Practice Questions from Chapter 1

First, three true-false questions:

1. A competitive equilibrium results in the largest possible number of transactions

in which both buyers and sellers make a profit.

2. A market equilibrium is said to be inefficient if some other possible arrangement

of trades will result in higher total profits for all participants.

3. In a competitive equilibrium, the Buyer Value of any buyer who buys a unit of

the good is greater than or equal to the Seller Cost of any seller who sells a unit of the good.

Here is a set of multiple-choice questions that you can use to practice drawing supply and demand curves

and finding competitive equilibrium prices, quantities, and profits.

    4.   A small tropical island's banana market has 60 banana growers
        and 40 banana consumers. Each banana grower can sell at most one
        sack of bananas. Each consumer can consume either 0 or 1 sack of
        bananas. There are 35 low-cost banana producers, each of whom can
        produce bananas at a cost of $15 per sack and 25 high-cost banana
        producers, each of whom can produce bananas at a cost of $30 per
        sack. There are 20 consumers who are willing to pay up to $40 a
        sack and 20 consumers who are willing to pay up to $20 a sack for
        bananas. What is the competitive equilibrium price of bananas on
        this island?

        (a) $20
        (b) $30
        (c) $15
        (d) $35
        (e) $40

    5.  What is the competitive equilibrium number of sacks of
        bananas sold on this island?

        (a) 35
        (b) 25
        (c) 20
        (d) 15
        (e) 50

    6. In competitive equilibrium, the total amount of profit
        made by banana growers will be:

        (a) $335
        (b) $125
        (c) $275
        (d) $225
        (e) $175

Here is yet another version of the banana market question.

    7.   A small tropical island's banana market has 35 banana growers
        and 45 banana consumers. Each banana grower can sell at most one
        sack of bananas. Each consumer can consume either 0 or 1 sack of
        bananas. There are 10 low-cost banana producers, each of whom can
        produce bananas at a cost of $15 per sack and 25 high-cost banana
        producers, each of whom can produce bananas at a cost of $30 per
        sack. There are 30 consumers who are willing to pay up to $40 a
        sack and 15 consumers who are willing to pay up to $20 a sack for
        bananas. What is the competitive equilibrium price of bananas on
        this island?

        (a) $20
        (b) $30
        (c) $15
        (d) $35
        (e) $40

    8.  What is the competitive equilibrium number
        of sacks of bananas sold on this island?

        (a) 10
        (b) 25
        (c) 30
        (d) 15
        (e) 50

    9. In competitive equilibrium, the total amount of profit
        made by banana growers will be:

        (a) $285
        (b) $100
        (c) $250
        (d) $200
        (e) $150

How about a little practice with the algebra of supply and demand?

10. The supply function for fresh strawberries is given by the equation P_s(Q)=2+2Q.

The demand function is given by the equation P_d(Q)=134-4Q where Q is the number of

crates of strawberries sold. In competitive equilibrium, how many crates of strawberries

will be sold?

(a) 19

(b) 22

(c) 27

(d) 46

(e) none of the above

11. In the competitive equilibrium described in problem 10, what is the competitive equilibrium price?

(a) $20

(b) $46

(c) $23

(d) $132

(e) none of the above

Answers:

1. F

2. T

3. T

4. A

5. A

6. E

7. B

8. C

9. E 

10. B

11. B