ECON 2100 (Summer 2012 Sections 07 and 08) Exam #2B Answer Key

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1 ECON 21 (Summer 212 Sections 7 and 8) Exam #2B Answer Key Multiple Choice Questions: (3 points each) 1. I am taking of the exam. B. Version B 2. A Price Control generally refers to A. who bears the burden of a tax, in terms of decreased surplus. B. the difference between maximum possible Total Social Surplus and realized Total Social Surplus. C. a legal restriction on the price at which trade can take place. D. efforts by firms to coordinate their actions in order to keep market prices and firm profits artificially high. 3. Which of the following observations would support a claim that Good X is a complement for Good Y? A. The Price Elasticity of Demand for Good X ( 1.53) is more negative than the Price Elasticity of Demand for Good Y ( 1.22). B. The Cross Price Elasticity of Demand for Good X with Respect to the Price of Good Y is (.45). C. The Cross Price Elasticity of Demand for Good X with Respect to the Price of Good Y is (.27). D. None of the above answers are correct. 4. If demand is very inelastic and supply is very elastic, then imposing a per unit tax on sellers will result in A. a relatively small decrease in price received by sellers, but a relatively big increase in price paid by consumers. B. a relatively big decrease in price received by sellers, but a relatively small increase in price paid by consumers. C. zero tax revenue being generated for the government. D. no change whatsoever in the quantity traded of the good. 5. Consider a market in which the efficient level of trade is 22, units. There would be a negative Deadweight-Loss if units were traded. A. 19,5. B. 25,25. C. both (A) and (B) are correct. D. None of the above answers are correct, since Deadweight-Loss can never be negative. 6. Sally manages a small manufacturing firm. During the month of May her company produced 6, units of output, resulting in Average Total Costs of $7. and Average Variable Costs of $6.25. It follows that A. Average Fixed Costs were equal to $ B. Fixed Costs were equal to $4,5. C. Marginal Costs were equal to zero for every unit of output produced, since the firm is clearly operating in the Intermediate Run.

2 7. A widespread series of price controls were administered in the United States by the Cost of Living Council in an unsuccessful attempt to combat inflation during the time when was President. A. William Jefferson Clinton B. George Herbert Walker Bush C. Ronald Wilson Reagan D. Richard Milhous Nixon For questions 8 through 11, consider a market with demand and supply as illustrated below. Suppose throughout that the efficient level of trade is 97 units. price 22.5 Supply a b d f c e 6 97 g 1,41 Demand quantity 8. Compared to the free market outcome, imposing a price floor of $14.25 in this market would: A. increase Total Producers Surplus by areas (b) (e). B. decrease Total Consumers Surplus by areas (b)+(c). C. create a Deadweight-Loss equal to area (g). 9. If a price ceiling of $9. were imposed in this market, then units would be traded. A. fewer than 6 B. exactly 6 C. more than 6 but fewer than 97 D. more than 97 but fewer than 1,41 1. A per unit tax of $3.75 imposed on buyers in this market would A. generate Tax Revenue of more than $2,25 but less than $3, B. result in exactly 6 units being traded. C. create a Deadweight-Loss exactly equal to areas (c)+(e). D. More than one of the above answers is correct. 11. Which of the following government policies would create a Deadweight-Loss exactly equal to areas (c)+(e)? A. A price ceiling of $8.3. B. A price floor of $12.. C. A per unit tax of $2.2 imposed on sellers.

3 12. Ann has a ticket to an upcoming Atlanta Braves game at Turner Field. Her reservation price as a seller of this item is r s 65. Both Ben and Charles are interested in purchasing the ticket from Ben Ann. Ben s reservation price as a buyer is r b 62 ; Charles reservation price as a buyer is r 55. In order to maximize Total Social Surplus Charles b A. Ben must end up with the ticket. B. Charles must end up with the ticket. C. Ann must keep the ticket. D. the ticket must be destroyed, without any of them attending the game (since each of them would like to attend the game, and it would clearly be unfair to let only one of them attend the game while the other two have to stay at home). 13. Imposing a price ceiling will generally A. increase Total Social Surplus. B. decrease the quantity traded of the good. C. make all sellers of the good worse off and all buyers of the good better off. For questions 14 and 15, consider a market with demand and supply as illustrated below. Assume throughout that there are no external effects. price 19.5 Supply a b c d e f Demand quantity 8 1,72 2,24 4, The level of trade which maximizes Total Social Surplus in this market is units. A. 4,69 B. some amount greater than 1,72 but fewer than 4,69. C. 1,72 D. some amount greater than but fewer than 1, If supply were to decrease so that the new equilibrium quantity of trade becomes 8 units, then at the new market equilibrium A. Deadweight-Loss will be positive. B. Total Consumers Surplus will be equal to area (a). C. Total Producers Surplus will have increased by areas (b)+(d) (compared to the equilibrium outcome before the decrease in Supply).

4 16. My brother manages a city-owned golf course in Wilkes-Barre, PA. He wants to increase the revenue generated by the golf course in order to more easily cover operating expenses. The mayor advises him to decrease the price of a round of golf, while the parks and recreations manager recommends that he increase the price of a round of golf. Based upon this advice, A. the parks and recreations manager likely thinks that demand is inelastic. B. it is clear that the mayor doesn t understand economics, since decreasing price can never increase revenue. C. the mayor likely thinks that demand is inelastic. D. More than one (perhaps all) of the above answers is correct 17. Suppose that the income elasticity of demand for peanut butter is equal to.31. If consumer income were to increase, then A. it would be necessary for the government to impose a price control in order to restore equilibrium. B. demand for peanut butter would decrease. C. Total Producers Surplus in the market for peanut butter would increase. 18. At the market equilibrium outcome A. Total Producers Surplus and Total Consumers Surplus are both typically equal to zero. B. Total Producers Surplus and Total Consumers Surplus are both typically positive. C. Total Producers Surplus is typically positive, while Total Consumers Surplus is typically equal to zero. D. Total Consumers Surplus is typically positive, while Total Producers Surplus is typically equal to zero. 19. The Law of Demand and Law of Supply imply that Price Elasticity of Demand should be and Price Elasticity of Supply should be. A. negative and less than 1 in value; negative but greater than 1 in value. B. positive but less than 1 in value; positive and greater than 1 in value. C. negative; positive. D. positive; negative. 2. Soumyajit enjoys drinking Vanilla Coke. His Buyer s Reservation Price is: $8 for his first 12 pack; $6.5 for his second 12 pack; $4.5 for his third twelve pack; $2. for his fourth twelve pack; and $.5 for his fifth twelve pack. If the price were to decrease from $5 to $3, then A. his Consumer s Surplus would increase by $6.. B. his Consumer s Surplus would increase by $5.5. C. his Consumer s Surplus would increase by $4.. D. his Consumer s Surplus would increase by $ Suppose that the current exchange rate between U.S. Dollars and Mexican Peso is 1 Mexican Peso is equal to.718 U.S. Dollars, and suppose that the price elasticity of demand for beer in Mexico is Consider a situation in which Mexico, Canada, and the U.S. were to adopt a single currency (the Amero ), the value of which was initially set equal to the value of the U.S. dollar. After converting all demand curves in Mexico from Mexican Pesos to Ameros, the value of the price elasticity of demand for beer in Mexico would A. still be equal to (.1795). B. be equal to (.718)(.1795) (.12888). C. be equal to (.718) (.1795) (.4). D. be equal to (.1795) (.718) ( 2.5).

5 22. refer(s) to input costs that do not require an outlay of money by the firm. A. Implicit Costs B. Explicit Costs C. Accounting Costs D. Fixed Costs 23. Suppose that the Price Elasticity of Supply for shoes is equal to (1.6). It follows that if price were to increase by 16%, then quantity supplied would A. increase by roughly 32%. B. increase by roughly 25.6%. C. increase by roughly 16%. D. increase by roughly 1%. 24. The is defined as a period of time during which the amount hired/used of at least one input is equal to a predetermined amount. A. Competitive Run B. Short Run C. Medium Run D. Long Run For questions 25 and 26, consider the two different demand curves illustrated below: price Demand A 8 Demand B 7 Demand B Demand A quantity 25. If the value of Price Elasticity of Demand along Demand A at a price of $8 is ( 1.429), then the value of Price Elasticity of Demand along Demand B at a price of $8 must A. be less than (i.e., more negative than) ( 1.429). B. also be exactly equal to ( 1.429). C. be greater than (i.e., closer to zero than) ( 1.429). D. None of the above answers are correct, since the above graph does not convey enough information to make this type of comparison. 26. If a drop in price from $8 to $7 were to increase Total Consumer Expenditures by $4, along Demand A, then along Demand B a drop in price from $8 to $7 would A. increase Total Consumer Expenditures, but by less than $4,. B. also increase Total Consumer Expenditures by exactly $4,. C. increase Total Consumer Expenditures, but by even more than $4,. D. None of the above answers are correct, since the above graph does not convey enough information to make this type of comparison.

6 27. Suppose that the county commissioners in Cobb County Georgia have decided to impose an additional $1 tax on every unit of gasoline purchased. However, they will let voters decide whether the tax is imposed on buyers or sellers. More precisely, Tax A is a $1 per gallon tax imposed on buyers of gasoline, while Tax B is a $1 per gallon tax imposed on sellers of gasoline. We can infer that A. Total Consumers Surplus would decrease by a greater amount under Tax A than under Tax B. B. Tax B would generate exactly the same amount of Tax Revenue as would Tax A. C. Deadweight-Loss would be greater under Tax A than under Tax B. For questions 28 through 3, consider a firm with costs of production as illustrated below: $ ATC(q)=AVC(q) quantity This firm is operating in the A. Long Run. B. Intermediate Run. C. Short Run. D. Cannonball Run. 29. The Efficient Scale of production is equal to units of output. A. 78 B. 59 C. 35 D This firm realizes Economies of Scale over what range of production? A. only for the 78 th unit of output. B. beyond 59 units. C. up to 59 units. D. None of the above answers are correct, since this firm cannot realize Economies of Scale over any range of production.

7 31. After two games as an NFL quarterback, Cam Newton was averaging 427 yards passing per game. From this observation it follows that A. he must have thrown for exactly 427 yards in each of his first two games. B. he had thrown for a total of 854 in his first two games. C. his average yards passing per game decreased when he threw for only 158 yards in his third game. 32. Consider a market in which demand is given by the linear demand function D(p) = 1, 5p. If price were decreased from $8 to $6, then total consumer expenditures would A. increase. B. decrease all the way down to zero. C. decrease, but remain positive. D. None of the above answers are necessarily correct, since more information is needed in order to answer this question. 33. Consider the demand for Ben and Jerry s Phish Food Ice Cream and the demand for Ice Cream (in general). If the price elasticity for Ben and Jerry s Phish Food Ice Cream is 2.187, then we would expect that price elasticity of demand for Ice Cream (in general) is: A. exactly equal to zero (because for all goods demand is always perfectly elastic at the market level ). B. less than (i.e., more negative than ) ( 2.187). C. also equal to ( 2.187), since all types of ice cream and ice cream in general must have the same value of price elasticity. D. somewhere between ( 2.187) and ().

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