1. The study of economics exists because people are confronted with the basic problem of
(B) negative externality
2. The table above shows the total benefit associated with reducing different levels of pollution on a small island. The cost of eliminating one ton of pollution is $150. Which of the following is the optimal quantity of pollution to eliminate?
(A) 5 tons
(B) 4 tons
(C) 3 tons
(D) 2 tons
(E) 1 tons
3. If a hurricane reduced the crab population, the price of crabs and quantity sold would change in which of the following ways?
(E)No change Decrease
4. To determine whether two goods are complements, one would calculate the
(A) price elasticity of demand
(B) price elasticity of supply
(C) income elasticity of demand
(D) cross-price elasticity of demand
(E) input-price elasticity of supply
5. The diagram above depicts the demand and supply curves for good Y. The perfectly competitive market is initially in equilibrium, but the government decides to institute a price floor program by setting the price of good Y at PF and agrees to purchase all unsold units of good Y from the producers. The cost of this program to the government is represented by which of the following areas?
6. For a normal good, the income effect of a price change refers to the change in the consumption of the good that occurs because of the change in
(A) consumers’ purchasing power
(B) the demand for a substitute good
(C) the supply of the good
(D) relative price
(E) marginal utility
1. Assume that pencils are manufactured in a perfectly competitive market that is in long-run equilibrium.
(a) Draw correctly labeled side-by-side graphs for the pencil market and for a representative firm and show each of the following.
(i) The market price and quantity, labeled PM and QM, respectively
(ii) The firm’s profit-maximizing price and quantity, labeled PF and QF, respectively
(b) What is the relationship between PM and PF? Explain.
(c) Rent on the factory building is an important fixed cost in the production of pencils, and the industry experiences significant increases in rent.
(i) What will happen to the firm’s profit-maximizing quantity in the short run? Explain.
(ii) On your graph in part (a), show the impact of the rent increase and completely shade the area representing the firm’s profit or loss in the short run.
(d) As a result of the rent increase, what will happen to each of the following in the long run?
(i) The number of firms in the market. Explain.
(ii) The market equilibrium quantity relative to QM and the market equilibrium price relative to PM. Explain.