I. Which of the following is a defining characteristic of a market economy?
(A) Private ownership of resources
(B) Equitable distribution of income
(C) Taxation of personal income
(D) Reliance on public goods
(E) Govermnent-guided resource allocation
2. The table above shows the maximum possible output combinations of good X and good Y that Microland can produce by using all of its available resources and technology. As the production of good X increases, what happens to the opportunity cost of producing good X?
(A) It decreases, because the production of good Y decreases by greater amounts.
(B) It decreases, because the production of good Y increases by smaller amounts
(C) It remains constant, because the production of good X increases by the same amount.
(D) It increases, because the production of good Y decreases by greater amounts.
(E) It increases, because the production of good Y increases by smaller amounts
3. An increase in the supply of good X resulted in an increase in the price and quantity of good Y.It can be concluded that good Y is
(A) an inferior good
(B) a luxury good
(C) a normal good
(D) a substitute for good X
(E) a complement for good X
4. Which of the following will shift the supply curve for apples to the right?
(A) An increase in consumers' income
(B) An increase in the price of apples
(C) An increase in the wages of apple pickers
(D) A decrease in the rental price for apple harvesting equipment
(E) A decrease in the demand for oranges, a substitute in consumption
5. Which of the following relationships among the price elasticity of demand, change in price, and change in total revenue is consistent?
6. Which of the following best describes how a consumer maximizes total utility from the consumption of a bundle of goods and services?
(A) By choosing the quantity of each good such that the quantity demanded of each good is equal to the quantity supplied
(B) By choosing the quantity of each good such that the marginal utility from each good is equal to zero
(C) By choosing the quantity of each good such that the price is equal to the marginal revenue
(D) By choosing the level of output where marginal revenue is equal to marginal cost
(E) By choosing the combination of goods such that the marginal utility per dollar spent on the last unit of each good is equal
I. L&P Power is a natural monopoly supplying electricity for a city. The firm produces the profit-maximizing quantity of electricity and earns a positive economic profit
(a) Describe a condition that distinguishes a natural monopoly from a typical monopoly
(b) Draw a correctly labeled graph for the natural monopoly market in which L&P Power operates and show each of the following
(i) The profit-maximizing quantity, labeled QM
(ii) The profit-maximizing price, labeled PM
(iii) The area representing economic profit, shaded completely
(c) Suppose the government wants to regulate L&P to produce the maximum quantity that would allow it to earn zero economic profit. On your graph in part (b), show the maximum quantity it will produce to earn zero economic profit, labeled QR, and price, labeled PR
(d) Suppose instead the government wants to regulate L&P to produce the allocatively efficient quantity
(i) Does L&P earn positive economic profit if it produces the allocatively efficient quantity? Explain
(ii) Under what condition will L&P agree to produce the allocatively efficient quantity?