Honors Microeconomics Exam Bank
Course Introduction
Honors Microeconomics offers an in-depth exploration of the fundamental principles governing individual decision-making, market structures, and the allocation of scarce resources. The course emphasizes rigorous economic modeling, critical analysis of consumer and producer behavior, and the role of incentives in shaping market outcomes. Students examine real-world applications through advanced problem-solving, case studies, and discussions of public policy. Designed for highly motivated students, this course incorporates mathematical tools, supplemented readings from contemporary research, and interactive learning experiences to foster a sophisticated understanding of microeconomic theory and its implications for society.
Recommended Textbook
Intermediate Microeconomics A Modern Approach 8th Edition by Hal R. Varian
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Chapter 1: Budget Constraint
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Q1) This weekend, Martha has time to read 40 pages of economics and 30 pages of sociology. Alternatively, she could read 30 pages of economics and 50 pages of sociology. Which of these equations describes all combinations of pages of economics, E, and sociology, S, that she could read over the weekend?
A) E + S = 70.
B) E/2+S=50
C) 2E + S = 110.
D) E + S = 80.
E) All of the above.
Answer: C
Q2) Georgina thrives on two goods: pears and bananas. The cost of pears is 30 pesos each and the cost of bananas is 15 pesos each. If her income is 180 pesos, how many pears can she buy if she spends all of her income on pears?
A) 9
B) 12
C) 4
D) 6
E) None of the above.
Answer: D
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Page 3
Chapter 1: A: Budget Constraint
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Q1) In the economy of Mungo, discussed in Problem 12, there is a third person called Ike. Ike has a red income of 90 and a blue income of 25. 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 15 units of ambrosia.
B) at least 15 units of bubble gum.
C) at least 10 units of bubble gum.
D) exactly twice as much bubble gum as ambrosia.
E) equal amounts of ambrosia and bubble gum.
Answer: A
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Chapter 2: Preferences
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Q1) If preferences are transitive, more is always preferred to less.
A)True
B)False
Answer: False
Q2) If two goods are both desirable and preferences are convex, then
A) there must be a kink in the indifference curves.
B) indifference curves must be straight lines.
C) if two bundles are indifferent, then an average of the two bundles is worse than either one.
D) the marginal rate of substitution is constant along indifference curves.
E) None of the above.
Answer: E
Q3) A consumer with convex preferences who is indifferent between the bundles (5, 2) and (11, 6) will like the bundle (8, 4) at least as well as either of the first two bundles.
A)True
B)False
Answer: False
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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) If someone has a utility function U = 2 min{x, y}, then x and y are perfect complements for that person.
A)True
B)False
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.
Q3) Use separate graphs to draw indifference curves for each of the following utility functions:
a. U(x, y) = min{2x + y,2y + x}.
b. U(x, y) = max{2x + y,2y + x}.
c. U(x, y) = x + min{x, y}.
In which of these cases are preferences convex?
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Page 7
Chapter 3: A: Utility
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Q1) Joe Bob from Problem 12 has a cousin Pete who consumes goods 1 and 2. Pete thinks that 3 units of good 1 is always a perfect substitute for 4 units of good 2. Which of the following utility functions is the only one that would not represent Pete's preferences?
A) U(x<sub>1</sub>, x<sub>2</sub>) = 40x<sub>1</sub> + 30x<sub>2</sub> - 10,000.
B) U(x<sub>1</sub>, x<sub>2</sub>) = 4x<sub>1</sub> + 3x<sub>2</sub> + 1000.
C) U(x<sub>1</sub>, x<sub>2</sub>) = min{ 4x<sub>1</sub>, 3x<sub>2</sub>}.
D) U(x<sub>1</sub>, x<sub>2</sub>) = 16x<sup>2</sup><sub>1</sub> + 24x<sub>1</sub>x<sub>2</sub> + 9x<sup>2</sup><sub>2</sub>.
E) More than one of the above does not represent Pete's preferences.
Q2) In Problem 1, Charlie's utility function is U(A, B) = AB, where A and B are the numbers of apples and bananas, respectively, that he consumes. If Charlie is consuming 40 apples and 160 bananas, then 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) -4.
B) -8.
C) -41.
D) .
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Page 8
Chapter 4: Choice
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Q1) At a boundary optimum, a consumer's indifference curve must be tangent to her budget line.
A)True
B)False
Q2) As you may know, Mungoites each have two left feet and one right foot. Their preferences for left and right shoes display perfect complementarity. Mungoites find shoes useful only in trios of two lefts and a right. The price of each type of shoe is $10 a shoe, and Mungoites consume nothing other than shoes. A Mungoite's Engel curve for right shoes has the equation
A) R =m/3.
B) R = m - 10.
C) R = 2m.
D) R = 10m.
E) R =m/10.
Q3) Max has the utility function U(x, y) = x(y + 1). The price of x is $2 and the price of y is
$1. Income is $10. How much x does Max demand? How much y? If his income doubles and prices stay unchanged, will Max's demand for both goods double?
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Page 9
Chapter 4: A: Choice
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Q1) Charlie's utility function is U(x<sub>A</sub>, x<sub>B</sub>) = x<sub>A</sub>x<sub>B</sub>. If Charlie's income were $40, the price of apples were $2, and the price of bananas were $5, how many apples would there be in the best bundle that Charlie could afford?
A) 20
B) 6
C) 4
D) 5
E) 10
Q2) In Problem 6, Elmer's utility function is U(x, y) = min{x, y<sup>2</sup>}. If the price of x is $25, the price of y is $10, and Elmer chooses to consume 5 units of y, what must Elmer's income be?
A) $1,350
B) $175
C) $775
D) $675
E) There is not enough information to tell.
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Page 10
Chapter 5: Demand
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Q1) Katie Kwasi's utility function is U(x<sub>1</sub>, x<sub>2</sub>) = 5(ln x<sub>1</sub>) + x<sub>2</sub>. Given her current income and the current relative prices, she consumes 10 units of x<sub>1</sub> and 15 units of x<sub>2</sub>. If her income doubles, while prices stay constant, how many units of x<sub>1</sub> will she consume after the change in income?
A) 10
B) 15
C) 5
D) 20
E) There is not enough information to determine how many.
Q2) Let w be the number of whips and j the number of leather jackets. If Kinko's utility function is U(x, y) = min{ 7w, 4w + 12j}, then if the price of whips is $20 and the price of leather jackets is $40, Kinko will demand
A) 4 times as many whips as leather jackets.
B) 6 times as many whips as leather jackets.
C) 3 times as many whips as leather jackets.
D) 5 times as many leather jackets as whips.
E) only leather jackets.
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Chapter 5: A: Demand
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Q1) In Problem 13, where x is whips and y is leather jackets, if Kinko's utility function were U(x, y) = min{ 7x, 5x + 10y}, then if the price of whips were $20 and the price of leather jackets were $20, Kinko would demand
A) 6 times as many leather jackets as whips.
B) 4 times as many leather jackets as whips.
C) 7 times as many whips as leather jackets.
D) 5 times as many whips as leather jackets.
E) only leather jackets.
Q2) In Problem 1, if Charlie's utility function were X<sup>6</sup><sub>A</sub>X<sub>B</sub>, if apples cost 40 cents each, and if bananas cost 10 cents each, Charlie's budget line would be tangent to one of his indifference curves whenever
A) X<sub>B</sub> = X<sub>A</sub>.
B) 6X<sub>B</sub> = 4X<sub>A</sub>.
C) X<sub>B</sub> = 6X<sub>A</sub>.
D) X<sub>A</sub> = 6X<sub>B</sub>.
E) 40X<sub>A</sub> + 10X<sub>B</sub> = M.
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Page 12
Chapter 6: Revealed Preference
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Q1) Rudolf Rational obeys the weak axiom of revealed preferences. His preferences don't change over time. One year he could afford bundle x but bought bundle y. If another year he buys bundle x, then he can't afford bundle y.
A)True
B)False
Q2) When prices are ($2, $4), Ms. Consumer chooses the bundle (7, 9), and when prices are ($15, $3), she chooses the bundle (10, 3). Is her behavior consistent with the weak axiom of revealed preference?
A) Yes.
B) No.
C) We would have to observe a third choice to be able to say.
D) We can't tell because we are not told her income in the two cases.
E) None of the above.
Q3) An increase in the price of an inferior good makes the people who consume that good 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 4 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) 2.
B) 3.
C) 1. D) 2.67.
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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Q1) Draw two different diagrams, one illustrating the Slutsky version of income and substitution effects and the other illustrating the Hicks version of income and substitution effects. How do these two notions differ?
Q2) Jimmy's utility function is U(a, b) = ab, where a is his consumption of apples and b is his consumption of bananas. If prices and income change in such a way that Jimmy's old consumption lies on his new budget line, then Jimmy will not change his consumption bundle.
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
Q4) When the price of a good rises and income remains constant, there is a substitution effect on demand but there cannot be an income effect.
A)True
B)False
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Page 15
Chapter 7: A: Slutsky Equation
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Q1) Suppose that Agatha in Problem 10 had $465 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 $.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) In Problem 1, Charlie's utility function is x<sub>A</sub>x<sub>B</sub>. The price of apples used to be $1, the price of bananas used to be $2, and his income used to be $40. If the price of apples increased to $7 and the price of bananas stayed constant, the substitution effect on Charlie's apple consumption would reduce his consumption by A) 6 apples.
B) 13.57 apples.
C) 8.57 apples.
D) 17.14 apples.
E) None of the above.
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Chapter 8: Buying and Selling
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Q1) Dudley 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 $35 per day and is paid a wage of $6 per hour, how many hours of leisure will he choose per day?
A) 10
B) 8
C) 7
D) 6
E) 9
Q2) If all goods, including leisure, are normal goods, then an increase in the wage rate will necessarily make people want to work more hours.
A)True
B)False
Q3) If a person is a net supplier of a normal good and its price increases while all other prices stay the same, then his demand for the good must decrease.
A)True
B)False
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Chapter 8: A: Buying and Selling
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Q1) In Problem 1, if Abishag owned 8 quinces and 10 kumquats and if the price of kumquats is 2 times the price of quinces, how many kumquats could she afford if she spent all of her money on kumquats?
A) 18
B) 14
C) 10
D) 28
E) 11
Q2) In Problem 1, if Abishag owned 12 quinces and 20 kumquats and if the price of kumquats is 3 times the price of quinces, how many kumquats could she afford if she spent all of her money on kumquats?
A) 48
B) 32
C) 20
D) 24
E) 21
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18
Chapter 9: Intertemporal Choice
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Q1) Kenny Kink's utility function is u(c<sub>1</sub>, c<sub>2</sub>) = min{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 earns $200 in period 1 and $220 in period 2. Kenny can borrow and lend at an interest rate of 10%, and there is no inflation. The number of dollars that Kenny spends on consumption in the first period must be
A) more than 200 but less than 220.
B) exactly 200.
C) more than 220.
D) exactly 180.
E) more than 180 but less than 200.
Q2) 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) If Peregrine in Problem 1 consumes (1, 500, 880) and earns (1, 300, 1, 100) and if the interest rate is 10%, the present value of his endowment is
A) $4,830.
B) $2,400.
C) $2,300.
D) $2,380.
E) $6,130.
Q2) If Peregrine in Problem 1 consumes (1, 500, 1, 080) and earns (1, 000, 1, 680) and if the interest rate is 20%, the present value of his endowment is
A) $2,680.
B) $5,280.
C) $2,400.
D) $2,580.
E) $6,280.
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Chapter 10: Asset Markets
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Q1) If the interest rate is r and will remain r forever, then a bond that will pay 95 dollars a year forever, starting one year from now, is worth how much today?
A) 95/(1 + r) dollars.
B) 95(1 + r) dollars.
C) 95/r dollars.
D) 95/(1 + r+r<sup>2</sup>+........+r<sup>n</sup>+........) dollars.
E) None of the above.
Q2) The interest rate is 10% 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 $110. If it is redeemed after two years, the investor gets $117.70. 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) Suppose that the cost of personal computers falls by 20% per year. To make this problem relatively easy, we will assume that their quality does not change and that computers never wear out. You plan to get one sometime. What is the rational way to decide when to buy one?
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Chapter 10: A: Asset Markets
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Q1) Ashley, in Problem 6, has discovered another wine, wine D. Wine drinkers are willing to pay 30 dollars to drink it right now. The amount that wine drinkers are willing to pay will rise by 15 dollars each year that the wine ages. The interest rate is 10%. How much would Ashley be willing to pay for the wine if he buys it as an investment? (Pick the closest answer.)
A) 330 dollars
B) 150 dollars
C) 69 dollars
D) 30 dollars
E) 56 dollars
Q2) If the interest rate is 5% and will remain 5% forever, how much would a rational investor be willing to pay for an asset that will pay him 6,300 dollars 1 year from now, 1,102 dollars 2 years from now, and nothing at any other time?
A) 7,000 dollars
B) 6,000 dollars
C) 140,000 dollars
D) 42,000 dollars
E) 8,000 dollars
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Page 22
Chapter 11: Uncertainty
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Q1) 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
Q2) An expected utility maximizer's preferences between two bundles contingent on event 1 happening must be independent of what he will get if event 2 happens.
A)True
B)False
Q3) 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
Q4) If the price of insurance goes up, people will become less risk averse.
A)True B)False
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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 averse if her income is less than $6,000 but risk loving if her income is more than $6,000.
B) Sally will be risk neutral if her income is less than $6,000 and risk averse 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 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
Q2) 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.
Q3) If two assets have the same expected rate of return but different variances, a risk-averse investor should always choose the one with the smaller variance, no matter what other assets she holds.
A)True
B)False
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Chapter 12: A: Risky Assets
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Q1) Suppose that Ms. Lynch in Problem 1 can make up her portfolio using a risk-free asset that offers a surefire rate of return of 10% and a risky asset with an expected rate of return of 15%, with standard deviation 5. If she chooses a portfolio with an expected rate of return of 15%, then the standard deviation of her return on this portfolio will be
A) 2.50%.
B) 8%.
C) 5%.
D) 10%.
E) None of the above.
Q2) Suppose that Ms. Lynch in Problem 1 can make up her portfolio using a risk-free asset that offers a surefire rate of return of 10% and a risky asset with an expected rate of return of 20%, with standard deviation 5. If she chooses a portfolio with an expected rate of return of 17.50%, then the standard deviation of her return on this portfolio will be
A) 3.75%.
B) 7.50%.
C) 6.75%.
D) 1.88%.
E) None of the above.
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26
Chapter 13: Consumers Surplus
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Q1) Sir Plus has a demand function for mead that is given by the equation D(p) = 100 - p. If the price of mead is $90, how much is Sir Plus's net consumer's surplus?
A) $25
B) $10
C) $50
D) $100
E) $8,550
Q2) Ella's utility function is min{ 5x, y}. If the price of x is $10 and the price of y is $15, how much money would she need to be able to purchase a bundle that she likes as well as the bundle (x, y) = (10, 25)?
A) $209
B) $440
C) $425
D) $475
E) $85
Q3) Consumer's surplus is another name for excess demand.
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 $16 and was paying a price of $8 for earrings when the price of earrings went up to $10, then the equivalent variation of the price change was
A) $3.56.
B) $1.45.
C) $2.91.
D) $7.11.
E) $3.23.
Q2) Betsy's utility function for BMWs and money is given by 8,000x + y, where x is the number of BMWs she has and y is the amount of money she has. Her income is $22,000. Her reservation price for one BMW is
A) $14,000.
B) $8,000 - y.
C) $8,000 - p.
D) $8,000.
E) $30,000.
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Chapter 14: Market Demand
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Q1) The only quantities of good 1 that Barbie can buy are 1 unit or 0 units. For x<sub>1</sub> equal to 0 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> + 4)(x<sub>2</sub> + 18). Then if her income were $16, her reservation price for good 1 would be
A) $13.60.
B) $6.80.
C) $9.50.
D) $0.22.
E) $4.40.
Q2) A firm faces a demand function D(p), for which the revenue-maximizing price is $10. The demand function is altered to 2D(p). What is the new revenue-maximizing price?
A) $5
B) $20
C) $10
D) There is insufficient information to determine this.
E) none of the above.
Q3) Using the graph of a demand curve, explain why marginal revenue is less than price.
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Chapter 14: A: Market Demand
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Q1) 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> + 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) 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> + 6)(x<sub>2</sub> + 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
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Q1) The inverse demand function for video games is p = 240 - 2q and the inverse supply function is p = 3 + q. When the government imposes a $6 tax on each video game purchased,
A) consumer's surplus falls by more than producer's surplus.
B) producer's surplus falls by more than consumer's surplus.
C) consumer's surplus and producer's surplus fall by the same amount.
D) consumer's surplus falls and producer's surplus increases.
E) producer's surplus falls and consumer's surplus increases.
Q2) The inverse demand function for apples is defined by the equation p = 214 - 5q, where q is the number of units sold. The inverse supply function is defined by p = 7 + 4q. A tax of $36 is imposed on suppliers for each unit of apples that they sell. When the tax is imposed, the quantity of apples sold falls to
A) 23.
B) 14.
C) 17.
D) 19.
E) 21.
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Chapter 15: A: Equilibrium
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Q1) Suppose that King Kanuta from Problem 11 demands that each of his subjects give him 4 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<sub>s</sub>)<sub> </sub>= 100p<sub>s</sub>, where p<sub>s</sub> is the price received by suppliers. The demand for coconuts by the king's subjects is given by D(p<sub>d</sub>) = 2,080 - 100p<sub>d</sub>, where p<sub>d</sub> is the price paid by consumers. In equilibrium, the price received by suppliers will be
A) $4.
B) $10.40.
C) $52.
D) $6.
E) None of the above.
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Chapter 16: Auctions
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Q1) In a common-value auction, the bids of other bidders can influence the maximum amount that one is willing to pay for an object, while in a private-value auction this is not the case.
A)True
B)False
Q2) A first edition of Adam Smith's Wealth of Nations (published in 1776) is being auctioned via the Internet. The current owner starts by posting his own "bid" for it. Bidders are allowed to submit bids at any time during a one-week interval. For the following week, bids will be accepted only if they exceed the currently posted high bid. Throughout the week, the highest bid that anyone has made so far will be posted. At the end of the week, the book will be sold to the highest bidder at the price that he or she bid for it. Assuming that bidders understand the rules of the auction, the outcome of this auction will be similar to that for
A) an English auction with a reserve price equal to the owner's bid.
B) a Dutch auction with a reserve price equal to the owner's bid.
C) a sealed-bid auction in which the book is sold to the highest bidder at the highest bidder's bid price.
D) a common-value auction.
E) an English auction with no reserve price.
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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, Gloria, Desiree, and Cindy. These bidders are unacquainted with each other and do not collude. Arabella values the cabinet at $1,000, Gloria values it at $800, Desiree values it at $1,300, and Cindy values it at $700. If the bidders bid in their rational self-interest, the cabinet will be sold to
A) Desiree for slightly more than $1,000.
B) Desiree for about $1,300.
C) Arabella for about $1,000.
D) either Desiree or Arabella for about $1,000. Which of these two buyers gets it is randomly determined.
E) either Desiree or Arabella for about $800. Which of these two buyers gets it is randomly determined.
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Chapter 17: Technology
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Q1) If output is produced with two factors of production and with increasing returns to scale,
A) there cannot be diminishing marginal rate of substitution.
B) all inputs must have increasing marginal products.
C) on a graph of production isoquants, moving along a ray from the origin, output more than doubles as the distance from the origin doubles.
D) the marginal product of at least one input must be increasing.
E) all inputs must have decreasing marginal products.
Q2) The economist's distinction between the long run and the short run captures the idea that quantities of some factor inputs can be varied in the short run but not in the long run.
A)True
B)False
Q3) The production function Q = 50K<sup>0.25</sup>L<sup>0.25</sup> exhibits
A) increasing returns to scale.
B) constant returns to scale.
C) decreasing returns to scale.
D) increasing, then diminishing returns to scale.
E) negative returns to scale.
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Page 35
Chapter 17: A: Technology
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Q1) A firm has a production function f(x, y) = 2(x<sup>0.90</sup> + y<sup>0.90</sup>)<sup>5</sup> whenever x > 0 and y > 0. When the amounts of both inputs are positive, this firm has
A) increasing returns to scale if x + y > 1 and decreasing returns to scale otherwise.
B) increasing returns to scale.
C) decreasing returns to scale.
D) constant returns to scale.
E) increasing returns to scale if output is less than 1 and decreasing returns to scale if output is greater than 1.
Q2) In Problem 3, if the exponents in the production function were 0.30 for x<sub>1</sub> and 0.30 for x<sub>2</sub>, this production function would exhibit (constant, increasing, decreasing) returns to scale and (would, would not) have diminishing technical rate of substitution.
A) constant, would
B) constant, would not
C) decreasing, would not
D) increasing, would
E) decreasing, would
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Page 36
Chapter 18: Profit Maximization
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Q1) A competitive firm produces output using three fixed factors and one variable factor. The firm's short-run production function is q = 305x - 2x<sup>2</sup>, where x is the amount of variable factor used. The price of the output is $2 per unit and the price of the variable factor is $10 per unit. In the short run, how many units of x should the firm use?
A) 37
B) 150
C) 21
D) 75
E) None of the above.
Q2) If the value of the marginal product of labor exceeds the wage rate, then a competitive, profit-maximizing firm would want to hire less labor.
A)True
B)False
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: 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) Nadine has a production function 4x1 + x2. If the factor prices are $12 for factor 1 and $2 for factor 2, how much will it cost her to produce 30 units of output?
A) $795
B) $60
C) $90
D) $1,500
E) $75
Q2) Ben runs a cookie factory. His cookies are made with sugar, peanut oil, and soybean oil. The number of boxes of cookies that he produces is f (su, po, so) = min{su, po + 2so}, where su is the number of bags of sugar, po the number of canisters of peanut oil, and so the number of canisters of soybean oil that he uses. The price of a bag of sugar is $12. The price of a canister of peanut oil is $6. The price of a canister of soybean oil is $19. If Ben makes 254 boxes of cookies in the cheapest way possible, how many canisters of soybean oil will he use?
A) 169.33
B) 127
C) 0
D) 84.67
E) 42.33
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Page 39
Chapter 19: A: Cost Minimization
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Q1) Suppose that Nadine in Problem 1 has a production function 3x<sub>1</sub> + x<sub>2</sub>. If the factor prices are $3 for factor 1 and $3 for factor 2, how much will it cost her to produce 80 units of output?
A) $960
B) $80
C) $240
D) $600
E) $160
Q2) Suppose that Nadine in Problem 1 has a production function 4x<sub>1</sub> + x<sub>2</sub>. If the factor prices are $12 for factor 1 and $2 for factor 2, how much will it cost her to produce 50 units of output?
A) $100
B) $2,500
C) $150
D) $1,325
E) $125
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Chapter 20: Cost Curves
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Q1) The marginal cost curve passes through the minimum point of the average fixed cost curve.
A)True
B)False
Q2) Average cost can never rise while marginal costs are declining.
A)True
B)False
Q3) A goatherd has the cost function c(y) = 4y2, where y is the number of tubs of goat cheese she makes per month. She faces a competitive market for goat cheese,with a price of $40 a tub. How many tubs should she produce per month?
A) The square root of 40
B) 16
C) 5
D) The square root of 10
E) 2.50
Q4) The cost function C(y) = 100 + 3y2 has marginal cost less than average cost for all positive levels of output.
A)True
B)False
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Chapter 20: A: Cost Curves
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Q1) 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.
Q2) In Problem 2, if Mr. Dent Carr's total costs were 2s<sup>2</sup> + 50s + 75, then if he repairs 25 cars, his average variable costs will be
A) $150.
B) $200.
C) $103.
D) $100.
E) $75.
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Chapter 21: Firm Supply
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Q1) The area under the marginal cost curve measures total variable costs.
A)True
B)False
Q2) A firm has the long-run cost function C(q) = 3q2 + 27.In the long run, it will supply a positive amount of output, so long as the price is greater than A) $36.
B) $44.
C) $9.
D) $18.
E) $23.
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
Q4) Average fixed costs never increase with output.
A)True
B)False
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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) = 2s<sup>2</sup> + 50. If the price he receives for repairing a car is $8, then in the long run, how many cars will he fix per week if he maximize profits?
A) 2
B) 0
C) 4
D) 3
E) 6
Q2) A firm has a long-run cost function, C(q) = 8q<sup>2</sup> + 72. In the long run, this firm will supply a positive amount of output, as long as the price is greater than A) $48.
B) $104.
C) $96.
D) $24.
E) $53.
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Chapter 22: Industry Supply
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Q1) The short-run industry supply curve can be found by horizontally summing the short-run supply curves of all the individual firms in the industry.
A)True
B)False
Q2) The price elasticity of gasoline in the United States has been estimated to be 0.15. If this is so, should profit-maximizing gasoline stations raise their prices? (Explain why or why not.)
Q3) A competitive industry has 10,000 identical firms. For each firm in the industry, the long-run cost of producing y units of output is c(y) = $100 + y2 if y > 0 and c(0) = 0. The government imposes a lump sum tax of $300 on each firm in the industry. Firms can avoid this tax only by going out of business. There is free entry and exit into this industry.
In the long run, the number of firms
A) stays constant and the price of output rises by $30.
B) doubles and the price of output doubles.
C) is halved and the price of output is doubled.
D) stays constant and the price of output rises by less than $30.
E) None of the above.
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Chapter 22: A: Industry Supply
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Q1) In Problem 4, suppose that each firm has the cost function c(y) = y<sup>2</sup> + 9 for y > 0 and c(0) = 0. With industry demand given by D(p) = 51 - p, the equilibrium price and equilibrium number of firms in the industry (in that order) will be
A) $8 and 11.
B) $3 and 18.
C) $3 and 48.
D) $6 and 15.
E) $6 and 45.
Q2) Suppose that the garden gnome industry was in long-run equilibrium given the circumstances described in Problem 1. Suppose, as in Problem 2, that it was discovered to everyone's surprise on January 1, 1993, after it was too late to change orders for gnome molds, that the cost of the plaster and labor needed to make a gnome had changed to $8. If the demand curve does not change, what will happen to the equilibrium price of gnomes?
A) Rises by $1.
B) Falls by $1.
C) Stays constant.
D) Rises by $8.
E) Falls by $4.
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Chapter 23: Monopoly
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Q1) A firm has invented a new beverage called Slops. It doesn't taste very good, but it gives people a craving for Lawrence Welk's music and Professor Johnson's jokes. Some people are willing to pay money for this effect, so the demand for Slops is given by the equation q = 14 - p. Slops can be made at zero marginal cost from old-fashioned macroeconomics books dissolved in bathwater. But before any Slops can be produced, the firm must undertake a fixed cost of $54. Since the inventor has a patent on Slops, it can be a monopolist in this new industry.
A) The firm will produce 7 units of Slops.
B) A Pareto improvement could be achieved by having the government pay the firm a subsidy of $59 and insisting that the firm offer Slops at zero price.
C) From the point of view of social efficiency, it is best that no Slops be produced.
D) The firm will produce 14 units of Slops.
E) None of the above.
Q2) For a monopolist who faces a downward-sloping demand curve, marginal revenue is less than price whenever quantity sold is positive.
A)True
B)False
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Page 47
Chapter 23: A: Monopoly
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Q1) In Problem 1, if the demand schedule for Bong's book is Q = 2,000 - 100p, the cost of having the book typeset is $9,000, and the marginal cost of printing an extra book is $4, then he would maximize his profits by
A) having it typeset and selling 1,600 copies.
B) not having it typeset and not selling any copies.
C) having it typeset and selling 1,000 copies.
D) having it typeset and selling 800 copies.
E) having it typeset and selling 400 copies.
Q2) In Problem 1, if the demand schedule for Bong's book is Q = 3,000 - 100p, the cost of having the book typeset is $9,000, and the marginal cost of printing an extra book is $4, then he would maximize his profits by
A) having it typeset and selling 1,300 copies.
B) having it typeset and selling 2,600 copies.
C) having it typeset and selling 1,500 copies.
D) not having it typeset and not selling any copies.
E) having it typeset and selling 650 copies.
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Chapter 24: Monopoly Behavior
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Q1) A monopolist finds that a person's demand for its product depends on the person's age. The inverse demand function of someone of age y can be written p = A(y) - q, where A(y) is an increasing function of y. The product cannot be resold from one buyer to another and the monopolist knows the ages of its consumers. If the monopolist maximizes its profits,
A) older people will pay higher prices and purchase less of this product.
B) older people will pay higher prices and purchase more of this product.
C) older people will pay lower prices and purchase more of this product.
D) everyone will pay the same price but older people will consume more.
E) None of the above
Q2) A monopolist who is able to practice third-degree price discrimination will make greater profits than a monopolist who is able to practice first-degree price discrimination.
A)True
B)False
Q3) A monopolist who is able to practice third-degree price discrimination charges a higher price in the market that is more elastic.
A)True
B)False
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Page 49
Chapter 24: A: Monopoly Behavior
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Q1) If a monopolist faces an inverse demand curve, p(y) = 100 - 2y and has constant marginal costs of $8 and zero fixed costs and if this monopolist is able to practice perfect price discrimination, its total profits will be
A) $2,116.
B) $23.
C) $1,058.
D) $3,174.
E) $529.
Q2) In Problem 1, if demand in the United States is given by Q<sub>1</sub> = 13,200600p<sub>1</sub>, where p<sub>1</sub> is the price in the United States, and if the demand in England is given by 9,000 - 500p<sub>2</sub>, where p<sub>2</sub> is the price in England, then the difference between the price charged in England and the price charged in the United States will be
A) $4.
B) $2.
C) $0.
D) $12.
E) $6.
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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) 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
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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 = 2012q, 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) $15.
B) $.83.
C) $1.67.
D) $10.
E) $5.
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Chapter 26: Oligopoly
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Q1) An industry has two colluding firms that act so as to maximize total profit in the industry and then split the profits equally. Firm 1 has cost function c(y) = 8y. Firm 2 has cost function c(y) = y<sup>2</sup>. Each firm produces an integer number of units. Market demand is given by Y(p) = 56 - p.
A) Firm 1 should produce 10 units and firm 2 should produce 10 units.
B) Firm 1 should produce 20 units and firm 2 should produce 4 units.
C) Each firm should produce 12 units.
D) Firm 1 should produce 24 units and firm 2 should produce 2 units.
E) None of the above.
Q2) Suppose that the inverse demand for bean sprouts is given by P(Y) = 370 - 4Y and the total cost of producing Y units for any firm is TC(Y) = 10Y. If the industry consists of two Cournot duopolists, then in equilibrium each firm's production is
A) 45 units.
B) 22.50 units.
C) 15 units.
D) 30 units.
E) 23.13 units.
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Page 53
Chapter 26: A: Oligopoly
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Q1) If in Problem 4, the inverse demand for bean sprouts were given by P(Y) = 940 - 5Y and the total cost of producing Y units for any firm were TC(Y) = 40Y and if the industry consisted of two Cournot duopolists, then in equilibrium each firm's production would be A) 90 units.
B) 45 units.
C) 30 units.
D) 60 units.
E) 47 units.
Q2) In Problem 4, suppose that the market demand curve for bean sprouts is given by P = 1,660 - 4Q, where P is the price and Q is total industry output. Suppose that the industry has two firms, a Stackleberg leader and a follower. Each firm has a constant marginal cost of $60 per unit of output. In equilibrium, total output by the two firms will be A) 400.
B) 300.
C) 100.
D) 200.
E) 50.
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Chapter 27: Game Theory
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Q1) Big Pig and Little Pig have two possible strategies, Press the Button, and Wait at the Trough. If both pigs choose Wait at the Trough, both get 3. If both pigs choose Press the Button, then Big Pig gets 8 and Little Pig gets 2. 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 at the trough, then Big Pig gets 2 and Little Pig gets 1. In Nash equilibrium,
A) Little Pig will get a payoff of 1 and Big Pig will get a payoff of 2.
B) Little Pig will get a payoff of 2 and Big Pig will get a payoff of 8.
C) both pigs will wait at the trough.
D) Little pig will get a payoff of zero.
E) the pigs must be using mixed strategies.
Q2) In the prisoner's dilemma game, if each prisoner believed that the other prisoner would deny the crime, then both would deny the crime.
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) Suppose that in the Hawk-Dove game discussed in Problem 8, the payoff to each player is -9 if both play Hawk. If both play Dove, the payoff to each player is 5, and if one plays Hawk and the other plays Dove, the one that plays Hawk gets a payoff of 9 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) .31.
B) .15.
C) .08.
D) .65.
E) 1.
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Chapter 29: Behavioral Economics
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Q1) A house was for sale for 9 months with no offers at $350,000. It was taken off the market, and relisted 1 month later at $399,500 and sold in 2 weeks. Which of the following behavioral economic concepts could explain this scenario?
A) Hyperbolic discounting of housing values
B) Time inconsistency of preferences
C) Spurious information
D) Framing effects
E) Fairness norms
Q2) A new DVD of lectures on the topic of macro economics and personal hygiene is being marketed on the Internet as a remedy for insomnia. As an experiment, the marketing firm wants to direct half of Web hits to a page that advertises the DVD as 90% successful in inducing sleep while the other half are directed to a page that advertises the DVD as failing to induce sleep 10% of the time. Would you expect equal numbers of sales from the 2 advertising approaches? Explain.
Q3) If a coin is tossed, and the results are 6 consecutive tails (TTTTTT), this is conclusive evidence that the coin is not a fair coin.
A)True
B)False
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Page 59
Chapter 30: Exchange
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Q1) Morris has the utility function U(b, w) = 3b + 3w and Philip has the utility function U(b, w) = bw, where b is the number of books consumed per month and w is bottles of wine consumed per month. If we draw an Edgeworth box with books on the horizontal axis and wine on the vertical axis and if we measure Morris's consumptions from the lower left corner of the box, then the contract curve contains
A) a straight line running from the upper right corner of the box to the lower left.
B) a curve that gets steeper as you move from left to right.
C) a straight line with slopepassing through the lower left corner of the box.
D) a straight line with slopepassing through the upper right corner of the box.
E) a curve that gets flatter as you move from left to right.
Q2) A situation is Pareto efficient if
A) there is no way to make everyone worse off without making someone better off.
B) aggregate profits are maximized.
C) there is no way to make someone better off without making someone else worse off.
D) there is some way to make everyone better off.
E) there is no way to make anyone better off.
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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 6 units of quiche and 9 units of wine and Barbie's endowment were 12 units of quiche and 9 units of wine, then at any Pareto optimal allocation where both persons consume some of each good,
A) Ken would consume 18 units of quiche for every 18 units of wine that he consumes.
B) Barbie would consume 12 units of quiche for every 9 units of wine that she consumes.
C) Ken would consume 6 units of quiche for every 9 units of wine.
D) Barbie would consume twice as much quiche as Ken.
E) None of the above.
Q2) ...
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Chapter 31: Production
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Q1) Robinson Crusoe spends 4 hours a day catching fish and picking coconuts. He can always catch 2 fish per hour and he can always gather 3 coconuts per hour. His utility function is CF, where C is the number of coconuts he eats per day and F is the number of fish he eats per day. How many fish will he choose to eat per day?
A) 8
B) 6
C) 4
D) 2
E) 1
Q2) If there are constant returns to scale in an industry, then in competitive equilibrium, profits in that industry must necessarily be zero.
A)True
B)False
Q3) 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: A: Production
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Q1) (See Problem 5.) 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 27 units of red money and 40 units of blue money to spend. The red price of ambrosia is 3 and the blue price of ambrosia is 8. 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, 47) to (5, 27) and the other running from (5, 27) to (14, 0).
B) two line segments, one running from (0, 47) to (9, 20) and another running from (9, 20) to (14, 0).
C) a vertical line segment and a horizontal line segment, intersecting at (9, 20).
D) two line segments, one running from (0, 25) to (9, 20) and the other running from (9, 20) to (36, 0).
E) a vertical line segment and a horizontal line segment, intersecting at (5, 27).
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Chapter 32: Welfare
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Q1) According to Arrow's impossibility theorem, it is impossible to find a social ordering that is complete, reflexive, and transitive.
A)True
B)False
Q2) If allocation x is Pareto optimal and allocation y is not, then everyone is at least as well off with x as with y, and someone is better off with x than with y.
A)True
B)False
Q3) The utility possibilities frontier is the boundary of the production possibilities set.
A)True
B)False
Q4) In a pure exchange economy if the initial allocation is Pareto optimal, then competitive equilibrium is fair.
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>8</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>8</sup><sub>J</sub>, where S<sub>R</sub> is Romeo's spaghetti consumption and S<sub>J</sub> is Juliet's. They have 120 units of spaghetti to divide between them.
A) Romeo would want to give Juliet some spaghetti if he had more than 60 units of spaghetti.
B) Juliet would want to give Romeo some spaghetti if she has more than 78 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 76 units of spaghetti.
E) Juliet would want to give Romeo some spaghetti if she has more than 80 units of spaghetti.
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65
Chapter 33: Externalities
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Q1) If your consumption of toothpaste produces positive externalities for your neighbors (which you ignore), then you are consuming less toothpaste than is Pareto optimal.
A)True
B)False
Q2) Suppose that in Horsehead, Massachusetts, the cost of operating a lobster boat is $4,000 per month. Suppose that if x lobster boats operate in the bay, the total monthly revenue from lobster boats in the bay is $1,000(12x - x<sup>2</sup>). If there are no restrictions on entry and new boats come into the bay until there is no profit to be made by a new entrant, then the number of boats who enter will be X<sub>1</sub>. If the number of boats that operate in the bay is regulated to maximize total profits, the number of boats in the bay will be X<sub>2</sub>.
A) X<sub>1</sub> = 8 and X<sub>2</sub> = 8.
B) X<sub>1</sub> = 4 and X<sub>2</sub> = 2.
C) X<sub>1</sub> = 8 and X<sub>2</sub> = 4.
D) X<sub>1</sub> = 12 and X<sub>2</sub> = 8.
E) None of the above.
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Chapter 33: A: Externalities
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Q1) In Problem 3, suppose Lawrence, a typical citizen, has the utility function U(m, d, h) = m + 7d<sup>2</sup> - d<sup>2</sup> - 4h, where d is the number of hours per day that he spends driving around, h is the average number of hours per day spent driving around by other people in his home town, and m is the amount of money he has left to spend on other stuff besides gasoline and auto repairs. Gas and auto repairs cost $1 per hour of driving. If each citizen believes that their own driving will not affect the amount of driving done by others, they will all drive D<sub>1</sub> hours per day. If all citizens drive to maximize the utility of a typical citizen, they will all drive D<sub>2</sub> hours per day, where
A) D<sub>1</sub> = 5 and D<sub>2</sub> = 2.
B) D<sub>1</sub> = D<sub>2</sub> = 3.
C) D<sub>1</sub> = 3 and D<sub>2</sub> = 1.
D) D<sub>1</sub> = 6 and D<sub>2</sub> = 0.
E) D<sub>1</sub> = 3 and D<sub>2</sub> = 0.
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Chapter 34: Information Technology
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Q1) Video marketers and publishers are more likely to profit from allowing rentals of their products, the higher the ratio of cost of production of originals to the transaction cost of rentals.
A)True
B)False
Q2) One proposed remedy for the Microsoft antitrust case is to break Microsoft into three equal parts and strictly prohibit any coordination between the parts. The three mini-Microsoft's would then compete with one another in both the operating system and applications markets. From a Systems Competition perspective, comment on how this proposed settlement might eventually affect consumers.
Q3) Intel produces the overwhelming majority of computer central processing units (CPUs) that run the Microsoft Windows operating system. Systems competition reasoning would suggest that Intel could only benefit from an outcome of the Microsoft antitrust case that is unfavorable to Microsoft.
A)True
B)False
Q4) 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: 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 5 consumers could all connect to the network and either make a profit or at least break even?
A) $49
B) $30
C) $42
D) $28
E) $35
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Chapter 35: Public Goods
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Q1) Remember Bonnie and Clyde from your workbook? Suppose that their total profits are 112H, 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> - 0.02H<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 must be A) 1,400.
B)750
C)650 1,500.
D) 650.
Q2) Economists define public goods to be those goods that are supplied by the government and private goods to be those goods that are supplied by the private sector.
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 140H, 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> - 0.03H<sup>2</sup> and U<sub>C</sub>(C<sub>C</sub>, H) = C<sub>C</sub> - 0.02H<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) 1,400.
B) 2,100.
C) 1,500.
D) 650.
E) 750.
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Chapter 36: Asymmetric Information
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Q1) In Rustbucket, Michigan, there are 200 used cars for sale; half of these cars are good and half of them are lemons. Owners of lemons are willing to sell them for $500. Owners of good used cars are willing to sell them for prices above $1,100 but will keep them if the price is lower than $1,100. There is a large number of potential buyers who are willing to pay $600 for a lemon and $1,700 for a good car. Buyers can't tell good cars from bad, but original owners know.
A) There will be an equilibrium in which all used cars sell for $800.
B) There will be an equilibrium in which lemons sell for $500 and good used cars sell for $1,100.
C) There will be an equilibrium in which all used cars sell for $1,150.
D) The only equilibrium is one in which all used cars on the market are lemons and they sell for $600.
E) There will be an equilibrium in which lemons sell for $600 and good used cars sell for $1,700.
Q2) The incentive compatibility constraint requires that incentives be consistent with a consumers budget constraint.
A)True
B)False
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Page 72
Chapter 36: A: Asymmetric Information
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Q1) Suppose that in Enigma, Ohio, klutzes have a productivity of $1,000 and kandos have a productivity of $4,000 per month. You can't tell klutzes from kandos by looking at them or asking them, and it is too expensive to monitor individual productivity. Kandos, however, have more patience than klutzes. Listening to an hour of dull lectures is as bad as losing $300 for a klutz and $150 for a kando. There will be a separating equilibrium in which anybody who attends a course of H hours of lectures is paid $4,000 per month and anybody who does not is paid $1,000 per month
A) for all positive values of H.
B) if 10 < H < 40.
C) if 10 < H < 20.
D) only in the limit as H approaches infinity.
E) if 8.33 < H < 16.67.
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