Question

1. Suppose that the price of a good decreases and therefore the Consumer Surplus increases. This is due to:

   		buyers leaving the market and remaining buyers paying a higher price.
   		buyers entering the market and remaining buyers paying a higher price.
   		buyers leaving the market and remaining buyers paying a lower price.
   		buyers entering the market and remaining buyers paying a lower price.

2. In the market for cars, the government levies a new tax on buyers. In this market, the Supply curve is more elastic than the Demand curve. This fact implies that sellers will bear a higher tax burden.

True

False

3. To maximize profits in a competitive market, a firm must produce where marginal revenue curve is equal to marginal cost curve.

True

False

4. On a 1000-acre date palm farm, Farah is able to produce 2,500 bushels of dates when she hires 2 workers. She is able to produce 5,000 bushels of dates when she hires 3 workers. Which of the following possibilities is consistent with the property of diminishing marginal product?

		Mariam is able to produce 7,500 bushels of dates when she hires 4 workers.
		Mariam is able to produce 6,500 bushels of dates when she hires 4 workers.
		Mariam is able to produce 8,500 bushels of dates when she hires 4 workers.
		Any of the above could be correct.

5. A firm produces 7 units of output at a average variable cost of AED 15. If fixed costs are AED 42,

		average fixed cost is AED 8.
		variable cost is AED 50.
		average total cost is AED 21.
		average fixed cost is AED10.

6. If the price that Meera pays for an iPhone is smaller to her willingness to pay, then her consumer surplus is

		negative, and Meera would not purchase the iPhone.
		positive, and Meera would purchase the iPhone.
		zero.
		there is not enough information to know the answer.

7. Suppose that the price of a good decreases and therefore the Producer Surplus decreases. This is due to:

		sellers leaving the market and remaining sellers getting a lower price.
		new sellers entering the market and all sellers getting a lower price.
		new sellers entering the market and all sellers getting a higher price.
		sellers leaving the market and remaining sellers getting a higher price.

Answer 1

1 - d

Lower price causes more buyers to enter the market but initial buyers keep paying low price.

2 - False

If supply is more elastic than demand, then buyers pay higher tax burden.

3 - False

In competitive market, Price = MC.

4 - b

MP of 3rdworker = 5,000 - 2,500 = 2,500

Due to diminishing returns, MP of 4th worker will be less than 2,500, so output when 4 workers are hired will be less than (5,000 + 2,500) = 7,500.

5 - c

TC = TFC + TVC = 42 + (7 x 15) = 42 + 105 = 147

ATC = TC/Q = 147/7 = 21

6 - b

CS = Maximum willingness to pay (MWTP) - Actual price (P)

When P < MWTP, CS > 0

7 - a

When price decreases, some sellers leave the market and remaining sellers get lower price.