Econ Practice Exam

Question 1

A city government hopes to decrease the quantity of sugary drinks consumed, and is planning to implement a tax on the drinks. Should the government tax companies that sell sugary drinks, or the consumers who purchase them?

• The companies that sell the drinks
• The consumers who purchase the drinks
• The impact of the tax will be the same regardless of who pays the tax
• The quantity of drinks consumed will not decrease as a result of the tax

Answer 1

The impact of the tax will be the same regardless of who pays the tax

Question 2

Which of the following statements is true?

• If demand is linear, slope will vary across different points on the demand curve whereas the elasticity will be the same at all points on the curve.
• A linear demand curve has a constant slope, but each point on the curve has a different elasticity.
• Elasticity does not depend on units whereas slope does.
• A demand curve’s slope might change if the unit’s demand is measured in change.
• The data needed to know the demand curve’s entire slope are more likely to be available than the data needed to calculate elasticity at a given price.
• Elasticity at a point on the demand curve can be approximated if you know how quantity demanded changes with a small price change.
• Price elasticity of demand and slope are two names for the same concept.
• Slope measures how much quantity changes as price changes, but elasticity gives a unit-less measure of how significant that change is.

Answer 2

Elasticity does not depend on units whereas slope does.

Question 3

Suppose that the table below shows the daily demand for high-speed train tickets from London to Paris. As the price increases from £250 to £350, what is the price elasticity of demand?

• 1/7
• 3/5
• 5/3
• 7

Answer 3

1/7
Elasticity is the absolute value of the percent change in quantity demanded divided by the percent change in price.

3/5
Elasticity is the absolute value of the percent change in quantity demanded divided by the percent change in price.

5/3
Elasticity is the absolute value of the percent change in quantity demanded divided by the percent change in price. Quantity demanded decreases by 1000, or 2/3 of 1500. Price increases by £100, or 2/5 of £250. Elasticity is 2/3 divided by 2/5, or 5/3.

7
7 would be the elasticity if price decreased from £350 to £250.

Question 4

The table below shows a Red Sox fan’s demand for tickets to a game:

Which of the following statements is true?

• WTP for the third ticket is $100.
• WTP for the third ticket is between $90 and $100.
• WTP for the fifth ticket is $0.
• The fan is willing to pay any amount greater than $90 for the second ticket.

Answer 4

WTP for the third ticket is $100.

• At a price of $100, the fan only purchases one ticket. WTP therefore cannot be more than $100 for the third ticket—otherwise the fan would purchase at least 3 tickets at that price.

WTP for the third ticket is between $90 and $100.

• Since the third ticket is purchased at $90 but not at $100, the fan must have WTP between $90 and $100 for it.

WTP for the fifth ticket is $0.

• The fan is willing to purchase a five tickets at a price of $90, so WTP for the fifth ticket must be at least $90.

The fan is willing to pay any amount greater than $90 for the second ticket.

• The fan is willing to pay at least $90 for the second ticket, but not ANY amount greater than $90. Since the fan purchases only 1 ticket at a price of $100, we know that the fan is not willing to pay $100 for the second ticket.

Question 5

An entrepreneur is considering starting a business baking and selling cupcakes. The entrepreneur estimates that average total costs per cupcake would be $1.00, and variable costs per cupcake would be $0.50.

An incumbent bakery in the neighborhood sells cupcakes at $3 per cupcake. The entrepreneur estimates that this bakery spends $1.50 in total costs on each cupcake, $0.75 of which is variable costs.

Should the entrepreneur start the new cupcake business?

Answer 5

The entrepreneur should start the new business as long as customers are not willing to pay more than $0.25 more for the incumbent’s cupcakes than for the entrepreneur’s cupcakes.

• See correct answer for explanation.

The entrepreneur should start the new business ONLY if customers are willing to pay at least $0.25 more for the new cupcakes than for the incumbent’s cupcakes.

• If customers have a higher WTP for the new cupcakes (by at least $0.25) the entrepreneur will be able to charge enough to cover total costs, even if the incumbent engages in a price war.

The entrepreneur should start the new business ONLY if customers are willing to pay at least $0.50 more for the new cupcakes than for the incumbent’s cupcakes.

• See correct answer for explanation.

The entrepreneur should definitely not start the new business.

• See correct answer for explanation.

Question 6

Which of the following is NOT a factor that directly impacts a consumer’s WTP for a good?

• Availability of substitute goods
• Consumers’ income
• Weather
• Prices of the inputs used to produce the good

Answer 6

Availability of substitute goods

• WTP and the shape of the demand curve are influenced by the availability of acceptable substitutes for a good.

Consumers’ income

• A consumer with higher income is typically willing to pay more for a good.

Weather

• Weather can influence WTP for many goods, such as outdoor events and certain types of clothing.

Prices of the inputs used to produce the good

• Although the price of a good affects quantity demanded, the prices of inputs used to produce the good do not affect WTP – and therefore demand – directly.

Question 7

A car collector wishes to sell a rare Porsche. There are two prospective buyers, and each buyer knows the willingness to pay of the other. The first buyer’s valuation is $200K, and the second buyer’s valuation is $300K. Which of the following methods would generate the greatest revenue?

• A fixed price of $200k.
• A fixed price of $250k.
• A sealed first-price auction.
• A sealed second-price (Vickrey) auction.

Answer 7

A fixed price of $200k.

• At this price, the car will definitely sell for $200k.

A fixed price of $250k.

• At this price, the higher-WTP customer will purchase the car for $250k. This is the only option that allows the seller to earn substantially more than $200k.

A sealed first-price auction.

• In a sealed first-price auction, the higher-WTP customer will bid just slightly above the lower-WTP customer’s WTP, and the car will sell for just over $200k.

A sealed second-price (Vickrey) auction.

• In a Vickrey auction, customers will bid their WTP, and the car will sell to the higher-WTP customer at a price of $200k.

Question 8

An increase in the popularity of corn ethanol as a fuel increases the demand for corn around the world, causing the price to rise. What is the reason behind the higher price?

• To meet higher demand, the industry relies more on less cost efficient producers of corn.
• Higher fixed costs incurred in order to meet demand end up increasing the cost of production.
• Corn ethanol’s relative inefficiency as a fuel raises production costs for corn producers.
• The opportunity cost for supplying corn is higher than before.

Answer 8

To meet higher demand, the industry relies more on less cost efficient producers of corn.

• As more corn is demanded, the additional corn will be produced by less efficient suppliers, and prices will increase to cover their costs.

Higher fixed costs incurred in order to meet demand end up increasing the cost of production.

• The price charged by producers is based on their variable, rather than fixed, costs of production.

Corn ethanol’s relative inefficiency as a fuel raises production costs for corn producers.

• The corn producers do not have to use corn ethanol themselves, so its relative inefficiency will probably not impact their costs.

The opportunity cost for supplying corn is higher than before.

• We have no reason to believe that the opportunity cost of supply corn has increased in general

Question 9

Two products have a cross-price elasticity of demand of approximately 0. Which of the following pairs of products could be the ones in question?

• High-speed internet access and online streaming of TV shows.
• Live concerts and iTunes downloads.
• Dishwashers and houseplants.
• Bicycles and public transportation.

Answer 9

High-speed internet access and online streaming of TV shows.

• These products are complements.

Live concerts and iTunes downloads.

• These products could be seen as substitutes or complements.

Dishwashers and houseplants.

• If the CPED is 0, the two goods are neither complements nor substitutes.

Bicycles and public transportation.

• These goods are substitutes.

Question 10

A museum curator is bidding in a sealed first-price auction on a painting. The curator should place a bid:

• Less than the museum’s willingness to pay for the painting
• Equal to 30% of the museum’s willingness to pay for the painting
• Equal to the museum’s willingness to pay for the painting
• Greater than the museum’s willingness to pay for the painting

Answer 10

Less than the museum’s willingness to pay for the painting

• The curator hopes to capture some value for the museum, and can only accomplish this if the price paid is less than the museum’s WTP. A bid below WTP will also protect the museum against the winner’s curse.

Equal to 30% of the museum’s willingness to pay for the painting

• We cannot know the exact optimal bid without having some idea of what the other bidders are willing to pay.

Equal to the museum’s willingness to pay for the painting

• If the museum wins the auction, it will pay its full WTP and capture no value.

Greater than the museum’s willingness to pay for the painting

• If the museum wins the auction, it will pay more than it is willing to pay, which is never a desirable outcome.

Question 11

A traveler’s willingness to pay for a room in a hotel in a remote location is $200. The traveler’s willingness to pay for internet access is $10. If the traveler views hotel rooms and internet access as complementary products, what is most likely the traveler’s willingness to pay for a room in a hotel that offers free internet access?

• $200
• Between $200 and $210
• $210
• More than $210

Answer 11

$200

• See correct answer for explanation.

Between $200 and $210

• See correct answer for explanation.

$210

• See correct answer for explanation.

More than $210

• Since the two goods are complementary, the traveler’s WTP for a bundle of the two should be higher than the sum of WTP for the two individual products.

Question 12

A startup company is currently selling each unit of its product for $10.00 less than its total costs per unit. If the startup has an opportunity to expand its customer base by 10% through a marketing campaign, should the company consider the campaign?

• No, the company should shut down to avoid further losses.
• Yes, if the additional customers would lower the average cost enough to make the firm profitable.
• No, since the company is losing money on each unit sold, a greater quantity would lower profits further.
• Yes, because more customers now will result in more profit in the future.

Answer 12

No, the company should shut down to avoid further losses.

• Expanding the customer base might decrease per-unit costs sufficiently to make the company profitable.

Yes, if the additional customers would lower the average cost enough to make the firm profitable.

• As output increases, fixed costs per unit will decrease. This may lead to low enough average costs that the firm will be profitable.

No, since the company is losing money on each unit sold, a greater quantity would lower profits further.

• Price might be higher than the variable costs, in which case producing a greater quantity of the good will actually decrease losses.

Yes, because more customers now will result in more profit in the future.

• We do not know whether the price is higher than the variable cost. If it is not, additional customers will simply result in greater losses.

Question 13

After running an advertising campaign for its line of dishwashers, an appliance store notices that consumer WTP for its dishwashers seems to have increased. However, the store has not captured any market share from its competitors. Which of the following might explain this outcome?

• The advertising campaign focused on negative features of competitors’ dishwashers rather than the positive features of the store’s own product.
• The advertising campaign focused on the advantages of owning a dishwasher, but did not mention the store’s specific brand of dishwasher.
• The advertising campaign alerted consumers that the store was having a major sale on dishwashers, without emphasizing the desirable features of the dishwashers.
• Dishwashers exhibit network effects, and the store is therefore operating in a “winner-take-all” industry.

Answer 13

The advertising campaign focused on negative features of competitors’ dishwashers rather than the positive features of the store’s own product.

• If the campaign had badmouthed a competitor, the store probably would have seen increased market share as consumers left the other store.

The advertising campaign focused on the advantages of owning a dishwasher, but did not mention the store’s specific brand of dishwasher.

• The campaign increased WTP for dishwashers in general, but without specifically promoting the store. Other dishwasher sellers have probably profited from the campaign in the same way.

The advertising campaign alerted consumers that the store was having a major sale on dishwashers, without emphasizing the desirable features of the dishwashers.

• Advertising the sale might not change consumer WTP for dishwashers, but should bring more customers to the store rather than to its competitors.

Dishwashers exhibit network effects, and the store is therefore operating in a “winner-take-all” industry.

• Dishwashers do not exhibit notable network effects.

Question 14

Exotic Getaway Inc. is selling vacation packages to Bahamas. The company’s CEO thinks that the consumers’ willingness to pay for the packages is $4,000 each, but she is not quite sure. The company has a month to sell the tickets. What price should she set?

• $3,000
• $3,999
• $4,000
• $5,000

Answer 14

$3,000

• The company has a whole month to sell the tickets, and should probably see if it can sell them at a higher price.

$3,999

• The company has a whole month to sell the tickets, and should probably see if it can sell them at a higher price.

$4,000

• The company has a whole month to sell the tickets, and should probably see if it can sell them at a higher price.

$5,000

• The company can price the tickets at $5,000 to see if they will sell. If they do not, there is plenty of time to decrease the price before the month is up.

Question 15

In order to test a new customer loyalty program, a store sends an email to its current customers in one of its existing markets, inviting them to opt into the new program. After several months, management observes that participants in the new program are much more frequent shoppers than the average customer. The management can conclude:

• That introducing the new loyalty program in all its markets will boost sales in the future
• That the new loyalty program has boosted sales among its test participants
• That the experiment was poorly designed
• All of the above

Answer 15

That introducing the new loyalty program in all its markets will boost sales in the future

• Other regions may not respond to the loyalty program in the same was that this region did.

That the new loyalty program has boosted sales among its test participants

• The shoppers who opted into the program may have been more frequent shoppers than the average customer already. The program itself may not have changed their behavior at all.

That the experiment was poorly designed

• By focusing on one region and selecting participants by allowing anyone to opt in, the store has created a potentially biased sample.

All of the above

• See explanations above.

Question 16

A factory currently manufactures and sells 1000 boats per year. Each boat costs $8,000 to produce. $7,000 of the per-boat costs are for materials and other variable costs, while the per-boat fixed costs (incurred on yearly rent, administrative, and other fixed costs) are $1,000. If boat orders decrease to 800 boats per year, how do per-unit costs change?

• Variable costs are unchanged at $7,000 per boat and fixed costs are unchanged at $1,000 per boat
• Variable costs rise to $8,750 per boat and fixed costs rise to $1,250 per boat
• Variable costs fall to $5,600 per boat and fixed costs are unchanged at $1,000 per boat
• Variable costs are unchanged at $7,000 per boat and fixed costs rise to $1,250 per boat

Answer 16

Variable costs are unchanged at $7,000 per boat and fixed costs are unchanged at $1,000 per boat

• See correct answer for explanation.

Variable costs rise to $8,750 per boat and fixed costs rise to $1,250 per boat

• See correct answer for explanation.

Variable costs fall to $5,600 per boat and fixed costs are unchanged at $1,000 per boat

• See correct answer for explanation.

Variable costs are unchanged at $7,000 per boat and fixed costs rise to $1,250 per boat

• The $1,000,000 in fixed costs is now spread across only 800 boats. This results in $1,250 in fixed costs per boat. Variable costs are unchanged.

Question 17

A farm equipment manufacturer has already spent $3 million in research and development to design a new model of tractor. To produce the tractors, the company will have to contract to rent a factory for a year at a cost of $20 million, and will then spend an additional $10,000 per tractor in materials and wages.

The company estimates that it can sell 2,000 tractors per year at a certain price, and concludes that it should produce the tractors. What is the lowest price the company could be using in this calculation?

• $10,000
• $11,500
• $20,000
• $20,000

Answer 17

$10,000

• Since the company is deciding whether to start producing tractors, it needs to cover the $20 million in fixed costs as well as the $10,000 in variable costs.

$11,500

• $11,500 would be enough to cover the variable costs of the tractors, plus the $3 million spent on research and development. However, the $3 million is sunk, and should not be included in calculations. Moreover, the $20 million in yearly fixed costs is not sunk, and should be taken into account.

$20,000

• The company needs to earn enough on each tractor to cover the fixed costs of operating for a year. $20 million spread over 2,000 tractors is $10,000 per tractor, so adding in the variable costs, the company needs to sell each tractor for $20,000

$21,500

• $21,500 per tractor would be enough to cover even the sunk costs of research and development. However, since these costs have already been incurred, they should not factor into forward-looking decisions.

Question 18

An apparel company recently introduced a new dress, which sold out within days. Which of the following strategies could management use to determine the best price for the dress?

• Send customers a survey asking how much they would be willing to pay for the dress
• Increase the quantity of dresses stocked in each store in order to satisfy demand at the current price
• Set a price equal to the cost of manufacturing the dress, plus a standard mark-up.
• Gradually increase the price of the dress until profits begin to fall

Answer 18

Send customers a survey asking how much they would be willing to pay for the dress

• Respondents have a strong motivation to lie on the survey.

Increase the quantity of dresses stocked in each store in order to satisfy demand at the current price

• Maximizing the quantity sold is not the store’s goal, as you may recall from the lesson on elasticity.

Set a price equal to the cost of manufacturing the dress, plus a standard mark-up.

• To determine an ideal price, the company should consider demand rather than focusing solely on cost.

Gradually increase the price of the dress until profits begin to fall

• The dress probably sold out because it was priced too low.

Question 19

The table below shows fixed and variable costs per-unit for an ice cream shop, “Company A,” and its local competitor, “Company B”.

Costs for rent and utilities are fixed by contract, and the two shops produce the same flavor of ice cream. The owner of Company A is considering lowering the price of its ice cream, starting a price war with Company B in an effort to grab market share from its competitor. Would it be a wise decision for Company A to enter a price war with Company B?

• Yes, because price wars are always an effective way to increase market share.
• Yes because Company A’s cost structure allows it to lower prices further than Company B.
• No, because Company B has greater market share than Company A.
• No, because Company B can produce the product for less than Company A can.

Answer 19

Yes, because price wars are always an effective way to increase market share.

• See correct answer for explanation.

Yes because Company A’s cost structure allows it to lower prices further than Company B.

• A price war would be won by the company that can lower its prices the most. The ability to lower prices is based off of the variable costs per unit.

No, because Company B has greater market share than Company A.

• See correct answer for explanation.

No, because Company B can produce the product for less than Company A can.

• See correct answer for explanation.

Question 20

Which of the following strategies would be most likely to allow a restaurant to keep its prices above its average cost?

• Offer the most popular dishes served by its most successful competitor
• Specialize in a type of cuisine not served by other restaurants in its region
• Locate near other popular restaurants

Answer 20

Offer the most popular dishes served by its most successful competitor

• This would make the restaurant more similar to its competitors, making it more likely to have to compete on price.

Specialize in a type of cuisine not served by other restaurants in its region

• This would differentiate the restaurant from its competitors, making it less likely to have to compete on price.

Locate near other popular restaurants

• This would make the restaurant more similar to its competitors, making it more likely to have to compete on price.

Question 21

Which of the following statements is true?

• The demand curve is an upward-sloping line which relates price and quantity demanded.
• If a company that faces a downward-sloping demand curve charges the same price to all its customers, there are usually some customers who are paying less than their willingness to pay.
• The quantity that corresponds to a particular price on the demand curve tells us the number of people who have that price as their willingness to pay.
• All of the above.

Answer 21

The demand curve is an upward-sloping line which relates price and quantity demanded.

• The demand curve is a downward sloping line, which relates price and quantity demanded. The negative slope results from the inverse relationship between price and quantity demanded—as one goes up, the other goes down.

If a company that faces a downward-sloping demand curve charges the same price to all its customers, there are usually some customers who are paying less than their willingness to pay.

• Unless the company sells only one unit to the customer with the highest WTP, at any price it charges there will always be people who were willing to pay even more and are paying less than their WTP at the given price.

The quantity that corresponds to a particular price on the demand curve tells us the number of people who have that price as their willingness to pay.

• The quantity that corresponds to a particular price tells us the number of people who have that price or higher as their WTP.

All of the above.

See explanations above.

Question 22

The price of electricity decreases, making it cheaper to operate subways, and concurrently, gasoline prices skyrocket. Assuming that prices can be freely set by the subway operator, how do the equilibrium price and quantity of subway tickets change?

• Price and quantity increase
• Price and quantity decrease
• Price decreases and quantity increases
• Quantity increases and the effect on price cannot be determined

Answer 22

Price and quantity increase

• See correct answer for explanation

Price and quantity decrease

• See correct answer for explanation

Price decreases and quantity increases

• See correct answer for explanation

Quantity increases and the effect on price cannot be determined

• Demand for subway tickets increases due to the higher gas prices, and supply increases due to the lower electricity costs. Quantity will certainly increase, but the effect on price depends on the magnitude of the effects of these two changes.

Question 23

It is a hot day in Boston. Walking along the Charles River, you see an ice cream stand. You stop and buy one ice cream cone for $2. You continue walking and five minutes later you have just finished the ice cream when you see another ice cream stand selling identical cones. Your willingness to pay for another cone is likely to be:

• Lower than before
• Higher than before
• Unchanged

Answer 23

Lower than before

• This illustrates a concept called “law of diminishing returns”—the idea that for many items, people value consecutive units of the good less and less.

Higher than before

• Once you have already eaten one ice cream cone, a second one is likely to give you less pleasure. Thus your WTP for the second cone is likely to be lower.

Unchanged

• Once you have already eaten one ice cream cone, a second one is likely to give you less pleasure. Thus your WTP for the second cone is likely to be lower.

Question 24

Consider the following statements:

I. An increase in the rate of income tax decreases the opportunity cost of being unemployed.

II. The introduction of e-learning, which enables students to earn a degree by watching lectures at their own pace and from any location, decreases the opportunity cost of earning a college degree.

• I is true, and II is false.
• I is false, and II is true.
• I and II are both true.
• I and II are both false.

Answer 24

I is true, and II is false.

• See correct answer for explanation.

I is false, and II is true.

• See correct answer for explanation.

I and II are both true.

• The opportunity cost of being unemployed decreases because the increase in the rate of income tax decreases disposable income from being employed. The introduction of e-learning allows students greater flexibility to work while taking classes, which decreases the opportunity cost of earning a degree.

I and II are both false.

• See correct answer for explanation.

Question 25

A publishing company knows that about half of the consumers who might purchase a new book are very excited for its new release and are willing to pay $20. The rest of the potential consumers have not really been anxiously awaiting the new release and are probably only willing to pay $15 for it. How could the publisher sell the book to all of these consumers without decreasing revenues from the consumers with a higher WTP? * Release a hardcover version of the book first, and later release a paperback version at a lower price * Offer the book for $20, and put it on sale for 25% off after a few weeks * Either of the above could allow the publisher to sell the book to the lower WTP consumers without decreasing revenues from the higher WTP consumers * The publisher cannot sell the book to the lower WTP consumers without decreasing revenues from the higher WTP consumers

Answer 25

Release a hardcover version of the book first, and later release a paperback version at a lower price * Hardcover books are typically priced higher than paperbacks, so the readers anxious to obtain the new book would pay up for the hardcover, and the readers with a lower WTP would wait. Offer the book for $20, and put it on sale for 25% off after a few weeks * Readers with a high WTP would purchase the book right away, but readers with lower WTP would have a chance to buy it later when it went on sale. **Either of the above could allow the publisher to sell the book to the lower WTP consumers without decreasing revenues from the higher WTP consumers** * See explanations above. The publisher cannot sell the book to the lower WTP consumers without decreasing revenues from the higher WTP consumers * See explanations above.

Question 26

A farm equipment manufacturer has developed new machinery that makes the harvest of soybeans significantly cheaper. A few years later the region experiences a severe drought, making it more expensive to water the crops. Assuming there have been no other changes to the market, how have the equilibrium price and quantity of soybeans changed since before the new machinery was introduced? * Price has increased and the effect on quantity cannot be determined * Price and quantity have both increased * Neither the effect on quantity nor the effect on price can be determined * Quantity decreases and the effect on price cannot be determined *

Answer 26

Price has increased and the effect on quantity cannot be determined * See correct answer for explanation. Price and quantity have both increased * See correct answer for explanation. **Neither the effect on quantity nor the effect on price can be determined** * The new machinery should increase the supply of soybeans, but the drought would decrease it. Without knowing the relative magnitude of the two changes, we cannot determine the impact on price or quantity. Quantity decreases and the effect on price cannot be determined * See correct answer for explanation.

Question 27

Refer to the figure below showing the market demand for bottled beer in Massachusetts. The arrows are consistent with which of the following events? * Due to health concerns, people are demanding less bottled beer at any price and producers have raised their prices in response. * Producers have increased the price of bottled beer and hence quantity demanded has decreased. * As wine consumption has increased in popularity, the quantity of beer demanded at any price has decreased and producers have raised their prices in response. * The arrows are consistent with all of these events.

Answer 27

Due to health concerns, people are demanding less bottled beer at any price and producers have raised their prices in response. * A reduction in demand would cause a shift in the demand curve, whereas this diagram only depicts a move along the existing demand curve. **Producers have increased the price of bottled beer and hence quantity demanded has decreased.** * The diagram depicts how the change in the price of a good reduces quantity demanded. As wine consumption has increased in popularity, the quantity of beer demanded at any price has decreased and producers have raised their prices in response. * A reduction in demand would cause a shift in the demand curve, whereas this diagram only depicts a move along the existing demand curve. The arrows are consistent with all of these events. * A reduction in demand would cause a shift in the demand curve, whereas this diagram only depicts a move along the existing demand curve.

Question 28

A bakery famous for its cupcakes opens its doors at 9 a.m. and allows each customer to purchase up to 2 cupcakes until the day's supply of cupcakes runs out. Customers begin lining up around 8 a.m. each day and the cupcakes usually run out around 9:30, leaving dozens of unserved customers disappointed. Which of the following statements about this market are true? Select all that apply. * The cupcakes are being sold below their equilibrium price. * The bakery is maximizing its short-run producer surplus. * The customers who receive cupcakes are the customers with the highest willingness to pay for cupcakes. * The bakery is not using price as the only means of allocating cupcakes to its customers. * Consumer surplus is being maximized.

Answer 28

The cupcakes are being sold below their equilibrium price. * If the cupcakes were being sold at or above their equilibrium price, there would not be dozens of disappointed customers left over when the bakery runs out of cupcakes. The bakery is maximizing its short-run producer surplus. * The bakery could increase its surplus by raising prices. The customers who receive cupcakes are the customers with the highest willingness to pay for cupcakes. * The cupcakes are allocated on a first-come, first-served basis, rather than based on willingness to pay. The bakery is not using price as the only means of allocating cupcakes to its customers. The bakery is using a queue to allocate its cupcakes. Consumer surplus is being maximized. Although low prices can increase consumer surplus, decreased quantity decreases consumer surplus. We cannot know that consumer surplus is being maximized.

Question 29

The price of a product increases. Therefore, consumer surplus: * decreases * increases * stays the same * unable to tell

Answer 29

decreases * Consumer surplus can increase if the price increase is due to an increase in demand. increases * Consumer surplus can decrease if the price increase is due to a decrease in supply. stays the same * Consumer surplus will either increase if the price increase is due to an increase in demand or decrease if the price increase is due to a decrease in supply. unable to tell * Correct!

Question 30

Suppose that when a monopolistic car manufacturer raised its prices, it lost half of its customer base, but reported higher profits than before. Which of the following can be concluded? * The consumers were very annoyed at the price increase. * The demand curve was upward sloping. * The firm was originally pricing where marginal revenue was greater than marginal cost. * The firm was originally pricing where marginal revenue was lower than marginal cost.

Answer 30

The consumers were very annoyed at the price increase. * See correct answer for explanation. The demand curve was upward sloping. * See correct answer for explanation. The firm was originally pricing where marginal revenue was greater than marginal cost. * See correct answer for explanation. The firm was originally pricing where marginal revenue was lower than marginal cost. * The fact that the manufacturer could increase its revenues by raising prices and narrowing the client base indicated that the WTP of the high-type consumers was sufficiently higher than the WTP of the low-type consumers to make it inefficient to serve the low-type consumers.

Question 31

Suppose that when a monopolistic car manufacturer raised its prices, it lost half of its customer base, but reported higher profits than before. Which of the following can be concluded? * The consumers were very annoyed at the price increase. * The demand curve was upward sloping. * The firm was originally pricing where marginal revenue was greater than marginal cost. * The firm was originally pricing where marginal revenue was lower than marginal cost.

Answer 31

The consumers were very annoyed at the price increase. * See correct answer for explanation. The demand curve was upward sloping. * See correct answer for explanation. The firm was originally pricing where marginal revenue was greater than marginal cost. * See correct answer for explanation. **The firm was originally pricing where marginal revenue was lower than marginal cost.** * The fact that the manufacturer could increase its revenues by raising prices and narrowing the client base indicated that the WTP of the high-type consumers was sufficiently higher than the WTP of the low-type consumers to make it inefficient to serve the low-type consumers.

Question 32

The tiny town of Nemo has three neighborhoods located on a straight line: Neighborhood 1, Neighborhood 2, and Neighborhood 3, with Neighborhood 2 located equidistant between Neighborhood 1 and Neighborhood 3. There is one daycare center, located on Neighborhood 1. There are 10 families residing in each neighborhood, and each family has one child. Each family is willing to pay $70/day for daycare, and prefers daycare closest to its own neighborhood (though at current distances, families will purchase daycare services even if it’s two neighborhoods away). Families are indifferent between any two daycares in the same neighborhood. Suppose that daycare costs $30/day per child to provide. A new daycare center is thinking of opening in Nemo. If both daycares will keep their price at $70/day, which neighborhood should the new daycare open in? * Neighborhood 1 * Neighborhood 2 * Neighborhood 3 * It does not matter

Answer 32

Neighborhood 1 * Opening in Neighborhood 1 would make the new day care identical to the old one, capturing half the total surplus: 15 \* ($70 - $30) = $600/day. **Neighborhood 2** * Being located in Neighborhood 2 would attract all residents of Neighborhoods 2 and 3, and none of the residents of Neighborhood 1, for a surplus of: 20 \* ($70 - $30) = $800/day. Neighborhood 3 * Being located in Neighborhood 3 would attract all residents of Neighborhood 3, and half the residents of Neighborhood 2, for a profit of: 15 \* ($70 - $30) = $600/day. It does not matter * See explanations above.

Question 33

A movie theater substantially decreases the price of its popcorn during the same week that a heavily advertised new movie is being released. How will the equilibrium price and quantity of movie tickets change? * Price and quantity will both increase * Quantity will increase and the effect on price cannot be determined * Quantity will increase and price will decrease * Neither the effect on quantity nor the effect on price can be determined

Answer 33

**Price and quantity will both increase** * The decreased popcorn prices and the new movie will both increase demand, leading to higher prices and higher quantity. Quantity will increase and the effect on price cannot be determined * See correct answer for explanation. Quantity will increase and price will decrease * See correct answer for explanation. Neither the effect on quantity nor the effect on price can be determined * See correct answer for explanation.

Question 34

Which of the following statements is true of active secondary markets? * They can undo some of the intended effects of a price ceiling * They exacerbate excess demand for a product * They exacerbate excess supply for a product * All of the above

Answer 34

**They can undo some of the intended effects of a price ceiling** * A secondary market can allow consumers with low WTP to resell the product to consumers with high WTP, undermining a price ceiling. They exacerbate excess demand for a product * See correct answer for explanation. They exacerbate excess supply for a product * See correct answer for explanation. All of the above * See correct answer for explanation.

Question 35

In which of the following scenarios would both the price and quantity sold of paperback books decrease? * The government passes new environmental regulations that increase the price of paper. * The price of e-books, a substitute for paperback books, decreases. * Printers develop processes that significantly decrease their costs. * The price of bookmarks, a complementary good to paperback books, decreases.

Answer 35

The government passes new environmental regulations that increase the price of paper. * This would shift supply to the left, decreasing quantity but increasing price. The price of e-books, a substitute for paperback books, decreases. * A decrease in the price of e-books, a substitute good, would shift demand for paperback books to the left, resulting in a lower price and a lower quantity demanded. Printers develop processes that significantly decrease their costs. * This would shift supply to the right, decreasing prices but increasing quantity. The price of bookmarks, a complementary good to paperback books, decreases. * This would shift demand to the right, increasing both price and quantity.

Question 36

A gas station has noticed a recent increase in demand for gasoline. What could have caused this shift? * The gas station has increased its price. * The government has decreased the price of public transportation. * Construction of a new bridge has been completed, opening up better routes for commuters. * A toll station on a major freeway has raised the toll by 10%.

Answer 36

The gas station has increased its price. * A change in price will not shift the demand curve. The government has decreased the price of public transportation. * This would decrease demand. Construction of a new bridge has been completed, opening up better routes for commuters. * The new bridge is a complement to gasoline. A toll station on a major freeway has raised the toll by 10%. * This toll essentially raises the price of a complementary product, and should decrease demand for gasoline.

Question 37

A telephone company offers two services: landlines and Internet. There are two types of customer demographics. One customer demographic only values the Internet service, with a WTP of $60/month. The other customer demographic values the Internet service less, at $35/month, but values the landline telephone service at $30/month. The two customer demographics are each comprised of 100 persons. Internet and landlines each cost $20/month to supply to each customer who purchases them (so the cost to supply both products to a customer is $40/month). Which pricing scheme should the telephone company adopt? * Price Internet at $60/month, and landlines at $30/month. * Price Internet at $35/month, and landlines at $30/month. * Bundle the two goods at a combined price of $65/month. * Bundle the two goods at a combined price of $60/month.

Answer 37

**Price Internet at $60/month, and landlines at $30/month.** * 100 customers would purchase only Internet, creating profits of $4000. The other 100 customers would only purchase landlines, creating profits of $1000. Total profits would be $5000 per month. Price Internet at $35/month, and landlines at $30/month. * All 200 customers would purchase Internet, creating profits of $3000, and 100 customers would also purchase landlines, creating profits of $1000. Total profits would be $4000 per month. Bundle the two goods at a combined price of $65/month. * Only 100 customers would purchase the bundle, leading to profits of $2500 per month. Bundle the two goods at a combined price of $60/month. * All of the customers would purchase the bundle, leading to profits of $4000 per month.

Question 38

A seller of luxury condos currently offers the condos for $700K each, and has 8 willing customers. The seller is considering lowering the price of each condo to $600K, since then he would have 9 customers willing to purchase condos. What would be the seller's marginal revenue from lowering the price in this way? * -$200k * $0 * $200k * $400k

Answer 38

- $200K * The current revenue is $700K \* 8 = $5.6M. By lowering the price, the seller would get $600K \* 9 = $5.4M, which is $200K less. $0 * See correct answer for explanation. $200K * See correct answer for explanation. $400K * See correct answer for explanation.

Question 39

The chart below shows consumers' willingness to pay for cups of coffee. If these are the only four buyers in the market, then the market quantity demanded at a price of $4 is: * 12 cups * 15 cups * 20 cups * 22 cups

Answer 39

12 cups * Customers will continue buying cups of coffee as long as their WTP for a certain cup is higher than its price. 15 cups * At a price of $4, John is willing to buy a fourth cup of coffee, but not a fifth. Similarly, Anton, Julie, and Sarah each buy 5, 4, and 2 cups of coffee, respectively. Hence total market demand at a price of $4 is 15 cups. 20 cups * The value John derives from his fourth cup of coffee is $6, so by purchasing it for $4, he gains $2 of value. However, he values a fifth cup at $3, and would be unwilling to spend $4 on it. Hence John buys 4 cups. Similar calculations can be made for the other three customers. 22 cups * The value John derives from his fourth cup of coffee is $6, so by purchasing it for $4, he gains $2 of value. However, he values a fifth cup at $3, and would be unwilling to spend $4 on it. Hence John buys 4 cups. Similar calculations can be made for the other three customers.

Question 40

A monopolistic seller of rare oriental rugs discovers that 60% of the population is willing to pay $1,000 for a rug. The remaining 40% of the population is willing to pay $2000. Each rug costs $600 to produce. How much should the monopolist charge for each rug? * $600 * $1000 * $1500 * $2000

Answer 40

$600 * Charging $600 would lead to zero profits. $1000 * Charging $1000 would lead to everyone purchasing the rug, at $400 of profit each. If there are 100 customers, that would lead to profits of $40,000. $1500 * At $1500, only 40% of the population would purchase a rug, in which case you might as well charge $2000. **$2000** * Charging $2000 would lead to 40% of the population purchasing at $1400 profit each. If there are 100 customers, that would be total profits of $56,000.

Question 41

A chocolatier produces truffles and sells each 1 pound box of truffles for $20. However, the chocolatier knows that some consumers would be willing to pay more than the cost of the chocolate, but less than $20 per pound, and wishes to sell truffles to these consumers as well. Which of the following price discrimination methods relies on the chocolatier knowing which types of consumers are likely to have a lower willingness to pay? * Offering one free box of truffles to anyone who purchases two boxes * Selling misshaped truffles in bulk at a price of $12 per pound * Offering a discount to students and seniors * Offering a 20% off sale on a single type of truffle each week

Answer 41

Offering one free box of truffles to anyone who purchases two boxes * The chocolatier does not need to know which consumers would be interested in buying larger quantities at a discount in order to offer the deal. Selling misshaped truffles in bulk at a price of $12 per pound * Consumers with lower WTP can self-select into buying the cheaper but uglier truffles. **Offering a discount to students and seniors** * This method relies on the chocolatier knowing that students and seniors are the consumers who have a lower WTP. Offering a 20% off sale on a single type of truffle each week * Consumers with a lower WTP could self-select buy choosing to buy only the truffles that were on sale.

Question 42

You are earning $40,000 per year as a branch manager at Dunkin Donuts. You are planning on leaving your job and going back to college; upon learning this, your branch manager offers you a 10% increase in salary to stay. Knowing this, how does the opportunity cost of going to college change? * It remains unchanged because the cost of room, board, and tuition has not changed. * It decreases because you now have more resources to afford college education. * It decreases because you now have more resources to afford college education. * It remains unchanged because the benefits of attending college have not changed.

Answer 42

It remains unchanged because the cost of room, board, and tuition has not changed. * See correct answer for explanation. It decreases because you now have more resources to afford college education. * See correct answer for explanation. **It increases because you are foregoing more money for college.** * The rise in salary increases the opportunity cost of going to college because you are foregoing a higher cost that you could have been earned by not going to college. It remains unchanged because the benefits of attending college have not changed. * See correct answer for explanation.

Question 43

Which of the following conditions could cause an industry to have a small number of firms? Select all that apply. * Low variable costs * Network effects * High customer willingness to pay * Low opportunity costs of entering the industry * High fixed costs

Answer 43

Low variable costs * See correct answers for explanation. **Network effects** * If a product exhibits network effects, the dominant suppliers in the industry grow more and more successful as existing customers draw in new customers. This leads to industries with a few large competitors rather than many small ones. High customer willingness to pay * See correct answers for explanation. Low opportunity costs of entering the industry * See correct answers for explanation. **High fixed costs** * High fixed costs can act as a barrier to entry. New firms will be less willing to enter an industry if they will have to incur large fixed costs in order to compete with incumbent firms.

Question 44

Suppose that a seller of yachts has a single consumer who may be interested in purchasing several boats. Suppose the seller knows the consumer's willingness to pay for each additional boat. If the firm decides to use a two-part tariff, where would the firm optimally set the price per unit? * At the consumer's WTP for the first unit. * At the consumer's WTP for the second unit. * At the seller's marginal cost. * Between the seller's marginal cost and the consumer's WTP.

Answer 44

At the consumer's WTP for the first unit. * See correct answer for explanation. At the consumer's WTP for the second unit. * See correct answer for explanation. **At the seller's marginal cost.** * An optimal two-part tariff prices each unit at marginal cost, and charges a lump sum fee on top. Between the seller's marginal cost and the consumer's WTP. * See correct answer for explanation.

Question 45

You want to gauge consumers’ reactions to a new line of high-end men’s suits. Which of the following is the most promising approach? * Conducting a survey outside a discount retail store on Tuesday evening. * Conducting a survey at a high-end shopping center on Tuesday mid-afternoon. * Conducting a survey at a high-end shopping center on Tuesday evening. * Conducting a focus group of shoppers on Tuesday mid-afternoon.

Answer 45

Conducting a survey outside a discount retail store on Tuesday evening. * People you survey at a discount retail store are less likely to be interested in high-end suits. Conducting a survey at a high-end shopping center on Tuesday mid-afternoon. * By conducting the survey in the afternoon, you are missing any consumers who are at work (and who are therefore more likely to need suits). Conducting a survey at a high-end shopping center on Tuesday evening. * This is the scenario that will ensure you are interviewing the most relevant consumers. Of these options, this survey will reach the most representative sample of the potential customers you are targeting. Conducting a focus group of shoppers on Tuesday mid-afternoon. * By conducting the focus group in the afternoon, you are missing any consumers who are at work (and who are therefore more likely to need suits).