the short run and think about shutting down in the long run B. discontinue operation in the short run since there is a loss when operating. C. keep operating as long as loss is not greater than total cost D. discontinue operation in the short run since average total cost is greater than price. 3

4 17. In the graph above the short run supply curve is A. Curve C to the right of curve A B. Curve B to the right of curve A C. Curve A above curve B D. Curve A above curve C 18. Pareto efficiency is a situation in which A. no one is made better off. B. trades remain that would make some better off without harming others. C. trades have benefited some and harmed others. D. any further trades will harm someone. 19. See the graph on the right. The marginal buyer values the tenth pound of oranges at. A. $0 B. $4 C. $8 D. $ The price of $4.00 per pound will lead to a(n) of pounds of oranges per day. A. excess supply; 20 B. excess demand; 30 C. equilibrium quantity; 20 D. excess demand; The following argument best describes the idea of equity: A. government intervention improves the efficiency of competitive markets. B. welfare gains will benefit the poor by less than the wealthy. C. welfare gains will be equally distributed in the population. D. lower income taxes will reduce income disparities in the population. 4

5 22. Suppose that jeans initially sell for $60 each. If the seller lowers price to $40 each it would create an extra of economic surplus. Thus, selling jeans for $60 each is. A. $160; inefficient B. $80; efficient C. $80; the equilibrium price D. $160; efficient 23. Total economic welfare (surplus) is A. the area between the demand curve and market price. B. the difference between consumer surplus and producer surplus. C. the difference between tax revenues and government expenditures. D. the sum of consumer and producer surpluses. 24. Refer to the figure above. Based on demand curve D and supply curve S, the dollar value of the consumer surplus is A. $240. B. $200. C. $180. D. $ Refer to the figure above. Based on demand curve D and supply curve S, the dollar value of the producer surplus is A. $180. B. $75. C. $150. D. $130. 5

6 26. Refer to the figure above. In the absence of a tax, the total economic surplus in the market is A. $64. B. $40. C. $32. D. $ Refer to the figure above. Suppose a $1 per unit tax is imposed on sellers. The share of the tax burden borne by consumers is and the share of the tax burden borne by producers is A. 50 cents; 50 cents. B. 80 cents; 20 cents. C. 60 cents; 40 cents D. 40 cents; 60 cents. 28. Refer to the figure above. The deadweight loss from imposing a $1 tax on sellers is A. 50 cents. B. $1. C. $3. D. $ The more inelastic demand is, the the burden of the tax borne by. A. smaller; consumers B. larger; consumers C. larger; producers D. smaller; consumers and producers 30. If a per unit tax is imposed, the more elastic demand is, the A. less likely the deadweight loss will be affected. B. smaller the deadweight loss. C. larger the deadweight loss. D. smaller the deadweight loss to producers. 6