Question 1

In a perfectly competitive market with free entry and exit, why do firms earn zero economic profit in the long run?

Accepted Answer

Because entry and exit drive profits to zero, and zero economic profit means firms are earning a normal return equal to their opportunity cost.

Question 2

Which area on a demand curve represents the consumer surplus for an individual consumer?

Accepted Answer

The area under the demand curve and above the market price up to the quantity purchased.

Question 3

Suppose the government imposes a sales tax on a good. What is the effect on consumer surplus, producer surplus, and government revenue?

Accepted Answer

Consumer surplus and producer surplus both decrease, but government revenue increases.

Question 4

If the supply curve for roses is linear, and the price falls from $$0.30 to 0.21 $$per stem, causing quantity sold to fall from 1.25 billion to 1.16 billion, how is the loss in producer surplus calculated?

Accepted Answer

By the area between the two prices and the supply curve, over the range of quantities sold.

Question 5

What is deadweight loss (DWL) in the context of market equilibrium?

Accepted Answer

The net reduction in welfare from a loss of surplus by one group that is not offset by a gain to another group.

Question 6

Which of the following policies creates a wedge between supply and demand, causing price and marginal cost to differ?

Accepted Answer

A government-imposed sales tax.

Question 7

A price floor set above the competitive equilibrium price will result in:

Accepted Answer

A surplus, as quantity supplied exceeds quantity demanded.

Question 8

If the government sets a price ceiling below the equilibrium price, what is the likely outcome?

Accepted Answer

Quantity demanded will exceed quantity supplied, resulting in a shortage.

Question 9

Which of the following best describes rent seeking?

Accepted Answer

Efforts and expenditures to gain a rent or profit from government actions.

Question 10

What is the formula for total welfare in a market with a sales tax, assuming the government uses the tax revenue for public benefit?

Accepted Answer

$$W = CS + PS + T$$

Question 11

Why does competition maximize welfare in a market?

Accepted Answer

Because price equals marginal cost at the competitive equilibrium, ensuring efficient allocation of resources.

Question 12

Which of the following is NOT a way governments can limit the number of firms in a market?

Accepted Answer

Subsidizing all new entrants equally.

Question 13

A quota on imports differs from a tariff in that:

Accepted Answer

A quota generates no government revenue, while a tariff does.

Question 14

If a government gives a specific subsidy of $$s$$ per unit to producers, what is the effect on the market?

Accepted Answer

It acts as a negative tax, increasing both consumer and producer surplus, but may create a deadweight loss.

Question 15

Which of the following best describes producer surplus?

Accepted Answer

The difference between the amount for which a good sells and the minimum amount necessary for the seller to be willing to produce the good.

Question 16

If a market has a relatively inelastic demand curve, what happens to consumer surplus when price increases?

Accepted Answer

Consumer surplus falls by a larger amount compared to a market with a more elastic demand curve.

Question 17

What is the effect of restricting the number of firms in a market, such as through taxi medallions?

Accepted Answer

It shifts the supply curve to the left, raising prices and reducing quantity.

Question 18

Which equation correctly represents the change in welfare after a tax is imposed?

Accepted Answer

$$\Delta W = \Delta CS + \Delta PS + \Delta T$$

Question 19

Why might large sunk costs act as a barrier to entry in a market?

Accepted Answer

Because they make it difficult for new firms to raise capital and increase the risk of loss if the firm exits.

Applying the Competitive Model: Welfare Analysis and Policy Impacts

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