Figure 5.14
(Figure 5.14) What is the size of the income effect associated with the decrease in the
price of good X?
A) The quantity of good X purchased increases from 3 to 4.
B) The quantity of good X purchased increases from 4 to 5.
C) The quantity of good X purchased decreases from 5 to 4.
D) The quantity of good X purchased increases from 3 to 5.
Which of the following statements is TRUE?
I. If labor and capital are perfect substitutes in production, the isoquant is a
downward-sloping line. II. If a company needs to use inputs in fixed proportion such
that the capital to labor ratio is always 2, the firm’s isoquants are “L-‘shaped. III. If the
production function is given by Q = min(14, 7), the firm can produce, at minimum, 21
units of output.
I. If labor and capital are perfect substitutes in production, the isoquant is a
downward-sloping line.
II. If a company needs to use inputs in fixed proportion such that the capital to labor
ratio is always 2, the firm’s isoquants are “L-‘shaped.
III. If the production function is given by Q = min(14, 7), the firm can produce, at
minimum, 21 units of output.
A) I, II, and III
B) I only
C) III only
D) I and II
The sunk-cost fallacy is the:
A) principle that sunk costs matter more and more with the passage of time.
B) mistaken belief that one should consider sunk costs when making decisions.
C) idea that people ignore past experiences when making future decisions.
D) correct belief that past investments can be recovered from future actions.
Suppose a firm’s total cost is given by TC = 100 + 4Q + 2Q2. Which of the following
statements is TRUE?
I. AVC = 4Q + 2Q2
II. AFC = 100/Q
III. ATC = 2Q + 4 + 100/Q
IV. FC = 100 + 4Q
A) I and II
B) II and III
C) III only
D) I and IV
At a swap meet, there are 10 sellers who are each trying to sell a used 7L Chevy engine.
Half the engines are in mint condition, with each valued by their sellers at $3,000. The
other engines need repair, with each of these valued by their sellers at $1,000. Buyers
value a mint engine at $3,500 and an engine that needs repair at $1,600. Sellers know
whether their engine is in mint condition or needs repair, and buyers can distinguish
between engines in mint condition and those needing repair. How many engines will be
sold at the swap meet?
A) zero
B) 10
C) five mint engines and no engines that need repair
D) no mint engines and five engines that need repair
Suppose that in an economy 50 rock concerts and 30 opera concerts are performed per
year. If the economy’s entertainment czar decides to schedule 49 rock concerts and 31
opera concerts next year, about 65% of the population would approve, 25% disapprove,
and 10% would not care. This indicates that:
A) output efficiency requires an equal number of rock and opera concerts.
B) it would be a Pareto improvement to schedule one more opera concert at the expense
of a rock concert.
C) it would not be a Pareto improvement to schedule one more opera concert at the
expense of a rock concert.
D) input efficiency requires an equal number of rock and opera concerts.
In the age before free agency, Major League Baseball (MLB) players were the property
of their team owners. The owners had complete control on whether to trade their
players away or keep them on the roster. In the period of free agency, players had the
right to sell their services to the highest-bidding team. According to the Coase theorem:
A) free agency will cause the salaries of talented players to decline.
B) free agency will allow a select group of teams to purchase all the talented players.
C) the distribution of player talent in MLB will not be affected by whether players have
free agency because player talent will flow to where it is most valued.
D) the salaries of players will not be affected by whether the league has free agency.
Competitive markets ______ goods with negative externalities and ______ provide
goods with positive externalities.
A) overprovide; underprovide
B) underprovide; overprovide
C) overprovide; overprovide
D) underprovide; underprovide
Figure 8.22
(Figure 8.22) Answer the following questions.
a. What is the firm’s short-run supply curve? Identify it on the graph.
b. Complete the following table.
Which of the following characteristics relate to perfect competition?
I. An industry is dominated by several large firms.
II. Consumers cannot distinguish one firm’s product from another.
III. New firms can easily enter the industry.
A) I and II
B) II and III
C) II only
D) III only
Principal”agent relationships arise from:
A) asymmetric information.
B) hyperbolic discounting.
C) risk aversion.
D) deadweight losses.
Figure 3.11
(Figure 3.11) The supply equation in the adult magazine market is given by QS = 2P ”
4, where P is the price per magazine and Q measures the number of magazines in
thousands. Which of the preceding supply curves reflects a government quota of 6,000
magazines?
A) panel (a)
B) panel (b)
C) panel (c)
D) panel (d)
Table 12.20
(Table 12.20) In the table, payoffs represent profits in millions of dollars. Which of the
following statements is TRUE?
I. In a simultaneous game that is played only once, the Nash equilibrium is (0, 0).
II. In a sequential game in which Player A moves first, the Nash equilibrium is (6, 0).
III. In the sequential game, Player A has a first-mover advantage.
A) I and III
B) II only
C) II and III
D) I, II, and III
Ted purchased a comprehensive insurance policy for his car. Which of the following is
an example of moral hazard?
A) Because of his insurance coverage, Ted is less likely to drive his car when the roads
are icy.
B) Because of his insurance coverage, Ted no longer locks his car doors in parking lots.
C) Because of his insurance coverage, Ted uses a designated driver for the nights he
spends bar hopping.
D) Because of his insurance coverage, Ted replaced his worn-out tires with Michelin
tires.
Antitrust laws:
A) encourage firms to work together on setting prices, market share, and output levels.
B) cannot be used to prevent the merger of two firms.
C) restrict firms from engaging in behaviors that make markets less competitive.
D) ensure that firms with market power are not penalized for colluding.
Suppose a firm faces the demand curve which gives a constant price elasticity
of demand of “2. To answer the next two questions, it will be helpful to recall the
Lerner index.
a. If the firm’s marginal cost is constant at $2, what is the profit-maximizing price and
quantity?
b. If the firm’s marginal cost increases to a constant $3, what is the profit-maximizing
price and quantity?
Figure 10.15
(Figure 10.15) Answer the following questions.
a. Under monopoly pricing, what are the price, quantity, and level of producer surplus?
b. Under a two-part tariff, what are the price per unit, access/entrance fee, and level of
producer surplus?
Figure 4.7
(Figure 4.7) Which of these indifference curves is convex to the origin?
A) U1
B) U2
C) U3
D) U4
The market for cookies is represented by the following supply and demand conditions:
QD= 1,000 ” 200P and QS = 400P ” 200, where P is price per box of cookies and Q
measures boxes per day.
a. Solve for the equilibrium price and quantity and then use supply and demand curves
to illustrate your answer.
b. Suppose the government places a quota on cookies of 500 boxes per day. Solve for
the equilibrium price and quantity and then use supply and demand curves to illustrate
your answer.
c. Calculate consumer surplus before and after the quota.
d. Calculate producer surplus before and after the quota.
e. Calculate the deadweight loss from the quota.
Table 6.1
A) 1; 3
B) 2; 1
C) 2; 3
D) 1; 1
Which of the following describes the effect of compounding on the growth of an initial
principal that is invested at a constant interest rate?
A) The value of the account will increase at an increasing rate over time.
B) The value of the account will increase at a constant rate over time.
C) The value of the account will increase at a decreasing rate over time.
D) The value of the account will increase at a linear rate over time.
Davey has the opportunity to buy an investment that pays $500 at the end of each of the
next two years. If interest rates are 6.5%, what is the maximum price that Davey should
pay for this investment?
A) $910.31
B) $889.23
C) $777.20
D) $686.40
A good is rival if:
A) it is produced by more than one firm.
B) consuming an item means that no one else can consume that same exact item
without another one being created.
C) the consumption of it creates negative externalities.
D) consumers can be restricted from buying it.
The supply curve of rubber balls is given by Q = 100P “ 10.
a. What happens to the quantity supplied of rubber balls if the price of rubber balls
increases by $1?
b. What is the equation for the inverse supply curve?
c. Graph the supply curve of rubber balls, showing the quantity supplied at a price of
$0.10 and $0.60.
Figure 10.11
(Figure 10.11) If a firm uses a two-part tariff pricing strategy, the entrance fee is ______
and the per-unit price is ______.
A) $12; $8
B) $8; $12
C) $16; $8
D) $8; $16
Figure 8.9
(Figure 8.9) At the profit-maximizing output level, this firm earns profit of:
A) “$60.
B) $48.
C) $60.
D) “$20.
Brenda’s Pastry employs three workers who produce 6 dozen pastries per hour. After
Brenda hires a fourth worker, the number of pastries produced increases to 7 dozen per
hour. Which of the following statements is TRUE?
A) Because the marginal product of the fourth worker is greater than the average
product of three workers, the average product must fall.
B) Because the marginal product of the fourth worker is less than the average product
of three workers, the average product must rise.
C) Because the marginal product of the fourth worker is greater than the average
product of three workers, the average product must rise.
D) Because the marginal product of the fourth worker is less than the average product
of three workers, the average product must fall.
Suppose that the MUX= Y and the MUY = X. The prices of good X and of good Y are $5
and $4, respectively. How many units of good X does the consumer buy if she has $410
of income?
A) 15
B) 41
C) 25
D) 33
The supply and demand for squash are given by QD = 200,000 ” 50,000P and QS =
90,000P ” 80,000, where P is price per pound and Q measures pounds of squash.
a. What is the level of consumer surplus at the equilibrium price?
b. What is the level of producer surplus at the equilibrium price?
As firms enter a monopolistically competitive industry, the existing firms’ demand
curves will:
A) remain unchanged.
B) shift outward and become more inelastic.
C) shift inward and become more elastic.
D) shift outward and become more elastic.
Suppose a consumer spends her income on lobster and frozen pizza. Assume that the
consumer has an income of $60, the price of lobster is $6, and the price of frozen pizza
is $6.
a. Using indifference curves and budget constraints, show the income and substitution
effects associated with a decrease in the price of frozen pizza. Put frozen pizza, an
inferior good, on the horizontal axis and lobster, a normal good, on the vertical axis.
b. Using indifference curves and budget constraints, show the income and substitution
effects associated with a decrease in the price of frozen pizza. Put frozen pizza, a Giffen
good, on the horizontal axis and lobster, a normal good, on the vertical axis.
The signaling model of education assumes that attending college will:
A) only improve the productivity of people with high innate ability.
B) only improve the productivity of people with low innate ability.
C) not improve productivity.
D) improve the productivity of all people.
The demand curve and supply curve for a good are given by QD= 100 ” 5P and QS=
25P ” 2.5. Suppose the production of this good creates a negative externality, where the
external marginal cost is constant at $2.
a. To achieve the socially optimal output level, what size tax should the government
implement in this market?
b. Based on your answer to part a, what price will buyers pay and what price will sellers
receive net of the tax?
The demand curve for a good is Q = 80 ” 0.20P, where Q is the quantity demanded and
P is the price per unit. This good’s inverse demand curve is:
A) P = 80 ” 0.20Q.
B) P = 40 ” Q.
C) P = 5Q + 40.
D) P = 400 ” 5Q.
Suppose that most people who plan to work out at a gym are overly optimistic about
how many times they will use the gym in the upcoming year. A rational gym owner
might respond by selling:
A) weekly memberships at inflated prices.
B) annual or multiyear memberships.
C) daily memberships at discounted prices.
D) a monthly plan at $100 and a yearly plan at $1,500.