Figure 3.17
(Figure 3.17) Figure 3.17 shows the effect of a government subsidy. Which of the
following statements is TRUE?
I. The area of the deadweight loss is C + D + E + G + H + I.
II. The subsidy causes producer surplus to increase from area F + G + H to area F + G
+ H + I.
III. The government’s cost of the subsidy is area B + C + D + E + F + G + H + I.
IV. With the subsidy, consumer surplus is area A + B + C + D + E.
A) I and IV
B) I and III
C) III only.
D) II, III, and IV
Bumper-to-bumper traffic on public non-toll roads, a(n) ______ good, is an example of
the ______.
A) nonexcludable; free-rider problem
B) excludable; free-rider problem
C) excludable; tragedy of the commons
D) nonexcludable; tragedy of the commons
A consumer’s bundle includes good X and good Y. Determine whether the following
statements are true, false, or uncertain.
a. If good X is a normal good and the price of good X rises, the consumer will buy more
of good X.
b. If good X is an inferior good and the price of good X rises, the consumer will buy less
of good X.
c. If good X is a Giffen good and the price of goodX falls, the consumer will buy less of
good X.
Figure 13.1
(Figure 13.1) The risk premium is:
A) $24,160.
B) $9,100.
C) $45,000.
D) $35,900.
A profit-maximizing skeet club, which segments its market, charges juniors $4 per
round based on their price elasticity of demand of “2.0. Its adult shooters have a price
elasticity of demand of “1.4. The marginal cost per round is constant and does not vary
by the shooter’s age. What price does the skeet club charge adult shooters?
A) $7
B) $8
C) $6
D) $5.75
The First Welfare Theorem states that:
A) perfectly competitive markets in general equilibrium distribute resources
Pareto-efficiently.
B) all markets in general equilibrium”from perfect competitive to monopoly”distribute
resources Pareto-efficiently.
C) only monopoly markets in general equilibrium distribute resources
Pareto-efficiently.
D) perfectly competitive markets in general equilibrium distribute resources
Pareto-efficiently, even in the face of asymmetric information, externalities, and public
goods.
Table 13.7
(Table 13.7) What is the expected value of the benefit payout?
A) $1.33 million
B) $1 million
C) $2.2 million
D) $2.5 million
The market for soybeans is characterized by = 18 ” Ps and = Ps ” 0.5Pc, where
Qs is the quantity of soybeans in millions of bushels, Psis the price per bushel of
soybeans, and Pcis the price per bushel of corn. The market for corn is characterized by
= 18 ” Pc and = Pc” 5Ps, where Qcis the quantity of corn in millions of bushels.
Suppose the government strengthens the mandate for the use of corn-based ethanol,
increasing the demand for corn by 6 million bushels at any given price. In general
equilibrium, what is the equilibrium price and quantity of soybeans?
A) Ps= $14.00 and Qs = 4 million bushels
B) Ps= $12.80 and Qs = 5.2 million bushels
C) Ps = $13.50 and Qs = 7 million bushels
D) Ps = $10.40 and Qs= 6 million bushels
Outlet stores frequently advertise huge discounts off base prices. Although nobody
actually pays the base price, the large discount may convince consumers that they are
getting a good deal. The outlet stores are using the high base prices as a form of:
A) shoveling.
B) anchoring.
C) yanking.
D) fanning.
Fran is considering permanently closing down her beauty salon. A consultant advises
her that if she stays open for business, she will have future operating revenues of
$300,000 and future operating costs of $280,000. In addition, Fran has paid $40,000 for
salon fixtures that, if necessary, can be resold for $15,000 after closing the beauty salon.
a. What is the value of Fran’s beauty salon if it remains open?
b. What is the value of Fran’s beauty salon if she closes it permanently?
c. Explain whether Fran should close down the beauty salon permanently.
Figure 10.13
(Figure 10.13) A pharmaceutical company sells its pills in a foreign and domestic
market.
a. Suppose the pharmaceutical company uses segmenting. What price should it charge
in each market? How many pills are sold in each market?
b. If the pharmaceutical company must charge the same price in all markets, what price
will it set? How many pills will it sell?
Consumers value high-quality dirt bikes at $6,000 and value low-quality dirt bikes at
$2,500. The supply of used high-quality dirt bikes is QH= 5PH ” 2,000, while the supply
of used low-quality dirt bikes is QL= PL ” 1,000. Potential buyers cannot distinguish the
difference between a used high-quality and used low-quality dirt bike. Buyers base their
willingness to pay on the belief that half the used dirt bikes are high-quality. How many
high-quality and low-quality dirt bikes will be offered at the buyers’ willingness to pay?
A) 125 high-quality dirt bikes and 3,250 low-quality dirt bikes
B) 2,000 high-quality dirt bikes and 2,000 low-quality dirt bikes
C) 450 high-quality dirt bikes and 900 low-quality dirt bikes
D) 3,000 high-quality dirt bikes and 1,500 low-quality dirt bikes
Figure 10.1
(Figure 10.1) The deadweight loss under monopoly and perfect price discrimination is
______ and ______, respectively.
A) $16; $0
B) $8; $16
C) $0; $32
D) $8; $0
Figure 3.9
(Figure 3.9) Suppose the government enacts a price ceiling of $250 per ton. Which of
the following statements are TRUE?
I. Consumer surplus before the price ceiling = A + B + C.
II. Consumer surplus after the price ceiling = D + E.
III. Producer surplus before the price ceiling = D + E + G.
IV. Producer surplus after the price ceiling = F.
A) I, II, and IV
B) I and IV
C) II and III
D) II, III, and IV
A firm with market power has the inverse demand curve P = 160 ” 4Q and the marginal
cost curve MC = 8Q. If the firm decides to practice perfect price discrimination,
consumer surplus will:
A) increase from $40 to $60.
B) increase from $120 to $200.
C) decrease from $80 to $20.
D) decrease from $200 to $0.
Figure 6.15
Answer the following questions.
a.Define an isoquant.
b.In this figure, what are the things that are wrong with the isoquants?
Kyle’s utility function is U = 4X + 3.7Y, where X is units of good X and Y is units of
good Y. What is the marginal utility of good X?
A) 4X + 3.7
B) 4
C) 0.3X
D) U/4
Let Π = inflation rate, r = real interest rate, and i = nominal interest rate. Which of the
following statements is TRUE?
A) Π= (r)(i)
B) Π= i + r
C) r = i ” Π
D) i = r “ Π
The market for soybeans is characterized by = 16 ” Ps+Pcand = Ps, where Qsis
the quantity of soybeans in millions of bushels, Psis the price per bushel of soybeans,
and Pc is the price per bushel of corn. The market for corn is characterized by = 40
” Pc + Ps and = Pc, where is the quantity of corn in millions of bushels. Suppose
the government eliminates the ethanol mandate, decreasing the demand for corn by 12
million bushels at any given price. What happens to the general equilibrium quantity of
corn from removing the corn-ethanol mandate?
A) The general equilibrium quantity of corn decreases from 32 million to 24 million
bushels.
B) The general equilibrium quantity of corn decreases from 32 million to 20 million
bushels.
C) The general equilibrium quantity of corn decreases from 20 million to 11 million
bushels.
D) The general equilibrium quantity of corn decreases from 24 million to 14 million
bushels.
Figure 7.4
(Figure 7.4) What could cause the movement from TC1 to TC2?
A) a decrease in the firm’s fixed costs of production
B) economies of scale
C) a technological change that increases the productivity of inputs
D) an increase in input prices
Jim owns Nickelback Bar, a bar located in a strip mall that is dedicated to the rock band
Nickelback. Jim pays a $3,000 monthly lease to operate out of the strip mall. If Jim
breaks the lease before the end of the calendar year, he is required to pay $2,000 for
each of the remaining months. Jim purchased $40,000 of Nickelback-themed bar
fixtures; the fixtures have absolutely no value in any alternative use. Each weekend Jim
contracts with a security company that provides four security guards for $1,200.
a. Does the $1,200 payment to the security firm represent a variable cost, sunk cost, or
avoidable fixed cost? Explain your answer.
b. Suppose that at the end of August Jim permanently shuts down his bar. What are
Jim’s sunk costs?
Figure 8.6
(Figure 8.6) This firm maximizes profit by producing _______ units of output.
A) 3
B) 7
C) 10
D) 12
Figure 4.5
(Figure 4.5) Which of the following statements is TRUE?
I. The consumer prefers any point on the indifference curve U2 to any point on
indifference curve U1.
II. The consumer receives 20% more satisfaction from consuming along indifference
curve U2 than indifference curve U1.
III. This consumer is not willing to give up units of good X for more units of good Y.
A) I and III
B) I only
C) II only
D) I and II
Figure 5.20
(FFigure 5.20) The cross-price elasticity of demand for good X with respect to good Y is
______ in panel (a) and ______ in panel (b).
A) zero; negative
B) negative; positive
C) positive; negative
D) negative infinity; positive
A donut shop has a production function given by Q = 50K1/3L1/2, where Q is the
number of donuts produced per hour, K is the number of donut fryers (which is fixed at
eight in the short run), and L is the number of employed workers. How many donuts
can be produced per hour with four workers in the short run?
A) 200
B) 167
C) 320
D) 84
Answer the following questions.
a. What is backward induction?
b. What is a grim trigger strategy?
c. What is a tit-for-tat strategy?
Which of the following is an example of a sunk cost fallacy?
A) “I paid $85 for this wool sweater, but it is too scratchy on my skin, so I think I’ll give
it to my mother-in-law.”
B) “I’m not going to allow the sacrifice of 2,527 troops who have died in Iraq to be in
vain by pulling out before the job is done.”
C) “I will not buy an Under Armour hoodie until it goes on sale for at least 25% off.”
D) “I’m going to buy another bag of popcorn because this popcorn is burnt.”
Figure 9.13
(Figure 9.13) Answer the following questions.
a. Suppose the figure represents a perfectly competitive industry. What effect does the
flattening of the demand curve have on the equilibrium price and quantity?
b. Suppose the figure represents a monopolist. What is the monopolist’s
profit-maximizing price and quantity for demand curve D1 and D2?
c. Redo your answer to b, assuming marginal cost changed to MC = 2Q.
Table 12.3
(Table 12.3) The table shows the initial cost outlays of two versions of the Ford Escape
and their estimated annual fuel costs. Stu is not sure whether he wants the hybrid or
nonhybrid model. Although more expensive, the hybrid model has better gas mileage
and would save $890 of gas per year. Assume both cars are worthless after six years. At
a 7% interest rate, what is the net present value of the net cost difference between the
hybrid and nonhybrid model if the hybrid is purchased?
A) $450.10
B) “$257.78
C) “$48.23
D) $175.96
Consider two firms engaged in Bertrand competition with differentiated goods and zero
marginal costs:
Firm A’s demand curve: qA = 60 ” 0.50PA+ 40PB
Firm B’s demand curve: qB = 72 ” 0.50PB + 0.40PA
In a Nash equilibrium, approximately how much profit does Firm A earn?
A) $4,800
B) $3,210
C) $6,040
D) $5,588
Figure 6.11
(Figure 6.11) Which of the following statements is TRUE?
I. If labor is relatively cheaper than capital, the firm will produce at point B. II. If
capital is relatively more expensive than labor, the firm will produce at point A. III. At
point A, the MRTSLK= W/R.
I. If labor is relatively cheaper than capital, the firm will produce at point B.
II. If capital is relatively more expensive than labor, the firm will produce at point A.
III. At point A, the MRTSLK= W/R.
A) II and III
B) III only
C) I and III
D) I and II
Which of the following statements is TRUE?
I. Moral hazard can either increase or decrease the likelihood of an insurance claim.
II. Moral hazard is the result of asymmetric information.
III. Insurance coverage creates moral hazard because people don’t respond to the
incentives created by the coverage.
A) I only
B) I and II
C) III only
D) II only
Bucky has $20 to spend on bowling and billiards. The prices of bowling and billiards
are $4 and $1 per game, respectively. Graph Bucky’s budget constraint, assuming she
has a coupon for two free games of bowling. Place bowling on the x-axis and billiards
on the y-axis.