Question

1. Consider a product known as Aguillons.

Note the following two facts:

1. Its PES = 2.5.

2. The product is considered essential by people.

What can we say about the tax burden?

a. The tax burden is paid by only one side of the market

b. The tax burden is determined by who the tax is levied on

c. The tax burden will fall equally on the buyers and sellers

d. The tax burden will fall mostly on the buyers

e. The tax burden will fall mostly on the suppliers

2. Consider the market for new cars. During the Great Recession, demand for this product fell by a lot. From this information, we can infer which of the following about this good’s Income Elasticity of Demand?

a.It is less than zero

b. It equals zero

c.It is greater than zero

d. It is between -0.1 and 0.1

e. There is no such thing as the Income Elasticity of Demand

3. Suppose we have the following information:

P=$22; q=100;

TC=$1,100 for q=0;

AVC=$11.00 for q=100;

MR=$10

What is the profit for q=100?

a. -$50

b. $0

c. $50

d. $100

e. Not enough information

4. Suppose we have a market where there are 100 firms and the economic profit to each firm is $10,000. If the market is competitive, what we do know will happen in the long run?

a. Five firms will exit the market

b. There will be more than 100 firms in this market

c. The market price will increase even further

d. The quantity produced by each firm will not change

e. The market will transform into a monopoly

Answer 1

Ans 1. Option d

This is because the good is considered essential by the consumers, making its demand inelastic and because supply is elastic which means that the tax burden mostly on the buyer.

Ans 2. Option c

In great recession, income fells which causes the demand for cars to fall which means the income elasticity of demand is greater than zero i.e. decrease in income leads to decrease in demand for cars.

Ans. Option b

For q = 0, TC = 1100

This means that fixed cost, FC = $1100

At q = 100, TVC = AVC * 100 = $1100

=> At q = 100, TC = TVC + FC = $2200

We have, Total Revenue, TR = P*q = 22*100 = $2200

Therefore, profit = TR - TC = 2200 - 2200 = 0

Ans 4. Option b

As firms earn a positive profit, more firms are attracted to the industry in long run, thus, there will be more than 100 firms in the industry in long run.

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