For the Cobb-Douglas utility function with two goods, the sum of the own price
elasticities of demand must be
a. 0.
b. -1.
c. -2
d. any number between 0 and -4.
Two goods are Hicksian (net) substitutes if a rise in the price of one causes a(n)
a. decline in the quantity demanded of the other holding nominal income constant.
b. increase in the quantity demanded of the other holding nominal income constant.
c. decline in the quantity demanded of the other holding utility constant.
d. increase in the quantity demanded of the other holding utility constant.
In experimental tests of the ultimatum game,
a. the proposer often offers an even split of the “pie”, and responders often reject
smaller offers, consistent with the predictions of game theory.
b. the proposer often offers an even split of the “pie”, and responders often reject
smaller offers, in contrast to the predictions of game theory.
c. the proposer often offers an unfair split, taking the lion’s share of the “pie” for him or
herself, and responders often accept such offers, consistent with the predictions of game
theory.
d. the proposer often offers an unfair split, taking the lion’s share of the “pie” for him or
herself, and responders often accept such offers, in contrast to the predictions of game
theory.
The cost function arises from
a. a Cobb-Douglas production function.
b. a CES production function.
c. a fixed proportions production function.
d. a Translog production function.
When a quota/trade barrier is instituted, the loss of domestic consumer surplus may be
transferred to all of the following except:
a. foreign consumers.
b. domestic producers.
c. foreign producers.
d. consumers of other domestic products
The slope of the production possibility frontier shows
a. the marginal rate of substitution between the two
goods.
b. the relative marginal costs of the two goods.
c. the efficient combination of outputs possible using fixed amounts of input.
d. the relative marginal productivities of the two goods.
Suppose that you were again competing in a sealed-bid auction for the Vermeer painting
which you value at $100,000, but now it is a first-price auction. What bid should you
submit?
a. Exactly $100,000.
b. Somewhat lower than $100,000 depending on the number of other bidders.
c. Somewhat higher than $100,000 depending on the number of other bidders.
d. Cannot say which of a), b), or c) is right without further information.
What is the term for the contract that maximizes the principal’s payoff subject to the
constraint that the principal lacks the agent’s private information?
a. First best.
b. Second best.
c. Third best.
d. Pareto optimum.
In probabilistic voting models,______may result in social welfare maximizing
decisions. (Which phrase best completes the sentence?)
a. logrolling.
b. bribes.
c. point voting.
d. competition among candidates.
The more a firm invests in a new production technology, the lower its marginal costs.
Which of the following scenarios involving this incumbent firm and a potential entrant
makes the least economic sense?
a. The incumbent overinvests to deter entry when this investment is observable to the
entrant.
b. The incumbent overinvests to deter entry when this investment is
unobservable to the entrant.
c. The incumbent underinvests to accommodate entry when this investment is
observable and they compete in prices.
d. The incumbent overinvests to accommodate entry when this investment is
observable and they compete in quantities.
The reason externalities distort the allocation of resources is that
a. too few goods are usually produced.
b. firms often go out of business because of the externality.
c. a firm’s private costs do not reflect the social cost of production.
d. regulating externalities uses scarce resources.
If a price-taking firm’s production function is given by , its profit function is
given by
a. .
b. .
c. .
d. .
Perfect (first degree) price discrimination
a. is a common occurrence in situations with many buyers.
b. occurs fairly often in situations with only a few buyers.
c. is only observed in competitive markets.
d. rarely occurs because firms do not have sufficient power to differentiate among
specific buyers.
The slope of the budget constraint line is
a. the ratio of the prices (x/py).
b. the negative of the ratio of the prices (x/py).
c. the ratio of income divided by price of y (I/py.
d. none of these is correct.
In volatile markets, ‘speculators” would be expected to provide some stability because
a. they will be required to do so by the government.
b. they will use current price moves to predict future moves.
c. they will buy when price is below equilibrium and sell when it is above equilibrium.
d. they will buy when price is above equilibrium and sell when it is below equilibrium.
The annual rental rate for a machine is
a. the yearly depreciation and maintenance costs for the machine.
b. the yearly interest costs associated with owning the machine.
c. the initial purchase price of the machine divided by the number of years the machine
is expected to last.
d. the sum of the yearly depreciation, maintenance, and interest costs associated with
owning the machine.
The general message of the folk theorems is that
a. Nash equilibria may not be sustainable over many replications of a game.
b. Payoffs that are unambiguously preferred to Nash equilibria may be sustainable over
many replications of a game.
c. Credible threats may inhibit the achievement of mutually beneficial outcomes over
many replications of a game.
d. Just plain folk play the best games.
If the firms in perfectly competitive industries each have a production function given by
and the price elasticity of demand for the industry’s output is -1, the wage
elasticity of demand for labor by the industry will be
a. 0.
b.
c. -1.
d. -2.
Suppose that at current consumption levels an individual’s marginal utility of
consuming an extra hot dog is 10 whereas the marginal utility of consuming an extra
soft drink is 2. Then the MRS (of soft drinks for hot dogs) — that is, the number of hot
dogs the individual is willing to give up to get one more soft drink__________is
a. 5.
b. 2.
c. 1/2.
d. 1/5.
The difference between a Nash equilibrium strategy and a dominant strategy is
a. nothing; they are synonymous.
b. the former is stable but the latter is unstable.
c. the former must be a best response to all others’ strategy profiles, whereas the latter
need only be a best response to others’ Nash equilibrium strategies.
d. the former need only be a best response to others’ Nash equilibrium strategies,
whereas the latter must be a best response to all others’ strategy profiles.
Suppose capital and labor must be used in fixed proportions to produce widgets and that
the price elasticity of demand for widgets is zero. Then the wage elasticity of demand
for labor by widget makers will be
a. +1.
b. 1.
c. 0.
d. infinite.
Adoption of a guaranteed annual income with benefits (B) given by
B= 20,000 -.5 (earnings)would be expected to reduce work effort by low wage workers
because
a. the income effect would outweigh the substitution effect of the plan.
b. the substitution effect would outweigh the income effect of the plan.
c. both substitution and income effects would operate to reduce work effort.
d. the plan would make working financially unattractive.
Suppose an individual’s MRS (of steak for beer) is 2:1. That is, at the current
consumption choices he or she is willing to give up 2 beers to get an extra steak.
Suppose also that the price of a steak is $1 and a beer is 254. Then in order to increase
utility the individual should
a. buy more steak and less beer.
b. buy more beer and less steak.
c. continue with current consumption plans.
Input demand functions that are calculated from profit functions differ from those
calculated from cost functions because
a. they assume cost-minimization.
b. they hold output constant.
c. they assume output price is constant.
d. they assume output is set at its profit-maximizing level.
A decrease in demand is represented by
a. a shift outward of the entire demand curve.
b. a shift inward of the entire demand curve.
c. a movement along the demand curve in a southeasterly direction.
d. a movement along the demand curve in a northwesterly direction.
The fact that more women have chosen to work as real wages rise is evidence that, for
them
a. leisure is an inferior good.
b. income and substitution effects of higher real wages work in the same direction.
c. income and substitution effects of higher real wages may work in opposite directions.
d. income and substitution effects may work in opposite directions but that the
substitution effect is stronger.
Adding uncertainty to future consumption will tend to increase savings providing:
a. .
b. .
c. .
d. .
In the Hotelling model, what effect would an increase in the transportation cost t have
on, in the first instance, a monopoly firm and, in the second instance, two firms located
at the extremes of the line segment who compete over the marginal consumer?
a. The monopolist’s profit would decrease but the duopolists’ would increase.
b. Both monopolist’s and duopolists’ profits would increase.
c. Both monopolist’s and duopolists’ profits would decrease.
d. The monopolist’s profit would increase but the duopolists’ would decrease.
Accelerated depreciation laws may increase firms’ investment in equipment because
a. machines will wear out more rapidly.
b. profits will be increased.
c. the rental rate on capital will be reduced.
d. the price of machines will fall.
The marginal physical productivity of labor is defined as
a. a firm’s total output divided by total labor input.
b. the extra output produced by employing one more unit of labor while allowing other
inputs to vary.
c. the extra output produced by employing one more unit of labor while holding other
inputs constant.
d. the extra output produced by employing one more unit of capital while holding labor
input constant.
A monopsonist that faces a labor supply curve of the form l = 4wand has a constant
marginal revenue product of 50 per unit of l, will opt for the following, w, l combination
a. w= 10 l= 40.
b. w= 25 l= 100.
c. w= 50 l= 200.
d. w= 100 l= 400.
Suppose identical firms engage in Bertrand competition in a stage game repeated
infinitely often. What condition on the discount factor is required for firms to be
able to tacitly collude on the monopoly industry output?
a. .
b. .
c. .
d. .
The price elasticity of demand for a vertical demand curve is
a. 0.
b. 1.
c. 1.
d. infinity.
A firm’s economic profits are given by
a. total revenue minus total accounting cost.
b. the owner’s opportunity cost.
c. total revenue minus total economic cost.
d. total revenue minus the cost of capital.
Let be the manager’s salary in an owner-manager version of the
principal-agent problem. Which of the following is characteristic of a “powerful”
incentive scheme?
a. a close to 0.
b. a close to 1.
c. close to 0.
d. close to 1.
Suppose an individual has a fixed amount of wealth to allocate between consumption in
two periods (c1 and c2). Any funds not spent in period 1 will earn interest (at the rate )
which will increase purchasing power in period 2. Consider four possible reactions to
an increase in r:
I. c1 increases.
II. c1 decreases.
III. c2 increases.
IV. c2 decreases.
Which of these is consistent with the hypothesis that both c1 and c2 are normal goods?
a. I, II, III, and IV.
b. I, II, and IV, but not III.
c. I, III, and IV, but not II.
d. II and III, but not I and IV.
e. I, II and III, but not IV.
Which of the following strategies that a union might pursue would result in the lowest
wage rate for its members?
a. Maximizing the total wage bill.
b. Maximizing employment of its members.
c. Restricting union membership severely.
d. Maximizing the total economic rent obtained by its members.
If income doubles and the quantity demanded of good x more than doubles, then good x
can be described as a____.
a. substitute good.
b. complement good.
c. necessity.
d. luxury.
Assume x and y are the only two goods a person consumes. If after a rise in x the
quantity demanded of y increases, one could say
a. the income effect dominates the substitution effect.
b. the substitution effect dominates the income effect.
c. it is still impossible to determine whether the substitution or income effect dominates.
d. none of these answers is correct.
The excess burden of a tax is
a. the amount by which the price of a good increases.
b. the loss of consumer and producer surplus that is not transferred elsewhere.
c. The amount by which a person’s after-tax income decreases as a result of the new tax.
d. the welfare costs to firms forced to leave the market due to an inward shift of the
demand curve.
Which of the following is a true statement about signaling games?
a. In a separating equilibrium, the second mover’s posterior beliefs are the same as his
priors.
b. In a separating equilibrium, Bayes’ rule cannot be used to compute posterior beliefs
(because it produces an undefined answer).
c. In a pooling equilibrium, both the first and second movers choose the same action.
d. In a pooling equilibrium, the second mover learns nothing from the first mover’s
action.
The price elasticity of demand for a horizontal demand curve is
a. 0.
b. -1.
c. 1.
d. – infinity.
In a mixed-strategy Nash equilibrium, a player is willing to randomize because
a. this confuses opponents.
b. he or she is indifferent between the actions in equilibrium.
c. the actions provide the same payoffs regardless of what the other player does.
d. he or she does not know what the other player is doing.
Fill in the blanks: _______________ is an important constraint in the moral-hazard
problem because _______________________.
a.The budget constraint; it ensures the principal has enough money to pay
the agent.
b. The participation constraint; it ensures the agent chooses the action in the principal’s
best interest.
c. The participation constraint; it ensures the principal is willing to offer the contract.
d. The incentive-compatibility constraint; it ensures the agent chooses the
action intended in the contract.