Suppose that Mystic Energy and E-Storm are the only two producers of hydrogen fuel
cells. The market inverse demand curve for hydrogen fuel cells is P = 1,300 ” 0.08Q,
where Q is the number of fuels cells per month and P is the price per fuel cell. The
marginal cost is constant at $500. Acting as a cartel, the owners of Mystic Energy and
E-Storm agree to evenly split the market output.
a. How much output does each firm produce?
b. What is the market price per fuel cell?
c. If each firm has fixed costs of $250,000, what is each firm’s profit?
Which assumption(s) allow(s) us to draw indifference curves?
A) The assumptions are cardinal measurement and cardinal ranking.
B) The assumptions are rankability and completeness.
C) The assumption is that the more we have of a good, the less we are willing to give up
to get even more of it.
D) The assumptions are free disposal and more is better.
Which of the following statements violates the basic assumptions of isoquants?
A) Isoquants cannot cross.
B) Isoquants closer to the origin correspond to lower output levels.
C) Diminishing marginal products imply that isoquants are concave to the origin.
D) Isoquants show all combinations of two inputs that can produce a particular quantity
of output.
A monopoly market is characterized by the inverse demand curve P = 1,200 ” 40Q and
a constant marginal cost of $200. If the marginal cost of production rises to $400, what
happens to the profit-maximizing price and output level?
A) The profit-maximizing output level decreases by 6 units and the price rises by $100.
B) The profit-maximizing output level decreases by 2.5 units and the price rises by
$100.
C) The profit-maximizing output level increases by 4 units and the price rises by $200.
D) The profit-maximizing output level decreases by 8 units and the price rises by $200.
Figure 2.2
(Figure 2.2) If the price of turkey is $4 per pound, ______ pounds of turkey will be
offered for sale; if the price of turkey is $7 per pound, ______ pounds of turkey will be
offered for sale.
A) 3,000; 6,000
B) 0; 6,000
C) 2,000; 5,000
D) 1,000; 8,000
Figure 10.9
(Figure 10.9) Consumer surplus under single-price monopoly and under block pricing
are ______ and ______, respectively.
A) $62.50; $82.50
B) $62.50; $40
C) $80; $120
D) $80; $112.50
In the market for lock washers, a perfectly competitive market, the current equilibrium
price is $5.00 per box. Washer King, one of the many producers of washers, has a daily
short-run total cost given by TC = 190 + 0.20Q + 0.0025Q2, where Q measures boxes
of washers. Washer King’s corresponding marginal cost is MC = 0.20 + 0.005Q. How
many boxes of washers should Washer King produce per day to maximize profit?
A) 280
B) 960
C) 1,450
D) 2,125
Table 13.1
(Table 13.1) At a 7% annual interest rate, what is the present discounted value of the
cash flows?
A) $1,688.08
B) $1,324.86
C) $1,275.33
D) $1,109.70
Figure 9.2
(Figure 9.2) The marginal revenue from expanding output from Q1 to Q2 is represented
by area(s):
A) C.
B) B +C.
C) B “D.
D) A +D “B.
Table 7.2
(Table 7.2) Carl’s Detailing is a small business that travels to people’s homes to
meticulously clean their high-end sports cars. Carl hires detailers (labor) at a wage of
$80 per day per worker. A van that is used to carry cleaning supplies to client homes has
a fixed cost of $20 per day. The table shows the relationship between the number of
cars cleaned and the number of detailers. The marginal cost of cleaning the first car is
______, and the marginal cost of cleaning the third car is ______.
A) $80; $480
B) $80; $240
C) $100; $260
D) $100; $300
Table 16.1
(Table 16.1) According to the table, what is the socially optimal output level?
A) 0
B) 3
C) 4
D) 7
Figure 17.8
(Figure 17.8) If the socially optimal quantity of the good is 200 pounds, there is a
______ externality, so the government should place a ______ per pound to increase
market efficiency.
A) negative; $6 tax
B) negative; $1 tax
C) positive; $6 subsidy
D) positive; $1 subsidy
Figure 4.6
(Figure 4.6) What type of good is good X?
A) perfect substitute
B) perfect complement
C) bad
D) neutral good
Which of the following factors could mitigate the tragedy of the commons?
I. Pigouvian taxes
II. government quotas
III. the elimination of private property rights in a common resource
A) II only
B) I and II
C) III only
D) I, II, and III
In a perfectly competitive market with 2,000 firms, output is zero at prices less than
$10. At prices greater than or equal to $10 and less than $20, each firm will produce
100 units of output. At any price greater than or equal to $20, each firm will produce
300 units of output. As this industry expands output, however, prices of the key inputs
in production increase substantially. The total industry output at a market price of $33
is:
A) between 200,000 and 800,000.
B) 600,000 or less.
C) greater than 600,000.
D) 800,000.
A market is characterized with the inverse demand curve P = 130 ” 1.5Q, and marginal
cost of production is constant at $ If this market is served by a two-firm cartel that
evenly splits the market output, how much output does each firm produce?
A) 20 units
B) 80 units
C) 40 units
D) 65 units
Figure 11.2
(Figure 11.2) The graph depicts the market demand curve for a two-firm industry, an
industry with no fixed costs. Suppose that the two firms are colluding by acting like a
monopolist, with each firm producing half the market output. If one of the firms cheats
on the cartel agreement and produces an additional unit of output, its profits will rise
from:
A) $16 to $18.
B) $32 to $36.
C) $24 to $32.
D) $8 to $12.
Table 10.11
(Table 10.11) Suppose that the marginal cost of a one-way airfare is $30.
a. If the airline practices perfect price discrimination, how many customers will
purchase one-way airfare? How much producer surplus is earned from perfect price
discrimination?
b. Suppose the airline cannot price-discriminate and must sell airfare at a single price.
What price does the airline charge per ticket? How many tickets are sold at this price?
How much producer surplus is earned?
Answer the following questions.
a. Suppose that a firm is currently producing where MR < MC. What would happen to
total revenue, total cost, and profit if the firm produced one less unit of output?
b. Suppose that a firm is currently producing where MR > MC. What would happen to
total revenue, total cost, and profit if the firm produced one more unit of output?
c. If a firm produces the next unit of output, total revenue rises from $12,000 to $13,500
and the marginal cost of the next unit is $1,700. Should the firm produce the next unit
of output?
Sparkling Water Co. has determined that the price elasticity of demand for a case of its
purified water by Michigan residents is “3.0, while the price elasticity of demand by
Florida residents is “2.5. Assume that the marginal cost is constant at $8. What price
should Sparking Water Co. charge Michigan and Florida customers?
A) Customers in Michigan and Florida should be charged $16 a case.
B) Michigan customers should be charged $12 a case and Florida customers charged
$13.33 a case.
C) Michigan customers should be charged $10 a case and Florida customers charged
$14.00 a case.
D) Customers in Michigan and Florida should be charged $13.33 a case.
Suppose a firm with a production function given by Q = K0.25L0.75 produces 1,500 units
of output. The firm pays a wage of $50 per unit and pays a rental rate of capital of $50
per unit. (Note: ). To minimize the cost of producing 1,500 units of output,
the firm should use:
A) 3 times as many units of labor as units of capital.
B) equal amounts of labor and capital.
C) 1.25 times as many units of capital as units of labor.
D) 16 units of capital and 6,814 units of labor.
Figure 10.6
(Figure 10.6) Little Pinehurst Miniature Golf has two types of customers: infrequent
players and frequent players. Using a strategy of second-degree price discrimination,
Little Pinehurst offers customers the choice of paying $15 per round of miniature golf
or $12 per round for a package of 16 rounds. Which of the following statements is
TRUE?
A) The pricing scheme is incentive-compatible for infrequent players but is not
incentive-compatible for frequent players.
B) The pricing scheme is not incentive-compatible for either group of players.
C) The pricing scheme is incentive-compatible for frequent players but is not
incentive-compatible for infrequent players.
D) The pricing scheme is incentive-compatible for both groups of players.
Figure 3.4
(Figure 3.4) The outward shift of the supply curve will cause consumer surplus to
increase from area(s) ______ to area(s) ______.
A) A + B;C + D
B) A + B + C + D;D + F
C) B + C;F
D) A;A + B + C + D
Suppose a company’s owners have a hard time observing whether management is acting
in its own self-interest or making decisions that benefit the company’s profit. This
situation creates a(n):
A) fiduciary responsibility conundrum.
B) principal”agent problem.
C) inefficient-loss-aversion problem.
D) symmetry relationship.
Figure 10.3
(Figure 10.3) Producer surplus using perfect price discrimination is ______ greater than
under perfect competition and ______ greater than under monopoly.
A) $800; $400
B) $1,600; $800
C) $3,200; $1,600
D) $4,800; $3,200
Answer the following questions.
a. At Dippy’s Amusement Park, it takes two workers to operate an amusement park ride.
Each amusement park ride is capable of providing 400 rides per day. Draw the
production isoquant corresponding to 2,000 amusement park rides.
b. Draw two production isoquants: one showing that labor and capital are close
substitutes and the other showing that labor and capital are not close substitutes.
c. Draw a production isoquant corresponding to the production function Q = 2K + L.
Table 12.11
(Table 12.11) In the table, the payoffs represent dollars won or lost. Which of the
following statements is TRUE?
A) The Nash equilibria are (1, “1) and (“1, 1).
B) The dominant strategy for Player B is Pick Odd Number.
C) In mixed strategy, the Nash equilibrium is for both players to randomly select their
strategy with a 50% probability.
D) The pure-strategy equilibrium is (Odd Number, Even Number).
Figure 6.7
(Figure 6.7) Based on the isocost line, the ratio of the wage rate (W) to rental rate of
capital (R) is:
A) 1.5.
B) 4.0.
C) 0.67.
D) 0.50.
Eugene has $100 and spends his income on video blackjack (priced at $1 per game) and
French fries (priced at $1 per basket).
a. Graph Eugene’s budget constraint, putting video games on the vertical axis and
French fries on the horizontal axis. Using an indifference curve, show Eugene’s optimal
consumption bundle at 20 blackjack games and 80 baskets of fries.
b. Suppose that Eugene’s income increases by $50. Adding a new budget constraint and
indifference curve to your original graph, show Eugene’s new optimal consumption
bundle, assuming blackjack and fries are normal goods.
Which of the following statements is TRUE?
I. MC = ΔTC/ΔQ
II. MC = ΔVC/ΔQ
III. Marginal cost falls as diminishing returns to labor set in.
A) I, II, and III
B) I and II
C) II and III
D) I and III
Which of the following statements is TRUE regarding monopolistic competition?
I. Firms produce identical products.
II. There are significant barriers to entry.
III. Firms consider the production decisions of their rivals when setting output levels.
IV. Firms act like monopolies by producing where marginal revenue equals marginal
cost.
A) I, II, and III
B) I and III
C) II only
D) IV only