ECON 2113: Microeconomics Problem Set 3 Instructor: Fei DING
Problem Set 3 (Ch5-6) Solution
Microeconomics, ECON 2113
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Part I: Multiple Choice Questions: choose the best answer
Assume perfect competitive market unless otherwise specified in the question.
1) Asian women lag far behind the West in their representation in management level positions. The
report by the McKinsley consulting company suggests that there is an opportunity for companies to
recruit under-utilized female talent and do well financially as a result. (Source: The Economist, July 7,
2012)
The fact that Asian women are currently less likely to be hired as managers is a result of the allocation
system using which of the following methods for hiring?
A) lottery
B) auction
C) first-come, first-served
D) personal characteristics
Answer: D
2) All of the following statements about marginal benefit are correct EXCEPT the marginal benefit of
a good
A) is the benefit a person receives from consuming one more unit of the good or service.
B) is measured as the maximum amount that a person is willing to pay for one more unit of the good.
C) is equal to zero when resource use is efficient.
D) decreases as the quantity consumed of the good increases.
Answer: C
3) Consider the market for hot dogs. As long as the marginal benefit of consuming hot dogs is greater
than the price of hot dogs
A) people receive consumer surplus from eating hot dogs.
B) the price of hot dogs will rise.
C) the value of hot dogs will rise.
D) there is no decreasing marginal benefit of eating hot dogs.
Answer: A
4) Four people each have a different willingness to pay for one unit of a good: George will pay $15,
Glen will pay $12, Tom will pay $10, and Peter will pay $8. If price is equal to $9 per unit then the
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ECON 2113: Microeconomics Problem Set 3 Instructor: Fei DING
quantity demanded in the market will be ________ and the consumer surplus for this unit will be
________.
A) 3; $10
B) 3; $37
C) 3; $36
D) 4; $8
Answer: A
5) Suppose a country produces only bikes and clothing. The country achieves an efficient allocation of
resources when
A) it can't produce any more bikes unless it gives up clothing.
B) it produces equal amount of bikes and clothes.
C) the marginal social benefit of producing a bike equals the marginal social cost of producing a bike.
D) the prices charged for the goods are as low as possible.
Answer: C
6) At the quantity of 200 bushels of apples, the marginal social benefit of a bushel of apples is $100 and
the marginal social cost is $50. To produce the efficient quantity of apples
A) more apples should be produced.
B) fewer apples should be produced.
C) there should be no change in the amount of apples produced.
D) More information on the willingness of consumers to purchase apples is needed to determine the
efficient level of apples.
Answer: A
7) Which of the following can prevent markets from reaching efficiency?
I. decreasing marginal benefit
II. taxes
III. quantity regulations that limit the quantity that may be produced
A) I and II
B) I and III
C) II and III
D) I, II and III
Answer: C
8) Fitness is a magazine for women about health and exercise. Fitness offers year subscriptions for $12
on their website. Jess, Ania, Mandy, and Chloe exercise together and each enjoy reading Fitness. Jess
is willing to pay $10, Ania is willing to pay $16, Mandy is willing to pay $24, and Chloe is willing to
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ECON 2113: Microeconomics Problem Set 3 Instructor: Fei DING
pay $12 for a subscription to the magazine. What is the value of market consumer surplus?
A) $16
B) $52
C) $40
D) $12
Answer: A
9) Alvin Roth of Harvard won the 2012 Nobel Prize in Economics for designing systems that allocate
resources in innovative ways. For example, he designed a system that matches donated kidneys to
recipients waiting for such donations. This system takes into account the needs of each perspective
recipient, their blood type, and the urgency of their case. (Source: Washington Post, October 16, 2012)
Based on the news clip above, the allocation of resources is made using
A) market price.
B) auction.
C) lottery.
D) personal characteristics.
Answer: D
10) The drought in the Midwest over the summer has decreased the supply of corn and, as a result,
brought a sharp increase in the price of corn. (Source: The Economist, August 4, 2012)
The increase in the price of corn
A) always increases consumer surplus.
B) always decreases consumer surplus.
C) does not affect consumer surplus because this change reflects only a movement along the demand
curve.
D) increases consumer surplus if demand is elastic and decreases consumer surplus if demand is
inelastic.
Answer: B
In the recent years, prices of basic food commodities such as corn, rice, and wheat have increased
sharply. An article in the Wall Street Journal stated that Chinese authorities were concerned that
escalating prices would cause inflation and be followed by civil unrest. (Source: Wall Street Journal,
February 20, 2011)
11) If the Chinese government sets a price ceiling below the equilibrium price, the result will be
I. an increase in the quantity demanded.
II. a decrease in the quantity supplied.
III. a shortage.
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ECON 2113: Microeconomics Problem Set 3 Instructor: Fei DING
A) I only
B) I and II only
C) III only
D) I, II, and III
Answer: D
12) In the short run, a minimum wage set above the equilibrium wage
I. increases the supply of labor.
II. increases the quantity of labor supplied.
III. decreases the demand for labor.
A) I only
B) II only
C) I and II only
D) I, II, and III
Answer: B
13) Suppose that the equilibrium wage in the low-skilled labor market is $9.25. Further, suppose the
federal government raises the minimum wage to $9.00 an hour from its present level of $8.15. The
government's action of increasing the minimum wage will result in
A) a decrease in unemployment.
B) an increase in unemployment.
C) a shortage of low-skilled labor.
D) neither a shortage nor a surplus of labor in the low-skilled labor market.
Answer: D
14) As long as the supply curve for a good is upward sloping and the demand curve is downward
sloping, a sales tax imposed on sellers shifts the supply curve
A) leftward and definitely raises the equilibrium price.
B) leftward and possibly raises the equilibrium price.
C) rightward and possibly increases the equilibrium quantity.
D) rightward and definitely decreases the equilibrium quantity.
Answer: A
15) Suppose the demand for wine is elastic and that initially 5 million bottles of wine are produced and
consumed in the United States. If the government imposes a tax of $2 per bottle of wine, the
government will collect
A) more than $10 million in tax revenues.
B) $10 million in tax revenues.
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ECON 2113: Microeconomics Problem Set 3 Instructor: Fei DING
C) less than $10 million in tax revenues.
D) an amount that may be more than, equal to, or less than $10 million in tax revenues depending on
the precise elasticity of demand.
Answer: C
16) The less elastic the supply, the
A) less likely the government is to tax the product.
B) less likely the government is to impose a price ceiling.
C) larger the fraction of any tax imposed on the product that is paid by the suppliers.
D) less elastic the demand.
Answer: C
17) Suppose the government wants to discourage the use of cigarettes. If it imposes a tax on cigarettes,
the equilibrium quantity falls the most when the elasticity of demand equals
A) 2.00.
B) 1.00.
C) 0.50.
D) 0.
Answer: A
18) When the minimum wage is set above the equilibrium wage rate, the number of hours of labor
employed is determined by the ________ and the ________.
A) supply of labor; minimum wage
B) demand for labor; supply of labor
C) supply of and demand for labor; the minimum wage
D) demand for labor; minimum wage
Answer: D
19) Suppose the government imposes a $1 tax on frisbees, and the price of a frisbee paid by demanders
rises by $1.
A) The price rise is consistent with a perfectly elastic supply for frisbees.
B) The price rise is consistent with a perfectly elastic demand for frisbees.
C) The price rise is consistent with a downward-sloping supply curve for frisbees.
D) The price could never rise this much, so this situation cannot happen.
Answer: A
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ECON 2113: Microeconomics Problem Set 3 Instructor: Fei DING
Price elasticity Price elasticity
of supply of demand
Hamburgers 1.2 1.8
French fries 1.7 1.4
Pizza 2.0 1.2
Ice cream 1.5 1.6
20) You are in the business of producing and selling hamburgers, french fries, pizza, and ice cream.
The mayor plans to impose a tax on one of these products. Based on the elasticities in the above table,
on which of these goods would your customers most prefer to be taxed?
A) hamburgers
B) pizza
C) French fries
D) ice cream
Answer: A
Part II: Short- and long-answer questions
Use the following table to work Problems 1 to 3.
Price Quantity demanded
(£ per (hours)
hour) Destiny Rosemary Emily
1 60 35 30
2 50 30 25
3 40 25 20
4 30 20 15
5 20 15 10
6 10 10 5
7 0 0 0
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ECON 2113: Microeconomics Problem Set 3 Instructor: Fei DING
The table gives the demand schedules for private ballet lessons for the only buyers in the market, Destiny,
Rosemary, and Emily.
1. a. Construct the market demand schedule.
The market demand schedule shows the sum of the quantities demanded
by Destiny, Rosemary, and Emily at each price. When the price is £1
per hour, the market quantity demanded is 125 hours of private lessons;
when the price is £2 per hour, the market quantity demanded is 105 hours;
when the price is £3 per hour, the market quantity demanded is 85 hours;
when the price is £4 per hour, the market quantity demanded is 65 hours;
when the price is £5 per hour, the market quantity demanded is 45 hours;
when the price is £6 per hour, the market quantity demanded is 25 hours;
and when the price is £7 per hour, the market quantity demanded is 0
hours.
b. What is the maximum price that each student is willing to pay to have 30 hours of private lessons?
Why?
b. Each student’s demand schedule shows the maximum price that student
is willing to pay to take 30 hours of private lessons. The maximum price
Destiny is willing to pay for 30 hours of private lessons is £4 per
hour, the maximum price Rosemary is willing to pay is £2 per hour, and
the maximum price Emily is willing to pay is £1 per hour.
2. a. What is the marginal social benefit when the total number of private lessons taken is 85 hours?
The marginal social benefit when the quantity is 85 hours is £3 per
hour. The marginal social benefit is determined from the consumers’
demand schedules and equals the maximum price that consumers will pay
for the quantity. The demand schedule shows that the maximum price
consumers will pay for 85 hours is £3 per hour and this price equals
the marginal social benefit.
b. When the total number of private lessons taken is 85 hours, how many hours of private lessons does
each student take and what is their marginal private benefit?
The three students take a total of 85 hours of private lessons when
the price is £3. Each person’s marginal benefit is £3 per hour. At this
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ECON 2113: Microeconomics Problem Set 3 Instructor: Fei DING
price Destiny takes 40 hours, Rosemary takes 25 hours, and Emily takes
20 hours.
3. What is each student’s consumer surplus when the price is £3 an hour? What is the market consumer surplus
when the price is £3 an hour?
Destiny’s consumer surplus is £80; Rosemary’s consumer surplus is £50;
and, Emily’s consumer surplus is £40.
When the price is £3 per hour, Destiny takes 40 hours. Destiny’s consumer
surplus is the triangular area under her demand curve and above the price.
The demand curve is linear, so Destiny’s consumer surplus is 1/2 (£7
£3) 40, which equals £80.
When the price is £3 per hour, Rosemary takes 25 hours. Rosemary’s
consumer surplus is the triangular area under her demand curve and above
the price. The demand curve is linear, so Rosemary‘s consumer surplus
is 1/2 (£7 £3) 25, which equals £50
When the price is £3 per hour, Emily takes 20 hours. Emily’s consumer
surplus is the triangular area under her demand curve and above the price.
The demand curve is linear, so Emily’s consumer surplus is 1/2 (£7
£3) 20, which equals £40.
The market consumer surplus is the sum of Destiny’s consumer surplus,
Rosemary’s consumer surplus, and Emily’s consumer surplus, or £170.
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ECON 2113: Microeconomics Problem Set 3 Instructor: Fei DING
Use the following news clip to work Problems 4 to 6.
Music’s Value in the Internet Age
The price of streaming services has been $10 a month or zero. Amazon and Pandora Media are poised to change
the streaming scene. Pandora is a streaming Internet radio service, and its new $5 version will be more like
Spotify and Apple Music, which let users create their own playlists. Amazon, which offers limited on-demand
music for $99 a year, is expected to expand its catalog and offer it for $10 a month or $5 a month for customers
who use the Echo, Amazon’s voice-activated speaker system.
Source: The New York Times, September 11, 2016
Assume that the marginal social cost of streaming is zero. (This assumption means that the cost of operating a
streaming service doesn’t change if more people stream more songs.)
4. a. Draw a graph of the market for streaming music with a price of $10 a month. On your graph, show
consumer surplus and producer surplus.
Figure 5.4 shows this market. The
marginal social cost curve runs along
the horizontal axis. The consumer
surplus is area A and the producer
surplus is area B.
b. With a price of $10 a month, is the market efficient or
inefficient? If it is inefficient, show the deadweight loss
on your graph.
The market is inefficient. Efficiency
requires that the amount be the
quantity for which the marginal social
benefit equals the marginal social cost, which in this case is the
quantity at which the marginal social benefit curve intersects the
horizontal axis. The deadweight loss is area C in Figure 5.4.
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ECON 2113: Microeconomics Problem Set 3 Instructor: Fei DING
5. If the $5 price described in the news clip were adopted, how would consumer surplus, producer surplus,
and the deadweight loss change?
The consumer surplus increases. If the demand for streaming is
inelastic, then the producer surplus decreases; if the demand is
elastic, then the producer surplus increases. Unambiguously the
deadweight loss decreases.
6. a. If the $5 price described in the news clip were adopted, would the market be efficient or inefficient?
Explain.
The market remains inefficient because the marginal social benefit still
does not equal the marginal social cost. The inefficiency is less if
the price is $5 per month than $10 because, as the answer to question
before noted, the deadweight loss is less, but the market is still
inefficient.
b. Is the $5 price described in the news clip a competitive market price? Explain.
With a pure competitive-market price, the price is determined by supply
and demand and would be $0. The $5 price is not a competitive market
price.
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ECON 2113: Microeconomics Problem Set 3 Instructor: Fei DING
7. The government wants to discourage the consumption of sugary drinks and proposes introducing a 20
percent tax on them. A survey shows that the demand for sugary drinks is perfectly elastic and people are
equally happy to stop consuming those drinks and switch to healthier alternatives. Producers of sugary
drinks complain and say they will increase
their prices by 20 percent. Explain, and
illustrate with a graph, why sugary drinks
producers are wrong.
Sugary drink producers are
wrong because the demand is
perfectly elastic.
Consequently consumers are
not willing to pay a price that
is higher than the price at
which the demand is elastic.
Figure 6.4 illustrates this
situation. The initial price
of a drink is $1.00 and the
demand for drinks is perfectly elastic at this price. Once the tax is
imposed, the supply curve shifts upward by the amount of the tax, 20
percent of the price without the tax, to the supply curve labeled S
+ tax. The new equilibrium price demanders pay is the same as the price
they paid without the tax: $1.00 per drink. Not only can the producers
not mark up the price by 20 percent, they cannot mark it up by anything
at all! In this case, the entire incidence of the tax falls on the sellers.
Price Quantity Quantity
(dollars demanded supplied
per meal) (meals per week)
4 3,000 1,500
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ECON 2113: Microeconomics Problem Set 3 Instructor: Fei DING
5 2,750 2,000
6 2,500 2,500
7 2,250 3,000
The table sets out the demand and supply schedules for college 8 2,000 3,500
meals.
8. a. What are the equilibrium meal price and equilibrium quantity of meals?
The equilibrium price of a meal is $6 per meal and the equilibrium
quantity is 2,500 meals per week.
b. If the college put a price ceiling on meals at $7 a meal, what is the price students pay for a meal? How
many meals do they buy?
The price ceiling is above the equilibrium price, so it is ineffective.
The price of a meal remains at $6 per meal and students buy 2,500 meals
per week.
9. If the college put a price ceiling on meals at $4 a meal, what is the quantity bought, the shortage of meals,
and the maximum price that someone is willing to pay for the last meal available?
The price ceiling is below the equilibrium price, so it has an effect.
The quantity of meals purchased is the quantity supplied at the price
of $4 per meal, 1,500 meals per week. At this price, the quantity of
meals demanded is 3,000, so the shortage of meals is 3,000 meals demanded
minus 1,500 meals supplied, or 1,500 meals. For 1,500 meals, the most
someone is willing to pay for a meal is above $8. Indeed, if the demand
schedule continues to be linear as in the table, someone is willing
to pay $10 for the last meal.
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