Question

1. Average fixed costs

		are always greater than average total costs
		are constant as Q increases
		are minimized when MR=MC
		decrease and then increase as Q increases because of specialization
		always decrease as Q increases because fixed costs are constant

2. Deadweight loss is guaranteed to occur when

		the maximum level of total welfare (total surplus) is not achieved
		producer surplus is reduced
		producer surplus is greater than consumer surplus
		tax revenue is positive
		consumer surplus is reduced

3. Imagine a market where the demand and supply are described by the following equations:

The quantity supplied equation is Qs = 2P - 20

The quantity demanded equation is Qd = 40 - P

Suppose the price is $30. What occurs at this price? ( note that $30 is not necessarily the answer to the other question that uses these equations )

		surplus of 15
		surplus of 30.
		shortage of 15
		shortage of 30

4. Imagine a market where the demand and supply are described by the following equations:

The quantity supplied equation is Qs = 2P - 20

The quantity demanded equation is Qd = 40 - P

Which of the following prices would be a binding price ceiling?

		$15
		$20
		$30

5.You decide to start a delivery service business that will cost you $10,000 and will yield revenue equal to $25,000 one year later. To fund the business, you draw $10,000 out of your savings account, which has a 5% interest rate. You also give up your job as a fast food worker, which pays you $5,000 a year. Which of the follow is included in the implicit cost?

		The $10,000 you took out of bank
		The $5000 you gave up as a fast food worker
		The money you would have earned with 5% interest if you left the $10,000 in the bank
		The $15,000 difference between the $25,000 revenue and the $10,000 cost
		Both the $5000 you gave up as a fast-food worker and the money you would have earned with 5% interest if you left the $10,000 in the bank

6. Which of the following conditions will result in the firm making a positive economic profit?

		P  ATC at the profit-maximizing q*
		P  ATC at the profit-maximizing q*
		ATC  P  AVC at the profit-maximizing q*
		P = AVC at the profit-maximizing q*
		P = ATC at the profit-maximizing q*

7.

Which of the following will cause a movement along a good’s supply curve?

		the price of the good increases
		the government places a subsidy on the producer of the good
		more firms enter the market
		the production process of the good becomes more efficient
		an increase in the price of an input

Answer 1

1. Average fixed cost always decreases as Q increases because fixed cost is constant.

AFC = TFC / Q

Answer: Option (E)

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2.

Deadweight loss is guaranteed to occur when the maximum level of total welfare (total surplus) is not achieved.

Answer: Option (A)

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3. Qs = 2P - 20

Put P = 30

=> Qs = 2(30) - 20

=> Qs = 40

Qd = 40 - P

Put P = 30

=> Qd = 40 - 30

=> Qd = 10.

At a price of $30, Qs is 40 and Qd is 10.

Since, quantity supply (Qs) is higher than quantity demand (Qd) at a price of $30 by 30 units. It means at a price of $30, there is surplus of 30 units

Answer: Option (B)

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(4) Qs = 2P - 20

Qd = 40 - P

At equilibrium, Qd = Qs

=> 2P - 20 = 40 - P

=> 2P + P = 40 + 20

=> 3P = 60

=> P = (60 / 3)

=> P = 20.

Equilibrium price is 20. A price ceiling is said to be binding if it is set below the equilibrium price.

Hence, $15 would be the binding price ceiling.

Answer: Option (A)

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(5) Implicit cost is the opportunity cost of doing any activity. If you decided to start your delivery service business then you have to left your current job, which pays you $5000 and you have to use your saving account money which could earn 5% interest.

Hence, implicit cost of doing your own business would be the following.

Both the $5000 you gave up as a fast-food worker and the money you would have earned with 5% interest if you left the $10,000 in the bank

Answer: Option (E)

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(6) P > ATC at the profit-maximizing q* will result a positive economic profit.

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(7) A change in the price of good leads to a movement along the supply curve.

Answer: Option (A)