The ______ model is an example of a simultaneous game, while the______ model is an
example of a sequential game.
A) Cournot; Stackelberg
B) Cournot; Bertrand
C) Bertrand; Cournot
D) Stackelberg; Bertrand
Figure 5.30
(Figure 5.30) The price of good Y increased from $1.00 to $5.00.
a. Explain whether goods X and Y are complements or substitutes.
b. Calculate the cross-price elasticity of demand for good X with respect to good Y.
c. What happened to the demand curve for good X?
Figure 9.3
(Figure 9.3) The profit-maximizing quantity and price are ______ and ______,
respectively.
A) 6 units; $6
B) 10 units; $8
C) 14 units; $4
D) 6 units; $12
Table 10.15
(Table 10.15) Tables A, B, and C show the consumers’ willingness to pay for two cable
television networks. Assume that the marginal cost of providing either channel is zero.
a. Complete the following table by providing the bundle price and the consumer and
producer surplus under bundling.
b. Complete the following table by indicating the optimal separate price for each
channel and the consumer and producer surplus under separate pricing.
c. What does this exercise indicate about consumer willingness to pay and whether
bundling will be more profitable than pricing separately?
The production function for laser eye surgery is given by Q = 20K0.5L0.5, where Q is
the number of laser eye surgeries performed per day, K is the number of eye surgery
machines (which is fixed at 2 in the short run), and L is the number of employees.
a. Write the equation for the firm’s short-run production function. b. Write the equation
for the firm’s short-run average product of labor function. c. Calculate the average
product of labor for L = 9 and L = 16. d. Calculate the marginal product of labor for L =
1, L = 2, and L = 3.
a. Write the equation for the firm’s short-run production function.
b. Write the equation for the firm’s short-run average product of labor function.
c. Calculate the average product of labor for L = 9 and L = 16.
d. Calculate the marginal product of labor for L = 1, L = 2, and L = 3.
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. 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. Suppose
Pam is paid $200 if jewelry profits are $400 a day and $50 if jewelry profits are $100 a
day. What is Pam’s expected pay for working hard?
A) $250
B) $100
C) $225.75
D) $162.50
Jewel’s utility is a function of golf (G) and music lessons (M), where MUG= 1/G and
MUM= 1/M. What is the equation for the marginal rate of substitution of music lessons
for golf (MRSGM)?
A) GM
B) M/G
C) G/M
D) M ” G
A Nash equilibrium occurs when:
A) each firm is doing the best it can, conditional on the actions taken by other firms.
B) each firm is doing the worst it can, conditional on the actions taken by other firms.
C) an oligopoly industry is characterized by excess demand, despite a market-clearing
price.
D) an oligopoly industry is characterized by excess supply, despite a market-clearing
price.
For each of the following production functions, determine whether they exhibit
constant, decreasing, or increasing returns to scale. a. Q = 4KL b. Q = K1/3L2/3 c. Q =
K1/3L1/3 d. Q = min(K, 4L) e. Q = 6K + 3L
Suppose that the marginal utility of good Y = 2X2, and the marginal utility of good X =
4XY. What is the slope of the indifference curve when Y = 7 and X = 2? Assume that
good X is placed on the horizontal axis and good Y is placed on the vertical axis.
A) “7
B) 0.143
C) “14
D) “0.143
The demand curve and supply curve for a good are given by QD= 100 “5P and QS =
1.25P ” 5. Suppose the production of this good creates a negative externality, where the
external marginal cost is constant at $2. To achieve the socially optimal output level, the
government wants to implement a quota. What should be the size of the quota?
Suppose a firm’s inverse demand curve is P = 100 ” Q and its marginal cost is constant
at $20. What is the value of the Lerner index at the profit-maximizing quantity?
A) 0.67
B) 0.80
C) 0.22
D) 0.33
Figure 5.4
(Figure 5.4) Which of the following statements is TRUE?
A) Fruitcake is an inferior good, regardless of the income level.
B) Fruitcake is a normal good, regardless of the income level.
C) Fruitcake is a normal good and then becomes an inferior good at income levels
above $120.
D) Fruitcake is an inferior good and then becomes a normal good at income levels
above $120.
The idea that firms pursue actions to maximize profits is:
A) generally rejected by economists in favor of the idea that firms maximize revenues.
B) a reasonable assumption because firms that do not maximize profits will see their
market share erode, it going to their profit-maximizing rivals.
C) easier to accomplish when management has little oversight from shareholders and
boards of directors.
D) refuted by evidence that firms engage in goodwill advertising and other charitable
activities.
Figure 7.2
(Figure 7.2) Consider a firm with the following cost structure:
Which of the preceding represents the cost curves of the firm?
A) panel (a)
B) panel (b)
C) panel (c)
D) panel (d)
Figure 10.10
(Figure 10.10) Which of the following statements is TRUE?
I. Producer surplus under perfect price discrimination is $75.
II. Producer surplus under a single-price monopoly is $45.
III. Producer surplus under block pricing (assume the price of the first block is $28 and
the price of the second block is $20) is $75.
A) I, II, and III
B) I and II
C) II and III
D) II
Table 12.16
(Table 12.16) In the table, the payoffs represent profits measured in thousands of
dollars. In this infinitely repeated game, Firm A and Firm B are both using grim trigger
strategies and agree to charge a high price in period 1. If Firm A charges a high price for
all periods, what is its expected payoff? Assume that d = 0.9.
A) $720,000
B) $3 million
C) $364,000
D) $200,000
Table 1
(Table 1) Which of the following is TRUE?
I. A = B = $400
II. C = $200
III. D = $0
A) I, II, and III
B) I and II
C) III only
D) I and III
Which of the following statements is TRUE?
I. A quota can only be used to address negative externalities, not positive externalities.
II. Implementing pollution quotas is difficult because quotas must be implemented on a
firm-by-firm basis.
III. The government could produce the good itself as a method of increasing the
quantity of a good with a positive externality.
A) II only
B) I and III
C) I, II, and III
D) II and III
Figure 5.23
(Figure 5.23) In panel (a), the price of good X is $1.50 per unit and the price of good Y
is $3 per unit. In panel (b), the consumer’s income increased from $400 to $480.
a. In panel (a), calculate the income elasticity of demand for good X. What type of good
is good X?
b. In panel (b), calculate the income elasticity of demand for good X. What type of good
is good X?
A drug company is considering investing $100 million today to bring a weight loss pill
to the market. At the end of one year, there is a 50 probability that the pill will forever
sell at a high price and generate $37 million dollars per year of profit forever, but there
is a 0.50 probability that the pill will forever sell at a low price and generate $1 million
per year of profit forever. Assume that the interest rate is 10%. Suppose the firm decides
to wait one year to determine whether the pill will sell at a high price or a low price.
The firm will not invest if it learns that the pill will sell at a low price. What is the
option value of waiting one year to make the investment?
A) $10 million
B) $46.4 million
C) $17.44 million
D) $8.1 million
Community rating regulations require insurance companies to charge everyone the
same premium, with sometimes slight adjustment for age and gender, regardless of a
person’s health status. How does this regulation affect adverse selection?
A) Adverse selection would worsen. Low-risk people and healthy people would be
more likely to buy insurance, because the insurance companies cannot legally offer
them higher premiums based on their risk.
B) Adverse selection would improve. High-risk people and healthy people would be
less likely to buy insurance, because the insurance companies cannot legally offer them
lower premiums based on their risk.
C) Adverse selection would improve. High-risk people and sick people would be more
likely to buy insurance, because the insurance companies cannot legally offer them
higher premiums based on their risk.
D) Adverse selection would worsen. Low-risk people and healthy people would be less
likely to buy insurance, because the insurance companies cannot legally offer them
lower premiums based on their risk.
During a down market in Boston, homeowners tried to sell their homes at prices based
on what they originally paid. As a result, the Boston real estate market:
A) experienced a housing shortage.
B) experienced an excess supply of housing.
C) was characterized by below-equilibrium-level prices.
D) set a record for the number of housing sales in a month.
The market inverse demand curve is P = 90 ” Q, where Q is the total market output
comprised of Firm 1’s output, q1, and Firm 2’s output, q2. Both firms have a constant
marginal cost of $10. If Firm 1 selects its output level first, how much output does each
firm produce?
A) q1 = 40; q2 = 20
B) q1 = 30; q2 = 15
C) q1 = 18; q2 = 18
D) q1 = 14; q2 = 21
Figure 16.11
(Figure 11) The government wants to set the socially optimal level of nitrogen runoff,
and government regulators believe that the actual marginal benefit of pollution (MBP)
is given by the estimated MBP curve. The deadweight loss associated with a quota is
______, while the deadweight loss from a Pigouvian tax is ______.
A) $2; $18
B) $12; $18
C) $6; $4
D) $8; $2
Which of the following statements is TRUE?
I. The gain in profit from cheating on a cartel agreement is greater if there are more
firms in the cartel.
II. In a cartel, noncheating firms will experience rising profits, as cheating firms lower
prices by expanding output.
III. If a firm cheats on a cartel agreement, the loss in profit to the noncheating firm will
be smaller in a two-firm cartel than a four-firm cartel.
A) I, II, and III
B) II only
C) I and III
D) III only
A key assumption of the supply and demand model is that:
A) each firm’s good is unique and cannot be duplicated by other firms in the market.
B) firms will continue to raise price until profits become positive.
C) each firm produces an identical good in the market.
D) each firm produces a level of output at which price exceeds marginal cost.
Justin purchased a Polar Express train set from Lionel Trains. He paid $240 for the set
and received consumer surplus of $125. What was Justin’s willingness to pay for the
train set?
A) $115
B) $240
C) $250
D) $365
What is an example of an endowment effect?
A) Mark purchased a used car for $3,100 that he values at $4,000. Recently, Mark was
offered $4,400 for the car but refuses to sell it.
B) Sammy receives increasing marginal utility as his 401K plan increases.
C) Toby prefers a guaranteed $200 to facing a gamble with an expected value of $200.
D) Deana refuses to transfer money from her checking account into her savings
account, even though she has paid all her monthly bills.
Figure 3.8
(Figure 3.8) Suppose the government mandates a price ceiling of $3 per pound. What
happens to producer surplus?
A) Producer surplus decreases from $1,500 to $800.
B) Producer surplus decreases from $2,200 to $1,400.
C) Producer surplus decreases from $4,500 to $2,000.
D) Producer surplus decreases from $3,000 to $2,700.
Suppose the market for soda is represented by the following supply and demand
equations:
QS= 35P ” 39.75 and QD = 10.25 ” 5P, where P is price per bottle and Q measures
bottles per second.
a. What is the value of consumer and producer surplus?
b. If the government imposes a $0.50 tax per bottle, what is the value of consumer and
producer surplus?
c. What is the deadweight loss from the tax? How much revenue does the government
collect from the tax?
Many years ago the Aluminum Company of America owned almost all sources of the
special ore (bauxite) needed to produce aluminum. This is an example of market power
arising from:
A) extreme economies of scale.
B) control of a key input.
C) switching costs.
D) network effects.