EC120 Review Questions for Final

EC120 – Review Questions for the Final 1

Question One

Assume that a market is initially in equilibrium. If the demand curve shifts left and the supply curve shifts right, then the equilibrium price _______ and the equilibrium quantity _______: (each blank is separated by a semi-colon)a) Falls; may rise, fall or remain constantb) Rises; may rise, fall or remain constantc) Rises, falls or remains constant; fallsd) Rises, falls or remains constant; rises


Question One

Solution

a) - ExplanationDemand curve shifts leftEquilibrium price falls and equilibrium quantity falls

Supply curve shifts rightEquilibrium price falls and equilibrium quantity rises

Price definitely fallsAmbiguous effect is on equilibrium quantity


Question Two

Suppose Carol’s Candid Cameras wants to increase its total revenue. If the firm lowers the price of cameras by 2 percent, Carol must be predicting that the quantity:a) Demanded will decrease by less than 2 percentb) Supplied will increase by more than 2 percentc) Supplied will decrease by less than 2 percentd) Demanded will increase by more than 2 percent


Question Two

Solution

Answer d)

If D is elastic: P, Q will by a larger %, so TR


Question Three

If the price of a good is not affected by a sales tax, then:a) Supply is perfectly elasticb) Demand is perfectly elasticc) Elasticity of supply is greater than elasticity of

demandd) Elasticity of demand is greater than elasticity of

supplye) None of the above


Question Three

Solution:

Perfectly Elastic Demand Curve

Demand is perfectly elastic. With no tax, price is $5 and the quantity is 100. At tax of $0.75 shifts the supply curve to S + tax. The price remains at $5 and the quantity decreases to 50. Sellers pay the entire tax.

Price

Quantity 100

D

S + tax

$5.00

S

50

$4.25


Question Four

Use these diagrams to answer Question Four (p.8)


Question Four (continued)

Suppose a sales tax of $1 is imposed. In which market would the seller pay the highest portion of the tax?a) (a)b) (b)c) (c)d) (d)e) All markets equally


Question Four

Solution

Answer c)

Although it is true that the most inelastic supply curve bears the highest tax burden, as is the case in Diagram (d); this is not the correct response.

In Diagram (d) the demand curve is perfectly inelastic and so the consumer bears the entire tax burden.

Diagram c) has the second most inelastic supply curve


Question Five

Question Five refers to Table 1 which represents Sam’s Marginal Utility schedules for bananas and apples:

Table 1:

Bananas ApplesQuantity

Marginal Utility

MUB/PB Quantity

Marginal Utility

MUA/PA

1 30 1 402 24 2 343 18 3 244 12 4 165 6 5 86 0 6 0Assume the price of bananas PB is $1 a kilogram and the price of apples PA is $2 a kilogram. Sam’s budget for bananas and apples is $10.

What is Sam’s marginal utility per dollar spent at each quantity of apples and bananas?

What is the utility maximizing combination of bananas and apples for Sam?


Question Five

Solution

Table 1:

Bananas PB = $1 Apples PA = $2Q Margina

l UtilityMUB/PB Q Margina

l UtilityMUA/PA

1 30 30/1 =30 1 40 40/2 = 402 24 24/1 = 24 2 34 34/2 = 173 18 18/1 = 18 3 24 24/2 = 124 12 12/1 = 12 4 16 16/2 = 85 6 6/1 = 6 5 8 8/2 = 46 0 0/1 = 0 6 0 0/2 = 0Sam will consume 4 bananas and 3 apples at his utility maximizing combination.

This combination exhausts Sam’s entire income.

($1 x 4) + ($2 x 3) = $10


Question Six

If the price of bananas rises to $2 a kilogram, how does Sam’s marginal utility per dollar for bananas change? Fill in Table 2 with the new marginal utility per dollar spent for bananas. Assume Sam’s income remains the same.

Table 2

Bananas ApplesQuantity Margina

l UtilityMUB/PB Quantity Margina

l UtilityMUA/PA

1 30 1 402 24 2 343 18 3 244 12 4 165 6 5 86 0 6 0

At the price of $2 a kilogram for bananas, what is the new utility maximizing combination of bananas and apples for Sam?


Solution

Table 1:

Bananas PB = $2 Apples PA = $2Q Margina

l UtilityMUB/PB Q Margina

l UtilityMUA/PA

1 30 30/2 = 15 1 40 40/2 = 402 24 24/2 = 12 2 34 34/2 = 173 18 18/2 = 9 3 24 24/2 = 124 12 12/2 = 6 4 16 16/2 = 85 6 6/2 = 3 5 8 8/2 = 46 0 0/2 = 0 6 0 0/2 = 0Sam will consume 2 bananas and 3 apples at his new utility maximizing combination.

This combination exhausts Sam’s entire income.

($2 x 2) + ($2 x 3) = $10


Question Seven

List two points on Sam’s demand curve for bananas.

Price

Quantity of Bananas

D

Sam’s Demand Curve for Bananas


Question Seven

Solution

Price

Quantity of Bananas

D

Sam’s Demand Curve for Bananas

2 4

$2

$1


Question Eight

If the total product of four workers is 156, calculate the average product of each worker.a) 39b) 19.5c) 78d) 152e) 624


Question Eight

Solution

AP = TP/L = 156/4 = 39


Use the following table to answer Questions Nine and Ten:

Firm BLow Price

High Price

Firm A Low Price

A: $2B: $5

A: $20B: -$15

High Price

A: - $10B: $25

A: $10B: $20

Question Nine

In equilibrium what are firm A’s profits?a) -$10b) $2c) $10d) $20

Question Ten

If both firms agree to collude, what would be firm A’sprofits?a) -$10b) $2c) $10d) $20


Question Nine

Solution

In equilibrium what are firm A’s profits?

A must decide what to do:If B chooses low A gets $2 for low A gets -$10 for highTherefore A should choose low

If B chooses high A gets $20 for lowA gets $10 for highTherefore A should choose low

b) In equilibrium – A’s profits are $2

Question Ten

Solution

If both firms agree to collude, what would be firm A’s profits?

a) -$10b) $2c) $10d) $20


Use the following diagram to answer Question Eleven:The diagram is of a monopolistically-competitive firm in short-run equilibrium.

(Display Graph)

Question Eleven

What is the firm’s profit maximizing level of output?

a) Q1

b) Q2

c) Q3

d) Q4

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Question Eleven

Solution

What is the firm’s profit maximizing level of output?

a) Q1

b) Q2

c) Q3

d) Q4

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Question Twelve

Under monopolistic competition, long-run economic profits tend towards zero because of:

a) Product differentiation

b) The lack of barriers to entry

c) Excess capacity

d) Inefficiency

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Question Twelve

Solution

Under monopolistic competition, long-run economic

profits tend towards zero because of:

a) Product differentiation

b) The lack of barriers to entry

c) Excess capacity

d) Inefficiency

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Use the following diagram to answer Question Thirteen:

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Question Thirteen

How much profit does the profit-maximizing monopoly earn?

a) $960

b) $0

c) $5040

d) $6000

e) $10

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Question Thirteen

Solution How much profit does the profit-maximizing monopoly earn?

a) $960

b) $0

c) $5040

d) $6000

e) $10

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Question Fourteen

Regardless of the type of market in which it operates, a firm should continue to operate in the short run as long as it can pay:

a) All of its fixed costs

b) The marginal costs of the last unit produced

c) All of its variable costs

d) All of its total costs

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Question Fourteen

Solution

Regardless of the type of market in which it operates, a firm should continue to operate in the short run as long as it can pay:

a) All of its fixed costs

b) The marginal costs of the last unit produced

c) All of its variable costs

d) All of its total costs

EC120 Review Questions for Final

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