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2
True-False
Topic: Chapter Budget Constraint Correct Responses: 90 Correct
Budget Constraint
Di culty: 1 Discrimination Index: 10
2.1 If there are two goods with positive prices and the price of one good is reduced, while income
and other prices remain constant, then the size of the budget set is reduced.
Topic: Budget Constraint Correct Responses: 76 Correct Di culty: 1 Discrimination Index: 24
2.2 If good 1 is measured on the horizontal axis and good 2 is measured on the vertical axis, and
if the price of good 1 is p1 and the price of good 2 is p2 ; then the slope of the budget line is ,p2 =p1.
Topic: Budget Constraint Correct Responses: 91 Correct
Di culty: 1 Discrimination Index: 13
2.3 If all prices are doubled and money income is left the same, the budget set does not change
because relative prices don't change.
Topic: Budget Constraint Correct Responses: 93 Correct
Di culty: 1 Discrimination Index: 21
2.4 If there are two goods, and if one good has a negative price and the other has a positive
price, then the slope of the budget line will be positive.
Topic: Budget Constraint Correct Responses: 94 Correct
Di culty: 1 Discrimination Index: 12
2.5 If all prices double and income triples, then the budget line will become steeper.
CHAPTER 2 Budget Constraint
Topic: Budget Constraint Correct Responses: 95 Correct Di culty: 1 Discrimination Index: 13
2
2.6 If Good 1 is on the horizontal axis and Good 2 is on the vertical axis, then an increase in the
price of Good 1 will not change the horizontal intercept of the budget line.
Topic: Budget Constraint Correct Responses: 98 Correct Di culty: 1 Discrimination Index: 1
2.7 If there are two goods and the prices of both goods rise, then the budget line must become
steeper.
Topic: Budget Constraint Correct Responses: 97 Correct Di culty: 1 Discrimination Index: 0
2.8 There are two goods. You know how much of good 1 a consumer can a ord if she spends all
of her income on good 1. If you know the ratio of the prices of the two goods, then you could draw the consumer's budget line without any more information.
Topic: Budget Constraint Correct Responses: 91 Correct Di culty: 1 Discrimination Index: 0
2.9 A consumer prefers more to less of every good. Her income rises, and the price of one of the
goods falls while other prices stay constant. These changes must have made her better o .
Topic: Budget Constraint Correct Responses: 0 Correct Di culty: 2 Discrimination Index: 0
2.10 There are 3 goods. The price of good 1 is ,1; the price of good 2 is +1; and the price
of good 3 is +2. It is physically possible for a consumer to consume any commodity bundle with non-negative amounts of each good. A consumer who has income of 10 could a ord to consume some commodity bundles that include 5 units of good 1 and 6 units of good 2.
Topic: Budget Constraint Correct Responses: 80 Correct Di culty: 1 Discrimination Index: 49
2.11 A decrease in income pivots the budget line around the bundle initially consumed.
Multiple Choice
Budget Constraint
Topic: Budget Constraint Correct Responses: 97 Correct
Di culty: 1 Discrimination Index: 6
2.1
If she spends all of her income on lemons and tangerines, Isabella can just a ord 30 lemons and 8 tangerines per day. She could also use her entire budget to buy 6 lemons and 14 tangerines per day. The price of lemons is 6 guineas each. How much is Isabella's income per day?
a 372 guineas b 377 guineas c 371 guineas d 363 guineas e None of the above.
Topic: Budget Constraint Correct Responses: 97 Correct
Di culty: 1 Discrimination Index: 6
2.2
If she spends all of her income on uglifruit and breadfruits, Maria can just a ord 11 uglifruit and 4 breadfruits per day. She could also use her entire budget to buy 3 uglifruit and 8 breadfruits per day. The price of uglifruit is 6 pesos each. How much is Maria's income per day?
a 115 pesos b 119 pesos c 114 pesos d 105 pesos e None of the above.
CHAPTER 2 Budget Constraint
Topic: Budget Constraint Correct Responses: 0 Correct Di culty: 2 Discrimination Index: 0
4
2.3 Matt lives on popcorn and seafood salads. The price of popcorn is 1 dollar per bag and the
price of seafood salads is 2 dollars each. Matt allows himself to spend no more than 13 dollars a day on food. He also restricts his consumption to 5,500 calories per day. There are 1,000 calories in a bag of popcorn and 500 calories in a seafood salad. If he spends his entire money budget each day and consumes no more calories than his calorie limit:
a he can consume up to 3 bags of popcorn per day, but no more. b he can consume up to 1 bags of popcorn per day, butno more. c he can consume up to 5 seafood salads per day, but no more. d he can consume up to 4 bags of popcorn per day, but no more. e None of the above.
Topic: Budget Constraint Correct Responses: 0 Correct
Di culty: 2 Discrimination Index: 0
2.4 Quincy lives on ding dongs and seafood salads. The price of ding dongs is 1 dollar per bag
and the price of seafood salads is 4 dollars each. Quincy allows himself to spend no more than 23 dollars a day on food. He also restricts his consumption to 3,300 calories per day. There are 600 calories in a bag of ding dongs and 300 calories in a seafood salad. If he spends his entire money budget each day and consumes no more calories than his calorie limit:
a he can consume up to 3 bags of ding dongs per day, but no more. b he can consume up to 1 bags of ding dongs per day, butno more. c he can consume up to 5 seafood salads per day, but no more. d he can consume up to 4 bags of ding dongs per day, but no more. e None of the above.
MULTIPLE CHOICE
Topic: Budget Constraint Correct Responses: 88 Correct Di culty: 1 Discrimination Index: 20
5
2.5 Teresa spends her entire budget and consumes 6 units of x and 20 units of y. The price of x
is twice the price of y. Her income doubles and the price of y doubles, but the price of x stays the same. If she continues to buy 20 units of y; what is the largest number of units of x that she can a ord?
a 12 b 6 c 14 d 16 e There is not enough information to say.
Topic: Budget Constraint Correct Responses: 88 Correct Di culty: 1 Discrimination Index: 20
2.6 Linda spends her entire budget and consumes 15 units of x and 19 units of y. The price of x
is twice the price of y. Her income doubles and the price of y doubles, but the price of x stays the same. If she continues to buy 19 units of y; what is the largest number of units of x that she can a ord?
a 30 b 15 c 32 d 34 e There is not enough information to say.
Topic: Budget Constraint Correct Responses: 50 Correct Di culty: 1 Discrimination Index: 50
2.7 In year 1, the price of good x was 1, the price of good y was 1, and income was 30. In year
2, the price of x was 6, the price of good y was 5, and income was 30. On a graph with x on the horizontal axis and y on the vertical, the new budget line is:
a atter than the old one and lies below it. b atter than the old one and lies above it. c steeper than the old one and lies below it. d steeper than the old one and lies above it. e none of the above.
CHAPTER 2 Budget Constraint
Topic: Budget Constraint Correct Responses: 50 Correct Di culty: 1 Discrimination Index: 50
6
2.8 In year 1, the price of good x was 4, the price of good y was 2, and income was 60. In year
2, the price of x was 17, the price of good y was 8, and income was 60. On a graph with x on the horizontal axis and y on the vertical, the new budget line is:
a atter than the old one and lies below it. b atter than the old one and lies above it. c steeper than the old one and lies below it. d steeper than the old one and lies above it. e none of the above.
Topic: Budget Constraint Correct Responses: 35 Correct
Di culty: 1 Discrimination Index: 8
2.9
If she spends her entire budget, Vanessa can a ord 47 apricots and 10 cherries. She can also just a ord 20 apricots and 19 cherries. The price of apricots is 18 cents. What is the price of cherries in cents?
a 64 b 3 c 21 d 54 e None of the above.
MULTIPLE CHOICE
Topic: Budget Constraint Correct Responses: 35 Correct Di culty: 1 Discrimination Index: 8
7
2.10
If she spends her entire budget, Heidi can a ord 39 peaches and 12 pears. She can also just a ord 24 peaches and 17 pears. The price of peaches is 9 cents. What is the price of pears in cents?
a 37 b 3 c 12 d 27 e None of the above.
Topic: Budget Constraint Correct Responses: 100 Correct Di culty: 1 Discrimination Index: 0
2.11 Heidi thrives on two goods: bananas and apples. The cost of bananas is 30 marks each and
the cost of apples is 15 marks each. If her income is 210 marks, how many bananas can she buy if she spends all of her income on bananas?
a 5 b 7 c 14 d 10 e None of the above
Topic: Budget Constraint Correct Responses: 100 Correct Di culty: 1 Discrimination Index: 0
2.12 Teresa thrives on two goods: mangos and melons. The cost of mangos is 30 yen each and
the cost of melons is 15 yen each. If her income is 180 yen, how many mangos can she buy if she spends all of her income on mangos?
a 4 b 6 c 12 d 9 e None of the above
CHAPTER 2 Budget Constraint
Topic: Budget Constraint Correct Responses: 76 Correct Di culty: 1 Discrimination Index: 34
8
2.13 Yoram spends his entire income on 11 sacks of acorns and 5 crates of butternuts. The price
of acorns is 4 dollars per sack and his income is 94 dollars. He can just a ord a commodity bundle with A sacks of acorns and B crates of butternuts which satis es the budget equation:
a 4A + 12B = 94. b 8A + 20B = 188. c 6A + 10B = 94. d 4A + 14B = 96. e None of the above.
Topic: Budget Constraint Correct Responses: 76 Correct Di culty: 1 Discrimination Index: 34
2.14 Eduardo spends his entire income on 12 sacks of acorns and 2 crates of butternuts. The
price of acorns is 2 dollars per sack and his income is 34 dollars. He can just a ord a commodity bundle with A sacks of acorns and B crates of butternuts which satis es the budget equation:
a 2A + 7B = 34. b 4A + 10B = 68. c 4A + 5B = 34. d 2A + 9B = 36. e None of the above.
Topic: Budget Constraint Correct Responses: 99 Correct Di culty: 1 Discrimination Index: 5
2.15 Harry thrives on two goods, paperback novels and bananas. The cost of paperback novels
is 4 dollars each and the cost of bananas is 3 dollars per bunch.If Harry spent all of his income on bananas, he could a ord 12 bunches of bananas per week. How many paperback novels could he buy if he spent all of his income on paperback novels?
a 36 b 48 c 9 d 16 e None of the above.
MULTIPLE CHOICE
Topic: Budget Constraint Correct Responses: 92 Correct Di culty: 1 Discrimination Index: 25
9
2.16 Suppose that the prices of good x and good y both double, and income triples. On a graph
where the budget line is drawn with x on the horizontal axis and y on the vertical axis:
a the budget line becomes steeper and shifts inward. b the budget line becomes atter and shifts outward. c the budget line becomes atter and shifts inward. d the new budget line is parallel to the old budget line and lies below it. e None of the above.
Topic: Budget Constraint Correct Responses: 96 Correct Di culty: 1 Discrimination Index: 18
2.17 Suppose that the price of good x triples and the price of good y doubles while income
remains constant. On a graph where the budget line is drawn with x on the horizontal axis and y on the vertical axis, the new budget line:
a is atter than the old one and lies below it. b is atter than the old one and lies above it. c crosses the old budget line. d is steeper than the old one and lies below it. e is steeper than the old one and lies above it.
Topic: Budget Constraint Correct Responses: 0 Correct
Di culty: 3 Discrimination Index: 0
2.18 While traveling abroad, Tammy spent all of the money in her purse to buy 5 plates of
spaghetti and 6 oysters. Spaghetti costs 8 units of the local currency per plate and she had 82 units of currency in her purse. If s denotes the number of plates of spaghetti and o denotes the number of oysters purchased, the set of commodity bundles that she could just a ord with the money in her purse is described by the equation:
a 82 + 6o = 82. b 6s + 8o = 82. c 8s + 7o = 82. d 5s + 6o = 82. e There is not enough information to determine the answer.
CHAPTER 2 Budget Constraint
Topic: Budget Constraint Correct Responses: 0 Correct Di culty: 2 Discrimination Index: 0
10
2.19 Billy Bob wants to gain some weight so that he can play football. Billy eats only milkshakes
and spinach. Milkshakes cost him $1 each and spinach costs $2 per serving. A milkshake 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 8000 calories per day. Which of the following is necessarily true?
a Billy Bob consumes at least 9 milkshakes 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 milkshakes. e None of the above.
Topic: Budget Constraint Correct Responses: 81 Correct
Di culty: 2 Discrimination Index: 21
2.20 Lars consumes only potatoes and herring. When the price of potatoes was 9 crowns per
sack and the price of herring was 5 crowns per crock, he spent his entire income to buy 5 sacks of potatoes and 10 crocks of herring per month. Now the government subsidizes potatoes. Market prices haven't changed, but consumers get a subsidy of 5 crowns for every sack of potatoes consumed. To pay for this subsidy, the government introduced an income tax. Lars pays an income tax of 20 crowns per month. If s is the number of sacks of potatoes and c is the number of crocks of herring, what is Lars's NEW budget equation?
a 9s + 5c = 100. b 14s + 5c = 95. c 4s + 5c = 95. d 4s + 5c = 75. e 14s + 5c = 120.
MULTIPLE CHOICE
Topic: Budget Constraint Correct Responses: 95 Correct Di culty: 1 Discrimination Index: 17
11
2.21 If you spent your entire income, you could a ord either 4 units of x and 8 units of y or 8
units of x and 4 units of y. If you spent your entire income on x; how many units of x could you buy?
a 20 b 17 c 12 d There is not enough information to determine the amount of x. e None of the above.
Topic: Budget Constraint Correct Responses: 95 Correct
Di culty: 1 Discrimination Index: 17
2.22 If you spent your entire income, you could a ord either 5 units of x and 15 units of y or 15
units of x and 5 units of y. If you spent your entire income on x; how many units of x could you buy?
a 35 b 24 c 20 d There is not enough information to determine the amount of x. e None of the above.
Topic: Budget Constraint Correct Responses: 95 Correct
Di culty: 1 Discrimination Index: 10
2.23 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.
CHAPTER 2 Budget Constraint
Topic: Budget Constraint Correct Responses: 94 Correct Di culty: 1 Discrimination Index: 26
12
2.24 Your budget constraint for the two goods A and B is 12A + 4B = I where I is your income.
a 0.33 b 0.07 c 3 d 15 e None of the above.
You are currently consuming more than 45 units of B. In order to get 5 more units of A, how many units of B would you have to give up?
Topic: Budget Constraint Correct Responses: 94 Correct
Di culty: 1 Discrimination Index: 26
2.25 Your budget constraint for the two goods A and B is 6A + 3B = I where I is your income.
a 0.50 b 0.25 c 2 d 4 e None of the above.
You are currently consuming more than 12 units of B. In order to get 2 more units of A, how many units of B would you have to give up?
MULTIPLE CHOICE
Topic: Budget Constraint Correct Responses: 70 Correct Di culty: 2 Discrimination Index: 32
13
2.26 Young Alasdair loves lollipops and hates oatmeal. To induce him to eat enough oatmeal
and to restrain him from eating too many lollipops, his mum pays him 10 pence for every quart of oatmeal that he eats. The only way that he can get lollipops is to buy them at the sweet shop, where lollipops cost 5 pence each. Besides what he earns from eating oatmeal, Alasdair gets an allowance of 10 pence per week. If Alasdair consumes only oatmeal and lollipops and if his consumption bundles are graphed with quarts of oatmeal on the horizontal axis and lollipops on the vertical axis, then Alasdair's budget line:
a has a slope of 2. b has a slope of less than ,2. c has a slope of ,2. d has a slope of 1=2. e has a slope greater than 2.
Topic: Budget Constraint Correct Responses: 41 Correct
Di culty: 2 Discrimination Index: 30
2.27 The Chuzzlewits have an income of $m per week. Let x be food and let y be all other goods.
Let px be the price of food and py be the price of other goods. They can use food stamps to buy food at a price of px 1,s for up to x* units of food per week. If they buy more food than x*, they have to pay the full price, px for additional units. Their weekly income is greater than px 1 , sx. The maximum amount of food that they can buy per week is:
a x +m=px b m + x=px c m=px + sx d m=1 , spx e m + px =1 , spx
CHAPTER 2 Budget Constraint
Topic: Budget Constraint Correct Responses: 100 Correct Di culty: 1 Discrimination Index: 0
14
2.28 Edmund must pay $6 each for punk rock video casettes, V . If Edmund is paid $24 per sack
for accepting garbage, G; and if his relatives send him an allowance of $192, then his budget line is described by the equation:
a 6V = 24G. b 6V + 24G = 192. c 6V , 24G = 192. d 6V = 192 , G. e None of the above.
Topic: Budget Constraint Correct Responses: 100 Correct Di culty: 1 Discrimination Index: 0
2.29 Edmund must pay $6 each for punk rock video casettes, V . If Edmund is paid $24 per sack
for accepting garbage, G; and if his relatives send him an allowance of $168, then his budget line is described by the equation:
a 6V = 24G. b 6V + 24G = 168. c 6V , 24G = 168. d 6V = 168 , G. e None of the above.
Topic: Budget Constraint Correct Responses: 0 Correct Di culty: 0 Discrimination Index: 0
2.30 If you have an income of $40 to spend, if commodity 1 costs $4 per unit, and commodity 2
costs $20 per unit, then the equation for your budget line can be written as:
a x1=4 + x2 =20 = 40. b x1 + x2 =24 = 40. c x1 + 5x2 = 10. d 5x1 + 21x2 = 41. e 24x1 + x2 = 40.
MULTIPLE CHOICE
Topic: Budget Constraint Correct Responses: 0 Correct Di culty: 0 Discrimination Index: 0
15
2.31 If you have an income of $36 to spend, if commodity 1 costs $4 per unit, and commodity 2
costs $12 per unit, then the equation for your budget line can be written as:
a x1=4 + x2 =12 = 36. b x1 + x2 =16 = 36. c x1 + 3x2 = 9. d 5x1 + 13x2 = 37. e 16x1 + x2 = 36.
Topic: Budget Constraint Correct Responses: 85 Correct
Di culty: 1 Discrimination Index: 20
2.32 If you could exactly a ord either 5 units of x and 17 units of y; or 8 units of x and 5 units
of y; then if you spent all of your income on y; how many units of y could you buy?
a 37 b 25 c 49 d 13 e None of the above.
Topic: Budget Constraint Correct Responses: 85 Correct
Di culty: 1 Discrimination Index: 20
2.33 If you could exactly a ord either 6 units of x and 17 units of y; or 9 units of x and 8 units
of y; then if you spent all of your income on y; how many units of y could you buy?
a 35 b 26 c 44 d 15 e None of the above.
CHAPTER 2 Budget Constraint
Topic: Budget Constraint Correct Responses: 99 Correct Di culty: 0 Discrimination Index: 4
16
2.34 Murphy used to consume 100 units of X and 50 units of Y when the price of X was 2 and
the price of Y was 4. If the price of X rose to 5 and the price of Y rose to 7, how much would Murphy's income have to rise so that he could still a ord his original bundle?
a 600 b 450 c 300 d 900 e None of the above.
Topic: Budget Constraint Correct Responses: 99 Correct Di culty: 0 Discrimination Index: 4
2.35 Murphy used to consume 100 units of X and 50 units of Y when the price of X was 2 and
the price of Y was 4. If the price of X rose to 6 and the price of Y rose to 8, how much would Murphy's income have to rise so that he could still a ord his original bundle?
a 800 b 600 c 400 d 1,200 e None of the above.
Topic: Budget Constraint Correct Responses: 0 Correct Di culty: 0 Discrimination Index: 0
2.36 This weekend, Martha has time to read 40 pages of economics and 30 pages of sociology.
Alternatively, she could read 20 pages of economics and 70 pages of sociology. Which of these equations describes all combinations of pages of economics, E; and sociology, S; that she could read over the weekend?
a E + S = 70 b E=2 + S = 50 c 2E + S = 110 d E + S = 90 e All of the above.
MULTIPLE CHOICE
Topic: Budget Constraint Correct Responses: 0 Correct Di culty: 0 Discrimination Index: 0
17
2.37 This weekend, Martha has time to read 40 pages of economics and 30 pages of sociology.
Alternatively, she could read 20 pages of economics and 110 pages of sociology. Which of these equations describes all combinations of pages of economics, E; and sociology, S; that she could read over the weekend?
a E + S = 70 b E=2 + S = 50 c 4E + S = 190 d E + S = 130 e All of the above.
Topic: Budget Constraint Correct Responses: 0 Correct
Di culty: 2 Discrimination Index: 0
2.38 Ads in a slick business magazine are read by 300 lawyers and 1000 M.B.A's. Ads in a 0
consumer publication are read by 250 lawyers and 300 M:B:A: s. If Harry had $ 3,600 to spend on advertising, if the price of ads in the business magazine were $600 and the price of ads in the consumer magazine were $300, then the combinations of recent M:B:A:0s and lawyers with hot tubs whom he could reach with his advertising budget would be represented by the integer values along a line segment that runs between the two points:
a 3; 000; 3; 600 and 1; 800; 6; 000. b 3; 600; 4; 200 and 1; 800; 7; 200. c 0; 3; 600 and 1; 800; 0. d 3; 600; 0 and 0; 7; 200. e 2; 400; 0 and 0; 6; 000.
CHAPTER 2 Budget Constraint
Topic: Budget Constraint Correct Responses: 0 Correct Di culty: 2 Discrimination Index: 0
18
2.39 Ads in a slick business magazine are read by 300 lawyers and 1000 M.B.A's. Ads in a 0
consumer publication are read by 250 lawyers and 300 M:B:A: s. If Harry had $ 2,600 to spend on advertising, if the price of ads in the business magazine were $400 and the price of ads in the consumer magazine were $200, then the combinations of recent M:B:A:0s and lawyers with hot tubs whom he could reach with his advertising budget would be represented by the integer values along a line segment that runs between the two points:
a 3; 250; 3; 900 and 1; 950; 6; 500. b 3; 900; 4; 550 and 1; 950; 7; 800. c 0; 3; 900 and 1; 950; 0. d 3; 900; 0 and 0; 7; 800. e 2; 600; 0 and 0; 6; 500.
Topic: Budget Constraint Correct Responses: 60 Correct
Di culty: 2 Discrimination Index: 47
2.40 In the economy of Mungo, discussed in your workbook, there is a third person called Ike.
Ike has a red income of 56 and a blue income of 10. Recall that blue prices are 1 bcu blue currency unit per unit of ambrosia and 1 bcu per unit of bubblegum. Red prices are 2 rcus red currency units per unit of ambrosia and 6 rcus per unit of bubblegum. You have to pay twice for what you buy, once in red currency, once in blue currency. If Ike spends all of his blue income, but not all of his red income, then it must be that:
a he consumes at least 9 units of bubblegum. b he consumes at least 1 units of ambrosia. c he consumes exactly twice as much bubblegum as ambrosia. d he consumes at least 17 units of bubblegum. e he consumes equal amounts of ambrosia and bubblegum.
MULTIPLE CHOICE
Topic: Budget Constraint Correct Responses: 60 Correct Di culty: 2 Discrimination Index: 47
19
2.41 In the economy of Mungo, discussed in your workbook, there is a third person called Ike.
Ike has a red income of 40 and a blue income of 10. Recall that blue prices are 1 bcu blue currency unit per unit of ambrosia and 1 bcu per unit of bubblegum. Red prices are 2 rcus red currency units per unit of ambrosia and 6 rcus per unit of bubblegum. You have to pay twice for what you buy, once in red currency, once in blue currency. If Ike spends all of his blue income, but not all of his red income, then it must be that:
a he consumes at least 5 units of bubblegum. b he consumes at least 5 units of ambrosia. c he consumes exactly twice as much bubblegum as ambrosia. d he consumes at least 14 units of bubblegum. e he consumes equal amounts of ambrosia and bubblegum.
Topic: Budget Constraint Correct Responses: 0 Correct
Di culty: 2 Discrimination Index: 0
2.42 Deadly Serious, II, studying for his M.B.A., consumes only two goods, Wheaties and pens.
Each pen costs $1. Each box of Wheaties costs $2 but has a "free" pen inside. Pens can be discarded at no cost. If we draw Serious's budget set with pens plotted on the horizontal axis, then his budget set will be bounded by two line segments with slopes:
a zero and ,1. b zero and ,2. c zero and ,:5. d zero and in nity. e zero and +2.
CHAPTER 2 Budget Constraint
Topic: Budget Constraint Correct Responses: 78 Correct Di culty: 0 Discrimination Index: 49
20
2.43 Suppose there are two goods, the prices of both goods are positive and a consumer's income
is also positive. If the consumer's income doubles and the price of both goods triple,
a the consumer's budget line gets steeper and shifts inward. b the slope of the consumer's budget line does not change but the budget line shifts outward away from the origin. c the consumer's budget line gets steeper and shifts outward. d the slope of the consumer's budget line does not change but the budget line shifts inward toward the origin. e the consumer's budget line gets atter and shifts inward.
Topic: Budget Constraint Correct Responses: 0 Correct Di culty: 0 Discrimination Index: 0
2.44 Thomas consumes co ee C and doughnuts D. His budget line was described by the
a The price of co ee and Thomas's income both increased. b The price of co ee increased and Thomas's income decreased. c The price of co ee decreased and Thomas's income increased. d The price of co ee and Thomas's income both decreased. e Thomas's utility for doughnuts decreased.
equation D = 20,2C. At a later time, his budget line could be described by the equation D = 10,C. The change between the earlier budget line and the later could be explained by the following.
Essay
Budget Constraint
Di culty: 1 Discrimination Index: 0
Topic: Budget Constraint Correct Responses: 0
2.1 Perry lives on avocados and beans. The price of avocados is 10, the price of beans is 5, and
his income is 40. Show Perry's budget line on a graph with avocados on the horizontal axis and beans on the vertical axis. Label the point where the budget line hits the horizontal axis A and the point where the budget line hits the vertical axis B. Next to these labels, write down the number of avocados purchased at A and the number of beans purchased at B. Draw another budget line showing what Perry's budget would be if his income doubled, the price of avocados doubled, and the price of beans stayed the same. Label the point where this line hits the vertical axis C and the point where it hits the horizontal axis D. Next to these labels write the number of avocados at C and the number of beans at D.
Answer: At A there are 4 avocados. At B there are 8 units of beans. At C there are 4 avocados. At D there are 16 units of beans.
Topic: Budget Constraint Correct Responses: 0
Di culty: 2 Discrimination Index: 0
2.2 Brenda likes hot dogs and Coca-Cola. Hot dogs cost $1 each and Cokes cost $.50 per bottle.
There is a special promotion for Coke that will last for one month. If Brenda sends in the bottle tops from the Cokes she drinks during the next month, she will get a refund of $.20 for every bottlecap beyond the rst 12 that she returns. For example, if she returns 25 bottle caps she will get back $2:60 = $:2025 , 12. Brenda has $40 to spend on hot dogs and Coke during the next month. Draw her budget line with Coke on the horizontal axis and hot dogs on the vertical axis. Find the points where the budget line hits the axes and the point where it has a kink. At each of these three points write down the quantities of each good consumed.
Answer: The budget line runs from 0; 40 on the vertical axis to a kink point 12; 34 and from 12; 34 to about 125:3; 0.
CHAPTER 2 Budget Constraint
Topic: Budget Constraint Correct Responses: 0 Di culty: 2 Discrimination Index: 0
22
2.3 Felicity is studying economics and political science. She can read 30 pages of political science
per hour but only 5 pages of economics per hour. This week she has a 50 page assignment in economics and a 150 page assignment in political science. Because of sorority rush, she cannot devote more than 10 hours to studying these subjects this week. She realizes she cannot complete all of her assignments but is determined to complete at least 30 pages of her economics reading. Draw a graph with pages of economics on the horizontal axis and pages of political science on the vertical axis. On this graph, show the possibilities that are consistent with the constraints that Felicity has imposed on herself. She is allowed to read ahead in either subject. Label key points on your graph with their numerical values.
Answer: Anything in the triangle bounded by 0; 300; 30; 120 and 30; 0 satis es these constraints.
Topic: Budget Constraint Correct Responses: 0 Di culty: 3 Discrimination Index: 0
2.4 Ed Moore and his family live in a city with many private schools and one public school. The
Moores are thinking of sending their only child to private school because they would like a school that has more teachers and other resources per student than the local public school. The Moores must pay taxes to support local public schools whether or not their child goes to private school. There is such a variety of private schools that the Moores can get just about any level of inputs per student by choosing the appropriate private school. Tuition in the private schools equals expenditure per student. Draw a diagram to show the Moores' budget constraint. Put expenditures per student in the child's school on the horizontal axis and other goods on the vertical.
Answer: One point is x; d where x is expenditures per pupil in public school and d is disposable income. The rest of the budget is a line with slope ,1 from 2s; d , x to the x axis.
Chapter 3
True-False
Topic: Preferences Correct Responses: 70 Correct Di culty: 1 Discrimination Index: 31
Preferences
3.1 If preferences are transitive, more is always preferred to less.
Topic: Preferences Correct Responses: 89 Correct Di culty: 1 Discrimination Index: 21
3.2 A person with re exive preferences is someone who does not shop carefully.
Topic: Preferences Correct Responses: 94 Correct Di culty: 2 Discrimination Index: 6
3.3 If someone has the utility function U = 1000+2minfx; yg then x and y are perfect complements
for that person.
Topic: Preferences Correct Responses: 68 Correct Di culty: 1 Discrimination Index: 40
3.4 A consumer with convex preferences who is indi erent between the bundles 1; 2 and 9; 6
will like the bundle 5; 4 at least as well as either of the rst two bundles.
Topic: Preferences Correct Responses: 68 Correct Di culty: 1 Discrimination Index: 40
3.5 A consumer with convex preferences who is indi erent between the bundles 2; 3 and 10; 9
will like the bundle 6; 6 at least as well as either of the rst two bundles.
Topic: Preferences Correct Responses: 81 Correct Di culty: 2 Discrimination Index: 0
3.6 If there are two goods, if a consumer prefers more of each good to less, and if she has diminishing marginal rate of substitution, then her preferences are convex.
CHAPTER 3 Preferences
Topic: Preferences Correct Responses: 75 Correct Di culty: 2 Discrimination Index: 11
24
3.7 If preferences are convex, then for any commodity bundle x; the set of commodity bundles
that are worse than x is a convex set.
Topic: Preferences Correct Responses: 58 Correct
Di culty: 2 Discrimination Index: 0
3.8 Bill Katz prefers more of good 1 to less and he prefers less of good 2 to more. Bill has convex
preferences. If we draw his indi erence curves with good 1 on the horizontal axis and good 2 on the vertical axis, then his indi erence curves have positive slope but get steeper as they rise.
Topic: Preferences Correct Responses: 99 Correct
Di culty: 1 Discrimination Index: 0
3.9 The marginal rate of substitution measures the distance between one indi erence curve and
the next one.
Topic: Preferences Correct Responses: 79 Correct
Di culty: 1 Discrimination Index: 11
2 1=2 1
3.10 Ambrose has an indi erence curve with equation x = 20 , 4x . When Ambrose is consuming the bundle 4; 16; his marginal rate of substitution is ,5=4.
Topic: Preferences Correct Responses: 77 Correct
Di culty: 1 Discrimination Index: 34
3.11 Nancy's psychology teacher will give her a course grade that is the maximum of her scores
on three midterm examinations. Nancy has convex preferences over the possible combinations of midterm scores.
TRUE-FALSE
Topic: Preferences Correct Responses: 39 Correct Di culty: 3 Discrimination Index: 26
25
3.12 If Melody has more classical records than rock and roll records, she is willing to exchange
exactly 1 classical record for 2 rock and roll records, but if she has more rock and roll records than classical records, then she is willing to exchange exactly 1 rock and roll record for 2 classical records. Melody has convex preferences.
Topic: Preferences Correct Responses: 71 Correct Di culty: 1 Discrimination Index: 17
3.13 Josephine buys 3 quarts of milk and 2 pounds of butter when milk sells for $2 a quart and
butter sells for $1 a pound. Wilma buys 2 quarts of milk and 3 pounds of butter at the same prices. Josephine's marginal rate of substitution between milk and butter is greater than Wilma's.
Topic: Preferences Correct Responses: 29 Correct Di culty: 2 Discrimination Index: 29
3.14 A consumer who is unable to detect small di erences in the amount of water in her beer
could have a transitive strict preference relation but is unlikely to have a transitive indi erence relation.
Multiple Choice
Topic: Preferences Correct Responses: 85 Correct Di culty: 1 Discrimination Index: 23
Preferences
3.1 Fanny consumes goods x and y. Her indi erence curves are described by the formula y =
k=x + 7. Higher values of k correspond to better indi erence curves. Which of the following is
true?
a Fanny likes good y and hates good x. b Fanny prefers bundle 8; 9 to bundle 9; 8. c Fanny prefers bundle 9; 5 to bundle 5; 9. d Fanny likes good x and hates good y. e More than one of the above statements are true.
Topic: Preferences Correct Responses: 85 Correct Di culty: 1 Discrimination Index: 23
3.2 Heidi consumes goods x and y. Her indi erence curves are described by the formula y =
k=x + 6. Higher values of k correspond to better indi erence curves. Which of the following is
true?
a Heidi likes good y and hates good x. b Heidi prefers bundle 10; 15 to bundle 15; 10. c Heidi prefers bundle 9; 8 to bundle 8; 9. d Heidi likes good x and hates good y. e More than one of the above statements are true.
Topic: Preferences Correct Responses: 67 Correct Di culty: 1 Discrimination Index: 14
3.3 George's indi erence curves are circles, all of which are centered at 18; 20. Of any two
indi erence circles, he would rather be on the inner one than the outer one. Which of the following is true?
a George's preferences are not complete. b George prefers 24; 26 to 14; 17. c George prefers14; 26 to 14; 17. d George prefers 16; 19 to 23; 26. e More than one of the above statements are true.
MULTIPLE CHOICE
Topic: Preferences Correct Responses: 67 Correct Di culty: 1 Discrimination Index: 14
27
3.4 Yoram's indi erence curves are circles, all of which are centered at 12; 19. Of any two indi erence circles, he would rather be on the inner one than the outer one. Which of the following is true?
a Yoram's preferences are not complete. b Yoram prefers 18; 25 to 8; 16. c Yoram prefers8; 25 to 8; 16. d Yoram prefers 8; 17 to 18; 28. e More than one of the above statements are true.
Topic: Preferences Correct Responses: 0 Correct
Di culty: 1 Discrimination Index: 0
3.5 Manuel consumes only apples and bananas. He prefers more apples to less, but he gets tired
of bananas. If he consumes fewer than 17 bananas per week, he thinks that one banana is a perfect substitute for one apple. But you would have to pay him one apple for each banana beyond 17 that he consumes. The indi erence curve that passes through the consumption bundle with 25 apples and 26 bananas also passes through the bundle with A apples and 11 bananas, where A equals:
a 21 b 22 c 24 d 26 e None of the above.
CHAPTER 3 Preferences
Topic: Preferences Correct Responses: 0 Correct Di culty: 1 Discrimination Index: 0
28
3.6 Wilbur consumes only apples and bananas. He prefers more apples to less, but he gets tired
of bananas. If he consumes fewer than 18 bananas per week, he thinks that one banana is a perfect substitute for one apple. But you would have to pay him one apple for each banana beyond 18 that he consumes. The indi erence curve that passes through the consumption bundle with 27 apples and 30 bananas also passes through the bundle with A apples and 13 bananas, where A equals:
a 17 b 20 c 26 d 28 e None of the above.
Topic: Preferences Correct Responses: 75 Correct
Di culty: 1 Discrimination Index: 50
3.7 If two goods are both desirable and preferences are convex, then:
a there must be a kink in the indi erence curves. b indi erence "curves" must be straight lines. c if two bundles are indi erent, then an average of the two bundles is worse than either one. d the marginal rate of substitution is constant along indi erence curves e None of the above.
Topic: Preferences Correct Responses: 53 Correct
Di culty: 2 Discrimination Index: 34
3.8 If there are only two goods, if more of good 1 is always preferred to less, and if less of good
2 is always preferred to more, then:
a indi erence curves slope downwards. b indi erence curves slope upwards. c indi erence curves may cross. d indi erence curves could take the form of ellipses. e None of the above.
MULTIPLE CHOICE
Topic: Preferences Correct Responses: 75 Correct Di culty: 2 Discrimination Index: 29
29
3.9 If two goods are perfect complements:
a there is a bliss point and the indi erence curves surround this point. b consumers will only buy the cheaper of the two goods. c indi erence curves have a positive slope. d None of the above.
Topic: Preferences Correct Responses: 0 Correct
Di culty: 2 Discrimination Index: 0
3.10 The relation is preferred to" between commodity bundles is just one example of a binary
a The relation R is re exive, transitive, and complete. b The relation R is transitive and complete but not re exive. c The relation R is transitive but not complete or re exive. d The relation R is complete but not transitive or re exive. e The relation R is neither re exive, transitive, nor complete.
relation. Another example is the relation is a full brother of" de ned over the set of all human beings. Let xRy mean person x is a full brother of person y.
Topic: Preferences Correct Responses: 61 Correct
Di culty: 1 Discrimination Index: 20
3.11 Preferences are said to be monotonic if:
a all goods must be consumed in xed proportions. b all goods are perfect substitutes. c more is always preferred to less. d there is diminishing marginal rate of substitution. e None of the above.
CHAPTER 3 Preferences
Topic: Preferences Correct Responses: 8 Correct Di culty: 3 Discrimination Index: 0
30
3.12 Toby Talkalot subscribes to a local phone service that charges a xed fee of $10 per month
and allows him to place as many local phone calls as he likes without further charge. Let Good 1 be an aggregate of commodities other than local phone use and let Good 2 be local phone use. Measure Good 1 on the horizontal axis and Good 2 on the vertical axis. On Monday, Toby didn't use the telephone at all. From this we can conclude that the slope m of his indi erence curve at the consumption bundle he chose on Monday was:
a positive. b less than or equal to 0. c 0. d greater than or equal to 0. e negative.
Topic: Preferences Correct Responses: 22 Correct
Di culty: 3 Discrimination Index: 26
3.13 Professor Goodheart's colleague Dr. Kremepu gives 3 midterm exams. He drops the lowest
and gives each student her average score on the other two exams. Polly Sigh is taking his course and has a 60 on her rst exam. Let x2 be her score on the second exam and x3 be her score on the third exam. If we draw her indi erence curves for scores on the second and third exams with x2 represented by the horizontal axis and x3 represented by the vertical axis, then her indi erence curve through the point x2 ; x3 = 50; 70 is:
a L-shaped with a kink where x2 = x3. 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.
MULTIPLE CHOICE
Topic: Preferences Correct Responses: 92 Correct Di culty: 0 Discrimination Index: 19
31
3.14 Charlie's indi erence curves have the equation xB = constant=xA; where larger constants
denote better indi erence curves. Charlie strictly prefers the bundle 10; 19 to the bundle:
a 19; 10. b 11; 18. c 15; 15. d more than one of these bundles. e none of these bundles.
Topic: Preferences Correct Responses: 92 Correct
Di culty: 0 Discrimination Index: 19
3.15 Charlie's indi erence curves have the equation xB = constant=xA; where larger constants
denote better indi erence curves. Charlie strictly prefers the bundle 9; 19 to the bundle:
a 19; 9. b 10; 18. c 12; 15. d more than one of these bundles. e none of these bundles.
Topic: Preferences Correct Responses: 77 Correct
Di culty: 2 Discrimination Index: 17
2 1=2 1
3.16 Ambrose has indi erence curves with the equation x = constant , 4x where larger constants correspond to higher indi erence curves. If good 1 is drawn on the horizontal axis and good 2 on the vertical axis, what is the slope of Ambrose's indi erence curve when his consumption bundle is 16; 9?
a ,16=9 b ,9=16 c ,0:50 d ,13 e ,4
CHAPTER 3 Preferences
Topic: Preferences Correct Responses: 77 Correct Di culty: 2 Discrimination Index: 17
2 1=2 1
32
3.17 Ambrose has indi erence curves with the equation x = constant , 4x where larger constants correspond to higher indi erence curves. If good 1 is drawn on the horizontal axis and good 2 on the vertical axis, what is the slope of Ambrose's indi erence curve when his consumption bundle is 9; 14?
a ,9=14 b ,14=9 c ,0:67 d ,17 e ,3
Topic: Preferences Correct Responses: 93 Correct
Di culty: 2 Discrimination Index: 4
3.18 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 rst midterm and 50 on her second midterm. When the rst midterm score is measured on the horizontal axis and her second midterm score on the vertical, her indi erence curve has a slope of zero at the point 40; 50. Therefore it must be that:
a this class could be Professor Goodheart's, but couldn't be Professor Stern's. b this class could be Professor Stern's, but couldn't be Professor Goodheart's. c this class couldn't be either Goodheart's or Stern's. d this class could be either Goodheart's or Stern's. e None of the other options are correct.
MULTIPLE CHOICE
Topic: Preferences Correct Responses: 93 Correct Di culty: 2 Discrimination Index: 4
33
3.19 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 70 on her rst midterm and 60 on her second midterm. When the rst midterm score is measured on the horizontal axis and her second midterm score on the vertical, her indi erence curve has a slope of zero at the point 70; 60. Therefore it must be that:
a this class could be Professor Goodheart's, but couldn't be Professor Stern's. b this class could be Professor Stern's, but couldn't be Professor Goodheart's. c this class couldn't be either Goodheart's or Stern's. d this class could be either Goodheart's or Stern's. e None of the other options are correct.
Topic: Preferences Correct Responses: 56 Correct
Di culty: 2 Discrimination Index: 65
3.20 If we graph Mary Granola's indi erence curves with avocados on the horizontal axis and
grapefruits on the vertical axis, then whenever she has more grapefruits than avocados, the slope of her indi erence curve is ,2. Whenever she has more avocados than grapefruits, the slope is ,1=2. Mary would be indi erent between a bundle with 11 avocados and 23 grapefruits and another bundle that has 19 avocados and:
a 15 grapefruits. b 19 grapefruits. c 11 grapefruits. d 13 grapefruits. e 14 grapefruits.
CHAPTER 3 Preferences
Topic: Preferences Correct Responses: 56 Correct Di culty: 2 Discrimination Index: 65
34
3.21 If we graph Mary Granola's indi erence curves with avocados on the horizontal axis and
grapefruits on the vertical axis, then whenever she has more grapefruits than avocados, the slope of her indi erence curve is ,2. Whenever she has more avocados than grapefruits, the slope is ,1=2. Mary would be indi erent between a bundle with 24 avocados and 36 grapefruits and another bundle that has 32 avocados and:
a 28 grapefruits. b 32 grapefruits. c 24 grapefruits. d 26 grapefruits. e 27 grapefruits.
Topic: Preferences Correct Responses: 75 Correct
Di culty: 2 Discrimination Index: 29
3.22 Recall that Tommy Twit's mother measures the departure of any bundle from her favorite
bundle for Tommy by the sum of the absolute values of the di erences. Her favorite bundle for Tommy is 2; 7 , ,that is, 2 cookies and 7 glasses of milk. Tommy's mother's indi erence curve that passes through the point c; m = 5; 4 also passes through:
a the point 8; 1. b the points 2; 1; 8; 7; and 5; 10. c the point 2; 7. d the points 5; 7; 2; 4; and 2; 10. e None of the above.
MULTIPLE CHOICE
Topic: Preferences Correct Responses: 75 Correct Di culty: 2 Discrimination Index: 29
35
3.23 Recall that Tommy Twit's mother measures the departure of any bundle from her favorite
bundle for Tommy by the sum of the absolute values of the di erences. Her favorite bundle for Tommy is 2; 7 , ,that is, 2 cookies and 7 glasses of milk. Tommy's mother's indi erence curve that passes through the point c; m = 3; 6 also passes through:
a the point 4; 5. b the points 2; 5; 4; 7; and 3; 8. c the point 2; 7. d the points 3; 7; 2; 6; and 2; 8. e None of the above.
Topic: Preferences Correct Responses: 0 Correct
Di culty: 0 Discrimination Index: 0
3.24 Scholastica is taking a class from Professor Chaos. Professor Chaos gives two tests in this
course and determines a student's grade as follows. He calculates the smaller of the following two numbers: half of the score on the rst test which is a relatively easy test and the actual score on the second test. He gives each student a numerical score equal to the result of this calculation and then ranks the students. Scholastica would like to be ranked as high as possible in Professor Chaos' rankings. If we represent her score on the rst exam on the horizontal axis and her score on the second exam on the vertical axis, then her indi erence curves:
a are L-shaped with kinks where the two exam scores are equal. b have sections with a slope ,2 and sections with a slope 1=2. c are positively sloped. d are L-shaped with kinks where the exam 1 score is twice the exam 2 score. e are straight lines with a slope of ,1=2.
CHAPTER 3 Preferences
Topic: Preferences Correct Responses: 0 Correct Di culty: 0 Discrimination Index: 0
36
3.25 In Professor Meanscore's class, the rst midterm exam and the second midterm exam are
weighted equally toward the nal grade. With the rst midterm's score on the horizontal axis, and the second midterm's score on the vertical axis, indi erence curves between the two exam scores are
a L-shaped with lines extending upward and to the right. b L-shaped with lines extending downward and to the left. c parabola shaped. d straight lines with slope ,1. e straight lines with slope 2.
Topic: Preferences Correct Responses: 0 Correct Di culty: 0 Discrimination Index: 0
3.26 Professor Stern's colleague, Dr. Schmertz, gives one midterm exam and a nal exam. He
weights the nal twice as heavily as the midterm to determine the course grade. No grades can be dropped. If the midterm score is represented on the horizontal axis and the nal score on the vertical axis, and if a student in Dr. Schmertz's class cares only about her course grade, her indifference curve is
a a line with slope ,2. b a line with slope ,1. c a line with slope ,0:5. d L-shaped with the kink at x; 2x. e L-shaped with the kink at 2x; x.
Topic: Preferences Correct Responses: 0 Correct Di culty: 0 Discrimination Index: 0
3.27 I prefer 6 apples and 1 orange to 5 apples and 2 oranges. From this we can conclude that
a my preferences are transitive. b my preferences are complete. c my preferences are convex. d my preferences obey the Law of Demand. e none of the above.
Essay
Preferences
Topic: Preferences Correct Responses: 0
Di culty: 3 Discrimination Index: 0
3.1 Draw graphs with quantities of pepperoni pizza on the horizontal axis and anchovy pizza on
the vertical axis to illustrate the following situations. In each case draw two di erent indi erence curves and make a little arrow pointing in the direction of greater preference. a Marvin loves pepperoni pizza and hates anchovy pizza.
b Mavis hates anchovy pizza and is completely indi erent about pepperoni pizza.
Indi erence curves slopes up and to the right. Arrow points down and to the left. b Indi erence curves are horizontal lines. Arrow points down.
CHAPTER 3 Preferences
Topic: Preferences Correct Responses: 0 Di culty: 3 Discrimination Index: 0
38
3.2 Coach Steroid likes his players to be big, fast, and obedient. If player A is better than player
B in two of these three characteristics, Steroid will prefer A to B. Three players try out for quar-
terback. Wilbur Westinghouse weighs 320 pounds, runs very slowly, and is quite obedient. Harold Hotpoint weighs 240 pounds, runs extremely fast, and is extremely disobedient. Jerry Jacuzzi weighs 150 pounds, runs at average speed, and is extremely obedient. Does Coach Steroid have transitive preferences? Explain your answer.
Answer: No. Steroid prefers W to H because W is heavier and more obedient. He preferes H to J because H is heavier and faster. But he prefers J to W because J is more obedient and faster than W. Since his preferences have a cycle, they cannot be transitive.
Topic: Preferences Correct Responses: 0
Di culty: 3 Discrimination Index: 0
3.3 Belinda loves chocolate and always thinks that more is better than less. Belinda thinks that
a few piano lessons would be worse than none at all but if she had enough piano lessons to get good at playing the piano, she would prefer more lessons to less. Draw a graph with piano lessons on the horizontal axis and chocolate on the vertical axis. On your graph sketch two indi erence curves for Belinda that would be consistent with this story. Label the better of the two indi erence curves AA and the worse one BB.
Answer: The indi erence curves would look something like inverted U 0s. The area under these curves needn't be necessarily convex. The better of the two curves drawn is the higher one.
ESSAY
Topic: Preferences Correct Responses: 0 Di culty: 3 Discrimination Index: 0
39
3.4 Mac Rowe doesn't sweat the petty stu . In fact, he just cannot detect small di erences. He 00
consumes two goods, x and y. He prefers the bundle x; y to the bundle x ; y if and only if xy, x0y0 1. Otherwise he is indi erent between the two bundles. Show: a that the relation of indi erence is not transitive for Mac Hint: Give an example.
b that the preferred relation is transitive for Mac.
Answer: Consider the bundles A = 1; 1; B = 1; 1:75; C = 1; 2:5. Then A is indi erent to B and B to C but C is preferred to A. To see that strict preference is transitive, suppose we have any three bundles, x; y; x0 ; y0 and x00; y00. If the rst is preferred to the second and the second to the third, then xy , x0 y0 1 and x0y0 , x00y00 1. Simple algebra shows that xy , x00y00 1. Therefore the rst must be preferred to the third.
Topic: Preferences Correct Responses: 0 Di culty: 3 Discrimination Index: 0
3.5 Blanche Carter has devised a system for rating the males in her economics class. She cares
about their intelligence and their looks. She has ranked each male on a scale of 1 to 5 for intelligence and 1 to 3 for looks. She de nes a preference re lation, R; as follows: xRy if boy x scores at least as high as boy y in either looks or in intelligence. Give an example to show that Blanche's method of determining preferences might not lead to transitive preferences.
Answer: Suppose boy x has rankings 1 and 2, boy y has rankings 3 and 1 and boy z has rankings 2 and 3. Then xRy because x is better looking than y and yRz because y is smarter than z. But it is not true that xRz. In fact z is both smarter and better looking than x.
Topic: Preferences Correct Responses: 0 Di culty: 2 Discrimination Index: 0
3.6 Explain how it would be possible to cheat someone who had intransitive preferences. Be
explicit about what you would o er him if you were trying to exploit his intransitivity and what he would do in response.
Answer: Suppose that he has bundle C right now and prefers A to B; B to C; and C to A. If you o er him a trade that leaves him at B instead of C; he will accept the deal. If you now o er him a trade that leaves him at A instead of B; he will accept that. But he will prefer to be back where he originally was to where he is. So you could o er to give him back his original bundle, minus a reward to you for your e orts and he would accept the deal.
CHAPTER 3 Preferences
Topic: Preferences Correct Responses: 0 Di culty: 1 Discrimination Index: 0
40
3.7 If good X is measured on the horizontal axis and good Y on the vertical, what can you
say about the preferences of someone whose indi erence curves are a Parallel to the Y axis? b Positively sloped with more desirable indi ernce curves as one moves to the right? c Negatively sloped with more desirable indi erence curves as one moves to the left?
This person doesn't care how much X he has. b This person likes X but hates Y . c This person hates both goods.
Topic: Preferences Correct Responses: 0 Di culty: 2 Discrimination Index: 0
3.8 Suppose that there are two commodities and a consumer prefers more to less of each good.
If the consumer has transitive preferences, can her indi erence curves cross? Sketch a brief proof of your answer, and illustrate with a diagram.
Answer: See the textbook.
Chapter 4
True-False
Topic: Utility Correct Responses: 85 Correct Di culty: 2 Discrimination Index: 10
Utility
4.1 With quasilinear preferences, the slope of indi erence curves is constant along all rays through
the origin.
Topic: Utility Correct Responses: 82 Correct Di culty: 2 Discrimination Index: 45
4.2 Wanda Lott has the utility function Ux; y = maxfx; yg. Wanda's preferences are convex.
Topic: Utility Correct Responses: 96 Correct Di culty: 1 Discrimination Index: 20
4.3 If someone has a utility function U = 2minfx; yg; then x and y are perfect complements for
that person.
Topic: Utility Correct Responses: 66 Correct Di culty: 1 Discrimination Index: 20
4.4 Maximilian consumes two goods x and y. His utility function is Ux; y = maxfx; yg. Therefore x and y are perfect substitutes for Max.
Topic: Utility Correct Responses: 36 Correct Di culty: 3 Discrimination Index: 11
2
4.5 A person with the utility function Ux; y = y + x has convex preferences.
Topic: Utility Correct Responses: 25 Correct Di culty: 3 Discrimination Index: 47
4.6 Mr. Surly consumes only two goods and hates them both. His utility function is Ux; y =
,maxfx; yg. Mr. Surly has weakly convex preferences.
CHAPTER 4 Utility
Topic: Utility Correct Responses: 71 Correct Di culty: 2 Discrimination Index: 43
1 2 1 2 3
42
4.7 Angela's utility function is Ux ; x = x + x . Her indi erence curves are downwardsloping, parallel straight lines.
Topic: Utility Correct Responses: 81 Correct
Di culty: 2 Discrimination Index: 0
1 2 12
4.8 Henrietta's utility function is Ux ; x = x x . She has diminishing marginal rate of substitution between goods 1 and 2.
Topic: Utility Correct Responses: 66 Correct 2
Di culty: 2 Discrimination Index: 8
2
4.9 Alice's utility function is Ux; y = x y. Steve's utility function is Ux; y = x y + 2x. Alice
and Steve have the same preferences since Steve's utility function is a monotonic transformation of Alice's.
Topic: Utility Correct Responses: 78 Correct
Di culty: 3 Discrimination Index: 29
2
4.10 Jean's utility function is Ux; y = x + y , y. If we draw her indi erence curves with x
on the horizontal axis and y on the vertical axis, then these indi erence curves are everywhere downward-sloping and get atter as one moves from left to right.
Topic: Preferences Correct Responses: 99 Correct 1 2 1
Di culty: 1 Discrimination Index: 4
2
4.11 The utility function Ux ; x = 2ln x + 3ln x represents Cobb-Douglas preferences.
TRUE-FALSE
Topic: Preferences Correct Responses: 92 Correct Di culty: 1 Discrimination Index: 29
43
4.12 Fiery Demon is a rotgut whisky made in Kentucky. Smoothy is an unblended malt whisky
imported from Scotland. Ed regards these brands as perfect substitutes. When he goes into a bar, he sometimes buys only Fiery Demon. Other times he buys only Smoothy. This shows that Ed has unstable preferences.
Topic: Utility Correct Responses: 93 Correct Di culty: 1 Discrimination Index: 16
4.13 Mark strictly prefers consumption bundle A to consumption bundle B and weakly prefers
bundle B to bundle A. These preferences can be represented by a utility function.
Topic: Utility Correct Responses: 63 Correct 2 2
Di culty: 3 Discrimination Index: 80
1 2 2 1 12
4.14 A consumer has preferences represented by the utility function Ux ; x = 10x + 2x x +
x , 50. For this consumer, goods 1 and 2 are perfect substitutes.
Topic: Utility Correct Responses: 52 Correct
Di culty: 1 Discrimination Index: 38
2
4.15 A person with utility function Ux; y = 5 + y + 2x has non-convex preferences.
Topic: Utility Correct Responses: 64 Correct Di culty: 2 Discrimination Index: 26
2
4.16 A person with the utility function Ux; y = 10 + y + x has convex preferences.
Topic: Utility Correct Responses: 43 Correct Di culty: 2 Discrimination Index: 29
1 2 1 2 1 2
4.17 A person with the utility function Ux ; x = minfx + 2x ; 2x + x g has convex, but not
strictly convex preferences.
CHAPTER 4 Utility
Topic: Utility Correct Responses: 0 Correct Di culty: 0 Discrimination Index: 0
44
4.18 If one utility function is a monotonic transformation of another, then the former must assign
a higher utility number to every bundle than the latter.
Topic: Preferences Correct Responses: 0 Correct Di culty: 0 Discrimination Index: 0
4.19 Quasilinear preferences are homothetic when the optimal amount of good 1 is not a ordable.
Multiple Choice
Topic: Utility Correct Responses: 28 Correct Di culty: 2 Discrimination Index: 17
Utility
4.1 Ike's utility function is Ux; y = 25xy. He has 12 units of good x and 8 units of y. Ben's
utility function for the same two goods is Ux; y = 4x + 4y. Ben has 9 units of x and 13 units of y.
a Ike prefers Ben's bundle to his own bundle, but Ben prefers his own bundle to Ike's. b Ben prefers Ike's bundle to his own, but Ike prefers his own bundle to Ben's. c Each prefers the other guy's bundle to his own. d Neither prefers the other guy's bundle to his own. e Since they have di erent preferences, there is not enough information to determine who envies whom.
Topic: Utility Correct Responses: 28 Correct
Di culty: 2 Discrimination Index: 17
4.2 Nick's utility function is Ux; y = 33xy. He has 12 units of good x and 6 units of y. Boris's
utility function for the same two goods is Ux; y = 2x+5y. Boris has 9 units of x and 13 units of y.
a Nick prefers Boris's bundle to his own bundle, but Boris prefers his own bundle to Nick's. b Boris prefers Nick's bundle to his own, but Nick prefers his own bundle to Boris's. c Each prefers the other guy's bundle to his own. d Neither prefers the other guy's bundle to his own. e Since they have di erent preferences, there is not enough information to determine who envies whom.
Topic: Utility Correct Responses: 58 Correct
Di culty: 2 Discrimination Index: 27
4.3 Tim has preferences represented by the utility function: Ux; y = minf6x + y; x + 2yg. If x is
on the horizontal axis and y is on the vertical axis, what is the slope of his indi erence curve at the point 8; 9? a The slope is ,6. b The slope is ,2=6. c The slope is ,1=2. d The slope is ,1=6. e The slope is ,8=9.
CHAPTER 4 Utility
Topic: Utility Correct Responses: 58 Correct Di culty: 2 Discrimination Index: 27
46
4.4 Chen has preferences represented by the utility function: Ux; y = minf4x + y; x + 6yg. If x
is on the horizontal axis and y is on the vertical axis, what is the slope of his indi erence curve at the point 9; 4? a The slope is ,4. b The slope is ,6=4. c The slope is ,1=6. d The slope is ,1=4. e The slope is ,9=4.
Topic: Utility Correct Responses: 95 Correct Di culty: 1 Discrimination Index: 9
4.5 Doreen has preferences represented by the utility function Ux; y = 10x + 5y. She consumes
10 units of good x and 9 units of good y. If her consumption of good x is lowered to 1, how many units of y must she have in order to be exactly as well o as before?
a 30 units of good y b 30 units of good y c 27 units of good y d 18 units of good y e None of the above
Topic: Utility Correct Responses: 95 Correct Di culty: 1 Discrimination Index: 9
4.6 Sheila has preferences represented by the utility function Ux; y = 8x + 4y. She consumes 12
units of good x and 3 units of good y. If her consumption of good x is lowered to 10, how many units of y must she have in order to be exactly as well o as before?
a 12 units of good y b 10 units of good y c 7 units of good y d 5 units of good y e None of the above
MULTIPLE CHOICE
Topic: Utility Correct Responses: 0 Correct Di culty: 3 Discrimination Index: 0
47
4.7 Mac's utility function is Ux; y = maxf2x , y; 2y , xg.
a Mac's preferences are quasi-linear. b If Mac has more x than y; any increase in his consumption of y would lower his utility. c If Mac has more x than y; a decrease in his consumption of y would raise his utility. d Mac always prefers more of each good to less. e Goods x and y are perfect substitutes.
Topic: Utility Correct Responses: 30 Correct
Di culty: 2 Discrimination Index: 29
4.8 Charles' utility function is Ux; y = xy. Anne's utility function is Ux; y = 1; 000xy. Diana's
utility function is ,xy. Elizabeth's utility function is Ux; y = ,1=xy +1. Fergie's utility function is xy , 10; 000. Margaret's utility function is x=y. Philip's utility function is xy + 1. the goods x and y are two very expensive goods. We leave you to speculate about what they are. Which of these persons have the same preferences as Charles?
a Everybody except Diana b Anne and Fergie c Anne, Fergie and Elizabeth d None of them e All of them
Topic: Utility Correct Responses: 55 Correct
Di culty: 3 Discrimination Index: 67
4.9 Raymond's preferences are represented by the utility function Ux; y = x=y if y
Ux; y = 0 if y = 0. a Raymond has indi erence curves that are rectangular hyperbolas. b Raymond prefers more of each good to less. c Raymond has quasi-linear preferences. d Raymond has a bliss point. e Raymond has indi erence curves that are upward sloping straight lines if y 0.
0 and
CHAPTER 4 Utility
Topic: Utility Correct Responses: 92 Correct Di culty: 2 Discrimination Index: 17
48
4.10 Molly's utility function is Ux; y = y + 4x:5. She has 25 units of x and 12 units of y. If her
consumption of x is reduced to 0, how many units of y would she need in order to be exactly as well o as before?
a 48 units. b 37 units. c 32 units. d 112 units. e None of the above.
Topic: Utility Correct Responses: 21 Correct
Di culty: 2 Discrimination Index: 13
4.11 Waldo's utility function is Ux; 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 gives up 5 units of x for every unit of y he gets. b Waldo would be willing to trade away all of his x for y so long he gets more than 5 units of y for every unit of x he gives up. c Waldo likes x and y equally well so he is always willing to exchange 1 unit of either good for more than one 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.
MULTIPLE CHOICE
Topic: Utility Correct Responses: 21 Correct Di culty: 2 Discrimination Index: 13
49
4.12 Ernie's utility function is Ux; y = xy. Ernie consumes 4 units of x and 16 units of y.
a Ernie would be willing to make small exchanges of x for y in which he gives up 4 units of x for every unit of y he gets. b Ernie would be willing to trade away all of his x for y so long he gets more than 4 units of y for every unit of x he gives up. c Ernie likes x and y equally well so he is always willing to exchange 1 unit of either good for more than one unit of the other. d Ernie 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.
Topic: Utility Correct Responses: 16 Correct Di culty: 2 Discrimination Index: 0
2 2
4.13 Henry's utility function is x + 16xw + 64w where x is his consumption of x and w is his
consumption of w.
a Henry's preferences are nonconvex. b Henry's indi erence curves are straight lines. c Henry has a bliss point. d Henry's indi erence curves are hyperbolas. e None of the above.
Topic: Utility Correct Responses: 92 Correct Di culty: 1 Discrimination Index: 37
4.14 Josephine's utility function is Ux; y = y + 5x:5. She has one unit of x and two units of y. If
her consumption of x is reduced to zero, how much y must she have in order to be exactly as well o as before?
a 14 units. b 9 units. c 11 units. d 7 units. e None of the above.
CHAPTER 4 Utility
Topic: Utility Correct Responses: 10 Correct Di culty: 2 Discrimination Index: 0
50
4.15 Jim's utility function is Ux; y = xy. Jerry's utility function is Ux; y = 1; 000xy + 2; 000.
Tammy's utility function is Ux; y = xy1,xy. Oral's utility function is ,1=10+xy. Billy's utility function is Ux; y = x=y. Pat's utility function is Ux; y = ,xy.
a No two of these people have the same preferences. b They all have the same preferences except for Billy. c Jim, Jerry, and Pat all have the same indi erence curves, but Jerry and Oral are the only ones with the same preferences as Jim. d Jim, Tammy, and Oral all have the same preferences. e There is no truth in any of the above statements.
Topic: Utility Correct Responses: 74 Correct 1 2
Di culty: 1 Discrimination Index: 15
1 2
4.16 Harmon's utility function is Ux ; x = x x . His income is $100, the price of good 2 is
p2 = 4. Good 1 is priced as follows. The rst 15 units cost $4 per unit and any additional units
cost $2 per unit. What consumption bundle does Harmon choose?
a 12:5; 12:5 b 25; 12:5 c 12:5; 25 d 15; 10 e None of the above.
Topic: Utility Correct Responses: 61 Correct 1 2
Di culty: 1 Discrimination Index: 37
1
4.17 Janet consumes x and x together in xed proportions. She always consumes 2 units of x
for every unit x2. One utility function that describes her preferences is:
a Ux1; x2 = 2x1x2 b Ux1 ; x2 = 2x1 + x2 c Ux1; x2 = x1 + 2x2 d Ux1 ; x2 = minf2x1; x2g e Ux1; x2 = minfx1 ; 2x2g
MULTIPLE CHOICE
Topic: Utility Correct Responses: 14 Correct Di culty: 3 Discrimination Index: 36
1 2 1 2
51
4.18 Oswald Odd consumes only goods 1 and 2. His utility function is Ux ; x = x + x +
minfx1 ; x2g. Each of Oswald's indi erence curves is: a L-shaped. b made up of 3 line segments with slopes ,2; ,1; and ,1=2. c made up of two line segments with slopes ,2 and ,1=2. d is smooth and has no kinks. e is a diamond-shaped gure consisting of 4 line segments.
Topic: Utility Correct Responses: 4 Correct
Di culty: 3 Discrimination Index: 0
4.19 The absolute value of Mars' MRS at his current consumption bundle is greater than 3. That
is; MU1 =MU2
both goods.
3. Mars has convex preferences and is currently consuming positive amounts of
a Taking away some of Good 1 and giving Mars 3 units of Good 2 for each unit of Good 1 taken away will necessarily make him worse o . b Taking away some Good 1 and giving Mars 3 units of Good 2 for each unit of Good 1 taken away will necessarily make him better o . c Giving Mars some Good 1 and taking away 3 units of Good 2 for each unit of Good 1 he is given will necessarily make him worse o . d Giving Mars some Good 1 and taking away 3 units of Good 2 for each unit of Good 1 he is given will necessarily make him better o . e More than one of the above is true.
CHAPTER 4 Utility
Topic: Utility Correct Responses: 48 Correct Di culty: 3 Discrimination Index: 84
52
4.20 Isabella's utility function is Ux; y = 4minfx; yg + y. If we draw her indi erence curves with
x on the horizontal axis and y on the vertical axis, these indi erence curves are: a L-shaped with kinks where x = y. b made up of two line segments that meet where x = y. One of these line segments is horizontal and the other has slope ,4. c L-shaped with kinks where x = 5y. d made up of two line segments that meet where x = 5y. One of these line segments is vertical and the other has slope ,1. e V-shaped with kinks where x = 4y.
Topic: Utility Correct Responses: 48 Correct Di culty: 3 Discrimination Index: 84
4.21 Penelope's utility function is Ux; y = 2minfx; yg + y. If we draw her indi erence curves
with x on the horizontal axis and y on the vertical axis, these indi erence curves are:
a L-shaped with kinks where x = y. b made up of two line segments that meet where x = y. One of these line segments is horizontal and the other has slope ,2. c L-shaped with kinks where x = 3y. d made up of two line segments that meet where x = 3y. One of these line segments is vertical and the other has slope ,1. e V-shaped with kinks where x = 2y.
Topic: Utility Correct Responses: 94 Correct Di culty: 1 Discrimination Index: 20
4.22 Charlie has the utility function UxA; xB = xAxB . His indi erence curve passing through
32 apples and 8 bananas will also pass through the point where he consumes 4 apples and:
a 16 bananas. b 32 bananas. c 68 bananas. d 72 bananas. e 64 bananas.
MULTIPLE CHOICE
Topic: Utility Correct Responses: 94 Correct Di culty: 1 Discrimination Index: 20
53
4.23 Charlie has the utility function UxA; xB = xAxB . His indi erence curve passing through
10 apples and 35 bananas will also pass through the point where he consumes 2 apples and:
a 35 bananas. b 70 bananas. c 177 bananas. d 182 bananas. e 175 bananas.
Topic: Utility Correct Responses: 95 Correct Di culty: 0 Discrimination Index: 47
4.24 Charlie's utility function is UA; B = AB where A and B are the numbers of apples and
bananas, respectively, that he consumes. When Charlie is consuming 15 apples and 90 bananas, if we put apples on the horizontal axis and bananas on the vertical axis, the slope of his indi erence curve at his current consumption is:
a ,15. b ,6. c ,12. d ,1=6. e ,1=12.
Topic: Utility Correct Responses: 95 Correct Di culty: 0 Discrimination Index: 47
4.25 Charlie's utility function is UA; B = AB where A and B are the numbers of apples and
bananas, respectively, that he consumes. When Charlie is consuming 25 apples and 100 bananas, if we put apples on the horizontal axis and bananas on the vertical axis, the slope of his indi erence curve at his current consumption is:
a ,25. b ,4. c ,8. d ,1=4. e ,1=8.
CHAPTER 4 Utility
Topic: Utility Correct Responses: 53 Correct 1 2
54
Di culty: 2 Discrimination Index: 49
1=2 1 2
4.26 Ambrose has the utility function Ux ; x = 4x + x . If Ambrose is initially consuming
a 9 b 19 c 4 d 2 e 1
Topic: Utility Correct Responses: 53 Correct 1 2
64 units of nuts and 10 units of berries, then what is the largest number of berries that he would be willing to give up in return for an additional 17 units of nuts.
Di culty: 2 Discrimination Index: 49
1=2 1 2
4.27 Ambrose has the utility function Ux ; x = 4x + x . If Ambrose is initially consuming 4
units of nuts and 18 units of berries, then what is the largest number of berries that he would be willing to give up in return for an additional 32 units of nuts.
a 6 b 24 c 16 d 8 e 4
Topic: Utility Correct Responses: 60 Correct Di culty: 2 Discrimination Index: 52
4.28 Joe Bob's cousin Leonard consumes goods 1 and 2. Leonard thinks that 2 units of good 1
a Ux1; x2 = 3x1 + 2x2 + 1000. b Ux1 ; x2 = 9x2 + 12x1x2 + 4x2. 1 2 c Ux1; x2 = Minf3x1; 2x2g. d Ux1 ; x2 = 30x1 + 20x2 , 10; 000. e More than one of the above does NOT represent Leonard's preferences.
is always a perfect substitute for 3 units of good 2. Which of the following utility functions is the only one that would NOT represent Leonard's preferences?
MULTIPLE CHOICE
Topic: Utility Correct Responses: 60 Correct Di culty: 2 Discrimination Index: 52
55
4.29 Joe Bob's cousin Tim consumes goods 1 and 2. Tim 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 Tim's preferences?
a Ux1; x2 = 2x1 + 4x2 + 1000. b Ux1 ; x2 = 4x2 + 16x1x2 + 16x2. 1 2 c Ux1; x2 = Minf2x1; 4x2g. d Ux1 ; x2 = 20x1 + 40x2 , 10; 000. e More than one of the above does NOT represent Tim's preferences.
Topic: Utility Correct Responses: 0 Correct
Di culty: 0 Discrimination Index: 0
1 2 1 2 1 2
4.30 Harry Mazzola has the utility function Ux ; x = minfx + 2x ; 2x + x g. He has $40 to
spend on corn chips and french fries, if the price of corn chips is 3 dollars per unit and the price of french fries is 4 dollars per unit, then Harry will:
a de nitely spend all of his income on corn chips. b de nitely spend all of his income on french fries. c consume at least as much corn chips as french fries, but might consume both. d consume at least as much french fries as corn chips, but might consume both. e consume equal amounts of french fries and corn chips.
Topic: Utility Correct Responses: 0 Correct
Di culty: 0 Discrimination Index: 0
1 2 1 2 1 2
4.31 Harry Mazzola has the utility function Ux ; x = minfx + 2x ; 2x + x g. He has $40 to
spend on corn chips and french fries, if the price of corn chips is 3 dollars per unit and the price of french fries is 5 dollars per unit, then Harry will:
a de nitely spend all of his income on corn chips. b de nitely spend all of his income on french fries. c consume at least as much corn chips as french fries, but might consume both. d consume at least as much french fries as corn chips, but might consume both. e consume equal amounts of french fries and corn chips.
CHAPTER 4 Utility
Topic: Utility Correct Responses: 0 Correct Di culty: 0 Discrimination Index: 0
56
4.32 Phil Rupp's sister Ethel has the utility function Ux; y = minf4x + y; 5yg. Where x is measured on the horizontal axis and y on the vertical axis, her indi erence curves:
a consist of a vertical line segment and a horizontal line segment which meet in a kink along the line y = 4x. b consist of a vertical line segment and a horizontal line segment which meet in a kink along the line x = 4y. c consist of a horizontal line segment and a negatively sloped line segment which meet in a kink along the line x = y. d consist of a positively sloped line segment and a negatively sloped line segment which meet along the line x = y. e consist of a horizontal line segment and a positively sloped line segment which meet in a kink along the line x = 4y.
Topic: Utility Correct Responses: 0 Correct Di culty: 0 Discrimination Index: 0
4.33 Phil Rupp's sister Ethel has the utility function Ux; y = minf5x + y; 6yg. Where x is measured on the horizontal axis and y on the vertical axis, her indi erence curves:
a consist of a vertical line segment and a horizontal line segment which meet in a kink along the line y = 5x. b consist of a vertical line segment and a horizontal line segment which meet in a kink along the line x = 5y. c consist of a horizontal line segment and a negatively sloped line segment which meet in a kink along the line x = y. d consist of a positively sloped line segment and a negatively sloped line segment which meet along the line x = y. e consist of a horizontal line segment and a positively sloped line segment which meet in a kink along the line x = 5y.
Essay
Topic: Utility Correct Responses: 0 Di culty: 1 Discrimination Index: 0
Utility
4.1 Jim's utility function is Ux; y = xy. Jerry's utility function is Ux; y = 1000xy + 2000.
Tammy's utility function is Ux; y = xy1 , xy. Oral's utility function is Ux; y = ,1=10 + 2xy. Marjoe's utility function is Ux; y = xy + 1000. Pat's utility function is Ux; y = :5xy , 10000. Billy's utility function is Ux; y = x=y. F Francis's utility function is Ux; y = ,xy. a Who has the same preferences as Jim? b Who had the same indi erence curves as Jim? c Explain why the answers to a and b di er.
Answer: Jerry, Pat and Oral have the same preferences as Jim since their utility functions are monotonic transformations of Jim's. Jerry, Pat, Oral, Tammy, and Francis have the same indifference curves as Jim, but Tammy and Francis have di erent preferences. Francis' utility function is a decreasing transformation of Jim's, so he orders his indi erence curves in the opposite way. Tammy's utility function is a transformation of Jim's but is sometimes increasing sometimes decreasing.
Topic: Utility Correct Responses: 0 Di culty: 3 Discrimination Index: 0
4.2 A consumer has a utility function of the form Ux; y = xa + yb where both a and b are nonnegative. What additional restrictions on the values of the parameters a and b are imposed by each of the following assumptions? i Preferences are quasi-linear, convex, and x is a normal good. ii Preferences are homothetic. iii Preferences are homothetic and convex. iv Goods x and y are perfect substitutes.
Answer: i a = 1 and b is between 0 and 1. ii a = b. iii a = b and a is between 0 and 1.iv a = b = 1.
Topic: Utility Correct Responses: 0 Di culty: 3 Discrimination Index: 0
4.3 Victor Finick likes to have the same amount of x as he has of y. His utility function is
of either good to less?
Ux; y = minf2x , y; 2y , xg. a Draw the indi erence curve for Victor that passes through the bundle 0; 0 and the indi erence curve that passes through 4; 4. Hint: Each indi erence curve is the intersection of two line segments. b If Victor has a bundle that he likes better than 0; 0 and his consumption of both goods is doubled, is Victor better o ? c Does Victor always prefer more
Answer: Victor's indi erence curves are V-shaped. The one through the origin consists of the two rays y = 2x and x = 2y. The one through 2; 2 has two rays going out from 2; 2,, one with slope 1=2; and the other with slope 2. b Yes c No. If x y; then an increase in x by itself makes him worse o and if y x; an increase in y by itself makes him worse o .
CHAPTER 4 Utility
Topic: Utility Correct Responses: 0 Di culty: 1 Discrimination Index: 0
58
4.4 Use separate graphs to sketch two indi erence curves for people with each of the following
utility functions: a Ux; y = x + 2y b Ux; y = Minfx; 2yg c Ux; y = maxfx; 2yg
These are straight lines with slope ,1=2. b These are L-shaped. The corners lie along the locus x = 2y. c A typical indi erence curve consists of a horizontal line from the y axis to the locus x = 2y and then a vertical line to the y axis from the point where the horiontal line met the line x = 2y.
Topic: Utility Correct Responses: 0 Di culty: 2 Discrimination Index: 0
4.5 Use separate graphs to draw indi erence curves for each of the following utility functions: a
Ux; y = minf2x + y; 2y + xg b Ux; y = maxf2x + y; 2y + xg. c Ux; y = x + minfx; yg. In which of these cases are preferences
convex?
Answer: If you take a point on the line x = y and draw two lines through it, one with a slope of ,1=2 and the other with a slope of ,2; the outer envelope of these lines will be an indi erence curve for a and the inner envelope will be an indi erence curve for b. The indi erence curves for c passing through a point on the line x = y consist of a line segment going down and to the right with slope ,1 and a line segment going up and to the left with slope ,2. Cases a and c display convex preferences and case b does not.
Chapter 5
True-False
Topic: Choice Correct Responses: 78 Correct Di culty: 1 Discrimination Index: 21
Choice
5.1 At a boundary optimum, a consumer's indi erence curve must be tangent to her budget line.
Topic: Choice Correct Responses: 56 Correct Di culty: 2 Discrimination Index: 20
5.2 Max Gross has the utility function Ux; y = maxfx; yg. If the price of x is the same as the
price of y; Max will buy equal amounts of x and y.
Topic: Choice Correct Responses: 83 Correct
Di culty: 2 Discrimination Index: 21
5.3 If a consumer does not have convex preferences, then a point of tangency between her indifference curve and her budget line must be an optimal consumption point.
Topic: Choice Correct Responses: 46 Correct Di culty: 2 Discrimination Index: 0
5.4 Sharon spends all of her income on peaches and strawberries. Peaches are a normal good for
her. Her income increased by 20 percent and prices did not change. Her consumption of strawberries could not have increased by more than 20 percent.
Topic: Choice Correct Responses: 32 Correct Di culty: 2 Discrimination Index: 46
5.5 Clara's utility function is Ux; y = x + 2y + 1. If her consumption of both x and y are
doubled, then her marginal rate of substitution between x and y remains constant.
CHAPTER 5 Choice
Topic: Choice Correct Responses: 80 Correct 2
60
Di culty: 1 Discrimination Index: 11
5.6 Charlie's utility function is Ux; y = xy . His marginal rate of substitution between x and y
does not change if you double the amount of both goods.
Topic: Choice Correct Responses: 64 Correct
Di culty: 2 Discrimination Index: 54
1=2
5.7 Ambrose's utility function is Ux; y = x + 4y . The price of x is 1 and the price of y is 2. If
his income rises from 100 to 150, his consumption of y increases by more than 10 but less than 50.
Topic: Choice Correct Responses: 91 Correct
Di culty: 2 Discrimination Index: 10
5.8 Linus has utility function Ux; y = x + 2y. If the price of x is 1 and the price of y is 1=2; then
Linus must consume equal amounts of both goods in order to maximize his utility.
Topic: Choice Correct Responses: 22 Correct
Di culty: 3 Discrimination Index: 3
5.9 Mary Granola's utility function is Ux; y = minfx + 2y; y + 2xg. Mary maximizes her utility
subject to a budget constraint. If she chooses the bundle 5; 6; then it must be that the price of x is exactly twice the price of y.
Topic: Choice Correct Responses: 62 Correct
Di culty: 2 Discrimination Index: 41
5.10 Millie's utility function is Ux; y = minfx; yg. She maximizes her utility subject to a budget
constraint. The price of x is the same as the price of y. If the price of x rises and the price of y and her income remain constant, then her consumption of y will certainly decrease.
TRUE-FALSE
Topic: Choice Correct Responses: 49 Correct Di culty: 2 Discrimination Index: 25
61
5.11 Other things being equal, a lump sum tax is at least as good for a consumer as a sales tax
that collects the same revenue from him.
Topic: Choice Correct Responses: 0 Correct Di culty: 2 Discrimination Index: 0
5.12 If a consumer doesn't consume any snails, but does consume Big Macs, then his marginal
rate of substitution between snails and Big Macs when his snail consumption is zero, must be equal to the ratio of the price of snails to the price of Big Macs.
Multiple Choice
Topic: Choice Correct Responses: 13 Correct Di culty: 1 Discrimination Index: 25
Choice
5.1 Hans has 27 dollars, which he decides to spend on x and y. Commodity x costs $16 per unit
a Hans will choose only x. b Hans will choose only y. c Hans will chose some of each commodity, but more y than x. d Hans will choose some of each commodity, but more x than y. e Hans will choose equal amounts of the two commodities.
Topic: Choice Correct Responses: 13 Correct
and commodity y costs $10 per unit. He has the utility function Ux; y = 5x2 + 2y2 and he can purchase fractional units of x and y.
Di culty: 1 Discrimination Index: 25
5.2 Ollie has 40 dollars, which he decides to spend on x and y. Commodity x costs $13 per unit
a Ollie will choose only x. b Ollie will choose only y. c Ollie will chose some of each commodity, but more y than x. d Ollie will choose some of each commodity, but more x than y. e Ollie will choose equal amounts of the two commodities.
Topic: Choice Correct Responses: 86 Correct
and commodity y costs $11 per unit. He has the utility function Ux; y = 6x2 + 4y2 and he can purchase fractional units of x and y.
Di culty: 2 Discrimination Index: 36
2
5.3 Wanda Littlemore's utility function is Ux; y = x + 63y , 3y . Her income is 184. If the price
of x is 1 and the price of y is 33, how many units of good x will Wanda demand?
a 17 b 22 c 24 d 0 e 19
MULTIPLE CHOICE
Topic: Choice Correct Responses: 86 Correct Di culty: 2 Discrimination Index: 36
2
63
5.4 Wanda Littlemore's utility function is Ux; y = x + 72y , 3y . Her income is 207. If the price
of x is 1 and the price of y is 24, how many units of good x will Wanda demand?
a 13 b 18 c 23 d 0 e 15
Topic: Choice Correct Responses: 0 Correct
Di culty: 3 Discrimination Index: 0
5.5 Henri's utility function is minfx; 5y + 2zg. The price of x is 1, the price of y is 15, and the
price of z is 7. Henri's income is 44. How many units of x does Henri demand?
a 9.78 b 11 c 5 d 3 e None of the above.
Topic: Choice Correct Responses: 0 Correct
Di culty: 3 Discrimination Index: 0
5.6 Matt's utility function is minfx; 4y + 5zg. The price of x is 1, the price of y is 4, and the price
of z is 7. Matt's income is 8. How many units of x does Matt demand?
a 3.33 b 4 c 7 d 5 e None of the above.
CHAPTER 5 Choice
Topic: Choice Correct Responses: 59 Correct Di culty: 2 Discrimination Index: 32
64
5.7 Peter consumes no commodities other than Miller Lite and Bud Light. His annual budget
a He will consume 60 sixpacks of Miller Lite per year. b He will consume 10 cases of Bud Light per year. c He will consume 14 cases of Bud Light per year. d He will consume 12 sixpacks of Miller Lite per year. e He is indi erent between any two bundles that use up his entire income.
Topic: Choice Correct Responses: 59 Correct
for these two commodities is described by the equation 5x + 30y = 300 where x is sixpacks of Miller Lite and y is cases of Bud Light. Peter considers 2 cases of Bud Light to be perfect substitutes for 6 sixpacks of Miller Lite. Which of the following is true?
Di culty: 2 Discrimination Index: 32
5.8 Harold consumes no commodities other than Miller Lite and Bud Light. His annual budget
a He will consume 60 sixpacks of Miller Lite per year. b He will consume 15 cases of Bud Light per year. c He will consume 19 cases of Bud Light per year. d He will consume 12 sixpacks of Miller Lite per year. e He is indi erent between any two bundles that use up his entire income.
Topic: Choice Correct Responses: 0 Correct Di culty: 1 Discrimination Index: 0
for these two commodities is described by the equation 5x + 20y = 300 where x is sixpacks of Miller Lite and y is cases of Bud Light. Harold considers 2 cases of Bud Light to be perfect substitutes for 10 sixpacks of Miller Lite. Which of the following is true?
5.9 Paul's utility function is minfx + 3y; 3x + yg. Simon's utility function is minf3x + 9y; 9x + 3yg.
Paul and Simon have the same income and face the same prices. Which of the following is true?
a Paul and Simon will demand the same amount of good x. b Paul will demand more y than Simon. c Simon will demand more y than Paul. d Each will prefer the other's consumption bundle to his own. e None of the above.
MULTIPLE CHOICE
Topic: Choice Correct Responses: 30 Correct Di culty: 3 Discrimination Index: 31
65
5.10 Mary Granola consumes tomatoes and nectarines. Mary's indi erence curves are kinky.
When she is consuming more tomatoes than nectarines, she is just willing to trade 3 tomatoes for 1 nectarines. When she is consuming more nectarines than tomatoes, she is just willing to trade 4 nectarines for 1 tomatoes. Let P1 be the price of nectarines and P2 the price of tomatoes. Mary maximizes her utility subject to her budget constraint. Which is true? Hint: Sketch one of her indi erence curves.
a When P1 P2; she must consume only tomatoes. b When P1 P2; she must consume 3 times as many tomatoes as nectarines. c When P1 3P2; she must consume only tomatoes. d When 4P1 P2; she must consume only nectarines. e She must consume equal amounts of both.
Topic: Choice Correct Responses: 30 Correct
Di culty: 3 Discrimination Index: 31
5.11 Mary Granola consumes oranges and apples. Mary's indi erence curves are kinky. When
she is consuming more oranges than apples, she is just willing to trade 5 oranges for 1 apples. When she is consuming more apples than oranges, she is just willing to trade 2 apples for 1 oranges. Let P1 be the price of apples and P2 the price of oranges. Mary maximizes her utility subject to her budget constraint. Which is true? Hint: Sketch one of her indi erence curves.
a When P1 P2; she must consume only oranges. b When P1 P2; she must consume 5 times as many oranges as apples. c When P1 5P2; she must consume only oranges. d When 2P1 P2; she must consume only apples. e She must consume equal amounts of both.
CHAPTER 5 Choice
Topic: Choice Correct Responses: 28 Correct Di culty: 3 Discrimination Index: 33
66
5.12 Badger Madison consumes only beer and sausages. His income is $100. Beer costs him $.50
per can and sausages cost $1 each. Where x is the number of cans of beer and y the number of sausages he consumes per week, Badger's utility function is Ux; y = , x , 502+ y , 402 .
a Badger must always be unhappy since whatever he consumes, his utility is negative. b He has monotonic preferences. c If his income increases, he won't change the commodity bundle that he buys. d If the price of beer goes down, he will buy more beer. e More than one of the above statements is true.
Topic: Choice Correct Responses: 70 Correct Di culty: 3 Discrimination Index: 58
5.13 Janet consumes two commodities x and y. Her utility function is minfx + 2y; y + 2xg. She
a Janet's income is 40. b Janet's income is 50. c Janet's income is 30. d Janet's income is 20. e There is not enough information in the problem to determine her income because we are not told the price of y.
Topic: Choice Correct Responses: 0 Correct Di culty: 2 Discrimination Index: 0
chooses to buy 10 units of good x and 20 units of good y. The price of good x is 1. Which of the following is true?
5.14 Martha's utility function is Ux; y = minfx + 2y; 2x + yg. George's utility function is
a George and Martha will both demand the same amount of y. b Martha will always prefer George's consumption bundle to her own. c George will always prefer Martha's consumption bundle to his own. d George will demand more x than Martha demands. e None of the above.
Ux; y = minf2x + 4y; 4x + 2yg. If George and Martha have the same income and face the same prices for the goods x and y :
MULTIPLE CHOICE
Topic: Choice Correct Responses: 69 Correct Di culty: 2 Discrimination Index: 48
67
5.15 Ollie has a utility function Ux; y = x + 2y + 3. The price of x is 1 and the price of y is
a Ollie consumes exactly as much x as y. b Ollie consumes one more unit of x than he consumes of y. c Ollie consumes one more unit of y than he consumes of x. d Ollie consumes two more units of x than he consumes of y. e None of the above.
1. When he maximizes his utility subject to his budget constraint, he consumes positive amounts of both goods.
Topic: Choice Correct Responses: 69 Correct
Di culty: 2 Discrimination Index: 48
5.16 Maurice has a utility function Ux; y = x+3y +2. The price of x is 1 and the price of y is
a Maurice consumes exactly as much x as y. b Maurice consumes one more unit of x than he consumes of y. c Maurice consumes one more unit of y than he consumes of x. d Maurice consumes two more units of x than he consumes of y. e None of the above.
1. When he maximizes his utility subject to his budget constraint, he consumes positive amounts of both goods.
CHAPTER 5 Choice
Topic: Choice Correct Responses: 19 Correct Di culty: 1 Discrimination Index: 27
68
5.17 Danny Featherweight is taking a tough course in law school. His prof agreed to give him
a course grade of maxf2x; 3yg where x and y are the number of answers he gets right on the rst and second midterms, respectively. Danny needs a course grade of 150 to pass. He nds that for the rst midterm, for every A minutes of study, he will get one more answer right. For the second midterm, for every B minutes that he studies, he will get one more answer right. If he doesn't study at all, Danny will get nothing right on either exam. All Danny cares about is passing. He doesn't want to waste any time getting a higher grade than he needs.
a If A=B 2=3; then Danny will not study for the second exam. b The ratio of the time Danny spends on exam 1 to the time he spends on exam 2 will be 2A=3B. c The ratio of the time Danny spends on exam 2 to the time he spends on exam 1 will be 3A=2B. d If A B; then Danny will not study for the rst exam. e Danny will spend 150=2A + 3B minutes studying for each exam.
Topic: Choice Correct Responses: 75 Correct
Di culty: 2 Discrimination Index: 40
5.18 Isobel consumes positive quantities of both jam and and juice. The price of jam is 5 cents
per unit and the price of juice is 10 cents per unit. Her marginal utility of jam is 10 and her marginal utility of juice is 5.
a Without changing her total expenditures, she could increase her utility by consuming more jam and less juice. b Without changing her total expenditures, she could increase her utility by consuming more juice and less jam. c Without changing her total expenditures on jam and juice, she could not increase her utility. d We can't tell whether any of the other statements are true or false without knowing the quantities she consumes. e She should spend more money on both jam and juice.
MULTIPLE CHOICE
Topic: Choice Correct Responses: 77 Correct Di culty: 2 Discrimination Index: 0
69
5.19 Harold's utility function is Ux; y = x + 3y + 2. The price of x is 1. The price of y is 2.
At all incomes for which Harold consumes positive amounts of both goods, he will consume:
a more than twice as much x as y. b more than twice as much y as x. c one more unit of x than of y. d one more unit of y than of x. e 2=3 as much y as x.
Topic: Choice Correct Responses: 31 Correct Di culty: 3 Discrimination Index: 14
5.20 Jane's utility function is Ux; y = x + 2y; where x is her consumption of good X and y is
her consumption of good Y . Her income is 2. The price of Y is 2. The cost per unit of X depends on how many units she buys. The total cost of x units of X is the square root of x.
a The bundle 1=4; 3=4 is Jane's utility maximizing choice, given her budget. b The bundle 1; 1=2 is Jane's utility maximizing choice, given her budget. c Given her budget, Jane would maximize her utility by spending all of her income on good x. d Given her budget, Jane would maximize her utility by spending all of her income on good y. e None of the above statements are true.
Topic: Choice Correct Responses: 62 Correct Di culty: 2 Discrimination Index: 43
5.21 As you may know, Mungoites each have two left feet and one right foot. Their preferences
for left and right shoes display perfect complementarity. Mungoites nd shoes useful only in trios" of two lefts and a right. The price of each type of shoe is $10 a shoe, and Mungoites consume nothing other than shoes. A Mungoite's Engel curve for right shoes has the equation:
a R = m=30 b R = m , 10. c R = 2m. d R = 10m. e R = m=10.
CHAPTER 5 Choice
Topic: Choice Correct Responses: 43 Correct Di culty: 2 Discrimination Index: 39
70
5.22 Howard has the utility function Ux; y = x , 1=y. His income is $30.
a Howard does not like good y. b Howard has a bliss point. c If the price of x is $4 and the price of y is $1, Howard will buy 2 units of y. d Howard will buy good y only if it is cheaper than good x. e None of the above.
Topic: Choice Correct Responses: 37 Correct Di culty: 3 Discrimination Index: 31
5.23 Minnie Applesauce is shopping for a summer lake cottage. Minnie hates mosquito bites,
but the cheapest lake cottages have the most mosquitos. The price of a lake cabin is related to b; the number of mosquito bites you can expect per hour, according to the formula p = $20; 000, 100b. Minnie's utility function is u = x , 5b2 where x is her expenditure on all goods other than her lake cabin. If Minnie makes her best choice of lake cabin, how many mosquito bites per hour will she get?
a 10 b 5 c 20 d 25 e None of the above.
Topic: Choice Correct Responses: 63 Correct Di culty: 2 Discrimination Index: 75
5.24 The prices of goods x and y are each $1. Jane has $20 to spend and is considering choosing
10 units of x and 10 units of y. Jane has nice convex preferences and more of both goods is better for her. Where x is drawn on the horizontal axis and y is drawn on the vertical axis, the slope of her indi erence curve at the bundle 10; 10 is ,2. From these facts we can conclude that:
a The bundle 10; 10 is the best she can a ord. b She would be better o consuming more of good x and less of good y. c She would be better o consuming more of good y and less of good x. d She must dislike one of the goods. e More than one of the above is true.
MULTIPLE CHOICE
Topic: Choice Correct Responses: 56 Correct Di culty: 1 Discrimination Index: 43
71
5.25 Which of the following could possibly change a rational consumer's demand?
a Changing his utility function by cubing it. b Changing his utility function by multiplying it by 3 and subtracting 100 from it. c Increasing all prices and his income by $3. d Multiplying all prices and income by 2.2. e More than one of the above.
Topic: Choice Correct Responses: 68 Correct Di culty: 1 Discrimination Index: 23
5.26 Coke and Pepsi are perfect substitutes for Mr. Drinker and the slope of his indi erence
a Coke is less expensive than Pepsi. b Coke is more expensive than Pepsi. c Coke and Pepsi cost the same. d Mr. Drinker prefers Pepsi to Coke. e None of the above.
Topic: Choice Correct Responses: 68 Correct Di culty: 1 Discrimination Index: 30
curves is minus 1. One day he bought 2 cans of Coke and 20 cans of Pepsi. The cans of both drinks are the same size.
5.27 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. Which of the following statements is true?
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.
CHAPTER 5 Choice
Topic: Choice Correct Responses: 35 Correct Di culty: 2 Discrimination Index: 5
72
5.28 If his wage rate increases, then a utility maximizing consumer will necessarily:
a increase or leave constant his labor supply. b increase or leave constant his labor supply if leisure is a normal good, but otherwise might reduce his labor supply. c increase or leave constant his labor supply if leisure is an inferior good, but otherwise might reduce his labor supply. d decrease or leave constant his labor supply. e none of the above.
Topic: Choice Correct Responses: 22 Correct Di culty: 2 Discrimination Index: 29
5.29 Angela consumes only two goods, x and y. Her income doubles and the prices of the two
goods remain unchanged. Assuming that she is a utility maximizer and likes both goods, which of the following statements is necessarily true?
a She will consume more of both goods. b The ratio of her consumption of x to y remains constant. c Her utility doubles. d If her preferences are convex, she must consume more x. e None of the above.
Topic: Choice Correct Responses: 74 Correct Di culty: 2 Discrimination Index: 22
1 2
5.30 Arthur's preferences are de ned over two basic food groups, beer, x ; and ice cream, x . His
utility function is ux1; x2 = x2 + x2 . He has $100 to spend, and each of these goods costs $10 per 1 quart. Which of the following statements is true?
a Arthur will consume 5 quarts of ice cream and 5 quarts of beer. b Arthur will nd that 10 quarts of beer and no ice cream is the best bundle. c Arthur will nd that 10 quarts of ice cream and no beer is the best bundle. d Arthur is indi erent between any two points on the line that connects 5; 5 and 10; 10. e Arthur will spend 2=3 of his income on beer and 1=3 of his income on ice cream.
MULTIPLE CHOICE
Topic: Choice Correct Responses: 19 Correct 1 2
73
Di culty: 3 Discrimination Index: 20
2 1 2
5.31 Andrew's utility function is Ux ; x = 4x +x . Andrew's income is $32, the price of good 1
is $16 per unit, and the price of good 2 is $1 per unit. What happens if Andrew's income increases to $80 and prices do not change? Hint: Does he have convex preferences?
a He will consume 48 more units of good 2 and the same amount of good 1 as before. b He will increase his consumption of both goods. c He will reduce his consumption of good 2. d He will consume the same amount of good 2 as before and 3 more units of good 1 than he consumed before. e None of the above.
Topic: Choice Correct Responses: 0 Correct Di culty: 2 Discrimination Index: 0
5.32 Lorenzo lives on x and y alone. His utility function is Ux; y = minf3x + 4y; 7yg. The prices
of both goods are positive. Which of the following statements is necessarily true?
a He will never buy more x than y. b He will buy equal amounts of the two goods. c He will always buy more y than x. d He will always buy more x than y. e More than one of the above.
Topic: Choice Correct Responses: 63 Correct 1 2 12
Di culty: 2 Discrimination Index: 65
5.33 Mort's utility function is Ux ; x = x x . His income is $100; the price of good 2 is $10.
Good 1 is priced as follows. The rst 6 units cost $10 per unit and any additional units cost $5 per unit. What consumption bundle does Mort choose?
a 5; 5 b 7; 3:5 c 9; 3 d 6; 4 e None of the above.
CHAPTER 5 Choice
Topic: Choice Correct Responses: 88 Correct Di culty: 1 Discrimination Index: 11
74
5.34 Clara's utility function is UX; Y = X + 2Y + 1. If her marginal rate of substitution is
,4 and she is consuming 14 units of Good X; how many units of Good Y must she be consuming?
a 30 b 68 c 18 d 63 e 9
Topic: Choice Correct Responses: 88 Correct
Di culty: 1 Discrimination Index: 11
5.35 Clara's utility function is UX; Y = X + 2Y + 1. If her marginal rate of substitution is
,2 and she is consuming 9 units of Good X; how many units of Good Y must she be consuming?
a 18 b 26 c 11 d 21 e 5
MULTIPLE CHOICE
Topic: Choice Correct Responses: 75 Correct Di culty: 2 Discrimination Index: 26
75
5.36
Elmer's utility function is Ux; y = minfx; y2 g. If the price of x is 25 and the price of y is 15, and if Elmer chooses to consume 7 units of Y; what must his income be?
a 2,660 b 280 c 1,430 d 1,330 e There is not enough information to determine his income.
Topic: Choice Correct Responses: 75 Correct
Di culty: 2 Discrimination Index: 26
5.37
Elmer's utility function is Ux; y = minfx; y2 g. If the price of x is 20 and the price of y is 20, and if Elmer chooses to consume 2 units of Y; what must his income be?
a 240 b 80 c 220 d 120 e There is not enough information to determine his income.
CHAPTER 5 Choice
Topic: Choice Correct Responses: 9 Correct Di culty: 3 Discrimination Index: 21
2
76
5.38 Justin consumes goods X and Y and has a utility function Ux; y = x + y. The price per
a his budget line is tangent to the indi erence curve passing through this bundle. b he consumes only x. c he consumes only y if p2 =py exceeds his income. x d he consumes some of each good if px = py . e he consumes some of each good if py = px =2.
Topic: Choice Correct Responses: 0 Correct Di culty: 0 Discrimination Index: 0
unit of X is px and the price per unit of Y is py . He has enough money so that he can a ord at least 1 unit of either good. When he chooses his best a ordable bundle, it must necessarily be that:
5.39 Charlie has a utility function UxA; xB = xAxB ; the price of apples is 1 and the price of
a 30 b 15 c 60 d 6 e 90
Topic: Choice Correct Responses: 0 Correct Di culty: 0 Discrimination Index: 0
bananas is 2. If Charlie's income were 120, how many units of bananas would he consume if he chose the bundle that maximized his utility subject to his budget constraint?
5.40 Charlie has a utility function UxA; xB = xAxB ; the price of apples is 1 and the price of
a 50 b 25 c 100 d 10 e 150
bananas is 2. If Charlie's income were 200, how many units of bananas would he consume if he chose the bundle that maximized his utility subject to his budget constraint?
MULTIPLE CHOICE
Topic: Choice Correct Responses: 68 Correct Di culty: 0 Discrimination Index: 30
77
5.41 Charlie's utility function is UXA ; XB = XAXB . If Charlie's income is 40, the price of apples
a 10 b 12 c 8 d 9 e 5
Topic: Choice Correct Responses: 68 Correct Di culty: 0 Discrimination Index: 30
is 4 and the price of bananas is 2, how many apples are there in the best bundle that Charlie can a ord?
5.42 Charlie's utility function is UXA ; XB = XAXB . If Charlie's income is 40, the price of apples
a 10 b 12 c 8 d 9 e 5
Topic: Choice Correct Responses: 0 Correct 1 2
is 4 and the price of bananas is 3, how many apples are there in the best bundle that Charlie can a ord?
Di culty: 0 Discrimination Index: 0
1=2 1 2
5.43 Ambrose's utility function is Ux ; x = 4x + x . If the price of nuts good 1 is 1, the
price of berries good 2 is 6, and his income is 264, how many units of NUTS will Ambrose choose.
a 20 b 144 c 288 d 147 e 72
CHAPTER 5 Choice
Topic: Choice Correct Responses: 0 Correct 1 2
78
Di culty: 0 Discrimination Index: 0
1=2 1 2
5.44 Ambrose's utility function is Ux ; x = 4x + x . If the price of nuts good 1 is 1, the
price of berries good 2 is 6, and his income is 252, how many units of NUTS will Ambrose choose.
a 18 b 144 c 288 d 147 e 72
Topic: Choice Correct Responses: 97 Correct
Di culty: 2 Discrimination Index: 4
5.45 Our old friend, Edmund Stench, of Chapter 2 loves punk rock video tapes. He has no
income and therefore has to accept garbage in his backyard in return for money. Each video tape cost $2 and each sack of garbage that he accepts brings him $1. His utility function is given by Uc; g = minf2c; 20,gg where c is the number of video tapes and g is the number of sacks of garbage that he gets per month. Each month he will choose to accept:
a 20 sacks of garbage. b no garbage. c 5 sacks of garbage. d 10 sacks of garbage. e 15 sacks of garbage.
MULTIPLE CHOICE
Topic: Choice Correct Responses: 0 Correct Di culty: 3 Discrimination Index: 0
79
5.46 Joseph's utility function is given by UJ = xA + 2xB ; where xA denotes his consumption of
apples and xB his consumption of bananas. Clara's utility function is given by UC = 3xA + 2xB . Joseph and Clara shop at the same grocery store.
a When we observe that Joseph leaves the store with some bananas, then we can deduce that Clara also buys some bananas. b There exist prices of apples and bananas such that both consumers buy strictly positive amounts of both goods. c When we observe that Joseph leaves the store with some apples and some bananas, then we can deduce that Clara also buys some apples and some bananas. d When we observe that Joseph leaves the store with some apples, then we can deduce that Clara also buys some apples. e Apples and bananas are perfect complements for Joseph.
Topic: Choice Correct Responses: 0 Correct Di culty: 0 Discrimination Index: 0
5.47 If a consumer maximizes her preferences subject to her budget by choosing a consumption
a must be consuming food but no shelter. b must be consuming shelter but no food. c must be consuming both food and shelter. d must not be spending all of her income. e must believe that shelter is a "bad".
bundle where the ratio of her marginal utilities of shelter and food, MUS MUF, is greater than the ratio of the prices of shelter and food, pS =pF ; then she
Essay
Choice
Di culty: 2 Discrimination Index: 0
Topic: Choice Correct Responses: 0
5.1 Max has the utility function Ux; y = xy + 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?
Answer: To set his MRS equal to the price ratio, Max sets y + 1=x = 2. His budget constraint is 2x + y = 10. Solve these two equations to nd that x = 11=4 and y = 9=2. If his income doubles and prices stay unchanged, his demand for both goods does not double. A quick way to see this is to note that if quantities of both goods doubled, the MRS would not stay the same and hence would not equal the price ratio, which has stayed constant.
Topic: Choice Correct Responses: 0
Di culty: 3 Discrimination Index: 0
5.2 Casper consumes cocoa and cheese. Cocoa is sold in an unusual way. There is only one
supplier, and the more cocoa you buy from him, the higher the price you have to pay per unit. In fact y units of cocoa will cost Casper y2 dollars. Cheese is sold in the usual way at a price of 2 dollars per unit. Casper's income is 20 dollars and his utility function is Ux; y = x + 2y where x is his consumption of cheese and y is his consumption of cocoa. a Sketch Casper's budget set and shade it in. b Sketch some of his indi erence curves and label the point that he chooses. c Calculate the amount of cheese and the amount of cocoa that Casper demands at these prices and this income.
Answer: This problem is di erent from those in the text and is designed to see whether the student can use the tools presented there in a creative way. The budget set is a convex set and the solution is a point of tangency. Casper demands 2 units of cocoa and 16 units of cheese.
Topic: Choice Correct Responses: 0
Di culty: 1 Discrimination Index: 0
5.3 Is the following statement true or false? Brie y explain your answer. "A utility maximizer
will always choose a bundle at which his indi erence curve is tangent to his budget line."
At a corner solution the indi erence curve need not be tangent to the budget line.
ESSAY
Topic: Choice Correct Responses: 0 Di culty: 2 Discrimination Index: 0
81
5.4 Max has a utility function Ux; y = 2xy + 1. The prices of x and y are both $1 and Max has
an income of $20. a How much of each good will he demand? b A tax is placed on x so that x now costs Max $2 while his income and the price of y stay the same. How much good x does he now demand? c Would Max be as well o as he was before the tax if when the tax was imposed, his income rose by an amount equal to $1 times the answer to part b?
10 x and 10 y. b5x c No.
Topic: Choice Correct Responses: 0 Di culty: 2 Discrimination Index: 0
2
5.5 Harold consumes chardonnay and quiche. His utility function is Uc; q = minfc; q g. Draw a
diagram showing three or four of Harold's indi erence curves. If the price of chardonnay is 10 and the price of quiche is 3 and if Harold is consuming 4 units of quiche, how many units of chardonnay is he consuming?
Answer: The diagram has xed-coe cients indi erence curves, but their corners line up along the locus c = q2 rather than along a straight line. 16 units of chardonnay.
Topic: Choice Correct Responses: 0 Di culty: 2 Discrimination Index: 0
5.6 Les has the utility function Ux; y = x + 1y + 4. The price of y is 1. Les spends all of his
income to buy 6 units of y and no x. From these facts we can tell that the price of x must be at least how much? Explain your answer and draw a diagram to illustrate it.
Answer: Price of x must be at least 10. His marginal rate of substitution at the bundle 6; 0 is 10. If the price of x is 10 or greater, he will choose that corner.
Chapter 6
True-False
Topic: Demand Correct Responses: 81 Correct Di culty: 1 Discrimination Index: 15
Demand
6.1 If preferences are quasilinear, then for very high incomes the income o er curve is a straight
line parallel to one of the axes.
Topic: Demand Correct Responses: 85 Correct Di culty: 1 Discrimination Index: 40
6.2 In economic theory, the demand for a good must depend only on income and its own price
and not on the prices of other goods.
Topic: Demand Correct Responses: 95 Correct Di culty: 1 Discrimination Index: 11
6.3 If two goods are substitutes, then an increase in the price of one of them will increase the
demand for the other.
Topic: Demand Correct Responses: 48 Correct Di culty: 2 Discrimination Index: 8
6.4 If consumers spend all of their income, it is impossible for all goods to be inferior goods.
Topic: Demand Correct Responses: 93 Correct Di culty: 1 Discrimination Index: 8
6.5 An Engel curve is a demand curve with the vertical and horizontal axes reversed.
Topic: Demand Correct Responses: 92 Correct Di culty: 2 Discrimination Index: 14
6.6 If the demand curve is a downward-sloping straight line, then the price elasticity of demand
is constant all along the demand curve.
TRUE-FALSE
Topic: Elasticity Correct Responses: 0 Correct Di culty: 2 Discrimination Index: 0
83
6.7 If the price elasticity of demand for a good is ,1; then doubling the price of that good will
leave total expenditures on that good unchanged.
Topic: Demand Correct Responses: 82 Correct
Di culty: 2 Discrimination Index: 33
6.8 If preferences are homothetic, then the slope of the Engel curve for any good will decrease
as income increases.
Topic: Elasticity Correct Responses: 0 Correct Di culty: 1 Discrimination Index: 0
6.9 A good is a luxury good if the income elasticity of demand for it is greater than 1.
Topic: Demand Correct Responses: 68 Correct Di culty: 2 Discrimination Index: 31
6.10 Prudence was maximizing her utility subject to her budget constraint. Then prices changed.
After the price change she is better o . Therefore the new bundle costs more at the old prices than the old bundle did.
Topic: Demand Correct Responses: 67 Correct Di culty: 1 Discrimination Index: 2
6.11 If income is doubled and all prices are doubled, then the demand for luxury goods will more
than double.
Topic: Demand Correct Responses: 86 Correct Di culty: 1 Discrimination Index: 21
6.12 If preferences are homothetic and all prices double while income remains constant, then
demand for all goods is halved.
CHAPTER 6 Demand
Topic: Demand Correct Responses: 0 Correct Di culty: 1 Discrimination Index: 0
84
6.13 An inferior good is less durable than a normal good.
Topic: Demand Correct Responses: 1 Correct Di culty: 2 Discrimination Index: 1
6.14 It is impossible for a person to have a demand curve that slopes upward at all prices.
Topic: Demand Correct Responses: 52 Correct Di culty: 2 Discrimination Index: 34
1=2
6.15 Donald's utility function is Ux; y = x + y . Currently he is buying some of both goods.
If his income rises and prices don't change, he will buy more of both goods.
Topic: Demand Correct Responses: 0 Correct
Di culty: 2 Discrimination Index: 0
1=2
6.16 Angela's utility function is x +y . It is possible that if her income is very high, an increase
in income will not make her spend more on y.
Topic: Demand Correct Responses: 58 Correct
Di culty: 2 Discrimination Index: 0
6.17 When other variables are held xed, the demand for a Gi en good rises when income is
increased.
Topic: Demand Correct Responses: 90 Correct Di culty: 1 Discrimination Index: 5
6.18 A rational consumer spends her entire income. If her income doubles and prices do not
change, then she will necessarily choose to consume twice as much of every good as she did before.
TRUE-FALSE
Topic: Demand Correct Responses: 84 Correct Di culty: 2 Discrimination Index: 21
1 2
85
6.19 A consumer has a utility function given by U = minfx ; 2x g. If Good 2 has a price of zero,
the consumer will always prefer more of Good 2 to less.
Topic: Demand Correct Responses: 61 Correct Di culty: 2 Discrimination Index: 42
6.20 A consumer has the utility function Ux; y = minfx; 2yg. If the price of good x is zero and
the price of good y is p; then the consumer's demand function for good y is m=2p.
Topic: Demand Correct Responses: 0 Correct Di culty: 0 Discrimination Index: 0
6.21 Fred has a Cobb-Douglas utility function with exponents that sum to 1. Sally consumes the
same two goods, but the two goods are perfect substitutes for her. Despite these di erences, Fred and Sally have the same price o er curves.
Topic: Demand Correct Responses: 53 Correct Di culty: 0 Discrimination Index: 16
33
6.22 Darlene's utility function is Ux; y; z = x y z. If her income doubles and prices remain
unchanged, her demand for good Y will more than double.
Topic: Demand Correct Responses: 53 Correct Di culty: 0 Discrimination Index: 16
47
6.23 Darlene's utility function is Ux; y; z = x y z. If her income doubles and prices remain
unchanged, her demand for good Y will more than double.
Topic: Demand Correct Responses: 0 Correct Di culty: 0 Discrimination Index: 0
6.24 Quasilinear preferences are homothetic when the optimal amount of one of the goods is not
a ordable.
Multiple Choice
Demand
Topic: Demand Correct Responses: 33 Correct
Di culty: 3 Discrimination Index: 42
6.1 Daisy received a tape recorder as a birthday gift and is not able to return it. Her utility
function is Ux; y; z = x+z 1=2fy where z is the number of tapes she buys, y is the number of tape recorders she has and x is the amount of money she has left to spend. fy = 0 if y 1 and fy = 8 if y is 1 or greater. The price of tapes is 2 and she can easily a ord to buy dozens of tapes. How many tapes will she buy?
a 4 b 6 c 2 d 8 e We need to know the price of tape recorders to solve this problem.
Topic: Demand Correct Responses: 33 Correct
Di culty: 3 Discrimination Index: 42
6.2 Daisy received a tape recorder as a birthday gift and is not able to return it. Her utility
function is Ux; y; z = x + z 1=2 fy where z is the number of tapes she buys, y is the number of tape recorders she has and x is the amount of money she has left to spend. fy = 0 if y 1 and fy = 32 if y is 1 or greater. The price of tapes is 4 and she can easily a ord to buy dozens of tapes. How many tapes will she buy?
a 16 b 18 c 14 d 20 e We need to know the price of tape recorders to solve this problem.
MULTIPLE CHOICE
Topic: Demand Correct Responses: 0 Correct Di culty: 2 Discrimination Index: 0
87
6.3 Mickey is considering buying a tape recorder. His utility function is Ux; y; z = x + fyz:5
where x is the amount of money he spends on other goods, y is the number of tape recorders he buys, and z is the number of tapes he buys. Let fy = 0 if y 1 and fy = 8 if y is greater than or equal to 1. The price of tape recorders is 20, the price of tapes is 1, and he can easily a ord to buy a tape recorder and and several tapes. Will he buy a tape recorder?
a He should buy a tape recorder at these prices, but if tapes were any more expensive, it would not pay to buy one. b He should not buy a tape recorder. c He is indi erent to buying a tape recorder or not. d There is not enough information here for us to be able to tell. e Even if the price of tapes doubled, he should still buy a tape recorder.
Topic: Demand Correct Responses: 86 Correct
Di culty: 1 Discrimination Index: 20
6.4 Walt consumes strawberries and cream but only in the xed ratio of three boxes of strawberries to two cartons of cream. At any other ratio, the excess goods are totally useless to him. The cost of a box of strawberries is 10 and the cost of a carton of cream is 10. Walt's income is 200. Which of the following is true?
a Walt demands 10 cartons of cream. b Walt demands 10 boxes of strawberries. c Walt considers strawberries and cartons of cream to be perfect substitutes. d Walt demands 12 boxes of strawberries. e None of the above.
CHAPTER 6 Demand
Topic: Demand Correct Responses: 0 Correct Di culty: 3 Discrimination Index: 0
88
6.5 Mike consumes two commodities, x and y; and his utility function is minfx + 2y; y + 2xg. He
chooses to buy 8 units of good x and 16 units of good y. The price of good y is 0.50. What is his income?
a 32 b 40 c 24 d 16 e Mike's income cannot be found unless the price of x is given too.
Topic: Demand Correct Responses: 68 Correct
Di culty: 2 Discrimination Index: 31
6.6
Georgina consumes only grapefruits and pineapples. Her utility function is Ux; y = x2y8 ; where x is the number of grapefruits consumed and y is the number of pineapples consumed. Georgina's income is 105, and the prices of grapefruits and pineapples are 1 and 3, respectively. How many grapefruits will she consume?
a 10.50 b 7 c 63 d 21 e None of the above.
MULTIPLE CHOICE
Topic: Demand Correct Responses: 68 Correct Di culty: 2 Discrimination Index: 31
89
6.7
Fanny consumes only grapefruits and grapes. Her utility function is Ux; y = x3y6 ; where x is the number of grapefruits consumed and y is the number of grapes consumed. Fanny's income is 48, and the prices of grapefruits and grapes are 1 and 3, respectively. How many grapefruits will she consume?
a 8 b 5.33 c 48 d 16 e None of the above.
Topic: Demand Correct Responses: 55 Correct 2
Di culty: 2 Discrimination Index: 45
1 2
6.8 For m p ; the demand functions for goods 1 and 2 are given by the equations, x = m=p ,1
and x2 = p1=p2 ; where m is income and p1 and p2 are prices. Let the horizontal axis represent the quantity of good 1. Let p1 = 1 and p2 = 2. Then for m 2; the income o er curve is:
a a vertical line. b a horizontal line. c a straight line with slope 2. d a straight line with a slope of 1=2. e none of the above.
CHAPTER 6 Demand
Topic: Demand Correct Responses: 85 Correct Di culty: 1 Discrimination Index: 38
90
6.9 Harry has ten dollars to spend on cans of Coke and Pepsi, which he regards as perfect substi-
tutes, one-for-one. Pepsi costs $.50 a can and Coke costs $.60 a can. Harry has 20 coupons, each of which can be used to buy one can of Coke for 40 cents. Which of the following bundles will Harry buy?
a 20 cans of Pepsi and no Coke. b 16 and two thirds cans of Coke and no Pepsi. c 10 cans of Coke and 8 cans of Pepsi. d 10 cans of Coke and 12 cans of Pepsi. e None of the above.
Topic: Demand Correct Responses: 67 Correct
Di culty: 2 Discrimination Index: 18
6.10 Madonna buys only two goods. Her utility function is Cobb-Douglas. Her demand functions
have which of the following properties?
a Her demand for one of the two goods does not depend on income. b Her demand for neither good depends on income. c Her demand for each of the goods depends on income and on the prices of both goods. d Her demand for each of the two goods depends only on her income and on the price of that good itself. e One of the goods is an inferior good and the other is a normal good.
MULTIPLE CHOICE
Topic: Demand Correct Responses: 33 Correct Di culty: 1 Discrimination Index: 20
91
6.11 Seppo consumes brandy and saunas. Neither is an inferior good. Seppo has a total of $30 a
day and 6 hours a day to spend on brandy and saunas. Each brandy costs $2 and takes half an hour to consume. Each sauna costs $1 and takes 1 hour to consume. It is; unfortunately, impossible to consume a brandy in the sauna. Seppo suddenly inherits a lot of money and now has $50 a day to spend on brandy and saunas. Since Seppo is a rational consumer, he must have:
a increased brandy consumption only. b increased sauna consumption only. c increased consumption of both. d consumed the same amounts of both goods as before. e we can't tell since we are told nothing about his indi erence curves.
Topic: Demand Correct Responses: 49 Correct
Di culty: 1 Discrimination Index: 41
6.12 Where x is the quantity of good X demanded, the inverse demand function for X :
a expresses 1=x as a function of prices and income. b expresses demand for x as a function of 1=px and income where px is the price of x. c expresses demand for x as a function of 1=px and 1=m; where m is income. d speci es 1=x as a function of 1=px and 1=m; where m is income. e None of the above.
Topic: Demand Correct Responses: 75 Correct
Di culty: 2 Discrimination Index: 7
6.13 If there are two goods and if income doubles and the price of good 1 doubles, while the price
of good 2 stays constant:
a a consumer's demand for good 1 will increase only if it is a Gi en good for her. b a consumer's demand for good 2 will decrease only if it is a Gi en good for her. c a consumer's demand for good 2 will increase only if it is an inferior good for her. d a consumer's demand for good 2 will decrease only if it is an inferior good for her. e None of the above.
CHAPTER 6 Demand
Topic: Demand Correct Responses: 71 Correct Di culty: 2 Discrimination Index: 63
2
92
6.14 Clarissa's utility function is Ur; z = z + 160r , r where r is the number of rose plants she
has in her garden and z is the number of zinnias. She has 250 square feet to allocate to roses and zinnias. Roses each take up 4 square feet and zinnias each take up 1 square foot. She gets the plants for free from a generous friend. If she acquires another 100 square feet of land for her garden and her utility function remains unchanged she will:
a plant 100 more zinnias and no more roses. b plant 25 more roses and no more zinnias. c plant 38 more zinnias and some more roses. d plant 20 more roses and 20 more zinnias. e do none of the above.
Topic: Demand Correct Responses: 71 Correct
Di culty: 2 Discrimination Index: 63
2
6.15 Clarissa's utility function is Ur; z = z + 80r , r where r is the number of rose plants she
has in her garden and z is the number of zinnias. She has 250 square feet to allocate to roses and zinnias. Roses each take up 4 square feet and zinnias each take up 1 square foot. She gets the plants for free from a generous friend. If she acquires another 100 square feet of land for her garden and her utility function remains unchanged she will:
a plant 100 more zinnias and no more roses. b plant 25 more roses and no more zinnias. c plant 99 more zinnias and some more roses. d plant 20 more roses and 20 more zinnias. e do none of the above.
Topic: Demand Correct Responses: 14 Correct
Di culty: 2 Discrimination Index: 25
6.16 Regardless of his income and regardless of prices, Smedley always spends 25 of his income
on housing, 10 on clothing, 30 on food, 15 on transportation, and 20 on recreation. This behavior is consistent with the following:
a All goods are perfect substitutes. b Smedley's demands for commodities do not change when their prices change. c Smedley consumes all goods in xed proportions. d Smedley has a Cobb-Douglas utility function. e More than one of the above.
MULTIPLE CHOICE
Topic: Demand Correct Responses: 73 Correct Di culty: 2 Discrimination Index: 44
93
6.17 Ms. Laura Mussel's preferences between golf and tennis are represented by Ug; t = gt
where g is the number of rounds of golf and t is the number of tennis matches she plays per week. She has $24 per week to spend on these sports. A round of golf and a tennis match each cost $4. She used to maximize her utility subject to this budget. She decided to limit the time she spends on these sports to 16 hours a week. A round of golf takes 4 hours. A tennis match takes 2 hours. As a result of this additional constraint on her choice, you conclude that:
a she plays one less round of golf and one more tennis match each week. b she plays more golf and less tennis, but can't say how much. c her choices and her utility are unchanged. d there is too little information to tell about her choices. e she plays 2 less rounds of golf and 3 more rounds of tennis per week.
Topic: Demand Correct Responses: 85 Correct
Di culty: 1 Discrimination Index: 18
6.18 Mary has homothetic preferences. When her income was $1,000, she bought 40 books and
60 newspapers. When her income increased to $1,500 and prices did not change, she bought:
a 60 books and 90 newspapers. b 80 books and 120 newspapers. c 60 books and 60 newspapers. d 40 books and 120 newspapers. e There is not enough information for us to determine what she would buy.
CHAPTER 6 Demand
Topic: Demand Correct Responses: 46 Correct 1 2
94
Di culty: 2 Discrimination Index: 54
1 2
6.19 Katie Kwasi's utility function is Ux ; x = 2ln x + x . Given her current income and the
current relative prices, she consumes 10 units of x1 and 15 units of x2 . If her income doubles, while prices stay constant, how many units of x1 will she consume after the change in income?
a 20 b 18 c 10 d 5 e There is not enough information to determine how much.
Topic: Demand Correct Responses: 46 Correct 1 2
Di culty: 2 Discrimination Index: 54
1 2
6.20 Katie Kwasi's utility function is Ux ; x = 2ln x + x . Given her current income and the
current relative prices, she consumes 5 units of x1 and 20 units of x2. If her income doubles, while prices stay constant, how many units of x1 will she consume after the change in income?
a 10 b 8 c 5 d 2.50 e There is not enough information to determine how much.
Topic: Demand Correct Responses: 43 Correct Di culty: 2 Discrimination Index: 23
6.21 Will Feckless unexpectedly inherits $10,000 from a rich uncle. He is observed to consume
fewer hamburgers than he used to. We conclude that:
a hamburgers are a Gi en good for Will. b hamburgers are a normal good for Will. c Will's Engel curve for hamburgers is vertical. d Will's Engel curve for hamburgers is horizontal. e Will's preferences are not homothetic.
MULTIPLE CHOICE
Topic: Demand Correct Responses: 11 Correct Di culty: 3 Discrimination Index: 24
95
6.22 Fred consumes pork chops and lamb chops and nothing else. When the price of pork chops
rises with no change in his income or in the price of lamb chops, Fred buys fewer lamb chops and fewer pork chops. From this information we can de nitely conclude that:
a pork chops are a normal good for Fred. b lamb chops are a normal good for Fred. c pork chops are an inferior good for Fred. d lamb chops are an inferior good for Fred. e Fred prefers pork chops to lamb chops.
Topic: Demand Correct Responses: 0 Correct 1 2
Di culty: 0 Discrimination Index: 0
6.23 Cecil consumes x and x in xed proportions. He consumes A units of good 1 with B units
of good 2. To solve for his demand functionsfor goods 1 and 2:
a set MU1=MU2 = p1 =p2 and solve for x1. b solve the following two equations in two unknowns: Ax1 = Bx2 and p1 x1 + p2x2 = m. c solve the following two equations in two unknowns: Bx1 = Ax2 and p1x1 + p2 x2 = m. d you only need to use the equation given by his budget line. e use the fact that he spends all of his income on good 1 so long as it is the cheaper good.
Topic: Demand Correct Responses: 0 Correct 1 2
Di culty: 0 Discrimination Index: 0
2 1 12 2 1
6.24 Wilma Q. has a utility function, Ux ; x = x + 1:5x x + 30x . The prices are p = 1 and
p2 = 1. For incomes between 20 and 60, the Engel curve for good 2 is: a upward-sloping. b downward-sloping. c vertical. d upward-sloping for incomes between 20 and 40 and downward-sloping between 40 and 60. e downward sloping for incomes between 20 and 40 and upward-sloping between 40 and 60.
CHAPTER 6 Demand
Topic: Demand Correct Responses: 48 Correct Di culty: 2 Discrimination Index: 16
96
6.25 Which of the following utility functions represent preferences of a consumer who does NOT
have homothetic preferences?
a Ux; y = xy. b Ux; y = x + 2y. c Ux; y = x + y:5 . d Ux; y = minfx; yg. e More than one of the above.
Topic: Demand Correct Responses: 78 Correct
Di culty: 2 Discrimination Index: 19
6.26 Robert's utility function is Ux; y = minf4x; 2x + yg. The price of x is $3 and the price of y
is $1. Robert's income o er curve is:
a a ray from the origin with a slope of 2. b a line parallel to the x axis. c a line parallel to the y axis. d the same as his Engel curve for x. e none of the above.
Topic: Demand Correct Responses: 8 Correct
Di culty: 2 Discrimination Index: 35
6.27 Alfredo lives on apples and bananas only. His utility function is Ua; b = minfa + b; 2bg.
He maximizes his utility subject to his budget constraint and consumes the bundle a; b = 4; 4. Which of the following statements must be true?
a pa pb. b pa is less than or equal to pb . c pa = pb. d pa = 2pb . e None of the above.
MULTIPLE CHOICE
Topic: Demand Correct Responses: 80 Correct Di culty: 2 Discrimination Index: 42
97
6.28 Miss Mu et insists upon consuming 2 units of whey per unit of curds. If the price of curds
is 5 and the price of whey is 3, then if Miss Mu et's income is M; her demand for curds will be:
a M=5. b 3M=5. c 5c + 3w = M. d 5M. e M=11.
Topic: Demand Correct Responses: 80 Correct
Di culty: 2 Discrimination Index: 42
6.29 Miss Mu et insists upon consuming 2 units of whey per unit of curds. If the price of curds
is 4 and the price of whey is 2, then if Miss Mu et's income is M; her demand for curds will be:
a M=4. b 2M=4. c 4c + 2w = M. d 4M. e M=8.
Topic: Demand Correct Responses: 88 Correct 3
Di culty: 0 Discrimination Index: 20
6.30 If Charlie's utility function were XAXB ; if apples cost 90 cents each and bananas cost 10
cents each, Charlie's budget line would be tangent to one of his indi erence curves whenever the following equation is satis ed:
a 3XB = 9XA b XB = XA c XA = 3XB d XB = 3XA e 90XA + 10XB = M
CHAPTER 6 Demand
Topic: Demand Correct Responses: 88 Correct 5
98
Di culty: 0 Discrimination Index: 20
6.31 If Charlie's utility function were XAXB ; if apples cost 40 cents each and bananas cost 10
cents each, Charlie's budget line would be tangent to one of his indi erence curves whenever the following equation is satis ed:
a 5XB = 4XA b XB = XA c XA = 5XB d XB = 5XA e 40XA + 10XB = M
Topic: Demand Correct Responses: 0 Correct 4
Di culty: 0 Discrimination Index: 0
6.32 If Charlie's utility function is XAXB ; if the price of apples is pA; the price of bananas is pB ;
and his income is m; then Charlie's demand for apples will be:
a m=2pA b 0:25pAm c m=pA + pB d 0:80m=pA e 1:25pB m=pA
Topic: Demand Correct Responses: 0 Correct 4
Di culty: 0 Discrimination Index: 0
6.33 If Charlie's utility function is XAXB ; if the price of apples is pA; the price of bananas is pB ;
and his income is m; then Charlie's demand for apples will be:
a m=2pA b 0:25pAm c m=pA + pB d 0:80m=pA e 1:25pB m=pA
MULTIPLE CHOICE
Topic: Demand Correct Responses: 0 Correct Di culty: 0 Discrimination Index: 0
1 2 1=2 1 2
99
6.34 Ambrose's brother Patrick has a utility function Ux ; x = 16x + x . His income is 82,
the price of good 1 nuts is 2 and the price of good 2 berries is 1. How many units of nuts will Patrick demand?
a 26 b 12 c 14 d 16 e 30
Topic: Demand Correct Responses: 0 Correct Di culty: 0 Discrimination Index: 0
1 2 1=2 1 2
6.35 Ambrose's brother Sebastian has a utility function Ux ; x = 40x + x . His income is
a 35 b 21 c 23 d 25 e 48
Topic: Demand Correct Responses: 0 Correct Di culty: 0 Discrimination Index: 0
1 2 1=2 1 2 1
110, the price of good 1 nuts is 4 and the price of good 2 berries is 1. How many units of nuts will Sebastian demand?
6.36 Ambrose's brother Bartholomew has a utility function Ux ; x = 40x + x ; where x is
a 35 b 16 c 70 d 22 e There is not enough information to determine the answer.
his consumption of nuts and x2 is his consumption of berries. His income is 115, the price of nuts is 5 and the price of berries is 1. How many units of berries will Bartholomew demand?
CHAPTER 6 Demand
Topic: Demand Correct Responses: 0 Correct Di culty: 0 Discrimination Index: 0
1 2 1=2 1 2 1
100
6.37 Ambrose's brother Patrick has a utility function Ux ; x = 48x + x ; where x is his
a 25 b 64 c 50 d 70 e There is not enough information to determine the answer.
consumption of nuts and x2 is his consumption of berries. His income is 217, the price of nuts is 3 and the price of berries is 1. How many units of berries will Patrick demand?
Topic: Demand Correct Responses: 64 Correct
Di culty: 0 Discrimination Index: 29
6.38 Miss Mu et insists on consuming 2 units of whey per unit of curds. If the price of curds is
3 and the price of whey is 3, then if Miss Mu ett's income is m; her demand for curds will be:
a m=3 b 3m=3 c 3C + 3W = m d 3m e m=9
Topic: Demand Correct Responses: 64 Correct
Di culty: 0 Discrimination Index: 29
6.39 Miss Mu et insists on consuming 2 units of whey per unit of curds. If the price of curds is
3 and the price of whey is 6, then if Miss Mu ett's income is m; her demand for curds will be:
a m=3 b 6m=3 c 3C + 6W = m d 3m e m=15
MULTIPLE CHOICE
Topic: Demand Correct Responses: 0 Correct Di culty: 0 Discrimination Index: 0
101
6.40 Casper's utility function is 3x+y; where x is his consumption of cocoa and y is his consumpa 12 b 15 c 29 d 14 e 30
Topic: Demand Correct Responses: 0 Correct Di culty: 0 Discrimination Index: 0
tion of cheese. If the total cost of x units of cocoa is x2; if the price of cheese is 10, and Casper's income is $260, how many units of cocoa will he consume?
6.41 Casper's utility function is 3x+y; where x is his consumption of cocoa and y is his consumpa 6 b 9 c 17 d 8 e 18
Topic: Demand Correct Responses: 0 Correct Di culty: 2 Discrimination Index: 0
tion of cheese. If the total cost of x units of cocoa is x2; if the price of cheese is 6, and Casper's income is $101, how many units of cocoa will he consume?
6.42 Let w be the number of whips and j the number of leather jackets. If Kinko's utility function
a 6 times as many whips as leather jackets. b 5 times as many leather jackets as whips. c 3 times as many whips as leather jackets. d 4 times as many whips as leather jackets. e only leather jackets.
is Ux; y = minf7w; 4w + 12jg; then if the price of whips is $20 and the price of leather jackets is $40, Kinko will demand:
CHAPTER 6 Demand
Topic: Demand Correct Responses: 0 Correct Di culty: 2 Discrimination Index: 0
102
6.43 Let w be the number of whips and j the number of leather jackets. If Kinko's utility function
is Ux; y = minf10w; 5w + 25jg; then if the price of whips is $20 and the price of leather jackets is $80, Kinko will demand:
a 7 times as many whips as leather jackets. b 6 times as many leather jackets as whips. c 4 times as many whips as leather jackets. d 5 times as many whips as leather jackets. e only leather jackets.
Topic: Demand Correct Responses: 0 Correct
Di culty: 3 Discrimination Index: 0
6.44 Between 1980 and 1990, a particular consumer's income increased by 25 percent, while the
price of X and of "all other goods" both increased by 10 percent. It was observed that the consumer's consumption of X and of all other goods both increased by 15 percent. From these facts we can deduce that:
a the consumer did not regard X and "all other goods" as perfect complements. b the consumer's preferences cannot be represented by a Cobb-Douglas utility function. c the consumer's preferences can be represented by a Cobb-Douglas utility function. d the consumer's preferences cannot be represented by a quasilinear utility function. e more than one of the above options is true.
MULTIPLE CHOICE
Topic: Demand Correct Responses: 0 Correct Di culty: 2 Discrimination Index: 0
103
6.45 John Parker Nosey works for the Internal Revenue Service. He is in charge of auditing in-
come of self-employed people. In any year, a person divides his total income between consumption and saving. John cannot determine people's consumptions, but he is able to determine how much people have saved over the course of a year. From years of experience, he has learned that people act as if they are maximizing a utility function of the form Uc; s = 10; 000 ln c+ s; where c is the number of dollars worth of consumption in a year and s is the number of dollars saved. Which of the following is true?
a If someone saves at least $1,000, then that person's income is at least $11,000. b If someone saves nothing, then that person must earn less than $1,000. c If someone saves exactly $1,000, then that person's income must be greater than $1,000 and less than $10,000. d If someone saves exactly $10,000, then that person must earn exactly $21,000. e If someone saves more than $1,000, then that person's income must be more than $20,000.
Topic: Demand Correct Responses: 0 Correct
Di culty: 0 Discrimination Index: 0
6.46 Carlos consumes only two goods, apples and bananas. His utility function is Ua; b =
minfa; bg. Before trade, his initial endowment is wa apples and wb bananas. After he trades to his
optimal consumption point at these prices, the relative prices change. Carlos is allowed to make further trades if he wishes.
a Carlos will dde nitely be better o after the price change. b Carlos will be better o if the price of the good he was selling went up and worse o if the price of the good he was selling went down. c Unless the price of both goods went down, we can not tell if Carlos is beter o or worse o . d Carlos will be better o if the price of the good he was selling went down and worse o if the price of the good he was selling went up. e Carlos' utility will not be a ected by the change.
CHAPTER 6 Demand
Topic: Demand Correct Responses: 0 Correct Di culty: 0 Discrimination Index: 0
104
6.47 Carlos consumes only two goods, apples and bananas. His utility function is Ua; b = a b .
32
Before trade, his initial endowment is wa apples and wb bananas. After he trades to his optimal consumption point at these prices, the relative prices change. Carlos is allowed to make further trades if he wishes.
a Carlos will de nitely be better o after the price change. b Carlos will be better o if the price of the good he was selling went up and worse o if the price of the good he was selling went down. c Unless the prices of both goods went down, we can not tell if Carlos is better o or worse o . d Carlos will be better o if the price of the good he was selling went down and worse o if the price of the good he was selling went up. e Carlos' utility will not be a ected by the change.
Essay
Topic: Demand Correct Responses: 0 Di culty: 3 Discrimination Index: 0
Demand
6.1 Is the following statement true or false? "If consumers spend their entire incomes, it is im-
possible for the income elasticity of demand for every good to be bigger than one." Write a brief, but convincing explanation of your answer.
If income elasticities of demand for all goods exceed 1, then a 1 increase in income would result in a more than 1 increase in expenditures for every good. Therefore total expenditures would rise by more than 1. But this is impossible if the entire budget is spent both before and after the income increase.
Topic: Demand Correct Responses: 0 Di culty: 3 Discrimination Index: 0
6.2 Wanda Lott's utility function is Ux; y = maxf2x; yg. Draw some of Wanda's indi erence
curves. If the price of x is 1, the price of y is p and her income is m; how much y does Wanda demand?
Answer: Wanda's indi erence curves are rectangles that are twice as high as they are wide. If p :5; Wanda demands no y. If p :5; Wanda demands m=p units of y. If p = :5; Wanda is indi erent between her two best options which are buying m units of x and no y or buying 2m units of y and no x.
Topic: Demand Correct Responses: 0 Di culty: 3 Discrimination Index: 0
6.3 Martha has the utility function U = minf4x; 2yg. Write down her demand function for x as a
function of the variables m; px ; and py ; where m is income, px is the price of x and py is the price of y.
Answer: x = m=px + 2py .
Topic: Demand Correct Responses: 0 Di culty: 1 Discrimination Index: 0
6.4 Brie y explain in a sentence or two how you could tell: a whether a good is a normal good
or an inferior good. b whether a good is a luxury or a necessity. c whether two goods are complements or substitutes.
If prices are left constant and income rises, demand for a normal good will rise and demand for an inferior good will fall. b If income rises, expenditure on it will rise more or less than proportionately depending on whether the good is a luxury or necessity respectively. c Two goods are complements or substitutes depending on whether a rise in the price of one of them increases or decreases demand for the other.
CHAPTER 6 Demand
Topic: Demand Correct Responses: 0 Di culty: 1 Discrimination Index: 0
106
6.5 De ne each of the following: a Inverse demand function. b Engel curve.
Answer: The inverse demand function expresses for any quantity the price at which that quantity can be sold. It is simply the inverse function corresponding to the demand function. An Engel curve is the graph of the function that expresses quantity demanded as a function of income.
Topic: Demand Correct Responses: 0
Di culty: 3 Discrimination Index: 0
6.6 Ray Starr has the utility function Ux; y = y=100 , x. a Does Ray prefer more to less
of both goods? b Draw a diagram showing Ray's indi erence curves corresponding to the utility levels U = 1=2; U = 1; and U = 2. c How can you describe the set of indi erence curves for Ray? d If the price of x is 1 and the price of y is 1, nd Ray's demand for x as a function of his income and draw a diagram showing his Engel curve for x.
Yes. b These curves are straight lines with the equations x=2 + y = 50; x + y = 100; 2x + y = 200. c The indi erence curve through any bundle is the straight line passing through that point and through the point 100; 0. The set of all indi erence curves is the star, shaped set of rays passing through the point 100; 0 to be more precise; the part of that set that is in the nonnegative quadrant. d If Ray's income is less than 100, he buys y and no x. If his income is more than 100, he buys x and no y.
Topic: Demand Correct Responses: 0
Di culty: 2 Discrimination Index: 0
6.7 With some services, e.g. checking accounts, phone service, or pay TV, a consumer is o ered
a choice of two or more payment plans. One can either pay a high "entry fee" and get a low price per unit of service or pay a low entry fee and a high price per unit of service. Suppose you have an income of $100. There are two plans. Plan A has an entry fee of $20 with a price of $2 per unit. Plan B has an entry fee of $40 with a price of $1 per unit for using the service. Let x be expenditure on other goods and y be consumption of the service. a Write down the budget equation that you would have after you paid the entry fee for each of the two plans. b If your utility function is xy, how much y would you choose in each case? c Which plan would you prefer? Explain.
x + 2y = 80; x + y = 60. b20; 30 c Plan B. The utility of the bundle chosen with A is 20 40 = 800 and the utility from the Plan B bundle is 30 30 = 900.
ESSAY
Topic: Demand Correct Responses: 0 Di culty: 2 Discrimination Index: 0
107
6.8 Marie's utility function is Ux; y = minf3x + 2y; 2x + 5yg where x is the number of units of
sugar she consumes and y is the number of units of spice she consumes. She is currently consuming 12 units of sugar and 40 units of spice and she is spending all of her income. Draw a graph showing her indi erence curve through this point. The price of spice is 1. In order for this to be her consumption bundle, what must be the price of sugar and what must her income be?
Answer: Her indi erence curve is a broken line consisting of the outer envelope of the two lines 3x + 2y = 116 and 2x + 5y = 116. The point 12; 40 is on the line 3x + 2y = 116. The price of sugar is 1.5 and her income is 58.
Topic: Demand Correct Responses: 0 Di culty: 0 Discrimination Index: 0
6.9 Murphy's utility function is Ux; y = minf4x + y; 2x + 2y; x + 4yg. Murphy is consuming 12
units of x and 6 units of y. Draw the indi erence curve through this point. At what points does this indi erence curve have kinks? The price of good x is 1. What is the highest possible price for y? What is the lowest possible price for y?
Answer: The indi erence curve is a broken line extending from 36; 0 to 12; 6 to 6; 12 to 0; 36. The price of y must be between 1 and 4.
Chapter 7
True-False
Topic: Revealed Preference Correct Responses: 95 Correct
Revealed Preference
Di culty: 2 Discrimination Index: 30
7.1 The strong axiom of revealed preference requires that if a consumer chooses x when he can
a ord y; and chooses y when he can a ord z; then he will not choose z when he can a ord x.
Topic: Revealed Preference Correct Responses: 78 Correct Di culty: 1 Discrimination Index: 10
7.2 Rudolf Rational obeys the weak axiom of revealed preferences. His preferences don't change
over time. One year he could a ord bundle x but bought bundle y. If another year he buys bundle x; then he can't a ord bundle y.
Topic: Revealed Preference Correct Responses: 46 Correct Di culty: 2 Discrimination Index: 0
7.3 If a consumer maximizes a utility function subject to a budget constraint and has strictly
convex preferences, then his behavior will necessarily satisfy the weak axiom of revealed preference and the strong axiom of revealed preference.
Topic: Revealed Preference Correct Responses: 73 Correct Di culty: 1 Discrimination Index: 37
7.4 The Laspeyres index of prices in period 2 relative to period 1 tells us the ratio of the cost of
buying the period 1 bundle at period 2 prices to the cost of buying the period 1 bundle at period 1 prices.
Topic: Revealed Preference Correct Responses: 83 Correct Di culty: 1 Discrimination Index: 32
7.5 The Laspeyres price index di ers 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.
TRUE-FALSE
Topic: Revealed Preference Correct Responses: 36 Correct Di culty: 2 Discrimination Index: 0
109
7.6 Patience was maximizing her utility subject to her budget constraint. Prices changed and
Patience was less well o than before. Therefore, at the old prices her new bundle must cost less than her old bundle.
Topic: Revealed Preference Correct Responses: 0 Correct
Di culty: 1 Discrimination Index: 0
7.7 It follows from the weak axiom of revealed preference that if a consumer chooses x when he
could a ord y and chooses y when he could a ord x; then his income must have changed between the two observations.
Topic: Revealed Preference Correct Responses: 0 Correct
Di culty: 2 Discrimination Index: 0
7.8 The strong axiom of revealed preference says that if a consumer bought x when he could
have a orded y and y when he could have a orded z; then he will buy x whenever he can a ord z.
Topic: Revealed Preference Correct Responses: 85 Correct
Di culty: 1 Discrimination Index: 8
7.9 An increase in the price of an inferior good makes the people who consume that good better
o.
Topic: Revealed Preference Correct Responses: 53 Correct
Di culty: 2 Discrimination Index: 19
7.10 Prudence was maximizing her utility subject to her budget constraint. Then prices changed.
After the change, she is better o . Therefore the new bundle costs more at the old prices than the old bundle did.
CHAPTER 7 Revealed Preference
Topic: Revealed Preference Correct Responses: 85 Correct Di culty: 1 Discrimination Index: 21
110
7.11 The Laspeyres price index di ers from the Paasche price index because the Paasche index
holds prices constant and varies quantities, while the Laspeyres index holds quantities constant and varies prices.
Topic: Revealed Preference Correct Responses: 78 Correct Di culty: 2 Discrimination Index: 20
7.12 It is possible for a consumer to satisfy the weak axiom of revealed preference, but violate
the strong axiom of revealed preference.
Topic: Revealed Preference Correct Responses: 83 Correct Di culty: 0 Discrimination Index: 33
7.13 For a consumer who has an allowance to spend and no endowment of goods, a decrease in
the price of an inferior good consumed makes the consumer better o .
Topic: Revealed Preference Correct Responses: 0 Correct Di culty: 2 Discrimination Index: 0
7.14 There are two goods, bananas and potatoes. The price of bananas increases and the price
of potatoes decreases. If after the price change a consumer whose preferences satisfy WARP can still exactly a ord her old consumption bundle, then she will consume at least as much potatoes as before, even if potatoes are a Gi en good.
Multiple Choice
Revealed Preference
Di culty: 1 Discrimination Index: 29
Topic: Revealed Preference Correct Responses: 52 Correct
7.1 Let A stand for the bundle 7; 9; B stand for the bundle 10; 5; and C stand for the bundle
following is true?
a A is directly revealed preferred to B. b A is indirectly revealed preferred to B. c C is directly revealed preferred to A. d B is directly revealed preferred to A. e None of the above.
6; 6. When prices are 2; 4; Betty chooses C. When prices are 12; 3 she chooses A. Which of the
Topic: Revealed Preference Correct Responses: 0 Correct
Di culty: 2 Discrimination Index: 0
7.2
Remember that the Laspeyres price index uses the old quantities for the weights. In 1971, good x cost 5 and good y cost 1. The current price of good x is 7 and the current price of good y is 6. In 1971 the consumption bundle was x; y = 2; 4. The current consumption bundle is x; y = 5; 3. The Laspeyres index of current prices relative to 1971 prices is closest to which of the following numbers?
a 3.79 b 2.71 c 0.26 d 1.89 e 1.26
CHAPTER 7 Revealed Preference
Topic: Revealed Preference Correct Responses: 0 Correct Di culty: 2 Discrimination Index: 0
112
7.3
Remember that the Laspeyres price index uses the old quantities for the weights. In 1971, good x cost 3 and good y cost 1. The current price of good x is 3 and the current price of good y is 5. In 1971 the consumption bundle was x; y = 3; 5. The current consumption bundle is x; y = 9; 4. The Laspeyres index of current prices relative to 1971 prices is closest to which of the following numbers?
a 3.36 b 2.43 c 0.30 d 1.52 e 1.30
Topic: Revealed Preference Correct Responses: 82 Correct
Di culty: 2 Discrimination Index: 30
7.4 Twenty years ago, Dmitri consumed bread which cost him 10 kopeks a loaf and potatoes
which cost him 14 kopeks a sack. With his income of 208, he bought 11 loaves of bread and 7 sacks of potatoes. Today he has an income of 393. Bread now costs him 21 kopeks a loaf and potatoes cost him 16 kopeks a sack. Assuming his preferences haven't changed and the sizes of loaves and sacks haven't changed, when was he better o ?
a Twenty years ago b Today c He was equally well o in the two periods. d From the information given here we are unable to tell. e None of the above.
MULTIPLE CHOICE
Topic: Revealed Preference Correct Responses: 82 Correct Di culty: 2 Discrimination Index: 30
113
7.5 Twenty years ago, Dmitri consumed bread which cost him 10 kopeks a loaf and potatoes
which cost him 13 kopeks a sack. With his income of 266, he bought 11 loaves of bread and 12 sacks of potatoes. Today he has an income of 510. Bread now costs him 20 kopeks a loaf and potatoes cost him 20 kopeks a sack. Assuming his preferences haven't changed and the sizes of loaves and sacks haven't changed, when was he better o ?
a Twenty years ago b Today c He was equally well o in the two periods. d From the information given here we are unable to tell. e None of the above.
Topic: Revealed Preference Correct Responses: 81 Correct
Di culty: 1 Discrimination Index: 31
7.6 At prices 4; 12; Harry chooses the bundle 9; 4. At the prices 8; 4; Harry chooses the bundle
2; 9. Is this behavior consistent with the weak axiom of revealed preference? a Yes b No c It depends on his income. d We would have to observe a third choice to be able to say. e None of the above.
Topic: Revealed Preference Correct Responses: 65 Correct Di culty: 2 Discrimination Index: 45
7.7 When prices are 6; 3; Holly chooses the bundle 9; 18 and when prices are 1; 2; she chooses
the bundle 8; 14. Which of the following is true?
a The bundle 9; 18 is revealed preferred to the bundle 8; 14 and she does not violate WARP. b She violates SARP but not WARP. c The bundle 8; 14 is revealed preferred to the bundle 9; 18 and she does not violate WARP. d She violates WARP. e None of the above.
CHAPTER 7 Revealed Preference
Topic: Revealed Preference Correct Responses: 65 Correct Di culty: 2 Discrimination Index: 45
114
7.8 When prices are 3; 1; Yolanda chooses the bundle 9; 21 and when prices are 1; 3; she
chooses the bundle 6; 14. Which of the following is true?
a The bundle 9; 21 is revealed preferred to the bundle 6; 14 and she does not violate WARP. b She violates SARP but not WARP. c The bundle 6; 14 is revealed preferred to the bundle 9; 21 and she does not violate WARP. d She violates WARP. e None of the above.
Topic: Revealed Preference Correct Responses: 0 Correct Di culty: 2 Discrimination Index: 0
7.9 Maria consumes strawberries which cost her 10 pesos a box and bananas which cost her 9
pesos a bunch. With her income of 192 pesos she buys 12 boxes of strawberries and 8 bananas. Daphne, with an income of 170 shillings, consumes strawberries at a cost of 6 shillings each and bananas at a cost of 12 shillings each. Assuming their preferences are identical:
a Maria would prefer Daphne's consumption bundle to her own. b Daphne would prefer Maria's consumption bundle to her own. c they would both be indi erent between their own bundles and the other person 0 s bundle. d each prefers her own bundle to the other's. e we can't make any of the above statements without more information.
Topic: Revealed Preference Correct Responses: 73 Correct Di culty: 2 Discrimination Index: 53
7.10 In 1971, good x cost 5 and good y cost 1. They now cost 9 and 5 respectively. In 1971 0 0 0 0
the consumption bundle of x and y was 4 x s and 5 y s. It is now 9 x s and 7 y s. Calculate the Laspeyres index of current prices relative to 1971 prices rounded to one decimal place. Remember the Laspeyres index uses the old quantities for weights.
a .5 b 2.4 c 2.5 d 2.2 e None of the above.
MULTIPLE CHOICE
Topic: Revealed Preference Correct Responses: 29 Correct Di culty: 2 Discrimination Index: 58
115
7.11 Carlos has at one time or another lived in Argentina, Bolivia, and Colombia. He buys only
two goods, x and y. In Argentina the prices were 9; 3 and he consumed the bundle 6; 7. In Bolivia he consumed 9; 2. In Colombia he consumed the bundle 6; 5 at the prices 3; 3. Which of the following is true?
a The Argentine bundle is directly revealed preferred to the Bolivian bundle. b The Argentine bundle is indirectly revealed preferred to the Bolivian bundle. c The Colombian bundle is directly revealed preferred to the Argentine bundle. d The Bolivian bundle is indirectly revealed preferred to the Argentine bundle. e None of the above.
Topic: Revealed Preference Correct Responses: 0 Correct
Di culty: 2 Discrimination Index: 0
7.12 Prudence is careful to plan ahead. She is going to Paris next year to study. To protect
herself from exchange rate uctuations, she bought a futures contract for the number of francs she plans to spend next year, given current prices. When she arrives in Paris, she can cash in her contract for this many francs no matter what the exchange rate is. If the value of the franc relative to the dollar should happen to fall before she gets to Paris:
a she will be at least as well o and probably better o than if the exchange rate hadn't changed. b she will be worse o than if exchange rates hadn't changed. c she will be exactly as well o as if exchange rates hadn't changed. d she might be better o or she might be worse o , depending on whether she planned to spend more or less than she does at home.
CHAPTER 7 Revealed Preference
Topic: Revealed Preference Correct Responses: 0 Correct Di culty: 2 Discrimination Index: 0
116
7.13 Jose consumes rare books which cost him 8 pesos each and pieces of antique furniture which
cost him 10 pesos each. He spends his entire income to buy 9 rare books and 11 pieces of antique furniture. Nigel has the same preferences as Jose but faces di erent prices and has a di erent income. Nigel has an income of 162 pounds. He buys rare books at a cost of 4 pounds each and pieces of antique furniture at a cost of 11 pounds each.
a Nigel would prefer Jose's bundle to his own. b Jose would prefer Nigel's bundle to his own. c Neither would prefer the other's bundle to his own. d Each prefers the other's bundle to his own. e We can't tell whether either would prefer the other's bundle without knowing what quantities Nigel consumes.
Topic: Revealed Preference Correct Responses: 0 Correct
Di culty: 2 Discrimination Index: 0
7.14 Twenty years ago, Amanda consumed cans of motor oil which cost her 6 pesos each and
gallons of gasoline which cost her 14 pesos each. With her income of 112 pesos, she bought 7 cans of motor oil and 5 gallons of gasoline. Today she has an income of 230 pesos. Cans of motor oil now cost 10 pesos each and gallons of gasoline now cost 32 pesos each. Assuming her preferences haven't changed, she:
a is de nitely better o than she was 20 years ago. b was de nitely better o 20 years ago than she is now. c is just as well o as she was 20 years ago. d may be be either better or worse o now than 20 years ago. There is not enough information to determine which is the case. e is behaving irrationally.
MULTIPLE CHOICE
Topic: Revealed Preference Correct Responses: 83 Correct Di culty: 1 Discrimination Index: 0
117
7.15 When prices are 2; 4; Ms. Consumer chooses the bundle 7; 9; and when prices are 15; 3;
she chooses the bundle 10; 3. Is her behavior consistent with the weak axiom of revealed preference?
a Yes b No c We would have to observe a third choice to be able to say. d We can't tell because we are not told her income in the two cases. e None of the above.
Topic: Revealed Preference Correct Responses: 35 Correct Di culty: 2 Discrimination Index: 20
7.16 Stan Ford currently spends $100 a week on entertainment. A rich uncle o ers him a choice
a prefer the $50 allowance. b prefer the half-price subsidy. c be indi erent between the allowance and the subsidy. d prefer the subsidy if entertainment is a normal good and otherwise be indi erent. e prefer the allowance if entertainment is an inferior good but otherwise prefer the subsidy.
Topic: Revealed Preference Correct Responses: 81 Correct Di culty: 2 Discrimination Index: 38
between a $50 a week allowance and the opportunity to buy all of his entertainment at half price. Stan has no kinks in his di erence curves. Stan would:
7.17 When prices are 2; 10; Emil chooses the bundle 1; 6 and when prices are 12; 4; he chooses
the bundle 7; 2. Which of the following is necessarily true?
a Emil violates WARP. b Emil has kinked indi erence curves. c The bundle 1; 6 is revealed preferred to 7; 2; but 7; 2 is not revealed preferred to 1; 6. d The bundle 7; 2 is revealed preferred to 1; 6; but 1; 6 is not revealed preferred to 7; 2. e None of the above.
CHAPTER 7 Revealed Preference
Topic: Revealed Preference Correct Responses: 0 Correct Di culty: 2 Discrimination Index: 0
118
7.18 Desmond has lived in Australia, Belgium and Canada. His tastes never changed but his
p1 ; p2 = 16; 4.
income and prices did. In Australia his commodity bundle was x1; x2 = 7; 8; in Belgium it was 9; 4 and in Canada it was 7; 5. Prices in Canada were p1; p2 = 3; 3 and in Australia prices were
a Desmond's consumption in Australia is directly revealed prefered to his consumption in Belgium. b His consumption in Australia is indirectly revealed preferred to his consumption in Belgium. c His consumption in Australia is indirectly but not directly revealed preferred to his consumption in Canada. d We can't tell if he was better o in Belgium or in Australia. e None of the above.
Topic: Revealed Preference Correct Responses: 87 Correct
Di culty: 1 Discrimination Index: 35
7.19 If all prices increase by 20:
a the Paasche price index increases by more than 20 and the Laspeyres price index increases by less than 20. b the Laspeyres price index increases by more than 20 and the Paasche price index increases by less than 20. c both the Paasche price index and the Laspeyres price index increase by more than 20. d both the Paasche price index and the Laspeyres price index increase by exactly 20. e both the Paasche price index and the Laspeyres price index increase by less than 20.
MULTIPLE CHOICE
Topic: Revealed Preference Correct Responses: 26 Correct Di culty: 3 Discrimination Index: 43
119
7.20 A student spends all of her income on pizza and books. When pizzas cost $3 each and books
a made her worse o . b left her exactly as well o as before. c left her at least as well o as before and possibly helped her. d might have helped her, might have harmed her. We can't tell which unless we observe what she consumed after the price change. e had the same e ect as a $3 increase in her income.
cost $10 each, she consumed 30 pizzas and 3 books per month. The price of pizzas fell to $2.90 each while the price of books rose to $11 each. The price change:
Topic: Revealed Preference Correct Responses: 59 Correct
Di culty: 1 Discrimination Index: 42
7.21 A consumer's behavior was observed in three situations with di erent prices and incomes.
In Situation 1, she chose a bundle that cost $1,600. In Situation 2, she chose a bundle that cost $2,500. In Situation 3, she chose a bundle that cost $3,100. The bundle purchased in Situation 2 would cost $1,200 at Situation 1 prices. The bundle purchased in Situation 3 cost $2,000 at Situation 2 prices. This consumer's behavior is known to satisfy the strong axiom of revealed preference. Therefore:
a the bundle purchased in Situation 1 must cost less than $3,100 at Situation 3 prices. b the bundle purchased in Situation 3 must cost at least $3,100 at Situation 1 prices. c the bundle purchased in Situation 1 can not cost less than $3,100 at Situation 3 prices. d the bundle purchased in Situation 2 must cost at least $3,100 at Situation 1 prices. e None of the above.
CHAPTER 7 Revealed Preference
Topic: Revealed Preference Correct Responses: 51 Correct Di culty: 2 Discrimination Index: 18
120
7.22 Recall that the Laspeyres price index uses the old bundle as weights and the Paasche price index uses the new bundle as weights. If the prices of all goods double and your income triples, then:
a your income increase has exceeded the increase in the Laspeyres P.I. but may not have exceeded the increase in the Paasche P.I. b your income increase has exceeded the increase in the Laspeyres P.I. and has also exceeded the increase in the Paasche P.I. c your income increase has exceeded the increase in the Paasche P.I. but may not have exceeded the increase in the Laspeyres P.I. d you would need to know the old and new consumption bundles to compare your income change with the change in price indexes. e None of the above.
Topic: Revealed Preference Correct Responses: 64 Correct
Di culty: 1 Discrimination Index: 20
7.23 If the government gave you a subsidy of $100 per month that you had to spend on hous-
ing and if you could spend the remainder of your income in any way you wished, the e ect of the subsidy would di er from the e ect of a $100 per month unrestricted increase in your income only if:
a housing were an inferior good for you. b housing were a normal good for you. c you would spend less than $100 per month on housing when you received the unrestricted $100 monthly increase in your income. d you would spend more than $100 per month on housing when you received the unrestricted $100 monthly increase in your income. e your preferences were homothetic.
MULTIPLE CHOICE
Topic: Revealed Preference Correct Responses: 30 Correct Di culty: 3 Discrimination Index: 0
121
7.24 When the prices were 5; 1; Vanessa chose the bundle x; y = 6; 3. Now at the new prices,
axiom of revealed preference, it must be that:
a 4py px . b px 4py . c 5py px. d py = 5px . e None of the above.
px ; py ; she chooses the bundle x; y = 5; 7. For Vanessa's behavior to be consistent with the weak
Topic: Revealed Preference Correct Responses: 30 Correct
Di culty: 3 Discrimination Index: 0
7.25 When the prices were 3; 1; Zelda chose the bundle x; y = 8; 7. Now at the new prices,
axiom of revealed preference, it must be that:
a 2py px . b px 2py . c 3py px. d py = 3px . e None of the above.
px ; py ; she chooses the bundle x; y = 7; 9. For Zelda's behavior to be consistent with the weak
CHAPTER 7 Revealed Preference
Topic: Revealed Preference Correct Responses: 0 Correct Di culty: 3 Discrimination Index: 0
122
7.26
At prices p1; p2 = 4; 1; George buys the bundle x1 ; x2 = 10; 20. At prices p01 ; p02 = 1; 4; he buys the bundle x01 ; x02 = 4; 14. At prices p00 ; p00; he buys the bundle x00; x00 = 20; 10. If his 1 2 1 2 preferences satisfy the strong axiom of revealed preferences, then it must be that:
a 10p00 10p00 1 2 00 8p2 b 10p1 c 8p1 8p2 d p00 = p00 1 2 e None of the above.
Topic: Revealed Preference Correct Responses: 0 Correct
Di culty: 3 Discrimination Index: 0
7.27
At prices p1 ; p2 = 3; 1; Chen buys the bundle x1; x2 = 10; 18. At prices p01 ; p02 = 1; 3; he buys the bundle x01; x02 = 3; 15. At prices p00 ; p00; he buys the bundle x00 ; x00 = 21; 9. If his 1 2 1 2 preferences satisfy the strong axiom of revealed preferences, then it must be that:
a 11p00 9p00 1 2 b 11p00 6p2 1 c 6p1 9p2 d p00 = p00 1 2 e None of the above.
MULTIPLE CHOICE
Topic: Revealed Preference Correct Responses: 4 Correct Di culty: 3 Discrimination Index: 0
123
7.28 Tonal is a travelling substitute orchestra conductor. Each year, he starts in Ann Arbor,
moves to Brownsville, then to Carson City,..., and so on until he reaches Zilvania, Ohio, after which he returns to Ann Arbor. He gets a salary according to the following simple rule. In Brownsville he is paid what his Ann Arbor consumption bundle would cost in Brownsville. In Carson City, he is paid what his Brownsville bundle would cost in Carson City, and so on. After 26 two-week stints, he returns to Ann Arbor, where he is paid the cost in Ann Arbor of his Zilvania bundle. At each stop, he spends his entire salary on apples A and paperback books B, so as to maximize the utility U = AB. Over the course of the year, his utility will:
a be constant at every stop. b increase at every stop where relative prices are di erent from the previous stop. c decrease at every stop where relative prices are di erent from the previous stop. d increase or decrease depending on whether the Paasche price index goes down or up between stops. e increase or decrease depending on whether the Laspeyres price index goes down or up between stops.
Topic: Revealed Preference Correct Responses: 44 Correct Di culty: 3 Discrimination Index: 38
7.29 If the only information we have about Goldie is that she chooses the bundle 6; 6 when
a the bundle 6; 6 is revealed preferred to 10; 0 but there is no evidence that she violates WARP. b neither bundle is revealed preferred to the other. c Goldie violates WARP. d the bundle 10; 0 is revealed preferred to 6; 6 and she violates WARP. e the bundle 10; 0 is revealed preferred to 6; 6 and there is no evidence that she violates WARP.
Topic: Revealed Preference Correct Responses: 44 Correct Di culty: 3 Discrimination Index: 38
prices are 6; 6 and she chooses the bundle 10; 0 when prices are 4; 5; then we can conclude that:
7.30 If the only information we have about Goldie is that she chooses the bundle 6; 6 when
a the bundle 6; 6 is revealed preferred to 10; 0 but there is no evidence that she violates WARP. b neither bundle is revealed preferred to the other. c Goldie violates WARP. d the bundle 10; 0 is revealed preferred to 6; 6 and she violates WARP. e the bundle 10; 0 is revealed preferred to 6; 6 and there is no evidence that she violates WARP.
prices are 6; 7 and she chooses the bundle 10; 0 when prices are 7; 5; then we can conclude that:
CHAPTER 7 Revealed Preference
Topic: Revealed Preference Correct Responses: 46 Correct Di culty: 2 Discrimination Index: 6
124
7.31 Pierre's friend Henri lives in a town where he has to pay 3 francs per glass of wine and 5
francs per loaf of bread. Henri consumes 5 glasses of wine and 4 loaves of bread per day. 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 consumption of bread and wine, we can deduce:
a nothing about whether one is better o than the other. b that Henri is better o than Bob. c that Bob is better o than Henri. d that both of them violate the weak axiom of revealed preferences. e that Bob and Henri are equally well o .
Topic: Revealed Preference Correct Responses: 46 Correct
Di culty: 2 Discrimination Index: 6
7.32 Pierre's friend Henri lives in a town where he has to pay 3 francs per glass of wine and 6
francs per loaf of bread. Henri consumes 9 glasses of wine and 4 loaves of bread per day. 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 consumption of bread and wine, we can deduce:
a nothing about whether one is better o than the other. b that Henri is better o than Bob. c that Bob is better o than Henri. d that both of them violate the weak axiom of revealed preferences. e that Bob and Henri are equally well o .
MULTIPLE CHOICE
Topic: Revealed Preference Correct Responses: 86 Correct Di culty: 2 Discrimination Index: 31
125
7.33 Consider the case of Ronald. Let the prices and consumptions in the base year be as in
Situation D; where p1 = 3; p2 = 1; x1 = 5; and x2 = 15. If in the current year, the price of good 1 s1 and the price of good 2 is 2, and Ronald's current c consumptions of good 1 and good 2 are 25 and 25 respectively, what is the Laspeyres price index of current prices relative to base year prices? Pick the most nearly correct 1.17 b 2.50 c 0.75 d 0.50 e 1.75
Topic: Revealed Preference Correct Responses: 86 Correct
Di culty: 2 Discrimination Index: 31
7.34 Consider the case of Ronald. Let the prices and consumptions in the base year be as in
Situation D; where p1 = 3; p2 = 1; x1 = 5; and x2 = 15. If in the current year, the price of good 1 s1 and the price of good 2 is 1, and Ronald's current c consumptions of good 1 and good 2 are 25 and 10 respectively, what is the Laspeyres price index of current prices relative to base year prices? Pick the most nearly correct 0.67 b 1.17 c 0.50 d 0.25 e 1
CHAPTER 7 Revealed Preference
Topic: Revealed Preference Correct Responses: 86 Correct Di culty: 2 Discrimination Index: 44
126
7.35 On the planet, Homogenia, every consumer who has ever lived consumes only two goods x
and y and has the utility function Ux; 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 96 fragels. In 1990, the price of good 1 was 4 fragels and the price of good 2 was 5 fragels. The Laspeyres price index for the price level in 1990 relative to the price level in 1900 is:
a 3.25. b 4.50. c 3. d 5.25. e not possible to determine from this information.
Topic: Revealed Preference Correct Responses: 86 Correct
Di culty: 2 Discrimination Index: 44
7.36 On the planet, Homogenia, every consumer who has ever lived consumes only two goods x
and y and has the utility function Ux; 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 1990, the price of good 1 was 1 fragels and the price of good 2 was 1 fragels. The Laspeyres price index for the price level in 1990 relative to the price level in 1900 is:
a 0.75. b 1. c 0.67. d 1.25. e not possible to determine from this information.
MULTIPLE CHOICE
Topic: Revealed Preference Correct Responses: 74 Correct Di culty: 2 Discrimination Index: 56
127
7.37 On the planet, Hyperion, every consumer who has ever lived has a utility function Ux; y =
prices in 1850 is:
minfx; 2yg. The currency of Hyperion is the doggerel. In 1850 the price of x was 1 doggerel per unit and the price of y was 2 doggerels per unit. In 1990, the price of x was 11 doggerels per unit and the price of y was 4 doggerels per unit. The Paasche price index of prices in 1990 relative to a 6.50. b 5. c 2.75. d 3.75. e not possible to determine without further information.
Topic: Revealed Preference Correct Responses: 74 Correct
Di culty: 2 Discrimination Index: 56
7.38 On the planet, Hyperion, every consumer who has ever lived has a utility function Ux; y =
prices in 1850 is:
minfx; 2yg. The currency of Hyperion is the doggerel. In 1850 the price of x was 1 doggerel per unit and the price of y was 2 doggerels per unit. In 1990, the price of x was 7 doggerels per unit and the price of y was 4 doggerels per unit. The Paasche price index of prices in 1990 relative to a 4.50. b 3.67. c 1.75. d 2.75. e not possible to determine without further information.
CHAPTER 7 Revealed Preference
Topic: Revealed Preference Correct Responses: 69 Correct Di culty: 0 Discrimination Index: 32
128
7.39 Howard Send is deciding whether to keep his car when he moves to New York City. To
operate his car for a year, he would have to pay a at fee of $6,000 for auto insurance and parking, plus 20 cents for every mile that he drives for gasoline and repairs. Alternatively, he could give his car to his brother-in-law in Bu alo the market value of the car is negligible and take taxicabs in New York, which costs $1 a mile. Howard knows that if he took the car to New York, he would drive 6500 miles per year. If he places no value, positive or negative, on his brother,in,law getting the car and if he is indi erent between riding a cab and driving, he should:
a keep his car if he wouldn't want to travel as much as 6500 miles by cab. b give his car away if he wouldn't travel more than 6000 miles by cab but keep it if he would travel more than 6000 miles by cab. c keep his car if he would travel more than 6,000 but less than 6,500 miles by cab. d give his car away. e There is not enough information given here to allow one to give him reasonable advice about what to do.
Topic: Budgets Correct Responses: 2 Correct
Di culty: 0 Discrimination Index: 0
7.40 Franco and Gianni have the same tastes and consume only two goods, wine and pizza.
Franco lives in Milano and spends 100,000 lire per week. It costs him 5,000 lire for a bottle of wine and 5,000 lire for a pizza. Gianni lives in Napoli. It costs him 4,000 lire for a bottle of wine and 6,000 lire for a pizza. At those prices, he chooses to buy 10 bottles of wine and 6 pizzas per week. From this information, we can deduce that:
a Franco is better o with his own budget than he would be with Gianni's. b Gianni is better o with his own budget than he would be with Franco's. c Franco and Gianni violate WARP. d Franco and Gianni are equally well o . e There is not enough information to determine whether either would prefer the other's bundle.
MULTIPLE CHOICE
Topic: Revealed Preference Correct Responses: 0 Correct Di culty: 0 Discrimination Index: 0
129
7.41 Hillary has an initial endowment of $500 and is interested in two things: how many visits
she can make to the doctor, and money left over to spend on other things. When a trip to the doctor costs $50, Hillary sees the doctor 7 times. After health care reform, a visit to the doctor will cost $10 but her taxes will rise by $360.
a Hillary will be made better o by health care reform. b Hillary will be made worse o by health care reform. c We cannot tell how health care reform will a ect Hillary. d Hillary violates the Weak Axiom of Revealed Preference.
Topic: Revealed Preference Correct Responses: 0 Correct Di culty: 0 Discrimination Index: 0
7.42 Hillary has an initial endowment of $500 and is interested in two things: how many visits
she can make to the doctor, and money left over to spend on other things. When a trip to the doctor costs $60, Hillary sees the doctor 4 times. After health care reform, a visit to the doctor will cost $10 but her taxes will rise by $290.
a Hillary will be made better o by health care reform. b Hillary will be made worse o by health care reform. c We cannot tell how health care reform will a ect Hillary. d Hillary violates the Weak Axiom of Revealed Preference.
Chapter 8
True-False
Topic: Slutsky Equation Correct Responses: 86 Correct
Slutsky Equation
Di culty: 1 Discrimination Index: 24
8.1 A Gi en good must be an inferior good.
Topic: Slutsky Equation Correct Responses: 80 Correct Di culty: 1 Discrimination Index: 28
8.2 If a good is an inferior good, then an increase in its price will increase the demand for it.
Topic: Slutsky Equation Correct Responses: 0 Correct Di culty: 1 Discrimination Index: 0
8.3 The compensated demand function refers to the demand function of someone who is adequately paid for what he or she sells.
Topic: Slutsky Equation Correct Responses: 55 Correct Di culty: 2 Discrimination Index: 26
8.4 The Slutsky substitution e ect measures the movement between two points on the same
indi erence curve.
Topic: Slutsky Equation Correct Responses: 45 Correct Di culty: 2 Discrimination Index: 9
8.5 In the case of homothetic preferences the entire change in demand from a price change is due
to the substitution e ect.
Topic: Slutsky Equation Correct Responses: 86 Correct Di culty: 1 Discrimination Index: 28
8.6 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 e ect.
TRUE-FALSE
Topic: Slutsky Equation Correct Responses: 84 Correct Di culty: 1 Discrimination Index: 19
131
8.7 If the Engel curve slopes up, then the demand curve slopes down.
Topic: Slutsky Equation Correct Responses: 54 Correct Di culty: 1 Discrimination Index: 10
8.8 A rational consumer prefers more of good x to less. If the price of good x rises and the prices
of all other goods remain constant, then the consumer must necessarily demand less of x.
Topic: Slutsky Equation Correct Responses: 69 Correct Di culty: 1 Discrimination Index: 45
8.9 When the price of a good rises and income remains constant, there is a substitution e ect on
demand but there cannot be an income e ect.
Topic: Slutsky Equation Correct Responses: 65 Correct
Di culty: 2 Discrimination Index: 35
8.10 Ivan spends his entire income on two goods. One of them is a Gi en good. If the price of
the Gi en good rises, demand for the other good must fall.
Topic: Slutsky Equation Correct Responses: 85 Correct
Di culty: 1 Discrimination Index: 21
8.11 An increase in the price of a Gi en good makes the people who consume that good better
o.
Topic: Slutsky Equation Correct Responses: 71 Correct Di culty: 2 Discrimination Index: 2
8.12 Jessica's preferences for peanut butter and jelly are represented by the utility function
on her new budget line, she will not change her consumption.
Up; j = minf2p; 5jg. If prices and income change, but her old consumption bundle lies somewhere
CHAPTER 8 Slutsky Equation
Topic: Slutsky Equation Correct Responses: 67 Correct Di culty: 2 Discrimination Index: 39
132
8.13 Jimmy's utility function is Ua; b = ab where a is his consumption of apples and b is his
consumption of bananas. If prices and income change in such a way that Jimmy's old consumption lies on his new budget line, then Jimmy will not change his consumption bundle.
Topic: Slutsky Equation Correct Responses: 56 Correct Di culty: 0 Discrimination Index: 8
8.14 Suppose a consumer has strictly convex preferences and her Engel curve for a good is a
vertical line for some range of income. In that same income range, her demand curve for the good slopes down.
Topic: Slutsky Equation Correct Responses: 42 Correct Di culty: 2 Discrimination Index: 0
8.15 John purchases two goods, x and y. Good x is an inferior good for some range of income.
There must be another range of income for which good x is a normal good.
Topic: Slutsky Equation Correct Responses: 0 Correct Di culty: 2 Discrimination Index: 0
1=2
8.16 A consumer has the utility function Ux; y = x + 2y . The price of good x is 2 and the
price of good y is 1. The consumer's income is 20. If the price of good y rises to 2, then entire change in demand for y is due to the substitution e ect.
Topic: Slutsky Equation Correct Responses: 0 Correct Di culty: 0 Discrimination Index: 0
8.17 The Hicks version of the substitution e ect of a price change measures the change in a
consumer's demand if the consumer's income were changed just enough so the consumer would remain on the same indi erence curve as before the price change.
Multiple Choice
Slutsky Equation
Topic: Slutsky Equation Correct Responses: 67 Correct
Di culty: 3 Discrimination Index: 46
8.1 Cindy consumes goods x and y. Her demand for x is given by xpx; m = 0:05m , 5:15px. Now
her income is 419, the price of x is 3, and the price of y is 1. If the price of x rises to 4 and if we denote the income e ect on her demand for x by DI and the substitution e ect on her demand for x by DS, then:
a DI = ,0:28 and DS = ,0:52. b DI = ,0:28 and DS = ,4:88. c DI = ,0:52 and DS = ,0:52. d DI = 0 and DS = ,2:00. e None of the above.
Topic: Slutsky Equation Correct Responses: 67 Correct
Di culty: 3 Discrimination Index: 46
8.2 Cindy consumes goods x and y. Her demand for x is given by xpx; m = 0:05m , 5:25px. Now
her income is 545, the price of x is 4, and the price of y is 1. If the price of x rises to 5 and if we denote the income e ect on her demand for x by DI and the substitution e ect on her demand for x by DS, then:
a DI = ,0:31 and DS = ,0:52. b DI = ,0:31 and DS = ,4:94. c DI = ,0:52 and DS = ,0:52. d DI = 0 and DS = ,2:00. e None of the above.
CHAPTER 8 Slutsky Equation
Topic: Slutsky Equation Correct Responses: 53 Correct Di culty: 1 Discrimination Index: 30
134
8.3 Walt considers x and y to be perfect substitutes. They originally cost 10 and 9 respectively.
His income is 720. One day the price of x drops to 8. Which of the following is true?
a The income e ect increases the quantity of y by 90. b The substitution e ect increases the quantity of y by 80. c The substitution e ect increases the quantity of x by 90. d The income e ect increases the quantity of x by 80. e None of the above.
Topic: Slutsky Equation Correct Responses: 0 Correct Di culty: 2 Discrimination Index: 0
8.4 Ernest's income elasticity of demand for natural gas is .4. His price elasticity of demand for
natural gas is ,:3; and he spends 10 of his income on natural gas. What is his substitution price elasticity?
a ,:26 b ,:34 c .20 d ,:12 e None of the above.
Topic: Slutsky Equation Correct Responses: 10 Correct Di culty: 2 Discrimination Index: 2
8.5 Suppose that bananas are a normal good and Woody is currently consuming 100 bananas at
a price of 10 cents each.
a His Slutsky compensated demand curve going through this point is steeper than his ordinary demand curve. b His ordinary demand curve going through this point is steeper than his Slutsky compensated demand curve. c His ordinary demand curve is steeper to the left and his Slutsky compensated demand curve is steeper to the right of this point. d Whether his ordinary demand curve or his compensated demand curve is steeper, depends on whether his price elasticity is greater than 1. e None of the above.
MULTIPLE CHOICE
Topic: Slutsky Equation Correct Responses: 68 Correct Di culty: 2 Discrimination Index: 21
135
8.6 The following can be said about the income and substitution e ects of a price increase on
the demand for the good whose price rose:
a The former is always positive and the latter is always negative. b Both can be either positive or negative. c While the latter is always negative, the former can be either positive or negative. d While the former is always negative, the latter can be either positive or negative. e The former can at times be negative, but it will never overwhelm the latter.
Topic: Slutsky Equation Correct Responses: 57 Correct Di culty: 3 Discrimination Index: 21
8.7 In 1989, Bruce spent his income on two goods x and y. Between 1989 and 1990, the price of
good x rose by 8 per cent and the price of good y rose by 8 per cent. In 1990, Bruce bought the same amount of x as he bought in 1989, but he bought more of good y than he had bought in 1989. From these facts, we conclude that:
a y is a normal good. b y is an inferior good. c x is an inferior good. d nothing can be said about inferiority or superiority, since we don't know what happened to income. e Bruce is acting irrationally, since the relative prices of x and y did not change.
Topic: Slutsky Equation Correct Responses: 36 Correct Di culty: 1 Discrimination Index: 59
8.8 When the price of x rises, Marvin responds by changing his demand for x. The substitution
e ect is the part of this change that represents his change in demand:
a holding the prices of substitutes constant. b if he is allowed to substitute as much x for y as he wishes. c if his money income is held constant when the price of x changes. d if the prices of all other goods are held constant. e none of the above.
CHAPTER 8 Slutsky Equation
Topic: Slutsky Equation Correct Responses: 0 Correct Di culty: 1 Discrimination Index: 0
136
8.9 Polly consumes crackers and fruit. The price of fruit rose and the price of crackers stayed
constant. The income e ect on Polly's demand is:
a zero because Polly's income didn't change. b the change in Polly's demand if her income is decreased by the change in the price of fruit times her old consumption of fruit. c the change in Polly's demand if her income is decreased by the total amount she used to spend on fruit. d the change in Polly's demand if her income is increased by the amount she used to spend on fruit. e the change in Polly's demand if her income is increased by the change in the price of fruit times the amount she used to buy.
Topic: Slutsky Equation Correct Responses: 0 Correct
Di culty: 2 Discrimination Index: 0
8.10 Waldo consumes only apples and bananas and bananas are an inferior good for him. The
price of apples increases, but there is an increase in his income that keeps him on the same indifference curve as before. Waldo has convex preferences; and he prefers more to less of either good.
a After the change, Waldo will buy more bananas and less apples. b After the change, Waldo will buy less bananas and more apples. c After the change, Waldo will buy more of both goods. d After the change, Waldo will buy less of both goods. e We would need to know his utility function to determine whether any of the above statements are true.
MULTIPLE CHOICE
Topic: Slutsky Equation Correct Responses: 43 Correct Di culty: 2 Discrimination Index: 41
2
137
8.11 Charlie consumes apples and bananas. His utility function is UXA ; XB = xAxB . The price
of apples is $1, the price of bananasis $2 and his income is $30 per week. If the price of bananas falls to $1:
a Charlie demands fewer apples and more bananas. b the substitution e ect of the fall in banana prices reduces his APPLE consumption, but the income e ect increases his apple consumption by the same amount. c the substitution e ect of the fall in the price of bananas reduces his BANANA consumption but the income e ect increases his banana consumption by enough so that his banana consumption rises. d the income used to calculate the substitution e ect is higher than his original income, since the change made Charlie better o . e more than one of the above is true.
Topic: Slutsky Equation Correct Responses: 43 Correct
Di culty: 2 Discrimination Index: 58
8.12 Rob consumes two goods, x and y. He has an allowance of $50 per week and is not endowed
with either of the goods. If the price of good x increases and his substitution and income e ects change demand in opposite directions:
a good x must be a Gi en good. b good x must be an inferior good. c WARP is violated. d good x must be a normal good. e there is not enough information to judge whether good x is a normal or inferior good.
CHAPTER 8 Slutsky Equation
Topic: Slutsky Equation Correct Responses: 54 Correct Di culty: 1 Discrimination Index: 42
1 2 24 12
138
8.13 Ben consumes two goods and his utility function is Ux ; x = x x . The price of good 2
does not change and his income does not change, but the price of good 1 decreases. It must be that:
a the income e ect is zero, since his income remained constant. b the substitution e ect on the demand for good 2 is zero, since the price of good 2 did not change. c the substitution e ect reduces the demand for good 2 and, since the income e ect is zero, demand for good 2 falls. d the substitution e ect of the price change reduces demand for good 2 and increases demand for good 1. e more than one of the above statements is true.
Topic: Slutsky Equation Correct Responses: 54 Correct Di culty: 1 Discrimination Index: 42
1 2 56 12
8.14 David consumes two goods and his utility function is Ux ; x = x x . The price of good 2
does not change and his income does not change, but the price of good 1 decreases. It must be that:
a the income e ect is zero, since his income remained constant. b the substitution e ect on the demand for good 2 is zero, since the price of good 2 did not change. c the substitution e ect reduces the demand for good 2 and, since the income e ect is zero, demand for good 2 falls. d the substitution e ect of the price change reduces demand for good 2 and increases demand for good 1. e more than one of the above statements is true.
Topic: Slutsky Equation Correct Responses: 97 Correct Di culty: 0 Discrimination Index: 9
8.15 Charlie's utility function is xAxB . The price of apples used to be $1 per unit and the price
of bananas was $2 per unit. His income was $40 per day. If the price of apples increased to $2.25 and the price of bananas fell to $1.25, then in order to be able to just a ord his old bundle, Charlie would have to have a daily income of:
a 57.50. b 116. c 28.75. d 86.25. e 230.
MULTIPLE CHOICE
Topic: Slutsky Equation Correct Responses: 97 Correct Di culty: 0 Discrimination Index: 9
139
8.16 Charlie's utility function is xAxB . The price of apples used to be $1 per unit and the price
of bananas was $2 per unit. His income was $40 per day. If the price of apples increased to $2 and the price of bananas fell to $0.50, then in order to be able to just a ord his old bundle, Charlie would have to have a daily income of:
a 45. b 91. c 22.50. d 67.50. e 180.
Topic: Slutsky Equation Correct Responses: 70 Correct
Di culty: 0 Discrimination Index: 75
8.17 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 6 and the price of bananas stayed constant, the substitution e ect on Charlie's apple consumption reduces his consumption by:
a 16.67 apples. b 5 apples. c 8.33 apples. d 13.33 apples. e None of the above.
CHAPTER 8 Slutsky Equation
Topic: Slutsky Equation Correct Responses: 70 Correct Di culty: 0 Discrimination Index: 75
140
8.18 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 e ect on Charlie's apple consumption reduces his consumption by:
a 16 apples. b 4 apples. c 8 apples. d 13 apples. e None of the above.
Topic: Slutsky Equation Correct Responses: 72 Correct Di culty: 2 Discrimination Index: 81
8.19 Neville from your workbook has a friend named Peregrine. Peregrine has the same demand
a reduced his demand by 20. b increased his demand by 20. c reduced his demand by 14. d reduced his demand by 26. e reduced his demand by 24.
Topic: Slutsky Equation Correct Responses: 72 Correct
function for claret as Neville, namely q = :02m , 2p where m is income and p is price. Peregrine's income is 6,500 and he initially had to pay a price of 50 per bottle of claret. The price of claret rose to 60. The substitution e ect of the price change:
Di culty: 2 Discrimination Index: 81
8.20 Neville from your workbook has a friend named Nigel. Nigel has the same demand function
a reduced his demand by 60. b increased his demand by 60. c reduced his demand by 36. d reduced his demand by 84. e reduced his demand by 46.
for claret as Neville, namely q = :02m , 2p where m is income and p is price. Nigel's income is 7,000 and he initially had to pay a price of 50 per bottle of claret. The price of claret rose to 80. The substitution e ect of the price change:
MULTIPLE CHOICE
Topic: Slutsky Equation Correct Responses: 88 Correct Di culty: 1 Discrimination Index: 38
141
8.21 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 income 300 and if the price of good 2 changes from 5 to 6, while the price of good 1 stays at 1, then the income e ect of the price change:
a is 6 times as strong as the substitution e ect. b does not change demand for good 1. c accounts for the entire change in demand. d is exactly twice as strong as the substitution e ect. e is 5 times as strong as the substitution e ect.
Topic: Slutsky Equation Correct Responses: 88 Correct
Di culty: 1 Discrimination Index: 38
8.22 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 income 720 and if the price of good 2 changes from 8 to 9, while the price of good 1 stays at 1, then the income e ect of the price change:
a is 9 times as strong as the substitution e ect. b does not change demand for good 1. c accounts for the entire change in demand. d is exactly twice as strong as the substitution e ect. e is 8 times as strong as the substitution e ect.
CHAPTER 8 Slutsky Equation
Topic: Slutsky Equation Correct Responses: 0 Correct Di culty: 0 Discrimination Index: 0
142
8.23 Suppose that Agatha has $ 465 to spend on tickets for her trip. She intends to spend the
entire amount $465 on tickets and she prefers traveling rst-class to travelling second class. She needs to travel a total of 1500 miles. Suppose that the price of rst class-tickets is $0.40 per mile and the price of second-class tickets is $0.10 per mile. How many miles will she travel by second class?
a 450 b 600 c 225 d 550 e 150
Topic: Slutsky Equation Correct Responses: 0 Correct
Di culty: 0 Discrimination Index: 0
8.24 Suppose that Agatha has $ 420 to spend on tickets for her trip. She intends to spend the
entire amount $420 on tickets and she prefers traveling rst-class to travelling second class. She needs to travel a total of 1500 miles. Suppose that the price of rst class-tickets is $0.30 per mile and the price of second-class tickets is $0.20 per mile. How many miles will she travel by second class?
a 300 b 450 c 150 d 400 e 100
MULTIPLE CHOICE
Topic: Slutsky Equation Correct Responses: 74 Correct Di culty: 2 Discrimination Index: 30
143
8.25 Maude thinks delphiniums and hollyhocks are perfect substitutes, one-for-one. If Delphinia the income e ect of the change in demand for delphiniums will be bigger than the substitution e ect. b there will be no change in the demand for hollyhocks. c the entire change in demand for delphiniums will be due to the substitution e ect. d 1=5 of the change will be due to the income e ect. e 4=5 of the change will be due to the income e ect.
ums currently cost $5 per unit and hollyhocks cost $6 per unit, and if the price of delphiniums rises to $10 per unit:
Topic: Slutsky Equation Correct Responses: 74 Correct
Di culty: 2 Discrimination Index: 30
8.26 Maude thinks delphiniums and hollyhocks are perfect substitutes, one-for-one. If Delphinia the income e ect of the change in demand for delphiniums will be bigger than the substitution e ect. b there will be no change in the demand for hollyhocks. c the entire change in demand for delphiniums will be due to the substitution e ect. d 1=5 of the change will be due to the income e ect. e 4=5 of the change will be due to the income e ect.
ums currently cost $4 per unit and hollyhocks cost $5 per unit, and if the price of delphiniums rises to $9 per unit:
CHAPTER 8 Slutsky Equation
Topic: Slutsky Equation Correct Responses: 0 Correct Di culty: 0 Discrimination Index: 0
144
8.27 Carlos consumes only two goods, apples and bananas. His utility function is given by
Ux; y = a3b2 . 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 de nitely be better o after the price change. b Carlos will de nitely be worse o after the price change. c Carlos will be better o 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 o 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' utility will not be a ected by the price change.
Topic: Slutsky Equation Correct Responses: 0 Correct
Di culty: 0 Discrimination Index: 0
8.28 Carlos consumes only two goods, apples and bananas. His utility function is given by
Ux; y = minfx; 2yg. 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 de nitely be better o after the price change. b Carlos will de nitely be worse o after the price change. c Carlos will be better o 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 o 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' utility will not be a ected by the price change.
MULTIPLE CHOICE
Topic: Slutsky Equation Correct Responses: 0 Correct Di culty: 0 Discrimination Index: 0
145
8.29 Gladys loves music and spends her money only on tapes and compact disks. She is always
willing to trade 2 tapes for 1 compact disk. Originally, music stores sold compact disks for $9 each and tapes for $5 each. Then the price of compact disks fell to $8 each. The change in the consumption of compact disks that resulted is:
a entirely due to the substitution e ect. b entirely due to the income e ect. c partly due to the income e ect and partly due to the substitution e ect. d will be due to the income e ect for low incomes and the substitution e ect for high incomes. e There is no change in her demand for compact disks.
Essay
Topic: Slutsky Equation Correct Responses: 0
Slutsky Equation
Di culty: 2 Discrimination Index: 0
8.1 A taxpayer says "Sure I pay a lot of income tax, but I don't mind because I get back just as
much money as I pay in." Assuming that his facts are correct, explain why the taxpayer's reasoning is faulty. Use a diagram to show that an income tax can make a person worse o even if he is rebated an amount of money equal to what he paid in.
Answer: See page 148 of Varian.
Topic: Slutsky Equation Correct Responses: 0 Di culty: 3 Discrimination Index: 0
8.2 Use a diagram to prove that in case there are two goods, the substitution e ect of an increase
in the price of good x reduces the demand for good x.
good way to proceed is to suppose that the price of x increases and the substitution e ect increases demand for x. Draw the pivoted budget and notice that the new bundle would have to be a bundle that was previously rejected in favor of the old bundle. Since the pivoted budget still allows the old purchase, the weak axiom of revealed preference would be violated.
Topic: Slutsky Equation Correct Responses: 0 Di culty: 2 Discrimination Index: 0
8.3 Draw two di erent diagrams, one illustrating the Slutsky version of income and substitution
Answer: The diagrams can be found in Varian's book. The Slutsky version of the substitution e ect has income adjusted so the consumer is just able to a ord the old bundle at the new prices. The Hicks version has the consumer's income adjusted so is exactly as well o as he was at the old prices.
Topic: Slutsky Equation Correct Responses: 0 Di culty: 1 Discrimination Index: 0
e ects and the other illustrating the Hicks version of income and substitution e ects. How do these two notions di er?
8.4 What conditions ensure that the quantity of a good demanded increases as its price falls?
Explain your answer, using diagrams.
Answer: The standard Slutsky analysis is called for here. See the text.
ESSAY
Topic: Slutsky Equation Correct Responses: 0 Di culty: 2 Discrimination Index: 0
147
8.5 Suggest at least one reason why it might be worth the trouble it takes to learn how to decompose the e ects of a price change into an income e ect and a substitution e ect.
Answer: The substitution e ect of a price increase must decrease demand for that good. We know that if demand for the good increases as income increases, then the income e ect works in the same direction as the substitution e ect. Therefore the decomposition into income and substitution e ects allows one to prove that the demand curve slopes down whenever the Engel curve slopes up. A second reason is that someone who has already purchased his planned consumption bundle faces only a substitution e ect and not an income e ect when prices change, since in this case his budget line just pivots around the current consumption.
Chapter 9
True-False
Topic: Buying and Selling Correct Responses: 0 Correct
Buying and Selling
Di culty: 2 Discrimination Index: 0
9.1 If a rational utility maximizer is a net demander of a good, and if an increase in its price
causes him to buy more of it, then it must be an inferior good.
Topic: Buying and Selling Correct Responses: 68 Correct
Di culty: 2 Discrimination Index: 22
9.2 If a person is a net supplier of a normal good and its price increases while all other prices
stay the same, then his demand for the good must decrease.
Topic: Buying and Selling Correct Responses: 70 Correct
Di culty: 1 Discrimination Index: 16
9.3 If a consumer is a buyer of some goods and a seller of others, then a change in prices will
generate an extra income e ect in the Slutsky equation due to the revaluation of the consumer's endowment.
Topic: Buying and Selling Correct Responses: 97 Correct Di culty: 1 Discrimination Index: 9
9.4 If a consumer is initially endowed with a positive amount of two goods and sells some of one
to get more of the other, and if she has no other sources of income, then her budget line will pass through her endowment point.
Topic: Buying and Selling Correct Responses: 71 Correct Di culty: 2 Discrimination Index: 29
9.5 If a utility maximizer is a net seller of something and the price of that good rises while other
prices stay constant, her situation might improve so much that she becomes a net buyer.
TRUE-FALSE
Topic: Buying and Selling Correct Responses: 93 Correct Di culty: 2 Discrimination Index: 23
149
9.6 If a person is a net seller of some good and the price of that good decreases, she might
possibly become a net buyer.
Topic: Buying and Selling Correct Responses: 68 Correct
Di culty: 2 Discrimination Index: 14
9.7 Wilhelm consumes only apples and bananas. His endowment is 5 units of apples and 10 units
of bananas. Both goods are normal goods for Wilhelm. At current prices, Wilhelm is a net seller of apples. If the price of apples rises and the price of bananas stays the same, his demand for apples must decrease.
Topic: Buying and Selling Correct Responses: 50 Correct
Di culty: 2 Discrimination Index: 0
9.8 Bill receives half of his income in wages and half of his income in dividends. Bill would be
indi erent between a 50 percent increase in his wage rate and a 50 percent increase in his dividend income.
Topic: Buying and Selling Correct Responses: 72 Correct
Di culty: 1 Discrimination Index: 6
9.9 If all goods, including leisure, are normal goods, then an increase in the wage rate will necessarily make people want to work more hours.
Topic: Buying and Selling Correct Responses: 19 Correct
Di culty: 2 Discrimination Index: 48
9.10 If someone has a Cobb-Douglas utility function and no income from any source other than
labor earnings, then an increase in wages will not change the amount that person chooses to work.
CHAPTER 9 Buying and Selling
Topic: Buying and Selling Correct Responses: 87 Correct Di culty: 1 Discrimination Index: 5
150
9.11 If leisure is a normal good, then an increase in non-labor income will reduce labor supply.
Topic: Buying and Selling Correct Responses: 0 Correct Di culty: 1 Discrimination Index: 0
9.12 A person's full income is the amount of income that he or she would have if there were no
taxes.
Topic: Buying and Selling Correct Responses: 79 Correct Di culty: 2 Discrimination Index: 29
9.13 If a person has no non-labor income, a decrease in wages causes the budget line between
leisure and other goods to shift downward in a parallel fashion.
Topic: Buying and Selling Correct Responses: 67 Correct Di culty: 1 Discrimination Index: 24
9.14 If leisure is an inferior good, then an increase in the wage rate will make a person work
more.
Topic: Buying and Selling Correct Responses: 64 Correct Di culty: 1 Discrimination Index: 31
9.15 Jack has a backward-bending labor supply curve. At wages of $5 an hour he chooses to
work 50 hours a week. His boss wants him to work more hours per week and o ers him $5 an hour for the rst 50 hours per week and $7 an hour for every hour beyond 50 hours per week. Because of his backward bending supply curve, Jack might actually choose to work fewer hours.
Topic: Buying and Selling Correct Responses: 73 Correct Di culty: 2 Discrimination Index: 26
9.16 Les is allowed to work only 8 hours a day at his main job, although he would like to work
more hours. He takes a second job. He can work as many hours as he wishes at the second job, but at a lower wage. If leisure is a normal good, then an increase in the wage rate for his rst job will reduce the number of hours he chooses to work at his second job.
TRUE-FALSE
Topic: Buying and Selling Correct Responses: 79 Correct Di culty: 2 Discrimination Index: 46
151
9.17 Suppose a consumer is initially endowed with a positive amount of two goods, sells some of
one to get more of the other, and has no other sources of income. If the price of one good falls, his new budget line is everywhere above his old budget line.
Multiple Choice
Buying and Selling
Topic: Buying and Selling Correct Responses: 88 Correct
Di culty: 1 Discrimination Index: 23
9.1 Marsha Mellow is very exible. She consumes x and y. She says `Give me x or give me y; I
don't care. I can't tell the di erence between them.' She is currently endowed with 14 units of x and 6 units of y. The price of x is 4 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 66 b 20 c 62 d 6 e 31
Topic: Buying and Selling Correct Responses: 88 Correct
Di culty: 1 Discrimination Index: 23
9.2 Marsha Mellow is very exible. She consumes x and y. She says `Give me x or give me y;
I don't care. I can't tell the di erence between them.' She is currently endowed with 4 units of x and 17 units of y. The price of x is 2 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 27 b 21 c 25 d 17 e 13
MULTIPLE CHOICE
Topic: Buying and Selling Correct Responses: 56 Correct Di culty: 3 Discrimination Index: 39
153
9.3 Yoram insists on consuming 3 times as much y as he consumes of x so he always has y = 3x.
He will consume these goods in no other ratio. The price of x is 2 times the price of y. Yoram has an endowment of 24 x0s and 42 y0 s which he can trade at the going prices. He has no other source of income. What is Yoram's gross demand for x?
a 90 b 66 c 18 d 16 e We can't determine the answer without knowing the price of x.
Topic: Buying and Selling Correct Responses: 56 Correct
Di culty: 3 Discrimination Index: 39
9.4 Pablo insists on consuming 4 times as much y as he consumes of x so he always has y = 4x.
He will consume these goods in no other ratio. The price of x is 5 times the price of y. Pablo has an endowment of 15 x0s and 60 y0 s which he can trade at the going prices. He has no other source of income. What is Pablo's gross demand for x?
a 135 b 75 c 15 d 10 e We can't determine the answer without knowing the price of x.
CHAPTER 9 Buying and Selling
Topic: Buying and Selling Correct Responses: 82 Correct Di culty: 1 Discrimination Index: 29
2
154
9.5 Diana consumes commodities x and y and her utility function is Ux; y = xy . Good x costs
$2 per unit and good y costs $1 per unit. If she is endowed with 3 units of x and 6 units of y; how many units of good y will she consume?
a 11 b 3 c 8 d 14 e None of the above.
Topic: Buying and Selling Correct Responses: 82 Correct Di culty: 1 Discrimination Index: 29
3
9.6 Maude consumes commodities x and y and her utility function is Ux; y = xy . Good x costs
$3 per unit and good y costs $1 per unit. If she is endowed with 6 units of x and 2 units of y; how many units of good y will she consume?
a 18 b 6 c 15 d 17 e None of the above.
Topic: Buying and Selling Correct Responses: 75 Correct Di culty: 2 Discrimination Index: 44
3
9.7 Donald consumes goods x and y. His utility function is Ux; y = xy . He is endowed with 43
units of x and 7 units of y. The price of x is 1 and the price of y is 3. Find his net demand for x.
a ,27 b 18 c ,30 d ,20 e 59
MULTIPLE CHOICE
Topic: Buying and Selling Correct Responses: 75 Correct Di culty: 2 Discrimination Index: 44
4
155
9.8 Donald consumes goods x and y. His utility function is Ux; y = xy . He is endowed with 78
units of x and 9 units of y. The price of x is 1 and the price of y is 3. Find his net demand for x.
a ,57 b 23 c ,60 d ,48 e 99
Topic: Buying and Selling Correct Responses: 87 Correct Di culty: 1 Discrimination Index: 6
9.9 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.
Topic: Buying and Selling Correct Responses: 71 Correct Di culty: 2 Discrimination Index: 46
9.10 Holly consumes x and y. The price of x is 4 and the price of y is 4. Holly's only source of
income is her endowment of 6 units of x and 6 units of y which she can buy or sell at the going prices. She plans to consume 7 units of x and 5 units of y. If the prices change to 7 for x and 7 for y; which of the following is true?
a She is better o . b She is worse o . c She is neither better o nor worse o . d We can't tell whether she is better o or worse o unless we know her utility function. e She is better o if she has non-convex preferences.
CHAPTER 9 Buying and Selling
Topic: Buying and Selling Correct Responses: 71 Correct Di culty: 2 Discrimination Index: 46
156
9.11 Kristina consumes x and y. The price of x is 5 and the price of y is 5. Kristina's only source
of income is her endowment of 6 units of x and 6 units of y which she can buy or sell at the going prices. She plans to consume 7 units of x and 5 units of y. If the prices change to 8 for x and 8 for y; which of the following is true?
a She is better o . b She is worse o . c She is neither better o nor worse o . d We can't tell whether she is better o or worse o unless we know her utility function. e She is better o if she has non-convex preferences.
Topic: Buying and Selling Correct Responses: 85 Correct Di culty: 1 Discrimination Index: 19
9.12 Milton consumes two commodities in a perfect market system. The price of x is 5 and the
a 110 b 105 c 50 d 100 e None of the above.
Topic: Buying and Selling Correct Responses: 85 Correct Di culty: 1 Discrimination Index: 19
price of y is 1. His utility function is Ux; y = xy. He is endowed with 40 units of good x and no y. Find his consumption of good y.
9.13 Milton consumes two commodities in a perfect market system. The price of x is 5 and the
a 70 b 65 c 30 d 60 e None of the above.
price of y is 1. His utility function is Ux; y = xy. He is endowed with 24 units of good x and no y. Find his consumption of good y.
MULTIPLE CHOICE
Topic: Buying and Selling Correct Responses: 75 Correct Di culty: 2 Discrimination Index: 47
157
9.14 Russ Tickman is a dairy farmer. He consumes milk and other goods. His utility function
is given by Ux; y = yx + 1 where x is his milk consumption and y is his consumption of other goods. His initial endowment is 19 units of milk per day and no units of other goods. If the price of milk is 2 and the price of other goods is 1, how much milk does he consume?
a 9 gallons b 38 gallons c 20 gallons d 14 gallons e 12 gallons
Topic: Buying and Selling Correct Responses: 0 Correct
Di culty: 2 Discrimination Index: 0
9.15 Jack earns 5 dollars per hour. He has 100 hours per week which he can use for either labor
or leisure. The government institutes a plan in which each worker receives a $100 grant from the government, but has to pay 50 of his or her labor income in taxes. If his utility function is Uc; r = cr where c is dollars worth of consumption of goods and r is hours of leisure per week, how many hours per week will Jack choose to work?
a 30 b 40 c 26 d 20 e None of the above.
CHAPTER 9 Buying and Selling
Topic: Buying and Selling Correct Responses: 57 Correct Di culty: 1 Discrimination Index: 15
158
9.16 Aristotle earns 5 dollars per hour. He has 110 hours per week available for either labor or
leisure. In the old days he paid no taxes and received nothing from the government. Now he gets a $200 payment per week from the government and he must pay half of his labor income in taxes. His before-tax wages are the same as they were before; and he has no other source of income than wages and payments from the government. He notices that with the government payment and his taxes, he can exactly a ord the combination of leisure and consumption goods that he used to choose. How many hours per week did he work in the old days?
a 100 b 20 c 45 d 60 e None of the above.
Topic: Buying and Selling Correct Responses: 31 Correct
Di culty: 2 Discrimination Index: 40
9.17 Rhoda takes a job with a construction company. She earns $5 an hour for the rst 40
hours of each week and then gets "double-time" for overtime. That is, she is paid $10 an hour for every hour beyond 40 hours a week that she works. Rhoda has 70 hours a week available to divide between construction work and leisure. She has no other source of income, and her utility function is U = cr where c is her income to spend on goods and r is the number of hours of leisure that she has per week. She is allowed to work as many hours as she wants to. How many hours will she work?
a 50 b 30 c 45 d 35 e None of the above.
MULTIPLE CHOICE
Topic: Buying and Selling Correct Responses: 0 Correct Di culty: 2 Discrimination Index: 0
159
9.18 Wendy and Mac work in fast-food restaurants. Wendy is paid $4 an hour for the rst
40 hours a week that she works and $6 an hour for every hour beyond 40 hours per week. Mac gets $5 an hour no matter how many hours he works. Each has 110 hours per week to allocate between work and leisure. Each has a utility function U = cr where c is expenditure per week on consumption and r is hours of leisure per week. Each can choose the number of hours to work. If Wendy works W hours and Mac works M hours, then:
a W = 1:5M. b W M. c W , M = 6:66. d W , M = 10. e None of the above.
Topic: Buying and Selling Correct Responses: 63 Correct
Di culty: 3 Discrimination Index: 36
9.19 Heather and Myrtle have the same tastes. Heather is paid $10 an hour and chooses to work
9 hours a day. Myrtle is paid $9 an hour for the rst 8 hours she works and $18 an hour for any time she works beyond 8 hours a day.
a Since she has the same tastes as Heather and can earn the same income by working 9 hours a day, she chooses to work 9 hours a day. b Unless her indi erence curve is kinked, Heather would be better o facing the same pay schedule as Myrtle. c Myrtle would prefer Heather's pay schedule to her own. d Myrtle will work less than 9 hours a day. e None of the above.
CHAPTER 9 Buying and Selling
Topic: Buying and Selling Correct Responses: 71 Correct Di culty: 1 Discrimination Index: 10
160
9.20 Mike Teevee likes to watch television and to eat candy. In fact his utility function is
Ux; y = x2y where x is the number of hours he spends watching television and y is the number of
dollars per week he spends on candy. Mike's mother doesn't like him to watch so much television. She limits his television watching to 36 hours a week and in addition she pays him $1 an hour for every hour that he reduces his television watching below 36 hours a week. If this is Mike's only source of income to buy candy, how many hours of television does he watch per week?
a 36 b 12 c 24 d 18 e 16
Topic: Buying and Selling Correct Responses: 75 Correct
Di culty: 2 Discrimination Index: 29
9.21 Georgina earns 6 dollars an hour. She has no non-labor income. She has 100 hours a week
a 23 b 25 c 28 d 50 e None of the above.
available for either labor or leisure. Her utility function is Uc; r = cr3 where c is dollars worth of goods and r is hours of leisure. How many hours per week will she work?
MULTIPLE CHOICE
Topic: Buying and Selling Correct Responses: 75 Correct Di culty: 2 Discrimination Index: 29
161
9.22 Nicole earns 6 dollars an hour. She has no non-labor income. She has 75 hours a week
a 23 b 25 c 28 d 37.50 e None of the above.
available for either labor or leisure. Her utility function is Uc; r = cr2 where c is dollars worth of goods and r is hours of leisure. How many hours per week will she work?
Topic: Buying and Selling Correct Responses: 48 Correct
Di culty: 2 Discrimination Index: 23
9.23 Will is paid $10 an hour for the rst 40 hours per week that he works. He can also work as
many hours overtime as he wishes to. He is paid $15 an hour for every hour that he works beyond 40 hours a week. Leisure is a normal good for Will and he is currently working some overtime. If his hourly wage for the rst 40 hours per week that he works rises to $12 and his wages for overtime remain at $15 per hour:
a he will choose to work fewer hours per week. b he will choose to work more hours per week. c he will choose to work the same number of hours per week. d he will choose to work more hours per week if and only if his income exceeds his labor income. e he will choose to work more hours per day if and only if he works less than 20 hours overtime per week.
CHAPTER 9 Buying and Selling
Topic: Buying and Selling Correct Responses: 48 Correct Di culty: 2 Discrimination Index: 23
162
9.24 Ben is paid $6 an hour for the rst 40 hours per week that he works. He can also work as
many hours overtime as he wishes to. He is paid $13 an hour for every hour that he works beyond 40 hours a week. Leisure is a normal good for Ben and he is currently working some overtime. If his hourly wage for the rst 40 hours per week that he works rises to $8 and his wages for overtime remain at $13 per hour:
a he will choose to work fewer hours per week. b he will choose to work more hours per week. c he will choose to work the same number of hours per week. d he will choose to work more hours per week if and only if his income exceeds his labor income. e he will choose to work more hours per day if and only if he works less than 20 hours overtime per week.
Topic: Buying and Selling Correct Responses: 40 Correct
Di culty: 3 Discrimination Index: 28
9.25 There are no taxes on the rst $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 Uc; r = rc2 ; 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
MULTIPLE CHOICE
Topic: Buying and Selling Correct Responses: 40 Correct Di culty: 2 Discrimination Index: 43
2
163
9.26 Susan's utility function is Ux; y = x + yR ; where x and y are the quantities of goods X
and Y that she consumes, and R is the number of hours of leisure that she has per day. Good X costs 4 dollars per unit and good Y costs 2 dollars per unit. Her wage rate is 8 dollars per hour and she has 15 hours per day to allocate between labor and leisure. She will:
a consume equal amounts of X and Y . b consume 10 units of X. c consume 20 units of Y . d work 10 hours a day. e consume twice as much of good X as of good Y .
Topic: Buying and Selling Correct Responses: 0 Correct
Di culty: 0 Discrimination Index: 0
9.27 George Goodhands is a life-insurance agent. He can work 40 hours a week for a large national
insurance company and receive a xed salary of S dollars per week, or he can work independently, for as many or as few hours per week as he likes and earn w dollars per hour. He can not take both jobs. Which of the following responses to an increase in the salary paid by the insurance company would be INCONSISTENT with the weak axiom of revealed preference?
a Leaving independent work for the 40 hour salaried job. b Doing exactly what he was doing before. c More than one of these options. d Continuing to work independently, but working more hours. e None of the above.
CHAPTER 9 Buying and Selling
Topic: Buying and Selling Correct Responses: 24 Correct Di culty: 3 Discrimination Index: 11
164
9.28 Gladys Goodhands is an insurance agent. She must choose one and only one of two possible
alternative jobs. She can either work for a large national insurance company for which she must work exactly 40 hours a week and will receive a salary of S dollars per week, or she can work as an independent insurance agent, in which case she can work exactly as many hours per week as she wishes and will earn w dollars for every hour that she works. Gladys satis es the weak axiom of revealed preference and she cares only about how much money she makes and about how much leisure time she has. Which of the following statements is necessarily true?
a If S=40 w; she will prefer to work for the large national insurance company. b If S=40 w and she decides to work independently, then it must be that she chooses to work more than 40 hours a week. c If S=40 w and she decides to work independently, then it must be that she chooses to work less than 40 hours a week. d If S=40 = w; she will be indi erent between working for the large insurance company and working independently. e None of the above.
Topic: Buying and Selling Correct Responses: 59 Correct
Di culty: 2 Discrimination Index: 58
9.29 Albert consumes only tangerines and bananas. His only source of income is an initial en-
dowment of 30 units of tangerines and 10 units of bananas. Albert insists on consuming tangerines and bananas in xed proportions , ,one unit of tangerines per unit of bananas. He initially faces a price of 10 per unit for each fruit. The price of tangerines rose to 30 per unit while the price of bananas stayed unchanged. After the price change, he would:
a increase his consumption of tangerines by exactly 5 units. b decrease his consumption or tangerines by at least 5 units. c increase his consumption of tangerines by exactly 15 units. d decrease his consumption of tangerines by exactly 7 units. e decrease his consumption of bananas by at least 1 unit.
MULTIPLE CHOICE
Topic: Buying and Selling Correct Responses: 59 Correct Di culty: 2 Discrimination Index: 58
165
9.30 Boris consumes only cherries and pineapples. His only source of income is an initial en-
dowment of 30 units of cherries and 10 units of pineapples. Boris insists on consuming cherries and pineapples in xed proportions , ,one unit of cherries per unit of pineapples. He initially faces a price of 25 per unit for each fruit. The price of cherries rose to 75 per unit while the price of pineapples stayed unchanged. After the price change, he would:
a increase his consumption of cherries by exactly 6 units. b decrease his consumption or cherries by at least 6 units. c increase his consumption of cherries by exactly 16 units. d decrease his consumption of cherries by exactly 8 units. e decrease his consumption of pineapples by at least 1 unit.
Topic: Buying and Selling Correct Responses: 88 Correct
Di culty: 1 Discrimination Index: 36
9.31 Yolanda receives a lump sum child-support payment of $150 per week. She has 80 hours a
week to divide between labor and leisure. She earns $5 an hour. The rst $150 per week of her labor income is untaxed, but all labor income that she earns above $ 150 is taxed at the rate 30 percent. If we graph her budget line with leisure on the horizontal axis and consumption on the vertical axis, her budget line:
a has a kink in it at the point where she takes 60 units of leisure. b has a kink in it where her income is 300 and her leisure is 50. c has a slope of ,3:50 everywhere, d has no kinks in the part that corresponds to positive labor supply. e has a piece that is a horizontal straight line.
CHAPTER 9 Buying and Selling
Topic: Buying and Selling Correct Responses: 88 Correct Di culty: 1 Discrimination Index: 36
166
9.32 Heidi receives a lump sum child-support payment of $50 per week. She has 80 hours a week
to divide between labor and leisure. She earns $5 an hour. The rst $200 per week of her labor income is untaxed, but all labor income that she earns above $ 200 is taxed at the rate 30 percent. If we graph her budget line with leisure on the horizontal axis and consumption on the vertical axis, her budget line:
a has a kink in it at the point where she takes 50 units of leisure. b has a kink in it where her income is 250 and her leisure is 40. c has a slope of ,3:50 everywhere, d has no kinks in the part that corresponds to positive labor supply. e has a piece that is a horizontal straight line.
Topic: Buying and Selling Correct Responses: 99 Correct Di culty: 0 Discrimination Index: 0
9.33 If Abishag owns 16 quinces and 15 kumquats, and if the price of kumquats is 4 times the
price of quinces, how many kumquats can she a ord if she buys as many kumquats as she can?
a 38 b 31 c 15 d 19 e 16
Topic: Buying and Selling Correct Responses: 99 Correct Di culty: 0 Discrimination Index: 0
9.34 If Abishag owns 12 quinces and 10 kumquats, and if the price of kumquats is 3 times the
price of quinces, how many kumquats can she a ord if she buys as many kumquats as she can?
a 28 b 22 c 10 d 14 e 11
MULTIPLE CHOICE
Topic: Buying and Selling Correct Responses: 78 Correct Di culty: 2 Discrimination Index: 35
167
9.35 Mario consumes eggplant and tomatoes in the ratio of one bushel of eggplant per bushel of
tomatoes. His garden yields 30 bushels of eggplant and 10 bushels of tomatoes. He initially faced prices of $25 per bushel for each vegetable, but the price of eggplant rose to $100 per bushel, while the price of tomatoes stayed unchanged. After the price change, he would:
a increase his eggplant consumption by 6 bushels. b decrease his eggplant consumption by at least 6 bushels. c increase his consumption of eggplant by 8 bushels. d decrease his consumption of eggplant by 8 bushels. e decrease his tomato consumption by at least 1 bushel.
Topic: Buying and Selling Correct Responses: 78 Correct Di culty: 2 Discrimination Index: 35
9.36 Mario consumes eggplant and tomatoes in the ratio of one bushel of eggplant per bushel of
tomatoes. His garden yields 30 bushels of eggplant and 10 bushels of tomatoes. He initially faced prices of $25 per bushel for each vegetable, but the price of eggplant rose to $50 per bushel, while the price of tomatoes stayed unchanged. After the price change, he would:
a increase his eggplant consumption by 3.33 bushels. b decrease his eggplant consumption by at least 3.33 bushels. c increase his consumption of eggplant by 5.33 bushels. d decrease his consumption of eggplant by 5.33 bushels. e decrease his tomato consumption by at least 1 bushel.
Topic: Buying and Selling Correct Responses: 88 Correct Di culty: 2 Discrimination Index: 36
9.37 Dr. Johnson receives a lump sum payment of $ 150 per week. Suppose that the rst $150 per
week of his labor income is untaxed, but all labor income above $150 is taxed at a rate of 10 percent.
a Dr. J 0s budget line has a kink in it at the point where he takes 60 units of leisure. b Dr. J 0 s budget line has a kink where his income is 300 and his leisure is 50. c Dr. J 0s budget line has slope ,4:50 everywhere. d Dr. J 0 s budget line has no kinks in the part of it that corresponds to a positive labor supply. e Dr. J 0s budget line has a piece that is a horizontal straight line.
CHAPTER 9 Buying and Selling
Topic: Buying and Selling Correct Responses: 88 Correct Di culty: 2 Discrimination Index: 36
168
9.38 Dr. Johnson receives a lump sum payment of $ 150 per week. Suppose that the rst $150 per
week of his labor income is untaxed, but all labor income above $150 is taxed at a rate of 50 percent.
a Dr. J 0s budget line has a kink in it at the point where he takes 60 units of leisure. b Dr. J 0 s budget line has a kink where his income is 300 and his leisure is 50. c Dr. J 0s budget line has slope ,2:50 everywhere. d Dr. J 0 s budget line has no kinks in the part of it that corresponds to a positive labor supply. e Dr. J 0s budget line has a piece that is a horizontal straight line.
Topic: Buying and Selling Correct Responses: 89 Correct Di culty: 1 Discrimination Index: 25
2
9.39 Dudley has a utility function UC; R = C,12,R ; 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 $20 per day and is paid a wage of $0 per hour, how many hours of leisure will he choose per day?
a 9 b 10 c 11 d 13 e 12
Topic: Buying and Selling Correct Responses: 89 Correct Di culty: 1 Discrimination Index: 25
2
9.40 Dudley has a utility function UC; R = C,12,R ; 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 $40 per day and is paid a wage of $0 per hour, how many hours of leisure will he choose per day?
a 7 b 8 c 9 d 11 e 10
MULTIPLE CHOICE
Topic: Buying and Selling Correct Responses: 97 Correct Di culty: 1 Discrimination Index: 10
169
9.41 Mr. Cog has 18 hours per day to divide between labor and leisure. His utility function is
UC; R = CR; where C is dollars per year spent on consumption and R is hours of leisure. If he
has 19 dollars of nonlabor income per day and gets a wage rate of 15 dollars per hour when he works, his budget equation, expressing combinations of consumption and leisure that he can a ord to have, can be written as:
a 15R + C = 19. b 15R + C = 289. c R + C=15 = 379. d C = 289 + 15R. e C = 346 + 15R.
Topic: Buying and Selling Correct Responses: 97 Correct
Di culty: 1 Discrimination Index: 10
9.42 Mr. Cog has 18 hours per day to divide between labor and leisure. His utility function is
UC; R = CR; where C is dollars per year spent on consumption and R is hours of leisure. If he has
5 dollars of nonlabor income per day and gets a wage rate of 18 dollars per hour when he works, his budget equation, expressing combinations of consumption and leisure that he can a ord to have, can be written as:
a 18R + C = 5. b 18R + C = 329. c R + C=18 = 437. d C = 329 + 18R. e C = 344 + 18R.
CHAPTER 9 Buying and Selling
Topic: Buying and Selling Correct Responses: 47 Correct Di culty: 0 Discrimination Index: 43
170
9.43 Mr. Cog has 18 hours per day to divide between labor and leisure. His utility function is
UC; R = CR; where C is dollars per year spent on consumption and R is hours of leisure. If he
has a nonlabor income of 40 dollars per day and a wage rate of 8 dollars per hour, he will choose a combination of labor and leisure that allows him to spend:
a 184 dollars per day on consumption. b 82 dollars per day on consumption. c 112 dollars per day on consumption. d 92 dollars per day on consumption. e 138 dollars per day on consumption.
Topic: Buying and Selling Correct Responses: 47 Correct
Di culty: 0 Discrimination Index: 43
9.44 Mr. Cog has 18 hours per day to divide between labor and leisure. His utility function is
UC; R = CR; where C is dollars per year spent on consumption and R is hours of leisure. If he
has a nonlabor income of 44 dollars per day and a wage rate of 19 dollars per hour, he will choose a combination of labor and leisure that allows him to spend:
a 386 dollars per day on consumption. b 183 dollars per day on consumption. c 215 dollars per day on consumption. d 193 dollars per day on consumption. e 289.50 dollars per day on consumption.
MULTIPLE CHOICE
Topic: Buying and Selling Correct Responses: 0 Correct Di culty: 3 Discrimination Index: 0
171
9.45 Ollie South has an endowment of 10 guns and 10 pounds of butter. He can buy or sell
butter at $1 a pound. But the world market for guns is more complicated: he can buy guns for $5 each, but he can sell guns for only $2. If we graph his budget line with guns on the horizontal axis and butter on the vertical axis, then Ollie's budget line is:
a a straight line joining 12; 0 and 0; 30. b a straight line joining 14; 0 and 0; 14. c a straight line with slope ,2=5 through the point 10; 10. d a straight line with slope ,5=2 going through the point 10; 10. e none of the above.
Topic: Buying and Selling Correct Responses: 0 Correct
Di culty: 0 Discrimination Index: 0
9.46 Charlie consumes apples and bananas; his utility function is Ua; b = ab. Charlie's fruit
farm yielded 5 apples and 10 bananas. In addition, Charlie has $10 that he was given by a secret admirer. Charlie can buy or sell apples at $2 each and he can buy or sell bananas at $1 each. Charlie will consume:
a more apples and more bananas than he grows. b more apples and fewer bananas than he grows. c fewer apples and more bananas than he grows. d fewer apples and more bananas than he grows. e exactly as many apples as he grows and more bananas than he grows.
CHAPTER 9 Buying and Selling
Topic: Buying and Selling Correct Responses: 0 Correct Di culty: 0 Discrimination Index: 0
172
9.47 A farmer gets 20 eggs and 10 tomatoes every week from her chickens and her tomato plants.
She has no other source of income. She has convex, downward-sloping indi erence curves. The current market prices are $2 per egg and $3 per tomato. At these prices she chooses the same bundle that she is endowed with 20 eggs and 10 tomatoes.
a If relative prices change in any way whatsoever, she will certainly be no worse o and may be better o than she was before the price change. b An increase in the price of eggs with the price of tomatoes remaining constant will decrease her utility. c An increase in the price of tomatoes with the price of eggs remaining constant will make her worse o . d If both prices rise, she will be worse o , but if only one price rises she might be made better o or worse o , depending on her tastes. e Since she earns her income from tomatoes and eggs only, she treats eggs and tomatoes as perfect substitutes.
Essay
Buying and Selling
Di culty: 3 Discrimination Index: 0
Topic: Buying and Selling Correct Responses: 0
9.1 Mr. and Mrs. Brauer owned their own home. There was a real estate boom in their town
and the price of house doubled. Their income and other prices stayed constant. The Brauer's complained that "we are being driven from our home, we can't a ord to live here any more". a Draw a diagram that illustrates what happened to the Brauer's budget constraint. b Could they have been made worse o by the change? Could they have been made better o ? Explain why or why not.
good diagram would show their budget line between housing and other goods pivoting around their current consumption. They can't be made worse o because they can still a ord their old consumption bundle. They might be better o because they might choose to consume less housing and more other goods.
Topic: Buying and Selling Correct Responses: 0
Di culty: 1 Discrimination Index: 0
9.2 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.
Answer: Harvey's gross demands are 8; 2. The graph is pretty straightforward. Check the text for similar graphs.
Topic: Buying and Selling Correct Responses: 0
Di culty: 2 Discrimination Index: 0
9.3 Is it ever possible that if someone is a net seller of a good, and the price of the good he sells
falls, the consumer could wind up better o than he was before by switching from being a seller to being a buyer? Draw a graph to justify your answer.
Answer: Yes, it is possible. For example, one can draw a budget line and an indi erence curve for a person who is a net seller of the good on the horizontal axis. The price decrease pivots the budget line around his initial endowment which is located below and to the right of his consumption. Draw the pivoted line so that it crosses the indi erence curve. The consumer can now bene t by becoming a net buyer of the good on the horizontal axis.
CHAPTER 9 Buying and Selling
Topic: Buying and Selling Correct Responses: 0 Di culty: 1 Discrimination Index: 0
174
9.4 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 o ? Use a diagram to illustrate your answer.
Answer: No, it is not. If one is a net seller of a good and its price rises, one can still a ord the old consumption bundle and hence can't be made worse o .
Topic: Buying and Selling Correct Responses: 0
Di culty: 1 Discrimination Index: 0
9.5 Peter has an endowment of 3 units of good x and 5 units of good y. He can buy and sell x at
a price of $100 and y at a price of $200. He receives an income of $700 as alimony from a former spouse. a Draw Peter's budget line for x and y. Show his initial endowment of x and y on your diagram. b Calculate the amount of x that he could a ord if he bought only x and of y he could a ord if he bought only y. c Write an equation for Peter's budget. Answer: He could a ord 20 units of x and no y or 10 units of y and no x. His budget is
100x + 200y = 2000.
Topic: Buying and Selling Correct Responses: 0
Di culty: 2 Discrimination Index: 0
9.6 Dudley's utility function for goods and leisure is UG; L = G , 20, L20 , L where G is
consumption of goods and L is the number of hours of leisure per day. Goods cost $1 per unit. a If Dudley has an income from nonlabor sources of $25 per day and could work as much as he chose to but gets zero wages, how much would he work? b Sketch Dudley's indi erence curves on a graph with leisure on the horizontal axis and income on the vertical axis. If Dudley's non-labor income were $25 a day and he could work as much as he wished for $10 an hour, how many hours a day would he choose to work?
4 hours a day. b9 hours a day.
ESSAY
Topic: Buying and Selling Correct Responses: 0 Di culty: 2 Discrimination Index: 0
175
9.7 Marilyn is a journalist. She is considering two possible jobs. One job is as an editor for a
magazine. The other job is writing "free-lance" articles and selling them to whoever buys them. If she works for the magazine, she must spend 10 hours a day at work and commuting. She will be paid $130 a day net of commuting costs and taxes if she takes this job. If she writes free-lance articles, she can work at home and work as many hours a day as she pleases. She estimates that she would earn $10 an hour after taxes if she does this. Her utility function is U = R3 C where R3 is the cube of the number of hours a day she spends not working or commuting and C is her earnings. a If Marilyn chooses to free-lance, how many hours will she work? b Calculate her utility in each job and tell which she will choose.
6 hours. b If she freelances, U = 349; 920. If she works for the magazine U = 356; 720. She should choose the magazine.
Topic: Buying and Selling Correct Responses: 0
Di culty: 1 Discrimination Index: 0
9.8 Ernie's wage rate is $10 an hour. He has no earnings other than his labor income. His utility
function is UC; L = CR2 where C is the amount of money he spends on consumption, and R is the number of hours a day he spends NOT working. a Write an equation that describes Ernie's budget constraint. b How many hours does Ernie choose to work per day? c How much money does he spend on consumption per day?
C + 10R = 240. b8. c80.
Topic: Buying and Selling Correct Responses: 0
1=2
Di culty: 3 Discrimination Index: 0
2
9.9 May's utility function is U = C + 14D , :5H + J where C is dollars spent on goods other
than housecleaning, D is the number of hours per day that somebody spends cleaning her house, H is the number of hours per day May spends cleaning her house, and J is the number of hours per day May spends working at her job. All May's income comes from her job. She can work as many hours a day as she wishes at a wage of $7 an hour. a If she cannot hire anyone to do her housecleaning, how many hours will she spend on the job and how many hours will she spend housecleaning? b If she can hire a housecleaner at $5 an hour, how many hours will she work on her job, how many hours of housecleaning will she hire, and how many hours will she clean house?
Answer: a6 hours, 1 hour b7 hours, 49=25; 0
CHAPTER 9 Buying and Selling
Topic: Buying and Selling Correct Responses: 0 Di culty: 2 Discrimination Index: 0
176
9.10 Leo thinks leisure and goods are perfect complements. Goods cost $1 per unit. Leo wants
to consume 5 units of goods per hour of leisure. Leo can work as much as he wants to at the wage rate of $15 an hour. He has no other source of income. a How many hours a day will Leo choose to spend at leisure? b Draw a diagram showing Leo's budget and his choice of goods and leisure. c Will Leo work more or less if his wage rate increases?
18 hours a day c less
Topic: Buying and Selling Correct Responses: 0 Di culty: 2 Discrimination Index: 0
9.11 Lucetta changes light bulbs. She is paid $10 an hour. She can work as many hours as she
wishes. Lucetta works only 6 hours a day. But she says she loves her job and is happier working at this job than she would be if she made the same income without working at all. Though this may sound strange, Lucetta is perfectly rational. Draw a graph showing leisure on the horizontal axis and income on the vertical axis. Draw a budget line and some indi erence curves for Lucetta that are consistent with Lucetta's words and actions. Explain in words what happens.
Answer: Work for Lucetta is desirable on average but undesirable at the margin when she is working 6 hours a day. The diagram will work if you draw a U-shaped indi erence curve tangent to her budget line at 6 hours. Make sure that this indi erence curve intersects the horizontal line through her consumption choice somewhere to the right of her choice but to the left of where she doesn't work at all.
Chapter 10
True-False
Topic: Intertemporal Choice Correct Responses: 71 Correct
Intertemporal Choice
Di culty: 2 Discrimination Index: 40
10.1 An increase in the interest rate can not make a lender who satis es WARP become a
borrower.
Topic: Intertemporal Choice Correct Responses: 61 Correct Di culty: 1 Discrimination Index: 67
10.2 If the real interest rate is positive, then a unit of future consumption can be had for the
sacri ce of less than one unit of current consumption.
Topic: Intertemporal Choice Correct Responses: 74 Correct
Di culty: 1 Discrimination Index: 23
10.3 The real interest rate is the interest rate that one receives net of brokerage costs or fees
imposed by nancial intermediaries.
Topic: Intertemporal Choice Correct Responses: 84 Correct
Di culty: 1 Discrimination Index: 8
10.4 An increase in the interest rate will necessarily result in a decrease in the present value of
a given stream of positive incomes.
Topic: Intertemporal Choice Correct Responses: 83 Correct
Di culty: 1 Discrimination Index: 20
10.5 In a graph that has current consumption on the horizontal axis and future consumption on
the vertical axis, the horizontal intercept of the budget line is the present value of all one's income in the two periods.
CHAPTER 10 Intertemporal Choice
Topic: Intertemporal Choice Correct Responses: 78 Correct Di culty: 1 Discrimination Index: 10
178
10.6 If a consumer can borrow and lend at the same interest rate, then he can exactly a ord a
consumption plan if the present value of his consumption equals the present value of his income.
Topic: Intertemporal Choice Correct Responses: 79 Correct Di culty: 1 Discrimination Index: 24
10.7 It would be a mistake to choose the investment that maximizes the present value of your
income stream unless you planned to spend your entire wealth in the current time period.
Topic: Intertemporal Choice Correct Responses: 33 Correct Di culty: 0 Discrimination Index: 0
10.8 If the interest rate at which you can borrow is higher than the interest rate at which you
can lend, your budget for current and future consumption is still a convex set.
Topic: Intertemporal Choice Correct Responses: 0 Correct Di culty: 2 Discrimination Index: 0
10.9 If apples today are perfect substitutes for bananas today, then apples today must also be
perfect substitutes for bananas tomorrow.
Topic: Intertemporal Choice Correct Responses: 55 Correct
Di culty: 2 Discrimination Index: 6
10.10 Isaiah is a net borrower when the interest rate is 5 and a net saver when the interest
rate is 25. An increase in the interest rate from 5 to 25 may make Isaiah worse o .
Topic: Intertemporal Choice Correct Responses: 33 Correct Di culty: 2 Discrimination Index: 15
10.11 If the interest rate is less than the in ation rate, a rational person will never save money.
TRUE-FALSE
Topic: Intertemporal Choice Correct Responses: 87 Correct Di culty: 0 Discrimination Index: 13
179
10.12 An increase in the interest rate can make a utility-maximizing lender become a borrower.
Topic: Intertemporal Choice Correct Responses: 56 Correct Di culty: 1 Discrimination Index: 26
10.13 The intertemporal budget constraint for a consumer can be expressed by setting the present
value of her lifetime consumption equal to the future value of her endowment.
Topic: Intertemporal Choice Correct Responses: 0 Correct Di culty: 1 Discrimination Index: 0
10.14 The nominal interest rate is 5 and the in ation rate is 6. A rational consumer will not
choose to save.
Topic: Intertemporal Choice Correct Responses: 70 Correct Di culty: 1 Discrimination Index: 27
10.15 If the in ation rate doubles and the nominal interest rate remains constant, the real interest rate must be halved.
Topic: Intertemporal Choice Correct Responses: 79 Correct
Di culty: 1 Discrimination Index: 13
10.16 If the nominal interest rate is 3 and if prices fall by 2 per year, then the real rate of
interest is approximately 5.
Topic: Intertemporal Choice Correct Responses: 79 Correct
Di culty: 1 Discrimination Index: 13
10.17 If the nominal interest rate is 4 and if prices fall by 4 per year, then the real rate of
interest is approximately 8.
CHAPTER 10 Intertemporal Choice
Topic: Intertemporal Choice Correct Responses: 73 Correct Di culty: 1 Discrimination Index: 35
180
10.18 A utility maximizing consumer would not choose the investment that maximizes the present
value of her income stream unless she planned to spend her entire wealth in the rst period.
Topic: Intertemporal Choice Correct Responses: 0 Correct Di culty: 2 Discrimination Index: 0
10.19 Susan is a net borrower when the interest rate is 10 and a net saver when the interest
rate is 20. A decrease in the interest rate from 20 to 10 may make Susan worse o .
Topic: Intertemporal Choice Correct Responses: 0 Correct Di culty: 1 Discrimination Index: 0
10.20 A newspaper article claims that more students are choosing 1,year MBA programs instead
of 2,year programs because the 2,year programs no longer guarantee a well-paid job. If the length of your MBA program doesn't matter to employers, and you take a job right after completing your MBA, the present value of your lifetime earnings is tbe the same whether you take a 1 , year or 2 , year program.
Topic: Intertemporal Choice Correct Responses: 0 Correct Di culty: 2 Discrimination Index: 0
10.21 If the interest rate is 5 and will be 5 forever, the present value of an income stream
consisting of $10 a year paid to you on February 11 of every year, starting right now, is $210.
Multiple Choice
Topic: Intertemporal Choice Correct Responses: 42 Correct
Intertemporal Choice
Di culty: 3 Discrimination Index: 13
10.1 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 o . e none of the above.
Topic: Intertemporal Choice Correct Responses: 24 Correct 1
Di culty: 2 Discrimination Index: 19
2 1 2 1 2
10.2 Harvey Habit has a utility function Uc ; c = minfc ; c g where c and c are his consumption in periods 1 and 2 respectively. Harvey earns $189 in period 1 and he will earn $63 in period 2. Harvey can borrow or lend at an interest rate of 10. There is no in ation.
a Harvey will save 60. b Harvey will borrow 60. c Harvey will neither borrow nor lend. d Harvey will save 124. e None of the above.
Topic: Intertemporal Choice Correct Responses: 24 Correct 1
Di culty: 2 Discrimination Index: 19
2 1 2 1 2
10.3 Harvey Habit has a utility function Uc ; c = minfc ; c g where c and c are his consumption in periods 1 and 2 respectively. Harvey earns $168 in period 1 and he will earn $105 in period 2. Harvey can borrow or lend at an interest rate of 10. There is no in ation.
a Harvey will save 30. b Harvey will borrow 30. c Harvey will neither borrow nor lend. d Harvey will save 133. e None of the above.
CHAPTER 10 Intertemporal Choice
Topic: Intertemporal Choice Correct Responses: 23 Correct Di culty: 3 Discrimination Index: 21
182
10.4 O. B. Kandle will live for only two periods. In the rst period he will earn $100,000. In
the second period he will retire and live on his savings. Mr. Kandle has a Cobb-Douglas utility function Uc1 ; c2 = c2 c2 where c1 is his period 1 consumption and c2 is his period 2 consumption. 1 The real interest rate is r.
a If the interest rate rises, Mr. Kandle will save more. b If the interest rises, Mr. Kandle will save less. c The e ect of the interest rate is ambiguous, but we can tell that he will arrange to consume the same amount in each period. d The change in the interest rate won't a ect his saving. e None of the above.
Topic: Intertemporal Choice Correct Responses: 0 Correct
Di culty: 2 Discrimination Index: 0
10.5 Suppose that a person can borrow and lend at an interest rate of 10 percent. But there is a
5 rate of in ation and one has to pay an income tax of 30 on all interest income. If you borrow money, you can deduct interest as an expense. Where current consumption is on the horizontal axis and future consumption is on the vertical axis:
a the budget line will have a kink at the point of no saving or lending. b the budget line will be a straight line with a slope of about ,1:02. c the budget line will be a straight line with a slope of about ,1:05. d the budget line will be a straight line with a slope of about ,1:35. e None of the above.
MULTIPLE CHOICE
Topic: Intertemporal Choice Correct Responses: 26 Correct Di culty: 3 Discrimination Index: 22
183
10.6 For every two boxes of strawberries that she consumes, Millicent insists on having one pitcher
of cream. She does not, however, insist on consuming the same amount every week. Her utility function is U = minfs1 ; 2c1gminfs2 ; 2c2g where s1 and s2 are the number of boxes of strawberries she consumes this week and next week and c1 and c2 are the number of pitchers of cream she consumes this week and next. Strawberries cost $2 a box and cream costs $1 a pitcher. She has a present value of $100 to spend on these goods in the next two weeks. The weekly interest rate is 1. How many boxes of strawberries will she consume this week?
a 10 b 20 c 22 d 14.1 e 6.06
Topic: Intertemporal Choice Correct Responses: 0 Correct 1
Di culty: 2 Discrimination Index: 0
2 1 2 1 2
10.7 Roger's utility function is U = minfa ; a gminfb ; b g where a and a are the number of
piano lessons he consumes this year and next and b1 and b2 are the number of ice skating lessons he consumes this year and next. The price of piano lessons is $10 each and the price of ice skating lessons is $4 each. The prices won't change, but the interest rate is 7. If Roger consumes 20 piano lessons this year, how many ice-skating lessons will he consume next year?
a 50 b 20 c 40 d 30 e There is not enough information for us to tell.
CHAPTER 10 Intertemporal Choice
Topic: Intertemporal Choice Correct Responses: 21 Correct Di culty: 2 Discrimination Index: 48
184
10.8 If a consumer views a unit of consumption in period 1 as a perfect substitute one-for-one
for a unit of consumption in period 2 and if the real interest rate is positive, the consumer will:
a consume only in period 1. b consume only in period 2. c consume equal amounts in each period. d consume more in period 1 than in period 2 if income elasticity exceeds 1, else would consume more in period 2 than in period 1. e equalize expenditures but not consumption in the two periods.
Topic: Intertemporal Choice Correct Responses: 66 Correct Di culty: 2 Discrimination Index: 39
10.9 If the price level increases by 80 in one year, then for the real rate of interest to be 10,
the nominal rate of interest would have to be:
a 98. b 70. c 18. d 88. e 72.
Topic: Intertemporal Choice Correct Responses: 51 Correct 1 2
Di culty: 2 Discrimination Index: 32
1 2 1
10.10 Kenny Kink's utility function is uc ; c = minfc ; c g; where c is his consumption in pe-
riod 1 and c2 is his consumption in period 2. He earns $200 in period 1 and $220 in period 2. Kenny can borrow and lend at an interest rate of 10 percent, and there is no in ation. The number of dollars that Kenny spends on consumption in the rst period must be:
a more than 200, but less than 220. b exactly 200. c more than 220. d exactly 180. e more than 180, but less than 200.
MULTIPLE CHOICE
Topic: Intertemporal Choice Correct Responses: 0 Correct Di culty: 2 Discrimination Index: 0
185
10.11 The nominal interest rate is 5 and the in ation rate is 6. A rational consumer:
a will not save since the real interest rate is negative. b will save less than 1 of her income. c will save the same amount regardless of the in ation rate, only the nominal interest rate matters. d might save despite the negative real interest rate. e will necessarily save less if the in ation rate rises and the nominal interest rate does not change.
Topic: Intertemporal Choice Correct Responses: 0 Correct
Di culty: 1 Discrimination Index: 1
10.12 If the real rate of interest is 8 and the nominal rate of interest is 28, then the rate of
in ation must be about pick the closest number:
a 36. b 24.26. c 3.50. d 18.52. e 23 .
Topic: Intertemporal Choice Correct Responses: 0 Correct
Di culty: 1 Discrimination Index: 1
10.13 If the real rate of interest is 5 and the nominal rate of interest is 31, then the rate of
in ation must be about pick the closest number:
a 36. b 27.26. c 6.20. d 24.76. e 29 .
CHAPTER 10 Intertemporal Choice
Topic: Intertemporal Choice Correct Responses: 39 Correct Di culty: 3 Discrimination Index: 36
186
10.14 In an isolated mountain village, the only crop is corn. Villagers plan for two time periods.
In the rst time period each villager will harvest 100 bushels. In the second time period, no corn will be harvested. There is no trade with the rest of the world and no stocks of corn remain from before the rst period. Corn can be stored from one time period to the next, but rats eat 25 of what is stored. The villagers all have Cobb-Douglas utility functions UC1 ; C2 = C1C2 and can allocate their own corn between consumption and storage as they wish. If the introduction of cats to the village reduces the rats' predations to 10 of what is stored:
a consumption in the rst time period will not change. b villagers will consume 5 more corn in each time period. c consumption in the rst time period will increase, but by less than 5. d consumption in the second time period would not change. e consumption in the rst time period will decrease.
Topic: Intertemporal Choice Correct Responses: 26 Correct
Di culty: 2 Discrimination Index: 53
10.15 Minnie has income $300 in period 1 and will have income $625 in period 2. Her utility
function is Uc1 ; c2 = c0:80c0:20 where c1 is her consumption in period 1 and c2 is her consumption 1 2 in period 2. The interest rate is 0.25. If she unexpectedly won a lottery which pays its prize in period 2 so that her income in period 2 would be $1,250 and her income in period 1 would remain $300, then her consumption in period 1 would:
a double. b increase by the amount 400. c increase by the amount 150. d stay constant. e increase by the amount 120.
MULTIPLE CHOICE
Topic: Intertemporal Choice Correct Responses: 26 Correct Di culty: 2 Discrimination Index: 53
187
10.16 Heidi has income $500 in period 1 and will have income $625 in period 2. Her utility
function is Uc1 ; c2 = c0:20c0:80 where c1 is her consumption in period 1 and c2 is her consumption 1 2 in period 2. The interest rate is 0.25. If she unexpectedly won a lottery which pays its prize in period 2 so that her income in period 2 would be $1,250 and her income in period 1 would remain $500, then her consumption in period 1 would:
a double. b increase by the amount 100. c increase by the amount 250. d stay constant. e increase by the amount 50.
Topic: Intertemporal Choice Correct Responses: 29 Correct 1 2 1=2 1
Di culty: 2 Discrimination Index: 26
1=2 2 1
10.17 Holly's utility function is Uc ; c = c + 0:87c where c is her consumption in period
a 0.30 b 0.08 c 0.23 d 0 e 0.15
1 and c2 is her consumption in period 2. In period 2, her income is 2 times as large as her income in period 1. At what interest rate will she choose to consume the same amount in period 2 as in period 1? Choose the closest answer.
Topic: Intertemporal Choice Correct Responses: 29 Correct 1 2
Di culty: 2 Discrimination Index: 26
1=2 1 1=2 2 1
10.18 Linda's utility function is Uc ; c = c + 0:95c where c is her consumption in period
a 0.20 b 0.03 c 0.08 d 0 e 0.05
1 and c2 is her consumption in period 2. In period 2, her income is 4 times as large as her income in period 1. At what interest rate will she choose to consume the same amount in period 2 as in period 1? Choose the closest answer.
CHAPTER 10 Intertemporal Choice
Topic: Intertemporal Choice Correct Responses: 58 Correct Di culty: 2 Discrimination Index: 32
1 2 12
188
10.19 Will Wisp will live for exactly two periods. His utility function is Uc ; c = c c where c
a his savings will increase by 2 and his consumption in period 2 will increase. b his savings will not change, but his consumption in period 2 will increase by 800. c his consumption in both periods will increase. d his consumption in both periods will decrease. e his consumption in period 1 will decrease by r and his consumption in period 2 will increase.
Topic: Intertemporal Choice Correct Responses: 58 Correct Di culty: 2 Discrimination Index: 32
1 2 12
is consumption in period 1 and c2 is consumption in period 2. He will have no income in period 2. His income in period 1 is 80,000. If the interest rate rises from 10 to 12:
1
10.20 Will Wisp will live for exactly two periods. His utility function is Uc ; c = c c where c
a his savings will increase by 1 and his consumption in period 2 will increase. b his savings will not change, but his consumption in period 2 will increase by 150. c his consumption in both periods will increase. d his consumption in both periods will decrease. e his consumption in period 1 will decrease by r and his consumption in period 2 will increase.
Topic: Intertemporal Choice Correct Responses: 24 Correct Di culty: 0 Discrimination Index: 21
is consumption in period 1 and c2 is consumption in period 2. He will have no income in period 2. His income in period 1 is 30,000. If the interest rate rises from 10 to 11:
1
10.21 Peregrine consumes 700; 880 and earns 600; 990. If the interest rate is 0.10, the present
value of his endowment is:
a 1,590. b 1,500. c 1,580. d 3,150. e 3,750.
MULTIPLE CHOICE
Topic: Intertemporal Choice Correct Responses: 24 Correct Di culty: 0 Discrimination Index: 21
189
10.22 Peregrine consumes 1; 200; 1; 080 and earns 600; 1; 800. If the interest rate is 0.20, the
present value of his endowment is:
a 2,400. b 2,100. c 2,280. d 4,620. e 5,220.
Topic: Intertemporal Choice Correct Responses: 69 Correct Di culty: 0 Discrimination Index: 39
10.23 Molly has income $400 in period 1 and income $600 in period 2. Her utility function is a
income in period 2 stayed the same, her consumption in period 1 would:
a double. b increase by 160. c increase by 80 d stay constant. e increase by 400.
Topic: Intertemporal Choice Correct Responses: 69 Correct Di culty: 0 Discrimination Index: 39
c1 c1,a ; where a = 0:40 and the interest rate is 0.20. If her income in period 1 doubled and her 2
10.24 Molly has income $600 in period 1 and income $230 in period 2. Her utility function is a
income in period 2 stayed the same, her consumption in period 1 would:
a double. b increase by 120. c increase by 60 d stay constant. e increase by 600.
c1 c1,a ; where a = 0:20 and the interest rate is 0.15. If her income in period 1 doubled and her 2
CHAPTER 10 Intertemporal Choice
Topic: Intertemporal Choice Correct Responses: 0 Correct Di culty: 0 Discrimination Index: 0
12 1
190
10.25 Mr. O.B. Kandle has a utility function c c where c is his consumption in period 1 and c
is his consumption in period 2. He will have no income in Period 2. If he had an income of 80,000 in period 1 and the interest rate increased from 10 to 19:
a his savings would increase by 9 and his consumption in period 2 would also increase. b his savings would not change, but his consumption in period 2 would increase by 3,600. c his consumption in both periods would be increase. d his consumption in both periods would decrease. e his consumption in period 1 would decrease by 19 and his consumption in period 2 would also decrease.
Topic: Intertemporal Choice Correct Responses: 0 Correct Di culty: 0 Discrimination Index: 0
12 1 2
2
10.26 Mr. O.B. Kandle has a utility function c c where c is his consumption in period 1 and c
is his consumption in period 2. He will have no income in Period 2. If he had an income of 60,000 in period 1 and the interest rate increased from 10 to 12:
a his savings would increase by 2 and his consumption in period 2 would also increase. b his savings would not change, but his consumption in period 2 would increase by 600. c his consumption in both periods would be increase. d his consumption in both periods would decrease. e his consumption in period 1 would decrease by 12 and his consumption in period 2 would also decrease.
Topic: Intertemporal Choice Correct Responses: 0 Correct Di culty: 0 Discrimination Index: 0
1 2 1 2
10.27 Harvey Habit has a utility function Uc ; c = minfc ; c g. If he had an income of 880 in
a 1,620 b 360 c 540 d 2,160 e 1,080
period 1, and 1,320 in period 2, and if the interest rate were 0.20, how much would Harvey choose to spend on bread in period 1?
MULTIPLE CHOICE
Topic: Intertemporal Choice Correct Responses: 0 Correct Di culty: 0 Discrimination Index: 0
1 2 1 2
191
10.28 Harvey Habit has a utility function Uc ; c = minfc ; c g. If he had an income of 645 in
a 1,117.50 b 248.33 c 372.50 d 1,490 e 745
period 1, and 860 in period 2, and if the interest rate were 0.15, how much would Harvey choose to spend on bread in period 1?
Topic: Intertemporal Choice Correct Responses: 0 Correct
Di culty: 0 Discrimination Index: 0
10.29 In an isolated mountain village, the harvest this year is 3,000 and the harvest next year
will be 1,100. The villagers all have utility functions Uc1; c2 = c1c2 ; where c1 is consumption this year and c2 is consumption next year. Rats eat 10 of any grain that is stored for a year. How much grain could the villagers consume next year if they consume 1000 bushels of grain this year?
a 2,900 b 1,800 c 4,100 d 4,350 e 1,200
CHAPTER 10 Intertemporal Choice
Topic: Intertemporal Choice Correct Responses: 0 Correct Di culty: 0 Discrimination Index: 0
192
10.30 In an isolated mountain village, the harvest this year is 4,000 and the harvest next year
will be 800. The villagers all have utility functions Uc1 ; c2 = c1c2 ; where c1 is consumption this year and c2 is consumption next year. Rats eat 50 of any grain that is stored for a year. How much grain could the villagers consume next year if they consume 1000 bushels of grain this year?
a 2,300 b 1,500 c 4,800 d 3,450 e 900
Topic: Intertemporal Choice Correct Responses: 16 Correct 1 2
Di culty: 0 Discrimination Index: 55
1=2 1 1=2 2 1
10.31 Patience has a utility function Uc ; c = c + 0:80 c ; c is her consumption in period
1 and c2 is her consumption in period 2. Her income in period 1 is 5 times as large as her income in period 2. At what interest rate will she choose to consume the same amount in period 1 as in period 2?
a 1.25 b 0.13 c 0.25 d 0 e 0.38
MULTIPLE CHOICE
Topic: Intertemporal Choice Correct Responses: 16 Correct 1 2
193
Di culty: 0 Discrimination Index: 55
1=2 1 1=2 2 1
10.32 Patience has a utility function Uc ; c = c + 0:87 c ; c is her consumption in period
1 and c2 is her consumption in period 2. Her income in period 1 is 6 times as large as her income in period 2. At what interest rate will she choose to consume the same amount in period 1 as in period 2?
a 0.90 b 0.08 c 0.15 d 0 e 0.23
Topic: Intertemporal Choice Correct Responses: 0 Correct Di culty: 0 Discrimination Index: 0
1 2 12 1
10.33 Samantha Smoothie's utility function is Uc ; c = c c where c is her consumption in
a more than 200 but less than 220. b exactly 220. c more than 220. d exactly 200. e less than 200.
Topic: Intertemporal Choice Correct Responses: 0 Correct
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 percent and there is no in ation. The number of dollars that Samantha spends in the second period must be
Di culty: 0 Discrimination Index: 0
10.34 I am always indi erent between a unit of consumption today and tomorrow and the interest
rate is 5 percent.
a My intertemporal indi erence curve is horizontal. b My intertemporal indi erence curve is a straight line with slope ,1. c I will spend all of my current and future income on consumption today. d I will spend 5 percent more on consumption today than on consumption tomorrow. e I will spend 5 percent more on consumption tomorrow than on consumption today.
Essay
Topic: Intertemporal Choice Correct Responses: 0
Intertemporal Choice
Di culty: 2 Discrimination Index: 0
10.1 Ophelia says "If I could lend money at the rates I must pay to borrow, I would. And if I
could borrow money at the rates I receive when I lend, I would again. But forsooth, although I spend, I neither borrow nor lend." Contrary to common belief, Ophelia is entirely rational. Draw a diagram to show how Ophelia's remarks can be consistent with rational behavior and smooth convex preferences if she pays a di erent interest rate when she borrows than she gets when she lends. Explain what happens in words.
Answer: Ophelia's budget between current and future consumption is kinked at the point where her consumption in each period equals her income. The highest indi erence curve to touch her budget touches at the kink. The extensions of each of the lines that meet at the kink pass above this indi erence curve for a ways. These lines are the lines she could move along if she could borrow at the lending rate and lend at the borrowing rate, respectively.
Topic: Intertemporal Choice Correct Responses: 0
1 2
Di culty: 3 Discrimination Index: 0
1=2 1 1=2 2 1
10.2 Patience has the utility function Uc ; c = c +2c where c is her consumption in period
1 and c1 is her consumption in period 2. She will earn 100 units of the consumption good in period 1 and 100 units of the consumption good in period 2. She can borrow or lend at an interest rate of 10. a Write an equation that describes Patience's budget. b If Patience neither borrows nor lends, what will be her marginal rate of substitution between current and future consumption? c If Patience does the optimal amount of borrowing or saving, what will be the ratio of her period 2 consumption to her period 1 consumption?
c1 + c2=1:1 = 100 + 100=1:1. b2 c She will consume 4.84 times as much in period 2 as in period 1.
Topic: Intertemporal Choice Correct Responses: 0 Di culty: 2 Discrimination Index: 0
10.3 Buzz is a chicken farmer. His earnings will be 100 this year and 100 next year. He can lend
money at an interest rate of 20. Because of a subsidized loan program for chicken farmers he can borrow money at an interest rate of 10. No matter what he borrows or lends, his earnings will still be 100 each year. a If he is not allowed to both borrow and lend, draw a graph showing his budget between consumption this year and consumption next year. Put numerical labels on the vertical and horizontal intercepts of the budget set. b Suppose that Buzz is allowed to borrow up to the present value of next year's earnings at 10 and is also allowed to make loans. Draw Buzz's budget constraint in this case.
Budget line is kinked at 100; 100. Vertical intercept is 220. Horizontal intercept is 100 + 100=1:1. b Budget constraint is a straight line with slope ,1:2 passing through horizontal intercept of previous budget line.
ESSAY
Topic: Intertemporal Choice Correct Responses: 0 Di culty: 2 Discrimination Index: 0
195
10.4 Ymir Larson farms near Ni eheim, Minnesota. He works 80 hours a week. He can either
grow rutabagas or pigs. Every hour that he spends growing rutabagas gives him $2 of income this year. Every hour that he spends with the pigs this year will add $4 to his income next year. In fact, next year's weekly income will be 100 + 4H dollars where H is the number of hours he spends with the pigs this year. Ymir's utility function is Uc1; c2 = minfc1; c2g where c1 and c2 are his consumption expenditures this year and next year. Ymir doesn't believe in banks and will neither lend money nor borrow money. a Draw Ymir's budget line for current and future consumption, labeling key points on it. b How many hours a week will he choose to spend with the pigs? c How much money will he spend per week on consumption in each year?
Answer: aBudget set is bounded by a line from 0; 420 to 160; 100 and a vertical line from 160; 100 to the horizontal axis. b10 c170
Topic: Intertemporal Choice Correct Responses: 0 Di culty: 2 Discrimination Index: 0
10.5 Luella has to pay an interest rate of 50 to borrow. She only gets an interest rate of 5 if
she lends. She is currently endowed with $1000 in period 1 and $1050 in period 2. She considers two alternative investment projects. She can only choose one of them. For project A she would HAVE TO PAY $500 in period 1 and would BE PAID BACK $630 in period 2. For project B; she would BE PAID $500 in period 1 and would HAVE TO PAY BACK $525 in period 2. a Diagram her budget set if she chooses project A. Also show her budget if she chooses project B. b If she neither borrows nor lends, which project has the higher present value at the interest rate 50? Which has the higher present value at an interest rate of 5? c Draw indi erence curves such that she should choose A. d With di erent preferences might she choose B?
B,A d yes
Topic: Intertemporal Choice Correct Responses: 0 Di culty: 2 Discrimination Index: 0
10.6 In an isolated peasant village, the only crop is corn. Good harvests alternate with bad
harvests. This year the harvest will be 1000 bushels. Next year it will be 150 bushels. There is no trade with the outside world. Corn can be stored, but rats will eat 25 of what is stored in a year. The villagers have the Cobb-Douglas utility function Uc1; c2 = c1c2 where c1 is consumption this year and c2 is consumption next year. a Draw a budget line for the village with this year's consumption on the horizontal axis and next year's consumption on the vertical axis. On your graph show the quantities at which the budget line intercepts the vertical and horizontal axes. b How much will the villagers consume this year? c How much will the rats eat? d How much will the villagers consume next year?
Answer: b600 c100 d450
Chapter 11
True-False
Topic: Asset Markets Correct Responses: 74 Correct Di culty: 1 Discrimination Index: 26
Asset Markets
11.1 If the interest rate is 10, then an asset that returns $1 a year forever is worth $1=1:1.
Topic: Asset Markets Correct Responses: 88 Correct Di culty: 1 Discrimination Index: 23
11.2 The interest rate is 6 and there is no in ation. A bond is available that can be redeemed
either after one year or after two years. If it is redeemed after one year, the investor gets $106. If it is redeemed after two years, the investor gets $109.18. The investor gets no other payments than what she receives when she redeems the bond. In equilibrium, investors will be willing to pay more than $100 for this bond.
Topic: Asset Markets Correct Responses: 88 Correct Di culty: 1 Discrimination Index: 23
11.3 The interest rate is 10 and there is no in ation. A bond is available that can be redeemed
either after one year or after two years. If it is redeemed after one year, the investor gets $110. If it is redeemed after two years, the investor gets $112.20. The investor gets no other payments than what she receives when she redeems the bond. In equilibrium, investors will be willing to pay more than $100 for this bond.
Topic: Asset Markets Correct Responses: 83 Correct Di culty: 1 Discrimination Index: 29
11.4 In a perfect asset market, it is known with certainty that an asset will sell for $24 in 1 year.
If the annual interest rate is 10, then the asset will sell for $26.40 right now.
Topic: Asset Markets Correct Responses: 83 Correct Di culty: 1 Discrimination Index: 38
11.5 A consumer who can borrow and lend at the same interest rate should prefer an endowment
with a higher present value to an endowment with a lower present value, no matter how he plans to allocate consumption over the course of his life.
TRUE-FALSE
Topic: Asset Markets Correct Responses: 99 Correct Di culty: 1 Discrimination Index: 7
197
11.6 If everybody has the same information, then a well-functioning market for assets would, in
equilibrium, leave no opportunities for arbitrage.
Topic: Asset Markets Correct Responses: 79 Correct Di culty: 1 Discrimination Index: 33
11.7 Suppose that the cost of cutting down a tree is zero and the tree grows on land that is
useless for anything else. The interest rate is constant and the price of lumber does not change. True or false: The optimal time to cut the tree is when the di erence between its growth rate and the interest rate is maximized.
Topic: Asset Markets Correct Responses: 35 Correct Di culty: 2 Discrimination Index: 0
11.8 According to the theory of asset markets, if the interest rate is constant, then the competitive market price of a bottle of wine will rise at a constant rate per year until it is consumed,,even if the amount that wine-drinkers are willing to pay for it does not rise at a constant rate.
Multiple Choice
Asset Markets
Topic: Asset Markets Correct Responses: 94 Correct
Di culty: 2 Discrimination Index: 17
11.1 Vincent Smudge's paintings are unappreciated now. Nobody is willing to pay anything to
have them on the walls. In 5 years Smudge's work will gain enduring popularity. People will suddenly be willing to pay $1,000 a year to have an original Smudge on their walls and will continue to be willing to do so ever after. If investors realize that this is the case, and if the interest rate is and always will be r; a painting by Smudge will currently be worth about:
a $1000=r 1=1 + r4 . b $1000=r , 5000=r. c $10001 + r5 . d $10001=r5. e $200=r.
Topic: Asset Markets Correct Responses: 82 Correct
Di culty: 1 Discrimination Index: 42
11.2 If the interest rate is r and will remain r forever, then a bond that will pay 25 dollars a year
forever, starting 1 year from now, is worth how much today?
a 25=1 + r b 251 + r c 25=r d 25=1 + r + r2 + ::: + rn + ::: e None of the above.
MULTIPLE CHOICE
Topic: Asset Markets Correct Responses: 82 Correct Di culty: 1 Discrimination Index: 42
199
11.3 If the interest rate is r and will remain r forever, then a bond that will pay 70 dollars a year
forever, starting 1 year from now, is worth how much today?
a 70=1 + r b 701 + r c 70=r d 70=1 + r + r2 + ::: + rn + ::: e None of the above.
Topic: Asset Markets Correct Responses: 46 Correct Di culty: 2 Discrimination Index: 42
11.4 If the nominal interest rate is 80 and the rate of in ation is 50, then the exact real rate
of interest is:
a 10. b 20. c 30. d 40. e None of the above.
Topic: Asset Markets Correct Responses: 68 Correct Di culty: 1 Discrimination Index: 38
11.5 The interest rate is 10. A certain piece of land can be used either for a parking lot, in
which case there are no construction costs and it will yield a net return of $5,000 per year forever starting one year from now. Or it can have a house built on it. Building a house would cost $50,000 now. If a house is built on the lot, it will yield a stream of net income equal to $12,000 per year starting one year from now. No other uses are contemplated. The theory of asset markets markets predicts that the lot will:
a sell for $120,000 and a house will be built on it. b sell for $50,000 and a parking lot will be built on it. c sell for $70,000 and a house will be built on it. d sell for $13,200 and a house will be built on it. e sell for $80,000 and a parking lot will be built on it.
CHAPTER 11 Asset Markets
Topic: Asset Markets Correct Responses: 72 Correct Di culty: 1 Discrimination Index: 39
200
11.6 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
Topic: Asset Markets Correct Responses: 40 Correct
Di culty: 2 Discrimination Index: 68
11.7 The interest rate will be 10 for one more year, but a year from now, it will fall to 5
a $8,000 b $8,800 c $4,000 d $4,400 e $9,000
and stay at 5 forever. What is the market value of an investment that is sure to pay $440 a year forever, starting two years from today?
MULTIPLE CHOICE
Topic: Asset Markets Correct Responses: 40 Correct Di culty: 2 Discrimination Index: 68
201
11.8 The interest rate will be 10 for one more year, but a year from now, it will fall to 5
a $8,000 b $8,800 c $4,000 d $4,400 e $9,000
and stay at 5 forever. What is the market value of an investment that is sure to pay $440 a year forever, starting two years from today?
Topic: Asset Markets Correct Responses: 28 Correct
Di culty: 2 Discrimination Index: 24
11.9 A certain wine costs $3 a bottle to produce. It improves in taste if stored properly for a
period of time. When it is newly bottled, people are willing to pay only $2 a bottle to drink it. But the amount that people are willing to pay to drink a bottle of this wine will rise by $3 a year for the next 50 years. Storage costs, not including interest, are $.50 per year. If the interest rate is 5 and it is kept by rational investors, how old will it be when it is drunk and what will be its price at that time?
a 50 years old and $152. b 16 years old and $50. c 50 years old and $153. d 20 years old and $63. e 4 years old and $14.
CHAPTER 11 Asset Markets
Topic: Asset Markets Correct Responses: 0 Correct Di culty: 2 Discrimination Index: 0
202
11.10 The amount people are willing to pay to drink a bottle of a certain certain vintage of wine
when it is t years old is $2 + 3t. It costs $.50 a bottle per year to store this wine. The interest rate is 5. If the annual cost of storing the wine rises to $1, what will be the e ect on the price of this wine when it is consumed and on the length of time for which it is stored before it is consumed?
a Both will rise. b Both will fall. c The price will rise and the time for which it is stored will fall. d The price will not change but the time for which it is stored will fall. e The price will rise and the time for which it is stored will stay constant.
Topic: Asset Markets Correct Responses: 13 Correct
Di culty: 2 Discrimination Index: 26
11.11 You buy a painting for $1280. Its market value will rise by $80 per year for the next 30
years. It is worth $80 a year to you to have it hanging on the wall. The interest rate is 10. In how many years will you sell it?
a 30 b immediately c 8 d 4 e 5
MULTIPLE CHOICE
Topic: Asset Markets Correct Responses: 84 Correct Di culty: 3 Discrimination Index: 24
203
11.12 Art Dreck's paintings are terribly unpopular now. In fact nobody would pay a dime to
have one of his paintings on the wall now. But experts believe that 10 years from now there will be a craze for Dreck paintings. The craze will last for 2 years and then nobody will ever want to see a Dreck again. During this 2 year period, people will be willing to pay $1,100 a year to have an original Dreck on the wall. The interest rate is r. If the experts' belief is widely held among investors, today's market value of a Dreck should be about:
a 2; 200=r. b 2; 200=1 + r. c 1; 1001 + r10 + 1; 1001 + r11. d 1; 100=1 + r10 + 1; 100=1 + r11. e 1; 100r + 1; 100r2.
Topic: Asset Markets Correct Responses: 65 Correct
Di culty: 2 Discrimination Index: 0
11.13 A large subterranean pool of oil lies in a remote region of Ohio. Oil companies have
explored this region and know how much oil there is. They have purchased the rights to drill and extract oil when they wish to do so. Because of the extremely forbidding geography and the savagery of the natives, the companies have decided to postpone extraction until the price of oil is higher. The theory of intertemporal arbitrage predicts that the:
a companies are behaving irrationally. b price of rights to this oil must rise at the interest rate. c oil companies will not drill unless production costs fall. d price of rights to this oil will stay constant until it pays to extract. e None of the above.
CHAPTER 11 Asset Markets
Topic: Asset Markets Correct Responses: 83 Correct Di culty: 1 Discrimination Index: 23
204
11.14 The interest rate is 10 and will remain so forever. You do not drink wine but are
interested in buying some for investment purposes. Assume that there are no transactions costs or storage costs and a certain bottle of wine will be worth $44 one year from now, $50 two years from now, and $61, three years from now. After that it turns to worthless vinegar. How much should you be willing to pay for a bottle? Pick the closest 40 b 41.32 c 50.86 d 45.83 e 49.47
Topic: Asset Markets Correct Responses: 83 Correct
Di culty: 1 Discrimination Index: 23
11.15 The interest rate is 10 and will remain so forever. You do not drink wine but are
interested in buying some for investment purposes. Assume that there are no transactions costs or storage costs and a certain bottle of wine will be worth $22 one year from now, $28 two years from now, and $35, three years from now. After that it turns to worthless vinegar. How much should you be willing to pay for a bottle? Pick the closest 20 b 23.14 c 31.32 d 26.30 e 32.29
MULTIPLE CHOICE
Topic: Asset Markets Correct Responses: 0 Correct Di culty: 2 Discrimination Index: 0
205
11.16 Suppose that a dispute in the Persian Gulf halts the sale of oil from Persian Gulf for 1
year. At the same time an important new oil eld is found in a place where nobody expected there to be oil. What does economic theory predict will be the e ect on the future price of oil to be delivered 2 years from now?
a It will fall if the new pool is larger than the stock of oil in the Persian Gulf and rise otherwise. b It will fall. c It will rise unless the new pool can be brought into production before the Persian Gulf supply is resumed. d It will rise. e It will rise if the cost of extraction for the new oil is greater than the cost of extraction in the Gulf, and fall otherwise.
Topic: Asset Markets Correct Responses: 65 Correct
Di culty: 2 Discrimination Index: 0
11.17 Bank 1 o ers a deal on deposits of $1000 or more. You must leave your money in the bank
for 3 years, but Bank 1 will pay you 7 interest for the rst year, 7 interest for the second year, and for the third year, it will pay 10 interest. In response, Bank 2 o ers a deal that it claims is even better. It also requires you to deposit at least $1,000 and to leave it in the bank for 3 years, but it will pay 10 interest in the rst year and then 7 in the second and third years. After 3 years, you can take your money out of either bank and do what you want with it. Both banks compound interest annually. Which of the following is true?
a Bank 2 o ers a better deal than Bank 1. b Bank 1 o ers a better deal than Bank 2. c The two o ers are equally valuable. d The o er of Bank 2 becomes relatively more attractive as the size of your initial deposit is larger. e None of the above.
CHAPTER 11 Asset Markets
Topic: Asset Markets Correct Responses: 65 Correct Di culty: 2 Discrimination Index: 0
206
11.18 Bank 1 o ers a deal on deposits of $1000 or more. You must leave your money in the bank
for 3 years, but Bank 1 will pay you 7 interest for the rst year, 7 interest for the second year, and for the third year, it will pay 13 interest. In response, Bank 2 o ers a deal that it claims is even better. It also requires you to deposit at least $1,000 and to leave it in the bank for 3 years, but it will pay 13 interest in the rst year and then 7 in the second and third years. After 3 years, you can take your money out of either bank and do what you want with it. Both banks compound interest annually. Which of the following is true?
a Bank 2 o ers a better deal than Bank 1. b Bank 1 o ers a better deal than Bank 2. c The two o ers are equally valuable. d The o er of Bank 2 becomes relatively more attractive as the size of your initial deposit is larger. e None of the above.
Topic: Asset Markets Correct Responses: 19 Correct
Di culty: 2 Discrimination Index: 40
11.19 If the rate of in ation is greater than the interest rate:
a you should consume all of your wealth in the rst period. b you are better o keeping your money in a mattress at home assuming no risk of it being stolen than at a bank. c you will necessarily consume less this period than you would if the rate of in ation were less than the interest rate. d you will necessarily consume more this period than you would if the rate of in ation were less than the interest rate. e None of the above.
MULTIPLE CHOICE
Topic: Asset Markets Correct Responses: 77 Correct Di culty: 2 Discrimination Index: 41
207
11.20 A zero coupon bond is a bond that pays no return until it comes due and then pays the
holder of the bond its face value. Suppose that a $1,000, zero coupon bond will come due on January 1, 2010. If the interest rate is 5 and will remain 5 forever, what will this bond be worth on January 1, 1995?
a 1; 000=0:05 b 1; 000=0:0515 c 1; 000 + 1; 000=15 d 1; 000=1:0515 e None of the above.
Topic: Asset Markets Correct Responses: 77 Correct Di culty: 2 Discrimination Index: 41
11.21 A zero coupon bond is a bond that pays no return until it comes due and then pays the
holder of the bond its face value. Suppose that a $4,000, zero coupon bond will come due on January 1, 2010. If the interest rate is 10 and will remain 10 forever, what will this bond be worth on January 1, 1995?
a 4; 000=0:10 b 4; 000=0:1015 c 4; 000 + 4; 000=15 d 4; 000=1:1015 e None of the above.
Topic: Asset Markets Correct Responses: 80 Correct Di culty: 1 Discrimination Index: 20
2 3
11.22 The sum of the terms of the in nite geometric series, 1, 0.98, 0:98 ; 0:98 ;..., is closest to
which of the following numbers?
a in nity b 1.98 c 50 d 0.51 e 102.04
CHAPTER 11 Asset Markets
Topic: Asset Markets Correct Responses: 80 Correct Di culty: 1 Discrimination Index: 20
2 3
208
11.23 The sum of the terms of the in nite geometric series, 1, 0.95, 0:95 ; 0:95 ;..., is closest to
which of the following numbers?
a in nity b 1.95 c 20 d 0.51 e 105.26
Topic: Asset Markets Correct Responses: 32 Correct Di culty: 2 Discrimination Index: 46
11.24 Ashley, from your workbook, has discovered another wine, Wine D. Wine drinkers are
willing to pay 70 dollars to drink it right now. The amount that wine drinkers are willing to pay will rise by 10 dollars each year that the wine ages. The interest rate is 10. How much would Ashley be willing to pay for the wine if he buys it as an investment? Pick the closest 75 b 70 c 100 d 770 e 91
Topic: Asset Markets Correct Responses: 32 Correct Di culty: 2 Discrimination Index: 46
11.25 Ashley, from your workbook, has discovered another wine, Wine D. Wine drinkers are
willing to pay 160 dollars to drink it right now. The amount that wine drinkers are willing to pay will rise by 20 dollars each year that the wine ages. The interest rate is 10. How much would Ashley be willing to pay for the wine if he buys it as an investment? Pick the closest 165 b 160 c 200 d 1,760 e 191
MULTIPLE CHOICE
Topic: Asset Markets Correct Responses: 42 Correct Di culty: 2 Discrimination Index: 18
209
11.26 Shivers' annual fuel bill for home heating is 1,000 dollars per year. He considers three
alternative plans for insulating his house. 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 1,000 dollars, Plan B would cost him 1,900 dollars and Plan C would cost him 11,000 dollars. If the interest rate is 10 and his house and the insulation job last forever, which plan is the best for Shivers?
a Plan A. b Plan B. c Plan C. d Plans A and B are equally good. e He is best o using none of the plans.
Topic: Asset Markets Correct Responses: 42 Correct
Di culty: 2 Discrimination Index: 18
11.27 Shivers' annual fuel bill for home heating is 800 dollars per year. He considers three
alternative plans for insulating his house. 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 800 dollars, Plan B would cost him 1,400 dollars and Plan C would cost him 8,800 dollars. If the interest rate is 10 and his house and the insulation job last forever, which plan is the best for Shivers?
a Plan A. b Plan B. c Plan C. d Plans A and B are equally good. e He is best o using none of the plans.
CHAPTER 11 Asset Markets
Topic: Asset Markets Correct Responses: 80 Correct Di culty: 2 Discrimination Index: 37
210
11.28 The price of an antique is expected to rise by 10 during the next year. The interest rate
is 13. You are thinking of buying an antique and selling it a year from now. You would be willing to pay a total of 1,000 dollars for the pleasure of owning the antique for a year. How much would you be willing to pay to buy this antique?
a 7,692.31 b 21,000 c 1,000 d 33,333.33 e 10,000
Topic: Asset Markets Correct Responses: 80 Correct
Di culty: 2 Discrimination Index: 37
11.29 The price of an antique is expected to rise by 4 during the next year. The interest rate
is 7. You are thinking of buying an antique and selling it a year from now. You would be willing to pay a total of 400 dollars for the pleasure of owning the antique for a year. How much would you be willing to pay to buy this antique?
a 5,714.29 b 8,400 c 400 d 13,333.33 e 4,000
MULTIPLE CHOICE
Topic: Asset Markets Correct Responses: 70 Correct Di culty: 2 Discrimination Index: 37
211
11.30 A bond has a face value of 4,000 dollars. It will pay 400 dollars in interest at the end of
every year for the next 41 years. At the time of the last interest payment, 41 years from now, the company that issued the bond will redeem the bond at face value". That is, the company will buy back the bond from its owner at a price equal to the face value of the bond. If the interest rate is 10 and is expected to remain at 10, how much would a rational investor pay for this bond right now?
a 4,000 b 20,400 c 16,400 d more than any of the above numbers e less than any of the above numbers
Topic: Asset Markets Correct Responses: 70 Correct
Di culty: 2 Discrimination Index: 37
11.31 A bond has a face value of 6,000 dollars. It will pay 600 dollars in interest at the end of
every year for the next 50 years. At the time of the last interest payment, 50 years from now, the company that issued the bond will redeem the bond at face value". That is, the company will buy back the bond from its owner at a price equal to the face value of the bond. If the interest rate is 10 and is expected to remain at 10, how much would a rational investor pay for this bond right now?
a 6,000 b 36,000 c 30,000 d more than any of the above numbers e less than any of the above numbers
CHAPTER 11 Asset Markets
Topic: Asset Markets Correct Responses: 68 Correct Di culty: 0 Discrimination Index: 34
212
11.32 If the interest rate is 7, and will remain 7 forever, how much would a rational investor
a 6,000 b 5,000 c 85,714.29 d 48,000 e 7,000
Topic: Asset Markets Correct Responses: 68 Correct Di culty: 0 Discrimination Index: 34
be willing to pay for an asset that will pay him 5,350 dollars one year from now, 1,144 dollars two years from now, and nothing at any other time?
11.33 If the interest rate is 15, and will remain 15 forever, how much would a rational investor
a 4,000 b 3,000 c 26,666.67 d 64,000 e 5,000
Topic: Asset Markets Correct Responses: 0 Correct Di culty: 0 Discrimination Index: 0
be willing to pay for an asset that will pay him 3,450 dollars one year from now, 1,322 dollars two years from now, and nothing at any other time?
11.34 The interest rate is 10 percent and is expected to stay constant at that level forever. The
present discounted value of $50,000 a year forever STARTING TODAY is
a $500,000 b $550,000 c $ in nity d $1 million e $45,454.45
Essay
Topic: Asset Markets Correct Responses: 0 Di culty: 2 Discrimination Index: 0
Asset Markets
11.1 The interest rate is 10 and will remain 10 forever. Suppose that you do not drink wine
but are interested in buying it for investment purposes. How much would you be willing to pay for each of the following? i A bottle of wine that will be worth $22 a year from now and will then go bad and be worthless. ii A bottle of wine that will be worth $22 a year from now and will rise in value by $1 a year forever? Explain your answer.
Answer: Both are worth $20. Each will be sold and drunk in 1 year. The increase in value of $1 per year on a $22 bottle of wine is not a high enough rate of return for anyone to want to hold it another year.
Topic: Asset Markets Correct Responses: 0
Di culty: 3 Discrimination Index: 0
11.2 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 get 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?
Answer: Wine would be kept for 16 years and sold for $50. The present value of this is 50=1:0516. From this number we have to subtract the present value of storage costs which is the present value of paying $.50 a year for 16 years. This is the cost of paying $.50 a year forever, starting now minus the cost of paying $.50 a year forever starting in 16 years or $:501=r1 , 1=1 + r16.
Topic: Asset Markets Correct Responses: 0
Di culty: 2 Discrimination Index: 0
11.3 Suppose that the cost of personal computers falls by 20 per year. To make this problem
relatively easy, we will assume that their quality does not change and that computers never wear out. You plan to get one sometime. What is the rational way to decide when to buy one?
Answer: Figure out what it is worth to you to have the computer for one year. Notice that the cost to you of having it is approximately the di erence between the price of a computer at the beginning of the year and the price at the end of the year. If the value to you is V and the current price is P; you buy if V :2P . Otherwise you wait. Eventually, :2P will be smaller than V . Then you buy.
CHAPTER 11 Asset Markets
Topic: Asset Markets Correct Responses: 0 Di culty: 2 Discrimination Index: 0
214
11.4 According to a recent story in the New York Times, the South African gold strike has been
costing South African mining companies about $7.5 million per day. Assuming that this number is the value of the gold that was not mined because of the strike, minus the labor costs and other operating costs that are saved by shutting down the mines, what is wrong with this calculation?
Answer: The gold that is not mined now will still be there and can be extracted later. The gure that was reached would be the cost if the gold that would have been mined had somehow been destroyed by the strike. The actual costs would be more closely measured by the interest cost of postponement of the net revenues from the gold mines until the strike is settled.
Chapter 12
True-False
Topic: Uncertainty Correct Responses: 0 Correct Di culty: 1 Discrimination Index: 0
Uncertainty
12.1 Of any two gambles, no matter what their expected returns, a risk-averter will choose the
one with the smaller variance.
Topic: Uncertainty Correct Responses: 0 Correct Di culty: 2 Discrimination Index: 0
12.2 An expected utility maximizer's preferences between two bundles contingent on Event 1
happening must be independent of what he will get if Event 2 happens.
Topic: Uncertainty Correct Responses: 0 Correct Di culty: 1 Discrimination Index: 0
12.3 If someone has strictly convex preferences between all contingent commodity bundles, then
he or she must be risk averse.
Topic: Uncertainty Correct Responses: 0 Correct Di culty: 1 Discrimination Index: 0
12.4 Wilma is not risk averse. She is o ered a chance to pay $10 for a lottery ticket that will
give her a prize of $100 with probability .06, a prize of $50 with probability .1, and no prize with probability .85. If she understands the odds and makes no mistakes in calculation, she will buy the lottery ticket.
Topic: Uncertainty Correct Responses: 91 Correct Di culty: 1 Discrimination Index: 15
12.5 If Paul is risk-loving and his basketball team has a probability of .5 of winning, then Paul
would rather bet $10 on his team than $100. When Paul bets X; he wins X if his team wins and loses X if his team loses.
CHAPTER 12 Uncertainty
Topic: Uncertainty Correct Responses: 70 Correct Di culty: 1 Discrimination Index: 0
216
12.6 If the price of insurance goes up, people will become less risk-averse.
Topic: Uncertainty Correct Responses: 0 Correct Di culty: 2 Discrimination Index: 0
12.7 A consumer has a von Neumann-Morgenstern utility function of the form UcA; cB ; pA; pB =
pA vcA + pB vcB where pA and pB are the probabilities of events A and B and where cA and cB are consumptions contingent on events A and B respectively. This consumer must be a risk lover if v is an increasing function.
Multiple Choice
Uncertainty
Topic: Uncertainty Correct Responses: 37 Correct
Di culty: 2 Discrimination Index: 38
12.1 Prufrock is risk averse. He is o ered a gamble in which with probability 1=4 he will lose
$1000 and with probability 3=4; he will win $500.
a Since he is risk averse, he will certainly not take the gamble. b Since the expected value of the gamble is positive, he will certainly take the gamble. c If Prufrock's initial wealth is greater than $1,500, then he will certainly take the gamble. d If Prufrock's initial wealth is smaller than $1,500, he will certainly not take the gamble. e Not enough information is given to determine for sure whether he will take the gamble.
Topic: Uncertainty Correct Responses: 0 Correct
Di culty: 3 Discrimination Index: 0
12.2 Timmy Qualm's uncle gave him a lottery ticket. With probability 1=2 the ticket will be
worth $100 and with probability 1=2 it will be worthless. Let x be Timmy's wealth if the lottery ticket is a winner and y his wealth if it is a loser. Timmy's preferences over alternative contingent commodity bundles are represented by the utility function Ux; y = minf2x , y; 2y , xg. He has no risks other than the ticket.
a Timmy would sell his lottery ticket for $25 but not for less. b Timmy hates risk so much that he'd be willing to throw away the lottery ticket rather than worry about whether he won. c Timmy satis es the expected utility hypothesis. d Timmy is misnamed, he is a risk-lover. e None of the above.
CHAPTER 12 Uncertainty
Topic: Uncertainty Correct Responses: 0 Correct Di culty: 2 Discrimination Index: 0
218
12.3 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 puc1 + 1 , puc2 where for any number, x; ux = 2x if x 1; 000 and ux = 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.
Topic: Uncertainty Correct Responses: 0 Correct
Di culty: 2 Discrimination Index: 0
12.4 Socrates owns just one ship. The ship is worth $200 million dollars. If the ship sinks,
Socrates loses $200 million. The probability that it will sink is .02. Socrates' total wealth, including the value of the ship is $225 million. He is an expected utility maximizer with von Neuman Morgenstern utility UW equal to the square root of W. What is the maximum amount that Socrates would be willing to pay in order to be fully insured against the risk of losing his ship?
a $4 million b $2 million c $3.84 million d $4.82 million e $5.96 million
MULTIPLE CHOICE
Topic: Uncertainty Correct Responses: 0 Correct Di culty: 2 Discrimination Index: 0
219
12.5 Buck Columbus is thinking of starting a pinball palace near a large Midwestern university.
Buck is an expected utility maximizer with a von Neuman-Morgenstern utility function, UW = 1,6; 000=W where W is his wealth. Buck's total wealth is $24,000. With probability .2 the palace will be a failure and he'll lose $18,000, so that his wealth will be just $6,000. With probability .8 it will succeed and his wealth will grow to $x. What is the smallest value of x that would be su cient to make Buck want to invest in the pinball palace rather than have a wealth of $24,000 with certainty?
a $28,500 b $150,000 c $96,000 d $72,000 e $30,000
Topic: Uncertainty Correct Responses: 0 Correct
Di culty: 2 Discrimination Index: 0
12.6 Buck Columbus is thinking of starting a pinball palace near a large Midwestern university.
Buck is an expected utility maximizer with a von Neuman-Morgenstern utility function, UW = 1,5; 000=W where W is his wealth. Buck's total wealth is $20,000. With probability .2 the palace will be a failure and he'll lose $15,000, so that his wealth will be just $5,000. With probability .8 it will succeed and his wealth will grow to $x. What is the smallest value of x that would be su cient to make Buck want to invest in the pinball palace rather than have a wealth of $20,000 with certainty?
a $23,750 b $125,000 c $80,000 d $60,000 e $25,000
CHAPTER 12 Uncertainty
Topic: Uncertainty Correct Responses: 0 Correct Di culty: 2 Discrimination Index: 0
220
12.7 Oskar's preferences over gambles in which the probability of events 1 and 2 are both 1=2 :5 :5
can be represented by the von Neuman-Morgenstern utility function :5y1 + :5y2 where y1 is his consumption if event 1 happens and y2 is his consumption if event 2 happens. A gamble that allows him a consumption of 9 if event 1 happens and 25 if event 2 happens is exactly as good for Oskar as being sure to have an income of:
a 12.5. b 9. c 16. d 17. e None of the above.
Topic: Uncertainty Correct Responses: 0 Correct
Di culty: 2 Discrimination Index: 0
12.8 Mabel and Emil were contemplating marriage. They got to talking. Mabel said that she
always acted according to the expected utility hypothesis, where she tried to maximize the expected value of the log of her income. Emil said that he too was an expected utility maximizer, but he tried to maximize the expected value of the square of his income. Mabel said, I fear we must part. Our attitudes toward risk are too di erent." Emil said, Never fear, my dear, the square of income is a monotonic increasing function of the log of income, so we really have the same preferences." Who is right about whether their preferences toward risk are di erent?
a Mabel is right. b Emil is right. c Emil is right about small risks, but wrong about large risks. d Mabel is right about small risks, but wrong about large risks. e They are both wrong.
MULTIPLE CHOICE
Topic: Uncertainty Correct Responses: 0 Correct Di culty: 1 Discrimination Index: 0
221
12.9 Ronald has $18,000. But he is forced to bet it on the ip of a fair coin. If:5he wins he has :5
$36,000. If he loses he has nothing. Ronald's expected utility function is :5x + :5y where x is his wealth if heads comes up and y is his wealth if tails comes up. Since he must make this bet, he is exactly as well o as if he had a perfectly safe income of:
a $16,000. b $15,000. c $12,000. d $11,000. e $9,000.
Topic: Uncertainty Correct Responses: 0 Correct
Di culty: 1 Discrimination Index: 0
12.10 Gary likes to gamble. Donna o ers to bet him $70 on the outcome of a boat race. If
Gary's boat wins, Donna would give him $70. If Gary's boat does not win, Gary would give her $70. Gary's utility function is Uc1 ; c2; p1; p2 = p1c2 + p2c2 where p1 and p2 are the probabilities of 1 2 events 1 and 2 and where c1 and c2 are his consumption if events 1 and 2 occur respectively. Gary's total wealth is currently only $80 and he believes that the probability that he will win the race is .3.
a Taking the bet would increase his expected utility. b Taking the bet would reduce his expected utility. c Taking the bet would leave his expected utility unchanged. d There is not enough information to determine whether taking the bet would increase or decrease his expected utility. e The information given in the problem is self-contradictory.
CHAPTER 12 Uncertainty
Topic: Uncertainty Correct Responses: 0 Correct Di culty: 3 Discrimination Index: 0
222
12.11 Clancy has $1,200. He plans to bet on a boxing match between Sullivan and Flanagan.
For $4, he can buy a coupon that pays $10 if Sullivan wins and nothing otherwise. For $6 he can buy a coupon that will pay $10 if Flanagan wins and nothing otherwise. Clancy doesn't agree with these odds. He thinks that the two ghters each have a probability of 1=2 of winning. If he is an expected utility maximizer who tries to maximize the expected value of ln W where ln W is the natural log of his wealth, it would be rational for him to buy:
a 50 "Sullivan coupons" and no "Flanagan coupons". b 100 "Sullivan coupons" and no "Flanagan coupons". c 50 "Flanagan coupons" and no "Sullivan coupons". d 100 "Flanagan coupons" and no "Sullivan coupons". e 100 of each kind of coupon.
Topic: Uncertainty Correct Responses: 0 Correct
Di culty: 3 Discrimination Index: 0
12.12 Diego has $6,400. He plans to bet on a soccer game. Team A is a favorite to win. Assume
no ties can occur. For $.80 one can buy a ticket that will pay $1 if team A wins and nothing if B wins. For $.20 one can buy a ticket that pays $1 if team B wins and nothing if A wins. Diego thinks the two teams are equally likely to win. He buys tickets so as to maximize the expected value of ln W the natural log of his wealth. After he buys his tickets, team A loses a star player and the ticket price moves to $.50 for either team. Diego buys some new tickets and sells some of his old ones. The game is then played and team A wins. How much wealth does he end up with?
a $5,000 b $15,000 c $6,400 d $8,400 e $10,000
MULTIPLE CHOICE
Topic: Uncertainty Correct Responses: 64 Correct Di culty: 1 Discrimination Index: 40
223
12.13 Joe's wealth is $100 and he is an expected utility maximizer with a von Neumann-
Morgenstern utility function UW = W 1=2 . Joe is afraid of oversleeping his econ exam. He gures there is only a 1 in 10 chance that he will, but if he does, it will cost him $100 in fees to the university for taking an exam late. Joe's neighbor, Mary, never oversleeps. She o ers to wake him 1 hour before the test, but he must pay her for this service. What is the most that Joe would be willing to pay for this wake-up service?
a $10 b $15 c $19 d $100 e $50
Topic: Uncertainty Correct Responses: 68 Correct
Di culty: 2 Discrimination Index: 39
12.14 Portia has waited a long time for her ship to come in and she has concluded that it will
arrive today with probability 1=4. If it does come, she will receive $16. If it doesn't come in today, it never will and she will have zero wealth. She has a von Neumann-Morgenstern utility function equal to the square root of her total income. What is the minimum price at which she would sell the rights to her ship?
a 1 b 2 c 21=2 d 4 e None of the above.
CHAPTER 12 Uncertainty
Topic: Uncertainty Correct Responses: 57 Correct Di culty: 1 Discrimination Index: 31
224
12.15 Harley's current wealth is $600, but there is a .25 probability that he will lose $100. Harley
is risk neutral. He has an opportunity to buy insurance that would restore his $100 if he loses it.
a Harley would be willing to pay a bit more than $25 for this insurance. b Harley would be willing to pay up to $25 for this insurance. c Since Harley is risk neutral, he wouldn't be willing to pay anything for this insurance. d Since Harley's utility function is not speci ed, we can't tell how much he would be willing to pay for this insurance. e Harley would not be wiling to pay more than $16.66 for this insurance.
Topic: Uncertainty Correct Responses: 0 Correct
Di culty: 2 Discrimination Index: 0
12.16 After graduating, Sallie Handshake's best job o er will either be with a Big ,8 accounting
rm for $160,000 a year or as a State Farm agent in Grand Rapids, Michigan for $40,000 a year. She can increase the probability of the former outcome by studying more, but such studying has its costs. If S is represents her amount of studying where S = 0 is no study and S = 1 is all-out e ort, her probability of getting the job with a Big , 8 rm just equals S. Her utility depends on how hard she studies and her subsequent annual income Y . She tries to maximize the expected value of the von Neuman-Morgenstern utility function US; Y = Y 1=2 , 400S 2 . If she chooses S to maximize her expected utility, how much will she study?
a S = :1 b S = :25 c S = :5 d S = :75 e S = :9
MULTIPLE CHOICE
Topic: Uncertainty Correct Responses: 0 Correct Di culty: 3 Discrimination Index: 0
225
12.17 Every dollar invested in Safe Sox will yield two dollars for sure. Each dollar invested in
Wobbly Umbrellas will yield $8 with probability 1=2 and zero 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 , S the amount that she invests in Wobbly Umbrellas, what should S be to maximize her expected utility? Pick the closest $1,111 b $3,333 c $5,000 d $6,667 e $9,111
Topic: Uncertainty Correct Responses: 47 Correct
Di culty: 2 Discrimination Index: 60
12.18 Billy Pigskin from your workbook has a von Neumann-Morgenstern utility function Uc =
c1=2. If Billy is not injured this season, he will receive an income of 16 million dollars. If he is a 3,610 b between 15 million and 16 million. c 100,000. d 7,220 e 14,440
injured, his income will be only $10,000. The probability that he will be injured is .1 and the probability that he will not be injured is .9. His expected utility is
CHAPTER 12 Uncertainty
Topic: Uncertainty Correct Responses: 47 Correct Di culty: 2 Discrimination Index: 60
226
12.19 Billy Pigskin from your workbook has a von Neumann-Morgenstern utility function Uc =
c1=2. If Billy is not injured this season, he will receive an income of 9 million dollars. If he is injured,
his income will be only $10,000. 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 2,710 b between 8 million and 9 million. c 100,000. d 5,420 e 10,840
Topic: Uncertainty Correct Responses: 0 Correct
Di culty: 0 Discrimination Index: 0
1=2
12.20 Willy's only source of wealth is his chocolate factory. He has the utility function pcf +
1,pc1=2 where p is the probability of a ood, 1,p is the probability of no ood and where cf and nf cn f are his wealth contingent on a ood and on no ood, respectively. The probability of ood is p = 1=10. The value of Willy's factory is $300,000 if there is no ood and 0 if there is a ood. Willy can buy insurance where if he buys $x worth of insurance, he must pay the insurance company $2x=11 whether there is a ood or not, but he gets back $x from the company if there is a ood.
Willy should buy:
a no insurance since the the cost per dollar of insurance exceeds the probability of a ood. b enough insurance so that if there is a ood, after he collects his insurance, his wealth will be 1=4 of what it would be if there is no ood. c enough insurance so that if there is a ood, after he collects his insurance, his wealth will be the same whether there is a ood or not. d enough insurance so that if there is a ood, after he collects his insurance, his wealth will be 1=3 of what it would be if there is no ood. e enough insurance so that if there is a ood, after he collects his insurance his wealth will be 1=5 of what it would be if there is no ood.
MULTIPLE CHOICE
Topic: Uncertainty Correct Responses: 0 Correct 1=2
227
Di culty: 0 Discrimination Index: 0
1=2
12.21 Willy's only source of wealth is his chocolate factory. He has the utility function pcf +
1,pcnf where p is the probability of a ood, 1,p is the probability of no ood and where cf and cn f are his wealth contingent on a ood and on no ood, respectively. The probability of ood is p = 1=16. The value of Willy's factory is $600,000 if there is no ood and 0 if there is a ood. Willy can buy insurance where if he buys $x worth of insurance, he must pay the insurance company $3x=18 whether there is a ood or not, but he gets back $x from the company if there is a ood.
Willy should buy:
a no insurance since the the cost per dollar of insurance exceeds the probability of a ood. b enough insurance so that if there is a ood, after he collects his insurance, his wealth will be 1=9 of what it would be if there is no ood. c enough insurance so that if there is a ood, after he collects his insurance, his wealth will be the same whether there is a ood or not. d enough insurance so that if there is a ood, after he collects his insurance, his wealth will be 1=4 of what it would be if there is no ood. e enough insurance so that if there is a ood, after he collects his insurance his wealth will be 1=7 of what it would be if there is no ood.
Topic: Uncertainty Correct Responses: 0 Correct
Di culty: 0 Discrimination Index: 0
1 2
12.22 Sally Kink is an expected utility maximizer with utility function puc +1,puc where
for any x 9; 000; ux = 2x and where ux = 9; 000 + x for x greater than or equal to 9,000.
a Sally will be risk averse if her income is less than 9,000 but risk loving if her income is more than 9,000. b Sally will be risk neutral if her income is less than 9,000 and risk averse if her income is more than 9,000. c For bets that involve no chance of her wealth exceeding 9,000, Sally will take any bet that has a positive expected net payo . d Sally will never take a bet if there is a chance that it leaves her with wealth less than 18,000. e None of the above are true.
CHAPTER 12 Uncertainty
Topic: Uncertainty Correct Responses: 0 Correct Di culty: 0 Discrimination Index: 0
1 2
228
12.23 Sally Kink is an expected utility maximizer with utility function puc +1,puc where
for any x 1; 000; ux = 2x and where ux = 1; 000 + x for x greater than or equal to 1,000.
a Sally will be risk averse if her income is less than 1,000 but risk loving if her income is more than 1,000. b Sally will be risk neutral if her income is less than 1,000 and risk averse if her income is more than 1,000. c For bets that involve no chance of her wealth exceeding 1,000, Sally will take any bet that has a positive expected net payo . d Sally will never take a bet if there is a chance that it leaves her with wealth less than 2,000. e None of the above are true.
Topic: Uncertainty Correct Responses: 0 Correct
Di culty: 0 Discrimination Index: 0
12.24
Pablo's expected utility function is pc1=2 + 1 , pc1=2 where p is the probability that he consumes 1 2 c1 and 1 , p is the probability that he consumes c2 . Wilbur is o ered a choice between getting a sure payment of $Z or a lottery in which he receives $3,600 with probability 0.70 and he receives $12,100 with probability 0.30. Wilbur will choose the sure payment if:
a Z b Z c Z d Z e Z 5; 625 and the lottery if Z 5; 625. 4; 612:50 and the lottery if Z 4; 612:50. 12; 100 and the lottery if Z 12; 100. 8; 862:50 and the lottery if Z 8; 862:50. 6; 150 and the lottery if Z 6; 150.
MULTIPLE CHOICE
Topic: Uncertainty Correct Responses: 0 Correct Di culty: 0 Discrimination Index: 0
229
12.25
Roger's expected utility function is pc1=2 +1,pc1=2 where p is the probability that he consumes c1 1 2 and 1 , p is the probability that he consumes c2. Wilbur is o ered a choice between getting a sure payment of $Z or a lottery in which he receives $900 with probability 0.80 and he receives $10,000 with probability 0.20. Wilbur will choose the sure payment if:
a Z b Z c Z d Z e Z 1; 936 and the lottery if Z 1; 418 and the lottery if Z 10; 000 and the lottery if Z 5; 968 and the lottery if Z 2; 720 and the lottery if Z 1; 936. 1; 418. 10; 000. 5; 968. 2; 720.
Topic: Uncertainty Correct Responses: 0 Correct
Di culty: 0 Discrimination Index: 0
12.26 Clancy has $3,200. He plans to bet on a boxing match between Sullivan and Flanagan.
He nds that he can buy coupons for $8 that will pay o $10 each if Sullivan wins. He also nds in another store some coupons that will pay o $10 if Flanagan wins. The Flanagan tickets cost $2 each. Clancy believes that the two ghters each have a probability of 1=2 of winning. Clancy is a risk averter who tries to maximize the expected value of the natural log of his wealth. Which of the following strategies would maximize his expected utility?
a Don't gamble at all. b Buy 200 Sullivan tickets and 800 Flanagan tickets. c Buy exactly as many Flanagan tickets as Sullivan tickets. d Buy 100 Sullivan tickets and 400 Flanagan tickets. e Buy 100 Sullivan tickets and 800 Flanagan tickets.
CHAPTER 12 Uncertainty
Topic: Uncertainty Correct Responses: 0 Correct Di culty: 0 Discrimination Index: 0
230
12.27 Clancy has $4,800. He plans to bet on a boxing match between Sullivan and Flanagan.
He nds that he can buy coupons for $6 that will pay o $10 each if Sullivan wins. He also nds in another store some coupons that will pay o $10 if Flanagan wins. The Flanagan tickets cost $4 each. Clancy believes that the two ghters each have a probability of 1=2 of winning. Clancy is a risk averter who tries to maximize the expected value of the natural log of his wealth. Which of the following strategies would maximize his expected utility?
a Don't gamble at all. b Buy 400 Sullivan tickets and 600 Flanagan tickets. c Buy exactly as many Flanagan tickets as Sullivan tickets. d Buy 200 Sullivan tickets and 300 Flanagan tickets. e Buy 200 Sullivan tickets and 600 Flanagan tickets.
Topic: Uncertainty Correct Responses: 0 Correct Di culty: 0 Discrimination Index: 0
12.28 Tom Cruiser's car is worth $100,000. But Tom is careless and leaves the top down and
the keys in the ignition. Consequently his car will be stolen with probability .5. If it is stolen he will never get it back. Tom has $100,000 in other wealth and his von Neumann-Morgenstern utility function for wealth is uw = lnw. Suppose that Tom can buy $K worth of insurance at a price of $:6K. How much insurance will Tom buy?
a $0. b $100,000. c more than $0 but less than $50,000. d more than $50,000 but less than $100,000. e exactly $50,000.
Essay
Topic: Uncertainty Correct Responses: 0 Di culty: 2 Discrimination Index: 0
Uncertainty
12.1 Gaston Gourmand loves good food. Due to an unusual ailment, he has a probability of 1=4
of losing his sense of smell, which would greatly reduce his enjoyment of food. Gaston nds an insurance company that will sell him "insurance" where he gets $3x if he loses his smell and pays $x if he doesn't. He can also buy "negative insurance" where he pays $3x if he loses his sense of smell and gets x dollars if he doesn't. Gaston says, "Money will be only half as important to me if I lose my sense of smell." If we look at his expected utility function, we see what he means. Where c1 is his consumption if he retains his sense of smell and c2 is his income if he loses his sense of smell, Gaston has the expected utility function Uc1 ; c2 = 3=4c1=2 + 1=8c1=2. What insurance should 1 2 he buy?
Answer: Negative insurance so that his wealth is 4 times as large if he doesn't lose his smell than if he does.
Topic: Uncertainty Correct Responses: 0 Di culty: 2 Discrimination Index: 0
12.2 Oliver takes his wealth of $1000 to a casino. He can bet as much as he likes on the toss of
a coin, but the "house" takes a cut. If Oliver bets $x on heads, then if heads comes up, he gets $:8x; and if tails comes up he pays $x. Similarly if he bets $x on tails and if tails comes up, he wins $:8x; and if heads comes up he pays $x. Draw a graph with dollars contingent on heads and dollars contingent on tails on the two axes. Show Oliver's budget constraint. Oliver is an expected utility maximizer with the utility function Uh; t = 1=2h2 + 1=2t2 where h is his wealth if heads comes up and t is his wealth if tails comes up. Draw the highest indi erence curve that Oliver can reach with his budget. What bets if any does he make?
Answer: Budget kinks at 1000; 1000; it meets the axes at 1800; 0 and 0; 1800. Indi erence curves are quarter circles. Oliver will gamble his entire wealth, either betting it all on heads or all on tails.
Topic: Uncertainty Correct Responses: 0 Di culty: 3 Discrimination Index: 0
12.3 Linus Piecewise is an expected utility maximizer. There are two events, H and T; which
each have probability 1=2. Linus's preferences over lotteries in which his wealth is h if Event H happens and t if Event T happens are representable by the utility function Uh; t = uh=2+ut=2. The function u takes the following form. For any x; ux = x if x 100 and ux = 100 + x=2 if x is greater than or equal to 100. Draw a graph showing the indi erence curves for Linus that pass through a the point 50; 0 b the point 50; 100 c the point 100; 100 d the point 150; 100. Answer: Curve a is a line with slope ,1. Curve b has 3 linear segments: a line from100; 50 to 50; 100; a line with slope ,2 to the left of 50; 100; and a line with slope ,1=2 to the right of 100; 50. Curve c has two segments: a line with slope ,2 going to the left and a line with slope ,1=2 to the right of 100; 100. Curve d has 3 segments, a line from 150; 100 to 100; 150; and lines from 150; 100 to 200; 0 and from 0; 200 to 100; 150.
CHAPTER 12 Uncertainty
Topic: Uncertainty Correct Responses: 0 Di culty: 2 Discrimination Index: 0
232
12.4 The "certainty equivalent" of a gamble is de ned to be an the amount of money which if
you were promised it with certainty would be indi erent to the gamble. a If an expected utility maximizer has a von Neuman Morgenstern utility function UW = W 1=2 where W is wealth and if the probability of events 1 and 2 are both 1=2; write a formula for the certainty equivalent of a gamble that gives you x if event 1 happens and y if event 2 happens. b Generalize your formula in part a to the case where the probability of event 1 is p and the probability of event 2 is 1 , p. c Generalize the formula in part a to the case where UW = W a for a 0.
Answer: acertainty equivalent is 1=2x1=2 +1=2y1=2 2 b px1=2 +1 ,py1=2 2 c 1=2xa +1=2ya f 1=ag
Chapter 13
True-False
Topic: Risky Assets Correct Responses: 0 Correct Di culty: 1 Discrimination Index: 0
Risky Assets
13.1 If two assets have the same expected rate of return but di erent variances, a risk-averse
investor should always choose the one with the smaller variance, no matter what other assets she holds.
Topic: Risky Assets Correct Responses: 0 Correct Di culty: 1 Discrimination Index: 0
13.2 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.
Topic: Risky Assets Correct Responses: 0 Correct Di culty: 1 Discrimination Index: 0
13.3 If mean is plotted on the horizontal axis and variance on the vertical, then indi erence
curves for a risk-averter must slope upwards and to the right.
Topic: Risky Assets Correct Responses: 0 Correct Di culty: 1 Discrimination Index: 0
13.4 If you invest half your money in a risk-free asset and half your money in a risky asset such
that the standard deviation of the return on the risky asset is s; then the standard deviation of the return on your investment portfolio is s=2.
Multiple Choice
Risky Assets
Topic: Risky Assets Correct Responses: 0 Correct
Di culty: 2 Discrimination Index: 0
13.1 Firm A sells lemonade and rm B sells hot chocolate. If you invest $100 if Firm A, in
one year you will get back $30+ T where T is the average temperature Fahrenheit during the summer. If you invest $100 in rm B; in one year you will get back $150,T where T is the average temperature during the summer. The expected value of T is 70 and the standard deviation of T is 10. If you invest $50 in Firm A and $50 in Firm B; what is the standard deviation of your return on your investment?
a 10 b 20 c 5 d 0 e None of the above.
Topic: Risky Assets Correct Responses: 0 Correct
Di culty: 2 Discrimination Index: 0
13.2 A risk-free asset is available at 5 interest. Another asset is available with a mean rate
of return of 15, but with a standard deviation of 5. An investor is considering an investment portfolio consisting of some of each stock. On a graph with standard deviation on the horizontal axis and mean on the vertical axis, the budget line that expresses the alternative combinations of mean return and standard deviation possible with portfolios of these assets is:
a a straight line with slope 2. b a straight line with slope ,3. c a straight line with increasing slope as you move left. d a straight line with slope ,1. e a straight line with slope ,1=3.
MULTIPLE CHOICE
Topic: Risky Assets Correct Responses: 0 Correct Di culty: 2 Discrimination Index: 0
235
13.3 Marvin is an expected utility maximizer. He chooses his portfolio so as to maximize the
expected value of 2; 000; 000x, x2 . If m is the mean of Marvin's income and s is the standard deviation, we can write Marvin's income as a function of mean and standard deviation in the following way:
a U = 2; 000; 000m , s2 . b U = 2; 000; 000m , s. c U = m , s=2; 000; 000. d U = 2; 000; 000 + s. e None of the above.
Topic: Risky Assets Correct Responses: 0 Correct
Di culty: 1 Discrimination Index: 0
13.4 You have been hired as a portfolio manager for a stock brokerage. Your rst job is to invest
$100,000 in a portfolio of two assets. The rst asset is a "safe asset" with a sure return of 4 interest. The second asset is a risky asset with a 26 expected rate of return, but the standard deviation of this return is 10. Your client wants a portfolio with as high a rate of return as possible consistent with a standard deviation no larger than 4. How much of her money do you invest in the safe asset?
a $22,000 b $40,000 c $64,000 d $36,000 e $60,000
CHAPTER 13 Risky Assets
Topic: Risky Assets Correct Responses: 0 Correct Di culty: 1 Discrimination Index: 0
236
13.5 Bill owns an export business. The expected pro t from his business is $100,000 a year. For
every 1 increase in the value of the Japanese yen relative to the dollar, its pro ts increase by $20,000. Bill plans to buy one of two rms. One is an import business which returns an expected pro t of $70,000. For every 1 increase in the value of the Japanese yen relative to the dollar, the pro ts of this rm shrink by $5,000. The second is a safe domestic rm which is certain to yield him $70,000 a year. The two rms cost the same. If Bill is risk averse:
a he should buy the domestic rm. b he should buy the import rm. c he should buy half of each of these two rms. d it doesn't matter which he buys. e he should buy 80 of the domestic rm and 20 of the import rm.
Topic: Risky Assets Correct Responses: 0 Correct
Di culty: 0 Discrimination Index: 0
13.6 Suppose that Ms. Lynch in Problem 13.1 can make up her portfolio using a risk-free asset
that o ers a sure- re rate of return of 15 and a risky asset with expected rate of return 30, with standard deviation 5. If she chooses a portfolio with expected rate of return 30, 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.
MULTIPLE CHOICE
Topic: Risky Assets Correct Responses: 0 Correct Di culty: 0 Discrimination Index: 0
237
13.7 Suppose that Ms. Lynch in Problem 13.1 can make up her portfolio using a risk-free asset
that o ers a sure- re rate of return of 15 and a risky asset with expected rate of return 25, with standard deviation 5. If she chooses a portfolio with expected rate of return 20, then the standard deviation of her return on this portfolio will be:
a 1.25. b 5.50. c 2.50. d 5. e None of the above.
Topic: Risky Assets Correct Responses: 0 Correct
Di culty: 0 Discrimination Index: 0
13.8 Suppose that Fenner Smith of Problem 13.2 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 30 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 4. b ,4. c 2. d ,2. e 6.
CHAPTER 13 Risky Assets
Topic: Risky Assets Correct Responses: 0 Correct Di culty: 0 Discrimination Index: 0
238
13.9 Suppose that Fenner Smith of Problem 13.2 must divide his portfolio between two assets,
one of which gives him an expected rate of return of 15 with zero standard deviation and one of which gives him an expected rate of return of 45 and has a standard deviation of 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 2. b ,2. c 1. d ,1. e 3.
Essay
Topic: Risky Assets Correct Responses: 0 Di culty: 3 Discrimination Index: 0
Risky Assets
13.1 If you invest $100 now in rm A, in one year you will get back $30 + T where T is the
average temperature during the next summer. If you invest $100 now in rm B; in one year you will get back $180 , T. The expected value of T is 70 and the standard deviation of T is 10. a Draw a graph showing the combinations of expected return and standard deviation that you can have by dividing $100 between stock in A and stock in B. Hint: Expected value has the property that Eax + b = aEx + b and standard deviation has the property that SDax + b = absolute value of a times SDx + b. b What is the expected value and standard deviation of the safest investment strategy you can make by this means? c What is the highest expected value you can achieve?
The locus includes the line segment from S; E = 0; 105 to S; E = 10; 110 as well as the line segment from 0; 105 to 10; 100. b105 and 0 c110.
Chapter 14
True-False
Topic: Consumer's Surplus Correct Responses: 63 Correct
Consumer's Surplus
Di culty: 1 Discrimination Index: 22
14.1 Consumer's surplus is another name for excess demand.
Topic: Consumer's Surplus Correct Responses: 85 Correct Di culty: 1 Discrimination Index: 27
14.2 There is a positive consumer surplus when the total amount one pays for something is less
than the amount one would be willing to pay rather than do without it altogether.
Topic: Consumer's Surplus Correct Responses: 74 Correct
Di culty: 1 Discrimination Index: 46
14.3 The equivalent variation in income from a tax is the amount of extra income that a consumer
would need in order to be as well o after the tax is imposed as he was originally.
Topic: Consumer's Surplus Correct Responses: 0 Correct
Di culty: 2 Discrimination Index: 0
14.4 With quasilinear preferences, the equivalent variation and the compensating variation in
income due to a tax are the same.
Topic: Consumer's Surplus Correct Responses: 76 Correct
Di culty: 1 Discrimination Index: 17
14.5 Producer's surplus at price p is the vertical distance between the supply curve and the
demand curve at price p.
TRUE-FALSE
Topic: Consumer's Surplus Correct Responses: 84 Correct Di culty: 2 Discrimination Index: 19
241
14.6 If somebody is buying 15 units of x and the price of x falls by $2, then that person's net
consumer surplus must increase by at least $30.
Topic: Consumer's Surplus Correct Responses: 84 Correct
Di culty: 2 Discrimination Index: 19
14.7 If somebody is buying 15 units of x and the price of x falls by $4, then that person's net
consumer surplus must increase by at least $60.
Topic: Consumer's Surplus Correct Responses: 83 Correct
Di culty: 1 Discrimination Index: 20
14.8 If there is Cobb-Douglas utility, compensating and equivalent variation are the same.
Topic: Consumer's Surplus Correct Responses: 62 Correct Di culty: 2 Discrimination Index: 15
14.9 Bernice has the utility function Ux; y = minfx; yg. The price of x used to be 3, but rose to
4. The price of y remained at 1. Her income is 12. The price increase was as bad for her as a loss of $3 in income.
Topic: Consumer's Surplus Correct Responses: 73 Correct Di culty: 0 Discrimination Index: 27
14.10 If there is a price increase for a good that Josephine consumes, her compensating variation is
the change in her income that allows her to purchase her new optimal bundle at the original prices.
Topic: Consumer's Surplus Correct Responses: 73 Correct Di culty: 0 Discrimination Index: 27
14.11 If there is a price increase for a good that Elsie consumes, her compensating variation is
the change in her income that allows her to purchase her new optimal bundle at the original prices.
CHAPTER 14 Consumer's Surplus
Topic: Consumer's Surplus Correct Responses: 0 Correct Di culty: 2 Discrimination Index: 0
242
14.12 Bernice's utility function is Ux; y = minfx; yg. The price of x used to be 3, but rose to 4.
The price of y remained at 1. Her income is 12. She would need an income of $15 to be able to a ord a bundle as good as her old one at the new prices.
Multiple Choice
Consumer's Surplus
Topic: Consumer's Surplus Correct Responses: 56 Correct
Di culty: 1 Discrimination Index: 40
14.1 Ella's utility function is minf4x; yg. If the price of x is 15 and the price of y is 20, how
much money would she need to be able to purchase a bundle that she likes as well as the bundle
x; y = 5; 8? a 92 b 198 c 190 d 235 e 47
Topic: Consumer's Surplus Correct Responses: 56 Correct
Di culty: 1 Discrimination Index: 40
14.2 Ella's utility function is minf2x; yg. If the price of x is 15 and the price of y is 10, how
much money would she need to be able to purchase a bundle that she likes as well as the bundle
x; y = 10; 8? a 67 b 148 c 140 d 230 e 70
CHAPTER 14 Consumer's Surplus
Topic: Consumer's Surplus Correct Responses: 33 Correct Di culty: 3 Discrimination Index: 32
2
244
14.3 Reginald is fond of cigars. His utility function is Ux; c = x+10c,:5c where c is the number
of cigars he smokes per week and x is the money that he spends on consumption of other goods. Reginald has $200 a week to spend. Cigars used to cost him $1 each, but their price went up to $2 each. This price increase was as bad for him as losing the following amount of income:
a $5 b $7.25 c $9 d $8 e $8.50
Topic: Consumer's Surplus Correct Responses: 62 Correct
Di culty: 2 Discrimination Index: 55
14.4 Sam's utility function is Ux; y = 2x + y where x is the number of x0s he consumes per week 0
and y is the number of y s he consumes per week. Sam has $200 a week to spend. The price of x is 4. Sam currently doesn't consume any y. Sam has received an invitation to join a club devoted to consumption of y. If he joins the club, Sam 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 Sam would be willing to pay to join this club?
a nothing b $100 a week c $50 a week d $40 a week e None of the above.
MULTIPLE CHOICE
Topic: Consumer's Surplus Correct Responses: 56 Correct Di culty: 2 Discrimination Index: 77
245
14.5 Yoram's utility function is Ux; y = 2x + 5y. The price of x is $4 and the price of y is
$15. Yoram has $150 a week to spend on x and y. Yoram is o ered a chance to join a club of y-consumers. If he joins, he can get y at a price of $10. What is the most that Yoram would be willing to pay to join the club?
a nothing b $30 a week c $50 a week d $75 a week e None of the above.
Topic: Consumer's Surplus Correct Responses: 0 Correct
Di culty: 2 Discrimination Index: 0
14.6 Minnie gets 4 tapes for her birthday, but they are currently useless to her because she
doesn't have a tape recorder and she cannot return them for a refund. Her utility function is Ux; y; z = x + fyz :5 where z is the number of tapes she has, y is the number of tape recorders she has, and x is the money she has to spend on other stu . Let fy = 0 if y 1 and fy = 7 otherwise. The price of tapes is $7.99. What is her reservation price for a tape recorder?
a 20 b 7 c 24 d 0 e None of the above.
CHAPTER 14 Consumer's Surplus
Topic: Consumer's Surplus Correct Responses: 0 Correct Di culty: 1 Discrimination Index: 0
246
14.7 Izaak likes to eat pizza and to sh. The more shing he does the happier he is, up to 8
hours a day. If he shes longer than 8 hours he gets a sore back and is less happy than if he hadn't shed at all. For y less than or equal to 8, his utility function is Ux; y = x + 4y where x is money spent on pizza and y is hours per day spent shing. His income is $45 a day and he has no expenses other than pizza. The Bureau of Fisheries has just decided to allow people without shing licenses to sh only 3 hours a day. But if you buy a shing license, you can sh as many hours as you wish. How much is Izaak willing pay for a license?
a $20 b $32 c $23 d $18 e 0.
Topic: Consumer's Surplus Correct Responses: 0 Correct
Di culty: 1 Discrimination Index: 0
14.8 Izaak likes to eat pizza and to sh. The more shing he does the happier he is, up to 8
hours a day. If he shes longer than 8 hours he gets a sore back and is less happy than if he hadn't shed at all. For y less than or equal to 8, his utility function is Ux; y = x + 4y where x is money spent on pizza and y is hours per day spent shing. His income is $41 a day and he has no expenses other than pizza. The Bureau of Fisheries has just decided to allow people without shing licenses to sh only 4 hours a day. But if you buy a shing license, you can sh as many hours as you wish. How much is Izaak willing pay for a license?
a $16 b $32 c $19 d $14 e 0.
MULTIPLE CHOICE
Topic: Consumer's Surplus Correct Responses: 51 Correct Di culty: 2 Discrimination Index: 26
247
14.9 Ellsworth's utility function is Ux; y = minfx; yg. Ellsworth has $150 and the price of x
and the price of y are both 1. Ellsworth's boss is thinking of sending him to another town where the price of x is 1 and the price of y is 2. The boss o ers no raise in pay. Ellsworth, who understands compensating and equivalent variation perfectly, complains bitterly. He says that although he doesn't mind moving for its own sake and the new town is just as pleasant as the old, having to move is as bad as a cut in pay of $A. He also says he wouldn't mind moving if when he moved he got a raise of $B. What are A and B?
a A = 50 B = 50 b A = 75 B = 75 c A = 75 B = 100 d A = 50 B = 75 e none of the above
Topic: Consumer's Surplus Correct Responses: 22 Correct
Di culty: 1 Discrimination Index: 40
14.10 Holly consumes only goods X and Y . Her income is 600 and her utility function is
2. The equivalent variation of this price change for Holly is:
a 300. b 600. c 150. d 800. e None of the above.
Ux; y = maxfx; yg where x is the number of units of X she consumes and y is the number of units of Y she consumes. The price of good Y is 1. The price of good X used to be 1=2; but is now
CHAPTER 14 Consumer's Surplus
Topic: Consumer's Surplus Correct Responses: 22 Correct Di culty: 1 Discrimination Index: 40
248
14.11 Zelda consumes only goods X and Y . Her income is 400 and her utility function is
The equivalent variation of this price change for Zelda is:
a 300. b 1,200. c 75. d 2,000. e None of the above.
Ux; y = maxfx; yg where x is the number of units of X she consumes and y is the number of units of Y she consumes. The price of good Y is 1. The price of good X used to be 1=4; but is now 2.
Topic: Consumer's Surplus Correct Responses: 53 Correct
Di culty: 2 Discrimination Index: 47
14.12 Poindexter's utility function is Ux; y = minfx+2y; 3x+yg where x is butter and y is guns.
If the price of butter is 4 and the price of guns is 5, what would it cost Poindexter to buy the cheapest bundle that he likes as well as 4 units of butter and 3 units of guns?
a 31 b 32 c 29 d 28 e None of the above.
MULTIPLE CHOICE
Topic: Consumer's Surplus Correct Responses: 82 Correct Di culty: 3 Discrimination Index: 41
249
14.13 Albin has quasilinear preferences and he loves pretzels. His inverse demand function for
pretzels is px = 49 , 6x; where x is the number of pretzels that he consumes. He is currently consuming 8 pretzels at a price of $1 per pretzel. If the price of pretzels rises to $7 per pretzel, the change in Albin's consumer surplus is:
a ,$90. b ,$56. c ,$42. d ,$45. e ,$42.
Topic: Consumer's Surplus Correct Responses: 44 Correct Di culty: 2 Discrimination Index: 49
14.14 Bernice's preferences can be represented by the utility function, Ux; y = minfx; yg. She
faces prices, 2; 1; and her income is 12. If prices change to 3; 1; then:
a the compensating variation equals the equivalent variation. b the compensating variation is $2 greater than the equivalent variation. c the compensating variation is $2 smaller than the equivalent variation. d the compensating variation is $1 greater than the equivalent variation. e there is not enough information to determine which is larger.
Topic: Consumer's Surplus Correct Responses: 0 Correct Di culty: 1 Discrimination Index: 0
14.15 At the initial prices, Teodoro is a net seller of apples and a net buyer of bananas. If the
price of apples decreases and the price of bananas does not change:
a the compensating variation must be negative and the equivalent variation positive. b the compensating variation must be positive and the equivalent variation negative. c both the compensating variation and the equivalent variation must be positive. d both the compensating variation and the equivalent variation must be negative. e the compensating variation must be negative, but the equivalent variation could be of either sign.
CHAPTER 14 Consumer's Surplus
Topic: Consumer's Surplus Correct Responses: 74 Correct Di culty: 1 Discrimination Index: 45
250
14.16 Sam has quasilinear preferences and his demand function for x is Dp = 15 , p=3. The
price of x is initially $15 per unit and increases to $24 per unit. Sam's change is consumer surplus is the closest to:
a ,168. b ,76. c ,27. d 75. e Sam won't consume x at either of the prices.
Topic: Consumer's Surplus Correct Responses: 87 Correct
Di culty: 1 Discrimination Index: 30
14.17 Sir Plus has a demand function for mead that is given by the equation Dp = 100 , p. If
the price of mead is 65, how much is Sir Plus's net consumer surplus?
a 35 b 612.50 c 1,225 d 306.25 e 4,550
Topic: Consumer's Surplus Correct Responses: 87 Correct
Di culty: 1 Discrimination Index: 30
14.18 Sir Plus has a demand function for mead that is given by the equation Dp = 100 , p. If
the price of mead is 75, how much is Sir Plus's net consumer surplus?
a 25 b 312.50 c 625 d 156.25 e 6,000
MULTIPLE CHOICE
Topic: Consumer's Surplus Correct Responses: 70 Correct Di culty: 2 Discrimination Index: 83
2
251
14.19 Quasimodo from your workbook has the utility function Ux; m = 100x,x =2+m where x
is his consumption of earplugs and m is money left over to spend on other stu . If he has $10,000 to spend on earplugs and other stu , and if the price of earplugs rises from $50 to 65, then his net consumer's surplus:
a falls by 637.50. b falls by 2,637.50. c falls by 525. d increases by 318.75. e increases by 1,275.
Topic: Consumer's Surplus Correct Responses: 70 Correct
Di culty: 2 Discrimination Index: 83
2
14.20 Quasimodo from your workbook has the utility function Ux; m = 100x,x =2+m where x
is his consumption of earplugs and m is money left over to spend on other stu . If he has $10,000 to spend on earplugs and other stu , and if the price of earplugs rises from $50 to 90, then his net consumer's surplus:
a falls by 1,200. b falls by 3,200. c falls by 400. d increases by 600. e increases by 2,400.
CHAPTER 14 Consumer's Surplus
Topic: Consumer's Surplus Correct Responses: 80 Correct Di culty: 2 Discrimination Index: 50
252
14.21 Bernice has the utility function ux; y = minfx; yg where x is the number of pairs of ear-
rings 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 $13 per week and was paying a price of $5 per pair of earrings, then if the price of earrings rose to $8, the comp ensating variation of that price change measured in dollars per w week would be closest to:
a $4.33. b $6.50. c $14. d $13. e $12.
Topic: Consumer's Surplus Correct Responses: 80 Correct
Di culty: 2 Discrimination Index: 50
14.22 Bernice has the utility function ux; y = minfx; yg where x is the number of pairs of ear-
rings 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 $11 per week and was paying a price of $3 per pair of earrings, then if the price of earrings rose to $5, the comp ensating variation of that price change measured in dollars per w week would be closest to:
a $3.67. b $5.50. c $12. d $11. e $10.
MULTIPLE CHOICE
Topic: Consumer's Surplus Correct Responses: 60 Correct Di culty: 2 Discrimination Index: 45
253
14.23 If Bernice whose utility function is minfx; yg where x is her consumption of earrings and
y is money left for other stu had an income of $ 12 and was paying a price of $9 for earrings
when the price of earrings went up to $14, then the equivalent variation of the price change was:
a $4. b $6. c $12. d $2. e $5.
Topic: Consumer's Surplus Correct Responses: 60 Correct Di culty: 2 Discrimination Index: 45
14.24 If Bernice whose utility function is minfx; yg where x is her consumption of earrings and
y is money left for other stu had an income of $ 12 and was paying a price of $3 for earrings
when the price of earrings went up to $7, then the equivalent variation of the price change was:
a $6. b $12. c $24. d $3. e $9.
Topic: Consumer's Surplus Correct Responses: 70 Correct Di culty: 2 Discrimination Index: 82
2
14.25 Lolita, the Holstein cow, has a utility function is Ux; y = x , x =2 + y where x is her
consumption of cow feed and y is her consumption of hay. If the price of cow feed is 0.40, the price of hay is 1, and her income is 3, and if Lolita chooses the combination of hay and cow feed that she likes best from among those combinations she can a ord, her utility will be:
a 3.18. b 2.60. c 0.18. d 4.68. e 1.68.
CHAPTER 14 Consumer's Surplus
Topic: Consumer's Surplus Correct Responses: 70 Correct Di culty: 2 Discrimination Index: 82
2
254
14.26 Lolita, the Holstein cow, has a utility function is Ux; y = x , x =2 + y where x is her
consumption of cow feed and y is her consumption of hay. If the price of cow feed is 0.10, the price of hay is 1, and her income is 5, and if Lolita chooses the combination of hay and cow feed that she likes best from among those combinations she can a ord, her utility will be:
a 5.40. b 4.90. c 0.40. d 7.90. e 2.90.
Topic: Consumer's Surplus Correct Responses: 28 Correct
Di culty: 2 Discrimination Index: 10
14.27 The number of "Quayle in 96" buttons demanded on a certain university campus is given
by Dp = 100 , p; where p is the price of buttons measured in pennies. The supply function is Sp = p. The current administration manages to enforce a price ceiling of 40 cents per button. The e ect on net consumers' surplus is:
a an increase of $5.50. b an increase of $3.50. c no change. d a decrease of $3.50. e a decrease of $5.50.
MULTIPLE CHOICE
Topic: Consumer's Surplus Correct Responses: 52 Correct Di culty: 2 Discrimination Index: 27
2
255
14.28 Chen's utility function is Ux; y = x + 6y , y =2; where x is the number of x0s he consumes 0
per week and y is the number of y s he consumes per week. Chen has $200 a week to spend. The price of x is 1. The price of y is currently $5 per unit. Chen has received an invitation to join a club devoted to consumption of y. If he joins the club, Chen 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 Chen would be willing to pay to join this club?
a 8 b 12 c 20 d 24 e None of the above.
Topic: Consumer's Surplus Correct Responses: 52 Correct Di culty: 2 Discrimination Index: 27
2
14.29 Peter's utility function is Ux; y = x +10y ,y =2; where x is the number of x0s he consumes 0
per week and y is the number of y s he consumes per week. Peter has $200 a week to spend. The price of x is 1. The price of y is currently $3 per unit. Peter has received an invitation to join a club devoted to consumption of y. If he joins the club, Peter 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 Peter would be willing to pay to join this club?
a 2 b 16 c 18 d 32 e None of the above.
Essay
Topic: Consumer's Surplus Correct Responses: 0
Consumer's Surplus
Di culty: 3 Discrimination Index: 0
14.1 The "indirect utility function" for a consumer with a utility function Ux1; x2 is de ned
to be a function V p1; p2; M such that V p1; p2; M is the maximum of Ux1; x2 subject to the constraint that the consumer can a ord x1; x2 at the prices p1; p2 with income M. a Find the indirect utility function for someone with the utility function Ux; y = 2x + y. b Find the indirect utility function for someone with the utility function Ux; y = minf2x; yg. Explain how you got your answers.
M=minfp1=2; p2g. b M=2p1 + p2.
Chapter 15
True-False
Topic: Market Demand Correct Responses: 86 Correct
Market Demand
Di culty: 1 Discrimination Index: 5
15.1 The inverse demand curve Px for a good x measures the price per unit at which the quantity x would be demanded.
Topic: Market Demand Correct Responses: 37 Correct
Di culty: 2 Discrimination Index: 0
15.2 In general, aggregate demand depends only on prices and total income and not on income
distribution.
Topic: Market Demand Correct Responses: 85 Correct Di culty: 1 Discrimination Index: 20
1
15.3 If consumer 1 has the demand function x = 1; 000 , 2p and consumer 2 has the demand
function x2 = 500 , p; then the aggregate demand function for an economy with just these two consumers would be x = 1; 500 , 3p for p 500.
Topic: Consumer's Surplus Correct Responses: 82 Correct Di culty: 1 Discrimination Index: 23
15.4 If a consumer has to pay his reservation price for a good, then he gets no consumer surplus
from purchasing it.
Topic: Market Demand Correct Responses: 0 Correct Di culty: 1 Discrimination Index: 0
15.5 If a price changes, then changes in consumption at the intensive margin are changes that
happen because consumers alter the amounts that they consume, but do not either stop consuming or start consuming the good.
CHAPTER 15 Market Demand
Topic: Elasticity Correct Responses: 86 Correct Di culty: 1 Discrimination Index: 25
258
15.6 If the demand curve is a linear function of price, then the price elasticity of demand is the
same at all prices.
Topic: Elasticity Correct Responses: 67 Correct
Di culty: 2 Discrimination Index: 21
15.7 If the demand function is q = 3m=p; where m is income and p is price, then the absolute
value of the price elasticity of demand decreases as price increases.
Topic: Market Demand Correct Responses: 48 Correct
Di culty: 1 Discrimination Index: 10
15.8 If the elasticity of demand curve for millet is ,0:50 at all prices higher than the current
price, we would expect that when bad weather reduces the size of the millet crop, total revenue of millet producers will fall.
Topic: Market Demand Correct Responses: 48 Correct
Di culty: 1 Discrimination Index: 10
15.9 If the elasticity of demand curve for buckwheat is ,0:75 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.
Topic: Market Demand Correct Responses: 51 Correct
Di culty: 2 Discrimination Index: 47
15.10 If the equation for the demand curve is q = 50 , 1p; then the ratio of marginal revenue to
price is constant as price changes.
TRUE-FALSE
Topic: Market Demand Correct Responses: 51 Correct Di culty: 2 Discrimination Index: 47
259
15.11 If the equation for the demand curve is q = 40 , 2p; then the ratio of marginal revenue to
price is constant as price changes.
Topic: Market Demand Correct Responses: 36 Correct
Di culty: 3 Discrimination Index: 0
15.12 If a rational consumer must consume either zero or one unit of a good, then an increase in
the price of that good with no change in income or in other prices can never lead to an increase in the consumer's demand for it.
Topic: Market Demand Correct Responses: 0 Correct
Di culty: 1 Discrimination Index: 0
15.13 In the reservation price model, either aggregate demand is zero or everyone demands one
unit of the good.
Topic: Market Demand Correct Responses: 0 Correct Di culty: 1 Discrimination Index: 0
15.14 The La er e ect occurs only if there is a backward-bending labor supply curve.
Topic: Market Demand Correct Responses: 64 Correct Di culty: 2 Discrimination Index: 4
15.15 If the demand curve were plotted on graph paper with logarithmic scales on both axes,
then its slope would be the elasticity of demand.
Topic: Market Demand Correct Responses: 71 Correct
Di culty: 1 Discrimination Index: 8
15.16 The market demand curve is simply the horizontal sum of the individual demand curves.
CHAPTER 15 Market Demand
Topic: Market Demand Correct Responses: 72 Correct Di culty: 1 Discrimination Index: 15
260
15.17 The demand curve is inelastic for inferior goods and elastic for normal goods.
Topic: Market Demand Correct Responses: 56 Correct Di culty: 1 Discrimination Index: 20
15.18 Marginal revenue is equal to price if the demand curve is horizontal.
Topic: Market Demand Correct Responses: 45 Correct Di culty: 2 Discrimination Index: 30
15.19 If the amount of money that people are willing to spend on a good stays the same when
its price doubles, then demand for that good must have a price elasticity of demand smaller in absolute value than one.
Topic: Elasticity Correct Responses: 38 Correct Di culty: 1 Discrimination Index: 0
15.20 If the price elasticity of demand for a normal good is constant, then a price increase of 10
cents will reduce demand by more if the original price is $1 than if the original price is $2.
Topic: Market Demand Correct Responses: 0 Correct Di culty: 1 Discrimination Index: 0
15.21 The demand function for potatoes has the equation q = 1; 000,10p. As the price of potatoes
changes from 10 to 20, the absolute value of the price elasticity of demand for potatoes increases.
Topic: Elasticity Correct Responses: 62 Correct Di culty: 1 Discrimination Index: 60
15.22 If the demand curve for a good is given by the equation q = 2=p; where q is quantity and p
is price, then at any positive price, the elasticity of demand will be ,1.
TRUE-FALSE
Topic: Market Demand Correct Responses: 0 Correct Di culty: 2 Discrimination Index: 0
261
15.23 If consumer 1 has the inverse demand function given by p = 15 , x and consumer 2 has
inverse demand function given by p = 20 , 3x; then the total quantity demanded by the two consumers is x = 7 when the price, p; is 11.
Topic: Market Demand Correct Responses: 67 Correct Di culty: 2 Discrimination Index: 27
15.24 The inverse demand for a good is given by p = 60 , 2q. Suppose that the number of
consumers doubles. For each consumer in the market another consumer with an identical demand function appears. The demand curve shifts to the right, doubling demand at every price, while the slope of the demand curve stays unchanged.
Topic: Market Demand Correct Responses: 68 Correct Di culty: 1 Discrimination Index: 45
15.25 If Castor's demand curve is described by q = 40 , p and Pollux's demand curve is given by
q = 60 , 2p; then each of their demand curves will pass through the point q = 20; p = 20. Therefore
if they are the only two consumers in a market, the market demand curve will also pass through
q = 20; p = 20.
Topic: Elasticity Correct Responses: 49 Correct
Di culty: 2 Discrimination Index: 44
15.26 If the price of broccoli falls by $3 per pound, then the demand for broccoli will rise by 15
pounds. Therefore we can conclude that the demand for broccoli is elastic.
Topic: Elasticity Correct Responses: 49 Correct Di culty: 2 Discrimination Index: 44
15.27 If the price of squash falls by $2 per pound, then the demand for squash will rise by 10
pounds. Therefore we can conclude that the demand for squash is elastic.
Multiple Choice
Topic: Market Demand Correct Responses: 77 Correct
Market Demand
Di culty: 1 Discrimination Index: 34
15.1 A peck is 1=4 of a bushel. If the price elasticity of demand for bran is ,0:20 when bran is
measured in bushels, then when bran is measured in pecks, the price elasticity of demand for bran will be: a ,0:05. b ,0:80. c ,0:10. d ,0:40.
e None of the above.
Topic: Market Demand Correct Responses: 77 Correct
Di culty: 1 Discrimination Index: 34
15.2 A peck is 1=4 of a bushel. If the price elasticity of demand for millet is ,0:60 when millet
is measured in bushels, then when millet is measured in pecks, the price elasticity of demand for millet will be: a ,0:15. b ,2:40. c ,0:60. d ,1:20.
e None of the above.
Topic: Market Demand Correct Responses: 91 Correct
Di culty: 1 Discrimination Index: 9
15.3 The demand function is described by the equation qp = 190 , p=5. The inverse demand
function is described by:
a qp = 190 , 5p. b pq = 950 , 5q. c qp = 1=190 , p=5. d pq = 1=190 , q=5. e pq = 190 , q=5.
MULTIPLE CHOICE
Topic: Market Demand Correct Responses: 91 Correct Di culty: 1 Discrimination Index: 9
263
15.4 The demand function is described by the equation qp = 210 , p=4. The inverse demand
function is described by:
a qp = 210 , 4p. b pq = 840 , 4q. c qp = 1=210 , p=4. d pq = 1=210 , q=4. e pq = 210 , q=4.
Topic: Market Demand Correct Responses: 37 Correct
Di culty: 3 Discrimination Index: 0
15.5 If the demand function is q = m , 2ln p over some range of values of p; then at all such
values of p the absolute value of the price elasticity of demand:
a increases as p increases. b decreases as p increases. c is constant as p changes. d increases with p at small values and decreases with p at large values. e decreases with p at large values and increases with p at small values.
Topic: Market Demand Correct Responses: 86 Correct
Di culty: 1 Discrimination Index: 27
15.6 If the demand function for tickets to a play is q = 3; 600,45p; at what price will total revenue
be maximized?
a 160 b 80 c 40 d 20 e None of the above.
CHAPTER 15 Market Demand
Topic: Market Demand Correct Responses: 86 Correct Di culty: 1 Discrimination Index: 27
264
15.7 If the demand function for tickets to a play is q = 800, 20p; at what price will total revenue
be maximized?
a 80 b 40 c 20 d 10 e None of the above.
Topic: Market Demand Correct Responses: 54 Correct
Di culty: 2 Discrimination Index: 54
15.8 Rollo would love to have a Mercedes. His preferences for consumption in the next year are
represented by a utility function Ux; y where x = 0 if he has no Mercedes and x = 1 if he has a Mercedes for the year and where y is the amount of income he has left to spend on other stu . If U0; y = the square root of y and U1; y = 10=9y:5 and if Rollo's income is $50,000 a year, how much would he be willing to pay per year to have a Mercedes?
a $5,555.55 b $5,000 c $12,200 d $9,500 e $10,000
MULTIPLE CHOICE
Topic: Market Demand Correct Responses: 0 Correct Di culty: 2 Discrimination Index: 0
265
15.9 In Ozone, California people all have the same tastes and they all like hot tubs. Nobody
wants more than one hot tub but a person with wealth $M will be willing to pay up to :01M for a hot tub. The distribution of wealth in Ozone is as follows. The number of people with a wealth greater than $W for any given W is approximately 1; 000; 000=W. The price elasticity of demand for hot tubs in Ozone California is:
a ,:1 b ,:01 c ,1 d ,:4 e None of the above.
Topic: Market Demand Correct Responses: 0 Correct
Di culty: 2 Discrimination Index: 0
15.10 In Manifold, Missouri pop. 1; 000; people all have the same tastes and they all like Buicks.
Nobody wants more than one Buick, but a person with income $M is willing to pay about :10M per year to have a Buick. Nobody in Manifold has an income greater than $50,000 and nobody has an income less than $10,000. For incomes, $M; between $10,000 and $50,000, the number of people with incomes greater than M is about 1; 250, :025M. If it costs $2,000 a year to have a Buick, how many people in Manifold will demand Buicks?
a 500 b 750 c 100 d 600 e 800
CHAPTER 15 Market Demand
Topic: Market Demand Correct Responses: 0 Correct Di culty: 2 Discrimination Index: 0
266
15.11 Rod cares about the number of cars he has and the amount of money he has to spend
on other stu . The only possibilities of interest for Rod are having 0, 1, or 2 cars. Where x is the number of cars he has and y is the money he has per year for other stu , Rod's utility is U0; y = y:5 ; U1; y = 15=14y:5; and U2; y = 10=9y:5 . Rod's income is $25,000 a year. It would cost Rod $2,500 a year to have 1 car and $3,500 a year to have 2 cars. How many cars will he choose?
a 0 b 1 c 2 d He is indi erent between buying 1 and buying 2 cars. e He is indi erent between buying 2 and buying 3 cars.
Topic: Market Demand Correct Responses: 51 Correct
Di culty: 2 Discrimination Index: 29
15.12 Dr. Social Science has recently gured out how to clone consumers. His rst e ort was
done on the population of Walla, Washington. Each original citizen got a clone who had exactly the same income and preferences. Which of the following statements describes what happened to the demand function for tuna- sh casseroles in Walla?
a The elasticity doubled and the slope remained constant. b The elasticity did not change at any price. c The elasticity of demand doubled and the slope doubled. d The elasticity halved and the slope remained constant. e None of the above.
MULTIPLE CHOICE
Topic: Market Demand Correct Responses: 67 Correct Di culty: 2 Discrimination Index: 0
267
15.13 At the price of 100, tourists demand 587 airplane tickets. At the same price, business
travelers demand 527. At the price 120, tourists demand 127 tickets and business travelers demand 127. Assuming that the demand curves of business travelers and tourists are both linear over this price range, what is the price elasticity of demand at the price 100?
a ,3:86 b ,43 c ,4:63 d ,0:04 e None of the above.
Topic: Market Demand Correct Responses: 67 Correct
Di culty: 2 Discrimination Index: 0
15.14 At the price of 180, tourists demand 427 airplane tickets. At the same price, business
travelers demand 507. At the price 200, tourists demand 127 tickets and business travelers demand 127. Assuming that the demand curves of business travelers and tourists are both linear over this price range, what is the price elasticity of demand at the price 180?
a ,6:55 b ,34 c ,7:28 d ,0:04 e None of the above.
CHAPTER 15 Market Demand
Topic: Market Demand Correct Responses: 77 Correct Di culty: 2 Discrimination Index: 32
268
15.15 The inverse demand function for nectarines is described by the equation p = 185,3q; where
p is the price in dollars per crate and where q is the number of crates of nectarines demanded per week. When p = $20 per crate, what is the price elasticity of demand for nectarines? a ,60=55 b ,3=185 c ,3=55 d ,55=20 e ,20=165
Topic: Market Demand Correct Responses: 77 Correct
Di culty: 2 Discrimination Index: 32
15.16 The inverse demand function for grapes is described by the equation p = 831 , 9q; where p
is the price in dollars per crate and where q is the number of crates of grapes demanded per week. When p = $39 per crate, what is the price elasticity of demand for grapes?
a ,351=88 b ,9=831 c ,9=88 d ,88=39 e ,39=792
Topic: Market Demand Correct Responses: 0 Correct
Di culty: 3 Discrimination Index: 0
15.17 If there are only two goods, an increase in the price of good 1 will increase the demand for
good 2:
a if and only if the price elasticity of demand for good 2 is greater than 1 in absolute value. b whenever both goods are normal goods. c only if the two goods are perfect substitutes. d never. e None of the above.
MULTIPLE CHOICE
Topic: Market Demand Correct Responses: 75 Correct Di culty: 1 Discrimination Index: 20
269
15.18 The demand function for small business computers in the U.S. is given by x = 200 , 10p
where x is annual sales measured in thousands of computers and p is the price measured in thousands of dollars. Japanese rms supply a big share of these computers. They measure prices in yen where 150 yen equal 1 dollar. The price of 1 computer is $10,000. Let Eu be the price elasticity of demand at this price as calculated by U.S. rms who measure in dollars and let Ej be the price elasticity of demand at the same $10,000 price, but measured in yen by the Japanese rms. Which of the following are the values of Eu and Ej ; respectively?
a ,1,,150 b ,1,,1 c ,2,,2 d ,2,,300 e ,2,,:0133
Topic: Market Demand Correct Responses: 98 Correct
Di culty: 1 Discrimination Index: 25
15.19 An economy has 100 consumers of Type 1 and 200 consumers of Type 2. If the price of the
good is less than 10, then each Type 1 consumer demands 10 , p units of the good; otherwise each Type 1 demands zero. If the price of the good is less than 8, then each Type 2 demands 24 , 3p; otherwise each Type 2 demands zero. If the price of the good is 6, then the total amount of the good demanded will be:
a 1,600. b 1,800. c 2,000. d 420. e 1,200.
CHAPTER 15 Market Demand
Topic: Market Demand Correct Responses: 77 Correct Di culty: 1 Discrimination Index: 36
270
15.20 Harry's demand function for blueberries is x = 20 , 2p where p is the price and x is the
quantity demanded. If the price of blueberries is 3, then what is Harry's price elasticity of demand for blueberries?
a ,6=14 b ,2=20 c ,2 d ,14=6 e None of the above.
Topic: Market Demand Correct Responses: 93 Correct
Di culty: 1 Discrimination Index: 18
15.21 The inverse demand function for rye is p = 31; 200 , 6q. Total revenue in this market will
be maximized when the quantity of rye produced is:
a 3,711 b 5,200 c 1,300 d 2,600 e None of the above.
Topic: Market Demand Correct Responses: 93 Correct
Di culty: 1 Discrimination Index: 18
15.22 The inverse demand function for barley is p = 28; 800 , 6q. Total revenue in this market
will be maximized when the quantity of barley produced is:
a 3,511 b 4,800 c 1,200 d 2,400 e None of the above.
MULTIPLE CHOICE
Topic: Market Demand Correct Responses: 49 Correct Di culty: 2 Discrimination Index: 49
271
15.23 When the price of bananas is 50 cents a pound, the total demand is 100 pounds. If the
a 50 b 90 c 60 d 80 e 70
Topic: Market Demand Correct Responses: 90 Correct Di culty: 1 Discrimination Index: 13
price elasticity of demand for bananas is ,2; what quantity would be demanded if the price rose to 60 cents a pound?
15.24 The inverse demand function for co ee is p = 50; 000 , 2q where q is the number of tons
produced and p is the price per ton. Total revenue from co ee sales be maximized when the output level is:
a 25,000 tons. b 15,000 tons. c 17,500 tons. d 12,500 tons. e None of the above.
Topic: Market Demand Correct Responses: 70 Correct Di culty: 2 Discrimination Index: 28
15.25 Jen, Eric, and Kurt are all buyers of chain saws. Jen's demand function is Qj = 520 , 13P;
Eric's demand function is Qe = 40 , P; and Kurt's demand function is Qk = 200 , 5P. Together, these three constitute the entire demand for chainsaws. At what price will the price elasticity of market demand be ,1?
a 19 b 20 c 25 d 15 e None of the above.
CHAPTER 15 Market Demand
Topic: Market Demand Correct Responses: 48 Correct Di culty: 2 Discrimination Index: 12
272
15.26 Given his current income, Rico's demand for bagels is related to the price of bagels by the
equation, Q = 160 , 20P . 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 = 160 , 20P. b Q = 640 , 80P . c Q = 160 , 40P. d Q = 320 , 40P e Q = 320 , 20P.
Topic: Market Demand Correct Responses: 48 Correct Di culty: 2 Discrimination Index: 12
15.27 Given his current income, Rico's demand for bagels is related to the price of bagels by the
equation, Q = 520 , 20P . 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 , 20P. b Q = 2; 080 , 80P. c Q = 520 , 40P. d Q = 1; 040 , 40P e Q = 1; 040 , 20P .
Topic: Market Demand Correct Responses: 18 Correct Di culty: 3 Discrimination Index: 17
15.28 A person with a quasilinear utility function will:
a have a price elasticity of demand equal to zero for some goods. b have an income elasticity of demand equal to one for some goods. c necessarily consume zero quantity of some good. d necessarily consume positive amounts of every good. e None of the above.
MULTIPLE CHOICE
Topic: Market Demand Correct Responses: 75 Correct Di culty: 2 Discrimination Index: 24
273
15.29 In the village of Frankfurter, the demand function for sausages per person is Dp = 20,1:5p;
where p is the price of a single sausage. The present population of Frankfurter is 100 persons. Suppose that 10 more people move into town, each of whom has the same demand function as the old residents. At a price of $2 the price elasticity of demand for sausages in Frankfurter is:
a increased by 10 percent. b decreased by 10 percent. c unchanged. d increased by 15 percent. e none of the above.
Topic: Market Demand Correct Responses: 37 Correct Di culty: 1 Discrimination Index: 59
15.30 A rm faces a demand function Dp; for which the revenue maximizing price is $14. The
demand function is altered to 2Dp. What is the new revenue maximizing price?
a $7 b $14 c $28 d There is insu cient information to determine this. e None of the above.
Topic: Market Demand Correct Responses: 37 Correct Di culty: 1 Discrimination Index: 59
15.31 A rm faces a demand function Dp; for which the revenue maximizing price is $12. The
demand function is altered to 2Dp. What is the new revenue maximizing price?
a $6 b $12 c $24 d There is insu cient information to determine this. e None of the above.
CHAPTER 15 Market Demand
Topic: Market Demand Correct Responses: 98 Correct Di culty: 1 Discrimination Index: 15
2
274
15.32 If the supply curve for x is given by x = 100p ; then the inverse supply curve is given by:
a 100=p2. b x2 =100. c x1=2=10. d p,2 =100. e None of the above.
Topic: Market Demand Correct Responses: 50 Correct
Di culty: 1 Discrimination Index: 30
15.33 Ed has 100 tons of manure. The lowest price at which he is willing to sell it is $10 per ton.
Fred wants to buy 100 tons of manure. The most he is willing to pay is $8 per ton. The Federal government o ers to subsidize manure sales at a rate of $1 per ton. If Ed and Fred are the only people who deal in manure, then the deadweight loss caused by the subsidy is:
a $100. b $50. c 0. d $200. e None of the above.
Topic: Market Demand Correct Responses: 64 Correct Di culty: 2 Discrimination Index: 28
15.34 Fred's price elasticity of demand for milk is ,2 at today's prices when we measure price
in dollars and quantity of milk in quarts. If the price per quart of milk stays the same but we measure quantity of milk in gallons and price in dollars, then what will be the elasticity of demand for gallons of milk? A gallon is four quarts.
a ,1 b ,1=2 c ,8 d ,4 e ,2
MULTIPLE CHOICE
Topic: Market Demand Correct Responses: 70 Correct Di culty: 2 Discrimination Index: 32
275
15.35 In a small Kansas town, there are two kinds of gasoline consumers: 100 Buick owners and
50 Dodge owners. Each Buick owner has the demand function Db p = maxf0; 20 , 5pg and each Dodge owner has the demand function Dd = maxf0; 15 , 3pg. In this town:
a the market demand curve has no kinks, but gets steeper as price rises. b the market demand curve has no kinks, but gets atter as price rises. c the market demand curve has constant slope since individual demand curves have constant slope. d the market demand curve has a kink at p = 4 and another at p = 5. e the market demand curve has a kink at p = 35=8.
Topic: Market Demand Correct Responses: 16 Correct
Di culty: 2 Discrimination Index: 19
15.36 In a certain city, the demand function for crack cocaine is q = 1000,p where p is the "street
price". The cocaine industry is competitive. Cocaine distributors can buy as much cocaine as they wish at a price of $50 per unit from Colombian sources. Whenever the city narcotics police catch a cocaine dealer, they con scate all the cocaine that he has. The jails are full so they do not imprison the dealers. The police are able to catch the dealers about half the time, so they get about half the cocaine that enters the city. Instead of destroying con scated crack, the police simply resell it on the street. If the original supply curve of cocaine on the streets was horizontal, what is the net e ect of police activities on the market for crack in this city?
a The amount purchased on the street is about 50 units smaller than it would be with no enforcement. b There is no e ect, since all of the drugs reach consumers anyway. c Crack dealers will stop dealing in this city altogther, since they can make more money elsewhere. d The amount of crack purchased on the street decreases by about half. e The quantity purchased by dealers rises to make up for the amount that is con scated.
CHAPTER 15 Market Demand
Topic: Market Demand Correct Responses: 50 Correct Di culty: 1 Discrimination Index: 36
276
15.37 If at current prices, the demand for a good is price-elastic, then for movements along the
demand curve:
a increasing the price will increase revenue. b decreasing the price will decrease revenue. c increasing the quantity sold will increase revenue. d increasing the quantity sold will decrease revenue. e More than one of the above statements are true.
Topic: Market Demand Correct Responses: 0 Correct
Di culty: 2 Discrimination Index: 0
15.38 The demand curve for a good is given by p = 140 , 8q where p is the price and q is the
quantity of the good. Suppose that the number of consumers in the economy doubles, with a "clone" appearing for each consumer, who has exactly the same demand curve as the original consumer. The demand curve for the doubled economy is described by: a p = 280 , 8q. b p = 280 , 16q. c p = 140 , 16q. d p = 140 , 4q. e p = 70 , 4q.
Topic: Market Demand Correct Responses: 0 Correct
Di culty: 2 Discrimination Index: 0
15.39 The demand curve for a good is given by p = 240 , 10q where p is the price and q is
the quantity of the good. Suppose that the number of consumers in the economy doubles, with a "clone" appearing for each consumer, who has exactly the same demand curve as the original consumer. The demand curve for the doubled economy is described by: a p = 480 , 10q. b p = 480 , 20q. c p = 240 , 20q. d p = 240 , 5q. e p = 120 , 5q.
MULTIPLE CHOICE
Topic: Market Demand Correct Responses: 98 Correct Di culty: 2 Discrimination Index: 7
277
15.40 The demand for drangles is given by Dp = p + 1,2 where p is the price of drangles. If
the price of drangles is 1, then the price elasticity of demand for drangles is:
a ,4 b ,2 c ,3 d ,2 e ,1
Topic: Market Demand Correct Responses: 98 Correct
Di culty: 2 Discrimination Index: 7
15.41 The demand for drangles is given by Dp = p + 1,2 where p is the price of drangles. If
the price of drangles is 18, then the price elasticity of demand for drangles is:
a ,7:58 b ,3:79 c ,5:68 d ,3:79 e ,1:89
Topic: Market Demand Correct Responses: 59 Correct
Di culty: 2 Discrimination Index: 47
15.42 The only quantities of Good 1 that Fanny can buy are 1 unit or zero units. For all positive
a 3.38. b 3.50. c 1.69. d 2. e 0.40.
values of x2 ; Fanny's preferences are represented by the utility function x1 + 12x2 + 6. If her income is 16 and the price of good 2 is 1, then Fanny's reservation price for Good 1 is:
CHAPTER 15 Market Demand
Topic: Market Demand Correct Responses: 59 Correct Di culty: 2 Discrimination Index: 47
278
15.43 The only quantities of Good 1 that Anneli can buy are 1 unit or zero units. For all positive
a 6.46. b 7.50. c 3.23. d 0.86. e 1.07.
values of x2 ; Anneli's preferences are represented by the utility function x1 + 12x2 + 14. If her income is 28 and the price of good 2 is 1, then Anneli's reservation price for Good 1 is:
Topic: Market Demand Correct Responses: 0 Correct
Di culty: 0 Discrimination Index: 0
15.44 In Gas Pump S.D., every Buick owner's demand for gasoline is 20 , 5p for p less than or
equal to 4 and 0 for p 4. Every Dodge owner's demand is 15 , 3p for p less than or equal to 5 and 0 for p 5. Suppose that Gas Pump, S.D. has 100 Buick owners and 250 Dodge owners. If the price of gasoline is 4.50, what is the total amount of gasoline demanded in Gas Pump?
a 750 b 187.50 c 562.50 d 375 e none of the above.
MULTIPLE CHOICE
Topic: Market Demand Correct Responses: 0 Correct Di culty: 0 Discrimination Index: 0
279
15.45 In Gas Pump S.D., every Buick owner's demand for gasoline is 20 , 5p for p less than or
equal to 4 and 0 for p 4. Every Dodge owner's demand is 15 , 3p for p less than or equal to 5 and 0 for p 5. Suppose that Gas Pump, S.D. has 100 Buick owners and 100 Dodge owners. If the price of gasoline is 3.25, what is the total amount of gasoline demanded in Gas Pump?
a 1,800 b 450 c 1,350 d 900 e none of the above.
Topic: Market Demand Correct Responses: 0 Correct
Di culty: 0 Discrimination Index: 0
1
15.46 The only quantities of Good 1 that Barbie can buy are 1 unit or zero units. For x equal
to zero or 1 and for all positive values of x2; suppose that Barbie's preferences were represented by the utility function x1 + 10x2 + 6. Then if her income were 4, her reservation price for Good 1 would be:
a 1.82 b 3.50 c 0.91 d 1.67 e 0.50
CHAPTER 15 Market Demand
Topic: Market Demand Correct Responses: 0 Correct Di culty: 0 Discrimination Index: 0
1
280
15.47 The only quantities of Good 1 that Barbie can buy are 1 unit or zero units. For x equal
to zero or 1 and for all positive values of x2; suppose that Barbie's preferences were represented by the utility function x1 + 2x2 + 10. Then if her income were 32, her reservation price for Good 1 would be:
a 28 b 5.50 c 14 d 0.20 e 4.90
Topic: Market Demand Correct Responses: 0 Correct Di culty: 0 Discrimination Index: 0
15.48 At a large institution of higher learning, the demand for football tickets at each game is
revenue maximizing price for this university to charge per ticket.
a 15 b 13.33 c 30 d 7.50 e 45
Topic: Market Demand Correct Responses: 0 Correct Di culty: 0 Discrimination Index: 0
180; 000 , 6; 000p. If the capacity of the stadium at that university is 100,000 seats, what is the
15.49 At a large institution of higher learning, the demand for football tickets at each game
a 3 b 2 c 6 d 1.50 e 9
is 60; 000 , 10; 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.
MULTIPLE CHOICE
Topic: Market Demand Correct Responses: 0 Correct Di culty: 0 Discrimination Index: 0
281
15.50 The demand for tickets to a rock concert is given by Dp = 200; 000 , 10; 000p; where p is
the price of tickets. If the price of tickets is 13, then the price elasticity of demand for tickets is:
a ,3:71. b ,2:79. c ,5:57. d ,0:93. e ,1:86.
Topic: Market Demand Correct Responses: 0 Correct
Di culty: 0 Discrimination Index: 0
15.51 The demand for tickets to a rock concert is given by Dp = 200; 000 , 10; 000p; where p is
the price of tickets. If the price of tickets is 12, then the price elasticity of demand for tickets is:
a ,3. b ,2:25. c ,4:50. d ,0:75. e ,1:50.
Topic: Market Demand Correct Responses: 0 Correct
Di culty: 0 Discrimination Index: 0
2
15.52 The demand for watches is Q = 1000P ,1:50I . Assume that per capita income, I, is $2,000.
At a price, P; of $70 the price elasticity of demand is
a 3.50. b 1.0. c 2. d 0.50. e 1.50.
CHAPTER 15 Market Demand
Topic: Market Demand Correct Responses: 0 Correct Di culty: 0 Discrimination Index: 0
282
15.53 The demand for watches is Q = 1000P ,2:50I ,1. Assume that per capita income, I, is $3,000.
At a price, P; of $80 the price elasticity of demand is
a 4. b 1.0. c ,1. d ,3:50. e 2.50.
Topic: Market Demand Correct Responses: 0 Correct
Di culty: 0 Discrimination Index: 0
15.54 The demand for voice mail is Q = 1000 , 150P + 15I. Assume that per capita disposable
income, I, is $800. At a price, P; of $50 the income elasticity of demand is
a 1.50. b 5. c 1.0. d 15. e 2.18.
Topic: Market Demand Correct Responses: 0 Correct
Di culty: 0 Discrimination Index: 0
15.55 The demand for voice mail is Q = 1000 , 150P + 35I. Assume that per capita disposable
income, I, is $700. At a price, P; of $40 the income elasticity of demand is
a 3.50. b 4. c 1.0. d 35. e 1.26.
MULTIPLE CHOICE
Topic: Market Demand Correct Responses: 0 Correct Di culty: 0 Discrimination Index: 0
283
15.56 If the marginal cost of making a photocopy is 2 cents and the elasticity of demand is 1.50,
the pro t maximizing price is
a 3 cents. b 3.33 cents. c 4 cents. d 5 cents. e 6 cents.
Topic: Market Demand Correct Responses: 0 Correct
Di culty: 0 Discrimination Index: 0
15.57 If the marginal cost of making a photocopy is 2 cents and the elasticity of demand is 2.00,
the pro t maximizing price is
a 3 cents. b 3.33 cents. c 4 cents. d 5 cents. e 6 cents.
Topic: Market Demand Correct Responses: 0 Correct
Di culty: 0 Discrimination Index: 0
15.58 If the marginal cost of brewing beer is 40 cents and the pro t maximizing price is 70 cents,
then the price elasticity of demand is a ,0:66. b ,1:8. c ,2. d ,2:33. e ,3.
CHAPTER 15 Market Demand
Topic: Market Demand Correct Responses: 0 Correct Di culty: 0 Discrimination Index: 0
284
15.59 If the marginal cost of brewing beer is 40 cents and the pro t maximizing price is 80 cents,
then the price elasticity of demand is a ,0:66. b ,1:8. c ,2. d ,2:33. e ,3.
Topic: Market Demand Correct Responses: 0 Correct
Di culty: 0 Discrimination Index: 0
15.60 The constant elasticity of demand for cigarettes has been estimated to be 0.5. To reduce
smoking by 50, approximately how much tax needs to be added to a $1 pack?
a $0.25. b $0.50. c $1. d $1.50. e $4.00.
Topic: Market Demand Correct Responses: 0 Correct
Di culty: 0 Discrimination Index: 0
15.61 The constant elasticity of demand for cigarettes has been estimated to be 0.5. To reduce
smoking by 75, approximately how much tax needs to be added to a $1 pack?
a $0.38. b $0.75. c $1.50 d $2.25. e $4.00.
MULTIPLE CHOICE
Topic: Market Demand Correct Responses: 0 Correct Di culty: 0 Discrimination Index: 0
0:5 2
285
15.62 The demand for cable television hookups is Q = 100 , 10P + 2I ; where P is price and I
is per capita income. Cable TV is
a a normal good. b a natural monopoly. c an inferior good. d a substitute good. e a complement good.
Topic: Market Demand Correct Responses: 0 Correct
Di culty: 0 Discrimination Index: 0
0:5
15.63 The demand for cable television hookups is Q = 100 , 10P + 2I ,2; where P is price and
I is per capita income. Cable TV is
a a normal good. b a natural monopoly. c an inferior good. d a substitute good. e a complement good.
Topic: Market Demand Correct Responses: 0 Correct
Di culty: 0 Discrimination Index: 0
15.64 If the demand for The Weekly World News at a local grocery store is described by
a $1.50 b $0.38 c $0.50 d $0.15 e $1
Q = 2500 , 400P, I=10 for I = $15; 000 and P = $1:50; the marginal revenue of an additional paper sold at this store is
CHAPTER 15 Market Demand
Topic: Market Demand Correct Responses: 0 Correct Di culty: 0 Discrimination Index: 0
286
15.65 If the demand for The Weekly World News at a local grocery store is described by
a $0.75 b $0.19 c $0.25 d $0.08 e $0.50
Topic: Market Demand Correct Responses: 0 Correct Di culty: 0 Discrimination Index: 0
2:50 1:80 0:60
Q = 2500 , 400P, I=10 for I = $20; 000 and P = $0:75; the marginal revenue of an additional paper sold at this store is
15.66 Demand for Barbara Streisand CD's is equal toQs = Ps I Pc where Qs is the number
of CD's, Ps is the price of a Streisand CD, I is per capita income, and Pc is the price of a Karen Carpenter CD. Streisand and Carpenter CD's
a are inferior goods. b are substitutes. c are complements. d have diminishing returns to scale. e are not as good as the original 8 track tapes.
Topic: Market Demand Correct Responses: 0 Correct
Di culty: 0 Discrimination Index: 0
2:80 2:50 1
15.67 Demand for Barbara Streisand CD's is equal toQs = Ps I Pc where Qs is the number
of CD's, Ps is the price of a Streisand CD, I is per capita income, and Pc is the price of a Karen Carpenter CD. Streisand and Carpenter CD's
a are inferior goods. b are substitutes. c are complements. d have diminishing returns to scale. e are not as good as the original 8 track tapes.
Essay
Topic: Market Demand Correct Responses: 0
Market Demand
Di culty: 2 Discrimination Index: 0
15.1 Suppose that the inverse demand function for wool is p = A=q for some constant A. Suppose
that 1=4 of the world's wool is produced in Australia. a If Australian wool production increases by 1 and the rest of the world holds its output constant, what will be the e ect on the world price of wool? b How is the marginal revenue to Australia from an extra unit of wool relate to the price of wool?
Price will fall by about one fourth of one percent. b Marginal revenue is three fourths of price.
Topic: Market Demand Correct Responses: 0 Di culty: 2 Discrimination Index: 0
15.2 Bart Wurst runs the only hotdog stand in a large park in a large boring town. On Sundays
people in this town all sit in the park and sunbathe. For any t between 0 and 30, the number of people who are sitting within t minutes of Bart's stand is 10t2. People in Bart's town are lazy and hate to walk. They think that every minute of walking they do is as bad as spending $.10. Everybody in the park has a reservation price of $1 for a hot dog where the cost of a hot dog includes the subjective cost of walking as well as the money price they have to pay when they get there. Nobody has ever thought of fetching a hot dog for someone else. Find a formula for the demand curve for Bart's hot dogs. Explain how you got it.
Answer: If Bart charges p where 0 p 1; his extensive margin is the customers who are at distance t* from Bart where p + :10t = 1. Then t = 10 , p and the demand for hot dogs at prices p is the number, 10 , p2; of people within t* of Bart.
Topic: Market Demand Correct Responses: 0 Di culty: 3 Discrimination Index: 0
15.3 In Tassel, Illinois pop; 20; 000; there are two kinds of families, those who like swimming
pools and those who don't. Half of the population is of each type. Families who like swimming pools are willing to spend up to 5 of their income each year on a swimming pool. Families who don't like them would pay nothing for a swimming pool. Nobody wants more than one swimming pool and nobody has thought of sharing a swimming pool. Incomes in Tassel range between $10,000 and $110,000. For incomes, M; in this range, the number of families in Tassel with income greater than M is about 22; 000,:2M. The two types of families have the same income distribution. Find the aggregate demand function for swimming pools in Tassel demand for swimming pools as a function of annual cost of having one.
Answer: The number of people willing to pay at least p is half of the number who have income at least 20p. Therefore the aggregate demand function is 11; 000 , 2p.
CHAPTER 15 Market Demand
Topic: Market Demand Correct Responses: 0 Di culty: 3 Discrimination Index: 0
288
15.4 Ethel is trying to decide whether to have 0 cars, 1 car, or 2 cars. If x is the number of cars she
has and y is the amount of money she has per year to spend on other stu , Ethel's utility function is Ux; y where U0; y = y1=2 ; U1; y = 15=14y1=2 ; and U2; y = 10=9y1=2 . Suppose that it costs $2000 a year to have 1 car and $4000 a year to have 2 cars. Ethel nds that the right thing to do depends on her income. What is her willingness to pay for 1 car if her income is M? What is the lowest income at which she would have a car? What is the lowest income at which she would have 2 cars?
Answer: Her willingness to pay for 1 car is about :129M where M is her income. The lowest income at which she would get a car is $15,504. If we solve the equation U1; y , 2000 = U2; y , 4000 we nd $55,143. At incomes above that she prefers 2 cars; below that she would be better o to have 1 car.
Topic: Market Demand Correct Responses: 0
Di culty: 0 Discrimination Index: 0
15.5 Using the graph of a demand curve, explain why marginal revenue is less than price.
Topic: Market Demand Correct Responses: 0
Di culty: 0 Discrimination Index: 0
15.6 ,1:40 demand for Craftmatic Adjustable Beds is described by The ,0:60
0:20 Qc = Pc I Pm A0:25 where Qc is the number of Craftmatic Adjustable Beds demanded, Pc is the price of a Craftmatic Adjustable Bed, I is per captia income, Pm is the price of a battery powered massage pillow, and
A is the advertising budget. a If the marginal cost of producing a Craftmatic Adjustable Bed is $200, what is the pro t maximizing price? b Per capita income in the United States is forecast to rise by 3 next year. How will this impact Craftmatic's sales? c The price of battery powered massage pillows suddenly fell by 10. How will this impace Craftmatic's sales?
ESSAY
Topic: Market Demand Correct Responses: 0 Di culty: 0 Discrimination Index: 0
289
15.7 ,1:40 demand for Craftmatic Adjustable Beds is described by The ,0:40 ,1:60
Qc = Pc I Pm A0:25 where Qc is the number of Craftmatic Adjustable Beds demanded, Pc is the price of a Craftmatic Adjustable Bed, I is per captia income, Pm is the price of a battery powered massage pillow, and
A is the advertising budget. a If the marginal cost of producing a Craftmatic Adjustable Bed is $200, what is the pro t maximizing price? b Per capita income in the United States is forecast to rise by 3 next year. How will this impact Craftmatic's sales? c The price of battery powered massage pillows suddenly fell by 10. How will this impace Craftmatic's sales?
Chapter 16
True-False
Topic: Equilibrium Correct Responses: 97 Correct Di culty: 1 Discrimination Index: 5
Equilibrium
16.1 If the supply curve is vertical, then the amount supplied is independent of price.
Topic: Equilibrium Correct Responses: 86 Correct Di culty: 1 Discrimination Index: 17
16.2 If the supply is perfectly elastic, then an upward shift of the demand curve will lead to a
higher price and quantity in equilibrium.
Topic: Equilibrium Correct Responses: 96 Correct
Di culty: 1 Discrimination Index: 0
16.3 The supply curve slopes up and to the right. If the demand curve shifts upward to a new
curve which is everywhere higher than the old curve but possibly of di erent slope and if the supply curve does not shift, then the equilibrium price and quantity must necessarily increase.
Topic: Equilibrium Correct Responses: 72 Correct Di culty: 1 Discrimination Index: 22
16.4 Supply and demand theory shows us that the burden of a sales tax is shared equally by
suppliers and demanders whether the tax is collected from the sellers or collected from the buyers.
Topic: Monopoly Correct Responses: 73 Correct
Di culty: 1 Discrimination Index: 16
16.5 An economic situation is Pareto optimal only if there is no way to make someone better o .
TRUE-FALSE
Topic: Equilibrium Correct Responses: 29 Correct Di culty: 1 Discrimination Index: 28
291
16.6 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.
Topic: Equilibrium Correct Responses: 91 Correct Di culty: 1 Discrimination Index: 14
16.7 If a quantity tax is collected from competitive suppliers of a good, placing a tax on the good
causes the price paid by consumers to increase more than if the tax had been collected directly from the buyers.
Topic: Budgets Correct Responses: 50 Correct Di culty: 2 Discrimination Index: 23
16.8 The demand curve, which is a downward-sloping straight line, crosses the supply curve,
which is an upward-sloping straight line. If a tax is introduced where sellers must pay a tax of $2 per unit sold, then the equilibrium price paid by demanders will rise by more than $1 if the absolute value of the slope of the demand curve is greater than the absolute value of the slope of the supply curve.
Multiple Choice
Topic: Equilibrium Correct Responses: 93 Correct Di culty: 1 Discrimination Index: 14
Equilibrium
16.1 The demand for pickles is given by p = 131 , 2q and supply is given by p = 5 + 7q. What is
the equilibrium quantity?
a 11 b 14 c 19 d 103 e None of the above.
Topic: Equilibrium Correct Responses: 93 Correct Di culty: 1 Discrimination Index: 14
16.2 The demand for pickles is given by p = 82 , 2q and supply is given by p = 2 + 2q. What is
the equilibrium quantity?
a 17 b 20 c 25 d 42 e None of the above.
Topic: Equilibrium Correct Responses: 99 Correct Di culty: 1 Discrimination Index: 23
16.3 The demand function for fresh strawberries is q = 200 , 5p and the supply function is
q = 60 + 2p. What is the equilibrium price? a 10 b 20 c 40 d 50 e None of the above.
MULTIPLE CHOICE
Topic: Equilibrium Correct Responses: 94 Correct Di culty: 1 Discrimination Index: 11
293
16.4 The inverse demand function for mangos is de ned by the equation, p = 91 , 5q; where q is
the number of crates that are sold. The inverse supply function is de ned by p = 3 + 6q. In the past there was no tax on mangos but now a tax of $44 per crate has been imposed. What are the quantities produced before and after the tax was imposed?
a 5 crates before and 5 crates after b 16 crates before and 9 crates after c 14 crates before and 7 crates after d 8 crates before and 4 crates after e None of the above.
Topic: Equilibrium Correct Responses: 94 Correct
Di culty: 1 Discrimination Index: 11
16.5 The inverse demand function for apples is de ned by the equation, p = 129 , 12q; where q
is the number of crates that are sold. The inverse supply function is de ned by p = 3 + 6q. In the past there was no tax on apples but now a tax of $90 per crate has been imposed. What are the quantities produced before and after the tax was imposed?
a 4 crates before and 3 crates after b 14 crates before and 5 crates after c 13 crates before and 5 crates after d 7 crates before and 2 crates after e None of the above.
CHAPTER 16 Equilibrium
Topic: Equilibrium Correct Responses: 87 Correct Di culty: 1 Discrimination Index: 9
294
16.6 The inverse demand for eggs is p = 84 , 9q where q is the number of cases of eggs. The
a Quantity drops by 2 cases. b Quantity drops by 3 cases. c Quantity drops by 6 cases. d Quantity drops by 4 cases. e None of the above.
Topic: Equilibrium Correct Responses: 87 Correct Di culty: 1 Discrimination Index: 9
inverse supply is p = 7 + 2q. In the past, eggs were not taxed, but now a tax of 33 dollars per case has been introduced. What is the e ect of the tax on the quantity of eggs supplied?
16.7 The inverse demand for eggs is p = 61 , 3q where q is the number of cases of eggs. The
a Quantity drops by 3 cases. b Quantity drops by 4 cases. c Quantity drops by 8 cases. d Quantity drops by 5 cases. e None of the above.
Topic: Equilibrium Correct Responses: 86 Correct Di culty: 1 Discrimination Index: 33
inverse supply is p = 7 + 6q. In the past, eggs were not taxed, but now a tax of 36 dollars per case has been introduced. What is the e ect of the tax on the quantity of eggs supplied?
16.8 The inverse demand function for cases of whiskey is de ned by p = 160 , 6q and the inverse
supply function is de ned by p = 61 + 3q. Originally there was no tax on whiskey. Then the government began to tax suppliers of whiskey $27 for every case they sold. How much did the price paid by consumers rise when the new equilibrium was reached.
a It rose by 27 dollars. b It rose by 29 dollars. c It rose by 18 dollars. d It rose by 16 dollars. e None of the above.
MULTIPLE CHOICE
Topic: Equilibrium Correct Responses: 86 Correct Di culty: 1 Discrimination Index: 33
295
16.9 The inverse demand function for cases of whiskey is de ned by p = 241,11q and the inverse
supply function is de ned by p = 17 + 5q. Originally there was no tax on whiskey. Then the government began to tax suppliers of whiskey $112 for every case they sold. How much did the price paid by consumers rise when the new equilibrium was reached.
a It rose by 112 dollars. b It rose by 114 dollars. c It rose by 77 dollars. d It rose by 75 dollars. e None of the above.
Topic: Equilibrium Correct Responses: 62 Correct
Di culty: 1 Discrimination Index: 50
16.10 The inverse demand function for cigars is de ned by p = 240 , 2q and the inverse supply
function is de ned by p = 3 + q. Cigars are taxed at $4 per box. Which of the following is true?
a The after tax price paid by consumers rises by more than $2 and the after tax price received by suppliers falls by less than $2. b The after tax price paid by consumers goes up by less than $2 and the after tax price received by suppliers rises. c Consumers and suppliers share the cost of the tax equally. d The after tax price paid by consumers rises by $4 and the after tax price received by suppliers stays constant. e The after tax price paid by consumers rises by less than $2 and the after tax price received by suppliers stays constant.
CHAPTER 16 Equilibrium
Topic: Equilibrium Correct Responses: 74 Correct Di culty: 2 Discrimination Index: 49
296
16.11 Xaquane and Yullare are obscure, but talented, 18th century painters. The world's stock
of Xaquanes is 100 and the world's stock of Yullares is 70. The demand for each painter's work depends on its own price and the price of the other painter's work. If Px is the price of Xaquanes and Py is the price of Yullares, the demand function for Xaquanes is 101,3Px +2Py and the demand function for Yullares is 72 + Px , Py . What is the equilibrium price for Yullare's paintings?
a 5 b 11 c 12 d 7 e None of the above.
Topic: Equilibrium Correct Responses: 38 Correct
Di culty: 2 Discrimination Index: 32767
16.12 In a certain kingdom, the demand function for rye bread was q = 381 , 3p and the supply
function was q = 5 + 7p where p is the price in zlotys and q is loaves of bread. The king made it illegal to sell rye bread for a price above 32 zlotys per loaf. To avoid shortages, he agreed to pay bakers enough of a subsidy for each loaf of bread so as to make supply equal demand. How much would the subsidy per loaf have to be?
a 21 zlotys b 14 zlotys c 8 zlotys d 20 zlotys e None of the above.
MULTIPLE CHOICE
Topic: Equilibrium Correct Responses: 38 Correct Di culty: 2 Discrimination Index: 32767
297
16.13 In a certain kingdom, the demand function for rye bread was q = 201 , 4p and the supply
function was q = 13 + 3p where p is the price in zlotys and q is loaves of bread. The king made it illegal to sell rye bread for a price above 23 zlotys per loaf. To avoid shortages, he agreed to pay bakers enough of a subsidy for each loaf of bread so as to make supply equal demand. How much would the subsidy per loaf have to be?
a 21 zlotys b 14 zlotys c 9 zlotys d 20 zlotys e None of the above.
Topic: Equilibrium Correct Responses: 0 Correct
Di culty: 1 Discrimination Index: 137
16.14 The demand function for orange juice is q = 269 , 9p and the supply function is q = 9 + 4p;
where q is the number of units sold per year and p is the price per unit, expressed in dollars. The government decides to support the price of orange juice at a price oor of $24 per unit by buying orange juice and destroying all that it has purchased. How many units must the government destroy per year?
a 52 b 56 c 25 d 61 e 57
CHAPTER 16 Equilibrium
Topic: Equilibrium Correct Responses: 0 Correct Di culty: 1 Discrimination Index: 137
298
16.15 The demand function for butter is q = 126 , 6p and the supply function is q = 14 + 2p;
where q is the number of units sold per year and p is the price per unit, expressed in dollars. The government decides to support the price of butter at a price oor of $20 per unit by buying butter and destroying all that it has purchased. How many units must the government destroy per year?
a 48 b 54 c 18 d 57 e 53
Topic: Equilibrium Correct Responses: 72 Correct Di culty: 2 Discrimination Index: 19
16.16 The demand function for rental apartments is q = 960 , 7p and the supply function is
demand will there be?
a 149 b 450 c 364 d 726 e 245
Topic: Equilibrium Correct Responses: 65 Correct Di culty: 1 Discrimination Index: 38
q = 160 + 3p. The government makes it illegal to charge a rent higher than 35. How much excess
16.17 The demand function for abalone is q = 30,9p and the supply function is q = 6p. Suddenly
a The price doubles and the quantity remains constant. b The quantity doubles and the price remains constant. c Both price and quantity double. d Both price and quantity increase, but neither doubles. e None of the above.
the yuppies discover abalone. The quantity demanded at every price doubles. The supply function, however, remains the same as before. What is the e ect on the equilibrium price and quantity?
MULTIPLE CHOICE
Topic: Equilibrium Correct Responses: 20 Correct Di culty: 3 Discrimination Index: 19
299
16.18 Remember King Kanuta and his tropical island? The demand function for coconuts by his
subjects on the island is Dp = 1200 ,100p and the supply function is Sp = 100p. The law used to be that any subject who consumed a coconut had to pay another coconut to the king. King Kanuta then ate all the coconuts he got. But now the king, apparently fed up with coconuts, decides to sell the coconuts that he collects in the local market at the going selling price, ps . In equilibrium, the number of coconuts that will now be produced is:
a 100. b 200. c 600. d 400. e 300.
Topic: Equilibrium Correct Responses: 71 Correct
Di culty: 1 Discrimination Index: 13
16.19 The inverse demand function for video games is p = 240 , 2q and the inverse supply is
p = 3 + q. When the government imposes a $6 tax on each video game purchased: a consumers' surplus falls by more than producers' surplus. b producers' surplus falls by more than consumers' surplus. c consumers' surplus and producers' surplus fall by the same amount. d comsumers' surplus falls and producers' surplus increases. e producers' surplus falls and consumers' surplus increases.
CHAPTER 16 Equilibrium
Topic: Equilibrium Correct Responses: 89 Correct Di culty: 1 Discrimination Index: 24
300
16.20 The demand function for corn is q = 200 , p and the supply function is q = 50 + :5p. The
a 11,250 b 18,750 c 7,500 d 10,750 e 14,500
Topic: Equilibrium Correct Responses: 36 Correct Di culty: 3 Discrimination Index: 23
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?
16.21 The market for tennis shoes has a horizontal supply curve and a linear, downward-sloping
demand curve. Currently the government imposes a tax of t on every pair of tennis shoes sold and does not tax other goods. The government is considering a plan to double the tax on tennis shoes, while leaving other goods untaxed. If the tax is doubled, then:
a the total deadweight loss caused by the doubled tax will be exactly twice the original deadweight loss. b the total deadweight loss caused by the doubled tax will be more than twice the original deadweight loss. c the total deadweight loss caused by the doubled tax will be less than twice the original deadweight loss. d to know if doubling the tax would more than double the deadweight loss, we would have to know the slope of the demand curve. e None of the above.
Topic: Equilibrium Correct Responses: 40 Correct Di culty: 1 Discrimination Index: 33
16.22 The demand curve for rutabagas is a straight line with slope ,3 and the supply curve is a
straight line with slope 2. Suppose that a new tax of $3 per sack of rutabagas is introduced. Which of the following must certainly be true of the change in equilibrium prices and or quantities?
a The total number of rutabagas purchased increases. b The price paid by demanders rises by the same amount as the price received by suppliers falls. c The price received by suppliers falls by more than the price paid by demanders rises. d The price paid by demanders rises by more than the price received by suppliers falls. e The price paid by demanders rises by more than $3.
MULTIPLE CHOICE
Topic: Equilibrium Correct Responses: 40 Correct Di culty: 1 Discrimination Index: 33
301
16.23 The demand curve for rutabagas is a straight line with slope ,2 and the supply curve is a
straight line with slope 2. Suppose that a new tax of $3 per sack of rutabagas is introduced. Which of the following must certainly be true of the change in equilibrium prices and or quantities?
a The total number of rutabagas purchased increases. b The price paid by demanders rises by the same amount as the price received by suppliers falls. c The price received by suppliers falls by more than the price paid by demanders rises. d The price paid by demanders rises by more than the price received by suppliers falls. e The price paid by demanders rises by more than $3.
Topic: Equilibrium Correct Responses: 42 Correct Di culty: 1 Discrimination Index: 40
16.24 The quantity q of grapefruits demanded at price p is given by q = 30 , 3p and the supply
a 10 b 3.33 c 3.67 d 11.50 e 13
Topic: Equilibrium Correct Responses: 42 Correct Di culty: 1 Discrimination Index: 40
schedule by q = 6p. The government imposes a quantity tax at some rate t; which it collects from buyers. What is the smallest tax rate that will result in no grapefruits being bought or sold?
16.25 The quantity q of nectarines demanded at price p is given by q = 16 , 4p and the supply
a 4 b 2.29 c 2.86 d 5.50 e 7
schedule by q = 3p. The government imposes a quantity tax at some rate t; which it collects from buyers. What is the smallest tax rate that will result in no nectarines being bought or sold?
CHAPTER 16 Equilibrium
Topic: Equilibrium Correct Responses: 93 Correct Di culty: 1 Discrimination Index: 23
302
16.26 The demand function for x is Dp = 65 , 2p and the supply function is Sp = 20 + p. The
price that should be set to restrict quantity supplied to 30 units is closest to:
a 5. b 10. c 15. d 50. e 55.
Topic: Equilibrium Correct Responses: 89 Correct Di culty: 2 Discrimination Index: 19
16.27 The inverse demand function for apples is de ned by the equation p = 214 , 5q; where q
is the number of units sold. The inverse supply function is de ned by p = 7 + 4q. A tax of 36 is imposed on suppliers for each unit of apples that they sell. When the tax is imposed, the quantity of apples sold falls to:
a 23. b 14. c 17. d 19. e 21.
Topic: Equilibrium Correct Responses: 89 Correct Di culty: 2 Discrimination Index: 19
16.28 The inverse demand function for melons is de ned by the equation p = 385 , 10q; where q
is the number of units sold. The inverse supply function is de ned by p = 13 + 2q. A tax of 36 is imposed on suppliers for each unit of melons that they sell. When the tax is imposed, the quantity of melons sold falls to:
a 31. b 13. c 26. d 28. e 29.50.
MULTIPLE CHOICE
Topic: Equilibrium Correct Responses: 0 Correct Di culty: 1 Discrimination Index: 0
303
16.29 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 b 10 c 13 d 26 e 19.50
Topic: Equilibrium Correct Responses: 0 Correct
Di culty: 1 Discrimination Index: 0
16.30 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 + 2p and the long run demand function was given by q = 94 , 2p where p is the rental rate in crowns per week. The authorities made it illegal to rent an apartment for more than 13 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 7 b 11 c 14 d 28 e 21
CHAPTER 16 Equilibrium
Topic: Equilibrium Correct Responses: 0 Correct Di culty: 0 Discrimination Index: 0
304
16.31 The price elasticity of demand for a certain agricultural product is constant over the
relevant range of prices and equal to ,1:50. The supply elasticity for this product is constant and equal to 4. Originally the equilibrium price of this good was 15 per unit. Then it was discovered that consumption of this product was unhealthy. The quantity that would be demanded at any price fell by 11. The percent change in the long run equilibrium consumption of this good was:
a ,11. b ,8. c ,2. d ,12. e There is not enough information to determine the answer.
Topic: Equilibrium Correct Responses: 0 Correct
Di culty: 0 Discrimination Index: 0
16.32 The price elasticity of demand for a certain agricultural product is constant over the
relevant range of prices and equal to ,2:50. The supply elasticity for this product is constant and equal to 4. Originally the equilibrium price of this good was 50 per unit. Then it was discovered that consumption of this product was unhealthy. The quantity that would be demanded at any price fell by 52. The percent change in the long run equilibrium consumption of this good was:
a ,52. b ,32. c ,8. d ,36. e There is not enough information to determine the answer.
MULTIPLE CHOICE
Topic: Equilibrium Correct Responses: 52 Correct Di culty: 0 Discrimination Index: 44
305
16.33 Suppose that King Kanuta, whom you met in your workbook, demands that each of his
subjects give him 1 coconuts for every coconut that they consume. The king puts all of the coconuts that he collects in a large pile and burns them. The supply of coconuts is given by Sps = 100ps; where ps is the price received by suppliers. The demand for coconuts by the king's subjects is given by Dpd = 1; 500,100pd; where pd is the price paid by consumers. In equilibrium, the price received by suppliers will be:
a 6 b 9 c 7.50 d 15 e None of the above
Topic: Equilibrium Correct Responses: 52 Correct
Di culty: 0 Discrimination Index: 44
16.34 Suppose that King Kanuta, whom you met in your workbook, demands that each of his
subjects give him 4 coconuts for every coconut that they consume. The king puts all of the coconuts that he collects in a large pile and burns them. The supply of coconuts is given by Sps = 100ps; where ps is the price received by suppliers. The demand for coconuts by the king's subjects is given by Dpd = 9; 360,100pd; where pd is the price paid by consumers. In equilibrium, the price received by suppliers will be:
a 18 b 27 c 46.80 d 234 e None of the above
CHAPTER 16 Equilibrium
Topic: Equilibrium Correct Responses: 0 Correct Di culty: 0 Discrimination Index: 0
306
16.35 Schrecklich and Lamerde are two obscure modernist painters, who are no longer alive, but
whose paintings are still enjoyed by persons of dubious taste. The demand function for Schrecklichs is 200 , 4PS , 2PL and the demand function for Lamerdes is 200 , 3PL , PS ; where PS and PL are respectively the price of Schrecklichs and Lamerdes. If the world supply of Schrecklichs is 110 and the world supply of Lamerdes is 110, then the equilibrium price of Schrecklichs is:
a 9. b 22.50. c 36. d 27. e 18.
Topic: Equilibrium Correct Responses: 0 Correct
Di culty: 0 Discrimination Index: 0
16.36 Schrecklich and Lamerde are two obscure modernist painters, who are no longer alive, but
whose paintings are still enjoyed by persons of dubious taste. The demand function for Schrecklichs is 200 , 4PS , 2PL and the demand function for Lamerdes is 200 , 3PL , PS ; where PS and PL are respectively the price of Schrecklichs and Lamerdes. If the world supply of Schrecklichs is 100 and the world supply of Lamerdes is 80, then the equilibrium price of Schrecklichs is:
a 6. b 25. c 44. d 38. e 12.
MULTIPLE CHOICE
Topic: Equilibrium Correct Responses: 0 Correct Di culty: 0 Discrimination Index: 0
307
16.37
Daily demand for gasoline at Billy-Bob's Mobile Station is described by Q = 776 , 200p where Q are gallons of gasoline sold and p is the price in dollars. Billy-Bob's supply is Q = ,890 + 1; 500p. Suppose the state government places a tax of 20 cents on every gallon of gasoline sold. What is the deadweight loss resulting from this tax?
a 3.53 dollars. b 3.11 dollars. c 0.42 dollars. d 96.12 dollars. e 34.59 dollars.
Topic: Equilibrium Correct Responses: 0 Correct Di culty: 0 Discrimination Index: 0
16.38
Daily demand for gasoline at Billy-Bob's Mobile Station is described by Q = 1; 870 , 1; 000p where Q are gallons of gasoline sold and p is the price in dollars. Billy-Bob's supply is Q = 362 + 300p. Suppose the state government places a tax of 7 cents on every gallon of gasoline sold. What is the deadweight loss resulting from this tax?
a 0.57 dollars. b 0.13 dollars. c 0.43 dollars. d 11.21 dollars. e 18.74 dollars.
Essay
Topic: Equilibrium Correct Responses: 0 Di culty: 1 Discrimination Index: 0
Equilibrium
16.1 Use supply and demand analysis to examine the following statement: "The practice of giving
food stamps is self-defeating. Food stamps e ectively lower the price of food. When food becomes available at lower prices, demand will increase thereby forcing the price up to its initial level." Is this reasoning correct? Draw supply and demand curves to illustrate your answer.
Answer: The subsidy would shift the demand curve to the right, much as the quotation says, but if the supply curve slopes up, then the new equilibrium should take place with a greater supply and a lower net price for those who use food stamps. The market price will rise, but not by the full amount of the discount one gets with food stamps.
Topic: Equilibrium Correct Responses: 0 Di culty: 2 Discrimination Index: 0
16.2 Long ago, a kindly prince noticed the misery of his subjects. His subjects all had the same
preferences and the same low incomes. The demand function of each subject for bread was q = 26,p where p is the price of bread and q is the number of loaves per week. The supply of bread per capita per week was given by the function q = :3p. The king declared since his subjects did not even get a loaf of bread per day, he would help them by making it illegal to sell bread for more than 10 groschens per loaf. Unhappily, a bread shortage arose and people waited in long lines to get bread. a Draw a graph to show why. Put numerical labels on the important points on your graph. b If the citizens could earn 4 groschens per hour at work that was exactly as unpleasant as waiting in line, what would be the equilibrium waiting time for a loaf of bread?
Answer: b3:25 Hours.
Chapter 17
True-False
Topic: Auctions Correct Responses: 0 Correct Di culty: 0 Discrimination Index: 0
Auctions
17.1 In a Dutch auction with rational bidders, it sometimes happens that the object being sold
goes to someone whose value for the object is not as high as that of some other bidders.
Topic: Auctions Correct Responses: 0 Correct Di culty: 0 Discrimination Index: 0
17.2 In an English auction, with rational bidders, the object being sold always goes to the bidder
who values it most highly.
Topic: Auctions Correct Responses: 0 Correct Di culty: 0 Discrimination Index: 0
17.3 An auction in which some bidders have di erent information about the value of an object
than others is said to be an auction with private values.
Topic: Auctions Correct Responses: 0 Correct Di culty: 0 Discrimination Index: 0
17.4 In a private-values auction with rational bidders, we can expect the same outcome from an
English auction as from a Vickrey auction.
Topic: Auctions Correct Responses: 0 Correct Di culty: 0 Discrimination Index: 0
17.5 An auctioneer allows bidders to examine a jar of pennies, but he does not allow them to open
Topic: Auctions Correct Responses: 0 Correct Di culty: 0 Discrimination Index: 0
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 a private-values auction, since opinions di er.
17.6 The reserve price in an auction is the lowest price at which the seller of a good will part
with it.
CHAPTER 17 Auctions
Topic: Auctions Correct Responses: 0 Correct Di culty: 0 Discrimination Index: 0
310
17.7 If a good is sold in a Dutch auction and the bidders bid rationally, the price paid for the
good will always be equal to the second-highest willingness to pay of auction participants.
Topic: Auctions Correct Responses: 0 Correct Di culty: 0 Discrimination Index: 0
17.8 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.
Topic: Auctions Correct Responses: 0 Correct Di culty: 0 Discrimination Index: 0
17.9 It is never a pro t-maximizing strategy for a seller in an English auction to set a reserve
price for the good he is selling, so high that he might not be able to sell it at all.
Topic: Auctions Correct Responses: 0 Correct Di culty: 0 Discrimination Index: 0
17.10 It is often the case that a seller can increase his pro ts from an auction by setting a reserve
price even if he has to destroy the object being auctioned if nobody bids as high as the reserve price.
Topic: Auctions Correct Responses: 0 Correct Di culty: 0 Discrimination Index: 0
17.11 The pro t-maximizing strategy for a bidder in a Vickrey auction where there are common
values for the object being sold is to bid less than her estimated value for the object, and the more bidders there are, the more the pro t-maximizing bidder should shade her bid below her estimated value.
Topic: Auctions Correct Responses: 0 Correct Di culty: 0 Discrimination Index: 0
17.12 The optimal strategy for a bidder in a private-values Vickrey auction is to bid his true
valuation.
TRUE-FALSE
Topic: Auctions Correct Responses: 0 Correct Di culty: 0 Discrimination Index: 0
311
17.13 In a common-value auction, the bids of other bidders can in uence the maximum amount
that one is willing to pay for an object, while in a private-value auction this is not the case.
Multiple Choice
Auctions
Topic: Auctions Correct Responses: 0 Correct
Di culty: 0 Discrimination Index: 0
17.1 A rst-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.
Topic: Auctions Correct Responses: 0 Correct
Di culty: 0 Discrimination Index: 0
17.2 A stamp dealer is holding an auction for an English Penny Black postage stamp, issued
in 1840. Potential buyers are asked to submit written bids for this stamp, and it will be sold to the highest bidder at a price equal to the bid submitted by the second-highest bidder. If bidders understand the logic of this auction and bid in their own self-interest,
a bidders will shade their bids by approximately 10 percent, and hence the stamp will be sold for about 10 percent less than the second-highest willingness to pay. b bidders will bid more than their true valuation, since they only have to pay the second-highest bid and not their own bid. c bidders will bid exactly their true valuation. d the highest bidder will overstate his valuation and the second-highest bidder will understate his valuation. e bidders will all bid n , 1=n of their true valuations, where n is the number of bidders.
MULTIPLE CHOICE
Topic: Auctions Correct Responses: 0 Correct Di culty: 0 Discrimination Index: 0
313
17.3 An antique cabinet is being sold by means of an English auction. There are four bidders,
Natalie, Heidi, Linda, and Eva. These bidders are unacquainted with each other and do not collude. Natalie values the cabinet at $1,200, Heidi values it at $950, Linda values it at $1,700, and Eva values it at $700. If the bidders bid in their rational self-interest, the cabinet will be sold to
a Linda for about $1,700. b Natalie for about $1,200. c either Linda or Natalie for slightly more than $1,200. Which of them actually gets it is randomly determined. d Linda for slightly more than $1,200. e None of the above statements are true.
Topic: Auctions Correct Responses: 0 Correct
Di culty: 0 Discrimination Index: 0
17.4 An antique cabinet is being sold by means of an English auction. There are four bidders,
Maria, Clara, Holly, and Josephine. These bidders are unacquainted with each other and do not collude. Maria values the cabinet at $1,600, Clara values it at $1,350, Holly values it at $2,100, and Josephine values it at $1,100. If the bidders bid in their rational self-interest, the cabinet will be sold to
a Holly for about $2,100. b Maria for about $1,600. c either Holly or Maria for slightly more than $1,600. Which of them actually gets it is randomly determined. d Holly for slightly more than $1,600. e None of the above statements are true.
CHAPTER 17 Auctions
Topic: Auctions Correct Responses: 0 Correct Di culty: 0 Discrimination Index: 0
314
17.5 An antique cabinet is being sold by means of an English auction. There are four bidders,
Maude, Kristina, Zelda, and Betsy. These bidders are unacquainted with each other and do not collude. Maude values the cabinet at $800, Kristina values it at $550, Zelda values it at $1,300, and Betsy values it at $300. If the bidders bid in their rational self-interest, the cabinet will be sold to
a Zelda for about $1,300. b Maude for about $800. c either Zelda or Maude for slightly more than $800. Which of them actually gets it is randomly determined. d Zelda for slightly more than $800. e None of the above statements are true.
Topic: Auctions Correct Responses: 0 Correct
Di culty: 0 Discrimination Index: 0
17.6 An antique cabinet is being sold by means of an English auction. There are four bidders,
Colette, Betsy, Doreen, and Elsie. These bidders are unacquainted with each other and do not collude. Colette values the cabinet at $4,000, Betsy values it at $3,750, Doreen values it at $4,500, and Elsie values it at $3,500. If the bidders bid in their rational self-interest, the cabinet will be sold to
a Doreen for about $4,500. b Colette for about $4,000. c either Doreen or Colette for slightly more than $4,000. Which of them actually gets it is randomly determined. d Doreen for slightly more than $4,000. e None of the above statements are true.
MULTIPLE CHOICE
Topic: Auctions Correct Responses: 0 Correct Di culty: 0 Discrimination Index: 0
315
17.7 An antique cabinet is being sold by means of an English auction. There are four bidders,
Susan, Kristina, Katerina, and Heidi. These bidders are unacquainted with each other and do not collude. Susan values the cabinet at $4,800, Kristina values it at $4,550, Katerina values it at $5,300, and Heidi values it at $4,300. If the bidders bid in their rational self-interest, the cabinet will be sold to
a Katerina for about $5,300. b Susan for about $4,800. c either Katerina or Susan for slightly more than $4,800. Which of them actually gets it is randomly determined. d Katerina for slightly more than $4,800. e None of the above statements are true.
Topic: Auctions Correct Responses: 0 Correct
Di culty: 0 Discrimination Index: 0
17.8
First Fiddler's Bank has foreclosed on a home mortgage and is selling the house at auction. There are three bidders for the house, Josh, Sheila, and Elsie. First Fiddler's does not know the willingness to pay of these three bidders for the house, but on the basis of its previous experience, the bank believes that each of these bidders has a probability of 1=3 of valuing it at $700,000, a probability of 1=3 of valuing at $500,000, and a probability of 1=3 of valuing it at $200,000. First Fiddler's believes that these probabilities are independent between buyers. If First Fiddler's sells the house by means of a second-bidder, sealed-bid auction Vickrey auction, what will be the bank's expected revenue from the sale? Choose the closest option.
a $500,000 b $474,074 c $466,667 d $700,000 e $200,000
CHAPTER 17 Auctions
Topic: Auctions Correct Responses: 0 Correct Di culty: 0 Discrimination Index: 0
316
17.9
First Fiddler's Bank has foreclosed on a home mortgage and is selling the house at auction. There are three bidders for the house, Tim, Katerina, and Elsie. First Fiddler's does not know the willingness to pay of these three bidders for the house, but on the basis of its previous experience, the bank believes that each of these bidders has a probability of 1=3 of valuing it at $600,000, a probability of 1=3 of valuing at $500,000, and a probability of 1=3 of valuing it at $300,000. First Fiddler's believes that these probabilities are independent between buyers. If First Fiddler's sells the house by means of a second-bidder, sealed-bid auction Vickrey auction, what will be the bank's expected revenue from the sale? Choose the closest option.
a $500,000 b $474,074 c $466,667 d $600,000 e $300,000
Topic: Auctions Correct Responses: 0 Correct
Di culty: 0 Discrimination Index: 0
17.10
First Fiddler's Bank has foreclosed on a home mortgage and is selling the house at auction. There are three bidders for the house, Boris, Emily, and Fanny. First Fiddler's does not know the willingness to pay of these three bidders for the house, but on the basis of its previous experience, the bank believes that each of these bidders has a probability of 1=3 of valuing it at $600,000, a probability of 1=3 of valuing at $400,000, and a probability of 1=3 of valuing it at $300,000. First Fiddler's believes that these probabilities are independent between buyers. If First Fiddler's sells the house by means of a second-bidder, sealed-bid auction Vickrey auction, what will be the bank's expected revenue from the sale? Choose the closest option.
a $400,000 b $425,926 c $433,333 d $600,000 e $300,000
MULTIPLE CHOICE
Topic: Auctions Correct Responses: 0 Correct Di culty: 0 Discrimination Index: 0
317
17.11
First Fiddler's Bank has foreclosed on a home mortgage and is selling the house at auction. There are three bidders for the house, Waldo, Heidi, and Isabella. First Fiddler's does not know the willingness to pay of these three bidders for the house, but on the basis of its previous experience, the bank believes that each of these bidders has a probability of 1=3 of valuing it at $600,000, a probability of 1=3 of valuing at $300,000, and a probability of 1=3 of valuing it at $200,000. First Fiddler's believes that these probabilities are independent between buyers. If First Fiddler's sells the house by means of a second-bidder, sealed-bid auction Vickrey auction, what will be the bank's expected revenue from the sale? Choose the closest option.
a $300,000 b $351,852 c $366,667 d $600,000 e $200,000
Topic: Auctions Correct Responses: 0 Correct
Di culty: 0 Discrimination Index: 0
17.12
First Fiddler's Bank has foreclosed on a home mortgage and is selling the house at auction. There are three bidders for the house, Roger, Wendy, and Doreen. First Fiddler's does not know the willingness to pay of these three bidders for the house, but on the basis of its previous experience, the bank believes that each of these bidders has a probability of 1=3 of valuing it at $700,000, a probability of 1=3 of valuing at $400,000, and a probability of 1=3 of valuing it at $200,000. First Fiddler's believes that these probabilities are independent between buyers. If First Fiddler's sells the house by means of a second-bidder, sealed-bid auction Vickrey auction, what will be the bank's expected revenue from the sale? Choose the closest option.
a $400,000 b $425,926 c $433,333 d $700,000 e $200,000
CHAPTER 17 Auctions
Topic: Auctions Correct Responses: 0 Correct Di culty: 0 Discrimination Index: 0
318
17.13 A dealer decides to sell an antique automobile by means of an English auction with a
reservation price of $900. There are two bidders. The dealer believes that there are only three possible values, $6,300, $2,700, and $900, that each bidder's willingness to pay might take. Each bidder has a probability of 1=3 of having each of these willingnesses to pay, and the probabilities for each of the two bidders are independent of the other's valuation. Assuming that the two bidders bid rationally and do not collude, the dealer's expected revenue from selling the car is approximately
a $4,500. b $3,300. c $2,700. d $2,100. e $6,300.
Topic: Auctions Correct Responses: 0 Correct
Di culty: 0 Discrimination Index: 0
17.14 A dealer decides to sell an antique automobile by means of an English auction with a
reservation price of $3,600. There are two bidders. The dealer believes that there are only three possible values, $5,400, $4,500, and $3,600, that each bidder's willingness to pay might take. Each bidder has a probability of 1=3 of having each of these willingnesses to pay, and the probabilities for each of the two bidders are independent of the other's valuation. Assuming that the two bidders bid rationally and do not collude, the dealer's expected revenue from selling the car is approximately
a $4,950. b $4,500. c $4,500. d $4,100. e $5,400.
MULTIPLE CHOICE
Topic: Auctions Correct Responses: 0 Correct Di culty: 0 Discrimination Index: 0
319
17.15 A dealer decides to sell an antique automobile by means of an English auction with a
reservation price of $2,700. There are two bidders. The dealer believes that there are only three possible values, $8,100, $5,400, and $2,700, that each bidder's willingness to pay might take. Each bidder has a probability of 1=3 of having each of these willingnesses to pay, and the probabilities for each of the two bidders are independent of the other's valuation. Assuming that the two bidders bid rationally and do not collude, the dealer's expected revenue from selling the car is approximately
a $6,750. b $5,400. c $5,400. d $4,200. e $8,100.
Topic: Auctions Correct Responses: 0 Correct
Di culty: 0 Discrimination Index: 0
17.16 A dealer decides to sell an antique automobile by means of an English auction with a
reservation price of $900. There are two bidders. The dealer believes that there are only three possible values, $3,600, $2,700, and $900, that each bidder's willingness to pay might take. Each bidder has a probability of 1=3 of having each of these willingnesses to pay, and the probabilities for each of the two bidders are independent of the other's valuation. Assuming that the two bidders bid rationally and do not collude, the dealer's expected revenue from selling the car is approximately
a $3,150. b $2,400. c $2,700. d $1,800. e $3,600.
CHAPTER 17 Auctions
Topic: Auctions Correct Responses: 0 Correct Di culty: 0 Discrimination Index: 0
320
17.17 A dealer decides to sell an antique automobile by means of an English auction with a
reservation price of $900. There are two bidders. The dealer believes that there are only three possible values, $5,400, $3,600, and $900, that each bidder's willingness to pay might take. Each bidder has a probability of 1=3 of having each of these willingnesses to pay, and the probabilities for each of the two bidders are independent of the other's valuation. Assuming that the two bidders bid rationally and do not collude, the dealer's expected revenue from selling the car is approximately
a $4,500. b $3,300. c $3,600. d $2,300. e $5,400.
Topic: Auctions Correct Responses: 0 Correct
Di culty: 0 Discrimination Index: 0
17.18 A dealer decides to sell an oil painting by means of an English auction with a reservation
price just slightly below $81,000. If he fails to get his reservation price for the painting, he will burn it. There are two bidders. The dealer believes that there are only three possible values, $90,000, $81,000, and $45,000, that each bidder's willingness to pay might take. Each bidder has a probability of 1=3 of having each of these willingnesses to pay, and the probabilities for each of the two bidders are independent of the other's valuation. 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 $73,000. b $81,000. c $45,000. d $63,000. e $72,000.
MULTIPLE CHOICE
Topic: Auctions Correct Responses: 0 Correct Di culty: 0 Discrimination Index: 0
321
17.19 A dealer decides to sell an oil painting by means of an English auction with a reservation
price just slightly below $45,000. If he fails to get his reservation price for the painting, he will burn it. There are two bidders. The dealer believes that there are only three possible values, $63,000, $45,000, and $27,000, that each bidder's willingness to pay might take. Each bidder has a probability of 1=3 of having each of these willingnesses to pay, and the probabilities for each of the two bidders are independent of the other's valuation. 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 $42,000. b $45,000. c $27,000. d $36,000. e $45,000.
Topic: Auctions Correct Responses: 0 Correct
Di culty: 0 Discrimination Index: 0
17.20 A dealer decides to sell an oil painting by means of an English auction with a reservation
price just slightly below $90,000. If he fails to get his reservation price for the painting, he will burn it. There are two bidders. The dealer believes that there are only three possible values, $117,000, $90,000, and $45,000, that each bidder's willingness to pay might take. Each bidder has a probability of 1=3 of having each of these willingnesses to pay, and the probabilities for each of the two bidders are independent of the other's valuation. 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 $83,000. b $90,000. c $45,000. d $67,500. e $84,000.
CHAPTER 17 Auctions
Topic: Auctions Correct Responses: 0 Correct Di culty: 0 Discrimination Index: 0
322
17.21 A dealer decides to sell an oil painting by means of an English auction with a reservation
price just slightly below $72,000. If he fails to get his reservation price for the painting, he will burn it. There are two bidders. The dealer believes that there are only three possible values, $117,000, $72,000, and $36,000, that each bidder's willingness to pay might take. Each bidder has a probability of 1=3 of having each of these willingnesses to pay, and the probabilities for each of the two bidders are independent of the other's valuation. 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 $69,000. b $72,000. c $36,000. d $54,000. e $75,000.
Topic: Auctions Correct Responses: 0 Correct
Di culty: 0 Discrimination Index: 0
17.22 A dealer decides to sell an oil painting by means of an English auction with a reservation
price just slightly below $63,000. If he fails to get his reservation price for the painting, he will burn it. There are two bidders. The dealer believes that there are only three possible values, $108,000, $63,000, and $27,000, that each bidder's willingness to pay might take. Each bidder has a probability of 1=3 of having each of these willingnesses to pay, and the probabilities for each of the two bidders are independent of the other's valuation. 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 $61,000. b $63,000. c $27,000. d $45,000. e $66,000.
MULTIPLE CHOICE
Topic: Auctions Correct Responses: 0 Correct Di culty: 0 Discrimination Index: 0
323
17.23 Herb's Auction House in Purloined Hubcap, Oregon, holds sealed-bid used-car auctions
every Wednesday. Each car is sold to the highest bidder at the second-highest bidder's bid. On average, two-thirds of the cars that are auctioned are lemons and one-third are good used cars. A good car is worth $1,500 to any buyer. A lemon is worth only $150 to a buyer. Most buyers can do no better than random at picking good cars from the lot. There is only one exception, Al Crankcase. Al can sometimes but not always detect lemons by means of a subtle test. A good car will never fail Al's test, but approximately half of the lemons fail his test. Al attends every auction, tests every car, and always bids his expected value. Normal bidders bid less than the expected value for a randomly selected car but more than the value of a lemon.
a Al will bid $825 for cars that pass his test and $150 for cars that fail his test. only lemons. b Al will bid $750 for cars that pass his test and $500 for cars that fail his test. only lemons c Al will bid $500 for cars that pass his test and $150 for cars that fail his test. good cars only 1=6 of the time. d Al will bid $600 for cars that pass his test and $250 for cars that fail his test. good cars only 1=6 of the time. e Al will bid $300 for cars that pass his test and $150 for cars that fail his test. good cars 1=12 of the time. Normal bidders will get Normal bidders will get Normal bidders will get Normal bidders will get Normal bidders will get
Topic: Auctions Correct Responses: 0 Correct
Di culty: 0 Discrimination Index: 0
17.24 A seller knows that there are two bidders for the object she is selling. She believes that
with probability 1=2; one has a buyer value of $5 and the other has a buyer value of $10 and, with probability 1=2; one has a buyer value of $8 and the other has a buyer value of $15. She knows that bidders will want to buy the object so long as they can get it for their buyer value or less. She sells it in an English auction with a reserve price which she must set before the auction starts. To maximize her expected pro ts, she should set the reserve price at
a $5. b $10. c $8. d $13. e $15.
CHAPTER 17 Auctions
Topic: Auctions Correct Responses: 0 Correct Di culty: 0 Discrimination Index: 0
324
17.25 A seller knows that there are two bidders for the object he is selling. He believes that
with probability 1=2; one has a buyer value of $5 and the other has a buyer value of $12 and, with probability 1=2; one has a buyer value of $10 and the other has a buyer value of $30. He knows that bidders will want to buy the object so long as they can get it for their buyer value or less. He sells it in an English auction with a reserve price which he must set before the auction starts. To maximize his expected pro ts, he should set the reserve price at
a $30. b $5. c $12. d $10. e $20.
Topic: Auctions Correct Responses: 0 Correct
Di culty: 0 Discrimination Index: 0
17.26 A seller decides to sell an object by means of a sealed-bid, second-price auction without a
reservation price. There are two bidders. The seller believes that for each of the two bidders there is a probability of 1=2 that the bidder's value for the object is $500 and a probability of 1=2 that the bidder's value is $100. The seller believes that these probabilities are independent between bidders. If the bidders bid rationally, what is the seller's expected revenue from the auction?
a $500 b $300 c $200 d $180 e $260
MULTIPLE CHOICE
Topic: Auctions Correct Responses: 0 Correct Di culty: 0 Discrimination Index: 0
325
17.27 A seller decides to sell an object by means of a sealed-bid, second-price auction without a
reservation price. There are two bidders. The seller believes that for each of the two bidders there is a probability of 1=2 that the bidder's value for the object is $500 and a probability of 1=2 that the bidder's value is $100. The seller believes that these probabilities are independent between bidders. If the bidders bid rationally, what is the seller's expected revenue from the auction?
a $500 b $300 c $200 d $180 e $260
Topic: Auctions Correct Responses: 0 Correct
Di culty: 0 Discrimination Index: 0
17.28 A seller decides to sell an object by means of a sealed-bid, second-price auction without a
reservation price. There are two bidders. The seller believes that for each of the two bidders there is a probability of 1=2 that the bidder's value for the object is $600 and a probability of 1=2 that the bidder's value is $100. The seller believes that these probabilities are independent between bidders. If the bidders bid rationally, what is the seller's expected revenue from the auction?
a $600 b $350 c $225 d $200 e $300
CHAPTER 17 Auctions
Topic: Auctions Correct Responses: 0 Correct Di culty: 0 Discrimination Index: 0
326
17.29 A seller decides to sell an object by means of a sealed-bid, second-price auction without a
reservation price. There are two bidders. The seller believes that for each of the two bidders there is a probability of 1=2 that the bidder's value for the object is $400 and a probability of 1=2 that the bidder's value is $100. The seller believes that these probabilities are independent between bidders. If the bidders bid rationally, what is the seller's expected revenue from the auction?
a $400 b $250 c $175 d $160 e $220
Topic: Auctions Correct Responses: 0 Correct
Di culty: 0 Discrimination Index: 0
17.30 A seller decides to sell an object by means of a sealed-bid, second-price auction without a
reservation price. There are two bidders. The seller believes that for each of the two bidders there is a probability of 1=2 that the bidder's value for the object is $500 and a probability of 1=2 that the bidder's value is $100. The seller believes that these probabilities are independent between bidders. If the bidders bid rationally, what is the seller's expected revenue from the auction?
a $500 b $300 c $200 d $180 e $260
MULTIPLE CHOICE
Topic: Auctions Correct Responses: 0 Correct Di culty: 0 Discrimination Index: 0
327
17.31 A seller decides to sell an object by means of an English auction without a reservation price.
There are two bidders. The seller believes that for each of the two bidders there is a probability of 1=2 that the bidder's value for the object is $600 and a probability of 1=2 that the bidder's value is $300. The seller believes that these probabilities are independent between bidders. If the bidders bid rationally, what is the seller's expected revenue from the auction?
a $375 b $420 c $450 d $600 e $300
Topic: Auctions Correct Responses: 0 Correct
Di culty: 0 Discrimination Index: 0
17.32 A seller decides to sell an object by means of an English auction without a reservation price.
There are two bidders. The seller believes that for each of the two bidders there is a probability of 1=2 that the bidder's value for the object is $500 and a probability of 1=2 that the bidder's value is $200. The seller believes that these probabilities are independent between bidders. If the bidders bid rationally, what is the seller's expected revenue from the auction?
a $275 b $320 c $350 d $500 e $200
CHAPTER 17 Auctions
Topic: Auctions Correct Responses: 0 Correct Di culty: 0 Discrimination Index: 0
328
17.33 A seller decides to sell an object by means of an English auction without a reservation price.
There are two bidders. The seller believes that for each of the two bidders there is a probability of 1=2 that the bidder's value for the object is $400 and a probability of 1=2 that the bidder's value is $300. The seller believes that these probabilities are independent between bidders. If the bidders bid rationally, what is the seller's expected revenue from the auction?
a $325 b $340 c $350 d $400 e $300
Topic: Auctions Correct Responses: 0 Correct
Di culty: 0 Discrimination Index: 0
17.34 A seller decides to sell an object by means of an English auction without a reservation price.
There are two bidders. The seller believes that for each of the two bidders there is a probability of 1=2 that the bidder's value for the object is $400 and a probability of 1=2 that the bidder's value is $100. The seller believes that these probabilities are independent between bidders. If the bidders bid rationally, what is the seller's expected revenue from the auction?
a $175 b $220 c $250 d $400 e $100
MULTIPLE CHOICE
Topic: Auctions Correct Responses: 0 Correct Di culty: 0 Discrimination Index: 0
329
17.35 A seller decides to sell an object by means of an English auction without a reservation price.
There are two bidders. The seller believes that for each of the two bidders there is a probability of 1=2 that the bidder's value for the object is $600 and a probability of 1=2 that the bidder's value is $300. The seller believes that these probabilities are independent between bidders. If the bidders bid rationally, what is the seller's expected revenue from the auction?
a $375 b $420 c $450 d $600 e $300
Chapter 18
True-False
Topic: Technology Correct Responses: 0 Correct Di culty: 1 Discrimination Index: 0
Technology
18.1 The production set of a rm is the set of all products the rm can produce.
Topic: Technology Correct Responses: 72 Correct Di culty: 1 Discrimination Index: 49
18.2 A production isoquant is a locus of combinations of inputs that are equally pro table.
Topic: Technology Correct Responses: 77 Correct Di culty: 1 Discrimination Index: 32
18.3 If there are constant returns to scale, then doubling the amount of any input will exactly
double the amount of output.
Topic: Technology Correct Responses: 0 Correct Di culty: 1 Discrimination Index: 0
18.4 The economist's distinction between long and short run captures the idea that quantities of
some factor inputs can be varied in the short run but not in the long run.
Topic: Technology Correct Responses: 79 Correct Di culty: 2 Discrimination Index: 23
18.5 If the production function is fx; y = minf2x + y; x + 2yg; then there are constant returns to
scale.
Topic: Technology Correct Responses: 84 Correct Di culty: 2 Discrimination Index: 10
18.6 If the production function is fx; y = x+minfx; yg; then there are constant returns to scale.
TRUE-FALSE
Topic: Technology Correct Responses: 0 Correct Di culty: 2 Discrimination Index: 0
331
18.7 If the production function is fx; y = minf12x; 3yg; then there is convexity in production.
Topic: Technology Correct Responses: 76 Correct 1 2
Di culty: 1 Discrimination Index: 14
12
18.8 If the production function is fx ; x = x x ; then there are constant returns to scale.
Topic: Technology Correct Responses: 55 Correct Di culty: 2 Discrimination Index: 38
18.9 It is possible to have decreasing marginal products for all inputs, and yet have increasing
returns to scale.
Topic: Technology Correct Responses: 83 Correct
Di culty: 1 Discrimination Index: 24
18.10 A production function has well-de ned marginal products at every input combination. If
Factor x is shown on the horizontal axis and Factor y is shown on the vertical axis, the slope of the isoquant through a point x; y is the negative of the ratio of the marginal product of x to the marginal product of y.
Topic: Technology Correct Responses: 80 Correct 2=3
Di culty: 1 Discrimination Index: 10
2=3
18.11 The production function fx; y = x + y has increasing returns to scale.
Topic: Technology Correct Responses: 96 Correct Di culty: 1 Discrimination Index: 2
18.12 The production function fx; y = x + y has constant returns to scale.
CHAPTER 18 Technology
Topic: Technology Correct Responses: 75 Correct Di culty: 2 Discrimination Index: 27
332
18.13 If there is one input used in production and if there are decreasing returns to scale, then
the marginal product for the input will be diminishing.
Topic: Technology Correct Responses: 92 Correct Di culty: 1 Discrimination Index: 7
1 2 1 2 2
18.14 A rm's production function is fx ; x = x +2x . This means that x is twice as expensive
as x1.
Topic: Technology Correct Responses: 75 Correct Di culty: 2 Discrimination Index: 20
1 2 1 2 1=2
18.15 A rm has two variable factors and a production function fx ; x = 2x + 4x . The
technical rate of substitution between x1 and x2 is constant.
Topic: Technology Correct Responses: 38 Correct Di culty: 1 Discrimination Index: 8
18.16 If the marginal product of each factor decreases as the amount of that factor used increases,
then there must be decreasing returns to scale.
Multiple Choice
Topic: Technology Correct Responses: 92 Correct Di culty: 1 Discrimination Index: 13
Technology
18.1 In any production process, the marginal product of labor equals:
a the value of total output minus the cost of the xed capital stock. b the change in output per unit change in labor input for small" changes in the amount of input. c total output divided by total labor inputs. d total output produced with the given labor inputs. e the average output of the least skilled workers employed by the rm.
Topic: Technology Correct Responses: 67 Correct Di culty: 2 Discrimination Index: 41
18.2 If a rm moves from one point on a production isoquant to another point on the same
isoquant, which of the following will certainly NOT happen?
a a change in the level of output b a change in the ratio in which the inputs are combined c a change in the marginal products of the inputs d a change in the rate of technical substitution e a change in pro tability
Topic: Technology Correct Responses: 0 Correct Di culty: 2 Discrimination Index: 0
18.3 A rm has the production function fx; y = x:5 + y where x is the amount of factor x it
uses and y is the amount of factor y. On a diagram we put x on the horizontal axis and y on the vertical axis. We draw some isoquants. Now we draw a straight line on the graph and we notice that the slopes of all the isoquants that it meets have the same slope at the point where they meet this line. The straight line we drew was:
a vertical. b horizontal. c diagonal through the origin with slope .5. d diagonal with slope 2. e diagonal with slope greater than 2.
CHAPTER 18 Technology
Topic: Technology Correct Responses: 72 Correct Di culty: 2 Discrimination Index: 24
334
18.4 Which of the following production functions exhibit constant returns to scale? In each
case y is output and K and L are inputs. 1 y = K 1=2L2=3 2 y = 3K 1=2L1=2 3 y = K 1=2 + L1=2
4y = 2K + 3L. a 1,2, and 4 b 2,3, and 4 c 1,3, and 4 d 2 and 3 e 2 and 4
Topic: Technology Correct Responses: 73 Correct
Di culty: 2 Discrimination Index: 54
3=5 2=5
18.5 A rm has the production function, fx; y = 20x y . The slope of the rm's isoquant at
the point x; y = 80; 10 is: Pick the closest one.
a ,8. b ,1:50. c ,0:67. d ,0:19. e ,4.
Topic: Technology Correct Responses: 73 Correct
Di culty: 2 Discrimination Index: 54
2=5 3=5
18.6 A rm has the production function, fx; y = 40x y . The slope of the rm's isoquant at
the point x; y = 70; 50 is: Pick the closest one.
a ,1:40. b ,0:67. c ,1:50. d ,0:48. e ,0:70.
MULTIPLE CHOICE
Topic: Technology Correct Responses: 51 Correct Di culty: 1 Discrimination Index: 11
335
18.7 A rm uses only two inputs to produce its output. These inputs are perfect substitutes.
This rm:
a must have increasing returns to scale. b must have constant returns to scale. c could have increasing returns to scale, constant returns to scale, or decreasing returns to scale. d must have decreasing returns to scale. e must have decreasing returns to scale in the short run and constant returns to scale in the long run.
Topic: Technology Correct Responses: 0 Correct Di culty: 2 Discrimination Index: 0
3=4 1=4
18.8 A rm has the production function fX; Y = X Y
where X is the amount of factor x used and Y is the amount of factor y used. On a diagram we put X on the horizontal axis and Y on the vertical axis. We draw some isoquants. Now we draw a straight line on the graph and we notice that wherever this line meets an isoquant, the isoquant has a slope of ,3. The straight line we drew:
a is vertical. b is horizontal. c is a ray through the origin with slope 1. d is a ray through the origin with slope 2. e has a negative slope.
Topic: Technology Correct Responses: 0 Correct Di culty: 2 Discrimination Index: 0
18.9 A rm has the production function fX; Y = X Y
2=3 1=3 where X is the amount of factor x used and Y is the amount of factor y used. On a diagram we put X on the horizontal axis and Y on the vertical axis. We draw some isoquants. Now we draw a straight line on the graph and we notice that wherever this line meets an isoquant, the isoquant has a slope of ,4. The straight line we drew:
a is vertical. b is horizontal. c is a ray through the origin with slope 2. d is a ray through the origin with slope 3. e has a negative slope.
CHAPTER 18 Technology
Topic: Technology Correct Responses: 31 Correct Di culty: 1 Discrimination Index: 32767
336
18.10 If output is produced with two factors of production and with increasing returns to scale:
a there cannot be diminishing marginal rate of substitution. b all inputs must have increasing marginal products. c on a graph of production isoquants, moving along a ray from the origin, output more than doubles as the distance from the origin doubles. d the marginal product of at least one input must be increasing. e all inputs must have decreasing marginal products.
Topic: Technology Correct Responses: 55 Correct
Di culty: 2 Discrimination Index: 46
1 2 1 2
18.11 A rm has the production function fx ; x = xb + xb c where b 0 and c 0. This rm
will have:
a increasing returns to scale if and only if 2b + c 1. b increasing returns to scale if and only if bc 1. c increasing returns to scale if and only if b + c 1. d constant returns to scale if and only if c = 1. e constant returns to scale if and only if b = c.
Topic: Technology Correct Responses: 0 Correct
Di culty: 0 Discrimination Index: 0
18.12 A rm has the production function fx; y = x + minfx; yg. The isoquants for the rm:
a are L shaped with the corners of the L on the line y = x. b are L shaped with the corners of the L on the line y = x + 1. c consist of two line segments, one vertical and the other with a slope of ,1. d consist of two line segments, one horizontal and the other with a slope of ,1. e are upside down L shaped.
MULTIPLE CHOICE
Topic: Technology Correct Responses: 32 Correct Di culty: 3 Discrimination Index: 41
1 2 1 2
337
18.13 Suppose that the production function is fx ; x = xa + xab; where a and b are positive
constants. For what values of a and b is there 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.
Topic: Technology Correct Responses: 0 Correct
Di culty: 0 Discrimination Index: 0
1 2 0:40 0:20 1 2
18.14 A rm has the production function fx ; x = x x . The isoquant on which output is
40
2=10
has the equation:
a x2 = 40x,2. 1 b x2 = 40x5. 1 c x1=x2 = 2. d x2 = 40x,0:20 1 e x1 = 0:20x,0:80. 2
Topic: Technology Correct Responses: 0 Correct
Di culty: 0 Discrimination Index: 0
1 2 1:20 0:60 1 2
18.15 A rm has the production function fx ; x = x x . The isoquant on which output is
30
6=10
has the equation:
a x2 = 30x,2. 1 b x2 = 30x1:67. 1 c x1=x2 = 2. d x2 = 30x,0:60 1 e x1 = 0:60x,0:40. 2
CHAPTER 18 Technology
Topic: Technology Correct Responses: 94 Correct Di culty: 1 Discrimination Index: 20
1 0:80
338
18.16 A rm has the production function fx; y = x y . This rm has:
a decreasing returns to scale and dimininishing marginal products for factor x. b increasing returns to scale and decreasing marginal product of factor x. c decreasing returns to scale and increasing marginal product for factor x. d constant returns to scale. e none of the above.
Topic: Technology Correct Responses: 94 Correct
Di culty: 1 Discrimination Index: 20
1:30 1
18.17 A rm has the production function fx; y = x y . This rm has:
a decreasing returns to scale and dimininishing marginal products for factor x. b increasing returns to scale and decreasing marginal product of factor x. c decreasing returns to scale and increasing marginal product for factor x. d constant returns to scale. e none of the above.
Topic: Technology Correct Responses: 100 Correct
Di culty: 1 Discrimination Index: 0
18.18 A rm uses 3 factors to produce its output. Its production function is fx; y; z =
plied by:
a 216 b 36 c 6 d 0.16 e The answer depends on the original choice of x; y; and z.
minfx3 =y; y2 ; z 4 , x4=y2 g. If the amount of each input is multiplied by 6, its output will be multi-
MULTIPLE CHOICE
Topic: Technology Correct Responses: 100 Correct Di culty: 1 Discrimination Index: 0
339
18.19 A rm uses 3 factors to produce its output. Its production function is fx; y; z =
plied by:
a 16 b 4 c 1 d 0.80 e The answer depends on the original choice of x; y; and z.
minfx2 =y; y1 ; z 3 , x3=y2 g. If the amount of each input is multiplied by 4, its output will be multi-
Topic: Technology Correct Responses: 65 Correct
Di culty: 2 Discrimination Index: 90
0:80 0:80 4
18.20 A rm has a production function fx; y = 1x +y whenever x 0 and y 0. When
the amounts of both inputs are positive, this rm has:
a increasing returns to scale. b decreasing returns to scale. c constant 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.
Topic: Technology Correct Responses: 65 Correct
Di culty: 2 Discrimination Index: 90
0:20
18.21 A rm has a production function fx; y = 1:10x
When the amounts of both inputs are positive, this rm has:
+ y0:205 whenever x
0 and y
0.
a increasing returns to scale. b decreasing returns to scale. c constant 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.
CHAPTER 18 Technology
Topic: Technology Correct Responses: 0 Correct Di culty: 0 Discrimination Index: 0
0:75 0:75
340
18.22 The production function Q = 50K L
a increasing returns to scale. b constant returns to scale. c decreasing returns to scale. d increasing, then diminishing returns to scale. e negative returns to scale.
exhibits
Topic: Technology Correct Responses: 0 Correct
Di culty: 0 Discrimination Index: 0
0:75 0:50
18.23 The production function Q = 50K L
a increasing returns to scale. b constant returns to scale. c decreasing returns to scale. d increasing, then diminishing returns to scale. e negative returns to scale.
exhibits
Topic: Technology Correct Responses: 0 Correct
Di culty: 0 Discrimination Index: 0
18.24 The UJava espresso stand needs two inputs, labor and co ee beans, to produce its only
output, espresso. Producing an espresso always requires the same amount of co ee beans, and the same amount of time. Which of the following production functions would appropriately describe the production process at UJava, where B represents ounces of co ee beans, and L represents hours of labor?
a Q = B 0:60L0:40 b Q = B=2 + L=30 c Q = min2B; 60L d Q = 0:5B + 0:5L0:5$ e none of the above.
MULTIPLE CHOICE
Topic: Technology Correct Responses: 0 Correct Di culty: 0 Discrimination Index: 0
341
18.25 The UJava espresso stand needs two inputs, labor and co ee beans, to produce its only
output, espresso. Producing an espresso always requires the same amount of co ee beans, and the same amount of time. Which of the following production functions would appropriately describe the production process at UJava, where B represents ounces of co ee beans, and L represents hours of labor?
a Q = B 0:70L0:30 b Q = B=2 + L=30 c Q = min2B; 60L d Q = 0:5B + 0:5L0:5$ e none of the above.
Essay
Topic: Technology Correct Responses: 0 Di culty: 2 Discrimination Index: 0
Technology
18.1 On separate axes, draw typical production isoquants for each of the following production
functions. a fx; y = minf2x; x + yg b fx; y = xy c fx; y = x + minfx; yg d fx; y = x + y1=2 .
Answer: For a, the isoquants have a kink at the line x = y. At a typical point on this line, say x = y = 3; the isoquant has a vertical segment going all the way to the sky and another segment running from 3; 3 to 6; 0. b These are rectangular hyperbolas. cIf x is on the horizontal axis and y on the vertical axis, an isoquant has a kink on the line x = y. To the left of this line, an isoquant has the slope ,1; to the right of this line, an isoquant has slope ,1. Above this line the isoquant is vertical. d The isoquants are convex to the origin. If you draw a horizontal line through two or more isoquants, they will all have the same slope where they meet this line.
Topic: Technology Correct Responses: 0 Di culty: 0 Discrimination Index: 0
18.2 For each of the following production functions, comment on the ability to substitute capital
for labor.a Q = K + L
b Q = K 0:5 L0:5 c Q = minK; L d Why would this information be of interest to a manager?
Topic: Technology Correct Responses: 0 Di culty: 0 Discrimination Index: 0
18.3 For each of the following production functions, draw a diagram showing the general shape
b Q = K 0:5 L0:5 c Q = minK; L
of its corresponding isoquant. Comment on the ease at which labor and capital can be substituted for one another relative to the other two production functions. a Q = K + L
Chapter 19
True-False
Topic: Pro t Maximization Correct Responses: 96 Correct
Pro t Maximization
Di culty: 1 Discrimination Index: 25
19.1 The weak axiom of pro t maximizing behavior states that in a modern mixed economy,
rms have only a weak incentive to maximize pro ts.
Topic: Pro t Maximization Correct Responses: 86 Correct
Di culty: 1 Discrimination Index: 30
19.2 A xed factor is a factor of production that is used in xed proportion to the level of output.
Topic: Pro t Maximization Correct Responses: 92 Correct Di culty: 1 Discrimination Index: 7
19.3 The marginal product of a factor is just the derivative of the production function with
respect to the amount of this factor, holding the amounts of other factor inputs constant.
Topic: Pro t Maximization Correct Responses: 37 Correct Di culty: 2 Discrimination Index: 19
19.4 If the value of the marginal product of factor x increases as the quantity of x increases, and
the value of the marginal product of x is equal to the wage rate, then the pro t maximizing amount of x is being used.
Topic: Pro t Maximization Correct Responses: 43 Correct Di culty: 2 Discrimination Index: 45
19.5 If the price of the output of a pro t-maximizing, competitive rm rises and all other prices
stay constant, then the rm's output cannot fall.
CHAPTER 19 Pro t Maximization
Topic: Pro t Maximization Correct Responses: 78 Correct Di culty: 1 Discrimination Index: 12
344
19.6 If a pro t-maximizing competitive rm has constant returns to scale, then its long run
pro ts must be zero.
Topic: Pro t Maximization Correct Responses: 58 Correct Di culty: 2 Discrimination Index: 17
19.7 Just as in the theory of utility maximizing consumers, the theory of pro t maximizing rms
allows the possibility of "Gi en factors". These are factors for which a fall in price leads to a fall in demand.
Topic: Pro t Maximization Correct Responses: 92 Correct Di culty: 1 Discrimination Index: 15
19.8 If the value of the marginal product of labor exceeds the wage rate, then a competitive,
pro t-maximizing rm would want to hire less labor.
Topic: Pro t Maximization Correct Responses: 63 Correct Di culty: 2 Discrimination Index: 40
19.9 A rm produces one input with one output and has decreasing returns to scale. The price
that it pays per unit of input and the price it gets per unit of output are independent of the amount that this rm buys or sells. If the government taxes its net pro ts at some percentage rate and subsidizes its inputs at the same percentage rate, the rm's pro t maximizing output will not change.
Multiple Choice
Pro t Maximization
Topic: Pro t Maximization Correct Responses: 81 Correct
Di culty: 2 Discrimination Index: 36
19.1 A competitive rm produces output using three xed factors and one variable factor. The
rm's short run production function is q = 163x,2x2; where x is the amount of variable factor used. The price of output is $3 per unit and the price of the variable factor is $9 per unit. In the short run, how many units of x should the rm use?
a 20 b 80 c 19 d 40 e None of the above.
Topic: Pro t Maximization Correct Responses: 81 Correct
Di culty: 2 Discrimination Index: 36
19.2 A competitive rm produces output using three xed factors and one variable factor. The
rm's short run production function is q = 455x,5x2; where x is the amount of variable factor used. The price of output is $3 per unit and the price of the variable factor is $15 per unit. In the short run, how many units of x should the rm use?
a 22 b 90 c 31 d 45 e None of the above.
CHAPTER 19 Pro t Maximization
Topic: Pro t Maximization Correct Responses: 69 Correct Di culty: 2 Discrimination Index: 50
346
19.3 A competitive rm produces a single output using several inputs. The price of output rises
by $2 per unit. The price of one of the inputs increases by $5 and the quantity of this input that the rm uses increases by 6 units. The prices of all other inputs stay unchanged. From the weak axiom of pro t maximization we can tell that:
a the output of the good must have increased by at least 15 units. b the inputs of the other factors must have stayed constant. c the output of the good must have decreased by at least 7.50 units. d the inputs of at least one of the other factors must have decreased by at least 6 units. e the inputs of at least one of the other factors must have increased by at least 6 units.
Topic: Pro t Maximization Correct Responses: 69 Correct Di culty: 2 Discrimination Index: 50
19.4 A competitive rm produces a single output using several inputs. The price of output rises
by $3 per unit. The price of one of the inputs increases by $3 and the quantity of this input that the rm uses increases by 6 units. The prices of all other inputs stay unchanged. From the weak axiom of pro t maximization we can tell that:
a the output of the good must have increased by at least 6 units. b the inputs of the other factors must have stayed constant. c the output of the good must have decreased by at least 3 units. d the inputs of at least one of the other factors must have decreased by at least 6 units. e the inputs of at least one of the other factors must have increased by at least 6 units.
Topic: Pro t Maximization Correct Responses: 13 Correct Di culty: 2 Discrimination Index: 17
19.5 If there is perfect certainty, a competitive rm will necessarily:
a seek to maximize its immediate pro ts rather than long run returns because otherwise it will go broke. b maximize the ratio of the present value of its sales to the present value of its costs. c equalize its pro ts in all periods. d equalize its sales in all periods. e None of the above.
MULTIPLE CHOICE
Topic: Pro t Maximization Correct Responses: 55 Correct Di culty: 2 Discrimination Index: 37
347
19.6 A rm produces one output using one input. When the cost of the input was 3 and the
price of the output was 3, the rm used 6 units of input to produce 18 units of output. Later, when the cost of the input was 7 and the price of the output was 4, the rm used 5 units of input to produce 20 units of output.
a This behavior is consistent with WAPM. b This behavior is not consistent with WAPM. c This behavior is impossible no matter what the rm is trying to do. d This behavior suggests the presence of increasing returns to scale. e This behavior suggests the presence of decreasing returns to scale.
Topic: Pro t Maximization Correct Responses: 88 Correct Di culty: 1 Discrimination Index: 27
19.7 A pro t-maximizing competitive rm uses just one input, x. Its production function is
rm demands is:
a 10. b 22.63. c 64. d 48. e None of the above.
Topic: Pro t Maximization Correct Responses: 88 Correct Di culty: 1 Discrimination Index: 27
q = 8x1=2. The price of output is 16 and the factor price is 8. The amount of the factor that the
19.8 A pro t-maximizing competitive rm uses just one input, x. Its production function is
rm demands is:
a 13. b 35.78. c 400. d 384. e None of the above.
q = 8x1=2. The price of output is 40 and the factor price is 8. The amount of the factor that the
CHAPTER 19 Pro t Maximization
Topic: Pro t Maximization Correct Responses: 36 Correct Di culty: 2 Discrimination Index: 28
348
19.9 A competitive, pro t-maximizing rm uses two inputs a and b. Its production function is
of output rises to $6 per unit but factor prices do not change,
a it will increase its purchases of factor a by 11=4 units. b it will increase its purchases of factor a by 9=4 units. c it will increase its purchases of factor a by 3=4 units. d we would need to know the price of factor b to be able to determine the change in demand for a. e none of the above is true.
Topic: Pro t Maximization Correct Responses: 44 Correct Di culty: 2 Discrimination Index: 40
1 2 1=2 1 1=2 2
Fa; b = a1=2 + b1=2. Its output sells for $5 per unit. The price of input a is $1 per unit. If the price
19.10 A competitive rm's production function is fx ; x = 4x + 10x . The price of factor 1
is 1 and the price of factor 2 is 1. The price of output is 2. What is the pro t-maximizing quantity of output?
a 116 b 232 c 112 d 244 e 104
Topic: Pro t Maximization Correct Responses: 44 Correct Di culty: 2 Discrimination Index: 40
1 2 1=2 1 1=2 2
19.11 A competitive rm's production function is fx ; x = 4x + 6x . The price of factor 1
is 1 and the price of factor 2 is 2. The price of output is 4. What is the pro t-maximizing quantity of output?
a 68 b 136 c 64 d 148 e 56
MULTIPLE CHOICE
Topic: Pro t Maximization Correct Responses: 0 Correct Di culty: 2 Discrimination Index: 0
349
19.12 Ji y-pol Consultants is paid $1,000,000 for each percent of the vote that Senator Sleaze
receives in the upcoming election. Sleaze's share of the vote is determined by the number of slanderous campaign ads run by Ji y-Pol according to the function S = 100N=N + 1; where N is the number of ads. If each ad costs $3,600 approximately how many ads should Ji y-pol buy in order to maximize its pro ts?
a 3,329 b 1,666 c 72 d 1,702 e 833
Topic: Pro t Maximization Correct Responses: 0 Correct
Di culty: 2 Discrimination Index: 0
19.13 Ji y-pol Consultants is paid $1,000,000 for each percent of the vote that Senator Sleaze
receives in the upcoming election. Sleaze's share of the vote is determined by the number of slanderous campaign ads run by Ji y-Pol according to the function S = 100N=N + 1; where N is the number of ads. If each ad costs $6,400 approximately how many ads should Ji y-pol buy in order to maximize its pro ts?
a 2,495 b 1,249 c 128 d 1,313 e 625
CHAPTER 19 Pro t Maximization
Topic: Pro t Maximization Correct Responses: 0 Correct Di culty: 2 Discrimination Index: 0
350
19.14 A competitive rm uses a single input, x; to produce its output, y. The rm's production
function is given by y = x3=2 for quantities of x between 0 and 4. For quantities of x greater than 4, the rm's output is y = 4 + x. If the price of the output y is 1 and the price of the input x is 3, how much x should the rm use to maximize its pro t?
a 16=9 b 4 c 0 d 4=3 e 9=2
Topic: Pro t Maximization Correct Responses: 80 Correct Di culty: 1 Discrimination Index: 40
2=3
19.15 The production function is given by FL = 6L . Suppose that the cost per unit of labor
is 12 and the price of output is 6, how many units of labor will the rm hire?
a 16 b 8 c 4 d 24 e None of the above.
Topic: Pro t Maximization Correct Responses: 80 Correct Di culty: 1 Discrimination Index: 40
2=3
19.16 The production function is given by FL = 6L . Suppose that the cost per unit of labor
is 8 and the price of output is 6, how many units of labor will the rm hire?
a 54 b 27 c 13.5 d 81 e None of the above.
MULTIPLE CHOICE
Topic: Pro t Maximization Correct Responses: 88 Correct Di culty: 1 Discrimination Index: 40
1=2
351
19.17 The production function is given by fx = 4x . If the price of the commodity produced
a 1,280 b 638 c 2,564 d 1,265 e 643
Topic: Pro t Maximization Correct Responses: 88 Correct Di culty: 1 Discrimination Index: 40
1=2
is 80 per unit and the cost of the input is 20 per unit, how much pro ts will the rm make if it maximizes pro ts?
19.18 The production function is given by fx = 4x . If the price of the commodity produced
a 731.43 b 363.71 c 1,466.86 d 716.43 e 368.71
Topic: Pro t Maximization Correct Responses: 80 Correct 1 2
is 80 per unit and the cost of the input is 35 per unit, how much pro ts will the rm make if it maximizes pro ts?
Di culty: 1 Discrimination Index: 45
1=2 1=2 1 2
19.19 The production function is fx ; x = x x . If the price of factor 1 is 8 and the price of
factor 2 is 4, in what proportions should the rm use factors 1 and 2 if it wants to maximize pro ts?
a x1 = x2 b x1 = 2x2 c x1 = 0:50x2 d We can't tell without knowing the price of output. e x1 = 4x2
CHAPTER 19 Pro t Maximization
Topic: Pro t Maximization Correct Responses: 80 Correct 1 2
352
Di culty: 1 Discrimination Index: 45
1=2 1=2 1 2
19.20 The production function is fx ; x = x x . If the price of factor 1 is 16 and the price
a x1 = x2 b x1 = 0:50x2 c x1 = 2x2 d We can't tell without knowing the price of output. e x1 = 32x2
of factor 2 is 32, in what proportions should the rm use factors 1 and 2 if it wants to maximize pro ts?
Topic: Pro t Maximization Correct Responses: 82 Correct
Di culty: 2 Discrimination Index: 20
19.21 When Farmer Hoglund applies N pounds of fertilizer per acre, the marginal product of
fertilizer is 1,N=200 bushels of corn. If the price of corn is $1 per bushel and the price of fertilizer is $0.40 per pound, then how many pounds of fertilizer per acre should Farmer Hoglund use in order to maximize his pro ts?
a 120 b 240 c 64 d 248 e 200
MULTIPLE CHOICE
Topic: Pro t Maximization Correct Responses: 82 Correct Di culty: 2 Discrimination Index: 20
353
19.22 When Farmer Hoglund applies N pounds of fertilizer per acre, the marginal product of
fertilizer is 1,N=200 bushels of corn. If the price of corn is $4 per bushel and the price of fertilizer is $0.40 per pound, then how many pounds of fertilizer per acre should Farmer Hoglund use in order to maximize his pro ts?
a 180 b 360 c 94 d 368 e 200
Topic: Pro t Maximization Correct Responses: 0 Correct Di culty: 0 Discrimination Index: 0
19.23 If the short run marginal cost of producing a good is $20 for the rst 200 units and $30
for each additional unit beyond 200, then in the short run, if the market price of output is 29, a pro t maximizing rm will:
a produce a level of output where marginal revenue equals marginal cost. b produce as much output as possible since there are constant returns to scale. c produce up to the point where average cost equals 29. d not produce at all, since marginal cost is increasing. e produce exactly 200 units.
Topic: Pro t Maximization Correct Responses: 0 Correct Di culty: 0 Discrimination Index: 0
19.24 If the short run marginal cost of producing a good is $20 for the rst 300 units and $30
for each additional unit beyond 300, then in the short run, if the market price of output is 27, a pro t maximizing rm will:
a produce a level of output where marginal revenue equals marginal cost. b produce as much output as possible since there are constant returns to scale. c produce up to the point where average cost equals 27. d not produce at all, since marginal cost is increasing. e produce exactly 300 units.
CHAPTER 19 Pro t Maximization
Topic: Pro t Maximization Correct Responses: 0 Correct Di culty: 0 Discrimination Index: 0
354
19.25 Diesel Dan is a contract truck driver. While his revenue is $2.50 per mile driven, the faster
he drives, the greater the risk of a speeding ticket. The cost of driving his truck one hour at a speed of S miles per hour is
CS = eS,60=3
To maximize his pro t, Dan should drive
a 60 miles per hour. b 60.92 miles per hour. c 62.75 miles per hour. d 66.04 miles per hour. e 70.20 miles per hour.
Topic: Pro t Maximization Correct Responses: 0 Correct
Di culty: 0 Discrimination Index: 0
19.26 Diesel Dan is a contract truck driver. While his revenue is $1.50 per mile driven, the faster
he drives, the greater the risk of a speeding ticket. The cost of driving his truck one hour at a speed of S miles per hour is
CS = eS,50=3
To maximize his pro t, Dan should drive
a 50 miles per hour. b 50.41 miles per hour. c 51.22 miles per hour. d 54.51 miles per hour. e 58.67 miles per hour.
MULTIPLE CHOICE
Topic: Pro t Maximization Correct Responses: 0 Correct Di culty: 0 Discrimination Index: 0
355
19.27 During the height of the pet rock craze in the 19700s; the price elasticity of demand was
estimated to be 1.10. Since pet rocks have a marginal cost of zero, a pro t maximizing seller of pet rocks would
a increase prices. b decrease prices. c leave prices unchanged. d need more detailed market information before making any pricing changes. e diversify into selling Karen Carpenter LP's.
Topic: Pro t Maximization Correct Responses: 0 Correct
Di culty: 0 Discrimination Index: 0
19.28 During the height of the pet rock craze in the 19700s; the price elasticity of demand was
estimated to be 1.50. Since pet rocks have a marginal cost of zero, a pro t maximizing seller of pet rocks would
a increase prices. b decrease prices. c leave prices unchanged. d need more detailed market information before making any pricing changes. e diversify into selling Karen Carpenter LP's.
CHAPTER 19 Pro t Maximization
Topic: Pro t Maximization Correct Responses: 0 Correct Di culty: 0 Discrimination Index: 0
356
19.29 Philip owns and operates a gas station. Philip works 40 hours a week managing the station
but doesn't draw a salary. He could earn $700 a week doing the same work for Terrance. The store owes its bank $100,000 and Philip has invested $100,000 of his own money. If Philip's accounting pro ts are $1,000 per week while the interest on his bank debt is $400 per week, the business' economic pro ts are
a $0 per week. b $ , 100 per week. c $600 per week. d $300 per week. e $1,000 per week.
Topic: Pro t Maximization Correct Responses: 0 Correct Di culty: 0 Discrimination Index: 0
19.30 Philip owns and operates a gas station. Philip works 40 hours a week managing the station
but doesn't draw a salary. He could earn $700 a week doing the same work for Terrance. The store owes its bank $100,000 and Philip has invested $100,000 of his own money. If Philip's accounting pro ts are $1,000 per week while the interest on his bank debt is $500 per week, the business' economic pro ts are
a $0 per week. b $ , 200 per week. c $500 per week. d $300 per week. e $1,000 per week.
Essay
Topic: Pro t Maximization Correct Responses: 0
Pro t Maximization
Di culty: 3 Discrimination Index: 0
19.1 A competitive rm has a production function described as follows. "Weekly output is the
square root of the minimum of the number of units of capital and the number of units of labor employed per week." Suppose that in the short run this rm must use 16 units of capital but can vary its amount of labor freely. a Write down a formula that describes the marginal product of labor in the short run as a function of the amount of labor used. Be careful at the boundaries. b If the wage is w = 1 and the price of output is p = 4; how much labor will the rm demand in the short run? c What if w = 1 and p = 10? d Write down an equation for the rm's short run demand for labor as function of w and p.
MP = 1=2L1=2 if L 16; MP = 0 if L 16. b4 c16 d L = p=2w2
Chapter 20
True-False
Topic: Cost Minimization Correct Responses: 96 Correct
Cost Minimization
Di culty: 2 Discrimination Index: 25
20.1 Quasi- xed costs are those costs that can be avoided if and only if a rm produces zero
output.
Topic: Cost Minimization Correct Responses: 79 Correct Di culty: 1 Discrimination Index: 21
20.2 If there are increasing returns to scale, then average costs are a decreasing function of
output.
Topic: Cost Minimization Correct Responses: 33 Correct Di culty: 2 Discrimination Index: 38
20.3 If there are increasing returns to scale, then costs per unit of output decrease as you move
downward and to the right along an isocost line.
Topic: Cost Minimization Correct Responses: 69 Correct
Di culty: 2 Discrimination Index: 45
1 2 1 2 1 2
20.4 If the production function is fx ; x = minfx ; x g; then the cost function is cw ; w ; y =
minfw1 ; w2gy.
Topic: Cost Minimization Correct Responses: 46 Correct Di culty: 1 Discrimination Index: 30
1 1 2
20.5 The conditional factor demand function for factor 1 is a function x w ; w ; y that tells the
ratio of price to output for an optimal factor choice of the rm.
TRUE-FALSE
Topic: Cost Minimization Correct Responses: 88 Correct 1 2
359
Di culty: 1 Discrimination Index: 30
20.6 The cost function cw ; w ; y expresses the cost per unit of output of producing y units of
output if equal amounts of both factors are used.
Topic: Cost Minimization Correct Responses: 36 Correct Di culty: 2 Discrimination Index: 35
20.7 A competitive, cost-minimizing rm has the production function fx; y = x + 2y and uses
positive amounts of both inputs. If the price of x doubles and the price of y triples, then the cost of production will more than double.
Topic: Cost Minimization Correct Responses: 37 Correct Di culty: 2 Discrimination Index: 27
1 2
20.8 The total cost function cw ; w ; y expresses the cost per unit of output as a function of
input prices and output.
Topic: Cost Minimization Correct Responses: 26 Correct Di culty: 3 Discrimination Index: 25
20.9 A rm uses a single variable input x to produce outputs according to the production func-
tion fx = 500x , 4x2. This rm has xed costs of $300. This rm's short run marginal cost curve lies below its short run average variable cost curve for all positive values of x.
Topic: Cost Minimization Correct Responses: 26 Correct Di culty: 3 Discrimination Index: 25
20.10 A rm uses a single variable input x to produce outputs according to the production func-
tion fx = 300x , 5x2. This rm has xed costs of $300. This rm's short run marginal cost curve lies below its short run average variable cost curve for all positive values of x.
Multiple Choice
Cost Minimization
Topic: Cost Minimization Correct Responses: 53 Correct
Di culty: 1 Discrimination Index: 30
20.1 George runs a cookie factory. His cookies are made with sugar, peanut oil, and soybean oil.
The number of boxes of cookies that he produces is fsu; po; so = minfsu; po + 2sog where su is the number of bags of sugar, po the number of canisters of peanut oil, and so the number of canisters of soybean oil that he uses. The price of a bag of sugar is 11. The price of a canister of peanut oil is 6. The price of a canister of soybean oil is 20. If George makes 254 boxes of cookies in the cheapest way possible, how many canisters of soybean oil will he use?
a 127 b 0 c 84.67 d 169.33 e 42.33
Topic: Cost Minimization Correct Responses: 53 Correct
Di culty: 1 Discrimination Index: 30
20.2 George runs a cookie factory. His cookies are made with sugar, peanut oil, and soybean oil.
The number of boxes of cookies that he produces is fsu; po; so = minfsu; po + 2sog where su is the number of bags of sugar, po the number of canisters of peanut oil, and so the number of canisters of soybean oil that he uses. The price of a bag of sugar is 5. The price of a canister of peanut oil is 9. The price of a canister of soybean oil is 13. If George makes 254 boxes of cookies in the cheapest way possible, how many canisters of soybean oil will he use?
a 127 b 0 c 84.67 d 169.33 e 42.33
MULTIPLE CHOICE
Topic: Cost Minimization Correct Responses: 66 Correct Di culty: 1 Discrimination Index: 50
0:50 0:50
361
20.3 A rm's production function is q = 16x y
a x=y = 0:17. b x=y = 0:33. c x=y = 1. d x=y = 2. e x=y = 6.
Topic: Cost Minimization Correct Responses: 66 Correct
where x and y are the amounts of factors x and y that the rm uses as inputs. If the rm is minimizing unit costs, and if the price of factor x is 6 times the price of factor y; the ratio in which the rm will use factors x and y is closest to:
Di culty: 1 Discrimination Index: 50
0:33 0:67
20.4 A rm's production function is q = 26x y
a x=y = 0:08. b x=y = 0:25. c x=y = 0:50. d x=y = 2:40. e x=y = 12.
Topic: Cost Minimization Correct Responses: 84 Correct
where x and y are the amounts of factors x and y that the rm uses as inputs. If the rm is minimizing unit costs, and if the price of factor x is 6 times the price of factor y; the ratio in which the rm will use factors x and y is closest to:
Di culty: 1 Discrimination Index: 13
1=2
20.5 A rm has xed costs of 9,000. Its short run production function is y = 3x ; where x is
the amount of variable factor it uses. The price of the variable factor is $ 5,000 per unit. Where y is the amount of output, the short run total cost function is:
a 9; 000=y + 5; 000. b 14; 000y. c 9; 000 + 5; 000y. d 9; 000 + 555:56y2. e 9; 000y + 0:56y2.
CHAPTER 20 Cost Minimization
Topic: Cost Minimization Correct Responses: 84 Correct Di culty: 1 Discrimination Index: 13
1=2
362
20.6 A rm has xed costs of 7,000. Its short run production function is y = 8x ; where x is
the amount of variable factor it uses. The price of the variable factor is $ 4,000 per unit. Where y is the amount of output, the short run total cost function is:
a 7; 000=y + 4; 000. b 11; 000y. c 7; 000 + 4; 000y. d 7; 000 + 62:50y2. e 7; 000y + 0:06y2.
Topic: Cost Minimization Correct Responses: 81 Correct 2 2
Di culty: 2 Discrimination Index: 33
1 1 2 1
20.7 A rm has two factories. One factory has the cost function c y = 2y + 90 and the other
has the cost function c2 y2 = 6y + 40. If the rm wishes to produce a total of 32 units as cheaply as possible, how many units will be produced in the second factory?
a 7 b 2 c 8 d 14 e None of the above.
Topic: Cost Minimization Correct Responses: 82 Correct Di culty: 1 Discrimination Index: 10
20.8 A company can rent one of two copying machines. The rst costs $34 a month to rent
and costs an additional 2 cents per copy to use. The second costs $107 a month to rent and an additional 1 cent per copy to use. How many copies would the company need to make per month in order for it to be worthwhile to rent the second machine?
a 7,300 b 13,300 c 12,400 d 6,900 e None of the above.
MULTIPLE CHOICE
Topic: Cost Minimization Correct Responses: 0 Correct Di culty: 2 Discrimination Index: 0
363
20.9 A rm produces ping pong balls using two inputs. When input prices are 15; 7 the rm
a Yes. b No. c It depends on the level of xed costs. d We have to know the price of output before we can test WACM. e It depends on the ratio of variable to xed costs.
uses the input bundle 17; 71. When the input prices are 12; 24 the rm uses the bundle 77; 4. The amount of output is the same in both cases. Is this behavior consistent with WACM?
Topic: Cost Minimization Correct Responses: 82 Correct
Di culty: 1 Discrimination Index: 45
20.10 As assistant vice-president in charge of production for a computer rm, you are asked to
calculate the cost of producing 170 computers. The production function is q = minfx; yg where x and y are the amounts of two factors used. The price of x is 18 and the price of y is 10. What is your 2,580 b 4,760 c 8,460 d 6,180 e None of the above.
CHAPTER 20 Cost Minimization
Topic: Cost Minimization Correct Responses: 25 Correct Di culty: 3 Discrimination Index: 10
364
20.11 As head of the planning commission of Eastern Motors, your job is to determine where
to locate a new plant. The only inputs used in your cars are steel and labor and the production function is Cobb-Douglas where fS; L = S :5 Lf :5g where S is tons of steel and L is units of labor. You can locate your plant either in country A or country B. In country A, steel costs $7 U.S. a ton and labor costs $7 U.S. per unit. In country B; steel costs $8 U.S. per ton and labor costs $6 U.S. per unit. In which country should the company locate its new plant so as to minimize costs per unit of output?
a Country A b Country B c It doesn't matter, because two locations are equally costly. d Country A if output is greater than 14, otherwise Country B. e There is not enough information to enable us to tell.
Topic: Cost Minimization Correct Responses: 48 Correct
Di culty: 2 Discrimination Index: 59
20.12 A competitive rm uses two inputs, x and y. Total output is the square root of x times
a 766 b 480 c 655 d 517 e None of the above.
the square root of y. The price of x is 17 and the price of y is 11. The company minimizes its costs per unit of output and spends $517 on x. How much does it spend on y?
MULTIPLE CHOICE
Topic: Cost Minimization Correct Responses: 53 Correct Di culty: 3 Discrimination Index: 44
365
20.13 A rm has the production function Q = KL where K is the amount of capital and L is the
amount of labor it uses as inputs. The cost per unit of capital is a rental fee r and the cost per unit of labor is a wage w. The conditional labor demand function, LQ; w; r is:
a Qwr. b the square root of Qr=w. c Qw=r. d the square root of Q rw. e Q wr.
Topic: Cost Minimization Correct Responses: 60 Correct
Di culty: 2 Discrimination Index: 32
20.14 Joe's Bar and Grill uses two inputs, beer and pretzels. When the price of beer was $10 a
case and the price of pretzels was $20 a case, Joe used 1 case of beer and 2 cases of pretzels a day. When the price of beer was $20 a case and the price of pretzels was $10 a case, Joe used 2 cases of beer and 1 case of pretzels a day. Joe produced the same output in each of these circumstances. From this information, we can conclude:
a Joe has a constant returns to scale production function. b Joe has a cost function that exhibits increasing returns. c Joe is not minimizing costs. d Joe's behavior is consistent with pro t maximization. e Joe's production function exhibits diminishing marginal product.
CHAPTER 20 Cost Minimization
Topic: Cost Minimization Correct Responses: 41 Correct Di culty: 3 Discrimination Index: 51
1 2 1 2 1=2 1
366
20.15 The production function for drangles is: fx ; x = minfx ; 3x g where x is the amount
of sugar and x2 is the amount of dough used. At the factor prices, w1 = w2 = 1; the minimum cost of producing y drangles is:
a 4y1=2 . b 3=4y1=2 . c 3=4y2 . d 4=3y2 . e None of the above.
Topic: Cost Minimization Correct Responses: 69 Correct
Di culty: 1 Discrimination Index: 49
20.16 An orange grower has discovered a process for producing oranges that requires two inputs.
The production function is Q = minf4x1 ; x2g where x1 and x2 are the amounts of inputs 1 and 2 that he uses. The prices of these two inputs are w1 = $4 and w2 = $2; respectively. The minimum cost of producing 280 units is therefore:
a $1,680. b $840. c $2,240. d $560. e $1,120.
MULTIPLE CHOICE
Topic: Cost Minimization Correct Responses: 69 Correct Di culty: 1 Discrimination Index: 49
367
20.17 An orange grower has discovered a process for producing oranges that requires two inputs.
The production function is Q = minf2x1 ; x2g where x1 and x2 are the amounts of inputs 1 and 2 that he uses. The prices of these two inputs are w1 = $2 and w2 = $4; respectively. The minimum cost of producing 80 units is therefore:
a $480. b $400. c $640. d $160. e $320.
Topic: Cost Minimization Correct Responses: 51 Correct
Di culty: 2 Discrimination Index: 41
20.18 Roberta runs a dress factory. She produces 50 dresses per day, using labor and electricity.
She uses a combination of labor and electricity that produces 50 dresses per day in the cheapest possible way. She can hire as much labor as she wants at a cost of 20 cents per minute. She can use as much electricity as she wants at a cost of 10 cents per minute. Her production isoquants are smooth curves without kinks and she uses positive amounts of both inputs.
a The marginal product of a kilowatt-hour of electricity is twice the marginal product of a minute of labor. b The marginal product of a minute of labor is twice the marginal product of a kilowatt-hour of electricity. c The marginalproduct of a minute of labor is equal to the marginal product of a kilowatt-hour of electricity. d There is not enough information to determine the ratio of marginal products. We'd have to know the production function to know this. e The marginal product of a minute of labor plus the marginal product of a kilowatt-hour of labor must equal 50=20 + 10.
CHAPTER 20 Cost Minimization
Topic: Cost Minimization Correct Responses: 27 Correct Di culty: 2 Discrimination Index: 46
1=2 1=2
368
20.19 A competitive rm has the three-factor production function fx; y; z = x + y z . The
factor prices used to be wx = 1; wy = 2; and wz = 3. Suppose that the price of factor y doubled while the other two prices stayed the same. Then the cost of production:
a increased by more than 10 but less than 50. b increased by 50. c doubled. d stayed the same. e increased by more than 50, but did not double.
Topic: Cost Minimization Correct Responses: 0 Correct Di culty: 2 Discrimination Index: 0
20.20 A competitive rm uses three factors of production. Its production function is fx; y; z =
of production:
x + y1=2 z 1=2. Originally the factor prices were wx = 1; wy = 2; and wz = 3. The prices of factors x and z decreased to half of their previous levels, but the price of factor y stayed constant. The cost a decreased by more than half. b decreased by one third. c decreased by exactly one half. d stayed constant. e decreased by less than one third.
Topic: Cost Minimization Correct Responses: 0 Correct Di culty: 0 Discrimination Index: 0
1 2 1=2 1
20.21 A competitive rm with output y has a production function, y = 2x +x where x and
x2 are inputs used in production. The rm produces output minimizing cost. With input prices w1 and w2 ; which of the following is true? a The rm has L shaped isoquants. b The rm must use the cheaper input. c The rm must use only input x1 if w1 2w2. d The technology has increasing returns to scale. e More than one of the above is true.
MULTIPLE CHOICE
Topic: Cost Minimization Correct Responses: 39 Correct Di culty: 0 Discrimination Index: 32
1 2 1 2
369
20.22 Suppose that the production function is fx ; x = minfx ; 2x g:5. Then:
a there are constant returns to scale. b the cost function is a min function. c if the price of x1 is more than twice the price of x2 ; only x2 is used in production. d a cost minimizing rm producing 5 units of output will use 25 units of x1 and some x2 . e the cost function is a linear function of output.
Topic: Cost Minimization Correct Responses: 30 Correct Di culty: 2 Discrimination Index: 55
1 2 3 4 1 2 3 4
20.23 If the production function is given by fx ; x ; x ; x = minfx ; x g + minfx ; x g and the
prices of inputs x1; x2; x3; x4 are 2; 1; 5; 3; the minimum cost of producing one unit of output is closest to:
a 1. b 3. c 4. d 8. e 11.
Topic: Cost Minimization Correct Responses: 51 Correct Di culty: 2 Discrimination Index: 21
20.24 Two rms, Wickedly E cient Widgets and Wildy Nepotistic Widgets both produce wid-
gets, using the same production function y = K 1=2L1=2 where K is the amount of labor used and L is the amount of capital used. Each company can hire labor at $1 per unit of labor and capital at $9 per unit. Each company produces 90 per week. WEW chooses its input combinations to produce in the cheapest way possible. Although it produces the same output per week as WEW, WNW is required by its dotty CEO to use twice as much labor as WEW. How much higher are WNW's total costs per week than WEW's?
a $135 b $270 c $275 d $67.50 e $132
CHAPTER 20 Cost Minimization
Topic: Cost Minimization Correct Responses: 51 Correct Di culty: 2 Discrimination Index: 21
370
20.25 Two rms, Wickedly E cient Widgets and Wildy Nepotistic Widgets both produce wid-
gets, using the same production function y = K 1=2L1=2 where K is the amount of labor used and L is the amount of capital used. Each company can hire labor at $1 per unit of labor and capital at $4 per unit. Each company produces 40 per week. WEW chooses its input combinations to produce in the cheapest way possible. Although it produces the same output per week as WEW, WNW is required by its dotty CEO to use twice as much labor as WEW. How much higher are WNW's total costs per week than WEW's?
a $40 b $80 c $85 d $20 e $37
Topic: Cost Minimization Correct Responses: 89 Correct
Di culty: 2 Discrimination Index: 15
20.26 A new metal alloy is discovered that uses copper and zinc in xed proportions where each
unit of the alloy requires 5 units of zinc and 5 units of copper. If no other inputs are required, if the price of zinc is 3 per unit, and the price of copper is 4 per unit and if total output is 2,000 units, what is the average cost per unit of output?
a 0.60 b 2.40 c 35 d 38 e 42
MULTIPLE CHOICE
Topic: Cost Minimization Correct Responses: 89 Correct Di culty: 2 Discrimination Index: 15
371
20.27 A new metal alloy is discovered that uses copper and zinc in xed proportions where each
unit of the alloy requires 2 units of zinc and 5 units of copper. If no other inputs are required, if the price of zinc is 2 per unit, and the price of copper is 5 per unit and if total output is 2,000 units, what is the average cost per unit of output?
a 1 b 4 c 29 d 31 e 36
Topic: Cost Minimization Correct Responses: 78 Correct
Di culty: 0 Discrimination Index: 21
20.28 The production function is fL; M = 2L M
1=2 1=2 where L is the number of units of labor and M is the number of machines. If the amounts of both factors can be varied, and if the cost of labor is $16 per unit and the cost of using machines is $49 per machine, then the total cost of producing 12 units of output is:
a 336. b 390. c 192. d 672. e 168.
CHAPTER 20 Cost Minimization
Topic: Cost Minimization Correct Responses: 78 Correct Di culty: 0 Discrimination Index: 21
1=2 1=2
372
20.29 The production function is fL; M = 4L M
where L is the number of units of labor and M is the number of machines. If the amounts of both factors can be varied, and if the cost of labor is $25 per unit and the cost of using machines is $16 per machine, then the total cost of producing 16 units of output is:
a 160. b 328. c 256. d 640. e 80.
Topic: Cost Minimization Correct Responses: 22 Correct
Di culty: 2 Discrimination Index: 27
20.30 Dou elberry 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 are produced using ounces of seeds, S; and hours labor, L; according to a production function B = S 1=2 L1=2. Gallons of Juice, J; are made from baskets of berries and hours of labor according to the production function J = minfB; Lg. If seeds cost 9 per ounce and labor costs 1 per hour, what is the cost of producing each gallon of dou elberry juice?
a 14 b 6 c 3 d 7 e Since there are not constant returns to scale, the cost per gallon depends on the number of gallons produced.
MULTIPLE CHOICE
Topic: Cost Minimization Correct Responses: 22 Correct Di culty: 2 Discrimination Index: 27
373
20.31 Dou elberry 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 are produced using ounces of seeds, S; and hours labor, L; according to a production function B = S 1=2 L1=2. Gallons of Juice, J; are made from baskets of berries and hours of labor according to the production function J = minfB; Lg. If seeds cost 4 per ounce and labor costs 4 per hour, what is the cost of producing each gallon of dou elberry juice?
a 24 b 8 c 4 d 12 e Since there are not constant returns to scale, the cost per gallon depends on the number of gallons produced.
Topic: Cost Minimization Correct Responses: 0 Correct 1
Di culty: 0 Discrimination Index: 0
2
20.32 Nadine has a production function 4x + x . If the factor prices are 12 for factor 1 and 2 for
factor 2, how much will it cost her to produce 60 units of output?
a 3,000 b 120 c 180 d 1,590 e 150
CHAPTER 20 Cost Minimization
Topic: Cost Minimization Correct Responses: 0 Correct 1
374
Di culty: 0 Discrimination Index: 0
2
20.33 Nadine has a production function 3x + x . If the factor prices are 3 for factor 1 and 5 for
factor 2, how much will it cost her to produce 20 units of output?
a 280 b 20 c 100 d 190 e 60
Topic: Cost Minimization Correct Responses: 76 Correct Di culty: 2 Discrimination Index: 60
1=2 1=2
20.34 The production function is fL; M = 4L M ; where L is the number of units of labor
and M is the number of machines used. If the cost of labor is $36 per unit and the cost of machines is $64 per unit, then the total cost of producing 6 units of output will be:
a 144. b 300. c 216. d 288. e None of the above.
Topic: Cost Minimization Correct Responses: 76 Correct Di culty: 2 Discrimination Index: 60
1=2 1=2
20.35 The production function is fL; M = 4L M ; where L is the number of units of labor
and M is the number of machines used. If the cost of labor is $25 per unit and the cost of machines is $64 per unit, then the total cost of producing 6 units of output will be:
a 120. b 267. c 150. d 240. e None of the above.
MULTIPLE CHOICE
Topic: Cost Minimization Correct Responses: 82 Correct Di culty: 2 Discrimination Index: 40
1=2 1=2
375
20.36 In the short run, a rm which has production function FL; M = 4L M
a 700. b 400. c 1,000. d 700. e 350.
must use 25 machines. If the cost of labor is 10 per unit and the cost of machines is 4 per unit, the short run total cost of producing 100 units of output is:
Topic: Cost Minimization Correct Responses: 82 Correct
Di culty: 2 Discrimination Index: 40
20.37 In the short run, a rm which has production function FL; M = 4L M
a 1,056. b 660. c 1,452. d 2,752. e 1,376.
1=2 1=2 must use 9 machines. If the cost of labor is 11 per unit and the cost of machines is 5 per unit, the short run total cost of producing 132 units of output is:
CHAPTER 20 Cost Minimization
Topic: Cost Minimization Correct Responses: 0 Correct Di culty: 0 Discrimination Index: 0
376
20.38
Al's production function for deer is fx1 ; x2 = 2x1 + x21=2 where x1 is the amount of plastic and x2 is the amount of wood used. If the cost of plastic is $8 per unit and the cost of wood is $2 per unit, then the cost of producing 6 deer is:
a 72. b 108. c 144. d 12. e 24.
Topic: Cost Minimization Correct Responses: 0 Correct
Di culty: 0 Discrimination Index: 0
20.39
Al's production function for deer is fx1 ; x2 = 2x1 + x21=2 where x1 is the amount of plastic and x2 is the amount of wood used. If the cost of plastic is $10 per unit and the cost of wood is $2 per unit, then the cost of producing 9 deer is:
a 162. b 198. c 405. d 18. e 45.
MULTIPLE CHOICE
Topic: Cost Minimization Correct Responses: 55 Correct 1 2
377
Di culty: 0 Discrimination Index: 39
3 4 1 2 3 4
20.40 A rm has production function fx ; x ; x ; x = minfx ; x g + minfx ; x g. This rm faces
competitive factor markets where the prices for the four factors are w1 = 3; w2 = 8; w3 = 3 and w4 = 7. The rm must use at least 20 units of factor 2. The cost of producing 100 units in the cheapest possible way is:
a 1,500 b 600 c 1,180 d 1,020 e 300
Topic: Cost Minimization Correct Responses: 55 Correct 1 2
Di culty: 0 Discrimination Index: 39
3 4 1 2 3 4
20.41 A rm has production function fx ; x ; x ; x = minfx ; x g + minfx ; x g. This rm faces
competitive factor markets where the prices for the four factors are w1 = 6; w2 = 8; w3 = 6 and w4 = 3. The rm must use at least 20 units of factor 2. The cost of producing 100 units in the cheapest possible way is:
a 1,400 b 900 c 1,160 d 1,000 e 300
CHAPTER 20 Cost Minimization
Topic: Cost Minimization Correct Responses: 47 Correct Di culty: 0 Discrimination Index: 31
378
20.42 The law rm of Dewey, Cheatham, and Howe specializes in accident injury claims. The
rm charges its clients 25 of any damage award given. The only cost to the rm of producing an accident injury claim is the time spent by a junior partner working on the case. Junior partners are paid $100 per hour for this drudgery. If the rm is suing for damages of $250,000 and if its chances of winning a case are 1 , 1=25h; where h is the number of hours spent working on the case, then to maximize its pro ts, how many hours should it spend working on the case?
a 15 b 25 c 5 d 7.50 e None of the above.
Topic: Cost Minimization Correct Responses: 47 Correct
Di culty: 0 Discrimination Index: 31
20.43 The law rm of Dewey, Cheatham, and Howe specializes in accident injury claims. The
rm charges its clients 25 of any damage award given. The only cost to the rm of producing an accident injury claim is the time spent by a junior partner working on the case. Junior partners are paid $100 per hour for this drudgery. If the rm is suing for damages of $490,000 and if its chances of winning a case are 1 , 1=25h; where h is the number of hours spent working on the case, then to maximize its pro ts, how many hours should it spend working on the case?
a 21 b 35 c 7 d 10.50 e None of the above.
MULTIPLE CHOICE
Topic: Cost Minimization Correct Responses: 0 Correct Di culty: 3 Discrimination Index: 0
1 2 3 4 1 2 3 4
379
20.44 A rm with the production function fx ; x ; x ; x = minfx ; x ; x ; x g faces input prices
2. The lowest cost at which it can produce 100 units of output is:
a 900. b 540 c 1,500 d 860 e 500
w1 = 1; w2 = 5; w3 = 5; w4 = 4 for factors 1,2,3 and 4. The rm must use at least 10 units of factor
Topic: Cost Minimization Correct Responses: 0 Correct
Di culty: 3 Discrimination Index: 0
1 2 3 4 1 2 3 4
20.45 A rm with the production function fx ; x ; x ; x = minfx ; x ; x ; x g faces input prices
2. The lowest cost at which it can produce 100 units of output is:
a 800. b 715 c 1,700 d 600 e 700
w1 = 5; w2 = 6; w3 = 4; w4 = 2 for factors 1,2,3 and 4. The rm must use at least 15 units of factor
Topic: Cost Minimization Correct Responses: 0 Correct
Di culty: 0 Discrimination Index: 0
20.46 If output is produced according to Q = 4L + 6K; the price of K is $12, and the price of L
is $4, then the cost minimizing combination of K and L capable of producing 72 units of output is
a L = 9 and K = 6. b L = 4 and K = 12. c L = 18 and K = 12. d L = 0 and K = 12. e L = 18 and K = 0.
CHAPTER 20 Cost Minimization
Topic: Cost Minimization Correct Responses: 0 Correct Di culty: 0 Discrimination Index: 0
380
20.47 If output is produced according to Q = 4L + 6K; the price of K is $12, and the price of L is
$12, then the cost minimizing combination of K and L capable of producing 24 units of output is
a L = 3 and K = 2. b L = 12 and K = 12. c L = 6 and K = 4. d L = 0 and K = 4. e L = 6 and K = 0.
Topic: Cost Minimization Correct Responses: 0 Correct
Di culty: 0 Discrimination Index: 0
20.48 If output is produced according to Q = 4LK; the price of K is $10, and the price of L is
$10, then the cost minimizing combination of K and L capable of producing 16 units of output is
a L = 4 and K = 1. b L = 2 and K = 2. c L = 1 and K = 1. d L = 8 and K = 8. e L = 1 and K = 4.
Topic: Cost Minimization Correct Responses: 0 Correct
Di culty: 0 Discrimination Index: 0
20.49 If output is produced according to Q = 4LK; the price of K is $10, and the price of L is
$40, then the cost minimizing combination of K and L capable of producing 64 units of output is
a L = 16 and K = 1. b L = 2 and K = 8. c L = 2 and K = 2. d L = 32 and K = 32. e L = 1 and K = 16.
MULTIPLE CHOICE
Topic: Cost Minimization Correct Responses: 0 Correct Di culty: 0 Discrimination Index: 0
381
20.50 If it costs $30 to set up and later clean a bagel press and bagels cost $1 per week, per
a Once. b Twice. c 3 times. d 4 times. e 5 times.
bagel, to store, how many times should the bagel press be run each week to produce 540 bagels a week to be sold continuously?
Topic: Cost Minimization Correct Responses: 0 Correct
Di culty: 0 Discrimination Index: 0
20.51 If it costs $10 to set up and later clean a bagel press and bagels cost $1 per week, per
a Once. b Twice. c 3 times. d 4 times. e 5 times.
bagel, to store, how many times should the bagel press be run each week to produce 500 bagels a week to be sold continuously?
Topic: Cost Minimization Correct Responses: 0 Correct
Di culty: 0 Discrimination Index: 0
20.52 A politician facing re-election can win votes according to the following process:
V = 500S 0:30M 0:50 where S is hours of making campaign speeches, and M is the number of yers mailed. If making
speeches costs $10 per hour, mailing yers costs $0.50 per yer, and $8,000 are available to spend on the campaign. Assuming the politician wants to maximize votes, how should the budget be allocated between speeches and mailing yers?
a No speeches should be given, 16,000 yers should be mailed. b 400 hours of speeches should be given, 8,000 yers should be mailed out. c 300 hours of speeches should be given, 10,000 yers should be mailed out. d 3,000 hours of speeches should be given, 5,000 yers should be mailed out. e 800 hours speeches should be given, no yers should be mailed out.
CHAPTER 20 Cost Minimization
Topic: Cost Minimization Correct Responses: 0 Correct Di culty: 0 Discrimination Index: 0
382
20.53 A politician facing re-election can win votes according to the following process:
V = 500S 0:30M 0:60 where S is hours of making campaign speeches, and M is the number of yers mailed. If making
speeches costs $10 per hour, mailing yers costs $0.50 per yer, and $3,000 are available to spend on the campaign. Assuming the politician wants to maximize votes, how should the budget be allocated between speeches and mailing yers?
a No speeches should be given, 6,000 yers should be mailed. b 150 hours of speeches should be given, 3,000 yers should be mailed out. c 100 hours of speeches should be given, 4,000 yers should be mailed out. d 1,000 hours of speeches should be given, 2,000 yers should be mailed out. e 300 hours speeches should be given, no yers should be mailed out.
Topic: Cost Minimization Correct Responses: 0 Correct
Di culty: 0 Discrimination Index: 0
20.54 The Chrysler Belvedere Truck Plant is attempting to minimize production costs. Over one
a Once. b Twice. c Three times. d Four times. e Five times.
month, 3,200 fenders are needed on the production line, which runs continuously. If it costs $100 to set up the stamping press to produce fenders, and $1 per month to store produced fenders, how many times should the stamping press be run per month?
MULTIPLE CHOICE
Topic: Cost Minimization Correct Responses: 0 Correct Di culty: 0 Discrimination Index: 0
383
20.55 The Chrysler Belvedere Truck Plant is attempting to minimize production costs. Over one
a Once. b Twice. c Three times. d Four times. e Five times.
month, 1,600 fenders are needed on the production line, which runs continuously. If it costs $200 to set up the stamping press to produce fenders, and $1 per month to store produced fenders, how many times should the stamping press be run per month?
Topic: Cost Minimization Correct Responses: 0 Correct
Di culty: 0 Discrimination Index: 0
20.56 A lobbyist in our nation's capitol must buy 250 votes in the House of Representatives
and Senate to win passage of a bill to add Millard Fillmore's face to Mount Rushmore. Votes in Congress can be purchased according to the following process:
V = CM=100; 000 where C is the number of dollars contributed to campaign funds, and M is the number of three-
martini lunches. If three-martini lunches cost $64 each, what is the smallest expenditure the lobbyist could make to insure Mr. Fillmore's proper place in history?
a $80,000 b $390,625 c $25,000,064 d $325,000 e $25,000,000
CHAPTER 20 Cost Minimization
Topic: Cost Minimization Correct Responses: 0 Correct Di culty: 0 Discrimination Index: 0
384
20.57 A lobbyist in our nation's capitol must buy 250 votes in the House of Representatives
and Senate to win passage of a bill to add Millard Fillmore's face to Mount Rushmore. Votes in Congress can be purchased according to the following process:
V = CM=100; 000 where C is the number of dollars contributed to campaign funds, and M is the number of three-
martini lunches. If three-martini lunches cost $16 each, what is the smallest expenditure the lobbyist could make to insure Mr. Fillmore's proper place in history?
a $40,000 b $1,562,500 c $25,000,016 d $85,000 e $25,000,000
Topic: Cost Minimization Correct Responses: 0 Correct
Di culty: 0 Discrimination Index: 0
20.58
The editors at Snoozeweek, a news magazine, constantly alter the proportion of celebrity photographs and mundane news stories so as to maximize the number of copies sold. A statistical consultant has estimated sales to be S = 1; 000C 0:50N 0:50 where C is the number of celebrity photographs and N is column inches of news stories. If the editors only have $12,000 to spend on each edition with celebrity photos costing $1,000 each and news stories costing $10 per column inch, what should the editors do?
a Purchase 8 celebrity photos and 400 column inches of news stories. b Purchase 6 celebrity photos and 600 column inches of news stories. c Purchase 2 celebrity photos and 1,000 column inches of news stories. d Purchase 4 celebrity photos and 800 column inches of news stories. e Purchase 10 celebrity photos and 200 column inches of news stories.
MULTIPLE CHOICE
Topic: Cost Minimization Correct Responses: 0 Correct Di culty: 0 Discrimination Index: 0
385
20.59
The editors at Snoozeweek, a news magazine, constantly alter the proportion of celebrity photographs and mundane news stories so as to maximize the number of copies sold. A statistical consultant has estimated sales to be S = 1; 000C 0:50N 0:50 where C is the number of celebrity photographs and N is column inches of news stories. If the editors only have $12,000 to spend on each edition with celebrity photos costing $1,000 each and news stories costing $10 per column inch, what should the editors do?
a Purchase 8 celebrity photos and 400 column inches of news stories. b Purchase 6 celebrity photos and 600 column inches of news stories. c Purchase 2 celebrity photos and 1,000 column inches of news stories. d Purchase 3 celebrity photos and 900 column inches of news stories. e Purchase 5 celebrity photos and 700 column inches of news stories.
Topic: Cost Minimization Correct Responses: 0 Correct
Di culty: 0 Discrimination Index: 0
20.60 Vincent Smudge, an avant-guard New York artist, creates living sculpture" by smearing
paint slowly all over himself. S hours of living sculpture" can be created by
S = minL; T=5 where L are hours of labor by Mr. Smudge, and T are tubes of water soluble paint. Since Mr.
Smudge is a highly renowned artist, his labor costs $50 per hour, while paint costs $40 per tube. Using a $3,000 grant from the National Endowment for the Arts, how many hours of living sculpture" can Mr. Smudge create?
a 33.33 b 51.72 c 12 d 500 e 2,500
CHAPTER 20 Cost Minimization
Topic: Cost Minimization Correct Responses: 0 Correct Di culty: 0 Discrimination Index: 0
386
20.61 Vincent Smudge, an avant-guard New York artist, creates living sculpture" by smearing
paint slowly all over himself. S hours of living sculpture" can be created by
S = minL; T=4 where L are hours of labor by Mr. Smudge, and T are tubes of water soluble paint. Since Mr.
Smudge is a highly renowned artist, his labor costs $200 per hour, while paint costs $30 per tube. Using a $2,000 grant from the National Endowment for the Arts, how many hours of living sculpture" can Mr. Smudge create?
a 8.70 b 9.64 c 6.25 d 400 e 1,600
Topic: Cost Minimization Correct Responses: 0 Correct
Di culty: 0 Discrimination Index: 0
20.62 Using existing plant and equipment, Priceless Moments Figurines can be manufactured
using plastic, clay, or any combination of these materials. A gurine can be manufactured by $3 per pound. What would be the lowest cost of producing 10,000 gurines?
a $13,333.33 b $15,000 c $14,166.67 d $3,333.33 e $10,000 F = 3P + 2C where P are pounds of plastic, and C are pounds of clay. Plastic costs $4 per pound and clay costs
MULTIPLE CHOICE
Topic: Cost Minimization Correct Responses: 0 Correct Di culty: 0 Discrimination Index: 0
387
20.63 Using existing plant and equipment, Priceless Moments Figurines can be manufactured
using plastic, clay, or any combination of these materials. A gurine can be manufactured by $4 per pound. What would be the lowest cost of producing 10,000 gurines?
a $6,666.67 b $20,000 c $13,333.33 d $3,333.33 e $10,000 F = 3P + 2C where P are pounds of plastic, and C are pounds of clay. Plastic costs $2 per pound and clay costs
Topic: Cost Minimization Correct Responses: 0 Correct
Di culty: 0 Discrimination Index: 0
20.64 Rocco's Pasta Bar makes manacotti according to an old family recipe where
M = min5=4 C; 5P M; C; and P are pounds of manicotti, cheese, and pasta respectively. If cheese costs $2 per pound, a 30. b 48. c 78 d 48.75 e 30
and pasta costs $5 per pound, how much would it cost to produce 30 pounds of manicotti in the cheapest way possible?
CHAPTER 20 Cost Minimization
Topic: Cost Minimization Correct Responses: 0 Correct Di culty: 0 Discrimination Index: 0
388
20.65 Rocco's Pasta Bar makes manacotti according to an old family recipe where
M = min3=2 C; 3P M; C; and P are pounds of manicotti, cheese, and pasta respectively. If cheese costs $5 per pound, a 20. b 100. c 120 d 54 e 30
and pasta costs $2 per pound, how much would it cost to produce 30 pounds of manicotti in the cheapest way possible?
Essay
Topic: Cost Minimization Correct Responses: 0
Cost Minimization
Di culty: 1 Discrimination Index: 0
20.1 A rm 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.
Answer: cw; r; y = w + ry2 .
Topic: Cost Minimization Correct Responses: 0 Di culty: 2 Discrimination Index: 0
1 2 1 2
20.2 The production function for good y is y = maxf10x ; 4x g where x and x are the amounts
of factors 1 and 2. Find the cost function for good y.
Answer: The cost function is minfp1y=10; p2y=4g.
Topic: Cost Minimization Correct Responses: 0 Di culty: 2 Discrimination Index: 0
1 2 2 1
20.3 If the production function for tuna casseroles is minfx ; x g; where x is the amount of factor
1 and x2 is the amount of factor x2; nd the cost function for tuna casseroles.
Answer: cw1; w2 = p1x + p2y1=2 .
Topic: Cost Minimization Correct Responses: 0 Di culty: 2 Discrimination Index: 0
20.4 The cost function, cw1; w2; y; of a rm, gives the cost of producing y units of output
when the wage of factor 1 is w1 and the wage of factor 2 is w2. Find the cost functions for the following rms: a a rm with production function fx1; x2 = minf2x1; 3x2g; b a rm with production function fx1; x2 = 2x1+3x2; and c a rm with production function fx1; x2 = maxf2x1; 3x2g.
Answer: aw1=2 + w2=3 bminfw1=2; w2=3g cminfw1=2; w2=3g
Chapter 21
True-False
Topic: Cost Curves Correct Responses: 0 Correct Di culty: 1 Discrimination Index: 0
Cost Curves
21.1 The average variable cost curve must always be U shaped.
Topic: Cost Curves Correct Responses: 82 Correct Di culty: 1 Discrimination Index: 34
21.2 The marginal cost curve passes through the minimum point of the average xed cost curve.
Topic: Cost Curves Correct Responses: 82 Correct Di culty: 1 Discrimination Index: 26
21.3 If the average cost curve is U shaped, then the marginal cost curve must cross the average
cost curve at the bottom of the U.
Topic: Cost Curves Correct Responses: 89 Correct Di culty: 1 Discrimination Index: 25
21.4 The cost function Cy = 10 + 3y has marginal cost less than average cost for all levels of
output.
Topic: Cost Curves Correct Responses: 92 Correct Di culty: 1 Discrimination Index: 10
2
21.5 The cost function Cy = 100 + 3y has marginal cost less than average cost for all positive
levels of output.
Topic: Cost Curves Correct Responses: 78 Correct Di culty: 1 Discrimination Index: 28
1 2 1=2 1 1=2 2
21.6 If a competitive rm uses two inputs and it has the production function Fx ; x = x +x ;
then its marginal cost curve is horizontal.
TRUE-FALSE
Topic: Cost Curves Correct Responses: 13 Correct Di culty: 2 Discrimination Index: 20
391
21.7 Average cost can never rise while marginal costs are declining.
Topic: Cost Curves Correct Responses: 89 Correct Di culty: 1 Discrimination Index: 21
21.8 The area under the marginal cost curve measures total xed costs.
Topic: Cost Curves Correct Responses: 80 Correct Di culty: 1 Discrimination Index: 23
21.9 If marginal costs increase as output increases, then the average xed cost curve will be
U-shaped.
Topic: Cost Curves Correct Responses: 74 Correct Di culty: 1 Discrimination Index: 27
21.10 Average xed cost curves will be U-shaped if the marginal cost curve is upward-sloping.
Multiple Choice
Topic: Cost Curves Correct Responses: 94 Correct Di culty: 1 Discrimination Index: 13
Cost Curves
21.1 The marginal cost curve of a rm is MC = 8y. Total variable costs to produce 7 units of
output are:
a 112. b 196. c 56. d 196. e 22.
Topic: Cost Curves Correct Responses: 94 Correct
Di culty: 1 Discrimination Index: 13
21.2 The marginal cost curve of a rm is MC = 6y. Total variable costs to produce 8 units of
output are:
a 96. b 192. c 64. d 256. e 22.
Topic: Cost Curves Correct Responses: 75 Correct
Di culty: 1 Discrimination Index: 18
21.3 The following relationship must hold between the average total cost ATC curve and the
marginal cost curve MC:
a if MC is rising, ATC must be rising. b if MC is rising, ATC must be greater than MC. c if MC is rising, ATC must be less than MC. d if ATC is rising, MC must be greater than ATC. e if ATC is rising, MC must be less than ATC.
MULTIPLE CHOICE
Topic: Cost Curves Correct Responses: 94 Correct Di culty: 1 Discrimination Index: 20
2
393
21.4 A goatherd has the cost function cy = 5y where y is the number of tubs of goat cheese
a the square root of 100 b 25 c 10 d the square root of 20 e 5
Topic: Cost Curves Correct Responses: 94 Correct Di culty: 1 Discrimination Index: 20
2
she makes per month. She faces a competitive market for goat cheese, with a price of $100 a tub. How many tubs should she produce per month?
21.5 A goatherd has the cost function cy = 3y where y is the number of tubs of goat cheese
a the square root of 42 b 9 c 7 d the square root of 14 e 3.50
Topic: Cost Curves Correct Responses: 72 Correct Di culty: 2 Discrimination Index: 17
she makes per month. She faces a competitive market for goat cheese, with a price of $42 a tub. How many tubs should she produce per month?
21.6 A rm has a short run cost function cy = 3y + 11 for y 0 and c0 = 7. The rm's
quasi- xed costs are:
a 7. b 11. c 4. d 7.50. e impossible to determine from this information.
CHAPTER 21 Cost Curves
Topic: Cost Curves Correct Responses: 72 Correct Di culty: 2 Discrimination Index: 17
394
21.7 A rm has a short run cost function cy = 3y + 16 for y 0 and c0 = 6. The rm's
quasi- xed costs are:
a 6. b 16. c 10. d 13. e impossible to determine from this information.
Topic: Cost Curves Correct Responses: 70 Correct
Di culty: 3 Discrimination Index: 37
3 2
21.8 A competitive rm has the short run cost function cy = 3y , 36y + 128y + 35. The rm
will produce a positive amount in the short run if and only if the price is greater than:
a 10. b 40. c 20. d 23. e 19.
Topic: Cost Curves Correct Responses: 70 Correct
Di culty: 3 Discrimination Index: 37
3 2
21.9 A competitive rm has the short run cost function cy = 2y , 16y + 96y + 50. The rm
will produce a positive amount in the short run if and only if the price is greater than:
a 32. b 128. c 64. d 67. e 63.
MULTIPLE CHOICE
Topic: Cost Curves Correct Responses: 0 Correct Di culty: 0 Discrimination Index: 0
395
21.10 The production function of a competitive rm is described by the equation y = 5x x .
1=2 1=2 1 2
The factor prices are p1 = 1 and p2 = 4 and the rm can hire as much of either factor it wants at these prices. The rm's marginal cost is:
a constant and equal to 0.80. b constant and equal to 3. c increasing. d decreasing. e none of the above.
Topic: Cost Curves Correct Responses: 0 Correct Di culty: 0 Discrimination Index: 0
1=2 1=2 1 2
21.11 The production function of a competitive rm is described by the equation y = 6x x .
a constant and equal to 0.67. b constant and equal to 3. c increasing. d decreasing. e none of the above.
Topic: Cost Curves Correct Responses: 90 Correct Di culty: 2 Discrimination Index: 18
2
The factor prices are p1 = 1 and p2 = 4 and the rm can hire as much of either factor it wants at these prices. The rm's marginal cost is:
21.12 A rm has the short run total cost function cy = 9y + 441. At what quantity of output
is short run average cost minimized?
a 7 b 3 c 49 d 0.43 e None of the above.
CHAPTER 21 Cost Curves
Topic: Cost Curves Correct Responses: 90 Correct Di culty: 2 Discrimination Index: 18
2
396
21.13 A rm has the short run total cost function cy = 4y + 100. At what quantity of output
is short run average cost minimized?
a 5 b 2 c 25 d 0.40 e None of the above.
Topic: Cost Curves Correct Responses: 31 Correct Di culty: 2 Discrimination Index: 40
1=2 1 2
21.14 A rm has the production function Q = X X . In the short run it must use exactly 20
units of factor 2. The price of factor 1 is $60 per unit and the price of factor 2 is $2 per unit. The rm's short run marginal cost function is:
a MCQ = 6Q=20. b MCQ = 40Q,1=2. c MCQ = 40 + 60Q2. d MCQ = 2Q. e MCQ = 20Q,1=2.
Topic: Cost Curves Correct Responses: 31 Correct Di culty: 2 Discrimination Index: 40
1=2 1 2
21.15 A rm has the production function Q = X X . In the short run it must use exactly 10
units of factor 2. The price of factor 1 is $40 per unit and the price of factor 2 is $6 per unit. The rm's short run marginal cost function is:
a MCQ = 8Q=10. b MCQ = 60Q,1=2. c MCQ = 60 + 40Q2. d MCQ = 6Q. e MCQ = 10Q,1=2.
MULTIPLE CHOICE
Topic: Cost Curves Correct Responses: 82 Correct Di culty: 1 Discrimination Index: 36
2
397
21.16 Mr. Dent Carr's total costs are 2s + 75s + 100. If he repairs 25 cars, his average variable
costs will be:
a 125. b 129. c 175. d 250. e 87.50.
Topic: Cost Curves Correct Responses: 82 Correct Di culty: 1 Discrimination Index: 36
2
21.17 Mr. Dent Carr's total costs are 4s + 100s + 60. If he repairs 20 cars, his average variable
costs will be:
a 180. b 183. c 260. d 360. e 130.
Topic: Cost Curves Correct Responses: 0 Correct Di culty: 0 Discrimination Index: 0
21.18 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 $350 per year to own and if with this smasher he could dispose of cars at a cost of $0.67 per car, it would be worthwhile for him to buy this high-quality smasher if
a he plans to dispose of at least 450 cars per year. b he plans to dispose of no more than 225 cars per year. c he plans to dispose of at least 460 cars per year. d he plans to dispose of no more than 450 cars per year. e he plans to dispose of at least 225 cars per year.
CHAPTER 21 Cost Curves
Topic: Cost Curves Correct Responses: 0 Correct Di culty: 0 Discrimination Index: 0
398
21.19 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 $450 per year to own and if with this smasher he could dispose of cars at a cost of $0.67 per car, it would be worthwhile for him to buy this high-quality smasher if
a he plans to dispose of at least 750 cars per year. b he plans to dispose of no more than 375 cars per year. c he plans to dispose of at least 760 cars per year. d he plans to dispose of no more than 750 cars per year. e he plans to dispose of at least 375 cars per year.
Topic: Cost Curves Correct Responses: 75 Correct
Di culty: 0 Discrimination Index: 41
2
21.20 Mary Magnolia from your workbook has variable costs equal to y =F where y is the number
of bouquets she sells per month and where F is the number of square feet of space in her shop. If Mary has signed a lease for a shop with 1,200 square feet and if she is not able to get out of the lease or to expand her store in the short run, and if the price of a bouquet is $ 4 per unit, how many bouquets per month should she sell in the short run?
a 1,200 b 600 c 2,400 d 3,600 e 2,640
MULTIPLE CHOICE
Topic: Cost Curves Correct Responses: 75 Correct Di culty: 0 Discrimination Index: 41
2
399
21.21 Mary Magnolia from your workbook has variable costs equal to y =F where y is the number
of bouquets she sells per month and where F is the number of square feet of space in her shop. If Mary has signed a lease for a shop with 800 square feet and if she is not able to get out of the lease or to expand her store in the short run, and if the price of a bouquet is $ 5 per unit, how many bouquets per month should she sell in the short run?
a 800 b 400 c 2,000 d 3,000 e 2,200
Topic: Cost Curves Correct Responses: 0 Correct
Di culty: 0 Discrimination Index: 0
1=2 3=4
21.22 Touchie McFeelie from your workbook has a production function :1J L ; where J is the
number of old jokes used and L is the number of hours of cartoonists' labor. Touchie is stuck with 900 old jokes for which he paid 4 dollars each. If the hourly wage rate for cartoonists is 3, then the total cost of producing 24 comics books is:
a 3,648. b 1,824. c 5,472. d 3,672. e 912.
CHAPTER 21 Cost Curves
Topic: Cost Curves Correct Responses: 0 Correct Di culty: 0 Discrimination Index: 0
1=2 3=4
400
21.23 Touchie McFeelie from your workbook has a production function :1J L ; where J is the
number of old jokes used and L is the number of hours of cartoonists' labor. Touchie is stuck with 1,600 old jokes for which he paid 3 dollars each. If the hourly wage rate for cartoonists is 4, then the total cost of producing 108 comics books is:
a 5,124. b 2,562. c 7,686. d 5,232. e 1,281.
Topic: Cost Curves Correct Responses: 0 Correct
Di culty: 0 Discrimination Index: 0
1=2 3=4
21.24 Touchie McFeelie's production function for comic books is :1J L ; where J is the number of jokes and L is the number of hours of cartoonists labor that he uses. If Touchie can vary both jokes and cartoonists' labor and if old jokes cost $ 4 each and cartoonists' labor costs $36 per hour, then the cheapest way to produce comics books requires using jokes and labor in the ratio
J=L = a 9. b 12. c 3. d 2=3. e 6.
MULTIPLE CHOICE
Topic: Cost Curves Correct Responses: 0 Correct Di culty: 0 Discrimination Index: 0
1=2 3=4
401
21.25 Touchie McFeelie's production function for comic books is :1J L ; where J is the number of jokes and L is the number of hours of cartoonists labor that he uses. If Touchie can vary both jokes and cartoonists' labor and if old jokes cost $ 1 each and cartoonists' labor costs $6 per hour, then the cheapest way to produce comics books requires using jokes and labor in the ratio
J=L = a 6. b 8. c 2. d 2=3. e 4.
Topic: Cost Curves Correct Responses: 0 Correct
Di culty: 0 Discrimination Index: 0
1=2
21.26 A rm's production function is given by q = minfM; L g; where M is the number of machines and L is the amount of labor that it uses. The price of labor is 2 and the price of machines is 3 per unit. The rm's long run marginal cost curve is:
a a straight line with slope 4. b upward-sloping and gets atter as Q increases. c upward-sloping and gets steeper as Q increases. d a straight line with slope 2. e a straight line with slope 3.
CHAPTER 21 Cost Curves
Topic: Cost Curves Correct Responses: 0 Correct Di culty: 0 Discrimination Index: 0
1=2
402
21.27 A rm's production function is given by q = minfM; L g; where M is the number of machines and L is the amount of labor that it uses. The price of labor is 4 and the price of machines is 2 per unit. The rm's long run marginal cost curve is:
a a straight line with slope 8. b upward-sloping and gets atter as Q increases. c upward-sloping and gets steeper as Q increases. d a straight line with slope 4. e a straight line with slope 2.
Topic: Cost Curves Correct Responses: 0 Correct
Di culty: 0 Discrimination Index: 0
21.28
In the reclining chair industry which is perfectly competitive, two di erent technologies of production exist. These technologies exhibit the following total cost functions: C1Q = 500 + 260Q , 20Q2 + Q3 C2Q = 1; 000 + 145Q , 10Q2 + Q3 Due to foreign competition, the market price of reclining chairs has fallen to 110. In the short run,
a rms using technology 1 will remain in business and rms using technology 2 will remain in business. b rms using technology 1 will remain in business and rms using technology 2 will shut down. c rms using technology 1 will shut down and rms using technology 2 will remain in business. d rms using technology 1 will shut down and rms using technology 2 will shut down. e more information is needed to make a judgment.
MULTIPLE CHOICE
Topic: Cost Curves Correct Responses: 0 Correct Di culty: 0 Discrimination Index: 0
403
21.29
In the reclining chair industry which is perfectly competitive, two di erent technologies of production exist. These technologies exhibit the following total cost functions: C1Q = 1; 500 + 600Q , 40Q2 + Q3 C2Q = 200 + 205Q , 10Q2 + Q3 Due to foreign competition, the market price of reclining chairs has fallen to 190. In the short run,
a rms using technology 1 will remain in business and rms using technology 2 will remain in business. b rms using technology 1 will remain in business and rms using technology 2 will shut down. c rms using technology 1 will shut down and rms using technology 2 will remain in business. d rms using technology 1 will shut down and rms using technology 2 will shut down. e more information is needed to make a judgment.
Topic: Cost Curves Correct Responses: 0 Correct Di culty: 0 Discrimination Index: 0
2
21.30 A rm has the long run cost function CQ = 7Q + 252. In the long run, it will supply a
positive amount of output, so long as the price is greater than:
a 168 b 176 c 42 d 84 e 89
Topic: Cost Curves Correct Responses: 0 Correct Di culty: 0 Discrimination Index: 0
2
21.31 A rm has the long run cost function CQ = 5Q + 245. In the long run, it will supply a
positive amount of output, so long as the price is greater than:
a 140 b 148 c 35 d 70 e 75
CHAPTER 21 Cost Curves
Topic: Cost Curves Correct Responses: 0 Correct Di culty: 0 Discrimination Index: 0
404
21.32 The VCR manufacturing business is perfectly competitive. Suppose that currently, rms
which manufacture VCR's utilize either technology 1 or technology 2, whose cost functions are given below: TC1Q = 1; 060 , 60Q + Q2 TC2Q = 220 , 20Q + Q2 In the long run, assuming no new manufacturing technologies, what will happen in this industry?
a Firms utilizing technology 1 will stay in business, and rms utilizing technology 2 will also stay in business. b Firms utilizing technology 1 will stay in business, but rms utilizing technology 2 will shut down. c Firms utilizing technology 1 will shut down, but rms utilizing technology 2 will stay in business. d Firms utilizing technology 1 will shut down, and rms utilizing technology 2 will also shut down. e None of the above.
Topic: Cost Curves Correct Responses: 0 Correct
Di culty: 0 Discrimination Index: 0
21.33 The VCR manufacturing business is perfectly competitive. Suppose that currently, rms
which manufacture VCR's utilize either technology 1 or technology 2, whose cost functions are given below: TC1Q = 1; 060 , 60Q + Q2 TC2Q = 560 , 40Q + Q2 In the long run, assuming no new manufacturing technologies, what will happen in this industry?
a Firms utilizing technology 1 will stay in business, and rms utilizing technology 2 will also stay in business. b Firms utilizing technology 1 will stay in business, but rms utilizing technology 2 will shut down. c Firms utilizing technology 1 will shut down, but rms utilizing technology 2 will stay in business. d Firms utilizing technology 1 will shut down, and rms utilizing technology 2 will also shut down. e None of the above.
MULTIPLE CHOICE
Topic: Cost Curves Correct Responses: 0 Correct Di culty: 0 Discrimination Index: 0
405
21.34 The snow removal business in East Iceicle, Minnesota is a competitive industry. All snowplow operators have the cost function C = Q2 + 25; where Q is the number of driveways cleared. Demand for snow removal in the town is given by Qd = 120 , P. The long run equilibrium number of rms in this industry is
a 11 b 22 c 14 d 120 e 23
Topic: Cost Curves Correct Responses: 0 Correct Di culty: 0 Discrimination Index: 0
21.35 The snow removal business in East Iceicle, Minnesota is a competitive industry. All snowplow operators have the cost function C = Q2 + 16; where Q is the number of driveways cleared. Demand for snow removal in the town is given by Qd = 120 , P. The long run equilibrium number of rms in this industry is
a 14 b 28 c 22 d 120 e 29
Topic: Cost Curves Correct Responses: 0 Correct Di culty: 0 Discrimination Index: 0
21.36 Florence's Restaurant estimates that its total cost of providing Q meals per month is given
by TC = 4; 000 + 4Q. If Florence charges $10 per meal, what is its break-even level of output?
a 1,000 meals b 400 meals c 285.71 meals d 1,333.33 meals e 666.67 meals
CHAPTER 21 Cost Curves
Topic: Cost Curves Correct Responses: 0 Correct Di culty: 0 Discrimination Index: 0
406
21.37 Florence's Restaurant estimates that its total cost of providing Q meals per month is given
by TC = 5; 000 + 3Q. If Florence charges $10 per meal, what is its break-even level of output?
a 1,666.67 meals b 500 meals c 384.62 meals d 1,428.57 meals e 714.29 meals
Topic: Cost Curves Correct Responses: 0 Correct Di culty: 0 Discrimination Index: 0
2
21.38 If Green Acres Turf Farm's total cost of producing acres of sod is TC = 3Q + 20Q + 60;
the marginal cost of producing the 10th acre of sod is
a $60. b $20. c $50. d $80. e $110.
Topic: Cost Curves Correct Responses: 0 Correct Di culty: 0 Discrimination Index: 0
2
21.39 If Green Acres Turf Farm's total cost of producing acres of sod is TC = 3Q + 5Q + 70; the
marginal cost of producing the 10th acre of sod is
a $70. b $5. c $35. d $65. e $95.
Essay
Cost Curves
Di culty: 1 Discrimination Index: 0
Topic: Cost Curves Correct Responses: 0
21.1 Not long ago, the Canadian edition of a famous textbook on principles of economics had
a diagram depicting a U-shaped average xed cost curve. This occasioned great mirth around the camp res 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 xed cost curve.
Answer: Average xed cost must decline monotonically with output and would asymptotically approach zero. Remember that average xed cost is just a constant divided by output.
Topic: Cost Curves Correct Responses: 0
Di culty: 3 Discrimination Index: 0
21.2 Hildegard, an intelligent and charming Holstein cow, grazes in a very large, mostly barren
pasture with a few lush patches of grass. When she nds a new grassy area, the amount of grass she gets from it is equal to the square root of the number of hours, h; that she spends grazing there. Finding a new patch of grass on which to graze takes her one hour. Since Hildegard does not have pockets, the currency in which her costs are measured is time. a What is the total cost to Hildegard of nding a new plot of grass and getting y units of grass from it? b Find an expression for her marginal costs and her average cost per patch of grass as a function of the amount of grass she gets from each patch. c How much time would she spend in each plot if she wanted to maximize her food intake? Hint: Minimize average costs per unit of grass eaten.
1 + y2 b2y; 1=y + y c1 hour.
Topic: Cost Curves Correct Responses: 0
Di culty: 2 Discrimination Index: 0
3 2
21.3 A competitive rm has the short run cost function cy = y , 2y + 5y + 6. Write down
equations for a the rm's average variable cost function, b the rm's marginal cost function. c At what level of output is average variable cost minimized? d Graph the short-run supply function for this rm, being careful to label the key points on the graph with the numbers specifying the exact prices and quantities at these points.
y2 , 2y + 5 b3y2 , 4y + 5 cy = 1 d The AVC curve is U-shaped with its bottom at y = 1; c = 2. The marginal cost curve is also U-shaped. It bottoms out at y = 2=3 and crosses the AVC curve from below at y = 1.
CHAPTER 21 Cost Curves
Topic: Cost Curves Correct Responses: 0 Di culty: 0 Discrimination Index: 0
408
21.4 North American Manufacturing has the following production function Q = min0:25K; 0:5L
where K is units of capital, and L is hours of labor. a Without any warning, the price of capital doubles. What should North American do in response? b If North American were planning a new manufacturing plant, are there any advantages to a larger facility?
Chapter 22
True-False
Topic: Firm Supply Correct Responses: 53 Correct Di culty: 2 Discrimination Index: 32
Firm Supply
22.1 A rm in a competitive industry takes account of the fact that the demand curve it confronts
has a signi cant negative slope.
Topic: Firm Supply Correct Responses: 73 Correct Di culty: 1 Discrimination Index: 25
22.2 In a perfectly competitive industry, the demand curve for the total output of the industry
may be downward sloping.
Topic: Firm Supply Correct Responses: 81 Correct Di culty: 1 Discrimination Index: 22
22.3 Price equals marginal cost is a su cient condition for pro t maximization.
Topic: Firm Supply Correct Responses: 21 Correct Di culty: 3 Discrimination Index: 2
22.4 A rm faces competitive markets both for its inputs and its outputs. If its long run supply
curve is q = 3p; then it can not have constant returns to scale.
Topic: Firm Supply Correct Responses: 84 Correct 2
Di culty: 1 Discrimination Index: 20
22.5 A rm with the cost function cy = 20y + 500 has a U-shaped cost curve.
Topic: Firm Supply Correct Responses: 44 Correct Di culty: 2 Discrimination Index: 19
2
22.6 Mr. O. Carr has the cost function cy = y + 144 if his output, y; is positive and c0 = 0.
If the price of output is 30, Mr. Carr' s pro t-maximizing output is zero.
CHAPTER 22 Firm Supply
Topic: Firm Supply Correct Responses: 44 Correct Di culty: 2 Discrimination Index: 19
2
410
22.7 Mr. O. Carr has the cost function cy = y + 36 if his output, y; is positive and c0 = 0. If
the price of output is 18, Mr. Carr' s pro t-maximizing output is zero.
Topic: Firm Supply Correct Responses: 25 Correct
Di culty: 2 Discrimination Index: 40
1=3
22.8 A rm produces one output, using one input, with the production function fx = 2x
where x is the amount of input. The cost function for this rm is proportional to the price of the input times the cube of the amount of output.
Topic: Firm Supply Correct Responses: 62 Correct
Di culty: 2 Discrimination Index: 15
22.9 A competitive rm has a continuous marginal cost curve. It nds that as output increases,
its marginal cost curve rst rises, then falls, then rises again. If it wants to maximize pro ts, the rm should never produce at a positive output where price equals marginal cost and marginal cost decreases as output increases.
Topic: Firm Supply Correct Responses: 78 Correct
Di culty: 2 Discrimination Index: 17
22.10 Two rms 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 did Firm 2. If they are both pro t maximizers and have upward sloping marginal cost curves, then we would expect Firm 1 to have a higher output than Firm 2.
Topic: Firm Supply Correct Responses: 55 Correct
Di culty: 2 Discrimination Index: 9
22.11 The area under the marginal cost curve measures total variable costs.
TRUE-FALSE
Topic: Firm Supply Correct Responses: 71 Correct Di culty: 1 Discrimination Index: 0
411
22.12 Average xed costs never increase with output.
Topic: Firm Supply Correct Responses: 0 Correct Di culty: 1 Discrimination Index: 0
1 2
22.13 The change in producer's surplus when the market price changes from p to p is half of
the area to the left of the marginal cost curve between p1 and p2 .
Multiple Choice
Firm Supply
Topic: Firm Supply Correct Responses: 59 Correct
Di culty: 2 Discrimination Index: 33
22.1 A pro t maximizing rm continues to operate even though it is losing money. It sells its
product at a price of $100. From these facts we deduce that:
a average total cost is less than $100. b average xed cost is less than $100. c marginal cost is increasing. d average variable cost is less than $100. e marginal cost is decreasing.
Topic: Firm Supply Correct Responses: 54 Correct
Di culty: 1 Discrimination Index: 27
22.2 A pro t maximizing dairy farm is currently producing 10,000 gallons of milk per day. The
government is considering two alternative policies. One is to give the farm a lump sum subsidy of $500 per month. The other policy is to give the farm a subsidy of $.05 per gallon of output.
a Both kinds of subsidy will increase production at this farm. b Neither subsidy will a ect production at this farm, since output is determined by pro t maximization. c Production at this farm will be increased if the per unit subsidy is adopted, but not if the lump-sum subsidy is adopted. d Which subsidy has the greater e ect on production at this farm depends on whether xed costs are greater than variable costs. e Production will be increased by either kind of subsidy if and only if there are not decreasing returns to scale.
MULTIPLE CHOICE
Topic: Firm Supply Correct Responses: 72 Correct Di culty: 1 Discrimination Index: 14
413
22.3 Marge Costa produces plastic dog dishes using a process that requires only labor and plastic
as inputs and has constant returns to scale. With the process she is currently using, a laborer can turn out 30 dog dishes an hour. The wage rate is $9 per hour. The plastic in a dog dish costs Marge $.10. She has no other costs besides labor and plastic. Marge faces a perfectly competitive market for plastic dog dishes, and she decides that she is maximizing pro ts when she makes 300 dog dishes an hour. What is the market price of dog dishes?
a $.21 b $.32 c $.40 d $.27 e $.28
Topic: Firm Supply Correct Responses: 57 Correct
Di culty: 3 Discrimination Index: 43
22.4 A competitive rm uses two variable factors to produces its output, with a production
function q = minfx1 ; x2g. The price of factor 1 is 2 and the price of factor 2 is 5. Due to a lack of warehouse space, the company cannot use more than 22 units of x1. The rm must pay a xed cost of 88 if it produces any positive amount, but doesn't have to pay this cost if it produces no output. What is the smallest integer price that would make a rm willing to produce a positive amount?
a 24 b 21 c 13 d 7 e 11
CHAPTER 22 Firm Supply
Topic: Firm Supply Correct Responses: 57 Correct Di culty: 3 Discrimination Index: 43
414
22.5 A competitive rm uses two variable factors to produces its output, with a production
function q = minfx1 ; x2g. The price of factor 1 is 5 and the price of factor 2 is 1. Due to a lack of warehouse space, the company cannot use more than 18 units of x1. The rm must pay a xed cost of 72 if it produces any positive amount, but doesn't have to pay this cost if it produces no output. What is the smallest integer price that would make a rm willing to produce a positive amount?
a 22 b 19 c 15 d 6 e 10
Topic: Firm Supply Correct Responses: 85 Correct
Di culty: 1 Discrimination Index: 33
2
22.6 A competitive rm has a single factory with the cost function cy = 4y + 89 and produces
28 units in order to maximize pro ts. Although the price of output does not change, the rm decides to build a second factory with the cost function cy = 8y2 + 39. To maximize its pro ts, how many units should it produce in the second factory?
a 14 b 21 c 9 d 13 e None of the above.
MULTIPLE CHOICE
Topic: Firm Supply Correct Responses: 73 Correct Di culty: 2 Discrimination Index: 51
415
22.7 A competitive rm is choosing an output level to maximize its pro ts in the short run.
Which of the following is not necessarily true? Assume that marginal cost is not constant and is well-de ned at all levels of output.
a Marginal cost is at least as large as average variable cost. b Total revenues are at least as large as total costs. c Price is at least as large as average variable cost. d Price equals marginal cost. e The marginal cost curve is rising.
Topic: Firm Supply Correct Responses: 55 Correct
Di culty: 2 Discrimination Index: 32
22.8 A competitive, capitalistic rm produces gift-wrapped pieces of the Berlin wall, using the
standard Marxian inputs, K and L. The production function is y = K + L1=2 ; where y is the number of pieces produced. Neglect the use of the wall itself. The price of capital, K; is r; and the price of labor, L; is w. Which of the following is true?
a Regardless of w and r; cost minimization requires that K = L. b The technology has increasing returns to scale. c If r w; then L = 0. d If r w; then K = 0. e None of the above.
Topic: Firm Supply Correct Responses: 63 Correct Di culty: 2 Discrimination Index: 60
2
22.9 A competitive rm has a long run total cost function cy = 3y + 243 for y 0 and c0 = 0.
Its long run supply function is described as follows:
a y = p=6 if p b y = p=3 if p c y = p=3 if p d y = p=6 if p e y = p=3 if p 54; y = 0 if p 52; y = 0 if p 57; y = 0 if p 57; y = 0 if p 59; y = 0 if p 54. 52. 63. 57. 49.
CHAPTER 22 Firm Supply
Topic: Firm Supply Correct Responses: 63 Correct Di culty: 2 Discrimination Index: 60
2
416
22.10 A competitive rm has a long run total cost function cy = 5y + 1; 280 for y 0 and
c0 = 0. Its long run supply function is described as follows: a y = p=10 if p b y = p=5 if p c y = p=5 if p d y = p=10 if p e y = p=5 if p 160; y = 0 if p 158; y = 0 if p 163; y = 0 if p 163; y = 0 if p 165; y = 0 if p 160. 158. 175. 163. 155.
Di culty: 2 Discrimination Index: 49
1 2 1 2
Topic: Firm Supply Correct Responses: 51 Correct
22.11 A competitive rm uses two inputs and has a production function fx ; x = 22x:25x:25.
a 2y=222 . b 22x1 + x2y. c x1 + x2=22. d y=44. e y2 =44.
Topic: Firm Supply Correct Responses: 51 Correct Di culty: 2 Discrimination Index: 49
1 2 1 2
The rm can buy as much of either factor as it likes at factor prices w1 = w2 = 1. The cost of producing y units of ouput for this rm is:
22.12 A competitive rm uses two inputs and has a production function fx ; x = 19x:25x:25.
a 2y=192 . b 19x1 + x2y. c x1 + x2=19. d y=38. e y2 =38.
The rm can buy as much of either factor as it likes at factor prices w1 = w2 = 1. The cost of producing y units of ouput for this rm is:
MULTIPLE CHOICE
Topic: Firm Supply Correct Responses: 65 Correct 1 2
417
Di culty: 0 Discrimination Index: 67
1 2 1=2
22.13 A rm's production function is fx ; x = minfx ; 5x g . If the price of factor 1 is
a p=14. b pmaxfw1; 5w2g. c pminfw1; 5w2g. d 7p. e pminf4p; 75pg.
Topic: Firm Supply Correct Responses: 65 Correct 1 2
w1 = 4 per unit and the price of factor 2 is w2 = 15 per unit, then its supply function is given by the equation Sp =
Di culty: 0 Discrimination Index: 67
1 2 1=2
22.14 A rm's production function is fx ; x = minfx ; 4x g . If the price of factor 1 is
a p=8. b pmaxfw1; 4w2g. c pminfw1; 4w2g. d 4p. e pminf2p; 32pg.
Topic: Firm Supply Correct Responses: 78 Correct Di culty: 0 Discrimination Index: 41
2
w1 = 2 per unit and the price of factor 2 is w2 = 8 per unit, then its supply function is given by the equation Sp =
22.15 Suppose that Dent Carr's long run total cost of repairing s cars per week is cs = 3s + 27.
If the price he receives for repairing a car is 30, then in the long run, how many cars will he x per week if he maximizes pro ts?
a 5. b 0. c 10. d 7.50. e 15.
CHAPTER 22 Firm Supply
Topic: Firm Supply Correct Responses: 78 Correct Di culty: 0 Discrimination Index: 41
2
418
22.16 Suppose that Dent Carr's long run total cost of repairing s cars per week is cs = 4s + 16.
If the price he receives for repairing a car is 48, then in the long run, how many cars will he x per week if he maximizes pro ts?
a 6. b 0. c 12. d 9. e 18.
Topic: Firm Supply Correct Responses: 0 Correct 1 2
Di culty: 0 Discrimination Index: 0
1 2 1=2 1
22.17 Irma's production function is fx ; x = minfx ; 4x g . If the price of factor 1 is w = 6
and the price of factor 2 is w2 = 12; then her supply function is given by the equation:
a Sp = p=18. b Sp = pmaxfw1; 4w2g2 . c Sp = pminfw1 ; 4w2g2 . d Sp = 9p. e Sp = minf6p; 48p.
Topic: Firm Supply Correct Responses: 0 Correct 1 2
Di culty: 0 Discrimination Index: 0
1 2 1=2 1
22.18 Irma's production function is fx ; x = minfx ; 4x g . If the price of factor 1 is w = 3
and the price of factor 2 is w2 = 12; then her supply function is given by the equation:
a Sp = p=12. b Sp = pmaxfw1; 4w2g2 . c Sp = pminfw1 ; 4w2g2 . d Sp = 6p. e Sp = minf3p; 48p.
MULTIPLE CHOICE
Topic: Firm Supply Correct Responses: 0 Correct Di culty: 0 Discrimination Index: 0
2
419
22.19 A rm has the long run cost function Cq = 7q + 112. In the long run, it will supply a
positive amount of output, so long as the price is greater than:
a 112 b 120 c 28 d 56 e 61
Topic: Firm Supply Correct Responses: 0 Correct
Di culty: 0 Discrimination Index: 0
2
22.20 A rm has the long run cost function Cq = 4q + 4. In the long run, it will supply a
positive amount of output, so long as the price is greater than:
a 16 b 24 c 4 d 8 e 13
Topic: Firm Supply Correct Responses: 0 Correct
Di culty: 0 Discrimination Index: 0
3
22.21 A competitive rm produces output according to the production function y = minx ; 1000.
Let p be the price of output, and let the price of input x be 1. The pro t-maximizing output for this rm is:
a 1000 if p 1 and 0 otherwise. b 10 for all p. c 1000 for all p. d 0 if p 1=100 and 1000 otherwise. e none of the above.
CHAPTER 22 Firm Supply
Topic: Firm Supply Correct Responses: 39 Correct Di culty: 0 Discrimination Index: 21
2
420
22.22 A competitive rm produces output according to the production function y = minx ; 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 given by the function:
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.
Topic: Firm Supply Correct Responses: 40 Correct Di culty: 0 Discrimination Index: 5
1=2
22.23 A competitive rm produces output according to the production function y = minx ; 10.
Let w be the price of the factor x; and let the price of output be 1. The demand for factor x when the factor price is w is given by:
a x = minw1=2 ; 10 b x = maxw1=2 =2; 100. c x = min1=4w2; 100. d x = 10 + x2=2. e none of the above.
Essay
Topic: Firm Supply Correct Responses: 0 Di culty: 3 Discrimination Index: 0
Firm Supply
22.1 The Lost Mountains of northern Iowa are inhabited by the rare Marshallian deer. Patches
of grass are far apart in this rugged land. If a deer nds a fresh patch of grass and spends h hours grazing it, it gets the square root of h units of grass. The deer compete for grass. When there are n deer, it takes a deer n squared minutes to nd a fresh patch. A deer can survive if it gets 1 unit of grass every 200 minutes. a Find the average cost in time of a unit of grass if a deer gets y units of grass from each patch. b How much time will an e cient deer spend in each patch when there are n deer? Hint: Min. Avg. Cost cSince there is free entry into the deer business, the equilibrium population is the maximum number of e cient deer who can survive. How many is this?
Answer: ay + n squared=y bn minutes. c100
Chapter 23
True-False
Topic: Industry Supply Correct Responses: 86 Correct
Industry Supply
Di culty: 1 Discrimination Index: 9
23.1 The short run industry supply curve can be found by horizontally summing the short run
supply curves of all the individual rms in the industry.
Topic: Industry Supply Correct Responses: 98 Correct
Di culty: 2 Discrimination Index: 12
23.2 It is possible to have an industry in which all rms make zero economic pro ts in long run
equilibrium.
Topic: Industry Supply Correct Responses: 73 Correct Di culty: 1 Discrimination Index: 14
23.3 The possibility of more rms entering an industry in the long run tends to make long run
industry supply more price elastic than short run industry supply.
Topic: Monopoly Correct Responses: 80 Correct
Di culty: 2 Discrimination Index: 14
23.4 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.
Topic: Industry Supply Correct Responses: 74 Correct Di culty: 2 Discrimination Index: 26
23.5 If there are constant returns to scale in a competitive industry, then the long run industry
supply curve for that industry is horizontal.
TRUE-FALSE
Topic: Industry Supply Correct Responses: 52 Correct Di culty: 2 Discrimination Index: 11
3=4 3=4
423
23.6 If some rm in an industry has the production function Fx; y = x y where x and y are
the only two inputs in producing the good, then that industry can not be competitive in the long run.
Topic: Industry Supply Correct Responses: 67 Correct Di culty: 1 Discrimination Index: 21
23.7 The market for a good is in equilibrium when the government unexpectedly imposes a quantity tax of $2 per unit. In the short run, the price will rise by $2 per unit so that rms can regain their lost revenue and continue to produce.
Multiple Choice
Industry Supply
Topic: Industry Supply Correct Responses: 32 Correct
Di culty: 2 Discrimination Index: 18
23.1 In East Icicle, Minnesota, on the northern edge of the corn belt, the growing season is short
and the soil is poor. Corn yields are meager unless a great deal of expensive fertilizer is used. In Corncrib, Illinois the land is fertile and at and the growing season is 20 days longer. For any given expenditure per acre, corn yields are far greater than in East Icicle. Farmers in both places are pro t maximizers who grow corn. We deduce that:
a marginal costs are higher in E. Icicle than in Corncrib. b more fertilizer is used per acre in E. Icicle than in Corncrib. c marginal costs are the same in both places. d more fertilizer is used per acre in Corncrib than in E. Icicle. e more than one of the above.
Topic: Industry Supply Correct Responses: 32 Correct
Di culty: 3 Discrimination Index: 13
23.2 A competitive industry has 10,000 identical rms. For each rm in the industry, the long
run cost of producing y units of output is cy = $100 + y2 if y 0 and c0 = 0. The government imposes a lump sum tax of $300 on each rm in the industry. Firms can avoid this tax only by going out of business. There is free entry and exit into this industry. In the long run:
a the number of rms stays constant and the price of output rises by $30. b the number of rms doubles and the price of output doubles. c the number of rms is halved and the price of output is doubled. d the number of rms stays constant and the price of output rises by less than $30. e None of the above.
MULTIPLE CHOICE
Topic: Industry Supply Correct Responses: 44 Correct Di culty: 2 Discrimination Index: 59
425
23.3 The bicycle industry is made up of 100 rms with the long run cost curve cy = 2 + y =2
2 2
and 80 rms with the long run cost curve cy = y =6. No new rms can enter the industry. What is the long run industry supply curve at prices greater than 2?
a y = 360p b y = 340p c y = 170p d y = 240p e y = 375p
Topic: Industry Supply Correct Responses: 44 Correct Di culty: 2 Discrimination Index: 59
2
23.4 The bicycle industry is made up of 100 rms with the long run cost curve cy = 2 + y =2
2
and 160 rms with the long run cost curve cy = y =10. No new rms can enter the industry. What is the long run industry supply curve at prices greater than 2?
a y = 920p b y = 900p c y = 450p d y = 800p e y = 935p
Topic: Industry Supply Correct Responses: 24 Correct Di culty: 2 Discrimination Index: 2
23.5 Two rms constitute the entire doghouse industry. One has a long run cost curve of
3 + 4y2 =3 and the other has a long run cost curve of 10 + y2 =10. If no new rms enter the
industry, at which of the following prices will exactly one rm operate?
a 1 b 3 c 5 d 7 e None of the above.
CHAPTER 23 Industry Supply
Topic: Industry Supply Correct Responses: 84 Correct Di culty: 1 Discrimination Index: 1
426
23.6 On a small island, papayas can only be sold in the market in the center of the island.
a 302 b 320 c 240 d 262 e None of the above.
Although papayas only cost 1 to raise, they can be sold in the market for 3. But it costs .1 per kilometer to transport each papaya to market. If an acre of land grows 200 papayas, how much rent does an acre of land 4 kilometers from the market command?
Topic: Industry Supply Correct Responses: 26 Correct
Di culty: 3 Discrimination Index: 33
23.7 On a tropical island there are 100 potential boat builders, numbered 1 through 100. Each
can build up to 12 boats a year, but anyone who goes into the boat-building business has to pay a xed cost of 11. Marginal costs di er from person to person. Where y denotes the number of boats built per year, boat builder 1 has a total cost function cy = 11 + y. Boat builder 2 has a total cost function cy = 11 + 2y and, more generally, for each i; from 1 to 100, boat builder i has a cost function cy = 11+iy. If the price of boats is 40, how many boats will be built per year?
a 468 b 348 c 174 d 702 e Any number between 480 and 492 is possible.
MULTIPLE CHOICE
Topic: Industry Supply Correct Responses: 26 Correct Di culty: 3 Discrimination Index: 33
427
23.8 On a tropical island there are 100 potential boat builders, numbered 1 through 100. Each
can build up to 12 boats a year, but anyone who goes into the boat-building business has to pay a xed cost of 11. Marginal costs di er from person to person. Where y denotes the number of boats built per year, boat builder 1 has a total cost function cy = 11 + y. Boat builder 2 has a total cost function cy = 11 + 2y and, more generally, for each i; from 1 to 100, boat builder i has a cost function cy = 11+iy. If the price of boats is 20, how many boats will be built per year?
a 228 b 108 c 54 d 342 e Any number between 240 and 252 is possible.
Topic: Industry Supply Correct Responses: 46 Correct
Di culty: 3 Discrimination Index: 52
23.9 Consider a competitive industry with several rms all of which have the same cost function,
cy = y2 + 4 for y 0 and c0 = 0. The demand curve for this industry is Dp = 50 , p; where p is
the price. The long run equilibrium number of rms in this industry is:
a 4. b 23. c 25. d 46. e 2.
CHAPTER 23 Industry Supply
Topic: Industry Supply Correct Responses: 80 Correct Di culty: 1 Discrimination Index: 15
428
23.10 Brand X is one of many rms in a competitive industry where each rm has a constant
marginal cost of 2 dollars per unit of output. If marginal cost for Brand X rises to 4 dollars per unit and marginal costs of all other rms in the industry stay constant, by how much does the price in the industry increase?
a 2 b 1 c 0 d 2=n where n is the number of rms in the industry e None of the above.
Topic: Industry Supply Correct Responses: 40 Correct
Di culty: 3 Discrimination Index: 21
23.11 A rm uses a single input to produce its output, which is sold in a competitive market. It
gets quantity discounts on purchases of its input. If it buys x units of the input, the price it must pay per unit of input is 36=x + 5. If it buys no inputs it doesn't have to pay anything. The rm's production function is fx = 13x , x2. If the price of the rm's output is 1, the pro t-maximizing amount of input to buy is:
a 4. b 0. c 8. d 6. e None of the above.
MULTIPLE CHOICE
Topic: Industry Supply Correct Responses: 40 Correct Di culty: 3 Discrimination Index: 21
429
23.12 A rm uses a single input to produce its output, which is sold in a competitive market. It
gets quantity discounts on purchases of its input. If it buys x units of the input, the price it must pay per unit of input is 441=x+3. If it buys no inputs it doesn't have to pay anything. The rm's production function is fx = 15x , x2. If the price of the rm's output is 1, the pro t-maximizing amount of input to buy is:
a 6. b 0. c 12. d 9. e None of the above.
Topic: Industry Supply Correct Responses: 49 Correct
Di culty: 2 Discrimination Index: 22
23.13 Chirimollas grow only on the island of Socorro, o the coast of Mexico. They need very
little soil, so virtually an unlimited supply can be grown at a cost of $4 per unit. When they are exported to the U.S., half of the chirimollas that are shipped rot on the boat and are dumped in the ocean. Shipping costs are $1 for every unit that is put on board a ship. The demand function for chirimollas in the U.S. is given by the equation q = 10; 000 , 20p2. If chirimollas are competitively supplied, the number of units that are sold in the United States will be:
a 8000. b 9500. c 9680. d 9190. e 9000.
CHAPTER 23 Industry Supply
Topic: Industry Supply Correct Responses: 38 Correct Di culty: 2 Discrimination Index: 37
1 2 1=2 1=2 1 2
430
23.14 An industry has 1000 rms, each with the production function fx ; x = x x . The
price of factor 1 is 1 and the price of factor 2 is 1. In the long run, both factors are variable, but in the short run, each rm is stuck with using 100 units of factor 2.The long run industry supply curve:
a is upward sloping with zero supply if price is less than 10. b is downward sloping for outputs less than 10. c is horizontal with zero supply for prices less than 2 and in nite supply for prices greater than 2. d is horizontal with zero supply for prices less than 10 and in nite supply for prices greater than 10. e is upward sloping with zero supply if price is less than 20.
Topic: Industry Supply Correct Responses: 56 Correct
Di culty: 3 Discrimination Index: 40
23.15 Suppose that all rms in a given industry have the same supply curve given by Si p = 2p
when p is greater than or equal to $2 and Si p = 0 when p is less than $2. Suppose that market demand is given by Dp = 12 , p. If rms continue to enter the industry so long as they can do so pro tably, the equilibrium price must be closest to:
a $5. b $4. c $2.40. d $2. e $1.75.
MULTIPLE CHOICE
Topic: Industry Supply Correct Responses: 0 Correct Di culty: 2 Discrimination Index: 0
431
23.16 In the absence of government interference, there is a constant marginal cost of $6 per ounce
for growing marijuana and delivering it to buyers. Suppose that government authorities seize shipments whenever they nd them and resell the marijuana that they seize on the open market. The probability that any shipment of marijuana is seized is 0.20. If a shipment is seized, there is no other punishment besides loss of the marijuana that is seized. The e ect of the government action is:
a to leave prices unchanged. b raise the equilibrium price by 1.50. c lower the equilibrium price by 0.75. d raise the equilibrium price by 3 e raise the equilibrium price by 1.20
Topic: Industry Supply Correct Responses: 0 Correct
Di culty: 2 Discrimination Index: 0
23.17 In the absence of government interference, there is a constant marginal cost of $7 per ounce
for growing marijuana and delivering it to buyers. Suppose that government authorities seize shipments whenever they nd them and resell the marijuana that they seize on the open market. The probability that any shipment of marijuana is seized is 0.10. If a shipment is seized, there is no other punishment besides loss of the marijuana that is seized. The e ect of the government action is:
a to leave prices unchanged. b raise the equilibrium price by 0.78. c lower the equilibrium price by 0.39. d raise the equilibrium price by 1.56 e raise the equilibrium price by 0.70
CHAPTER 23 Industry Supply
Topic: Industry Supply Correct Responses: 0 Correct Di culty: 0 Discrimination Index: 0
432
23.18 In the problem discussed in your workbook, the cost of capturing a cockatoo and trans-
porting him to the U.S. is about $40 per bird. Cockatoos are drugged and smuggled in suitcases to the U.S. Half of the smuggled cockatoos die in transit. Each smuggled cockatoo has a 10 probability of being discovered, in which case the smuggler is ned. If the ne imposed for each smuggled cockatoo is increased to $900, then the equilibrium price of cockatoos in the U.S. will be:
a 288.89. b 130. c 85. d 67. e 200.
Topic: Industry Supply Correct Responses: 0 Correct
Di culty: 0 Discrimination Index: 0
23.19 In the problem discussed in your workbook, the cost of capturing a cockatoo and trans-
porting him to the U.S. is about $40 per bird. Cockatoos are drugged and smuggled in suitcases to the U.S. Half of the smuggled cockatoos die in transit. Each smuggled cockatoo has a 10 probability of being discovered, in which case the smuggler is ned. If the ne imposed for each smuggled cockatoo is increased to $1,400, then the equilibrium price of cockatoos in the U.S. will be:
a 400. b 180. c 110. d 82. e 311.11.
MULTIPLE CHOICE
Topic: Industry Supply Correct Responses: 0 Correct Di culty: 0 Discrimination Index: 0
433
23.20 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 0.10 and the ne if a shipper is caught is $50 per ounce, then the equilibrium price of marijuana per ounce is:
a 11.11. b 10. c 55. d 4.50. e 5.50.
Topic: Industry Supply Correct Responses: 0 Correct Di culty: 0 Discrimination Index: 0
23.21 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 0.30 and the ne if a shipper is caught is $15 per ounce, then the equilibrium price of marijuana per ounce is:
a 13.57. b 9.50. c 20. d 3.50. e 6.50.
Topic: Industry Supply Correct Responses: 0 Correct Di culty: 0 Discrimination Index: 0
23.22 In a certain industry, the supply curve of any rm is Si p = p=2. If a rm produces 3 units
of output, what is its total variable costs?
a $18 b $7 c $13.50 d $9 e There is not enough information given to determine total variable costs.
CHAPTER 23 Industry Supply
Topic: Industry Supply Correct Responses: 0 Correct Di culty: 0 Discrimination Index: 0
434
23.23 In a certain industry, the supply curve of any rm is Si p = p=2. If a rm produces 6 units
of output, what is its total variable costs?
a $72 b $34 c $54 d $36 e There is not enough information given to determine total variable costs.
Topic: Industry Supply Correct Responses: 12 Correct Di culty: 0 Discrimination Index: 15
23.24 An industry has 100 rms. These rms have identical production functions. In the short
run, each rm has xed costs of $400. There are two variable factors in the short run and output is given by y = minx1 ; 4x21=2 . The cost of factor 1 is $4 per unit and the cost of factor 2 is $2 per unit. In the short run, the industry supply curve is given by:
a Q = 100p=9 b Q = 100p=8 c Q = 600p1=2 d the part of the line Q = 50min4; 8 for which pQ 400=Q. e None of the above.
Topic: Industry Supply Correct Responses: 12 Correct Di culty: 0 Discrimination Index: 15
23.25 An industry has 100 rms. These rms have identical production functions. In the short
run, each rm has xed costs of $200. There are two variable factors in the short run and output is given by y = minx1 ; 4x21=2 . The cost of factor 1 is $5 per unit and the cost of factor 2 is $3 per unit. In the short run, the industry supply curve is given by:
a Q = 100p=11:50 b Q = 100p=10 c Q = 633:33p1=2 d the part of the line Q = 50min5; 12 for which pQ 200=Q. e None of the above.
MULTIPLE CHOICE
Topic: Industry Supply Correct Responses: 0 Correct Di culty: 0 Discrimination Index: 0
435
23.26 The cheese business in Lake Fon-du-lac, Wisconsin is a competitive industry. All cheese
a 19 b 38 c 34 d 120 e 39
manufacturers have the cost function C = Q2 + 9; while demand for cheese in the town is given by Qd = 120 , P. The long run equilibrium number of rms in this industry is
Topic: Industry Supply Correct Responses: 0 Correct
Di culty: 0 Discrimination Index: 0
23.27 The cheese business in Lake Fon-du-lac, Wisconsin is a competitive industry. All cheese
a 14 b 28 c 22 d 120 e 29
manufacturers have the cost function C = Q2 + 16; while demand for cheese in the town is given by Qd = 120 , P. The long run equilibrium number of rms in this industry is
CHAPTER 23 Industry Supply
Topic: Industry Supply Correct Responses: 0 Correct Di culty: 0 Discrimination Index: 0
436
23.28 In Baggs, Wyoming, cattle can be produced according to the following process:
C = G=10+ P=30 where C is the number of cattle, G are bushels of grain, and P are acres of pasture. If grain costs
$5 per bushel, and pasture costs $4 per acre, how many cattle can Rancher Roy produce with a budget of $9,000?
a 1,800 b 225 c 180 d 75 e 900
Topic: Industry Supply Correct Responses: 0 Correct Di culty: 0 Discrimination Index: 0
23.29 In Baggs, Wyoming, cattle can be produced according to the following process:
C = G=10+ P=40 where C is the number of cattle, G are bushels of grain, and P are acres of pasture. If grain costs
$2 per bushel, and pasture costs $3 per acre, how many cattle can Rancher Roy produce with a budget of $9,000?
a 3,000 b 180 c 450 d 75 e 900
Essay
Topic: Industry Supply Correct Responses: 0
Industry Supply
Di culty: 2 Discrimination Index: 0
23.1 The cost per bushel of growing corn on a given acre of land depends partly on how intensely
the land is farmed and partly on the quality of the soil, the amount of rainfall and the length of the growing season. Suppose that the last three factors are summarized by a single index "f" for fertility. Suppose that the long run total cost of producing y hundred bushels of corn on an acre of land of fertility f is cy; f where cy; f = 1 + y2 =f for y 0 and c0; f = 0. a Write down a formula for the long run average cost function per hundred bushels of corn from an acre of land of quality f? b At what level of output is long run average cost minimized on an acre of land of quality f? c What is the lowest price per hundred bushels at which an acre of land of quality f will be used to produce corn? Answer: aLRAC = y + 1=y=f b1 hundred bushels c2=f.
Topic: Industry Supply Correct Responses: 0 Di culty: 0 Discrimination Index: 0
23.2 The price elasticity of gasoline in the United States has been estimated to be 0.15. If this
is so, should pro t maximizing gasoline stations raise their prices? Explain why or why not.
Answer: Individual station's price elasticities of demand are quite elastic because of competition between stations.
Topic: Industry Supply Correct Responses: 0 Di culty: 0 Discrimination Index: 0
23.3 The price elasticity of demand for gasoline in the United States is equal to 0.15. How should
the price elasticity of demand for the individual rm compare to 0.15 higher; lower, same, can't tell? Explain why.
Chapter 24
True-False
Topic: Monopoly Correct Responses: 76 Correct Di culty: 1 Discrimination Index: 37
Monopoly
24.1 Since a monopoly charges a price higher than marginal cost, it will produce an ine cient
amount of output.
Topic: Monopoly Correct Responses: 45 Correct Di culty: 2 Discrimination Index: 22
24.2 If the interest rate is 10, a monopolist will choose a markup of price over marginal cost of
at least 10.
Topic: Monopoly Correct Responses: 73 Correct Di culty: 1 Discrimination Index: 13
24.3 A natural monopoly occurs when a rm gains ownership of the entire stock of some natural
resource and thus is able to exclude other producers.
Topic: Monopoly Correct Responses: 0 Correct
Di culty: 1 Discrimination Index: 0
24.4 Since a monopoly makes excess pro ts beyond the normal rate of return on investment, an
investor is likely to get a higher rate of return in the stock market by investing in monopolistic rather than competitive industries.
Topic: Monopoly Correct Responses: 90 Correct Di culty: 1 Discrimination Index: 3
24.5 If he produces anything at all, a pro t-maximizing monopolist with some xed costs and
no variable costs will set price and output so as to maximize revenue.
TRUE-FALSE
Topic: Monopoly Correct Responses: 85 Correct Di culty: 1 Discrimination Index: 29
439
24.6 For a monopolist who faces a downward sloping demand curve, marginal revenue is less
than price whenever quantity sold is positive.
Topic: Monopoly Correct Responses: 46 Correct Di culty: 2 Discrimination Index: 32
24.7 A monopolist with constant marginal costs faces a demand curve with a constant elasticity
of demand and does not practice price discrimination. If the government imposes a tax of $1 per unit of goods sold by the monopolist, the monopolist will increase his price by more than $1 per unit.
Topic: Monopoly Correct Responses: 0 Correct Di culty: 1 Discrimination Index: 0
24.8 A monopolist will always equate marginal revenue and marginal cost when maximizing
pro t.
Multiple Choice
Topic: Monopoly Correct Responses: 20 Correct Di culty: 2 Discrimination Index: 33
Monopoly
24.1 A monopolist faces the inverse demand function described by p = 32 , 5q where q is output.
The monopolist has no xed cost and his marginal cost is 7 at all levels of output. Which of the following expresses the monopolist's pro ts as a function of his output?
a 32 , 5q , 7 b 32 , 10q c 25q , 5q2 d 32q , 5q2 , 7 e None of the above.
Topic: Monopoly Correct Responses: 20 Correct Di culty: 2 Discrimination Index: 33
24.2 A monopolist faces the inverse demand function described by p = 29 , 2q where q is output.
The monopolist has no xed cost and his marginal cost is 6 at all levels of output. Which of the following expresses the monopolist's pro ts as a function of his output?
a 29 , 2q , 6 b 29 , 4q c 23q , 2q2 d 29q , 2q2 , 6 e None of the above.
Topic: Monopoly Correct Responses: 91 Correct Di culty: 1 Discrimination Index: 23
24.3 A monopolist faces the inverse demand curve p = 192 , 4q. At what level of output is his
total revenue maximized?
a 36 b 34 c 12 d 48 e 24
MULTIPLE CHOICE
Topic: Monopoly Correct Responses: 91 Correct Di culty: 1 Discrimination Index: 23
441
24.4 A monopolist faces the inverse demand curve p = 288 , 6q. At what level of output is his
total revenue maximized?
a 36 b 34 c 12 d 48 e 24
Topic: Monopoly Correct Responses: 69 Correct Di culty: 2 Discrimination Index: 23
24.5 The demand for a monopolist's output is 7000 divided by the square of the price in dollars
a 1. b 2. c 3. d 1.5. e 2.5.
Topic: Monopoly Correct Responses: 68 Correct Di culty: 2 Discrimination Index: 27
that it charges per unit. The rm has constant marginal costs equal to 1 dollar per unit. To maximize its pro ts it should charge a price of:
24.6 A pro t-maximizing monopolist faces the demand curve, q = 100 , 3p. It produces at a cona rises by $5. b rises by $10. c rises by $20. d rises by $12. e stays constant.
stant marginal cost of $20 per unit. A quantity tax of $10 per unit is imposed on the monopolist's product. The price of the monopolist's product:
CHAPTER 24 Monopoly
Topic: Monopoly Correct Responses: 39 Correct Di culty: 2 Discrimination Index: 44
442
24.7 The demand for a monopolist's output is 10,000 divided by the square of the price he
a $5. b $10. c $20. d $12. e None of the above.
charges. The monopolist produces at a constant marginal cost of $5. If the government imposes a sales tax of $10 per unit on the monopolist's output, the monopolists price will rise by:
Topic: Monopoly Correct Responses: 56 Correct
Di culty: 2 Discrimination Index: 35
2
24.8 The demand for a monopolist's output is 2; 000=p+ 1 where p is the price she charges. At
a price of 3, the elasticity of demand for the monopolist's output is:
a ,1. b ,2:50. c ,1:50. d ,2. e ,1.
Topic: Monopoly Correct Responses: 56 Correct
Di culty: 2 Discrimination Index: 35
2
24.9 The demand for a monopolist's output is 4; 000=p+ 5 where p is the price she charges. At
a price of 9, the elasticity of demand for the monopolist's output is:
a ,1. b ,2:29. c ,1:29. d ,1:79. e ,0:79.
MULTIPLE CHOICE
Topic: Monopoly Correct Responses: 57 Correct Di culty: 3 Discrimination Index: 33
2
443
24.10 The demand for a monopolist's output is 3; 000=p + 1 where p is her price. She has
constant marginal costs equal to $5 per unit. What price will she charge to maximize her pro ts?
a 15 b 6 c 14 d 11 e 5
Topic: Monopoly Correct Responses: 57 Correct
Di culty: 3 Discrimination Index: 33
2
24.11 The demand for a monopolist's output is 6; 000=p + 3 where p is her price. She has
constant marginal costs equal to $5 per unit. What price will she charge to maximize her pro ts?
a 20 b 8 c 17 d 13 e 5
Topic: Monopoly Correct Responses: 60 Correct
Di culty: 2 Discrimination Index: 36
24.12 A monopolist faces a constant marginal cost of $1 per unit. If at the price he is charging,
the price elasticity of demand for the monopolist's output is ,:5; then:
a the price he is charging must be 2. b the price he is charging must exceed 2. c the price he is charging must be less than 2. d the monopolist can not be maximizing pro ts. e the monopolist must use price discrimination.
CHAPTER 24 Monopoly
Topic: Monopoly Correct Responses: 95 Correct Di culty: 1 Discrimination Index: 0
444
24.13 A pro t-maximizing monopolist sets:
a price equal to average cost. b price equal to marginal cost. c price equal to marginal cost plus a pro-rated share of overhead. d price equal to marginal revenue. e marginal revenue equal to marginal cost.
Topic: Monopoly Correct Responses: 38 Correct
Di culty: 2 Discrimination Index: 32
24.14 A monopolist has decreasing average costs as output increases. If the monopolist sets price
equal to average cost, it will:
a produce too much output from the standpoint of e ciency. b lose money. c produce too little output from the standpoint of e ciency. d maximize its pro ts. e face excess demand.
Topic: Monopoly Correct Responses: 87 Correct
Di culty: 1 Discrimination Index: 24
24.15 A pro t maximizing monopolist faces a downward sloping demand curve that has a constant
elasticity of ,4. The rm nds it optimal to charge a price of 60 for its output. What is its marginal cost at this level of output?
a 23.50 b 136 c 120 d 45 e 60
MULTIPLE CHOICE
Topic: Monopoly Correct Responses: 87 Correct Di culty: 1 Discrimination Index: 24
445
24.16 A pro t maximizing monopolist faces a downward sloping demand curve that has a constant
elasticity of ,2. The rm nds it optimal to charge a price of 60 for its output. What is its marginal cost at this level of output?
a 16 b 91 c 120 d 30 e 60
Topic: Monopoly Correct Responses: 82 Correct
Di culty: 2 Discrimination Index: 3
24.17 A monopolist has constant marginal costs of $1 per unit. The demand for her output is
1000=p if p is less than or equal to 50. The demand is 0 if p 50. What is her pro t maximizing
level of output?
a 5 b 10 c 15 d 20 e 25
Topic: Monopoly Correct Responses: 42 Correct
Di culty: 2 Discrimination Index: 32
24.18 The demand curve for the output of a certain industry is linear, q = A , Bp. There are
constant marginal costs of C. For all values of A, B; and C such that A 0; B 0; and 0 C A=B :
a if the industry is monopolized, prices will be exactly twice as high as they would be if the industry were competitive. b if the industry is competitive, output will be exactly twice as great as it would be if the industry were monopolized. c if the industry is monopolized, prices will be more than twice as high as if the industry is competitive. d if the industry is monopolized, output will be more than half as large as it would be if the industry were competitive. e None of the above.
CHAPTER 24 Monopoly
Topic: Monopoly Correct Responses: 15 Correct Di culty: 3 Discrimination Index: 0
446
24.19 A monopolist receives a subsidy from the government for every unit of output that is con-
sumed. He has constant marginal costs and the subsidy that he gets per unit of output is greater than his marginal cost of production. But to get the subsidy on a unit of output, somebody has to consume it. From these facts we can conclude that:
a he will pay consumers to consume his product. b if he sells at a positive price, demand must be inelastic at that price. c he will sell at a price where demand is elastic. d he will give the good away. e None of the above.
Topic: Monopoly Correct Responses: 59 Correct
Di culty: 2 Discrimination Index: 24
24.20 A monopolist faces the demand curve q = 110,p=2 where q is the number of units sold and
p is the price in dollars. He has quasi- xed costs, C; and constant marginal costs of $20 per unit of output. Therefore his total costs are C + 20q if q 0 and 0 if q = 0. What is the largest value of C
for which he would be willing to produce positive output?
a $20 b $4,000 c $5,000 d $7,500 e $6,000
MULTIPLE CHOICE
Topic: Monopoly Correct Responses: 59 Correct Di culty: 2 Discrimination Index: 24
447
24.21 A monopolist faces the demand curve q = 115,p=2 where q is the number of units sold and
p is the price in dollars. He has quasi- xed costs, C; and constant marginal costs of $30 per unit of output. Therefore his total costs are C + 30q if q 0 and 0 if q = 0. What is the largest value of C
for which he would be willing to produce positive output?
a $30 b $4,000 c $5,000 d $7,500 e $6,000
Topic: Monopoly Correct Responses: 0 Correct
Di culty: 2 Discrimination Index: 0
24.22 A natural monopolist has the a total cost function cq = 350 + 20q where q is its output.
The inverse demand function for the monopolist's product is p = 100 , 2q. Government regulations require this rm to produce a positive amount and to set price equal to average cost. To comply with these requirements:
a is impossible for this rm. b the rm must produce 40 units. c the rm could produce either 5 units or 35 units. d the rm must charge a price of 70. e the rm must produce 20 units.
CHAPTER 24 Monopoly
Topic: Monopoly Correct Responses: 69 Correct Di culty: 2 Discrimination Index: 20
448
24.23 A monopolist has the total cost function, cq = 1; 300 + 7q. The inverse demand function
a the rm's pro ts will be zero. b the rm will lose $650. c the rm will make positive pro t, but not as much pro t as it would make if it were allowed to choose its own price. d the rm will lose $1,300 e the rm will lose $780
is 110 , 2q; where prices and costs are measured in dollars. If the rm is required by law to meet demand at a price equal to its marginal cost:
Topic: Monopoly Correct Responses: 69 Correct
Di culty: 2 Discrimination Index: 20
24.24 A monopolist has the total cost function, cq = 850 + 4q. The inverse demand function
a the rm's pro ts will be zero. b the rm will lose $425. c the rm will make positive pro t, but not as much pro t as it would make if it were allowed to choose its own price. d the rm will lose $850 e the rm will lose $510
is 190 , 5q; where prices and costs are measured in dollars. If the rm is required by law to meet demand at a price equal to its marginal cost:
MULTIPLE CHOICE
Topic: Monopoly Correct Responses: 61 Correct Di culty: 2 Discrimination Index: 10
449
24.25 A monopolist enjoys a monopoly over the right to sell automobiles on a certain island.
He imports automobiles from abroad at a cost of $10,000 each and sells them at the price that maximizes pro ts. One day, the island's government annexes a neighboring island and extends the monopolist's monopoly rights to this island. People on the annexed island have the same tastes and incomes and there are just as many people as on the rst.
a The monopolist doubles his price and his sales stay constant. b The monopolist keeps his price constant and his sales double. c The monopolist raises his price but does not necessarily double it. d The monopolist's pro ts more than double. e None of the above.
Topic: Monopoly Correct Responses: 41 Correct
Di culty: 3 Discrimination Index: 53
24.26 An airline has exclusive landing rights at the local airport. The airline ies one ight per
day to New York with a plane that has a seating capacity of 100. The cost of ying the plane per day is $4,000 +10q where q is the number of passengers. The number of ights to New York demanded is q = 165 , :5p. If the airline maximizes its monopoly pro ts, the di erence between the marginal cost of ying an extra passenger and the amount the marginal passenger is willing to pay to y to New York is:
a $10. b $100. c $140. d $160. e None of the above.
CHAPTER 24 Monopoly
Topic: Monopoly Correct Responses: 65 Correct Di culty: 2 Discrimination Index: 25
450
24.27 A monopoly has the demand curve q = 10; 000 , 100p. Its total cost function is cq =
1000 + 10q. The government plans to tax the monopoly's pro ts at a rate of 50. If it does so: a the monopoly will increase its price by 50. b the monopoly will increase its price by more than 50. c the monopoly will recover some, but not all of the tax it pays by increasing its price. d the monopoly will not change its price or the quantity it sells. e none of the above.
Topic: Monopoly Correct Responses: 0 Correct
Di culty: 2 Discrimination Index: 0
24.28 A monopolist faces a downward-sloping demand curve and has xed costs so large that
when he maximizes pro ts with a positive amount of output, he earns exactly zero pro ts. At this positive, pro t-maximizing output, it must be that:
a there are decreasing returns to scale. b demand is price inelastic. c marginal revenue is greater than marginal cost. d price equals marginal cost. e average total cost is greater than marginal cost.
MULTIPLE CHOICE
Topic: Monopoly Correct Responses: 70 Correct Di culty: 2 Discrimination Index: 45
451
24.29 A computer software rm has developed a new and better spreadsheet program. The pro-
gram is protected by copyrights, so the rm can act as a monopolist for this product. The demand function for the spreadsheet is q = 50; 000 , 100p. Any single consumer will want only one copy. The marginal cost of producing and distributing another copy and its documentation is just $10 per copy. If the company sells this software at the pro t maximizing monopoly price, the number of consumers who would not buy the software at the monopoly price but would be willing to pay at least the marginal cost is:
a 50,000. b 12,000. c 14,000. d 25,000. e None of the above.
Topic: Monopoly Correct Responses: 21 Correct
Di culty: 3 Discrimination Index: 9
24.30 The town council of Frostbite, Ontario is trying to decide whether to build an outdoor
skating rink which would cost $1 million and last for only one season. Operating costs would be zero. Yearly passes would be sold to anyone who wanted to use the rink. If p is the price of the pass in dollars, the number demanded would be q = 1200,:6p. The council has asked you to advise them on building the rink. You should tell them:
a revenues won't cover construction costs at any ticket price. There is no way to increase total consumer surplus by building the rink. b if the rink is built and price is set to maximize pro ts, the town makes a pro t and consumers will be better o . c if the rink is built and price set to maximize pro ts, the town makes a pro t but consumers are worse o than without a rink. d there is no price at which ticket revenues still cover costs, but total consumer surplus from the rink exceeds costs. e None of the above.
CHAPTER 24 Monopoly
Topic: Monopoly Correct Responses: 58 Correct Di culty: 2 Discrimination Index: 35
452
24.31 A monopolist produces at a point where the price elasticity of demand is ,:7 and the
marginal cost is 2. If you were hired to advise this monopolist on how to increase his pro ts, you would nd that the way to increase his pro ts is to:
a increase his output. b lower the price. c decrease his output. d produce the output level where marginal cost equals price. e increase his advertising e orts.
Topic: Monopoly Correct Responses: 46 Correct
Di culty: 2 Discrimination Index: 22
24.32 The Hard Times Concrete company is a monopolist in the concrete market. It uses two
inputs, cement and gravel, which it buys in competitive markets. The company's production function is q = c1=2 g1=2 where q is its output, c is the amount of cement it uses, and g is the amount of gravel it uses. If the price of cement goes up the rm's demand for cement:
a goes down and its demand for gravel goes up. b goes down and its demand for gravel goes down. c goes down and its demand for gravel may go up, down, or remain the same, depending on the demand function for concrete. d may go up, down, or not change, based on whether the cement's elasticity of demand is less than, equal to, or greater than ,1. e could go up or down, but must move in the opposite direction from its demand for gravel.
MULTIPLE CHOICE
Topic: Monopoly Correct Responses: 80 Correct Di culty: 1 Discrimination Index: 41
453
24.33 In a market with inverse demand curve P = 10 , Q; Brand X is a monopolist with no xed
a 2 b 1 c 3 d No change, the rm is already charging the monopoly price. e None of the above.
costs and with a marginal cost of 2. If marginal cost rises to 4, by how much will the price of Brand X rise?
Topic: Monopoly Correct Responses: 43 Correct
Di culty: 2 Discrimination Index: 23
24.34 Charlie can work as many hours as he wishes at a local fast food restaurant for a wage
of $4 per hour. Charlie also does standup comedy. Since Charlie lives in a quiet, rather solemn midwestern town, he is the town's only comedian and has a local monopoly for standup comedy. The demand for comedy is Q = 40 , P where Q is the number of hours of comedy performed per week and P is the price charged per hour of comedy. When Charlie maximizes his utility, he spends at least one hour per week working at the restaurant and he gets at least one hour of leisure time. His utility depends only on income and leisure. How many hours per week does he perform standup comedy?
a 36 b 40 c 18 d 20 e We can't tell without knowing his utility function.
CHAPTER 24 Monopoly
Topic: Monopoly Correct Responses: 63 Correct Di culty: 2 Discrimination Index: 23
454
24.35 A certain monopolist has a positive marginal cost of production. Despite this fact, the
a is minimizing its pro ts. b produces the same output that it would if it maximized pro ts. c produces less output than it would if it maximized pro ts. d produces more output than it would if it were maximizing pro ts. e produces an output where marginal revenue is strictly less than 1.
monopolist decides to produce a quantity of output that maximizes total revenues. Assume that the marginal revenue curve for this monopolist always has a negative slope. Then the monopolist:
Topic: Monopoly Correct Responses: 46 Correct
Di culty: 2 Discrimination Index: 9
24.36 The demand curve facing a monopolist is Dp = 100=p if p is 20 or smaller and Dp = 0
if p 20. The monopolist has a constant marginal cost of $1 per unit produced. What is the pro t-maximizing quantity of output for this monopolist?
a 4 b 3 c 2 d 5 e Cannot be determined.
MULTIPLE CHOICE
Topic: Monopoly Correct Responses: 74 Correct Di culty: 2 Discrimination Index: 37
455
24.37 An industry has two rms, a leader and a follower. The demand curve for the industry's
output is given by the function p = 320 , 4q; where q is total industry output. Each rm has zero marginal cost. The leader chooses his quantity rst, knowing that the follower will observe the leader's choice and choose his quantity to maximize pro ts, given the quantity produced by the leader. The leader will choose an output of:
a 26.67. b 40. c 20. d 80. e None of the above.
Topic: Monopoly Correct Responses: 74 Correct
Di culty: 2 Discrimination Index: 37
24.38 An industry has two rms, a leader and a follower. The demand curve for the industry's
output is given by the function p = 80 , 2q; where q is total industry output. Each rm has zero marginal cost. The leader chooses his quantity rst, knowing that the follower will observe the leader's choice and choose his quantity to maximize pro ts, given the quantity produced by the leader. The leader will choose an output of:
a 13.33. b 20. c 10. d 40. e None of the above.
CHAPTER 24 Monopoly
Topic: Monopoly Correct Responses: 72 Correct Di culty: 1 Discrimination Index: 19
456
24.39 A monopolist faces a constant marginal cost of $1 per unit and has no xed costs. If the
price elasticity of demand for this product is constant and equal to ,3; then:
a to maximize pro ts, he should charge a price of 1.50. b to maximize pro ts, he should charge a price of 3. c to maximize pro ts, he should charge a price of 1.33. d he is not maximizing pro ts. e none of the above
Topic: Monopoly Correct Responses: 72 Correct Di culty: 1 Discrimination Index: 19
24.40 A monopolist faces a constant marginal cost of $1 per unit and has no xed costs. If the
price elasticity of demand for this product is constant and equal to ,5; then:
a to maximize pro ts, he should charge a price of 1.25. b to maximize pro ts, he should charge a price of 5. c to maximize pro ts, he should charge a price of 1.20. d he is not maximizing pro ts. e none of the above
Topic: Monopoly Correct Responses: 0 Correct Di culty: 2 Discrimination Index: 0
24.41 A pro t-maximizing monopolist has the cost schedule, cy = 10y. The demand for her
product is given by y = 800=p3 where p is her price. Suppose that the government tries to get her to increase her output by giving her a subsidy of 18 dollars for every unit that she sells. Giving her the subsidy would make her:
a decrease her price by 9 dollars. b decrease her price by 18 dollars. c decrease her price by 27 dollars. d decrease her price by 45 dollars. e leave her price unchanged.
MULTIPLE CHOICE
Topic: Monopoly Correct Responses: 0 Correct Di culty: 2 Discrimination Index: 0
457
24.42 A pro t-maximizing monopolist has the cost schedule, cy = 30y. The demand for her
product is given by y = 700=p2 where p is her price. Suppose that the government tries to get her to increase her output by giving her a subsidy of 8 dollars for every unit that she sells. Giving her the subsidy would make her:
a decrease her price by 4 dollars. b decrease her price by 8 dollars. c decrease her price by 16 dollars. d decrease her price by 24 dollars. e leave her price unchanged.
Topic: Monopoly Correct Responses: 74 Correct
Di culty: 2 Discrimination Index: 22
24.43 A pro t-maximizing monopolist faces a demand function given by q = 1000,20p where p is
the price of her output in dollars. She has a constant marginal cost of 20 dollars per unit of output. In an e ort to induce her to increase her output, the government agrees to pay her a subsidy of 10 dollars for every unit that she produces. In response to the subsidy, she will:
a increase her price and lower her output. b decrease her price by $5 per unit. c decrease her price by $10 per unit. d decrease her price by more than $10 per unit, but by less than $16 per unit. e decrease her price by more than $16 per unit.
CHAPTER 24 Monopoly
Topic: Monopoly Correct Responses: 69 Correct Di culty: 2 Discrimination Index: 36
458
24.44 A rm has discovered a new kind of non-fattening, non-habit forming dessert called zwi e.
It doesn't taste very good, but some people like it and it can be produced from old newspapers at zero marginal cost. Before any zwi e can be produced, the rm would have to spend a xed cost of $F. Demand for zwi e is given by the equation q = 20 , p. The rm has a patent on zwi e, so it can have a monopoly in this market.
a The rm will produce zwi e only if F is less than or equal to 100. b The rm will not produce zwi e if F 20. c The rm will produce 20 units of zwi e. d The rm will produce 15 units of zwi e. e None of the above.
Topic: Monopoly Correct Responses: 69 Correct
Di culty: 2 Discrimination Index: 36
24.45 A rm has discovered a new kind of non-fattening, non-habit forming dessert called zwi e.
It doesn't taste very good, but some people like it and it can be produced from old newspapers at zero marginal cost. Before any zwi e can be produced, the rm would have to spend a xed cost of $F. Demand for zwi e is given by the equation q = 22 , p. The rm has a patent on zwi e, so it can have a monopoly in this market.
a The rm will produce zwi e only if F is less than or equal to 121. b The rm will not produce zwi e if F 22. c The rm will produce 22 units of zwi e. d The rm will produce 16.50 units of zwi e. e None of the above.
MULTIPLE CHOICE
Topic: Monopoly Correct Responses: 23 Correct Di culty: 3 Discrimination Index: 22
459
24.46 A rm 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 e ect, so the demand for Slops is given by the equation q = 18 , 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 rm must undertake a xed cost of 86. Since the inventor has a patent on Slops, it can be a monopolist in this new industry.
a The rm will produce 9 units of Slops. b A Pareto improvement could be achieved by having the government pay the rm a subsidy of 91 and insisting that the rm o er Slops at zero price. c From the point of view of social e ciency, it is best that no Slops be produced. d The rm will produce 18 units of Slops. e None of the above.
Topic: Monopoly Correct Responses: 23 Correct
Di culty: 3 Discrimination Index: 22
24.47 A rm 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 e ect, so the demand for Slops is given by the equation q = 20 , 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 rm must undertake a xed cost of 105. Since the inventor has a patent on Slops, it can be a monopolist in this new industry.
a The rm will produce 10 units of Slops. b A Pareto improvement could be achieved by having the government pay the rm a subsidy of 110 and insisting that the rm o er Slops at zero price. c From the point of view of social e ciency, it is best that no Slops be produced. d The rm will produce 20 units of Slops. e None of the above.
CHAPTER 24 Monopoly
Topic: Monopoly Correct Responses: 57 Correct Di culty: 2 Discrimination Index: 21
460
24.48 The demand for Professor Bongmore's new book is given by the function Q = 5; 000 , 100p.
If the cost of having the book typeset is 7,000, if the marginal cost of printing an extra copy is 4, and if he has no other costs, then he would maximize his pro ts by:
a having it typeset and selling 2,300 copies. b having it typeset and selling 2,500 copies. c not having it typeset and not selling any copies. d having it typeset and selling 4,600 copies. e having it typeset and selling 1,150 copies.
Topic: Monopoly Correct Responses: 57 Correct
Di culty: 2 Discrimination Index: 21
24.49 The demand for Professor Bongmore's new book is given by the function Q = 1; 000 , 100p.
If the cost of having the book typeset is 12,000, if the marginal cost of printing an extra copy is 4, and if he has no other costs, then he would maximize his pro ts by:
a having it typeset and selling 300 copies. b having it typeset and selling 500 copies. c not having it typeset and not selling any copies. d having it typeset and selling 600 copies. e having it typeset and selling 150 copies.
Topic: Monopoly Correct Responses: 0 Correct
Di culty: 0 Discrimination Index: 0
24.50 Peter Morgan sells pigeon pies from his pushcart in Central Park. Due to the abundant
supplies of raw materials, his costs are zero. The demand schedule for his pigeon pies is py = 90 , y=4. What level of output will maximize Peter's pro ts?
a 180 b 36 c 360 d 540 e None of the above
MULTIPLE CHOICE
Topic: Monopoly Correct Responses: 0 Correct Di culty: 0 Discrimination Index: 0
461
24.51 Peter Morgan sells pigeon pies from his pushcart in Central Park. Due to the abundant
supplies of raw materials, his costs are zero. The demand schedule for his pigeon pies is py = 70 , y=3. What level of output will maximize Peter's pro ts?
a 105 b 21 c 210 d 315 e None of the above
Topic: Monopoly Correct Responses: 0 Correct
Di culty: 0 Discrimination Index: 0
24.52 A pro t-maximizing monopoly faces an inverse demand function described by the equation
py = 40 , y and its total costs are cy = 9y; where prices and costs are measured in dollars. In a increase its price by 8. b increase its price by 12. c increase its price by 4. d leave its price constant. e none of the above.
Topic: Monopoly Correct Responses: 0 Correct Di culty: 0 Discrimination Index: 0
the past it was not taxed, but now it must pay a tax of 8 dollars per unit of output. After the tax, the monopoly will:
24.53 A pro t-maximizing monopoly faces an inverse demand function described by the equation
py = 100 , y and its total costs are cy = 7y; where prices and costs are measured in dollars. In a increase its price by 4. b increase its price by 6. c increase its price by 2. d leave its price constant. e none of the above.
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:
CHAPTER 24 Monopoly
Topic: Monopoly Correct Responses: 0 Correct Di culty: 0 Discrimination Index: 0
462
24.54 A monopolist faces a demand function Q = 4; 000=p+ 7,2. If she charges a price of p; her
marginal revenue will be:
a p=2 + 7 b 2p + 3:50 c p=2 , 7=2. d ,2p + 7,3 e p + B, 2
Topic: Monopoly Correct Responses: 0 Correct
Di culty: 0 Discrimination Index: 0
24.55 A monopolist faces a demand function Q = 2; 000=p+ 8,2. If she charges a price of p; her
marginal revenue will be:
a p=2 + 8 b 2p + 4 c p=2 , 8=2. d ,2p + 8,3 e p + B, 2
Topic: Monopoly Correct Responses: 0 Correct
Di culty: 0 Discrimination Index: 0
24.56 The demand for copies of the software package Macrosoft Doors is given by Q = 10; 000P ,32.
The cost to produce Doors is C = 100; 000+5Q. If Macrosoft practices cost plus pricing, what would be the pro t maximizing markup?
a 100. b 33.33. c 14.29. d 6.67. e 3.23.
MULTIPLE CHOICE
Topic: Monopoly Correct Responses: 0 Correct Di culty: 0 Discrimination Index: 0
463
24.57 The demand for copies of the software package Macrosoft Doors is given by Q = 10; 000P ,16.
a 100. b 33.33. c 14.29. d 6.67. e 3.23.
The cost to produce Doors is C = 100; 000 + 10Q. If Macrosoft practices cost plus pricing, what would be the pro t maximizing markup?
Topic: Monopoly Correct Responses: 0 Correct
Di culty: 0 Discrimination Index: 0
24.58 A major software developer has estimated the demand for its new personal nance software ,1:10
package to be Q = 1; 000; 000P while the total cost of the package is C = 400; 000 + 20Q. If this rm wishes to maximize pro t, what percentage markup should it place on this product?
a 1,020. b 1,100. c 1,000. d 850. e 1,150.
Topic: Monopoly Correct Responses: 0 Correct Di culty: 0 Discrimination Index: 0
24.59 A major software developer has estimated the demand for its new personal nance software ,1:40
package to be Q = 1; 000; 000P while the total cost of the package is C = 100; 000 + 20Q. If this rm wishes to maximize pro t, what percentage markup should it place on this product?
a 230. b 150. c 250. d 340. e 200.
CHAPTER 24 Monopoly
Topic: Monopoly Correct Responses: 0 Correct Di culty: 0 Discrimination Index: 0
464
24.60
The Fabulous 500s Decor Company is the only producer of pink amingo lawn statues. While business is not a good as it used to be, in recent times the annual demand has been Q = 400 , 4P. Flamingo lawn statues are hand crafted by artisans using the process Q = minL; P=9; where L is hours of labor, and P is pounds of pink plastic. PL = 20 and PP = 4. What would be the pro t maximizing output and price?
a Q = 180; P = 55 b Q = 189:78; P = 52:56 c Q = 199:44; P = 50:14 d Q = 88; P = 78 e Q = 176; P = 56
Topic: Monopoly Correct Responses: 0 Correct
Di culty: 0 Discrimination Index: 0
24.61
The Fabulous 500s Decor Company is the only producer of pink amingo lawn statues. While business is not a good as it used to be, in recent times the annual demand has been Q = 800 , 2P. Flamingo lawn statues are hand crafted by artisans using the process Q = minL; P=6; where L is hours of labor, and P is pounds of pink plastic. PL = 15 and PP = 2. What would be the pro t maximizing output and price?
a Q = 393; P = 203:50 b Q = 392:33; P = 203:83 c Q = 399:42; P = 200:29 d Q = 373; P = 213:50 e Q = 746; P = 27
MULTIPLE CHOICE
Topic: Monopoly Correct Responses: 0 Correct Di culty: 0 Discrimination Index: 0
465
24.62 An obscure inventor in Strasburg, North Dakota has a monopoly on a new beverage called
Bubbles, which produces an unexplained craving for Lawrence Welk music. Bubbles is produced by the following process: Q = minR=5; W where R is pulverized Lawrence Welk records, and W is gallons of North Dakota well water. PR = PW = 1. Demand for Bubbles is Q = 2; 304P ,2A0:5. If the advertising budget for Bubbles is $81, the pro t maximizing quantity of Bubbles is
a 0 b 36 c 864 d 144 e 140
Topic: Monopoly Correct Responses: 0 Correct
Di culty: 0 Discrimination Index: 0
24.63 An obscure inventor in Strasburg, North Dakota has a monopoly on a new beverage called
Bubbles, which produces an unexplained craving for Lawrence Welk music. Bubbles is produced by the following process: Q = minR=5; W where R is pulverized Lawrence Welk records, and W is gallons of North Dakota well water. PR = PW = 1. Demand for Bubbles is Q = 3; 600P ,2A0:5. If the advertising budget for Bubbles is $64, the pro t maximizing quantity of Bubbles is
a 0 b 40 c 1,200 d 200 e 196
CHAPTER 24 Monopoly
Topic: Monopoly Correct Responses: 0 Correct Di culty: 0 Discrimination Index: 0
466
24.64 The Cleveland Visitors Bureau is the exclusive national marketer of weekend getaway vacations in Cleveland, Ohio. At current market prices, the price elasticity of demand is 0.50. To maximize pro ts, the bureau should
a Raise prices. b Lower prices. c Do not change prices. d More information is needed to make an accurate judgement. e Run new TV commercials.
Topic: Monopoly Correct Responses: 0 Correct
Di culty: 0 Discrimination Index: 0
24.65 The Cleveland Visitors Bureau is the exclusive national marketer of weekend getaway
vacations in Cleveland, Ohio. At current market prices, the price elasticity of demand is 1. To maximize pro ts, the bureau should
a Raise prices. b Lower prices. c Do not change prices. d More information is needed to make an accurate judgement. e Run new TV commercials.
MULTIPLE CHOICE
Topic: Monopoly Correct Responses: 0 Correct Di culty: 0 Discrimination Index: 0
467
24.66 In some parts of the world, Red Lizzard Wine is alleged to increase one's longevity. It is
produced by the following process: the quantity of wine which should be imported into the US is
a 0 b 40 c 800 d 160 e 156
Topic: Monopoly Correct Responses: 0 Correct Di culty: 0 Discrimination Index: 0
Q = min1=4L; R where L is the number of spotted red lizzards, and R is gallons of rice wine. PL = PR = 1. Demand 1 for Red Lizzard Wine in the United States is Q = 1; 600P ,2A 2 . If the advertising budget is $100,
24.67 In some parts of the world, Red Lizzard Wine is alleged to increase one's longevity. It is
produced by the following process: quantity of wine which should be imported into the US is
a 0 b 18 c 216 d 36 e 32 Q = min1=5L; R where L is the number of spotted red lizzards, and R is gallons of rice wine. PL = PR = 1. Demand 1 for Red Lizzard Wine in the United States is Q = 576P ,2A 2 . If the advertising budget is $81, the
Essay
Topic: Monopoly Correct Responses: 0 Di culty: 3 Discrimination Index: 0
Monopoly
24.1 A baseball team's attendance depends on the number of games it wins per season and on
the price of its tickets. The demand function it faces is Q = N20 , p where Q is the number of tickets in hundred thousands sold per year, p is the price per ticket and N is the fraction of its games that the team wins. The team can increase the number of games it wins by hiring better players. If the team spends C million dollars on players it will win the fraction :7,1=C of its games. Over the relevant range, marginal cost of selling an extra ticket is zero. a Write an expression for the rm's pro ts as a function of ticket price and expenditure on players. bFind the ticket price that maximizes revenue. c Find the pro t maximizing expenditure on players and the pro t maximizing fraction of games to win.
Answer: a:7 , 1=C20 , pp , C bp = 10 c C = 10
Chapter 25
True-False
Topic: Monopoly Behavior Correct Responses: 82 Correct
Monopoly Behavior
Di culty: 2 Discrimination Index: 35
25.1 Third degree price discrimination occurs when a monopolist sells output to di erent people
at di erent prices, but every unit that an individual buys costs the same amount.
Topic: Monopoly Behavior Correct Responses: 79 Correct Di culty: 1 Discrimination Index: 19
25.2 A monopolist who is able to practice third degree price discrimination will make greater
pro ts than a monopolist who is able to practice rst degree price discrimination.
Topic: Monopoly Behavior Correct Responses: 86 Correct Di culty: 2 Discrimination Index: 3
25.3 A discriminating monopolist is able to charge di erent prices in two di erent markets. If
when the same price is charged in both markets, the quantity demanded in market 1 is always greater than the quantity demanded in market 2, then in order to maximize pro ts, the monopolist should charge a higher price in market 1 than in market 2.
Topic: Monopoly Behavior Correct Responses: 28 Correct Di culty: 2 Discrimination Index: 11
25.4 In a monopolistically competitive industry with zero pro ts, each rm will produce less than
the amount that minimizes average costs.
Topic: Monopoly Behavior Correct Responses: 61 Correct
Di culty: 3 Discrimination Index: 22
25.5 It is possible that a pro t-maximizing monopolist who is able to practice rst degree perfect
price discrimination would sell a quantity x such that the demand curve for his product is inelastic when the quantity sold is x.
CHAPTER 25 Monopoly Behavior
Topic: Monopoly Behavior Correct Responses: 80 Correct Di culty: 1 Discrimination Index: 15
470
25.6 In order to maximize his pro ts, a monopolist who practices third degree price discrimina-
tion with two or more markets should charge higher prices in markets with more inelastic demand functions.
Topic: Monopoly Behavior Correct Responses: 71 Correct Di culty: 1 Discrimination Index: 20
25.7 A pro t-maximizing monopolist is able to practice third degree price discrimination. If he
charges p1 in market 1 and p2 in market 2, where p1 p2; it must be that the quantity sold in market 1 is smaller than the quantity sold in market 2.
Topic: Monopoly Behavior Correct Responses: 32 Correct Di culty: 2 Discrimination Index: 24
25.8 A pro t-maximizing monopolist practices third degree price discrimination. If he charges
p1 in market 1 and p2 in market 2, where p1 p2 ; then if the law forced him to charge the same price in both markets, more would be demanded in market 1 than in market 2.
Topic: Monopoly Behavior Correct Responses: 74 Correct Di culty: 2 Discrimination Index: 27
25.9 A price discriminating monopolist charges p in market 1 and p in market 2. If p
p2 ; it 1 2 1 must be that the absolute value of the price elasticity in market 1 at price p1 is smaller than the absolute value of the price elasticity in market 2 at price p2 .
Topic: Monopoly Behavior Correct Responses: 0 Correct Di culty: 1 Discrimination Index: 0
25.10 A monopolist who is able to practice third degree price discrimination charges a higher
price in the market that is more elastic.
Multiple Choice
Monopoly Behavior
Topic: Monopoly Behavior Correct Responses: 31 Correct
Di culty: 2 Discrimination Index: 23
25.1 A monopolist is able to practice third degree price discrimination between two markets.
The demand function in the rst market is q = 500 , 2p and the demand function in the second market is q = 1500 , 6p. To maximize his pro ts, he should:
a charge a higher price in the second market than in the rst. b charge a higher price in the rst market than in the second. c charge the same price in both markets. d sell only in one of the two markets. e none of the above.
Topic: Monopoly Behavior Correct Responses: 45 Correct
Di culty: 2 Discrimination Index: 0
25.2 A monopolist nds that a person's demand for its product depends on the person's age. The
inverse demand function of someone of age y; can be written p = Ay,q where Ay is an increasing function of y. The product cannot be resold from one buyer to another and the monopolist knows the ages of its consumers. If the monopolist maximizes its pro ts:
a older people will pay higher prices and purchase less of this product. b older people will pay higher prices and purchase more of this product. c older people will pay lower prices and purchase more of this product. d everyone pays the same price but old people consume more. e None of the above.
CHAPTER 25 Monopoly Behavior
Topic: Monopoly Behavior Correct Responses: 17 Correct Di culty: 3 Discrimination Index: 24
472
25.3 A monopolist has discovered that the inverse demand function of a person with income M
for the monopolist's product is p = :002M , q. The monopolist is able to observe the incomes of its consumers and to practice price discrimination according to income second-degree price discrimination. The monopolist has a total cost function, cq = 100q. The price it will charge a consumer depends on the consumer's income, M; according to the formula:
a p = :001M + 50. b p = :002M , 100. c p = M 2. d p = :01M 2 + 100. e None of the above.
Topic: Monopoly Behavior Correct Responses: 59 Correct
Di culty: 2 Discrimination Index: 41
25.4 Wobble's Weebles is the only producer of weebles. It makes weebles at constant marginal
cost c where c 0 and sells them at a price of p1 per weeble in Market 1 and at a price of p2 per weeble in Market 2. The demand curve for weebles in Market 1 has a constant price elasticity of demand equal to ,2. The demand curve for weebles in Market 2 has a constant price elasticity equal to ,3=2. The ratio of the pro t maximizing price in Market 1 to the pro t maximizing price in Market 2 is:
a 2=3. b 1=3. c 3=2. d 3. e dependent on the value of c.
MULTIPLE CHOICE
Topic: Monopoly Behavior Correct Responses: 24 Correct Di culty: 2 Discrimination Index: 22
473
25.5 A monopolist sells in two markets. The demand curve for her product is given by p =
303 , 3x1 in the rst market and p2 = 253 , 5x2 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 xed costs. She can charge di erent prices in the two markets. What is
1
the pro t-maximizing combination of quantities for this monopolist?
a x1 = 100 and x2 = 27 b x1 = 50 and x2 = 25 c x1 = 75 and x2 = 50 d x1 = 60 and x2 = 23 e x1 = 70 and x2 = 35
Topic: Monopoly Behavior Correct Responses: 24 Correct
Di culty: 2 Discrimination Index: 22
1
25.6 A monopolist sells in two markets. The demand curve for her product is given by p =
119 , 2x1 in the rst market and p2 = 123 , 5x2 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 xed costs. She can charge di erent prices in the two markets. What is
the pro t-maximizing combination of quantities for this monopolist?
a x1 = 58 and x2 = 14 b x1 = 29 and x2 = 12 c x1 = 41 and x2 = 29 d x1 = 39 and x2 = 10 e x1 = 49 and x2 = 22
CHAPTER 25 Monopoly Behavior
Topic: Monopoly Behavior Correct Responses: 36 Correct Di culty: 2 Discrimination Index: 46
474
25.7 A price-discriminating monopolist sells in two separate markets such that goods sold in one
market are never resold in the other. It charges p1 = 3 in one market and p2 = 7 in the other market. At these prices, the price elasticity in the rst market is ,2:50 and the price elasticity in the second market is ,0:80. Which of the following actions is sure to raise the monopolists pro ts?
a Lower p2. b Raise p2. c Raise p1 and lower p2. d Raise both p1 and p2. e Raise p2 and lower p1.
Topic: Monopoly Behavior Correct Responses: 36 Correct
Di culty: 2 Discrimination Index: 46
25.8 A price-discriminating monopolist sells in two separate markets such that goods sold in one
market are never resold in the other. It charges p1 = 3 in one market and p2 = 9 in the other market. At these prices, the price elasticity in the rst market is ,2:50 and the price elasticity in the second market is ,0:90. Which of the following actions is sure to raise the monopolists pro ts?
a Lower p2. b Raise p2. c Raise p1 and lower p2. d Raise both p1 and p2. e Raise p2 and lower p1.
MULTIPLE CHOICE
Topic: Monopoly Behavior Correct Responses: 75 Correct Di culty: 0 Discrimination Index: 47
475
25.9 A monopolist has a constant marginal cost of $2 per unit and no xed costs. He faces
separate markets in the U.S. and England. He can set one price p1 for the American market and another price p2 for the English market. If demand in the U.S. is given by Q1 = 8; 400 , 700p1; and demand in England is given by Q2 = 5; 000 , 500p2; then the price in America will:
a be larger than the price in England by 1. b be smaller than the price in England by 1. c equal the price in England. d be larger than the price in England by 3. e be smaller than the price in England by 3.
Topic: Monopoly Behavior Correct Responses: 75 Correct
Di culty: 0 Discrimination Index: 47
25.10 A monopolist has a constant marginal cost of $2 per unit and no xed costs. He faces
separate markets in the U.S. and England. He can set one price p1 for the American market and another price p2 for the English market. If demand in the U.S. is given by Q1 = 6; 400 , 800p1; and demand in England is given by Q2 = 6; 400 , 400p2; then the price in America will:
a be larger than the price in England by 4. b be smaller than the price in England by 4. c equal the price in England. d be larger than the price in England by 6. e be smaller than the price in England by 6.
CHAPTER 25 Monopoly Behavior
Topic: Monopoly Behavior Correct Responses: 42 Correct Di culty: 0 Discrimination Index: 48
476
25.11 Roach Motors has a monopoly on used cars in Enigma, Ohio. By installing secret mi-
crophones in the showroom, the friendly salespersons at Roach are able to learn each customer's willingness to pay and can therefore practice rst degree price discrimination, extracting from each customer his entire consumer surplus. The inverse demand function for cars in Enigma is P = 2000 , 10Q. Roach Motors purchases its stock of used cars at an auction in Cleveland for $400 each. Roach motors will
a sell 80 cars for a total pro t of $64,000. b sell 160 cars at a price of $300 a car. c sell 160 cars for a total pro t of $12,8000. d sell 192 cars and make a total pro t of $20,4800 e shut down since revenue will not cover variable costs.
Topic: Monopoly Behavior Correct Responses: 42 Correct
Di culty: 0 Discrimination Index: 48
25.12 Roach Motors has a monopoly on used cars in Enigma, Ohio. By installing secret mi-
crophones in the showroom, the friendly salespersons at Roach are able to learn each customer's willingness to pay and can therefore practice rst degree price discrimination, extracting from each customer his entire consumer surplus. The inverse demand function for cars in Enigma is P = 2000 , 10Q. Roach Motors purchases its stock of used cars at an auction in Cleveland for $700 each. Roach motors will
a sell 65 cars for a total pro t of $42,250. b sell 130 cars at a price of $300 a car. c sell 130 cars for a total pro t of $8,4500. d sell 156 cars and make a total pro t of $13,5200 e shut down since revenue will not cover variable costs.
MULTIPLE CHOICE
Topic: Monopoly Behavior Correct Responses: 0 Correct Di culty: 0 Discrimination Index: 0
477
25.13 BMW Bayerische Motoren Werk charges a considerably higher price for its automobiles
in the North American market than it does in its home market of Europe. Assuming that the goal of BMW's pricing policy is pro t maximization, which of the following would be a plausible explanation for BMW's pricing policy?
a The income elasticity of demand in North America must be greater than 1, making BMWs a luxury good in North America; and between 0 and 1 in Europe, making BMWs a normal good. b The income elasticity of demand in North America must be between 0 and 1, making BMWs a normal good in North America; and between and less than 1 in Europe, making BMWs an inferior good. c The price elasticity of demand in North America must be greater than 1, making demand for BMWs price elastic in North America; and between 0 and 1 in Europe, making demand for BMWs price inelastic. d The income elasticity of demand in both North America and Europe are greater than 1, since BMWs are a luxury good; but per capita income in North America is much higher than in Europe. e The price elasticity of demand is greater than 1 in both North America and Europe, making BMWs price elastic; but must be higher in Europe.
Topic: Monopoly Behavior Correct Responses: 0 Correct
Di culty: 0 Discrimination Index: 0
25.14 A careful analysis of demand for Bubbles in Strasburg, ND reveals a strange segmentation
in the market. Recall Bubbles is the beverage which produces an unexplained craving for Lawrence Welk's music. It is produced by the process Q = minR=4; W; where R is the number of pulverized Lawrence Welk records, and W is gallons of North Dakota well water. PR = 1; PW = 3. If demand for Bubbles by senior citizens is described by Qo = 500P f,3=2g while demand by those under 65 years old is Qy = 50P ,2; how should Bubbles be priced to maximize pro ts?
a $21 for senior citizens, $14 for those younger. b $10.50 for senior citizens, $14 for those younger. c $7 for senior citizens, $9.33 for those younger. d $16.33 for all citizens of Strasburg. e $36 for senior citizens, $24 for those younger.
CHAPTER 25 Monopoly Behavior
Topic: Monopoly Behavior Correct Responses: 0 Correct Di culty: 0 Discrimination Index: 0
478
25.15 A careful analysis of demand for Bubbles in Strasburg, ND reveals a strange segmentation
in the market. Recall Bubbles is the beverage which produces an unexplained craving for Lawrence Welk's music. It is produced by the process Q = minR=5; W; where R is the number of pulverized Lawrence Welk records, and W is gallons of North Dakota well water. PR = 1; PW = 4. If demand for Bubbles by senior citizens is described by Qo = 500P f,3=2g while demand by those under 65 years old is Qy = 50P ,3; how should Bubbles be priced to maximize pro ts?
a $27 for senior citizens, $13.50 for those younger. b $13.50 for senior citizens, $27 for those younger. c $9 for senior citizens, $18 for those younger. d $16.20 for all citizens of Strasburg. e $60 for senior citizens, $30 for those younger.
Topic: Monopoly Behavior Correct Responses: 0 Correct
Di culty: 0 Discrimination Index: 0
25.16 Miron Floren, of The Lawrence Welk Show fame, now tours the country performing at ac-
cordion concerts. A careful analysis of demand for tickets to Mr. Floren's concerts reveals a strange segmentation in the market. Demand for tickets by senior citizens is described by Qo = 500P f,3=2g while demand by those under 65 years old is Qy = 50P ,5. If the marginal cost of a ticket is $4, how should tickets to Mr. Floren's concerts be priced to maximize pro ts?
a $12 for senior citizens, $5for those younger. b $20 for senior citizens, $6for those younger. c $4 for senior citizens, $13.33for those younger. d $5.78 for all tickets. e $8 for senior citizens, $16for those younger.
MULTIPLE CHOICE
Topic: Monopoly Behavior Correct Responses: 0 Correct Di culty: 0 Discrimination Index: 0
479
25.17 Miron Floren, of The Lawrence Welk Show fame, now tours the country performing at ac-
cordion concerts. A careful analysis of demand for tickets to Mr. Floren's concerts reveals a strange segmentation in the market. Demand for tickets by senior citizens is described by Qo = 500P f,3=2g while demand by those under 65 years old is Qy = 50P ,2. If the marginal cost of a ticket is $2, how should tickets to Mr. Floren's concerts be priced to maximize pro ts?
a $6 for senior citizens, $4for those younger. b $4 for senior citizens, $3for those younger. c $2 for senior citizens, $2.67for those younger. d $4.67 for all tickets. e $4 for senior citizens, $8for those younger.
Essay
Topic: Monopoly Behavior Correct Responses: 0
Monopoly Behavior
Di culty: 0 Discrimination Index: 0
25.1 Disneyland has two possibilities for pricing rides at its theme parks: 1 Set MR = MC for
each ride and charge the maximum price consumers would bear. 2 Charge an admission fee to the theme park, but allow unlimited rides for free. Using graphs, show which pricing scheme is more pro table for Disneyland.
Chapter 26
True-False
Topic: Factor Markets Correct Responses: 93 Correct
Factor Markets
Di culty: 1 Discrimination Index: 0
26.1 A monopsony occurs when two previously competing rms reach an agreement to collude
on price.
Topic: Factor Markets Correct Responses: 56 Correct Di culty: 1 Discrimination Index: 0
26.2 A monopsonist's market power enables him to hire labor at a marginal cost that is lower
than the wage rate.
Topic: Factor Markets Correct Responses: 38 Correct Di culty: 1 Discrimination Index: 40
26.3 For a monopsonist, the supply curve of a factor of production is less steep than the marginal
cost curve.
Topic: Factor Markets Correct Responses: 0 Correct Di culty: 2 Discrimination Index: 0
26.4 A coal producer has a monopoly on coal. A di erent monopoly controls the railroad that
takes the coal to market. Each monopolist chooses prices to maximize its pro ts. If the coal monopolist buys the railroad then it will increase its pro ts by raising the market price of coal.
Topic: Factor Markets Correct Responses: 0 Correct Di culty: 2 Discrimination Index: 0
26.5 For a monopsonist, the more elastic the supply of labor, the greater the di erence between
the marginal cost of labor and the wage rate.
CHAPTER 26 Factor Markets
Topic: Factor Markets Correct Responses: 31 Correct Di culty: 2 Discrimination Index: 20
482
26.6 If a monopolist faces a competitive labor market, it will hire labor up to the point where
the price of output times the marginal product of labor equals the wage rate.
Topic: Factor Markets Correct Responses: 0 Correct Di culty: 1 Discrimination Index: 0
26.7 A monopolist who faces a horizontal labor supply curve will demand less labor than he
would if he acted competitively.
Topic: Factor Markets Correct Responses: 0 Correct Di culty: 1 Discrimination Index: 0
26.8 If an upstream monopolist sells to a downstream monopolist, the price to consumers will
be higher than the competitive price, but not so high as it would be if the downstream monopolist took control of the upstream monopolist's business and ran both the upstream and downstream markets to maximize total pro ts.
Topic: Factor Markets Correct Responses: 0 Correct Di culty: 0 Discrimination Index: 0
26.9 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.
Multiple Choice
Factor Markets
Topic: Factor Markets Correct Responses: 31 Correct
Di culty: 1 Discrimination Index: 60
26.1 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 downwardsloping straight line with slope ,1. The monopolist faces a horizontal labor supply curve. If the monopolist chooses output to maximize pro ts, then the:
a marginal cost of labor to the monopolist exceeds the wage. b marginal product of labor times price of output equals the wage. c marginal product of labor times price of output is less than the wage. d marginal product of labor times price of output exceeds the wage. e marginal revenue product of labor is less than the wage.
Topic: Factor Markets Correct Responses: 0 Correct
Di culty: 1 Discrimination Index: 0
26.2 If a monopsonist pays the wage rate w; then the amount of labor that he can hire is
Lw = Aw; where A is a positive constant. The marginal cost of labor to the monopsonist is: a equal to the wage rate. b twice the wage rate. c half the wage rate. d greater than the wage rate but less than twice as great. e less than the wage rate but more than half as great.
CHAPTER 26 Factor Markets
Topic: Factor Markets Correct Responses: 0 Correct Di culty: 1 Discrimination Index: 0
484
26.3 A pro t-maximizing monopsonist hires both men and women to do a certain task. The two
sexes are equally good at this task and are regarded as perfect substitutes. Labor supply curves for both sexes are upward-sloping. In order to hire M men, the rm would have to pay men a wage of AM, where A is a positive constant. In order to hire F women, the monopsonist would have to pay a wage of BF c where B and c are positive constants. Which, if any, of these conditions necessarily implies that he pays a lower wage to women than to men?
a A b A c c d Bc e C B. c. 1. A. 2.
Topic: Factor Markets Correct Responses: 0 Correct
Di culty: 3 Discrimination Index: 0
26.4 The frangle industry is a monopoly, with a demand curve 100 , p; where p is the price of
frangles. It takes one unit of labor and no other inputs to produce a frangle. The Frangle-makers Guild is a strong union. The Guild sets a wage and prevents anyone from working for less than that wage. The frangle monopoly must pay that wage but can hire as much labor as it chooses to. If the guild chooses a wage so as to maximize the total earnings wage times number of units of labor hired of frangle-makers, then:
a the price of frangles will be 50. b the price of frangles will be 25. c the price of frangles will equal the wage rate. d the wage rate will be 25. e the wage will be 50.
MULTIPLE CHOICE
Topic: Factor Markets Correct Responses: 0 Correct Di culty: 2 Discrimination Index: 0
485
26.5 The bauble industry is competitive with free entry. There is a xed-coe cient technology.
One unit of labor and one unit of plastic are required for each bauble. Workers in the bauble industry must all belong to the Bauble-makers Union. The union sets the wage that will be paid to all bauble-makers. The price of plastic is 10 dollars per unit and the demand function for baubles is 1000,10p. Long run equilibrium requires that the price of baubles equals the cost of production. The wage per unit of labor that maximizes total revenue of workers is:
a 100. b 10. c 45. d 20. e in nity.
Topic: Factor Markets Correct Responses: 0 Correct
Di culty: 2 Discrimination Index: 0
26.6 Suppose that the demand curve for mineral water is given by p = 20,8q where p is the price
per bottle paid by consumers and q is the number of bottles purchased by consumers. Mineral water is supplied to consumers by a monopolistic distributor who buys from a monopolistic producer, who is able to produce mineral water at zero cost. The producer charges the distributor a price of c per bottle. Given his marginal cost of c per unit, the distributor chooses an output to maximize his own pro ts. Knowing that this is what the distributor will do, the producer sets his price c so as to maximize his revenue. The price paid by consumers under this arrangement is:
a 15 b 2.50 c 10 d 5 e 1.25
CHAPTER 26 Factor Markets
Topic: Factor Markets Correct Responses: 0 Correct Di culty: 2 Discrimination Index: 0
486
26.7 Suppose that the demand curve for mineral water is given by p = 60,8q where p is the price
per bottle paid by consumers and q is the number of bottles purchased by consumers. Mineral water is supplied to consumers by a monopolistic distributor who buys from a monopolistic producer, who is able to produce mineral water at zero cost. The producer charges the distributor a price of c per bottle. Given his marginal cost of c per unit, the distributor chooses an output to maximize his own pro ts. Knowing that this is what the distributor will do, the producer sets his price c so as to maximize his revenue. The price paid by consumers under this arrangement is:
a 45 b 7.50 c 30 d 15 e 3.75
Topic: Factor Markets Correct Responses: 0 Correct
Di culty: 2 Discrimination Index: 0
26.8 The labor supply curve faced by a large rm in a small city is given by w = 40+0:05L where
L is the number of units of labor per week hired by the large rm and w is the weekly wage rate
that it pays. If the rm is currently hiring 1000 units of labor per week, then the marginal cost of a unit of labor to the rm is:
a equal to 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.
MULTIPLE CHOICE
Topic: Factor Markets Correct Responses: 0 Correct Di culty: 2 Discrimination Index: 0
487
26.9 The labor supply curve faced by a large rm in a small city is given by w = 60+0:09L where
L is the number of units of labor per week hired by the large rm and w is the weekly wage rate
that it pays. If the rm is currently hiring 1000 units of labor per week, then the marginal cost of a unit of labor to the rm is:
a equal to the wage rate. b is twice the wage rate. c equals the wage rate plus 180. d equals the wage rate plus 90. e equals the wage rate plus 270.
Topic: Factor Markets Correct Responses: 0 Correct
Di culty: 0 Discrimination Index: 0
26.10
Rabelaisian Restaurants has a monopoly in the town of Upper Glutton. Its production function is Q = 10L where L is the amount of labor it uses and Q is the number of meals produced. In order to hire L units of labor, Rabelaisian Restaurants must pay a wage of 20 + :1L per unit of labor. The demand curve for meals at Rabelaisian Restaurants is given by P = 50 , Q=1000. The pro t maximizing output for Rabelasian Restaurants is:
a 12,000. b 24,000. c 3,000. d 2,000. e 1,500.
CHAPTER 26 Factor Markets
Topic: Factor Markets Correct Responses: 0 Correct Di culty: 0 Discrimination Index: 0
488
26.11
Rabelaisian Restaurants has a monopoly in the town of Upper Glutton. Its production function is Q = 40L where L is the amount of labor it uses and Q is the number of meals produced. In order to hire L units of labor, Rabelaisian Restaurants must pay a wage of 120 + :1L per unit of labor. The demand curve for meals at Rabelaisian Restaurants is given by P = 20 , Q=1000. The pro t maximizing output for Rabelasian Restaurants is:
a 8,000. b 16,000. c 2,000. d 500. e 1,000.
Essay
Topic: Factor Markets Correct Responses: 0
Factor Markets
Di culty: 3 Discrimination Index: 0
26.1 This comes from an actual newspaper story. "The average price of a home in W. county
rose more than 12 last year...but the number of sales fell nearly 15. `It's the old law of supply and demand', said a spokesman for the Board of Realtors. `The number of sales is down because there's a higher demand for properties but there isn't a corresponding number to sell.'" a What does the "old law of supply and demand" predict would happen to price and quantity if the demand curve shifts outward and the supply curve does not change? b Draw a diagram to illustrate the case of a shift in demand and or supply curves that is consistent with the observed change in prices and quantities. Answer: aThe price would rise and the quantity would rise. Even if the supply were very inelastic, the number of sales would not fall if the supply curve did not shift. b One simple case would be a leftward shift in the supply curve and no change in the demand curve.
Chapter 27
True-False
Topic: Oligopoly Correct Responses: 72 Correct Di culty: 1 Discrimination Index: 31
Oligopoly
27.1 In Cournot equilibrium each rm chooses the quantity that maximizes its own pro ts assuming that the rm's rival will continue to sell at the same price as before.
Topic: Oligopoly Correct Responses: 61 Correct Di culty: 1 Discrimination Index: 14
27.2 In Bertrand competition between two rms, each rm believes that if it changes its output,
the rival rm will change its output by the same amount.
Topic: Oligopoly Correct Responses: 96 Correct
Di culty: 1 Discrimination Index: 0
27.3 Suppose that the demand curve for an industry's output is a downward sloping straight line
and there is constant marginal cost. Then the larger the number of identical rms producing in Cournot equilibrium, the lower will be the price.
Topic: Oligopoly Correct Responses: 96 Correct Di culty: 1 Discrimination Index: 0
27.4 A Stackelberg leader chooses his actions on the assumption that his rival will adjust to the
leader's actions in such a way as to maximize the rival's pro ts.
Topic: Oligopoly Correct Responses: 0 Correct
Di culty: 1 Discrimination Index: 0
27.5 Conjectural variation refers to the fact that in a single market there is variation among rms
in their estimates of the demand function in future periods.
TRUE-FALSE
Topic: Oligopoly Correct Responses: 0 Correct Di culty: 1 Discrimination Index: 0
491
27.6 A duopoly in which two identical rms are engaged in Bertrand competition will not distort
prices from their competitive levels.
Topic: Oligopoly Correct Responses: 92 Correct Di culty: 2 Discrimination Index: 21
27.7 A Stackelberg leader will necessarily make at least as much pro t as he would if he acted
as a Cournot oligopolist.
Topic: Oligopoly Correct Responses: 37 Correct Di culty: 2 Discrimination Index: 22
27.8 In the Cournot model, each rm chooses its actions on the assumption that its rivals will
react by changing their quantities in such a way as to maximize their own pro ts.
Topic: Oligopoly Correct Responses: 54 Correct Di culty: 0 Discrimination Index: 10
27.9 In the Bertrand model of duopoly, each rm sets its price, believing that the other's price
will not change. When both rms have identical production functions and produce with constant returns to scale, the Bertrand equilibrium price is equal to marginal cost.
Multiple Choice
Oligopoly
Topic: Oligopoly Correct Responses: 3 Correct
Di culty: 3 Discrimination Index: 3
27.1 An industry has two rms each of which produces output at a constant unit cost of $10 per
a 5. b 10. c 15. d 20. e 25.
unit. The demand function for the industry is q = 1; 000; 000=p. The Cournot equilibrium price for this industry is:
Topic: Oligopoly Correct Responses: 21 Correct
Di culty: 2 Discrimination Index: 29
27.2 An industry has two rms. The inverse demand function for this industry is p = 320 , 4q.
Both rms produce at a constant unit cost of $20 per unit. What is the Cournot equilibrium price for this industry?
a 20 b 22 c 120 d 60 e None of the above.
MULTIPLE CHOICE
Topic: Oligopoly Correct Responses: 21 Correct Di culty: 2 Discrimination Index: 29
493
27.3 An industry has two rms. The inverse demand function for this industry is p = 92 , 2q.
Both rms produce at a constant unit cost of $32 per unit. What is the Cournot equilibrium price for this industry?
a 32 b 34 c 52 d 26 e None of the above.
Topic: Oligopoly Correct Responses: 0 Correct
Di culty: 3 Discrimination Index: 0
27.4 One unit of zinc and one unit of copper are needed to produce a unit of brass. The world's
supply of zinc and the world's supply of copper are owned by two di erent monopolists. For simplicity assume that it costs nothing to mine zinc and copper, that no other inputs are needed to produce brass and that the brass industry operates competitively. Then the price of a unit of brass equals the cost of the inputs used to make it. The demand function for brass is q = 900 , 2p where p is the price of brass. The zinc and copper monopolists each set a price, believing that the other monopolist will not change his price. What is the equilibrium price of brass?
a 100 b 200 c 300 d 50 e 25
CHAPTER 27 Oligopoly
Topic: Oligopoly Correct Responses: 57 Correct Di culty: 2 Discrimination Index: 33
494
27.5 A duopoly faces the inverse demand curve p = 160 , 2q. Both rms 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
Topic: Oligopoly Correct Responses: 0 Correct
Di culty: 2 Discrimination Index: 0
27.6 Suppose that the price elasticity of demand for airline ights betweem two cities is constant
and equal to ,1:5. If 4 airlines with equal costs are in Cournot equilibrium for this industry, then the ratio of price to marginal cost in the industry is:
a 8=7. b 9=8. c 7=6. d 3=2. e None of the above.
MULTIPLE CHOICE
Topic: Oligopoly Correct Responses: 66 Correct Di culty: 2 Discrimination Index: 44
495
27.7 A city has two major league baseball teams, A and B. The number of tickets sold by either
team depends on the price of the team's own tickets and the price of the other team's ticket. If team A charges Pa for its tickets and team B charges Pb for its tickets, then ticket sales, measured in hundreds of thousands per season are 20,2Pa +Pb for team A and 10+Pa ,2Pb for team B. The marginal cost of an extra spectator is zero for both teams. Each team believes the other's price is independent of its own choice of price and each team sets its own price so as to maximize its revenue. What price do they charge per ticket?
a Team A charges 6 and team B charges 4. b Team A charges 8 and team B charges 3. c Team A charges 7 and team B charges 6. d Team A charges 6 and team B charges 8. e None of the above.
Topic: Oligopoly Correct Responses: 66 Correct
Di culty: 2 Discrimination Index: 44
27.8 A city has two major league baseball teams, A and B. The number of tickets sold by either
team depends on the price of the team's own tickets and the price of the other team's ticket. If team A charges Pa for its tickets and team B charges Pb for its tickets, then ticket sales, measured in hundreds of thousands per season are 21 , 2Pa + Pb for team A and 6 + Pa , 2Pb for team B. The marginal cost of an extra spectator is zero for both teams. Each team believes the other's price is independent of its own choice of price and each team sets its own price so as to maximize its revenue. What price do they charge per ticket?
a Team A charges 6 and team B charges 3. b Team A charges 8 and team B charges 2. c Team A charges 7 and team B charges 5. d Team A charges 6 and team B charges 6. e None of the above.
CHAPTER 27 Oligopoly
Topic: Oligopoly Correct Responses: 0 Correct Di culty: 3 Discrimination Index: 0
496
27.9 A city has two newspapers. Demand for either paper depends on its own price and the price
of its rival. Demand functions for papers A and B respectively, measured in tens of thousands of subscriptions, are 21 ,2Pa +Pb and 21+Pa ,2Pb. The marginal cost of printing and distributing an extra paper just equals the extra advertising revenue one gets from another reader, so each paper treats marginal costs as zero. Each paper maximizes its revenue assuming that the other's price is independent of its own choice of price. If the papers enter a joint operating agreement where they set prices to maximize total revenue, by how much will newspaper prices rise?
a 3 b 2 c 0 d 3.5 e 2.5
Topic: Oligopoly Correct Responses: 77 Correct
Di culty: 1 Discrimination Index: 35
27.10 There are two major producers of corncob pipes in the world, both located in Herman,
Missouri. Suppose that the inverse demand function for corncob pipes is described by p = 120 , 4q where q is total industry output and suppose that marginal costs are zero. What is the Cournot reaction function of rm 1 to the output, q2; of rm 2?
2 a 120 , 4q2 b 120 , 4q2 c 15 , :5q2 d 30 , 4q2 e 124 , 8q2
MULTIPLE CHOICE
Topic: Oligopoly Correct Responses: 77 Correct Di culty: 1 Discrimination Index: 35
497
27.11 There are two major producers of corncob pipes in the world, both located in Herman,
Missouri. Suppose that the inverse demand function for corncob pipes is described by p = 180 , 3q where q is total industry output and suppose that marginal costs are zero. What is the Cournot reaction function of rm 1 to the output, q2; of rm 2?
2 a 180 , 3q2 b 180 , 3q2 c 30 , :5q2 d 60 , 3q2 e 183 , 6q2
Topic: Oligopoly Correct Responses: 61 Correct
Di culty: 2 Discrimination Index: 52
27.12 An industry has two rms producing at a constant unit cost of $10 per unit. The inverse
demand curve for the industry is p = 110 , :5q. Suppose that rm 1 is a Stackleberg leader in choosing its quantity i.e. rm 1 chooses it's quantity rst, knowing that rm 2 will observe rm 10s quantity when it chooses its own output. How much output will rm 2, the follower, produce?
a 40 b 15 c 20 d 50 e 30
CHAPTER 27 Oligopoly
Topic: Oligopoly Correct Responses: 28 Correct Di culty: 3 Discrimination Index: 32
498
27.13 The cartel of copper exporting countries is called COPEC. As part of an international
marketing agreement, the United States has agreed to buy all the copper that COPEC wants to sell the U.S. at a constant price of $100 per ton. COPEC also sells copper in Europe at a price of $150 per ton. COPEC acts just like a monopolist. If COPEC nds it pro table to sell in the U.S. at $100 per ton and simultaneously to sell in Europe for $150 a ton, what is the price elasticity of demand of COPEC's copper in the European market? Hint: What is COPEC's marginal revenue in the U.S. market?
a ,1 b ,2 c ,3 d ,1=3 e ,2=3
Topic: Oligopoly Correct Responses: 61 Correct
Di culty: 2 Discrimination Index: 17
27.14 Two rms decide to form a cartel and collude in a way that maximizes industry pro ts.
Each rm has zero production costs and each rm is given a positive output quota by the cartel. Which of the following statements is NOT true?
a Each rm would want to produce more than its quota if it knew that the other would continue to produce at its quota. b The price elasticity of demand will be ,1 at the output level chosen. c Output will be lower than if the rms behaved as Cournot rms. d Output will be lower than if the rms behaved as competitors. e All of the other statements are false.
MULTIPLE CHOICE
Topic: Oligopoly Correct Responses: 49 Correct Di culty: 2 Discrimination Index: 42
499
27.15 The inverse demand function for fuzzy dice is p = 20 , q. There are constant returns to
scale in this industry with unit costs of $8. Which of the following statements is completely true?
a Monopoly output is 6. Cournot duopoly total output is 8. A Stackelberg leader's output is 8. b Monopoly output is 8. Cournot duopoly total output is 8. A Stackelberg leader's output is 8. c Monopoly output is 6. Cournot duopoly total output is 6. A Stackelberg follower's output is 3. d Monopoly output is 6. Cournot duopoly total output is 8. A Stackelberg follower's output is 3. e Monopoly output is 6. Cournot duopoly total output is 8. A Stackelberg follower's output is 4.
Topic: Oligopoly Correct Responses: 69 Correct Di culty: 2 Discrimination Index: 80
27.16 An industry has two rms. Firm 10s cost function is cy = 2y + 500 and rm 20s cost
function is cy = 2y + 400. The demand curve for the outputof this industry is a downward-sloping straight line. In a Cournot equilibrium, where both rms produce positive amounts of output:
a the rm with lower xed costs produces more. b the rm with higher xed costs produces more. c both rms produce the same amount of output. d there is less output than there would be if the rms colluded to maximize joint pro ts. e rm 1 always operates in the region where the demand curve is inelastic.
Topic: Oligopoly Correct Responses: 26 Correct Di culty: 3 Discrimination Index: 0
27.17 The price elasticity of demand for melocotones is constant and equal to ,2. The meloco-
tone market is controlled by two Cournot duopolists who have di erent cost functions. One of the duopolists has a constant marginal cost of $980 per ton and he produces 60 of the total number of melocotones sold. The equilibrium price of a ton of melocotones must be:
a 1,400. b 700. c 980. d 2,800. e 2,100.
CHAPTER 27 Oligopoly
Topic: Oligopoly Correct Responses: 26 Correct Di culty: 3 Discrimination Index: 0
500
27.18 The price elasticity of demand for melocotones is constant and equal to ,3. The meloco-
tone market is controlled by two Cournot duopolists who have di erent cost functions. One of the duopolists has a constant marginal cost of $720 per ton and he produces 60 of the total number of melocotones sold. The equilibrium price of a ton of melocotones must be:
a 900. b 450. c 720. d 1,800. e 1,350.
Topic: Oligopoly Correct Responses: 62 Correct
Di culty: 3 Discrimination Index: 10
2
27.19 The demand for y is given by y = 256=p . Only two rms produce y. They have identical
a 2 b 5 c 10 d 12 e 16
costs cy = y2 . If they agree to collude and maximize their joint pro ts, how much output will each rm produce?
MULTIPLE CHOICE
Topic: Oligopoly Correct Responses: 25 Correct Di culty: 3 Discrimination Index: 21
501
27.20 A certain type of mushroom used to be produced on 50 farms, each of which had a cost
function cy = y2 + 1 where y 0 and c0 = 0. The rms operated as competitors. The demand curve for this kind of mushroom is given by Dp = 52,p. Marauding deviant Ninja turtles invaded many of the mushroom farms leaving absolute devastation and loathsome slime in their wake. The turtles had no e ect on the cost functions of farms that were not invaded.
a If all of the farms but one were invaded and that farm became a monopolist, total output of mushrooms would fall to half of the preinvasion output. b If all of the farms but one were invaded and that farm became a monopolist, total output of mushrooms would fall to 1=50th of the preinvasion output. c If all of the farms but two were invaded and the two undamaged farms became Cournot duopolists, total output of mushrooms would be 2=3 of the preinvasion output. d If half of the farms were invaded and the industry remained competitive, industry output would fall to half of the preinvasion output. e If half of the farms were invaded and the industry remained compeitive, industry output would fall, but would be greater than half of the preinvasion output.
Topic: Oligopoly Correct Responses: 69 Correct
Di culty: 2 Discrimination Index: 40
27.21 A duopoly faces the demand curve Dp = 30 , :5p. Both rms in the industry have a
a q1 = 14 , :5q2. b q2 = 14 , :5q1. 2 c 28q1, q1 . 2 d 56q1, q1 . e 60q, q2 .
total cost function given by Cq = 4q. Suppose that Firm 1 is a Stackelberg leader in choosing its quantity rst. Firm 10 s pro t function can be written as:
CHAPTER 27 Oligopoly
Topic: Oligopoly Correct Responses: 63 Correct Di culty: 0 Discrimination Index: 67
502
27.22 A duopoly faces the inverse demand curve p = 160,2q. Firm 10s total cost function is given 0
by C1q1 = 8q1 and Firm 2 s total cost function is given by C2q2 = 10q2. In a Cournot equilibrium:
a the rm with the lower marginal cost produces more. b both rms will produce the same amount. c the rm with the higher marginal cost produces more to cover the higher costs. d the reaction function for both rms is the same since both rms have a constant marginal cost. e more than one of the above is correct.
Topic: Oligopoly Correct Responses: 63 Correct
Di culty: 0 Discrimination Index: 67
27.23 Consider a market with one large rm and many small rms. The supply function of
all of the small rms together is given by Sp = 200 + p; the market demand curve is given by Dp = 400 , p; and the cost function for the large rm is Cy = 20y. The residual demand curve for the large rm where DL is large rm's demand and yL is large rm's output is given by:
a DL p = 400 , 21yL. b DL p = 200 , 2p. c DL p = 600 , 2p. d DL yL = 200 , 2p , 20yL. e DL yL = 200 + p + 20yL .
MULTIPLE CHOICE
Topic: Oligopoly Correct Responses: 77 Correct Di culty: 0 Discrimination Index: 48
503
27.24 The duopolists Carl and Simon face a demand function for pumpkins of Q = 5; 600 , 800P
where Q is the total number of pumpkins that reach the market and P is the price of pumpkins. Suppose further that each farmer has a constant marginal cost of $1 for each pumpkin produced. If Carl believes that Simon is going to produce Qs pumpkins this year, then the reaction function tells us how many pumpkins Carl should produce in order to maximize his pro ts. Carl's reaction function is RC Qs =
a 2; 400 , Qs =2. b 5; 600 , 800Qs. c 5; 600 , 1; 600Qs. d 1; 200 , Qs =2. e 3; 600 , Qs.
Topic: Oligopoly Correct Responses: 77 Correct
Di culty: 0 Discrimination Index: 48
27.25 The duopolists Carl and Simon face a demand function for pumpkins of Q = 3; 600 , 400P
where Q is the total number of pumpkins that reach the market and P is the price of pumpkins. Suppose further that each farmer has a constant marginal cost of $1 for each pumpkin produced. If Carl believes that Simon is going to produce Qs pumpkins this year, then the reaction function tells us how many pumpkins Carl should produce in order to maximize his pro ts. Carl's reaction function is RC Qs =
a 1; 600 , Qs =2. b 3; 600 , 400Qs. c 3; 600 , 800Qs. d 800 , Qs =2. e 2; 400 , Qs.
CHAPTER 27 Oligopoly
Topic: Oligopoly Correct Responses: 0 Correct Di culty: 2 Discrimination Index: 0
504
27.26 Supose that the inverse demand for bean sprouts is given by PY = 520,2Y and the total
cost of producing Y units for any rm is TCY = 40Y . If the industry consists of two Cournot duopolists, then in equilibrium each rm's production is:
a 120 units. b 60 units. c 40 units. d 80 units. e 65 units.
Topic: Oligopoly Correct Responses: 0 Correct
Di culty: 2 Discrimination Index: 0
27.27 Supose that the inverse demand for bean sprouts is given by PY = 390,2Y and the total
cost of producing Y units for any rm is TCY = 30Y . If the industry consists of two Cournot duopolists, then in equilibrium each rm's production is:
a 90 units. b 45 units. c 30 units. d 60 units. e 48.75 units.
MULTIPLE CHOICE
Topic: Oligopoly Correct Responses: 72 Correct Di culty: 0 Discrimination Index: 56
505
27.28 Suppose that Grinch and Grubb go into the wine business in a small country where wine is
di cult 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 $15 and Grubb has marginal costs of $15. How much is Grinch's output in equilibrium?
a 675 b 1,350 c 337.50 d 1,012.50 e 2,025
Topic: Oligopoly Correct Responses: 72 Correct
Di culty: 0 Discrimination Index: 56
27.29 Suppose that Grinch and Grubb go into the wine business in a small country where wine is
di cult to grow. The demand for wine is given by p = $600 , :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 $75. How much is Grinch's output in equilibrium?
a 925 b 1,850 c 462.50 d 1,387.50 e 2,775
CHAPTER 27 Oligopoly
Topic: Oligopoly Correct Responses: 0 Correct Di culty: 0 Discrimination Index: 0
506
27.30
Suppose that two airlines are Cournot duopolists serving the Peoria-Dubuque route, and the demand curve for tickets per day is Q = 180 , 2p so p = 90 , Q=2. Total costs of running a ight on this route are 200+30q where q is the number of passengers on the ight. Each ight has a capacity of 80 passengers. In Cournot equilibrium, each duopolist will run one ight per day and will make a daily pro t of:
a 600 b 100 c 180 d 1,200 e 2,000
Topic: Oligopoly Correct Responses: 0 Correct
Di culty: 0 Discrimination Index: 0
27.31
Suppose that two airlines are Cournot duopolists serving the Peoria-Dubuque route, and the demand curve for tickets per day is Q = 140 , 2p so p = 70 , Q=2. Total costs of running a ight on this route are 100+40q where q is the number of passengers on the ight. Each ight has a capacity of 80 passengers. In Cournot equilibrium, each duopolist will run one ight per day and will make a daily pro t of:
a 100 b 50 c 140 d 200 e 1,000
MULTIPLE CHOICE
Topic: Oligopoly Correct Responses: 0 Correct Di culty: 0 Discrimination Index: 0
507
27.32 Suppose that the market demand curve for bean sprouts is given by
P = 3; 580 , 5Q; where P is the price and Q is total industry output. Suppose that the industry has
two rms, a Stackleberg leader and a follower. Each rm has a constant marginal cost of $80 per unit of output. In equilibrium, total output by the two rms will be:
a 350. b 175. c 525. d 700. e 87.50.
Topic: Oligopoly Correct Responses: 0 Correct
Di culty: 0 Discrimination Index: 0
27.33 Suppose that the market demand curve for bean sprouts is given by
P = 3; 520 , 5Q; where P is the price and Q is total industry output. Suppose that the industry has
two rms, a Stackleberg leader and a follower. Each rm has a constant marginal cost of $20 per unit of output. In equilibrium, total output by the two rms will be:
a 350. b 175. c 525. d 700. e 87.50.
CHAPTER 27 Oligopoly
Topic: Oligopoly Correct Responses: 0 Correct Di culty: 0 Discrimination Index: 0
508
27.34 There are two rms in the blastopheme industry. The demand curve for blastophemes is
given by p = 1; 000 , 2q. Each rm has one manufacturing plant and each rm i has a cost function Cqi = qi2 where qi is the output of rm i. The two rms form a cartel and arrange to split total industry pro ts equally. Under this cartel arrangement, they will maximize joint pro ts if:
a and only if each rm produces 100 units in its plant. b they produce a total of 200 units, no matter which rm produces them. c and only if they each produce a total of 250 units. d they produce a total of 166.67 units, no matter which rm produces them. e they shut down one of the two plants, having the other operate as a monopoly, and splitting the pro ts.
Topic: Oligopoly Correct Responses: 0 Correct
Di culty: 0 Discrimination Index: 0
27.35 There are two rms in the blastopheme industry. The demand curve for blastophemes is
given by p = 5; 400 , 4q. Each rm has one manufacturing plant and each rm i has a cost function Cqi = qi2 where qi is the output of rm i. The two rms form a cartel and arrange to split total industry pro ts equally. Under this cartel arrangement, they will maximize joint pro ts if:
a and only if each rm produces 300 units in its plant. b they produce a total of 600 units, no matter which rm produces them. c and only if they each produce a total of 675 units. d they produce a total of 450 units, no matter which rm produces them. e they shut down one of the two plants, having the other operate as a monopoly, and splitting the pro ts.
MULTIPLE CHOICE
Topic: Oligopoly Correct Responses: 55 Correct Di culty: 0 Discrimination Index: 30
509
27.36 A Stackleberg leader and follower each choose their outputs to maximize their own pro ts.
Local property taxes which constitute a lump sum tax for each of them are reduced by $500 per year for the leader and by $200 a year for the follower. In consequence, the rms:
a both increase output, with the leader increasing output by more. b both increase output, with the follower increasing output by more. c increase output by equal amounts for each rm. d leave their outputs unchanged. e There is not enough information in the question to determine what the rms will do.
Topic: Oligopoly Correct Responses: 40 Correct Di culty: 0 Discrimination Index: 25
27.37 An industry has two colluding rms, who act so as to maximize total pro t in the industry
and then split the pro ts equally. Firm 1 has cost function cy = 8y. Firm 2 has cost function cy = y2 . Each rm produces an integer number of units. Market demand is given by Y p = 80,p.
a Firm 1 should produce 16 units and rm 2 should produce 16 units. b Firm 1 should produce 32 units and rm 2 should produce 4 units. c Each rm should produce 18 units. d Firm 1 should produce 36 units and rm 2 should produce 2 units. e None of the above.
Topic: Oligopoly Correct Responses: 40 Correct Di culty: 0 Discrimination Index: 25
27.38 An industry has two colluding rms, who act so as to maximize total pro t in the industry
and then split the pro ts equally. Firm 1 has cost function cy = 8y. Firm 2 has cost function cy = y2 . Each rm produces an integer number of units. Market demand is given by Y p = 48,p.
a Firm 1 should produce 8 units and rm 2 should produce 8 units. b Firm 1 should produce 16 units and rm 2 should produce 4 units. c Each rm should produce 10 units. d Firm 1 should produce 20 units and rm 2 should produce 2 units. e None of the above.
CHAPTER 27 Oligopoly
Topic: Oligopoly Correct Responses: 63 Correct Di culty: 0 Discrimination Index: 40
510
27.39 An industry has two firms , ,a Stackleberg leader and a follower. The price of the indus-
try output is given by P = 48 , Q where Q is the total output of the two rms. The follower has a marginal cost of 0. The leader has a marginal cost of 12. How much should the leader produce in order to maximize pro ts?
a 15 b 24 c 12 d 10 e None of the above.
Topic: Oligopoly Correct Responses: 63 Correct
Di culty: 0 Discrimination Index: 40
27.40 An industry has two firms , ,a Stackleberg leader and a follower. The price of the indus-
try output is given by P = 24 , Q where Q is the total output of the two rms. The follower has a marginal cost of 0. The leader has a marginal cost of 6. How much should the leader produce in order to maximize pro ts?
a 9 b 12 c 6 d 4 e None of the above.
MULTIPLE CHOICE
Topic: Oligopoly Correct Responses: 0 Correct Di culty: 0 Discrimination Index: 0
511
27.41 Roach Motors is the dominant used car dealer in a small midwestern city. After paying
$50,000 for overhead, Roach Motors' cost per car is $500. There are 4 other small used car lots in this town, but since they are not large enough to purchase cars through the same discount sources as Roach, each rm faces the cost function C = 5; 000 + 600Q + 5Q2. The demand for used cars is Q = 400 , P2=10. Assuming Roach is aware of its competitors' costs, what price should Roach set for a used car?
a $783.33 b $816.67 c $600 d $641.67 e $1,016.67
Topic: Oligopoly Correct Responses: 0 Correct
Di culty: 0 Discrimination Index: 0
27.42 Roach Motors is the dominant used car dealer in a small midwestern city. After paying
$50,000 for overhead, Roach Motors' cost per car is $500. There are 5 other small used car lots in this town, but since they are not large enough to purchase cars through the same discount sources as Roach, each rm faces the cost function C = 5; 000 + 600Q + 5Q2. The demand for used cars is Q = 200 , P1=10. Assuming Roach is aware of its competitors' costs, what price should Roach set for a used car?
a $666.67 b $600 c $600 d $583.33 e $900
CHAPTER 27 Oligopoly
Topic: Oligopoly Correct Responses: 0 Correct Di culty: 0 Discrimination Index: 0
512
27.43
Roach Motors is the dominant used car dealer in a small midwestern city. After paying $50,000 for overhead, Roach Motors' cost per car is $500. There are 4 other small used car lots in this town, but since they are not large enough to purchase cars through the same discount sources as Roach, each rm faces the cost function C = 5; 000 + 700Q + 5Q2. The demand for used cars is Q = 500 , P2=10. Assuming Roach sets the market price so as to maximize its pro t, how many cars will each of the follower rms supply?
a 12 b 20 c 27 d 17 e 15
Topic: Oligopoly Correct Responses: 0 Correct
Di culty: 0 Discrimination Index: 0
27.44
Roach Motors is the dominant used car dealer in a small midwestern city. After paying $50,000 for overhead, Roach Motors' cost per car is $500. There are 4 other small used car lots in this town, but since they are not large enough to purchase cars through the same discount sources as Roach, each rm faces the cost function C = 5; 000 + 700Q + 5Q2. The demand for used cars is Q = 500 , P2=10. Assuming Roach sets the market price so as to maximize its pro t, how many cars will each of the follower rms supply?
a 29 b 20 c 26 d 19 e 14
MULTIPLE CHOICE
Topic: Oligopoly Correct Responses: 0 Correct Di culty: 0 Discrimination Index: 0
513
27.45
North Bend currently has one McDonald's fast food franchise. Demand for hamburgers in North Bend is given by Q = 200 , 40P . Any McDonald's franchise has costs of C = 80 + 2Q for producing Q hamburgers. If a second McDonald's franchise were to move into North Bend and both behave as duopolists, the pro t of the original McDonald's would
a fall from $10 to $ , 80. b fall from $210 to $120. c fall from $90 to $ , 80. d fall from $10 to $ , 40. e fall from $90 to $0.
Topic: Oligopoly Correct Responses: 0 Correct
Di culty: 0 Discrimination Index: 0
27.46
North Bend currently has one McDonald's fast food franchise. Demand for hamburgers in North Bend is given by Q = 400 , 10P . Any McDonald's franchise has costs of C = 60 + 4Q for producing Q hamburgers. If a second McDonald's franchise were to move into North Bend and both behave as duopolists, the pro t of the original McDonald's would
a fall from $3,180 to $2,760. b fall from $3,960 to $1,920. c fall from $3,240 to $2,760. d fall from $3,180 to $1,380. e fall from $3,240 to $2,820.
CHAPTER 27 Oligopoly
Topic: Oligopoly Correct Responses: 0 Correct Di culty: 0 Discrimination Index: 0
514
27.47 Ann and Bruce each own a pizza store in Frostbite Falls, MN. Demand for pizza is given by
If Ann and Bruce behave as duopolists each earns a pro t of
a $0. b $ , 42:22. c $35.56. d $97.78. e $40.
Topic: Oligopoly Correct Responses: 0 Correct Di culty: 0 Discrimination Index: 0
Q = 200 , 40P . Being the only two pizza stores in Frostbite Falls, they attempt to pro tably split the market without violating the Sherman Antitrust Act. Each has the cost function C = 60 + 3Q.
27.48 Ann and Bruce each own a pizza store in Frostbite Falls, MN. Demand for pizza is given by
If Ann and Bruce behave as duopolists each earns a pro t of
a $0. b $ , 5:56. c $108.89. d $241.11. e $122.50.
Q = 300 , 40P . Being the only two pizza stores in Frostbite Falls, they attempt to pro tably split the market without violating the Sherman Antitrust Act. Each has the cost function C = 60 + 4Q.
Chapter 28
True-False
Topic: Game Theory Correct Responses: 76 Correct Di culty: 2 Discrimination Index: 13
Game Theory
28.1 A situation where everyone is playing a dominant strategy must be a Nash equilibrium.
Topic: Game Theory Correct Responses: 87 Correct Di culty: 2 Discrimination Index: 40
28.2 In a Nash equilibrium, everyone must be playing a dominant strategy.
Topic: Game Theory Correct Responses: 39 Correct Di culty: 2 Discrimination Index: 14
28.3 In the prisoners' dilemma game, if each prisoner believed that the other prisoner would deny
the crime, then both would deny the crime.
Topic: Game Theory Correct Responses: 56 Correct
Di culty: 1 Discrimination Index: 41
28.4 A general has the two possible pure strategies, sending all of his troops by land or all of his
troops by sea. An example of a mixed strategy is where he sends 1=4 of his troops by land and 3=4 of his troops by sea.
Topic: Game Theory Correct Responses: 0 Correct Di culty: 1 Discrimination Index: 0
28.5 While game theory predicts noncooperative behavior for a single play of prisoners' dilemma,
it would predict cooperative tit-for-tat behavior if the same people play prisoners' dilemma together for, say, 20 rounds.
CHAPTER 28 Game Theory
Topic: Game Theory Correct Responses: 80 Correct Di culty: 1 Discrimination Index: 33
516
28.6 A two-person game in which each person has access to only two possible strategies will have
at most one Nash equilibrium.
Topic: Game Theory Correct Responses: 93 Correct Di culty: 1 Discrimination Index: 13
28.7 A dominant strategy equilibrium is a set of choices such that each player's choices are optimal regardless of what the other players choose.
Topic: Game Theory Correct Responses: 0 Correct Di culty: 1 Discrimination Index: 0
28.8 In Nash equilibrium, each player is making an optimal choice for herself, given the choices
of the other players.
Topic: Game Theory Correct Responses: 79 Correct Di culty: 1 Discrimination Index: 2
28.9 If a game does not have an equilibrium in pure strategies, then it will not have an equilibrium in mixed strategies either.
Topic: Game Theory Correct Responses: 82 Correct Di culty: 2 Discrimination Index: 15
28.10 A game has two players and each has two strategies. The strategies are Be Nice and Be
Mean. If both players play Be Nice, both get a payo of 5. If both players play Be Mean, both get a payo of ,3. If one player plays Be Nice and the other plays Be Mean, the player who played Be Nice gets 0 and the player who played Be Mean gets 10. Playing Be Mean is a dominant strategy for both players.
Multiple Choice
Game Theory
Topic: Game Theory Correct Responses: 74 Correct
Di culty: 2 Discrimination 57
28.1 Index: A game has two players. Each player has two possible strategies. One strategy is called
cooperate", the other is called defect". Each player writes on a piece of paper either a C for cooperate or a D for defect. If both players write C; they both get a payo of $100. If both players defect they each get a payo of 0. If one player cooperates and the other player defects, the cooperating player gets a payo of S and the defecting player gets a payo of T . To defect will be a dominant strategy for both players if:
a S + T 100 b T 2S c S 0 and T 100. d S T and T 100. e S amd T are any positive numbers.
Topic: Game Theory Correct Responses: 89 Correct
Di culty: 1 Discrimination Index: 33
28.2 In the game matrix below, the rst payo in each pair goes to Player A who chooses the
row, and the second payo goes to Player B; who chooses the column. Let a, b; c; and d be positive constants. If Player A chooses bottom and Player B chooses right in a Nash equilibrium then we know that: !ta game1.tab!
a b b c c b d b e a 1 and d 1 and b 1 and c c and d 1 and b 1. 1. d. 1. d.
CHAPTER 28 Game Theory
Topic: Game Theory Correct Responses: 36 Correct Di culty: 2 Discrimination Index: 35
518
28.3 In the town of Torrelodones, each of the N 2 inhabitants has $100. They are told that
they can all voluntarily contribute to a fund that will be evenly divided among all residents. If $F are contributed to the fund, the local K-Mart will match the private contributions so that the total amount to be divided is $2F . That is, each resident will get back a payment of $2F=N when the fund is divided. If people in town care only about their own net incomes, in Nash equilibrium, how much will each person contribute to the fund?
a 0 b $10 c $20 d $50 e $100
Topic: Game Theory Correct Responses: 43 Correct
Di culty: 3 Discrimination Index: 35
28.4 Frank and Nancy met at a sorority sock-hop. They agreed to meet for a date at a local bar
the next week. Regrettably, they were so fraught with passion that they forgot to agree on which bar would be the site of their rendezvous. Luckily, the town has only two bars, Rizotti's and the Oasis. Having discussed their tastes in bars at the sock-hop, both are aware that Frank prefers Rizotti's to the Oasis and Nancy prefer the Oasis to Rizottis. In fact, the payo s are as follows. If both go to the Oasis, Nancy's utility is 3 and Frank's utility is 2. If both go to Rizotti's, Frank's utility is 3 and Nancy's utility is 2. If they don't both go to the same bar, both have a utility of 0.
a This game has no Nash equilibrium in pure strategies. b This game has a dominant strategy equilibrium. c There are two Nash equilibria in pure strategies and a Nash equilibrium in mixed strategies where the probability that Frank and Nancy go to the same bar is 12=25. d This game has two Nash equilibria in pure strategies and a Nash equilbrium in mixed strategies where each person has a probability of 1=2 of going to each bar. e This game has exactly one Nash equilibrium.
MULTIPLE CHOICE
Topic: Game Theory Correct Responses: 28 Correct Di culty: 2 Discrimination Index: 16
519
28.5 George and Sam have taken their fathers' cars out on a lonely road and are engaged in a game
of "Chicken". George has his father's Mercedes and Sam has his father's rattly little Yugoslavianbuilt subcompact car. Each of the players can choose either to Swerve or to Not Swerve. If both choose Swerve, both get a payo of zero. If one chooses Swerve and the other chooses Not Swerve, the one who chooses Not Swerve gets a payo of 10 and the one who chooses Swerve gets zero. If both choose Not Swerve, the damage to George's car is fairly minor and he gets a payo of ,5; while for Sam the results are disastrous and he gets a payo of ,100.
a This game has a dominant strategy equilibrium in which George does not swerve and Sam swerves. b This game has two pure strategy Nash equilibria and no mixed-strategy equilibrium. c This game has three di erent Nash equilibria, two of which are pure strategy equilibria and one of which is a mixed strategy equilibrium in which George is more likely to swerve than Sam is. d The one and only Nash equilibrium in this game is where George does not swerve and Sam swerves. e This game has two pure strategy equilibria and a mixed strategy equilibrium in which Sam randomizes his strategy and George chooses Not Swerve with certainty.
Topic: Game Theory Correct Responses: 75 Correct
Di culty: 0 Discrimination Index: 0
28.6 Big Pig and Little Pig have two possible strategies, Press the Button, and Wait at the
trough. If both pigs choose Wait, both get 2. If both pigs press the button then Big Pig gets 7 and Little Pig gets 3. 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 6 and Little Pig gets 1. In Nash equilibrium,
a Little Pig will get a payo of 1 and Big Pig will get a payo of 6. b Little Pig will get a payo of 3 and Big Pig will get a payo of 7. c Both pigs will wait at the trough. d Little pig will get a payo of zero. e The pigs must be using mixed strategies.
CHAPTER 28 Game Theory
Topic: Game Theory Correct Responses: 75 Correct Di culty: 0 Discrimination Index: 0
520
28.7 Big Pig and Little Pig have two possible strategies, Press the Button, and Wait at the
trough. If both pigs choose Wait, both get 1. If both pigs press the button then Big Pig gets 8 and Little Pig gets 2. If Little Pig presses the button and Big Pig waits at the trough, then Big Pig gets 10 and Little Pig gets 0. Finally, if Big Pig presses the button and Little Pig waits, then Big Pig gets 4 and Little Pig gets 3. In Nash equilibrium,
a Little Pig will get a payo of 3 and Big Pig will get a payo of 4. b Little Pig will get a payo of 2 and Big Pig will get a payo of 8. c Both pigs will wait at the trough. d Little pig will get a payo of zero. e The pigs must be using mixed strategies.
Topic: Game Theory Correct Responses: 0 Correct
Di culty: 0 Discrimination Index: 0
28.8 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 payo of zero, regardless of what the other player does. A player who chooses to Drive Straight gets a payo of 12 if the other player swerves and a payo of ,12 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 0.50 and drives straight with probability 0.50. 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 0.50 and the other swerves with probability 0.50. d a mixed strategy in which each player swerves with probability 0.25 and drives straight with probability 0.75. e no mixed strategies.
MULTIPLE CHOICE
Topic: Game Theory Correct Responses: 0 Correct Di culty: 0 Discrimination Index: 0
521
28.9 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 payo of zero, regardless of what the other player does. A player who chooses to Drive Straight gets a payo of 9 if the other player swerves and a payo of ,36 if the other player also chooses to Drive Straight. This game has two pure strategy equilibria and:
a a mixed strategy equilibrium in which each player swerves with probability 0.80 and drives straight with probability 0.20. 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 0.80 and the other swerves with probability 0.20. d a mixed strategy in which each player swerves with probability 0.40 and drives straight with probability 0.60. e no mixed strategies.
Topic: Game Theory Correct Responses: 0 Correct
Di culty: 0 Discrimination Index: 0
28.10 A famous Big Ten football coach had only two strategies. Run the ball to the left side
of the line. Run the ball to the right side. The defense can concentrate forces on the left side or the right side. If the opponent concentrates on the wrong side, his o ense is sure to gain at least 5 yards. If the defense defended the left side and the o ense ran left, it gain only 1 yard. If the opponent defended the right side when the o ense ran right, the o ense would still gain at least 5 yards with probability 0.70. It is the last play of the game and the famous coach's team is on o ense. If it makes 5 yards or more it wins, if not it loses. Both sides choose Nash equilibrium strategies. In equilibrium the o ense:
a is sure to run to the right side. b will run to the right side with probability 0.77. c will run to the right side with probability 0.87. d will run to the two sides with equal probability. e will run to the right side with probability 0.70.
CHAPTER 28 Game Theory
Topic: Game Theory Correct Responses: 0 Correct Di culty: 0 Discrimination Index: 0
522
28.11 A famous Big Ten football coach had only two strategies. Run the ball to the left side
of the line. Run the ball to the right side. The defense can concentrate forces on the left side or the right side. If the opponent concentrates on the wrong side, his o ense is sure to gain at least 5 yards. If the defense defended the left side and the o ense ran left, it gain only 1 yard. If the opponent defended the right side when the o ense ran right, the o ense would still gain at least 5 yards with probability 0.30. It is the last play of the game and the famous coach's team is on o ense. If it makes 5 yards or more it wins, if not it loses. Both sides choose Nash equilibrium strategies. In equilibrium the o ense:
a is sure to run to the right side. b will run to the right side with probability 0.59. c will run to the right side with probability 0.74. d will run to the two sides with equal probability. e will run to the right side with probability 0.70.
Topic: Game Theory Correct Responses: 74 Correct
Di culty: 0 Discrimination Index: 56
28.12 Suppose that in a Hawk-Dove game similar to the one discussed in your workbook, the
payo to each player is ,4 if both play hawk. If both play dove, the payo to each player is 1 and if one plays hawk and the other plays dove, the one that plays hawk gets a payo of 4 and the one that plays dove gets 0. In equilibrium, we would expect hawks and doves to do equally well. This happens when the fraction of the total population that plays hawk is:
a 0.43. b 0.21. c 0.11. d 0.71. e 1.
MULTIPLE CHOICE
Topic: Game Theory Correct Responses: 74 Correct Di culty: 0 Discrimination Index: 56
523
28.13 Suppose that in a Hawk-Dove game similar to the one discussed in your workbook, the
payo to each player is ,9 if both play hawk. If both play dove, the payo to each player is 5 and if one plays hawk and the other plays dove, the one that plays hawk gets a payo of 7 and the one that plays dove gets 0. In equilibrium, we would expect hawks and doves to do equally well. This happens when the fraction of the total population that plays hawk is:
a 0.18. b 0.09. c 0.05. d 0.59. e 1.
Topic: Game Theory Correct Responses: 0 Correct
Di culty: 0 Discrimination Index: 0
28.14
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 77 + 0:30X. What is a long run equilibrium attendance for this club?
a 77 b 256.67 c 154 d 110 e 33
CHAPTER 28 Game Theory
Topic: Game Theory Correct Responses: 0 Correct Di culty: 0 Discrimination Index: 0
524
28.15
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 21 + 0:70X. What is a long run equilibrium attendance for this club?
a 21 b 30 c 42 d 70 e 49
Topic: Game Theory Correct Responses: 0 Correct
Di culty: 0 Discrimination Index: 0
28.16 Professor Binmore has a monopoly in the market for undergraduate game theory textbooks.
The time discounted value of Professor Binmore's future earnings is $2,000. Professor Ditt is considering writing a book to compete with Professor Binmore's book. With two books amicably splitting the market, the time discounted value of each professor's future earnings would be $200. If there is full information each professor knows the pro ts of the other, under what conditions could Professor Binmore deter the entry of Professor Ditt into his market? More than one answer may be correct. Full credit will be given only if all correct choices are selected.
a Professor Binmore threatens to cut his price so that Professor Ditt would loose $200. In so doing, Professor Binmore would loose $20 over time. b Professor Binmore threatens to cut his price so that Professor Ditt would loose $20. In so doing, Professor Binmore would just break even over time. c Professor Binmore threatens to cut his price and attack the credibility of Professor Ditt's book so that Professor Ditt would loose $2. In so doing, Professor Binmore would still make $190 over time. d Professor Binmore threatens to cut his price and attack the credibility of Professor Ditt's book so that Professor Ditt would only make $2. In so doing, Professor Binmore would still make $100 over time. e None of the above.
MULTIPLE CHOICE
Topic: Game Theory Correct Responses: 0 Correct Di culty: 0 Discrimination Index: 0
525
28.17 Professor Binmore has a monopoly in the market for undergraduate game theory textbooks.
The time discounted value of Professor Binmore's future earnings is $1,000. Professor Ditt is considering writing a book to compete with Professor Binmore's book. With two books amicably splitting the market, the time discounted value of each professor's future earnings would be $100. If there is full information each professor knows the pro ts of the other, under what conditions could Professor Binmore deter the entry of Professor Ditt into his market? More than one answer may be correct. Full credit will be given only if all correct choices are selected.
a Professor Binmore threatens to cut his price so that Professor Ditt would loose $200. In so doing, Professor Binmore would loose $20 over time. b Professor Binmore threatens to cut his price so that Professor Ditt would loose $20. In so doing, Professor Binmore would just break even over time. c Professor Binmore threatens to cut his price and attack the credibility of Professor Ditt's book so that Professor Ditt would loose $2. In so doing, Professor Binmore would still make $90 over time. d Professor Binmore threatens to cut his price and attack the credibility of Professor Ditt's book so that Professor Ditt would only make $2. In so doing, Professor Binmore would still make $50 over time. e None of the above.
Essay
Topic: Game Theory Correct Responses: 0 Di culty: 2 Discrimination Index: 0
Game Theory
28.1 The coach of the o ensive football team has two options on the next play. He can run the
ball or he can pass. His rival can defend either against the run or against the pass. Suppose that the o ense passes. Then if the defense defends against the pass, it will make zero yards and if the defense defends against the run, it will make 25 yards. Suppose that the o ense runs. If the defense defends against the pass, the o ense will make 10 yards and if the defense defends against a run, the o ense will gain 2 yards. a Write down a payo matrix for this game. b Is there a Nash equilibrium in pure strategies for this game? If so, what is it? If not, demonstrate that there is none.
Answer: This game does not have a Nash equilibrium in pure strategies. The best response to a pass run is a defense against the pass run. But the best response to a defense against the pass run is to run pass.
Chapter 29
True-False
Topic: Exchange Correct Responses: 62 Correct Di culty: 1 Discrimination Index: 5
Exchange
29.1 Partial equilibrium analysis concerns only supply or only demand while general equilibrium
analysis deals with supply and demand at the same time.
Topic: Exchange Correct Responses: 52 Correct
Di culty: 1 Discrimination Index: 31
29.2 A pure exchange economy is an economy where goods are traded but there is no production.
Topic: Exchange Correct Responses: 0 Correct Di culty: 1 Discrimination Index: 0
29.3 In general equilibrium analysis, an allocation is a feasible allocation if every consumer is
consuming a bundle that costs no more than his or her income.
Topic: Exchange Correct Responses: 53 Correct
Di culty: 2 Discrimination Index: 31
29.4 From Walras' 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.
Topic: Exchange Correct Responses: 89 Correct
Di culty: 1 Discrimination Index: 14
29.5 If the assumptions of the rst theorem of welfare economics apply, and if the economy is
in a competitive equilibrium, then any reallocation that bene ts someone must harm someone else.
CHAPTER 29 Exchange
Topic: Exchange Correct Responses: 95 Correct Di culty: 1 Discrimination Index: 0
528
29.6 If there are consumption externalities, then a competitive equilibrium is not necessarily
Pareto optimal.
Topic: Exchange Correct Responses: 88 Correct Di culty: 1 Discrimination Index: 0
29.7 A competitive equilibrium allocation must be a feasible allocation.
Topic: Exchange Correct Responses: 0 Correct Di culty: 2 Discrimination Index: 0
29.8 The second welfare theorem states that if preferences are convex, then any Pareto optimal
allocation could be achieved as a competitive equilibrium after some reallocation of initial endowments.
Topic: Exchange Correct Responses: 0 Correct Di culty: 1 Discrimination Index: 0
29.9 In a competitive pure exchange economy, if the total value of excess demand for all types
of food is zero, then the total value of excess demand for all nonfood commodities must be zero.
Topic: Exchange Correct Responses: 84 Correct Di culty: 1 Discrimination Index: 18
29.10 Every allocation on the contract curve is Pareto optimal.
Topic: Exchange Correct Responses: 75 Correct Di culty: 2 Discrimination Index: 10
29.11 In a pure exchange economy with two goods, if there is a competitive equilibrium with
p2 = 54.
prices p1 = 12; p2 = 27; then there must also be a competitive equilibrium with prices p1 = 24;
TRUE-FALSE
Topic: Exchange Correct Responses: 0 Correct Di culty: 2 Discrimination Index: 0
529
29.12 If demand varies continuously with price, then even if there are thousands of goods there
will be at least one set of prices such that demand equals supply in every market.
Topic: Exchange Correct Responses: 43 Correct Di culty: 3 Discrimination Index: 23
29.13 If allocation x is a competitive equilibrium at prices p and if everybody likes his bundle in
allocation y better than his bundle in allocation x; then the total value of allocation y at prices p exceeds the total value of allocation x at prices p.
Topic: Exchange Correct Responses: 58 Correct Di culty: 2 Discrimination Index: 16
29.14 If the initial endowment is on the contract curve, then there must always be a competitive
equilibrium in which no trade takes place.
Topic: Exchange Correct Responses: 57 Correct
Di culty: 2 Discrimination Index: 40
29.15 Jack Spratt's utility function is UF; L = L. His wife's utility function is UF; L = F . If
Jack's initial endowment is 70 units of F and 35 units of L and if Jack's wife's initial endowment is 42 units of F and 70 units of L; then in an Edgeworth box for Jack and his wife, an allocation of F and L will be Pareto optimal only if it is at a corner of the box.
Topic: Exchange Correct Responses: 57 Correct Di culty: 2 Discrimination Index: 40
29.16 Jack Spratt's utility function is UF; L = L. His wife's utility function is UF; L = F . If
Jack's initial endowment is 50 units of F and 25 units of L and if Jack's wife's initial endowment is 30 units of F and 50 units of L; then in an Edgeworth box for Jack and his wife, an allocation of F and L will be Pareto optimal only if it is at a corner of the box.
CHAPTER 29 Exchange
Topic: Exchange Correct Responses: 0 Correct Di culty: 3 Discrimination Index: 0
530
29.17 If two people have identical Cobb-Douglas utility functions, then in every Pareto optimal
allocation, they must consume all goods in the same proportions as each other.
Topic: Exchange Correct Responses: 0 Correct Di culty: 2 Discrimination Index: 0
29.18 If two people have identical homothetic preferences and if their indi erence curves have
diminishing marginal rate of substitution, then in an Edgeworth box, the locus of Pareto optimal allocations between them is a diagonal straight line.
Topic: Exchange Correct Responses: 0 Correct Di culty: 1 Discrimination Index: 0
29.19 In a model with two consumers, two goods, and no production, the contract curve must
be a line going from one consumer's origin to the other consumer's origin.
Topic: Exchange Correct Responses: 40 Correct Di culty: 2 Discrimination Index: 20
29.20 In a competitive pure exchange economy, if the initial endowment is on the diagonal line
between the two origins, then, according to the rst welfare theorem, there must always be a competitive equilibrium in which no trade takes place.
Multiple Choice
Exchange
Topic: Exchange Correct Responses: 12 Correct
Di culty: 2 Discrimination Index: 8
29.1 In a pure exchange economy with two persons and two goods, one person always prefers
more to less of both goods and one person likes one of the goods and hates the other so much that she would have to be paid to consume it. Both are initially endowed with positive amounts of both goods. The competitive equilibrium price of the good that one person hates must be:
a negative. b smaller than the price of the good both people like. c less than 1. d could be positive or negative, depending on details of tastes and technology. e positive.
Topic: Exchange Correct Responses: 65 Correct
Di culty: 2 Discrimination Index: 35
29.2 If an allocation is Pareto optimal and if indi erence curves between the two goods have no
kinks, then it must be that:
a two consumers who consume both goods must have the same MRS between them but consumers may consume the goods in di erent ratios. b two consumers with the same income who consume both goods must have the same MRS, but if their incomes di er their MRS's may di er. c any two consumers who consume both goods must consume them in the same ratio. d for any two consumers who consume both goods, neither will prefer the other consumer's bundle to his own. e all consumers receive the bundle that they prefer to any other bundle the economy could produce for them.
CHAPTER 29 Exchange
Topic: Exchange Correct Responses: 55 Correct Di culty: 2 Discrimination Index: 35
532
29.3 According to the First Theorem of Welfare Economics:
a Every competitive equilibrium is fair. b If the economy is in a competitive equilibrium, there is no way to make anyone better o . c A competitive equilibrium always exists. d At a Pareto optimum, all consumers must be equally wealthy. e None of the above.
Topic: Exchange Correct Responses: 76 Correct
Di culty: 2 Discrimination Index: 47
29.4 A small economy has only two consumers, Ben and Penelope. Ben's utility function is
Ux; y = x + 84y1=2 . Penelope's utility function is Ux; y = x + 7y. At a Pareto optimal allocation in which both individuals consume some of each good, how much y does Ben consume? a 36 b 6.50 c 12 d 13 e We can't tell without knowing the initial endowments.
Topic: Exchange Correct Responses: 76 Correct
Di culty: 2 Discrimination Index: 47
29.5 A small economy has only two consumers, Leonard and Katerina. Leonard's utility function
is Ux; y = x+144y1=2 . Katerina's utility function is Ux; y = x+6y. At a Pareto optimal allocation in which both individuals consume some of each good, how much y does Leonard consume?
a 144 b 9 c 24 d 18 e We can't tell without knowing the initial endowments.
MULTIPLE CHOICE
Topic: Exchange Correct Responses: 59 Correct Di culty: 2 Discrimination Index: 37
533
29.6 Eduardo and Francisca participate in an economy that is in competitive equilibrium. Al-
though they are unacquainted with each other, both purchase strawberries and champagne. Eduardo's utility function is Us; c = 2s+c where s is the number of boxes of strawberries he consumes per month and c is the number of bottles of champagne. Francisca's utility function is Us; c = sc. From this information we can conclude that:
a Francisca consumes equal amounts of strawberries and champagne. b Eduardo consumes more strawberries than champagne. c Francisca consumes twice as many bottles of champagne as boxes of strawberries. d Francisca consumes twice as many boxes of strawberries as bottles of champange. e Eduardo consumes more champagne than strawberries.
Topic: Exchange Correct Responses: 75 Correct
Di culty: 3 Discrimination Index: 29
29.7 Tomoko and Matt both consume the same goods in a pure exchange economy. Tomoko is
originally endowed with 16 units of good 1 and 14 units of good 2. Matt is originally endowed with 216 units of good 1 and 15 units of good 2. They both have the utility function Ux1; x2 = x1=3x2=3. 1 2 If we let good 1 be the numeraire, so that p1 = 1; then what will be the equilibrium price of good 2?
a 2 b 32 c 1 d 16 e 8
CHAPTER 29 Exchange
Topic: Exchange Correct Responses: 75 Correct Di culty: 3 Discrimination Index: 29
534
29.8 Holly and Steven both consume the same goods in a pure exchange economy. Holly is
originally endowed with 5 units of good 1 and 3 units of good 2. Steven is originally endowed with 5 units of good 1 and 2 units of good 2. They both have the utility function Ux1 ; x2 = x1=3x2=3. 1 2 If we let good 1 be the numeraire, so that p1 = 1; then what will be the equilibrium price of good 2?
a 2 b 8 c 1 d 4 e 2
Topic: Exchange Correct Responses: 93 Correct
Di culty: 2 Discrimination Index: 32
1 2 1 2
29.9 Pete and Dud live in a D D two-commodity world. Pete's utility function is U P xP ; xP = xP xP . D Dd
Dud's utility function is U x1 ; x2 = minfx1 ; x2 g. Pete is initially endowed with 3 units of commodity 1 and 4 units of commodity 2. Dud is initially endowed with 7 units of commodity 1 and 6 units of commodity 2. Which of the following is true?
a Both consume 5 units of each good in competitive equilibrium. b At competitive equilibrium, Dud consumes 6 units of each, since the 7th unit of his endowment of commodity 1 gives him no added utility c At a competitive equilibrium, Dud must consume equal amounts of both goods, so the price of good 1 must equal the price of good 2. d The prices of the two goods cannot be equal in equilibrium since Pete and Dud do not have equal endowments. e All of the above statements are false.
MULTIPLE CHOICE
Topic: Exchange Correct Responses: 95 Correct Di culty: 1 Discrimination Index: 17
535
29.10 A situation is Pareto e cient if:
a there is no way to make everyone worse o without making someone better o . b aggregate pro ts are maximized. c there is no way to make someone better o without making someone else worse o . d there is some way to make everyone better o . e there is no way to make anyone better o .
Topic: Elasticity Correct Responses: 46 Correct Di culty: 2 Discrimination Index: 26
29.11 Dan and Marilyn consume two goods, x and y. They have identical Cobb-Douglas utility
functions. Initially Dan owns 10 units of x and 10 units of y. Initially Marilyn owns 40 units of x and 20 units of y. They make exchanges to reach a Pareto optimal allocation which is better for both than the no-trade allocation. Which of the following is NOT necessarily true about the allocation they trade to?
a Marilyn consumes 5 units of x for every 3 units of y that she consumes. b The locus of Pareto optimal allocations is a diagonal straight line in the Edgeworth box. c Dan's consumption of x is greater than his consumption of y. d Dan consumes more than 10 units of x. e Marilyn consumes at least 40 units of x.
Topic: Exchange Correct Responses: 0 Correct Di culty: 3 Discrimination Index: 0
29.12 Xavier and Yvette are the only two persons on a desert island. There are only two
goods, nuts and berries. Xavier's utility function is UNx ; Bx = Nx Bx . Yvette's utility function is UNy ; By = 6Ny + By . Xavier is endowed with 4 units of berries and 10 units of nuts. Yvette is endowed with 6 units of berries and 8 units of nuts. In a competitive equilibrium for this economy, how many units of berries does Xavier consume?
a 35 b 64 c 30 d 32 e None of the above.
CHAPTER 29 Exchange
Topic: Exchange Correct Responses: 0 Correct Di culty: 3 Discrimination Index: 0
536
29.13 Xavier and Yvette are the only two persons on a desert island. There are only two
goods, nuts and berries. Xavier's utility function is UNx ; Bx = Nx Bx . Yvette's utility function is UNy ; By = 3Ny + By . Xavier is endowed with 3 units of berries and 10 units of nuts. Yvette is endowed with 6 units of berries and 8 units of nuts. In a competitive equilibrium for this economy, how many units of berries does Xavier consume?
a 19.50 b 33 c 14.50 d 16.50 e None of the above.
Topic: Exchange Correct Responses: 57 Correct
Di culty: 2 Discrimination Index: 9
29.14 Eva and Ollie live in an isolated valley and trade with no one but each other. They con-
sume only grapefruits and lemons. Eva has an initial endowment of 10 grapefruits and 15 lemons. Ollie has an initial endowment of 14 grapefruits and 26 lemons. For Eva, the two goods are perfect substitutes, one-for-one. For Ollie, they are perfect complements, one-for-one. At all Pareto e cient allocations:
a Eva must consume at least 25 lemons. b Eva must consume at least 17 lemons. c Ollie must consume 17.50 grapefruits. d the slopes of the two traders' indi erence curves are the same. e Ollie must consume all of the grapefruits.
MULTIPLE CHOICE
Topic: Exchange Correct Responses: 57 Correct Di culty: 2 Discrimination Index: 9
537
29.15 Isabella and Horace live in an isolated valley and trade with no one but each other. They
consume only tomatoes and grapes. Isabella has an initial endowment of 20 tomatoes and 2 grapes. Horace has an initial endowment of 4 tomatoes and 38 grapes. For Isabella, the two goods are perfect substitutes, one-for-one. For Horace, they are perfect complements, one-for-one. At all Pareto e cient allocations:
a Isabella must consume at least 22 grapes. b Isabella must consume at least 16 grapes. c Horace must consume 19 tomatoes. d the slopes of the two traders' indi erence curves are the same. e Horace must consume all of the tomatoes.
Topic: Exchange Correct Responses: 11 Correct
Di culty: 3 Discrimination Index: 35
29.16 Amaranda and Bartolo consume only two goods, X and Y . They can trade only with each
other and there is no production. The total endowment of Good X equals the total endowment of Good Y . Amaranda's utility function is UxA ; yA = minfxA ; yA g and Bartolo's utility function is UxB ; yB = maxfxA ; yB g. In an Edgeworth box for Amaranda and Bartolo, the set of Pareto optimal allocations is:
a the main diagonal. b both diagonals. c the whole Edgeworth box. d the edges of the box and the main diagonal. e the edges of the box.
CHAPTER 29 Exchange
Topic: Exchange Correct Responses: 0 Correct Di culty: 3 Discrimination Index: 0
538
29.17 Adelino and Benito consume only two goods X and Y . They trade only with each other
and there is no production. Adelino's utility function is given by UxA; yA = 2xA +5yA and Benito's utility function is given by UxB ; yB = 26xB + 15yB 1=2. In the Edgeworth box constructed for Adelino and Benito, the set of Pareto optimal allocations is:
a the main diagonal. b both diagonals. c the entire contents of the Edgeworth box. d the right and left edges of the box. e the upper and lower edges of the box.
Topic: Exchange Correct Responses: 0 Correct
Di culty: 2 Discrimination Index: 0
29.18 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.
MULTIPLE CHOICE
Topic: Exchange Correct Responses: 53 Correct Di culty: 2 Discrimination Index: 49
539
29.19 Arturo and Belen consume only two goods, X and Y . They have strictly convex preferences
and no kinks in their indi erence curves. At the initial allocation, the ratio of Arturo's marginal utility of X to his marginal utility of Y is A and the ratio of Belen's marginal utility of X to his marginal utility of Y is B; where A B. The competitive equilibrium price ratio is px=py = C. Then:
a C B. b C A. c C = A. d C = B. e A C B.
Topic: Exchange Correct Responses: 30 Correct
Di culty: 2 Discrimination Index: 20
29.20 In a two-person, two-good, exchange economy, both consumers have quasilinear utility
a a horizontal line through the interior of the box. b a vertical line. c a straight line from the lower left to the upper right corner of the box. d a curved line from the lower left to the upper right corner of the box. e all four edges of the box.
functions, linear in Good 2. If quantities of Good 1 are measured horizontally and quantities of Good 2 are measured vertically in the Edgeworth box, the set of Pareto optimal allocations includes
CHAPTER 29 Exchange
Topic: Exchange Correct Responses: 0 Correct Di culty: 0 Discrimination Index: 0
540
29.21 A small economy has only two consumers, Roger and Heidi. Roger's utility function is
Ux; y = x + 50y1=2. Heidi's utility function is Ux; y = x + 5y. Roger is endowed with 625 units of x and 60 units of y. They make trades to reach a Pareto optimal allocation of resources in which both persons consume positive amounts. How much y does Roger consume? a 50 b 25 c 28 d 23 e There is not enough information to determine how much y he will consume.
Topic: Exchange Correct Responses: 0 Correct
Di culty: 0 Discrimination Index: 0
29.22 A small economy has only two consumers, George and Penelope. George's utility function
is Ux; y = x + 16y1=2. Penelope's utility function is Ux; y = x + 4y. George is endowed with 64 units of x and 60 units of y. They make trades to reach a Pareto optimal allocation of resources in which both persons consume positive amounts. How much y does George consume?
a 8 b 4 c 7 d 2 e There is not enough information to determine how much y he will consume.
MULTIPLE CHOICE
Topic: Exchange Correct Responses: 20 Correct Di culty: 2 Discrimination Index: 37
541
29.23 Abdul's utility is UXA ; YA = minfXA ; YAg where XA and YA are his consumptions of goods
X and Y respectively. Babette's utility function is UXB ; YB = XB YB where XB and YB are her consumptions of goods X and Y . Abdul's initial endowment is no units of Y and 10 units of X. Babette's initial endowment is no units of X and 12 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 the following equation
is satis ed.
a 10=p + 1 + 6 = 12 b 12=10 = p c 12=p + 1 + 5 = 12 d Minf10; 12g + 10=2p = 12 e Minf10; 12g + 12=2p = 12
Topic: Exchange Correct Responses: 20 Correct
Di culty: 2 Discrimination Index: 37
29.24 Abdul's utility is UXA; YA = minfXA ; YAg where XA and YA are his consumptions of
goods X and Y respectively. Babette's utility function is UXB ; YB = XB YB where XB and YB are her consumptions of goods X and Y . Abdul's initial endowment is no units of Y and 4 units of X. Babette's initial endowment is no units of X and 14 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 the following equation is satis ed.
a 4=p + 1 + 7 = 14 b 14=4 = p c 14=p + 1 + 2 = 14 d Minf4; 14g + 4=2p = 14 e Minf4; 14g + 14=2p = 14
CHAPTER 29 Exchange
Topic: Exchange Correct Responses: 63 Correct 1=2
542
Di culty: 2 Discrimination Index: 38
1=2
29.25 Professor Nightsoil's utility function is UN BN ; PM = BN + 4PN and Dean Interface's
utility function is UI BI ; PI = BI +2PI where BN and BI are the number of bromides and PN and PI are the number of platitudes consumed by Nightsoil and Interface respectively . If Nightsoil's initial endowment is 4 bromides and 15 platitudes and if Interface's initial endowment is 5 bromides and 20 platitudes, then at any Pareto e cient allocation in which both persons consume positive amounts of both goods, it must be that:
a Nightsoil consumes the same ratio of bromides to platitudes as Interface. b Interface consumes 7 platitudes. c Interface consumes 4.50 bromides. d Interface consumes 3 bromides. e Interface consumes 4 bromides.
Topic: Exchange Correct Responses: 63 Correct 1=2
Di culty: 2 Discrimination Index: 38
1=2
29.26 Professor Nightsoil's utility function is UN BN ; PM = BN + 4PN and Dean Interface's
utility function is UI BI ; PI = BI +2PI where BN and BI are the number of bromides and PN and PI are the number of platitudes consumed by Nightsoil and Interface respectively . If Nightsoil's initial endowment is 2 bromides and 10 platitudes and if Interface's initial endowment is 3 bromides and 25 platitudes, then at any Pareto e cient allocation in which both persons consume positive amounts of both goods, it must be that:
a Nightsoil consumes the same ratio of bromides to platitudes as Interface. b Interface consumes 7 platitudes. c Interface consumes 2.50 bromides. d Interface consumes 2 bromides. e Interface consumes 5 bromides.
MULTIPLE CHOICE
Topic: Exchange Correct Responses: 61 Correct Di culty: 2 Discrimination Index: 58
543
29.27 An economy has two people Charlie and Doris. There are two goods, apples and bananas.
Charlie has an initial endowment of 5 apples and 4 bananas. Doris has an initial endowment of 10 apples and 2 bananas. Charlie's utility function is UAC ; BC = AC BC where AC is his apple consumption and BC is his banana consumption. Doris's utility function is UAD ; BD = AD BD where AD and BD are her apple and banana consumptions. At every Pareto optimal allocation:
a Charlie consumes the same number of apples as Doris. b Charlie consumes 15 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 apples and bananas in the ratio of 10 apples for every 2 bananas that she consumes.
Topic: Exchange Correct Responses: 61 Correct
Di culty: 2 Discrimination Index: 58
29.28 An economy has two people Charlie and Doris. There are two goods, apples and bananas.
Charlie has an initial endowment of 3 apples and 12 bananas. Doris has an initial endowment of 6 apples and 6 bananas. Charlie's utility function is UAC ; BC = AC BC where AC is his apple consumption and BC is his banana consumption. Doris's utility function is UAD ; BD = AD BD where AD and BD are her apple and banana consumptions. At every Pareto optimal allocation:
a Charlie consumes the same number of apples as Doris. b Charlie consumes 9 apples for every 18 bananas that he consumes. c Doris consumes equal numbers of apples and bananas. d Charlie consumes more bananas per apple than Doris does. e Doris consumes apples and bananas in the ratio of 6 apples for every 6 bananas that she consumes.
CHAPTER 29 Exchange
Topic: Exchange Correct Responses: 55 Correct Di culty: 2 Discrimination Index: 41
544
29.29 Ken's utility function is UQK ; WK = QK WK and Barbie's utility function is UQB ; WB =
QB WB . If Ken's initial endowment were 3 units of quiche and 9 units of wine and Barbie's endow-
ment were 6 units of quiche and 9 units of wine, then at any Pareto optimal allocation where both persons consume some of each good:
a Ken would consume 3 units of quiche for every 9 units of wine. b Barbie would consume twice as much quiche as Ken. c Ken would consume 9 units of quiche for every 18 units of wine that he consumes. d Barbie would consume 6 units of quiche for every 9 units of wine that she consumes. e None of the above.
Topic: Exchange Correct Responses: 55 Correct
Di culty: 2 Discrimination Index: 41
29.30 Ken's utility function is UQK ; WK = QK WK and Barbie's utility function is UQB ; WB =
QB WB . If Ken's initial endowment were 3 units of quiche and 12 units of wine and Barbie's ena Ken would consume 3 units of quiche for every 12 units of wine. b Barbie would consume twice as much quiche as Ken. c Ken would consume 9 units of quiche for every 24 units of wine that he consumes. d Barbie would consume 6 units of quiche for every 12 units of wine that she consumes. e None of the above.
dowment were 6 units of quiche and 12 units of wine, then at any Pareto optimal allocation where both persons consume some of each good:
MULTIPLE CHOICE
Topic: Exchange Correct Responses: 20 Correct Di culty: 3 Discrimination Index: 12
545
29.31 Morris has the utility function Ub; w = 3b + 12w and Philip has the utility function
Ub; w = bw; where b is the number of books consumed per month and w is bottles of wine con-
sumed per month. If we draw an Edgeworth box with books on the horizontal axis and wine on the vertical axis and if we measure Morris' consumptions from the lower left corner of the box, then the contract curve contains:
a a straight line running from the upper right corner of the box to the lower left. b a curve that gets steeper as you move from left to right. c a straight line with slope 1=4 passing through the lower left corner of the box. d a straight line with slope 1=4 passing through the upper right corner of the box. e a curve that gets atter as you move from left to right.
Topic: Exchange Correct Responses: 20 Correct
Di culty: 3 Discrimination Index: 12
29.32 Morris has the utility function Ub; w = 4b + 12w and Philip has the utility function
Ub; w = bw; where b is the number of books consumed per month and w is bottles of wine con-
sumed per month. If we draw an Edgeworth box with books on the horizontal axis and wine on the vertical axis and if we measure Morris' consumptions from the lower left corner of the box, then the contract curve contains:
a a straight line running from the upper right corner of the box to the lower left. b a curve that gets steeper as you move from left to right. c a straight line with slope 1=3 passing through the lower left corner of the box. d a straight line with slope 1=3 passing through the upper right corner of the box. e a curve that gets atter as you move from left to right.
CHAPTER 29 Exchange
Topic: Exchange Correct Responses: 62 Correct Di culty: 2 Discrimination Index: 39
546
29.33 Astrid's utility function is UHA; CA = HACA. Birger's utility function is minfHB ; CBg. If
Astrid's initial endowment is no cheese and 8 units of herring and if Birger's initial endowments are 8 units of cheese and no herring, then where p is a competitive equilibrium price of herring and cheese is the numeraire, it must be that demand equals supply in the herring market. This implies that:
a 8=p + 1 + 4 = 8 b 8=8 = p c 8=8 = p d 8=p + 8=2p = 8 e Minf8; 8g = p
Topic: Exchange Correct Responses: 62 Correct
Di culty: 2 Discrimination Index: 39
29.34 Astrid's utility function is UHA; CA = HACA. Birger's utility function is minfHB ; CBg. If
Astrid's initial endowment is no cheese and 12 units of herring and if Birger's initial endowments are 8 units of cheese and no herring, then where p is a competitive equilibrium price of herring and cheese is the numeraire, it must be that demand equals supply in the herring market. This implies that:
a 8=p + 1 + 6 = 12 b 8=12 = p c 12=8 = p d 8=p + 12=2p = 12 e Minf12; 8g = p
MULTIPLE CHOICE
Topic: Exchange Correct Responses: 29 Correct Di culty: 2 Discrimination Index: 27
547
29.35 Mutt's utility function is Um; j = maxf4m; jg and Je 's utility function is Um; j = 2m+j.
Mutt is initially endowed with 3 units of milk and 2 units of juice and Je is initially endowed with 5 units of milk and 6 units of juice.If we draw an Edgeworth box with milk on the horizontal axis and juice on the vertical axis and if we measure goods for Mutt by the distance from the lower left corner of the box, then the set of Pareto optimal allocations includes the:
a left edge of the Edgeworth box, but no other edges. b bottom edge of the Edgeworth box, but no other edges. c left edge and bottom edge of the Edgeworth box. d right edge of the Edgeworth box, but no other edges. e right edge and top edge of the Edgeworth box.
Topic: Exchange Correct Responses: 29 Correct
Di culty: 2 Discrimination Index: 27
29.36 Mutt's utility function is Um; j = maxf4m; jg and Je 's utility function is Um; j = 3m+j.
Mutt is initially endowed with 3 units of milk and 2 units of juice and Je is initially endowed with 5 units of milk and 6 units of juice.If we draw an Edgeworth box with milk on the horizontal axis and juice on the vertical axis and if we measure goods for Mutt by the distance from the lower left corner of the box, then the set of Pareto optimal allocations includes the:
a left edge of the Edgeworth box, but no other edges. b bottom edge of the Edgeworth box, but no other edges. c left edge and bottom edge of the Edgeworth box. d right edge of the Edgeworth box, but no other edges. e right edge and top edge of the Edgeworth box.
Essay
Topic: Exchange Correct Responses: 0 Di culty: 2 Discrimination Index: 0
Exchange
29.1 In a pure exchange economy, Ollie's utility function is 0 Ux; y = 3x + y and Fawn's utility 0
function is Ux; y = xy. Ollie's initial allocation is 1 x and no y s. Fawn's initial allocation is no x s and 2 y0 s. Draw an Edgeworth box for Fawn and Ollie. Put x0s on the horizontal axis and y0 s on the vertical axis. Measure goods for Ollie from the lower left and goods for Fawn from the upper right. Mark the initial allocation with the letter W. The locus of Pareto optimal points consists of two line segments. Describe these line segments in words or formulas and show them on your graph.
Answer: The Edgeworth box is 1 unit wide and 2 units high. Along the contract curve, Fawn consumes 3 times as much y as x. The contract curve consists of a line running from the upper right corner of the box to the point on the bottom of the box where Fawn consumes all of the y and 2=3 units of x and a line from this point to the lower left of the box.
Topic: Exchange Correct Responses: 0 Di culty: 3 Discrimination Index: 0
29.2 An economy has 2000 people. 1000 of them have utility functions Ux; y = x+y and 1000 of
them have utility functions Ux; y = minf2x; yg. Everybody has an initial allocation of 1 unit of x and 1 unit of y. Find the competitive equilibrium prices and consumptions for each type of person.
Answer: Prices are 1 and 1. The rst type of person will consume 2=3 units of y and 4=3 units of x and the second type of person will consume 4=3 units of y and 2=3 units of x.
Topic: Exchange Correct Responses: 0 Di culty: 2 Discrimination Index: 0
29.3 Will likes apples and hates bananas. Wanda likes both apples and bananas. Both of them
have convex preferences. Will's initial endowment is 10 apples and 5 bananas. Wanda's initial endowment is 5 bananas and 10 apples. a Draw an Edgeworth box with apples on the horizontal axis. Label the initial endowment point, W. b Show two indi erence curves for each person. c Show where on your diagram the Pareto optimal allocations are.
Answer: The Pareto optimal allocations include all of the allocations where Will has no bananas. If stu for Will is measured from the lower left corner, then these allocations are all along the bottom of the box.
Chapter 30
True-False
Topic: Production Correct Responses: 0 Correct Di culty: 2 Discrimination Index: 0
Production
30.1 If there are constant returns to scale in an industry, then in competitive equilibrium, pro ts
in that industry must necessarily be zero.
Topic: Production Correct Responses: 0 Correct Di culty: 1 Discrimination Index: 0
30.2 When there is production, a competitive equilibrium is not Pareto optimal unless there are
increasing returns to scale.
Topic: Production Correct Responses: 82 Correct Di culty: 1 Discrimination Index: 14
30.3 The marginal rate of transformation between two goods indicates the rate at which an e cient economy would have to give up one good to obtain more of the other.
Topic: Production Correct Responses: 68 Correct Di culty: 2 Discrimination Index: 25
30.4 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.
Multiple Choice
Production
Di culty: 1 Discrimination Index: 22
Topic: Production Correct Responses: 77 Correct
30.1 A small company produces two goods, swords and plowshares. The company has 100 Type
Alpha employees and 100 Type Beta employees. If an Alpha devotes all his time to producing swords, he can make 4 swords per week. If he devotes all his time to producing plowshares, he can make 20 plowshares per week. A Beta can produce either 1 plowshare per week or 1 sword per week. The company wants to produce 425 swords and as many plowshares as it can. How many type Betas should it employ at making swords?
a 100 b 25 c 80 d 0 e None of the above.
Topic: Production Correct Responses: 77 Correct
Di culty: 1 Discrimination Index: 22
30.2 A small company produces two goods, swords and plowshares. The company has 100 Type
Alpha employees and 100 Type Beta employees. If an Alpha devotes all his time to producing swords, he can make 3 swords per week. If he devotes all his time to producing plowshares, he can make 6 plowshares per week. A Beta can produce either 1 plowshare per week or 1 sword per week. The company wants to produce 314 swords and as many plowshares as it can. How many type Betas should it employ at making swords?
a 100 b 14 c 85 d 0 e None of the above.
MULTIPLE CHOICE
Topic: Production Correct Responses: 64 Correct Di culty: 2 Discrimination Index: 32
551
30.3 Ernie and Burt both make pizzas for a living. Making a pizza consists of two tasks: making
the crust and applying toppings. Ernie can make crusts at the rate of 30 crusts per hour. He can apply toppings at the rate of 15 toppings per hour. Burt can make crusts at the rate of 15 crusts per hour. He can apply toppings at the rate of 30 toppings per hour. After years of operating separate, one-man shops, they realize they can produce more e ciently by combining operations and dividing the tasks between them. How many more pizzas per hour can they make if they work together and allocate tasks e ciently than they made when they worked separately?
a 5 b 10 c 14 d 25 e 8
Topic: Production Correct Responses: 0 Correct
Di culty: 2 Discrimination Index: 0
30.4 Mandy is a master woodcarver 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.
CHAPTER 30 Production
Topic: Production Correct Responses: 0 Correct Di culty: 1 Discrimination Index: 0
552
30.5 Amy Canvas is an artist who produces sketches and paintings. She can produce 12 sketches
a week if she spends all of her workday sketching. She can produce 3 paintings per week if she spends all of her workdays painting. The rate at which she produces either sketches or paintings is independent of how many she makes. She can divide her time in any way she wishes between sketching and painting. If you draw her production possibility frontier with sketches on the horizontal axis and paintings on the vertical axis, the production possibility frontier will be
a the outer two sides of a rectangle. b a downward sloping curve that gets steeper as you move to the left. c a downward sloping straight line. d an upward sloping straight line. e an upward sloping curve that gets steeper as you move to the left.
Topic: Production Correct Responses: 49 Correct
Di culty: 2 Discrimination Index: 25
30.6 Last year a pestilential fungus ravaged the cocoa elds. The price of chocolate has risen
abruptly to $1 per ounce. The government is considering emergency measures to aid su ering chocolate addicts. One plan being considered is the Chocolate Relief Plan CRP. This plan would set a price ceiling of $.80 per ounce on chocolate. This would cause a shortage, so the CRP will limit consumption to no more than 10 ounces of chocolate per person per week. At $.80 per ounce, enough chocolate would be produced for everyone to have 10 ounces. Jill buys less than 10 ounces per week at $1 per ounce, but would buy more than 10 ounces if the price dropped to $.80.
a Jill is de nitely better o without the CRP. b Jill is better o without the CRP if $1 is the competitive equilibrium price without the CRP. c Jill is better o with CRP only if the industry is monopolized and the price exceeds marginal cost in the absence of the CRP. d Jill is de nitely better o with the CRP. e None of the above.
MULTIPLE CHOICE
Topic: Production Correct Responses: 0 Correct Di culty: 2 Discrimination Index: 0
553
30.7 Robinson Crusoe's preferences over coconut consumption, C; and leisure, R; are represented
by the utility function, UC; R = CR. There are 48 hours available for Robinson to allocate between labor and leisure. If he works L hours, he will produce the square root of L coconuts. He will choose to work:
a 8 hours. b 12 hours. c 16 hours. d 20 hours. e 24 hours.
Topic: Production Correct Responses: 76 Correct
Di culty: 2 Discrimination Index: 23
30.8 Robinson Crusoe spends 4 hours a day catching sh and picking coconuts. He can always
catch 2 sh per hour and he can always gather 3 coconuts per hour. His utility function is CF where C is the number of coconuts he eats per day and F is the number of sh he eats per day. How many sh will he choose to eat per day?
a 8 b 6 c 4 d 2 e 1
CHAPTER 30 Production
Topic: Production Correct Responses: 0 Correct Di culty: 0 Discrimination Index: 0
554
30.9 Tip can write 5 pages of term paper or solve 20 workbook problems in an hour, while Spot
can write 4 pages of term paper or solve 12 workbook problems in an hour. If they each decide to work a total of 8 hours and to share their output, then if they produce as many pages of term paper as possible given that they produce 35 workbook problems:
a Spot will spend all of his time writing term papers and Tip will spend some time at each task. b Tip will spend all of his time writing term papers and Spot will spend some time at each task. c Both students will spend some time at each task. d Spot will write term papers only and Tip will do workbook problems only. e Tip will write term papers only and Spot will do workbook problems only.
Topic: Production Correct Responses: 0 Correct Di culty: 0 Discrimination Index: 0
30.10 Tip can write 2 pages of term paper or solve 2 workbook problems in an hour, while Spot
can write 5 pages of term paper or solve 20 workbook problems in an hour. If they each decide to work a total of 6 hours and to share their output, then if they produce as many pages of term paper as possible given that they produce 10 workbook problems:
a Spot will spend all of his time writing term papers and Tip will spend some time at each task. b Tip will spend all of his time writing term papers and Spot will spend some time at each task. c Both students will spend some time at each task. d Spot will write term papers only and Tip will do workbook problems only. e Tip will write term papers only and Spot will do workbook problems only.
Topic: Production Correct Responses: 0 Correct Di culty: 0 Discrimination Index: 0
30.11 Al and Bill are the only workers in a small factory which makes geegaws and doodads. Al
can make 5 geegaws per hour or 20 doodads per hour. Bill can make 4 geegaws per hour or 24 doodads per hour. Assuming that neither of them nds one task more odious than the other:
a Al has comparative advantage in producing geegaws and Bill has comparative advantage in producing doodads. b Bill has comparative advantage in producing geegaws and Al has comparative advantage in producing doodads. c Al has comparative advantage in producing both geegaws and doodads. d Bill has comparative advantage in producing both geegaws and doodads. e Both persons have comparative advantage in producing doodads.
MULTIPLE CHOICE
Topic: Production Correct Responses: 0 Correct Di culty: 0 Discrimination Index: 0
555
30.12 Al and Bill are the only workers in a small factory which makes geegaws and doodads.
a Al has comparative advantage in producing geegaws and Bill has comparative advantage in producing doodads. b Bill has comparative advantage in producing geegaws and Al has comparative advantage in producing doodads. c Al has comparative advantage in producing both geegaws and doodads. d Bill has comparative advantage in producing both geegaws and doodads. e Both persons have comparative advantage in producing doodads.
Al can make 3 geegaws per hour or 15 doodads per hour. Bill can make 2 geegaws per hour or 6 doodads per hour. Assuming that neither of them nds one task more odious than the other:
Topic: Production Correct Responses: 0 Correct
Di culty: 0 Discrimination Index: 0
30.13
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 30 units of red money to spend and 48 units of blue money to spend. The red price of ambrosia is 3 and the blue price of ambrosia is 8. The red price of bubblegum is 1 and the blue price of bubblegum is 2. If ambrosia is on the horizontal axis, and bubblegum on the vertical, axis, then Harold's budget set is bounded:
a by two line segments, one running from 0; 54 to 10; 24 and another running from 10; 24 to 16; 0. b by two line segments one running from 0; 54 to 6; 30 and the other running from 6; 30 to 16; 0. c by two line segments, one running from 0; 30to 10; 24 and the other running from 10; 24 to 40; 0. d a vertical line segment and a horizontal line segement, intersecting at 10; 24. e a vertical line segment and a horizontal line segment, intersecting at 6; 30.
CHAPTER 30 Production
Topic: Production Correct Responses: 0 Correct Di culty: 0 Discrimination Index: 0
556
30.14
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 20 units of red money to spend and 48 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 bubblegum is 1 and the blue price of bubblegum is 2. If ambrosia is on the horizontal axis, and bubblegum on the vertical, axis, then Harold's budget set is bounded:
a by two line segments, one running from 0; 44 to 10; 24 and another running from 10; 24 to 18; 0. b by two line segments one running from 0; 44 to 8; 20 and the other running from 8; 20 to 18; 0. c by two line segments, one running from 0; 32to 10; 24 and the other running from 10; 24 to 30; 0. d a vertical line segment and a horizontal line segement, intersecting at 10; 24. e a vertical line segment and a horizontal line segment, intersecting at 8; 20.
Topic: Production Correct Responses: 0 Correct
Di culty: 0 Discrimination Index: 0
30.15 Robinson Crusoe has exactly 10 hours per day to spend gathering coconuts or catching
UF; C = FC where F is his consumption of sh and C is his consumption of coconuts. If he allo-
sh. He can catch 5 sh per hour or he can pick 15 coconuts per hour. His utility function is
cates his time in the best possible way between catching sh and picking coconuts, his consumption will be the same as it would be if he could buy sh and coconuts in a competitive market where the price of coconuts is 1.
a His income is 150, and the price of sh is 3. b His income is 50, and the price of sh is 5. c His income is 200 and the price of sh is 5. d His income is 150 and the price of sh is 0.20. e His income is 100 and the price of sh is 0.20.
MULTIPLE CHOICE
Topic: Production Correct Responses: 0 Correct Di culty: 0 Discrimination Index: 0
557
30.16 Robinson Crusoe has exactly 10 hours per day to spend gathering coconuts or catching sh.
He can catch 3 sh per hour or he can pick 9 coconuts per hour. His utility function is UF; C = FC where F is his consumption of sh and C is his consumption of coconuts. If he allocates his time in the best possible way between catching sh and picking coconuts, his consumption will be the same as it would be if he could buy sh and coconuts in a competitive market where the price of coconuts is 1.
a His income is 90, and the price of sh is 3. b His income is 30, and the price of sh is 3. c His income is 120 and the price of sh is 3. d His income is 90 and the price of sh is 0.33. e His income is 60 and the price of sh is 0.33.
Topic: Production Correct Responses: 0 Correct
Di culty: 0 Discrimination Index: 0
30.17 On a certain island there are only two goods, wheat and milk. The only scarce resource is
land. There are 1000 acres of land. An acre of land will produce either 20 units of milk or 30 units of wheat. Some citizens have lots of land, some have just a little bit. The citizens of the island all have utility functions of the form UM; W = MW. At every Pareto optimal allocation:
a the number of units of milk produced equals the number of units of wheat produced. b total milk production is 10,000. c all citizens consume the same commodity bundle. d every consumer's marginal rate of substitution between milk and wheat is ,1. e None of the above is true at EVERY Pareto optimal allocation.
CHAPTER 30 Production
Topic: Production Correct Responses: 0 Correct Di culty: 0 Discrimination Index: 0
558
30.18 On a certain island there are only two goods, wheat and milk. The only scarce resource is
land. There are 1000 acres of land. An acre of land will produce either 11 units of milk or 31 units of wheat. Some citizens have lots of land, some have just a little bit. The citizens of the island all have utility functions of the form UM; W = MW. At every Pareto optimal allocation:
a the number of units of milk produced equals the number of units of wheat produced. b total milk production is 5,500. c all citizens consume the same commodity bundle. d every consumer's marginal rate of substitution between milk and wheat is ,1. e None of the above is true at EVERY Pareto optimal allocation.
Topic: Production Correct Responses: 0 Correct
Di culty: 0 Discrimination Index: 0
30.19 In the process of producing one hormone-free, stress-free, happy cow, the New Age Cattle
Ranch produces one ton of natural, organic plant fertilizer. Demand for the ranch's cattle is given by Pc = 2; 000 , 10Qc ; and demand for fertilizer is given by Pf = 500 , 3Qf . The cost of producing Q cow-fertilizer bundles is C = 5; 000 + 300Q. To maximize pro ts, the ranch should
a produce 85 cow-fertilizer units; sell 85 cattle, and sell 85 tons of fertilizer. b produce 85 cow-fertilizer units; sell 85 cattle, and sell 33.33 tons of fertilizer. c produce 85 cow-fertilizer units; sell 85 cattle, and sell 83.33 tons of fertilizer. d produce 84.62 cow-fertilizer units; sell 84.62 cattle, and sell 84.62 tons of fertilizer. e produce 100 cow-fertilizer units; sell 100 cattle, and dispose of all the fertilizer in an environmentally friendly manner.
MULTIPLE CHOICE
Topic: Production Correct Responses: 0 Correct Di culty: 0 Discrimination Index: 0
559
30.20 In the process of producing one hormone-free, stress-free, happy cow, the New Age Cattle
Ranch produces one ton of natural, organic plant fertilizer. Demand for the ranch's cattle is given by Pc = 2; 000 , 20Qc ; and demand for fertilizer is given by Pf = 500 , 4Qf . The cost of producing Q cow-fertilizer bundles is C = 5; 000 + 400Q. To maximize pro ts, the ranch should
a produce 40 cow-fertilizer units; sell 40 cattle, and sell 40 tons of fertilizer. b produce 40 cow-fertilizer units; sell 40 cattle, and sell 12.50 tons of fertilizer. c produce 62.50 cow-fertilizer units; sell 40 cattle, and sell 62.50 tons of fertilizer. d produce 43.75 cow-fertilizer units; sell 43.75 cattle, and sell 43.75 tons of fertilizer. e produce 50 cow-fertilizer units; sell 50 cattle, and dispose of all the fertilizer in an environmentally friendly manner.
Topic: Production Correct Responses: 0 Correct
Di culty: 0 Discrimination Index: 0
30.21
For each carload of ore removed from the Matchless Mine, one pound of lead and one ounce of silver is smelted. The cost of mining and processing one carload of ore is CQ = 500 + 2Q + 0:03Q2. The demand for silver per ounce is Ps = 50 , 0:40Qs and the demand for lead per pound is Pl = 5 , 0:03Ql. What should the owners of the Matchless Mine do to maximize pro ts in the long run?
a Mine and process 57.61 carloads of ore, sell 57.61 ounces of silver, and sell 57.61 pounds of lead. b Mine and process 62.50 carloads of ore, sell 62.50 ounces of silver, and sell 25 pounds of lead. c Mine and process 83.33 carloads of ore, sell 55.81 ounces of silver, and sell 83.33 pounds of lead. d Mine and process 83.33 carloads of ore, sell 62.50 ounces of silver, and sell 83.33 pounds of lead. e Shut down the mine.
CHAPTER 30 Production
Topic: Production Correct Responses: 0 Correct Di culty: 0 Discrimination Index: 0
560
30.22
For each carload of ore removed from the Matchless Mine, one pound of lead and one ounce of silver is smelted. The cost of mining and processing one carload of ore is CQ = 700 + 5Q + 0:01Q2. The demand for silver per ounce is Ps = 40 , 0:50Qs and the demand for lead per pound is Pl = 6 , 0:04Ql. What should the owners of the Matchless Mine do to maximize pro ts in the long run?
a Mine and process 37.27 carloads of ore, sell 37.27 ounces of silver, and sell 37.27 pounds of lead. b Mine and process 40 carloads of ore, sell 40 ounces of silver, and sell 10 pounds of lead. c Mine and process 75 carloads of ore, sell 34.31 ounces of silver, and sell 75 pounds of lead. d Mine and process 75 carloads of ore, sell 40 ounces of silver, and sell 75 pounds of lead. e Shut down the mine.
Essay
Topic: Production Correct Responses: 0 Di culty: 2 Discrimination Index: 0
Production
30.1 On a certain small island, there are 100 units of labor and 200 units of capital. Two goods
can be produced. Good A is produced with xed coe cients, using 1 unit of labor and 3 units of capital per unit of output. Good B is produced with xed coe cients, using 1 unit of labor and 1 unit of capital per unit of ouput. Let Xa denote the quantity of good A and Xb be the quantity of good B that is produced. The set of feasible outputs combinations for this economy is restricted by the fact that it cannot use more than 100 units of labor or 200 units of capital. a Write down two inequalities expressed in terms of Xa and Xb that must be satis ed at feasible output combinations. b Draw a graph showing the economy's production possibility set. Put numerical labels on your graph so that this graph is precisely described.
Xa + Xb = 100; 3Xa + Xb = 200 b Production possibility set is the area in the intersection of the halfspaces from a.
Chapter 31
True-False
Topic: Welfare Correct Responses: 0 Correct Di culty: 1 Discrimination Index: 0
Welfare
31.1 According to Arrow's impossibility theorem, it is impossible to nd a social ordering that
is complete, re exive, and transitive.
Topic: Welfare Correct Responses: 0 Correct
Di culty: 1 Discrimination Index: 0
31.2 An allocation is fair if whenever one person envies another, the envied person does not envy
the envier.
Topic: Welfare Correct Responses: 0 Correct Di culty: 2 Discrimination Index: 0
31.3 In a pure exchange economy if the initial allocation is Pareto optimal, then competitive
equilibrium is fair.
Topic: Welfare Correct Responses: 60 Correct Di culty: 2 Discrimination Index: 28
31.4 In a competitive equilibrium, no matter how di erent their preferences may be, no two
people with the same income will envy each other's consumption bundles.
Topic: Welfare Correct Responses: 0 Correct
Di culty: 1 Discrimination Index: 0
31.5 An allocation which is worse for somebody than the initial allocation can not be Pareto
optimal.
TRUE-FALSE
Topic: Welfare Correct Responses: 0 Correct Di culty: 2 Discrimination Index: 0
563
31.6 If allocation x is Pareto optimal and allocation y is not, then everyone is at least as well o
with x as with y; and someone is better o with x than with y.
Topic: Welfare Correct Responses: 0 Correct Di culty: 1 Discrimination Index: 0
31.7 The utility possibilities frontier is the boundary of the production possibility set.
Topic: Welfare Correct Responses: 0 Correct Di culty: 1 Discrimination Index: 0
31.8 In a pure exchange economy, if an allocation is Pareto e cient, it is impossible to have two
people who prefer each other's consumption bundles to their own.
Topic: Welfare Correct Responses: 0 Correct Di culty: 2 Discrimination Index: 0
31.9 If a social welfare function is an increasing function of each person's utility, then every
allocation that maximizes this social welfare function must be a Pareto optimum.
Multiple Choice
Welfare
Topic: Welfare Correct Responses: 84 Correct
Di culty: 1 Discrimination Index: 13
31.1 Mr. Angst has two children, Dick and Jane. Dick is a slow learner and Jane is very bright.
If Mr. Angst spends $X per month on Dick's education, Dick will score a total of X=2 points on his SAT tests. If Mr. Angst spends $Y per month on Jane's education, she will score a total of 2Y on her SAT tests. Mr. Angst has a utility function UD; J = minfD; Jg where D is Dick's SAT score and J is Jane's SAT score. To maximize his utility, he will:
a spend equal amounts of money on the two children. b spend 4 times as much money on Dick's education as on Jane's. c spend 4 times as much money on Jane's education as on Dick's. d spend between 1 and 2 times as much money on Dick's education as on Jane's. e spend between 1 and 2 times as much money on Jane's education as on Dick's.
Topic: Welfare Correct Responses: 0 Correct
Di culty: 0 Discrimination Index: 0
31.2 A Borda count is used to decide an election between 3 candidates, x,y, and z; where a score
of 1 is awarded to a rst choice, 2 to a second choice, and 3 to a third choice. There are 21 voters. 2 voters rank the candidates x rst, y second, z third; 2 voters rank the candidates x rst, z second, y third; 7 rank the candidates z rst, y second, x third; 10 voters rank the candidates y rst, z second, x x x third. Which candidate wins?
a Candidate x. b Candidate y. c Candidate z. d There is a tie between x and y; with z coming in third. e There is a tie between y and z; with x coming in third.
MULTIPLE CHOICE
Topic: Welfare Correct Responses: 0 Correct Di culty: 0 Discrimination Index: 0
565
31.3 A Borda count is used to decide an election between 3 candidates, x,y, and z; where a score
of 1 is awarded to a rst choice, 2 to a second choice, and 3 to a third choice. There are 16 voters. 4 voters rank the candidates x rst, y second, z third; 3 voters rank the candidates x rst, z second, y third; 5 rank the candidates z rst, y second, x third; 4 voters rank the candidates y rst, z second, x x x third. Which candidate wins?
a Candidate x. b Candidate y. c Candidate z. d There is a tie between x and y; with z coming in third. e There is a tie between y and z; with x coming in third.
Topic: Welfare Correct Responses: 0 Correct
Di culty: 0 Discrimination Index: 0
31.4 A parent has two children living in cities with di erent 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 4,000 and the child in city B has an income of 8,000. The parent wants to give a total of $4,000 to her two children. Her utility function is UCA ; CB = CA CB ; where CA and CB are the consumptions of the children living in cities A and B respectively. She will choose to:
a give each child $2,000, even though this will buy less goods for the child in city B. b give the child in city B2 times as much money as the child in city B. c Give the child in city A 2 times as much money as the child in city B. d Give the child in city B1 times as much money as the child in city A. e Give the child in city A 1 times as much money as the child in city B.
CHAPTER 31 Welfare
Topic: Welfare Correct Responses: 0 Correct Di culty: 0 Discrimination Index: 0
566
31.5 A parent has two children living in cities with di erent costs of living. The cost of living
in city B is 4 times the cost of living in city A. The child in city A has an income of 5,000 and the child in city B has an income of 20,000. The parent wants to give a total of $4,000 to her two children. Her utility function is UCA ; CB = CA CB ; where CA and CB are the consumptions of the children living in cities A and B respectively. She will choose to:
a give each child $2,000, even though this will buy less goods for the child in city B. b give the child in city B4 times as much money as the child in city B. c Give the child in city A 4 times as much money as the child in city B. d Give the child in city B2 times as much money as the child in city A. e Give the child in city A 2 times as much money as the child in city B.
Topic: Welfare Correct Responses: 0 Correct
Di culty: 0 Discrimination Index: 0
31.6 Suppose that Paul and David have utility functions U = 2AP + OP and U = AD + 2OD;
respectively, where AP and OP are Paul's consumptions of apples and oranges and AD and OD are David's consumptions of apples and oranges. The total supply of apples and oranges to be divided between them is 14 apples and 18 oranges. The "fair" allocations consist of all allocations satisfying the following conditions.
a AD = AP and OD = OP . b 4AP + 2OP is at least 46 and 2AD + 4OD is at least 50. c 2AP + OP is at least 46 and 2AD + 2OD is at least 50. d AD + OD is at least 16 and AS + OS is at least 16. e 2AP + OP is at least AD + 2OD and AD + 2OD is at least 2AP + OP .
MULTIPLE CHOICE
Topic: Welfare Correct Responses: 0 Correct Di culty: 0 Discrimination Index: 0
567
31.7 Suppose that Paul and David have utility functions U = 4AP + OP and U = AD + 2OD;
respectively, where AP and OP are Paul's consumptions of apples and oranges and AD and OD are David's consumptions of apples and oranges. The total supply of apples and oranges to be divided between them is 14 apples and 14 oranges. The "fair" allocations consist of all allocations satisfying the following conditions.
a AD = AP and OD = OP . b 8AP + 2OP is at least 70 and 2AD + 4OD is at least 42. c 4AP + OP is at least 70 and 2AD + 2OD is at least 42. d AD + OD is at least 14 and AS + OS is at least 14. e 4AP + OP is at least AD + 2OD and AD + 2OD is at least 4AP + OP .
Topic: Welfare Correct Responses: 0 Correct
Di culty: 0 Discrimination Index: 0
3 2
31.8 Suppose that Romeo has the utility function U = SR SJ and Juliet has the utility function
spaghetti to divide between them.
a Romeo would want to give Juliet some spaghetti if he had more than 22.50 units of spaghetti. b Juliet would want to give Romeo some spaghetti if she has more than 25 units. c Romeo and Juliet would never disagree about how to divide the spaghetti. d Romeo would want to give Juliet some spaghetti if he has more than 23 units of spaghetti. e Juliet would want to give Romeo some spaghetti if she has more than 27 units of spaghetti.
23 U = SR SJ where SR is Romeo's spaghetti consumption and SJ is Juliet's. They have 45 units of
CHAPTER 31 Welfare
Topic: Welfare Correct Responses: 0 Correct Di culty: 0 Discrimination Index: 0
3 2
568
31.9 Suppose that Romeo has the utility function U = SR SJ and Juliet has the utility function
spaghetti to divide between them.
2 3
U = SR SJ where SR is Romeo's spaghetti consumption and SJ is Juliet's. They have 30 units of a Romeo would want to give Juliet some spaghetti if he had more than 15 units of spaghetti. b Juliet would want to give Romeo some spaghetti if she has more than 16 units. c Romeo and Juliet would never disagree about how to divide the spaghetti. d Romeo would want to give Juliet some spaghetti if he has more than 14 units of spaghetti. e Juliet would want to give Romeo some spaghetti if she has more than 18 units of spaghetti.
Topic: Welfare Correct Responses: 0 Correct
Di culty: 0 Discrimination Index: 0
31.10 Hat eld and McCoy burn with hatred for each other. They both consume corn whisky.
2 2 Hat eld's utility function is U = WH , WM =40 and McCoy's utility is U = WM , WH =40; where WH is Hat eld's whisky consumption and WM is McCoy's whisky consumption, measured in gallons. The sheri has a total of 80 units of con scated whisky which he could give back to them. For some reason, the sheri wants them both to be as happy as possible and he wants to treat them equally. The sheri should give them each:
a 40 gallons. b 20 gallons and spill 40 gallons in the creek. c 10 gallons and spill 60 gallons in the creek. d 24 gallons and spill the rest in the creek. e 5 gallons and spill the rest in the creek.
MULTIPLE CHOICE
Topic: Welfare Correct Responses: 0 Correct Di culty: 0 Discrimination Index: 0
569
31.11 Hat eld and McCoy burn with hatred for each other. They both consume corn whisky.
2 2 Hat eld's utility function is U = WH , WM =16 and McCoy's utility is U = WM , WH =16; where WH is Hat eld's whisky consumption and WM is McCoy's whisky consumption, measured in gallons. The sheri has a total of 36 units of con scated whisky which he could give back to them. For some reason, the sheri wants them both to be as happy as possible and he wants to treat them equally. The sheri should give them each:
a 18 gallons. b 8 gallons and spill 20 gallons in the creek. c 4 gallons and spill 28 gallons in the creek. d 12 gallons and spill the rest in the creek. e 2 gallons and spill the rest in the creek.
Essay
Topic: Welfare Correct Responses: 0 Di culty: 2 Discrimination Index: 0
Welfare
31.1 No one is meaner and uglier than Gladys. Someone is meaner and uglier than Harold.
Therefore Gladys is meaner and uglier than Harold. Is this reasoning correct? If so, explain why. If not, explain why not. Assume that people can be ranked from ugliest to least ugly by a complete transitive ordering and that there are no ties. Likewise assume that people can be ranked from meanest to least mean by a complete transitive ordering and that there are no ties.
Answer: The reasoning is incorrect. Consider the following example. There are 3 people: Fred, Gladys and Harold. The rankings for ugly are Gladys is ugliest, Fred is second ugliest and Harold is least ugly. The rankings for mean are Fred is meanest, Harold is second meanest and Gladys is least mean. Then nobody is meaner and uglier than Gladys. Fred is meaner and uglier than Harold, but Gladys is not meaner and uglier than Harold.
Chapter 32
True-False
Topic: Externalities Correct Responses: 93 Correct Di culty: 1 Discrimination Index: 11
Externalities
32.1 A trade between two people is an example of an externality.
Topic: Externalities Correct Responses: 80 Correct Di culty: 1 Discrimination Index: 0
32.2 The only known way to eliminate externalities is through taxes or subsidies.
Topic: Externalities Correct Responses: 0 Correct Di culty: 1 Discrimination Index: 0
32.3 The e cient amount of air pollution is in general independent of whether polluters or pollutees pay to reduce pollution.
Topic: Externalities Correct Responses: 52 Correct Di culty: 1 Discrimination Index: 45
32.4 A Pigouvian tax on pollution is designed to collect enough revenue to pay for pollution
detection by the government.
Topic: Externalities Correct Responses: 84 Correct Di culty: 2 Discrimination Index: 29
32.5 If there are negative externalities in production or consumption, competitive equilibrium is
unlikely to be Pareto e cient, but positive externalities enhance the e ciency of the market.
Topic: Externalities Correct Responses: 0 Correct Di culty: 1 Discrimination Index: 0
32.6 The tragedy of the commons" refers to the tendency for common property to be overused.
CHAPTER 32 Externalities
Topic: Externalities Correct Responses: 0 Correct Di culty: 1 Discrimination Index: 0
572
32.7 If preferences are quasilinear, then the delineation of property rights has no distributional
consequences.
Topic: Externalities Correct Responses: 70 Correct Di culty: 1 Discrimination Index: 5
32.8 If your consumption of toothpaste produces positive externalities for your neighbors which
you ignore, then you are consuming less toothpaste than is Pareto optimal.
Topic: Externalities Correct Responses: 0 Correct Di culty: 1 Discrimination Index: 0
32.9 Mobil Oil Corporation recently bought the right to emit an additional 900 pounds of noxious
gas vapors per day at its Torrance, California re nery. This suggests that allowing pollution rights to be marketed is likely to lead to more pollution than there would be if there were no restrictions on polluting.
Multiple Choice
Externalities
Di culty: 2 Discrimination Index: 18
Topic: Externalities Correct Responses: 12 Correct
32.1 A mountain village owns a common pasture where villagers graze their goats. The cost to a
goat owner of owning and caring for a goat is 4 groschens. The pasture gets overgrazed if too many goats share the pasture. The total revenue from all goats on the common pasture is fg = 48g,2g2; where g is the number of goats on the pasture. The town council notices that total pro t from the pasture is not maximized if villagers are allowed to pasture goats for free. The council decides to allow a goat to use the common pasture only if its owner buys it a goat license. To maximize total pro t of villagers and council, how many groschens per goat should the council charge?
a 12 b 20 c 24 d 26 e 22
Topic: Externalities Correct Responses: 84 Correct
Di culty: 2 Discrimination Index: 30
32.2 The 130 campers at Bear Creek Campground love their own camp res, but hate the smoke
from their neighbors' camp res. Each camper's utility function is U = 22f , f 2 , s where f is the number of hours her own camp re burns per day and where s is the amount of smoke in the air. It happens that s is 12 times the average amount of hours that campers use their res. The campground authority could make all campers better o by limiting the number of hours of camp re per day for everyone. How many hours of camp res per day should the authority allow each camper in order to make the typical camper as well o as possible?
a 5 b 11 c 3 d 6 e Campers will be best o if they are free to choose their own amounts of camp re.
CHAPTER 32 Externalities
Topic: Externalities Correct Responses: 84 Correct Di culty: 2 Discrimination Index: 30
574
32.3 The 130 campers at Bear Creek Campground love their own camp res, but hate the smoke
from their neighbors' camp res. Each camper's utility function is U = 17f , f 2 , s where f is the number of hours her own camp re burns per day and where s is the amount of smoke in the air. It happens that s is 9 times the average amount of hours that campers use their res. The campground authority could make all campers better o by limiting the number of hours of camp re per day for everyone. How many hours of camp res per day should the authority allow each camper in order to make the typical camper as well o as possible?
a 4 b 8.50 c 2 d 5 e Campers will be best o if they are free to choose their own amounts of camp re.
Topic: Externalities Correct Responses: 57 Correct
Di culty: 2 Discrimination Index: 28
32.4 Two stores are located side by side. They attract customers to each other and to themselves by advertising. The pro t functions of the two stores are 75 + x2 x1 , 2x2 for store 1, and 1 120 + x1x2 , 2x2 for store 2, where x1 and x2 are total advertising expenditures by stores 1 and 2 2 respectively. If each store sets its advertising expenditures independently as in Nash equilibrium, how much would store 1 spend on advertising?
a 28 b 30 c 25 d 33 e None of the above.
MULTIPLE CHOICE
Topic: Externalities Correct Responses: 57 Correct Di culty: 2 Discrimination Index: 28
575
32.5 Two stores are located side by side. They attract customers to each other and to themselves by advertising. The pro t functions of the two stores are 120 + x2 x1 , 2x2 for store 1, and 1 60 + x1x2 , 2x2 for store 2, where x1 and x2 are total advertising expenditures by stores 1 and 2 2 respectively. If each store sets its advertising expenditures independently as in Nash equilibrium, how much would store 1 spend on advertising?
a 36 b 38 c 33 d 41 e None of the above.
Topic: Externalities Correct Responses: 62 Correct
Di culty: 3 Discrimination Index: 57
32.6 Two stores are located side by side and attract customers to each other and to themselves
by advertising. Where x1 and x2 are the advertising expenditures of stores 1 and 2, the pro ts of the rms are 48 + x2x1 , 2x12 for store 1 and 54 + x1x2 , 2x2 2 for store 2. Knowing these functions, one investor buys both stores. In order to maximize his total pro ts, how much should he spend on advertising for store 1?
a 10 b 26 c 25 d 35 e None of the above.
CHAPTER 32 Externalities
Topic: Externalities Correct Responses: 18 Correct Di culty: 2 Discrimination Index: 34
576
32.7 A small co ee company roasts co ee beans in its shop. The unroasted beans cost the com-
pany 200 cents per pound. The MARGINAL cost of roasting co ee beans is 150 , 10q + q2 cents per pound when q pounds are roasted. The smell of roasting beans imposes costs on the company's neighbors. The total amount that neighbors would be willing to pay to have the shop stop roasting altogether is 5q2; where q is the number of pounds being roasted. The company sells its output in a competitive market at 450 cents per pound. What is the socially e cient amount of co ee for the company to roast?
a 10 lbs. b 15 lbs. c the square root of 10 lbs. d 45 lbs. e None of the above.
Topic: Externalities Correct Responses: 40 Correct
Di culty: 2 Discrimination Index: 20
1 2
32.8 Firm 1 produces output x with a cost function c x = x + 10. Firm 2 produces output y
with a cost function c2 y; x = y2 + x. Thus, the more that rm 1 produces, the greater are rm 20s costs. Both rms face competitive product markets. The competitive price of x is 20 and the competitive price of y is 40. No new rms can enter the industry and the old ones must remain. The e cient Pigouvian tax on the x good is:
a 0. b 1. c 2. d 3. e 4.
MULTIPLE CHOICE
Topic: Externalities Correct Responses: 25 Correct Di culty: 2 Discrimination Index: 21
2
577
32.9 Mike's utility function is Uc; d; h = 4c + 6d , d , 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 1001 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 a ect the amount that others drive, how many hours per day will he choose to drive?
a 2 b 3 c 4 d 1 e 0.50
Topic: Externalities Correct Responses: 25 Correct
Di culty: 2 Discrimination Index: 21
2
32.10 Mike's utility function is Uc; d; h = 4c + 12d , d , 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 1001 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 a ect the amount that others drive, how many hours per day will he choose to drive?
a 5 b 6 c 7 d 2.50 e 0.50
CHAPTER 32 Externalities
Topic: Externalities Correct Responses: 22 Correct Di culty: 2 Discrimination Index: 0
578
32.11 Marbella has 101 residents. All wear the same fancy clothes and each has the same utility
function, um; b; B = m + 16b , b2 , B=50; where m is the amount of maccaroni in kilograms that he or she eats per day, b is the number of hours that he or she spends on the beach per day, and B is the total number of person-hours spent per day on the beach by other residents of Marbella. Each has an income of $10 per day and maccaroni costs $1 per kilogram. City council is considering a law that would limit the amount of time that any person can spend on the beach. How many hours per day should they allow in order to maximize the utility of a typical Marbellite?
a 8 hours b 10 hours c 7 hours d 11 hours e They could not possibly be made better o by legislation that limits their freedom to choose.
Topic: Externalities Correct Responses: 22 Correct
Di culty: 2 Discrimination Index: 0
32.12 Marbella has 101 residents. All wear the same fancy clothes and each has the same utility
function, um; b; B = m + 22b , b2 , B=50; where m is the amount of maccaroni in kilograms that he or she eats per day, b is the number of hours that he or she spends on the beach per day, and B is the total number of person-hours spent per day on the beach by other residents of Marbella. Each has an income of $10 per day and maccaroni costs $1 per kilogram. City council is considering a law that would limit the amount of time that any person ca