Question

Q1. The minimum wage is an example of a ________ that might lead to a _________.

	a) price ceiling; shortage of labor
	b) price floor; shortage of labor
	c) price ceiling; surplus of labor
	d) price ceiling; deadweight loss
	e) price floor; black market for labor

Q2. When I pay less for a good than I actually would have been willing to pay,

	a) I am behaving unethically
	b) I receive some producer’s surplus
	c) I receive some consumer’s surplus
	d) there is a surplus in the market
	e) the producer is left with no surplus

Q3. If incomes rise and at the same time a technological breakthrough lowers the cost of producing weazils, then

	a) the price of weazils will definitely fall
	b) the price of weazils will definitely rise
	c) the equilibrium quantity of weazils will rise if weazils are a normal good
	d) the price will rise if weazils are an inferior good
	e) the price will fall if weazils are a normal good

Q4. In long-run equilibrium in a perfectly competitive market,

	a) price equals marginal cost.
	b) price equals the minimum of (long-run) average cost.
	c) price equals marginal revenue.
	d) profits are zero.
	e) all of the above.

Q5. Which of the following lists the correct sequence of events that will take place when a perfectly competitive firm earns a positive profit?

	a) price falls, firms exit, profits fall
	b) firms exit, supply shifts in, price rises, profits reach zero
	c) supply shifts out, firms exit, price rises, profits stabilize
	d) firms enter, supply shifts out, price falls, profits reach zero
	e) none of the above.

Q6. If an increase in wages raises the cost of producing lawnmowers, then

	a) demand will shift out causing equilibrium price and quantity to rise.
	b) supply will shift in causing equilibrium price to rise and equilibrium quantity to fall.
	c) supply will shift in causing equilibrium price and quantity to rise.
	d) demand will shift in causing equilibrium price and quantity to fall.
	e) demand will shift out causing equilibrium price to fall and equilibrium quantity to rise.

Q7.Long run supply in a perfectly competitive market

	a) is upward sloping.
	b) is downward sloping.
	c) is horizontal.
	d) is not defined.
	e) may be upward sloping, downward sloping, or horizontal.

Answer 1

Ans 1:

e) price floor; black market for labor

(Price floors are the minimum price laws. If the minium wage is set above equilibrium level, then it causes surplus of labor and would create black market for labor, in which labor would be working below minimum wage level in order to get employment).

Ans 2:

c) I receive some consumer’s surplus

(Consumer surplus is the area above price level and below demand curve)

Ans 3: (c)

the equilibrium quantity of weazils will rise if weazils are a normal good

This is because both demand and supply curve shift to right, but we do not know the magnitude of shift of both the curves, so the change in price is ambiguous but the increase in quantity is for sure. Also, if the quantity is normal good, then a rise in income causes rise in quantity.

Ans 4: (C) All of the above. This is because, Price is equal to marginal revenue in perfect competition. The long run equilibrium point is, price equal to lowest point of long run average total cost, where MC is intersecting the LRAC.

Ans 5:

d)	firms enter, supply shifts out, price falls, profits reach zero

Because as existing firms are earning profits, new firm will enter which increases the supply and lowers the price which drives out the profit level.

Ans 6:

b)	supply will shift in causing equilibrium price to rise and equilibrium quantity to fall.

This is because as cost of production rises, supply curve shift to left, which raises price level and decreases quantity level.

Ans 7:

e) may be upward sloping, downward sloping, or horizontal.

Because if the industry is constant cost industry, then long run supply curve will be horizontal in shape.

If the industry is increasing cost industry, then long run supply curve will be Upward in shape

If the industry is decreasing cost industry, then long run supply curve will be Downward in shape