What is the endowment effect?
A) Children who receive a large inheritance are less likely to work.
B) The more you have of something, the more you want to get rid of it.
C) The act of owning a good makes it more valuable.
D) Colleges with large endowments give student aid more generously.
A firm produces two goods Q1 and Q2. For economies of scope to exist, it must be
TRUE that:
A) TC(Q1,0) + TC(0,Q2) > TC(Q1,Q2).
B) TC(Q1,0) + TC(0,Q2) < TC(Q1,Q2).
C)
D) (TC(Q11,0) + TC(0,Q12))/(TC(Q11, Q12)) < 1.
Answer the following questions regarding taxes.
a. Suppose the demand for insulin pumps is QD = 2,000 and the supply of insulin
pumps is QS = 0.5P ” 1,000. What is the price that sellers receive per pump? Suppose
the government imposes a $400 tax per pump on sellers. What is the price per pump
that sellers receive (after submitting the tax to the government)?
b. In the market for organic fruit, the elasticity of supply is 0.75 and the elasticity of
demand is “1.25. If there is a $2-per-unit tax placed on organic fruit, what share of the
tax is paid by buyers and what share is paid by sellers?
Suppose that a firm’s production function is given by Q = KL(MPK = L and MPL = K),
where Q is quantity of output, K is units of capital, and L is units of labor. The price per
unit of labor and capital are $30 and $20, respectively.
a.How many units of labor and capital should the firm use if it wants to minimize the
cost of producing 600 units of output?
b.Suppose that the firm experiences a technological change, transforming its production
function to Q = 1.23KL (MPK = L and MPL = K). What is the minimum cost of
producing 600 units of output?
Figure 4.1
(Figure 4.1) Sam’s grandmother, who is visiting from Florida, gives Sam 10 oranges
and 1 pineapple. As a result, Sam will be willing to:
A) trade away more than one orange for an additional pineapple.
B) trade lots of pineapples for an additional orange.
C) trade his only pineapple for one more orange.
D) give up all his oranges for several more pineapples.
Figure 10.1
(Figure 10.1) Producer surplus under monopoly and perfect price discrimination is
______ and ______, respectively.
A) $16; $32
B) $24; $48
C) $8; $12
D) $32; $12
For a monopoly, marginal revenue equals:
A) the gain from selling an additional unit at the market price less the loss in revenue
from lowering the price on the previous units.
B) ΔP/ΔQ + P
C) P + (ΔQ/ΔP)Q
D) Q + (ΔP/ΔQ)P
Why is the type of the product sold in an industry an important characteristic?
A) A firm that can differentiate its product from that of rivals may be able to charge a
higher price for a superior product.
B) A firm that sells intangible goods is usually considered a monopoly.
C) Expensive products are usually sold by perfectly competitive firms.
D) Service industries cannot differentiate their products, making it easy for new firms to
enter the industry.
A profit-maximizing monopolist is selling 20,000 units of output at $1,400 per unit. The
marginal cost of production is constant at $600. What happens if marginal cost rises to
$680?
A) The monopolist will increase the price by less than $80 and sell less than 20,000
units of output.
B) The monopolist will increase the price to $1,480 and sell 20,000 units of output.
C) Because the monopolist is already maximizing profit, the increase in marginal cost
will have no effect on the price or quantity produced.
D) The monopolist will keep the price unchanged but sell more than 20,000 units of
output to make up for higher costs of production.
Figure 17.1
(Figure 17.1) Suppose that people selling their homes fall prey to the sunk-cost fallacy,
refusing to sell at the going market price to avoid a nominal loss during an economic
downturn. What price might these homeowners try to sell their homes for?
A) $120,000
B) $150,000
C) $100,000
D) any price less than $120,000
Figure 5.21
(Figure 5.21) Suppose Milli and Vanilli are the only two customers in the market for
vocal lessons. Milli’s demand for vocal lessons is QM = 40 ” 4P, and Vanilli’s demand
for vocal lessons is QV= 75 ” 5P. Which of the preceding panels represents the market
demand for vocal lessons?
A) panel (a)
B) panel (b)
C) panel (c)
D) panel (d)
In an economy, there are a total of 20 units of labor and 10 units of capital that can be
allocated to produce food or clothing.
a. Draw the production Edgeworth box.
b. Using isoquants, illustrate a Pareto-efficient allocation of labor and capital between
the food and clothing sectors.
c. Using isoquants, illustrate a Pareto-inefficient allocation of labor and capital between
the food and clothing sectors.
Todd, who just started college, is promised $10,000 by his grandmother at the end of
four years if he graduates with honors. What is the present discounted value of this
payment at a 6% interest rate?
A) $9,400.68
B) $8,180.26
C) $6,000.32
D) $7,920.94
A basic assumption of the short run is that a firm:
A) can employ more workers and add more capital to the production process.
B) cannot adjust its workforce or the amount of capital it uses.
C) can reduce the number of workers it uses, but it cannot adjust how much capital it
uses.
D) can freely adjust the amount of labor and capital that it employs.
A landscaping company is considering renting a backhoe at a fixed cost of $12,000 for
the season. The variable cost of completing a landscaping project with the use of the
backhoe is $500. Alternatively, without the use of the backhoe, the company would
incur a variable cost of $1,000 per landscaping project and no fixed costs. If the
landscaping company plans to complete more than ______ projects, the total cost of
landscaping projects will be lower ______.
A) 24; with the use of the backhoe
B) 18; with the use of the backhoe
C) 44; without the use of the backhoe
D) 12; without the use of the backhoe
Table 12.36
(Table 12.36)
a. In a simultaneous game, what is the Nash equilibrium?
b. In a sequential game, what is the Nash equilibrium if Firm A moves first? Does Firm
A have a first-mover advantage?
In a perfectly competitive industry, there are two types of firms: low-cost producers and
high-cost producers. The minimum average total cost of the high-cost producers is $1
The low-cost producers have a long-run total cost curve given by LTC = 150Q “15Q2 +
0.4Q2, where LMC = 150 ” 30Q + 1.2Q2. How much economic rent does the low-cost
producer earn?
A) $3,125
B) $14,000
C) $710
D) $45,000
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 or not. If Pam works hard, there is a 75% probability that jewelry profits
will equal $400 a day and a 25% probability that jewelry profits will equal $100 a day.
If Pam shirks, there is a 75% probability that jewelry profits will equal $100 a day and a
25% 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 $87.50 is greater than the net
gain from working hard of $62.50.
B) Pam will shirk because the net gain from shirking of $125 is greater than the net gain
from working hard of $118.
C) Pam will work hard because the net gain from shirking of $50 is less than the net
gain from working hard of $62.50.
D) Pam will work hard because the net gain from shirking of $100 is less than the net
gain from working hard of $250.
Figure 4.10
(Figure 4.10) ________ is willing to give up a lot guitars for a small number of video
games, while _______ is willing to give up a lot of video games for a small number of
guitars.
A) John; Paul
B) Paul; John
C) Paul; Paul
D) John; John
The theory that accounts for racial prejudice reveals that:
A) racist business owners should earn higher profits by underpaying minorities.
B) prejudice is most common in competitive markets.
C) racist business owners pay for their prejudice in the form of lower profits.
D) gender bias has been eliminated but not racial bias.
Table 14.1
(Table 14.1) Using the Rawlsian social welfare function, rank the utility outcomes from
the most to least desirable.
A) outcome A, outcome B, outcome C
B) outcome B, outcome C, outcome A
C) outcome A, outcome C, outcome B
D) outcome C, outcome A, outcome B
Which of the following statements is TRUE?
I. A natural monopoly owes its existence to economies of scale.
II. In contrast to a monopoly industry, there are no barriers to entry in industries served
by natural monopolies.
III. Natural monopolies have cost structures characterized by small, fixed costs and
steeply rising marginal costs.
A) I and II
B) I only
C) III only
D) II and III
Suppose the market for a good is composed of 1,000 identical consumers. The market’s
demand curve is given by QM = 150,000 ” 25P. What is the equation for an individual
consumer’s demand curve?
A) Q = 150,000,000 ” 25,000P
B) Q = 6,000,000 ” 40P
C) Q = 6 ” 4P
D) Q = 150 ” 0.025
Consider three consumers of a public good whose marginal benefit of consumption are
as follows:
Consumer 1: MB1 = 5 ” 2Q
Consumer 2: MB2 = 4 ” Q
Consumer 3: MB3 = 3 ” Q
a. If the marginal cost of producing the public good is MC = 8Q, what is the efficient
quantity of the public good?
b. If the marginal cost of producing the public good is constant at $4, what is the
efficient quantity of the public good?
The price of baseball tickets increased by 5%, leading to a 3% decrease in the number
of tickets sold. As a result, total expenditures on baseball tickets:
A) fell.
B) stayed the same.
C) increased.
D) could have increased, decreased, or stayed the same depending on the price elasticity
of demand.
Table 7.1
(Table 7.1) Which of the following is correct at 4 units of output?
A) AFC = 70; AVC = 21; ATC = 91
B) AFC = 50; AVC = 52.50; ATC = 70
C) AFC = 0.06; AVC = 0.02; ATC = 0.08
D) AFC = 280; AVC = 840; ATC = 1,320
Figure 5.25
(Figure 5.25) Answer the following questions:
a. What caused the budget constraint to change from BC1 to BC2?
b. At BC1, the consumer has $40 of income to spend on goods X and Y. Graph the
consumer’s demand curve for good X, being sure to illustrate two price-quantity
combinations along the demand curve.
c. What happens to the demand for good Y as the budget constraint pivots from BC1 to
BC2?
Figure 6.13
(Figure 6.13) A technological change is represented by the movement from point
______ to point ______.
A) X; Z
B) Z; X
C) W; Z
D) Z; W
Define the following terms.
a. endowment effect
b. mental accounting
c. sunk-cost fallacy
d. hyperbolic discounting
Table 6.7
a. Does this production function exhibit constant return to scale? Explain your answer.
b. How many units of output are produced with 4 units of labor and 2 units of capital?
c. Suppose the firm is using 3 units of capital and 2 units of labor and then decides to
employ a third worker. What is the marginal product of the third worker?
d. Suppose the firm is using 1 unit of labor and 1 unit of capital. What is the marginal
product of capital for K = 2, K = 3, and K = 4? Does capital experience diminishing
returns?
A market is served by two firms in Cournot competition, each with a constant marginal
cost of $100. The market inverse demand curve is P = 2,000 ” 50Q, where Q is the total
market output produced by the two firms, q1 + q2. What is Firm 1’s reaction function?
A) q1 = 19 ” 0.5q2
B) q1 = 210 ” q2
C) q1 = 400 ” 0.2P
D) q1 = 400 ” 100q2
Which of the following behaviors is consistent with hyperbolic discounting?
I. having unprotected sex
II. not studying enough for a final exam
III. spending too much money today
IV. using addictive substances
A) III only
B) I and III
C) I, II, and IV
D) I, II, III, and IV
The market for soybeans is characterized by = 16 ” Ps + Pcand = Ps, where Qs is
the quantity of soybeans in millions of bushels, Psis the price per bushel of soybeans,
and Pcis the price per bushel of corn. The market for corn is characterized by = 40 “
Pc + Ps and = Pc, where Qcis the quantity of corn in millions of bushels. In general
equilibrium, what is the equilibrium quantity of soybeans?
A) 42 million bushels
B) 18 million bushels
C) 24 million bushels
D) 30 million bushels
Figure 15.6
(Figure 15.6) Under perfect competition, the deadweight loss is given by area:
A) A + B.
B) C + E.
C) A + B + C.
D) E.
In Cournot competition, the market inverse demand curve is P = 240 ” 0.5Q, where Q is
the total output produced by Firm A and Firm B, qA + qB.The marginal cost for each
firm is constant at $30. If Firm B produces 140 units of output, how much output
should Firm A produce?
A) 80
B) 140
C) 34
D) 90