Question

1. If the marginal cost of production of a good is a positively sloped function of the quantity supplied to the market and the price of the good is a negatively sloped function of the quantity demanded,
   1. In a monopoly market price there will always be a dead-weight loss compared to the result of a competitive market.
   2. In a competitive market, the long-run equilibrium quantity supplied and demanded will be the quantity at which long run marginal cost and price are equal if price is greater than or equal to long run average total cost.
   3. In a monopoly market, the profit maximizing quantity will always be the quantity at which marginal cost equals marginal revenue.
   4. In a monopoly market consumer surplus will be greater than in a competitive market.
   5. None of the above.

2. If the own-price elasticity of demand for dry breakfast cereal is -2.5, what would be a likely value for the elasticity of demand for Kellogg brand Corn Flakes?
   1. Less than -2.5
   2. -2.5
   3. Greater than -2.5
   4. -2.5 divided by the number of other competing brands of corn flakes
   5. None of the above.

3. It the elasticity of demand for good x is minus 0.4 at the price P= $5 and quantity Q = 1000, what is the value of the parameter b if the demand function is of the form Q = A + bP?
   1. Minus 50
   2. Minus 45
   3. Minus 75
   4. Minus 80
   5. None of the above.

4. If the income elasticity of demand for electricity is + .04 when income is $30,000 per year and quantity demanded is 15,000 kilowatt hours of electricity per year, what is the value of c in the demand function Q = A + bP + cM, where A is a constant, P is price per kilowatt hour and M is average household annual income?
   1. 20
   2. .04
   3. -.04
   4. -20
   5. None of the above.

5. If the cross elasticity of demand for good x with respect to the price of good y is 2.5
   1. Goods x and y are both normal goods
   2. Good x is a normal good and good y is an inferior good.
   3. Goods x and y are complements
   4. Goods x and y are substitutes
   5. None of the above.

Answer 1

(1) (a)

Monopoly leads to deadweight loss.

(2) (c)

The broader (narrower) the product definition, the less elastic (more elastic) demand is. So elasticity for a specific brand will be higher than elasticity of the product in general.

(3) (d)

Q = A + bP

Elasticity = (dQ/dP) x (P/Q) = b x (5/1000)

- 0.4 = b / 200

b = - 80

(4) (e)

Q = A + bP + cM

Income elasticity = (dQ/dM) x (M/Q) = c x (M/Q)

0.04 = c x (30,000 / 15,000)

0.04 = 2c

c = 0.02

(5) (d)

When cross-price elasticity > 0, goods are substitutes.