1.

Suppose you are in charge of sales at a pharmaceutical company, and your firm has a new drug that
clears acne in teenagers. Assume that the company wants to earn as much revenue as possible from this
drug. If the elasticity of demand for your company's product at the current price is 1, what would you
advise the company to do? Select the best answer.
-Keep the price the same

Suppose you are in charge of sales at a pharmaceutical company, and your firm has a new drug that
clears acne in teenagers. Assume that the company wants to earn as much revenue as possible from this
drug. If the elasticity of demand for your company's product at the current price is 0.3, what would you
advise the company to do? Select the best answer.
-Raise the price

Suppose you are in charge of sales at a pharmaceutical company, and your firm has a new drug that
causes bald men to grow hair. Assume that the company wants to earn as much revenue as possible
from this drug. If the elasticity of demand for your company's product at the current price is 1.2, what
would you advise the company to do? Select the best answer.
-Lower the price

Suppose you are in charge of sales at a pharmaceutical company, and your firm has a new drug that
causes bald men to grow hair. Assume that the company wants to earn as much revenue as possible
from this drug. If the elasticity of demand for your company's product at the current price is 0.2, what
would you advise the company to do? Select the best answer.
-Raise the price

2. Are the following statements true or false? Select the best answer.
Statement 1: Perfectly competitive markets are allocatively efficient because consumers value the goods
more than the value of the resources used to produce them.
Statement 2: Perfectly competitive firms achieve allocative efficiency in the short run and in the long
run.
-Statement 1 is false; Statement 2 is true

Are the following statements true or false? Select the best answer.
Statement 1: Productive efficiency is the condition where resources are fairly distributed.
Statement 2: In the long run, in perfect competition, market price equals the minimum average cost of
production, a condition that is called productive efficiency.
-1 true 2 false
Are the following statements true or false? Select the best answer.
Statement 1: Each firm in perfect competition produces the minimum efficient scale of output in the
long run.
Statement 2: From a social viewpoint, productive efficiency ensures that scarce resources have been
used effectively with no wastage.
-both
Are the following statements true or false? Select the best answer.
Statement 1: By being productively efficient, perfectly competitive markets are able to sell their
products at the lowest possible prices.
Statement 2: By being productively efficient, perfect competitors utilize society's scarce resources in the
best possible way.
-both

Are the following statements true or false? Select the best answer.
Statement 1: In perfect competition, the allocatively efficient level of output is produced because it is
where price equals marginal cost.
Statement 2: Perfectly competitive firms achieve allocative efficiency in the long run but not in the short
run.
- Statement 1 is true; Statement 2 is false.

Statement 1: Allocative efficiency is the condition where the marginal benefit of consuming an extra unit
of a good exactly equals the marginal cost of producing the good.
Statement 2: In perfect competition, firms maximize profit by producing output up to the point where
price equals marginal cost, thereby ensuring that allocative efficiency is attained.
-Both statements are true
Are the following statements true or false? Select the best answer.
Statement 1: In perfect competition, the allocatively efficient level of output is produced because firms
earn only a normal profit in the long run.
Statement 2: From a social viewpoint, when price equals marginal cost, firms produce the exact amount
of the good that consumers are willing to pay for.
- Statement 1 is false; Statement 2 is true.

3. A local artisan produces handmade toys. The monthly office rent is $800. The production materials
cost $350 a month. In one month, the artisan can produce 75 toys. What is the maximum price at which
the artisan should exit the market in the long run?
$15.33
Step 1: $800 + $350 = $1,150
Step 2: $1,150 / 75 = $15.33

4. How would the following event affect the supply and demand curves for textbooks? Select the best
answer.
A new university is opening in town, which will draw many college-aged students to move there.
-The Demand Curve shifts to the right
5. What is the consumer surplus in the following scenario? Select the best answer.
Consumers were charged $75 for a boat tour they would have paid $100 for.
-$25 (100-75)

6. The demand curve in the market for meat is described by the equation Qd=150−15P, and the supply
curve is described by the equation Qs=15+12P, where P is the price measured in a national currency and
Q is the quantity of kilograms of meat. Calculate the equilibrium price in this market.
-5unit(s) of national currency
Qs = Qd
15 + 12P = 150 – 15P
27P = 135
P=5

7. Goodsen Tech (G) and ChefBots (C) are two startups that have developed a food-prep robot that
reduces the risk of foodborne illnesses by assembling prepared food stored in refrigerated canisters. The
firms are targeting businesses that may install this robot in their office kitchens. Each firm must decide
between a high-price and low-price strategy. The payoff matrix of expected economic profits is given
below.

Goodsen Tech (G)

Low Price High Price
G: $0.8 million G: $0.6 million
Low Price
C: $0.7 million C: $1.1 million
ChefBots (C)
G: $1.2 million G: $1.0 million
High Price
C: $0.6 million C: $0.9 million

What is the likely market outcome in this case?

Both firms will select a low-price strategy.
Which of the following statements correctly describes Goodsen Tech's strategy given what ChefBots
may do? Select the best answer
Goodsen Tech will choose a low-price strategy regardless of what ChefBots does.

8. Suppose the equation for supply of water is Qs=53+20P, and the equation for demand for water looks
like Qd=98−10P, where P is the price of a gallon and Q is the number of gallons.
Determine the shortage from the price ceiling if the government sets the maximum price of water as
$1.10 per gallon.
-12 gallon(s)
Step 1: 53 + 20 * $1.10 = 75
Step 2: 98 – 10 * $1.10 = 87
Step 3: 87 gallons – 75 gallons = 12 gallons
9. Sarah has $50in spending money each week, which she can allocate between cookies and cakes. The
price of cookies is $2 per cookie, and the price of cakes is $5 per cake. What is the opportunity cost of
cookies? What is the opportunity cost of cake?
-The opportunity cost of a pack of cookies is 0.4 cakes, and the opportunity cost for a cake is 2.5 packs of
cookies.

10. The demand curve in a market is described by the equation Qd=80−9P, and the supply curve is
described by the equation Qs=14+11P, where P is the price of gasoline and Q is the quantity of gasoline
(in millions of gallons).
Suppose the price of gasoline is $3.00 per gallon. What would be the outcome in the gasoline market?
Select the best answer.
-There would be a shortage
Qd = Qs
80−9P = 14+11P
P = $3.30
Since $3.00 per gallon is below the equilibrium price, the quantity demanded would rise, and the
quantity supplied would fall. There would be a shortage of gasoline.

11. The table below shows the number of workers (labor), the marginal product of labor, and the value
of the marginal product of labor. Calculate the price at which the firm can sell output in a perfectly
competitive market. Round your final answer to two decimal places if necessary.

Workers 1 2 3 4 5

Marginal Product of Labor 18 17 16 15 14

Value of Marginal Product of
$92.70 $87.55 $82.40 $77.25 $72.10
Labor

-$5.15 (92.70 / 18)

12. The equilibrium price of a good is $26. Suppose the government introduces a tax on this good. In this
case, the price paid by consumers is 1.5 times more than the equilibrium price, and the price received by
producers is 1.3 times less than the equilibrium price. Calculate the amount of tax per good. Enter your
answer in the box below and round to two decimal places if necessary.
-$19
Step 1: $26 * 1.5 = $39
Step 2: $26 / 1.3 = $20
Step 3: $39 - $20 = $19
13. China and Pakistan each produce only two goods: Bluetooth transmitters and wireless adapters. The
table below shows the number of labor hours used to produce these goods in each country.

Labor Hours for 1 Bluetooth Labor Hours for 1 Wireless

Transmitter Adapter
China 40 160
Pakistan 50 150

14. Based on the following information about a perfectly competitive footwear firm, what is the firm's
profit? Write the exact answer. Do not round.
Price is $150, average cost is $50, and quantity is 90.
-$9,000
(150 – 50) * 90 = 9,000

The average annual income rises from $20,000 to $30,000, and the quantity of bread consumed in a
year by the average person falls from 30 loaves to 24 loaves.
Step 1 of 2 : What is the income elasticity of bread consumption? Round your answer to two decimal
places. Enter the results in the box below.
-(-0.56)
Step 1: 24-30 / [(24+30)/2] * 100 = -22.22%
Step 2: $30,000 - $20,000 / [($30,000 + $20,000) / 2] * 100 = 40%
Step 3: -22.22% / 40% = 0.56

Step 2 of 2 : Is bread a normal good or an inferior good? Select the best answer.
-inferior

The Rivera Company has the following information on costs.

Quantity Fixed Cost Variable Cost

3 200 10
4 200 20
5 200 30

Calculate the marginal cost of producing 5 units. Round your answer to two decimal places if necessary.
-$10
(230 – 220) / (5-4) = $10
17. Consider the following table.

Supply of Labor 55 77 99 1111

Wage Rate ($$⁢per hour) $1$⁢1 $2$⁢2 $3$⁢3 $4$⁢4
Total Cost of Labor $5$⁢5 $14$⁢14 $27$⁢27 $44$⁢44

Calculate the marginal cost of labor for hiring the seventh seasonal worker. Enter your answer in the box
below, rounding to two decimal places if necessary.
-$4.5 ($9/2)

18. Today, you've decided to treat yourself to some dessert, so you go to the store to buy a doughnut or
a cupcake. The utilities of one doughnut and one cupcake are 14 and 28, respectively.
Given that the price of one doughnut is $7, what should be the price of a cupcake to get the same utility
per dollar spent? Enter your answer in the box below and round to two decimal places if necessary.
-$14

Step 1: 14/7 = 2
Step 2: 28 / 2 = 14

19. A product’s price was $6, and its quantity demanded was 60 units. Then, the quantity demanded
decreased by 35 units, while the product’s price increased by $5.
Calculate the price elasticity of demand. Use the midpoint method in your calculations and enter your
answer as a positive number in the box below, rounding to two decimal places if necessary.
- 1.4
Step 1: (60 – 35) – 60 / ((60 – 35 + 60)/ 2 * 100 = -82.35%
Step 2: ($6 + $5) - $6 / (($6 + $5) + $6) / 2 * 100 = 58,82 %
Step 3: -82.35 % / 58.82% = -1.40 , 1.40 since answer has to be positive

20. A firm had a sales revenue of $1,200,000 last year. It spent $300,000 on labor, $150,000 on capital,
and $200,000 on materials. The firm's factory sits on land owned by the firm that it could rent for
$80,000 per year. What was the firm's economic profit?
-$470,000 ($1,200,000 - $300,000 - $150,000 - $200,000 - $80,000)
21. An electricity generation company currently emits 9 tons of sulfur dioxide. Sulfur dioxide emissions
contribute to respiratory illness and create acid rain when combined with other chemicals in the
atmosphere. The table below shows the marginal cost of abatement, which increases as different
abatement techniques are used.

Quantity Abated (tons) Marginal Cost of Abatement per Ton

1 $5,000
2 $8,000
3 $15,000
4 $20,000
5 $30,000
6 $42,000
7 $56,000
8 $80,000
9 $135,000

Suppose the government imposes a pollution tax of $45,000 per ton of sulfur dioxide emitted. How
many tons of sulfur dioxide will the company abate, and how many tons of sulfur dioxide will it emit?
-6 ton(s) abated3 ton(s) emitted

22. The following diagram shows the curves for perceived demand, marginal revenue, and cost for
Manuela’s Pizza, which serves Mexican-style pizza. Manuela’s is one of many other fast food restaurants
in this town.

Manuela’s Pizza is a monopolistically competitive firm. Which of the following is not a characteristic of
monopolistically competitive firms? Select the best answer.
- The demand curve for Manuela’s is relatively inelastic because it is the only Mexican-style pizza
restaurant

23. Use the following table to calculate the marginal product of shirts produced by hiring a second tailor.
Write the exact answer. Do not round.

Tailors Hired (L) 1 2 3 4 5

Number of Shirts Produced (TP) 5 12 16 18 19
-7
24. Suppose that Country A can produce 50 bags of sugar or 40 bags of flour per worker hour. Country B
can produce 25 bags of sugar or 10 bags of flour per worker hour. Assume that there is 100%
specialization, and each country has 20 worker hours. If each country specializes in its comparative
advantage, calculate the quantity of the good that Country B should produce.
500 bags of sugar
Step 1: Country A: 40/50 = 0.8 Step 2: Country A 50/40 = 1.25 Step 3: 20 * 25 = 500
Country B: 10/25 = 0.4 Country B 25/10 = 2.5

25. Suppose that a monopolist has a constant marginal cost curve. That is, for each unit of output that
the monopolist produces, it costs an additional $40. The monopolist's marginal revenue is MR=200−4Q,
where Q is the quantity produced. The demand curve is P=200−2Q.
What is the monopolist's profit-maximizing output and price? Write the exact answer. Do not round.
- Quantity=40
Price=$120

This is correct because a monopolist will produce up to the point where MR=MC, and then the
monopolist's price is determined by market demand at that quantity. In this problem, MR=200−4Q,
where Q is the quantity produced. Set MR=MC.

40=200−4Q
Solving for Q gives Q=40.

The demand curve is P=200−2Q, so if Q=40, P=200−2(40)=$120.