The following figure shows the domestic demand and supply curves for a good. With
free trade, the price of the good in the domestic market is P3. The government
introduces a 5% tariff in the market which raises the domestic price to P2.
Figure 7-1
Refer to Figure 7-1. If the government substitutes the tariff for a quota that raises the
price in the domestic price to P2, the deadweight loss in the market would be equal to:
a) the area of GHLM.
b) the area of GHKJ.
c) the area of HMK.
d) the area of JGL.
e) the area of JGL + HMK.
Assume that a worker works 60 hours a week. He contributes an additional $90,000 to
the firm’s revenue and his personal disutility from the job is $35,000. If he is paid
$58,000 per year, what is the net profit from this employment relationship?
a) $32,000
b) $35,000
c) $55,000
d) $34,000
e) $23,000
If there is a change in input prices, what is the most likely impact on production
isoquants?
a) They will shift leftward toward the origin.
b) The curvature of the isoquant will change.
c) They will remain unchanged.
d) They will shift outward away from the origin.
e) Uncertain, depends on which input prices change.
A beverage producer produces cola at two bottling plants and distributes it to 4 major
cities in the Southeast. The table below shows the bottling plant capacities, the number
of cases to be shipped to each city, and the transport costs ($ per case) between plants
and cities. The producer’s objective is to meet its delivery requirements while
minimizing its total transport costs.
(a) Formulate the firm’s linear programming problem.
(b) The optimal solution is: XC = 1,200, XD = 1,800, YA = 1,000, YB = 1,400, and YC
= 900. What is the shadow price associated with Plant Y capacity? Show that the
increase in total cost in delivering an additional case to City D is $.20.
The outcome of a negotiated agreement is deemed efficient only if:
a) neither the buyer nor the seller receives more than 60% of the total surplus.
b) the sum of the buyer’s and seller’s profit shares is less than 100%.
c) the agreement equitably balances both sides’ interests.
d) both parties benefit from the agreement (relative to their walk-away options).
e) no other agreement makes one party better off without making the other worse off.
What is meant by consumer surplus?
a) It is the net gain that buyers obtain from purchasing a good.
b) It is the area enclosed by the demand and supply curves.
c) It is the difference between the good’s price and its cost per unit.
d) It is the maximum monetary amount that a person would be willing to pay for a
good.
e) It is the total satisfaction from the consumption of a good.
Market efficiency is typically achieved by:
a) a small number of dominant firms whose large size ensures low cost.
b) large firms that practice corporate social responsibility.
c) competitive firms that maximize benefits for consumers.
d) command-and-control type regulation of the market.
e) firms that make positive economic profits.
If a study examines several different markets at the same time, and compares outcomes
with conditions in each market, it is specifically using:
a) time series data.
b) censored data.
c) controlled data.
d) truncated data.
e) cross-sectional data.
The optimal combination of decision variables of a linear programming problem is x =
20 and y = 30. The given resource constraints are: 5x + 2y ‚ 150 and y ‚ 15. The
shadow price of the second constraint is:
a) 1.5.
b) .67.
c) Zero.
d) 10.
e) There is insufficient information to provide and answer.
A used car salesperson offers a warranty on any car sold in the lot. This is known as:
a) signaling.
b) risk aversion.
c) self-selection.
d) screening.
e) adverse selection.
The following table shows the total output per hour produced in a factory at various
levels of employment of labor. The firm sells each unit of output at $2 and each worker
is paid a wage of $12.
Table 5-1
Refer to Table 5-1. What is the marginal revenue product of the 4th worker?
a) $82
b) $20.50
c) $22
d) $18
e) None of these answers is correct.
If buyers’ private values are drawn from different distributions, then which of the
following statements is incorrect?
a) Revenue equivalence will no longer hold.
b) In an English auction, each buyer will be willing to bid up to its reservation price if
necessary.
c) The sealed bid auction will yield greater expected revenue than English auction.
d) Buyers will employ identical bidding strategies.
e) In an English auction, the allocation of the item is efficient.
Information is considered to be valueless if it:
a) has a negative expected value.
b) drastically alters decisions made by the firm.
c) leaves the prior probability unchanged.
d) it changes the revised probability to zero.
e) it comes from an imperfect test.
Decision trees are numerically evaluated:
a) From left to right
b) By pruning low probability events from the tree.
c) By averaging at chance events.
d) By averaging at points of decision.
e) By selecting the best outcome at chance events
To maximize profit, the firm should set output at the level where:
a) the average cost per unit is minimized.
b) average revenue just equals average cost.
c) marginal cost equals zero.
d) marginal revenue is equal to marginal cost.
e) marginal revenue equals zero.
Assume that a firm is producing at its profit-maximizing level of output. A decrease in
the price of raw materials used in production is most likely to lead to:
a) an increase in quantity produced at an unchanged price.
b) a fall in the price of the good and an increase in the quantity produced.
c) a fall in both the price of the good and the quantity produced.
d) an increase in both the price of the good and the quantity produced.
e) a fall in the quantity produced of the good at an unchanged price.
Centralized decision making is favored over decentralized decision making:
a) when there are no principal-agent problems.
b) when decisions need to be made on a case-by-case basis.
c) when coordinated decisions are essential.
d) when information that is relevant to the decision is dispersed.
e) when the firm has a flat organizational structure.
Compared to a perfectly competitive industry, a monopolist will generally produce:
a) a greater level of output a lower price.
b) a greater level of output at a higher price.
c) a smaller level of output a lower price.
d) a smaller level of output at a higher price.
e) roughly the same level of output but at a higher price.
Business cycles are:
a) short-term patterns of increases and decreases in economic activity around a general
trend.
b) irregular fluctuations in the level of economic activity, which rarely occur anymore.
c) predictable economic expansions above the long-term trend.
d) abrupt and unexpected departures from the current economic trend.
e) periodic fluctuations in aggregate demand that depend on the time of the year.
If the price of a good increases and is above the equilibrium price, then:
a) suppliers’ inventories will build up, they will reduce output, and lower prices.
b) demand will exceed supply and there will be a shortage in the market.
c) the demand curve will shift to the left until equilibrium is established at the new
higher prices.
d) the supply curve will shift to the right until equilibrium is established at the new
higher price.
e) consumers will bid down the good’s price, but there will be no reduction in output.
Given the opportunity, a rational decision-maker should always select the alternative
with the:
a) greatest expected return regardless of risk.
b) lowest expected return regardless of risk.
c) greatest expected utility.
d) lowest probability of occurrence.
e) greatest marginal utility.
A firm has the following cost function: C = 30 ‘“ 14Q + Q2. Derive the firm’s supply
curve from the total cost function.
Why might legislators often end up reversing their political position on an issue by
voting in favor of a bill when previously they had spoken out against it?
Which of the following settings approximate pure selling problems? Explain why or
why not.
(i) A toll bridge
(ii) CD sales in a music store
(iii) Selling advertising time on a commercial radio station
(iv) Checking account services
(v) Seats on the subway
(vi) Frozen vegetables in a store
(vii) Fresh fish at the end of the business day
Draw a graph of a market in equilibrium. Describe what might cause a change in
demand or supply, and how this would affect the new equilibrium. Indicate the effect on
equilibrium price and quantity.
Discuss the role of reputation in strategic settings.
If a decision is made on the basis of expected utility, which of the two investments,
investment R and investment C, should the decision-maker choose?
Briefly describe the potential pitfalls associated with making intuitive predictions.