ECON1210 Introductory Microeconomics

University of Hong Kong

Final Examination
Date: May 15, 2023, 14:30-16:30 (+ 15 minutes of grace period)

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1. My university ID number is [ Answer01 ].

2. Calvin has to go to the Peak in the late afternoon. He has to decide whether to take the Peak Tram
or bus. It takes 15 minutes by Peak Tram and the Tram fare costs $160. It takes 55 minutes by bus
and the bus fare costs $30. By taking Peak Tram instead of bus, Calvin can use the saved time to
pursue either one of the following two activities: (1) delay the go-out time by 40 minutes and enjoy
some leisure at home, and he is willing to pay $1.2/minute for the additional leisure time; or (2) enjoy
the sunset from the Peak for 40 minutes, and he is willing to pay a total of $44 for such activity. In
addition, Calvin is willing to pay $X to enjoy Hong Kong’s scenery during the Peak Tram ride rather
than the bus ride. Based on the information, Calvin should choose to take bus if X is [ Answer02A
] (A. smaller, B. larger) than [ Answer02B ].

3. The equations below show the government’s estimated economic benefit of conducting reclamation for
n hectares of land in Utopia. Assume that n is perfectly divisible and can take any arbitrary quantity
(say, 3.14 hectares).

Total benefit (million dollars): T B(n) = 107n − 5n2

Marginal benefit (million dollars): M B(n) = 107 − 10n
Average benefit (million dollars): AB(n) = 107 − 5n

Suppose the construction cost amounts 23 million dollars per hectare of land, and the environmental
cost is estimated to amount 11 million dollars per hectare of land. From the society’s perspective, the
government should choose to reclaim [ Answer03A ] hectares of land, and the corresponding total
economic surplus to the society will be [ Answer03B ] million dollars.

4. Tom and Jerry form a two-person economy. They both can produce food and shelter. Jerry has the
comparative advantage in producing shelter but Tom has the absolute advantage in producing shelter.
Evaluate whether the following statements are True or False?
A) Tom has a lower opportunity cost of producing shelter than Jerry.
[ Answer04A ] (T. True, F. False)
B) Tom must have the comparative advantage in producing food.
[ Answer04B ] (T. True, F. False)
C) Jerry may have the absolute advantage in producing food.
[ Answer04C ] (T. True, F. False)
D) Jerry can produce more shelter per week than Tom.
[ Answer04D ] (T. True, F. False)

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Please refer to the background information below to answer the following three questions.
Cindy and Veronica constitute a small economy that produces only two goods: tea and cakes. We know
that Cindy has the comparative advantage in producing tea and Veronica has the comparative advantage
in producing cakes. If they fully specialize in the production that they have comparative advantage in, they
will produce a total of 99 kgs of tea and 30 kgs of cakes per week.
5. If the admissible range of the terms of trade between Cindy and Veronica is between 0.6 kgs of tea
per kg of cakes and 4.3 kgs of tea per kg of cakes, We can infer that Cindy alone can produce a
maximum of [ Answer05A ] kgs of cakes per week and Veronica alone can produce a maximum of [
Answer05B ] kgs of tea per week.
6. Continue from the previous question. Suppose this small economy opens up its trade with the rest
of the world. The world prices are $3.8 per kg of tea and $X per kg of cakes. If both Cindy and
Veronica will specialize in the production of cakes only, we may infer that X is [ Answer06A ] (A.
smaller; B. larger) than [ Answer06B ].
7. Continue from the previous question. Suppose the world price of tea remains $3.8 per kg but the
price of cakes is $1.3 per kg. If Cindy and Veronica together decide to consume tea and cakes at
the ratio of 1.8:1 (i.e., for each 1 kg of cakes, they would want to consume 1.8 kgs of tea), they will
consume [ Answer07A ] kgs of tea and [ Answer07B ] kgs of cakes per week.

Please refer to the background information below to answer the following two questions.
There are two groups of consumers, A and B, for semiconductor with the following demand relations
respectively:

Group A: P = 190 − 0.8Q

Group B: P = 470 − 0.7Q

The market supply of semiconductor is

P = 95 + 0.8Q

where P is price per unit of semiconductor (in dollars), and Q is quantity of semiconductor.
8. Suppose the market is free of government intervention. We can compute that the market equilibrium
price is [ Answer08A ] dollars per unit, and the market equilibrium quantity is [ Answer08B ]
units.
9. Suppose the central planner forces the economy to produce and exchange semiconductor with the
quantity of 325 units. We will expect a minimum welfare loss of [ Answer09 ] dollars when compared
to the market without intervention.

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10. The enthusiasm of Utopian travelers for Japan has experienced a record high recently due to the relax
of border control measures on travelers from overseas in Japan. Suppose the exchange rate was 12 yen
per Utopian currency before the relax of border control measures in Japan. Other things being equal,
how many of the following exchange rates (yen per Utopian currency) are more likely to prevail now?

10 15 13 9

A) 0
B) 1
C) 2
D) 3
E) 4
[ Answer10 ]

11. Evaluate whether the following statements are True or False?

A) Consider downward-sloping demand curve and upward-sloping supply curve. When there exists
excess supply in the market, there will be pressure for the price to adjust upward.
[ Answer11A ] (T. True, F. False)
B) If income falls, the demand curve of a normal good shifts leftward.
[ Answer11B ] (T. True, F. False)
C) In a perfectly competitive market with external costs (but zero external benefits), the social
optimum does not occur at the point when excess demand and excess supply are both exactly
zero.
[ Answer11C ] (T. True, F. False)
D) Consider an inferior good X. If the price of its substitute (good Y) drops, the demand curve of X
shifts leftward.
[ Answer11D ] (T. True, F. False)

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12. Consider downward-sloping demand curve and upward-sloping supply curve and initial positive
equilibrium price and quantity in the domestic market of good X. A student claims that the following
events can result in a movement along the demand curve to the RIGHT in the domestic market of
good X. True or False?
A) Rise in the number of substitute goods of X
[ Answer12A ] (T. True, F. False)
B) Increase in supply of X
[ Answer12B ] (T. True, F. False)
C) A foreign country agrees to sell an additional quantity of X at any price.
[ Answer12C ] (T. True, F. False)
D) Rise in the price of complement goods of X
[ Answer12D ] (T. True, F. False)

13. Consider downward-sloping demand curve and upward-sloping supply curve and initial positive
equilibrium price and quantity. Assume there is no government intervention in the form of tax or
subsidy. Evaluate whether the following statements are True or False.
A) A leftward shift in demand reduces total producer surplus.
[ Answer13A ] (T. True, F. False)
B) A leftward shift in supply reduces total gains from trade.
[ Answer13B ] (T. True, F. False)
C) Establishing a price floor above the market equilibrium price will always raise the sellers’ revenue.
[ Answer13C ] (T. True, F. False)
D) A rightward shift in supply raises total consumer surplus.
[ Answer13D ] (T. True, F. False)

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14. Assume linear downward-sloping demand curve(s) and linear upward-sloping supply curve(s). Evaluate
whether the following statements are True or False.
A) The supply curve with a positive y-intercept has a price elastic portion and a price inelastic
portion.
[ Answer14A ] (T. True, F. False)
B) Supply becomes more price elastic as price rises if it has a positive y-intercept.
[ Answer14B ] (T. True, F. False)
C) A monopoly facing a relatively more inelastic demand curve is more likely to charge a higher
price.
[ Answer14C ] (T. True, F. False)
D) If two supply curves have a point in common with positive x and y coordinates, the flatter curve
must be more price elastic at that common point.
[ Answer14D ] (T. True, F. False)

15. Consider downward-sloping demand curve and upward-sloping supply curve and initial positive
equilibrium quantity. Evaluate whether the following statements are True or False.
A) For the same amount of tax per unit imposed, change in equilibrium quantity is greater when
the demand and/or supply is more price elastic.
[ Answer15A ] (T. True, F. False)
B) Consider a per-unit subsidy, if sellers are less price elastic than buyers, buyers will receive more
of the benefit of the subsidy.
[ Answer15B ] (T. True, F. False)
C) If the government withdraws a subsidy of 1 dollar for each gallon of gas, at equilibrium, the price
of gas received by the sellers increases.
[ Answer15C ] (T. True, F. False)
D) When a per-unit subsidy is withdrawn, the decrease in total economic surplus received by
consumers and producers is always less than the reduction in subsidy expenditure paid by the
government.
[ Answer15D ] (T. True, F. False)

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 16. A non-government organization (NGO) sells calendar, facing a linear downward-sloping demand curve.
To maximize revenue, the NGO sets the price at 14.9 dollars per calendar and sells 368 calendars per
day on average. To support the NGO, the government introduces a per-unit subsidy of 5.8 dollars,
which are given to buyers. With the government subsidy, to maximize revenue, the NGO will set the
selling price at [ Answer16A ] dollars per calendar, and sell [ Answer16B ] calendars per day on
average.

Please refer to the background information below to answer the following two questions.
Consider the market of medical check-up. The supply curve has a constant slope of 1.5 and the demand
curve has a constant slope of -4.7. The equilibrium quantity without any taxes or subsidies (i.e. unregulated)
is 96 units of medical check-up, and the price elasticity of demand at the equilibrium point is -1.9.
17. From the information, we can conclude that the equilibrium price for medical check-up is [ Answer17
] dollars per unit.
18. Suppose the government now provides a per-unit subsidy of 17 dollars on medical check-up. At the
new equilibrium, the price received by sellers becomes [ Answer18A ] dollars per unit and the price
paid by buyers becomes [ Answer18B ] dollars per unit.

Please refer to the background information below to answer the following two questions.
Suppose the Financial Secretary of Utopia would like to implement a per-pack tax on cigarette with the
objective of maximizing tax revenue. The demand and supply of cigarette are given by the following
equations:

Demand: Q = 58810 − 300P

Supply: Q = 840P − 23770

where the price P is measured in Utopian dollars per pack and Q is number of cigarette packs per year.
Before the tax, the equilibrium price is P = 72.44 dollars per pack and the equilibrium quantity is
Q = 37078.42 packs per year.
19. To achieve the objective of maximizing tax revenue, the Financial Secretary should set a cigarette tax
of [ Answer19 ] dollars per pack.
20. With this tax, the consumer surplus and producer surplus combined decrease in the cigarette market
would be [ Answer20 ] dollars per year.

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Please refer to the background information below to answer the following two questions.
Suppose there are 7 persons in the economy with the following willingness to pay for a candy.

$18 $14 $10 $8 $6 $4 $2

At the price ceiling of $4, only 4 candies are supplied.

21. Consider the allocation of candies based on bribery. Suppose the amount of bribe can be observed by
everyone. At equilibrium, we would expect the total value of bribe in this market to be higher than
$[ Answer21 ].
22. Consider the alternative allocation mechanism under such price ceiling: waiting in line. Suppose
everyone earns $2 per hour. At equilibrium, the monetary equivalence of waiting time each person
has to spend to obtain a candy will be higher than $[ Answer22A ]. Each person who gets a candy
needs to spend more than [ Answer22B ] hour(s) in the waiting-line.

Please refer to the background information below to answer the following three questions.
The following equations show the rental market for apartments in a big city. Due to political pressure, the
government decides to set a rent ceiling of C dollars per apartment.

Demand: Q = 1700 − 2P thousand apartments

Supply: Q = 2P − 500 thousand apartments

where P is the rent per apartment (in dollars), and Q is the quantity of rental flats (in thousand apartments).
23. The government would like to limit the lost gains from trade due to the price ceiling to 1000 thousand
dollars. The minimum value of C is [ Answer23 ] dollars.
(Assume all consumption are automatically allocated to consumers with the highest valuation and all
production are allocated to producers with the lowest cost of production.)
24. Consider an alternative way of allocating the apartments by competitive bribery. At the minimum
rent ceiling of C dollars concluded earlier, the welfare loss to the society due to the rent ceiling will
be [ Answer24A ] thousand dollars, and the consumer surplus will be [ Answer24B ] thousand
dollars.
25. Consider another alternative way of allocating the apartments by waiting-in-line. Assume the per-unit
cost of waiting time is same for all buyers. At the minimum rent ceiling of C dollars concluded earlier,
the welfare loss to the society due to the rent ceiling will be [ Answer25A ] thousand dollars, and
the consumer surplus will be [ Answer25B ] thousand dollars.

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26. The following equations describe the demand and supply of the market for taxi services in Utopia.

Demand: P = 200 − 5Qd

Supply: P = 15 + 4Qs

where P is the taxi fare ($/km), Qd and Qs are quantity demanded and quantity supplied respectively.
How many of the followings can happen if the government decides to set a price floor at $106?

(i) The taxi fare would become lower.

(ii) The quantity demanded for taxi services will increase.
(iii) The quantity supplied for taxi services will increase.
(iv) The demand for taxi services will decrease.

A) 0
B) 1
C) 2
D) 3
E) 4
[ Answer26 ]

27. Consider downward-sloping demand curve and upward-sloping supply curve and initial positive
equilibrium quantity. Evaluate whether the following statements are True or False.
A) The government decides to impose an effective price ceiling, then the price control causes the
producer surplus to decrease, relative to the initial equilibrium.
[ Answer27A ] (T. True, F. False)
B) Consider a rent control that sets the rent below the equilibrium rent. We expect a bigger excess
demand when both of the demand and the supply are more elastic.
[ Answer27B ] (T. True, F. False)
C) After the imposition of price ceiling, total economic surplus must fall.
[ Answer27C ] (T. True, F. False)
D) The quantity transacted in a market will increase if the government decreases a binding price
floor by a small amount in that market.
[ Answer27D ] (T. True, F. False)

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Please refer to the background information below to answer the following three questions.
The market demand and supply curves of vodka in Utopia are given by the following equations (P is the
price of vodka in dollars per bottle).

Demand: Q = 168 − P million bottles per year

Supply: Q = 3P − 252 million bottles per year

Without regulation, the market equilibrium price is 105 dollars per bottle, and the market equilibrium
quantity is 63 million bottles per year.
28. Consider a price ceiling at 96.2 dollars per bottle. At this price ceiling, the maximum possible total
economic surplus will be [ Answer28 ] million dollars per year. (Assume that all quantity are
allocated to the highest value consumers.)
29. In response to the price ceiling, all sellers in the market start to reduce the quality by diluting their
vodka with water. Suppose mixing vodka and water with ratio 100 to x (x > 0) will reduce the cost
of production for each bottle of vodka by x dollars, but will also reduce the willingness to pay for each
bottle by 2x dollars. Assume that x can be varied continuously and all sellers in the market select the
same x. After the quality adjustment is done, in equilibrium, market price will be [ Answer29A ]
dollars per bottle and market quantity will be [ Answer29B ] million bottles per year.
30. At the equilibrium with quality adjustment, total economic surplus is expected to be [ Answer30 ]
million dollars per year.

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Please refer to the background information below to answer the following four questions.
The market demand and supply curves of construction of new houses in Utopia are given by the following
equations (P is price in terms of thousand dollars per unit):

Demand: Q = 205 − 0.4P thousand units per year

Supply: Q = −40 + 4P thousand units per year

During the construction, noise and hazardous solid wastes are generated. Such marginal environmental
damage to the society is equivalent to 2.15Q thousand dollars when Q thousand units are built per year.
The unregulated market equilibrium transaction is 182.73 thousand units per year. Note (1 thousand) × (1
thousand) = 1 million.
31. The total economic welfare to the society from the unregulated market equilibrium level of new houses
is [ Answer31 ] million dollars per year.
32. The socially efficient quantity of new houses in Utopia is [ Answer32 ] thousand units per year.
33. In order to induce the market to minimize the welfare loss to the society, it is optimal for the Utopian
government to impose a [ Answer33A ]( A. tax; B. subsidy; C. price ceiling; D. price floor ) of [
Answer33B ] thousand dollars per unit.
34. Instead of the policy alternatives considered in the previous question, the Utopian government would
like to minimize the welfare loss to the society by selling building permits. Under the building permit
scheme, each producer will be allowed to build q units only if the producer has q building permits.
Suppose these permits are perfectly divisible, the Utopian government should set the permit price at [
Answer34A ] thousand dollars per permit, and expect to obtain an annual revenue of [ Answer34B
] million dollars from the building permits.

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Please refer to the background information below to answer the following three questions.
Smith and Jones share an apartment. Smith likes loud music and Jones does not. Smith’s marginal value
of each hour of loud music measured in dollars is M B = 7.7 − 0.7Q, where Q is hours of loud music.
Suppose that music imposes an increasing marginal cost on Jones measured in dollars as M EC = 0.6Q.
The production of loud music does not incur any costs for Smith, and it does not incur any benefits for
Jones.
35. Suppose negotiation between Smith and Jones is impossible. If Smith has the right to listen to music
as loud and as much as he wants, we would expect Smith to generate [ Answer35A ] hours of loud
music eventually. If Jones has the right for quiet environment, we would expect Smith to generate [
Answer35B ] hours of loud music eventually.
36. Suppose negotiation costs are negligible now. If Smith has the right to listen to music as loud and as
much as he wants, we would expect Smith to generate [ Answer36A ] hours of loud music eventually.
If Jones has the right for quiet environment, we would expect Smith to generate [ Answer36B ]
hours of loud music eventually.
37. Suppose negotiation cost is 20 dollars, to split between the involved parties. If Smith has the right to
listen to music as loud and as much as he wants, we would expect Smith to generate [ Answer37A ]
hours of loud music eventually. If Jones has the right for quiet environment, we would expect Smith
to generate [ Answer37B ] hours of loud music eventually.

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Please refer to the background information below to answer the following five questions.
Two real-estate developers, X and Y, have access to seven different production processes to build houses
in Utopia, each one of which has a different profit (in million dollars) and gives off a different amount of
construction noise (measured in units). The information is summarized in the table below.

Profit to Developer X Profit to Developer Y

Process (daily noise) (million dollars) (million dollars)
A (6 units) 7730 6150
B (5 units) 7040 5920
C (4 units) 6010 5450
D (3 units) 4960 4490
E (2 units) 3820 3450
F (1 unit) 2650 2380
G (0 unit) 1400 1220

38. If construction noise is unregulated, and negotiation between the developers and their victims is
impossible, Developer X will use the production process [ Answer38A ], Developer Y will use the
production process [ Answer38B ], and the total amount of construction noise will be [ Answer38C
] unit(s) per day.
39. Suppose the government levies a tax of 1035 million dollars per unit of construction noise. Developer
X will choose process [ Answer39A ] and Developer Y will choose process [ Answer39B ]. The
total amount of construction noise will be [ Answer39C ] unit(s) per day.
40. Suppose the government has recently decided to cut total construction noise by two-third from
the unregulated equilibrium level, and would like to set a tax of T million dollars on each unit of
construction noise generated each day. To achieve the desired reduction in total construction noise, T
should be greater than [ Answer40A ] and less than [ Answer40B ].
41. Suppose, instead of taxation, the government issues 4 tradable construction noise permits, each of
which grants the holder the permission to generate 1 unit of construction noise per day, and allocates
all permits to Developer X initially free of charge. If negotiation costs are negligible between the
developers, in the end, Developer X will eventually choose process [ Answer41A ] and Developer Y
will eventually choose process [ Answer41B ].
42. Suppose, instead of giving out tradable permits free of charge, the government wants to sell the
permits. If the government sells 6 permits, the maximum price it can charge is [ Answer42 ] million
dollars per permit.

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Please refer to the background information below to answer the following four questions.
In Utopia, on a typical day, 30 residents are sick and need to seek medical treatment. Each of them has a
choice to go to the emergency room of public hospital or to the private clinics. The charge per treatment at
the public hospital is zero while that at the private clinics is 1030 dollars. If n sick residents choose to use
the public emergency room, on average it will take 3n + 8 minutes of waiting time before each sick resident
can receive any medical treatment. On the other hand, it always takes 0 minute of waiting time to receive
any medical treatment at private clinics. Assume that it takes 10 minutes of transportation time for each
sick resident to go to either medical facility (the emergency room of public hospital or the private clinics);
all residents have the same opportunity cost of time (20 dollars per minute); and the cost of providing
medical treatment to an additional sick resident is constant and is the same in both public hospital and
private clinics. (Note that n can only take integer values.)
43. If the residents make their decisions individually, we would expect [ Answer43 ] residents to use the
emergency room of public hospital in equilibrium each day.
44. From the society’s perspective (i.e, the perspective of the sick residents as a group), we should have [
Answer44 ] residents to use the emergency room of public hospital each day.
45. If the public hospital charges 600 dollars per treatment at its emergency room, and the residents
make their decisions individually, we would expect [ Answer45 ] residents to use the emergency
room at the public hospital in equilibrium each day.
46. Suppose instead the government wants to give residents a subsidy of S dollars per treatment to use
the private clinics, so as to induce the socially optimal number of residents using the emergency room
of public hospital. S should be greater than [ Answer46A ] and less than [ Answer46B ].

47. There are 2000 citizens in Utopia. They are considering how much area of country parks to be
retained in the city. Half of the citizens are each willing to pay 300 dollars to retain each additional
hectare of country park. Three-eighths of the citizens are each willing to pay 1200 dollars to retain
each additional hectare of country park. The remaining one-eighth of the citizens are each willing to
pay 2400 dollars to retain each additional hectare of country park. The marginal cost of retaining
each additional hectare of country park is 10000 + 47100Q dollars, where Q is the number of hectares
of country park in Utopia (assumed to be perfectly divisible). The socially efficient area of country
parks to be retained in Utopia is [ Answer47 ] hectares.

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48. Evaluate whether the following statements are True or False?
A) Consider the case of public goods. Public goods are characterized with being non-rival and
non-excludable goods.
[ Answer48A ] (T. True, F. False)
B) Consider the case of common resources. The tragedy of the commons can be viewed as a type of
negative externality imposed by individuals on the others in the society, leading to an overuse of
common resources.
[ Answer48B ] (T. True, F. False)
C) Consider the case of monopoly. For a monopolist who is able to charge each buyer his/her
reservation price, it will cause a larger welfare loss to the society than a single-price monopoly.
[ Answer48C ] (T. True, F. False)
D) Consider the case with zero external benefit and positive external cost. If the amount of the
subsidy imposed equals the marginal external cost of the activity at the socially efficient quantity,
then the market will end up with production and consumption at the socially efficient level.
[ Answer48D ] (T. True, F. False)

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Please refer to the background information below to answer the following eight questions.
Suppose the hotel industry is a perfectly competitive constant cost industry. All hotels are identical (having
the same production costs and producing the same product). Both the number of hotels and the quantity of
hotel service are assumed to be perfectly divisible. A typical hotel has the following total cost and marginal
cost functions of hotel service:

Total Cost: T C = 60q 2 + 330q + F dollars

Marginal Cost: M C = 120q + 330 dollars

where q is quantity of hotel service (in units) produced by a typical hotel, F is a constant that denotes the
fixed cost. Suppose that initially the hotel industry is at the long-run equilibrium and there are 82.5 hotels
in the market.
49. We conclude that the short-run supply curve of this industry is of the form (P is price per unit of
hotel service in dollars, and Q is market quantity of hotel service):

P =A+B×Q dollars

where A is equal to [ Answer49A ], and B is equal to [ Answer49B ].

50. Continue with the previous question. Suppose the market demand curve for hotel services is given as
below (P is price per unit of hotel service in dollars, and Q is market quantity of hotel service):

P = 11800 − 16.6Q dollars

At initial long-run equilibrium, the price is [ Answer50A ] dollars per unit of hotel service. Each
hotel produces [ Answer50B ] units of services.
51. Continue with the previous question. The value of F is [ Answer51 ] dollars.
52. A typical hotel will shut-down and produce zero quantity in the short run if the price is lower than [
Answer52A ] dollars. A typical hotel will exit from the industry in the long run if the price is lower
than [ Answer52B ] dollars.
53. Now a worldwide pandemic hits the hotel industry such that each consumer’s willingness to pay falls
by 5900 dollars permanently. At the post-pandemic short-run equilibrium, the price is [ Answer53A
] dollars per unit of hotel service. Each hotel produces [ Answer53B ] units of services.
54. Continue with the previous question. At post-pandemic short-run equilibrium, each hotel will earn
an economic profit of [ Answer54 ] dollars. (Remember to include the negative sign if the profit is
negative.)
55. Continue with the previous question. With free entry and exit of hotels, in the post-pandemic long-run
equilibrium, there will be [ Answer55 ] hotels in the market.
56. Suppose after the pandemic hits the hotel industry, the government wants to use subsidy policy to
induce the hotel market to generate a post-pandemic long-run equilibrium quantity the same as the
pre-pandemic long-run equilibrium quantity. The government should provide subsidy [ Answer56A ]
(A. to consumers; B. to hotels; C. to either consumers or hotels) at a rate of [ Answer56B ] dollars
per unit of hotel service.

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57. Consider downward-sloping market demand curve(s) and no government intervention of any form.
Evaluate whether the following statements are True or False?
A) A perfectly competitive firm’s short-run supply curve is the section of marginal cost curve that
is above the total variable cost.
[ Answer57A ] (T. True, F. False)
B) Consider a monopoly. With constant marginal cost, the average variable cost always equals the
marginal cost.
[ Answer57B ] (T. True, F. False)
C) The maximum transportation cost to prevent arbitrage for a good is the price difference of the
good between two segmented markets.
[ Answer57C ] (T. True, F. False)
D) For a perfectly discriminating monopolist, the marginal revenue (per additional unit of output)
curve facing the firm always lies below the demand curve facing the firm.
[ Answer57D ] (T. True, F. False)

58. Consider downward-sloping market demand curve(s) and no government intervention of any form.
Evaluate whether the following statements are True or False?
A) Entry of new firms in a perfectly competitive market will drive the accounting profits of the
existing firms to zero in the long run.
[ Answer58A ] (T. True, F. False)
B) If a firm continues to operate in the short run, we can conclude that it is earning non-negative
economic profit.
[ Answer58B ] (T. True, F. False)
C) Under perfect price discrimination, deadweight loss is zero.
[ Answer58C ] (T. True, F. False)
D) A firm will shut down in the short run if the market price is lower than the average variable cost
at all levels of output.
[ Answer58D ] (T. True, F. False)

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59. Assume that the two firms A and B are in two isolated markets. The total cost functions of both
firms are shown below:

Firm A’s total costs = $(185 + 9Q)

Firm B’s total costs = $(150 + 9Q)

where Q is the quantity produced.

Suppose that both firms face the identical demand function, that they are both pursuing a profit
maximization policy, and that both firms are earning positive economic profits. Compared with firm
A, firm B produces ______, and has ______ profits and ______ producer surplus.
A) less; lower; smaller
B) the same quantity; lower; the same size of
C) more; higher; larger
D) the same quantity; higher; the same size of
E) the same quantity; the same amount of; the same size of
F) Not enough information to answer this question.
[ Answer59 ]

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Please refer to the background information below to answer the following six questions.
Victoria Gas is the sole provider of towngas in Utopia. It faces a demand curve and total cost curve below:

Demand: Q = 660 − 5P million units each year

Total cost: T C = 19300 + 26Q million dollars each year

where P is the price of towngas in dollars per unit, Q is the quantity of towngas in million units per year,
and marginal cost of providing towngas is fixed at 26 dollars per unit.
60. To maximize profit, Victoria Gas would charge [ Answer60A ] dollars per unit of towngas and
provides [ Answer60B ] million units of towngas per year.
61. Continue with the previous question. The deadweight loss in this market is [ Answer61 ] million
dollars per year.
62. The Utopian government is considering a Scheme of Control by setting the maximum price per unit
of towngas to be the average of profit-maximizing price and the marginal cost. Under this Scheme of
Control, the deadweight loss in the towngas market will be [ Answer62 ] million dollars per year.
63. Continue with the previous question. Under the Scheme of Control, Victoria Gas will earn a profit of
[ Answer63A ] million dollars per year. In the long run, Victoria Gas will [ Answer63B ] (A. stay
in; B. exit) the towngas market.
64. Suppose, instead of the Scheme of Control policy above, the government provides a per-unit subsidy
of 13 dollars to Victoria Gas. The deadweight loss in the towngas market will be [ Answer64 ]
million dollars per year.
65. Suppose the government instead wants to use subsidy to towngas consumers to completely eliminate
the deadweight loss in the market. The subsidy rate has to be [ Answer65 ] dollars per unit of
towngas.

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Please refer to the background information below to answer the following three questions.
Doris runs a wedding photography business in Utopia. The marginal cost of providing each unit of wedding
photography service is $285. Doris has to incur a fixed cost of $20 per month. On a typical month, Doris
expects to see 10 customer couples with the following reservation prices for wedding photography service.
(Each customer couple will purchase either zero or one unit of wedding photography service.)

Customer couple Reservation price ($ per unit)

A 240
B 270
C 300
D 330
E 360
F 390
G 415
H 440
I 460
J 480

66. If Doris has to charge the same price for all wedding photography services, to maximize profit, she will
charge $[ Answer66A ] per unit and sell to [ Answer66B ] customer couples, and consequently
make a monthly profit of $[ Answer66C ].
67. Suppose Doris does not know each customer couple’s reservation price but she knows that all customer
couples with a reservation price above $345 never use discount coupons. Those with reservation
prices below $345 use them whenever they are available. If Doris makes coupons available in wedding
magazines, those customer couples who clip and present them get to pay a discounted price for
wedding photography service. Others pay the regular list price. To maximize profit, Doris should set
the list price at $[ Answer67A ] per unit and the discount price at $[ Answer67B ] per unit.
68. Suppose instead Doris knows each customer couple’s reservation price and can practice perfect price
discrimination. Doris will provide wedding photography service to [ Answer68A ] customer couples
in total, and consequently make a monthly profit of $[ Answer68B ] in total.

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69. A pharmaceutical company has developed vaccines to help prevent two diseases (Math Pox and Econ
Fever). Andy and Betty are potential consumers for the two vaccines. They can choose to get the
vaccination or not. If they choose to do so, they need only at most one dose of each vaccine. The
following table shows their willingness to pay (in dollars) for the two vaccines.

Andy Betty
Math Pox vaccine 200 500
Econ Fever vaccine 540 300

Suppose, for both vaccines, the marginal cost of supplying an additional dose is constant at 60 dollars,
and the fixed cost is zero. The company can sell the two vaccines separately or as a combo. When
the vaccines are sold as a combo, the company will incur an additional packaging cost of 5 dollars per
combo. The company should sell the two vaccines [ Answer69A ] (A. as a combo; B. separately).
The company can at most make a profit of [ Answer69B ] dollars.

END

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