Chapter 10 Review Multiple Choice 1. In a perfectly competitive market with a su

Question

Chapter 10 Review Multiple Choice 1. In a perfectly competitive market with a subsidy, what can we say? O There will be a range of values for the consumer surplus and producer surplus. (b) There will be one value for the consumer surplus, but a range of values for the producer (e) There will be one value for the consumer surplhes and the producer surplus (d) There will be a range of values for the consumer surplus, but only one value for the producer surplus. 2. In a perfectly competitive market with a price ceiling below the equilibrium value, what can we say? /a) There will be one value for the consumer surplus and the producer surplus (b) There will be one value for the consumer surplus, but a range of values for t (c) There will be a range of values for the consumer surplus, but only one value for the (d) There will be a range of values for the consumer surplus and producer surplus. he producer surplus 07 5 3. If the incidence of a tax is less than negative one (the demand curve), what can we say? curve is relatively more inelastic than the supply (a) The burden of the tax cannot be determined with the information given. (b) The producer will bear more of the burden of the tax than the consumer. (e) The consumer will bear more of the burden of the tax than the producer. (d) The tax will have an equal effect on both the consumer and the producer. 4. Suppose demand in a perfectly competitive market is Q- 12 - P and supply is Q- P. If there is a price fooroly at P= 8 what is the lowest deadweight loss possible in the market? (b) 0 (c) 16 (d) 8

Explanation / Answer

1 . (A) First we know that this is a competitive industry, so we know that firms can enter or exit the market as they wish. This means that in the long run, firms will be producing at the minimum of their average total cost (ATC) to ensure that there is zero economic profit. We can find the minimum of the ATC quite easily by finding equations for both the ATC and the marginal cost (MC) and setting them equal to each other and solving for quantity (q). This works because MC crosses ATC at its minimum.

So first we need to find ATC, this is done by taking our cost function, and dividing by q:

Total Cost = C = q^2 + 16 => ATC = C/q = q^2/q + 16/q

Simplify to get ATC= q + 16/q

To find MC we need to take the first derivative of the cost function with respect to q. This gives us:

2q (by use of the power rule, the exponent drops down and becomes the coefficient and the 16 drops out).

So now we set MC equal to ATC:

2q = q + 16/q

We can subtract q from both sides, and then multiply both sides by q to get:

q^2 = 16, and then take the square root of both sides to get:

q = 4.

So the quantity that each perfectly competitive firm will product at is at a quantity of 4. Note that this will be the minimum ATC regardless of the subsidy because the subsidy will simply lower the MC, and ATC by $4 at any point because it is a per unit subsidy.

2. (A )

3. ( C)

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