# Micro Problem Set 1 WCC Winter 2016

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1 Micro Problem Set 1 WCC Winter 2016 True=A/False=B 25 points 1) Your boss wants you to maximize total revenue for Harry Potter lunch boxes. At their current price, the price elasticity of demand for these boxes is equal to Therefore, you should advise your boss to lower the price of these lunch boxes in order to sell more units. 2) When a demand curve shifts inward, the price elasticity of demand increases. 3) A vertical supply curve will have a constant price elasticity of supply along its length. 4) As time goes by, the price elasticities of demand and supply for a good are both likely to increase. 5) If demand for a good is price inelastic, an increase in price will decrease revenues. 6) Price elasticity of demand for a good changes whenever we change the units of measurement. 7) A negative cross price elasticity of demand indicates that the goods are substitutes. 8) Necessities typically have elastic demand curves associated with them. 9) The income elasticity of demand for Ramen noodles is 0.2. This tells us that Ramen noodles are an inferior good. 10) A consumer should purchase more of a good as long as its MU is positive. 11) Perfectly elastic supply curves are are horizontal. 12) In the case of a good for which the demand is inelastic, total revenue will decline when a producer lowers the price of the good. 13) The OC of another unit of a good never changes as one moves along a linear PPF. 14) Suppose a country produces only two goods: gleeb and wroxil. Ceteris paribus, if the country becomes more efficient at producing gleeb the OC of producing wroxil will increase. 15) In a market economy, both parties in a transaction expect to gain from any market exchange of goods and services.

2 16) A stable equilibrium is one that cannot be disturbed. 17) If the price of Pepsi decreases, this should lead to an inward shift in the demand for curve for Coke, and an outward shift in the demand curve for Pepsi. 18) A steeper supply curve leads to a more efficient tax. 19) An allocatively efficient level of output will always maximize economic surplus. 20) An improvement in technology will shift the demand curve outward. 21) Suppliers bear a greater burden of a tax as the supply curve becomes flatter. 22) Any time a shift in a supply or demand curve leads to a gain producer surplus, consumer surplus necessarily shrinks. 23) Imposing an effective price ceiling will lead to a reduction in producer surplus. 24) A government subsidy to wheat farmers actually increases the consumer surplus of wheat consumers. 25) Effective price floors and ceilings both lead to a deadweight loss. Multiple Choice Choose the single best answer. 25 points 26) We observe that the equilibrium price of food rises while the equilibrium quantity decreases. This could be explained by a. a technological breakthrough in refrigeration that reduces spoilage. b. a severe drought in the Midwest. c. a population boom. d. the successful introduction of a new appetite suppressant. e. none of the above. 27) Consider the market for all beef burgers and the market for vegetarian pizza. Suppose a major outbreak of Mad Cow Disease leads to all of the cows in the U.S. being destroyed. As a result, all beef must now be shipped in from overseas. Which of the following will occur? a. Producer and consumer surplus both increase in the burger market. b. Producer surplus decreases in the burger market while producer surplus increases in the veggie pizza market. c. Producer surplus decreases in both markets. d. Consumer surplus decreases in the burger market, and producer surplus decreases in the veggie pizza market.

3 28) The demand and supply functions for muskrat tenderloins (them s good eatin ) are given, respectively, by the equations: P = Q and P = Q. The equilibrium price and quantity are: a. P = 12 and Q = b. P = 20 and Q = c. P = 400 and Q = 12. d. P = 12 and Q = ) If there are empty seats at a Lions football game when the price is P*, this situation can best be represented by which graph in the figure below? a. 1 b. 2 c. 3 d. 4 30) Our typical supply curve has a positive slope because a. economists have traditionally drawn it this way. b. this is the only way it can be differentiated from the demand curve. c. higher production brings more consumers into the market who drive up prices. d. higher levels of output are often associated with rising marginal costs. e. none of the above. 31) Generally speaking, price control mechanisms (i.e. floors and ceilings) will lead to a a. reduction in the quantity sold only if the price is forced down. b. reduction in the quantity sold if price is forced down and increase in the quantity sold if price is forced up. c. increase in the quantity sold whether the price is forced down or up. d. decrease in the quantity sold whether the price is forced down or up. 32)If the price of oil, a close substitute for coal, increases, then the a. producer surplus for coal producers will increase. b. producer surplus for coal producers will decrease. c. consumer surplus for oil consumers will increase. d. economic surplus in the coal market will decrease.

4 33) Brazil sold more soybeans in 2011 than it sold five years earlier, but total revenue is 17 percent less. Which graph in the figure below is consistent with this set of facts? a. 1 b. 2 c. 3 d. 4 34) Consider the case of Brazil and the graphs above again. Given what happened in Brazil, which of the following statements can we make with certainty? a. The Supply curve is elastic over the range of the price change. b. The supply curve is inelastic over the range of the price change. c. The demand curve is elastic over the range of the price change. d. The demand curve is inelastic over the range of the price change. 35) Lisa, Leslie, Lulu, and Lola all head out to decorate their separate dorm rooms for the coming year. Each is considering buying a bulletin board. These boards are priced at \$20 locally and on line. Lisa values a bulletin board at \$25, Leslie s at \$35, Lulu s at \$25, and Lola s at \$15. Assuming each of these women behave ratiaonally, how many of theses women buy a bulletin board and what is the total consumer surplus generated by their purchases. a. All 4 buy a bulletin board and their consumer surplus is \$35. b. All 4 buy a bulletin board and their consumer surplus is \$120. c. 3 of them buy a bulletin board and their consumer surplus is \$45. d. 3 of them buy a bulletin board and their consumer surplus is \$ ) Which of the following would lead to a lower price elasticity of demand for a good? a. the existence of numerous close substitutes b. an extended period of time to make adjustments to any price change c. classification of the good as a luxury d. having a very small portion of one s budget devoted to that good e. none of the above

5 37) Given that Kleenex and Puffs are close substitutes, which of the following is true? a. The cross price elasticity of demand for these goods will be negative. b. The cross price elasticity of demand will be positive, but small. c. The cross price elasticity of demand will be positive and large. d. The cross price elasticity of one will be negative and the other will positive. e. None of the above 38) If the income elasticity of demand for a good is positive, an increase in income should a. lead one to purchase less of a good. b. shift the demand curve for the good outward. c. reduce expenditure on the good. d. increase the slope of the demand curve. 39) An excise tax on alcohol will likely generate significant revenue without changing the quantity consumed if a. demand for alcohol is inelastic. b. demand for alcohol is elastic. c. numerous close substitutes exist. d. Prohibition is declared. 40) In an attempt to raise sales, Hannah cut prices in her book store by 20%. The dollar value of her sales remained unchanged, however. Which of the following does not fit this observation? a. Old customers bought more books. b. New customers bought more books. c. The quantity of books sold increased by 20%. d. The demand curve is vertical. e. None of the above. 41) Farmers who grow various crops in western states buy water from the U.S. government at prices well below the government s cost of supplying the water. Farmers, many of whom are quite wealthy, claim they do not benefit from the subsidy, because the subsidy is simply passed on to consumers in the form of lower prices. The basic economic assumption underlying their argument is that a. consumers know about the subsidies so they demand lower prices. b. Congress sets up price ceilings as part of the subsidy program. c. demand is very inelastic in these markets. d. producers know Congress intended to help consumers with these subsidies so they lower prices out of a sense of fairness. e. none of the above.

6 42) Setting a price ceiling above the equilibrium price will do a. lead to reduced producr surplus. b. lead to reduced economic surplus. c. lead to allocative inefficiency. d. lead to reduced consumer surplus. e. nothing. Gleeb A C B Wroxil 43) Which of the following is true of the figure above? a. The OC of another unit of Gleeb is higher at B than at A. b. The OC of another unit of Gleeb is higher at A than at B. c. The OC of another unit of Gleeb is higher at C than it is at either A or B. d. A is likely to be more allocatively efficient than B. 44) The demand for gondoliers is given by the equation P = 80 3Q and the supply is given by the equation P = Q. After a lengthy strike, the city council enacts a minimum wage of 62 florins per fortnight. As a result, a. the wage rate rises by 12 florins, the number of gondoliers employed falls by 4, and a shortage of 10 gondoliers results. b. the wage rate rises by 12 florins, the number of gondoliers employed falls by 4, and a surplus of 10 gondoliers results. c. the wage rate rises by 12 florins, the number of gondoliers employed rises by 6, and a surplus of 10 gondoliers results. d. neither price nor quantity changes. 45) In a one good world, whenever the MU of the last unit of a good exceeds its price, the consumer a. is consuming less than she should. b. is consuming more than she should. c. should reduce the price to match the MU. d. should cut back on their consumption of this good.

7 46) Assume an entrepreneur is considering producing a new good. After some research she decides that the supply curve for the new good will intersect the vertical axis above the demand curve. If this is the case, which of the following will hold? a. The equilibrium price of this good will be quite high. b. A shortage of this good will occur. c. None of this good will be produced or sold. d. A surplus of this good will occur. e. none of the above. 47) Refer to the graph below. Some buyers will offer sellers \$7 per unit rather than the \$6 maximum set by the price ceiling. This is because a. \$7 is closer to the equilibrium price and buyers prefer the equilibrium price to all others. b. they think it only fair that sellers receive something closer to the equilibrium price. c. they want to increase their chance of obtaining a good of which there is a shortage. d. ceilings only set a lower limit on price.

8 Figure 4 7 shows the market for cigarettes. The government plans to impose a per unit tax in this market on the seller. Figure ) Refer to Figure 4 7. The total tax revenue collected by the government is a. \$120,000. b. \$200,000. c. \$320,000. d. \$350, ) Refer to Figure 4 7 again. The deadweight loss due to this tax is a. \$30,000. b. \$75,000. c. \$120,000. d. \$245, ) In Figure 4 5, what is the area that represents the portion of producer surplus transferred to consumers as a result of the rent ceiling? a. D b. F c. D + E d. D + F Figure 4 5

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