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Midterm Exam - Practice Set
Practice Set 1 Multiple Choice Questions
1) The strategy that is best no matter what other players do is called a A) payoff. B) Nash equilibrium. C) dominant strategy. D) profit-maximizing strategy. E) prisonerʹs dilemma. 2) When incomes rise, A) many demanders drop out of the market. B) the demand for normal goods drop. C) the demand for normal goods rise. D) expectations of future price changes improve. E) there is no effect on the demand for normal goods. 3) In economics, the long run is A) a time period in which no inputs can be varied. B) a time period in which there is at least one fixed input. C) five years. D) a time period in which all inputs can be varied. E) one year. 4) A key problem with centrally planned economies is that they A) are based on the principle of entropy. B) never reach an unemployment level of zero. C) tend to face inflationary pressures. D) grow too fast for the government to control adequately. E) do not create the right incentives for firms to meet consumer desires and for workers to work hard. 5) If a firm shuts down in the short run, its profit will be equal to A) –FC B) -VC C) zero D) It depends on the firm and the market. E) –(FC + VC) 6) Consider the following statements about perfectly competitive markets. I. It is unlikely that firms in competitive markets have extensive economies of scale. II. Firms in competitive markets can enter and exit freely. III. Firms in competitive markets have no fixed costs. A) I is true; II and III are false. B) All three statements are false. C) I and III are true; II is false. D) All three statements are true. E) I and II are true; III is false. 7) A perfectly elastic demand curve is one where buyers are so A) insensitive to price that quantity demanded cannot be calculated. B) sensitive to price that quantity demanded becomes infinity for even the smallest increase in price. C) insensitive to price that quantity demanded becomes infinity for even the smallest increase in price. D) sensitive to price that quantity demanded becomes zero for even the smallest increase in price. E) insensitive to price that quantity demanded becomes zero for even the smallest increase in price.
Midterm Exam - Practice Set
Narrative: In a week, a worker in the United States can produce forty (40) pounds of chicken or twenty (20) pounds of beef; a worker from Argentina can produce twenty (20) pounds of chicken or forty (40) pounds of beef. 8) Refer to the previous narrative: Which of the following statements is true? A) The United States should import chicken from Argentina in exchange for beef. B) The United States should not export chicken to Argentina in exchange for beef. C) Trade would cause the consumption possibilities frontiers of both countries to be inside their respective production possibilities frontiers. D) The United States should export chicken to Argentina in exchange for beef. E) Given these particular production possibilities frontiers, trade would benefit the United States only. 9) Jeff consumes onion rings and orange soda. Holding Jeffʹs utility constant, as he gives up more onion rings to get soda, the marginal utility that he gets from soda ________, and his marginal rate of substitution (of onion rings for soda) ________. A) increases; decreases B) decreases; decreases C) remains constant; decreases D) decreases; increases E) increases; increases 10) Governments allow natural monopolies to be the only firm in the market because A) the firm has spent resources on rent-seeking. B) scale economies make it more efficient to have a single firm in the market. C) they wish to be able to tax large firms. D) natural monopolies encourage innovation. E) licensing can keep undesirable firms out of local markets. 11) Use of the midpoint formula solves the problem that A) the more common method of calculating percent changes requires more computations. B) price increases tend to have greater elasticities than price decreases. C) percent increases equal percent decreases over the same range of numbers. D) price increases yield positive elasticities while price decreases yield negative elasticities. E) price increases yield inelastic results while price decreases yield elastic results. 12) One reason why high prices are associated with a high quantity supplied is that A) higher output levels lead to higher transportation costs. B) suppliers need to be compensated for higher production costs of higher output levels. C) suppliers are reluctant to offer quantity discounts unless pressured to do so. D) consumers expect higher prices for greater quantities. E) quality is higher as more goods are produced because of the learning curve so consumers are willing to pay more. 13) Currently, average product of labor is 20 units per worker. If an additional worker is hired and produces 10 units, which of the following statements must be true? A) The average product of labor is decreasing. B) The next worker hired will only produce 5 units. C) The firm will be able to pay the last worker less than previous workers D) Total product is decreasing. E) The last worker is less productive and should not have been hired. 14) Adding a 5th worker causes the output of a firm to rise from 90 to 125 units, and causes average productivity to rise to 25. Which of the following is a TRUE statement? A) Adding one more worker will cause total output to fall. B) The average product of labor was 20 when there were only 4 workers. C) There are diminishing returns to labor at this point. D) The marginal product of the 4th worker was less than 25. E) The average product of labor was less than 25 when there were only 3 workers. 15) Which pair comes from an elastic demand curve? A) A three percent increase in price leads to a half percent decrease in quantity demanded. B) A one percent increase in price leads to a one percent decrease in quantity demanded. C) A six percent decrease in price leads to a one percent increase in quantity demanded. D) A six percent increase in price leads to a one percent increase in quantity supplied. E) A one percent increase in price leads to a five percent decrease in quantity demanded.
Midterm Exam - Practice Set
16) Suppose the elasticity of demand for a seasonal allergy medicine is -2.3 in Arizona and -1.2 in Colorado. If the price of the medicine were originally $1 in both locations, we can conclude that A) the revenue effects cannot be compared for such disparate geographic locations. B) a $0.50 increase in price will cause an equal percentage drop in quantity demanded in both areas. C) a $0.50 increase in price will cause a smaller percentage drop in quantity demanded in Arizona than in Colorado. D) a $0.50 decrease in price will cause decreases in quantity demanded in both Arizona and in Colorado E) a $0.50 increase in price will cause a larger percentage drop in quantity demanded in Arizona than in Colorado. 17) The Hirfindahl-Hirschman Index (HHI) is calculated by A) adding the profits of the top four firms in the industry. B) dividing the profits of the top four firms by total profits. C) multiplying the market shares of the top four firms in the industry. D) adding the squared market shares of all firms in the industry. E) adding the market shares of the top four firms in the industry. 18) The reason taxes impose a burden on demanders is that taxes A) lower the price paid and increase quantity demanded, causing a loss in consumer surplus. B) raise the price paid and decrease quantity demanded, causing a loss in consumer surplus. C) raise the price paid and increase quantity demanded, causing a gain in consumer surplus. D) raise the price paid and decrease quantity demanded, causing a gain in consumer surplus. E) lower the price paid and decrease quantity demanded, causing a loss in producer surplus.
Diseconomies of Scale; Income effect; Negative Externality; Opportunity Cost; Moral Hazard
Exercise 1 Assume that the NYC demand for the flu vaccine is 120 units regardless of the price charged. Assume further that the supply is given by Q = -200 + 4P. (a) What is the equilibrium price and quantity of the flu vaccine? (b) Mayor Bloomberg, horrified at the high price for the flu vaccine decides to set a price ceiling at $60. What are the results of this ceiling? Is the government’s goal of helping those that badly need the vaccine being met? Explain—using a diagram. (c) Finally the government dismantles the price ceiling and hires an economist to help with the problem. The economist writes: “There is a better way to handle this; we can simply place a sales tax of $20 on the flu vaccine and then refund all of the revenue from the sales tax to those who are buying the drug. This is a simple way to subsidize those that really need the vaccine and stop price gouging.” Will this scheme work? Why or why not? What makes this case different from the standard supply and demand case? Exercise 2 Suppose that Shakira Inc. produces a brand new music CD. The production cost information for the firm and the demand for the new CDs are given as follows: FC = 30 VC = 8Q Q = 40 – P (a) Is Shakira Inc. operating in a perfectly competitive market? How can you be sure? (b) What is the firm’s average cost function? (c) What quantity of output will the firm produce? At what price? (d) How much profit is the firm making when it maximizes profits? (e) If the firm were forced the firm to produce where price is equal to average cost, what would the firm earn in profits? Exercise 3 Hella buys only two products (CDs and books). Hella has prefernces so that her Total Utility of CDs is TUCD = 100+5CD where CD is the number of CDs she already owns. Hella’s marginal utility of books is MUB = 10. Furthermore, books and CDs sell for exactly the same amount, $12 each. a. At what rate is Hella willing to trade CDs for books? Does this rate depend on the number of books or CDs she already owns? b. Does Hella consider books and CDs perfect complements, imperfect substitutes or perfect substitutes? c. Suppose Hella has $60. How many CDs and how many books does she buys when she is maximizing her utility? d. In a diagram, draw Hella’s budget constraint and indifference curves and indicate her optimal combination of books and CDs.
c. Budget line: CD intercept of 6.Solutions Multiple Choice questions: 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 C C D E A E D D B B C B A E E E D B Exercises (1) a. setting MR=MC␣40-2Q=8␣Q*=16. To simply refund them the proceeds is not beneficial to them (though one could make the case that if you redistribute within the consumer group some twill be benefitted). (c) With perfectly inelastic demand (as in this case) there is no producer burden to the tax—i. (2) a. d. TC=VC+FC␣8(16) + 30=158. others are rationed out of the market. (e) If P=AC. while her MUCD = change in TUCD/ change in CD = 5. She considers books and CDs perfect substitutes. no need to solve any quadratic equations!). books intercept of 6. Hella’s MUB = 10. (b) With price ceiling at P=60. (3) a. For MR. Q*=120. b. Indifference curves are straight lines with slope of 2 (if books are measured along the horizontal axis).Practice Set Musatti Practice Set 1. slope of -1. profits are 0 by definition (i. Qd = 120. CDs and books are sold at the same price and Hella’s MUB=10 > 5=MUCD. Qs=40 and thus you have excess demand or shortage of 80 units. Hella’s MUB/PB > MUCD/PCD and she spends all her money in books. MC is 8 (from VC=8Q). setting Qd=Qs yields 120=-200+4P ␣4P=320␣P*=80. (d) Profit equals TR-TC␣TR=16 x 24 =384.e.Spring 2013 Midterm Exam . (c) Need to calculate MR and MC. Some consumers are helped. inverting demand curve yields P=40-Q and you know that MR has twice the slope of demand so MR=40-2Q. Hella is willing to trade books for CDs according to her MRS. all of the tax is paid by consumers. TR-TC=384-158=$226. The optimal bundle is at a corner of the budget constraint . putting this into demand curve yields P*=24. Hella’s MRS is independent of the number of CDs or the number of books she owns. Hella’s MRS is equal to 2. The MRS of CDs for books is given by the ratio of MUB/MUCD. No. Hella’s MRS is independent of the number of CDs or the number of books she owns. Qs = -200+4P. (b) AC =TC/Q␣TC=FC+VC␣30+8Q␣AC=(30+8Q)/Q. and she is willing to trade two CDs for one book.e. Downward sloping demand curve.
c. e. efficiency would require the payment of a subsidy to drivers or to car dealerships. the price of petroleum has dropped to $65 per barrel. Leather bags are Nash goods. c. Building expectations of a worldwide economic downturn due to the effects of the 2008 financial crises. In England. Price rebates at Staples. 4. even if the markets for vehicles and liquors were perfectly competitive. The Earned Income Tax Credit. 7. b. d) Starbucks’ coffee beverages are luxury goods e) the increase in price was compensated by an equal increase in the cost of production. an Indian worker could grow 15 tons of cotton or weave 6 rolls of cloth. d. c. England should have exported cotton and cloth to India. 2) Refer to Narrative 1. d. the company’s revenue stayed the same. Which of the following is an example of a price floor? a. egotistically competitive. 5. an inefficiently low amount of liquor would be consumed each year.Practice Set Musatti Practice Set 2 Multiple Choice Questions: 1) When Starbucks’ raised the price of its coffee beverages by 10c per cup. c. e. England should have imported cotton from India while exporting cloth to India. d. Narrative 1. By the end of the year. a pure monopoly. The fast rate of growth of the Chinese economy. Leather bags are necessities.Spring 2013 Midterm Exam . hundreds of offer a standard menu of services catering to an average of 200. b. In Lower Manhattan. . d. the opportunity cost of a roll of cloth was ½ ton of cotton. OPEC announcing a plan to drastically cut production of crude oil. The federal minimum wage. b. Leather bags are a Veblen good. In July 2008. a regulated monopoly. efficiency would require a complete ban on alcoholic beverages. c. e. there would be a surplus of liquor. a. This data imply that: a. In the late 1800s. the price of petroleum was $145 per barrel. an inefficiently high number of vehicles would be sold each year. More consumers wish to buy a leather bag when it I sold for $300 than when it is sold for $50. b. d. Leather bags are complement goods. e. e. The United States Department of Energy replenishing its Strategic Petroleum Reserves (SPR). Rent stabilization and rent control in New York City. perfectly competitive. 6. Which of the following events could explain the sharp drop in the price of petroleum? a. b. b. Leather bags are a Giffen good. Excise taxes on cigarettes. d. an oligopoly. It appears that a) Starbucks coffee is an inferior good. None of the above. Hence. England had a comparative advantage in growing cotton. b) Starbuck’s price elasticity of supply is lower than its price elasticity of demand. Trade between the two countries was driven by England’s absolute advantage. c) Demand for Starbucks’ coffee beverages is unit-elastic. e. a. Individuals that drive under the influence of alcohol or recreational drugs make roads more dangerous to all.000 customers each week. The market for nail services in Lower Manhattan is a. 3. each year an English worker could grow 10 tons of cotton or weave 5 rolls of cloth. c.
D e. e. Bob should buy more bananas since he likes this fruit better. b.25 cents while one apple costs 50 cents. e. All firms experience economies of scale. . Output is produced at the minimum average cost. A b. Refer to Figure 1. Bob’s marginal rate of substitution is 1. Bob should buy more apples and fewer bananas. 11. Which of the following is NOT true when a perfectly competitive market is in long-run equilibrium? a.00. c. None of the above. Firms’ marginal cost equals buyers’ marginal benefit. b. 160 Figure 1 9.Spring 2013 Midterm Exam . a. 120. 80.Practice Set Musatti 8. 60. d. e. If the price elasticity of demand for comforters measured using the midpoint formula is -2. how many comforters would the company sell at a unit price of $110? a. d. Which of the four graphs represents the market for bottled water after a drop in the price of PET. The Store Company sold 120 comforters at a price of $90 each. d. Bob’s marginal utility from bananas is 2 times his marginal utility from apples. B c. All consumers pay the same unit price. c. b. 10. Bob should buy more apples to increase his marginal utility. Bob should buy more apples and more bananas. C d. c. a type of plastic used to manufacture water bottles? a. All firms have the same MC. In August. One banana costs 1. 100.
is Saudi Arabia produces 1 billion barrels and UAE produces 0. Saudi Arabia has a perfect strategy. 13. are choosing the yearly number of barrels of petroleum they will produce and market this year. The most likely outcome of this strategic interaction a. David’s opportunity cost of a shirt is two sweaters. If the cleaners lost one of David’s shirts. producer surplus increased by 5 rupees per day. consumer surplus dropped by 5 million rupees per year. producing 1 billion barrels is Saudi Arabia’s dominant strategy. b. depends on the number of times the interaction is repeated over time. there is no Nash equilibrium. c. Morning cereal and cellular phone services are sold in a. He paid $40 for each shirt and $80 for each sweater. d. . d. Refer to Figure 2. e. c. d.5 billion barrels. UAE should produce 0. Which of the following is a fixed cost for Joe the plumber? a. regulated monopolies. the Indian government spent 50 million rupees per day to finance the subsidy. 14. David’s marginal utility of sweaters is twice his marginal utility of shirts. Monthly payments for gasoline.Spring 2013 Midterm Exam . if he worked for Sam’s Super Plumbers. b. is Saudi Arabia produces 1 billion barrels and UAE produces 0. the subsidy raised the Indian government’s revenue by 55 million rupees. In this “game”. is Saudi Arabia produces 1 billion barrels and UAE produces 1 billion barrels. d.5 billion barrels. administration controlled markets. d. Monthly payments for the lease of his company pick-up truck. The cost of duct tape.Practice Set Musatti Figure 2 Saudi Arabia and the United Arab Emirates. is Saudi Arabia produces 2 billion barrels and UAE produces 1 billion barrels. producing 1 billion barrels is UAE’s dominant strategy.5 billion barrels UAE $ 50 billion $ 60 billion 2 billion barrels $ 10 billion $ 30 billion 1 billion barrels $ 40 billion $ 15 billion $ 45 billion 12. the two largest exporters of petroleum. The economic profits from the sales are illustrated in the matrix below. monopolistically competitive markets. c. a. b. e. d. perfectly competitive markets. e. bought two shirts and four woolen sweaters. a. Saudi Arabia 1 billion barrels $ 25 billion 0. David. In India. 17. Income taxes. David should have bought more shirts since they are cheaper than sweaters. e. oligopolies.5 billion barrels. when the government introduced a 5 rupees per pound rice subsidy daily purchases of rice increased from 10 million pounds to 11 million pounds and ________. c. b. b. David likes shirts better than sweaters. if Saudi Arabia produces 2 billion barrels. b. e. c. e. the subsidy created a daily deadweight loss of 2. he would need to receive two sweaters to fell fully compensated for the loss. 16. Refer to Figure 2. a rational consumer. Profits for UAE are in the shaded triangles. 15. c.5 million rupees. Wages he could earn. a.
c. DEF e. but the equilibrium quantity could increase. a luxury good. a. A number of New Jersey orchards did not pick their apples. This evidence shows that American families consider medical services a. Washington State orchards were had a surplus of Red Delicious. ACF c. b. If the economy enters a recession and at the same time the price of gold and silver increase.Practice Set Musatti 18. Which area represents consumer surplus after a price floor raises the price from P2 to P1? a. d. drop or stay the same. d. A number of New Jersey orchards raised the number of acres cultivated with apples. The price elasticity of demand for gold watches is . Both the equilibrium price and the equilibrium quantity of jewelry increase. The price elasticity of supply of gold watches is 2. Comparative Advantage . BDFC b. c. d. Refer to Figure 7-2. The same season.Spring 2013 Midterm Exam . a complement to income. the tax has no effect on the market price. We need information about the change in the price of medical services to determine what type of product medical services are. Most New Jersey orchards recorded accounting profits. the tax generates no revenue. buyers and sellers pay an equal share of the tax. MES. e. buyers bear the larger share of the burden of the tax. If Mayor Bloomberg levies a tax on gold watches. 22. 20. The equilibrium quantity decreases.15. Jewelry is a normal good. but the equilibrium price could increase. b. in New Jersey. decrease or stay the same because changes in input prices have no effect on quantity. e. what happens to the equilibrium price and equilibrium quantity of jewelry? a. The equilibrium price increases.0. a substitute good. Identifications: Substitution Effect. b. c.5. sellers bear the full burden of the tax. the cost of picking. Because supply is more price elastic than demand. In the same years. a box of Red Delicious apples sold for $10. b. In the Fall of 2011. in the U. c. After WWII. BCED d. packaging and shipping a box of Red Delicious was $13. e. Both the equilibrium price and the equilibrium quantity of jewelry decrease. Which of the following events likely happened? a. d. ABD 21. 19. the median family income rapidly increased. The variable cost of a box of Red Delicious was $3. a necessity. The equilibrium price increases as during recessions inflation tends to be high. the share of income American families spent on medical services increased as well.15. e.S.
In August of 2008. Last year. ATC 14 12 10 8 6 4 2 0 Price $ per pie MC Long Run AC AVC A. In a diagram. b.Practice Set Musatti Short Answers/ Exercises Exercise 1. Exercise 3. C. In a diagram. However. The GVT suggests the introduction of a price floor at 11 pesos per lb. The daily demand and supply of bread are represented by the following equations: Qd = 24 – 2P and Qs = 0. a. a. How much wheat would be produced then? At what price would the wheat be sold? c.5P-1 where quantity is measured in thousands of lbs. Show your work. a young economist fresh from college worked 2. Exercise 5. of bread. the market for bread is perfectly competitive. then using algebra. The government breaks up the monopoly and the market for wheat is perfectly competitive once again.000 hours at an hourly rate of $100. It has been a long while since the price of wheat changed last. clearly mark the short run supply curve for this firm. clearly label the curves and the market equilibrium. show the effect of the price floor on the price of bread and the amount of bread sold each day. B.000. Will the young economist work longer or shorter hours once offered the new compensation package? . The diagram illustrates the cost structure of Ray’s Pizza in 2007.Spring 2013 Midterm Exam . Suppose a large agri-business company buys all farms and becomes the only seller of wheat. In August 2007 the price of a pizza pie was $10 – was Ray’s Pizza open for business? Clearly explain. In the diagram. c. of bread and price is measured in pesos per lb. has decided to lower his hourly wage to $90 but to pay him a yearly bonus of $20. show how the higher price of rice influences the price and quantity of wheat. In Oaxaca. 100 day 200 300 400 500 600 700 Pies per Exercise 2. The market for wheat is perfectly competitive. This year Hanna. If the MTA wants to increase revenue. the price of rice increases five folds. Would bakers lobby in favor of the price floor? Why? Exercise 4. Did the pizza parlor sell more pizzas in August 2007 or August 2008? Explain. Currently the demand for wheat is D = 30-2P while the supply of wheat is S=P. In the diagram. What is the ATC of producing wheat? How do you know? b. should it increase or decrease the price of a subway ride? Explain. his boss. Ray’s pizza was open for business. a perfectly competitive firm selling pizza. find the equilibrium price and the equilibrium quantity in this market. draw the demand and supply curves.
it is a long-run equilibrium price. D=30 – 2P =P=S P = 10 B.5P è P = 10 è Q = 24-2x10 = 4 B.5P – 1=S è 25=2. that is if demand is inelastic. while lower expected future prices increase the current supply of previously grown wheat 5. B. The price of bread increases to 11 pesos. The price increase reduces quantity so sharply that bakers producer surplus drops after the introduction of the price floor. B. As most likely the demand for subway rides is inelastic. Firms earn the highest profits when output satisfies MR=MC. There is a surplus. P>AVC and Ray should stay open. At this price Ray’s would sell 500 pizzas. as they require different climatic conditions. The . If rice and wheat are complements: D drops and D curve shifts to Price S the left. As long as the young economist considers purchases an imperfect substitute of free time. In August 2008. Rice and wheat are not substitutes in production. The price floor lowers bakers’ producer surplus. the amount of bread sold drops to 2 thousand lbs. the MTA could increase revenue by lowering its prices. ATC MC Long Run AC AVC A.5 and charge P = 30 – 15 = 15 cents. Demand could also move in response to changes in expected future prices.Q = Q è Q* = 7. In perfectly competitive markets. The monopolist would produce 15. As the price has not changed for a while. Whether MTA should increase or lower prices depends on the price elasticity of demand for subway rides. Higher expected future price for wheat depress the current supply of previously grown wheat. If rice and wheat are substitutes: D increases. C. he will work shorter hours. furthermore it takes time to shift acreage from one crop to another. Ray’s pizza sells fewer pizza pies. the MTA could raise revenue by increasing prices. 3. At that level of output. The AR of a pure monopolist is the price P = 15-Q/2. C. When the price of a pizza pie is $10. The bonus fully compensates the lower wage and the change in compensation package has no income effect but only a substitution effect. C1) The diagram shows that in 2007 Ray’s pizza ran at an inefficiently high scale.Practice Set Musatti Practice 2 – Solutions Multiple Choice 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 C 16 C A 17 18 C 19 B 20 E 21 B 22 B C A E C E D B D D A D E E B Short Answers / Exercises Price $ per pie 14 12 10 8 6 4 2 0 1. C. (6 points) The diagram illustrates the cost structure of Ray’s Pizza in 2007. price equals the ATC. clearly the green area is larger than the red area. the price adjust so that in equilibrium D(P) = S(P) D=24-2P = 0. 2. A.Spring 2013 Midterm Exam . C2) All pizza parlors have similar cost structure. If the price elasticity of demand is higher than -1. a perfectly competitive firm selling pizza. that is if demand is elastic. then the MTA could increase revenue by raising prices. profit maximizing output is about 600 pizzas where P=MC. No. Yes. the D curve shifts to the right. entry of new parlors eventually lowers price to $6. in the longrun the. In competitive markets. 100 day 200 300 400 500 600 700 Pies per D Quantity Supply changes only if higher rice prices affect the expected future price of wheat. If the price elasticity of demand is less than -1.Producer surplus would drop by the green area (loss in customers) and would increase by the red area (higher price per customer). See Diagram. 4. the MR of a pure monopolist is MR = 15 –Q. 10 cents per lb.
If the young economists considers free time a perfect complement of consumption. ultimate Frisbee …) that take a lot of time.Practice Set Musatti lower hourly wage reduces the rewards of working longer hours nudging the young economist to consume less and enjoy more free time. video-gaming. for example if he spends his budget in entertainment activities (movies. then before and after the change in compensation package he works the same number of hours.Spring 2013 Midterm Exam . rock concerts. theatre. .
c. e. the lower its marginal cost. c. 3. D e. Substitution and wealth effects. d. C d. the larger a firm’s scale. the lower the average cost of production. (i) only. For which of these markets can we use the demand and supply model of perfectly competitive markets to predict the welfare effects of a subsidy? (i) The market for commercial aircrafts. According to the law of diminishing (marginal) returns. International trade and income effects. Social marginal cost of producing a good is higher than the private marginal cost. total surplus is a poor indicator of social welfare.S. market for first class mail. d. There are price controls. e. (i) and (ii). c. A b. consumers enjoy higher welfare than producers. A D G No Change in Supply B E H A Decrease in Supply C F I Refer to table 4: Which case results in an increase in both equilibrium price and equilibrium quantity? a. the higher the price. the higher the amount of an input. the lower the revenue. d. 2. social welfare is highest if all markets are perfectly competitive and in equilibrium. b. e. c. the lower its marginal product. (ii) and (iii). The opportunity cost of producing a good is higher than the explicit cost. When competition is high. (ii) The U. There are quantity controls. a. A negative externality exists if a.Spring 2013 Midterm Exam . b. The demand curve for sneakers is downward sloping because of the a. c. E 5. b. Interest rate and marginal rate effects. e. b. B c. According to the first welfare theorem. the higher a firm’s output. (iii) The market for wireless calling plans. Social marginal benefit of producing a good is higher than private marginal benefit. social welfare is highest when the government acts first. a. Income and substitution effects. Table 4 An Increase in Supply An Increase in Demand No Change in Demand A Decrease in Demand 4. prices are poor signals of social welfare. d. 6. b.Practice Set Musatti Practice Set 3 Multiple Choice 1. For none of these markets . Wealth and marginal rate effects. e. a. the larger a financial investment the lower its return. d. (ii) only.
c. Bob buys one slice of pizza and one can of Coke. b. 10. perfectly elastic. Eve has no dominant strategy. elastic. d. Refer to Figure 7. there is one firm and many buyers. . Bob buys three slices of pizza and no Coke. c. The matrix below summarizes Adam’s and Eve’s utility depending on what each chooses to do. Game Eve Theatre UB = 0 UM = 100 UB = 50 UM = 50 UB = 100 UM = 70 UM = 0 Game Adam UB = 70 Theatre 7. The price of college textbooks rises by 20%. In an oligopoly. Eved. the price of a can of Coke is $1.Spring 2013 Midterm Exam . There is no Nash equilibrium. e. Revenues from the sale of college textbooks increases by 10%. a. e. e. unit-elastic. perfectly inelastic. The price of a slice of pizza is $2. Bob buys three slices of pizza and four cans of Coke. Bob utility from consuming pizza and Coke is shown in the table above. is in Eve is in a prisoner’s dilemma. b. e. Bob buys two slices of pizza and two cans of Coke. 8. Adam and Eve have to decide separately whether to go to a baseball game or go to the theatre.Practice Set Musatti Figure 7. In this game. There is a perfectly competitive equilibrium. there are few buyers and many firms. a. c. d. d. Quantity 1 2 3 4 5 6 9. a. Adam has a perfect strategy. b. Bob buys one slice of pizza and no Coke. there are few firms that sell a similar but not identical product. Inelastic b. there are many firms that sell a standardized product. Utility 20 30 36 36 36 36 Pizza MU 20 10 6 0 0 0 Utility 10 15 19 22 25 25 Coke MU 10 5 4 3 2 0 Refer to the Table Above Bob is a rational consumer with $6 to spend on Pizza and Coke. buyers and firms are price makers. c. The demand for college textbooks is price a.
consumer surplus is highest. Which of the four graphs represents the market for a product after the government start paying a subsidy to purchases of a complement good? a. c. e. Consumer surplus increases to $8. Refer to Figure 11. C d. there is a surplus of three (3) units. None of them. A b. Refer to Figure 12. all of the above. producer surplus increases to $4.A Perfectly Competitive Market. 13.00. B c.00. If in this market the government sets and enforces a price ceiling of $4.00. the social marginal benefit of the product equals the social marginal cost. the government collects revenue of $6. d.Spring 2013 Figure 11 . b. D e. a. Midterm Exam . the government imposes no taxes. economic surplus is highest. c. there is allocative efficiency if a. Figure 12 12. d.Practice Set Musatti 10 9 8 7 6 5 4 3 2 1 0 0 1 2 3 Units 4 5 6 11. b. Price in $ per unit . e. In a market. quantity increases to five units.
b. e. 18. Phil’s. c. Because there is insufficient demand at that output level. Decrease by 5%.5. $25. In one month. d. d. 2 balloons. d.Practice Set Musatti Narrative 14. Soap is a necessity. worker can produce 150 shirts or 30 cars. Import shirts from Canada and export cars to Canada. The ATC of caffè lattes is lowest. 14. $1. Coffee shops suffer losses. Export shirts to Canada without importing cars. e. _____ opportunity cost of inflating a balloon is ______ . Increase by 80%.000 per year. Mary received $1 million.S. b. Phil can inflate one (1) balloons or prepare eight (8) invitations. should a. ½ of a balloon. b.000 each year. income. She decided to use the money to purchase a small business in Anywhere. Refer to narrative 14. c. What are Mary's opportunity costs of operating her new business? a. 0. c. Import cars from Canada and exports shirts to Canada.Com Inc.075. c. Because at the efficient output level MC is above the demand curve. e. . a. a. 8 invitations. If Mary would have invested the $1 million in a risk free bond fund.S. $175. e. price. Her salary at Lucky. b. a U. increase by 20%. Kobe’s.000 b. Kobe’s. 5. c. According to the data. Because Erickson Power will earn zero profits. Narrative 16. The price elasticity of demand for Gummy Bears is –4. e. USA. income.5. Erickson Power is a natural monopolist. c. 20. Refer to narrative 19. she could have made $100. the price of Gummy Bears should _____ by ____.000 e. income. Refer to narrative 16. In the long run. . The price of caffè lattes is equal to the MC of caffè lattes. The ________ elasticity of demand for soap could be equal to ________. 19.0. Phil’s. Why won’t regulators require that Erickson Power produce the economically efficient output level? a. price. Narrative 19 As part of an estate settlement. Because Erickson Power will sustain persistent losses and will not continue in business in the long run. She also quit her job with Lucky. Kobe and Phil are organizing a party. to devote all of her time to her new business. Decrease by 4%.000 c. e. d. 15. Import shirts and cars from Canada. d. 16. According to economic sense. . 1 balloon. To celebrate the last Lakers win. the market for caffè lattes is monopolistically competitive. b. was $75.00 d.5. a. In NYC. Export cars and shirts to Canada. Kobe can inflate ten (10) balloons or prepare five (5) invitations. 0. Because at the efficient output the MR is higher than MC. a.Com Inc. In ten minutes.Spring 2013 Midterm Exam . $75.000 17. $100. Decrease by 80%. Kobe’s. the U. b. On the little island of Filicudi. d. The price of caffè lattes is equal to the ATC of caffè lattes. Coffee shops collude. 2 invitations.5. a Canadian worker can produce 120 shirts or 30 cars. To increase quantity demanded for Gummy Bears by 20%.
The U. benefits both China and the U.S. 25. Refer to Narrative 24.Spring 2013 21.S. 23. benefits China and hurts the U. however it hurts Chinese low skilled workers. AVC . There is not enough information to determine quantity or price in this market. b. airplane and toy industries to international trade with China. Midterm Exam . 22.S. has a monopolistic advantage in producing toys. benefits the U. Joe’s Pizza has a number of very loyal customers. c. Command and control policies. e. Opening the U. e. has a comparative advantage in high-skilled workers. however it hurts American low skilled workers.S. Quantity is equal to 15. but hurts China. d. e.. a. China has a comparative advantage in producing toys. The U. Identifications: Coase Theorem. The U. a. Coase policies. hurts both China and the U. demand is Qd = 20 – 0. Quantity is equal to 10. Narrative 24 The United States has a relative abundance of skilled workers. Piguvian policies. Internalization policies. shut down for good. temporarily close down stay open and sell more pizza pies. a. Price is equal to 10.. 24. MC=$10. e. d. while making toys requires employing low-skilled workers.S.S. b. PPF. China has a mercantile advantage in producing airplanes. e.5P while firms’ MC is equal to ten (10). c.S. d. while China has a relative abundance of unskilled workers. P=$10. stay open and sell fewer pizza pies. Making airplanes requires employing high-skilled workers. benefits both China and the U.S.S. d. Joe should a. c. c.Practice Set Musatti In a market. has a competitive advantage in low-skilled workers. Policies that mandate the installation of specific pollution control devices like scrubbers are called a. AVC=$7. d. Today at Joe’s Pizza. b. b. Price is equal to 20. stay open and sell the same number of pizza pies. c. b. ATC=$8. To earn the highest profit. negative externalities. Refer to Narrative 24.
In the diagram. After a couple of years. the price of heating oil climbs to $5 per gallon. the Council wanted to pay bookstores $6. The program pays $100 to each family. One hundred small bookstores used to sell paperbacks and the market supply was Qs = 2P . 0 0 10 20 30 40 50 60 70 80 90 100 Gallons of Heating Oil 30 28 26 24 22 20 18 16 14 12 10 8 6 4 2 0 0 2 4 6 8 10 12 14 16 18 20 22 24 26 28 30 Exercise 2. In the end. Heating oil costs $3 per gallon. 175 An economic pundit writes in the New York Times: “This year we will see 150 125 low income families shiver in their homes. the family buys 50 gallons of heating oil. 300 B. the Nook or the Kindle). the price of imported paper and glue dropped. many years ago (before the advent of the internet. If the label wanted to increase revenues from the sale of Taylor’s music. One year. draw the family’s monthly budget constraint and by adding an indifference curve. due to lack of revenue. just enough to keep the house temperature at sixty-five. Who would have benefited the most from this initiative. What do you think happened to the price and quantity of paperback books? Exercise 3 (5 points) Big Machine Records is the label that releases Taylor Swift’s music. should it force Amazon and i-Tunes to raise or lower the price of Taylor’s songs? Justify your answer using clear economic concepts. Each month. Show your work.Spring 2013 Midterm Exam . On the upside. What do you think happened to the price and quantity of paperbacks (in Gotham City paperback books are a normal good)? (4 points) D. illustrate the family’s optimal bundle in 2009. (4 points) B. The local 275 government starts a fuel assistance program to help the poor heat their 250 225 homes. the yearly demand for paperback books was Qd = 30 – P. a low-income family has a $300 monthly budget for heating oil and other expenses. A. The same year. raising the monthly budget 200 to $400. The fuel assistance program is 100 not doing enough. Do you agree with him? Clearly justify your answer 50 25 using the concepts of substitution and income effect. (14 points) In Gotham City. bookstores or readers? Clearly justify your answer. In 2010. the city economy was hard hit by a recession. C. For each book sold. the City Council of Gotham wanted to launch a “One Thousand Books in Every Home” initiative.Practice Set Musatti Short Answers/Exercises Exercise 1 (5 points) In 2009. other expenses are measured in dollars. one firm (Engulf & Devour) bought all city bookstores and became the sole monopolist in the Gotham market for paperbacks. clearly label the curves and the market equilibrium. Unfortunately. . halving the cost of production of paperback books. A. then use algebra to find equilibrium price and quantity. families will buy less oil than last year and 75 children will be cold”. Draw the demand and supply curves.12 (quantity in million of books and price in dollars per book). the Gotham City Council had to cancel the “One Thousand Books in Every Home” initiative before it even started. Thousands of local workers lose their jobs and families found it hard to make ends meet.
Each month. However. Equilibrium price drops. the demand side. demand would be less sensitive to price changes. since the opportunity cost of heating oil has increased. 300 275 250 225 200 175 150 125 100 75 50 25 0 a. the yearly demand for paperback books was Qd = 30 – P. the Nook or the Kindle). However. Draw the demand and supply curves. then use algebra to find equilibrium price and quantity.Practice Set Musatti Practice Set 3 . 30 28 26 24 22 20 18 16 14 12 10 8 6 4 2 0 A.Solutions Section I . thanks to the fuel assistance program. Exercise 3 To increase revenues.Multiple Choice questions (1 point each): 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 D 16 C 17 B 18 B 19 D 20 E 21 E 22 A 23 C 24 D 25 C A D C B D A A B D E B D D B Exercises. However. Show your work. clearly label the curves and the market equilibrium.12 (quantity in million of books and price in dollars per book). The higher price of heating oil increases the family bill for oil. This is because by reducing output they can crank up the price and their profits. other expenses are measured in dollars. 0 10 20 30 40 50 60 70 80 90 100 Gallons of Heating Oil Exercise 2. Qd is equal to Qs: 30-P = 2P – 12 è 42 = 3P è P = 14 è Q = 16 B. in this example. Subsidies benefit the most the side of the market that is less price elastic. many years ago (before the advent of the internet. . the family buys 50 gallons of heating oil. 0 2 4 6 8 10 12 14 16 18 20 22 24 26 28 30 C. As Big Machine Records has market power over the sale of Taylor Swift’s music. However. D. Demand for Taylor’s music is most likely price elastic as there are many other musicians people can listen to. it would contract price so that MR = MC and this happens only at a number of albums and songs and at a price where demand for Taylor’s music is elastic. the family will spend less on oil and more on other products as the pundit suggests. b. Families’ lower incomes depress the demand for books and the demand curve shifts to the left. nothing can be said about equilibrium quantity that could decrease. just enough to keep the house temperature at sixty-five. stay the same or increase. One hundred small bookstores used to sell paperbacks and the market supply was Qs = 2P . Heating oil costs $3 per gallon. a firm should increase price if demand is inelastic and should lower price if demand is elastic. (4 points) In equlibrium. the family can still purchase 50 gallons of oil and spend $150 on other products as it did in 2009. Also the positive part of the price coefficient in the demand function is smaller than the price coefficient in the supply function. This puts downward pressure on quantity and upward pressure on prices. Exercise 1 In 2009. a low-income family has a $300 monthly budget for heating oil and other expenses. Lower cost of inputs increases the supply of books and the supply curve shifts to the right. We can see that the demand for books is less elastic than the supply of books as the demand curve is flatter than the supply curve. In Gotham City.Spring 2013 Midterm Exam . Unregulated monopolists tend to produce less and charge a higher price than firms in competitive markets would do. if Taylor’s fans are very loyal. Readers would benefit the most. In the diagram. if the repeated acquisitions allow Engulf and Devour to benefit from significant economies of scale.
DWL Short Answers/ Exercises . False. a rational consumer. Present Value.Practice Set Musatti Practice Set 4 True. has bought milk but not bread. As a share of income. If a firm makes losses it should temporarily close down. demand and supply for oranges must be below their normal levels. Allocative Efficiency. ______________________________________________________________________________________________________________________ ______________________________________________________________________________________________________________________ _________________________ 5. ______________________________________________________________________________________________________________________ _____________________________________________________________________________________________________________________ 4.Spring 2013 Midterm Exam . Justify 1. ______________________________________________________________________________________________________________________ ______________________________________________________________________________________________________________________ _________________________ 3. ______________________________________________________________________________________________________________________ ______________________________________________________________________________________________________________________ _________________________ Identifications: Choke Price. If the price of oranges is unusually low. ______________________________________________________________________________________________________________________ ______________________________________________________________________________________________________________________ _________________________ 2. the burden of taxes on necessities falls more heavily on lower income families. High income nations do not face scarcity. she must like milk better than bread. If Jody.
Price is measured in dollars and quantity in pairs of sneakers. find the number of meals the restaurant serves each day and the price of a meal. market for cocaine. 150 140 130 120 110 100 90 80 70 60 50 40 30 20 10 0 0 10 20 30 40 50 60 70 80 90 100 110 120 130 140 150 A. explains what happens in the U.(5 points) The Manhattan market for restaurant meals is in long run equilibrium. does the license fee affect the supply curve of sneakers? Briefly explain. the City introduces a license fee. Instead of the tax. market for cocaine after U. The daily demand for sneakers is Qd = 60 – 0. In the short run. (2 points) Exercise 2 .S. market for cocaine if the prices of ecstasy and heroin drop. b) In the diagram. a) Using the diagram or algebra. (4 points) B.S. Show your work. clearly labeling the curves and the market equilibrium. Do you agree with the City mayor? Why? D.Practice Set Musatti Exercise 1 (10 points) In a fictional City. find the equilibrium price and quantity. Customs and Border Protection officers at Laredo seize 20% of the weekly supply of cocaine. b) With the aid of the diagram.Spring 2013 Midterm Exam .S. explain what happens in the U. the retail market for sneakers is perfectly competitive. a restaurant on Broadway between 112 and 113 street. The demand and marginal cost lines for meals served at Campo are represented in the diagram to the left.5P and the daily supply is Qs = P. shade in the area that represents Producer Surplus when the market is in equilibrium. 100 90 80 70 60 50 40 30 20 10 0 0 10 20 30 40 50 60 70 80 90 100 At Campo. the daily demand for meals is Qd = 100 – P and the marginal cost of a meal is $20. add an Average Cost (AC) curve to illustrate profits at Campo. then using algebra. c) Is the number of meals served at Campo efficient? Why? th th Exercise 3 The diagrams below illustrate demand and supply in the U.S. 100 90 80 70 60 50 40 30 20 10 0 0 10 20 30 40 50 60 70 80 100 90 80 70 60 50 40 30 20 10 0 0 10 20 30 40 50 60 70 80 a) With the aid of the diagram. Draw the demand and supply curves. we raise $800 each day without imposing any pain on consumers”. Any store selling sneakers must pay a daily license of $100 regardless of the number of sneakers it sells. . In the diagram. (1 point) C. The City mayor stated: “If we ask stores to pay the City $20 for each pair of sneakers they sell. The City is discussing the introduction of a tax on sneakers.
If the price of oranges is unusually low. a) If the City introduces a $20 tax. Justify 1. No. find the equilibrium price and quantity. ___________________ 5. _________________________ 4. In the diagram.______________________________________________________________________ 2. demand and supply for oranges must be below their normal levels. the burden of taxes on necessities falls more heavily on lower income families. High income nations do not face scarcity. If Jody. _______________________ Short Answers/ Exercises Exercise 1 (10 points) In a fictional City. sales would fall below 40 units and revenue would be less than $800. if revenues did not cover all variable costs. False Demand must be unusually low. If a firm makes losses it should temporarily close down. shade in the area that represents Producer Surplus when the market is in equilibrium. False.e. True Low income families spend a larger fraction of their income on necessities.Spring 2013 Midterm Exam .5P = P 60 = 1. a large portion of the tax burden will fall on consumers. High income nations like all others would have higher welfare if they had more resources. (1 point) C. b) Because buyers are less price sensitive than sellers (demand is less price elastic than supply). _________________________________________ 3. Price is measured in dollars and quantity in pairs of sneakers.Solutions True. False The firm should close down only if losses exceeded fixed cost. Draw the demand and supply curves. then using algebra. i. The daily demand for sneakers is Qd = 60 – 0. As a share of income. The market is in equilibrium at the price where Qd=Qs 60-0. a rational consumer.5P P = $40 and Q = 60 – 20 = 40 B. the retail market for sneakers is perfectly competitive.Practice Set Musatti Practice Set 4 . D. The license fee is a fixed cost and does not affect stores’ marginal cost. The supply curve is the marginal cost of producing sneakers. however supply must be unusually high. has bought milk but not bread. ( 1 point) .5P and the daily supply is Qs = P. _____False___________Scarcity is the mis-match between available resources and their potential uses. she must like milk better than bread. 150 140 130 120 110 100 90 80 70 60 50 40 30 20 10 0 0 10 20 30 40 50 60 70 80 90 100 110 120 130 140 150 A. clearly labeling the curves and the market equilibrium. Show your work. False Her marginal utility per dollar of milk (MUm/Pm) must have been higher than her marginal utility per dollar of bread (MUb/Pb). hence a tax on necessities falls more heavily on them.
a)Using the diagram or algebra. The restaurant can charge 100 – 40 = $60 per meal. no restaurant earns extra profits. market for cocaine if the prices of ecstasy and heroin drop.Practice Set Musatti The Manhattan market for restaurant meals is in long run equilibrium. P = 100 – Q è MR =100 – 2Q è MR = 100 – 2Q = 20 = MC 80 = 2Q and Q = 40 P = 100 – 40 = 60 th th b) Restaurants sell their product in monopolistically competitive markets . 100 90 80 70 60 50 40 30 20 10 0 0 10 20 30 40 50 60 70 80 a) With the aid of the diagram. demand for cocaine drops. The restaurant serves meals up to the point where MR equals MC. the daily demand for meals is Qd = 100 – P and the marginal cost of a meal is $20. Exercise 3 (4 points) The diagrams below illustrate demand and supply in the U. In the long run.S. the price of cocaine drops and the amount of cocaine sold drops.(5 points) Midterm Exam .Spring 2013 Exercise 2 . explain what happens in the U. In monopolistically competitive markets. explains what happens in the U. the price of cocaine increases while the amount of cocaine sold drops. The demand and marginal cost lines for meals served at Campo are represented in the diagram to the left. c) No. all firms operate below their minimum efficient scale – no productive efficiency. Ecstasy and heroin are substitutes for cocaine. find the number of meals the restaurant serves each day and the price of a meal. Furthermore they charge a price P>MC – no allocative efficiency. market for cocaine. a restaurant on Broadway between 112 and 113 street. market for cocaine after U. . 100 90 80 70 60 50 40 30 20 10 0 0 10 20 30 40 50 60 70 80 90 100 At Campo.S. When their price drops. The supply of cocaine drops.S. Customs and Border Protection officers at Laredo seize 20% of the weekly supply of cocaine. In the diagram this happens when 40 meals are served each day.S. 100 90 80 70 60 50 40 30 20 10 0 0 10 20 30 40 50 60 70 80 b) With the aid of the diagram.
patent iii. 2) Consider the market for smart phones. If the government imposes a price floor of $5 per gallon of milk. E) each firm can increase its profit if it decreases its production even more than the decrease set by the cartel. B) supply will decrease because of the high cartel price. B) quantity supplied of milk exceeds the quantity demanded. large economies of scale A) i. The above figure shows the demand and cost curves for his firm. Kevin will train how many clients per day? A) between 2 and 4 B) 6 C) 4 D) 10 E) None of the above answers is correct. exclusive ownership of a necessary input ii. which competes in a monopolistically competitive market. 3) Which of the following can be a barrier to entry? i. the A) demand decreases. D) quantity supplied of milk falls short of the quantity demanded. a substitute for smart phones B) a decrease in the price of smart phones C) a decrease in the number of smart phone buyers D) an increase in the price of smart phones E) an increase in the supply of smart phones. Which of the following shifts the demand curve rightward? A) an increase in the price of land-‐line phone service. ii and iii B) ii only C) i and ii D) i and iii E) i only 4) Suppose the equilibrium price of a gallon of milk is $4. D) demanders will rebel once they realize a cartel has been formed. . C) price of milk remains $4 per gallon. E) supply increases.Spring 2013 Midterm Exam . C) forming a cartel is legal but frowned upon throughout the world. 5) Kevin owns a personal training gymnasium in Orlando.Practice Set Musatti MC Set 4 1) A collusive agreement to form a cartel is difficult to maintain because A) each member firm can increase its own profits by cutting its price and selling more.
B) a sewing machine. a substitute for movies D) an increase in the price of HDTV sets E) an increase in the price of movie tickets . D) It decreases.Practice Set Musatti 6) At the Punjab Bakery. E) 6 cakes and the average product for three workers is also 6 cakes. E) a pair of running shoes. wheat 8) Pizza Hut lowers the price of its pizza. C) It becomes negative. What happens to the Pizza Hut's total revenue? A) nothing B) It increases. If the United Kingdom and France specialize and engage in trade. The marginal product of the third worker is A) 32 cakes and the average product for three workers is 9 cakes. B) 18 cakes and the average product for three workers is 6 cakes. D) an imported good. A) fish. 9) A example of a good with external benefits is A) a dose of flu vaccine. C) a pizza. C) 4 cakes and the average product for three workers is 6 cakes. 10) Which of the following shifts the demand curve for movies rightward? A) an increase in movie star salaries B) a decrease in the price of move tickets C) an increase in the price of NetFlix. decreases. D) 9 cakes and is equal to the average product. fish B) both wheat and fish.3. two workers can decorate 14 cakes in an hour and three workers can decorate 18 cakes in an hour. the United Kingdom will produce ________ and France will produce ________. The price elasticity of demand for Pizza Hut pizza equals 0. but more information is needed to determine if it increases. or does not change. 7) The figure above shows the production possibilities frontiers for the United Kingdom and France. fish E) wheat.Spring 2013 Midterm Exam . E) It might change. both wheat and fish C) fish. wheat D) wheat.
D) It becomes negative.73. but more information is needed to determine if it increases.Spring 2013 Midterm Exam . but the market is NOT in equilibrium. E) there is neither a surplus nor a shortage. D) without more information we cannot determine if there is a surplus.Practice Set Musatti 11) The table above shows the situation in the gasoline market in Tulsa. or an equilibrium in the gasoline market in Tulsa. Oklahoma. but the market is NOT in equilibrium. The opportunity cost of a loaf of bread is ________ when moving from possibility B to possibility C. E) there is neither a surplus nor a shortage. What happens to the KFC's total revenue? A) nothing B) It decreases.62. E) It might change.8. a shortage. 14) KFC raises the price of its grilled chicken. or an equilibrium in the gasoline market in Tulsa. Oklahoma. B) unemployment decreases as a country produces more and more of one good. a reason opportunity costs increase is that A) some resources are better suited for producing one good rather than the other. B) there is a surplus of gasoline in Tulsa. a shortage. E) technology declines as a country produces more and more of one good. D) unemployment increases as a country produces more and more of one good. C) the gasoline market in Tulsa is in equilibrium. The price elasticity of demand for KFC grilled chicken is 0. A) 1/2 of a book B) 200 books C) 2 books D) 100 loaves of bread E) 1 loaf of bread . 13) Moving along a country's PPF. D) without more information we cannot determine if there is a surplus. C) technology must advance in order to produce more and more of one good. 12) The table above shows the situation in the gasoline market in Tulsa. C) It increases. B) the gasoline market in Tulsa is in equilibrium. or does not change. If the price of a gallon of gasoline is $3. decreases. C) there is a surplus of gasoline in Tulsa. then A) there is a shortage of gasoline in Tulsa. If the price of a gallon of gasoline is $3. 15) The table above shows the production possibilities for an economy. then A) there is a shortage of gasoline in Tulsa.
Spring 2013 Midterm Exam . The price of a Subway sandwich is $5 and the price of a milkshake is $4. E) He is not maximizing his utility and should buy more Subway sandwiches. He buys 6 sandwiches and 5 milkshakes. Which of the following is true? A) He is not maximizing his utility because he is not spending all of his income. The marginal utility of the 6th sandwich = 25 and the marginal utility of the 5th milkshake = 24. C) He is maximizing his utility even if he is not spending all of his income. D) He is not maximizing his utility and should buy more milkshakes. 17) Which figure above shows the effect of an increase in the cost of the tomato sauce used to produce pizza? A) Figure A B) Figure B C) Figure C D) Figure D E) Both Figure B and Figure C 18) Pizza is a normal good. Which figure above shows the effect of a decrease in consumers' incomes? A) Figure A B) Figure B C) Figure C D) Figure D E) Both Figure B and Figure C . B) He is maximizing his utility.Practice Set Musatti 16) Terence has $50 per week to spend on Subway sandwiches and milkshakes.
A) $60. iii. iv. ii. buyers D) $30.Practice Set Musatti 19) Deb and Pete have volunteered to help their favorite charity mail out fundraiser information. ii and iv C) iii only D) i. The figure shows that the government has imposed a tax of ________ per tire and that ________ pay most of the tax.00 and the elasticity of supply is 1. Sellers bear the larger share of the tax burden. iii. A) iv only B) i . sellers E) $40. ii. buyers 21) Suppose the elasticity of demand for Mexican food is -‐3. The government receives the excess burden as revenue. which of the following occurs? i. Only producer surplus decreases. sellers B) $30. buyers C) $60. The figure above shows their production possibilities frontiers for assembling packets and stuffing envelopes. What is Deb's opportunity cost of assembling 1 packet? A) 1/4 of an envelope B) 40 envelopes C) 160 envelopes D) 4 envelopes E) 4 packets 20) The figure above shows the market for tires. and iv E) i and ii . If the government imposes a sales tax on Mexican food.Spring 2013 Midterm Exam . Less Mexican food is produced by sellers.
Figure 9-‐3 illustrates the impact of the quota. Suppose the country is producing at point E. B) increases. What is the area of domestic producer surplus after the imposition of a quota? A) B B) B + C C) E + I + J + M D) A +B +C E) B + E + I + J + M 24) Which of the following is a fixed cost for ACME manufacturing? A) the cost of shipping its product to market B) raw material costs C) the utility bill D) the annual fire and theft insurance premiums E) wages paid to labor 25) The above figure shows the production possibility frontier for a country. Figure 9-‐3 Since 1953 the United States has imposed a quota to limit the imports of peanuts. as more of one good is produced. decrease. C) decreases. D) might increase.Practice Set Musatti 22) When a production possibilities frontier is bowed outward. E) cannot be predicted. its opportunity cost A) remains constant. or remain constant depending on how much people value the additional units of the good.Spring 2013 Midterm Exam . What would be the opportunity cost to increase the production of wine to 9 thousand bottles? A) 3 tons of rice B) 15 thousand bottles of wine C) 12 tons of rice . 23) Refer to Figure 9-‐3.
then the percentage change in the quantity demanded A) is larger than 10 percent. C) Country B has a comparative advantage over Country A in the production of planes. B) equals 0 percent.0 B) 1. 26) The deadweight loss from a rent ceiling below the equilibrium rent is smallest when the supply of housing is A) elastic but not perfectly elastic. D) is greater than 0 percent but less than 10 percent. What is the price elasticity of demand? A) 40. D) that give him the same marginal rate of substitution.80 31) The extra cost associated with undertaking an activity is called A) marginal cost. C) equals 10 percent. B) foregone cost. 28) Sam's budget is $60. C) opportunity cost. E) None of the above answers are correct. then A) the two countries have no incentive to trade with one another. E) sunk cost.Practice Set Musatti D) 9 thousand bottles of wine E) Nothing. D) Country A has a comparative advantage over Country B in the production of planes.00 budget. 30) The price of a bag of pretzels rises from $2 to $3 and the quantity demanded decreases from 100 to 60.25 C) 1. The combinations of gasoline and coffee along one of Sam's indifference curves are combinations A) that he can afford with his $60. E) perfectly inelastic.0 E) 0. D) net loss. E) More information is needed to determine the magnitude of the change in the quantity demanded.Spring 2013 Midterm Exam . . 27) If the percentage change in price is 10 percent and the demand is elastic. B) inelastic but not perfectly inelastic.0 D) 20. 29) If Country A can produce an extra plane by giving up two boats. but B cannot gain by trading with A. D) perfectly elastic. it is a free lunch. B) that require the same total expenditure. C) among which he is indifferent. and Country B can produce an extra plane by giving up three boats. E) Country A would like to trade with B.00. C) unit elastic. B) Country A has an absolute advantage in producing planes and a comparative advantage in producing boats.
Spring 2013 Midterm Exam .Practice Set Musatti 1) A 2) A 3) A 4) B 5) C 6) C 7) C 8) D 9) A 10) C 11) A 12) C 13) A 14) C 15) C 16) D 17) C 18) B 19) D 20) D 21) E 22) B 23) B 24) D 25) A 26) E 27) A 28) C 29) D 30) B 31) A .
Fall 2012 Principles of Economics Musatti Practice Sets 31 .
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