Micro Problem Set 2 WCC Winter 2015

Transcription

1 Micro Problem Set 2 WCC Winter 2015 True=A/False=B 20 points 1) For any quota that exists, there is a tariff that will restrict trade by an equivalent amount. 2) Imposing a tariff usually increases producer surplus in the exporting country. 3) It is impossible for one individual/producer/country to have a comparative advantage in all goods. 4) Improvements in efficiency are unimportant for a country. 5) If one country is more efficient than another at producing textiles, we can it has a comparative advantage in textiles. 6) Assume Italy and Zambia trade. Italy will benefit the most from this trade if it can get terms of trade close to its own autarky OC of production. 7) A country can benefit from trade even if it is less productive in every good than its trading partners. 8) If a small country that is importing sugar decides to impose a $10/ton tariff, the price of sugar will rise by $10 in that country. 9) When individuals engage in arbitrage, they purchase a commodity and hold it in the hope of selling at a higher price at a later point in time. 10) If marginal social cost is greater than marginal private cost at a given level of output, society would benefit if output is smaller than the equilibrium market level. 11) Private firms cannot provide public goods because these goods are non-rival in consumption. 12) To derive a market demand curve for a public good, we simply add up individual demand curves vertically. 13) From an allocative efficiency perspective, the Coase Theorem argues that it does not matter too whom the property rights are assigned. 14) If MC is greater than AVC, AVC must be rising.

2 15) All combinations of capital and labor along a given isoquant cost the same amount. 16) An increasing MPP leads to decreasing MC. 17) If the MPP L /P L > MPP K /P K, a cost minimizing firm should reduce its use of capital and increase its use of labor. 18) A profit-maximizing firm will try to select the least costly input combination to produce its chosen level of output. 19) Total profit can be represented by the vertical distance between a total revenue curve and a total cost curve. 20) If MC is greater than MR, total profit must be negative. Multiple Choice Select the single best answer. 15 points 21) A tariff or quota on automobile imports will lead to all but one of the following a. a smaller volume of imports of automobiles b. a decline in the domestic quantity demanded of automobiles c. a decline in the domestic production of automobiles d. higher automobile prices 22) Market failure is a situation in which a. the market does not provide the productively efficient amount of a particular good. b. there are too many buyers but not enough sellers. c. prices are too high for average people to buy necessities. d. the equilibrium output does not maximize economic surplus. 23) A negative externality is being generated in the course of producing a good. If this market is left alone, which of the following will be true at equilibrium? a. P E < MSC b. MSC < MPC c. MPB > MPC d. output will be inefficiently small

3 24) The graph above represents a small importing country that has imposed a tariff. Because of this tariff, economic surplus in this country by an amount equal to the area of. a. increases: b. increases: c. decreases: 3 d. decreases: e. decreases: Table 1 (Output Per Unit of Labor) United States Mexico Autos Wheat ) Using the data from Table 1, suppose the U.S. transfers 1 unit of labor from autos to wheat and Mexico transfers 2 units from wheat to autos. The combined production of wheat and autos will be increased by a. 5 autos, 10 wheat b. 15 autos, 15 wheat c. 5 autos, 20 wheat d. 10 autos, 5 wheat

4 Table 2 Supply Demand Supply Demand Price in USA in USA in Taiwan in Taiwan ================================================== ================================================== 26) In Table 2 above, what tariff would limit imports to the same degree as a quota of 200 units? a. 2 b. 4 c. 6 d. 8 27) If production of a good generates a positive externality, which of the following will hold? a. Left to themselves markets will produce too little. b. MSC will exceed MSB at the market output. c. Market price will exceed the MSB at the market output level. d. None of the above 28) Producers of computer software are plagued with the problem of "pirating;" that is, many people copy software from disks legally purchased by others. The industry estimates that for each legal copy of a program, there are two pirated copies in use. The industry wants strict laws for the enforcement of their "intellectual property rights," but enforcement is obviously very difficult. The problem here revolves around an issue that economists refer to as a. depletability. b. externality. c. nonexcludability. d. durability.

5 29) The 4 graphs below represent four sets of PPF's for two hypothetical countries. In which case will there be no advantage to trade between the two countries. a. 1 b. 2 c. 3 d. 4 30)If MC > MR a. output should be reduced. b. marginal profit is positive. c. there are losses. d. the total profit curve has yet to peak. e. none of the above. 31) The federal government imposes a 50 percent tax on the economic profit of all companies. We can expect that firms will a. raise prices. b. reduce output. c. raise prices and reduce output. d. do nothing.

6 The graph below shows the economics of cattle production in feedlots. Pollution of local water resources occurs when cattle dung is dumped in a local river. 32) Examine the graph above. If the externality is not addressed, feedlots will a. overproduce cattle by 3,000 head per period. b. produce 3,000 head per period. c. overproduce 1,000 head per period. d. voluntarily reduce output. 33) In the feedlot example illustrated by the graph above, the "emissions" tax needed to achieve a socially optimal level of production is a. $3 per head. b. $2 per head. c. $1 per head. d. $4 per head. 34) Given the information in the table to the right, where does diminishing MPP set in? a. before the first unit of labor b. between the first and second units of labor c. between the third and fourth units of labor d. between the fourth and fifth units of labor e. between the fifth and sixth units of labor Labor TPP

7 35) Table 3 gives a production function. Assuming the capital stock is fixed at three units and the cost per day of labor is $70, what is the most labor that it is efficient to hire if the product price is $1 per unit? a. 6 b. 5 c. 4 d. 3 Table C A P I T A L Labor 36) Allie's Donuts produces about 600 dozen donuts per day. Due to bad weather, there is a shortage of wheat and the price of flour has risen 20 percent. Which of the cost curves for Allie's will shift up? a. marginal cost only b. marginal cost and average total cost only c. marginal cost, average variable cost, and average total cost only d. marginal cost, average variable cost, average total cost, and average fixed cost 37) In 1975, there was a great surplus of tankers on the world's oceans. As a result, Exxon was able to rent a tanker and the services of its crew from a Japanese ship owner for one year at a cost of $900,000. Salaries of the sailors are the responsibility of the ship owner, and wages for the crew of this tanker were $2 million per year. Japanese unions require crews be paid even if the ship does not sail. For the Japanese, this deal obviously a. was irrational. b. maximized profits. c. increased losses. d. was a mistake.

8 38) The ATC and AVC curves get closer to each other as output increase because a. AFC approaches zero as output increases. b. fixed costs are being spread over a larger and larger output. c. some costs do not change as output increases. d. all of the above are true. 39) Which of the following will shift the ATC curve (everything else equal)? a. the price of the product rises b. technical change raises MPP of one input c. output is increased d. increasing returns to scale 40) Richard owns Gas Monkey Garage. He buys old cars and fixes them up for sale. Recently Richard bought a cheap 57 Chevy at auction for $14,000. While he could have simply relisted the car on his website and sold it for $20,000, he chose to lower the suspension at a cost of $2,000, give it a wicked cool paint job for $3,000, and have Sue install a two-tone leather interior for $4,000. He then sold this car for $38,000. What is Richard s economic profit on this restoration job? a. $38,000 b. $9,000 c. $24,000 d. -$5,000

9 Short Answer 15 points Directions: Write and draw neatly. Label all graphs completely. Answers should be complete, coherent, and cogent. Price per computer Quantity Demanded in U.S. Quantity Supplied in U.S. Quantity Demanded in Japan , , , , , , (NOTE: All quantities above are measured in thousands.) Quantity Supplied in Japan 1) Draw supply and demand diagrams for Japan and the US. a) Indicate the autarky equilibrium price and quantity in each country. b) Indicate the world price under free trade. c) Which country will export computers? d) Indicate the quantity of exports and imports on the appropriate graphs. e) Ceteris paribus, what would happen to the pattern of trade and the world equilibrium price if the U.S. were to become increasingly efficient at producing computers? f) Ceteris paribus, what would happen to producer and to consumer surplus in each country if this happened? 2) Assume that the importing country places a quota of 20,000 on computer imports. Draw a new set of supply and demand diagrams. a) Indicate the new price for computers in each country. b) What happens to producer and consumer surplus in each country as a result of this quota? c) What would the equivalent tariff be and how much revenue would it generate?