Deck 9: Properties and Applications of the Competitive Model

Question 1

In the long run,firms in a competitive market make zero economic profit.This induces most firms to leave the industry.

Answer 1

False

Question 2

Producer surplus is equal to

A)the area under the supply curve.
B)the difference between price and average cost for all units sold.
C)the difference between price and marginal cost for all units sold.
D)the firm's profit when fixed costs exist.

Answer 2

the difference between price and marginal cost for all units sold.

Question 3

The difference between producer surplus and profit is always the associated

A)opportunity costs.
B)total costs.
C)variable costs.
D)fixed costs.

Answer 3

fixed costs.

Question 4

Suppose the market supply curve is p = 5 + Q.At a price of 10,producer surplus equals

A)50.
B)25.
C)12.50.
D)10.

Question 5

A firm that generates zero economic profit usually faces

A)negative business profit.
B)zero business profit.
C)positive business profit.
D)business profit equal to half the total revenue.

Question 6

Mister Jones was selling his house.The asking price was $220,000,and Jones decided he would take no less than $200,000.After some negotiation,Mister Smith purchased the house for $205,000.Jones' producer surplus is

A)$5,000.
B)$15,000.
C)$20,000.
D)Not able to be calculated from the information given.

Question 7

Firms are ________ with an economic profit of zero,they will ________ in the industry because they ________ be better off in another industry.

A)satisfied,stay,won't
B)unsatisfied,leave,will
C)satisfied,leave,will
D)unsatisfied,stay,won't

Question 8

Producer surplus equals

A)total revenue minus total variable cost.
B)total revenue minus the sum of all marginal cost.
C)profit plus fixed cost.
D)All of the above.

Question 9

In the short run,if a firm operates,it earns a profit of $500.The fixed costs of the firm are $100.This firm has a producer surplus of

A)$500.
B)$100.
C)$400.
D)$600.

Question 10

Long-run economic rent or profit do not exist for fixed factors like land because

A)bidding drives up the price of the factor until no economic rent exists.
B)there is no market for such factors.
C)these factors have L-shaped isoquants.
D)these factors will earn economic profits.

Question 11

Does a competitive long-run equilibrium require cost-minimization?

A)Yes,if firms fail to be as efficient as their competitors they are driven out of the market.
B)No,in the long-run firms make zero profits.
C)Yes,if they didn't even less efficient firms would enter the industry.
D)No,because competition ensures their survival.

Question 12

If entry is limited due to a limited input,firms in that market earn long run economic profit.

Question 13

Suppose the market supply curve is p = 5Q.If price increases from 10 to 15,the change in producer surplus is

A)25.
B)5.
C)12.5.
D)20.

Question 14

Even if two competitive firms in the same market have different production technologies,they will each earn long-run zero profits.Why?

Question 15

In the long run,competitive firms MUST be profit maximizers because if they do not maximize profits,

A)they will not survive.
B)they will not be price takers.
C)they will attract entry.
D)the profits that they do earn will only cover variable costs.

Question 16

Suppose the market supply curve is p = 5 + Q.If price increases from 10 to 15,the change in producer surplus is

A)12.5.
B)5.
C)50.
D)37.5.

Question 17

Competitive firms earn zero profit in the long run when

A)entry is completely free.
B)entry is limited.
C)Both A and B.
D)Neither A nor B.

Question 18

Suppose the inverse supply curve in a market is Q = 6p².If price decreases from 5 to 4,the change in producer surplus is

A)150.
B)-54.
C)-6.
D)-122.

Question 19

Suppose the market supply curve is p = 5Q.At a price of 10,producer surplus equals

A)50.
B)25.
C)12.50.
D)10.

Question 20

Suppose the inverse supply curve in a market is Q = 6p².What is the producer surplus when price is equal to 4?

A)96
B)128
C)28
D)48

Question 21

As the quantity produced of a good increases,the social welfare generated by that good increases.

Question 22

If an economist states that not enough of a good is being produced,she usually means that

A)not everyone can afford the good.
B)price exceeds marginal cost.
C)consumer surplus equals zero.
D)at equilibrium,some people who still wish to sell the good cannot find a buyer.

Question 23

Producer surplus equals total revenue minus the sum of all marginal cost.

Question 24

If a market produces a level of output below the competitive equilibrium,then

A)social welfare is not maximized.
B)consumer surplus might still be maximized.
C)the actual price will be below the equilibrium price.
D)social welfare might still be enhanced if a price ceiling keeps price below the competitive price.

Question 25

The deadweight loss associated with output less than the competitive level can be determined by

A)subtracting the competitive level producer surplus from the producer surplus associated with less output.
B)subtracting the consumer surplus from the producer surplus associated with less output.
C)summing the consumer and producer surplus associated with less output.
D)summing the change in the total consumer and producer surplus from moving from the competitive level of output to less output.

Question 26

A competitive market maximizes social welfare because in a competitive market,

A)profits are zero.
B)price equals marginal cost of the last unit produced.
C)price equals average cost of the last unit produced.
D)there is free entry and exit.

Question 27

When is the profit a firm earns equal to the producer surplus? Explain.

Question 28

While producing less than the competitive output decreases social welfare,the same cannot be said about producing more than the competitive output.

Question 29

Explain why the competitive output maximizes welfare.

Question 30

The inverse supply curve in a market is given by Q = 3p².What is the producer surplus when the market price is $6? Illustrate using a graph.

Question 31

Advocates of steel tariffs to protect American steel firms realize that when imposing such tariffs the gains of firms are outweighed by the losses to consumers.This implies that

A)such advocates value producer surplus more than consumer surplus.
B)such advocates want to help consumers.
C)such advocates value consumer surplus more than producer surplus.
D)such advocates value producer surplus and consumer surplus equally.

Question 32

Suppose an industry trade group has convinced legislators that a price floor should be used so that producer surplus is maximized in the market for milk.The group argues that such a policy would save the "family farm." Assuming a downward-sloping linear demand curve and a horizontal long-run supply curve,determine the resulting price,output and social welfare from such a policy.Compare this result to the competitive equilibrium.

Question 33

Deadweight loss occurs when

A)producer surplus is greater than consumer surplus.
B)the maximum level of total welfare is not achieved.
C)consumer surplus is reduced.
D)an inferior good is consumed.

Question 34

Producer surplus is the sum of the profits earned by all firms in a market.

Question 35

Giving presents on Christmas does NOT generate a deadweight loss if

A)all gift are money.
B)everybody gets exactly want she wants.
C)nobody can be made better off by returning the gift and purchasing a different one.
D)All of the above.

Question 36

Suppose a consumer advocacy group has convinced legislators that vitamin pills should be free to consumers.Such a policy would enhance the health of the citizenry,they argue.Assuming a downward-sloping linear demand curve and a horizontal long-run supply curve,determine the resulting output and social welfare from such a policy.Compare this result to the competitive equilibrium.

Question 37

Suppose the market supply curve for wheat is shown in the above figure.Calculate the producer surplus when price is $2 per bushel.If legislation mandates that the price be $1 per bushel,what is the resulting loss in producer surplus?

Question 38

If a market produces a level of output that exceeds the competitive equilibrium output,then

A)social welfare will be higher.
B)producer surplus will be higher.
C)marginal cost will exceed price.
D)All of the above.

Question 39

Economists claim that measuring society's welfare as CS + PS

A)is inappropriate since ultimately everyone is a consumer.
B)is valid only when the same person could be either a consumer or a producer.
C)treats the gains to consumers and producers equally.
D)is not commonly accepted.

Question 40

If in a market the last unit of output was sold at a price higher than marginal cost,

A)producers are better off producing more.
B)consumers are better off if less of the product is sold.
C)social welfare is not maximized.
D)the unit increased total profit.

Question 41

Policies that restrict supply could generate an increase in social welfare because the increase in producer surplus could exceed the decrease in consumer surplus.

Question 42

The above figure shows the demand and supply curves in the market for milk.If the government imposes a quota at 500 gallons,calculate the deadweight loss.

Question 43

If a city decides to restrict the number of pizza parlors,

A)the price of pizza will increase.
B)pizza parlors will make higher profits.
C)total welfare will decrease.
D)All of the above.

Question 44

The total welfare associated with a market that includes a government sales tax equals

A)consumer surplus plus producer surplus.
B)consumer surplus plus producer surplus minus government tax revenue.
C)consumer surplus plus producer surplus plus government tax revenue.
D)the government tax revenue.

Question 45

The above figure shows supply and demand curves for apartment units in a large city.If the city government passes a law that establishes $350 per month as the legal maximum rent,deadweight loss occurs because

A)consumers place a greater value on the last apartment unit than the cost to supply it.
B)the supplier of the last apartment unit receives a rental price that is less than the marginal cost of supplying it.
C)the quantity of apartments supplied has decreased.
D)All of the above.

Question 46

The above figure shows supply and demand curves for apartment units in a large city.If the city government passes a law that establishes $350 per month as the legal maximum rent,producer surplus decreases by

A)d.
B)b + f.
C)c + g.
D)i.

Question 47

The above figure shows supply and demand curves for apartment units in a large city.If the city government passes a law that establishes $350 per month as the legal maximum rent,the loss in social welfare equals

A)b + c.
B)f.
C)a.
D)f + g.

Question 48

Suppose anyone with a driver's license is capable of supplying one trip from the airport to the downtown business center on any given day.The long-run supply curve of such trips is horizontal at p = $50,which is the average cost of such trips.Suppose daily demand is Q = 1000 - 10p.Calculate the change in consumer surplus,producer surplus and social welfare if the city government requires those people supplying such trips to possess a special license,and the government will issue only 300 licenses.

Question 49

The above figure shows supply and demand curves for apartment units in a large city.If the city government passes a law that establishes $350 per month as the legal maximum rent,the consumer's net gain in surplus equals

A)c - f.
B)b - f.
C)d - f.
D)The answer cannot be determined from the information given.

Question 50

The government requires the steel industry to adopt new eco-friendly machines,which cannot be used in other industries.If the machines are very expensive and the capital market does not work efficiently,then

A)entrants are encouraged to enter the market and adopt the new machines.
B)firms can easily leave the steel industry without loss.
C)entrants are discouraged by the new requirements.
D)None of the above.

Question 51

A new law applied to a competitive market that requires that laid off workers be paid a large severance payment will

A)not generate a deadweight loss.
B)increase total welfare.
C)increase consumer surplus in the market.
D)decrease consumer surplus in the market.

Question 52

The services of real estate brokers are provided in a competitive market.If the state Board of Realtors enacts several requirements that limit the number of real estate brokers,then consumer surplus will most likely

A)increase.
B)decrease.
C)remain unchanged.
D)There is not enough information to answer.

Question 53

If a city decides to lift restrictions on how many taxi cabs can operate,social welfare will increase.

Question 54

If a city government enacts a maximum price on rent,

A)quantity supplied will decrease.
B)quantity demanded will increase.
C)allocational problems develop.
D)All of the above.

Question 55

The services of real estate brokers are provided in a competitive market.If the state Board of Realtors enacts several requirements that limit the number of real estate brokers,which of the following is most likely to occur?

A)The supply curve of real estate brokers will shift to the left.
B)The supply curve of real estate brokers will shift to the right.
C)Social welfare will remain unchanged.
D)The supply curve will remain unchanged.

Question 56

The above figure shows supply and demand curves for apartment units in a large city.If the city government passes a law that establishes $350 per month as the legal maximum rent,producer surplus

A)increases.
B)decreases.
C)stays the same.
D)changes in a direction that cannot be determined from the information given.

Question 57

The services of real estate brokers are provided in a competitive market.If the state Board of Realtors enacts several requirements that limit the number of real estate brokers,which of the following is most likely to occur?

A)Consumer surplus will increase.
B)Producer surplus will increase.
C)Entry of new brokers will increase.
D)Social welfare will increase.

Question 58

Suppose that all firms in a constant-cost industry have the following long-run cost curve:
c(q)= 4q² + 100q + 100
The demand in this market is given by Q^D = 1280 - 2p.Suppose the number of firms in the market is restricted to 80
a.Derive the supply curve with this restriction.Find the market equilibrium price and quantity with the restriction.
b.If firms are allowed to buy and sell these permits in an open market,what will be the rental price of permits? Will firm's that own permits make profit? Briefly explain.
c.How much deadweight loss is generated by the permit system? Provide a graph showing the region of this deadweight loss.
d.Suppose the government abandons the permit system and simply imposes a fixed fee on firms in the market.If the fee is set equal to the permit price you found in c. ,what will be the equilibrium price,quantity,number of firms and deadweight loss?

Question 59

The services of real estate brokers are provided in a competitive market.If the state Board of Realtors enacts several requirements that limit the number of real estate brokers,then social welfare will most likely

A)not change but there will be a transfer from consumer to producer.
B)not change but there will be a transfer from producer to consumer.
C)decrease although producers are made better off.
D)decrease although consumers are made better off.

Question 60

Which of the following best describes the market reaction if a city restricts the number of firms that are allowed to operate in a market?

A)The market supply curve shifts to the left.
B)The market demand curve shifts to the left.
C)Quantity supplied increases because price increases.
D)Price decreases.

Question 61

The above figure shows supply and demand curves for milk.If amount Q₂ is produced in the market,

A)producer surplus is maximized.
B)consumer surplus is minimized.
C)a deadweight loss is generated.
D)All of the above.

Question 62

The above figure shows supply and demand curves for milk.If the government passes a law that establishes $3 per month as the legal minimum per gallon price,change in producer surplus will be

A)b + c + d.
B)b - f - g.
C)c + d + g.
D)b - g.

Question 63

The tax revenue that is generated by a government tax is counted towards total welfare.

Question 64

The above figure shows supply and demand curves for milk.If the government passes a $2 per gallon specific tax,the loss in producer surplus will equal

A)b + c + f + g.
B)f + g.
C)b + f.
D)c + g.

Question 65

The above figure shows supply and demand curves for milk.In an effort to help farmers,the government passes a law that establishes a $3 per gallon price support.To maintain the price support,government expenditures must equal

A)k + i.
B)f + g + h + i + j.
C)f + g + h + i + j + k.
D)f + g + h + i + j + k + e.

Question 66

The above figure shows supply and demand curves for milk.In an effort to help farmers,the government passes a law that establishes a $3 per gallon price support.To maintain the price support,government must purchase

A)Q₁ gallons.
B)Q₂ gallons.
C)Q₁ - Q₂ gallons.
D)Q₂ - Q₁ gallons.

Question 67

A per unit subsidy increases both consumer and producer surplus,but results in a deadweight loss.

Question 68

The above figure shows supply and demand curves for apartment units in a large city.If the city government passes a law that establishes $350 per month as the legal maximum rent,consumer surplus will be

A)a.
B)a + b + f.
C)a + b + c.
D)a + b + c + f + g.

Question 69

The above figure shows supply and demand curves for apartment units in a large city.The area "e" represents

A)the loss in producer surplus if a rent ceiling of $350 is imposed.
B)the total variable cost of supplying Q1 units.
C)the marginal cost of supplying Q1 units.
D)the total revenue received by supplying Q1 units.

Question 70

The above figure shows the demand and supply curves in the market for milk.Currently the market is in equilibrium.If the government imposes a $2 per gallon tax to be collected from sellers,estimate the change in p,Q,and social welfare.

Question 71

The above figure shows supply and demand curves for milk.If the government passes a law that establishes $3 per month as the legal minimum per gallon price,consumer surplus will be

A)a.
B)a + b + f.
C)a + b + c.
D)c + d + g.

Question 72

The above figure shows supply and demand curves for apartment units in a large city.If the city government passes a law that establishes $450 per month as the legal maximum rent,consumer surplus will be

A)a.
B)a + b + f.
C)a + b + c.
D)a + b + c + f + g.

Question 73

The above figure shows supply and demand curves for milk.In an effort to help farmers,the government passes a law that establishes a $3 per gallon price support.The loss in social welfare resulting from this price support equals

A)k + i.
B)j.
C)[$3 ∗ (Q₂ - Q₁)] - h.
D)$3 ∗ k.

Question 74

The above figure shows supply and demand curves for apartment units in a large city.If the city government passes a law that establishes $350 per month as the legal maximum rent,producer surplus will be

A)d.
B)d + e.
C)d + g.
D)d + c + g.

Question 75

The above figure shows supply and demand curves for milk.If the government passes a $2 per gallon specific tax,the tax revenue is

A)$2∗
B)$ ∗
C)$2 ∗ (Q₂ - Q₁ ).
D)$2.

Question 76

The above figure shows supply and demand curves for milk.If the government passes a $2 per gallon specific tax,the loss in consumer surplus will equal

A)b + c + f + g.
B)f + g.
C)b + f.
D)c + g.

Question 77

The above figure shows supply and demand curves for apartment units in a large city.At the unregulated equilibrium,producer surplus will be

A)d.
B)d + e.
C)d + g.
D)d + c + g.

Question 78

The above figure shows supply and demand curves for apartment units in a large city.The area "c" represents

A)the loss in consumer surplus if a rent ceiling of $350 is imposed.
B)a transfer from producers to consumers if a rent ceiling of $350 is imposed.
C)a transfer from consumers to producers if a rent ceiling of $350 is imposed.
D)the total revenue received by supplying Q1 units.

Question 79

The above figure shows supply and demand curves for milk.In an effort to help farmers,the government passes a law that establishes a $3 per gallon price support.As a result,consumer surplus falls by

A)a.
B)b + f.
C)f + g.
D)b + f - c.

Question 80

The above figure shows supply and demand curves for milk.If the government passes a $2 per gallon specific tax,the loss in social welfare will equal

A)b + c + f + g.
B)f + g.
C)b + f.
D)c + g.