Intermediate Microeconomics and Its Application 12th Edition by Walter Christopher TEST BANK

Chapter 1 1. The problem of scarcity a. arises only in poor countries. b. exists because the price of goods is too high. c. exists because of limited resources. d. will eventually be solved by better planning.

ANSWER: c POINTS: 1 2. If society is producing a combination of goods on its production possibilities frontier a. it must be employing all available resources. b. it must be growing. c. it is using all the available natural resources but may not be using all available labor resources. d. Both a and b.

ANSWER: a POINTS: 1 3. The slope of the production possibility frontier shows a. how inputs must be changed to keep them fully employed. b. the technically efficient combinations of the two goods. c. how demanders are willing to trade one good for another. d. the opportunity cost of one good in terms of the other.

ANSWER: d POINTS: 1 4. If the prevailing price of shirts is $10 and at this price demanders demand 100 shirts while suppliers are willing to supply 110 shirts, there is a(n) a. shortage at the $10 price. b. surplus at the $10 price. c. equilibrium in this market. d. shortage if price were to rise above $10.

ANSWER: b POINTS: 1 5. Positive economic analysis a. involves the study of firms with positive profits. b. involves how resources are actually used in an economy. c. involves judgments on how resources should be used in an economy. d. is usually thought to be a waste of time.

ANSWER: b POINTS: 1 6. Normative economic analysis a. involves the study of what comprises a normal firm. b. involves how resources are actually used in an economy.

c. involves judgments on how resources should be used in an economy. d. is usually thought to be a waste of time.

ANSWER: c POINTS: 1 7. A major problem that may occur with models that predict the values of economic variables in the future is that a. researchers are pessimistic about the future. b. the model may fail to acknowledge that economic actors will change their behavior in response to changing situations. c. the model may make predictions that conflict with widely held opinions. d. no one cares about these predictions.

ANSWER: b POINTS: 1 8. In the equation where Y is a function of X a. Y is the independent variable. b. 38 is a variable. c. the slope of the line is 38. d. None of the above.

ANSWER: d POINTS: 1 9. The Y-intercept of a. 3/8. b. 3. c. 8. d. –8/3.

ANSWER: c POINTS: 1 10. The X-intercept of a. −3. b. 3. c. −1/3 d. 12.

ANSWER: a POINTS: 1

is

is

11. If the Y-intercept of a linear function increases while the slope remains unchanged a. the graph must shift down in a parallel way. b. the graph must rotate to the left about the X intercept. c. the graph must shift up in a parallel. d. the graph remains unchanged.

ANSWER: c POINTS: 1

12. If the slope of a linear function changes with no change in the Y-intercept a. the graph shifts either up or down in a parallel way. b. the graph remains unchanged. c. the graph rotates about its X-intercept. d. the graph rotates about its Y-intercept.

ANSWER: d POINTS: 1 13. The slope of a nonlinear function at some particular point a. is the slope of the straight line that is tangent to the function at that point. b. is the slope of the straight line connecting the origin and the point. c. cannot be determined. d. is constant for the entire function.

ANSWER: a POINTS: 1 14. Given which of the following are necessarily true? a. Y is a linear function. b. X, Z are dependent variables. c. A contour line of this function would keep Y constant. d. An increase in X would increase Y. ANSWER: c POINTS: 1 15. For the function a. the X-intercept. b. the Y-intercept. c. a contour line. d. a tangent line.

ANSWER: c POINTS: 1 16. For the equation a. , b.

.

c.

, d. Both a and c.

ANSWER: c POINTS: 1

17. For the equation

, the equation

represents

, which of the following points lie on the . . .

the point

,

a. yields a value of . b. lies below the contour line that includes the point

,

contour line?

. c. lies on the same contour line as the point d. Both a and b.

ANSWER: d POINTS: 1

,

.

18. If , the contour lines a. are concentric circles. b. are parabolas. c. are hyperbolas. d. intersect whenever either X or Z is zero.

ANSWER: a POINTS: 1 19. The solution to the simultaneous equations a. , . b. , .

and

is

c.

, . d. None of the above.

ANSWER: b POINTS: 1 20. Graphically, the solution to a system of two independent linear equations is usually a. the average of the slopes. b. the average of the intercepts. c. a single point. d. None of the above.

ANSWER: c POINTS: 1 21. Let a.

and ;

b.

;

c. d.

;

. Here equilibrium price and quantity are

; ANSWER: a POINTS: 1 22. If the production possibilities frontier can be expressed as a. outside the production possibilities frontier b. on the production possibilities frontier c. inside the production possibilities frontier

then the point

;

is

d. in the wrong quadrant to be on the graph ANSWER: a POINTS: 1 23. If the production possibilities frontier can be expressed as a. outside the production possibilities frontier b. on the production possibilities frontier c. inside the production possibilities frontier d. in the wrong quadrant to be on the graph ANSWER: b POINTS: 1 24. Suppose a production possibilities frontier can be expressed as from 1 unit of X to 2 units of X (in terms of units of Y)? a. 45 b.

then the point

;

is

what is the opportunity cost of going

c. d. 1 ANSWER: c POINTS: 1 25. Suppose a production possibilities frontier can be expressed as from 2 units of X to 3 units of X (in terms of units of Y)? a.

what is the opportunity cost of going

b. c. 1 d. 0 ANSWER: b POINTS: 1 26. An increase in the technology used in the production of only one of the two goods in a society will a. eliminate scarcity b. move the production possibilities frontier out in all directions c. move the production possibilities frontier in all directions d. leave one intercept of the production possibilities frontier fixed and swing out from the other ANSWER: d POINTS: 1 27. Suppose a. 7 b. 8 c. 9 d. 10

and

. The equilibrium price is

ANSWER: b POINTS: 1 28. Suppose a. 2 b. 3 c. 4 d. 5 ANSWER: c POINTS: 1 29. Suppose a.

and

. The equilibrium quantity is

. If taxes are progressive which of the following is true?

b. c. d.

ANSWER: a POINTS: 1 30. Suppose a. b.

. If taxes are regressive which of the following is true?

c. d.

ANSWER: b POINTS: 1 31. Suppose a.

. If taxes are proportional which of the following is true?

b. c. d.

ANSWER: c POINTS: 1 32. Suppose you can write generic supply and demand curves such that price is given by a. b. c. d.

ANSWER: a POINTS: 1

and

. Equilibrium

33. Suppose you can write generic supply and demand curves such that quantity is then given by a.

and

. Equilibrium

34. Suppose you can write generic supply and demand curves such that reach a certain level before firms supply anything,, A must be a. positive b. negative c. 0 ANSWER: b POINTS: 1

and

. If price must

35. Suppose you can write generic supply and demand curves such that produce more when price rises, B must be a. positive b. negative c. 0 ANSWER: a POINTS: 1

and

. If firms

36. Suppose you can write generic supply and demand curves such that demand less as price rises, C must be a. positive b. negative c. 0 ANSWER: b POINTS: 1

and

. If consumers

37. Suppose you can write generic supply and demand curves such that supply-demand configuration, D must be a. positive b. negative c. 0 ANSWER: a POINTS: 1

and

. In the usual

b. c. d.

ANSWER: b POINTS: 1

38. The Ricardian notion that of diminishing returns implies that a. as more input is used more output will be made. b. as more input is used less output will be made. c. as more input is used the increase in output will increase.

d. as more input is used the increase in output will decrease.

ANSWER: d POINTS: 1 39. Economists typically use a. positive; positive b. normative; normative c. positive; normative d. normative; positive ANSWER: c POINTS: 1

analysis, whereas clergy members typically use

analysis.

Chapter 2 1. Indifference curves a. are nonintersecting. b. are contour lines of a utility function. c. are negatively sloped. d. All of the above.

ANSWER: d POINTS: 1 2. For an individual who consumes only two goods, X and Y, the opportunity cost of consuming one unit of X in terms of how much Y must be given up is reflected in a. the individual’s marginal rate of substitution. b. the slope of the individual’s budget constraint. c. the slope of the individual’s indifference curve. d. None of the above.

ANSWER: b POINTS: 1 3. If bundles of goods A and B lie on the same indifference curve, one can assume the individual a. prefers bundle A to bundle B. b. prefers bundle B to bundle A. c. enjoys bundle A and B equally. d. bundle A contains the same goods as bundle B. ANSWER: c POINTS: 1 4. If bundle A lies on an indifference curve and bundle B lies to the right of the curve, the individual a. prefers bundle A to bundle B. b. prefers bundle B to bundle A. c. enjoys bundle A and B equally. d. must receive more of both—with bundle B. ANSWER: b POINTS: 1 5. “If an individual is to maximize the utility received from consumption, he or she should spend all available income. . . .” This statement assumes a. that saving is impossible. b. that the individual is not satiated in all goods. c. that no goods are “inferior.” d. Both a and b.

ANSWER: d POINTS: 1 6. Suppose an individual’s MRS (of steak for beer) is 2:1. That is, at the current consumption choices he or she is willing to give up 2 beers to get an extra steak. Suppose also that the price of a steak is $1 and a beer is 25¢. Then in order to increase utility the individual should

a. buy more steak and less beer. b. buy more beer and less steak. c. continue with current consumption plans. d. Not enough information to answer the question.

ANSWER: b POINTS: 1 7. Suppose that at current consumption levels an individual’s marginal utility of consuming an extra hot dog is 10 whereas the marginal utility of consuming an extra soft drink is 2. Then the MRS (of soft drinks for hot dogs)—that is, the number of hot dogs the individual is willing to give up to get one more soft drink is a. 5 b. 2 c. 1/2 d. 1/5 ANSWER: d POINTS: 1 8. If an individual’s indifference curve map does not obey the assumption of a diminishing MRS, then a. the individual will not maximize utility. b. the individual will buy none of good X. c. tangencies of indifference curves to the budget constraint may not be points of utility maximization. d. the budget constraint cannot be tangent to an appropriate indifference curve.

ANSWER: c POINTS: 1 9. As an individual moves northwest along an indifference curve substituting more and more Y for X, his or her MRS of X for Y a. increases. b. decreases. c. stays the same. d. changes in a way that cannot be determined.

ANSWER: a POINTS: 1 10. The X-intercept of the budget constraint represents a. how much of good Y can be purchased if no good X is purchased and all income is spent. b. how much of good X can be purchased if no good Y is purchased and all income is spent. c. total income divided by the price of X. d. b and c.

ANSWER: d POINTS: 1 11. The point of tangency between a consumer’s budget constraint and his or her indifference curve represents a. complete satisfaction for the consumer. b. the equivalence of prices the consumer pays. c. constrained utility maximization for the consumer.

d. the least he or she can spend.

ANSWER: c POINTS: 1 12. An increase in an individual’s income without changing relative prices will a. rotate the budget constraint about the X-axis. b. shift the indifference curves outward. c. shift the budget constraint outward in a parallel way. d. rotate the budget constraint about the Y axis.

ANSWER: c POINTS: 1 13. The slope of the budget constraint line is a. the ratio of the prices

.

b. the negative of the ratio of the prices

.

c. the ratio of income divided by price of Y . d. none of the above.

ANSWER: b POINTS: 1 14. If the price of X falls, the budget constraint a. shifts outward in a parallel fashion. b. shifts inward in a parallel fashion. c. rotates outward about the X-intercept. d. rotates outward about the Y-intercept.

ANSWER: d POINTS: 1 15. If an individual has a constant MRS of shoes for sneakers of 3/4 (that is, he or she is always willing to give up 3 pairs of sneakers to get 4 pairs of shoes) then, if sneakers and shoes are equally costly, he or she will a. buy only sneakers. b. buy only shoes. c. spend his or her income equally on sneakers and shoes. d. wear sneakers only 3/4 of the time.

ANSWER: a POINTS: 1 16. Suppose a cup of coffee at the campus coffee shop is $2.50 and a cup of hot tea is $1.25 and that a student’s beverage budget is $20 per week. What is the most cups of tea the student could buy? a. 20 b. 16 c. 10 d. 8 ANSWER: b

POINTS: 1 17. Suppose a cup of coffee at the campus coffee shop is $2.50 and a cup of hot tea is $1.25 and that a student’s beverage budget is $20 per week. What is the market tradeoff between coffee and tea? a. 1 coffee to 1 tea b. 2 coffee to 1 tea c. 1 coffee to 2 tea d. 2 coffee to 2 tea ANSWER: c POINTS: 1 18. Suppose a cup of coffee at the campus coffee shop is $2.50 and a cup of hot tea is $1.25 and that a student’s beverage budget is $20 per week. What is the algebraic expression of the budget? a. b. c. d.

ANSWER: a POINTS: 1 19. Suppose a cup of coffee at the campus coffee shop is $2.50 and a cup of hot tea is $1.25 and that a student’s beverage budget is $20 per week. If you were going to write an algebraic expression of this budget line of the form . B would be a. 16 b. 2 c. -2 d. -1/2 ANSWER: d POINTS: 1 20. Suppose a cup of coffee at the campus coffee shop is $2.50 and a cup of hot tea is $1.25. Suppose a student’s beverage budget is $20 per week. Suppose the student simply prefers more caffeine to less and that the tea sold has the same amount of caffeine as the coffee. The student will buy a. all tea. b. all coffee. c. a mix of coffee and tea. d. quantities that cannot be determined from the information given here.

ANSWER: a POINTS: 1 21. Suppose a caffeine-deprived man needs to wake up. Suppose his preferences can be described by . If the price of coffee is $4 and the price of tea is $1, he will buy a. all coffee. b. all tea. c. some of both, but more coffee. d. some of both, but more tea.

ANSWER: b

POINTS: 1 22. Suppose a little girl likes peanut butter and jelly sandwiches with exactly 2T of jelly and 1T of peanut butter. Suppose further that her mom agrees to make sandwiches to those exact specifications and the price of peanut butter is $.25/T and the price of jelly is $.10/T. If she has $1.80 to spend on peanut butter and jelly ingredients (ignore the bread) in a week, how many sandwiches will she make? a. 1 b. 2 c. 4 d. 8 ANSWER: c POINTS: 1 23. If people like their goods in fixed proportions, the two goods are a. perfect substitutes b. perfect complements c. complements (but not perfect) d. substitutes (but not perfect) ANSWER: b POINTS: 1 24. If a person’s indifference curves can be represented as a straight line, the person views the goods as a. perfect substitutes b. perfect complements c. complements (but not perfect) d. substitutes (but not perfect) ANSWER: a POINTS: 1

25. Suppose a person likes both rap music (R) and country music (C) with a set of preferences so that

.

Which point (C, R) makes this person the happiest? a. 4, 16 b. 25, 1 c. 9, 9 d. 16, 4 ANSWER: c POINTS: 1 26. Suppose a person has $20 and likes both rap music (R) and country music (C) with a set of preferences so that . Suppose that the iTunes price of a rap music song is . Which level of utility is affordable? a. b. 9 c. 16 d. 25

and the price of a country music song is

ANSWER: a POINTS: 1 27. Suppose a person has $20 and likes both rap music (R) and country music (C) with a set of preferences so that . Suppose that the iTunes price of a rap music song is . What is the lowest level of utility that is unaffordable? a. 6 b. 7 c. d. 8 ANSWER: d POINTS: 1

and the price of a country music song is

Chapter 3 1. Which of the following functional forms for utility suggests the greatest substitution effect when starting at the point where a. b. c. d.

ANSWER: b POINTS: 1 2. With only two goods, if the income effect is in the same direction as the substitution effect then the good is a. normal b. inferior but not Giffen c. Giffen d. There is not enough information to answer.

ANSWER: a POINTS: 1 3. With only two goods, if the income effect is in the opposite direction as the substitution effect but the substitution effect dominates then the good is a. normal b. inferior but not Giffen c. Giffen d. There is not enough information to answer.

ANSWER: b POINTS: 1 4. With only two goods, if the income effect is in the opposite direction as the substitution effect but the income effect dominates then the good is a. normal b. inferior but not Giffen c. Giffen d. There is not enough information to answer.

ANSWER: c POINTS: 1 5. Suppose a person’s utility is only a function of their consumption of diet soda and they do not care which brand, Diet Coke (DC) or Diet Pepsi (DP) they consume. Suppose further that . If PDC rises but it remains less than PDP then the consumption of DC a. Falls from a positive amount to zero b. Falls from a positive amount to another positive amount. c. rises. d. stays at zero.

ANSWER: b POINTS: 1 6. Suppose a person’s utility is only a function of their consumption of diet soda and they do not care which brand, Diet Coke (DC) or Diet Pepsi (DP) they consume. Suppose further that . If PDC rises to a point where then the consumption of DC a. Falls from a positive amount to zero b. Falls from a positive amount to another positive amount. c. rises. d. stays at zero.

ANSWER: a POINTS: 1 7. Suppose two goods coffee and creamer provide the consumer with utility but only if they are consumed in fixed proportions. An increase in the price of coffee will yield a. a substitution effect and an income effect in opposite directions. b. a substitution effect and an income effect in the same direction. c. a substitution effect but no income effect. d. an income effect but no substitution effect.

ANSWER: d POINTS: 1 8. Suppose you were to believe that “money illusion” exists that is as prices and incomes both rise proportionally, people buy more. Which of the following characteristics of demand does that cause you to doubt? a. demand functions are downward sloping b. demand has a positive vertical intercept c. demand has a positive horizontal intercept. d. demand functions are homogeneous of degree zero.

ANSWER: d POINTS: 1 9. Suppose there are two goods (X and Y). On a traditional graph of a budget line a tripling of all prices and incomes will a. alter the slope of the budget line only. b. alter the slope of the budget line as well as the Y-intercept. c. alter the slope of the budget line as well as the X-intercept. d. leave the budget line unaltered.

ANSWER: d POINTS: 1 10. The lump sum principle suggests that the tax that reduces utility the least is a. a tax on income b. a tax on a good with many substitutes c. an equal tax per-unit on all goods d. a tax on a good with only a few substitutes ANSWER: a POINTS: 1

11. If a good is normal and its price increases, a. the income effect will be positive and the substitution effect will be positive. b. the income effect will be negative and the substitution effect will be negative. c. the income effect will be positive and the substitution effect will be negative. d. the income effect will be negative and the substitution effect will be positive.

ANSWER: b POINTS: 1 12. If a good is inferior and its price increases, a. the income effect will be positive and the substitution effect will be positive. b. the income effect will be negative and the substitution effect will be negative. c. the income effect will be positive and the substitution effect will be negative. d. the income effect will be negative and the substitution effect will be positive.

ANSWER: c POINTS: 1 13. If a good is Giffen and its price increases, a. the income effect will be positive and the substitution effect will be positive. b. the income effect will be negative and the substitution effect will be negative. c. the income effect will be positive and the substitution effect will be negative. d. the income effect will be negative and the substitution effect will be positive.

ANSWER: c POINTS: 1 14. If a good is normal and its price decreases, a. the income effect will be positive and the substitution effect will be positive. b. the income effect will be negative and the substitution effect will be negative. c. the income effect will be positive and the substitution effect will be negative. d. the income effect will be negative and the substitution effect will be positive.

ANSWER: a POINTS: 1 15. If a good is inferior and its price decreases, a. the income effect will be positive and the substitution effect will be positive. b. the income effect will be negative and the substitution effect will be negative. c. the income effect will be positive and the substitution effect will be negative. d. the income effect will be negative and the substitution effect will be positive.

ANSWER: d POINTS: 1 16. Suppose and the price of X is 1, the price of Y is 1 and income is $12. If the price of X increases to 2, the income effect (in terms of units of X bought) is a. 2 b. -1 c. 0 d. -2

ANSWER: d POINTS: 1 17. Suppose the substitution effect is a. 2 b. -1 c. 0 d. -2 ANSWER: c POINTS: 1

and the price of X is 1, the price of Y is 1 and income is $12. If the price of X increases to 2,

18. If the prices of all goods increase by the same proportion as income, the quantity demanded of good X will a. decrease. b. increase. c. remain unchanged. d. change in a way that cannot be determined from the information given.

ANSWER: c POINTS: 1 19. Demand functions are “homogeneous of degree zero in all prices and income.” This means a. a proportional increase in all prices and income will leave quantities demanded unchanged. b. a doubling of all prices will not alter consumption decisions. c. prices directly enter individuals’ utility functions. d. an increase in income will cause all quantities demanded to increase proportionately.

ANSWER: a POINTS: 1 20. The relationship between changes in income and purchase of a good indicates a. whether the good is a luxury or necessity. b. whether the good is normal or inferior. c. whether the good is a complement or substitute. d. Both a and b.

ANSWER: d POINTS: 1 21. If income doubles and the quantity demanded of good X more than doubles, then good X can be described as a a. substitute good. b. complement good. c. necessity. d. luxury.

ANSWER: d POINTS: 1 22. If an individual’s housing purchases are always a constant fraction of income, then the income elasticity of demand for housing is

a. greater than one. b. equal to one. c. less than one. d. Cannot be determined from the available information.

ANSWER: b POINTS: 1 23. If an individual buys only two goods and these must be used in a fixed relationship with one another (e.g., coffee and cream for a coffee drinker who never varies the amount of cream used in each cup), then a. there is no substitution effect from a change in the price of coffee. b. there is no income effect from a change in the price of coffee. c. Giffen’s Paradox must occur if both coffee and cream are inferior goods. d. an increase in income will not affect cream purchases.

ANSWER: a POINTS: 1 24. Consider the two statements: I. X is an inferior good.

II. X exhibits Giffen’s Paradox.

Which of the following is true? a. I implies II, but II does not necessarily imply I. b. II implies I, but I does not necessarily imply II. c. I and II are statements of the same phenomenon.

ANSWER: b POINTS: 1 25. Two goods, X and Y, are called substitutes if a. an increase in PX causes more Y to be bought. b. an increase in PX causes less Y to be bought. c. an increase in PY causes less Y to be bought. d. an increase in income causes more of both X and Y to be bought.

ANSWER: a POINTS: 1 26. Two goods, X and Y, are called complements if a. an increase in PX causes more Y to be bought. b. an increase in PX causes less Y to be bought. c. an increase in PY causes less Y to be bought. d. an increase in income causes more of both X and Y to be bought.

ANSWER: b POINTS: 1 27. If good X is a normal good and its price rises, then quantity demanded a. may or may not fall. b. will always fall. c. will always rise. d. will remain unchanged.

ANSWER: b POINTS: 1 28. Assume X and Y are the only two goods a person consumes. If after a rise in the quantity demanded of Y increases, one could say a. the income effect dominates the substitution effect for Y. b. the substitution effect dominates the income effect for Y. c. it is impossible to determine whether the substitution or income effect dominates for Y. d. None of the above.

ANSWER: b POINTS: 1 29. An individual’s demand curve a. represents the various quantities that a consumer is willing to purchase of a good at various prices. b. is derived from an individual’s indifference curve map. c. will shift if preferences, prices of other goods, or income change. d. all of the above.

ANSWER: d POINTS: 1 30. An increase in quantity demanded is represented by a. a shift outward of the entire demand curve. b. a shift inward of the entire demand curve. c. a movement along the demand curve in a southeasterly direction in response to a decline in the good’s price. d. a movement along the demand curve in a northwesterly direction in response to a decline in the good’s price.

ANSWER: c POINTS: 1 31. Which of the following will not cause a demand curve to shift position? a. A doubling of the good’s price. b. A doubling of the price of a closely substitutable good. c. A doubling of income. d. A shift in preferences. e. A doubling of both the price of X and the price of Y. ANSWER: a POINTS: 1 32. A decrease in demand is represented by

a. a shift outward of the entire demand curve. b. a shift inward of the entire demand curve. c. a movement along the demand curve in a southeasterly direction. d. a movement along the demand curve in a northwesterly direction.

ANSWER: b POINTS: 1 33. Suppose demand can be written as . The price elasticity of demand is a. increasing as price rises. b. decreasing as price rises. c. constant regardless of prices and perfectly elastic. d. constant regardless of prices and unit elastic.

ANSWER: d POINTS: 1 34. Suppose demand can be written as . The elasticity of demand is a. increasing as price rises. b. decreasing as price rises. c. constant regardless of prices and perfectly elastic. d. constant regardless of prices and unit elastic.

ANSWER: c POINTS: 1 35. Suppose demand can be written as . The elasticity of demand is) a. increasing as price rises. b. decreasing as price rises. c. constant regardless of prices and perfectly inelastic. d. constant regardless of prices and unit elastic.

ANSWER: c POINTS: 1 36. The demand for gasoline is more elastic in the long run than in the short run because a. other prices are more likely to change in the long run. b. incomes tend to rise over time. c. people can buy new cars in the long run. d. cars have become more expensive over time.

ANSWER: c POINTS: 1 37.37.

In the picture above the point A2 is half way between the origin and the quantity intercept of the demand curve. The price elasticity at point “1” is a. 0 b. between -∞ and -1 c. -1 d. between -1 and 0 ANSWER: b POINTS: 1 38.38.

In the picture above the point A2 is half way between the origin and the quantity intercept of the demand curve. The price elasticity at point “2” is a. 0

b. between -∞ and -1 c. -1 d. between -1 and 0 ANSWER: c POINTS: 1 39.39.

In the picture above the point A2 is half way between the origin and the quantity intercept of the demand curve. The price elasticity at point “3” is a. 0 b. between -∞ and -1 c. -1 d. between -1 and 0 ANSWER: d POINTS: 1 40. If the income elasticity of demand is 2, the good is a. a luxury. b. a normal good (but not a luxury). c. an inferior good. d. a Giffen good.

ANSWER: a POINTS: 1 41. If the income elasticity of demand is 0.5, the good is a. a luxury. b. a normal good (but not a luxury). c. an inferior good. d. a Giffen good.

ANSWER: b POINTS: 1 42. In Homogenia everyone is the same. Demand for apples is demand for apples in Homogenia is given by the equation a. . b. . c. d.

. .

for each of its 1 million citizens. Market

ANSWER: d POINTS: 1 43. In Sameslopia (all N people) have a different price at which they will start buying apples, but their reaction to a price change is the same so for each person i, individual demand is . At a price where they are all buying a positive amount, the slope of the market demand curve (with P as a function of Q) will be a. -B b. c. -BN d. -N ANSWER: b POINTS: 1 44. Suppose the “poor” and “rich” have identical demand functions for good X but only differ in income (I): . At a given price of X, the price elasticity of their individual demand curves is such that a. the rich person’s demand is more elastic than the poor person’s. b. the poor person’s demand is more elastic than the rich person’s. c. the poor person’s demand is as elastic as the rich person’s.

ANSWER: b POINTS: 1 45. The market demand curve for any good is a. independent of individuals’ demand curves for the good. b. the vertical summation of individuals’ demand curves. c. the horizontal summation of individuals’ demand curves. d. derived from the firm’s marginal cost of production.

ANSWER: c POINTS: 1 46. An increase in the price of good X will be accompanied by a. a shift in the market demand curve for good X. b. a shift in the market demand curve for good Y (a substitute for good X). c. a movement along the market demand curve for good X. d. Both b and c.

ANSWER: d POINTS: 1 47. If the demand for a product is elastic, then a rise in price will a. cause total spending on the good to increase. b. cause total spending on the good to decrease. c. keep total spending the same, but reduce the quantity demanded. d. keep total spending the same, but increase the quantity demanded.

ANSWER: b POINTS: 1

48. The price elasticity of demand for a linear demand curve follows the pattern (moving from high prices to low prices) a. elastic, unit elastic, inelastic. b. unit elastic, inelastic, elastic. c. inelastic, unit elastic, elastic. d. elastic, inelastic, unit elastic.

ANSWER: a POINTS: 1 49. If demand is elastic, a decrease in quantity will cause the total spending a. rise. b. fall. c. remain unchanged. d. change in a way that cannot be determined.

ANSWER: b POINTS: 1

to

50. If there are only two goods and these are consumed in fixed proportions, the price elasticities of demand for these two goods will sum to a. 0.0 b. -0.5 c. -1.0 d. a number between 0 and -1.

ANSWER: c POINTS: 1 51. A change in the distribution of income which leaves total income constant will not shift the market demand curve for a product if a. everyone has an income elasticity of demand of zero for the product. b. everyone has the same income elasticity of demand for the product. c. individuals have differing income elasticities for the product, but the average income elasticity for income gainers is equal to the average income elasticity for income losers. d. any of the above conditions occur.

ANSWER: d POINTS: 1 52. If a consumer purchases only two goods (X and Y ) and the demand for X is elastic, then a rise in the price of X a. will cause total spending on good Y to rise. b. will cause total spending on good Y to fall. c. will cause total spending on good Y to remain unchanged. d. will have an indeterminate effect on total spending on good Y. ANSWER: a POINTS: 1 53. The price elasticity of demand for any good must be less than or equal to zero unless a. the good is a necessity. b. the good is a luxury.

c. the good is a Giffen good.

ANSWER: c POINTS: 1 54. If goods X and Y are complements, then the cross price elasticity of demand between them will be a. positive. b. negative. c. zero. d. infinity.

ANSWER: b POINTS: 1

Chapter 4 1. Probability is sometimes defined as a. the expected profit of a fair bet. b. the most likely outcome of a given experiment. c. the outcome that will occur on average for a given experiment. d. the relative frequency with which an event will occur.

ANSWER: d POINTS: 1 2. Expected value is defined as a. the profit on a fair bet. b. the most likely outcome of a given experiment. c. the outcome that will occur on average for a given experiment. d. the relative frequency with which an event will occur.

ANSWER: c POINTS: 1 3. If a fair gamble is played many times, the combined monetary losses or gains will a. approach zero. b. be negative. c. be positive. d. result in an outcome that cannot be determined without more information.

ANSWER: a POINTS: 1 4. People who choose not to participate in fair gambles are called a. risk takers. b. risk averse. c. risk neutral. d. broke.

ANSWER: b POINTS: 1 5. A gamble can be described as “fair” if the expected value of the gamble (including any costs of play) is a. positive. b. zero. c. negative. d. one.

ANSWER: b POINTS: 1 6. Risk aversion is best explained by a. timidity. b. increasing marginal utility of income. c. constant marginal utility of income.

d. decreasing marginal utility of income.

ANSWER: d POINTS: 1 7. An individual will never buy complete insurance if a. he or she is risk averse. b. he or she is a risk taker. c. insurance premiums are fair. d. under any circumstances.

ANSWER: b POINTS: 1 8. With moral hazard, fair insurance contracts are not viable because a. individuals’ aversion to risk is reduced. b. insurance company’s administrative costs are increased. c. individuals fear unscrupulous agents. d. probabilities of loss are increased over what is expected.

ANSWER: d POINTS: 1 9. Risk averse individuals will diversify their investments because this will a. increase their expected returns. b. provide them with some much-needed variety. c. reduce the variability of their returns. d. reduce their transactions costs.

ANSWER: c POINTS: 1 10. Suppose a lottery ticket costs $1 and the probability that a holder will win nothing is 90%. What must the jackpot be for this to be a fair bet? a. 10 b. 100 c. 1,000 d. 10,000 ANSWER: a POINTS: 1 11. Suppose a lottery ticket costs $1 and the probability that a holder will win nothing is 99%. What must the jackpot be for this to be a fair bet? a. 10 b. 100 c. 1,000 d. 10,000 ANSWER: b POINTS: 1

12. Suppose a lottery ticket costs $1 and the probability that a holder will win nothing is 99.9%. What must the jackpot be for this to be a fair bet? a. 10 b. 100 c. 1,000 d. 10,000 ANSWER: c POINTS: 1 13. Suppose a lottery ticket costs $1and has a jackpot of $1,000. What must the probability of winning nothing be if the bet is fair? a. 99% b. 99.9% c. 99.999% d. 99.9999% ANSWER: b POINTS: 1 14. Suppose a lottery ticket costs $1and has a jackpot of $1 million. What must the probability of winning nothing be if the bet is fair? a. 99% b. 99.9% c. 99.999% d. 99.9999% ANSWER: d POINTS: 1 15. Suppose a family has saved enough for a 10 day vacation (the only one they will be able to take for 10 years) and has a utility function U = V1/2 (where V is the number of healthy vacation days they experience). Suppose they are not a particularly healthy family and the probability that someone will have a vacation-ruining illness (V = 0) is 20%. What is the expected value of V? a. 10 b. 8 c. 2 d. 0 ANSWER: b POINTS: 1 16. Continuing with the family from the preceding question, what is their expected utility? a. b. c. d.

ANSWER: b POINTS: 1

17. Continuing with the same family from the preceding question, what is the greatest (integer) number of vacation days the family would be willing to give up in order to guarantee a healthy vacation? a. 1 b. 2 c. 3 d. 4 ANSWER: c POINTS: 1 18. Continuing with the same family from the preceding question, suppose a risk neutral insurance company exists to provide vacation insurance. Suppose further that each vacation day requires a constant expenditure, and this expenditure is standard across everybody. This allows us to simplify the problem by considering all payments to be in terms of vacation days. What is the least the insurance company would charge (in terms of vacation days)? a. 1 b. 2 c. 3 d. 4 ANSWER: b POINTS: 1 19. Continuing with the same vacation-insurance company from the preceding question, what vacation-day price(s) would be acceptable to both the family and the insurance company? a. 2 only b. 3 only c. 2 or 3 d. 4 ANSWER: c POINTS: 1 20. Continuing with the same vacation-insurance company from the preceding question, is there any vacation-day price that would both strictly increase the family’s expected utility (compared to no insurance) and strictly increase the profits of the risk-neutral insurance company? a. Yes, two days. b. Yes, three days. c. Yes, four days. d. No. ANSWER: b POINTS: 1 21. Suppose a family has saved enough for a 10 day vacation (the only one they will be able to take for 10 years) and has a utility function U = V1/2 (where V is the number of healthy vacation days they experience). Suppose they are not a particularly healthy family and the probability that someone will have a vacation ruining illness (V = 0) is 30%. What is the expected value of V? a. 10 b. 7 c. 3 d. 0

ANSWER: b POINTS: 1 22. Continuing with the family from the preceding question, what is their expected utility? a. b. c. d.

ANSWER: b POINTS: 1 23. Continuing with the same family from the preceding question, what is the greatest (integer) number of vacation days the family would be willing to give up in order to guarantee a healthy vacation? a. 3 b. 4 c. 5 d. 6 ANSWER: c POINTS: 1 24. Continuing with the same family from the preceding question, suppose a risk neutral insurance company exists to provide vacation insurance. Suppose further that each vacation day requires a constant expenditure, and this expenditure is standard across everybody. This allows us to simplify the problem by considering all payments to be in terms of vacation days. What is the least the insurance company would charge (in terms of vacation days)? a. 3 b. 4 c. 5 d. 6 ANSWER: a POINTS: 1 25. Continuing with the same vacation-insurance company from the preceding question, what vacation-day price(s) would be acceptable to both the family and the insurance company? a. 3 or 4 b. 3,4 or 5 c. 3,4,5 or 6 d. 3,4,5,6 or 7 ANSWER: b POINTS: 1 26. Continuing with the same vacation-insurance company from the preceding question, is there any vacation-day price that would both strictly increase the family’s expected utility (compared to no insurance) and strictly increase the profits of the risk-neutral insurance company? a. No. b. Yes, 3 or 4.

c. Yes, 4. d. Yes, 4 or 5.

ANSWER: d POINTS: 1 27. Suppose a risk-neutral power plant needs 10,000 tons of coal for its operations next month. It is uncertain about the future price of coal. Today it sells for $60 a ton but next month it could be $50 or $70 (with equal probability). How much would the power plant be willing to pay today for an option to buy a ton of coal next month at today’s price?

(Ignore discounting over the short period of a month.) a. 5 b. 4 c. 3 d. 0 ANSWER: a POINTS: 1 28. Continuing with the power plant from the previous question, suppose instead the price of coal next month could be $54 or $66 (with equal probability). Now how much would it be willing to pay for an option to buy a ton of coal oil next month at today’s price? a. 5 b. 4 c. 3 d. 0 ANSWER: c POINTS: 1 29. Continue with the power plant from the previous question, where again coal currently sells for $60 a ton but will sell for either $54 or $66 next month with equal probability. Now suppose coal can be stored for a month at the cost of $2 per ton. How would the new alternative of being able to buy coal at today’s prices and store it affect the amount the power plant would be willing to pay for an option to buy coal next month at today’s prices? a. Increase its willingness to pay for the option. b. Decrease its willingness to pay for the option. c. Lead it to never pay for the option. d. No effect. The new alternative of storing would never be chosen since it is worse than simply waiting and buying at next month’s uncertain price.

ANSWER: d POINTS: 1

Chapter 5 1. A football team has the chance of scoring the game-winning touchdown on the last play of the game. It can either run or pass. The defense can play for the run or play for the pass. The following normal form lists the payoffs from the game made up by this last play. The payoffs are probabilities of winning the game.

Offense

Pass Run

Defense Defend Pass Defend Run 0, 1 1, 0 1, 0 0, 1

What is the defense’s dominant strategy? a. Defend the run. b. Defend the pass. c. Defend both plays at random with equal probability. d. The defense does not have a dominant strategy.

ANSWER: d POINTS: 1 2. Consider the same football situation as in the previous question, but now suppose the probabilities of winning are less extreme than before, given by the following normal form:

Offense

Pass Run

Defense Defend Pass Defend Run .2, .8 .8, .2 .8, .2 .2, .8

What is the defense’s dominant strategy? a. Defend the run. b. Defend the pass. c. Defend both play at random with equal probability. d. The defense does not have a dominant strategy.

ANSWER: d POINTS: 1 3. Consider the same football situation as in the previous question, but now suppose the payoffs (probabilities of winning) are as given in the following normal form:

Offense

Pass Run

Defense Defend Pass Defend Run .2, .8 .3, .7 .5, .5 .4, .6

Which team has a dominant strategy? a. Neither. b. Both. c. Only the offense. d. Only the defense.

ANSWER: c POINTS: 1 4. A football team has the chance of scoring the game-winning touchdown on the last play of the game. It can either run or pass. The defense can play for the run or play for the pass. The following normal form lists the payoffs from the game made up by this last play. The payoffs are probabilities of winning the game.

Offense

Pass Run

Defense Defend Pass Defend Run 0, 1 1, 0 1, 0 0, 1

The Nash equilibrium is (equilibria are) a. the offense runs and the defense plays for the run. b. the offense passes and the defense plays for the pass. c. the offense runs and the defense plays for the pass. d. both pick their choice at random with equal probability.

ANSWER: d POINTS: 1 5. Consider the same football setting as in the previous question, but now suppose the payoffs (probabilities of winning) are given by the following normal form:

Offense

Pass Run

Defense Defend Pass Defend Run .2, .8 .9, .1 .5, .5 .4, .6

The Nash equilibrium is (equilibria are) a. the offense runs and the defense plays for the run. b. both pick their choice at random with the offense focusing more on the run and the defense on defending the pass. c. both pick their choice at random with the offense focusing more on the pass and the defense on defending the run. d. both pick their choice at random with equal probability of either play.

ANSWER: b POINTS: 1 6. Teens A and B are smitten with each other but neither knows of the other’s feelings. Suppose the teachers at their school organize a dance. The “payoff” is based on whether their advances are rebuffed or accepted. If they both Declare, they get positive utility but if they are Rebuffed they face humiliation (significantly negative payoff). Rebuffing an advance slightly elevates the teen’s standing with peers.

Teen B

Teen A

Declare

Ignore/ Rebuff

Declare

10, 10

−10, 1

Ignore/ Rebuff

1, −10

0, 0

What is a teen’s dominant strategy? a. Declare. b. choose at random. c. Rebuff/Ignore. d. No dominant strategy.

ANSWER: d POINTS: 1 7. Consider the game between the teens from the previous question. The pure-strategy Nash equilibrium is (equilibria are) a. Both Declare. b. Both Ignore/Rebuff. c. There are two: in one, both Declare, and in the other, both Rebuff/Ignore. d. There are two: in both, the teens do the opposite of each other.

ANSWER: c POINTS: 1 8. Consider the game between the teens from the previous question. In addition to any pure-strategy Nash equilibrium, there is another one in mixed strategies. In it, each teen chooses to declare with probability a. 0.52 b. 0.5 c. 0.34 d. 0.1 ANSWER: a POINTS: 1 9. Consider the game between the teens from the previous question. Instead of being a simultaneous game, suppose it is sequential, with teen A moving first. What is the subgame-perfect equilibrium of this new game? a. Both Declare. b. Both Ignore/Rebuff. c. It is a mixed strategy equilibrium. d. Teen A Declares and Teen B follows A’s action.

ANSWER: d POINTS: 1 10. A teacher curves the final exam such that the top half of students get an A and the bottom half an F (so their grade depends only on relative and not absolute performance). Suppose that there are equal numbers of two groups, the Brainiacs and the Numbskulls. If they both study or they both party, the Brainiacs will get the As but if the Brainiacs party and the Numbskulls study, the Numbskulls will get the As. Suppose further that they both dislike studying and both like good grades. Suppose all students of a type choose the same action (so we can view it as a two-player game). The payoff matrix is Numbskulls

Brainiacs

Study

Party

Study

5, 0

5, 2

Party

2, 5

7, 2

Characterize the Nash equilibrium or equilibria: a. There is only one equilibrium, in mixed strategies. b. The Brainiacs study and the Numbskulls party. c. There are two: in one, the Brainiacs study and the Numbskulls party, and in the other they do the reverse. d. Both types party.

ANSWER: a POINTS: 1 11. Consider the same setup with the curved final exam as in the previous question. Now suppose the students move sequentially. Which best describes the outcome in the subgame-perfect equilibrium? a. Brainiacs study and Numbskulls party regardless of who moves first. b. Brainiacs party and Numbskulls study regardless of who moves first. c. The party moving first studies. d. The party moving first parties.

ANSWER: c POINTS: 1 12. A lake supports a delicious variety of fish. The land around the lake is owned by two fisherman, so by state law both are free to fish as much as they like. Let FA and FB be the number of fish each catches, respectively. Suppose the price of fish is 100 - FA - FB. Given this demand curve, it turns out that marginal revenue is 100 - 2FA - FB for fisherman A and 100 - FA - 2FB for fisherman B. What is the total number of fish by both in the Nash equilibrium? a. 30 b. 45 c. 60 d. 90 ANSWER: a POINTS: 1 13. Consider the same game between the fishermen in the previous question. How does the total number of fish caught in the Nash equilibrium compare to the number they would catch if they belonged to same company, so shared revenues and costs equally? a. No change. b. They would catch more if they worked in the same company. c. They would catch less if they worked in the same company.

ANSWER: c POINTS: 1 14. Return to the version of the game between the fishermen in which they fish independently. If the marginal cost for just fisherman A went up, what would be the likely effect on the Nash equilibrium? a. A would catch more fish, and B would catch fewer. b. A would catch fewer fish, and B would catch more. c. A would catch more fish, but B’s catch would not change.

d. A would catch fewer fish, but B’s catch would not change.

ANSWER: b POINTS: 1 15. When a game has multiple equilibria, a useful method to sort out which one would be the "best" prediction is to a. find the one (if any) in which both players are better off than in any other equilibrium. b. find the equilibrium that is symmetric, if any. c. find the one which seems “focal”, if any. d. all of the above.

ANSWER: d POINTS: 1 16. Best-response functions a. can only be used to analyze games with continuous actions. b. are always downward sloping. c. always intersect at Nash equilibria. d. never intersect.

ANSWER: c POINTS: 1 17. The Prisoners’ Dilemma is so named because a. the Nash equilibrium is one of the worst outcomes for the players. b. the game has no Nash equilibrium. c. the game is zero-sum. d. players end up earning a lighter sentence than the prosecutor would like.

ANSWER: a POINTS: 1 18. If the Prisoners’ Dilemma is repeated over and over again with the same two players having an indefinite time horizon, a. the unique equilibrium is to play the Nash equilibrium of Rat each period. b. players can cooperate on Silent if they are not too patient. c. players can cooperate on Silent if they are patient enough. d. players can only cooperate on Silent in the initial stages of the game.

ANSWER: c POINTS: 1 19. The game of Matching Pennies a. has no Nash equilibrium. b. has a pure-strategy Nash equilibrium. c. has a mixed strategy Nash equilibrium. d. has multiple Nash equilibria.

ANSWER: c POINTS: 1 20. The beauty of Nash's equilibrium concept is that

a. all games have one. b. all games have no more than one. c. all games have a rich set to choose from. d. it is a Pareto optimum.

ANSWER: a POINTS: 1 21. A subgame-perfect equilibrium is a Nash equilibrium that a. cannot persist through several periods. b. involves only credible threats. c. consists only of dominant strategies. d. is unique.

ANSWER: b POINTS: 1 22. In what way or ways can strategies more complicated than simple actions? a. They can be conditioned on a first mover’s action. b. They can involve random choices. c. Both a and b. d. Neither a or b.

ANSWER: c POINTS: 1 23. Two games that differ only in the timing of moves—one simultaneous, the other sequential move—can sometimes have completely different subgame-perfect equilibria. Why? a. The second mover to choose non-credible threats. b. The first mover can choose an action that it would deviate from if its action were secret. c. Subgame-perfect equilibrium cannot be applied to simultaneous games. d. All of the above.

ANSWER: b POINTS: 1

1.

With a cubic production with fixed capital Q = A + BL + CL2 + DL3 and a shape shown above, A is a. positive and greater than B. b. positive and less than B. c. zero. d. negative.

ANSWER: c POINTS: 1 2.

With a cubic production with fixed capital Q = A + BL + CL2 + DL3 and a shape shown above, C is a. positive. b. zero. c. negative and less than D. d. negative and greater than D. ANSWER: a POINTS: 1 3.

With a quadratic production with fixed capital Q = A + BL + CL2 and the shape shown above, A is a. positive and greater than B. b. positive and less than B. c. zero. d. negative.

ANSWER: c POINTS: 1 4.

With a quadratic production with fixed capital Q = A + BL + CL2 and the shape shown above, B is a. positive. b. zero. c. negative and less than C. d. negative and greater than C. ANSWER: a POINTS: 1 5. If production is given by Q = KL, doubling both inputs a. more than doubles output. b. exactly doubles output. c. increases output but does not double it. d. leaves output unchanged.

ANSWER: a POINTS: 1 6. If production is given by Q = KsLb, (a + b < 1) doubling both inputs a. more than doubles output. b. exactly doubles output. c. increases output but does not double it. d. leaves output unchanged.

ANSWER: c POINTS: 1 7. Suppose Q = KaLb, if a + b > 1 the isoquants will be a. upward sloping. b. progressively closer together at higher quantities. c. progressively further apart at higher quantities. d. equally spaced.

ANSWER: b POINTS: 1 8. Suppose Q = KaLb, if a + b < 1 the isoquants will be a. upward sloping.

b. progressively closer together at higher quantities. c. progressively further apart at higher quantities. d. equally spaced.

ANSWER: c POINTS: 1 9. If Q = K1/2L1/2 the MPL is a. constant b. increasing c. diminishing ANSWER: c POINTS: 1 10. If Q = K1/2L1/2 the MPK is a. constant b. diminishing c. increasing ANSWER: b POINTS: 1 11. If Q = K2L2 the MPL is a. constant b. diminishing c. increasing ANSWER: c POINTS: 1 12. If Q = K2L2 the MPK is a. constant b. diminishing c. increasing ANSWER: c POINTS: 1 13. If Q = K1/3L2 the MPL is a. constant b. diminishing c. increasing ANSWER: c POINTS: 1 14. If Q = K1/3L2 the MPK is a. constant b. diminishing c. increasing

ANSWER: b POINTS: 1 15. Suppose electricity (E) can be produced with coal (C) or gas (G) to operate steam turbines (T). Suppose gas is more efficiently burned than coal but that they are otherwise perfect substitutes. E = min((G + .5C), T). The isoquants between gas and coal will be a. hyperbolas b. quarter circles c. straight lines ANSWER: c POINTS: 1 16. When isoquants get progressively further apart there is a. increasing returns to scale b. decreasing returns to scale c. constant returns to scale ANSWER: b POINTS: 1 17. When isoquants get progressively closer together there is a. increasing returns to scale b. decreasing returns to scale c. constant returns to scale ANSWER: a POINTS: 1 18. In a two-input model you can tell that a non-optimal short-run production decision is being made if a. all decisions in the short run are nonoptimal b. the rate of technical substitution is equal to the ratio of the input prices c. the rate of technical substitution is not equal to the ratio of the input prices ANSWER: c POINTS: 1 19. A firm is defined as a. a president, some vice presidents, and some employees. b. any organization that wants to make a profit. c. any accumulation of productive assets. d. any organization that turns inputs into outputs.

ANSWER: d POINTS: 1 20. A production function measures how an individual maximizes utility. a. a firm transforms output into input. b. a firm transforms inputs into output. c.

d. a firm minimizes cost.

ANSWER: b POINTS: 1 21. The marginal physical product of labor is defined as a. a firm’s total output divided by total labor input. b. the extra output produced by employing one more unit of labor while allowing other inputs to vary. c. the extra output produced by employing one more unit of labor while holding other inputs constant. d. the extra output produced by employing one more unit of capital while holding labor input constant.

ANSWER: c POINTS: 1 22. If more and more labor is employed while keeping all other inputs constant, the marginal physical productivity of labor a. will eventually increase. b. will eventually decrease. c. will eventually remain constant. d. cannot tell from the information provided.

ANSWER: b POINTS: 1 23. The marginal physical product of labor is a. the slope of the total output curve at the relevant point. b. the negative of the slope of the total output curve at the relevant point. c. the slope of the line connecting the origin with the relevant point on the total output curve. d. the negative of the slope of the line connecting the origin with the relevant point on the total output curve.

ANSWER: a POINTS: 1 24. The average productivity of capital is defined as the ratio of total capital employed to the total output produced. a. the extra output produced by employing one more unit of capital while holding other inputs constant. b. the extra output produced by employing one more unit of capital while allowing other inputs to vary. c. the ratio of total output produced to the quantity of capital employed. d.

ANSWER: c POINTS: 1 25. Graphically, the average productivity of labor would be illustrated by the slope of the marginal productivity curve at the relevant point. a. the slope of the total product curve at the relevant point. b. c. the negative of the slope of the marginal productivity curve at the relevant point. d. the slope of the chord connecting the origin with the relevant point on the total output curve.

ANSWER: d POINTS: 1

26. A firm’s isoquant shows a. the amount of labor needed to produce a given level of output with capital held constant. b. the amount of capital needed to produce a given level of output with labor held constant. c. the various combinations of capital and labor that will produce a given amount of output. d. None of the above.

ANSWER: c POINTS: 1 27. The marginal rate of technical substitution of labor for capital measures a. the amount by which capital input can be reduced while holding quantity produced constant when one more unit of labor is used. b. the amount by which labor input can be reduced while holding quantity produced constant when one more unit of capital is used. c. the ratio of total labor to total capital. d. the ratio of total capital to total labor.

ANSWER: a POINTS: 1 28. A firm’s rate of technical substitution is represented graphically by a. the slope of the line connecting the origin with the relevant point on the isoquant. b. the negative of the slope of the line connecting the origin with the relevant point on the isoquant. c. the slope of the isoquant at the relevant point. d. the negative of the slope of the isoquant at the relevant point.

ANSWER: d POINTS: 1 29. A production function may exhibit a. constant returns to scale and diminishing marginal productivities to all inputs. b. constant returns to scale and diminishing marginal productivities to all but one input, but at least one input must have a constant marginal productivity. c. constant returns to scale and diminishing marginal productivity to at most one input. d. constant returns to scale and diminishing marginal productivities for no inputs.

ANSWER: a POINTS: 1 30. Suppose the production function for good q is given by q = 3K + 2 L where K and L are capital and labor inputs.

Consider three statements about this function: I. The function exhibits constant returns to scale.

II. The function exhibits diminishing marginal productivities to all inputs.

III. The function has a constant rate of technical substitution.

Which of these statements is true? a. All of them. b. None of them. c. I and II but not III. d. I and III but not II. e. only I.

ANSWER: d POINTS: 1 31. For a fixed proportion production function, at the vertex of any of the (L-shaped) isoquants the marginal productivity of either input is a. constant b. zero. c. negative. d. a value that cannot be determined.

ANSWER: b POINTS: 1 32. If, as a result of doubling all its inputs, a firm can more than double its output, the firm’s production function exhibits a. constant returns to scale. b. increasing returns to scale. c. decreasing returns to scale. d. increasing marginal productivity to at least one input.

ANSWER: b POINTS: 1 33. The production function a. exhibits constant returns to scale and constant marginal productivities for K and L. b. exhibits diminishing returns to scale and diminishing marginal productivities for K and L. c. exhibits constant returns to scale and diminishing marginal productivities for K and L. d. exhibits diminishing returns to scale and constant marginal productivities for K and L..

ANSWER: c POINTS: 1 34. A fixed-proportion production function has isoquants that are a. almost flat (i.e., the isoquants are almost straight lines). b. L-shaped. c. normally shaped (rectangular hyperbolas). d. None of the above.

ANSWER: b POINTS: 1 35. A technical innovation in the production of automobiles by Ford Motor Company’s for 1 million cars per year would necessarily a. shift the “1 million car” isoquant away from the origin. b. shift the “1 million car” isoquant toward the origin. c. cause 1 million cars to be produced with more capital and less labor. d. cause 1 million cars to be produced with more labor and less capital.

ANSWER: b POINTS: 1 36. A rise in the average productivity of labor

a. always reflects technical progress. b. reflects technical progress if other input usage hasn’t changed. c. reflects technical progress only if labor input hasn’t changed. d. reflects technical progress only if the quantity of output is increased.

ANSWER: b POINTS: 1

Chapter 7 1. Suppose the production function for coffee (C) is C = min(B,W), where B = beans in pounds and W = water in gallons.

Suppose the price of water is $.10 per gallon and the price of beans is $10 per pound. The cost minimizing combination of beans and water for C = 200 is a. B = 200, W = 2000 b. B = 2000, W = 200 c. B = 100, W = 100 d. B = 200, W = 200 ANSWER: d POINTS: 1 2. Suppose the production function for coffee (C) is C = min(B,W), where B = beans in pounds and W = water in gallons.

Suppose the price of water is $.10 per gallon and the price of beans is $10 per pound. The expansion path is a. B = 10W b. B = .1W c. B = W d. −10 = B + W ANSWER: c POINTS: 1 3. Suppose the production function for coffee (C) is C = min(B,W), where B = beans in pounds and W = water in gallons.

Suppose the price of water is $.10 per gallon and the price of beans is $10 per pound. The expansion path a. depends on the price of beans only. b. depends on the price of water only c. depends on the price of neither beans nor water. d. depends of the costs of both beans and water.

ANSWER: c POINTS: 1 4. Suppose pigs (P) can be fed corn-based feed (C) or soybean-based feed (S) such that the production function is P = 2C + 5S. If the price of corn feed is $4 and the price of soybean feed is $5, what is the cost-minimizing feed combination producing P = 200? a. C = 100 b. S = 40 c. C = 50, S = 20 d. C = 20, S = 50 ANSWER: b POINTS: 1 5. Suppose pigs (P) can be fed corn-based feed (C) or soybean-based feed (S) such that the production function is P = 2C + 5S. If the price of corn feed is $2 and the price of soybean feed is $5, what is the cost-minimizing feed combination producing P = 100? a. C = 50 b. S = 20 c. C = 25, S = 10 d. All points on the P = 100 isoquant, including those listed in a-c would cost the same.

ANSWER: d POINTS: 1 6. Suppose pigs (P) can be fed corn-based feed (C) or soybean-based feed (S) such that the production function is P = 2C + 5S. If the price of corn feed is $2 and the price of soybean feed is $6, what is the cost-minimizing fee combination producing P = 200? a. C = 100 b. S = 40 c. C = 50, S = 20 d. All points on the P = 200 isoquant would cost the same.

ANSWER: a POINTS: 1 7. Suppose pigs (P) can be fed corn-based feed (C) or soybean-based feed (S) such that the production function is P = 2C + 5S. If the price of corn feed is $4 and corn feed is on the horizontal axis, and the price of soybean feed is $5 and soybean feed lies on the vertical axis, what is expansion path? a. C =5S/2 b. S =2C/5 c. the horizontal axis d. the vertical axis ANSWER: d POINTS: 1 8. Suppose pigs (P) can be fed corn-based feed (C) or soybean-based feed (S) such that the production function is P = 2C + 5S. The expansion path depends a. on the price of corn-based feed only. b. on the price of soybean-based feed only. c. on neither the price of corn-based or soybean-based feed. d. on whether the price of corn-based feed is greater than or less than 2/5 the price of soybean-based feed.

ANSWER: d POINTS: 1 9. Suppose that a lawn mowing services production function for lawns mowed in a week is M = (LK)1/2, where L is labor hours and K is the amount of capital (mowers and trimmers). The expansion path depends on a. the wage rate only. b. the rental rate only. c. both the wage and rental rates. d. neither the wage nor rental rates.

ANSWER: c POINTS: 1 10. Suppose a cost function is TC = Aq3 + bq2 + cq + d. Then the total fixed cost is a. Aq2 + bq + cq +d/q b. Aq2 + bq + c c. Aq3 + bq2 + cq d. d

ANSWER: d POINTS: 1 11. Suppose a cost function is TC = Aq3 + bq2 + cq + d. Then the average total cost is a. Aq2 + bq + cq +d/q b. Aq2 + bq + c c. Aq3 + bq2 + cq d. d ANSWER: a POINTS: 1 12. Suppose a cost function is TC = Aq3 + bq2 + cq + d. Then the average variable cost is a. Aq2 + bq + cq +d/q b. Aq2 + bq + c c. Aq3 + bq2 + cq d. d ANSWER: b POINTS: 1 13. Suppose a production function is q = K1/2L1/3 and in the short run capital (K) is fixed at 100. If the wage is $10 and the rental rate on capital is $20, the short run production function is a. q = 10L1/3 b. q = 100L1/3 c. d. q = 100 ANSWER: a POINTS: 1 14. Suppose a production function is q = K1/2L1/3 and in the short run capital (K) is fixed at 100. If the wage is $10 and the rental rate on capital is $20, the fixed cost is a. $2,000 b. $200 c. $20,000 d. $0 ANSWER: a POINTS: 1 15. Suppose a production function is q = K1/2L1/3 and in the short run capital (K) is fixed at 100. If the wage is $10 and the rental rate on capital is $20, the short run average cost is a.

b. c. d.

ANSWER: a POINTS: 1 16. Suppose a production function is q = K1/2L1/3 and in the short run capital (K) is fixed at 100. If the wage is $10 and the rental rate on capital is $20, the short run marginal cost is a. 1000 + q3 b.

c. q3 d. 2q3 ANSWER: b POINTS: 1 17. Suppose MPL = 20 and MPK = 40 and the rental rate on capital is $10. If the level of production is currently efficient, the wage rate must be a. $10 b. $5 c. $20 d. $40 ANSWER: b POINTS: 1 18. Suppose MPL = 40 and MPK = 20 and the rental rate on capital is $10. If the level of production is currently efficient, the wage rate must be a. $10 b. $5 c. $20 d. $40 ANSWER: c POINTS: 1 19. The opportunity cost of producing a bicycle refers to a. the out-of-pocket payments made to produce the bicycle. b. the value of the goods that were given up to produce the bicycle. c. the bicycle's retail price. d. the marginal cost of the last bicycle produced.

ANSWER: b POINTS: 1

20. The accountant's cost of producing a bicycle refers to a. the out-of-pocket payments made to produce the bicycle. b. the value of the goods that were given up to produce the bicycle. c. the bicycle's retail price. d. the marginal cost of the last bicycle produced.

ANSWER: a POINTS: 1 21. A firm's economic profits are given by a. total revenue minus total accounting cost. b. the owner's opportunity cost. c. total revenue minus total economic cost. d. total revenue minus the cost of capital.

ANSWER: c POINTS: 1 22. In order to minimize the cost of a particular level of output, a firm should produce where a. labor input equals capital input b. the RTS (of L for K) = c. the RTS (of L for K) = d. the MRS = ANSWER: c POINTS: 1 23. The firm's expansion path records a. profit-maximizing output choices for every possible price. b. cost-minimizing input choices for all possible output levels for when input prices expand along with production. c. cost-minimizing input choices for all possible output levels for a fixed set of input prices. d. cost-minimizing input choices for profit-maximizing output levels.

ANSWER: c POINTS: 1 24. The shape of a firm's expansion path depends upon a. the price of the labor input. b. the price of the capital input. c. the shape of the firm's production function. d. all of these factors.

ANSWER: d POINTS: 1 25. The expansion path for a constant-returns-to-scale production function

a. is a straight line through the origin with a slope greater than 1 if w > v. b. is a straight line through the origin with a slope greater than 1 if w < v. c. is a straight line through the origin, though its slope cannot be determined by w and v alone. d. has a positive slope but is not necessarily a straight line.

ANSWER: c POINTS: 1 26. A firm whose production function displays increasing returns to scale will have a total cost curve that is a. a straight line through the origin. b. a curve with a positive and continually decreasing slope. c. a curve with a positive and continually increasing slope. d. a curve with a negative and continually decreasing slope.

ANSWER: b POINTS: 1 27. A firm's marginal cost is defined as a. the ratio of total cost to total output. b. the ratio of total output to total cost. c. the additional cost of producing one more unit of output. d. the reciprocal of total average cost.

ANSWER: c POINTS: 1 28. A linear total cost curve which passes through the origin implies that a. average cost is constant and marginal cost is variable. b. average cost is variable and marginal cost is constant. c. average and marginal costs are constant and equal. d. need more information to answer question.

ANSWER: c POINTS: 1 29. As long as marginal cost is below average cost, average cost will be a. falling b. rising. c. constant. d. changing in a direction that cannot be determined without more information ANSWER: a POINTS: 1 30. In the short run, a. all inputs are fixed. b. all inputs are variable. c. some inputs are fixed. d. no production occurs.

ANSWER: c POINTS: 1

31. In the long run a. all inputs are fixed. b. all inputs are variable. c. some inputs are fixed. d. production levels never change.

ANSWER: b POINTS: 1 32. The shape of a firm's long-run average cost curve is determined by a. the degree to which each input encounters diminishing marginal productivity. b. the underlying nature of the firm's production function when all inputs are able to be varied. c. how much the firm decides to produce. d. the way in which the firm's expansion path reacts to changes in the rental rate on capital.

ANSWER: b POINTS: 1 33. For a constant-returns-to-scale production function, a. marginal costs are constant but the average cost curve has a U-shape. b. both average and marginal costs are constant. c. marginal cost has a U-shape; average costs are constant. d. both average and marginal cost curves are U-shaped.

ANSWER: b POINTS: 1 34. Short-run total cost is the sum of a. short-run fixed cost, short-run variable cost, and short-run marginal costs. b. short-run fixed cost and short-run marginal costs. c. short-run variable cost and short-run costs. d. short-run fixed cost and short-run variable cost.

ANSWER: d POINTS: 1 35. A firm's marginal cost curve a. is always U-shaped. b. always has a positive slope. c. is always below its average cost curve. d. always intersects its average cost curve at its minimum point.

ANSWER: d POINTS: 1 36. A firm's short-run average cost is defined as a. the ratio of total output to short-run total cost. b. the ratio of short-run total cost to total output. c. the additional cost of producing one more unit of output while some input is fixed. d. the additional cost of producing one more unit of output while all inputs are fixed.

ANSWER: b POINTS: 1 37. For any given output level, a firm's long-run costs a. are always greater than or equal to its short-run costs. b. are usually greater than or equal to its short-run costs except in the case of diminishing returns to scale. c. are always less than or equal to its short-run costs. d. are usually less than or equal to its short-run costs except in the case of diminishing returns to scale.

ANSWER: c POINTS: 1 38. An increase in the wage rate will have a greater effect on average costs a. the larger the proportion labor costs are of total costs and the easier it is to substitute capital for labor. b. the larger the proportion labor costs are of total costs and the harder it is to substitute capital for labor. c. the greater is the diminishing marginal product of labor. d. the greater are returns to scale.

ANSWER: b POINTS: 1 39. Technical progress will a. shift a firm's production function and its related cost curves. b. not affect the production function, but may shift cost curves. c. shift a firm's production function and alter its marginal revenue curve. d. shift a firm's production function and cause more capital (and less labor) to be hired.

ANSWER: a POINTS: 1

Chapter 8 1. In general, microeconomic theory assumes that firms attempt to maximize the difference between a. total revenue and accounting costs. b. price and marginal cost. c. total revenues and economic costs. d. economic costs and average cost.

ANSWER: c POINTS: 1 2. A firm's total revenue is equal to a. total quantity produced times marginal cost. b. total quantity produced times market price. c. marginal revenue times total quantity produced. d. market price divided by total quantity produced.

ANSWER: b POINTS: 1 3. A firm's marginal revenue is defined as a. the ratio of total revenue to total quantity produced. b. the additional output produced by lowering price. c. the additional revenue received due to technical innovation. d. the additional revenue received when selling one more unit of output.

ANSWER: d POINTS: 1 4. In order to maximize profits, a firm should produce at the output level for which a. average cost is minimized. b. marginal revenue equals marginal cost. c. marginal cost is minimized. d. price minus average cost is as large as possible.

ANSWER: b POINTS: 1 5. If demand is inelastic, marginal revenue will be a. positive. b. zero. c. negative. d. constant.

ANSWER: c POINTS: 1 6. If a firm wished to maximize total revenues it should produce where a. marginal cost is zero. b. marginal revenue is zero. c. marginal revenue is equal to marginal cost.

d. marginal revenue is equal to price.

ANSWER: b POINTS: 1 7. In order to maximize profits, a firm that can sell all it wants without affecting price should produce a. where average variable costs are minimized. b. where marginal cost is equal to average variable costs. c. where marginal cost is equal to price. d. where marginal cost is a minimum.

ANSWER: c POINTS: 1 8. If a firm is a price taker, its marginal revenue is a. equal to market price. b. less than market price. c. greater than market price. d. a multiple of market price that may be either greater than or less than one.

ANSWER: a POINTS: 1 9. If a firm's marginal revenue is below its marginal cost, an increase in production will usually a. increase profits. b. leave profits unchanged. c. decrease profits. d. increase marginal revenue.

ANSWER: c POINTS: 1 10. If the demand faced by a firm is inelastic, selling one more unit of output will a. increase revenues. b. decrease revenues. c. keep revenues constant. d. increase profits.

ANSWER: b POINTS: 1 11. If the demand faced by a firm is elastic, selling one less unit of output will a. increase revenue. b. decrease revenue. c. keep revenues constant. d. decrease price.

ANSWER: b POINTS: 1 12. If the demand curve a firm faces shifts to the right, usually a. it would be impossible to tell whether the marginal revenue curve shifts.

b. the marginal revenue curve would shift to the left. c. the marginal revenue curve would shift to the right. d. the marginal revenue curve would not shift.

ANSWER: c POINTS: 1 13. A firm that sought to "maximize market share" would choose to produce an output level for which marginal revenue was equal to a. marginal cost b. average cost. c. price. d. zero.

ANSWER: d POINTS: 1 14. The markup pricing technique involves determining the selling price of a good by adding a profit markup to minimum average cost. This would result in maximum profits only if a. average cost were constant. b. the markup were zero. c. the markup varied with the elasticity of demand. d. demand were inelastic.

ANSWER: c POINTS: 1 15. It is usually assumed that a perfectly competitive firm's supply curve is given by its marginal cost curve. In order for this to be true, which of the following additional assumptions are necessary?

I. That the firm seek to maximize profits.

II. That the marginal cost curve be positively sloped.

III. That price exceeds average variable cost.

IV. That price exceeds average total cost. a. All of the above. b. I and II but not III and IV. c. I and III but not II and IV. d. I and II only. e. I, II and III, but not IV. ANSWER: e POINTS: 1 16. Which of the following conditions would result in the short run marginal cost curve not correctly reflecting the supply behavior of a profit maximizing firm? a. The firm is a price taker. b. Price exceeds average total cost. c. The elasticity of demand facing the firm is −3. d. the firm can vary several inputs in the short run.

ANSWER: c POINTS: 1

17. If price is equal to short-run average variable cost, this price is known as a. the break-even price. b. the profit-maximizing price. c. the shutdown price. d. the revenue-maximizing price.

ANSWER: c POINTS: 1 18. Suppose a farmer is a price taker for soybean sales with cost functions given by TC = .1q2 + 2q + 100 MC = .2q + 2 The firm's supply curve is given by a. q = 5P - 10 b. q = .2P +2 c. q = 10P - 2 d. q = 2P - 5 ANSWER: a POINTS: 1 19. Suppose a farmer is a price taker for soybean sales with cost functions given by TC = .1q2 + 2q + 30 MC = .2q + 2 If P = 6 , the profit-maximizing level of output is a. 10 b. 20 c. 40 d. 80 ANSWER: b POINTS: 1 20. Suppose a farmer is a price taker for soybean sales with cost functions given by TC = .1q2 + 2q + 30 MC = .2q + 2 If P = 6 the profit-maximizing level of profits is a. 10 b. 20 c. 30 d. −10 ANSWER: a POINTS: 1 21. Suppose a farmer is a price taker for soybean sales with cost functions given by TC = .1q2 + 2q + 30 MC = .2q + 2 The profit maximizing level of output is a. 0 b. 30

c. 40 d. 50 ANSWER: c POINTS: 1 22. Suppose a farmer is a price taker in soybeans with cost functions given by TC = .1q2 + 2q + 100 MC = .2q + 2 Suppose the farmer has to purchase a license for $50 per period in order to stay in business. In this case, its marginal cost function is a. still MC = .2q + 2 b. MC = .2q + 50 c. MC = .2q + 52 d. MC = 50 ANSWER: a POINTS: 1 23. Suppose a farmer is a price taker in soybeans with cost functions given by TC = .1q2 + 2q + 30 MC = .2q + 2 Suppose the farmer has to purchase a license for $50 per period in order to stay in business. In this case, its new total cost function is a. still TC = .1q2 + 2 b. TC = .1q2 + .2q + 80 c. TC = .1q2 + 2q + 50 d. TC = 50 ANSWER: b POINTS: 1 24. Suppose that a firm has to pay a 10% tax on its total revenue. This has the effect of a. flattening marginal cost. b. increasing marginal revenue. c. decreasing marginal cost. d. decreasing marginal revenue.

ANSWER: d POINTS: 1 25. Suppose that a firm has to pay a 10% tax on revenue. The profit-maximizing level of output is a. unaffected by the tax. b. increased because of the tax. c. decreased because of the tax.

ANSWER: c POINTS: 1

26. If an unregulated electric company is a monopolist and faces demand of Q = 50 - 10P, its marginal revenue function is given by a. b. c. d.

ANSWER: d POINTS: 1 27. If an unregulated electric company is a monopolist, faces demand of Q = 100 - 50P, and has constant total costs, the profit-maximizing level of output is a. 50 b. 100 c. 25 d. 12.5 ANSWER: a POINTS: 1 28. If an unregulated electric company is a monopolist, faces demand of Q = 100 - 50P, and has a constant marginal cost of 1, the profit-maximizing price is a. 0 b. 1 c. 1.5 d. 2 ANSWER: b POINTS: 1 29. If an unregulated electric company is a monopolist and faces demand of Q = 50 - 10P. It has a constant marginal cost of 1 and must pay an environmental fee to the government of 0.2 per unit of output. In this situation, the profitmaximizing level of output is: a. 5 b. 10 c. 20 d. 50 ANSWER: c POINTS: 1 30. An unregulated electric company is a monopolist and faces demand of Q = 50 - 10P. If the company has zero marginal costs, its profit-maximizing price is a. 0 b. 1

c. 2.5 d. 5 ANSWER: c POINTS: 1

Chapter 9 1. In the very short run a. new firms may enter the industry. b. existing firms may change the quantity they are supplying. c. price and quantity supplied is absolutely fixed. d. quantity supplied is absolutely fixed.

ANSWER: d POINTS: 1 2. In the short run a. new firms may enter an industry. b. existing firms may change the quantity they are supplying. c. price and quantity supplied are absolutely fixed. d. quantity supplied is absolutely fixed.

ANSWER: b POINTS: 1 3. The short-run market supply curve is a. the horizontal summation of each firm's short-run supply curve. b. the vertical summation of each firm's short-run supply curve. c. the horizontal summation of each firm's short-run average cost curve. d. the vertical summation of each firm's short-run average cost curve.

ANSWER: a POINTS: 1 4. In the short run, an increase in market demand will usually lead to a(n) a. decrease in price and an increase in quantity. b. decrease in price and a decrease in quantity. c. increase in price and an increase in quantity. d. increase in price and a decrease in quantity.

ANSWER: c POINTS: 1 5. A demand curve will shift out for any of the following reasons except a. preference for a good increases. b. price of a substitute falls. c. income rises. d. price of a complement falls.

ANSWER: b POINTS: 1 6. If a 1 percent increase in price leads to a .7 percent increase in quantity supplied in the short run, the short-run supply curve is a. elastic. b. inelastic.

c. unit elastic. d. perfectly inelastic.

ANSWER: b POINTS: 1 7. If the market for hula-hoops is characterized by a very inelastic supply curve and a very elastic demand curve, an inward shift in the supply curve would be reflected primarily in the form of a. higher prices. b. higher output. c. lower prices. d. lower output.

ANSWER: d POINTS: 1 8. If the market for bottled spring water is characterized by a very elastic supply curve and a very inelastic demand curve, an outward shift in the supply curve would be reflected primarily in the form of a. higher prices. b. higher output. c. lower prices. d. lower output.

ANSWER: c POINTS: 1 9. Suppose that the price elasticity of demand for a product is −1 and that the price elasticity of supply is +1. Assume also that the income elasticity of demand is +2. Then an increase in income of 10% will raise equilibrium price by a. 10%. b. 5%. c. 20%. d. an annual amount that cannot be determined.

ANSWER: a POINTS: 1 10. Under perfect competition, if an industry is characterized by positive economic profits in the short run a. firms will leave the market in the long run and the short-run supply curve will shift outward. b. firms will enter the market in the long run and the short-run supply curve will shift outward. c. firms will enter the market in the long run and the short-run supply curve will shift inward. d. firms will leave the market in the long run and the short-run supply curve will shift inward.

ANSWER: b POINTS: 1 11. Positive economic profits exist for a firm in the long run if price is above a. long-run average cost. b. long-run marginal cost. c. long-run total cost. d. long-run variable cost.

ANSWER: a

POINTS: 1 12. Firms in long-run equilibrium in a perfectly competitive industry will produce at the low points of their average total cost curves because a. free entry implies that long-run profits will be zero no matter how much each firm produces. b. firms seek maximum profits and to do so they must choose to produce where average costs are minimized. c. firms maximize profits and free entry implies that maximum profits will be zero. d. firms in the industry desire to operate efficiently.

ANSWER: c POINTS: 1 13. For an increasing cost industry, the long-run supply curve has a(n) elasticity of supply a. infinite. b. negative. c. positive. d. zero.

ANSWER: c POINTS: 1 14. Long-run elasticity of supply is defined as a. percentage change in quantity demanded in the long run divided by percentage change in price. b. percentage change in price divided by percentage change in quantity demanded in the long run. c. percentage change in quantity supplied in the long run divided by percentage change in price. d. percentage change in price divided by percentage change in quantity demanded in the long run.

ANSWER: c POINTS: 1 15. Suppose domestic beef producers face demand of QD = 1000 - 5P. In the very short run 500 head of beef are produced. Suppose mad cow strikes a portion of the national herd and the amount brought to market falls to 400. The price per head will rise by a. 10 b. 30 c. 30 d. 50 ANSWER: b POINTS: 1 16. Suppose domestic beef producers face demand of QD = 1000 - 5P. Suppose the Chinese acquire a taste for U.S. beef such that their demand is QD = 500 - 5P. Market demand is now a. 1000 - 10P for all P b. 1500 - 10P for all P c. 1500 - 5P for all P d. 1000 - 5P for P > 100 and 1500 - 10P for P < 100 ANSWER: d POINTS: 1

17. Suppose a chemical company is in a perfectly competitive industry and has a short run total cost curve of and a short run marginal cost of SMC = q2 + 10q + 10. At the price of 49, how much will be produced? a. 0 b. 3 c. 5 d. 15 ANSWER: b POINTS: 1 18. Suppose a chemical company is in a perfectly competitive industry and has a short run total cost curve and a short run marginal cost of SMC = q2 + 10q + 10. At the price of 385, how much

of will be produced? a. 0 b. 3 c. 5 d. 15 ANSWER: d POINTS: 1

19. Suppose there are 100 firms each with a short run total cost of STC = q2 + q + 10, so that marginal cost is MC = 2q +1. The short-run supply curve for each firm is a. b. c. d.

ANSWER: a POINTS: 1 20. Suppose there are 100 firms each with a short run total cost of STC = q2 + q + 10, so that marginal cost is MC = 2q +1. The market supply curve is a. QS = −50 + 50P b. c. QS = −100 + 100P d. QS = −50 + 50P2 ANSWER: a POINTS: 1 21. Suppose there are 100 firms each with a short run total cost of STC = q2 + q + 10, so that marginal cost is MC = 2q +1. If market demand is given by QD = 1050 − 50P, what is the equilibrium price? a. 5

b. 10 c. 11 d. 50 ANSWER: c POINTS: 1 22. Suppose there are 100 firms each with a short run total cost of STC = q2 + q + 10, so that marginal cost is MC = 2q +1. If market demand is given by QD = 1050 − 50P, how much will the individual firm produce? a. 3 b. 4 c. 5 d. 6 ANSWER: c POINTS: 1 23. Suppose there are 100 firms each with a short run total cost of STC = q2 + q + 10, so that marginal cost is MC = 2q +1. If market demand is given by QD = 1050 − 50P, how much will be produced in the market? a. 300 b. 400 c. 500 d. 600 ANSWER: c POINTS: 1 24. A deadweight loss of consumer and/or producer surplus occurs when a. producers fail to maximize profits. b. mutually beneficial transactions cannot be completed. c. consumers do not maximize their utility. d. the price of inputs increases.

ANSWER: b POINTS: 1 25. In a competitive market, an efficient allocation of resources is characterized by a. a price greater than the marginal cost of production. b. the possibility of further mutually beneficial transactions. c. the largest possible sum of consumer and producer surplus. d. a value of consumer surplus equal to that of producer surplus.

ANSWER: c POINTS: 1 26. "Missing markets" result from a. high transactions costs of such markets. b. strict price controls. c. the inability of producers to gain economies of scale. d. foreign countries dominating a domestic market for a product.

ANSWER: a POINTS: 1 27. Price controls a. are always popular with consumers because they lower prices. b. create shortages. c. increase producer surplus because firms can now sell a greater quantity of a good at a lower price. d. are necessary to preserve equity.

ANSWER: b POINTS: 1 28. One example of Ricardian rent is a. rent paid to landlords under price controls. b. the difference between the wage of a star baseball player and what he could earn outside of baseball. c. the amount paid to a seller above the equilibrium price of tourist class tickets in order to receive higher quality seats in first class. d. the price rise of wool from a disease among sheep.

ANSWER: b POINTS: 1 29. In the short run, the incidence of a sales tax is a. wholly absorbed by the producer. b. shared between the consumer and the producer. c. deferred until the market is able to re-establish an equilibrium price. d. wholly absorbed by the consumer.

ANSWER: b POINTS: 1 30. In the long run, the greater burden of a specific tax will usually be absorbed by a. consumers. b. the party⎯consumers or producers⎯with the more elastic demand/supply curve. c. the party with the least elastic demand/supply curve. d. shareholders and employees of the firm in the form of reduced dividends and wages.

ANSWER: c POINTS: 1 31. In the short run, specific taxes on a firm result in a. price increases that may not persist in the long run. b. an increase in consumer surplus because the tax permits spending in additional government services. c. shortages of the good being taxed. d. an increase in producer surplus because of the rise in price.

ANSWER: a POINTS: 1 32. The excess burden of a tax is a. the amount by which the price of a good increases.

b. the loss of consumer and producer surplus that is not transferred elsewhere. c. The amount by which a person's after-tax income decreases as a result of the new tax. d. the welfare costs to firms forced to leave the market due to an inward shift of the demand curve.

ANSWER: b POINTS: 1 33. One way to minimize the deadweight loss resulting from a specific tax is to a. tax only wealthy firms and individuals. b. spread the tax over many goods and services. c. tax goods for which either supply or demand is inelastic. d. tax luxury items such as yachts and sports cars.

ANSWER: c POINTS: 1 34. Per-unit transaction costs a. may cause the demand and supply curves to shift either inward or outward depending on the value obtained from transaction agents. b. refer only to the commission paid to a third party for each transaction made. c. are absorbed by the party seeking the transaction. d. have the same effect on behavior as do lump-sum transaction costs; the difference in terminology is purely definitional.

ANSWER: a POINTS: 1 35. When prices drop in response to a decline in demand for an increasing cost industry a. producer surplus will increase but rents may decrease. b. rent earned by elastically supplied inputs will decline by more than rent earned by inelastically supplied inputs. c. rent earned by elastically supplied inputs will decline by less than rent earned by inelastically supplied inputs. d. both producer surplus and rents will increase.

ANSWER: c POINTS: 1 36. If quantity supplied is either greater or less than the equilibrium quantity, then all of the following are true except: a. total loss of surplus will depend on the shape of the demand and supply curves. b. the resulting loss of consumer surplus will depend on the price of the good. c. total loss of surplus will depend on the price of the good. d. there will be an inefficient allocation of resources.

ANSWER: c POINTS: 1 37. In the opening of free trade, if world prices of a good are less than domestic prices of that same good, a. domestic consumers will experience a loss of surplus. b. domestic prices will drop to the world price level. c. all domestic producers of that good will try to find another market because they can’t compete with foreign producers. d. domestic producers will increase the quantity supplied in order to crowd out the foreign-produced good.

ANSWER: b POINTS: 1 38. Who benefit(s) from protectionism? a. Consumers b. Domestic producers c. No one d. Both consumers and domestic producers.

ANSWER: b POINTS: 1 39. Quotas that limit the quantity of imports of a foreign good provide an incentive for foreign suppliers to: I. Provide higher quality goods.

II. Seek more open markets elsewhere.

III. Lower prices to be more competitive.

IV. Stop all trade with the country imposing the quotas.

Which of the above statements are true? a. I and II. b. I and III. c. II and IV. d. I, III, and IV. e. III only.

ANSWER: a POINTS: 1 40. When a quota/trade barrier is instituted, the loss of domestic consumer surplus may be transferred to all of the following except a. foreign consumers. b. domestic producers. c. foreign producers. d. consumers of other domestic products.

ANSWER: d POINTS: 1 41. Suppose demand for a good is QD = 100 - P and supply is QS = -20 + P. What is the equilibrium price? a. 20 b. 40 c. 60 d. 80 ANSWER: c POINTS: 1 42. Suppose demand for a good is QD = 100 - P and supply is QS = -20 + P. What is the equilibrium quantity? a. 20 b. 40 c. 60 d. 80

ANSWER: b POINTS: 1 43. Suppose demand for a good is QD = 100 - P and supply is QS = -20 + P. What is the value consumers place on the amount of the good they consume? a. 60 b. 2400 c. 2800 d. 3200 ANSWER: d POINTS: 1 44. Suppose demand for a good is QD = 100 - P and supply is QS = -20 + P. What is the amount consumers pay producers? a. 60 b. 2400 c. 3600 d. 6400 ANSWER: b POINTS: 1 45. Suppose demand for a good is QD = 100 - P and supply is QS = -20 + P. What is the consumer surplus? a. 200 b. 400 c. 600 d. 800 ANSWER: d POINTS: 1 46. Suppose demand for a good is QD = 100 - P and supply is QS = -20 + P. Suppose that a nationwide quota (of 20) is enforced so that more can be used in a war effort. What is the price? a. 20 b. 40 c. 60 d. 80 ANSWER: d POINTS: 1 47. Suppose demand for a good is QD = 100 - P and supply is QS = -20 + P. Suppose that a nationwide quota (of 20) is enforced so that more can be used in a war effort. What is the consumer surplus? a. 200 b. 400 c. 600 d. 800 ANSWER: a

POINTS: 1

Chapter 10 1. Consider a two-good production economy in which both goods are produced with fixed proportions production functions. Then, some efficient allocations will exhibit unemployment of some factor providing a. the firms use the inputs in different proportions. b. the firms exhibit diminishing returns to scale. c. the firms exhibit increasing returns to scale. d. production can never be efficient if there are unemployed inputs.

ANSWER: a POINTS: 1 2. Suppose two goods (X and Y ) are being produced efficiently and that the production of X is always more labor intensive than the production of Y. Production depends only on two factors (capital and labor); these may be smoothly substituted for each other. The total quantities of these inputs are fixed. An increase in the production of X and a decrease in the production of Y will a. increase the capital-labor ratio in each firm. b. decrease the capital-labor ratio in each firm. c. leave the capital-labor ratio for each firm unchanged. d. increase the capital-labor ratio in Y production and decrease the capital-labor ratio in X production.

ANSWER: a POINTS: 1 3. The slope of the production possibility frontier shows a. the marginal rate of substitution between the two goods. b. the relative marginal costs of the two goods. c. the efficient combination of outputs possible using fixed amounts of input. d. the relative marginal productivities of the two goods.

ANSWER: b POINTS: 1 4. The rate of product transformation refers to a. how a consumer can trade one good for another while still maximizing his or her utility. b. how a firm can substitute one input for another and still maintain the same production level. c. how production of one good can be substituted for another while still using a fixed supply of inputs efficiently. d. how quickly a firm can produce a final good while starting with only natural resources.

ANSWER: c POINTS: 1 5. In an economy consisting of only two goods, corn and cloth, the amount of extra cloth that can be produced efficiently if corn output is reduced by one unit is equal to a. the rate of technical substitution for corn divided by the rate of technical substitution for cloth. b. the rate of technical substitution for cloth divided by the rate of technical substitution for corn. c. the marginal cost of producing cloth divided by the marginal cost of producing corn. d. the marginal cost of producing corn divided by the marginal cost of producing cloth.

ANSWER: d POINTS: 1

6. Each of the following factors might interfere with the efficiency of perfect competition except: a. increasing returns to scale. b. imperfect price information. c. externalities. d. diminishing returns to scale.

ANSWER: d POINTS: 1 7. The reason externalities distort the allocation of resources is that a. too few goods are usually produced. b. firms often go out of business because of the externality. c. a firm’s private costs do not reflect the social cost of production. d. regulating externalities uses scarce resources.

ANSWER: c POINTS: 1 8. Under a perfectly competitive price system a. an equitable allocation of the available resources will always result. b. there is no opportunity for individuals to trade amongst themselves. c. there is no reason to expect that voluntary trading will result in an equitable allocation of the available resources. d. None of the above will result.

ANSWER: c POINTS: 1 9. Consider three ways of allocating two goods in a two-person exchange economy.

Both individuals take prices as given and equilibrium prices are established by an impartial I. auctioneer.

One individual can act as a perfect price discriminator and force the other individual to pay II. a different price for each unit of a good that is traded.

One individual is a monopolist and can charge the other individual a single, utilityIII. maximizing price.

Which of these situations is efficient? a. None of them. b. Only I. c. I and II, but not III. d. I and III, but not II. ANSWER: c POINTS: 1 10. In free exchange among two individuals the position on the contract curve finally arrived at will, among other things, depend on: I. The bargaining strength of each individual.

II. The initial endowments of the individuals.

III. The individuals’ preferences.

Which of these correctly completes the statement? a. Only III. b. Only II.

c. I and III, but not II. d. II and III, but not I. e. I, II, and III. ANSWER: e POINTS: 1 11. Markets can fail to achieve efficiency when a. there are prices consumers do not think are fair. b. there are wages workers do not think are fair. c. trade puts people out of work. d. there are public goods.

ANSWER: d POINTS: 1 12. Markets can fail to achieve efficiency when a. there are prices consumers do not think are fair. b. there are wages workers do not think are fair. c. trade puts people out of work. d. there are markets with imperfect competition.

ANSWER: d POINTS: 1 13. Markets can fail to achieve efficiency when a. there are prices consumers do not think are fair. b. there are wages workers do not think are fair. c. trade puts people out of work. d. there are buyers or sellers without adequate information about the quality of goods.

ANSWER: d POINTS: 1 14. Suppose the Economics Department has a graduation party for its students but as a final test they must show they have learned something about trade. The men are given food when they walk in and the women are given drink. Suppose they have identical preferences where food and drink provide utility U = FαDβ. The contract curve in the Edgeworth box using a representative man and woman would be a. a right angle connecting the lower left corner with the upper right corner. b. a curve (not necessarily a line) connecting the lower left corner with the upper right corner. c. a line connecting the lower left corner with the upper right corner. d. a right angle connecting the upper left corner with the lower right corner.

ANSWER: b POINTS: 1 15. Suppose the Economics Department has a graduation party for its students but as a final test they must show they have learned something about trade. The men are given food when they walk in and the women are given drink. Suppose they have identical preferences where food and drink provide utility U = FαDβ. The exchange would be such that a. both would be guaranteed to be better off than when they entered. b. both would be guaranteed to be at least as well off as when they entered. c. the men would end up with more.

d. the women would end up with more.

ANSWER: b POINTS: 1 16. Suppose the Economics Department has a graduation party for its students but as a final test they must show they have learned something about trade. The men are given food when they walk in and the women are given drink. Suppose they have very different preferences where food and drink provide utility. For men U = FαDβ. For women U=min(F,D) The contract curve in the Edgeworth box using a representative man and woman would be a. a right angle connecting the lower left corner with the upper right corner. b. a curve (not necessarily a line) connecting the lower left corner with the upper right corner. c. a line connecting the lower left corner with the upper right corner. d. a right angle connecting the upper left corner with the lower right corner.

ANSWER: c POINTS: 1 17. Suppose goods X and Y are produced along a production possibilities frontier 4X2 + Y2 = 500 and they are perfect substitutes such that U = X + Y. The slope of the production possibilities frontier is

. How much X should

be produced? a. 0 b. 5 c. 10 d. 20 ANSWER: b POINTS: 1 18. Suppose goods X and Y are produced along a production possibilities frontier 4X2 + Y2 = 500 and they are perfect substitutes such that U = X + Y. The slope of the production possibilities frontier is

. How much Y should

be produced? a. 0 b. 5 c. 10 d. 20 ANSWER: d POINTS: 1 19. Suppose goods X and Y are produced along a production possibilities frontier 4X2 + Y2 = 500 and they are perfect substitutes such that U = X + Y. The slope of the production possibilities frontier is the utility-maximizing point? a. 0 b. −1 c. −4 d. −5 ANSWER: b

. What is this slope at

POINTS: 1 20. Suppose goods X and Y are produced along a production possibilities frontier 4X2 + Y2 = 500 and they are perfect substitutes such that U = X + Y. The slope of the production possibilities frontier is

. How much Y should

be produced? a. 0 b. 5 c. 10 d. 20 ANSWER: b POINTS: 1 21. Suppose goods X and Y are produced along a production possibilities frontier 4X2 + Y2 = 500 and they are perfect substitutes such that U = X + Y. The slope of the production possibilities frontier is

. What is this slope at

the utility-maximizing point? a. 0 b. −1 c. −4 d. −5 ANSWER: b POINTS: 1 22. Suppose two coffee snobs who must have their coffee and cream in exact proportions (each cup is 10 coffee per 1 unit cream) are invited to a weekend long event (during which they can easily consume 8 cups of coffee). Suppose Snob A is given 8 units of cream and Snob B is given 80 units of coffee. The contract curve in the Edgeworth box would be a. a right angle connecting the lower left corner with the upper right corner. b. a curve (not a line) connecting the lower left corner with the upper right corner. c. a line connecting the lower left corner with the upper right corner. d. a right angle connecting the upper left corner with the lower right corner.

ANSWER: c POINTS: 1 23. Suppose two coffee snobs who must have their coffee and cream in exact proportions (each cup is 10 coffee per 1 unit cream) are invited to a weekend long event (during which they can easily consume 8 cups of coffee). Suppose Snob A is given 8 units of cream and Snob B is given 80 units of coffee. The post trading result (one in which any trade that makes both parties better off than their initial allocation) will guarantee each person a. nothing b. at least 1 cup of properly made coffee. c. at least 2 cups of properly made coffee. d. exactly 4 cups of properly made coffee.

ANSWER: b POINTS: 1

24. Suppose country A has a production possibilities frontier such that possibilities frontier such that Country B will produce a. only x (=

) and trade for y.

b. only y (=

) and trade for x.

and country B has a production

and consumers in each country view x and y as perfect substitutes.

c. both x (= 20) and y (= 5) and trade x to get y. d. both x (= 20) and y (= 5) and trade y to get x.

ANSWER: c POINTS: 1 25. Suppose a man and a woman are in love and care for the other’s happiness as well as their own consumption.

Suppose they have 100 units of consumption to distribute, they will maximize the joint happiness (UM + UW) where a. CM = 100; CW = 0 b. CW = 100; CM = 100 c. CM = 67; CW = 33 d. CW = 50; CM = 50 ANSWER: d POINTS: 1 26. Suppose a man and a woman are in love and care for the other’s happiness as well as their own consumption. Suppose the man is more selfish than the woman UM = C 2/3 U 1/3 M W 1/2 UW = CW UM1/2 They will maximize the joint happiness (UM + UW) where a. CM = 100; CW = 0 b. CW = 100; CM = 100 c. 50 < CM < 100; 0 < CW < 50 d. 50 < CW < 100; 0 < CM < 50 ANSWER: c POINTS: 1 27. Suppose a man and a woman are in love and care for the other’s happiness as well as their own consumption. Suppose the woman is more selfish than the woman

UM = CM1/2 UW1/2 UW = CW2/3 UM1/3 They will maximize the joint happiness (UM + UW) where a. CM = 100; CW = 0 b. CW = 100; CM = 100 c. 50 < CM < 100; 0 < CW < 50 d. 50 < CW < 100; 0 < CM < 50 ANSWER: d POINTS: 1

Chapter 11 1. A monopolist with constant average and marginal cost equal to 8 (AC = MC = 8) faces demand Q = 100 - P, implying that its marginal revenue is MR = 100 - 2Q. Its profit maximizing quantity is a. 8 b. 46 c. 50 d. 92 ANSWER: b POINTS: 1 2. Consider the same monopoly situation as in the previous question. The monopoly price is a. 8 b. 46 c. 54 d. 92 ANSWER: c POINTS: 1 3. Consider the same monopoly situation as in the previous question. The deadweight loss associated with this monopoly is a. 966 b. 1,058 c. 2,484 d. 3,680 ANSWER: b POINTS: 1 4. A monopolist has total cost TC = .1Q2 - 2Q + 100 and marginal cost MC = .2Q - 2. Market demand is Q = 86 - P, implying that the firm’s marginal revenue is MR = 86 - 2Q. Its profit-maximizing output is a. 92 b. 46 c. 40 d. 20 ANSWER: c POINTS: 1 5. Consider the same monopoly situation as in the previous question. The firm’s profit will be a. 1,760 b. 1,660 c. 2,264 d. 6,728 ANSWER: b POINTS: 1 6. Consider the same monopoly situation as in the previous question. The deadweight loss (compared to a single firm behaving as if it were perfectly competitive) is about

a. 667 b. 333 c. 1,000 d. 1,333 ANSWER: a POINTS: 1 7. A monopolist has total cost TC = Q2 + 10Q + 100 and marginal cost MC = 2Q + 10. It faces demand Q = 130- P (so its marginal revenue is MR = 130 - 2Q). Its profit-maximizing output a. 30 b. 25 c. 20 d. 10 ANSWER: a POINTS: 1 8. The Soup Nut serves his signature minestrone soup in two different bowl sizes, large and small. What strategy should he use to extract the most surplus possible out of customers who come in two types, regular and big eaters, when he cannot distinguish between the two types by observation? a. Distort the size of the small bowl downward to make it less attractive to the big eaters, allowing him to raise the price of the large bowl. b. Distort the size of the large bowl downward to make it attractive to both big and regular eaters. c. Distort the size of the small bowl upward to make it harder for regular eaters to separate themselves from big eaters. d. Distort the size of the large bowl upward to make big eaters less likely to consume the small bowl.

ANSWER: a POINTS: 1 9. Which is not an example of price discriminating by separating markets? a. offering discounts for students with IDs. b. charging lower prices for airline tickets with a Saturday stay-over. c. selling 13 bagels (a “baker’s dozen”) for the price of 12. d. selling snowblowers at a discount in relatively warmer climates.

ANSWER: c POINTS: 1 10. Which might be a possible reason a cable television operator want to bundle channels together in packages (“tiers”)? a. delivering many channels to the consumer is not much more costly than delivering a few. b. simplifies the consumer’s choice and perhaps lowers administrative costs. c. allows the firm to extract revenue from a consumer even if it does not know exactly which channels the consumer likes the most.. d. all of the above.

ANSWER: d POINTS: 1 11. All monopolies exist because of a. firms’ desire to maximize profits.

b. failure of antitrust laws. c. barriers to entry. d. natural selection.

ANSWER: c POINTS: 1 12. Which of the following is not a technical barrier to entry in a monopolized market? a. A patent. b. Decreasing average cost. c. A low cost method of production known only by monopolist. d. Increasing returns to scale.

ANSWER: a POINTS: 1 13. Which of the following is not a legal barrier to entry in a monopolized market? a. A patent. b. An exclusive franchise. c. Decreasing average cost. d. An exclusive license.

ANSWER: c POINTS: 1 14. A natural monopoly a. is a monopoly in the production of raw materials. b. occurs when one firm can supply the entire market more cheaply than can a number of firms. c. is one result of a patent. d. results from decreasing returns to scale.

ANSWER: b POINTS: 1 15. A profit-maximizing monopoly will produce that output for which a. marginal revenue equals price. b. average cost is minimized. c. marginal cost is minimized. d. marginal cost equals marginal revenue.

ANSWER: d POINTS: 1 16. The supply curve for a monopoly is given by a. the firm’s marginal cost curve above the average variable cost curve. b. the one point on the demand curve that corresponds to the quantity for which price is equal to marginal cost. c. the entire demand curve above the point where price is equal to average cost. d. the monopolist does not have a well-defined supply curve.

ANSWER: d POINTS: 1

17. A monopoly’s economic profits are represented by a. [price minus marginal cost] times number of units sold. b. [price minus average cost] times number of units sold. c. [marginal revenue minus price] times number of units sold. d. [marginal cost minus price] times number of units sold.

ANSWER: b POINTS: 1 18. The principal difference between economic profits for a monopolist and for a competitive firm is that a. monopoly profits create major problems of equity whereas competitive profits do not. b. competitive profits exist only in the short run whereas monopoly profits may exist in the long run as well. c. monopoly profits represent a transfer out of consumer surplus whereas competitive profits do not.monopoly profits are considered a deadweight loss but competitive profits are not. d. monopoly profits are considered a deadweight loss but competitive profits are not.

ANSWER: b POINTS: 1 19. From the point of view of economic efficiency, output in a monopolized market is a. too high. b. perfect. c. too low. d. undesirable.

ANSWER: c POINTS: 1 20. If a monopoly is maximizing profits, a. price will always be greater than the elasticity of demand. b. price will always equal marginal cost. c. price will always be greater than marginal cost. d. price will always equal marginal revenue.

ANSWER: c POINTS: 1 21. The “deadweight loss” from a monopoly refers to a. the portion of a monopolist’s profits that are above the competitive profit level. b. the increase in price due to the monopolization of a market. c. the inefficient use of factors of production by a monopoly. d. the loss of consumer surplus due to the monopolization of a market that is not transferred to another economic actor.

ANSWER: d POINTS: 1 22. For the practice of price discrimination to be successful, the monopoly must a. face an imperfect resale market for its product. b. face similar demand curves for various markets. c. have similar costs among markets.

d. have a downward sloping marginal cost curve.

ANSWER: a POINTS: 1 23. A price-discriminating monopolist having identical costs in two markets should charge a higher price in that market a. which has a higher demand. b. which has a more elastic demand. c. which has a less elastic demand. d. which has a higher marginal revenue.

ANSWER: c POINTS: 1 24. Perfect price discrimination a. is a common occurrence in situations with many buyers. b. occurs fairly often in situations with only a few buyers. c. is only observed in competitive markets. d. rarely occurs because firms do not have sufficient power to differentiate among specific buyers.

ANSWER: d POINTS: 1 25. All of the following might explain a firm offering quantity discounts except: a. lower costs of handling large orders. b. an inelastic demand for the good. c. monopoly power in this market. d. existence of some high and some low demand consumers.

ANSWER: b POINTS: 1 26. If the government requires a natural monopoly to price at marginal cost, a. monopoly firms will earn zero economic profits because the price of the good equals the cost of producing that good. b. monopoly firms will operate at a loss because P < AC. c. more firms will be able to enter the market. d. producer surplus will increase because quantity supplied is greater.

ANSWER: b POINTS: 1 27. Possible benefits of a monopoly include which of the following (choose all that apply)? a. a savings of fixed costs because only one firm supplies quantity demanded. b. greater opportunities for research due to long-run positive economic profits. c. government regulation is more effective because the firm is “too big to fail.” d. goods and services are provided at a lower price than under perfect competition because of a monopoly’s decreasing average cost curve.

ANSWER: a, b POINTS: 1

Chapter 12 1. Suppose there are two firms, Boors and Cudweiser, each selling identical-tasting nonalcoholic beer. Consumers of this beer have no brand loyalty so market demand can be expressed as P = 5 − .001(QB + QC). Boors’ marginal revenue function can be written MR = 5 − .001(2QB + QC) and symmetrically for Cudweiser. Boors operates with out-of-date technology and has constant cost of $2 per unit , whereas Cudweiser has constant cost of $1 per unit.

Assuming the firms behave as Cournot competitors, Boor’s best-response function is a. QB = 2,000 − .5QC b. QB = 1,500 − .5QC c. QC = 2,000 − .5QB d. QC = 1,500 − .5QB ANSWER: b POINTS: 1 2. Consider the same market for nonalcoholic beer as in the previous question. Cudweiser’s response function is a. QB = 2,000 − .5QC b. QB = 1,500 − .5QC c. QC = 2,000 − .5QB d. QC = 1,500 − .5QB ANSWER: c POINTS: 1 3. Consider the same market for nonalcoholic beer as in the previous question. How many “units” of beer will Boors produce in the Nash equilibrium? a. 667 b. 1,667 c. 2,333 d. 3,000 ANSWER: a POINTS: 1 4. Consider the same market for nonalcoholic beer as in the previous question. How many “units” of beer will Cudweiser produce? a. 667 b. 1,667 c. 2,333 d. 3,000 ANSWER: b POINTS: 1 5. Suppose there are two firms, Boors and Cudweiser, each selling identical-tasting nonalcoholic beer. Consumers of this beer have no brand loyalty so market demand can be expressed as . Boors’ marginal revenue function can be written and symmetrically for Cudweiser. Boors operates with out-of-date technology and has constant cost of $4 per unit , whereas Cudweiser has constant cost of $2 per unit.

Assuming the firms behave as Cournot competitors, in the Nash equilibrium, Cudweiser will produce

a. 1,333 b. 2,333 c. 3,333 d. 4,333 ANSWER: c POINTS: 1 6. Consider the same market for nonalcoholic beer as in the previous question. How many units will Boors produce in the Nash equilibrium? a. 1,333 b. 2,333 c. 3,333 d. 4,333 ANSWER: a POINTS: 1 7. Suppose there are two firms, Boors and Cudweiser, each selling nonalcoholic beer. Suppose Boors and Cudweiser are not viewed as perfect substitutes but rather demand for Boors is QB = 5000 − 1000PB + 100PC and demand for Cudweiser is QC = 3000 − 1500PC + 100PB. For simplicity, assume zero marginal costs. Which is the more preferred beer? a. Boor's b. Cudweiser c. they are equally preferred d. neither are preferred ANSWER: a POINTS: 1 8. Consider the market for nonalcoholic beers from the previous question. Which of the following is the best-response function for Boors from the Bertrand game? a. PB = -2.5 + .05PC b. PB = 2.5 + .05PC c. PC = 2.5 - .05PB d. PB = 2.5 - .15PC ANSWER: b POINTS: 1 9. Consider the market for nonalcoholic beers from the previous question. Which of the following is the Bertrand reaction function for Cudweiser? a. PC = 1 + .033PB b. PC = 1 - .033PB c. PC = 1.5 + .075PB d. PB = 1.5 + .075PC ANSWER: a POINTS: 1 10. Consider the market for nonalcoholic beers from the previous question. Boors’ price in a Nash equilibrium (assuming

Bertrand competition in these differentiated beers) is about a. 1.71 b. 2.55 c. 3.55 d. 4.29 ANSWER: b POINTS: 1 11. Consider the market for nonalcoholic beers from the previous question. Cudweisers’ price in a Nash equilibrium (assuming Bertrand competition in these differentiated beers) is about a. 0.99 b. 1.09 c. 1.71 d. 2.55 ANSWER: b POINTS: 1 12. Two firms engage in Bertrand competition in differentiated products. After doing all the appropriate calculations, you find the best-response functions are PB = 2.5 + .15PC and PC = 1.5 + .075PB. Without doing any further calculations, can you determine the relationship between their Nash equilibrium prices? a. Yes, PB > PC b. Yes, PC > PB c. Yes, PB = PC d. No; it cannot be determined.

ANSWER: a POINTS: 1 13. Which game does the Cournot model most resemble and why? a. the Battle of the Sexes because firms need to coordinate their outputs. b. the Battle of the Sexes because firms disagree on which outcome is best. c. the Prisoners Dilemma because firms don’t maximize joint payoffs in equilibrium. d. the Prisoners Dilemma because firms play dominant strategies.

ANSWER: c POINTS: 1 14. Which alteration of the assumptions behind the Bertrand model can help avoid the Bertrand Paradox (that an outcome resembling perfect competition may arise with even as few as two firms)? a. assume firms have limited capacities. b. assume firms produce differentiated rather than homogeneous products. c. assume firms play repeatedly and thus may collude. d. all of the above.

ANSWER: d POINTS: 1 15. Which factor would facilitate tacit collusion among firms in a market? a. an increase in the number of firms.

b. a decrease in the probability the market will continue into future periods. c. a decrease in the interest rate. d. none of these.

ANSWER: c POINTS: 1 16. Relative to the case in which two identical firms choose quantities simultaneously in a Cournot model, if one of the two moves first and is observed by the other, how would this affect its output? a. it would increase its output, more so if it could deter the other from entering the market at all. b. it would increase its output, but would moderate this increase if it were concerned about entry deterrence. c. it would decrease its output if it couldn’t deter entry and increase it otherwise. d. it would decrease its output whether or not it wanted to deter entry.

ANSWER: a POINTS: 1 17. In the monopolistic competition model a. firms are price takers b. barriers to entry maintain some monopoly “rents” in the long run. c. one dominant firm acts as the monopolist that is followed by the fringe of competitors. d. none of these.

ANSWER: d POINTS: 1 18. In the long run, in the model of monopolistic competition, for a typical firm, price is a. above average cost but equal to marginal cost. b. above marginal cost but equal to average cost. c. above marginal cost. d. equal to marginal cost and equal to or greater than average cost.

ANSWER: b POINTS: 1 19. In the cartel model a. firms believe that price increases result in a very elastic demand, while price decreases result in an inelastic demand for their products. b. each firm acts as a price taker. c. one dominant firm takes the reactions of all other firms into account in its output and pricing decisions. d. firms coordinate their decisions to act as a multiplant monopoly.

ANSWER: d POINTS: 1 20. Under the cartel model, each firm produces where a. marginal cost equals marginal revenue. b. price equals marginal cost. c. the average cost curve is at a minimum. d. price exceeds marginal cost by the greatest amount.

ANSWER: a

POINTS: 1 21. All of the following are problems associated with maintaining a cartel except a. cartels are illegal. b. a large amount of information is needed to coordinate a cartel. c. profits are not maximized by a cartel so it will evolve into a monopoly. d. each member of the cartel has an incentive to “chisel” by expanding output.

ANSWER: c POINTS: 1 22. Each firm in a cartel has an incentive to chisel because market price exceeds a. marginal cost. b. average cost. c. average variable cost. d. average fixed cost.

ANSWER: a POINTS: 1 23. In the price-leadership model, a. firms believe that price increases result in a very elastic demand, while price decreases result in an inelastic demand for their product. b. each firm acts as a price taker. c. one dominant firm takes the reactions of all other firms into account in its output and pricing decisions. d. firms coordinate their decisions to act as multiplant monopolies.

ANSWER: c POINTS: 1 24. In the Cournot model, each firm assumes that its rival will word best completes the sentence? a. increase b. not change c. decrease d. adjust ANSWER: b POINTS: 1

its output when the firm adjusts its own output. Which

25. In a Cournot equilibrium, each firm chooses an output level that a. maximizes joint profits. b. maximizes the price received. c. maximizes profits given what the other firm produces. d. maximizes revenue given what the other firm produces.

ANSWER: c POINTS: 1 26. Product differentiation complicates the study of oligopolies because such markets may not a. be efficient.

b. have prices equal to marginal cost. c. have free entry and exit. d. obey the law of one price.

ANSWER: d POINTS: 1 27. A profit-maximizing firm should spend an additional dollar on advertising so long as this expenditure results in more than one dollar of a. additional sales. b. reduced costs. c. increased profits. d. demand.

ANSWER: c POINTS: 1

Chapter 13 1. A firm’s demand for labor is known as a “derived demand” because a. the firm gains utility from hiring more labor. b. the amount of labor hired depends upon how much output the firm can sell. c. the wage rate paid to workers is derived from the market for labor. d. it is derived from the demand for capital.

ANSWER: b POINTS: 1 2. If the price of an input falls, a firm would increase the use of that input for two reasons: a. The input is now more productive, and the firm can substitute this input for other relatively more expensive inputs. b. The input is now more productive, and overall production costs are now lower, meaning a firm may choose to increase production. c. Overall production costs are now lower and the firm can substitute this input for other relatively more expensive inputs. d. Overall production costs are now lower and the firm will have more of other inputs to use with the one in question.

ANSWER: c POINTS: 1 3. In an input market, economic rent is defined as a. the total remuneration paid to a factor of production. b. the minimum amount required to retain a factor of production in its present use. c. the total cost for a firm of renting land, equipment, and buildings. d. the extent to which payments to a factor of production exceed the minimum amount required to retain it in its present use.

ANSWER: d POINTS: 1 4. If a factor of production comes to have more and more alternative uses, its supply curve to any one use a. remains unchanged. b. becomes more inelastic. c. becomes more elastic. d. may move in any direction.

ANSWER: c POINTS: 1 5. A firm will hire additional units of any input up to the point where a. the marginal productivity of the input is maximized. b. the marginal cost of employing the input is minimized. c. the expense of employing the last unit is equal to the revenue brought in by the last unit. d. the revenue brought in by the input is maximized.

ANSWER: c POINTS: 1

6. An input’s marginal revenue product is given by a. the input’s marginal expense times marginal revenue. b. the input’s marginal expense times the input’s marginal physical productivity. c. marginal revenue times the number of units employed. d. the input’s marginal physical productivity times marginal revenue of the firm’s output.

ANSWER: d POINTS: 1 7. If a profit-maximizing firm is a price taker in the input market but not in the output market, its marginal value product of labor a. exceeds the marginal revenue product of labor. b. equals its marginal revenue product of labor. c. is less than the marginal revenue product of labor. d. equals the marginal physical product of labor.

ANSWER: a POINTS: 1 8. If a profit-maximizing firm is a price taker in both the input and output markets, its marginal revenue product of labor is given by a. the price of its output times labor's marginal physical productivity. b. the marginal value product of labor. c. the marginal revenue product of capital times the ratio of the wage rate to the rental rate on capital. d. all of the above.

ANSWER: d POINTS: 1 9. A profit-maximizing firm will never hire that quantity of a factor of production for which that factor has an increasing marginal productivity because a. it would not be maximizing output. b. it would not be maximizing the productivity of labor. c. it would not be minimizing costs. d. it would not be maximizing profits.

ANSWER: d POINTS: 1 10. The substitution effect of a change in wage rate on a firm’s demand for labor input will be more significant a. the greater the change in output. b. the more sharply curved are the firm’s isoquants. c. the flatter are the firm’s isoquants. d. the larger the quantity of labor employed.

ANSWER: b POINTS: 1 11. The output effect of a change in the wage rate on a firm’s demand for labor input will be greater a. the larger the share of labor costs in total costs and the greater the price elasticity of demand for output. b. the larger the share of labor costs in total costs and the smaller the price elasticity of demand for output. c. the larger the share of labor costs in total costs and the higher the quantity demanded.

d. the smaller the possibilities of substituting capital for labor.

ANSWER: a POINTS: 1 12. The notion that when the price of an input falls, a firm’s marginal cost curve shifts down and overall production increases so that more of every input is employed is known as a. the output effect. b. the substitution effect. c. the input effect. d. the cost effect.

ANSWER: a POINTS: 1 13. The size of the reduction in quantity of labor hired by a firm due to an increase in the wage rate depends upon all of the following except a. what percentage of total costs are made up of labor costs. b. how much quantity demanded in the output market will be reduced by a higher price. c. the capital to labor ratio before the wage increase. d. how easily other inputs can be substituted for labor.

ANSWER: c POINTS: 1 14. Suppose capital and labor must be used in fixed proportions to produce widgets and that the price elasticity of demand for widgets is zero. Then the wage elasticity of demand for labor by widget makers will be a. +1. b. −1. c. 0. d. infinite.

ANSWER: c POINTS: 1 15. If the wage rate rises, labor’s share in the total costs of a production process a. will increase. b. will decrease. c. may increase or decrease depending on the elasticity of demand for the product. d. may increase or decrease depending on the ease of substitution of other inputs for labor.

ANSWER: d POINTS: 1 16. If a firm is a monopsonistic hirer of labor, a. its marginal expense for labor is greater than the market wage. b. its marginal expense for labor is equal to the market wage. c. its marginal expense for labor is less than the market wage. d. it is a price taker in the labor market.

ANSWER: a POINTS: 1

17. A monopsonist will hire labor up to the point where a. the marginal expense of labor is minimized. b. the marginal physical productivity of labor is maximized. c. the marginal expense of labor is equal to marginal revenue. d. the marginal expense of labor is equal to the marginal value product of labor.

ANSWER: d POINTS: 1 18. For a monopsonistic hirer of labor the gap between labor’s marginal value product and its wage rate will be greater a. the more elastic the supply curve for labor. b. the more inelastic the supply curve for labor. c. the more elastic the firm’s demand for labor. d. the more inelastic the firm’s demand for labor.

ANSWER: b POINTS: 1 19. A price discriminating monopsonist could increase its profits by a. paying the minimum wages possible. b. hiring as little capital as possible. c. paying lower wages to workers with inelastic supply of labor curves than to workers with elastic curves. d. paying lower wages to workers with elastic supply of labor curves than to workers with inelastic curves.

ANSWER: c POINTS: 1 20. Consider two situations: In situation A the production of widgets is monopolized by a single firm. In situation B the production of widgets is perfectly competitive. In both situations the supply of labor to widget makers is infinitely elastic at a wage of w. Which of the following statements is true? a. The marginal value product of labor will be the same in the two cases. b. The marginal value product of labor is higher in case B than in case A. c. The marginal value product of labor is higher in case A than in case B. d. From the information given it is not possible to make a definite statement about the marginal value product of labor.

ANSWER: c POINTS: 1 21. A monopolist union that desired to maximize its total wage bill ( ) would offer that quantity of labor for which a. labor’s marginal productivity is zero. b. labor’s wage falls to zero. c. the quantity of labor hired is as great as possible given the firm’s demand curve. d. the marginal revenue from providing one more worker to the market is zero.

ANSWER: d POINTS: 1 22. In the study of labor supply, “leisure” refers to a. time spent sleeping. b. time spent doing absolutely nothing (except breathing).

c. time spent in one’s place of residence. d. time spent that is not spent in market work.

ANSWER: d POINTS: 1 23. When an individual’s wage rises, the substitution effect tends to a. increase hours worked. b. decrease hours worked. c. leave hours worked unchanged. d. it is impossible to predict what will happen to hours worked.

ANSWER: a POINTS: 1 24. When an individual’s wage rises, the income effect tends to a. increase hours worked. b. decrease hours worked. c. leave hours worked unchanged. d. it is impossible to predict what will happen to hours worked.

ANSWER: b POINTS: 1 25. If an individual’s supply of labor curve is positively sloped throughout, then a. the substitution effect always dominates the income effect. b. the income effect always dominates the substitution effect. c. the substitution effect dominates at low real wage levels and the income effect dominates at high real wage levels. d. the income effect dominates at low real wage levels and the substitution effect dominates at high real wage levels.

ANSWER: a POINTS: 1 26. The fact that more women have chosen to work as real wages rise is evidence that, for them a. leisure is an inferior good. b. income and substitution effects of higher real wages work in the same direction. c. income and substitution effects of higher real wages may work in opposite directions. d. income and substitution effects may work in opposite directions but that the substitution effect is stronger.

ANSWER: d POINTS: 1 27. Suppose Woody Chuck’s business is to clear trees for housing developments. Given the constraints of fixed capital, the production function is price per cleared lot is $5000. (Note a. constant at $5000. b. constant at 25

. Suppose Woody Chuck’s is one of many firms clearing land and that the market ) The marginal Revenue Product of labor is

c. d.

ANSWER: c POINTS: 1 28. Suppose Woody Chuck’s business is to clear trees for housing developments. Given the constraints of fixed capital, the production function is price per cleared lot is $5000. (Note

. Suppose Woody Chuck’s is one of many firms clearing land and that the market ) How many workers will Woody Chuck hire at w = 5?

a. 1 b. 4 c. 16 d. 25 ANSWER: d POINTS: 1 29. Suppose Woody Chuck’s business is to clear trees for housing developments. Given the constraints of fixed capital, the production function is price per cleared lot is $5000. (Note

. Suppose Woody Chuck’s is one of many firms clearing land and that the market ) How many workers will Woody Chuck hire at w = 6.25?

a. 1 b. 4 c. 16 d. 25 ANSWER: c POINTS: 1 30. Suppose the market for labor is perfectly competitive and the demand for labor is is . The equilibrium wage will be a. 5 b. 6 c. 7 d. 8 ANSWER: b POINTS: 1

and market supply

31. Suppose the market for labor is perfectly competitive and the demand for labor is . The equilibrium number of workers hired will be a. 30 b. 40 c. 50 d. 60 ANSWER: b

and market supply is

POINTS: 1 32. Suppose the market for labor is perfectly competitive and the demand for labor is . If a minimum wage is imposed at w = 8, the number of workers hired will be a. 20 b. 40 c. 60 d. 80 ANSWER: a POINTS: 1

and market supply is

33. Suppose the market for labor is perfectly competitive and the demand for labor is is . If a minimum wage is imposed at w = 8, the total unemployed ( ) will be a. 20 b. 40 c. 60 d. 80 ANSWER: b POINTS: 1

and market supply

34. Suppose the market for labor is perfectly competitive and the demand for labor is and market supply is . If a minimum wage is imposed at w = 8, the net gain to all workers, not just those who keep their jobs, (in producer surplus terms) will be a. 10 b. 20 c. 30 d. 40 ANSWER: b POINTS: 1 35. Suppose the market for labor is perfectly competitive and the demand for labor is and market supply is . If a minimum wage is imposed at w = 8, the gain to workers who keep their jobs, (in producer surplus terms) will be a. 10 b. 20 c. 30 d. 40 ANSWER: d POINTS: 1 36. Suppose the market for labor is perfectly competitive and the demand for labor is is . If a minimum wage is imposed at w = 8, the loss to firms will be a. 20 b. 40 c. 60 d. 80

and market supply

ANSWER: c POINTS: 1 37. Suppose the market for labor is perfectly competitive and the demand for labor is and market supply is . If a minimum wage is imposed at w = 8, the deadweight loss of the imposition of the minimum wage is a. 10 b. 20 c. 30 d. 40 ANSWER: d POINTS: 1 38. Suppose a firm is a monopolist in its output market and a perfect competitor in its input market. The demand for its output is . The firm’s production is given by maximizing level of labor input is a. 100 b. 1,000 c. 3,600 d. 5,000 ANSWER: c POINTS: 1

and the market wage is $50. The profit-

Chapter 14 1. In the two-period utility maximization model the opportunity cost of one unit of C1 is a. one unit of C0. b. 1 + r units of C0. c. 1/(1 + r) units of C0. d. cannot be determined without more information.

ANSWER: c POINTS: 1 2. A rise in the real interest rate r a. creates income and substitution effects that reduce C0. b. creates income effects that reduce C0, substitution effects that increase C0. c. creates income effects that increase C0, substitution effects that reduce C0. d. creates income and substitution effects that increase C0.

ANSWER: c POINTS: 1 3. Suppose an individual has a fixed amount of wealth to allocate between consumption in two periods (C1 and C2). Any funds not spent in period 1 will earn interest (at the rate r), which will increase purchasing power in period 2. Consider four possible reactions to an increase in r: I. C1 increases.

II. C1 decreases.

III. C2 increases.

IV. C2 decreases.

Which of these is consistent with the hypothesis that both C1 and C2 are normal goods? a. I, II, III, and IV. b. I, II, and IV, but not III. c. I, III, and IV, but not II. d. II and III, but not I and IV. e. I, II and III, but not IV. ANSWER: e POINTS: 1 4. The annual rental rate for a machine is a. the yearly depreciation and maintenance costs for the machine. b. the yearly interest costs associated with owning the machine. c. the initial purchase price of the machine divided by the number of years the machine is expected to last. d. the sum of the yearly depreciation, maintenance, and interest costs associated with owning the machine.

ANSWER: d POINTS: 1 5. A fall in the real interest rate leads to a. an increase in the rental rate on a machine.

b. a decrease in the rental rate on a machine. c. no change in the rental rate on a machine. d. a fall in the marginal productivity of capital.

ANSWER: b POINTS: 1 6. An increase in the corporate profits tax will most likely lead to a. a decrease in the rental rate of capital in the corporate sector. b. no change in the rental rate of capital in the corporate sector. c. no change in the rental rate of capital in the non-corporate sector. d. an increase in the rental rate of capital in the corporate sector.

ANSWER: d POINTS: 1 7. The present value of $1 payable in two years is a. $1. b. $1/(1 + 2r). c. $1/(1 − 2r). d. $1/(1 + r)2.

ANSWER: d POINTS: 1 8. The present value of $1 payable in the future decreases a. the higher r is and the sooner it is to be paid. b. the lower r is and the sooner it is to be paid. c. the higher r is and the longer time until it is paid. d. the lower r is and the longer time until it is paid.

ANSWER: c POINTS: 1 9. In a perfectly competitive market a firm’s rental rate for a machine (v) will be given by: v = P(r + d) where r is the prevailing rate of interest and d is the depreciation rate. In this formula P represents a. the present market price of the machine. b. the initial purchase price of the machine (assuming this differs from its present market price. c. the price of the firm’s product. d. the depreciated value of the machine.

ANSWER: a POINTS: 1 10. Accelerated depreciation laws may increase firms’ investment in equipment because a. machines will wear out more rapidly. b. profits will be increased. c. the rental rate on capital will be lowered. d. the price of machines will fall.

ANSWER: c POINTS: 1

11. If real extraction costs do not change, the relative price of a finite resource would be expected to a. fall over time. b. remain constant over time. c. rise at a rate given by the nominal rate of interest. d. rise at a rate given by the real rate of interest.

ANSWER: d POINTS: 1 12. A monopolist who owned the entire supply of a scarce resource would set a price a. at about the competitive level. b. lower than the competitive level. c. higher than the competitive level but lower than what a monopoly producer of a non-scarce good would. d. above that which would be chosen by a monopoly producer of a nonscarce good.

ANSWER: a POINTS: 1 13. The difference in present value between a perpetuity that promised $1 per year starting today and one that promised $1 per year starting next year is a. 0. b. $1. c. $1/(1 + r). d. $r/(1 + r).

ANSWER: b POINTS: 1 14. A firm that wished to calculate the present value of its future nominal profits should use the a. real interest rate

to do so.

b. nominal interest rate c. nominal interest rate minus the expected inflation rate d. real interest rate minus the expected inflation rate ANSWER: b POINTS: 1 15. The yield on a bond is that interest rate for which the present value of the interest and principal payments promised by the bond are a. equal. b. as large as possible. c. equal to the price of the bond. d. equal to the face value of the bond.

ANSWER: c POINTS: 1 16. For a given interest rate, r, which of the following expressions is smallest?

a. 1 + r. b. (1 + r/2)2.

c. (1 + r/12)12 d. (1 + r/365)365.

ANSWER: a POINTS: 1 17. The rental rate approach to investment choices by firms and the present value approach a. always agree. b. agree only if depreciation is 0. c. agree only if the price of equipment does not change. d. agree only when inflation rates are zero.

ANSWER: a POINTS: 1 18. Draw a two period budget line where the borrow/lending rate of interest, r, allows consumers to choose consumption in each of the two periods. C1 and C2 given their anticipated income on two periods, Y1 and Y2. The horizontal (C1) intercept is a.

b.

c. d.

ANSWER: a POINTS: 1 19. Draw a two period budget line where the borrow/lending rate of interest, r, allows consumers to choose consumption in each of the two periods. C1 and C2 given their anticipated income on two periods, Y1 and Y2. The vertical (C2) intercept is a.

b.

c. d.

ANSWER: d POINTS: 1 20. Draw a two period budget line where the borrow/lending rate of interest, r, allows consumers to choose consumption in each of the two periods. C1 and C2 given their anticipated income on two periods, Y1 and Y2. The slope is a. r b. −r c. 1 + r d. −(1 + r)

ANSWER: d POINTS: 1 21. Draw a two period budget line where the borrow/lending rate of interest, r, allows consumers to choose consumption in each of the two periods. C1 and C2 given their anticipated income on two periods, Y1 and Y2. The one point on the budget line not affected by the interest rate is a. b. the horizontal intercept. c. the vertical intercept ANSWER: a POINTS: 1 22. Suppose a person’s preferences are to “consumption smooth”, which means they wish to get and interest rates. For any interest rate and , the person will in the first period. a. borrow

for all incomes

b. save c. neither borrow nor save ANSWER: c POINTS: 1 23. Suppose a person’s preferences are to “consumption smooth”, which means they wish to get and interest rates. For any interest rate and , the person will in the first period. a. borrow

for all incomes

b. save c. neither borrow nor save ANSWER: b POINTS: 1 24. Suppose a person’s preferences are to “consumption smooth”, which means they wish to get and interest rates. For any interest rate and , the person will in the first period. a. borrow

for all incomes

b. save c. neither borrow nor save ANSWER: a POINTS: 1 25. Suppose you know a piece of land will be worth $1 million (real) in 2025, and the real interest rate is 5%. About how much should you be willing to pay for the land today (20150)? (Assume no taxes). a. $610,000 b. $1 million c. $1.89 million d. $230.000 ANSWER: a POINTS: 1 26. Suppose you know a piece of land will be worth $1 million (real) in 2045, and the real interest rate is 5%. About how

much should you be willing to pay for the land today (2015)? (Assume no taxes). a. $610,000 b. $1 million c. $1.89 million d. $230,000 ANSWER: d POINTS: 1 27. Suppose Johnny Stroller sells 12, 25, and 75 year-old scotch in under black, red, and blue labels. Suppose the storage costs are zero and the initial production costs are the same. What is the implied (approximate) interest rate if black sells for $18, red for $34 and blue for $388. a. 2 b. 5 c. 8 d. 10 ANSWER: b POINTS: 1 28. Suppose Johnny Stroller sells 12, 25, and 75 year-old scotch in under black, red, and blue labels. Suppose the storage costs are zero and the initial production costs are the same. What is the implied (approximate) interest rate if black sells for $12, red for $16 and blue for $44. a. 2 b. 5 c. 8 d. 10 ANSWER: a POINTS: 1 29. The two-period budget line for incomes Y1 and Y2 and consumption C1 and C2 can be written as , if the interest rate were to rise the budget line would a. shift to the left in a parallel fashion b. shift to the right in a parallel fashion c. rotate counter-clockwise pivoting on Y1, Y2 d. rotate clockwise pivoting on Y1, Y2 ANSWER: d POINTS: 1 30. The two-period budget line for incomes Y1 and Y2 and consumption C1 and C2 can be written as , if the interest rate were to fall the budget line would a. shift to the left in a parallel fashion b. shift to the right in a parallel fashion c. rotate counter-clockwise pivoting on Y1, Y2 d. rotate clockwise pivoting on Y1, Y2 ANSWER: c POINTS: 1

Chapter 15 1. The principal is distinct from the agent in the principal-agent model because a. the principal offers the contract to the agent. b. the principal is fully informed. c. both a and b. d. neither a nor b.

ANSWER: a POINTS: 1 2. Which of the following is an application of the adverse-selection problem? a. a customer driving more recklessly after buying car insurance. b. a teenager “hanging out” with friends his or her parents do not approve of. c. shareholders offering a high-powered incentive contract to a manager. d. an auto repairman claiming that the repairs are more extensive than they actually are.

ANSWER: d POINTS: 1 3. Adverse selection arises in insurance markets because a. insurance buyers have more information than insurance sellers. b. insurance sellers have more information than insurance buyers. c. individuals can select which insurance company to patronize. d. insurance companies can exercise too much control over whom they insure.

ANSWER: a POINTS: 1 4. Adverse selection in competitive insurance markets harms a. high-risk individuals. b. low risk individuals. c. owners of competitive insurance companies. d. everyone.

ANSWER: b POINTS: 1 5. An example of adverse selection is a. purchasing a new car sight unseen based on the recommendation of a neighbor. b. high health-insurance premiums resulting from the poor health of people who buy policies. c. suppliers who charge more for better quality clothing than for lower quality clothing. d. being talked into buying a low-quality item because the price is lower.

ANSWER: b POINTS: 1 6. Which of the following is an application of the moral-hazard problem? a. a person buying insurance after a cancer diagnosis. b. an salesperson who is not paid on commission being rude to customers. c. coffee hounds buying the menu item meant for lower-demand consumers.

d. only inexperienced workers applying for a managerial job advertised with a relatively low salary.

ANSWER: b POINTS: 1 7. A risk-averse manager is hired to run a firm for shareholders. If the manager’s effort can be observed and specified in a contract, which would be the best employment contract? a. a high-powered incentive contract to elicit the most effort. b. a fixed salary paid as long as the required effort is undertaken. c. a proportion of profits paid as long as the required effort is undertaken. d. a wage well in excess of his or her outside opportunity.

ANSWER: b POINTS: 1 8. A risk-averse manager is hired to run a firm for shareholders. If shareholders cannot observe the manager’s effort, which would be the best employment contract? a. a high-powered incentive contract to elicit maximum effort. b. a fixed salary. c. a moderately powered incentive scheme that elicits some effort without exposing the manager to too much risk. d. an incentive scheme that provides maximum incentives and maximum insurance.

ANSWER: c POINTS: 1 9. Given a series of contracts offered to an executive having the same slope (where slope refers to how the contract varies with changes in the firm’s gross profits) but different intercepts (referring to the overall generosity of the contract).

Which of these is not a consideration in figuring out which of these intercepts the shareholders would decide to build into the contract offered to the executive? a. if too generous a contract is offered, this comes out of the firm’s bottom-line profit. b. if too generous a contract is offered, the executive may become lazy and not exert the required effort. c. if the contract isn’t generous enough, the executive will decide to work elsewhere. d. if the contract isn’t generous enough, only low-ability executives will apply.

ANSWER: b POINTS: 1 10. Which are social costs associated with the inability of shareholders to observe an executive’s effort? (You may choose more than one.) a. Excessive insurance offered. b. The executive has to be exposed to risk to induce effort, and risk is costly. c. The executive ends up exerting less than first-best effort. d. Excessive effort induced.

ANSWER: b, c POINTS: 1 11. A monopoly coffee shop is deciding on a menu of different cup sizes to sell to a population of consumers, some of whom are high demanders and some low demanders. How would the optimal menu differ depending on whether the consumers can be observably separated into the different types or not? a. The menu is unaffected by type observability. b. If types aren’t observable, the large cup size should be increased to separate the high demander.

c. If types aren’t observable, the small cup size should be increased to make it more attractive to low demanders. d. If types aren’t observable, the small cup size should be reduced to make it less attractive to high demanders.

ANSWER: d POINTS: 1 12. How is it logically possible for a monopolist to get different consumers to purchase different bundles on a menu (such as different sizes of coffee cups), and thereby achieve a form of price discrimination, even if the firm cannot observe the consumers’ valuations directly? a. Different types of consumers have different tradeoffs between money and amounts of the good. b. The monopolist can use a market-separation strategy. c. Social norms are powerful deterrents to lying about one’s type. d. This is impossible: if one bundle is preferred by one type, logically it will be preferred by all.

ANSWER: a POINTS: 1 13. Which is a distortion (a loss of social surplus) associated with a monopolist’s inability to observe consumer types when constructing a nonlinear pricing scheme? a. The monopolist must expend more resources on market research. b. All bundles involve inefficiently low quantities. c. Some but not all bundles involve inefficiently low quantities. d. Quantities aren’t distorted, but prices extract too much consumer surplus.

ANSWER: c POINTS: 1 14. Which of the following are potential problems faced by a firm that wants to provide warranties for its lawnmowers?

(Select all that apply.) a. A moral hazard problem might arise, in that homeowners may be less careful with the mower, since they can always return it if it breaks. b. The warranty may select for homeowners that don’t have a lot of mowing to do, or have smooth lawns, because they won’t have to pay as much for a warranty. c. The warranty will increase demand by assuring customers of the product’s quality. d. The warranty will reduce demand because only makers of low-quality goods would need to reassure consumers in this way.

ANSWER: a POINTS: 1 15. Concerning auctions, what is the definition of a “common-values setting”? a. Bids are submitted using open outcries. b. Bids are submitted simultaneously, and the highest is selected as the winner. c. Bidders value the object the same, but are uncertain as to what that value is. d. Bids are submitted by syndicates of cooperating bidders.

ANSWER: c POINTS: 1 16. Which auction format generates the most revenue for the seller? a. First price. b. Second price.

c. They generate the same expected revenue. d. Depends on the environment.

ANSWER: d POINTS: 1 17. Suppose that your personal valuation for a painting is $200. Which auction format would induce you to bid more? a. First price. b. Second price. c. You would bid the same in any format. d. Depends on the environment.

ANSWER: b POINTS: 1 18. How do participants in an auction respond to the problem of the “winner’s curse”? a. They bid more aggressively to win the auction and avoid the “curse”. b. They exit the auction because winning can only be a bad sign of the object’s worth. c. All bid less aggressively, so that the winner ends up not regretting having won. d. The winner regrets having won the auction.

ANSWER: c POINTS: 1 19. In the Spence education signaling model, what is the social value of education? a. Employees improve their ability to perform on the job. b. Employers can use education as a screen to match talented employees with high-skill jobs. c. Employers can save the costs of on-the-job training, which is less efficient than a general education. d. It allows low-ability employees to apply for high-salary jobs.

ANSWER: b POINTS: 1 20. One way the “lemons problem” in the used-car market can be mitigated is by a. raising the price of used cars. b. hiring auto experts to sell used cars. c. requiring sellers to guarantee trouble-free cars. d. allowing owners to trade in their own cars when they purchase a used car.

ANSWER: c POINTS: 1 21. The “lemons model” predicts quality deterioration in the used-car market because a. used cars require increasing maintenance. b. suppliers and demanders have different information about cars’ quality. c. used cars are generally of a lower quality than new cars. d. people will usually buy new cars if they are available.

ANSWER: b POINTS: 1 22. A market characterized by asymmetric information will have an equilibrium price if at that price

a. quantity demanded equals quantity supplied when all participants have the same information. b. quantity demanded equals quantity supplied given prevailing information levels. c. quantity demanded equals quantity supplied under perfect information. d. quantity demanded exceeds quantity supplied if suppliers are better informed (and vice versa).

ANSWER: b POINTS: 1 23. A ready-to-eat cereal manufacturer faces two types of consumers, adults and children, having the following schedule of gross surpluses for each additional unit of cereal consumed.

Marginal Marginal surplus surplus this ounce this ounce provides provides Ounce of adults in children cereal cents in cents First 20 40 Second 16 32 Third 12 24 Fourth 8 16 Fifth 4 8 Sixth 0 0 Seventh 0 0 Cereal costs 10 cents per ounce to produce. Begin by assuming that the manufacturer has full information about types because adults only by fiber-rich cereal and children only buy sweet cereal (with marshmallows). a. 3 ounces of fiber cereal sold to adults for 48 cents; 4 ounces of sweet cereal sold to children for $1.12. b. 3 ounces of fiber cereal sold to adults for 36 cents; 4 ounces of sweet cereal sold to children for 64 cents. c. 5 ounces of fiber cereal sold to adults for 60 cents; 5 ounces of sweet cereal sold to children for $1.20. d. 5 ounces of fiber cereal sold to adults for 20 cents; 5 ounces of sweet cereal sold to children for 40 cents.

ANSWER: a POINTS: 1 24. Return to the ready-to-eat cereal example from the previous question. Now assume that there is only one kind of cereal, so the manufacturer cannot distinguish between types of consumer (adults vs. children, of which suppose there are equal numbers in the market). What is the optimal menu of cereal boxes? a. a 3 ounce box (which adults will buy) sold for 48 cents; a 4 ounce box (which children will buy) sold for $1.12. b. a 3 ounce box (which adults will buy) sold for 48 cents; a 4 ounce box (which children will buy) sold for 64 cents. c. a 2 ounce box (which adults will buy) sold for 36 cents; a 4 ounce box (which children will buy) sold for 76 cents. d. No menu; the manufacturer is better off just selling a 5 ounce box for $1.12, which is only purchased by children.

ANSWER: d POINTS: 1 25. A executive can either slack (effort e = 0) or work hard (e = 1) on behalf of shareholders. If she slacks, the firm earns a gross return of 1,000 for sure. If she works hard, there is an even chance of the gross return being 10,000 or 80,000.

Her overall utility equals her utility from wage income (of the form w1/2, where w is the wage) minus the disutility of work (simply d), or in other words U = w1/2 – d. If she slacks, she experiences no disutility of work (d = 0) but if she

works hard, the disutility of work is d = 50. Assume that U = 0 in her next best available job. What is the optimal wage contract that shareholders would offer if they can observe the effort of the executive? a. A flat wage w = 0 and no requirement to work hard. b. A flat wage w = 50 and a requirement to work hard. c. A flat wage w = 2,500 and a requirement to work hard. d. A share of 50% of the profits and a requirement to work hard.

ANSWER: c POINTS: 1 26. Return to the situation with the executive from the previous question. Now assume that shareholders cannot observe effort, so cannot specify how hard the executive works in the contract but must induce it through the incentive scheme.

Which of the following wage contracts would work out best for shareholders in equilibrium? a. A flat wage w = 2,500 with no profit share. b. A share of 35% of the gross profits. c. A share of 55% of the gross profits. d. A share of 70% of the gross profits.

ANSWER: c POINTS: 1 27. There are two types of worker, high ability and low ability. High-ability workers generate gross profit of A on the job and low-ability generate nothing. Education does not make workers more productive, but is costly to obtain (cH for high ability workers and cL for low ability ones). Let w be the wage that all firms in the economy pay by regulatory mandate.

Suppose the worker obtains utility given by the wage (if the worker is employed, 0 if not) minus the cost of education (if any). There is no disutility from work. Which condition is required if only the high-ability type is to obtain an education in equilibrium? a. cH < w < cL. b. cL < w < cH. c. cH < cL < w. d. cL < cH < w.

ANSWER: a POINTS: 1 28. Return to the case of education and the job market from the previous question. Which condition would be consistent with both types’ obtaining an education in equilibrium? a. cH < w < cL. b. cL < w < cH. c. cH < cL < w. d. w < cL < cH. ANSWER: c POINTS: 1

Chapter 16 1. Suppose the market for oranges is perfectly competitive and unregulated. Suppose also that the chemicals used to keep the oranges insect-free damage the environment by an estimated $1 per bushel of oranges. Suppose QD = 1000 - 100P and QS = -100 + 100P. The market equilibrium quantity is a. 400 b. 450 c. 500 d. 550 ANSWER: b POINTS: 1 2. Suppose the market for oranges is perfectly competitive and unregulated. Suppose also that the chemicals used to keep the oranges insect-free damage the environment by an estimated $1 per bushel of oranges. Suppose QD = 1000 - 100P and QS = -100 + 100P. The total dollar value damage to society is a. 400 b. 450 c. 500 d. 550 ANSWER: b POINTS: 1 3. Suppose the market for oranges is perfectly competitive and unregulated. Suppose also that the chemicals used to keep the oranges insect-free damage the environment by an estimated $1 per bushel of oranges. Suppose QD = 1000 - 100P and QS = -100 + 100P. The price consumers would have to pay for the market to achieve the socially optimal level of production is a. 5 b. 5.5 c. 6 d. 6.5 ANSWER: c POINTS: 1 4. Suppose the market for oranges is perfectly competitive and unregulated. Suppose also that the chemicals used to keep the oranges insect-free damage the environment by an estimated $1 per bushel of oranges. Suppose QD = 1000 - 100P and QS = -100 + 100P. The tax that would have to exist to achieve the socially optimal level of production would be a. $0 b. $.50 c. $1 d. $2 ANSWER: c POINTS: 1 5. Suppose the market for oranges is perfectly competitive and unregulated. Suppose also that the chemicals used to keep the oranges insect-free damage the environment by an estimated $1 per bushel of oranges. Suppose QD = 1000 - 100P and QS = -100 + 100P. The “optimal” amount of environmental damage would be

a. $0 b. $40 c. $450 d. $500 ANSWER: b POINTS: 1 6. Suppose the market for oranges is perfectly competitive and unregulated. Suppose also that the chemicals used to keep the oranges insect-free damage the environment by an estimated $1 per bushel of oranges. Suppose QD = 1000 - 100P and QS = -100 + 100P. If regulators limited production to 200 bushels, the deadweight loss relative to the option of setting the optimal tax would be would be a. $0 b. $200 c. $500 d. $1000 ANSWER: c POINTS: 1 7. Suppose residents of Toadhop live on the Quabache River, a river prone to flooding. Suppose there are 1000 (type A) people who value flood control more than the 1000 (type B) people.

Type A Demand QD = 100 − P Type B Demand QD = 50 − P Where Q measures the quality of flood control. If the price of a unit of flood control is $100,000 and the citizens of Toadhop did not work together the amount of flood control purchased would be a. 0 b. 10 c. 25 d. 70 ANSWER: a POINTS: 1 8. Suppose residents of Toadhop live on the Quabache River, a river prone to flooding. Suppose there are 1000 (type A) people who value flood control more than the 1000 (type B) people.

Type A Demand QD = 100 − P Type B Demand QD = 50 − P Where Q measures the quality of flood control. If the price of a unit of flood control is $100,000 and the citizens of Toadhop gather for a townhall meeting to find the socially optimal level of flood control, and they are successful, they will pick Q equal to a. 0 b. 10 c. 25 d. 70 ANSWER: c POINTS: 1

9. Suppose residents of Toadhop live on the Quabache River, a river prone to flooding. Suppose there are 1000 (type A) people who value flood control more than the 1000 (type B) people.

Type A Demand QD = 100 − P Type B Demand QD = 50 − P Where Q measures the quality of flood control. If the price of a unit of flood control is $100,000 and the citizens of Toadhop gather for a townhall meeting to find the socially optimal level of flood control, and they are successful, how much will type B individuals contribute per unit of flood control? a. 25 b. 50 c. 75 d. 100 ANSWER: a POINTS: 1 10. Suppose residents of Toadhop live on the Quabache River, a river prone to flooding. Suppose there are 1000 (type A) people who value flood control more than the 1000 (type B) people.

Type A Demand QD = 100 − P Type B Demand QD = 50 − P Where Q measures the quality of flood control. If the price of a unit of flood control is $100000 and the citizens of Toadhop gather for a townhall meeting to find the socially optimal level of flood control, and they are successful, how much will each type A individual contribute in total? a. 1875 b. 1500 c. 875 d. 625 ANSWER: a POINTS: 1 11. Suppose residents of Toadhop live on the Quabache River, a river prone to flooding. Suppose there are 1000 (type A) people who value flood control more than the 1000 (type B) people.

Type A Demand QD = 100 − P Type B Demand QD = 50 − P Where Q measures the quality of flood control. If the price of a unit of flood control is $100,000 and the citizens of Toadhop gather for a townhall meeting to find the socially optimal level of flood control, and they are successful, how much will each type B individual contribute in total? a. 1875 b. 1500 c. 875 d. 625 ANSWER: d POINTS: 1

12. In the case of a negative externality, the social marginal cost will a. exceed the private marginal cost. b. be equal to private marginal cost. c. fall short of private marginal cost. d. bear no significant relation to private marginal cost.

ANSWER: a POINTS: 1 13. A perfectly competitive steel mill that produces large amounts of pollution (a negative externality) will, from a social point of view, a. produce too little steel. b. produce the socially optimal quantity of steel. c. produce too much steel. d. produce too much steel only if it installs pollution control equipment.

ANSWER: c POINTS: 1 14. In the case of a positive externality, social marginal cost will a. exceed private marginal cost. b. be equal to private marginal cost. c. fall short of private marginal cost. d. have no specific relation to private marginal cost.

ANSWER: c POINTS: 1 15. Each of the following provides incentives to reduce a negative externality except: a. a merger with affected firms. b. subsidizing consumption of the good being produced. c. bargaining among firms. d. taxation of the externality.

ANSWER: b POINTS: 1 16. To reach an economically efficient output level, the size of an excise tax imposed on a firm generating a negative externality should be a. the firm’s marginal cost. b. the social marginal cost. c. the difference between the social marginal cost and the firm’s marginal cost. d. the sum of the social marginal cost and the firm’s marginal cost.

ANSWER: c POINTS: 1 17. Which of the following “externalities” does not distort the allocation of resources?

I. An individual’s unwillingness to cut his or her own lawn in an otherwise immaculately kept neighborhood.

II. Smoke produced by a new firm in an area that raises the costs of other firms.

III. A new firm’s bidding up skilled wages in an area, thus raising costs of other firms.

IV. An individual’s unwillingness to obtain job training, thereby lowering the total GNP. a. I, III, and IV. b. III and IV. c. III only. d. IV only.

ANSWER: b POINTS: 1 18. In perfect competition, environmental externalities need not distort the allocation of resources providing a. transactions costs are zero. b. average costs are constant for all output levels. c. firms install pollution control equipment. d. the government sets realistic pollution standards.

ANSWER: a POINTS: 1 19. In drilling a new oil well in an existing oil field, the fact that output on existing wells is reduced means that a. existing wells have negatively sloped marginal cost curves. b. existing wells and new wells are owned by different people. c. existing wells and new wells are owned by the same people. d. there is a discrepancy between private and social marginal costs.

ANSWER: d POINTS: 1 20. Bargaining costs are generally high in cases involving environmental externalities because a. there are strong incentives to be a free rider. b. many individuals may be affected by the externalities. c. it is difficult to measure the costs of the externalities. d. all of the above.

ANSWER: d POINTS: 1 21. Externalities between two firms can be "internalized" if: I. The two firms merge.

II. Bargaining costs are zero.

III. The externalities affect each firm equally.

IV. Marginal costs for both firms are constant.

Which statement(s) correctly complete(s) the sentence? a. Only II. b. All except III. c. I and II, but not III and IV. d. I and IV, but not II and III ANSWER: c POINTS: 1 22. Common property a. is owned by specific people.

b. is inexhaustible. c. refers strictly to land resource. d. refers to goods “owned” by society at large and freely usable by anyone.

ANSWER: d POINTS: 1 23. If bargaining is costless, the assignment of property rights for an externality a. has no impact on the possibility of an efficient outcome and no distributional impact. b. has no impact on the possibility of an efficient outcome but does have a distributional impact. c. does have an impact on the possibility of an efficient outcome but has no distributional impact. d. does have an impact on the possibility of an efficient outcome and does have a distributional impact.

ANSWER: b POINTS: 1 24. A nonexclusive good is a good that a. is sold in low price markets. b. is impossible to keep people from enjoying the benefits the good provides. c. is produced by a perfectly competitive firm. d. is produced at the lowest possible cost.

ANSWER: b POINTS: 1 25. A nonrival good is a good that a. is produced by a monopoly. b. is produced by a cartel. c. can provide benefits to additional users at a zero marginal cost. d. is sold in a single market.

ANSWER: c POINTS: 1 26. Left to their own, private markets tend to a. under-allocate resources to public goods. b. allocate the economically efficient amount of resources to public goods. c. over-allocate resources to public goods.

ANSWER: a POINTS: 1 27. Perfectly competitive markets will tend to under-allocate resources to nonexclusive public goods because a. these goods are produced under conditions of increasing returns to scale. b. no single individual can appropriate the total benefits provided by the purchase of such goods. c. these goods are best produced under conditions of monopoly. d. no private producer can provide the capital necessary to produce such goods.

ANSWER: b POINTS: 1 28. Efficient production of a public good requires

a. that individuals pay for such goods according to benefits received. b. that each individual’s MRS be equal to the RPT of public goods for private goods. c. that the sum of individuals’ MRSs be equal to the RPT of public goods for private goods. d. that governments produce at the low point of the average cost curve for the public good.

ANSWER: c POINTS: 1 29. The “free-rider problem” of public goods refers to a. individuals’ refusal to pay taxes. b. individuals’ attempts to hide their preferences for collective goods and to avoid paying for them. c. individuals’ overuse of collective goods. d. the inelasticity of individuals’ demands for public goods.

ANSWER: b POINTS: 1 30. If preferences are one-dimensional and preferences are single peaked, majority rule will result in selection of the project most favored by a. no one. b. the median voter. c. the average voter. d. everyone.

ANSWER: b POINTS: 1 31. Special interest groups often a. represent broad questions of public interest. b. pursue rent-seeking behavior. c. do not use lobbying techniques. d. have no effect on the political process.

ANSWER: b POINTS: 1 32. Consider four possible benefits of a water resources project: I. Provides employment to construction workers currently building houses.

II. Provides electric power to the market.

III. Provides reduced flood risk to individuals living along the river.

IV. Raises the profits of MacDonald’s stands in the area that serve construction workers.

Which of these are social benefits of the project? a. All of them. b. I, II, and III, but not IV. c. I and III, but not II and IV. d. II and III, but not I and IV. ANSWER: d POINTS: 1 33. In evaluating public projects, a higher interest rate (r) will favor those projects which a. have costs and benefits occurring in the more distant future.

b. have costs and benefits occurring in the more immediate future. c. have benefits occurring in the more immediate future and costs occurring in the more distant future. d. have benefits occurring in the more distant future and costs occurring in the more immediate future.

ANSWER: c POINTS: 1 34. The opportunity cost doctrine suggests that which of the following are not costs of government educational programs? a. The wages of teachers. b. The foregone earnings of participants. c. Stipends paid to participants. d. Materials used by students.

ANSWER: c POINTS: 1

Chapter 17 1. What are the main differences between neoclassical economics and behavioral economics? a. Neoclassical economics is mainly theoretical. b. Behavioral economics does not take as given that decision makers are rational. c. Neoclassical economics assumes that decision makers are fully informed. d. All of the above.

ANSWER: b POINTS: 1 2. Limits to self-interested payoff maximization that have been studied by behavioral economists include a. limited cognitive ability. b. limited willpower. c. limits to self interest. d. all of the above.

ANSWER: d POINTS: 1 3. An economist encounters some unexpected behavior in a market or laboratory setting. How can he or she distinguish between behavior resulting from mistakes by decision makers as opposed to being decisions based on unusual preferences? a. If the same behavior is observed repeatedly even after opportunities to learn are provided, it is probably not a mistake. b. If the behavior is observed more often with inexperienced subjects, it is likely a mistake. c. Both a and b. d. It is impossible to distinguish between mistakes and unusual preferences empirically.

ANSWER: c POINTS: 1 4. Which is not a factor that makes cognitive mistakes more likely? a. uncertainty. b. time pressure. c. repetition. d. large number of choices.

ANSWER: c POINTS: 1 5. In what way does prospect theory differ from the standard theory of expected utility? a. With prospect theory, preferences depend only on final wealth levels. b. With prospect theory, preferences vary with initial (reference) wealth levels. c. With prospect theory, individuals are risk loving over small losses. d. With prospect theory, risk aversion does not play a role.

ANSWER: b POINTS: 1 6. When psychologists refer to the “Paradox of Choice”, what do they mean? a. More choices may lead people to avoid the decision all together.

b. More choices always make people at least as well off (related to the option value principle). c. Risk-averse people sometimes prefer risk because of the thrill it provides. d. If two people with free will make simultaneous decisions, these may sometimes conflict.

ANSWER: a POINTS: 1 7. Which of the following would make a player more inclined to continue into later stages of the Centipede Game rather than ending the game immediately? (Choose all that apply.) a. The subgame-perfect equilibrium is to continue as long as possible because the payoffs eventually get much larger. b. An increase in the chance that your rival has difficulty performing a long chain of deductions. c. An increase in the chance that your rival believes you have difficulty solving a long chain of deductions. d. Altruism toward one’s rival.

ANSWER: b, c, d POINTS: 1 8. Which of the following weights on utility (over four periods starting with the current one) provide an illustration of hyperbolic discounting that could well lead to inconsistent choices over time? a. 1, .5, .25, .125. b. 1, .25, .0625, .015625. c. 1, .8, .72, .648. d. 1, 1, 1, 1.

ANSWER: c POINTS: 1 9. The option-value principle can be roughly stated as “more choices can’t make a person worse off.” Are there any exceptions to this rule? Choose all that apply. a. No. b. Yes, in strategic situations. c. Yes, in situations involving self-control. d. Yes, for certain complicated financial derivatives.

ANSWER: b, c POINTS: 1 10. Consider a version of the ultimatum game in which player A makes an integer offer {1,2 …,9} to player B. If B accepts, he or she gets that amount of money and A gets to keep the remainder of $10. If B rejects, both get nothing.

Which of the following is an offer that arises in a subgame-perfect equilibrium assuming players only care about monetary payoffs? a. 1. b. 2. c. 4. d. 5.

ANSWER: a POINTS: 1 11. Consider the same ultimatum game as in the previous question but consider some new preferences reflecting a desire for fairness. In particular, now assume players get 1 util per dollar earned but lose 1/4 util for the absolute difference between their monetary payoffs. Which of the following is an offer that arises in a subgame-perfect equilibrium with

these new preferences? a. 1. b. 2. c. 4. d. 5.

ANSWER: b POINTS: 1 12. Consider the same ultimatum game as in the previous questions but consider yet new preferences reflecting envy. In particular, now assume players get 1 util per dollar earned. That is all for the player who earns at least as much as the other. The player who earns strictly less than the other loses 1 util for each dollar difference. Which of the following is an offer that arises in a subgame-perfect equilibrium with these preferences? a. 1. b. 2. c. 4. d. 5.

ANSWER: c POINTS: 1 13. People are sometimes seen to give up money to make an allocation more fair. What experiment could be used to determine if this is because people truly care about fairness or because people want to avoid the consequences of others’ spite? a. The Ultimatum Game could be run to see if an even split is proposed. b. The Dictator Game could be run to see if an even split is proposed. c. The Battle of the Sexes could be run to see if players choose the rival’s preferred outcome. d. The repeated Prisoners Dilemma could be run to see if players can tacitly collude on Silent.

ANSWER: b POINTS: 1 14. The government is considering a mandatory savings program that forces people to save 8% of their income each year for retirement. What behavioral biases might be used as a justification for such a program? (Choose all that apply.) a. Limited cognitive ability, preventing people from being able to accurately estimate how much an investment early in one’s career will grow. b. Limited willpower, preventing people from being able to give up the pleasure of current consumption for the benefits of consumption later in retirement. c. Limited commitment power, leading the government to use the funds for current expenditures. d. Risk aversion, leading people to consume now rather than wait until the uncertain future.

ANSWER: a, b POINTS: 1 15. An individual has preferences consistent with prospect theory. The person takes their current wealth of $10,000 (plus any certain additions) as their reference point. Gains above this reference point are worth +1 util. Losses below this reference point are worth -2 utils. The person is faced with two choice problems. The first involves a choice between (A) no gamble and (B) a gamble with an equal chance of winning $1,800 and losing $1,000. The second choice problem, the person first has $1,000 taken away (resulting in the adjustment of the reference point). The choice is then between (C) being given back $1,000 for sure and (D) an equal chance of winning $2,800 or nothing. What choices would the person make? a. A and C. b. A and D.

c. B and C. d. B and D. ANSWER: b POINTS: 1 16. An individual has preferences consistent with standard expected utility theory. They have utility function U(x) over wealth x. Starting with initial wealth of $10,000, the person is then faced with two choice problems. The first involves a choice between (A) no gamble and (B) a gamble with an equal chance of winning $1,800 and losing $1,000. The second choice problem, the person first has $1,000 taken away (resulting in the adjustment of the reference point). The choice is then between (C) being given back $1,000 for sure and (D) an equal chance of winning $2,800 or nothing. What can be said about the choices the person would make? a. The person would never choose both A and D. b. The person would never choose both A and C. c. The person would choose A and D. d. The person would choose A and C. ANSWER: a POINTS: 1 17. Jan is a hyperbolic discounter. She puts weight 1 on utility earned in the current period but only weight .5 on utility earned in future periods. In period 1 she comes up with a plan, which involves taking some action that leads to a loss of C utils in period 2 but provides a benefit of B utils in period 3. What values of B and C will lead her to behave inconsistently and not follow through on her plans? a. C < B < 2C. b. B < C. c. B > 2C. d. B < C < 2B. ANSWER: a POINTS: 1 18. Return to the case of Jan, the hyperbolic discounter from the previous question. What values of B and C will lead her to be consistent with a plan not to undertake the action? a. C < B < 2C. b. B < C. c. B > 2C. d. B < C < 2B. ANSWER: b POINTS: 1 19. Return to the case of Jan, the hyperbolic discounter from the previous question. What values of B and C will lead her to be consistent with a plan to undertake the action? a. C < B < 2C. b. B < C. c. B > 2C. d. B < C < 2B. ANSWER: c POINTS: 1 20. Return to the case of Jan, the hyperbolic discounter from the previous question. Suppose she can sign a contract that

requires her to give up money equivalent to a loss of X utils if she does not undertake the action. Assume she does not behave consistent with her plans without this contract. How high would the contractual value of X have to be to prevent her inconsistency? a. C – B/2. b. B. c. C. d. B + C. ANSWER: a POINTS: 1 21. Supply in the market for cigarettes is perfectly competitive, given by the function QS = P. True demand in the market is QD = 100 – P. Due to behavioral biases (of whatever form, whether people have limited willpower or have limited cognitive abilities to process the actual health effects of smoking), people overestimate the value of cigarettes, leading to the perceived demand curve . Compute the deadweight loss from the overconsumption generated by this behavioral bias. (Hint: use the perceived demand curve to compute market equilibrium but make your welfare calculations using the true demand curve.) a. DWL = 0. b. DWL = 500. c. DWL = 1,000 d. DWL = 2,500.

ANSWER: d POINTS: 1 22. Return to the market for cigarettes from the previous question. What per-unit tax could the government levy to eliminate the deadweight loss from the behavioral bias? a. 0 b. 1 c. 50 d. 100 ANSWER: c POINTS: 1 23. Return to the market for cigarettes from the previous questions. Suppose the government implements the tax you found in the previous question. But suppose the government is making a mistake. The true demand curve is in fact , and this is not a result of any behavioral bias. Compute the deadweight loss of the government’s tax policy. a. DWL = 0. b. DWL = 500. c. DWL = 1,000 d. DWL = 2,500.

ANSWER: d POINTS: 1