An apple farmer must decide how many apples to harvest for the world apple market.
He knows that there is a one-third probability that the world price will be $1, a
one-third probability that it will be $1.50, and a one-third probability that it will be $2.
His cost function is C(Q) = .01Q2. If the farmer is risk neutral:
A. he strictly prefers producing the expected profit-maximizing quantity to producing
nothing.
B. he is indifferent between producing the expected profit-maximizing quantity and
producing nothing.
C. he should produce at a quantity in between zero and the expected profit-maximizing
quantity.
D. he strictly prefers to produce.
Spot checks are typically a solution to the:
A. manager-consumer, principal-agent problem.
B. manager-worker, principal-agent problem.
C. consumer-worker, principal-agent problem.
D. None of the statements is correct.
Suppose the cost function is C(Q) = 50 + Q – 10Q2 + 2Q3. At 10 units of output, the
average cost curve is:
A. in the increasing stage.
B. in the declining stage.
C. at the minimum level.
D. at the maximum level.
In a competitive industry with identical firms, long-run equilibrium is characterized by:
A. P > AC.
B. P < MC.
C. MR = MC.
D. MR < P.
Suppose that a consumer’s preferences are well behaved in that properties 4-1 to 4-4 are
satisfied and the initial equilibrium consumption bundle consists of 10 units of X and
25 units of Y. If PY increases such that the new equilibrium consumption bundle is 15
units of X and 10 units of Y, then goods X and Y are:
A. complements.
B. substitutes.
C. normal goods.
D. unrelated.
The external marginal cost of producing coal is MCexternal = 8Q while the internal
marginal cost is MC internal = 6Q. The inverse demand for coal is given by P = 180 – 4Q.
How much output would a competitive industry produce?
A. 10
B. 20
C. 15
D. 18
Which of the following pricing strategies is NOT used in markets with special cost and
demand structures?
A. Peak-load pricing
B. Cross-subsidization
C. Transfer pricing
D. Low-price guarantees
By the transitivity property, if A B and B C then:
A. A C
B. A C
C. A C
D. B C
If insurance companies are required to offer coverage to all interested people, it is said
that premiums for each person will be increased. Assume that the insurance market is
perfectly competitive. What is the major reason for raising the premium?
A. The insurance companies take advantage of the increased demand and collude.
B. Medical services are more expensive because of increased demand.
C. Less healthy people join the pool of insured and hence increase the risk and the
premium.
D. None of the statements is correct.
Joe prefers a three-pack of soda to a six-pack. What properties does this preference
violate?
A. Completeness
B. Transitivity
C. More is better
D. Diminishing MRS
If the production function is Q = K.5L.5 and capital is fixed at 1 unit, then the average
product of labor when L = 25 is:
A. 2/5
B. 1/5
C. 10
D. None of the answers are correct.