Carfax offers a report on used cars for $39.99 that details the ownership type and
history, vehicle mileage, accident reports, and other information. Carfax is an example
of how markets try to:
A) increase adverse selection.
B) lessen the lemons problem by reducing asymmetric information.
C) profit from increasing information disparities between buyers and sellers.
D) address an inefficiency by making things worse because buyers must now pay for
the report.
Suppose that a bond with a face value of $10,000 and coupon rate of 7% is currently
selling for $9,880. The bond’s yield to maturity is ______ and thus the bond is selling
_______.
A) 7%; below par
B) less than 7%; below par
C) less than 7%; above par
D) greater than 7%; below par
Carl’s spending decisions are not affected by the source of his money. In this case, Carl
is:
A) not acting as if money is fungible.
B) using mental accounting.
C) not using mental accounting.
D) risk-inconsistent.
Table 10.3
(Table 10.3) Suppose that Fender is trying to practice indirect price discrimination
through versioning. It plans to offer a cheaper version of its guitar for consumers who
are highly price-sensitive and a more expensive version of its guitar to consumers who
are less price-sensitive. Which of the following pricing schemes is
incentive-compatible?
A) price of American Standard = $800; price of American Deluxe = $1,599
B) price of American Standard = $900; price of American Deluxe = $1,001
C) price of American Standard = $999; price of American Deluxe = $1,499
D) price of American Standard = $1,119; price of American Deluxe = $1,750
There are two firms that are producing identical goods in a market characterized by the
inverse demand curve P = 60 ” 2Q, where Q is the sum of Firm 1’s and Firm 2’s output,
q1+ q2. Each firm’s marginal cost is constant at $12, and fixed costs are zero. Answer
the following questions, assuming that the firms are Cournot competitors.
a. Calculate each firm’s reaction function.
b. How much output does each firm produce?
c. What is the market price?
d. How much profit does each firm earn?
Figure 3.13
(Figure 3.13) The supply of private golf courses is “Sprivategolf” and the supply of
private and public golf courses is “Stotal.” The government provision of public golf
courses reduced the number of rounds played on private golf courses by:
A) 400 per week.
B) 200 per week.
C) 100 per week.
D) 50 per week.
Table 12.12
(Table 12.12) In the table, the payoffs are profits in millions of dollars. If Firm 1
follows a maximin strategy, the outcome of this game is:
A) (20, 20).
B) (8, 8).
C) (“20, 15).
D) (“1, 10).
Table 12.7
(Table 12.7) In the table, payoffs represent profits in millions of dollars. What is Owens
Corning’s dominated strategy?
A) No Expansion
B) Small Expansion
C) Large Expansion
D) Owens Corning does not have a dominated strategy.
The income elasticity of demand for dental services is 2.40, and the income elasticity of
demand for nursing homes is 0.90. Based on these estimates, dental services is a(n)
______ and nursing home care is a(n) ______.
A) luxury good; normal good
B) normal good; inferior good
C) inferior good; luxury good
D) normal good; luxury good
Figure 15.1
(Figure 15.1) An individual with no automobile insurance will choose to take _____
units of action to prevent theft.
A) 0
B) between 1 and 3
C) 4
D) 8
Which of the following situations is an example of general equilibrium analysis?
A) An excise tax on cigarettes reduces the supply of cigarettes, leading to higher
cigarette prices.
B) A severe frost destroys a significant portion of the coffee crop, leading to higher
coffee prices. The higher coffee prices increase the demand for tea, resulting in higher
tea prices. The higher tea prices will, in turn, cause the demand for coffee to rise even
more, further increasing the price of coffee.
C) A decrease in the demand for peanuts causes both the equilibrium price and quantity
of peanuts to decrease. As a result, peanut farmers reduce their peanut output and
supply decreases.
D) As fuel costs rise, airlines experience rising costs of production. Higher production
costs cause airline profits to fall, leading to higher air fares and fewer flights.
Table 10.12
(Table 10.12) The table shows consumer valuations for two types of Callaway golf
shoes.
a. Suppose Callaway prices the C-Tech shoes at $85 and the Xtreme shoes at $125.
Show that this pricing scheme is incentive compatible.
b. Suppose Callaway prices the C-Tech shoes at $70 and the Xtreme shoes at $125.
Show that this pricing scheme is NOT incentive-compatible.
Suppose that a firm is currently producing 100 units of output at a total cost of $20,000.
a. Give a numerical example of this firm experiencing economies of scale as it expands
output.
b. Give a numerical example of this firm experiencing constant economies of scale as it
expands output.
c. Give a numerical example of this firm experiencing diseconomies of scale as it
expands output.
Suppose that each firm in a perfectly competitive market has a short-run total cost of
TC =
75 + 500Q ” 5Q2 + 0.5Q2, where MC = 500 ” 10Q + 1.5Q2.
a. Calculate the output that minimizes the firm’s AVC.
b. What is the firm’s shutdown price?
For a signal to be meaningful, the cost of acquiring a signal must be:
A) the same for everyone.
B) zero.
C) lower for high-quality goods than for low-quality goods.
D) higher for high-quality goods than for low-quality goods.
The marginal utility for a pair of black socks is 4 and the marginal utility for a pair of
white socks is 1.
a. What is the MRSWB?
b. If the consumer traded 8 pairs of white socks for 1 pair of black socks, what would
happen to the consumer’s utility?
A rock-climbing school faces two demand curves. The demand by local residents is Q =
400 ” 0.5P, and the demand by nonlocal residents is Q = 500 ” 0.5P. The marginal cost
of serving either local or nonlocal residents is constant at $100. If the rock-climbing
school cannot practice third-degree price discrimination and must charge a single price
to all customers, it will charge a price of:
A) $400.
B) $375.
C) $800.
D) $500.
Figure 4.15
(Figure 4.15) The consumer maximizes utility by consuming:
A) 7 mushrooms and 0 units of spinach.
B) 8 units of spinach and 0 mushrooms.
C) on indifference curve U2.
D) approximately 4 mushrooms and 4 units of spinach.
Tankim has $4,000 in his savings account that pays an annual interest rate of 2%. The
value of his account at the end of eight years is:
A) $4,200.
B) $4,686.64.
C) $4,640.
D) $4,808.16.
Figure 14.11
(Figure 14.11) Answer the following questions.
a. On the graph, illustrate a Pareto-efficient allocation of cream and peaches between
Billy Joe and Bobby Sue.
b. On the graph, illustrate an inefficient allocation of cream and peaches between Billy
Joe and Bobby Sue.
c. Is there a Pareto-efficient allocation that gives Billy Joe the majority of cream and
peaches?
The supply and demand for almonds are QD = 80″ 10P and QS = 10P, where P is price
per bag and Q measures hundreds of bags per day.
a. What is the equilibrium price and quantity?
b. Calculate consumer and producer surplus.
c. Suppose the government imposes a price floor of $7 per bag. Is there a shortage or
surplus of almonds and, if so, what is the size?
d. Calculate consumer and producer surplus with the price floor.
e. What is the size of the deadweight loss?
Which of the following statements is TRUE?
I. The lemons problem causes an inefficiently high number of sales in high-quality
goods.
II. The lemons problem affects how much buyers are willing to pay for goods.
III. The lemons problem does not affect the market for services.
A) I and II
B) II only
C) III only
D) I, II, and III
Adam has wealth of $40,000 as long as his business does not burn down. However,
there is a 50% probability that his business will burn down, causing a loss of $30,000
and leaving him with $10,000 of wealth. Adam’s utility function is given by U = W0.5,
where W is wealth. What is Adam’s expected utility?
A) 150
B) 48
C) 66
D) 120
Which situation will likely give rise to diminishing marginal product of labor?
A) Plasma television manufacturers are going out of business because of increased
competition from LCD televisions.
B) Hell’s Kitchen, which has enough counter space for three cooks per shift, decides to
hire a fourth cook per shift.
C) Nevaeh’s Kitchen undertakes a massive expansion, doubling both the size of its
kitchen and number of cooks.
D) A landscaping firm replaces all of its self-propelled lawnmowers with push mowers.
Figure 4.9
(Figure 4.9) Suppose that the consumer moves from point A to point B along her
indifference curve. If the marginal utility of winter coats is 25, the marginal utility of
wool sweaters is:
A) 12.5.
B) 2.
C) 16.
D) 50.
In a country with 100 people, each person has a utility function given by U = LY, where
L is hours of leisure per day and Y is daily income. If each person earns $50 per day and
enjoys 10 hours of leisure, what is the value of the utilitarian social welfare function for
the country as a whole?
A) 500
B) 250
C) 25,000
D) 50,000
Which of the following statements is TRUE regarding the principal”agent problem in
residential real estate transactions?
A) Because selling agents are paid on commission, there is no principal”agent problem.
B) Selling agents have an incentive to sell quickly, without waiting for slightly higher
offers.
C) If a selling agent sells an owner’s home for an additional $20,000, the agent stands to
gain more than the owner.
D) Owners know more than selling agents about the state of the real estate market and
the value of comparable homes.
Economists assume that firms maximize:
A) the difference between marginal revenue and marginal cost.
B) TR = PQ.
C) Π= TR ” TC.
D) P ” ATC, the profit per unit of output.
Figure 6.5
(Figure 6.5) Put these four panels in order from the easiest case of input substitutability
to the hardest case of input substitutability.
A) panel (b), panel (a), panel (c), and panel (d)
B) panel (a), panel (c), panel (d), and panel (b)
C) panel (d), panel (c), panel (a), and panel (b)
D) panel (a), panel (d), panel (c), and panel (b)
A consumer’s bundle includes good X (an inferior good) and good Y (a normal good).
According to the income effect, a(n) ______ in the price of good X or ______ in the
price of good Y will cause the consumer to buy more of good X.
A) increase; decrease
B) increase; increase
C) decrease; increase
D) decrease; decrease