In an exchange economy A‘s utility is given byUA = x + yand B‘s byUB = min[x,
2y].The initial endowment for A is x = 10 y = 8 and for B, x = 8 y = 4. To reach the
contact curve, these individuals must
a. Trade 1x for 1y.
b. Trade 2x for 1 y.
c. Trade 1x for 2y.
d. Do nothing, since they are already on the contract curve.
The following definitions for an individual who consumes only two goods:
x = share of income spent on x.
y = 1 -sx .
= price elasticity of demand for x.
= price elasticity of demand for y.
ex, I = income elasticity of demand for x.
ey, I = income elasticity of demand for y.
= cross price elasticity of demand for x.
= cross price elasticity of demand for y.
If the demand for x is given by , which of parameter values hold?
a. .
b. .
c. .
d. None of these relations hold since the demand function is not homogeneous of degree
zero in
Relative to single price policy third degree price discrimination
a. always reduces welfare.
b. always increases welfare.
c. may increase welfare if total output falls.
d. may increase welfare if total output rises.
Which of the following factors might explain why the long-run equilibrium number of
firms can in some instances exceed the socially optimal number?
a. The appropriability effect (the increase in consumers surplus following entry is not
“appropriated” by entrants).
b. The feedback effect (an increase in the number of firms increases the
competitiveness of the market).
c. The business-stealing effect (entry reduces rival firms’ profits, a social loss
that entrants do not account for).
d. The ratchet effect (the more profits the entrants earn, the more the stockholders
expect them to earn in the future).
The strategy profile in which both players remain silent in the Prisoners’ Dilemma can
be described as
a. nonPareto optimal and unstable.
b. Pareto optimal and unstable.
c. nonPareto optimal and stable.
d. Pareto optimal and stable.
The price elasticity of demand for a linear demand curve follows the pattern (moving
from high prices to low prices)
a. elastic, unit elastic, inelastic.
b. unit elastic, inelastic, elastic.
c. inelastic, unit elastic, elastic.
d. elastic, inelastic, unit elastic.
For any given output level, a firm’s longrun costs
a. are always greater than or equal to its shortrun costs.
b. are usually greater than or equal to its shortrun costs except in the case of
diminishing returns to scale.
c. are always less than or equal to its shortrun costs.
d. are usually less than or equal to its shortrun costs except in the case of diminishing
returns to scale.
Profit functions are homogeneous of degree
a. zero in input and output prices
b. zero in input prices.
c. one in input and output prices.
d. one in input prices.
An individual whose utility function is given by (where
Wi is wealth in state i) will
a. never gamble no matter how favorable the odds.
b. only gamble if the expected value of the bet is positive.
c. gamble if the bet is not too unfair.
d. always gamble, no matter how unfavorable the odds.
Technical progress will
a. shift a firm’s production function and its related cost curves.
b. not affect the production function, but may shift cost curves.
c. shift a firm’s production function and alter its marginal revenue curve.
d. shift a firm’s production function and cause more capital (and less labor) to be hired.
The Cobb-Douglas production function yields the cost function C = (where
B is a constant).
a. .
b. .
c. .
d. .
For the “Composite Commodity Theorem” to hold, all goods in the composite must
a. have constant prices.
b. have constant relative prices.
c. be used in fixed proportions.
d. be net complements.
With the Cobb-Douglas utility function , x and y are
a. net and gross substitutes.
b. net substitutes and gross complements.
c. net substitutes and neither gross substitutes or complements.
d. net and gross complements.
The shape of a firm’s longrun average cost curve is determined by
a. the degree to which each input encounters diminishing marginal productivity.
b. the underlying nature of the firm’s production function when all inputs are able to be
varied.
c. how much the firm decides to produce.
d. the way in which the firm’s expansion path reacts to changes in the rental rate on
capital.
Median voter decisions may not yield efficient allocations of resources because
a. votes are allocated differently than income.
b. externalities may cause private and social costs to diverge.
c. free riders will cause too few public goods to be produced.
d. the median voter may not be the same as the mean voter.
Left to their own, private markets tend to
a. underallocate resources to public goods.
b. allocate the economically efficient amount of resources to public goods.
c. overallocate resources to public goods.
de Condorcet’s Paradox occurs when
a. majority rule voting cycles among alternatives.
b. majority rule voting results in decisions that are not Pareto optimal.
c. point voting yields indeterminate results.
d. point voting results in decisions that are not Pareto optimal.
In a two-good exchange economy, A‘s utility is given by and B‘s utility by
Along the contract curve x/y for B will be times x/y for A.
a. 4.
b. 3.
c. 2.
d. 1.
Indifference curves
a. are nonintersecting.
b. are contour lines of a utility function.
c. are negatively sloped.
d. all of these are correct.
A subgame-perfect equilibrium
a. is not a Nash equilibrium; it is a refinement of Nash equilibrium.
b. is an equilibrium concept used in simultaneous games.
c. is a special sort of Nash equilibrium.
d. can be ruled out using backward induction.
A price discriminating monopsonist could increase its profits by
a. paying the minimum wages possible.
b. hiring as little capital as possible.
c. paying lower wages to workers with inelastic supply of labor curves than to workers
with elastic curves.
d. paying lower wages to workers with elastic supply of labor curves than to workers
with inelastic curves.
The following definitions for an individual who consumes only two goods:
x = share of income spent on x.
y = 1 -sx .
= price elasticity of demand for x.
= price elasticity of demand for y.
ex, I = income elasticity of demand for x.
ey, I = income elasticity of demand for y.
= cross price elasticity of demand for x.
= cross price elasticity of demand for y.
Homogeneity of the demand function is shown by:
a. .
b. .
c. .
d. .
If utility is given by , then the person’s MRSat the point x= 5, y= 2 is
given by
a. 0.4.
b. 1.0.
c. 2.5.
d. 5.0.
To reach an economically efficient output level, the size of an excise tax imposed on a
firm generating a negative externality should be
a. the firm’s marginal cost.
b. the social marginal cost.
c. the difference between the social marginal cost and the firm’s marginal cost.
d. the sum of the social marginal cost and the firm’s marginal cost.
In an economy consisting of only two goods, corn and cloth, the amount of extra cloth
that can be produced efficiently if corn output is reduced by one unit is equal to
a. the rate of technical substitution for corn divided by the rate of technical substitution
for cloth.
b. the rate of technical substitution for cloth divided by the rate of technical substitution
for corn.
c. the marginal cost of producing cloth divided by the marginal cost of producing corn.
d. the marginal cost of producing corn divided by the marginal cost of producing cloth.
In Fisher’s model of the determination of the rate of return, the price of a “future good”
is
a. less than the price of a current good if the interest rate is negative.
b. equal to the price of a current good if the interest rate is positive.
c. greater than the price of a current good if the interest rate is positive.
d. less than the price of a current good if the interest rate is positive.
If a firm is a monopsonistic hirer of labor
a. its marginal expense for labor is greater than the market wage.
b. its marginal expense for labor is equal to the market wage.
c. its marginal expense for labor is less than the market wage.
d. it is a price taker in the labor market.
If the price of x falls, the budget constraint
a. shifts outward in a parallel fashion.
b. shifts inward in a parallel fashion.
c. rotates outward about the xintercept.
d. rotates outward about the yintercept.
Longrun elasticity of supply is defined as
a. percentage change in quantity demanded in the long run divided by percentage
change in price.
b. percentage change in price divided by percentage change in quantity demanded in the
long run
c. percentage change in quantity supplied in the long run divided by percentage change
in price.
d. percentage change in price divided by percentage change in quantity demanded in the
long run.
If a price-taking firm’s production function is given by , its supply function is
given by
a. q = 2pw.
b. q = /2w.
c. q = 2/w.
d. q = 2w/.
Demand functions are “homogeneous of degree zero in all prices and income.” This
means
a. a proportional increase in all prices and income will leave quantities demanded
unchanged.
b. a doubling of all prices will not alter consumption decisions.
c. prices directly enter individuals’ utility functions.
d. an increase in income will cause all quantities demanded to increase proportionately.
Consider four possible benefits of a water resources project:
I. Provides employment to construction workers currently building houses.
II. Provides electric power to the market.
III. Provides reduced flood risk to individuals living along the river.
IV. Raises the profits of MacDonald’s stands in the area which serves construction
workers.
According to the opportunity cost notion of costbenefit analysis, which of these are true
benefits?
a. All of them.
b. I, II, and III, but not IV.
c. I and III, but not II and IV.
d. II and III, but not I and IV.
e. II, but not I, III, and IV.