Suppose the market for sprouts is in long-run equilibrium. In the short run, what will
happen if there is an E.coli outbreak that causes a decrease in the demand for sprouts?
A) The marginal cost curve will shift downward for each producer, leaving prices
unchanged.
B) The market price of sprouts will fall, causing each firm to produce fewer sprouts.
C) Existing firms will expand output to make up for the decrease in demand.
D) The marginal cost curve will shift upward for each producer, causing prices to rise
and profits to fall.
Chauncey’s Burgers sells hamburgers in a monopolistically competitive industry.
Chauncey faces an inverse demand curve of P = 9 ” 0.4Q, where Q is measured in
hamburgers per hour and P is the price per hamburger. The total cost is TC = 20 + Q,
and marginal cost is constant at $1. What is Chauncey’s hourly profit?
A) $15
B) $20
C) $35
D) $70
Figure 8.24
(Figure 24) Answer the following questions.
a. Identify the firm’s producer surplus by shading in the appropriate area.
b. Calculate the value of the firm’s producer surplus.
In a small island population, half the people are healthy and half are sick. The annual
expected medical claims of the healthy and sick are $200 and $4,000, respectively.
Assume that the health insurance company does not know whether people are healthy
or sick before they buy insurance. What happens if the health insurance company
charges an annual premium of $2,100 (the average expected claim)?
A) Only the sick would buy insurance, causing future premiums to increase.
B) Only the healthy would buy insurance, causing future premiums to decrease.
C) Only the sick would buy insurance, causing future premiums to decrease.
D) Only the healthy would buy insurance, causing future premiums to increase.
Figure 11.4
(Figure 11.4) In a Cournot market with two firms, the inverse market demand curve is
P = 20 ” 0.5Q, where Q = q1 + q2 (Firm 1‘s output = q1; Firm 2’s output = q2). If Firm 2
produces 20 units of output, Firm 1’s residual marginal revenue curve is depicted in:
A) panel (a).
B) panel (b).
C) panel (c).
D) panel (d).
Who are the economists who accounted for racial prejudice in utility functions?
A) Gary Becker and Kevin Murphy
B) William Jevons and Albertus Magnus
C) Richard Cantillon and Jeremy Bentham
D) Edwin Chadwick and David Ricardo
A firm should ______ output whenever MR > MC because ______.
A) reduce; revenues will rise by more than costs from producing less output, increasing
the firm’s profit
B) reduce; total revenues exceed total costs
C) expand; revenues will rise by more than costs from selling additional units of output,
increasing the firm’s profit
D) leave output unchanged; selling additional units of output will cause marginal
revenue to increase by a smaller amount than marginal cost
What interest rate would make a person indifferent between receiving $1,250 today and
$1,500 at the end of one year?
A) 16.7%
B) 12.5%
C) 24%
D) 20%
Nominal loss aversion is a:
A) phenomenon whereby simply possessing an item increases its value.
B) situation in which a consumer prefers to avoid economic losses over acquiring
economic gains.
C) bias, whereby a person places too much emphasis on the immediate future, while
ignoring the recent past.
D) bias, whereby a person places too much emphasis on the immediate future while
ignoring the distant future.
Figure 17.2
(Figure 17.2) The graph shows the current demand and supply curves for Bryce
Harper’s rookie baseball card. If baseball card collectors, who are nominally loss averse,
originally paid $6 for Harper’s card, the current market for Harper’s card will be
characterized by:
A) 3 million cards being traded.
B) an excess supply of 3 million cards.
C) an excess demand of 3 million cards.
D) 5 million cards being traded.
Consider a simultaneous game played by two players. Each player has a choice between
playing two strategies: Friend or Foe. If both players play Friend, they each win $1,000.
If both players play Foe, they each win nothing. If one player plays Foe and the other
player plays Friend, the player playing Foe wins $2,000 and the other player wins
nothing. Which of the following statements is TRUE?
I. This game has a mixed-strategy equilibrium.
II. This game has a pure-strategy equilibrium.
III. The Nash equilibrium is for both players to play Friend.
A) I and II
B) I, II, and III
C) III and IV
D) II only
Explain the behavior bias being made in the following scenarios.
a. A baseball team offers a lottery for the random chance to buy season tickets at a deep
discount. The fans who paid full price for season tickets are more likely to attend games
than the fans who bought discounted season tickets.
b. A person prefers $50 today over $100 one year from now but prefers $100 in six
years over $50 in five years.
c. A person is more likely to drive across town to save $5 off the purchase of a $10
calculator than drive across town to save $5 off the purchase of a $100 coat.
The demand and supply of capital are given by QD = 50 ” 8r and QS = 4r ” 10, where Q
is the quantity of capital in millions of dollars and r is the interest rate measured as a
percentage. What is the equilibrium quantity of capital?
A) $5 million
B) $60 million
C) $10 million
D) $12 million
What is the substitution effect of a price change?
A) Consumers will consume more of the good whose relative price has risen and less of
the good whose relative price has fallen.
B) When prices fall, consumers will have more purchasing power and buy more of the
good whose price has fallen.
C) When prices fall, consumers will have more purchasing power and buy more of all
goods.
D) Consumers will consume less of the good whose relative price has risen and more of
the good whose relative price has fallen.
The income effect of a price change predicts that a:
A) fall in a good’s price will increase consumer purchasing power, leading to an
increased consumption of normal goods.
B) fall in a good’s price will decrease consumer purchasing power, leading to a
decreased consumption of normal goods.
C) rise in a good’s price will increase consumer purchasing power, leading to an
increased consumption of inferior goods.
D) rise in a good’s price will increase consumer purchasing power, leading to a
decreased consumption of inferior goods.
The notion that market participants can negotiate an efficient market outcome,
assuming negotiating is costless, is known as the:
A) Coase theorem.
B) blanket theorem.
C) acceptance principle.
D) Dranove principle.
Suppose that a publisher is considering how to pay an author for writing a book. The
publisher would like the author to put forth his maximum effort, but the publisher is
unable to observe the author’s effort.
a. In this example, who is the principal and who is the agent?
b. What are the moral hazard implications of paying an author a fixed fee of $50,000 for
writing a book? Is there an alternative way of paying the author that would lead to
greater effort?
Figure 2.1
(Figure 2.1) Mathematically, the demand curve D1 is described by the equation:
A) Q = 0.75 ” P.
B) Q = 6 ” 0.75P.
C) Q = 8 ” 1.33P.
D) P = 6 ” 8P.
Ney Inc. and ARN Parts are the only two producers of bulldozer bucket teeth. The
owners of the two firms conspire to charge a monopoly price, with each firm serving
half the market. The market inverse demand curve is P = 1,000 ” 10Q, where Q
measures the daily number of sets of bulldozer bucket teeth and P is the price per set.
The marginal cost of production for either firm is constant at $200, and fixed costs are
zero.
a. What is each firm’s profit?
b. Now suppose that Ney Inc. reneges on the cartel agreement and decides to produce
an additional 10 sets of bucket teeth per day. What is each firm’s new profit?
The market for cod liver oil pills is characterized by the following demand and supply
equations: QD = 100 ” 4P and QS = “20 + 2P, where P is the price per bottle and Q is
the quantity of bottles.
a. What is the equilibrium price and quantity?
b. If consumers want to purchase 60 more bottles at any given price, what is the new
equilibrium price and quantity?
Which of the following is an example of Stackelberg competition?
A) Firestone offers consumer rebates to keep its tire prices below Goodyear’s.
B) A price war between American Airlines and United Airlines leads to both airlines
setting ticket prices equal to marginal cost.
C) Natura Pet Products introduced the first grain-free dog food; eventually, other dog
food companies entered this market but had to limit their production plans, given
Natura Pet Products’ sizeable market share.
D) GlaxoSmithKline and Pfizer compete in the HIV drug market by annually
announcing their production quotas during the second week of January.
Figure 3.7
(Figure 3.7) At a price ceiling of $8, there is a shortage of ______ and a deadweight
loss of ______.
A) 200 pounds; $1,200
B) 500 pounds; $400
C) 300 pounds; $600
D) 300 pounds; $300
Suppose the demand curve for steel is Q = 100 ” P, where P is the price per unit of steel
and Q measures millions of units of steel. The private marginal cost of producing steel
is MC = 5Q + 40, while the external marginal cost of producing steel is $12. In a
perfectly competitive steel industry, the deadweight loss is:
A) $12 million.
B) $2 million.
C) $750,000.
D) $200,000.
The market for toilet paper is characterized by the following inverse demand and supply
equations:
P = 100 ” Q
P = MC = 2Q ” 3
where P is the price per roll of toilet paper and Q measures millions of rolls of toilet
paper. The external marginal cost is $0.30 for each roll of toilet paper produced. The
socially optimal price of toilet paper is ______ higher than the price under perfect
competition.
A) $0.40
B) $0.30
C) $0.20
D) $0.10
Table 15.3
(Table 15.3) You are the owner of a bowling alley and need to hire a manager to operate
the facility. Because you live far away from the bowling alley, you will not be able to
observe the manager’s effort. Your profit depends on the state of the economy and the
manager’s effort level, as the table shows. A manager’s utility depends on his salary and
effort level and is summarized as follows.
Utility with low effort: U = salary
Utility with high effort: U = salary ” 8,000
a. If the owner pays the manager a salary of $50,000, how much effort will the manager
put forth? What is the owner’s expected profit net of the manager’s salary?
b. If the owner pays the manager a flat salary of $30,000 plus 10% of gross profits, how
much utility will the manager receive, providing low effort and high effort? How much
effort will the manager put forth?
c. Is the owner better off paying the manager a flat salary of $50,000 or a flat salary of
$30,000 with 10% gross profit sharing?
Table 14.4
(Table 14.4) In this small economy, there are a total of 4 units of labor and 4 units of
capital that can be used between the boat and car industries.
a. Suppose that the boat industry is using 3 units of labor and 2 units of capital, leaving
the car industry with 1 unit of labor and 2 units of capital. What is the MRTSLK in the
boat industry and in the car industry?
b. If the wage rate (W) in the economy is $100 and the rental rate of capital (R) is $200,
what is a Pareto-efficient allocation of labor and capital between the two industries?
In the market for good X, demand is QD = 6,000 ” 0.8P and supply is QS = 0.4P ” 300.
a. What is the equilibrium price and quantity?
b. Solve for the inverse demand and inverse supply equations.
c. Suppose that an increase in consumer income makes consumers willing to pay $500
more per unit of good X. Also, a technological breakthrough in production makes firms
willing to sell good X for $500 less per unit. What is the new equilibrium price and
quantity?
Figure 11.3
(Figure 11.3) The graph depicts a four-firm industry, an industry with no fixed costs.
Suppose that the four firms are colluding by acting like a monopolist, with each firm
producing one-fourth of the market output. If one of the firms cheats on the cartel
agreement and produces an additional unit of output, the profits of each of the
noncheating firms will:
A) increase from $36 to $40.
B) decrease from $16 to $14.
C) increase from $8 to $12.
D) decrease from $18 to $12.
There are only three consumers in the market, and their demand equations are as
follows: (1) Q = 5 ” 0.5P, (2) Q = 10 ” P, and (3) Q = 2 ” 0.2P. What is the equation for
the market demand curve?
A) P = 30 ” 8Q
B) Q = 3.75 ” 0.125P
C) Q = 17 ” 1.7P
D) Q = 30 ” 2P
Which of the following statements is FALSE?
A) Utility is the difference between the consumer’s assets and liabilities.
B) One person’s utility cannot be compared to another person’s utility.
C) A utility function gives the relationship between a consumer’s well-being and the
quantities of goods consumed.
D) Inputs into a utility function may include wool socks, DVD rentals, roller coaster
rides, asparagus, and Sunday church services.
In a Cournot market with two firms, the inverse market demand curve is P = 50 ” 2Q,
whereQ = q1 + q2 (Firm 1’s output = q1; Firm 2’s output = q2). If Firm 2 produces 10
units of output, what is Firm 1’s residual demand curve?
A) P = 30 ” 2q1
B) P = 40 ” 2q1
C) P = 10 ” 2q1
D) P = 40 ” q1