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Assignment 5 for Intermediate Microeconomics | ECON 301, Assignments of Microeconomics

Iowa State University (ISU)Microeconomics

Material Type: Assignment; Class: INTERMED MICROECON; Subject: ECONOMICS; University: Iowa State University; Term: Unknown 2004;

Typology: Assignments

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ECON 301
SUMMER 2004
HW #5
1) A firm in a perfectly competitive market
(a) Is a price taker.
(b) Faces a perfectly elastic demand curve.
(c) Faces a demand curve that is horizontal at the market price.
(d) All of the above are correct.
2) The shutdown rule for a price-taking firm says
(a) Shut down if price is less than average variable cost at all output levels.
(b) Shut down if revenue is less than average variable cost at all output levels.
(c) Shut down if revenue is less than total cost at all output levels.
(d) both a and b.
3) In a competitive market, a short-run equilibrium cannot persist in the long run if
(a) The firms are earning aero economic profits.
(b) The firms are earning positive economic profits.
(c) The firms are earning negative economic profits.
(d) both b and c.
4) In a competitive market, a short-run equilibrium cannot persist in the long run if
(a) The firms are earning aero economic profits.
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ECON 301

SUMMER 2004

HW

  1. A firm in a perfectly competitive market (a) Is a price taker. (b) Faces a perfectly elastic demand curve. (c) Faces a demand curve that is horizontal at the market price. (d) All of the above are correct.
  2. The shutdown rule for a price-taking firm says (a) Shut down if price is less than average variable cost at all output levels. (b) Shut down if revenue is less than average variable cost at all output levels. (c) Shut down if revenue is less than total cost at all output levels. (d) both a and b.
  3. In a competitive market, a short-run equilibrium cannot persist in the long run if (a) The firms are earning aero economic profits. (b) The firms are earning positive economic profits. (c) The firms are earning negative economic profits. (d) both b and c.
  4. In a competitive market, a short-run equilibrium cannot persist in the long run if (a) The firms are earning aero economic profits.

(b) The firms are earning positive economic profits. (c) The firms are earning negative economic profits. (d) both b and c.

  1. 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.
  2. If a firm makes zero economic profit, then the firm (a) has total revenues greater than its costs. (b) must shut down. (c) can be earning positive business profit. (d) must have no fixed costs.
  3. A small business owner earns $50,000 in revenue annually. The explicit annual costs equal $30,000. The owner could work for someone else and earn $25,000 annually. The owner’s business profit is ___ and the economic profit is ___. (a) $20,000, $5, (b) $20,000, $5, (c) $25,000, $5, (d) $45,000, $5, Figure 1

(d) –10 because the firm will shut down.

  1. Suppose TC  10  (0.1 * q^2 ). If there are 100 identical firms in the market, the market supply curve is (a) Q  1000 * p. (b) Q  500 * p. (c) Q  100 * p. (d) Q  10.
  2. If a firm is currently in short-run equilibrium earning a profit, what impact will a lump-sum tax have on its production decision? (a) The firm will decrease output to earn a higher profit. (b) The firm will increase output but earn a lower profit. (c) The firm will not change output but earn a lower profit. (d) The firm will not change output and earn a higher profit.
  3. In the long run, profits will equal zero in a competitive market because of (a) constant returns to scale.

(b) identical products being produced by all firms. (c) the availability of information. (d) free entry and exit.

  1. Assuming a horizontal long-run market supply curve, which of the following statements is (are) TRUE about competitive firms in the long run? (a) p  MC (b) p  AC (c) profit  0 (d) All of the above.
  2. Suppose that for each firm in the competitive market for potatoes, long-run average cost is minimized at $0.20 per pound when 500 pounds are grown. The demand for potatoes is Q  10,000/p. If the long-run supply curve is horizontal, then how many firms will this industry p. If the long-run supply curve is horizontal, then how many firms will this industry sustain in the long run? (a) 0 (b) 100 (c) 50, (d) There is not enough information to answer.
  3. Mary purchased a stuffed animal toy for $5. After a few weeks, someone offered her $ for the toy. Mary refused. One can conclude that Mary’s consumer surplus from the toy is (a) less than $5. (b) at least $95. (c) at least $100. (d) $105.
  4. Joe’s demand for spring water can be represented as p  10  Q (where p is measured in $/p. If the long-run supply curve is horizontal, then how many firms will this industry gallon and Q is measured in gallons). He recently discovered a spring where water can be obtained free of charge. His consumer surplus from this water is (a) $0. (b) $50. (c) $100. (d) unknown based upon the information provided.

(a) $5,000. (b) $15,000. (c) $20,000. (d) not able to be calculated from the information given.

  1. 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.
  2. The difference between producer surplus and profit is always the associated (a) opportunity costs. (b) total costs. (c) variable costs. (d) fixed costs.
  3. If a market produces a level of output below the competitive equilibrium, then (a) social welfare is not maximized. (b) consumer surplus might still be maximized. (c) the actual price will be below the equilibrium price. (d) social welfare might still be enhanced if a price ceiling keeps price below the competitive price.
  4. If a market produces a level of output that exceeds the competitive equilibrium output, then (a) social welfare will be higher. (b) producer surplus will be higher. (c) marginal cost will exceed price. (d) All of the above.
  5. A new law applied to a competitive market that requires laid off workers must be paid a large severance payment will (a) not generate a deadweight loss. (b) increase total welfare. (c) increase consumer surplus in the market. (d) decrease consumer surplus in the market.
  6. The total welfare associated with a market that includes a government sales tax equals (a) consumer surplus plus producer surplus. (b) consumer surplus plus producer surplus minus government tax revenue. (c) consumer surplus plus producer surplus plus government tax revenue. (d) the government tax revenue.

Figure 3

  1. Figure 3 Figure 9.2 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 consumer’s net gain in surplus equals (a) c  f. (b) b  f. (c) d  f. (d) Answer cannot be determined from the information given.
  2. Figure 3 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
  1. Figure 4 shows supply and demand curves for milk. If the government passes a $2 per gallon specific tax, the tax revenue is (a) $2 * Q 1. (b) $2 * Q 2. (c) $2 *(Q 2 – Q 1 ). (d) $2. Calculation
  2. Kim’s company makes dachshund refrigerator magnets. The total cost function is 2

C  9  3 q  q , where q=packets of magnets.^ MC^  ^3 2 q. The market price is $11.

a. How many packets will she supply in the short run? b. How much profit will she earn? c. What is Kim’s shut-down point? d. Draw a graph showing her short-run supply curve and the demand curve that she faces. e. Is the price likely to stay at $11 in the long run? What will be the price in the long run if this is a constant-cost market?

  1. The market demand schedule for noodles is as follows: Price Quantity Demanded (dollars per case) (cases per week) 5.40 50, 6.40 45, 7.40 40,

The market is perfectly competitive with constant input prices, and each firm has the same cost structure, described by the following table: Output Marginal Cost Average Variable Costs Average Total Costs 150 6.00 8.80 16. 200 6.40 7.80 13. 250 7.00 7.00 11. 300 7.65 7.10 10. 350 8.40 7.20 10. 400 10.00 7.50 10. 450 12.40 8.00 10. 500 12.70 9.00 11. Initially, there are 100 firms in the industry. a. What is the market price in the short run? b. What is the market output in the short run? c. What is the output of each firm in the short run? d. What is the economic profit of each firm in the short run? e. What is the shutdown point? f. What is the long-run equilibrium price? g. What is the number of firms in the long run?

  1. What are the effects in the soybean market of a $5-per-bushel price support using a deficiency payment on the equilibrium price and quantity, consumer surplus, producer surplus, and deadweight loss? Hint: The program works as the following way: Government sets a support price, $5. Farmers decide how much to grow and sell all of their produce to consumers at the market price, p, which clears the market. The government then gives the farmers a deficiency payment equal to the difference between the support and actual price, 5-p, for every unit sold so that farmers receive the support price on their entire crop.

40) The initial demand for bottled water is QDI  300  200 p. The supply of bottled water is

Qs  100  600 p , where quantity is gallons per day and p=dollars per gallon. Then a

hurricane hits and the demand for bottled water climbs to QDH  500  200 p. Which

policy is in the best interest of consumers as a group, setting a price ceiling at the old equilibrium price or allowing the price to rise to the new equilibrium?