Week 5 Revision

The diagram shows the demand and the supply curves for a textbook. The curves intersect at (Q, P) = (24, 8). Which of the following is correct?

• At price $10, there is an excess demand for the textbook.

• At $8, some of the sellers have an incentive to increase their selling price to $9.

• At $8, the market clears.

• 40 books will be sold in total.

The figure shows a price-taking bakery’s marginal and average cost curves, and its isoprofit curves. The market price for bread is P*= €2.35. Which of the following statements is correct?

• The firm’s supply curve is horizontal.

• At the market price of €2.35, the firm will supply 62 loaves, at the point where the firm makes zero profit.

• At any market price, the firm’s supply is given by the corresponding point on the average cost curve.

• The marginal cost curve is the firm’s supply curve.

There are two different types of producers of a good in an industry where firms are price-takers. The marginal cost curves of the two types are given below. Type A is more efficient than Type B: for example, as shown, at the output of 20 units, the Type A firms have a marginal cost of $2, as opposed to a marginal cost of $3 for the Type B firms. There are 10 Type A firms and 8 Type B firms in the market. Which of the following statements is correct?

• At price $2, the market supply is 450 units.

• The market will supply 510 units at price $3.

• At price $2, the market’s marginal cost of supplying one extra unit of the good will depend on the type of the firm that produces it.

• With different types of firms, we cannot determine the marginal cost curve for the market.

In Figure the market equilibrium output and price of the bread market is shown to be at (Q*, P*) = (5,000, €2). Suppose that the mayor decrees that bakeries must sell as much bread as consumers want, at a price of €1.50. Which of the following statements are correct?

• The consumer and producer surpluses both increase.

• The producer surplus increases but the consumer surplus decreases.

• The consumer surplus increases but the producer surplus decreases.

• The total surplus is higher than at the market equilibrium.

Which of the following statements about a competitive equilibrium allocation are correct?

• It is the best possible allocation.

• No buyer’s or seller’s surplus can be increased without reducing someone else’s surplus.

• The allocation is usually not Pareto Efficient.

• The total surplus from trade is not maximum.

The figure shows the equilibrium of the bread market to be 5,000 loaves per day at price €2. A year later, we find that the market equilibrium price has fallen to €1.50. What can we conclude?

• The fall in the price must have been caused by a downward shift in the demand curve.

• The fall in the price must have been caused by a downward shift in the supply curve.

• The fall in price could have been caused by a shift in either curve.

• At a price of €1.50, there will be an excess demand for bread.

Which of the following statements are correct?

• A fall in the mortgage interest rate would shift up the demand curve for new houses.

• The launch of a new Sony smartphone would shift up the demand curve for existing iPhones.

• A fall in the oil price would shift up the demand curve for oil.

• A fall in the oil price would shift up the supply curve for plastics.

The figure shows the demand and supply curves for salt, and the shift in the supply curve due to the implementation of a 30% tax on the price of salt. Which of the following statements are correct?

• In the post-tax equilibrium, the consumers pay P₁ and the producers receive P*.

• The government’s tax revenue is given by (P* – P₀)Q₁.

• The deadweight loss is given by(1/2)(P₁ – P₀)(Q* – Q₁).

• As a result of the tax, the producer surplus is reduced by (1/2)(Q* - Q₁)(P₁ – P*).

The figure shows the effect of a tax intended to reduce the consumption of butter. The before-tax equilibrium is at A = (2.0 kg, 45kr) and the after-tax equilibrium is at B = (1.6 kg, 54kr). The tax imposed is 10kr per kg of butter. Which of the following statements is correct?

• The producers receive 45 kr per kg of butter.

• The tax policy would be more effective if the supply curve were less elastic.

• The very elastic supply curve implies that the incidence of the tax falls mainly on consumers.

• The loss of consumer surplus due to tax is (1/2) × 10 × (2.0 – 1.6) = 2.0.

As a student representative, one of your roles is to organize a second-hand textbook market between the current and former first-year students. After a survey, you estimate the demand and supply curves to be the ones shown in the figures provided. For example, you estimate that pricing the book at $7 would lead to a supply of 20 books and a demand of 26 books. Which of the following statements is correct?

• A rumour that the textbook may be required again in Year 2 would change the supply curve, shifting it to the left.

• Doubling the price to $14 would double the supply.

• A rumour that the textbook may no longer be on the reading list for the first-year students would change the demand curve, shifting it to the right.

• Demand would double if the price were reduced sufficiently.