Sample Final exam

5) Fifi and Bumble are best mates. Fifi currently owns a honey pot that she values at $10. Bumble values the honey pot at $8 and has $20 in his wallet.

a. The current allocation of the honey pot is Pareto inefficient. 

b. Fifi and Bumble should be able to come to a mutually advantageous trade with respect to the honey pot. 

c. Given the current allocation, it will be possible to make both Bumble and Fifi better off. 

d. The current allocation of the honey pot is Pareto efficient. 

e. a, b and c are all true.

6) Gordon used to work for MacSquander bank where he earned a yearly salary of $150,000. Gordon got fired as a result of the global financial crisis and found that the skills he had were not wanted by other employers. As a result, Gordon now runs a pie shop called Gordon’s Grumble Pie. Gordon pays rent of $100,000 per annum and spends $50,000 per year on other inputs. He earns $200,000 in total annual revenue. Gordon’s economic profit is

a. -$100,000.                                b. $0.                                                      c. $50,000.

 d. $200,000. e. None of the above because the answer depends on how much Gordon is willing to work for other banks for.

7) The supply curve for blueberry juice is estimated to be Q=40+2p. Then:

a. supply is price elastic at all prices 

b. supply is price inelastic at all prices

 c. supply is only elastic at prices below 20 

d. no general statements about price elasticity of supply can be made

e. none of the above.

8) Producer surplus is: 

a. Always at least as large as profit. 

b. Revenue less the sum of marginal costs 

c. Equal to profits plus fixed costs. 

d. b and c only are true. 

e. a, b and c are all true.

9) Consider the following two demand curves for brie (d b ) and cheddar cheese (d c ) in the diagram below (note both have the same slope)

10) In a monopoly the consumer surplus is equals 

a. 200            b. 300            c. 600           d. 900             e. 1100

11) When the market shifts from perfect competition to monopoly, which share of consumer surplus is transferred to the monopolist?

 a. 200            b. 300            c. 400           d. 500             e. 600

12) An aspect of a good in which one person’s increased consumption of it does not decrease the amount available for consumption by others is called

 a. non-rivalry.      b. non-excludability.        c. rivalry.       d. excludability.         e. exclusiveness.

13) Costs to society will equal costs to a private firm when

 a. harmful externalities occur in the firm’s market.

 b. the firm misallocates resources in its market. 

c. third parties bear some costs of producing the firm’s product. 

d. no externalities occur when the firm produces its product. 

e. beneficial externalities occur in the firm’s market.

14) Which statement is true?

 a. Revenue (or total expenditure) is maximised at the middle point of a linear (straight line) demand curve. 

b. When prices rise total expenditure rises when demand is elastic in the relevant range 

c. Total expenditure rises when demand in inelastic in the relevant range and price falls 

d. All of the above statements are true 

e. None of the above

15) Which statement is true?

 a. A positive tax always creates a deadweight loss

 b. A tax that does not raise any revenue has a zero deadweight loss. 

c. In a market where the domestic no trade price is above the world price, if demand is inelastic and the law of supply holds, a tariff does not create any deadweight loss. 

d. If the law of demand holds and supply if perfectly inelastic, consumers pay for all of a tax. 

e. None of the above.

Question B1 

Trieste is a beautiful city located in the Gulf of Venice. Although it belongs to Italy nowadays, many people living there for generations speak languages other than Italian. This is the case of the Slovenes. The only Slovenian bookshop in Trieste is Tržaška Knjigarna (it simply translates to Triestian Bookshop). During the 1970s it was relatively difficult for the Slovenes from Trieste to cross the border and buy books in Yugoslavia. Therefore Tržaška Knjigarna (or just TK) was effectively a monopolist. By that time the monthly demand in Trieste for the novel Na klancu by Ivan Cankar was given by Q D = 1200 – 12P, where P is measured in thousands of Italian lire . TK estimated the total cost of selling Na klancu as TC = Q 2 /12 – 40Q + 3000 .

 (a) Suppose TK wants to maximise profits, what would be the price for Cankar’s novel? In your answer you must draw a diagram indicating the relevant curves and the equilibrium outcome. [4 marks] 

(b) The owners of TK decided they wanted to support the reading of Slovenian books. How many copies of the novel TK would sell if they wanted to make the market efficient? Please identify the quantity in the diagram drawn for part a) [2 marks] 

(c) One of the employees at TK proposed a third solution: setting a price such that revenue is maximised. Which was the price he proposed? [1 marks]

 (d) After a few years some of the conditions on the market changed. Demand remained Q D = 1200 – 12P. However, total cost became TC = 50Q + 5000. Assume again that TK acted again as a monopolist. Moreover, the Italian government imposed a 2,000 lump sum tax on all bookshops. Calculate TK’s new price and profits under the new conditions. Please, use a new diagram to illustrate your answer. [3 marks] For each of the four parts of this problem you must show the calculations that lead to find the answer