Even if we were able to completely eliminate greenhouse gas (GHG) emissions today,
the problems associated with the accumulated stock of GHGs in the atmosphere will
persist for a long time because:
A) their dissipation rate is very low.
B) their dissipation rate is very high.
C) the social discount rate is very low.
D) the social discount rate is very high.
Gold buyers are located in New York and Zurich. If the price of gold is $400 an ounce,
the worldwide demand for gold is 10,000 ounces. Also, the price elasticity of demand
for gold in New York and Zurich are -3 and -2 respectively. If the slope of each demand
curve in New York is the same as in Zurich, then the quantity of gold demanded by
dealers in Zurich is
A) 10,000/3.
B) 5,000.
C) 6,000.
D) 10,000.
E) none of the above
What happens to the market outcome if cartel members cheat on the collusive
agreement?
A) Price declines, but firm-level quantities remain the same because the firms act like
price takers
B) Price and quantity revert to the single-seller monopoly equilibrium outcome
C) Other firms raise prices so that the average market price remains unchanged
D) Price declines and quantity increases toward the perfectly competitive equilibrium
Which of the following is TRUE about producers’ willingness to offer warranties on
products?
A) Producers are equally likely to offer warranties on high-quality and low-quality
goods.
B) Producers are more likely to offer warranties on low-quality goods, because without
the signal that the warranty provides, the low-quality good wouldn’t sell.
C) Producers are more likely to offer warranties on high-quality goods, because the
expected cost of repairs is lower for those goods.
D) Producers have an incentive to deal with third-party companies to provide the
warranties, so that an “impartial” view of the product is given to the consumer.
E) Producers will not offer warranties in any market that suffers from asymmetric
information.
Over the past several years, the federal government has rescued a few financially
distressed banks and other large private companies, and the key reasons for these
actions is to stabilize financial markets and to prevent additional business failures that
may arise from the original problem. However, critics of these interventions argue that
these actions generate a moral hazard problem. Why?
A) Government oversight of rescued firms is typically based on limited information, so
the outcome is economically inefficient.
B) Rescued firms will have a difficult time buying insurance in private markets, so the
government will also have to insure the firm against losses from fire, theft, etc.
C) Managers have more information about the financial strength of their firm than
government officials, so the rescue attempts may be unnecessary.
D) Managers may be more likely to invest in risky projects if they believe the
government will save the firm in case of failure.
The market supply function is P = 10 + Q and the market demand function is P = 70 –
2Q. What is the change in consumer surplus associated with a minimum floor price of
$30?
A) Zero
B) -$100
C) -$30
D) -$55
Scenario 10.2:
A monopolist faces the following demand curve, marginal revenue curve, total cost
curve and marginal cost curve for its product:
Q = 200 – 2P
MR = 100 – Q
TC = 5Q
MC = 5
Refer to Scenario 10.2. What is the profit maximizing level of output?
A) 0
B) 90
C) 95
D) 100
E) none of the above
If the interest rate is 5%, in one period the future value of $1 today is
A) $1.20.
B) $1.05.
C) 95 cents.
D) 20 cents.
E) 5 cents.
You view tea and scones as perfect complements, and the corners of the indifference
curves lie on the 45-degree line. Tea is plotted along the horizontal axis of the
indifference map. Also, at your current point of consumption, you have not fully
exhausted the available budget, and you consume more tea than scones. Based on this
information, which of the following statements is NOT true?
A) The marginal utility of tea equals zero for your current consumption bundle.
B) The marginal utility of scones equals zero for your current consumption bundle.
C) To reach the point of optimal consumption, you must increase your scone
consumption.
D) The equal marginal principle does not have to be satisfied at the optimal
consumption point for this problem.
In the ________, two duopolists compete by simultaneously selecting price.
A) Cournot model
B) Nash model
C) Bertrand model
D) kinked-demand model
E) none of the above
Monopoly power results from the ability to
A) set price equal to marginal cost.
B) equate marginal cost to marginal revenue.
C) set price above average variable cost.
D) set price above marginal cost.
What describes the graphical relationship between average product and marginal
product?
A) Average product cuts marginal product from above, at the maximum point of
marginal product.
B) Average product cuts marginal product from below, at the maximum point of
marginal product.
C) Marginal product cuts average product from above, at the maximum point of average
product.
D) Marginal product cuts average product from below, at the maximum point of
average product.
E) Average and marginal product do not intersect.
Two bonds of equal risk are for sale on the secondary bond market. The two bonds have
the same face value, and both mature in 10 years. Bond A pays $10 per year and bond B
pay $15 per year. Which bond will sell for a higher price?
A) Bond A
B) Bond B
C) They will sell for the same price.
D) The relative prices will depend on the expected interest rate over the next 10 years.
A monopolist has determined that at the current level of output the price elasticity of
demand is -0.15. Which of the following statements is true?
A) The firm should cut output.
B) This is typical for a monopolist; output should not be altered.
C) The firm should increase output.
D) None of the above is necessarily correct.
Access to the movie “Casablanca,” showing in a half-empty theater, is
A) a rival good because other movies are available in other theaters.
B) a rival good because it is used up as it is seen. It is not enjoyed as a whole all at
once.
C) a rival good because individuals were willing and able to pay a positive amount to
get in to the theater.
D) a non-rival good because no other movie is available in that theater.
E) a non-rival good because when a new viewer enters the theater, there is not less of
the movie for everybody else.
Scenario 12.3:
Suppose a stream is discovered whose water has remarkable healing powers. You
decide to bottle the liquid and sell it. The market demand curve is linear and is given as
follows:
P = 30 – Q
The marginal cost to produce this new drink is $3.
Refer to Scenario 12.3. What will be the price of this new drink in the long run if the
industry is a Stackelberg duopoly?
A) $3
B) $9
C) $12
D) $13.50
E) none of the above
Sally Henin has a price elasticity of demand for gasoline of -0.8. Her income elasticity
for gasoline is 0.5. Sally’s current income is $40,000 per year. Sally currently spends
$800 per year on gasoline. The price of gasoline is currently $1.00 per gallon.
a. A contemplated excise tax on gasoline will cause the price of gasoline to rise to
$1.40. What impact will the tax have on Sally’s consumption of gasoline?
b. Since the purpose of the tax is only to discourage gasoline consumption, Congress is
considering a $200 income tax rebate to lessen the burden of the gasoline tax. What
impact will the rebates have on Sally’s consumption of gasoline?
c. Assume that both the tax and rebate are implemented. Will Sally be worse off or
better off?
A positive externality is shown by a marginal social benefit (MSB) curve that is
A) above and to the right of the demand curve for the good that generates it.
B) below and to the left of the demand curve for the good that generates it.
C) above and to the left of the supply curve for the good that generates it.
D) below and to the right of the supply curve for the good that generates it.
E) positively related to both the supply curve and the demand curve for the good that
generates it.
Dry cleaning of clothing produces air pollutants. Therefore, in the market for dry
cleaning services, the equilibrium price
A) and output are too low to be optimal.
B) and output are too high to be optimal.
C) is too low to be optimal, and equilibrium quantity is too high.
D) is too high to be optimal, and equilibrium quantity is too low.
E) is optimal, but there is an excess supply.
Which of the following is NOT conducive to the successful operation of a cartel?
A) Market demand for the good is relatively inelastic.
B) The cartel supplies all of the world’s output of the good.
C) Cartel members have substantial cost advantages over non-member producers.
D) The supply of non-cartel members is very price elastic.
Suppose a firm has one variable input, labor. Why is the MRPL curve for a competitive
firm above the MRPL curve for a monopolist?
A) Without competition from other firms, monopolies are less efficient and the marginal
product of labor is lower at each level of output.
B) Although the marginal product of labor may be the same under both market
structures, the marginal revenue of the monopoly declines with output.
C) Monopolists have less incentive to invest in worker training and other methods for
improving labor productivity, so the marginal product of labor is lower in the monopoly
case.
D) none of the above
Your uncle wants to help you with your college expenses, and he promised to pay you
$10,000 next year and $15,000 in two years. The current interest rate is 6%, and you
expect that this interest rate will be the same for the next year and will increase to 8% in
the year after. What is the formula that you should use to compute the present
discounted value of your uncle’s contribution to your education expenses?
A) 0 + 10,000 + 15,000
B) 10,000/(1.06) + 15,000/((1.06)*(1.06))
C) 10,000/(1.06) + 15,000/((1.06)(1.08))
D) 10,000/(1.06) + 15,000/((1.08)(1.08))
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,
what is the marginal cost of 5th red rubber ball?
A) 4
B) 5
C) 8
D) 20
E) none of the above
Your family operates Voltaire’s Pizza, which ships frozen hand-made pizzas by
over-night delivery to homes within 500 miles of your city. You are asked to determine
the optimal monthly advertising expenditures for the business. The total monthly cost of
pizza production is TC = 4Q + 0.0005Q2 + A where A is the advertising expenditure.
The firm’s marginal revenue from advertising is constant at MRA = $3, and the
advertising elasticity of demand is 0.3.
a. What is the firm’s marginal cost of production (MC)? What is the firm’s full marginal
cost of advertising (as a function of Q and A)?
b. Suppose you know the profit maximizing level of output is Q = 9,000 pizzas per
month. What is the firm’s optimal level of advertising expenditure?
The Clean Air Act is designed to restrict automobile emissions and reduce the external
costs of air pollution. The economic analysis used to develop the Clean Air Act was:
A) normative.
B) positive.
C) macroeconomic.
D) none of the above
In a competitive labor market, with one variable factor, the supply of labor to the firm is
A) equal to the marginal expenditure curve.
B) equal to the demand curve for labor.
C) greater than the marginal expenditure curve.
D) equal to the marginal revenue product curve.
Government water resource specialists have estimated that the Great Lakes currently
contain about 200 thousand tons of pesticide pollutants, the amount of new pesticide
pollutants that enter the lakes are about 20 thousand tons per year, and the stock of
pesticide pollutants was about 200 thousand tons last year. Based on this information,
what is the stock dissipation rate?
A) Zero
B) 5 percent
C) 10 percent
D) 20 percent
The Cournot equilibrium can be found by treating ________ as a pair of simultaneous
equations and by finding the combination of Q1 and Q2 that satisfy both equations.
A) the reaction curves for firms 1 and 2
B) the market supply curve and the market demand curve
C) the contract curve and the market demand curve
D) the contract curve and the market supply curve
E) the firm’s supply curve and the firm’s demand curve
Suppose we expect consumer prices to increase by about 30 percent between 2010 and
2020, and the minimum wage was $7.25 per hour in What should be the minimum
wage in 2020 if it is set to maintain the same purchasing power as in 2010?
A) $7.25
B) $7.55
C) $9.42
D) none of the above.
An individual demand curve can be derived from the ________ curve.
A) price-consumption
B) price-income
C) income-substitution
D) income-consumption
E) Engel
Use the following statements to answer this question:
I. If mixed strategies are allowed, every game has at least one Nash equilibrium.
II. The maximin strategy is optimal in the game of “matching pennies.”
A) Both I and II are true.
B) I is true, and II is false.
C) I is false, and II is true.
D) Both I and II are false.
Washington D.C.’s metro train system is being extended further into the neighboring
states of Maryland and Virginia, thereby reducing the cost of commuting into the
United States’ capitol. Other things being held constant, this can be expected to:
A) decrease the extent of the market for housing around Washington D.C.
B) increase the extent of the market for housing around Washington D.C.
C) have no effect on the extent of the market for housing around Washington D.C. as
the actual geography remains unchanged.
D) have no effect on the extent of the market for housing around Washington D.C. as
the range of houses available has not changed.
E) have no effect on the extent of the market for housing around Washington D.C. as
property taxes have not changed.
Figure 14.4
Given the information in Figure 14.4, the monopoly wage rate is:
A) W1.
B) W2.
C) W3.
D) W4.
E) none of the above
For a monopolist, changes in demand will lead to changes in
A) price with no change in output.
B) output with no change in price.
C) both price and quantity.
D) any of the above can be true.
What is the approximate price of a $10,000 coupon bond that pays $1,000 in one year
and $1,000 in two years at maturity? The effective yield on the bond is 6 percent.
A) $10,000
B) $10,730
C) $10,900
D) $12,000
Three individuals consume a public good, and their demands are expressed as:
P1 = 1.5 – 0.005Q (for Q < 300);
P2 = 4.5 – 0.007Q (for Q < 643);
P3 = 3.0 – 0.002Q (for Q < 1500),
where P represents price in dollars per unit and Q represents output in units per day. The
marginal cost of providing the service is given as a constant $5.00 per unit. Determine
the efficient level of output of this public good.
Suppose that a consumer’s increase in nominal income from the base year exceeds the
inflation level given by a Laspeyres cost of living index for their level of purchases :
( < ).
Show that this information implies that the consumer is strictly better-off as compared
to the base year. (Hint: Use a revealed preference argument.)
The demand curves for steak, eggs, and hot dogs are given in the table below. The
current price of steak is $5. The price of eggs is $2.50, and the price of hot dogs is
$0.75. Fill in the remaining columns of the table using this information. Indicate which
goods are substitutes and which goods are complements.
Marge’s Beauty Salon sells shampoo and conditioner. Marge has two types of
customers. Their willingness-to-pay for shampoo and conditioner are given in the table
below. If Marge bundles the shampoo and conditioner, could she increase revenue?
The city of Econoville currently does not charge a fee to residents to use the city
garbage services. The marginal social cost of garbage is: MSCd (gd) = 23gd, where gd is
tons of garbage disposed per year. The marginal benefit function of garbage removed
from residences is: MB(g) = 1,000 – 2g. Given the lack of a payment plan for garbage
disposal, what level of garbage are the city residents disposing each year? Is this level
of disposal efficient? Why or why not? Suppose the marginal cost of recycling is:
MSCr(gr) = 46gr. The marginal benefit of garbage removed from residences is: MB(gd,
gr) = 1,000 – 2(gd+ gr). What is the optimal level of garbage disposed and garbage
recycled in Econoville?
The city of Econoville currently charges a fee of $0.50 to residents for each 50 gallon
can of trash the city garbage service collects from their residence. The marginal social
cost of garbage disposed is: MSCd (gd) = 15.50, where gd is a 50 gallon drum of
garbage disposed. The marginal benefit function of garbage removed from residences
is: MB(g) = 800 – 2g. Given the payment plan for garbage disposal, what level of
garbage are the city residents disposing each year? Is this level of disposal efficient?
Why or why not? Suppose the marginal cost of recycling is: MSCr (gr) = 2.50gr. The
marginal benefit of garbage removed from residences is: MB(gd, gr) = 800 – 2(gd+ gr).
What is the optimal level of garbage disposed and garbage recycled in Econoville?
The daily demand for hotel rooms on Manhattan Island in New York is given by the
equation
QD = 250,000 – 375P. The daily supply of hotel rooms on Manhattan Island is given by
the equation QS = 15,000 + 212.5P. Diagram these demand and supply curves in price
and quantity space.
What is the equilibrium price and quantity of hotel rooms on Manhattan Island?
Trisha’s Fashion Boutique is considering a profit sharing arrangement with her
employees. Currently, the employees receive an annual bonus. Trisha can sell all the
output she produces for $150 per unit. Trisha’s total cost function (including bonus
payments to employees) is: TC(Q) = 75Q + 2.5Q2. The marginal cost function is:
MC(Q) = 75 + 5Q. The profit sharing plan would pay employees 30% of profits.
However, due to greater cost saving initiatives from employees, Trisha’s total cost
function becomes: TC(Q) = 50Q + 2Q2. The relevant marginal cost function becomes:
MC(Q) = 50 + 4Q. Which plan offers Trisha the greatest profits for herself?
Cecil’s Home Appliances sells high quality washing machines. Cecil’s marginal cost
function is:
MCC(QC) = . Zach’s Appliances sells low quality washing machines. Zach’s
marginal cost function is: MCC(QZ) = . The market demand for high quality
washing machines is:
= 8,250 – 10PH. The market demand for low quality washing machines is: =
5,000 – 10PL. If Consumer’s can distinguish between the quality of Cecil’s and Zach’s
machines (and Cecil and Zach behave as price takers), determine the equilibrium price
of washing machines. Calculate Cecil’s producer surplus. Now, suppose that consumers
can not distinguish between the quality of Cecil’s and Zach’s washing machines. In this
case, the demand for washing machines is: QD = 6,625 – 10P. Determine the joint
market supply curve. Calculate the equilibrium price of washing machines and the
quantity brought to market by Cecil and Zach. What is Cecil’s producer surplus? If
Cecil offers a warranty on his washing machines, his marginal cost function becomes:
MCC( ) = . However, consumers will then perceive his machines to be high
quality. Should Cecil offer the warranty?
Hale’s One Stop Gas and Auto Service competes with Murray’s Gas and Service Mart.
The local demand is given by: P = 2.50 – 0.01Q. Hale’s marginal cost function is:
(qH) = 0.35qH. Murray’s marginal cost function is: (qM) = 0.30qM. Given the
demand relationship above, Hale’s marginal revenue function is: (qH, qM) = 2.50 –
0.02qH – 0.01qM. Determine Hale’s reaction function. Murray’s marginal revenue
function is: (qM, qH) = 2.50 – 0.02qM – 0.01qH. Determine Murray’s reaction
function. What is the Cournot solution?
Historically, investors have considered gold commodities to be a good investment to
preserve wealth in times of inflation. If investors are no longer worried about inflation
and gold demand decreases, what do you expect will happen to gold prices? How would
your answer change if you learn that a recent gold mine discovery will increase the
supply of gold?
The market structure of the local pizza industry is best characterized by monopolistic
competition. One Guy’s Pizza is one of the producers in the local market. The demand
for One Guy’s Pizza is:
Qd = 225 – 10P P = 22.5 – 0.1Qd.
The resulting marginal revenue curve is
MR(Qd) = 22.5 – 0.2Qd.
One Guy’s cost function is:
C(Q) = 0.15Q2 MC(Q) = 0.3Q.
Determine One Guy’s profit maximizing level of output and the price charged to
customers. Is this a long-run equilibrium?
The monthly supply of desktop personal computers is given by the equation QS =
15,000 + 43.75P. At a price of $800, what is the price elasticity of supply?
Melissa’s optimal consumption is indicated in the diagram below for three different
income levels. For Melissa are park visits a normal or inferior good? Explain your
answer.
Bookstores often offer annual memberships that allow customers to purchase books at a
10% discount. Explain why this may increase profits of the bookstore.
Homer’s Boat Manufacturing cost function is: C(q) = q4 + 10,240. The marginal
cost function is: MC(q) = q3. If Homer can sell all the boats he produces for $1,200,
what is his optimal output? Calculate Homer’s profit or loss.
In the diagram below, Marvin’s optimal consumption bundles are indicated for five
different budget constraints. Sketch the Engel curve for Marvin. Next, use the diagram
to sketch Marvin’s demand curve for the good on the horizontal axis.
The following table gives the current price, quantity, and price elasticities of the linear
demand curves for pencils, paper and scissors. The columns Ercunder the Price
Elasticities heading are calculated as Erc = ( ) . The terms r and c refer to the row
of the table and the column under the price elasticities heading, respectively. For
example, if r is one and c is two, the value E12is the responsiveness of pencil demand to
changes in the paper price (i.e., a cross-price elasticity). The demand curves for each
good are in the form Qr = ar + brP1 + crP2 + drP3 . Using the information in the table,
derive the demand curve for each good.
Jeremy’s Jet Ski Rentals can influence demand by advertising. Currently, Jeremy rents
30 jet skis per period. His advertising budget is $250 per period. The advertising
elasticity of demand is 25. The price elasticity of demand is -2. If we know that Jeremy
is maximizing profits, calculate the price he must be charging per jet ski rental.