ECO101H1 L301, L401: Principles of Microeconomics Midterm 2, Fall 2021
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ECO101H1 L301, L401: Principles of Microeconomics
Midterm 2, Fall 2021
Multiple Choice: Answer using the Bubble Sheet in the other booklet
1) [2 points] A single-price monopolist has a constant Marginal Cost of $10. Market demand is Q = 230 - 2P .
A Market price is $110
B Market quantity is 120
C Market price is $62.5
D Market quantity is 210
E Market price is $55
Solution: C. Rewrite demand as P = - . Set MR=MC and solve for Q. 115 - Q = 10 ÷ Q = 105. Plug this into demand to get P = 115 - 52.5 = 62.5
2) [3 points] Consider a perfectly competitive market with identical firms. Each firm has the usual shaped cost curves. Market price is currently $5. We are in long-run and short-run market equilibrium. If market demand increases...
A Market price increases in the long-run.
B Each firm’s Average Variable Cost decreases in the long-run.
C Each firm’s quantity stays the same in the short-run.
D Market price is min Average Variable Cost in the short-run
E Each firm’s Average Variable Cost increases in the short-run.
Solution E. Short run supply is the sum of firms MC above min AVC. If demand increases, in the SR we move along the firms MC curve which increases market price, firm quantity and hence AVC.
3) [3 points] In a perfectly competitive market, with Demand given by QD = 150 - P and Supply given by QS = 2P The government imposes a price ceiling of $20. Market quantity is
A 20
B 40
C 50
D 100
E 130
Solution: B. The price ceiling is binding as without it, the market price is $50. At the binding price ceiling, market quantity is determined by market supply so 2 * 20 = 40.
4) [3 points] For a firm in a perfectly competitive market Marginal Cost is MC = 5+0.5Q. Total Cost at a quantity of 0 is $100. Based on this information at a quantity of 8 Average Total Cost is...
A $9
B $17
C $18
D $19.5
E $21.5
Solution D VC is the area under the MC curve= 5*8+0.5*4*8 = 56. Fixed cost =100. ATC=(100+56)/8=19.5
5) [3 points] In a perfectly competitive market, a government imposes a binding quota. Market demand increases. Which of the statements below is true? CS: Consumer Surplus, PS: Producer Surplus, QR: Quota Rent.
A CS?, QR 个, PS 兮
B CS 个, QR 个, PS 兮
C CS 个, QR 兮, PS 个
D CS?, QR 兮, PS 兮
E CS?, QR 个, PS 个
Solution A. The quantity stays the same due to the binding quota. Increased MWTP and higher prices makes CS uncertain. The PS stays the same as the effective producer price stays the same. Quota price is the difference between effective consumer price (个) and effective producer price (兮). Quote rent is quota price * quantity.
6) [3 points] Consider a perfectly competitive market (without externalities). Market Demand is downward sloping and Market Supply is upward sloping. Based on this information alone when the government imposes a $2 tax, when is tax revenue the highest?
A Demand is Elastic and Supply is INelastic at the pre-tax equilibrium.
B Demand is INelastic and Supply is INelastic at the pre-tax equilibrium.
C Demand is Elastic and Supply is Elastic at the pre-tax equilibrium.
D Demand is INelastic and Supply is Elastic at the pre-tax equilibrium.
E Demand is more elastic than Supply at the pre-tax equilibrium.
Solution B. Revenue is highest for the same tax when the quantity reduction is the lowest. This happens when both Supply and Demand are inelastic.
7) [3 points] The market for Wheat is perfectly competitive. You need land and seeds to produce wheat. All farmers have the same size of land, rented at the same price. Farmer Alex saved seeds he bought last year and doesn’t need to buy any more this year, though he could sell them at the seed market price if he wanted. Every other farmer needs to buy seeds at the seed market price. Compared to the other farmers in the wheat industry...
A Farmer Alex produces more wheat at every market price.
B Farmer Alex makes a higher profit as his costs are lower.
C Farmer Alex has a higher fixed cost.
D Farmer Alex’s cost of seeds is last year’s price
E Farmer Alex makes the same profits as the other farmers.
Solution E. The cost of seeds is the opportunity cost of selling them at the market price of seeds. This makes Alex and the other farmers have the same profits.
8) [3 points] The government imposes a binding price ceiling on a perfectly competitive market with the usual downward-sloping Market Demand and upward-sloping Market Supply. Suppose that at the perfectly com- petitive price, demand becomes more elastic. With this change...
A Excess demand at the price ceiling increases.
B Excess demand at the price ceiling decreases.
C Excess supply at the price ceiling increases.
D Excess supply at the price ceiling decreases.
E Quantity traded is determined by supply so the excess demand/supply is unaffected.
Solution: A. For a binding price ceiling has price below the competitive equilibrium price, resulting in excess demand. If demand is more elastic, as price falls, the quantity response is larger so excess demand increases.
9) [3 points] A firm’s Total Cost curve is given by TC = 169 + 10q + q2 , Marginal Cost is MC = 10 + 2q . If market price is $20 then firm quantity is
A 0 in the short-run
B 5 in the short-run
C 10 in the short-run
D 36 in the long-run
E 48.8 in the short-run
Solution B. In the short-run the firm will set P = 20 = 10 + 2q ÷ q = 5. min AVC is 0 so the firm will produce even though it is making negative profits.
10) [3 points] Consider a perfectly competitive market (without externalities) that has a per-unit $4 tax. Market supply is perfectly inelastic. Market demand at the equilibrium price is inelastic. Based on this information alone which of the statement is true when the government increases the per-unit tax by $1 making it a $5 tax?
A Market quantity (Q) 兮, Deadweight Loss (DWL) = 0
B Market price (P) t, Deadweight Loss (DWL) 个
C Market price (P) 个, Deadweight Loss (DWL) 兮
D Market quantity (Q) t, Deadweight Loss (DWL) 个
E Market price (P) 兮, Deadweight Loss (DWL) = 0
Solution A. We don’t know statutory incidence so can’t tell whether market price is PD or PS . Supply is perfectly inelastic so demand doesn’t change with the tax. The quantity is the efficient quantity so
DWL=0
11) [3 points] Identical firms in a perfectly competitive orange market have the usual shaped curves. The fixed cost of each firm increases,everything else remains unchanged. In the short run...
A Market supply becomes less elastic.
B Demand decreases.
C Market supply elasticity stays the same.
D Firms exit due to decreased profits.
E Market price rises.
Solution C. The number of firms in the short run stays the same. The SR supply curve is the sum of the MC curves of the firms above the min AVC. As the MC and AVC remain unchanged, the SR supply and hence the elasticity of the SR supply curve stays the same. Demand remains unchanged.
12) [3 points] The government imposes a price ceiling of $5 on a perfectly competitive market. 50 units are perfectly inelastically demanded in the market, Supply is perfectly elastic at a price of $10. At the new equilibrium... CS: Consumer Surplus, PS: Producer Surplus, TS: Total Surplus, Q: Quantity traded, ∆: change in.
A Q = 50, CS = 0
B Q = 50, PS = 0
C DWL = 0
D Q = 50, PS = $250
E None of the above.
Solution: E MC=$10 for every unit which is why Supply is perfectly elastic at $10. If the price ceiling is $5 it is binding and no firm will be willing to supply anything. This make the quantity traded 0 and hence
PS=CS=TS=0 .
13) [3 points] The market for pencils in Canada is perfectly competitive with identical producers who have the typical shaped cost curves. Bad weather in B.C. has permanently increased the cost of wood used to produce pencils.
A In the short-run, the number of firms decreases.
B In the short-run, firms increase their prices to cover their higher costs.
C In the short-run, profits increase as market prices rise.
D In the long-run, market prices will return to the original equilibrium prices as firms make zero profits. E In the short-run, firms produce less at every market price.
Solution E An increase in the price of inputs increases MC at every quantity, moving the MC curve to the left. That means for the same market price, the quantity produced is lower. Note: this also moves the short-run market supply curve which increases prices. Firms will produce in the short-run as long as
this price is above min AVC. We don’t know if profits increase as it depends on where this new price is relative to ATC. It could increase or decrease.
14) [3 points] Lena is a monopolist in the mango market. At her current price choice, she is making zero profits. The (absolute) elasticity of demand at her current price choice is 1.1. What can you conclude based on this information?
A Lena has a zero Marginal cost of production for the last unit sold.
B Lena has a positive Marginal cost of production for the last unit produced.
C Lena has no fixed cost.
D If Lena increases her price, her revenues will increase.
E Lena only has fixed costs.
Solution B. As demand is elastic at the point she chooses, she is producing on the elastic portion of the curve, making it MR>0 and since MR=MC, MC>0. Her zero profits are because she has a fixed cost.
15) [3 points] Consider a perfectly competitive market. Market Demand is QD = 200 - 2P and Market Supply is QS = 2P . The government imposes a quota of 150. At the equilibrium...
A P = 300, Q = 150
B P = 125, Q = 150
C P = 75, Q = 150
D P = 50, Q = 100
E P = 25, Q = 150
Solution: D The market price without any quota is 200 - 2P = 2P ÷ P = 50, Q = 100. A quota of 150 is not binding so we get the same equilibrium as if there was no quota.
16) [3 points] Consider the perfectly competitive market for peaches, with identical firms and the usual shaped cost curves. Land is a fixed cost in the long and short run. You notice that in the long run the prices of peaches has stayed the same, but the number of firms has increased. What could explain this?
A Market demand has increased.
B The cost of land used in peach production decreases.
C The cost of land used in peach production increases.
D Market demand has decreased.
E Farmers produce more peaches at every price.
Solution: A We have same min ATC so market price stays the same and all firms produce the same quantity.
N = fi(ma)r(r)kemti(n)t(t)ityy . As the number of firms increased with costs staying the same, it must mean that
17) [3 points] A perfectly competitive market has a market price of $10 and a quantity of 50 is traded. When the government imposes a $3 per-unit tax on the market, market price increases by 10%. Which of the statements below could be true based on this information.
A Consumers pay the tax and supply is relatively more inelastic than demand.
B Consumers pay the tax and demand is relatively more inelastic than supply.
C Producers pay the tax and supply is relatively more inelastic than demand.
D Producers pay the tax and demand is relatively more inelastic than supply.
E Producers pay the tax and the elasticity of supply is the same as demand (in absolute terms).
Solution: C If market price rises, the market price is PD and producers pay the tax. 10% of $10 is $1. Since the price for consumers increases by $1 it means that producers bear the other $2 burden of the tax. This would only happen if Supply was more inelastic than demand.
2022-11-23