Section 1 - TRUE or FALSE:

1. When price increases, the quantity supplied increases.

2. The demand curve for good X shifts higher when the price of good X declines.

3. An increase in expected future price of fabric causes the current demand for fabric to fall.

4. If Pancakes and syrup are complements, an increase in the price of pancakes will result in  higher demand for syrup.

5. If the price of apples is held below its equilibrium value, a surplus of apples will exist.

6. When supply is more elastic than demand, a subsidy will benefit sellers more than buyers.

7. Economic profit is usually larger than accounting profit.

8. Monopolists charge higher prices than the competitive market, but there is no deadweight loss from their pricing behavior.

9. In a successful economy, no firm should go bankrupt. Bankruptcy is a signal of a market failure.

10. Overall production costs will be minimized when the marginal costs of production across  firms are equal.

11. In the presence of a positive externality, the market equilibrium will typically result in a quantity above the social optimum.

12. Monopolists and competitive firms both maximize profit by setting marginal cost equal to marginal revenue.

Section 2 – Multiple Choice; Pick the best choice among the options provided:

1. During a day working at the auto repair shop, John can repair one transmission per hour or repair two fuel injectors per hour. What is the opportunity cost of repairing one fuel injector?

(a) Repairing one transmission.

(b) One half of a transmission repair job.

(c) Repairing two transmissions.

(d) It depends on the relative price of transmission repairs of fuel injector repairs.

2. Assume that butter and margarine are substitutes. What will happen in the market for butter if the price of margarine increases?

(a) The supply of butter will increase and its price will rise.

(b) The demand for butter will increase and its price will rise.

(c) The demand for butter will decrease and its price will fall.

(d) The supply of butter will decrease and its price will fall.

3. If the price of kiwi fruit is above its equilibrium price,

(a) there will be shortage and the price of kiwi fruit will rise.

(b) there will be a shortage and the price of kiwi fruit will fall.

(c) there will be a surplus and the price of kiwi fruit will rise.

(d) there will be a surplus and the price of kiwi fruit will fall.

4. In a equilibrium, for a market that functions efficiently,

(a) Price serves as a signal of relative scarcity.

(b) Goods are produced by the lowest-cost suppliers.

(c) Total consumer and producer surplus is maximized.

(d) All of the above.

5. When supply is inelastic, a 2% increase in price results in

(a) a small increase in quantity supplied (less than 2%)

(b) a large increase in quantity supplied (greater than 2%)

(c) a small decrease in quantity supplied (less than 2%)

(d) a large decrease in quantity supplied (greater than 2%)

6. When the government sets a minimum price for milk that is below the market clearing price

(a) There will be a shortage of milk

(b) There will be a surplus of milk

(c) There is no deadweight loss

(d) The minimum price has no effect on allocations

7. A monopolist will set price using the following criterion:

(a) Average revenue = Average cost

(b) Marginal revenue = Price

(c) Marginal revenue = Marginal cost

(d) As high as possible 

8. A subsidy paid to the buyers of turnips will typically result in

(a) Fewer turnips being produced.

(b) A lower price received by sellers.

(c) A higher price paid by buyers.

(d) None of the above.

9. When a sales tax is imposed on the seller of a good,

(a) The seller bears some of the burden of the tax

(b) The tax is partially passed through to consumers through higher prices

(c) Sales of that good will decline

(d) All of the above

10. If a firm is earning positive economic profit, it must be the case that

(a) price is less than average cost.

(b) price is equal to average cost.

(c) price is equal to total cost.

(d) price is greater than average cost.

Section 3 – Short Answer:

1. Fill in the blanks (increases/decreases):

 All else equal, when the price of Widgets falls,

a. the quantity of Widgets demanded.

b. the quantity of Widgets supplied.

c. the demand for Widget substitutes.

d. the demand for Widget complements.

2. Referring to the diagram below, fill in the blanks

a. What is the equilibrium price?

b. What is the equilibrium quantity?

c. If a price floor (minimum price) was set at $3, what would be the surplus or shortage?

d. With the price floor, what is total consumer surplus?

e. Indicate the deadweight loss of the price floor on the diagram.

3. The diagram below shows the effect of a tax on the market for avocados. Identify the following Areas W, X, Y and Z with the terms used to describe them.

a. Area W:

b. Area X:

c. Area Y:

d. Area Z:

4. Referring to the figure in question 3 above, answer the following questions

a. What is the equilibrium price and quantity in the absence of the tax? Price:

Quantity:

b. After the tax is imposed what is the equilibrium quantity sold?

c. After the tax is imposed, what is the price received by the seller?

d. After the tax is imposed, what is the price paid by the buyer?

5. The supply and demand diagram below shows the market for toilet paper. Suppose that a public panic caused households to suddenly stock up on their inventories of toilet paper.

a. Illustrate on the diagram how this effects the supply and/or demand for toilet paper.

b. What happens to the equilibrium price and quantity?

c. If you observed empty store shelves in the toilet paper aisle, what might you conclude about the shortterm functioning of the toilet paper market?

Longer Questions

1. The figure below shows the cost curves for a small firm producing lamp shades in a competitive market.

(In the diagram, ATC=Average Total Cost, AVC=Average Variable Cost, MC=Marginal Cost.)

a. If the market price of lamp shades was $30, what would be the profit maximizing quantity to produce?

b. At the price of $30, would the firm be making a profit or loss?

c. If the price dropped to $20, how much should be produced?

d. At the price of $20 dollars, would the firm be making a profit or loss?

e. Calculate or show on the diagram the profit or loss for the firm at the $20 price.

f. If the price dropped to $10, what would be the optimal production level?

g. If the $10 price is expected to persist, characterize the firm’s profit or loss situation and describe what advice you might give to the owner of the firm.

2. The figure below shows the situation of a natural monopoly. Answer the following questions.

a. What is the equilibrium price and quantity for a competitive market?

b. What is the monopolist price and quantity?

c. What is the monopolist’s markup and profit?

d. In the presence of the monopoly, what is the socially optimal price and quantity?

e. What regulated price would minimize deadweight loss and still allow for normal (zero) profits?