Economic Analysis Practice Exam - 2659 Verified Questions

Economic Analysis

Practice Exam

Course Introduction

Economic Analysis explores the fundamental principles and methodologies used to assess economic behavior, decision-making, and outcomes in both microeconomic and macroeconomic contexts. The course covers topics such as demand and supply analysis, consumer and producer behavior, market structures, price determination, and the role of government in the economy. Students will learn how to apply analytical tools to evaluate real-world economic problems, assess the impact of various policies, and interpret economic data to inform business and policy decisions. The course aims to develop critical thinking and quantitative skills essential for understanding and addressing contemporary economic challenges.

Recommended Textbook

Intermediate Microeconomics A Modern Approach 9th Edition by Hal R. Varian

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Chapter 1: Budget Constraint-Part A

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Sample Questions

Q1) Felicity is studying economics and political science.She can read 30 pages of political science per hour but only 5 pages of economics per hour.This week she has a 50-page assignment in economics and a 150-page assignment in political science.Because of sorority rush, she cannot devote more than 10 hours to studying these subjects this week.She realizes she cannot complete all of her assignments but is determined to complete at least 30 pages of her economics reading.Draw a graph with pages of economics on the horizontal axis and pages of political science on the vertical axis.On this graph, show the possibilities that are consistent with the constraints that Felicity has imposed on herself.(She is allowed to read ahead in either subject.)Label key points on your graph with their numerical values.

Answer: Anything in the triangle bounded by (0, 300), (30, 120), and (30, 0)satisfies these constraints.

Q2) If there are two goods and the prices of both goods rise, then the budget line must become steeper.

A)True

B)False

Answer: False

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Page 3

Chapter 1: Budget Constraint-Part B

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Sample Questions

Q1) if you have an income of $16 to spend, if commodity 1 costs $2 per unit, and if commodity 2 costs $4 per unit, then the equation for your budget line can be written

A)x₁ +2x₂ = 8.

B)3x₁ + 5x₂ = 17.

C)(x₁ + x₂)/6 = 16

D)x₁/2 + x₂/4 = 16.

E)6(x₁ + x₂) = 16.

Answer: A

Q2) Murphy used to consume 100 units of X and 50 units of Y when the price of X was $2 and the price of Y was $4.If the price of X rose to $6 and the price of Y rose to $5, how much would Murphy's income have to rise so that he could still afford his original bundle?

A)$750

B)$250

C)$450

D)$500

E)None of the above.

Answer: C

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Chapter 2: Preferences-Part A

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Sample Questions

Q1) A person with reflexive preferences is someone who does not shop carefully.

A)True

B)False

Answer: False

Q2) The marginal rate of substitution measures the distance between one indifference curve and the next one.

A)True

B)False

Answer: False

Q3) 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

Q4) If preferences are transitive, more is always preferred to less.

A)True

B)False

Answer: False

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Page 5

Chapter 2: Preferences-Part B

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Sample Questions

Q1) Charlie's indifference curves have the equation x_B =constant/x_A, where larger constants correspond to better indifference curves.Charlie strictly prefers the bundle (9, 18)to the bundle A)(10, 17).

B)(18, 9).

C)(11, 12).

D)More than one of these options are correct.

E)None of the above are correct.

Q2) Charlie's indifference curves have the equation x_B = constant/x_A, where larger constants correspond to better indifference curves.Charlie strictly prefers the bundle (10, 15)to the bundle A)(15, 10).

B)(11, 14).

C)(12, 13).

D)More than one of these options are correct.

E)None of the above are correct.

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Chapter 3: Utility-Part A

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Q1) Alice's utility function is U(x, y)=x²y.Steve's utility function is U(x, y)= x²y + 2x.Alice and Steve have the same preferences since Steve's utility function is a monotonic transformation of Alice's.

A)True

B)False

Q2) Charlie has the utility function U(x_A, x_B)= x_Ax_B.His indifference curve passing through 32 apples and 8 bananas will also pass through the point where he consumes 4 apples and A)16 bananas.

B)32 bananas.

C)68 bananas.

D)72 bananas.

E)64 bananas.

Q3) Mr.Surly consumes only two goods and hates them both.His utility function is U(x, y)=2max{x, y}.Mr.Surly has (weakly)convex preferences.

A)True

B)False

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Page 7

Chapter 3: Utility-Part B

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Q1) Harry Mazzola has the utility function U(x₁, x₂)=min{x₁ + 2x₂, 2x₁ +x₂}.He has $40 to spend on corn chips and french fries.If the price of corn chips is $3 per unit and the price of french fries is $5 per unit, then Harry will A)definitely spend all of his income on french fries.

B)consume at least as many corn chips as french fries but might consume both. C)definitely spend all of his income on corn chips.

D)consume at least as many french fries as corn chips but might consume both. E)consume equal amounts of french fries and corn chips.

Q2) Charlie has the utility function U(x_A, x_B)=x_Ax_B.His indifference curve passing through 6 apples and 16 bananas will also pass through the point where he consumes 2 apples and

A)12 bananas.

B)24 bananas.

C)50 bananas.

D)54 bananas.

E)48 bananas.

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Chapter 4: Choice-Part A

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Sample Questions

Q1) Badger Madison consumes only beer and sausages.His income is $100.Beer costs him $.50 per can and sausages cost $1 each.Where x is the number of cans of beer and y the number of sausages he consumes per week, Badger's utility function is U(x, y)=-[(x50)² + (y - 40)²].

A)Badger must always be unhappy since whatever he consumes, his utility is negative.

B)He has monotonic preferences.

C)If his income increases, he won't change the commodity bundle that he buys.

D)If the price of beer goes down, he will buy more beer.

E)More than one of the above statements is true.

Q2) Coke and Pepsi are perfect substitutes for Mr.Drinker and the slope of his indifference curves is - 1.One day he bought 2 cans of Coke and 20 cans of Pepsi.(The cans of both drinks are the same size.)

A)Coke is less expensive than Pepsi.

B)Coke is more expensive than Pepsi.

C)Coke and Pepsi cost the same.

D)Mr.Drinker prefers Pepsi to Coke.

E)None of the above.

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Chapter 4: Choice-Part B

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Sample Questions

Q1) Charlie has a utility function

U(x_A, x_B)=x_Ax_B, the price of apples is $1, and the price of bananas is $2.If Charlie's income were $320, how many units of bananas would he consume if he chose the bundle that maximized his utility subject to his budget constraint?

A)80

B)40

C)160

D)16

E)240

Q2) Charlie has a utility function

U(x_A, x_B)=x_Ax_B, 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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Chapter 5: Demand-Part A

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Sample Questions

Q1) If preferences are quasilinear, then for very high incomes the income offer curve is a straight line parallel to one of the axes.

A)True

B)False

Q2) Casper's utility function is 3x + y, where x is his consumption of cocoa and y is his consumption of cheese.If the total cost of x units of cocoa is x², the price of cheese is $8, and Casper's income is $174, how many units of cocoa will he consume?

A)9

B)11

C)12

D)23

E)24

Q3) A rational consumer spends her entire income.If her income doubles and prices do not change, then she will necessarily choose to consume twice as much of every good as she did before.

A)True

B)False

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Chapter 5: Demand-Part B

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Sample Questions

Q1) if Charlie's utility function were X ⁵_AX_B, 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_B = 7X_A.

B)X_B = X_A.

C)X_A = 5X_B.

D)X_B = 5X_A.

E)70X_A + 10X_B = M.

Q2) recall that Miss Muffett insists on consuming 2 units of whey per unit of curds.If the price of curds is $5 and the price of whey is $4, then if Miss Muffett's income is m, her demand for curds will be A)5m.

B)4m/5.

C)5C + 4W = m.

D)m/5.

E)m/13.

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Chapter 6: Revealed Preference-Part A

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Sample Questions

Q1) 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

Q2) Twenty years ago, Amanda consumed cans of motor oil which cost her 6 pesos each and gallons of gasoline which cost her 14 pesos each.With her income of 112 pesos, she bought 7 cans of motor oil and 5 gallons of gasoline.Today she has an income of 230 pesos.Cans of motor oil now cost 10 pesos each and gallons of gasoline now cost 32 pesos each.Assuming her preferences haven't changed, she

A)is definitely better off than she was 20 years ago.

B)was definitely better off 20 years ago than she is now.

C)is just as well off as she was 20 years ago.

D)may be either better or worse off now than 20 years ago.There is not enough information to determine which is the case.

E)is behaving irrationally.

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Chapter 6: Revealed Preference-Part B

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Sample Questions

Q1) Let us reconsider the case of Ronald in Problem 4.Let the prices and consumptions in the base year be as in situation D, where p₁ = $3, p₂ = $1, x₁ = 5, and x₂ = 15.If in the current year, the price of good 1 is $1 and the price of good 2 is $1, and his current consumptions of good 1 and good 2 are 25 and 20 respectively, what is the Laspeyres price index of current prices relative to base year prices? (Pick the most nearly correct answer.)

A)0.67

B)1.50

C)0.25

D)0.50

E)1

Q2) 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-Part A

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Sample Questions

Q1) Carlos consumes only two goods, apples and bananas.His utility function is given by U(x, y)=a³b².He is endowed with w_a apples and w_b bananas.Unaware that prices are about to change, Carlos buys the quantities of apples and bananas that maximize his utility subject to his budget constraint.After he has made his purchases but before he has eaten them, the relative prices change.Carlos is then free to make further trades at the new relative prices if he wishes.

A)Carlos will definitely be better off after the price change.

B)Carlos will definitely be worse off after the price change.

C)Carlos will be better off after the price change if the price of the good for which he is a net seller rises relative to the price of the other good.

D)Carlos will be better off after the price change if the price of the good for which he is a net buyer rises relative to the price of the other good.

E)Carlos's utility will not be affected by the price change.

Q2) If the Engel curve slopes up, then the demand curve slopes down.

A)True

B)False

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Page 15

Chapter 7: Slutsky Equation-Part B

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Sample Questions

Q1) Maude thinks delphiniums and hollyhocks are perfect substitutes, one for one.If delphiniums currently cost $2 per unit and hollyhocks cost $3 per unit and if the price of delphiniums rises to $5 per unit,

A)there will be no change in the demand for hollyhocks.

B)the entire change in demand for delphiniums will be due to the substitution effect.

C)1/3 of the change in demand will be due to the income effect.

D)the income effect of the change in demand for delphiniums will be bigger than the substitution effect.

E)2/3 of the change in demand will be due to the income effect.

Q2) Suppose that Agatha had $270 to spend on tickets for her trip.She needs to travel a total of 1,500 miles.Suppose that the price of first-class tickets is $.30 per mile and the price of second-class tickets is $.10 per mile.How many miles will she travel by second class?

A)1,000

B)450

C)1,050

D)900

E)300

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Page 16

Chapter 8: Buying and Selling-Part A

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Sample Questions

Q1) If a utility maximizer is a net seller of something and the price of that good rises while other prices stay constant, her situation might improve so much that she becomes a net buyer.

A)True

B)False

Q2) If a consumer is a buyer of some goods and a seller of others, then a change in prices will generate an extra income effect in the Slutsky equation due to the revaluation of the consumer's endowment.

A)True

B)False

Q3) Suppose a consumer is initially endowed with a positive amount of two goods, sells some of one to get more of the other, and has no other sources of income.If the price of one good falls, his new budget line is everywhere above his old budget line.

A)True

B)False

Q4) Is it ever possible that an increase in the price of a good for which a person is a net seller can make him worse off? Use a diagram to illustrate your answer.

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Chapter 8: Buying and Selling-Part B

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Q1) Mr.Cog has 18 hours a day to divide between labor and leisure.If he has 8 dollars of nonlabor income per day and gets a wage rate of 5 dollars per hour when he works, his budget equation, expressing combinations of consumption and leisure that he can afford to have, can be written as

A)5R + C = 98.

B)R + C/5 = 128.

C)C = 98 + 5R.

D)5R + C = 8.

E)C = 122 + 5R.

Q2) Mr.Cog has 18 hours a day to divide between labor and leisure.If he has 13 dollars of nonlabor income per day and gets a wage rate of 17 dollars per hour when he works, his budget equation, expressing combinations of consumption and leisure that he can afford to have, can be written as

A)17R + C = 13.

B)17R + C = 319.

C)R + C/17 = 421.

D)C = 319 + 17R.

E)C = 358 + 17R.

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Page 18

Chapter 9: Intertemporal Choice-Part A

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Sample Questions

Q1) If the interest rate is 5% and will be 5% forever, the present value of an income stream consisting of $10 a year paid to you on February 11 of every year, starting right now, is $210.

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) If the real interest rate is positive, then a unit of future consumption can be had for the sacrifice of less than 1 unit of current consumption.

A)True

B)False

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19

Chapter 9: Intertemporal Choice-Part B

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Q1) Harvey Habit has a utility function U(c₁, c₂)= min{c₁, c₂}.If he had an income of $645 in period 1 and $1,290 in period 2 and if the interest rate were 15%, how much would Harvey choose to spend on bread in period 1?

A)$1,417.50

B)$315

C)$1,890

D)$472.50

E)$945

Q2) Patience has a utility function U(c₁, c₂)=c^1/2₁ +.080c^1/2₂, where c₁ is her consumption in period 1 and c₂ is her consumption in period 2.Her income in period 1 is 3 times as large as her income in period 2.At what interest rate will she choose to consume the same amount in period 1 as in period 2?

A)0.75

B)0.13

C)0.25

D)0

E)0.38

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Page 20

Chapter 10: Asset Markets-Part A

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Q1) You buy a painting for $1,280.Its market value will rise by $80 per year for the next 30 years.It is worth $80 a year to you to have it hanging on the wall.The interest rate is 10%.In how many years will you sell it?

A)30

B)Immediately

C)8

D)4

E)5

Q2) The interest rate is 9% and there is no inflation.A bond is available that can be redeemed either after one year or after two years.If it is redeemed after one year, the investor gets $109.If it is redeemed after two years, the investor gets $115.54.The investor gets no other payments than what she receives when she redeems the bond.In equilibrium, investors will be willing to pay more than $100 for this bond.

A)True

B)False

Q3) If the interest rate is 10%, then an asset that returns $1 a year forever is worth $1/1.1.

A)True

B)False

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21

Chapter 10: Asset Markets-Part B

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Q1) If the interest rate is 13% and will remain 13% forever, how much would a rational investor be willing to pay for an asset that will pay him 6,780 dollars 1 year from now, 1,276 dollars 2 years from now, and nothing at any other time?

A)53,846.15 dollars

B)6,000 dollars

C)98,000 dollars

D)7,000 dollars

E)8,000 dollars

Q2) The price of an antique is expected to rise by 6% during the next year.The interest rate is 7%.You are thinking of buying an antique and selling it a year from now.You would be willing to pay a total of 600 dollars for the pleasure of owning the antique for a year.How much would you be willing to pay to buy this antique? (See Problem 5.)

A)12,600 dollars

B)60,000 dollars

C)600 dollars

D)8,571.43 dollars

E)6,000 dollars

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Chapter 11: Uncertainty-Part A

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Q1) Oskar's preferences over gambles in which the probability of events 1 and 2 are both 1/2 can be represented by the von Neuman-Morgenstern utility function .5y^.5₁ + .5y^.5₂, where y₁ is his consumption if event 1 happens and y₂ is his consumption if event 2 happens.A gamble that allows him a consumption of $9 if event 1 happens and $25 if event 2 happens is exactly as good for Oskar as being sure to have an income of A)$12.5.

B)$9.

C)$16.

D)$17.

E)None of the above.

Q2) If Paul is risk loving and his basketball team has a probability of .5 of winning, then Paul would rather bet $10 on his team than $100.(When Paul bets X, he wins X if his team wins and loses X if his team loses.)

A)True

B)False

Q3) If the price of insurance goes up, people will become less risk averse.

A)True

B)False

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Page 23

Chapter 11: Uncertainty-Part B

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Q1) Billy has a von Neumann-Morgenstern utility function U(c)= c^1/2.If Billy is not injured this season, he will receive an income of 16 million dollars.If he is injured, his income will be only 10,000 dollars.The probability that he will be injured is .1 and the probability that he will not be injured is .9.His expected utility is

A)3,610 dollars.

B)7,220 dollars.

C)100,000 dollars.

D)between 15 and 16 million dollars.

E)14,440 dollars.

Q2) Billy has a von Neumann-Morgenstern utility function U(c)= c^1/2.If Billy is not injured this season, he will receive an income of 4 million dollars.If he is injured, his income will be only 10,000 dollars.The probability that he will be injured is .1 and the probability that he will not be injured is .9.His expected utility is

A)3,620 dollars.

B)1,810 dollars.

C)between 3 and 4 million dollars.

D)100,000 dollars.

E)7,240 dollars.

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Chapter 12: Risky Assets-Part A

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Q1) Suppose that Fenner Smith of Workouts 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 30% and has a standard deviation of 5%.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 combinations that Smith can obtain, the slope of this budget line is A)3.

B)-3.

C)1.50.

D)-1.50.

E)4.50.

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

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25

Chapter 12: Risky Assets-Part B

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Q1) Suppose that Fenner Smith 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 25% 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 combinations that Smith can obtain, the slope of this budget line is A)1.

B)-1.

C)0.50.

D)-0.50.

E)1.50.

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26

Chapter 13: Consumers Surplus-Part A

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Q1) Izaak likes to eat pizza and to fish.The more fishing he does the happier he is, up to 8 hours a day.If he fishes longer than 8 hours he gets a sore back and is less happy than if he hadn't fished at all.For y less than or equal to 8, his utility function is U(x, y)= x + 3y, where x is money spent on pizza and y is hours per day spent fishing.His income is $40 a day and he has no expenses other than pizza.The Bureau of Fisheries has just decided to allow people without fishing licenses to fish only 3 hours a day.But if you buy a fishing license, you can fish as many hours as you wish.How much is Izaak willing pay for a license?

A)$15

B)$24

C)$18

D)$13

E)$0

Q2) There is a positive consumer's surplus when the total amount the consumer pays for something is less than the amount she would be willing to pay rather than do without it altogether.

A)True

B)False

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Page 27

Chapter 13: Consumers Surplus-Part B

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Q1) Lolita's utility function is U(x, y)=x - x²/2 + y, where x is her consumption of cow feed and y is her consumption of hay.If the price of cow feed is $.30, the price of hay is $1, and her income is $2 and if Lolita chooses the combination of hay and cow feed that she likes best from among those combinations she can afford, her utility will be

A)2.24.

B)1.70.

C)0.24.

D)3.24.

E)1.24.

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 $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.

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Chapter 14: Market Demand-Part A

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101 Verified Questions

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Sample Questions

Q1) If the amount of money that people are willing to spend on a good stays the same when its price doubles, then demand for that good must have a price elasticity of demand smaller in absolute value than 1.

A)True

B)False

Q2) If the demand for the Weekly World News at a local grocery store is described by Q = 2,500 - 400P - I/10for I = $15,000 and P = $1.50, the marginal revenue of an additional paper sold at this store is

A)$.15.

B)$.38.

C)$.50.

D)$1.50.

E)$1.

Q3) If the demand curve were plotted on graph paper with logarithmic scales on both axes, then its slope would be the elasticity of demand.

A)True

B)False

Q4) Using the graph of a demand curve, explain why marginal revenue is less than price.

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Chapter 14: Market Demand-Part B

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Sample Questions

Q1) the only quantities of good 1 that Barbie can buy are 1 unit or zero units.For x₁ equal to zero or 1 and for all positive values of x₂, suppose that Barbie's preferences were represented by the utility function (x₁ + 10)(x₂ + 12).Then if her income were $4, her reservation price for good 1 would be

A)$2.91.

B)$6.50.

C)$1.45.

D)$.83.

E)$1.10.

Q2) the only quantities of good 1 that Barbie can buy are 1 unit or zero units.For x₁ equal to zero or 1 and for all positive values of x₂, suppose that Barbie's preferences were represented by the utility function (x₁ + 6)(x₂ + 8).Then if her income were $20, her reservation price for good 1 would be

A)$4.50.

B)$.75.

C)$8.

D)$4.

E)$1.23.

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Chapter 15: Equilibrium-Part A

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Sample Questions

Q1) The demand function for fresh strawberries is q = 200 - 5p and the supply function is q = 60 + 2p.What is the equilibrium price?

A)$10

B)$20

C)$40

D)$50

E)None of the above.

Q2) Supply and demand theory shows us that the burden of a sales tax is shared equally by suppliers and demanders whether the tax is collected from the sellers or collected from the buyers.

A)True

B)False

Q3) The demand curve, which is a downward-sloping straight line, crosses the supply curve, which is an upward-sloping straight line.If a tax is introduced where sellers must pay a tax of $2 per unit sold, then the equilibrium price paid by demanders will rise by more than $1 if the absolute value of the slope of the demand curve is greater than the absolute value of the slope of the supply curve.

A)True

B)False

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Page 31

Chapter 15: Equilibrium-Part B

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Q1) Suppose that King Kanuta from demands that each of his subjects give him 3 coconuts for every coconut that they consume.The king puts all of the coconuts that he collects in a large pile and burns them.The supply of coconuts is given by S(p_s)= 100p_s, where p_s is the price received by suppliers.The demand for coconuts by the king's subjects is given by D(p_d)= 7,650 - 100p_d, where p_d is the price paid by consumers.In equilibrium, the price received by suppliers will be

A)$153.

B)$18.

C)$27.

D)$38.25.

E)None of the above.

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Chapter 16: Auctions-Part A

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Q1) First Fiddler's Bank has foreclosed on a home mortgage and is selling the house at auction.There are three bidders for the house, Zeke, Fanny, and Heidi.First Fiddler's does not know the willingness to pay of these three bidders for the house, but on the basis of its previous experience, the bank believes that each of these bidders has a probability of 1/3 of valuing it at $800,000, a probability of 1/3 of valuing at $600,000, and a probability of 1/3 of valuing it at $300,000.First Fiddler's believes that these probabilities are independent among buyers.If First Fiddler's sells the house by means of a second-bidder, sealed-bid auction (Vickrey auction), what will be the bank's expected revenue from the sale? (Choose the closest option.)

A)$566,667

B)$600,000

C)$800,000

D)$574,074

E)$300,000

Q2) It is often the case that a seller can increase his profit from an auction by setting a reserve price even if he has to destroy the object being auctioned if nobody bids as high as the reserve price.

A)True

B)False

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Chapter 16: Auctions-Part B

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Q1) A dealer decides to sell an oil painting by means of an English auction with a reservation price of slightly below $100,000.If she fails to get a bid as high as her reservation price, she will burn the painting.There are two bidders.The dealer believes that each bidder's willingness to pay will take one of the three following values: $120,000, $100,000, and $25,000.The dealer believes that each bidder has a probability of 1/3 of having each of these three values.The probability distribution of each buyer's value is independent of that of the other's.Assuming that the two bidders bid rationally and do not collude, the dealer's expected revenue from selling the painting is slightly less than A)$110,000.

B)$100,000.

C)$89,000.

D)$80,000.

E)$81,666.67.

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Chapter 17: Technology-Part A

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Q1) For each of the following production functions, draw a diagram showing the general shape of its corresponding isoquant.Comment on the ease at which labor and capital can be substituted for one another relative to the other two production functions.

a.Q = K + L.

b.Q= K^0.5L^0.5.

c.Q = min(K, L).

Q2) A firm has the production function f(x, y)= x^1.40y¹.This firm has

A)decreasing returns to scale and diminishing marginal products for factor x.

B)increasing returns to scale and decreasing marginal product of factor x.

C)decreasing returns to scale and increasing marginal product for factor x.

D)constant returns to scale.

E)None of the above.

Q3) If the production function is f(x, y)= min{12x, 3y}, then there is convexity in production.

A)True

B)False

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Page 35

Chapter 17: Technology-Part B

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Sample Questions

Q1) A firm has a production function f(x, y)= 1.80(x^0.10 + y^0.10)² 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.

Q2) if a = 2.10, b = 0.90, and c = 1, the marginal products of x₁, x₂, and x₃ (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.

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Page 36

Chapter 18: Profit Maximization-Part A

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Sample Questions

Q1) If the price of the output of a profit-maximizing, competitive firm rises and all other prices stay constant, then the firm's output cannot fall.

A)True

B)False

Q2) During the height of the pet rock craze in the 1970s, the price elasticity of demand was estimated to be 1.20.Since pet rocks have a marginal cost of zero, a profit-maximizing seller of pet rocks would A)increase prices.

B)decrease prices.

C)leave prices unchanged.

D)need more-detailed market information before making any pricing changes.

E)diversify into selling Karen Carpenter LPs.

Q3) The weak axiom of profit-maximizing behavior states that in a modern mixed economy, firms have only a weak incentive to maximize profits.

A)True

B)False

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Chapter 18: Profit Maximization-Part B

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Sample Questions

Q1) the production function is f(x₁, x₂)= x^1/2₁x^1/2₂.If the price of factor 1 is $10 and the price of factor 2 is $20, in what proportions should the firm use factors 1 and 2 if it wants to maximize profits?

A)We can't tell without knowing the price of output.

B)x₁ =2x₂.

C)x₁ = 0.50x₂.

D)x₁ = x₂.

E)x₁ = 20x₂.

Q2) 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-Part A

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Sample Questions

Q1) If the production function is f (x1, x2)= min{x1, x2}, then the cost function is c(w1, w2, y)= min{w1, w2}y.

A)True

B)False

Q2) If output is produced according to Q =4L +6K, the price of K is $24, and the price of L is $20, then the cost-minimizing combination of K and L capable of producing 72 units of output is

A)L = 9 and K = 6.

B)L = 20 and K = 24.

C)L = 18 and K = 12.

D)L = 0 and K = 12.

E)L = 18 and K = 0.

Q3) The total cost function c(w1, w2, y)expresses the cost per unit of output as a function of input prices and output.

A)True

B)False

Q4) If the production function for tuna casseroles is min{x1,x2 }, where x1 is the amount of factor 1 and x2 is the amount of factor x2, find the cost function for tuna casseroles.

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Page 39

Chapter 19: Cost Minimization-Part B

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Sample Questions

Q1) 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 a new alloy is invented which uses copper and zinc in fixed proportions where 1 unit of output requires 4 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 $5, and the price of zinc is $2, what is the average cost per unit when 2,000 units of the alloy are produced?

A)$14.25

B)$.50

C)$28

D)$500

E)$14,250

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Chapter 20: Cost Curves-Part A

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Sample Questions

Q1) A firm has the long-run cost function C(Q)= 4Q2 + 196.In the long run, it will supply a positive amount of output, so long as the price is greater than

A)$120.

B)$112.

C)$56.

D)$28.

E)$61.

Q2) Mary Magnolia from your workbook has variable costs equal to y²/F, where y is the number of bouquets she sells per month and where F is the number of square feet of space in her shop.If Mary has signed a lease for a shop with 600 square feet, if she is not able to get out of the lease or to expand her store in the short run, and if the price of a bouquet is $4 per unit, how many bouquets per month should she sell in the short run?

A)600

B)1,800

C)300

D)1,200

E)1,320

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Chapter 20: Cost Curves-Part B

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Sample Questions

Q1) Recall that Touchie McFeelie's production function for comics books is 0.1J^1/2 L^3/4.Suppose that Touchie can vary both jokes and cartoonists' labor.If old jokes cost $2 each and cartoonists' labor costs $12 per hour, then the cheapest way to produce comics books requires using jokes and labor in the ratio

A)J/L = 6.

B)J/L = 2.

C)J/L = 2/3.

D)J/L = 8.

E)J/L = 4.

Q2) if Mr.Dent Carr's total costs were 2s² + 75s + 100, then if he repairs 25 cars, his average variable costs will be

A)$250.

B)$125.

C)$129.

D)$175.

E)$87.50.

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Chapter 21: Firm Supply-Part A

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Sample Questions

Q1) In a perfectly competitive industry, the demand curve for the total output of the industry may be downward sloping.

A)True

B)False

Q2) A competitive firm is choosing an output level to maximize its profits in the short run.Which of the following is not necessarily true? (Assume that marginal cost is not constant and is well defined at all levels of output.)

A)Marginal cost is at least as large as average variable cost.

B)Total revenues are at least as large as total costs.

C)Price is at least as large as average variable cost.

D)Price equals marginal cost.

E)The marginal cost curve is rising.

Q3) A competitive firm has a continuous marginal cost curve.It finds that as output increases, its marginal cost curve first rises, then falls, then rises again.If it wants to maximize profits, the firm should never produce at a positive output where price equals marginal cost and marginal cost decreases as output increases.

A)True

B)False

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43

Chapter 21: Firm Supply-Part B

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Sample Questions

Q1) suppose that Irma's production function is f(x₁, x₂)=(min{x₁, 3x₂})^1/2.If the price of factor 1 is w₁ = $2 and the price of factor 2 is w₂ = $6, then her supply function is given by the equation

A)S(p)=p(max{w₁, 3w₂})².

B)S(p)= 4p.

C)S(p)=p(min{w₁, 3w₂})².

D)S(p)= p/8.

E)S(p)= min{2p, 18p}.

Q2) suppose that Irma's production function is f(x₁, x₂)= (min{x₁, 3x₂})^1/2.If the price of factor 1 is w₁ = $3 and the price of factor 2 is w₂ = $9, then her supply function is given by the equation

A)S(p)=p(min{w₁, 3w₂})².

B)S(p)= 6p.

C)S(p)= p/12.

D)S(p)= p(max{w₁, 3w₂})².

E)S(p)= min{3p, 27p}.

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Page 44

Chapter 22: Industry Supply-Part A

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Sample Questions

Q1) In East Icicle, Minnesota, on the northern edge of the corn belt, the growing season is short and the soil is poor.Corn yields are meager unless a great deal of expensive fertilizer is used.In Corncrib, Illinois, the land is fertile and flat and the growing season is 20 days longer.For any given expenditure per acre, corn yields are far greater than in East Icicle.Farmers in both places are profit maximizers who grow corn.

A)Marginal costs are higher in East Icicle than in Corncrib.

B)More fertilizer is used per acre in East Icicle than in Corncrib.

C)Marginal costs are the same in both places.

D)More fertilizer is used per acre in Corncrib than in East Icicle.

E)More than one of the above is true.

Q2) In a competitive market, if both demand and supply curves are linear, then a per-unit tax of $10 will generate exactly the same deadweight loss as a per-unit subsidy of $10.

A)True

B)False

Q3) It is possible to have an industry in which all firms make zero economic profits in long-run equilibrium.

A)True

B)False

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Page 45

Chapter 22: Industry Supply-Part B

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Sample Questions

Q1) if the cost of plaster and labor were $13 per gnome and everything else is as in the problem (gnome molds cost $1,000, interest rate is 10%), what is the lowest price of gnomes at which there would be a positive supply in the long run?

A)$14.30

B)$26

C)$15.20

D)$13

E)$15.60

Q2) if the cost of plaster and labor were $11 per gnome and everything else is as in the problem (gnome molds cost $1,000, interest rate is 10%), what is the lowest price of gnomes at which there would be a positive supply in the long run?

A)$11

B)$22

C)$13.20.

D)$12.10.

E)$13.20

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Chapter 23: Monopoly-Part A

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Q1) The demand for Professor Bongmore's new book is given by the function Q = 2,000100p.If the cost of having the book typeset is $7,000, if the marginal cost of printing an extra copy is $4, and if he has no other costs, then he would maximize his profits by

A)having it typeset and selling 800 copies.

B)having it typeset and selling 1,000 copies.

C)not having it typeset and not selling any copies.

D)having it typeset and selling 1,600 copies.

E)having it typeset and selling 400 copies.

Q2) The demand for copies of the software package Macrosoft Doors is given by Q = 10,000P^-².The cost to produce Doors is C = 100,000 + 5Q.If Macrosoft practices cost plus pricing, what would be the profit-maximizing markup?

A)6.67%

B)100%

C)14.29%

D)33.33%

E)3.23%

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Page 47

Chapter 23: Monopoly-Part B

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Q1) if there are no fixed costs and marginal cost is constant at $44, the price elasticity of demand at the profit-maximizing level of output is closest to A)20.39.

B)25.14.

C)22.57.

D)210.29.

E)20.19.

Q2) if demand for the book is Q = 900 - 300p, the marginal revenue function is given by A)3 - Q/150.

B)900 - 600.

C)3Q - Q²/300.

D) 300

E) -1/300.

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Chapter 24: Monopoly Behavior-Part A

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Sample Questions

Q1) A monopolist has a constant marginal cost of $2 per unit and no fixed costs.He faces separate markets in the United States and England.He can set one price p₁ for the U.S.market and another price p₂ for the English market.If demand in the United States is given by Q₁ = 7,000 - 700p₁ and demand in England is given by Q₂ = 1,200 - 200p₂, then the price in the United States will

A)equal the price in England.

B)be smaller than the price in England by $2.

C)be larger than the price in England by $4.

D)be larger than the price in England by $2.

E)be smaller than the price in England by $4.

Q2) A price-discriminating monopolist charges p₁ in market 1 and p₂ in market 2.If p₁ > p₂, the absolute value of the price elasticity in market 1 at price p₁ must be smaller than the absolute value of the price elasticity in market 2 at price p₂.

A)True

B)False

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Chapter 24: Monopoly Behavior-Part B

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Sample Questions

Q1) Suppose that 2,500 people are interested in attending ElvisLand.Once a person arrives at ElvisLand, his or her demand for rides is given by x = max{3 - p, 0} , where p is the price per ride.There is a constant marginal cost of $2 for providing a ride at ElvisLand.ElvisLand charges a profit-maximizing two-part tariff, with one price for admission to ElvisLand and another price per ride for those who get in.How much should it charge per ride and how much for admission?

A)$2 per ride and $3 for admission

B)$0 per ride and $2.50 for admission

C)$2 per ride and $.50 for admission

D)$0 per ride and $1 for admission

E)$3 per ride and $3 for admission

Q2) If a monopolist faces an inverse demand curve, p(y)=100 - 2y and has constant marginal costs of $4 and zero fixed costs and if this monopolist is able to practice perfect price discrimination, its total profits will be

A)$24.

B)$3,456.

C)$2,304.

D)$1,152.

E)$576.

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Page 50

Chapter 25: Factor Markets-Part A

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Sample Questions

Q1) For a monopsonist, the more elastic the supply of labor, the greater the difference between the marginal cost of labor and the wage rate.

A)True

B)False

Q2) A monopsonist's market power enables him to hire labor at a marginal cost that is lower than the wage rate.

A)True

B)False

Q3) A coal producer has a monopoly on coal.A different monopoly controls the railroad that takes the coal to market.Each monopolist chooses prices to maximize its profits.If the coal monopolist buys the railroad, then it will increase its profits by raising the market price of coal.

A)True

B)False

Q4) A monopsony occurs when two previously competing firms reach an agreement to collude on price.

A)True

B)False

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Chapter 25: Factor Markets-Part B

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Sample Questions

Q1) Suppose the demand curve for mineral water is given by p = 70 - 16q, 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)$52.50.

B)$35.

C)$4.38.

D)$2.19.

E)$17.50.

Q2) suppose that the demand curve for antimacassars is p = 66 - Q/1,000.The firm's profit-maximizing output is closest to A)24,375 antimacassars.

B)16,250 antimacassars.

C)5,362.50 antimacassars.

D)8,125 antimacassars.

E)4,062.50 antimacassars.

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Page 52

Chapter 26: Oligopoly-Part A

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Sample Questions

Q1) The price elasticity of demand for melocotones is constant and equal to -2.The melocotone market is controlled by two Cournot duopolists who have different cost functions.One of the duopolists has a constant marginal cost of $975 per ton and produces 70% of the total number of melocotones sold.The equilibrium price of a ton of melocotones must be

A)$1,500.

B)$750.

C)$975.

D)$3,000.

E)$2,250.

Q2) Suppose that the demand curve for an industry's output is a downward-sloping straight line and there is constant marginal cost.Then the larger the number of identical firms producing in Cournot equilibrium, the lower will be the price.

A)True

B)False

Q3) A duopoly in which two identical firms are engaged in Bertrand competition will not distort prices from their competitive levels.

A)True

B)False

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Page 53

Chapter 26: Oligopoly-Part B

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Sample Questions

Q1) Suppose that the duopolists Carl and Simon face a demand function for pumpkins of Q = 1,800 - 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 $.50 for each pumpkin produced.If Carl believes that Simon is going to produce Q_s 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_C(Q_s)=

A)1,800 - 400Q_s.

B)1,800 - 800Q_s.

C)800 - Q_s/2.

D)400 - Q_s/2.

E)1,200 - Q_s.

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54

Chapter 27: Game Theory-Part A

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Sample Questions

Q1) Suppose that in a Hawk-Dove game similar to the one discussed in your workbook, the payoff to each player is -6 if both play Hawk.If both play Dove, the payoff to each player is 4, and if one plays Hawk and the other plays Dove, the one that plays Hawk gets a payoff of 6 and the one that plays Dove gets 0.In equilibrium, we would expect hawks and doves to do equally well.This happens when the proportion of the total population that plays Hawk is A).25.

B).63.

C).06.

D).13.

E)1.

Q2) A dominant strategy equilibrium is a set of choices such that each player's choices are optimal regardless of what the other players choose.

A)True

B)False

Q3) In Nash equilibrium, each player is making an optimal choice for herself, given the choices of the other players.

A)True

B)False

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Page 55

Chapter 27: Game Theory-Part B

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Q1) A small community has 40 people, each of whom has a wealth of $16,000.Each individual must choose whether to contribute $100 or $0 to the support of public entertainment for their community.The money value of the benefit that a person gets from this public entertainment is b times the total amount of money contributed by individuals in the community.

A)If 40b > 1, everybody is better off if all contribute to the public entertainment fund than if nobody contributes, but if 40b < 1, everybody is better off if nobody contributes than if all contribute.

B)This game has a dominant strategy equilibrium in which nobody contributes anything for public entertainment.

C)If 40b > 1, there is a dominant strategy equilibrium in which everybody contributes.

D)Everybody is worse off if all contribute than if nobody contributes if b > 1, but if b < 1, everybody is better off if nobody contributes.

E)In order for there to be a dominant strategy equilibrium in which all contribute, it must be that b > 40.

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Chapter 28: Game Applications-Part A

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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) For the following scenarios, state whether the strategic effect of the firm's action will cause competitors to behave more or less aggressively, and why.

a.Sleep Country USA announces that it will beat any competitor's advertised price by 5%.

b.Termite Woods, a local, new home development, unexpectedly announces that it will decrease by 50% the number of homes it had planned to build in the coming year.

c.Used car dealership Roach Motors announces a 25% price cut on its entire stock.

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Page 57

Chapter 28: Game Applications-Part B

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Q1) The old Michigan football coach had only two strategies, Run the Ball to the Left Side of the line, and Run the Ball to the Right Side.The defense can concentrate either on the left side or the right side of Michigan's line.If the opponent concentrates on the wrong side, Michigan is sure to gain at least 5 yards.If the defense defended the left side and Michigan ran left, Michigan would be stopped for no gain.But if the opponent defended the right side when Michigan ran right, Michigan would still gain at least 5 yards with probability .60.It is the last play of the game and Michigan needs to gain 5 yards to win.Both sides choose Nash equilibrium strategies.In Nash equilibrium, Michigan would

A)run to the right side with probability .71.

B)run to the right side with probability .83.

C)be sure to run to the right side.

D)run to the two sides with equal probability.

E)run to the right side with probability .60.

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Chapter 29: Behavioral Economics

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Q1) Under hyperbolic discounting, a person discounts the long term future more heavily than the near term future.

A)True

B)False

Q2) In the movie The Hunt for Red October, Captain Ramius (Sean Connery)leaves a letter for the Soviet Navy announcing that he intends to defect to the United States.As a result, the Soviet Navy launches a massive effort to find and sink Ramius's ship, the Red October.In announcing that he was intending to defect, Capt.Ramius's actions could be explained as

A)an act of irrationality.

B)a step to remove the option of return to the Soviet Union, thereby increasing the likelihood of a successful defection to the West.

C)a spurious piece of information that might affect behavior.

D)part of the process of discovering his preferences.

E)an attempt at randomizing behavior to make his adversaries less certain of his true intentions.

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Chapter 30: Exchange-Part A

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Q1) Astrids utility function is U(H A, C A)= H A C A.Birgers utility function is min{H B, C B}.If Astrids initial endowment is no cheese and 11 units of herring and if Birgers initial endowments are 4 units of cheese and no herring, then where p is a competitive equilibrium price of herring and cheese is the numeraire, it must be that demand equals supply in the herring market.This implies that

A)4/(p + 1)+ 6 = 12.

B)4/12 = p.

C)412/4 = p.

D)4/p + 12/2p = 12.

E)min{12, 4} = p.

Q2) From Walras's law it follows that in a market with two goods, if demand equals supply in one market, then demand must equal supply in the other market.

A)True

B)False

Q3) Every allocation on the contract curve is Pareto optimal.

A)True

B)False

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Page 60

Chapter 30: Exchange-Part B

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Q1) Ken's utility function is U(Q_K, W_K)=Q_KW_K and Barbie's utility function is U(Q_B, W_B)=Q_BW_B.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.

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Chapter 31: Production-Part A

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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 8 units of milk or 15 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)every consumer's marginal rate of substitution between milk and wheat is -1.

B)the number of units of milk produced equals the number of units of wheat produced.

C)total milk production is 4,000 units.

D)all citizens consume the same commodity bundle.

E)None of the above is true at every Pareto optimal allocation.

Q2) The marginal rate of transformation between two goods indicates the rate at which an efficient economy would have to give up one good to obtain more of the other.

A)True

B)False

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Chapter 31: Production-Part B

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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 16 units of red money and 42 units of blue money to spend.The red price of ambrosia is 2 and the blue price of ambrosia is 6.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, 28)to (8, 21)and the other running from (8, 21)to (24, 0).

B)two line segments, one running from (0, 37)to (8, 21)and another running from (8, 21)to (15, 0).

C)two line segments one running from (0, 37)to (7, 16)and the other running from (7, 16)to (15, 0).

D)a vertical line segment and a horizontal line segment, intersecting at (8, 21).

E)a vertical line segment and a horizontal line segment, intersecting at (7, 16).

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Chapter 32: Welfare-Part A

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Q1) A tiny fishing village has 3 residents.Ann has a utility of 10, Bruce has a utility of 6, and Charlie has a utility of 7.If the mayor uses a Rawlsian social welfare function, the social welfare of this tiny village would be

A)6.

B)10.

C)23.

D)420.

E)20.49.

Q2) A Borda count is used to decide an election between 3 candidates, x, y, and z, where a score of 1 is awarded to a first choice, 2 to a second choice, and 3 to a third choice.There are 29 voters.10 voters rank the candidates x first, y second, and z third; 3 voters rank the candidates x first, z second, and y third; 8 voters rank the candidates z first, y second, and x third; 8 voters rank the candidates y first, z second, and x third.Which candidate wins?

A)Candidate x.

B)Candidate y.

C)Candidate z.

D)There is a tie between x and y, with z coming in third.

E)There is a tie between y and z, with x coming in third.

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Page 64

Chapter 32: Welfare-Part B

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Q1) Suppose that Paul and David have utility functions U = 5A_P + O_P and U = A_D + 3O_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 oranges.The total supply of apples and oranges to be divided between them is 16 apples and 14 oranges.The "fair" allocations consist of all allocations satisfying A)5A_P + O_P is at least 94 and 2A_D + 3O_D is at least 58.

B)A_D = A_P and O_D + O_P.

C)A_D + O_D is at least 15 and A_S + O_S is at least 15.

D)10A_P + 2O_P is at least 94 and 2A_D + 6O_D is at least 58.

E)5A_P + O_P is at least A_D + 3O_D and A_D + 3O_D is at least 5A_P + O_P.

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65

Chapter 33: Externalities-Part A

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Q1) The 130 campers at Bear Creek Campground love their own campfires but hate the smoke from their neighbors' campfires.Each camper's utility function is U = 25f - f ² - s, where f is the number of hours her own campfire burns per day and where s is the amount of smoke in the air.It happens that s is 11 times the average amount of hours that campers use their fires.The campground authority could make all campers better off by limiting the number of hours of campfire per day for everyone.How many hours of campfire per day should the authority allow each camper in order to make the typical camper as well off as possible?

A)5

B)7

C)12.50

D)8

E)Campers will be best off if they are free to choose their own amounts of campfire.

Q2) The only known way to eliminate externalities is through taxes or subsidies.

A)True

B)False

Q3) A trade between two people is an example of an externality.

A)True

B)False

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Page 66

Chapter 33: Externalities-Part B

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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 (42 + J)C - C² and the profits of the jeweler will be (54 + C)J - 2J².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)74.

B)111.

C)18.50.

D)37.

E)55.50.

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Chapter 34: Information Technology-Part A

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Q1) A group of 9 consumers are trying to decide whether to connect to a new communications network.Consumer 1 is of type 1, consumer 2 of type 2, consumer 3 of type 3, and so on.Each consumer's willingness to pay to belong to the network is proportional to the number of consumers who belong.Where k is the number of consumers who belong, the willingness to pay of a type n consumer is equal to k times n.What is the highest price at which 7 consumers could all connect to the network and either make a profit or at least break even?

A)$23

B)$26

C)$18

D)$19

E)$21

Q2) Network externalities are a special kind of externality in which people care about the number of other people who consume the good.

A)True

B)False

Q3) List three examples of products for which there are significant network externalities.Explain why you believe network externalities are present in each case.

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Chapter 34: Information Technology-Part B

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Q1) If the demand function for the DoorKnobs operating system is related to perceived market share s and actual market share x by the equation p = 512s(1 - x), then in the long run, the highest price at which DoorKnobs could sustain a market share of 4/5 is A)$96.

B)$256.

C)$113.78.

D)$128.

E)$81.92.

Q2) If the demand function for the DoorKnobs operating system is related to perceived market share s and actual market share x by the equation p = 512s(1 - x), then in the long run, the highest price at which DoorKnobs could sustain a market share of 3/4 is A)$256.

B)$113.78.

C)$96.

D)$128.

E)$81.92.

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Chapter 35: Public Goods-Part A

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Q1) Remember Bonnie and Clyde from your workbook? Suppose that their total profits are 160H, where H is the number of hours they work per year.Their utility functions are, respectively, U_B(C_B, H )= C_B - 0.04H ² and U_C(C_C, H )= C_C - 0.01H ², where C_B and C_C 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 must be A)750.

B)1,600.

C)850.

D)1,700.

Q2) If preferences are single peaked, then everyone will agree about the right amount of public goods to be supplied.

A)True

B)False

Q3) 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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Page 70

Chapter 35: Public Goods-Part B

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Q1) They are thinking of buying a sofa.Bob's utility function is U_B(S, M_B)= (1 + S)M_B and Ray's utility function is U_R(S, M_R)= (3 + S)M_R, where S = 0 if they don't get the sofa and S = 1 if they do and where M_B and M_R are the amounts of money they have respectively to spend on their private consumptions.Bob has a total of $2,000 to spend on the sofa and other stuff.Ray has a total of $1,600 to spend on the sofa and other stuff.The maximum amount that they could pay for the sofa and still arrange to both be better off than without it is

A)$2,100.

B)$533.33.

C)$750.

D)$1,400.

E)$2,800.

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Chapter 36: Asymmetric Information-Part A

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Q1) There are two types of used cars, high quality and low quality.Buyers cannot distinguish the two types until after they have purchased them.Owners of high-quality cars will sell them if the price is $2,000 or higher.Owners of low-quality cars will sell them if the price is $1,000 or higher.Buyers value a high-quality used car at $4,266 and a low-quality used car at $1,200.Suppose that 30% of used cars are of high quality and 70% of used cars are of low quality.In equilibrium,

A)only high-quality used cars will be sold.

B)only low-quality used cars will be sold.

C)all used cars will be sold.

D)no used cars will be sold.

E)high-quality used cars will sell for a uniformly higher price than low-quality used cars.

Q2) Lexus has recently begun a program in which a used Lexus automobile which passes a 100 + point inspection is designated by the local dealer to be a Lexus Certified Pre-owned Vehicle.Would local Lexus dealers find it in their best interest to participate? Explain.

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Chapter 36: Asymmetric Information-Part B

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Q1) Suppose that in New Crankshaft, Pennsylvania, the quality distribution of the 2,000 used cars on the market is such that the number of used cars of value less than V is V/2.Original owners must sell their used cars.Original owners know what their cars are worth, but buyers can't determine a car's value until they buy it.An owner can either take his car to an appraiser and pay the appraiser $500 to appraise the car (accurately and credibly)or sell the car unappraised.In equilibrium, car owners will have their cars appraised if and only if their value is at least

A)$1,500.

B)$1,000.

C)$500

D)$1,000

E)$2,000

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