Answer Key Econ 103 Sample Final

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Page 1. Answer Key. Econ 103 Sample Final. 1. A. 2. D. 3. B. 4. C. 5. B. 6. A. 7. A. 8. C. 9. C. 10. B. 11. B. 12. A. 13. A. 14. B. 15. C. 16. D. 17. C. 18. B. 19. B. 20. C.
Answer Key Econ 103 Sample Final 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16. 17. 18. 19. 20. 21. 22. 23. 24. 25. 26. 27. 28. 29. 30. 31. 32. 33. 34. 35. 36. 37. 38. 39. 40. 41. 42. 43.

A D B C B A A C C B B A A B C D C B B C D D A B C D D D B C A A D A C D C A A A D B A

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44. 45. 46. 47. 48. 49. 50. 51. 52. 53. 54. 55. 56. 57. 58. 59. 60.

B A C D C A B D D A C A B B C C D

Short Answer Questions, 1. The province needs to raise money, and the premier has a choice of imposing an excise tax of the same amount on one of two previously untaxed goods: the province can either tax sales of restaurant meals or sales of gasoline. Both the demand for and supply of restaurant meals are more elastic than the demand for and supply of gasoline. If the premier wants to minimize the deadweight loss caused by the tax, which good should be taxed? For each good, draw a diagram that illustrates the deadweight loss from taxation and explain your answer.

The tax should be imposed on sales of gasoline. Since both demand for and supply of gasoline are less elastic, changes in the price of gasoline will result in smaller reductions in quantity demanded and the quantity supplied. As a result, fewer transactions are discouraged by the tax – in other words, less total surplus (consumer and producer surplus) is lost. Draw two diagrams to convince yourself that this is the case!

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2. The structure of the local gas station industry is monopolistic competition. Suppose that currently each gas station incurs a loss. a. Draw a diagram for a typical gas station to show this short-run situation. b. In a separate diagram, show what will happen to the typical gas station in the long run. Explain your reasoning.

a. Each gas station will produce the output, and therefore charge the price, that maximizes its profit. That is, it will produce quantity QU where marginal cost equals marginal revenue, and therefore charge price PU. Since each gas station makes negative profit, at the quantity QU, the price PU is lower than average total cost at the quantity. That is, the situation for the typical gas station looks like that in the following diagram:

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b. Since gas stations are making losses, in the long run some will leave the industry. This shifts the demand and marginal revenue curves for each of the remaining gas stations rightward. If profit for the typical gas station is still negative, more gas stations will leave the industry. This continues until each gas station makes just zero economic profit. This is the new long-run equilibrium. The situation for the typical gas station in this equilibrium is illustrated in the accompanying diagram. Demand has increased sufficiently to just give the gas station zero profit at a price of PMC and a quantity of QMC.

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