Microeconomic Theory Review Questions - 2659 Verified Questions by Quizplus

Microeconomic Theory Review

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Course Introduction

Microeconomic Theory explores the foundational principles governing individual and firm decision-making within various market structures. The course examines concepts such as consumer choice, production and cost functions, market equilibrium, and the impact of government intervention on resource allocation. Students develop analytical frameworks to assess how prices are determined, how resources are allocated efficiently, and how market failures can arise. Through mathematical models and real-world applications, the course deepens understanding of topics like perfect and imperfect competition, game theory, and welfare economics, preparing students for further studies in economics and applied policy analysis.

Recommended Textbook

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

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Chapter 1: Budget Constraint-Part A

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Sample Questions

Q1) Eduardo spends his entire income on 9 sacks of acorns and 4 crates of butternuts.The price of acorns is 6 dollars per sack and his income is 90 dollars.He can just afford a commodity bundle with A sacks of acorns and B crates of butternuts that satisfies the budget equation

A)6A + 13B = 92.

B)12A + 18B = 180.

C)8A + 9B = 90.

D)6A + 11B = 90.

E)None of the above.

Answer: B

Q2) If she spends her entire budget, Heidi can afford 39 peaches and 12 pears.She can also just afford 24 peaches and 17 pears.The price of peaches is 9 cents.What is the price of pears in cents?

A)12 cents

B)37 cents

C)27 cents

D)3 cents

E)None of the above.

Answer: C

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Chapter 1: Budget Constraint-Part B

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Sample Questions

Q1) if in the same amount of time that it takes her to read 40 pages of economics and 30 pages of sociology, Martha could read 10 pages of economics and 90 pages of sociology, then which of these equations describes combinations of pages of economics, E, and sociology, S, that she could read in the time it takes to read 40 pages of economics and 30 pages of sociology?

A)E + S = 70.

B)E/2 + S = 50.

C)2E + S = 110.

D)E + S = 100.

E)All of the above.

Answer: C

Q2) if you have an income of $18 to spend, if commodity 1 cost $3 per unit, and if commodity 2 costs $9 per unit, then the equation for your budget line can be written

A)x1/3 + x2/9 = 18.

B)(x1 + x2)/12 = 18.

C)x1 + 3x2 = 6.

D)4x1 + 10x2 = 19.

E)12(x1 +x2) = 18.

Answer: C

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Page 4

Chapter 2: Preferences-Part A

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Q1) Angela consumes goods x and y.Her indifference curves are described by the formula y = k/(x + 3).Higher values of k correspond to better indifference curves.

A)Angela prefers bundle (8, 9)to bundle (9, 8).

B)Angela likes good y and hates good x.

C)Angela prefers bundle (11, 9)to bundle (9, 11).

D)Angela likes good x and hates good y.

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

Answer: A

Q2) Charlie's indifference curves have the equation xB = constant/xA, where larger constants denote better indifference curves.Charlie strictly prefers the bundle (6, 16)to

A)the bundle (16, 6).

B)the bundle (7, 15).

C)the bundle (10, 11).

D)more than one of these bundles.

E)none of these bundles.

Answer: E

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Page 5

Chapter 2: Preferences-Part B

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Q1) Ambrose has indifference curves with the equation x2 = constant4x1/21, where larger constants correspond to higher indifference curves.If good 1 is drawn on the horizontal axis and good 2 on the vertical axis, what is the slope of Ambrose's indifference curve when his consumption bundle is (1, 11)?

A)-1/11

B)-11/1

C)-12

D)-2

E)-1

Q2) Charlie's indifference curves have the equation xB = constant/xA, where larger constants correspond to better indifference curves.Charlie strictly prefers the bundle (9, 17)to the bundle A)(17, 9).

B)(14, 14).

C)(10, 16).

D)All of the above.

E)None of the above.

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Chapter 3: Utility-Part A

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Q1) The utility function U(x1, x2)= 2lnx1 + 3lnx2 represents Cobb-Douglas preferences.

A)True

B)False

Q2) Henrietta's utility function is U(x1, x2)= x1x2.She has diminishing marginal rate of substitution between goods 1 and 2.

A)True

B)False

Q3) 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

Q4) A person with the utility function U(x, y)= y + x2 has convex preferences.

A)True

B)False

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Page 7

Chapter 3: Utility-Part B

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Q1) Joe Bob has a cousin Ike who consumes goods 1 and 2.Ike thinks that 4 units of good 1 is always a perfect substitute for 2 units of good 2.Which of the following utility functions is the only one that would not represent Ike's preferences?

A)U(x1, x2)=2x1 + 4x2 + 1000.

B)U(x1, x2)+4x21 + 16x1x2 + 16x22.

C)U(x1, x2)= min{2x1, 4x2}.

D)U(x1, x2)=20x1 + 40x2 + 10,000.

E)More than one of the above does not represent Ike's preferences.

Q2) Harry Mazzola has the utility function U(x1, x2)=min{x1 + 2x2, 2x1 +x2}.He has $40 to spend on corn chips and french fries.If the price of corn chips is $3 per unit and the price of french fries is $5 per unit, then Harry will A)definitely spend all of his income on french fries.

B)consume at least as many corn chips as french fries but might consume both.

C)definitely spend all of his income on corn chips.

D)consume at least as many french fries as corn chips but might consume both.

E)consume equal amounts of french fries and corn chips.

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Chapter 4: Choice-Part A

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Sample Questions

Q1) Ed and Al both consume only bread and cheese.Both of them always choose to have some bread and some cheese, and both have strictly convex preferences.However, Ed likes to have a great deal of bread with a little cheese, and Al likes lots of cheese with a little bread.Both face the same prices for both goods and have chosen bundles to maximize their utilities subject to their budgets.

A)Al's marginal rate of substitution is larger in absolute value than Ed's.

B)Ed's marginal rate of substitution is larger in absolute value than Al's.

C)Their marginal rates of substitution are the same.

D)Who has the larger marginal rate of substitution depends on income levels.

E)There is not enough information for us to be able to tell who has the larger marginal rate of substitution.

Q2) Charlie has a utility function U(x, y)= (x + 3)(y + 4).The price of x is $1 and the price of y is $1.When he maximizes his utility subject to his budget constraint, he consumes positive amounts of both goods.Charlie consumes

A)2 more units of x than he consumes of y.

B)1 more unit of x than he consumes of y.

C)exactly as many units of x as of y.

D)1 more unit of y than he consumes of x.

E)None of the above.

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Page 9

Chapter 4: Choice-Part B

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Q1) Ambrose's utility function is = 4x1/21 + x2.If the price of nuts (good 1)is $1, the price of berries (good 2)is $7, and his income is $259, how many units of berries will Ambrose choose?

A)8

B)197

C)9

D)18

E)12

Q2) Clara's utility function is U(X, Y)=(X + 2)(Y + 1).If Clara's marginal rate of substitution is -6 and she is consuming 8 units of good X, how many units of good Y is she consuming?

A)14

B)60

C)59

D)6

E)13

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Chapter 5: Demand-Part A

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Sample Questions

Q1) If preferences are homothetic and all prices double while income remains constant, then demand for all goods is halved.

A)True

B)False

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

B)False

Q3) Murphy's utility function is U(x, y)= min{4x + y, 2x + 2y, x + 4y}.Murphy is consuming 12 units of x and 6 units of y.

a.Draw the indifference curve through this point.At what points does this indifference curve have kinks?

b.The price of good x is $1.What is the highest possible price for y? What is the lowest possible price for y?

Q4) Angela's utility function is x + y1/2.It is possible that if her income is very high, an increase in income will not make her spend more on y.

A)True

B)False

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Chapter 5: Demand-Part B

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Sample Questions

Q1) recall that Casper's utility function is 3x + y, where x is his consumption of cocoa and y is his consumption of cheese.If the total cost of x units of cocoa is x2, the price of cheese is $4, and Casper's income is $56, how many units of cocoa will he consume? A)6 B)5 C)11 D)3

E)12

Q2) recall that Casper's utility function is 3x + y, where x is his consumption of cocoa and y is his consumption of cheese.If the total cost of x units of cocoa is x2, the price of cheese is $2, and Casper's income is $39, how many units of cocoa will he consume?

A)5 B)0 C)2 D)3 E)6

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Chapter 6: Revealed Preference-Part A

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Q1) Prudence was maximizing her utility subject to her budget constraint.Then prices changed.After the change, she is better off.Therefore the new bundle costs more at the old prices than the old bundle did.

A)True

B)False

Q2) 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

Q3) It follows from the weak axiom of revealed preference that if a consumer chooses x when he could afford y and chooses y when he could afford x, then his income must have changed between the two observations.

A)True

B)False

Q4) An increase in the price of an inferior good makes the people who consume that good better off.

A)True

B)False

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Chapter 6: Revealed Preference-Part B

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Sample Questions

Q1) Pierre's friend Henri lives in a town where he has to pay 3 francs per glass of wine and 2 francs per loaf of bread.Henri consumes 10 glasses of wine and 4 loaves of bread per day.Recall that Bob has an income of $15 per day and pays $.50 per loaf of bread and $2 per glass of wine.If Bob has the same tastes as Henri and if the only thing that either of them cares about is the consumption of bread and wine,

A)Henri is better off than Bob.

B)both of them violate the weak axiom of revealed preferences.

C)there is not enough information to determine whether one is better off than the other.

D)Bob is better off than Henri.

E)Bob and Henri are equally well off.

Q2) if situation D is p = (3, 1)and x = (5, 10),

A)Ronald's behavior is consistent with both the Weak and the Strong Axioms of Revealed Preference.

B)Ronald's behavior is consistent with the Weak but not the Strong Axiom of Revealed Preference.

C)Ronald's behavior violates both the Weak and the Strong Axioms of Revealed Preference.

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Page 14

Chapter 7: Slutsky Equation-Part A

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Sample Questions

Q1) Carlos consumes only two goods, apples and bananas.His utility function is given by U(x, y)= min{x, 2y}.He is endowed with wa apples and wb bananas.Unaware that prices are about to change, Carlos buys the quantities of apples and bananas that maximize his utility subject to his budget constraint.After he has made his purchases but before he has eaten them, the relative prices change.Carlos is then free to make further trades at the new relative prices if he wishes.

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

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

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

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

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

Q2) If two goods x and y are perfect complements, then if the price of x falls, the entire change in the demand for x is due to the income effect.

A)True

B)False

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Page 15

Chapter 7: Slutsky Equation-Part B

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Sample Questions

Q1) refer to scenario above, Charlie's utility function is xAxB.The price of apples used to be $1, the price of bananas used to be $2, and his income used to be $40.If the price of apples increased to $5 and the price of bananas stayed constant, the substitution effect on Charlie's apple consumption would reduce his consumption by

A)8 apples.

B)16 apples.

C)13 apples.

D)4 apples.

E)None of the above.

Q2) Goods 1 and 2 are perfect complements, and a consumer always consumes them in the ratio of 2 units of good 2 per unit of good 1.If a consumer has an income of $120 and if the price of good 2 changes from $3 to $4, while the price of good 1 stays at $1, then the income effect of the price change

A)is 4 times as strong as the substitution effect.

B)does not change demand for good 1.

C)is exactly twice as strong as the substitution effect.

D)accounts for the entire change in demand.

E)is 3 times as strong as the substitution effect.

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Page 16

Chapter 8: Buying and Selling-Part A

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Q1) Jackie's net demands for x and y are (6, -6)and her gross demands are (15, 15).What is her initial endowment of x?

A)16

B)13

C)5

D)9

E)None of the above.

Q2) Marsha Mellow is very flexible.She consumes x and y.She says, "Give me x or give me y, I don't care.I can't tell the difference between them." She is currently endowed with 14 units of x and 3 units of y.The price of x is 3 times the price of y.Marsha can trade x and y at the going prices but has no other source of income.How many units of y will Marsha consume?

A)48

B)17

C)45

D)3

E)23

Q3) Is it ever possible that an increase in the price of a good for which a person is a net seller can make him worse off? Use a diagram to illustrate your answer.

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Page 17

Chapter 8: Buying and Selling-Part B

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Q1) Dudley, 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

Q2) Dudley, 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 $35 per day and is paid a wage of $0 per hour, how many hours of leisure will he choose per day?

A)11

B)9

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Chapter 9: Intertemporal Choice-Part A

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Q1) If the inflation rate doubles and the nominal interest rate remains constant, the real interest rate must be halved.

A)True

B)False

Q2) Samantha Smoothie's utility function is U(c1, c2)= c1c2, where c1 is her consumption in period 1 and c2 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.

Q3) 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

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Page 19

Chapter 9: Intertemporal Choice-Part B

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Q1) If Peregrine consumes (1, 400, 1, 440)and earns (900, 2, 040)and if the interest rate is 20%, the present value of his endowment is

A)$2,940.

B)$2,600.

C)$5,720.

D)$2,840.

E)$6,620.

Q2) If Peregrine consumes (1, 500, 1, 080)and earns (1, 000, 1, 680)and if the interest rate is 20%, the present value of his endowment is

A)$2,680.

B)$5,280.

C)$2,400.

D)$2,580.

E)$6,280.

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Chapter 10: Asset Markets-Part A

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Q1) Today is January 1.The interest rate is 8% and investors are convinced that it will stay at 8% for the next 10 years.A corporate bond comes on the market that for the next 7 years will pay $160 on December 31 to whoever owns the bond on that date.On January 1, 7 years from today, the issuer of the bond will redeem the bond by buying it back from the bondholder for $2,000.What should this bond sell for?

A)$3,120

B)$2,160

C)$1,600

D)$2,000

E)$2,780

Q2) A certain wine costs $3 a bottle to produce.The amount that people are willing to pay to drink it t years after it has been bottled is $2 + 3t.Storage costs, not including interest, are $.50 per year.If the interest rate is 5%, how much would a rational investor be willing to pay for it at the time it is bottled? Explain how you got your answer.Feel free to write formulas for present value calculations without working out the numerical answer if it involves long calculations.(Hint: How long would the wine be kept before it is drunk? At what price would it sell?)

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Chapter 10: Asset Markets-Part B

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Q1) 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

Q2) If the interest rate is 13% and will remain 13% forever, how much would a rational investor be willing to pay for an asset that will pay him 6,780 dollars 1 year from now, 1,276 dollars 2 years from now, and nothing at any other time?

A)53,846.15 dollars

B)6,000 dollars

C)98,000 dollars

D)7,000 dollars

E)8,000 dollars

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Chapter 11: Uncertainty-Part A

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Q1) Every $1 invested in Safe Sox will yield $2 for sure.Each $1 invested in Wobbly Umbrellas will yield $8 with probability 1/2 and $0 with probability 1/2.An investor has $10,000 to invest in these two companies and her von Neumann-Morgenstern utility function is the expected value of the natural logarithm of the total yield on her investments.If S is the amount of money that she invests in Safe Sox and $10,000 2 S is the amount that she invests in Wobbly Umbrellas, what should S be to maximize her expected utility? (Pick the closest answer.)

A)$1,111

B)$3,333

C)$5,000

D)$6,667

E)$9,111

Q2) If the price of insurance goes up, people will become less risk averse.

A)True

B)False

Q3) Of any two gambles, no matter what their expected returns, a risk averter will choose the one with the smaller variance.

A)True

B)False

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Page 23

Chapter 11: Uncertainty-Part B

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Q1) Sally Kink is an expected utility maximizer with utility function pu(c1)+ (1p)u(c2), where for any x < 8,000, u(x)= 2x, and for x greater than or equal to 8,000, u(x)= 16,000 + x.

A)Sally will never take a bet if there is a chance that it leaves her with wealth less than $16,000.

B)Sally will be risk neutral if her income is less than $8,000 and risk averse if her income is more than $8,000.

C)Sally will be risk averse if her income is less than $8,000 but risk loving if her income is more than $8,000.

D)For bets that involve no chance of her wealth exceeding $8,000, 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-Part A

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Q1) Suppose that Fenner Smith of Workouts must divide his portfolio between two assets, one of which gives him an expected rate of return of 10% with zero standard deviation and one of which gives him an expected rate of return of 25% and has a standard deviation of 5%.He can alter the expected rate of return and the variance of his portfolio by changing the proportions in which he holds the two assets.If we draw a "budget line" with expected return on the vertical axis and standard deviation on the horizontal axis, depicting the combinations that Smith can obtain, the slope of this budget line is

A)1.50.

B)-1.50.

C)-3.

D)3.

E)4.50.

Q2) If the returns on two assets are negatively correlated, then a portfolio that contains some of each will have less variance in its return per dollar invested than either asset has by itself.

A)True

B)False

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Chapter 12: Risky Assets-Part B

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Q1) Suppose that Ms.Lynch 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 8.75%, then the standard deviation of her return on this portfolio will be

A)7.50%.

B)3.75%.

C)1.88%.

D)6.75%.

E)None of the above.

Q2) Suppose that Ms.Lynch can make up her portfolio using a risk-free asset that offers a surefire rate of return of 10% and a risky asset with an expected rate of return of 15%, with standard deviation 5.If she chooses a portfolio with an expected rate of return of 15%, then the standard deviation of her return on this portfolio will be A)2.50%.

B)8%.

C)5%.

D)10%.

E)None of the above.

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Chapter 13: Consumers Surplus-Part A

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Q1) Pablo's utility function is U(x, y)= x + 10y - y2/2, where x is the number of x's he consumes per week and y is the number of y's he consumes per week.Pablo has $200 a week to spend.The price of x is $1.The price of y is currently $5 per unit.Pablo has received an invitation to join a club devoted to the consumption of y.If he joins the club, Pablo can get a discount on the purchase of y.If he belonged to the club, he could buy y for $1 a unit.How much is the most Pablo would be willing to pay to join this club?

A)$8

B)$28

C)$36

D)$56

E)None of the above.

Q2) If somebody is buying 10 units of x and the price of x falls by $3, then that person's net consumer's surplus must increase by at least $30.

A)True

B)False

Q3) Consumer's surplus is another name for excess demand.

A)True

B)False

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Chapter 13: Consumers Surplus-Part B

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Q1) Ms.Quasimodo has the utility function U(x, m)= 100x - x2/2 + m, where x is her consumption of earplugs and m is money left over to spend on other stuff.If she has $10,000 to spend on earplugs and other stuff and if the price of earplugs rises from $50 to $75, then her net consumer's surplus

A)falls by 937.50.

B)falls by 625.

C)falls by 2,937.50.

D)increases by 468.75.

E)increases by 1,875.

Q2) 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.

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Page 28

Chapter 14: Market Demand-Part A

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Sample Questions

Q1) Given his current income, Rico's demand for bagels is related to the price of bagels by the equation Q = 520 - 12P.Rico's income elasticity of demand for bagels is known to be equal to 0.5 at all prices and incomes.If Rico's income quadruples, his demand for bagels will be related to the price of bagels by the equation

A)Q = 520 - 24P.

B)Q = 1,040 - 24P.

C)Q = 2,080 - 48P.

D)Q = 520 - 12P.

E)Q = 1,040 - 12P.

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 elasticity of demand curve for buckwheat is -1.25 at all prices higher than the current price, we would expect that when bad weather reduces the size of the buckwheat crop, total revenue of buckwheat producers will fall.

A)True

B)False

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Chapter 14: Market Demand-Part B

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Sample Questions

Q1) In the same football conference there is another university where the demand for football tickets at each game is 60,000 - 8,000p.If the capacity of the stadium at that university is 40,000 seats, what is the revenue-maximizing price for this university to charge per ticket?

A)$3.75

B)$1.88

C)$7.50

D)$2.50

E)$11.25

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

A)$4.50.

B)$.75.

C)$8.

D)$4.

E)$1.23.

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Page 30

Chapter 15: Equilibrium-Part A

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Sample Questions

Q1) The demand function for corn is q = 200 - p and the supply function is q = 50 + .5p.The government sets the price of corn at $150 and agrees to purchase and destroy any excess supply of corn at that price.How much money does it cost the government to buy this corn?

A)$11,250

B)$18,750

C)$7,500

D)$10,750

E)$14,500

Q2) The inverse demand function for eggs is p = 125 - 6q, where q is the number of cases of eggs.The inverse supply is p = 5 + 6q.In the past, eggs were not taxed, but now a tax of 72 dollars per case has been introduced.What is the effect of the tax on the quantity of eggs supplied?

A)Quantity drops by 7 cases.

B)Quantity drops by 5 cases.

C)Quantity drops by 6 cases.

D)Quantity drops by 12 cases.

E)None of the above.

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Chapter 15: Equilibrium-Part B

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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 = 15 + 3p and the long-run demand function was given by q = 237 - 3p, 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)14 crowns

B)7 crowns

C)11 crowns

D)28 crowns

E)21 crowns

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Chapter 16: Auctions-Part A

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Sample Questions

Q1) A first edition of Adam Smith's Wealth of Nations (published in 1776)is being auctioned via the Internet.The current owner starts by posting his own "bid" for it.Bidders are allowed to submit bids at any time during a one-week interval.For the following week, bids will be accepted only if they exceed the currently posted high bid.Throughout the week, the highest bid that anyone has made so far will be posted.At the end of the week, the book will be sold to the highest bidder at the price that he or she bid for it.Assuming that bidders understand the rules of the auction, the outcome of this auction will be similar to that for

A)an English auction with a reserve price equal to the owner's bid.

B)a Dutch auction with a reserve price equal to the owner's bid.

C)a sealed-bid auction in which the book is sold to the highest bidder at the highest bidder's bid price.

D)a common-value auction.

E)an English auction with no reserve price.

Q2) The "winner's curse" refers to the fact that in a sealed-bid auction with private values, the winning bidder often pays more than he would have to in order to win the object auctioned.

A)True

B)False

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Page 33

Chapter 16: Auctions-Part B

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Q1) A dealer decides to sell an oil painting by means of an English auction with a reservation price of slightly below $70,000.If she fails to get a bid as high as her reservation price, she will burn the painting.There are two bidders.The dealer believes that each bidder's willingness to pay will take one of the three following values: $80,000, $70,000, and $45,000.The dealer believes that each bidder has a probability of 1/3 of having each of these three values.The probability distribution of each buyer's value is independent of that of the other's.Assuming that the two bidders bid rationally and do not collude, the dealer's expected revenue from selling the painting is slightly less than A)$70,000.

B)$59,000.

C)$75,000.

D)$50,000.

E)$65,000.

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Chapter 17: Technology-Part A

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Sample Questions

Q1) A firm uses 3 factors to produce its output.Its production function is f(x, y, z)= min{x3/y, y2, (z4x4)/y2}.If the amount of each input is multiplied by 3, its output will be multiplied by A)27.

B)9.

C)3.

D)0.30.

E)The answer depends on the original choice of x, y, and z.

Q2) A firm's production function is f(x1, x2)= x1 + 2x2.This means that x2 is twice as expensive as x1.

A)True

B)False

Q3) For each of the following production functions, comment on the ability to substitute capital for labor.

a.Q = K + L.

b.Q = K0.5L0.5.

c.Q = min(K, L).

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Chapter 17: Technology-Part B

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Q1) if a = 2.40, b = 0.50, and c = 1, the marginal products of x1, x2, and x3 (in this order)are

A)increasing, decreasing, and constant.

B)all increasing.

C)all decreasing.

D)decreasing, increasing, and decreasing.

E)all increasing if A > 1.

Q2) A firm has the production function $f(x1, x2)=x2.501x0.502.The isoquant on which output is 505/10 has the equation

A)x2 =50x-51.

B)x2 =50x21.

C)x1/x2 = 5.

D)x2 = 50x-0.501.

E)x1 =0.50x-0.502.

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Chapter 18: Profit Maximization-Part A

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Q1) When Farmer Hoglund applies N pounds of fertilizer per acre, the marginal product of fertilizer is 1 -N/100 bushels of corn.If the price of corn is $2 per bushel and the price of fertilizer is $40 per pound, then how many pounds of fertilizer per acre should Farmer Hoglund use in order to maximize his profits?

A)320

B)328

C)160

D)84

E)200

Q2) Diesel Dan is a contract truck driver.While his revenue is $2 per mile driven, the faster he drives, the greater the risk of a speeding ticket.The cost of driving his truck 1 hour at a speed of S miles per hour is C(S)=eS - (60/5).To maximize his profit, Dan should drive

A)65.69 miles per hour.

B)65 miles per hour.

C)70.38 miles per hour.

D)67.08 miles per hour.

E)74.53 miles per hour.

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Page 37

Chapter 18: Profit Maximization-Part B

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Q1) the production function is given by f(x)= 4x1/2.If the price of the commodity produced is $50 per unit and the cost of the input is $25 per unit, how much profit will the firm make if it maximize profits?

A)$804

B)$385

C)$400

D)$198

E)$203

Q2) the production function is f(x1, x2)= x1/21x1/22.If the price of factor 1 is $8 and the price of factor 2 is $4, in what proportions should the firm use factors 1 and 2 if it wants to maximize profits?

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

B)x1 = x2.

C)x1 = 0.50x2.

D)x1 =2x2.

E)x1 = 4x2.

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Chapter 19: Cost Minimization-Part A

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Sample Questions

Q1) Douffelberry juice is a mild intoxicant, prized for facilitating conversation among university administrators but not otherwise valued.The berry does not travel well,so it must be squeezed on the farm where it is grown.Baskets of berries, B, are produced using ounces of seeds, S, and hours of labor, L, according to a production function B = S1/2L1/2.Gallons of juice, J, are made from baskets of berries and hours of labor according to the production function J =min{B, L}.If seeds cost $16 per ounce and labor costs $1 per hour, what is the cost of producing each gallon of douffelberry juice?

A)$18

B)$8

C)$4

D)$9

E)Since there are not constant returns to scale, the cost per gallon depends on the number of gallons produced.

Q2) Quasi-fixed costs are those costs that can be avoided if and only if a firm produces zero output.

A)True

B)False

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Page 39

Chapter 19: Cost Minimization-Part B

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Sample Questions

Q1) the production function is f(L, M)= 4L1/2 M1/2, where L is the number of units of labor and M is the number of machines used.If the cost of labor is $49 per unit and the cost of machines is $36 per unit, then the total cost of producing 4 units of output will be

A)$84.

B)$170.

C)$144.

D)$168.

E)None of the above.

Q2) Suppose that in the short run, the firm which has production function F(L, M)=4L1/2M1/2 must use 9 machines.If the cost of labor is $5 per unit and the cost of machines is $5 per unit, the short-run total cost of producing 108 units of output is

A)$900

B)$540

C)$540.

D)$450

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Chapter 20: Cost Curves-Part A

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Sample Questions

Q1) A firm has a short-run cost function c(y)= 3y + 11 for y = 0 and c(0)= 8.The firm's quasi-fixed costs are

A)$8.

B)$11.

C)$3.

D)$7.

E)They are not possible to determine from this information.

Q2) Not long ago, the Canadian edition of a famous textbook on principles of economics had a diagram depicting a U-shaped average fixed cost curve.This occasioned great mirth around the campfires of some economists in the Great White North and did much to shorten a long hard winter.Explain what is wrong with drawing a U-shaped average fixed cost curve.

Q3) The marginal cost curve of a firm is MC = 6y.Total variable costs to produce 10 units of output are

A)$120.

B)$300.

C)$80.

D)$400.

E)$26.

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Page 41

Chapter 20: Cost Curves-Part B

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Sample Questions

Q1) 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 $650 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 1,800 cars per year.

B)no more than 900 cars per year.

C)at least 1,810 cars per year.

D)no more than 1,800 cars per year.

E)at least 900 cars per year.

Q2) if Mr.Dent Carr's total costs were 2s2 + 50s + 75, then if he repairs 25 cars, his average variable costs will be

A)$150.

B)$200.

C)$103.

D)$100.

E)$75.

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Page 42

Chapter 21: Firm Supply-Part A

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Sample Questions

Q1) A firm produces one output, using one input, with the production function f(x)= 2x1/3, where x is the amount of input.The cost function for this firm is proportional to the price of the input times the cube of the amount of output.

A)True

B)False

Q2) A competitive firm produces its output according to the production function y = min{x2, 100}.Let w be the price of the factor x, and let the price of output be $1.The demand for x, when the price of x is w, is

A)10 when w < 1 and 100 otherwise.

B)100 for all w.

C)10 for all w.

D)0 if w > 10 and 10 otherwise.

E)None of the above.

Q3) A firm with the cost function c(y)= 20y2 + 500 has a U-shaped cost curve.

A)True

B)False

Q4) Average fixed costs never increase with output.

A)True

B)False

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Chapter 21: Firm Supply-Part B

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Sample Questions

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

A)S(p)= 6p.

B)S(p)= p/12.

C)S(p)= p(min{w1, 2w2})2.

D)S(p)=p(max{w1, 2w2})2.

E)S(p)= min{3p, 12p}.

Q2) A firm has a long-run cost function, C(q)= 8q2 + 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.

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Chapter 22: Industry Supply-Part A

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Sample Questions

Q1) In the absence of government interference, there is a constant marginal cost of $5 per ounce for growing marijuana and delivering it to buyers.If the probability that any shipment of marijuana is seized is .10 and the fine if a shipper is caught is $25 per ounce, then the equilibrium price of marijuana per ounce is

A)$8.33.

B)$7.50.

C)$30.

D)$4.50.

E)$5.50.

Q2) The cheese business in Lake Fon-du-lac, Wisconsin, is a competitive industry.All cheese manufacturers have the cost function C = Q2 + 4, while demand for cheese in the town is given by Qd = 120 - P.The long-run equilibrium number of firms in this industry is A)29.

B)58.

C)56.

D)120.

E)59.

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Chapter 22: Industry Supply-Part B

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Sample Questions

Q1) if the demand curve for pollicles is negatively sloped and the government imposes a tax t on every unit of output sold by the industry, in the long run

A)fewer pollicles will be sold.

B)more pollicles will be sold.

C)each firm in the industry produces more pollicles.

D)each firm in the industry produces fewer pollicles.

E)the same number of pollicles will be sold.

Q2) in the absence of government interference, there is a constant marginal cost of $5 per ounce for growing marijuana and delivering it to buyers.If the probability that any shipment of marijuana seized is .20 and the fine if a shipper caught is $45 per ounce, then the equilibrium price of marijuana per ounce is

A)$50.

B)$17.50.

C)$4.

D)$14.

E)$6.

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Chapter 23: Monopoly-Part A

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Sample Questions

Q1) A monopolist faces a constant marginal cost of $1 per unit and has no fixed costs.If the price elasticity of demand for this product is constant and equal to -3, then

A)to maximize profits, he should charge a price of $1.50.

B)to maximize profits, he should charge a price of $3.

C)to maximize profits, he should charge a price of $1.33.

D)he is not maximizing profits.

E)None of the above.

Q2) A profit-maximizing monopolist has the cost schedule c(y)= 40y.The demand for her product is given by y = 600/p4, where p is her price.Suppose that the government tries to get her to increase her output by giving her a subsidy of $21 for every unit that she sells.Giving her the subsidy would make her

A)decrease her price by $49.

B)decrease her price by $28.

C)decrease her price by $10.50.

D)decrease her price by $21.

E)leave her price unchanged.

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Chapter 23: Monopoly-Part B

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Sample Questions

Q1) if demand for the book is Q =1,000 - 300p, the marginal revenue function is given by A)300.

B)1,000 - 600.

C)3.33 - Q/150.

D)3.33Q - Q2/300.

E)-1/300.

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)= 9y, where prices and costs are measured in dollars.In the past it was not taxed, but now it must pay a tax of 4 dollars per unit of output.After the tax, the monopoly will

A)increase its price by 4 dollars.

B)increase its price by 2 dollars.

C)leave its price constant.

D)increase its price by 6 dollars.

E)None of the above.

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Chapter 24: Monopoly Behavior-Part A

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Sample Questions

Q1) A monopolist sells in two markets.The demand curve for her product is given by p1 = 141 - 3x1 in the first market and p2 = 1152x2 in the second market, where xi is the quantity sold in market i and pi is the price charged in market i.She has a constant marginal cost of production, c = 3, and no fixed costs.She can charge different prices in the two markets.What is the profit-maximizing combination of quantities for this monopolist?

A)x1 = 46 and x2 = 30.

B)x1 = 51 and x2 = 23.

C)x1 = 23 and x2 = 28.

D)x1 = 33 and x2 = 26.

E)x1 = 43 and x2 = 38.

Q2) A monopolist who is able to practice third-degree price discrimination will make greater profits than a monopolist who is able to practice first-degree price discrimination.

A)True

B)False

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Chapter 24: Monopoly Behavior-Part B

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Sample Questions

Q1) if demand in the United States is given by Q1 = 18,000900p1, where p1 is the price in the United States, and if the demand in England is given by 2,000 - 200p2, where p2 is the price in England, then the difference between the price charged in England and the price charged in the United States will be

A)$10.

B)$0.

C)$11.

D)$5.

E)$15.

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-Part A

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Sample Questions

Q1) The labor supply curve faced by a large firm in a small city is given by w = 60 + 0.05L, where L is the number of units of labor per week hired by the large firm and w is the weekly wage rate that it pays.If the firm is currently hiring 1,000 units of labor per week, then the marginal cost of a unit of labor to the firm

A)equals the wage rate.

B)is twice the wage rate.

C)equals the wage rate plus $100.

D)equals the wage rate plus $50.

E)equals the wage rate plus $150.

Q2) A monopolist produces a good using only one factor, labor.There are constant returns to scale in production, and the demand for the monopolist's product is described by a downward-sloping straight line with slope 21.The monopolist faces a horizontal labor supply curve.If the monopolist chooses output to maximize profits, then the marginal

A)cost of labor to the monopolist exceeds the wage.

B)product of labor times the price of output equals the wage.

C)product of labor times the price of output is less than the wage.

D)product of labor times the price of output exceeds the wage.

E)revenue product of labor is less than the wage.

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Chapter 25: Factor Markets-Part B

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Q1) Suppose that the labor supply curve for a large university in a small town is given by w = 160 + 0.05L, where L is number of units of labor per week and w is he 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)equals the wage rate plus $50.

C)is twice the wage rate.

D)equals the wage rate plus $100.

E)equals the wage rate plus $150.

Q2) Suppose that the labor supply curve for a large university in a small town is given by w = 140 + 0.02L, 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 plus $40.

B)is twice the wage rate.

C)equals the wage rate plus $20.

D)equals the wage rate.

E)equals the wage rate plus $60.

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Chapter 26: Oligopoly-Part A

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Sample Questions

Q1) Ann and Bruce each own a pizza store in Frostbite Falls, Minnesota.Demand for pizza is given by Q = 200 - 10P.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 + 5Q.If Ann and Bruce behave as duopolists, each earns a profit of A)$0.

B)$200.

C)$500

D)$500.

E)$562.50.

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: Oligopoly-Part B

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Q1) 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 the inverse demand for bean sprouts were given by P(Y)= 430 - 2Y and the total cost of producing Y units for any firm were TC(Y)= 10Y and if the industry consisted of two Cournot duopolists, then in equilibrium each firm's production would be

A)52.50 units.

B)70 units.

C)105 units.

D)35 units.

E)53.75 units.

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Chapter 27: Game Theory-Part A

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Sample Questions

Q1) A situation where everyone is playing a dominant strategy must be a Nash equilibrium.

A)True

B)False

Q2) 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 32 if the other player swerves and a payoff of -48 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 .60 and drives straight with probability .40.

B)two mixed strategies in which players alternate between swerving and driving straight. C)a mixed strategy equilibrium in which one player swerves with probability .60 and the other swerves with probability .40.

D)a mixed strategy in which each player swerves with probability .30 and drives straight with probability .70.

E)no mixed strategies.

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Page 55

Chapter 27: Game Theory-Part B

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Q1) If the number of persons who attend the club meeting this week is X, then the number of people who will attend next week is 80 + 0.20X.What is a long-run equilibrium attendance for this club?

A)400

B)80

C)100

D)160

E)20

Q2) Alice and Betsy are playing a game in which each can play either of two strategies, leave or stay.If both play the strategy leave, then each gets a payoff of $100.If both play the strategy stay, then each gets a payoff of $800.If one plays stay and the other plays leave, then the one who plays stay gets a payoff of $C and the one who plays leave gets a payoff of $D.When is the outcome where both play leave a Nash equilibrium?

A)When D > C and C > $100.

B)Never, since $800 > $100.

C)When $100 > C and D > $800 but not when $800 > D

D)Whenever D < $800.

E)Whenever $100 > C.

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Page 56

Chapter 28: Game Applications-Part A

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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) 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: Game Applications-Part B

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Q1) Big Pig and Little Pig have two possible strategies, Press the Button, and Wait at the Trough.If both pigs choose Wait, both get 3.If both pigs Press the Button, then Big Pig gets 9 and Little Pig gets 1.If Little Pig Presses the Button and Big Pig Waits at the Trough, then Big Pig gets 10 and Little Pig gets 0.Finally, if Big Pig Presses the Button and Little Pig Waits, then Big Pig gets 4 and Little Pig gets 1.In Nash equilibrium,

A)Little Pig will get a payoff of 1 and Big Pig will get a payoff of 4.

B)Little Pig will get a payoff of 1 and Big Pig will get a payoff of 9.

C)both pigs will wait at the trough.

D)Little Pig will get a payoff of zero.

E)the pigs must be using mixed strategies.

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Chapter 29: Behavioral Economics

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Q1) 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.

Q2) If a coin is tossed, and the results are 6 consecutive tails (TTTTTT), this is conclusive evidence that the coin is not a fair coin.

A)True

B)False

Q3) John is doing very well in Intermediate Micro economics, but hires a graduate student to spend 1 hour a week with him to do workbook problems together.John always gets every problem correct without help from the graduate student, but he insists on continuing the relationship.Is there a behavioral economic explanation of why this is rational? Explain.

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Chapter 30: Exchange-Part A

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Q1) Tamara and Julio consume only bread and wine.They trade only with each other and there is no production.They both have strictly convex preferences.Tamara's initial endowment of bread and wine is the same as Julio's.

A)At the initial endowment their marginal rates of substitution must be the same.

B)In a competitive equilibrium, the ratio of the two prices must be 1.

C)In a competitive equilibrium, they must consume identical consumption bundles.

D)If they have identical utility functions, then the initial allocation is Pareto optimal.

E)None of the above.

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

A)True

B)False

Q3) If there are consumption externalities, then a competitive equilibrium is not necessarily Pareto optimal.

A)True

B)False

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Chapter 30: Exchange-Part B

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Q1) Astrid's utility function is U(HA, CA)= HACA.Birger's utility function is min{HB, CB}.If Astrid's initial endowment is no cheese and 20 units of herring and if Birger's initial endowments are 4 units of cheese and no herring, then where p is a competitive equilibrium price of herring and cheese is the numeraire, demand equals supply in the herring market.This implies that

A)4/(p + 1)+ 10 = 20.

B)20/4 = p.

C)4/20 = p.

D)4/p + 20/2p = 20.

E)min{20, 4} = p.

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Chapter 31: Production-Part A

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Q1) For each carload of ore removed from the Matchless Mine, 1 pound of lead and 1 ounce of silver is smelted.The cost of mining and processing 1 carload of ore is C(Q)= 700 + 2Q + 0.09Q2.The demand for silver (per ounce)is Ps = 40 - 0.30Qs and the demand for lead (per pound)is Pl = 50.02Ql.What should the owners of the Matchless Mine do to maximize profits (in the long run)?

A)Mine and process 52.44 carloads of ore, sell 52.44 ounces of silver, and sell 52.44 pounds of lead.

B)Mine and process 66.67 carloads of ore, sell 66.67 ounces of silver, and sell 13.64 pounds of lead.

C)Mine and process 125 carloads of ore, sell 66.67 ounces of silver, and sell 125 pounds of lead.

D)Mine and process 125 carloads of ore, sell 48.72 ounces of silver, and sell 125 pounds of lead.

E)Shut down the mine.

Q2) When there is production, a competitive equilibrium is not Pareto optimal unless there are increasing returns to scale.

A)True

B)False

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Chapter 31: Production-Part B

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Q1) Every consumer has a red-money income and a blue-money income and each commodity has a red price and a blue price.You can buy a good by paying for it either with blue money at the blue price or with red money at the red price.Harold has 16 units of red money and 42 units of blue money to spend.The red price of ambrosia is 2 and the blue price of ambrosia is 6.The red price of bubble gum is 1 and the blue price of bubble gum is 2.If ambrosia is on the horizontal axis, and bubble gum on the vertical axis, then Harold's budget set is bounded by

A)two line segments, one running from (0, 28)to (8, 21)and the other running from (8, 21)to (24, 0).

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

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

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

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

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Chapter 32: Welfare-Part A

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Q1) In a competitive equilibrium, no matter how different their preferences may be, no two people with the same income will envy each other's consumption bundles.

A)True

B)False

Q2) Hatfield and McCoy burn with hatred for each other.They both consume corn whisky.Hatfield's utility function is U = WH - W 2M / 8 and McCoy's utility is U = WM - W 2H / 8, where WH is Hatfield's whisky consumption and WM is McCoy's whisky consumption, measured in gallons.The sheriff has a total of 28 gallons of confiscated whisky which he could give back to them.For some reason, the sheriff wants them both to be as happy as possible and he wants to treat them equally.The sheriff should give them each

A)14 gallons.

B)4 gallons and spill 20 gallons in the creek.

C)2 gallons and spill 24 gallons in the creek.

D)8 gallons and spill the rest in the creek.

E)1 gallon and spill the rest in the creek.

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Page 64

Chapter 32: Welfare-Part B

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Q1) Suppose that Romeo has the utility function U = S 5RS 2J and Juliet has the utility function U = S 2RS 5J, where SR is Romeo's spaghetti consumption and SJ is Juliet's.They have 70 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 has more than 46 units of spaghetti.

C)Romeo would want to give Juliet some spaghetti if he had more than 35 units of spaghetti.

D)Juliet would want to give Romeo some spaghetti if she has more than 48 units.

E)Juliet would want to give Romeo some spaghetti if she has more than 50 units of spaghetti.

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Chapter 33: Externalities-Part A

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Q1) If your consumption of toothpaste produces positive externalities for your neighbors (which you ignore), then you are consuming less toothpaste than is Pareto optimal.

A)True

B)False

Q2) 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?

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Chapter 33: Externalities-Part B

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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 and X2 = 8.

D)X1= 8 and X2 = 6.

E)None of the above.

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Chapter 34: Information Technology-Part A

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Q1) Given the many components of a personal computer that are perfect complements, which of the following factors would NOT contribute to increased profit for Microsoft as a supplier of operating systems?

A)A single corporation (Intel)controls the overwhelming majority of the market for CPU chips.

B)Hardware has largely become a commodity.

C)The market for DRAM memory chips is highly competitive.

D)Microsoft Office is frequently bundled with PCs.

E)More than one of the above answers is correct.

Q2) Copyright protection discourages the production of new software.

A)True

B)False

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

Q4) Video marketers and publishers are more likely to profit from allowing rentals of their products, the higher the ratio of cost of production of originals to the transaction cost of rentals.

A)True

B)False

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Chapter 34: Information Technology-Part B

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Q1) Eleven consumers are trying to decide whether to connect to a new communications network.Consumer 1 is of type 1, consumer 2 is of type 2, consumer 3 is of type 3, and so on.Where k is the number of consumers connected to the network (including oneself), a consumer of type n has a willingness to pay to belong to this network equal to k times n.What is the highest price at which 5 consumers could all connect to the network and either make a profit or at least break even?

A)$49

B)$30

C)$42

D)$28

E)$35

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Chapter 35: Public Goods-Part A

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Q1) A tax imposed on polluters to give them an incentive to make an efficient reduction in pollution is called a Clarke tax.

A)True

B)False

Q2) 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

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 a pure public good is provided by voluntary contributions, economic theory predicts that in general too little will be supplied.

A)True

B)False

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Page 70

Chapter 35: Public Goods-Part B

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

A)$3,000.

B)$1,500.

C)$2,000.

D)$1,050.

E)$4,000.

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Chapter 36: Asymmetric Information-Part A

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Q1) Suppose that in Enigma, Ohio, klutzes have a productivity of $1,000 and kandos have a productivity of $5,000 per month.You can't tell klutzes from kandos by looking at them or asking them, and it is too expensive to monitor individual productivity.Kandos, however, have more patience than klutzes.Listening to an hour of dull lectures is as bad as losing $250 for a klutz and $100 for a kando.There will be a separating equilibrium in which anybody who attends a course of H hours of lectures is paid $5,000 per month and anybody who does not is paid $1,000 per month

A)if 16 < H < 80.

B)if 16 < H < 40.

C)only in the limit as H approaches infinity.

D)for all positive values of H.

E)if 14 < H < 35.

Q2) In a market where there is a separating equilibrium, different types of agents make different choices of actions.

A)True

B)False

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Page 72

Chapter 36: Asymmetric Information-Part B

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Q1) Suppose that in New Crankshaft, Pennsylvania, the quality distribution of the 3,000 used cars on the market is such that the number of used cars of value less than V is V/2.Original owners must sell their used cars.Original owners know what their cars are worth, but buyers can't determine a car's value until they buy it.An owner can either take his car to an appraiser and pay the appraiser $100 to appraise the car (accurately and credibly)or sell the car unappraised.In equilibrium, car owners will have their cars appraised if and only if their value is at least

A)$200.

B)$300.

C)$1,500.

D)$100.

E)$400.

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