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Practice Questions for Mid-Semester Exam

You are encouraged to attempt these questions by yourself first, and check your answers against the provided model answers. To get a HD in the exam, you will need to provide explanations as detailed as possible.

1. Discuss about the situation where imposing a tax on the market can be considered as a right thing to do.

2. Suppose a market for butter is a perfect competitive market.

a. Draw a diagram illustrating the long-run equilibrium of the market for butter and of a representative firm.

b. Suppose a health organization published an article recommending butter as one of ingredi-ents of a healthy diet. Explain and show on a diagram what will happen in the market for butter in the short-run and the long-run.

c. Considering the health benefit of butter, the government wanted to encourage the con-sumption of butter by setting a price-ceiling in the market. Discuss about the effectiveness of this policy.

3. Suppose Ann spends all her income on buying wine and cheese. The price of wine is \$20 and a pack of cheese costs \$5. Ann’s income is \$100.

a. Draw a budget constraint and explain.

b. Ann maximizes her utility and is currently consuming 2 wines. When the price of wines increases to \$25, Ann consumes 1 wine only. Explain the change of her consumption bundle assuming that wine is a normal good. Show it on the diagram.

4. Suppose a monopolist in a small town faces a market demand curve given by  and has a constant marginal cost, . Assume the monopolist is operating in the long-run.

a. Find the monopolist’s profit-maximizing quantity and price. Show it on a diagram. Calculate the profit.

b. Calculate the DWL in the market and explain.

c. Suppose there is another town locates nearby. An inverse demand curve of this town for the good produced by the monopolist is given by . Are these consumers served by the monopolist? Explain. In what circumstances, the residents of another town could be served by the monopolist?

5. The market demand curve is given by and the supply curve is .

a. Find the equilibrium quantity and price in the market.

b. Calculate the consumer surplus and producer surplus.

c. Suppose the government imposes a tax of \$2. Do a welfare analysis before and after tax and illustrate it on the diagram.