A firm practicing third-degree price discrimination may:
I. segment its customers by age, such as offering senior citizen discounts.
II. charge customers living in certain zip codes a higher price than customers living in
other locations.
III. initially charge high prices and then reduce the price over time to sell to the more
price-sensitive consumers.
A) II only
B) I and II
C) I only
D) I, II, and III
There is an 80% probability that Tom will be in good health during the year and incur
only $200 in medical expenses, but there is a 20% probability that he will be ill and
incur $20,000 in medical expenses. If an insurance company charged Tom an
actuarially fair premium, how much would Tom pay for health insurance?
A) $3,840
B) $4,000
C) $4,160
D) $3,460
Suppose the demand curve for a firm is Q = 50 ” 0.125P, where Q measures units of
output and P is the price per unit.
a. Derive the firm’s marginal revenue curve.
b. What is the value of marginal revenue at 10 units of output?
c. Graph the firm’s demand and marginal revenue curve.
A firm faces the demand curve Q = 6 ” P, and its marginal cost is constant at $2.
a. Calculate producer surplus under monopoly pricing.
b. Derive a block-pricing strategy that, limited to two prices and two quantity blocks,
generates the firm more producer surplus than under monopoly pricing.
The inverse demand for a drug that treats melanoma is given by P = 3,000 ” 10Q, where
Q measures the number of drug treatments and P is the price per treatment. Suppose
that the marginal cost per drug treatment is constant at $10. What is the
profit-maximizing price per drug treatment?
A) $2,000
B) $1,505
C) $300
D) $2,900
Which of the following supply curves (where P is price per bushel and QS measures
number of bushels) generates $64 of producer surplus at a market price of $10 per
bushel?
A) QS = 7.5P ” 5
B) QS= 10P ” 3
C) QS = 2P ” 4
D) QS = 6P ” 8
A consumer spends his limited income on three goods such that the MUX = 4, MUY = 4,
MUZ= 4, and PX = 4, PY = 2, PZ = 1. Which of the following statements is TRUE?
I. Because the marginal utilities of all three goods are equal, the consumer is
maximizing utility.
II. The consumer receives the most bang-for-the-buck from good Z.
III. The marginal utility per dollar spent is not equal across all 3 goods, so the consumer
is not maximizing utility.
A) I only
B) II only
C) III only
D) II and III
Figure 3.15
(Figure 3.15) Which of the following statements is TRUE?
I. Consumer surplus after the tax is area A + B.
II. Producer surplus before the tax is D + E + F.
III. Consumer surplus before the tax is A + C + E.
IV. The size of the tax is $0.50, raising $170,000 in tax revenue.
A) I and II
B) II, III, and IV
C) IV only
D) II and IV
A warehouse club has customers with identical demand curves: Q = 100 ” 5P, where Q
measures the annual number of merchandise units and P is the price per merchandise
unit. The marginal cost of a merchandise unit is $10. If the warehouse club uses a
two-part tariff strategy, it will earn producer surplus of ______ per customer.
A) $1,060
B) $75
C) $450
D) $250
In competitive markets, people who have systemic biases are likely to:
A) increase over time.
B) exit the market over time or adjust their behaviors.
C) have a comparative advantage compared to their rational counterparts.
D) never enter markets and participate in them.
Which of the following statements is TRUE?
A) Evidence suggests that schooling raises earnings only by raising productivity.
B) Sheepskin effects are consistent with signaling.
C) The sheepskin effect refers to evidence that students with a 4-year college degree
earn no more than students with 4 years of college but no degree.
D) The effects of signaling are the smallest for recent graduates who are just starting to
work.
In 2004, people paid $400,000 for their homes located around Crystal City, Virginia.
Because of the housing crisis, the current price of these homes is $300,000. If
homeowners are nominally loss-averse, what price do they try to sell their homes for?
Graphically, illustrate this situation with supply and demand curves. Is there an excess
demand for housing?
Answer the following questions.
a. Tim’s marginal rate of substitution of hamburger for steak is , and Ron’s
marginal rate of substitution of hamburger for steak is 2. Is the allocation of hamburger
and steak Pareto-efficient between Tim and Ron? If not, explain how Tim and Ron
could be made better off.
b. Polly and Grace’s marginal rate of substitution of purses for shoes is 2.5. What is the
price ratio of purses to shoes?
Suppose the government is considering changing payroll taxes. Which of the following
tax laws would be most beneficial for workers (e.g., provide the highest after-tax
wage)?
A) a 5% payroll tax placed on workers and a 10% payroll tax placed on employers
B) a 9% payroll tax placed on workers and a 6% payroll tax placed on employers
C) a 12% payroll tax placed on workers and a 1% payroll tax placed on employers
D) a 2% payroll tax placed on workers and a 14% payroll tax placed on employers
When calculating net present value (NPV), the interest rate represents the ________ of
investing, so a higher interest rate _____ the NPV.
A) opportunity cost; increases
B) opportunity cost; reduces
C) benefit; increases
D) benefit; reduces
Which of the following games is solvable by backward induction?
I. a 3-period simultaneous game
II. an infinitely repeated simultaneous game
III. a 1-period simultaneous game
IV. a sequential game
A) II only
B) IV only
C) I and III
D) I and IV
Figure 2.4
(Figure 2.4) At what price does the quantity demanded by consumers equal the quantity
supplied by producers?
A) $5
B) $4
C) $1
D) $3
The Second Welfare Theorem states that:
A) perfectly competitive markets, if Pareto-efficient, are equitable.
B) Pareto efficiency implies that input allocations are socially desirable.
C) Pareto efficiency cannot occur if resources are not equitably allocated.
D) any Pareto-efficient allocation can be achieved in a perfectly competitive market by
adjusting the initial allocations of goods.
Which of the following statements is TRUE?
I. As market prices increase, industry output rises because individual firms have
upward-sloping marginal cost curves.
II. As market prices increase, industry output rises because high-cost producers enter
the industry.
III. As market prices increase, industry output rises because individual firms have
upward-sloping short-run supply curves.
A) I, II, and III
B) II and III
C) III only
D) II only
The price elasticity of demand is “1.25, and the share of the tax borne by consumers is
0.80. What is the price elasticity of supply?
A) 6
B) 5
C) 1.56
D) 1.
Pam is an employee at a jewelry kiosk in a mall. Pam doesn’t like to work hard and
incurs a cost of $100 from doing so. Pam’s employer cannot observe whether Pam
works hard. If Pam works hard, there is a 90% probability that jewelry profits will equal
$400 a day and a 10% probability that jewelry profits will equal $100 a day. If Pam
shirks, there is a 90% probability that jewelry profits will equal $100 a day and a 10%
probability that jewelry profits will equal $400 a day. Suppose Pam is paid $200 if
jewelry profits are $400 a day and $50 if jewelry profits are $100 a day. How will Pam
respond to this compensation scheme?
A) Pam will shirk because the net gain from shirking of $50 is greater than the net gain
from working hard of $45.
B) Pam will shirk because the net gain from shirking of $75 is greater than the net gain
from working hard of $65.
C) Pam will work hard because the net gain from shirking of $45 is less than the net
gain from working hard of $185.
D) Pam will work hard because the net gain from shirking of $65 is less than the net
gain from working hard of $85.
What is the nature of the positive externality associated with research and
development?
A) Firms that engage in research and development may develop more profitable
products.
B) Firms that engage in research and development may be able to lower their
production costs.
C) Research and development may lead to discoveries that make other firms more
innovative.
D) Firms that engage in research and development tend to pay higher stock dividends.
Table 12.2
(Table 12.2) Thelma and Louise have been arrested for a crime. In this simultaneous
game, the payoffs represent years in jail. Louise’s dominated strategy is:
A) confess.
B) deny.
C) for Thelma to choose Deny.
D) for Thelma to choose Confess.
The market for organic cabbage is represented by QD = 1,200 ” 75P and QS= 425P ”
300, where P is the price per head of cabbage and Q measures the number of heads of
cabbage per week. Suppose the price of organic fertilizer falls, making sellers willing to
sell 100 more heads of cabbage per week at every price. What happens to producer and
consumer surplus as a result of this change?
A) Consumer surplus increases from $6,337.50 to $6,534, and producer surplus
increases from $1,116.38 to $1,153.35.
B) Consumer surplus increases from $15,000 to $16,200, and producer surplus
increases from $4,600 to $7,700.
C) Consumer surplus remains unchanged, but producer surplus increases from $351.22
to $454.15.
D) Consumer surplus increases from $1,899 to $2,300.25, and producer surplus
increases from $1,500.40 to $1,910.05.
Which of the following statements is TRUE, assuming the firm is choosing the optimal
bundle of inputs that minimizes the cost of producing a given quantity of output?
I. The marginal product per dollar spent on labor equals the marginal product per dollar
spent on capital. II. APL = APK III. IV. MPL × W = MPK × R
I. The marginal product per dollar spent on labor equals the marginal product per dollar
spent on capital.
II. APL = APK
III.
IV. MPL × W = MPK × R
A) I and II
B) I, II, III, and IV
C) IV only
D) I and III
Suppose a firm’s total cost and marginal cost are given by TC = 192 + 10Q + 3Q2 and
MC = 10 + 6Q. What is the output level that minimizes average total cost?
A) 8
B) 1.5
C) 21
D) 4
Adam has wealth of $40,000 as long as his business does not burn down. However,
there is a 50% probability that his business will burn down and cause a $30,000 loss,
leaving him with $10,000 of wealth. Adam’s utility function is given by U = W0.5,
where W is wealth. What is the maximum price that Adam would pay for full insurance
that covers the potential $30,000 loss? [Hint: The maximum price equals the actuarially
fair premium plus the risk premium.]
A) $17,500
B) $12,500
C) $15,500
D) $22,500
Behavioral economics:
A) invalidates most of the standard economics models because it is difficult to account
for irrational behavior.
B) suggests that people are even more rational and calculating than suggested by
standard economic models.
C) concludes that, at least for durable goods, demand curves and supply curves both
slope upward.
D) provides insights that can, in many cases, easily be accounted for by standard
economic models.