In an experiment, each subject observed a random spin of a wheel that had values on it
from 0 to 100. The subjects were then asked to guess the number of African countries in
the United Nations. If the subjects were affected by anchoring, what did the researchers
likely find?
A) The researchers found a negative correlation between the number on the wheel and
the subject’s predicted number of African countries in the United Nations.
B) The researchers found a positive correlation between the number on the wheel and
the subject’s predicted number of African countries in the United Nations.
C) The researchers found zero correlation between the number on the wheel and the
subject’s predicted number of African countries in the United Nations.
D) The researchers found a random correlation between the number on the wheel and
the subject’s predicted number of African countries in the United Nations.
Figure 9.4
(Figure 9.4) Which of the following statements is TRUE?
I. If the firm is producing 5 units of output, it should expand output to increase profits
because P > MC.
II. At a price of $16, the firm’s profits would rise from raising its price.
III. The profit-maximizing quantity is 600 units.
IV. The profit-maximizing price is $13.
A) I and III
B) IV only
C) II only
D) III only
Figure 12.6
(Figure 12.6) Which of the panels correctly illustrates trimming the branches?
A) panel (a)
B) panel (b)
C) panel (c)
D) panel (d)
Which of the following methods reduce adverse selection in insurance markets?
I. selling insurance policies to groups of employees in a firm
II. requiring medical exams for anyone purchasing life insurance
III. denying insurance coverage to people with preexisting health conditions
IV. mandating by law that all people must buy health insurance
A) I, II, III, and IV
B) I and III
C) III only
D) I and II
Figure 10.2
(Figure 10.2) Which of the following statements is TRUE?
I. Consumer surplus under perfect competition is $20.25.
II. Consumer surplus under perfect price discrimination is $0.
III. Consumer surplus under monopoly is $9.
A) I, II, and III
B) I and III
C) II only
D) II and III
Suppose that technological breakthroughs make jet packs affordable, convenient, and
safe for personal transportation. How would the proliferation of jet packs affect
consumer surplus in the market for automobiles?
A) The demand for automobiles would become more price elastic, decreasing the
consumer surplus from automobiles.
B) The demand for automobiles would become more price inelastic, increasing the
consumer surplus from automobiles.
C) The demand for automobiles would become more price inelastic, decreasing the
consumer surplus from automobiles.
D) The demand for automobiles would become perfectly inelastic, increasing the
consumer surplus from automobiles.
Hersheypark in Pennsylvania mentions the following offer on its Web page: “A military
discount is available at Hersheypark during the regular summer operating schedule off
of the Regular, Junior and Senior One Day admission. This discount is available to
active duty military, reserves, retired military personnel, and members of the National
Guard.” What is the name of this pricing strategy?
A) first-degree price discrimination
B) second-degree price discrimination
C) segmenting or third-degree price discrimination
D) perfect price discrimination
A medical device manufacturer sells its sterilization equipment in a market with an
inverse demand curve of P = 6,000 ” 400Q, where Q measures the number of sterilizers
in thousands and P is the price per unit. The marginal cost of production is constant at
$4,000.
a. Solve for the profit-maximizing price and quantity.
b. The Patient Protection and Affordable Care Act signed into law by President Barack
Obama creates a tax on medical device manufactures. Suppose the tax raises the
marginal cost of production from $4,000 to $4,400. What is the new profit-maximizing
price and quantity?
c. The actual implication of the medical device tax calls for a 2.3% tax on a firm’s total
revenue, which leaves the marginal cost of production unchanged. This means that
marginal revenue with the tax will equal 7% of the marginal revenue without the tax, or
MRtax= 0.977MRno tax . What is the profit-maximizing price and quantity under this
scenario?
Manny Metal creates 300 tons of sulfur dioxide emissions, and Silk Steel creates 550
tons of sulfur dioxide emissions. The marginal abatement cost (MAC) of reducing sulfur
dioxide is given by:
Manny Metal:MACM= 10 + 3eM
Silk Steel:MACS= 50 +eS
Government regulators want to reduce total sulfur dioxide emissions to 650 tons, a
200-ton reduction. If the government gives each firm 325 tradable pollution permits,
how many tons of pollution will each firm emit?
A) Manny Metal emits 240 tons and Silk Steel emits 410 tons.
B) Manny Metal emits 280 tons and Silk Steel emits 370 tons.
C) Manny Metal emits 200 tons and Silk Steel emits 450 tons.
D) Manny Metal emits 320 tons and Silk Steel emits 330 tons.
In a perfectly competitive market with 50 firms, output is zero at prices less than $20.
At prices greater than or equal to $20 and less than $30, each firm will produce 1 unit of
output. At any price greater than or equal to $30, each firm will produce 3 units of
output. At a price of $27, the industry produces ______ units, and at a price of $35, the
industry produces ______units.
A) 16.67; 50
B) 50; 150
C) 30; 75
D) 9; 45
A firm is producing 50 units of output at a total cost of $1,000, with a per-unit variable
cost of $8. What is the firm’s average fixed cost?
A) $12
B) $4
C) $20
D) $28
Allen earns $1,000 per week and purchases health-care (H) at $200 per unit and
non-health-care (N) goods at $50 per unit.
a. What is the equation for Allen’s budget constraint?
b. Graph Allen’s budget constraint.
The inverse market demand curve is P = 260 ” Q, where Q is the output of Firm 1 and
Firm 2, q1+ q2. The output of each firm is identical.
a. Firm 1 and Firm 2 have the same cost structure: AC = MC = $20. If the firms are in
Cournot competition, how much profit does each firm earn?
b. Now suppose that Firm 2’s production costs increase to AC = MC = $80. If the firms
continue their Cournot competition, how much profit does each firm earn?
Suppose that MUY = 15, MUX = 10, PY = $2, and PX = $1. Which of the following
statements is TRUE?
A) The consumer is maximizing utility.
B) The consumer could increase utility by giving up 1 unit of good Y for 2 units of good
X.
C) The consumer could increase utility by giving up 2 units of good X for 1 unit of good
Y.
D) The consumer is receiving more marginal utility per dollar from good Y than from
good X.
Figure 12.2
(Figure 12.2) Refer to the figure, where two firms are considering whether to expand
their production capacity. Which of the following statements is TRUE?
A) The outcome of this game is (10, 6) or (6, 10).
B) For this game, there is no first-mover advantage.
C) The outcome of this game is that neither firm expands its production capacity.
D) For this game, there is a first-mover advantage.
Table 11.2
Payoffs: University of Michigan’s Football Revenue, Michigan State’s Football
Revenue
(Table 11.2) The table shows the payoffs associated with spending different amounts of
money recruiting star football players. What is the Nash equilibrium?
A) Each school will choose to spend a little money on recruiting.
B) Each school will choose to spend lots of money on recruiting.
C) The University of Michigan will spend a little money on recruiting and Michigan
State University will spend lots of money on recruiting.
D) There are two Nash equilibria: (1) both schools spend lots of money recruiting or (2)
both schools spend little money recruiting.
Figure 3.12
(Figure 3.12) What is the effect of the quota on producer surplus?
A) The quota causes producer surplus to decrease from $12 to $2.
B) The quota causes producer surplus to decrease from $16 to $2.
C) The quota causes producer surplus to increase from $2 to $12.
D) The quota causes producer surplus to increase from $8 to $10.
Table 15.2
(Table 15.2) In a small town, there are five people who vary in health status. Each
person knows his or her own health status and expected medical bills, which are given
in the table. These people are considering buying insurance to pay for their medical
bills.
a. Suppose that the health insurance company does not know the expected health
insurance claims of any one person but does know the expected claims of the group. If
the health insurance company sets the premium based on the average expected claims
of these five people, what is the premium?
b. At the premium determined in part a, who buys health insurance? What will happen
to the premium over time?
Table 8.2
(Table 8.2) Suppose that both firms are currently producing 100 units of output. If the
firms want to increase profit, firm A should produce _______ and firm B should
produce _______.
A) less output; more output
B) less output; less output
C) more output; more output
D) more output; less output
Figure 5.24
(Figure 5.24) Answer the following questions:
a. What is the income expansion path?
b. What quantities of good X does the income expansion path go through in the figure?
c. Draw the Engel curve for good X. Assume that the price of good X = $100 per unit
and the price of good Y = $100 per unit.
d. What is the income elasticity of demand for goodX if income increases from $1,200
to $1,600?
A business that makes and sells pea gravel faces two types of customers with the
following inverse demand curves:
Type A: P = 5 ” 0.002Q
Type B: P = 3 ” 0.001Q
where Q measures bags of pea gravel and P is the price per bag. The marginal cost is
$0.50.
a. Suppose the business wants to use discounting to price-discriminate. Calculate the
price per bag and the price per bag with the quantity discount. What minimum quantity
will the firm set for the quantity discount?
b. How much consumer surplus do Type A buyers receive from the regular price and the
quantity-discount price?
c. How much consumer surplus do Type B buyers receive from the regular price and the
quantity-discount price?
d. Based on your answers to parts b and c, are the prices incentive-compatible?
Which of the following statements is TRUE?
I. Free entry in a perfectly competitive industry results in the industry’s firms earning
zero economic profit in the long run, except for the most efficient producers, who may
earn economic rent.
II. In a perfectly competitive market, long-run equilibrium is characterized by LMC < P
< LATC.
III. If a competitive industry is in long-run equilibrium, a decrease in demand causes
firms to earn negative profit because the market price will fall below average total cost.
A) I, II, and III
B) II, III, and IV
C) I and III
D) I only
To maximize profits, a firm should produce where:
A) MR = MC.
B) TR/Q = TC/Q.
C) P = AVC.
D) ATC < P < AVC.
Figure 2.5
(Figure 2.5) Which of the following events could have caused the demand curve to
shift?
I. The price of a substitute good decreased.
II. The price of a complement good increased.
III. The income of consumers increased.
IV. The number of buyers in the market increased.
A) I, II, III, and IV
B) III and IV
C) II, III, and IV
D) I and II
A consumer is currently consuming a bundle of goods, in which her MRSXY is greater
than PX/PY.
a. In a well-labeled diagram, show this situation using a budget constraint and
indifference curve.
b. Is the consumer maximizing utility? If not, what should the consumer do to
maximize utility?
Figure 8.17
(Figure 8.17) Initially, the constant-cost industry was in long-run equilibrium at point A
when the demand for the good increased to D2. How much output will be produced in
the long run as a result of the demand increase?
A) 3,000
B) 5,000
C) 6,000
D) 7,000
Taggart Express operates in a monopolistically competitive industry. Its inverse demand
curve is P = 80 ” Q and the total cost curve is TC = 20Q. What is the long-run
equilibrium price?
A) $60
B) $75
C) $50
D) $20
Figure 4.3
(Figure 4.3) Which of the following statements is FALSE?
A) Indifference curve U2 provides a higher level of utility than indifference curve U1.
B) Bundle C is preferred to bundle D.
C) Bundle A is preferred to bundle C.
D) The consumer is indifferent between bundle A and bundle D.
The practice of bundling requires a firm to:
A) have market power, prevent arbitrage, and sell two products in which consumers’
demand for one product is negatively correlated with their demand for the other
product.
B) have market power and sell two products in which consumers’ demand for one
product is positively correlated with their demand for the other product.
C) ignore arbitrage and sell two products in which consumers’ demand for one product
is negatively correlated with their demand for the other product.
D) set price equal to marginal cost for each consumer whose demand can be identified
after the purchase of the product.
Table 12.8
(Table 12.8) In the table, payoffs represent profits measured in thousands of dollars.
Which of the following outcomes represent(s) a Nash equilibrium?
I. (200, 200)
II. (600, 990)
III. (650, 400)
IV. (400, 825)
A) II and IV
B) II only
C) II and III
D) III and IV