Reference no: EM131018887
Second Midterm-
Problems:
1. You are given the following information about the market for motorcycles.
Market Demand: P = 400 - 4Q
Market Supply: P = 4Q
a. Find the equilibrium price and quantity in this market.
b. What is the value of consumer surplus in this market?
c. What is the value of producer surplus in this market?
d. Suppose that the government decides to impose an excise tax of $80 per motorcycle on producers in this market. What will be the number of motorcycles sold in this market once this tax is imposed?
e. Given the tax described in part (d), what will be the tax incidence on consumers?
f. Given the tax described in part (d), what is the value of the deadweight loss from the tax?
g. What is the loss in producer surplus from the imposition of the excise tax described in part (d)?
h. Suppose the government would like motorcycle consumption to fall to 20 units. Relative to the initial situation before there was any excise tax, how big an excise tax would the government need to place on motorcycles in order for consumption to fall to 20 units?
2. Suppose there is a small, closed economy that produces bananas. The domestic demand and domestic supply curves for bananas in this small, closed economy are given as:
Domestic demand: P = 20 - (1/2)Q
Domestic supply: P = 2 + (1/10)Q
a. What is the equilibrium price and quantity of bananas in this small, closed economy?
b. Suppose that the world price of bananas is $8 per unit of bananas and this economy opens to trade. Provide a numerical measure of this country's imports or exports of bananas once the market is open to trade.
c. If this closed economy opens its banana market to trade with the world price of bananas equal to $8 per unit of bananas, what will be the change in consumer surplus due to this decision?
d. Suppose that the world price of bananas is $2.50 per unit of bananas. If this market opens to trade, what will be the level of imports or exports of bananas?
e. Given the scenario in part (d), what will be the change in consumer surplus when this economy goes from being a closed economy with regard to the banana market to being an open economy with regard to the banana market?
f. Suppose that the world price of bananas is $2.50 per unit of bananas and that this economy is open to trade. Suppose the government implements a tariff of $1.00 per unit of bananas. Calculate the tariff revenue from the implementation of this policy and the deadweight loss from the tariff.
g. Suppose the government wishes to replace the tariff described in part (h) with a quota that results in the same consumer surplus as the consumer surplus with the tariff, the same producer surplus as the producer surplus with the tariff, and the same deadweight loss as the deadweight loss with the tariff. How many units of bananas should the quota equal for this result? Explain your answer.
h. Trade has distributional consequences. Briefly summarize who wins and who loses when an economy opens to trade. Be specific in your answer.
3. Use the following information to answer this question. Joe's income is $100 a day and he currently buys two goods: fresh fruit (F) and cheese (C). The price of a unit of fresh fruit is $4 and the price of a unit of cheese is $5.
a. What is Joe's budget line in slope-intercept form? Assume that cheese is measured on the y-axis and fresh fruit is measured on the x-axis.
b. Given the above information, which of the following consumption bundles can Joe afford?
|
Combination
|
Units of Fruit
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Units of Cheese
|
Joe can afford
|
Joe cannot afford
|
|
i.
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20
|
4
|
|
|
|
ii.
|
17
|
6
|
|
|
|
iii.
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15
|
10
|
|
|
|
iv.
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12
|
12
|
|
|
|
v.
|
5
|
16
|
|
|
c. If Joe is maximizing his utility which of the consumption bundles in part (b) could be utility maximizing bundles given his income, the prices of the two goods, and his tastes? [Hint: there might be more than one possible answer.] Explain your answer.
Use the following information for the rest of the questions for this problem.
Suppose that Joe consumes 8 units of cheese when he maximizes his utility given his initial income and the prices of fruit and cheese. Holding everything else constant, when the price of fruit increases to $5, Joe maximizes his utility by consuming 10 units of cheese.
d. When Joe consumes 8 units of cheese and the price of fruit is $4, how many units of fruit does he consume?
e. When Joe consumes 10 units of cheese and the price of fruit is $5, how many units of fruit does he consume?
f. Given this information find the equation for Joe's demand curve for fruit. Assume this is a linear demand curve.
Multiple Choice Questions:
1. Suppose the demand for city bus tickets has a price elasticity of demand of 1.5. This tells us that
a. If the city increases the price of bus tickets by 10%, the percentage change in the quantity of bus tickets demanded will be less than 15%.
b. If the city increases the price of bus tickets by 20%, the percentage change in the quantity of bus tickets demanded will be greater than 15% but less than 30%.
c. If the city decreases the price of bus tickets by 20%, the percentage change in the quantity of bus tickets demanded will be equal to 30%.
d. If the city decreases the price of bus tickets then the quantity of bus tickets demanded will also decrease since the price elasticity of demand is a positive number.
2. When the price of books is $10, Joe's Bookstore sells 500 books per week. When the price of books is $12, Joe's Bookstore sells 480 books per week. Holding everything else constant, from this information we can conclude that the demand for books at Joe's Bookstore is
a. Elastic.
b. Inelastic.
3. Suppose the demand curve for potatoes is given by the equation P = 200 - 4Q and the supply curve for potatoes is given by the equation P = Q. From this information we can conclude that when this market is in equilibrium demand for potatoes is
a. Elastic.
b. Inelastic.
4. Suppose the income elasticity of demand for potatoes is equal to -0.5. Holding everything else constant, if income decreases then
a. The quantity of potatoes demanded will increase.
b. The quantity of potatoes demanded will decrease.
5. The cross-price elasticity of demand of gadgets for widgets is equal to 2.4. Jerry, a producer of gadgets, reads on the Internet tonight that the cost of labor used to produce widgets has increased. From this information Jerry concludes that
a. Sales of his gadgets will increase.
b. Sales of his gadgets will decrease.
6. Which of the following statements is true?
I. For a perfectly competitive firm, average fixed cost is constant at all levels of output.
II. In the short run, at least one input is fixed.
III. In the short run, if a firm's revenue does not cover its fixed costs of production the firm should shut down.
a. Statements I, II and III are true.
b. Statements II and III are true.
c. Statements I and II are true.
d. Statement II is true.
e. Statement III is true.
7. Consider a representative firm operating in a perfectly competitive market. As output increases
a. Fixed cost decreases.
b. Variable cost increases initially but then it decreases.
c. Total cost per unit initially decreases but eventually it increases.
d. Cost per unit is constant.
8. In the short run a firm will produce if
a. Price is greater than average variable cost.
b. Price is less than average total cost but greater than average variable cost.
c. Price is greater than average total cost.
d. Answers (a), (b) and (c) are all true answers.
9. Suppose a firm has a fixed amount of capital. As this firm hires additional units of labor
a. Output will initially fall due to diminishing returns to labor, but eventually output will increase as the labor increases its skill at fully utilizing the capital.
b. Output initially increases at an increasing rate but eventually output will increase at a decreasing rate due to diminishing marginal returns to labor.
c. Output initially increases at a decreasing rate but eventually output will increase due to increasing returns to scale.
d. Output initially increases at an increasing rate but eventually output will increase at a decreasing rate due to decreasing returns to scale.
10. Joe currently hires 4 workers and 9 units of capital and he is able to produce 6 chairs. If Joe hires 8 workers and 18 units of capital he finds he is able to produce 12 chairs. From this information we can conclude that
a. The marginal product of labor is negative.
b. Joe's production process exhibits constant returns to scale.
c. Joe's production process exhibits decreasing returns to scale.
d. Joe's production process exhibits increasing returns to scale.
Use the following information to answer the next two (2) questions.
Consider a perfectly competitive constant cost industry initially in long-run equilibrium. All the firms in this industry are identical. Suppose that incomes increase in this economy and the good that this industry produces is a normal good.
11. Given this information, which of the following statements is true?
a. In the short run, the market price of this good will not change.
b. In the short run, firms in this industry will increase their production of the good.
c. In the short run, the economic profit of each firm will be unaffected.
d. In the long run, the market price for this good will increase.
12. Given this information, which of the following statements is true?
I. Holding everything else constant, when this industry returns to long-run equilibrium there will be more firms in the industry.
II. Holding everything else constant, in the short run existing firms will earn positive economic profits.
III. Holding everything else constant, in the long run total expenditure on this good will increase.
a. Statements I and II are true.
b. Statements I and III are true.
c. Statements I, II and III are true.
d. Statements II and III are true.
e. Statement I is true.
Use the following information to answer the next three (3) questions.
A perfectly competitive constant cost industry is described by the following demand and supply curves:
Market Demand: P = 50 - Q
Market Supply: P = 4Q
A representative firm in this industry has total costs given as
Total Costs: TC = 10q2 + 40
And marginal costs for a representative firm are given as
Marginal Costs: MC = 20q
13. Suppose this industry is in long run equilibrium. How many firms are in this industry?
a. 10 firms
b. 2 firms
c. 20 firms
d. 5 firms
14. Suppose this industry is in long run equilibrium. What is the total revenue for a representative firm?
a. $2
b. $20
c. $40
d. $80
15. Suppose that population increases and at every price market demand changes by 20 units. Once this industry returns to long run equilibrium the number of firms in the industry will be
a. 7 firms.
b. 2 firms.
c. 5 firms.
d. 6 firms.
16. Holding everything else constant, the more inelastic the supply curve the
a. Smaller the deadweight loss from an excise tax.
b. Smaller the producer tax incidence from an excise tax.
c. Smaller the amount of producer surplus captured by the government.
17. In calculating the income effect
a. The individual's level of utility is constant between the two points of consumer utility optimization that are being used for the calculation.
b. The individual's consumer optimization choices for two different budget lines are compared where these two budget lines reflect different prices for the two goods.
c. It is necessary for both goods to be normal goods or else the calculation is not possible.
d. We compare two consumer optimization points arising from two different budget lines where the budget lines have the same prices but different levels of income.
18. Suppose there are two budget lines that share the same x-intercept but different y-intercepts. Budget line 1 has a y-intercept that is larger than budget line 2's y-intercept. This implies that
a. The price of good x has decreased and income has increased when moving from budget line 1 to budget line 2.
b. The price of good y has increased and income has not changed when moving from budget line 1 to budget line 2.
c. The price of good y has decreased and income has increased when moving from budget line 1 to budget line 2.
d. The price of good y has decreased and the price of good x has increased.
19. A country that opens its market to trade and finds that the world price of the good is greater than its own domestic price will
a. Find that trade is beneficial to its domestic producers of the good.
b. Export the good to other economies.
c. Find that consumer surplus in this market decreases with trade while total surplus increases with trade.
d. Answers (a), (b) and (c) are all true answers.
20. Suppose that the market demand and market supply curves for a good are given by the following equations:
Market Demand: P = 100 - Q
Market Supply: Q = 4P
The government decides that they would like to impose an excise tax on this good so that total consumption of the good falls to 20 units. The government should impose an excise tax of
a. $35 per unit.
b. $45 per unit.
c. $55 per unit.
d. $75 per unit.