Deck 2: Modeling the Market Process: a Review of the Basics

Question 1

In perfect competition, the firm faces a perfectly inelastic demand.

Answer 1

False

Question 2

If a market is perfectly competitive, allocative efficiency is achieved at the point where the profit-maximizing firm produces.

Answer 2

True

Question 3

If Q_S = -10 + ½ P, the slope of supply, when conventionally graphed, is +½ .

Answer 3

False

Question 4

Consumer surplus is the net gain to the firm measured as the excess of price over the marginal cost of production summed over all units sold.

Question 5

The supply curve is positively sloped because marginal cost (MC) rises with output (Q).

Question 6

Market demand for a private good is found by vertically summing individual demands.

Question 7

If the price level is such that quantity supplied exceeds quantity demanded, there is excess demand, or a shortage in the market.

Question 8

Two characteristics of a private good are rivalry in consumption and excludability.

Question 9

Equilibrium price is the price level at which Q_D equals Q_S.

Question 10

The sum of the change in consumer surplus plus the change in producer surplus is called deadweight loss to society.

Question 11

The demand faced by the perfectly competitive firm is perfectly elastic, meaning that price and marginal revenue are equal.

Question 12

If a consumer is willing to pay more for a good than he/she actually must pay, he/she enjoys a gain for that unit of output known as consumer surplus.

Question 13

The demand price represents the consumer's willingness to pay for the good.

Question 14

A change in price results in a shift in the demand curve.

Question 15

Assume that the marginal revenue associated with the 12^th unit of output is $25 and the marginal cost is $14. As a result, the firm should produce more, because the marginal profit at that output level is greater than zero.

Question 16

Conventionally, the graph of demand uses the inverse form of the demand function, which is P = f(Q_D).

Question 17

If a firm maximizes output from a stock of available resources, it must be achieving allocative efficiency.

Question 18

When a profit-maximizing firm increases output to Q = 50, its MR = $100 and MC = $124, meaning that total profit falls by $24, so the firm should contract production.

Question 19

Cost-effectiveness requires that resources are allocated such that the additional benefits to society are equal to the additional costs.

Question 20

Producers' decisions are modeled through the demand function, and consumers' decisions are captured by the supply function.

Question 21

If market demand for solar panels is specified as Q_D = 100 - 2.5P, the vertical intercept of demand, as conventionally graphed, is

A) +100
B) -100
C) -2.5
D) +40

Question 22

Allocative efficiency in a market means that resources are appropriated such that

A) the additional social benefits outweigh the additional social costs
B) the additional social benefits outweigh the additional private benefits
C) the marginal social benefits are equal to the marginal social costs
D) the marginal social benefits are greater than the marginal social costs

Question 23

Horizontal summing of individual demands yields

A) the market demand for a private good
B) the market supply of a private good
C) the market demand for a public good
D) the market supply of a public good

Question 24

Suppose that a company produces at a point where its MR is $430 and its MC is $105, this implies that

A) the firm earns a total profit of $325 at that output level
B) the firm's total costs are rising faster than its total revenue
C) the firm's total profit is rising, suggesting that the firm should expand production
D) each unit of output generates an average profit of $325

Question 25

If a firm is maximizing profit, it produces at the point where

A) MR > MC
B) MR = MC
C) TR > TC
D) TR = TC

Question 26

Marginal revenue is defined as

A) the accumulated revenue associated with production
B) ΔTR/ΔQ
C) the change in profit associated with another unit of output produced
D) ΔTC/ΔQ

Question 27

If the demand for recycled plastic is specified as Q_D = 100 - 2.5P, the slope of demand, as conventionally graphed, is

A) -2.5
B) -0.4
C) +100
D) none of the above

Question 28

If a firm is producing at an output level such that the MR is $550 and the MC is $780,

A) the firm incurs a total loss of $230
B) the firm should contract production because marginal profit is less than zero
C) Mπ is +$230
D) the firm should expand its output level because its total revenue is rising by $550

Question 29

Suppose that in the market for bottled water, the market supply is Q_S = 14 + 20P and the market demand is Q_D = 74 - 10P, then equilibrium price is

A) $2
B) $54
C) $6
D) none of the above

Question 30

If a perfectly competitive firm is a profit-maximizer, it produces where

A) MR > MC
B) P > MR
C) P = MC
D) TR = TC

Question 31

Assume that the market demand for organic tomatoes is modeled as Q_D = 104 - 2P and market supply is Q_S = 20 + 4P. If the actual price is set at $20 per pound, there is a _________ of _______ units of the good.

A) surplus; 36
B) surplus; 26
C) shortage; 10
D) none of the above

Question 32

If supply in the market for air filters is specified as Q_S = 24 + 3P, then, when conventionally graphed,

A) the vertical intercept is +24
B) the slope of the supply curve is +3
C) the horizontal intercept is +3
D) none of the above

Question 33

A competitive market is characterized by

A) the absence of entry barriers
B) many buyers with a single seller
C) imperfect information
D) a differentiated product

Question 34

According to the theory of demand,

A) a change in the consumer's income or wealth changes the entire demand relationship
B) the consumer's willingness to pay is also called the demand price
C) demand price measures the marginal benefit (MB) of consuming another unit of the good
D) a change in product price changes quantity demanded
E) all of the above

Question 35

According to the Law of Supply,

A) price and quantity supplied are positively related,
B) firms produce less output as the price of the product rises, ceteris paribus
C) marginal cost rises as the firm contracts production
C)p.
D) there is an inverse relationship between output and price, holding all else constant

Question 36

Marginal cost is defined as

A) ΔQ/ΔTC
B) TC /Q
C) ΔTC/ΔQ
D) Q/TC

Question 37

Market supply for a private good is found by

A) vertically summing all market prices for a given quantity
B) horizontally summing the quantity decisions of producers at each and every price
C) adding the price-quantity pairs for all units sold
D) none of the above

Question 38

Which of the following is NOT a characteristic of a private good?

A) rivalry in consumption
B) benefits of consumption are nonexcludable
C) consumption of the good precludes consumption by another individual
D) the benefits to a consumer of consuming the good are exclusive to that individual

Question 39

Assume that in the market for bottled water, the market supply is Q_S = 14 + 20P and the market demand is Q_D = 74 - 10P. This means that the equilibrium quantity is

A) 2
B) 54
C) 6
D) none of the above

Question 40

If the market for a good or service is competitive,

A) there are many independent buyers and sellers
B) buyers and sellers have no control over price
C) there are no entry barriers
D) all of the above

Question 41

If a firm makes production decisions such that it achieves maximum output from a fixed stock of resources, this means that this firm is

A) achieving allocative efficiency
B) earning a positive economic profit
C) earning a normal profit
D) technically efficient

Question 42

The deadweight loss associated with a policy change is measured as

A) the maximum value of consumer surplus
B) the sum of consumer surplus and producer surplus associated with the new policy
C) the excess of producer surplus over consumer surplus
D) the sum of Δ consumer surplus plus Δ producer surplus associated with the new policy

Question 43

Consider the market for a Procter and Gamble biodegradable detergent. Suppose that market demand is Q_D = 120 - 3P, and market supply is Q_S = -50 + 2P, where P is the price per case and Q is the quantity in thousands per week.
a. Find equilibrium quantity and price.
b. What is the value of consumer surplus (CS) and producer surplus (PS) at equilibrium?
c. If each case of detergent were sold at $30, determine the amount of the shortage or surplus that would result.

Question 44

Suppose that a producer's supply curve is estimated to be P = 15 + 3Q and that the product is sold at P = $45. At this price level, the firm's producer surplus is

A) $2250
B) $150
C) $300
D) $10

Question 45

If demand for clean water is specified as P = 140 - 2Q, and the market price is $40, then consumer surplus at that price level is

A) $2500
B) $3000
C) $1600
D) $50

Question 46

In the competitive market for organic corn, market demand is Q_D = 340 - 2P and market supply is Q_S = 100 + 4P, where P is the price per bushel, and Q is market output in thousands of bushels. Each individual farmer faces a marginal cost function of MC = 10 + 3q, where q is the single farmer's output level in thousands.
a. What is the equation for the demand (which is also MR) faced by the individual farmer?
b. Based on your answer to part (a), find the profit-maximizing output level for each farmer.
c. At an output level of 8 thousand bushels, explain in terms of both marginal profit and total profit why the individual farmer should expand production.