Deadweight loss is a term used in economics to describe a situation where the overall society or economy

loses out due to market inefficiencies. Imagine a scenario where a mismatch occurs between what buyers are
willing to pay for a good or service and what sellers are willing to accept, creating a loss that no one benefits
from. This lost value, which could have been enjoyed under a perfectly competitive market scenario, is what
economists refer to as "deadweight loss"

The marginal cost is rising and equal to average cost in long-run equilibrium output
In monopoly, firms have a certain amount of monopoly power because they Face downward sloping
demand curves
A firm's marginal cost of production equals its average cost of production. Which of the following statement
is therefore true? - average cost is at a minimum
In the short run, a perfectly competitive firm will shut down when b. it is not covering average variable costs
A monopolistic firm will expand its output when a. marginal revenue exceeds marginal cost
TRUE/FALSE QUESTIONS AND EXPLAINATION (10 points each)
1) A movement along the demand curve shows a change in demand
False. A movement along the demand curve shows a change in quantity demanded, not a change in demand.
A change in quantity demanded is caused by a change in the price of the good itself, while holding other
factors constant. On the other hand, a change in demand refers to a shift of the entire demand curve, which is
caused by changes in non-price factors such as income, tastes and preferences, the price of related goods,
expectations about future prices, and the number of buyers.
2) If a firm is maximizing profits, the extra revenue it receive from from selling its last unit of output
exceeds the extra cost of producing that unit
False. If a firm is maximizing profits, the extra revenue it receives from selling its last unit of output
(marginal revenue) equals the extra cost of producing that unit (marginal cost). In other words, at the point
of profit maximization, marginal revenue equals marginal cost. If marginal revenue exceeded marginal cost,
the firm could increase profits by producing more units. If marginal cost exceeded marginal revenue, the
firm could increase profits by producing fewer units.
3) Advertisement makes the demand curve shift rightwards and more elastic
Partly True. Advertisement can indeed shift the demand curve rightwards as it can increase the desire of
consumers to buy the product, leading to an increase in demand. However, whether advertisement makes the
demand curve more elastic is not certain. Elasticity of demand depends on a variety of factors, including the
availability of substitutes, the proportion of income spent on the good, and the degree to which the good is a
necessity. Advertising could potentially make the demand curve more inelastic if it strengthens brand loyalty
and reduces the perceived substitutability of the product. On the other hand, if advertising increases
consumer awareness of substitutes, it could make the demand curve more elastic. So the effect of advertising
on the elasticity of demand is not clear-cut.
1. For a typical consumer, indifference curves can intersect if they satisfy the property of transitivity.
False. Indifference curves cannot intersect if they satisfy the property of transitivity. The principle of
transitivity suggests that if a consumer prefers bundle A to bundle B and prefers bundle B to bundle C, then
the consumer also prefers bundle A to bundle C. If indifference curves were to intersect, this would imply a
violation of the transitivity assumption because it would mean that the same bundle of goods could be on
two different indifference curves, implying two different levels of utility for the same bundle.
2. A decrease in the price of a product and an increase in the number of buyers in the market affect
the demand curve in the same general way.
True, but with qualifications. A decrease in the price of a product typically leads to an increase in the
quantity demanded for the product, resulting in a movement along the demand curve (price effect). An
increase in the number of buyers, on the other hand, shifts the entire demand curve to the right, as it
indicates a growth in market demand at every price level (demand shift). While both actions generally
increase the quantity demanded, they do so through different mechanisms: one is a movement along the
demand curve, the other is a shift of the entire curve.
3. In competitive markets, firms that raise their prices are typically rewarded with larger profits.
False. In perfectly competitive markets, firms are price takers, meaning they do not have the ability to set
their own prices. Rather, the price is determined by the market equilibrium of supply and demand. If a firm
in such a market were to unilaterally raise its prices, it would likely lose customers to other firms offering
the same good or service at a lower price, potentially reducing its profits.
4. A monopolist produces where P=MC= MR.
False. A monopolist produces where Marginal Cost (MC) equals Marginal Revenue (MR), but this does not
mean that price (P) also equals MC or MR. Because a monopolist faces the downward sloping market
demand curve, it can charge a price higher than MC or MR at the profit-maximizing quantity of output. This
is one of the key differences between a monopolist and a firm in perfect competition, which does produce
where P=MC=MR.

Short answer:
1. If a demand curve is linear, is the elasticity constant along the demand curve? Which part tends to
be elastic and which part tends to be inelastic? Why?
No, the elasticity is not constant along a linear demand curve. Elasticity measures the responsiveness of
quantity demanded to a change in price, and it varies depending on where you are on the demand curve.
Generally, the upper portion of the demand curve (where price is high and quantity demanded is low) tends
to be elastic. This means that the quantity demanded is highly responsive to price changes. Here, a small
decrease in price can lead to a large increase in the quantity demanded. The reason is that when the price is
high, consumers may be more sensitive to price changes and more willing to buy more when the price drops.
On the contrary, the lower portion of the demand curve (where price is low and quantity demanded is high)
tends to be inelastic. Here, a further decrease in price won't significantly increase the quantity demanded.
This happens because, at low prices, consumers may already be buying as much of the good as they want or
can afford, and further price reductions won't stimulate much additional demand.
The point of unitary elasticity, where the price elasticity of demand equals one (meaning that a 1% change in
price results in a 1% change in quantity demanded), lies in the middle of the linear demand curve. It is
important to note that the shape and slope of the demand curve can affect these generalizations.

1. Normal goods have negative income elasticities of demand, while inferior goods have positive
income elasticities of demand.
False. Normal goods have positive income elasticities of demand, meaning that when income increases,
demand for these goods increases. Inferior goods, on the other hand, have negative income elasticities of
demand. This means that as income increases, the demand for these goods decreases, as consumers are able
to afford and choose to buy more of higher-quality substitutes.
2. Any point that lies on the production possibilities curve or within the curve is said to be an
unattainable point while points that lie to the right of the production possibilities curve are said to be
attainable.
False. Any point that lies on or within the production possibilities curve is said to be attainable given the
current resources and technology. Points on the curve represent efficient use of resources, while points inside
the curve represent inefficiencies or underutilization of resources. Points to the right of the production
possibilities curve, however, are unattainable with current resources and technology.
3. "Steak" and "Eggs" are "complementary goods". If the price of steak increases, in egg market
equilibrium price will increase and equilibrium quantity will decrease.
True. "Steak" and "Eggs" are complementary goods, meaning they are often used together. If the price of
steak increases, the demand for eggs (its complement) will decrease because people will buy less steak and,
as a result, also buy fewer eggs. In the egg market, the decrease in demand will lead to a lower equilibrium
price and a lower equilibrium quantity, assuming other factors remain constant.
4. Economic profit is always higher than accounting profit.
False. Economic profit is not always higher than accounting profit. In fact, it's often lower. The reason is that
economic profit takes into account both explicit costs (which are the actual out-of-pocket costs, the same
costs that are considered in calculating accounting profit) and implicit costs (the opportunity costs of using
resources in one way rather than in their next best alternative use). Because it takes these implicit costs into
account, economic profit is typically less than accounting profit. If economic profit is positive, it means the
firm is earning more than its opportunity cost and is thus doing better than its next best alternative.
1. The marginal revenue curve for a monopolist will be "beneath" her demand curve because in
order to increase sales, the monopolist must lower the price of all output sold.
True. The marginal revenue (MR) curve for a monopolist is indeed "beneath" her demand curve. This is
because, to sell an additional unit, a monopolist must lower the price of all units sold, not just the additional
unit. Thus, the additional revenue from selling one more unit (MR) is less than the price of that unit,
resulting in the MR curve lying below the demand curve.
2. The law of supply states that when the price of a product increases, the quantity supplied of
the product increases, thus, the supply curve of the product shifts to the right.
False. The law of supply states that when the price of a product increases, the quantity supplied of the
product increases, but this results in a movement along the supply curve, not a shift of the curve. A shift to
the right of the supply curve would be caused by factors other than price, such as improvements in
technology, lower input costs, or an increase in the number of sellers in the market.
3. Cross-price elasticity is used to determine whether goods are inferior or normal goods.
False. Cross-price elasticity is not used to determine whether goods are inferior or normal goods. Instead, it
is used to determine whether goods are substitutes or complements. If the cross-price elasticity of two goods
is positive, they are substitutes (when the price of one good increases, the demand for the other increases). If
it is negative, they are complements (when the price of one good increases, the demand for the other
decreases). Income elasticity of demand, not cross-price elasticity, is used to determine whether goods are
inferior (negative income elasticity) or normal (positive income elasticity).
4. A firm which earns economic profits must also be earning accounting profits.
True. A firm that earns economic profits must also be earning accounting profits. Economic profit takes into
account both explicit costs (the actual out-of-pocket costs, the same costs that are considered in calculating
accounting profit) and implicit costs (the opportunity costs of using resources in one way rather than in their
next best alternative use). Therefore, if a firm is earning an economic profit, this means it is covering all
explicit and implicit costs, and it must be earning an accounting profit.
1. For a typical consumer, indifference curves can intersect if they satisfy the property of transitivity.
False. For a typical consumer, indifference curves cannot intersect if they satisfy the property of transitivity.
The assumption of transitivity in consumer preferences means that if a consumer prefers bundle A to bundle
B and bundle B to bundle C, then the consumer also prefers bundle A to bundle C. If indifference curves
intersected, it would violate this assumption, creating a situation where the consumer simultaneously prefers
both A to B and B to A, which is inconsistent.
2. A decrease in the price of a complement will shift the demand curve for a good to the left.
False. A decrease in the price of a complement will shift the demand curve for a good to the right, not the
left. Complementary goods are consumed together, so if the price of one falls, the demand for the other
increases because consumers can afford to consume more of both goods.
3. In the short run, a competitive firm should exit the industry if its marginal cost exceeds its marginal
revenue.
False. In the short run, a competitive firm's decision to exit the industry is based on its ability to cover its
variable costs, not the comparison of marginal cost to marginal revenue. A firm should exit the industry in
the short run if the price it receives is less than its average variable cost, not if its marginal cost exceeds its
marginal revenue. In the long run, however, the firm should exit if the price is less than average total cost.
4. A monopolist produces an output level where marginal revenue equals marginal cost and charges a
price where marginal cost equals average total cost.
False. A monopolist does produce an output level where marginal revenue equals marginal cost, but the price
it charges is found on the demand curve above that quantity, not where marginal cost equals average total
cost. Monopolists are price makers and can charge a price higher than marginal cost, which is why they earn
positive economic profits.
What is the shape of the marginal-cost curve in the typical firm? Why is it shaped this way?
The marginal-cost curve in a typical firm is U-shaped. Initially, as production increases, marginal costs often
fall due to factors such as specialization of labor or economies of scale. However, after a certain point,
marginal costs start to rise. This is due to the law of diminishing marginal returns, which states that adding
more of a variable input, like labor, to the same amount of a fixed input, like capital, will eventually yield
diminishing increments of output. This causes the cost of producing each additional unit of output to
increase, resulting in a U-shaped marginal-cost curve.
Section A - True/False and explanation. You are recommended to apply graphs where are applicable. (60
marks)
1. A market-based policy in dealing with externalities generates a higher cost for our society than a
command-and-control policy.
False. Market-based policies (like taxes or tradable permits) are often more cost-effective at dealing with
externalities than command-and-control policies (like regulations). This is because market-based policies
give firms the flexibility to reduce externalities in the way that is least costly for them, while command-and-
control policies dictate a specific method of reducing externalities that may not be the most efficient for all
firms. Additionally, market-based policies can provide an ongoing incentive to continue finding ways to
reduce externalities, while command-and-control policies do not.
2. There is always a deadweight loss whether government imposes a unit tax or provides a per unit
subsidy in a market.
True. Both a unit tax and a per unit subsidy can create deadweight loss. A unit tax creates a wedge between
the price consumers pay and the price producers receive, reducing the quantity traded below the efficient
level and creating a deadweight loss. A per unit subsidy, on the other hand, increases the quantity traded
above the efficient level, also creating a deadweight loss. This happens because the subsidy drives a wedge
between the social cost of production and the private cost.
3. Non-price competition is very important in monopolistic competition markets. However, it is not
necessary in perfect competition and monopoly.
True. Non-price competition, such as advertising and product differentiation, is a key feature of
monopolistic competition, where many firms sell similar but not identical products. In contrast, in perfect
competition and monopoly, non-price competition is not necessary or prevalent. In perfect competition, all
firms sell an identical product, and competition is based solely on price. In a monopoly, there is only one
seller, so there is no competition at all.
4. When the market price is greater than average variable cost but less than average total cost, a
perfectly competitive firm will continue its profluction even losing money.
True. In the short run, a perfectly competitive firm will continue to produce as long as the price is greater
than average variable cost, even if it is less than average total cost. This is because the firm has already
incurred its fixed costs, and as long as the price covers the average variable cost, it can contribute to
covering some of its fixed costs. In the long run, however, if the price is less than average total cost, the firm
will not be able to cover all of its costs, including its fixed costs, and will exit the industry.
Section A - True/False and explanation. You are recommended to apply graphs where are applicable. (60
marks)
1. A market-based policy in dealing with externalities generates a higher cost for our society than a
command-and-control policy.
False. Market-based policies (like taxes or tradable permits) are often more cost-effective at dealing with
externalities than command-and-control policies (like regulations). This is because market-based policies
give firms the flexibility to reduce externalities in the way that is least costly for them, while command-and-
control policies dictate a specific method of reducing externalities that may not be the most efficient for all
firms. Additionally, market-based policies can provide an ongoing incentive to continue finding ways to
reduce externalities, while command-and-control policies do not.
2. There is always a deadweight loss whether government imposes a unit tax or provides a per unit
subsidy in a market.
True. Both a unit tax and a per unit subsidy can create deadweight loss. A unit tax creates a wedge between
the price consumers pay and the price producers receive, reducing the quantity traded below the efficient
level and creating a deadweight loss. A per unit subsidy, on the other hand, increases the quantity traded
above the efficient level, also creating a deadweight loss. This happens because the subsidy drives a wedge
between the social cost of production and the private cost.
3. Non-price competition is very important in monopolistic competition markets. However, it is not
necessary in perfect competition and monopoly.
True. Non-price competition, such as advertising and product differentiation, is a key feature of
monopolistic competition, where many firms sell similar but not identical products. In contrast, in perfect
competition and monopoly, non-price competition is not necessary or prevalent. In perfect competition, all
firms sell an identical product, and competition is based solely on price. In a monopoly, there is only one
seller, so there is no competition at all.
4. When the market price is greater than average variable cost but less than average total cost, a
perfectly competitive firm will continue its profluction even losing money.
True. In the short run, a perfectly competitive firm will continue to produce as long as the price is greater
than average variable cost, even if it is less than average total cost. This is because the firm has already
incurred its fixed costs, and as long as the price covers the average variable cost, it can contribute to
covering some of its fixed costs. In the long run, however, if the price is less than average total cost, the firm
will not be able to cover all of its costs, including its fixed costs, and will exit the industry.
a. Absolute advantage is more important than comparative advantage in explaining pattern de among
countries.
a. False. Comparative advantage is more important than absolute advantage in explaining the pattern of trade
among countries. Comparative advantage refers to the ability of a country to produce a particular good or
service at a lower opportunity cost compared to other goods or services, not necessarily at a higher rate of
output. Even if one country has an absolute advantage in producing all goods, trade can still be beneficial
because it allows countries to specialize in producing the goods for which they have a comparative
advantage, leading to overall gains in global output.
b. If the economy goes into a recession and incomes fall as well as more sellers entering ferior good
market, price and quantity of the inferior good both decreases.
b. False. In a recession with falling incomes, the demand for inferior goods typically increases because
consumers switch to less expensive alternatives. Additionally, more sellers entering the market would
typically increase supply. The combined effect on price is ambiguous without knowing the relative
magnitudes of the shifts in demand and supply. The effect on quantity would likely be an increase unless the
decrease in demand is much larger than the increase in supply.
c. The government will get larger tax revenue by imposing per unit tax on a good w er price elasticity
of demand than on lower price elasticity of demand one.
c. True. When demand is inelastic (lower price elasticity), quantity demanded is less responsive to price
changes. So, when a tax is imposed, the quantity demanded doesn't decrease much, leading to a larger tax
revenue. In contrast, when demand is elastic (higher price elasticity), quantity demanded is more responsive
to price changes, and a tax could lead to a significant decrease in quantity demanded, reducing tax revenue.
d. Unemployment rate will be higher in the long run than in the short run wher rnment raises the
minimum wage.
d. True. Raising the minimum wage could lead to higher unemployment in the long run. While some
workers benefit from higher wages, others may lose their jobs as employers cut back on labor to save costs.
In the short run, businesses might absorb the cost increase, but in the long run, they are more likely to reduce
their demand for labor, leading to higher unemployment.
e. Buyers will get larger consumer surplus; sellers will get larger producer surp fore total surplus will
be larger when our government provides per unit subsidy for a p
e. True. When a government provides a per unit subsidy for a product, it effectively lowers the price that
buyers pay and increases the price that sellers receive, which can increase both consumer and producer
surplus. The total surplus (the sum of consumer and producer surplus) in the market also increases.
However, this doesn't take into account the cost to the government of providing the subsidy, which could
lead to a decrease in total surplus in the overall economy if the subsidy is funded through taxation or
borrowing.
a) The advertisement will make demand curve shift to the right and more elastic.
a) True and False. Advertising can indeed shift the demand curve to the right as it can increase the desire for
a product, leading to increased demand. However, advertising does not necessarily make the demand curve
more elastic. The elasticity of demand is determined by factors such as the availability of substitutes, the
proportion of income spent on the good, and the time horizon, not by the level of advertising.
b) When the Government imposes unit tax on goods/services, the consumers will incur more
tax burden than the producers if the demand is more elastic.
b) True. The burden of a tax falls more heavily on the side of the market that is less elastic. If demand is
more elastic than supply, consumers are more responsive to changes in price and can more easily reduce
their quantity demanded, so the producers will bear a larger share of the tax burden.
c) When the income of consumers increases twice, they will consume twice.
c) False. An increase in income does not necessarily mean that consumers will consume twice as much. The
effect of income on consumption depends on the type of good. For normal goods, consumption will increase
with income, but not necessarily in direct proportion. For inferior goods, consumption could actually
decrease when income increases.
d) If the supply is vertical, unit tax on goods will be paid all by the sellers.
d) True. If the supply curve is perfectly inelastic (represented by a vertical line), then the sellers bear the
entire tax burden. This is because they are unable to reduce their quantity supplied in response to the tax, so
they cannot pass any of the tax on to buyers in the form of higher prices.
e) When total utility increases, marginal utility increases.
e) False. Total utility and marginal utility are related, but they do not necessarily move in the same direction.
Total utility is the overall satisfaction a consumer gets from consuming a certain amount of a good, while
marginal utility is the additional satisfaction from consuming one more unit. According to the law of
diminishing marginal utility, as the quantity consumed of a good increases, the marginal utility from
consuming additional units typically decreases, even though total utility is still increasing.
a. Equilibrium price will decrease when both market demand and supply decrease.
a. False. The effect on equilibrium price when both market demand and supply decrease is uncertain without
information on the relative magnitude of these changes. If demand decreases more than supply, the
equilibrium price will decrease. Conversely, if supply decreases more than demand, the equilibrium price
will increase.
b. A perfectly competitive firm can apply price discrimination to capture consumers' surplus.
b. False. A perfectly competitive firm cannot practice price discrimination. In a perfectly competitive
market, firms are price takers, meaning they accept the market price and cannot influence it. Price
discrimination involves charging different prices to different consumers for the same product, which requires
some degree of market power that firms in perfectly competitive markets do not possess.
c. Comparative advantage or relative advantage is more important than absolute advantage in
explaining pattern of trade among countries.
c. True. Comparative advantage, or relative advantage, is more important than absolute advantage in
explaining the pattern of trade among countries. This is because comparative advantage focuses on the
opportunity cost of producing goods and encourages countries to specialize in producing goods for which
they have a lower opportunity cost. This leads to increased efficiency and benefits from trade, even if a
country does not have an absolute advantage in the production of any good.
d. Government can improve the market efficiency by setting a price control such as ceiling rice or
floor price.
d. False. Government intervention in the form of price controls such as price ceilings (maximum prices) or
price floors (minimum prices) can lead to market inefficiencies. Price ceilings can result in shortages if the
price is set below the equilibrium price, while price floors can result in surpluses if the price is set above the
equilibrium price. These controls prevent the market from reaching the equilibrium price at which supply
and demand are equal.
e. Demand curve faced by a firm will shift to the right when the firm spends more money on
advertising for its goods or services. It makes the demand become more elastic with respect to price.
e. False. While it is true that advertising can shift the demand curve for a firm's goods or services to the right
(increase demand), it does not necessarily make the demand more elastic with respect to price. The price
elasticity of demand is determined by factors such as the availability of substitutes and the proportion of
income spent on the good, not by the level of advertising. While advertising can make consumers more
aware of a product, it does not necessarily make them more responsive to changes in the price of the
product.
1. A movement along the demand curve shows a change in demand.
False. A movement along the demand curve shows a change in quantity demanded, not a change in demand.
A change in quantity demanded is caused by a change in the price of the good itself, while a change in
demand (which shifts the entire demand curve) is caused by factors other than the price of the good, such as
income, tastes and preferences, prices of related goods, etc.
2. If the demand is vertical, unit tax on goods will be paid all by the consumers.
True. If the demand curve is perfectly inelastic (represented by a vertical line), then consumers are
completely unresponsive to price changes and will bear the entire tax burden. This is because they will not
reduce their quantity demanded in response to the tax, so sellers can pass the entire tax on to consumers in
the form of higher prices.
3. To maximize the profit, the consumers have to choose the goods with cheap prices.
False. While price is an important factor, profit maximization for consumers (or utility maximization, as it's
usually referred to in economics) also depends on the utility or satisfaction that consumers get from
consuming different goods. Consumers have to consider both the price and the utility of the goods in their
decision making. Consumers aim to achieve the highest level of satisfaction (utility) given their budget
constraints, which doesn't necessarily mean choosing the cheapest goods.
4. The high barrier in the monopoly market structure ensures the economic profit for the monopolist.
False. High barriers to entry in a monopoly market structure can indeed prevent new firms from entering the
market and competing with the monopolist, but they do not guarantee economic profit for the monopolist.
The monopolist's economic profit also depends on its cost structure and demand curve. For example, if the
monopolist has high costs or faces a low demand, it might not earn an economic profit even with no
competition.
Section A - True/False and explanation. You are recommended to apply graphs where applicable (50
Marks)
a. If the economy goes into a booming period and incomes increase as well as more sellers entering an
inferior good market, price and quantity of the inferior good both decreases. (F)
a. True. In a booming economy with rising incomes, the demand for inferior goods typically decreases
because consumers can afford to purchase more normal goods. Additionally, more sellers entering the
market would typically increase supply. The combined effect would likely be a decrease in price. The effect
on quantity, however, depends on the relative magnitude of the decrease in demand and increase in supply. If
demand decreases more than supply increases, quantity would also decrease.
b. When two individuals produce efficiently and then make a mutually trade based on comparative
advantage, they both obtain consumption outside their production possibilities frontier. (
b. True. By specializing in the production of the good for which they have a comparative advantage and then
trading, individuals can consume at a point that would be unattainable through their own production alone.
This can potentially allow them to consume outside their production possibilities frontier.
c. Bowed outward PPF shows that opportunity cost in producing a good will increase when the good
production expands. It also implies that we are losing our comparative advantage in producing this
good.
c. True. A production possibilities frontier (PPF) that is bowed outward implies that the opportunity cost of
producing a good increases as production of that good expands. This reflects the law of increasing
opportunity costs, which states that as the production of a good expands, the opportunity cost of producing
another unit of that good generally increases.
d. Tradable pollution permit is more efficient than government regulation in reducing pollution.
d. True. Tradable pollution permits can be more efficient than government regulations at reducing pollution.
This is because tradable permits create a market for pollution that allows firms with low costs of reducing
pollution to sell their permits to firms with high costs of reducing pollution. This flexibility can lead to a
more cost-effective reduction in overall pollution than uniform government regulations.
e. non-price competition such as advertising is important for a monopolistically competitive firm due
to product differentiation.
e. True. In a monopolistically competitive market, firms sell differentiated products, so non-price
competition such as advertising is important for distinguishing a firm's product from those of its
competitors. By differentiating their products, firms can gain some market power, which enables them to
charge prices above marginal cost.
Section A-True/False and explanation. You are recommended to apply graphs where applicable (50
Marks)
a. Buyers will pay lower price, and sellers will get higher price when the government imposes per unit
tax on buyers.
process.
a. False. When the government imposes a per unit tax on buyers, it increases the price buyers have to pay,
but it doesn't necessarily increase the price sellers receive. The tax creates a wedge between the price buyers
pay and the price sellers receive. The actual price received by sellers may decrease, remain the same, or
increase, depending on the elasticities of demand and supply.
b. The average fixed cost is U Shaped due to the law of diminishing returns in production
b. False. Average fixed cost (AFC) is not U-shaped; instead, it continually declines as output increases. AFC
is calculated as total fixed costs divided by the quantity of output. Since fixed costs are constant, as output
increases, AFC decreases
c. The government will get smaller tax revenue by imposing per unit tax on a good with higher price
elasticity of demand than on lower price elasticity of demand one.
c. True. If demand is more elastic, the quantity demanded is more responsive to price changes. Therefore, a
per unit tax would lead to a significant decrease in quantity demanded, which could result in smaller tax
revenue. Conversely, if demand is less elastic, the quantity demanded changes only slightly in response to a
tax, potentially resulting in greater tax revenue.
d. Unemployment rate will be smaller in the long run than in the short run when the government
raises the minimum wage.
d. False. When the government raises the minimum wage, it can lead to higher unemployment rates both in
the short run and the long run as employers may not be able to afford to keep the same number of workers at
the higher wage. However, the actual impact on unemployment can vary depending on a range of factors,
including the level of the minimum wage and the specific characteristics of the labor market.
e. The Coarse theorem does not apply when transaction cost is high and large number of engaged
parties.
.e. True. The Coase theorem suggests that in the presence of externalities, private parties can negotiate
solutions that lead to the socially optimal output level, given that transaction costs are minimal and property
rights are clearly defined. However, when transaction costs are high or a large number of parties are
involved, negotiations can be impractical or overly complex, and the Coase theorem may not apply.
PART I: True/False and Explanation(4 points)
1. If the average cost of transporting a passenger on the train from Chicago to St. Lo $75, it would be
irrational for the railroad to allow any passenger to ride for less than $7
False. It would not necessarily be irrational for the railroad to allow a passenger to ride for less than $75.
The $75 figure likely refers to average total cost, which includes both fixed costs (costs that don't change
with the level of output, such as the cost of the train itself) and variable costs (costs that do change with the
level of output, such as fuel). If the train has empty seats (i.e., it's not at full capacity), the additional cost
(marginal cost) of transporting one more passenger could be quite low. Therefore, as long as the price covers
the marginal cost and contributes something towards fixed costs, it can still be profitable for the railroad to
allow the passenger to ride.
2. The flatter the demand curve that passes through a given point, the more elasti demand.
True. The elasticity of demand is a measure of how much the quantity demanded changes in response to a
change in price. A flatter demand curve represents a greater quantity change in response to a price change,
which means the demand is more elastic.
3. A monopolist produces where P= MC - MR.
False. A monopolist produces where marginal cost (MC) equals marginal revenue (MR). However, because
the monopolist faces a downward-sloping demand curve, the price (P) the monopolist charges will be higher
than the marginal cost at the profit-maximizing quantity.
4. The average fixed cost curve is constant.
False. The average fixed cost curve is not constant. Average fixed cost is total fixed cost divided by the
quantity of output. As output increases, average fixed cost decreases because the total fixed cost is being
spread over a larger number of units. Therefore, the average fixed cost curve is downward-sloping, not
constant.

1. Price will rise to eliminate a shortage.

True. A shortage in the market occurs when the quantity demanded exceeds the quantity supplied at the
current market price. As consumers compete for the limited quantity available, they are willing to pay more,
which puts upward pressure on the price. As the price increases, quantity demanded decreases and quantity
supplied increases, which eliminates the shortage.
2. If the marginal cost of producing the tenth unit of output is $2.50, and if the average total cost of
producing the tenth unit of output is $3, then at ten units of output, average total cost is rising.
True. If the marginal cost of producing an additional unit of output (in this case, the tenth unit) is higher than
the average total cost at the current level of output, this means that producing the additional unit is more
costly on average, which will cause the average total cost to rise.
3. A firm is currently producing 100 units of output per day. The manager reports to the owner that
producing the 100th unit costs the firm $5. The firm can sell the unit for $6. The firm should produce
more than 100 units in order to maximize its profits (or minimize its losses).
False. Based solely on the information given, we cannot determine whether the firm should produce more
than 100 units. While the 100th unit is profitable (since the marginal cost is less than the price it can be sold
for), we do not know whether the 101st unit, the 102nd unit, etc., will also be profitable. The firm should
continue to increase production as long as the price exceeds the marginal cost.
4. A price ceiling set above the equilibrium price causes a surplus in the market.
False. A price ceiling set above the equilibrium price has no effect on the market because it doesn't constrain
market forces. It does not cause a surplus. A surplus would only occur if the price ceiling was set below the
equilibrium price and then the market price couldn't adjust upwards to clear the surplus.
1. An increase in supply will cause a decrease in price, which will cause an increase in demand.
False. An increase in supply can cause a decrease in price, but it doesn't cause an increase in demand. The
decrease in price can cause an increase in quantity demanded (movement along the demand curve), not an
increase in demand (shift of the demand curve).
2. The shape of the marginal cost curve tells a producer something about the marginal product of her
workers.
True. The shape of the marginal cost curve does reflect the marginal product of labor. When the marginal
product of labor is increasing (due to increasing returns to the variable input, labor), marginal cost is falling.
When the marginal product of labor is decreasing (due to diminishing returns to labor), marginal cost is
rising. So the shape of the marginal cost curve provides insight into the productivity of the workers.
3. A popular resort restaurant will maximize profits if it chooses to stay open during the less crowded
"off season" when its total revenues exceed its variable costs. TR. Yve
True. As long as total revenues exceed variable costs, the firm is covering all its variable costs and
contributing something toward its fixed costs. Thus, even if the firm is incurring a loss (because it's not
covering all its fixed costs), it's better off operating rather than shutting down.
4. If the price elasticity of supply is 2 and the quantity supplied decreases by 6%, then the price must
have decreased by 3%.
True. The price elasticity of supply is calculated as the percentage change in quantity supplied divided by the
percentage change in price. So if the price elasticity of supply is 2, a 3% decrease in price would lead to a
6% decrease in quantity supplied.
Section A-True/False and explanation. You are recommended to apply graphs where applicable (50
a. Cost minimization is more important for a firm in a perfectly competitive market than in a
monopolistically competitive market.
a. False. Cost minimization is a goal for all firms, regardless of the market structure. Both perfectly
competitive firms and monopolistically competitive firms seek to minimize costs to maximize profit. In a
monopolistically competitive market, firms also differentiate their products, so they might incur additional
costs for branding, advertising, etc.
b. short run supply curve of a perfectly competitive firm is the part of marginal cost curve
which is above the minimum point of average total cost.
b. False. The short-run supply curve of a perfectly competitive firm is the portion of the marginal cost curve
that lies above the minimum point of the average variable cost (AVC), not the average total cost (ATC). If
the price falls below the AVC, the firm would choose to shut down in the short run and produce nothing.
c. The marginal revenue of a firm in monopoly will be negative at the inelastic part of the
firm's demand curve.
c. True. In a monopoly, the marginal revenue curve lies below the demand curve. When the demand curve is
inelastic, meaning the percentage change in quantity demanded is less than the percentage change in price,
marginal revenue can become negative.
d. A perfectly competitive firm will maximize its total revenue when its marginal revenue
equals zero.
d. True. The revenue-maximizing level of output for a firm occurs where marginal revenue is zero. Beyond
this point, selling an additional unit will reduce total revenue as the increase in revenue from selling more
units is less than the decrease in revenue from having to lower the price on all units sold.
e. Even a monopolistically competitive firm makes zero economic profit but buyers in this
market still pay a price which is higher than marginal cost as well as minimum point of average
total cost.
e. True. In monopolistic competition, firms have some degree of market power due to product
differentiation. This means that, in the long run, they can charge a price that is higher than marginal cost and
potentially above the minimum point of ATC. This is different from a perfectly competitive market, where
the price equals marginal cost in the long run.
Perfect competition
Shutdown point p = min ATC
Profit max= p= MC(Q)
Monopoly: MR<P=AR
Profit max MR=MC
Can have negative profit if ATC>P => profit <0. Cause ATC > đường cầu