Consider the following questions on elasticity.
a. If a 3% increase in income leads to a 1% increase in the quantity purchased, what is
the income elasticity of demand? Is the good an inferior good?
b. The price of good Y decreases by 15% and the quantity of good X sold increases by
4%. What is the cross-price elasticity of demand for good X with respect to good Y?
How are good X and good Y related?
c. The demand equation is QD= 15 ” P. What is the price elasticity of demand at P =
$6?
The market inverse demand curve is P = 60 ” Q. There are three firms in this industry
that are acting like a monopolist, evenly splitting the industry output. The marginal cost
is $6. Suppose one of the firms cheats on the agreement and produces an additional unit
of output. What will happen to the cheating firm’s profit from reneging on the cartel
agreement?
A) The firm’s profit will decrease from $50 to $40.
B) The firm’s profit will increase from $34 to $67.
C) The firm’s profit will increase from $230 to $252.
D) The firm’s profit will increase from $243 to $260.
Figure 14.11
(Figure 14.11) Billy Joe’s marginal utility of peaches is given by = C and his
marginal utility of cream is given by = P, where C is cups of cream and P is
pounds of peaches. Bobby Sue’s marginal utility of peaches is given by = 2CP
and her marginal utility of cream is given by = P2.
a. Calculate Billy Joe’s and Bobby Sue’s marginal rate of substitution of peaches for
cream.
b. Suppose Billy Joe has 2 cups of cream and 2 pounds of peaches, and Bobby Sue has
2 cups of cream and 4 pounds of peaches. Is this allocation Pareto-efficient?
c. Suppose Billy Joe has 1 cup of cream and 5 pounds of peaches, and Bobby Sue has 3
cups of cream and 1 pound of peaches. Is this allocation Pareto-efficient?
Figure 3.2
(Figure 3.2) If the price per bag of grapefruit increases from $6 to $8, producer surplus
changes by:
A) $130.
B) $50.
C) $90.
D) $40.
Suppose a firm with a production function given by Q = 30 K0.5L0.5 produces 1,500
units of output. The firm pays a wage of $40 per unit and pays a rental rate of capital of
$640 per unit. How many units of labor and capital should the firm employ to minimize
the cost of producing 1,500 units of output? (Note: )
A) L = 200; K = 12.5
B) L = 625; K = 4.
C) L = 275; K = 8.75
D) L = 150; K = 10
Figure 3.4
(Figure 3.4) The outward shift of the supply curve will cause producer surplus to
increase from area(s) ______ to area(s) ______.
A) B;E + F
B) A + B;D + F
C) A + B + C;D + F
D) C;D
In the market for capital, the discovery of new productive technologies increases the
profitability of investments. What happens to the market interest rate and quantity of
capital?
A) The market interest rate increases and the quantity of capital increases.
B) The market interest rate increases and the quantity of capital decreases.
C) The market interest rate decreases and the quantity of capital decreases.
D) The market interest rate decreases and the quantity of capital increases.
Recreation centers offer a place for young people to play sports and do other activities
at a marginal cost of MC = 0.25Q. The inverse demand curve for recreation centers is
given by P = 10 ” 0.25Q, where P is the price of entry and Q measures hundreds of
entrants. Recreation centers create positive externalities because they help get young
people off the street and engaged in more productive activities. The external marginal
benefits areEMB = 1 + 0.06Q.
a. Without government intervention, what is the number of people who use the
recreation centers?
b. Derive the social demand curve for recreation centers.
c. What is the socially optimal number of entrants?
d. Explain how the government could use a price-based intervention to achieve the
socially optimal number of entrants.
Figure 7.9
(Figure 7.9) Suppose the firm is currently producing at point A. If the firm wants to
produce more output, it will:
A) not be able to because capital is fixed.
B) move to point W in the short run and point Z in the long run.
C) move to a point between W and Z in the short run.
D) move to point Z in the short run and point W in the long run.
Lucy, who has no mechanical knowledge of automobiles, takes her car to a mechanic
because of a pinging noise in the engine. The transaction between Lucy and the
mechanic is characterized by:
A) symmetric information with complete ignorance.
B) asymmetric information.
C) symmetric information.
D) complete information.
Figure 8.15
(Figure 8.15) Which of the following statements is TRUE?
I. Producer surplus = TR ” VC = $25 ” $15
II. The shaded area between the demand curve and marginal cost represents producer
surplus and equals $10.
III. The firm’s profit = $10 ” FC.
A) I, II, and III
B) II only
C) I and III
D) III only
According to Goolsbee and Syverson, how did incumbent airlines respond to the entry
of Southwest Airlines?
A) Incumbent airlines raised airfares just before Southwest’s arrival and then cut
airfares when Southwest began operating.
B) Incumbent airlines lowered airfares just before Southwest’s arrival and then raised
airfares when Southwest began operating.
C) Incumbent airlines began cutting airfare as early as 1 to 2 years before Southwest
began operating from the same airport.
D) Incumbent airlines kept airfares unchanged before Southwest’s arrival and then
lowered airfares when Southwest began operating.
Figure 3.6
(Figure 3.6) The increase in demand caused consumer surplus to change from ______
to ______.
A) $16; $36
B) $8; $12
C) $400; $900
D) $715; $850
Figure 12.7
(Figure 12.7) Suppose that Player A promises a $2 side payment to Player B if Player B
chooses Pass. As a result of the side payment, the game’s outcome will change from:
A) (2, 10) to (10, 9).
B) (5, 0) to (8, 11).
C) (5, 0) to (7, 2).
D) (2, 10) to (8, 11).
Carleton is presented with two bundles of goods: silk ties and cufflinks. Which of the
following statements satisfies the assumption of rankability?
I. Carleton prefers silk ties to cufflinks.
II. Carleton prefers cufflinks to silk ties.
III. Carleton is equally satisfied with either silk ties or cufflinks.
A) I only
B) II only
C) I or II
D) I, II, or III
The demand curve for a product is Q = 50 ” 0.5P. What is the price elasticity of demand
at a price of $60?
A) “1.50
B) “1.0
C) “0.80
D) “0.25
Versioning is a form of:
A) first-degree price discrimination because the firm is able to identify the types of
demand curves its customers have before they purchase the product, allowing the firm
to select for their customers the profit-maximizing version of the product.
B) second-degree price discrimination because the firm cannot identify the types of
demand curves its customers have before they purchase the product, so the firm creates
different versions of the product in hopes that customers with different price
sensitivities will self-select the appropriate product.
C) perfect price discrimination because each customer buys a unique version of the
product that is priced to eliminate all consumer surplus.
D) third-degree price discrimination because the firm can identify directly which
customers should buy which version of the product before the sale is made.
Table 6.3
I. A combination of 4 units of capital and 2 units of labor produces the same amount of
output as a combination of 3 units of capital and 3 units of labor.
II. If labor is fixed at 3 units, adding more capital increases output at an increasing rate.
III. If capital is fixed at 2 units, adding more labor results in diminishing returns.
IV. A combination of 3 units of capital and 4 units of labor produces 171.4 units of
output.
A) I, II, III, and IV
B) II, III, and IV
C) III and IV
D) IV only
Table 12.7
(Table 12.7) In the table, payoffs represent profits in millions of dollars. The Nash
equilibrium:
A) does not exist.
B) occurs when both firms choose Small Expansion.
C) occurs when both firms choose Large Expansion.
D) occurs when both firms choose No Expansion.
The demand and supply of ethanol are given by QD = 8,000 ” 2,000P and QS = 1,000P
” 1,000, where P is price per gallon and Q measures gallons per minute. What does it
cost the government to subsidize ethanol at $0.30 a gallon?
A) $660 per minute
B) $14,000 per minute
C) $150 per minute
D) $2,000 per minute
The inverse demand curve for eggs is P = 20 ” 0.25Q. What is the price elasticity of
demand at P = $4?
A) “0.45
B) “2.0
C) “4.0
D) “0.25.
If a firm has market power but cannot prevent its customers from reselling the product
to other customers, the firm will:
A) produce a quantity of output at which marginal revenue equals marginal cost.
B) produce a quantity of output at which price equals marginal cost.
C) engage in second-degree price discrimination.
D) engage in first-degree price discrimination.
Figure 12.9
(Figure 12.9) Which of the following threats might Brad use?
A) Brad threatens that he will play strategy B if Sly plays strategy A, in an attempt to
move the game’s outcome from (10, 3) to (7, 4).
B) Brad threatens that he will play strategy B if Sly plays strategy B, in an attempt to
move the game’s outcome from (10, 3) to (7, 4).
C) Brad threatens that he will always play strategy B.
D) Brad threatens that he will play strategy A if Sly plays strategy A, in an attempt to
move the game’s outcome from (1, 2) to (10, 3).
Figure 8.16
(Figure 8.16) Which of the following shows a representative firm (operating in a
perfectly competitive industry) in a long-run equilibrium?
A) panel (a)
B) panel (b)
C) panel (c)
D) panel (d)
A graph of the utility function U = 4Y + X would reveal that goods X and Y are:
A) perfect substitutes.
B) near substitutes.
C) perfect complements.
D) near complements.
Table 12.5
(Table 12.5) In the table, payoffs represent profits in millions of dollars. What is ESPN’s
dominant strategy?
A) ESPN does not have a dominant strategy.
B) ESPN’s dominant strategy is to run the Brett Favre cover story.
C) ESPN’s dominant strategy is to run the Tim Tebow cover story.
D) ESPN’s dominant strategy is to run either cover story.
Figure 15.2
(Figure 15.2) Lilly, who owns the Cigar Bar and Grill, is considering whether to
purchase fire insurance. Without insurance, the marginal benefit of taking actions to
reduce the risk of fire is given by MB1.Which of the following statements is TRUE?
I. With full insurance, the marginal benefit of taking actions to reduce the risk of fire is
given by MB3.
II. If Lilly purchases fire insurance, whether it is full or partial coverage, the marginal
benefits of taking actions to reduce the risk of fire will increase.
III. With partial insurance, the marginal benefit of taking actions to reduce the risk of
fire is given by MB2.
A) I and III
B) III only
C) II only
D) I only
Between 1994 and 2008, the share of the workforce employed in manufacturing ______
and manufacturing output ______.
A) decreased; decreased
B) increased; increased
C) decreased; increased
D) increased; decreased
Government encouragement of monopoly:
A) usually leads to lower prices and higher consumer surplus.
B) through patents causes higher consumer prices but encourages firms to innovate and
bring new products to the market.
C) serves to reduce the market power of regulated firms.
D) results in the regulated firm producing beyond the competitive output level.
Mobile phone portability allows consumers to retain their phone number if they change
to a different phone network, which will tend to:
A) increase barriers to entry in the phone industry.
B) discourage product differentiation and increase switching costs.
C) encourage the formation of natural monopolies.
D) reduce market power in the phone industry.
Suppose that that the demand for a product is given by Q = 25 ” 0.25P.
a. Solve for the inverse demand curve.
b. Graph the inverse demand curve, showing the numerical values for the vertical and
the horizontal intercepts.
c. If the product’s price is $105 per unit, how many units will consumers be willing to
buy?
Table 6.3
A) short-run production function because capital and labor are used in equal
increments.
B) long-run production function because labor and capital can both be varied.
C) long-run production function because capital and labor are used in equal increments.
D) short-run production function because labor and capital can both be varied.
Suppose that the demand and supply curve for a good are given by QD = 90 ” P and
QS= 4P ” 10.
a. What is the equilibrium price and equilibrium quantity?
b. At what price is there an excess demand of 50 units?
A corporate bond has a $10,000 face value, five-year maturity, and an 8% annual
coupon rate. If interest rates are 6%, what is the present discounted value of the bond?
A) $10,540.18
B) $9,805.25
C) $10,842.47
D) $11,220.82
Which of the following is NOT a feature of Cournot competition?
A) Firms sell identical products.
B) Firms compete by choosing a quantity to produce.
C) All goods sell at the same price.
D) One firm sets its quantity to produce before the other firm.