1. If the demand curve is perfectly elastic and a $10 per unit sales tax is impo
ID: 1107173 • Letter: 1
Question
1. If the demand curve is perfectly elastic and a $10 per unit sales tax is imposed on the buyers then the net price received by suppliers will
a. decrease by more than $10
b. decrease by exactly $10
c. decrease but by less than $10
d. not decrease at all because demand is perfectly elastic.
e. None of the above
2.An increase in a monopolist's fixed costs would
a. possibly increase, decrease or not affect profit-maximizing price and quantity, depending on the elasticity of demand.
b. not affect the profit-maximizing price or quantity, but it would change net revenues.
c. increase the profit-maximizing price and decrease the profit-maximizing quantity produced.
d. not affect revenue, the profit-maximizing price, or quantity.
e. none of the above.
3.As firms enter a competitive industry that is profitable in the short-run, during the transition from the short-run to the long-run, the economic profit of each firm remaining in the industry:
a. decreases and the price rises.
b. decreases and the price falls.
c. increases and the price falls.
d. increases and the price rises.
e. None of the above.
4. A competitive firm in long-run equilibrium will not
a. produce where average total costs are falling.
b. price discriminate among units of output.
c. price discriminate among buyers.
d. change price to increase profit, or be able to lower costs by producing more output.
e. all of the above
Explanation / Answer
(1) (b)
If demand curve is perfectly elastic, an increase in tax by $N will mean that producers will bear the entire $N tax burden, so effective price received by producers will decrease by exactly $N.
(2) (d)
Monopolist maximizes profit by equating Marginal revenue (MR) with Marginal cost (MC). Since fixed cost does not affect MC, after increase in fixed cost, MR & MC remains the same, so profit maximizing P and Q remains the same, and Revenue (= P x Q) remains the same.
(3) (b)
As new firms enter a market, each firm's individual demand decreases. Since market supply increases, market price decreases, and each firm's profit keeps decreasing.
(4) (e)
In long run equilibrium, price equals minimum average total cost. So firm will not produce at the decreasing portion of the ATC curve. Also, price and cost structure remains the same.
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