# finalf06 - Use the following information and graph to...

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Use the following information and graph to answer the next eight questions: The graph below describes the supply and demand of the perfectly competitive market for nail clips. The equations of supply and demand are: Supply: P=32-(1/6)Q Demand: P=2+(1/6)Q I 1. What is the competitive equilibrium price and quantity (P*, Q*)? a) P*=15, Q*=102 b) P*=17, Q*=90 c) P*=15, Q*=78 d) P*=12, Q*=60 e) P*=12, Q*=120 2. The total social surplus generated by the competitive market equilibrium is given by the areas: 22 P* 12 P S D A B C D E F G 60 Q* 120 Q H J

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a) H+A+B b) A+B+E+F c) H+A+B+E+F d) H+A+B+E+F+J e) H+A+B+E+F+G 3. When demand is 120 units, the absolute value of the elasticity of demand is: (remember that the formula for the elasticity of demand is ε=(ΔQ/ΔP)(P/Q)) a) 60 b) 1/6 c) 0.6 d) 6 e) 10/6 4. Suppose that in order to help consumers, the government sets a maximum price of \$12. As a consequence of this policy: a) 60 units are sold; the deadweight loss of the policy will be given by the areas B+F b) 120 units are sold; the deadweight loss of the policy will be given by the area D. c) The policy will have no impact on the market because the maximum price is below the equilibrium price. d) 60 units are sold; the deadweight loss of this policy is given by the areas A+B+E+F. e) 120 units are sold; the deadweight loss of the policy will be given by the areas B+C+D+F+G. 5. Suppose that the government instead decides to give the firms a subsidy of \$5 per unit sold in the hope of lowering the price to \$12. As a results of this policy: a) Price falls to \$12 and 120 units are sold. b) Price falls by less than \$5 and less than 120 units are sold . c) Price increases by \$5 and less than Q* units are sold. d) Price increases to \$22 and 60 units are sold. e) Price falls by less than \$5 but the sold quantity stays at Q*. 6. Suppose that the price of scissors –a substitute good –suddenly increases for some random reason. In the short run in the market for nail clips: a) Demand shifts to the left, supply stays constant and price falls. b) Demand shifts to the right, supply also shifts to the right as new firms enter the market and price stays constant. c) Demand shifts to the right, supply stays constant and price increases. d) Demand shifts to the left, supply shifts to the left as firms leave the market and move to the scissors sector, and price increases. e) Demand stays constant, supply shifts to the left as firms leave the market and move to the scissors sector, and price increases. 7. Assume that the industry is a constant cost industry. Suppose that at the equilibrium in the graph above firms are making zero profits. Again suppose there is a sudden rise in the
price of scissors. As a consequence, in the long run in the market for nail clips: a) The sold quantity increases and firms make positive profits. b) The sold quantity decreases and prices increase above P* as firms shift their

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## This note was uploaded on 08/08/2008 for the course ECON 101 taught by Professor Hansen during the Spring '07 term at University of Wisconsin.

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finalf06 - Use the following information and graph to...

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