Managerial Economics Study Guide Questions - 2618 Verified Questions

Managerial Economics Study Guide Questions

Course Introduction

Managerial Economics is a course that explores the application of economic theories, concepts, and analytical tools to business decision-making. It focuses on how managers can use economic reasoning to solve practical problems related to production, pricing, market structure, and resource allocation. Students learn to analyze demand, estimate costs, evaluate market competition, and assess the impact of government regulations, all with the objective of optimizing organizational performance and achieving strategic business goals. The course bridges microeconomic theory with real-world management practices, empowering students to make informed and effective managerial decisions in dynamic and competitive environments.

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Intermediate Microeconomics A Modern Approach 8th Edition by Hal R. Varian

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Page 2

Chapter 1: Budget Constraint

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Q1) Deadly Serious, II, studying for his M.B.A., consumes only two goods, Wheaties and pens. Each pen costs $1. Each box of Wheaties costs $2 but has a free pen inside. Pens can be discarded at no cost. If we draw Serious's budget set with pens plotted on the horizontal axis, then his budget set will be bounded by two line segments with slopes

A) zero and -1.

B) zero and-2.

C) zero and -0.5.

D) zero and infinity.

E) zero and +2.

Answer: A

Q2) If you spent your entire income, you could afford either 6 units of x and 13 units of y or 13 units of x and 6 units of y. If you spent your entire income on x, how many units of x could you buy?

A) 19

B) 32

C) 24

D) There is not enough information to determine the number of x.

E) None of the above.

Answer: A

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Page 3

Chapter 1: A: Budget Constraint

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Sample Questions

Q1) In Problem 3, if you could exactly afford either 2 units of x and 10 units of y, or 4 units of x and 2 units of y, then if you spent all of your income on y, how many units of y could you buy?

A) 6

B) 10

C) 18

D) 26

E) None of the above.

Answer: C

Q2) In Problem 4, Murphy used to consume 100 units of X and 50 units of Y when the price of X was $2 and the price of Y was $4. If the price of X rose to $4 and the price of Y rose to $7, how much would Murphy's income have to rise so that he could still afford his original bundle?

A) $750

B) $500

C) $350

D) $250

E) None of the above.

Answer: C

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4

Chapter 2: Preferences

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Q1) 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

Q2) If Melody has more classical records than rock and roll records, she is willing to exchange exactly 1 classical record for 2 rock and roll records, but if she has more rock and roll records than classical records, then she is willing to exchange exactly 1 rock and roll record for 2 classical records. Melody has convex preferences.

A)True

B)False

Answer: False

Q3) If preferences are transitive, more is always preferred to less.

A)True

B)False

Answer: False

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Page 5

Chapter 2: A: Preferences

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Q1) In Problem 12, recall that Tommy Twit's mother measures the departure of any bundle from her favorite bundle for Tommy by the sum of the absolute values of the differences. Her favorite bundle for Tommy is (2, 7), that is, 2 cookies and 7 glasses of milk. Tommy's mother's indifference curve that passes through the point (c, m) = (4, 5) also passes through

A) the points (2, 3), (6, 7), and (4, 9).

B) the point (6, 3).

C) the point (2, 7).

D) the points (4, 7), (2, 5), and (2, 9).

E) None of the above.

Q2) In Problem 12, recall that Tommy Twit's mother measures the departure of any bundle from her favorite bundle for Tommy by the sum of the absolute values of the differences. Her favorite bundle for Tommy is (2, 7), that is, 2 cookies and 7 glasses of milk. Tommy's mother's indifference curve that passes through the point (c, m) = (4, 5) also passes through

A) the points (4, 7), (2, 5), and (2, 9).

B) the point (2, 7).

C) the points (2, 3), (6, 7), and (4, 9).

D) the point (6, 3).

E) None of the above.

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Page 6

Chapter 3: Utility

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Q1) Phil Rupp's sister Ethel has the utility function U(x, y) = min{ 5x + y, 6y}. Where x is measured on the horizontal axis and y on the vertical axis, her indifference curves consist of a

A) horizontal line segment and a negatively sloped line segment which meet in a kink along the line x = y.

B) vertical line segment and a horizontal line segment which meet in a kink along the line y = 5x.

C) positively sloped line segment and a negatively sloped line segment which meet along the line x = y.

D) vertical line segment and a horizontal line segment which meet in a kink along the line x = 5y.

E) horizontal line segment and a positively sloped line segment which meet in a kink along the line x = 5y.

Q2) Maximilian consumes two goods, x and y. His utility function is U(x, y) = max{x, y}. Therefore x and y are perfect substitutes for Max.

A)True

B)False

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Page 7

Chapter 3: A: Utility

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Q1) Joe Bob from Problem 12 has a cousin Sam who consumes goods 1 and 2. Sam thinks that 2 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 Sam's preferences?

A) U(x₁, x₂) = 16x²₁ + 16x₁x₂ + 4x²₂.

B) U(x₁, x₂) = min{ 4x₁, 2x₂}.

C) U(x₁, x₂) = 40x₁ + 20x₂ - 10,000.

D) U(x₁, x₂) = 4x₁ + 2x₂ + 1000.

E) More than one of the above does not represent Sam'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 30 apples and 120 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) -31.

B) -8.

C) . D) -4.

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Page 8

Chapter 4: Choice

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Q1) Charlie's utility function is U(x_A, x_B) = x_Ax_B. If Charlie's income is $40, the price of apples is $4, and the price of bananas is $2, how many apples are there in the best bundle that Charlie can afford?

A) 10

B) 8

C) 12

D) 9

E) 5

Q2) Mort's utility function is U(x₁, x₂) = x₁x₂. His income is $100. The price of good 2 is $10. Good 1 is priced as follows. The first 6 units cost $10 per unit and any additional units cost $5 per unit. What consumption bundle does Mort choose?

A) (5, 5)

B) (7, 3.5)

C) (9, 3)

D) (6, 4)

E) None of the above.

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Page 9

Chapter 4: A: Choice

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Q1) Charlie's utility function is U(x_A, x_B) = x_Ax_B. If Charlie's income were $40, the price of apples were $4, and the price of bananas were $6, how many apples would there be in the best bundle that Charlie could afford?

A) 8

B) 10

C) 12

D) 9

E) 5

Q2) In Problem 1, Charlie has a utility function U(x_A, x_B) = x_Ax_B, the price of apples is $1, and the price of bananas is $2. If Charlie's income were $160, how many units of bananas would he consume if he chose the bundle that maximized his utility subject to his budget constraint?

A) 80

B) 40

C) 8

D) 20

E) 120

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Chapter 5: Demand

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Q1) Seppo consumes brandy and saunas. Neither is an inferior good. Seppo has a total of $30 a day and 6 hours a day to spend on brandy and saunas. Each brandy costs $2 and takes half an hour to consume. Each sauna costs $1 and takes 1 hour to consume. (It is, unfortunately, impossible to consume a brandy in the sauna.) Seppo suddenly inherits a lot of money and now has $50 a day to spend on brandy and saunas. Since Seppo is a rational consumer, he will

A) increase brandy consumption only.

B) increase sauna consumption only.

C) increase consumption of both.

D) consume the same amounts of both goods as before.

E) We can't tell since we are told nothing about his indifference curves.

Q2) An Engel curve is a demand curve with the vertical and horizontal axes reversed.

A)True

B)False

Q3) If two goods are substitutes, then an increase in the price of one of them will increase the demand for the other.

A)True

B)False

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Chapter 5: A: Demand

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Q1) In Problem 1, if Charlie's utility function were X⁶_AX_B, 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_A = 6X_B.

B) X_B = 6X_A.

C) X_B = X_A.

D) 6X_B = 9X_A.

E) 90X_A + 10X_B = M.

Q2) 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.

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Chapter 6: Revealed Preference

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Q1) The strong axiom of revealed preference requires that if a consumer chooses x when he can afford y and chooses y when he can afford z, then he will not choose z when he can afford x.

A)True

B)False

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

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

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

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

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

E) is behaving irrationally.

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Page 13

Chapter 6: A: Revealed Preference

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

A) 1.17

B) 2.17

C) 0.75

D) 0.50

E) 1.75

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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Chapter 7: Slutsky Equation

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Sample Questions

Q1) 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

Q2) Carlos consumes only two goods, apples and bananas. His utility function is given by U(x, y) = a³b². He is endowed with w_a apples and w_b bananas. Unaware that prices are about to change, Carlos buys the quantities of apples and bananas that maximize his utility subject to his budget constraint. After he has made his purchases but before he has eaten them, the relative prices change. Carlos is then free to make further trades at the new relative prices if he wishes.

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

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

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

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

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

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Page 15

Chapter 7: A: Slutsky Equation

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Q1) Neville, in Problem 2, has a friend named Colin. Colin has the same demand function for claret as Neville, namely q = .02m - 2p, where m is income and p is price. Colin's income is $7,500 and he initially had to pay a price of $40 per bottle of claret. The price of claret rose to $80. The substitution effect of the price change

A) reduced his demand by 80.

B) reduced his demand by 24.

C) increased his demand by 80.

D) reduced his demand by 136.

E) reduced his demand by 34.

Q2) In Problem 1, Charlie's utility function is x_Ax_B. 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 $1.50 and the price of bananas fell to $.75, then in order to be able to just afford his old bundle, Charlie would have to have a daily income of

A) $56.25.

B) $37.50.

C) $76.

D) $18.75.

E) $150.

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Page 16

Chapter 8: Buying and Selling

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Q1) Holly consumes x and y. The price of x is 4 and the price of y is 4. Holly's only source of income is her endowment of 6 units of x and 6 units of y which she can buy or sell at the going prices. She plans to consume 7 units of x and 5 units of y. If the prices change to $7 for x and $7 for y,

A) she is better off.

B) she is worse off.

C) she is neither better off nor worse off.

D) she is better off if she has nonconvex preferences.

E) We can't tell whether she is better off or worse off unless we know her utility function.

Q2) If someone has a Cobb-Douglas utility function and no income from any source other than labor earnings, then an increase in wages will not change the amount that person chooses to work.

A)True

B)False

Q3) 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

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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) Dudley, in Problem 15, has a utility function U(C, R) = C - (12 - R)², where R is leisure and C is consumption per day. He has 16 hours per day to divide between work and leisure. If Dudley has a nonlabor income of $30 per day and is paid a wage of $4 per hour, how many hours of leisure will he choose per day?

A) 9

B) 7

C) 8

D) 11

E) 10

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Page 18

Chapter 9: Intertemporal Choice

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Q1) If a consumer can borrow and lend at the same interest rate, then he can exactly afford a consumption plan if the present value of his consumption equals the present value of his income.

A)True

B)False

Q2) Harvey Habit has a utility function U(c₁, c₂) = min{c₁, c₂}, where c₁and c₂ are his consumption in periods 1 and 2 respectively. Harvey earns $189 in period 1 and he will earn $63 in period 2. Harvey can borrow or lend at an interest rate of 10%. There is no inflation.

A) Harvey will save $60.

B) Harvey will borrow $60.

C) Harvey will neither borrow nor lend.

D) Harvey will save $124.

E) None of the above.

Q3) An increase in the interest rate will necessarily result in a decrease in the present value of a given stream of positive incomes.

A)True

B)False

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Page 19

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 (900, 805) and earns (600, 1, 150) and if the interest rate is 15%, the present value of his endowment is

A) $1,600.

B) $3,440.

C) $1,705.

D) $1,750.

E) $4,040.

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Chapter 10: Asset Markets

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Q1) Suppose that a dispute in the Persian Gulf halts the sale of oil from the Persian Gulf for one year. At the same time an important new oil field is found in a place where nobody expected there to be oil. What does economic theory predict will be the effect on the future price of oil to be delivered two years from now?

A) It will fall if the new pool is larger than the stock of oil in the Persian Gulf and rise otherwise.

B) It will fall.

C) It will rise unless the new pool can be brought into production before the Persian Gulf supply is resumed.

D) It will rise.

E) It will rise if the cost of extraction for the new oil is greater than the cost of extraction in the Gulf and fall otherwise.

Q2) According to the theory of asset markets, if the interest rate is constant, then the competitive market price of a bottle of wine will rise at a constant rate per year until it is consumed, even if the amount that wine drinkers are willing to pay for it does not rise at a constant rate.

A)True

B)False

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Chapter 10: A: Asset Markets

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Q1) The sum of the terms of the infinite geometric series 1, 0.78, 0.78², 0.78³, . . . is closest to

A) infinity.

B) 1.78.

C) 0.56.

D) 4.55.

E) 128.21.

Q2) A bond has a face value of 4,000 dollars. It will pay 400 dollars in interest at the end of every year for the next 40 years. At the time of the final interest payment, 40 years from now, the company that issued the bond will redeem the bond at face value. That is, the company will buy back the bond from its owner at a price equal to the face value of the bond. If the interest rate is 10% and is expected to remain at 10%, how much would a rational investor pay for this bond right now?

A) More than any of the amounts below.

B) 20,000 dollars

C) 16,000 dollars

D) 4,000 dollars

E) Less than any of the above amounts.

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Page 22

Chapter 11: Uncertainty

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Q1) Gary likes to gamble. Donna offers to bet him $70 on the outcome of a boat race. If Gary's boat wins, Donna would give him $70. If Gary's boat does not win, Gary would give her $70. Gary's utility function is U(c₁, c₂, p₁, p₂) = p₁c²₁+ p₂c²₁, where p₁ and p₂ are the probabilities of events 1 and 2 and where c₁ and c₂ are his consumption if events 1 and 2 occur respectively. Gary's total wealth is currently only $80 and he believes that the probability that he will win the race is .3.

A) Taking the bet would increase his expected utility.

B) Taking the bet would reduce his expected utility.

C) Taking the bet would leave his expected utility unchanged.

D) There is not enough information to determine whether taking the bet would increase or decrease his expected utility.

E) The information given in the problem is self-contradictory.

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

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Page 23

Chapter 11: A: Uncertainty

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Q1) Sally Kink is an expected utility maximizer with utility function pu(c₁) + (1 - p)u(c₂), 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) You have been hired as a portfolio manager for a stock brokerage. Your first job is to invest $100,000 in a portfolio of two assets. The first asset is a safe asset with a sure return of 4% interest. The second asset is a risky asset with a 26% expected rate of return, but the standard deviation of this return is 10%. Your client wants a portfolio with as high a rate of return as possible consistent with a standard deviation no larger than 4%. How much of her money do you invest in the safe asset?

A) $22,000

B) $40,000

C) $64,000

D) $36,000

E) $60,000

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

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Chapter 12: A: Risky Assets

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Q1) Suppose that Fenner Smith of Problem 2 must divide his portfolio between two assets, one of which gives him an expected rate of return of 15% with zero standard deviation and one of which gives him an expected rate of return of 45% and has a standard deviation of 10. He can alter the expected rate of return and the variance of his portfolio by changing the proportions in which he holds the two assets. If we draw a "budget line" with expected return on the vertical axis and standard deviation on the horizontal axis, depicting the combination that Smith can obtain, the slope of this budget line is

A) 1.50.

B) -1.50.

C) -3.

D) 3.

E) 4.50.

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Chapter 13: Consumers Surplus

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Q1) If somebody is buying 10 units of x and the price of x falls by $4, then that person's net consumer's surplus must increase by at least $40.

A)True

B)False

Q2) Producer's surplus at price p is the vertical distance between the supply curve and the demand curve at price p.

A)True

B)False

Q3) Bernice's utility function is U(x, y) = min{x, y}. The price of x used to be 3 but rose to 4. The price of y remained at 1. Her income is 12. She would need an income of $15 to be able to afford a bundle as good as her old one at the new prices.

A)True

B)False

Q4) The equivalent variation in income from a tax is the amount of extra income that a consumer would need in order to be as well off after the tax is imposed as he was originally.

A)True

B)False

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Chapter 13: A: Consumers Surplus

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Q1) Kitty's utility function for BMWs and money is given by 16,000x + y, where x is the number of BMWs she has and y is the amount of money she has. Her income is $23,000. Her reservation price for one BMW is

A) $16,000 - y.

B) $16,000 - p.

C) $16,000.

D) $7,000.

E) $39,000.

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 $19 and was paying a price of $5 for earrings when the price of earrings went up to $11, then the equivalent variation of the price change was

A) $19.

B) $38.

C) $9.50.

D) $4.75.

E) $14.25.

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Chapter 14: Market Demand

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Q1) Ed has 100 tons of manure. The lowest price at which he is willing to sell it is $10 per ton. Fred wants to buy 100 tons of manure. The most he is willing to pay is $8 per ton. The federal government offers to subsidize manure sales at a rate of $1 per ton. If Ed and Fred are the only people who deal in manure, then the deadweight loss caused by the subsidy is

A) $100.

B) $50.

C) $0.

D) $200.

E) none of the above.

Q2) If the marginal cost of making a photocopy is 2 cents and the elasticity of demand is 3, the profit-maximizing price is

A) 5 cents.

B) 4 cents.

C) 3.33 cents.

D) 3 cents.

E) 6 cents.

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 1, suppose every Buick owner's demand for gasoline is 20 - 5p for p less than or equal to 4 and 0 for p > 4. Every Dodge owner's demand is 15 - 3p for p less than or equal to 5 and 0 for p > 5. Suppose that Gas Pump, South Dakota, has 100 Buick owners and 200 Dodge owners. If the price of gasoline is $4.25, what is the total amount of gasoline demanded in Gas Pump?

A) 225 gallons

B) 675 gallons

C) 450 gallons

D) 900 gallons

E) None of the above.

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 $8, then the price elasticity of demand for tickets is

A) -0.33.

B) -1.33.

C) -1.

D) -2.

E) -0.67.

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Chapter 15: Equilibrium

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Q1) If a quantity tax is collected from competitive suppliers of a good, placing a tax on the good causes the price paid by consumers to increase more than if the tax had been collected directly from the buyers.

A)True

B)False

Q2) The price elasticity of demand for a certain agricultural product is constant (over the relevant range of prices) and equal to -1.50. The supply elasticity for this product is constant and equal to 4. Originally the equilibrium price of this good was $15 per unit. Then it was discovered that consumption of this product was unhealthy. The quantity that would be demanded at any price fell by 11%. The percent change in the long-run equilibrium consumption of this good was

A) -11%.

B) -8%.

C) -2%.

D) -12%.

E) There is not enough information to determine the answer.

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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 1 coconuts for every coconut that they consume. The king puts all of the coconuts that he collects in a large pile and burns them. The supply of coconuts is given by S(p_s)= 100p_s, where p_s is the price received by suppliers. The demand for coconuts by the king's subjects is given by D(p_d) = 4,000 - 100p_d, where p_d is the price paid by consumers. In equilibrium, the price received by suppliers will be

A) $24.

B) $20.

C) $40.

D) $16.

E) None of the above.

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Chapter 16: Auctions

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Q1) An antique cabinet is being sold by means of an English auction. There are four bidders, Penelope, Marilyn, Irene, and Betsy. These bidders are unacquainted with each other and do not collude. Penelope values the cabinet at $1,600, Marilyn values it at $1,350, Irene values it at $2,100, and Betsy values it at $1,100. If the bidders bid in their rational self-interest, the cabinet will be sold to

A) Irene for about $2,100.

B) either Irene or Penelope for slightly more than $1,600. Which of them actually gets it is randomly determined.

C) Penelope for about $1,600.

D) Irene for slightly more than $1,600.

E) None of the above.

Q2) If a good is sold in a Dutch auction and the bidders bid rationally, the price paid for the good will always be equal to the second-highest willingness to pay of auction participants.

A)True

B)False

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Page 33

Chapter 16: A: Auctions

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Q1) An antique cabinet is being sold by means of an English auction. There are four bidders, Gloria, Elise, Judy, and Arabella. These bidders are unacquainted with each other and do not collude. Gloria values the cabinet at $800, Elise values it at $500, Judy values it at $1,800, and Arabella values it at $600. If the bidders bid in their rational self-interest, the cabinet will be sold to

A) Gloria for about $800.

B) either Judy or Gloria for about $800. Which of these two buyers gets it is randomly determined.

C) Judy for slightly more than $800.

D) Judy for about $1,800.

E) either Judy or Gloria for about $500. Which of these two buyers gets it is randomly determined.

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Chapter 17: Technology

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Q1) If the production function is f(x, y) = min{ 12x, 3y}, then there is convexity in production.

A)True B)False

Q2) If there are constant returns to scale, then doubling the amount of any input will exactly double the amount of output.

A)True B)False

Q3) The production function Q = 50K^0.25L^0.25 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.

Q4) The production set of a firm is the set of all products the firm can produce. A)True B)False

Q5) The production function f(x, y) = x + y has constant returns to scale. A)True B)False

35

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Chapter 17: A: Technology

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Q1) In Problem 3, if the exponents in the production function were 0.30 for x₁ and 0.30 for x₂, 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

Q2) In Problem 3, if the exponents in the production function were 0.40 for x₁ and 0.40 for x₂, 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 output using three fixed factors and one variable factor. The firm's short-run production function is q = 305x - 2x², 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 short-run marginal costs of producing a good are $40 for the first 200 units and $50 for each additional unit beyond 200, then in the short run, if the market price of output is $46, a profit-maximizing firm will

A) produce a level of output where marginal revenue equals marginal costs.

B) produce as much output as possible since there are constant returns to scale.

C) produce up to the point where average costs equal $46.

D) not produce at all, since marginal costs are increasing.

E) produce exactly 200 units.

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Page 37

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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Sample Questions

Q1) Quasi-fixed costs are those costs that can be avoided if and only if a firm produces zero output.

A)True

B)False

Q2) A competitive firm uses two inputs, x and y. Total output is the square root of x times the square root of y.The price of x is $17 and the price of y is $11. The company minimizes its costs per unit of output and spends $517 on x. How much does it spend on y?

A) $766

B) $480

C) $655

D) $517

E) None of the above.

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

A)True

B)False

Q4) The production function for good y is y = max{10x1,4x2}, where x1 and x2 are the amounts of factors 1 and 2. Find the cost function for good y.

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Page 39

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 4 units of copper and 4 units of zinc for each unit of alloy produced. If no other inputs are needed, the price of copper is $5, and the price of zinc is $2, what is the average cost per unit when 2,000 units of the alloy are produced?

A) $14.25

B) $.50

C) $28

D) $500

E) $14,250

Q2) Suppose that Nadine in Problem 1 has a production function 3x₁ + x₂. If the factor prices are $12 for factor 1 and $3 for factor 2, how much will it cost her to produce 20 units of output?

A) $430

B) $780

C) $60

D) $80

E) $70

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Chapter 20: Cost Curves

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Q1) A competitive firm has the short-run cost function c(y) = 2y3 - 16y2 + 128y + 10. The firm will produce a positive amount in the short run if and only if the price is greater than

A) $192.

B) $48.

C) $99.

D) $96.

E) $95.

Q2) A firm has the short-run total cost function c(y) = 9y2 +144. At what quantity of output is short-run average cost minimized?

A) 4

B) 16

C) 0.75

D) 3

E) None of the above.

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 2, if Mr. Dent Carr's total costs were 5s² + 50s + 20, then if he repairs 10 cars, his average variable costs will be

A) $100.

B) $102.

C) $150.

D) $200.

E) $75.

Q2) In Problem 2, if Mr. Dent Carr's total costs were 2s² + 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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Chapter 21: Firm Supply

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Q1) A competitive firm uses two variable factors to produce its output, with a production function q = min{x1, x2}.The price of factor 1 is $4 and the price of factor 2 is $1. Due to a lack of warehouse space, the company cannot use more than 15 units of x1. The firm must pay a fixed cost of $90 if it produces any positive amount but doesn't have to pay this cost if it produces no output. What is the smallest integer price that would make a firm willing to produce a positive amount?

A) $15

B) $21

C) $5

D) $24

E) $11

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

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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) = 2s² + 18. 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) 4

B) 0

C) 3

D) 2

E) 6

Q2) Suppose that Dent Carr's long-run total cost of repairing s cars per week is c(s) = 3s² + 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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44

Chapter 22: Industry Supply

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Q1) If there are constant returns to scale in a competitive industry, then the long-run industry supply curve for that industry is horizontal.

A)True

B)False

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

A)True B)False

Q3) 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.)

Q4) The market for a good is in equilibrium when the government unexpectedly imposes a quantity tax of $2 per unit. In the short run, the price will rise by $2 per unit so that firms can regain their lost revenue and continue to produce.

A)True B)False

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Chapter 22: A: Industry Supply

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Q1) Suppose that the cost of capturing a cockatoo and transporting him to the United States is about $40 per bird. Cockatoos are drugged and smuggled in suitcases to the United States. Half of the smuggled cockatoos die in transit. Each smuggled cockatoo has a 10% probability of being discovered, in which case the smuggler is fined. If the fine imposed for each smuggled cockatoo is increased to $900, then the equilibrium price of cockatoos in the United States will be

A) $130.

B) $85.

C) $288.89.

D) $67.

E) $200.

Q2) In Problem 4, suppose that each firm has the cost function c(y) = y² + 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.

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Page 46

Chapter 23: Monopoly

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Q1) A monopolist faces the inverse demand curve p = 120 - 6q. At what level of output is his total revenue maximized?

A) 20

B) 5

C) 20.

D) 15

E) 10

Q2) A firm has discovered a new kind of nonfattening, non-habit-forming dessert called zwiffle. It doesn't taste very good, but some people like it and it can be produced from old newspapers at zero marginal cost. Before any zwiffle could be produced, the firm would have to spend a fixed cost of $F. Demand for zwiffle is given by the equation q = 12 - p. The firm has a patent on zwiffle, so it can have a monopoly in this market.

A) The firm will produce zwiffle only if F is less than or equal to 36.

B) The firm will not produce zwiffle if F > 12.

C) The firm will produce 12 units of zwiffle.

D) The firm will produce 9 units of zwiffle.

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) = 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.

Q2) In Problem 1, if the demand schedule for Bong's book is Q = 5,000 - 100p, the cost of having the book typeset is $6,000, and the marginal cost of printing an extra book is $4, then he would maximize his profits by

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

B) having it typeset and selling 4,600 copies.

C) having it typeset and selling 2,500 copies.

D) having it typeset and selling 2,300 copies.

E) having it typeset and selling 1,150 copies.

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Chapter 24: Monopoly Behavior

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Q1) A price-discriminating monopolist sells in two separate markets such that goods sold in one market are never resold in the other. It charges p₁ = $4 in one market and p₂ = $8 in the other market. At these prices, the price elasticity in the first market is -1.90 and the price elasticity in the second market is 20.30. Which of the following actions is sure to raise the monopolist's profits?

A) Raise p₂.

B) Raise p₁ and lower p₂.

C) Lower p₂.

D) Raise both p₁ and p₂.

E) Raise p₂ and lower p₁.

Q2) A profit-maximizing monopolist practices third-degree price discrimination. If he charges p₁ in market 1 and p₂ in market 2, where p₁ > p₂, then if the law forced him to charge the same price in both markets, more would be demanded in market 1 than in market 2.

A)True

B)False

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Chapter 24: A: Monopoly Behavior

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Q1) Suppose that 1,000 people are interested in attending ElvisLand. Once a person arrives at ElvisLand, his or her demand for rides is given by x = max{ 6 - p, 0} , where p is the price per ride. There is a constant marginal cost of $3 for providing a ride at ElvisLand. If 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) $3 per ride and $6 for admission

B) $3 per ride and $4.50 for admission

C) $0 per ride and $3 for admission

D) $0 per ride and $7.50 for admission

E) $6 per ride and $6 for admission

Q2) If a monopolist faces an inverse demand curve, p(y) = 100 - 2y and has constant marginal costs of $32 and zero fixed costs and if this monopolist is able to practice perfect price discrimination, its total profits will be

A) $1,156.

B) $17.

C) $578.

D) $1,734.

E) $289.

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Chapter 25: Factor Markets

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Q1) A monopsonist's market power enables him to hire labor at a marginal cost that is lower than the wage rate.

A)True

B)False

Q2) 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

Q3) A monopolist who faces a horizontal labor supply curve will demand less labor than he would if he acted competitively.

A)True

B)False

Q4) If a labor market is dominated by a monopolist, it is possible that the imposition of a minimum wage law could increase the amount of employment in that market.

A)True

B)False

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Chapter 25: A: Factor Markets

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Q1) Suppose that the labor supply curve for a large university in a small town is given by w = 160 + 0.03L, where L is number of units of labor per week and w is the weekly wage paid per unit of labor. If the university is currently hiring 1,000 units of labor per week, the marginal cost of an additional unit of labor

A) equals the wage rate.

B) is twice the wage rate.

C) equals the wage rate plus $60.

D) equals the wage rate plus $30.

E) equals the wage rate plus $90.

Q2) Suppose that the labor supply curve for a large university in a small town is given by w = 60 + 0.08L, where L is number of units of labor per week and w is the weekly wage paid per unit of labor. If the university is currently hiring 1,000 units of labor per week, the marginal cost of an additional unit of labor

A) equals the wage rate.

B) is twice the wage rate.

C) equals the wage rate plus $160.

D) equals the wage rate plus $80.

E) equals the wage rate plus $240.

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Chapter 26: Oligopoly

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Q1) In the Bertrand model of duopoly, each firm sets its price, believing that the other's price will not change. When both firms have identical production functions and produce with constant returns to scale, the Bertrand equilibrium price is equal to marginal cost.

A)True

B)False

Q2) In Cournot equilibrium each firm chooses the quantity that maximizes its own profits assuming that the firm's rival will continue to sell at the same price as before.

A)True

B)False

Q3) A Stackelberg leader will necessarily make at least as much profit as he would if he acted as a Cournot oligopolist.

A)True

B)False

Q4) In the Cournot model, each firm chooses its actions on the assumption that its rivals will react by changing their quantities in such a way as to maximize their own profits.

A)True

B)False

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53

Chapter 26: A: Oligopoly

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Q1) In Problem 5, suppose that Grinch and Grubb go into the wine business in a small country where wine is difficult to grow. The demand for wine is given by p = $420 - .2Q, where p is the price and Q is the total quantity sold. The industry consists of just the two Cournot duopolists, Grinch and Grubb. Imports are prohibited. Grinch has constant marginal costs of $60 and Grubb has marginal costs of $30. How much Grinch's output in equilibrium?

A) 275

B) 550

C) 825

D) 1,100

E) 1,650

Q2) 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.

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Page 54

Chapter 27: Game Theory

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Q1) Two players are engaged in a game of Chicken. There are two possible strategies, Swerve and Drive Straight. A player who chooses to Swerve is called Chicken and gets a payoff of zero, regardless of what the other player does. A player who chooses to Drive Straight gets a payoff of 36 if the other player swerves and a payoff of -36 if the other player also chooses to Drive Straight. This game has two pure strategy equilibria and

A) a mixed strategy equilibrium in which each player swerves with probability .50 and drives straight with probability .50.

B) a mixed strategy equilibrium in which one player swerves with probability .50 and the other swerves with probability .50.

C) a mixed strategy in which each player swerves with probability .25 and drives straight with probability .75.

D) two mixed strategies in which players alternate between swerving and driving straight.

E) no mixed strategies.

Q2) In a Nash equilibrium, everyone must be playing a dominant strategy.

A)True

B)False

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Page 55

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

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

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

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

Q2) 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?

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Page 57

Chapter 28: A: Game Applications

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Q1) (See Problem 3.) Two players are engaged in a game of "chicken." There are two possible strategies, Swerve and Drive Straight. A player who chooses to Swerve is called "chicken" and gets a payoff of zero, regardless of what the other player does. A player who chooses to Drive Straight gets a payoff of 4 if the other player Swerves and a payoff of -36 if the other player also chooses to Drive Straight. This game has two pure strategy equilibria and

A) a mixed strategy equilibrium in which one player swerves with probability 0.90 and the other swerves with probability 0.10.

B) a mixed strategy in which each player swerves with probability 0.45 and drives straight with probability 0.55.

C) a mixed strategy equilibrium in which each player swerves with probability 0.90 and drives straight with probability 0.10.

D) two mixed strategies in which players alternate between swerving and driving straight.

E) no mixed strategies.

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Chapter 29: Behavioral Economics

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Q1) The following statement is a defense of conventional models of consumer behavior against the objections of behavioral economists: Even if many participants in a market do not behave rationally, those who consistently maximize utility will have the greatest effect on market prices and outcomes.

A)True

B)False

Q2) If a tennis player were truly randomizing over which half of the court to serve to, she would never serve to the same side of the court 5 times in a row.

A)True

B)False

Q3) People who have recently become unemployed often believe the national unemployment rate is higher than it actually is. Behavioral economists would attribute this to

A) the anchoring effect.

B) the law of small numbers.

C) time inconsistency of preferences.

D) fairness norms.

E) hyperbolic discounting.

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Chapter 30: Exchange

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Q1) If two people have identical Cobb-Douglas utility functions, then in every Pareto optimal allocation, they must consume all goods in the same proportions as each other.

A)True

B)False

Q2) Xavier and Yvette are the only two persons on a desert island. There are only two goods, nuts and berries. Xavier's utility function is U(N_x, B_x) = N_xB_x. Yvette's utility function is U(N_y, B_y) = 2N_y + B_y. Xavier is endowed with 3 units of berries and 8 units of nuts. Yvette is endowed with 6 units of berries and 8 units of nuts. In a competitive equilibrium for this economy, how many units of berries does Xavier consume?

A) 12.50

B) 19

C) 7.50

D) 9.50

E) None of the above.

Q3) A competitive equilibrium allocation must be a feasible allocation.

A)True

B)False

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Page 60

Chapter 30: A: Exchange

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Q1) An economy has two people, Charlie and Doris. There are two goods, apples and bananas. Charlie has an initial endowment of 3 apples and 12 bananas. Doris has an initial endowment of 6 apples and 6 bananas. Charlie's utility function is U(A_C, B_C) = A_CB_C, where A_C is his apple consumption and B_C is his banana consumption. Doris's utility function is U(A_D, B_D) = A_DB_D, where A_D and B_D are her apple and banana consumptions. At every Pareto optimal allocation,

A) Charlie consumes the same number of apples as Doris.

B) Charlie consumes 9 apples for every 18 bananas that he consumes.

C) Doris consumes equal numbers of apples and bananas.

D) Charlie consumes more bananas per apple than Doris does.

E) Doris consumes 6 apples for every 6 bananas that she consumes.

Q2) ...

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Chapter 31: Production

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Q1) Tip can write 2 pages of term paper or solve 2 workbook problems in an hour, while Spot can write 2 pages of term paper or solve 6 workbook problems in an hour. If they each decide to work a total of 8 hours and to share their output, then if they produce as many pages of term paper as possible given that they produce 14 workbook problems, A) Tip will spend all of his time writing term papers and Spot will spend some time at each task.

B) Spot will spend all of his time writing term papers and Tip will spend some time at each task.

C) Spot will write term papers only and Tip will do workbook problems only. D) both students will spend some time at each task.

E) Tip will write term papers only and Spot will do workbook problems only.

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 2 fish per hour or he can pick 4 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) $48 and the price of fish is $2.

B) $48 and the price of fish is $.50.

C) $24 and the price of fish is $2.

D) $72 and the price of fish is $2.

E) $36 and the price of fish is $.50.

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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) In a pure exchange economy, if an allocation is Pareto efficient, it is impossible to have two people who prefer each other's consumption bundles to their own.

A)True B)False

Q3) An allocation that is worse for somebody than the initial allocation cannot be Pareto optimal.

A)True

B)False

Q4) 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

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64

Chapter 32: A: 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 3 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 $9,000. The parent wants to give a total of $2,000 to her two children. Her utility function is U(C_A, C_B) = C_AC_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) the child in city B 3 times as much money as the child in city A.

B) the child in city B 1.50 times as much money as the child in city A.

C) the child in city A 3 times as much money as the child in city B.

D) each child $1,000, even though this will buy less goods for the child in city B.

E) the child in city A 1.50 times as much money as the child in city B.

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Chapter 33: Externalities

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Q1) Mike's utility function is U(c, d, h) = 8c + 12d - d² - 6h, 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 citizens of his town, and c is the amount of money he has to spend on other things than gasoline and auto repairs. There are 1,001 identical citizens in Mike's home town. Mike's expenses for gasoline and auto repairs amount to $.50 per hour for the time he spends driving. If Mike believes that his amount of driving won't affect the amount that others drive, how many hours per day will he choose to drive?

A) 4

B) 6

C) 8

D) 2

E) 1

Q2) The efficient amount of air pollution is in general independent of whether polluters or pollutees pay to reduce pollution.

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 $5,000 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(21x - x²). 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 X₁. 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 X₂.

A) X₁= 16 and X₂ = 16.

B) X₁ = 20 and X₂ = 12.

C) X₁ = 16 andX₂ = 8.

D) X₁= 8 and X₂ = 6.

E) None of the above.

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Chapter 34: Information Technology

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Q1) 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

Q2) For a good with network externalities, the number of people who are willing to buy a unit of the good is uniquely determined by the price.

A)True

B)False

Q3) Copyright protection discourages the production of new software.

A)True

B)False

Q4) For a good with network externalities, draw a diagram showing the relation between the number of units sold and the willingness to pay of demanders. Find a price at which there are two stable and one unstable equilibrium quantities. Label these equilibria and explain why the unstable equilibrium is unstable.

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68

Chapter 34: A: Information Technology

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Q1) Eleven consumers are trying to decide whether to connect to a new communications network. Consumer 1 is of type 1, consumer 2 is of type 2, consumer 3 is of type 3, and so on. Where k is the number of consumers connected to the network (including oneself), a consumer of type n has a willingness to pay to belong to this network equal to k times n. What is the highest price at which 11 consumers could all connect to the network and either make a profit or at least break even?

A) $12

B) $10

C) $1

D) $0

E) $11

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Chapter 35: Public Goods

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Questions

Q1) The Sons of Knute had a hunting lodge up on Loon Lake that burned down last winter. They plan to rebuild it this summer and are trying to decide how large the new lodge should be. The organization has 50 members. The marginal rate of substitution of each of them between square feet of hunting lodge and money for other goods is 1.20.0004y, where y is the size of the hunting lodge in square feet. What is the efficient size for the new hunting lodge?

A) 1,000 square feet

B) 1,200 square feet

C) 2,000 square feet

D) 2,400 square feet

E) None of the above.

Q2) Which of the following is the best example of a public good as defined in your text?

A) Cable television

B) Day care

C) Radio broadcasts

D) Medical care

E) Disneyland

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Chapter 35: A: Public Goods

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Q1) Recall Bonnie and Clyde from Problem 5. Suppose that their total profits are 192H, where H is the number of hours they work per year. Their utility functions are, respectively, U_B(C_B, H) = C_B - 0.02H² and U_C(C_C, H) = C_C - 0.04H², where C_B and C_C are their private goods consumptions and H is the number of hours they work per year. If they find a Pareto optimal choice of hours of work and income distribution, the number of hours they work per year is A) 750.

B) 2,400. C) 1,700.

D) 1,600.

E) 850.

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Chapter 36: Asymmetric Information

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Q1) Suppose that low-productivity workers all have marginal products of 10 and high-productivity workers have marginal products of 16. The community has equal numbers of each type of worker. The local community college offers a course in microeconomics. High-productivity workers think taking this course is as bad as a cut in wages of $5 and low-productivity workers think it is as bad as a wage cut of $9.

A) There is no separating equilibrium and no pooling equilibrium.

B) There is no separating equilibrium, but there is a pooling equilibrium in which everybody is paid $13.

C) There is a separating equilibrium in which high- productivity workers take the course and are paid $21 and low-productivity workers do not take the course and are paid $10.

D) There is a separating equilibrium in which high- productivity workers take the course and are paid $16 and low-productivity workers do not take the course and are paid $10.

E) There is a separating equilibrium in which high- productivity workers take the course and are paid $16 and low-productivity workers are paid $13.

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Chapter 36: A: Asymmetric Information

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Q1) In Rustbucket, Michigan, there are 200 used cars for sale, half of them are good and half of them are lemons. Owners of lemons are willing pay $200 for a lemon and $2,300 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 $1,250.

B) There will be an equilibrium in which all used cars sell for $700.

C) The only equilibrium is one in which all used cars on the market are lemons and they sell for $200.

D) There will be an equilibrium in which lemons sell for $100 and good used cars sell for $1,300.

E) There will be an equilibrium in which lemons sell for $200 and good used cars sell for $2,300.

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