PN 4001 FINAL EXAM QUESTIONS
AND CORRECT ANSWERS
If firms in a competitive market are not identical, then an increase in cost will ______.
ANSW✅✅push the most inefficient firms out of the market
Suppose when a market has four firms, average economic profit is $1,000 per month. When the
market has 5 firms, the average economic profit is $-50 per month. This suggests that ______.
ANSW✅✅the long-run equilibrium number of firms is between four and five
The owners of sports franchises often complain that free-agency (open bidding for player services)
threatens their profitability and, thus, their long-run viability. Given your knowledge of perfect
competition, which of the following is correct? ANSW✅✅Team owners might be correct in as
much as free-agency bids up the price of players so that economic profits from those players equals
zero.
The above figure shows the market demand curve for telecommunication while driving one's car
(time spent on the phone). The current price is $0.35 per minute. If the price were to increase by ten
cents per minute, consumer surplus would ______. ANSW✅✅fall by $84
Sarah's demand curve for shoes has the same slope as Pete's; however, it lies to the right of Pete'd
demand curve. An increase in the price of shoes will cause ______. ANSW✅✅Sarah to incur a
greater loss of consumer surplus than Pete will
Suppose the market supply curve is p = 5 + Q. At a price of $10, producer surplus equals _____.
ANSW✅✅12.50
Producer surplus equals total revenue minus the sum of all marginal cost. ANSW✅✅True
Mister Jones was selling his house. The asking price was $220,000, and Jones decided he would take
no less than $200,000. After some negotiation, Mister Smith purchased the house for $205,000.
Mister Jones' producer surplus is ______. ANSW✅✅$5,000
Economists claim that measuring society's welfare as CS + PS ______. ANSW✅✅treats the gains
to consumers and producers equally
,If activists successfully lobbied government to force firms to produce more output than they
normally would in a perfectly competitive market, ______. ANSW✅✅total surplus in the market
would decline
In economics, welfare analysis focuses on _____. ANSW✅✅none of these choices
The services of real estate brokers are provided in a competitive market. If the state Board of
Realtors enacts several requirements that limit the number of real estate brokers, then social
welfare will most likely ______. ANSW✅✅decrease, although producers are made better off
The above figure shows the supply and demand curves for milk. If the government passes a $2 per
gallon specific tax, the loss in social welfare will equal _______. ANSW✅✅f + g
The above figure shows the supply and demand curves for apartment units in a large city. The area
"c" represents ______. ANSW✅✅a transfer from producers to consumers if a rent ceiling of $350
is imposed
The welfare loss of a tariff equals that of an import quota that leads to the same levels of imports.
ANSW✅✅False
A ban on imports, a tariff, or a quota raises the price to domestic consumers. This means that
consumers will buy less of the product at a higher price. The loss associated with this is called
_______. ANSW✅✅consumption distortion losss
Employers in a city must pay a specific tax of $t per hour worked by their employees, while
employers in the suburbs of the city do not have an employment tax. What does a general
equilibrium approach predict regarding the wages and employment of both the city and suburban
workers if the city decides to substantially reduce their employment tax rate? ANSW✅✅Wages
will increase in both the city and the suburbs, employment will increase in the city, but decrease in
the suburbs.
There are two closely related crops, X and Y, with the following demand functions: QX = 180 - 2PX +
PY and QY = 150 + PX - PY where QX is the quantity of X, PX is the price of X, QY is he quantity of Y,
and PY is the price of Y. These two crops are grown in two widely separated countries so there is no
interrelationship between the supply curves. The short-run perfectly inelastic supply for X is 150,
, while the short-run perfectly inelastic suppy curve for Y is 100. In equilibrium, the prices of X and Y
are _____ and _____. ANSW✅✅Px = 80; Py = 130
The effects of a price change are always understated by a partial equilibrium analysis when
compared to a general equilibrium analysis. ANSW✅✅False
Only individuals A and B live on a desert island where no production is possible. A is endowed with
15 units of good X and 17 units of good Y. B is endowed with 13 units of good X and 23 units of good
Y. In the Edgeworth box, good X is measured on the horizontal axis. Individual A's utility function is
UA = 3XY so her MUX = 3Y and her MUY = 3X. Individual B's utility function is UB = 10 X Yso his MUX
= 5 Y Xand his MUY = 5 X Y. Which of the following allocations are on the contract curve?
ANSW✅✅(XA = 14, YA = 20), (XB = 14, YB = 20)
The above figure depicts the Edgeworth box for two individuals, Al and Bruce. If the endowment is at
point a and trade is possible, which of the following points are possible equilibria? ANSW✅✅c and
d
Joe and Rita each have some milk and cookies (milk on the horizontal axis). Joe's MRS of cookies for
milk is 2. Rita's MRS of cookies for milk is 4. Which of the following statements is TRUE?
ANSW✅✅Both Rita and Joe can be made better off if Rita gives Joe some cookies in exchange for
milk.
The so-called "death tax" might _____. ANSW✅✅aim to alter endowments consistent with the
Second Theorem of Welfare Economics
Any competitive equilibrium is Pareto-efficient because, with a competitive equilibrium, ______.
ANSW✅✅the marginal rates of substitution are equal for all consumers
Assume a government likes a particular equilibrium along the contract curve. It can achieve that
equilibrium through competition and income redistribution. ANSW✅✅True
Competition results in the efficient product mix because _____. ANSW✅✅producers are setting
MRT equal to minus the price ratio while consumers are setting MRS equal to minus the price ratio,
ensuring that MRT will equal MRS
Suppose the production possibilities for two countries, producing either food or clothing, are shown
in the above figure. They can produce any linear combination as well. Measuring food on the
AND CORRECT ANSWERS
If firms in a competitive market are not identical, then an increase in cost will ______.
ANSW✅✅push the most inefficient firms out of the market
Suppose when a market has four firms, average economic profit is $1,000 per month. When the
market has 5 firms, the average economic profit is $-50 per month. This suggests that ______.
ANSW✅✅the long-run equilibrium number of firms is between four and five
The owners of sports franchises often complain that free-agency (open bidding for player services)
threatens their profitability and, thus, their long-run viability. Given your knowledge of perfect
competition, which of the following is correct? ANSW✅✅Team owners might be correct in as
much as free-agency bids up the price of players so that economic profits from those players equals
zero.
The above figure shows the market demand curve for telecommunication while driving one's car
(time spent on the phone). The current price is $0.35 per minute. If the price were to increase by ten
cents per minute, consumer surplus would ______. ANSW✅✅fall by $84
Sarah's demand curve for shoes has the same slope as Pete's; however, it lies to the right of Pete'd
demand curve. An increase in the price of shoes will cause ______. ANSW✅✅Sarah to incur a
greater loss of consumer surplus than Pete will
Suppose the market supply curve is p = 5 + Q. At a price of $10, producer surplus equals _____.
ANSW✅✅12.50
Producer surplus equals total revenue minus the sum of all marginal cost. ANSW✅✅True
Mister Jones was selling his house. The asking price was $220,000, and Jones decided he would take
no less than $200,000. After some negotiation, Mister Smith purchased the house for $205,000.
Mister Jones' producer surplus is ______. ANSW✅✅$5,000
Economists claim that measuring society's welfare as CS + PS ______. ANSW✅✅treats the gains
to consumers and producers equally
,If activists successfully lobbied government to force firms to produce more output than they
normally would in a perfectly competitive market, ______. ANSW✅✅total surplus in the market
would decline
In economics, welfare analysis focuses on _____. ANSW✅✅none of these choices
The services of real estate brokers are provided in a competitive market. If the state Board of
Realtors enacts several requirements that limit the number of real estate brokers, then social
welfare will most likely ______. ANSW✅✅decrease, although producers are made better off
The above figure shows the supply and demand curves for milk. If the government passes a $2 per
gallon specific tax, the loss in social welfare will equal _______. ANSW✅✅f + g
The above figure shows the supply and demand curves for apartment units in a large city. The area
"c" represents ______. ANSW✅✅a transfer from producers to consumers if a rent ceiling of $350
is imposed
The welfare loss of a tariff equals that of an import quota that leads to the same levels of imports.
ANSW✅✅False
A ban on imports, a tariff, or a quota raises the price to domestic consumers. This means that
consumers will buy less of the product at a higher price. The loss associated with this is called
_______. ANSW✅✅consumption distortion losss
Employers in a city must pay a specific tax of $t per hour worked by their employees, while
employers in the suburbs of the city do not have an employment tax. What does a general
equilibrium approach predict regarding the wages and employment of both the city and suburban
workers if the city decides to substantially reduce their employment tax rate? ANSW✅✅Wages
will increase in both the city and the suburbs, employment will increase in the city, but decrease in
the suburbs.
There are two closely related crops, X and Y, with the following demand functions: QX = 180 - 2PX +
PY and QY = 150 + PX - PY where QX is the quantity of X, PX is the price of X, QY is he quantity of Y,
and PY is the price of Y. These two crops are grown in two widely separated countries so there is no
interrelationship between the supply curves. The short-run perfectly inelastic supply for X is 150,
, while the short-run perfectly inelastic suppy curve for Y is 100. In equilibrium, the prices of X and Y
are _____ and _____. ANSW✅✅Px = 80; Py = 130
The effects of a price change are always understated by a partial equilibrium analysis when
compared to a general equilibrium analysis. ANSW✅✅False
Only individuals A and B live on a desert island where no production is possible. A is endowed with
15 units of good X and 17 units of good Y. B is endowed with 13 units of good X and 23 units of good
Y. In the Edgeworth box, good X is measured on the horizontal axis. Individual A's utility function is
UA = 3XY so her MUX = 3Y and her MUY = 3X. Individual B's utility function is UB = 10 X Yso his MUX
= 5 Y Xand his MUY = 5 X Y. Which of the following allocations are on the contract curve?
ANSW✅✅(XA = 14, YA = 20), (XB = 14, YB = 20)
The above figure depicts the Edgeworth box for two individuals, Al and Bruce. If the endowment is at
point a and trade is possible, which of the following points are possible equilibria? ANSW✅✅c and
d
Joe and Rita each have some milk and cookies (milk on the horizontal axis). Joe's MRS of cookies for
milk is 2. Rita's MRS of cookies for milk is 4. Which of the following statements is TRUE?
ANSW✅✅Both Rita and Joe can be made better off if Rita gives Joe some cookies in exchange for
milk.
The so-called "death tax" might _____. ANSW✅✅aim to alter endowments consistent with the
Second Theorem of Welfare Economics
Any competitive equilibrium is Pareto-efficient because, with a competitive equilibrium, ______.
ANSW✅✅the marginal rates of substitution are equal for all consumers
Assume a government likes a particular equilibrium along the contract curve. It can achieve that
equilibrium through competition and income redistribution. ANSW✅✅True
Competition results in the efficient product mix because _____. ANSW✅✅producers are setting
MRT equal to minus the price ratio while consumers are setting MRS equal to minus the price ratio,
ensuring that MRT will equal MRS
Suppose the production possibilities for two countries, producing either food or clothing, are shown
in the above figure. They can produce any linear combination as well. Measuring food on the
