Figure 9.5
Refer to Figure 9.5. If the government establishes a price floor of $2.50 and farmers
grow only the amount of berries that will be sold, producer surplus will
A) fall by $50.
B) fall by $100.
C) remain the same.
D) rise by $50.
E) rise by $100.
An industry has 1000 competitive firms, each producing 50 tons of output. At the
current market price of $10, half of the firms have a short-run supply curve with a slope
of 1; the other half each have a short-run supply curve with slope 2. The short-run
elasticity of market supply is
A) 1/50
B) 3/10
C) 1/5
D) 2/5
E) none of the above
Suppose we plot the total revenue curve with quantity on the horizontal axis and
revenue on the vertical axis (as in Figure 8.1 in the book). Under price-taking behavior,
the total revenue curve should be:
A) an inverted U-shaped curve (first increasing and then decreasing).
B) a U-shaped curve (first decreasing and then increasing).
C) a horizontal line with vertical axis intercept equal to the market price.
D) a straight line from the origin with slope equal to the market price.
Consumer surplus measures
A) the extra amount that a consumer must pay to obtain a marginal unit of a good or
service.
B) the excess demand that consumers have when a price ceiling holds prices below
their equilibrium.
C) the benefit that consumers receive from a good or service beyond what they pay.
D) gain or loss to consumers from price fixing.
Janice Doe consumes two goods, X and Y. Janice has a utility function given by the
expression:
U = 4X0.5Y0.5.
So, MUX = and MUY = . The current prices of X and Y are 25 and 50,
respectively. Janice currently has an income of 750 per time period.
a. Write an expression for Janice’s budget constraint.
b. Calculate the optimal quantities of X and Y that Janice should choose, given her
budget constraint. Graph your answer.
c. Suppose that the government rations purchases of good X such that Janice is limited
to 10 units of X per time period. Assuming that Janice chooses to spend her entire
income, how much Y will Janice consume? Construct a diagram that shows the impact
of the limited availability of X. Is Janice satisfying the usual conditions of consumer
equilibrium while the restriction is in effect?
d. Calculate the impact of the ration restriction on Janice’s utility.
If leisure is a normal good, then the income effect of a decrease in wage will
A) decrease the number of hours worked.
B) increase the number of hours worked.
C) decrease the number of leisure hours.
D) increase the sum of leisure plus hours worked.
Due to the recent increase in the price of natural gas, the quantity of coal demanded by
electric power generation plants has increased. Based on this information, coal and
natural gas are:
A) complements.
B) substitutes.
C) independent goods.
D) none of the above
Which of the following statements is NOT true?
A) The sharp decline in housing prices that first appeared in the U.S. during 2006 also
spread to other countries around the world.
B) The housing price bubble that burst in 2006 was the first housing bubble in U.S.
history.
C) One reason for the formation of the housing price bubble was an unfounded belief
that housing prices always increased over time.
D) Speculative demand was an important contributor to the most recent housing price
bubble.
The cartel of oil-producing nations (OPEC) once controlled about 80% of the world
petroleum market, but OPEC’s market share has declined to about half of its former
level. This outcome is a good example of how firms may have:
A) relatively high short-run monopoly power that strengthens in the long run.
B) relatively high short-run monopoly power that declines in the long run.
C) relatively low short-run monopoly power that strengthens in the long run.
D) relatively low short-run monopoly power that declines in the long run.
Johnny’s Shop-and-Pay is a regional grocery chain, and their marketing manager is
trying to determine the profit-maximizing coupon program for the store’s laundry
detergent brand. Coupon users at the store have an elasticity of demand for this product
that equals -3, and the elasticity of demand for non-users of the coupon for the store
brand equals -1.5. If the full retail (undiscounted) price of the detergent is $10 per box,
what is the optimal discount to provide for coupon users?
A) 25% off
B) 50% off
C) 75% off
D) The optimal strategy is to charge the same price to both groups
Use the following two statements in answering this question:
I. All Giffen goods are inferior goods.
II. All inferior goods are Giffen goods.
A) I and II are true.
B) I is true, and II is false.
C) I is false, and II true.
D) I and II are false.
John consumes two goods, X and Y. The marginal utility of X and the marginal utility
of Y satisfy the following equations:
MUX = Y MUY = X.
The price of X is $9, and the price of Y is $12.
a. Write an expression for John’s MRS.
b. What is the optimal mix between X and Y in John’s market basket?
c. John is currently consuming 15 X and 10 Y per time period.
Is he consuming an optimal mix of X and Y?
When peach canners process fresh peaches, they produce three products. The first,
canned peaches, is sold in the marketplace. The others, liquid and solid wastes, are
by-products that must be removed. The liquid is sometimes temporarily kept in holding
ponds and later released into a nearby stream or sewer. Liquid dumped in the stream
represents a negative externality to downstream users. In the peach growing region, the
marginal external costs of the canning process have been estimated as:
MEC = 0.000043Q,
where Q represents output of canned peaches in cases per week. The marginal cost of
canning peaches (ignoring MEC) is:
MC = 2.00 + 0.000157Q,
and the demand for canned peaches is:
P = 9.00 – 0.000243Q.
a. How many cases of peaches will be produced per week during the growing season,
and what will the selling price per case be if producers ignore the costs imposed on
others?
b. If producers are forced to incorporate the marginal external costs into their
production decisions, what will the new production rate and selling price be?
c. In taking account of the external costs imposed on others (part b), what was the
impact on the selling price and production rate of canned peaches? Explain the impact
on market efficiency.
Use the following statements to answer this question:
I. Political candidates need to know the geographical extent of the market for TV
commercials in determining how to reach the target number of eligible voters with the
smallest possible expenditure.
II. The geographical extent of the market for gasoline in Texas will determine whether
an oil company drills for oil there.
A) I and II are true.
B) I is true, and II is false.
C) I is false, and II is true.
D) I and II are false.
Consider the information below:
For Group A the cost of attaining an educational level y is
CA(y) = $6,000y
and for Group B the cost of attaining that level is
CB (y) = $10,000y.
Employees will be offered $50,000 if they have y < y*, where y* is an education
threshold determined by the employer. They will be offered $130,000 if they have y >
y*.
If the threshold educational level y* is set at 45,
A) only individuals in Group K will attain it.
B) only individuals in Group M will attain it.
C) individuals in both groups will attain it.
D) no individuals will attain it.
E) some fraction of individuals in each group will attain it.
Scenario 6
Consider the following game. Payoffs are in millions of dollars.
In the game in Scenario 13.6, what is the Nash equilibrium?
A) The strategy pair associated with -$100, -$1.
B) The strategy pair associated with $2, -$0.5.
C) The strategy pair associated with $1, -$1.
D) The strategy pair associated with -$0.5, -$0.5.
E) There is no Nash equilibrium in pure strategies.
The provision of an education in public school is
A) exclusive and rival.
B) exclusive and non-rival.
C) nonexclusive and non-rival.
D) nonexclusive and rival.
E) a public good, regardless of exclusivity and rivalness.
Scenario 14.4:
John’s firm is a competitor in your product market and a monopsonist in the labor
market. The current market price of the product that your firm produces is $2. The total
product and marginal product of labor are given as:
TP = 100L – 0.125L2 MP = 100 – 0.25L
where L is the amount of labor employed. The supply curve for labor and the marginal
expenditure curve for labor are given as follows:
L = PL -5 MEL = 2L + 5
Refer to Scenario 14.4. How much will the monopsonist pay each worker?
A) 0
B) 78
C) 83
D) 92
E) 100
Due to externalities generated by home landscaping, its price
A) is above the optimal level, and quantity that is below the optimal level.
B) is below the optimal level, and quantity that is above the optimal level.
C) and quantity traded are both above the optimal level.
D) and quantity traded are both below the optimal level.
E) must fall in order for the market to reach equilibrium.
Suppose the US demand curve for gasoline shifts rightward, and the U.S. supply curve
for gasoline remains unchanged. As a result, the price of gasoline increases by 9
percent, and the equilibrium quantity increases by 3 percent. Which of the following
statements is true based on this information?
A) The price elasticity of supply for gasoline is roughly 0.33.
B) The price elasticity of supply for gasoline is roughly 3.
C) The price elasticity of demand for gasoline is roughly 0.33.
D) The price elasticity of demand for gasoline is roughly -3.
A risk-averse individual prefers
A) the utility of expected income of a risky gamble to the expected utility of income of
the same risky gamble.
B) the expected utility of income of a risky gamble to the utility of expected income of
the same risky gamble.
C) outcomes with 50-50 odds to those with more divergent probabilities, no matter what
the dollar outcomes.
D) outcomes with higher probabilities assigned to more favorable outcomes, no matter
what the outcomes are.
E) outcomes with highly divergent probabilities so that one of the outcomes is almost
certain.
Scenario 13.11
Consider the game below:
In the game in Scenario 13.11, equilibrium is
A) R1, C1.
B) R1, C2.
C) R2, C1.
D) R2, C2.
E) a mixed strategy based on all four pure strategies.
Scenario 10.6:
John is the manufacturer of red rubber balls (Q). He has a red rubber ball manufacturing
plant in California, Florida and Montana. The total cost of producing red rubber balls at
each of the three plants is given by the following table:
California Florida Montana
Qc TCc Qf TCf Qm TCm
1 5 1 8 1 4
2 10 2 16 2 8
3 15 3 24 3 12
4 20 4 32 4 16
5 25 5 40 5 20
6 30 6 48 6 24
7 35 7 56 7 28
8 40 8 64 8 32
9 45 9 72 9 36
10 50 10 80 10 40
11 infinity 11 infinity 11 infinity
Refer to Scenario 10.6. If red rubber balls can be produced at any of the three plants,
and John decides to produce 1 red rubber ball, at which plant will he produce it?
A) California
B) Florida
C) Montana
D) He is indifferent between California and Florida.
E) He is indifferent between Florida and Montana.
The authors cited statistical evidence that the price elasticity of demand for Royal
Crown cola is -2.4, and the price elasticity of demand for Coke is roughly -5.5. Which
firm likely has stronger brand loyalty among customers that provides greater potential
for monopoly power in the cola market?
A) Coke
B) Royal Crown
C) Both firms should have identical monopoly power
D) We do not have enough information to answer this question.
In the short run, a perfectly competitive firm earning negative economic profit
A) is on the downward-sloping portion of its AVC.
B) is at the minimum of its AVC.
C) is on the upward-sloping portion of its AVC.
D) is not operating on its AVC.
E) can be at any point on its AVC.
An isoquant
A) must be linear.
B) cannot have a negative slope.
C) is a curve that shows all the combinations of inputs that yield the same total output.
D) is a curve that shows the maximum total output as a function of the level of labor
input.
E) is a curve that shows all possible output levels that can be produced at the same cost.
Which major asset experienced a price bubble just before the housing price bubble of
2006-2009?
A) Internet or tech-stocks
B) Tulip bulbs
C) Japanese real estate
D) Railroad stocks
Assume that as the wage rate rises a worker’s substitution effect for leisure is larger than
the income effect. We can conclude that in this region, the worker’s
A) labor supply curve will be backward bending.
B) labor supply curve will have the usual upward slope.
C) labor supply curve will be completely inelastic.
D) supply curve will be horizontal.
In a Cournot duopoly, we find that Firm 1’s reaction function is Q1 = 50 – 0.5Q2, and
Firm 2’s reaction function is Q2 = 75 – 0.75Q1. What is the Cournot equilibrium
outcome in this market?
A) Q1 = 20 and Q2 = 60
B) Q1 = 20 and Q2 = 20
C) Q1 = 60 and Q2 = 60
D) Q1 = 60 and Q2 = 20
How does the federal government avoid the asymmetric information problem
associated with providing health care to people over 65 years of age?
A) Health care is standardized and is the same for all people over 65 years of age.
B) Health insurers rely on the reputation of the covered individuals.
C) Participation in the Medicare program is mandatory for all people over 65 years of
age.
D) Health information about people enrolled in the Medicare program is publically
available.
Which of the following pairs of goods are NOT complements?
A) Hockey sticks and hockey pucks
B) Computer CPUs and computer monitors
C) On-campus student housing and off-campus rental apartments
D) all of the above
E) none of the above
Scenario 4.5:
The demand curve for grilled cheese sandwiches has been estimated using statistical
techniques as follows:
log(Q) = -1.10 – 0.18 log(P) + 1.21 log(I) + 0.84 log(Ph)
where Q is the quantity of grilled cheese sandwiches
P is the price of grilled cheese sandwiches
I is income
Ph is the price of hamburgersSee Scenario 4.5. If P = $1,000, the price elasticity of
demand:
A) is 0,
B) is negative infinity.
C) is -0.18.
D) cannot be determined without knowing I and Ph.