ECON 102 – In a market with voluntary trade and exchange

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 payB) Firms charging higher prices because there are no substitute goods forconsumers to buyC) Firms selling a good at a price that is greater than the marginal cost of producingthe goodD) All of the above2.Suppose a binding price control is placed on a competitive market. What is thereason that deadweight loss (DWL) is created?A) The government is deciding the allocation of goodsB) Consumers are now paying lower pricesC) Producers are now receiving higher pricesD) The number of trades in the market is reduced3.Suppose a market has the following demand and supply functions:Qd = 40 – 2PQs = –8 + 4PUsing the equations, solve for equilibrium price and quantity. You may want todouble check your math just to be sure.A) Q* = 16, P* = 16B) Q* = 29, P* = 5.3C) Q* = 13, P* = 5.3D) Q* = 24, P* = 16E) Q* = 28, P* = 6F) Q* = 29, P* = 8G) Q* = 24, P* = 8H) Q* = 24, P* = 204.Notice that I have provided the graph of these functions, although it is notnecessarily drawn to scale. I have provided the vertical intercepts for the supply anddemand functions for you. What is the consumer surplus at this equilibrium price?A) CS = $8B) CS = $20C) CS = $24D) CS = $72E) CS = $144F) CS = $2885.What is the producer surplus at this equilibrium price?A) PS = $2B) PS = $8C) PS = $24D) PS = $72E) PS = $144F) PS = $366.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 thenumber of trades actually occurring at this price. The number of trades occurring islabeled “A” on the graph. You must find “A” by plugging in the PF price into thedemand curve.A) A = 8B) A = 12C) A = 16D) A = 207.At this quantity “A” that you just found, find B, the height of the supply curve. Do thisby plugging in a quantity “A” into the supply function and solving for price (which isthe height of the supply curve).A) B = $6B) B = $7C) B = $8D) B = $98.What is consumer surplus with the price floor?A) CS = $80B) CS = $320C) CS = $160D) CS = $64E) CS = $96F) CS = $1289.What is producer surplus with the price floor?A) PS = $64B) PS = $128C) PS = $192D) PS = $96E) PS = $216F) PS = $14410.What is deadweight loss with the price floor?A) DWL = $24B) DWL = $36C) DWL = $48D) DWL = $64E) DWL = $72F) DWL = $9611.On the previous graph, why did the price floor decrease number of trades from Q* toA?A) The government didn’t allow as many goods to be soldB) The firms wanted to sell more goodsC) The consumers didn’t want to buy as many goodsD) The profit of the firms became too high12.Your local farmer has many competitors and exists in a market structure known asperfect competition. This means that price is determined outside of the individualfarmer’s ability to charge a price higher than the going market for a bushel of wheat,hence the farmer isA) 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 industryD) a price taker and cannot affect the market price of wheat.13.A perfectly competitive market hasA) high barriers to entry or exitB) homogeneous productsC) to do a lot of advertising to attract buyersD) few firms14.Which of the following statements is correct?A) The demand curve of the perfectly competitive industry is elastic as are thedemand curves facing the individual firms.B) The market demand curve of perfect competition is inelastic because theindividual consumers are buying a homogeneous product.C) The market demand curve of the perfectly competitive industry is downwardsloping while the demand curve of an individual firm is horizontal with a heightequal to the product price.D) The market demand curve of the perfectly competitive industry is downwardsloping, 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 makeprofits. Axel noted that there are many small firms here, and it’s easy to enter. Doesthis mean that Halloween costume stores would fit the model of perfectcompetition?A) No – because the costumes are only sold during a few weeks out of the yearB) No – because the products sold are not homogenous and may differ from store tostoreC) Yes – with many firms, they will be price takersD) Yes – since these firms advertise, consumers have perfect price informationE) Both [A] and [B]F) Both [C] and [D]16.True or False: “Free entry” in the Halloween costume business means it costs zerodollars up front to start the business.A) True – but there will be marginal costs involved with producing outputB) True – a firm doesn’t need any physical capital when it first startsC) False – free entry means that government pays for new firms to promotecompetitionD) False – free entry means there are no serious barriers for an individual to start abusinessE) Both [A] and [B]F) Both [C] and [D]17.After Halloween ended, Axel ate some candy and decided to start a leaf rakingbusiness. The leaf raking industry is perfectly competitive. Perfect competition inleaf raking means that:A) Axel’s business sells an identical service offered by other leaf rakersB) There is a going market price charged by all businessesC) Consumers and producers have perfect information with regards to the marketpriceD) Anyone can enter the leaf raking businessE) All of the above18.Refer to the above table. Axel’s leaf raking firm operates in a perfectly competitivemarket in which the market price is $10 per yard raked (total output refers to totalyards raked). What is its profit-maximizing rate of production? Hint: There are twoways to solve this (total and marginal).A) 104 yards rakedB) 106 yards rakedC) 108 yards rakedD) 110 yards raked19.Refer to the above table. Axel’s firm operates in a perfectly competitive market inwhich 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 apicture of Axel operating a lawn mower). Consider the cost structure of the perfectlycompetitive lawn mowing firm in the above figure. If the market price is $15 peryard mowed, the firmA) 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 beA) $0 (breaks even)B) $10C) $15D) $20E) a negative number (loss), but we don’t know how much based on the graph22.In the above lawn mowing figure, suppose that the break-even price is $13.50 (notdirectly labeled on graph). If the market price is less than $13.50, the profitmaximizing firm willA) still continue to produce outputB) shut downC) raise the price of the goodD) either [A] or [B] could be correct, depending on the priceE) none of the above23.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 exitD) Both buyers and sellers have equally good information.24.In a perfectly competitive market structure any firm can enter or leave the industrywithout serious impediments. This impliesA) the products sold will be alike.B) firms will move labor and capital in pursuit of profit-making opportunities towhatever 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 beA) entry of new firms into the market in the long runB) an accounting loss for existing firms.C) exiting of existing firms out of the market in the long runD) an upward pressure on price.E) an incentive for firms to try and differentiate their products26.Economic profits and losses are true market signals because theyA) convey true information to some people and false information to othersB) convey information about rewards people should anticipate experiencing byshifting resources from one activity to another.C) convey information to public officials about how to control pricesD) cause people to move into careers in both undesirable and desirable industrieswith equal ease.27.This homework had some difficult questions on it. This question is probably not asdifficult. 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.

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