Question 1

If a regulator requires a natural monopoly to sell its product at the price where P = MC,

- The firm will incur economic losses and shut down in the long run.
- The firm will earn monopoly profits in the long run.
- The firm will produce the perfectly competitive level of output in the long run.
- Producer surplus will be positive in the long run.

Accepted Answer

The firm will incur economic losses and shut down in the long run.

Question 2

Which of the following statements regarding a marginal-cost pricing rule for a natural monopoly is WRONG?

- It is efficient
- It maximizes total surplus in a regulated industry
- It sets price equal to marginal cost
- It allows the firm to earn a normal profit

Accepted Answer

It allows the firm to earn a normal profit

Question 3

Which of the following statements regarding an average-cost pricing rule for a natural monopoly is WRONG?

- It is efficient
- The firm earns a normal profit
- More output is produced than if the firm maximized profit
- It sets price equal to average total cost

Accepted Answer

It is efficient

Question 4

If the elasticity of supply is less elastic than the elasticity of demand then

- The tax will be borne mostly by producers regardless of who the tax is charged to.
- The tax will be borne mostly by consumers regardless of who the tax is charged to.
- The tax will be borne mostly by producers only if the tax is charged to producers.
- The tax will be borne mostly by consumers only if the tax is charged to consumers.

Accepted Answer

The tax will be borne mostly by producers regardless of who the tax is charged to.

Question 5

The demand and supply functions for swordfish are given, respectively, by the equations: Q=200-3P and Q=2P. P is the price of a pound of swordfish and Q is in thousands of pounds. After imposing a $10 per unit tax on swordfish the equilibrium quantity of swordfish will be___________.

- 80
- None of the answers is correct
- 40
- 68

Accepted Answer

68

Qd = 200 - 3Pd
Qs = 2Ps
Pd = Ps + 10

200 - 3(Ps + 10) = 2Ps
Ps = 34

Pd = 34 + 10 = 44

Q = 2(34) = 68
or
Q = 200 - 3(44) = 68

Question 6

The demand and supply functions for swordfish are given, respectively, by the equations: Q=200-3P and Q=2P. P is the price of a pound of swordfish and Q is in thousands of pounds. After imposing a $10 per unit tax on swordfish the price consumers pay will be___________.

- None of the answers is correct
- 40
- 34
- 44

Accepted Answer

44

Qd = 200 - 3Pd
Qs = 2Ps
Pd = Ps + 10

200 - 3(Ps + 10) = 2Ps
Ps = 34

Pd = 34 + 10 = 44

Question 7

The demand and supply functions for swordfish are given, respectively, by the equations: Q=200-3P and Q=2P. P is the price of a pound of swordfish and Q is in thousands of pounds. After imposing a $10 per unit tax on swordfish the percent of the tax paid by producers will be _________.

- 40%
- 80%
- 60%
- 10%

Accepted Answer

60%

2P = 200 - 3P
P = 40

Qd = 200 - 3Pd
Pd = Ps + 10

200 - 3(Ps + 10) = 2Ps
Ps = 34

(40 - 34) / 10 = 0.6 = 60%

Question 8

Suppose the supply of shaved ice is more elastic with respect to price in the long run than in the short run. All else equal we should expect that a tax on shaved ice

- Falls equally on buyers and sellers in the short run but not the long run.
- Falls more on buyers in the short run than in the long run.
- Falls equally on buyers and sellers in the short run and in the long run.
- Falls more on sellers in the short run than in the long run.
- Falls to the same degree on buyers in the short run as in the long run.

Accepted Answer

Falls more on sellers in the short run than in the long run.

b/c supply is inelastic in the short run thus falls into sellers in short run

Question 9

Estimates of long-run elasticity of labor demand are around -1. Estimates of labor supply are very inelastic. Assume the elasticity of labor supply is 0.1. What percent of a payroll tax would you expect employers to pay?

- It depends on whether the government charges the tax to employers or workers.
- 9%
- 91%
- 50% under the current arrangement where the government assesses half the tax on employers and half on workers.

Accepted Answer

9%

0.1 / (0.1 - (-1)) = 0.09

Question 10

The domestic demand for quinoa in Iceland is given by Q=1000-30P and the domestic supply is given by Q=20P, where Q is denoted in thousands of bushels. The world price of quinoa is $10 a bushel and Iceland is a relatively small nation compared to the world market. What will be the tariff revenue if Iceland imposed a $2 per bushel tariff on all quinoa imports?

- 100,000
- 200,000
- 400,000
- 600,000
- 800,000

Accepted Answer

800,000

P = 10 Tariff = 2
New price = 12

Qs = 20P
Qs = 20(12) = 240

Qd = 1000 - 30P
Qd = 1000 - 3(12) = 640

# imports = 640 - 240 = 400

Tariff rev = 400(2) = 800

Question 11

Suppose that the U.S. market for sugar is relatively small compared to the world market for sugar so that the world supply of sugar to the U.S. is perfectly elastic. If the U.S. government imposes a tariff on sugar imports, who ultimately pays for the tariff?

- U.S. consumers
- U.S. producers
- Foreign producers
- U.S. consumers and foreign producers

Accepted Answer

U.S. consumers

Since world supply is perfectly elastic, tax is pushed entirely onto consumer since the less elastic party bears the tax burden

Question 12

A monopolist faces the inverse demand curve P = 200 - 0.5Q. It has variable costs of 2Q^2 so that its marginal costs are 4Q, and it has fixed costs of $2,000. The monopoly's profit maximizing output is

- 40
- 50
- 80
- 60
- None of the answers is correct

Accepted Answer

40

MR = 200 - Q
MC = 4Q

200 - Q = 4Q
Q= 40

Question 13

As the manager of a firm you calculate the marginal revenue is $80 and marginal cost is $75. You should

- Expand output until marginal revenue equals marginal cost.
- Do nothing without information about your fixed costs.
- Expand output until marginal revenue equals zero.
- Reduce output until marginal revenue equals marginal cost.

Accepted Answer

Expand output until marginal revenue equals marginal cost.

b/c MR > MC want to continue producing till you reach profit maximization (aka where MR = MC)

Question 14

Which of the following is true when a firm maximizes profit?

- Marginal Revenue = 0
- Demand is elastic
- Demand is unit elastic
- Total revenue is maximized
- None of the answers are correct

Accepted Answer

Demand is elastic

Question 15

Why does Twitter have virtually no competition?

- Economies of scale
- Economies of scope
- A patent
- Demand-side increasing returns
- Sunk costs

Accepted Answer

Demand-side increasing returns

Question 16

Which of the following describes a natural monopoly?

- Market demand is relatively limited compared to the firm's minimum efficient scale.
- Demand for the firm's product is always inelastic.
- The firm is protected by government licensing.
- Both economies of scale and market demand are large.

Accepted Answer

Market demand is relatively limited compared to the firm's minimum efficient scale.

Minimum efficient scale: lowest Q needed to obtain lowest per unit cost

Natural monopoly: 1 firm can achieve lowest cost if tis the only firm in the market
- If there are multiple firms each firms will be producing less at higher costs, thus customers would not be better served with competition

Question 17

A monopolist faces the inverse demand curve P = 200 - 0.5Q. It has variable costs of 2Q^2 so that its marginal costs are 4Q, and it has fixed costs of $2,000. The monopoly's maximum profit is

- 1000
- None of the answers is correct
- 900
- 2000
- 2500

Accepted Answer

2000

MR = 200 - Q
MC = 4Q

200 - Q = 4Q
Q= 40

P= 200 - 0.5(40) = 180

Profit = 180(40) - 2(40)^2 - 2,000 = 2,000

Question 18

If the number of Happy Smile Dentistry's competitors decreased we would expect that

- None of the answers is correct
- Its demand would become less elastic.
- Its price markup above marginal cost would increase.
- Its price/marginal cost ratio of 3.0 would decrease.

Accepted Answer

Its price markup above marginal cost would increase.

B/c less competitors = decrease in demand = increase in price mark up and MC (seen in Lerner Index equation)

Question 19

Which of the following industries is most likely to have a monopolist?

- Natural gas
- Tacos
- Automobiles
- Corn

Accepted Answer

Natural gas

Question 20

A profit-maximizing monopolist will never operate in the portion of the demand curve where price elasticity of demand is equal to

- (-0.3)
- (-1)
- (-6)
- (-3)

Accepted Answer

-0.3

-0.3: is in inelastic portion
-1: in unit elastic portion
-6 and -3: is in elastic portion

Question 21

A firm in the market for men's sandals has some degree of monopoly (market) power. The demand curve it faces has a constant price elasticity of demand of -3.0, while the price elasticity of demand for the market is -1.5. Moreover, the firm has a constant marginal cost of $50. Using the rule of thumb for pricing (or Lerner index), calculate the firm's profit-maximizing price.

- 75
- 150
- None of the answers is correct
- 65
- 100

Accepted Answer

75

Use Lerner Index
(P - 50) / 50 = 1 / - (-3)
P = 75

Question 22

At the profit maximizing quantity, the price elasticity of demand is ______.

- Unit elastic
- Inelastic
- Elastic
- None of the above

Accepted Answer

Elastic

Question 23

Suppose the supply curve for a good is completely inelastic. If the government imposed a price ceiling below the market-clearing price, would a deadweight loss result?

- Yes. Since the supply curve is horizontal, the quantity supplied will drop to zero. Thus, all producer and consumer surplus are lost and there is a complete deadweight loss.
- No. Since the supply curve is vertical, the market-clearing quantity supplied and the price-ceiling quantity supplied are the same. Thus, the entire loss of producer surplus is transferred to consumers and there is no deadweight loss.
- Yes. Since the supply curve is vertical, the market-clearing quantity supplied and the price-ceiling quantity supplied are the same. Thus, there is a loss of producer surplus, which results in a deadweight loss.
- No. Since the supply curve is horizontal, the market-clearing quantity supplied and the price-ceiling quantity supplied are the same. Thus, the entire loss of producer surplus is transferred to consumers and there is no deadweight loss.

Accepted Answer

No. Since the supply curve is​ vertical, the​ market-clearing quantity supplied and the​ price-ceiling quantity supplied are the same.​ Thus, the entire loss of producer surplus is transferred to consumers and there is no deadweight loss.

Question 24

The demand for labor is L = 4000−300w, where L is the number of workers demanded and w is the hourly wage rate. The supply of labor is L = 200w

What is the wage rate in this market?
What is the equilibrium quantity of labor?

If a minimum wage law is passed to set the minimum wage at $9 per hour, what is the deadweight loss from the minimum wage?

Accepted Answer

Wage rate: $8
Equilibrium quantity of labor: 1600 workers
Deadweight loss: $375

Qd = 4000 - 300(9) = 1300
Qs = 1300 = 200w
w = 6.5
DWL = (9 - 6.5)(1600 - 1300)(0.5)= 375

Question 25

A binding minimum wage creates unemployment because the quantity of labor supplied is greater than the quantity of labor demanded at the binding minimum wage. What is likely to happen to workers who differ by experience, education, age, and race? Which of the following statements is true?

- Teenagers are more likely to be unemployed than adults.
- Workers with a college education are less likely to be unemployed than those with only a high school education.
- Less productive workers are more likely to be unemployed than more productive workers.
- White males are less likely to be unemployed than African American males.
- All of the above.

Accepted Answer

All of the above.

Question 26

The Japanese government restricts imports of rice into Japan. This import quota causes

- A decrease in the consumer surplus of Japanese consumers.
- Japanese production of rice to fall.
- A decrease in the producer surplus of Japanese rice growers.
- The price of rice to be lower than it would have been without the quota.

Accepted Answer

A decrease in the consumer surplus of Japanese consumers.

Question 27

A tariff can be described as ________________. The purpose of a tariff is to protect _____________.

- A tax on an imported good; domestic producers from foreign competition by raising the domestic price of the good.
- Either a tax on or a limit on the quantity of an imported good; domestic consumers from foreign competition by lowering the domestic price of the good.
- Either a tax on or a limit on the quantity of an imported good; domestic producers from foreign competition by raising the domestic price of the good.
- A tax on an imported good; domestic consumers from foreign competition by lowering the domestic price of the good.

Accepted Answer

A tax on an imported​ good; domestic producers from foreign competition by raising the domestic price of the good.

Question 28

The burden of a tax is shared by producers and consumers. Under what conditions will consumers pay most of the tax? Under what conditions will producers pay most of it?

- If demand is relatively less elastic than supply, consumers will pay more of the tax.
- It depends on who is legally obligated to pay the tax. Typically consumers are required to pay the tax and therefore bear most of the burden.
- It depends on who is legally obligated to pay the tax. Typically producers are required to pay the tax and therefore bear most of the burden.
- If demand is relatively more elastic than supply, consumers will pay more of the tax.

Accepted Answer

If demand is relatively less elastic than​ supply, consumers will pay more of the tax.

Question 29

What determines the share of a subsidy that benefits consumers?

- If demand is relatively more elastic than supply, consumers will benefit more from the subsidy than producers.
- Subsidies are used to induce firms to produce more output and therefore are designed to benefit producers.
- If demand is relatively less elastic than supply, consumers will benefit more from the subsidy than producers.
- It depends on the type of subsidy. Obviously, if it's a consumer subsidy, the consumer receives the entire benefit.

Accepted Answer

If demand is relatively less elastic than​ supply, consumers will benefit more from the subsidy than producers.

Question 30

Among the tax proposals regularly considered by Congress is an additional tax on distilled liquors. The tax would not apply to beer. The price elasticity of supply of liquor is 4, and the price elasticity of demand is −0.3. The cross-elasticity of demand for beer with respect to the price of liquor is 0.1.

If the new tax is imposed, who will bear the greater burden—liquor suppliers or liquor consumers?

Liquor suppliers will pay what percentage of tax?
Liquor consumers will pay what percentage of tax?

Accepted Answer

Suppliers: 6.9%
Consumers: 93%

Question 31

If demand in a perfectly competitive market is perfectly inelastic and supply is upward sloping, a specific tax placed on suppliers will

- Be paid entirely by suppliers, and there will be a deadweight loss.
- Be paid entirely by consumers, and there will be a deadweight loss.
- Be paid partly by suppliers and partly by consumers, and there will be a deadweight loss.
- Be paid entirely by consumers, and there will be no deadweight loss.
- Be paid entirely by suppliers, and there will be no deadweight loss.

Accepted Answer

Be paid entirely by​ consumers, and there will be no deadweight loss.

Question 32

The inverse demand for wind powered turbines (that produce electricity from the wind) is P = 25−0.2Q. The supply of wind powered turbines is P = 5 + 0.8Q, where P is in thousands of dollars and Q is in thousands of wind turbines.

The market for wind powered turbines is perfectly competitive. The equilibrium quantity in the market is 2020 thousand wind turbines.

What is the equilibrium price?

Accepted Answer

$21 thousand

Question 33

A local government is seeking to impose a specific tax on
hotel rooms. The price elasticity of supply of hotel rooms is 4, and the price elasticity of demand is −0.2.

What percentage of tax will hotel consumers pay?
What percentage of tax will hotel suppliers pay?

Accepted Answer

Consumer: 95.2%
Supplier: 4.8%

Question 34

Does a subsidy create a deadweight loss? Why or why not?

- No. Although the cost of a subsidy is typically large, there is no deadweight loss because it only occurs in the case of underproduction. A subsidy increases the equilibrium quantity relative to the free-market quantity.
- No. Consumers and producers gain surplus, while the cost of the subsidy is minimal. In fact, a subsidy often results in a net gain in welfare.
- Yes. While producers and consumers gain surplus, the cost of the subsidy exceeds their gain. The cost of the subsidy is the subsidized equilibrium quantity, which is lower than the free-market quantity, multiplied by the subsidy per unit.
- Yes. While producers and consumers gain surplus, the cost of the subsidy exceeds their gain. The cost of the subsidy is the subsidized equilibrium quantity, which is higher than the free-market quantity, multiplied by the subsidy per unit.

Accepted Answer

Yes. While producers and consumers gain​ surplus, the cost of the subsidy exceeds their gain. The cost of the subsidy is the subsidized equilibrium​ quantity, which is higher than the​ free-market quantity, multiplied by the subsidy per unit.

Question 35

Suppose a profit-maximizing monopolist is producing 900 units of output and is charging a price of $50.00 per unit. If the elasticity of demand for the product is −2.00, find the marginal cost of the last unit produced.

What is the marginal cost of the last unit produced?
What is the firm's Lerner Index?

Accepted Answer

MC: 25
Lerner Index: 0.5

Question 36

Suppose a profit-maximizing monopolist is producing 900 units of output and is charging a price of $50.00 per unit. If the elasticity of demand for the product is −2.00, find the marginal cost of the last unit produced.
Suppose that the average cost of the last unit produced is
$15.00 and the firm's fixed cost is
$1500.

Find the firm's profit.

Accepted Answer

31500

Question 37

A monopolist produces its product in two different plants. Currently, the MC in plant 1 is $5.60, the MC in plant 2 is $6.20, and the marginal revenue of the last unit sold is $6.00. To maximize its profit, the monopolist should

- Decrease production in plant 1 and increase production in plant 2, but there is not enough information to tell whether the monopolist should increase or decrease total production.
- Increase production in plant 1, decrease production in plant 2, and decrease total production.
- Increase production in plant 1 and decrease production in plant 2, but there is not enough information to tell whether the monopolist should increase or decrease total production.
- Decrease production in plant 1, increase production in plant 2, and increase total production.
- Increase production in plant 1, decrease production in plant 2, and increase total production.

Accepted Answer

Increase production in plant 1 and decrease production in plant​ 2, but there is not enough information to tell whether the monopolist should increase or decrease total production.

Question 38

...

Accepted Answer

Quantity: 6
Price: 7
Profit: 18
Lerner Index: 0.43

Question 39

A firm in the market for designer jeans has some degree of monopoly power. The demand curve it faces has a price elasticity of demand of
−2, while the price elasticity demand of the market is −1.5. Moreover, the firm has a constant marginal cost of
$40.00.

Using the rule of thumb for pricing, calculate the firm's profit-maximizing price.

Accepted Answer

80

Question 40

A monopoly manufacturer faces two types of consumers. The first type has a relatively flat, linear demand curve. The second type has a relatively steep, linear demand curve. Suppose the monopolist can choose the price and quantity for each type that maximizes its profits.

For the first type, it will set a relatively______. For the second type, it will set a relatively ______.

- High price and high quantity; high price and low quantity.
- Low price and high quantity; high price and low quantity.
- Low price and low quantity; high price and low quantity.
- high price and low quantity; low price and high quantity.

Accepted Answer

low price and high quantity; high price and low quantity.

Question 41

Which of the following does not create a barrier to entry?

- A copyright on a new computer program.
- A government license required to practice law.
- A patent for a new drug.
- Economies of scale in production.
- All of the above create barriers to entry.

Accepted Answer

All of the above create barriers to entry.

Question 42

Suppose a small group of manufacturers in the auto parts industry currently enjoy considerable monopoly power. How would you expect monopoly power in this industry to change in the long run?

- The demand curve facing each firm will become more elastic as the number of firms in the industry increases. Thus, monopoly power will increase over time.
- The market demand curve will become more inelastic as the number of firms in the industry decreases. Thus, monopoly power will increase over time.
- The market demand curve will become more elastic as the number of firms in the industry increases. Thus, monopoly power will diminish over time.
- The demand curve facing each firm will become more inelastic as the number of firms in the industry decreases. Thus, monopoly power will increase over time.
- The demand curve facing each firm will become more elastic as the number of firms in the industry increases. Thus, monopoly power will diminish over time.

Accepted Answer

The demand curve facing each firm will become more elastic as the number of firms in the industry increases.​ Thus, monopoly power will diminish over time.

Question 43

There is a social cost to monopoly power because

- he amount produced by monopolies is greater than competitive outcomes.
- Monopolies earn less profit than competitive firms.
- Monopolies charge prices that are below marginal revenue.
- Monopoly production occurs where price is greater than marginal cost.
- Monopolies create less producer surplus than competitive firms.

Accepted Answer

Monopoly production occurs where price is greater than marginal cost.

Question 44

Redistributing monopoly gains would not eliminate social costs because

- The monopoly's profits are less than fixed costs.
- The monopoly's profits are less than lost consumer surplus.
- Deadweight loss is equal to zero.
- The monopoly's profits are equal to zero.
- Deadweight loss is greater than consumer surplus.

Accepted Answer

The​ monopoly's profits are less than lost consumer surplus.

Question 45

The government sets a price ceiling for a monopoly that is below the profit-maximizing price but above the level at which the monopolist's marginal cost curve intersects demand. At the firm's new profit-maximizing point, price is above average variable cost. As a result of the price ceiling, the monopolist will

- Produce more than the monopoly level of output.
- Produce the perfectly competitive level of output.
- Produce the monopoly level of output.
- Produce less than the monopoly level of output.
- Shut down.

Accepted Answer

Produce more than the monopoly level of output.

Question 46

Rent seeking is

- Charging the maximum price allowed by a regulatory agency based on a firm's expected rate of return.
- Gaining additional benefit derived from purchasing one more unit of a good.
- Spending money in socially unproducitive efforts to acquire, maintain, or exercise monopoly.
- One firm consistently following the actions of another.
- A seller affecting the price of a good.

Accepted Answer

Spending money in socially unproducitive efforts to​ acquire, maintain, or exercise monopoly.

Question 47

...

Accepted Answer

903.13

Question 48

Suppose that the world price of 6061 aluminum alloy is $20 a lb. The US domestic supply of the aluminum alloy is given by Q = 10P and the US domestic demand is Q = 1,000 - 10P. Assume that the US is a relatively small nation compared to the world.
What is the number of imports?

- 1,200
- 800
- 600
- 1,000

Accepted Answer

600

Qd = 1,000 - 10(20)= 800
Qs = 10(20) = 200

# imports = 800 - 200 = 600

Question 49

Suppose that the world price of 6061 aluminum alloy is $20 a lb. The US domestic supply of the aluminum alloy is given by Q = 10P and the US domestic demand is Q = 1,000 - 10P. Assume that the US is a relatively small nation compared to the world.

Suppose that the US government imposes a $10 tariff on all 6061 aluminum alloy being imported into the US. How many lbs of aluminum would the US import?

Accepted Answer

400

P = 20 + 10 = 30

Qd = 1,000 - 10(30) = 700
Qs= 10(30) = 300

# imports = 700 - 300 = 400

Question 50

A monopolist faces the inverse demand curve P = 150 - 0.5Q. It has a variable cost of Q^2 so that its MC are 2Q and it has FC of 2,000
What is the profit maximizing quantity?

- 50
- 100
- 25
- 10

Accepted Answer

50

MR = 150 - Q
MC = 2Q

150 - Q = 2Q
Q = 50

Question 51

A monopolist faces the inverse demand curve P = 150 - 0.5Q. It has a variable cost of Q^2 so that its MC are 2Q and it has FC of 2,000.
What is the profit maximizing price?

- 125
- 75
- 150
- 100

Accepted Answer

125

150 - Q = 2Q
Q = 50

P = 150 - 0.5(50) = 125

Question 52

A monopolist faces the inverse demand curve P = 150 - 0.5Q. It has a variable cost of Q^2 so that its MC are 2Q and it has FC of 2,000.
What is the profit?

- 1,500
- 1,450
- 1,750
- 1,250

Accepted Answer

1,750

150 - Q = 2Q
Q = 50

P = 150 - 0.5(50) = 125

Profit = (125 x 50) - 50^2 - 2,000 = 1,750

Question 53

A monopolist firm faces a demand with constant elasticity of -3. It has constant MC of $6 per unit and sets a price to maximize profit. What is the price?

- 8
- 2
- 6
- 9

Accepted Answer

9

Use Lerner Index:
(P - 6) / P = 1 / - (-3)
P = 9

Question 54

A monopolist firm faces a demand with constant elasticity of -2. It has constant MC of $20 per unit and sets a price to maximize profit. What is the price?

- 80
- 20
- 40
- 30

Accepted Answer

40

Use Lerner Index:
(P - 20) / P = 1 / - (-2)
P = 40

ECON 300 Exam 3

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