Pricing Strategy
Test Bank
Course Introduction
Pricing Strategy explores the core principles and techniques organizations use to determine effective pricing for their products and services. The course examines the interplay between costs, customer value perception, market demand, competitor actions, and legal or ethical considerations in shaping pricing decisions. Students will analyze real-world case studies, develop skills in quantitative pricing models, and learn to apply frameworks for value-based, cost-based, and competition-based pricing. Emphasis is placed on strategic pricing in digital markets, product life cycles, new product launches, and pricing for different segments, equipping students with tools to optimize profitability while meeting customer needs and maintaining competitive advantage.
Recommended Textbook
Intermediate Microeconomics A Modern Approach 9th Edition by Hal R. Varian
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Page 2
Chapter 1: Budget Constraint-Part A
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Sample Questions
Q1) Billy Bob wants to gain some weight so that he can play football.Billy consumes only milk shakes and spinach.Milk shakes cost him $1 each and spinach costs $2 per serving.A milk shake has 850 calories and a serving of spinach has 200 calories.Billy Bob never spends more than $20 a day on food and he always consumes at least 8,000 calories per day.Which of the following is necessarily true?
A)Billy Bob consumes at least 9 milk shakes a day.
B)Billy Bob never consumes more than 6 servings of spinach a day.
C)Billy Bob never consumes positive amounts of both goods.
D)Billy Bob consumes only milk shakes.
E)None of the above.
Answer: B
Q2) Bella's budget line for x and y depends on all of the following except
A)the amount of money she has to spend on x and y.
B)the price of x.
C)her preferences between x and y.
D)the price of y.
E)None of the above.
Answer: C
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Page 3
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 costs $3 per unit, and if commodity 2 costs $9 per unit, then the equation for your budget line can be written
A)x<sub>1</sub>/3 + x<sub>2</sub>/9 = 18.
B)4x<sub>1</sub> + 10x<sub>2</sub> = 19.
C)x<sub>1</sub> + 3x<sub>2 </sub>= 6.
D)(x<sub>1</sub> + x<sub>2</sub>)/12 = 18.
E)12(x<sub>1</sub> + x<sub>2</sub>) = 18.
Answer: C
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Page 4
Chapter 2: Preferences-Part A
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Sample Questions
Q1) Professor Goodheart's colleague Dr.Kremepuff gives 3 midterm exams.He drops the lowest score and gives each student her average score on the other two exams.Polly Sigh is taking his course and has a 60 on her first exam.Let x<sub>2</sub> be her score on the second exam and x<sub>3</sub> be her score on the third exam.If we draw her indifference curves for scores on the second and third exams with x<sub>2</sub> represented by the horizontal axis and x<sub>3</sub> represented by the vertical axis, then her indifference curve through the point (x<sub>2</sub>, x<sub>3</sub>) = (50,70)is
A)L-shaped with a kink where x<sub>2</sub> = x<sub>3</sub>.
B)three line segments, one vertical, one horizontal, and one running from (70, 60)to (60, 70).
C)a straight line, running from (0, 120)to (120, 0).
D)three line segments, one vertical, one horizontal, and one running from (70, 50)to (50, 70).
E)a V-shaped curve with its point at (50, 70).
Answer: B
Q2) If preferences are transitive, more is always preferred to less.
A)True
B)False
Answer: False
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Page 5
Chapter 2: Preferences-Part B
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Sample Questions
Q1) Nancy Lerner is taking a course from Professor Goodheart who will count only her best midterm grade and from Professor Stern who will count only her worst midterm grade.In one of her classes, Nancy has scores of 40 on her first midterm and 50 on her second midterm.When the first midterm score is measured on the horizontal axis and her second midterm score on the vertical, her indifference curve has a slope of zero at the point (40, 50).This class could
A)be Professor Stern's but could not be Professor Goodheart's.
B)be either Professor Goodheart's or Professor Stern's.
C)not be either Professor Goodheart's or Professor Stern's.
D)be Professor Goodheart's but could not be Professor Stern's.
E)There is not enough information to tell whose class it could or couldn't be.
Q2) Charlie's indifference curves have the equation x<sub>B</sub> = constant/x<sub>A</sub>, where larger constants correspond to better indifference curves.Charlie strictly prefers the bundle (5, 13)to the bundle
A)(13, 5).
B)(6, 12).
C)(11, 8).
D)All of the above.
E)None of the above.
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Page 6
Chapter 3: Utility-Part A
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Sample Questions
Q1) Waldo's utility function is U(x, y)= xy.Waldo consumes 5 units of x and 25 units of y.
A)Waldo would be willing to make small exchanges of x for y in which he would give up 5 units of x for every unit of y he got.
B)Waldo would be willing to trade away all of his x for y as long as he got more than 5 units of y for every unit of x he gave up.
C)Waldo likes x and y equally well so he is always willing to exchange 1 unit of either good for more than 1 unit of the other.
D)Waldo will always be willing to make trades at any price if he does not have equal amounts of the two goods.
E)None of the above.
Q2) Henrietta's utility function is U(x<sub>1</sub>, x<sub>2</sub>)= x<sub>1</sub>x<sub>2</sub>.She has diminishing marginal rate of substitution between goods 1 and 2.
A)True
B)False
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Page 7
Chapter 3: Utility-Part B
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Q1) Charlie has the utility function U(x<sub>A</sub>, x<sub>B</sub>)=x<sub>A</sub>x<sub>B</sub>.His indifference curve passing through 12 apples and 64 bananas will also pass through the point where he consumes 2 apples and
A)386 bananas.
B)48 bananas.
C)96 bananas.
D)394 bananas.
E)384 bananas.
Q2) Charlie has the utility function U(x<sub>A</sub>, x<sub>B</sub>)=x<sub>A</sub>x<sub>B</sub>.His indifference curve passing through 40 apples and 9 bananas will also pass through the point where he consumes 5 apples and
A)48 bananas.
B)77 bananas.
C)80 bananas.
D)24 bananas.
E)72 bananas.
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Chapter 4: Choice-Part A
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Sample Questions
Q1) Lorenzo lives on x and y alone.His utility function is U(x, y)=min{3x + 4y, 7y}.The prices of both goods are positive.He will
A)never buy more x than y.
B)buy equal amounts of the two goods.
C)always buy more y than x.
D)always buy more x than y.
E)More than one of the above is true.
Q2) Clara's utility function is U(x, y)= (x + 2)(y + 1).If her consumption of both x and y are doubled, then her marginal rate of substitution between x and y remains constant.
A)True
B)False
Q3) Max has the utility function U(x, y)= x(y + 1).The price of x is $2 and the price of y is $1.Income is $10.How much x does Max demand? How much y? If his income doubles and prices stay unchanged, will Max's demand for both goods double?
Q4) Is the following statement true or false? Briefly explain your answer."A utility maximizer will always choose a bundle at which his indifference curve is tangent to his budget line."
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Chapter 4: Choice-Part B
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Sample Questions
Q1) 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
Q2) Charlie's utility function is U(x<sub>A</sub>, x<sub>B</sub>)=x<sub>A</sub>x<sub>B</sub>.If Charlie's income were $40, the price of apples were $2, and the price of bananas were $3, how many apples would there be in the best bundle that Charlie could afford?
A)6
B)20
C)4
D)5
E)10
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Chapter 5: Demand-Part A
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Sample Questions
Q1) 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 x<sup>2</sup>, the price of cheese is $10, and Casper's income is $260, how many units of cocoa will he consume?
A)12
B)15
C)29
D)14
E)30
Q2) Ray Starr has the utility function U(x, y)= y/(100 - x).
a.Does Ray prefer more to less of both goods?
b.Draw a diagram showing Ray's indifference curves corresponding to the utility levels U = 1/2, U = 1, and U = 2.
c.How can you describe the set of indifference curves for Ray?
d.If the price of x is $1 and the price of y is $1, find Ray's demand for x as a function of his income and draw a diagram showing his Engel curve for x.
Q3) Wanda Lott's utility function is U(x, y)= max{x, y}.Draw some of Wanda's indifference curves.If the price of x is 1, the price of y is p, and her income is m, how much of y does Wanda demand?
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11
Chapter 5: Demand-Part B
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Q1) Ambrose's brother Bartholomew has an income of $109 and a utility function
U(x<sub>1</sub>, x<sub>2</sub>)= 32x<sup>1/2</sup><sub>1</sub> + x<sub>2</sub>.The price of good 1 (nuts)is $4 and the price of good 2 (berries)is $1.How many units of nuts will Bartholomew demand?
A)12
B)26
C)14
D)16
E)30
Q2) Ambrose's brother Augustine has an income of $52 and a utility function
U(x<sub>1</sub>, x<sub>2</sub>)= 18x<sup>1/2</sup><sub>1</sub> + x<sub>2</sub>.The price of good 1(nuts)is $3 and the price of good 2(berries)is $1.How many units of berries will Augustine demand?
A)25
B)9
C)50
D)15
E)There is not enough information to determine the answer.
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Page 12
Chapter 6: Revealed Preference-Part A
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Sample Questions
Q1) On the planet Homogenia, every consumer who has ever lived consumes only two goods, x and y, and has the utility function U(x, y)= xy.The currency in Homogenia is the fragel.In this country in 1900, the price of good 1 was 1 fragel and the price of good 2 was 2 fragels.Per capita income was 72 fragels.In 2000, the price of good 1 was 5 fragels and the price of good 2 was 2 fragels.The Laspeyres price index for the price level in 2000 relative to the price level in 1900 is
A)3.50.
B)2.33.
C)3.
D).5.50.
E).It is not possible to determine the Laspeyres price index from this information.
Q2) The Laspeyres price index differs from the Paasche price index because the Laspeyres index holds prices constant and varies quantities while the Paasche price index holds quantities constant and varies prices.
A)True
B)False
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Page 13
Chapter 6: Revealed Preference-Part B
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Sample Questions
Q1) On the planet Homogenia every consumer who has ever lived consumes only two goods, x and y, and has the utility function U(x, y)= xy.The currency in Homogenia is the fragel.In this country in 1900, the price of good 1 was 1 fragel and the price of good 2 was 2 fragels.Per capita income was 84 fragels.In 2000, the price of good 1 was 4 fragels and the price of good 2 was 2 fragels.The Laspeyres price index for the price level in 2000 relative to the price level in 1900 is A)4.50.
B)2.50.
C)2.
D)3.
E)not possible to determine from this information.
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)=a<sup>3</sup>b<sup>2</sup>.He is endowed with w<sub>a</sub> apples and w<sub>b</sub> bananas.Unaware that prices are about to change, Carlos buys the quantities of apples and bananas that maximize his utility subject to his budget constraint.After he has made his purchases but before he has eaten them, the relative prices change.Carlos is then free to make further trades at the new relative prices if he wishes.
A)Carlos will definitely be better off after the price change.
B)Carlos will definitely be worse off after the price change.
C)Carlos will be better off after the price change if the price of the good for which he is a net seller rises relative to the price of the other good.
D)Carlos will be better off after the price change if the price of the good for which he is a net buyer rises relative to the price of the other good.
E)Carlos's utility will not be affected by the price change.
Q2) If the Engel curve slopes up, then the demand curve slopes down.
A)True
B)False
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Page 15
Chapter 7: Slutsky Equation-Part B
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Q1) Suppose that Agatha had $495 to spend on tickets for her trip.She needs to travel a total of 1,500 miles.Suppose that the price of first-class tickets is $.40 per mile and the price of second-class tickets is $.10 per mile.How many miles will she travel by second class?
A)500
B)350
C)450
D)175
E)116.67
Q2) Maude thinks delphiniums and hollyhocks are perfect substitutes, one for one.If delphiniums currently cost $2 per unit and hollyhocks cost $3 per unit and if the price of delphiniums rises to $5 per unit,
A)there will be no change in the demand for hollyhocks.
B)the entire change in demand for delphiniums will be due to the substitution effect.
C)1/3 of the change in demand will be due to the income effect.
D)the income effect of the change in demand for delphiniums will be bigger than the substitution effect.
E)2/3 of the change in demand will be due to the income effect.
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Page 16
Chapter 8: Buying and Selling-Part A
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Sample Questions
Q1) Harvey's net demands for goods 1 and 2 are (2, -3)and his endowment is (6, 5).
a.What are his gross demands?
b.Draw a diagram illustrating his budget line, his endowment, and his consumption.(Put good 1 on the horizontal axis.)
c.Draw a dotted line to show what his budget line would be if the price of good 1 doubled and the price of good 2 stayed the same.
Q2) There are no taxes on the first $500 that Debra earns per week, but on income above $500 per week, she must pay a 60% tax.Debra's job pays $10 per hour.Her utility function is U(c, r)= rc<sup>2</sup>, where r is hours of leisure and c is dollars worth of consumption.She has 100 hours to divide between work and leisure.How many hours per week will she choose to work?
A)66.66
B)50
C)40
D)33.33
E)20
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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Chapter 8: Buying and Selling-Part B
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Q1) Dr.J has 80 hours per week to divide between work and leisure.His wage rate if $5 per hour.Dr.J receives a lump sum payment of $150 per week.Suppose that the first $100 per week of his labor income is untaxed, but all labor income above $100 is taxed at a rate of 70%.
A)Dr.J's budget line has no kinks in the part of it that corresponds to a positive labor supply.
B)The slope of Dr.J's budget line is everywhere -1.50.
C)Dr.J's budget line has a kink in it at the point where he takes 70 units of leisure.
D)Dr.J's budget line has a kink where his income is $250 and his leisure is 60 hours.
E)Dr.J's budget line has a piece that is a horizontal straight line.
Q2) if Abishag owned 6 quinces and 5 kumquats and if the price of kumquats is 3 times the price of quinces, how many kumquats could she afford if she spent all of her money on kumquats?
A)7
B)14
C)11
D)5
E)4
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Chapter 9: Intertemporal Choice-Part A
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Q1) Will Wisp will live for exactly two periods.His utility function is U(c<sub>1</sub>, c<sub>2</sub>)= c<sub>1</sub>c<sub>2</sub>, where c<sub>1</sub> is consumption in period 1 and c<sub>2</sub> is consumption in period 2.He will have no income in period 2.His income in period 1 is $40,000.If the interest rate rises from 10 to 14%:
A)his savings will increase by 4% and his consumption in period 2 will increase.
B)his consumption in both periods will increase.
C)his consumption in both periods will decrease.
D)his savings will not change but his consumption in period 2 will increase by $800.
E)his consumption in period 1 will decrease by 14% and his consumption in period 2 will increase.
Q2) If current and future consumption are both normal goods, an increase in the interest rate will necessarily
A)cause savers to save more.
B)cause borrowers to borrow less.
C)reduce everyone's current consumption.
D)make everyone worse off.
E)None of the above.
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Chapter 9: Intertemporal Choice-Part B
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Q1) Mr.O.B.Kandle has a utility function c<sub>1</sub>c<sub>2</sub>, where c<sub>1</sub> is his consumption in period 1 and c<sub>2</sub> is his consumption in period 2.He has no income in period 2.If he had an income of $50,000 in period 1 and the interest rate increased from 10 to 15%, A)his savings would increase by 5% and his consumption in period 2 would also increase.
B)his savings would not change but his consumption in period 2 would increase by 1,250.
C)his consumption in both periods would increase.
D)his consumption in both periods would decrease.
E)his consumption in period 1 would decrease by 15% and his consumption in period 2 would also decrease.
Q2) If Peregrine consumes (1, 400, 1, 210)and earns (900, 1, 760)and if the interest rate is 10%, the present value of his endowment is
A)$2,660.
B)$2,500.
C)$2,610.
D)$5,250.
E)$6,150.
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Page 20
Chapter 10: Asset Markets-Part A
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Q1) If the interest rate is 18%, and will remain 18% forever, how much would a rational investor be willing to pay for an asset that will pay him 9,440 dollars 1 year from now, 1,392 dollars 2 years from now, and nothing at any other time?
A)9,000 dollars
B)171,000 dollars
C)8,000 dollars
D)50,000 dollars
E)10,000 dollars
Q2) If the nominal interest rate is 80% and the rate of inflation is 50%, then the exact real rate of interest is
A)10%.
B)20%.
C)30%.
D)40%.
E)None of the above.
Q3) If the interest rate is 10%, then an asset that returns $1 a year forever is worth $1/1.1.
A)True
B)False
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Chapter 10: Asset Markets-Part B
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Q1) Chillingsworth has a neighbor, Shivers, who faces the same options for insulating his house as Chillingsworth.But Shivers has a larger house.Shivers's annual fuel bill for home heating is 900 dollars per year.Plan A will reduce his annual fuel bill by 15%, plan B will reduce it by 20%, and plan C will eliminate his need for heating fuel altogether.The plan A insulation job would cost Shivers 900 dollars, plan B would cost him 1,700 dollars, and plan C would cost him 9,900 dollars.If the interest rate is 10% and his house and the insulation job last forever, which plan is the best for Shivers?
A)Plans A and B are equally good.
B)Plan B.
C)Plan A.
D)Plan C.
E)He is best off using none of the plans.
Q2) The sum of the terms of the infinite geometric series 1, 0.78, 0.78<sup>2</sup>, 0.78<sup>3</sup>, ...is closest to A)0.56.
B)infinity.
C)4.55.
D)1.78.
E)128.21.
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Page 22
Chapter 11: Uncertainty-Part A
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Q1) There are two events, 1 and 2.The probability of event 1 is p and the probability of event 2 is 1 - p.Sally Kink is an expected utility maximizer with a utility function is pu(c<sub>1</sub>)+ (1 - p)u(c<sub>2</sub>), where for any number x, u(x)= 2x if x < 1,000 and u(x)= 1,000 + x if x is greater than or equal to 1,000.
A)Sally is a risk lover.
B)Sally will be a risk averter if she is poor but will be a risk lover if she is rich.
C)Sally will be a risk lover if she is poor but a risk averter if she is rich.
D)If there is no chance of her wealth exceeding $1,000, then she will take any bet that has positive expected net winnings.
E)None of the above.
Q2) 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
Q3) If the price of insurance goes up, people will become less risk averse.
A)True
B)False
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Chapter 11: Uncertainty-Part B
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Q1) Billy has a von Neumann-Morgenstern utility function U(c)= c<sup>1/2</sup>.If Billy is not injured this season, he will receive an income of 4 million dollars.If he is injured, his income will be only 10,000 dollars.The probability that he will be injured is .1 and the probability that he will not be injured is .9.His expected utility is
A)100,000 dollars.
B)1,810 dollars.
C)3,620 dollars.
D)between 3 and 4 million dollars.
E)7,240 dollars.
Q2) Billy has a von Neumann-Morgenstern utility function U(c)=c<sup>1/2</sup>.If Billy is not injured this season, he will receive an income of 4 million dollars.If he is injured, his income will be only 10,000 dollars.The probability that he will be injured is .1 and the probability that he will not be injured is .9.His expected utility is
A)3,620 dollars.
B)1,810 dollars.
C)100,000 dollars.
D)between 3 and 4 million dollars.
E)7,240 dollars.
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Chapter 12: Risky Assets-Part A
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Q1) 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
Q2) Suppose that Ms.Lynch in Workouts 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 12.50%, then the standard deviation of her return on this portfolio will be A)5%.
B)5.50%.
C)2.50%.
D)1.25%.
E)None of the above.
Q3) If the mean is plotted on the horizontal axis, and the variance on the vertical, then indifference curves for a risk averter must slope upward and to the right.
A)True
B)False
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Chapter 12: Risky Assets-Part B
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Q1) Suppose that Fenner Smith must divide his portfolio between two assets, one of which gives him an expected rate of return of 15% with zero standard deviation and one of which gives him an expected rate of return of 75% and has a standard deviation of 15.He can alter the expected rate of return and the variance of his portfolio by changing the proportions in which he holds the two assets.If we draw a "budget line" with expected return on the vertical axis and standard deviation on the horizontal axis, depicting the combinations that Smith can obtain, the slope of this budget line is A)4.
B)-2.
C)2.
D)-4.
E)6.
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Chapter 13: Consumers Surplus-Part A
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Q1) 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
Q2) Bernice has the utility function u(x, y)= min{x, y}, where x is the number of pairs of earrings she buys per week and y is the number of dollars per week she has left to spend on other things.(We allow the possibility that she buys fractional numbers of pairs of earrings per week.)If she originally had an income of $10 per week and was paying a price of $8 per pair of earrings, then if the price of earrings rose to $13 per pair, the compensating variation of that price change (measured in dollars per week)would be closest to
A)$3.57.
B)$5.56.
C)$12.11.
D)$11.11.
E)$10.11.
Q3) Consumer's surplus is another name for excess demand.
A)True
B)False
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Page 27
Chapter 13: Consumers Surplus-Part B
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Q1) Ms.Quasimodo has the utility function U(x, m)= 100x - x<sup>2</sup>/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 $65, then her net consumer's surplus
A)falls by 2,637.50.
B)falls by 525.
C)falls by 637.50.
D)increases by 318.75.
E)increases by 1,275.
Q2) Lolita's utility function is U(x, y)=x - x<sup>2</sup>/2 + y, where x is her consumption of cow feed and y is her consumption of hay.If the price of cow feed is $.30, the price of hay is $1, and her income is $2 and if Lolita chooses the combination of hay and cow feed that she likes best from among those combinations she can afford, her utility will be A)2.24.
B)1.70.
C)0.24.
D)3.24.
E)1.24.
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28
Chapter 14: Market Demand-Part A
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Q1) 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
Q2) The demand for drangles is given by D(p)= (p + 1)<sup>-2</sup>, where p is the price of drangles.If the price of drangles is $20, then the price elasticity of demand for drangles is
A)-7.62.
B)-3.81
C)-5.71.
D)-3.81.
E)-1.90.
Q3) In general, aggregate demand depends only on prices and total income and not on income distribution.
A)True
B)False
Q4) Using the graph of a demand curve, explain why marginal revenue is less than price.
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Chapter 14: Market Demand-Part B
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Q1) the only quantities of good 1 that Barbie can buy are 1 unit or zero units.For x<sub>1</sub> equal to zero or 1 and for all positive values of x<sub>2</sub>, suppose that Barbie's preferences were represented by the utility function (x<sub>1</sub> + 6)(x<sub>2</sub> + 4).Then if her income were $16, her reservation price for good 1 would be
A)$2.86.
B)$2.50.
C)$5.71.
D)$1.50.
E)$.57.
Q2) In the same football conference there is another university where the demand for football tickets at each game is 180,000 - 10,000p.If the capacity of the stadium at that university is 100,000 seats, what is the revenue-maximizing price for this university to charge per ticket?
A)$4.50
B)$9
C)$8
D)$18
E)$27
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Page 30
Chapter 15: Equilibrium-Part A
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Q1) In a crowded city far away, the civic authorities decided that rents were too high.The long-run supply function of two-room rental apartments was given by q = 14 + 5p, and the long-run demand function was given by q = 329 - 5p, where p is the rental rate in crowns per week.The authorities made it illegal to rent an apartment for more than 25 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)6.50 crowns
B)10 crowns
C)13 crowns
D)26 crowns
E)19.50 crowns
Q2) The amount of a good supplied is independent of the price.If a sales tax is imposed on the good, then the price paid by consumers will not change at all.
A)True
B)False
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Chapter 15: Equilibrium-Part B
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Q1) The inverse demand function for grapefruit is defined by the equation p = 136 - 4q, where q is the number of units sold.The inverse supply function is defined by p = 16 + 4q.A tax of $16 is imposed on suppliers for each unit of grapefruit that they sell.When the tax is imposed, the quantity of grapefruit sold falls to
A)13
B)11
C)11.
D)15
E)14.
Q2) the demand function for Schrecklichs is 200 - 4P<sub>S</sub> -2P<sub>L</sub> and the demand function for LaMerdes is 200 - 3P<sub>L</sub> - P<sub>S</sub>, where P<sub>S</sub> and P<sub>L</sub> are respectively the price of Schrecklichs and LaMerdes.If the world supply of Schrecklichs is 140 and the world supply of LaMerdes is 180, then the equilibrium price of Schrecklichs is
A)$15.
B)$14.
C)$2.
D)$16.
E)$28.
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Page 32
Chapter 16: Auctions-Part A
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Q1) 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
Q2) An auctioneer allows bidders to examine a jar of pennies, but he does not allow them to open the jar and count the pennies.The jar is then sold by means of an English auction.Economists call an auction of this type a private-values auction, since opinions differ.
A)True
B)False
Q3) The optimal strategy for a bidder in a private-values Vickrey auction is to bid his true valuation.
A)True
B)False
Q4) The reserve price in an auction is the lowest price at which the seller of a good will part with it.
A)True B)False
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Chapter 16: Auctions-Part B
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Q1) An antique cabinet is being sold by means of an English auction.There are four bidders, Kitty, Gloria, Judy, and Cindy.These bidders are unacquainted with each other and do not collude.Kitty values the cabinet at $800, Gloria values it at $500, Judy values it at $1,700, and Cindy values it at $700.If the bidders bid in their rational self-interest, the cabinet will be sold to
A)Judy for about $1,700.
B)Kitty for about $800.
C)either Judy or Kitty for about $800.Which of these two buyers gets it is randomly determined.
D)Judy for slightly more than $800.
E)either Judy or Kitty for about $500.Which of these two buyers gets it is randomly determined.
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Chapter 17: Technology-Part A
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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) Suppose that the production function is f(x<sub>1</sub>, x<sub>2</sub>)=(x<sup>a</sup><sub>1</sub> +x<sup>a</sup><sub>2</sub>)b, where a and b are positive constants.For what values of a and b is there a diminishing technical rate of substitution?
A)For any value of a if b < 1
B)For any values of a and b if ab < 1
C)For any values of a and b if a > b
D)For any value of b if a < 1
E)None of the above.
Q3) If the production function is f(x, y)= min{2x + y, x + 2y}, then there are constant returns to scale.
A)True
B)False
Q4) The production set of a firm is the set of all products the firm can produce.
A)True
B)False
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Chapter 17: Technology-Part B
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Q1) A firm has a production function f(x, y)= 1.80(x<sup>0.80</sup> +y<sup>0.80</sup>)<sup>1</sup> whenever x > 0 and y > 0.When the amounts of both inputs are positive, this firm has
A)increasing returns to scale.
B)constant returns to scale.
C)decreasing returns to scale.
D)increasing returns to scale if x + y > 1 and decreasing returns to scale otherwise.
E)increasing returns to scale if output is less than 1 and decreasing returns to scale if output is greater than 1.
Q2) A firm has the production function f(x, y)=x<sup>1.40</sup>y<sup>1.40</sup>.This firm has
A)constant returns to scale.
B)decreasing returns to scale and increasing marginal product for factor x.
C)decreasing returns to scale and diminishing marginal product for factor x.
D)increasing returns to scale and decreasing marginal product for factor x.
E)None of the above.
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Chapter 18: Profit Maximization-Part A
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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 = 154x - 5x<sup>2</sup>, where x is the amount of variable factor used.The price of the output is $2 per unit and the price of the variable factor is $8 per unit.In the short run, how many units of x should the firm use?
A)15
B)30
C)17
D)7
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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Chapter 18: Profit Maximization-Part B
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Q1) the production function is f(x<sub>1</sub>, x<sub>2</sub>)=x<sup>1/2</sup><sub>1</sub>x<sup>1/2</sup><sub>2</sub>.If the price of factor 1 is $4 and the price of factor 2 is $6, in what proportions should the firm use factors 1 and 2 if it wants to maximize profits?
A)x<sub>1</sub> =x<sub>2</sub>.
B)x<sub>1</sub> = 0.67x<sub>2</sub>.
C)x<sub>1</sub> =1.50x<sub>2</sub>.
D)We can't tell without knowing the price of output.
E)x<sub>1</sub> =6x<sub>2</sub>.
Q2) the production function is given by F(L)=6L<sup>2/3</sup>.Suppose that the cost per unit of labor is $16 and the price of output is 16, how many units of labor will the firm hire?
A)32
B)64
C)192
D)128
E)None of the above.
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Chapter 19: Cost Minimization-Part A
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Q1) If there are increasing returns to scale, then average costs are a decreasing function of output.
A)True
B)False
Q2) A firm has a production function described as follows:"Weekly output is equal to the square root of the minimum of the amount of capital and the number of hours of labor used per week." Suppose that the cost of a unit of capital is r and the price of a unit of labor is w and the level of output is y.Write down the long-run total cost as a function of w, r, and y.
Q3) If the production function is f (x1, x2)= min{x1, x2}, then the cost function is c(w1, w2, y)= min{w1, w2}y.
A)True
B)False
Q4) If the production function for tuna casseroles is min{x1,x2 }, where x1 is the amount of factor 1 and x2 is the amount of factor x2, find the cost function for tuna casseroles.
Q5) 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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Chapter 19: Cost Minimization-Part B
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Q1) Suppose that in the short run, the firm which has production function F(L, M)=4L<sup>1/2</sup>M<sup>1/2</sup> 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
Q2) Suppose that in the short run, the firm which has production function F(L, M)= 4L<sup>1/2</sup>M<sup>1/2</sup> must use 4 machines.If the cost of labor is $10 per unit and the cost of machines is $6 per unit, the short-run total cost of producing 64 units of output is
A)$512.
B)$384.
C)$640.
D)$1,328.
E)$664.
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Chapter 20: Cost Curves-Part A
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Q1) In the reclining chair industry (which is perfectly competitive), two different technologies of production exist.These technologies exhibit the following total cost functions:
C1(Q)= 1,000 + 600Q - 40Q2 + Q3
C2(Q)= 200 + 145Q- 10Q2 + Q3
Due to foreign competition, the market price of reclining chairs has fallen to $190.In the short run, firms using technology 1
A)and firms using technology 2 will remain in business.
B)will remain in business and firms using technology 2 will shut down.
C)will shut down and firms using technology 2 will remain in business.
D)and firms using technology 2 will shut down.
E)More information is needed to make a judgment.
Q2) Average fixed cost curves will be U-shaped if the marginal cost curve is upward sloping.
A)True
B)False
Q3) The marginal cost curve passes through the minimum point of the average fixed cost curve.
A)True B)False
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Chapter 20: Cost Curves-Part B
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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 2s<sup>2</sup> + 75s + 100, then if he repairs 25 cars, his average variable costs will be
A)$250.
B)$125.
C)$129.
D)$175.
E)$87.50.
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Chapter 21: Firm Supply-Part A
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Q1) A firm in a competitive industry takes account of the fact that the demand curve it confronts has a significant negative slope.
A)True
B)False
Q2) Two firms have the same technology and must pay the same wages for labor.They have identical factories, but firm 1 paid a higher price for its factory than firm 2 did.If they are both profit maximizers and have upward-sloping marginal cost curves, then we would expect firm 1 to have a higher output than firm 2.
A)True
B)False
Q3) Irma's production function is f(x1, x2)= (min{x<sub>1</sub>, 5x<sub>2</sub>})<sup>1/2</sup>.If the price of factor 1 is w1 = $5 and the price of factor 2 is w2 = $20, then her supply function is given by the equation
A)S(p)= p/18.
B)S(p)=p(max{w1, 5w2})2.
C)S(p)=p(min{w1, 5w2})2.
D)S(p)= 9p.
E)S(p)=min{5p, 100p}.
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Chapter 21: Firm Supply-Part B
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Q1) suppose that Irma's production function is f(x<sub>1</sub>, x<sub>2</sub>)= (min{x<sub>1</sub>, 3x<sub>2</sub>})<sup>1/2</sup>.If the price of factor 1 is w<sub>1</sub> = $3 and the price of factor 2 is w<sub>2</sub> = $9, then her supply function is given by the equation
A)S(p)=p(min{w<sub>1</sub>, 3w<sub>2</sub>})<sup>2</sup>.
B)S(p)= 6p.
C)S(p)= p/12.
D)S(p)= p(max{w<sub>1</sub>, 3w<sub>2</sub>})<sup>2</sup>.
E)S(p)= min{3p, 27p}.
Q2) suppose that Irma's production function is f(x<sub>1</sub>, x<sub>2</sub>)=(min{x<sub>1</sub>, 3x<sub>2</sub>})<sup>1/2</sup>.If the price of factor 1 is w<sub>1</sub> = $5 and the price of factor 2 is w<sub>2</sub> = $15, then her supply function is given by the equation
A)S(p)= p(max{w<sub>1</sub>, 3w<sub>2</sub>})<sup>2</sup>.
B)S(p)=p(min{w<sub>1</sub>, 3w<sub>2</sub>})<sup>2</sup>.
C)S(p)=10p.
D)S(p)= p/20.
E)S(p)= min{5p, 45p}.
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Page 44
Chapter 22: Industry Supply-Part A
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Q1) If some firm in an industry has the production function F(x, y)= x<sup>3/4</sup> y<sup>3/4</sup>, where x and y are the only two inputs in producing the good, then that industry cannot be competitive in the long run.
A)True
B)False
Q2) In a certain industry, the supply curve of any firm is S<sub>i</sub>(p)= p/2.If a firm produces 6 units of output, what are its total variable costs?
A)$34
B)$72
C)$54
D)$36
E)There is not enough information given to determine total variable costs.
Q3) In a competitive market, if both demand and supply curves are linear, then a per-unit tax of $10 will generate exactly the same deadweight loss as a per-unit subsidy of $10.
A)True
B)False
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Chapter 22: Industry Supply-Part B
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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) the supply curve of any firm is S<sub>i</sub>(p)= p/2.If a firm produces 2 units of output, what are its total variable costs?
A)$8
B)$6
C)$2
D)$4
E)There is not enough information given to determine total variable costs.
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Chapter 23: Monopoly-Part A
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Q1) An industry has two firms, a leader and a follower.The demand curve for the industry's output is given by p = 456 - 6q, where q is total industry output.Each firm has zero marginal cost.The leader chooses his quantity first, knowing that the follower will observe the leader's choice and choose his quantity to maximize profits, given the quantity produced by the leader.The leader will choose an output of A)25.33.
B)38.
C)19.
D)76.
E)None of the above.
Q2) The demand for a monopolist's output is 6,000/(p + 2)<sup>2</sup>, where p is the price it charges.At a price of $3, the elasticity of demand for the monopolist's output is A)-1.
B)-2.20.
C)-1.20.
D)-1.70.
E)-0.70.
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Chapter 23: Monopoly-Part B
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Q1) A firm has invented a new beverage called Slops.It doesn't taste very good, but it gives people a craving for Lawrence Welk's music and Professor Johnson's jokes.Some people are willing to pay money for this effect, so the demand for Slops is given by the equation q = 10 - p.Slops can be made at zero marginal cost from old-fashioned macroeconomics books dissolved in bathwater.But before any Slops can be produced, the firm must undertake a fixed cost of $30.Since the inventor has a patent on Slops, it can be a monopolist in this new industry.
A)The firm will produce 5 units of Slops.
B)A Pareto improvement could be achieved by having the government pay the firm a subsidy of $35 and insisting that the firm offer Slops at zero price.
C)From the point of view of social efficiency, it is best that no Slops be produced.
D)The firm will produce 10 units of Slops.
E)None of the above.
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Chapter 24: Monopoly Behavior-Part A
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Questions
Q1) Roach Motors has a monopoly on used cars in Enigma, Ohio.By installing secret microphones in the showroom, the friendly salespersons at Roach are able to learn each customer's willingness to pay and can therefore practice first-degree price discrimination, extracting from each customer his entire consumer's surplus.The inverse demand function for cars in Enigma is P = 2,000 - 10Q.Roach Motors purchases its stock of used cars at an auction in Cleveland for $500 each.Roach motors will
A)sell 150 cars for a total profit of $112,500.
B)sell 75 cars for a total profit of $56,250.
C)sell 150 cars at a price of $300 a car.
D)sell 180 cars and make a total profit of $180,000.
E)shut down since revenue will not cover variable costs.
Q2) A profit-maximizing monopolist practices third-degree price discrimination.If he charges p<sub>1</sub> in market 1 and p<sub>2</sub> in market 2, where p<sub>1</sub> > p<sub>2</sub>, 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: Monopoly Behavior-Part B
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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 $2 in one market and $12 in the other market.At these prices, the price elasticity in the first market is -2.50 and the price elasticity in the second market is -0.70.Which of the following actions is sure to raise the monopolist's profits?
A)Raise p<sub>2</sub>.
B)Raise both p<sub>1</sub> and p<sub>2</sub>.
C)Lower p<sub>2</sub>.
D)Raise p<sub>1</sub> and lower p<sub>2</sub>.
E)Raise p<sub>2</sub> and lower p<sub>1</sub>.
Q2) If a monopolist faces an inverse demand curve, p(y)=100 - 2y and has constant marginal costs of $4 and zero fixed costs and if this monopolist is able to practice perfect price discrimination, its total profits will be
A)$24.
B)$3,456.
C)$2,304.
D)$1,152.
E)$576.
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Chapter 25: Factor Markets-Part A
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Q1) The labor supply curve faced by a large firm in a small city is given by w = 60 + 0.08L, 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)is twice the wage rate.
B)equals the wage rate.
C)equals the wage rate plus $160.
D)equals the wage rate plus $80.
E)equals the wage rate plus $240.
Q2) A monopsony occurs when two previously competing firms reach an agreement to collude on price.
A)True
B)False
Q3) 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: Factor Markets-Part B
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Q1) suppose that the demand curve for antimacassars is p = 55 - Q/1,100.The firm's profit-maximizing output is closest to A)4,900.50 antimacassars.
B)22,275 antimacassars.
C)7,425 antimacassars.
D)14,850 antimacassars.
E)3,712.50 antimacassars.
Q2) Suppose the demand curve for mineral water is given by p = 20 - 12q, where p is the price per bottle paid by consumers and q is the number of bottles purchased by consumers.Mineral water is supplied to consumers by a monopolistic distributor, who buys from a monopolist producer who is able to produce mineral water at zero cost.The producer charges the distributor a price of c per bottle, that will maximize the producer's total revenue.Given his marginal cost of c, the distributor chooses an output to maximize profits.The price paid by consumers under this arrangement is A)$15.
B)$.83.
C)$1.67.
D)$10.
E)$5.
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Page 52
Chapter 26: Oligopoly-Part A
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Q1) A duopoly faces the inverse demand curve p = 160 - 2q.Both firms in the industry have constant costs of $10 per unit of output.In a Cournot equilibrium how much output will each duopolist sell?
A)75
B)54
C)25
D)35
E)48
Q2) 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
Q3) A duopoly in which two identical firms are engaged in Bertrand competition will not distort prices from their competitive levels.
A)True
B)False
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Chapter 26: Oligopoly-Part B
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Q1) There are two firms in the blastopheme industry.The demand curve for blastophemes is given by p = 3,000 - 2q.Each firm has one manufacturing plant and each firm i has a cost function C(q<sub>i</sub>)= q<sup>2</sup>i, where q<sub>i</sub> is the output of firm i.The two firms form a cartel and arrange to split total industry profits equally.Under this cartel arrangement, they will maximize joint profits if
A)and only if they each produce a total of 750 units.
B)they produce a total of 500 units, no matter which firm produces them.
C)and only if each firm produces 300 units in its plant.
D)they produce a total of 600 units, no matter which firm produces them.
E)they shut down one of the two plants, having the other operate as a monopoly and splitting the profits.
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Chapter 27: Game Theory-Part A
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Q1) In the prisoner's dilemma game, if each prisoner believed that the other prisoner would deny the crime, then both would deny the crime.
A)True
B)False
Q2) Suppose that in a Hawk-Dove game similar to the one discussed in your workbook, the payoff to each player is -9 if both play Hawk.If both play Dove, the payoff to each player is 4, and if one plays Hawk and the other plays Dove, the one that plays Hawk gets a payoff of 5 and the one that plays Dove gets 0.In equilibrium, we would expect hawks and doves to do equally well.This happens when the proportion of the total population that plays Hawk is A).10.
B).55.
C).05. D).03.
E)1.
Q3) In a Nash equilibrium, everyone must be playing a dominant strategy. A)True B)False
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Chapter 27: Game Theory-Part B
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Q1) A small community has 10 people, each of whom has a wealth of $17,000.Each individual must choose whether to contribute $200 or $0 to the support of public entertainment for their community.The money value of the benefit that a person gets from this public entertainment is .80 times the total amount of money contributed by individuals in the community.
A)This game has two Nash equilibria, one in which everybody contributes $200 and one in which nobody contributes $200.
B)This game has a dominant strategy equilibrium in which all 10 citizens contribute $200 to support public entertainment.
C)This game has a Nash equilibrium in which 5 people contribute $200 and for public entertainment and 5 people contribute nothing.
D)This game has no Nash equilibrium in pure strategies, but has a Nash equilibrium in mixed strategies.
E)This game has a dominant strategy equilibrium in which nobody contributes anything for public entertainment.
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Chapter 28: Game Applications-Part A
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Q1) In the classic 1960s macabre comedy Dr.Strangelove, the Soviet Union constructed a Doomsday Machine which would end all life on earth if ever the Soviet Union were attacked.When playing against a rational opponent, the existence of such a machine would be of great benefit to the Soviets.
A)True
B)False
Q2) In the classic 1960s macabre comedy Dr.Strangelove, the Soviet Union constructed a Doomsday Machine which would end all life on earth if ever the Soviet Union were attacked.In the movie, the existence of the Doomsday Machine was kept secret.This would enhance the effectiveness of such a machine.
A)True
B)False
Q3) An equilibrium in a sequential game is always a Nash equilibrium in a simultaneous game with equivalent payoffs.
A)True
B)False
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Chapter 28: Game Applications-Part B
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Q1) The old Michigan football coach had only two strategies, Run the Ball to the Left Side of the line, and Run the Ball to the Right Side.The defense can concentrate either on the left side or the right side of Michigan's line.If the opponent concentrates on the wrong side, Michigan is sure to gain at least 5 yards.If the defense defended the left side and Michigan ran left, Michigan would be stopped for no gain.But if the opponent defended the right side when Michigan ran right, Michigan would still gain at least 5 yards with probability .70.It is the last play of the game and Michigan needs to gain 5 yards to win.Both sides choose Nash equilibrium strategies.In Nash equilibrium, Michigan would
A)run to the right side with probability .77.
B)run to the right side with probability .87.
C)run to the two sides with equal probability.
D)be sure to run to the right side.
E)run to the right side with probability .70.
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Chapter 29: Behavioral Economics
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Q1) 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
Q2) In the 1960s dark comedy classic Dr.Strangelove, the Soviet Union constructs a Doomsday Machine that will destroy all life on earth automatically if the Soviet Union is attacked.The Doomsday Machine can never be turned off or disabled.Which of the following would best explain why the Soviets would build the Doomsday Machine?
A)This is a completely irrational action.
B)This is an example of the use of spurious information to influence outcomes.
C)This is an example of the negative framing effect.
D)By removing the choice of whether or not to retaliate, the Soviets increase the chance that the United States will not attack.
E)The Soviets would gain utility from destroying all life on earth.
Q3) Under hyperbolic discounting, a person discounts the long term future more heavily than the near term future.
A)True
B)False
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Chapter 30: Exchange-Part A
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Q1) Abduls utility is U(X A, Y A)= min{X A, Y A}, where X A, and Y A are his consumptions of goods X and Y respectively.Babettes utility function is U(X B, Y B)= X B Y B, where X B and Y B are her consumptions of goods X and Y.Abduls initial endowment is no units of Y and 6 units of X.Babettes initial endowment is no units of X and 10 units of Y.If X is the numeraire good and p is the price of good Y, then supply will equal demand in the market for Y if
A)6/(p + 1)+ 5 = 10.
B)10/6= p.
C)10/(p + 1)+ 3 = 10.
D)min{6, 10} + 6/2p = 10.
E)min{6, 10} + 10/2p = 10.
Q2) A situation is Pareto efficient if
A)there is no way to make everyone worse off without making someone better off.
B)aggregate profits are maximized.
C)there is no way to make someone better off without making someone else worse off.
D)there is some way to make everyone better off.
E)there is no way to make anyone better off.
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Chapter 30: Exchange-Part B
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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 6 apples and 4 bananas.Doris has an initial endowment of 12 apples and 2 bananas.Charlie's utility function is U(A<sub>C</sub>, B<sub>C</sub>)=A<sub>C</sub>B<sub>C</sub>, where A<sub>C</sub> is his apple consumption and B<sub>C</sub> is his banana consumption.Doris's utility function is U(A<sub>D</sub>, B<sub>D</sub>)=A<sub>D</sub>B<sub>D</sub>, where A<sub>D</sub> and B<sub>D</sub> are her apple and banana consumptions.At every Pareto optimal allocation,
A)Charlie consumes the same number of apples as Doris.
B)Charlie consumes 18 apples for every 6 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 12 apples for every 2 bananas that she consumes.
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Chapter 31: Production-Part A
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Q1) There are two people and two goods, person A has comparative advantage in the production of good 1 if and only if it takes person A less time to produce good 1 than it takes person B.
A)True
B)False
Q2) Mandy is a master wood-carver and Jerry is her apprentice.They will each work the same number of hours making toy cars.Each car requires 4 wheels and 1 body.Mandy makes wheels at the rate of 25 per hour and bodies at the rate of 10 per hour.Jerry makes wheels at the rate of 10 per hour and bodies at the rate of 10 per hour.If they wish to maximize output, how many wheels should Jerry make per hour?
A)3
B)2
C)10
D)6
E)There is not enough information to determine the answer.
Q3) 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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Page 62
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 40 units of red money and 35 units of blue money to spend.The red price of ambrosia is 4 and the blue price of ambrosia is 5.The red price of bubble gum is 1 and the blue price of bubble gum is 1.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, 75)to (10, 35)and another running from (10, 35)to (17, 0).
B)a vertical line segment and a horizontal line segment, intersecting at (10, 35).
C)two line segments one running from (0, 75)to (7, 40)and the other running from (7, 40)to (17, 0).
D)two line segments, one running from (0, 42)to (10, 35)and the other running from (10, 35)to (50, 0).
E)a vertical line segment and a horizontal line segment, intersecting at (7, 40).
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Chapter 32: Welfare-Part A
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Q1) Suppose that Romeo has the utility function U = S <sup>7</sup><sub>R</sub>S<sup>3</sup><sub>J</sub> and Juliet has the utility function U = S <sup>3</sup><sub>R</sub>S<sup>7</sup><sub>J</sub>, where S<sub>R</sub> is Romeo's spaghetti consumption and S<sub>J</sub> is Juliet's.They have 60 units of spaghetti to divide between them.
A)Romeo would want to give Juliet some spaghetti if he had more than 30 units of spaghetti.
B)Romeo would want to give Juliet some spaghetti if he had more than 38 units of spaghetti.
C)Romeo and Juliet would never disagree about how to divide the spaghetti.
D)Juliet would want to give Romeo some spaghetti if she had more than 40 units.
E)Juliet would want to give Romeo some spaghetti if she had more than 42 units of spaghetti.
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
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Page 64
Chapter 32: Welfare-Part B
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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 2 times the cost of living in city A.The child in city A has an income of $5,000 and the child in city B has an income of $10,000.The parent wants to give a total of $4,000 to her two children.Her utility function is U(C<sub>A</sub>, C<sub>B</sub>)= C<sub>A</sub>C<sub>B</sub>, where C<sub>A</sub> and C<sub>B</sub> are the consumptions of the children living in cities A and B respectively.She will choose to give A)each child $2,000, even though this will buy less goods for the child in city B
B)the child in city B twice as much money as the child in city A.
C)the child in city A twice as much money as the child in city B.
D)the child in city B the same amount of money as the child in city A.
E)the child in city A the same amount of money as the child in city B.
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Chapter 33: Externalities-Part A
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Q1) Mike's utility function is U(c, d, h)= 8c + 12d - d<sup>2</sup> - 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) If preferences are quasilinear, then the delineation of property rights has no distributional consequences.
A)True
B)False
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Chapter 33: Externalities-Part B
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Q1) suppose that the cost function of the honey farm is C<sub>H</sub>(H, A)= H <sup>2</sup>/100 - 3A and the cost function of the apple orchard is C<sub>A</sub>(H, A)= A<sup>2</sup>/100, where H and A are the number of units of honey and apples produced respectively.The price of honey is $7 and the price of apples is $5 per unit.Let A<sub>1</sub> be the output of apples if the firms operate independently, and let A<sub>2</sub> be the output of apples if the firms are operated by a profit-maximizing single owner.
A)A<sub>1</sub> = 125 and A<sub>2</sub> = 250.
B)A<sub>1</sub> = A<sub>2</sub> = 250.
C)A<sub>1</sub> = 200 and A<sub>2</sub> = 250.
D)A<sub>1</sub> = 250 and A<sub>2</sub> = 400.
E)A<sub>1</sub> = 350 and A<sub>2</sub> = 250.
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Chapter 34: Information Technology-Part A
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Q1) Why might a profit-maximizing firm producing a new product with network externalities want to give its product away for free?
A)To lock customers in then raise prices at a later date.
B)Although this practice loses money, it can get the firm valuable publicity.
C)By building market share, the product becomes much more valuable and the firm can make money by offering a premium version of the product for sale.
D)The product becomes a more valuable place to advertise if it doesn't cost anything.
E)A profit-maximizing firm would never give its product away for free.
Q2) If the demand curve for the DoorKnobs operating system is related to perceived market share s and actual market share t by the equation p = 98s(1 - x), then in the long run, the highest price at which DoorKnobs would maintain a market share of 6/7 would be
A)$18.
B)$15.60.
C)$10.80.
D)$12.
E)$14.40.
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Chapter 34: Information Technology-Part B
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Q1) If the demand function for the DoorKnobs operating system is related to perceived market share s and actual market share x by the equation p = 512s(1 - x), then in the long run, the highest price at which DoorKnobs could sustain a market share of 4/5 is A)$96.
B)$256.
C)$113.78.
D)$128.
E)$81.92.
Q2) If the demand function for the DoorKnobs operating system is related to perceived market share s and actual market share x by the equation p = 512s(1 - x), then in the long run, the highest price at which DoorKnobs could sustain a market share of 3/4 is A)$96.
B)$128.
C)$256.
D)$113.78.
E)$81.92.
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Chapter 35: Public Goods-Part A
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Q1) 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
Q2) One of the problems with the Clarke tax mechanism is that when it is used, people have an incentive to lie about their preferences.
A)True
B)False
Q3) If the supply of public goods is determined by majority vote, then the outcome must be Pareto optimal.
A)True
B)False
Q4) If preferences are single peaked, then everyone will agree about the right amount of public goods to be supplied.
A)True
B)False
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Page 70
Chapter 35: Public Goods-Part B
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Q1) Lucy's utility function is 2X<sub>L</sub> + G and Melvin's utility function is X<sub>M</sub>G, where G is their expenditures on the public goods they share in their apartment and where X<sub>L</sub> and X<sub>M</sub> are their respective private consumption expenditures.The total amount they have to spend on private goods and public goods is $33,000.They agree on a Pareto optimal pattern of expenditures in which the amount that is spent on Lucy's private consumption is $9,000.How much do they spend on public goods?
A)$8,550
B)$4,000
C)$8,000
D)$16,000
E)There is not enough information here to be able to determine the answer.
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Chapter 36: Asymmetric Information-Part A
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Q1) In a market where there is a pooling equilibrium, different types of agents choose the same action.
A)True
B)False
Q2) Which of the following is the best example of adverse selection?
A)People who face the highest risks are the people most likely to buy insurance against these risks.
B)The residual claimant will have to bear the consequences of the most adverse outcomes.
C)An individual can influence the probability that she has an accident.
D)Items in the most popular styles sell out the quickest.
E)People sometimes mistakenly choose low-quality products.
Q3) A life insurance company must be concerned about the possibility that the people who buy life insurance may tend to be less healthy than those who do not.This is an example of adverse selection.
A)True
B)False
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Chapter 36: Asymmetric Information-Part B
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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 to sell them for $100.Owners of good used cars are willing to sell them for prices above $1,100 but will keep them if the price is lower than $1,100.There is a large number of potential buyers who are willing to pay $200 for a lemon and $2,100 for a good car.Buyers can't tell good cars from bad, but original owners know.
A)There will be an equilibrium in which lemons sell for $100 and good used cars sell for $1,100.
B)There will be an equilibrium in which all used cars sell for $600.
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 all used cars sell for $1,150.
E)There will be an equilibrium in which lemons sell for $200 and good used cars sell for $2,100.
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