Question

Q1. Sarah has decided to spend always $200 on clothing per month. Which one of the statements below is true?
A. Sarah’s price elasticity of demand is one because she is maintaining her clothing expenditures as a constant fraction of the price.
B. Sarah’s income elasticity of demand is equal to zero because her clothing expenditure does not depend on the price.
C. Sarah’s income elasticity of demand is infinite because she is willing to spend a huge amount of money on her clothing.
D. None of the above

Q2. Producers' total revenue will stay the same if
A. the price rises, and demand is perfectly elastic.
B. the price decreases and demand is perfectly inelastic.
C. the price rises, and demand is inelastic.
D. the price decreases and demand is unit-elastic.

Q3. The income elasticity of demand for canned food is.
A. positive as the higher is the income, the higher is the demand for canned food.
B. negative as the higher is the income, the lower is the demand for canned food.
C. equal to zero as the demand for canned food does not depend on income.
D. None of the above

Consider the market for hotel rooms. You will use Figure 1- below to answer Q4. and Q5.

Figure 1- Market for hotel rooms
Q4. A price ceiling of 90 is
A. not binding and has no effect on the equilibrium outcome
B. binding and results into a shortage of 30 hotel rooms.
C. binding and results into a surplus of 30 hotel rooms.
D. None of the above

Q5. If you consider a price ceiling of 80, the producer surplus at equilibrium is equal to
A. 3,200.
B. 5,000
C. 2,500
D. 2,100

Q6. If the cross elasticity of demand between peanut butter and yoghurt is 1.5, then are peanut butter and yoghurt substitutes or complements?
A. They are substitutes because when the price of yoghurt increases by 10% for example the demand for peanut butter decreases by 15%.
B. They are complements because when the price of yoghurt increases by 10% for example, the demand for peanut butter decreases by 15%.
C. They are substitutes because when the price of yoghurt increases by 10% for example the demand for peanut butter increases by 15%.
D. They are complements because when the price of yoghurt increases by 10% for example, the demand for peanut butter increases by 15%.

Q7. As consequence of a government subsidy, _____, consumers are _____, producers are _____ which is _____ a government tax policy.
A. quantity sold at equilibrium decreases – better off – worse off – opposite to.
B. quantity sold at equilibrium increases – better off – better off –   opposite to.
C. quantity sold at equilibrium decreases – worse off – worse off – similar to.
D. quantity sold at equilibrium increases– worse off – better off – similar to.

Q8. Which statement is not true?
A. AVC is increasing when marginal cost is below it and rising when marginal cost is above it.
B. AVC is falling when marginal cost is below it and rising when marginal cost is above it.
C. ATC is increasing when marginal cost is below it and rising when marginal cost is above it.
D. ATC is falling when marginal cost is below it and rising when marginal cost is above it.

Q9. Which statement is true?

A. Economies of scale are more common when Q is low and occur when increasing production lowers ATC as for natural monopolies.
B. Diseconomies of scale are more common when Q is high and occur when increasing production decreases ATC as for natural monopolies.
C. Economies of scale are more common when Q is high and occur when increasing production increases ATC as in a perfect competition framework.
D. Diseconomies of scale are more common when Q is low and occur when increasing production decreases ATC as in a perfect competition framework.

Q10. Which of the following is an implicit cost?
A. The salary earned by a corporate executive.
B. Corporate taxes
C. The opportunity cost of using your office space instead of renting it.
D. All of the above are implicit costs.

Q11. If the accounting profit is equal to zero,
A. The economic profit which considers both implicit and explicit costs can be positive.
B. The economic profit which ignores implicit costs is certainly positive.
C. The economic profit which considers both implicit and explicit costs cannot be positive.
D. The economic profit which ignores implicit costs is certainly negative.


Q12. Ellay corp. is a profit-maximizing competitive firm selling baby diapers. The company sells each box for $30. Total costs are $4000 per day, of which $1200 are a fixed cost. The number of boxes sold per day is 100. What can you say about Ellay corp. short-run and long run decisions?
A. Ellay corp. will shut down in the short run and exit the market in the long run.
B. Ellay corp. will not shut down in the short run and will not exit the market neither in the long run.
C. Ellay corp. will shut down in the short run but will remain in the industry in the long run.
D. Ellay corp. will not shut down in the short run but will exit the industry in the long run.

Use Figure 2 to answer the following questions (Q13., Q14. and Q15.)



Figure 2- Production costs
Q13. Which statement is true:
A. The firm depicted by the graphic is competitive as the marginal revenue is equal to the marginal     cost at equilibrium.
B. The firm depicted by the graphic is a monopoly as the marginal revenue is equal to the marginal     cost at equilibrium.
C. The firm depicted by the graphic is a monopoly as the marginal revenue is above the marginal cost for any quantity below 30.
D. The firm depicted by the graphic is competitive as the price is equal to the marginal revenue.

Q14. What is the profit of this firm?
A. $480
B. $300.
C. $270.
D. $120


Q15. The efficient level for this firm is
A. 30 units equalizing MR to MC.
B. 18 units minimizing the ATC.
C. 13 units where the MC is equal to zero.
D. None of the above.

Use Figure 2 to answer the following questions (Q13., Q14. and Q15.) P, costs МС P = $16 MR ATC 13 18 30 Figure 2- Production costs Q13. Which statement is true: A. The firm depicted by the graphic is competitive as the marginal revenue is equal to the marginal cost at equilibrium, B. The firm depicted by the graphic is a monopoly as the marginal revenue is equal to the marginal cost at equilibrium. C. The firm depicted by the graphic is a monopoly as the marginal revenue is above the marginal cost for any quantity below 30. D. The firm depicted by the graphic is competitive as the price is equal to the marginal revenue. Q14. What is the profit of this firm? A. $480 B. $300 C. $270. D. $120

Answer 1

Part 1) It is given that Sarah has decided to spend always $200 on clothing per month. This means that Sarah’s income elasticity of demand is zero because a change in income does not result in change in the demand for the good, as Sarah will spend only $200 on clothing per month irrespective of the income or the price.

Part 2) Producers’ total revenue will stay the same if the price decreases and demand is unit-elastic.

Part 3) The income elasticity of demand for canned food is positive as the higher is the income, the higher is the demand for canned food. This is because, canned food is normal good, and for normal good the income elasticity of demand is positive.

Part 4) Price ceiling means that the price cannot fall below the price ceiling level. From the diagram we can say that the price ceiling of 90 is not binding and has no effect on the equilibrium outcome. This is because the equilibrium price is above the price ceiling level.