Sweet Steel and Molten Metal create sulfur dioxide emissions from their production
process. The total abatement cost (TAC) and marginal abatement cost (MAC) for each
company are given by:
Sweet Steel: TACS= 100,000+ 1eS
2 and MACS= 2eS
Molten Metal: TACM= 100,000 + 1.5eM
2 and MACM= 3eM
where eS and eM represent tons of sulfur dioxide emissions eliminated by each
company. Suppose the government wants to eliminate 1,000 tons of sulfur dioxide
emissions, mandating that each firm cut its emissions by 500 tons. What is the total cost
(TACS + TACM) of reducing emissions by 1,000 tons?
A) $304,000
B) $670,550
C) $233,333
D) $825,000
Carl’s budget constraint is 75 = 10X + 4Y.
a. How many units of good X can Carl afford?
b. What is the vertical intercept of the budget constraint?
c. What is the slope of the budget constraint?
d. Can Carl afford to buy 4 units of good X and 10 units of good Y?
e. If Carl’s income increases by 10%, what happens to the slope of the budget
constraint?
f. What is Carl’s MRSXY at the utility-maximizing point?
If a firm practices first-degree price discrimination, it must be TRUE that the firm:
A) has customers with identical demand curves.
B) has complete information about each customer’s unique demand curve before the
customer buys the product.
C) can identify each customer’s demand curve after the customer’s purchase of the
product.
D) lacks market power but knows how its customers differ by their willingness to pay
for the product.
Figure 8.2
(Figure 8.2) The total revenue curve for a perfectly competitive firm is represented by
curve:
A) A.
B) B.
C) C.
D) D.
Which of the following statements is TRUE?
I. If a firm experiences economies of scale, long-run average total cost rises with
increases in output.
II. Diseconomies of scale are associated with the portion of the long-run average total
cost curve that slopes upward.
III. For the long-run average total cost curve to slope downward, the total cost of
production must increase less than proportionately with output.
IV. A firm may experience economies of scale despite a production function with
constant returns to scale.
A) I, II, and III
B) II, III, and IV
C) II and III
D) I only
A perfectly competitive industry consists of 50 East Coast firms and 80 West Coast
firms. Each of the East Coast firms has a short-run supply curve of QE = 20P, and each
of the West Coast firms has a short-run supply curve of QW = 30P.
a. Which type of firms are the low-cost producers?
b. Determine the industry supply curve.
c. If the market price is $10, what is the industry’s producer surplus?
Figure 5.16
(Figure 5.16) The substitution effect of the price increase causes consumption of
baseball hats to:
A) decrease by 1.
B) decrease by 3.
C) decrease by 4.
D) increase by 1.
At the current level of pollution in an economy, the marginal abatement cost is $30,000
and the marginal cost of pollution is $80,000. This economy is producing:
A) an efficient level of pollution if the total cost of pollution is $50,000.
B) too little pollution and should increase its pollution level.
C) too much pollution and should reduce its pollution level.
D) an efficient level of pollution if the marginal cost of pollution is $110,000.
Figure 8.4
(Figure 8.4) In a perfectly competitive market with 5,000 firms, the equilibrium price
and quantity are $0.70 and 3.0 million units. The demand curve facing a firm in this
market is represented by:
A) panel (a).
B) panel (b).
C) panel (c).
D) panel (d).
Table 12.18
(Table 12.18) In the table, the payoffs represent profits measured in thousands of
dollars. In this infinitely repeated game, the Detroit Art School and the Motor City Art
School agree to cooperate and not offer their students financial aid. Each school follows
a grim trigger strategy. At what value of d is the Motor City Art School indifferent
between not offering financial aid and cheating on the agreement?
A) 0.5
B) 0.7
C) 0.75
D) 0.9
Government regulators want to limit pesticide runoff to its efficient level.
Unfortunately, government regulators are uncertain how marginal abatement costs
behave with changes in runoff, but they do know that marginal abatement costs are less
sensitive to changes in runoff than marginal costs of pollution. In this situation, the use
of a ______ leads to a smaller deadweight loss than a ______.
A) quota; Pigouvian tax
B) quota; quantity restriction
C) Pigouvian tax; quantity restriction
D) Pigouvian subsidy; Pigouvian tax
Which of the following production functions exhibit constant returns to scale?
I. Q = II. Q = 2K + L III. Q = K0.8L0.2
I. Q =
II. Q = 2K + L
III. Q = K0.8L0.2
A) II and III
B) I and II
C) III only
D) I, II, and III
Answer the following questions on price elasticity of demand.
a. The price elasticity of demand for MLB tickets is “0.50. What happens to the quantity
of tickets sold if ticket prices rise by 5%?
b. The price elasticity of demand for fried chicken is “1.12. What happens to
expenditures on fried chicken following a price increase?
c. Suppose the demand for insulin is given by QD= 1,000. What is the price elasticity of
demand at P = $100?
d. What will happen to the price elasticity of demand if there are more substitute goods
available?
Suppose that you close down your coffee shop and sell your coffee maker for $500. If
you originally bought the coffee maker for $4,000 and it lost $1,000 because of
depreciation (i.e., age and use), the sunk cost of the coffee maker is:
A) $3,500.
B) $3,000.
C) $2,500.
D) $1,500.
In game theory, a simultaneous game:
A) requires that both participants play the same exact strategy at the same time.
B) involves at least one participant playing a random strategy after first observing her
opponent’s strategies.
C) involves participants revealing their strategies at the same time without knowing the
strategies of their opponent.
D) requires both players to choose their strategy based on backward induction.
A firm is producing 4 units of output at an average total cost of $40. When the firm
produces 5 units of output, average total cost rises to $50. What is the marginal cost of
the fifth unit of output?
A) $10
B) $30
C) $90
D) $120
Figure 9.12
(Figure 9.12) Suppose the firm’s demand curve for its product increases from D1 to D2.
The firm’s marginal cost is given by MC = 5Q.
a. Solve for the change in the profit-maximizing quantity resulting from the increase in
demand.
b. Solve for the change in the profit-maximizing price resulting from the increase in
demand.
Figure 5.18
(Figure 5.18) Which of the following statements is TRUE?
I. The demand curve for good Y shifted outward.
II. The demand curve for good Y shifted inward.
III. The demand curve for good X shifted inward.
IV. The price of good Y decreased, causing an increase in the quantity demanded of
good Y.
A) II and III
B) I, III, and IV
C) III and IV
D) I and IV
With which of the following scenarios should a perfectly competitive firm shut down in
the short run?
I. P = $80, VC = $180,000, and Q = 2,000
II. TR = $45,000, AVC = 500, ATC = 600, and Q = 84
III. P = $11.55, ATC = $15, and AFC = $2
A) II only
B) III only
C) II and III
D) I and III
Figure 6.8
(Figure 6.8) The movement in the isocost line is caused by a(n):
A) increase in the rental rate of capital.
B) decrease in the rental rate of capital.
C) decrease in the wage rate.
D) increase in the wage rate.
Table 12.19
(Table 12.19) In the table, the payoffs represent profits in thousands of dollars. Which
of the following statements is TRUE?
I. In a simultaneous game that is played only once, the Nash equilibrium is (20, 20).
II. In a sequential game in which Player A moves first, the Nash equilibrium is (18, 18).
III. In the sequential game, Player A has a first-mover advantage.
A) I and III
B) II only
C) II and III
D) I, II, and III
The production function given by Q = 10(0.7K2 + 0.3L2)0.5 has ______ returns to scale.
A) constant
B) instant
C) increasing
D) decreasing
Figure 8.11
(Figure 8.11) If this firm operates, it earns a profit of ______, but if it shuts down, it
earns a profit of _______.
A) $4,000; $0
B) “$9,000; “$5,000
C) “$5,000; “$9,000
D) “$2,500; “$4,000
In a market served by a monopoly, the marginal cost is $60 and the price is $110. In a
perfectly competitive market, the marginal cost is $60. What would happen to the price
in each market if the marginal cost increased from $60 to $75?
A) The monopoly would raise its price by $75, and the price in the perfectly
competitive market would increase to $75.
B) The monopoly would raise its price to $115, and the price in the perfectly
competitive market would remain unchanged at $60.
C) The monopoly would raise its price by less than $15, and the price in the perfectly
competitive market would increase to $75.
D) The price in both markets would increase by $15.
Answer the following questions.
a. In a perfectly competitive industry, the industry demand and supply curves are given
by Qd = 2,500 ” 50P and QS = 20P ” 300. Given the market conditions, graph the
competitive firm’s demand and marginal revenue curves.
b. Graph a competitive firm that is earning economic profit. In your graph, indicate the
level of profit by shading in the appropriate area.
c. A perfectly competitive firm is selling 2,000 units at a price of $3, with average total
cost equal to $1.85. Calculate the firm’s profit.
Sonia says she prefers two theater tickets and one bottle of French wine to three games
of bowling and one pitcher of draft beer. In this example, Sonia is demonstrating the
______ assumption of consumer behavior.
A) more is better than less
B) completeness and rankability
C) transitivity
D) diminishing marginal utility
Suppose that the marginal product of labor and marginal product of capital are given by
K and L, respectively. What happens to the firm’s cost minimizing capital-to-labor ratio
if the price of capital falls by 50%?
A) The capital-to-labor ratio will decrease by 50%.
B) The capital-to-labor ratio will double.
C) The capital-to-labor ratio will increase by 50%.
D) The capital-to-labor ratio will increase fivefold.
Reed is interested in purchasing a hydrographics machine for $10,000. The machine
would be used for three years and generate a $4,000 cash flow per year. After three
years, the machine could be sold for $3,000. What is the net present value of the
machine at a 12% interest rate?
A) $1,742.67
B) $3,200.23
C) $2,012.18
D) $4,158.40
Table 12.4
(Table 12.4) Which of the following lists the investments in order from highest net
present value to lowest net present value?
A) investment I, investment II, investment III
B) investment III, investment II, investment I
C) investment III, investment I, investment II
D) investment I, investment III, investment II
Consider the following information:
Inverse market demand: P = 12 ” 0.5(q1+ q2), where q1 and q2 are Firm 1’s and Firm 2’s
output
Firm 1’s reaction function: q1 = 9 ” 0.5q2
Firm 2’s reaction function: q2 = 9 ” 0.5q1
The marginal cost of production for both firms is constant at $3. The equilibrium price
in Cournot and Stackelberg are ______ and ______, respectively.
A) $8; $7
B) $9; $10
C) $4; $3.50
D) $6; $5.25
Frozen dessert companies produce ice cream and yogurt. Because of a large increase in
obesity and a growing problem of type II diabetes among children, the government bans
the sale and consumption of ice cream to anyone under 13 years of age. Analyze the
general equilibrium effects by focusing on the supply-side linkages between ice cream
and yogurt.
Figure 14.3
(Figure 14.3) Which of the following statements is TRUE?
I. Pareto efficiency occurs when Elaine consumes 4 pancakes and 3 bowls of cereal and
Jerry consumes 4 pancakes and 7 bowls of cereal.
II. Pareto efficiency occurs when Elaine consumes 3 pancakes and 3 bowls of cereal
and Jerry consumes 5 pancakes and 3 bowls of cereal.
III. Pareto efficiency occurs when Elaine consumes 3 pancakes and 3 bowls of cereal
and Jerry consumes 5 pancakes and 7 bowls of cereal.
A) I only
B) I and II
C) II only
D) I, II, and III
Suppose that a windshield business changes from paying its workers an hourly wage
rate to a piece rate system (i.e., paying workers for each windshield installed). The new
compensation scheme increases worker productivity by 44%, with only a negligible
effect on worker earnings. Graphically illustrate how the change in worker
compensation affects the total cost of windshield installation.
For the following scenarios, explain the direction of the substitution effect, income
effect, and total effect.
I. The price of good X, a normal good, increases.
II. The price of good X, an inferior good, decreases.
III. The price of good X, a Giffen good, increases.
What is a social welfare function? What are the problems in using social welfare
functions in evaluating market outcomes?
Does behavioral economics mean everything we’ve learned is useless?
A firm’s long-run total cost function is given by LTC = 115,000Q ” 500Q2 + Q3, where
long-run marginal cost is given by LMC = 115,000 ” 1,000Q +3Q2. At what range of
output does this firm experience economies of scale?
Figure 14.7
(Figure 14.7) Which of the following statements is TRUE?
A) At point A, the economy is producing an equal number of jets and drones.
B) At point B, 3 units of capital and 7 units of labor are used to produce drones.
C) At point B, the labor and capital inputs are efficiently allocated across the economy.
D) There are fewer jets being produced at point D than at point A.
In green communities, it is sometimes common for homeowners to install solar panels
on the street side of their house, even though it is the least sunny part of the house. Why
would some homeowners behave this way?
How might firms conduct field experiments?
In a small economy, labor and capital are used to produce food and medicine. In the
food industry, the MRTSLK is 8, and the MRTSLK is 4 in the medicine industry. Is the
allocation of labor and capital efficient between the two industries? If not, suggest a
reallocation of labor and capital that will lead to both industries producing more output.
Table 16.6
(Table 16.6) Insert X marks in the appropriate categories for each good.
In an economy with two industries, food and clothing, the price of labor is $100 and the
price of capital is $80. Input efficiency requires that the marginal:
A) rate of technical substitution of labor for capital is 100 in the food industry and 80 in
the clothing industry.
B) rate of technical substitution of labor for capital is 1.25 in the food industry and in
the clothing industry.
C) product of labor is 100 in the food industry, and the marginal product of capital is 80
in the clothing industry.
D) product of labor equals the marginal product of capital in the food industry and in
the clothing industry.
The price elasticity of demand for coffee by adults and by seniors is “2.3 and “3.6,
respectively. In percentage terms, how much is senior coffee discounted from the price
of adult coffee?
Bertha’s utility function for soccer balls (S) and tennis balls (T) is U = ST + 5S. Find
five different consumption bundles that give Bertha exactly 100 units of utility.
A perfectly competitive industry consists of 500 identical firms, each with a short-run
supply curve given by Qs= “20 + 15P. What is the equation for the industry’s short-run
supply curve?
The first snow blower was sold in 1927. What effect did the sale of the snow blower
have on the demand curve for snow shovels and the consumer surplus from snow
shovels?