| Note.(3/18/99, 11:36 am.) An alert student pointed out to me that in the first posting of these questions, the answer to question 2 was incorrectly listed as E. It should be A. This is now fixed. These are some problems that appeared on past quizzes, but with new numbers. Retreads from Economics 1 1. A small tropical island's banana market has 70 banana growers and 25 banana consumers. Each banana grower can sell at most one sack of bananas. Each consumer can consume either or 1 sack of bananas. There are 30 low-cost banana producers, each of whom can produce bananas at a cost of $30 per sack and 40 high-cost banana producers, each of whom can produce bananas at a cost of $60 per sack. There are 10 consumers who are willing to pay up to $40 a sack and 15 consumers who are willing to pay up to $20 a sack for bananas. What is the competitive equilibrium price of bananas on this island? (a) $20 (b) $60 (c) $30 (d) $50 (e) $40 2. What is the competitive equilibrium number of sacks of bananas sold on this island? (a) 10 (b) 40 (c) 15 (d) 15 (e) 50 3. In competitive equilibrium, the total amount of profit made by banana growers will be: (a) $-15 (b) $-50 (c) $100 (d) $0 (e) $50 4. If the demand curve is given by a straight line with the equation P=117-Q (over the range of quantities from to 100) and the supply curve by a straight line P=30+Q/2, what will be the competitive equilbrium price? (a) $61 (b) $30 (c) $74 (d) $59 (e) $44 5. Boomtown is a growing community bounded by mountains and the sea. The remaining undeveloped land in town has been subdivided into 1,000 residential lots which will be offered for sale. The demand curve for residential lots in Boomtown is described by the formula P=800,000-200Q where P is the price and Q is the number of lots sold. The market for these lots is competitive and sellers will try to get the highest price they can for them. These lots are of no value for any use other than residential housing. If there are no taxes on the sale of a lot, what will be the competitive price per lot? (a) $440,000 (b) $800,000 (c) $10,000 (d) $600,000 (e) $4,000 6. If the city council of Boomtown imposes a sales tax of $60,000 per lot which is collected from the buyers when they purchase a lot, what will be the effect of the tax on the equilibrium price that buyers pay to sellers of residential lots in Boomtown? (a) The tax will have no effect on the price paid that buyers pay to sellers. (b) The tax will cause the price that buyers pay to sellers to decrease by $30,000 (c) The tax will cause the price that buyers pay to sellers to decrease by $60,000. (d) The tax will cause the price paid by buyers to decrease by more than $30,000 but less than $60,000. (e) The tax will cause the price that buyers pay to sellers to increase, but not by as much as $60,000. 7. The supply curve in the market for residential lots in Boomtown (a) is a vertical line which intersects the horizontal axis at 1,000. (b) is a straight line extending from the origin to the point where quantity is 1,000 and price is $800,000. (c) consists of two straight line segments, one vertical and one horizontal. (d) is a step function, with three steps. (e) is a straight line, extending from (0,1000) to (800,000,0) 8. The excess burden due to the tax imposed on buyers of residential lots in Boomtown is equal to (a) the total revenue collected by the tax. (b) twice the total revenue collected by the tax. (c) more than twice the total revenue collected by the tax. (d) more than zero, but less than the total revenue collected by the tax. (e) zero. 9. In the rental housing market in the town of Enchilada Grande, the price elasticity of demand is -3 and the price elasticity of supply is 2. The market is currently in competitive equilibrium. A rent-control ordinance is proposed which would set the maximum rent at a rate 20% lower than the current rate. If this proposal is adopted (a) the demand curve in Enchilade Grande would shift down by 60%. (b) the supply curve in Enchilade Grande would shift down by 40%. (c) the demand curve in Enchilade Grande would shift up by 60%. (d) the demand curve in Enchilade would shift up by 100%. (e) none of the above. 10. If the rent-control ordinance is adopted in Enchilada Grande, then the number of housing units that are actually rented will (a) increase by 60%. (b) increase by 40%. (c) decrease by 40%. (d) decrease by 60%. (e) not change. 11. Residents of the town of Los Locos (population 100) like to drive noisy offroad vehicles, but they hate the disturbance and dust caused by each others' vehicles. Each vehicle that is purchased by a resident cause $20 worth of damage to each of the 100 residents. There are 10 residents who are willing to pay up to $4000 for an offroad vehicle. There are 40 residents who are willing to pay up to $3000 for an offroad vehicle and there are 50 residents who are willing to pay up to $2500 for an offroad vehicle. The price of offroad vehicles is $1200. In the absence of any governmental interference, how many residents of Los Locos would buy offroad vehicles and how many people in Los Locos would be better off if offroad vehicles were outlawed? (a) 100 vehicles would be purchased and 90 residents would be better off if they were outlawed. (b) 50 vehicles would be purchased and nobody would be better off if they were outlawed. (c) 50 vehicles would be purchased and 50 residents would be better off if they were outlawed. (d) 10 vehicles would be purchased and 90 residents would be better off if they were outlawed. (e) 100 units would be purchased and all 100 residents would be better off if they were outlawed. 12. Suppose that the town of Los Locos imposes a tax of $2000 on every resident who buys an offroad vehicle and the town distributes the revenues collected from the tax equally among all residents of Los Locos. With the tax in place, how many people in Los Locos will buy offroad vehicles and how much tax revenue will the government distribute to each resident? (a) 50 residents will buy offroad vehicles and each resident will get a rebate of 1,000. (b) 10 residents will buy offroad vehicles and each resident will get a rebate of $200. (c) Nobody will buy an offroad vehicle and there will be no rebates. (d) Everybody will buy an offroad vehicle and everyone will get a rebate of $2000. (e) None of the above. 13. The residents of Los Locos decided to vote on whether to impose a tax of $2000 on each offroad vehicle purchaser. (Assume that with the tax in place, the amount of damage caused by each offroad vehicle that is purchased is still $20 to each resident of Los Locos.) In order to decide how to vote, each of them has to figure out whether he or she will be better off with or without the tax. Who would gain and who would lose from the tax on offroad vehicles? (a) The residents with low buyer values for offroad vehicles will be better off with the tax than they were with no tax and the residents with intermediate and high buyer values will be worse off. (b) Every resident will be worse off. (c) The residents with high buyer values will be better off with the tax and the residents with low buyer values will be worse off with the tax. (d) The residents with low buyer values and with intermediate buyer values will be better off with the tax and the residents with high buyer values will be just as well off with the tax as without the tax. (e) The residents with high buyer values would be worse off with the tax, the residents with intermediate buyer values would be exactly as well off with or without the tax and the residents with low buyer values would be better off with the tax. 14. A profit-maximizing firm in a competitive market has fixed costs of $2,000 and variable costs of $50 per unit sold. It has a capacity of 50 units of output. In the short run it can not avoid its fixed costs. In the long run it could avoid its fixed costs by shutting down. In the short run, this firm (a) will supply no output at prices below $50 and will supply 50 units at prices above $50. (b) will supply no output at prices below $90 and will supply 50 units at prices above $90. (c) will supply no output at prices below $50, will supply 25 units at prices between $50 and $90, and will supply 50 units at prices above $90. (d) will supply 50 units at any price above 0. (e) will have a supply curve that is an upward-sloping straight line passing through the origin, with slope 5. 15. In the long run, the profit-maximizing firm described in the previous question would be able to avoid its fixed costs by shutting down and producing zero output. In the long run, this firm (a) will supply no output at prices below $50 and will supply 50 units at prices above $50. (b) will supply no output at prices below $90 and will supply 50 units at prices above $90. (c) will supply 50 units of output at any price above 0. (d) will supply no output at prices below $50, will supply 25 units at prices between $50 and $90, and will supply 50 units at prices above $90. (e) will have a supply curve that is an upward-sloping straight line passing through the origin, with slope 5. 16. The small island nation of Ruritania is populated by two farmers, Alf and Barney. Each farmer has 100 acres. The land can be used either for growing wheat or as pasture for beef cattle. Alf's land is better than Barney's land. Each acre that Alf plants to wheat will yield 70 bushels of wheat per year. Each acre that Alf devotes to pasture will yield 90 pounds of beef per year. Each acre that Barney plants to wheat will yield 35 bushels of wheat per year and each acre that Barney devotes to pasture will yield 40 pounds of beef per year. (a) Alf's farm has absolute advantage in the production of beef and comparative advantage in the production of wheat. (b) Barney's farm has comparative advantage in the production of beef. (c) Barney's farm has comparative advantage in the production of wheat. (d) Alf's farm has comparative advantage in both beef and wheat. (e) More than one of the above statements is true. 17. We can draw a national production possibility frontier for the island of Ruritania which shows the combinations of total amounts of beef and wheat that can produced when resources in Ruritania are allocated efficiently. If we graph total wheat production on the horizontal axis and total beef production on the vertical axis then the production possibility frontier consists of (a) two line segments, one of which extends from (0,13,000) to (3,500,9,000) and one of which extends from (3,500,9,000) to (10,500,0). (b) a single line segment extending from (0,13,000) to (10,500,0). (c) two line segments, one of which extends from (0,4,000) to (3,500,0) and one of which extends from (0,9,000) to (7,000,0). (d) two line segments, one of which extends from (0,13,000) to (7,000,4,000) and one of which extends from (7,000,4,000) to (10,500,0). (e) two line segments, one of which extends from (0,13,000) to (4,000,9,000) and one of which extends from (4,000,9,000) to (10,500,0). Answer Key 1. C 2. A 3. D 4. D 5. D 6. C 7. A 8. E 9. E 10. C 11. A 12. B 13. D 14. A 15. B 16. C 17. A | |
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