Question

1. Suppose that a widget is considered a normal good. What is the impact of a decrease in income on the perfectly competitive market for widgets?

1. The price of widgets will increase and the quantity exchanged will decrease.
2. The price of widgets will decrease and the quantity exchanged will decrease
3. The price of widgets will increase and the quantity exchanged will increase.
4. The price of widgets will decrease and the quantity exchanged will increase.

2. What is the absolute value of price elasticity of demand from (P =6, Q=900)   to (P = 8, Q= 800)

Round your answer to 3 decimal points and interpret the meaning of your answer.

3. A decrease in demand for oil and an increase in supply of oil will:

     A) quantity decreases, but price may either increase, decrease, or remain unchanged.

     B) price increases, but quantity may either increase, decrease, or remain unchanged.

     C) quantity increases, but price may either increase, decrease, or remain unchanged.

     D) price decreases, but quantity may either increase, decrease, or remain unchanged.

4. A firm in a perfectly competitive industry is producing where short run marginal cost is less than price. Total revenue is $1700; short run total cost is $1800 and total fixed cost is $500. The firm’s best strategy in the short run is to

A) Increase its price.              B) Increase its output.

C) Decrease its output.           D) Shut down.

E) Maintain output at its present level.

5. A firm in a perfectly competitive industry is producing where short run marginal cost is equal to price. Total revenue is $700; short run total cost is $800 and total fixed cost is $300. The firm’s best strategy in the short run is to

A) Increase its price.              B) Increase its output.

C) Decrease its output.           D) Shut down.

E) Maintain output at its present level.

6. Productive efficiency refers to:

A) maximizing profits by producing where MR = MC.              B) setting TR = TC.

C) cost minimization, where P = minimum ATC.                D) equilibrium, where MB = MC

1. Cross Price elasticity of demand between two substitute goods is:

     A)   positive.    B) unitary.    C) zero.    D) negative.

2. Allocative efficiency occurs when producing the quantity where:

A) Marginal Revenue = Marginal Cost.                          B) Marginal Benefits = Marginal Cost.

C)   Price = minimum Average total Cost.                      D) Total Revenue = Total Cost.

3. A normative statement is one which

A) is based on the law of averages.                                       B) is based on generalizations.

C) is based upon, subjective beliefs or opinions.                  D) is based on facts.

4. Which of the following goods has the characteristic of non-rivalry, and non-excludability?

A) congested highway with a toll booth.                            B) A cell phone signal

   C) a pair of pants.                                                                D) asteroid defence.

Answer 1

1. In case of normal goods the income effect is positive. A decrease in income of the consumers will decrease the quantity demanded and thus the price decrease.

Answer: B. The price of widget will decrease and the quantity exchanged will decrease.

2. Price elasticity of demand is the degree of change in quantity demanded due to a given change in price. PED= percentage change in quantity demanded/percentage change in price. Percentage change in quantity demanded = Q1-Q0/Q0×100. Percentage change in price = P1-P0/P0×100. Q1 is the new quantity demanded and Q0 is the initial quantity demanded. P1 is the new price and P0 is the initial price.

%∆Q= 800-900/900×100= 11.11%

%∆P= 8-6/6×100=33.33

PED= 11.11/33.33=0.333

When PED is less than 1 the demand is inelastic. When the demand is inelastic an increase in price does not reduce the quantity demanded more.

3. When the quantity demanded decrease and quantity supplied increase the price will fall. The fall in price is definite. But the quantity may increase decrease or remain unchanged. The change in quantity depends upon the change in variable which change in a larger quantity.

Answer: D. Price decreases, but the quantity may increase, decrease or remain unchanged.

4. When MC is less than price (MR) the firm can increase its total revenue by increasing its volume of output.

Answer: B. Increase its output.

5. When MC= price a firm under perfect competition does not have any incentive to change its output. The output where MC=MR is the equilibrium level of output.

Answer: E. Maintain output at its present level.

6. Productive efficiency occurs when firm produce a volume of output where price = minimum ATC.

Answer: C. cost minimization, where P= minimum ATC.

7. Allocative efficiency occurs when a firm charge a price where MB=MC.

Answer: B. Marginal benefit= Marginal cost.

8. A normative statement is based on beliefs and opinion and cannot be tested or verified.

Answer: C. is based upon subjective belief or opinion.

9. Defence is an example of public goods where there is no rivalry in consumption and exclusion cannot be applied.

Answer: D. asteroid defence