#10 How do you find the socially optimal quantity?#18 How do you find at what price they should trade?#23 How do you find the government revenue?

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ECO 304K:

INTRODUCTION TO MICROECONOMICS

Prof. Wiseman

Practice Questions for Final Exam

1.

Understand all the material for Midterms 1 and 2.

2. Review the homework exercises and the questions and study problems at the

end of your textbook chapters.

THE NEXT THREE QUESTIONS ARE BASED ON THE FOLLOWING SITUATION:

The

table below shows the number of units of output that a firm can produce per day,

as function of the number of workers hired.

The firm is price-taker in both the

labor market and the output market.

The market price of a unit of output is $20,

and the market daily wage rate is $150.

The firm has no costs besides labor.

# of workers hired

# of units of output produced

1

8

2

20

3

30

4

36

5

40

3.

What is the marginal revenue product of labor for the fourth worker hired?

a)

$720.

b)

$6.

c)

$180.

d)

$120.

e)

$20.

4.

How many workers should the firm hire in order to maximize profit?

a)

1.

b)

4.

c)

5.

d)

2.

e)

3.

5.

Now suppose that the firm invents a new production method, so that output as

a function of the number of workers hired increases, as shown below:

# of workers hired

# of units of output produced

1

12

2

30

3

45

4

54

5

60

View the Answer

2

By how much does the new production method increase the value of maximized

profit?

a)

$300.

b)

$0.

c)

$360.

d)

$480.

e)

$330.

6.

Consider a good that generates a negative externality.

Is the quantity produced

by a profit-maximizing monopolist greater than, less than, or equal to the efficient

quantity?

What if the externality is positive?

7.

True or False:

A tax always reduces total surplus.

8.

True or False:

Since competitive markets are efficient, there is no role for

government in the economy.

THE NEXT THREE QUESTIONS DEAL WITH THE FOLLOWING SITUATION: The supply

curve in the cookie sculpture market is given by P = 500 + 40Q

S

.

The demand

curve is given by P = 2000 – 10Q

D

.

Each cookie sculpture produced generates a

positive externality worth $500, because of the wonderful smell.

9.

What are the competitive price and quantity?

10.

What is the socially optimal quantity?

How much larger is total surplus at the

optimal quantity than at the competitive outcome?

11.

How large a subsidy should the government offer to producers to achieve the

efficient quantity?

How much will the government spend on the subsidy?

12.

A November 11, 2005 article in the

New York Times

reports that a roughly $14

“congestion charge” to drive into central London has led to a 20% decrease in

carbon dioxide emissions and a 12% decrease in emissions of nitrogen oxides.

From those figures, which of the following conclusions can be drawn?

a)

The charge is too high relative to the socially optimal level.

b)

The charge is too low relative to the socially optimal level.

c)

The charge is set at the socially optimal level.

d)

New York City would benefit from adopting a similar policy, but with a much

lower charge.

e)

None of the above.

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