Question #2 refers to the information below.
Assume that the University of Margaritaville has two parking lots.
One is a garage on the east end of campus, near most of the classrooms, and another
closest to the west end of campus, twice as far from most classrooms as the garage.
Both have 2,000 parking spaces. Students must buy a yearly parking permit for $100 to
legally park in either lot. There are no other parking options outside of these two lots.
2. Which of the following is necessarily (directly) implied by this situation.
a. the supply curve associated with parking is vertical
b. there is a parking shortage in the garage, but no shortage in the other lot
c. raising the price of parking permits causes more people to park in the west end lot
d. lowering the price of a parking permit causes fewer people to park in the garage
e. students who hate walking far (to get to class) have a more elastic demand, when it
comes to parking in the garage, than students who don’t care about walking far
3. If the equilibrium price for good A increases, while the equilibrium quantity of good A
decreases, then what is the most likely explanation?
a. decrease in the demand for good A
b. increase in the demand for good A
c. decrease in the supply of good A
d. increase in the supply of good A
4. Assume that the market for new cars can be described by a demand and supply graph.
When Ford and the United Auto Workers sign a new wage contract, giving auto workers greater
health benefits, what is the most likely effect on the market for new cars?
a. increase in the demand for new cars
b. decrease in the supply of new cars
c. increase in the supply of new cars
d. decrease in the demand for new cars
5. If Country A can produce 60 units of tomatoes in one day, or produce 80 units of
cotton in the same day, then what is the opportunity cost of producing each unit of cotton?
a. 60 units of tomatoes
b. 3/4 of a unit of tomatoes
c. 4/3 of a unit of tomatoes
d. 80 units of tomatoes
e. none of the above
6. What effect does higher income have on a market?
a. higher income leads to decreases in the demand for some goods
b. higher income leads to increases in the demand for some goods
c. higher income leads to increases in the supply of some goods
d. both a and b are true
Question #7 refers to the following situation:
During the summer, there is an increase in the demand for low to unskilled workers
(e.g. fast food services, janitorial services, etc.), but during winter, demand falls.
Assume that in the absence of price controls: during summer the equilibrium (hourly)
wage is $8 for these jobs; but in winter, the equilibrium wage is $4.
7. What effect will a $5 price (wage) floor have on the quantity of winter labor?
a. the price floor will not affect winter labor
b. a shortage will occur
c. a surplus will occur
d. the price floor will decrease (i.e. shift in) the demand curve for winter labor
8. Which of the following is probably the best example of a relationship that
involves a negative cross price elasticity?
a. the price of Coca Cola and the quantity demanded of Coca Cola
b. lunch meat and cheese
c. white bread and whole wheat bread
d. fish and beef
e. luxuries and necessities
9. If demand is elastic, then a 5% increase in quantity demanded is most likely
associated with:
a. a 2% price decrease
b. a 5% price decrease
c. a 6% price decrease
d. a 4% price increase
10. Which of the following is true:
a. (own) price elasticity of demand can be positive or negative
b. income elasticity can be positive or negative
c. cross price elasticity is always negative
d. when measured in absolute value, (own) price elasticity is always greater than one
e. all of the above
11. The 1999 model year cars were first sold in Fall of 1998. The demand for 1999 cars
in Fall 1998 is more inelastic than the demand for 1999 cars in Summer 1999. If a (per unit)
tax were placed on cars, then what would be the effect:
a. consumers buying a car in Fall 1998 would bear a greater tax burden than consumers
buying cars in Summer 1999
b. consumers buying a car in Summer 1999 would bear a greater tax burden than consumers
buying cars in Fall 1999
c. consumers buying cars in either period will always bear a greater tax burden than
producers
d. producers would bear no tax burden at all during both periods
12. What is consumer surplus?
a. the difference in value for each good purchased, between the most consumers are
willing to pay and what they actually do pay
b. the difference in value for each good purchased, between what consumers actually
pay and what it costs to produce each good
c. the difference in value for each good purchased, between the most consumers are
willing to pay and what it costs to produce each good
d. the difference in value for each good purchased, between the most consumers are
willing to pay and the least amount that consumers are willing to pay
13. Suppose you attend the Great Econ Fiesta, a cool addition to any weekend,
and found out that your favorite beverage is only 10¢ per can. You also learn that you can
buy and consume as many cans as you want. If you act consistently with the concept of
consumer equilibrium, then how many cans will you buy?
a. you will stop buying cans when your marginal benefit is zero
b. you will stop buying when your marginal benefit is greater than 10¢
c. you will stop buying when your marginal benefit is equal to 10¢
d. you will stop buying when your marginal benefit is less than 10¢, but not zero
Question #14 corresponds with this function for total product:
15. The Law of Diminishing Returns is observed when utilizing more of a variable factor,
alongside a fixed factor. What direct evidence do we have that this Law exists?
a. the output of all firms eventually decreases
b. the marginal product of each firm eventually decreases
c. the marginal revenue of each firm eventually decreases
d. the marginal product of all firms is negative
e. both a and b are correct
16. How are corporations distinct from sole proprietorships and partnerships?
a. corporation ownership is determined by who buys equity (stock) in the corporation
b. corporations allow investors to limit their liability
c. corporations are managed by individuals who must report to corporation shareholders
d. all of the above
17. What is a transactions cost?
a. the cost associated with producing goods for sale, or transactions
b. the cost associated with operating a business, apart from production cost
c. the cost associated with advertising, which promotes transactions
d. the cost associated with selling goods directly to consumers
18. Which of the following is true about economies of scale
a. natural monopolies can achieve economies of scale
b. economies of scale implies that costs rise as output (scale) rises
c. economies of scale is consistent with what we find in an increasing cost industry
d. economies of scale is consistent with what we find with decreasing returns to scale
19. What is the most direct implication of being in an industry with many small
firms, where each firm’s product is a perfect substitute for the other firms’ products?
a. total (market) output is low
b. each firm in the market sets the lowest price that that firm can afford
c. each firm in the market will receive the same price for its product
d. each firm in the market will make zero economic profit in the long run
e. each firm in the market will make some economic profit in the short run
20. What is the most direct implication of being in an industry where there are
no barriers to either entering the market or exiting the market?
a. total (market) output is low
b. each firm in the market sets the lowest price that that firm can afford
c. each firm in the market will receive the same price for its product
d. each firm in the market will make zero economic profit in the long run
e. each firm in the market will make some economic profit in the short run
21. When all of a perfectly competitive firm’s fixed costs are sunk, which statement(s)
is false:
a. the profit maximizing level of output is found using both price and marginal cost
b. the level of profits are found using price, output and average cost
c. the level of fixed costs are found using output, average cost and average variable cost
d. the level of profits are found using price, marginal cost and output
When a perfectly competitive firm produces, the firm encounters certain costs.
Those costs are listed below, and Questions #22-24 correspond with this information
(note: q = output).
22. What is the value of Average (total) Cost when q = 5?
a. 75
b. 15
c. 95
d. 475
e. none of the above
23. What are the Recoverable Fixed Costs, if the firm pays nothing when it produces zero?
a. $400
b. $0
c. $80
d. none of the above
24. Suppose we learn that the firm pays $200 when it produces zero. What are the
Average Fixed Costs associated with producing q = 10?
a. $400
b. $200
c. $40
d. $20
e. not enough information is given to calculate this response
25. What does it mean when a perfectly competitive firm makes negative economic profit?
a. firm owners can obtain a better return on their investment by placing their money
elsewhere
b. firm owners are not making positive accounting profits either
c. firm owners would be better off if they shut down and did not produce
d. firm owners should change the price of their product
26. If the average cost of each perfectly competitive firm were greater than the
market price, then what will happen in the long run?
a. firms would set lower prices
b. firms would set higher prices
c. firms would produce greater output
d. firms would exit the industry
27. Which statement about monopolies is true:
a. monopolists always earn at least some economic profit (i.e.
p > 0)
b. it is illegal to operate as a monopoly
c. when monopolies charge only one price, that price is greater than MC (i.e. P > MC)
d. monopolies only exist because government intervenes in markets
e. all of the above
28. What is the best example of price discrimination:
a. when firms charge higher prices for products that are more expensive to produce
b. when firms charge one price, set at marginal cost
c. when firms charge a hookup fee and charge one price (set at marginal cost)
d. when firms use coupons or year-end clearance sales to attract additional customers
29. In order for a monopolist to price discriminate, the firm must separate consumers
into identifiable groups. To successfully price discriminate, the monopolist must:
a. charge high prices to all consumers
b. reduce their overall output, to get prices higher
c. prevent resale of the product between the different groups of consumers
d. all of the above
30. The following statements compare oligopoly and perfect competition. Which is true:
a. both oligopoly and perfectly competitive industries have low entry barriers
b. both oligopolists and perfectly competitive industries always produce where P = MC
c. oligopoly markets have many firms and perfectly competitive markets have many firms
d. oligopolists can make profits greater than zero in the long run, but perfectly
competitive firms do not
e. all of the above
31. The following statements compare monopolistic competition and perfect competition.
Which is true:
a. both monopolistic competition and perfect competition have low entry barriers
b. both monopolistically competitive and perfectly competitive firms charge P = MC
c. both monopolistically competitive and perfectly competitive industries produce
homogeneous products
d. both monopolistically competitive and perfectly competitive firms can only make
zero economic profit in the short run
e. all of the above
The information below goes with question #32.
Firms A and B engage in a "price setting game". Each firm must decide
whether to set a high or low price, and do so simultaneously. After both firms make their
decision, one of four possible outcomes will occur:
32. If these firms are only interested in maximizing their (own) benefit, then which of the four possible outcomes will occur?
33. What potential problem exists when the government sets prices for a natural monopoly
at average cost (i.e. when there is rate regulation)?
a. the firm has an incentive to produce too much output
b. the firm does not make a "normal return" on its capital investment
c. the firm does not have as strong an incentive to minimize all costs
d. the firm will make a loss and exit the industry
34. According to the handout from class, which group below is responsible for setting
LG&E’s rates in Kentucky?
a. Kentucky’s Public Service Commission
b. Kentucky Rate-Setting Board
c. Kentucky Natural Monopoly Commission
d. Kentucky Electric Utility Rate Board
35. How do two-part tariffs work?
a. charge different prices to different consumers
b. charge a membership or hookup fee to each potential consumer and then another price
for every unit purchased
c. set two tariffs on foreign firms to keep import prices high
d. charge one price for the first unit purchased and a different price for the second
unit purchased
36. What is the best example of a negative externality involving pollution?
a. when a firm produces any amount of pollution, no matter how small
b. when a firm produces too little because the firm does not pay for pollution control
c. when a firm produces too much because the firm does not pay for pollution control
d. when a firm produces pollution and does pay for pollution control
37. When goods with positive externalities associated with them get produced, government
often takes action designed to change their output. What is an example of that action?
a. subsidize the production of these goods because firms don’t produce enough of them
b. subsidize the production of these goods because firms produce too many of them
c. tax the production of these goods because firms don’t produce enough of them
d. tax the production of these goods because firms produce too many of them
38. Why is the Coase Theorem relevant?
a. the Coase Theorem provides a way for government to eliminate all pollution
b. the Coase Theorem provides a way for government to eliminate all negative
externalities
c. the Coase Theorem represents an alternative to government intervention designed to
resolve (internalize) externalities
d. the Coase Theorem represents a type of direct control that allows externalities to
be resolved
39. What causes an externality to exist?
a. when a firm chooses to produce externally, rather than internally
b. when a consumer decides to purchase goods from a market, rather than
become self-sufficient
c. when my consumption or production of something affects the
utility or profit calculations of someone else
d. when I must rely upon external forces to increase my utility
40. What conditions must exist if the Coase Theorem is to work?
a. property rights must be well-defined and transaction and bargaining
costs low
b. government regulators must be willing to maximize society's benefit,
rather than their own benefit
c. monopolies must be willing to produce where P = MC, even if it leads to the
firm making temporary losses
d. firms must not operate strategically, using game theory to determine
output or prices
Part II: Short Answer Questions (60 total pts, individual points given by each
question)
The (market) demand and supply curves below go only with question #1.
For full credit, be sure to show all your work.
[7 pts] 1. What is the equilibrium price and quantity in this market?
[7 pts] 2. Suppose a $20 per unit tax causes the Supply equation to become
P = 40 + 3Qs. How much of this $20 per unit tax is paid by consumers and how
much is paid by suppliers?
[7 pts] 3. Show/explain why New Albany’s landlords, where there is no
rent control, would favor rent controls in Louisville? note: rent controls are a
price ceiling, placed on rent
Questions #4-6 below correspond with the table. Note that you can ignore values in rows where
the numbers are not given (e.g. when Q = 13 or 14). To receive full credit, be sure to
show all relevant work within each answer below.
Assume that this firm pays a sunk cost of $50.
|
Output |
Average Cost |
Marginal Cost |
Average Fixed Cost |
|
1 |
153 |
4 |
150 |
|
2 |
79 |
6 |
75 |
|
3 |
55 |
8 |
50 |
|
4 |
43.5 |
10 |
37.5 |
|
5 |
37 |
12 |
30 |
|
6 |
33 |
14 |
25 |
|
7 |
30.43 |
16 |
21.43 |
|
8 |
28.75 |
18 |
18.75 |
|
9 |
27.67 |
20 |
16.67 |
|
10 |
27 |
22 |
15 |
|
11 |
26.64 |
24 |
13.64 |
|
12 |
26.5 |
26 |
12.5 |
|
... |
... |
... |
... |
|
15 |
27 |
32 |
10 |
|
... |
... |
... |
... |
|
20 |
29.5 |
42 |
7.5 |
[6 pts.] 4. If the market price is given as $12, then what level of
output provides the greatest profits for this perfectly competitive firm?
[6 pts.] 5. If the market price is given as $22, then what will happen
within this perfectly competitive industry in the long run?
[6 pts.] 6. What are this firm’s recoverable fixed costs?
The equations below represent a monopolist and correspond with questions #7-9. It’s possible to use
these equations to answer each question. For full credit, show all your work.
[7 pts] 7. What are the most profits (
[7 pts] 8. Show in as much detail as you are able how this monopolist can earn more than
$1600 in profit. (hint: use a different pricing strategy from that given in question #7)
[7 pts] 9. Is this firm a natural monopoly? Explain, using the definition of natural monopoly.