FinalF11AnswersExplained

FinalF11AnswersExplained - Final, Fall 2011, December 5,...

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Final, Fall 2011, December 5, 2011 True/False Bubble in A for True and B for False 1. A producer’s average fixed cost declines as it produces more output. Answer: True Fixed cost doesn’t change with output. Average fixed cost is just fixed cost divided by output. As output increases, the average falls 2. If a monopolist’s marginal revenue is positive at a particular quantity, its demand curve is elastic at that quantity. Answer: True Suppose a monopolist increases its output by one unit. Quantity rises, but price falls. The percentage change in revenue is approximately equal to the percentage change in quantity plus the percentage change in price. Because marginal revenue is positive, the percentage change in quantity must be larger than the percentage decrease in price. The elasticity of demand is the percentage change in output divided by the percentage change in price. Because the percentage change in output is larger in absolute value than the percentage change in price, this elasticity must be less than -1. Demand is elastic. 3. If a producer’s marginal cost exceeds its average variable cost, its average variable cost rises as output increases. Answer: True Marginal cost is the addition to cost from one more unit of output. Average variable cost is variable cost divided by output. If the cost of an additional unit exceeds the average of the previous units, the average will rise. 4. In a competitive equilibrium, every buyer who buys at least one unit of the good pays the same price for the good. Answer: True Competitive equilibrium is defined to be a situation in which demand at a certain price equals supply at the price. Both buyers and sellers pay the same price. That’s the definition of competitive equilibrium.
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5. If a series of trades has made each buyer and seller better off and there are no further trades that would make both buyer and seller better off, the outcome of these trades is efficient. Answer: False Remember the matchmaking exercise that you completed in homework 1 and that we played out on the stage in Campbell Hall? In homework 1, the objective for the matchmaker was to find the maximum number of trades for which the buyer value of the buyer was greater than or equal to the seller cost of the seller. In the onstage demonstration, the objective was to find the maximum number of pairs for which the height of the dark shirted person was greater than the height of the light shirted person. In both cases, you found a series of trades or matches and there were no further trades or matches in which the buyer value (height) of the buyer (dark shirt) was greater than or equal to the seller cost (height) of the seller (light shirt). Yet, as we showed, those trades or matches produced less profit than the competitive equilibrium. Hence they can’t be efficient. 6. If the Laws of Supply and Demand hold in the market for a good, an increase in the price of a
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This note was uploaded on 12/12/2011 for the course ECON 1 taught by Professor Bergstrom during the Fall '07 term at UCSB.

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FinalF11AnswersExplained - Final, Fall 2011, December 5,...

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