Table 16.5
(Table 16.5) Suppose that each firm is emitting 10 units of pollution, for a total of 20
units. The government would like to decrease total pollution to 10 units by giving each
firm five tradable pollution permits.
a. How many units of pollution will each firm emit under the tradable permit system?
b. Which firm will sell unused pollution permits to the other firm?
c. How much will the pollution permits sell for?
The tragedy of the commons stems from a common resource that people can ______
acquire whose value to people ______ as more people use it.
A) freely; decreases
B) pay to; increases
C) freely; increases
D) pay to; decreases
An industry faces the demand curve Q = 200 ” P, where each firm produces an identical
good at a constant marginal cost of $8. What is the Bertrand equilibrium price and
quantity?
A) Q = 96; P = $8
B) Q = 96; P = $104
C) Q = 192; P = $8
D) Q = 192; P = $104
A firm faces the demand curve Q = 20 ” 0.8P and marginal cost MC = 2.5Q.
a. If the firm cannot price-discriminate, what is the profit-maximizing price and
quantity?
b. If the firm can practice perfect price discrimination, how many units will it sell?
There are three consumers of a public good; their marginal benefits are given by:
Consumer 1: MB = 400 ” Q
Consumer 2: MB = 200 ” 2Q
Consumer 3: MB = 600 ” Q
where Q is the quantity of the public good. The marginal cost of the public good is MC
= 600 + 296Q. What is the socially optimal quantity?
A) 6
B) 2
C) 3
D) 1
A firm with market power has the inverse demand curve P = 90 ” 1.5Q and the marginal
cost curve MC = 10 + Q. If the firm decides to practice perfect price discrimination, its
producer surplus will:
A) decrease from $750 to $550.
B) increase from $800 to $1,280.
C) increase from $400 to $840.
D) decrease from $1,600 to $880.
Figure 7.1
(Figure 7.1) The total cost of producing 7 units of output is:
A) $200.
B) $100.
C) $300.
D) $500.
Stan is a soybean farmer and takes actions to ensure his crop does not fail. The marginal
benefit of these actions is represented by MB = 80 ” A, where A is the number of Stan’s
precautionary actions. The marginal cost of these precautions (e.g., soil preparation, and
pesticide and fertilizer use) is MC = 20 ” 0.5A. Suppose the government offers Stan
crop insurance, which changes the marginal benefit of taking precautionary actions to
MB = 65 ” 2A. How does crop insurance affect the number of precautionary actions
taken by Stan?
A) The number of his precautionary actions falls from 20 without insurance to 3 with
insurance.
B) The number of his precautionary actions falls from 40 without insurance to 20 with
insurance.
C) The number of his precautionary actions falls from 120 without insurance to 30 with
insurance.
D) The number of his precautionary actions rises from 60 without insurance to 140 with
insurance.
Adverse selection can occur when the:
I. buyer has more information than the seller.
II. seller has more information than the buyer.
III. buyer and seller have complete information.
A) I, II, and III
B) II only
C) I and II
D) III only
Suppose that a perfectly competitive firm’s AVC curve is given by AVC = WQ, and its
marginal cost curve is given by MC = 2WQ, where W is the wage rate.
a. Graph the firm’s AVC and MC curves if W =
b. How many units of output will the firm produce at a market price of $3,200?
c. Graph the firm’s AVC and MC curves if the wage rate falls to $10.
d. How many units of output will the firm now produce at a market price of $3,200?
Table 13.8
(Table 13.8) Suppose the person’s utility function is given by U = I0.5, where I is
income. What is the person’s expected utility?
A) 270
B) 45
C) 184
D) 81
Suppose that a $1,000 face value bond, which matures in one year and pays a 10%
coupon rate, is currently selling for $1,025. What is the bond’s yield to maturity?
A) 9.8%
B) 7.3%
C) 11.1%
D) 10.2%
Why are the slopes of isocost lines constant?
A) because firms must use capital and labor inputs in fixed proportions
B) because firms can hire as much of an input as they desire without changing wages or
rental rates
C) because firms must use less labor if employing more capital
D) because the marginal rate of technical substitution of labor for capital is constant
Suppose that the demand and supply curve for a good are given by QD =1,000/P and
QS= 10P.
a. What is the equilibrium price and equilibrium quantity?
b. Explain what is happening in the market at a price of $2.
c. Explain what is happening in the market at a price of $20.
Table 12.22
(Table 12.22) Payoffs, in the table, represent profits in millions of dollars. In this
simultaneous game, TriStar and New Line Cinema need to decide the genre of their
summer movie release. TriStar prefers to release a superhero movie and New Line
Cinema releases a comedy. TriStar enters into a nonrevocable contract that will provide
penalty payments to theater chains if it releases a summer comedy. These penalty
payments serve as a credible commitment to TriStar’s desire to release a superhero
movie. How large do these penalty payments need to be to convince New Line Cinema
that TriStar will release a superhero movie?
A) between $1million and $5 million
B) greater than $5 million
C) at least $90 million
D) less than $95 million
Answer the following questions.
a. Suppose that a firm spends $5,000 producing 80 units of output. The rental rate of
capital is $500 per hour and the wage rate is $50 per hour. Graph the firm’s isocost line
and show the values of the horizontal intercept and vertical intercept.
b. The cost function for a firm is given by C = 25K + 50L. What is the slope of the
isocost line for C = $10,000 and C = $18,000?
c. Graphically illustrate the effect of a rise in the price of labor on a firm’s isocost line.
d. Why do isocost lines have a constant slope?
Figure 15.3
(Figure 15.3) What is the equilibrium in this principal”agent game?
A) (800, 120)
B) (540, 210)
C) (700, 150)
D) (600, 80)
Figure 5.9
(Figure 5.9) What is the size of the substitution effect associated with the decrease in
the price of milk?
A) The quantity of milk consumed increases from 2 to 6 gallons.
B) The quantity of milk consumed increases from 4 to 6 gallons.
C) The quantity of milk consumed decreases from 6 to 2 gallons.
D) The quantity of milk consumed increases from 2 to 4 gallons.
Frank’s utility function is U = 10X + 6Y. Frank has a budget of $60 to spend on goods X
and Y. The price of good X is $3 and the price of good Y is $2. How many units of good
X and good Y does Frank purchase?
A) X = 20 and Y = 0
B) X = 0 and Y = 10
C) X = 15 and Y = 5
D) X = 10 and Y = 20
A consumer has $200 to spend on bags of groceries and entertainment. The price of
entertainment is $40 and the price of groceries is $20.
a. What is the equation for the consumer’s budget constraint?
b. Graph the consumer’s budget constraint.
c. Suppose the price of groceries increases to $25. Graph the consumer’s new budget
constraint.
d. Starting from the position of the original budget constraint, graph the effect of the
consumer’s income increasing to $320.
In an economy, half the workers have high productivity and half the workers have low
productivity. High-productivity workers are valued at $100,000 a year and
low-productivity workers are valued at $40,000 a year. Because of asymmetric
information, employers cannot distinguish high-productivity workers from
low-productivity workers, so all workers are paid based on the average economy-wide
value of productivity. Now suppose that high-productivity workers found a method to
signal their high productivity to employers. What would happen to wages in the
economy?
A) High-productivity workers’ pay would increase by $30,000, and low-productivity
workers’ pay would increase by $30,000.
B) High-productivity workers’ pay would increase by $30,000, and low-productivity
workers’ pay would decrease by $30,000.
C) High-productivity workers’ pay would decrease by $30,000, and low-productivity
workers’ pay would increase by $30,000.
D) High-productivity workers’ pay would increase by $30,000, and low-productivity
workers’ pay would remain unchanged.
Figure 2.7
(Figure 2.7) What is the price elasticity of demand at point A and pointB?
A) point A = “2.0, point B = “0.50
B) point A = “0.50, point B = “0.50
C) point A = “1.0, point B = “2.0
D) point A = “2.5, point B = “1.5
Ideally, regulations that address low-quality cars should:
A) ban the sale of low-quality cars.
B) make buyers fully aware of which cars are low-quality.
C) prevent low-quality cars from being sold to the public at discounted prices.
D) make sellers fully aware of which cars are low-quality.
Suppose that U = U(P, M), where P and M are peanuts and marshmallows. The
marginal utility of marshmallows, MUM, is given by:
A) P + M.
B) P/M.
C) ΔU(P, M)/ΔM.
D) ΔU(P, M) × ΔM.
Figure 8.3
(Figure 8.3) The graph depicts the market for walnutsa perfectly competitive market.
Which of the following statements is TRUE?
I. The demand curve facing a walnut grower is perfectly elastic at $1.00.
II. If a walnut grower sold 80,000 pounds of walnuts, his total revenue would equal
$138,400.
III. If a walnut grower sold one more pound of walnuts, his total revenue would
increase by $1.73.
A) I, II, and III
B) II only
C) II and III
D) I only
Figure 3.5
(Figure 3.5) The loss in producer surplus attributable to the decrease in demand is equal
to area(s):
A) A.
B) A + B.
C) B + C.
D) B.
Consider two people, Troy and Paula, who each recently purchased health insurance
with a 20% coinsurance rate (i.e., an insured person pays 20% of the price of a
physician visit). Troy’s demand curve for physician visits is QR= 6, and Paula’s demand
curve for physician visits is QP= 20 ” 0.10P, where Q represents the number of
physician visits and P is the price per visit. Suppose that the market price, P, for
physician visits is $100.
a. Without insurance coverage, what is the number of physician visits for Troy and
Paula?
b. Assuming a 20% coinsurance rate and market price of $100, what out-of-pocket price
does Paula pay per visit with insurance coverage?
c. With insurance coverage, what is the number of physician visits for Troy? For Paula?
d. Explain whether Troy and Paula’s purchase of health insurance created moral hazard.
In a small country, the demand and supply of kidneys are represented by QD= 10,000 ”
0.25P and QS= 5P + 4,000. Which of the following statements is TRUE?
I. The equilibrium price is $8,000.
II. At a price ceiling of $0, there are 4,000 volunteer donors.
III. At a price ceiling of $0, there is an excess demand of 14,000 kidneys.
A) I, II, and III
B) II and III (because the demand curve shifts out, pushing up the price)
C) I and II
D) III only
Suppose a firm’s marginal cost is MC = 80 + 2Q and its marginal revenue is MR = 200 “
Q. Which of the following statements is TRUE?
I. The profit-maximizing price is $180.
II. If Q = 20, MR > MC, so the firm should expand output to increase profits.
III. If Q = 50, MR < MC, so the firm should reduce output to increase profits.
A) II and III
B) I, II, and III
C) I only
D) III only
Figure 7.3
(Figure 7.3) The firm’s total cost is given by curve ______ on the following graph.
A) A
B) B
C) C
D) D
Table 10.9
(Table 10.9) The marginal cost of a one-night stay and one round of golf are $50 and
$10, respectively. Which of the following statements is TRUE?
I. If a firm is using a pure bundling strategy, the bundle price should equal $230 to
maximize producer surplus.
II. Suppose a firm uses the following mixed bundling strategy: the bundle price is $240,
or the price for a one-night stay is $180 and the price per round of golf is $80. With this
strategy, producer surplus is $380.
III. If a firm prices each item separately such that the price for a one-night stay is $100
and the price per round of golf is $50, producer surplus will be $270.
A) I, II, and III
B) II and III
C) I and III
D) I only
Figure 4.9
(Figure 4.9) What is the marginal rate of substitution between points A and B?
A) 4
B) 6
C) 2
D) 8
A firm with market power has the inverse demand curve P = 90 ” 1.5Q and marginal
cost curve MC = 10 + Q. If the firm decides to practice perfect price discrimination, its
profit-maximizing output level will:
A) increase from 14 to 28 units.
B) decrease from 24 to 12 units.
C) increase from 20 to 32 units.
D) decrease from 28 to 14 units.