# Use the following information and graph to answer

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```					Use the following information and graph to answer the next eight questions:
The graph below describes the supply and demand of the perfectly competitive market
for nail clips. The equations of supply and demand are:

Supply: P=32-(1/6)Q
Demand: P=2+(1/6)Q

I

P
H
S
22
C
A        B

P*
D
F
E                        G

12

D
J

60            Q*            120           Q

1. What is the competitive equilibrium price and quantity (P*, Q*)?
a) P*=15, Q*=102
b) P*=17, Q*=90
c) P*=15, Q*=78
d) P*=12, Q*=60
e) P*=12, Q*=120

2. The total social surplus generated by the competitive market equilibrium is given by
the areas:
a) H+A+B
b) A+B+E+F
c) H+A+B+E+F
d) H+A+B+E+F+J
e) H+A+B+E+F+G

3. When demand is 120 units, the absolute value of the elasticity of demand is:
(remember that the formula for the elasticity of demand is ε=(ΔQ/ΔP)(P/Q))
a) 60
b) 1/6
c) 0.6
d) 6
e) 10/6

4. Suppose that in order to help consumers, the government sets a maximum price of \$12.
As a consequence of this policy:
a) 60 units are sold; the deadweight loss of the policy will be given by the areas B+F
b) 120 units are sold; the deadweight loss of the policy will be given by the area D.
c) The policy will have no impact on the market because the maximum price is below the
equilibrium price.
d) 60 units are sold; the deadweight loss of this policy is given by the areas A+B+E+F.
e) 120 units are sold; the deadweight loss of the policy will be given by the areas
B+C+D+F+G.

5. Suppose that the government instead decides to give the firms a subsidy of \$5 per unit
sold in the hope of lowering the price to \$12. As a results of this policy:
a) Price falls to \$12 and 120 units are sold.
b) Price falls by less than \$5 and less than 120 units are sold.
c) Price increases by \$5 and less than Q* units are sold.
d) Price increases to \$22 and 60 units are sold.
e) Price falls by less than \$5 but the sold quantity stays at Q*.

6. Suppose that the price of scissors –a substitute good –suddenly increases for some
random reason. In the short run in the market for nail clips:
a) Demand shifts to the left, supply stays constant and price falls.
b) Demand shifts to the right, supply also shifts to the right as new firms enter the market
and price stays constant.
c) Demand shifts to the right, supply stays constant and price increases.
d) Demand shifts to the left, supply shifts to the left as firms leave the market and move
to the scissors sector, and price increases.
e) Demand stays constant, supply shifts to the left as firms leave the market and move to
the scissors sector, and price increases.

7. Assume that the industry is a constant cost industry. Suppose that at the equilibrium in
the graph above firms are making zero profits. Again suppose there is a sudden rise in the
price of scissors. As a consequence, in the long run in the market for nail clips:
a) The sold quantity increases and firms make positive profits.
b) The sold quantity decreases and prices increase above P* as firms shift their
production to scissors.
c) The sold quantity decreases and firms leave the market so that price stays constant at
P*..
d) The sold quantity increases as firms enter the market therefore making the price fall
below P*.
e) The sold quantity increases as new firms enter the market so that price stays constant at
P*.

8. If the graph above corresponds to a long run equilibrium, then:
a) It must be that P* is equal to the firms’ minimum marginal cost.
b) It must be that P* is equal to the firms’ minimum average cost.
c) It must be that P* is strictly greater than the firms’ average cost.
d) It must be that P* is strictly less than the average variable cost.
e) It must be that revenues are equal to the fixed cost.

Use the following information and graph to answer the next seven questions. The
graph illustrates several indifference curves and budget constraints of Jim, who has \$100
each week to spend on cheese and wine.
Cheese Pounds

15

10

D
8
A           B

C

10       15   16      20   Bottles of Wine

9. If the price of cheese is \$10 a pound and the price of wine is \$5 a bottle, the maximum
amounts of cheese and wine that Jim could buy are:
a) 15 and 20, respectively.
b) 10 and 20, respectively.
c) 8 and 16, respectively.
d) 10 and 10, respectively.
e) 15 and 15, respectively.

10. If the price of wine is \$5 a bottle and the price of cheese is \$10 a pound, in order to
maximize his utility Jim would choose to consume at point:
a) A
b) He could choose either B or D.
c) B
d) C
e) D

11. Suppose that Jim is initially consuming at point A. If income increases
50%, and prices of cheese and wine also increase 50%, what will the new
optimal consumption point?
a) A
b) He could choose either B or D.
c) B
d) C
e) D

12. When consuming at point A, the absolute value of Jim’s marginal rate
of substitution between wine and cheese is:
a) 0.5
b) 1
c) 2/3
d) 1.5
e) 2

13. Suppose that Jim is consuming at B. The price of cheese stays constant at \$10 a
pound, but the price of wine increases from \$5 to \$10. As a consequence of this change:
a) Jim will choose to consume at A; the substitution effect is the movement between C
and A.
b) Jim will choose to consume at C; the substitution effect is the movement between B
and A.
c) Jim will choose to consume at D; the substitution effect is the movement between A
and D.
d) Jim will choose to consume at C; the substitution effect is the movement between B
and D.
d) Jim will choose to consume at A; the substitution effect is the movement between B
and D.

14. From the graph we can say that for Jim:
a) Both cheese and wine are always normal goods.
b) Both cheese and wine are always inferior goods .
c) Cheese is normal but wine can be both normal and inferior.
d) Cheese is normal and wine is always inferior.
e) Cheese is inferior and wine is always normal.

15. Suppose that the price of cheese is \$10 and the price of wine is also \$10. How much
weekly income should Jim have in order to be as happy as he was when the price of
cheese was \$10 but the price of wine was \$5 (that was when Jim was consuming at
point B):
a) \$50
b) \$80
c) \$100
d) \$120
e) \$150
K

q=150

q=100
10                                 B

8

A
4                                                                C1

C0

8             12     16                             L

Use the graph above to answer the following seven questions. The graph illustrates the
isoquants corresponding to output levels of q=100 and q=150 for a given firm. It also
displays the optimal choices of inputs capital K and labor L for both output levels given a
price of capital r=\$4 and a price of labor w=\$2.

16. The minimum cost of producing 100 units of output is:
a) 64
b) 32
c) 108
d) 160
e) 200

17. What is the absolute value of the MRTS LK at A?
a) 1/2
b) 5/6
c) 2
d) 12/10
e) 8/5

18. What is the value of the cost function when q=150?
a) C(q=150)=64
b) C(q=150)=100
c) C(q=150)=146
d) C(q=150)= 164
e) C(q=150)= 150

19. From the graph we can say:
a) The technology exhibits increasing returns to scale.
b) The technology exhibits constant returns to scale.
c) The technology exhibits decreasing returns to scale.
d) The technology exhibits economies of scale.
e) The technology exhibits increasing marginal returns to capital.

21. Suppose that in the short run capital is fixed at 4 units and the firm is producing at
point A. The fixed cost (FC) and variable cost (VC) for this firm are:
a) FC=60, VC=40
b) FC=64, VC=80
c) FC=16, VC=16
d) FC=40, VC=60
e) FC=40, VC=160

22. Suppose that in the short run capital is fixed at 4 units. In the short run, in order to
produce 150 units of output, the firm would have to hire:
a) Between 6 and 12 units of labor.
b) Less than 6 units of labor.
c) More than 12 units of labor.
d) Exactly 12 units of labor.
e) Exactly 6 units of labor.

23. Suppose that the firm is producing at point A. In the long run, if the price of capital
decreases but the price of labor stays constant, in order to produce efficiently 100 units of
output, this firm would have to adjust its usage of inputs in the following manner:
a) Decrease L, increase K
b) Decrease K, keep L constant
c) Keep K and L constant, since the income and substitution effects offset each other
d) Decrease both K and L
e) None of the above
Dollars
MC

ATC=AVC
\$10

\$8

\$4

Nail clips
7000             15000 18000                   per year

Use the graph above to answer the next seven questions: The graph illustrates the
short run marginal and average cost functions of one of the many firms in the nail clips
industry which is perfectly competitive. (MC=Marginal Cost, ATC= Average Total Cost,
AVC=Average Variable Cost; notice that ATC=AVC). Suppose that this industry is a
constant cost industry.

24. If the price is \$10, then in order to maximize profits:
a) The firm will produce 18000 nail clips and will make negative economic profits.
b) The firm will produce 18000 nail clips and will make zero economic profits.
c) The firm will produce 7000 nail clips and will make zero economic profits.
d) The firm will produce 16000 nail clips and will make zero economic profits.
e) The firm will produce 18000 nail clips and will make positive economic profits.

25. What is the fixed cost of this firm?
a) \$8
b) \$16000
c) \$0
d) \$128000
e) Cannot be known from the information given.

26. What is the total cost for the firm when producing 15000 units?
a) \$8
b) \$15000
c) \$0
d) \$120000
e) Cannot be known from the information given.
27. If the price is \$8 and there are 100 identical nail clip firms in this market, total yearly
demand for nail clips at a price of \$8 is:
a) Between than 1’500000 and 1’700000 units.
b) Between 700000 and 1’500000 units.
c) Exactly 1’500000 units.
d) Less than 700000 units.
e) There is not enough information to answer this question.

28. If the market price is lower than \$8:
a) The firm will have economic losses and will exit the market in the short run.
b) The firm will have economic losses but will stay in the market both in the short and the
long run.
c) The firm will have economic losses, will stay in the market in the short run but then
will exit in the long run.
d) The firm will charge a price higher than \$8 in order not to have losses.
e) None of the above.

29. If all firms are identical, what will be the price of nail clips in the long run?
a) Higher than \$10.
b) \$10
c) Between \$8 and \$10
d) \$8
e) \$4

30. Suppose that all firms in the market are identical and the price is \$8. The price of
scissors –a substitute good –falls, shifting the demand for nail clips to the left. Then, in
the market for nail clips, in the long run:
a) Some firms exit the market and the price stays constant at \$8.
b) Some firms exit the market and the price falls below \$8.
c) Some firms enter the market and the price falls below \$8.
d) Some firms enter the market and the price stays constant at \$8.
e) There is no effect on the nail clip industry.
Use the following graph to answer the next six questions: The graph illustrates the
demand and cost functions of a monopolist. Notice that the demand function is a
straight line.

31. What is the socially optimal quantity of output to be produced in this industry in order
to maximize social surplus?
a) 0
b) 4
c) 6
d) Between 8 and 10
e) Infinite

32. In order to maximize profits, the unregulated, single-price monopolist illustrated in
the figure will:
a) Produce 6 units, charge a price of \$6
b) Produce 4 units, charge a price of \$4
c) Produce 4 units, charge a price of \$8
d) Produce 4 units, charge a price of \$10
e) Produce 4 units, charge a price of \$2

33. The unregulated, single-price monopolist illustrated in the figure above has a total
fixed cost of:
a) 40
b) 32
c) 16
d) 8
e) 0

34. If the monopolist charges a price of \$10, it will have:
a) Profits of \$8 and a surplus of \$24
b) Profits of \$10 and a surplus of \$32
c) Profits of \$8 and a surplus of \$32
d) Profits of \$24 and a surplus of \$24
e) Profits of \$0 and a surplus of \$32

35. In the figure above, if the price increases from \$6 to \$10, the consumer surplus falls
by:
a) 10
b) 16
c) 20
d) 24
e) 36

36. In the figure above, if the firm is a single-price, unregulated monopoly and observes
the willingness to pay of every costumer for any number of units that they may want to
buy, so that it can price-discriminate perfectly (first degree price discrimination), what
quantity will it produce?
a) 2
b) 4
c) 6
d) 8
e) 9

Use the following information to answer the next seven questions:
A monopolist faces the following demand and total cost:
QD  10  P
TC  10  2Q
The monopolist produces 4 units of output to maximize profit.

37. What is the total revenue at 4 units of output?
a) \$4
b) \$6
c) \$8
d) \$18
e) \$24

38. What is the consumer surplus at 4 units of output?
a) \$0
b) \$6
c) \$8
d) \$12
e) \$24

39. The single-price profit-maximizing monopolist will produce the level of output at
which
a) Price is equal to marginal cost
b) Marginal Revenue is equal to marginal cost
c) the marginal cost curve intercepts the demand curve
d) Marginal Revenue is zero
e) Marginal cost is zero

40. Marginal revenue is: MR  10  2Q . What is the marginal cost at the profit-
maximizing choice?
a) \$2
b) \$4
c) \$6
d) \$12
e) \$24

41. The marginal revenue curve for a monopolist always lies
a) above the demand curve
b) on the demand curve
c) below the demand curve
d) above the average cost curve
e) none of the above

42. The supply function of this monopolist is given by:
a) The marginal cost above the minimum variable cost
b) The marginal cost above the minimum average variable cost
c) The marginal cost above the minimum average total cost
d) The average cost
e) The monopolist has no supply function

43. Suppose that the monopolist is producing at some non-optimal output level, so that its
marginal cost is \$15 and its marginal revenue is \$20. The monopolist will generate
greater profit (or less loss) by
a) increasing price while keeping output constant
b) decreasing price and increasing output
c) keeping price constant and decreasing output
d) decreasing both price and output
e) increasing both price and output
Use the following information to answer the next four questions: Suppose the sky
resort with no competition has two costumers with different demands as shown below,
where D1 stands for the yearly demand for “ski-days” of the young costumer and D2
stands for the yearly demand of the old costumer. The dotted lines are marginal revenues.
For the resort the marginal cost of providing one more “ski-day” to its costumers is zero
(MC=0).

Price per
day
45

D1

30   D2

25

15

20                 40           Number      of
days

44. Consider the case where the resort can charge different prices to each costumer
What are the profit maximizing prices charged to the young and old costumer for each
“ski-day”, respectively?
a) 0,0
b) 15,25
c) 15,15
d) 20,40
e) 30,60

45. What is the price that the resort should charge to each costumer if the objective is to
maximize social welfare?
a) 0,0
b) 15,25
c) 15,15
d) 20,40
e) 30,60

46. If the resort was given a choice between price discrimination and no price
discrimination which one will he prefer?
a) He prefers price discrimination.
b) He prefers to charge same price.
c) He is indifferent to both of them.
d) He would choose neither and not produce and exit the market.
e) Not enough information.

47. Assume that the resort can use a two-part tariff separately for each of the two
costumers. It will therefore charge a membership fee and a price per day. In the case of
the old costumer, what should be the membership fee and the price per day in order to
extract his/her whole consumer surplus?
a) Fee: \$150 Price per day: \$15
b) Fee: \$300 Price per day: \$15
c) Fee: \$600 Price per day: \$0
d) Fee: \$300 Price per day: \$0
e) Fee: \$0 Price per day: \$15

Use the following information to answer the next five questions: Consider the
duopoly example we did in class. Two firms (1 and 2) producing a homogeneous
product face one market with demand given by P=30-Q, where Q=Q1+Q2. Both
firms have zero costs no matter how much they sell. Remember that this is a one-
period market, in the sense that the firms make their decisions once and then
“disappear”.

48. Suppose that the two firms compete choosing the quantities they sell in one period of
time. We showed that the “reaction functions” of these firms are Q1=15-(1/2)Q2 and
Q2=15-(1/2)Q1. How much should we expect firm 1 to produce in order to maximize
profits, assuming that firm 2 also wants to maximize profits and what price should we
expect that firm 1 will be able to charge? (Hint: find the Nash equilibrium of this “game”)

a) Q1=15, P=15
b) Q1=30, P=0
c) Q1=7.5, P=15
d) Q1=10, P=20
e) Q1=15, P=10

49. If the objective is to maximize social surplus, what price should be charged in this
market so that social surplus is maximized?
a) 30
b) 22.5
c) 15
d) 10
e) 0
50. If firm 1 becomes a monopolist, how much would it sell and at what price?
a) Q1=15, P=15
b) Q1=30, P=0
c) Q1=7.5, P=15
d) Q1=10, P=20
e) Q1=15, P=10

51. If the two firms get together and form a cartel to share equally the market, how much
should each firm sell and at what price?
a) Q1=15, Q2=15, P=0
b) Q1=15, Q2=15, P=15
c) Q1=10, Q2=10, P=10
d) Q1=7.5, Q2=7.5, P=15
e) Q1=7.5, Q2=7.5, P=22.5

52. Suppose that instead of competing choosing the quantities they sell, firms competing
choosing the prices they charge. What are the prices charged by the two firms in the Nash
equilibrium of this “game”? (Remember that the two firms sell identical homogeneous
goods)

a) P1=15, P2=0
b) P1=10, P2=10
c) P1=15, P2=15
d) P1=0, P2=0
e) P1=0, P2=15
Use the following information for the next three questions: Niren and Zer are tutoring
service providers for Econ 101; since they are so good, there is no other competitor in the
market. They can choose two price levels, which are High and Low. If the both tutors
choose High, both of them will enjoy \$500 of income. If one tutor chooses High while
the other chooses Low, the former will earn \$100 and the latter will enjoy the income of
\$600. If both of them choose Low, they will only earn \$200 each. The following table
summarizes this situation. Assume that they teach just one time and there is zero
possibility for one to meet the other again in their lifetime, so they just care for the money
they earn now; the first number indicates Niren’s income and the second number
indicates Ker’s income in any combination of price choices.

Ker
High                 Low
High        (\$500, \$500)         (\$100, \$600)
Niren
Low         (\$600, \$100)         (\$200, \$200)

53. If Ker and Niren don’t cooperate and each one tries to maximize his revenues
accounting for the fact that the other one also wants to maximize his revenues, what
would be plausible equilibrium incomes of this “game” (Income of Niren, Income of
Ker)? (Hint: find the Nash equilibrium)
a) (\$500, \$500)
b) (\$600, \$100)
c) (\$100, \$600)
d) (\$200, \$200)
e) None of the above.

54. If they do not like the Nash equilibrium and form a successful cartel to charge High
prices, what will be the individual income?
a) \$400
b) \$500
c) \$200
d) \$100
e) None of the above.

55. Which of the following statements about this cartel is true?
a) Since joint income is being maximized, this cartel has no reason to be broken.
b) Since there is no collective gain from breaking the cartel, the cartel will work.
c) The cartel can easily be broken, because there is a gain of breaking the cartel
individually.
d) The cartel can easily be broken, because they will be better off if both of them break
the cartel at the same time.
e) None of the above.

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