Nancy’s ratio of marginal utilities for coffee and lipstick is 3/1, while the price ratio of
coffee to lipstick is 1.5/1. Which of the following statements is TRUE?
I. Coffee provides Nancy with 3 times the utility of lipstick.
II. Nancy could increase utility by decreasing her consumption of coffee by 3 units and
increasing her consumption of lipstick by 1.5 units.
III. Nancy could increase utility by decreasing her consumption of lipstick by 3 units
and increasing her consumption of coffee by 2 units.
IV. Nancy could increase utility by decreasing her consumption of coffee by 1 unit and
increasing her consumption of lipstick by 3 units.
A) IV only
B) I and II
C) I and III
D) III only
Pareto efficiency occurs when an economic allocation of goods:
A) creates more winners than losers.
B) equalizes the net gains to all individuals.
C) cannot be changed without at least making one person worse off.
D) enables the winners to compensate the losers for their losses.
Figure 5.7
(Figure 5.7) Based on the consumer’s indifference curves and budget constraints, which
of the following demand curves reflects the consumer’s demand for water park tickets?
Assume the consumer has income of $100.
A) Demand curve A
B) Demand curve B
C) Demand curve C
D) Demand curveD
Figure 9.7
(Figure 9.7) The levels of producer surplus under monopoly and perfect competition are
______ and ______, respectively.
A) $800; $0
B) $1,200; $0
C) $800; $400
D) $600; $200
Suppose the outboard motor market is characterized by Stackelberg competition. The
market inverse demand curve for outboard motors is P = 10,000 ” 50Q, where Q is the
total market output produced by Mercury Marine and Yamaha, qM+qY. Suppose that the
marginal cost for both firms is constant at $1,000. If Yamaha is the first-mover, what is
the equilibrium price?
A) $1,800
B) $2,600
C) $3,250
D) $4,000
The market for cigars is characterized by QD = 10″0.25P and QS= 15P, where P is price
per box of cigars and Q measures boxes per hour.
a. What is the equilibrium price of cigars?
b. Suppose the government taxes sellers $5 per box. What is the price that buyers pay
and sellers receive (after submitting the tax to the government)?
c. Suppose the government taxes buyers $5 per box rather than sellers. What is the price
that buyers pay (after submitting the tax to the government) and sellers receive?
In market A, a firm with market power faces an inverse demand curve of P = 10 ” Q and
a marginal cost that is constant at $2. In market B, a firm with market power faces an
inverse demand curve of P = 8 ” 0.75Q and a marginal cost of $2. Producer surplus in
market A is ______ than in market B.
A) $8 higher
B) $4 higher
C) $2 lower
D) $1 lower
Figure 9.7
(Figure 9.7) The levels of consumer surplus under monopoly and perfect competition
are ______ and ______, respectively.
A) $600; $2,000
B) $200; $400
C) $800; $3,200
D) $400; $1,600
Which of the following statements is TRUE?
I. As more sellers enter a market, the supply of the product will increase.
II. If input prices increase, the supply of the product will be unaffected because firms
pass the higher costs of production on to consumers in the form of higher prices.
III. Firms respond to high prices for their product by offering a larger quantity for sale.
A) I only
B) II and III
C) I, II, and III
D) I and III
Suppose that a firm generates $40,000 of profit per year, and this profit will continue
forever. At a 10% interest rate, what is the present discounted value of the firm’s profit?
A) $400,000
B) $4 million
C) $4.4 million
D) $360,000
Which of the following statements is TRUE?
I. If the government regulates the price of a natural monopoly such that price equals
marginal cost, the natural monopolist may earn a negative profit.
II. Government regulation of natural monopolies is straightforward because regulators
are able to precisely estimate the demand and cost conditions of regulated firms.
III. Government regulation based on production costs makes firms less likely to lower
costs if lower costs lead to lower regulated prices.
A) I, II, and III
B) II and III
C) I and III
D) I only
The production of toilet paper in a perfectly competitive market is characterized by the
inverse supply curve (marginal cost curve) P = 4Q, where Q is measured in million
4-pack rolls per month. The inverse demand for toilet paper is P = 10 ” 6Q.
a. Solve for the market equilibrium price and quantity.
b. If the production of toilet paper creates an external marginal cost of $0.50 per 4-pack,
what is the socially optimal price and quantity of toilet paper?
Suppose that you deposit $2,828 in your savings account that pays 4% interest annually.
What is your account balance at the end of four years?
A) $3,308.36
B) $2,417.39
C) $3,100.12
D) $2,988.44
Which of the following statements is TRUE?
I. Public goods tend to be underprovided in the market.
II. One person’s consumption of a public good diminishes its use to another person.
III. The marginal cost of providing a public good to another consumer is infinite.
A) I and III
B) II and III
C) I only
D) I, II, and III
Consumers are more price-responsive when:
A) it is difficult to substitute across suppliers and prices are high.
B) they have little time to change their consumption patterns and prices are low.
C) there are many substitute goods available for a product, and they have a long time
horizon to adjust their consumption.
D) there are few substitute goods available for a product, and they have a short time
horizon to adjust their consumption.
Table 12.28
(Table 12.28)
a. What is the hitter’s dominant strategy?
b. What is the pitcher’s dominant strategy?
c. What is the pure-strategy Nash equilibrium?
d. What is the mixed-strategy Nash equilibrium?
Suppose that market demand is Q = 660 ” 12P and marginal cost is MC = 5.
a. Calculate consumer and producer surplus assuming a perfectly competitive market.
b. Calculate consumer and producer surplus assuming a monopoly market.
A basic assumption of production is that the firm:
A) cannot borrow money to finance its input expenditures.
B) can buy as much labor and capital as it desires at fixed prices.
C) must bid up the prices of labor and capital in order to produce more output.
D) has a downward-sloping budget constraint.
A drug company is considering investing $100 million today to bring a weight loss pill
to the market. At the end of one year, there is a 50 probability that the pill will forever
sell at a high price and generate $37 million dollars per year of profit forever, but there
is a 0.50 probability that the pill will forever sell at a low price and generate $1 million
per year of profit forever. Assume that the interest rate is 10%. What is the expected net
present value of this investment?
A) $280 million
B) $112 million
C) $44 million
D) $90 million
Which of the following statements is TRUE?
I. A Nash equilibrium requires that each player have a dominant strategy.
II. A Nash equilibrium requires that each player have a dominated strategy.
III. A game can have more than one Nash equilibrium.
A) I and II
B) I, II, and III
C) I and III
D) III only
Figure 9.5
(Figure 9.5) What happens to the firm’s profit-maximizing price and quantity following
the increase in demand from D1 to D2?
A) The firm will increase the price to P3 and sell Q1 units of output.
B) The firm will raise the price from P2 to less than P3 and increase output from Q1 to
less than Q2.
C) The firm will sell Q2 units of output at a price of P2.
D) The firm will reduce output from Q3 to Q2 and raise price from P2 to P3.
The rule of 72 states that it will take ______ years for a savings account to double at a
9% annual interest rate.
A) 8
B) 9
C) 6.5
D) 6.1
An amusement park’s customers each have the demand curve for park rides given byQ
= 11 ” 0.5P, where P is the price per ride and Q measures the number of rides. The
marginal cost is $4. If the amusement park uses a two-part tariff, what are the park’s
entrance fee and its price per ride?
A) entrance fee = $81; price per ride = $4
B) entrance fee = $100; price per ride = $11
C) entrance fee = $40; price per ride = $4
D) entrance fee = $22; price per ride = $2
A basic assumption of the long run is that a firm:
A) cannot change the amount of labor or capital that it employs.
B) can change the amount of labor and capital that it employs.
C) can change the amount of capital that it employs but not the amount of labor.
D) cannot change the amount of capital that it employs but can change the amount of
labor.
A fixed cost is a cost that:
A) does not change with the level of the firm’s output.
B) is associated with the firm’s variable inputs.
C) decreases as the firm increases output.
D) captures the wear and tear of using capital in the production process.
Figure 6.12
(Figure 6.12) Which of the following statements is TRUE?
I. Panel (a) illustrates constant returns to scale. II. Panel (b) illustrates decreasing
returns to scale. III. Panel (a) illustrates increasing returns to scale IV. Panel (b)
illustrates constant returns to scale.
I. Panel (a) illustrates constant returns to scale.
II. Panel (b) illustrates decreasing returns to scale.
III. Panel (a) illustrates increasing returns to scale
IV. Panel (b) illustrates constant returns to scale.
A) I and IV
B) II and III
C) III and IV
D) I and III
The idea that people are altruistic:
A) reinforces the basic economic notion of self-interested rational behavior.
B) challenges the basic economic notion of self-interested rational behavior.
C) cannot be modeled into utility functions.
D) assumes that marginal benefits of certain activities will not be subject to diminishing
returns.
The marginal cost of pollution is MC = 2Q, while the marginal abatement cost is MAC
= 12 ” Q. Government regulators incorrectly estimate the marginal abatement cost at
MACE = 9 ” Q. The level of pollution, measured in units, is Q.
a. Solve for the socially optimal level of pollution by using MAC.
b. Based on the government’s incorrect estimate of marginal abatement costs, what does
the government think is the socially optimal level of pollution?
c. If the government uses a quota to intervene in the market, how much pollution will
be omitted?
d. If the government taxes each unit of pollution, how much pollution will be omitted?
e. Does the quantity-restriction or price-based intervention get us closer to the socially
optimal output level?
Figure 16.1
(Figure 16.1) The external marginal cost is:
A) $4.
B) $3.
C) $6.
D) $1.
Suppose that two manufacturers produce identical fireproof safes at a constant marginal
cost of $90. The market inverse demand curve for fireproof safes is P = 450 ” 2Q,
where Q is the total output of fireproof safes produced by the two manufacturers, q1 +
q2. The firms compete by simultaneously choosing their quantity to produce. At Nash
equilibrium, what is the market price of a fireproof safe?
A) $340
B) $210
C) $160
D) $130
Figure 14.9
(Figure 14.9) Which of the following output combinations does NOT fall on the
production contract curve?
I. guns = 20, roses = 2,000
II. guns = 15, roses = 2,800
III. guns = 90, roses = 750
A) I, II, and III
B) I only
C) III only
D) I and II
A firm with a production function Q = KL (where K is units of capital and L is units of
labor) has an expansion path that is given by K = 2L. The wage rate (W) is $20 and the
rental rate of capital is $10. Complete the following table, assuming that the firm is
using the optimal mix of inputs for any given output level.
Figure 14.8
(Figure 14.8) Suppose the food industry is using 3 capital inputs and 5 labor inputs,
while the clothing industry is using 2 capital inputs and 3 labor inputs. The economy’s
output of food is ______ units and the output of clothing is ______ units.
A) greater than 100; less than 40
B) greater than 100; greater than 40
C) less than 100; greater than 40
D) less than 100; less than 40
For Christmas, Josh and Cybil, who are brother and sister, each recently received 25
iTunes music downloads and 10 movie passes. Josh’s marginal rate of substitution of
music downloads for movie passes is 1/4, while Cybil’s marginal rate of substitution of
music downloads for movie passes is 2. Which of the following trades would be a
Pareto improvement over the original allocation?
A) Josh gives Cybil 1 music download for 3 of her movie passes.
B) Josh gives Cybil 3 music downloads for 1 of her movie passes.
C) Josh gives Cybil 8 music downloads for 1 of her movie passes.
D) Josh gives Cybil 1 music download for 4 of her movie passes.
Bob’s utility function for black (B) and white (W) socks is U = 10B + 10W, where MUB
= 10 and MUW = 10. Suppose that Bob has $40 of income to spend on socks. With the
price of white socks held constant at $10, graph Bob’s demand curve for black socks at
a price of $2, $4, $5, $8, $10, and $20.
Suppose there are 100 consumers in the computer speaker market, each with an
identical demand curve given by Qi= 10 ” 0.1P, where P is the price per pair of
speakers and Qi measures the quantity demanded of computer speakers by each person.
The market supply for computer speakers is given by QS = 20P ” 200. What is the
equilibrium price and quantity in the computer speaker market?
Draw an Edgeworth box for Elaine and Jerry. There are a total of 8 pancakes and 10
bowls of cereal that can be allocated between them. Draw the consumption contract
curve and describe it. If Jerry consumes all 8 pancakes and 10 bowls of cereal, is this
allocation Pareto-efficient?
The MRTSLKin the cell phone industry is 5 and the MRTSLKin the tablet industry is 8.
Which of the following resource reallocations will lead to a Pareto improvement?
A) The cell phone industry should use more labor and more capital, and the tablet
industry should use less labor and less capital.
B) The cell phone industry should use less labor and less capital, and the tablet industry
should use more labor and more capital.
C) The cell phone industry should use more labor and less capital, and the tablet
industry should use less labor and more capital.
D) The cell phone industry should use less labor and more capital, and the tablet
industry should use more labor and less capital.
Table 15.1
(Table 15.1) At an auction for used cars, nine sellers are trying to sell their cars. Each of
the sellers knows the quality rating of his car, all of which the table displays, and which
range from 0 to 2.
Sellers value their car at 1,000Q, where Q is its quality rating. Buyers do not know the
value of any given car, but they do know the average quality rating of all the cars that
sellers are willing to sell at the going auction price. Buyers value any given car at 1,500
, where is the average quality rating of the cars available for sale. Complete the
following table.
Helen considers Titleist (T) and Callaway (C) golf balls perfect substitutes. Her utility
function is U = 10T + 8C. A sleeve of Titleist is priced at $12, compared to $10 for
Callaway balls. What is Helen’s utility-maximizing bundle of golf balls? Assume that
Helen can spend $120.
Suppose that U = min{2X, Y}, where X is units of good X and Y is units of good Y. The
price of good X is $4 and the price of good Y is $7. What is the minimum expenditure
necessary to achieve a utility level of 100?
Figure 10.12
(Figure 10.12) Complete the following table.
Figure 5.27
(Figure 5.27) Illustrate the substitution effect and income effect associated with the
decrease in the price of milk.
Suppose that a company offers insurance for the cost of surgical hair replacement. After
selling this insurance coverage for a short-term period, the company finds that almost
all of its insurance customers are undergoing hair replacement treatment and filing a
claim. What problem does the insurance company face? Is there anything the insurance
company could do to try to limit this problem?
A firm with market power, which faces a linear demand curve, is practicing perfect
price discrimination. It is producing 1,000 units of output and earning producer surplus
of $5,000. Marginal cost is constant at $10. If the firm cannot price-discriminate, how
much producer surplus will it earn?