In a market with voluntary trade and exchange,

QUESTION

In a market with voluntary trade and exchange, where does
producer surplus (PS) come from?
A) Firms forcing consumers to pay prices higher than they
are willing to pay
B) Firms charging higher prices because there are no
substitute goods for consumers to buy
C) Firms selling a good at a price that is greater than the
marginal cost of producing the good
D) All of the above
2.
Suppose a binding price control is placed on a competitive
market. What is the reason that deadweight loss (DWL) is created?
A) The government is deciding the allocation of goods
B) Consumers are now paying lower prices
C) Producers are now receiving higher prices
D) The number of trades in the market is reduced
3.
Suppose a market has the following demand and supply
functions:

Qd = 40 – 2P

Qs = –8 + 4P

Using the equations, solve for equilibrium price and
quantity. You may want to double check your math just to be sure.

A) Q* = 16, P* = 16
B) Q* = 29, P* = 5.3
C) Q* = 13, P* = 5.3
D) Q* = 24, P* = 16
E) Q* = 28, P* = 6
F) Q* = 29, P* = 8
G) Q* = 24, P* = 8
H) Q* = 24, P* = 20
4.

Notice that I have provided the graph of these functions,
although it is not necessarily drawn to scale. I have provided the vertical
intercepts for the supply and demand functions for you. What is the consumer
surplus at this equilibrium price?

A) CS = $8
B) CS = $20
C) CS = $24
D) CS = $72
E) CS = $144
F) CS = $288
5.
What is the producer surplus at this equilibrium price?
A) PS = $2
B) PS = $8
C) PS = $24
D) PS = $72
E) PS = $144
F) PS = $36
6.

Now, suppose that the government imposes a price floor on
the market for this good. The price floor is PF = $12. See the provided
picture. First, we need to find the number of trades actually occurring at this
price. The number of trades occurring is labeled “A” on the graph. You must
find “A” by plugging in the PF price into the demand curve.

A) A = 8
B) A = 12
C) A = 16
D) A = 20
7.
At this quantity “A” that you just found, find B, the height
of the supply curve. Do this by plugging in a quantity “A” into the supply
function and solving for price (which is the height of the supply curve).
A) B = $6
B) B = $7
C) B = $8
D) B = $9
8.
What is consumer surplus with the price floor?
A) CS = $80
B) CS = $320
C) CS = $160
D) CS = $64
E) CS = $96
F) CS = $128
9.
What is producer surplus with the price floor?
A) PS = $64
B) PS = $128
C) PS = $192
D) PS = $96
E) PS = $216
F) PS = $144
10.
What is deadweight loss with the price floor?
A) DWL = $24
B) DWL = $36
C) DWL = $48
D) DWL = $64
E) DWL = $72
F) DWL = $96
11.
On the previous graph, why did the price floor decrease
number of trades from Q* to A?
A) The government didn’t allow as many goods to be sold
B) The firms wanted to sell more goods
C) The consumers didn’t want to buy as many goods
D) The profit of the firms became too high
12.
Your local farmer has many competitors and exists in a
market structure known as perfect competition. This means that price is
determined outside of the individual farmer’s ability to charge a price higher
than the going market for a bushel of wheat, hence the farmer is
A) a price maker and can therefore charge different
customers different prices.
B) always able to price produce above the competition and
earn a larger profit.
C) never able to make a profit in this industry
D) a price taker and cannot affect the market price of
wheat.
13.
A perfectly competitive market has
A) high barriers to entry or exit
B) homogeneous products
C) to do a lot of advertising to attract buyers
D) few firms
14.
Which of the following statements is correct?
A) The demand curve of the perfectly competitive industry is
elastic as are the demand curves facing the individual firms.
B) The market demand curve of perfect competition is
inelastic because the individual consumers are buying a homogeneous product.
C) The market demand curve of the perfectly competitive
industry is downward sloping while the demand curve of an individual firm is
horizontal with a height equal to the product price.
D) The market demand curve of the perfectly competitive
industry is downward sloping, so the demand curves of the individual firms are
also downward sloping.
15.

Pictured here is Axel, who started a Halloween costume
business, hoping to make profits. Axel noted that there are many small firms
here, and it’s easy to enter. Does this mean that Halloween costume stores
would fit the model of perfect competition?

A) No – because the costumes are only sold during a few
weeks out of the year
B) No – because the products sold are not homogenous and may
differ from store to store
C) Yes – with many firms, they will be price takers
D) Yes – since these firms advertise, consumers have perfect
price information
E) Both [A] and [B]
F) Both [C] and [D]
16.
True or False: “Free entry” in the Halloween costume
business means it costs zero dollars up front to start the business.

A) True – but there will be marginal costs involved with
producing output
B) True – a firm doesn’t need any physical capital when it
first starts
C) False – free entry means that government pays for new
firms to promote competition
D) False – free entry means there are no serious barriers
for an individual to start a business
E) Both [A] and [B]
F) Both [C] and [D]
17.

After Halloween ended, Axel ate some candy and decided to
start a leaf raking business. The leaf raking industry is perfectly
competitive. Perfect competition in leaf raking means that:

A) Axel’s business sells an identical service offered by
other leaf rakers
B) There is a going market price charged by all businesses
C) Consumers and producers have perfect information with
regards to the market price
D) Anyone can enter the leaf raking business
E) All of the above
18.

Refer to the above table. Axel’s leaf raking firm operates
in a perfectly competitive market in which the market price is $10 per yard
raked (total output refers to total yards raked). What is its profit-maximizing
rate of production? Hint: There are two ways to solve this (total and
marginal).

A) 104 yards raked
B) 106 yards raked
C) 108 yards raked
D) 110 yards raked
19.

Refer to the above table. Axel’s firm operates in a
perfectly competitive market in which the market price is $10/yard. What is
true when the Axel rakes 103 yards?

A) Total revenue equals $5,060.
B) Total costs exceed total revenue by $403.
C) Marginal revenue is less than marginal cost.
D) Total profit is $524.
20.

Suppose that the lawn mowing industry is also perfectly
competitive. (I don’t have a picture of Axel operating a lawn mower). Consider
the cost structure of the perfectly competitive lawn mowing firm in the above
figure. If the market price is $15 per yard mowed, the firm

A) mows 10 lawns.
B) mows 12 lawns.
C) shuts down operations.
D) mows 11 lawns.
21.
In the above lawn mowing figure, if the market price is $15,
the firm’s profit will be
A) $0 (breaks even)
B) $10
C) $15
D) $20
E) a negative number (loss), but we don’t know how much
based on the graph
22.
In the above lawn mowing figure, suppose that the break-even
price is $13.50 (not directly labeled on graph). If the market price is less
than $13.50, the profit-maximizing firm will

A) still continue to produce output
B) shut down
C) raise the price of the good
D) either [A] or [B] could be correct, depending on the
price
E) none of the above
23.
Which of the following is NOT a characteristic of perfect
competition?
A) There are large numbers of buyers and sellers.
B) The firms in an industry produce goods that are different
from each other.
C) There are no barriers to entry or exit
D) Both buyers and sellers have equally good information.
24.
In a perfectly competitive market structure any firm can
enter or leave the industry without serious impediments. This implies
A) the products sold will be alike.
B) firms will move labor and capital in pursuit of
profit-making opportunities to whatever business venture gives them the highest
return on their investment.
C) no one buyer or seller has any influence on price.
D) consumers are able to find out about lower prices charged
by other firms.
25.
In a perfectly competitive market, if P > ATC, there is
likely to be
A) entry of new firms into the market in the long run
B) an accounting loss for existing firms.
C) exiting of existing firms out of the market in the long
run
D) an upward pressure on price.
E) an incentive for firms to try and differentiate their
products
26.
Economic profits and losses are true market signals because
they
A) convey true information to some people and false
information to others
B) convey information about rewards people should anticipate
experiencing by shifting resources from one activity to another.
C) convey information to public officials about how to
control prices
D) cause people to move into careers in both undesirable and
desirable industries with equal ease.
27.
This homework had some difficult questions on it. This
question is probably not as difficult. Pick [C] if you want a free point for
answering this question.
A) Do not pick this answer.
B) Do not pick this answer.
C) Choose this answer for a free point.
D) Do not pick this answer.

ANSWER:

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