1. Correct Answer: B
2. Correct Answer: A
quantity demanded in response to a change in market price.
3. Correct Answer: C
4. Correct Answer: C
For an individual, consumer surplus is defined as the sum of the differences between
what that individual is willing to pay for each individual unit of a good or service that he
or she purchases (marginal benefit) and the amount that he or she actually pays for
each of these individual units.
5. Correct Answer: B
6. Correct Answer: B
Price controls and taxes are obstacles to allocative efficiency. Rent controls and
minimum wages are examples of price controls. As opposed to being obstacles to the
efficient allocation of resources, changes in consumer tastes lead to the reallocation of
society’s resources, producing a different mix of goods or services that provide
increased benefits
7. Correct Answer: C
The symmetry principle holds that people in similar situations should be treated
similarly. It implies that the market allocates resources fairly if the rules of economic
allocation are fair.
9. Correct Answer: C
Firms can often coordinate economic activity more efficiently than markets because
firms can reduce the costs of market transactions, and they can achieve economies of
scale, scope, and team production.
Diseconomies of scale occur along the upward sloping segment of the long-run average
total cost curve where costs rise as output increases. The flat portion at the bottom of
the long-run average total costs curve represents constant returns to scale
The game of Prisoners’ Dilemma applies to oligopoly and the solution from Nash
equilibrium is that both prisoners would confess to the crime
In the extreme cases of products with perfectly elastic and perfectly inelastic demand,
the sellers and buyers, respectively, pay the entire tax.
15. Correct Answer: A
The consumer surplus is the value of the good minus the price paid for it (10-4) = 6,
summed over the quantity bought. The total consumer surplus is the consumer surplus
on each mango that Reddy buys and added together. It is the area of the right triangle =
(base x height) / 2 as in Figure 3 on p. 40, with base equal to 20 mangoes a week and the
height equal to 6, the consumer surplus on each mango. Thus the total consumer
surplus = (20 x 6) / 2 = Rs.60
The relationship between the tax rate and the amount of tax revenue collected is called
the Laffer curve, named after Arthur B. Laffer, a supply-side economist and a member of
President Reagan’s economic policy advisory board. They argued that tax cuts would
increase tax revenues and decrease the budget deficit
Upon introduction of a subsidy, the equilibrium level of supply increases and the price
falls. In the new equilibrium, marginal cost (on the supply curve) exceeds marginal
benefit (on the demand curve) and a deadweight loss arises due to overproduction
The three indicators of the state of the labor market that the U.S. Census Bureau
calculates are: the unemployment rate, the labor force participation rate, and the
employment-to-population ratio.
When a firm is producing a given output at the least possible cost, it is said to be
operating on its long-run average cost curve.
The quantity of investment that firms plan to undertake depends only on how
productive capital is and what it costs - its real interest rate. Therefore, a tax on interest
income has no effect on investment demand. On the other hand, a tax on interest
income weakens the incentive to save as savers look at the after-tax real interest rate
they receive. The interest rates would rise as a result of the decrease in saving supply
When the supply of the factor is perfectly elastic (horizontal supply curve), the factor’s
entire income comprises opportunity cost. When the supply of the factor is perfectly
inelastic (vertical supply curve), the factor’s entire income comprises economic rent.
A change in total revenue that results from one more unit of labor is called the marginal
revenue product of labor. In a perfectly competitive market, profit is maximized when,
at the quantity of labor hired, marginal revenue equals marginal cost and marginal
revenue product equals the wage rate. These two conditions are equivalent and the
quantity of labor that maximizes profit produces the output that maximizes profit.
The marginal cost pricing rule is efficient but it leaves the natural monopoly incurring an
economic loss. Therefore, regulators almost never impose marginal cost pricing rule.
Instead, they adopt the average cost pricing rule, which allows the firm to cover its costs
and earn a normal profit.
The real interest rate equals the nominal interest rate minus the expected inflation rate,
which is the same as nominal interest rate equals the real interest rate plus the
expected inflation rate.
MRP decreases for a firm in perfect competition, due to a decline in marginal product.
The cross elasticity of demand is negative for a complement and positive for a
substitute.
Increased material costs cause firms to manufacture less. Less manufacturing decreases
short-run supply making prices rise
Adjusting taxation is not a tool available to central banks. Only the government can
adjust taxation as it is a fiscal policy tool.
CPI equals 100 times the cost of the CPI basket at current-period prices divided by the
cost of the CPI basket at base-period prices. In this problem the current period cost is
(15 × 1.75 + 5 × 12) = 86.25. The base period cost is (15 × 2 + 5 × 10) = 80.
The CPI is (86.25 / 80) × 100 = 107.81