Practice Questions for Experiment 8
THE NEXT NINE QUESTIONS ARE BASED ON THE FOLLOWING SITUATION: In the city of
San Barberia, the demand curve for haircuts is given by the equation P=39-Q/20,
where Q is the number of haircuts per day and P is the price of a haircut. Each
barber shop that is open has a fixed cost of $200 per day which must be paid so
long as the shop is in business and regardless of the number of haircuts it
sells. There is also a variable cost of $4 for each customer served. Each
barber shop has a capacity of 40 customers per day. Initially, 12 barber shops
are open in San Barberia. A barber shop that is open cannot escape its fixed
costs immediately; instead, the barber shop must give 6 months advance notice to
its landlord that it will close. It also takes about 6 months to organize and
open a new barber shop.
1. On a graph, (x,y) represents the point which has the value x along the
horizontal axis and the value y along the vertical axis. The point (0,0) is
known as the origin. Using this notation, the short run supply curve for
haircuts in San Barberia consists of:
a) a vertical segment extending from the origin to the point (0,4), and an
unbounded horizontal line extending to the right of the point (0,4).
b) a vertical segment extending from the origin to the point (0,4), a horizontal
segment extending from (0,4) to (480,4), and a vertical segment extending
upwards from (480,4).
c) a vertical segment extending from the origin to the point (0,9), a horizontal
segment extending from (0,9) to (480,9), and a vertical segment extending
upwards from (480,9).
d) a vertical segment extending from the origin to the point (0,4), a horizontal
segment extending from (0,4) to (560,4), and a vertical segment extending
upwards from (560,4).
e) a vertical segment extending from the origin to the point (0,4), a horizontal
segment extending from (0,4) to (360,4), and a vertical segment extending
upwards from (360,4).
2. What is the short-run equilibrium price of a haircut in San Barberia?
a) $15
b) $5
c) $4
d) $9
e) $20
3. In short-run equilibrium, what are the profits earned by each individual
barber shop that is currently open in San Barberia?
a) $440
b) $150
c) -$80
d) $240
e) $0
4. In the long run, the haircut market in San Barberia is characterized by free
entry and exit of barber shops. The theory of competitive equilibrium predicts
that as the San Barberia haircut market moves from its initial short-run
equilibrium to the long-run equilibrium, the number of barber shops open
a) will decrease, and the number of haircuts per day sold by each barber shop
will increase.
b) will decrease, and the number of haircuts per day sold by each barber shop
will not change.
c) will not change, and the number of haircuts per day sold by each barber shop
will increase.
d) will not change, and the number of haircuts per day sold by each barber shop
will decrease.
e) will increase.
5. Starting from the initial short-run equilibrium, suppose that 5 new barber
shops open in San Barberia and none of the old barber shops close. In the new
short-run equilibrium, the price of a haircut
a) is $9 and all barber shops make zero profits.
b) is $10 and all barber shops make positive profits.
c) is $8 and all barber shops make losses.
d) is $5 and all barber shops make losses.
e) is $6 and all barber shops make losses.
6. In long-run equilibrium, the number of barber shops in San Barberia
a) is 15 and the price of a haircut is $9.
b) is 17 and the price of a haircut is $5.
c) is 12 and the price of a haircut is $15.
d) is 13 and the price of a haircut is $13.
e) is 16 and the price of a haircut is $9.
7. Starting from the long-run equilibrium, the city of San Barberia
unexpectedly imposes a tax on barbers. In particular, barbers must now pay the
city a sales tax of $2 for every haircut sold. In the short run, how will this
tax affect the price of a haircut?
a) The price will rise by $2.
b) The price will rise by $1.
c) The price will remain the same as before the tax.
d) The price will rise by $.50.
e) The price will rise by $1.50.
8. In the short run, how will the tax affect the profits of a barber shop that
is currently open?
a) Profits will not change.
b) Profits will fall but remain positive after the tax.
c) Profits will fall to zero after the tax.
d) Profits will fall to -$40 after the tax.
e) Profits will fall to -$80 after the tax.
9. Compare the long-run equilibrium that existed prior to the tax with the
long-run equilibrium that results from the tax. In the long run, the tax will
cause the price of haircuts
a) to rise by $1.50 and the number of barber shops in business to increase by 1.
b) to rise by $1 and the number of barber shops in business to stay constant.
c) to rise by $2 and the number of barber shops in business to stay constant.
d) to rise by $2 and the number of barber shops in business to decrease by 1.
e) to rise by $2 and the number of barber shops in business to decrease by 3.
THE NEXT SIX QUESTIONS ARE BASED ON THE FOLLOWING SITUATION: Let q represent
the amount of output produced by a particular firm. Let TC denote total costs
of production for this firm, FC denote fixed costs, VC denote variable costs, MC
denote marginal costs, ATC denote average total costs, and AVC denote average
variable costs. Using this notation, the following is true about the firm’s
cost structure:
TC=$100 at q=0.
VC=$50 at q=1.
MC=$30 at q=2.
AVC=$70 at q=3.
ATC=$125 at q=4.
MC=$300 at q=5.
Use the information provided above and the definitions of the various cost
concepts to answer the questions listed below.
(Hint: Make a table with 6 rows and 7 columns in which the first column is
labeled q and ranges from 0 to 5, and the other columns are labeled TC, FC, VC,
MC, ATC, and AVC. Enter the information provided above into the appropriate
cells of the table. Using this information, you should be able fill in all of
the remaining cells of the table, including the cells that answer the questions
asked below.)
10. What is FC at q=0?
a) $20
b) $40
c) $50
d) $80
e) $100
11. What is TC at q=1?
a) $50
b) $80
c) $100
d) $150
e) $220
12. What is VC at q=2?
a) $50
b) $80
c) $100
d) $120
e) $150
13. What is MC at q=3?
a) $80
b) $100
c) $120
d) $130
e) $150
14. What is AVC at q=4?
a) $100
b) $120
c) $125
d) $130
e) $150
15. What is ATC at q=5?
a) $100
b) $130
c) $160
d) $190
e) $200
Correct Answers:
1. b
2. a
3. d
4. e
5. d
6. a
7. c
8. e
9. d
10. e
11. d
12. b
13. d
14. a
15. c