Consider the following three market baskets:
If baskets B and C are on the same indifference curve, and if preferences satisfy all four
of the basic assumptions, then:
A) A is preferred to C.
B) A is preferred to B.
C) Both A and B answer choices are correct.
D) none of the above
Scenario 5.8:
Risk-neutral Icarus Airlines must commit now to leasing 1, 2, or 3 new airplanes. It
knows with certainty that on the basis of business travel alone, it will need at least 1
airplane. The marketing division says that there is a 50% chance that tourism will be big
enough for a second plane only. Otherwise, tourism will be big enough for a third plane.
This, plus revenue information, yields the following table:
Planes Tourism Revenue Expected
Leased Light Heavy Profit
2 $90 million $30 million $60 million
3 $10 million $140 million $75 million
Refer to Scenario 5.8. The value to Icarus Airlines of complete information is
A) $40 million.
B) $90 million.
C) $115 million.
D) $120 million.
E) $125 million.
Consider two upward sloping income-utility curves with income on the horizontal axis.
The steeper curve represents risk preferences that are more:
A) risk averse.
B) risk loving.
C) loss averting.
D) We cannot answer this question without more information about the shapes of the
curves.
A situation in which each firm selects its best action, given what its rivals are doing, is
called a
A) Nash equilibrium.
B) Cooperative equilibrium.
C) Stackelberg equilibrium.
D) zero sum game.
Which of the following is NOT a potential objective of tying strategies used by firms?
A) Reduce production costs and avoid problems associated with diseconomies of scale
B) Protect brand image and ensure product quality
C) Meter consumption across different buyers in order to collect a two-part tariff
D) Extend a firm’s market power from one product market into another market
Consider a supply curve of the form: Q = c + dP. If d equals zero, then supply is:
A) completely inelastic.
B) inelastic, but not completely inelastic.
C) elastic, but not infinitely elastic.
D) infinitely elastic
Some high-end retail stores that distribute mail-order catalogs will prominently offer
some very high priced goods for sale (for example, a luxury sports car with gold-plated
interior trim) in addition to their regular line of merchandise. Behavioral economists
argue that the stores do not really plan to sell these goods, but they use these items to
provide the customers with a high reference point for the prices of the other goods in
the catalog. This practice is an example of:
A) the ultimatim game.
B) loss aversion.
C) anchoring.
D) none of the above
When there are externalities, economic efficiency can be achieved without government
intervention
A) at no time.
B) when the externality affects many people and property rights are not well defined.
C) when the externality affects many people and property rights are well defined.
D) when the externality affects only a few parties and property rights are not well
defined.
E) when the externality affects only a few parties and property rights are well defined.
A firm sells an identical product to two groups of consumers, A and B. The firm has
decided that third-degree price discrimination is feasible and wishes to set prices that
maximize profits. Which of the following best describes the price and output strategy
that will maximize profits?
A) PA = PB = MC.
B) MRA = MRB.
C) MRA = MRB = MC.
D) (MRA – MRB) = (1 – MC).
Suppose a labor market has perfectly inelastic supply that is composed of union and
non-union workers, and both groups of workers initially earn the perfectly competitive
wage. What happens to the equilibrium employment level and wage for non-union
workers if the union exercises its bargaining power?
A) Both increase.
B) Employment increases and wage declines.
C) Wage increases and employment declines.
D) Both decline.
Scenario 3:
Sam and Sally are the only consumers in an economy where tee shirts and candy are the
only commodities that are consumed. The marginal utility schedule for each appears
below.
Sam tee shirts MU(tee shirts) Candy MU(Candy)
1 10 1 6
2 9 2 5
3 8 3 4
4 7 4 5
5 6 5 4
Sally tee shirts MU(tee shirts) Candy MU(Candy)
1 24 1 12
2 19 2 9
3 18 3 8
4 14 4 7
5 10 5 3
There are 7 candies and 7 tee shirts total in the economy.
Consider the case when the goods are redistributed such that Sam has 4 tee shirts and 4
candies. Sally has 3 tee shirts and 3 candies.
Is the current distribution Pareto optimal?
A) Yes.
B) No, as Sam has more of both goods.
C) No, as it is possible to find a way for Sam to sell tee shirts to Sally (and receive
candy in return) that would make both of them better off.
D) No, as it is possible to find a way for Sam to sell candy to Sally (and receive tee
shirts in return) that would make both of them better off.
E) Without knowing the prices of tee shirts and candy we cannot determine if this
distribution is Pareto optimal.
Which of the following statements is NOT true?
A) Unemployment in the US economy represents an excess demand for labor.
B) A surplus may be reduced by shifting the demand curve rightward.
C) A surplus may be reduced by shifting both the supply and demand curves.
D) A shortage may be reduced by shifting the supply rightward.
Scenario 10.7:
The marginal revenue of green ink pads is given as follows:
MR = 2500 – 5Q
The marginal cost of green ink pads is 5Q.
Refer to Scenario 10.7. How many ink pads will be produced to maximize profit?
A) 50
B) 250
C) 500
D) 800
E) none of the above
If a competitive firm’s marginal cost curve is U-shaped then
A) its short run supply curve is U-shaped too
B) its short run supply curve is the downward-sloping portion of the marginal cost
curve
C) its short run supply curve is the upward-sloping portion of the marginal cost curve
D) its short run supply curve is the upward-sloping portion of the marginal cost curve
that lies above the short run average variable cost curve
E) its short run supply curve is the upward-sloping portion of the marginal cost curve
that lies above the short run average total cost curve
Although there are many reasons why a market can be non-competitive, the principal
economic difference between a competitive and a non-competitive market is:
A) the number of firms in the market.
B) the extent to which any firm can influence the price of the product.
C) the size of the firms in the market.
D) the annual sales made by the largest firms in the market.
E) the presence of government intervention.
Figure 18.1
All producers in the corbomite industry dump wastes in the river in the production of
their output.
Given the information in Figure 18.1, the competitive output in the corbomite industry
is:
A) Q0.
B) Q1.
C) Q2.
D) any level as long as price is P0.
The most popular state park in the Craggy Mountains recently reached the point where
a common property resources problem arose too many people hunted for wild boar each
season. The boar population became over hunted and was in peril of extinction. An
economist at the local university studied the problem for the park management and
estimated the following cost and revenue relationships:
Demand: P = 10 – 0.008Q
Marginal social cost: MSC = 1.00 + 0.0067Q
Marginal private cost: MPC = 1.00 + 0.0010Q.
The variable Q represents the number of boars killed each season and price P is in
hundreds ($).
a. Determine the equilibrium number of boars killed per season, when there is unlimited
access to the park.
b. Determine the per boar fee that must be charged to reduce the harvest to the efficient
level.
c. Determine the social cost of unlimited hunting of the boar.
Scenario 5.4:
Suppose an individual is considering an investment in which there are exactly three
possible outcomes, whose probabilities and pay-offs are given below:
The expected value of the investment is $25. Although all the information is correct,
information is missing.
Refer to Scenario 5.4. What is the deviation of outcome A?
A) 30
B) 50
C) 75
D) 100
The price elasticity of demand for a demand curve that has a zero slope is
A) zero.
B) one.
C) negative but approaches zero as consumption increases.
D) infinity.
In an unregulated, competitive market producer surplus exists because some
A) consumers are willing to pay more than the equilibrium price.
B) producers are willing to take more than the equilibrium price.
C) producers are willing to sell at less than the equilibrium price.
D) consumers are willing to purchase, but only at prices below equilibrium price.
We manufacturer automobiles given the production function q = 5KL where q is the
number of autos assembled per eight-hour shift, K is the number of robots used on the
assembly line (capital) and L is the number of workers hired per hour (labor). If we use
K=10 robots and L=10 workers in order to produce q = 450 autos per shift, then we
know that production is:
A) technologically efficient.
B) technologically inefficient.
C) maximized.
D) optimal.
If current output is less than the profit-maximizing output, which must be true?
A) Total revenue is less than total cost.
B) Average revenue is less than average cost.
C) Average revenue is greater than average cost.
D) Marginal revenue is less than marginal cost.
E) Marginal revenue is greater than marginal cost.
Figure 9.2
Refer to Figure 9.2. At price 0E and quantity Q*, the deadweight loss is
A) 0ACQ*.
B) 0ECQ*.
C) 0FCQ*.
D) EFC.
E) none of the above
Microsoft wants to calculate the effect of a worldwide 5% price cut on its sales of Excel
to clients in different countries. Microsoft sells Excel at different prices in U.S., Japan
and Europe. Before the price cut U.S. sales were twice sales in Japan and Europe. If the
price of elasticity of demand in the U.S., Japan and Europe are -3, -4, and -2
respectively, the worldwide sales rise by
A) 10%.
B) 15%.
C) 20%.
D) 25%.
E) none of the above
Figure 9.5
Refer to Figure 9.5. If the government establishes a price floor of $2.50, consumer
surplus will
A) fall by $50.
B) fall by $150.
C) remain the same.
D) rise by $50.
E) rise by $150.
You want to add a new room on your house, but you are not familiar with the local
building contractors and are not sure who to consider for the job. If you ask your friends
for referrals, you are using their past experience as a way to evaluate the ________ of
the builders.
A) efficiency wages
B) moral hazard
C) asymmetric information
D) reputation
Scenario 5.8:
Risk-neutral Icarus Airlines must commit now to leasing 1, 2, or 3 new airplanes. It
knows with certainty that on the basis of business travel alone, it will need at least 1
airplane. The marketing division says that there is a 50% chance that tourism will be big
enough for a second plane only. Otherwise, tourism will be big enough for a third plane.
This, plus revenue information, yields the following table:
Planes Tourism Revenue Expected
Leased Light Heavy Profit
2 $90 million $30 million $60 million
3 $10 million $140 million $75 million
Refer to Scenario 5.8. Without additional information, Icarus Airlines would
A) lease only the one airplane it is sure it can use.
B) lease 2 airplanes in order to guarantee it avoids the worst outcome, $10 million.
C) lease 3 airplanes because $140 million is greater than $90 million.
D) lease 3 airplanes because $75 million is greater than $60 million.
E) lease 3 airplanes because heavy tourism is more likely than light tourism.
DVDs can be produced at a constant marginal cost, and Roaring Lion Studios is
releasing the DVDs for its last two major films. The DVD for Rambeau 17 is priced at
$20 per disk, and the DVD for Schreck 10 is priced at $30 per disk. If the Lerner indices
for Rambeau 17 divided by the Lerner index for Schreck 10 equals 0.5, what is the
constant marginal cost of producing both DVDs?
A) MC = $10
B) MC = $15
C) MC = $20
D) MC = $5
The problem of adverse selection in health insurance leads to a situation in which
A) health insurance covers inappropriate items for the population it serves.
B) overinsurance of the premium-paying population occurs.
C) underinsurance of the premium-paying population occurs.
D) the percentage of the premium-paying population that is healthy rises, squeezing
unhealthy individuals out of the market.
E) the percentage of the premium-paying population that is unhealthy rises, squeezing
healthy individuals out of the market.
Figure 6.1
Refer to Figure 6.1. At point A, the marginal product of labor is
A) rising.
B) at its minimum.
C) at its maximum.
D) diminishing.
Figure 14.3
A labor union is exercising monopoly power in the labor market.
Refer to Figure 14.3. To maximize economic rent, the labor union will agree to wage
rate:
A) W0.
B) W1.
C) W2.
D) W3.
E) none of the above
Figure 9.4
Refer to Figure 9.4. If the government establishes a price floor of $40 and government
purchases the surplus over quantity demanded, producer surplus will
A) fall by $275.
B) fall by $500.
C) remain the same.
D) rise by $275.
E) rise by $500.
Short-run supply curves for perfectly competitive firms tend to be upward sloping
because:
A) there is diminishing marginal product for one or more variable inputs.
B) marginal costs increase as output increases.
C) marginal fixed costs equal zero.
D) A and B are correct.
E) B and C are correct.
To simplify our consumption models, suppose U.S. consumers only purchase food and
all other goods where food is plotted along the horizontal axis of the indifference map.
If the U.S. Congress passes an economic stimulus package that pays $300 to each
person, how does this affect the budget line for each consumer?
A) Makes the budget line steeper
B) Makes the budget line flatter
C) Parallel outward (rightward) shift
D) Parallel inward (leftward) shift
E) none of the above
Suppose there is currently a surplus of wheat on the world market. The problem of
excess supply may be removed from the market by:
A) lowering the market price.
B) shifting the supply curve leftward.
C) shifting the demand curve leftward.
D) Both A and B are plausible actions.
In an unregulated, competitive market we could calculate consumer surplus if we knew
the equations representing supply and demand. For this problem assume that supply and
demand are as follows:
Supply P = 4 + 0.116Q
Demand P = 25 – 0.10Q,
where P represents unit price in dollars and Q represents number of units sold each year.
Calculate the annual value of aggregate consumer surplus.
Bobby is a college student who has $500 of income to spend each semester on books
and pizzas. The price of a pizza is $10 and the price of a book is $50. Diagram Bobby’s
budget constraint. Now, suppose Bobby’s parents buy him a $300 gift certificate each
semester that can only be used to buy books. Diagram Bobby’s budget constraint when
he has the gift certificate in addition to his $500 income. Is Bobby better-off with the
gift certificates?
The demand for on-line brokerage services is: QD = 6,500 – 100P ⇔P = 65 – 0.01QD. If
the on-line brokerage firms collude, the collusive marginal revenue function is: MR(Q)
= 65 – 0.02Q. The brokerage firm specific marginal cost functions are: {
Calculate the collusive output level and market price. If the brokerage firms behaved
competitively and each firm set its own marginal cost equal to price, what would be the
output level and market price?
George has a fixed income and can afford at most 7 units of X if he spends his entire
income on X. Alternatively, if he spends all his income on Y, he can afford at most 6
units of Y. Draw George’s budget line and an indifference curve such that George
chooses to buy 4 pieces of X. Martha has the same income and faces the same prices,
yet she chooses to buy 2 pieces of X. In equilibrium, what is George’s subjective value
of X in terms of Y? What is Martha’s?
The operation of large trucks in Econoville causes damages to public roads. The
marginal external cost function of operating large trucks in Econoville is: MEC(m) =
0.05m, where m is the number of miles large trucks are driven in Econoville in
thousands. The marginal benefit of large truck operation in Econoville is: MB(m) =
1,000 – 2m. How many miles do large trucks drive in Econoville if they are not forced
to pay for damage to roads? If Econoville charges a fee for every thousand miles a large
truck drives in Econoville, what is the optimal fee? If Econoville sets a standard for the
quantity of miles large trucks drive in Econoville, what is the optimal standard? If the
profitability of large truck operation in Econoville increases the marginal benefit
function to: MB(m) = 1,500 – 2m and Econoville is using a standard, is it optimal for
Econoville to increase the standard?
Matthew drives a truck for Overtheroad Haulers. Matthew’s marginal benefit for driving
per day is: MB(m) = 2,400 – 2m, where m is the number of miles driven. The marginal
social cost per mile is MSC(m) = 2m. Calculate the efficient number of miles driven for
Matthew in a day. Since Overtheroad Haulers has full insurance on Matthew’s truck,
Matthew’s personal marginal cost is: MPC(m) = m. How many miles per day will
Matthew drive? Would it be efficient for society if Overtheroad Haulers places a limit
on the number of miles Matthew drives? If so, what limit should they set?
The reward for the capture of Jesse James was $500.00 in 1881. Suppose the CPI in
1881 was 0.25. What is the real value of the reward in 2010 dollars if the CPI was 218.1
in 2010?
May enjoys spending her free time with her friends at the mall and solving problems
from her microeconomics text. She has 16 hours per week of free time. Diagram May’s
time constraint.
If MUF = and MUP = where F is her time spent with friends at the
mall and P is her time spent working problems, how much time should May spend at
each activity?
An island economy produces only two goods, coconuts and pineapples. There are five
people (A,B, C, D, and E) living on the island with these preferences:
A has a strong preference for pineapples.
B has a strong preference for coconuts.
C doesn’t care for pineapples (assigns no value to them).
D doesn’t care for coconuts (assigns no value to them)
E will only consume pineapples and coconuts in the fixed
proportion of one pineapple to one coconut.
For each of these five individuals, construct a representative indifference curve with
pineapples on the vertical axis and coconuts on the horizontal axis. Discuss the shape of
the indifference curves and relate them to the MRS.
Donna is considering the option of becoming a co-owner in a business. Her investment
choices are to hold a risk free asset that has a return of Rjand co-ownership of the
business, which has a rate of return of Rband a level of risk of σb. Donna’s marginal rate
of substitution of return for risk
( / ) is = where RP is Donna’s portfolio rate of return and
σP is her optimal portfolio risk. Donna’s budget constraint is given by
RP = Rj + σP. Solve for Donna’s optimal portfolio rate of return and risk as a
function of Rj,Rbandσb. Suppose the table below lists the relevant rates of returns and
risks. Use this table to determine Donna’s optimal rate or return and risk.
The following table presents Alfred’s marginal utility for each good while exhausting
his income. Fill in the remaining column in the table. If the price of tuna is twice the
price of peanut butter, at what consumption bundle in the table is Alfred maximizing his
level of satisfaction? Which commodity bundle entails the largest level of tuna fish
consumption?
American Tire and Rubber Company sells identical radial tires under the firm’s own
brand name and private label tires to discount stores. The radial tires sold in both
sub-markets are identical, and the marginal cost is constant at $10 per tire for both
types. The firm has estimated the following demand curves for each of the markets.
PB = 70 – 0.0005QB (brand name)
PP = 20 – 0.0002QP (private label).
Quantities are measured in thousands per month and price refers to the wholesale price.
American currently sells brand name tires at a wholesale price of $28.50 and private
label tires for a price of $17. Are these prices optimal for the firm?
Jonathan and Roberto enjoy playing poker. Jonathan’s utility as a function of winning a
poker hand is UJ = { .
Roberto’s utility as a function of winning a poker hand is UR = { .
Unfortunately for Jonathan, he has a habit of whistling only when he gets a full-house
or better. Roberto, however, has not noticed this habit. Roberto currently has
three-of-a-kind (which will lose to a full-house or better). Roberto believes that the
probability Jonathan can beat his three-of-a-kind is 1/10. Roberto could choose to fold or
play the hand. Calculate Roberto’s expected utility according to his beliefs. Jonathan is
currently whistling. How much could Roberto increase his utility by recognizing
Jonathan’s whistling habit?
A lower east-side cinema charges $3.00 per ticket for children under 12 years of age
and $5.00 per ticket for anyone 12 years of age or older. The firm has estimated that the
price elasticity of demand for tickets purchased by those 12 years of age or older is -1.5.
Calculate the elasticity of demand for tickets purchased for children under 12 years of
age if prices are optimal.
Calculate the expected value of the following game. If you win the game, your wealth
will increase by 100,000,000 times your wager. If you lose, you lose your wager
amount.
The probability of winning is .
The market for gravel has been estimated to have these supply and demand
relationships:
Supply P = 10 + 0.01Q
Demand P = 100 – 0.01Q,
where P represents price per unit in dollars, and Q represents sales per week in tons.
Determine the equilibrium price and sales. Determine the amount of shortage or surplus
that would develop at P = $40/ton.
If the marginal rate of substitution is infinite or zero, show that the substitution effect of
a price change for a good is zero.
