Advanced Microeconomic Analysis Exam Preparation Guide
Course Introduction
Advanced Microeconomic Analysis delves into the rigorous examination of individual decision-making processes, market structures, and the allocation of resources under various competitive scenarios. The course covers advanced topics such as consumer and producer theory, general equilibrium, game theory, information asymmetry, and market failures. Students develop analytical and mathematical tools to model complex economic environments and explore the implications of policy interventions. Emphasis is placed on formal derivations, proofs, and the application of microeconomic theory to real-world issues and empirical studies.
Recommended Textbook
Intermediate Microeconomics A Modern Approach 8th Edition by Hal R. Varian
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Page 2
Chapter 1: Budget Constraint
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Sample Questions
Q1) In the economy of Mungo, discussed in your workbook, there is a third person called Ike. Ike has a red income of 92 rcus and a blue income of 20 bcus. (Recall that red prices are 2 rcus [red currency units] per unit of ambrosia and 6 rcus per unit of bubble gum. Blue prices are 1 bcu [blue currency unit] per unit of ambrosia and 1 bcu per unit of bubble gum. You have to pay twice for what you buy, once in red currency and once in blue currency.) If Ike spends all of his blue income but not all of his red income, then he consumes
A) at least 13 units of bubble gum.
B) at least 7 units of ambrosia.
C) exactly twice as much bubble gum as ambrosia.
D) at least 17 units of bubble gum.
E) equal amounts of ambrosia and bubble gum.
Answer: D
Q2) There are two goods. You know how much of good 1 a consumer can afford if she spends all of her income on good 1. If you knew the ratio of the prices of the two goods, then you could draw the consumer's budget line without any more information.
A)True
B)False
Answer: True
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Page 3
Chapter 1: A: Budget Constraint
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Sample Questions
Q1) In the economy of Mungo, discussed in Problem 12, there is a third person called Ike. Ike has a red income of 104 and a blue income of 30. Recall that blue prices are 1 bcu (blue currency unit) per unit of ambrosia and 1 bcu per unit of bubble gum. Red prices are 2 rcus (red currency units) per unit of ambrosia and 6 rcus per unit of bubble gum. You have to pay twice for what you buy, once in red currency, once in blue currency. If Ike spends all of his blue income but not all of his red income, he must consume
A) at least 19 units of ambrosia.
B) at least 11 units of bubble gum.
C) exactly twice as much bubble gum as ambrosia.
D) at least 21 units of bubble gum.
E) equal amounts of ambrosia and bubble gum.
Answer: A
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4
Chapter 2: Preferences
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Sample Questions
Q1) A consumer with convex preferences who is indifferent between the bundles (5, 1) and (11, 3) will like the bundle (8, 2) at least as well as either of the first two bundles.
A)True
B)False
Answer: False
Q2) If preferences are convex, then for any commodity bundle x, the set of commodity bundles that are worse than x is a convex set.
A)True
B)False
Answer: False
Q3) Preferences are said to be monotonic if
A) all goods must be consumed in fixed proportions.
B) all goods are perfect substitutes.
C) more is always preferred to less.
D) there is a diminishing marginal rate of substitution.
E) None of the above.
Answer: C
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Chapter 2: A: Preferences
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Q1) In Problem 8, Nancy Lerner is taking a course from Professor Goodheart who will count only her best midterm grade and from Professor Stern who will count only her worst midterm grade. In one of her classes, Nancy has scores of 40 on her first midterm and 80 on her second midterm. When the first midterm score is measured on the horizontal axis and her second midterm score on the vertical, her indifference curve has a slope of zero at the point (40, 80). This class could
A) be Professor Goodheart's but could not be Professor Stern's.
B) not be either Professor Goodheart's or Professor Stern's.
C) be either Professor Goodheart's or Professor Stern's.
D) be Professor Stern's but could not be Professor Goodheart's.
E) There is not enough information to tell whose class it could or couldn't be.
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Chapter 3: Utility
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Q1) Charlie's utility function is U(A, B) = AB, where A and B are the numbers of apples and bananas, respectively, that he consumes. When Charlie is consuming 20 apples and 80 bananas, if we put apples on the horizontal axis and bananas on the vertical axis, the slope of his indifference curve at his current consumption is
A) -8.
B) -1/4.
C) -20.
D) -4.
E) -1/8.
Q2) Angela has preferences represented by the utility function U(x, y) = 2x + 2y. She consumes 10 units of good x and 6 units of good y. If her consumption of good x is lowered to 4, how many units of y must she have in order to be exactly as well off as before?
A) 14
B) 13
C) 12
D) 15
E) None of the above.
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Chapter 3: A: Utility
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Q1) Phil Rupp, from Problem 4, has a sister Ethel who has the utility function U(x, y) = min{ 2x + y, 3y}. Where x is measured on the horizontal axis and y on the vertical axis, her indifference curves consist of a
A) vertical line segment and a horizontal line segment that meet in a kink along the line x = 2y.
B) positively sloped line segment and a negatively sloped line segment that meet along the line x = y.
C) horizontal line segment and a negatively sloped line segment that meet in a kink along the line x = y.
D) vertical line segment and a horizontal line segment that meet in a kink along the line y = 2x.
E) horizontal line segment and a positively sloped line segment that meet in a kink along the line x = 2y.
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8
Chapter 4: Choice
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Q1) Linus has utility function U(x, y) = x + 2y. If the price of x is $1 and the price of y is .50 cents then Linus must consume equal amounts of both goods in order to maximize his utility.
A)True
B)False
Q2) If a consumer does not have convex preferences, then a point of tangency between her indifference curve and her budget line must be an optimal consumption point.
A)True
B)False
Q3) Harold's utility function is U(x, y) = (x + 3)(y + 2). The price of x is $1. The price of y is $2. At all incomes for which Harold consumes positive amounts of both goods, he will consume
A) more than twice as many units of x as of y.
B) more than twice as many units of y as of x.
C) 1 more unit of x than of y.
D) 1 more unit of y than of x.
E) as many units of y as of x.
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Page 9
Chapter 4: A: Choice
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Q1) In Problem 6, Elmer's utility function is U(x, y) = min{x, y<sup>2</sup>}. If the price of x is $20, the price of y is $30, and Elmer chooses to consume 4 units of y, what must Elmer's income be?
A) $540
B) $880
C) $440
D) $200
E) There is not enough information to tell.
Q2) In Problem 1, Charlie has a utility function U(x<sub>A</sub>, x<sub>B</sub>) = x<sub>A</sub>x<sub>B</sub>, the price of apples is $1, and the price of bananas is $2. If Charlie's income were $160, how many units of bananas would he consume if he chose the bundle that maximized his utility subject to his budget constraint?
A) 8
B) 40
C) 20
D) 80
E) 120
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Page 10
Chapter 5: Demand
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Sample Questions
Q1) With some services,
a. Write down the budget equation that you would have after you paid the entry fee for each of the two plans.
b. If your utility function is xy, how much y would you choose in each case?
c. Which plan would you prefer? Explain.
e.g., checking accounts, phone service, or pay TV, a consumer is offered a choice of two or more payment plans. One can either pay a high entry fee and get a low price per unit of service or pay a low entry fee and a high price per unit of service. Suppose you have an income of $100. There are two plans. Plan A has an entry fee of $20 with a price of $2 per unit. Plan B has an entry fee of $40 with a price of $1 per unit for using the service. Let x be expenditure on other goods and y be consumption of the service.
Q2) In economic theory, the demand for a good must depend only on income and its own price and not on the prices of other goods.
A)True
B)False
Q3) Define each of the following:
a. Inverse demand function
b. Engel curve
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11
Chapter 5: A: Demand
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Q1) In Problem 1, if Charlie's utility function were X<sup>5</sup><sub>A</sub>X<sub>B</sub>, if apples cost 70 cents each, and if bananas cost 10 cents each, Charlie's budget line would be tangent to one of his indifference curves whenever
A) 5X<sub>B</sub> = 7X<sub>A</sub>.
B) X<sub>B</sub> = X<sub>A</sub>.
C) X<sub>A</sub> = 5X<sub>B</sub>.
D) X<sub>B</sub> = 5X<sub>A</sub>.
E) 70X<sub>A</sub> + 10X<sub>B</sub> = M.
Q2) In Problem 13, where x is whips and y is leather jackets, if Kinko's utility function were U(x, y) = min{ 5x, 3x + 6y}, then if the price of whips were $20 and the price of leather jackets were $20, Kinko would demand
A) 3 times as many whips as leather jackets.
B) 4 times as many leather jackets as whips.
C) 2 times as many leather jackets as whips.
D) 5 times as many whips as leather jackets.
E) only leather jackets.
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Chapter 6: Revealed Preference
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Q1) When prices are ($2, $10), Emil chooses the bundle (1, 6), and when prices are ($12, $4), he chooses the bundle (7, 2).
A) Emil violates WARP.
B) Emil has kinked indifference curves.
C) The bundle (1, 6) is revealed preferred to (7, 2), but (7, 2) is not revealed preferred to (1, 6).
D) The bundle (7, 2) is revealed preferred to (1, 6), but (1, 6) is not revealed preferred to (7, 2).
E) None of the above.
Q2) It follows from the weak axiom of revealed preference that if a consumer chooses x when he could afford y and chooses y when he could afford x, then his income must have changed between the two observations.
A)True
B)False
Q3) For a consumer who has an allowance to spend and no endowment of goods, a decrease in the price of an inferior good consumed makes him better off.
A)True
B)False
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Chapter 6: A: Revealed Preference
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Q1) On the planet Hyperion every consumer who has ever lived has a utility function U(x, y) = min{x, 2y}. The currency of Hyperion is the doggerel. In 1850 the price of x was 1 doggerel per unit and the price of y was 2 doggerels per unit. In 2000, the price of x was 10 doggerels per unit and the price of y was 4 doggerels per unit. The Paasche price index of prices in 2000 relative to prices in 1850 is A) 6.
B) 4.67.
C) 2.50.
D) 3.50.
E) not possible to determine without further information.
Q2) In Problem 4, if situation D is p = (3, 1) and x = (5, 10),
A) Ronald's behavior is consistent with both the Weak and the Strong Axioms of Revealed Preference.
B) Ronald's behavior is consistent with the Weak but not the Strong Axiom of Revealed Preference.
C) Ronald's behavior violates both the Weak and the Strong Axioms of Revealed Preference.
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Page 14
Chapter 7: Slutsky Equation
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Sample Questions
Q1) Suppose that Agatha has $465 to spend on tickets for her trip. She intends to spend the entire amount $465 on tickets and prefers traveling first class to traveling second class. She needs to travel a total of 1,500 miles. Suppose that the price of first-class tickets is $.40 per mile and the price of second-class tickets is $.10 per mile. How many miles will she travel by second class?
A) 450
B) 600
C) 225
D) 550
E) 150
Q2) If the Engel curve slopes up, then the demand curve slopes down. A)True
B)False
Q3) Jessica's preferences for peanut butter and jelly are represented by the utility function U(p, j) = min{ 2p, 5j}. If prices and income change, but her old consumption bundle lies somewhere on her new budget line, she will not change her consumption. A)True
B)False
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Chapter 7: A: Slutsky Equation
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Q1) Neville, in Problem 2, has a friend named Marmaduke. Marmaduke has the same demand function for claret as Neville, namely q = .02m - 2p, where m is income and p is price. Marmaduke's income is $8,000 and he initially had to pay a price of $40 per bottle of claret. The price of claret rose to $80. The substitution effect of the price change
A) reduced his demand by 80.
B) increased his demand by 80.
C) reduced his demand by 16.
D) reduced his demand by 144.
E) reduced his demand by 26.
Q2) Goods 1 and 2 are perfect complements, and a consumer always consumes them in the ratio of 2 units of good 2 per unit of good 1. If a consumer has an income of $200 and if the price of good 2 changes from $4 to $5, while the price of good 1 stays at $1, then the income effect of the price change
A) does not change demand for good 1.
B) is exactly twice as strong as the substitution effect.
C) is 5 times as strong as the substitution effect.
D) accounts for the entire change in demand.
E) is 4 times as strong as the substitution effect.
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Chapter 8: Buying and Selling
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Sample Questions
Q1) Nick insists on consuming 3 times as much of y as he consumes of x (so he always has y = 3x). He will consume these goods in no other ratio. The price of x is 2 times the price of y. Nick has an endowment of 20 x's and 75 y's which he can trade at the going prices. He has no other source of income. What is Nick's gross demand for x?
A) 21
B) 115
C) 23
D) 95
E) We can't determine the answer without knowing the price of x.
Q2) Mr. Cog has 18 hours per day to divide between labor and leisure. His utility function is U(C, R) = CR, where C is dollars per year spent on consumption and R is hours of leisure. If he has a nonlabor income of 32 dollars per day and a wage rate of 13 dollars per hour, he will choose a combination of labor and leisure that allows him to spend
A) 133 dollars per day on consumption.
B) 149 dollars per day on consumption.
C) 266 dollars per day on consumption.
D) 123 dollars per day on consumption.
E) 199.50 dollars per day on consumption.
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Page 17
Chapter 8: A: Buying and Selling
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Q1) Dudley, in Problem 15, has a utility function U(C, R) = C - (12 - R)<sup>2</sup>, where R is leisure and C is consumption per day. He has 16 hours per day to divide between work and leisure. If Dudley has a nonlabor income of $20 per day and is paid a wage of $8 per hour, how many hours of leisure will he choose per day?
A) 7
B) 6
C) 9
D) 5
E) 8
Q2) Dudley, in Problem 15, has a utility function U(C, R) = C - (12 - R)<sup>2</sup>, where R is leisure and C is consumption per day. He has 16 hours per day to divide between work and leisure. If Dudley has a nonlabor income of $30 per day and is paid a wage of $4 per hour, how many hours of leisure will he choose per day?
A) 9
B) 7
C) 8
D) 11
E) 10
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Page 18
Chapter 9: Intertemporal Choice
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Q1) If the inflation rate doubles and the nominal interest rate remains constant, the real interest rate must be halved.
A)True
B)False
Q2) Peregrine consumes ($1,300, $1,320) and earns ($1,000, $1,680). If the interest rate is 0.20, the present value of his endowment is
A) $2,400.
B) $2,680.
C) $2,620.
D) $5,280.
E) $6,280.
Q3) Peregrine consumes ($700, $880) and earns ($600, $990). If the interest rate is 0.10, the present value of his endowment is
A) $1,590.
B) $1,500.
C) $1,580.
D) $3,150.
E) $3,750.
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Chapter 9: A: Intertemporal Choice
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Q1) Mr. O. B. Kandle, of Problem 8, has a utility function c<sub>1</sub>c<sub>2</sub>, where c<sub>1</sub> is his consumption in period 1 and c<sub>2</sub> is his consumption in period 2. He has no income in period 2. If he had an income of $70,000 in period 1 and the interest rate increased from 10 to 16%,
A) his savings would increase by 6% and his consumption in period 2 would also increase.
B) his consumption in both periods would decrease.
C) his savings would not change but his consumption in period 2 would increase by 2,100.
D) his consumption in both periods would increase.
E) his consumption in period 1 would decrease by 16% and his consumption in period 2 would also decrease.
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20
Chapter 10: Asset Markets
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Q1) In a perfect asset market, it is known with certainty that an asset will sell for $24 in one year. If the annual interest rate is 10%, then the asset will sell for $26.40 right now.
A)True
B)False
Q2) If the rate of inflation is greater than the interest rate,
A) you should consume all of your wealth in the first period.
B) you are better off keeping your money in a mattress at home (assuming no risk of it being stolen) than at a bank.
C) you will necessarily consume less this period than you would if the rate of inflation were less than the interest rate.
D) you will necessarily consume more this period than you would if the rate of inflation were less than the interest rate.
E) None of the above.
Q3) If everybody has the same information, then a well-functioning market for assets would, in equilibrium, leave no opportunities for arbitrage.
A)True
B)False
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Chapter 10: A: Asset Markets
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Q1) Chillingsworth from Problem 10 has a neighbor, Shivers, who faces the same options for insulating his house as Chillingsworth. But Shivers has a larger house. Shivers's annual fuel bill for home heating is 1,200 dollars per year. Plan A will reduce his annual fuel bill by 15%, plan B will reduce it by 20%, and plan C will eliminate his need for heating fuel altogether. The plan A insulation job would cost Shivers 1,200 dollars, plan B would cost him 1,700 dollars, and plan C would cost him 13,200 dollars. If the interest rate is 10% and his house and the insulation job last forever, which plan is the best for Shivers?
A) Plan A.
B) Plan B.
C) Plan C.
D) Plans A and B are equally good.
E) He is best off using none of the plans.
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Chapter 11: Uncertainty
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Q1) Wilma is not risk averse. She is offered a chance to pay $10 for a lottery ticket that will give her a prize of $100 with probability .06, a prize of $50 with probability .1, and no prize with probability .85. If she understands the odds and makes no mistakes in calculation, she will buy the lottery ticket.
A)True
B)False
Q2) If someone has strictly convex preferences between all contingent commodity bundles, then he or she must be risk averse.
A)True
B)False
Q3) If the price of insurance goes up, people will become less risk averse.
A)True
B)False
Q4) Of any two gambles, no matter what their expected returns, a risk averter will choose the one with the smaller variance.
A)True
B)False
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23
Chapter 11: A: Uncertainty
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Q1) Sally Kink is an expected utility maximizer with utility function pu(c<sub>1</sub>) + (1 - p)u(c<sub>2</sub>), where for any x < 6,000, u(x) = 2x, and for x greater than or equal to 6,000, u(x) = 12,000 + x.
A) Sally will be risk neutral if her income is less than $6,000 and risk averse if her income is more than $6,000.
B) Sally will be risk averse if her income is less than $6,000 but risk loving if her income is more than $6,000.
C) For bets that involve no chance of her wealth exceeding $6,000, Sally will take any bet that has a positive expected net payoff.
D) Sally will never take a bet if there is a chance that it leaves her with wealth less than $12,000.
E) None of the above.
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Chapter 12: Risky Assets
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Q1) If the returns on two assets are negatively correlated, then a portfolio that contains some of each will have less variance in its return per dollar invested than either asset has by itself.
A)True
B)False
Q2) If the mean is plotted on the horizontal axis, and the variance on the vertical, then indifference curves for a risk averter must slope upward and to the right.
A)True
B)False
Q3) Suppose that Ms. Lynch in Workouts Problem 13.1 can make up her portfolio using a risk-free asset that offers a surefire rate of return of 5% and a risky asset with an expected rate of return of 10%, with standard deviation 5. If she chooses a portfolio with an expected rate of return of 6.25%, then the standard deviation of her return on this portfolio will be
A) 0.63%.
B) 2.50%.
C) 1.25%.
D) 4.25%.
E) None of the above.
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Page 25
Chapter 12: A: Risky Assets
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Q1) Suppose that Fenner Smith of Problem 2 must divide his portfolio between two assets, one of which gives him an expected rate of return of 15% with zero standard deviation and one of which gives him an expected rate of return of 45% and has a standard deviation of 10. He can alter the expected rate of return and the variance of his portfolio by changing the proportions in which he holds the two assets. If we draw a "budget line" with expected return on the vertical axis and standard deviation on the horizontal axis, depicting the combination that Smith can obtain, the slope of this budget line is
A) 1.50.
B) -1.50.
C) -3.
D) 3.
E) 4.50.
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Chapter 13: Consumers Surplus
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Q1) At the initial prices, Teodoro is a net seller of apples and a net buyer of bananas. If the price of apples decreases and the price of bananas does not change,
A) the compensating variation must be negative and the equivalent variation positive. B) the compensating variation must be positive and the equivalent variation negative. C) both the compensating variation and the equivalent variation must be positive. D) both the compensating variation and the equivalent variation must be negative. E) the compensating variation must be negative but the equivalent variation could be of either sign.
Q2) If there is a price increase for a good that Marilyn consumes, her compensating variation is the change in her income that allows her to purchase her new optimal bundle at the original prices.
A)True
B)False
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Chapter 13: A: Consumers Surplus
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Q1) If Bernice (whose utility function is min{x, y}, where x is her consumption of earrings and y is money left for other stuff) had an income of $20 and was paying a price of $1 for earrings when the price of earrings went up to $6, then the equivalent variation of the price change was
A) $50.
B) $14.29.
C) $7.14.
D) $100.
E) $32.14.
Q2) If Bernice (whose utility function is min{x, y}, where x is her consumption of earrings and y is money left for other stuff) had an income of $13 and was paying a price of $2 for earrings when the price of earrings went up to $3, then the equivalent variation of the price change was
A) $3.25.
B) $4.33.
C) $8.67.
D) $1.63.
E) $3.79.
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28
Chapter 14: Market Demand
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Q1) If the marginal cost of brewing beer is 40 cents and the profit-maximizing price is 90 cents, then the price elasticity of demand is
A) -2.
B) -1.8.
C) -2.33.
D) -0.66.
E) -3.
Q2) Dr. Social Science has recently figured out how to clone consumers. His first effort was done on the population of Walla, Washington. Each original citizen got a clone who had exactly the same income and preferences. Which of the following statements describes what happened to the demand function for tuna-fish casseroles in Walla?
A) The elasticity doubled and the slope remained constant.
B) The elasticity did not change at any price.
C) The elasticity of demand doubled and the slope doubled.
D) The elasticity halved and the slope remained constant.
E) none of the above.
Q3) Marginal revenue is equal to price if the demand curve is horizontal.
A)True
B)False
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Page 29
Chapter 14: A: Market Demand
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Sample Questions
Q1) In Problem 5, the demand function for drangles is given by D(p) = (p + 1)<sup>-2</sup>. If the price of drangles is $8, then the price elasticity of demand is
A) -3.56.
B) -5.33.
C) -0.89.
D) -7.11.
E) -1.78.
Q2) In Problem 6, the only quantities of good 1 that Barbie can buy are 1 unit or zero units. For x<sub>1</sub> equal to zero or 1 and for all positive values of x<sub>2</sub>, suppose that Barbie's preferences were represented by the utility function (x<sub>1</sub> + 10)(x<sub>2</sub> + 4). Then if her income were $12, her reservation price for good 1 would be
A) $2.50.
B) $1.45.
C) $2.91.
D) $2.50
E) $.30.
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Chapter 15: Equilibrium
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Q1) Remember King Kanuta and his tropical island? The demand function for coconuts by his subjects on the island is D(p) = 1,200 - 100p and the supply function is S(p) = 100p. The law used to be that any subject who consumed a coconut had to pay another coconut to the king. King Kanuta then ate all the coconuts he got. But now the king, apparently fed up with coconuts, decides to sell the coconuts that he collects in the local market at the going selling price, p<sub>s</sub>. In equilibrium, the number of coconuts that will now be produced is
A)100
B)200
C)600
D)400
E) 300.
Q2) Use supply and demand analysis to examine the following statement: "The practice of giving food stamps is self-defeating. Food stamps effectively lower the price of food. When food becomes available at lower prices, demand will increase thereby forcing the price up to its initial level." Is this reasoning correct? Draw supply and demand curves to illustrate your answer.
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Page 31
Chapter 15: A: Equilibrium
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Q1) In a crowded city far away, the civic authorities decided that rents were too high. The long-run supply function of two-room rental apartments was given by q = 18 + 3p and the long-run demand function was given by q = 267 - 4p, where p is the rental rate in crowns per week. The authorities made it illegal to rent an apartment for more than 27 crowns per week. To avoid a housing shortage, the authorities agreed to pay landlords enough of a subsidy to make supply equal to demand. How much would the weekly subsidy per apartment have to be to eliminate excess demand at the ceiling price?
A) 40 crowns
B) 10 crowns
C) 17 crowns
D) 20 crowns
E) 30 crowns
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Chapter 16: Auctions
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Q1) An antique cabinet is being sold by means of an English auction. There are four bidders, Holly, Penelope, Minnie, and Sheila. These bidders are unacquainted with each other and do not collude. Holly values the cabinet at $1,600, Penelope values it at $1,350, Minnie values it at $2,100, and Sheila values it at $1,100. If the bidders bid in their rational self-interest, the cabinet will be sold to
A) Holly for about $1,600.
B) Minnie for about $2,100.
C) either Minnie or Holly for slightly more than $1,600. Which of them actually gets it is randomly determined.
D) Minnie for slightly more than $1,600.
E) None of the above.
Q2) The optimal strategy for a bidder in a private-values Vickrey auction is to bid his true valuation.
A)True
B)False
Q3) The reserve price in an auction is the lowest price at which the seller of a good will part with it.
A)True
B)False
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Page 33
Chapter 16: A: Auctions
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Q1) An antique cabinet is being sold by means of an English auction. There are four bidders, Arabella, Lana, Hester, and Betsy. These bidders are unacquainted with each other and do not collude. Arabella values the cabinet at $1,000, Lana values it at $500, Hester values it at $1,300, and Betsy values it at $800. If the bidders bid in their rational self-interest, the cabinet will be sold to
A) Hester for slightly more than $1,000.
B) Hester for about $1,300.
C) Arabella for about $1,000.
D) either Hester or Arabella for about $1,000. Which of these two buyers gets it is randomly determined.
E) either Hester or Arabella for about $500. Which of these two buyers gets it is randomly determined.
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Chapter 17: Technology
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Q1) A firm's production function is f(x<sub>1</sub>, x<sub>2</sub>) = x<sub>1</sub> + 2x<sub>2</sub>. This means that x<sub>2</sub> is twice as expensive as x<sub>1</sub>.
A)True
B)False
Q2) If the production function is f(x<sub>1</sub>, x<sub>2</sub>) = x<sub>1</sub>x<sub>2</sub>, then there are constant returns to scale.
A)True B)False
Q3) A production isoquant is a locus of combinations of inputs that are equally profitable.
A)True
B)False
Q4) A firm has the production function f(x, y) = x<sup>0.90</sup>y<sup>0.80</sup>. This firm has
A) constant returns to scale.
B) decreasing returns to scale and diminishing marginal products for factor x.
C) decreasing returns to scale and increasing marginal product for factor x.
D) increasing returns to scale and decreasing marginal product of factor x.
E) None of the above.
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Chapter 17: A: Technology
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Q1) In Problem 8, if a = 2.10, b = 0.90, and c = 1, the marginal products of x<sub>1</sub>, x<sub>2</sub>, and x<sub>3</sub> (in this order) are
A) decreasing, increasing, and decreasing.
B) all increasing.
C) increasing, decreasing, and constant.
D) all decreasing.
E) all increasing if A > 1.
Q2) A firm has a production function f(x, y) = 1.80(x<sup>0.10</sup> + y<sup>0.10</sup>)<sup>2</sup> whenever x > 0 and y > 0. When the amounts of both inputs are positive, this firm has
A) increasing returns to scale.
B) decreasing returns to scale.
C) constant returns to scale.
D) increasing returns to scale if x + y > 1 and decreasing returns to scale otherwise.
E) increasing returns to scale if output is less than 1 and decreasing returns to scale if output is greater than 1.
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Page 36
Chapter 18: Profit Maximization
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Q1) A firm produces one output using one input. When the cost of the input was $3 and the price of the output was $3, the firm used 6 units of input to produce 18 units of output. Later, when the cost of the input was $7 and the price of the output was $4, the firm used 5 units of input to produce 20 units of output. This behavior
A) is consistent with WAPM.
B) is not consistent with WAPM.
C) is impossible no matter what the firm is trying to do.
D) suggests the presence of increasing returns to scale. E) suggests the presence of decreasing returns to scale.
Q2) Just as in the theory of utility-maximizing consumers, the theory of profit-maximizing firms allows the possibility of Giffen factors. These are factors for which a fall in price leads to a fall in demand.
A)True B)False
Q3) A fixed factor is a factor of production that is used in fixed proportion to the level of output.
A)True
B)False
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Chapter 18: A: Profit Maximization
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Q1) In Problem 12, if the price of the output good is $4, the price of factor 1 is $1, and the price of factor 2 is $3, what is the profit-maximizing amount of factor 1?
A) 8
B) 2
C) 1
D) 0
E) There is not enough information to tell.
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Chapter 19: Cost Minimization
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Q1) The editors at Snoozeweek, a news magazine, constantly alter the proportion of celebrity photographs and mundane news stories so as to maximize the number of copies sold. A statistical consultant has estimated sales to be S = 1,000C0.60N 0.50, where C is the number of celebrity photographs and N is column inches of news stories. If the editors only have $11,000 to spend on each edition with celebrity photos costing $400 each and news stories costing $10 per column inch, what should the editors do?
A) Purchase 10 celebrity photos and 700 column inches of news stories.
B) Purchase 15 celebrity photos and 500 column inches of news stories.
C) Purchase 11 celebrity photos and 660 column inches of news stories.
D) Purchase 13 celebrity photos and 580 column inches of news stories.
E) Purchase 20 celebrity photos and 300 column inches of news stories.
Q2) A firm uses a single variable input x to produce outputs according to the production function f (x) = 300x 6x2. This firm has fixed costs of $400. This firm's short-run marginal cost curve lies below its short-run average variable cost curve for all positive values of x. A)True
B)False
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Chapter 19: A: Cost Minimization
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Q1) In Problem 2, suppose that a new alloy is invented which uses copper and zinc in fixed proportions where 1 unit of output requires 3 units of copper and 4 units of zinc for each unit of alloy produced. If no other inputs are needed, the price of copper is $2, and the price of zinc is $3, what is the average cost per unit when 3,000 units of the alloy are produced?
A) $18
B) $.67
C) $666.67
D) $9.33
E) $9,333.33
Q2) Suppose that Nadine in Problem 1 has a production function 3x<sub>1</sub> + x<sub>2</sub>. If the factor prices are $12 for factor 1 and $3 for factor 2, how much will it cost her to produce 20 units of output?
A) $430
B) $780
C) $60
D) $80
E) $70
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Chapter 20: Cost Curves
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Q1) A firm has the long-run cost function C(Q) = 4Q2 + 64.In the long run, it will supply a positive amount of output, so long as the price is greater than
A) $64.
B) $72.
C) $16.
D) $32.
E) $37.
Q2) If Green Acres Turf Farm's total cost of producing acres of sod is TC = 5Q2 + 25Q + 40, the marginal cost of producing the 10th acre of sod is
A) $125.
B) $40.
C) $25.
D) $75.
E) $275.
Q3) The marginal cost curve passes through the minimum point of the average fixed cost curve.
A)True
B)False
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Chapter 20: A: Cost Curves
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Q1) In Problem 3, Rex Carr could pay $10 for a shovel that lasts one year and pay $5 a car to his brother Scoop to bury the cars, or he could buy a low-quality car smasher that costs $200 a year to own and that smashes cars at a marginal cost of $1 per car. If it is also possible for Rex to buy a high-quality hydraulic car smasher that cost $550 per year to own and if with this smasher he could dispose of cars at a cost of $.80 per car, it would be worthwhile for him to buy this high-quality smasher if he planned to dispose of A) at least 1,760 cars per year.
B) no more than 1,750 cars per year.
C) at least 1,750 cars per year.
D) no more than 875 cars per year.
E) at least 875 cars per year.
Q2) In Problem 2, if Mr. Dent Carr's total costs were 2s<sup>2</sup> + 20s + 40, then if he repairs 10 cars, his average variable costs will be
A) $44.
B) $80.
C) $40.
D) $60.
E) $30.
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Page 42
Chapter 21: Firm Supply
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Q1) Suppose that Dent Carr's long-run total cost of repairing s cars per week is c(s) = 3s2 + 108. If the price he receives for repairing a car is $18, then in the long run, how many cars will he fix per week if he maximizes profits?
A) 4.50
B) 0
C) 6
D) 3
E) 9
Q2) Price equals marginal cost is a sufficient condition for profit maximization.
A)True
B)False
Q3) A firm has the long-run cost function C(q) = 7q2 + 175.In the long run, it will supply a positive amount of output, so long as the price is greater than A) $70.
B) $148.
C) $35.
D) $140.
E) $75.
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43
Chapter 21: A: Firm Supply
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Q1) Suppose that Dent Carr's long-run total cost of repairing s cars per week is c(s) = 3s<sup>2</sup> + 108. If the price he receives for repairing a car is $24, then in the long run, how many cars will he fix per week if he maximize profits?
A) 0
B) 4
C) 6
D) 8
E) 12
Q2) A firm has a long-run cost function, C(q) = 4q<sup>2</sup> + 4. In the long run, this firm will supply a positive amount of output, as long as the price is greater than A) $8.
B) $4.
C) $24.
D) $16.
E) $13.
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Chapter 22: Industry Supply
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Q1) In the absence of government interference, there is a constant marginal cost of $5 per ounce for growing marijuana and delivering it to buyers. If the probability that any shipment of marijuana is seized is .30 and the fine if a shipper is caught is $35 per ounce, then the equilibrium price of marijuana per ounce is
A) $22.14.
B) $40.
C) $3.50.
D) $15.50.
E) $6.50.
Q2) In the absence of government interference, there is a constant marginal cost of $5 per ounce for growing marijuana and delivering it to buyers. If the probability that any shipment of marijuana is seized is .10 and the fine if a shipper is caught is $45 per ounce, then the equilibrium price of marijuana per ounce is A) $50.
B) $9.50.
C) $10.56.
D) $4.50.
E) $5.50.
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45
Chapter 22: A: Industry Supply
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Q1) In Problem 13, in the absence of government interference, there is a constant marginal cost of $5 per ounce for growing marijuana and delivering it to buyers. If the probability that any shipment of marijuana seized is .30 and the fine if a shipper caught is $50 per ounce, then the equilibrium price of marijuana per ounce is
A) $28.57.
B) $20.
C) $55.
D) $3.50.
E) $6.50.
Q2) In Problem 13, in the absence of government interference, there is a constant marginal cost of $5 per ounce for growing marijuana and delivering it to buyers. If the probability that any shipment of marijuana seized is .50 and the fine if a shipper caught is $40 per ounce, then the equilibrium price of marijuana per ounce is A) $50.
B) $45.
C) $2.50.
D) $25.
E) $7.50.
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Chapter 23: Monopoly
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Q1) A monopolist faces a constant marginal cost of $1 per unit and has no fixed costs. If the price elasticity of demand for this product is constant and equal to -3, then
A) to maximize profits, he should charge a price of $1.50.
B) to maximize profits, he should charge a price of $3.
C) to maximize profits, he should charge a price of $1.33.
D) he is not maximizing profits.
E) None of the above.
Q2) A natural monopolist has the total cost function c(q) = 350 + 20q, where q is its output. The inverse demand function for the monopolist's product is p = 100 - 2q. Government regulations require this firm to produce a positive amount and to set price equal to average costs. To comply with these requirements
A) is impossible for this firm.
B) the firm must produce 40 units.
C) the firm could produce either 5 units or 35 units.
D) the firm must charge a price of $70.
E) the firm must produce 20 units.
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Chapter 23: A: Monopoly
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Q1) In Problem 6, if there are no fixed costs and marginal cost is constant at $48, the price elasticity of demand at the profit-maximizing level of output is closest to
A) -5.69.
B) -0.35.
C) -11.38.
D) -2.85.
E) -0.18.
Q2) A profit-maximizing monopoly faces an inverse demand function described by the equation p(y) = 90 - y and its total costs are c(y) = 8y, where prices and costs are measured in dollars. In the past it was not taxed, but now it must pay a tax of 8 dollars per unit of output. After the tax, the monopoly will
A) increase its price by 4 dollars.
B) leave its price constant.
C) increase its price by 8 dollars.
D) increase its price by 12 dollars.
E) None of the above.
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Chapter 24: Monopoly Behavior
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Q1) Disneyland has two possibilities for pricing rides at its theme parks: (1) Set MR = MC for each ride and charge the maximum price consumers will bear. (2) Charge an admission fee to the theme park but allow unlimited rides for free. Using graphs, show which pricing scheme is more profitable for Disneyland.
Q2) A monopolist sells in two markets. The demand curve for her product is given by p<sub>1</sub> = 165 - 3x<sub>1</sub> in the first market and p<sub>2</sub> = 2334x<sub>2</sub> in the second market, where x<sub>i</sub> is the quantity sold in market i and p<sub>i</sub> is the price charged in market i. She has a constant marginal cost of production, c = 9, and no fixed costs. She can charge different prices in the two markets. What is the profit-maximizing combination of quantities for this monopolist?
A) x<sub>1</sub> = 26 and x<sub>2</sub> = 28.
B) x<sub>1</sub> = 54 and x<sub>2</sub> = 26.
C) x<sub>1</sub> = 36 and x<sub>2</sub> = 26.
D) x<sub>1</sub> = 52 and x<sub>2</sub> = 30.
E) x<sub>1</sub> = 46 and x<sub>2</sub> = 38.
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Chapter 24: A: Monopoly Behavior
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Q1) A price-discriminating monopolist sells in two separate markets such that goods sold in one market are never resold in the other. It charges $4 in one market and $9 in the other market. At these prices, the price elasticity in the first market is -1.50 and the price elasticity in the second market is -0.40. Which of the following actions is sure to raise the monopolist's profits?
A) Lower p<sub>2</sub>.
B) Raise p<sub>2</sub>.
C) Raise p<sub>1</sub> and lower p<sub>2</sub>.
D) Raise both p<sub>1</sub> and p<sub>2</sub>.
E) Raise p<sub>2 </sub>and lower p<sub>1</sub>.
Q2) If a monopolist faces an inverse demand curve, p(y) = 100 - 2y and has constant marginal costs of $32 and zero fixed costs and if this monopolist is able to practice perfect price discrimination, its total profits will be
A) $1,156.
B) $17.
C) $578.
D) $1,734.
E) $289.
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Chapter 25: Factor Markets
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Q1) Suppose that the demand curve for mineral water is given by p = 70 - 12q, where p is the price per bottle paid by consumers and q is the number of bottles purchased by consumers. Mineral water is supplied to consumers by a monopolistic distributor who buys from a monopolistic producer, who is able to produce mineral water at zero cost. The producer charges the distributor a price of c per bottle. Given his marginal cost of c per unit, the distributor chooses an output to maximize his own profits. Knowing that this is what the distributor will do, the producer sets his price c so as to maximize his revenue. The price paid by consumers under this arrangement is
A) $17.50.
B) $35.
C) $5.83.
D) $52.50.
E) $2.92
Q2) A monopolist who faces a horizontal labor supply curve will demand less labor than he would if he acted competitively.
A)True
B)False
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Chapter 25: A: Factor Markets
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Q1) Suppose that in Problem 2, the demand curve for mineral water is given by p = 608q, where p is the price per bottle paid by consumers and q is the number of bottles purchased by consumers. Mineral water is supplied to consumers by a monopolistic distributor, who buys from a monopolist producer who is able to produce mineral water at zero cost. The producer charges the distributor a price of c per bottle, that will maximize the producer's total revenue. Given his marginal cost of c, the distributor chooses an output to maximize profits. The price paid by consumers under this arrangement is
A) $30.
B) $45.
C) $3.75.
D) $7.50.
E) $15.
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Chapter 26: Oligopoly
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Q1) An industry has two firms. The inverse demand function for this industry is p = 744q. Both firms produce at a constant unit cost of $26 per unit. What is the Cournot equilibrium price for this industry?
A) $21
B) $29
C) $42
D) $26
E) None of the above.
Q2) In the Bertrand model of duopoly, each firm sets its price, believing that the other's price will not change. When both firms have identical production functions and produce with constant returns to scale, the Bertrand equilibrium price is equal to marginal cost.
A)True
B)False
Q3) Conjectural variation refers to the fact that in a single market there is variation among firms in their estimates of the demand function in future periods.
A)True
B)False
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Page 53
Chapter 26: A: Oligopoly
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Q1) Suppose that the duopolists Carl and Simon in Problem 1 face a demand function for pumpkins of Q = 16,400 - 400P, where Q is the total number of pumpkins that reach the market and P is the price of pumpkins. Suppose further that each farmer has a constant marginal cost of $1 for each pumpkin produced. If Carl believes that Simon is going to produce Q<sub>s</sub> pumpkins this year, then the reaction function tells us how many pumpkins Carl should produce in order to maximize his profits. Carl's reaction function is R<sub>C</sub>(Q<sub>s</sub>) =
A) 8,000 -.
B) 16,400 - 400Q<sub>s</sub>.
C) 16,400 - 800Q<sub>s</sub>.
D) 4,000 -.
E) 12,000 - Q<sub>s</sub>.
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Chapter 27: Game Theory
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Q1) A game has two players. Each player has two possible strategies. One strategy is Cooperate, the other is Defect. Each player writes on a piece of paper either a C for cooperate or a D for defect. If both players write C, they each get a payoff of $100. If both players write D, they each get a payoff of 0. If one player writes C and the other player writes D, the cooperating player gets a payoff of S and the defecting player gets a payoff of T. To defect will be a dominant strategy for both players if A) S + T > 100.
B) T > 2S.
C) S < 0 and T > 100.
D) S < T and T > 100.
E) S and T are any positive numbers.
Q2) In Nash equilibrium, each player is making an optimal choice for herself, given the choices of the other players.
A)True
B)False
Q3) In a Nash equilibrium, everyone must be playing a dominant strategy.
A)True
B)False
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Chapter 27: A: Game Theory
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Q1) (See Problem 4, the Stag Hunt.) Two partners start a business. Each has two possible strategies, spend full time or secretly take a second job and spend only part time on the business. Any profits that the business makes will be split equally between the two partners, regardless of whether they work full time or part time for the business. If a partner takes a second job, he will earn $20,000 from this job plus his share of profits from the business. If he spends full time on the business, his only source of income is his share of profits from this business. If both partners spend full time on the business, total profits will be $200,000. If one partner spends full time on the business and the other takes a second job, the business profits will be $80,000. If both partners take second job, the total business profits are $20,000.
A) In the only Nash equilibrium for this game, one partner earns $60,000 and the other earns $40,000.
B) In the only Nash equilibrium for this game, both partners earn $30,000.
C) This game has two Nash equilibria, one in which each partner has an income of $100,000 and one in which each partner has an income of $30,000.
D) In the only Nash equilibrium for this game, both partners earn $100,000.
E) This game has no pure strategy Nash equilibria, but has a mixed strategy equilibrium.
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Chapter 28: Game Applications
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Q1) The February 24, 1997, issue of Forbes has an article about a private Belgian utility company which is aggressively expanding its overseas holdings. Loosely quoting from Forbes, "At least one of the Belgian utility's foreign moves was inspired by game theory. Last year, the Belgian utility paid $141 million for 49% of a Hungarian power station. The firm's CEO figured that if French utilities threatened to dump cheap power into the Belgian market, he could retaliate by dumping cheap Hungarian power into France."
a. What is this CEO trying to accomplish?
b. What is necessary for this plan to be successful?
Q2) An equilibrium in a sequential game is always a Nash equilibrium in a simultaneous game with equivalent payoffs.
A)True
B)False
Q3) In the classic 1960s macabre comedy Dr. Strangelove, the Soviet Union constructed a Doomsday Machine which would end all life on earth if ever the Soviet Union were attacked. When playing against a rational opponent, the existence of such a machine would be of great benefit to the Soviets.
A)True
B)False
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Chapter 28: A: Game Applications
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Q1) (See Problem 6.) Big Pig and Little Pig have two possible strategies, Press the Button, and Wait at the Trough. If both pigs choose Wait, both get 1. If both pigs Press the Button, then Big Pig gets 9 and Little Pig gets 1. If Little Pig Presses the Button and Big Pig Waits at the Trough, then Big Pig gets 10 and Little Pig gets 0. Finally, if Big Pig Presses the Button and Little Pig Waits, then Big Pig gets 5 and Little Pig gets 1. In Nash equilibrium,
A) Little Pig will get a payoff of zero.
B) both pigs will wait at the trough.
C) Little Pig will get a payoff of 1 and Big Pig will get a payoff of 9.
D) Little Pig will get a payoff of 1 and Big Pig will get a payoff of 5.
E) the pigs must be using mixed strategies.
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Chapter 29: Behavioral Economics
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Q1) In practice, people tend to accept too many large risks (such as forgoing life insurance) and avoid too many small risks (such as losing or breaking a cell phone).
A)True
B)False
Q2) In an experiment on risk aversion and inconsistency, a group of people were given the option to accept or reject the following gamble: 50% chance to win $150, 50% chance to lose $100. Which of the following scenarios is most accurate and would most likely occur?
A) A majority accepted the gamble. People who chose the gamble can expect to gain from it.
B) A majority rejected the gamble. People who chose the gamble can expect to gain from it.
C) A majority accepted the gamble. People who chose the gamble can expect to lose from it.
D) A majority rejected the gamble. People who chose the gamble can expect to lose from it.
E) People were evenly split between accepting and rejecting the gamble. Expected winnings from the gamble are zero.
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Chapter 30: Exchange
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Q1) In a pure exchange economy, Ollie's utility function is U(x, y) = 3x + y and Fawn's utility function is U(x, y) = xy. Ollie's initial allocation is 1 x and no y's. Fawn's initial allocation is no x's and 2 y's. Draw an Edgeworth box for Fawn and Ollie. Put x on the horizontal axis and y on the vertical axis. Measure goods for Ollie from the lower left and goods for Fawn from the upper right. Mark the initial allocation with the letter W. The locus of Pareto optimal points consists of two line segments. Describe these line segments in words or formulas and show them on your graph.
Q2) Jack Spratt's utility function is U(F, L) = L. His wife's utility function is U(F, L) = F. If Jack's initial endowment is 10 units of F and 5 units of L and if Jack's wife's initial endowment is 6 units of F and 10 units of L, then in an Edgeworth box for Jack and his wife, an allocation of F and L will be Pareto optimal only if it is at a corner of the box.
A)True
B)False
Q3) Every allocation on the contract curve is Pareto optimal.
A)True
B)False
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Chapter 30: A: Exchange
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Q1) In Problem 4, Ken's utility function is U(Q<sub>K</sub>, W<sub>K</sub>) = Q<sub>K</sub>W<sub>K</sub> and Barbie's utility function is U(Q<sub>B</sub><sub>,</sub> W<sub>B</sub>) = Q<sub>B</sub>W<sub>B</sub>. If Ken's initial endowment were 3 units of quiche and 7 units of wine and Barbie's endowment were 6 units of quiche and 7 units of wine, then at any Pareto optimal allocation where both persons consume some of each good,
A) Ken would consume 3 units of quiche for every 7 units of wine.
B) Ken would consume 9 units of quiche for every 14 units of wine that he consumes.
C) Barbie would consume twice as much quiche as Ken.
D) Barbie would consume 6 units of quiche for every 7 units of wine that she consumes.
E) None of the above.
Q2) ...
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Chapter 31: Production
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Q1) Every consumer has a red-money income and a blue-money income and each commodity has a red price and a blue price. You can buy a good by paying for it either with blue money at the blue price or with red money at the red price. Harold has 7 units of red money to spend and 32 units of blue money to spend. The red price of ambrosia is 1 and the blue price of ambrosia is 4. The red price of bubble gum is 1 and the blue price of bubble gum is 2. If ambrosia is on the horizontal axis, and bubble gum on the vertical axis, then Harold's budget set is bounded by
A) two line segments, one running from (0, 23) to (7, 16) and another running from (7, 16) to (15, 0).
B) two line segments one running from (0, 23) to (8, 7) and the other running from (8, 7) to (15, 0).
C) two line segments, one running from (0, 24) to (7, 16) and the other running from (7, 16) to (14, 0).
D) a vertical line segment and a horizontal line segment, intersecting at (7, 16).
E) a vertical line segment and a horizontal line segment, intersecting at (8, 7).
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Chapter 31: A: Production
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Q1) On a certain island there are only two goods, wheat and milk. The only scarce resource is land. There are 1,000 acres of land. An acre of land will produce either 3 units of milk or 7 units of wheat. Some citizens have lots of land; some have just a little bit. The citizens of the island all have utility functions of the form U(M, W) = MW. At every Pareto optimal allocation,
A) the number of units of milk produced equals the number of units of wheat produced. B) all citizens consume the same commodity bundle.
C) total milk production is 1,500 units.
D) every consumer's marginal rate of substitution between milk and wheat is -1.
E) None of the above is true at every Pareto optimal allocation.
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Chapter 32: Welfare
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Q1) Suppose that Paul and David have utility functions U = 4A P + O P and U = A D + 5O D, respectively, where A P and O P are Paul's consumptions of apples and oranges and A D and O D are David's consumptions of apples and orange. The total supply of apples and oranges to be divided between them is 20 apples and 14 oranges. The "fair" allocations consist of all allocations satisfying the following conditions.
A) 4A<sub>P</sub> + O<sub>P</sub> is at least 94 and 2A<sub>D</sub> + 5O<sub>D</sub> is at least 90.
B) A<sub>D</sub> + O<sub>D</sub> is at least 17 and A<sub>S</sub> + O<sub>S</sub> is at least 17.
C) A<sub>D</sub> = A<sub>P</sub> and O<sub>D</sub> = O<sub>P</sub>.
D) 8A<sub>P</sub> + 2O<sub>P</sub> is at least 94 and 2A<sub>D</sub> + 10O<sub>D</sub> is at least 90.
E) 4A<sub>P</sub> + O<sub>P</sub> is at least A<sub>D</sub> + 5O<sub>D</sub> and A<sub>D</sub> + 5O<sub>D</sub> is at least 4A<sub>P</sub> + O<sub>P</sub>.
Q2) An allocation that is worse for somebody than the initial allocation cannot be Pareto optimal.
A)True
B)False
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Chapter 32: A: Welfare
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Q1) Suppose that Romeo in Problem 8 has the utility function U = S<sup>6</sup><sub>R</sub>S<sup>4</sup><sub>J</sub> and Juliet has the utility function U = S<sup>4</sup><sub>R</sub>S<sup>6</sup><sub>J</sub>, where S<sub>R</sub> is Romeo's spaghetti consumption and S<sub>J</sub> is Juliet's. They have 70 units of spaghetti to divide between them.
A) Romeo would want to give Juliet some spaghetti if he had more than 35 units of spaghetti.
B) Juliet would want to give Romeo some spaghetti if she has more than 40 units.
C) Romeo and Juliet would never disagree about how to divide the spaghetti.
D) Romeo would want to give Juliet some spaghetti if he has more than 38 units of spaghetti.
E) Juliet would want to give Romeo some spaghetti if she has more than 42 units of spaghetti.
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Chapter 33: Externalities
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Q1) An airport is located next to a housing development. Where X is the number of planes that land per day and Y is the number of houses in the housing development, profits of the airport are 36X - X<sup>2</sup> and profits of the developer are 42YY<sup>2</sup> - XY. Let H<sub>1</sub> be the number of houses built if a single profit-maximizing company owns the airport and the housing development. Let H<sub>2</sub> be the number of houses built if the airport and the housing development are operated independently and the airport has to pay the developer the total "damages" XY done by the planes to the profits of the developer.
A) H<sub>1</sub> = 18 and H<sub>2</sub> = 20.
B) H<sub>1</sub> = 21 and H<sub>2</sub> = 16.
C) H<sub>1</sub> = H<sub>2</sub> = 16.
D) H<sub>1</sub> = 16 and H<sub>2</sub> = 21.
E) H<sub>1</sub> = 20 and H<sub>2</sub> = 24.
Q2) Mobil Oil Corporation recently bought the right to emit an additional 900 pounds of noxious gas vapors per day at its Torrance, California, refinery. This suggests that allowing pollution rights to be marketed is likely to lead to more pollution than there would be if there were no restrictions on polluting.
A)True
B)False
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Chapter 33: A: Externalities
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Q1) A clothing store and a jeweler are located side by side in a shopping mall. If the clothing store spends C dollars on advertising and the jeweler spends J dollars on advertising, then the profits of the clothing store will be (18 + J)C - C<sup>2</sup> and the profits of the jeweler will be (36 + C)J - 2J<sup>2</sup>. The clothing store gets to choose its amount of advertising first, knowing that the jeweler will find out how much the clothing store advertised before deciding how much to spend. The amount spent by the clothing store will be
A) 54.
B) 9.
C) 36.
D) 18.
E) 27.
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Chapter 34: Information Technology
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Q1) For a good with network externalities, the number of people who are willing to buy a unit of the good is uniquely determined by the price.
A)True
B)False
Q2) Banks have started offering electronic bill pay for free. This decision can best be explained as
A) matching free services provided by competitor banks to win over new customers. B) increasing switching costs. Customers would have to set up electronic bill pay again at their new bank.
C) banks wanting to enhance their reputation for good service.
D) banks reducing their costs of paper check processing.
E) a fad or novelty.
Q3) For a good with network externalities, draw a diagram showing the relation between the number of units sold and the willingness to pay of demanders. Find a price at which there are two stable and one unstable equilibrium quantities. Label these equilibria and explain why the unstable equilibrium is unstable.
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Chapter 34: A: Information Technology
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Q1) Eleven consumers are trying to decide whether to connect to a new communications network. Consumer 1 is of type 1, consumer 2 is of type 2, consumer 3 is of type 3, and so on. Where k is the number of consumers connected to the network (including oneself), a consumer of type n has a willingness to pay to belong to this network equal to k times n. What is the highest price at which 11 consumers could all connect to the network and either make a profit or at least break even?
A) $12
B) $10
C) $1
D) $0
E) $11
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Chapter 35: Public Goods
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Q1) If preferences are single peaked, then pairwise majority voting among alternative options will not lead to voting cycles.
A)True
B)False
Q2) To say that preferences are single peaked means that everybody either prefers more public goods to less or everybody prefers less public goods to more.
A)True
B)False
Q3) A Pareto optimal amount of public goods is shown on a graph (with quantities of public goods on the x axis) by the point at which the horizontal sum of the marginal rate of substitution curves meets the marginal cost curve.
A)True
B)False
Q4) If the supply of public goods is determined by majority vote, then the outcome must be Pareto optimal.
A)True
B)False
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Chapter 35: A: Public Goods
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Q1) Recall Bonnie and Clyde from Problem 5. Suppose that their total profits are 192H, where H is the number of hours they work per year. Their utility functions are, respectively, U<sub>B</sub>(C<sub>B</sub>, H) = C<sub>B</sub> - 0.02H<sup>2</sup> and U<sub>C</sub>(C<sub>C</sub>, H) = C<sub>C</sub> - 0.04H<sup>2</sup>, where C<sub>B</sub> and C<sub>C</sub> are their private goods consumptions and H is the number of hours they work per year. If they find a Pareto optimal choice of hours of work and income distribution, the number of hours they work per year is A) 750.
B) 2,400. C) 1,700.
D) 1,600.
E) 850.
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Chapter 36: Asymmetric Information
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Q1) Which of the following is the best example of adverse selection?
A) People who face the highest risks are the people most likely to buy insurance against these risks.
B) The residual claimant will have to bear the consequences of the most adverse outcomes.
C) An individual can influence the probability that she has an accident.
D) Items in the most popular styles sell out the quickest.
E) People sometimes mistakenly choose low-quality products.
Q2) In a market where there is a separating equilibrium, different types of agents make different choices of actions.
A)True
B)False
Q3) The incentive compatibility constraint requires that incentives be consistent with a consumers budget constraint.
A)True
B)False
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Chapter 36: A: Asymmetric Information
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Q1) Suppose that low-productivity workers all have marginal products of 10 and high-productivity workers all have marginal products of 16. The community has equal numbers of each type of worker. The local community college offers a course in microeconomics. High-productivity workers think taking this course is as bad as a wage cut of $2, and low-productivity workers think it is as bad as a wage cut of $4.
A) There is a separating equilibrium in which high-productivity workers take the course and are paid $18 and low-productivity workers do not take the course and are paid $10.
B) There is a separating equilibrium in which high-productivity workers take the course and are paid $16 and low-productivity workers do not take the course and are paid $10.
C) There is no separating equilibrium and no pooling equilibrium.
D) There is no separating equilibrium, but there is a pooling equilibrium in which everybody is paid $13.
E) There is a separating equilibrium in which high-productivity workers take the course and are paid $16 and low-productivity workers are paid $13.
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