Summary Microeconomics Applications PDF

Summary Microeconomics Applications 1. An airline evaluates the cost of a flight performed by a 200-seat airplane at \$100,000, which means the cost per seat is \$500 (\$100,000/200). Suppose the aircraft is going to perform the flight with 10 empty seats. However, the company prefers...

Summary Microeconomics Applications 1. An airline evaluates the cost of a flight performed by a 200-seat airplane at \$100,000, which means the cost per seat is \$500 (\$100,000/200). Suppose the aircraft is going to perform the flight with 10 empty seats. However, the company prefers to sell a ticket to a passenger on standby who is willing to pay a maximum of \$300, even though the average cost per passenger is estimated by the company at \$500. The company's marginal cost for this passenger might only be the cost of a sandwich and a bottle of water, for example (provided to passengers during the flight). As long as the passenger pays more than the company's marginal cost, this decision is rational.\ This is:\ a) an unlikely situation;\ b) a trade-off between efficiency and equity;\ c) an example of comparative advantage;\ **d) an example of marginal analysis.** *(see Chapter 1 Principles of Economics)* 2. Which of the following statements represents a positive statement?\ a) If the government wants to increase employment, it should increase budgetary spending;\ b) The trade of arms should be banned;\ **c) If the price of a good decreases, the quantity demanded will increase;**\ d) The government should increase taxes on meat imports to protect domestic producers. 3. Which of the following statements represents a normative statement?\ a) Tax reduction promotes investment growth;\ b) An increase in consumer income leads to an increase in demand;\ **c) To reduce income inequality, the government [must/should] raise the minimum wage;**\ d) A tax is borne more by buyers than by sellers if demand is more inelastic than supply. 4. The theory of comparative advantage asserts that economic u units specialize in producing those goods that ensure:\ a) the highest average total cost of production;\ b) the lowest profit;\ c) the highest opportunity cost;\ **d) the lowest opportunity cost.** *(see Chapter 2 The Economic Way of Thinking)* 5. If two economic agents trade based on comparative advantage:\ a) both will incur losses;\ b) both could consume below the production possibility frontier;\ **c) both could consume above the production possibility frontier;**\ d) only one of the two economic agents may experience an increase in welfare. *(see Chapter 2 The Economic Way of Thinking)* 6. Which of the following is NOT a direct factor influencing supply?\ a) Prices of production factors;\ **b) Consumer incomes;**\ c) Technology;\ d) Production costs; 7. Given the supply and demand functions on a market Qd= 90 - 10P, Qs = 10 + 6P, where Q is quantity, and P is price. Calculate the equilibrium price and quantity. If the government imposes a price of 4 units, determine whether a demand or supply surplus occurs.\ At equilibrium, on a market, Qd = Qs ↔ 90 - 10P = 10 + 6P → Pe = 5\ Qe = 40\ The price of 4 is a price ceiling.\ P = 4 → Qc = 50, Qo = 34 → Excess demand (shortage of supply). 8. Given the supply and demand functions: Qs = 3P and Qd = 12 - P, If the government imposes a price twice as high as the equilibrium price, the market will experience a surplus of:\ a) demand, 6 units;\ **b) supply, 12 units;**\ c) demand, 12 units;\ d) supply, 18 units. Qs = Qd ↔ 12 - P = 3P → Pe = 3\ The price imposed by the government = 6 (price floor/minimum price)\ P = 6 → Qc = 6, Qo = 18 →supply surplus of 12. 9. Setting minimum prices by the Government results in:\ a) shortage;\ b) an increase in quantities demanded by consumers;\ c) constant quantities offered by producers;\ **d) surpluses in the market.** 10. When **[both demand and supply]** **[decrease]** on a market but at different rates:\ a) the equilibrium price may increase or decrease, and the equilibrium quantity may increase, decrease, or remain unchanged;\ b) the equilibrium price increases, and the equilibrium quantity decreases;\ **c) the equilibrium price may either increase or decrease, and t[he equilibrium quantity decreases];**\ d) the equilibrium price decreases, and the equilibrium quantity increases. 11. Ticket speculators for various events:\ a) disrupt the market;\ **b) move the market towards equilibrium;**\ c) increase the supply of tickets;\ d) artificially reduce the supply of tickets. 12. Price controls on /Price capping in a market lead to:\ a) surpluses (of supply);\ **b) supply shortage;**\ c) demand shortage;\ d) an increase in the surplus of producers and buyers. 13. If the price of pencils increases by 10% and, as a result, sales revenue (total revenue TR) increases by 5%, determine how much the quantity demanded for pencils changed, as well as the elasticity of demand: a) +5%, elastic demand; b) +5%, inelastic demand; c) -5%, elastic demand; **d) -5%, inelastic demand.\ ***Price of pencils increases by 10% → P1 = 1.1P0\ Total revenue (TR) increases by 5% → TR1 = 1.05TR0\ TR = P × Q\ TR0 = P0 × Q0\ TR1 = P1 × Q1\ 1.05TR0 = 1.1P0 × Q1 → Q1 = (1.05/1.1) × (TR0/P0) → Q1 = 0.95 × Q0 → Q1 = 95% × Q0 → Δ%Q = -5%\ The demand is inelastic because the percentage change in quantity demanded is smaller than the percentage change in price.* 14. If a 30% increase in price causes a 50% reduction in quantity sold, the demand is:\ a) inelastic;\ **b) elastic;**\ c) unitary elastic;\ d) perfectly inelastic. *The percentage change in quantity demanded is greater (in magnitude) than the percentage change in price.* 15. Goods with high price elasticity of demand:\ **a) have a high degree of substitution;**\ b) are hard to substitute in consumption;\ c) are considered necessary goods;\ d) have a low share in a person's budget. 16. If a 10% increase in price leads to a 5% increase in quantity supplied, the supply is:\ a) elastic;\ **b) inelastic;**\ c) unitary elastic;\ d) perfectly inelastic. *The percentage change in the quantity supplied is smaller than the percentage change in price.* 17. Introducing an indirect tax when demand is more inelastic than supply will affect:\ a) only consumers;\ b) primarily producers;\ c) equally consumers and producers;\ **d) primarily consumers.** *The burden of the tax is borne more by the category with lower elasticity (less sensitivity to price changes), which in this case is the consumers.* 18. The price elasticity of demand for coffee is 0.9 and the price elasticity of supply is 1.1. The Ministry of Finance imposes a tax of 2 units per kg on coffee sales.Following this measure, daily coffee sales in city A become 1200 kg. The tax collected daily in city A is 1200 \* 2 = 2400 units. The tax burden is borne by:\ a) buyers;\ b) sellers (producers);\ c) primarily by producers;\ **d) primarily by consumers.** Ed/p = -Δ%Qd / Δ%P = 0.9 → *demand is inelasti*\ Es/p = Δ%Qs / Δ%P = 1.1 → *supply is elastic*\ The tax burden is borne more by the category *with a lower elasticity (less sensitivity to price changes). Therefore, in this case, consumers bear a larger share of the tax burden*. 19. In international trade, imposing a tariff will generate:\ a) an increase in volume of imports;\ b) an increase in consumer welfare;\ **c) a social loss;**\ d) an increase in consumer surplus. *(see Chapter 6 International Trade)* 20. Which of the following statements regarding the social loss generated by the imposition of a tariff is true:\ **a) total surplus decreases;**\ b) consumer losses are smaller than government revenues;\ c) producers experience a higher loss than consumers;\ d) none of the above. *(see Chapter 6 International Trade)* 21. When production Q increases by 25%, average fixed cost (AFC) will:\ **a) decrease by 20%;**\ b) increase by 20%;\ c) decrease by 25%;\ d) increase by 25%. Q increases by 25% → Q1 = 1.25 \* Q0\ AFC = FC / Q (fixed cost FC remains constant)\ AFC1 = FC / Q1 = AF / 1.25 \* Q0 = 1/1.25 \* AFC0 = 0.8 \* AFC0 → AFC decreases by 20%. 22. If production increases by 75%, variable cost increases by 50%. How do you think average total cost will evolve? a) It increases; **b) It decreases;** c) It does not change; d) It may increase, decrease, or remain constant.\ ATC = (FC + VC) / Q\ ATC will decrease since both average fixed cost and average variable cost decrease. *TC = FC+ VC/ Q\ TC/Q = FC/Q + VC/Q\ ↓ATC = AFC↓ + AVC↓\ AVC= VC/Q\ AVC1= VC1/Q1 = 1.5VC0 / 1.75Q0 = 1.5/1.75 × VC0/Q0 = 0.85 ×AVC0 = 85% × AVC0 → AVC decreases\ AFC1 = FC / Q1 =FC / 1.75Q0 = 1/1.75 × FC/Q0 → AFC1 = 0.57 × AFC 0 → AFC decreases\ AFC↓, AVC↓ → ATC↓\ So, average total cost decreases.* 23. Suppose a company produces 100,000 units annually, selling them at a price of 5 units per piece. The explicit production costs are 375,000 units, and the implicit costs are estimated at 50,000 units. In this case, the accounting and economic profits are(in units):\ a) 150,000; 100,000;\ b) 100,000; 50,000;\ c**) 125,000; 75,000;**\ d) 200,000; 25,000. *Accounting profit = Total Revenue -- Explicit Costs\ Economic profit = Total Revenue -- (Explicit Costs + Implicit Costs)\ Explicit Costs + Implicit Costs = Economic Costs or Opportunity Costs\ Accounting profit = 500,000 -- 375,000 = 125,000\ Economic profit = 500,000 -- (375,000 + 50,000) = 75,000\ So, accounting profit is 125,000 units, and economic profit is 75,000 units.* 24. Given that a company\'s costs is TC = 400 + 10Q (TC = total costs), and the price of the good on the market is 50 units, calculate the output (Q) corresponding to the break-even point:\ a) Q=20;\ **b) Q=10;**\ c) Q=15;\ d) Q=5. *At the break-even point, profit is zero (Profit = TR - TC).\ TR = TC\ P × Q = 400 + 10Q → Q = 10\ If the firm produces beyond the break-even point, for example, Q = 12, it would register a profit:\ TR = 600\ TC = 520\ Profit = 80.* 25. The market with perfect and pure competition is characterized by: freedom to enter and exit the market; homogeneous products; easily differentiated products; firms are price-takers. Choose the correct option:\ a) 1+2+3+4;\ b) 1+3+4;\ **c) 1+2+4;**\ d) 1+2. 26. A firm's total cost in a perfectly competitive market is given by TC = Q² - 4Q + 10, and the equilibrium price in the market is P = 10 units. Determine the quantity that the firm will offer on the market in order to maximize profit, as well as the profit size:\ **a) Q=7, profit = 39;**\ b) Q=39, profit = 7;\ c) Q=17, profit = 29;\ d) Q=17, profit = 39. *2Q-4 = 10 →Q = 7* *Profit = TR -- TC\ TR = P × Q = 10 × 7 = 70\ TC = Q² - 4Q + 10 = 7² - 4 × 7 + 10 = 49 - 28 + 10 = 31\ Profit = 70 - 31 = 39 units.* 27. A firm in a perfectly competitive market should shut down to minimize short-term losses when:\ a) marginal revenue is less than average total cost;\ **b) marginal revenue is less than average variable cost;\ **c) marginal revenue equals marginal cost;\ d) marginal revenue is greater than average variable cost. *If the revenue from each unit sold doesn\'t cover the variable cost of producing it (like raw materials), the company should be shut down to minimize losses.* 28. Firm A operates as a monopoly and has a total cost function given by TC = 3Q² + 4Q + 10, and an inverse demand function of P = 24 - 2Q (where Q is the quantity produced and sold). Calculate the profit-maximizing Q, price, and maximum profit.\ Maximum profit condition in a monopoly: MC = MR\ MC = (TC)'Q = 6Q + 4 *TR=P\*Q = (24-2Q)\*Q = 24Q-2Q^2^*\ MR = (TR)'Q = 24 - 4Q\ MC = MR ↔ 6Q + 4 = 24 - 4Q → Q = 2\ P = 24 -- 2 \* 2 = 20\ Profit = TR - TC\ TR = P \* Q = 20 \* 2 = 40\ TC = 3Q² + 4Q + 10 = 30\ Profit = 40 - 30 = 10 units. 29. In the case of a monopoly: There is a single producer controlling the market and a large number of consumers; The firm is a price-taker; The firm can influence the market price; The monopolist can practice price discrimination; Profit is maximized when MC = MR = P.\ Choose the correct option:\ a) 1+2+3+4+5;\ b) 1+2+3+4;\ c) 1+2+4;\ **d) 1+3+4.** 30. The difference between monopolistic competition and perfect competition is given by:\ **a) product differentiation;**\ b) the large number of suppliers;\ c) the large number of consumers;\ d) free market entry. 31. A monopoly has a downward-sloping demand curve because:\ a) it can sell the entire production at the price determined by the market;\ **b) it must lower the price to sell more units of its product;\ **c) it sells a product with easy substitutes;\ d) market entry barriers prevent any potential competition. 32. In a monopoly, price discrimination:\ a) increases total production costs;\ b) reduces total profit for the monopolist;\ **c) reduces consumer surplus;**\ d) can only be practiced in the case of high market transparency. 33. (Oligopoly) Which of the following statements regarding cartel stability is true:\ a) Each member of the cartel is encouraged to cheat by reducing production below their quota to increase profits;\ b) The larger the cartel, the higher the profit distributed to each member;\ **c) Each member of the cartel is encouraged to cheat by increasing production beyond their quota to increase profits;**\ d) None of the above.