*This preview shows page 1. Sign up to view the full content.*

**Unformatted text preview: **Chapter 2Budget ConstraintTrue-FalseTopic: Budget Constraint Correct Responses: 90Correct Answer: FalseDi culty: 1Discrimination Index: 102.1 If there are two goods with positive prices and the price of one good is reduced, while incomeand other prices remain constant, then the size of the budget set is reduced.Topic: Budget Constraint Correct Responses: 76Correct Answer: FalseDi culty: 1Discrimination Index: 242.2 If good 1 is measured on the horizontal axis and good 2 is measured on the vertical axis, andif 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: 91Correct Answer: FalseDi culty: 1Discrimination Index: 132.3 If all prices are doubled and money income is left the same, the budget set does not changebecause relative prices don't change.Topic: Budget Constraint Correct Responses: 93Correct Answer: TrueDi culty: 1Discrimination Index: 212.4 If there are two goods, and if one good has a negative price and the other has a positiveprice, then the slope of the budget line will be positive.Topic: Budget Constraint Correct Responses: 94Correct Answer: FalseDi culty: 1Discrimination Index: 122.5 If all prices double and income triples, then the budget line will become steeper.CHAPTER 2 Budget ConstraintTopic: Budget Constraint Correct Responses: 95Correct Answer: False2Di culty: 1Discrimination Index: 132.6 If Good 1 is on the horizontal axis and Good 2 is on the vertical axis, then an increase in theprice of Good 1 will not change the horizontal intercept of the budget line.Topic: Budget Constraint Correct Responses: 98Correct Answer: FalseDi culty: 1Discrimination Index: 12.7 If there are two goods and the prices of both goods rise, then the budget line must becomesteeper.Topic: Budget Constraint Correct Responses: 97Correct Answer: TrueDi culty: 1Discrimination Index: 02.8 There are two goods. You know how much of good 1 a consumer can a ord if she spends allof her income on good 1. If you know the ratio of the prices of the two goods, then you could drawthe consumer's budget line without any more information.Topic: Budget Constraint Correct Responses: 91Correct Answer: TrueDi culty: 1Discrimination Index: 02.9 A consumer prefers more to less of every good. Her income rises, and the price of one of thegoods falls while other prices stay constant. These changes must have made her better o .Topic: Budget Constraint Correct Responses: 0Correct Answer: TrueDi culty: 2Discrimination Index: 02.10 There are 3 goods. The price of good 1 is ,1; the price of good 2 is +1; and the priceof good 3 is +2. It is physically possible for a consumer to consume any commodity bundle withnon-negative amounts of each good. A consumer who has income of 10 could a ord to consumesome commodity bundles that include 5 units of good 1 and 6 units of good 2.Topic: Budget Constraint Correct Responses: 80Correct Answer: FalseDi culty: 1Discrimination Index: 492.11 A decrease in income pivots the budget line around the bundle initially consumed.Multiple ChoiceTopic: Budget Constraint Correct Responses: 97Correct Answer: ABudget ConstraintDi culty: 1Discrimination Index: 62.1If she spends all of her income on lemons and tangerines, Isabella can just a ord 30 lemons and8 tangerines per day. She could also use her entire budget to buy 6 lemons and 14 tangerines perday. The price of lemons is 6 guineas each. How much is Isabella's income per day?a 372 guineasb 377 guineasc 371 guineasd 363 guinease None of the above.Topic: Budget Constraint Correct Responses: 97Correct Answer: ADi culty: 1Discrimination Index: 62.2If she spends all of her income on uglifruit and breadfruits, Maria can just a ord 11 uglifruitand 4 breadfruits per day. She could also use her entire budget to buy 3 uglifruit and 8 breadfruitsper day. The price of uglifruit is 6 pesos each. How much is Maria's income per day?a 115 pesosb 119 pesosc 114 pesosd 105 pesose None of the above.CHAPTER 2 Budget ConstraintTopic: Budget Constraint Correct Responses: 0Correct Answer: A4Di culty: 2Discrimination Index: 02.3 Matt lives on popcorn and seafood salads. The price of popcorn is 1 dollar per bag and theprice of seafood salads is 2 dollars each. Matt allows himself to spend no more than 13 dollars aday on food. He also restricts his consumption to 5,500 calories per day. There are 1,000 caloriesin a bag of popcorn and 500 calories in a seafood salad. If he spends his entire money budget eachday 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: 0Correct Answer: ADi culty: 2Discrimination Index: 02.4 Quincy lives on ding dongs and seafood salads. The price of ding dongs is 1 dollar per bagand the price of seafood salads is 4 dollars each. Quincy allows himself to spend no more than 23dollars a day on food. He also restricts his consumption to 3,300 calories per day. There are 600calories in a bag of ding dongs and 300 calories in a seafood salad. If he spends his entire moneybudget 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 CHOICETopic: Budget Constraint Correct Responses: 88Correct Answer: A5Di culty: 1Discrimination Index: 202.5 Teresa spends her entire budget and consumes 6 units of x and 20 units of y. The price of xis twice the price of y. Her income doubles and the price of y doubles, but the price of x stays thesame. If she continues to buy 20 units of y; what is the largest number of units of x that she cana ord?a 12b 6c 14d 16e There is not enough information to say.Topic: Budget Constraint Correct Responses: 88Correct Answer: ADi culty: 1Discrimination Index: 202.6 Linda spends her entire budget and consumes 15 units of x and 19 units of y. The price of xis twice the price of y. Her income doubles and the price of y doubles, but the price of x stays thesame. If she continues to buy 19 units of y; what is the largest number of units of x that she cana ord?a 30b 15c 32d 34e There is not enough information to say.Topic: Budget Constraint Correct Responses: 50Correct Answer: CDi culty: 1Discrimination Index: 502.7 In year 1, the price of good x was 1, the price of good y was 1, and income was 30. In year2, the price of x was 6, the price of good y was 5, and income was 30. On a graph with x on thehorizontal 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 ConstraintTopic: Budget Constraint Correct Responses: 50Correct Answer: C6Di culty: 1Discrimination Index: 502.8 In year 1, the price of good x was 4, the price of good y was 2, and income was 60. In year2, the price of x was 17, the price of good y was 8, and income was 60. On a graph with x on thehorizontal 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: 35Correct Answer: DDi culty: 1Discrimination Index: 82.9If she spends her entire budget, Vanessa can a ord 47 apricots and 10 cherries. She can also justa ord 20 apricots and 19 cherries. The price of apricots is 18 cents. What is the price of cherriesin cents?a 64b 3c 21d 54e None of the above.MULTIPLE CHOICETopic: Budget Constraint Correct Responses: 35Correct Answer: D7Di culty: 1Discrimination Index: 82.10If she spends her entire budget, Heidi can a ord 39 peaches and 12 pears. She can also just a ord24 peaches and 17 pears. The price of peaches is 9 cents. What is the price of pears in cents?a 37b 3c 12d 27e None of the above.Topic: Budget Constraint Correct Responses: 100Correct Answer: BDi culty: 1Discrimination Index: 02.11 Heidi thrives on two goods: bananas and apples. The cost of bananas is 30 marks each andthe cost of apples is 15 marks each. If her income is 210 marks, how many bananas can she buy ifshe spends all of her income on bananas?a 5b 7c 14d 10e None of the aboveTopic: Budget Constraint Correct Responses: 100Correct Answer: BDi culty: 1Discrimination Index: 02.12 Teresa thrives on two goods: mangos and melons. The cost of mangos is 30 yen each andthe cost of melons is 15 yen each. If her income is 180 yen, how many mangos can she buy if shespends all of her income on mangos?a 4b 6c 12d 9e None of the aboveCHAPTER 2 Budget ConstraintTopic: Budget Constraint Correct Responses: 76Correct Answer: B8Di culty: 1Discrimination Index: 342.13 Yoram spends his entire income on 11 sacks of acorns and 5 crates of butternuts. The priceof acorns is 4 dollars per sack and his income is 94 dollars. He can just a ord a commodity bundlewith 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: 76Correct Answer: BDi culty: 1Discrimination Index: 342.14 Eduardo spends his entire income on 12 sacks of acorns and 2 crates of butternuts. Theprice of acorns is 2 dollars per sack and his income is 34 dollars. He can just a ord a commoditybundle 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: 99Correct Answer: CDi culty: 1Discrimination Index: 52.15 Harry thrives on two goods, paperback novels and bananas. The cost of paperback novelsis 4 dollars each and the cost of bananas is 3 dollars per bunch.If Harry spent all of his income onbananas, he could a ord 12 bunches of bananas per week. How many paperback novels could hebuy if he spent all of his income on paperback novels?a 36b 48c 9d 16e None of the above.MULTIPLE CHOICETopic: Budget Constraint Correct Responses: 92Correct Answer: E9Di culty: 1Discrimination Index: 252.16 Suppose that the prices of good x and good y both double, and income triples. On a graphwhere 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: 96Correct Answer: DDi culty: 1Discrimination Index: 182.17 Suppose that the price of good x triples and the price of good y doubles while incomeremains constant. On a graph where the budget line is drawn with x on the horizontal axis and yon 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: 0Correct Answer: CDi culty: 3Discrimination Index: 02.18 While traveling abroad, Tammy spent all of the money in her purse to buy 5 plates ofspaghetti and 6 oysters. Spaghetti costs 8 units of the local currency per plate and she had 82 unitsof currency in her purse. If s denotes the number of plates of spaghetti and o denotes the numberof oysters purchased, the set of commodity bundles that she could just a ord with the money inher 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 ConstraintTopic: Budget Constraint Correct Responses: 0Correct Answer: B10Di culty: 2Discrimination Index: 02.19 Billy Bob wants to gain some weight so that he can play football. Billy eats only milkshakesand spinach. Milkshakes cost him $1 each and spinach costs $2 per serving. A milkshake has 850calories and a serving of spinach has 200 calories. Billy Bob never spends more than $20 a day onfood and he always consumes at least 8000 calories per day. Which of the following is necessarilytrue?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: 81Correct Answer: DDi culty: 2Discrimination Index: 212.20 Lars consumes only potatoes and herring. When the price of potatoes was 9 crowns persack and the price of herring was 5 crowns per crock, he spent his entire income to buy 5 sacks ofpotatoes and 10 crocks of herring per month. Now the government subsidizes potatoes. Marketprices 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 incometax of 20 crowns per month. If s is the number of sacks of potatoes and c is the number of crocksof 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 CHOICETopic: Budget Constraint Correct Responses: 95Correct Answer: C11Di culty: 1Discrimination Index: 172.21 If you spent your entire income, you could a ord either 4 units of x and 8 units of y or 8units of x and 4 units of y. If you spent your entire income on x; how many units of x could you buy?a 20b 17c 12d There is not enough information to determine the amount of x.e None of the above.Topic: Budget Constraint Correct Responses: 95Correct Answer: CDi culty: 1Discrimination Index: 172.22 If you spent your entire income, you could a ord either 5 units of x and 15 units of y or 15units of x and 5 units of y. If you spent your entire income on x; how many units of x could you buy?a 35b 24c 20d There is not enough information to determine the amount of x.e None of the above.Topic: Budget Constraint Correct Responses: 95Correct Answer: CDi culty: 1Discrimination Index: 102.23 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 ConstraintTopic: Budget Constraint Correct Responses: 94Correct Answer: D12Di culty: 1Discrimination Index: 262.24 Your budget constraint for the two goods A and B is 12A + 4B = I where I is your income.You are currently consuming more than 45 units of B . In order to get 5 more units of A, how manyunits of B would you have to give up?a 0.33b 0.07c 3d 15e None of the above.Topic: Budget Constraint Correct Responses: 94Correct Answer: DDi culty: 1Discrimination Index: 262.25 Your budget constraint for the two goods A and B is 6A + 3B = I where I is your income.You are currently consuming more than 12 units of B . In order to get 2 more units of A, how manyunits of B would you have to give up?a 0.50b 0.25c 2d 4e None of the above.MULTIPLE CHOICETopic: Budget Constraint Correct Responses: 70Correct Answer: A13Di culty: 2Discrimination Index: 322.26 Young Alasdair loves lollipops and hates oatmeal. To induce him to eat enough oatmealand to restrain him from eating too many lollipops, his mum pays him 10 pence for every quartof 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 anallowance 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 thevertical 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: 41Correct Answer: CDi culty: 2Discrimination Index: 302.27 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 buyfood at a price of px 1 , s for up to x* units of food per week. If they buy more food than x*, theyhave 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=pxc m=px + sxd m=1 , spxe m + px =1 , spxCHAPTER 2 Budget ConstraintTopic: Budget Constraint Correct Responses: 100Correct Answer: C14Di culty: 1Discrimination Index: 02.28 Edmund must pay $6 each for punk rock video casettes, V . If Edmund is paid $24 per sackfor accepting garbage, G; and if his relatives send him an allowance of $192, then his budget line isdescribed 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: 100Correct Answer: CDi culty: 1Discrimination Index: 02.29 Edmund must pay $6 each for punk rock video casettes, V . If Edmund is paid $24 per sackfor accepting garbage, G; and if his relatives send him an allowance of $168, then his budget line isdescribed 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: 0Correct Answer: CDi culty: 0Discrimination Index: 02.30 If you have an income of $40 to spend, if commodity 1 costs $4 per unit, and commodity 2costs $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 CHOICETopic: Budget Constraint Correct Responses: 0Correct Answer: C15Di culty: 0Discrimination Index: 02.31 If you have an income of $36 to spend, if commodity 1 costs $4 per unit, and commodity 2costs $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: 85Correct Answer: ADi culty: 1Discrimination Index: 202.32 If you could exactly a ord either 5 units of x and 17 units of y; or 8 units of x and 5 unitsof y; then if you spent all of your income on y; how many units of y could you buy?a 37b 25c 49d 13e None of the above.Topic: Budget Constraint Correct Responses: 85Correct Answer: ADi culty: 1Discrimination Index: 202.33 If you could exactly a ord either 6 units of x and 17 units of y; or 9 units of x and 8 unitsof y; then if you spent all of your income on y; how many units of y could you buy?a 35b 26c 44d 15e None of the above.CHAPTER 2 Budget ConstraintTopic: Budget Constraint Correct Responses: 99Correct Answer: B16Di culty: 0Discrimination Index: 42.34 Murphy used to consume 100 units of X and 50 units of Y when the price of X was 2 andthe price of Y was 4. If the price of X rose to 5 and the price of Y rose to 7, how much wouldMurphy's income have to rise so that he could still a ord his original bundle?a 600b 450c 300d 900e None of the above.Topic: Budget Constraint Correct Responses: 99Correct Answer: BDi culty: 0Discrimination Index: 42.35 Murphy used to consume 100 units of X and 50 units of Y when the price of X was 2 andthe price of Y was 4. If the price of X rose to 6 and the price of Y rose to 8, how much wouldMurphy's income have to rise so that he could still a ord his original bundle?a 800b 600c 400d 1,200e None of the above.Topic: Budget Constraint Correct Responses: 0Correct Answer: CDi culty: 0Discrimination Index: 02.36 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 theseequations describes all combinations of pages of economics, E; and sociology, S; that she could readover the weekend?a E + S = 70b E=2 + S = 50c 2E + S = 110d E + S = 90e All of the above.MULTIPLE CHOICETopic: Budget Constraint Correct Responses: 0Correct Answer: C17Di culty: 0Discrimination Index: 02.37 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 theseequations describes all combinations of pages of economics, E; and sociology, S; that she could readover the weekend?a E + S = 70b E=2 + S = 50c 4E + S = 190d E + S = 130e All of the above.Topic: Budget Constraint Correct Responses: 0Correct Answer: ADi culty: 2Discrimination Index: 02.38 Ads in a slick business magazine are read by 300 lawyers and 1000 M.B.A's. Ads in a0consumer publication are read by 250 lawyers and 300 M:B:A: s. If Harry had $ 3,600 to spendon advertising, if the price of ads in the business magazine were $600 and the price of ads in theconsumer magazine were $300, then the combinations of recent M:B:A:0s and lawyers with hot tubswhom he could reach with his advertising budget would be represented by the integer values alonga 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 ConstraintTopic: Budget Constraint Correct Responses: 0Correct Answer: A18Di culty: 2Discrimination Index: 02.39 Ads in a slick business magazine are read by 300 lawyers and 1000 M.B.A's. Ads in a0consumer publication are read by 250 lawyers and 300 M:B:A: s. If Harry had $ 2,600 to spendon advertising, if the price of ads in the business magazine were $400 and the price of ads in theconsumer magazine were $200, then the combinations of recent M:B:A:0s and lawyers with hot tubswhom he could reach with his advertising budget would be represented by the integer values alonga 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: 60Correct Answer: BDi culty: 2Discrimination Index: 472.40 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 currencyunit per unit of ambrosia and 1 bcu per unit of bubblegum. Red prices are 2 rcus red currencyunits per unit of ambrosia and 6 rcus per unit of bubblegum. You have to pay twice for what youbuy, once in red currency, once in blue currency. If Ike spends all of his blue income, but not allof 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 CHOICETopic: Budget Constraint Correct Responses: 60Correct Answer: B19Di culty: 2Discrimination Index: 472.41 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 currencyunit per unit of ambrosia and 1 bcu per unit of bubblegum. Red prices are 2 rcus red currencyunits per unit of ambrosia and 6 rcus per unit of bubblegum. You have to pay twice for what youbuy, once in red currency, once in blue currency. If Ike spends all of his blue income, but not allof 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: 0Correct Answer: ADi culty: 2Discrimination Index: 02.42 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, thenhis 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 ConstraintTopic: Budget Constraint Correct Responses: 78Correct Answer: D20Di culty: 0Discrimination Index: 492.43 Suppose there are two goods, the prices of both goods are positive and a consumer's incomeis 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 fromthe 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 theorigin.e the consumer's budget line gets atter and shifts inward.Topic: Budget Constraint Correct Responses: 0Correct Answer: BDi culty: 0Discrimination Index: 02.44 Thomas consumes co ee C and doughnuts D. His budget line was described by theequation 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.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.EssayTopic: Budget Constraint Correct Responses: 0Budget ConstraintDi culty: 1Discrimination Index: 02.1 Perry lives on avocados and beans. The price of avocados is 10, the price of beans is 5, andhis income is 40. Show Perry's budget line on a graph with avocados on the horizontal axis andbeans on the vertical axis. Label the point where the budget line hits the horizontal axis A and thepoint where the budget line hits the vertical axis B . Next to these labels, write down the numberof avocados purchased at A and the number of beans purchased at B . Draw another budget lineshowing what Perry's budget would be if his income doubled, the price of avocados doubled, andthe price of beans stayed the same. Label the point where this line hits the vertical axis C and thepoint where it hits the horizontal axis D. Next to these labels write the number of avocados at Cand 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: 0Di culty: 2Discrimination Index: 02.2 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 bottletops from the Cokes she drinks during the next month, she will get a refund of $.20 for everybottlecap beyond the rst 12 that she returns. For example, if she returns 25 bottle caps she willget back $2:60 = $:2025 , 12. Brenda has $40 to spend on hot dogs and Coke during the nextmonth. 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 ofthese 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 from12; 34 to about 125:3; 0.CHAPTER 2 Budget ConstraintTopic: Budget Constraint Correct Responses: 022Di culty: 2Discrimination Index: 02.3 Felicity is studying economics and political science. She can read 30 pages of political scienceper hour but only 5 pages of economics per hour. This week she has a 50 page assignment ineconomics and a 150 page assignment in political science. Because of sorority rush, she cannotdevote more than 10 hours to studying these subjects this week. She realizes she cannot completeall 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 thevertical axis. On this graph, show the possibilities that are consistent with the constraints thatFelicity has imposed on herself. She is allowed to read ahead in either subject. Label key pointson 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: 0Di culty: 3Discrimination Index: 02.4 Ed Moore and his family live in a city with many private schools and one public school. TheMoores are thinking of sending their only child to private school because they would like a schoolthat has more teachers and other resources per student than the local public school. The Mooresmust 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 inputsper 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 expendituresper 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 disposableincome. The rest of the budget is a line with slope ,1 from 2s; d , x to the x axis.Chapter 3True-FalseTopic: Preferences Correct Responses: 70Correct Answer: FalseDi culty: 1Discrimination Index: 31Preferences3.1 If preferences are transitive, more is always preferred to less.Topic: Preferences Correct Responses: 89Correct Answer: FalseDi culty: 1Discrimination Index: 213.2 A person with re exive preferences is someone who does not shop carefully.Topic: Preferences Correct Responses: 94Correct Answer: TrueDi culty: 2Discrimination Index: 63.3 If someone has the utility function U = 1000+2minfx; yg then x and y are perfect complementsfor that person.Topic: Preferences Correct Responses: 68Correct Answer: TrueDi culty: 1Discrimination Index: 403.4 A consumer with convex preferences who is indi erent between the bundles 1; 2 and 9; 6will like the bundle 5; 4 at least as well as either of the rst two bundles.Topic: Preferences Correct Responses: 68Correct Answer: TrueDi culty: 1Discrimination Index: 403.5 A consumer with convex preferences who is indi erent between the bundles 2; 3 and 10; 9will like the bundle 6; 6 at least as well as either of the rst two bundles.Topic: Preferences Correct Responses: 81Correct Answer: TrueDi culty: 2Discrimination Index: 03.6 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 PreferencesTopic: Preferences Correct Responses: 75Correct Answer: False24Di culty: 2Discrimination Index: 113.7 If preferences are convex, then for any commodity bundle x; the set of commodity bundlesthat are worse than x is a convex set.Topic: Preferences Correct Responses: 58Correct Answer: FalseDi culty: 2Discrimination Index: 03.8 Bill Katz prefers more of good 1 to less and he prefers less of good 2 to more. Bill has convexpreferences. If we draw his indi erence curves with good 1 on the horizontal axis and good 2 onthe vertical axis, then his indi erence curves have positive slope but get steeper as they rise.Topic: Preferences Correct Responses: 99Correct Answer: FalseDi culty: 1Discrimination Index: 03.9 The marginal rate of substitution measures the distance between one indi erence curve andthe next one.Topic: Preferences Correct Responses: 79Correct Answer: FalseDi culty: 1Discrimination Index: 113.10 Ambrose has an indi erence curve with equation x = 20 , 4x = . When Ambrose is con2suming the bundle 4; 16; his marginal rate of substitution is ,5=4.Topic: Preferences Correct Responses: 77Correct Answer: False121Di culty: 1Discrimination Index: 343.11 Nancy's psychology teacher will give her a course grade that is the maximum of her scoreson three midterm examinations. Nancy has convex preferences over the possible combinations ofmidterm scores.TRUE-FALSETopic: Preferences Correct Responses: 39Correct Answer: False25Di culty: 3Discrimination Index: 263.12 If Melody has more classical records than rock and roll records, she is willing to exchangeexactly 1 classical record for 2 rock and roll records, but if she has more rock and roll recordsthan classical records, then she is willing to exchange exactly 1 rock and roll record for 2 classicalrecords. Melody has convex preferences.Topic: Preferences Correct Responses: 71Correct Answer: FalseDi culty: 1Discrimination Index: 173.13 Josephine buys 3 quarts of milk and 2 pounds of butter when milk sells for $2 a quart andbutter 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: 29Correct Answer: TrueDi culty: 2Discrimination Index: 293.14 A consumer who is unable to detect small di erences in the amount of water in her beercould have a transitive strict preference relation but is unlikely to have a transitive indi erencerelation.PreferencesMultiple ChoiceTopic: Preferences Correct Responses: 85Correct Answer: BDi culty: 1Discrimination Index: 233.1 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 istrue?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: 85Correct Answer: BDi culty: 1Discrimination Index: 233.2 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 istrue?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: 67Correct Answer: DDi culty: 1Discrimination Index: 143.3 George's indi erence curves are circles, all of which are centered at 18; 20. Of any twoindi erence circles, he would rather be on the inner one than the outer one. Which of the followingis 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 CHOICETopic: Preferences Correct Responses: 67Correct Answer: D27Di culty: 1Discrimination Index: 143.4 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 followingis 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: 0Correct Answer: BDi culty: 1Discrimination Index: 03.5 Manuel consumes only apples and bananas. He prefers more apples to less, but he gets tiredof bananas. If he consumes fewer than 17 bananas per week, he thinks that one banana is a perfectsubstitute for one apple. But you would have to pay him one apple for each banana beyond 17that 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 21b 22c 24d 26e None of the above.CHAPTER 3 PreferencesTopic: Preferences Correct Responses: 0Correct Answer: B28Di culty: 1Discrimination Index: 03.6 Wilbur consumes only apples and bananas. He prefers more apples to less, but he gets tiredof bananas. If he consumes fewer than 18 bananas per week, he thinks that one banana is a perfectsubstitute for one apple. But you would have to pay him one apple for each banana beyond 18that 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 17b 20c 26d 28e None of the above.Topic: Preferences Correct Responses: 75Correct Answer: EDi culty: 1Discrimination Index: 503.7 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 curvese None of the above.Topic: Preferences Correct Responses: 53Correct Answer: BDi culty: 2Discrimination Index: 343.8 If there are only two goods, if more of good 1 is always preferred to less, and if less of good2 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 CHOICETopic: Preferences Correct Responses: 75Correct Answer: D29Di culty: 2Discrimination Index: 293.9 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: 0Correct Answer: CDi culty: 2Discrimination Index: 03.10 The relation is preferred to" between commodity bundles is just one example of a binaryrelation. Another example is the relation is a full brother of" de ned over the set of all humanbeings. Let xRy mean person x is a full brother of person y.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.Topic: Preferences Correct Responses: 61Correct Answer: C3.11 Preferences are said to be monotonic if:Di culty: 1Discrimination Index: 20a 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 PreferencesTopic: Preferences Correct Responses: 8Correct Answer: C30Di culty: 3Discrimination Index: 03.12 Toby Talkalot subscribes to a local phone service that charges a xed fee of $10 per monthand allows him to place as many local phone calls as he likes without further charge. Let Good1 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'tuse the telephone at all. From this we can conclude that the slope m of his indi erence curve atthe 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: 22Correct Answer: BDi culty: 3Discrimination Index: 263.13 Professor Goodheart's colleague Dr. Kremepu gives 3 midterm exams. He drops the lowestand gives each student her average score on the other two exams. Polly Sigh is taking his courseand has a 60 on her rst exam. Let x2 be her score on the second exam and x3 be her score onthe third exam. If we draw her indi erence curves for scores on the second and third exams withx2 represented by the horizontal axis and x3 represented by the vertical axis, then her indi erencecurve 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 CHOICETopic: Preferences Correct Responses: 92Correct Answer: E31Di culty: 0Discrimination Index: 193.14 Charlie's indi erence curves have the equation xB = constant=xA; where larger constantsdenote 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: 92Correct Answer: EDi culty: 0Discrimination Index: 193.15 Charlie's indi erence curves have the equation xB = constant=xA; where larger constantsdenote 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: 77Correct Answer: CDi culty: 2Discrimination Index: 173.16 Ambrose has indi erence curves with the equation x = constant , 4x = where larger con2121stants correspond to higher indi erence curves. If good 1 is drawn on the horizontal axis and good2 on the vertical axis, what is the slope of Ambrose's indi erence curve when his consumptionbundle is 16; 9?a ,16=9b ,9=16c ,0:50d ,13e ,4CHAPTER 3 PreferencesTopic: Preferences Correct Responses: 77Correct Answer: C32Di culty: 2Discrimination Index: 173.17 Ambrose has indi erence curves with the equation x = constant , 4x = where larger con2121stants correspond to higher indi erence curves. If good 1 is drawn on the horizontal axis and good2 on the vertical axis, what is the slope of Ambrose's indi erence curve when his consumptionbundle is 9; 14?a ,9=14b ,14=9c ,0:67d ,17e ,3Topic: Preferences Correct Responses: 93Correct Answer: ADi culty: 2Discrimination Index: 43.18 Nancy Lerner is taking a course from Professor Goodheart who will count only her bestmidterm grade and from Professor Stern who will count only her worst midterm grade. In one ofher classes, Nancy has scores of 40 on her rst midterm and 50 on her second midterm. Whenthe rst midterm score is measured on the horizontal axis and her second midterm score on thevertical, 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 CHOICETopic: Preferences Correct Responses: 93Correct Answer: A33Di culty: 2Discrimination Index: 43.19 Nancy Lerner is taking a course from Professor Goodheart who will count only her bestmidterm grade and from Professor Stern who will count only her worst midterm grade. In one ofher classes, Nancy has scores of 70 on her rst midterm and 60 on her second midterm. Whenthe rst midterm score is measured on the horizontal axis and her second midterm score on thevertical, 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: 56Correct Answer: DDi culty: 2Discrimination Index: 653.20 If we graph Mary Granola's indi erence curves with avocados on the horizontal axis andgrapefruits on the vertical axis, then whenever she has more grapefruits than avocados, the slope ofher 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 anotherbundle that has 19 avocados and:a 15 grapefruits.b 19 grapefruits.c 11 grapefruits.d 13 grapefruits.e 14 grapefruits.CHAPTER 3 PreferencesTopic: Preferences Correct Responses: 56Correct Answer: D34Di culty: 2Discrimination Index: 653.21 If we graph Mary Granola's indi erence curves with avocados on the horizontal axis andgrapefruits on the vertical axis, then whenever she has more grapefruits than avocados, the slope ofher 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 anotherbundle that has 32 avocados and:a 28 grapefruits.b 32 grapefruits.c 24 grapefruits.d 26 grapefruits.e 27 grapefruits.Topic: Preferences Correct Responses: 75Correct Answer: BDi culty: 2Discrimination Index: 293.22 Recall that Tommy Twit's mother measures the departure of any bundle from her favoritebundle for Tommy by the sum of the absolute values of the di erences. Her favorite bundle forTommy is 2; 7 , ,that is, 2 cookies and 7 glasses of milk. Tommy's mother's indi erence curvethat 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 CHOICETopic: Preferences Correct Responses: 75Correct Answer: B35Di culty: 2Discrimination Index: 293.23 Recall that Tommy Twit's mother measures the departure of any bundle from her favoritebundle for Tommy by the sum of the absolute values of the di erences. Her favorite bundle forTommy is 2; 7 , ,that is, 2 cookies and 7 glasses of milk. Tommy's mother's indi erence curvethat 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: 0Correct Answer: DDi culty: 0Discrimination Index: 03.24 Scholastica is taking a class from Professor Chaos. Professor Chaos gives two tests in thiscourse and determines a student's grade as follows. He calculates the smaller of the following twonumbers: half of the score on the rst test which is a relatively easy test and the actual scoreon the second test. He gives each student a numerical score equal to the result of this calculationand then ranks the students. Scholastica would like to be ranked as high as possible in ProfessorChaos' rankings. If we represent her score on the rst exam on the horizontal axis and her scoreon 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 PreferencesTopic: Preferences Correct Responses: 0Correct Answer: D36Di culty: 0Discrimination Index: 03.25 In Professor Meanscore's class, the rst midterm exam and the second midterm exam areweighted equally toward the nal grade. With the rst midterm's score on the horizontal axis, andthe second midterm's score on the vertical axis, indi erence curves between the two exam scores area 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: 0Correct Answer: CDi culty: 0Discrimination Index: 03.26 Professor Stern's colleague, Dr. Schmertz, gives one midterm exam and a nal exam. Heweights the nal twice as heavily as the midterm to determine the course grade. No grades canbe dropped. If the midterm score is represented on the horizontal axis and the nal score on thevertical axis, and if a student in Dr. Schmertz's class cares only about her course grade, her indifference curve isa 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: 0Correct Answer: EDi culty: 0Discrimination Index: 03.27 I prefer 6 apples and 1 orange to 5 apples and 2 oranges. From this we can conclude thata 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.PreferencesEssayTopic: Preferences Correct Responses: 0Di culty: 3Discrimination Index: 03.1 Draw graphs with quantities of pepperoni pizza on the horizontal axis and anchovy pizza onthe vertical axis to illustrate the following situations. In each case draw two di erent indi erencecurves 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.Answer: a Indi erence curves slopes up and to the right. Arrow points down and to the left. bIndi erence curves are horizontal lines. Arrow points down.CHAPTER 3 PreferencesTopic: Preferences Correct Responses: 038Di culty: 3Discrimination Index: 03.2 Coach Steroid likes his players to be big, fast, and obedient. If player A is better than playerB 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. HaroldHotpoint weighs 240 pounds, runs extremely fast, and is extremely disobedient. Jerry Jacuzziweighs 150 pounds, runs at average speed, and is extremely obedient. Does Coach Steroid havetransitive preferences? Explain your answer.Answer: No. Steroid prefers W to H because W is heavier and more obedient. He preferes H to Jbecause H is heavier and faster. But he prefers J to W because J is more obedient and faster thanW . Since his preferences have a cycle, they cannot be transitive.Topic: Preferences Correct Responses: 0Di culty: 3Discrimination Index: 03.3 Belinda loves chocolate and always thinks that more is better than less. Belinda thinks thata few piano lessons would be worse than none at all but if she had enough piano lessons to getgood at playing the piano, she would prefer more lessons to less. Draw a graph with piano lessonson the horizontal axis and chocolate on the vertical axis. On your graph sketch two indi erencecurves for Belinda that would be consistent with this story. Label the better of the two indi erencecurves AA and the worse one BB.Answer: The indi erence curves would look something like inverted U 0s. The area under thesecurves needn't be necessarily convex. The better of the two curves drawn is the higher one.ESSAYTopic: Preferences Correct Responses: 039Di culty: 3Discrimination Index: 03.4 Mac Rowe doesn't sweat the petty stu . In fact, he just cannot detect small di erences. He00consumes 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 andB to C but C is preferred to A. To see that strict preference is transitive, suppose we have anythree bundles, x; y; x0 ; y0 and x00; y00. If the rst is preferred to the second and the second to thethird, then xy , x0 y0 1 and x0y0 , x00y00 1. Simple algebra shows that xy , x00y00 1. Thereforethe rst must be preferred to the third.Topic: Preferences Correct Responses: 0Di culty: 3Discrimination Index: 03.5 Blanche Carter has devised a system for rating the males in her economics class. She caresabout their intelligence and their looks. She has ranked each male on a scale of 1 to 5 for intelligenceand 1 to 3 for looks. She de nes a preference re lation, R; as follows: xRy if boy x scores at leastas high as boy y in either looks or in intelligence. Give an example to show that Blanche's methodof 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 rankings2 and 3. Then xRy because x is better looking than y and yRz because y is smarter than z . Butit is not true that xRz. In fact z is both smarter and better looking than x.Topic: Preferences Correct Responses: 0Di culty: 2Discrimination Index: 03.6 Explain how it would be possible to cheat someone who had intransitive preferences. Beexplicit about what you would o er him if you were trying to exploit his intransitivity and whathe 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 youo er him a trade that leaves him at B instead of C; he will accept the deal. If you now o er him atrade that leaves him at A instead of B; he will accept that. But he will prefer to be back wherehe originally was to where he is. So you could o er to give him back his original bundle, minus areward to you for your e orts and he would accept the deal.CHAPTER 3 PreferencesTopic: Preferences Correct Responses: 040Di culty: 1Discrimination Index: 03.7 If good X is measured on the horizontal axis and good Y on the vertical, what can yousay about the preferences of someone whose indi erence curves are a Parallel to the Y axis? bPositively sloped with more desirable indi ernce curves as one moves to the right? c Negativelysloped with more desirable indi erence curves as one moves to the left?Answer: a This person doesn't care how much X he has. b This person likes X but hates Y . cThis person hates both goods.Topic: Preferences Correct Responses: 0Di culty: 2Discrimination Index: 03.8 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 proofof your answer, and illustrate with a diagram.Answer: See the textbook.Chapter 4UtilityTrue-FalseTopic: Utility Correct Responses: 85Correct Answer: FalseDi culty: 2Discrimination Index: 104.1 With quasilinear preferences, the slope of indi erence curves is constant along all rays throughthe origin.Topic: Utility Correct Responses: 82Correct Answer: FalseDi culty: 2Discrimination Index: 454.2 Wanda Lott has the utility function U x; y = maxfx; yg. Wanda's preferences are convex.Topic: Utility Correct Responses: 96Correct Answer: TrueDi culty: 1Discrimination Index: 204.3 If someone has a utility function U = 2minfx; yg; then x and y are perfect complements forthat person.Topic: Utility Correct Responses: 66Correct Answer: FalseDi culty: 1Discrimination Index: 204.4 Maximilian consumes two goods x and y. His utility function is U x; y = maxfx; yg. Therefore x and y are perfect substitutes for Max.Topic: Utility Correct Responses: 36Correct Answer: FalseDi culty: 3Discrimination Index: 114.5 A person with the utility function U x; y = y + x has convex preferences.2Topic: Utility Correct Responses: 25Correct Answer: TrueDi culty: 3Discrimination Index: 474.6 Mr. Surly consumes only two goods and hates them both. His utility function is U x; y =,maxfx; yg. Mr. Surly has weakly convex preferences.CHAPTER 4 UtilityTopic: Utility Correct Responses: 71Correct Answer: True42Di culty: 2Discrimination Index: 434.7 Angela's utility function is U x ; x = x + x . Her indi erence curves are downward1sloping, parallel straight lines.21Topic: Utility Correct Responses: 81Correct Answer: True23Di culty: 2Discrimination Index: 04.8 Henrietta's utility function is U x ; x = x x . She has diminishing marginal rate of substi1tution between goods 1 and 2.212Topic: Utility Correct Responses: 66Correct Answer: FalseDi culty: 2Discrimination Index: 84.9 Alice's utility function is U x; y = x y. Steve's utility function is U x; y = x y + 2x. Alice22and Steve have the same preferences since Steve's utility function is a monotonic transformation ofAlice's.Topic: Utility Correct Responses: 78Correct Answer: FalseDi culty: 3Discrimination Index: 294.10 Jean's utility function is U x; y = x + y , y. If we draw her indi erence curves with x2on the horizontal axis and y on the vertical axis, then these indi erence curves are everywheredownward-sloping and get atter as one moves from left to right.Topic: Preferences Correct Responses: 99Correct Answer: TrueDi culty: 1Discrimination Index: 44.11 The utility function U x ; x = 2ln x + 3ln x represents Cobb-Douglas preferences.1212TRUE-FALSETopic: Preferences Correct Responses: 92Correct Answer: False43Di culty: 1Discrimination Index: 294.12 Fiery Demon is a rotgut whisky made in Kentucky. Smoothy is an unblended malt whiskyimported 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 hasunstable preferences.Topic: Utility Correct Responses: 93Correct Answer: FalseDi culty: 1Discrimination Index: 164.13 Mark strictly prefers consumption bundle A to consumption bundle B and weakly prefersbundle B to bundle A. These preferences can be represented by a utility function.Topic: Utility Correct Responses: 63Correct Answer: TrueDi culty: 3Discrimination Index: 804.14 A consumer has preferences represented by the utility function U x ; x = 10x + 2x x +1x , 50. For this consumer, goods 1 and 2 are perfect substitutes.22Topic: Utility Correct Responses: 52Correct Answer: True22112Di culty: 1Discrimination Index: 384.15 A person with utility function U x; y = 5 + y + 2x has non-convex preferences.2Topic: Utility Correct Responses: 64Correct Answer: FalseDi culty: 2Discrimination Index: 264.16 A person with the utility function U x; y = 10 + y + x has convex preferences.2Topic: Utility Correct Responses: 43Correct Answer: TrueDi culty: 2Discrimination Index: 294.17 A person with the utility function U x ; x = minfx + 2x ; 2x + x g has convex, but notstrictly convex preferences.121212CHAPTER 4 UtilityTopic: Utility Correct Responses: 0Correct Answer: False44Di culty: 0Discrimination Index: 04.18 If one utility function is a monotonic transformation of another, then the former must assigna higher utility number to every bundle than the latter.Topic: Preferences Correct Responses: 0Correct Answer: FalseDi culty: 0Discrimination Index: 04.19 Quasilinear preferences are homothetic when the optimal amount of good 1 is not a ordable.UtilityMultiple ChoiceTopic: Utility Correct Responses: 28Correct Answer: ADi culty: 2Discrimination Index: 174.1 Ike's utility function is U x; y = 25xy. He has 12 units of good x and 8 units of y. Ben'sutility function for the same two goods is U x; 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: 28Correct Answer: ADi culty: 2Discrimination Index: 174.2 Nick's utility function is U x; y = 33xy. He has 12 units of good x and 6 units of y. Boris'sutility function for the same two goods is U x; 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: 58Correct Answer: CDi culty: 2Discrimination Index: 274.3 Tim has preferences represented by the utility function: U x; y = minf6x + y; x + 2yg. If x ison the horizontal axis and y is on the vertical axis, what is the slope of his indi erence curve atthe 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 UtilityTopic: Utility Correct Responses: 58Correct Answer: C46Di culty: 2Discrimination Index: 274.4 Chen has preferences represented by the utility function: U x; y = minf4x + y; x + 6yg. If xis on the horizontal axis and y is on the vertical axis, what is the slope of his indi erence curve atthe 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: 95Correct Answer: CDi culty: 1Discrimination Index: 94.5 Doreen has preferences represented by the utility function U x; y = 10x + 5y. She consumes10 units of good x and 9 units of good y. If her consumption of good x is lowered to 1, how manyunits of y must she have in order to be exactly as well o as before?a 30 units of good yb 30 units of good yc 27 units of good yd 18 units of good ye None of the aboveTopic: Utility Correct Responses: 95Correct Answer: CDi culty: 1Discrimination Index: 94.6 Sheila has preferences represented by the utility function U x; y = 8x + 4y. She consumes 12units of good x and 3 units of good y. If her consumption of good x is lowered to 10, how manyunits of y must she have in order to be exactly as well o as before?a 12 units of good yb 10 units of good yc 7 units of good yd 5 units of good ye None of the aboveMULTIPLE CHOICETopic: Utility Correct Responses: 0Correct Answer: B47Di culty: 3Discrimination Index: 04.7 Mac's utility function is U x; 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: 30Correct Answer: CDi culty: 2Discrimination Index: 294.8 Charles' utility function is U x; y = xy. Anne's utility function is U x; y = 1; 000xy. Diana'sutility function is ,xy. Elizabeth's utility function is U x; y = ,1=xy +1. Fergie's utility functionis xy , 10; 000. Margaret's utility function is x=y. Philip's utility function is xy + 1. the goods xand y are two very expensive goods. We leave you to speculate about what they are. Which ofthese persons have the same preferences as Charles?a Everybody except Dianab Anne and Fergiec Anne, Fergie and Elizabethd None of theme All of themTopic: Utility Correct Responses: 55Correct Answer: EDi culty: 3Discrimination Index: 674.9 Raymond's preferences are represented by the utility function U x; y = x=y if yU x; 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 andCHAPTER 4 UtilityTopic: Utility Correct Responses: 92Correct Answer: C48Di culty: 2Discrimination Index: 174.10 Molly's utility function is U x; y = y + 4x: . She has 25 units of x and 12 units of y. If her5consumption of x is reduced to 0, how many units of y would she need in order to be exactly aswell o as before?a 48 units.b 37 units.c 32 units.d 112 units.e None of the above.Topic: Utility Correct Responses: 21Correct Answer: EDi culty: 2Discrimination Index: 134.11 Waldo's utility function is U x; y = xy. Waldo consumes 5 units of x and 25 units of y.a Waldo would be willing to make small exchanges of x for y in which he gives up 5 units of x for everyunit 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 everyunit 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 thanone 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 twogoods.e None of the above.MULTIPLE CHOICETopic: Utility Correct Responses: 21Correct Answer: E49Di culty: 2Discrimination Index: 134.12 Ernie's utility function is U x; 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 everyunit 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 everyunit 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 thanone 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 twogoods.e None of the above.Topic: Utility Correct Responses: 16Correct Answer: BDi culty: 2Discrimination Index: 04.13 Henry's utility function is x + 16xw + 64w where x is his consumption of x and w is hisconsumption of w.22a 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: 92Correct Answer: DDi culty: 1Discrimination Index: 374.14 Josephine's utility function is U x; y = y + 5x: . She has one unit of x and two units of y. If5her consumption of x is reduced to zero, how much y must she have in order to be exactly as wello as before?a 14 units.b 9 units.c 11 units.d 7 units.e None of the above.CHAPTER 4 UtilityTopic: Utility Correct Responses: 10Correct Answer: C50Di culty: 2Discrimination Index: 04.15 Jim's utility function is U x; y = xy. Jerry's utility function is U x; y = 1; 000xy + 2; 000.Tammy's utility function is U x; y = xy1 , xy. Oral's utility function is ,1=10+ xy. Billy's utilityfunction is U x; y = x=y. Pat's utility function is U x; 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 thesame 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: 74Correct Answer: ADi culty: 1Discrimination Index: 154.16 Harmon's utility function is U x ; x = x x . His income is $100, the price of good 2 is1212p2 = 4. Good 1 is priced as follows. The rst 15 units cost $4 per unit and any additional unitscost $2 per unit. What consumption bundle does Harmon choose?a 12:5; 12:5b 25; 12:5c 12:5; 25d 15; 10e None of the above.Topic: Utility Correct Responses: 61Correct Answer: EDi culty: 1Discrimination Index: 374.17 Janet consumes x and x together in xed proportions. She always consumes 2 units of x12for every unit x2. One utility function that describes her preferences is:a U x1; x2 = 2x1x2b U x1 ; x2 = 2x1 + x2c U x1; x2 = x1 + 2x2d U x1 ; x2 = minf2x1; x2ge U x1; x2 = minfx1 ; 2x2g1MULTIPLE CHOICETopic: Utility Correct Responses: 14Correct Answer: C51Di culty: 3Discrimination Index: 364.18 Oswald Odd consumes only goods 1 and 2. His utility function is U x ; x = x + x +minfx1 ; x2g. Each of Oswald's indi erence curves is:1212a 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: 4Correct Answer: ADi culty: 3Discrimination Index: 04.19 The absolute value of Mars' MRS at his current consumption bundle is greater than 3. Thatis; MU1 =MU2both goods.3. Mars has convex preferences and is currently consuming positive amounts ofa Taking away some of Good 1 and giving Mars 3 units of Good 2 for each unit of Good 1 taken away willnecessarily 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 willnecessarily 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 willnecessarily 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 willnecessarily make him better o .e More than one of the above is true.CHAPTER 4 UtilityTopic: Utility Correct Responses: 48Correct Answer: B52Di culty: 3Discrimination Index: 844.20 Isabella's utility function is U x; y = 4minfx; yg + y. If we draw her indi erence curves withx 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 theother 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 theother has slope ,1.e V-shaped with kinks where x = 4y.Topic: Utility Correct Responses: 48Correct Answer: BDi culty: 3Discrimination Index: 844.21 Penelope's utility function is U x; y = 2minfx; yg + y. If we draw her indi erence curveswith 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 theother 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 theother has slope ,1.e V-shaped with kinks where x = 2y.Topic: Utility Correct Responses: 94Correct Answer: EDi culty: 1Discrimination Index: 204.22 Charlie has the utility function U xA; xB = xAxB . His indi erence curve passing through32 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 CHOICETopic: Utility Correct Responses: 94Correct Answer: E53Di culty: 1Discrimination Index: 204.23 Charlie has the utility function U xA; xB = xAxB . His indi erence curve passing through10 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: 95Correct Answer: BDi culty: 0Discrimination Index: 474.24 Charlie's utility function is U A; B = AB where A and B are the numbers of apples andbananas, respectively, that he consumes. When Charlie is consuming 15 apples and 90 bananas, ifwe put apples on the horizontal axis and bananas on the vertical axis, the slope of his indi erencecurve at his current consumption is:a ,15.b ,6.c ,12.d ,1=6.e ,1=12.Topic: Utility Correct Responses: 95Correct Answer: BDi culty: 0Discrimination Index: 474.25 Charlie's utility function is U A; B = AB where A and B are the numbers of apples andbananas, respectively, that he consumes. When Charlie is consuming 25 apples and 100 bananas, ifwe put apples on the horizontal axis and bananas on the vertical axis, the slope of his indi erencecurve at his current consumption is:a ,25.b ,4.c ,8.d ,1=4.e ,1=8.CHAPTER 4 UtilityTopic: Utility Correct Responses: 53Correct Answer: C54Di culty: 2Discrimination Index: 494.26 Ambrose has the utility function U x ; x = 4x = + x . If Ambrose is initially consuming12121264 units of nuts and 10 units of berries, then what is the largest number of berries that he wouldbe willing to give up in return for an additional 17 units of nuts.a 9b 19c 4d 2e 1Topic: Utility Correct Responses: 53Correct Answer: CDi culty: 2Discrimination Index: 494.27 Ambrose has the utility function U x ; x = 4x = + x . If Ambrose is initially consuming 4121212units of nuts and 18 units of berries, then what is the largest number of berries that he would bewilling to give up in return for an additional 32 units of nuts.a 6b 24c 16d 8e 4Topic: Utility Correct Responses: 60Correct Answer: CDi culty: 2Discrimination Index: 524.28 Joe Bob's cousin Leonard consumes goods 1 and 2. Leonard thinks that 2 units of good 1is always a perfect substitute for 3 units of good 2. Which of the following utility functions is theonly one that would NOT represent Leonard's preferences?a U x1; x2 = 3x1 + 2x2 + 1000.b U x1 ; x2 = 9x2 + 12x1x2 + 4x2.12c U x1; x2 = Minf3x1; 2x2g.d U x1 ; x2 = 30x1 + 20x2 , 10; 000.e More than one of the above does NOT represent Leonard's preferences.MULTIPLE CHOICETopic: Utility Correct Responses: 60Correct Answer: C55Di culty: 2Discrimination Index: 524.29 Joe Bob's cousin Tim consumes goods 1 and 2. Tim thinks that 4 units of good 1 is alwaysa perfect substitute for 2 units of good 2. Which of the following utility functions is the only onethat would NOT represent Tim's preferences?a U x1; x2 = 2x1 + 4x2 + 1000.b U x1 ; x2 = 4x2 + 16x1x2 + 16x2.12c U x1; x2 = Minf2x1; 4x2g.d U x1 ; x2 = 20x1 + 40x2 , 10; 000.e More than one of the above does NOT represent Tim's preferences.Topic: Utility Correct Responses: 0Correct Answer: EDi culty: 0Discrimination Index: 04.30 Harry Mazzola has the utility function U x ; x = minfx + 2x ; 2x + x g. He has $40 to121212spend on corn chips and french fries, if the price of corn chips is 3 dollars per unit and the priceof 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: 0Correct Answer: EDi culty: 0Discrimination Index: 04.31 Harry Mazzola has the utility function U x ; x = minfx + 2x ; 2x + x g. He has $40 to121212spend on corn chips and french fries, if the price of corn chips is 3 dollars per unit and the priceof 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 UtilityTopic: Utility Correct Responses: 0Correct Answer: C56Di culty: 0Discrimination Index: 04.32 Phil Rupp's sister Ethel has the utility function U x; 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 linex = 4y.c consist of a horizontal line segment and a negatively sloped line segment which meet in a kink along theline x = y.d consist of a positively sloped line segment and a negatively sloped line segment which meet along theline x = y.e consist of a horizontal line segment and a positively sloped line segment which meet in a kink along theline x = 4y.Topic: Utility Correct Responses: 0Correct Answer: CDi culty: 0Discrimination Index: 04.33 Phil Rupp's sister Ethel has the utility function U x; 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 linex = 5y.c consist of a horizontal line segment and a negatively sloped line segment which meet in a kink along theline x = y.d consist of a positively sloped line segment and a negatively sloped line segment which meet along theline x = y.e consist of a horizontal line segment and a positively sloped line segment which meet in a kink along theline x = 5y.UtilityEssayTopic: Utility Correct Responses: 0Di culty: 1Discrimination Index: 04.1 Jim's utility function is U x; y = xy. Jerry's utility function is U x; y = 1000xy + 2000.Tammy's utility function is U x; y = xy1 , xy. Oral's utility function is U x; y = ,1=10 + 2xy.Marjoe's utility function is U x; y = xy + 1000. Pat's utility function is U x; y = :5xy , 10000.Billy's utility function is U x; y = x=y. F Francis's utility function is U x; y = ,xy. a Who hasthe same preferences as Jim? b Who had the same indi erence curves as Jim? c Explain whythe answers to a and b di er.Answer: Jerry, Pat and Oral have the same preferences as Jim since their utility functions aremonotonic 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 functionis 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: 0Di culty: 3Discrimination Index: 04.2 A consumer has a utility function of the form U x; 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 eachof the following assumptions? i Preferences are quasi-linear, convex, and x is a normal good. iiPreferences are homothetic. iii Preferences are homothetic and convex. iv Goods x and y areperfect 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.iva = b = 1.Topic: Utility Correct Responses: 0Di culty: 3Discrimination Index: 04.3 Victor Finick likes to have the same amount of x as he has of y. His utility function isU x; y = minf2x , y; 2y , xg. a Draw the indi erence curve for Victor that passes through thebundle 0; 0 and the indi erence curve that passes through 4; 4. Hint: Each indi erence curve isthe intersection of two line segments. b If Victor has a bundle that he likes better than 0; 0 andhis consumption of both goods is doubled, is Victor better o ? c Does Victor always prefer moreof either good to less?Answer: Victor's indi erence curves are V-shaped. The one through the origin consists of the tworays y = 2x and x = 2y. The one through 2; 2 has two rays going out from 2; 2 ,, one with slope1=2; and the other with slope 2. b Yes c No. If x y; then an increase in x by itself makes himworse o and if y x; an increase in y by itself makes him worse o .CHAPTER 4 UtilityTopic: Utility Correct Responses: 058Di culty: 1Discrimination Index: 04.4 Use separate graphs to sketch two indi erence curves for people with each of the followingutility functions: a U x; y = x + 2y b U x; y = Minfx; 2yg c U x; y = maxfx; 2ygAnswer: a These are straight lines with slope ,1=2. b These are L-shaped. The corners lie alongthe locus x = 2y. c A typical indi erence curve consists of a horizontal line from the y axis to thelocus x = 2y and then a vertical line to the y axis from the point where the horiontal line met theline x = 2y.Topic: Utility Correct Responses: 0Di culty: 2Discrimination Index: 04.5 Use separate graphs to draw indi erence curves for each of the following utility functions: aU x; y = minf2x + y; 2y + xgb U x; y = maxf2x + y; 2y + xg. c U x; y = x + minfx; yg. In which of these cases are preferencesconvex?Answer: If you take a point on the line x = y and draw two lines through it, one with a slopeof ,1=2 and the other with a slope of ,2; the outer envelope of these lines will be an indi erencecurve for a and the inner envelope will be an indi erence curve for b. The indi erence curves forc passing through a point on the line x = y consist of a line segment going down and to the rightwith slope ,1 and a line segment going up and to the left with slope ,2. Cases a and c displayconvex preferences and case b does not.Chapter 5ChoiceTrue-FalseTopic: Choice Correct Responses: 78Correct Answer: FalseDi culty: 1Discrimination Index: 215.1 At a boundary optimum, a consumer's indi erence curve must be tangent to her budget line.Topic: Choice Correct Responses: 56Correct Answer: FalseDi culty: 2Discrimination Index: 205.2 Max Gross has the utility function U x; y = maxfx; yg. If the price of x is the same as theprice of y; Max will buy equal amounts of x and y.Topic: Choice Correct Responses: 83Correct Answer: FalseDi culty: 2Discrimination Index: 215.3 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: 46Correct Answer: TrueDi culty: 2Discrimination Index: 05.4 Sharon spends all of her income on peaches and strawberries. Peaches are a normal good forher. 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: 32Correct Answer: FalseDi culty: 2Discrimination Index: 465.5 Clara's utility function is U x; y = x + 2y + 1. If her consumption of both x and y aredoubled, then her marginal rate of substitution between x and y remains constant.CHAPTER 5 ChoiceTopic: Choice Correct Responses: 80Correct Answer: True60Di culty: 1Discrimination Index: 115.6 Charlie's utility function is U x; y = xy . His marginal rate of substitution between x and y2does not change if you double the amount of both goods.Topic: Choice Correct Responses: 64Correct Answer: TrueDi culty: 2Discrimination Index: 545.7 Ambrose's utility function is U x; y = x + 4y = . The price of x is 1 and the price of y is 2. If12his income rises from 100 to 150, his consumption of y increases by more than 10 but less than50.Topic: Choice Correct Responses: 91Correct Answer: FalseDi culty: 2Discrimination Index: 105.8 Linus has utility function U x; y = x + 2y. If the price of x is 1 and the price of y is 1=2; thenLinus must consume equal amounts of both goods in order to maximize his utility.Topic: Choice Correct Responses: 22Correct Answer: TrueDi culty: 3Discrimination Index: 35.9 Mary Granola's utility function is U x; y = minfx + 2y; y + 2xg. Mary maximizes her utilitysubject to a budget constraint. If she chooses the bundle 5; 6; then it must be that the price of xis exactly twice the price of y.Topic: Choice Correct Responses: 62Correct Answer: TrueDi culty: 2Discrimination Index: 415.10 Millie's utility function is U x; y = minfx; yg. She maximizes her utility subject to a budgetconstraint. The price of x is the same as the price of y. If the price of x rises and the price of yand her income remain constant, then her consumption of y will certainly decrease.TRUE-FALSETopic: Choice Correct Responses: 49Correct Answer: True61Di culty: 2Discrimination Index: 255.11 Other things being equal, a lump sum tax is at least as good for a consumer as a sales taxthat collects the same revenue from him.Topic: Choice Correct Responses: 0Correct Answer: FalseDi culty: 2Discrimination Index: 05.12 If a consumer doesn't consume any snails, but does consume Big Macs, then his marginalrate of substitution between snails and Big Macs when his snail consumption is zero, must be equalto the ratio of the price of snails to the price of Big Macs.ChoiceMultiple ChoiceTopic: Choice Correct Responses: 13Correct Answer: BDi culty: 1Discrimination Index: 255.1 Hans has 27 dollars, which he decides to spend on x and y. Commodity x costs $16 per unitand commodity y costs $10 per unit. He has the utility function U x; y = 5x2 + 2y2 and he canpurchase fractional units of x and y.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: 13Correct Answer: BDi culty: 1Discrimination Index: 255.2 Ollie has 40 dollars, which he decides to spend on x and y. Commodity x costs $13 per unitand commodity y costs $11 per unit. He has the utility function U x; y = 6x2 + 4y2 and he canpurchase fractional units of x and y.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: 86Correct Answer: EDi culty: 2Discrimination Index: 365.3 Wanda Littlemore's utility function is U x; y = x + 63y , 3y . Her income is 184. If the price2of x is 1 and the price of y is 33, how many units of good x will Wanda demand?a 17b 22c 24d 0e 19MULTIPLE CHOICETopic: Choice Correct Responses: 86Correct Answer: E63Di culty: 2Discrimination Index: 365.4 Wanda Littlemore's utility function is U x; y = x + 72y , 3y . Her income is 207. If the price2of x is 1 and the price of y is 24, how many units of good x will Wanda demand?a 13b 18c 23d 0e 15Topic: Choice Correct Responses: 0Correct Answer: BDi culty: 3Discrimination Index: 05.5 Henri's utility function is minfx; 5y + 2zg. The price of x is 1, the price of y is 15, and theprice of z is 7. Henri's income is 44. How many units of x does Henri demand?a 9.78b 11c 5d 3e None of the above.Topic: Choice Correct Responses: 0Correct Answer: BDi culty: 3Discrimination Index: 05.6 Matt's utility function is minfx; 4y + 5zg. The price of x is 1, the price of y is 4, and the priceof z is 7. Matt's income is 8. How many units of x does Matt demand?a 3.33b 4c 7d 5e None of the above.CHAPTER 5 ChoiceTopic: Choice Correct Responses: 59Correct Answer: A64Di culty: 2Discrimination Index: 325.7 Peter consumes no commodities other than Miller Lite and Bud Light. His annual budgetfor these two commodities is described by the equation 5x + 30y = 300 where x is sixpacks of MillerLite and y is cases of Bud Light. Peter considers 2 cases of Bud Light to be perfect substitutes for6 sixpacks of Miller Lite. Which of the following is true?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: 59Correct Answer: ADi culty: 2Discrimination Index: 325.8 Harold consumes no commodities other than Miller Lite and Bud Light. His annual budgetfor these two commodities is described by the equation 5x + 20y = 300 where x is sixpacks of MillerLite and y is cases of Bud Light. Harold considers 2 cases of Bud Light to be perfect substitutesfor 10 sixpacks of Miller Lite. Which of the following is true?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: 0Correct Answer: ADi culty: 1Discrimination Index: 05.9 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 CHOICETopic: Choice Correct Responses: 30Correct Answer: C65Di culty: 3Discrimination Index: 315.10 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 for1 nectarines. When she is consuming more nectarines than tomatoes, she is just willing to trade 4nectarines for 1 tomatoes. Let P1 be the price of nectarines and P2 the price of tomatoes. Marymaximizes her utility subject to her budget constraint. Which is true? Hint: Sketch one of herindi 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: 30Correct Answer: CDi culty: 3Discrimination Index: 315.11 Mary Granola consumes oranges and apples. Mary's indi erence curves are kinky. Whenshe is consuming more oranges than apples, she is just willing to trade 5 oranges for 1 apples. Whenshe is consuming more apples than oranges, she is just willing to trade 2 apples for 1 oranges. LetP1 be the price of apples and P2 the price of oranges. Mary maximizes her utility subject to herbudget 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 ChoiceTopic: Choice Correct Responses: 28Correct Answer: C66Di culty: 3Discrimination Index: 335.12 Badger Madison consumes only beer and sausages. His income is $100. Beer costs him $.50per can and sausages cost $1 each. Where x is the number of cans of beer and y the number ofsausages he consumes per week, Badger's utility function is U x; 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: 70Correct Answer: DDi culty: 3Discrimination Index: 585.13 Janet consumes two commodities x and y. Her utility function is minfx + 2y; y + 2xg. Shechooses to buy 10 units of good x and 20 units of good y. The price of good x is 1. Which of thefollowing is true?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 theprice of y.Topic: Choice Correct Responses: 0Correct Answer: ADi culty: 2Discrimination Index: 05.14 Martha's utility function is U x; y = minfx + 2y; 2x + yg. George's utility function isU x; y = minf2x + 4y; 4x + 2yg. If George and Martha have the same income and face the sameprices for the goods x and y :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.MULTIPLE CHOICETopic: Choice Correct Responses: 69Correct Answer: B67Di culty: 2Discrimination Index: 485.15 Ollie has a utility function U x; y = x + 2y + 3. The price of x is 1 and the price of y is1. When he maximizes his utility subject to his budget constraint, he consumes positive amountsof both goods.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.Topic: Choice Correct Responses: 69Correct Answer: BDi culty: 2Discrimination Index: 485.16 Maurice has a utility function U x; y = x +3y +2. The price of x is 1 and the price of y is1. When he maximizes his utility subject to his budget constraint, he consumes positive amountsof both goods.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.CHAPTER 5 ChoiceTopic: Choice Correct Responses: 19Correct Answer: A68Di culty: 1Discrimination Index: 275.17 Danny Featherweight is taking a tough course in law school. His prof agreed to give hima course grade of maxf2x; 3yg where x and y are the number of answers he gets right on the rstand second midterms, respectively. Danny needs a course grade of 150 to pass. He nds that forthe rst midterm, for every A minutes of study, he will get one more answer right. For the secondmidterm, for every B minutes that he studies, he will get one more answer right. If he doesn'tstudy at all, Danny will get nothing right on either exam. All Danny cares about is passing. Hedoesn'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: 75Correct Answer: ADi culty: 2Discrimination Index: 405.18 Isobel consumes positive quantities of both jam and and juice. The price of jam is 5 centsper unit and the price of juice is 10 cents per unit. Her marginal utility of jam is 10 and hermarginal utility of juice is 5.a Without changing her total expenditures, she could increase her utility by consuming more jam and lessjuice.b Without changing her total expenditures, she could increase her utility by consuming more juice andless 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 sheconsumes.e She should spend more money on both jam and juice.MULTIPLE CHOICETopic: Choice Correct Responses: 77Correct Answer: A69Di culty: 2Discrimination Index: 05.19 Harold's utility function is U x; 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: 31Correct Answer: CDi culty: 3Discrimination Index: 145.20 Jane's utility function is U x; y = x + 2y; where x is her consumption of good X and y isher consumption of good Y . Her income is 2. The price of Y is 2. The cost per unit of X dependson 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: 62Correct Answer: ADi culty: 2Discrimination Index: 435.21 As you may know, Mungoites each have two left feet and one right foot. Their preferencesfor 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=30b R = m , 10.c R = 2m.d R = 10m.e R = m=10.CHAPTER 5 ChoiceTopic: Choice Correct Responses: 43Correct Answer: C70Di culty: 2Discrimination Index: 395.22 Howard has the utility function U x; 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: 37Correct Answer: ADi culty: 3Discrimination Index: 315.23 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 lakecabin. If Minnie makes her best choice of lake cabin, how many mosquito bites per hour will sheget?a 10b 5c 20d 25e None of the above.Topic: Choice Correct Responses: 63Correct Answer: BDi culty: 2Discrimination Index: 755.24 The prices of goods x and y are each $1. Jane has $20 to spend and is considering choosing10 units of x and 10 units of y. Jane has nice convex preferences and more of both goods is betterfor her. Where x is drawn on the horizontal axis and y is drawn on the vertical axis, the slope ofher 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 CHOICETopic: Choice Correct Responses: 56Correct Answer: C71Di culty: 1Discrimination Index: 435.25 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: 68Correct Answer: CDi culty: 1Discrimination Index: 235.26 Coke and Pepsi are perfect substitutes for Mr. Drinker and the slope of his indi erencecurves is minus 1. One day he bought 2 cans of Coke and 20 cans of Pepsi. The cans of bothdrinks are the same size.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: 68Correct Answer: CDi culty: 1Discrimination Index: 305.27 Ed and Al both consume only bread and cheese. Both of them always choose to have somebread and some cheese, and both have strictly convex preferences. However, Ed likes to have agreat deal of bread with a little cheese and Al likes lots of cheese with a little bread. Both facethe same prices for both goods and have chosen bundles to maximize their utilities subject to theirbudgets. 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 ChoiceTopic: Choice Correct Responses: 35Correct Answer: C72Di culty: 2Discrimination Index: 55.28 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 hislabor supply.c increase or leave constant his labor supply if leisure is an inferior good, but otherwise might reduce hislabor supply.d decrease or leave constant his labor supply.e none of the above.Topic: Choice Correct Responses: 22Correct Answer: EDi culty: 2Discrimination Index: 295.29 Angela consumes only two goods, x and y. Her income doubles and the prices of the twogoods remain unchanged. Assuming that she is a utility maximizer and likes both goods, which ofthe 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: 74Correct Answer: BDi culty: 2Discrimination Index: 225.30 Arthur's preferences are de ned over two basic food groups, beer, x ; and ice cream, x . His12utility function is ux1; x2 = x2 + x2 . He has $100 to spend, and each of these goods costs $10 per1quart. 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 CHOICETopic: Choice Correct Responses: 19Correct Answer: C73Di culty: 3Discrimination Index: 205.31 Andrew's utility function is U x ; x = 4x + x . Andrew's income is $32, the price of good 112212is $16 per unit, and the price of good 2 is $1 per unit. What happens if Andrew's income increasesto $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 consumedbefore.e None of the above.Topic: Choice Correct Responses: 0Correct Answer: ADi culty: 2Discrimination Index: 05.32 Lorenzo lives on x and y alone. His utility function is U x; y = minf3x + 4y; 7yg. The pricesof 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: 63Correct Answer: ADi culty: 2Discrimination Index: 655.33 Mort's utility function is U x ; x = x x . His income is $100; the price of good 2 is $10.1212Good 1 is priced as follows. The rst 6 units cost $10 per unit and any additional units cost $5 perunit. What consumption bundle does Mort choose?a 5; 5b 7; 3:5c 9; 3d 6; 4e None of the above.CHAPTER 5 ChoiceTopic: Choice Correct Responses: 88Correct Answer: D74Di culty: 1Discrimination Index: 115.34 Clara's utility function is U X; 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 30b 68c 18d 63e 9Topic: Choice Correct Responses: 88Correct Answer: DDi culty: 1Discrimination Index: 115.35 Clara's utility function is U X; 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 18b 26c 11d 21e 5MULTIPLE CHOICETopic: Choice Correct Responses: 75Correct Answer: D75Di culty: 2Discrimination Index: 265.36Elmer's utility function is U x; y = minfx; y2 g. If the price of x is 25 and the price of y is 15, andif Elmer chooses to consume 7 units of Y; what must his income be?a 2,660b 280c 1,430d 1,330e There is not enough information to determine his income.Topic: Choice Correct Responses: 75Correct Answer: DDi culty: 2Discrimination Index: 265.37Elmer's utility function is U x; y = minfx; y2 g. If the price of x is 20 and the price of y is 20, andif Elmer chooses to consume 2 units of Y; what must his income be?a 240b 80c 220d 120e There is not enough information to determine his income.CHAPTER 5 ChoiceTopic: Choice Correct Responses: 9Correct Answer: C76Di culty: 3Discrimination Index: 215.38 Justin consumes goods X and Y and has a utility function U x; y = x + y. The price per2unit of X is px and the price per unit of Y is py . He has enough money so that he can a ord atleast 1 unit of either good. When he chooses his best a ordable bundle, it must necessarily be that: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.xd he consumes some of each good if px = py .e he consumes some of each good if py = px =2.Topic: Choice Correct Responses: 0Correct Answer: ADi culty: 0Discrimination Index: 05.39 Charlie has a utility function U xA; xB = xAxB ; the price of apples is 1 and the price ofbananas is 2. If Charlie's income were 120, how many units of bananas would he consume if hechose the bundle that maximized his utility subject to his budget constraint?a 30b 15c 60d 6e 90Topic: Choice Correct Responses: 0Correct Answer: ADi culty: 0Discrimination Index: 05.40 Charlie has a utility function U xA; xB = xAxB ; the price of apples is 1 and the price ofbananas is 2. If Charlie's income were 200, how many units of bananas would he consume if hechose the bundle that maximized his utility subject to his budget constraint?a 50b 25c 100d 10e 150MULTIPLE CHOICETopic: Choice Correct Responses: 68Correct Answer: E77Di culty: 0Discrimination Index: 305.41 Charlie's utility function is U XA ; XB = XAXB . If Charlie's income is 40, the price of applesis 4 and the price of bananas is 2, how many apples are there in the best bundle that Charlie cana ord?a 10b 12c 8d 9e 5Topic: Choice Correct Responses: 68Correct Answer: EDi culty: 0Discrimination Index: 305.42 Charlie's utility function is U XA ; XB = XAXB . If Charlie's income is 40, the price of applesis 4 and the price of bananas is 3, how many apples are there in the best bundle that Charlie cana ord?a 10b 12c 8d 9e 5Topic: Choice Correct Responses: 0Correct Answer: BDi culty: 0Discrimination Index: 05.43 Ambrose's utility function is U x ; x = 4x = + x . If the price of nuts good 1 is 1, the121212price of berries good 2 is 6, and his income is 264, how many units of NUTS will Ambrose choose.a 20b 144c 288d 147e 72CHAPTER 5 ChoiceTopic: Choice Correct Responses: 0Correct Answer: B78Di culty: 0Discrimination Index: 05.44 Ambrose's utility function is U x ; x = 4x = + x . If the price of nuts good 1 is 1, the121212price of berries good 2 is 6, and his income is 252, how many units of NUTS will Ambrose choose.a 18b 144c 288d 147e 72Topic: Choice Correct Responses: 97Correct Answer: DDi culty: 2Discrimination Index: 45.45 Our old friend, Edmund Stench, of Chapter 2 loves punk rock video tapes. He has noincome and therefore has to accept garbage in his backyard in return for money. Each video tapecost $2 and each sack of garbage that he accepts brings him $1. His utility function is given byU c; g = minf2c; 20 , gg where c is the number of video tapes and g is the number of sacks of garbagethat 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 CHOICETopic: Choice Correct Responses: 0Correct Answer: D79Di culty: 3Discrimination Index: 05.46 Joseph's utility function is given by UJ = xA + 2xB ; where xA denotes his consumption ofapples 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 alsobuys some bananas.b There exist prices of apples and bananas such that both consumers buy strictly positive amounts of bothgoods.c When we observe that Joseph leaves the store with some apples and some bananas, then we can deducethat 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 alsobuys some apples.e Apples and bananas are perfect complements for Joseph.Topic: Choice Correct Responses: 0Correct Answer: BDi culty: 0Discrimination Index: 05.47 If a consumer maximizes her preferences subject to her budget by choosing a consumptionbundle where the ratio of her marginal utilities of shelter and food, MUS MUF, is greater than theratio of the prices of shelter and food, pS =pF ; then shea 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".ChoiceEssayTopic: Choice Correct Responses: 0Di culty: 2Discrimination Index: 05.1 Max has the utility function U x; 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 stayunchanged, 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 is2x + y = 10. Solve these two equations to nd that x = 11=4 and y = 9=2. If his income doubles andprices stay unchanged, his demand for both goods does not double. A quick way to see this is tonote that if quantities of both goods doubled, the MRS would not stay the same and hence wouldnot equal the price ratio, which has stayed constant.Topic: Choice Correct Responses: 0Di culty: 3Discrimination Index: 05.2 Casper consumes cocoa and cheese. Cocoa is sold in an unusual way. There is only onesupplier, 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 of2 dollars per unit. Casper's income is 20 dollars and his utility function is U x; y = x + 2y wherex is his consumption of cheese and y is his consumption of cocoa. a Sketch Casper's budget setand shade it in. b Sketch some of his indi erence curves and label the point that he chooses. cCalculate the amount of cheese and the amount of cocoa that Casper demands at these prices andthis income.Answer: This problem is di erent from those in the text and is designed to see whether the studentcan use the tools presented there in a creative way. The budget set is a convex set and the solutionis a point of tangency. Casper demands 2 units of cocoa and 16 units of cheese.Topic: Choice Correct Responses: 0Di culty: 1Discrimination Index: 05.3 Is the following statement true or false? Brie y explain your answer. "A utility maximizerwill always choose a bundle at which his indi erence curve is tangent to his budget line."Answer: False. At a corner solution the indi erence curve need not be tangent to the budget line.ESSAYTopic: Choice Correct Responses: 081Di culty: 2Discrimination Index: 05.4 Max has a utility function U x; y = 2xy + 1. The prices of x and y are both $1 and Max hasan income of $20. a How much of each good will he demand? b A tax is placed on x so that xnow costs Max $2 while his income and the price of y stay the same. How much good x does henow 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?Answer: a 10 x and 10 y. b5x c No.Topic: Choice Correct Responses: 0Di culty: 2Discrimination Index: 05.5 Harold consumes chardonnay and quiche. His utility function is U c; q = minfc; q g. Draw a2diagram showing three or four of Harold's indi erence curves. If the price of chardonnay is 10 andthe price of quiche is 3 and if Harold is consuming 4 units of quiche, how many units of chardonnayis he consuming?Answer: The diagram has xed-coe cients indi erence curves, but their corners line up along thelocus c = q2 rather than along a straight line. 16 units of chardonnay.Topic: Choice Correct Responses: 0Di culty: 2Discrimination Index: 05.6 Les has the utility function U x; y = x + 1y + 4. The price of y is 1. Les spends all of hisincome to buy 6 units of y and no x. From these facts we can tell that the price of x must be atleast 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 is10. If the price of x is 10 or greater, he will choose that corner.Chapter 6True-FalseTopic: Demand Correct Responses: 81Correct Answer: TrueDi culty: 1Discrimination Index: 15Demand6.1 If preferences are quasilinear, then for very high incomes the income o er curve is a straightline parallel to one of the axes.Topic: Demand Correct Responses: 85Correct Answer: FalseDi culty: 1Discrimination Index: 406.2 In economic theory, the demand for a good must depend only on income and its own priceand not on the prices of other goods.Topic: Demand Correct Responses: 95Correct Answer: TrueDi culty: 1Discrimination Index: 116.3 If two goods are substitutes, then an increase in the price of one of them will increase thedemand for the other.Topic: Demand Correct Responses: 48Correct Answer: TrueDi culty: 2Discrimination Index: 86.4 If consumers spend all of their income, it is impossible for all goods to be inferior goods.Topic: Demand Correct Responses: 93Correct Answer: FalseDi culty: 1Discrimination Index: 86.5 An Engel curve is a demand curve with the vertical and horizontal axes reversed.Topic: Demand Correct Responses: 92Correct Answer: FalseDi culty: 2Discrimination Index: 146.6 If the demand curve is a downward-sloping straight line, then the price elasticity of demandis constant all along the demand curve.TRUE-FALSETopic: Elasticity Correct Responses: 0Correct Answer: True83Di culty: 2Discrimination Index: 06.7 If the price elasticity of demand for a good is ,1; then doubling the price of that good willleave total expenditures on that good unchanged.Topic: Demand Correct Responses: 82Correct Answer: FalseDi culty: 2Discrimination Index: 336.8 If preferences are homothetic, then the slope of the Engel curve for any good will decreaseas income increases.Topic: Elasticity Correct Responses: 0Correct Answer: TrueDi culty: 1Discrimination Index: 06.9 A good is a luxury good if the income elasticity of demand for it is greater than 1.Topic: Demand Correct Responses: 68Correct Answer: TrueDi culty: 2Discrimination Index: 316.10 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 thanthe old bundle did.Topic: Demand Correct Responses: 67Correct Answer: FalseDi culty: 1Discrimination Index: 26.11 If income is doubled and all prices are doubled, then the demand for luxury goods will morethan double.Topic: Demand Correct Responses: 86Correct Answer: TrueDi culty: 1Discrimination Index: 216.12 If preferences are homothetic and all prices double while income remains constant, thendemand for all goods is halved.CHAPTER 6 DemandTopic: Demand Correct Responses: 0Correct Answer: False84Di culty: 1Discrimination Index: 06.13 An inferior good is less durable than a normal good.Topic: Demand Correct Responses: 1Correct Answer: TrueDi culty: 2Discrimination Index: 16.14 It is impossible for a person to have a demand curve that slopes upward at all prices.Topic: Demand Correct Responses: 52Correct Answer: FalseDi culty: 2Discrimination Index: 346.15 Donald's utility function is U x; y = x + y = . Currently he is buying some of both goods.12If his income rises and prices don't change, he will buy more of both goods.Topic: Demand Correct Responses: 0Correct Answer: TrueDi culty: 2Discrimination Index: 06.16 Angela's utility function is x + y = . It is possible that if her income is very high, an increase12in income will not make her spend more on y.Topic: Demand Correct Responses: 58Correct Answer: FalseDi culty: 2Discrimination Index: 06.17 When other variables are held xed, the demand for a Gi en good rises when income isincreased.Topic: Demand Correct Responses: 90Correct Answer: FalseDi culty: 1Discrimination Index: 56.18 A rational consumer spends her entire income. If her income doubles and prices do notchange, then she will necessarily choose to consume twice as much of every good as she did before.TRUE-FALSETopic: Demand Correct Responses: 84Correct Answer: False85Di culty: 2Discrimination Index: 216.19 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: 61Correct Answer: False12Di culty: 2Discrimination Index: 426.20 A consumer has the utility function U x; y = minfx; 2yg. If the price of good x is zero andthe price of good y is p; then the consumer's demand function for good y is m=2p.Topic: Demand Correct Responses: 0Correct Answer: FalseDi culty: 0Discrimination Index: 06.21 Fred has a Cobb-Douglas utility function with exponents that sum to 1. Sally consumes thesame two goods, but the two goods are perfect substitutes for her. Despite these di erences, Fredand Sally have the same price o er curves.Topic: Demand Correct Responses: 53Correct Answer: FalseDi culty: 0Discrimination Index: 166.22 Darlene's utility function is U x; y; z = x y z. If her income doubles and prices remain33unchanged, her demand for good Y will more than double.Topic: Demand Correct Responses: 53Correct Answer: FalseDi culty: 0Discrimination Index: 166.23 Darlene's utility function is U x; y; z = x y z. If her income doubles and prices remain47unchanged, her demand for good Y will more than double.Topic: Demand Correct Responses: 0Correct Answer: FalseDi culty: 0Discrimination Index: 06.24 Quasilinear preferences are homothetic when the optimal amount of one of the goods is nota ordable.DemandMultiple ChoiceTopic: Demand Correct Responses: 33Correct Answer: ADi culty: 3Discrimination Index: 426.1 Daisy received a tape= recorder as a birthday gift and is not able to return it. Her utilityfunction is U x; y; z = x + z 1 2f y where z is the number of tapes she buys, y is the number of taperecorders she has and x is the amount of money she has left to spend. f y = 0 if y 1 and f y = 8if y is 1 or greater. The price of tapes is 2 and she can easily a ord to buy dozens of tapes. Howmany tapes will she buy?a 4b 6c 2d 8e We need to know the price of tape recorders to solve this problem.Topic: Demand Correct Responses: 33Correct Answer: ADi culty: 3Discrimination Index: 426.2 Daisy received a tape =recorder as a birthday gift and is not able to return it. Her utilityfunction is U x; y; z = x + z 1 2 f y where z is the number of tapes she buys, y is the number oftape recorders she has and x is the amount of money she has left to spend. f y = 0 if y 1 andf y = 32 if y is 1 or greater. The price of tapes is 4 and she can easily a ord to buy dozens oftapes. How many tapes will she buy?a 16b 18c 14d 20e We need to know the price of tape recorders to solve this problem.MULTIPLE CHOICETopic: Demand Correct Responses: 0Correct Answer: B87Di culty: 2Discrimination Index: 06.3 Mickey is considering buying a tape recorder. His utility function is U x; y; z = x + f yz:5where x is the amount of money he spends on other goods, y is the number of tape recorders hebuys, and z is the number of tapes he buys. Let f y = 0 if y 1 and f y = 8 if y is greater thanor equal to 1. The price of tape recorders is 20, the price of tapes is 1, and he can easily a ord tobuy 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 tobuy 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: 86Correct Answer: DDi culty: 1Discrimination Index: 206.4 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. Thecost 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 DemandTopic: Demand Correct Responses: 0Correct Answer: D88Di culty: 3Discrimination Index: 06.5 Mike consumes two commodities, x and y; and his utility function is minfx + 2y; y + 2xg. Hechooses to buy 8 units of good x and 16 units of good y. The price of good y is 0.50. What is hisincome?a 32b 40c 24d 16e Mike's income cannot be found unless the price of x is given too.Topic: Demand Correct Responses: 68Correct Answer: DDi culty: 2Discrimination Index: 316.6Georgina consumes only grapefruits and pineapples. Her utility function is U x; y = x2y8 ; wherex is the number of grapefruits consumed and y is the number of pineapples consumed. Georgina'sincome is 105, and the prices of grapefruits and pineapples are 1 and 3, respectively. How manygrapefruits will she consume?a 10.50b 7c 63d 21e None of the above.MULTIPLE CHOICETopic: Demand Correct Responses: 68Correct Answer: D89Di culty: 2Discrimination Index: 316.7Fanny consumes only grapefruits and grapes. Her utility function is U x; y = x3y6 ; where x is thenumber 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 sheconsume?a 8b 5.33c 48d 16e None of the above.Topic: Demand Correct Responses: 55Correct Answer: BDi culty: 2Discrimination Index: 456.8 For m p ; the demand functions for goods 1 and 2 are given by the equations, x = m=p , 1212and x2 = p1=p2 ; where m is income and p1 and p2 are prices. Let the horizontal axis represent thequantity 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 DemandTopic: Demand Correct Responses: 85Correct Answer: E90Di culty: 1Discrimination Index: 386.9 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 ofwhich can be used to buy one can of Coke for 40 cents. Which of the following bundles will Harrybuy?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: 67Correct Answer: DDi culty: 2Discrimination Index: 186.10 Madonna buys only two goods. Her utility function is Cobb-Douglas. Her demand functionshave 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 CHOICETopic: Demand Correct Responses: 33Correct Answer: D91Di culty: 1Discrimination Index: 206.11 Seppo consumes brandy and saunas. Neither is an inferior good. Seppo has a total of $30 aday and 6 hours a day to spend on brandy and saunas. Each brandy costs $2 and takes half an hourto consume. Each sauna costs $1 and takes 1 hour to consume. It is; unfortunately, impossible toconsume a brandy in the sauna. Seppo suddenly inherits a lot of money and now has $50 a dayto 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: 49Correct Answer: EDi culty: 1Discrimination Index: 416.12 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: 75Correct Answer: DDi culty: 2Discrimination Index: 76.13 If there are two goods and if income doubles and the price of good 1 doubles, while the priceof 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 DemandTopic: Demand Correct Responses: 71Correct Answer: C92Di culty: 2Discrimination Index: 636.14 Clarissa's utility function is U r; z = z + 160r , r where r is the number of rose plants she2has in her garden and z is the number of zinnias. She has 250 square feet to allocate to roses andzinnias. Roses each take up 4 square feet and zinnias each take up 1 square foot. She gets theplants for free from a generous friend. If she acquires another 100 square feet of land for her gardenand 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: 71Correct Answer: CDi culty: 2Discrimination Index: 636.15 Clarissa's utility function is U r; z = z + 80r , r where r is the number of rose plants she2has in her garden and z is the number of zinnias. She has 250 square feet to allocate to roses andzinnias. Roses each take up 4 square feet and zinnias each take up 1 square foot. She gets theplants for free from a generous friend. If she acquires another 100 square feet of land for her gardenand 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: 14Correct Answer: DDi culty: 2Discrimination Index: 256.16 Regardless of his income and regardless of prices, Smedley always spends 25 of his incomeon housing, 10 on clothing, 30 on food, 15 on transportation, and 20 on recreation. Thisbehavior 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 CHOICETopic: Demand Correct Responses: 73Correct Answer: A93Di culty: 2Discrimination Index: 446.17 Ms. Laura Mussel's preferences between golf and tennis are represented by U g; t = gtwhere 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 spendson 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: 85Correct Answer: ADi culty: 1Discrimination Index: 186.18 Mary has homothetic preferences. When her income was $1,000, she bought 40 books and60 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 DemandTopic: Demand Correct Responses: 46Correct Answer: C94Di culty: 2Discrimination Index: 546.19 Katie Kwasi's utility function is U x ; x = 2ln x + x . Given her current income and the1212current relative prices, she consumes 10 units of x1 and 15 units of x2 . If her income doubles, whileprices stay constant, how many units of x1 will she consume after the change in income?a 20b 18c 10d 5e There is not enough information to determine how much.Topic: Demand Correct Responses: 46Correct Answer: CDi culty: 2Discrimination Index: 546.20 Katie Kwasi's utility function is U x ; x = 2ln x + x . Given her current income and the1212current relative prices, she consumes 5 units of x1 and 20 units of x2. If her income doubles, whileprices stay constant, how many units of x1 will she consume after the change in income?a 10b 8c 5d 2.50e There is not enough information to determine how much.Topic: Demand Correct Responses: 43Correct Answer: EDi culty: 2Discrimination Index: 236.21 Will Feckless unexpectedly inherits $10,000 from a rich uncle. He is observed to consumefewer 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 CHOICETopic: Demand Correct Responses: 11Correct Answer: B95Di culty: 3Discrimination Index: 246.22 Fred consumes pork chops and lamb chops and nothing else. When the price of pork chopsrises with no change in his income or in the price of lamb chops, Fred buys fewer lamb chops andfewer 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: 0Correct Answer: CDi culty: 0Discrimination Index: 06.23 Cecil consumes x and x in xed proportions. He consumes A units of good 1 with B units12of 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: 0Correct Answer: BDi culty: 0Discrimination Index: 06.24 Wilma Q. has a utility function, U x ; x = x + 1:5x x + 30x . The prices are p = 1 and1221122p2 = 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 60.1CHAPTER 6 DemandTopic: Demand Correct Responses: 48Correct Answer: C96Di culty: 2Discrimination Index: 166.25 Which of the following utility functions represent preferences of a consumer who does NOThave homothetic preferences?a U x; y = xy.b U x; y = x + 2y.c U x; y = x + y:5 .d U x; y = minfx; yg.e More than one of the above.Topic: Demand Correct Responses: 78Correct Answer: ADi culty: 2Discrimination Index: 196.26 Robert's utility function is U x; y = minf4x; 2x + yg. The price of x is $3 and the price of yis $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: 8Correct Answer: BDi culty: 2Discrimination Index: 356.27 Alfredo lives on apples and bananas only. His utility function is U a; 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 CHOICETopic: Demand Correct Responses: 80Correct Answer: E97Di culty: 2Discrimination Index: 426.28 Miss Mu et insists upon consuming 2 units of whey per unit of curds. If the price of curdsis 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: 80Correct Answer: EDi culty: 2Discrimination Index: 426.29 Miss Mu et insists upon consuming 2 units of whey per unit of curds. If the price of curdsis 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: 88Correct Answer: ADi culty: 0Discrimination Index: 206.30 If Charlie's utility function were XAXB ; if apples cost 90 cents each and bananas cost 103cents each, Charlie's budget line would be tangent to one of his indi erence curves whenever thefollowing equation is satis ed:a 3XB = 9XAb XB = XAc XA = 3XBd XB = 3XAe 90XA + 10XB = MCHAPTER 6 DemandTopic: Demand Correct Responses: 88Correct Answer: A98Di culty: 0Discrimination Index: 206.31 If Charlie's utility function were XAXB ; if apples cost 40 cents each and bananas cost 105cents each, Charlie's budget line would be tangent to one of his indi erence curves whenever thefollowing equation is satis ed:a 5XB = 4XAb XB = XAc XA = 5XBd XB = 5XAe 40XA + 10XB = MTopic: Demand Correct Responses: 0Correct Answer: DDi culty: 0Discrimination Index: 06.32 If Charlie's utility function is XAXB ; if the price of apples is pA; the price of bananas is pB ;4and his income is m; then Charlie's demand for apples will be:a m=2pA b 0:25pAmc m=pA + pB d 0:80m=pAe 1:25pB m=pATopic: Demand Correct Responses: 0Correct Answer: DDi culty: 0Discrimination Index: 06.33 If Charlie's utility function is XAXB ; if the price of apples is pA; the price of bananas is pB ;4and his income is m; then Charlie's demand for apples will be:a m=2pA b 0:25pAmc m=pA + pB d 0:80m=pAe 1:25pB m=pAMULTIPLE CHOICETopic: Demand Correct Responses: 0Correct Answer: D99Di culty: 0Discrimination Index: 06.34 Ambrose's brother Patrick has a utility function U x ; x = 16x = + x . His income is 82,112122the price of good 1 nuts is 2 and the price of good 2 berries is 1. How many units of nuts willPatrick demand?a 26b 12c 14d 16e 30Topic: Demand Correct Responses: 0Correct Answer: DDi culty: 0Discrimination Index: 06.35 Ambrose's brother Sebastian has a utility function U x ; x = 40x = + x . His income is112122110, the price of good 1 nuts is 4 and the price of good 2 berries is 1. How many units of nutswill Sebastian demand?a 35b 21c 23d 25e 48Topic: Demand Correct Responses: 0Correct Answer: ADi culty: 0Discrimination Index: 06.36 Ambrose's brother Bartholomew has a utility function U x ; x = 40x = + x ; where x is1212121his consumption of nuts and x2 is his consumption of berries. His income is 115, the price of nutsis 5 and the price of berries is 1. How many units of berries will Bartholomew demand?a 35b 16c 70d 22e There is not enough information to determine the answer.CHAPTER 6 DemandTopic: Demand Correct Responses: 0Correct Answer: A100Di culty: 0Discrimination Index: 06.37 Ambrose's brother Patrick has a utility function U x ; x = 48x = + x ; where x is his1212121consumption of nuts and x2 is his consumption of berries. His income is 217, the price of nuts is 3and the price of berries is 1. How many units of berries will Patrick demand?a 25b 64c 50d 70e There is not enough information to determine the answer.Topic: Demand Correct Responses: 64Correct Answer: EDi culty: 0Discrimination Index: 296.38 Miss Mu et insists on consuming 2 units of whey per unit of curds. If the price of curds is3 and the price of whey is 3, then if Miss Mu ett's income is m; her demand for curds will be:a m=3b 3m=3c 3C + 3W = md 3me m=9Topic: Demand Correct Responses: 64Correct Answer: EDi culty: 0Discrimination Index: 296.39 Miss Mu et insists on consuming 2 units of whey per unit of curds. If the price of curds is3 and the price of whey is 6, then if Miss Mu ett's income is m; her demand for curds will be:a m=3b 6m=3c 3C + 6W = md 3me m=15MULTIPLE CHOICETopic: Demand Correct Responses: 0Correct Answer: B101Di culty: 0Discrimination Index: 06.40 Casper's utility function is 3x + y; where x is his consumption of cocoa and y is his consump-tion of cheese. If the total cost of x units of cocoa is x2; if the price of cheese is 10, and Casper'sincome is $260, how many units of cocoa will he consume?a 12b 15c 29d 14e 30Topic: Demand Correct Responses: 0Correct Answer: BDi culty: 0Discrimination Index: 06.41 Casper's utility function is 3x + y; where x is his consumption of cocoa and y is his consump-tion of cheese. If the total cost of x units of cocoa is x2; if the price of cheese is 6, and Casper'sincome is $101, how many units of cocoa will he consume?a 6b 9c 17d 8e 18Topic: Demand Correct Responses: 0Correct Answer: DDi culty: 2Discrimination Index: 06.42 Let w be the number of whips and j the number of leather jackets. If Kinko's utility functionis U x; y = minf7w; 4w + 12j g; then if the price of whips is $20 and the price of leather jackets is$40, Kinko will demand: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.CHAPTER 6 DemandTopic: Demand Correct Responses: 0Correct Answer: D102Di culty: 2Discrimination Index: 06.43 Let w be the number of whips and j the number of leather jackets. If Kinko's utility functionis U x; y = minf10w; 5w + 25j g; 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: 0Correct Answer: DDi culty: 3Discrimination Index: 06.44 Between 1980 and 1990, a particular consumer's income increased by 25 percent, while theprice 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 factswe 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 CHOICETopic: Demand Correct Responses: 0Correct Answer: A103Di culty: 2Discrimination Index: 06.45 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 consumptionand saving. John cannot determine people's consumptions, but he is able to determine how muchpeople have saved over the course of a year. From years of experience, he has learned that peopleact as if they are maximizing a utility function of the form U c; s = 10; 000 ln c+ s; where c is thenumber of dollars worth of consumption in a year and s is the number of dollars saved. Which ofthe 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: 0Correct Answer: EDi culty: 0Discrimination Index: 06.46 Carlos consumes only two goods, apples and bananas. His utility function is U a; b =minfa; bg. Before trade, his initial endowment is wa apples and wb bananas. After he trades to hisoptimal consumption point at these prices, the relative prices change. Carlos is allowed to makefurther 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 thegood 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 ofthe good he was selling went up.e Carlos' utility will not be a ected by the change.CHAPTER 6 DemandTopic: Demand Correct Responses: 0Correct Answer: A104Di culty: 0Discrimination Index: 06.47 Carlos consumes only two goods, apples and bananas. His utility function is U a; b = a b .32Before trade, his initial endowment is wa apples and wb bananas. After he trades to his optimalconsumption point at these prices, the relative prices change. Carlos is allowed to make furthertrades 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 thegood 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 ofthe good he was selling went up.e Carlos' utility will not be a ected by the change.DemandEssayTopic: Demand Correct Responses: 0Di culty: 3Discrimination Index: 06.1 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.Answer: True. If income elasticities of demand for all goods exceed 1, then a 1 increase inincome would result in a more than 1 increase in expenditures for every good. Therefore totalexpenditures would rise by more than 1. But this is impossible if the entire budget is spent bothbefore and after the income increase.Topic: Demand Correct Responses: 0Di culty: 3Discrimination Index: 06.2 Wanda Lott's utility function is U x; y = maxf2x; yg. Draw some of Wanda's indi erencecurves. If the price of x is 1, the price of y is p and her income is m; how much y does Wandademand?Answer: Wanda's indi erence curves are rectangles that are twice as high as they are wide. Ifp :5; Wanda demands no y. If p :5; Wanda demands m=p units of y. If p = :5; Wanda isindi erent between her two best options which are buying m units of x and no y or buying 2m unitsof y and no x.Topic: Demand Correct Responses: 0Di culty: 3Discrimination Index: 06.3 Martha has the utility function U = minf4x; 2yg. Write down her demand function for x as afunction 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: 0Di culty: 1Discrimination Index: 06.4 Brie y explain in a sentence or two how you could tell: a whether a good is a normal goodor an inferior good. b whether a good is a luxury or a necessity. c whether two goods are complements or substitutes.Answer: a If prices are left constant and income rises, demand for a normal good will rise anddemand for an inferior good will fall. b If income rises, expenditure on it will rise more or less thanproportionately depending on whether the good is a luxury or necessity respectively. c Two goodsare complements or substitutes depending on whether a rise in the price of one of them increasesor decreases demand for the other.CHAPTER 6 DemandTopic: Demand Correct Responses: 0106Di culty: 1Discrimination Index: 06.5 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 quantitycan be sold. It is simply the inverse function corresponding to the demand function. An Engelcurve is the graph of the function that expresses quantity demanded as a function of income.Topic: Demand Correct Responses: 0Di culty: 3Discrimination Index: 06.6 Ray Starr has the utility function U x; y = y=100 , x. a Does Ray prefer more to lessof both goods? b Draw a diagram showing Ray's indi erence curves corresponding to the utilitylevels 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 incomeand draw a diagram showing his Engel curve for x.Answer: a 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 throughthat point and through the point 100; 0. The set of all indi erence curves is the star, shaped setof rays passing through the point 100; 0 to be more precise; the part of that set that is in thenonnegative quadrant. d If Ray's income is less than 100, he buys y and no x. If his income ismore than 100, he buys x and no y.Topic: Demand Correct Responses: 0Di culty: 2Discrimination Index: 06.7 With some services, e.g. checking accounts, phone service, or pay TV, a consumer is o ereda choice of two or more payment plans. One can either pay a high "entry fee" and get a low priceper unit of service or pay a low entry fee and a high price per unit of service. Suppose you have anincome 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 expenditureon other goods and y be consumption of the service. a Write down the budget equation that youwould 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.Answer: a x + 2y = 80; x + y = 60. b20; 30 c Plan B . The utility of the bundle chosen with A is20 40 = 800 and the utility from the Plan B bundle is 30 30 = 900.ESSAYTopic: Demand Correct Responses: 0107Di culty: 2Discrimination Index: 06.8 Marie's utility function is U x; y = minf3x + 2y; 2x + 5yg where x is the number of units ofsugar 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 graphshowing her indi erence curve through this point. The price of spice is 1. In order for this to beher 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 lines3x + 2y = 116 and 2x + 5y = 116. The point 12; 40 is on the line 3x + 2y = 116. The price of sugaris 1.5 and her income is 58.Topic: Demand Correct Responses: 0Di culty: 0Discrimination Index: 06.9 Murphy's utility function is U x; y = minf4x + y; 2x + 2y; x + 4yg. Murphy is consuming 12units of x and 6 units of y. Draw the indi erence curve through this point. At what points doesthis indi erence curve have kinks? The price of good x is 1. What is the highest possible price fory? 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 7True-FalseTopic: Revealed Preference Correct Responses: 95Correct Answer: TrueRevealed PreferenceDi culty: 2Discrimination Index: 307.1 The strong axiom of revealed preference requires that if a consumer chooses x when he cana 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: 78Correct Answer: TrueDi culty: 1Discrimination Index: 107.2 Rudolf Rational obeys the weak axiom of revealed preferences. His preferences don't changeover time. One year he could a ord bundle x but bought bundle y. If another year he buys bundlex; then he can't a ord bundle y.Topic: Revealed Preference Correct Responses: 46Correct Answer: TrueDi culty: 2Discrimination Index: 07.3 If a consumer maximizes a utility function subject to a budget constraint and has strictlyconvex preferences, then his behavior will necessarily satisfy the weak axiom of revealed preferenceand the strong axiom of revealed preference.Topic: Revealed Preference Correct Responses: 73Correct Answer: TrueDi culty: 1Discrimination Index: 377.4 The Laspeyres index of prices in period 2 relative to period 1 tells us the ratio of the cost ofbuying the period 1 bundle at period 2 prices to the cost of buying the period 1 bundle at period1 prices.Topic: Revealed Preference Correct Responses: 83Correct Answer: FalseDi culty: 1Discrimination Index: 327.5 The Laspeyres price index di ers from the Paasche price index because the Laspeyres indexholds prices constant and varies quantities while the Paasche price index holds quantities constantand varies prices.TRUE-FALSETopic: Revealed Preference Correct Responses: 36Correct Answer: False109Di culty: 2Discrimination Index: 07.6 Patience was maximizing her utility subject to her budget constraint. Prices changed andPatience was less well o than before. Therefore, at the old prices her new bundle must cost lessthan her old bundle.Topic: Revealed Preference Correct Responses: 0Correct Answer: FalseDi culty: 1Discrimination Index: 07.7 It follows from the weak axiom of revealed preference that if a consumer chooses x when hecould a ord y and chooses y when he could a ord x; then his income must have changed betweenthe two observations.Topic: Revealed Preference Correct Responses: 0Correct Answer: FalseDi culty: 2Discrimination Index: 07.8 The strong axiom of revealed preference says that if a consumer bought x when he couldhave 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: 85Correct Answer: FalseDi culty: 1Discrimination Index: 87.9 An increase in the price of an inferior good makes the people who consume that good bettero.Topic: Revealed Preference Correct Responses: 53Correct Answer: TrueDi culty: 2Discrimination Index: 197.10 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 theold bundle did.CHAPTER 7 Revealed PreferenceTopic: Revealed Preference Correct Responses: 85Correct Answer: False110Di culty: 1Discrimination Index: 217.11 The Laspeyres price index di ers from the Paasche price index because the Paasche indexholds prices constant and varies quantities, while the Laspeyres index holds quantities constant andvaries prices.Topic: Revealed Preference Correct Responses: 78Correct Answer: TrueDi culty: 2Discrimination Index: 207.12 It is possible for a consumer to satisfy the weak axiom of revealed preference, but violatethe strong axiom of revealed preference.Topic: Revealed Preference Correct Responses: 83Correct Answer: TrueDi culty: 0Discrimination Index: 337.13 For a consumer who has an allowance to spend and no endowment of goods, a decrease inthe price of an inferior good consumed makes the consumer better o .Topic: Revealed Preference Correct Responses: 0Correct Answer: TrueDi culty: 2Discrimination Index: 07.14 There are two goods, bananas and potatoes. The price of bananas increases and the priceof potatoes decreases. If after the price change a consumer whose preferences satisfy WARP canstill exactly a ord her old consumption bundle, then she will consume at least as much potatoesas before, even if potatoes are a Gi en good.Multiple ChoiceTopic: Revealed Preference Correct Responses: 52Correct Answer: ERevealed PreferenceDi culty: 1Discrimination Index: 297.1 Let A stand for the bundle 7; 9; B stand for the bundle 10; 5; and C stand for the bundle6; 6. When prices are 2; 4; Betty chooses C . When prices are 12; 3 she chooses A. Which of thefollowing 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.Topic: Revealed Preference Correct Responses: 0Correct Answer: BDi culty: 2Discrimination Index: 07.2Remember that the Laspeyres price index uses the old quantities for the weights. In 1971, good xcost 5 and good y cost 1. The current price of good x is 7 and the current price of good y is 6. In1971 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 followingnumbers?a 3.79b 2.71c 0.26d 1.89e 1.26CHAPTER 7 Revealed PreferenceTopic: Revealed Preference Correct Responses: 0Correct Answer: B112Di culty: 2Discrimination Index: 07.3Remember that the Laspeyres price index uses the old quantities for the weights. In 1971, good xcost 3 and good y cost 1. The current price of good x is 3 and the current price of good y is 5. In1971 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 followingnumbers?a 3.36b 2.43c 0.30d 1.52e 1.30Topic: Revealed Preference Correct Responses: 82Correct Answer: BDi culty: 2Discrimination Index: 307.4 Twenty years ago, Dmitri consumed bread which cost him 10 kopeks a loaf and potatoeswhich cost him 14 kopeks a sack. With his income of 208, he bought 11 loaves of bread and 7 sacksof potatoes. Today he has an income of 393. Bread now costs him 21 kopeks a loaf and potatoescost him 16 kopeks a sack. Assuming his preferences haven't changed and the sizes of loaves andsacks haven't changed, when was he better o ?a Twenty years agob Todayc 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 CHOICETopic: Revealed Preference Correct Responses: 82Correct Answer: B113Di culty: 2Discrimination Index: 307.5 Twenty years ago, Dmitri consumed bread which cost him 10 kopeks a loaf and potatoeswhich cost him 13 kopeks a sack. With his income of 266, he bought 11 loaves of bread and 12sacks of potatoes. Today he has an income of 510. Bread now costs him 20 kopeks a loaf andpotatoes cost him 20 kopeks a sack. Assuming his preferences haven't changed and the sizes ofloaves and sacks haven't changed, when was he better o ?a Twenty years agob Todayc 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: 81Correct Answer: ADi culty: 1Discrimination Index: 317.6 At prices 4; 12; Harry chooses the bundle 9; 4. At the prices 8; 4; Harry chooses the bundle2; 9. Is this behavior consistent with the weak axiom of revealed preference?a Yesb Noc 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: 65Correct Answer: ADi culty: 2Discrimination Index: 457.7 When prices are 6; 3; Holly chooses the bundle 9; 18 and when prices are 1; 2; she choosesthe 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 PreferenceTopic: Revealed Preference Correct Responses: 65Correct Answer: A114Di culty: 2Discrimination Index: 457.8 When prices are 3; 1; Yolanda chooses the bundle 9; 21 and when prices are 1; 3; shechooses 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: 0Correct Answer: ADi culty: 2Discrimination Index: 07.9 Maria consumes strawberries which cost her 10 pesos a box and bananas which cost her 9pesos 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 andbananas 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: 73Correct Answer: BDi culty: 2Discrimination Index: 537.10 In 1971, good x cost 5 and good y cost 1. They now cost 9 and 5 respectively. In 19710000the 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 theLaspeyres index of current prices relative to 1971 prices rounded to one decimal place. Rememberthe Laspeyres index uses the old quantities for weights.a .5b 2.4c 2.5d 2.2e None of the above.MULTIPLE CHOICETopic: Revealed Preference Correct Responses: 29Correct Answer: B115Di culty: 2Discrimination Index: 587.11 Carlos has at one time or another lived in Argentina, Bolivia, and Colombia. He buys onlytwo goods, x and y. In Argentina the prices were 9; 3 and he consumed the bundle 6; 7. InBolivia he consumed 9; 2. In Colombia he consumed the bundle 6; 5 at the prices 3; 3. Whichof 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: 0Correct Answer: ADi culty: 2Discrimination Index: 07.12 Prudence is careful to plan ahead. She is going to Paris next year to study. To protectherself from exchange rate uctuations, she bought a futures contract for the number of francs sheplans to spend next year, given current prices. When she arrives in Paris, she can cash in hercontract for this many francs no matter what the exchange rate is. If the value of the franc relativeto 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 orless than she does at home.CHAPTER 7 Revealed PreferenceTopic: Revealed Preference Correct Responses: 0Correct Answer: B116Di culty: 2Discrimination Index: 07.13 Jose consumes rare books which cost him 8 pesos each and pieces of antique furniture whichcost him 10 pesos each. He spends his entire income to buy 9 rare books and 11 pieces of antiquefurniture. Nigel has the same preferences as Jose but faces di erent prices and has a di erentincome. Nigel has an income of 162 pounds. He buys rare books at a cost of 4 pounds each andpieces 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 Nigelconsumes.Topic: Revealed Preference Correct Responses: 0Correct Answer: DDi culty: 2Discrimination Index: 07.14 Twenty years ago, Amanda consumed cans of motor oil which cost her 6 pesos each andgallons of gasoline which cost her 14 pesos each. With her income of 112 pesos, she bought 7 cansof motor oil and 5 gallons of gasoline. Today she has an income of 230 pesos. Cans of motor oilnow cost 10 pesos each and gallons of gasoline now cost 32 pesos each. Assuming her preferenceshaven'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 determinewhich is the case.e is behaving irrationally.MULTIPLE CHOICETopic: Revealed Preference Correct Responses: 83Correct Answer: B117Di culty: 1Discrimination Index: 07.15 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 Yesb Noc 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: 35Correct Answer: BDi culty: 2Discrimination Index: 207.16 Stan Ford currently spends $100 a week on entertainment. A rich uncle o ers him a choicebetween 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: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: 81Correct Answer: ADi culty: 2Discrimination Index: 387.17 When prices are 2; 10; Emil chooses the bundle 1; 6 and when prices are 12; 4; he choosesthe 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 PreferenceTopic: Revealed Preference Correct Responses: 0Correct Answer: B118Di culty: 2Discrimination Index: 07.18 Desmond has lived in Australia, Belgium and Canada. His tastes never changed but hisincome and prices did. In Australia his commodity bundle was x1; x2 = 7; 8; in Belgium it was9; 4 and in Canada it was 7; 5. Prices in Canada were p1; p2 = 3; 3 and in Australia prices werep1 ; p2 = 16; 4.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 inCanada.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: 87Correct Answer: D7.19 If all prices increase by 20:Di culty: 1Discrimination Index: 35a the Paasche price index increases by more than 20 and the Laspeyres price index increases by less than20.b the Laspeyres price index increases by more than 20 and the Paasche price index increases by less than20.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 CHOICETopic: Revealed Preference Correct Responses: 26Correct Answer: C119Di culty: 3Discrimination Index: 437.20 A student spends all of her income on pizza and books. When pizzas cost $3 each and bookscost $10 each, she consumed 30 pizzas and 3 books per month. The price of pizzas fell to $2.90each while the price of books rose to $11 each. The price change: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 consumedafter the price change.e had the same e ect as a $3 increase in her income.Topic: Revealed Preference Correct Responses: 59Correct Answer: CDi culty: 1Discrimination Index: 427.21 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 2would 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 PreferenceTopic: Revealed Preference Correct Responses: 51Correct Answer: B120Di culty: 2Discrimination Index: 187.22 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 theincrease in the Paasche P.I.b your income increase has exceeded the increase in the Laspeyres P.I. and has also exceeded the increasein the Paasche P.I.c your income increase has exceeded the increase in the Paasche P.I. but may not have exceeded the increasein the Laspeyres P.I.d you would need to know the old and new consumption bundles to compare your income change with thechange in price indexes.e None of the above.Topic: Revealed Preference Correct Responses: 64Correct Answer: CDi culty: 1Discrimination Index: 207.23 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 thesubsidy 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 monthlyincrease in your income.d you would spend more than $100 per month on housing when you received the unrestricted $100 monthlyincrease in your income.e your preferences were homothetic.MULTIPLE CHOICETopic: Revealed Preference Correct Responses: 30Correct Answer: A121Di culty: 3Discrimination Index: 07.24 When the prices were 5; 1; Vanessa chose the bundle x; y = 6; 3. Now at the new prices,px ; py ; she chooses the bundle x; y = 5; 7. For Vanessa's behavior to be consistent with the weakaxiom of revealed preference, it must be that:a 4py px .b px 4py .c 5py px.d py = 5px .e None of the above.Topic: Revealed Preference Correct Responses: 30Correct Answer: ADi culty: 3Discrimination Index: 07.25 When the prices were 3; 1; Zelda chose the bundle x; y = 8; 7. Now at the new prices,px ; py ; she chooses the bundle x; y = 7; 9. For Zelda's behavior to be consistent with the weakaxiom of revealed preference, it must be that:a 2py px .b px 2py .c 3py px.d py = 3px .e None of the above.CHAPTER 7 Revealed PreferenceTopic: Revealed Preference Correct Responses: 0Correct Answer: A122Di culty: 3Discrimination Index: 07.26At prices p1; p2 = 4; 1; George buys the bundle x1 ; x2 = 10; 20. At prices p01 ; p02 = 1; 4; hebuys the bundle x01 ; x02 = 4; 14. At prices p00 ; p00; he buys the bundle x00; x00 = 20; 10. If his1212preferences satisfy the strong axiom of revealed preferences, then it must be that:a 10p00 10p001200 8p2b 10p1c 8p1 8p2d p00 = p0012e None of the above.Topic: Revealed Preference Correct Responses: 0Correct Answer: ADi culty: 3Discrimination Index: 07.27At prices p1 ; p2 = 3; 1; Chen buys the bundle x1; x2 = 10; 18. At prices p01 ; p02 = 1; 3; hebuys the bundle x01; x02 = 3; 15. At prices p00 ; p00; he buys the bundle x00 ; x00 = 21; 9. If his1212preferences satisfy the strong axiom of revealed preferences, then it must be that:a 11p00 9p0012b 11p00 6p21c 6p1 9p2d p00 = p0012e None of the above.MULTIPLE CHOICETopic: Revealed Preference Correct Responses: 4Correct Answer: B123Di culty: 3Discrimination Index: 07.28 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 whichhe returns to Ann Arbor. He gets a salary according to the following simple rule. In Brownsvillehe 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-weekstints, he returns to Ann Arbor, where he is paid the cost in Ann Arbor of his Zilvania bundle. Ateach stop, he spends his entire salary on apples A and paperback books B, so as to maximizethe 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: 44Correct Answer: ADi culty: 3Discrimination Index: 387.29 If the only information we have about Goldie is that she chooses the bundle 6; 6 whenprices are 6; 6 and she chooses the bundle 10; 0 when prices are 4; 5; then we can conclude that: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: 44Correct Answer: ADi culty: 3Discrimination Index: 387.30 If the only information we have about Goldie is that she chooses the bundle 6; 6 whenprices are 6; 7 and she chooses the bundle 10; 0 when prices are 7; 5; then we can conclude that: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.CHAPTER 7 Revealed PreferenceTopic: Revealed Preference Correct Responses: 46Correct Answer: C124Di culty: 2Discrimination Index: 67.31 Pierre's friend Henri lives in a town where he has to pay 3 francs per glass of wine and 5francs per loaf of bread. Henri consumes 5 glasses of wine and 4 loaves of bread per day. Bob hasan income of $15 per day and pays $.50 per loaf of bread and $2 per glass of wine. If Bob has thesame tastes as Henri, and if the only thing that either of them cares about is consumption of breadand 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: 46Correct Answer: CDi culty: 2Discrimination Index: 67.32 Pierre's friend Henri lives in a town where he has to pay 3 francs per glass of wine and 6francs per loaf of bread. Henri consumes 9 glasses of wine and 4 loaves of bread per day. Bob hasan income of $15 per day and pays $.50 per loaf of bread and $2 per glass of wine. If Bob has thesame tastes as Henri, and if the only thing that either of them cares about is consumption of breadand 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 CHOICETopic: Revealed Preference Correct Responses: 86Correct Answer: A125Di culty: 2Discrimination Index: 317.33 Consider the case of Ronald. Let the prices and consumptions in the base year be as inSituation D; where p1 = 3; p2 = 1; x1 = 5; and x2 = 15. If in the current year, the price of good 1s1 and the price of good 2 is 2, and Ronald's current c consumptions of good 1 and good 2 are 25and 25 respectively, what is the Laspeyres price index of current prices relative to base year prices?Pick the most nearly correct answer.a 1.17b 2.50c 0.75d 0.50e 1.75Topic: Revealed Preference Correct Responses: 86Correct Answer: ADi culty: 2Discrimination Index: 317.34 Consider the case of Ronald. Let the prices and consumptions in the base year be as inSituation D; where p1 = 3; p2 = 1; x1 = 5; and x2 = 15. If in the current year, the price of good 1s1 and the price of good 2 is 1, and Ronald's current c consumptions of good 1 and good 2 are 25and 10 respectively, what is the Laspeyres price index of current prices relative to base year prices?Pick the most nearly correct answer.a 0.67b 1.17c 0.50d 0.25e 1CHAPTER 7 Revealed PreferenceTopic: Revealed Preference Correct Responses: 86Correct Answer: A126Di culty: 2Discrimination Index: 447.35 On the planet, Homogenia, every consumer who has ever lived consumes only two goods xand y and has the utility function U x; y = xy. The currency in Homogenia is the fragel. In thiscountry in 1900, the price of good 1 was 1 fragel and the price of good 2 was 2 fragels. Per capitaincome was 96 fragels. In 1990, the price of good 1 was 4 fragels and the price of good 2 was 5fragels. 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: 86Correct Answer: ADi culty: 2Discrimination Index: 447.36 On the planet, Homogenia, every consumer who has ever lived consumes only two goods xand y and has the utility function U x; y = xy. The currency in Homogenia is the fragel. In thiscountry in 1900, the price of good 1 was 1 fragel and the price of good 2 was 2 fragels. Per capitaincome was 84 fragels. In 1990, the price of good 1 was 1 fragels and the price of good 2 was 1fragels. 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 CHOICETopic: Revealed Preference Correct Responses: 74Correct Answer: A127Di culty: 2Discrimination Index: 567.37 On the planet, Hyperion, every consumer who has ever lived has a utility function U x; y =minfx; 2yg. The currency of Hyperion is the doggerel. In 1850 the price of x was 1 doggerel perunit and the price of y was 2 doggerels per unit. In 1990, the price of x was 11 doggerels per unitand the price of y was 4 doggerels per unit. The Paasche price index of prices in 1990 relative toprices in 1850 is:a 6.50.b 5.c 2.75.d 3.75.e not possible to determine without further information.Topic: Revealed Preference Correct Responses: 74Correct Answer: ADi culty: 2Discrimination Index: 567.38 On the planet, Hyperion, every consumer who has ever lived has a utility function U x; y =minfx; 2yg. The currency of Hyperion is the doggerel. In 1850 the price of x was 1 doggerel perunit and the price of y was 2 doggerels per unit. In 1990, the price of x was 7 doggerels per unitand the price of y was 4 doggerels per unit. The Paasche price index of prices in 1990 relative toprices in 1850 is:a 4.50.b 3.67.c 1.75.d 2.75.e not possible to determine without further information.CHAPTER 7 Revealed PreferenceTopic: Revealed Preference Correct Responses: 69Correct Answer: D128Di culty: 0Discrimination Index: 327.39 Howard Send is deciding whether to keep his car when he moves to New York City. Tooperate 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 hiscar to his brother-in-law in Bu alo the market value of the car is negligible and take taxicabs inNew York, which costs $1 a mile. Howard knows that if he took the car to New York, he woulddrive 6500 miles per year. If he places no value, positive or negative, on his brother , in , law gettingthe 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 morethan 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: 2Correct Answer: ADi culty: 0Discrimination Index: 07.40 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 wineand 5,000 lire for a pizza. Gianni lives in Napoli. It costs him 4,000 lire for a bottle of wine and6,000 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 CHOICETopic: Revealed Preference Correct Responses: 0Correct Answer: C129Di culty: 0Discrimination Index: 07.41 Hillary has an initial endowment of $500 and is interested in two things: how many visitsshe can make to the doctor, and money left over to spend on other things. When a trip to thedoctor costs $50, Hillary sees the doctor 7 times. After health care reform, a visit to the doctorwill 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: 0Correct Answer: CDi culty: 0Discrimination Index: 07.42 Hillary has an initial endowment of $500 and is interested in two things: how many visitsshe can make to the doctor, and money left over to spend on other things. When a trip to thedoctor costs $60, Hillary sees the doctor 4 times. After health care reform, a visit to the doctorwill 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 8True-FalseTopic: Slutsky Equation Correct Responses: 86Correct Answer: TrueSlutsky EquationDi culty: 1Discrimination Index: 248.1 A Gi en good must be an inferior good.Topic: Slutsky Equation Correct Responses: 80Correct Answer: FalseDi culty: 1Discrimination Index: 288.2 If a good is an inferior good, then an increase in its price will increase the demand for it.Topic: Slutsky Equation Correct Responses: 0Correct Answer: FalseDi culty: 1Discrimination Index: 08.3 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: 55Correct Answer: FalseDi culty: 2Discrimination Index: 268.4 The Slutsky substitution e ect measures the movement between two points on the sameindi erence curve.Topic: Slutsky Equation Correct Responses: 45Correct Answer: FalseDi culty: 2Discrimination Index: 98.5 In the case of homothetic preferences the entire change in demand from a price change is dueto the substitution e ect.Topic: Slutsky Equation Correct Responses: 86Correct Answer: TrueDi culty: 1Discrimination Index: 288.6 If two goods x and y are perfect complements, then if the price of x falls, the entire changein the demand for x is due to the income e ect.TRUE-FALSETopic: Slutsky Equation Correct Responses: 84Correct Answer: True131Di culty: 1Discrimination Index: 198.7 If the Engel curve slopes up, then the demand curve slopes down.Topic: Slutsky Equation Correct Responses: 54Correct Answer: FalseDi culty: 1Discrimination Index: 108.8 A rational consumer prefers more of good x to less. If the price of good x rises and the pricesof all other goods remain constant, then the consumer must necessarily demand less of x.Topic: Slutsky Equation Correct Responses: 69Correct Answer: FalseDi culty: 1Discrimination Index: 458.9 When the price of a good rises and income remains constant, there is a substitution e ect ondemand but there cannot be an income e ect.Topic: Slutsky Equation Correct Responses: 65Correct Answer: TrueDi culty: 2Discrimination Index: 358.10 Ivan spends his entire income on two goods. One of them is a Gi en good. If the price ofthe Gi en good rises, demand for the other good must fall.Topic: Slutsky Equation Correct Responses: 85Correct Answer: FalseDi culty: 1Discrimination Index: 218.11 An increase in the price of a Gi en good makes the people who consume that good bettero.Topic: Slutsky Equation Correct Responses: 71Correct Answer: TrueDi culty: 2Discrimination Index: 28.12 Jessica's preferences for peanut butter and jelly are represented by the utility functionU p; j = minf2p; 5j g. If prices and income change, but her old consumption bundle lies somewhereon her new budget line, she will not change her consumption.CHAPTER 8 Slutsky EquationTopic: Slutsky Equation Correct Responses: 67Correct Answer: False132Di culty: 2Discrimination Index: 398.13 Jimmy's utility function is U a; b = ab where a is his consumption of apples and b is hisconsumption of bananas. If prices and income change in such a way that Jimmy's old consumptionlies on his new budget line, then Jimmy will not change his consumption bundle.Topic: Slutsky Equation Correct Responses: 56Correct Answer: TrueDi culty: 0Discrimination Index: 88.14 Suppose a consumer has strictly convex preferences and her Engel curve for a good is avertical line for some range of income. In that same income range, her demand curve for the goodslopes down.Topic: Slutsky Equation Correct Responses: 42Correct Answer: TrueDi culty: 2Discrimination Index: 08.15 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: 0Correct Answer: TrueDi culty: 2Discrimination Index: 08.16 A consumer has the utility function U x; y = x + 2y = . The price of good x is 2 and the12price of good y is 1. The consumer's income is 20. If the price of good y rises to 2, then entirechange in demand for y is due to the substitution e ect.Topic: Slutsky Equation Correct Responses: 0Correct Answer: TrueDi culty: 0Discrimination Index: 08.17 The Hicks version of the substitution e ect of a price change measures the change in aconsumer's demand if the consumer's income were changed just enough so the consumer wouldremain on the same indi erence curve as before the price change.Multiple ChoiceTopic: Slutsky Equation Correct Responses: 67Correct Answer: BSlutsky EquationDi culty: 3Discrimination Index: 468.1 Cindy consumes goods x and y. Her demand for x is given by xpx; m = 0:05m , 5:15px. Nowher 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 wedenote the income e ect on her demand for x by DI and the substitution e ect on her demand forx 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: 67Correct Answer: BDi culty: 3Discrimination Index: 468.2 Cindy consumes goods x and y. Her demand for x is given by xpx; m = 0:05m , 5:25px. Nowher 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 wedenote the income e ect on her demand for x by DI and the substitution e ect on her demand forx 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 EquationTopic: Slutsky Equation Correct Responses: 53Correct Answer: C134Di culty: 1Discrimination Index: 308.3 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: 0Correct Answer: ADi culty: 2Discrimination Index: 08.4 Ernest's income elasticity of demand for natural gas is .4. His price elasticity of demand fornatural gas is ,:3; and he spends 10 of his income on natural gas. What is his substitution priceelasticity?a ,:26b ,:34c .20d ,:12e None of the above.Topic: Slutsky Equation Correct Responses: 10Correct Answer: ADi culty: 2Discrimination Index: 28.5 Suppose that bananas are a normal good and Woody is currently consuming 100 bananas ata price of 10 cents each.a His Slutsky compensated demand curve going through this point is steeper than his ordinary demandcurve.b His ordinary demand curve going through this point is steeper than his Slutsky compensated demandcurve.c His ordinary demand curve is steeper to the left and his Slutsky compensated demand curve is steeperto the right of this point.d Whether his ordinary demand curve or his compensated demand curve is steeper, depends on whetherhis price elasticity is greater than 1.e None of the above.MULTIPLE CHOICETopic: Slutsky Equation Correct Responses: 68Correct Answer: C135Di culty: 2Discrimination Index: 218.6 The following can be said about the income and substitution e ects of a price increase onthe 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: 57Correct Answer: ADi culty: 3Discrimination Index: 218.7 In 1989, Bruce spent his income on two goods x and y. Between 1989 and 1990, the price ofgood x rose by 8 per cent and the price of good y rose by 8 per cent. In 1990, Bruce bought thesame 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: 36Correct Answer: EDi culty: 1Discrimination Index: 598.8 When the price of x rises, Marvin responds by changing his demand for x. The substitutione 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 EquationTopic: Slutsky Equation Correct Responses: 0Correct Answer: B136Di culty: 1Discrimination Index: 08.9 Polly consumes crackers and fruit. The price of fruit rose and the price of crackers stayedconstant. 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 oldconsumption 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 theamount she used to buy.Topic: Slutsky Equation Correct Responses: 0Correct Answer: ADi culty: 2Discrimination Index: 08.10 Waldo consumes only apples and bananas and bananas are an inferior good for him. Theprice 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 CHOICETopic: Slutsky Equation Correct Responses: 43Correct Answer: B137Di culty: 2Discrimination Index: 418.11 Charlie consumes apples and bananas. His utility function is U XA ; XB = xAxB . The price2of apples is $1, the price of bananasis $2 and his income is $30 per week. If the price of bananasfalls 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 ectincreases 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 theincome 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 changemade Charlie better o .e more than one of the above is true.Topic: Slutsky Equation Correct Responses: 43Correct Answer: BDi culty: 2Discrimination Index: 588.12 Rob consumes two goods, x and y. He has an allowance of $50 per week and is not endowedwith either of the goods. If the price of good x increases and his substitution and income e ectschange 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 EquationTopic: Slutsky Equation Correct Responses: 54Correct Answer: D138Di culty: 1Discrimination Index: 428.13 Ben consumes two goods and his utility function is U x ; x = x x . The price of good 2124122does 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 forgood 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: 54Correct Answer: DDi culty: 1Discrimination Index: 428.14 David consumes two goods and his utility function is U x ; x = x x . The price of good 2125612does 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 forgood 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: 97Correct Answer: ADi culty: 0Discrimination Index: 98.15 Charlie's utility function is xAxB . The price of apples used to be $1 per unit and the priceof bananas was $2 per unit. His income was $40 per day. If the price of apples increased to $2.25and the price of bananas fell to $1.25, then in order to be able to just a ord his old bundle, Charliewould have to have a daily income of:a 57.50.b 116.c 28.75.d 86.25.e 230.MULTIPLE CHOICETopic: Slutsky Equation Correct Responses: 97Correct Answer: A139Di culty: 0Discrimination Index: 98.16 Charlie's utility function is xAxB . The price of apples used to be $1 per unit and the priceof bananas was $2 per unit. His income was $40 per day. If the price of apples increased to $2 andthe price of bananas fell to $0.50, then in order to be able to just a ord his old bundle, Charliewould have to have a daily income of:a 45.b 91.c 22.50.d 67.50.e 180.Topic: Slutsky Equation Correct Responses: 70Correct Answer: CDi culty: 0Discrimination Index: 758.17 Charlie's utility function is xAxB . The price of apples used to be $1, the price of bananasused to be $2, and his income used to be $40. If the price of apples increased to 6 and the price ofbananas 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 EquationTopic: Slutsky Equation Correct Responses: 70Correct Answer: C140Di culty: 0Discrimination Index: 758.18 Charlie's utility function is xAxB . The price of apples used to be $1, the price of bananasused to be $2, and his income used to be $40. If the price of apples increased to 5 and the price ofbananas 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: 72Correct Answer: CDi culty: 2Discrimination Index: 818.19 Neville from your workbook has a friend named Peregrine. Peregrine has the same demandfunction for claret as Neville, namely q = :02m , 2p where m is income and p is price. Peregrine'sincome is 6,500 and he initially had to pay a price of 50 per bottle of claret. The price of claretrose to 60. The substitution e ect of the price change: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: 72Correct Answer: CDi culty: 2Discrimination Index: 818.20 Neville from your workbook has a friend named Nigel. Nigel has the same demand functionfor claret as Neville, namely q = :02m , 2p where m is income and p is price. Nigel's income is 7,000and he initially had to pay a price of 50 per bottle of claret. The price of claret rose to 80. Thesubstitution e ect of the price change: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.MULTIPLE CHOICETopic: Slutsky Equation Correct Responses: 88Correct Answer: C141Di culty: 1Discrimination Index: 388.21 Goods 1 and 2 are perfect complements and a consumer always consumes them in the ratioof 2 units of Good 2 per unit of Good 1. If a consumer has income 300 and if the price of good 2changes 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: 88Correct Answer: CDi culty: 1Discrimination Index: 388.22 Goods 1 and 2 are perfect complements and a consumer always consumes them in the ratioof 2 units of Good 2 per unit of Good 1. If a consumer has income 720 and if the price of good 2changes 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 EquationTopic: Slutsky Equation Correct Responses: 0Correct Answer: A142Di culty: 0Discrimination Index: 08.23 Suppose that Agatha has $ 465 to spend on tickets for her trip. She intends to spend theentire amount $465 on tickets and she prefers traveling rst-class to travelling second class. Sheneeds to travel a total of 1500 miles. Suppose that the price of rst class-tickets is $0.40 per mileand the price of second-class tickets is $0.10 per mile. How many miles will she travel by secondclass?a 450b 600c 225d 550e 150Topic: Slutsky Equation Correct Responses: 0Correct Answer: ADi culty: 0Discrimination Index: 08.24 Suppose that Agatha has $ 420 to spend on tickets for her trip. She intends to spend theentire amount $420 on tickets and she prefers traveling rst-class to travelling second class. Sheneeds to travel a total of 1500 miles. Suppose that the price of rst class-tickets is $0.30 per mileand the price of second-class tickets is $0.20 per mile. How many miles will she travel by secondclass?a 300b 450c 150d 400e 100MULTIPLE CHOICETopic: Slutsky Equation Correct Responses: 74Correct Answer: C143Di culty: 2Discrimination Index: 308.25 Maude thinks delphiniums and hollyhocks are perfect substitutes, one-for-one. If Delphini-ums currently cost $5 per unit and hollyhocks cost $6 per unit, and if the price of delphiniums risesto $10 per unit:a 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.Topic: Slutsky Equation Correct Responses: 74Correct Answer: CDi culty: 2Discrimination Index: 308.26 Maude thinks delphiniums and hollyhocks are perfect substitutes, one-for-one. If Delphini-ums currently cost $4 per unit and hollyhocks cost $5 per unit, and if the price of delphiniums risesto $9 per unit:a 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.CHAPTER 8 Slutsky EquationTopic: Slutsky Equation Correct Responses: 0Correct Answer: A144Di culty: 0Discrimination Index: 08.27 Carlos consumes only two goods, apples and bananas. His utility function is given byU x; y = a3b2 . He is endowed with wa apples and wb bananas. Unaware that prices are aboutto change, Carlos buys the quantities of apples and bananas that maximize his utility subject tohis 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 risesrelative 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 risesrelative to the price of the other good.e Carlos' utility will not be a ected by the price change.Topic: Slutsky Equation Correct Responses: 0Correct Answer: EDi culty: 0Discrimination Index: 08.28 Carlos consumes only two goods, apples and bananas. His utility function is given byU x; y = minfx; 2yg. He is endowed with wa apples and wb bananas. Unaware that prices are aboutto change, Carlos buys the quantities of apples and bananas that maximize his utility subject tohis 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 risesrelative 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 risesrelative to the price of the other good.e Carlos' utility will not be a ected by the price change.MULTIPLE CHOICETopic: Slutsky Equation Correct Responses: 0Correct Answer: B145Di culty: 0Discrimination Index: 08.29 Gladys loves music and spends her money only on tapes and compact disks. She is alwayswilling to trade 2 tapes for 1 compact disk. Originally, music stores sold compact disks for $9each and tapes for $5 each. Then the price of compact disks fell to $8 each. The change in theconsumption 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.Slutsky EquationEssayTopic: Slutsky Equation Correct Responses: 0Di culty: 2Discrimination Index: 08.1 A taxpayer says "Sure I pay a lot of income tax, but I don't mind because I get back just asmuch money as I pay in." Assuming that his facts are correct, explain why the taxpayer's reasoningis faulty. Use a diagram to show that an income tax can make a person worse o even if he isrebated an amount of money equal to what he paid in.Answer: See page 148 of Varian.Topic: Slutsky Equation Correct Responses: 0Di culty: 3Discrimination Index: 08.2 Use a diagram to prove that in case there are two goods, the substitution e ect of an increasein the price of good x reduces the demand for good x.Answer: A good way to proceed is to suppose that the price of x increases and the substitutione ect increases demand for x. Draw the pivoted budget and notice that the new bundle would haveto be a bundle that was previously rejected in favor of the old bundle. Since the pivoted budgetstill allows the old purchase, the weak axiom of revealed preference would be violated.Topic: Slutsky Equation Correct Responses: 0Di culty: 2Discrimination Index: 08.3 Draw two di erent diagrams, one illustrating the Slutsky version of income and substitutione ects and the other illustrating the Hicks version of income and substitution e ects. How do thesetwo notions di er?Answer: The diagrams can be found in Varian's book. The Slutsky version of the substitutione 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 oldprices.Topic: Slutsky Equation Correct Responses: 0Di culty: 1Discrimination Index: 08.4 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.ESSAYTopic: Slutsky Equation Correct Responses: 0147Di culty: 2Discrimination Index: 08.5 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 knowthat if demand for the good increases as income increases, then the income e ect works in the samedirection as the substitution e ect. Therefore the decomposition into income and substitutione ects allows one to prove that the demand curve slopes down whenever the Engel curve slopesup. A second reason is that someone who has already purchased his planned consumption bundlefaces only a substitution e ect and not an income e ect when prices change, since in this case hisbudget line just pivots around the current consumption.Chapter 9Buying and SellingTrue-FalseTopic: Buying and Selling Correct Responses: 0Correct Answer: TrueDi culty: 2Discrimination Index: 09.1 If a rational utility maximizer is a net demander of a good, and if an increase in its pricecauses him to buy more of it, then it must be an inferior good.Topic: Buying and Selling Correct Responses: 68Correct Answer: FalseDi culty: 2Discrimination Index: 229.2 If a person is a net supplier of a normal good and its price increases while all other pricesstay the same, then his demand for the good must decrease.Topic: Buying and Selling Correct Responses: 70Correct Answer: TrueDi culty: 1Discrimination Index: 169.3 If a consumer is a buyer of some goods and a seller of others, then a change in prices willgenerate an extra income e ect in the Slutsky equation due to the revaluation of the consumer'sendowment.Topic: Buying and Selling Correct Responses: 97Correct Answer: TrueDi culty: 1Discrimination Index: 99.4 If a consumer is initially endowed with a positive amount of two goods and sells some of oneto get more of the other, and if she has no other sources of income, then her budget line will passthrough her endowment point.Topic: Buying and Selling Correct Responses: 71Correct Answer: FalseDi culty: 2Discrimination Index: 299.5 If a utility maximizer is a net seller of something and the price of that good rises while otherprices stay constant, her situation might improve so much that she becomes a net buyer.TRUE-FALSETopic: Buying and Selling Correct Responses: 93Correct Answer: True149Di culty: 2Discrimination Index: 239.6 If a person is a net seller of some good and the price of that good decreases, she mightpossibly become a net buyer.Topic: Buying and Selling Correct Responses: 68Correct Answer: FalseDi culty: 2Discrimination Index: 149.7 Wilhelm consumes only apples and bananas. His endowment is 5 units of apples and 10 unitsof bananas. Both goods are normal goods for Wilhelm. At current prices, Wilhelm is a net seller ofapples. If the price of apples rises and the price of bananas stays the same, his demand for applesmust decrease.Topic: Buying and Selling Correct Responses: 50Correct Answer: FalseDi culty: 2Discrimination Index: 09.8 Bill receives half of his income in wages and half of his income in dividends. Bill would beindi erent between a 50 percent increase in his wage rate and a 50 percent increase in his dividendincome.Topic: Buying and Selling Correct Responses: 72Correct Answer: FalseDi culty: 1Discrimination Index: 69.9 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: 19Correct Answer: TrueDi culty: 2Discrimination Index: 489.10 If someone has a Cobb-Douglas utility function and no income from any source other thanlabor earnings, then an increase in wages will not change the amount that person chooses to work.CHAPTER 9 Buying and SellingTopic: Buying and Selling Correct Responses: 87Correct Answer: True150Di culty: 1Discrimination Index: 59.11 If leisure is a normal good, then an increase in non-labor income will reduce labor supply.Topic: Buying and Selling Correct Responses: 0Correct Answer: FalseDi culty: 1Discrimination Index: 09.12 A person's full income is the amount of income that he or she would have if there were notaxes.Topic: Buying and Selling Correct Responses: 79Correct Answer: FalseDi culty: 2Discrimination Index: 299.13 If a person has no non-labor income, a decrease in wages causes the budget line betweenleisure and other goods to shift downward in a parallel fashion.Topic: Buying and Selling Correct Responses: 67Correct Answer: TrueDi culty: 1Discrimination Index: 249.14 If leisure is an inferior good, then an increase in the wage rate will make a person workmore.Topic: Buying and Selling Correct Responses: 64Correct Answer: FalseDi culty: 1Discrimination Index: 319.15 Jack has a backward-bending labor supply curve. At wages of $5 an hour he chooses towork 50 hours a week. His boss wants him to work more hours per week and o ers him $5 an hourfor the rst 50 hours per week and $7 an hour for every hour beyond 50 hours per week. Becauseof his backward bending supply curve, Jack might actually choose to work fewer hours.Topic: Buying and Selling Correct Responses: 73Correct Answer: TrueDi culty: 2Discrimination Index: 269.16 Les is allowed to work only 8 hours a day at his main job, although he would like to workmore 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 jobwill reduce the number of hours he chooses to work at his second job.TRUE-FALSETopic: Buying and Selling Correct Responses: 79Correct Answer: False151Di culty: 2Discrimination Index: 469.17 Suppose a consumer is initially endowed with a positive amount of two goods, sells some ofone to get more of the other, and has no other sources of income. If the price of one good falls, hisnew budget line is everywhere above his old budget line.Multiple ChoiceTopic: Buying and Selling Correct Responses: 88Correct Answer: CBuying and SellingDi culty: 1Discrimination Index: 239.1 Marsha Mellow is very exible. She consumes x and y. She says `Give me x or give me y; Idon't care. I can't tell the di erence between them.' She is currently endowed with 14 units of xand 6 units of y. The price of x is 4 times the price of y. Marsha can trade x and y at the goingprices, but has no other source of income. How many units of y will Marsha consume?a 66b 20c 62d 6e 31Topic: Buying and Selling Correct Responses: 88Correct Answer: CDi culty: 1Discrimination Index: 239.2 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 xand 17 units of y. The price of x is 2 times the price of y. Marsha can trade x and y at the goingprices, but has no other source of income. How many units of y will Marsha consume?a 27b 21c 25d 17e 13MULTIPLE CHOICETopic: Buying and Selling Correct Responses: 56Correct Answer: C153Di culty: 3Discrimination Index: 399.3 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 hasan endowment of 24 x0s and 42 y0 s which he can trade at the going prices. He has no other sourceof income. What is Yoram's gross demand for x?a 90b 66c 18d 16e We can't determine the answer without knowing the price of x.Topic: Buying and Selling Correct Responses: 56Correct Answer: CDi culty: 3Discrimination Index: 399.4 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 hasan endowment of 15 x0s and 60 y0 s which he can trade at the going prices. He has no other sourceof income. What is Pablo's gross demand for x?a 135b 75c 15d 10e We can't determine the answer without knowing the price of x.CHAPTER 9 Buying and SellingTopic: Buying and Selling Correct Responses: 82Correct Answer: C154Di culty: 1Discrimination Index: 299.5 Diana consumes commodities x and y and her utility function is U x; y = xy . Good x costs2$2 per unit and good y costs $1 per unit. If she is endowed with 3 units of x and 6 units of y; howmany units of good y will she consume?a 11b 3c 8d 14e None of the above.Topic: Buying and Selling Correct Responses: 82Correct Answer: CDi culty: 1Discrimination Index: 299.6 Maude consumes commodities x and y and her utility function is U x; y = xy . Good x costs3$3 per unit and good y costs $1 per unit. If she is endowed with 6 units of x and 2 units of y; howmany units of good y will she consume?a 18b 6c 15d 17e None of the above.Topic: Buying and Selling Correct Responses: 75Correct Answer: ADi culty: 2Discrimination Index: 449.7 Donald consumes goods x and y. His utility function is U x; y = xy . He is endowed with 433units 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 ,27b 18c ,30d ,20e 59MULTIPLE CHOICETopic: Buying and Selling Correct Responses: 75Correct Answer: A155Di culty: 2Discrimination Index: 449.8 Donald consumes goods x and y. His utility function is U x; y = xy . He is endowed with 784units 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 ,57b 23c ,60d ,48e 99Topic: Buying and Selling Correct Responses: 87Correct Answer: DDi culty: 1Discrimination Index: 69.9 Jackie's net demands for x and y are 6; ,6 and her gross demands are 15; 15. What is herinitial endowment of x?a 16b 13c 5d 9e None of the above.Topic: Buying and Selling Correct Responses: 71Correct Answer: CDi culty: 2Discrimination Index: 469.10 Holly consumes x and y. The price of x is 4 and the price of y is 4. Holly's only source ofincome is her endowment of 6 units of x and 6 units of y which she can buy or sell at the goingprices. She plans to consume 7 units of x and 5 units of y. If the prices change to 7 for x and 7 fory; 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 SellingTopic: Buying and Selling Correct Responses: 71Correct Answer: C156Di culty: 2Discrimination Index: 469.11 Kristina consumes x and y. The price of x is 5 and the price of y is 5. Kristina's only sourceof income is her endowment of 6 units of x and 6 units of y which she can buy or sell at the goingprices. She plans to consume 7 units of x and 5 units of y. If the prices change to 8 for x and 8 fory; 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: 85Correct Answer: DDi culty: 1Discrimination Index: 199.12 Milton consumes two commodities in a perfect market system. The price of x is 5 and theprice of y is 1. His utility function is U x; y = xy. He is endowed with 40 units of good x and noy. Find his consumption of good y.a 110b 105c 50d 100e None of the above.Topic: Buying and Selling Correct Responses: 85Correct Answer: DDi culty: 1Discrimination Index: 199.13 Milton consumes two commodities in a perfect market system. The price of x is 5 and theprice of y is 1. His utility function is U x; y = xy. He is endowed with 24 units of good x and noy. Find his consumption of good y.a 70b 65c 30d 60e None of the above.MULTIPLE CHOICETopic: Buying and Selling Correct Responses: 75Correct Answer: A157Di culty: 2Discrimination Index: 479.14 Russ Tickman is a dairy farmer. He consumes milk and other goods. His utility functionis given by U x; y = yx + 1 where x is his milk consumption and y is his consumption of othergoods. His initial endowment is 19 units of milk per day and no units of other goods. If the priceof milk is 2 and the price of other goods is 1, how much milk does he consume?a 9 gallonsb 38 gallonsc 20 gallonsd 14 gallonse 12 gallonsTopic: Buying and Selling Correct Responses: 0Correct Answer: ADi culty: 2Discrimination Index: 09.15 Jack earns 5 dollars per hour. He has 100 hours per week which he can use for either laboror leisure. The government institutes a plan in which each worker receives a $100 grant from thegovernment, but has to pay 50 of his or her labor income in taxes. If his utility function isU c; 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 30b 40c 26d 20e None of the above.CHAPTER 9 Buying and SellingTopic: Buying and Selling Correct Responses: 57Correct Answer: E158Di culty: 1Discrimination Index: 159.16 Aristotle earns 5 dollars per hour. He has 110 hours per week available for either labor orleisure. In the old days he paid no taxes and received nothing from the government. Now he getsa $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 thanwages and payments from the government. He notices that with the government payment andhis taxes, he can exactly a ord the combination of leisure and consumption goods that he used tochoose. How many hours per week did he work in the old days?a 100b 20c 45d 60e None of the above.Topic: Buying and Selling Correct Responses: 31Correct Answer: CDi culty: 2Discrimination Index: 409.17 Rhoda takes a job with a construction company. She earns $5 an hour for the rst 40hours of each week and then gets "double-time" for overtime. That is, she is paid $10 an hour forevery hour beyond 40 hours a week that she works. Rhoda has 70 hours a week available to dividebetween construction work and leisure. She has no other source of income, and her utility functionis U = cr where c is her income to spend on goods and r is the number of hours of leisure that shehas per week. She is allowed to work as many hours as she wants to. How many hours will she work?a 50b 30c 45d 35e None of the above.MULTIPLE CHOICETopic: Buying and Selling Correct Responses: 0Correct Answer: C159Di culty: 2Discrimination Index: 09.18 Wendy and Mac work in fast-food restaurants. Wendy is paid $4 an hour for the rst40 hours a week that she works and $6 an hour for every hour beyond 40 hours per week. Macgets $5 an hour no matter how many hours he works. Each has 110 hours per week to allocatebetween work and leisure. Each has a utility function U = cr where c is expenditure per week onconsumption and r is hours of leisure per week. Each can choose the number of hours to work. IfWendy 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: 63Correct Answer: BDi culty: 3Discrimination Index: 369.19 Heather and Myrtle have the same tastes. Heather is paid $10 an hour and chooses to work9 hours a day. Myrtle is paid $9 an hour for the rst 8 hours she works and $18 an hour for anytime 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, shechooses to work 9 hours a day.b Unless her indi erence curve is kinked, Heather would be better o facing the same pay schedule asMyrtle.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 SellingTopic: Buying and Selling Correct Responses: 71Correct Answer: C160Di culty: 1Discrimination Index: 109.20 Mike Teevee likes to watch television and to eat candy. In fact his utility function isU x; y = x2y where x is the number of hours he spends watching television and y is the number ofdollars 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 forevery hour that he reduces his television watching below 36 hours a week. If this is Mike's onlysource of income to buy candy, how many hours of television does he watch per week?a 36b 12c 24d 18e 16Topic: Buying and Selling Correct Responses: 75Correct Answer: BDi culty: 2Discrimination Index: 299.21 Georgina earns 6 dollars an hour. She has no non-labor income. She has 100 hours a weekavailable for either labor or leisure. Her utility function is U c; r = cr3 where c is dollars worth ofgoods and r is hours of leisure. How many hours per week will she work?a 23b 25c 28d 50e None of the above.MULTIPLE CHOICETopic: Buying and Selling Correct Responses: 75Correct Answer: B161Di culty: 2Discrimination Index: 299.22 Nicole earns 6 dollars an hour. She has no non-labor income. She has 75 hours a weekavailable for either labor or leisure. Her utility function is U c; r = cr2 where c is dollars worth ofgoods and r is hours of leisure. How many hours per week will she work?a 23b 25c 28d 37.50e None of the above.Topic: Buying and Selling Correct Responses: 48Correct Answer: ADi culty: 2Discrimination Index: 239.23 Will is paid $10 an hour for the rst 40 hours per week that he works. He can also work asmany hours overtime as he wishes to. He is paid $15 an hour for every hour that he works beyond40 hours a week. Leisure is a normal good for Will and he is currently working some overtime. Ifhis hourly wage for the rst 40 hours per week that he works rises to $12 and his wages for overtimeremain 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 SellingTopic: Buying and Selling Correct Responses: 48Correct Answer: A162Di culty: 2Discrimination Index: 239.24 Ben is paid $6 an hour for the rst 40 hours per week that he works. He can also work asmany hours overtime as he wishes to. He is paid $13 an hour for every hour that he works beyond40 hours a week. Leisure is a normal good for Ben and he is currently working some overtime. Ifhis hourly wage for the rst 40 hours per week that he works rises to $8 and his wages for overtimeremain 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: 40Correct Answer: BDi culty: 3Discrimination Index: 289.25 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 isU c; r = rc2 ; where r is hours of leisure and c is dollars worth of consumption. She has 100 hoursto divide between work and leisure. How many hours per week will she choose to work?a 66.66b 50c 40d 33.33e 20MULTIPLE CHOICETopic: Buying and Selling Correct Responses: 40Correct Answer: C163Di culty: 2Discrimination Index: 439.26 Susan's utility function is U x; y = x + yR ; where x and y are the quantities of goods X2and Y that she consumes, and R is the number of hours of leisure that she has per day. Good Xcosts 4 dollars per unit and good Y costs 2 dollars per unit. Her wage rate is 8 dollars per hourand 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: 0Correct Answer: CDi culty: 0Discrimination Index: 09.27 George Goodhands is a life-insurance agent. He can work 40 hours a week for a large nationalinsurance 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 takeboth jobs. Which of the following responses to an increase in the salary paid by the insurancecompany 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 SellingTopic: Buying and Selling Correct Responses: 24Correct Answer: E164Di culty: 3Discrimination Index: 119.28 Gladys Goodhands is an insurance agent. She must choose one and only one of two possiblealternative jobs. She can either work for a large national insurance company for which she mustwork exactly 40 hours a week and will receive a salary of S dollars per week, or she can work asan independent insurance agent, in which case she can work exactly as many hours per week asshe wishes and will earn w dollars for every hour that she works. Gladys satis es the weak axiomof revealed preference and she cares only about how much money she makes and about how muchleisure 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 morethan 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 than40 hours a week.d If S=40 = w; she will be indi erent between working for the large insurance company and workingindependently.e None of the above.Topic: Buying and Selling Correct Responses: 59Correct Answer: ADi culty: 2Discrimination Index: 589.29 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 tangerinesand bananas in xed proportions , ,one unit of tangerines per unit of bananas. He initially facesa price of 10 per unit for each fruit. The price of tangerines rose to 30 per unit while the price ofbananas 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 CHOICETopic: Buying and Selling Correct Responses: 59Correct Answer: A165Di culty: 2Discrimination Index: 589.30 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 cherriesand pineapples in xed proportions , ,one unit of cherries per unit of pineapples. He initially facesa price of 25 per unit for each fruit. The price of cherries rose to 75 per unit while the price ofpineapples 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: 88Correct Answer: BDi culty: 1Discrimination Index: 369.31 Yolanda receives a lump sum child-support payment of $150 per week. She has 80 hours aweek to divide between labor and leisure. She earns $5 an hour. The rst $150 per week of herlabor income is untaxed, but all labor income that she earns above $ 150 is taxed at the rate 30percent. If we graph her budget line with leisure on the horizontal axis and consumption on thevertical 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 SellingTopic: Buying and Selling Correct Responses: 88Correct Answer: B166Di culty: 1Discrimination Index: 369.32 Heidi receives a lump sum child-support payment of $50 per week. She has 80 hours a weekto divide between labor and leisure. She earns $5 an hour. The rst $200 per week of her laborincome 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 verticalaxis, 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: 99Correct Answer: DDi culty: 0Discrimination Index: 09.33 If Abishag owns 16 quinces and 15 kumquats, and if the price of kumquats is 4 times theprice of quinces, how many kumquats can she a ord if she buys as many kumquats as she can?a 38b 31c 15d 19e 16Topic: Buying and Selling Correct Responses: 99Correct Answer: DDi culty: 0Discrimination Index: 09.34 If Abishag owns 12 quinces and 10 kumquats, and if the price of kumquats is 3 times theprice of quinces, how many kumquats can she a ord if she buys as many kumquats as she can?a 28b 22c 10d 14e 11MULTIPLE CHOICETopic: Buying and Selling Correct Responses: 78Correct Answer: A167Di culty: 2Discrimination Index: 359.35 Mario consumes eggplant and tomatoes in the ratio of one bushel of eggplant per bushel oftomatoes. His garden yields 30 bushels of eggplant and 10 bushels of tomatoes. He initially facedprices of $25 per bushel for each vegetable, but the price of eggplant rose to $100 per bushel, whilethe 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: 78Correct Answer: ADi culty: 2Discrimination Index: 359.36 Mario consumes eggplant and tomatoes in the ratio of one bushel of eggplant per bushel oftomatoes. His garden yields 30 bushels of eggplant and 10 bushels of tomatoes. He initially facedprices of $25 per bushel for each vegetable, but the price of eggplant rose to $50 per bushel, whilethe 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: 88Correct Answer: BDi culty: 2Discrimination Index: 369.37 Dr. Johnson receives a lump sum payment of $ 150 per week. Suppose that the rst $150 perweek 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 SellingTopic: Buying and Selling Correct Responses: 88Correct Answer: B168Di culty: 2Discrimination Index: 369.38 Dr. Johnson receives a lump sum payment of $ 150 per week. Suppose that the rst $150 perweek 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: 89Correct Answer: EDi culty: 1Discrimination Index: 259.39 Dudley has a utility function U C; R = C , 12 , R ; where R is leisure and C is consumption2per day. He has 16 hours per day to divide between work and leisure. If Dudley has a nonlaborincome of $20 per day and is paid a wage of $0 per hour, how many hours of leisure will he chooseper day?a 9b 10c 11d 13e 12Topic: Buying and Selling Correct Responses: 89Correct Answer: EDi culty: 1Discrimination Index: 259.40 Dudley has a utility function U C; R = C , 12 , R ; where R is leisure and C is consumption2per day. He has 16 hours per day to divide between work and leisure. If Dudley has a nonlaborincome of $40 per day and is paid a wage of $0 per hour, how many hours of leisure will he chooseper day?a 7b 8c 9d 11e 10MULTIPLE CHOICETopic: Buying and Selling Correct Responses: 97Correct Answer: B169Di culty: 1Discrimination Index: 109.41 Mr. Cog has 18 hours per day to divide between labor and leisure. His utility function isU C; R = CR; where C is dollars per year spent on consumption and R is hours of leisure. If hehas 19 dollars of nonlabor income per day and gets a wage rate of 15 dollars per hour when heworks, his budget equation, expressing combinations of consumption and leisure that he can a ordto 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: 97Correct Answer: BDi culty: 1Discrimination Index: 109.42 Mr. Cog has 18 hours per day to divide between labor and leisure. His utility function isU C; R = CR; where C is dollars per year spent on consumption and R is hours of leisure. If he has5 dollars of nonlabor income per day and gets a wage rate of 18 dollars per hour when he works, hisbudget 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 SellingTopic: Buying and Selling Correct Responses: 47Correct Answer: D170Di culty: 0Discrimination Index: 439.43 Mr. Cog has 18 hours per day to divide between labor and leisure. His utility function isU C; R = CR; where C is dollars per year spent on consumption and R is hours of leisure. If hehas a nonlabor income of 40 dollars per day and a wage rate of 8 dollars per hour, he will choosea 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: 47Correct Answer: DDi culty: 0Discrimination Index: 439.44 Mr. Cog has 18 hours per day to divide between labor and leisure. His utility function isU C; R = CR; where C is dollars per year spent on consumption and R is hours of leisure. If hehas a nonlabor income of 44 dollars per day and a wage rate of 19 dollars per hour, he will choosea 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 CHOICETopic: Buying and Selling Correct Responses: 0Correct Answer: E171Di culty: 3Discrimination Index: 09.45 Ollie South has an endowment of 10 guns and 10 pounds of butter. He can buy or sellbutter at $1 a pound. But the world market for guns is more complicated: he can buy guns for $5each, but he can sell guns for only $2. If we graph his budget line with guns on the horizontal axisand 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: 0Correct Answer: ADi culty: 0Discrimination Index: 09.46 Charlie consumes apples and bananas; his utility function is U a; b = ab. Charlie's fruitfarm yielded 5 apples and 10 bananas. In addition, Charlie has $10 that he was given by a secretadmirer. 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 SellingTopic: Buying and Selling Correct Responses: 0Correct Answer: A172Di culty: 0Discrimination Index: 09.47 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. Thecurrent market prices are $2 per egg and $3 per tomato. At these prices she chooses the samebundle 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 othan 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 worseo , depending on her tastes.e Since she earns her income from tomatoes and eggs only, she treats eggs and tomatoes as perfect substitutes.EssayTopic: Buying and Selling Correct Responses: 0Buying and SellingDi culty: 3Discrimination Index: 09.1 Mr. and Mrs. Brauer owned their own home. There was a real estate boom in their townand the price of house doubled. Their income and other prices stayed constant. The Brauer'scomplained that "we are being driven from our home, we can't a ord to live here any more". aDraw a diagram that illustrates what happened to the Brauer's budget constraint. b Could theyhave been made worse o by the change? Could they have been made better o ? Explain why orwhy not.Answer: A good diagram would show their budget line between housing and other goods pivotingaround their current consumption. They can't be made worse o because they can still a ord theirold consumption bundle. They might be better o because they might choose to consume lesshousing and more other goods.Topic: Buying and Selling Correct Responses: 0Di culty: 1Discrimination Index: 09.2 Harvey's net demands for goods 1 and 2 are 2; ,3 and his endowment is 6; 5. a Whatare his gross demands? b Draw a diagram illustrating his budget line, his endowment, and hisconsumption. Put good 1 on the horizontal axis. c Draw a dotted line to show what his budgetline 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 textfor similar graphs.Topic: Buying and Selling Correct Responses: 0Di culty: 2Discrimination Index: 09.3 Is it ever possible that if someone is a net seller of a good, and the price of the good he sellsfalls, the consumer could wind up better o than he was before by switching from being a seller tobeing 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 aperson who is a net seller of the good on the horizontal axis. The price decrease pivots the budgetline 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 bybecoming a net buyer of the good on the horizontal axis.CHAPTER 9 Buying and SellingTopic: Buying and Selling Correct Responses: 0174Di culty: 1Discrimination Index: 09.4 Is it ever possible that an increase in the price of a good for which a person is a net sellercan 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 theold consumption bundle and hence can't be made worse o .Topic: Buying and Selling Correct Responses: 0Di culty: 1Discrimination Index: 09.5 Peter has an endowment of 3 units of good x and 5 units of good y. He can buy and sell x ata price of $100 and y at a price of $200. He receives an income of $700 as alimony from a formerspouse. a Draw Peter's budget line for x and y. Show his initial endowment of x and y on yourdiagram. b Calculate the amount of x that he could a ord if he bought only x and of y he coulda 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 is100x + 200y = 2000.Topic: Buying and Selling Correct Responses: 0Di culty: 2Discrimination Index: 09.6 Dudley's utility function for goods and leisure is U G; L = G , 20, L20 , L where G isconsumption 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 hechose to but gets zero wages, how much would he work? b Sketch Dudley's indi erence curves ona graph with leisure on the horizontal axis and income on the vertical axis. If Dudley's non-laborincome were $25 a day and he could work as much as he wished for $10 an hour, how many hoursa day would he choose to work?Answer: a 4 hours a day. b9 hours a day.ESSAYTopic: Buying and Selling Correct Responses: 0175Di culty: 2Discrimination Index: 09.7 Marilyn is a journalist. She is considering two possible jobs. One job is as an editor for amagazine. The other job is writing"free-lance" articles and selling them to whoever buys them. If she works for the magazine, shemust spend 10 hours a day at work and commuting. She will be paid $130 a day net of commutingcosts and taxes if she takes this job. If she writes free-lance articles, she can work at home andwork as many hours a day as she pleases. She estimates that she would earn $10 an hour aftertaxes if she does this. Her utility function is U = R3 C where R3 is the cube of the number ofhours a day she spends not working or commuting and C is her earnings. a If Marilyn chooses tofree-lance, how many hours will she work? b Calculate her utility in each job and tell which shewill choose.Answer: a 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: 0Di culty: 1Discrimination Index: 09.8 Ernie's wage rate is $10 an hour. He has no earnings other than his labor income. His utilityfunction is U C; L = CR2 where C is the amount of money he spends on consumption, and R isthe number of hours a day he spends NOT working. a Write an equation that describes Ernie'sbudget constraint. b How many hours does Ernie choose to work per day? c How much moneydoes he spend on consumption per day?Answer: a C + 10R = 240. b8. c80.Topic: Buying and Selling Correct Responses: 0Di culty: 3Discrimination Index: 09.9 May's utility function is U = C + 14D = , :5H + J where C is dollars spent on goods other122than 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 hoursper day May spends working at her job. All May's income comes from her job. She can workas many hours a day as she wishes at a wage of $7 an hour. a If she cannot hire anyone to doher housecleaning, how many hours will she spend on the job and how many hours will she spendhousecleaning? b If she can hire a housecleaner at $5 an hour, how many hours will she work onher 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; 0CHAPTER 9 Buying and SellingTopic: Buying and Selling Correct Responses: 0176Di culty: 2Discrimination Index: 09.10 Leo thinks leisure and goods are perfect complements. Goods cost $1 per unit. Leo wantsto consume 5 units of goods per hour of leisure. Leo can work as much as he wants to at the wagerate of $15 an hour. He has no other source of income. a How many hours a day will Leo chooseto 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?Answer: a 18 hours a day c lessTopic: Buying and Selling Correct Responses: 0Di culty: 2Discrimination Index: 09.11 Lucetta changes light bulbs. She is paid $10 an hour. She can work as many hours as shewishes. Lucetta works only 6 hours a day. But she says she loves her job and is happier working atthis job than she would be if she made the same income without working at all. Though this maysound strange, Lucetta is perfectly rational. Draw a graph showing leisure on the horizontal axisand income on the vertical axis. Draw a budget line and some indi erence curves for Lucetta thatare 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 isworking 6 hours a day. The diagram will work if you draw a U-shaped indi erence curve tangentto her budget line at 6 hours. Make sure that this indi erence curve intersects the horizontal linethrough her consumption choice somewhere to the right of her choice but to the left of where shedoesn't work at all.Chapter 10Intertemporal ChoiceTrue-FalseTopic: Intertemporal Choice Correct Responses: 71Correct Answer: TrueDi culty: 2Discrimination Index: 4010.1 An increase in the interest rate can not make a lender who satis es WARP become aborrower.Topic: Intertemporal Choice Correct Responses: 61Correct Answer: TrueDi culty: 1Discrimination Index: 6710.2 If the real interest rate is positive, then a unit of future consumption can be had for thesacri ce of less than one unit of current consumption.Topic: Intertemporal Choice Correct Responses: 74Correct Answer: FalseDi culty: 1Discrimination Index: 2310.3 The real interest rate is the interest rate that one receives net of brokerage costs or feesimposed by nancial intermediaries.Topic: Intertemporal Choice Correct Responses: 84Correct Answer: TrueDi culty: 1Discrimination Index: 810.4 An increase in the interest rate will necessarily result in a decrease in the present value ofa given stream of positive incomes.Topic: Intertemporal Choice Correct Responses: 83Correct Answer: TrueDi culty: 1Discrimination Index: 2010.5 In a graph that has current consumption on the horizontal axis and future consumption onthe vertical axis, the horizontal intercept of the budget line is the present value of all one's incomein the two periods.CHAPTER 10 Intertemporal ChoiceTopic: Intertemporal Choice Correct Responses: 78Correct Answer: True178Di culty: 1Discrimination Index: 1010.6 If a consumer can borrow and lend at the same interest rate, then he can exactly a ord aconsumption plan if the present value of his consumption equals the present value of his income.Topic: Intertemporal Choice Correct Responses: 79Correct Answer: FalseDi culty: 1Discrimination Index: 2410.7 It would be a mistake to choose the investment that maximizes the present value of yourincome stream unless you planned to spend your entire wealth in the current time period.Topic: Intertemporal Choice Correct Responses: 33Correct Answer: FalseDi culty: 0Discrimination Index: 010.8 If the interest rate at which you can borrow is higher than the interest rate at which youcan lend, your budget for current and future consumption is still a convex set.Topic: Intertemporal Choice Correct Responses: 0Correct Answer: FalseDi culty: 2Discrimination Index: 010.9 If apples today are perfect substitutes for bananas today, then apples today must also beperfect substitutes for bananas tomorrow.Topic: Intertemporal Choice Correct Responses: 55Correct Answer: TrueDi culty: 2Discrimination Index: 610.10 Isaiah is a net borrower when the interest rate is 5 and a net saver when the interestrate is 25. An increase in the interest rate from 5 to 25 may make Isaiah worse o .Topic: Intertemporal Choice Correct Responses: 33Correct Answer: FalseDi culty: 2Discrimination Index: 1510.11 If the interest rate is less than the in ation rate, a rational person will never save money.TRUE-FALSETopic: Intertemporal Choice Correct Responses: 87Correct Answer: False179Di culty: 0Discrimination Index: 1310.12 An increase in the interest rate can make a utility-maximizing lender become a borrower.Topic: Intertemporal Choice Correct Responses: 56Correct Answer: FalseDi culty: 1Discrimination Index: 2610.13 The intertemporal budget constraint for a consumer can be expressed by setting the presentvalue of her lifetime consumption equal to the future value of her endowment.Topic: Intertemporal Choice Correct Responses: 0Correct Answer: FalseDi culty: 1Discrimination Index: 010.14 The nominal interest rate is 5 and the in ation rate is 6. A rational consumer will notchoose to save.Topic: Intertemporal Choice Correct Responses: 70Correct Answer: FalseDi culty: 1Discrimination Index: 2710.15 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: 79Correct Answer: TrueDi culty: 1Discrimination Index: 1310.16 If the nominal interest rate is 3 and if prices fall by 2 per year, then the real rate ofinterest is approximately 5.Topic: Intertemporal Choice Correct Responses: 79Correct Answer: TrueDi culty: 1Discrimination Index: 1310.17 If the nominal interest rate is 4 and if prices fall by 4 per year, then the real rate ofinterest is approximately 8.CHAPTER 10 Intertemporal ChoiceTopic: Intertemporal Choice Correct Responses: 73Correct Answer: False180Di culty: 1Discrimination Index: 3510.18 A utility maximizing consumer would not choose the investment that maximizes the presentvalue of her income stream unless she planned to spend her entire wealth in the rst period.Topic: Intertemporal Choice Correct Responses: 0Correct Answer: TrueDi culty: 2Discrimination Index: 010.19 Susan is a net borrower when the interest rate is 10 and a net saver when the interestrate is 20. A decrease in the interest rate from 20 to 10 may make Susan worse o .Topic: Intertemporal Choice Correct Responses: 0Correct Answer: FalseDi culty: 1Discrimination Index: 010.20 A newspaper article claims that more students are choosing 1 , year MBA programs insteadof 2 , year programs because the 2 , year programs no longer guarantee a well-paid job. If the lengthof your MBA program doesn't matter to employers, and you take a job right after completing yourMBA, the present value of your lifetime earnings is tbe the same whether you take a 1 , year or2 , year program.Topic: Intertemporal Choice Correct Responses: 0Correct Answer: TrueDi culty: 2Discrimination Index: 010.21 If the interest rate is 5 and will be 5 forever, the present value of an income streamconsisting of $10 a year paid to you on February 11 of every year, starting right now, is $210.Intertemporal ChoiceMultiple ChoiceTopic: Intertemporal Choice Correct Responses: 42Correct Answer: BDi culty: 3Discrimination Index: 1310.1 If current and future consumption are both normal goods, an increase in the interest ratewill 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: 24Correct Answer: ADi culty: 2Discrimination Index: 1910.2 Harvey Habit has a utility function U c ; c = minfc ; c g where c and c are his consump121212tion in periods 1 and 2 respectively. Harvey earns $189 in period 1 and he will earn $63 in period2. 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: 24Correct Answer: ADi culty: 2Discrimination Index: 1910.3 Harvey Habit has a utility function U c ; c = minfc ; c g where c and c are his consump121212tion in periods 1 and 2 respectively. Harvey earns $168 in period 1 and he will earn $105 in period2. 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 ChoiceTopic: Intertemporal Choice Correct Responses: 23Correct Answer: D182Di culty: 3Discrimination Index: 2110.4 O. B. Kandle will live for only two periods. In the rst period he will earn $100,000. Inthe second period he will retire and live on his savings. Mr. Kandle has a Cobb-Douglas utilityfunction U c1 ; c2 = c2 c2 where c1 is his period 1 consumption and c2 is his period 2 consumption.1The 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 sameamount 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: 0Correct Answer: BDi culty: 2Discrimination Index: 010.5 Suppose that a person can borrow and lend at an interest rate of 10 percent. But there is a5 rate of in ation and one has to pay an income tax of 30 on all interest income. If you borrowmoney, you can deduct interest as an expense. Where current consumption is on the horizontalaxis 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 CHOICETopic: Intertemporal Choice Correct Responses: 26Correct Answer: B183Di culty: 3Discrimination Index: 2210.6 For every two boxes of strawberries that she consumes, Millicent insists on having one pitcherof cream. She does not, however, insist on consuming the same amount every week. Her utilityfunction is U = minfs1 ; 2c1gminfs2 ; 2c2g where s1 and s2 are the number of boxes of strawberries sheconsumes this week and next week and c1 and c2 are the number of pitchers of cream she consumesthis week and next. Strawberries cost $2 a box and cream costs $1 a pitcher. She has a presentvalue of $100 to spend on these goods in the next two weeks. The weekly interest rate is 1. Howmany boxes of strawberries will she consume this week?a 10b 20c 22d 14.1e 6.06Topic: Intertemporal Choice Correct Responses: 0Correct Answer: ADi culty: 2Discrimination Index: 010.7 Roger's utility function is U = minfa ; a gminfb ; b g where a and a are the number of121212piano lessons he consumes this year and next and b1 and b2 are the number of ice skating lessonshe consumes this year and next. The price of piano lessons is $10 each and the price of ice skatinglessons is $4 each. The prices won't change, but the interest rate is 7. If Roger consumes 20piano lessons this year, how many ice-skating lessons will he consume next year?a 50b 20c 40d 30e There is not enough information for us to tell.CHAPTER 10 Intertemporal ChoiceTopic: Intertemporal Choice Correct Responses: 21Correct Answer: B184Di culty: 2Discrimination Index: 4810.8 If a consumer views a unit of consumption in period 1 as a perfect substitute one-for-onefor 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 inperiod 2 than in period 1.e equalize expenditures but not consumption in the two periods.Topic: Intertemporal Choice Correct Responses: 66Correct Answer: ADi culty: 2Discrimination Index: 3910.9 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: 51Correct Answer: ADi culty: 2Discrimination Index: 3210.10 Kenny Kink's utility function is uc ; c = minfc ; c g; where c is his consumption in pe12121riod 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 numberof 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 CHOICETopic: Intertemporal Choice Correct Responses: 0Correct Answer: D185Di culty: 2Discrimination Index: 010.11 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: 0Correct Answer: ADi culty: 1Discrimination Index: 110.12 If the real rate of interest is 8 and the nominal rate of interest is 28, then the rate ofin 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: 0Correct Answer: ADi culty: 1Discrimination Index: 110.13 If the real rate of interest is 5 and the nominal rate of interest is 31, then the rate ofin ation must be about pick the closest number:a 36.b 27.26.c 6.20.d 24.76.e 29 .CHAPTER 10 Intertemporal ChoiceTopic: Intertemporal Choice Correct Responses: 39Correct Answer: A186Di culty: 3Discrimination Index: 3610.14 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 cornwill be harvested. There is no trade with the rest of the world and no stocks of corn remain frombefore the rst period. Corn can be stored from one time period to the next, but rats eat 25of what is stored. The villagers all have Cobb-Douglas utility functions U C1 ; C2 = C1C2 and canallocate their own corn between consumption and storage as they wish. If the introduction of catsto 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: 26Correct Answer: BDi culty: 2Discrimination Index: 5310.15 Minnie has income : $300 in period 1 and will have income $625 in period 2. Her utility:function is U c1 ; c2 = c0 80c0 20 where c1 is her consumption in period 1 and c2 is her consumption12in period 2. The interest rate is 0.25. If she unexpectedly won a lottery which pays its prize inperiod 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 CHOICETopic: Intertemporal Choice Correct Responses: 26Correct Answer: B187Di culty: 2Discrimination Index: 5310.16 Heidi has income $500 in period 1 and will have income $625 in period 2. Her utility::function is U c1 ; c2 = c0 20c0 80 where c1 is her consumption in period 1 and c2 is her consumption12in period 2. The interest rate is 0.25. If she unexpectedly won a lottery which pays its prize inperiod 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: 29Correct Answer: EDi culty: 2Discrimination Index: 2610.17 Holly's utility function is U c ; c = c = + 0:87c = where c is her consumption in period1212112211 and c2 is her consumption in period 2. In period 2, her income is 2 times as large as her incomein period 1. At what interest rate will she choose to consume the same amount in period 2 as inperiod 1? Choose the closest answer.a 0.30b 0.08c 0.23d 0e 0.15Topic: Intertemporal Choice Correct Responses: 29Correct Answer: EDi culty: 2Discrimination Index: 2610.18 Linda's utility function is U c ; c = c = + 0:95c = where c is her consumption in period1212112211 and c2 is her consumption in period 2. In period 2, her income is 4 times as large as her incomein period 1. At what interest rate will she choose to consume the same amount in period 2 as inperiod 1? Choose the closest answer.a 0.20b 0.03c 0.08d 0e 0.05CHAPTER 10 Intertemporal ChoiceTopic: Intertemporal Choice Correct Responses: 58Correct Answer: B188Di culty: 2Discrimination Index: 3210.19 Will Wisp will live for exactly two periods. His utility function is U c ; c = c c where c12121is 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: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: 58Correct Answer: BDi culty: 2Discrimination Index: 3210.20 Will Wisp will live for exactly two periods. His utility function is U c ; c = c c where c12121is 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: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: 24Correct Answer: BDi culty: 0Discrimination Index: 2110.21 Peregrine consumes 700; 880 and earns 600; 990. If the interest rate is 0.10, the presentvalue of his endowment is:a 1,590.b 1,500.c 1,580.d 3,150.e 3,750.MULTIPLE CHOICETopic: Intertemporal Choice Correct Responses: 24Correct Answer: B189Di culty: 0Discrimination Index: 2110.22 Peregrine consumes 1; 200; 1; 080 and earns 600; 1; 800. If the interest rate is 0.20, thepresent 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: 69Correct Answer: BDi culty: 0Discrimination Index: 3910.23a Molly has income $400 in period 1 and income $600 in period 2. Her utility function isa,c1 c1 ; where a = 0:40 and the interest rate is 0.20. If her income in period 1 doubled and her2income in period 2 stayed the same, her consumption in period 1 would:a double.b increase by 160.c increase by 80d stay constant.e increase by 400.Topic: Intertemporal Choice Correct Responses: 69Correct Answer: BDi culty: 0Discrimination Index: 3910.24a Molly has income $600 in period 1 and income $230 in period 2. Her utility function isa,c1 c1 ; where a = 0:20 and the interest rate is 0.15. If her income in period 1 doubled and her2income in period 2 stayed the same, her consumption in period 1 would:a double.b increase by 120.c increase by 60d stay constant.e increase by 600.CHAPTER 10 Intertemporal ChoiceTopic: Intertemporal Choice Correct Responses: 0Correct Answer: B190Di culty: 0Discrimination Index: 010.25 Mr. O.B. Kandle has a utility function c c where c is his consumption in period 1 and c1212is his consumption in period 2. He will have no income in Period 2. If he had an income of 80,000in 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: 0Correct Answer: BDi culty: 0Discrimination Index: 010.26 Mr. O.B. Kandle has a utility function c c where c is his consumption in period 1 and c1212is his consumption in period 2. He will have no income in Period 2. If he had an income of 60,000in 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: 0Correct Answer: EDi culty: 0Discrimination Index: 010.27 Harvey Habit has a utility function U c ; c = minfc ; c g. If he had an income of 880 in1212period 1, and 1,320 in period 2, and if the interest rate were 0.20, how much would Harvey chooseto spend on bread in period 1?a 1,620b 360c 540d 2,160e 1,080MULTIPLE CHOICETopic: Intertemporal Choice Correct Responses: 0Correct Answer: E191Di culty: 0Discrimination Index: 010.28 Harvey Habit has a utility function U c ; c = minfc ; c g. If he had an income of 645 in1212period 1, and 860 in period 2, and if the interest rate were 0.15, how much would Harvey chooseto spend on bread in period 1?a 1,117.50b 248.33c 372.50d 1,490e 745Topic: Intertemporal Choice Correct Responses: 0Correct Answer: ADi culty: 0Discrimination Index: 010.29 In an isolated mountain village, the harvest this year is 3,000 and the harvest next yearwill be 1,100. The villagers all have utility functions U c1; c2 = c1c2 ; where c1 is consumption thisyear and c2 is consumption next year. Rats eat 10 of any grain that is stored for a year. Howmuch grain could the villagers consume next year if they consume 1000 bushels of grain this year?a 2,900b 1,800c 4,100d 4,350e 1,200CHAPTER 10 Intertemporal ChoiceTopic: Intertemporal Choice Correct Responses: 0Correct Answer: A192Di culty: 0Discrimination Index: 010.30 In an isolated mountain village, the harvest this year is 4,000 and the harvest next yearwill be 800. The villagers all have utility functions U c1 ; c2 = c1c2 ; where c1 is consumption thisyear and c2 is consumption next year. Rats eat 50 of any grain that is stored for a year. Howmuch grain could the villagers consume next year if they consume 1000 bushels of grain this year?a 2,300b 1,500c 4,800d 3,450e 900Topic: Intertemporal Choice Correct Responses: 16Correct Answer: CDi culty: 0Discrimination Index: 5510.31 Patience has a utility function U c ; c = c = + 0:80 c = ; c is her consumption in period1212112211 and c2 is her consumption in period 2. Her income in period 1 is 5 times as large as her incomein period 2. At what interest rate will she choose to consume the same amount in period 1 as inperiod 2?a 1.25b 0.13c 0.25d 0e 0.38MULTIPLE CHOICETopic: Intertemporal Choice Correct Responses: 16Correct Answer: C193Di culty: 0Discrimination Index: 5510.32 Patience has a utility function U c ; c = c = + 0:87 c = ; c is her consumption in period1212112211 and c2 is her consumption in period 2. Her income in period 1 is 6 times as large as her incomein period 2. At what interest rate will she choose to consume the same amount in period 1 as inperiod 2?a 0.90b 0.08c 0.15d 0e 0.23Topic: Intertemporal Choice Correct Responses: 0Correct Answer: CDi culty: 0Discrimination Index: 010.33 Samantha Smoothie's utility function is U c ; c = c c where c is her consumption in12121period 1 and c2 is her consumption in period 2. She earns $200 in period 1 and $220 in period2. Samantha can borrow and lend at an interest rate of 10 percent and there is no in ation. Thenumber of dollars that Samantha spends in the second period must bea 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: 0Correct Answer: BDi culty: 0Discrimination Index: 010.34 I am always indi erent between a unit of consumption today and tomorrow and the interestrate 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.Intertemporal ChoiceEssayTopic: Intertemporal Choice Correct Responses: 0Di culty: 2Discrimination Index: 010.1 Ophelia says "If I could lend money at the rates I must pay to borrow, I would. And if Icould borrow money at the rates I receive when I lend, I would again. But forsooth, although Ispend, I neither borrow nor lend." Contrary to common belief, Ophelia is entirely rational. Drawa diagram to show how Ophelia's remarks can be consistent with rational behavior and smoothconvex preferences if she pays a di erent interest rate when she borrows than she gets when shelends. Explain what happens in words.Answer: Ophelia's budget between current and future consumption is kinked at the point whereher consumption in each period equals her income. The highest indi erence curve to touch herbudget touches at the kink. The extensions of each of the lines that meet at the kink pass abovethis indi erence curve for a ways. These lines are the lines she could move along if she could borrowat the lending rate and lend at the borrowing rate, respectively.Topic: Intertemporal Choice Correct Responses: 0Di culty: 3Discrimination Index: 010.2 Patience has the utility function U c ; c = c = +2c = where c is her consumption in period1212112211 and c1 is her consumption in period 2. She will earn 100 units of the consumption good in period1 and 100 units of the consumption good in period 2. She can borrow or lend at an interest rateof 10. a Write an equation that describes Patience's budget. b If Patience neither borrows norlends, what will be her marginal rate of substitution between current and future consumption? cIf Patience does the optimal amount of borrowing or saving, what will be the ratio of her period 2consumption to her period 1 consumption?Answer: a c1 + c2=1:1 = 100 + 100=1:1. b2 c She will consume 4.84 times as much in period 2 asin period 1.Topic: Intertemporal Choice Correct Responses: 0Di culty: 2Discrimination Index: 010.3 Buzz is a chicken farmer. His earnings will be 100 this year and 100 next year. He can lendmoney at an interest rate of 20. Because of a subsidized loan program for chicken farmers he canborrow money at an interest rate of 10. No matter what he borrows or lends, his earnings willstill be 100 each year. a If he is not allowed to both borrow and lend, draw a graph showing hisbudget between consumption this year and consumption next year. Put numerical labels on thevertical and horizontal intercepts of the budget set. b Suppose that Buzz is allowed to borrow upto the present value of next year's earnings at 10 and is also allowed to make loans. Draw Buzz'sbudget constraint in this case.Answer: a Budget line is kinked at 100; 100. Vertical intercept is 220. Horizontal intercept is100 + 100=1:1. b Budget constraint is a straight line with slope ,1:2 passing through horizontalintercept of previous budget line.ESSAYTopic: Intertemporal Choice Correct Responses: 0195Di culty: 2Discrimination Index: 010.4 Ymir Larson farms near Ni eheim, Minnesota. He works 80 hours a week. He can eithergrow rutabagas or pigs. Every hour that he spends growing rutabagas gives him $2 of income thisyear. Every hour that he spends with the pigs this year will add $4 to his income next year. Infact, next year's weekly income will be 100 + 4H dollars where H is the number of hours he spendswith the pigs this year. Ymir's utility function is U c1; c2 = minfc1; c2g where c1 and c2 are hisconsumption expenditures this year and next year. Ymir doesn't believe in banks and will neitherlend 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 Howmuch 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 from160; 100 to the horizontal axis. b10 c170Topic: Intertemporal Choice Correct Responses: 0Di culty: 2Discrimination Index: 010.5 Luella has to pay an interest rate of 50 to borrow. She only gets an interest rate of 5 ifshe lends. She is currently endowed with $1000 in period 1 and $1050 in period 2. She considerstwo alternative investment projects. She can only choose one of them. For project A she wouldHAVE TO PAY $500 in period 1 and would BE PAID BACK $630 in period 2. For project B; shewould BE PAID $500 in period 1 and would HAVE TO PAY BACK $525 in period 2. a Diagramher budget set if she chooses project A. Also show her budget if she chooses project B . b If sheneither 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 thatshe should choose A. d With di erent preferences might she choose B ?Answer: b B,A d yesTopic: Intertemporal Choice Correct Responses: 0Di culty: 2Discrimination Index: 010.6 In an isolated peasant village, the only crop is corn. Good harvests alternate with badharvests. This year the harvest will be 1000 bushels. Next year it will be 150 bushels. There isno trade with the outside world. Corn can be stored, but rats will eat 25 of what is stored in ayear. The villagers have the Cobb-Douglas utility function U c1; c2 = c1c2 where c1 is consumptionthis year and c2 is consumption next year. a Draw a budget line for the village with this year'sconsumption on the horizontal axis and next year's consumption on the vertical axis. On yourgraph show the quantities at which the budget line intercepts the vertical and horizontal axes. bHow much will the villagers consume this year? c How much will the rats eat? d How much willthe villagers consume next year?Answer: b600 c100 d450Chapter 11True-FalseTopic: Asset Markets Correct Responses: 74Correct Answer: FalseDi culty: 1Discrimination Index: 26Asset Markets11.1 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: 88Correct Answer: FalseDi culty: 1Discrimination Index: 2311.2 The interest rate is 6 and there is no in ation. A bond is available that can be redeemedeither after one year or after two years. If it is redeemed after one year, the investor gets $106. Ifit is redeemed after two years, the investor gets $109.18. The investor gets no other payments thanwhat she receives when she redeems the bond. In equilibrium, investors will be willing to pay morethan $100 for this bond.Topic: Asset Markets Correct Responses: 88Correct Answer: FalseDi culty: 1Discrimination Index: 2311.3 The interest rate is 10 and there is no in ation. A bond is available that can be redeemedeither after one year or after two years. If it is redeemed after one year, the investor gets $110. Ifit is redeemed after two years, the investor gets $112.20. The investor gets no other payments thanwhat she receives when she redeems the bond. In equilibrium, investors will be willing to pay morethan $100 for this bond.Topic: Asset Markets Correct Responses: 83Correct Answer: FalseDi culty: 1Discrimination Index: 2911.4 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: 83Correct Answer: TrueDi culty: 1Discrimination Index: 3811.5 A consumer who can borrow and lend at the same interest rate should prefer an endowmentwith a higher present value to an endowment with a lower present value, no matter how he plansto allocate consumption over the course of his life.TRUE-FALSETopic: Asset Markets Correct Responses: 99Correct Answer: True197Di culty: 1Discrimination Index: 711.6 If everybody has the same information, then a well-functioning market for assets would, inequilibrium, leave no opportunities for arbitrage.Topic: Asset Markets Correct Responses: 79Correct Answer: FalseDi culty: 1Discrimination Index: 3311.7 Suppose that the cost of cutting down a tree is zero and the tree grows on land that isuseless 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 andthe interest rate is maximized.Topic: Asset Markets Correct Responses: 35Correct Answer: TrueDi culty: 2Discrimination Index: 011.8 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 ,,evenif the amount that wine-drinkers are willing to pay for it does not rise at a constant rate.Asset MarketsMultiple ChoiceTopic: Asset Markets Correct Responses: 94Correct Answer: ADi culty: 2Discrimination Index: 1711.1 Vincent Smudge's paintings are unappreciated now. Nobody is willing to pay anything tohave 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 continueto be willing to do so ever after. If investors realize that this is the case, and if the interest rate isand 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: 82Correct Answer: CDi culty: 1Discrimination Index: 4211.2 If the interest rate is r and will remain r forever, then a bond that will pay 25 dollars a yearforever, starting 1 year from now, is worth how much today?a 25=1 + rb 251 + rc 25=rd 25=1 + r + r2 + ::: + rn + :::e None of the above.MULTIPLE CHOICETopic: Asset Markets Correct Responses: 82Correct Answer: C199Di culty: 1Discrimination Index: 4211.3 If the interest rate is r and will remain r forever, then a bond that will pay 70 dollars a yearforever, starting 1 year from now, is worth how much today?a 70=1 + rb 701 + rc 70=rd 70=1 + r + r2 + ::: + rn + :::e None of the above.Topic: Asset Markets Correct Responses: 46Correct Answer: BDi culty: 2Discrimination Index: 4211.4 If the nominal interest rate is 80 and the rate of in ation is 50, then the exact real rateof interest is:a 10.b 20.c 30.d 40.e None of the above.Topic: Asset Markets Correct Responses: 68Correct Answer: CDi culty: 1Discrimination Index: 3811.5 The interest rate is 10. A certain piece of land can be used either for a parking lot, inwhich case there are no construction costs and it will yield a net return of $5,000 per year foreverstarting one year from now. Or it can have a house built on it. Building a house would cost $50,000now. If a house is built on the lot, it will yield a stream of net income equal to $12,000 per yearstarting one year from now. No other uses are contemplated. The theory of asset markets marketspredicts 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 MarketsTopic: Asset Markets Correct Responses: 72Correct Answer: D200Di culty: 1Discrimination Index: 3911.6 Today is January 1. The interest rate is 8 and investors are convinced that it will stay at8 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 $3,120b $2,160c $1,600d $2,000e $2,780Topic: Asset Markets Correct Responses: 40Correct Answer: ADi culty: 2Discrimination Index: 6811.7 The interest rate will be 10 for one more year, but a year from now, it will fall to 5and stay at 5 forever. What is the market value of an investment that is sure to pay $440 a yearforever, starting two years from today?a $8,000b $8,800c $4,000d $4,400e $9,000MULTIPLE CHOICETopic: Asset Markets Correct Responses: 40Correct Answer: A201Di culty: 2Discrimination Index: 6811.8 The interest rate will be 10 for one more year, but a year from now, it will fall to 5and stay at 5 forever. What is the market value of an investment that is sure to pay $440 a yearforever, starting two years from today?a $8,000b $8,800c $4,000d $4,400e $9,000Topic: Asset Markets Correct Responses: 28Correct Answer: BDi culty: 2Discrimination Index: 2411.9 A certain wine costs $3 a bottle to produce. It improves in taste if stored properly for aperiod 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 yearfor the next 50 years. Storage costs, not including interest, are $.50 per year. If the interest rateis 5 and it is kept by rational investors, how old will it be when it is drunk and what will be itsprice 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 MarketsTopic: Asset Markets Correct Responses: 0Correct Answer: B202Di culty: 2Discrimination Index: 011.10 The amount people are willing to pay to drink a bottle of a certain certain vintage of winewhen it is t years old is $2 + 3t. It costs $.50 a bottle per year to store this wine. The interest rateis 5. If the annual cost of storing the wine rises to $1, what will be the e ect on the price ofthis 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: 13Correct Answer: DDi culty: 2Discrimination Index: 2611.11 You buy a painting for $1280. Its market value will rise by $80 per year for the next 30years. It is worth $80 a year to you to have it hanging on the wall. The interest rate is 10. Inhow many years will you sell it?a 30b immediatelyc 8d 4e 5MULTIPLE CHOICETopic: Asset Markets Correct Responses: 84Correct Answer: D203Di culty: 3Discrimination Index: 2411.12 Art Dreck's paintings are terribly unpopular now. In fact nobody would pay a dime tohave one of his paintings on the wall now. But experts believe that 10 years from now there willbe a craze for Dreck paintings. The craze will last for 2 years and then nobody will ever want tosee a Dreck again. During this 2 year period, people will be willing to pay $1,100 a year to havean original Dreck on the wall. The interest rate is r. If the experts' belief is widely held amonginvestors, 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: 65Correct Answer: BDi culty: 2Discrimination Index: 011.13 A large subterranean pool of oil lies in a remote region of Ohio. Oil companies haveexplored this region and know how much oil there is. They have purchased the rights to drilland extract oil when they wish to do so. Because of the extremely forbidding geography and thesavagery of the natives, the companies have decided to postpone extraction until the price of oil ishigher. 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 MarketsTopic: Asset Markets Correct Responses: 83Correct Answer: D204Di culty: 1Discrimination Index: 2311.14 The interest rate is 10 and will remain so forever. You do not drink wine but areinterested in buying some for investment purposes. Assume that there are no transactions costs orstorage costs and a certain bottle of wine will be worth $44 one year from now, $50 two years fromnow, and $61, three years from now. After that it turns to worthless vinegar. How much shouldyou be willing to pay for a bottle? Pick the closest answer.a 40b 41.32c 50.86d 45.83e 49.47Topic: Asset Markets Correct Responses: 83Correct Answer: DDi culty: 1Discrimination Index: 2311.15 The interest rate is 10 and will remain so forever. You do not drink wine but areinterested in buying some for investment purposes. Assume that there are no transactions costs orstorage costs and a certain bottle of wine will be worth $22 one year from now, $28 two years fromnow, and $35, three years from now. After that it turns to worthless vinegar. How much shouldyou be willing to pay for a bottle? Pick the closest answer.a 20b 23.14c 31.32d 26.30e 32.29MULTIPLE CHOICETopic: Asset Markets Correct Responses: 0Correct Answer: B205Di culty: 2Discrimination Index: 011.16 Suppose that a dispute in the Persian Gulf halts the sale of oil from Persian Gulf for 1year. At the same time an important new oil eld is found in a place where nobody expected thereto be oil. What does economic theory predict will be the e ect on the future price of oil to bedelivered 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, andfall otherwise.Topic: Asset Markets Correct Responses: 65Correct Answer: CDi culty: 2Discrimination Index: 011.17 Bank 1 o ers a deal on deposits of $1000 or more. You must leave your money in the bankfor 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 iseven 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 3years, you can take your money out of either bank and do what you want with it. Both bankscompound 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 MarketsTopic: Asset Markets Correct Responses: 65Correct Answer: C206Di culty: 2Discrimination Index: 011.18 Bank 1 o ers a deal on deposits of $1000 or more. You must leave your money in the bankfor 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 iseven 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 3years, you can take your money out of either bank and do what you want with it. Both bankscompound 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: 19Correct Answer: EDi culty: 2Discrimination Index: 4011.19 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 thanat a bank.c you will necessarily consume less this period than you would if the rate of in ation were less than theinterest rate.d you will necessarily consume more this period than you would if the rate of in ation were less than theinterest rate.e None of the above.MULTIPLE CHOICETopic: Asset Markets Correct Responses: 77Correct Answer: D207Di culty: 2Discrimination Index: 4111.20 A zero coupon bond is a bond that pays no return until it comes due and then pays theholder of the bond its face value. Suppose that a $1,000, zero coupon bond will come due onJanuary 1, 2010. If the interest rate is 5 and will remain 5 forever, what will this bond beworth on January 1, 1995?a 1; 000=0:05b 1; 000=0:0515c 1; 000 + 1; 000=15d 1; 000=1:0515e None of the above.Topic: Asset Markets Correct Responses: 77Correct Answer: DDi culty: 2Discrimination Index: 4111.21 A zero coupon bond is a bond that pays no return until it comes due and then pays theholder of the bond its face value. Suppose that a $4,000, zero coupon bond will come due onJanuary 1, 2010. If the interest rate is 10 and will remain 10 forever, what will this bond beworth on January 1, 1995?a 4; 000=0:10b 4; 000=0:1015c 4; 000 + 4; 000=15d 4; 000=1:1015e None of the above.Topic: Asset Markets Correct Responses: 80Correct Answer: CDi culty: 1Discrimination Index: 2011.22 The sum of the terms of the in nite geometric series, 1, 0.98, 0:98 ; 0:98 ;..., is closest towhich of the following numbers?a in nityb 1.98c 50d 0.51e 102.0423CHAPTER 11 Asset MarketsTopic: Asset Markets Correct Responses: 80Correct Answer: C208Di culty: 1Discrimination Index: 2011.23 The sum of the terms of the in nite geometric series, 1, 0.95, 0:95 ; 0:95 ;..., is closest to2which of the following numbers?3a in nityb 1.95c 20d 0.51e 105.26Topic: Asset Markets Correct Responses: 32Correct Answer: ADi culty: 2Discrimination Index: 4611.24 Ashley, from your workbook, has discovered another wine, Wine D. Wine drinkers arewilling to pay 70 dollars to drink it right now. The amount that wine drinkers are willing to paywill rise by 10 dollars each year that the wine ages. The interest rate is 10. How much wouldAshley be willing to pay for the wine if he buys it as an investment? Pick the closest answer.a 75b 70c 100d 770e 91Topic: Asset Markets Correct Responses: 32Correct Answer: ADi culty: 2Discrimination Index: 4611.25 Ashley, from your workbook, has discovered another wine, Wine D. Wine drinkers arewilling to pay 160 dollars to drink it right now. The amount that wine drinkers are willing to paywill rise by 20 dollars each year that the wine ages. The interest rate is 10. How much wouldAshley be willing to pay for the wine if he buys it as an investment? Pick the closest answer.a 165b 160c 200d 1,760e 191MULTIPLE CHOICETopic: Asset Markets Correct Responses: 42Correct Answer: A209Di culty: 2Discrimination Index: 1811.26 Shivers' annual fuel bill for home heating is 1,000 dollars per year. He considers threealternative plans for insulating his house. Plan A will reduce his annual fuel bill by 15, plan Bwill reduce it by 20, and plan C will eliminate his need for heating fuel altogether. The Plan Ainsulation job would cost Shivers 1,000 dollars, Plan B would cost him 1,900 dollars and Plan Cwould cost him 11,000 dollars. If the interest rate is 10 and his house and the insulation job lastforever, 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: 42Correct Answer: ADi culty: 2Discrimination Index: 1811.27 Shivers' annual fuel bill for home heating is 800 dollars per year. He considers threealternative plans for insulating his house. Plan A will reduce his annual fuel bill by 15, plan Bwill reduce it by 20, and plan C will eliminate his need for heating fuel altogether. The PlanA insulation job would cost Shivers 800 dollars, Plan B would cost him 1,400 dollars and Plan Cwould cost him 8,800 dollars. If the interest rate is 10 and his house and the insulation job lastforever, 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 MarketsTopic: Asset Markets Correct Responses: 80Correct Answer: D210Di culty: 2Discrimination Index: 3711.28 The price of an antique is expected to rise by 10 during the next year. The interest rateis 13. You are thinking of buying an antique and selling it a year from now. You would be willingto pay a total of 1,000 dollars for the pleasure of owning the antique for a year. How much wouldyou be willing to pay to buy this antique?a 7,692.31b 21,000c 1,000d 33,333.33e 10,000Topic: Asset Markets Correct Responses: 80Correct Answer: DDi culty: 2Discrimination Index: 3711.29 The price of an antique is expected to rise by 4 during the next year. The interest rateis 7. You are thinking of buying an antique and selling it a year from now. You would be willingto pay a total of 400 dollars for the pleasure of owning the antique for a year. How much wouldyou be willing to pay to buy this antique?a 5,714.29b 8,400c 400d 13,333.33e 4,000MULTIPLE CHOICETopic: Asset Markets Correct Responses: 70Correct Answer: A211Di culty: 2Discrimination Index: 3711.30 A bond has a face value of 4,000 dollars. It will pay 400 dollars in interest at the end ofevery year for the next 41 years. At the time of the last interest payment, 41 years from now, thecompany that issued the bond will redeem the bond at face value". That is, the company will buyback the bond from its owner at a price equal to the face value of the bond. If the interest rate is 10and is expected to remain at 10, how much would a rational investor pay for this bond right now?a 4,000b 20,400c 16,400d more than any of the above numberse less than any of the above numbersTopic: Asset Markets Correct Responses: 70Correct Answer: ADi culty: 2Discrimination Index: 3711.31 A bond has a face value of 6,000 dollars. It will pay 600 dollars in interest at the end ofevery year for the next 50 years. At the time of the last interest payment, 50 years from now, thecompany that issued the bond will redeem the bond at face value". That is, the company will buyback the bond from its owner at a price equal to the face value of the bond. If the interest rate is 10and is expected to remain at 10, how much would a rational investor pay for this bond right now?a 6,000b 36,000c 30,000d more than any of the above numberse less than any of the above numbersCHAPTER 11 Asset MarketsTopic: Asset Markets Correct Responses: 68Correct Answer: A212Di culty: 0Discrimination Index: 3411.32 If the interest rate is 7, and will remain 7 forever, how much would a rational investorbe willing to pay for an asset that will pay him 5,350 dollars one year from now, 1,144 dollars twoyears from now, and nothing at any other time?a 6,000b 5,000c 85,714.29d 48,000e 7,000Topic: Asset Markets Correct Responses: 68Correct Answer: ADi culty: 0Discrimination Index: 3411.33 If the interest rate is 15, and will remain 15 forever, how much would a rational investorbe willing to pay for an asset that will pay him 3,450 dollars one year from now, 1,322 dollars twoyears from now, and nothing at any other time?a 4,000b 3,000c 26,666.67d 64,000e 5,000Topic: Asset Markets Correct Responses: 0Correct Answer: BDi culty: 0Discrimination Index: 011.34 The interest rate is 10 percent and is expected to stay constant at that level forever. Thepresent discounted value of $50,000 a year forever STARTING TODAY isa $500,000b $550,000c $ in nityd $1 millione $45,454.45Asset MarketsEssayTopic: Asset Markets Correct Responses: 0Di culty: 2Discrimination Index: 011.1 The interest rate is 10 and will remain 10 forever. Suppose that you do not drink winebut are interested in buying it for investment purposes. How much would you be willing to pay foreach of the following? i A bottle of wine that will be worth $22 a year from now and will then gobad and be worthless. ii A bottle of wine that will be worth $22 a year from now and will rise invalue 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 $1per year on a $22 bottle of wine is not a high enough rate of return for anyone to want to hold itanother year.Topic: Asset Markets Correct Responses: 0Di culty: 3Discrimination Index: 011.2 A certain wine costs $3 a bottle to produce. The amount that people are willing to pay todrink it t years after it has been bottled is $2 + 3t. Storage costs, not including interest, are $.50per year. If the interest rate is 5, how much would a rational investor be willing to pay for it atthe time it is bottled? Explain how you get your answer. Feel free to write formulas for presentvalue 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 valueof paying $.50 a year for 16 years. This is the cost of paying $.50 a year forever, starting now minusthe cost of paying $.50 a year forever starting in 16 years or $:501=r1 , 1=1 + r16.Topic: Asset Markets Correct Responses: 0Di culty: 2Discrimination Index: 011.3 Suppose that the cost of personal computers falls by 20 per year. To make this problemrelatively easy, we will assume that their quality does not change and that computers never wearout. 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 thecost to you of having it is approximately the di erence between the price of a computer at thebeginning of the year and the price at the end of the year. If the value to you is V and the currentprice is P; you buy if V :2P . Otherwise you wait. Eventually, :2P will be smaller than V . Thenyou buy.CHAPTER 11 Asset MarketsTopic: Asset Markets Correct Responses: 0214Di culty: 2Discrimination Index: 011.4 According to a recent story in the New York Times, the South African gold strike has beencosting South African mining companies about $7.5 million per day. Assuming that this numberis the value of the gold that was not mined because of the strike, minus the labor costs and otheroperating 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 gurethat was reached would be the cost if the gold that would have been mined had somehow beendestroyed by the strike. The actual costs would be more closely measured by the interest cost ofpostponement of the net revenues from the gold mines until the strike is settled.Chapter 12UncertaintyTrue-FalseTopic: Uncertainty Correct Responses: 0Correct Answer: FalseDi culty: 1Discrimination Index: 012.1 Of any two gambles, no matter what their expected returns, a risk-averter will choose theone with the smaller variance.Topic: Uncertainty Correct Responses: 0Correct Answer: TrueDi culty: 2Discrimination Index: 012.2 An expected utility maximizer's preferences between two bundles contingent on Event 1happening must be independent of what he will get if Event 2 happens.Topic: Uncertainty Correct Responses: 0Correct Answer: TrueDi culty: 1Discrimination Index: 012.3 If someone has strictly convex preferences between all contingent commodity bundles, thenhe or she must be risk averse.Topic: Uncertainty Correct Responses: 0Correct Answer: TrueDi culty: 1Discrimination Index: 012.4 Wilma is not risk averse. She is o ered a chance to pay $10 for a lottery ticket that willgive her a prize of $100 with probability .06, a prize of $50 with probability .1, and no prize withprobability .85. If she understands the odds and makes no mistakes in calculation, she will buy thelottery ticket.Topic: Uncertainty Correct Responses: 91Correct Answer: FalseDi culty: 1Discrimination Index: 1512.5 If Paul is risk-loving and his basketball team has a probability of .5 of winning, then Paulwould rather bet $10 on his team than $100. When Paul bets X; he wins X if his team wins andloses X if his team loses.CHAPTER 12 UncertaintyTopic: Uncertainty Correct Responses: 70Correct Answer: False216Di culty: 1Discrimination Index: 012.6 If the price of insurance goes up, people will become less risk-averse.Topic: Uncertainty Correct Responses: 0Correct Answer: FalseDi culty: 2Discrimination Index: 012.7 A consumer has a von Neumann-Morgenstern utility function of the form U cA; cB ; pA; pB =pA vcA + pB vcB where pA and pB are the probabilities of events A and B and where cA and cBare consumptions contingent on events A and B respectively. This consumer must be a risk loverif v is an increasing function.UncertaintyMultiple ChoiceTopic: Uncertainty Correct Responses: 37Correct Answer: EDi culty: 2Discrimination Index: 3812.1 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: 0Correct Answer: BDi culty: 3Discrimination Index: 012.2 Timmy Qualm's uncle gave him a lottery ticket. With probability 1=2 the ticket will beworth $100 and with probability 1=2 it will be worthless. Let x be Timmy's wealth if the lotteryticket is a winner and y his wealth if it is a loser. Timmy's preferences over alternative contingentcommodity bundles are represented by the utility function U x; y = minf2x , y; 2y , xg. He has norisks 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 aboutwhether 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 UncertaintyTopic: Uncertainty Correct Responses: 0Correct Answer: D218Di culty: 2Discrimination Index: 012.3 There are two events, 1 and 2. The probability of event 1 is p and the probability of event2 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 to1,000.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 expectednet winnings.e None of the above.Topic: Uncertainty Correct Responses: 0Correct Answer: EDi culty: 2Discrimination Index: 012.4 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 NeumanMorgenstern utility U W equal to the square root of W . What is the maximum amount thatSocrates would be willing to pay in order to be fully insured against the risk of losing his ship?a $4 millionb $2 millionc $3.84 milliond $4.82 millione $5.96 millionMULTIPLE CHOICETopic: Uncertainty Correct Responses: 0Correct Answer: C219Di culty: 2Discrimination Index: 012.5 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, U W =1 , 6; 000=W where W is his wealth. Buck's total wealth is $24,000. With probability .2 the palacewill 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 besu cient to make Buck want to invest in the pinball palace rather than have a wealth of $24,000with certainty?a $28,500b $150,000c $96,000d $72,000e $30,000Topic: Uncertainty Correct Responses: 0Correct Answer: CDi culty: 2Discrimination Index: 012.6 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, U W =1 , 5; 000=W where W is his wealth. Buck's total wealth is $20,000. With probability .2 the palacewill 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 besu cient to make Buck want to invest in the pinball palace rather than have a wealth of $20,000with certainty?a $23,750b $125,000c $80,000d $60,000e $25,000CHAPTER 12 UncertaintyTopic: Uncertainty Correct Responses: 0Correct Answer: C220Di culty: 2Discrimination Index: 012.7 Oskar's preferences over gambles in which the probability of events 1 and 2 are both 1=2::can be represented by the von Neuman-Morgenstern utility function :5y15 + :5y25 where y1 is hisconsumption if event 1 happens and y2 is his consumption if event 2 happens. A gamble thatallows him a consumption of 9 if event 1 happens and 25 if event 2 happens is exactly as good forOskar 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: 0Correct Answer: ADi culty: 2Discrimination Index: 012.8 Mabel and Emil were contemplating marriage. They got to talking. Mabel said that shealways acted according to the expected utility hypothesis, where she tried to maximize the expectedvalue of the log of her income. Emil said that he too was an expected utility maximizer, but hetried 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 incomeis 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 CHOICETopic: Uncertainty Correct Responses: 0Correct Answer: E221Di culty: 1Discrimination Index: 012.9 Ronald has $18,000. But he is forced to bet it on the ip of a fair coin. If: he wins he has:$36,000. If he loses he has nothing. Ronald's expected utility function is :5x 5 + :5y 5 where x is hiswealth if heads comes up and y is his wealth if tails comes up. Since he must make this bet, he isexactly 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: 0Correct Answer: ADi culty: 1Discrimination Index: 012.10 Gary likes to gamble. Donna o ers to bet him $70 on the outcome of a boat race. IfGary's boat wins, Donna would give him $70. If Gary's boat does not win, Gary would give her$70. Gary's utility function is U c1 ; c2; p1; p2 = p1c2 + p2c2 where p1 and p2 are the probabilities of12events 1 and 2 and where c1 and c2 are his consumption if events 1 and 2 occur respectively. Gary'stotal 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 hisexpected utility.e The information given in the problem is self-contradictory.CHAPTER 12 UncertaintyTopic: Uncertainty Correct Responses: 0Correct Answer: A222Di culty: 3Discrimination Index: 012.11 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 canbuy a coupon that will pay $10 if Flanagan wins and nothing otherwise. Clancy doesn't agree withthese odds. He thinks that the two ghters each have a probability of 1=2 of winning. If he is anexpected utility maximizer who tries to maximize the expected value of ln W where ln W is thenatural 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: 0Correct Answer: EDi culty: 3Discrimination Index: 012.12 Diego has $6,400. He plans to bet on a soccer game. Team A is a favorite to win. Assumeno ties can occur. For $.80 one can buy a ticket that will pay $1 if team A wins and nothing ifB wins. For $.20 one can buy a ticket that pays $1 if team B wins and nothing if A wins. Diegothinks the two teams are equally likely to win. He buys tickets so as to maximize the expectedvalue of ln W the natural log of his wealth. After he buys his tickets, team A loses a star playerand the ticket price moves to $.50 for either team. Diego buys some new tickets and sells someof his old ones. The game is then played and team A wins. How much wealth does he end up with?a $5,000b $15,000c $6,400d $8,400e $10,000MULTIPLE CHOICETopic: Uncertainty Correct Responses: 64Correct Answer: C223Di culty: 1Discrimination Index: 4012.13 Joe's wealth is $100 and he is= an expected utility maximizer with a von Neumann-Morgenstern utility function U W = W 1 2 . Joe is afraid of oversleeping his econ exam. He guresthere is only a 1 in 10 chance that he will, but if he does, it will cost him $100 in fees to theuniversity for taking an exam late. Joe's neighbor, Mary, never oversleeps. She o ers to wake him1 hour before the test, but he must pay her for this service. What is the most that Joe would bewilling to pay for this wake-up service?a $10b $15c $19d $100e $50Topic: Uncertainty Correct Responses: 68Correct Answer: ADi culty: 2Discrimination Index: 3912.14 Portia has waited a long time for her ship to come in and she has concluded that it willarrive 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 functionequal to the square root of her total income. What is the minimum price at which she would sellthe rights to her ship?a 1b 2c 21=2d 4e None of the above.CHAPTER 12 UncertaintyTopic: Uncertainty Correct Responses: 57Correct Answer: B224Di culty: 1Discrimination Index: 3112.15 Harley's current wealth is $600, but there is a .25 probability that he will lose $100. Harleyis 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 thisinsurance.e Harley would not be wiling to pay more than $16.66 for this insurance.Topic: Uncertainty Correct Responses: 0Correct Answer: BDi culty: 2Discrimination Index: 012.16 After graduating, Sallie Handshake's best job o er will either be with a Big , 8 accountingrm 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 hasits costs. If S is represents her amount of studying where S = 0 is no study and S = 1 is all-oute ort, her probability of getting the job with a Big , 8 rm just equals S . Her utility depends onhow hard she studies and her subsequent annual income Y . She tries to maximize the expectedvalue of the von Neuman-Morgenstern utility function U S; Y = Y 1=2 , 400S 2 . If she chooses S tomaximize her expected utility, how much will she study?a S = :1b S = :25c S = :5d S = :75e S = :9MULTIPLE CHOICETopic: Uncertainty Correct Responses: 0Correct Answer: D225Di culty: 3Discrimination Index: 012.17 Every dollar invested in Safe Sox will yield two dollars for sure. Each dollar invested inWobbly 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 theexpected value of the natural logarithm of the total yield on her investments. If S is the amountof money that she invests in Safe Sox and $10; 000 , S the amount that she invests in WobblyUmbrellas, what should S be to maximize her expected utility? Pick the closest answer.a $1,111b $3,333c $5,000d $6,667e $9,111Topic: Uncertainty Correct Responses: 47Correct Answer: ADi culty: 2Discrimination Index: 6012.18 Billy Pigskin from your workbook has a von Neumann-Morgenstern utility function U c ==c1 2. If Billy is not injured this season, he will receive an income of 16 million dollars. If he isinjured, his income will be only $10,000. The probability that he will be injured is .1 and theprobability that he will not be injured is .9. His expected utility isa 3,610b between 15 million and 16 million.c 100,000.d 7,220e 14,440CHAPTER 12 UncertaintyTopic: Uncertainty Correct Responses: 47Correct Answer: A226Di culty: 2Discrimination Index: 6012.19 Billy Pigskin from your workbook has a von Neumann-Morgenstern utility function U c ==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 probabilitythat he will not be injured is .9. His expected utility isa 2,710b between 8 million and 9 million.c 100,000.d 5,420e 10,840Topic: Uncertainty Correct Responses: 0Correct Answer: BDi culty: 0Discrimination Index: 012.20 Willy's only source of wealth is his chocolate factory. He has the utility function pcf= +121 , pc1=2 where p is the probability of a ood, 1 , p is the probability of no ood and where cf andnfcn f are his wealth contingent on a ood and on no ood, respectively. The probability of ood isp = 1=10. The value of Willy's factory is $300,000 if there is no ood and 0 if there is a ood. Willycan 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 whatit 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 samewhether 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 whatit 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 whatit would be if there is no ood.MULTIPLE CHOICETopic: Uncertainty Correct Responses: 0Correct Answer: B227Di culty: 0Discrimination Index: 012.21 Willy's only source of wealth is his chocolate factory. He has the utility function pcf= +12=1 , pcnf where p is the probabilitycn f are his wealth contingent on aof a ood, 1 , p is the probability of no ood and where cf andood and on no ood, respectively. The probability of ood isp = 1=16. The value of Willy's factory is $600,000 if there is no ood and 0 if there is a ood. Willycan 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:12a 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 whatit 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 samewhether 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 whatit 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 whatit would be if there is no ood.Topic: Uncertainty Correct Responses: 0Correct Answer: CDi culty: 0Discrimination Index: 012.22 Sally Kink is an expected utility maximizer with utility function puc +1 , puc where12for 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 positiveexpected 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 UncertaintyTopic: Uncertainty Correct Responses: 0Correct Answer: C228Di culty: 0Discrimination Index: 012.23 Sally Kink is an expected utility maximizer with utility function puc +1 , puc where12for 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 positiveexpected 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: 0Correct Answer: ADi culty: 0Discrimination Index: 012.24Pablo's expected utility function is pc1=2 + 1 , pc1=2 where p is the probability that he consumes12c1 and 1 , p is the probability that he consumes c2 . Wilbur is o ered a choice between getting asure 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 Zb Zc Zd Ze Z5; 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 CHOICETopic: Uncertainty Correct Responses: 0Correct Answer: A229Di culty: 0Discrimination Index: 012.25Roger's expected utility function is pc1=2 +1 , pc1=2 where p is the probability that he consumes c112and 1 , p is the probability that he consumes c2. Wilbur is o ered a choice between getting a surepayment of $Z or a lottery in which he receives $900 with probability 0.80 and he receives $10,000with probability 0.20. Wilbur will choose the sure payment if:a Zb Zc Zd Ze Z1; 936 and the lottery if Z1; 418 and the lottery if Z10; 000 and the lottery if Z5; 968 and the lottery if Z2; 720 and the lottery if ZTopic: Uncertainty Correct Responses: 0Correct Answer: B1; 936.1; 418.10; 000.5; 968.2; 720.Di culty: 0Discrimination Index: 012.26 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 ndsin 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 isa risk averter who tries to maximize the expected value of the natural log of his wealth. Which ofthe 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 UncertaintyTopic: Uncertainty Correct Responses: 0Correct Answer: B230Di culty: 0Discrimination Index: 012.27 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 ndsin 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 isa risk averter who tries to maximize the expected value of the natural log of his wealth. Which ofthe 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: 0Correct Answer: CDi culty: 0Discrimination Index: 012.28 Tom Cruiser's car is worth $100,000. But Tom is careless and leaves the top down andthe keys in the ignition. Consequently his car will be stolen with probability .5. If it is stolen hewill never get it back. Tom has $100,000 in other wealth and his von Neumann-Morgenstern utilityfunction 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.UncertaintyEssayTopic: Uncertainty Correct Responses: 0Di culty: 2Discrimination Index: 012.1 Gaston Gourmand loves good food. Due to an unusual ailment, he has a probability of 1=4of losing his sense of smell, which would greatly reduce his enjoyment of food. Gaston nds aninsurance 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 ofsmell and gets x dollars if he doesn't. Gaston says, "Money will be only half as important to me ifI lose my sense of smell." If we look at his expected utility function, we see what he means. Wherec1 is his consumption if he retains his sense of smell and c2 is his income if he loses his sense ofsmell, Gaston has the expected utility function U c1 ; c2 = 3=4c1=2 + 1=8c1=2. What insurance should12he buy?Answer: Negative insurance so that his wealth is 4 times as large if he doesn't lose his smell thanif he does.Topic: Uncertainty Correct Responses: 0Di culty: 2Discrimination Index: 012.2 Oliver takes his wealth of $1000 to a casino. He can bet as much as he likes on the toss ofa 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 dollarscontingent on tails on the two axes. Show Oliver's budget constraint. Oliver is an expected utilitymaximizer with the utility function U h; t = 1=2h2 + 1=2t2 where h is his wealth if heads comes upand t is his wealth if tails comes up. Draw the highest indi erence curve that Oliver can reach withhis 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 curvesare quarter circles. Oliver will gamble his entire wealth, either betting it all on heads or all on tails.Topic: Uncertainty Correct Responses: 0Di culty: 3Discrimination Index: 012.3 Linus Piecewise is an expected utility maximizer. There are two events, H and T; whicheach have probability 1=2. Linus's preferences over lotteries in which his wealth is h if Event Hhappens and t if Event T happens are representable by the utility function U h; 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 xis greater than or equal to 100. Draw a graph showing the indi erence curves for Linus that passthrough 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 to50; 100; a line with slope ,2 to the left of 50; 100; and a line with slope ,1=2 to the right of100; 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 linesfrom 150; 100 to 200; 0 and from 0; 200 to 100; 150.CHAPTER 12 UncertaintyTopic: Uncertainty Correct Responses: 0232Di culty: 2Discrimination Index: 012.4 The "certainty equivalent" of a gamble is de ned to be an the amount of money which ifyou were promised it with certainty would be indi erent to the gamble. a If an expected utilitymaximizer has a von Neuman Morgenstern utility function U W = W 1=2 where W is wealth andif the probability of events 1 and 2 are both 1=2; write a formula for the certainty equivalent of agamble that gives you x if event 1 happens and y if event 2 happens. b Generalize your formula inpart a to the case where the probability of event 1 is p and the probability of event 2 is 1 , p. cGeneralize the formula in part a to the case where U W = 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=agChapter 13True-FalseTopic: Risky Assets Correct Responses: 0Correct Answer: FalseRisky AssetsDi culty: 1Discrimination Index: 013.1 If two assets have the same expected rate of return but di erent variances, a risk-averseinvestor should always choose the one with the smaller variance, no matter what other assets sheholds.Topic: Risky Assets Correct Responses: 0Correct Answer: TrueDi culty: 1Discrimination Index: 013.2 If the returns on two assets are negatively correlated, then a portfolio that contains someof each will have less variance in its return per dollar invested than either asset has by itself.Topic: Risky Assets Correct Responses: 0Correct Answer: TrueDi culty: 1Discrimination Index: 013.3 If mean is plotted on the horizontal axis and variance on the vertical, then indi erencecurves for a risk-averter must slope upwards and to the right.Topic: Risky Assets Correct Responses: 0Correct Answer: TrueDi culty: 1Discrimination Index: 013.4 If you invest half your money in a risk-free asset and half your money in a risky asset suchthat the standard deviation of the return on the risky asset is s; then the standard deviation of thereturn on your investment portfolio is s=2.Risky AssetsMultiple ChoiceTopic: Risky Assets Correct Responses: 0Correct Answer: DDi culty: 2Discrimination Index: 013.1 Firm A sells lemonade and rm B sells hot chocolate. If you invest $100 if Firm A, inone year you will get back $30+ T where T is the average temperature Fahrenheit during thesummer. If you invest $100 in rm B; in one year you will get back $150 , T where T is the averagetemperature during the summer. The expected value of T is 70 and the standard deviation of T is10. If you invest $50 in Firm A and $50 in Firm B; what is the standard deviation of your returnon your investment?a 10b 20c 5d 0e None of the above.Topic: Risky Assets Correct Responses: 0Correct Answer: ADi culty: 2Discrimination Index: 013.2 A risk-free asset is available at 5 interest. Another asset is available with a mean rateof return of 15, but with a standard deviation of 5. An investor is considering an investmentportfolio consisting of some of each stock. On a graph with standard deviation on the horizontalaxis and mean on the vertical axis, the budget line that expresses the alternative combinations ofmean 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 CHOICETopic: Risky Assets Correct Responses: 0Correct Answer: A235Di culty: 2Discrimination Index: 013.3 Marvin is an expected utility maximizer. He chooses his portfolio so as to maximize theexpected 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 followingway: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: 0Correct Answer: EDi culty: 1Discrimination Index: 013.4 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 4interest. The second asset is a risky asset with a 26 expected rate of return, but the standarddeviation of this return is 10. Your client wants a portfolio with as high a rate of return aspossible consistent with a standard deviation no larger than 4. How much of her money do youinvest in the safe asset?a $22,000b $40,000c $64,000d $36,000e $60,000CHAPTER 13 Risky AssetsTopic: Risky Assets Correct Responses: 0Correct Answer: B236Di culty: 1Discrimination Index: 013.5 Bill owns an export business. The expected pro t from his business is $100,000 a year. Forevery 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 expectedpro t of $70,000. For every 1 increase in the value of the Japanese yen relative to the dollar, thepro ts of this rm shrink by $5,000. The second is a safe domestic rm which is certain to yieldhim $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: 0Correct Answer: CDi culty: 0Discrimination Index: 013.6 Suppose that Ms. Lynch in Problem 13.1 can make up her portfolio using a risk-free assetthat 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 thestandard deviation of her return on this portfolio will be:a 2.50.b 8.c 5.d 10.e None of the above.MULTIPLE CHOICETopic: Risky Assets Correct Responses: 0Correct Answer: C237Di culty: 0Discrimination Index: 013.7 Suppose that Ms. Lynch in Problem 13.1 can make up her portfolio using a risk-free assetthat 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 thestandard 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: 0Correct Answer: ADi culty: 0Discrimination Index: 013.8 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 ofwhich gives him an expected rate of return of 30 and has a standard deviation of 5. He can alterthe expected rate of return and the variance of his portfolio by changing the proportions in whichhe holds the two assets. If we draw a "budget line" with expected return on the vertical axis andstandard deviation on the horizontal axis, depicting the combinations that Smith can obtain, theslope of this budget line is:a 4.b ,4.c 2.d ,2.e 6.CHAPTER 13 Risky AssetsTopic: Risky Assets Correct Responses: 0Correct Answer: A238Di culty: 0Discrimination Index: 013.9 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 ofwhich gives him an expected rate of return of 45 and has a standard deviation of 15. He can alterthe expected rate of return and the variance of his portfolio by changing the proportions in whichhe holds the two assets. If we draw a "budget line" with expected return on the vertical axis andstandard deviation on the horizontal axis, depicting the combinations that Smith can obtain, theslope of this budget line is:a 2.b ,2.c 1.d ,1.e 3.Risky AssetsEssayTopic: Risky Assets Correct Responses: 0Di culty: 3Discrimination Index: 013.1 If you invest $100 now in rm A, in one year you will get back $30 + T where T is theaverage temperature during the next summer. If you invest $100 now in rm B; in one year youwill get back $180 , T . The expected value of T is 70 and the standard deviation of T is 10. aDraw a graph showing the combinations of expected return and standard deviation that you canhave by dividing $100 between stock in A and stock in B . Hint: Expected value has the propertythat E ax + b = aE x + b and standard deviation has the property that SDax + b = absolutevalue of a times SDx + b. b What is the expected value and standard deviation of the safestinvestment strategy you can make by this means? c What is the highest expected value you canachieve?Answer: a The locus includes the line segment from S; E = 0; 105 to S; E = 10; 110 as wellas the line segment from 0; 105 to 10; 100. b105 and 0 c110.Chapter 14True-FalseTopic: Consumer's Surplus Correct Responses: 63Correct Answer: FalseConsumer's SurplusDi culty: 1Discrimination Index: 2214.1 Consumer's surplus is another name for excess demand.Topic: Consumer's Surplus Correct Responses: 85Correct Answer: TrueDi culty: 1Discrimination Index: 2714.2 There is a positive consumer surplus when the total amount one pays for something is lessthan the amount one would be willing to pay rather than do without it altogether.Topic: Consumer's Surplus Correct Responses: 74Correct Answer: FalseDi culty: 1Discrimination Index: 4614.3 The equivalent variation in income from a tax is the amount of extra income that a consumerwould need in order to be as well o after the tax is imposed as he was originally.Topic: Consumer's Surplus Correct Responses: 0Correct Answer: TrueDi culty: 2Discrimination Index: 014.4 With quasilinear preferences, the equivalent variation and the compensating variation inincome due to a tax are the same.Topic: Consumer's Surplus Correct Responses: 76Correct Answer: FalseDi culty: 1Discrimination Index: 1714.5 Producer's surplus at price p is the vertical distance between the supply curve and thedemand curve at price p.TRUE-FALSETopic: Consumer's Surplus Correct Responses: 84Correct Answer: True241Di culty: 2Discrimination Index: 1914.6 If somebody is buying 15 units of x and the price of x falls by $2, then that person's netconsumer surplus must increase by at least $30.Topic: Consumer's Surplus Correct Responses: 84Correct Answer: TrueDi culty: 2Discrimination Index: 1914.7 If somebody is buying 15 units of x and the price of x falls by $4, then that person's netconsumer surplus must increase by at least $60.Topic: Consumer's Surplus Correct Responses: 83Correct Answer: FalseDi culty: 1Discrimination Index: 2014.8 If there is Cobb-Douglas utility, compensating and equivalent variation are the same.Topic: Consumer's Surplus Correct Responses: 62Correct Answer: FalseDi culty: 2Discrimination Index: 1514.9 Bernice has the utility function U x; y = minfx; yg. The price of x used to be 3, but rose to4. The price of y remained at 1. Her income is 12. The price increase was as bad for her as a lossof $3 in income.Topic: Consumer's Surplus Correct Responses: 73Correct Answer: FalseDi culty: 0Discrimination Index: 2714.10 If there is a price increase for a good that Josephine consumes, her compensating variation isthe change in her income that allows her to purchase her new optimal bundle at the original prices.Topic: Consumer's Surplus Correct Responses: 73Correct Answer: FalseDi culty: 0Discrimination Index: 2714.11 If there is a price increase for a good that Elsie consumes, her compensating variation isthe change in her income that allows her to purchase her new optimal bundle at the original prices.CHAPTER 14 Consumer's SurplusTopic: Consumer's Surplus Correct Responses: 0Correct Answer: True242Di culty: 2Discrimination Index: 014.12 Bernice's utility function is U x; 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 toa ord a bundle as good as her old one at the new prices.Multiple ChoiceTopic: Consumer's Surplus Correct Responses: 56Correct Answer: CConsumer's SurplusDi culty: 1Discrimination Index: 4014.1 Ella's utility function is minf4x; yg. If the price of x is 15 and the price of y is 20, howmuch money would she need to be able to purchase a bundle that she likes as well as the bundlex; y = 5; 8?a 92b 198c 190d 235e 47Topic: Consumer's Surplus Correct Responses: 56Correct Answer: CDi culty: 1Discrimination Index: 4014.2 Ella's utility function is minf2x; yg. If the price of x is 15 and the price of y is 10, howmuch money would she need to be able to purchase a bundle that she likes as well as the bundlex; y = 10; 8?a 67b 148c 140d 230e 70CHAPTER 14 Consumer's SurplusTopic: Consumer's Surplus Correct Responses: 33Correct Answer: E244Di culty: 3Discrimination Index: 3214.3 Reginald is fond of cigars. His utility function is U x; c = x +10c , :5c where c is the number2of 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 $2each. This price increase was as bad for him as losing the following amount of income:a $5b $7.25c $9d $8e $8.50Topic: Consumer's Surplus Correct Responses: 62Correct Answer: BDi culty: 2Discrimination Index: 5514.4 Sam's utility function is U x; y = 2x + y where x is the number of x0s he consumes per week0and y is the number of y s he consumes per week. Sam has $200 a week to spend. The price of x is4. Sam currently doesn't consume any y. Sam has received an invitation to join a club devoted toconsumption of y. If he joins the club, Sam can get a discount on the purchase of y. If he belongedto the club he could buy y for $1 a unit. How much is the most Sam would be willing to pay tojoin this club?a nothingb $100 a weekc $50 a weekd $40 a weeke None of the above.MULTIPLE CHOICETopic: Consumer's Surplus Correct Responses: 56Correct Answer: A245Di culty: 2Discrimination Index: 7714.5 Yoram's utility function is U x; 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 ofy-consumers. If he joins, he can get y at a price of $10. What is the most that Yoram would bewilling to pay to join the club?a nothingb $30 a weekc $50 a weekd $75 a weeke None of the above.Topic: Consumer's Surplus Correct Responses: 0Correct Answer: EDi culty: 2Discrimination Index: 014.6 Minnie gets 4 tapes for her birthday, but they are currently useless to her because shedoesn't have a tape recorder and she cannot return them for a refund. Her utility function isU x; y; z = x + f yz :5 where z is the number of tapes she has, y is the number of tape recordersshe has, and x is the money she has to spend on other stu . Let f y = 0 if y 1 and f y = 7otherwise. The price of tapes is $7.99. What is her reservation price for a tape recorder?a 20b 7c 24d 0e None of the above.CHAPTER 14 Consumer's SurplusTopic: Consumer's Surplus Correct Responses: 0Correct Answer: A246Di culty: 1Discrimination Index: 014.7 Izaak likes to eat pizza and to sh. The more shing he does the happier he is, up to 8hours a day. If he shes longer than 8 hours he gets a sore back and is less happy than if he hadn'tshed at all. For y less than or equal to 8, his utility function is U x; y = x + 4y where x is moneyspent on pizza and y is hours per day spent shing. His income is $45 a day and he has no expensesother than pizza. The Bureau of Fisheries has just decided to allow people without shing licensesto 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 $20b $32c $23d $18e 0.Topic: Consumer's Surplus Correct Responses: 0Correct Answer: ADi culty: 1Discrimination Index: 014.8 Izaak likes to eat pizza and to sh. The more shing he does the happier he is, up to 8hours a day. If he shes longer than 8 hours he gets a sore back and is less happy than if he hadn'tshed at all. For y less than or equal to 8, his utility function is U x; y = x + 4y where x is moneyspent on pizza and y is hours per day spent shing. His income is $41 a day and he has no expensesother than pizza. The Bureau of Fisheries has just decided to allow people without shing licensesto 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 $16b $32c $19d $14e 0.MULTIPLE CHOICETopic: Consumer's Surplus Correct Responses: 51Correct Answer: D247Di culty: 2Discrimination Index: 2614.9 Ellsworth's utility function is U x; y = minfx; yg. Ellsworth has $150 and the price of xand the price of y are both 1. Ellsworth's boss is thinking of sending him to another town wherethe 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 althoughhe doesn't mind moving for its own sake and the new town is just as pleasant as the old, having tomove is as bad as a cut in pay of $A. He also says he wouldn't mind moving if when he moved hegot a raise of $B . What are A and B ?a A = 50 B = 50b A = 75 B = 75c A = 75 B = 100d A = 50 B = 75e none of the aboveTopic: Consumer's Surplus Correct Responses: 22Correct Answer: ADi culty: 1Discrimination Index: 4014.10 Holly consumes only goods X and Y . Her income is 600 and her utility function isU x; y = maxfx; yg where x is the number of units of X she consumes and y is the number ofunits of Y she consumes. The price of good Y is 1. The price of good X used to be 1=2; but is now2. The equivalent variation of this price change for Holly is:a 300.b 600.c 150.d 800.e None of the above.CHAPTER 14 Consumer's SurplusTopic: Consumer's Surplus Correct Responses: 22Correct Answer: A248Di culty: 1Discrimination Index: 4014.11 Zelda consumes only goods X and Y . Her income is 400 and her utility function isU x; y = maxfx; yg where x is the number of units of X she consumes and y is the number of unitsof Y she consumes. The price of good Y is 1. The price of good X used to be 1=4; but is now 2.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.Topic: Consumer's Surplus Correct Responses: 53Correct Answer: DDi culty: 2Discrimination Index: 4714.12 Poindexter's utility function is U x; 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 thecheapest bundle that he likes as well as 4 units of butter and 3 units of guns?a 31b 32c 29d 28e None of the above.MULTIPLE CHOICETopic: Consumer's Surplus Correct Responses: 82Correct Answer: D249Di culty: 3Discrimination Index: 4114.13 Albin has quasilinear preferences and he loves pretzels. His inverse demand function forpretzels is px = 49 , 6x; where x is the number of pretzels that he consumes. He is currentlyconsuming 8 pretzels at a price of $1 per pretzel. If the price of pretzels rises to $7 per pretzel, thechange in Albin's consumer surplus is:a ,$90.b ,$56.c ,$42.d ,$45.e ,$42.Topic: Consumer's Surplus Correct Responses: 44Correct Answer: DDi culty: 2Discrimination Index: 4914.14 Bernice's preferences can be represented by the utility function, U x; y = minfx; yg. Shefaces 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: 0Correct Answer: CDi culty: 1Discrimination Index: 014.15 At the initial prices, Teodoro is a net seller of apples and a net buyer of bananas. If theprice 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 SurplusTopic: Consumer's Surplus Correct Responses: 74Correct Answer: B250Di culty: 1Discrimination Index: 4514.16 Sam has quasilinear preferences and his demand function for x is Dp = 15 , p=3. Theprice of x is initially $15 per unit and increases to $24 per unit. Sam's change is consumer surplusis 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: 87Correct Answer: BDi culty: 1Discrimination Index: 3014.17 Sir Plus has a demand function for mead that is given by the equation Dp = 100 , p. Ifthe price of mead is 65, how much is Sir Plus's net consumer surplus?a 35b 612.50c 1,225d 306.25e 4,550Topic: Consumer's Surplus Correct Responses: 87Correct Answer: BDi culty: 1Discrimination Index: 3014.18 Sir Plus has a demand function for mead that is given by the equation Dp = 100 , p. Ifthe price of mead is 75, how much is Sir Plus's net consumer surplus?a 25b 312.50c 625d 156.25e 6,000MULTIPLE CHOICETopic: Consumer's Surplus Correct Responses: 70Correct Answer: A251Di culty: 2Discrimination Index: 8314.19 Quasimodo from your workbook has the utility function U x; m = 100x , x =2+ m where x2is his consumption of earplugs and m is money left over to spend on other stu . If he has $10,000to spend on earplugs and other stu , and if the price of earplugs rises from $50 to 65, then his netconsumer'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: 70Correct Answer: ADi culty: 2Discrimination Index: 8314.20 Quasimodo from your workbook has the utility function U x; m = 100x , x =2+ m where x2is his consumption of earplugs and m is money left over to spend on other stu . If he has $10,000to spend on earplugs and other stu , and if the price of earplugs rises from $50 to 90, then his netconsumer'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 SurplusTopic: Consumer's Surplus Correct Responses: 80Correct Answer: B252Di culty: 2Discrimination Index: 5014.21 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 otherthings. 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 measuredin 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: 80Correct Answer: BDi culty: 2Discrimination Index: 5014.22 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 otherthings. 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 measuredin dollars per w week would be closest to:a $3.67.b $5.50.c $12.d $11.e $10.MULTIPLE CHOICETopic: Consumer's Surplus Correct Responses: 60Correct Answer: A253Di culty: 2Discrimination Index: 4514.23 If Bernice whose utility function is minfx; yg where x is her consumption of earrings andy is money left for other stu had an income of $ 12 and was paying a price of $9 for earringswhen 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: 60Correct Answer: ADi culty: 2Discrimination Index: 4514.24 If Bernice whose utility function is minfx; yg where x is her consumption of earrings andy is money left for other stu had an income of $ 12 and was paying a price of $3 for earringswhen 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: 70Correct Answer: ADi culty: 2Discrimination Index: 8214.25 Lolita, the Holstein cow, has a utility function is U x; y = x , x =2 + y where x is her2consumption of cow feed and y is her consumption of hay. If the price of cow feed is 0.40, the priceof hay is 1, and her income is 3, and if Lolita chooses the combination of hay and cow feed thatshe 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 SurplusTopic: Consumer's Surplus Correct Responses: 70Correct Answer: A254Di culty: 2Discrimination Index: 8214.26 Lolita, the Holstein cow, has a utility function is U x; y = x , x =2 + y where x is her2consumption of cow feed and y is her consumption of hay. If the price of cow feed is 0.10, the priceof hay is 1, and her income is 5, and if Lolita chooses the combination of hay and cow feed thatshe 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: 28Correct Answer: BDi culty: 2Discrimination Index: 1014.27 The number of "Quayle in 96" buttons demanded on a certain university campus is givenby Dp = 100 , p; where p is the price of buttons measured in pennies. The supply function isS p = 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 CHOICETopic: Consumer's Surplus Correct Responses: 52Correct Answer: B255Di culty: 2Discrimination Index: 2714.28 Chen's utility function is U x; y = x + 6y , y =2; where x is the number of x0s he consumes02per week and y is the number of y s he consumes per week. Chen has $200 a week to spend. Theprice of x is 1. The price of y is currently $5 per unit. Chen has received an invitation to join aclub devoted to consumption of y. If he joins the club, Chen can get a discount on the purchase ofy. If he belonged to the club he could buy y for $1 a unit. How much is the most Chen would bewilling to pay to join this club?a 8b 12c 20d 24e None of the above.Topic: Consumer's Surplus Correct Responses: 52Correct Answer: BDi culty: 2Discrimination Index: 2714.29 Peter's utility function is U x; y = x +10y , y =2; where x is the number of x0s he consumes02per week and y is the number of y s he consumes per week. Peter has $200 a week to spend. Theprice of x is 1. The price of y is currently $3 per unit. Peter has received an invitation to join aclub devoted to consumption of y. If he joins the club, Peter can get a discount on the purchase ofy. If he belonged to the club he could buy y for $1 a unit. How much is the most Peter would bewilling to pay to join this club?a 2b 16c 18d 32e None of the above.EssayTopic: Consumer's Surplus Correct Responses: 0Consumer's SurplusDi culty: 3Discrimination Index: 014.1 The "indirect utility function" for a consumer with a utility function U x1; x2 is de nedto be a function V p1; p2; M such that V p1; p2; M is the maximum of U x1; x2 subject to theconstraint that the consumer can a ord x1; x2 at the prices p1; p2 with income M . a Find theindirect utility function for someone with the utility function U x; y = 2x + y. b Find the indirectutility function for someone with the utility function U x; y = minf2x; yg. Explain how you gotyour answers.Answer: a M=minfp1=2; p2g. b M=2p1 + p2.Chapter 15Market DemandTrue-FalseTopic: Market Demand Correct Responses: 86Correct Answer: TrueDi culty: 1Discrimination Index: 515.1 The inverse demand curve P x for a good x measures the price per unit at which the quantity x would be demanded.Topic: Market Demand Correct Responses: 37Correct Answer: FalseDi culty: 2Discrimination Index: 015.2 In general, aggregate demand depends only on prices and total income and not on incomedistribution.Topic: Market Demand Correct Responses: 85Correct Answer: TrueDi culty: 1Discrimination Index: 2015.3 If consumer 1 has the demand function x = 1; 000 , 2p and consumer 2 has the demand1function x2 = 500 , p; then the aggregate demand function for an economy with just these twoconsumers would be x = 1; 500 , 3p for p 500.Topic: Consumer's Surplus Correct Responses: 82Correct Answer: TrueDi culty: 1Discrimination Index: 2315.4 If a consumer has to pay his reservation price for a good, then he gets no consumer surplusfrom purchasing it.Topic: Market Demand Correct Responses: 0Correct Answer: TrueDi culty: 1Discrimination Index: 015.5 If a price changes, then changes in consumption at the intensive margin are changes thathappen because consumers alter the amounts that they consume, but do not either stop consumingor start consuming the good.CHAPTER 15 Market DemandTopic: Elasticity Correct Responses: 86Correct Answer: False258Di culty: 1Discrimination Index: 2515.6 If the demand curve is a linear function of price, then the price elasticity of demand is thesame at all prices.Topic: Elasticity Correct Responses: 67Correct Answer: FalseDi culty: 2Discrimination Index: 2115.7 If the demand function is q = 3m=p; where m is income and p is price, then the absolutevalue of the price elasticity of demand decreases as price increases.Topic: Market Demand Correct Responses: 48Correct Answer: FalseDi culty: 1Discrimination Index: 1015.8 If the elasticity of demand curve for millet is ,0:50 at all prices higher than the currentprice, we would expect that when bad weather reduces the size of the millet crop, total revenue ofmillet producers will fall.Topic: Market Demand Correct Responses: 48Correct Answer: FalseDi culty: 1Discrimination Index: 1015.9 If the elasticity of demand curve for buckwheat is ,0:75 at all prices higher than the currentprice, we would expect that when bad weather reduces the size of the buckwheat crop, total revenueof buckwheat producers will fall.Topic: Market Demand Correct Responses: 51Correct Answer: FalseDi culty: 2Discrimination Index: 4715.10 If the equation for the demand curve is q = 50 , 1p; then the ratio of marginal revenue toprice is constant as price changes.TRUE-FALSETopic: Market Demand Correct Responses: 51Correct Answer: False259Di culty: 2Discrimination Index: 4715.11 If the equation for the demand curve is q = 40 , 2p; then the ratio of marginal revenue toprice is constant as price changes.Topic: Market Demand Correct Responses: 36Correct Answer: TrueDi culty: 3Discrimination Index: 015.12 If a rational consumer must consume either zero or one unit of a good, then an increase inthe price of that good with no change in income or in other prices can never lead to an increase inthe consumer's demand for it.Topic: Market Demand Correct Responses: 0Correct Answer: FalseDi culty: 1Discrimination Index: 015.13 In the reservation price model, either aggregate demand is zero or everyone demands oneunit of the good.Topic: Market Demand Correct Responses: 0Correct Answer: FalseDi culty: 1Discrimination Index: 015.14 The La er e ect occurs only if there is a backward-bending labor supply curve.Topic: Market Demand Correct Responses: 64Correct Answer: TrueDi culty: 2Discrimination Index: 415.15 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: 71Correct Answer: TrueDi culty: 1Discrimination Index: 815.16 The market demand curve is simply the horizontal sum of the individual demand curves.CHAPTER 15 Market DemandTopic: Market Demand Correct Responses: 72Correct Answer: False260Di culty: 1Discrimination Index: 1515.17 The demand curve is inelastic for inferior goods and elastic for normal goods.Topic: Market Demand Correct Responses: 56Correct Answer: TrueDi culty: 1Discrimination Index: 2015.18 Marginal revenue is equal to price if the demand curve is horizontal.Topic: Market Demand Correct Responses: 45Correct Answer: FalseDi culty: 2Discrimination Index: 3015.19 If the amount of money that people are willing to spend on a good stays the same whenits price doubles, then demand for that good must have a price elasticity of demand smaller inabsolute value than one.Topic: Elasticity Correct Responses: 38Correct Answer: TrueDi culty: 1Discrimination Index: 015.20 If the price elasticity of demand for a normal good is constant, then a price increase of 10cents will reduce demand by more if the original price is $1 than if the original price is $2.Topic: Market Demand Correct Responses: 0Correct Answer: TrueDi culty: 1Discrimination Index: 015.21 The demand function for potatoes has the equation q = 1; 000 , 10p. As the price of potatoeschanges from 10 to 20, the absolute value of the price elasticity of demand for potatoes increases.Topic: Elasticity Correct Responses: 62Correct Answer: TrueDi culty: 1Discrimination Index: 6015.22 If the demand curve for a good is given by the equation q = 2=p; where q is quantity and pis price, then at any positive price, the elasticity of demand will be ,1.TRUE-FALSETopic: Market Demand Correct Responses: 0Correct Answer: True261Di culty: 2Discrimination Index: 015.23 If consumer 1 has the inverse demand function given by p = 15 , x and consumer 2 hasinverse 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: 67Correct Answer: FalseDi culty: 2Discrimination Index: 2715.24 The inverse demand for a good is given by p = 60 , 2q. Suppose that the number ofconsumers doubles. For each consumer in the market another consumer with an identical demandfunction appears. The demand curve shifts to the right, doubling demand at every price, whilethe slope of the demand curve stays unchanged.Topic: Market Demand Correct Responses: 68Correct Answer: FalseDi culty: 1Discrimination Index: 4515.25 If Castor's demand curve is described by q = 40 , p and Pollux's demand curve is given byq = 60 , 2p; then each of their demand curves will pass through the point q = 20; p = 20. Thereforeif they are the only two consumers in a market, the market demand curve will also pass throughq = 20; p = 20.Topic: Elasticity Correct Responses: 49Correct Answer: FalseDi culty: 2Discrimination Index: 4415.26 If the price of broccoli falls by $3 per pound, then the demand for broccoli will rise by 15pounds. Therefore we can conclude that the demand for broccoli is elastic.Topic: Elasticity Correct Responses: 49Correct Answer: FalseDi culty: 2Discrimination Index: 4415.27 If the price of squash falls by $2 per pound, then the demand for squash will rise by 10pounds. Therefore we can conclude that the demand for squash is elastic.Multiple ChoiceTopic: Market Demand Correct Responses: 77Correct Answer: EMarket DemandDi culty: 1Discrimination Index: 3415.1 A peck is 1=4 of a bushel. If the price elasticity of demand for bran is ,0:20 when bran ismeasured in bushels, then when bran is measured in pecks, the price elasticity of demand for branwill be:a ,0:05.b ,0:80.c ,0:10.d ,0:40.e None of the above.Topic: Market Demand Correct Responses: 77Correct Answer: EDi culty: 1Discrimination Index: 3415.2 A peck is 1=4 of a bushel. If the price elasticity of demand for millet is ,0:60 when milletis measured in bushels, then when millet is measured in pecks, the price elasticity of demand formillet will be:a ,0:15.b ,2:40.c ,0:60.d ,1:20.e None of the above.Topic: Market Demand Correct Responses: 91Correct Answer: BDi culty: 1Discrimination Index: 915.3 The demand function is described by the equation qp = 190 , p=5. The inverse demandfunction 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 CHOICETopic: Market Demand Correct Responses: 91Correct Answer: B263Di culty: 1Discrimination Index: 915.4 The demand function is described by the equation qp = 210 , p=4. The inverse demandfunction 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: 37Correct Answer: ADi culty: 3Discrimination Index: 015.5 If the demand function is q = m , 2ln p over some range of values of p; then at all suchvalues 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: 86Correct Answer: CDi culty: 1Discrimination Index: 2715.6 If the demand function for tickets to a play is q = 3; 600 , 45p; at what price will total revenuebe maximized?a 160b 80c 40d 20e None of the above.CHAPTER 15 Market DemandTopic: Market Demand Correct Responses: 86Correct Answer: C264Di culty: 1Discrimination Index: 2715.7 If the demand function for tickets to a play is q = 800 , 20p; at what price will total revenuebe maximized?a 80b 40c 20d 10e None of the above.Topic: Market Demand Correct Responses: 54Correct Answer: DDi culty: 2Discrimination Index: 5415.8 Rollo would love to have a Mercedes. His preferences for consumption in the next year arerepresented by a utility function U x; y where x = 0 if he has no Mercedes and x = 1 if he has aMercedes for the year and where y is the amount of income he has left to spend on other stu . IfU 0; y = the square root of y and U 1; y = 10=9y:5 and if Rollo's income is $50,000 a year, howmuch would he be willing to pay per year to have a Mercedes?a $5,555.55b $5,000c $12,200d $9,500e $10,000MULTIPLE CHOICETopic: Market Demand Correct Responses: 0Correct Answer: C265Di culty: 2Discrimination Index: 015.9 In Ozone, California people all have the same tastes and they all like hot tubs. Nobodywants more than one hot tub but a person with wealth $M will be willing to pay up to :01M fora hot tub. The distribution of wealth in Ozone is as follows. The number of people with a wealthgreater than $W for any given W is approximately 1; 000; 000=W . The price elasticity of demand forhot tubs in Ozone California is:a ,:1b ,:01c ,1d ,:4e None of the above.Topic: Market Demand Correct Responses: 0Correct Answer: BDi culty: 2Discrimination Index: 015.10 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 :10Mper year to have a Buick. Nobody in Manifold has an income greater than $50,000 and nobody hasan income less than $10,000. For incomes, $M; between $10,000 and $50,000, the number of peoplewith incomes greater than M is about 1; 250 , :025M . If it costs $2,000 a year to have a Buick, howmany people in Manifold will demand Buicks?a 500b 750c 100d 600e 800CHAPTER 15 Market DemandTopic: Market Demand Correct Responses: 0Correct Answer: C266Di culty: 2Discrimination Index: 015.11 Rod cares about the number of cars he has and the amount of money he has to spendon other stu . The only possibilities of interest for Rod are having 0, 1, or 2 cars. Where x isthe number of cars he has and y is the money he has per year for other stu , Rod's utility isU 0; y = y:5 ; U 1; y = 15=14y:5; and U 2; y = 10=9y:5 . Rod's income is $25,000 a year. It wouldcost Rod $2,500 a year to have 1 car and $3,500 a year to have 2 cars. How many cars will hechoose?a 0b 1c 2d 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: 51Correct Answer: BDi culty: 2Discrimination Index: 2915.12 Dr. Social Science has recently gured out how to clone consumers. His rst e ort wasdone on the population of Walla, Washington. Each original citizen got a clone who had exactlythe same income and preferences. Which of the following statements describes what happened tothe 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 CHOICETopic: Market Demand Correct Responses: 67Correct Answer: A267Di culty: 2Discrimination Index: 015.13 At the price of 100, tourists demand 587 airplane tickets. At the same price, businesstravelers demand 527. At the price 120, tourists demand 127 tickets and business travelers demand127. Assuming that the demand curves of business travelers and tourists are both linear over thisprice range, what is the price elasticity of demand at the price 100?a ,3:86b ,43c ,4:63d ,0:04e None of the above.Topic: Market Demand Correct Responses: 67Correct Answer: ADi culty: 2Discrimination Index: 015.14 At the price of 180, tourists demand 427 airplane tickets. At the same price, businesstravelers demand 507. At the price 200, tourists demand 127 tickets and business travelers demand127. Assuming that the demand curves of business travelers and tourists are both linear over thisprice range, what is the price elasticity of demand at the price 180?a ,6:55b ,34c ,7:28d ,0:04e None of the above.CHAPTER 15 Market DemandTopic: Market Demand Correct Responses: 77Correct Answer: E268Di culty: 2Discrimination Index: 3215.15 The inverse demand function for nectarines is described by the equation p = 185 , 3q; wherep is the price in dollars per crate and where q is the number of crates of nectarines demanded perweek. When p = $20 per crate, what is the price elasticity of demand for nectarines?a ,60=55b ,3=185c ,3=55d ,55=20e ,20=165Topic: Market Demand Correct Responses: 77Correct Answer: EDi culty: 2Discrimination Index: 3215.16 The inverse demand function for grapes is described by the equation p = 831 , 9q; where pis 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=88b ,9=831c ,9=88d ,88=39e ,39=792Topic: Market Demand Correct Responses: 0Correct Answer: ADi culty: 3Discrimination Index: 015.17 If there are only two goods, an increase in the price of good 1 will increase the demand forgood 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 CHOICETopic: Market Demand Correct Responses: 75Correct Answer: B269Di culty: 1Discrimination Index: 2015.18 The demand function for small business computers in the U.S. is given by x = 200 , 10pwhere 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 yenwhere 150 yen equal 1 dollar. The price of 1 computer is $10,000. Let Eu be the price elasticityof demand at this price as calculated by U.S. rms who measure in dollars and let Ej be the priceelasticity of demand at the same $10,000 price, but measured in yen by the Japanese rms. Whichof the following are the values of Eu and Ej ; respectively?a ,1,,150b ,1,,1c ,2,,2d ,2,,300e ,2,,:0133Topic: Market Demand Correct Responses: 98Correct Answer: ADi culty: 1Discrimination Index: 2515.19 An economy has 100 consumers of Type 1 and 200 consumers of Type 2. If the price of thegood is less than 10, then each Type 1 consumer demands 10 , p units of the good; otherwise eachType 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 thegood demanded will be:a 1,600.b 1,800.c 2,000.d 420.e 1,200.CHAPTER 15 Market DemandTopic: Market Demand Correct Responses: 77Correct Answer: A270Di culty: 1Discrimination Index: 3615.20 Harry's demand function for blueberries is x = 20 , 2p where p is the price and x is thequantity demanded. If the price of blueberries is 3, then what is Harry's price elasticity of demandfor blueberries?a ,6=14b ,2=20c ,2d ,14=6e None of the above.Topic: Market Demand Correct Responses: 93Correct Answer: DDi culty: 1Discrimination Index: 1815.21 The inverse demand function for rye is p = 31; 200 , 6q. Total revenue in this market willbe maximized when the quantity of rye produced is:a 3,711b 5,200c 1,300d 2,600e None of the above.Topic: Market Demand Correct Responses: 93Correct Answer: DDi culty: 1Discrimination Index: 1815.22 The inverse demand function for barley is p = 28; 800 , 6q. Total revenue in this marketwill be maximized when the quantity of barley produced is:a 3,511b 4,800c 1,200d 2,400e None of the above.MULTIPLE CHOICETopic: Market Demand Correct Responses: 49Correct Answer: C271Di culty: 2Discrimination Index: 4915.23 When the price of bananas is 50 cents a pound, the total demand is 100 pounds. If theprice elasticity of demand for bananas is ,2; what quantity would be demanded if the price rose to60 cents a pound?a 50b 90c 60d 80e 70Topic: Market Demand Correct Responses: 90Correct Answer: DDi culty: 1Discrimination Index: 1315.24 The inverse demand function for co ee is p = 50; 000 , 2q where q is the number of tonsproduced and p is the price per ton. Total revenue from co ee sales be maximized when the outputlevel 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: 70Correct Answer: BDi culty: 2Discrimination Index: 2815.25 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 ofmarket demand be ,1?a 19b 20c 25d 15e None of the above.CHAPTER 15 Market DemandTopic: Market Demand Correct Responses: 48Correct Answer: D272Di culty: 2Discrimination Index: 1215.26 Given his current income, Rico's demand for bagels is related to the price of bagels by theequation, Q = 160 , 20P . Rico's income elasticity of demand for bagels is known to be equal to 0.5at all prices and incomes. If Rico's income quadruples, his demand for bagels will be related to theprice of bagels by the equation:a Q = 160 , 20P .b Q = 640 , 80P .c Q = 160 , 40P .d Q = 320 , 40Pe Q = 320 , 20P .Topic: Market Demand Correct Responses: 48Correct Answer: DDi culty: 2Discrimination Index: 1215.27 Given his current income, Rico's demand for bagels is related to the price of bagels by theequation, Q = 520 , 20P . Rico's income elasticity of demand for bagels is known to be equal to 0.5at all prices and incomes. If Rico's income quadruples, his demand for bagels will be related to theprice of bagels by the equation:a Q = 520 , 20P .b Q = 2; 080 , 80P .c Q = 520 , 40P .d Q = 1; 040 , 40Pe Q = 1; 040 , 20P .Topic: Market Demand Correct Responses: 18Correct Answer: EDi culty: 3Discrimination Index: 1715.28 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 CHOICETopic: Market Demand Correct Responses: 75Correct Answer: C273Di culty: 2Discrimination Index: 2415.29 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 oldresidents. 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: 37Correct Answer: BDi culty: 1Discrimination Index: 5915.30 A rm faces a demand function Dp; for which the revenue maximizing price is $14. Thedemand function is altered to 2Dp. What is the new revenue maximizing price?a $7b $14c $28d There is insu cient information to determine this.e None of the above.Topic: Market Demand Correct Responses: 37Correct Answer: BDi culty: 1Discrimination Index: 5915.31 A rm faces a demand function Dp; for which the revenue maximizing price is $12. Thedemand function is altered to 2Dp. What is the new revenue maximizing price?a $6b $12c $24d There is insu cient information to determine this.e None of the above.CHAPTER 15 Market DemandTopic: Market Demand Correct Responses: 98Correct Answer: C274Di culty: 1Discrimination Index: 1515.32 If the supply curve for x is given by x = 100p ; then the inverse supply curve is given by:2a 100=p2.b x2 =100.c x1=2=10.d p,2 =100.e None of the above.Topic: Market Demand Correct Responses: 50Correct Answer: CDi culty: 1Discrimination Index: 3015.33 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 Federalgovernment o ers to subsidize manure sales at a rate of $1 per ton. If Ed and Fred are the onlypeople 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: 64Correct Answer: EDi culty: 2Discrimination Index: 2815.34 Fred's price elasticity of demand for milk is ,2 at today's prices when we measure pricein dollars and quantity of milk in quarts. If the price per quart of milk stays the same but wemeasure quantity of milk in gallons and price in dollars, then what will be the elasticity of demandfor gallons of milk? A gallon is four quarts.a ,1b ,1=2c ,8d ,4e ,2MULTIPLE CHOICETopic: Market Demand Correct Responses: 70Correct Answer: D275Di culty: 2Discrimination Index: 3215.35 In a small Kansas town, there are two kinds of gasoline consumers: 100 Buick owners and50 Dodge owners. Each Buick owner has the demand function Db p = maxf0; 20 , 5pg and eachDodge 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: 16Correct Answer: ADi culty: 2Discrimination Index: 1915.36 In a certain city, the demand function for crack cocaine is q = 1000 , p where p is the "streetprice". The cocaine industry is competitive. Cocaine distributors can buy as much cocaine as theywish at a price of $50 per unit from Colombian sources. Whenever the city narcotics police catch acocaine dealer, they con scate all the cocaine that he has. The jails are full so they do not imprisonthe dealers. The police are able to catch the dealers about half the time, so they get about halfthe cocaine that enters the city. Instead of destroying con scated crack, the police simply resell iton the street. If the original supply curve of cocaine on the streets was horizontal, what is the nete 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 DemandTopic: Market Demand Correct Responses: 50Correct Answer: C276Di culty: 1Discrimination Index: 3615.37 If at current prices, the demand for a good is price-elastic, then for movements along thedemand 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: 0Correct Answer: DDi culty: 2Discrimination Index: 015.38 The demand curve for a good is given by p = 140 , 8q where p is the price and q is thequantity 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: 0Correct Answer: DDi culty: 2Discrimination Index: 015.39 The demand curve for a good is given by p = 240 , 10q where p is the price and q isthe quantity of the good. Suppose that the number of consumers in the economy doubles, witha "clone" appearing for each consumer, who has exactly the same demand curve as the originalconsumer. 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 CHOICETopic: Market Demand Correct Responses: 98Correct Answer: E277Di culty: 2Discrimination Index: 715.40 The demand for drangles is given by Dp = p + 1, where p is the price of drangles. If2the price of drangles is 1, then the price elasticity of demand for drangles is:a ,4b ,2c ,3d ,2e ,1Topic: Market Demand Correct Responses: 98Correct Answer: EDi culty: 2Discrimination Index: 715.41 The demand for drangles is given by Dp = p + 1, where p is the price of drangles. If2the price of drangles is 18, then the price elasticity of demand for drangles is:a ,7:58b ,3:79c ,5:68d ,3:79e ,1:89Topic: Market Demand Correct Responses: 59Correct Answer: CDi culty: 2Discrimination Index: 4715.42 The only quantities of Good 1 that Fanny can buy are 1 unit or zero units. For all positivevalues of x2 ; Fanny's preferences are represented by the utility function x1 + 12x2 + 6. If herincome is 16 and the price of good 2 is 1, then Fanny's reservation price for Good 1 is:a 3.38.b 3.50.c 1.69.d 2.e 0.40.CHAPTER 15 Market DemandTopic: Market Demand Correct Responses: 59Correct Answer: C278Di culty: 2Discrimination Index: 4715.43 The only quantities of Good 1 that Anneli can buy are 1 unit or zero units. For all positivevalues of x2 ; Anneli's preferences are represented by the utility function x1 + 12x2 + 14. If herincome is 28 and the price of good 2 is 1, then Anneli's reservation price for Good 1 is:a 6.46.b 7.50.c 3.23.d 0.86.e 1.07.Topic: Market Demand Correct Responses: 0Correct Answer: DDi culty: 0Discrimination Index: 015.44 In Gas Pump S.D., every Buick owner's demand for gasoline is 20 , 5p for p less than orequal to 4 and 0 for p 4. Every Dodge owner's demand is 15 , 3p for p less than or equal to 5and 0 for p 5. Suppose that Gas Pump, S.D. has 100 Buick owners and 250 Dodge owners. Ifthe price of gasoline is 4.50, what is the total amount of gasoline demanded in Gas Pump?a 750b 187.50c 562.50d 375e none of the above.MULTIPLE CHOICETopic: Market Demand Correct Responses: 0Correct Answer: D279Di culty: 0Discrimination Index: 015.45 In Gas Pump S.D., every Buick owner's demand for gasoline is 20 , 5p for p less than orequal to 4 and 0 for p 4. Every Dodge owner's demand is 15 , 3p for p less than or equal to 5and 0 for p 5. Suppose that Gas Pump, S.D. has 100 Buick owners and 100 Dodge owners. Ifthe price of gasoline is 3.25, what is the total amount of gasoline demanded in Gas Pump?a 1,800b 450c 1,350d 900e none of the above.Topic: Market Demand Correct Responses: 0Correct Answer: CDi culty: 0Discrimination Index: 015.46 The only quantities of Good 1 that Barbie can buy are 1 unit or zero units. For x equal1to zero or 1 and for all positive values of x2; suppose that Barbie's preferences were represented bythe utility function x1 + 10x2 + 6. Then if her income were 4, her reservation price for Good 1would be:a 1.82b 3.50c 0.91d 1.67e 0.50CHAPTER 15 Market DemandTopic: Market Demand Correct Responses: 0Correct Answer: C280Di culty: 0Discrimination Index: 015.47 The only quantities of Good 1 that Barbie can buy are 1 unit or zero units. For x equal1to zero or 1 and for all positive values of x2; suppose that Barbie's preferences were represented bythe utility function x1 + 2x2 + 10. Then if her income were 32, her reservation price for Good 1would be:a 28b 5.50c 14d 0.20e 4.90Topic: Market Demand Correct Responses: 0Correct Answer: ADi culty: 0Discrimination Index: 015.48 At a large institution of higher learning, the demand for football tickets at each game is180; 000 , 6; 000p. If the capacity of the stadium at that university is 100,000 seats, what is therevenue maximizing price for this university to charge per ticket.a 15b 13.33c 30d 7.50e 45Topic: Market Demand Correct Responses: 0Correct Answer: ADi culty: 0Discrimination Index: 015.49 At a large institution of higher learning, the demand for football tickets at each gameis 60; 000 , 10; 000p. If the capacity of the stadium at that university is 40,000 seats, what is therevenue maximizing price for this university to charge per ticket.a 3b 2c 6d 1.50e 9MULTIPLE CHOICETopic: Market Demand Correct Responses: 0Correct Answer: E281Di culty: 0Discrimination Index: 015.50 The demand for tickets to a rock concert is given by Dp = 200; 000 , 10; 000p; where p isthe 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: 0Correct Answer: EDi culty: 0Discrimination Index: 015.51 The demand for tickets to a rock concert is given by Dp = 200; 000 , 10; 000p; where p isthe 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: 0Correct Answer: EDi culty: 0Discrimination Index: 015.52 The demand for watches is Q = 1000P , : I . Assume that per capita income, I, is $2,000.1 50 2At a price, P; of $70 the price elasticity of demand isa 3.50.b 1.0.c 2.d 0.50.e 1.50.CHAPTER 15 Market DemandTopic: Market Demand Correct Responses: 0Correct Answer: E282Di culty: 0Discrimination Index: 015.53 The demand for watches is Q = 1000P , : I , . Assume that per capita income, I, is $3,000.2 501At a price, P; of $80 the price elasticity of demand isa 4.b 1.0.c ,1.d ,3:50.e 2.50.Topic: Market Demand Correct Responses: 0Correct Answer: EDi culty: 0Discrimination Index: 015.54 The demand for voice mail is Q = 1000 , 150P + 15I . Assume that per capita disposableincome, I, is $800. At a price, P; of $50 the income elasticity of demand isa 1.50.b 5.c 1.0.d 15.e 2.18.Topic: Market Demand Correct Responses: 0Correct Answer: EDi culty: 0Discrimination Index: 015.55 The demand for voice mail is Q = 1000 , 150P + 35I . Assume that per capita disposableincome, I, is $700. At a price, P; of $40 the income elasticity of demand isa 3.50.b 4.c 1.0.d 35.e 1.26.MULTIPLE CHOICETopic: Market Demand Correct Responses: 0Correct Answer: E283Di culty: 0Discrimination Index: 015.56 If the marginal cost of making a photocopy is 2 cents and the elasticity of demand is 1.50,the pro t maximizing price isa 3 cents.b 3.33 cents.c 4 cents.d 5 cents.e 6 cents.Topic: Market Demand Correct Responses: 0Correct Answer: CDi culty: 0Discrimination Index: 015.57 If the marginal cost of making a photocopy is 2 cents and the elasticity of demand is 2.00,the pro t maximizing price isa 3 cents.b 3.33 cents.c 4 cents.d 5 cents.e 6 cents.Topic: Market Demand Correct Responses: 0Correct Answer: DDi culty: 0Discrimination Index: 015.58 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 isa ,0:66.b ,1:8.c ,2.d ,2:33.e ,3.CHAPTER 15 Market DemandTopic: Market Demand Correct Responses: 0Correct Answer: D284Di culty: 0Discrimination Index: 015.59 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 isa ,0:66.b ,1:8.c ,2.d ,2:33.e ,3.Topic: Market Demand Correct Responses: 0Correct Answer: CDi culty: 0Discrimination Index: 015.60 The constant elasticity of demand for cigarettes has been estimated to be 0.5. To reducesmoking 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: 0Correct Answer: CDi culty: 0Discrimination Index: 015.61 The constant elasticity of demand for cigarettes has been estimated to be 0.5. To reducesmoking by 75, approximately how much tax needs to be added to a $1 pack?a $0.38.b $0.75.c $1.50d $2.25.e $4.00.MULTIPLE CHOICETopic: Market Demand Correct Responses: 0Correct Answer: A285Di culty: 0Discrimination Index: 015.62 The demand for cable television hookups is Q = 100 , 10P : + 2I ; where P is price and Iis per capita income. Cable TV is052a a normal good.b a natural monopoly.c an inferior good.d a substitute good.e a complement good.Topic: Market Demand Correct Responses: 0Correct Answer: CDi culty: 0Discrimination Index: 015.63 The demand for cable television hookups is Q = 100 , 10P : + 2I , ; where P is price andI is per capita income. Cable TV is052a a normal good.b a natural monopoly.c an inferior good.d a substitute good.e a complement good.Topic: Market Demand Correct Responses: 0Correct Answer: CDi culty: 0Discrimination Index: 015.64 If the demand for The Weekly World News at a local grocery store is described byQ = 2500 , 400P , I=10for I = $15; 000 and P = $1:50; the marginal revenue of an additional paper sold at this store isa $1.50b $0.38c $0.50d $0.15e $1CHAPTER 15 Market DemandTopic: Market Demand Correct Responses: 0Correct Answer: C286Di culty: 0Discrimination Index: 015.65 If the demand for The Weekly World News at a local grocery store is described byQ = 2500 , 400P , I=10for I = $20; 000 and P = $0:75; the marginal revenue of an additional paper sold at this store isa $0.75b $0.19c $0.25d $0.08e $0.50Topic: Market Demand Correct Responses: 0Correct Answer: BDi culty: 0Discrimination Index: 015.66 Demand for Barbara Streisand CD's is equal toQs = Ps : I : Pc : where Qs is the number2 50 1 800 60of CD's, Ps is the price of a Streisand CD, I is per capita income, and Pc is the price of a KarenCarpenter CD. Streisand and Carpenter CD'sa 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: 0Correct Answer: BDi culty: 0Discrimination Index: 015.67 Demand for Barbara Streisand CD's is equal toQs = Ps : I : Pc where Qs is the number2 80 2 501of CD's, Ps is the price of a Streisand CD, I is per capita income, and Pc is the price of a KarenCarpenter CD. Streisand and Carpenter CD'sa 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.EssayTopic: Market Demand Correct Responses: 0Market DemandDi culty: 2Discrimination Index: 015.1 Suppose that the inverse demand function for wool is p = A=q for some constant A. Supposethat 1=4 of the world's wool is produced in Australia. a If Australian wool production increases by1 and the rest of the world holds its output constant, what will be the e ect on the world priceof wool? b How is the marginal revenue to Australia from an extra unit of wool relate to the priceof wool?Answer: a Price will fall by about one fourth of one percent. b Marginal revenue is three fourthsof price.Topic: Market Demand Correct Responses: 0Di culty: 2Discrimination Index: 015.2 Bart Wurst runs the only hotdog stand in a large park in a large boring town. On Sundayspeople in this town all sit in the park and sunbathe. For any t between 0 and 30, the numberof people who are sitting within t minutes of Bart's stand is 10t2. People in Bart's town are lazyand 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 dogincludes the subjective cost of walking as well as the money price they have to pay when they getthere. Nobody has ever thought of fetching a hot dog for someone else. Find a formula for thedemand 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 atdistance t* from Bart where p + :10t = 1. Then t = 10 , p and the demand for hot dogs at pricesp is the number, 10 , p2; of people within t* of Bart.Topic: Market Demand Correct Responses: 0Di culty: 3Discrimination Index: 015.3 In Tassel, Illinois pop; 20; 000; there are two kinds of families, those who like swimmingpools and those who don't. Half of the population is of each type. Families who like swimmingpools are willing to spend up to 5 of their income each year on a swimming pool. Families whodon't like them would pay nothing for a swimming pool. Nobody wants more than one swimmingpool and nobody has thought of sharing a swimming pool. Incomes in Tassel range between $10,000and $110,000. For incomes, M; in this range, the number of families in Tassel with income greaterthan M is about 22; 000 , :2M . The two types of families have the same income distribution. Findthe aggregate demand function for swimming pools in Tassel demand for swimming pools as afunction 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 atleast 20p. Therefore the aggregate demand function is 11; 000 , 2p.CHAPTER 15 Market DemandTopic: Market Demand Correct Responses: 0288Di culty: 3Discrimination Index: 015.4 Ethel is trying to decide whether to have 0 cars, 1 car, or 2 cars. If x is the number of cars shehas and y is the amount of money she has per year to spend on other stu , Ethel's utility functionis U x; y where U 0; y = y1=2 ; U 1; y = 15=14y1=2 ; and U 2; 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 lowestincome 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 incomeat which she would get a car is $15,504. If we solve the equation U 1; y , 2000 = U 2; y , 4000 wend $55,143. At incomes above that she prefers 2 cars; below that she would be better o to have1 car.Topic: Market Demand Correct Responses: 0Di culty: 0Discrimination Index: 015.5 Using the graph of a demand curve, explain why marginal revenue is less than price.Topic: Market Demand Correct Responses: 0Di culty: 0Discrimination Index: 015.6 , : demand: for :Craftmatic Adjustable Beds is described byThe,:0Qc = Pc 1 40I 0 60Pm 20A0 25where Qc is the number of Craftmatic Adjustable Beds demanded, Pc is the price of a CraftmaticAdjustable Bed, I is per captia income, Pm is the price of a battery powered massage pillow, andA 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 impactCraftmatic's sales?c The price of battery powered massage pillows suddenly fell by 10. How will this impace Craftmatic's sales?ESSAYTopic: Market Demand Correct Responses: 0289Di culty: 0Discrimination Index: 015.7 , : demand :for Craftmatic Adjustable Beds is described byThe,: ,:Qc = Pc 1 40I 0 40Pm 1 60A0 25where Qc is the number of Craftmatic Adjustable Beds demanded, Pc is the price of a CraftmaticAdjustable Bed, I is per captia income, Pm is the price of a battery powered massage pillow, andA 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 impactCraftmatic's sales?c The price of battery powered massage pillows suddenly fell by 10. How will this impace Craftmatic's sales?Chapter 16EquilibriumTrue-FalseTopic: Equilibrium Correct Responses: 97Correct Answer: TrueDi culty: 1Discrimination Index: 516.1 If the supply curve is vertical, then the amount supplied is independent of price.Topic: Equilibrium Correct Responses: 86Correct Answer: FalseDi culty: 1Discrimination Index: 1716.2 If the supply is perfectly elastic, then an upward shift of the demand curve will lead to ahigher price and quantity in equilibrium.Topic: Equilibrium Correct Responses: 96Correct Answer: TrueDi culty: 1Discrimination Index: 016.3 The supply curve slopes up and to the right. If the demand curve shifts upward to a newcurve which is everywhere higher than the old curve but possibly of di erent slope and if thesupply curve does not shift, then the equilibrium price and quantity must necessarily increase.Topic: Equilibrium Correct Responses: 72Correct Answer: FalseDi culty: 1Discrimination Index: 2216.4 Supply and demand theory shows us that the burden of a sales tax is shared equally bysuppliers and demanders whether the tax is collected from the sellers or collected from the buyers.Topic: Monopoly Correct Responses: 73Correct Answer: FalseDi culty: 1Discrimination Index: 1616.5 An economic situation is Pareto optimal only if there is no way to make someone better o .TRUE-FALSETopic: Equilibrium Correct Responses: 29Correct Answer: True291Di culty: 1Discrimination Index: 2816.6 The amount of a good supplied is independent of the price. If a sales tax is imposed on thegood, then the price paid by consumers will not change at all.Topic: Equilibrium Correct Responses: 91Correct Answer: FalseDi culty: 1Discrimination Index: 1416.7 If a quantity tax is collected from competitive suppliers of a good, placing a tax on the goodcauses the price paid by consumers to increase more than if the tax had been collected directlyfrom the buyers.Topic: Budgets Correct Responses: 50Correct Answer: TrueDi culty: 2Discrimination Index: 2316.8 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 theabsolute value of the slope of the demand curve is greater than the absolute value of the slope ofthe supply curve.EquilibriumMultiple ChoiceTopic: Equilibrium Correct Responses: 93Correct Answer: BDi culty: 1Discrimination Index: 1416.1 The demand for pickles is given by p = 131 , 2q and supply is given by p = 5 + 7q. What isthe equilibrium quantity?a 11b 14c 19d 103e None of the above.Topic: Equilibrium Correct Responses: 93Correct Answer: BDi culty: 1Discrimination Index: 1416.2 The demand for pickles is given by p = 82 , 2q and supply is given by p = 2 + 2q. What isthe equilibrium quantity?a 17b 20c 25d 42e None of the above.Topic: Equilibrium Correct Responses: 99Correct Answer: BDi culty: 1Discrimination Index: 2316.3 The demand function for fresh strawberries is q = 200 , 5p and the supply function isq = 60 + 2p. What is the equilibrium price?a 10b 20c 40d 50e None of the above.MULTIPLE CHOICETopic: Equilibrium Correct Responses: 94Correct Answer: D293Di culty: 1Discrimination Index: 1116.4 The inverse demand function for mangos is de ned by the equation, p = 91 , 5q; where q isthe number of crates that are sold. The inverse supply function is de ned by p = 3 + 6q. In thepast there was no tax on mangos but now a tax of $44 per crate has been imposed. What are thequantities produced before and after the tax was imposed?a 5 crates before and 5 crates afterb 16 crates before and 9 crates afterc 14 crates before and 7 crates afterd 8 crates before and 4 crates aftere None of the above.Topic: Equilibrium Correct Responses: 94Correct Answer: DDi culty: 1Discrimination Index: 1116.5 The inverse demand function for apples is de ned by the equation, p = 129 , 12q; where qis the number of crates that are sold. The inverse supply function is de ned by p = 3 + 6q. In thepast there was no tax on apples but now a tax of $90 per crate has been imposed. What are thequantities produced before and after the tax was imposed?a 4 crates before and 3 crates afterb 14 crates before and 5 crates afterc 13 crates before and 5 crates afterd 7 crates before and 2 crates aftere None of the above.CHAPTER 16 EquilibriumTopic: Equilibrium Correct Responses: 87Correct Answer: B294Di culty: 1Discrimination Index: 916.6 The inverse demand for eggs is p = 84 , 9q where q is the number of cases of eggs. Theinverse supply is p = 7 + 2q. In the past, eggs were not taxed, but now a tax of 33 dollars per casehas been introduced. What is the e ect of the tax on the quantity of eggs supplied?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: 87Correct Answer: BDi culty: 1Discrimination Index: 916.7 The inverse demand for eggs is p = 61 , 3q where q is the number of cases of eggs. Theinverse supply is p = 7 + 6q. In the past, eggs were not taxed, but now a tax of 36 dollars per casehas been introduced. What is the e ect of the tax on the quantity of eggs supplied?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: 86Correct Answer: CDi culty: 1Discrimination Index: 3316.8 The inverse demand function for cases of whiskey is de ned by p = 160 , 6q and the inversesupply 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 pricepaid 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 CHOICETopic: Equilibrium Correct Responses: 86Correct Answer: C295Di culty: 1Discrimination Index: 3316.9 The inverse demand function for cases of whiskey is de ned by p = 241 , 11q and the inversesupply 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 pricepaid 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: 62Correct Answer: ADi culty: 1Discrimination Index: 5016.10 The inverse demand function for cigars is de ned by p = 240 , 2q and the inverse supplyfunction 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 suppliersfalls 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 suppliersrises.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 staysconstant.e The after tax price paid by consumers rises by less than $2 and the after tax price received by suppliersstays constant.CHAPTER 16 EquilibriumTopic: Equilibrium Correct Responses: 74Correct Answer: D296Di culty: 2Discrimination Index: 4916.11 Xaquane and Yullare are obscure, but talented, 18th century painters. The world's stockof Xaquanes is 100 and the world's stock of Yullares is 70. The demand for each painter's workdepends on its own price and the price of the other painter's work. If Px is the price of Xaquanesand Py is the price of Yullares, the demand function for Xaquanes is 101 , 3Px +2Py and the demandfunction for Yullares is 72 + Px , Py . What is the equilibrium price for Yullare's paintings?a 5b 11c 12d 7e None of the above.Topic: Equilibrium Correct Responses: 38Correct Answer: CDi culty: 2Discrimination Index: 3276716.12 In a certain kingdom, the demand function for rye bread was q = 381 , 3p and the supplyfunction was q = 5 + 7p where p is the price in zlotys and q is loaves of bread. The king made itillegal to sell rye bread for a price above 32 zlotys per loaf. To avoid shortages, he agreed to paybakers enough of a subsidy for each loaf of bread so as to make supply equal demand. How muchwould the subsidy per loaf have to be?a 21 zlotysb 14 zlotysc 8 zlotysd 20 zlotyse None of the above.MULTIPLE CHOICETopic: Equilibrium Correct Responses: 38Correct Answer: C297Di culty: 2Discrimination Index: 3276716.13 In a certain kingdom, the demand function for rye bread was q = 201 , 4p and the supplyfunction was q = 13 + 3p where p is the price in zlotys and q is loaves of bread. The king made itillegal to sell rye bread for a price above 23 zlotys per loaf. To avoid shortages, he agreed to paybakers enough of a subsidy for each loaf of bread so as to make supply equal demand. How muchwould the subsidy per loaf have to be?a 21 zlotysb 14 zlotysc 9 zlotysd 20 zlotyse None of the above.Topic: Equilibrium Correct Responses: 0Correct Answer: ADi culty: 1Discrimination Index: 13716.14 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. Thegovernment decides to support the price of orange juice at a price oor of $24 per unit by buyingorange juice and destroying all that it has purchased. How many units must the government destroyper year?a 52b 56c 25d 61e 57CHAPTER 16 EquilibriumTopic: Equilibrium Correct Responses: 0Correct Answer: A298Di culty: 1Discrimination Index: 13716.15 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. Thegovernment decides to support the price of butter at a price oor of $20 per unit by buying butterand destroying all that it has purchased. How many units must the government destroy per year?a 48b 54c 18d 57e 53Topic: Equilibrium Correct Responses: 72Correct Answer: BDi culty: 2Discrimination Index: 1916.16 The demand function for rental apartments is q = 960 , 7p and the supply function isq = 160 + 3p. The government makes it illegal to charge a rent higher than 35. How much excessdemand will there be?a 149b 450c 364d 726e 245Topic: Equilibrium Correct Responses: 65Correct Answer: DDi culty: 1Discrimination Index: 3816.17 The demand function for abalone is q = 30 , 9p and the supply function is q = 6p. Suddenlythe 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?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.MULTIPLE CHOICETopic: Equilibrium Correct Responses: 20Correct Answer: D299Di culty: 3Discrimination Index: 1916.18 Remember King Kanuta and his tropical island? The demand function for coconuts by hissubjects on the island is Dp = 1200 , 100p and the supply function is S p = 100p. The law used tobe that any subject who consumed a coconut had to pay another coconut to the king. King Kanutathen ate all the coconuts he got. But now the king, apparently fed up with coconuts, decides tosell 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: 71Correct Answer: ADi culty: 1Discrimination Index: 1316.19 The inverse demand function for video games is p = 240 , 2q and the inverse supply isp = 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 EquilibriumTopic: Equilibrium Correct Responses: 89Correct Answer: A300Di culty: 1Discrimination Index: 2416.20 The demand function for corn is q = 200 , p and the supply function is q = 50 + :5p. Thegovernment sets the price of corn at 150 and agrees to purchase and destroy any excess supply ofcorn at that price. How much money does it cost the government to buy this corn?a 11,250b 18,750c 7,500d 10,750e 14,500Topic: Equilibrium Correct Responses: 36Correct Answer: BDi culty: 3Discrimination Index: 2316.21 The market for tennis shoes has a horizontal supply curve and a linear, downward-slopingdemand curve. Currently the government imposes a tax of t on every pair of tennis shoes sold anddoes 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 theslope of the demand curve.e None of the above.Topic: Equilibrium Correct Responses: 40Correct Answer: DDi culty: 1Discrimination Index: 3316.22 The demand curve for rutabagas is a straight line with slope ,3 and the supply curve is astraight line with slope 2. Suppose that a new tax of $3 per sack of rutabagas is introduced. Whichof 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 CHOICETopic: Equilibrium Correct Responses: 40Correct Answer: D301Di culty: 1Discrimination Index: 3316.23 The demand curve for rutabagas is a straight line with slope ,2 and the supply curve is astraight line with slope 2. Suppose that a new tax of $3 per sack of rutabagas is introduced. Whichof 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: 42Correct Answer: ADi culty: 1Discrimination Index: 4016.24 The quantity q of grapefruits demanded at price p is given by q = 30 , 3p and the supplyschedule by q = 6p. The government imposes a quantity tax at some rate t; which it collects frombuyers. What is the smallest tax rate that will result in no grapefruits being bought or sold?a 10b 3.33c 3.67d 11.50e 13Topic: Equilibrium Correct Responses: 42Correct Answer: ADi culty: 1Discrimination Index: 4016.25 The quantity q of nectarines demanded at price p is given by q = 16 , 4p and the supplyschedule by q = 3p. The government imposes a quantity tax at some rate t; which it collects frombuyers. What is the smallest tax rate that will result in no nectarines being bought or sold?a 4b 2.29c 2.86d 5.50e 7CHAPTER 16 EquilibriumTopic: Equilibrium Correct Responses: 93Correct Answer: B302Di culty: 1Discrimination Index: 2316.26 The demand function for x is Dp = 65 , 2p and the supply function is Sp = 20 + p. Theprice 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: 89Correct Answer: DDi culty: 2Discrimination Index: 1916.27 The inverse demand function for apples is de ned by the equation p = 214 , 5q; where qis the number of units sold. The inverse supply function is de ned by p = 7 + 4q. A tax of 36 isimposed on suppliers for each unit of apples that they sell. When the tax is imposed, the quantityof apples sold falls to:a 23.b 14.c 17.d 19.e 21.Topic: Equilibrium Correct Responses: 89Correct Answer: DDi culty: 2Discrimination Index: 1916.28 The inverse demand function for melons is de ned by the equation p = 385 , 10q; where qis the number of units sold. The inverse supply function is de ned by p = 13 + 2q. A tax of 36 isimposed on suppliers for each unit of melons that they sell. When the tax is imposed, the quantityof melons sold falls to:a 31.b 13.c 26.d 28.e 29.50.MULTIPLE CHOICETopic: Equilibrium Correct Responses: 0Correct Answer: C303Di culty: 1Discrimination Index: 016.29 In a crowded city far away, the civic authorities decided that rents were too high. Thelong run supply function of two-room rental apartments was given by q = 14 + 5p and the long rundemand function was given by q = 329 , 5p where p is the rental rate in crowns per week. Theauthorities made it illegal to rent an apartment for more than 25 crowns per week. To avoid ahousing shortage, the authorities agreed to pay landlords enough of a subsidy to make supply equalto demand. How much would the weekly subsidy per apartment have to be to eliminate excessdemand at the ceiling price?a 6.50b 10c 13d 26e 19.50Topic: Equilibrium Correct Responses: 0Correct Answer: CDi culty: 1Discrimination Index: 016.30 In a crowded city far away, the civic authorities decided that rents were too high. Thelong run supply function of two-room rental apartments was given by q = 14 + 2p and the longrun demand function was given by q = 94 , 2p where p is the rental rate in crowns per week. Theauthorities made it illegal to rent an apartment for more than 13 crowns per week. To avoid ahousing shortage, the authorities agreed to pay landlords enough of a subsidy to make supply equalto demand. How much would the weekly subsidy per apartment have to be to eliminate excessdemand at the ceiling price?a 7b 11c 14d 28e 21CHAPTER 16 EquilibriumTopic: Equilibrium Correct Responses: 0Correct Answer: B304Di culty: 0Discrimination Index: 016.31 The price elasticity of demand for a certain agricultural product is constant over therelevant range of prices and equal to ,1:50. The supply elasticity for this product is constant andequal to 4. Originally the equilibrium price of this good was 15 per unit. Then it was discoveredthat consumption of this product was unhealthy. The quantity that would be demanded at anyprice 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: 0Correct Answer: BDi culty: 0Discrimination Index: 016.32 The price elasticity of demand for a certain agricultural product is constant over therelevant range of prices and equal to ,2:50. The supply elasticity for this product is constant andequal to 4. Originally the equilibrium price of this good was 50 per unit. Then it was discoveredthat consumption of this product was unhealthy. The quantity that would be demanded at anyprice 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 CHOICETopic: Equilibrium Correct Responses: 52Correct Answer: A305Di culty: 0Discrimination Index: 4416.33 Suppose that King Kanuta, whom you met in your workbook, demands that each of hissubjects give him 1 coconuts for every coconut that they consume. The king puts all of the coconutsthat he collects in a large pile and burns them. The supply of coconuts is given by S ps = 100ps;where ps is the price received by suppliers. The demand for coconuts by the king's subjects is givenby Dpd = 1; 500 , 100pd; where pd is the price paid by consumers. In equilibrium, the price receivedby suppliers will be:a 6b 9c 7.50d 15e None of the aboveTopic: Equilibrium Correct Responses: 52Correct Answer: ADi culty: 0Discrimination Index: 4416.34 Suppose that King Kanuta, whom you met in your workbook, demands that each of hissubjects give him 4 coconuts for every coconut that they consume. The king puts all of the coconutsthat he collects in a large pile and burns them. The supply of coconuts is given by S ps = 100ps;where ps is the price received by suppliers. The demand for coconuts by the king's subjects is givenby Dpd = 9; 360 , 100pd; where pd is the price paid by consumers. In equilibrium, the price receivedby suppliers will be:a 18b 27c 46.80d 234e None of the aboveCHAPTER 16 EquilibriumTopic: Equilibrium Correct Responses: 0Correct Answer: A306Di culty: 0Discrimination Index: 016.35 Schrecklich and Lamerde are two obscure modernist painters, who are no longer alive, butwhose paintings are still enjoyed by persons of dubious taste. The demand function for Schrecklichsis 200 , 4PS , 2PL and the demand function for Lamerdes is 200 , 3PL , PS ; where PS and PL arerespectively the price of Schrecklichs and Lamerdes. If the world supply of Schrecklichs is 110 andthe 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: 0Correct Answer: ADi culty: 0Discrimination Index: 016.36 Schrecklich and Lamerde are two obscure modernist painters, who are no longer alive, butwhose paintings are still enjoyed by persons of dubious taste. The demand function for Schrecklichsis 200 , 4PS , 2PL and the demand function for Lamerdes is 200 , 3PL , PS ; where PS and PL arerespectively the price of Schrecklichs and Lamerdes. If the world supply of Schrecklichs is 100 andthe world supply of Lamerdes is 80, then the equilibrium price of Schrecklichs is:a 6.b 25.c 44.d 38.e 12.MULTIPLE CHOICETopic: Equilibrium Correct Responses: 0Correct Answer: A307Di culty: 0Discrimination Index: 016.37Daily demand for gasoline at Billy-Bob's Mobile Station is described by Q = 776 , 200p where Qare 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 thedeadweight 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: 0Correct Answer: ADi culty: 0Discrimination Index: 016.38Daily demand for gasoline at Billy-Bob's Mobile Station is described by Q = 1; 870 , 1; 000p whereQ 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 thedeadweight 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.EquilibriumEssayTopic: Equilibrium Correct Responses: 0Di culty: 1Discrimination Index: 016.1 Use supply and demand analysis to examine the following statement: "The practice of givingfood stamps is self-defeating. Food stamps e ectively lower the price of food. When food becomesavailable at lower prices, demand will increase thereby forcing the price up to its initial level." Isthis 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, butif the supply curve slopes up, then the new equilibrium should take place with a greater supplyand a lower net price for those who use food stamps. The market price will rise, but not by thefull amount of the discount one gets with food stamps.Topic: Equilibrium Correct Responses: 0Di culty: 2Discrimination Index: 016.2 Long ago, a kindly prince noticed the misery of his subjects. His subjects all had the samepreferences and the same low incomes. The demand function of each subject for bread was q = 26 , pwhere p is the price of bread and q is the number of loaves per week. The supply of bread percapita per week was given by the function q = :3p. The king declared since his subjects did noteven get a loaf of bread per day, he would help them by making it illegal to sell bread for morethan 10 groschens per loaf. Unhappily, a bread shortage arose and people waited in long lines toget bread. a Draw a graph to show why. Put numerical labels on the important points on yourgraph. b If the citizens could earn 4 groschens per hour at work that was exactly as unpleasant aswaiting in line, what would be the equilibrium waiting time for a loaf of bread?Answer: b3:25 Hours.Chapter 17True-FalseTopic: Auctions Correct Responses: 0Correct Answer: TrueDi culty: 0Discrimination Index: 0Auctions17.1 In a Dutch auction with rational bidders, it sometimes happens that the object being soldgoes to someone whose value for the object is not as high as that of some other bidders.Topic: Auctions Correct Responses: 0Correct Answer: TrueDi culty: 0Discrimination Index: 017.2 In an English auction, with rational bidders, the object being sold always goes to the bidderwho values it most highly.Topic: Auctions Correct Responses: 0Correct Answer: TrueDi culty: 0Discrimination Index: 017.3 An auction in which some bidders have di erent information about the value of an objectthan others is said to be an auction with private values.Topic: Auctions Correct Responses: 0Correct Answer: TrueDi culty: 0Discrimination Index: 017.4 In a private-values auction with rational bidders, we can expect the same outcome from anEnglish auction as from a Vickrey auction.Topic: Auctions Correct Responses: 0Correct Answer: FalseDi culty: 0Discrimination Index: 017.5 An auctioneer allows bidders to examine a jar of pennies, but he does not allow them to openthe jar and count the pennies. The jar is then sold by means of an English auction. Economistscall an auction of this type a a private-values auction, since opinions di er.Topic: Auctions Correct Responses: 0Correct Answer: TrueDi culty: 0Discrimination Index: 017.6 The reserve price in an auction is the lowest price at which the seller of a good will partwith it.CHAPTER 17 AuctionsTopic: Auctions Correct Responses: 0Correct Answer: False310Di culty: 0Discrimination Index: 017.7 If a good is sold in a Dutch auction and the bidders bid rationally, the price paid for thegood will always be equal to the second-highest willingness to pay of auction participants.Topic: Auctions Correct Responses: 0Correct Answer: FalseDi culty: 0Discrimination Index: 017.8 The "winner's curse" refers to the fact that in a sealed-bid auction with private values, thewinning bidder often pays more than he would have to in order to win the object auctioned.Topic: Auctions Correct Responses: 0Correct Answer: FalseDi culty: 0Discrimination Index: 017.9 It is never a pro t-maximizing strategy for a seller in an English auction to set a reserveprice for the good he is selling, so high that he might not be able to sell it at all.Topic: Auctions Correct Responses: 0Correct Answer: TrueDi culty: 0Discrimination Index: 017.10 It is often the case that a seller can increase his pro ts from an auction by setting a reserveprice even if he has to destroy the object being auctioned if nobody bids as high as the reserveprice.Topic: Auctions Correct Responses: 0Correct Answer: TrueDi culty: 0Discrimination Index: 017.11 The pro t-maximizing strategy for a bidder in a Vickrey auction where there are commonvalues for the object being sold is to bid less than her estimated value for the object, and the morebidders there are, the more the pro t-maximizing bidder should shade her bid below her estimatedvalue.Topic: Auctions Correct Responses: 0Correct Answer: TrueDi culty: 0Discrimination Index: 017.12 The optimal strategy for a bidder in a private-values Vickrey auction is to bid his truevaluation.TRUE-FALSETopic: Auctions Correct Responses: 0Correct Answer: True311Di culty: 0Discrimination Index: 017.13 In a common-value auction, the bids of other bidders can in uence the maximum amountthat one is willing to pay for an object, while in a private-value auction this is not the case.AuctionsMultiple ChoiceTopic: Auctions Correct Responses: 0Correct Answer: ADi culty: 0Discrimination Index: 017.1 A rst-edition of Adam Smith's Wealth of Nations published in 1776 is being auctioned viathe internet. The current owner starts by posting his own bid" for it. Bidders are allowed tosubmit bids at any time during a one-week interval. For the following week, bids will be acceptedonly if they exceed the currently posted high bid. Throughout the week, the highest bid thatanyone has made so far will be posted. At the end of the week, the book will be sold to the highestbidder at the price that he or she bid for it. Assuming that bidders understand the rules of theauction, the outcome of this auction will be similar to that fora 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: 0Correct Answer: CDi culty: 0Discrimination Index: 017.2 A stamp dealer is holding an auction for an English Penny Black postage stamp, issuedin 1840. Potential buyers are asked to submit written bids for this stamp, and it will be sold tothe highest bidder at a price equal to the bid submitted by the second-highest bidder. If biddersunderstand 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 about10 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 andnot 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 CHOICETopic: Auctions Correct Responses: 0Correct Answer: D313Di culty: 0Discrimination Index: 017.3 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 Evavalues it at $700. If the bidders bid in their rational self-interest, the cabinet will be sold toa 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 randomlydetermined.d Linda for slightly more than $1,200.e None of the above statements are true.Topic: Auctions Correct Responses: 0Correct Answer: DDi culty: 0Discrimination Index: 017.4 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 notcollude. 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 willbe sold toa 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 AuctionsTopic: Auctions Correct Responses: 0Correct Answer: D314Di culty: 0Discrimination Index: 017.5 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 notcollude. Maude values the cabinet at $800, Kristina values it at $550, Zelda values it at $1,300, andBetsy values it at $300. If the bidders bid in their rational self-interest, the cabinet will be sold toa 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: 0Correct Answer: DDi culty: 0Discrimination Index: 017.6 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 notcollude. 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 besold toa 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 randomlydetermined.d Doreen for slightly more than $4,000.e None of the above statements are true.MULTIPLE CHOICETopic: Auctions Correct Responses: 0Correct Answer: D315Di culty: 0Discrimination Index: 017.7 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 notcollude. 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 cabinetwill be sold toa 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 randomlydetermined.d Katerina for slightly more than $4,800.e None of the above statements are true.Topic: Auctions Correct Responses: 0Correct Answer: BDi culty: 0Discrimination Index: 017.8First Fiddler's Bank has foreclosed on a home mortgage and is selling the house at auction. Thereare three bidders for the house, Josh, Sheila, and Elsie. First Fiddler's does not know the willingnessto pay of these three bidders for the house, but on the basis of its previous experience, the bankbelieves that each of these bidders has a probability of 1=3 of valuing it at $700,000, a probability of1=3 of valuing at $500,000, and a probability of 1=3 of valuing it at $200,000. First Fiddler's believesthat these probabilities are independent between buyers. If First Fiddler's sells the house by meansof a second-bidder, sealed-bid auction Vickrey auction, what will be the bank's expected revenuefrom the sale? Choose the closest option.a $500,000b $474,074c $466,667d $700,000e $200,000CHAPTER 17 AuctionsTopic: Auctions Correct Responses: 0Correct Answer: B316Di culty: 0Discrimination Index: 017.9First Fiddler's Bank has foreclosed on a home mortgage and is selling the house at auction. Thereare three bidders for the house, Tim, Katerina, and Elsie. First Fiddler's does not know thewillingness 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, aprobability of 1=3 of valuing at $500,000, and a probability of 1=3 of valuing it at $300,000. FirstFiddler's believes that these probabilities are independent between buyers. If First Fiddler's sellsthe house by means of a second-bidder, sealed-bid auction Vickrey auction, what will be thebank's expected revenue from the sale? Choose the closest option.a $500,000b $474,074c $466,667d $600,000e $300,000Topic: Auctions Correct Responses: 0Correct Answer: BDi culty: 0Discrimination Index: 017.10First Fiddler's Bank has foreclosed on a home mortgage and is selling the house at auction. Thereare three bidders for the house, Boris, Emily, and Fanny. First Fiddler's does not know thewillingness 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, aprobability of 1=3 of valuing at $400,000, and a probability of 1=3 of valuing it at $300,000. FirstFiddler's believes that these probabilities are independent between buyers. If First Fiddler's sellsthe house by means of a second-bidder, sealed-bid auction Vickrey auction, what will be thebank's expected revenue from the sale? Choose the closest option.a $400,000b $425,926c $433,333d $600,000e $300,000MULTIPLE CHOICETopic: Auctions Correct Responses: 0Correct Answer: B317Di culty: 0Discrimination Index: 017.11First Fiddler's Bank has foreclosed on a home mortgage and is selling the house at auction. Thereare three bidders for the house, Waldo, Heidi, and Isabella. First Fiddler's does not know thewillingness 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, aprobability of 1=3 of valuing at $300,000, and a probability of 1=3 of valuing it at $200,000. FirstFiddler's believes that these probabilities are independent between buyers. If First Fiddler's sellsthe house by means of a second-bidder, sealed-bid auction Vickrey auction, what will be thebank's expected revenue from the sale? Choose the closest option.a $300,000b $351,852c $366,667d $600,000e $200,000Topic: Auctions Correct Responses: 0Correct Answer: BDi culty: 0Discrimination Index: 017.12First Fiddler's Bank has foreclosed on a home mortgage and is selling the house at auction. Thereare three bidders for the house, Roger, Wendy, and Doreen. First Fiddler's does not know thewillingness 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, aprobability of 1=3 of valuing at $400,000, and a probability of 1=3 of valuing it at $200,000. FirstFiddler's believes that these probabilities are independent between buyers. If First Fiddler's sellsthe house by means of a second-bidder, sealed-bid auction Vickrey auction, what will be thebank's expected revenue from the sale? Choose the closest option.a $400,000b $425,926c $433,333d $700,000e $200,000CHAPTER 17 AuctionsTopic: Auctions Correct Responses: 0Correct Answer: D318Di culty: 0Discrimination Index: 017.13 A dealer decides to sell an antique automobile by means of an English auction with areservation price of $900. There are two bidders. The dealer believes that there are only threepossible values, $6,300, $2,700, and $900, that each bidder's willingness to pay might take. Eachbidder has a probability of 1=3 of having each of these willingnesses to pay, and the probabilities foreach of the two bidders are independent of the other's valuation. Assuming that the two bidders bidrationally and do not collude, the dealer's expected revenue from selling the car is approximatelya $4,500.b $3,300.c $2,700.d $2,100.e $6,300.Topic: Auctions Correct Responses: 0Correct Answer: DDi culty: 0Discrimination Index: 017.14 A dealer decides to sell an antique automobile by means of an English auction with areservation price of $3,600. There are two bidders. The dealer believes that there are only threepossible values, $5,400, $4,500, and $3,600, that each bidder's willingness to pay might take. Eachbidder has a probability of 1=3 of having each of these willingnesses to pay, and the probabilities foreach of the two bidders are independent of the other's valuation. Assuming that the two bidders bidrationally and do not collude, the dealer's expected revenue from selling the car is approximatelya $4,950.b $4,500.c $4,500.d $4,100.e $5,400.MULTIPLE CHOICETopic: Auctions Correct Responses: 0Correct Answer: D319Di culty: 0Discrimination Index: 017.15 A dealer decides to sell an antique automobile by means of an English auction with areservation price of $2,700. There are two bidders. The dealer believes that there are only threepossible values, $8,100, $5,400, and $2,700, that each bidder's willingness to pay might take. Eachbidder has a probability of 1=3 of having each of these willingnesses to pay, and the probabilities foreach of the two bidders are independent of the other's valuation. Assuming that the two bidders bidrationally and do not collude, the dealer's expected revenue from selling the car is approximatelya $6,750.b $5,400.c $5,400.d $4,200.e $8,100.Topic: Auctions Correct Responses: 0Correct Answer: DDi culty: 0Discrimination Index: 017.16 A dealer decides to sell an antique automobile by means of an English auction with areservation price of $900. There are two bidders. The dealer believes that there are only threepossible values, $3,600, $2,700, and $900, that each bidder's willingness to pay might take. Eachbidder has a probability of 1=3 of having each of these willingnesses to pay, and the probabilities foreach of the two bidders are independent of the other's valuation. Assuming that the two bidders bidrationally and do not collude, the dealer's expected revenue from selling the car is approximatelya $3,150.b $2,400.c $2,700.d $1,800.e $3,600.CHAPTER 17 AuctionsTopic: Auctions Correct Responses: 0Correct Answer: D320Di culty: 0Discrimination Index: 017.17 A dealer decides to sell an antique automobile by means of an English auction with areservation price of $900. There are two bidders. The dealer believes that there are only threepossible values, $5,400, $3,600, and $900, that each bidder's willingness to pay might take. Eachbidder has a probability of 1=3 of having each of these willingnesses to pay, and the probabilities foreach of the two bidders are independent of the other's valuation. Assuming that the two bidders bidrationally and do not collude, the dealer's expected revenue from selling the car is approximatelya $4,500.b $3,300.c $3,600.d $2,300.e $5,400.Topic: Auctions Correct Responses: 0Correct Answer: ADi culty: 0Discrimination Index: 017.18 A dealer decides to sell an oil painting by means of an English auction with a reservationprice just slightly below $81,000. If he fails to get his reservation price for the painting, he willburn 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 aprobability of 1=3 of having each of these willingnesses to pay, and the probabilities for each of thetwo bidders are independent of the other's valuation. Assuming that the two bidders bid rationallyand do not collude, the dealer's expected revenue from selling the painting is slightly less thana $73,000.b $81,000.c $45,000.d $63,000.e $72,000.MULTIPLE CHOICETopic: Auctions Correct Responses: 0Correct Answer: A321Di culty: 0Discrimination Index: 017.19 A dealer decides to sell an oil painting by means of an English auction with a reservationprice just slightly below $45,000. If he fails to get his reservation price for the painting, he willburn 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 aprobability of 1=3 of having each of these willingnesses to pay, and the probabilities for each of thetwo bidders are independent of the other's valuation. Assuming that the two bidders bid rationallyand do not collude, the dealer's expected revenue from selling the painting is slightly less thana $42,000.b $45,000.c $27,000.d $36,000.e $45,000.Topic: Auctions Correct Responses: 0Correct Answer: ADi culty: 0Discrimination Index: 017.20 A dealer decides to sell an oil painting by means of an English auction with a reservationprice just slightly below $90,000. If he fails to get his reservation price for the painting, he willburn 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 hasa probability of 1=3 of having each of these willingnesses to pay, and the probabilities for each of thetwo bidders are independent of the other's valuation. Assuming that the two bidders bid rationallyand do not collude, the dealer's expected revenue from selling the painting is slightly less thana $83,000.b $90,000.c $45,000.d $67,500.e $84,000.CHAPTER 17 AuctionsTopic: Auctions Correct Responses: 0Correct Answer: A322Di culty: 0Discrimination Index: 017.21 A dealer decides to sell an oil painting by means of an English auction with a reservationprice just slightly below $72,000. If he fails to get his reservation price for the painting, he willburn 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 hasa probability of 1=3 of having each of these willingnesses to pay, and the probabilities for each of thetwo bidders are independent of the other's valuation. Assuming that the two bidders bid rationallyand do not collude, the dealer's expected revenue from selling the painting is slightly less thana $69,000.b $72,000.c $36,000.d $54,000.e $75,000.Topic: Auctions Correct Responses: 0Correct Answer: ADi culty: 0Discrimination Index: 017.22 A dealer decides to sell an oil painting by means of an English auction with a reservationprice just slightly below $63,000. If he fails to get his reservation price for the painting, he willburn 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 hasa probability of 1=3 of having each of these willingnesses to pay, and the probabilities for each of thetwo bidders are independent of the other's valuation. Assuming that the two bidders bid rationallyand do not collude, the dealer's expected revenue from selling the painting is slightly less thana $61,000.b $63,000.c $27,000.d $45,000.e $66,000.MULTIPLE CHOICETopic: Auctions Correct Responses: 0Correct Answer: A323Di culty: 0Discrimination Index: 017.23 Herb's Auction House in Purloined Hubcap, Oregon, holds sealed-bid used-car auctionsevery Wednesday. Each car is sold to the highest bidder at the second-highest bidder's bid. Onaverage, 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 buyerscan do no better than random at picking good cars from the lot. There is only one exception, AlCrankcase. Al can sometimes but not always detect lemons by means of a subtle test. A good carwill 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 expectedvalue 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 lemonsc 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.Topic: Auctions Correct Responses: 0Correct Answer: BNormal bidders will getNormal bidders will getNormal bidders will getNormal bidders will getNormal bidders will getDi culty: 0Discrimination Index: 017.24 A seller knows that there are two bidders for the object she is selling. She believes thatwith probability 1=2; one has a buyer value of $5 and the other has a buyer value of $10 and, withprobability 1=2; one has a buyer value of $8 and the other has a buyer value of $15. She knowsthat bidders will want to buy the object so long as they can get it for their buyer value or less. Shesells it in an English auction with a reserve price which she must set before the auction starts. Tomaximize her expected pro ts, she should set the reserve price ata $5.b $10.c $8.d $13.e $15.CHAPTER 17 AuctionsTopic: Auctions Correct Responses: 0Correct Answer: A324Di culty: 0Discrimination Index: 017.25 A seller knows that there are two bidders for the object he is selling. He believes thatwith probability 1=2; one has a buyer value of $5 and the other has a buyer value of $12 and, withprobability 1=2; one has a buyer value of $10 and the other has a buyer value of $30. He knowsthat bidders will want to buy the object so long as they can get it for their buyer value or less. Hesells it in an English auction with a reserve price which he must set before the auction starts. Tomaximize his expected pro ts, he should set the reserve price ata $30.b $5.c $12.d $10.e $20.Topic: Auctions Correct Responses: 0Correct Answer: CDi culty: 0Discrimination Index: 017.26 A seller decides to sell an object by means of a sealed-bid, second-price auction without areservation price. There are two bidders. The seller believes that for each of the two bidders thereis a probability of 1=2 that the bidder's value for the object is $500 and a probability of 1=2 that thebidder'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 $500b $300c $200d $180e $260MULTIPLE CHOICETopic: Auctions Correct Responses: 0Correct Answer: C325Di culty: 0Discrimination Index: 017.27 A seller decides to sell an object by means of a sealed-bid, second-price auction without areservation price. There are two bidders. The seller believes that for each of the two bidders thereis a probability of 1=2 that the bidder's value for the object is $500 and a probability of 1=2 that thebidder'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 $500b $300c $200d $180e $260Topic: Auctions Correct Responses: 0Correct Answer: CDi culty: 0Discrimination Index: 017.28 A seller decides to sell an object by means of a sealed-bid, second-price auction without areservation price. There are two bidders. The seller believes that for each of the two bidders thereis a probability of 1=2 that the bidder's value for the object is $600 and a probability of 1=2 that thebidder'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 $600b $350c $225d $200e $300CHAPTER 17 AuctionsTopic: Auctions Correct Responses: 0Correct Answer: C326Di culty: 0Discrimination Index: 017.29 A seller decides to sell an object by means of a sealed-bid, second-price auction without areservation price. There are two bidders. The seller believes that for each of the two bidders thereis a probability of 1=2 that the bidder's value for the object is $400 and a probability of 1=2 that thebidder'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 $400b $250c $175d $160e $220Topic: Auctions Correct Responses: 0Correct Answer: CDi culty: 0Discrimination Index: 017.30 A seller decides to sell an object by means of a sealed-bid, second-price auction without areservation price. There are two bidders. The seller believes that for each of the two bidders thereis a probability of 1=2 that the bidder's value for the object is $500 and a probability of 1=2 that thebidder'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 $500b $300c $200d $180e $260MULTIPLE CHOICETopic: Auctions Correct Responses: 0Correct Answer: A327Di culty: 0Discrimination Index: 017.31 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 of1=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 biddersbid rationally, what is the seller's expected revenue from the auction?a $375b $420c $450d $600e $300Topic: Auctions Correct Responses: 0Correct Answer: ADi culty: 0Discrimination Index: 017.32 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 of1=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 biddersbid rationally, what is the seller's expected revenue from the auction?a $275b $320c $350d $500e $200CHAPTER 17 AuctionsTopic: Auctions Correct Responses: 0Correct Answer: A328Di culty: 0Discrimination Index: 017.33 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 of1=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 biddersbid rationally, what is the seller's expected revenue from the auction?a $325b $340c $350d $400e $300Topic: Auctions Correct Responses: 0Correct Answer: ADi culty: 0Discrimination Index: 017.34 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 of1=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 biddersbid rationally, what is the seller's expected revenue from the auction?a $175b $220c $250d $400e $100MULTIPLE CHOICETopic: Auctions Correct Responses: 0Correct Answer: A329Di culty: 0Discrimination Index: 017.35 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 of1=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 biddersbid rationally, what is the seller's expected revenue from the auction?a $375b $420c $450d $600e $300Chapter 18TechnologyTrue-FalseTopic: Technology Correct Responses: 0Correct Answer: FalseDi culty: 1Discrimination Index: 018.1 The production set of a rm is the set of all products the rm can produce.Topic: Technology Correct Responses: 72Correct Answer: FalseDi culty: 1Discrimination Index: 4918.2 A production isoquant is a locus of combinations of inputs that are equally pro table.Topic: Technology Correct Responses: 77Correct Answer: FalseDi culty: 1Discrimination Index: 3218.3 If there are constant returns to scale, then doubling the amount of any input will exactlydouble the amount of output.Topic: Technology Correct Responses: 0Correct Answer: TrueDi culty: 1Discrimination Index: 018.4 The economist's distinction between long and short run captures the idea that quantities ofsome factor inputs can be varied in the short run but not in the long run.Topic: Technology Correct Responses: 79Correct Answer: TrueDi culty: 2Discrimination Index: 2318.5 If the production function is f x; y = minf2x + y; x + 2yg; then there are constant returns toscale.Topic: Technology Correct Responses: 84Correct Answer: TrueDi culty: 2Discrimination Index: 1018.6 If the production function is f x; y = x + minfx; yg; then there are constant returns to scale.TRUE-FALSETopic: Technology Correct Responses: 0Correct Answer: True331Di culty: 2Discrimination Index: 018.7 If the production function is f x; y = minf12x; 3yg; then there is convexity in production.Topic: Technology Correct Responses: 76Correct Answer: FalseDi culty: 1Discrimination Index: 1418.8 If the production function is f x ; x = x x ; then there are constant returns to scale.1212Topic: Technology Correct Responses: 55Correct Answer: TrueDi culty: 2Discrimination Index: 3818.9 It is possible to have decreasing marginal products for all inputs, and yet have increasingreturns to scale.Topic: Technology Correct Responses: 83Correct Answer: TrueDi culty: 1Discrimination Index: 2418.10 A production function has well-de ned marginal products at every input combination. IfFactor x is shown on the horizontal axis and Factor y is shown on the vertical axis, the slope of theisoquant through a point x; y is the negative of the ratio of the marginal product of x to themarginal product of y.Topic: Technology Correct Responses: 80Correct Answer: FalseDi culty: 1Discrimination Index: 1018.11 The production function f x; y = x = + y = has increasing returns to scale.23Topic: Technology Correct Responses: 96Correct Answer: True23Di culty: 1Discrimination Index: 218.12 The production function f x; y = x + y has constant returns to scale.CHAPTER 18 TechnologyTopic: Technology Correct Responses: 75Correct Answer: True332Di culty: 2Discrimination Index: 2718.13 If there is one input used in production and if there are decreasing returns to scale, thenthe marginal product for the input will be diminishing.Topic: Technology Correct Responses: 92Correct Answer: FalseDi culty: 1Discrimination Index: 718.14 A rm's production function is f x ; x = x +2x . This means that x is twice as expensiveas x1.12Topic: Technology Correct Responses: 75Correct Answer: True122Di culty: 2Discrimination Index: 2018.15 A rm has two variable factors and a production function f x ; x = 2x + 4x = . Thetechnical rate of substitution between x1 and x2 is constant.Topic: Technology Correct Responses: 38Correct Answer: False121212Di culty: 1Discrimination Index: 818.16 If the marginal product of each factor decreases as the amount of that factor used increases,then there must be decreasing returns to scale.TechnologyMultiple ChoiceTopic: Technology Correct Responses: 92Correct Answer: BDi culty: 1Discrimination Index: 1318.1 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: 67Correct Answer: ADi culty: 2Discrimination Index: 4118.2 If a rm moves from one point on a production isoquant to another point on the sameisoquant, which of the following will certainly NOT happen?a a change in the level of outputb a change in the ratio in which the inputs are combinedc a change in the marginal products of the inputsd a change in the rate of technical substitutione a change in pro tabilityTopic: Technology Correct Responses: 0Correct Answer: ADi culty: 2Discrimination Index: 018.3 A rm has the production function f x; y = x: + y where x is the amount of factor x it5uses and y is the amount of factor y. On a diagram we put x on the horizontal axis and y on thevertical axis. We draw some isoquants. Now we draw a straight line on the graph and we noticethat the slopes of all the isoquants that it meets have the same slope at the point where they meetthis 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 TechnologyTopic: Technology Correct Responses: 72Correct Answer: E334Di culty: 2Discrimination Index: 2418.4 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 24y = 2K + 3L.a 1,2, and 4b 2,3, and 4c 1,3, and 4d 2 and 3e 2 and 4Topic: Technology Correct Responses: 73Correct Answer: DDi culty: 2Discrimination Index: 5418.5 A rm has the production function, f x; y = 20x = y = . The slope of the rm's isoquant atthe point x; y = 80; 10 is: Pick the closest one.3525a ,8.b ,1:50.c ,0:67.d ,0:19.e ,4.Topic: Technology Correct Responses: 73Correct Answer: DDi culty: 2Discrimination Index: 5418.6 A rm has the production function, f x; y = 40x = y = . The slope of the rm's isoquant atthe point x; y = 70; 50 is: Pick the closest one.a ,1:40.b ,0:67.c ,1:50.d ,0:48.e ,0:70.2535MULTIPLE CHOICETopic: Technology Correct Responses: 51Correct Answer: C335Di culty: 1Discrimination Index: 1118.7 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: 0Correct Answer: CDi culty: 2Discrimination Index: 018.8 A rm has the production function f X; Y = X = Y=where X is the amount of factor xused and Y is the amount of factor y used. On a diagram we put X on the horizontal axis and Y onthe vertical axis. We draw some isoquants. Now we draw a straight line on the graph and we noticethat wherever this line meets an isoquant, the isoquant has a slope of ,3. The straight line we drew:3414a 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: 0Correct Answer: CDi culty: 2Discrimination Index: 018.9 A rm has the production function f X; Y = X = Y2 3 1=3where X is the amount of factor xused and Y is the amount of factor y used. On a diagram we put X on the horizontal axis and Y onthe vertical axis. We draw some isoquants. Now we draw a straight line on the graph and we noticethat 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 TechnologyTopic: Technology Correct Responses: 31Correct Answer: C336Di culty: 1Discrimination Index: 3276718.10 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 asthe 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: 55Correct Answer: BDi culty: 2Discrimination Index: 4618.11 A rm has the production function f x ; x = xb + xb c where b 0 and c 0. This rmwill have:1212a 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: 0Correct Answer: CDi culty: 0Discrimination Index: 018.12 A rm has the production function f x; 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 CHOICETopic: Technology Correct Responses: 32Correct Answer: D337Di culty: 3Discrimination Index: 4118.13 Suppose that the production function is f x ; x = xa + xab; where a and b are positive1212constants. 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: 0Correct Answer: DDi culty: 0Discrimination Index: 018.14 A rm has the production function f x ; x = x : x : . The isoquant on which output is=402 10has the equation:120 40 0 2012a x2 = 40x,2.1b x2 = 40x5.1c x1=x2 = 2.d x2 = 40x,0:201e x1 = 0:20x,0:80.2Topic: Technology Correct Responses: 0Correct Answer: DDi culty: 0Discrimination Index: 018.15 A rm has the production function f x ; x = x : x : . The isoquant on which output is=306 10has the equation:a x2 = 30x,2.1b x2 = 30x1:67.1c x1=x2 = 2.d x2 = 30x,0:601e x1 = 0:60x,0:40.2121 20 0 6012CHAPTER 18 TechnologyTopic: Technology Correct Responses: 94Correct Answer: E338Di culty: 1Discrimination Index: 2018.16 A rm has the production function f x; y = x y : . This rm has:1 0 80a 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: 94Correct Answer: EDi culty: 1Discrimination Index: 2018.17 A rm has the production function f x; y = x : y . This rm has:1 30 1a 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: 100Correct Answer: BDi culty: 1Discrimination Index: 018.18 A rm uses 3 factors to produce its output. Its production function is f x; y; z =minfx3 =y; y2 ; z 4 , x4=y2 g. If the amount of each input is multiplied by 6, its output will be multi-plied by:a 216b 36c 6d 0.16e The answer depends on the original choice of x; y; and z .MULTIPLE CHOICETopic: Technology Correct Responses: 100Correct Answer: B339Di culty: 1Discrimination Index: 018.19 A rm uses 3 factors to produce its output. Its production function is f x; y; z =minfx2 =y; y1 ; z 3 , x3=y2 g. If the amount of each input is multiplied by 4, its output will be multi-plied by:a 16b 4c 1d 0.80e The answer depends on the original choice of x; y; and z .Topic: Technology Correct Responses: 65Correct Answer: ADi culty: 2Discrimination Index: 9018.20 A rm has a production function f x; y = 1x : + y : whenever x 0 and y 0. When0 80the amounts of both inputs are positive, this rm has:0 80 4a 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 greaterthan 1.Topic: Technology Correct Responses: 65Correct Answer: ADi culty: 2Discrimination Index: 9018.21 A rm has a production function f x; y = 1:10x : + y : whenever x 0 and y 0.0 20When the amounts of both inputs are positive, this rm has:0 20 5a 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 greaterthan 1.CHAPTER 18 TechnologyTopic: Technology Correct Responses: 0Correct Answer: A340Di culty: 0Discrimination Index: 018.22 The production function Q = 50K : L : exhibits0 750 75a 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.Topic: Technology Correct Responses: 0Correct Answer: ADi culty: 0Discrimination Index: 018.23 The production function Q = 50K : L : exhibits0 750 50a 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.Topic: Technology Correct Responses: 0Correct Answer: CDi culty: 0Discrimination Index: 018.24 The UJava espresso stand needs two inputs, labor and co ee beans, to produce its onlyoutput, espresso. Producing an espresso always requires the same amount of co ee beans, and thesame amount of time. Which of the following production functions would appropriately describethe production process at UJava, where B represents ounces of co ee beans, and L represents hoursof labor?a Q = B 0:60L0:40b Q = B=2 + L=30c Q = min2B; 60Ld Q = 0:5B + 0:5L0:5$e none of the above.MULTIPLE CHOICETopic: Technology Correct Responses: 0Correct Answer: C341Di culty: 0Discrimination Index: 018.25 The UJava espresso stand needs two inputs, labor and co ee beans, to produce its onlyoutput, espresso. Producing an espresso always requires the same amount of co ee beans, and thesame amount of time. Which of the following production functions would appropriately describethe production process at UJava, where B represents ounces of co ee beans, and L represents hoursof labor?a Q = B 0:70L0:30b Q = B=2 + L=30c Q = min2B; 60Ld Q = 0:5B + 0:5L0:5$e none of the above.TechnologyEssayTopic: Technology Correct Responses: 0Di culty: 2Discrimination Index: 018.1 On separate axes, draw typical production isoquants for each of the following production=functions. a f x; y = minf2x; x + yg b f x; y = xy c f x; y = x + minfx; yg d f x; y = x + y1 2 .Answer: For a, the isoquants have a kink at the line x = y. At a typical point on this line, sayx = y = 3; the isoquant has a vertical segment going all the way to the sky and another segmentrunning from 3; 3 to 6; 0. b These are rectangular hyperbolas. cIf x is on the horizontal axis andy on the vertical axis, an isoquant has a kink on the line x = y. To the left of this line, an isoquanthas the slope ,1; to the right of this line, an isoquant has slope ,1. Above this line the isoquantis vertical. d The isoquants are convex to the origin. If you draw a horizontal line through two ormore isoquants, they will all have the same slope where they meet this line.Topic: Technology Correct Responses: 0Di culty: 0Discrimination Index: 018.2 For each of the following production functions, comment on the ability to substitute capitalfor labor.a Q = K + Lb Q = K 0:5 L0:5c Q = minK; Ld Why would this information be of interest to a manager?Topic: Technology Correct Responses: 0Di culty: 0Discrimination Index: 018.3 For each of the following production functions, draw a diagram showing the general shapeof its corresponding isoquant. Comment on the ease at which labor and capital can be substitutedfor one another relative to the other two production functions.a Q = K + Lb Q = K 0:5 L0:5c Q = minK; LChapter 19Pro t MaximizationTrue-FalseTopic: Pro t Maximization Correct Responses: 96Correct Answer: FalseDi culty: 1Discrimination Index: 2519.1 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: 86Correct Answer: FalseDi culty: 1Discrimination Index: 3019.2 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: 92Correct Answer: TrueDi culty: 1Discrimination Index: 719.3 The marginal product of a factor is just the derivative of the production function withrespect to the amount of this factor, holding the amounts of other factor inputs constant.Topic: Pro t Maximization Correct Responses: 37Correct Answer: FalseDi culty: 2Discrimination Index: 1919.4 If the value of the marginal product of factor x increases as the quantity of x increases, andthe value of the marginal product of x is equal to the wage rate, then the pro t maximizing amountof x is being used.Topic: Pro t Maximization Correct Responses: 43Correct Answer: TrueDi culty: 2Discrimination Index: 4519.5 If the price of the output of a pro t-maximizing, competitive rm rises and all other pricesstay constant, then the rm's output cannot fall.CHAPTER 19 Pro t MaximizationTopic: Pro t Maximization Correct Responses: 78Correct Answer: True344Di culty: 1Discrimination Index: 1219.6 If a pro t-maximizing competitive rm has constant returns to scale, then its long runpro ts must be zero.Topic: Pro t Maximization Correct Responses: 58Correct Answer: FalseDi culty: 2Discrimination Index: 1719.7 Just as in the theory of utility maximizing consumers, the theory of pro t maximizing rmsallows the possibility of "Gi en factors". These are factors for which a fall in price leads to a fallin demand.Topic: Pro t Maximization Correct Responses: 92Correct Answer: FalseDi culty: 1Discrimination Index: 1519.8 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: 63Correct Answer: FalseDi culty: 2Discrimination Index: 4019.9 A rm produces one input with one output and has decreasing returns to scale. The pricethat it pays per unit of input and the price it gets per unit of output are independent of theamount that this rm buys or sells. If the government taxes its net pro ts at some percentage rateand subsidizes its inputs at the same percentage rate, the rm's pro t maximizing output will notchange.Multiple ChoiceTopic: Pro t Maximization Correct Responses: 81Correct Answer: DPro t MaximizationDi culty: 2Discrimination Index: 3619.1 A competitive rm produces output using three xed factors and one variable factor. Therm'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 shortrun, how many units of x should the rm use?a 20b 80c 19d 40e None of the above.Topic: Pro t Maximization Correct Responses: 81Correct Answer: DDi culty: 2Discrimination Index: 3619.2 A competitive rm produces output using three xed factors and one variable factor. Therm'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 shortrun, how many units of x should the rm use?a 22b 90c 31d 45e None of the above.CHAPTER 19 Pro t MaximizationTopic: Pro t Maximization Correct Responses: 69Correct Answer: A346Di culty: 2Discrimination Index: 5019.3 A competitive rm produces a single output using several inputs. The price of output risesby $2 per unit. The price of one of the inputs increases by $5 and the quantity of this input thatthe rm uses increases by 6 units. The prices of all other inputs stay unchanged. From the weakaxiom 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: 69Correct Answer: ADi culty: 2Discrimination Index: 5019.4 A competitive rm produces a single output using several inputs. The price of output risesby $3 per unit. The price of one of the inputs increases by $3 and the quantity of this input thatthe rm uses increases by 6 units. The prices of all other inputs stay unchanged. From the weakaxiom 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: 13Correct Answer: EDi culty: 2Discrimination Index: 1719.5 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 CHOICETopic: Pro t Maximization Correct Responses: 55Correct Answer: B347Di culty: 2Discrimination Index: 3719.6 A rm produces one output using one input. When the cost of the input was 3 and theprice 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 inputto 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: 88Correct Answer: CDi culty: 1Discrimination Index: 2719.7 =A pro t-maximizing competitive rm uses just one input, x. Its production function isq = 8x1 2. The price of output is 16 and the factor price is 8. The amount of the factor that therm demands is:a 10.b 22.63.c 64.d 48.e None of the above.Topic: Pro t Maximization Correct Responses: 88Correct Answer: CDi culty: 1Discrimination Index: 2719.8 =A pro t-maximizing competitive rm uses just one input, x. Its production function isq = 8x1 2. The price of output is 40 and the factor price is 8. The amount of the factor that therm demands is:a 13.b 35.78.c 400.d 384.e None of the above.CHAPTER 19 Pro t MaximizationTopic: Pro t Maximization Correct Responses: 36Correct Answer: A348Di culty: 2Discrimination Index: 2819.9 A competitive, pro t-maximizing rm uses two inputs a and b. Its production function is==F a; b = a1 2 + b1 2. Its output sells for $5 per unit. The price of input a is $1 per unit. If the priceof 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: 44Correct Answer: ADi culty: 2Discrimination Index: 4019.10 A competitive rm's production function is f x ; x = 4x = + 10x = . The price of factor 112121122is 1 and the price of factor 2 is 1. The price of output is 2. What is the pro t-maximizing quantityof output?a 116b 232c 112d 244e 104Topic: Pro t Maximization Correct Responses: 44Correct Answer: ADi culty: 2Discrimination Index: 4019.11 A competitive rm's production function is f x ; x = 4x = + 6x = . The price of factor 112121122is 1 and the price of factor 2 is 2. The price of output is 4. What is the pro t-maximizing quantityof output?a 68b 136c 64d 148e 56MULTIPLE CHOICETopic: Pro t Maximization Correct Responses: 0Correct Answer: B349Di culty: 2Discrimination Index: 019.12 Ji y-pol Consultants is paid $1,000,000 for each percent of the vote that Senator Sleazereceives 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 thenumber of ads. If each ad costs $3,600 approximately how many ads should Ji y-pol buy in orderto maximize its pro ts?a 3,329b 1,666c 72d 1,702e 833Topic: Pro t Maximization Correct Responses: 0Correct Answer: BDi culty: 2Discrimination Index: 019.13 Ji y-pol Consultants is paid $1,000,000 for each percent of the vote that Senator Sleazereceives 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 thenumber of ads. If each ad costs $6,400 approximately how many ads should Ji y-pol buy in orderto maximize its pro ts?a 2,495b 1,249c 128d 1,313e 625CHAPTER 19 Pro t MaximizationTopic: Pro t Maximization Correct Responses: 0Correct Answer: C350Di culty: 2Discrimination Index: 019.14 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 than4, 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=9b 4c 0d 4=3e 9=2Topic: Pro t Maximization Correct Responses: 80Correct Answer: BDi culty: 1Discrimination Index: 4019.15 The production function is given by F L = 6L = . Suppose that the cost per unit of labor23is 12 and the price of output is 6, how many units of labor will the rm hire?a 16b 8c 4d 24e None of the above.Topic: Pro t Maximization Correct Responses: 80Correct Answer: BDi culty: 1Discrimination Index: 4019.16 The production function is given by F L = 6L = . Suppose that the cost per unit of labor23is 8 and the price of output is 6, how many units of labor will the rm hire?a 54b 27c 13.5d 81e None of the above.MULTIPLE CHOICETopic: Pro t Maximization Correct Responses: 88Correct Answer: A351Di culty: 1Discrimination Index: 4019.17 The production function is given by f x = 4x = . If the price of the commodity produced12is 80 per unit and the cost of the input is 20 per unit, how much pro ts will the rm make if itmaximizes pro ts?a 1,280b 638c 2,564d 1,265e 643Topic: Pro t Maximization Correct Responses: 88Correct Answer: ADi culty: 1Discrimination Index: 4019.18 The production function is given by f x = 4x = . If the price of the commodity produced12is 80 per unit and the cost of the input is 35 per unit, how much pro ts will the rm make if itmaximizes pro ts?a 731.43b 363.71c 1,466.86d 716.43e 368.71Topic: Pro t Maximization Correct Responses: 80Correct Answer: CDi culty: 1Discrimination Index: 4519.19 The production function is f x ; x = x = x = . If the price of factor 1 is 8 and the price of1212 1212factor 2 is 4, in what proportions should the rm use factors 1 and 2 if it wants to maximize pro ts?a x1 = x2b x1 = 2x2c x1 = 0:50x2d We can't tell without knowing the price of output.e x1 = 4x2CHAPTER 19 Pro t MaximizationTopic: Pro t Maximization Correct Responses: 80Correct Answer: C352Di culty: 1Discrimination Index: 4519.20 The production function is f x ; x = x = x = . If the price of factor 1 is 16 and the price1212 1212of factor 2 is 32, in what proportions should the rm use factors 1 and 2 if it wants to maximizepro ts?a x1 = x2b x1 = 0:50x2c x1 = 2x2d We can't tell without knowing the price of output.e x1 = 32x2Topic: Pro t Maximization Correct Responses: 82Correct Answer: ADi culty: 2Discrimination Index: 2019.21 When Farmer Hoglund applies N pounds of fertilizer per acre, the marginal product offertilizer is 1 , N=200 bushels of corn. If the price of corn is $1 per bushel and the price of fertilizeris $0.40 per pound, then how many pounds of fertilizer per acre should Farmer Hoglund use inorder to maximize his pro ts?a 120b 240c 64d 248e 200MULTIPLE CHOICETopic: Pro t Maximization Correct Responses: 82Correct Answer: A353Di culty: 2Discrimination Index: 2019.22 When Farmer Hoglund applies N pounds of fertilizer per acre, the marginal product offertilizer is 1 , N=200 bushels of corn. If the price of corn is $4 per bushel and the price of fertilizeris $0.40 per pound, then how many pounds of fertilizer per acre should Farmer Hoglund use inorder to maximize his pro ts?a 180b 360c 94d 368e 200Topic: Pro t Maximization Correct Responses: 0Correct Answer: EDi culty: 0Discrimination Index: 019.23 If the short run marginal cost of producing a good is $20 for the rst 200 units and $30for each additional unit beyond 200, then in the short run, if the market price of output is 29, apro 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: 0Correct Answer: EDi culty: 0Discrimination Index: 019.24 If the short run marginal cost of producing a good is $20 for the rst 300 units and $30for each additional unit beyond 300, then in the short run, if the market price of output is 27, apro 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 MaximizationTopic: Pro t Maximization Correct Responses: 0Correct Answer: D354Di culty: 0Discrimination Index: 019.25 Diesel Dan is a contract truck driver. While his revenue is $2.50 per mile driven, the fasterhe drives, the greater the risk of a speeding ticket. The cost of driving his truck one hour at aspeed of S miles per hour isC S = eS ,60=3To maximize his pro t, Dan should drivea 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: 0Correct Answer: DDi culty: 0Discrimination Index: 019.26 Diesel Dan is a contract truck driver. While his revenue is $1.50 per mile driven, the fasterhe drives, the greater the risk of a speeding ticket. The cost of driving his truck one hour at aspeed of S miles per hour isC S = eS ,50=3To maximize his pro t, Dan should drivea 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 CHOICETopic: Pro t Maximization Correct Responses: 0Correct Answer: B355Di culty: 0Discrimination Index: 019.27 During the height of the pet rock craze in the 19700s; the price elasticity of demand wasestimated to be 1.10. Since pet rocks have a marginal cost of zero, a pro t maximizing seller of petrocks woulda 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: 0Correct Answer: BDi culty: 0Discrimination Index: 019.28 During the height of the pet rock craze in the 19700s; the price elasticity of demand wasestimated to be 1.50. Since pet rocks have a marginal cost of zero, a pro t maximizing seller of petrocks woulda 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 MaximizationTopic: Pro t Maximization Correct Responses: 0Correct Answer: B356Di culty: 0Discrimination Index: 019.29 Philip owns and operates a gas station. Philip works 40 hours a week managing the stationbut doesn't draw a salary. He could earn $700 a week doing the same work for Terrance. The storeowes its bank $100,000 and Philip has invested $100,000 of his own money. If Philip's accountingpro ts are $1,000 per week while the interest on his bank debt is $400 per week, the business'economic pro ts area $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: 0Correct Answer: BDi culty: 0Discrimination Index: 019.30 Philip owns and operates a gas station. Philip works 40 hours a week managing the stationbut doesn't draw a salary. He could earn $700 a week doing the same work for Terrance. The storeowes its bank $100,000 and Philip has invested $100,000 of his own money. If Philip's accountingpro ts are $1,000 per week while the interest on his bank debt is $500 per week, the business'economic pro ts area $0 per week.b $ , 200 per week.c $500 per week.d $300 per week.e $1,000 per week.EssayTopic: Pro t Maximization Correct Responses: 0Pro t MaximizationDi culty: 3Discrimination Index: 019.1 A competitive rm has a production function described as follows. "Weekly output is thesquare root of the minimum of the number of units of capital and the number of units of laboremployed per week." Suppose that in the short run this rm must use 16 units of capital but canvary its amount of labor freely. a Write down a formula that describes the marginal product oflabor 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 inthe short run? c What if w = 1 and p = 10? d Write down an equation for the rm's short rundemand for labor as function of w and p.Answer: a MP = 1=2L1=2 if L 16; MP = 0 if L 16. b4 c16 d L = p=2w2Chapter 20Cost MinimizationTrue-FalseTopic: Cost Minimization Correct Responses: 96Correct Answer: TrueDi culty: 2Discrimination Index: 2520.1 Quasi- xed costs are those costs that can be avoided if and only if a rm produces zerooutput.Topic: Cost Minimization Correct Responses: 79Correct Answer: TrueDi culty: 1Discrimination Index: 2120.2 If there are increasing returns to scale, then average costs are a decreasing function ofoutput.Topic: Cost Minimization Correct Responses: 33Correct Answer: FalseDi culty: 2Discrimination Index: 3820.3 If there are increasing returns to scale, then costs per unit of output decrease as you movedownward and to the right along an isocost line.Topic: Cost Minimization Correct Responses: 69Correct Answer: FalseDi culty: 2Discrimination Index: 4520.4 If the production function is f x ; x = minfx ; x g; then the cost function is cw ; w ; y =minfw1 ; w2gy.Topic: Cost Minimization Correct Responses: 46Correct Answer: False121212Di culty: 1Discrimination Index: 3020.5 The conditional factor demand function for factor 1 is a function x w ; w ; y that tells theratio of price to output for an optimal factor choice of the rm.112TRUE-FALSETopic: Cost Minimization Correct Responses: 88Correct Answer: False359Di culty: 1Discrimination Index: 3020.6 The cost function cw ; w ; y expresses the cost per unit of output of producing y units of12output if equal amounts of both factors are used.Topic: Cost Minimization Correct Responses: 36Correct Answer: FalseDi culty: 2Discrimination Index: 3520.7 A competitive, cost-minimizing rm has the production function f x; y = x + 2y and usespositive amounts of both inputs. If the price of x doubles and the price of y triples, then the costof production will more than double.Topic: Cost Minimization Correct Responses: 37Correct Answer: FalseDi culty: 2Discrimination Index: 2720.8 The total cost function cw ; w ; y expresses the cost per unit of output as a function ofinput prices and output.Topic: Cost Minimization Correct Responses: 26Correct Answer: False12Di culty: 3Discrimination Index: 2520.9 A rm uses a single variable input x to produce outputs according to the production func-tion f x = 500x , 4x2. This rm has xed costs of $300. This rm's short run marginal cost curvelies below its short run average variable cost curve for all positive values of x.Topic: Cost Minimization Correct Responses: 26Correct Answer: FalseDi culty: 3Discrimination Index: 2520.10 A rm uses a single variable input x to produce outputs according to the production func-tion f x = 300x , 5x2. This rm has xed costs of $300. This rm's short run marginal cost curvelies below its short run average variable cost curve for all positive values of x.Multiple ChoiceTopic: Cost Minimization Correct Responses: 53Correct Answer: ACost MinimizationDi culty: 1Discrimination Index: 3020.1 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 f su; po; so = minfsu; po + 2sog where su is thenumber of bags of sugar, po the number of canisters of peanut oil, and so the number of canistersof soybean oil that he uses. The price of a bag of sugar is 11. The price of a canister of peanutoil is 6. The price of a canister of soybean oil is 20. If George makes 254 boxes of cookies in thecheapest way possible, how many canisters of soybean oil will he use?a 127b 0c 84.67d 169.33e 42.33Topic: Cost Minimization Correct Responses: 53Correct Answer: ADi culty: 1Discrimination Index: 3020.2 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 f su; po; so = minfsu; po + 2sog where su is thenumber of bags of sugar, po the number of canisters of peanut oil, and so the number of canistersof soybean oil that he uses. The price of a bag of sugar is 5. The price of a canister of peanut oil is9. The price of a canister of soybean oil is 13. If George makes 254 boxes of cookies in the cheapestway possible, how many canisters of soybean oil will he use?a 127b 0c 84.67d 169.33e 42.33MULTIPLE CHOICETopic: Cost Minimization Correct Responses: 66Correct Answer: A361Di culty: 1Discrimination Index: 5020.3 A rm's production function is q = 16x : y : where x and y are the amounts of factors0 50 0 50x 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: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: 66Correct Answer: ADi culty: 1Discrimination Index: 5020.4 A rm's production function is q = 26x : y : where x and y are the amounts of factors0 33 0 67x 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: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: 84Correct Answer: DDi culty: 1Discrimination Index: 1320.5 A rm has xed costs of 9,000. Its short run production function is y = 3x = ; where x is12the amount of variable factor it uses. The price of the variable factor is $ 5,000 per unit. Where yis 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 MinimizationTopic: Cost Minimization Correct Responses: 84Correct Answer: D362Di culty: 1Discrimination Index: 1320.6 A rm has xed costs of 7,000. Its short run production function is y = 8x = ; where x is12the amount of variable factor it uses. The price of the variable factor is $ 4,000 per unit. Where yis 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: 81Correct Answer: CDi culty: 2Discrimination Index: 3320.7 A rm has two factories. One factory has the cost function c y = 2y + 90 and the other1121has the cost function c2 y2 = 6y + 40. If the rm wishes to produce a total of 32 units as cheaplyas possible, how many units will be produced in the second factory?22a 7b 2c 8d 14e None of the above.Topic: Cost Minimization Correct Responses: 82Correct Answer: ADi culty: 1Discrimination Index: 1020.8 A company can rent one of two copying machines. The rst costs $34 a month to rentand costs an additional 2 cents per copy to use. The second costs $107 a month to rent and anadditional 1 cent per copy to use. How many copies would the company need to make per monthin order for it to be worthwhile to rent the second machine?a 7,300b 13,300c 12,400d 6,900e None of the above.MULTIPLE CHOICETopic: Cost Minimization Correct Responses: 0Correct Answer: A363Di culty: 2Discrimination Index: 020.9 A rm produces ping pong balls using two inputs. When input prices are 15; 7 the rmuses 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?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.Topic: Cost Minimization Correct Responses: 82Correct Answer: BDi culty: 1Discrimination Index: 4520.10 As assistant vice-president in charge of production for a computer rm, you are asked tocalculate the cost of producing 170 computers. The production function is q = minfx; yg where xand y are the amounts of two factors used. The price of x is 18 and the price of y is 10. What isyour answer?a 2,580b 4,760c 8,460d 6,180e None of the above.CHAPTER 20 Cost MinimizationTopic: Cost Minimization Correct Responses: 25Correct Answer: B364Di culty: 3Discrimination Index: 1020.11 As head of the planning commission of Eastern Motors, your job is to determine whereto locate a new plant. The only inputs used in your cars are steel and labor and the productionfunction is Cobb-Douglas where f S; 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. aton 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 minimizecosts per unit of output?a Country Ab Country Bc 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: 48Correct Answer: DDi culty: 2Discrimination Index: 5920.12 A competitive rm uses two inputs, x and y. Total output is the square root of x timesthe square root of y. The price of x is 17 and the price of y is 11. The company minimizes its costsper unit of output and spends $517 on x. How much does it spend on y?a 766b 480c 655d 517e None of the above.MULTIPLE CHOICETopic: Cost Minimization Correct Responses: 53Correct Answer: B365Di culty: 3Discrimination Index: 4420.13 A rm has the production function Q = KL where K is the amount of capital and L is theamount of labor it uses as inputs. The cost per unit of capital is a rental fee r and the cost perunit 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: 60Correct Answer: CDi culty: 2Discrimination Index: 3220.14 Joe's Bar and Grill uses two inputs, beer and pretzels. When the price of beer was $10 acase 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 casesof 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 MinimizationTopic: Cost Minimization Correct Responses: 41Correct Answer: D366Di culty: 3Discrimination Index: 5120.15 The production function for drangles is: f x ; x = minfx ; 3x g = where x is the amount1212121of sugar and x2 is the amount of dough used. At the factor prices, w1 = w2 = 1; the minimum costof 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: 69Correct Answer: BDi culty: 1Discrimination Index: 4920.16 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 2that he uses. The prices of these two inputs are w1 = $4 and w2 = $2; respectively. The minimumcost of producing 280 units is therefore:a $1,680.b $840.c $2,240.d $560.e $1,120.MULTIPLE CHOICETopic: Cost Minimization Correct Responses: 69Correct Answer: B367Di culty: 1Discrimination Index: 4920.17 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 2that he uses. The prices of these two inputs are w1 = $2 and w2 = $4; respectively. The minimumcost of producing 80 units is therefore:a $480.b $400.c $640.d $160.e $320.Topic: Cost Minimization Correct Responses: 51Correct Answer: BDi culty: 2Discrimination Index: 4120.18 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 cheapestpossible way. She can hire as much labor as she wants at a cost of 20 cents per minute. She canuse as much electricity as she wants at a cost of 10 cents per minute. Her production isoquants aresmooth 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 theproduction function to know this.e The marginal product of a minute of labor plus the marginal product of a kilowatt-hour of labor mustequal 50=20 + 10.CHAPTER 20 Cost MinimizationTopic: Cost Minimization Correct Responses: 27Correct Answer: D368Di culty: 2Discrimination Index: 4620.19 A competitive rm has the three-factor production function f x; y; z = x + y = z = . The12 12factor prices used to be wx = 1; wy = 2; and wz = 3. Suppose that the price of factor y doubledwhile 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: 0Correct Answer: CDi culty: 2Discrimination Index: 020.20 = A competitive rm uses three factors of production. Its production function is f x; y; z ==x + y1 2 z 1 2. Originally the factor prices were wx = 1; wy = 2; and wz = 3. The prices of factors xand z decreased to half of their previous levels, but the price of factor y stayed constant. The costof production: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: 0Correct Answer: CDi culty: 0Discrimination Index: 020.21 A competitive rm with output y has a production function, y = 2x + x = where x and12121x2 are inputs used in production. The rm produces output minimizing cost. With input prices w1and 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 CHOICETopic: Cost Minimization Correct Responses: 39Correct Answer: D369Di culty: 0Discrimination Index: 3220.22 Suppose that the production function is f x ; x = minfx ; 2x g: . Then:12125a 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: 30Correct Answer: BDi culty: 2Discrimination Index: 5520.23 If the production function is given by f x ; x ; x ; x = minfx ; x g + minfx ; x g and the12341234prices of inputs x1; x2; x3; x4 are 2; 1; 5; 3; the minimum cost of producing one unit of output isclosest to:a 1.b 3.c 4.d 8.e 11.Topic: Cost Minimization Correct Responses: 51Correct Answer: ADi culty: 2Discrimination Index: 2120.24 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 andL is the amount of capital used. Each company can hire labor at $1 per unit of labor and capitalat $9 per unit. Each company produces 90 per week. WEW chooses its input combinations toproduce 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 areWNW's total costs per week than WEW's?a $135b $270c $275d $67.50e $132CHAPTER 20 Cost MinimizationTopic: Cost Minimization Correct Responses: 51Correct Answer: A370Di culty: 2Discrimination Index: 2120.25 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 andL is the amount of capital used. Each company can hire labor at $1 per unit of labor and capitalat $4 per unit. Each company produces 40 per week. WEW chooses its input combinations toproduce 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 areWNW's total costs per week than WEW's?a $40b $80c $85d $20e $37Topic: Cost Minimization Correct Responses: 89Correct Answer: CDi culty: 2Discrimination Index: 1520.26 A new metal alloy is discovered that uses copper and zinc in xed proportions where eachunit of the alloy requires 5 units of zinc and 5 units of copper. If no other inputs are required, ifthe price of zinc is 3 per unit, and the price of copper is 4 per unit and if total output is 2,000units, what is the average cost per unit of output?a 0.60b 2.40c 35d 38e 42MULTIPLE CHOICETopic: Cost Minimization Correct Responses: 89Correct Answer: C371Di culty: 2Discrimination Index: 1520.27 A new metal alloy is discovered that uses copper and zinc in xed proportions where eachunit of the alloy requires 2 units of zinc and 5 units of copper. If no other inputs are required, ifthe price of zinc is 2 per unit, and the price of copper is 5 per unit and if total output is 2,000units, what is the average cost per unit of output?a 1b 4c 29d 31e 36Topic: Cost Minimization Correct Responses: 78Correct Answer: ADi culty: 0Discrimination Index: 2120.28 The production function is f L; M = 2L = M121=2where L is the number of units of laborand M is the number of machines. If the amounts of both factors can be varied, and if the costof labor is $16 per unit and the cost of using machines is $49 per machine, then the total cost ofproducing 12 units of output is:a 336.b 390.c 192.d 672.e 168.CHAPTER 20 Cost MinimizationTopic: Cost Minimization Correct Responses: 78Correct Answer: A372Di culty: 0Discrimination Index: 2120.29 The production function is f L; M = 4L = M=where L is the number of units of laborand M is the number of machines. If the amounts of both factors can be varied, and if the costof labor is $25 per unit and the cost of using machines is $16 per machine, then the total cost ofproducing 16 units of output is:1212a 160.b 328.c 256.d 640.e 80.Topic: Cost Minimization Correct Responses: 22Correct Answer: DDi culty: 2Discrimination Index: 2720.30 Dou elberry juice is a mild intoxicant, prized for facilitating conversation among universityadministrators, but not otherwise valued. The berry does not travel well, so it must be squeezed onthe 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 basketsof berries and hours of labor according to the production function J = minfB; Lg. If seeds cost 9per ounce and labor costs 1 per hour, what is the cost of producing each gallon of dou elberry juice?a 14b 6c 3d 7e Since there are not constant returns to scale, the cost per gallon depends on the number of gallonsproduced.MULTIPLE CHOICETopic: Cost Minimization Correct Responses: 22Correct Answer: D373Di culty: 2Discrimination Index: 2720.31 Dou elberry juice is a mild intoxicant, prized for facilitating conversation among universityadministrators, but not otherwise valued. The berry does not travel well, so it must be squeezed onthe 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 basketsof berries and hours of labor according to the production function J = minfB; Lg. If seeds cost 4per ounce and labor costs 4 per hour, what is the cost of producing each gallon of dou elberry juice?a 24b 8c 4d 12e Since there are not constant returns to scale, the cost per gallon depends on the number of gallonsproduced.Topic: Cost Minimization Correct Responses: 0Correct Answer: BDi culty: 0Discrimination Index: 020.32 Nadine has a production function 4x + x . If the factor prices are 12 for factor 1 and 2 for12factor 2, how much will it cost her to produce 60 units of output?a 3,000b 120c 180d 1,590e 150CHAPTER 20 Cost MinimizationTopic: Cost Minimization Correct Responses: 0Correct Answer: B374Di culty: 0Discrimination Index: 020.33 Nadine has a production function 3x + x . If the factor prices are 3 for factor 1 and 5 for12factor 2, how much will it cost her to produce 20 units of output?a 280b 20c 100d 190e 60Topic: Cost Minimization Correct Responses: 76Correct Answer: ADi culty: 2Discrimination Index: 6020.34 The production function is f L; M = 4L = M = ; where L is the number of units of labor1212and M is the number of machines used. If the cost of labor is $36 per unit and the cost of machinesis $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: 76Correct Answer: ADi culty: 2Discrimination Index: 6020.35 The production function is f L; M = 4L = M = ; where L is the number of units of labor1212and M is the number of machines used. If the cost of labor is $25 per unit and the cost of machinesis $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 CHOICETopic: Cost Minimization Correct Responses: 82Correct Answer: E375Di culty: 2Discrimination Index: 4020.36 In the short run, a rm which has production function F L; M = 4L = M=must use 25machines. If the cost of labor is 10 per unit and the cost of machines is 4 per unit, the short runtotal cost of producing 100 units of output is:1212a 700.b 400.c 1,000.d 700.e 350.Topic: Cost Minimization Correct Responses: 82Correct Answer: EDi culty: 2Discrimination Index: 4020.37 In the short run, a rm which has production function F L; M = 4L = M121=2must use 9machines. If the cost of labor is 11 per unit and the cost of machines is 5 per unit, the short runtotal cost of producing 132 units of output is:a 1,056.b 660.c 1,452.d 2,752.e 1,376.CHAPTER 20 Cost MinimizationTopic: Cost Minimization Correct Responses: 0Correct Answer: A376Di culty: 0Discrimination Index: 020.38Al's production function for deer is f x1 ; x2 = 2x1 + x21=2 where x1 is the amount of plastic andx2 is the amount of wood used. If the cost of plastic is $8 per unit and the cost of wood is $2 perunit, then the cost of producing 6 deer is:a 72.b 108.c 144.d 12.e 24.Topic: Cost Minimization Correct Responses: 0Correct Answer: ADi culty: 0Discrimination Index: 020.39Al's production function for deer is f x1 ; x2 = 2x1 + x21=2 where x1 is the amount of plastic andx2 is the amount of wood used. If the cost of plastic is $10 per unit and the cost of wood is $2 perunit, then the cost of producing 9 deer is:a 162.b 198.c 405.d 18.e 45.MULTIPLE CHOICETopic: Cost Minimization Correct Responses: 55Correct Answer: D377Di culty: 0Discrimination Index: 3920.40 A rm has production function f x ; x ; x ; x = minfx ; x g + minfx ; x g. This rm faces12341234competitive factor markets where the prices for the four factors are w1 = 3; w2 = 8; w3 = 3 andw4 = 7. The rm must use at least 20 units of factor 2. The cost of producing 100 units in thecheapest possible way is:a 1,500b 600c 1,180d 1,020e 300Topic: Cost Minimization Correct Responses: 55Correct Answer: DDi culty: 0Discrimination Index: 3920.41 A rm has production function f x ; x ; x ; x = minfx ; x g + minfx ; x g. This rm faces12341234competitive factor markets where the prices for the four factors are w1 = 6; w2 = 8; w3 = 6 andw4 = 3. The rm must use at least 20 units of factor 2. The cost of producing 100 units in thecheapest possible way is:a 1,400b 900c 1,160d 1,000e 300CHAPTER 20 Cost MinimizationTopic: Cost Minimization Correct Responses: 47Correct Answer: C378Di culty: 0Discrimination Index: 3120.42 The law rm of Dewey, Cheatham, and Howe specializes in accident injury claims. Therm 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. Juniorpartners are paid $100 per hour for this drudgery. If the rm is suing for damages of $250,000and 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 15b 25c 5d 7.50e None of the above.Topic: Cost Minimization Correct Responses: 47Correct Answer: CDi culty: 0Discrimination Index: 3120.43 The law rm of Dewey, Cheatham, and Howe specializes in accident injury claims. Therm 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. Juniorpartners are paid $100 per hour for this drudgery. If the rm is suing for damages of $490,000and 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 21b 35c 7d 10.50e None of the above.MULTIPLE CHOICETopic: Cost Minimization Correct Responses: 0Correct Answer: B379Di culty: 3Discrimination Index: 020.44 A rm with the production function f x ; x ; x ; x = minfx ; x ; x ; x g faces input prices12341234w1 = 1; w2 = 5; w3 = 5; w4 = 4 for factors 1,2,3 and 4. The rm must use at least 10 units of factor2. The lowest cost at which it can produce 100 units of output is:a 900.b 540c 1,500d 860e 500Topic: Cost Minimization Correct Responses: 0Correct Answer: BDi culty: 3Discrimination Index: 020.45 A rm with the production function f x ; x ; x ; x = minfx ; x ; x ; x g faces input prices12341234w1 = 5; w2 = 6; w3 = 4; w4 = 2 for factors 1,2,3 and 4. The rm must use at least 15 units of factor2. The lowest cost at which it can produce 100 units of output is:a 800.b 715c 1,700d 600e 700Topic: Cost Minimization Correct Responses: 0Correct Answer: EDi culty: 0Discrimination Index: 020.46 If output is produced according to Q = 4L + 6K; the price of K is $12, and the price of Lis $4, then the cost minimizing combination of K and L capable of producing 72 units of output isa 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 MinimizationTopic: Cost Minimization Correct Responses: 0Correct Answer: E380Di culty: 0Discrimination Index: 020.47 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 isa 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: 0Correct Answer: BDi culty: 0Discrimination Index: 020.48 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 isa 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: 0Correct Answer: BDi culty: 0Discrimination Index: 020.49 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 isa 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 CHOICETopic: Cost Minimization Correct Responses: 0Correct Answer: C381Di culty: 0Discrimination Index: 020.50 If it costs $30 to set up and later clean a bagel press and bagels cost $1 per week, perbagel, to store, how many times should the bagel press be run each week to produce 540 bagels aweek to be sold continuously?a Once.b Twice.c 3 times.d 4 times.e 5 times.Topic: Cost Minimization Correct Responses: 0Correct Answer: CDi culty: 0Discrimination Index: 020.51 If it costs $10 to set up and later clean a bagel press and bagels cost $1 per week, perbagel, to store, how many times should the bagel press be run each week to produce 500 bagels aweek to be sold continuously?a Once.b Twice.c 3 times.d 4 times.e 5 times.Topic: Cost Minimization Correct Responses: 0Correct Answer: CDi culty: 0Discrimination Index: 020.52 A: politician facing re-election can win votes according to the following process::V = 500S 0 30M 0 50where S is hours of making campaign speeches, and M is the number of yers mailed. If makingspeeches costs $10 per hour, mailing yers costs $0.50 per yer, and $8,000 are available to spendon the campaign. Assuming the politician wants to maximize votes, how should the budget beallocated 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 MinimizationTopic: Cost Minimization Correct Responses: 0Correct Answer: C382Di culty: 0Discrimination Index: 020.53 A: politician facing re-election can win votes according to the following process::V = 500S 0 30M 0 60where S is hours of making campaign speeches, and M is the number of yers mailed. If makingspeeches costs $10 per hour, mailing yers costs $0.50 per yer, and $3,000 are available to spendon the campaign. Assuming the politician wants to maximize votes, how should the budget beallocated 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: 0Correct Answer: DDi culty: 0Discrimination Index: 020.54 The Chrysler Belvedere Truck Plant is attempting to minimize production costs. Over onemonth, 3,200 fenders are needed on the production line, which runs continuously. If it costs $100to set up the stamping press to produce fenders, and $1 per month to store produced fenders, howmany times should the stamping press be run per month?a Once.b Twice.c Three times.d Four times.e Five times.MULTIPLE CHOICETopic: Cost Minimization Correct Responses: 0Correct Answer: B383Di culty: 0Discrimination Index: 020.55 The Chrysler Belvedere Truck Plant is attempting to minimize production costs. Over onemonth, 1,600 fenders are needed on the production line, which runs continuously. If it costs $200to set up the stamping press to produce fenders, and $1 per month to store produced fenders, howmany times should the stamping press be run per month?a Once.b Twice.c Three times.d Four times.e Five times.Topic: Cost Minimization Correct Responses: 0Correct Answer: ADi culty: 0Discrimination Index: 020.56 A lobbyist in our nation's capitol must buy 250 votes in the House of Representativesand Senate to win passage of a bill to add Millard Fillmore's face to Mount Rushmore. Votes inCongress can be purchased according to the following process:V = CM=100; 000where 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 thelobbyist could make to insure Mr. Fillmore's proper place in history?a $80,000b $390,625c $25,000,064d $325,000e $25,000,000CHAPTER 20 Cost MinimizationTopic: Cost Minimization Correct Responses: 0Correct Answer: A384Di culty: 0Discrimination Index: 020.57 A lobbyist in our nation's capitol must buy 250 votes in the House of Representativesand Senate to win passage of a bill to add Millard Fillmore's face to Mount Rushmore. Votes inCongress can be purchased according to the following process:V = CM=100; 000where 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 thelobbyist could make to insure Mr. Fillmore's proper place in history?a $40,000b $1,562,500c $25,000,016d $85,000e $25,000,000Topic: Cost Minimization Correct Responses: 0Correct Answer: BDi culty: 0Discrimination Index: 020.58The 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 statisticalconsultant 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 eachedition 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 CHOICETopic: Cost Minimization Correct Responses: 0Correct Answer: B385Di culty: 0Discrimination Index: 020.59The 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 statisticalconsultant 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 eachedition 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: 0Correct Answer: CDi culty: 0Discrimination Index: 020.60 Vincent Smudge, an avant-guard New York artist, creates living sculpture" by smearingpaint slowly all over himself. S hours of living sculpture" can be created byS = minL; T=5where 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 33.33b 51.72c 12d 500e 2,500CHAPTER 20 Cost MinimizationTopic: Cost Minimization Correct Responses: 0Correct Answer: C386Di culty: 0Discrimination Index: 020.61 Vincent Smudge, an avant-guard New York artist, creates living sculpture" by smearingpaint slowly all over himself. S hours of living sculpture" can be created byS = minL; T=4where 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 8.70b 9.64c 6.25d 400e 1,600Topic: Cost Minimization Correct Responses: 0Correct Answer: ADi culty: 0Discrimination Index: 020.62 Using existing plant and equipment, Priceless Moments Figurines can be manufacturedusing plastic, clay, or any combination of these materials. A gurine can be manufactured byF = 3P + 2Cwhere P are pounds of plastic, and C are pounds of clay. Plastic costs $4 per pound and clay costs$3 per pound. What would be the lowest cost of producing 10,000 gurines?a $13,333.33b $15,000c $14,166.67d $3,333.33e $10,000MULTIPLE CHOICETopic: Cost Minimization Correct Responses: 0Correct Answer: A387Di culty: 0Discrimination Index: 020.63 Using existing plant and equipment, Priceless Moments Figurines can be manufacturedusing plastic, clay, or any combination of these materials. A gurine can be manufactured byF = 3P + 2Cwhere P are pounds of plastic, and C are pounds of clay. Plastic costs $2 per pound and clay costs$4 per pound. What would be the lowest cost of producing 10,000 gurines?a $6,666.67b $20,000c $13,333.33d $3,333.33e $10,000Topic: Cost Minimization Correct Responses: 0Correct Answer: CDi culty: 0Discrimination Index: 020.64 Rocco's Pasta Bar makes manacotti according to an old family recipe whereM = min5=4 C; 5P M; C; and P are pounds of manicotti, cheese, and pasta respectively. If cheese costs $2 per pound,and pasta costs $5 per pound, how much would it cost to produce 30 pounds of manicotti in thecheapest way possible?a 30.b 48.c 78d 48.75e 30CHAPTER 20 Cost MinimizationTopic: Cost Minimization Correct Responses: 0Correct Answer: C388Di culty: 0Discrimination Index: 020.65 Rocco's Pasta Bar makes manacotti according to an old family recipe whereM = min3=2 C; 3P M; C; and P are pounds of manicotti, cheese, and pasta respectively. If cheese costs $5 per pound,and pasta costs $2 per pound, how much would it cost to produce 30 pounds of manicotti in thecheapest way possible?a 20.b 100.c 120d 54e 30Cost MinimizationEssayTopic: Cost Minimization Correct Responses: 0Di culty: 1Discrimination Index: 020.1 A rm has a production function described as follows: "Weekly output is equal to the squareroot 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 ofoutput 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: 0Di culty: 2Discrimination Index: 020.2 The production function for good y is y = maxf10x ; 4x g where x and x are the amountsof factors 1 and 2. Find the cost function for good y.1212Answer: The cost function is minfp1y=10; p2y=4g.Topic: Cost Minimization Correct Responses: 0Di culty: 2Discrimination Index: 020.3 If the production function for tuna casseroles is minfx ; x g; where x is the amount of factor12211 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: 0Di culty: 2Discrimination Index: 020.4 The cost function, cw1; w2; y; of a rm, gives the cost of producing y units of outputwhen the wage of factor 1 is w1 and the wage of factor 2 is w2. Find the cost functions for thefollowing rms: a a rm with production function f x1; x2 = minf2x1; 3x2g; b a rm with production function f x1; x2 = 2x1+3x2; and c a rm with production function f x1; x2 = maxf2x1; 3x2g.Answer: aw1=2 + w2=3 bminfw1=2; w2=3g cminfw1=2; w2=3gChapter 21Cost CurvesTrue-FalseTopic: Cost Curves Correct Responses: 0Correct Answer: FalseDi culty: 1Discrimination Index: 021.1 The average variable cost curve must always be U shaped.Topic: Cost Curves Correct Responses: 82Correct Answer: FalseDi culty: 1Discrimination Index: 3421.2 The marginal cost curve passes through the minimum point of the average xed cost curve.Topic: Cost Curves Correct Responses: 82Correct Answer: TrueDi culty: 1Discrimination Index: 2621.3 If the average cost curve is U shaped, then the marginal cost curve must cross the averagecost curve at the bottom of the U .Topic: Cost Curves Correct Responses: 89Correct Answer: TrueDi culty: 1Discrimination Index: 2521.4 The cost function C y = 10 + 3y has marginal cost less than average cost for all levels ofoutput.Topic: Cost Curves Correct Responses: 92Correct Answer: FalseDi culty: 1Discrimination Index: 1021.5 The cost function C y = 100 + 3y has marginal cost less than average cost for all positivelevels of output.2Topic: Cost Curves Correct Responses: 78Correct Answer: FalseDi culty: 1Discrimination Index: 2821.6 If a competitive rm uses two inputs and it has the production function F x ; x = x = +x = ;then its marginal cost curve is horizontal.12121122TRUE-FALSETopic: Cost Curves Correct Responses: 13Correct Answer: False391Di culty: 2Discrimination Index: 2021.7 Average cost can never rise while marginal costs are declining.Topic: Cost Curves Correct Responses: 89Correct Answer: FalseDi culty: 1Discrimination Index: 2121.8 The area under the marginal cost curve measures total xed costs.Topic: Cost Curves Correct Responses: 80Correct Answer: FalseDi culty: 1Discrimination Index: 2321.9 If marginal costs increase as output increases, then the average xed cost curve will beU-shaped.Topic: Cost Curves Correct Responses: 74Correct Answer: FalseDi culty: 1Discrimination Index: 2721.10 Average xed cost curves will be U-shaped if the marginal cost curve is upward-sloping.Cost CurvesMultiple ChoiceTopic: Cost Curves Correct Responses: 94Correct Answer: BDi culty: 1Discrimination Index: 1321.1 The marginal cost curve of a rm is MC = 8y. Total variable costs to produce 7 units ofoutput are:a 112.b 196.c 56.d 196.e 22.Topic: Cost Curves Correct Responses: 94Correct Answer: BDi culty: 1Discrimination Index: 1321.2 The marginal cost curve of a rm is MC = 6y. Total variable costs to produce 8 units ofoutput are:a 96.b 192.c 64.d 256.e 22.Topic: Cost Curves Correct Responses: 75Correct Answer: DDi culty: 1Discrimination Index: 1821.3 The following relationship must hold between the average total cost ATC curve and themarginal 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 CHOICETopic: Cost Curves Correct Responses: 94Correct Answer: C393Di culty: 1Discrimination Index: 2021.4 A goatherd has the cost function cy = 5y where y is the number of tubs of goat cheese2she 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?a the square root of 100b 25c 10d the square root of 20e 5Topic: Cost Curves Correct Responses: 94Correct Answer: CDi culty: 1Discrimination Index: 2021.5 A goatherd has the cost function cy = 3y where y is the number of tubs of goat cheese2she 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?a the square root of 42b 9c 7d the square root of 14e 3.50Topic: Cost Curves Correct Responses: 72Correct Answer: CDi culty: 2Discrimination Index: 1721.6 A rm has a short run cost function cy = 3y + 11 for y 0 and c0 = 7. The rm'squasi- xed costs are:a 7.b 11.c 4.d 7.50.e impossible to determine from this information.CHAPTER 21 Cost CurvesTopic: Cost Curves Correct Responses: 72Correct Answer: C394Di culty: 2Discrimination Index: 1721.7 A rm has a short run cost function cy = 3y + 16 for y 0 and c0 = 6. The rm'squasi- xed costs are:a 6.b 16.c 10.d 13.e impossible to determine from this information.Topic: Cost Curves Correct Responses: 70Correct Answer: CDi culty: 3Discrimination Index: 3721.8 A competitive rm has the short run cost function cy = 3y , 36y + 128y + 35. The rm32will 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: 70Correct Answer: CDi culty: 3Discrimination Index: 3721.9 A competitive rm has the short run cost function cy = 2y , 16y + 96y + 50. The rm32will 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 CHOICETopic: Cost Curves Correct Responses: 0Correct Answer: A395Di culty: 0Discrimination Index: 021.10 The production function of a competitive rm is described by the equation y = 5x = x = .12 1212The factor prices are p1 = 1 and p2 = 4 and the rm can hire as much of either factor it wants atthese 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: 0Correct Answer: ADi culty: 0Discrimination Index: 021.11 The production function of a competitive rm is described by the equation y = 6x = x = .12 1212The factor prices are p1 = 1 and p2 = 4 and the rm can hire as much of either factor it wants atthese prices. The rm's marginal cost is: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: 90Correct Answer: ADi culty: 2Discrimination Index: 1821.12 A rm has the short run total cost function cy = 9y + 441. At what quantity of outputis short run average cost minimized?a 7b 3c 49d 0.43e None of the above.2CHAPTER 21 Cost CurvesTopic: Cost Curves Correct Responses: 90Correct Answer: A396Di culty: 2Discrimination Index: 1821.13 A rm has the short run total cost function cy = 4y + 100. At what quantity of output2is short run average cost minimized?a 5b 2c 25d 0.40e None of the above.Topic: Cost Curves Correct Responses: 31Correct Answer: ADi culty: 2Discrimination Index: 4021.14 A rm has the production function Q = X = X . In the short run it must use exactly 201212units of factor 2. The price of factor 1 is $60 per unit and the price of factor 2 is $2 per unit. Therm's short run marginal cost function is:a MC Q = 6Q=20.b MC Q = 40Q,1=2.c MC Q = 40 + 60Q2.d MC Q = 2Q.e MC Q = 20Q,1=2.Topic: Cost Curves Correct Responses: 31Correct Answer: ADi culty: 2Discrimination Index: 4021.15 A rm has the production function Q = X = X . In the short run it must use exactly 101212units of factor 2. The price of factor 1 is $40 per unit and the price of factor 2 is $6 per unit. Therm's short run marginal cost function is:a MC Q = 8Q=10.b MC Q = 60Q,1=2.c MC Q = 60 + 40Q2.d MC Q = 6Q.e MC Q = 10Q,1=2.MULTIPLE CHOICETopic: Cost Curves Correct Responses: 82Correct Answer: A397Di culty: 1Discrimination Index: 3621.16 Mr. Dent Carr's total costs are 2s + 75s + 100. If he repairs 25 cars, his average variablecosts will be:2a 125.b 129.c 175.d 250.e 87.50.Topic: Cost Curves Correct Responses: 82Correct Answer: ADi culty: 1Discrimination Index: 3621.17 Mr. Dent Carr's total costs are 4s + 100s + 60. If he repairs 20 cars, his average variablecosts will be:2a 180.b 183.c 260.d 360.e 130.Topic: Cost Curves Correct Responses: 0Correct Answer: ADi culty: 0Discrimination Index: 021.18 Rex Carr could pay $10 for a shovel that lasts one year and pay $5 a car to his brotherScoop to bury the cars, or he could buy a low-quality car smasher that costs $200 a year to own andthat smashes cars at a marginal cost of $1 per car. If it is also possible for Rex to buy a high-qualityhydraulic car smasher that cost $350 per year to own and if with this smasher he could disposeof cars at a cost of $0.67 per car, it would be worthwhile for him to buy this high-quality smasher ifa 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 CurvesTopic: Cost Curves Correct Responses: 0Correct Answer: A398Di culty: 0Discrimination Index: 021.19 Rex Carr could pay $10 for a shovel that lasts one year and pay $5 a car to his brotherScoop to bury the cars, or he could buy a low-quality car smasher that costs $200 a year to own andthat smashes cars at a marginal cost of $1 per car. If it is also possible for Rex to buy a high-qualityhydraulic car smasher that cost $450 per year to own and if with this smasher he could disposeof cars at a cost of $0.67 per car, it would be worthwhile for him to buy this high-quality smasher ifa 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: 75Correct Answer: CDi culty: 0Discrimination Index: 4121.20 Mary Magnolia from your workbook has variable costs equal to y =F where y is the number2of bouquets she sells per month and where F is the number of square feet of space in her shop. IfMary has signed a lease for a shop with 1,200 square feet and if she is not able to get out of thelease or to expand her store in the short run, and if the price of a bouquet is $ 4 per unit, howmany bouquets per month should she sell in the short run?a 1,200b 600c 2,400d 3,600e 2,640MULTIPLE CHOICETopic: Cost Curves Correct Responses: 75Correct Answer: C399Di culty: 0Discrimination Index: 4121.21 Mary Magnolia from your workbook has variable costs equal to y =F where y is the number2of bouquets she sells per month and where F is the number of square feet of space in her shop. IfMary has signed a lease for a shop with 800 square feet and if she is not able to get out of the leaseor to expand her store in the short run, and if the price of a bouquet is $ 5 per unit, how manybouquets per month should she sell in the short run?a 800b 400c 2,000d 3,000e 2,200Topic: Cost Curves Correct Responses: 0Correct Answer: ADi culty: 0Discrimination Index: 021.22 Touchie McFeelie from your workbook has a production function :1J = L = ; where J is the1234number 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 forcartoonists 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 CurvesTopic: Cost Curves Correct Responses: 0Correct Answer: A400Di culty: 0Discrimination Index: 021.23 Touchie McFeelie from your workbook has a production function :1J = L = ; where J is the1234number 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 forcartoonists 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: 0Correct Answer: EDi culty: 0Discrimination Index: 021.24 Touchie McFeelie's production function for comic books is :1J = L = ; where J is the num1234ber of jokes and L is the number of hours of cartoonists labor that he uses. If Touchie can varyboth jokes and cartoonists' labor and if old jokes cost $ 4 each and cartoonists' labor costs $36 perhour, then the cheapest way to produce comics books requires using jokes and labor in the ratioJ=L =a 9.b 12.c 3.d 2=3.e 6.MULTIPLE CHOICETopic: Cost Curves Correct Responses: 0Correct Answer: E401Di culty: 0Discrimination Index: 021.25 Touchie McFeelie's production function for comic books is :1J = L = ; where J is the num1234ber of jokes and L is the number of hours of cartoonists labor that he uses. If Touchie can varyboth jokes and cartoonists' labor and if old jokes cost $ 1 each and cartoonists' labor costs $6 perhour, then the cheapest way to produce comics books requires using jokes and labor in the ratioJ=L =a 6.b 8.c 2.d 2=3.e 4.Topic: Cost Curves Correct Responses: 0Correct Answer: ADi culty: 0Discrimination Index: 021.26 A rm's production function is given by q = minfM; L = g; where M is the number of ma12chines and L is the amount of labor that it uses. The price of labor is 2 and the price of machinesis 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 CurvesTopic: Cost Curves Correct Responses: 0Correct Answer: A402Di culty: 0Discrimination Index: 021.27 A rm's production function is given by q = minfM; L = g; where M is the number of ma12chines and L is the amount of labor that it uses. The price of labor is 4 and the price of machinesis 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: 0Correct Answer: DDi culty: 0Discrimination Index: 021.28In 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 + Q3C2Q = 1; 000 + 145Q , 10Q2 + Q3Due 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 CHOICETopic: Cost Curves Correct Responses: 0Correct Answer: D403Di culty: 0Discrimination Index: 021.29In 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 + Q3C2Q = 200 + 205Q , 10Q2 + Q3Due 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: 0Correct Answer: DDi culty: 0Discrimination Index: 021.30 A rm has the long run cost function C Q = 7Q + 252. In the long run, it will supply a2positive amount of output, so long as the price is greater than:a 168b 176c 42d 84e 89Topic: Cost Curves Correct Responses: 0Correct Answer: DDi culty: 0Discrimination Index: 021.31 A rm has the long run cost function C Q = 5Q + 245. In the long run, it will supply a2positive amount of output, so long as the price is greater than:a 140b 148c 35d 70e 75CHAPTER 21 Cost CurvesTopic: Cost Curves Correct Responses: 0Correct Answer: C404Di culty: 0Discrimination Index: 021.32 The VCR manufacturing business is perfectly competitive. Suppose that currently, rmswhich manufacture VCR's utilize either technology 1 or technology 2, whose cost functions aregiven below:TC1Q = 1; 060 , 60Q + Q2TC2Q = 220 , 20Q + Q2In 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 inbusiness.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: 0Correct Answer: CDi culty: 0Discrimination Index: 021.33 The VCR manufacturing business is perfectly competitive. Suppose that currently, rmswhich manufacture VCR's utilize either technology 1 or technology 2, whose cost functions aregiven below:TC1Q = 1; 060 , 60Q + Q2TC2Q = 560 , 40Q + Q2In 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 inbusiness.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 CHOICETopic: Cost Curves Correct Responses: 0Correct Answer: B405Di culty: 0Discrimination Index: 021.34 The snow removal business in East Iceicle, Minnesota is a competitive industry. All snow-plow 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 numberof rms in this industry isa 11b 22c 14d 120e 23Topic: Cost Curves Correct Responses: 0Correct Answer: BDi culty: 0Discrimination Index: 021.35 The snow removal business in East Iceicle, Minnesota is a competitive industry. All snow-plow 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 numberof rms in this industry isa 14b 28c 22d 120e 29Topic: Cost Curves Correct Responses: 0Correct Answer: EDi culty: 0Discrimination Index: 021.36 Florence's Restaurant estimates that its total cost of providing Q meals per month is givenby TC = 4; 000 + 4Q. If Florence charges $10 per meal, what is its break-even level of output?a 1,000 mealsb 400 mealsc 285.71 mealsd 1,333.33 mealse 666.67 mealsCHAPTER 21 Cost CurvesTopic: Cost Curves Correct Responses: 0Correct Answer: E406Di culty: 0Discrimination Index: 021.37 Florence's Restaurant estimates that its total cost of providing Q meals per month is givenby TC = 5; 000 + 3Q. If Florence charges $10 per meal, what is its break-even level of output?a 1,666.67 mealsb 500 mealsc 384.62 mealsd 1,428.57 mealse 714.29 mealsTopic: Cost Curves Correct Responses: 0Correct Answer: DDi culty: 0Discrimination Index: 021.38 If Green Acres Turf Farm's total cost of producing acres of sod is TC = 3Q + 20Q + 60;2the marginal cost of producing the 10th acre of sod isa $60.b $20.c $50.d $80.e $110.Topic: Cost Curves Correct Responses: 0Correct Answer: DDi culty: 0Discrimination Index: 021.39 If Green Acres Turf Farm's total cost of producing acres of sod is TC = 3Q + 5Q + 70; themarginal cost of producing the 10th acre of sod isa $70.b $5.c $35.d $65.e $95.2Cost CurvesEssayTopic: Cost Curves Correct Responses: 0Di culty: 1Discrimination Index: 021.1 Not long ago, the Canadian edition of a famous textbook on principles of economics hada diagram depicting a U-shaped average xed cost curve. This occasioned great mirth aroundthe camp res of some economists in the Great White North and did much to shorten a long hardwinter. Explain what is wrong with drawing a U-shaped average xed cost curve.Answer: Average xed cost must decline monotonically with output and would asymptoticallyapproach zero. Remember that average xed cost is just a constant divided by output.Topic: Cost Curves Correct Responses: 0Di culty: 3Discrimination Index: 021.2 Hildegard, an intelligent and charming Holstein cow, grazes in a very large, mostly barrenpasture with a few lush patches of grass. When she nds a new grassy area, the amount of grassshe gets from it is equal to the square root of the number of hours, h; that she spends grazingthere. Finding a new patch of grass on which to graze takes her one hour. Since Hildegard does nothave pockets, the currency in which her costs are measured is time. a What is the total cost toHildegard of nding a new plot of grass and getting y units of grass from it? b Find an expressionfor her marginal costs and her average cost per patch of grass as a function of the amount of grassshe gets from each patch. c How much time would she spend in each plot if she wanted to maximizeher food intake? Hint: Minimize average costs per unit of grass eaten.Answer: a 1 + y2 b2y; 1=y + y c1 hour.Topic: Cost Curves Correct Responses: 0Di culty: 2Discrimination Index: 021.3 A competitive rm has the short run cost function cy = y , 2y + 5y + 6. Write down32equations for a the rm's average variable cost function, b the rm's marginal cost function. c Atwhat level of output is average variable cost minimized? d Graph the short-run supply functionfor this rm, being careful to label the key points on the graph with the numbers specifying theexact prices and quantities at these points.Answer: a y2 , 2y + 5 b3y2 , 4y + 5 cy = 1 d The AVC curve is U-shaped with its bottom aty = 1; c = 2. The marginal cost curve is also U-shaped. It bottoms out at y = 2=3 and crosses theAVC curve from below at y = 1.CHAPTER 21 Cost CurvesTopic: Cost Curves Correct Responses: 0408Di culty: 0Discrimination Index: 021.4 North American Manufacturing has the following production function Q = min0:25K; 0:5Lwhere 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 alarger facility?Chapter 22True-FalseTopic: Firm Supply Correct Responses: 53Correct Answer: FalseFirm SupplyDi culty: 2Discrimination Index: 3222.1 A rm in a competitive industry takes account of the fact that the demand curve it confrontshas a signi cant negative slope.Topic: Firm Supply Correct Responses: 73Correct Answer: TrueDi culty: 1Discrimination Index: 2522.2 In a perfectly competitive industry, the demand curve for the total output of the industrymay be downward sloping.Topic: Firm Supply Correct Responses: 81Correct Answer: FalseDi culty: 1Discrimination Index: 2222.3 Price equals marginal cost is a su cient condition for pro t maximization.Topic: Firm Supply Correct Responses: 21Correct Answer: TrueDi culty: 3Discrimination Index: 222.4 A rm faces competitive markets both for its inputs and its outputs. If its long run supplycurve is q = 3p; then it can not have constant returns to scale.Topic: Firm Supply Correct Responses: 84Correct Answer: TrueDi culty: 1Discrimination Index: 2022.5 A rm with the cost function cy = 20y + 500 has a U-shaped cost curve.2Topic: Firm Supply Correct Responses: 44Correct Answer: FalseDi culty: 2Discrimination Index: 1922.6 Mr. O. Carr has the cost function cy = y + 144 if his output, y; is positive and c0 = 0.2If the price of output is 30, Mr. Carr' s pro t-maximizing output is zero.CHAPTER 22 Firm SupplyTopic: Firm Supply Correct Responses: 44Correct Answer: False410Di culty: 2Discrimination Index: 1922.7 Mr. O. Carr has the cost function cy = y + 36 if his output, y; is positive and c0 = 0. If2the price of output is 18, Mr. Carr' s pro t-maximizing output is zero.Topic: Firm Supply Correct Responses: 25Correct Answer: TrueDi culty: 2Discrimination Index: 4022.8 A rm produces one output, using one input, with the production function f x = 2x =13where x is the amount of input. The cost function for this rm is proportional to the price of theinput times the cube of the amount of output.Topic: Firm Supply Correct Responses: 62Correct Answer: TrueDi culty: 2Discrimination Index: 1522.9 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, therm should never produce at a positive output where price equals marginal cost and marginal costdecreases as output increases.Topic: Firm Supply Correct Responses: 78Correct Answer: FalseDi culty: 2Discrimination Index: 1722.10 Two rms have the same technology and must pay the same wages for labor. They haveidentical factories, but Firm 1 paid a higher price for its factory than did Firm 2. If they are bothpro t maximizers and have upward sloping marginal cost curves, then we would expect Firm 1 tohave a higher output than Firm 2.Topic: Firm Supply Correct Responses: 55Correct Answer: TrueDi culty: 2Discrimination Index: 922.11 The area under the marginal cost curve measures total variable costs.TRUE-FALSETopic: Firm Supply Correct Responses: 71Correct Answer: True411Di culty: 1Discrimination Index: 022.12 Average xed costs never increase with output.Topic: Firm Supply Correct Responses: 0Correct Answer: FalseDi culty: 1Discrimination Index: 022.13 The change in producer's surplus when the market price changes from p to p is half ofthe area to the left of the marginal cost curve between p1 and p2 .12Firm SupplyMultiple ChoiceTopic: Firm Supply Correct Responses: 59Correct Answer: DDi culty: 2Discrimination Index: 3322.1 A pro t maximizing rm continues to operate even though it is losing money. It sells itsproduct 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: 54Correct Answer: CDi culty: 1Discrimination Index: 2722.2 A pro t maximizing dairy farm is currently producing 10,000 gallons of milk per day. Thegovernment 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-sumsubsidy is adopted.d Which subsidy has the greater e ect on production at this farm depends on whether xed costs aregreater than variable costs.e Production will be increased by either kind of subsidy if and only if there are not decreasing returns toscale.MULTIPLE CHOICETopic: Firm Supply Correct Responses: 72Correct Answer: C413Di culty: 1Discrimination Index: 1422.3 Marge Costa produces plastic dog dishes using a process that requires only labor and plasticas inputs and has constant returns to scale. With the process she is currently using, a laborer canturn out 30 dog dishes an hour. The wage rate is $9 per hour. The plastic in a dog dish costsMarge $.10. She has no other costs besides labor and plastic. Marge faces a perfectly competitivemarket for plastic dog dishes, and she decides that she is maximizing pro ts when she makes 300dog dishes an hour. What is the market price of dog dishes?a $.21b $.32c $.40d $.27e $.28Topic: Firm Supply Correct Responses: 57Correct Answer: EDi culty: 3Discrimination Index: 4322.4 A competitive rm uses two variable factors to produces its output, with a productionfunction q = minfx1 ; x2g. The price of factor 1 is 2 and the price of factor 2 is 5. Due to a lack ofwarehouse space, the company cannot use more than 22 units of x1. The rm must pay a xed costof 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 24b 21c 13d 7e 11CHAPTER 22 Firm SupplyTopic: Firm Supply Correct Responses: 57Correct Answer: E414Di culty: 3Discrimination Index: 4322.5 A competitive rm uses two variable factors to produces its output, with a productionfunction q = minfx1 ; x2g. The price of factor 1 is 5 and the price of factor 2 is 1. Due to a lack ofwarehouse space, the company cannot use more than 18 units of x1. The rm must pay a xed costof 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 22b 19c 15d 6e 10Topic: Firm Supply Correct Responses: 85Correct Answer: ADi culty: 1Discrimination Index: 3322.6 A competitive rm has a single factory with the cost function cy = 4y + 89 and produces228 units in order to maximize pro ts. Although the price of output does not change, the rmdecides 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 14b 21c 9d 13e None of the above.MULTIPLE CHOICETopic: Firm Supply Correct Responses: 73Correct Answer: B415Di culty: 2Discrimination Index: 5122.7 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 iswell-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: 55Correct Answer: DDi culty: 2Discrimination Index: 3222.8 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 thenumber of pieces produced. Neglect the use of the wall itself. The price of capital, K; is r; and theprice 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: 63Correct Answer: ADi culty: 2Discrimination Index: 6022.9 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 pb y = p=3 if pc y = p=3 if pd y = p=6 if pe y = p=3 if p54; y = 0 if p52; y = 0 if p57; y = 0 if p57; y = 0 if p59; y = 0 if p54.52.63.57.49.2CHAPTER 22 Firm SupplyTopic: Firm Supply Correct Responses: 63Correct Answer: A416Di culty: 2Discrimination Index: 6022.10 A competitive rm has a long run total cost function cy = 5y + 1; 280 for y 0 andc0 = 0. Its long run supply function is described as follows:a y = p=10 if pb y = p=5 if pc y = p=5 if pd y = p=10 if pe y = p=5 if p160; y = 0 if p158; y = 0 if p163; y = 0 if p163; y = 0 if p165; y = 0 if pTopic: Firm Supply Correct Responses: 51Correct Answer: A2160.158.175.163.155.Di culty: 2Discrimination Index: 4922.11 A competitive rm uses two inputs and has a production function f x ; x = 22x: x: .1225 2512The rm can buy as much of either factor as it likes at factor prices w1 = w2 = 1. The cost ofproducing y units of ouput for this rm is:a 2y=222 .b 22x1 + x2y.c x1 + x2=22.d y=44.e y2 =44.Topic: Firm Supply Correct Responses: 51Correct Answer: ADi culty: 2Discrimination Index: 4922.12 A competitive rm uses two inputs and has a production function f x ; x = 19x: x: .1225 2512The rm can buy as much of either factor as it likes at factor prices w1 = w2 = 1. The cost ofproducing y units of ouput for this rm is:a 2y=192 .b 19x1 + x2y.c x1 + x2=19.d y=38.e y2 =38.MULTIPLE CHOICETopic: Firm Supply Correct Responses: 65Correct Answer: A417Di culty: 0Discrimination Index: 6722.13 A rm's production function is f x ; x = minfx ; 5x g = . If the price of factor 1 is121212w1 = 4 per unit and the price of factor 2 is w2 = 15 per unit, then its supply function is given bythe equation S p =a p=14.b pmaxfw1; 5w2g.c pminfw1; 5w2g.d 7p.e pminf4p; 75pg.Topic: Firm Supply Correct Responses: 65Correct Answer: ADi culty: 0Discrimination Index: 6722.14 A rm's production function is f x ; x = minfx ; 4x g = . If the price of factor 1 is121212w1 = 2 per unit and the price of factor 2 is w2 = 8 per unit, then its supply function is given by theequation S p =a p=8.b pmaxfw1; 4w2g.c pminfw1; 4w2g.d 4p.e pminf2p; 32pg.Topic: Firm Supply Correct Responses: 78Correct Answer: ADi culty: 0Discrimination Index: 4122.15 Suppose that Dent Carr's long run total cost of repairing s cars per week is cs = 3s + 27.2If the price he receives for repairing a car is 30, then in the long run, how many cars will he x perweek if he maximizes pro ts?a 5.b 0.c 10.d 7.50.e 15.CHAPTER 22 Firm SupplyTopic: Firm Supply Correct Responses: 78Correct Answer: A418Di culty: 0Discrimination Index: 4122.16 Suppose that Dent Carr's long run total cost of repairing s cars per week is cs = 4s + 16.2If the price he receives for repairing a car is 48, then in the long run, how many cars will he x perweek if he maximizes pro ts?a 6.b 0.c 12.d 9.e 18.Topic: Firm Supply Correct Responses: 0Correct Answer: ADi culty: 0Discrimination Index: 022.17 Irma's production function is f x ; x = minfx ; 4x g = . If the price of factor 1 is w = 6121212and the price of factor 2 is w2 = 12; then her supply function is given by the equation:1a S p = p=18.b S p = pmaxfw1; 4w2g2 .c S p = pminfw1 ; 4w2g2 .d S p = 9p.e S p = minf6p; 48p.Topic: Firm Supply Correct Responses: 0Correct Answer: ADi culty: 0Discrimination Index: 022.18 Irma's production function is f x ; x = minfx ; 4x g = . If the price of factor 1 is w = 3121212and the price of factor 2 is w2 = 12; then her supply function is given by the equation:a S p = p=12.b S p = pmaxfw1; 4w2g2 .c S p = pminfw1 ; 4w2g2 .d S p = 6p.e S p = minf3p; 48p.1MULTIPLE CHOICETopic: Firm Supply Correct Responses: 0Correct Answer: D419Di culty: 0Discrimination Index: 022.19 A rm has the long run cost function C q = 7q + 112. In the long run, it will supply a2positive amount of output, so long as the price is greater than:a 112b 120c 28d 56e 61Topic: Firm Supply Correct Responses: 0Correct Answer: DDi culty: 0Discrimination Index: 022.20 A rm has the long run cost function C q = 4q + 4. In the long run, it will supply a2positive amount of output, so long as the price is greater than:a 16b 24c 4d 8e 13Topic: Firm Supply Correct Responses: 0Correct Answer: DDi culty: 0Discrimination Index: 022.21 A competitive rm produces output according to the production function y = minx ; 1000.3Let p be the price of output, and let the price of input x be 1. The pro t-maximizing output forthis 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 SupplyTopic: Firm Supply Correct Responses: 39Correct Answer: D420Di culty: 0Discrimination Index: 2122.22 A competitive rm produces output according to the production function y = minx ; 100.2Let w be the price of the factor x; and let the price of output be 1. The demand for x when theprice 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: 40Correct Answer: CDi culty: 0Discrimination Index: 522.23 A competitive rm produces output according to the production function y = minx = ; 10.12Let w be the price of the factor x; and let the price of output be 1. The demand for factor x whenthe factor price is w is given by:a x = minw1=2 ; 10b x = maxw1=2 =2; 100.c x = min1=4w2; 100.d x = 10 + x2=2.e none of the above.Firm SupplyEssayTopic: Firm Supply Correct Responses: 0Di culty: 3Discrimination Index: 022.1 The Lost Mountains of northern Iowa are inhabited by the rare Marshallian deer. Patchesof grass are far apart in this rugged land. If a deer nds a fresh patch of grass and spends h hoursgrazing it, it gets the square root of h units of grass. The deer compete for grass. When there are ndeer, it takes a deer n squared minutes to nd a fresh patch. A deer can survive if it gets 1 unit ofgrass every 200 minutes. a Find the average cost in time of a unit of grass if a deer gets y units ofgrass from each patch. b How much time will an e cient deer spend in each patch when there aren deer? Hint: Min. Avg. Cost cSince there is free entry into the deer business, the equilibriumpopulation is the maximum number of e cient deer who can survive. How many is this?Answer: ay + n squared=y bn minutes. c100Chapter 23Industry SupplyTrue-FalseTopic: Industry Supply Correct Responses: 86Correct Answer: TrueDi culty: 1Discrimination Index: 923.1 The short run industry supply curve can be found by horizontally summing the short runsupply curves of all the individual rms in the industry.Topic: Industry Supply Correct Responses: 98Correct Answer: TrueDi culty: 2Discrimination Index: 1223.2 It is possible to have an industry in which all rms make zero economic pro ts in long runequilibrium.Topic: Industry Supply Correct Responses: 73Correct Answer: TrueDi culty: 1Discrimination Index: 1423.3 The possibility of more rms entering an industry in the long run tends to make long runindustry supply more price elastic than short run industry supply.Topic: Monopoly Correct Responses: 80Correct Answer: TrueDi culty: 2Discrimination Index: 1423.4 In a competitive market, if both demand and supply curves are linear, then a per unit taxof $10 will generate exactly the same deadweight loss as a per unit subsidy of $10.Topic: Industry Supply Correct Responses: 74Correct Answer: TrueDi culty: 2Discrimination Index: 2623.5 If there are constant returns to scale in a competitive industry, then the long run industrysupply curve for that industry is horizontal.TRUE-FALSETopic: Industry Supply Correct Responses: 52Correct Answer: True423Di culty: 2Discrimination Index: 1123.6 If some rm in an industry has the production function F x; y = x = y = where x and y are3434the only two inputs in producing the good, then that industry can not be competitive in the longrun.Topic: Industry Supply Correct Responses: 67Correct Answer: FalseDi culty: 1Discrimination Index: 2123.7 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 regaintheir lost revenue and continue to produce.Industry SupplyMultiple ChoiceTopic: Industry Supply Correct Responses: 32Correct Answer: CDi culty: 2Discrimination Index: 1823.1 In East Icicle, Minnesota, on the northern edge of the corn belt, the growing season is shortand the soil is poor. Corn yields are meager unless a great deal of expensive fertilizer is used. InCorncrib, Illinois the land is fertile and at and the growing season is 20 days longer. For any givenexpenditure per acre, corn yields are far greater than in East Icicle. Farmers in both places arepro 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: 32Correct Answer: EDi culty: 3Discrimination Index: 1323.2 A competitive industry has 10,000 identical rms. For each rm in the industry, the longrun cost of producing y units of output is cy = $100 + y2 if y 0 and c0 = 0. The governmentimposes a lump sum tax of $300 on each rm in the industry. Firms can avoid this tax only bygoing 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 CHOICETopic: Industry Supply Correct Responses: 44Correct Answer: B425Di culty: 2Discrimination Index: 5923.3 The bicycle industry is made up of 100 rms with the long run cost curve cy = 2 + y =22and 80 rms with the long run cost curve cy = y =6. No new rms can enter the industry. Whatis the long run industry supply curve at prices greater than 2?2a y = 360pb y = 340pc y = 170pd y = 240pe y = 375pTopic: Industry Supply Correct Responses: 44Correct Answer: BDi culty: 2Discrimination Index: 5923.4 The bicycle industry is made up of 100 rms with the long run cost curve cy = 2 + y =22and 160 rms with the long run cost curve cy = y =10. No new rms can enter the industry. Whatis the long run industry supply curve at prices greater than 2?2a y = 920pb y = 900pc y = 450pd y = 800pe y = 935pTopic: Industry Supply Correct Responses: 24Correct Answer: BDi culty: 2Discrimination Index: 223.5 Two rms constitute the entire doghouse industry. One has a long run cost curve of3 + 4y2 =3 and the other has a long run cost curve of 10 + y2 =10. If no new rms enter theindustry, at which of the following prices will exactly one rm operate?a 1b 3c 5d 7e None of the above.CHAPTER 23 Industry SupplyTopic: Industry Supply Correct Responses: 84Correct Answer: B426Di culty: 1Discrimination Index: 123.6 On a small island, papayas can only be sold in the market in the center of the island.Although papayas only cost 1 to raise, they can be sold in the market for 3. But it costs .1 perkilometer to transport each papaya to market. If an acre of land grows 200 papayas, how muchrent does an acre of land 4 kilometers from the market command?a 302b 320c 240d 262e None of the above.Topic: Industry Supply Correct Responses: 26Correct Answer: ADi culty: 3Discrimination Index: 3323.7 On a tropical island there are 100 potential boat builders, numbered 1 through 100. Eachcan build up to 12 boats a year, but anyone who goes into the boat-building business has to paya xed cost of 11. Marginal costs di er from person to person. Where y denotes the number ofboats built per year, boat builder 1 has a total cost function cy = 11 + y. Boat builder 2 hasa total cost function cy = 11 + 2y and, more generally, for each i; from 1 to 100, boat builder ihas a cost function cy = 11+ iy. If the price of boats is 40, how many boats will be built per year?a 468b 348c 174d 702e Any number between 480 and 492 is possible.MULTIPLE CHOICETopic: Industry Supply Correct Responses: 26Correct Answer: A427Di culty: 3Discrimination Index: 3323.8 On a tropical island there are 100 potential boat builders, numbered 1 through 100. Eachcan build up to 12 boats a year, but anyone who goes into the boat-building business has to paya xed cost of 11. Marginal costs di er from person to person. Where y denotes the number ofboats built per year, boat builder 1 has a total cost function cy = 11 + y. Boat builder 2 hasa total cost function cy = 11 + 2y and, more generally, for each i; from 1 to 100, boat builder ihas a cost function cy = 11+ iy. If the price of boats is 20, how many boats will be built per year?a 228b 108c 54d 342e Any number between 240 and 252 is possible.Topic: Industry Supply Correct Responses: 46Correct Answer: BDi culty: 3Discrimination Index: 5223.9 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 isthe 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 SupplyTopic: Industry Supply Correct Responses: 80Correct Answer: C428Di culty: 1Discrimination Index: 1523.10 Brand X is one of many rms in a competitive industry where each rm has a constantmarginal cost of 2 dollars per unit of output. If marginal cost for Brand X rises to 4 dollars perunit and marginal costs of all other rms in the industry stay constant, by how much does the pricein the industry increase?a 2b 1c 0d 2=n where n is the number of rms in the industrye None of the above.Topic: Industry Supply Correct Responses: 40Correct Answer: BDi culty: 3Discrimination Index: 2123.11 A rm uses a single input to produce its output, which is sold in a competitive market. Itgets quantity discounts on purchases of its input. If it buys x units of the input, the price it mustpay per unit of input is 36=x + 5. If it buys no inputs it doesn't have to pay anything. The rm'sproduction function is f x = 13x , x2. If the price of the rm's output is 1, the pro t-maximizingamount of input to buy is:a 4.b 0.c 8.d 6.e None of the above.MULTIPLE CHOICETopic: Industry Supply Correct Responses: 40Correct Answer: B429Di culty: 3Discrimination Index: 2123.12 A rm uses a single input to produce its output, which is sold in a competitive market. Itgets quantity discounts on purchases of its input. If it buys x units of the input, the price it mustpay per unit of input is 441=x+3. If it buys no inputs it doesn't have to pay anything. The rm'sproduction function is f x = 15x , x2. If the price of the rm's output is 1, the pro t-maximizingamount of input to buy is:a 6.b 0.c 12.d 9.e None of the above.Topic: Industry Supply Correct Responses: 49Correct Answer: ADi culty: 2Discrimination Index: 2223.13 Chirimollas grow only on the island of Socorro, o the coast of Mexico. They need verylittle soil, so virtually an unlimited supply can be grown at a cost of $4 per unit. When they areexported to the U.S., half of the chirimollas that are shipped rot on the boat and are dumped in theocean. Shipping costs are $1 for every unit that is put on board a ship. The demand function forchirimollas in the U.S. is given by the equation q = 10; 000 , 20p2. If chirimollas are competitivelysupplied, 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 SupplyTopic: Industry Supply Correct Responses: 38Correct Answer: C430Di culty: 2Discrimination Index: 3723.14 An industry has 1000 rms, each with the production function f x ; x = x = x = . The1212 1212price of factor 1 is 1 and the price of factor 2 is 1. In the long run, both factors are variable, but inthe 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: 56Correct Answer: CDi culty: 3Discrimination Index: 4023.15 Suppose that all rms in a given industry have the same supply curve given by Si p = 2pwhen p is greater than or equal to $2 and Si p = 0 when p is less than $2. Suppose that marketdemand is given by Dp = 12 , p. If rms continue to enter the industry so long as they can do sopro tably, the equilibrium price must be closest to:a $5.b $4.c $2.40.d $2.e $1.75.MULTIPLE CHOICETopic: Industry Supply Correct Responses: 0Correct Answer: B431Di culty: 2Discrimination Index: 023.16 In the absence of government interference, there is a constant marginal cost of $6 per ouncefor 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. Theprobability that any shipment of marijuana is seized is 0.20. If a shipment is seized, there is noother punishment besides loss of the marijuana that is seized. The e ect of the government actionis: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 3e raise the equilibrium price by 1.20Topic: Industry Supply Correct Responses: 0Correct Answer: BDi culty: 2Discrimination Index: 023.17 In the absence of government interference, there is a constant marginal cost of $7 per ouncefor 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. Theprobability that any shipment of marijuana is seized is 0.10. If a shipment is seized, there is noother punishment besides loss of the marijuana that is seized. The e ect of the government actionis: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 1.56e raise the equilibrium price by 0.70CHAPTER 23 Industry SupplyTopic: Industry Supply Correct Responses: 0Correct Answer: A432Di culty: 0Discrimination Index: 023.18 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 suitcasesto the U.S. Half of the smuggled cockatoos die in transit. Each smuggled cockatoo has a 10probability of being discovered, in which case the smuggler is ned. If the ne imposed for eachsmuggled 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: 0Correct Answer: ADi culty: 0Discrimination Index: 023.19 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 suitcasesto the U.S. Half of the smuggled cockatoos die in transit. Each smuggled cockatoo has a 10probability of being discovered, in which case the smuggler is ned. If the ne imposed for eachsmuggled 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 CHOICETopic: Industry Supply Correct Responses: 0Correct Answer: A433Di culty: 0Discrimination Index: 023.20 In the absence of government interference, there is a constant marginal cost of $5 perounce for growing marijuana and delivering it to buyers. If the probability that any shipment ofmarijuana is seized is 0.10 and the ne if a shipper is caught is $50 per ounce, then the equilibriumprice of marijuana per ounce is:a 11.11.b 10.c 55.d 4.50.e 5.50.Topic: Industry Supply Correct Responses: 0Correct Answer: ADi culty: 0Discrimination Index: 023.21 In the absence of government interference, there is a constant marginal cost of $5 perounce for growing marijuana and delivering it to buyers. If the probability that any shipment ofmarijuana is seized is 0.30 and the ne if a shipper is caught is $15 per ounce, then the equilibriumprice of marijuana per ounce is:a 13.57.b 9.50.c 20.d 3.50.e 6.50.Topic: Industry Supply Correct Responses: 0Correct Answer: DDi culty: 0Discrimination Index: 023.22 In a certain industry, the supply curve of any rm is Si p = p=2. If a rm produces 3 unitsof output, what is its total variable costs?a $18b $7c $13.50d $9e There is not enough information given to determine total variable costs.CHAPTER 23 Industry SupplyTopic: Industry Supply Correct Responses: 0Correct Answer: D434Di culty: 0Discrimination Index: 023.23 In a certain industry, the supply curve of any rm is Si p = p=2. If a rm produces 6 unitsof output, what is its total variable costs?a $72b $34c $54d $36e There is not enough information given to determine total variable costs.Topic: Industry Supply Correct Responses: 12Correct Answer: ADi culty: 0Discrimination Index: 1523.24 An industry has 100 rms. These rms have identical production functions. In the shortrun, each rm has xed costs of $400. There are two variable factors in the short run and outputis given by y = minx1 ; 4x21=2 . The cost of factor 1 is $4 per unit and the cost of factor 2 is $2per unit. In the short run, the industry supply curve is given by:a Q = 100p=9b Q = 100p=8c Q = 600p1=2d the part of the line Q = 50min4; 8 for which pQ 400=Q.e None of the above.Topic: Industry Supply Correct Responses: 12Correct Answer: ADi culty: 0Discrimination Index: 1523.25 An industry has 100 rms. These rms have identical production functions. In the shortrun, each rm has xed costs of $200. There are two variable factors in the short run and outputis given by y = minx1 ; 4x21=2 . The cost of factor 1 is $5 per unit and the cost of factor 2 is $3per unit. In the short run, the industry supply curve is given by:a Q = 100p=11:50b Q = 100p=10c Q = 633:33p1=2d the part of the line Q = 50min5; 12 for which pQ 200=Q.e None of the above.MULTIPLE CHOICETopic: Industry Supply Correct Responses: 0Correct Answer: B435Di culty: 0Discrimination Index: 023.26 The cheese business in Lake Fon-du-lac, Wisconsin is a competitive industry. All cheesemanufacturers have the cost function C = Q2 + 9; while demand for cheese in the town is given byQd = 120 , P . The long run equilibrium number of rms in this industry isa 19b 38c 34d 120e 39Topic: Industry Supply Correct Responses: 0Correct Answer: BDi culty: 0Discrimination Index: 023.27 The cheese business in Lake Fon-du-lac, Wisconsin is a competitive industry. All cheesemanufacturers have the cost function C = Q2 + 16; while demand for cheese in the town is given byQd = 120 , P . The long run equilibrium number of rms in this industry isa 14b 28c 22d 120e 29CHAPTER 23 Industry SupplyTopic: Industry Supply Correct Responses: 0Correct Answer: C436Di culty: 0Discrimination Index: 023.28 In Baggs, Wyoming, cattle can be produced according to the following process:C = G=10+ P=30where 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 abudget of $9,000?a 1,800b 225c 180d 75e 900Topic: Industry Supply Correct Responses: 0Correct Answer: CDi culty: 0Discrimination Index: 023.29 In Baggs, Wyoming, cattle can be produced according to the following process:C = G=10+ P=40where 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 abudget of $9,000?a 3,000b 180c 450d 75e 900EssayTopic: Industry Supply Correct Responses: 0Industry SupplyDi culty: 2Discrimination Index: 023.1 The cost per bushel of growing corn on a given acre of land depends partly on how intenselythe land is farmed and partly on the quality of the soil, the amount of rainfall and the length ofthe growing season. Suppose that the last three factors are summarized by a single index "f" forfertility. Suppose that the long run total cost of producing y hundred bushels of corn on an acreof land of fertility f is cy; f where cy; f = 1 + y2 =f for y 0 and c0; f = 0. a Write down aformula for the long run average cost function per hundred bushels of corn from an acre of landof quality f ? b At what level of output is long run average cost minimized on an acre of land ofquality f ? c What is the lowest price per hundred bushels at which an acre of land of quality fwill be used to produce corn?Answer: aLRAC = y + 1=y=f b1 hundred bushels c2=f .Topic: Industry Supply Correct Responses: 0Di culty: 0Discrimination Index: 023.2 The price elasticity of gasoline in the United States has been estimated to be 0.15. If thisis 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 competitionbetween stations.Topic: Industry Supply Correct Responses: 0Di culty: 0Discrimination Index: 023.3 The price elasticity of demand for gasoline in the United States is equal to 0.15. How shouldthe price elasticity of demand for the individual rm compare to 0.15 higher; lower, same, can'ttell? Explain why.Chapter 24MonopolyTrue-FalseTopic: Monopoly Correct Responses: 76Correct Answer: TrueDi culty: 1Discrimination Index: 3724.1 Since a monopoly charges a price higher than marginal cost, it will produce an ine cientamount of output.Topic: Monopoly Correct Responses: 45Correct Answer: FalseDi culty: 2Discrimination Index: 2224.2 If the interest rate is 10, a monopolist will choose a markup of price over marginal cost ofat least 10.Topic: Monopoly Correct Responses: 73Correct Answer: FalseDi culty: 1Discrimination Index: 1324.3 A natural monopoly occurs when a rm gains ownership of the entire stock of some naturalresource and thus is able to exclude other producers.Topic: Monopoly Correct Responses: 0Correct Answer: FalseDi culty: 1Discrimination Index: 024.4 Since a monopoly makes excess pro ts beyond the normal rate of return on investment, aninvestor is likely to get a higher rate of return in the stock market by investing in monopolisticrather than competitive industries.Topic: Monopoly Correct Responses: 90Correct Answer: TrueDi culty: 1Discrimination Index: 324.5 If he produces anything at all, a pro t-maximizing monopolist with some xed costs andno variable costs will set price and output so as to maximize revenue.TRUE-FALSETopic: Monopoly Correct Responses: 85Correct Answer: True439Di culty: 1Discrimination Index: 2924.6 For a monopolist who faces a downward sloping demand curve, marginal revenue is lessthan price whenever quantity sold is positive.Topic: Monopoly Correct Responses: 46Correct Answer: TrueDi culty: 2Discrimination Index: 3224.7 A monopolist with constant marginal costs faces a demand curve with a constant elasticityof demand and does not practice price discrimination. If the government imposes a tax of $1 perunit of goods sold by the monopolist, the monopolist will increase his price by more than $1 perunit.Topic: Monopoly Correct Responses: 0Correct Answer: TrueDi culty: 1Discrimination Index: 024.8 A monopolist will always equate marginal revenue and marginal cost when maximizingpro t.MonopolyMultiple ChoiceTopic: Monopoly Correct Responses: 20Correct Answer: CDi culty: 2Discrimination Index: 3324.1 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 thefollowing expresses the monopolist's pro ts as a function of his output?a 32 , 5q , 7b 32 , 10qc 25q , 5q2d 32q , 5q2 , 7e None of the above.Topic: Monopoly Correct Responses: 20Correct Answer: CDi culty: 2Discrimination Index: 3324.2 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 thefollowing expresses the monopolist's pro ts as a function of his output?a 29 , 2q , 6b 29 , 4qc 23q , 2q2d 29q , 2q2 , 6e None of the above.Topic: Monopoly Correct Responses: 91Correct Answer: EDi culty: 1Discrimination Index: 2324.3 A monopolist faces the inverse demand curve p = 192 , 4q. At what level of output is histotal revenue maximized?a 36b 34c 12d 48e 24MULTIPLE CHOICETopic: Monopoly Correct Responses: 91Correct Answer: E441Di culty: 1Discrimination Index: 2324.4 A monopolist faces the inverse demand curve p = 288 , 6q. At what level of output is histotal revenue maximized?a 36b 34c 12d 48e 24Topic: Monopoly Correct Responses: 69Correct Answer: BDi culty: 2Discrimination Index: 2324.5 The demand for a monopolist's output is 7000 divided by the square of the price in dollarsthat it charges per unit. The rm has constant marginal costs equal to 1 dollar per unit. Tomaximize its pro ts it should charge a price of:a 1.b 2.c 3.d 1.5.e 2.5.Topic: Monopoly Correct Responses: 68Correct Answer: ADi culty: 2Discrimination Index: 2724.6 A pro t-maximizing monopolist faces the demand curve, q = 100 , 3p. It produces at a con-stant marginal cost of $20 per unit. A quantity tax of $10 per unit is imposed on the monopolist'sproduct. The price of the monopolist's product:a rises by $5.b rises by $10.c rises by $20.d rises by $12.e stays constant.CHAPTER 24 MonopolyTopic: Monopoly Correct Responses: 39Correct Answer: C442Di culty: 2Discrimination Index: 4424.7 The demand for a monopolist's output is 10,000 divided by the square of the price hecharges. The monopolist produces at a constant marginal cost of $5. If the government imposes asales tax of $10 per unit on the monopolist's output, the monopolists price will rise by:a $5.b $10.c $20.d $12.e None of the above.Topic: Monopoly Correct Responses: 56Correct Answer: CDi culty: 2Discrimination Index: 3524.8 The demand for a monopolist's output is 2; 000=p + 1 where p is the price she charges. At2a 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: 56Correct Answer: CDi culty: 2Discrimination Index: 3524.9 The demand for a monopolist's output is 4; 000=p + 5 where p is the price she charges. At2a 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 CHOICETopic: Monopoly Correct Responses: 57Correct Answer: D443Di culty: 3Discrimination Index: 3324.10 The demand for a monopolist's output is 3; 000=p + 1 where p is her price. She has2constant marginal costs equal to $5 per unit. What price will she charge to maximize her pro ts?a 15b 6c 14d 11e 5Topic: Monopoly Correct Responses: 57Correct Answer: DDi culty: 3Discrimination Index: 3324.11 The demand for a monopolist's output is 6; 000=p + 3 where p is her price. She has2constant marginal costs equal to $5 per unit. What price will she charge to maximize her pro ts?a 20b 8c 17d 13e 5Topic: Monopoly Correct Responses: 60Correct Answer: DDi culty: 2Discrimination Index: 3624.12 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 MonopolyTopic: Monopoly Correct Responses: 95Correct Answer: E444Di culty: 1Discrimination Index: 024.13 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: 38Correct Answer: CDi culty: 2Discrimination Index: 3224.14 A monopolist has decreasing average costs as output increases. If the monopolist sets priceequal 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: 87Correct Answer: DDi culty: 1Discrimination Index: 2424.15 A pro t maximizing monopolist faces a downward sloping demand curve that has a constantelasticity of ,4. The rm nds it optimal to charge a price of 60 for its output. What is its marginalcost at this level of output?a 23.50b 136c 120d 45e 60MULTIPLE CHOICETopic: Monopoly Correct Responses: 87Correct Answer: D445Di culty: 1Discrimination Index: 2424.16 A pro t maximizing monopolist faces a downward sloping demand curve that has a constantelasticity of ,2. The rm nds it optimal to charge a price of 60 for its output. What is its marginalcost at this level of output?a 16b 91c 120d 30e 60Topic: Monopoly Correct Responses: 82Correct Answer: DDi culty: 2Discrimination Index: 324.17 A monopolist has constant marginal costs of $1 per unit. The demand for her output is1000=p if p is less than or equal to 50. The demand is 0 if plevel of output?50. What is her pro t maximizinga 5b 10c 15d 20e 25Topic: Monopoly Correct Responses: 42Correct Answer: BDi culty: 2Discrimination Index: 3224.18 The demand curve for the output of a certain industry is linear, q = A , Bp. There areconstant 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 werecompetitive.b if the industry is competitive, output will be exactly twice as great as it would be if the industry weremonopolized.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 werecompetitive.e None of the above.CHAPTER 24 MonopolyTopic: Monopoly Correct Responses: 15Correct Answer: B446Di culty: 3Discrimination Index: 024.19 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 greaterthan his marginal cost of production. But to get the subsidy on a unit of output, somebody has toconsume 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: 59Correct Answer: CDi culty: 2Discrimination Index: 2424.20 A monopolist faces the demand curve q = 110 , p=2 where q is the number of units sold andp is the price in dollars. He has quasi- xed costs, C; and constant marginal costs of $20 per unit ofoutput. Therefore his total costs are C + 20q if q 0 and 0 if q = 0. What is the largest value of Cfor which he would be willing to produce positive output?a $20b $4,000c $5,000d $7,500e $6,000MULTIPLE CHOICETopic: Monopoly Correct Responses: 59Correct Answer: C447Di culty: 2Discrimination Index: 2424.21 A monopolist faces the demand curve q = 115 , p=2 where q is the number of units sold andp is the price in dollars. He has quasi- xed costs, C; and constant marginal costs of $30 per unit ofoutput. Therefore his total costs are C + 30q if q 0 and 0 if q = 0. What is the largest value of Cfor which he would be willing to produce positive output?a $30b $4,000c $5,000d $7,500e $6,000Topic: Monopoly Correct Responses: 0Correct Answer: CDi culty: 2Discrimination Index: 024.22 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 regulationsrequire this rm to produce a positive amount and to set price equal to average cost. To complywith 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 MonopolyTopic: Monopoly Correct Responses: 69Correct Answer: D448Di culty: 2Discrimination Index: 2024.23 A monopolist has the total cost function, cq = 1; 300 + 7q. The inverse demand functionis 110 , 2q; where prices and costs are measured in dollars. If the rm is required by law to meetdemand at a price equal to its marginal cost: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 chooseits own price.d the rm will lose $1,300e the rm will lose $780Topic: Monopoly Correct Responses: 69Correct Answer: DDi culty: 2Discrimination Index: 2024.24 A monopolist has the total cost function, cq = 850 + 4q. The inverse demand functionis 190 , 5q; where prices and costs are measured in dollars. If the rm is required by law to meetdemand at a price equal to its marginal cost: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 chooseits own price.d the rm will lose $850e the rm will lose $510MULTIPLE CHOICETopic: Monopoly Correct Responses: 61Correct Answer: B449Di culty: 2Discrimination Index: 1024.25 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 thatmaximizes pro ts. One day, the island's government annexes a neighboring island and extends themonopolist's monopoly rights to this island. People on the annexed island have the same tastesand 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: 41Correct Answer: DDi culty: 3Discrimination Index: 5324.26 An airline has exclusive landing rights at the local airport. The airline ies one ight perday to New York with a plane that has a seating capacity of 100. The cost of ying the planeper day is $4,000 +10q where q is the number of passengers. The number of ights to New Yorkdemanded is q = 165 , :5p. If the airline maximizes its monopoly pro ts, the di erence between themarginal cost of ying an extra passenger and the amount the marginal passenger is willing to payto y to New York is:a $10.b $100.c $140.d $160.e None of the above.CHAPTER 24 MonopolyTopic: Monopoly Correct Responses: 65Correct Answer: D450Di culty: 2Discrimination Index: 2524.27 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: 0Correct Answer: EDi culty: 2Discrimination Index: 024.28 A monopolist faces a downward-sloping demand curve and has xed costs so large thatwhen he maximizes pro ts with a positive amount of output, he earns exactly zero pro ts. At thispositive, 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 CHOICETopic: Monopoly Correct Responses: 70Correct Answer: D451Di culty: 2Discrimination Index: 4524.29 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 demandfunction 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 $10per copy. If the company sells this software at the pro t maximizing monopoly price, the numberof consumers who would not buy the software at the monopoly price but would be willing to payat 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: 21Correct Answer: DDi culty: 3Discrimination Index: 924.30 The town council of Frostbite, Ontario is trying to decide whether to build an outdoorskating rink which would cost $1 million and last for only one season. Operating costs would bezero. Yearly passes would be sold to anyone who wanted to use the rink. If p is the price of thepass in dollars, the number demanded would be q = 1200 , :6p. The council has asked you to advisethem 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 consumersurplus 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 bebetter o .c if the rink is built and price set to maximize pro ts, the town makes a pro t but consumers are worseo than without a rink.d there is no price at which ticket revenues still cover costs, but total consumer surplus from the rinkexceeds costs.e None of the above.CHAPTER 24 MonopolyTopic: Monopoly Correct Responses: 58Correct Answer: C452Di culty: 2Discrimination Index: 3524.31 A monopolist produces at a point where the price elasticity of demand is ,:7 and themarginal cost is 2. If you were hired to advise this monopolist on how to increase his pro ts, youwould 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: 46Correct Answer: CDi culty: 2Discrimination Index: 2224.32 The Hard Times Concrete company is a monopolist in the concrete market. It uses twoinputs, 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 ofgravel 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 demandfunction for concrete.d may go up, down, or not change, based on whether the cement's elasticity of demand is less than, equalto, or greater than ,1.e could go up or down, but must move in the opposite direction from its demand for gravel.MULTIPLE CHOICETopic: Monopoly Correct Responses: 80Correct Answer: B453Di culty: 1Discrimination Index: 4124.33 In a market with inverse demand curve P = 10 , Q; Brand X is a monopolist with no xedcosts and with a marginal cost of 2. If marginal cost rises to 4, by how much will the price of BrandX rise?a 2b 1c 3d No change, the rm is already charging the monopoly price.e None of the above.Topic: Monopoly Correct Responses: 43Correct Answer: CDi culty: 2Discrimination Index: 2324.34 Charlie can work as many hours as he wishes at a local fast food restaurant for a wageof $4 per hour. Charlie also does standup comedy. Since Charlie lives in a quiet, rather solemnmidwestern 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 perweek and P is the price charged per hour of comedy. When Charlie maximizes his utility, he spendsat 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 standupcomedy?a 36b 40c 18d 20e We can't tell without knowing his utility function.CHAPTER 24 MonopolyTopic: Monopoly Correct Responses: 63Correct Answer: D454Di culty: 2Discrimination Index: 2324.35 A certain monopolist has a positive marginal cost of production. Despite this fact, themonopolist decides to produce a quantity of output that maximizes total revenues. Assume thatthe marginal revenue curve for this monopolist always has a negative slope. Then the monopolist: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.Topic: Monopoly Correct Responses: 46Correct Answer: DDi culty: 2Discrimination Index: 924.36 The demand curve facing a monopolist is Dp = 100=p if p is 20 or smaller and Dp = 0if p 20. The monopolist has a constant marginal cost of $1 per unit produced. What is thepro t-maximizing quantity of output for this monopolist?a 4b 3c 2d 5e Cannot be determined.MULTIPLE CHOICETopic: Monopoly Correct Responses: 74Correct Answer: B455Di culty: 2Discrimination Index: 3724.37 An industry has two rms, a leader and a follower. The demand curve for the industry'soutput is given by the function p = 320 , 4q; where q is total industry output. Each rm has zeromarginal cost. The leader chooses his quantity rst, knowing that the follower will observe theleader's choice and choose his quantity to maximize pro ts, given the quantity produced by theleader. 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: 74Correct Answer: BDi culty: 2Discrimination Index: 3724.38 An industry has two rms, a leader and a follower. The demand curve for the industry'soutput is given by the function p = 80 , 2q; where q is total industry output. Each rm has zeromarginal cost. The leader chooses his quantity rst, knowing that the follower will observe theleader's choice and choose his quantity to maximize pro ts, given the quantity produced by theleader. The leader will choose an output of:a 13.33.b 20.c 10.d 40.e None of the above.CHAPTER 24 MonopolyTopic: Monopoly Correct Responses: 72Correct Answer: A456Di culty: 1Discrimination Index: 1924.39 A monopolist faces a constant marginal cost of $1 per unit and has no xed costs. If theprice 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 aboveTopic: Monopoly Correct Responses: 72Correct Answer: ADi culty: 1Discrimination Index: 1924.40 A monopolist faces a constant marginal cost of $1 per unit and has no xed costs. If theprice 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 aboveTopic: Monopoly Correct Responses: 0Correct Answer: CDi culty: 2Discrimination Index: 024.41 A pro t-maximizing monopolist has the cost schedule, cy = 10y. The demand for herproduct is given by y = 800=p3 where p is her price. Suppose that the government tries to get herto increase her output by giving her a subsidy of 18 dollars for every unit that she sells. Giving herthe 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 CHOICETopic: Monopoly Correct Responses: 0Correct Answer: C457Di culty: 2Discrimination Index: 024.42 A pro t-maximizing monopolist has the cost schedule, cy = 30y. The demand for herproduct is given by y = 700=p2 where p is her price. Suppose that the government tries to get herto increase her output by giving her a subsidy of 8 dollars for every unit that she sells. Giving herthe 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: 74Correct Answer: BDi culty: 2Discrimination Index: 2224.43 A pro t-maximizing monopolist faces a demand function given by q = 1000 , 20p where p isthe 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 10dollars 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 MonopolyTopic: Monopoly Correct Responses: 69Correct Answer: A458Di culty: 2Discrimination Index: 3624.44 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 atzero marginal cost. Before any zwi e can be produced, the rm would have to spend a xed costof $F . Demand for zwi e is given by the equation q = 20 , p. The rm has a patent on zwi e, soit 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: 69Correct Answer: ADi culty: 2Discrimination Index: 3624.45 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 atzero marginal cost. Before any zwi e can be produced, the rm would have to spend a xed costof $F . Demand for zwi e is given by the equation q = 22 , p. The rm has a patent on zwi e, soit 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 CHOICETopic: Monopoly Correct Responses: 23Correct Answer: B459Di culty: 3Discrimination Index: 2224.46 A rm has invented a new beverage called Slops. It doesn't taste very good, but it givespeople a craving for Lawrence Welk's music and Professor Johnson's jokes. Some people are willingto pay money for this e ect, so the demand for Slops is given by the equation q = 18 , p. Slops canbe 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 andinsisting 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: 23Correct Answer: BDi culty: 3Discrimination Index: 2224.47 A rm has invented a new beverage called Slops. It doesn't taste very good, but it givespeople a craving for Lawrence Welk's music and Professor Johnson's jokes. Some people are willingto pay money for this e ect, so the demand for Slops is given by the equation q = 20 , p. Slops canbe 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 theinventor 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 andinsisting 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 MonopolyTopic: Monopoly Correct Responses: 57Correct Answer: A460Di culty: 2Discrimination Index: 2124.48 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: 57Correct Answer: ADi culty: 2Discrimination Index: 2124.49 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: 0Correct Answer: ADi culty: 0Discrimination Index: 024.50 Peter Morgan sells pigeon pies from his pushcart in Central Park. Due to the abundantsupplies 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 180b 36c 360d 540e None of the aboveMULTIPLE CHOICETopic: Monopoly Correct Responses: 0Correct Answer: A461Di culty: 0Discrimination Index: 024.51 Peter Morgan sells pigeon pies from his pushcart in Central Park. Due to the abundantsupplies 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 105b 21c 210d 315e None of the aboveTopic: Monopoly Correct Responses: 0Correct Answer: CDi culty: 0Discrimination Index: 024.52 A pro t-maximizing monopoly faces an inverse demand function described by the equationpy = 40 , y and its total costs are cy = 9y; where prices and costs are measured in dollars. Inthe past it was not taxed, but now it must pay a tax of 8 dollars per unit of output. After the tax,the monopoly will:a increase its price by 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: 0Correct Answer: CDi culty: 0Discrimination Index: 024.53 A pro t-maximizing monopoly faces an inverse demand function described by the equationpy = 100 , y and its total costs are cy = 7y; where prices and costs are measured in dollars. Inthe past it was not taxed, but now it must pay a tax of 4 dollars per unit of output. After the tax,the monopoly will:a increase its price by 4.b increase its price by 6.c increase its price by 2.d leave its price constant.e none of the above.CHAPTER 24 MonopolyTopic: Monopoly Correct Responses: 0Correct Answer: C462Di culty: 0Discrimination Index: 024.54 A monopolist faces a demand function Q = 4; 000=p + 7, . If she charges a price of p; hermarginal revenue will be:2a p=2 + 7b 2p + 3:50c p=2 , 7=2.d ,2p + 7,3e p + B , 2Topic: Monopoly Correct Responses: 0Correct Answer: CDi culty: 0Discrimination Index: 024.55 A monopolist faces a demand function Q = 2; 000=p + 8, . If she charges a price of p; hermarginal revenue will be:2a p=2 + 8b 2p + 4c p=2 , 8=2.d ,2p + 8,3e p + B , 2Topic: Monopoly Correct Responses: 0Correct Answer: EDi culty: 0Discrimination Index: 024.56 The demand for copies of the software package Macrosoft Doors is given by Q = 10; 000P , .32The cost to produce Doors is C = 100; 000+5Q. If Macrosoft practices cost plus pricing, what wouldbe the pro t maximizing markup?a 100.b 33.33.c 14.29.d 6.67.e 3.23.MULTIPLE CHOICETopic: Monopoly Correct Responses: 0Correct Answer: E463Di culty: 0Discrimination Index: 024.57 The demand for copies of the software package Macrosoft Doors is given by Q = 10; 000P , .16The cost to produce Doors is C = 100; 000 + 10Q. If Macrosoft practices cost plus pricing, whatwould be the pro t maximizing markup?a 100.b 33.33.c 14.29.d 6.67.e 3.23.Topic: Monopoly Correct Responses: 0Correct Answer: CDi culty: 0Discrimination Index: 024.58 A major software developer has estimated the demand for its new personal nance software,:package to be Q = 1; 000; 000P 1 10 while the total cost of the package is C = 400; 000 + 20Q. If thisrm 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: 0Correct Answer: CDi culty: 0Discrimination Index: 024.59 A major software developer has estimated the demand for its new personal nance software,:package to be Q = 1; 000; 000P 1 40 while the total cost of the package is C = 100; 000 + 20Q. If thisrm 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 MonopolyTopic: Monopoly Correct Responses: 0Correct Answer: D464Di culty: 0Discrimination Index: 024.60The Fabulous 500s Decor Company is the only producer of pink amingo lawn statues. Whilebusiness 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 ishours of labor, and P is pounds of pink plastic. PL = 20 and PP = 4. What would be the pro tmaximizing output and price?a Q = 180; P = 55b Q = 189:78; P = 52:56c Q = 199:44; P = 50:14d Q = 88; P = 78e Q = 176; P = 56Topic: Monopoly Correct Responses: 0Correct Answer: DDi culty: 0Discrimination Index: 024.61The Fabulous 500s Decor Company is the only producer of pink amingo lawn statues. Whilebusiness 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 ishours of labor, and P is pounds of pink plastic. PL = 15 and PP = 2. What would be the pro tmaximizing output and price?a Q = 393; P = 203:50b Q = 392:33; P = 203:83c Q = 399:42; P = 200:29d Q = 373; P = 213:50e Q = 746; P = 27MULTIPLE CHOICETopic: Monopoly Correct Responses: 0Correct Answer: D465Di culty: 0Discrimination Index: 024.62 An obscure inventor in Strasburg, North Dakota has a monopoly on a new beverage calledBubbles, which produces an unexplained craving for Lawrence Welk music. Bubbles is producedby the following process: Q = minR=5; W where R is pulverized Lawrence Welk records, and Wis gallons of North Dakota well water. PR = PW = 1. Demand for Bubbles is Q = 2; 304P ,2A0:5. Ifthe advertising budget for Bubbles is $81, the pro t maximizing quantity of Bubbles isa 0b 36c 864d 144e 140Topic: Monopoly Correct Responses: 0Correct Answer: DDi culty: 0Discrimination Index: 024.63 An obscure inventor in Strasburg, North Dakota has a monopoly on a new beverage calledBubbles, which produces an unexplained craving for Lawrence Welk music. Bubbles is producedby the following process: Q = minR=5; W where R is pulverized Lawrence Welk records, and Wis gallons of North Dakota well water. PR = PW = 1. Demand for Bubbles is Q = 3; 600P ,2A0:5. Ifthe advertising budget for Bubbles is $64, the pro t maximizing quantity of Bubbles isa 0b 40c 1,200d 200e 196CHAPTER 24 MonopolyTopic: Monopoly Correct Responses: 0Correct Answer: A466Di culty: 0Discrimination Index: 024.64 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. Tomaximize pro ts, the bureau shoulda 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: 0Correct Answer: ADi culty: 0Discrimination Index: 024.65 The Cleveland Visitors Bureau is the exclusive national marketer of weekend getawayvacations in Cleveland, Ohio. At current market prices, the price elasticity of demand is 1. Tomaximize pro ts, the bureau shoulda 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 CHOICETopic: Monopoly Correct Responses: 0Correct Answer: D467Di culty: 0Discrimination Index: 024.66 In some parts of the world, Red Lizzard Wine is alleged to increase one's longevity. It isproduced by the following process:Q = min1=4L; Rwhere L is the number of spotted red lizzards, and R is gallons of rice wine. PL = PR = 1. Demand1for Red Lizzard Wine in the United States is Q = 1; 600P ,2A 2 . If the advertising budget is $100,the quantity of wine which should be imported into the US isa 0b 40c 800d 160e 156Topic: Monopoly Correct Responses: 0Correct Answer: DDi culty: 0Discrimination Index: 024.67 In some parts of the world, Red Lizzard Wine is alleged to increase one's longevity. It isproduced by the following process:Q = min1=5L; Rwhere L is the number of spotted red lizzards, and R is gallons of rice wine. PL = PR = 1. Demand1for Red Lizzard Wine in the United States is Q = 576P ,2A 2 . If the advertising budget is $81, thequantity of wine which should be imported into the US isa 0b 18c 216d 36e 32MonopolyEssayTopic: Monopoly Correct Responses: 0Di culty: 3Discrimination Index: 024.1 A baseball team's attendance depends on the number of games it wins per season and onthe price of its tickets. The demand function it faces is Q = N 20 , p where Q is the number oftickets in hundred thousands sold per year, p is the price per ticket and N is the fraction of itsgames that the team wins. The team can increase the number of games it wins by hiring betterplayers. 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 expressionfor the rm's pro ts as a function of ticket price and expenditure on players. bFind the ticketprice that maximizes revenue. c Find the pro t maximizing expenditure on players and the pro tmaximizing fraction of games to win.Answer: a:7 , 1=C 20 , pp , C bp = 10 c C = 10Chapter 25True-FalseTopic: Monopoly Behavior Correct Responses: 82Correct Answer: TrueMonopoly BehaviorDi culty: 2Discrimination Index: 3525.1 Third degree price discrimination occurs when a monopolist sells output to di erent peopleat di erent prices, but every unit that an individual buys costs the same amount.Topic: Monopoly Behavior Correct Responses: 79Correct Answer: FalseDi culty: 1Discrimination Index: 1925.2 A monopolist who is able to practice third degree price discrimination will make greaterpro ts than a monopolist who is able to practice rst degree price discrimination.Topic: Monopoly Behavior Correct Responses: 86Correct Answer: FalseDi culty: 2Discrimination Index: 325.3 A discriminating monopolist is able to charge di erent prices in two di erent markets. Ifwhen the same price is charged in both markets, the quantity demanded in market 1 is alwaysgreater than the quantity demanded in market 2, then in order to maximize pro ts, the monopolistshould charge a higher price in market 1 than in market 2.Topic: Monopoly Behavior Correct Responses: 28Correct Answer: TrueDi culty: 2Discrimination Index: 1125.4 In a monopolistically competitive industry with zero pro ts, each rm will produce less thanthe amount that minimizes average costs.Topic: Monopoly Behavior Correct Responses: 61Correct Answer: TrueDi culty: 3Discrimination Index: 2225.5 It is possible that a pro t-maximizing monopolist who is able to practice rst degree perfectprice discrimination would sell a quantity x such that the demand curve for his product is inelasticwhen the quantity sold is x.CHAPTER 25 Monopoly BehaviorTopic: Monopoly Behavior Correct Responses: 80Correct Answer: True470Di culty: 1Discrimination Index: 1525.6 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 demandfunctions.Topic: Monopoly Behavior Correct Responses: 71Correct Answer: FalseDi culty: 1Discrimination Index: 2025.7 A pro t-maximizing monopolist is able to practice third degree price discrimination. If hecharges p1 in market 1 and p2 in market 2, where p1 p2; it must be that the quantity sold inmarket 1 is smaller than the quantity sold in market 2.Topic: Monopoly Behavior Correct Responses: 32Correct Answer: FalseDi culty: 2Discrimination Index: 2425.8 A pro t-maximizing monopolist practices third degree price discrimination. If he chargesp1 in market 1 and p2 in market 2, where p1p2 ; then if the law forced him to charge the sameprice in both markets, more would be demanded in market 1 than in market 2.Topic: Monopoly Behavior Correct Responses: 74Correct Answer: TrueDi culty: 2Discrimination Index: 2725.9 A price discriminating monopolist charges p in market 1 and p in market 2. If pp2 ; it121must be that the absolute value of the price elasticity in market 1 at price p1 is smaller than theabsolute value of the price elasticity in market 2 at price p2 .Topic: Monopoly Behavior Correct Responses: 0Correct Answer: FalseDi culty: 1Discrimination Index: 025.10 A monopolist who is able to practice third degree price discrimination charges a higherprice in the market that is more elastic.Monopoly BehaviorMultiple ChoiceTopic: Monopoly Behavior Correct Responses: 31Correct Answer: CDi culty: 2Discrimination Index: 2325.1 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 secondmarket 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: 45Correct Answer: BDi culty: 2Discrimination Index: 025.2 A monopolist nds that a person's demand for its product depends on the person's age. Theinverse demand function of someone of age y; can be written p = Ay , q where Ay is an increasingfunction of y. The product cannot be resold from one buyer to another and the monopolist knowsthe 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 BehaviorTopic: Monopoly Behavior Correct Responses: 17Correct Answer: A472Di culty: 3Discrimination Index: 2425.3 A monopolist has discovered that the inverse demand function of a person with income Mfor the monopolist's product is p = :002M , q. The monopolist is able to observe the incomes of itsconsumers 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 consumerdepends 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: 59Correct Answer: ADi culty: 2Discrimination Index: 4125.4 Wobble's Weebles is the only producer of weebles. It makes weebles at constant marginalcost c where c 0 and sells them at a price of p1 per weeble in Market 1 and at a price of p2per weeble in Market 2. The demand curve for weebles in Market 1 has a constant price elasticityof demand equal to ,2. The demand curve for weebles in Market 2 has a constant price elasticityequal to ,3=2. The ratio of the pro t maximizing price in Market 1 to the pro t maximizing pricein Market 2 is:a 2=3.b 1=3.c 3=2.d 3.e dependent on the value of c.MULTIPLE CHOICETopic: Monopoly Behavior Correct Responses: 24Correct Answer: B473Di culty: 2Discrimination Index: 2225.5 A monopolist sells in two markets. The demand curve for her product is given by p =1303 , 3x1 in the rst market and p2 = 253 , 5x2 in the second market, where xi is the quantitysold in Market i and pi is the price charged in Market i. She has a constant marginal cost ofproduction, c = 3; and no xed costs. She can charge di erent prices in the two markets. What isthe pro t-maximizing combination of quantities for this monopolist?a x1 = 100 and x2 = 27b x1 = 50 and x2 = 25c x1 = 75 and x2 = 50d x1 = 60 and x2 = 23e x1 = 70 and x2 = 35Topic: Monopoly Behavior Correct Responses: 24Correct Answer: BDi culty: 2Discrimination Index: 2225.6 A monopolist sells in two markets. The demand curve for her product is given by p =1119 , 2x1 in the rst market and p2 = 123 , 5x2 in the second market, where xi is the quantitysold in Market i and pi is the price charged in Market i. She has a constant marginal cost ofproduction, c = 3; and no xed costs. She can charge di erent prices in the two markets. What isthe pro t-maximizing combination of quantities for this monopolist?a x1 = 58 and x2 = 14b x1 = 29 and x2 = 12c x1 = 41 and x2 = 29d x1 = 39 and x2 = 10e x1 = 49 and x2 = 22CHAPTER 25 Monopoly BehaviorTopic: Monopoly Behavior Correct Responses: 36Correct Answer: B474Di culty: 2Discrimination Index: 4625.7 A price-discriminating monopolist sells in two separate markets such that goods sold in onemarket are never resold in the other. It charges p1 = 3 in one market and p2 = 7 in the othermarket. At these prices, the price elasticity in the rst market is ,2:50 and the price elasticity inthe 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: 36Correct Answer: BDi culty: 2Discrimination Index: 4625.8 A price-discriminating monopolist sells in two separate markets such that goods sold in onemarket are never resold in the other. It charges p1 = 3 in one market and p2 = 9 in the othermarket. At these prices, the price elasticity in the rst market is ,2:50 and the price elasticity inthe 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 CHOICETopic: Monopoly Behavior Correct Responses: 75Correct Answer: A475Di culty: 0Discrimination Index: 4725.9 A monopolist has a constant marginal cost of $2 per unit and no xed costs. He facesseparate markets in the U.S. and England. He can set one price p1 for the American market andanother price p2 for the English market. If demand in the U.S. is given by Q1 = 8; 400 , 700p1; anddemand 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: 75Correct Answer: ADi culty: 0Discrimination Index: 4725.10 A monopolist has a constant marginal cost of $2 per unit and no xed costs. He facesseparate markets in the U.S. and England. He can set one price p1 for the American market andanother price p2 for the English market. If demand in the U.S. is given by Q1 = 6; 400 , 800p1; anddemand 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 BehaviorTopic: Monopoly Behavior Correct Responses: 42Correct Answer: C476Di culty: 0Discrimination Index: 4825.11 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'swillingness to pay and can therefore practice rst degree price discrimination, extracting fromeach customer his entire consumer surplus. The inverse demand function for cars in Enigma isP = 2000 , 10Q. Roach Motors purchases its stock of used cars at an auction in Cleveland for $400each. Roach motors willa 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 $20,4800e shut down since revenue will not cover variable costs.Topic: Monopoly Behavior Correct Responses: 42Correct Answer: CDi culty: 0Discrimination Index: 4825.12 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'swillingness to pay and can therefore practice rst degree price discrimination, extracting fromeach customer his entire consumer surplus. The inverse demand function for cars in Enigma isP = 2000 , 10Q. Roach Motors purchases its stock of used cars at an auction in Cleveland for $700each. Roach motors willa 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 $13,5200e shut down since revenue will not cover variable costs.MULTIPLE CHOICETopic: Monopoly Behavior Correct Responses: 0Correct Answer: E477Di culty: 0Discrimination Index: 025.13 BMW Bayerische Motoren Werk charges a considerably higher price for its automobilesin the North American market than it does in its home market of Europe. Assuming that thegoal of BMW's pricing policy is pro t maximization, which of the following would be a plausibleexplanation for BMW's pricing policy?a The income elasticity of demand in North America must be greater than 1, making BMWs a luxury goodin 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 normalgood 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 BMWsprice 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 BMWsare 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 priceelastic; but must be higher in Europe.Topic: Monopoly Behavior Correct Responses: 0Correct Answer: ADi culty: 0Discrimination Index: 025.14 A careful analysis of demand for Bubbles in Strasburg, ND reveals a strange segmentationin the market. Recall Bubbles is the beverage which produces an unexplained craving for LawrenceWelk's music. It is produced by the process Q = minR=4; W ; where R is the number of pulverizedLawrence Welk records, and W is gallons of North Dakota well water. PR = 1; PW = 3. If demandfor Bubbles by senior citizens is described by Qo = 500P f,3=2g while demand by those under 65years 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 BehaviorTopic: Monopoly Behavior Correct Responses: 0Correct Answer: A478Di culty: 0Discrimination Index: 025.15 A careful analysis of demand for Bubbles in Strasburg, ND reveals a strange segmentationin the market. Recall Bubbles is the beverage which produces an unexplained craving for LawrenceWelk's music. It is produced by the process Q = minR=5; W ; where R is the number of pulverizedLawrence Welk records, and W is gallons of North Dakota well water. PR = 1; PW = 4. If demandfor Bubbles by senior citizens is described by Qo = 500P f,3=2g while demand by those under 65years 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: 0Correct Answer: ADi culty: 0Discrimination Index: 025.16 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 strangesegmentation in the market. Demand for tickets by senior citizens is described by Qo = 500P f,3=2gwhile demand by those under 65 years old is Qy = 50P ,5. If the marginal cost of a ticket is $4, howshould 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 CHOICETopic: Monopoly Behavior Correct Responses: 0Correct Answer: A479Di culty: 0Discrimination Index: 025.17 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 strangesegmentation in the market. Demand for tickets by senior citizens is described by Qo = 500P f,3=2gwhile demand by those under 65 years old is Qy = 50P ,2. If the marginal cost of a ticket is $2, howshould 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.EssayTopic: Monopoly Behavior Correct Responses: 0Monopoly BehaviorDi culty: 0Discrimination Index: 025.1 Disneyland has two possibilities for pricing rides at its theme parks: 1 Set MR = MC foreach ride and charge the maximum price consumers would bear. 2 Charge an admission fee to thetheme park, but allow unlimited rides for free. Using graphs, show which pricing scheme is morepro table for Disneyland.Chapter 26True-FalseTopic: Factor Markets Correct Responses: 93Correct Answer: FalseFactor MarketsDi culty: 1Discrimination Index: 026.1 A monopsony occurs when two previously competing rms reach an agreement to colludeon price.Topic: Factor Markets Correct Responses: 56Correct Answer: FalseDi culty: 1Discrimination Index: 026.2 A monopsonist's market power enables him to hire labor at a marginal cost that is lowerthan the wage rate.Topic: Factor Markets Correct Responses: 38Correct Answer: TrueDi culty: 1Discrimination Index: 4026.3 For a monopsonist, the supply curve of a factor of production is less steep than the marginalcost curve.Topic: Factor Markets Correct Responses: 0Correct Answer: FalseDi culty: 2Discrimination Index: 026.4 A coal producer has a monopoly on coal. A di erent monopoly controls the railroad thattakes 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: 0Correct Answer: FalseDi culty: 2Discrimination Index: 026.5 For a monopsonist, the more elastic the supply of labor, the greater the di erence betweenthe marginal cost of labor and the wage rate.CHAPTER 26 Factor MarketsTopic: Factor Markets Correct Responses: 31Correct Answer: False482Di culty: 2Discrimination Index: 2026.6 If a monopolist faces a competitive labor market, it will hire labor up to the point wherethe price of output times the marginal product of labor equals the wage rate.Topic: Factor Markets Correct Responses: 0Correct Answer: TrueDi culty: 1Discrimination Index: 026.7 A monopolist who faces a horizontal labor supply curve will demand less labor than hewould if he acted competitively.Topic: Factor Markets Correct Responses: 0Correct Answer: FalseDi culty: 1Discrimination Index: 026.8 If an upstream monopolist sells to a downstream monopolist, the price to consumers willbe higher than the competitive price, but not so high as it would be if the downstream monopolisttook control of the upstream monopolist's business and ran both the upstream and downstreammarkets to maximize total pro ts.Topic: Factor Markets Correct Responses: 0Correct Answer: TrueDi culty: 0Discrimination Index: 026.9 If a labor market is dominated by a monopolist, it is possible that the imposition of aminimum wage law could INCREASE the amount of employment in that market.Factor MarketsMultiple ChoiceTopic: Factor Markets Correct Responses: 31Correct Answer: DDi culty: 1Discrimination Index: 6026.1 A monopolist produces a good using only one factor, labor. There are constant returns toscale 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 themonopolist 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: 0Correct Answer: BDi culty: 1Discrimination Index: 026.2 If a monopsonist pays the wage rate w; then the amount of labor that he can hire isLw = 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 MarketsTopic: Factor Markets Correct Responses: 0Correct Answer: C484Di culty: 1Discrimination Index: 026.3 A pro t-maximizing monopsonist hires both men and women to do a certain task. The twosexes are equally good at this task and are regarded as perfect substitutes. Labor supply curves forboth sexes are upward-sloping. In order to hire M men, the rm would have to pay men a wage ofAM, where A is a positive constant. In order to hire F women, the monopsonist would have to paya wage of BF c where B and c are positive constants. Which, if any, of these conditions necessarilyimplies that he pays a lower wage to women than to men?a Ab Ac cd Bce CB.c.1.A.2.Topic: Factor Markets Correct Responses: 0Correct Answer: EDi culty: 3Discrimination Index: 026.4 The frangle industry is a monopoly, with a demand curve 100 , p; where p is the price offrangles. It takes one unit of labor and no other inputs to produce a frangle. The Frangle-makersGuild is a strong union. The Guild sets a wage and prevents anyone from working for less thanthat 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 oflabor 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 CHOICETopic: Factor Markets Correct Responses: 0Correct Answer: C485Di culty: 2Discrimination Index: 026.5 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 baubleindustry must all belong to the Bauble-makers Union. The union sets the wage that will be paid toall bauble-makers. The price of plastic is 10 dollars per unit and the demand function for baublesis 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: 0Correct Answer: ADi culty: 2Discrimination Index: 026.6 Suppose that the demand curve for mineral water is given by p = 20 , 8q where p is the priceper 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 ofc per bottle. Given his marginal cost of c per unit, the distributor chooses an output to maximizehis own pro ts. Knowing that this is what the distributor will do, the producer sets his price c soas to maximize his revenue. The price paid by consumers under this arrangement is:a 15b 2.50c 10d 5e 1.25CHAPTER 26 Factor MarketsTopic: Factor Markets Correct Responses: 0Correct Answer: A486Di culty: 2Discrimination Index: 026.7 Suppose that the demand curve for mineral water is given by p = 60 , 8q where p is the priceper 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 ofc per bottle. Given his marginal cost of c per unit, the distributor chooses an output to maximizehis own pro ts. Knowing that this is what the distributor will do, the producer sets his price c soas to maximize his revenue. The price paid by consumers under this arrangement is:a 45b 7.50c 30d 15e 3.75Topic: Factor Markets Correct Responses: 0Correct Answer: DDi culty: 2Discrimination Index: 026.8 The labor supply curve faced by a large rm in a small city is given by w = 40+0:05L whereL is the number of units of labor per week hired by the large rm and w is the weekly wage ratethat it pays. If the rm is currently hiring 1000 units of labor per week, then the marginal cost ofa 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 CHOICETopic: Factor Markets Correct Responses: 0Correct Answer: D487Di culty: 2Discrimination Index: 026.9 The labor supply curve faced by a large rm in a small city is given by w = 60+0:09L whereL is the number of units of labor per week hired by the large rm and w is the weekly wage ratethat it pays. If the rm is currently hiring 1000 units of labor per week, then the marginal cost ofa 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: 0Correct Answer: ADi culty: 0Discrimination Index: 026.10Rabelaisian Restaurants has a monopoly in the town of Upper Glutton. Its production function isQ = 10L where L is the amount of labor it uses and Q is the number of meals produced. In order tohire L units of labor, Rabelaisian Restaurants must pay a wage of 20 + :1L per unit of labor. Thedemand curve for meals at Rabelaisian Restaurants is given byP = 50 , Q=1000. The pro t maximizing output forRabelasian Restaurants is:a 12,000.b 24,000.c 3,000.d 2,000.e 1,500.CHAPTER 26 Factor MarketsTopic: Factor Markets Correct Responses: 0Correct Answer: A488Di culty: 0Discrimination Index: 026.11Rabelaisian Restaurants has a monopoly in the town of Upper Glutton. Its production function isQ = 40L where L is the amount of labor it uses and Q is the number of meals produced. In orderto 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 byP = 20 , Q=1000. The pro t maximizing output forRabelasian Restaurants is:a 8,000.b 16,000.c 2,000.d 500.e 1,000.EssayTopic: Factor Markets Correct Responses: 0Factor MarketsDi culty: 3Discrimination Index: 026.1 This comes from an actual newspaper story. "The average price of a home in W . countyrose more than 12 last year...but the number of sales fell nearly 15. `It's the old law of supplyand demand', said a spokesman for the Board of Realtors. `The number of sales is down becausethere's a higher demand for properties but there isn't a corresponding number to sell.'" a Whatdoes the "old law of supply and demand" predict would happen to price and quantity if the demandcurve shifts outward and the supply curve does not change? b Draw a diagram to illustrate thecase of a shift in demand and or supply curves that is consistent with the observed change in pricesand 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 aleftward shift in the supply curve and no change in the demand curve.Chapter 27OligopolyTrue-FalseTopic: Oligopoly Correct Responses: 72Correct Answer: FalseDi culty: 1Discrimination Index: 3127.1 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: 61Correct Answer: FalseDi culty: 1Discrimination Index: 1427.2 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: 96Correct Answer: TrueDi culty: 1Discrimination Index: 027.3 Suppose that the demand curve for an industry's output is a downward sloping straight lineand there is constant marginal cost. Then the larger the number of identical rms producing inCournot equilibrium, the lower will be the price.Topic: Oligopoly Correct Responses: 96Correct Answer: TrueDi culty: 1Discrimination Index: 027.4 A Stackelberg leader chooses his actions on the assumption that his rival will adjust to theleader's actions in such a way as to maximize the rival's pro ts.Topic: Oligopoly Correct Responses: 0Correct Answer: FalseDi culty: 1Discrimination Index: 027.5 Conjectural variation refers to the fact that in a single market there is variation among rmsin their estimates of the demand function in future periods.TRUE-FALSETopic: Oligopoly Correct Responses: 0Correct Answer: True491Di culty: 1Discrimination Index: 027.6 A duopoly in which two identical rms are engaged in Bertrand competition will not distortprices from their competitive levels.Topic: Oligopoly Correct Responses: 92Correct Answer: TrueDi culty: 2Discrimination Index: 2127.7 A Stackelberg leader will necessarily make at least as much pro t as he would if he actedas a Cournot oligopolist.Topic: Oligopoly Correct Responses: 37Correct Answer: FalseDi culty: 2Discrimination Index: 2227.8 In the Cournot model, each rm chooses its actions on the assumption that its rivals willreact by changing their quantities in such a way as to maximize their own pro ts.Topic: Oligopoly Correct Responses: 54Correct Answer: TrueDi culty: 0Discrimination Index: 1027.9 In the Bertrand model of duopoly, each rm sets its price, believing that the other's pricewill not change. When both rms have identical production functions and produce with constantreturns to scale, the Bertrand equilibrium price is equal to marginal cost.OligopolyMultiple ChoiceTopic: Oligopoly Correct Responses: 3Correct Answer: DDi culty: 3Discrimination Index: 327.1 An industry has two rms each of which produces output at a constant unit cost of $10 perunit. The demand function for the industry is q = 1; 000; 000=p. The Cournot equilibrium price forthis industry is:a 5.b 10.c 15.d 20.e 25.Topic: Oligopoly Correct Responses: 21Correct Answer: CDi culty: 2Discrimination Index: 2927.2 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 pricefor this industry?a 20b 22c 120d 60e None of the above.MULTIPLE CHOICETopic: Oligopoly Correct Responses: 21Correct Answer: C493Di culty: 2Discrimination Index: 2927.3 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 pricefor this industry?a 32b 34c 52d 26e None of the above.Topic: Oligopoly Correct Responses: 0Correct Answer: CDi culty: 3Discrimination Index: 027.4 One unit of zinc and one unit of copper are needed to produce a unit of brass. The world'ssupply 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 toproduce brass and that the brass industry operates competitively. Then the price of a unit of brassequals the cost of the inputs used to make it. The demand function for brass is q = 900 , 2p wherep is the price of brass. The zinc and copper monopolists each set a price, believing that the othermonopolist will not change his price. What is the equilibrium price of brass?a 100b 200c 300d 50e 25CHAPTER 27 OligopolyTopic: Oligopoly Correct Responses: 57Correct Answer: C494Di culty: 2Discrimination Index: 3327.5 A duopoly faces the inverse demand curve p = 160 , 2q. Both rms in the industry haveconstant costs of $10 per unit of output. In a Cournot equilibrium how much output will eachduopolist sell?a 75b 54c 25d 35e 48Topic: Oligopoly Correct Responses: 0Correct Answer: BDi culty: 2Discrimination Index: 027.6 Suppose that the price elasticity of demand for airline ights betweem two cities is constantand equal to ,1:5. If 4 airlines with equal costs are in Cournot equilibrium for this industry, thenthe 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 CHOICETopic: Oligopoly Correct Responses: 66Correct Answer: A495Di culty: 2Discrimination Index: 4427.7 A city has two major league baseball teams, A and B. The number of tickets sold by eitherteam depends on the price of the team's own tickets and the price of the other team's ticket. Ifteam A charges Pa for its tickets and team B charges Pb for its tickets, then ticket sales, measuredin hundreds of thousands per season are 20 , 2Pa + Pb for team A and 10+ Pa , 2Pb for team B . Themarginal cost of an extra spectator is zero for both teams. Each team believes the other's priceis independent of its own choice of price and each team sets its own price so as to maximize itsrevenue. 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: 66Correct Answer: ADi culty: 2Discrimination Index: 4427.8 A city has two major league baseball teams, A and B. The number of tickets sold by eitherteam depends on the price of the team's own tickets and the price of the other team's ticket. Ifteam A charges Pa for its tickets and team B charges Pb for its tickets, then ticket sales, measuredin hundreds of thousands per season are 21 , 2Pa + Pb for team A and 6 + Pa , 2Pb for team B . Themarginal cost of an extra spectator is zero for both teams. Each team believes the other's priceis independent of its own choice of price and each team sets its own price so as to maximize itsrevenue. 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 OligopolyTopic: Oligopoly Correct Responses: 0Correct Answer: D496Di culty: 3Discrimination Index: 027.9 A city has two newspapers. Demand for either paper depends on its own price and the priceof its rival. Demand functions for papers A and B respectively, measured in tens of thousands ofsubscriptions, are 21 , 2Pa + Pb and 21+ Pa , 2Pb. The marginal cost of printing and distributing anextra paper just equals the extra advertising revenue one gets from another reader, so each papertreats marginal costs as zero. Each paper maximizes its revenue assuming that the other's price isindependent of its own choice of price. If the papers enter a joint operating agreement where theyset prices to maximize total revenue, by how much will newspaper prices rise?a 3b 2c 0d 3.5e 2.5Topic: Oligopoly Correct Responses: 77Correct Answer: CDi culty: 1Discrimination Index: 3527.10 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 , 4qwhere q is total industry output and suppose that marginal costs are zero. What is the Cournotreaction function of rm 1 to the output, q2; of rm 2?2a 120 , 4q2b 120 , 4q2c 15 , :5q2d 30 , 4q2e 124 , 8q2MULTIPLE CHOICETopic: Oligopoly Correct Responses: 77Correct Answer: C497Di culty: 1Discrimination Index: 3527.11 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 , 3qwhere q is total industry output and suppose that marginal costs are zero. What is the Cournotreaction function of rm 1 to the output, q2; of rm 2?2a 180 , 3q2b 180 , 3q2c 30 , :5q2d 60 , 3q2e 183 , 6q2Topic: Oligopoly Correct Responses: 61Correct Answer: DDi culty: 2Discrimination Index: 5227.12 An industry has two rms producing at a constant unit cost of $10 per unit. The inversedemand curve for the industry is p = 110 , :5q. Suppose that rm 1 is a Stackleberg leader inchoosing its quantity i.e. rm 1 chooses it's quantity rst, knowing that rm 2 will observe rm10s quantity when it chooses its own output. How much output will rm 2, the follower, produce?a 40b 15c 20d 50e 30CHAPTER 27 OligopolyTopic: Oligopoly Correct Responses: 28Correct Answer: C498Di culty: 3Discrimination Index: 3227.13 The cartel of copper exporting countries is called COPEC. As part of an internationalmarketing agreement, the United States has agreed to buy all the copper that COPEC wants tosell 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 ofdemand of COPEC's copper in the European market? Hint: What is COPEC's marginal revenuein the U.S. market?a ,1b ,2c ,3d ,1=3e ,2=3Topic: Oligopoly Correct Responses: 61Correct Answer: EDi culty: 2Discrimination Index: 1727.14 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 produceat 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 CHOICETopic: Oligopoly Correct Responses: 49Correct Answer: D499Di culty: 2Discrimination Index: 4227.15 The inverse demand function for fuzzy dice is p = 20 , q. There are constant returns toscale 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: 69Correct Answer: CDi culty: 2Discrimination Index: 8027.16 An industry has two rms. Firm 10s cost function is cy = 2y + 500 and rm 20s costfunction is cy = 2y + 400. The demand curve for the outputof this industry is a downward-slopingstraight 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: 26Correct Answer: ADi culty: 3Discrimination Index: 027.17 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 theduopolists has a constant marginal cost of $980 per ton and he produces 60 of the total numberof 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 OligopolyTopic: Oligopoly Correct Responses: 26Correct Answer: A500Di culty: 3Discrimination Index: 027.18 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 theduopolists has a constant marginal cost of $720 per ton and he produces 60 of the total numberof 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: 62Correct Answer: ADi culty: 3Discrimination Index: 1027.19 The demand for y is given by y = 256=p . Only two rms produce y. They have identical2costs cy = y2 . If they agree to collude and maximize their joint pro ts, how much output willeach rm produce?a 2b 5c 10d 12e 16MULTIPLE CHOICETopic: Oligopoly Correct Responses: 25Correct Answer: E501Di culty: 3Discrimination Index: 2127.20 A certain type of mushroom used to be produced on 50 farms, each of which had a costfunction cy = y2 + 1 where y 0 and c0 = 0. The rms operated as competitors. The demandcurve for this kind of mushroom is given by Dp = 52 , p. Marauding deviant Ninja turtles invadedmany of the mushroom farms leaving absolute devastation and loathsome slime in their wake. Theturtles 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 mushroomswould 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 mushroomswould 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, totaloutput 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 tohalf of the preinvasion output.e If half of the farms were invaded and the industry remained compeitive, industry output would fall, butwould be greater than half of the preinvasion output.Topic: Oligopoly Correct Responses: 69Correct Answer: CDi culty: 2Discrimination Index: 4027.21 A duopoly faces the demand curve Dp = 30 , :5p. Both rms in the industry have atotal cost function given by C q = 4q. Suppose that Firm 1 is a Stackelberg leader in choosing itsquantity rst. Firm 10 s pro t function can be written as:a q1 = 14 , :5q2.b q2 = 14 , :5q1.2c 28q1, q1 .2d 56q1, q1 .e 60q, q2 .CHAPTER 27 OligopolyTopic: Oligopoly Correct Responses: 63Correct Answer: A502Di culty: 0Discrimination Index: 6727.22 A duopoly faces the inverse demand curve p = 160 , 2q. Firm 10s total cost function is given0by 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: 63Correct Answer: BDi culty: 0Discrimination Index: 6727.23 Consider a market with one large rm and many small rms. The supply function ofall of the small rms together is given by S p = 200 + p; the market demand curve is given byDp = 400 , p; and the cost function for the large rm is C y = 20y. The residual demand curvefor 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 CHOICETopic: Oligopoly Correct Responses: 77Correct Answer: A503Di culty: 0Discrimination Index: 4827.24 The duopolists Carl and Simon face a demand function for pumpkins of Q = 5; 600 , 800Pwhere 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 functiontells us how many pumpkins Carl should produce in order to maximize his pro ts. Carl's reactionfunction 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: 77Correct Answer: ADi culty: 0Discrimination Index: 4827.25 The duopolists Carl and Simon face a demand function for pumpkins of Q = 3; 600 , 400Pwhere 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 functiontells us how many pumpkins Carl should produce in order to maximize his pro ts. Carl's reactionfunction 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 OligopolyTopic: Oligopoly Correct Responses: 0Correct Answer: D504Di culty: 2Discrimination Index: 027.26 Supose that the inverse demand for bean sprouts is given by P Y = 520 , 2Y and the totalcost of producing Y units for any rm is TC Y = 40Y . If the industry consists of two Cournotduopolists, 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: 0Correct Answer: DDi culty: 2Discrimination Index: 027.27 Supose that the inverse demand for bean sprouts is given by P Y = 390 , 2Y and the totalcost of producing Y units for any rm is TC Y = 30Y . If the industry consists of two Cournotduopolists, 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 CHOICETopic: Oligopoly Correct Responses: 72Correct Answer: A505Di culty: 0Discrimination Index: 5627.28 Suppose that Grinch and Grubb go into the wine business in a small country where wine isdi cult to grow. The demand for wine is given by p = $420 , :2Q where p is the price and Q is thetotal 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 costsof $15. How much is Grinch's output in equilibrium?a 675b 1,350c 337.50d 1,012.50e 2,025Topic: Oligopoly Correct Responses: 72Correct Answer: ADi culty: 0Discrimination Index: 5627.29 Suppose that Grinch and Grubb go into the wine business in a small country where wine isdi cult to grow. The demand for wine is given by p = $600 , :2Q where p is the price and Q is thetotal 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 costsof $75. How much is Grinch's output in equilibrium?a 925b 1,850c 462.50d 1,387.50e 2,775CHAPTER 27 OligopolyTopic: Oligopoly Correct Responses: 0Correct Answer: A506Di culty: 0Discrimination Index: 027.30Suppose 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 onthis route are 200+30q where q is the number of passengers on the ight. Each ight has a capacityof 80 passengers. In Cournot equilibrium, each duopolist will run one ight per day and will makea daily pro t of:a 600b 100c 180d 1,200e 2,000Topic: Oligopoly Correct Responses: 0Correct Answer: ADi culty: 0Discrimination Index: 027.31Suppose 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 onthis route are 100+40q where q is the number of passengers on the ight. Each ight has a capacityof 80 passengers. In Cournot equilibrium, each duopolist will run one ight per day and will makea daily pro t of:a 100b 50c 140d 200e 1,000MULTIPLE CHOICETopic: Oligopoly Correct Responses: 0Correct Answer: C507Di culty: 0Discrimination Index: 027.32 Suppose that the market demand curve for bean sprouts is given byP = 3; 580 , 5Q; where P is the price and Q is total industry output. Suppose that the industry hastwo rms, a Stackleberg leader and a follower. Each rm has a constant marginal cost of $80 perunit 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: 0Correct Answer: CDi culty: 0Discrimination Index: 027.33 Suppose that the market demand curve for bean sprouts is given byP = 3; 520 , 5Q; where P is the price and Q is total industry output. Suppose that the industry hastwo rms, a Stackleberg leader and a follower. Each rm has a constant marginal cost of $20 perunit 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 OligopolyTopic: Oligopoly Correct Responses: 0Correct Answer: A508Di culty: 0Discrimination Index: 027.34 There are two rms in the blastopheme industry. The demand curve for blastophemes isgiven by p = 1; 000 , 2q. Each rm has one manufacturing plant and each rm i has a cost functionC qi = qi2 where qi is the output of rm i. The two rms form a cartel and arrange to split totalindustry 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: 0Correct Answer: ADi culty: 0Discrimination Index: 027.35 There are two rms in the blastopheme industry. The demand curve for blastophemes isgiven by p = 5; 400 , 4q. Each rm has one manufacturing plant and each rm i has a cost functionC qi = qi2 where qi is the output of rm i. The two rms form a cartel and arrange to split totalindustry 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 CHOICETopic: Oligopoly Correct Responses: 55Correct Answer: D509Di culty: 0Discrimination Index: 3027.36 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 peryear 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: 40Correct Answer: BDi culty: 0Discrimination Index: 2527.37 An industry has two colluding rms, who act so as to maximize total pro t in the industryand then split the pro ts equally. Firm 1 has cost function cy = 8y. Firm 2 has cost functioncy = 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: 40Correct Answer: BDi culty: 0Discrimination Index: 2527.38 An industry has two colluding rms, who act so as to maximize total pro t in the industryand then split the pro ts equally. Firm 1 has cost function cy = 8y. Firm 2 has cost functioncy = 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 OligopolyTopic: Oligopoly Correct Responses: 63Correct Answer: C510Di culty: 0Discrimination Index: 4027.39 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 amarginal cost of 0. The leader has a marginal cost of 12. How much should the leader produce inorder to maximize pro ts?a 15b 24c 12d 10e None of the above.Topic: Oligopoly Correct Responses: 63Correct Answer: CDi culty: 0Discrimination Index: 4027.40 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 amarginal cost of 0. The leader has a marginal cost of 6. How much should the leader produce inorder to maximize pro ts?a 9b 12c 6d 4e None of the above.MULTIPLE CHOICETopic: Oligopoly Correct Responses: 0Correct Answer: A511Di culty: 0Discrimination Index: 027.41 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 inthis town, but since they are not large enough to purchase cars through the same discount sourcesas Roach, each rm faces the cost function C = 5; 000 + 600Q + 5Q2. The demand for used cars isQ = 400 , P 2=10. Assuming Roach is aware of its competitors' costs, what price should Roach setfor a used car?a $783.33b $816.67c $600d $641.67e $1,016.67Topic: Oligopoly Correct Responses: 0Correct Answer: ADi culty: 0Discrimination Index: 027.42 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 inthis town, but since they are not large enough to purchase cars through the same discount sourcesas Roach, each rm faces the cost function C = 5; 000 + 600Q + 5Q2. The demand for used cars isQ = 200 , P 1=10. Assuming Roach is aware of its competitors' costs, what price should Roach setfor a used car?a $666.67b $600c $600d $583.33e $900CHAPTER 27 OligopolyTopic: Oligopoly Correct Responses: 0Correct Answer: B512Di culty: 0Discrimination Index: 027.43Roach Motors is the dominant used car dealer in a small midwestern city. After paying $50,000for overhead, Roach Motors' cost per car is $500. There are 4 other small used car lots in thistown, but since they are not large enough to purchase cars through the same discount sources asRoach, each rm faces the cost function C = 5; 000 + 700Q + 5Q2. The demand for used cars isQ = 500 , P 2=10. Assuming Roach sets the market price so as to maximize its pro t, how manycars will each of the follower rms supply?a 12b 20c 27d 17e 15Topic: Oligopoly Correct Responses: 0Correct Answer: BDi culty: 0Discrimination Index: 027.44Roach Motors is the dominant used car dealer in a small midwestern city. After paying $50,000for overhead, Roach Motors' cost per car is $500. There are 4 other small used car lots in thistown, but since they are not large enough to purchase cars through the same discount sources asRoach, each rm faces the cost function C = 5; 000 + 700Q + 5Q2. The demand for used cars isQ = 500 , P 2=10. Assuming Roach sets the market price so as to maximize its pro t, how manycars will each of the follower rms supply?a 29b 20c 26d 19e 14MULTIPLE CHOICETopic: Oligopoly Correct Responses: 0Correct Answer: D513Di culty: 0Discrimination Index: 027.45North Bend currently has one McDonald's fast food franchise. Demand for hamburgers in NorthBend is given by Q = 200 , 40P . Any McDonald's franchise has costs of C = 80 + 2Q for producingQ hamburgers. If a second McDonald's franchise were to move into North Bend and both behaveas duopolists, the pro t of the original McDonald's woulda 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: 0Correct Answer: DDi culty: 0Discrimination Index: 027.46North Bend currently has one McDonald's fast food franchise. Demand for hamburgers in NorthBend is given by Q = 400 , 10P . Any McDonald's franchise has costs of C = 60 + 4Q for producingQ hamburgers. If a second McDonald's franchise were to move into North Bend and both behaveas duopolists, the pro t of the original McDonald's woulda 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 OligopolyTopic: Oligopoly Correct Responses: 0Correct Answer: B514Di culty: 0Discrimination Index: 027.47 Ann and Bruce each own a pizza store in Frostbite Falls, MN. Demand for pizza is given byQ = 200 , 40P . Being the only two pizza stores in Frostbite Falls, they attempt to pro tably splitthe market without violating the Sherman Antitrust Act. Each has the cost function C = 60 + 3Q.If Ann and Bruce behave as duopolists each earns a pro t ofa $0.b $ , 42:22.c $35.56.d $97.78.e $40.Topic: Oligopoly Correct Responses: 0Correct Answer: BDi culty: 0Discrimination Index: 027.48 Ann and Bruce each own a pizza store in Frostbite Falls, MN. Demand for pizza is given byQ = 300 , 40P . Being the only two pizza stores in Frostbite Falls, they attempt to pro tably splitthe market without violating the Sherman Antitrust Act. Each has the cost function C = 60 + 4Q.If Ann and Bruce behave as duopolists each earns a pro t ofa $0.b $ , 5:56.c $108.89.d $241.11.e $122.50.Chapter 28Game TheoryTrue-FalseTopic: Game Theory Correct Responses: 76Correct Answer: TrueDi culty: 2Discrimination Index: 1328.1 A situation where everyone is playing a dominant strategy must be a Nash equilibrium.Topic: Game Theory Correct Responses: 87Correct Answer: FalseDi culty: 2Discrimination Index: 4028.2 In a Nash equilibrium, everyone must be playing a dominant strategy.Topic: Game Theory Correct Responses: 39Correct Answer: FalseDi culty: 2Discrimination Index: 1428.3 In the prisoners' dilemma game, if each prisoner believed that the other prisoner would denythe crime, then both would deny the crime.Topic: Game Theory Correct Responses: 56Correct Answer: FalseDi culty: 1Discrimination Index: 4128.4 A general has the two possible pure strategies, sending all of his troops by land or all of histroops by sea. An example of a mixed strategy is where he sends 1=4 of his troops by land and 3=4of his troops by sea.Topic: Game Theory Correct Responses: 0Correct Answer: FalseDi culty: 1Discrimination Index: 028.5 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 togetherfor, say, 20 rounds.CHAPTER 28 Game TheoryTopic: Game Theory Correct Responses: 80Correct Answer: False516Di culty: 1Discrimination Index: 3328.6 A two-person game in which each person has access to only two possible strategies will haveat most one Nash equilibrium.Topic: Game Theory Correct Responses: 93Correct Answer: TrueDi culty: 1Discrimination Index: 1328.7 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: 0Correct Answer: TrueDi culty: 1Discrimination Index: 028.8 In Nash equilibrium, each player is making an optimal choice for herself, given the choicesof the other players.Topic: Game Theory Correct Responses: 79Correct Answer: FalseDi culty: 1Discrimination Index: 228.9 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: 82Correct Answer: FalseDi culty: 2Discrimination Index: 1528.10 A game has two players and each has two strategies. The strategies are Be Nice and BeMean. If both players play Be Nice, both get a payo of 5. If both players play Be Mean, both geta payo of ,3. If one player plays Be Nice and the other plays Be Mean, the player who played BeNice gets 0 and the player who played Be Mean gets 10. Playing Be Mean is a dominant strategyfor both players.Game TheoryMultiple ChoiceTopic: Game Theory Correct Responses: 74Correct Answer: CDi culty: 2Discrimination Index: 5728.1 A game has two players. Each player has two possible strategies. One strategy is calledcooperate", the other is called defect". Each player writes on a piece of paper either a C forcooperate or a D for defect. If both players write C; they both get a payo of $100. If bothplayers 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 willbe a dominant strategy for both players if:a S + T 100b T 2Sc S 0 and T 100.d S T and T 100.e S amd T are any positive numbers.Topic: Game Theory Correct Responses: 89Correct Answer: CDi culty: 1Discrimination Index: 3328.2 In the game matrix below, the rst payo in each pair goes to Player A who chooses therow, and the second payo goes to Player B; who chooses the column. Let a, b; c; and d be positiveconstants. If Player A chooses bottom and Player B chooses right in a Nash equilibrium then weknow that: !ta game1.tab!a bb cc bd be a1 and d1 and b1 and cc and d1 and b1.1.d.1.d.CHAPTER 28 Game TheoryTopic: Game Theory Correct Responses: 36Correct Answer: A518Di culty: 2Discrimination Index: 3528.3 In the town of Torrelodones, each of the N 2 inhabitants has $100. They are told thatthey can all voluntarily contribute to a fund that will be evenly divided among all residents. If $Fare contributed to the fund, the local K-Mart will match the private contributions so that the totalamount to be divided is $2F . That is, each resident will get back a payment of $2F=N when thefund is divided. If people in town care only about their own net incomes, in Nash equilibrium, howmuch will each person contribute to the fund?a 0b $10c $20d $50e $100Topic: Game Theory Correct Responses: 43Correct Answer: CDi culty: 3Discrimination Index: 3528.4 Frank and Nancy met at a sorority sock-hop. They agreed to meet for a date at a local barthe next week. Regrettably, they were so fraught with passion that they forgot to agree on whichbar would be the site of their rendezvous. Luckily, the town has only two bars, Rizotti's and theOasis. Having discussed their tastes in bars at the sock-hop, both are aware that Frank prefersRizotti's to the Oasis and Nancy prefer the Oasis to Rizottis. In fact, the payo s are as follows. Ifboth go to the Oasis, Nancy's utility is 3 and Frank's utility is 2. If both go to Rizotti's, Frank'sutility 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 theprobability 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 whereeach person has a probability of 1=2 of going to each bar.e This game has exactly one Nash equilibrium.MULTIPLE CHOICETopic: Game Theory Correct Responses: 28Correct Answer: C519Di culty: 2Discrimination Index: 1628.5 George and Sam have taken their fathers' cars out on a lonely road and are engaged in a gameof "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 bothchoose 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. Ifboth 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 whichis 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 randomizeshis strategy and George chooses Not Swerve with certainty.Topic: Game Theory Correct Responses: 75Correct Answer: EDi culty: 0Discrimination Index: 028.6 Big Pig and Little Pig have two possible strategies, Press the Button, and Wait at thetrough. If both pigs choose Wait, both get 2. If both pigs press the button then Big Pig gets 7 andLittle Pig gets 3. If Little Pig presses the button and Big Pig waits at the trough, then Big Piggets 10 and Little Pig gets 0. Finally, if Big Pig presses the button and Little Pig waits, then BigPig 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 TheoryTopic: Game Theory Correct Responses: 75Correct Answer: E520Di culty: 0Discrimination Index: 028.7 Big Pig and Little Pig have two possible strategies, Press the Button, and Wait at thetrough. If both pigs choose Wait, both get 1. If both pigs press the button then Big Pig gets 8 andLittle Pig gets 2. If Little Pig presses the button and Big Pig waits at the trough, then Big Piggets 10 and Little Pig gets 0. Finally, if Big Pig presses the button and Little Pig waits, then BigPig 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: 0Correct Answer: ADi culty: 0Discrimination Index: 028.8 Two players are engaged in a game of "Chicken". There are two possible strategies. Swerveand 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 of12 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 withprobability 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 swerveswith probability 0.50.d a mixed strategy in which each player swerves with probability 0.25 and drives straight with probability0.75.e no mixed strategies.MULTIPLE CHOICETopic: Game Theory Correct Responses: 0Correct Answer: A521Di culty: 0Discrimination Index: 028.9 Two players are engaged in a game of "Chicken". There are two possible strategies. Swerveand 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 of9 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 withprobability 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 swerveswith probability 0.20.d a mixed strategy in which each player swerves with probability 0.40 and drives straight with probability0.60.e no mixed strategies.Topic: Game Theory Correct Responses: 0Correct Answer: BDi culty: 0Discrimination Index: 028.10 A famous Big Ten football coach had only two strategies. Run the ball to the left sideof the line. Run the ball to the right side. The defense can concentrate forces on the left side orthe right side. If the opponent concentrates on the wrong side, his o ense is sure to gain at least5 yards. If the defense defended the left side and the o ense ran left, it gain only 1 yard. If theopponent defended the right side when the o ense ran right, the o ense would still gain at least5 yards with probability 0.70. It is the last play of the game and the famous coach's team is ono ense. If it makes 5 yards or more it wins, if not it loses. Both sides choose Nash equilibriumstrategies. 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 TheoryTopic: Game Theory Correct Responses: 0Correct Answer: B522Di culty: 0Discrimination Index: 028.11 A famous Big Ten football coach had only two strategies. Run the ball to the left sideof the line. Run the ball to the right side. The defense can concentrate forces on the left side orthe right side. If the opponent concentrates on the wrong side, his o ense is sure to gain at least5 yards. If the defense defended the left side and the o ense ran left, it gain only 1 yard. If theopponent defended the right side when the o ense ran right, the o ense would still gain at least5 yards with probability 0.30. It is the last play of the game and the famous coach's team is ono ense. If it makes 5 yards or more it wins, if not it loses. Both sides choose Nash equilibriumstrategies. 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: 74Correct Answer: ADi culty: 0Discrimination Index: 5628.12 Suppose that in a Hawk-Dove game similar to the one discussed in your workbook, thepayo to each player is ,4 if both play hawk. If both play dove, the payo to each player is 1 andif one plays hawk and the other plays dove, the one that plays hawk gets a payo of 4 and the onethat plays dove gets 0. In equilibrium, we would expect hawks and doves to do equally well. Thishappens 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 CHOICETopic: Game Theory Correct Responses: 74Correct Answer: A523Di culty: 0Discrimination Index: 5628.13 Suppose that in a Hawk-Dove game similar to the one discussed in your workbook, thepayo to each player is ,9 if both play hawk. If both play dove, the payo to each player is 5 andif one plays hawk and the other plays dove, the one that plays hawk gets a payo of 7 and the onethat plays dove gets 0. In equilibrium, we would expect hawks and doves to do equally well. Thishappens 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: 0Correct Answer: DDi culty: 0Discrimination Index: 028.14If the number of persons who attend the club meeting this week is X; then the number of peoplewho will attend next week is 77 + 0:30X . What is a long run equilibrium attendance for this club?a 77b 256.67c 154d 110e 33CHAPTER 28 Game TheoryTopic: Game Theory Correct Responses: 0Correct Answer: D524Di culty: 0Discrimination Index: 028.15If the number of persons who attend the club meeting this week is X; then the number of peoplewho will attend next week is 21 + 0:70X . What is a long run equilibrium attendance for this club?a 21b 30c 42d 70e 49Topic: Game Theory Correct Responses: 0Correct Answer: EDi culty: 0Discrimination Index: 028.16 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 isconsidering writing a book to compete with Professor Binmore's book. With two books amicablysplitting 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 conditionscould Professor Binmore deter the entry of Professor Ditt into his market? More than one answermay 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, ProfessorBinmore would just break even over time.c Professor Binmore threatens to cut his price and attack the credibility of Professor Ditt's book so thatProfessor 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 thatProfessor Ditt would only make $2. In so doing, Professor Binmore would still make $100 over time.e None of the above.MULTIPLE CHOICETopic: Game Theory Correct Responses: 0Correct Answer: E525Di culty: 0Discrimination Index: 028.17 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 isconsidering writing a book to compete with Professor Binmore's book. With two books amicablysplitting 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 conditionscould Professor Binmore deter the entry of Professor Ditt into his market? More than one answermay 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, ProfessorBinmore would just break even over time.c Professor Binmore threatens to cut his price and attack the credibility of Professor Ditt's book so thatProfessor 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 thatProfessor Ditt would only make $2. In so doing, Professor Binmore would still make $50 over time.e None of the above.Game TheoryEssayTopic: Game Theory Correct Responses: 0Di culty: 2Discrimination Index: 028.1 The coach of the o ensive football team has two options on the next play. He can run theball or he can pass. His rival can defend either against the run or against the pass. Suppose thatthe o ense passes. Then if the defense defends against the pass, it will make zero yards and ifthe defense defends against the run, it will make 25 yards. Suppose that the o ense runs. If thedefense defends against the pass, the o ense will make 10 yards and if the defense defends againsta run, the o ense will gain 2 yards. a Write down a payo matrix for this game. b Is there aNash equilibrium in pure strategies for this game? If so, what is it? If not, demonstrate that thereis none.Answer: This game does not have a Nash equilibrium in pure strategies. The best response to apass run is a defense against the pass run. But the best response to a defense against the passrun is to run pass.Chapter 29ExchangeTrue-FalseTopic: Exchange Correct Responses: 62Correct Answer: FalseDi culty: 1Discrimination Index: 529.1 Partial equilibrium analysis concerns only supply or only demand while general equilibriumanalysis deals with supply and demand at the same time.Topic: Exchange Correct Responses: 52Correct Answer: TrueDi culty: 1Discrimination Index: 3129.2 A pure exchange economy is an economy where goods are traded but there is no production.Topic: Exchange Correct Responses: 0Correct Answer: FalseDi culty: 1Discrimination Index: 029.3 In general equilibrium analysis, an allocation is a feasible allocation if every consumer isconsuming a bundle that costs no more than his or her income.Topic: Exchange Correct Responses: 53Correct Answer: TrueDi culty: 2Discrimination Index: 3129.4 From Walras' law it follows that in a market with two goods, if demand equals supply inone market, then demand must equal supply in the other market.Topic: Exchange Correct Responses: 89Correct Answer: TrueDi culty: 1Discrimination Index: 1429.5 If the assumptions of the rst theorem of welfare economics apply, and if the economy isin a competitive equilibrium, then any reallocation that bene ts someone must harm someone else.CHAPTER 29 ExchangeTopic: Exchange Correct Responses: 95Correct Answer: True528Di culty: 1Discrimination Index: 029.6 If there are consumption externalities, then a competitive equilibrium is not necessarilyPareto optimal.Topic: Exchange Correct Responses: 88Correct Answer: TrueDi culty: 1Discrimination Index: 029.7 A competitive equilibrium allocation must be a feasible allocation.Topic: Exchange Correct Responses: 0Correct Answer: TrueDi culty: 2Discrimination Index: 029.8 The second welfare theorem states that if preferences are convex, then any Pareto optimalallocation could be achieved as a competitive equilibrium after some reallocation of initial endowments.Topic: Exchange Correct Responses: 0Correct Answer: TrueDi culty: 1Discrimination Index: 029.9 In a competitive pure exchange economy, if the total value of excess demand for all typesof food is zero, then the total value of excess demand for all nonfood commodities must be zero.Topic: Exchange Correct Responses: 84Correct Answer: TrueDi culty: 1Discrimination Index: 1829.10 Every allocation on the contract curve is Pareto optimal.Topic: Exchange Correct Responses: 75Correct Answer: TrueDi culty: 2Discrimination Index: 1029.11 In a pure exchange economy with two goods, if there is a competitive equilibrium withprices p1 = 12; p2 = 27; then there must also be a competitive equilibrium with prices p1 = 24;p2 = 54.TRUE-FALSETopic: Exchange Correct Responses: 0Correct Answer: True529Di culty: 2Discrimination Index: 029.12 If demand varies continuously with price, then even if there are thousands of goods therewill be at least one set of prices such that demand equals supply in every market.Topic: Exchange Correct Responses: 43Correct Answer: TrueDi culty: 3Discrimination Index: 2329.13 If allocation x is a competitive equilibrium at prices p and if everybody likes his bundle inallocation y better than his bundle in allocation x; then the total value of allocation y at prices pexceeds the total value of allocation x at prices p.Topic: Exchange Correct Responses: 58Correct Answer: TrueDi culty: 2Discrimination Index: 1629.14 If the initial endowment is on the contract curve, then there must always be a competitiveequilibrium in which no trade takes place.Topic: Exchange Correct Responses: 57Correct Answer: TrueDi culty: 2Discrimination Index: 4029.15 Jack Spratt's utility function is U F; L = L. His wife's utility function is U F; L = F . IfJack's initial endowment is 70 units of F and 35 units of L and if Jack's wife's initial endowmentis 42 units of F and 70 units of L; then in an Edgeworth box for Jack and his wife, an allocation ofF and L will be Pareto optimal only if it isat a corner of the box.Topic: Exchange Correct Responses: 57Correct Answer: TrueDi culty: 2Discrimination Index: 4029.16 Jack Spratt's utility function is U F; L = L. His wife's utility function is U F; L = F . IfJack's initial endowment is 50 units of F and 25 units of L and if Jack's wife's initial endowmentis 30 units of F and 50 units of L; then in an Edgeworth box for Jack and his wife, an allocation ofF and L will be Pareto optimal only if it isat a corner of the box.CHAPTER 29 ExchangeTopic: Exchange Correct Responses: 0Correct Answer: True530Di culty: 3Discrimination Index: 029.17 If two people have identical Cobb-Douglas utility functions, then in every Pareto optimalallocation, they must consume all goods in the same proportions as each other.Topic: Exchange Correct Responses: 0Correct Answer: TrueDi culty: 2Discrimination Index: 029.18 If two people have identical homothetic preferences and if their indi erence curves havediminishing marginal rate of substitution, then in an Edgeworth box, the locus of Pareto optimalallocations between them is a diagonal straight line.Topic: Exchange Correct Responses: 0Correct Answer: FalseDi culty: 1Discrimination Index: 029.19 In a model with two consumers, two goods, and no production, the contract curve mustbe a line going from one consumer's origin to the other consumer's origin.Topic: Exchange Correct Responses: 40Correct Answer: FalseDi culty: 2Discrimination Index: 2029.20 In a competitive pure exchange economy, if the initial endowment is on the diagonal linebetween the two origins, then, according to the rst welfare theorem, there must always be a competitive equilibrium in which no trade takes place.ExchangeMultiple ChoiceTopic: Exchange Correct Responses: 12Correct Answer: EDi culty: 2Discrimination Index: 829.1 In a pure exchange economy with two persons and two goods, one person always prefersmore to less of both goods and one person likes one of the goods and hates the other so much thatshe would have to be paid to consume it. Both are initially endowed with positive amounts of bothgoods. 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: 65Correct Answer: ADi culty: 2Discrimination Index: 3529.2 If an allocation is Pareto optimal and if indi erence curves between the two goods have nokinks, then it must be that:a two consumers who consume both goods must have the same MRS between them but consumers mayconsume the goods in di erent ratios.b two consumers with the same income who consume both goods must have the same MRS, but if theirincomes 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 hisown.e all consumers receive the bundle that they prefer to any other bundle the economy could produce forthem.CHAPTER 29 ExchangeTopic: Exchange Correct Responses: 55Correct Answer: E532Di culty: 2Discrimination Index: 3529.3 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: 76Correct Answer: ADi culty: 2Discrimination Index: 4729.4 A small economy has only two consumers, Ben and Penelope. Ben's utility function is=U x; y = x + 84y1 2 . Penelope's utility function is U x; y = x + 7y. At a Pareto optimal allocationin which both individuals consume some of each good, how much y does Ben consume?a 36b 6.50c 12d 13e We can't tell without knowing the initial endowments.Topic: Exchange Correct Responses: 76Correct Answer: ADi culty: 2Discrimination Index: 4729.5 A small economy has only two consumers, Leonard and Katerina. Leonard's utility function=is U x; y = x +144y1 2 . Katerina's utility function is U x; y = x +6y. At a Pareto optimal allocationin which both individuals consume some of each good, how much y does Leonard consume?a 144b 9c 24d 18e We can't tell without knowing the initial endowments.MULTIPLE CHOICETopic: Exchange Correct Responses: 59Correct Answer: C533Di culty: 2Discrimination Index: 3729.6 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 U s; c = 2s + c where s is the number of boxes of strawberries he consumesper month and c is the number of bottles of champagne. Francisca's utility function is U s; 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: 75Correct Answer: DDi culty: 3Discrimination Index: 2929.7 Tomoko and Matt both consume the same goods in a pure exchange economy. Tomoko isoriginally endowed with 16 units of good 1 and 14 units of good 2. Matt is originally endowed with216 units of good 1 and 15 units of good 2. They both have the utility function U x1; x2 = x1=3x2=3.12If we let good 1 be the numeraire, so that p1 = 1; then what will be the equilibrium price of good 2?a 2b 32c 1d 16e 8CHAPTER 29 ExchangeTopic: Exchange Correct Responses: 75Correct Answer: D534Di culty: 3Discrimination Index: 2929.8 Holly and Steven both consume the same goods in a pure exchange economy. Holly isoriginally endowed with 5 units of good 1 and 3 units of good 2. Steven is originally endowed with5 units of good 1 and 2 units of good 2. They both have the utility function U x1 ; x2 = x1=3x2=3.12If we let good 1 be the numeraire, so that p1 = 1; then what will be the equilibrium price of good 2?a 2b 8c 1d 4e 2Topic: Exchange Correct Responses: 93Correct Answer: CDi culty: 2Discrimination Index: 3229.9 Pete and Dud live in a D Dtwo-commodity world. Pete's utility function is U P xP ; xP = xP xP .DDd1212Dud'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 and6 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 ofcommodity 1 gives him no added utilityc At a competitive equilibrium, Dud must consume equal amounts of both goods, so the price of good 1must 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 equalendowments.e All of the above statements are false.MULTIPLE CHOICETopic: Exchange Correct Responses: 95Correct Answer: C535Di culty: 1Discrimination Index: 1729.10 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: 46Correct Answer: EDi culty: 2Discrimination Index: 2629.11 Dan and Marilyn consume two goods, x and y. They have identical Cobb-Douglas utilityfunctions. Initially Dan owns 10 units of x and 10 units of y. Initially Marilyn owns 40 units ofx and 20 units of y. They make exchanges to reach a Pareto optimal allocation which is betterfor both than the no-trade allocation. Which of the following is NOT necessarily true about theallocation 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: 0Correct Answer: DDi culty: 3Discrimination Index: 029.12 Xavier and Yvette are the only two persons on a desert island. There are only twogoods, nuts and berries. Xavier's utility function is U Nx ; Bx = Nx Bx . Yvette's utility function isU Ny ; By = 6Ny + By . Xavier is endowed with 4 units of berries and 10 units of nuts. Yvette isendowed 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 35b 64c 30d 32e None of the above.CHAPTER 29 ExchangeTopic: Exchange Correct Responses: 0Correct Answer: D536Di culty: 3Discrimination Index: 029.13 Xavier and Yvette are the only two persons on a desert island. There are only twogoods, nuts and berries. Xavier's utility function is U Nx ; Bx = Nx Bx . Yvette's utility function isU Ny ; By = 3Ny + By . Xavier is endowed with 3 units of berries and 10 units of nuts. Yvette isendowed 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 19.50b 33c 14.50d 16.50e None of the above.Topic: Exchange Correct Responses: 57Correct Answer: BDi culty: 2Discrimination Index: 929.14 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 Paretoe 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 CHOICETopic: Exchange Correct Responses: 57Correct Answer: B537Di culty: 2Discrimination Index: 929.15 Isabella and Horace live in an isolated valley and trade with no one but each other. Theyconsume 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 Paretoe 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: 11Correct Answer: CDi culty: 3Discrimination Index: 3529.16 Amaranda and Bartolo consume only two goods, X and Y . They can trade only with eachother and there is no production. The total endowment of Good X equals the total endowmentof Good Y . Amaranda's utility function is U xA ; yA = minfxA ; yA g and Bartolo's utility functionis U xB ; yB = maxfxA ; yB g. In an Edgeworth box for Amaranda and Bartolo, the set of Paretooptimal 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 ExchangeTopic: Exchange Correct Responses: 0Correct Answer: C538Di culty: 3Discrimination Index: 029.17 Adelino and Benito consume only two goods X and Y . They trade only with each otherand there is no production. Adelino's utility function is given by U xA; yA = 2xA +5yA and Benito'sutility function is given by U xB ; yB = 26xB + 15yB 1=2. In the Edgeworth box constructed forAdelino 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: 0Correct Answer: DDi culty: 2Discrimination Index: 029.18 Tamara and Julio consume only bread and wine. They trade only with each other andthere is no production. They both have strictly convex preferences. Tamara's initial endowment ofbread 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 CHOICETopic: Exchange Correct Responses: 53Correct Answer: E539Di culty: 2Discrimination Index: 4929.19 Arturo and Belen consume only two goods, X and Y . They have strictly convex preferencesand no kinks in their indi erence curves. At the initial allocation, the ratio of Arturo's marginalutility of X to his marginal utility of Y is A and the ratio of Belen's marginal utility of X to hismarginal 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: 30Correct Answer: BDi culty: 2Discrimination Index: 2029.20 In a two-person, two-good, exchange economy, both consumers have quasilinear utilityfunctions, linear in Good 2. If quantities of Good 1 are measured horizontally and quantities ofGood 2 are measured vertically in the Edgeworth box, the set of Pareto optimal allocations includesa 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.CHAPTER 29 ExchangeTopic: Exchange Correct Responses: 0Correct Answer: B540Di culty: 0Discrimination Index: 029.21 A small =economy has only two consumers, Roger and Heidi. Roger's utility function isU x; y = x + 50y1 2. Heidi's utility function is U x; y = x + 5y. Roger is endowed with 625 units ofx and 60 units of y. They make trades to reach a Pareto optimal allocation of resources in whichboth persons consume positive amounts. How much y does Roger consume?a 50b 25c 28d 23e There is not enough information to determine how much y he will consume.Topic: Exchange Correct Responses: 0Correct Answer: BDi culty: 0Discrimination Index: 029.22 A small economy has only two consumers, George and Penelope. George's utility function=is U x; y = x + 16y1 2. Penelope's utility function is U x; y = x + 4y. George is endowed with 64units of x and 60 units of y. They make trades to reach a Pareto optimal allocation of resources inwhich both persons consume positive amounts. How much y does George consume?a 8b 4c 7d 2e There is not enough information to determine how much y he will consume.MULTIPLE CHOICETopic: Exchange Correct Responses: 20Correct Answer: A541Di culty: 2Discrimination Index: 3729.23 Abdul's utility is U XA ; YA = minfXA ; YAg where XA and YA are his consumptions of goodsX and Y respectively. Babette's utility function is U XB ; YB = XB YB where XB and YB are herconsumptions 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 pis the price of good Y; then supply will equal demand in the market for Y if the following equationis satis ed.a 10=p + 1 + 6 = 12b 12=10 = pc 12=p + 1 + 5 = 12d Minf10; 12g + 10=2p = 12e Minf10; 12g + 12=2p = 12Topic: Exchange Correct Responses: 20Correct Answer: ADi culty: 2Discrimination Index: 3729.24 Abdul's utility is U XA; YA = minfXA ; YAg where XA and YA are his consumptions ofgoods X and Y respectively. Babette's utility function is U XB ; YB = XB YB where XB and YB areher 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 pis the price of good Y; then supply will equal demand in the market for Y if the following equationis satis ed.a 4=p + 1 + 7 = 14b 14=4 = pc 14=p + 1 + 2 = 14d Minf4; 14g + 4=2p = 14e Minf4; 14g + 14=2p = 14CHAPTER 29 ExchangeTopic: Exchange Correct Responses: 63Correct Answer: B542Di culty: 2Discrimination Index: 3829.25 Professor Nightsoil's utility function is UN BN ; PM = BN + 4PN= and Dean Interface's12=utility function is UI BI ; PI = BI +2PI where BN and BI are the number of bromides and PN andPI are the number of platitudes consumed by Nightsoil and Interface respectively . If Nightsoil'sinitial endowment is 4 bromides and 15 platitudes and if Interface's initial endowment is 5 bromidesand 20 platitudes, then at any Pareto e cient allocation in which both persons consume positiveamounts of both goods, it must be that:12a 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: 63Correct Answer: BDi culty: 2Discrimination Index: 3829.26 Professor Nightsoil's utility function is UN BN ; PM = BN + 4PN= and Dean Interface's12=utility function is UI BI ; PI = BI +2PI where BN and BI are the number of bromides and PN andPI are the number of platitudes consumed by Nightsoil and Interface respectively . If Nightsoil'sinitial endowment is 2 bromides and 10 platitudes and if Interface's initial endowment is 3 bromidesand 25 platitudes, then at any Pareto e cient allocation in which both persons consume positiveamounts of both goods, it must be that:12a 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 CHOICETopic: Exchange Correct Responses: 61Correct Answer: B543Di culty: 2Discrimination Index: 5829.27 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 of10 apples and 2 bananas. Charlie's utility function is U AC ; BC = AC BC where AC is his appleconsumption and BC is his banana consumption. Doris's utility function is U AD ; BD = AD BDwhere 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: 61Correct Answer: BDi culty: 2Discrimination Index: 5829.28 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 of6 apples and 6 bananas. Charlie's utility function is U AC ; BC = AC BC where AC is his appleconsumption and BC is his banana consumption. Doris's utility function is U AD ; BD = AD BDwhere 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 ExchangeTopic: Exchange Correct Responses: 55Correct Answer: C544Di culty: 2Discrimination Index: 4129.29 Ken's utility function is U QK ; WK = QK WK and Barbie's utility function is U QB ; 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 bothpersons 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: 55Correct Answer: CDi culty: 2Discrimination Index: 4129.30 Ken's utility function is U QK ; WK = QK WK and Barbie's utility function is U QB ; WB =QB WB . If Ken's initial endowment were 3 units of quiche and 12 units of wine and Barbie's en-dowment were 6 units of quiche and 12 units of wine, then at any Pareto optimal allocation whereboth persons consume some of each good:a 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.MULTIPLE CHOICETopic: Exchange Correct Responses: 20Correct Answer: D545Di culty: 3Discrimination Index: 1229.31 Morris has the utility function U b; w = 3b + 12w and Philip has the utility functionU b; 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 thevertical axis and if we measure Morris' consumptions from the lower left corner of the box, thenthe 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: 20Correct Answer: DDi culty: 3Discrimination Index: 1229.32 Morris has the utility function U b; w = 4b + 12w and Philip has the utility functionU b; 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 thevertical axis and if we measure Morris' consumptions from the lower left corner of the box, thenthe 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 ExchangeTopic: Exchange Correct Responses: 62Correct Answer: A546Di culty: 2Discrimination Index: 3929.33 Astrid's utility function is U HA; CA = HACA. Birger's utility function is minfHB ; CBg. IfAstrid's initial endowment is no cheese and 8 units of herring and if Birger's initial endowmentsare 8 units of cheese and no herring, then where p is a competitive equilibrium price of herring andcheese is the numeraire, it must be that demand equals supply in the herring market. This impliesthat:a 8=p + 1 + 4 = 8b 8=8 = pc 8=8 = pd 8=p + 8=2p = 8e Minf8; 8g = pTopic: Exchange Correct Responses: 62Correct Answer: ADi culty: 2Discrimination Index: 3929.34 Astrid's utility function is U HA; CA = HACA. Birger's utility function is minfHB ; CBg. IfAstrid's initial endowment is no cheese and 12 units of herring and if Birger's initial endowmentsare 8 units of cheese and no herring, then where p is a competitive equilibrium price of herring andcheese is the numeraire, it must be that demand equals supply in the herring market. This impliesthat:a 8=p + 1 + 6 = 12b 8=12 = pc 12=8 = pd 8=p + 12=2p = 12e Minf12; 8g = pMULTIPLE CHOICETopic: Exchange Correct Responses: 29Correct Answer: B547Di culty: 2Discrimination Index: 2729.35 Mutt's utility function is U m; j = maxf4m; jg and Je 's utility function is U m; j = 2m+j.Mutt is initially endowed with 3 units of milk and 2 units of juice and Je is initially endowed with5 units of milk and 6 units of juice.If we draw an Edgeworth box with milk on the horizontal axisand juice on the vertical axis and if we measure goods for Mutt by the distance from the lower leftcorner 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: 29Correct Answer: BDi culty: 2Discrimination Index: 2729.36 Mutt's utility function is U m; j = maxf4m; jg and Je 's utility function is U m; j = 3m+j.Mutt is initially endowed with 3 units of milk and 2 units of juice and Je is initially endowed with5 units of milk and 6 units of juice.If we draw an Edgeworth box with milk on the horizontal axisand juice on the vertical axis and if we measure goods for Mutt by the distance from the lower leftcorner 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.ExchangeEssayTopic: Exchange Correct Responses: 0Di culty: 2Discrimination Index: 029.1 In a pure exchange economy, Ollie's utility function is 0 U x; y = 3x + y and Fawn's utility0function is U x; y = xy. Ollie's initial allocation is 1 x and no y s. Fawn's initial allocation is no x sand 2 y0 s. Draw an Edgeworth box for Fawn and Ollie. Put x0s on the horizontal axis and y0 s onthe vertical axis. Measure goods for Ollie from the lower left and goods for Fawn from the upperright. Mark the initial allocation with the letter W . The locus of Pareto optimal points consists oftwo 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, Fawnconsumes 3 times as much y as x. The contract curve consists of a line running from the upperright corner of the box to the point on the bottom of the box where Fawn consumes all of the yand 2=3 units of x and a line from this point to the lower left of the box.Topic: Exchange Correct Responses: 0Di culty: 3Discrimination Index: 029.2 An economy has 2000 people. 1000 of them have utility functions U x; y = x + y and 1000 ofthem have utility functions U x; y = minf2x; yg. Everybody has an initial allocation of 1 unit of xand 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 ofx and the second type of person will consume 4=3 units of y and 2=3 units of x.Topic: Exchange Correct Responses: 0Di culty: 2Discrimination Index: 029.3 Will likes apples and hates bananas. Wanda likes both apples and bananas. Both of themhave convex preferences. Will's initial endowment is 10 apples and 5 bananas. Wanda's initialendowment is 5 bananas and 10 apples. a Draw an Edgeworth box with apples on the horizontalaxis. Label the initial endowment point, W . b Show two indi erence curves for each person. cShow 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 thebottom of the box.Chapter 30True-FalseTopic: Production Correct Responses: 0Correct Answer: TrueDi culty: 2Discrimination Index: 0Production30.1 If there are constant returns to scale in an industry, then in competitive equilibrium, pro tsin that industry must necessarily be zero.Topic: Production Correct Responses: 0Correct Answer: FalseDi culty: 1Discrimination Index: 030.2 When there is production, a competitive equilibrium is not Pareto optimal unless there areincreasing returns to scale.Topic: Production Correct Responses: 82Correct Answer: TrueDi culty: 1Discrimination Index: 1430.3 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: 68Correct Answer: FalseDi culty: 2Discrimination Index: 2530.4 There are two people and two goods, person A has comparative advantage in the productionof good 1 if and only if it takes person A less time to produce good 1 than it takes person B .ProductionMultiple ChoiceTopic: Production Correct Responses: 77Correct Answer: ADi culty: 1Discrimination Index: 2230.1 A small company produces two goods, swords and plowshares. The company has 100 TypeAlpha employees and 100 Type Beta employees. If an Alpha devotes all his time to producingswords, he can make 4 swords per week. If he devotes all his time to producing plowshares, he canmake 20 plowshares per week. A Beta can produce either 1 plowshare per week or 1 sword perweek. The company wants to produce 425 swords and as many plowshares as it can. How manytype Betas should it employ at making swords?a 100b 25c 80d 0e None of the above.Topic: Production Correct Responses: 77Correct Answer: ADi culty: 1Discrimination Index: 2230.2 A small company produces two goods, swords and plowshares. The company has 100 TypeAlpha employees and 100 Type Beta employees. If an Alpha devotes all his time to producingswords, he can make 3 swords per week. If he devotes all his time to producing plowshares, hecan make 6 plowshares per week. A Beta can produce either 1 plowshare per week or 1 sword perweek. The company wants to produce 314 swords and as many plowshares as it can. How manytype Betas should it employ at making swords?a 100b 14c 85d 0e None of the above.MULTIPLE CHOICETopic: Production Correct Responses: 64Correct Answer: B551Di culty: 2Discrimination Index: 3230.3 Ernie and Burt both make pizzas for a living. Making a pizza consists of two tasks: makingthe crust and applying toppings. Ernie can make crusts at the rate of 30 crusts per hour. He canapply toppings at the rate of 15 toppings per hour. Burt can make crusts at the rate of 15 crustsper hour. He can apply toppings at the rate of 30 toppings per hour. After years of operatingseparate, one-man shops, they realize they can produce more e ciently by combining operationsand dividing the tasks between them. How many more pizzas per hour can they make if they worktogether and allocate tasks e ciently than they made when they worked separately?a 5b 10c 14d 25e 8Topic: Production Correct Responses: 0Correct Answer: ADi culty: 2Discrimination Index: 030.4 Mandy is a master woodcarver and Jerry is her apprentice. They will each work the samenumber of hours making toy cars. Each car requires 4 wheels and 1 body. Mandy makes wheelsat the rate of 25 per hour and bodies at the rate of 10 per hour. Jerry makes wheels at the rateof 10 per hour and bodies at the rate of 10 per hour. If they wish to maximize output, how manywheels should Jerry make per hour?a 3b 2c 10d 6e There is not enough information to determine the answer.CHAPTER 30 ProductionTopic: Production Correct Responses: 0Correct Answer: C552Di culty: 1Discrimination Index: 030.5 Amy Canvas is an artist who produces sketches and paintings. She can produce 12 sketchesa week if she spends all of her workday sketching. She can produce 3 paintings per week if shespends all of her workdays painting. The rate at which she produces either sketches or paintingsis independent of how many she makes. She can divide her time in any way she wishes betweensketching 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 bea 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: 49Correct Answer: DDi culty: 2Discrimination Index: 2530.6 Last year a pestilential fungus ravaged the cocoa elds. The price of chocolate has risenabruptly to $1 per ounce. The government is considering emergency measures to aid su eringchocolate addicts. One plan being considered is the Chocolate Relief Plan CRP. This plan wouldset a price ceiling of $.80 per ounce on chocolate. This would cause a shortage, so the CRP willlimit 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 ouncesper 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 theabsence of the CRP.d Jill is de nitely better o with the CRP.e None of the above.MULTIPLE CHOICETopic: Production Correct Responses: 0Correct Answer: C553Di culty: 2Discrimination Index: 030.7 Robinson Crusoe's preferences over coconut consumption, C; and leisure, R; are representedby the utility function, U C; 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. Hewill choose to work:a 8 hours.b 12 hours.c 16 hours.d 20 hours.e 24 hours.Topic: Production Correct Responses: 76Correct Answer: CDi culty: 2Discrimination Index: 2330.8 Robinson Crusoe spends 4 hours a day catching sh and picking coconuts. He can alwayscatch 2 sh per hour and he can always gather 3 coconuts per hour. His utility function is CFwhere 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 8b 6c 4d 2e 1CHAPTER 30 ProductionTopic: Production Correct Responses: 0Correct Answer: A554Di culty: 0Discrimination Index: 030.9 Tip can write 5 pages of term paper or solve 20 workbook problems in an hour, while Spotcan write 4 pages of term paper or solve 12 workbook problems in an hour. If they each decideto work a total of 8 hours and to share their output, then if they produce as many pages of termpaper 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: 0Correct Answer: ADi culty: 0Discrimination Index: 030.10 Tip can write 2 pages of term paper or solve 2 workbook problems in an hour, while Spotcan write 5 pages of term paper or solve 20 workbook problems in an hour. If they each decideto work a total of 6 hours and to share their output, then if they produce as many pages of termpaper 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: 0Correct Answer: ADi culty: 0Discrimination Index: 030.11 Al and Bill are the only workers in a small factory which makes geegaws and doodads. Alcan make 5 geegaws per hour or 20 doodads per hour. Bill can make 4 geegaws per hour or 24doodads 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 producingdoodads.b Bill has comparative advantage in producing geegaws and Al has comparative advantage in producingdoodads.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 CHOICETopic: Production Correct Responses: 0Correct Answer: A555Di culty: 0Discrimination Index: 030.12 Al and Bill are the only workers in a small factory which makes geegaws and doodads.Al can make 3 geegaws per hour or 15 doodads per hour. Bill can make 2 geegaws per hour or 6doodads 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 producingdoodads.b Bill has comparative advantage in producing geegaws and Al has comparative advantage in producingdoodads.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.Topic: Production Correct Responses: 0Correct Answer: ADi culty: 0Discrimination Index: 030.13Every consumer has a red-money income and a blue-money income and each commodity has a redprice and a blue price. You can buy a good by paying for it either with blue money at the blueprice, or with red money at the red price. Harold has 30 units of red money to spend and 48 unitsof blue money to spend. The red price of ambrosia is 3 and the blue price of ambrosia is 8. Thered price of bubblegum is 1 and the blue price of bubblegum is 2. If ambrosia is on the horizontalaxis, 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 ProductionTopic: Production Correct Responses: 0Correct Answer: A556Di culty: 0Discrimination Index: 030.14Every consumer has a red-money income and a blue-money income and each commodity has a redprice and a blue price. You can buy a good by paying for it either with blue money at the blueprice, or with red money at the red price. Harold has 20 units of red money to spend and 48 unitsof blue money to spend. The red price of ambrosia is 2 and the blue price of ambrosia is 6. Thered price of bubblegum is 1 and the blue price of bubblegum is 2. If ambrosia is on the horizontalaxis, 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: 0Correct Answer: ADi culty: 0Discrimination Index: 030.15 Robinson Crusoe has exactly 10 hours per day to spend gathering coconuts or catchingsh. He can catch 5 sh per hour or he can pick 15 coconuts per hour. His utility function isU F; C = FC where F is his consumption of sh and C is his consumption of coconuts. If he allo-cates his time in the best possible way between catching sh and picking coconuts, his consumptionwill be the same as it would be if he could buy sh and coconuts in a competitive market wherethe 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 CHOICETopic: Production Correct Responses: 0Correct Answer: A557Di culty: 0Discrimination Index: 030.16 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 U F; C = FCwhere F is his consumption of sh and C is his consumption of coconuts. If he allocates his timein the best possible way between catching sh and picking coconuts, his consumption will be thesame as it would be if he could buy sh and coconuts in a competitive market where the price ofcoconuts 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: 0Correct Answer: BDi culty: 0Discrimination Index: 030.17 On a certain island there are only two goods, wheat and milk. The only scarce resource island. There are 1000 acres of land. An acre of land will produce either 20 units of milk or 30 unitsof wheat. Some citizens have lots of land, some have just a little bit. The citizens of the island allhave utility functions of the form U M; 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 ProductionTopic: Production Correct Responses: 0Correct Answer: B558Di culty: 0Discrimination Index: 030.18 On a certain island there are only two goods, wheat and milk. The only scarce resource island. There are 1000 acres of land. An acre of land will produce either 11 units of milk or 31 unitsof wheat. Some citizens have lots of land, some have just a little bit. The citizens of the island allhave utility functions of the form U M; 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: 0Correct Answer: CDi culty: 0Discrimination Index: 030.19 In the process of producing one hormone-free, stress-free, happy cow, the New Age CattleRanch produces one ton of natural, organic plant fertilizer. Demand for the ranch's cattle is givenby Pc = 2; 000 , 10Qc ; and demand for fertilizer is given by Pf = 500 , 3Qf . The cost of producingQ cow-fertilizer bundles is C = 5; 000 + 300Q. To maximize pro ts, the ranch shoulda 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 environmentallyfriendly manner.MULTIPLE CHOICETopic: Production Correct Responses: 0Correct Answer: C559Di culty: 0Discrimination Index: 030.20 In the process of producing one hormone-free, stress-free, happy cow, the New Age CattleRanch produces one ton of natural, organic plant fertilizer. Demand for the ranch's cattle is givenby Pc = 2; 000 , 20Qc ; and demand for fertilizer is given by Pf = 500 , 4Qf . The cost of producingQ cow-fertilizer bundles is C = 5; 000 + 400Q. To maximize pro ts, the ranch shoulda 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 friendlymanner.Topic: Production Correct Responses: 0Correct Answer: ADi culty: 0Discrimination Index: 030.21For each carload of ore removed from the Matchless Mine, one pound of lead and one ounce ofsilver is smelted. The cost of mining and processing one carload of ore is C Q = 500 + 2Q + 0:03Q2.The demand for silver per ounce is Ps = 50 , 0:40Qs and the demand for lead per pound isPl = 5 , 0:03Ql. What should the owners of the Matchless Mine do to maximize pro ts in the longrun?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 ProductionTopic: Production Correct Responses: 0Correct Answer: A560Di culty: 0Discrimination Index: 030.22For each carload of ore removed from the Matchless Mine, one pound of lead and one ounce ofsilver is smelted. The cost of mining and processing one carload of ore is C Q = 700 + 5Q + 0:01Q2.The demand for silver per ounce is Ps = 40 , 0:50Qs and the demand for lead per pound isPl = 6 , 0:04Ql. What should the owners of the Matchless Mine do to maximize pro ts in the longrun?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.ProductionEssayTopic: Production Correct Responses: 0Di culty: 2Discrimination Index: 030.1 On a certain small island, there are 100 units of labor and 200 units of capital. Two goodscan be produced. Good A is produced with xed coe cients, using 1 unit of labor and 3 units ofcapital per unit of output. Good B is produced with xed coe cients, using 1 unit of labor and 1unit of capital per unit of ouput. Let Xa denote the quantity of good A and Xb be the quantity ofgood B that is produced. The set of feasible outputs combinations for this economy is restricted bythe fact that it cannot use more than 100 units of labor or 200 units of capital. a Write down twoinequalities 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 yourgraph so that this graph is precisely described.Answer: a Xa + Xb = 100; 3Xa + Xb = 200 b Production possibility set is the area in theintersection of the halfspaces from a.Chapter 31WelfareTrue-FalseTopic: Welfare Correct Responses: 0Correct Answer: FalseDi culty: 1Discrimination Index: 031.1 According to Arrow's impossibility theorem, it is impossible to nd a social ordering thatis complete, re exive, and transitive.Topic: Welfare Correct Responses: 0Correct Answer: FalseDi culty: 1Discrimination Index: 031.2 An allocation is fair if whenever one person envies another, the envied person does not envythe envier.Topic: Welfare Correct Responses: 0Correct Answer: FalseDi culty: 2Discrimination Index: 031.3 In a pure exchange economy if the initial allocation is Pareto optimal, then competitiveequilibrium is fair.Topic: Welfare Correct Responses: 60Correct Answer: TrueDi culty: 2Discrimination Index: 2831.4 In a competitive equilibrium, no matter how di erent their preferences may be, no twopeople with the same income will envy each other's consumption bundles.Topic: Welfare Correct Responses: 0Correct Answer: FalseDi culty: 1Discrimination Index: 031.5 An allocation which is worse for somebody than the initial allocation can not be Paretooptimal.TRUE-FALSETopic: Welfare Correct Responses: 0Correct Answer: False563Di culty: 2Discrimination Index: 031.6 If allocation x is Pareto optimal and allocation y is not, then everyone is at least as well owith x as with y; and someone is better o with x than with y.Topic: Welfare Correct Responses: 0Correct Answer: FalseDi culty: 1Discrimination Index: 031.7 The utility possibilities frontier is the boundary of the production possibility set.Topic: Welfare Correct Responses: 0Correct Answer: TrueDi culty: 1Discrimination Index: 031.8 In a pure exchange economy, if an allocation is Pareto e cient, it is impossible to have twopeople who prefer each other's consumption bundles to their own.Topic: Welfare Correct Responses: 0Correct Answer: TrueDi culty: 2Discrimination Index: 031.9 If a social welfare function is an increasing function of each person's utility, then everyallocation that maximizes this social welfare function must be a Pareto optimum.WelfareMultiple ChoiceTopic: Welfare Correct Responses: 84Correct Answer: BDi culty: 1Discrimination Index: 1331.1 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 onhis SAT tests. If Mr. Angst spends $Y per month on Jane's education, she will score a total of 2Yon her SAT tests. Mr. Angst has a utility function U D; J = minfD; J g where D is Dick's SATscore 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: 0Correct Answer: CDi culty: 0Discrimination Index: 031.2 A Borda count is used to decide an election between 3 candidates, x,y, and z; where a scoreof 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, zsecond, 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 CHOICETopic: Welfare Correct Responses: 0Correct Answer: C565Di culty: 0Discrimination Index: 031.3 A Borda count is used to decide an election between 3 candidates, x,y, and z; where a scoreof 1 is awarded to a rst choice, 2 to a second choice, and 3 to a third choice. There are 16 voters. 4voters rank the candidates x rst, y second, z third; 3 voters rank the candidates x rst, z second, ythird; 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: 0Correct Answer: ADi culty: 0Discrimination Index: 031.4 A parent has two children living in cities with di erent costs of living. The cost of livingin city B is 2 times the cost of living in city A. The child in city A has an income of 4,000 andthe child in city B has an income of 8,000. The parent wants to give a total of $4,000 to her twochildren. Her utility function is U CA ; CB = CA CB ; where CA and CB are the consumptions of thechildren 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 B 2 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 B 1 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 WelfareTopic: Welfare Correct Responses: 0Correct Answer: A566Di culty: 0Discrimination Index: 031.5 A parent has two children living in cities with di erent costs of living. The cost of livingin city B is 4 times the cost of living in city A. The child in city A has an income of 5,000 andthe child in city B has an income of 20,000. The parent wants to give a total of $4,000 to her twochildren. Her utility function is U CA ; CB = CA CB ; where CA and CB are the consumptions of thechildren 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 B 4 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 B 2 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: 0Correct Answer: BDi culty: 0Discrimination Index: 031.6 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 areDavid's consumptions of apples and oranges. The total supply of apples and oranges to be dividedbetween them is 14 apples and 18 oranges. The "fair" allocations consist of all allocations satisfyingthe 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 CHOICETopic: Welfare Correct Responses: 0Correct Answer: B567Di culty: 0Discrimination Index: 031.7 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 areDavid's consumptions of apples and oranges. The total supply of apples and oranges to be dividedbetween them is 14 apples and 14 oranges. The "fair" allocations consist of all allocations satisfyingthe 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: 0Correct Answer: EDi culty: 0Discrimination Index: 031.8 Suppose that Romeo has the utility function U = SR SJ and Juliet has the utility function3223U = SR SJ where SR is Romeo's spaghetti consumption and SJ is Juliet's. They have 45 units ofspaghetti 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.CHAPTER 31 WelfareTopic: Welfare Correct Responses: 0Correct Answer: E568Di culty: 0Discrimination Index: 031.9 Suppose that Romeo has the utility function U = SR SJ and Juliet has the utility function32U = SR SJ where SR is Romeo's spaghetti consumption and SJ is Juliet's. They have 30 units of23spaghetti to divide between them.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: 0Correct Answer: BDi culty: 0Discrimination Index: 031.10 Hat eld and McCoy burn with hatred for each other. They both consume corn whisky.22Hat eld's utility function is U = WH , WM =40 and McCoy's utility is U = WM , WH =40; where WHis 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. Forsome reason, the sheri wants them both to be as happy as possible and he wants to treat themequally. 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 CHOICETopic: Welfare Correct Responses: 0Correct Answer: B569Di culty: 0Discrimination Index: 031.11 Hat eld and McCoy burn with hatred for each other. They both consume corn whisky.22Hat eld's utility function is U = WH , WM =16 and McCoy's utility is U = WM , WH =16; where WHis 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. Forsome reason, the sheri wants them both to be as happy as possible and he wants to treat themequally. 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.WelfareEssayTopic: Welfare Correct Responses: 0Di culty: 2Discrimination Index: 031.1 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. Ifnot, explain why not. Assume that people can be ranked from ugliest to least ugly by a completetransitive ordering and that there are no ties. Likewise assume that people can be ranked frommeanest 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 Haroldis least ugly. The rankings for mean are Fred is meanest, Harold is second meanest and Gladysis least mean. Then nobody is meaner and uglier than Gladys. Fred is meaner and uglier thanHarold, but Gladys is not meaner and uglier than Harold.Chapter 32ExternalitiesTrue-FalseTopic: Externalities Correct Responses: 93Correct Answer: FalseDi culty: 1Discrimination Index: 1132.1 A trade between two people is an example of an externality.Topic: Externalities Correct Responses: 80Correct Answer: FalseDi culty: 1Discrimination Index: 032.2 The only known way to eliminate externalities is through taxes or subsidies.Topic: Externalities Correct Responses: 0Correct Answer: FalseDi culty: 1Discrimination Index: 032.3 The e cient amount of air pollution is in general independent of whether polluters or pollutees pay to reduce pollution.Topic: Externalities Correct Responses: 52Correct Answer: FalseDi culty: 1Discrimination Index: 4532.4 A Pigouvian tax on pollution is designed to collect enough revenue to pay for pollutiondetection by the government.Topic: Externalities Correct Responses: 84Correct Answer: FalseDi culty: 2Discrimination Index: 2932.5 If there are negative externalities in production or consumption, competitive equilibrium isunlikely to be Pareto e cient, but positive externalities enhance the e ciency of the market.Topic: Externalities Correct Responses: 0Correct Answer: TrueDi culty: 1Discrimination Index: 032.6 The tragedy of the commons" refers to the tendency for common property to be overused.CHAPTER 32 ExternalitiesTopic: Externalities Correct Responses: 0Correct Answer: False572Di culty: 1Discrimination Index: 032.7 If preferences are quasilinear, then the delineation of property rights has no distributionalconsequences.Topic: Externalities Correct Responses: 70Correct Answer: TrueDi culty: 1Discrimination Index: 532.8 If your consumption of toothpaste produces positive externalities for your neighbors whichyou ignore, then you are consuming less toothpaste than is Pareto optimal.Topic: Externalities Correct Responses: 0Correct Answer: FalseDi culty: 1Discrimination Index: 032.9 Mobil Oil Corporation recently bought the right to emit an additional 900 pounds of noxiousgas vapors per day at its Torrance, California re nery. This suggests that allowing pollution rightsto be marketed is likely to lead to more pollution than there would be if there were no restrictionson polluting.ExternalitiesMultiple ChoiceTopic: Externalities Correct Responses: 12Correct Answer: EDi culty: 2Discrimination Index: 1832.1 A mountain village owns a common pasture where villagers graze their goats. The cost to agoat owner of owning and caring for a goat is 4 groschens. The pasture gets overgrazed if too manygoats share the pasture. The total revenue from all goats on the common pasture is f g = 48g , 2g2;where g is the number of goats on the pasture. The town council notices that total pro t from thepasture is not maximized if villagers are allowed to pasture goats for free. The council decides toallow a goat to use the common pasture only if its owner buys it a goat license. To maximize totalpro t of villagers and council, how many groschens per goat should the council charge?a 12b 20c 24d 26e 22Topic: Externalities Correct Responses: 84Correct Answer: ADi culty: 2Discrimination Index: 3032.2 The 130 campers at Bear Creek Campground love their own camp res, but hate the smokefrom their neighbors' camp res. Each camper's utility function is U = 22f , f 2 , s where f is thenumber 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 perday for everyone. How many hours of camp res per day should the authority allow each camperin order to make the typical camper as well o as possible?a 5b 11c 3d 6e Campers will be best o if they are free to choose their own amounts of camp re.CHAPTER 32 ExternalitiesTopic: Externalities Correct Responses: 84Correct Answer: A574Di culty: 2Discrimination Index: 3032.3 The 130 campers at Bear Creek Campground love their own camp res, but hate the smokefrom their neighbors' camp res. Each camper's utility function is U = 17f , f 2 , s where f is thenumber 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 perday for everyone. How many hours of camp res per day should the authority allow each camperin order to make the typical camper as well o as possible?a 4b 8.50c 2d 5e Campers will be best o if they are free to choose their own amounts of camp re.Topic: Externalities Correct Responses: 57Correct Answer: ADi culty: 2Discrimination Index: 2832.4 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, and1120 + x1x2 , 2x2 for store 2, where x1 and x2 are total advertising expenditures by stores 1 and 22respectively. If each store sets its advertising expenditures independently as in Nash equilibrium,how much would store 1 spend on advertising?a 28b 30c 25d 33e None of the above.MULTIPLE CHOICETopic: Externalities Correct Responses: 57Correct Answer: A575Di culty: 2Discrimination Index: 2832.5 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, and160 + x1x2 , 2x2 for store 2, where x1 and x2 are total advertising expenditures by stores 1 and 22respectively. If each store sets its advertising expenditures independently as in Nash equilibrium,how much would store 1 spend on advertising?a 36b 38c 33d 41e None of the above.Topic: Externalities Correct Responses: 62Correct Answer: CDi culty: 3Discrimination Index: 5732.6 Two stores are located side by side and attract customers to each other and to themselvesby advertising. Where x1 and x2 are the advertising expenditures of stores 1 and 2, the pro ts ofthe rms are 48 + x2x1 , 2x12 for store 1 and 54 + x1x2 , 2x2 2 for store 2. Knowing thesefunctions, one investor buys both stores. In order to maximize his total pro ts, how much shouldhe spend on advertising for store 1?a 10b 26c 25d 35e None of the above.CHAPTER 32 ExternalitiesTopic: Externalities Correct Responses: 18Correct Answer: A576Di culty: 2Discrimination Index: 3432.7 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 centsper pound when q pounds are roasted. The smell of roasting beans imposes costs on the company'sneighbors. The total amount that neighbors would be willing to pay to have the shop stop roastingaltogether is 5q2; where q is the number of pounds being roasted. The company sells its output ina competitive market at 450 cents per pound. What is the socially e cient amount of co ee forthe 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: 40Correct Answer: BDi culty: 2Discrimination Index: 2032.8 Firm 1 produces output x with a cost function c x = x + 10. Firm 2 produces output y12with a cost function c2 y; x = y2 + x. Thus, the more that rm 1 produces, the greater are rm20s costs. Both rms face competitive product markets. The competitive price of x is 20 and thecompetitive 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 CHOICETopic: Externalities Correct Responses: 25Correct Answer: A577Di culty: 2Discrimination Index: 2132.9 Mike's utility function is U c; d; h = 4c + 6d , d , 6h; where d is the number of hours per2day that he spends driving around, h is the average number of hours per day spent driving aroundby other citizens of his town, and c is the amount of money he has to spend on other things thangasoline and auto repairs. There are 1001 identical citizens in Mike's home town. Mike's expensesfor gasoline and auto repairs amount to $.50 per hour for the time he spends driving. If Mikebelieves that his amount of driving won't a ect the amount that others drive, how many hours perday will he choose to drive?a 2b 3c 4d 1e 0.50Topic: Externalities Correct Responses: 25Correct Answer: ADi culty: 2Discrimination Index: 2132.10 Mike's utility function is U c; d; h = 4c + 12d , d , 6h; where d is the number of hours per2day that he spends driving around, h is the average number of hours per day spent driving aroundby other citizens of his town, and c is the amount of money he has to spend on other things thangasoline and auto repairs. There are 1001 identical citizens in Mike's home town. Mike's expensesfor gasoline and auto repairs amount to $.50 per hour for the time he spends driving. If Mikebelieves that his amount of driving won't a ect the amount that others drive, how many hours perday will he choose to drive?a 5b 6c 7d 2.50e 0.50CHAPTER 32 ExternalitiesTopic: Externalities Correct Responses: 22Correct Answer: C578Di culty: 2Discrimination Index: 032.11 Marbella has 101 residents. All wear the same fancy clothes and each has the same utilityfunction, um; b; B = m + 16b , b2 , B=50; where m is the amount of maccaroni in kilogramsthat he or she eats per day, b is the number of hours that he or she spends on the beach perday, and B is the total number of person-hours spent per day on the beach by other residents ofMarbella. Each has an income of $10 per day and maccaroni costs $1 per kilogram. City councilis 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 hoursb 10 hoursc 7 hoursd 11 hourse They could not possibly be made better o by legislation that limits their freedom to choose.Topic: Externalities Correct Responses: 22Correct Answer: CDi culty: 2Discrimination Index: 032.12 Marbella has 101 residents. All wear the same fancy clothes and each has the same utilityfunction, um; b; B = m + 22b , b2 , B=50; where m is the amount of maccaroni in kilogramsthat he or she eats per day, b is the number of hours that he or she spends on the beach perday, and B is the total number of person-hours spent per day on the beach by other residents ofMarbella. Each has an income of $10 per day and maccaroni costs $1 per kilogram. City councilis 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 11 hoursb 13 hoursc 10 hoursd 14 hourse They could not possibly be made better o by legislation that limits their freedom to choose.MULTIPLE CHOICETopic: Externalities Correct Responses: 83Correct Answer: C579Di culty: 0Discrimination Index: 2832.13 Suppose that in Horsehead, Massachusetts, the cost of operating a lobster boat is $3,000per month. Suppose that if x lobster boats operate in the bay, the total monthly revenue fromlobster boats in the bay is $100019x , x2. If there are no restrictions on entry and new boats comeinto the bay until there is no pro t to be made by a new entrant, then the number of boats whoenter will be X1. If the number of boats that operate in the bay is regulated to maximize totalpro ts, the number of boats in the bay will be X2.a X 1 = 16 and X 2 = 16.b X 1 = 8 and X 2 = 6c X 1 = 16 and X 2 = 8d X 1 = 20 and X 2 = 12e None of the above.Topic: Externalities Correct Responses: 83Correct Answer: CDi culty: 0Discrimination Index: 2832.14 Suppose that in Horsehead, Massachusetts, the cost of operating a lobster boat is $2,000per month. Suppose that if x lobster boats operate in the bay, the total monthly revenue fromlobster boats in the bay is $100014x , x2. If there are no restrictions on entry and new boats comeinto the bay until there is no pro t to be made by a new entrant, then the number of boats whoenter will be X1. If the number of boats that operate in the bay is regulated to maximize totalpro ts, the number of boats in the bay will be X2.a X 1 = 12 and X 2 = 12.b X 1 = 6 and X 2 = 4c X 1 = 12 and X 2 = 6d X 1 = 16 and X 2 = 10e None of the above.CHAPTER 32 ExternalitiesTopic: Externalities Correct Responses: 0Correct Answer: D580Di culty: 0Discrimination Index: 032.15 An apiary is located next to an apple orchard. The apiary produces honey and the appleorchard produces apples. The cost function of the apiary is CH H; A = H 2 =100 , 2A and the costfunction of the apple orchard is CA H; A = A2 =100 where H and A are the number of units of honeyand apples produced respectively. The price of honey is 4 and the price of apples is 1 per unit. LetA1 be the output of apples if the rms operate independently, and let A2 be the output of applesif the rms are operated by a single owner so as to maximize total pro t.a A1 = 25 and A2 = 50b A1 = A2 = 50c A1 = 75 and A2 = 50d A1 = 50 and A2 = 150e A1 = 200 and A2 = 50Topic: Externalities Correct Responses: 0Correct Answer: DDi culty: 0Discrimination Index: 032.16 An apiary is located next to an apple orchard. The apiary produces honey and the appleorchard produces apples. The cost function of the apiary is CH H; A = H 2 =100 , 3A and the costfunction of the apple orchard is CA H; A = A2 =100 where H and A are the number of units of honeyand apples produced respectively. The price of honey is 3 and the price of apples is 4 per unit. LetA1 be the output of apples if the rms operate independently, and let A2 be the output of applesif the rms are operated by a single owner so as to maximize total pro t.a A1 = 100 and A2 = 200b A1 = A2 = 200c A1 = 175 and A2 = 200d A1 = 200 and A2 = 350e A1 = 150 and A2 = 200MULTIPLE CHOICETopic: Externalities Correct Responses: 0Correct Answer: A581Di culty: 0Discrimination Index: 032.17 Will's utility is U c; d; h = 8c + 18d , d , 6h; where d is the number of hours per day that2he spends driving around, h is the number of hours per day spent driving around by other peoplein his home town and c is the amount of money he has left to spend on other stu besides gasolineand auto repairs. Gas and auto repairs cost $.50 per hour of driving. All the people in Will'shome town have the same tastes. If each citizen believes that his own driving will not a ect theamount of driving done by others, they will all drive D1 hours per day. If they are all drive thesame amount, they would all be best o if each drove D2 hours per day where:a D1 = 7 and D2 = 4.b D1 = D2 = 7.c D1 = 9 and D2 = 5.d D1 = 10 and D2 = 0.e D1 = 7 D2 = 2.Topic: Externalities Correct Responses: 0Correct Answer: ADi culty: 0Discrimination Index: 032.18 Chen's utility is U c; d; h = 4c + 8d , d , 2h; where d is the number of hours per day that2he spends driving around, h is the number of hours per day spent driving around by other peoplein his home town and c is the amount of money he has left to spend on other stu besides gasolineand auto repairs. Gas and auto repairs cost $.50 per hour of driving. All the people in Chen'shome town have the same tastes. If each citizen believes that his own driving will not a ect theamount of driving done by others, they will all drive D1 hours per day. If they are all drive thesame amount, they would all be best o if each drove D2 hours per day where:a D1 = 3 and D2 = 2.b D1 = D2 = 3.c D1 = 5 and D2 = 3.d D1 = 6 and D2 = 1.e D1 = 3 D2 = 0.CHAPTER 32 ExternalitiesTopic: Externalities Correct Responses: 0Correct Answer: B582Di culty: 0Discrimination Index: 032.19 An airport is located next to a housing development. Where X is the number of planesthat land per day and Y is the number of houses in the housing development, pro ts of the airportare 30X , X 2 and pro ts of the developer are 36Y , Y 2 , XY . Let H1 be the number of houses builtif a single pro t-maximizing company owns the airport and the housing development. Let H2 bethe number of houses built if the airport and the housing development are operated independentlyand the airport has to pay the developer the total "damages" XY done by the planes to the pro tsof the developer.a H 1 = H 2 = 14.b H 1 = 14 and H 2 = 18.c H 1 = 18 and H 2 = 14d H 1 = 16 and H 2 = 17e H 1 = 17 and H 2 = 21Topic: Externalities Correct Responses: 0Correct Answer: BDi culty: 0Discrimination Index: 032.20 An airport is located next to a housing development. Where X is the number of planesthat land per day and Y is the number of houses in the housing development, pro ts of the airportare 34X , X 2 and pro ts of the developer are 32Y , Y 2 , XY . Let H1 be the number of houses builtif a single pro t-maximizing company owns the airport and the housing development. Let H2 bethe number of houses built if the airport and the housing development are operated independentlyand the airport has to pay the developer the total "damages" XY done by the planes to the pro tsof the developer.a H 1 = H 2 = 10.b H 1 = 10 and H 2 = 16.c H 1 = 16 and H 2 = 10d H 1 = 12 and H 2 = 15e H 1 = 15 and H 2 = 19MULTIPLE CHOICETopic: Externalities Correct Responses: 0Correct Answer: A583Di culty: 2Discrimination Index: 032.21 A clothing store and a jeweler are located side by side in a shopping mall. If the clothingstore spend C dollars on advertising and the jeweler spends J dollars on advertising, then the pro tsof the clothing store will be 12 + J C , 2C 2 and the pro ts of the jeweler will be 60 + C J , 2J 2.The clothing store gets to choose his amount of advertising rst, knowing that the jeweler will ndout how much the clothing store advertised before deciding how much to spend. The amount spentby the clothing store will be:a 14.b 28.c 42.d 7.e 21.Topic: Externalities Correct Responses: 0Correct Answer: ADi culty: 2Discrimination Index: 032.22 A clothing store and a jeweler are located side by side in a shopping mall. If the clothingstore spend C dollars on advertising and the jeweler spends J dollars on advertising, then the pro tsof the clothing store will be 30 + J C , 2C 2 and the pro ts of the jeweler will be 72 + C J , 2J 2.The clothing store gets to choose his amount of advertising rst, knowing that the jeweler will ndout how much the clothing store advertised before deciding how much to spend. The amount spentby the clothing store will be:a 22.b 44.c 66.d 11.e 33.CHAPTER 32 ExternalitiesTopic: Externalities Correct Responses: 0Correct Answer: E584Di culty: 2Discrimination Index: 032.23 Millie Bush has written a best-seller. Revenues net of production costs are $300T = A =1313where T is the number of publicity trips Millie takes and A is the number of ads for the book thatappear. Millie has to pay for all of her own publicity trips, which cost $100 each. Her publisherpays for the advertising, which costs $100 per ad. Revenues from the book are split equally betweenMillie and her publisher. Let T1 be the number of trips that Millie would choose to make in aNash equilibrium where she chooses the number of trips and the publisher chooses the amount ofadvertising. Let T2 be the number of trips that Millie should make if trips and advertising aredetermined so as to maximize total pro ts net of trip and ad costs.a T 1 = 1 and T 2 = 1.b T 1 = 1 and T 2 = 2.c T 1 = 2 amd T 2 = 1.d T 1 = 1 and T 2 = 1=8.e T 1 = 1=8 and T 2 = 1.ExternalitiesEssayTopic: Externalities Correct Responses: 0Di culty: 3Discrimination Index: 032.1 Two rms in a grimy Ohio town produce the same product in a competitive industry. Eachhas an old factory using an old technology. It still pays to operate these factories but it would notpay to expand them. The only variable factor used by either rm is labor. Each rm pollutes theother and thus reduces the output of the other rm. The production functions of rms A and Brespectively are Qa = La: 5 , 2=3Qb and Qb = Lb: 5 , 1=3Qa where La: 5 and Lb: 5 are the squareroots respectively of the amount of labor used by rms A and B . The wage rate of labor is 1 andthe price of the rms' output is 12. aIf the two rms each maximize pro ts independently, whatis there total output and how much quasi-rents do their factories earn? b If someone buys themboth and maximizes joint pro ts, how much quasi-rents are earned in total?Answer: Each produces 48 and quasirents are 12 for each. Each produces 36 and quasirents total40.Chapter 33True-FalseTopic: Law and Economics Correct Responses: 93Correct Answer: FalseLaw and EconomicsDi culty: 1Discrimination Index: 1233.1 If detection of a crime is very unlikely, then economic analysis suggests that the penalty forthis crime should be small.Topic: Law and Economics Correct Responses: 0Correct Answer: TrueDi culty: 2Discrimination Index: 033.2 Economic analysis suggests that the severity of penalty for a crime should be greater themore serious the crime and also be greater the less likely it is to be detected.Topic: Law and Economics Correct Responses: 0Correct Answer: TrueDi culty: 1Discrimination Index: 033.3 If the probability of an accident depends on the actions of the victim as well as those ofthe perpetrator, then strict liability rules are likely to lead potential victims to take too many risks.Topic: Law and Economics Correct Responses: 0Correct Answer: FalseDi culty: 2Discrimination Index: 033.4 "Negligence rules" which say that the injurer is liable for all damages unless he has taken"due care", are likely to lead to ine ciency regardless of the standards of due care, because theydo not take into account the incentives of the victim to avoid an accident.Topic: Law and Economics Correct Responses: 59Correct Answer: FalseDi culty: 1Discrimination Index: 4333.5 Under strict liability rules, potential victims are likely to spend too much resources onavoiding accidents.TRUE-FALSETopic: Law and Economics Correct Responses: 0Correct Answer: False587Di culty: 2Discrimination Index: 033.6 Economic analysis suggests that it is ine cient to make the punishment for an anti-socialaction greater than the cost of that action to society.Topic: Law and Economics Correct Responses: 0Correct Answer: FalseDi culty: 1Discrimination Index: 033.7 Tort law is the branch of antitrust law that is concerned with damages for monopolisticpractices, unfair practices and price- xing.Topic: Law and Economics Correct Responses: 0Correct Answer: FalseDi culty: 1Discrimination Index: 033.8 No-fault automobile insurance appears to be a mistaken policy, because the appropriatepunishment for dangerous driving is restitution for the damage done in the event of an accident.Topic: Law and Economics Correct Responses: 0Correct Answer: TrueDi culty: 1Discrimination Index: 033.9 Socially optimal punishment and optimal compensation in the event of an accident neednot be equal.Topic: Law and Economics Correct Responses: 0Correct Answer: FalseDi culty: 3Discrimination Index: 033.10 Economic analysis suggests that if the two participants in an automobile accident are de-termined to be equally at fault and if the damages to the two parties are equal, then there is noeconomic justi cation for punishing either of them beyond the damage they have already received.Multiple ChoiceTopic: Law and Economics Correct Responses: 0Correct Answer: DLaw and EconomicsDi culty: 0Discrimination Index: 033.1 Madame N . gets a total payment of $ 24 log x if she delivers x stolen buttons to her "fence".She has to pay a ne of $F if she is caught, but there is no other cost of getting caught. How bigshould the ne be if we want to limit Madame N . to taking 6 buttons?a $20b $400c $44d $40e $60Topic: Law and Economics Correct Responses: 0Correct Answer: DDi culty: 0Discrimination Index: 033.2 Madame N . gets a total payment of $ 4 log x if she delivers x stolen buttons to her "fence".She has to pay a ne of $F if she is caught, but there is no other cost of getting caught. How bigshould the ne be if we want to limit Madame N . to taking 4 buttons?a $5b $100c $14d $10e $15MULTIPLE CHOICETopic: Law and Economics Correct Responses: 0Correct Answer: B589Di culty: 0Discrimination Index: 033.3 Jim rides his bicycle at speed s and has money mJ ; his utility function if he does not collidewith Dick is 20 s + mJ . Dick walks at speed w and has money mD ; his utility function if Jim doesnot collide with him is 10 w + mD . The probability and severity of a collision depends on both theirspeeds. In fact, if Jim rides at speed s and Dick walks at speed w; the probability of an accidenttimes the cost of an accident will be s2 + w2; for each of them. If there are no rules about liabilityand no deals are made between Jim and Dick, how fast will they travel?a s = 10 and w = 10b s = 10 and w = 5c s = 20 and w = 10d s = 15 and w = 5e s = 5 and w = 2:50Topic: Law and Economics Correct Responses: 0Correct Answer: BDi culty: 0Discrimination Index: 033.4 Jim rides his bicycle at speed s and has money mJ ; his utility function if he does not collidewith Dick is 16 s + mJ . Dick walks at speed w and has money mD ; his utility function if Jim doesnot collide with him is 10 w + mD . The probability and severity of a collision depends on both theirspeeds. In fact, if Jim rides at speed s and Dick walks at speed w; the probability of an accidenttimes the cost of an accident will be s2 + w2; for each of them. If there are no rules about liabilityand no deals are made between Jim and Dick, how fast will they travel?a s = 8 and w = 10b s = 8 and w = 5c s = 16 and w = 10d s = 13 and w = 5e s = 4 and w = 2:50EssayTopic: Law and Economics Correct Responses: 0Law and EconomicsDi culty: 0Discrimination Index: 033.1 Discuss the relation between e cient punishments for those who "cause" accidents and efcient compensation for accident victims.Answer:Chapter 34Multiple ChoiceTopic: Information Technology Correct Responses: 0Correct Answer: CInformation TechnologyDi culty: 0Discrimination Index: 034.1 If the demand curve for DoorKnobs operating system is related to perceived market shares and actual market share t by the equation p = 245s1 , x; then in the long run, the highest priceat which DoorKnobs would maintain a market share of 6=7 would bea $45.b $39.c $30.d $27.e $36.Topic: Information Technology Correct Responses: 0Correct Answer: CDi culty: 0Discrimination Index: 034.2 If the demand curve for DoorKnobs operating system is related to perceived market shares and actual market share t by the equation p = 196s1 , x; then in the long run, the highest priceat which DoorKnobs would maintain a market share of 4=7 would bea $72.b $62.40.c $48.d $43.20.e $57.60.Topic: Information Technology Correct Responses: 0Correct Answer: CDi culty: 0Discrimination Index: 034.3 If the demand curve for DoorKnobs operating system is related to perceived market shares and actual market share t by the equation p = 128s1 , x; then in the long run, the highest priceat which DoorKnobs would maintain a market share of 6=8 would bea $36.b $31.20.c $24.d $21.60.e $28.80.CHAPTER 34 Information TechnologyTopic: Information Technology Correct Responses: 0Correct Answer: C592Di culty: 0Discrimination Index: 034.4 If the demand curve for DoorKnobs operating system is related to perceived market shares and actual market share t by the equation p = 486s1 , x; then in the long run, the highest priceat which DoorKnobs would maintain a market share of 6=9 would bea $162.b $140.40.c $108.d $97.20.e $129.60.Topic: Information Technology Correct Responses: 0Correct Answer: CDi culty: 0Discrimination Index: 034.5 If the demand curve for DoorKnobs operating system is related to perceived market shares and actual market share t by the equation p = 216s1 , x; then in the long run, the highest priceat which DoorKnobs would maintain a market share of 4=6 would bea $72.b $62.40.c $48.d $43.20.e $57.60.MULTIPLE CHOICETopic: Information Technology Correct Responses: 0Correct Answer: E593Di culty: 0Discrimination Index: 034.6 Professor Kremepu has published a new textbook. This book will be used in classes fortwo years, at which time it will be replaced by a new edition. The publisher charges a price of $p1in the rst year and $p2 in the second year. After the rst year, bookstores buy back copies fromstudents for $p2=2 and resell them to students in the second year for $p2 . Students are indi erentbetween new and used copies. The cost to a student in the rst year of owning the book for ayear is therefore $p1 , p2=2. In the rst year of publication, the number of students willing to pay$v to own the book for a year is 60; 000 , 1; 000v. The number of students taking the course in therst year who are willing to pay at least $w to keep the book for reference rather than resell it is60; 000 , 5; 000w. In the second year, the number of students who have not previously taken thecourse and are willing to pay at least $p for a copy of the book is 50; 000 , 1; 000p. If the publishersets a price of p1 in the rst year and p2 in the second year, with p1 p2; then the total number ofcopies that the publisher sells over two years will be equal toa 110; 000 , 1; 000p1 + p2 =2.b 120; 000 , 1; 000p1 , p2=2.c 120; 000 , 3; 000p2.d 120; 000 , 1; 000p1 , 1; 000p2.e 110; 000 , 1; 500p2.Topic: Information Technology Correct Responses: 0Correct Answer: EDi culty: 0Discrimination Index: 034.7 Professor Kremepu has published a new textbook. This book will be used in classes fortwo years, at which time it will be replaced by a new edition. The publisher charges a price of $p1in the rst year and $p2 in the second year. After the rst year, bookstores buy back copies fromstudents for $p2=2 and resell them to students in the second year for $p2 . Students are indi erentbetween new and used copies. The cost to a student in the rst year of owning the book for ayear is therefore $p1 , p2=2. In the rst year of publication, the number of students willing to pay$v to own the book for a year is 60; 000 , 1; 000v. The number of students taking the course in therst year who are willing to pay at least $w to keep the book for reference rather than resell it is60; 000 , 5; 000w. In the second year, the number of students who have not previously taken thecourse and are willing to pay at least $p for a copy of the book is 50; 000 , 1; 000p. If the publishersets a price of p1 in the rst year and p2 in the second year, with p1 p2; then the total number ofcopies that the publisher sells over two years will be equal toa 110; 000 , 1; 000p1 + p2 =2.b 120; 000 , 1; 000p1 , p2=2.c 120; 000 , 3; 000p2.d 120; 000 , 1; 000p1 , 1; 000p2.e 110; 000 , 1; 500p2.CHAPTER 34 Information TechnologyTopic: Information Technology Correct Responses: 0Correct Answer: E594Di culty: 0Discrimination Index: 034.8 Professor Kremepu has published a new textbook. This book will be used in classes fortwo years, at which time it will be replaced by a new edition. The publisher charges a price of $p1in the rst year and $p2 in the second year. After the rst year, bookstores buy back copies fromstudents for $p2=2 and resell them to students in the second year for $p2 . Students are indi erentbetween new and used copies. The cost to a student in the rst year of owning the book for ayear is therefore $p1 , p2=2. In the rst year of publication, the number of students willing to pay$v to own the book for a year is 40; 000 , 1; 000v. The number of students taking the course in therst year who are willing to pay at least $w to keep the book for reference rather than resell it is40; 000 , 5; 000w. In the second year, the number of students who have not previously taken thecourse and are willing to pay at least $p for a copy of the book is 30; 000 , 1; 000p. If the publishersets a price of p1 in the rst year and p2 in the second year, with p1 p2; then the total number ofcopies that the publisher sells over two years will be equal toa 70; 000 , 1; 000p1 + p2=2.b 80; 000 , 1; 000p1 , p2 =2.c 80; 000 , 3; 000p2.d 80; 000 , 1; 000p1 , 1; 000p2.e 70; 000 , 1; 500p2.Topic: Information Technology Correct Responses: 0Correct Answer: EDi culty: 0Discrimination Index: 034.9 Professor Kremepu has published a new textbook. This book will be used in classes fortwo years, at which time it will be replaced by a new edition. The publisher charges a price of $p1in the rst year and $p2 in the second year. After the rst year, bookstores buy back copies fromstudents for $p2=2 and resell them to students in the second year for $p2 . Students are indi erentbetween new and used copies. The cost to a student in the rst year of owning the book for ayear is therefore $p1 , p2=2. In the rst year of publication, the number of students willing to pay$v to own the book for a year is 50; 000 , 1; 000v. The number of students taking the course in therst year who are willing to pay at least $w to keep the book for reference rather than resell it is50; 000 , 5; 000w. In the second year, the number of students who have not previously taken thecourse and are willing to pay at least $p for a copy of the book is 40; 000 , 1; 000p. If the publishersets a price of p1 in the rst year and p2 in the second year, with p1 p2; then the total number ofcopies that the publisher sells over two years will be equal toa 90; 000 , 1; 000p1 + p2=2.b 100; 000 , 1; 000p1 , p2=2.c 100; 000 , 3; 000p2.d 100; 000 , 1; 000p1 , 1; 000p2.e 90; 000 , 1; 500p2.MULTIPLE CHOICETopic: Information Technology Correct Responses: 0Correct Answer: E595Di culty: 0Discrimination Index: 034.10 Professor Kremepu has published a new textbook. This book will be used in classes fortwo years, at which time it will be replaced by a new edition. The publisher charges a price of $p1in the rst year and $p2 in the second year. After the rst year, bookstores buy back copies fromstudents for $p2=2 and resell them to students in the second year for $p2 . Students are indi erentbetween new and used copies. The cost to a student in the rst year of owning the book for ayear is therefore $p1 , p2=2. In the rst year of publication, the number of students willing to pay$v to own the book for a year is 50; 000 , 1; 000v. The number of students taking the course in therst year who are willing to pay at least $w to keep the book for reference rather than resell it is50; 000 , 5; 000w. In the second year, the number of students who have not previously taken thecourse and are willing to pay at least $p for a copy of the book is 40; 000 , 1; 000p. If the publishersets a price of p1 in the rst year and p2 in the second year, with p1 p2; then the total number ofcopies that the publisher sells over two years will be equal toa 90; 000 , 1; 000p1 + p2=2.b 100; 000 , 1; 000p1 , p2=2.c 100; 000 , 3; 000p2.d 100; 000 , 1; 000p1 , 1; 000p2.e 90; 000 , 1; 500p2.Topic: Information Technology Correct Responses: 0Correct Answer: EDi culty: 0Discrimination Index: 034.11 A group of 11 consumers are trying to decide whether to connect to a new communicationsnetwork. Consumer 1 is of type 1, consumer 2 of type 2, Consumer 3 of type 3, and so on. Eachconsumer's willingness to pay to belong to the network is proportional to the number of consumerswho belong. Where k is the number of consumers who belong, the willingness to pay of a type nconsumer is equal to k times n. What is the highest price at which 7 consumers could all connectto the network and either make a pro t or at least break even?a 37b 33c 32d 40e 35CHAPTER 34 Information TechnologyTopic: Information Technology Correct Responses: 0Correct Answer: E596Di culty: 0Discrimination Index: 034.12 A group of 9 consumers are trying to decide whether to connect to a new communicationsnetwork. Consumer 1 is of type 1, consumer 2 of type 2, Consumer 3 of type 3, and so on. Eachconsumer's willingness to pay to belong to the network is proportional to the number of consumerswho belong. Where k is the number of consumers who belong, the willingness to pay of a type nconsumer is equal to k times n. What is the highest price at which 7 consumers could all connectto the network and either make a pro t or at least break even?a 23b 19c 18d 26e 21Topic: Information Technology Correct Responses: 0Correct Answer: EDi culty: 0Discrimination Index: 034.13 A group of 11 consumers are trying to decide whether to connect to a new communicationsnetwork. Consumer 1 is of type 1, consumer 2 of type 2, Consumer 3 of type 3, and so on. Eachconsumer's willingness to pay to belong to the network is proportional to the number of consumerswho belong. Where k is the number of consumers who belong, the willingness to pay of a type nconsumer is equal to k times n. What is the highest price at which 7 consumers could all connectto the network and either make a pro t or at least break even?a 37b 33c 32d 40e 35MULTIPLE CHOICETopic: Information Technology Correct Responses: 0Correct Answer: E597Di culty: 0Discrimination Index: 034.14 A group of 11 consumers are trying to decide whether to connect to a new communicationsnetwork. Consumer 1 is of type 1, consumer 2 of type 2, Consumer 3 of type 3, and so on. Eachconsumer's willingness to pay to belong to the network is proportional to the number of consumerswho belong. Where k is the number of consumers who belong, the willingness to pay of a type nconsumer is equal to k times n. What is the highest price at which 9 consumers could all connectto the network and either make a pro t or at least break even?a 29b 25c 24d 32e 27Topic: Information Technology Correct Responses: 0Correct Answer: EDi culty: 0Discrimination Index: 034.15 A group of 11 consumers are trying to decide whether to connect to a new communicationsnetwork. Consumer 1 is of type 1, consumer 2 of type 2, Consumer 3 of type 3, and so on. Eachconsumer's willingness to pay to belong to the network is proportional to the number of consumerswho belong. Where k is the number of consumers who belong, the willingness to pay of a type nconsumer is equal to k times n. What is the highest price at which 9 consumers could all connectto the network and either make a pro t or at least break even?a 29b 25c 24d 32e 27Chapter 35Public GoodsTrue-FalseTopic: Public Goods Correct Responses: 0Correct Answer: FalseDi culty: 1Discrimination Index: 035.1 To say that preferences are single peaked means that everybody either prefers more publicgoods to less or everybody prefers less public goods to more.Topic: Public Goods Correct Responses: 0Correct Answer: TrueDi culty: 1Discrimination Index: 035.2 If preferences are single peaked, then pairwise majority voting among alternative optionswill not lead to voting cycles.Topic: Public Goods Correct Responses: 0Correct Answer: FalseDi culty: 1Discrimination Index: 035.3 A tax imposed on polluters to give them an incentive to make an e cient reduction inpollution is called a Clarke tax.Topic: Public Goods Correct Responses: 80Correct Answer: TrueDi culty: 1Discrimination Index: 2035.4 If a pure public good is provided by voluntary contributions, economic theory predicts thatin general too little will be supplied.Topic: Public Goods Correct Responses: 0Correct Answer: FalseDi culty: 2Discrimination Index: 035.5 A Pareto optimal amount of public goods is shown on a graph with quantities of publicgoods on the x axis by the point at which the horizontal sum of the marginal rate of substitutioncurves meets the marginal cost curve.TRUE-FALSETopic: Public Goods Correct Responses: 0Correct Answer: False599Di culty: 2Discrimination Index: 035.6 One of the problems with the Clarke tax mechanism is that when it is used, people have anincentive to lie about their preferences.Topic: Public Goods Correct Responses: 80Correct Answer: FalseDi culty: 1Discrimination Index: 2835.7 Economists de ne public goods to be those goods that are supplied by the government andprivate goods to be those goods that are supplied by the private sector.Topic: Public Goods Correct Responses: 0Correct Answer: FalseDi culty: 2Discrimination Index: 035.8 If the supply of public goods is determined by majority vote, then the outcome must bePareto optimal.Topic: Public Goods Correct Responses: 0Correct Answer: FalseDi culty: 1Discrimination Index: 035.9 If preferences are single-peaked, then everyone will agree about the right amount of publicgoods to be supplied.Public GoodsMultiple ChoiceTopic: Public Goods Correct Responses: 4Correct Answer: EDi culty: 2Discrimination Index: 350335.1 A quiet town in Kansas has 2000 people, all of whom have the same preferences. :There isone private good and one public good. Each person, i; in town has utility U xi ; y = xi + y 5 ; wherexi is private good for person i and y is the amount of public good that the town provides. If theprivate good costs $1 per unit and the public good costs $10 per unit, then the Pareto optimalamount of public good for the town to provide is:a 100 units.b 500 units.c 2000 unitsd 8000 units.e 10000 unitsTopic: Public Goods Correct Responses: 0Correct Answer: CDi culty: 2Discrimination Index: 035.2 The Sons of Knute had a hunting lodge up on Loon Lake which burned down last winter.They plan to rebuild it this summer and are trying to decide how large the new lodge should be.The organization has 50 members. The marginal rate of substitution of each of them betweensquare feet of hunting lodge and money for other goods is 1:2 , :0004y where y is the size of thehunting lodge in square feet. What is the e cient size for the new hunting lodge?a 1,000 square feetb 1,200 square feetc 2,000 square feetd 2,400 square feete None of the above.MULTIPLE CHOICETopic: Public Goods Correct Responses: 0Correct Answer: D601Di culty: 2Discrimination Index: 035.3 Anton, Bertha, and Cecilia all consume crackers and music. Crackers are a pure private goodABand music is a pure public good. Their utility functions are: U cA ; m = cA m; U cB ; m = cB m;and U B cC ; m = 2cC m; where cA is Anton's cracker consumption, cB is Bertha's cracker consumption, and cC is Cecilia's cracker consumption and where m is the amount of music jointly consumedby all three of them. Music is measured in hours. Crackers cost $1 each. Music costs $10 an hour.Anton's wealth is $30, Bertha's wealth is $50, and Cecilia's wealth is $20. What is the e cientamount of music for them to consume?a 2 hoursb 3 hoursc 4 hoursd 5 hourse 6 hoursTopic: Public Goods Correct Responses: 85Correct Answer: CDi culty: 3Discrimination Index: 035.4 Which of the following is the best example of a public good as de ned in your text?a cable televisionb day carec radio broadcastsd medical caree DisneylandCHAPTER 35 Public GoodsTopic: Public Goods Correct Responses: 39Correct Answer: A602Di culty: 2Discrimination Index: 2435.5 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 perpound when q pounds are roasted. The smell of roasting beans imposes costs on the company'sneighbors. The total amount that neighbors would be willing to pay to have the shop stop roastingaltogether is 5q2; where q is the number of pounds being roasted. The company sells its output ina competitive market at 450 cents per pound. What is the socially e cient amount of co ee forthe 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: Public Goods Correct Responses: 0Correct Answer: ADi culty: 2Discrimination Index: 035.6 Nadia Comeneci and Mr. X have preferences de ned over pizza, p; and trampolines, t. They=have identical utility functions, U p; t = p + 2; 000t1 2. Each pizza costs $1 and each trampolinecosts $1,000. Nadia and Mr. X like to share, and indeed trampolines are a public good for them.Pizza, however, is a private good. We don't know their exact incomes, but we do know that eachof them earns at least $10,000. Which of the following is true?a The Pareto e cient number of trampolines for them is 4.b The Pareto e cient number of trampolines for them is 1.c The Pareto e cient number of trampolines for them cannot be determined without knowing how thecosts will be shared.d The Pareto e cient number of trampolines for them is 2.e Since their preferences are homothetic, their income elasticity of demand for pizza is ,1.MULTIPLE CHOICETopic: Public Goods Correct Responses: 0Correct Answer: A603Di culty: 0Discrimination Index: 035.7 Just north of the town of Muskrat, Ontario, is the town of Brass Monkey, population 6400.Brass Monkey, like Muskrat, has a single public good, the town skating rink, and a single privategood, Labatts ale. Everyone's utility function is Ui Xi ; Y = Xi , 81=Y; where Xi is the number ofbottles of ale consumed by i and Y is the size of the skating rink in square meters. The price of aleis $1 per bottle. The cost of the skating rink to the city is $4 per square meter. Everyone has anincome of at least $5,000. What is the Pareto e cient size for the town skating rink?a 360 square metersb 480 square metersc 240 square metersd 725 square meterse None of the above.Topic: Public Goods Correct Responses: 0Correct Answer: DDi culty: 0Discrimination Index: 035.8 Bob and Ray are thinking of buying a sofa. Bob's utility function is UB S; MB = 1 + SMBand Ray's utility function is UR S; MR = 4 + S MR ; where S = 0 if they don't get the sofa andS = 1 if they do and where MB and MR are the amounts of money they have respectively to spendon their private consumptions. Bob has a total of $800 to spend on the sofa and other stu . Rayhas a total of $ 3,000 to spend on the sofa and other stu . The maximum amount that they couldpay for the sofa and still arrange to both be better o than without it is:a 1,500.b 750.c 550.d 1,000.e 2,000.CHAPTER 35 Public GoodsTopic: Public Goods Correct Responses: 0Correct Answer: D604Di culty: 0Discrimination Index: 035.9 Bob and Ray are thinking of buying a sofa. Bob's utility function is UB S; MB = 1 + SMBand Ray's utility function is UR S; MR = 3 + S MR ; where S = 0 if they don't get the sofa andS = 1 if they do and where MB and MR are the amounts of money they have respectively to spendon their private consumptions. Bob has a total of $2,000 to spend on the sofa and other stu . Rayhas a total of $ 4,000 to spend on the sofa and other stu . The maximum amount that they couldpay for the sofa and still arrange to both be better o than without it is:a 3,000.b 1,333.33.c 1,050.d 2,000.e 4,000.Topic: Public Goods Correct Responses: 0Correct Answer: CDi culty: 0Discrimination Index: 035.10 Remember Bonnie and Clyde from your workbook? Suppose that their total pro ts are84H where H is the number of hours they work per year. Their utility functions are, respectively, UB CB ; H = CB , 0:03H 2; and UC CC ; H = CC , 0:04H 2; where CB a and CC are their private goodsconsumptions and H is the number of hours they work per year. If they nd a Pareto optimal choiceof hours of work and income distribution, it must be that the number of hours they work per year is:a 700.b 600.c 250.d 350.MULTIPLE CHOICETopic: Public Goods Correct Responses: 0Correct Answer: C605Di culty: 0Discrimination Index: 035.11 Remember Bonnie and Clyde from your workbook? Suppose that their total pro ts are128H where H is the number of hours they work per year. Their utility functions are, respectively,U B CB ; H = CB , 0:02H 2; and UC CC ; H = CC , 0:02H 2; where CB a and CC are their private goodsconsumptions and H is the number of hours they work per year. If they nd a Pareto optimal choiceof hours of work and income distribution, it must be that the number of hours they work per year is:a 1,700.b 1,600.c 750.d 850.Topic: Public Goods Correct Responses: 0Correct Answer: BDi culty: 0Discrimination Index: 035.12 Lucy's utility function is 2XL + G and Melvin's utility function is XM G where G is theirexpenditures on the public goods they share in their apartment and where XL and XM are theirrespective private consumption expenditures. The total amount they have to spend on privategoods and public goods is 29,000. They agree on a Pareto optimal pattern of expenditures in whichthe amount that is spent on Lucy's private consumption is 5,000. How much do they spent onpublic goods?a 8,000b 16,000c 6,550d 4,000e There is not enough information here to be able to determine the answer.CHAPTER 35 Public GoodsTopic: Public Goods Correct Responses: 0Correct Answer: B606Di culty: 0Discrimination Index: 035.13 Lucy's utility function is 2XL + G and Melvin's utility function is XM G where G is theirexpenditures on the public goods they share in their apartment and where XL and XM are theirrespective private consumption expenditures. The total amount they have to spend on privategoods and public goods is 36,000. They agree on a Pareto optimal pattern of expenditures in whichthe amount that is spent on Lucy's private consumption is 9,000. How much do they spent onpublic goods?a 9,000b 18,000c 9,050d 4,500e There is not enough information here to be able to determine the answer.Public GoodsEssayTopic: Public Goods Correct Responses: 0Di culty: 3Discrimination Index: 035.1 An otherwise charming island is inhabited by two religious groups who hate each other. Theisland is presided over by a benevolent monarch who is extremely concerned about envy betweengroups. He chooses the distribution of income on the island so as to maximize the social welfarefunction, W x; y = minf2x , y; 2y , xg where x is the utility of the average member of group X and yis the utility of the average member of group Y . a If the monarch can accomplish any distributionof utility such that x + 3y = 24; diagram the utility possibility frontier and the monarch's isowelfarelines. b What income distribution maximizes W ? c Show that an equal increase in both groupsincome will always please the monarch. dIf the initial incomes are equal, when do increases inboth groups' utility reduce W ?Answer: a see prob 99 b6; 6 c Adding a constant to both x and y increases 2x-y and 2y-x. dwhen either's income increases by more than twice the increase in the other's.Chapter 36InformationTrue-FalseTopic: Information Correct Responses: 60Correct Answer: TrueDi culty: 1Discrimination Index: 1336.1 An insurance company must be concerned about the possibility that someone will buy reinsurance on a building and then set re to it. This is an example of moral hazard.Topic: Information Correct Responses: 90Correct Answer: TrueDi culty: 1Discrimination Index: 1336.2 A life insurance company must be concerned about the possibility that the people who buylife insurance may tend to be less healthy than those who do not. This is an example of adverseselection.Topic: Information Correct Responses: 0Correct Answer: FalseDi culty: 1Discrimination Index: 036.3 In a market where there is signalling, a separating equilibrium occurs when economic agentsseparate their actions as consumers from their actions as producers.Topic: Information Correct Responses: 51Correct Answer: TrueDi culty: 1Discrimination Index: 3436.4 In a market where there is a separating equilibrium, di erent types of agents make di erentchoices of actions.Topic: Information Correct Responses: 0Correct Answer: TrueDi culty: 1Discrimination Index: 036.5 In a market where there is a pooling equilibrium, di erent types of agents choose the sameaction.TRUE-FALSETopic: Information Correct Responses: 0Correct Answer: False609Di culty: 1Discrimination Index: 036.6 The incentive compatibility constraint requires that incentives be consistent with a consumer's budget constraint.Topic: Information Correct Responses: 0Correct Answer: FalseDi culty: 1Discrimination Index: 036.7 An example of adverse selection is where someone chooses a car that is not as good as it isclaimed to be.InformationMultiple ChoiceTopic: Information Correct Responses: 64Correct Answer: DDi culty: 2Discrimination Index: 5836.1 A rm hires two kinds of workers, alphas and betas.The population at large has equal num-ber of alphas and betas. One can't tell a beta from an alpha by looking at her, but an alpha willproduce $3,000 worth of output per month and a beta will produce $2,500 worth of output in amonth. The rm decides to distinguish alphas from betas by making them pass an examination.For each question that they get right on the exam, alphas have to spend 1=2 hour studying andbetas have to spend 1 hour. A worker will be paid $3,000 if she gets at least 60 answers right and$2,500 otherwise. For either type, an hour's studying is as bad as giving up $20 income per month.This scheme leads to:a a separating equilibrium where alphas score 60 and betas score 0.b a pooling equilibrium where alphas score 60 and betas score 0.c a pooling equilibrium where everybody scores 60.d a pooling equilibrium where everybody scores 0.e a separating equilibrium where everybody scores 60.Topic: Information Correct Responses: 38Correct Answer: ADi culty: 1Discrimination Index: 3136.2 Ten workers work jointly on a project. All 10 workers are equally skilled. The total valueof the output produced is $40 times the sum of the number of hours worked by all 10 workers.Each worker's utility is equal to his income minus the square of the number of hours he works.Each worker is sel sh. They have no way of keeping track of any individual's work e ort, so theydecide to let each person work as long as he wants to and they divide the total value of their outputequally among them. How much income will each worker get?a $80b $800c $20d $95e None of the above.MULTIPLE CHOICETopic: Information Correct Responses: 38Correct Answer: A611Di culty: 1Discrimination Index: 3136.3 Ten workers work jointly on a project. All 10 workers are equally skilled. The total valueof the output produced is $50 times the sum of the number of hours worked by all 10 workers.Each worker's utility is equal to his income minus the square of the number of hours he works.Each worker is sel sh. They have no way of keeping track of any individual's work e ort, so theydecide to let each person work as long as he wants to and they divide the total value of their outputequally among them. How much income will each worker get?a $125b $1,250c $25d $140e None of the above.Topic: Information Correct Responses: 74Correct Answer: ADi culty: 1Discrimination Index: 3736.4 Which of the following is the best example of adverse selection?a People who face the highest risks are the people most likely to buy insurance against these risks.b The residual claimant will have to bear the consequences of the most adverse outcomes.c An individual can in uence the probability that she has an accident.d Items in the most popular styles sell out the quickest.e People sometimes mistakenly choose low quality products.CHAPTER 36 InformationTopic: Information Correct Responses: 34Correct Answer: C612Di culty: 2Discrimination Index: 3836.5 A certain city has two kinds of workers, alphas and betas. An alpha can produce $100 worthof output per day working for himself. If he works in the local factory, he produces $120 worth ofouput a day. A beta produces $60 worth of ouput per day working for himself and he produces$80 worth of output per day if he works for the local factory. Workers either work for themselvesor work in the factory. The factory owner can't tell alphas from betas. He pays a wage equal tothe average product of his labor force and he has at least some alphas working for him. Workers are free to choose to work for themselves or the factory, depending on which o ers more money.a At least 5=6 of the factory's employees must be alphas.b At least half of the factory's employees must be betas.c At least half of the factory's employees must be alphas.d None of the factory's employees can be betas.e No more than 5=6 of the betas can work in the factory.Topic: Information Correct Responses: 29Correct Answer: ADi culty: 0Discrimination Index: 2536.6 Enigma, Ohio, has two kinds of workers, klutzes whose labor is worth $1,000 a month andkandos whose labor is worth $2,500 a month. Enigma has exactly twice as many klutzes as kandos.Klutzes look just like kandos and are accomplished liars, so if you ask, they claim to be kandos. Itis too expensive to monitor anybody's work. A professor who likes to talk o ers to give free lectureson personal hygiene and macroeconomics. Klutzes and kandos nd these lectures excruciatinglydull. An hour's lecture is as bad as losing $50 for a kando and as bad as losing $100 for a klutz. Ifall other rms pay wages equal to the productivity of an average citizen of Enigma, which of thesestrategies would be most pro table for a new rm?a Ob Oc Od Oe Oer a wage of $2000 per month and require its workers to listen to 6 hours of lectures per month.er a wage of $2000 per month and require its workers to listen to 4 hours of lectures per month.er a wage of $1750 per month and require its workers to listen to 6 hours of lectures per month.er a wage of $1660 per month and require its workers to attend 1 hour of lectures per month.er a wage of $2600 per month and require its workers to attend 8 hours of lectures per month.MULTIPLE CHOICETopic: Information Correct Responses: 0Correct Answer: D613Di culty: 3Discrimination Index: 036.7 Jan's utility function is C , H ; where C is consumption and H is hours worked per day.2She can work in the city for 8 hours per day, earning$100 a day. Alternatively, she can rent a smallfarm from the landlord, Mr. Porksni er. If she rents the farm, she can work as many hours a dayas she wishes. If she works H hours per day, she can sell her crops for a total of $20H per day, butshe must pay Mr. Porksni er an annual rent of $R. Mr. Porksni er wants to charge the highestrent $R that he can and still be able to get Jan to work for him. What is the highest rent he cancharge? A penny less than:a $100 per day.b $64 per day.c $60 per day.d $50 per day.e $36 per day.Topic: Information Correct Responses: 0Correct Answer: CDi culty: 0Discrimination Index: 036.8 Suppose that low productivity workers all have marginal products of 10 and high produc-tivity workers have marginal products of 14. The community has equal numbers of each type ofworker. The local community college o ers a course in microeconomics. High productivity workersthink taking this course is as badas a cut in wages of 4 and low productivity workers think it is as bad as a wage cut of 9.a There is a separating equilibrium in which high-productivity workers take the course and are paid 14and low-productivity workers do not take the course and are paid 10.b There is no separating equilibrium and no pooling equilibrium.c There is no separating equilibrium, but there is a pooling equilibrium in which everybody is paid 12.d There is a separating equilibrium in which high-productivity workers take the course and are paid 18and low productivity workers do not take the course and are paid 10.e There is a separating equilibrium in which high-productivity workers take the course and are paid 14and low productivity workers are paid 12.CHAPTER 36 InformationTopic: Information Correct Responses: 0Correct Answer: C614Di culty: 0Discrimination Index: 036.9 Suppose that low productivity workers all have marginal products of 10 and high produc-tivity workers have marginal products of 13. The community has equal numbers of each type ofworker. The local community college o ers a course in microeconomics. High productivity workersthink taking this course is as badas a cut in wages of 2 and low productivity workers think it is as bad as a wage cut of 7.a There is a separating equilibrium in which high-productivity workers take the course and are paid 13and low-productivity workers do not take the course and are paid 10.b There is no separating equilibrium and no pooling equilibrium.c There is no separating equilibrium, but there is a pooling equilibrium in which everybody is paid 11.50.d There is a separating equilibrium in which high-productivity workers take the course and are paid 15and low productivity workers do not take the course and are paid 10.e There is a separating equilibrium in which high-productivity workers take the course and are paid 13and low productivity workers are paid 11.50.Topic: Information Correct Responses: 0Correct Answer: ADi culty: 0Discrimination Index: 036.10 Suppose that in Enigma, Ohio, Klutzes have productivity of $1000 and Kandos have productivity of $4,000 per month. You can't tell Klutzes from Kandos by looking at them or askingthem and it is too expensive to monitor individual productivity. Kandos, however, have morepatience than Klutzes. Listening to an hour of dull lectures is as bad losing $300 for a Klutz and$150 for a Kando. There will be a separating equilibrium in which anybody who attends a courseof H hours of lectures is paid 4,000 per month and anybody who does not is paid $1000 per month:a if H 20 and H 10.b if H 40 and H 10.c for all positive values of H .d only in the limit as H approaches in nity.e if H 16:67 and H 8:33.MULTIPLE CHOICETopic: Information Correct Responses: 0Correct Answer: A615Di culty: 0Discrimination Index: 036.11 Suppose that in Enigma, Ohio, Klutzes have productivity of $1000 and Kandos have productivity of $5,000 per month. You can't tell Klutzes from Kandos by looking at them or askingthem and it is too expensive to monitor individual productivity. Kandos, however, have morepatience than Klutzes. Listening to an hour of dull lectures is as bad losing $200 for a Klutz and$100 for a Kando. There will be a separating equilibrium in which anybody who attends a courseof H hours of lectures is paid 5,000 per month and anybody who does not is paid $1000 per month:a if H 40 and H 20.b if H 80 and H 20.c for all positive values of H .d only in the limit as H approaches in nity.e if H 35 and H 17:50.Topic: Information Correct Responses: 0Correct Answer: ADi culty: 0Discrimination Index: 036.12 In Rustbucket, Michigan, there are 200 used cars for sale; half of these cars are good andhalf of them are lemons. Owners of lemons are willing to sell them for $300. Owners of good usedcars are willing to sell them for prices above $900 but will keep them if the price is lower than $900.There is a large number of potential buyers who are willing to pay $500 for a lemon and $1,900 fora good car. Buyers can't tell good cars from bad, but original owners know.a There will be an equilibrium in which all used cars sell for $1,200.b The only equilibrium is one in which all used cars on the market are lemons and they sell for $500.c There will be an equilibrium in which lemons sell for $300 and good used cars sell for $900.d There will be an equilibrium in which all used cars sell for $600.e There will be an equilibrium in which lemons sell for $500 and good used cars sell for $1,900.CHAPTER 36 InformationTopic: Information Correct Responses: 0Correct Answer: A616Di culty: 0Discrimination Index: 036.13 In Rustbucket, Michigan, there are 200 used cars for sale; half of these cars are good andhalf of them are lemons. Owners of lemons are willing to sell them for $300. Owners of good usedcars are willing to sell them for prices above $900 but will keep them if the price is lower than $900.There is a large number of potential buyers who are willing to pay $600 for a lemon and $1,300 fora good car. Buyers can't tell good cars from bad, but original owners know.a There will be an equilibrium in which all used cars sell for $950.b The only equilibrium is one in which all used cars on the market are lemons and they sell for $600.c There will be an equilibrium in which lemons sell for $300 and good used cars sell for $900.d There will be an equilibrium in which all used cars sell for $600.e There will be an equilibrium in which lemons sell for $600 and good used cars sell for $1,300.Topic: Information Correct Responses: 0Correct Answer: DDi culty: 0Discrimination Index: 036.14 Suppose that in New Crankshaft, Pennsylvania, the quality distribution of the 5,000 usedcars on the market is such that the number of used cars of value less than V is V=2. Originalowners must sell their used cars. Original owners know what their cars are worth, but buyers can'tdetermine a car's quality until they buy it. An owner can either take his car to an appraiser andpay the appraiser $200 to appraise the car accurately and credibly or he can sell the car unappraised. In equilibrium, car owners will have their cars appraised if and only if their value is at least:a 200.b 2,500.c 600.d 400.e 800.MULTIPLE CHOICETopic: Information Correct Responses: 0Correct Answer: D617Di culty: 0Discrimination Index: 036.15 Suppose that in New Crankshaft, Pennsylvania, the quality distribution of the 4,000 usedcars on the market is such that the number of used cars of value less than V is V=2. Originalowners must sell their used cars. Original owners know what their cars are worth, but buyers can'tdetermine a car's quality until they buy it. An owner can either take his car to an appraiser andpay the appraiser $200 to appraise the car accurately and credibly or he can sell the car unappraised. In equilibrium, car owners will have their cars appraised if and only if their value is at least:a 200.b 2,000.c 600.d 400.e 800.Topic: Information Correct Responses: 77Correct Answer: DDi culty: 0Discrimination Index: 3736.16 There are two types of used cars, high-quality and low-quality. Buyers can not tell dis-tinguish the two types until after they have purchased them. Owners of high-quality cars will sellthem if the price is $2000 or higher. Owners of low-quality cars will sell them if the price is $1000or higher. Buyers value a high-quality used car at $2,142 and a low-quality used car at $1200.Suppose that the fraction 0.70 of used cars are of high quality and the fraction 0.30 of used carsare of low quality. In equilibriuma Only high-quality used cars are sold.b Only low-quality used cars are sold.c All used cars are sold.d No used cars are sold.e High-quality used cars will sell for a uniformly higher price than low-quality used cars.CHAPTER 36 InformationTopic: Information Correct Responses: 77Correct Answer: D618Di culty: 0Discrimination Index: 3736.17 There are two types of used cars, high-quality and low-quality. Buyers can not tell dis-tinguish the two types until after they have purchased them. Owners of high-quality cars will sellthem if the price is $2000 or higher. Owners of low-quality cars will sell them if the price is $1000or higher. Buyers value a high-quality used car at $1,800 and a low-quality used car at $1200.Suppose that the fraction 0.80 of used cars are of high quality and the fraction 0.20 of used carsare of low quality. In equilibriuma Only high-quality used cars are sold.b Only low-quality used cars are sold.c All used cars are sold.d No used cars are sold.e High-quality used cars will sell for a uniformly higher price than low-quality used cars.Chapter 2Multiple ChoiceTopic: Budget Constraint Correct Responses: 0Correct Answer: CBudget ConstraintDi culty: 0Discrimination Index: 02.1A In Problem 2.1, if you have an income of $18 to spend, if commodity 1 costs $3 per unit,and if commodity 2 costs $9 per unit, then the equation for your budget line can be written asa x1=3 + x2 =9 = 18.b x1 + x2 =12 = 18.c x1 + 3x2 = 6.d 4x1 + 10x2 = 19.e 12x1 + x2 = 18.Topic: Budget Constraint Correct Responses: 86Correct Answer: ADi culty: 1Discrimination Index: 332.2A In Problem 2.3, if you could exactly a ord either 2 units of x and 7 units of y; or 4 unitsof x and 3 units of y; then if you spent all of your income on y; how many units of y could you buy?a 11b 7c 15d 6e None of the other options are correct.CHAPTER 2 Budget ConstraintTopic: Budget Constraint Correct Responses: 100Correct Answer: B620Di culty: 0Discrimination Index: 02.3A In Problem 2.4, Murphy used to consume 100 units of X and 50 units of Y when the priceof 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 5, howmuch would Murphy's income have to rise so that he could still a ord his original bundle?a 400b 350c 200d 600e None of the other options are correct.Topic: Budget Constraint Correct Responses: 88Correct Answer: CDi culty: 0Discrimination Index: 382.4A In Problem 2.7, Edmund must pay $6 each for punk rock video cassettes. If Edmund ispaid $48 per sack for accepting garbage and if his relatives send him an allowance of $432, then hisbudget line is described by the equationa 6V = 48G.b 6V + 48G = 432.c 6V , 48G = 432.d 6V = 432 , G.e None of the other options are correct.Topic: Budget Constraint Correct Responses: 84Correct Answer: CDi culty: 0Discrimination Index: 132.5A In Problem 2.10, if in the same amount of time that it takes her to read 40 pages of eco-nomics and 30 pages of sociology, Martha could read 10 pages of economics and 90 pages of sociology, then which of these equations describes combinations of pages of economics, E; and sociology,S; that she could read in the time it takes to read 40 pages of economics and 30 pages of sociology?a E + S = 70b E=2 + S = 50c 2E + S = 110d E + S = 100e All of the above.MULTIPLE CHOICETopic: Budget Constraint Correct Responses: 0Correct Answer: A621Di culty: 0Discrimination Index: 02.6A In Problem 2.11, ads in the boring business magazine are read by 300 lawyers and 1,000M.B.A's. Ads in the consumer publication are read by 250 lawyers and 300 M.B.A.s. If Harry had$3,000 to spend on advertising, if the price of ads in the boring business magazine were 600 andthe price of ads in the consumer magazine were 300, then the combinations of recent M.B.A.s andlawyers with hot tubs whom he could reach with his advertising budget would be represented bythe integer values along a line segment that runs between the two pointsa 2; 500; 3; 000 and 1; 500; 5; 000.b 3; 000; 3; 500 and 1; 500; 6; 000.c 0; 3; 000 and 1; 500; 0.d 3; 000; 0 and 0; 6; 000.e 2; 000; 0 and 0; 5; 000.Topic: Budget Constraint Correct Responses: 68Correct Answer: BDi culty: 2Discrimination Index: 752.7A In the economy of Mungo, discussed in Problem 2.12, there is a third person called Ike. Ikehas a red income of 82 and a blue income of 25. Recall that blue ices are 1 bcu blue currencyunit per unit of ambrosia and 1 bcu p p per unit of bubblegum. Red prices are 2 rcus red currencyunits per unit of ambrosia and 6 rcus per unit of bubblegum. You have to pay twice for what youbuy, once in red currency, once in blue currency. If Ike spends all of its blue income, but not allof its red income, then it must be thata it consumes at least 8 units of bubblegum.b it consumes at least 17 units of ambrosia.c it consumes exactly twice as much bubblegum as ambrosia.d it consumes at least 13 units of bubblegum.e it consumes equal amounts of ambrosia and bubblegum.Multiple ChoiceTopic: Budget Constraint Correct Responses: 0Correct Answer: CBudget ConstraintDi culty: 0Discrimination Index: 02.1B In Problem 2.1, if you have an income of $18 to spend, if commodity 1 costs $3 per unit,and if commodity 2 costs $9 per unit, then the equation for your budget line can be written asa x1=3 + x2 =9 = 18.b x1 + x2 =12 = 18.c x1 + 3x2 = 6.d 4x1 + 10x2 = 19.e 12x1 + x2 = 18.Topic: Budget Constraint Correct Responses: 86Correct Answer: ADi culty: 1Discrimination Index: 332.2B In Problem 2.3, if you could exactly a ord either 2 units of x and 7 units of y; or 4 unitsof x and 3 units of y; then if you spent all of your income on y; how many units of y could you buy?a 11b 7c 15d 6e None of the other options are correct.Topic: Budget Constraint Correct Responses: 100Correct Answer: BDi culty: 0Discrimination Index: 02.3B In Problem 2.4, Murphy used to consume 100 units of X and 50 units of Y when the priceof 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 5, howmuch would Murphy's income have to rise so that he could still a ord his original bundle?a 400b 350c 200d 600e None of the other options are correct.MULTIPLE CHOICETopic: Budget Constraint Correct Responses: 88Correct Answer: C623Di culty: 0Discrimination Index: 382.4B In Problem 2.7, Edmund must pay $6 each for punk rock video cassettes. If Edmund ispaid $48 per sack for accepting garbage and if his relatives send him an allowance of $432, then hisbudget line is described by the equationa 6V = 48G.b 6V + 48G = 432.c 6V , 48G = 432.d 6V = 432 , G.e None of the other options are correct.Topic: Budget Constraint Correct Responses: 84Correct Answer: CDi culty: 0Discrimination Index: 132.5B In Problem 2.10, if in the same amount of time that it takes her to read 40 pages of eco-nomics and 30 pages of sociology, Martha could read 10 pages of economics and 90 pages of sociology, then which of these equations describes combinations of pages of economics, E; and sociology,S; that she could read in the time it takes to read 40 pages of economics and 30 pages of sociology?a E + S = 70b E=2 + S = 50c 2E + S = 110d E + S = 100e All of the above.CHAPTER 2 Budget ConstraintTopic: Budget Constraint Correct Responses: 0Correct Answer: A624Di culty: 0Discrimination Index: 02.6B In Problem 2.11, ads in the boring business magazine are read by 300 lawyers and 1,000M.B.A's. Ads in the consumer publication are read by 250 lawyers and 300 M.B.A.s. If Harry had$3,000 to spend on advertising, if the price of ads in the boring business magazine were 600 andthe price of ads in the consumer magazine were 300, then the combinations of recent M.B.A.s andlawyers with hot tubs whom he could reach with his advertising budget would be represented bythe integer values along a line segment that runs between the two pointsa 2; 500; 3; 000 and 1; 500; 5; 000.b 3; 000; 3; 500 and 1; 500; 6; 000.c 0; 3; 000 and 1; 500; 0.d 3; 000; 0 and 0; 6; 000.e 2; 000; 0 and 0; 5; 000.Topic: Budget Constraint Correct Responses: 68Correct Answer: BDi culty: 2Discrimination Index: 752.7B In the economy of Mungo, discussed in Problem 2.12, there is a third person called Ike. Ikehas a red income of 82 and a blue income of 25. Recall that blue ices are 1 bcu blue currencyunit per unit of ambrosia and 1 bcu p p per unit of bubblegum. Red prices are 2 rcus red currencyunits per unit of ambrosia and 6 rcus per unit of bubblegum. You have to pay twice for what youbuy, once in red currency, once in blue currency. If Ike spends all of its blue income, but not allof its red income, then it must be thata it consumes at least 8 units of bubblegum.b it consumes at least 17 units of ambrosia.c it consumes exactly twice as much bubblegum as ambrosia.d it consumes at least 13 units of bubblegum.e it consumes equal amounts of ambrosia and bubblegum.Multiple ChoiceTopic: Budget Constraint Correct Responses: 0Correct Answer: CBudget ConstraintDi culty: 0Discrimination Index: 02.1C In Problem 2.1, if you have an income of $40 to spend, if commodity 1 costs $5 per unit,and if commodity 2 costs $20 per unit, then the equation for your budget line can be written asa x1=5 + x2 =20 = 40.b x1 + x2 =25 = 40.c x1 + 4x2 = 8.d 6x1 + 21x2 = 41.e 25x1 + x2 = 40.Topic: Budget Constraint Correct Responses: 86Correct Answer: ADi culty: 1Discrimination Index: 332.2C In Problem 2.3, if you could exactly a ord either 2 units of x and 15 units of y; or 7 unitsof 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 19b 9c 29d 9e None of the other options are correct.Topic: Budget Constraint Correct Responses: 100Correct Answer: BDi culty: 0Discrimination Index: 02.3C In Problem 2.4, Murphy used to consume 100 units of X and 50 units of Y when the priceof 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 10, howmuch would Murphy's income have to rise so that he could still a ord his original bundle?a 900b 600c 450d 1,350e None of the other options are correct.CHAPTER 2 Budget ConstraintTopic: Budget Constraint Correct Responses: 88Correct Answer: C626Di culty: 0Discrimination Index: 382.4C In Problem 2.7, Edmund must pay $6 each for punk rock video cassettes. If Edmund ispaid $48 per sack for accepting garbage and if his relatives send him an allowance of $192, then hisbudget line is described by the equationa 6V = 48G.b 6V + 48G = 192.c 6V , 48G = 192.d 6V = 192 , G.e None of the other options are correct.Topic: Budget Constraint Correct Responses: 84Correct Answer: CDi culty: 0Discrimination Index: 132.5C In Problem 2.10, if in the same amount of time that it takes her to read 40 pages of eco-nomics and 30 pages of sociology, Martha could read 20 pages of economics and 90 pages of sociology, then which of these equations describes combinations of pages of economics, E; and sociology,S; that she could read in the time it takes to read 40 pages of economics and 30 pages of sociology?a E + S = 70b E=2 + S = 50c 3E + S = 150d E + S = 110e All of the above.MULTIPLE CHOICETopic: Budget Constraint Correct Responses: 0Correct Answer: A627Di culty: 0Discrimination Index: 02.6C In Problem 2.11, ads in the boring business magazine are read by 300 lawyers and 1,000M.B.A's. Ads in the 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 boring business magazine were 600 andthe price of ads in the consumer magazine were 300, then the combinations of recent M.B.A.s andlawyers with hot tubs whom he could reach with his advertising budget would be represented bythe integer values along a line segment that runs between the two pointsa 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.Topic: Budget Constraint Correct Responses: 68Correct Answer: BDi culty: 2Discrimination Index: 752.7C In the economy of Mungo, discussed in Problem 2.12, there is a third person called Ike. Ikehas a red income of 80 and a blue income of 30. Recall that blue ices are 1 bcu blue currencyunit per unit of ambrosia and 1 bcu p p per unit of bubblegum. Red prices are 2 rcus red currencyunits per unit of ambrosia and 6 rcus per unit of bubblegum. You have to pay twice for what youbuy, once in red currency, once in blue currency. If Ike spends all of its blue income, but not allof its red income, then it must be thata it consumes at least 5 units of bubblegum.b it consumes at least 25 units of ambrosia.c it consumes exactly twice as much bubblegum as ambrosia.d it consumes at least 9 units of bubblegum.e it consumes equal amounts of ambrosia and bubblegum.Multiple ChoiceTopic: Budget Constraint Correct Responses: 0Correct Answer: CBudget ConstraintDi culty: 0Discrimination Index: 02.1D In Problem 2.1, if you have an income of $80 to spend, if commodity 1 costs $5 per unit,and if commodity 2 costs $20 per unit, then the equation for your budget line can be written asa x1=5 + x2 =20 = 80.b x1 + x2 =25 = 80.c x1 + 4x2 = 16.d 6x1 + 21x2 = 81.e 25x1 + x2 = 80.Topic: Budget Constraint Correct Responses: 86Correct Answer: ADi culty: 1Discrimination Index: 332.2D In Problem 2.3, if you could exactly a ord either 2 units of x and 13 units of y; or 4 unitsof 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 21b 13c 29d 6e None of the other options are correct.Topic: Budget Constraint Correct Responses: 100Correct Answer: BDi culty: 0Discrimination Index: 02.3D In Problem 2.4, Murphy used to consume 100 units of X and 50 units of Y when the priceof X was 2 and the price of Y was 4. If the price of X rose to 3 and the price of Y rose to 8, howmuch would Murphy's income have to rise so that he could still a ord his original bundle?a 500b 300c 250d 750e None of the other options are correct.MULTIPLE CHOICETopic: Budget Constraint Correct Responses: 88Correct Answer: C629Di culty: 0Discrimination Index: 382.4D In Problem 2.7, Edmund must pay $6 each for punk rock video cassettes. If Edmund ispaid $36 per sack for accepting garbage and if his relatives send him an allowance of $144, then hisbudget line is described by the equationa 6V = 36G.b 6V + 36G = 144.c 6V , 36G = 144.d 6V = 144 , G.e None of the other options are correct.Topic: Budget Constraint Correct Responses: 84Correct Answer: CDi culty: 0Discrimination Index: 132.5D In Problem 2.10, if in the same amount of time that it takes her to read 40 pages of eco-nomics and 30 pages of sociology, Martha could read 10 pages of economics and 180 pages of sociology, then which of these equations describes combinations of pages of economics, E; and sociology,S; that she could read in the time it takes to read 40 pages of economics and 30 pages of sociology?a E + S = 70b E=2 + S = 50c 5E + S = 230d E + S = 190e All of the above.CHAPTER 2 Budget ConstraintTopic: Budget Constraint Correct Responses: 0Correct Answer: A630Di culty: 0Discrimination Index: 02.6D In Problem 2.11, ads in the boring business magazine are read by 300 lawyers and 1,000M.B.A's. Ads in the consumer publication are read by 250 lawyers and 300 M.B.A.s. If Harry had$4,550 to spend on advertising, if the price of ads in the boring business magazine were 700 andthe price of ads in the consumer magazine were 350, then the combinations of recent M.B.A.s andlawyers with hot tubs whom he could reach with his advertising budget would be represented bythe integer values along a line segment that runs between the two pointsa 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: 68Correct Answer: BDi culty: 2Discrimination Index: 752.7D In the economy of Mungo, discussed in Problem 2.12, there is a third person called Ike. Ikehas a red income of 84 and a blue income of 20. Recall that blue ices are 1 bcu blue currencyunit per unit of ambrosia and 1 bcu p p per unit of bubblegum. Red prices are 2 rcus red currencyunits per unit of ambrosia and 6 rcus per unit of bubblegum. You have to pay twice for what youbuy, once in red currency, once in blue currency. If Ike spends all of its blue income, but not allof its red income, then it must be thata it consumes at least 11 units of bubblegum.b it consumes at least 9 units of ambrosia.c it consumes exactly twice as much bubblegum as ambrosia.d it consumes at least 21 units of bubblegum.e it consumes equal amounts of ambrosia and bubblegum.Multiple ChoiceTopic: Budget Constraint Correct Responses: 0Correct Answer: CBudget ConstraintDi culty: 0Discrimination Index: 02.1E In Problem 2.1, if you have an income of $24 to spend, if commodity 1 costs $2 per unit,and if commodity 2 costs $8 per unit, then the equation for your budget line can be written asa x1=2 + x2 =8 = 24.b x1 + x2 =10 = 24.c x1 + 4x2 = 12.d 3x1 + 9x2 = 25.e 10x1 + x2 = 24.Topic: Budget Constraint Correct Responses: 86Correct Answer: ADi culty: 1Discrimination Index: 332.2E In Problem 2.3, if you could exactly a ord either 3 units of x and 24 units of y; or 7 unitsof 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 36b 20c 52d 10e None of the other options are correct.Topic: Budget Constraint Correct Responses: 100Correct Answer: BDi culty: 0Discrimination Index: 02.3E In Problem 2.4, Murphy used to consume 100 units of X and 50 units of Y when the priceof X was 2 and the price of Y was 4. If the price of X rose to 3 and the price of Y rose to 5, howmuch would Murphy's income have to rise so that he could still a ord his original bundle?a 200b 150c 100d 300e None of the other options are correct.CHAPTER 2 Budget ConstraintTopic: Budget Constraint Correct Responses: 88Correct Answer: C632Di culty: 0Discrimination Index: 382.4E In Problem 2.7, Edmund must pay $6 each for punk rock video cassettes. If Edmund ispaid $24 per sack for accepting garbage and if his relatives send him an allowance of $168, then hisbudget line is described by the equationa 6V = 24G.b 6V + 24G = 168.c 6V , 24G = 168.d 6V = 168 , G.e None of the other options are correct.Topic: Budget Constraint Correct Responses: 84Correct Answer: CDi culty: 0Discrimination Index: 132.5E In Problem 2.10, if in the same amount of time that it takes her to read 40 pages of eco-nomics and 30 pages of sociology, Martha could read 20 pages of economics and 110 pages of sociology, then which of these equations describes combinations of pages of economics, E; and sociology,S; that she could read in the time it takes to read 40 pages of economics and 30 pages of sociology?a E + S = 70b E=2 + S = 50c 4E + S = 190d E + S = 130e All of the above.MULTIPLE CHOICETopic: Budget Constraint Correct Responses: 0Correct Answer: A633Di culty: 0Discrimination Index: 02.6E In Problem 2.11, ads in the boring business magazine are read by 300 lawyers and 1,000M.B.A's. Ads in the consumer publication are read by 250 lawyers and 300 M.B.A.s. If Harry had$3,850 to spend on advertising, if the price of ads in the boring business magazine were 700 andthe price of ads in the consumer magazine were 350, then the combinations of recent M.B.A.s andlawyers with hot tubs whom he could reach with his advertising budget would be represented bythe integer values along a line segment that runs between the two pointsa 2; 750; 3; 300 and 1; 650; 5; 500.b 3; 300; 3; 850 and 1; 650; 6; 600.c 0; 3; 300 and 1; 650; 0.d 3; 300; 0 and 0; 6; 600.e 2; 200; 0 and 0; 5; 500.Topic: Budget Constraint Correct Responses: 68Correct Answer: BDi culty: 2Discrimination Index: 752.7E In the economy of Mungo, discussed in Problem 2.12, there is a third person called Ike. Ikehas a red income of 58 and a blue income of 15. Recall that blue ices are 1 bcu blue currencyunit per unit of ambrosia and 1 bcu p p per unit of bubblegum. Red prices are 2 rcus red currencyunits per unit of ambrosia and 6 rcus per unit of bubblegum. You have to pay twice for what youbuy, once in red currency, once in blue currency. If Ike spends all of its blue income, but not allof its red income, then it must be thata it consumes at least 7 units of bubblegum.b it consumes at least 8 units of ambrosia.c it consumes exactly twice as much bubblegum as ambrosia.d it consumes at least 16 units of bubblegum.e it consumes equal amounts of ambrosia and bubblegum.Chapter 3PreferencesMultiple ChoiceTopic: Preferences Correct Responses: 83Correct Answer: CDi culty: 1Discrimination Index: 333.1A In Problem 3.1, Charlie's indi erence curves have the equation xB = constant=xA; wherelarger constants correspond to better indi erence curves. Charlie strictly prefers the bundle 9; 17to the following bundlea 17; 9.b 10; 16.c 11; 11.d all three of these bundles.e none of these bundles.Topic: Preferences Correct Responses: 90Correct Answer: CDi culty: 2Discrimination Index: 223.2A In Problem 3.2, Ambrose has indi erence curves with the equation x = constant , 4x = ;2121where 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 hisconsumption bundle is 1; 13?a ,1=13b ,13=1c ,2d ,14e ,1MULTIPLE CHOICETopic: Preferences Correct Responses: 62Correct Answer: A635Di culty: 2Discrimination Index: 223.3A In Problem 3.8, Nancy Lerner is taking a course from Professor Goodheart who will countonly her best midterm grade and from Professor Stern who will count only her worst midtermgrade. In one of her classes, Nancy has scores of 70 on her rst midterm and 80 on her secondmidterm. When the rst midterm score is measured on the horizontal axis and her second midtermscore on the vertical, her indi erence curve has a slope of zero at the point 70; 80. Therefore itmust be thata 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 there is not enough information to tell whose class it could or couldn't beTopic: Preferences Correct Responses: 79Correct Answer: DDi culty: 2Discrimination Index: 03.4A In Problem 3.9, if we graph Mary Granola's indi erence curves with avocados on the hor-izontal axis and grapefruits on the vertical axis, then whenever she has more grapefruits thanavocados, 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 30grapefruits and another bundle that has 34 avocados anda 26 grapefruits.b 28 grapefruits.c 18 grapefruits.d 22 grapefruits.e 24 grapefruits.CHAPTER 3 PreferencesTopic: Preferences Correct Responses: 68Correct Answer: B636Di culty: 2Discrimination Index: 633.5A In Problem 3.12, recall that Tommy Twit's mother measures the departure of any bundlefrom her favorite bundle for Tommy by the sum of the absolute values of the di erences. Herfavorite bundle for Tommy is 2; 7 , ,that is, 2 cookies and 7 glasses of milk. Tommy's mother'sindi erence curve that passes through the point c; m = 4; 5 also passes througha 6; 3.b the points 2; 3; 6; 7; and 4; 9.c 2; 7.d the points 4; 7; 2; 5; and 2; 9.e None of the other options are correct.Topic: Preferences Correct Responses: 52Correct Answer: EDi culty: 0Discrimination Index: 383.6A In Problem 3.1, Charlie's indi erence curves have the equation xB = constant=xA; wherelarger constants correspond to better indi erence curves. Charlie strictly prefers the bundle 8; 15to the following bundle:a 15; 8b 9; 14c 14; 14d more than one of these options are correct.e none of the above are correct.PreferencesMultiple ChoiceTopic: Preferences Correct Responses: 83Correct Answer: CDi culty: 1Discrimination Index: 333.1B In Problem 3.1, Charlie's indi erence curves have the equation xB = constant=xA; wherelarger constants correspond to better indi erence curves. Charlie strictly prefers the bundle 9; 19to the following bundlea 19; 9.b 10; 18.c 12; 15.d all three of these bundles.e none of these bundles.Topic: Preferences Correct Responses: 90Correct Answer: CDi culty: 2Discrimination Index: 223.2B In Problem 3.2, Ambrose has indi erence curves with the equation x = constant , 4x = ;2121where 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 hisconsumption bundle is 9; 14?a ,9=14b ,14=9c ,0:67d ,17e ,3CHAPTER 3 PreferencesTopic: Preferences Correct Responses: 62Correct Answer: A638Di culty: 2Discrimination Index: 223.3B In Problem 3.8, Nancy Lerner is taking a course from Professor Goodheart who will countonly her best midterm grade and from Professor Stern who will count only her worst midtermgrade. In one of her classes, Nancy has scores of 70 on her rst midterm and 60 on her secondmidterm. When the rst midterm score is measured on the horizontal axis and her second midtermscore on the vertical, her indi erence curve has a slope of zero at the point 70; 60. Therefore itmust be thata 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 there is not enough information to tell whose class it could or couldn't beTopic: Preferences Correct Responses: 79Correct Answer: DDi culty: 2Discrimination Index: 03.4B In Problem 3.9, if we graph Mary Granola's indi erence curves with avocados on the hor-izontal axis and grapefruits on the vertical axis, then whenever she has more grapefruits thanavocados, 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 36grapefruits and another bundle that has 32 avocados anda 28 grapefruits.b 32 grapefruits.c 24 grapefruits.d 26 grapefruits.e 27 grapefruits.MULTIPLE CHOICETopic: Preferences Correct Responses: 68Correct Answer: B639Di culty: 2Discrimination Index: 633.5B In Problem 3.12, recall that Tommy Twit's mother measures the departure of any bundlefrom her favorite bundle for Tommy by the sum of the absolute values of the di erences. Herfavorite bundle for Tommy is 2; 7 , ,that is, 2 cookies and 7 glasses of milk. Tommy's mother'sindi erence curve that passes through the point c; m = 3; 6 also passes througha 4; 5.b the points 2; 5; 4; 7; and 3; 8.c 2; 7.d the points 3; 7; 2; 6; and 2; 8.e None of the other options are correct.Topic: Preferences Correct Responses: 52Correct Answer: EDi culty: 0Discrimination Index: 383.6B In Problem 3.1, Charlie's indi erence curves have the equation xB = constant=xA; wherelarger constants correspond to better indi erence curves. Charlie strictly prefers the bundle 7; 12to the following bundle:a 12; 7b 8; 11c 13; 8d more than one of these options are correct.e none of the above are correct.PreferencesMultiple ChoiceTopic: Preferences Correct Responses: 83Correct Answer: CDi culty: 1Discrimination Index: 333.1C In Problem 3.1, Charlie's indi erence curves have the equation xB = constant=xA; wherelarger constants correspond to better indi erence curves. Charlie strictly prefers the bundle 7; 14to the following bundlea 14; 7.b 8; 13.c 13; 8.d all three of these bundles.e none of these bundles.Topic: Preferences Correct Responses: 90Correct Answer: CDi culty: 2Discrimination Index: 223.2C In Problem 3.2, Ambrose has indi erence curves with the equation x = constant , 4x = ;2121where 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 hisconsumption bundle is 9; 16?a ,9=16b ,16=9c ,0:67d ,19e ,3MULTIPLE CHOICETopic: Preferences Correct Responses: 62Correct Answer: A641Di culty: 2Discrimination Index: 223.3C In Problem 3.8, Nancy Lerner is taking a course from Professor Goodheart who will countonly her best midterm grade and from Professor Stern who will count only her worst midtermgrade. In one of her classes, Nancy has scores of 30 on her rst midterm and 60 on her secondmidterm. When the rst midterm score is measured on the horizontal axis and her second midtermscore on the vertical, her indi erence curve has a slope of zero at the point 30; 60. Therefore itmust be thata 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 there is not enough information to tell whose class it could or couldn't beTopic: Preferences Correct Responses: 79Correct Answer: DDi culty: 2Discrimination Index: 03.4C In Problem 3.9, if we graph Mary Granola's indi erence curves with avocados on the hor-izontal axis and grapefruits on the vertical axis, then whenever she has more grapefruits thanavocados, 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 15 avocados and 30grapefruits and another bundle that has 24 avocados anda 20 grapefruits.b 25 grapefruits.c 16 grapefruits.d 18 grapefruits.e 19 grapefruits.CHAPTER 3 PreferencesTopic: Preferences Correct Responses: 68Correct Answer: B642Di culty: 2Discrimination Index: 633.5C In Problem 3.12, recall that Tommy Twit's mother measures the departure of any bundlefrom her favorite bundle for Tommy by the sum of the absolute values of the di erences. Herfavorite bundle for Tommy is 2; 7 , ,that is, 2 cookies and 7 glasses of milk. Tommy's mother'sindi erence curve that passes through the point c; m = 5; 4 also passes througha 8; 1.b the points 2; 1; 8; 7; and 5; 10.c 2; 7.d the points 5; 7; 2; 4; and 2; 10.e None of the other options are correct.Topic: Preferences Correct Responses: 52Correct Answer: EDi culty: 0Discrimination Index: 383.6C In Problem 3.1, Charlie's indi erence curves have the equation xB = constant=xA; wherelarger constants correspond to better indi erence curves. Charlie strictly prefers the bundle 9; 16to the following bundle:a 16; 9b 10; 15c 15; 13d more than one of these options are correct.e none of the above are correct.PreferencesMultiple ChoiceTopic: Preferences Correct Responses: 83Correct Answer: CDi culty: 1Discrimination Index: 333.1D In Problem 3.1, Charlie's indi erence curves have the equation xB = constant=xA; wherelarger constants correspond to better indi erence curves. Charlie strictly prefers the bundle 7; 12to the following bundlea 12; 7.b 8; 11.c 13; 8.d all three of these bundles.e none of these bundles.Topic: Preferences Correct Responses: 90Correct Answer: CDi culty: 2Discrimination Index: 223.2D In Problem 3.2, Ambrose has indi erence curves with the equation x = constant , 4x = ;2121where 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 hisconsumption bundle is 25; 12?a ,25=12b ,12=25c ,0:40d ,17e ,5CHAPTER 3 PreferencesTopic: Preferences Correct Responses: 62Correct Answer: A644Di culty: 2Discrimination Index: 223.3D In Problem 3.8, Nancy Lerner is taking a course from Professor Goodheart who will countonly her best midterm grade and from Professor Stern who will count only her worst midtermgrade. In one of her classes, Nancy has scores of 20 on her rst midterm and 40 on her secondmidterm. When the rst midterm score is measured on the horizontal axis and her second midtermscore on the vertical, her indi erence curve has a slope of zero at the point 20; 40. Therefore itmust be thata 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 there is not enough information to tell whose class it could or couldn't beTopic: Preferences Correct Responses: 79Correct Answer: DDi culty: 2Discrimination Index: 03.4D In Problem 3.9, if we graph Mary Granola's indi erence curves with avocados on the hor-izontal axis and grapefruits on the vertical axis, then whenever she has more grapefruits thanavocados, 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 26 avocados and 38grapefruits and another bundle that has 34 avocados anda 30 grapefruits.b 34 grapefruits.c 26 grapefruits.d 28 grapefruits.e 29 grapefruits.MULTIPLE CHOICETopic: Preferences Correct Responses: 68Correct Answer: B645Di culty: 2Discrimination Index: 633.5D In Problem 3.12, recall that Tommy Twit's mother measures the departure of any bundlefrom her favorite bundle for Tommy by the sum of the absolute values of the di erences. Herfavorite bundle for Tommy is 2; 7 , ,that is, 2 cookies and 7 glasses of milk. Tommy's mother'sindi erence curve that passes through the point c; m = 5; 4 also passes througha 8; 1.b the points 2; 1; 8; 7; and 5; 10.c 2; 7.d the points 5; 7; 2; 4; and 2; 10.e None of the other options are correct.Topic: Preferences Correct Responses: 52Correct Answer: EDi culty: 0Discrimination Index: 383.6D In Problem 3.1, Charlie's indi erence curves have the equation xB = constant=xA; wherelarger constants correspond to better indi erence curves. Charlie strictly prefers the bundle 7; 15to the following bundle:a 15; 7b 8; 14c 12; 12d more than one of these options are correct.e none of the above are correct.PreferencesMultiple ChoiceTopic: Preferences Correct Responses: 83Correct Answer: CDi culty: 1Discrimination Index: 333.1E In Problem 3.1, Charlie's indi erence curves have the equation xB = constant=xA; wherelarger constants correspond to better indi erence curves. Charlie strictly prefers the bundle 10; 16to the following bundlea 16; 10.b 11; 15.c 14; 13.d all three of these bundles.e none of these bundles.Topic: Preferences Correct Responses: 90Correct Answer: CDi culty: 2Discrimination Index: 223.2E In Problem 3.2, Ambrose has indi erence curves with the equation x = constant , 4x = ;2121where 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 hisconsumption bundle is 49; 11?a ,49=11b ,11=49c ,0:29d ,18e ,7MULTIPLE CHOICETopic: Preferences Correct Responses: 62Correct Answer: A647Di culty: 2Discrimination Index: 223.3E In Problem 3.8, Nancy Lerner is taking a course from Professor Goodheart who will countonly her best midterm grade and from Professor Stern who will count only her worst midtermgrade. In one of her classes, Nancy has scores of 70 on her rst midterm and 40 on her secondmidterm. When the rst midterm score is measured on the horizontal axis and her second midtermscore on the vertical, her indi erence curve has a slope of zero at the point 70; 40. Therefore itmust be thata 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 there is not enough information to tell whose class it could or couldn't beTopic: Preferences Correct Responses: 79Correct Answer: DDi culty: 2Discrimination Index: 03.4E In Problem 3.9, if we graph Mary Granola's indi erence curves with avocados on the hor-izontal axis and grapefruits on the vertical axis, then whenever she has more grapefruits thanavocados, 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 9 avocados and 15grapefruits and another bundle that has 15 avocados anda 11 grapefruits.b 13 grapefruits.c 7 grapefruits.d 9 grapefruits.e 10 grapefruits.CHAPTER 3 PreferencesTopic: Preferences Correct Responses: 68Correct Answer: B648Di culty: 2Discrimination Index: 633.5E In Problem 3.12, recall that Tommy Twit's mother measures the departure of any bundlefrom her favorite bundle for Tommy by the sum of the absolute values of the di erences. Herfavorite bundle for Tommy is 2; 7 , ,that is, 2 cookies and 7 glasses of milk. Tommy's mother'sindi erence curve that passes through the point c; m = 4; 5 also passes througha 6; 3.b the points 2; 3; 6; 7; and 4; 9.c 2; 7.d the points 4; 7; 2; 5; and 2; 9.e None of the other options are correct.Topic: Preferences Correct Responses: 52Correct Answer: EDi culty: 0Discrimination Index: 383.6E In Problem 3.1, Charlie's indi erence curves have the equation xB = constant=xA; wherelarger constants correspond to better indi erence curves. Charlie strictly prefers the bundle 6; 14to the following bundle:a 14; 6b 7; 13c 10; 13d more than one of these options are correct.e none of the above are correct.Chapter 4UtilityMultiple ChoiceTopic: Utility Correct Responses: 0Correct Answer: EDi culty: 1Discrimination Index: 04.1A In Problem 4.1, Charlie has the utility function U xA; xB = xAxB . His indi erence curvepassing through 16 apples and 12 bananas will also pass through the point where he consumes 2apples anda 16 bananas.b 32 bananas.c 98 bananas.d 104 bananas.e 96 bananas.Topic: Utility Correct Responses: 86Correct Answer: BDi culty: 0Discrimination Index: 334.2A In Problem 4.1, Charlie's utility function is U A; B = AB where A and B are the numbersof apples and bananas, respectively, that he consumes. When Charlie is consuming 30 apples and120 bananas, then if we put apples on the horizontal axis and bananas on the vertical axis, theslope of his indi erence curve at his current consumption isa ,31.b ,4.c ,8.d ,1=4.e ,1=8.CHAPTER 4 UtilityTopic: Utility Correct Responses: 76Correct Answer: C650Di culty: 2Discrimination Index: 444.3A In Problem 4.2, Ambrose has the utility function U x ; x = 4x = + x . If Ambrose were112122initially consuming 4 units of nuts good 1 and 20 units of berries good 2; then what is the largestnumber of berries that he would be willing to give up in return for an additional 5 units of nuts.a 3b 23c 4d 2e 1Topic: Utility Correct Responses: 72Correct Answer: CDi culty: 2Discrimination Index: 674.4A Joe Bob, from Problem 4.12 has a cousin Wilfred who consume goods 1 and 2. Wilfredthinks that 2 units of good 1 is always a perfect substitute for 3 units of good 2. Which of thefollowing utility functions is the only one that would NOT represent Wilfred's preferences?a U x1; x2 = 3x1 + 2x2 + 1000.b U x1 ; x2 = 9x2 + 12x1x2 + 4x2.12c U x1; x2 = Minf3x1; 2x2g.d U x1 ; x2 = 30x1 + 20x2 , 10; 000.e More than one of the above does NOT represent Wilfred's preferences.Topic: Utility Correct Responses: 0Correct Answer: EDi culty: 0Discrimination Index: 04.5A In Problem 4.7, Harry Mazzola has the utility function U x ; x = minfx + 2x ; 2x + x g.121212He has $40 to spend on corn chips and french fries, if the price of corn chips is 3 dollars per unitand the price of french fries is 3 dollars per unit, then Harry willa 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.MULTIPLE CHOICETopic: Utility Correct Responses: 86Correct Answer: C651Di culty: 0Discrimination Index: 224.6A Phil Rupp, from Problem 4.4, has a sister Ethel who has the utility function U x; y =minf5x + y; 6yg. Where x is measured on the horizontal axis and y on the vertical axis, her indif-ference curvesa 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 linex = 5y.c consist of a horizontal line segment and a negatively sloped line segment which meet in a kink along theline x = y.d consist of a positively sloped line segment and a negatively sloped line segment which meet along theline x = y.e consist of a horizontal line segment and a positively sloped line segment which meet in a kink along theline x = 5y.UtilityMultiple ChoiceTopic: Utility Correct Responses: 0Correct Answer: EDi culty: 1Discrimination Index: 04.1B In Problem 4.1, Charlie has the utility function U xA; xB = xAxB . His indi erence curvepassing through 16 apples and 16 bananas will also pass through the point where he consumes 2apples anda 16 bananas.b 32 bananas.c 130 bananas.d 138 bananas.e 128 bananas.Topic: Utility Correct Responses: 86Correct Answer: BDi culty: 0Discrimination Index: 334.2B In Problem 4.1, Charlie's utility function is U A; B = AB where A and B are the numbersof apples and bananas, respectively, that he consumes. When Charlie is consuming 20 apples and80 bananas, then if we put apples on the horizontal axis and bananas on the vertical axis, the slopeof his indi erence curve at his current consumption isa ,21.b ,4.c ,8.d ,1=4.e ,1=8.MULTIPLE CHOICETopic: Utility Correct Responses: 76Correct Answer: C653Di culty: 2Discrimination Index: 444.3B In Problem 4.2, Ambrose has the utility function U x ; x = 4x = + x . If Ambrose were112122initially consuming 36 units of nuts good 1 and 28 units of berries good 2; then what is thelargest number of berries that he would be willing to give up in return for an additional 85 unitsof nuts.a 11b 39c 20d 10e 5Topic: Utility Correct Responses: 72Correct Answer: CDi culty: 2Discrimination Index: 674.4B Joe Bob, from Problem 4.12 has a cousin Norbert who consume goods 1 and 2. Norbertthinks that 3 units of good 1 is always a perfect substitute for 4 units of good 2. Which of thefollowing utility functions is the only one that would NOT represent Norbert's preferences?a U x1; x2 = 4x1 + 3x2 + 1000.b U x1 ; x2 = 16x2 + 24x1x2 + 9x2.12c U x1; x2 = Minf4x1; 3x2g.d U x1 ; x2 = 40x1 + 30x2 , 10; 000.e More than one of the above does NOT represent Norbert's preferences.Topic: Utility Correct Responses: 0Correct Answer: EDi culty: 0Discrimination Index: 04.5B In Problem 4.7, Harry Mazzola has the utility function U x ; x = minfx + 2x ; 2x + x g.121212He has $40 to spend on corn chips and french fries, if the price of corn chips is 4 dollars per unitand the price of french fries is 3 dollars per unit, then Harry willa 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 UtilityTopic: Utility Correct Responses: 86Correct Answer: C654Di culty: 0Discrimination Index: 224.6B Phil Rupp, from Problem 4.4, has a sister Ethel who has the utility function U x; y =minf4x + y; 5yg. Where x is measured on the horizontal axis and y on the vertical axis, her indif-ference curvesa 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 linex = 4y.c consist of a horizontal line segment and a negatively sloped line segment which meet in a kink along theline x = y.d consist of a positively sloped line segment and a negatively sloped line segment which meet along theline x = y.e consist of a horizontal line segment and a positively sloped line segment which meet in a kink along theline x = 4y.UtilityMultiple ChoiceTopic: Utility Correct Responses: 0Correct Answer: EDi culty: 1Discrimination Index: 04.1C In Problem 4.1, Charlie has the utility function U xA; xB = xAxB . His indi erence curvepassing through 14 apples and 70 bananas will also pass through the point where he consumes 2apples anda 49 bananas.b 98 bananas.c 492 bananas.d 502 bananas.e 490 bananas.Topic: Utility Correct Responses: 86Correct Answer: BDi culty: 0Discrimination Index: 334.2C In Problem 4.1, Charlie's utility function is U A; B = AB where A and B are the numbersof apples and bananas, respectively, that he consumes. When Charlie is consuming 40 apples and120 bananas, then if we put apples on the horizontal axis and bananas on the vertical axis, theslope of his indi erence curve at his current consumption isa ,41.b ,3.c ,6.d ,1=3.e ,1=6.CHAPTER 4 UtilityTopic: Utility Correct Responses: 76Correct Answer: C656Di culty: 2Discrimination Index: 444.3C In Problem 4.2, Ambrose has the utility function U x ; x = 4x = + x . If Ambrose were112122initially consuming 49 units of nuts good 1 and 16 units of berries good 2; then what is thelargest number of berries that he would be willing to give up in return for an additional 51 unitsof nuts.a 10b 26c 12d 6e 3Topic: Utility Correct Responses: 72Correct Answer: CDi culty: 2Discrimination Index: 674.4C Joe Bob, from Problem 4.12 has a cousin Lawrence who consume goods 1 and 2. Lawrencethinks that 2 units of good 1 is always a perfect substitute for 3 units of good 2. Which of thefollowing utility functions is the only one that would NOT represent Lawrence's preferences?a U x1; x2 = 3x1 + 2x2 + 1000.b U x1 ; x2 = 9x2 + 12x1x2 + 4x2.12c U x1; x2 = Minf3x1; 2x2g.d U x1 ; x2 = 30x1 + 20x2 , 10; 000.e More than one of the above does NOT represent Lawrence's preferences.Topic: Utility Correct Responses: 0Correct Answer: EDi culty: 0Discrimination Index: 04.5C In Problem 4.7, Harry Mazzola has the utility function U x ; x = minfx + 2x ; 2x + x g.121212He has $40 to spend on corn chips and french fries, if the price of corn chips is 4 dollars per unitand the price of french fries is 2 dollars per unit, then Harry willa 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.MULTIPLE CHOICETopic: Utility Correct Responses: 86Correct Answer: C657Di culty: 0Discrimination Index: 224.6C Phil Rupp, from Problem 4.4, has a sister Ethel who has the utility function U x; y =minf4x + y; 5yg. Where x is measured on the horizontal axis and y on the vertical axis, her indif-ference curvesa 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 linex = 4y.c consist of a horizontal line segment and a negatively sloped line segment which meet in a kink along theline x = y.d consist of a positively sloped line segment and a negatively sloped line segment which meet along theline x = y.e consist of a horizontal line segment and a positively sloped line segment which meet in a kink along theline x = 4y.UtilityMultiple ChoiceTopic: Utility Correct Responses: 0Correct Answer: EDi culty: 1Discrimination Index: 04.1D In Problem 4.1, Charlie has the utility function U xA; xB = xAxB . His indi erence curvepassing through 10 apples and 50 bananas will also pass through the point where he consumes 2apples anda 25 bananas.b 50 bananas.c 252 bananas.d 262 bananas.e 250 bananas.Topic: Utility Correct Responses: 86Correct Answer: BDi culty: 0Discrimination Index: 334.2D In Problem 4.1, Charlie's utility function is U A; B = AB where A and B are the numbersof apples and bananas, respectively, that he consumes. When Charlie is consuming 30 apples and60 bananas, then if we put apples on the horizontal axis and bananas on the vertical axis, the slopeof his indi erence curve at his current consumption isa ,31.b ,2.c ,4.d ,1=2.e ,1=4.MULTIPLE CHOICETopic: Utility Correct Responses: 76Correct Answer: C659Di culty: 2Discrimination Index: 444.3D In Problem 4.2, Ambrose has the utility function U x ; x = 4x = + x . If Ambrose were112122initially consuming 16 units of nuts good 1 and 30 units of berries good 2; then what is thelargest number of berries that he would be willing to give up in return for an additional 33 unitsof nuts.a 7b 37c 12d 6e 3Topic: Utility Correct Responses: 72Correct Answer: CDi culty: 2Discrimination Index: 674.4D Joe Bob, from Problem 4.12 has a cousin Ed who consume goods 1 and 2. Ed thinks that3 units of good 1 is always a perfect substitute for 4 units of good 2. Which of the following utilityfunctions is the only one that would NOT represent Ed's preferences?a U x1; x2 = 4x1 + 3x2 + 1000.b U x1 ; x2 = 16x2 + 24x1x2 + 9x2.12c U x1; x2 = Minf4x1; 3x2g.d U x1 ; x2 = 40x1 + 30x2 , 10; 000.e More than one of the above does NOT represent Ed's preferences.Topic: Utility Correct Responses: 0Correct Answer: EDi culty: 0Discrimination Index: 04.5D In Problem 4.7, Harry Mazzola has the utility function U x ; x = minfx + 2x ; 2x + x g.121212He has $40 to spend on corn chips and french fries, if the price of corn chips is 2 dollars per unitand the price of french fries is 4 dollars per unit, then Harry willa 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 UtilityTopic: Utility Correct Responses: 86Correct Answer: C660Di culty: 0Discrimination Index: 224.6D Phil Rupp, from Problem 4.4, has a sister Ethel who has the utility function U x; y =minf5x + y; 6yg. Where x is measured on the horizontal axis and y on the vertical axis, her indif-ference curvesa 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 linex = 5y.c consist of a horizontal line segment and a negatively sloped line segment which meet in a kink along theline x = y.d consist of a positively sloped line segment and a negatively sloped line segment which meet along theline x = y.e consist of a horizontal line segment and a positively sloped line segment which meet in a kink along theline x = 5y.UtilityMultiple ChoiceTopic: Utility Correct Responses: 0Correct Answer: EDi culty: 1Discrimination Index: 04.1E In Problem 4.1, Charlie has the utility function U xA; xB = xAxB . His indi erence curvepassing through 16 apples and 15 bananas will also pass through the point where he consumes 4apples anda 12 bananas.b 24 bananas.c 64 bananas.d 69 bananas.e 60 bananas.Topic: Utility Correct Responses: 86Correct Answer: BDi culty: 0Discrimination Index: 334.2E In Problem 4.1, Charlie's utility function is U A; B = AB where A and B are the numbersof apples and bananas, respectively, that he consumes. When Charlie is consuming 25 apples and125 bananas, then if we put apples on the horizontal axis and bananas on the vertical axis, theslope of his indi erence curve at his current consumption isa ,26.b ,5.c ,10.d ,1=5.e ,1=10.CHAPTER 4 UtilityTopic: Utility Correct Responses: 76Correct Answer: C662Di culty: 2Discrimination Index: 444.3E In Problem 4.2, Ambrose has the utility function U x ; x = 4x = + x . If Ambrose were112122initially consuming 9 units of nuts good 1 and 21 units of berries good 2; then what is the largestnumber of berries that he would be willing to give up in return for an additional 16 units of nuts.a 5b 26c 8d 4e 2Topic: Utility Correct Responses: 72Correct Answer: CDi culty: 2Discrimination Index: 674.4E Joe Bob, from Problem 4.12 has a cousin Pete who consume goods 1 and 2. Pete thinksthat 3 units of good 1 is always a perfect substitute for 4 units of good 2. Which of the followingutility functions is the only one that would NOT represent Pete's preferences?a U x1; x2 = 4x1 + 3x2 + 1000.b U x1 ; x2 = 16x2 + 24x1x2 + 9x2.12c U x1; x2 = Minf4x1; 3x2g.d U x1 ; x2 = 40x1 + 30x2 , 10; 000.e More than one of the above does NOT represent Pete's preferences.Topic: Utility Correct Responses: 0Correct Answer: EDi culty: 0Discrimination Index: 04.5E In Problem 4.7, Harry Mazzola has the utility function U x ; x = minfx + 2x ; 2x + x g.121212He has $40 to spend on corn chips and french fries, if the price of corn chips is 1 dollars per unitand the price of french fries is 3 dollars per unit, then Harry willa 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.MULTIPLE CHOICETopic: Utility Correct Responses: 86Correct Answer: C663Di culty: 0Discrimination Index: 224.6E Phil Rupp, from Problem 4.4, has a sister Ethel who has the utility function U x; y =minf2x + y; 3yg. Where x is measured on the horizontal axis and y on the vertical axis, her indif-ference curvesa consist of a vertical line segment and a horizontal line segment which meet in a kink along the line y = 2x.b consist of a vertical line segment and a horizontal line segment which meet in a kink along the linex = 2y.c consist of a horizontal line segment and a negatively sloped line segment which meet in a kink along theline x = y.d consist of a positively sloped line segment and a negatively sloped line segment which meet along theline x = y.e consist of a horizontal line segment and a positively sloped line segment which meet in a kink along theline x = 2y.Chapter 5ChoiceMultiple ChoiceTopic: Choice Correct Responses: 0Correct Answer: ADi culty: 0Discrimination Index: 05.1A In Problem 5.1, Charlie has a utility function U xA; xB = xAxB ; the price of apples is 1and the price of bananas is 2. If Charlie's income were 320, how many units of bananas would heconsume if he chooses the bundle that maximizes his utility subject to his budget constraint?a 80b 40c 160d 16e 240Topic: Choice Correct Responses: 100Correct Answer: EDi culty: 0Discrimination Index: 05.2A Charlie's utility function is U xA; xB = xAxB . If Charlie's income were 40, the price ofapples were 4 and the price of bananas were 6, how many apples would there be in the best bundlethat Charlie could a ord?a 10b 12c 8d 9e 5MULTIPLE CHOICETopic: Choice Correct Responses: 88Correct Answer: D665Di culty: 0Discrimination Index: 385.3A In Problem 5.2, Clara's utility function is U X; Y = X +2Y +1. If Clara's marginal rateof substitution is ,2 and she is consuming 11 units of Good X; how many units of good Y is sheconsuming?a 2b 26c 13d 25e 5Topic: Choice Correct Responses: 0Correct Answer: BDi culty: 0Discrimination Index: 05.4A In Problem 5.3, Ambrose's utility is U x ; x = 4x = + x . If the price of nuts good 1 is1212121, the price of berries good 2 is 3, and his income is 96, how many units of NUTS will Ambrosechoose.a 20b 36c 72d 39e 18Topic: Choice Correct Responses: 92Correct Answer: BDi culty: 0Discrimination Index: 255.5A Ambrose's utility function is 4x = + x . If the price of nuts good 1 is 1, the price of berries1212good 2 is 3, and his income is 51, how many units of BERRIES will Ambrose choose?a 37b 5c 10d 4e 8CHAPTER 5 ChoiceTopic: Choice Correct Responses: 76Correct Answer: D666Di culty: 0Discrimination Index: 635.6A In Problem 5.6, Elmer's utility function is U x; y = minfx; y g. If the price of x is 15, the2price of y is 25, and Elmer chooses to consume 7 units of Y; what must Elmer's income be?a 1,820b 280c 1,010d 910e There is not enough information to tell.Topic: Choice Correct Responses: 0Correct Answer: ADi culty: 0Discrimination Index: 05.7A In Problem 5.7, what bundle would Linus choose if the price of x is 2, the price of y is 4and his income is 24?a 0; 6b 12; 0c 12; 6d 6; 3e 6; 6ChoiceMultiple ChoiceTopic: Choice Correct Responses: 0Correct Answer: ADi culty: 0Discrimination Index: 05.1B In Problem 5.1, Charlie has a utility function U xA; xB = xAxB ; the price of apples is 1and the price of bananas is 2. If Charlie's income were 80, how many units of bananas would heconsume if he chooses the bundle that maximizes his utility subject to his budget constraint?a 20b 10c 40d 4e 60Topic: Choice Correct Responses: 100Correct Answer: EDi culty: 0Discrimination Index: 05.2B Charlie's utility function is U xA; xB = xAxB . If Charlie's income were 40, the price ofapples were 3 and the price of bananas were 2, how many apples would there be in the best bundlethat Charlie could a ord?a 13.33b 9c 6d 7e 6.67CHAPTER 5 ChoiceTopic: Choice Correct Responses: 88Correct Answer: D668Di culty: 0Discrimination Index: 385.3B In Problem 5.2, Clara's utility function is U X; Y = X +2Y +1. If Clara's marginal rateof substitution is ,6 and she is consuming 10 units of Good X; how many units of good Y is sheconsuming?a 6b 72c 16d 71e 13Topic: Choice Correct Responses: 0Correct Answer: BDi culty: 0Discrimination Index: 05.4B In Problem 5.3, Ambrose's utility is U x ; x = 4x = + x . If the price of nuts good 1 is1212121, the price of berries good 2 is 8, and his income is 304, how many units of NUTS will Ambrosechoose.a 6b 256c 512d 259e 128Topic: Choice Correct Responses: 92Correct Answer: BDi culty: 0Discrimination Index: 255.5B Ambrose's utility function is 4x = + x . If the price of nuts good 1 is 1, the price of berries1212good 2 is 9, and his income is 459, how many units of BERRIES will Ambrose choose?a 325b 15c 30d 14e 18MULTIPLE CHOICETopic: Choice Correct Responses: 76Correct Answer: D669Di culty: 0Discrimination Index: 635.6B In Problem 5.6, Elmer's utility function is U x; y = minfx; y g. If the price of x is 20, the2price of y is 15, and Elmer chooses to consume 3 units of Y; what must Elmer's income be?a 450b 105c 325d 225e There is not enough information to tell.Topic: Choice Correct Responses: 0Correct Answer: ADi culty: 0Discrimination Index: 05.7A In Problem 5.7, what bundle would Linus choose if the price of x is 2, the price of y is 4and his income is 24?a 0; 6b 12; 0c 12; 6d 6; 3e 6; 6ChoiceMultiple ChoiceTopic: Choice Correct Responses: 0Correct Answer: ADi culty: 0Discrimination Index: 05.1C In Problem 5.1, Charlie has a utility function U xA; xB = xAxB ; the price of apples is 1and the price of bananas is 2. If Charlie's income were 240, how many units of bananas would heconsume if he chooses the bundle that maximizes his utility subject to his budget constraint?a 60b 30c 120d 12e 180Topic: Choice Correct Responses: 100Correct Answer: EDi culty: 0Discrimination Index: 05.2C Charlie's utility function is U xA; xB = xAxB . If Charlie's income were 40, the price ofapples were 3 and the price of bananas were 7, how many apples would there be in the best bundlethat Charlie could a ord?a 13.33b 9c 6d 7e 6.67MULTIPLE CHOICETopic: Choice Correct Responses: 88Correct Answer: D671Di culty: 0Discrimination Index: 385.3C In Problem 5.2, Clara's utility function is U X; Y = X +2Y +1. If Clara's marginal rateof substitution is ,6 and she is consuming 13 units of Good X; how many units of good Y is sheconsuming?a 6b 90c 19d 89e 13Topic: Choice Correct Responses: 0Correct Answer: BDi culty: 0Discrimination Index: 05.4C In Problem 5.3, Ambrose's utility is U x ; x = 4x = + x . If the price of nuts good 1 is1212121, the price of berries good 2 is 2, and his income is 44, how many units of NUTS will Ambrosechoose.a 14b 16c 32d 19e 8Topic: Choice Correct Responses: 92Correct Answer: BDi culty: 0Discrimination Index: 255.5C Ambrose's utility function is 4x = + x . If the price of nuts good 1 is 1, the price of berries1212good 2 is 7, and his income is 336, how many units of BERRIES will Ambrose choose?a 197b 20c 40d 19e 23CHAPTER 5 ChoiceTopic: Choice Correct Responses: 76Correct Answer: D672Di culty: 0Discrimination Index: 635.6C In Problem 5.6, Elmer's utility function is U x; y = minfx; y g. If the price of x is 10, the2price of y is 25, and Elmer chooses to consume 2 units of Y; what must Elmer's income be?a 180b 70c 190d 90e There is not enough information to tell.Topic: Choice Correct Responses: 0Correct Answer: ADi culty: 0Discrimination Index: 05.7A In Problem 5.7, what bundle would Linus choose if the price of x is 2, the price of y is 4and his income is 24?a 0; 6b 12; 0c 12; 6d 6; 3e 6; 6ChoiceMultiple ChoiceTopic: Choice Correct Responses: 0Correct Answer: ADi culty: 0Discrimination Index: 05.1D In Problem 5.1, Charlie has a utility function U xA; xB = xAxB ; the price of apples is 1and the price of bananas is 2. If Charlie's income were 320, how many units of bananas would heconsume if he chooses the bundle that maximizes his utility subject to his budget constraint?a 80b 40c 160d 16e 240Topic: Choice Correct Responses: 100Correct Answer: EDi culty: 0Discrimination Index: 05.2D Charlie's utility function is U xA; xB = xAxB . If Charlie's income were 40, the price ofapples were 5 and the price of bananas were 7, how many apples would there be in the best bundlethat Charlie could a ord?a 8b 15c 10d 11e 4CHAPTER 5 ChoiceTopic: Choice Correct Responses: 88Correct Answer: D674Di culty: 0Discrimination Index: 385.3D In Problem 5.2, Clara's utility function is U X; Y = X +2Y +1. If Clara's marginal rateof substitution is ,3 and she is consuming 14 units of Good X; how many units of good Y is sheconsuming?a 3b 48c 17d 47e 7Topic: Choice Correct Responses: 0Correct Answer: BDi culty: 0Discrimination Index: 05.4D In Problem 5.3, Ambrose's utility is U x ; x = 4x = + x . If the price of nuts good 1 is1212121, the price of berries good 2 is 8, and his income is 272, how many units of NUTS will Ambrosechoose.a 2b 256c 512d 259e 128Topic: Choice Correct Responses: 92Correct Answer: BDi culty: 0Discrimination Index: 255.5D Ambrose's utility function is 4x = + x . If the price of nuts good 1 is 1, the price of berries1212good 2 is 4, and his income is 112, how many units of BERRIES will Ambrose choose?a 65b 12c 24d 11e 15MULTIPLE CHOICETopic: Choice Correct Responses: 76Correct Answer: D675Di culty: 0Discrimination Index: 635.6D In Problem 5.6, Elmer's utility function is U x; y = minfx; y g. If the price of x is 25, the2price of y is 15, and Elmer chooses to consume 5 units of Y; what must Elmer's income be?a 1,400b 200c 800d 700e There is not enough information to tell.Topic: Choice Correct Responses: 0Correct Answer: ADi culty: 0Discrimination Index: 05.7A In Problem 5.7, what bundle would Linus choose if the price of x is 2, the price of y is 4and his income is 24?a 0; 6b 12; 0c 12; 6d 6; 3e 6; 6ChoiceMultiple ChoiceTopic: Choice Correct Responses: 0Correct Answer: ADi culty: 0Discrimination Index: 05.1E In Problem 5.1, Charlie has a utility function U xA; xB = xAxB ; the price of apples is 1and the price of bananas is 2. If Charlie's income were 160, how many units of bananas would heconsume if he chooses the bundle that maximizes his utility subject to his budget constraint?a 40b 20c 80d 8e 120Topic: Choice Correct Responses: 100Correct Answer: EDi culty: 0Discrimination Index: 05.2E Charlie's utility function is U xA; xB = xAxB . If Charlie's income were 40, the price ofapples were 5 and the price of bananas were 2, how many apples would there be in the best bundlethat Charlie could a ord?a 8b 15c 10d 11e 4MULTIPLE CHOICETopic: Choice Correct Responses: 88Correct Answer: D677Di culty: 0Discrimination Index: 385.3E In Problem 5.2, Clara's utility function is U X; Y = X +2Y +1. If Clara's marginal rateof substitution is ,2 and she is consuming 10 units of Good X; how many units of good Y is sheconsuming?a 2b 24c 12d 23e 5Topic: Choice Correct Responses: 0Correct Answer: BDi culty: 0Discrimination Index: 05.4E In Problem 5.3, Ambrose's utility is U x ; x = 4x = + x . If the price of nuts good 1 is1212121, the price of berries good 2 is 3, and his income is 81, how many units of NUTS will Ambrosechoose.a 15b 36c 72d 39e 18Topic: Choice Correct Responses: 92Correct Answer: BDi culty: 0Discrimination Index: 255.5E Ambrose's utility function is 4x = + x . If the price of nuts good 1 is 1, the price of berries1212good 2 is 9, and his income is 423, how many units of BERRIES will Ambrose choose?a 325b 11c 22d 10e 14CHAPTER 5 ChoiceTopic: Choice Correct Responses: 76Correct Answer: D678Di culty: 0Discrimination Index: 635.6E In Problem 5.6, Elmer's utility function is U x; y = minfx; y g. If the price of x is 15, the2price of y is 10, and Elmer chooses to consume 4 units of Y; what must Elmer's income be?a 560b 100c 380d 280e There is not enough information to tell.Topic: Choice Correct Responses: 0Correct Answer: ADi culty: 0Discrimination Index: 05.7A In Problem 5.7, what bundle would Linus choose if the price of x is 2, the price of y is 4and his income is 24?a 0; 6b 12; 0c 12; 6d 6; 3e 6; 6Chapter 6DemandMultiple ChoiceTopic: Demand Correct Responses: 88Correct Answer: ADi culty: 0Discrimination Index: 386.1A In Problem 6.1, if Charlie's utility function were XA XB ; if apples cost 40 cents each and6bananas cost 10 cents each, Charlie's budget line would be tangent to one of his indi erence curveswhenever the following equation is satis ed:a 6XB = 4XAb XB = XAc XA = 6XBd XB = 6XAe 40XA + 10XB = MTopic: Demand Correct Responses: 0Correct Answer: DDi culty: 0Discrimination Index: 06.2A In Problem 6.1, if Charlie's utility function were XAXB ; if the price of apples were pA; the2price of bananas were pB ; and his income were m; then Charlie's demand for apples would bea m=2pA .b 0:50pAm.c m=pA + pB .d 0:67m=pA.e 1:50pB m=pA .CHAPTER 6 DemandTopic: Demand Correct Responses: 92Correct Answer: D680Di culty: 0Discrimination Index: 256.3A Ambrose's brother Anselm has income 265 and a utility function U x ; x = 70x = + x .121212The price of good 1 nuts is 5 and the price of good 2 berries is 1. How many units of nuts willAnselm demand?a 59b 45c 47d 49e 96Topic: Demand Correct Responses: 0Correct Answer: ADi culty: 0Discrimination Index: 06.4A Ambrose's brother Augustine has income 128 and a utility function U x ; x = 36x = + x .121212The price of nuts is 3 and the price of berries is 1. How many units of berries will Augustinedemand?a 20b 36c 40d 42e There is not enough information to determine the answer.Topic: Demand Correct Responses: 80Correct Answer: EDi culty: 0Discrimination Index: 506.5A In Problem 6.6, recall that Miss Mu ett insists on consuming 2 units of whey per unit ofcurds. If the price of curds is 5 and the price of whey is 5, then if Miss Mu ett's income is m; herdemand for curds will bea m=5.b 5m=5.c 5C + 5W = m.d 5m.e m=15.MULTIPLE CHOICETopic: Demand Correct Responses: 68Correct Answer: B681Di culty: 0Discrimination Index: 636.6A In Problem 6.8, recall that Casper's utility function is 3x + y; where x is his consumptionof cocoa and y is his consumption of cheese. If the total cost of x units of cocoa is x2; if the priceof cheese is 8, and Casper0 s income is $159, how many units of cocoa will he consume?a 9b 12c 23d 11e 24Topic: Demand Correct Responses: 0Correct Answer: DDi culty: 3Discrimination Index: 06.7A In Problem 6.13, where x is whips and y is leather jackets, if Kinko's utility function wereU x; y = Minf5x; 3x + 6yg; then if the price of whips were $20 and the price of leather jackets were$ 20, Kinko would demanda 5 times as many whips as leather jackets.b 4 times as many leather jackets as whips.c 2 times as many leather jackets as whips.d 3 times as many whips as leather jackets.e only leather jackets.Topic: Demand Correct Responses: 0Correct Answer: BDi culty: 0Discrimination Index: 06.8A In Problem 6.7, suppose that it takes 2 square feet to grow a cockle shell and 5 square feetto grow a silver bell in Mary's garden. If her space had initially been 90 square feet and increasedto 120 square feet:a she would only increase her planting of silver bellsb she would plant more silver bells and more cockle shellsc she would only increase her planting of cockle shellsd cockle shells would be an inferior goode she would increase her planting of cockle shells and decrease her planting of silver bellsDemandMultiple ChoiceTopic: Demand Correct Responses: 88Correct Answer: ADi culty: 0Discrimination Index: 386.1B In Problem 6.1, if Charlie's utility function were XA XB ; if apples cost 60 cents each and3bananas cost 10 cents each, Charlie's budget line would be tangent to one of his indi erence curveswhenever the following equation is satis ed:a 3XB = 6XAb XB = XAc XA = 3XBd XB = 3XAe 60XA + 10XB = MTopic: Demand Correct Responses: 0Correct Answer: DDi culty: 0Discrimination Index: 06.2B In Problem 6.1, if Charlie's utility function were XAXB ; if the price of apples were pA; the5price of bananas were pB ; and his income were m; then Charlie's demand for apples would bea m=2pA .b 0:20pAm.c m=pA + pB .d 0:83m=pA.e 1:20pB m=pA .Topic: Demand Correct Responses: 92Correct Answer: DDi culty: 0Discrimination Index: 256.3B Ambrose's brother Thomas has income 90 and a utility function U x ; x = 20x = + x .121212The price of good 1 nuts is 2 and the price of good 2 berries is 1. How many units of nuts willThomas demand?a 35b 21c 23d 25e 48MULTIPLE CHOICETopic: Demand Correct Responses: 0Correct Answer: A683Di culty: 0Discrimination Index: 06.4B Ambrose's brother Anselm has income 51 and a utility function U x ; x = 16x = + x . The121212price of nuts is 4 and the price of berries is 1. How many units of berries will Anselm demand?a 35b 4c 70d 10e There is not enough information to determine the answer.Topic: Demand Correct Responses: 80Correct Answer: EDi culty: 0Discrimination Index: 506.5B In Problem 6.6, recall that Miss Mu ett insists on consuming 2 units of whey per unit ofcurds. If the price of curds is 1 and the price of whey is 6, then if Miss Mu ett's income is m; herdemand for curds will bea m=1.b 6m=1.c 1C + 6W = m.d 1m.e m=13.Topic: Demand Correct Responses: 68Correct Answer: BDi culty: 0Discrimination Index: 636.6B In Problem 6.8, recall that Casper's utility function is 3x + y; where x is his consumptionof cocoa and y is his consumption of cheese. If the total cost of x units of cocoa is x2; if the priceof cheese is 10, and Casper's income is $240, how many units of cocoa will he consume?a 12b 15c 29d 14e 30CHAPTER 6 DemandTopic: Demand Correct Responses: 0Correct Answer: D684Di culty: 3Discrimination Index: 06.7B In Problem 6.13, where x is whips and y is leather jackets, if Kinko's utility function wereU x; y = Minf9x; 4x +20yg; then if the price of whips were $20 and the price of leather jackets were$ 80, Kinko would demanda 6 times as many whips as leather jackets.b 5 times as many leather jackets as whips.c 3 times as many leather jackets as whips.d 4 times as many whips as leather jackets.e only leather jackets.Topic: Demand Correct Responses: 0Correct Answer: BDi culty: 0Discrimination Index: 06.8A In Problem 6.7, suppose that it takes 2 square feet to grow a cockle shell and 5 square feetto grow a silver bell in Mary's garden. If her space had initially been 90 square feet and increasedto 120 square feet:a she would only increase her planting of silver bellsb she would plant more silver bells and more cockle shellsc she would only increase her planting of cockle shellsd cockle shells would be an inferior goode she would increase her planting of cockle shells and decrease her planting of silver bellsDemandMultiple ChoiceTopic: Demand Correct Responses: 88Correct Answer: ADi culty: 0Discrimination Index: 386.1C In Problem 6.1, if Charlie's utility function were XA XB ; if apples cost 80 cents each and3bananas cost 10 cents each, Charlie's budget line would be tangent to one of his indi erence curveswhenever the following equation is satis ed:a 3XB = 8XAb XB = XAc XA = 3XBd XB = 3XAe 80XA + 10XB = MTopic: Demand Correct Responses: 0Correct Answer: DDi culty: 0Discrimination Index: 06.2C In Problem 6.1, if Charlie's utility function were XA XB ; if the price of apples were pA; the2price of bananas were pB ; and his income were m; then Charlie's demand for apples would bea m=2pA .b 0:50pAm.c m=pA + pB .d 0:67m=pA.e 1:50pB m=pA .Topic: Demand Correct Responses: 92Correct Answer: DDi culty: 0Discrimination Index: 256.3C Ambrose's brother Bartholomew has income 109 and a utility function U x ; x = 32x = +x .121212The price of good 1 nuts is 4 and the price of good 2 berries is 1. How many units of nuts willBartholomew demand?a 26b 12c 14d 16e 30CHAPTER 6 DemandTopic: Demand Correct Responses: 0Correct Answer: A686Di culty: 0Discrimination Index: 06.4C Ambrose's brother Sebastian has income 60 and a utility function U x ; x = 20x = + x .121212The price of nuts is 2 and the price of berries is 1. How many units of berries will Sebastian demand?a 10b 25c 20d 31e There is not enough information to determine the answer.Topic: Demand Correct Responses: 80Correct Answer: EDi culty: 0Discrimination Index: 506.5C In Problem 6.6, recall that Miss Mu ett insists on consuming 2 units of whey per unit ofcurds. If the price of curds is 2 and the price of whey is 2, then if Miss Mu ett's income is m; herdemand for curds will bea m=2.b 2m=2.c 2C + 2W = m.d 2m.e m=6.Topic: Demand Correct Responses: 68Correct Answer: BDi culty: 0Discrimination Index: 636.6C In Problem 6.8, recall that Casper's utility function is 3x + y; where x is his consumptionof cocoa and y is his consumption of cheese. If the total cost of x units of cocoa is x2; if the priceof cheese is 2, and Casper0 s income is $34, how many units of cocoa will he consume?a 0b 3c 5d 2e 6MULTIPLE CHOICETopic: Demand Correct Responses: 0Correct Answer: D687Di culty: 3Discrimination Index: 06.7C In Problem 6.13, where x is whips and y is leather jackets, if Kinko's utility function wereU x; y = Minf6x; 4x + 8yg; then if the price of whips were $20 and the price of leather jackets were$ 20, Kinko would demanda 6 times as many whips as leather jackets.b 5 times as many leather jackets as whips.c 3 times as many leather jackets as whips.d 4 times as many whips as leather jackets.e only leather jackets.Topic: Demand Correct Responses: 0Correct Answer: BDi culty: 0Discrimination Index: 06.8A In Problem 6.7, suppose that it takes 2 square feet to grow a cockle shell and 5 square feetto grow a silver bell in Mary's garden. If her space had initially been 90 square feet and increasedto 120 square feet:a she would only increase her planting of silver bellsb she would plant more silver bells and more cockle shellsc she would only increase her planting of cockle shellsd cockle shells would be an inferior goode she would increase her planting of cockle shells and decrease her planting of silver bellsDemandMultiple ChoiceTopic: Demand Correct Responses: 88Correct Answer: ADi culty: 0Discrimination Index: 386.1D In Problem 6.1, if Charlie's utility function were XA XB ; if apples cost 20 cents each and5bananas cost 10 cents each, Charlie's budget line would be tangent to one of his indi erence curveswhenever the following equation is satis ed:a 5XB = 2XAb XB = XAc XA = 5XBd XB = 5XAe 20XA + 10XB = MTopic: Demand Correct Responses: 0Correct Answer: DDi culty: 0Discrimination Index: 06.2D In Problem 6.1, if Charlie's utility function were XA XB ; if the price of apples were pA; the2price of bananas were pB ; and his income were m; then Charlie's demand for apples would bea m=2pA .b 0:50pAm.c m=pA + pB .d 0:67m=pA.e 1:50pB m=pA .Topic: Demand Correct Responses: 92Correct Answer: DDi culty: 0Discrimination Index: 256.3D Ambrose's brother Anthony has income 114 and a utility function U x ; x = 32x = + x .121212The price of good 1 nuts is 4 and the price of good 2 berries is 1. How many units of nuts willAnthony demand?a 26b 12c 14d 16e 30MULTIPLE CHOICETopic: Demand Correct Responses: 0Correct Answer: A689Di culty: 0Discrimination Index: 06.4D Ambrose's brother Bartholomew has income 281 and a utility function U x ; x = 64x = +12121x2. The price of nuts is 4 and the price of berries is 1. How many units of berries will Bartholomewdemand?a 25b 64c 50d 70e There is not enough information to determine the answer.Topic: Demand Correct Responses: 80Correct Answer: EDi culty: 0Discrimination Index: 506.5D In Problem 6.6, recall that Miss Mu ett insists on consuming 2 units of whey per unit ofcurds. If the price of curds is 5 and the price of whey is 2, then if Miss Mu ett's income is m; herdemand for curds will bea m=5.b 2m=5.c 5C + 2W = m.d 5m.e m=9.Topic: Demand Correct Responses: 68Correct Answer: BDi culty: 0Discrimination Index: 636.6D In Problem 6.8, recall that Casper's utility function is 3x + y; where x is his consumptionof cocoa and y is his consumption of cheese. If the total cost of x units of cocoa is x2; if the priceof cheese is 2, and Casper0 s income is $49, how many units of cocoa will he consume?a 0b 3c 5d 2e 6CHAPTER 6 DemandTopic: Demand Correct Responses: 0Correct Answer: D690Di culty: 3Discrimination Index: 06.7D In Problem 6.13, where x is whips and y is leather jackets, if Kinko's utility function wereU x; y = Minf7x; 5x +10yg; then if the price of whips were $20 and the price of leather jackets were$ 20, Kinko would demanda 7 times as many whips as leather jackets.b 6 times as many leather jackets as whips.c 4 times as many leather jackets as whips.d 5 times as many whips as leather jackets.e only leather jackets.Topic: Demand Correct Responses: 0Correct Answer: BDi culty: 0Discrimination Index: 06.8A In Problem 6.7, suppose that it takes 2 square feet to grow a cockle shell and 5 square feetto grow a silver bell in Mary's garden. If her space had initially been 90 square feet and increasedto 120 square feet:a she would only increase her planting of silver bellsb she would plant more silver bells and more cockle shellsc she would only increase her planting of cockle shellsd cockle shells would be an inferior goode she would increase her planting of cockle shells and decrease her planting of silver bellsDemandMultiple ChoiceTopic: Demand Correct Responses: 88Correct Answer: ADi culty: 0Discrimination Index: 386.1E In Problem 6.1, if Charlie's utility function were XA XB ; if apples cost 60 cents each and3bananas cost 10 cents each, Charlie's budget line would be tangent to one of his indi erence curveswhenever the following equation is satis ed:a 3XB = 6XAb XB = XAc XA = 3XBd XB = 3XAe 60XA + 10XB = MTopic: Demand Correct Responses: 0Correct Answer: DDi culty: 0Discrimination Index: 06.2E In Problem 6.1, if Charlie's utility function were XAXB ; if the price of apples were pA; the3price of bananas were pB ; and his income were m; then Charlie's demand for apples would bea m=2pA .b 0:33pAm.c m=pA + pB .d 0:75m=pA.e 1:33pB m=pA .Topic: Demand Correct Responses: 92Correct Answer: DDi culty: 0Discrimination Index: 256.3E Ambrose's brother Augustine has income 115 and a utility function U x ; x = 40x = + x .121212The price of good 1 nuts is 5 and the price of good 2 berries is 1. How many units of nuts willAugustine demand?a 26b 12c 14d 16e 30CHAPTER 6 DemandTopic: Demand Correct Responses: 0Correct Answer: A692Di culty: 0Discrimination Index: 06.4E Ambrose's brother Anthony has income 33 and a utility function U x ; x = 12x = + x .121212The price of nuts is 2 and the price of berries is 1. How many units of berries will Anthony demand?a 15b 9c 30d 15e There is not enough information to determine the answer.Topic: Demand Correct Responses: 80Correct Answer: EDi culty: 0Discrimination Index: 506.5E In Problem 6.6, recall that Miss Mu ett insists on consuming 2 units of whey per unit ofcurds. If the price of curds is 1 and the price of whey is 4, then if Miss Mu ett's income is m; herdemand for curds will bea m=1.b 4m=1.c 1C + 4W = m.d 1m.e m=9.Topic: Demand Correct Responses: 68Correct Answer: BDi culty: 0Discrimination Index: 636.6E In Problem 6.8, recall that Casper's utility function is 3x + y; where x is his consumptionof cocoa and y is his consumption of cheese. If the total cost of x units of cocoa is x2; if the priceof cheese is 6, and Casper0 s income is $101, how many units of cocoa will he consume?a 6b 9c 17d 8e 18MULTIPLE CHOICETopic: Demand Correct Responses: 0Correct Answer: D693Di culty: 3Discrimination Index: 06.7E In Problem 6.13, where x is whips and y is leather jackets, if Kinko's utility function wereU x; y = Minf6x; 3x + 9yg; then if the price of whips were $20 and the price of leather jackets were$ 40, Kinko would demanda 5 times as many whips as leather jackets.b 4 times as many leather jackets as whips.c 2 times as many leather jackets as whips.d 3 times as many whips as leather jackets.e only leather jackets.Topic: Demand Correct Responses: 0Correct Answer: BDi culty: 0Discrimination Index: 06.8A In Problem 6.7, suppose that it takes 2 square feet to grow a cockle shell and 5 square feetto grow a silver bell in Mary's garden. If her space had initially been 90 square feet and increasedto 120 square feet:a she would only increase her planting of silver bellsb she would plant more silver bells and more cockle shellsc she would only increase her planting of cockle shellsd cockle shells would be an inferior goode she would increase her planting of cockle shells and decrease her planting of silver bellsChapter 7Multiple ChoiceTopic: Revealed Preference Correct Responses: 0Correct Answer: ARevealed PreferenceDi culty: 3Discrimination Index: 07.1A In Problem 7.1, if the only information we had about Goldie were that she chooses thebundle 6; 6 when prices are 6; 6 and she chooses the bundle 10; 0 when prices are 3; 5; then wecould conclude thata 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 noevidence that she violates WARP.Topic: Revealed Preference Correct Responses: 12Correct Answer: CDi culty: 2Discrimination Index: 07.2A In Problem 7.3, Pierre's friend Henri lives in a town where he has to pay 3 francs per glassof wine and 3 francs per loaf of bread. Henri consumes 5 glasses of wine and 4 loaves of bread perday. Recall that Bob has an income of $15 per day, and pays $.50 per loaf of bread and $2 perglass of wine. If Bob has the same tastes as Henri, and if the only thing that either of them caresabout is consumption of bread and wine, we can deducea nothing about whether one is better 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 CHOICETopic: Revealed Preference Correct Responses: 0Correct Answer: A695Di culty: 2Discrimination Index: 07.3A Let us reconsider the case of Ronald in Problem 7.4. Let the prices and consumptions inthe base year be as in Situation D; where p1 = 3; p2 = 1; x1 = 5; and x2 = 15. If in the current year,the price of good 1 is 1 and the price of good 2 is 1, and his current consumptions of good 1 andgood 2 are 25 and 20 respectively, what is the Laspeyres price index of current prices relative tobase year prices? Pick the most nearly correct answer.a 0.67b 1.50c 0.50d 0.25e 1Topic: Revealed Preference Correct Responses: 56Correct Answer: ADi culty: 2Discrimination Index: 757.4A On the planet, Homogenia, every consumer who has ever lived consumes only two goods xand y and has the utility function U x; y = xy. The currency in Homogenia is the fragel. In thiscountry in 1900, the price of good 1 was 1 fragel and the price of good 2 was 2 fragels. Per capitaincome was 60 fragels. In 1990, the price of good 1 was 3 fragels and the price of good 2 was 5fragels. The Laspeyres price index for the price level in 1990 relative to the price level in 1900 isa 2.75b 4c 2.67d 4.25e not possible to determine from this information.CHAPTER 7 Revealed PreferenceTopic: Revealed Preference Correct Responses: 0Correct Answer: A696Di culty: 2Discrimination Index: 07.5A On the planet, Hyperion, every consumer who has ever lived has a utility function U x; y =minfx; 2yg. The currency of Hyperion is the doggerel. In 1850 the price of x was 1 doggerel per unitand the price of y was 2 doggerels per unit. In 1990, the price of x was 10 doggerels per unit and theprice of y was 4 doggerels per unit. Paasche price index of prices in 1990 relative to prices in 1850 isa 6b 4.67c 2.50d 3.50e not possible to determine without further information.Topic: Revealed Preference Correct Responses: 0Correct Answer: ADi culty: 0Discrimination Index: 07.6A In Problem 7.4, if Situation D is p = 3; 1 and x = 5; 10 :a Ronald's behavior is consistent with both the Weak and the Strong Axiom of Revealed Preferenceb Ronald's behavior is consistent with the Weak, but not the Strong Axiom of Revealed Preferencec Ronald's behavior violates both the Weak and the Strong Axiom of Revealed Preferenced Ronald prefers Situation A to all otherse more than one of the above is trueMultiple ChoiceTopic: Revealed Preference Correct Responses: 0Correct Answer: ARevealed PreferenceDi culty: 3Discrimination Index: 07.1B In Problem 7.1, if the only information we had about Goldie were that she chooses thebundle 6; 6 when prices are 6; 7 and she chooses the bundle 10; 0 when prices are 4; 5; then wecould conclude thata 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 noevidence that she violates WARP.Topic: Revealed Preference Correct Responses: 12Correct Answer: CDi culty: 2Discrimination Index: 07.2B In Problem 7.3, Pierre's friend Henri lives in a town where he has to pay 3 francs per glassof wine and 7 francs per loaf of bread. Henri consumes 4 glasses of wine and 4 loaves of bread perday. Recall that Bob has an income of $15 per day, and pays $.50 per loaf of bread and $2 perglass of wine. If Bob has the same tastes as Henri, and if the only thing that either of them caresabout is consumption of bread and wine, we can deducea nothing about whether one is better 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 .CHAPTER 7 Revealed PreferenceTopic: Revealed Preference Correct Responses: 0Correct Answer: A698Di culty: 2Discrimination Index: 07.3B Let us reconsider the case of Ronald in Problem 7.4. Let the prices and consumptions inthe base year be as in Situation D; where p1 = 3; p2 = 1; x1 = 5; and x2 = 15. If in the current year,the price of good 1 is 1 and the price of good 2 is 3, and his current consumptions of good 1 andgood 2 are 25 and 25 respectively, what is the Laspeyres price index of current prices relative tobase year prices? Pick the most nearly correct answer.a 1.67b 3.33c 1d 0.75e 2.50Topic: Revealed Preference Correct Responses: 56Correct Answer: ADi culty: 2Discrimination Index: 757.4B On the planet, Homogenia, every consumer who has ever lived consumes only two goods xand y and has the utility function U x; y = xy. The currency in Homogenia is the fragel. In thiscountry in 1900, the price of good 1 was 1 fragel and the price of good 2 was 2 fragels. Per capitaincome was 72 fragels. In 1990, the price of good 1 was 4 fragels and the price of good 2 was 3fragels. The Laspeyres price index for the price level in 1990 relative to the price level in 1900 isa 2.75b 3.50c 2.33d 4.75e not possible to determine from this information.MULTIPLE CHOICETopic: Revealed Preference Correct Responses: 0Correct Answer: A699Di culty: 2Discrimination Index: 07.5B On the planet, Hyperion, every consumer who has ever lived has a utility function U x; y =minfx; 2yg. The currency of Hyperion is the doggerel. In 1850 the price of x was 1 doggerel per unitand the price of y was 2 doggerels per unit. In 1990, the price of x was 9 doggerels per unit and theprice of y was 4 doggerels per unit. Paasche price index of prices in 1990 relative to prices in 1850 isa 5.50b 4.33c 2.25d 3.25e not possible to determine without further information.Topic: Revealed Preference Correct Responses: 0Correct Answer: ADi culty: 0Discrimination Index: 07.6A In Problem 7.4, if Situation D is p = 3; 1 and x = 5; 10 :a Ronald's behavior is consistent with both the Weak and the Strong Axiom of Revealed Preferenceb Ronald's behavior is consistent with the Weak, but not the Strong Axiom of Revealed Preferencec Ronald's behavior violates both the Weak and the Strong Axiom of Revealed Preferenced Ronald prefers Situation A to all otherse more than one of the above is trueMultiple ChoiceTopic: Revealed Preference Correct Responses: 0Correct Answer: ARevealed PreferenceDi culty: 3Discrimination Index: 07.1C In Problem 7.1, if the only information we had about Goldie were that she chooses thebundle 6; 6 when prices are 6; 6 and she chooses the bundle 10; 0 when prices are 1; 5; then wecould conclude thata 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 noevidence that she violates WARP.Topic: Revealed Preference Correct Responses: 12Correct Answer: CDi culty: 2Discrimination Index: 07.2C In Problem 7.3, Pierre's friend Jacques lives in a town where he has to pay 3 francs perglass of wine and 3 francs per loaf of bread. Jacques consumes 9 glasses of wine and 4 loaves ofbread per day. Recall that Bob has an income of $15 per day, and pays $.50 per loaf of bread and$2 per glass of wine. If Bob has the same tastes as Jacques, and if the only thing that either ofthem cares about is consumption of bread and wine, we can deducea nothing about whether one is better than the other.b that Jacques is better o than Bob.c that Bob is better o than Jacques.d that both of them violate the weak axiom of revealed preferences.e that Bob and Jacques are equally well o .MULTIPLE CHOICETopic: Revealed Preference Correct Responses: 0Correct Answer: A701Di culty: 2Discrimination Index: 07.3C Let us reconsider the case of Ronald in Problem 7.4. Let the prices and consumptions inthe base year be as in Situation D; where p1 = 3; p2 = 1; x1 = 5; and x2 = 15. If in the current year,the price of good 1 is 1 and the price of good 2 is 3, and his current consumptions of good 1 andgood 2 are 25 and 20 respectively, what is the Laspeyres price index of current prices relative tobase year prices? Pick the most nearly correct answer.a 1.67b 2.83c 1d 0.75e 2.50Topic: Revealed Preference Correct Responses: 56Correct Answer: ADi culty: 2Discrimination Index: 757.4C On the planet, Homogenia, every consumer who has ever lived consumes only two goods xand y and has the utility function U x; y = xy. The currency in Homogenia is the fragel. In thiscountry in 1900, the price of good 1 was 1 fragel and the price of good 2 was 2 fragels. Per capitaincome was 84 fragels. In 1990, the price of good 1 was 5 fragels and the price of good 2 was 2fragels. The Laspeyres price index for the price level in 1990 relative to the price level in 1900 isa 3b 3.50c 2.33d 5.50e not possible to determine from this information.CHAPTER 7 Revealed PreferenceTopic: Revealed Preference Correct Responses: 0Correct Answer: A702Di culty: 2Discrimination Index: 07.5C On the planet, Hyperion, every consumer who has ever lived has a utility function U x; y =minfx; 2yg. The currency of Hyperion is the doggerel. In 1850 the price of x was 1 doggerel per unitand the price of y was 2 doggerels per unit. In 1990, the price of x was 11 doggerels per unit and theprice of y was 4 doggerels per unit. Paasche price index of prices in 1990 relative to prices in 1850 isa 6.50b 5c 2.75d 3.75e not possible to determine without further information.Topic: Revealed Preference Correct Responses: 0Correct Answer: ADi culty: 0Discrimination Index: 07.6A In Problem 7.4, if Situation D is p = 3; 1 and x = 5; 10 :a Ronald's behavior is consistent with both the Weak and the Strong Axiom of Revealed Preferenceb Ronald's behavior is consistent with the Weak, but not the Strong Axiom of Revealed Preferencec Ronald's behavior violates both the Weak and the Strong Axiom of Revealed Preferenced Ronald prefers Situation A to all otherse more than one of the above is trueMultiple ChoiceTopic: Revealed Preference Correct Responses: 0Correct Answer: ARevealed PreferenceDi culty: 3Discrimination Index: 07.1D In Problem 7.1, if the only information we had about Goldie were that she chooses thebundle 6; 6 when prices are 6; 7 and she chooses the bundle 10; 0 when prices are 3; 5; then wecould conclude thata 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 noevidence that she violates WARP.Topic: Revealed Preference Correct Responses: 12Correct Answer: CDi culty: 2Discrimination Index: 07.2D In Problem 7.3, Pierre's friend Henri lives in a town where he has to pay 3 francs per glassof wine and 6 francs per loaf of bread. Henri consumes 7 glasses of wine and 4 loaves of bread perday. Recall that Bob has an income of $15 per day, and pays $.50 per loaf of bread and $2 perglass of wine. If Bob has the same tastes as Henri, and if the only thing that either of them caresabout is consumption of bread and wine, we can deducea nothing about whether one is better 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 .CHAPTER 7 Revealed PreferenceTopic: Revealed Preference Correct Responses: 0Correct Answer: A704Di culty: 2Discrimination Index: 07.3D Let us reconsider the case of Ronald in Problem 7.4. Let the prices and consumptions inthe base year be as in Situation D; where p1 = 3; p2 = 1; x1 = 5; and x2 = 15. If in the current year,the price of good 1 is 1 and the price of good 2 is 1, and his current consumptions of good 1 andgood 2 are 25 and 15 respectively, what is the Laspeyres price index of current prices relative tobase year prices? Pick the most nearly correct answer.a 0.67b 1.33c 0.50d 0.25e 1Topic: Revealed Preference Correct Responses: 56Correct Answer: ADi culty: 2Discrimination Index: 757.4D On the planet, Homogenia, every consumer who has ever lived consumes only two goods xand y and has the utility function U x; y = xy. The currency in Homogenia is the fragel. In thiscountry in 1900, the price of good 1 was 1 fragel and the price of good 2 was 2 fragels. Per capitaincome was 120 fragels. In 1990, the price of good 1 was 3 fragels and the price of good 2 was 3fragels. The Laspeyres price index for the price level in 1990 relative to the price level in 1900 isa 2.25b 3c 2d 3.75e not possible to determine from this information.MULTIPLE CHOICETopic: Revealed Preference Correct Responses: 0Correct Answer: A705Di culty: 2Discrimination Index: 07.5D On the planet, Hyperion, every consumer who has ever lived has a utility function U x; y =minfx; 2yg. The currency of Hyperion is the doggerel. In 1850 the price of x was 1 doggerel per unitand the price of y was 2 doggerels per unit. In 1990, the price of x was 9 doggerels per unit and theprice of y was 4 doggerels per unit. Paasche price index of prices in 1990 relative to prices in 1850 isa 5.50b 4.33c 2.25d 3.25e not possible to determine without further information.Topic: Revealed Preference Correct Responses: 0Correct Answer: ADi culty: 0Discrimination Index: 07.6A In Problem 7.4, if Situation D is p = 3; 1 and x = 5; 10 :a Ronald's behavior is consistent with both the Weak and the Strong Axiom of Revealed Preferenceb Ronald's behavior is consistent with the Weak, but not the Strong Axiom of Revealed Preferencec Ronald's behavior violates both the Weak and the Strong Axiom of Revealed Preferenced Ronald prefers Situation A to all otherse more than one of the above is trueMultiple ChoiceTopic: Revealed Preference Correct Responses: 0Correct Answer: ARevealed PreferenceDi culty: 3Discrimination Index: 07.1E In Problem 7.1, if the only information we had about Goldie were that she chooses thebundle 6; 6 when prices are 6; 6 and she chooses the bundle 10; 0 when prices are 5; 5; then wecould conclude thata 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 noevidence that she violates WARP.Topic: Revealed Preference Correct Responses: 12Correct Answer: CDi culty: 2Discrimination Index: 07.2E In Problem 7.3, Pierre's friend Henri lives in a town where he has to pay 3 francs per glassof wine and 7 francs per loaf of bread. Henri consumes 4 glasses of wine and 4 loaves of bread perday. Recall that Bob has an income of $15 per day, and pays $.50 per loaf of bread and $2 perglass of wine. If Bob has the same tastes as Henri, and if the only thing that either of them caresabout is consumption of bread and wine, we can deducea nothing about whether one is better 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 CHOICETopic: Revealed Preference Correct Responses: 0Correct Answer: A707Di culty: 2Discrimination Index: 07.3E Let us reconsider the case of Ronald in Problem 7.4. Let the prices and consumptions inthe base year be as in Situation D; where p1 = 3; p2 = 1; x1 = 5; and x2 = 15. If in the current year,the price of good 1 is 1 and the price of good 2 is 1, and his current consumptions of good 1 andgood 2 are 25 and 10 respectively, what is the Laspeyres price index of current prices relative tobase year prices? Pick the most nearly correct answer.a 0.67b 1.17c 0.50d 0.25e 1Topic: Revealed Preference Correct Responses: 56Correct Answer: ADi culty: 2Discrimination Index: 757.4E On the planet, Homogenia, every consumer who has ever lived consumes only two goods xand y and has the utility function U x; y = xy. The currency in Homogenia is the fragel. In thiscountry in 1900, the price of good 1 was 1 fragel and the price of good 2 was 2 fragels. Per capitaincome was 84 fragels. In 1990, the price of good 1 was 2 fragels and the price of good 2 was 2fragels. The Laspeyres price index for the price level in 1990 relative to the price level in 1900 isa 1.50b 2c 1.33d 2.50e not possible to determine from this information.CHAPTER 7 Revealed PreferenceTopic: Revealed Preference Correct Responses: 0Correct Answer: A708Di culty: 2Discrimination Index: 07.5E On the planet, Hyperion, every consumer who has ever lived has a utility function U x; y =minfx; 2yg. The currency of Hyperion is the doggerel. In 1850 the price of x was 1 doggerel per unitand the price of y was 2 doggerels per unit. In 1990, the price of x was 12 doggerels per unit and theprice of y was 4 doggerels per unit. Paasche price index of prices in 1990 relative to prices in 1850 isa 7b 5.33c 3d 4e not possible to determine without further information.Topic: Revealed Preference Correct Responses: 0Correct Answer: ADi culty: 0Discrimination Index: 07.6A In Problem 7.4, if Situation D is p = 3; 1 and x = 5; 10 :a Ronald's behavior is consistent with both the Weak and the Strong Axiom of Revealed Preferenceb Ronald's behavior is consistent with the Weak, but not the Strong Axiom of Revealed Preferencec Ronald's behavior violates both the Weak and the Strong Axiom of Revealed Preferenced Ronald prefers Situation A to all otherse more than one of the above is trueChapter 8Multiple ChoiceTopic: Slutsky Equation Correct Responses: 0Correct Answer: ASlutsky EquationDi culty: 0Discrimination Index: 08.1A In Problem 8.1, Charlie's utility function is xAxB . The price of apples used to be $1 perunit and the price of bananas was $2 per unit. His income was $40 per day. If the price of applesincreased to $1.75 and the price of bananas fell to $0.25, then in order to be able to just a ord hisold bundle, Charlie would have to have a daily income ofa 37.50b 76c 18.75d 56.25e 150Topic: Slutsky Equation Correct Responses: 64Correct Answer: CDi culty: 0Discrimination Index: 608.2A In Problem 8.1, Charlie's utility function is xAxB . The price of apples used to be $1 and theprice of bananas used to be $2, and his income used to be $40. If the price of apples increased to6 and the price of bananas stayed constant, the substitution e ect on Charlie's apple consumptionreduces his consumption bya 16.67 apples.b 5 apples.c 8.33 apples.d 13.33 apples.e None of the other options are correct.CHAPTER 8 Slutsky EquationTopic: Slutsky Equation Correct Responses: 0Correct Answer: C710Di culty: 2Discrimination Index: 08.3A Neville, in Problem 8.2, has a friend named Marmaduke. Marmaduke has the same demandfunction for claret as Neville, namely q = :02m , 2p where m is income and p is price. Marmaduke'sincome is 4,000 and he initially had to pay a price of 30 per bottle of claret. The price of claretrose to 60. The substitution e ect of the price changea reduced his demand by 60.b increased his demand by 60.c reduced his demand by 48.d reduced his demand by 72.e reduced his demand by 58.Topic: Slutsky Equation Correct Responses: 79Correct Answer: CDi culty: 1Discrimination Index: 478.4A Goods 1 and 2 are perfect complements and a consumer always consumes them in the ratioof 2 units of Good 2 per unit of Good 1. If a consumer has income 720 and if the price of good2 changes from 8 to 9, while the price of good 1 stays at 1, then the income e ect of the price changea 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.Topic: Slutsky Equation Correct Responses: 0Correct Answer: ADi culty: 0Discrimination Index: 08.5A Suppose that Agatha in Problem 8.10 had $330 to spend on tickets for her trip. She needsto travel a total of 1500 miles. Suppose that the price of rst-class tickets is $0.40 per mile and theprice of second-class tickets is $0.10 per mile. How many miles will she travel by second class?a 900b 1,050c 450d 1,000e 300MULTIPLE CHOICETopic: Slutsky Equation Correct Responses: 0Correct Answer: C711Di culty: 2Discrimination Index: 08.6A In Problem 8.4, Maude thinks delphiniums and hollyhocks are perfect substitutes, one-forone. If Delphiniums currently cost $3 per unit and hollyhocks cost $4 per unit, and if the price ofdelphiniums rises to $7 per unit,a 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 the fraction 1=4 of the change will be due to the income e ect.e the fraction 3=4 of the change will be due to the income e ect.Multiple ChoiceTopic: Slutsky Equation Correct Responses: 0Correct Answer: ASlutsky EquationDi culty: 0Discrimination Index: 08.1B In Problem 8.1, Charlie's utility function is xAxB . The price of apples used to be $1 perunit and the price of bananas was $2 per unit. His income was $40 per day. If the price of applesincreased to $2 and the price of bananas fell to $0.25, then in order to be able to just a ord his oldbundle, Charlie would have to have a daily income ofa 42.50b 86c 21.25d 63.75e 170Topic: Slutsky Equation Correct Responses: 64Correct Answer: CDi culty: 0Discrimination Index: 608.2B In Problem 8.1, Charlie's utility function is xAxB . The price of apples used to be $1 and theprice of bananas used to be $2, and his income used to be $40. If the price of apples increased to3 and the price of bananas stayed constant, the substitution e ect on Charlie's apple consumptionreduces his consumption bya 13.33 apples.b 2 apples.c 6.67 apples.d 11.67 apples.e None of the other options are correct.MULTIPLE CHOICETopic: Slutsky Equation Correct Responses: 0Correct Answer: C713Di culty: 2Discrimination Index: 08.3B Neville, in Problem 8.2, has a friend named Marmaduke. Marmaduke has the same demandfunction for claret as Neville, namely q = :02m , 2p where m is income and p is price. Marmaduke'sincome is 5,500 and he initially had to pay a price of 30 per bottle of claret. The price of claretrose to 60. The substitution e ect of the price changea reduced his demand by 60.b increased his demand by 60.c reduced his demand by 30.d reduced his demand by 90.e reduced his demand by 40.Topic: Slutsky Equation Correct Responses: 79Correct Answer: CDi culty: 1Discrimination Index: 478.4B Goods 1 and 2 are perfect complements and a consumer always consumes them in the ratioof 2 units of Good 2 per unit of Good 1. If a consumer has income 420 and if the price of good2 changes from 6 to 7, while the price of good 1 stays at 1, then the income e ect of the price changea is 7 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 6 times as strong as the substitution e ect.Topic: Slutsky Equation Correct Responses: 0Correct Answer: ADi culty: 0Discrimination Index: 08.5B Suppose that Agatha in Problem 8.10 had $615 to spend on tickets for her trip. She needsto travel a total of 1500 miles. Suppose that the price of rst-class tickets is $0.50 per mile and theprice of second-class tickets is $0.20 per mile. How many miles will she travel by second class?a 450b 600c 225d 550e 150CHAPTER 8 Slutsky EquationTopic: Slutsky Equation Correct Responses: 0Correct Answer: C714Di culty: 2Discrimination Index: 08.6B In Problem 8.4, Maude thinks delphiniums and hollyhocks are perfect substitutes, one-forone. If Delphiniums currently cost $4 per unit and hollyhocks cost $5 per unit, and if the price ofdelphiniums rises to $8 per unit,a 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 the fraction 1=4 of the change will be due to the income e ect.e the fraction 3=4 of the change will be due to the income e ect.Multiple ChoiceTopic: Slutsky Equation Correct Responses: 0Correct Answer: ASlutsky EquationDi culty: 0Discrimination Index: 08.1C In Problem 8.1, Charlie's utility function is xAxB . The price of apples used to be $1 perunit and the price of bananas was $2 per unit. His income was $40 per day. If the price of applesincreased to $2.25 and the price of bananas fell to $0.25, then in order to be able to just a ord hisold bundle, Charlie would have to have a daily income ofa 47.50b 96c 23.75d 71.25e 190Topic: Slutsky Equation Correct Responses: 64Correct Answer: CDi culty: 0Discrimination Index: 608.2C In Problem 8.1, Charlie's utility function is xAxB . The price of apples used to be $1 and theprice of bananas used to be $2, and his income used to be $40. If the price of apples increased to4 and the price of bananas stayed constant, the substitution e ect on Charlie's apple consumptionreduces his consumption bya 15 apples.b 3 apples.c 7.50 apples.d 12.50 apples.e None of the other options are correct.CHAPTER 8 Slutsky EquationTopic: Slutsky Equation Correct Responses: 0Correct Answer: C716Di culty: 2Discrimination Index: 08.3C Neville, in Problem 8.2, has a friend named Nigel. Nigel has the same demand function forclaret as Neville, namely q = :02m , 2p where m is income and p is price. Nigel's income is 5,000and he initially had to pay a price of 40 per bottle of claret. The price of claret rose to 80. Thesubstitution e ect of the price changea reduced his demand by 80.b increased his demand by 80.c reduced his demand by 64.d reduced his demand by 96.e reduced his demand by 74.Topic: Slutsky Equation Correct Responses: 79Correct Answer: CDi culty: 1Discrimination Index: 478.4C Goods 1 and 2 are perfect complements and a consumer always consumes them in the ratioof 2 units of Good 2 per unit of Good 1. If a consumer has income 120 and if the price of good2 changes from 3 to 4, while the price of good 1 stays at 1, then the income e ect of the price changea is 4 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 3 times as strong as the substitution e ect.Topic: Slutsky Equation Correct Responses: 0Correct Answer: ADi culty: 0Discrimination Index: 08.5C Suppose that Agatha in Problem 8.10 had $630 to spend on tickets for her trip. She needsto travel a total of 1500 miles. Suppose that the price of rst-class tickets is $0.60 per mile and theprice of second-class tickets is $0.30 per mile. How many miles will she travel by second class?a 900b 1,050c 450d 1,000e 300MULTIPLE CHOICETopic: Slutsky Equation Correct Responses: 0Correct Answer: C717Di culty: 2Discrimination Index: 08.6C In Problem 8.4, Maude thinks delphiniums and hollyhocks are perfect substitutes, one-forone. If Delphiniums currently cost $4 per unit and hollyhocks cost $5 per unit, and if the price ofdelphiniums rises to $9 per unit,a 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 the fraction 1=5 of the change will be due to the income e ect.e the fraction 4=5 of the change will be due to the income e ect.Multiple ChoiceTopic: Slutsky Equation Correct Responses: 0Correct Answer: ASlutsky EquationDi culty: 0Discrimination Index: 08.1D In Problem 8.1, Charlie's utility function is xAxB . The price of apples used to be $1 perunit and the price of bananas was $2 per unit. His income was $40 per day. If the price of applesincreased to $2.50 and the price of bananas fell to $1.25, then in order to be able to just a ord hisold bundle, Charlie would have to have a daily income ofa 62.50b 126c 31.25d 93.75e 250Topic: Slutsky Equation Correct Responses: 64Correct Answer: CDi culty: 0Discrimination Index: 608.2D In Problem 8.1, Charlie's utility function is xAxB . The price of apples used to be $1 and theprice of bananas used to be $2, and his income used to be $40. If the price of apples increased to9 and the price of bananas stayed constant, the substitution e ect on Charlie's apple consumptionreduces his consumption bya 17.78 apples.b 8 apples.c 8.89 apples.d 13.89 apples.e None of the other options are correct.MULTIPLE CHOICETopic: Slutsky Equation Correct Responses: 0Correct Answer: C719Di culty: 2Discrimination Index: 08.3D Neville, in Problem 8.2, has a friend named Marmaduke. Marmaduke has the same demandfunction for claret as Neville, namely q = :02m , 2p where m is income and p is price. Marmaduke'sincome is 8,500 and he initially had to pay a price of 50 per bottle of claret. The price of claretrose to 80. The substitution e ect of the price changea reduced his demand by 60.b increased his demand by 60.c reduced his demand by 18.d reduced his demand by 102.e reduced his demand by 28.Topic: Slutsky Equation Correct Responses: 79Correct Answer: CDi culty: 1Discrimination Index: 478.4D Goods 1 and 2 are perfect complements and a consumer always consumes them in the ratioof 2 units of Good 2 per unit of Good 1. If a consumer has income 720 and if the price of good2 changes from 8 to 9, while the price of good 1 stays at 1, then the income e ect of the price changea 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.Topic: Slutsky Equation Correct Responses: 0Correct Answer: ADi culty: 0Discrimination Index: 08.5D Suppose that Agatha in Problem 8.10 had $660 to spend on tickets for her trip. She needsto travel a total of 1500 miles. Suppose that the price of rst-class tickets is $0.50 per mile and theprice of second-class tickets is $0.20 per mile. How many miles will she travel by second class?a 300b 450c 150d 400e 100CHAPTER 8 Slutsky EquationTopic: Slutsky Equation Correct Responses: 0Correct Answer: C720Di culty: 2Discrimination Index: 08.6D In Problem 8.4, Maude thinks delphiniums and hollyhocks are perfect substitutes, one-forone. If Delphiniums currently cost $2 per unit and hollyhocks cost $3 per unit, and if the price ofdelphiniums rises to $5 per unit,a 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 the fraction 1=3 of the change will be due to the income e ect.e the fraction 2=3 of the change will be due to the income e ect.Multiple ChoiceTopic: Slutsky Equation Correct Responses: 0Correct Answer: ASlutsky EquationDi culty: 0Discrimination Index: 08.1E In Problem 8.1, Charlie's utility function is xAxB . The price of apples used to be $1 perunit and the price of bananas was $2 per unit. His income was $40 per day. If the price of applesincreased to $2 and the price of bananas fell to $1.50, then in order to be able to just a ord his oldbundle, Charlie would have to have a daily income ofa 55b 111c 27.50d 82.50e 220Topic: Slutsky Equation Correct Responses: 64Correct Answer: CDi culty: 0Discrimination Index: 608.2E In Problem 8.1, Charlie's utility function is xAxB . The price of apples used to be $1 and theprice of bananas used to be $2, and his income used to be $40. If the price of apples increased to9 and the price of bananas stayed constant, the substitution e ect on Charlie's apple consumptionreduces his consumption bya 17.78 apples.b 8 apples.c 8.89 apples.d 13.89 apples.e None of the other options are correct.CHAPTER 8 Slutsky EquationTopic: Slutsky Equation Correct Responses: 0Correct Answer: C722Di culty: 2Discrimination Index: 08.3E Neville, in Problem 8.2, has a friend named Colin. Colin has the same demand function forclaret as Neville, namely q = :02m , 2p where m is income and p is price. Colin's income is 4,500and he initially had to pay a price of 30 per bottle of claret. The price of claret rose to 70. Thesubstitution e ect of the price changea reduced his demand by 80.b increased his demand by 80.c reduced his demand by 56.d reduced his demand by 104.e reduced his demand by 66.Topic: Slutsky Equation Correct Responses: 79Correct Answer: CDi culty: 1Discrimination Index: 478.4E Goods 1 and 2 are perfect complements and a consumer always consumes them in the ratioof 2 units of Good 2 per unit of Good 1. If a consumer has income 120 and if the price of good2 changes from 3 to 4, while the price of good 1 stays at 1, then the income e ect of the price changea is 4 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 3 times as strong as the substitution e ect.Topic: Slutsky Equation Correct Responses: 0Correct Answer: ADi culty: 0Discrimination Index: 08.5E Suppose that Agatha in Problem 8.10 had $300 to spend on tickets for her trip. She needsto travel a total of 1500 miles. Suppose that the price of rst-class tickets is $0.30 per mile and theprice of second-class tickets is $0.10 per mile. How many miles will she travel by second class?a 750b 900c 375d 850e 250MULTIPLE CHOICETopic: Slutsky Equation Correct Responses: 0Correct Answer: C723Di culty: 2Discrimination Index: 08.6E In Problem 8.4, Maude thinks delphiniums and hollyhocks are perfect substitutes, one-forone. If Delphiniums currently cost $3 per unit and hollyhocks cost $4 per unit, and if the price ofdelphiniums rises to $8 per unit,a 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 the fraction 1=5 of the change will be due to the income e ect.e the fraction 4=5 of the change will be due to the income e ect.Chapter 9Buying and SellingMultiple ChoiceTopic: Buying and Selling Correct Responses: 98Correct Answer: DDi culty: 0Discrimination Index: 79.1A In Problem 9.1, if Abishag owned 4 quinces and 5 kumquats, and if the price of kumquatsis 2 times the price of quinces, how many kumquats could she a ord if she spent all of her moneyon kumquats?a 14b 9c 5d 7e 4Topic: Buying and Selling Correct Responses: 0Correct Answer: ADi culty: 2Discrimination Index: 09.2A Suppose that Mario in Problem 9.2 consumes eggplant and tomatoes in the ratio of onebushel of eggplant per bushel of tomatoes. His garden yields 30 bushels of eggplant and 10 bushelsof tomatoes. He initially faced prices of $20 per bushel for each vegetable, but the price of eggplantrose to $80 per bushel, while the price of tomatoes stayed unchanged. After the price change, hewoulda 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.MULTIPLE CHOICETopic: Buying and Selling Correct Responses: 0Correct Answer: B725Di culty: 2Discrimination Index: 09.3A Dr. J . has 80 hours per week to divide between work and leisure. His wage rate if $5per hour. Dr. J . receives a lump sum payment of $150 per week. Suppose that the rst $50 perweek of his labor income is untaxed, but all labor income above $50 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 80 units of leisure.b Dr. J 0 s budget line has a kink where his income is 200 and his leisure is 70.c The slope of Dr. J 0 s budget line is everywhere ,2:50d 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: 70Correct Answer: EDi culty: 1Discrimination Index: 539.4A Dudley, in Problem 9.15, has a utility function U C; R = C , 12 , R ; where R is leisure2and C is consumption per day. He has 16 hours per day to divide between work and leisure. IfDudley has a nonlabor income of $50 per day and is paid a wage of $0 per hour, how many hoursof leisure will he choose per day?a 9b 10c 11d 13e 12CHAPTER 9 Buying and SellingTopic: Buying and Selling Correct Responses: 0Correct Answer: B726Di culty: 1Discrimination Index: 09.5A Mr. Cog in Problem 9.7 has 18 hours a day to divide between labor and leisure If he has 10dollars of nonlabor income per day and gets a wage rate of 9 dollars per hour when he works, hisbudget equation, expressing combinations of consumption and leisure that he can a ord to have,can be written asa 9R + C = 10b 9R + C = 172c R + C=9 = 226d C = 172 + 9Re C = 202 + 9RTopic: Buying and Selling Correct Responses: 0Correct Answer: DDi culty: 0Discrimination Index: 09.6A Mr. Cog in Problem 9.7 has 18 hours per day to divide between labor and leisure. If hehas a nonlabor income of 36 dollars per day and a wage rate of 19 dollars per hour, he will choosea combination of labor and leisure that allows him to spenda 378 dollars per day on consumption.b 179 dollars per day on consumption.c 207 dollars per day on consumption.d 189 dollars per day on consumption.e 283.50 dollars per day on consumption.Buying and SellingMultiple ChoiceTopic: Buying and Selling Correct Responses: 98Correct Answer: DDi culty: 0Discrimination Index: 79.1B In Problem 9.1, if Abishag owned 20 quinces and 5 kumquats, and if the price of kumquatsis 4 times the price of quinces, how many kumquats could she a ord if she spent all of her moneyon kumquats?a 20b 25c 5d 10e 7Topic: Buying and Selling Correct Responses: 0Correct Answer: ADi culty: 2Discrimination Index: 09.2B Suppose that Mario in Problem 9.2 consumes eggplant and tomatoes in the ratio of onebushel of eggplant per bushel of tomatoes. His garden yields 30 bushels of eggplant and 10 bushelsof tomatoes. He initially faced prices of $25 per bushel for each vegetable, but the price of eggplantrose to $50 per bushel, while the price of tomatoes stayed unchanged. After the price change, hewoulda 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.CHAPTER 9 Buying and SellingTopic: Buying and Selling Correct Responses: 0Correct Answer: B728Di culty: 2Discrimination Index: 09.3B Dr. J . has 80 hours per week to divide between work and leisure. His wage rate if $5per hour. Dr. J . receives a lump sum payment of $200 per week. Suppose that the rst $50 perweek of his labor income is untaxed, but all labor income above $50 is taxed at a rate of 60 percent.a Dr. J 0s budget line has a kink in it at the point where he takes 80 units of leisure.b Dr. J 0 s budget line has a kink where his income is 250 and his leisure is 70.c The slope of Dr. J 0 s budget line is everywhere ,2d 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: 70Correct Answer: EDi culty: 1Discrimination Index: 539.4B Dudley, in Problem 9.15, has a utility function U C; R = C , 12 , R ; where R is leisure2and C is consumption per day. He has 16 hours per day to divide between work and leisure. IfDudley has a nonlabor income of $15 per day and is paid a wage of $4 per hour, how many hoursof leisure will he choose per day?a 7b 8c 9d 11e 10MULTIPLE CHOICETopic: Buying and Selling Correct Responses: 0Correct Answer: B729Di culty: 1Discrimination Index: 09.5B Mr. Cog in Problem 9.7 has 18 hours a day to divide between labor and leisure If he has 15dollars of nonlabor income per day and gets a wage rate of 6 dollars per hour when he works, hisbudget equation, expressing combinations of consumption and leisure that he can a ord to have,can be written asa 6R + C = 15b 6R + C = 123c R + C=6 = 159d C = 123 + 6Re C = 168 + 6RTopic: Buying and Selling Correct Responses: 0Correct Answer: DDi culty: 0Discrimination Index: 09.6B Mr. Cog in Problem 9.7 has 18 hours per day to divide between labor and leisure. If hehas a nonlabor income of 40 dollars per day and a wage rate of 20 dollars per hour, he will choosea combination of labor and leisure that allows him to spenda 400 dollars per day on consumption.b 190 dollars per day on consumption.c 220 dollars per day on consumption.d 200 dollars per day on consumption.e 300 dollars per day on consumption.Buying and SellingMultiple ChoiceTopic: Buying and Selling Correct Responses: 98Correct Answer: DDi culty: 0Discrimination Index: 79.1C In Problem 9.1, if Abishag owned 12 quinces and 20 kumquats, and if the price of kumquatsis 6 times the price of quinces, how many kumquats could she a ord if she spent all of her moneyon kumquats?a 44b 32c 20d 22e 19Topic: Buying and Selling Correct Responses: 0Correct Answer: ADi culty: 2Discrimination Index: 09.2C Suppose that Mario in Problem 9.2 consumes eggplant and tomatoes in the ratio of onebushel of eggplant per bushel of tomatoes. His garden yields 30 bushels of eggplant and 10 bushelsof tomatoes. He initially faced prices of $15 per bushel for each vegetable, but the price of eggplantrose to $60 per bushel, while the price of tomatoes stayed unchanged. After the price change, hewoulda 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.MULTIPLE CHOICETopic: Buying and Selling Correct Responses: 0Correct Answer: B731Di culty: 2Discrimination Index: 09.3C Dr. J . has 80 hours per week to divide between work and leisure. His wage rate if $5per hour. Dr. J . receives a lump sum payment of $100 per week. Suppose that the rst $50 perweek of his labor income is untaxed, but all labor income above $50 is taxed at a rate of 60 percent.a Dr. J 0s budget line has a kink in it at the point where he takes 80 units of leisure.b Dr. J 0 s budget line has a kink where his income is 150 and his leisure is 70.c The slope of Dr. J 0 s budget line is everywhere ,2d 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: 70Correct Answer: EDi culty: 1Discrimination Index: 539.4C Dudley, in Problem 9.15, has a utility function U C; R = C , 12 , R ; where R is leisure2and C is consumption per day. He has 16 hours per day to divide between work and leisure. IfDudley has a nonlabor income of $30 per day and is paid a wage of $10 per hour, how many hoursof leisure will he choose per day?a 4b 5c 6d 8e 7CHAPTER 9 Buying and SellingTopic: Buying and Selling Correct Responses: 0Correct Answer: B732Di culty: 1Discrimination Index: 09.5C Mr. Cog in Problem 9.7 has 18 hours a day to divide between labor and leisure If he has 14dollars of nonlabor income per day and gets a wage rate of 14 dollars per hour when he works, hisbudget equation, expressing combinations of consumption and leisure that he can a ord to have,can be written asa 14R + C = 14b 14R + C = 266c R + C=14 = 350d C = 266 + 14Re C = 308 + 14RTopic: Buying and Selling Correct Responses: 0Correct Answer: DDi culty: 0Discrimination Index: 09.6C Mr. Cog in Problem 9.7 has 18 hours per day to divide between labor and leisure. If hehas a nonlabor income of 30 dollars per day and a wage rate of 7 dollars per hour, he will choosea combination of labor and leisure that allows him to spenda 156 dollars per day on consumption.b 68 dollars per day on consumption.c 93 dollars per day on consumption.d 78 dollars per day on consumption.e 117 dollars per day on consumption.Buying and SellingMultiple ChoiceTopic: Buying and Selling Correct Responses: 98Correct Answer: DDi culty: 0Discrimination Index: 79.1D In Problem 9.1, if Abishag owned 4 quinces and 15 kumquats, and if the price of kumquatsis 2 times the price of quinces, how many kumquats could she a ord if she spent all of her moneyon kumquats?a 34b 19c 15d 17e 14Topic: Buying and Selling Correct Responses: 0Correct Answer: ADi culty: 2Discrimination Index: 09.2D Suppose that Mario in Problem 9.2 consumes eggplant and tomatoes in the ratio of onebushel of eggplant per bushel of tomatoes. His garden yields 30 bushels of eggplant and 10 bushelsof tomatoes. He initially faced prices of $20 per bushel for each vegetable, but the price of eggplantrose to $40 per bushel, while the price of tomatoes stayed unchanged. After the price change, hewoulda 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.CHAPTER 9 Buying and SellingTopic: Buying and Selling Correct Responses: 0Correct Answer: B734Di culty: 2Discrimination Index: 09.3D Dr. J . has 80 hours per week to divide between work and leisure. His wage rate if $5 perhour. Dr. J . receives a lump sum payment of $250 per week. Suppose that the rst $200 perweek of his labor income is untaxed, but all labor income above $200 is taxed at a rate of 30 percent.a Dr. J 0s budget line has a kink in it at the point where he takes 50 units of leisure.b Dr. J 0 s budget line has a kink where his income is 450 and his leisure is 40.c The slope of Dr. J 0 s budget line is everywhere ,3:50d 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: 70Correct Answer: EDi culty: 1Discrimination Index: 539.4D Dudley, in Problem 9.15, has a utility function U C; R = C , 12 , R ; where R is leisure2and C is consumption per day. He has 16 hours per day to divide between work and leisure. IfDudley has a nonlabor income of $50 per day and is paid a wage of $10 per hour, how many hoursof leisure will he choose per day?a 4b 5c 6d 8e 7MULTIPLE CHOICETopic: Buying and Selling Correct Responses: 0Correct Answer: B735Di culty: 1Discrimination Index: 09.5D Mr. Cog in Problem 9.7 has 18 hours a day to divide between labor and leisure If he has 5dollars of nonlabor income per day and gets a wage rate of 8 dollars per hour when he works, hisbudget equation, expressing combinations of consumption and leisure that he can a ord to have,can be written asa 8R + C = 5b 8R + C = 149c R + C=8 = 197d C = 149 + 8Re C = 164 + 8RTopic: Buying and Selling Correct Responses: 0Correct Answer: DDi culty: 0Discrimination Index: 09.6D Mr. Cog in Problem 9.7 has 18 hours per day to divide between labor and leisure. If hehas a nonlabor income of 32 dollars per day and a wage rate of 5 dollars per hour, he will choosea combination of labor and leisure that allows him to spenda 122 dollars per day on consumption.b 51 dollars per day on consumption.c 77 dollars per day on consumption.d 61 dollars per day on consumption.e 91.50 dollars per day on consumption.Buying and SellingMultiple ChoiceTopic: Buying and Selling Correct Responses: 98Correct Answer: DDi culty: 0Discrimination Index: 79.1E In Problem 9.1, if Abishag owned 8 quinces and 15 kumquats, and if the price of kumquatsis 2 times the price of quinces, how many kumquats could she a ord if she spent all of her moneyon kumquats?a 38b 23c 15d 19e 16Topic: Buying and Selling Correct Responses: 0Correct Answer: ADi culty: 2Discrimination Index: 09.2E Suppose that Mario in Problem 9.2 consumes eggplant and tomatoes in the ratio of onebushel of eggplant per bushel of tomatoes. His garden yields 30 bushels of eggplant and 10 bushelsof tomatoes. He initially faced prices of $20 per bushel for each vegetable, but the price of eggplantrose to $60 per bushel, while the price of tomatoes stayed unchanged. After the price change, hewoulda increase his eggplant consumption by 5 bushels.b decrease his eggplant consumption by at least 5 bushels.c increase his consumption of eggplant by 7 bushels.d decrease his consumption of eggplant by 7 bushels.e decrease his tomato consumption by at least 1 bushel.MULTIPLE CHOICETopic: Buying and Selling Correct Responses: 0Correct Answer: B737Di culty: 2Discrimination Index: 09.3E Dr. J . has 80 hours per week to divide between work and leisure. His wage rate if $5per hour. Dr. J . receives a lump sum payment of $50 per week. Suppose that the rst $50 perweek of his labor income is untaxed, but all labor income above $50 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 80 units of leisure.b Dr. J 0 s budget line has a kink where his income is 100 and his leisure is 70.c The slope of Dr. J 0 s budget line is everywhere ,4:50d 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: 70Correct Answer: EDi culty: 1Discrimination Index: 539.4E Dudley, in Problem 9.15, has a utility function U C; R = C , 12 , R ; where R is leisure2and C is consumption per day. He has 16 hours per day to divide between work and leisure. IfDudley has a nonlabor income of $50 per day and is paid a wage of $2 per hour, how many hoursof leisure will he choose per day?a 8b 9c 10d 12e 11CHAPTER 9 Buying and SellingTopic: Buying and Selling Correct Responses: 0Correct Answer: B738Di culty: 1Discrimination Index: 09.5E Mr. Cog in Problem 9.7 has 18 hours a day to divide between labor and leisure If he has 5dollars of nonlabor income per day and gets a wage rate of 18 dollars per hour when he works, hisbudget equation, expressing combinations of consumption and leisure that he can a ord to have,can be written asa 18R + C = 5b 18R + C = 329c R + C=18 = 437d C = 329 + 18Re C = 344 + 18RTopic: Buying and Selling Correct Responses: 0Correct Answer: DDi culty: 0Discrimination Index: 09.6E Mr. Cog in Problem 9.7 has 18 hours per day to divide between labor and leisure. If hehas a nonlabor income of 42 dollars per day and a wage rate of 10 dollars per hour, he will choosea combination of labor and leisure that allows him to spenda 222 dollars per day on consumption.b 101 dollars per day on consumption.c 132 dollars per day on consumption.d 111 dollars per day on consumption.e 166.50 dollars per day on consumption.Chapter 10Multiple ChoiceTopic: Intertemporal Choice Correct Responses: 0Correct Answer: BIntertemporal ChoiceDi culty: 0Discrimination Index: 010.1A If Peregrine in Problem 10.1 consumes 1; 500; 690 and earns 1; 100; 1; 150 and if theinterest rate is 0.15, the present value of his endowment isa 2,250.b 2,100.c 2,190.d 4,515.e 5,615.Topic: Intertemporal Choice Correct Responses: 0Correct Answer: BDi culty: 0Discrimination Index: 010.2A Suppose that Molly from Problem 10.2 had,income $500 in period 1 and income 840 inaaperiod 2. Suppose that her utility function were c1 c1 ; where a = 0:80 and the interest rate were20.05.If her income in period 1 doubled and her income in period 2 stayed the same, her consumptionin period 1 woulda double.b increase by 400.c increase by 200d stay constant.e increase by 500.CHAPTER 10 Intertemporal ChoiceTopic: Intertemporal Choice Correct Responses: 70Correct Answer: B740Di culty: 0Discrimination Index: 6710.3A Mr. O.B. Kandle, of Problem 10.8 has a utility function c c where c is his consumption121in period 1 and c2 is his consumption in period 2. He will have no income in period 2. If he hadan income of 50,000 in period 1 and the interest rate increased from 10 to 13,a his savings would increase by 3 and his consumption in period 2 would also increase.b his savings would not change, but his consumption in period 2 would increase by 750.c his consumption in both periods would increase.d his consumption in both periods would decrease.e his consumption in period 1 would decrease by 13 and his consumption in period 2 would also decrease.Topic: Intertemporal Choice Correct Responses: 77Correct Answer: EDi culty: 0Discrimination Index: 7310.4A Harvey Habit in Problem 10.9 has a utility function U c ; c = minfc ; c g. If he had an1212income of 1,025 in period 1, and 1,230 in period 2, and if the interest rate were 0.05, how muchwould Harvey choose to spend on bread in period 1?a 1,687.50b 375c 562.50d 2,250e 1,125Topic: Intertemporal Choice Correct Responses: 0Correct Answer: ADi culty: 0Discrimination Index: 010.5A In the village in Problem 10.10, if the harvest this year is 6,000 and the harvest next yearwill be 1,100, and if rats eat 10 of any grain that is stored for a year, how much grain could thevillagers consume next year if they consume 1000 bushels of grain this year.a 5,600b 4,500c 7,100d 8,400e 1,200MULTIPLE CHOICETopic: Intertemporal Choice Correct Responses: 0Correct Answer: C741Di culty: 0Discrimination Index: 010.6A Patience has a utility function U c ; c = c = + 0:83 c = ; c is her consumption in period1212112211 and c2 is her consumption in period 2. Her income in period 1 is 6 times as large as her incomein period 2. At what interest rate will she choose to consume the same amount in period 1 as inperiod 2?a 1.20b 0.10c 0.20d 0e 0.30Topic: Intertemporal Choice Correct Responses: 75Correct Answer: ADi culty: 0Discrimination Index: 2710.7A Let i be the rate of in ation and r the nominal interest rate.We use pi to denote the rateof in ation in the book. The exact real rate of interest is given by:a r , i=i + 1b r + i=i + 1c r + i=i , 1d r , i=i , 1e r , i=rMultiple ChoiceTopic: Intertemporal Choice Correct Responses: 0Correct Answer: BIntertemporal ChoiceDi culty: 0Discrimination Index: 010.1B If Peregrine in Problem 10.1 consumes 1; 700; 1; 100 and earns 1; 400; 1; 430 and if theinterest rate is 0.10, the present value of his endowment isa 2,830.b 2,700.c 2,800.d 5,670.e 7,070.Topic: Intertemporal Choice Correct Responses: 0Correct Answer: BDi culty: 0Discrimination Index: 010.2B Suppose that Molly from Problem 10.2 had,income $400 in period 1 and income 440 inaaperiod 2. Suppose that her utility function were c1 c1 ; where a = 0:20 and the interest rate were20.10.If her income in period 1 doubled and her income in period 2 stayed the same, her consumptionin period 1 woulda double.b increase by 80.c increase by 40d stay constant.e increase by 400.MULTIPLE CHOICETopic: Intertemporal Choice Correct Responses: 70Correct Answer: B743Di culty: 0Discrimination Index: 6710.3B Mr. O.B. Kandle, of Problem 10.8 has a utility function c c where c is his consumption121in period 1 and c2 is his consumption in period 2. He will have no income in period 2. If he hadan income of 70,000 in period 1 and the interest rate increased from 10 to 11,a his savings would increase by 1 and his consumption in period 2 would also increase.b his savings would not change, but his consumption in period 2 would increase by 350.c his consumption in both periods would increase.d his consumption in both periods would decrease.e his consumption in period 1 would decrease by 11 and his consumption in period 2 would also decrease.Topic: Intertemporal Choice Correct Responses: 77Correct Answer: EDi culty: 0Discrimination Index: 7310.4B Harvey Habit in Problem 10.9 has a utility function U c ; c = minfc ; c g. If he had an1212income of 1,025 in period 1, and 410 in period 2, and if the interest rate were 0.05, how much wouldHarvey choose to spend on bread in period 1?a 1,087.50b 241.67c 362.50d 1,450e 725Topic: Intertemporal Choice Correct Responses: 0Correct Answer: ADi culty: 0Discrimination Index: 010.5B In the village in Problem 10.10, if the harvest this year is 3,000 and the harvest next yearwill be 900, and if rats eat 30 of any grain that is stored for a year, how much grain could thevillagers consume next year if they consume 1000 bushels of grain this year.a 2,300b 1,400c 3,900d 3,450e 1,000CHAPTER 10 Intertemporal ChoiceTopic: Intertemporal Choice Correct Responses: 0Correct Answer: C744Di culty: 0Discrimination Index: 010.6B Patience has a utility function U c ; c = c = + 0:87 c = ; c is her consumption in period1212112211 and c2 is her consumption in period 2. Her income in period 1 is 2 times as large as her incomein period 2. At what interest rate will she choose to consume the same amount in period 1 as inperiod 2?a 0.30b 0.08c 0.15d 0e 0.23Topic: Intertemporal Choice Correct Responses: 75Correct Answer: ADi culty: 0Discrimination Index: 2710.7A Let i be the rate of in ation and r the nominal interest rate.We use pi to denote the rateof in ation in the book. The exact real rate of interest is given by:a r , i=i + 1b r + i=i + 1c r + i=i , 1d r , i=i , 1e r , i=rMultiple ChoiceTopic: Intertemporal Choice Correct Responses: 0Correct Answer: BIntertemporal ChoiceDi culty: 0Discrimination Index: 010.1C If Peregrine in Problem 10.1 consumes 1; 500; 1; 155 and earns 1; 100; 1; 575 and if theinterest rate is 0.05, the present value of his endowment isa 2,675.b 2,600.c 2,655.d 5,330.e 6,430.Topic: Intertemporal Choice Correct Responses: 0Correct Answer: BDi culty: 0Discrimination Index: 010.2C Suppose that Molly from Problem 10.2 had,income $700 in period 1 and income 960 inaaperiod 2. Suppose that her utility function were c1 c1 ; where a = 0:60 and the interest rate were20.20.If her income in period 1 doubled and her income in period 2 stayed the same, her consumptionin period 1 woulda double.b increase by 420.c increase by 210d stay constant.e increase by 700.CHAPTER 10 Intertemporal ChoiceTopic: Intertemporal Choice Correct Responses: 70Correct Answer: B746Di culty: 0Discrimination Index: 6710.3C Mr. O.B. Kandle, of Problem 10.8 has a utility function c c where c is his consumption121in period 1 and c2 is his consumption in period 2. He will have no income in period 2. If he hadan income of 50,000 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 2,250.c his consumption in both periods would increase.d his consumption in both periods would decrease.e his consumption in period 1 would decrease by 19 and his consumption in period 2 would also decrease.Topic: Intertemporal Choice Correct Responses: 77Correct Answer: EDi culty: 0Discrimination Index: 7310.4C Harvey Habit in Problem 10.9 has a utility function U c ; c = minfc ; c g. If he had an1212income of 820 in period 1, and 410 in period 2, and if the interest rate were 0.05, how much wouldHarvey choose to spend on bread in period 1?a 930b 206.67c 310d 1,240e 620Topic: Intertemporal Choice Correct Responses: 0Correct Answer: ADi culty: 0Discrimination Index: 010.5C In the village in Problem 10.10, if the harvest this year is 5,000 and the harvest next yearwill be 1,000, and if rats eat 40 of any grain that is stored for a year, how much grain could thevillagers consume next year if they consume 1000 bushels of grain this year.a 3,400b 2,400c 6,000d 5,100e 1,100MULTIPLE CHOICETopic: Intertemporal Choice Correct Responses: 0Correct Answer: C747Di culty: 0Discrimination Index: 010.6C Patience has a utility function U c ; c = c = + 0:95 c = ; c is her consumption in period1212112211 and c2 is her consumption in period 2. Her income in period 1 is 3 times as large as her incomein period 2. At what interest rate will she choose to consume the same amount in period 1 as inperiod 2?a 0.15b 0.03c 0.05d 0e 0.08Topic: Intertemporal Choice Correct Responses: 75Correct Answer: ADi culty: 0Discrimination Index: 2710.7A Let i be the rate of in ation and r the nominal interest rate.We use pi to denote the rateof in ation in the book. The exact real rate of interest is given by:a r , i=i + 1b r + i=i + 1c r + i=i , 1d r , i=i , 1e r , i=rMultiple ChoiceTopic: Intertemporal Choice Correct Responses: 0Correct Answer: BIntertemporal ChoiceDi culty: 0Discrimination Index: 010.1D If Peregrine in Problem 10.1 consumes 1; 700; 1; 050 and earns 1; 400; 1; 365 and if theinterest rate is 0.05, the present value of his endowment isa 2,765.b 2,700.c 2,750.d 5,535.e 6,935.Topic: Intertemporal Choice Correct Responses: 0Correct Answer: BDi culty: 0Discrimination Index: 010.2D Suppose that Molly from Problem 10.2 had,income $600 in period 1 and income 220 inaaperiod 2. Suppose that her utility function were c1 c1 ; where a = 0:60 and the interest rate were20.10.If her income in period 1 doubled and her income in period 2 stayed the same, her consumptionin period 1 woulda double.b increase by 360.c increase by 180d stay constant.e increase by 600.MULTIPLE CHOICETopic: Intertemporal Choice Correct Responses: 70Correct Answer: B749Di culty: 0Discrimination Index: 6710.3D Mr. O.B. Kandle, of Problem 10.8 has a utility function c c where c is his consumption121in period 1 and c2 is his consumption in period 2. He will have no income in period 2. If he hadan income of 60,000 in period 1 and the interest rate increased from 10 to 17,a his savings would increase by 7 and his consumption in period 2 would also increase.b his savings would not change, but his consumption in period 2 would increase by 2,100.c his consumption in both periods would increase.d his consumption in both periods would decrease.e his consumption in period 1 would decrease by 17 and his consumption in period 2 would also decrease.Topic: Intertemporal Choice Correct Responses: 77Correct Answer: EDi culty: 0Discrimination Index: 7310.4D Harvey Habit in Problem 10.9 has a utility function U c ; c = minfc ; c g. If he had an1212income of 1,320 in period 1, and 1,320 in period 2, and if the interest rate were 0.20, how muchwould Harvey choose to spend on bread in period 1?a 1,980b 440c 660d 2,640e 1,320Topic: Intertemporal Choice Correct Responses: 0Correct Answer: ADi culty: 0Discrimination Index: 010.5D In the village in Problem 10.10, if the harvest this year is 3,000 and the harvest next yearwill be 1,100, and if rats eat 40 of any grain that is stored for a year, how much grain could thevillagers consume next year if they consume 1000 bushels of grain this year.a 2,300b 1,200c 4,100d 3,450e 1,200CHAPTER 10 Intertemporal ChoiceTopic: Intertemporal Choice Correct Responses: 0Correct Answer: C750Di culty: 0Discrimination Index: 010.6D Patience has a utility function U c ; c = c = + 0:83 c = ; c is her consumption in period1212112211 and c2 is her consumption in period 2. Her income in period 1 is 3 times as large as her incomein period 2. At what interest rate will she choose to consume the same amount in period 1 as inperiod 2?a 0.60b 0.10c 0.20d 0e 0.30Topic: Intertemporal Choice Correct Responses: 75Correct Answer: ADi culty: 0Discrimination Index: 2710.7A Let i be the rate of in ation and r the nominal interest rate.We use pi to denote the rateof in ation in the book. The exact real rate of interest is given by:a r , i=i + 1b r + i=i + 1c r + i=i , 1d r , i=i , 1e r , i=rIntertemporal ChoiceMultiple ChoiceTopic: Intertemporal Choice Correct Responses: 0Correct Answer: BDi culty: 0Discrimination Index: 010.1E If Peregrine in Problem 10.1 consumes 900; 960 and earns 800; 1; 080 and if the interestrate is 0.20, the present value of his endowment isa 1,880.b 1,700.c 1,860.d 3,740.e 4,540.Topic: Intertemporal Choice Correct Responses: 0Correct Answer: BDi culty: 0Discrimination Index: 010.2E Suppose that Molly from Problem 10.2 had,income $600 in period 1 and income 920 inaaperiod 2. Suppose that her utility function were c1 c1 ; where a = 0:80 and the interest rate were20.15.If her income in period 1 doubled and her income in period 2 stayed the same, her consumptionin period 1 woulda double.b increase by 480.c increase by 240d stay constant.e increase by 600.CHAPTER 10 Intertemporal ChoiceTopic: Intertemporal Choice Correct Responses: 70Correct Answer: B752Di culty: 0Discrimination Index: 6710.3E Mr. O.B. Kandle, of Problem 10.8 has a utility function c c where c is his consumption121in period 1 and c2 is his consumption in period 2. He will have no income in period 2. If he hadan income of 10,000 in period 1 and the interest rate increased from 10 to 13,a his savings would increase by 3 and his consumption in period 2 would also increase.b his savings would not change, but his consumption in period 2 would increase by 150.c his consumption in both periods would increase.d his consumption in both periods would decrease.e his consumption in period 1 would decrease by 13 and his consumption in period 2 would also decrease.Topic: Intertemporal Choice Correct Responses: 77Correct Answer: EDi culty: 0Discrimination Index: 7310.4E Harvey Habit in Problem 10.9 has a utility function U c ; c = minfc ; c g. If he had an1212income of 420 in period 1, and 840 in period 2, and if the interest rate were 0.10, how much wouldHarvey choose to spend on bread in period 1?a 930b 206.67c 310d 1,240e 620Topic: Intertemporal Choice Correct Responses: 0Correct Answer: ADi culty: 0Discrimination Index: 010.5E In the village in Problem 10.10, if the harvest this year is 5,000 and the harvest next yearwill be 1,200, and if rats eat 40 of any grain that is stored for a year, how much grain could thevillagers consume next year if they consume 1000 bushels of grain this year.a 3,600b 2,400c 6,200d 5,400e 1,300MULTIPLE CHOICETopic: Intertemporal Choice Correct Responses: 0Correct Answer: C753Di culty: 0Discrimination Index: 010.6E Patience has a utility function U c ; c = c = + 0:91 c = ; c is her consumption in period1212112211 and c2 is her consumption in period 2. Her income in period 1 is 5 times as large as her incomein period 2. At what interest rate will she choose to consume the same amount in period 1 as inperiod 2?a 0.50b 0.05c 0.10d 0e 0.15Topic: Intertemporal Choice Correct Responses: 75Correct Answer: ADi culty: 0Discrimination Index: 2710.7A Let i be the rate of in ation and r the nominal interest rate.We use pi to denote the rateof in ation in the book. The exact real rate of interest is given by:a r , i=i + 1b r + i=i + 1c r + i=i , 1d r , i=i , 1e r , i=rChapter 11Asset MarketsMultiple ChoiceTopic: Asset Markets Correct Responses: 0Correct Answer: ADi culty: 2Discrimination Index: 011.1A Ashley, in Problem 11.6, has discovered another wine, Wine D. Wine drinkers are willingto pay 60 dollars to drink it right now. The amount that wine drinkers are willing to pay will riseby 10 dollars each year that the wine ages. The interest rate is 10. How much would Ashley bewilling to pay for the wine if he buys it as an investment? Pick the closest answer.a 68b 60c 100d 660e 81Topic: Asset Markets Correct Responses: 0Correct Answer: ADi culty: 2Discrimination Index: 011.2A Chillingsworth, from Problem 11.10 has a neighbor, Shivers, who faces the same optionsfor insulating his house as Chillingsworth. But Shivers has a larger house. Shivers' annual fuelbill for home heating is 600 dollars per year. Plan A will reduce his annual fuel bill by 15, planB will reduce it by 20, and plan C will eliminate his need for heating fuel altogether. The PlanA insulation job would cost Shivers 600 dollars, Plan B would cost him 1,200 and Plan C wouldcost him 6,600 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.MULTIPLE CHOICETopic: Asset Markets Correct Responses: 0Correct Answer: D755Di culty: 2Discrimination Index: 011.3A The price of an antique is expected to rise by 7 during the next year. The interest rateis 8. You are thinking of buying an antique and selling it a year from now. You would be willingto pay a total of 700 dollars for the pleasure of owning the antique for a year. How much wouldyou be willing to pay to buy this antique. See Problem 11:5a 8,750b 14,700c 700d 70,000e 7,000Topic: Asset Markets Correct Responses: 0Correct Answer: ADi culty: 2Discrimination Index: 011.4A A bond has a face value of 8,000 dollars. It will pay 800 dollars in interest at the end ofevery year for the next 43 years. At the time of the nal interest payment, 43 years from now, thecompany that issued the bond will redeem the bond at face value". That is, the company buysback the bond from its owner at a price equal to the face value of the bond. If the interest rate is 10and is expected to remain at 10, how much would a rational investor pay for this bond right now?a 8,000b 42,400c 34,400d More than any of the above numberse Less than any of the above numbersCHAPTER 11 Asset MarketsTopic: Asset Markets Correct Responses: 0Correct Answer: C756Di culty: 2Discrimination Index: 011.5A The sum of the terms of the in nite geometric series 1, 0.87, 0:87 ; 0:87 ;...., is closest to2the following.3a in nityb 1.87c 7.69d 0.53e 114.94Topic: Asset Markets Correct Responses: 81Correct Answer: ADi culty: 0Discrimination Index: 4711.6A If the interest rate is 12, and will remain 12 forever, how much would a rational in-vestor be willing to pay for an asset that will pay him 6,720 dollars one year from now, 1,254 dollarstwo years from now, and nothing at any other time.a 7,000b 6,000c 58,333.33d 91,000e 8,000Asset MarketsMultiple ChoiceTopic: Asset Markets Correct Responses: 0Correct Answer: ADi culty: 2Discrimination Index: 011.1B Ashley, in Problem 11.6, has discovered another wine, Wine D. Wine drinkers are willingto pay 200 dollars to drink it right now. The amount that wine drinkers are willing to pay will riseby 25 dollars each year that the wine ages. The interest rate is 10. How much would Ashley bewilling to pay for the wine if he buys it as an investment? Pick the closest answer.a 206b 200c 250d 2,200e 236Topic: Asset Markets Correct Responses: 0Correct Answer: ADi culty: 2Discrimination Index: 011.2B Chillingsworth, from Problem 11.10 has a neighbor, Shivers, who faces the same optionsfor insulating his house as Chillingsworth. But Shivers has a larger house. Shivers' annual fuelbill for home heating is 900 dollars per year. Plan A will reduce his annual fuel bill by 15, planB will reduce it by 20, and plan C will eliminate his need for heating fuel altogether. The PlanA insulation job would cost Shivers 900 dollars, Plan B would cost him 1,600 and Plan C wouldcost him 9,900 dollars. If the interest rate is 10 and his house and the insulation job last forever,which plan is the best for Shivers?a 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 MarketsTopic: Asset Markets Correct Responses: 0Correct Answer: D758Di culty: 2Discrimination Index: 011.3B The price of an antique is expected to rise by 8 during the next year. The interest rateis 12. You are thinking of buying an antique and selling it a year from now. You would be willingto pay a total of 800 dollars for the pleasure of owning the antique for a year. How much wouldyou be willing to pay to buy this antique. See Problem 11:5a 6,666.67b 16,800c 800d 20,000e 8,000Topic: Asset Markets Correct Responses: 0Correct Answer: ADi culty: 2Discrimination Index: 011.4B A bond has a face value of 2,000 dollars. It will pay 200 dollars in interest at the end ofevery year for the next 43 years. At the time of the nal interest payment, 43 years from now, thecompany that issued the bond will redeem the bond at face value". That is, the company buysback the bond from its owner at a price equal to the face value of the bond. If the interest rate is 10and is expected to remain at 10, how much would a rational investor pay for this bond right now?a 2,000b 10,600c 8,600d More than any of the above numberse Less than any of the above numbersMULTIPLE CHOICETopic: Asset Markets Correct Responses: 0Correct Answer: C759Di culty: 2Discrimination Index: 011.5B The sum of the terms of the in nite geometric series 1, 0.88, 0:88 ; 0:88 ;...., is closest to2the following.3a in nityb 1.88c 8.33d 0.53e 113.64Topic: Asset Markets Correct Responses: 81Correct Answer: ADi culty: 0Discrimination Index: 4711.6B If the interest rate is 2, and will remain 2 forever, how much would a rational investorbe willing to pay for an asset that will pay him 2,040 dollars one year from now, 1,040 dollars twoyears from now, and nothing at any other time.a 3,000b 2,000c 150,000d 9,000e 4,000Asset MarketsMultiple ChoiceTopic: Asset Markets Correct Responses: 0Correct Answer: ADi culty: 2Discrimination Index: 011.1C Ashley, in Problem 11.6, has discovered another wine, Wine D. Wine drinkers are willingto pay 75 dollars to drink it right now. The amount that wine drinkers are willing to pay will riseby 15 dollars each year that the wine ages. The interest rate is 10. How much would Ashley bewilling to pay for the wine if he buys it as an investment? Pick the closest answer.a 93b 75c 150d 825e 101Topic: Asset Markets Correct Responses: 0Correct Answer: ADi culty: 2Discrimination Index: 011.2C Chillingsworth, from Problem 11.10 has a neighbor, Shivers, who faces the same optionsfor insulating his house as Chillingsworth. But Shivers has a larger house. Shivers' annual fuelbill for home heating is 800 dollars per year. Plan A will reduce his annual fuel bill by 15, planB will reduce it by 20, and plan C will eliminate his need for heating fuel altogether. The PlanA insulation job would cost Shivers 800 dollars, Plan B would cost him 1,300 and Plan C wouldcost 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.MULTIPLE CHOICETopic: Asset Markets Correct Responses: 0Correct Answer: D761Di culty: 2Discrimination Index: 011.3C The price of an antique is expected to rise by 5 during the next year. The interest rateis 6. You are thinking of buying an antique and selling it a year from now. You would be willingto pay a total of 500 dollars for the pleasure of owning the antique for a year. How much wouldyou be willing to pay to buy this antique. See Problem 11:5a 8,333.33b 10,500c 500d 50,000e 5,000Topic: Asset Markets Correct Responses: 0Correct Answer: ADi culty: 2Discrimination Index: 011.4C A bond has a face value of 4,000 dollars. It will pay 400 dollars in interest at the end ofevery year for the next 48 years. At the time of the nal interest payment, 48 years from now, thecompany that issued the bond will redeem the bond at face value". That is, the company buysback the bond from its owner at a price equal to the face value of the bond. If the interest rate is 10and is expected to remain at 10, how much would a rational investor pay for this bond right now?a 4,000b 23,200c 19,200d More than any of the above numberse Less than any of the above numbersCHAPTER 11 Asset MarketsTopic: Asset Markets Correct Responses: 0Correct Answer: C762Di culty: 2Discrimination Index: 011.5C The sum of the terms of the in nite geometric series 1, 0.87, 0:87 ; 0:87 ;...., is closest to2the following.3a in nityb 1.87c 7.69d 0.53e 114.94Topic: Asset Markets Correct Responses: 81Correct Answer: ADi culty: 0Discrimination Index: 4711.6C If the interest rate is 19, and will remain 19 forever, how much would a rational in-vestor be willing to pay for an asset that will pay him 4,760 dollars one year from now, 1,416 dollarstwo years from now, and nothing at any other time.a 5,000b 4,000c 26,315.79d 100,000e 6,000Asset MarketsMultiple ChoiceTopic: Asset Markets Correct Responses: 0Correct Answer: ADi culty: 2Discrimination Index: 011.1D Ashley, in Problem 11.6, has discovered another wine, Wine D. Wine drinkers are willingto pay 50 dollars to drink it right now. The amount that wine drinkers are willing to pay will riseby 10 dollars each year that the wine ages. The interest rate is 10. How much would Ashley bewilling to pay for the wine if he buys it as an investment? Pick the closest answer.a 62b 50c 100d 550e 71Topic: Asset Markets Correct Responses: 0Correct Answer: ADi culty: 2Discrimination Index: 011.2D Chillingsworth, from Problem 11.10 has a neighbor, Shivers, who faces the same optionsfor insulating his house as Chillingsworth. But Shivers has a larger house. Shivers' annual fuelbill for home heating is 900 dollars per year. Plan A will reduce his annual fuel bill by 15, planB will reduce it by 20, and plan C will eliminate his need for heating fuel altogether. The PlanA insulation job would cost Shivers 900 dollars, Plan B would cost him 1,600 and Plan C wouldcost him 9,900 dollars. If the interest rate is 10 and his house and the insulation job last forever,which plan is the best for Shivers?a 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 MarketsTopic: Asset Markets Correct Responses: 0Correct Answer: D764Di culty: 2Discrimination Index: 011.3D The price of an antique is expected to rise by 3 during the next year. The interest rateis 6. You are thinking of buying an antique and selling it a year from now. You would be willingto pay a total of 300 dollars for the pleasure of owning the antique for a year. How much wouldyou be willing to pay to buy this antique. See Problem 11:5a 5,000b 6,300c 300d 10,000e 3,000Topic: Asset Markets Correct Responses: 0Correct Answer: ADi culty: 2Discrimination Index: 011.4D A bond has a face value of 9,000 dollars. It will pay 900 dollars in interest at the end ofevery year for the next 44 years. At the time of the nal interest payment, 44 years from now, thecompany that issued the bond will redeem the bond at face value". That is, the company buysback the bond from its owner at a price equal to the face value of the bond. If the interest rate is 10and is expected to remain at 10, how much would a rational investor pay for this bond right now?a 9,000b 48,600c 39,600d More than any of the above numberse Less than any of the above numbersMULTIPLE CHOICETopic: Asset Markets Correct Responses: 0Correct Answer: C765Di culty: 2Discrimination Index: 011.5D The sum of the terms of the in nite geometric series 1, 0.89, 0:89 ; 0:89 ;...., is closest to2the following.3a in nityb 1.89c 9.09d 0.53e 112.36Topic: Asset Markets Correct Responses: 81Correct Answer: ADi culty: 0Discrimination Index: 4711.6D If the interest rate is 14, and will remain 14 forever, how much would a rational in-vestor be willing to pay for an asset that will pay him 10,260 dollars one year from now, 1,299dollars two years from now, and nothing at any other time.a 10,000b 9,000c 71,428.57d 150,000e 11,000Asset MarketsMultiple ChoiceTopic: Asset Markets Correct Responses: 0Correct Answer: ADi culty: 2Discrimination Index: 011.1E Ashley, in Problem 11.6, has discovered another wine, Wine D. Wine drinkers are willingto pay 75 dollars to drink it right now. The amount that wine drinkers are willing to pay will riseby 15 dollars each year that the wine ages. The interest rate is 10. How much would Ashley bewilling to pay for the wine if he buys it as an investment? Pick the closest answer.a 93b 75c 150d 825e 101Topic: Asset Markets Correct Responses: 0Correct Answer: ADi culty: 2Discrimination Index: 011.2E Chillingsworth, from Problem 11.10 has a neighbor, Shivers, who faces the same optionsfor insulating his house as Chillingsworth. But Shivers has a larger house. Shivers' annual fuel billfor home heating is 1,200 dollars per year. Plan A will reduce his annual fuel bill by 15, planB will reduce it by 20, and plan C will eliminate his need for heating fuel altogether. The PlanA insulation job would cost Shivers 1,200 dollars, Plan B would cost him 1,700 and Plan C wouldcost him 13,200 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.MULTIPLE CHOICETopic: Asset Markets Correct Responses: 0Correct Answer: D767Di culty: 2Discrimination Index: 011.3E The price of an antique is expected to rise by 9 during the next year. The interest rateis 10. You are thinking of buying an antique and selling it a year from now. You would be willingto pay a total of 900 dollars for the pleasure of owning the antique for a year. How much wouldyou be willing to pay to buy this antique. See Problem 11:5a 9,000b 18,900c 900d 90,000e 9,000Topic: Asset Markets Correct Responses: 0Correct Answer: ADi culty: 2Discrimination Index: 011.4E A bond has a face value of 9,000 dollars. It will pay 900 dollars in interest at the end ofevery year for the next 46 years. At the time of the nal interest payment, 46 years from now, thecompany that issued the bond will redeem the bond at face value". That is, the company buysback the bond from its owner at a price equal to the face value of the bond. If the interest rate is 10and is expected to remain at 10, how much would a rational investor pay for this bond right now?a 9,000b 50,400c 41,400d More than any of the above numberse Less than any of the above numbersCHAPTER 11 Asset MarketsTopic: Asset Markets Correct Responses: 0Correct Answer: C768Di culty: 2Discrimination Index: 011.5E The sum of the terms of the in nite geometric series 1, 0.84, 0:84 ; 0:84 ;...., is closest to2the following.3a in nityb 1.84c 6.25d 0.54e 119.05Topic: Asset Markets Correct Responses: 81Correct Answer: ADi culty: 0Discrimination Index: 4711.6E If the interest rate is 7, and will remain 7 forever, how much would a rational investorbe willing to pay for an asset that will pay him 7,490 dollars one year from now, 1,144 dollars twoyears from now, and nothing at any other time.a 8,000b 7,000c 114,285.71d 64,000e 9,000Chapter 12UncertaintyMultiple ChoiceTopic: Uncertainty Correct Responses: 0Correct Answer: ADi culty: 0Discrimination Index: 012.1A In Problem 12.9, Billy has a von Neumann-Morgenstern utility function U c = c = . If12Billy is not injured this season, he will receive an income of 9 million dollars. If he is injured, hisincome will be only $10,000. The probability that he will be injured is .1 and the probability thathe will not be injured is .9. His expected utility isa 2,710b between 8 million and 9 million dollars.c 100,000.d 5,420e 10,840Topic: Uncertainty Correct Responses: 0Correct Answer: BDi culty: 0Discrimination Index: 012.2A See Prob 12:2 Willy's only source of wealth is his chocolate factory. He has the utilityfunction pc1=2 + 1 , pc1=2 where p is the probability of a ood, 1 , p is the probability of no oodfnfand where cf and cn f are his wealth contingent on a ood and on no ood, respectively. Theprobability of ood is p = 1=15. The value of Willy's factory is $800,000 if there is no ood and 0 ifthere is a ood. Willy can buy insurance where if he buys $x worth of insurance, he must pay theinsurance company $5x=19 whether there is a ood or not, but he gets back $x from the companyif there is a ood. Willy should buya no insurance since 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=25 of whatit 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 samewhether 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=6 of whatit 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=11 of whatit would be if there is no ood.CHAPTER 12 UncertaintyTopic: Uncertainty Correct Responses: 0Correct Answer: C770Di culty: 0Discrimination Index: 012.3A Sally Kink is an expected utility maximizer with utility function puc +1 , puc where12for any x 2; 000; ux = 2x and where ux = 4; 000 + x for x greater than or equal to 2,000.a Sally will be risk averse if her income is less than 2,000 but risk loving if her income is more than 2,000.b Sally will be risk neutral if her income is less than 2,000 and risk averse if her income is more than 2,000.c For bets that involve no chance of her wealth exceeding 2,000, Sally will take any bet that has a positiveexpected net payo .d Sally will never take a bet if there is a chance that it leaves her with wealth less than 4,000.e None of the above are true.Topic: Uncertainty Correct Responses: 0Correct Answer: ADi culty: 0Discrimination Index: 012.4A See Problem 12:11 Pete's expected utility function is pc = + 1 , pc = where p is the121122probability that he consumes c1 and 1 , p is the probability that he consumes c2 . Wilbur is o ereda choice between getting a sure payment of $Z or a lottery in which he receives $4,900 with probability 0.70 and he receives $12,100 with probability 0.30. Wilbur will choose the sure payment ifa Zb Zc Zd Ze Z6; 724 and the lottery if Z5; 812 and the lottery if Z12; 100 and the lottery if Z9; 412 and the lottery if Z7; 060 and the lottery if Z6; 724.5; 812.12; 100.9; 412.7; 060.MULTIPLE CHOICETopic: Uncertainty Correct Responses: 0Correct Answer: B771Di culty: 0Discrimination Index: 012.5A Clancy has $4,200. He plans to bet on a boxing match between Sullivan and Flanagan.He nds that he can buy coupons for $3 that will pay o $10 each if Sullivan wins. He also ndsin another store some coupons that will pay o $10 if Flanagan wins. The Flanagan tickets cost$7 each. Clancy believes that the two ghters each have a probability of 1=2 of winning. Clancy isa risk averter who tries to maximize the expected value of the natural log of his wealth. Which ofthe following strategies would maximize his expected utility?a Don't gamble at all.b Buy 700 Sullivan tickets and 300 Flanagan tickets.c Buy exactly as many Flanagan tickets as Sullivan tickets.d Buy 350 Sullivan tickets and 150 Flanagan tickets.e Buy 350 Sullivan tickets and 300 Flanagan tickets.UncertaintyMultiple ChoiceTopic: Uncertainty Correct Responses: 0Correct Answer: ADi culty: 0Discrimination Index: 012.1B In Problem 12.9, Billy has a von Neumann-Morgenstern utility function U c = c = . If12Billy is not injured this season, he will receive an income of 25 million dollars. If he is injured, hisincome will be only $10,000. The probability that he will be injured is .1 and the probability thathe will not be injured is .9. His expected utility isa 4,510b between 24 million and 25 million dollars.c 100,000.d 9,020e 18,040Topic: Uncertainty Correct Responses: 0Correct Answer: BDi culty: 0Discrimination Index: 012.2B See Prob 12:2 Willy's only source of wealth is his chocolate factory. He has the utilityfunction pc1=2 + 1 , pc1=2 where p is the probability of a ood, 1 , p is the probability of no oodfnfand where cf and cn f are his wealth contingent on a ood and on no ood, respectively. Theprobability of ood is p = 1=16. The value of Willy's factory is $800,000 if there is no ood and 0 ifthere is a ood. Willy can buy insurance where if he buys $x worth of insurance, he must pay theinsurance company $4x=19 whether there is a ood or not, but he gets back $x from the companyif there is a ood. Willy should buya no insurance since 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=16 of whatit 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 samewhether 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=5 of whatit 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=9 of whatit would be if there is no ood.MULTIPLE CHOICETopic: Uncertainty Correct Responses: 0Correct Answer: C773Di culty: 0Discrimination Index: 012.3B Sally Kink is an expected utility maximizer with utility function puc +1 , puc where12for any x 8; 000; ux = 2x and where ux = 16; 000 + x for x greater than or equal to 8,000.a Sally will be risk averse if her income is less than 8,000 but risk loving if her income is more than 8,000.b Sally will be risk neutral if her income is less than 8,000 and risk averse if her income is more than 8,000.c For bets that involve no chance of her wealth exceeding 8,000, Sally will take any bet that has a positiveexpected net payo .d Sally will never take a bet if there is a chance that it leaves her with wealth less than 16,000.e None of the above are true.Topic: Uncertainty Correct Responses: 0Correct Answer: ADi culty: 0Discrimination Index: 012.4B See Problem 12:11 Martin's expected utility function is pc = + 1 , pc = where p is the121122probability that he consumes c1 and 1 , p is the probability that he consumes c2 . Wilbur is o ereda choice between getting a sure payment of $Z or a lottery in which he receives $1,600 with probability 0.90 and he receives $12,100 with probability 0.10. Wilbur will choose the sure payment ifa Zb Zc Zd Ze Z2; 209 and the lottery if Z 2; 209.1; 904:50 and the lottery if Z 1; 904:50.12; 100 and the lottery if Z 12; 100.7; 154:50 and the lottery if Z 7; 154:50.2; 650 and the lottery if Z 2; 650.CHAPTER 12 UncertaintyTopic: Uncertainty Correct Responses: 0Correct Answer: B774Di culty: 0Discrimination Index: 012.5B Clancy has $1,800. He plans to bet on a boxing match between Sullivan and Flanagan.He nds that he can buy coupons for $1 that will pay o $10 each if Sullivan wins. He also ndsin another store some coupons that will pay o $10 if Flanagan wins. The Flanagan tickets cost$9 each. Clancy believes that the two ghters each have a probability of 1=2 of winning. Clancy isa risk averter who tries to maximize the expected value of the natural log of his wealth. Which ofthe following strategies would maximize his expected utility?a Don't gamble at all.b Buy 900 Sullivan tickets and 100 Flanagan tickets.c Buy exactly as many Flanagan tickets as Sullivan tickets.d Buy 450 Sullivan tickets and 50 Flanagan tickets.e Buy 450 Sullivan tickets and 100 Flanagan tickets.UncertaintyMultiple ChoiceTopic: Uncertainty Correct Responses: 0Correct Answer: ADi culty: 0Discrimination Index: 012.1C In Problem 12.9, Billy has a von Neumann-Morgenstern utility function U c = c = . If12Billy is not injured this season, he will receive an income of 9 million dollars. If he is injured, hisincome will be only $10,000. The probability that he will be injured is .1 and the probability thathe will not be injured is .9. His expected utility isa 2,710b between 8 million and 9 million dollars.c 100,000.d 5,420e 10,840Topic: Uncertainty Correct Responses: 0Correct Answer: BDi culty: 0Discrimination Index: 012.2C See Prob 12:2 Willy's only source of wealth is his chocolate factory. He has the utilityfunction pc1=2 + 1 , pc1=2 where p is the probability of a ood, 1 , p is the probability of no oodfnfand where cf and cn f are his wealth contingent on a ood and on no ood, respectively. Theprobability of ood is p = 1=11. The value of Willy's factory is $900,000 if there is no ood and 0 ifthere is a ood. Willy can buy insurance where if he buys $x worth of insurance, he must pay theinsurance company $3x=13 whether there is a ood or not, but he gets back $x from the companyif there is a ood. Willy should buya no insurance since 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 whatit 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 samewhether 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 whatit 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 whatit would be if there is no ood.CHAPTER 12 UncertaintyTopic: Uncertainty Correct Responses: 0Correct Answer: C776Di culty: 0Discrimination Index: 012.3C Sally Kink is an expected utility maximizer with utility function puc +1 , puc where12for any x 4; 000; ux = 2x and where ux = 8; 000 + x for x greater than or equal to 4,000.a Sally will be risk averse if her income is less than 4,000 but risk loving if her income is more than 4,000.b Sally will be risk neutral if her income is less than 4,000 and risk averse if her income is more than 4,000.c For bets that involve no chance of her wealth exceeding 4,000, Sally will take any bet that has a positiveexpected net payo .d Sally will never take a bet if there is a chance that it leaves her with wealth less than 8,000.e None of the above are true.Topic: Uncertainty Correct Responses: 0Correct Answer: ADi culty: 0Discrimination Index: 012.4C See Problem 12:11 Rob's expected utility function is pc = + 1 , pc = where p is the121122probability that he consumes c1 and 1 , p is the probability that he consumes c2 . Wilbur is o ered achoice between getting a sure payment of $Z or a lottery in which he receives $900 with probability0.30 and he receives $3,600 with probability 0.70. Wilbur will choose the sure payment ifa Zb Zc Zd Ze Z2; 601 and the lottery if Z 2; 601.1; 750:50 and the lottery if Z 1; 750:50.3; 600 and the lottery if Z 3; 600.3; 100:50 and the lottery if Z 3; 100:50.2; 790 and the lottery if Z 2; 790.MULTIPLE CHOICETopic: Uncertainty Correct Responses: 0Correct Answer: B777Di culty: 0Discrimination Index: 012.5C Clancy has $4,200. He plans to bet on a boxing match between Sullivan and Flanagan.He nds that he can buy coupons for $3 that will pay o $10 each if Sullivan wins. He also ndsin another store some coupons that will pay o $10 if Flanagan wins. The Flanagan tickets cost$7 each. Clancy believes that the two ghters each have a probability of 1=2 of winning. Clancy isa risk averter who tries to maximize the expected value of the natural log of his wealth. Which ofthe following strategies would maximize his expected utility?a Don't gamble at all.b Buy 700 Sullivan tickets and 300 Flanagan tickets.c Buy exactly as many Flanagan tickets as Sullivan tickets.d Buy 350 Sullivan tickets and 150 Flanagan tickets.e Buy 350 Sullivan tickets and 300 Flanagan tickets.UncertaintyMultiple ChoiceTopic: Uncertainty Correct Responses: 0Correct Answer: ADi culty: 0Discrimination Index: 012.1D In Problem 12.9, Billy has a von Neumann-Morgenstern utility function U c = c = . If12Billy is not injured this season, he will receive an income of 25 million dollars. If he is injured, hisincome will be only $10,000. The probability that he will be injured is .1 and the probability thathe will not be injured is .9. His expected utility isa 4,510b between