Intermediate Microeconomics Problem Set #4

Maria Cherry Lyn S. Rodolfo Due: March 16, 2009

1. For questions 1-8 please refer to Figure 1.

Price (US$)

35
S

20

15
D + Qs

5 D

Quantity (berries in lbs)

300 400 600
600

1. The government policy pictured is

(a) a price ceiling of US$ 20
(b) a price support of US$ 20
(c) a price ceiling of US$ 15
(d) a price support of US$ 15
(e) quota of 600

2. Before this policy was implemented, consumer surplus was

(a) US$ 20
(b) US$ 4,000
(c) US$ 6,000
(d) US$ 8,000
(e) US$ 12,000

3. Before this policy was implemented, producer surplus was

(a) US$ 10
(b) US$ 2,000
(c) US$ 4,000
(d) US$ 6,000
(e) US$ 12,000

4. As a result of this policy, quantity will

(a) fall by 300
(b) rise to 400
(c) stay at 400

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 (d) fall by 400
(e) rise to 600

5. As a result of this policy, consumer surplus will

(a) fall by US$ 15
(b) fall by US$ 2250
(c) rise by US$ 2250
(d) fall by US$ 1750
(e) rise by US$ 5000

6. As a result of this policy, producer surplus will

(a) fall by US$ 2000
(b)rise by US$ 3375
(c) rise by US$ 4500
(d)rise by US$ 2500
(e) rise by US$2000

7. Including the consumer’s expected tax burden , the total change in welfare from this policy is
(a) -US$ 6000
(b)-US$ 5250
(c) -US$ 4500
(d)US$ 4500
(e) US$ 5250

II. Problem Solving

1. Assume that the market for tortillas is perfectly competitive. The market supply and demand curves
for tortillas are given as follows:

Supply curve : P = 0.000002

Demand curve : P = 11-0.00002Q

The short run marginal cost for a typical tortilla factory is:

MC = 0.1 + 0.0009q

(a) Determine the equilibrium price for tortillas by equating the demand with the supply equations
(b) Determine the profit maximizing output level for a tortilla factory. (Hint: The profit maximizing
condition is MR = MC or P=MC)
(c) At the level of output determined above in (B), is the factory making a profit, break-even, or
incurring a loss? Please explain your answer.
(d) Assuming that all of the tortilla factories are identical, how many tortilla factories are producing
tortillas?

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