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Microeconomics II
Homework#1
Spring 2009
Due day: 3/17
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I. Multiple choice question
01) A special license is required to operate a taxi in many cities. The number of
licenses is restricted. More drivers want licenses than are issued. This describes a
non-perfectly competitive market because
A) taxi services are very different.
B) firms cannot freely enter and exit the market.
C) transaction costs are high.
D) the government generates revenue from the licenses.
Answer: B
Topic: Competition
02) If a firm operates in a perfectly competitive market, then
A) all firms will advertise.
B) no firms will advertise.
C) the market leader will advertise.
D) new firms will advertise.
Answer: B
Topic: Competition
03) If a firm makes zero economic profit, then the firm
A) has total revenues greater than its economic costs.
B) must shut down.
C) can be earning positive business profit.
D) must have no fixed costs.
Answer: C
Topic: Profit Maximization
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04) Firms are ___________ with an economic profit of zero, they will
__________ in the industry because they __________ be better off in another
industry.
A) safisfied, stay, won't
B) unsatisfied, leave, will
C) satisfied, leave, will
D) unsatisfied, stay, won't
Answer: A
Topic: Zero Profit for Competitive Firms in the Long Run
05) Suppose the market supply curve is p = 5 + Q. At a price of 10, producer
surplus equals
A) 50.
B) 25.
C) 12.50.
D) 10.
Answer: C
Topic: Producer Welfare
Figure 1.1
06) The above figure shows supply and demand curves for apartment units in a
large city. If the city government passes a law that establishes $350 per month as
the legal maximum rent, the loss in social welfare equals
A) b + c.
B) f.
C) a.
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D) f + g.
Answer: D
Topic: Policies that Create a Wedge
07) The above figure shows supply and demand curves for apartment units in a
large city. If the city government passes a law that establishes $350 per month as
the legal maximum rent, deadweight loss occurs because
A) consumers place a greater value on the last apartment unit than the cost to
supply it.
B) the supplier of the last apartment unit receives a rental price that is less than
the marginal cost of supplying it.
C) the quantity of apartments supplied has decreased.
D) All of the above.
Answer: A
Topic: Policies that Create a Wedge
8. As opposed to general equilibrium analysis, partial equilibrium analysis looks
A) at an equilibrium and changes to it in a single, isolated market.
B) at how changes in one market effect other markets.
C) at how equilibrium is determined in all markets simultaneously.
D) at either price or quantity movements.
9. Any policy change that results in a Pareto-superior allocation
A) will increase welfare under certain conditions.
B) must increase welfare.
C) will leave welfare unchanged.
D) will have an unpredictable effect on welfare.
10. Every point on the joint production possibilities frontier represents
A) an initial endowment.
B) inefficient production.
C) the marginal rate of substitution of goods for each producer.
D) at least one producer specializing in production.
11. Any competitive equilibrium is Pareto efficient because, with a competitive
equilibrium
A) the marginal rates of substitution are equal for all consumers.
B) the price line is the contract curve.
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C) mutual gains from trade exist.
D) the slope of the price line equals the ratio of the MRS for all consumers.
12. If the government attempts to force a natural monopoly to charge a price
equal to marginal cost
A) the natural monopoly will shut down.
B) the natural monopoly will still make high profits.
C) the natural monopoly's marginal cost curve will shift up.
D) Total welfare is maximized.
13. The situation in which
one firm can produce the total output of the market
at lower cost than several firms is called.
A) natural monopoly.
B) pure monopoly.
C) ruling monopoly.
D) cost monopoly.
14. If the government desires to raise a certain amount of revenue by taxing a
monopoly, an ad valorem tax will
A) generate the same loss of consumer surplus as a specific tax.
B) generate a greater loss of consumer surplus than a specific tax.
C) generate a smaller loss of consumer surplus than a specific tax.
D) generate no loss of consumer surplus.
15. The more elastic the demand curve, a monopoly
A) will have a larger Lerner Index.
B) will face a lower marginal cost.
C) will earn more profit.
D) will lose more sales as it raises its price.
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II. Problem
1.(ch11 Q24)
1. The inverse demand curve that a monopoly faces is P=10Q(-1/2) . The
firm’s cost curve is C(Q)=5Q. What is the profit maximizing solution?
Ans:
Set MC MR and solve.
dR
d
d

(10Q 1/ 2  Q) 
(10Q1/ 2 )  5Q 1/ 2
dQ dQ
dQ
MC  5
MR 
Q*  1
p*  10
2.(ch 10 Q19)
2. Mexico and the United States can both produce food and toys. Mexico has
100 workers and the United States has 300 workers. If they do not trade,
the United States consumers 10 units of food and 10 toys, and Mexico
consumers 5 units of food and 1 toy. The following table shows how many
workers are necessary to produce each good:
Workers per pound of food
Workers per toy
Mexico
United States
10
50
10
20
a. In the absence of trade, how many units of food and toys can the United
States produce? How many can Mexico produce?
b. Which country has a comparative advantage in producing food? In
producing toys?
c. Draw the production possibility for each country and show where the two
produce without trade. Label the axes accurately.
d. Draw the production possibility frontier with trade.
e. Show that both countries can benefit from trade.
Ans:
a. In the absence of trade, the United States can produce 30 units of food and
15 units of toys. Mexico can produce 10 units of food and 2 units of toys.
b. The United States has comparative advantages in producing toys and
Mexico has comparative advantages in producing food.
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c. The left and middle diagram in Figure 10.6 show the production frontier
for the United States and Mexico.
d. The right diagram in Figure 10.6 shows the joint production frontier.
e. As shown in the joint production frontier, if the United States produces 5
units of food and 12.5 units of toys and Mexico produces 10 units of food,
the total amount of goods is larger than when there is no trade. Hence both
countries can benefit from trade. (Not the only answer)
Figure 10.6
3.(ch10 Q20)
3. Adrienne and Stephen consume pizza, Z and cola, C. Adrienne’s utility
function is UA=ZA+CA, and Stephen’s is U S  Z S0.5C S0.5 . Their endowments
are ZA=10, CA=20, ZS=20, and CS=10.
a. What are the marginal rates of substitution for each person at their
endowment point?
b. What is the formula for the contract curve? Draw an Edgeworth box and
indicate the contract curve.
Ans:
a. The marginal rate of substitution is 1 for A and 0.5 for S.
b. The contract curve is on the 45 degree line, which is the dark section as
shown in Figure 10.7.
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Figure 10.7
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