The production process is an extremely complicated task, so economists make a number
of simplifying assumptions. Which of the following assumptions do economists make
in their basic model of producer behavior?
I. Multiproduct firms: All firms produce at least two goods. II. Firms only use two
inputs in the production process: capital and labor. III. Cost minimization: Firms
attempt to produce a fixed quantity of output at the lowest possible total cost. IV. Firms
can produce more output by using more inputs.
I. Multiproduct firms: All firms produce at least two goods.
II. Firms only use two inputs in the production process: capital and labor.
III. Cost minimization: Firms attempt to produce a fixed quantity of output at the lowest
possible total cost.
IV. Firms can produce more output by using more inputs.
A) I and IV
B) I, II, III, and IV
C) II, III, and IV
D) I and III
Table 10.5
(Table 10.5) Assume that the marginal cost of producing software programs is zero. If
the firm priced and sold each software program separately, it would earn total revenues
of ______, while a pure bundling strategy would generate the firm total revenues of
______.
A) $450; $900
B) $380; $450
C) $700; $760
D) $600; $660
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%. Suppose the firm decides
to wait one year to determine whether the pill will sell at a high or low price. The firm
will not invest if it learns that the pill will sell at a low price. What is the net present
value of waiting one year to make the investment?
A) $107.44 million
B) $88 million
C) $201.22 million
D) $64.5 million
The consumer’s utility function for goods X and Y is U = 3X + 15Y. Good X is placed on
the x-axis and good Y is placed on they-axis. Which of the following statements is
TRUE?
I. The marginal utility of good Y is 15.
II. The MRSXY = 5.
III. The consumer is always willing to trade away 5 units of good X for 1 unit of good
Y.
A) I and II
B) II only
C) I and III
D) I, II, and III
Suppose that the costs of going to college are given by:
Low-ability person: C = $60,000y
High-ability person: C = $30,000y
where y is years in college. In the economy, there are two types of workers, high- and
low-ability. Employers cannot distinguish between the types of workers, so they pay
each worker $250,000, the average value of output per worker. Employers will pay
workers $380,000 if they earn a four-year degree.
a. Will high-ability workers choose to get a four-year degree? How about low-ability
workers?
b. Because of rampant grade inflation, the cost of going to college for a low-ability
person falls to C = 32,000y. Will low-ability workers choose to get a four-year degree?
Does going to college serve as an effective signal?
Figure 4.13
(Figure 4.13) What caused the budget constraint to rotate?
A) an increase in the price of good X
B) a decrease in the price of good Y
C) a decrease in income
D) an increase in the price of good Y
Figure 14.12
(Figure 14.12) Answer the following questions.
a. At point A, how many crumpets and cups of tea does Eliza have? How many
crumpets and cups of tea does Henry have?
b. At point A, give an example of a reallocation of goods that will put Eliza and Henry
on higher indifference curves.
Figure 8.18
(Figure 8.18) Which of the following statements is TRUE?
I. In the long run, this firm will produce 500 units of output.
II. In the short run, this firm produces 600 units of output.
III. The long-run equilibrium price is $4.
IV. At a price of $5, new firms will eventually enter the market, eliminating this firm’s
economic profits.
A) I, II, III, and IV
B) III and IV
C) I and II
D) III only
Figure 2.6
(Figure 2.6) Suppose that the demand curve in both markets shifts out by the same
distance. The change in price will be relatively larger in ______, and the change in
quantity will be relatively larger in ______.
A) market A; market A
B) market A; market B
C) market B; market A
D) market B; market B
In the case of producing a good with a negative externality, a firm will likely consider
only the:
A) external marginal costs of production, which cause more output to be produced than
is socially optimal.
B) private marginal costs of production and not the external marginal costs, which
cause more output to be produced than is socially optimal.
C) private marginal costs of production and not the external marginal costs, which
cause less output to be produced than is socially optimal.
D) external marginal costs of production, which cause less output to be produced than is
socially optimal.
Majestic Manicures provides manicures in a monopolistically competitive market. Its
inverse demand curve is P = 85 ” 4Q, where Q is the number of daily manicures and P
is the price per manicure. The total cost of providing manicures is TC = 13Q and
marginal cost is $13.
a. What is Majestic Manicures’ profit-maximizing output level and price?
b. What is Majestic Manicures’ profit?
c. What will happen to Majestic Manicures’ demand curve in the long run?
d. What is the expected long-run equilibrium price for manicures?
The market for plywood is characterized by the following demand and supply
equations: QD = 800 ” 10P and QS = 50P ” 1,000, where P is the price per sheet of
plywood and Q measures the quantity of plywood. What happens to producer surplus if
the government imposes a price ceiling of $25 per sheet of plywood?
A) Producer surplus increases from $3,333 to $4,225.
B) Producer surplus decreases from $5,000 to $1,250.
C) Producer surplus decreases from $1,875 to $1,240.
D) Producer surplus decreases from $2,500 to $625.
Genetically modified soybean seed is an example of a new production technology that
has increased soybean productivity. As a result, this new technology ______ production
costs and ______ the supply of soybeans.
A) raised; increased
B) lowered; decreased
C) lowered; increased
D) raised; decreased
A decrease in both demand and supply will cause:
A) a decrease in the equilibrium quantity and an uncertain effect on the equilibrium
price.
B) an increase in the equilibrium price and a decrease in the equilibrium quantity.
C) an increase in the equilibrium price and an uncertain effect on the equilibrium
quantity.
D) a decrease in the equilibrium price and an uncertain effect on the equilibrium
quantity.
Barbecue sauce and chicken thighs are complement goods. Suppose that the
government places a tax on chicken thighs to discourage the consumption of fatty meat.
a. What is the partial equilibrium effect of the tax on the barbecue sauce market?
b. What is the general equilibrium effect of the tax on the barbecue sauce market? Does
general equilibrium analysis predict a larger or smaller effect on the equilibrium price
and quantity of barbecue sauce than partial equilibrium analysis?
Figure 5.15
(Figure 5.15) What is the size of the substitution effect associated with the decrease in
the price of good X?
A) The quantity of good X purchased increases from 3 to 5.
B) The quantity of good X purchased decreases from 3 to 2.
C) The quantity of good X purchased increases from 2 to 3.
D) The quantity of good X purchased increases from 2 to 5.
Figure 8.10
(Figure 8.10) Economic profit for this firm can be calculated as:
A) (160 ” 130) × 80.
B) (160 × 80) ” 30.
C) 80 ” 30.
D) (160 ” 30) × 80.
Suppose the inverse demand for a good is given by P = 6 ” Q.
a. What is the price elasticity of demand at P = $3? Is demand elastic at this price?
b. If consumers are willing to pay $2 more per unit, what is the price elasticity of
demand at P = $3? Is demand elastic at this price?
Which of the following statements is TRUE?
A) The present discounted value of future cash flows is higher the further into the future
the cash flows occur.
B) The present discounted value of future cash flows is higher when the interest rate is
higher.
C) The present discounted value of future cash flows is lower when the interest rate is
higher.
D) The present discounted value of future cash flows is lower the closer into the future
the cash flows occur.
Suppose that a drug company produces a new drug that cures baldness. The inverse
demand curve for the drug is P = 205 ” 20Q, where Q measures the number of pills in
millions. The various costs of production are given by TC = 100 + 5Q, ATC = 5 +
100/Q, and MC = 5. If the government grants this firm a patent, it will earn profits of
______. If the government revokes the patent and the firm must sell its drug at marginal
cost because of competition, it will earn profits of ______.
A) $600 million; $500,000
B) $2 billion; $0
C) $400 million; “$100 million
D) $70 million; “$25 million
Gotcha is the only seller of stun guns and faces the inverse market demand curve P =
400 ” 12Q, where Q measures the number of stun guns per day and P is the price per
stun gun. The marginal cost is constant at $64.
a. What is Gotcha’s profit-maximizing price and quantity?
b. Suppose a new firm, Ouchy, enters the stun gun market. Ouchy’s marginal cost is also
constant at $64. Gotcha and Ouchy decide to form a cartel and evenly split the market
output. What is the market price? How much output does each firm produce?
c. Now suppose that Ouchy no longer abides by the cartel agreement and decides to
produce and sell 5 additional stun guns per day. What happens to the market price and
market output?
The firm’s long-run total cost is given by and long-run marginal cost is
given by LMC = 100 ” 20Q + Q2. At what output level does the firm experience
economies of scale?
A) Q < 15
B) Q < 175
C) Q < 4,000
D) Q < 88
Suppose that the marginal utility of good X and good Y is given by the following
equations:
MUX = 1/(X + 10)
MUY = 1/Y
a. As more units of good X are consumed, what happens to utility and marginal utility of
good X?
b. What is MRSXY?
Jasmine is considering buying a 1954 Chevy for a restoration project and then selling it.
She expects that there is a 0.2 probability that she will gain 25% from the project, a 0.3
probability that she will gain 10%, and a 0.5 probability that she will gain 5%. What is
Jasmine’s expected return?
A) 18%
B) 10.5%
C) 7%
D) 12%
An increase in input prices causes:
A) the market supply to shift inward, driving the equilibrium price downward.
B) the market supply to shift outward, leading to a higher equilibrium price.
C) the market supply to shift inward, driving the equilibrium price higher.
D) the supply curve to decrease and the demand curve to decrease due to the higher
price.
The demand and supply of ethanol are given by QD = 8,000 ” 2,000P and QS = 1,000P
” 1,000, where P is price per gallon and Q measures gallons per minute. If the
government subsidizes ethanol at $0.30 per gallon, what is the deadweight loss?
A) $30
B) $7,800
C) $440
D) $119
Figure 9.9
(Figure 9.9) Which of the following statements is TRUE?
I. Consumer surplus under perfect competition is given by area A + B + C.
II. Producer surplus under monopoly is given by area B + D.
III. The deadweight loss from market power is area C.
A) I, II, and III
B) I and II
C) III only
D) I only
The utility function for a consumer is U = XY/(X +Y), where the MUX = Y2/(X+Y)2 and
MUY= X2/(X + Y)2.
a. What is the slope of the indifference curve when X = 3.75 and Y = 3.75?
b. What is the marginal rate of substitution when X = 4 and Y = 16?
The supply of housing in New York City is more inelastic than the supply of housing in
York, Pennsylvania. As a result, the long-run labor supply curve in New York City is
______ than the long-run labor supply curve in York, Pennsylvania.
A) more inelastic
B) more elastic
C) more negatively sloped
D) less inelastic
Suppose there are two Bertrand firms that produce similar but not identical products.
The demand curves facing each firm are given by:
Firm A: qA = 10 ” 3PA + PB
Firm B: qB = 10 ” 3PB + PA
Assume that marginal cost is zero for both firms.
a. Graph each firm’s reaction function and identify the Nash equilibrium.
b. How much output does each firm produce?
Why might professional golfers who display loss aversion be more tentative putting for
birdie than putting for par and thus making a greater proportion of par putts from equal
distances?
A) The psychological loss of missing a par putt (worsening your score by one stroke) is
greater than the psychological gain of making a birdie putt (improving your score by
one stroke).
B) The psychological loss of missing a par putt (worsening your score by one stroke) is
less than the psychological gain of making a birdie putt (improving your score by one
stroke).
C) The psychological loss of missing a par putt (worsening your score by one stroke) is
equivalent to the psychological gain of making a birdie putt (improving your score by
one stroke).
D) There is no psychological gain for making birdie putts when golfers are nominally
loss averse.
What is hyperbolic discounting?
A) the tendency of people to place much greater importance on the immediate present
than even the near future when making economic decisions
B) the use of a positive discount rate that exceeds the real interest rate
C) the valuing of future benefits at an exponentially higher rate than current benefits
D) the ability of people to psychologically discount losses more than gains
As Southwest Airlines began operating at different airports around the country:
A) prices at those airports decreased and the number of passengers flying increased
dramatically.
B) market power became more concentrated, leading to higher fares and fewer flights.
C) consumer surplus and the deadweight loss increased.
D) consumer surplus decreased and the deadweight loss increased.