Question 1

One way to minimize the deadweight loss resulting from a specific tax is to

Accepted Answer

Taxing goods for which either supply or demand is inelastic will result in a smaller deadweight loss because the quantity demanded or supplied is less affected by the change in price. Therefore, the change in consumer and producer surplus will be smaller, resulting in a smaller deadweight loss.

Question 2

Suppose there are 100 firms each with a short run total cost of STC = q² + q + 10,so that marginal cost is MC = 2q +1.If market demand is given by Q_D = 1050 - 50P,profit to the firm will be

Accepted Answer

The answer of Suppose there are 100 firms each with...

Question 3

Suppose there are 100 firms each with a short run total cost of STC = q² + q + 10,so that marginal cost is MC = 2q +1.If market demand is given by Q_D = 1050 - 50P,what is the equilibrium price?

Accepted Answer

To find the equilibrium price, we need to find the quantity where the market demand equals the market supply. Since we have 100 firms, the market supply can be found by multiplying each firm's quantity by 100. Thus, the market supply is given by Q_D = 100q² = 100(2MC - 1 - 10) = 200MC - 1000. Setting this equal to the market demand, we have: 1050 - 50P = 200MC - 1000 Solving for P, we get P = 11.

Question 4

If quantity supplied is either greater or less than the equilibrium quantity,then all of the following are true except:

Accepted Answer

DOption C is incorrect because the total loss of surplus depends on the distance between the equilibrium quantity and the actual quantity supplied, as well as the shapes of the demand and supply curves, rather than directly on the price of the good. Option D is correct because when quantity supplied is not at equilibrium, it leads to either excess supply or demand, causing an inefficient allocation of resources.

Question 5

In the short run,specific taxes on a firm result in

Accepted Answer

In the short run, imposing specific taxes on a firm will lead to an increase in their costs of production, which will result in a rise in the price of the goods or services they produce. However, in the long run, the firm may find ways to reduce their costs and bring the price back down. Therefore, the price increases due to the tax may not persist in the long run.

Question 6

Suppose there are 100 firms each with a short run total cost of STC = q² + q + 10,so that marginal cost is MC = 2q +1.If market demand is given by Q_D = 1050 - 50P,how much will the individual firm produce?

Accepted Answer

To find the individual firm's optimal production level, we need to set marginal cost equal to price (since firms maximize profit where MR=MC). In this case, we can use the market demand curve to find the price for each firm:

1050 - 50P = QD
1050 - 50P = 1000 - 100Q
10Q + 50P = 50
P = (5 - 0.2Q)

Now we can substitute this into the marginal cost equation to get:

2q + 1 = 5 - 0.2q
2.2q = 4
q = 1.82 (rounded)

Since firms produce in whole units, the firm will produce 5 units (the nearest whole number to 1.82). Therefore, the best choice is (C) 5.

Question 7

The excess burden of a tax is

Accepted Answer

The excess burden of a tax is the loss of consumer and producer surplus that is not transferred elsewhere. It refers to the overall efficiency loss or deadweight loss that results from the market distortion caused by the tax. This is because taxes create a wedge between the price that buyers pay and the price that sellers receive, reducing the amount of goods exchanged in the market and causing a deadweight loss.

Question 8

Suppose there are 100 firms each with a short run total cost of STC = q² + q + 10,so that marginal cost is MC = 2q +1.If market demand is given by Q_D = 1050 - 50P,total revenue to each firm will be

Accepted Answer

To find the optimal quantity to produce, we equate marginal cost to marginal revenue (MR) which is equal to the price in a perfectly competitive market. MR = P = Q_D/100 - (1050 - 50P)/100 Simplifying this expression, we get P = 21 - Q/20. Setting MC equal to P and solving for q, we get q = 10. Total revenue for a firm is TR = P*q = (21 - Q/20)*10. When Q = 50, TR is maximized at 55. Therefore, the best choice is C) 55.

Question 9

In a competitive market,an efficient allocation of resources is characterized by

Accepted Answer

An efficient allocation of resources in a competitive market is characterized by the largest possible sum of consumer and producer surplus. This means that the benefits to both consumers and producers are maximized, and resources are being used in the most effective way possible. A price greater than the marginal cost of production may lead to inefficiencies and deadweight losses, while the possibility of further mutually beneficial transactions is a characteristic of a market that is not yet fully efficient. A value of consumer surplus equal to that of producer surplus is not necessarily indicative of an efficient allocation of resources.

Question 10

When prices drop in response to a decline in demand for an increasing cost industry

Accepted Answer

When prices drop due to a decline in demand for an increasing cost industry, the rents earned by elastically supplied inputs (those that can be easily substituted) will decline by more than rents earned by inelastically supplied inputs (those that cannot be easily substituted). However, producer surplus will still increase as prices drop. Therefore, the correct choice is C.

Question 11

Suppose there are 100 firms each with a short run total cost of STC = q² + q + 10,so that marginal cost is MC = 2q +1.If market demand is given by Q_D = 1050 - 50P,how much will be produced in the market?

Accepted Answer

To find the quantity produced in the market, we need to first find the equilibrium price by setting the market demand equal to the total quantity supplied by all firms: 1050 - 50P = Qs = 100q Substituting the equation for STC into the equation for MC, we get: 2q + 1 = ∂STC/∂q = 2q² + 10 Solving for q, we get: q = (² + 9)/2 Substituting this expression for q into the equation for Qs, we get: 1050 - 50P = 100(² + 9)/2 Simplifying and solving for P, we get: P = 21 - 0.2² Substituting this expression for P into the equation for Qs, we get: Qs = 100q = 50² + 450 Finally, substituting this expression for Qs into the equation for market demand, we get: 1050 - 50P = 50² + 450 Solving for ², we get: ² = 20 Substituting this value into the equation for Qs, we get: Qs = 100q = 50(20) + 450 = 1450 Therefore, the quantity produced in the market is 500 (since there are 100 firms each producing 5 units).

Question 12

A deadweight loss of consumer and/or producer surplus occurs when

Accepted Answer

A deadweight loss occurs when mutually beneficial transactions cannot be completed, either because the price is too high for consumers or the quantity produced is too low for producers, leading to a loss of consumer and/or producer surplus. This can happen due to market inefficiencies such as externalities, imperfect information, or price floors/ceilings. Options A, C, and D do not necessarily lead to deadweight loss.

Question 13

In the long run,the greater burden of a specific tax will usually be absorbed by

Accepted Answer

The greater burden of a specific tax will usually be absorbed by the party with the least elastic demand/supply curve, because they are less responsive to price changes and cannot easily avoid the tax by changing their quantity demanded or supplied.

Question 14

Suppose there are 100 firms each with a short run total cost of STC = q² + q + 10,so that marginal cost is MC = 2q +1.The market supply curve is

Accepted Answer

The answer of Suppose there are 100 firms each with...

Question 15

"Missing markets" result from

Accepted Answer

Missing markets refer to a situation where a market does not exist even though there's both supply and demand for a particular product/service. This often occurs due to high transaction costs such as search and bargaining costs, costs of enforcing contracts, and costs of gathering and processing information. As a result, buyers and sellers cannot find each other to conduct trade, leading to the absence of a market. Other factors such as price controls, inability to gain economies of scale, and foreign competition may also affect market outcomes, but they do not necessarily lead to missing markets.

Question 16

Price controls

Accepted Answer

Price controls create shortages because they set a price either above or below the market equilibrium price, resulting in either excess supply or excess demand. This can lead to either shortages or surpluses, depending on the specific type of price control implemented.

Question 17

One example of Ricardian rent is

Accepted Answer

Ricardian rent refers to the extra payment made to a factor of production (such as a landlord) due to its unique and scarce nature. In this case, the highly demanded artwork is scarce and unique, so the extra payment made for it is a form of Ricardian rent. A is incorrect because rent paid under price controls is not determined by supply and demand and does not necessarily reflect the unique and scarce nature of the rented property. C is incorrect because the extra payment for first class seats is not due to their unique and scarce nature, but rather their higher quality. D is incorrect because the price rise due to the disease is not a form of extra payment for a unique and scarce factor, but rather a market disruption caused by a supply shock.

Question 18

In the short run,the incidence of a sales tax is

Accepted Answer

In the short run, producers may not be able to adjust prices immediately in response to a sales tax, so some of the tax burden will be passed on to consumers in the form of higher prices. However, the degree to which consumers and producers share the burden of the tax will depend on the price elasticity of supply and demand.

Question 19

Suppose there are 100 firms each with a short run total cost of STC = q² + q + 10,so that marginal cost is MC = 2q +1.If market demand is given by Q_D = 1050 - 50P,total cost to the firm will be

Accepted Answer

To find the total cost to the firm, we first need to find the equilibrium price and quantity. Set MC = P to find the firm's supply curve: 2q + 1 = P. The market supply is 100 firms, so Q_S = 100q. Set Q_S = Q_D: 100q = 1050 - 50P. Substitute P = 2q + 1 into the demand equation and solve for q. Once q is found, substitute it back into the STC equation to find the total cost.

Question 20

Per-unit transaction costs

Accepted Answer

Per-unit transaction costs may affect both buyers and sellers in a market, causing the demand and supply curves to shift either inward or outward depending on the value obtained from the transaction agents. For example, high per-unit transaction costs may discourage buyers from purchasing goods or services, causing demand to shift inward, while low per-unit transaction costs may encourage more buyers to enter the market, causing demand to shift outward. Similarly, high per-unit transaction costs may discourage sellers from offering goods or services, causing supply to shift inward, while low per-unit transaction costs may encourage more sellers to enter the market, causing supply to shift outward.

Quiz 9: Perfect Competition in a Single Market