Microeconomics – Exam 2

1.

Consumer surplus for an individual buyer is equal to:

the consumer’s willingness to pay for the good, minus the marginal cost of producing the good.

the price of the good, minus the marginal cost of producing the good.

the consumer’s willingness to pay for the good, minus the price of the good.

the marginal cost of the good, minus the consumer’s willingness to pay for the good.

 

 

2.

Along a given demand curve, an increase in the price of a good will cause consumer surplus to:

increase.

decrease.

not change.

The answer cannot be determined without information about the supply curve.

 

3.

Along a given supply curve, a decrease in price will cause producer surplus to:

increase.

decrease.

stay the same.

We cannot determine what producer surplus will do without information about the demand curve.

 

Reference: Ref 4-5

 

(Table: Music Downloads) Two consumers, Eli and Madison, like to download songs to their MP3 players. The table represents their willingness to pay for each downloaded song. If an individual song can be downloaded at a price of $1, what is the total consumer surplus received by these consumers?

A) $19.25 B) $18

C) $10 D) $11

 

5.

Maria wants to get rid of her bookshelf. She is willing to give it away for free but her neighbor offers to pay $30 for it. Maria experiences a:

gain of consumer surplus.

loss of consumer surplus.

gain of producer surplus.

loss of producer surplus.

 

6.

Producer surplus for an individual seller is equal to:

the price of the good, minus the marginal cost of producing the good.

the cost of the good, minus the willingness to pay for the good.

the willingness to pay for the good, minus the price of the good.

the cost of the good, minus the price of the good.

 

Reference: Ref 4-1

 

(Table: Consumer Surplus and Phantom Tickets) If the box-office price of a ticket to see Phantom of the Opera is $50, and there is no other market for tickets, then total consumer surplus for the five students is:

A) $100. B) $175. C) $230. D) $240.

 

 

8.

Adie wants to take some online classes this semester. She is willing to pay $1,000 for the first class, $800 for the second, $700 for the third, and $500 for the fourth. If online classes cost $750, Adie will take

online classes and her consumer surplus will equal     .

A) 3; $350

B) 4; $600

C) 2; $400

D) 2; $300

 

Reference: Ref 4-13

 

(Figure: Producer Surplus III) If the price of the good increases from $3 to $4, producer surplus will increase by:

A) $5.

B) $15.

C) $25.

D) $35.

 

10.

If a frost destroys much of the grapefruit crop, total surplus:

will increase.

will decrease.

will not change.

may change, but we cannot determine the change without more information.

 

11.

If the market for grapefruit is in equilibrium without any government intervention:

total surplus is minimized.

there is some deadweight loss.

a few mutually beneficial trades are missed.

consumer and producer surplus are maximized.

the sum of the individual producer surpluses in this market.

the sum of all prices paid multiplied by the number of gallons of milk sold.

the total revenue of the milk producers in Wisconsin.

the total cost of selling milk in Wisconsin.

 

 

13.

Figure: Gains from Trade

 

Reference: Ref 4-18

 

(Figure: Gain from Trade) As demand decreases from D2 to D1, total surplus:

decreases.

does not change.

increases.

is indeterminant.

 

14.

Suppose apartments rent for $1,600 in Boston. If the city of Boston forces each landlord to charge $1,200, there will be:

an increase in producer surplus for each landlord.

a surplus of new apartments in Boston.

an increase in consumer surplus for Bostonians who can find apartments for $1,200.

an increase in total surplus.

will increase.

will decrease.

will not change.

may change, but we cannot determine the change without more information.

 

 

16.

If the cost to download a song from the Internet onto an MP3 player falls from $0.99 to $0.50, then we would predict that producer surplus would   in the market for MP3 players.

increase

decrease

not change

We cannot determine what producer surplus will do without information about consumer surplus.

 

 

17.

If total surplus falls, which of the following must have occurred?

There was an increase in demand or a decrease in supply.

There was an increase in demand and an increase in supply.

There was a decrease in demand or a decrease in supply.

There was a decrease in demand and an increase in supply.

Figure: Market for Sandwiches

 

Reference: Ref 4-27

 

(Figure: Market for Sandwiches) Referring again to the market for sandwiches during the lunch hour at a local deli, how much total surplus would be lost if a quota dictated that only eight sandwiches could be legally exchanged at a price of $5?

A) $3 B) $72 C) $27 D) $32

 

19.

An excise tax is a tax charged on:

each unit of a good or service that is sold.

earnings.

the ownership of real estate.

the inheritance of assets.

 

20.

If the income elasticity of demand for a good is negative, the good is said to be a(n):

inferior good.

negative good.

positive good.

normal good.

If two goods are complements, their cross-price elasticity of demand should be:

less than 0.

equal to 0.

positive, yet almost equal to 0.

greater than 0.

 

 

22.

If the absolute value of the price elasticity of demand is found to be 6, then demand is:

price-inelastic.

price-elastic.

price unit-elastic.

horizontal.

 

 

23.

Assume that as your income increases, your consumption of burgers increases. We can assume that burgers are considered a(n):

negative good.

positive good.

inferior good.

normal good.

 

 

24.

Goods A and B have a positive cross-price elasticity of demand. This means Goods A and B are:

normal goods.

substitutes.

complements.

inferior goods.

 

25.

Suppose at a price of $10, the quantity demanded is 100. When the price falls to $8, the quantity demanded increases to 130. The price elasticity of demand between the prices of $10 and $8, using the midpoint method, is approximately:

A) 1.17.

B) 1.50.

C) 0.85.

D) 1.00.

26.

Gas prices recently increased by 25%. In response, purchases of gasoline decreased by 5%. Based on this data, the price elasticity of demand for gas is:

5.

2. C) 0.2. D) 0.5.

 

27.

A good is likely to have an inelastic demand curve if:

the consumer has significant time to respond to the price change.

the good has few available substitutes.

the good is a luxury.

the good accounts for a large share of consumer income.

 

 

28.

If your purchases of shoes decrease from 11 pairs per year to 9 pairs per year when the price of shirts increases from $8 to $12, then, for you, shoes and shirts are considered:

inferior goods.

luxury goods.

substitute goods.

complementary goods.

 

 

29.

Generally speaking, a tax leads to a(n)           in consumer surplus and a(n)  in producer surplus.

increase; increase

increase; decrease

decrease; increase

decrease; decrease

Figure: Demand Curve for Crossings

 

Reference: Ref 5-14

 

(Figure: Demand Curve for Crossings) In the figure, demand is price          between $0.90 and $1.10, since total revenue   when price       .

-elastic; increases; decreases

-inelastic; stays the same; decreases

unit-elastic; stays the same; increases

-inelastic; increases; increases

 

31.

Scenario: Price Elasticity

When calculating price elasticity with the following data, please use the midpoint method and take the absolute value.

 

Demand and Price Elasticity

Reference: Ref 5-6

 

(Scenario: Price Elasticity) Using the midpoint formula, what is the price elasticity of demand between

$1.75 and $1.50?

A) 0.42

B) 1.5

C) 1.86

D) 0.08

The price elasticity of demand for fresh tomatoes has been estimated to be 2.22. If a new insecticide and fertilizer treatment yields a 20% increase in the nation’s fresh tomato crop, how will that affect total revenue for fresh tomatoes, all other things unchanged?

Total revenue will remain unchanged.

Total revenue will fall.

Total revenue will rise.

Not enough information is given to answer the question.

 

 

33.

Suppose the absolute value of the price elasticity of demand for blueberries is 1.5. If climate change destroys one-fourth of the nation’s blueberry crop (and thus reduces supply), how will that affect total revenue, all other things unchanged? (Hint: Consider which direction blueberry prices will go.)

Total revenue will rise.

Total revenue will fall.

Total revenue will remain unchanged.

Not enough information is given to answer the question.

 

34.

Suppose the government decides to fight obesity in America by imposing an excise tax on the saturated fat content of food. The effect of this tax would be to:

lower the profits of ice cream suppliers.

decrease revenue for the government.

decrease black market activity.

raise the profits of ice cream suppliers.

 

 

35.

The income elasticity of demand for peaches has been estimated to be 1.43. If income grows by 15% in a period, how will that affect total revenue from peaches in that period, all other things unchanged?

Total revenue will rise.

Total revenue will fall.

Total revenue will remain unchanged.

Not enough information is given to answer the question.

The income elasticity of demand for eggs has been estimated to be 0.57. If income grows by 5% in a period, how will that affect demand for eggs in that period, all other things unchanged?

Demand will increase by more than 5.7%.

Demand will increase by about 2.9%.

Demand will decrease by more than 5.7%.

Demand will decrease by about 2.9%.

 

 

37.

Individuals in a market who must take the market price as given are:

quantity-minimizers.

quantity-takers.

price-takers.

price-searchers.

 

 

38.

The perfectly competitive model assumes all of the following except:

a great number of buyers.

easy entry into and easy exit from the market.

complete information on the part of buyers and sellers.

government pricing.

 

39.

Marginal revenue is a firm’s:

ratio of the change in total revenue to the change in output.

ratio of average revenue to total revenue.

profit per unit times the number of units sold.

increase in profit when it sells an additional unit of output.

 

40.

In perfect competition:

price and marginal cost are the same.

price and marginal revenue are the same.

price and total revenue are the same.

total revenue and total variable cost are the same.

41.

If a perfectly competitive firm is producing a quantity that generates P = MC, then profit:

is maximized.

can be increased by decreasing the quantity.

can be increased by decreasing the price.

can be increased by increasing production.

 

 

42.

The short-run supply curve for a perfectly competitive firm is its:

demand curve above its marginal revenue curve.

marginal revenue curve to the right of its marginal cost curve.

marginal cost curve above its average variable cost curve.

average total cost curve below its marginal cost curve.

 

 

43.

Zoe’s Bakery determines that P < ATC and P > AVC. Zoe should:

continue to operate, even though she is experiencing an economic loss.

continue to operate, as she is making an economic profit.

shut down immediately, as she is experiencing an economic loss.

raise the price until she has maximized her profits.

 

44.

Many furniture stores run “Going out of Business” sales but never go out of business. In order for the shut-down decision to be the appropriate one, the price of furniture must be       than the            average variable cost.

higher; maximum

lower; minimum

higher; minimum

lower; maximum

 

 

45.

If a perfectly competitive firm is producing a quantity that generates P > MC, then profit:

is maximized.

can be decreased by increasing the price.

can be increased by decreasing the price.

can be increased by increasing production.

46.

Lilly is the price-taking owner of an apple orchard. Currently the price of apples is high enough that Lilly is earning positive economic profits. In the long run, Lilly should expect:

lower apple prices due to entry of new firms.

higher apple prices due to exit of existing firms.

lower apple prices due to exit of existing firms.

higher apple prices due to entry of new firms.

 

 

47.

If a firm in perfect competition sells 10 units of output at a market price of $5 per unit, its marginal revenue is:

A) $5.

B) more than $5 but less than $50. C) $50.

D) $250.

 

48.

Figure: A Perfectly Competitive Firm in the Short Run

 

Reference: Ref 7-7

 

(Figure: A Perfectly Competitive Firm in the Short Run) If market price is G, the firm’s total revenue from the sale of its most profitable level of output is:

0GLD.

0GHB.

BH.

DL.

 

Reference: Ref 7-7

 

(Figure: A Perfectly Competitive Firm in the Short Run) If market price is G, the firm’s total economic profit at its most profitable level of output is:

0GHB.

EFJS.

EGHS.

FGLK.

 

 

 

50.

For a firm producing at any level of output less than the most profitable one, an increase in output adds:

more to total cost than to total revenue.

more to total revenue than to total cost.

the same amount to total revenue as to total cost.

to total revenue but not to total cost.

 

Reference: Ref 7-7

 

(Figure: A Perfectly Competitive Firm in the Short Run) The firm will produce in the short run if the price is            the price indicated by .

at least as much as; F

greater than; E

greater than; N

at least as much as; P

 

 

52.

In the short run, a perfectly competitive firm produces output and incurs an economic loss if:

P > ATC.

P < AVC.

AVC > P > ATC.

AVC < P < ATC.

 

 

53.

A perfectly competitive industry is currently in a state of long-run equilibrium. Which of the following must be true?

P = MR = MC > ATC

P = MR = MC = AVC

P = MR = MC = ATC

P > MR = MC = AVC