HANOI UNIVERSITY

FACULTY OF MANAGEMENT AND TOURISM

MICROECONOMICS
TUTORIAL EXERCISES

SUMMER 2023
 MIC Tut 2_Demand-supply
Multiple Choice
Identify the choice that best completes the statement or answers the question.

____ 1. In a competitive market, the price of a product

a. is determined by buyers and the quantity of the product produced is determined by sellers.
b. is determined by sellers and the quantity of the product produced is determined by buyers.
c. and the quantity of the product produced are both determined by sellers.
d. None of the above is correct.

____ 2. Which of the following is not a characteristic of a perfectly competitive market?

a. Different sellers sell identical products.
b. There are many sellers.
c. Sellers must accept the price the market determines.
d. All of the above are characteristics of a perfectly competitive market.

____ 3. The law of demand states that, other things equal,

a. when the price of a good falls, the demand for the good rises.
b. when the price of a good rises, the quantity demanded of the good rises.
c. when the price of a good rises, the demand for the good falls.
d. when the price of a good falls, the quantity demanded of the good rises.

____ 4. The following table contains a demand schedule for a good.

Price Quantity Demanded

$10 100
$20 ?

If the law of demand applies to this good, then “?” could be

a. 0. Law of demand: Price rises -> demand falls
b. 100.
c. 200.
d. 400.

Table 4-1

Price Aaron’s Angela’s Austin’s Alyssa’s

Quantity Quantity Quantity Quantity
Demanded Demanded Demanded Demanded
$0.00 20 16 4 8
$0.50 18 12 6 6
$1.00 14 10 2 5
$1.50 12 8 0 4
$2.00 6 6 0 2
$2.50 0 4 0 0
 obey: tuân theo
____ 5. Refer to Table 4-1. Whose demand does not obey the law of demand?
a. Aaron’s
b. Angela’s
c. Austin’s when the price of the good rises to 0.50 Austin's quantity demand also rise from 4 -> 6
d. Alyssa’s

____ 6. A decrease in the price of a good would Law of supply : price rises -> supply rises
a. increase the supply of the good.
b. increase the quantity demanded of the good.
c. give producers an incentive to produce more to keep profits from falling.
d. shift the supply curve for the good to the left.

Figure 4-2

____ 7. Refer to Figure 4-2. The movement from point A to point B on the graph is caused by
a. an increase in price.
b. a decrease in price.
c. a decrease in the price of a substitute good.
d. an increase in income.

____ 8. Most studies indicate that tobacco and marijuana tend to be

a. substitutes.
b. complements.
c. not related since one is legal and one is illegal.
d. inferior goods.

____ 9. A supply curve slopes upward because

a. as more is produced, total cost of production falls.
b. an increase in input prices increases supply.
c. the quantity supplied of most goods and services increases over time.
d. an increase in price gives producers an incentive to supply a larger quantity.
Table 4-3

Price Firm A’s Firm B’s Firm C’s Firm D’s

Quantity Quantity Quantity Quantity
Supplied Supplied Supplied Supplied
$0 10 0 0 0
$2 8 3 4 5
$4 6 6 8 10
$6 4 9 12 15
$8 2 12 8 20
$10 0 15 4 25

____ 10. Refer to Table 4-3. If these are the only four sellers in the market, then the market
quantity supplied at a price of $4 is
a. 4 units. Market quantity supplies is sum of the quantity supplied by all seller at each price.
b. 7.5 units. At price $4: 6+6+8+10= 30 units
c. 10 units.
d. 30 units.

____ 11. Which of the following changes would not shift the supply curve for a good or service?
a. a change in technology
b. a change in the price of the good or service
c. a change in expectations about the future price of the good or service
d. a change in input prices

Figure 4-6

____ 12. Refer to Figure 4-6. The movement from point A to point B on the graph is called
a. a decrease in supply.
b. an increase in supply.
c. an increase in the quantity supplied.
d. a decrease in the quantity supplied.
Figure 4-7

____ 13. Refer to Figure 4-7. The movement from S to S’ could be caused by
a. an increase in the price of the good.
b. an improvement in technology.
c. an increase in income.
d. an increase in input prices.

____ 14. Another term for equilibrium price is

a. dynamic price.
b. market-clearing price.
c. quantity-defining price.
d. balance price.

Table 4-6

A country club usually only allows members to purchase tickets for its celebrity golf tournament, but
the club is considering allowing non-members to purchase tickets this year. The demand and supply
schedules are as follows:

Price Quantity Demanded Quantity Demanded Quantity Supplied

by Members by Non-members
$10 1000 500 600
$15 800 400 600
$20 600 300 600
$25 400 200 600
$30 200 100 600
____ 15. Refer to Table 4-6. If both members and non-members are allowed to purchase tickets
to this year's celebrity golf tournament and the country club sets the ticket price at $30, then there will
be
a. a shortage of 300 tickets.
b. a surplus of 300 tickets.
c. 600 tickets sold.
d. 600 tickets unsold.

Figure 4-8

____ 16. Refer to Figure 4-8. Equilibrium price and quantity are, respectively,
a. $15 and 200.
b. $25 and 600.
c. $25 and 400.
d. $35 and 200.

____ 17. Refer to Figure 4-8. At a price of $35,

a. a shortage would exist and the price would tend to rise from $35 to a higher price.
b. a surplus would exist and the price would tend to rise from $35 to a higher price.
c. an excess demand would exist and the price would tend to fall from $35 to a lower price.
d. an excess supply would exist and the price would tend to fall from $35 to a lower price.
Figure 4-12

The diagram below pertains to the demand for turkey in the United States.

____ 18. Refer to Figure 4-12. All else equal, an increase in the income of buyers who consider
turkey to be an inferior good would cause a move
a. from DA to DB.
b. from DB to DA.
c. from x to y.
d. from y to x.
Figure 4-14

Panel (a) Panel (b)

Panel (c) Panel (d)

____ 19. Refer to Figure 4-14. Which of the four panels illustrates an increase in quantity
supplied?
a. Panel (a)
b. Panel (b)
c. Panel (c)
d. Panel (d)

____ 20. Refer to Figure 4-14. Which of the four panels represents the market for winter coats as
we progress from winter to spring?
a. Panel (a)
b. Panel (b)
c. Panel (c)
d. Panel (d)
Short Answer

Q1.
a. What is the difference between a "change in demand" and a "change in quantity
demanded?" Graph your answer.
b. For each of the following changes, determine whether there will be a change in quantity demanded
or a change in demand.
i. a change in the price of a related good
ii. a change in tastes
iii. a change in the number of buyers
iv. a change in price
v. a change in consumer expectations
vi. a change in income

Q2.
a. Given the table below, graph the demand and supply curves for flashlights. Make certain to
label the equilibrium price and equilibrium quantity.

Price Quantity Demanded Quantity Supplied

Per Month Per Month
$5 6,000 10,000
$4 8,000 8,000
$3 10,000 6,000
$2 12,000 4,000
$1 14,000 2,000

b. What is the equilibrium price and the equilibrium quantity?

c. Suppose the price is currently $5. What problem would exist in the market? What would you
expect to happen to price? Show this on your graph.
d. Suppose the price is currently $2. What problem would exist in the market? What would you
expect to happen to price? Show this on your graph.

Q3. Fill in the table below, showing whether equilibrium price and equilibrium quantity go
up, go down, stay the same, or change ambiguously.

No Change in Supply An Increase in Supply A Decrease in Supply

No Change in
Demand
An Increase in
Demand
A Decrease in
Demand
 MIC TUT 3 - Elasticity
Multiple Choice
Identify the choice that best completes the statement or answers the question.

____ 1. For a good that is a luxury, demand

a. tends to be inelastic.
b. tends to be elastic.
c. has unit elasticity.
d. cannot be represented by a demand curve in the usual way.

____ 2. The demand for Werthers candy is likely

a. elastic because candy is expensive relative to other snacks.
b. elastic because there are many close substitutes for Werthers.
c. elastic because Werthers are regarded as a necessity by many people.
d. inelastic because it is usually eaten quickly, making the relevant time horizon short.

Table 5-2
The following table shows a portion of the demand schedule for a particular good at various levels of
income.

Quantity Demanded Quantity Demanded Quantity Demanded

Price (Income = $5,000) (Income = $7,500) (Income = $10,000)
$24 2 3 4
$20 4 6 8
$16 6 9 12
$12 8 12 16
$8 10 15 20
$4 12 18 24

____ 3. Refer to Table 5-2. Using the midpoint method, at a price of $16, what is the income
elasticity of demand when income rises from $5,000 to $10,000?
a. 0.00
b. 0.50
c. 1.00
d. 1.50
Table 5-3
The following table shows the demand schedule for a particular good.

Price Quantity
$15 0
$12 5
$9 10
$6 15
$3 20
$0 25

____ 4. Refer to Table 5-3. Using the midpoint method, what is the price elasticity of demand
when price rises from $9 to $12?
a. 0.43
b. 0.67
c. 1.50
d. 2.33

Table 5-4
Price Total
Revenue
$10 $100
$12 $108
$14 $112
$16 $112

____ 5. Refer to Table 5-4. As price rises from $10 to $12, the price elasticity of demand using
the midpoint method is approximately
a. 0.08.
b. 0.18.
c. 0.42.
d. 0.58.
Figure 5-5

____ 6. Refer to Figure 5-5. The maximum value of total revenue corresponds to a price of
a. $18.
b. $30.
c. $42.
d. $48.

Figure 5-11

____ 7. Refer to Figure 5-11. When the price is $30, total revenue is
a. $3,000.
b. $5,000.
c. $7,000.
d. $9,000.
____ 8. Eric produces jewelry boxes. If the demand for jewelry boxes is elastic and Eric wants to
increase his total revenue, he should
a. increase the price of his jewelry boxes.
b. decrease the price of his jewelry boxes.
c. not change the price of his jewelry boxes.
d. None of the above answers is correct.

____ 9. An increase in price causes an increase in total revenue when

a. demand is elastic.
b. demand is inelastic.
c. demand is unit elastic.
d. All of the above are possible.

____ 10. Necessities such as food and clothing tend to have

a. high price elasticities of demand and high income elasticities of demand.
b. high price elasticities of demand and low income elasticities of demand.
c. low price elasticities of demand and high income elasticities of demand.
d. low price elasticities of demand and low income elasticities of demand.

____ 11. Suppose good X has a negative income elasticity of demand. This implies that good X is
a. a normal good.
b. a necessity.
c. an inferior good.
d. a luxury.

____ 12. Assume that a 4 percent decrease in income results in a 6 percent increase in the quantity
demanded of a good. The income elasticity of demand for the good is
a. negative and therefore the good is an inferior good.
b. negative and therefore the good is a normal good.
c. positive and therefore the good is an inferior good.
d. positive and therefore the good is a normal good.

Table 5-5
Quantity of Good X Quantity of Good Y
Income Purchased Purchased
$30,000 2 20
$40,000 6 10

____ 13. Refer to Table 5-5. Using the midpoint method, the income elasticity of demand for
good Y is
a. 2.33, and good Y is a normal good.
b. -2.33, and good Y is an inferior good.
c. -0.43, and good Y is a normal good.
d. -0.43, and good Y is an inferior good.
____ 14. Last month, sellers of good Y took in $100 in total revenue on sales of 50 units of good
Y. This month sellers of good Y raised their price and took in $120 in total revenue on sales of 40 units
of good Y. At the same time, the price of good X stayed the same, but sales of good X increased from
20 units to 40 units. We can conclude that goods X and Y are
a. substitutes, and have a cross-price elasticity of 0.60.
b. complements, and have a cross-price elasticity of 0.60.
c. substitutes, and have a cross-price elasticity of 1.67.
d. complements, and have a cross-price elasticity of 1.67.

____ 15. Which of the following could be the cross-price elasticity of demand for two goods that
are complements?
a. -1.3
b. 0
c. 0.2
d. 1.4

____ 16. If two goods are substitutes, their cross-price elasticity will be
a. positive.
b. negative.
c. zero.
d. equal to the difference between the income elasticities of demand for the two goods.

____ 17. A key determinant of the price elasticity of supply is

a. the ability of sellers to change the price of the good they produce.
b. the ability of sellers to change the amount of the good they produce.
c. how responsive buyers are to changes in sellers' prices.
d. the slope of the demand curve.

Figure 5-12
The following figure shows the supply curve for a particular good.
____ 18. Refer to Figure 5-12. Over which range is the supply curve in this figure the least
elastic?
a. Between $16 and $40
b. Between $40 and $100
c. Between $100 and $220
d. Between $220 and $430

Figure 5-13

____ 19. Refer to Figure 5-13. Using the midpoint method, what is the price elasticity of supply
between points D and G?
a. 1.89
b. 1.26
c. 0.53
d. 0.34

Scenario 5-4
Suppose the government is concerned about firms in the United States importing illegal caviar. As a
result, the government increases border patrols to catch illegal shipments. U.S. Customs agents perform
DNA testing on the caviar to determine if it comes from endangered species of fish. If so, the
government destroys the caviar.
____ 20. Refer to Scenario 5-4. What would we expect to observe in the caviar market?
a. Equilibrium prices and quantities will increase.
b. Equilibrium prices will increase by more if the demand for caviar is elastic than if demand is
inelastic.
c. Total revenues to caviar firms will increase if the demand for caviar is inelastic.
d. All of the above are correct.
True/False
Indicate whether the statement is true or false.

____ 21. The demand for bread is likely to be more elastic than the demand for solid-gold bread
plates.

____ 22. In general, demand curves for necessities tend to be price elastic.

____ 23. Price elasticity of demand along a linear, downward-sloping demand curve increases as
price falls.

____ 24. If demand is perfectly inelastic, the demand curve is vertical, and the price elasticity of
demand equals 0.

____ 25. Along the elastic portion of a linear demand curve, total revenue rises as price rises.

____ 26. The income elasticity of demand is defined as the percentage change in quantity
demanded divided by the percentage change in price.

____ 27. If the cross-price elasticity of demand for two goods is negative, then the two goods are
complements.

____ 28. Cross-price elasticity is used to determine whether goods are inferior or normal goods.

____ 29. Price elasticity of supply measures how much the quantity supplied responds to changes
in the price.

____ 30. OPEC failed to maintain a high price of oil in the long run, partly because both the supply
of oil and the demand for oil are more elastic in the long run than in the short run.
Short Answer

31. You own a small town movie theatre. You currently charge $5 per ticket for everyone
who comes to your movies. Your friend who took an economics course in college tells you that there
may be a way to increase your total revenue. Given the demand curves shown, answer the following
questions.

a. What is your current total revenue for both groups?

b. The elasticity of demand is more elastic in which market?
c. Which market has the more inelastic demand?
d. What is the elasticity of demand between the prices of $5 and $2 in the adult market? Is this elastic
or inelastic?
e. What is the elasticity of demand between $5 and $2 in the children's market? Is this elastic or
inelastic?
f. Given the graphs and what your friend knows about economics, he recommends you increase the
price of adult tickets to $8 each and lower the price of a child's ticket to $3. How much could you
increase total revenue if you take his advice?
 32. Use the graph shown to answer the following questions. Put the correct letter(s) in the
blank.

a. The elastic section of the graph is represented by section from _______.

b. The inelastic section of the graph is represented by section from _______.
c. The unit elastic section of the graph is represented by section _______.
d. The portion of the graph in which a decrease in price would cause total revenue to fall would be
from _________.
e. The portion of the graph in which a decrease in price would cause total revenue to rise would be
from _________.
f. The portion of the graph in which a decrease in price would not cause a change in total revenue
would be _________.
g. The section of the graph in which total revenue would be at a maximum would be _______.
h. The section of the graph in which elasticity is greater than 1 is _______.
i. The section of the graph in which elasticity is equal to 1 is ______.
j. The section of the graph in which elasticity is less than 1 is _______.
 MIC TUT 4 - Consumer, Producer and Market Efficiency
Multiple Choice
Identify the choice that best completes the statement or answers the question.

____ 1. Welfare economics explains which of the following in the market for DVDs?
a. The government sets the price of DVDs; firms respond to the price by producing a specific level
of output.
b. The government sets the quantity of DVDs; firms respond to the quantity by charging a specific
price.
c. The market equilibrium price for DVDs maximizes the total welfare to DVD buyers and sellers.
d. The market equilibrium price for DVDs maximizes consumer welfare but minimizes producer
welfare.

____ 2. Consumer surplus is the

a. amount of a good consumers get without paying anything.
b. amount a consumer pays minus the amount the consumer is willing to pay.
c. amount a consumer is willing to pay minus the amount the consumer actually pays.
d. value of a good to a consumer.

Table 7-5
For each of three potential buyers of oranges, the table displays the willingness to pay for the first three
oranges of the day. Assume Alex, Barb, and Carlos are the only three buyers of oranges, and only three
oranges can be supplied per day.

First Orange Second Orange Third Orange

Alex $2.00 $1.50 $0.75
Barb $1.50 $1.00 $0.80
Carlos $0.75 $0.25 $0

____ 3. Refer to Table 7-5. Which of the following statements is correct?

a. Neither Barb’s consumer surplus nor Carlos’s consumer surplus can exceed Alex’s consumer
surplus, for any price of an orange.
b. All three individuals will buy at least one orange only if the price of an orange is less than $0.25.
c. If the price of an orange is $0.60, total consumer surplus is $4.90.
d. All of the above are correct.

____ 4. When the demand for a good increases and the supply of the good remains unchanged,
consumer surplus
a. decreases.
b. is unchanged.
c. increases.
d. may increase, decrease, or remain unchanged.
____ 5. Motor oil and gasoline are complements. If the price of motor oil increases, consumer
surplus in the gasoline market
a. decreases.
b. is unchanged.
c. increases.
d. may increase, decrease, or remain unchanged.

____ 6. If Roberta sells a shirt for $30, and her producer surplus from the sale is $23, her cost
must have been
a. $53.
b. $30.
c. $7.
d. We would have to know the consumer surplus in order to make this determination.

Table 7-6
The following table represents the costs of five possible sellers.

Seller Cost
Abby $1,500
Bobby $1,200
Carlos $1,000
Dianne $750
Evalina $500

____ 7. Refer to Table 7-6. If the market price is $1,000, the producer surplus in the market is
a. $700.
b. $750.
c. $2,250.
d. $3,700.

Figure 7-6
____ 8. Refer to Figure 7-6. If the price of the good is $8.50, then producer surplus is
a. $2.50.
b. $6.50.
c. $8.00.
d. $11.00.

Figure 7-7

____ 9. Refer to Figure 7-7. When the price rises from P1 to P2, which area represents the
increase in producer surplus to existing producers?
a. BCG
b. ACH
c. DGH
d. ABGD

Figure 7-9
____ 10. Refer to Figure 7-9. If the equilibrium price is $200, what is the producer surplus?
a. $625
b. $3,750
c. $10,000
d. $20,000

Figure 7-11

____ 11. Refer to Figure 7-11. When the price rises from P1 to P2, which area represents the
increase in producer surplus due to new producers entering the market?
a. A
b. B
c. A+B
d. G

____ 12. Suppose consumer income increases. If grass seed is a normal good, the equilibrium price
of grass seed will
a. decrease, and producer surplus in the industry will decrease.
b. increase, and producer surplus in the industry will increase.
c. decrease, and producer surplus in the industry will increase.
d. increase, and producer surplus in the industry will decrease.

____ 13. Total surplus in a market is equal to

a. consumer surplus + producer surplus.
b. value to buyers - amount paid by buyers.
c. amount received by sellers - costs of sellers.
d. producer surplus - consumer surplus.
____ 14. Efficiency in a market is achieved when
a. a social planner intervenes and sets the quantity of output after evaluating buyers' willingness to
pay and sellers' costs.
b. the sum of producer surplus and consumer surplus is maximized.
c. all firms are producing the good at the same low cost per unit.
d. no buyer is willing to pay more than the equilibrium price for any unit of the good.

Figure 7-12

____ 15. Refer to Figure 7-12. At the equilibrium price, total surplus is
a. $150.
b. $200.
c. $300.
d. $500.
Figure 7-17

____ 16. Refer to Figure 7-17. At equilibrium, producer surplus is

a. $36.
b. $72.
c. $108.
d. $144.

Figure 7-18
____ 17. Refer to Figure 7-18. Sellers whose costs are greater than the equilibrium price are
represented by segment
a. AC.
b. CK.
c. BC.
d. CH.

____ 18. Refer to Figure 7-18. If the government mandated a price increase from P1 to a higher
price, then
a. total surplus would decrease.
b. consumer surplus would increase.
c. total surplus would increase, since producer surplus would increase.
d. total surplus would remain unchanged.

____ 19. A simultaneous increase in both the demand for MP3 players and the supply of MP3
players would imply that
a. both the value of MP3 players to consumers and the cost of producing MP3 players has increased.
b. both the value of MP3 players to consumers and the cost of producing MP3 players has
decreased.
c. the value of MP3 players to consumers has decreased, and the cost of producing MP3 players has
increased.
d. the value of MP3 players to consumers has increased, and the cost of producing MP3 players has
decreased.

____ 20. Inefficiency can be caused in a market by the presence of

a. market power.
b. externalities.
c. imperfectly competitive markets.
d. All of the above are correct.

True/False
Indicate whether the statement is true or false.

____ 21. Welfare economics is the study of the welfare system.

____ 22. The willingness to pay is the maximum amount that a buyer will pay for a good and
measures how much the buyer values the good.

____ 23. A buyer is willing to buy a product at a price greater than or equal to his willingness to
pay, but would refuse to buy a product at a price less than his willingness to pay.

____ 24. All else equal, an increase in supply will cause an increase in consumer surplus.

____ 25. If producing a soccer ball costs Jake $5, and he sells it for $40, his producer surplus is
$35.
____ 26. Connie can clean windows in large office buildings at a cost of $1 per window. The
market price for window-cleaning services is $3 per window. If Connie cleans 100 windows, her
producer surplus is $100.

____ 27. Producing a soccer ball costs Jake $5. He sells it to Darby for $35. Darby values the
soccer ball at $50. For this transaction, the total surplus in the market is $40.

____ 28. The equilibrium of supply and demand in a market maximizes the total benefits to buyers
and sellers of participating in that market.

____ 29. Even though participants in the economy are motivated by self-interest, the "invisible
hand" of the marketplace guides this self-interest into promoting general economic well-being.

____ 30. Markets will always allocate resources efficiently.

Short Answer

31. Tammy loves donuts. The table shown reflects the value Tammy places on each donut
she eats:

Value of first donut $0.60

Value of second donut $0.50
Value of third donut $0.40
Value of fourth donut $0.30
Value of fifth donut $0.20
Value of sixth donut $0.10

a. Use this information to construct Tammy's demand curve for donuts.

b. If the price of donuts is $0.20, how many donuts will Tammy buy?
c. Show Tammy's consumer surplus on your graph. How much consumer surplus would she have at a
price of $0.20?
d. If the price of donuts rose to $0.40, how many donuts would she purchase now? What would
happen to Tammy's consumer surplus? Show this change on your graph.

32. Answer each of the following questions about supply and producer surplus.
a. What is producer surplus, and how is it measured?
b. What is the relationship between the cost to sellers and the supply curve?
c. Other things equal, what happens to producer surplus when the price of a good rises? Illustrate
your answer on a supply curve.

33. Answer the following questions based on the graph that represents J.R.'s demand for ribs
per week of ribs at Judy's rib shack.

a. At the equilibrium price, how many ribs would J.R. be willing to purchase?
b. How much is J.R. willing to pay for 20 ribs?
c. What is the magnitude of J.R.'s consumer surplus at the equilibrium price?
d. At the equilibrium price, how many ribs would Judy be willing to sell?
e. How high must the price of ribs be for Judy to supply 20 ribs to the market?
f. At the equilibrium price, what is the magnitude of total surplus in the market?
g. If the price of ribs rose to $10, what would happen to J.R.'s consumer surplus?
h. If the price of ribs fell to $5, what would happen to Judy's producer surplus?
i. Explain why the graph that is shown verifies the fact that the market equilibrium (quantity)
maximizes the sum of producer and consumer surplus.
 MIC TUT 5 - Governmental Intervention & Welfare
Multiple Choice
Identify the choice that best completes the statement or answers the question.

____ 1. In the housing market, rent control causes

a. quantity supplied and quantity demanded to fall.
b. quantity supplied to fall and quantity demanded to rise.
c. quantity supplied to rise and quantity demanded to fall.
d. quantity supplied and quantity demanded to rise.

____ 2. If a nonbinding price floor is imposed on a market, then

a. the quantity sold in the market will decrease.
b. the quantity sold in the market will stay the same.
c. the price in the market will increase.
d. the price in the market will decrease.

____ 3. When a binding price floor is imposed on a market to benefit sellers,

a. every seller in the market benefits.
b. every buyer in the market benefits, too.
c. every seller who wants to sell the good will be able to do so, but only if they appeal to the personal
biases of the buyers.
d. some sellers will not be able to sell any amount of the good.

____ 4. The minimum wage, if it is binding, lowers the incomes of

a. no workers.
b. only those workers become unemployed.
c. only those workers who have jobs.
d. all workers.

____ 5. A tax levied on the sellers of blueberries

a. increases sellers’ costs, reduces profits, and shifts the supply curve up.
b. increases sellers’ costs, reduces profits, and shifts the supply curve down.
c. decreases sellers’ costs, increases profits, and shifts the supply curve up.
d. decreases sellers’ costs, increases profits, and shifts the supply curve down.

____ 6. If the government passes a law requiring sellers of motorcycles to send $500 to
the government for every motorcycle they sell, then
a. the supply curve for motorcycles shifts downward by $500.
b. sellers of motorcycles receive $500 less per motorcycle than they were receiving before the
tax.
c. buyers of motorcycles are unaffected by the tax.
d. None of the above is correct.
____ 7. When a tax is placed on the buyers of a product, the
a. size of the market decreases.
b. effective price received by sellers decreases and the price paid by buyers
increases.
c. demand for the product decreases.
d. All of the above are correct.

Figure 6-9

____ 8. Refer to Figure 6-9. The burden of the tax on buyers is

a. $1 per unit.
b. $1.50 per unit.
c. $2 per unit.
d. $3 per unit.

Figure 6-13

The vertical distance between points A and B represents the tax in the market.

____ 9. Refer to Figure 6-13. The per-unit burden of the tax on sellers is
a. $6.
b. $8.
c. $10.
d. $14.
____ 10. Suppose that the demand for picture frames is elastic and the supply of picture
frames is inelastic. A tax of $1 per frame levied on picture frames will decrease the effective price
received by sellers of picture frames by
a. less than $0.50.
b. $0.50.
c. between $0.50 and $1.
d. $1.

____ 11. If the government wants to reduce smoking, it should impose a tax on
a. buyers of cigarettes.
b. sellers of cigarettes.
c. either buyers or sellers of cigarettes.
d. whichever side of the market is less elastic.

____ 12. If a tax shifts the supply curve downward (or to the right), we can infer that the
tax was levied on
a. buyers of the good.
b. sellers of the good.
c. both buyers and sellers of the good.
d. We cannot infer anything because the shift described is not consistent with a
tax.

____ 13. The benefit that government receives from a tax is measured by
a. deadweight loss.
b. consumer surplus.
c. tax incidence.
d. tax revenue.

Figure 8-4
The vertical distance between points A and B represents a tax in the market.
____ 14. Refer to Figure 8-4. The price that buyers effectively pay after the tax is
imposed is
a. $24.
b. $16.
c. $14.
d. $10.

____ 15. Refer to Figure 8-4. The per-unit burden of the tax on sellers is
a. $14.
b. $10.
c. $8.
d. $6.
Figure 8-6
The vertical distance between points A and B represents a tax in the market.

____ 16. Refer to Figure 8-6. When the tax is imposed in this market, sellers effectively
pay what amount of the $10 tax?
a. $0
b. $4
c. $6
d. $10

____ 17. Refer to Figure 8-6. What happens to producer surplus when the tax is imposed
in this market?
a. Producer surplus falls by $600. before tax: 1/2 x 4x 300= 600
after tax: 1/2 x8x600= 2400
b. Producer surplus falls by $900. => producer surplus fall ( 2400-600= 1800
c. Producer surplus falls by
$1,800.
d. Producer surplus falls by
$2,100.

____ 18. Buyers of a product will bear the larger part of the tax burden, and sellers will
bear a smaller part of the tax burden, when the
a. tax is placed on the sellers of the product.
b. tax is placed on the buyers of the product.
c. supply of the product is more elastic than the demand for the
product.
d. demand for the product is more elastic than the supply of the
product.
True/False
Indicate whether the statement is true or false.

____ 1. A price ceiling set below the equilibrium price is binding.

____ 2. When a free market for a good reaches equilibrium, anyone who is willing and
able to pay the market price can buy the good.

____ 3. A price floor set below the equilibrium price is binding.

____ 4. A binding price floor may not help all sellers, but it does not hurt any sellers.

____ 5. The impact of the minimum wage depends on the skill and experience of the
worker.

____ 6. Who bears the majority of a tax burden depends on the relative elasticity of
supply and demand.

____ 7. Normally, both buyers and sellers of a good become worse off when the good is
taxed.

____ 8. A tax on a good causes the size of the market to shrink.

____ 9. If a tax did not induce buyers or sellers to change their behavior, it would not
cause a deadweight loss.

____ 10. If the size of a tax doubles, the deadweight loss doubles.

Short Answer

1. Using the graph shown, answer the following questions.

Graph
a. What was the equilibrium price in this market before the tax?
b. What is the amount of the tax?
c. How much of the tax will the buyers pay?
d. How much of the tax will the sellers pay?
e. How much will the buyer pay for the product after the tax is imposed?
f. How much will the seller receive after the tax is imposed?
g. As a result of the tax, what has happened to the level of market
activity?
2. Suppose that instead of a supply-demand diagram, you are given the following
information:

Qs = 100 + 3P
Qd = 400 - 2P

From this information compute equilibrium price and quantity. Now suppose that a tax is placed on
buyers so that
Qd = 400 - (2P + T).

If T = 15, solve for the new equilibrium price and quantity. (Note: P is the price received by sellers and
P + T is the price paid by buyers.) Compare these answers for equilibrium price and quantity with your
first answers. What does this show you?
Equilibrium = Qs = Qd
<=> 100+3P=400-2P
<=> P= $60 per unit

New E
<=> 100+3P= 400-(2P+15)
=> P= $57
=>price buyer have to pay= 57+15= $72
New E quantity
- Qs= 100+3x57= 271 units
- Qd= 400-(2x72)+15= 271 units
 MIC TUT 6 – Cost of Production
Multiple Choice
Identify the choice that best completes the statement or answers the question.

____ 1. Economists normally assume that the goal of a firm is to

a. maximize its total revenue.
b. maximize its profit.
c. minimize its explicit costs.
d. minimize its total cost.

____ 2. Zoe sells 200 glasses of lemonade at $0.50 each. Her total costs are $25. Her profits are
a. $25.
b. $75.
c. $100.
d. $175.

____ 3. Which of the following expressions is correct?

a. accounting profit = total revenue - explicit costs
b. economic profit = total revenue - implicit costs
c. economic profit = total revenue - explicit costs
d. Both a and b are correct.

Scenario 13-2
Zach withdrew $400,000 out of his personal savings account and used it to start his new cookie
business. The bank account pays 3 percent interest per year. During the first year of his business, Zach
sold 6,000 boxes of cookies for $2.50 per box. Also during the first year, the cookie business made
monetary outlays of $9,000. You may assume that there is no opportunity cost to Zach’s time.

____ 4. Refer to Scenario 13-2. Zach's accounting profit for the year was
a. $-494,000. TR= 6000X2.5 = 15,000
b. $-6,000. Monetary outlays- explicits cost = 9000
c. $6,000. Acc profit= 15,000-9,000= 6,000
d. $12,000.

Scenario 13-4
Wanda owns a lemonade stand. She produces lemonade using five inputs: water, sugar, lemons, paper
cups, and labor. Her costs per glass are as follows: $0.01 for water, $0.02 for sugar, $0.03 for lemons,
$0.02 for cups, and $0.10 for the opportunity cost of her labor. She can sell 300 glasses for $0.50 each.

____ 5. Refer to Scenario 13-4. What are Wanda’s total accounting profits?
a. $150 TR= 300x0.5= 150
b. $126 explicits cost= 0.01+0.02+0.03+0.02= 0.08 x 300= 24
c. $96 ACC profits= 150-24=126
d. $24

____ 6. Suppose a certain firm is able to produce 165 units of output per day when 15 workers
are hired. The firm is able to produce 176 units of output per day when 16 workers are hired (holding
other inputs fixed). Then the marginal product of the 16th worker is
a. 10 units of output.
b. 11 units of output. (176/165) /16-15 = 11
c. 16 units of output.
d. 176 units of output.

____ 7. David’s firm experiences diminishing marginal product for all ranges of inputs. The total
cost curve associated with David’s firm
a. gets flatter as output increases.
b. gets steeper as output increases.
c. is constant for all ranges of output.
d. is unrelated to the production function.

____ 8. Average total cost is equal to

a. output/total cost.
b. total cost - total quantity of output.
c. average variable cost + total fixed cost.
d. total cost/output.

____ 9. Which of the following expressions is correct?

a. marginal cost = (change in quantity of output)/(change in total cost)
b. average total cost = (total cost)/(quantity of output)
c. total cost = variable cost + marginal cost
d. average variable cost = (quantity of output)/(total variable cost)

____ 10. Charles’s Car Wash has average variable costs of $2 and average fixed costs of $3 when
it produces 100 units of output (car washes). The firm's total cost is
a. $100. AVC= 2
b. $200. AFC= 3
c. $300. => TOTAL COST= 5X100 =500
d. $500.

____ 11. The cost of producing an additional unit of output is the firm's
a. marginal cost.
b. productivity offset.
c. variable cost.
d. average variable cost.

Table 13-9
Teacher's Helper is a small company that has a subcontract to produce instructional materials for
disabled children in public school districts. The owner rents several small rooms in an office building in
the suburbs for $600 a month and has leased computer equipment that costs $480 a month.

Output
(Instructional Fixed Variable Total Average Average Average Marginal
Modules Costs Costs Cost Fixed Variable Total Cost
per Month) Cost Cost Cost
0 $1,080
1 $1,080 $ 400 $1,480 $400
2 $965 $450
3 $1,350 $2,430
4 $1,900 $475
5 $2,500 $216
 6 $4,280 $700
7 $4,100
8 $5,400 $135
9 $7,300
10 $10,880 $980

____ 12. Refer to Table 13-9. What is the average variable cost for the month if 6 instructional
modules are produced?
a. $180.00 AVC= VC/Q
b. $533.33 VC= TC-FC= 4280-1080=3280
c. $700.00 => AVC=3280/6= 533.33
d. $713.33

____ 13. Marginal cost is equal to average total cost when

a. average variable cost is falling.
b. average fixed cost is rising.
c. marginal cost is at its minimum.
d. average total cost is at its minimum.

____ 14. Which of the following must always be true as the quantity of output increases?
a. Marginal cost must rise.
b. Average total cost must rise.
c. Average variable cost must rise.
d. Average fixed cost must fall.

Scenario 13-8
Suppose that a given firm experiences decreasing marginal product of labor with the addition of each
worker regardless of the current output level.

____ 15. Refer to Scenario 13-8. Average fixed cost will be

a. rising at all points.
b. falling at all points.
c. U-shaped.
d. constant.
Figure 13-7

____ 16. Refer to Figure 13-7. Quantity B represents the output level where the firm
a. maximizes profits.
b. minimizes average variable costs.
c. produces at the efficient scale.
d. minimizes marginal costs.

____ 17. In the long run Firm A incurs total costs of $1,200 when output is 30 units and $1,400
when output is 40 units. Firm A exhibits
a. diseconomies of scale because total cost is rising as output rises.
b. diseconomies of scale because average total cost is rising as output rises. ATC firm A = 1200/30 =40
firm B = 1400/40= 35
c. economies of scale because total cost is rising as output rises.
d. economies of scale because average total cost is falling as output rises.

____ 18. Diseconomies of scale occur when

a. average fixed costs are falling.
b. average fixed costs are constant.
c. long-run average total costs rise as output increases.
d. long-run average total costs fall as output increases.
True/False
Indicate whether the statement is true or false.

____ 1. The difference between economic profit and accounting profit is that economic profit is
calculated based on both implicit and explicit costs whereas accounting profit is calculated based on
explicit costs only.

____ 2. Accountants keep track of the money that flows into and out of firms.

____ 3. The shape of the total cost curve is related to the shape of the production function.

____ 4. If the marginal cost of producing the tenth unit of output is $3, and if the average total
cost of producing the tenth unit of output is $2, then at ten units of output, average total cost is rising.

____ 5. Variable costs equal fixed costs when nothing is produced.

____ 6. If the marginal cost curve is rising, then so is the average total cost curve.

____ 7. There is general agreement among economists that the long-run time period exceeds one
year.

Short Answer

1. What are opportunity costs? How do explicit and implicit costs relate to opportunity
costs?

2. A key difference between accountants and economists is their different treatment of the
cost of capital. Does this cause an accountant's estimate of total costs to be higher or lower than an
economist's estimate? Explain.

3. The production function depicts a relationship between which two variables? Also, draw
a production function that exhibits diminishing marginal product.
 MIC TUT 7: FIRMS IN COMPETITIVE MARKET

Multiple Choice
Identify the choice that best completes the statement or answers the question.

____ 1. Which of the following is not a characteristic of a competitive market?

a. Buyers and sellers are price takers.
b. Each firm sells a virtually identical product.
c. Free entry is limited.
d. Each firm chooses an output level that maximizes profits.

____ 2. Which of the following statements regarding a competitive market is not correct?
a. There are many buyers and many sellers in the market.
b. Because of firm location or product differences, some firms can charge a higher price than other
firms and still maintain their sales volume.
c. Price and average revenue are equal.
d. Price and marginal revenue are equal.

Table 14-1
Quantity Total Revenue
0 $0
1 $7
2 $14
3 $21
4 $28

____ 3. Refer to Table 14-1. For a firm operating in a competitive market, the price is
a. $0.
b. $7.
c. $14.
d. $21.

____ 4. Firms operating in competitive markets produce output levels where marginal revenue
equals
a. price.
b. average revenue.
c. total revenue divided by output.
d. All of the above are correct.

____ 5. Suppose a firm in a competitive market produces and sells 8 units of output and has a
marginal revenue of $8.00. What would be the firm's total revenue if it instead produced and sold 4 units
of output?
a. $4
b. $8
c. $32
d. $64
____ 6. If a competitive firm is currently producing a level of output at which marginal revenue
exceeds marginal cost, then
a. a one-unit increase in output will increase the firm's profit.
b. a one-unit decrease in output will increase the firm's profit.
c. total revenue exceeds total cost.
d. total cost exceeds total revenue.

Table 14-4
Quantity Total Revenue Total Cost
0 $0 $3
1 $7 $5
2 $14 $8
3 $21 $12
4 $28 $17
5 $35 $23
6 $42 $30
7 $49 $38

____ 7. Refer to Table 14-4. A firm operating in a competitive market and facing the total costs
listed in the table will not produce an output level beyond
a. 4 units.
b. 5 units.
c. 6 units.
d. 7 units.

Table 14-5
Quantity Total Revenue Total Cost
0 $0 $10
1 $9 $14
2 $18 $19
3 $27 $25
4 $36 $32
5 $45 $40
6 $54 $49
7 $63 $59
8 $72 $70
9 $81 $82

____ 8. Refer to Table 14-5. At which quantity of output is marginal revenue equal to marginal
cost? AR= change in TR / change in Q
a. 3 AC= change in TC / change in Q
b. 6
c. 8
d. 9

____ 9. Refer to Table 14-5. In order to maximize profit, the firm will produce a level of output
where marginal revenue is equal to
a. $6.
b. $7.
c. $8.
d. $9.

____ 10. A profit-maximizing firm in a competitive market is currently producing 200 units of
output. It has average revenue of $9 and average total cost of $7. It follows that the firm's
a. average total cost curve intersects the marginal cost curve at an output level of less than 200 units.
b. average variable cost curve intersects the marginal cost curve at an output level of less than 200
units. TR = 200X9=1800
c. profit is $400. TC=7X200= 1400
d. All of the above are correct. => PROFIT = TR - TC=400

____ 11. Raiman's Shoe Repair produces custom-made shoes. When Mr. Raiman produces 12
pairs per week, the marginal cost of the twelfth pair is $84, and the marginal revenue of the twelfth pair
is $70. What would you advise Mr. Raiman to do?
a. shut down the business
b. produce more custom-made shoes MC > MR => He is running a loss
c. decrease the price nên sản xuất ít hơn để continue maximizing his
d. produce fewer custom-made shoes profit

____ 12. Suppose that a firm is currently maximizing its short-run profit at an output of 50 units. If
the current price is $9, the marginal cost of the 50th unit is $9, and the average total cost of producing
50 units is $4, what is the firm's profit?
a. $0 TR= 50X9= 450
b. $200 PROFIT= 450-200 = 250
c. $250
d. $450

Figure 14-5

____ 13. Refer to Figure 14-5. When market price is P3, a profit-maximizing firm's total costs
a. can be represented by the area P2 × Q2.
b. can be represented by the area P3 × Q2.
c. can be represented by the area (P3-P2) × Q3.
d. are zero.

____ 14. A competitive firm's short-run supply curve is part of which of the following curves?
a. marginal revenue
b. average variable cost
c. average total cost
d. marginal cost

____ 15. Which of these curves is the competitive firm's short-run supply curve?
a. the average variable cost curve above marginal cost
b. the average total cost curve above marginal cost
c. the marginal cost curve above average variable cost
d. the average fixed cost curve

____ 16. The competitive firm's short-run supply curve is its

a. marginal revenue curve, but only the portion where marginal revenue exceeds marginal cost.
b. marginal cost curve.
c. marginal cost curve, but only the portion above the minimum of average total cost.
d. marginal cost curve, but only the portion above the minimum of average variable cost.

Figure 14-6

____ 17. Refer to Figure 14-6. If the firm is in a short-run position where P < AVC, it is most
likely to be on what segment of its supply curve?
a. BC
b. CD
c. DF
d. AB

____ 18. When managers of firms in a competitive market observe falling profits, they are likely to
infer that the market is characterized by
a. a violation of conventional market forces.
b. over-investment.
c. the entry of new firms.
d. too few firms in the market.
____ 19. In the long-run equilibrium of a market with free entry and exit, marginal firms are
operating
a. at the point where average variable cost equals marginal cost.
b. at the minimum point on their marginal cost curves.
c. at their efficient scale.
d. where accounting profit is zero.

Figure 14-9

____ 20. Refer to Figure 14-9. If the market starts in equilibrium at point C in panel (b), a
decrease in demand will ultimately lead to
a. more firms in the industry but lower levels of output for each firm.
b. fewer firms in the market.
c. a new long-run equilibrium at point D in panel (b).
d. lower prices once the new long-run equilibrium is reached.

True/False
Indicate whether the statement is true or false.

____ 21. For a firm operating in a perfectly competitive industry, total revenue, marginal revenue,
and average revenue are all equal.

____ 22. A profit-maximizing firm in a competitive market will increase production when average
revenue exceeds marginal cost.

____ 23. Firms operating in perfectly competitive markets try to maximize profits.

____ 24. Firms operating in perfectly competitive markets produce an output level where marginal
revenue equals marginal cost.

____ 25. A firm is currently producing 100 units of output per day. The manager reports to the
owner that producing the 100th unit costs the firm $5. The firm can sell the 100th unit for $4.75. The
firm should continue to produce 100 units in order to maximize its profits (or minimize its losses).
____ 26. All firms maximize profits by producing an output level where marginal revenue equals
marginal cost; for firms operating in perfectly competitive industries, maximizing profits also means
producing an output level where price equals marginal cost.

____ 27. A firm operating in a perfectly competitive industry will continue to operate in the short
run but earn losses if the market price is less than that firm’s average variable cost.

____ 28. A firm will shut down in the short run if revenue is not sufficient to cover all of its fixed
costs of production.

____ 29. When a resource used in the production of a good sold in a competitive market is
available in only limited quantities, the long-run supply curve is likely to be upward sloping.

____ 30. A firm operating in a perfectly competitive industry will continue to operate if it earns
zero economic profits because it is likely to be earning positive accounting profits.

Short Answer

31. Describe the difference between average revenue and marginal revenue. Why are both of
these revenue measures important to a profit-maximizing firm?

32. Explain how a firm in a competitive market identifies the profit-maximizing level of
production. When should the firm raise production, and when should the firm lower production?

33. If identical firms that remain in a competitive market over the long run make zero
economic profit, why do these firms choose to remain in the market?
 MIC TUT 8: MONOPOLY
Multiple Choice
Identify the choice that best completes the statement or answers the question.

____ 1. Which of the following would be most likely to have monopoly power?
a. a long-distance telephone service provider
b. a local cable TV provider
c. a large department store
d. a gas station

____ 2. Which of the following is not an example of a barrier to entry?

a. Mighty Mitch’s Mining Company owns a unique plot of land in Tanzania, under which lies the
only large deposit of Tanzanite in the world.
b. A pharmaceutical company obtains a patent for a specific high blood pressure medication.
c. A musician obtains a copyright for her original song.
d. An entrepreneur opens a popular new restaurant.

____ 3. Patent and copyright laws encourage

a. creative activity.
b. lower prices due to decreasing average total costs.
c. competition among firms.
d. Both a and b are correct.

____ 4. Young Johnny inherited the only local cable TV company in town after his father passed
away. The company is completely unregulated by the government and is therefore free to operate as it
wishes. Assume that Johnny understands the true power of his new monopoly. Which of the following
statements is (are) correct?
(i) He will be able to set the price of cable TV service at whatever level he wishes.
(ii) The customers will be forced to purchase cable TV service at whatever price he wants to
set.
(iii) He will be able to achieve any profit level that he desires.

a. (i) only
b. (ii) only
c. (i) and (iii) only
d. (i), (ii), and (iii)

____ 5. When a firm operates under conditions of monopoly, its price is

a. not constrained.
b. constrained by marginal cost.
c. constrained by demand.
d. constrained only by its social agenda.

____ 6. A monopoly's marginal cost will

a. be less than its average fixed cost.
b. be less than the price per unit of its product.
c. exceed its marginal revenue.
d. equal its average total cost.
____ 7. For a monopoly firm, the shape and position of the demand curve play a role in
determining
(i) the profit-maximizing price.
(ii) the shape and position of the marginal cost curve.
(iii) the shape and position of the marginal revenue curve.

a. (i) and (ii) only

b. (ii) and (iii) only
c. (i) and (iii) only
d. (i), (ii), and (iii)

____ 8. For a monopoly,

a. average revenue exceeds marginal revenue.
b. average revenue equals marginal revenue.
c. average revenue is less than marginal revenue.
d. price equals marginal revenue.

Figure 15-4

____ 9. Refer to Figure 15-4. If the monopoly firm wants to maximize its profit, it should
operate at a level of output equal to
a. Q1.
b. Q2.
c. Q3.
d. Q4.

____ 10. Refer to Figure 15-4. A profit-maximizing monopoly's total revenue is equal to
a. P4 x Q2.
b. P3 x Q4.
c. (P4-P2) x Q2.
d. (P4-P3) x Q2.

Table 15-2
Dreher's Designer Shirt Company, a monopolist, has the following cost and revenue information.

COSTS REVENUES
Quantity Total Cost Marginal Quantity Price Total Marginal
Produced ($) Cost Demanded ($/unit) Revenue Revenue
0 100 -- 0 170 --
1 140 1 160
2 184 2 150
3 230 3 140
4 280 4 130
5 335 5 120
6 395 6 110
7 475 7 100
8 565 8 90

____ 11. Refer to Table 15-2. What is the total revenue from selling 6 shirts?
a. $100
b. $600
c. $625
d. $660

____ 12. Refer to Table 15-2. What is total profit at the profit-maximizing quantity?
a. $100
b. $245
c. $265
d. $395

____ 13. What happens to the price and quantity sold of a drug when its patent runs out?
(i) The price will fall.
(ii) The quantity sold will fall.
(iii) The marginal cost of producing the drug will rise.

a. (i) only
b. (i) and (ii) only
c. (ii) and (iii) only
d. (i), (ii), and (iii)

____ 14. To maximize total surplus with a monopoly firm, a benevolent social planner would
a. choose the level of output where MR = MC.
b. choose the level of output where MR intersects the demand curve.
c. choose the level of output where MC intersects the demand curve.
d. allow the free market system to determine the level of output.

____ 15. Antitrust laws allow the government to

a. collect revenues through the antitrust tax.
b. break up companies.
c. purchase privately-held companies through eminent domain.
d. All of the above are correct.

____ 16. If government regulation sets the maximum price for a natural monopoly equal to its
marginal cost, then the natural monopolist will
a. earn economic losses.
b. earn economic profits.
c. earn zero economic profits.
d. produce a lower quantity of output than is socially optimal.

____ 17. A monopolist's profits with price discrimination will be

a. lower than if the firm charged a single, profit-maximizing price
b. the same as if the firm charged a single, profit-maximizing price.
c. higher than if the firm charged just one price because the firm will capture more consumer surplus.
d. higher than if the firm charged a single price because the costs of selling the good will be lower.

____ 18. A monopolist faces the following demand curve:

Price Quantity
$8 300
$7 400
$6 500
$5 600
$4 700
$3 800
$2 900
$1 1,000

The monopolist has fixed costs of $1,000 and has a constant marginal cost of $2 per unit. If the
monopolist were able to perfectly price discriminate, how many units would it sell?
a. 400
b. 500
c. 900
d. 4,200

____ 19. Round-trip airline tickets are usually cheaper if you stay over a Saturday night before you
fly back. What is the reason for this price discrepancy?
a. Airlines are practicing imperfect price discrimination to raise their profits.
b. Airlines charge a different rate based on the different nature of peoples' travel needs.
c. Airlines are attempting to charge people based on their willingness to pay.
d. All of the above are correct.

____ 20. When a local grocery store offers discount coupons in the Sunday paper it is most likely
trying to
a. reduce prices for all customers.
b. encourage literacy.
c. encourage arbitrage.
d. price discriminate.
True/False
Indicate whether the statement is true or false.

____ 21. Declining average total cost with increased production is one of the defining
characteristics of a natural monopoly.

____ 22. A monopolist produces where P > MC = MR.

____ 23. A monopolist produces where P = MC = MR.

____ 24. A monopolist’s supply curve is vertical.

____ 25. A monopolist’s supply curve is horizontal.

____ 26. A monopoly creates a deadweight loss to society because it produces less output than the
socially efficient level.

____ 27. Suppose a profit-maximizing monopolist faces a constant marginal cost of $10, produces
an output level of 100 units, and charges a price of $50. The socially efficient level of output is 200
units. Assume that the demand curve and marginal revenue curve are the typical downward-sloping
straight lines. The monopoly deadweight loss equals $4,000.

____ 28. By selling hardcover books to die-hard fans and paperback books to less enthusiastic
readers, the publisher is able to price discriminate and raise its profits.

____ 29. Antitrust laws give the Justice Department the authority to challenge potential mergers
between companies in an effort to safeguard society from monopoly power.

____ 30. The government may choose to do nothing to reduce monopoly inefficiency because the
“fix” may be worse than the problem.

Short Answer
GOV can create a monopolu by giving exclusive right, through copyright and patents law
to grant sole ownership of inventions , help eliminate the market failure.
31. Describe how government is involved in creating a monopoly. Why might the
government create one? Give an example.

32. What is the defining characteristic of a natural monopoly? Give an example of a natural
monopoly. supply a good and service at lower cost than 2 or more company for entire market
it non rival/ water distribution systems and bridge
33. Graphically depict the deadweight loss caused by a monopoly. How is this similar to the
deadweight loss from taxation?
 MIC TUT 9 – MARKET FAILURES
True/False
Indicate whether the statement is true or false.

____ 1. In a market characterized by externalities, the market equilibrium fails to maximize the
total benefit to society as a whole.

____ 2. When a driver enters a crowded highway he increases the travel times of all other drivers
on the highway. This is an example of a negative externality.

____ 3. Negative externalities lead markets to produce a smaller quantity of a good than is
socially desirable, while positive externalities lead markets to produce a larger quantity of a good than is
socially desirable.

____ 4. Corrective taxes enhance efficiency, but the cost to administer them exceeds the revenue
they raise for the government.

____ 5. According to recent research, the gas tax in the United States is lower than the optimal
level.

____ 6. Roads can be considered either public goods or common resources, depending on how
congested they are.

____ 7. Some goods, such as lighthouses, can switch between being public goods and being
private goods depending on the circumstances.

____ 8. A free rider is a person who pays for a good but does not receive the benefit of it.

____ 9. In some cases the government can make everyone better off by raising taxes to pay for
certain goods that the market fails to provide.

____ 10. Even economists who advocate small government agree that national defense is a good
that the government should provide.

____ 11. Advocates of antipoverty programs claim that fighting poverty is a public good.

____ 12. Economists argue that we can calculate the value of a human life by observing voluntary
risks that people take every day.

Multiple Choice
Identify the choice that best completes the statement or answers the question.

____ 13. Which of the following is a problem that keeps people from privately solving externality
problems?
a. Each party involved holds out for a better deal.
b. The externality is large.
c. Only problems with a sufficiently large number of parties can be solved.
d. There is a lack of government intervention.
____ 14. In which of the following cases is the Coase theorem most likely to solve the externality?
a. Ed is allergic to his roommate’s cat.
b. Chemicals from manufacturing plants in the Midwest are causing acid rain in Canada.
c. Polluted water runoff from farms is making residents of a nearby town sick.
d. Industrialization around the world is causing global warming.

____ 15. When goods do not have a price, which of the following primarily ensures that the good
is produced?
a. buyers
b. sellers
c. government
d. the market

____ 16. When something of value has no price attached to it,

a. externalities will be present.
b. production of the product has no cost.
c. government should not intervene to produce the product.
d. private companies will eventually produce the product, and the good will no longer be free.

____ 17. A view of a spectacular sunset along a private beach is an example of a

a. private good.
b. public good.
c. nonrival but excludable good.
d. rival but nonexcludable good.

____ 18. Most goods in the economy are

a. natural monopolies.
b. common resources.
c. public goods.
d. private goods.

____ 19. A beach house in Florida is

a. not rival in consumption and excludable.
b. rival in consumption and excludable.
c. not rival in consumption and not excludable.
d. rival in consumption and not excludable.

____ 20. At the local park there is a playground for children to use. While anyone is allowed to
use the playground, it is often very busy, reducing the enjoyment of many of the children who use
it. The playground is a
a. private good.
b. natural monopoly.
c. common resource.
d. public good.

____ 21. Tom is a non-union employee at General Power. The majority of the employees at
General Power are unionized. The union at General Power has negotiated very good benefits. Even
though he is not a union member and he does not have to pay union dues, Tom receives all the benefits
that the union has negotiated. Tom’s behavior is an example of
a. rivalry.
b. a barrier to entry.
c. free riding.
d. Taft-Hartley opposition.

____ 22. Suppose that everyone prefers to live in a society without poverty. Further suppose that
some private charities are successful in reducing poverty. People who do not contribute to the charities
a. receive no external benefit from private antipoverty programs.
b. decrease the reliance of individuals on antipoverty programs.
c. can free ride on the generosity of others.
d. are most likely to be in favor of government-sponsored programs.

____ 23. People have little incentive to produce a public good because
a. the social benefit is less than the private benefit.
b. the social benefit is less than the social cost.
c. there is a free-rider problem.
d. there is a Tragedy of the Commons.

____ 24. The privately-owned school system in Smalltown has a virtually unlimited capacity. It
accepts all applicants and operates on both tuition and private donations. Although every resident places
value on having an educated community, the school's revenues have suffered lately due to a large
decline in private donations from the elderly population. Since the benefit that each citizen receives
from having an educated community is a public good, which of the following would not be correct?
a. The free-rider problem causes the private market to undersupply education to the community.
b. The government can potentially help the market reach a socially optimal level of education.
c. A tax increase to pay for education could potentially make the community better off.
d. The private market is the best way to supply education.

____ 25. Which of the following is not a reason why government agencies subsidize basic
research?
a. The private market devotes too few resources to basic research.
b. The general knowledge developed through basic research can be used without charge.
c. The social benefit of additional knowledge is perceived to be greater than the cost of the subsidies.
d. The government wants to attract the brightest researchers away from private research firms.

____ 26. Economists think that the best way to determine the value of a human life is to
a. evaluate the value of a person’s expected earnings in the labor market.
b. evaluate the risks people are willing to take and what they would have to be paid to take them.
c. determine a person’s accumulated wealth at the time of death.
d. do nothing; human life is priceless.

____ 27. To increase safety at a bad intersection, you must decide whether to install a traffic light
in your hometown at a cost of $15,000. If the traffic light reduces the risk of fatality by 0.4 percent, and
the value of a human life is estimated to be $10 million, you should
a. install the light because the expected benefit of $40,000 is greater than the cost.
b. install the light because the expected benefit of $20,000 is greater than the cost.
c. not install the light because the expected benefit of $15,000 is only equal to the cost.
d. not install the light because the expected benefit of $4,000 is less than the cost.

____ 28. Which of the following statements is not correct?

a. Environmental degradation is an example of the Tragedy of the Commons.
b. Cost-benefit analysis is an important tool that economists use to evaluate the benefits of providing
a public good.
c. Some goods, such as lighthouses, may be either private or public goods.
d. The free-rider problem prevents governments from supplying public goods.

____ 29. The Tragedy of the Commons occurs because

a. a common resource is rival in consumption.
b. a common resource is underutilized.
c. crimes are committed in public places.
d. common resources are subject to exclusionary rules.

____ 30. The Tragedy of the Commons for sheep grazing on common land can be eliminated by
the government doing each of the following except
a. assigning land property rights.
b. auctioning off sheep-grazing permits.
c. taxing sheep flocks.
d. subsidizing sheep flocks.

____ 31. Since the London congestion toll plan was introduced,
a. vehicle speeds in the city’s central business district have increased.
b. carbon-dioxide emissions from cars and trucks have decreased.
c. the toll has grown increasingly popular with Londoners.
d. All of these things have happened.

____ 32. Governments can grant private property rights over resources that were previously
viewed as public, such as fish or elephants. Why would governments want to do so?
a. to prevent overuse
b. to decrease taxes
c. to fight poverty
d. to increase consumption

Short Answer

33. Using a supply and demand diagram, demonstrate how a negative externality leads to
market inefficiency. How might the government help to eliminate this inefficiency?

34. Use a graph to illustrate the quantity of pollution that would be emitted (a) after a
corrective tax has been imposed and (b) after tradable pollution permits have been imposed. Could these
two quantities ever be equivalent?
 35. Place each of the following in the correct location in the table.

Rival?
Yes No
Excludable? Yes Private Goods Natural Monopolies
No Common Resources Public Goods

a. Congested toll roads

b. Knowledge
c. Fish in the ocean
d. National defense
e. Congested nontoll roads
f. Cable TV
g. The environment
h. Fire protection
i. Ice-cream cones
j. Uncongested toll roads
k. Clothing
l. Uncongested nontoll roads

36. The government often intervenes when private markets fail to provide an optimal level of
certain goods and services. For example, the government imposes an excise tax on gasoline to account
for the negative externality that drivers impose on one another. Why might the private market not reach
the socially optimal level of traffic without the help of government?