Question 33

33. Which of the following would cause the equilib- rium price of good X to increase? (A) Producers of good X find a new technology that reduces the cost of oducin X. (B) The price of an essential input in the production of good X increases. o s an are comp ements, an the government imposes a tax on good Y. (D) Good X is a normal good, and the government increases income taxes by 3%. (E) Good X is an inferior good, and the government decreases income taxes by 10%.

Question 41

  • The price will remain unchanged even if the demand for the good increases in the long run.

    Short-Run and Long-Run AØustments to an Increase in Demand Figure 9.12 Panel (a) Market 52 Panel (b) One Firm B' $2.30 1.70 - $2.30 c MR2 ATC MRI DI Bushels of oats per period q, 02 Bushels of oats per period The initial equilibrium price and output are determined in the market for oats by the intersection of demand and supply at point A in Panel (a). An increase in the market demand for oats, from DI to in Panel (a), shifts the equilibrium solution to point B. The price increases in the short run from $1.70 per bushel to $2.30. Industry output rises to Q2. For a single firm, the increase in price raises marginal revenue from MRI to MR2,• the firm responds in the short run by increasing its output to (12. It earns an economic profit given by the shaded rectangle. In the long run, the opportunity for profit attracts new firms. In a constant-cost industry, the short-run supply curve shifts to S2,• market equilibrium now moves to point C in Panel (a). The market price falls back to $1.70. The firm's demand curve returns to MRI, and its output falls back to the original level, ql. Industry output has risen to Q3 because there are more firms.

Question 51

51. Which of the following best explains why the short-run average total cost curve is U-shaped? (B) (C (D) (E) Spreading total fixed costs over a larger Spreading total fixed costs over a larger output, and eventually diminishing returns Increasmg total Ixe costs an Increasmg returns Increasing average variable costs and decreasing returns Decreasing average variable costs and increasing returns

Short-Run Cost The ATC curve is also U- shaped. The MC curve is very special. Where AVC is falling, MC is below AVC. Where AVC is rising, MC is above AVC. At the minimum AVC, MC equals AVC. Arc 15

Question 55

60 40 20 10 Elastic 20 Unit elastic Inelastic 50 800 10 20 Elastic Unit elastic 30 40 50 Inelastic

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