Worksheet for AgEc first year students, March 20, 2018 Total load 15%

Part I: Answer All questions in this part by writing letter of the best answer on the space provided in
front of each question.

1. Which of the following cause positive externality

A. Technological innovation D. Air pollution due to smoke of

B. Education services automotives
C. Deforestation E. A and B
F. C and D
2. Which of the following goods or services is not a public good?
A. Road D. Telephone service
B. Street light E. None
C. National defense
3. An oligopoly firm maximizes its profit by equating its MC with its own MR if

A. the firm enter into non-price competition agreement

B. the firm is a low cost price leader
C. the firm is a sophisticated oligopoly firm
D. the firm enter into market sharing agreement
E. B and C
F. All except D
4. Suppose AU is a monopsony firm and the labor market is competitive. The average wage rate of
10 workers was 2000 Birr/worker/month. But when it adds the 11 th worker, average wage rate
rises to 2500 Birr/month. How much is the marginal expense of the last worker.

A. 500 D. 227.7
B. 5000 E. None
C. 7500
5. Which of the following is false about equilibrium?

A. If there is positive excess supply for prices below equilibrium, the equilibrium will be
unstable
B. If the excess demand is positive in the relevant price ranges, the equilibrium will be
unstable
C. If the excess demand function intersects the price axis, there is equilibrium
D. An equilibrium price will be stable if the excess demand function has negative slope at
the point of its intersection

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 E. If there are two equilibrium points, one of the equilibrium will be definitely unstable.
F. None
6. Production Possibility Curve (PPC) in a 222 general equilibrium model

A. It is the locus of points of efficient distribution of commodities X and Y between two consumers
(A and B)
B. It is the locus of points of combination of X and Y which can be produced with the total
available factors in the economy if all factors are used efficiently.
C. represents the quantities of commodities X and Y a country chooses to maximize the welfare of
the society
D. it is the locus of points of combinations of L and K factors used in the country
E. None

7. in general equilibrium model represents

A. Efficiency in production D. Efficiency in both production and

B. Efficiency in consumption consumption
C. Efficiency in allocation of E. Efficiency in factor substitution
production F. None
8. One of the following is true about externalities

A. When there is negative externality, market price will be higher than the socially efficient
price
B. When there is negative externality, output will be lower than what the society wants it to
be produced
C. When there is positive externality, market price will be higher than the socially efficient
price
D. When there is positive externality, output will be lower than what the society wants it to
be produced
E. C and D
F. None

9. Which of the following does describe monopolistic competition?

A. Few number of buyers and D. Differentiated but close

sellers substitutes
B. Homogenous products E. Barrier to entry or exit
C. Complementary goods

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10. One of the following shows fancied differentiation?
A. Differences in the specification of products
B. Differences in the location of firms
C. Differences in related services
D. Differences in packaging
E. None
11. Identify the correct statement about advertising in monopolistic competition.
A. It will depress the demand for a product
B. It makes demand to be inelastic
C. It constitutes a form of real differentiation
D. Its cost is believed to have an inverted U-shape
E. None
12. When labor is the only variable factor in a perfectly competitive product and factor market
A. The demand for labor will be its VMPL
B. The demand for labor will be its MPPL
C. The supply of labor to the individual firm is perfectly inelastic.
D. Both MPPL and VMPL are increasing functions of employment
E. Profit will be maximized if the firm employs labor at the point where the wage rate
equals the MPPL

13. One of the following doesn’t determine the demand for labor

A. Wage rate D. Technical progress

B. MPPL E. None
C. VMPL

14. Identify the correct statement about the Pareto criterion of welfare?
A. It evaluates all types of welfare changes
B. The maximization of social welfare is guaranteed if one uses this criterion
C. It is the necessary but not the sufficient condition for social welfare maximization
D. Points off the production possibility curve represents a Pareto-efficient situation
E. None
15. One of the following is wrong about Bentham’s welfare criterion.
A. Welfare is improved when a change increases the total social welfare and that of the
majority of the people
B. It is highly accepted because it makes comparisons of the relative deservingness of
members of the society

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 C. It fails as a criterion when a change improves the welfare of the majority of people but
doesn’t improve the total societal welfare
D. It fails as a criterion when a change improves the total societal welfare but doesn’t
improve the welfare of the majority of people
E. None
16. One of the following views of equity puts a heavy weight on equality without explicitly
requiring equal allocations

A. The egalitarian view D. The market oriented view

B. The Rawlsian View E. None
C. The utilitarian view

17. Which of the following welfare criteria states that social welfare will be maximized if income
was equally distributed to all members of the society?

A. The Pareto criterion D. The GNP/Growth approach

B. The Bergson criterion E. The Cardinalist criterion
C. The Kaldor-Hicks
Compensation Criterion

18. 16. Which of the following uses purchase of the right to pollute as a solution for correcting
externalities?

A. Pigouvian Taxes D. Coasian Bargaining

B. Quotas E. All
C. Tradable Permits and
Auctions
19. Which of the following item cannot be considered as public good?

A. Fire brigade service D. Research findings

B. Highway (road) E. Vaccine service
C. electric power service F. None
20. A person who purchased fire insurance may take less precautionary measures than before. This
is due to

A. Moral hazard D. Externality

B. Adverse selection E. A and B
C. Principal-agent problem F. None
Part II: True or false

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1. If the demand curve has negative slope and the supply curve has positive slope at all price ranges,
equilibrium will always exist ________________
2. If both the supply and demand curves have negative slopes within a relevant price ranges,
equilibrium cannot exist __________
3. The demand curve for any product or factor cannot be positive _____
4. If the supply curve has positive slope and the demand curve is negative within a relevant price
ranges, equilibrium will always be unique ________
5. Stable equilibrium will always have unique equilibrium _________
6. If the excess demand curve of a market that has both positive and negative slope can have unique
equilibrium ________

Part III: Fill in the blank

1. The following figure shows equilibrium of consumption and production in a general equilibrium
analysis of 2 commodity (X and Y), 2 consumers (A and B) and 2 factors (L and K) with fixed
supply. The line PP’ is the PPF. Based on the figure below identify the following. Assume also the line
gg’ is parallel to CC’. (6 points)

Y
C

V T
A4 B’s indifference curves
A3
g A2
B1
A1 ●T2
E ● T*
B2

B4 B3 g’
O W X
F P’ C’
A’s indifference curves

Equilibrium of consumption and production

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 A. OE represents

B. Point T* is

C. OV shows
____________________________

D. FW shows
_________________________

G. B3 represents___________________________________

H. T2 shows_______________________________________

Part IV: Work out questions

1. Define and illustrate excess capacity.

2. Define and illustrate Monopsonistic exploitation.
3. If the payoff matrix of the Row and Column players is given in the table below, then find the Nash
equilibrium of the game.

1. Column

Left Right
2. R
Up (1, 1) (2, 4)
o
w
Down (4, 1) (3, 2)

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4. Relationship between Productivity and Costs

Foothills Refrigerators assembles refrigerators for retail sales and pays all their workers $10 per hour
and incur $500 of fixed costs per week. The following table indicates their weekly production function
using labour as their only variable input:

Labour (L) Output(Q)

0 0
2 10
4 18
6 24
8 28

(a) Using the above information, create a table and calculate the marginal product (MP) average
product (AP), total cost (TC), and marginal cost (MC).

(b) Graph the marginal product (MP) and the average product (AP) on one graph.

(c) Do we observe increasing, constant, diminishing returns to labour or some combination of the
three? Explain.

5. Perfectly Competitive Markets.

Given the following information about a firm under perfect competition:

Q TC
0 50
10 125
12 135
14 140
16 150
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 17 160
18 175
20 215

(a) Calculate the firm’s MC, ATC, AFC, and AVC, for the given levels of output.

(b) If the price of the product is $20, at what output will the firm maximize its profits?

(c) Calculate the profits at the above profit-maximizing output?

(d) At what price should the firm shut down operations in the short run?

6. Taxes and Efficiency

The demand and supply functions of a good are given as:

P = 50 - 2QD

P = 25 + 0.5QS

where P = price;
QD = quantity demanded; and
QS = quantity supplied.

(a) Calculate the equilibrium price and quantity.

(b) Suppose the government decides to impose a $5 tax/unit on the suppliers. What will be the new
equilibrium price paid by consumers? Received by suppliers?

(c) Sketch the graph illustrating both the original equilibrium and the new equilibrium.

(d) Calculate the dollar value of the deadweight loss caused by this tax. [Recall that the area of a
triangle is ½ the height x base!] Shade in this area in your graph.

7. Factor Market Pricing

A perfectly competitive labor market determines the equilibrium wage and employment in that
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 market. Firms that buy labor in this market will pay the market wage and can hire all the
workers they want at this wage. This activity demonstrates how the market wage is set and how
a firm interacts with the labor market.

Part A: Labor Demand for the Perfectly Competitive Firm

The Awesome Belt Company (ABC) is a price taker in both the input and output markets. It hires
labor in a perfectly competitive resource market and sells its belts in a perfectly competitive
product market. The total revenue (TR) the firm receives from each amount of labor is found by
multiplying output (Q) by the price (P) at which that level of output can be sold. The marginal
revenue product (MRP) of an extra unit of labor is the change in TR resulting from the firm
adding the extra labor unit.

1. Complete Table 7.1 based on two different possible prices for ABC’s belts.

Table 7.1.ABC’s Productivity and Revenue Data

Marginal Price - $2.00 Price - $3.00
physical
product
(MPP)
Labor (L) Output (Q) (AQ/AL) TR MRP TR MRP
- $0 - $0 -
0 0
1 10 +10 $20 +$20 $30 +$30

2 30
3 70
4 105
5 135

6 160
7 180
8 195
9 205

10 205

11 195

2. Assuming there are 1,000 firms identical to ABC in the belt industry, complete Table 7.1, based
on the market price of belts being $3.00.

3. Assume the wage is at some level greater than the equilibrium wage. Is there a shortage
or surplus of labor? What adjustments take place in the market to move the wage to the

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 equilibrium wage?

4. Assume the wage is at some level less than the equilibrium wage. Is there a shortage or
surplus of labor? What adjustments take place in the market to move the wage to the
equilibrium wage?
5. Why is the market demand curve for labor downward sloping? Why is the market
supply curve of labor upward sloping?

Quantity of labor Quantity of labor

Wage demanded supplied* State of the labor market
$30 9,000 4,000 Shortaae
$45 8,000 4,500
$60 7,000 7,000
$75 6,000 8,000
$90 5,000 10,000
$105 4,000 11,500
$120 3,000 13,000
Table 7.2

5. From table 7.1, plot the market demand curve for labor when the price of belts $2.00. Plot
again the market demand curve for labor when the price of belts $3.00.

6. Why did the market demand curve for labor shift to the right when the price of belts increased
from $2.00 to $3.00?

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