Intermediate Microeconomics
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Course
Introduction
Intermediate Microeconomics builds upon the foundational concepts of introductory microeconomics to provide a deeper analytical understanding of how individuals, firms, and markets operate. The course covers consumer and producer theory, focusing on utility maximization, cost minimization, and the derivation of demand and supply curves. It explores the efficiency of competitive markets, the effects of market power in monopoly and oligopoly settings, and examines real-world issues such as externalities and public goods. Mathematical models and graphical analysis are used extensively to analyze decision-making and market outcomes, equipping students with essential tools for economic reasoning and policy evaluation.
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) In year 1, the price of good x was $3, the price of good y was $2, and income was $90. In year 2, the price of x was $9, the price of good y was $6, and income was $90. On a graph with x on the horizontal axis and y on the vertical, the new budget line is
A) flatter than the old one and lies below it.
B) flatter than the old one and lies above it.
C) steeper than the old one and lies below it.
D) steeper than the old one and lies above it.
E) None of the above.
Answer: E
Q2) If there are two goods and if one good has a negative price and the other has a positive price, then the slope of the budget line will be positive.
A)True
B)False
Answer: True
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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 88 and a blue income of 30. Recall that blue prices are 1 bcu (blue currency unit) per unit of ambrosia and 1 bcu per unit of bubble gum. Red prices are 2 rcus (red currency units per unit of ambrosia and 6 rcus per unit of bubble gum. You have to pay twice for what you buy, once in red currency, once in blue currency. If Ike spends all of his blue income but not all of his red income, he must consume
A) at least 23 units of ambrosia.
B) exactly twice as much bubble gum as ambrosia.
C) at least 17 units of bubble gum.
D) at least 7 units of bubble gum.
E) equal amounts of ambrosia and bubble gum.
Answer: A
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Chapter 2: Preferences
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Sample Questions
Q1) Josephine buys 3 quarts of milk and 2 pounds of butter when milk sells for $2 a quart and butter sells for $1 a pound. Wilma buys 2 quarts of milk and 3 pounds of butter at the same prices. Josephine's marginal rate of substitution between milk and butter is greater than Wilma's.
A)True
B)False
Answer: False
Q2) Toby Talkalot subscribes to a local phone service that charges a fixed fee of $10 per month and allows him to place as many local phone calls as he likes without further charge. Let good 1 be an aggregate of commodities other than local phone use and let good 2 be local phone use. (Measure good 1 on the horizontal axis and good 2 on the vertical axis.) On Monday, Toby didn't use the telephone at all. The slope m of his indifference curve at the consumption bundle he chose on Monday was
A) positive.
B) less than or equal to 0.
C)0.
D) greater than or equal to 0.
E) negative.
Answer: C
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Page 5
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 20 on her first midterm and 30 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 (20, 30). This class could
A) be Professor Goodheart's but could not be Professor Stern's.
B) be Professor Stern's but could not be Professor Goodheart's.
C) not be either Professor Goodheart's or Professor Stern's.
D) be either Professor Goodheart's or Professor Stern'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) A person with the utility function U(x, y) = y + x<sup>2 </sup>has convex preferences.
A)True
B)False
Q2) Mark strictly prefers consumption bundle A to consumption bundle B and weakly prefers bundle B to bundle A. These preferences can be represented by a utility function. A)True
B)False
Q3) Emily's utility function is U(x, y) = 3min{x, y} + y. If we draw her indifference curves with x on the horizontal axis and y on the vertical axis, these indifference curves are A) made up of two line segments that meet where x = 4y. One of these line segments is vertical and the other has slope -1.
B) L-shaped with kinks where x = 4y.
C) L-shaped with kinks where x = y.
D) made up of two line segments that meet where x = y. One of these line segments is horizontal and the other has slope -3.
E) V-shaped with kinks where x = 3y.
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Chapter 3: A: Utility
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Q1) In Problem 1, Charlie has the utility function U(x<sub>A</sub>, x<sub>B</sub>) = x<sub>A</sub>x<sub>B</sub>. 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.
Q2) In Problem 7, Harry Mazzola has the utility function U(x<sub>1</sub>, x<sub>2</sub>) = min{x<sub>1</sub> + 2x<sub>2</sub>, 2x<sub>1</sub> + x<sub>2</sub>}. He has $40 to spend on corn chips and french fries. If the price of corn chips is $4 per unit and the price of french fries is $2 per unit, then Harry will A) definitely spend all of his income on corn chips. B) definitely spend all of his income on french fries.
C) consume at least as many corn chips as french fries but might consume both. 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.
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Page 8
Chapter 4: Choice
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Q1) Clara's utility function is U(x, y) = (x + 2)(y + 1). If her consumption of both x and y are doubled, then her marginal rate of substitution between x and y remains constant.
A)True
B)False
Q2) Wanda Littlemore's utility function is U(x, y) = x + 47y - 3y<sup>2</sup>. Her income is $107. If the price of x is $1 and the price of y is $23, how many units of good x will Wanda demand?
A) 11
B) 19
C) 0
D) 18
E) 15
Q3) Sharon spends all of her income on peaches and strawberries. Peaches are a normal good for her. Her income increased by 20 percent and prices did not change. Her consumption of strawberries could not have increased by more than 20 percent.
A)True
B)False
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Chapter 4: A: Choice
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Q1) In Problem 6, Elmer's utility function is U(x, y) = min{x, y<sup>2</sup>}. If the price of x is $15, the price of y is $20, and Elmer chooses to consume 7 units of y, what must Elmer's income be?
A) $245
B) $1,750
C) $975
D) $875
E) There is not enough information to tell.
Q2) 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 $6, how many apples would there be in the best bundle that Charlie could afford?
A) 4
B) 20
C) 5
D) 6
E) 10
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Page 10
Chapter 5: Demand
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Q1) Clarissa's utility function is U(r, z) = z + 160r - r<sup>2</sup>, where r is the number of rose plants she has in her garden and z is the number of zinnias. She has 250 square feet to allocate to roses and zinnias. Roses each take up 4 square feet and zinnias each take up 1 square foot. She gets the plants for free from a generous friend. If she acquires another 100 square feet of land for her garden and her utility function remains unchanged, she will plant
A) 100 more zinnias and no more roses.
B) 25 more roses and no more zinnias.
C) max(1, min(99, zdem + 100)) more zinnias and some more roses.
D) 20 more roses and 20 more zinnias.
E) None of the above.
Q2) Mike consumes two commodities, x and y, and his utility function is min{x + 2y, y + 2x}. He chooses to buy 8 units of good x and 16 units of good y. The price of good y is $.50. What is his income?
A) $32
B) $40
C) $24
D) $16
E) Mike's income cannot be found unless the price of x is given too.
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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{ 5x, 3x + 6y}, then if the price of whips were $20 and the price of leather jackets were $20, Kinko would demand
A) 3 times as many whips as leather jackets.
B) 4 times as many leather jackets as whips.
C) 2 times as many leather jackets as whips.
D) 5 times as many whips as leather jackets.
E) only leather jackets.
Q2) In Problem 1, if Charlie's utility function were X<sup>6</sup><sub>A</sub>X<sub>B</sub>, if apples cost 90 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>A</sub> = 6X<sub>B</sub>.
B) X<sub>B</sub> = 6X<sub>A</sub>.
C) X<sub>B</sub> = X<sub>A</sub>.
D) 6X<sub>B</sub> = 9X<sub>A</sub>.
E) 90X<sub>A</sub> + 10X<sub>B</sub> = M.
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Page 12
Chapter 6: Revealed Preference
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Q1) Hillary has an initial endowment of $500 and is interested in two things: how many visits she can make to the doctor and how much money will be left over to spend on other things. When a trip to the doctor costs $50, Hillary sees the doctor 7 times. After health care reform, a visit to the doctor will cost $10 but her taxes will rise by $360.
A) Hillary will be made better off by health care reform.
B) Hillary will be made worse off by health care reform.
C) We cannot tell how health care reform will affect Hillary.
D) Hillary violates the Weak Axiom of Revealed Preference.
E) Hillary violates the Strong Axiom of Revealed Preference.
Q2) When the prices were ($5, $1), Vanessa chose the bundle (x, y) = (6, 3). Now at the new prices, (p<sub>x</sub>, p<sub>y</sub>), she chooses the bundle (x, y) = (5, 7). For Vanessa's behavior to be consistent with the weak axiom of revealed preference, it must be that
A) 4p<sub>y</sub> < p<sub>x</sub>.
B) p<sub>x</sub> < 4p<sub>y</sub>.
C) 5p<sub>y</sub> < p<sub>x</sub>.
D) p<sub>y</sub> = 5p<sub>x</sub>.
E) None of the above.
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Page 13
Chapter 6: A: Revealed Preference
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Q1) On the planet Homogenia every consumer who has ever lived consumes only two goods, x and y, and has the utility function U(x, y) = xy. The currency in Homogenia is the fragel. In this country in 1900, the price of good 1 was 1 fragel and the price of good 2 was 2 fragels. Per capita income was 84 fragels. In 2000, the price of good 1 was 3 fragels and the price of good 2 was 4 fragels. The Laspeyres price index for the price level in 2000 relative to the price level in 1900 is
A) 2.50.
B) 3.50.
C) 2.33.
D) 4.
E) not possible to determine from this 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) The Slutsky substitution effect measures the movement between two points on the same indifference curve.
A)True
B)False
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) If the Engel curve slopes up, then the demand curve slopes down.
A)True
B)False
Q4) The compensated demand function refers to the demand function of someone who is adequately paid for what he or she sells.
A)True
B)False
Q5) What conditions ensure that the quantity of a good demanded increases as its price falls? Explain your answer, using diagrams.
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Chapter 7: A: Slutsky Equation
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Q1) Neville, in Problem 2, has a friend named Algernon. Algernon has the same demand function for claret as Neville, namely q = .02m - 2p, where m is income and p is price. Algernon's income is $5,500 and he initially had to pay a price of $20 per bottle of claret. The price of claret rose to $50. The substitution effect of the price change
A) reduced his demand by 60.
B) reduced his demand by 18.
C) reduced his demand by 102.
D) increased his demand by 60.
E) reduced his demand by 28.
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 per unit, and the price of bananas $2 per unit. His income was $40 per day. If the price of apples increased to $2.25 and the price of bananas fell to $1.75, then in order to be able to just afford his old bundle, Charlie would have to have a daily income of
A) $62.50.
B) $126.
C) $31.25.
D) $93.75.
E) $250.
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Page 16
Chapter 8: Buying and Selling
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Q1) Mike Teevee likes to watch television and to eat candy. In fact his utility function is U(x, y) = x<sup>2</sup>y, where x is the number of hours he spends watching television and y is the number of dollars per week he spends on candy. Mike's mother doesn't like him to watch so much television. She limits his television watching to 36 hours a week and in addition she pays him $1 an hour for every hour that he reduces his television watching below 36 hours a week. If this is Mike's only source of income to buy candy, how many hours of television does he watch per week?
A) 36
B) 12
C) 24
D) 18
E) 16
Q2) Les is allowed to work only 8 hours a day at his main job, although he would like to work more hours. He takes a second job. He can work as many hours as he wishes at the second job, but at a lower wage. If leisure is a normal good, then an increase in the wage rate for his first job will reduce the number of hours he chooses to work at his second job.
A)True
B)False
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Page 17
Chapter 8: A: Buying and Selling
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Q1) Suppose that Mario in Problem 2 consumes eggplants and tomatoes in the ratio of 1 bushel of eggplants per 1 bushel of tomatoes. His garden yields 30 bushels of eggplants and 10 bushels of tomatoes. He initially faced prices of $25 per bushel for each vegetable, but the price of eggplants rose to $50 per bushel, while the price of tomatoes stayed unchanged. After the price change, he would
A) increase his consumption of eggplants by 5.33 bushels.
B) increase his eggplant consumption by 3.33 bushels.
C) decrease his eggplant consumption by at least 3.33 bushels.
D) decrease his consumption of eggplants by 5.33 bushels.
E) decrease his tomato consumption by at least 1 bushel.
Q2) Mr. Cog in Problem 7 has 18 hours per day to divide between labor and leisure. If he has a nonlabor income of 44 dollars per day and a wage rate of 14 dollars per hour, he will choose a combination of labor and leisure that allows him to spend
A) 296 dollars per day on consumption.
B) 138 dollars per day on consumption.
C) 170 dollars per day on consumption.
D) 148 dollars per day on consumption.
E) 222 dollars per day on consumption.
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Page 18
Chapter 9: Intertemporal Choice
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Q1) Samantha Smoothie's utility function is U(c<sub>1</sub>, c<sub>2</sub>) = c<sub>1</sub>c<sub>2</sub>, where c<sub>1</sub> is her consumption in period 1 and c<sub>2</sub> is her consumption in period 2. She earns $200 in period 1 and $220 in period 2. Samantha can borrow and lend at an interest rate of 10% and there is no inflation. The number of dollars that Samantha spends in the second period must be
A) more than 200 but less than 220.
B) exactly 220.
C) more than 220.
D) exactly 200.
E) less than 200.
Q2) 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
Q3) If the nominal interest rate is 3% and if prices fall by 2% per year, then the real rate of interest is approximately 5%.
A)True
B)False
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Page 19
Chapter 9: A: Intertemporal Choice
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Q1) Mr. O. B. Kandle, of Problem 8, has a utility function c<sub>1</sub>c<sub>2</sub>, where c<sub>1</sub> is his consumption in period 1 and c<sub>2</sub> is his consumption in period 2. He has no income in period 2. If he had an income of $40,000 in period 1 and the interest rate increased from 10 to 12%,
A) his consumption in both periods would increase.
B) his savings would increase by 2% and his consumption in period 2 would also increase.
C) his consumption in both periods would decrease.
D) his savings would not change but his consumption in period 2 would increase by 400.
E) his consumption in period 1 would decrease by 12% and his consumption in period 2 would also decrease.
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Chapter 10: Asset Markets
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Q1) Shivers's annual fuel bill for home heating is 800 dollars per year. He considers three alternative plans for insulating his house. Plan A would reduce his annual fuel bill by 15%, plan B would reduce it by 20%, and plan C would eliminate his need for heating fuel altogether. The plan A insulation job would cost Shivers 800 dollars, plan B would cost him 1,100, dollars, and plan C would cost him 8,800 dollars. If the interest rate is 10% and his house and the insulation job last forever, which plan is the best for Shivers?
A) Plan A.
B) Plan B.
C) Plan C.
D) Plans A and B are equally good.
E) He is best off using none of the plans.
Q2) The interest rate is 10% and will remain 10% forever. Suppose that you do not drink wine but are interested in buying it for investment purposes. How much would you be willing to pay for each of the following?
a. A bottle of wine that will be worth $22 a year from now and will then go bad and be worthless.
b. A bottle of wine that will be worth $22 a year from now and will rise in value by $1 a year forever? Explain your answer.
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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 45 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) 76 dollars
B) 45 dollars
C) 150 dollars
D) 495 dollars
E) 71 dollars
Q2) If the interest rate is 15% and will remain 15% forever, how much would a rational investor be willing to pay for an asset that will pay him 3,450 dollars 1 year from now, 1,322 dollars 2 years from now, and nothing at any other time?
A) 4,000 dollars
B) 26,666.67 dollars
C) 64,000 dollars
D) 3,000 dollars
E) 5,000 dollars
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Page 22
Chapter 11: 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 < $2,000, u(x) = 2x, and for x greater than or equal to $2,000, u(x) = 2,000 + x.
A) For bets that involve no chance of her wealth exceeding $2,000, Sally will take any bet that has a positive expected net payoff.
B) Sally will be risk averse if her income is less than $2,000 but risk loving if her income is more than $2,000.
C) Sally will be risk neutral if her income is less than $2,000 and risk averse if her income is more than $2,000.
D) Sally will never take a bet if there is a chance that it leaves her with wealth less than $4,000.
E) None of the above are true.
Q2) If someone has strictly convex preferences between all contingent commodity bundles, then he or she must be 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 < 1,000, u(x) = 2x, and for x greater than or equal to 1,000, u(x) = 2,000 + x.
A) Sally will be risk averse if her income is less than $1,000 but risk loving if her income is more than $1,000.
B) Sally will never take a bet if there is a chance that it leaves her with wealth less than $2,000.
C) Sally will be risk neutral if her income is less than $1,000 and risk averse if her income is more than $1,000.
D) For bets that involve no chance of her wealth exceeding $1,000, Sally will take any bet that has a positive expected net payoff.
E) None of the above.
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Chapter 12: Risky Assets
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Q1) 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.
Q2) 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
Q3) 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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Page 25
Chapter 12: A: Risky Assets
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Q1) Suppose that Fenner Smith of Problem 2 must divide his portfolio between two assets, one of which gives him an expected rate of return of 15% with zero standard deviation and one of which gives him an expected rate of return of 30% and has a standard deviation of 15. 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) 0.50.
B) -1.
C) -0.50.
D) 1.
E) 1.50.
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Chapter 13: 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 $15 and was paying a price of $8 for a pair of earrings, then if the price of earrings went up to $13, the equivalent variation of the price change would be
A) $5.36.
B) $8.33.
C) $16.67.
D) $2.68.
E) $6.85.
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 $12 and was paying a price of $4 for a pair of earrings, then if the price of earrings went up to $6, the equivalent variation of the price change would be
A) $4.80.
B) $3.43.
C) $1.71.
D) $9.60.
E) $4.11.
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Chapter 13: A: Consumers Surplus
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Q1) In Problem 1, Sir Plus has a demand function for mead that is given by the equation D(p) = 100 - p. If the price of mead is $95, how much is Sir Plus's net consumer's surplus?
A) 25
B) 6.25
C) 5
D) 12.50
E) 9,500
Q2) Bernice in Problem 5 has the utility function u(x, y) = min{x, y}, where x is the number of pairs of earrings she buys per week and y is the number of dollars per week she has left to spend on other things. (We allow the possibility that she buys fractional numbers of pairs of earrings per week.) If she originally had an income of $18 per week and was paying a price of $8 per pair of earrings, then if the price of earrings rose to $14, the compensating variation of that price change (measured in dollars per week) would be closest to
A) $12.
B) $25.
C) $7.20.
D) $24.
E) $23.
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Page 28
Chapter 14: Market Demand
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Q1) Jen, Eric, and Kurt are all buyers of chain saws. Jen's demand function is Q<sub>j</sub> = 520 - 13P, Eric's demand function is Q<sub>e</sub> = 40 - P, and Kurt's demand function is Q<sub>k</sub> = 200 - 5P. Together, these three constitute the entire demand for chainsaws. At what price will the price elasticity of market demand be 21?
A) $19
B) $20
C) $25
D) $15
E) none of the above.
Q2) The inverse demand curve P(x) for a good x measures the price per unit at which the quantity x would be demanded.
A)True
B)False
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
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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> + 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.
Q2) In Problem 9, the demand for tickets is given by D(p) = 200,000 - 10,000p, where p is the price of tickets. If the price of tickets is $18, then the price elasticity of demand for tickets is
A) -27.
B) -18.
C) -13.50.
D) -4.50.
E) -9.
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Chapter 15: Equilibrium
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Q1) Schrecklich and Lamerde are two obscure modernist painters, who are no longer alive but whose paintings are still enjoyed by persons of dubious taste. The demand function for Schrecklichs is 200 - 4P<sub>S</sub> - 2P<sub>L</sub> and the demand function for Lamerdes is 200 - 3P<sub>L</sub> - P<sub>S</sub>, where P<sub>S</sub> and P<sub>L</sub> are respectively the price of Schrecklichs and Lamerdes. If the world supply of Schrecklichs is 110 and the world supply of Lamerdes is 110, then the equilibrium price of Schrecklichs is
A) $9.
B) $22.50.
C) $36.
D) $27.
E) $18.
Q2) If the supply curve is vertical, then the amount supplied is independent of price.
A)True
B)False
Q3) An economic situation is Pareto optimal only if there is no way to make someone better off.
A)True
B)False
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Page 31
Chapter 15: A: Equilibrium
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Q1) In a crowded city far away, the civic authorities decided that rents were too high. The long-run supply function of two-room rental apartments was given by q = 14 + 3p and the long-run demand function was given by q = 260 - 4p, where p is the rental rate in crowns per week. The authorities made it illegal to rent an apartment for more than 30 crowns per week. To avoid a housing shortage, the authorities agreed to pay landlords enough of a subsidy to make supply equal to demand. How much would the weekly subsidy per apartment have to be to eliminate excess demand at the ceiling price?
A) 9 crowns
B) 24 crowns
C) 12 crowns
D) 6 crowns
E) 18 crowns
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Chapter 16: Auctions
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Q1) It is never a profit-maximizing strategy for a seller in an English auction to set a reserve price for the good he is selling so high that he might not be able to sell it at all.
A)True
B)False
Q2) An antique cabinet is being sold by means of an English auction. There are four bidders, Zelda, Clara, Anneli, and Diana. These bidders are unacquainted with each other and do not collude. Zelda values the cabinet at $800, Clara values it at $550, Anneli values it at $1,300, and Diana values it at $300. If the bidders bid in their rational self-interest, the cabinet will be sold to
A) Anneli for about $1,300.
B) Zelda for about $800.
C) either Anneli or Zelda for slightly more than $800. Which of them actually gets it is randomly determined.
D) Anneli for slightly more than $800.
E) None of the above.
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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, Kitty, Gloria, Judy, and Cindy. These bidders are unacquainted with each other and do not collude. Kitty values the cabinet at $800, Gloria values it at $500, Judy values it at $1,700, and Cindy values it at $700. If the bidders bid in their rational self-interest, the cabinet will be sold to
A) Judy for about $1,700.
B) Kitty for about $800.
C) either Judy or Kitty for about $800. Which of these two buyers gets it is randomly determined.
D) Judy for slightly more than $800.
E) either Judy or Kitty for about $500. Which of these two buyers gets it is randomly determined.
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34
Chapter 17: Technology
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Q1) If the marginal product of each factor decreases as the amount of that factor used increases, then there must be decreasing returns to scale.
A)True
B)False
Q2) The production function Q = 50K<sup>0.25</sup>L<sup>0.75</sup> exhibits
A) increasing returns to scale.
B) decreasing returns to scale.
C) constant returns to scale.
D) increasing, then diminishing returns to scale.
E) negative returns to scale.
Q3) A firm has the production function f(x, y) = x<sup>1.40</sup>y<sup>1</sup>. 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.
Q4) The production function f(x, y) = x + y has constant returns to scale.
A)True
B)False
Page 35
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Chapter 17: A: Technology
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Q1) A firm has the production function f(x, y) = x<sup>1.20</sup>y<sup>2</sup>. This firm has
A) constant returns to scale.
B) decreasing returns to scale and increasing marginal product for factor x.
C) increasing returns to scale and decreasing marginal product for factor x.
D) decreasing returns to scale and diminishing marginal product for factor x.
E) None of the above.
Q2) In Problem 3, if the exponents in the production function were 0.40 for x<sub>1</sub> and 0.40 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) increasing, would
B) decreasing, would not C) constant, would D) constant, would not E) decreasing, would
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Chapter 18: Profit Maximization
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Q1) A competitive firm produces a single output using several inputs. The price of output rises by $4 per unit. The price of one of the inputs increases by $2 and the quantity of this input that the firm uses increases by 8 units. The prices of all other inputs stay unchanged. From the weak axiom of profit maximization we can tell that
A) the output of the good must have increased by at least 4 units.
B) the inputs of the other factors must have stayed constant.
C) the output of the good must have decreased by at least 2 units.
D) the inputs of at least one of the other factors must have decreased by at least 8 units.
E) the inputs of at least one of the other factors must have increased by at least 8 units.
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
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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) A firm has production function f (x1, x2, x3, x4) =min{x1, x2} + min{x3, x4}. This firm faces competitive factor markets where the prices for the four factors arew1 = $7, w2 = $8, w3 = $6, and w4 = $5. The firm must use at least 20 units of factor 2. The cost of producing 100 units in the cheapest possible way is
A) $1,400.
B) $1,200.
C) $1,340.
D) $1,180.
E) $500.
Q2) If the production function is given by f (x1, x2, x3, x4) =min{x1, x2} + min{x3, x4} and the prices of inputs (x1,x2, x3, x4) are (2, 1, 5, 3), the minimum cost of producing 1 unit of output is closest to
A) $1.
B) $3.
C) $4.
D) $8.
E) $11.
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Chapter 19: A: Cost Minimization
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Q1) In Problem 2, suppose that a new alloy is invented which uses copper and zinc in fixed proportions where 1 unit of output requires 3 units of copper and 4 units of zinc for each unit of alloy produced. If no other inputs are needed, the price of copper is $2, and the price of zinc is $3, what is the average cost per unit when 3,000 units of the alloy are produced?
A) $18
B) $.67
C) $666.67
D) $9.33
E) $9,333.33
Q2) Suppose that Nadine in Problem 1 has a production function 3x<sub>1</sub> + x<sub>2</sub>. If the factor prices are $12 for factor 1 and $3 for factor 2, how much will it cost her to produce 20 units of output?
A) $430
B) $780
C) $60
D) $80
E) $70
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Chapter 20: Cost Curves
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Q1) If Green Acres Turf Farm's total cost of producing acres of sod is TC = 5Q2 + 25Q + 40, the marginal cost of producing the 10th acre of sod is
A) $125.
B) $40.
C) $25.
D) $75.
E) $275.
Q2) A firm has the long-run cost function C(Q) = 4Q2 + 64.In the long run, it will supply a positive amount of output, so long as the price is greater than
A) $64.
B) $72.
C) $16.
D) $32.
E) $37.
Q3) If the average cost curve is U-shaped, then the marginal cost curve must cross the average cost curve at the bottom of the U.
A)True
B)False
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Chapter 20: A: Cost Curves
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Q1) In Problem 3, Rex Carr could pay $10 for a shovel that lasts one year and pay $5 a car to his brother Scoop to bury the cars, or he could buy a low-quality car smasher that costs $200 a year to own and that smashes cars at a marginal cost of $1 per car. If it is also possible for Rex to buy a high-quality hydraulic car smasher that cost $550 per year to own and if with this smasher he could dispose of cars at a cost of $.75 per car, it would be worthwhile for him to buy this high-quality smasher if he planned to dispose of A) at least 1,410 cars per year.
B) no more than 700 cars per year.
C) no more than 1,400 cars per year.
D) at least 1,400 cars per year.
E) at least 700 cars per year.
Q2) In Problem 2, if Mr. Dent Carr's total costs were 2s<sup>2</sup> + 20s + 40, then if he repairs 10 cars, his average variable costs will be
A) $44.
B) $80.
C) $40.
D) $60.
E) $30.
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Page 42
Chapter 21: Firm Supply
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Q1) A competitive firm has a long-run total cost function c(y) = 3y2 + 675 for y > 0 and c(0) = 0. Its long-run supply function is described as
A) y =if p > 90, y = 0 if p < 90.
B) y =if p > 88, y = 0 if p < 88.
C) y =if p > 93, y = 0 if p < 99.
D) y =if p > 93, y = 0 if p < 93.
E) y =if p > 95, y = 0 if p < 85.
Q2) Two firms have the same technology and must pay the same wages for labor. They have identical factories, but firm 1 paid a higher price for its factory than firm 2 did. If they are both profit maximizers and have upward-sloping marginal cost curves, then we would expect firm 1 to have a higher output than firm 2.
A)True
B)False
Q3) The area under the marginal cost curve measures total variable costs.
A)True
B)False
Q4) A firm with the cost function c(y) = 20y2 + 500 has a U-shaped cost curve.
A)True
B)False
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Chapter 21: A: Firm Supply
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Q1) A firm has a long-run cost function, C(q) = 8q<sup>2</sup> + 288. In the long run, this firm will supply a positive amount of output, as long as the price is greater than
A) $200.
B) $192.
C) $96.
D) $48.
E) $101.
Q2) Suppose that Dent Carr's long-run total cost of repairing s cars per week is c(s) = 3s<sup>2</sup> + 75. If the price he receives for repairing a car is $36, then in the long run, how many cars will he fix per week if he maximize profits?
A) 0
B) 12
C) 9
D) 6
E) 18
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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) Brand X is one of many firms in a competitive industry where each firm has a constant marginal cost of 2 dollars per unit of output. If marginal cost for Brand X rises to 4 dollars per unit and marginal costs of all other firms in the industry stay constant, by how much does the price in the industry increase?
A) 2 dollars
B) 1 dollar
C) 0 dollar
D) 2/n , where n is the number of firms in the industry
E) None of the above.
Q3) 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
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Chapter 22: A: Industry Supply
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Q1) 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.
Q2) In Problem 1, if the cost of plaster and labor were $10 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) $10
B) $11
C) $20
D) $12.20
E) $12
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Page 46
Chapter 23: Monopoly
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Q1) A natural monopolist has the total cost function c(q) = 350 + 20q, where q is its output. The inverse demand function for the monopolist's product is p = 100 - 2q. Government regulations require this firm to produce a positive amount and to set price equal to average costs. To comply with these requirements
A) is impossible for this firm.
B) the firm must produce 40 units.
C) the firm could produce either 5 units or 35 units.
D) the firm must charge a price of $70.
E) the firm must produce 20 units.
Q2) A monopoly has the demand curve q = 10,000 - 100p. Its total cost function is c(q) = 1,000 + 10q. The government plans to tax the monopoly's profits at a rate of 50%. If it does so, the monopoly will
A) increase its price by 50%.
B) increase its price by more than 50%.
C) recover some but not all of the tax it pays by increasing its price.
D) not change its price or the quantity it sells.
E) None of the above.
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Page 47
Chapter 23: A: Monopoly
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Q1) A profit-maximizing monopoly faces an inverse demand function described by the equation p(y) = 50 - y and its total costs are c(y) = 10y, where prices and costs are measured in dollars. In the past it was not taxed, but now it must pay a tax of 2 dollars per unit of output. After the tax, the monopoly will
A) leave its price constant.
B) increase its price by 2 dollars.
C) increase its price by 3 dollars.
D) increase its price by 1 dollar.
E) None of the above.
Q2) A profit-maximizing monopoly faces an inverse demand function described by the equation p(y) = 90 - y and its total costs are c(y) = 8y, where prices and costs are measured in dollars. In the past it was not taxed, but now it must pay a tax of 8 dollars per unit of output. After the tax, the monopoly will
A) increase its price by 4 dollars.
B) leave its price constant.
C) increase its price by 8 dollars.
D) increase its price by 12 dollars.
E) None of the above.
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Page 48
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) Disneyland has two possibilities for pricing rides at its theme parks: (1) Set MR = MC for each ride and charge the maximum price consumers will bear. (2) Charge an admission fee to the theme park but allow unlimited rides for free. Using graphs, show which pricing scheme is more profitable for Disneyland.
Q3) Third-degree price discrimination occurs when a monopolist sells output to different people at different prices but every unit that an individual buys costs the same amount. A)True B)False
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Chapter 24: A: Monopoly Behavior
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Q1) Suppose that 3,500 people are interested in attending ElvisLand. Once a person arrives at ElvisLand, his or her demand for rides is given by x = max{ 2 - p, 0} , where p is the price per ride. There is a constant marginal cost of $1 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) $1 per ride and $2 for admission
B) $0 per ride and $1 for admission
C) $1 per ride and $.50 for admission
D) $0 per ride and $1.50 for admission
E) $2 per ride and $2 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
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Q1) 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
Q2) The bauble industry is competitive with free entry. There is a fixed-coefficient technology. One unit of labor and one unit of plastic are required for each bauble. Workers in the bauble industry must all belong to the Bauble-Makers Union. The union sets the wage that will be paid to all bauble makers. The price of plastic is 10 dollars per unit and the demand function for baubles is 1,000 - 10p. Long-run equilibrium requires that the price of baubles equals the cost of production. The wage per unit of labor that maximizes total revenue of workers is
A) 100 dollars.
B) 10 dollars.
C) 45 dollars.
D) 20 dollars.
E) infinity.
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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 = 4016q, 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) $2.50.
B) $20.
C) $1.25.
D) $30.
E) $10.
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Chapter 26: Oligopoly
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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) Ann and Bruce each own a pizza store in Frostbite Falls, Minnesota. Demand for pizza is given by Q = 400 2 40P. Having the only two pizza stores in Frostbite Falls, they attempt to profitably split the market without violating the Sherman Antitrust Act. Each has the cost function C = 50 + 2Q. If Ann and Bruce behave as duopolists, each earns a profit of A) $568.89.
B) $497.78.
C) $0.
D) $234.44.
E) $640.
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Page 53
Chapter 26: A: Oligopoly
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Q1) There are two firms in the blastopheme industry. The demand curve for blastophemes is given by p = 1,500 - 2q. Each firm has one manufacturing plant and each firm i has a cost function C(q<sub>i</sub>) = q<sup>2</sup><sub>i</sub>, where q<sub>i</sub> is the output of firm i. The two firms form a cartel and arrange to split total industry profits equally. Under this cartel arrangement, they will maximize joint profits if A) and only if each firm produces 150 units in its plant.
B) they produce a total of 300 units, no matter which firm produces them.
C) they produce a total of 250 units, no matter which firm produces them.
D) and only if they each produce a total of 375 units.
E) they shut down one of the two plants, having the other operate as a monopoly and splitting the profits.
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Chapter 27: Game Theory
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Q1) A famous Big Ten 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 forces on the left side or the right side. If the opponent concentrates on the wrong side, his offense is sure to gain at least 5 yards. If the defense defended the left side and the offense ran left, the offense gained only 1 yard. If the opponent defended the right side when the offense ran right, the offense would still gain at least 5 yards with probability .50. It is the last play of the game and the famous coach's team is on offense. If it makes 5 yards or more, it wins; if not, it loses. Both sides choose Nash equilibrium strategies. In equilibrium the offense
A) will run to the right side with probability .67.
B) will run to the right side with probability .80.
C) will run to the two sides with equal probability.
D) is sure to run to the right side.
E) will run to the right side with probability .50.
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
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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 $60,000 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, both partners earn $70,000.
B) In the only Nash equilibrium for this game, one partner earns $100,000 and the other earns $40,000.
C) In the only Nash equilibrium for this game, both partners earn $100,000.
D) 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 $70,000.
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) 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
Q2) 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. In the movie, the existence of the Doomsday Machine was kept secret. This would enhance the effectiveness of such a machine.
A)True
B)False
Q3) An equilibrium in a sequential game is always a Nash equilibrium in a simultaneous game with equivalent payoffs.
A)True
B)False
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Chapter 28: A: Game Applications
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Q1) (See Problem 7.) 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 .50. 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 two sides with equal probability.
B) be sure to run to the right side.
C) run to the right side with probability .67.
D) run to the right side with probability .80.
E) run to the right side with probability .50.
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Chapter 29: Behavioral Economics
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Q1) In a study by financial economists Brad Barber and Terrance Odeank of stock portfolio management techniques and returns, men trade more frequently on average than women, and as a result of more active management, men's portfolios grow at a higher rate of return than women's.
A)True
B)False
Q2) In the 1960s dark comedy classic Dr. Strangelove, the Soviet Union constructs a Doomsday Machine that will destroy all life on earth automatically if the Soviet Union is attacked. The Doomsday Machine can never be turned off or disabled. Which of the following would best explain why the Soviets would build the Doomsday Machine?
A) This is a completely irrational action.
B) This is an example of the use of spurious information to influence outcomes.
C) This is an example of the negative framing effect.
D) By removing the choice of whether or not to retaliate, the Soviets increase the chance that the United States will not attack.
E) The Soviets would gain utility from destroying all life on earth.
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Q1) Eduardo and Francisca participate in an economy that is in competitive equilibrium. Although they are unacquainted with each other, both purchase strawberries and champagne. Edouardo's utility function is U(s, c) = 2s + c, where s is the number of boxes of strawberries he consumes per month and c is the number of bottles of champagne. Francisca's utility function is U(s, c) = sc.
A) Francisca consumes equal amounts of strawberries and champagne. B) Eduardo consumes more strawberries than champagne.
C) Francisca consumes twice as many bottles of champagne as boxes of strawberries. D) Francisca consumes twice as many boxes of strawberries as bottles of champagne. E) Eduardo consumes more champagne than strawberries.
Q2) If the initial endowment is on the contract curve, then there must always be a competitive equilibrium in which no trade takes place.
A)True
B)False
Q3) A competitive equilibrium allocation must be a feasible allocation.
A)True
B)False
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Chapter 30: A: Exchange
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Q1) Suppose that in Problem 8, Mutt's utility function is U(m, j) = max{ 2m, j} and Jeff's utility function is U(m, j) = 3m + j. Mutt is initially endowed with 6 units of milk and 2 units of juice, and Jeff is initially endowed with 2 units of milk and 6 units of juice. If we draw an Edgeworth box with milk on the horizontal axis and juice on the vertical axis and if we measure goods for Mutt by the distance from the lower left corner of the box, then the set of Pareto optimal allocations includes the
A) right edge of the Edgeworth box but no other edges.
B) bottom edge of the Edgeworth box but no other edges.
C) left edge of the Edgeworth box but no other edges.
D) left edge and bottom edge of the Edgeworth box.
E) right edge and top edge of the Edgeworth box.
Q2) ...
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Chapter 31: Production
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Q1) A small company produces two goods, swords and plowshares. The company has 100 type alpha employees and 100 type beta employees. If an alpha devotes all his time to producing swords, he can make 3 swords per week. If he devotes all his time to producing plowshares, he can make 6 plowshares per week. A beta can produce either 1 plowshare per week or 1 sword per week. The company wants to produce 324 swords and as many plowshares as it can. How many type betas should it employ at making swords?
A) 0
B) 85
C) 24
D) 100
E) None of the above.
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
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Chapter 31: A: Production
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Q1) (See Problem 2.) Robinson Crusoe has exactly 12 hours per day to spend gathering coconuts or catching fish. He can catch 3 fish per hour or he can pick 12 coconuts per hour. His utility function is U(F, C) = FC, where F is his consumption of fish and C is his consumption of coconuts. If he allocates his time in the best possible way between catching fish and picking coconuts, his consumption will be the same as it would be if he could buy fish and coconuts in a competitive market where the price of coconuts is $1, his income is
A) $144 and the price of fish is $4.
B) $144 and the price of fish is $.33.
C) $36 and the price of fish is $3.
D) $180 and the price of fish is $3.
E) $90 and the price of fish is $.33.
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Chapter 32: Welfare
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Q1) A parent has two children living in cities with different costs of living. The cost of living in city B is 4 times the cost of living in city A. The child in city A has an income of $3,000 and the child in city B has an income of $12,000. The parent wants to give a total of $1,000 to her two children. Her utility function is U(C A, C B ) = C A C B, where C A and C B are the consumptions of the children living in cities A and B respectively. She will choose to give A) each child $500, even though this will buy less goods for the child in city B.
B) the child in city B 4 times as much money as the child in city A.
C) the child in city A 4 times as much money as the child in city B.
D) the child in city B 2 times as much money as the child in city A.
E) the child in city A 2 times as much money as the child in city B.
Q2) According to Arrow's impossibility theorem, it is impossible to find a social ordering that is complete, reflexive, and transitive.
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>3</sup><sub>R</sub>S<sup>1</sup><sub>J</sub> and Juliet has the utility function U = S<sup>1</sup><sub>R</sub>S<sup>3</sup><sub>J</sub>, where S<sub>R</sub> is Romeo's spaghetti consumption and S<sub>J</sub> is Juliet's. They have 36 units of spaghetti to divide between them.
A) Romeo and Juliet would never disagree about how to divide the spaghetti.
B) Romeo would want to give Juliet some spaghetti if he had more than 18 units of spaghetti.
C) Juliet would want to give Romeo some spaghetti if she has more than 25 units.
D) Romeo would want to give Juliet some spaghetti if he has more than 23 units of spaghetti.
E) Juliet would want to give Romeo some spaghetti if she has more than 27 units of spaghetti.
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Chapter 33: Externalities
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Q1) Two stores are located side by side. They attract customers to each other and to themselves by advertising. The profit functions of the two stores are (45 + x<sub>2</sub>)x<sub>1</sub> - 2x<sup>2</sup><sub>1</sub> for store 1 and (75 + x<sub>1</sub>)x<sub>2</sub> - 2x<sup>2</sup><sub>2</sub> for store 2, where x<sub>1</sub> and x<sub>2</sub> are total advertising expenditures by stores 1 and 2 respectively. If each store sets its advertising expenditures independently (as in Nash equilibrium), how much would store 1 spend on advertising?
A) $14
B) $19
C) $22
D) $17
E) None of the above.
Q2) 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
Q3) A trade between two people is an example of an externality.
A)True
B)False
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Chapter 33: A: Externalities
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Q1) Suppose that in Horsehead, Massachusetts, the cost of operating a lobster boat is $6,000 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(18x - 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> = 6 and X<sub>2</sub> = 4.
B) X<sub>1 </sub>=<sup> </sup>12 and<sup> </sup>X<sub>2</sub> = 12.
C) X<sub>1 </sub>=<sup> </sup>12 and X<sub>2</sub> = 6.
D) X<sub>1 </sub>=<sup> </sup>16 and X<sub>2</sub> = 10.
E) None of the above.
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Chapter 34: Information Technology
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Q1) Banks have started offering electronic bill pay for free. This decision can best be explained as
A) matching free services provided by competitor banks to win over new customers.
B) increasing switching costs. Customers would have to set up electronic bill pay again at their new bank.
C) banks wanting to enhance their reputation for good service.
D) banks reducing their costs of paper check processing.
E) a fad or novelty.
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) 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 4 consumers could all connect to the network and either make a profit or at least break even?
A) $24
B) $40
C) $64
D) $28
E) $32
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Chapter 35: Public Goods
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Q1) A Pareto optimal amount of public goods is shown on a graph (with quantities of public goods on the x axis) by the point at which the horizontal sum of the marginal rate of substitution curves meets the marginal cost curve.
A)True
B)False
Q2) One of the problems with the Clarke tax mechanism is that when it is used, people have an incentive to lie about their preferences.
A)True
B)False
Q3) 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
Q4) If preferences are single peaked, then pairwise majority voting among alternative options will not lead to voting cycles.
A)True
B)False
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Chapter 35: A: Public Goods
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Q1) Recall Lucy and Melvin from Problem 6. Lucy's utility function is 2X<sub>L</sub> + G and Melvin's utility function is X<sub>M</sub>G, where G is their expenditures on the public goods they share in their apartment and where X<sub>L</sub> and X<sub>M</sub> are their respective private consumption expenditures. The total amount they have to spend on private goods and public goods is $24,000. They agree on a Pareto optimal pattern of expenditures in which the amount that is spent on Lucy's private consumption is $9,000. How much do they spend on public goods?
A) $5,000
B) $10,000
C) $7,050
D) $2,500
E) There is not enough information here to be able to determine the answer.
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Chapter 36: Asymmetric Information
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Q1) Jan's utility function is C - H<sup>2</sup>, where C is consumption and H is hours worked per day. She can work in the city for 8 hours per day, earning $100 a day. Alternatively, she can rent a small farm from Mr. Porksniffer. If she rents the farm, she can work as many hours a day as she wishes. If she works H hours per day, she can sell her crops for a total of $20H per day, but she must pay Mr. Porksniffer an annual rent of $R. Mr. Porksniffer wants to charge the highest rent $R that he can and still be able to have Jan rent from him. What is the highest rent he can charge? A penny less than
A) $100 per day.
B) $64 per day.
C) $60 per day.
D) $50 per day.
E) $36 per day.
Q2) An example of adverse selection is the situation where someone chooses a car that is not as good as it is claimed to be.
A)True
B)False
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Chapter 36: A: Asymmetric Information
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Q1) Suppose that low-productivity workers all have marginal products of 10 and high-productivity workers all have marginal products of 15. The community has equal numbers of each type of worker. The local community college offers a course in microeconomics. High-productivity workers think taking this course is as bad as a wage cut of $2, and low-productivity workers think it is as bad as a wage cut of $4.
A) There is a separating equilibrium in which high- productivity workers take the course and are paid $15 and low-productivity workers do not take the course and are paid $10.
B) There is no separating equilibrium and no pooling equilibrium.
C) There is no separating equilibrium, but there is a pooling equilibrium in which everybody is paid $12.50.
D) There is a separating equilibrium in which high-productivity workers take the course and are paid $17 and low-productivity workers do not take the course and are paid $10.
E) There is a separating equilibrium in which high-productivity workers take the course and are paid $15 and low-productivity workers are paid $12.50.
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