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Exam 2 Questions - Test 2 1 Suppose a grocery store issues...

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Test 2: 1. Suppose a grocery store issues this newspaper for canned soup: “Buy Three—Get One Free with this coupon.” With this offer, the store is _____________. - Engaging in first-degree price discrimination . -Both coupon and deal 2. Suppose that price elasticity of demand for tomato juice is 1.4 and the price elasticity of demand for carrot juice is 1.8. Suppose further that the price elasticity of supply for both juices is 2.0. If a tax of the same percentage is imposed on both markets, consumers in the _____________ market will bear a relatively larger burden of the tax and the deadweight loss will be greater in the _____________ market. - Tomato juice; carrot juice - E d T.J. = 1.4; E d C.J. = 1.8 -E s for both is 2.0 -More inelastic carries higher tax burden -Dead weight loss determined by quantity transacted; greater E d , the more dead weight loss 3. Suppose the demand for a good is perfectly price elastic and the supply of it is perfectly price inelastic. If a tax of $1 per unit is imposed on the consumption of this good, everything else held constant, the price the buyer pays for the good will _____________. - Not change . 4. Suppose a firm producing one unit of output has a marginal cost equal to $15 and a total cost equal to $25. In the short run, its fixed cost is equal to _____________. -$10 . -Mc = 15 -Tc = 25 -25 – 15 = $10 5. Which of the following conditions MUST hold if a firm is to engage in price discrimination? -A firm must be a price maker in its market. 6. Jerry’s Quarry is a profit-maximizing firm selling building materials in a perfectly competitive market. At its current level of building stone production, Jerry’s has marginal costs equal to $57. If the market price of building stone is $49, Jerry’s Quarry should _____________. - Decrease its production of building stone . -P = $49 = MR -MR < MC -49 < 57 production, profit 7. Suppose Michelle’s Mitten Mill operates in a perfectly competitive market and is producing its profit-maximizing level of output. Suppose further that at this level of
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production its average total cost of producing mittens is $18, average variable cost is $16, and marginal cost is $14. Michelle should _____________. - Shut down immediately . -P < AVC 8. Cartel pricing is most likely to be maintained when _____________. - Firms can detect cheating and exact punishment . 9. Answer true or false to the following statement. The non-price discriminating, profit- maximizing monopolist receives more revenue from new customers by increasing output, but it gets less revenue from existing customers because it has to decrease its price. - True 10. Suppose the price elasticity of demand for a good is 2.1 and the price elasticity of supply for the good is 0.9. Suppose further that an excise tax of $10.00 per unit is placed on the good. Everything else held constant, the price sellers receive for the good after the tax is levied will be _____________ the price they received prior to the tax.
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