Chapter 5: Price Controls: Multiple Choice Questions 1. ANSWER: d. ceiling. 2. ANSWER: a. a shortage, which cannot be eliminated through market adjustment. 3. ANSWER: b. the equilibrium price is below the ceiling. 4. ANSWER: b. panel (b). 5. ANSWER: d. $8.00. 6. ANSWER: b. surplus of 40. 7. ANSWER: c. shortage of 20. 8. ANSWER: b. panel (b) 9. ANSWER: c. a surplus of wheat. 10. ANSWER: b. a common example of a price ceiling. 11. ANSWER: a. increase, because the demand and supply curves for housing are more elastic in the long run. 12. ANSWER: b. lower rent and lower quality housing. 13. ANSWER: b. a price floor. 14. ANSWER: d. Sellers of corn, recognizing that the price floor is good for them, have pressured policy makers into enacting the price floor. Chapter 6: Elasticity Multiple Choice Questions 1. ANSWER: c. buyers are to a change in price. 2. ANSWER: a. fewer the available substitutes. 3. ANSWER: d. the percentage change in quantity demanded is larger than the percentage change in the price of the good 4. ANSWER: d. inelastic. 5. ANSWER: b. elastic. 6. ANSWER: d. elastic. 7. ANSWER: c. inelastic 8. ANSWER: a. fewer the available substitutes. 9. ANSWER: d. other flavors of ice cream are almost perfect substitutes. 10. ANSWER: c. buyers tend to be much more sensitive to a change in price when given more time to react. 11. ANSWER: c. percentage change in the quantity demanded divided by the percentage change in price. 12. ANSWER: a. consumers are to move away from the good as price rises. 13. ANSWER: d. greater the responsiveness of quantity demanded to price. 14. ANSWER: b. elastic. (% change in Q = 0.5, % change in P = 0.2) 15. ANSWER: d. -2.5 16. ANSWER: a. -1. 17. ANSWER: b. -0.8 18. ANSWER: c. 40 percent decrease in the quantity demanded. 19. ANSWER: d. greater than 1. 20. ANSWER: a. less than 1. 21. ANSWER: c. equal to 1. 22. ANSWER: b. any rise in price above that represented by the demand curve will result in no output demanded. 23. ANSWER: b. horizontal. 24. ANSWER: a. quantity demanded stays the same regardless of price changes. 25. ANSWER: b. a decrease in total revenue. 26. ANSWER: a. $9,000. 27. ANSWER: a. elastic, since total revenue increases from $8000 to $9000. 28. ANSWER: d. decrease total revenue by $1,000. 29. ANSWER: a. B + D. 30. ANSWER: a. increase total revenue of donut sellers. 31. ANSWER: c. raise the price of the bread sticks.
Chapter 6: Elasticity Short Answer Questions 1. a. Diamonds are luxuries, and water is a necessity. Therefore, diamonds have the more elastic demand. b. Insulin has no close substitutes, but decongestant spray does. Therefore, nasal decongestant spray has the more elastic demand. c. Breakfast cereal has more substitutes than does food in general. Therefore, breakfast cereal has the more elastic demand. d. The longer the time period, the more elastic demand is. Therefore, gasoline over the course of a year has the more elastic demand. e. There are more substitutes for Microsoft personal computers than there are for personal computers. Therefore, Microsoft personal computers have the more elastic demand. 2. a. Total revenue from children s tickets is $100 and from adult tickets is $250. Total revenue from all sales would be $350. b. the demand for children s tickets is more elastic. c. The adult ticket market has the more elastic demand. d. The elasticity of demand at $5 is -1/3 and therefore inelastic. e. The elasticity of demand at $5 is -2.5 and therefore is elastic. f. If price is increased to $8 for adult tickets (maximum for the graph) and price decreased to $3 for child tickets (minimum for graph), total revenue would increase to $440 ($8 40 + $3 40) or $90 more than before. Chapter 7: Consumer and Producer Surplus Multiple Choice Questions 1. ANSWER: d. maximum amount that a buyer will pay for a good. 2. ANSWER: a. a buyer s willingness to pay minus the price. 3. ANSWER: c. consumer would not purchase the good and would not have any consumer surplus. 4. ANSWER: a. $6.00. 5. ANSWER: c. Mike, Sandy, and Jonathan 6. ANSWER: c. your consumer surplus is zero. 7. ANSWER: b. below the demand curve and above price. 8. ANSWER: c. increases. 9. ANSWER: b. A 10. ANSWER: b. amount a seller is paid less the cost of production. 11. ANSWER: b. $750. 12. ANSWER: b. well-being of sellers. 13. ANSWER: b. $5 per dozen. 14.ANSWER: a. Consumer surplus + Producer surplus. 15. ANSWER: a. $480. 16. ANSWER: b. $360. 17. ANSWER: b. $640. 18. ANSWER: c. $1,120. 19. ANSWER: b. import 250 calculators. 20. ANSWER: c. $2,250. 21. ANSWER: a. $625. Chapter 7: Consumer and Producer Surplus Short Answer Questions 1.a. Consumer surplus measures the benefit to buyers of participating in a market. It is measured as the amount a buyer is willing to pay for a good minus the amount a buyer actually pays for it. For an individual purchase, consumer surplus is the difference between the willingness to pay, as shown on the demand curve, and the market price. For the market, total consumer surplus is the area under the demand curve and above the price, from the origin to the quantity purchased. b. Because the demand curve shows the maximum amount buyers are willing to pay for a given market quantity, the price given by the demand curve represents the willingness to pay of the marginal buyer. c. When the price of a good falls, consumer surplus increases for two reasons. First, those buyers who were already buying the good receive an increase in consumer surplus because they are paying less (area B). Second, some new buyers enter the market because the price of the good is now lower than their willingness to pay (area C); hence, there is additional consumer surplus generated from their purchases. The graph should show that as price falls from P2 to P1, consumer surplus increases from area A to area A + B + C.
d. Since the demand curve represents the maximum price the marginal buyer is willing to pay for a good, it must also represent the maximum benefit the buyer expects to receive from consuming the good. Consumer surplus must take into account the amount the buyer actually pays for the good, with consumer surplus measured as the difference between what the buyer is willing to pay and what he/she actually paid. Consumer surplus, then, measures the benefit the buyer didn t have to pay for. 2. a. b. At a price of $0.20, Tammy would buy 5 donuts. c. The figure below shows Tammy s consumer surplus. At a price of $0.20, Tammy s consumer surplus would be $1.00. d. If the price of donuts rose to $0.40, Tammy s consumer surplus would fall to $0.30 and she would purchase only 3 donuts.
3. a. Producer surplus measures the benefit to sellers of participating in a market. It is measured as the amount a seller is paid minus the cost of production. For an individual sale, producer surplus is measured as the difference between the market price and the cost of production, as shown on the supply curve. For the market, total producer surplus is measured as the area above the supply curve and below the market price, between the origin and the quantity sold. b. Because the supply curve shows the minimum amount sellers are willing to accept for a given quantity, the supply curve represents the cost of the marginal seller. c. When the price of a good rises, producer surplus increases for two reasons. First, those sellers who were already selling the good have an increase in producer surplus because the price they receive is higher (area A). Second, new sellers will enter the market because the price of the good is now higher than their willingness to sell (area B); hence, there is additional producer surplus generated from their sales. The graph should show that as price rises from P1 to P2, producer surplus increases from area C to area A + B + C. 4. Start with the equation: Total Surplus = Consumer Surplus + Producer Surplus. Then, since Consumer Surplus = Value to buyers Amount paid by buyers, and since Producer Surplus = Amount received by sellers Costs of sellers, then Total Surplus can be written as: Value to buyers Amount paid by buyers + Amount received by sellers Costs of sellers. Since the Amount paid by buyers equals the Amount received by sellers, the middle two terms cancel out and the result is: Total Surplus = Value to buyers Costs of sellers. Multiple Choice Questions 1. ANSWER: c. (iii) only 2. ANSWER: c. total revenue. 3. ANSWER: a. total cost. 4. ANSWER: b. total revenue minus total cost. 5. ANSWER: a. total output multiplied by price per unit of output. 6. ANSWER: a. require an outlay of money by the firm. 7. ANSWER: c. the cost of flour for a baker. 8. ANSWER: c. (i) only 9. ANSWER: b. total revenue minus the opportunity cost of producing goods and services. 10. ANSWER: b. total revenue minus the explicit cost of producing goods and services. 11. ANSWER: b. (i) and (ii) 12. ANSWER: b. (iii) only 13. ANSWER: d. increase in output obtained from a one unit increase in labor. 14. ANSWER: a. crowded office space reduces the productivity of new workers. 16. ANSWER: c. diminishing marginal product. 17. ANSWER: c. the size of the factory is fixed. 18. ANSWER: a. average total cost. 19. ANSWER: d. total cost/output. 20. ANSWER: b. marginal cost. 21. ANSWER: d. None of the above are correct. 22. ANSWER: a. (i) and (ii) 23. ANSWER: a. always declines with increased levels of output. 24. ANSWER: c. average total cost is falling. 25. ANSWER: a. (ii) only 26. ANSWER: d. All of the above are correct. 27. ANSWER: b. is falling. 28. ANSWER: a. fixed costs and variable costs. 29. ANSWER: b. the cost of the steel that is used in producing automobiles 30. ANSWER: a. $15,000. 31. ANSWER: a. $3. 32. ANSWER: c. $6. 33. ANSWER: d. $9. 34. ANSWER: b. $ 5,000 35. ANSWER: b. long-run average total costs fall as output increases. 36. ANSWER: c. long-run average total costs rise as output increases. 37. ANSWER: d. It depends on the nature of the firm. 38. ANSWER: d. All of the above are correct.
Chapter 9: Perfect Competition Multiple Choice Questions 1. ANSWER: c. (ii) and (iii) only 2. ANSWER: a. a competitive market 3. ANSWER: a. equal to marginal revenue. 4. ANSWER: d. sellers will have little reason to charge less than the going market price. 5. ANSWER: b. Firms have difficulty entering the market. 6. ANSWER: a. many other sellers are offering a product that is essentially identical. 7. ANSWER: b. $10 and 50 8. ANSWER: b. Total revenue is greater than variable cost. 9. ANSWER: b. 6 10. ANSWER: d. 9 11. ANSWER: a. $5. 12. ANSWER: d. None of the above are correct. 13. ANSWER: b. increase production to maximize profit. 14. ANSWER: c. Q3 15. ANSWER: c. losses because P2 < ATC at output level Q1. 16. ANSWER: d. Q4 17. ANSWER: b. experiences a zero profit. 18. ANSWER: c. price is below the minimum of average variable cost. 19. ANSWER: b. fixed costs. 20. ANSWER: a. shut down and incur fixed costs. 21. ANSWER: a. sheepherders making a shut-down decision to save the variable cost of transporting sheep to a slaughter house. 22. ANSWER: d. sunk cost. 23. ANSWER: a. will experience losses but it will continue to produce rubber balls. 24. ANSWER: b. The firm will immediately stop production to minimize its losses. 25. ANSWER: a. price < average variable cost. 26. ANSWER: a. price < average total cost. 27. ANSWER: c. new firms will enter the market. 28. ANSWER: c. (P5 P4) Q3. 29. ANSWER: c. P3. 30. ANSWER: d. At a market price of P2 the firm has losses, but the reference points in the figure don t identify the losses. 31. ANSWER: d. total revenue is less than total cost. 32. ANSWER: a. a one-unit increase in output will increase the firm s profit. 33. ANSWER: c. a one-unit decrease in output would increase the firm s profit. 34. ANSWER: c. marginal revenue = marginal cost. 35. ANSWER: d. All of the above are correct. 36. ANSWER: a. Profit = (Price of output Average total cost) Quantity of output. 37. ANSWER: b. $1,600. 38. ANSWER: b. drive down profits of existing firms in the market. 39. ANSWER: c. raise profits for firms that remain in the market. 40. ANSWER: b. all firms will operate at efficient scale in the long run. 41. ANSWER: d. All of the above are correct.
Chapter 9: Perfect Competition Short Answer Questions 1. There are many buyers and sellers in the market. The goods offered by the various sellers are largely the same. Firms can freely enter or exit the market. There are no entry or exit barriers. 2. It could not sell any more of its product at the lower price than it could sell at the higher price. As a result, it would needlessly forgo revenue if it set a price below the going price. 3. In a competitive market where firms are earning economic profits, new firms will have an incentive to enter the market. This entry will expand the number of firms, increase the quantity of the good supplied, and drive down prices and profits. 4. By selecting the level of output at which marginal revenue is equal to marginal cost. If MR > MC, profit will increase if the firm increases Q. If MR < MC, profit will increase if the firm decreases Q. 5. If the selling price is not sufficient to cover the variable cost of sending them to market this behavior would make sense. 6. The loss and revenue are identified on the individual firm s graph. Total cost is equal to the sum of the losses and revenue. The decision about whether this firm shuts down or remains in the market depends upon the position of average variable cost. If average variable cost is below P0 at output level Q0, the firm will remain in the market. If average variable cost is above P0 at output level Q0 the firm will shut down in the short run. 7. $2,500; firms are likely to enter this market since existing firms are earning economic profits.