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Introduction to Microeconomics 2014 -2015

PARTIAL EXAM, 5th of November 2014
Permutation 2
Professor: Rosemarie Nagel

PART A. COMPULSORY QUESTIONS

There are 20 multiple choice questions each with only one correct option. The
maximum score is 60 points. Each correct answer counts +3, each wrong answer
counts -1 and blank responses yield a score of 0.
Duration: 90 minutes
Note:
Unless explicitly stated otherwise,
consider supply and demand functions that are
neither perfectly elastic nor perfectly inelastic.
Statement for questions 1-1 0: The fish market is perfectly competitive. The
following table represents the distribution of values and costs for buyers and
sellers. Each agent can sell or buy only one box of fish. All suppliers have, in
addition to the variable cost, a fixed cost of 6 euros.

Value 25
Value 20
Value 15
Value 10
Variable Cost 15

Number of
buyers
12
7
7
7

Number of
sellers

16

1. What is the reservation price (minimum price to accept) of a fisherman

who has a fixed cost of 6 and a variable cost of 15?
a) Reservation price = 6.
b) Reservation price = 0.
c) Reservation price = 15.
d) Reservation price = 21.
2.

Calculate price and quantity in the competitive equilibrium.

a) P * = 21, Q * = 12
b) P * = 20, Q * = 16
c) P * = 15, Q * = 19
d) P * = 15, Q * = 16

3.

Calculate the consumer surplus.

a) Consumer Surplus = 60.
b) Consumer surplus = 120.
c) Consumer surplus = 140.
d) Consumer surplus = 155.

4.

Calculate the profit of the sellers.

a) Sellers profit = 80.
b) Sellers profit = -16.
c) Sellers profit = -42.
d) Sellers profit = -114.

5.

What kind of demanders will trade?

a) All demanders with values 25 or 20.
b) Only the demanders with value 25.
c) All demanders except for the ones with value 10.
d) None of the above answers is correct.

6. Is the competitive equilibrium efficient?

a) Yes, because all sellers are selling and all buyers are buying.
b) Yes, because the sum of the profits of sellers and buyers
attains its highest possible maximum.
c) No, because there are sellers who are not selling and buyers who
are not buying.
d) No, because we could increase the consumer surplus by lowering
the price.
7. If the fixed cost of all buyers decreases from 6 to 4.50 euros, what
happens to the supply curve?
a) The supply curve shifts up, since for the same price sellers are
willing to supply fewer units.
b) The supply curve shifts down, since for the same price they are
willing to supply more units.
c) The supply curve does not shift.
d) The demand curve shifts down, since for the same price they
demand more.
8. The variable cost of all suppliers increases by 9 units, what is the new
price and quantity in the new equilibrium?
a) P * = 24, Q * = 12
b) P * = 30, Q * = 0
c) P * = 15, Q * = 26
d) P * = 15, Q * = 16
9. Because scientific studies found that fish has high nutritional value, the
demand for fish increases. What happens to the equilibrium price and
quantity?
a) The quantity increases but the price does not decrease.
b) The quantity increases but the price decreases.
c) The quantity and the price increase.
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d) The quantity does not decrease and the price increases.

10. We are facing a long-term decision in the fish market. One of the
fishermen is planning on paying the fixed cost and to go fishing. He
knows that if he fishes, he will get a box of fish and that the market will
be the same as shown in the table from the beginning. Having seen the
results of competitive equilibrium (without shifts), what would you
recommend?
a) Whatever the fixed cost, I would recommend him to go out fishing.
b) Only if he has a fixed cost less than or equal to 3 euros, I would
recommend him to go out fishing.
c) Whatever the fixed cost, I would recommend him not to go out
fishing.
d) Only if he has a fixed cost less than or equal to 5, I would
recommend him to go out fishing.
Statement for questions 11-13: Figure 1 represents a perfectly competitive
market.
Price ()

Figure 1

50

Supply

40

30

Demand

15

20

40

Quantity

11. From Figure 1 we can deduce:

a) The maximum production cost is 50.
b) No supplier will be willing to sell for less than 30 euros (the
equilibrium price) for one unit of this good.
c) The production of this good requires an irrecoverable fixed cost of
15 .
d) The minimum production cost is 15.
12. In Figure 1, a sales tax of 35 euros...
a) ... does not generate any efficiency loss.
b) ... generates tax revenue equal to the loss in total benefits of the
market.
c) ... generates a deadweight loss equal to the total market
profits before tax.
d) ... would be borne rather by the consumers than the producers.

13. What can we say about the demand before an increase in the price from
30 to 40 euros?
a) Demand is elastic, because the price elasticity is -1.5.
b) Demand is elastic, because the increase in quantity is 20 units,
higher than the price drop of 10 units.
c) Demand is inelastic, because the price elasticity is greater than -1
(or less than 1 in absolute value).
d) Demand is inelastic, because the price elasticity is -4.
Statement for questions 14 & 15: With the aim to fight against tobacco, the
state introduces a sales tax of 4 per package of cigarettes. As a result, the price
per package of tobacco increases by 30% (from 10 to 13 per package), while
consumption is reduced by half.
14. What percentage of the tax is borne by the smokers?
a) 75%
b) 30%
c) 4%
d) 70%
15. What is the elasticity of demand implied by the data?
a) -0.6
b) -1.67
c) -1
d) -0.3
The following questions have separate statements.
16. At a price of 25 , 10 units are supplied and the price elasticity of supply
is 7.5. If the price increases to 26 ,
a) the supplied quantity increases by 7.5 units.
b) the supplied quantity increases by 3 units.
c) the supplied quantity increases by 0.75 units.
d) the supplied quantity increases by 2 units.
17. Alejandro, Beatriz and Cristina are the only consumers of science fiction.
The latest title by Ursula K. Le Guin is sold on the market for a price of 25
. Alejandro would be willing to pay up to 30 for it, Beatriz up to 28
and Cristina up to 26 . Books have a tax of 2 , which increases the final
price to 27 . As a result of the tax ...
a) ... the consumer surplus is reduced by 9 and the tax revenue
increases by 6 , resulting in a loss of efficiency of 3 .
b) ... the consumer surplus is reduced by 6 and tax revenue
increases by 6 , so there is no loss of efficiency.
c) ... the consumer surplus is reduced by 6 and tax revenue
increased by 4 , causing a loss of efficiency of 2 .
d) ... the consumer surplus is reduced by 5 and tax revenue
increased by 4 , causing a loss of efficiency of 1 .
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18. Consider the following statement: "Nowadays, leather jackets become

fashionable. This causes a shift in the demand curve for leather jackets,
causing an increase in their price. As the price increases, the quantity
demanded falls and it is impossible to know the final equilibrium
quantity."
a) This statement is not correct; the fall in demand for the
increase in price is already incorporated in the shift of the
curve.
b) The statement is not correct; the increased demand would not
cause an increase in price.
c) This statement is incorrect, the price could decrease.
d) The statement is correct.
19. The demand for internet on a Pacific island is as follows: 40,000 people
have a buyer value of 101 , 30,000 people have a buyer value of 81
and 10,000 people have a buyer value of 61 . The supply of mobile
phones is horizontal at a price of 40 . Which of the following sales taxes
will produce the greatest tax revenue for the government of the island?
a) 80
b) 60
c) 40
d) 20
20. Which of the following statements would be true if the supply curve
were perfectly inelastic?
a) A new 300 euros tax on the sale of trucks does not affect the
equilibrium price of cars.
b) A new tax of 300 euros on the purchase of trucks causes a fall in
the equilibrium price equal to 300 euros.
c) A new discovery allows reducing production costs. The supply
shifts and the market price decreases.
d) Statements a) and b) but not c).

PART B. OPTIONAL QUESTION

This question can only be corrected and evaluated if you have earned at least 48
points (80%) in the previous mandatory questions. A correct answer gives you 3
points (5%). No partial score can be obtained. A correct response requires both the
reasoning and the result to be correct.
QUESTION
Consider a perfectly competitive housing market in which supply and demand is
represented by the following functions:
D: P = 3000 10 Q
S: Q = 100,
where Q is the number of homes and P is the price per square meter (in euros).
a) Calculate the price and the quantity in equilibrium.
b) The state offers a tax reduction on the purchase of a house equivalent to a
subsidy of 500 euros per square meter. Calculate the new price and the
new quantity in equilibrium.
c) The article "The relief is for the developer" (which appeared in the further
reading) argued that this type of tax reduction is inflationary. Do the
results of this exercise support this conclusion? Explain your reasoning.