Quiz (II) - Answer Sheet
(ECON 202-505)
Oct 31 2012
(True / False) Questions (1-10)
Answer (T) if the statement is true, otherwise (F). Read them carefully.
(4 point each)
1. If the government imposes a binding price ceiling in a market, then the producer surplus in
that market will increase. (F)
2. The equilibrium of supply and demand in a market maximizes the total benefits to buyers
and sellers of participating in that market. (T)
3. When a tax is imposed on sellers, consumer surplus and producer surplus both decrease. (T)
4. The demand for bread is less elastic than the demand for donuts; hence, a tax on bread will
create a larger deadweight loss than will the same tax on donuts, other things equal. (F)
5. Accounting profit is greater than or equal to economic profit. (T)
6. The typical total-cost curve is U-shaped. (F)
7. In the short run, if a firm produces nothing, total costs are zero. (F)
8. By comparing the marginal revenue and marginal cost from each unit produced, a firm in a
competitive market can determine the profit-maximizing level of production. (T)
9. A dairy farmer must be able to calculate sunk costs in order to determine how much revenue
the farm receives for the typical gallon of milk. (F)
10. In the short run, a firm should exit the industry if its marginal cost exceeds its marginal
revenue. (F)
Short Answer Questions (1-4)
1. Refer to Figure 1. (15 points)
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Figure 1: Demand and Supply Curves
a. At the equilibrium price, total surplus is ($1,120). (5 points)
b. If the price decreases from $22 to $16 due to a shift in the supply curve, consumer surplus
increases by ($360). (5 points)
c. Assume demand increases and as a result, equilibrium price increases to $22 and equilibrium
quantity increases to 110. The increase in producer surplus due to new producers entering the
market would be ($90). (5 points)
2. Claudia would be willing to pay as much as $100 per week to have her house cleaned. John’s
opportunity cost of cleaning Claudia’s house is $70 per week. (16 points)
a. If Claudia pays John $80 to clean her house, Claudia’s consumer surplus is ($20).(3 points)
b. If John cleans Claudia’s house for $80, John’s producer surplus is ($10).(3 points)
c. Assume Claudia is required to pay a tax of $40 when she hires someone to clean her house for a
week. Which of the following is correct? (a) (5 points)
a. Claudia will now clean her own house.
b. John will continue to clean Claudia’s house, but his producer surplus will decline.
c. Total economic welfare (consumer surplus plus producer surplus plus tax revenue) will
increase.
d. Claudia will continue to hire John to clean her house, but her consumer surplus will decline.
d. Assume Claudia is required to pay a tax of $15 when she hires someone to clean her house.
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Which of the following is true? (d) (5 points)
a. Claudia will continue to hire John to clean her house, but her consumer surplus will decline.
b. John will continue to clean Claudia’s house, but his producer surplus will decline.
c. Total economic welfare (consumer surplus plus producer surplus plus tax revenue) will
decrease.
d. All of the above are correct.
Number of Workers
Output
Fixed Cost
Variable Cost
Total Cost
0
0
$ 50
$0
$ 50
1
90
$ 50
$ 20
$ 70
2
170
$ 50
$ 40
$ 90
3
230
$ 50
$ 60
$ 110
4
240
$ 50
$ 80
$ 130
Table 1: Output and Various Costs
3. Refer to Table 1. (19 points)
a. Draw the various cost curves on the graph. You do not need to specify each value of each curve,
but should indicate each curve. (Shape or trend)
(i) Total Cost Curve, Fixed Cost Curve, and Variable Cost Curve (6 points)
(ii) Average Total Cost Curve, Average Fixed Cost Curve, Average Variable Cost Curve, and Normal Marginal Cost Curve (8 points)
Ans) Refer to the textbook.
b. The marginal product of the third worker is ( 60 units ). (2 points)
c. At which number of workers does diminishing marginal product begin? (3 points)
Ans) 2
4. a. Refer to Figure 2. Which line segment best reflects the short-run supply curve for this
firm? (5 points)
Ans) ABCF
b. Refer to Figure 2. If the firm is in a short-run position where P < AVC, it is most likely to
be on what segment of its supply curve? (5 points)
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Ans) AB
Figure 2: Average Total Cost and Marginal Cost Curve
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