Problem Set 4 Eco 112, Fall 2011 Chapters covered: Ch. 8 and Ch. 9 (up to slide 15 Price Discrimination) Due date: October 20, 2011 There are 30 multiple choice questions in this problem set. Answer these questions by the beginning of the class on Thursday October 20, 2011. 1. An example of an implicit cost is A. interest paid on a bank loan. B. wages paid to a family member C. the value of a spare bedroom turned into a home office. D. operating costs of a company-owned car. 2. It is always true that A. accounting profits are positive. B. economic profits are zero. C. economic profits are greater than or equal to accounting profits. D. accounting profits greater than or equal to economic profits. Pat used to work as an aerobics instructor at the local gym earning $35,000 a year. Pat quit that job and started working as a personal trainer. Pat makes $50,000 in total annual revenue. Pat's only out-of-pocket costs are $12,000 per year for rent and utilities, $1,000 per year for advertising and $3,000 per year for equipment. 3. What is Pat's explicit cost? A. $12,000 B. $15,000 C. $16,000 D. $35,000 4. Pat's accounting profit (loss) is. A. $50,000 B. $34,000 C. $15,000 D. -$1000 5. Pat's economic profit (loss) is. A. $50,000 B. $34,000 C. $15,000 D. -$1,000 6. Which of the following would be an example of the rationing function of price? A. Switching from a Ph.D. in economics to finance because finance salaries are higher B. Bill Gates purchasing the Mona Lisa for $5 billion C. A firm attempting to lower its explicit costs D. Government price controls 1
7. f all firms in a perfectly competitive industry are experiencing economic losses, then firms will A. exit the industry, until economic profits are positive. B. exit the industry, until accounting profits equal zero. C. continue in the industry, hoping for better times. D. exit the industry, until economic profits equal zero. 8. The long-run equilibrium price in this industry is A. $15 B. $10. C. $5. D. $5 for some firms and $10 for others. 9. When price is $15 in this industry, A. the industry is in its long run equilibrium. B. it is because supply has shifted from Supply B to Supply A because firms that were not making a profit left the industry. C. new firms will be expected to enter. D. all firms are making zero economic profits. 10. The firm depicted in the graph on the right faces a demand curve that A. is horizontal at the market price. B. is downward sloping, and less than market demand curve. C. is the same as the marginal cost curve. D. is the same as the market demand curve. 11. In the long run, there will be firms in this market. A. 10 B. 15 C. 25 D. 50 12. Superstar professional athletes can sustain their economic rents because A. team owners will pay anything to win the championship. B. they have excellent union representation. C. their opportunity costs of playing are high. D. if their current team does not pay, they can take their unique talents to another team willing to pay. 2
Suppose the city of Austin, TX chooses to regulate the number of street vendors operating near the University of Texas by requiring each vendor to own a permit in order to operate. The city gives permits to all existing vendors and announces that no new permits will ever be issued. Prior to regulation, the costs (including implicit costs) of operating were $85,000 and revenues were $150,000. The city ordinance allows the permits to be bought and sold without restriction. The permits have no expiration date. The interest rate is 10 percent. 13. Prior to the option of the ordinance, street vendors were earning A. economic profits of zero. B. accounting profits of $65,000. C. a normal profit. D. economic profits of $65,000. 14. The equilibrium price of permits is A. $650,000. B. $150,000. C. $65,000. D. $6,500. 15. Gerry receives an offer that will pay $1500 two years from now. If the interest rate is 7%, the most Gerry would be willing to pay for this offer is A. $519. B. $882. C. $1310. D. $1402. 16. An imperfectly competitive firm is one A. that attempts but fails to compete perfectly. B. with the ability to set price at any level it wishes. C. that possesses some degree of control over its price. D. that faces perfectly inelastic demand. 17. To sell an extra unit of output, a perfect competitor while an imperfect competitor. A. does not alter price; must lower price B. must hope the market price falls; must lower price C. does not alter price; does not alter price either D. must lower price; must lower price 18. Which of the following firms is most likely to be a monopolist? A. The clothing retailer in a mall B. The grocery store in a large city C. The most popular hot dog vendor on a city street corner D. The one grocery store in a small town 19. Which of the following industries does not fit the natural monopoly model? A. Electricity B. Cable TV C. Diamonds D. Natural gas 3
20. If a firm functions in an oligopoly, it A. is one of a few firms that produces a good with close substitutes. B. has no close substitutes in a market. C. is one of many suppliers of a good with perfect substitutes. D. is the only firm in a geographic region. 21. For perfectly competitive firms price marginal revenue; for monopolists price marginal revenue. A. equals; equals B. equals; is less than C. is less than; equals D. equals; is greater than 22. Refer to the figure above. The total revenue of selling 3 units is and the marginal revenue of selling the third unit is A. $28; 8. B. $24; 6. C. $52; 1. D. $24; 8. 23. Refer to the figure above. The total revenue of selling six units is and the average revenue of selling six unit is A. $5; $1. B. $30; $5. C. $24; $5. D. $30; $6 24. Refer to the figure above. When the firm lowers price from $8 to $7, marginal revenue is less than $7 because A. marginal cost is greater than $3. B. the consumer only pays $4 for the fourth unit. C. the firm is charging $1 less for each of the first three units of output. D. demand is perfectly elastic. 25. The monopolist will maximize profits if it produces where A. price equals marginal costs. B. price equals the minimum average total cost. C. marginal revenue equals average total cost. D. marginal revenue equals marginal cost. 4
26. Refer to the figure below. The profit-maximizing level of output for the monopolist is and the profitmaximizing price is. A. 50; $20 B. 33.33; $13.33 C. 33.33; $26.67 D. 50; $26.67 27. Refer to the figure below. At the profit-maximizing level of output, profit for this monopolist is. A. $0 B. $666.60 C. $533.40 D. $444.62 28. Refer to the figure above. At the point of monopoly profit maximization, consumer surplus is, and at the point of perfectly competitive profit maximization, consumer surplus is A. $333.33; $355.51 B. $222.14; $500 C. $500.00; $222.14 D. $266.67; $355.51 29. Refer to the figure above. The deadweight loss resulting from monopoly is. A. $111.19 B. $277.86 C. $222.21 D. $360 30. Perfect competition is efficient and monopoly is not because in perfect competition while in monopoly. A. P = MC; P > MC B. P < MR; P = MR C. P = MR; P < MR D. P = MC; P < MC 5