Quiz 8 in Principles of Microeconomics (Econ 2) from Drake University, Summer 2008 - Prof., Quizzes of Microeconomics

Download Quiz 8 in Principles of Microeconomics (Econ 2) from Drake University, Summer 2008 - Prof. and more Quizzes Microeconomics in PDF only on Docsity! Principles of Microeconomics (Econ 2) Signature: Drake University, Summer 2008 William M. Boal Printed name: QUIZ #8 VERSION A “Economic Efficiency and Perfect Competition” August 12, 2008 INSTRUCTIONS: This quiz is closed-book, closed-notes. Simple calculators are permitted, but graphing calculators or calculators with alphabetical keyboards are NOT permitted. Numerical answers, if rounded, must be correct to at least 3 significant digits. Point values for each question are noted in brackets. Maximum total points are 100. I. Multiple choice: Circle the one best answer to each question. [3 pts each: 24 pts total] (1) Suppose a change in government policy causes small business owners to gain $10 billion and other people to lose $5 billion. Then this change a. passes the compensation test of Kaldor and Hicks. b. is a Pareto improvement. c. both (a) and (b). d. neither (a) nor (b). (2) Welfare analysis adds up the gains and losses of all participants in a market as a result of a change, but in so doing, welfare analysis assumes that consumers' gains and losses a. are more important than producers'. b. are less important than producers'. c. are just as important as producers'. d. are intangible and cannot be measured. (3) When new firms enter an industry, the a. short-run supply curve shifts right. b. short-run supply curve shifts left. c. short-run demand curve shifts right. d. short-run demand curve shifts left. (4) New firms enter an industry because they hope to a. drive down the market price. b. drive down the profits of existing firms. c. enjoy economic profit. d. increase the total quantity produced in the market. (5) The long-run supply curve for any industry is necessarily a. just as elastic as the short-run supply curve. b. more elastic than the short-run supply curve. c. less elastic than the short-run supply curve. d. perfectly inelastic. (6) If one of the resources used by an industry is scarce, then the long-run supply curve for the industry a. is horizontal. b. slopes down. c. slopes up. d. is shaped like a U. e. is shaped like an inverted U. (7) Price equals average cost in a competitive industry in long-run equilibrium because a. the threat of government regulation causes firms to hold prices down. b. business owners have a sense of fairness. c. individual firms adjust their output levels using the rule "price equals average cost" to maximize profit. d. consumers refuse to pay more than what is reasonable. e. positive profits encourage entry of new firms while negative profits encourage existing firms to leave the industry. (8) Price equals marginal cost in a competitive industry in both short-run and long-run equilibrium because a. the threat of government regulation causes firms to hold prices down. b. business owners have a sense of fairness. c. individual firms adjust their output levels using the rule "price equals marginal cost" to maximize profit. d. consumers refuse to pay more than what is reasonable. e. positive profits encourage entry of new firms while negative profits encourage existing firms to leave the industry. Principles of Microeconomics (Econ 2) Drake University, Summer 2008 Quiz 8 Version A Page 2 of 6 II. Problems: Insert your answer to each question below in the box provided. Feel free to use the margins and graphs for scratch workonly the answers in the boxes will be graded. Work carefullypartial credit is not normally given for questions in this section. (1) [Welfare effects of price controls: 12 pts] The graph below shows the market for vitamins. $0 $1 $2 $3 $4 $5 $6 $7 $8 $9 $10 $11 $12 $13 $14 $15 $16 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 Quantity (millions) P ri c e Demand Supply Suppose a price floor (or legal minimum price) of $8 is imposed on the market for vitamins. No vitamins may be sold for less than the price floor. a. Compute the quantity traded with the price floor. million b. Does producer surplus increase or decrease because of the price floor, as compared to the market without government intervention? (Assume optimistically that vitamins are actually sold by those sellers with the lowest costs.) c. By how much? $ million d. Does consumer surplus increase or decrease because of the price floor, as compared to the market without government intervention? e. By how much? $ million f. Compute the deadweight social loss caused by the price floor. $ million Principles of Microeconomics (Econ 2) Drake University, Summer 2008 Quiz 8 Version A Page 5 of 6 (4) [Long-run competitive equilibrium: 22 pts] The graph below shows the market for natural-fiber shirts, which is competitive. Assume all producers and potential producers have the same costs as each other. $0 $1 $2 $3 $4 $5 $6 $7 $8 $9 $10 $11 $12 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 Quantity (millions) P ri ce Old demand New demand Short-run supply Long-run supply Initially the market is in long-run equilibrium, with the demand curve given by “old demand” and the short-run supply curve given by “short-run supply” as shown in the graph. a. What is the initial equilibrium price? $ b. What is the initial equilibrium quantity? million c. What is the average cost of production for firms in this industry? $ Suddenly, natural-fiber shirts become unpopular, and the demand shifts left to “new demand.” Consider the short-run market response to this demand shift. d. What is the new equilibrium price in the short run? $ e. What is the new equilibrium quantity in the short run? million f. Are producers making economic profits, losses, or just breaking even? Now, consider the long-run market response to this demand shift. g. Given your answer to (f) above, will existing firms try to exit the industry or will new firms try to enter the industry? h. What is the new equilibrium price in the long run? $ i. What is the new equilibrium quantity in the long run? million j. What is the new long-run average cost of production for firms in this industry? $ k. Is this a constant-cost industry, an increasing-cost industry, or a decreasing-cost industry? Principles of Microeconomics (Econ 2) Drake University, Summer 2008 Quiz 8 Version A Page 6 of 6 III. Critical thinking: Write a one-paragraph essay answering one question below (your choice). [4 pts] (1) Consider the following statement: "When two countries begin international trade in some good, the price falls in one country and rises in the other. So both countries cannot benefit from trade. Social welfare must decrease in one of the countries." Do you agree or disagree? Justify your answer with supply-and-demand diagrams for both countries, using the concepts of consumer and producer surplus. (2) Suppose Country X subsidizes production of tomatoes, so that the price in Country X is $0.50 per pound, whereas in the United States the price is $2.00 per pound. Should the United States refuse to allow trade in tomatoes with Country X? Justify your answer with a supply-and-demand diagram of the U.S. market for tomatoes, using the concepts of consumer and producer surplus. (3) Why do producers want the government to impose quotas on them? Justify your answer with a supply-and-demand diagram, using the concepts of consumer and producer surplus. Please circle the question you are answering. Write your answer below. Full credit requires correct economic reasoning, legible writing, good grammar including complete sentences, and accurate spelling. [end of quiz]