Microeconomics II
Homework#1
Spring 2009
Due day: 3/17
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I. Multiple choice questions
01) A special license is required to operate a taxi in many cities. The number of licenses is restricted. More drivers want licenses than are issued. This describes a non-perfectly competitive market because
A) taxi services are very different.
B) firms cannot freely enter and exit the market.
C) transaction costs are high.
D) the government generates revenue from the licenses.
02) If a firm operates in a perfectly competitive market, then
A) all firms will advertise.
B) no firms will advertise.
C) the market leader will advertise.
D) new firms will advertise.
03) If a firm makes zero economic profit, then the firm
A) has total revenues greater than its economic costs.
B) must shut down.
C) can be earning positive business profit.
D) must have no fixed costs.
04) Firms are ______with an economic profit of zero, they will ______in the industry because they ______be better off in another industry.
A) safisfied, stay, won't
B) unsatisfied, leave, will
C) satisfied, leave, will
D) unsatisfied, stay, won't
05) Suppose the market supply curve is p = 5 + Q. At a price of 10, producer surplus equals
A) 50.
B) 25.
C) 12.50.
D) 10.
Figure 1.1
06) The above figure shows supply and demand curves for apartment units in a large city. If the city government passes a law that establishes $350 per month as the legal maximum rent, the loss in social welfare equals
A) b + c.
B) f.
C) a.
D) f + g.
07) The above figure shows supply and demand curves for apartment units in a large city. If the city government passes a law that establishes $350 per month as the legal maximum rent, deadweight loss occurs because
A) consumers place a greater value on the last apartment unit than the cost to supply it.
B) the supplier of the last apartment unit receives a rental price that is less than the marginal cost of supplying it.
C) the quantity of apartments supplied has decreased.
D) All of the above.
8. As opposed to general equilibrium analysis, partial equilibrium analysis looks
A) at an equilibrium and changes to it in a single, isolated market.
B) at how changes in one market effect other markets.
C) at how equilibrium is determined in all markets simultaneously.
D) at either price or quantity movements.
9. Any policy change that results in a Pareto-superior allocation
A) will increase welfare under certain conditions.
B) must increase welfare.
C) will leave welfare unchanged.
D) will have an unpredictable effect on welfare.
10. Every point on the joint production possibilities frontier represents
A) an initial endowment.
B) inefficient production.
C) the marginal rate of substitution of goods for each producer.
D) at least one producer specializing in production.
11. Any competitive equilibrium is Pareto efficient because, with a competitive equilibrium
A) the marginal rates of substitution are equal for all consumers.
B) the price line is the contract curve.
C) mutual gains from trade exist.
D) the slope of the price line equals the ratio of the MRS for all consumers.
12. If the government attempts to force a natural monopoly to charge a price equal to marginal cost
A) the natural monopoly will shut down.
B) the natural monopoly will still make high profits.
C) the natural monopoly's marginal cost curve will shift up.
D) Total welfare is maximized.
13. The situation in which one firm can produce the total output of the market at lower cost than several firms is called.
A) natural monopoly.
B) pure monopoly.
C) ruling monopoly.
D) cost monopoly.
14. If the government desires to raise a certain amount of revenue by taxing a monopoly, an ad valorem tax will
A) generate the same loss of consumer surplus as a specific tax.
B) generate a greater loss of consumer surplus than a specific tax.
C) generate a smaller loss of consumer surplus than a specific tax.
D) generate no loss of consumer surplus.
15. The more elastic the demand curve, a monopoly
A) will have a larger Lerner Index.
B) will face a lower marginal cost.
C) will earn more profit.
D) will lose more sales as it raises its price.
II. Problem
1. The inverse demand curve that a monopoly faces is P=10Q(-1/2) . The firm’s cost curve is C(Q)=5Q. What is the profit maximizing solution?
2. Mexico and the United States can both produce food and toys. Mexico has 100 workers and the United States has 300 workers. If they do not trade, the United States consumers 10 units of food and 10 toys, and Mexico consumers 5 units of food and 1 toy. The following table shows how many workers are necessary to produce each good:
Mexico / United StatesWorkers per pound of food / 10 / 10
Workers per toy / 50 / 20
a. In the absence of trade, how many units of food and toys can the United States produce? How many can Mexico produce?
b. Which country has a comparative advantage in producing food? In producing toys?
c. Draw the production possibility for each country and show where the two produce without trade. Label the axes accurately.
d. Draw the production possibility frontier with trade.
e. Show that both countries can benefit from trade.
3. Adrienne and Stephen consume pizza, Z and cola, C. Adrienne’s utility function is UA=ZA+CA, and Stephen’s is . Their endowments are ZA=10, CA=20, ZS=20, and CS=10.
a. What are the marginal rates of substitution for each person at their endowment point?
b. What is the formula for the contract curve? Draw an Edgeworth box and indicate the contract curve.
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