# ECO 201 Practice Problem Bank

## Module 1

Use the following four graphs for Questions 1 - 2.

Question #1: Suppose Will makes a technological discovery that allows him to become more efficient in the production of GBD shirts but does NOT affect his ability to produce more GBD hats. Which graph shows the most likely impact on Will’s PPF?

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

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

When a technological discovery (or setback) happens that relates to only ONE product on the PPF, that is the only product affected. That means we can cross out any graphs that correspond to a change in GBD Hats (A, B, & C)...

...leaving us with answer choice D! This is the only graph that correctly only affects GBD Shirts. As stated in the problem, the technological discovery causes Will to be able to produce more GBD Shirts, resulting in the PPF expanding on the y-axis (corresponding to GBD Shirts).

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Question #1: Which of the price and quantity combinations in the accompanying graph represents the market of Nike Air Forces at competitive equilibrium?

A. \$70 and 80 shoes
B. \$20 and 50 shoes
C. \$40 and 100 shoes
D. None of the above

A. \$70 and 80 shoes
B. \$20 and 50 shoes
C. \$40 and 100 shoes
D. None of the above

Remember: The equilibrium point in a perfectly competitive market is located where your supply and demand curve intersect.

In our Nike Air Forces market, the supply and demand curves intersect at a quantity of 100 shoes and an equilibrium price of \$40!

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Question #1: Based on the opportunity cost for each trader, comparative advantage and _______ make it possible to achieve gains from trade between people, corporations, and countries.

B. Specialization
C. Production
D. Technology

B. Specialization
C. Production
D. Technology

When considering absolute advantage, the trading parties focus on their own production and their own capabilities without consideration of trade or their own opportunity costs. Therefore, answer choice A relates to part of our question, but not all, so let's cross it out.

B. Specialization
C. Production
D. Technology

Production is a key part of the initial process for trade, but production itself isn’t the method that results in total gain for society or both trading parties. With that considered, let's cross out answer choice B.

B. Specialization
C. Production
D. Technology

Technology is similar to production in the fact that it helps grow our markets, but isn’t the key method to maximize gains from trade. Therefore, we'll cross it out.

B. Specialization
C. Production
D. Technology

This leaves us with the correct answer choice B. Specialization allows countries to limit their work and production to areas of their strengths to create overall gains for society.

B. Specialization
C. Production
D. Technology

Use the following table to answer Questions 2 - 3.

Billy and Max use the same amount of resources to produce pizzas and milkshakes. Max produces 5 pizzas per hour or 3 milkshakes per hour. Billy produces 3 pizzas per hour or 2 milkshakes per hour.

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## Module 2

Question #1: The demand for LuLuLemon will be less elastic than the demand for athletic attire.

The demand for LuLuLemon would be MORE elastic than the demand for athletic attire.

Remember, the narrower a product classification is, the greater the elasticity is for consumers. There are more product substitutes for the brand LuLuLemon than there are substitutes for athletic attire overall.

In other words, the more substitutes, the more elastic a product is!

Elasticity is similar to price sensitivity. Consumers are MORE sensitive to the price of LuLuLemon (one single brand) compared to the price of athletic attire overall (many brands).

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Question #1: If all other variables are held constant, when the price of a good increases, producer surplus decreases.

Producer surplus is considered to be the difference between what a consumer actually paid (the market price) and what the producers were willing to sell their product for.

If the price of a good increases, this means that consumers are paying more. This widens the differences between our market price and the producer’s willingness to sell.

Therefore, our producer surplus would increase in this example, not decrease.

Please use the following graph for questions 2 - 3.

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Question #1: A person that bears the incidence of a tax is the same person who hands over that tax money to the government.

The legal burden of a tax is experienced by those who are responsible for turning over their tax money to the government.

This may seem contradictory to Tax Incidence & DWL, however it's important to remember that technically speaking, the person who bears the burden of the tax is the person handing the tax money over to the government.

Question #2: The deadweight loss that results from incidence tax represents the loss in consumer and producer surplus since no one receives the surplus and it is not given to the government.

Deadweight loss is considered to be the decrease in economic activity caused by market distortions. In this case, those distortions are the tax.

When a tax is imposed, the price of a good rises and thus less people are able to afford/purchase that item compared to the original pre-tax equilibrium point.

That means that certain members of society aren’t able to get a good due to the tax and producers are forced to sell less. This is why there is a decrease in economic activity!

When there is a decrease in economic activity, both consumers and producers suffer as it decreases their surplus. Therefore, our answer is true!

Please use the following graph for Question 3. This graph shows the impact on a market after a government imposed an excise tax.

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## Module 3

Question #1: One of your fraternity brothers, Joseph, was caught selling Delta Blueberry Pi merch on the black market, at a lower price than set by the President. When the President confronts Joseph, what would he most likely say to explain himself?

A) “I decided to sell my hoodies on the black market because brothers couldn’t afford the more expensive option and I wanted to do something kind for the fraternity.”
B) “I decided to sell my hoodies on the black market because you imposed an expensive price floor and I had too much surplus not to sell it for cheaper”
C) “I decided to sell my hoodies on the black market because you imposed a non-binding price ceiling and I simply wanted to sell for even cheaper than that”
D) “The non-binding price floor you set created a shortage for our brothers so I simply wanted to do something kind for the fraternity”

A) “I decided to sell my hoodies on the black market because brothers couldn’t afford the more expensive option and I wanted to do something kind for the fraternity.”
B) “I decided to sell my hoodies on the black market because you imposed an expensive price floor and I had too much surplus not to sell it for cheaper”
C) “I decided to sell my hoodies on the black market because you imposed a non-binding price ceiling and I simply wanted to sell for even cheaper than that”
D) “The non-binding price floor you set created a shortage for our brothers so I simply wanted to do something kind for the fraternity”

When a merchant chooses to sell a product on the black market for a cheaper price, it is because a binding price floor has been put in place.

In other words, the President was requiring a higher price for the hoodies than the fraternity would pay at equilibrium.

This means the Quantity Supplied (Qs) would be greater than the Quantity Demanded (Qd), and the sellers would need to lower their prices in the black market to get rid of their surplus!

This aligns with answer choice B!

A) “I decided to sell my hoodies on the black market because brothers couldn’t afford the more expensive option and I wanted to do something kind for the fraternity.”
B) “I decided to sell my hoodies on the black market because you imposed an expensive price floor and I had too much surplus not to sell it for cheaper”
C) “I decided to sell my hoodies on the black market because you imposed a non-binding price ceiling and I simply wanted to sell for even cheaper than that”
D) “The non-binding price floor you set created a shortage for our brothers so I simply wanted to do something kind for the fraternity”

NOTE: You may have considered option A, but often times merchants do not participate in the black market simply out of the goodness of their own hearts. With a binding price floor, merchants tend to have extra supply, due to the shortage and want to make sure they are able to sell it.

Use the following graph for Questions 2 - 3.

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Question #1: If a non-binding price ceiling is put in place, what is the typical consequence on the market?

A) The legal market quantity and price do not change, the market operates at equilibrium
B) There will be an increase in quantity sold in the market
C) Consumers will be unable to receive the desired quantity of goods in the market
D) Producers will be stopped from receiving their goods at the equilibrium price

A) The legal market quantity and price do not change, the market operates at equilibrium
B) There will be an increase in quantity sold in the market
C) Consumers will be unable to receive the desired quantity of goods in the market
D) Producers will be stopped from receiving their goods at the equilibrium price

First, let's consider: what is a price ceiling?

A price ceiling is a legally established maximum price for a good or service. They're typically imposed when the market price is “too high”.

In terms of binding vs nonbinding, the distinction comes down to how the price ceiling compares to when the market is at equilibrium.

In order for a price ceiling to be binding, it must be below the equilibrium price. When it's below the equilibrium price, then the price ceiling "binds" the market to operate at a lower price (set by the ceiling).

If a price ceiling is not binding, that means that it's above the equilibrium price, and therefore doesn't interfere with the equilibrium price.

This question is dealing with a non-binding price ceiling...

Question #1: If a non-binding price ceiling is put in place, what is the typical consequence on the market?

...and since it's non-binding, that means it won't impact the market price, and therefore won't impact market quantity!

This corresponds with answer choice A!

A) The legal market quantity and price do not change, the market operates at equilibrium
B) There will be an increase in quantity sold in the market
C) Consumers will be unable to receive the desired quantity of goods in the market
D) Producers will be stopped from receiving their goods at the equilibrium price

Use the following information for Questions 2 - 4:

• Qs = 10 + 6P
• Qd = 34 - 2P
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Question #1: The socially optimal quantity will equal the market quantity once external benefits are considered in the situation of a positive externality. True or False?

Once the market takes into consideration any external benefits that affect third parties, the equilibrium quantity and socially optimal quantity become the same value!

Please see our Positive Externalities article for more context here.

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Use the following information to answer Questions 1-7: Dylan owns a Greek Life merchandise company, Steez Inc. In 2022, his total costs were \$10,000, his variable costs were \$8,000, and he sold 800 crewnecks.

Question #1: How much were Dylan's fixed costs?

Remember the total costs equation...

Total Costs = Fixed Costs + Variable Costs

...with which, we can easily pinpoint in the prompt a Total Costs value of \$10,000...

Use the following information to answer Questions 1-7: Dylan owns a Greek Life merchandise company, Steez Inc. In 2022, his total costs were \$10,000, his variable costs were \$8,000, and he sold 800 crewnecks.

\$10,000 = Fixed Costs + Variable Costs

...and a Variable Costs value of \$8,000...

Use the following information to answer Questions 1-7: Dylan owns a Greek Life merchandise company, Steez Inc. In 2022, his total costs were \$10,000, his variable costs were \$8,000, and he sold 800 crewnecks.

\$10,000 = Fixed Costs + \$8,000

...leaving us with a Fixed Costs value of \$2,000!

\$10,000 = Fixed Costs + \$8,000
Fixed Costs = \$2,000

This serves as our final answer!

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Use the following information to answer Questions 12-15:

Question #12: If this firm wanted to maximize their profit, they'd set their price to ___________ and their quantity to ______________.

Remember: the profit maximizing point for any firm is where MR = MC!

We can pinpoint this point here on our graph...

...which aligns to 4 units of output.

Now... how can we identify price?

Don't make the mistake of going directly to the left from the point where MR = MC!! We've gotta go up to the demand (D) curve...

...and then to the left to pinpoint our price of \$30! This results in our final answer!

The reason we go up to the demand (D) curve is because that's the price that our consumers are willing to pay (at 4 units of output). If we set our price to anything less that what consumers were willing to pay... we'd be missing out on profit!

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## Module 4

Question #1: Imagine a given market is competitive, and firms are making profit. This means that we could expect firms to _____________ the market.

A) enter
B) exit

A) enter
B) exit

Remember: When working in markets of competitive firms, in the long-run they operate at zero economic profits.

This means that if in the short-run firms are making profit, other competitors will enter the market to get in on that profit! Over time as more and more competitors enter the market, the economic profits return back to zero.

That's why we choose answer choice A!

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