Practice Questions for Experiments 5 & 6
THE NEXT THREE QUESTIONS ARE BASED ON THE FOLLOWING SITUATION: Ed's bakery can
sell as many loaves of bread as it wishes for a price of $2 per loaf. To keep
calculations simple, let us assume that Ed's only costs are hired labor. If Ed
does not hire any workers, he will not produce any bread. If Ed hires 1 worker,
he can produce 200 loaves of bread per day. If hires 2 workers, he can produce
350 loaves of bread per day. If he hires 3 workers, he can produce 450 loaves
of bread per day. If he hires 4 workers, he can produce 480 loaves of bread per
day. If he hires 5 workers, he can produce 500 loaves of bread per day. If he
hires 6 workers, he can produce 510 loaves of bread per day. If he hires 7 or
more workers, he can still produce only 510 loaves of bread per day.
1. If Ed increases his work crew from 4 workers to 5 workers, his daily revenue
will increase by:
a) $100
b) $40
c) $60
d) $20
e) $120
2. If each worker that Ed hires must be paid a daily wage of $65, how many
workers should he hire per day to maximize his profits?
a) 3
b) 2
c) 4
d) 5
e) 1
3. Ed's demand for labor curve looks like a stairway with horizontal line
segments one unit long at heights of:
a) $200, $350, $450, $480, $500, and $510
b) $400, $700,$900, $960, $1,000, and $1,020
c) $400, $300, $200, $60, $40, and $20
d) $400, $350, $300, $240, $200, and $170
e) $200, $175, $150, $120, $100, and $85
THE NEXT SIX QUESTIONS ARE BASED ON THE FOLLOWING SITUATION: The town of
Dyspepsia, Minnesota has 7 restaurants. Each restaurant can hire at most two
workers. The only costs that these restaurants have are for labor and
materials. A restaurant that hires no workers will have no costs. After paying
for its materials and before it pays its wages, a restaurant that hires one
worker will have a net revenue of $100 per day and a firm that hires two workers
will have a net revenue of $140 per day.
4. What is the highest daily wage rate at which a restaurant would be willing
to hire two workers?
a) $70
b) $140
c) $100
d) $40
e) $20
5. In Dyspepsia, the total number of workers that restaurants will be willing
to hire is
a) 14 if the daily wage rate per worker is below $70, 7 if the daily wage rate
per worker is between $70 and $100, and 0 if the daily wage rate per worker is
above $100.
b) 14 if the daily wage rate per worker is below $40, 7 if the daily wage rate
per worker is between $40 and $100, and 0 if the daily wage rate per worker is
above $100.
c) 7 if the daily wage rate per worker is below $70, 14 if the daily wage rate
per worker is between $70 and $100, and 0 if the daily wage rate per worker is
above $100.
d) 7 if the daily wage rate per worker is below $60, and 0 if the daily wage
rate per worker is above $60.
e) 14 if the daily wage rate per worker is below $140, and 0 if the daily wage
rate per worker is above $140.
6. Suppose that there are 11 laborers who could potentially work in Dyspepsia
restaurants. None of these laborers are suitable for work in any other
industry, and none of them are eligible for unemployment benefits. Each
potential laborer has a very small reservation value for his or her time. For
simplicity, we will suppose that this reservation value is zero. In the absence
of minimum wage legislation, what is the equilibrium daily wage rate paid to
Dyspepsia restaurant workers?
a) $40
b) $100
c) $140
d) $0
e) $20
7. Now suppose that Dyspepsia enacts a minimum wage law that makes it illegal
for restaurant workers to be paid a daily wage rate below $55. With this
minimum wage in place,
a) there will be 7 involuntarily unemployed restaurant laborers in Dyspepsia.
b) all restaurant laborers will be better off than they were without the minimum
wage.
c) there will be 5 involuntarily unemployed restaurant laborers in Dyspepsia.
d) there will be 4 involuntarily unemployed restaurant laborers in Dyspepsia.
e) the only restaurant laborers in Dyspepsia without jobs will be those who are
unwilling to work at the going wage rate.
8. The minimum wage in Dyspepsia will
a) increase the total amount of money earned by restaurant laborers but decrease
the amount of money earned by some individual restaurant laborers.
b) increase the amount of money earned by every restaurant laborer.
c) decrease the total amount of money earned by restaurant laborers but increase
the amount of money earned by some individual restaurant laborers.
d) decrease the amount of money earned by every restaurant laborer.
e) drive all restaurants out of business.
9. What is the deadweight loss associated with the minimum wage imposed in
Dyspepsia?
a) $0
b) $40
c) $60
d) $100
e) $160
THE NEXT TWO QUESTIONS ARE BASED ON THE FOLLOWING SITUATION: The supply curve
for barley is described by the equation Q=P/3, where P is the price of barley
and Q is the amount that will be supplied at price P. The demand curve for
barley is described by the equation Q=112-9P, where P is the price of barley and
Q is the amount that will be demanded at price P.
10. What is the competitive equilibrium price of barley?
a) $19
b) $24
c) $12
d) $9
e) $27
11. Consumers of barley argue that the competitive equilibrium price of barley
is too high. These consumers ask Congress to pass a law making it illegal to
buy or sell barley at a price higher than 9. If such a law were passed, then at
the maximum legal price of barley, we would find that:
(a) supply of barley exceeds demand by 28 units.
(b) demand for barley exceeds supply by 28 units.
(c) supply of barley equals demand.
(d) there exists both excess demand and excess supply in the market for barley.
(e) demand for barley and supply of barley are both reduced by 28 units.
12. Consider a market for rental housing in which the price elasticity of
demand is –2 and the price elasticity of supply is 3. A rent control law is in
place that sets a maximum price for rental housing which is below the
equilibrium price that would arise if this market were not regulated. As part
of his re-election campaign, a local politician proposes a 20% reduction in the
maximum price allowed for rental housing in this market. What would happen if
this proposal were implemented?
a) The quantity of rental housing would rise by 40%.
b) The quantity of rental housing would rise by 60%.
c) The quantity of rental housing would fall by 40%.
d) The quantity of rental housing would fall by 60%.
e) None of the above.
THE NEXT THREE QUESTIONS ARE BASED ON THE FOLLOWING SITUATION: Residents of the
town of Los Locos (population 100) like to drive noisy offroad vehicles, but
they hate the disturbance and dust caused by each others' vehicles. Each
vehicle that is purchased by a resident causes $20 worth of damage to each of
the 100 residents. There are 10 residents who are willing to pay up to $4000
for an offroad vehicle, 40 residents who are willing to pay up to $3000 for an
offroad vehicle, and 50 residents who are willing to pay up to $2500 for an
offroad vehicle. Each Los Locos resident will purchase at most one offroad
vehicle. Offroad vehicles are available in unlimited supply to Los Locos
residents at a price of $1200 per vehicle.
13. In the absence of any government interference, how many residents of Los
Locos would purchase an offroad vehicle? How many residents of Los Locos would
be better off if offroad vehicles were outlawed?
a) 100 vehicles would be purchased and 90 residents would be better off if such
vehicles were outlawed.
b) 50 vehicles would be purchased and nobody would be better off if such
vehicles were outlawed.
c) 50 vehicles would be purchased and 50 residents would be better off if such
vehicles were outlawed.
d) 10 vehicles would be purchased and 90 residents would be better off if such
vehicles were outlawed.
e) 100 units would be purchased and all 100 residents would be better off if
such vehicles were outlawed.
14. Now suppose that Los Locos imposes a tax of $2000 on every resident who
buys an offroad vehicle. The revenues collected from this tax are distributed
equally among all residents of Los Locos. With the tax in place, how many
residents of Los Locos will buy offroad vehicles, and how much tax revenue will
the government distribute to each resident?
a) 50 residents will buy offroad vehicles and each resident will receive $1,000
from the tax revenue that is collected.
b) 10 residents will buy offroad vehicles and each resident will receive $200
from the tax revenue that is collected.
c) Nobody will buy an offroad vehicle and each resident will receive $0 from the
tax revenue that is collected.
d) 100 residents will buy an offroad vehicle and each resident will receive
$2000 from the tax revenue that is collected.
e) None of the above.
15. Compared to the situation that existed when there was no government
interference in the Los Locos market for offroad vehicles, who gains and who
loses from the $2,000 tax imposed on buyers of offroad vehicles? (In answering
this question, be sure to take account of the fact that the tax revenues
collected are distributed equally among all residents of Los Locos.)
a) Residents with the lowest buyer values for offroad vehicles are better off
with the tax, and residents with the highest buyer values and residents with
intermediate buyer values are worse off with the tax.
b) All residents are worse off with the tax.
c) Residents with the highest buyer values for offroad vehicles are better off
with the tax, and residents with the lowest buyer values are worse off with the
tax.
d) Residents with the lowest buyer values for offroad vehicles and residents
with intermediate buyer values are better off with the tax, and residents with
the highest buyer values are just as well off with the tax as without the tax.
e) All residents are better off with the tax.
THE NEXT THREE QUESTIONS ARE BASED ON THE FOLLOWING SITUATION: Consider the
market for a good that generates harmful pollution. In particular, every unit
of the good that is produced imposes $3 of pollution damage on society.
Participating in this market are 12 consumers, each of whom will buy at most one
unit of the good, and 11 suppliers, each of whom will sell at most one unit of
the good. The distribution of buyer values (or buyer reservation prices) is as
follows:
Buyer Value Number of Buyers
$1 2
$3 4
$5 3
$9 3
The distribution of seller costs (or seller reservation prices) is as follows:
Seller Cost Number of Sellers
$2 2
$4 5
$6 4
16. Without any intervention in this market, how many units of the good would
be produced in a competitive equilibrium?
a) 2
b) 3
c) 4
d) 6
e) 9
17. How many units of the good should be produced to obtain the socially
efficient outcome?
a) 2
b) 3
c) 4
d) 6
e) 9
18. Under these circumstances, what is the deadweight loss associated with the
competitive equilibrium?
a) $6
b) $8
c) $11
d) $17
e) $22
Correct Answers:
1. b
2. a
3. c
4. d
5. b
6. a
7. d
8. c
9. e
10. c
11. b
12. d
13. a
14. b
15. d
16. d
17. b
18. a