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 ECON 2106 Principles of Microeconomics

Problem Set 3 mankiw chapter 7

dUE fRIDAY 18:00 september 4, 2009

 

Directions: Print this answer sheet out at your computer. Work individually or in a group with a maximum of three people. A group will submit one answer sheet with each group member’s name at the top. Read each question carefully. Each question has only one correct answer. Place the letter that corresponds to the correct answer alongside the number that corresponds to the question on the problem set on this answer sheet. Turn in only the answer sheet no later than 18:00 of the date indicated above.

 

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ECON 2106 Principles of Microeconomics

Problem Set 3 Mankiw chapter 7

dUE fRIDAY 18:00 september 4, 2009

 

____               1.     In which of the following circumstances would a buyer be indifferent about buying a good?

a.

The amount of consumer surplus the buyer would experience as a result of buying the good is zero.

b.

The price of the good is equal to the buyer’s willingness to pay for the good.

c.

The price of the good is equal to the value the buyer places on the good.

d.

All of the above are correct.

 

____               2.     Noah drinks Dr. Pepper. He can buy as many cans of Dr. Pepper as he wishes at a price of $0.50 per can. On a particular day, he is willing to pay $0.95 for the first can, $0.80 for the second can, $0.60 for the third can, and $0.40 for the fourth can. Assume Noah is rational in deciding how many cans to buy. His consumer surplus is

a.

$0.50.

b.

$0.85.

c.

$1.05.

d.

$1.20.

 

Table 7-1

BUYER

WILLINGNESS TO PAY

MIKE

$50.00

SANDY

$30.00

JONATHAN

$20.00

HALEY

$10.00

 

____               3.     Refer to Table 7-1. If the table represents the willingness to pay of four buyers and the price of the product is $30, then their total consumer surplus is

a.

$-10.

b.

$-6.

c.

$20.

d.

$30.

 

____               4.     Suppose there is an early freeze in California that reduces the size of the lemon crop. What happens to consumer surplus in the market for lemons?

a.

It increases.

b.

It decreases.

c.

It is not affected by this change in market forces.

d.

We would have to know whether the demand for lemons is elastic or inelastic to make this determination.

 

Table 7-3

For each of three potential buyers of oranges, the table displays the willingness to pay for the first three oranges of the day. Assume Alex, Barb, and Carlos are the only three buyers of oranges, and only three oranges can be supplied per day.

 

 

First Orange

Second Orange

Third Orange

Alex

$2.00

$1.50

$0.75

Barb

$1.50

$1.00

$0.80

Carlos

$0.75

$0.25

$0

 

 

____               5.     Refer to Table 7-3. If the market price of an orange is $0.70, the market quantity of oranges demanded per day is

a.

5.

b.

6.

c.

7.

d.

9.

 

____               6.     If the cost of producing sofas decreases, then consumer surplus in the sofa market will

a.

increase.

b.

decrease.

c.

remain constant.

d.

increase for some buyers and decrease for other buyers.

 

Figure 7-1

____               7.     Refer to Figure 7-1. When the price rises from P1 to P2, which of the following statements is not true?

a.

The buyers who still buy the good are worse off because they now pay more.

b.

Some buyers leave the market because they are not willing to buy the good at the higher price.

c.

Buyers place a higher value on the good after the price increase.

d.

Consumer surplus in the market falls.

 

 


Figure 7-5. On the graph below, Q represents the quantity of the good and P represents the good's price.

 

 

____               8.     Refer to Figure 7-5. If the price of the good is $8.50, then producer surplus is

a.

$6.50.

b.

$8.00.

c.

$9.50.

d.

$11.00.

 

____               9.     The Surgeon General announces that eating chocolate increases tooth decay. As a result, the equilibrium price of chocolate

a.

increases, and producer surplus increases.

b.

increases, and producer surplus decreases.

c.

decreases, and producer surplus increases.

d.

decreases, and producer surplus decreases.

 

The following table represents the costs of five possible sellers.

 

Table 7-4

SELLER

COST

DALE

$1,500

JILL

$1,200

DENISE

$1,000

CATHERINE

$750

JACKSON

$500

 

____               10.  Refer to Table 7-4. If the market price is $1,000, the producer surplus in the market is

a.

$700.

b.

$750.

c.

$2,250.

d.

$3,700.

 


____               11.  The marginal seller is the seller

a.

for whom the marginal cost of producing one more unit of output is the lowest among all sellers, and the marginal buyer is the buyer for whom the marginal benefit of one more unit of the good is the highest among all buyers.

b.

who supplies the smallest quantity of the good among all sellers, and the marginal buyer is the buyer who demands the smallest quantity of the good among all buyers.

c.

who would leave the market first if the price were any lower, and the marginal buyer is the buyer who would leave the market first if the price were any higher.

d.

who has the largest producer surplus, and the marginal buyer is the buyer who has the largest consumer surplus.

 

Figure 7-6

 

____               12.  Refer to Figure 7-6. When the price falls from P2 to P1, which of the following would not be true?

a.

The sellers who still sell the good are worse off because they now receive less.

b.

Some sellers leave the market because they are not willing to sell the good at the lower price.

c.

The total cost of what is now sold by sellers is actually higher than it was before the decrease in the price.

d.

Producer surplus would fall by area A + B.

 

____               13.  Ronnie operates a lawn-care service. On each day, the cost of mowing the first lawn is $10; the cost of mowing the second lawn is $12; and the cost of mowing the third lawn is $15. His producer surplus on the first three lawns of the day is $53. If Ronnie charges all customers the same price for lawn mowing, that price is

a.

$25.

b.

$30.

c.

$36.

d.

$45.

 


Market Supply and Demand for Pepperoni Pizza

 

Table 7-5

 

PRICE

QUANTITY

DEMANDED

QUANTITY

SUPPLIED

$12.00

 0

12

$10.00

 4

10

$ 8.00

 8

 8

$ 6.00

12

 6

$ 4.00

16

 4

$ 2.00

20

 2

 

____               14.  Refer to Table 7-5. As the table suggests, the demand curve is a straight line and so is the supply curve. Taking this into account, when there is equilibrium, producer surplus is

a.

$16.

b.

$24.

c.

$32.

d.

$48.

 

____               15.  Which of the following equations is not valid?

a.

Consumer surplus = Value to buyers - Amount paid by buyers

b.

Producer surplus = Amount received by sellers - Cost to sellers

c.

Total surplus = Value to buyers - Amount paid by buyers + Amount received by sellers - Costs of sellers

d.

Total surplus = Value to sellers - Cost to sellers

 

Figure 7-9

____               16.  Refer to Figure 7-9. Assume demand increases and as a result, equilibrium price increases to $22 and equilibrium quantity increases to 110. The increase in producer surplus due to new producers entering the market would be equal to

a.

$90.

b.

$210.

c.

$360.

d.

$480.

____               17.  Which of the following statements is not correct about a market in equilibrium?

a.

The price determines which buyers and which sellers participate in the market.

b.

Those buyers who value the good more than the price choose to buy the good.

c.

Those sellers whose costs are less than the price choose to produce and sell the good.

d.

Consumer surplus will be equal to producer surplus.

 

____               18.  The distinction between efficiency and equity can be described as follows:

a.

Efficiency refers to maximizing the number of trades among buyers and sellers; equity refers to maximizing the gains from trade among buyers and sellers.

b.

Efficiency refers to minimizing the price paid by buyers; equity refers to maximizing the gains from trade among buyers and sellers.

c.

Efficiency refers to maximizing the size of the pie; equity refers to producing a pie of a given size at the least possible cost.

d.

Efficiency refers to maximizing the size of the pie; equity refers to distributing the pie fairly among members of society.

 

____               19.  Inefficiency exists in an economy when a good is

a.

not being consumed by buyers who value it most highly.

b.

not distributed fairly among buyers.

c.

not produced because buyers do not value it very highly.

d.

being produced with less than all available resources.

 

____               20.  The "invisible hand" refers to

a.

the marketplace guiding the self-interests of market participants into promoting general economic well-being.

b.

the fact that social planners sometimes have to intervene, even in perfectly competitive markets, to make those markets more efficient.

c.

the equity that results from market forces allocating the goods produced in the market.

d.

the automatic maximization of consumer surplus in free markets.

 

____               21.  If a market is allowed to move freely to its equilibrium price and quantity, then an increase in supply will

a.

increase consumer surplus.

b.

reduce consumer surplus.

c.

not affect consumer surplus.

d.

increase or decrease consumer surplus or leave consumer surplus unchanged.

 

____               22.  Cornflakes and milk are complementary goods. A decrease in the price of corn will

a.

increase consumer surplus in the market for cornflakes and decrease producer surplus in the market for milk.

b.

increase consumer surplus in the market for cornflakes and increase producer surplus in the market for milk.

c.

decrease consumer surplus in the market for cornflakes and increase producer surplus in the market for milk.

d.

decrease consumer surplus in the market for cornflakes and decrease producer surplus in the market for milk.

 

The following questions are True-False and deal with chapters 5, 6, 7, and 9 in Miller et al. Mark a “T” or an “F” alongside the appropriate question number on the answer sheet.

 

23. When the government seeks to prevent voluntary exchange of goods and services such as sex and drugs, governmental agents target buyers.

 

24. The opportunity cost of a woman’s time has been increasing causing the increased availability of prepared foods leading to greater numbers of overweight and obese individuals in the US. 

 

25. The elasticity of supply of usable water available on the earth is necessarily perfectly inelastic.