Prof. Jennifer Olmsted
Practice questions Exam 2

Sample Terms:

1. dead weight loss
2 . barriers to entry
3 . natural monopoly
4 . efficiency
5 . regressive
6 . marginal revenue
7. sin tax
8. perfect competition
9. accounting profit

II.

Be sure to EXPLAIN your answer, showing ALL your work and including all relevant GRAPHS, FORMULAS, etc.

1. a. Using the data provided above, graph a perfectly competitive market for computers.
b. Calculate total revenue, consumer and producer surplus.
c. Suppose all firms go out of business except one and that firm decides to raise the price to 60. How many computers will be supplied and demanded at this price?
d. Using economic terminology, discuss whether it seems realistic for a computer company to raise its price in such a way. (Hint - what factors other than being a sole producer, determine whether a firm will have market power?)
e. Calculate the new consumer surplus.
f. Show graphically and explain verbally what the new producer surplus will be.
g. Show the impact of this change in the market for computers on the computer workers' wages.

2. a. Draw a graph showing the impact of a price ceiling on consumer and producer surplus.
b. Explain the impact of this policy on efficiency.

3. a. Explain the difference between fixed and variable costs.
b. How do firms use information about fixed and variable costs in making their production decisions?

4. a. What rule do both perfectly competitive and monopolistic firms use to determine Q?
b. How does the monopoly decision differ from the perfectly competitive firm's decision?

5. A politician makes the following campaign promise: “I plan to impose a tobacco tax, in order to cut smoking rates by 50%.”
a. Given what you know about cigarettes, does this sound like a realistic plan?
b. Does it sound like an equitable plan?
c. If the elasticity of demand for cigarettes is -0.25, how much will the price have to rise in order to achieve this goal. Explain why this is the case.

6. How do economists view taxes? Why do policy makers levy taxes and what are the economic and social consequences of taxes? Discuss the case of the tobacco tax. Be sure to discuss in your answer to discuss issues of equity and efficiency.