Test Bank Docx Essentials of Microeconomics 1e Test Bank 1e

Test bank questions for Nguyen and Wait, Essentials of Microeconomics

Chapter 1

1. As an economist you observe that as inflation (the rate of increase in the price level) falls unemployment rises. What can you say in regards to this observation?

a. The decrease in inflation caused unemployment to rise.

b. The increase in unemployment cased inflation to decrease.

c. Both a and b.

d. Without an economic theory, it is not possible to imply causality from this observation.

e. None of the above.

2. Opportunity cost is:

a. The sum of the value of all the forgone activities.

b. The value of the second and third actions forgone.

c. The next best forgone opportunity.

d. The value of the action chosen, net of the value of the next best action.

e. None of the above.

3. A sunk cost:

a. Is the opportunity cost of an action.

b. Is a cost that cannot be recovered.

c. Is the marginal cost of an action being considered by a person or firm.

d. Has no opportunity cost.

e. b and d.

4. Ceteris paribus means:

a. Only two variables are moving at the one time.

b. Everything is variable.

c. Everything is constant.

d. Other things equal.

e. None of the above.

5. Ceteris paribus is used in economics:

a. To help highlight the impact from the change in one economic variable.

b. Because in the real world only one variable changes at a time.

c. Because more than one variable changing at a time is extremely rare.

d. All of the above.

e. None of the above.

6. Opportunity costs:

a. Include both explicit and implicit costs.

b. Include explicit and sunk costs.

c. Include implicit, explicit and sunk costs.

d. Include explicit costs only.

e. Only include implicit costs.

7. Elina is contemplating doing a degree. If she does she will incur university fees of $20,000 in her first year and have to spend $5,000 on textbooks and university supplies, expenses that she would not have otherwise incurred. To help pay for these fees Elina will have to cash out a term deposit of $20,000 from which she earned interest of 10 per cent per annum. What is the opportunity cost of Elina attending university for a year?

a. $20,000

b. $27,000

c. $25,000

d. $22,000

e. $7,000

8. Elina is contemplating doing a degree. If she does she will incur university fees of $20,000 in her first year and have to spend $5,000 on textbooks and university supplies, expenses that she would not have otherwise incurred. To come to university Elina will also have to give up her job in a local brewery from which she earns $35,000 a year. What is the opportunity cost of Elina attending university for a year?

a. $40,000

b. $35,000

c. $5,000

d. $25,000

e. $60,000

9. Suzie spends her Thursday afternoon sleeping. If she had not slept she would have read a book. Her third preferred choice would have been to chat with her housemate. Which statement is true?

a. The opportunity cost of sleeping is not reading the book and not chatting to her housemate.

b. The opportunity cost of sleeping is not reading the book, minus the benefit of chatting to her housemate.

c. The opportunity cost of sleeping is not chatting to her housemate.

d. The opportunity cost of sleeping is not reading the book.

e. None of the above.

10. Which statement is true?

a. The marginal benefit of an activity is the extra cost incurred.

b. The marginal benefit of an activity is the extra benefit enjoyed.

c. The marginal benefit of an activity is the total benefit a person receives from consuming all of the items of that good.

d. All of the above.

e. None of the above.

Chapter 2

1. If there is a 10 per cent change in y given a 5 per cent change in x, what is the elasticity of y given the change in x?

a. 10

b. 2

c. 1/2

d. 5

e. None of the above

2. If there is a -20 per cent change in y given a 5 per cent change in x, what is the elasticity of y given the change in x?

a. 2

b. -.025

c. -1/2

d. -4

e. 3

3. Consider a market with a demand curve given by P = 150 – q and a supply curve of P = 2q. Solving for q and P yields

a. q = 60, P = 30

b. q= 120, P = 60

c. q = 90, P = 60

d. q = 40, P = 80

e. q = 50, P = 100

4. Consider a market with a demand curve given by q = 120 -P and a supply curve of q = 2P. Solving for q and P yields

a. q = 10, P = 30

b. q = 20, P = 40

c. q = 80, P = 40

d. q = 50, P = 25

e. q = 30, P = 15

5. What is the quantity q at which the profit function given by 240q – 4q² is maximized?

a. 30

b. 40

c. 50

d. 60

e. 70

6. What is the quantity q at which the profit function given by 200q – q² is maximized?

a. 20

b. 40

c. 60

d. 80

e. 100

7. A cost function is given by C(q) = 100 + 3q + 5q², where q is the quantity produced. What is the first derivative dC(q)/dq of the cost function with respect to q?

a. dC(q)/dq =3

b. dC(q)/dq = 3 + 10q

c. dC(q)/dq = 100 + 10q

d. dC(q)/dq = 10q

e. None of the above

8. Consider a straight-line demand curve that cuts the P axis at P = 10 and cuts the q axis at q = 20. What is the equation for this demand curve?

a. P = 20 - q

b. P = 10 – 2q

c. P = 20 – 2q

d. P = 10 – 1/2q

e. None of the above.

9. Consider a demand curve represented by P = 100 – 2q, where P is price and q is the quantity demanded. What is the price when the quantity demanded is 20?

a. 100

b. 80

c. 60

d. 40

e. 20

10. Consider a demand curve represented by P = 10 – 2q, where P is price and q is the quantity demanded. What is the slope of the line?

a. 10

b. 2

c. -2

d. -1/2

e. P

Chapter 3

1. For a player in a game, a dominant strategy is:

a. When a player adopts the same strategy, regardless as to the strategies of any other players in the game.

b. When a player chooses a given strategy most of the time.

c. The strategy that maximizes the joint payoff of players in the game.

d. All of the above.

e. None of the above.

2. In a dominant strategy equilibrium:

a. The players adopt strategies that maximize the joint payoffs to all players in the game.

b. Each player adopts a strategy that maximizes the payoffs to all of the other players in the game.

c. Players adopt strategies that minimize the payoffs of their rivals.

d. Every player plays their dominant strategy.

e. None of the above.

3. Consider the following game in which Sally can play T or B and John chooses between L or R. Each player makes their choice simultaneously. If Sally chooses T and John chooses L, Sally gets a payoff of 3 and John has a payoff of 7. If Sally plays T and John R, Sally’s payoff is 2 and John gets 1. If Sally Chooses B and John L, the payoffs are 1 to Sally and 2 to John. Finally, if Sally chooses B and John R, the payoffs are 4 to Sally and 3 to John. What is the Nash equilibria of the game?

a. (T, R)

b. (B,R)

c. (T,L) and (B,R)

d. (T,L)

e. None of the above.

4. In a prisoners’ dilemma:

a. Each player, acting irrationally, chooses a strategy that reduces total surplus.

b. Each player adopts a strategy with the aim of minimize the payoff of the other players.

c. Each player does not have a dominant strategy, but the sum of payoffs to all players are not maximized.

d. Each player has a dominant strategy and in the unique equilibrium joint payoffs of the players are not maximized.

e. None of the above.

5. Consider the following sequential game. Wally first chooses L or H. Having observed Wally’s choice, Elizabeth chooses between A and F. The payoffs are as follows. If Wally chose L and Elizabeth chose A, the payoffs are 30 to Wally and 20 to Elizabeth. If Wally chose L and Elizabeth F, the payoffs are 40 to Wally and 10 and to Elizabeth. If Wally decides to opt for H and Elizabeth A, the payoffs are 10 and 2 to Wally and Elizabeth, respectively. Finally, if Wally opts for H and Elizabeth F, the payoffs are 35 to Wally and 5 to Elizabeth. What is the outcome in the subgame perfect equilibrium of this game?

a. (L, F)

b. (H, A)

c. (H, F) and (L, F)

d. (L, A) and (H, F)

e. (H, F)

6. Consider the following sequential game. Wally first chooses L or H. Having observed Wally’s choice, Elizabeth chooses between A and F. The payoffs are as follows. If Wally chose L and Elizabeth chose A, the payoffs are 20 to Wally and 30 to Elizabeth. If Wally chose L and Elizabeth F, the payoffs are 25 to Wally and 40 and to Elizabeth. If Wally decides to opt for H and Elizabeth A, the payoffs are 30 and 20 to Wally and Elizabeth, respectively. Finally, if Wally opts for H and Elizabeth F, the payoffs are 20 to Wally and 50 to Elizabeth. What is the outcome in the subgame perfect equilibrium of this game?

a. (H, A)

b. (L, F)

c. (H, F)

d. (L, A)

e. (L, F) and (H, A)

7. Consider the following game in which Sally can play T or B and John chooses between L or R. Each player makes their choice simultaneously. If Sally chooses T and John chooses L, Sally gets a payoff of 5 and John has a payoff of 4. If Sally plays T and John R, Sally’s payoff is 8 and John gets 3. If Sally Chooses B and John L, the payoffs are 3 to Sally and 2 to John. Finally, if Sally chooses B and John R, the payoffs are 7 to Sally and 0 to John. Which statement is true?

a. The Nash equilibrium is (B,R); this is a prisoners’ dilemma.

b. The Nash equilibrium is (T,R); this is a prisoners’ dilemma.

c. The Nash equilibrium is (T,R); this is not dominant strategy equilibrium.

d. The Nash equilibrium is (T,L); this is a dominant strategy equilibrium.

e. None of the above.

8. Consider the following game in which Sally can play T or B and John chooses between L or R. Each player makes their choice simultaneously. If Sally chooses T and John chooses L, Sally gets a payoff of 5 and John has a payoff of 4. If Sally plays T and John R, Sally’s payoff is 8 and John gets 3. If Sally Chooses B and John L, the payoffs are 3 to Sally and 2 to John. Finally, if Sally chooses B and John R, the payoffs are 7 to Sally and 0 to John. What is the Nash equilibrium of the game?

a. (T, L)

b. (B, L)

c. (B, R)

d. (T, R) and (B, R)

e. None of the above.

9. A subgame perfect equilibrium is when:

a. Every player’s strategy is a Nash equilibrium in every subgame (part of the game).

b. Players adopt strategies to maximize the total payoff to players in the game.

c. Every player adopts a strategy that they would credible implement if they were ever required to.

d. a and c.

e. None of the above.

10. A Nash equilibrium is:

a. When there is no unilateral profitable deviation for any player.

b. The strategy adopted by every player is optimal given the strategies adopted by every other player.

c. When all player’s adopt their best response to the strategies of all other players in the game.

d. Players adopt strategies so that the total payoff to all players is maximized.

e. a, b, and c.

Chapter 4

1. The theory of comparative advantage suggests that:

a. Both trading parties can gain if they specialize in producing the good in which they have an absolute advantage.

b. Both trading parties can gain if they specialize in producing the good for which they have the lower opportunity cost, and that all the gains from trade will accrue to the more productive party.

c. Both trading parties can gain if they each specialize in producing the good for which they have the higher opportunity cost.

d. Both trading parties can gain if they each specialize in producing the good for which they have the lower opportunity cost.

e. None of the above.

2. Which statement is true?

a. A party has the comparative advantage in producing a good if it has the absolute advantage in producing the other good.

b. If one party is more productive in producing both products, it has a comparative advantage in producing both goods.

c. A party can have a comparative disadvantage in producing both goods.

d. If parties specialize and trade, it is only the less productive party that can experience any gains from trade.

e. None of the above statements are true.

3. Bill and Jen are the only two people in an economy. Each has 10 hours in which they can make either croissants, juice or some combination of both products. In takes Bill one hour to make one croissant and one hour to make a litre of juice. It takes Jen 20 minutes to make a croissant and 40 minutes to make a litre of juice. Which statement is true?

a. The opportunity cost for Jen to make a croissant is ½ a litre of juice.

b. The opportunity cost for Jen to make a croissant is 2 litres of juice.

c. The opportunity cost for Jen to make a croissant is 20 minutes.

d. The opportunity cost for Bill to make a croissant is ½ a litre of juice.

e. The opportunity cost for Bill to make a litre of juice is a litre of juice.

4. Bill and Jen are the only two people in an economy. Each has 10 hours in which they can either make croissants, juice or some combination of both products. In takes Bill 1 hour to make one croissant and one hour to make a litre of juice. It takes Jen 20 minutes to make a croissant and 40 minutes to make a litre of juice. Which statement is true?

a. Bill has the comparative disadvantage in juice; Jen has the comparative disadvantage in making croissants.

b. Bill has the comparative advantage in juice production; Jen has the comparative advantage in making croissants.

c. Bill has the comparative advantage in croissants and juice.

d. Bill has the comparative advantage in croissants; Jen has the comparative advantage in making juice.

e. Jen has the comparative advantage in producing both goods.

5. Bill and Jen are the only two people in an economy. Each has 10 hours in which they can make either croissants, juice or some combination of both products. In takes Bill one hour to make one croissant and one hour to make a litre of juice. It takes Jen 20 minutes to make a croissant and 40 minutes to make a litre of juice. If the parties trade, which statement is true?

a. Bill will specialize in juice production and Jen will specialize in juice; the price of a croissant will be between 1 and 2 litres of juice.

b. Bill will specialize in croissant production and Jen will specialize in making juice; the price of a croissant will be between ½ and 1 litre of juice.

c. Bill will specialize in juice production and Jen will specialize making croissants; the price of a croissant will be between ½ and 1 litre of juice.

d. Bill will specialize in juice production and Jen will specialize in juice; the price of a croissant will be 1 litre of juice.

e. None of the above.

6. Paulene and Charles, the only two people in an economy, can spend their time making either herbs or eggs. Each has four hours in total to work. Paulene can make either 36 bunches of herbs and 0 dozen eggs or no herbs and 12 dozen eggs in her four hours. Charles on the other hand can make 16 bunches of herbs if he spends all his time on herb production (and no eggs) or he can make 8 dozen eggs in his four 4 hours (and no herbs). Which statement is true?

a. Paulene’s opportunity cost of making one bunch of herbs is forgoing three of a dozen eggs; Charles opportunity cost of making one bunch of herbs is ½ a dozen eggs.

b. Paulene’s opportunity cost of making one bunch of herbs is forgoing a dozen eggs; Charles opportunity cost of making one bunch of herbs is ½ a dozen eggs.

c. Paulene’s opportunity cost of making one bunch of herbs is forgoing three of a dozen eggs; Charles opportunity cost of making one bunch of herbs is two of a dozen eggs.

d. Paulene’s opportunity cost of making one bunch of herbs is forgoing 1/3 of a dozen eggs; Charles opportunity cost of making one bunch of herbs is ½ a dozen eggs.

e. None of the above.

7. Paulene and Charles, the only two people in an economy, can spend their time making either herbs or eggs. Each has four hours in total to work. Paulene can make either 36 bunches of herbs and 0 dozen eggs or no herbs and 12 dozen eggs in her four hours. Charles on the other hand can make 16 bunches of herbs if he spends all his time on herb production (and no eggs) or he can make eight dozen eggs in his four hours (and no herbs). Which statement is true?

a. Paulene has the comparative advantage in egg production Charles has the comparative advantage in producing eggs.

b. Paulene has the comparative advantage in herb production Charles has the comparative advantage in producing eggs.

c. Paulene has the comparative advantage in egg production Charles has the comparative advantage in producing herbs.

d. Paulene has the comparative disadvantage in producing both goods.

e. Charles has a comparative disadvantage in producing both goods.

8. Paulene and Charles, the only two people in an economy, can spend their time making either herbs or eggs. Each has four hours in total to work. Paulene can make either 36 bunches of herbs and 0 dozen eggs or no herbs and 12 dozen eggs in her four hours. Charles on the other hand can make 16 bunches of herbs if he spends all his time on herb production (and no eggs) or he can make eight dozen eggs in his four hours (and no herbs). If both parties are going to be willing to trade:

a. The price of a bunch of herbs must be between 1/3 and ½ a dozen eggs.

b. The price of a bunch of herbs must be between 1/2 and a dozen eggs.

c. The price of a bunch of herbs must be between 1 and 2 a dozen eggs.

d. The price of a bunch of herbs must be between 2 and 3 a dozen eggs.

e. The price of a bunch of herbs must be at least 3 dozen eggs.

9. Cassandra and Jim can make either sushi or wine or some combination of both. Each have eight hours to work. In her eight hours Cassandra can make 24 sushi rolls or 8 litres of wine (or some combination, if she splits her time). Jim can make either 16 sushi rolls or 4 litres of wine (or some combination). Which statement is true?

a. Cassandra’s opportunity cost of making a sushi roll is 3 litres of wine; Jim’s opportunity cost of making a sushi roll is forgoing ¼ a litre of wine.

b. Cassandra’s opportunity cost of making a sushi roll is a litre of wine; Jim’s opportunity cost of making a sushi roll is forgoing 4 litres of wine.

c. Cassandra’s opportunity cost of making a sushi roll is 2 litres of wine; Jim’s opportunity cost of making a sushi roll is forgoing 8 litres of wine.

d. Cassandra’s opportunity cost of making a sushi roll is 1/3 a litre of wine; Jim’s opportunity cost of making a sushi roll is forgoing ¼ a litre of wine.

e. None of the above.

10. Cassandra and Jim can make either sushi or wine or some combination of both. Each have eight hours to work. In her eight hours Cassandra can make 24 sushi rolls or 8 litres of wine (or some combination, if she splits her time). Jim can make either 16 sushi rolls or 4 litres of wine (or some combination). If the gains from trade are to be realized:

a. Cassandra will specialize in wine and Jim will specialize in producing sushi; the price of a litre of wine must be between 1/4 and 1/3 of a sushi roll.

b. Cassandra will specialize in wine and Jim will specialize in producing sushi; the price of a litre of wine must be between 3 and 4 sushi rolls.

c. Cassandra will specialize in wine and Jim will specialize in producing sushi; the price of a litre of wine must be between 1/4 and 1 sushi roll.

d. Cassandra will specialize in sushi and Jim will specialize in producing wine; the price of a litre of wine must be between 3 and 4 sushi rolls.

e. Cassandra will specialize in wine and Jim will specialize in producing sushi; the price of a litre of wine must be between 2 and 4 sushi rolls.

Chapter 5

1. Chrissie owns a vintage guitar that she values at $0. Mark would like to buy the guitar and values it at $1000. The negotiations are as follows. Chrissie suggests a price to Mark. If Mark agrees trade takes place at the agreed price. If Mark rejects the offer, negotiations end and each party receives a payoff of $0. What is the outcome of the negotiations?

a. Trade takes place at a price of $0.

b. Trade takes place at a price of $500.

c. Chrissie offers a price close to $1000 and Mark rejects the offer.

d. Trade takes place at a price of $1000.

e. Mark rejects any offer Chrissie makes.

2. Chrissie owns a vintage guitar that she values at $300. Mark would like to buy the guitar and values it at $1000. The negotiations are as follows. Chrissie suggests a price to Mark. If Mark agrees trade takes place at the agreed price. If Mark rejects the offer, negotiations end and each party receives a payoff of $0. What are the potential gains from trade?

a. $300

b. $400

c. $700

d. $1000

e. None of the above.

3. Chrissie owns a vintage guitar that she values at $0. Mark would like to buy the guitar and values it at $1000. The negotiations are as follows. Chrissie suggests a price to Mark. If Mark agrees trade takes place at the agreed price. If Mark rejects the offer, Mark buys an identical guitar from Angus for a price of $400 and Chrissie receives a payoff of $0. What is the outcome of the negotiations?

a. Chrissie offers a price of $400 and Mark accepts.

b. Chrissie offers a price of $600 and Mark accepts.

c. Chrissie offers a price of $1000 and Mark accepts.

d. Chrissie offers a price of $0 and Mark accepts.

e. Chrissie offers a price of $500 and Mark rejects.

4. Chrissie owns a vintage guitar that she values at $0. Mark would like to buy the guitar and values it at $1000. The negotiations are as follows. Chrissie suggests a price to Mark. If Mark agrees trade takes place at the agreed price. If Mark rejects the offer, negotiations proceed to the next round in which Mark makes an offer to Chrissie. If Chrissie agrees with Mark’s suggested price, trade takes place at that price. If Chrissie rejects this offer negotiations end and each party receives a payoff of $0. What is the outcome of the negotiations?

a. Chrissie offers a price of $400 and Mark accepts.

b. Chrissie offers a price of $600 and Mark accepts.

c. Chrissie offers a price of $1000 and Mark accepts.

d. Chrissie offers a price of $500 and Mark rejects.

e. Chrissie offers a price of $0 and Mark agrees.

5. When considering a bargaining game, we determine the outcome of the game by:

a. Going to the end and working backwards.

b. Working forwards, considering each stage of the negotiation in turn.

c. Assume that a bargaining agent will only make and accept offers that are in their interest.

d. Assume that bargaining agents act irrationality.

e. a and c.

6. William owns a car that he values at $3000. Jackson values the car at $5000. The negotiations between them for a potential trade are as follows: William offers a price to Jackson. If Jackson accepts, trade takes place at that price. If Jackson rejects no trade takes place. William keeps the car and Jackson gets a payoff of $0. What will the outcome be of the negotiation process?

a. William suggests Jackson pay $4000 and Jackson rejects the deal.

b. William suggests Jackson pay $8000 and Jackson accepts the deal.

c. William suggests Jackson pay $3000 and Jackson accepts the deal.

d. William suggests Jackson pay $5000 and Jackson accepts the deal.

e. William suggests Jackson pay $3000 and Jackson rejects the deal.

7. William owns a car that he values at $3000. Jackson values the car at $5000. The negotiations between them for a potential trade are as follows: William offers a price to Jackson. If Jackson accepts, trade takes place at that price. If Jackson rejects no trade takes place. William keeps the car and Jackson gets a payoff of $0. Given the equilibrium outcome of the negotiations, what are the realized gains from trade?

a. $1000

b. $2000

c. $3000

d. $4000

e. $5000

8. William owns a car that he values at $3000. Jackson values the car at $5000. The negotiations between them for a potential trade are as follows: William offers a price to Jackson. If Jackson accepts, trade takes place at that price. If Jackson rejects, bargaining proceeds to the next round in which Jackson gets the make a price offer to William. At this point, if William accepts, trade takes place at the price suggested by Jackson. If William rejects the offer, no trade takes place between them. William keeps the car and Jackson gets a payoff of $0. What outcome will result from negotiation process?

a. William offers a price of $3000 and Jackson accepts.

b. William offers a price of $5000 and Jackson accepts.

c. William offers a price of $4000 and Jackson accepts.

d. William offers a price of $3000 and Jackson rejects; Jackson offers a price of $5000 in the second period of negotiations and William rejects.

e. William offers a price of $5000 and Jackson rejects; Jackson offers a price of $3000 in the second period of negotiations and William rejects.

9. William owns a car that he values at $3000. Jackson values the car at $5000. The negotiations between them for a potential trade are as follows: William offers a price to Jackson. If Jackson accepts, trade takes place at that price. If Jackson rejects, bargaining proceeds to the next round in which Jackson gets to make a price offer to William. At this point, if William accepts, trade takes place at the price suggested by Jackson. If William rejects the offer, no trade takes place between them. William keeps the car and Jackson gets a payoff of $0. Given the equilibrium outcome of the negotiations, what are the realized gains from trade?

a. $5000

b. $4000

c. $3000

d. $2000

e. $1000

10. Ainslie is in a team with Michelle and together they must produce a report for their boss. To determine who will do the work, they engage in the following negotiations: Ainslie can propose that either she does the work, or that Michelle does the work. Michelle can then accept or reject Ainslie’s offer. If Ainslie offers to do the work, and Michelle accepts this offer, Ainslie gets a payoff of 20 and Michelle a payoff of 40. If Michelle rejects this offer both get a payoff of 10. If Ainslie suggests Michelle do the work and Michelle accepts, the payoffs are 50 to Ainslie and 20 to Michelle. If Michelle rejects Ainslie’s suggestion that Michelle is the one who should complete the work, Ainslie has an opportunity to respond. At this juncture, Ainslie can opt not to do the work, and both workers get a payoff of 10. If Ainslie chooses to do the work, she receives a payoff of 15 and Michelle gets a return of 50. What is the outcome of this negotiation process?

a. Ainslie suggests Michelle do the work, and Michelle refuses; Ainslie then chooses to do the work.

b. Ainslie suggests Michelle do the work, and Michelle accepts.

c. Ainslie suggests Michelle do the work, Michelle refuses; Ainslie then chooses not to do the work.

d. Ainslie suggests that she does the work herself, and Michelle refuses.

e. Ainslie suggests she does the work, and Michelle accepts.

Chapter 6

1. A demand curve is:

a. The amount of a product or service that a consumer desires.

b. The quantity of a good or service that a consumer thinks about buying.

c. The quantity of a consumer would like to buy, if they had the money.

d. The amount of a good that a consumer is willing and able to purchase at different prices of the good.

e. None of the above.

2. A demand curve is derived:

a. Holding everything else constant, except for the price of the good itself.

b. Holding everything else constant, except for the consumer’s income and the price of the good.

c. Allowing everything relevant to vary, but only by a small amount.

d. Holding everything constant, except for the price of the good itself and the price of related products.

e. None of the above

3. A market demand curve is the:

a. Horizontal summation of individual demand curves.

b. Summation of the quantities each individual in the market is willing and able to purchase, for every price.

c. The summation of individual demand curves, allowing income to vary.

d. a and b

e. a and c.

4. The marginal benefit curve is:

a. An individual’s demand curve for the product.

b. An individual’s demand curve, that is derived varying income.

c. Typically flat, indicating a constant benefit derived from consuming the good.

d. b and c

e. None of the above.

5. Which statement is true?

a. The law of demand typically holds because an individual consumer’s demand curve is derived holding income constant.

b. The law of demand always holds in every market.

c. The law of demand suggests an inverse relationship between price and the quantity demanded.

d. The law of demand suggests that the demand curve for an individual is upward sloping, due to diminishing MB.

e. None of the above.

6. If a consumer’s income increases:

a. There will be a change in demand.

b. There will be a movement along the demand curve.

c. There will be an increase in the quantity demanded, but the demand curve will not shift.

d. b and c

e. None of the above.

7. A consumer’s marginal benefit curve (MB) for a good is represented by MB = 100 – 2q. What is the individual’s MB of the 50th unit of the good consumed?

a. 100

b. 80

c. 40

d. 20

e. 0

8. A consumer’s marginal benefit curve (MB) for a good is represented by MB = 100 – 2q. What is the highest price the individual is willing to pay for the 10th unit of the good?

a. 0

b. 100

c. 80

d. 40

e. 60

9. In a market there are two consumers. Each consumer has a demand curve of P = 10 – 0.5q. What is the market demand curve?

a. P = 10 - q

b. P = 10 - 0.25q

c. P = 20 - q

d. P = 10 – 2q

e. P = 20 – 0.5q

10. In a market there are two consumers. The first has a demand curve of P = 20 – 2q. The other has a demand curve of P = 20 – q. What is the market demand curve?

a. P = 30 - q

b. P = 40 – 3/2q

c. P = 20 - 3q

d. P = 20 – 2/3q

e. None of the above.

Chapter 7

1. In the short run:

a. At least one factor of production cannot be varied.

b. A firm has only one factor of production.

c. A firm can vary all inputs in the production process.

d. A firm cannot vary any input in the production process.

e. None of the above.

2. In the long run:

a. A firm can vary all but one of its factors of production.

b. A firm can vary all of its inputs in the production process.

c. A firm cannot vary any inputs in the production process.

d. All of the above.

e. None of the above.

3. A short-run production function at some point becomes flatter due to:

a. Decreasing returns to scale.

b. Increasing returns to scale.

c. The fact that a firm has to hire poorer quality workers as production increases.

d. Diminishing marginal product.

e. None of the above.

4. A firm has a short-run cost function of TC(q) = 100 + 2q + 3q². What is the firm’s fixed costs?

a. 3q².

b. 2q

c. It depends on the level of q

d. 80

e. 100

5. A firm has a short-run cost function of TC(q) = 100 + 2q + 3q². What is the firm’s MC?

a. MC = 2 +6q

b. MC = 2

c. MC = 3q

d. MC = 6q

e. None of the above.

6. A firm’s short-run MC curve:

a. Is eventually upwards sloping due to diminishing marginal product.

b. Is downward sloping due to increasing returns to scale.

c. Is eventually upward sloping due to decreasing returns to scale.

d. Is flat due to constant returns to scale.

e. None of the above.

7. Which statement is true?

a. Marginal cost always lies below ATC for every level of output.

b. Marginal cost intersects the maximum of ATC from below

c. Marginal cost intersects the minimum of AFC from below.

d. Marginal cost intersects the minimum of ATC from below.

e. None of the above.

8. Which statement is true?

a. Long-run average costs are the same or more than short-run average costs.

b. Long-run average costs are increasing due to diminishing marginal product.

c. Long-run average costs are the lower envelope of short-run average cost curves.

d. Long-run average costs equal long-run marginal costs for every level of output.

e. None of the above.

9. Which statement is FALSE?

a. A firm cannot experience both economies of scale and diminishing marginal product.

b. A firm’s long-run average costs can be increasing, decreasing or remain unchanged as output increases.

c. A firm has no fixed costs in the long run.

d. Long-run average total costs are decreasing as output increases if a firm is experiencing economies of scale.

10. Which statement is true?

a. Marginal cost intersects the maximum of AVC from below.

b. Marginal cost intersects the minimum of AVC from below.

c. Marginal cost intersects the minimum of AFC from below.

d. The difference between AVC and ATC is AFC for every level of output.

e. b and d are both true.

Chapter 8

1. If a firm’s marginal cost is MC = 2 +2q and market price is $10, what is the profit maximizing level of output (assuming the firm produces a positive quantity)?

a. 2

b. 4

c. 6

d. 8

e. 10

2. The law of supply typically holds because:

a. Of decreasing returns to scale.

b. Of economies of scale.

c. As production increases, a firm has to resort to hiring inherently less productive workers.

d. Of diminishing marginal product ensures that a firm’s short-run MC is upward sloping.

e. None of the above.

3. A firm that is producing a positive quantity of output has a profit-maximizing rule that:

a. It will keep producing until MR is less MC for the next until of production.

b. It will keep producing provided MR > 0.

c. It will produce so as to minimize MC.

d. It will stop producing when MR exceeds MC.

e. None of the above.

4. A supply curve:

a. Is derived holding everything constant, except for a firm’s technology.

b. Is derived holding everything constant, except for the output price of the good itself.

c. Is derived holding everything constant.

d. All of the above.

e. None of the above.

5. The market supply curve:

a. Is the horizontal summation of individual firm’s ATC curves.

b. Is the summation of the individual firm’s AVC curves for every level of output.

c. Is the prices firms choose to sell in a competitive market.

d. The horizontal summation of individual firm supply curves.

e. None of the above.

6. If a firm’s marginal cost is MC = 20 +5q and market price is $80, what is the profit-maximizing level of output (assuming the firm produces a positive quantity)?

a. 8

b. 10

c. 12

d. 15

e. 20

7. If a firm’s marginal cost is MC = 20 +2q and market price is $10, what is the profit-maximizing level of output?

a. 0

b. 8

c. 10

d. 12

e. 5

8. If a firm’s marginal cost is MC = 5 +2q and market price is $35, what is the profit-maximizing level of output (assuming the firm produces a positive quantity)?

a. 1

b. 5

c. 10

d. 15

e. None of the above.

9. Which statement is true?

a. The market supply curve is derived assuming consumers are price takers, but that firms in the market are not price takers.

b. The supply curve for an individual firm is derived assuming the firm itself is a price taker, but this is not true for the derivation of the market supply curve.

c. The supply curves for both an individual firm and for the market are derived assuming all firms are price takers.

d. All of the above.

e. None of the above.

10. Which statement is true?

a. A firm’s supply curve is the horizontal summation of its individual total cost curve.

b. A firm’s supply indicates the different prices a competitive firm will wish to set, given the quantity it wishes to sell.

c. A firm’s supply curve is derived under the assumption of price taking behaviour.

d. All of the above.

e. None of the above.

Chapter 9

1. In a market the demand curve is given by P = 100 – 2q and supply by P = 2q. What are the equilibrium price and quantity traded?

a. P = 25, q = 25

b. P = 100, q = 50

c. P = 50, q = 50

d. P = 50, q = 25

e. None of the above.

2. In a market the demand curve is given by P = 120 – 2q and supply by P = q. What are the equilibrium price and quantity traded?

a. P = 60, q = 60

b. P = 40, q = 80

c. P = 40, q = 40

d. P = 20, q = 40

e. None of the above.

3. In a market the demand curve is given by P = 100 – 2q and supply by P = 2q. What is CS in the market equilibrium?

a. CS = 625

b. CS = 1250

c. CS = 750

d. CS = 500

e. None of the above.

4. In a market the demand curve is given by P = 100 – 2q and supply by P = 2q. What is PS in the market equilibrium?

a. PS = 725

b. PS = 125

c. PS = 500

d. PS = 625

e. None of the above.

5. In a market the demand curve is given by P = 120 – 2q and supply by P = q. What is CS in the market equilibrium?

a. CS = 3200

b. CS = 1600

c. CS = 3600

d. CS = 800

e. None of the above.

6. In a market the demand curve is given by P = 120 – 2q and supply by P = q. What is PS in the market equilibrium?

a. PS = 1600

b. PS = 3200

c. PS = 1200

d. PS = 800

e. None of the above.

7. Consider the competitive markets for running shoes and gym memberships, two complementary products. Assume that the laws of demand supply hold in each market. You observe the following facts in the two markets: in the running shoe market both the price and quantity traded fall; and in the gym membership market the price increases and the quantity traded falls. What change could explain these changes?

a. The cost of rubber, an input into running shoes, increases.

b. The cost of rubber, an input into running shoes, falls.

c. New computer and security technology allows gyms to operate with fewer staff.

d. New medical research shows that people that exercise regularly live longer and are happier.

e. A new workplace safety law requires that all gyms need to have more and better trained staff.

8. Producer surplus:

a. Is the area under the supply curve above the price line.

b. Is the price a firm receives for a good minus its marginal cost of production, for every unit it sells.

c. Is the firm’s marginal cost minus the price it receives for selling the good for every unit sold.

d. The area between the MB and MC curves

e. None of the above.

9. Which statement is true?

a. Consumer surplus is the benefit a consumer receives from consuming a product, net of the price they have to pay for it.

b. Consumer surplus is the area underneath the demand curve above the price line.

c. Consumer surplus is the area underneath the price line above the demand curve.

d. a and b.

e. None of the above.

10. Which statement is true?

a. A competitive market maximizes total surplus as all the gains from trade are realized.

b. In a competitive market all trade for which the MB is greater than or equal to the MC of production take place.

c. If output was increased beyond the traded in a competitive market total surplus would decrease

d. The competitive equilibrium outcome is Pareto efficient.

e. All of the above.

Chapter 10

1. The quantity demanded increases from 20 to 30 units as the price falls from 50 to 40. What is the price elasticity of demand using the arc (or midpoint) method?

a. -1/5

b. -9

c. -1/2

d. -9/5

e. None

2. What is the price elasticity of supply if the supply curve is given by P = 2q?

a. 1

b. 2

c. 3

d. 4

e. None of the above

3. If the quantity supplied increases from 100 to 150 if the price rises from 5 to 10, what is the price elasticity of supply according to the arc (or midpoint) method?

a. 1/5

b. 2/5

c. 3/5

d. 1

e. None of the above

4. Consider a market with a demand curve of P = 150 – q and a supply curve of P = 2q. What is the price elasticity of demand at the market equilibrium?

a. -1/2

b. -1

c. -3/2

d. -2

e. None of the above

5. Consider a market with a demand curve of P = 150 – q and a supply curve of P = 2q. What is the price elasticity of supply at the market equilibrium?

a. 1/2

b. 1

c. 3/2

d. 2

e. None of the above

6. If an increase in income by 15 per cent results in a 45 per cent increase in the quantity demanded, what is the income elastic of the good?

a. 3/2

b. 3

c. 1/2

d. 1/3

e. None of the above

7. Which statement is true?

a. The cross-price elasticity of demand for two substitute products is zero.

b. The cross-price elasticity of demand for two substitute products is negative.

c. The cross-price elasticity of demand for two substitute products is positive.

d. Either a or b.

e. None of the above.

8. Which statement is true?

a. The price elasticity of demand is constant along a straight-line demand curve.

b. The price elasticity of demand varies along a straight-line demand curve.

c. Given slope is constant, the price elasticity of demand is constant along a straight-line demand curve.

d. a and c

e. None of the above.

9. A company that supplies water to a city faces a market demand curve of P = 240 - 3q. At what quantity does the company maximize total revenue?

a. q = 20

b. q = 40

c. q = 60

d. q = 80

e. None of the above

10. A company that supplies water to a city faces a market demand curve of P = 150 - 2q. At what price does the company maximize total revenue?

a. P = 75

b. P = 150

c. P = 50

d. P = 100

e. None of the above.

Chapter 12

1. The short-run supply curve for a firm in a competitive market is:

a. The downward-sloping section of the short-run marginal cost curve.

b. The upward-sloping section of the short-run marginal cost curve above the minimum of ATC.

c. The upward-sloping section of the short-run marginal cost curve.

d. The upward-sloping section of its short-run marginal cost curve above the minimum of AVC.

e. None of the above.

2. Which statement is true?

a. The long-run supply curve for a competitive firm is its long-run marginal cost curve above the minimum of AVC.

b. The long-run supply curve for a competitive firm is its long-run marginal cost curve above the minimum of ATC.

c. The long-run supply curve for a competitive firm is its long-run marginal cost curve above the minimum of AFC.

d. The long-run supply curve for a competitive firm is its long-run marginal cost curve.

e. None of the above.

3. Which statement is true?

a. Zero economic profits in the long run means that firms make zero accounting profits.

b. Free entry and exit in a competitive industry means that firms make negative economic profits in the long run.

c. A competitive firm in the long run can make positive economic profits.

d. A competitive firm in the long run will always leave the industry as it makes zero economic profits.

e. None of the above.

4. In the long run in a constant-cost industry:

a. A firm’s supply curve is upward sloping but the industry supply curve is perfectly elastic at the minimum of ATC.

b. A firm’s supply curve is upward sloping but the industry supply curve is perfectly elastic at the minimum of AVC.

c. Both the industry and a firm’s supply curve are perfectly elastic at the minimum of ATC.

d. The supply curve for a firm is perfectly elastic at the minimum of average total cost and the industry supply curve is the horizontal summation of the upward sloping sections of the MC curves of firms in the industry (above the minimum of ATC).

e. None of the above.

5. Assume that a firm has TC = 100 + q². If price is $50, which statement is true?

a. The firm produces 50 units, and makes an economic profit; this outcome is not a long-run equilibrium

b. The firm produces 25 units, and makes an economic profit; this outcome is not a long-run equilibrium.

c. The firm produces 25 units, and makes zero economic profit; this outcome is not a long-run equilibrium.

d. The firm produces 25 units, and make zero economic profit; the market is in its long-run equilibrium.

e. None of the above.

6. Assume that a firm has TC = 100 + q². If price is $20, which statement is true?

a. The firm produces 20 units, and makes an economic profit; this outcome is not a long-run equilibrium.

b. The firm produces 25 units, and makes an economic profit; this outcome is not a long-run equilibrium.

c. The firm produces 10 units, and makes zero economic profit; this outcome is a long-run equilibrium.

d. The firm produces 20 units, and make zero economic profit; the market is in its long-run equilibrium.

e. None of the above.

7. Which statement is true?

a. In an increasing-cost industry, a firm’s long-run supply curve is perfectly elastic at the minimum of ATC and the long-run industry supply curve is upward sloping.

b. In an increasing-cost industry, a firm’s long-run supply curve is upward sloping and the long run industry supply curve is also upward sloping.

c. In a decreasing-cost industry, a firm’s long-run supply curve is upward sloping and the long-run industry supply curve is perfectly elastic at the minimum of ATC.

d. In an increasing-cost industry, a firm’s long-run supply curve is upward sloping and the long-run industry supply curve can either be perfectly elastic or upward sloping, depending on the circumstances.

e. None of the above.

8. Consider a competitive firm with a TC = 50 + 2q² + q. If price is $21, which statement is true?

a. The firm produces 5 units of output and is making an economic loss; the firm will exit the industry in the long run.

b. The firm produces 10 units of output and this is the long-run equilibrium.

c. The firm produces 5 units of output, and is making a positive economic profit; this is the long-run equilibrium.

d. The firm produces 5 units of output and this is the long-run equilibrium.

e. The firm shuts down in the short run and produces zero output; the firm will leave the industry in the long run.

9. Consider a competitive firm with a TC = 50 + 2q² + q. If price is $17, which statement is true?

a. The firm produces 4 units of output in the short run and is making an economic loss; the firm will exit the industry in the long run.

b. The firm produces 8.5 units of output and this is the long-run equilibrium.

c. The firm produces 4 units of output, and is making a positive economic profit; this is the long-run equilibrium.

d. The firm produces 4 units of output, and is making a zero economic profit; this is the long-run equilibrium.

e. The firm shuts down in the short run and produces zero output; the firm will leave the industry in the long run.

10. A competitive firm has a TC = 64 + q² + 20q. If the market price is $16, which statement is true?

a. The firm produces 2 units of output in the short run and is making an economic loss; the firm will exit the industry in the long run.

b. The firm produces 5 units of output and this is the long-run equilibrium.

c. The firm produces 16 units of output, and is making a positive economic profit; this is not the long-run equilibrium.

d. The firm produces 4 units of output, and is making a zero economic profit; this is the long-run equilibrium.

e. The firm shuts down in the short run and produces zero output; the firm will leave the industry in the long run.

Chapter 13

1. Laura runs a nightclub called the ‘Two Standard Drinks’. Given the popularity and cache of the club, she has a monopoly position in the market. The market demand curve is given by P = 120 – q. Laura has a marginal cost per drink of MC = 2q and a fixed cost FC = $150. If Laura charges the same price to all customers, what are Laura’s profit-maximizing price P^M and quantity q^M?

a. P^M = $90; q^M = 60 units

b. P^M = $60; q^M = 60 units

c. P^M = $120; q^M = 0 units

d. P^M = $30; q^M = 30 units

e. P^M = $90; q^M = 30 units

2. Laura runs a nightclub, ‘Two Standard Drinks’. Given the popularity and cache of the club, she has a monopoly position in the market. The market demand curve is given by P = 120 – q. Laura has a marginal cost per drink of MC = 2q and a fixed cost FC = $150. If Laura charges the same price to all customers, what is the resulting DWL?

a. $100

b. $200

c. $150

d. $400

e. $500

3. Laura runs a nightclub. Given the popularity and cache of the club, she has a monopoly position in the market. The market demand curve is given by P = 120 – q. Laura has a marginal cost per drink of MC = 2q and a fixed cost FC = $150. If Laura charges the same price to all customers, what is Laura’s profit?

a. $3200

b. $3050

c. $650

d. $1600

e. $1650

4. Laura runs a nightclub. Given the popularity and cache of the club, she has a monopoly position in the market. Each potential nightclub goer has the same demand of P = 22 – q, and there are 1000 customers in total in the market. Laura has a marginal cost per drink of MC = $2 per unit and no fixed cost. If Laura can charge an entry fee as well as for each drink, which statement is true?

a. Laura charges an entry fee of $200 and $2 per drink; she makes a profit of $200 000; there is zero DWL generated in this market.

b. Laura charges an entry fee of $0 and $12 per drink; there is a DWL of $72 generated in this market.

c. Laura charges an entry fee of $250 and $2 per drink; there is zero DWL generated in this market.

d. Laura charges an entry fee of $50 and $2 per drink; she makes a profit of $0; there is zero DWL generated in this market.

e. None of the above.

5. Laura runs a nightclub called ‘The ’Gong’. Given the popularity and cache of the club, she has a monopoly position in the market. Males nightclub goers have an individual demand curve of P = 22 – q, whereas female customers each have an individual demand curve of P = 16 – q. Laura has a marginal cost per drink of MC = $2 per unit and no fixed cost. By law, Laura is unable to charge an entrance fee. She can, however, charge different prices for men and women for their drinks (by serving men blue glasses and women customers their drinks in green glasses). If Laura tries to maximize profit, which statement is true?

a. Laura charges both men and women $12 per drink; this is first-degree price discrimination.

b. Laura charges men $12 per drink and women $9 per drink; this is an example of third-degree price discrimination.

c. Laura charges men $9 per drink and women $12 per drink; this is an example of third-degree price discrimination.

d. Laura charges men $10 per drink and women $7 per drink; this is an example of third-degree price discrimination.

e. Laura will use second-price discrimination in order to maximize her profit.

6. Aletheia is a monopoly supplier of a product in a seaside city. Her marginal cost is $5 per unit and she has no fixed costs. The market demand curve for the product is P = 25 – q. What are the profit-maximizing price, quantity, profit and DWL if Aletheia charges the same price to all her customers?

a. P = $5, q = 10 units, π = $75, DWL = $25

b. P = $15, q = 10 units, π = $100, DWL = $100

c. P = $5, q = 5 units, π = $10, DWL = $40

d. P = $10, q = 10 units, π = $50, DWL = $25

e. P = $15, q = 10 units, π = $100, DWL = $50

7. Yongling is a monopoly seller of a good in a town. She has a fixed supply of 8 units and no other costs. The market demand curve for the product is P = 20 – q. What is her profit if she sells to all her clients at the same price?

a. $24

b. $36

c. $72

d. $48

e. $96

8. Suzanne is the monopoly seller of an illegal product in a particular city. Her marginal cost is $10 per unit and she has no other costs. She faces a demand curve of P = 130 – q, and she charges a linear price to her clients. Unfortunately for Suzanne, in the city there is a corrupt government official who has the power to shut Suzanne’s operation down. This official, however, is willing to take a bribe and let Suzanne continue to sell. What is the highest bribe that Suzanne is willing to pay?

a. $3200

b. $1250

c. $3600

d. $5000

e. $6400

9. Suzanne is the monopoly seller of a highly addictive consumer product. Her marginal cost is $2 per unit and she has no other costs. Suzanne knows that new clients have an individual demand curve of P = 10 – q and that previous clients (or repeated customers) have a demand curve of P = 18 – q. Suzanne knows exactly who each client is – that is, whether they are a new client or a previous client. What is Suzanne’s profit-maximizing strategy?

a. Sell a bundle of 10 units to each new client for a price of $100; sell a bundle of 18 units to previous clients at a price of $324.

b. Sell a bundle of 8 units to each new client for a price of $48; sell a bundle of 16 units to previous clients at a price of $160.

c. Sell a bundle of 8 units to each new client for a price of $64; sell a bundle of 16 units to previous clients at a price of $128.

d. Sell a bundle of 4 units to each new client for a price of $32; sell a bundle of 6 units to previous clients at a price of $40.

e. None of the above.

10. If a government regulates a firm with increasing returns to scale for all levels of output:

a. Average cost pricing results in economic losses; a firm will need an additional subsidy to cover its fixed costs to prevent it from leaving the industry.

b. Marginal cost price regulation results in economic losses for the firm and a positive DWL.

c. Average cost pricing results in zero economic profit but a positive DWL.

d. Average cost price regulation allows the firm to make a positive economic profit but eliminates any DWL.

e. None of the above

Chapter 14

1. In a monopolistically competitive industry, which statement is true?

a. MR = MC ≤ P = ATC in the long run

b. ATC is minimized in the long run.

c. MC = P > ATC and a firm can earn positive economic profits in the long run.

d. MC = ATC = P in the long run equilibrium.

e. None of the above.

2. In the short run in a monopolistically competitive industry:

a. Firms can earn positive economic profits.

b. Firms can earn negative economic profits.

c. Firms can earn zero economic profits.

d. Firms are profit maximizers, setting MR = MC if they produce a positive level of output.

e. All of the above statements are true.

3. In the short run in a monopolistically competitive industry:

a. MR = MC; if a firm is making zero economic profits, it will immediately leave the industry.

b. MR = MC; if a firm is making negative economic profits it will immediately leave the industry.

c. MR = MC < P; a firm can make positive, negative or zero economic profits.

d. MR = ATC < P; a firm makes positive economic profits.

e. None of the above.

4. In the short run for a firm in a monopolistically competitive industry:

a. P > MC = MR; there is a DWL.

b. P = MC; there is no DWL.

c. P must be equal to ATC, and there is a positive DWL.

d. P < AVC, there is a DWL

e. As the firm faces a perfectly elastic demand curve at the market price, MR = MC = P, and there is no DWL.

5. Which statement is true?

a. The product variety effect suggests that there will be too much entry in a monopolistically competitive industry.

b. The product variety effect suggests that a firm in a monopolistically competitive industry is more likely to shut down.

c. The business stealing effect suggests that there is too little entry in a monopolistically competitive industry.

d. Depending on the relative importance of the business stealing and the product variety effects, there can be too much or too little entry in a monopolistically competitive industry.

e. None of the above.

Chapter 15

1. Dell and HP must both simultaneously prices for their new laptops. They can both either choose to set a Low or High price. The payoffs are as follows. If both firms set a Low price, Dell gets 5 and HP 6. If both firms set a High price, the payoffs are 7 to Dell and 8 to HP. If Dell sets a High price and HP chooses Low, the payoffs are 3 to Dell and 10 to HP. If Dell sets a Low price and HP opts for High, the payoffs are 9 to Dell and 1 to H. What is the Nash equilibrium?

a. (Low, High), where the first strategy is Dell’s and the second HP’s.

b. (High, Low), where the first strategy is Dell’s and the second HP’s.

c. (High, High), where the first strategy is Dell’s and the second HP’s.

d. (Low, Low), where the first strategy is Dell’s and the second HP’s.

e. None of the above.

2. Dell and HP must both simultaneously prices for their new laptops. They can both either choose to set a Low or High price. The payoffs are as follows. If both firms set a Low price, Dell gets 3 and HP 7. If both firms set a High price, the payoffs are 6 to Dell and 3 to HP. If Dell sets a High price and HP chooses Low, the payoffs are 8 to Dell and 6 to HP. If Dell sets a Low price and HP opts for High, the payoffs are 7 to Dell and 2 to H. What is the Nash equilibrium?

a. (Low, High), where the first strategy is Dell’s and the second HP’s.

b. (High, Low), where the first strategy is Dell’s and the second HP’s.

c. (High, High), where the first strategy is Dell’s and the second HP’s.

d. (Low, Low), where the first strategy is Dell’s and the second HP’s.

e. None of the above.

3. Dell and HP must both simultaneously prices for their new laptops. They can both either choose to set a Low or High price. The payoffs are as follows. If both firms set a Low price, Dell gets 5 and HP 6. If both firms set a High price, the payoffs are 7 to Dell and 8 to HP. If Dell sets a High price and HP chooses Low, the payoffs are 3 to Dell and 10 to HP. If Dell sets a Low price and HP opts for High, the payoffs are 9 to Dell and 1 to H. What statement is true?

a. Dell has a dominant strategy, but HP does not have a dominant strategy.

b. The dominant strategy equilibrium is (Low, Low).

c. Each firm has a dominant strategy; this game is a prisoners’ dilemma.

d. b and c are true.

e. Neither player has a dominant strategy; this is a prisoner’s dilemma.

4. Mick and Nicky need to decide where to locate their restaurants. They each have to simultaneously choose to locate on State or Main. The payoffs are as follows. If both restaurants are located on Main, each player gets a payoff of 10. If they both choose State, the payoffs are 5 to each player. If Mick locates on State and Nicky on Main, each player gets a payoff of 2. If Mick locates on Main and Nicky opts for State each player gets 0. What is the Nash equilibrium?

a. (State, State) where the first strategy is Mick’s and Nicky’s is the second strategy.

b. (State, Main)

c. (Main, Main) and (State, State)

d. (Main, State) and (State, Main)

e. (Main, State)

5. Mick and Nicky need to decide where to locate their restaurants. They each have to simultaneously choose to locate on State or Main. The payoffs are as follows. If both restaurants are located on Main, each player gets a payoff of 5. If they both choose State, the payoffs are 3 to each player. If Mick locates on State and Nicky on Main, Mick gets a payoff of 7 and Nicky gets 8. If Mick locates on Main and Nicky opts for State, Mick gets 8 and Nicky gets 7. What is the Nash equilibrium?

a. (State, State) where the first strategy is Mick’s and Nicky’s is the second strategy.

b. (State, Main)

c. (Main, Main) and (State, State)

d. (Main, State) and (State, Main)

e. (Main, State)

6. Consider an entry game in a particular market. NW Coffee decides whether to Enter or Not Enter a market. If NW Coffee chooses Not Enter it gets a payoff of 10 and Dunkin’ Donuts (DDs) gets a payoff of 30. If NW Coffee enters, DDs can choose to either Punish or to Cooperate. If DDs chooses Punish following Enter, the payoffs are 5 to NW Coffee and 10 to DDs. If DDs chooses to Cooperate following Enter, NW Coffee gets a payoff of 20 and DDs gets 20. What are the Nash equilibria?

a. (Enter, Punish) and (Not Enter, Cooperate).

b. (Enter, Cooperate).

c. (Not Enter, Punish).

d. (Not Enter, Punish) and (Enter, Cooperate).

e. None of the above.

7. Consider an entry game in a particular market. NW Coffee decides whether to Enter or Not Enter a market. If NW Coffee chooses Not Enter it gets a payoff of 10 and Dunkin’ Donuts (DDs) gets a payoff of 30. If NW Coffee enters, DDs can choose to either Punish or to Cooperate. If DDs chooses Punish following Enter, the payoffs are 5 to NW Coffee and 10 to DDs. If DDs chooses to Cooperate following Enter, NW Coffee gets a payoff of 20 and DDs gets 20. What are the subgame (credible) equilibria?

a. (Enter, Punish) and (Not Enter, Cooperate).

b. (Enter, Cooperate).

c. (Not Enter, Punish).

d. (Not Enter, Punish) and (Enter, Cooperate).

e. None of the above.

8. Consider an entry game in a particular market. NW Coffee decides whether to Enter or Not Enter a market. If NW Coffee chooses Not Enter it gets a payoff of 10 and Dunkin’ Donuts (DDs) gets a payoff of 30. If NW Coffee enters, DDs can choose to either Punish or to Cooperate. If DDs chooses Punish following Enter, the payoffs are 5 to NW Coffee and 25 to DDs. If DDs chooses to Cooperate following Enter, NW Coffee gets a payoff of 20 and DDs gets 20. What are the subgame (credible) equilibria?

a. (Enter, Punish) and (Not Enter, Cooperate).

b. (Enter, Cooperate).

c. (Not Enter, Punish).

d. (Not Enter, Punish) and (Enter, Cooperate).

e. None of the above.

9. Consider the following market in which both Apple and Samsung must choose a new platform for their suite of products. The two choices for each firm are either P1 or P2. The timing of the game is as follows. Apple first chooses either P1 or P2. Samsung observes the choice of Apple and then gets to makes its choice of either P1 or P2. The payoffs are as follows. If both firms chose P1 Apple gets 30 and Samsung 10. If Apple chooses P1 and Samsung P2, Apple receives a payoff of 10 and Samsung gets 0. If Apple opts for P2 and Samsung follows this choice with P1, the payoffs are 50 and 10 to Apple and Samsung, respectively. Finally, if Apple chose P2 and Samsung P2, each firm gets 20. In the subgame (credible) equilibria, what are the actions we observe in the equilibrium play of the game?

a. (P1, P1) where the first term in the parentheses is Apple’s action and the second is the action of Samsung.

b. (P1, P2)

c. (P2, P1)

d. (P2, P2)

e. (P1, P1) and (P2, P2).

10. Consider the following market in which both Apple and Samsung must choose a new platform for their suite of products. The two choices for each firm are either P1 or P2. The timing of the game is as follows. Apple first chooses either P1 or P2. Samsung observes the choice of Apple and then gets to makes its choice of either P1 or P2. The payoffs are as follows. If both firms chose P1 Apple gets 30 and Samsung 10. If Apple chooses P1 and Samsung P2, Apple receives a payoff of 10 and Samsung gets 0. If Apple opts for P2 and Samsung follows this choice with P1, the payoffs are 50 and 20 to Apple and Samsung, respectively. Finally, if Apple chose P2 and Samsung P2, Apple gets 20 and Samsung gets 10. In the subgame (credible) equilibria, what are the actions we observe in the equilibrium play of the game?

a. (P1, P1) where the first term in the parentheses is Apple’s action and the second is the action of Samsung.

b. (P1, P2)

c. (P2, P1)

d. (P2, P2)

e. (P1, P1) and (P2, P2).

Chapter 16

1. Which of the following statements is true?

a. A binding price ceiling results in excess supply.

b. A non-binding price ceiling results in excess demand.

c. A non-binding price ceiling results in excess supply.

d. A binding price ceiling results in excess demand.

e. a and c are correct.

2. Which of the following statements is true?

a. A non-binding price floor results in excess supply.

b. A binding price floor results in excess supply.

c. A binding price floor results in excess demand.

d. A non-binding price floor results in excess demand.

e. None of the above statements are true.

3. Which statement is true?

a. A positive tax can create a DWL and not raise any revenue.

b. A tax that raises no revenue will never create a DWL.

c. A tax that raises tax revenue will create a DWL.

d. All of the above statements are true.

e. None of the above.

4. Which statement is true?

a. The economic incidence of a tax depends on the legal incidence of a tax.

b. The economic incidence of a tax does not depend on the legal incidence of a tax.

c. The economic incidence is always shared between the buyers and sellers in the market.

d. A tax is always paid for equally by suppliers and buyers in a market, irrespective of which side of the market is legally responsible for the tax.

e. None of the above.

5. Consider a market with a demand curve of P = 15 – q and a supply curve of P = 2q. If the government levies a tax on consumers of $3 per unit, what is the equilibrium quantity traded in the market.

a. 3

b. 4

c. 5

d. 6

e. 7

6. Consider a market with a demand curve of P = 15 – q and a supply curve of P = 2q. If the government levies a tax on consumers of $3 per unit, what are the prices paid by consumers (P^c) and the price received by suppliers (P^s)?

a. P^c = 10, P^s = 7.

b. P^c = 12, P^s = 9.

c. P^c = 10, P^s = .10

d. P^c = 11, P^s = 8.

e. P^c = 13, P^s = .10

7. Consider a market with a demand curve of P = 15 – q and a supply curve of P = 2q. If the government levies a tax on consumers of $3 per unit, what is the resulting DWL?

a. DWL = $0

b. DWL = $1

c. DWL = $1.5

d. DWL = $2

e. DWL = $3

8. Consider a market in which the law of demand hold, but supply is perfectly inelastic. The government levies a tax on consumers of t per unit consumed. In this case

a. Consumer and suppliers share the incidence of the tax; the DWL is increasing in the price elasticity of demand.

b. Consumer and supplier share the incidence of the tax; there is no DWL.

c. Suppliers pay for part of the tax; the DWL is increasing in the price elasticity of demand.

d. Suppliers pay for all of the tax; the DWL is zero.

e. None of the above.

9. Consider a market in which demand is given by P = 30 – 2q and supply is given by P = q. If the government imposes a tax of $6 per unit on suppliers:

a. Consumers pay a price of $16 and suppliers receive a net price (not including the tax) of $10.

b. Consumers pay a price of $12 and suppliers receive a net price (not including the tax) of $6.

c. Consumers pay a price of $14 and suppliers receive a net price (not including the tax) of $8.

d. Consumers pay a price of $20 and suppliers receive a net price (not including the tax) of $14.

e. None of the above.

10. Consider a market in which demand is given by P = 30 – 2q and supply is given by P = q. If the government imposes a tax of $6 per unit on suppliers, the resulting DWL is:

a. $0

b. $2

c. $4

d. $6

e. $8

Chapter 17

1. A positive consumption externality results in:

a. A market equilibrium quantity traded being more than the surplus-maximizing quantity, and consumers paying too high a price.

b. A market equilibrium quantity traded being more than the surplus-maximizing quantity, and consumers paying too little for the product.

c. The market output being below the surplus-maximizing level, and the market equilibrium price paid by consumers being too high.

d. All of the above.

e. None of the above.

2. A negative production externality results in:

a. A DWL in the market equilibrium because there is too much output relative to the efficient level of production.

b. A DWL in the market equilibrium because output is too low in the market equilibrium relative to the socially efficient level of output.

c. No DWL loss in the market equilibrium as all costs and benefits are captured in the actions of market participants.

d. All of the above.

e. None of the above.

3. The Coase theorem states that:

a. The initial allocation of property rights affects the final outcome achieved in the market.

b. Bargaining is difficult, given the high transaction costs typically involved.

c. Provided property rights have been assigned and transactions costs are low, the efficient outcome will be achieved regardless as to the initial allocation of property rights.

d. The initial allocation of property rights has no impact on the final outcome in market equilibrium, which is typically inefficient and results in a DWL.

e. None of the above.

4. The government issues tradable permits to tackle with the issue of sulphur dioxide emissions. Which statement is true?

a. The initial allocation does not affect the final allocation and use of the permits.

b. The initial distribution of permits impacts on their final use because it changes the relative opportunity cost of selling and buying permits for firms depending on their initial allocation.

c. Firms that were not allocated any permits initially never end up using any permits.

d. The firms allocated more permits in the initial allocation process typically use more permits than other firms.

e. None of the above statements are true.

5. Consider a competitive market in which the MPB = 180 – 2q and the MSC = q. In this market, however, there is a positive consumption externality of $60 per unit consumed. What is the efficient level of output in this market?

a. 60

b. 70

c. 80

d. 90

e. 100

6. Consider a competitive market in which the MPB = 180 – 2q and the MSC = q. In this market, however, there is a positive consumption externality of $60 per unit consumed. What is the DWL that results in the market equilibrium?

a. $200

b. $600

c. $400

d. $500

e. $0

7. Consider a competitive market in which the MPB = 180 – 2q and the MSC = q. In this market, however, there is a positive consumption externality of $60 per unit consumed. What government intervention will result in the efficient outcome?

a. The government implement a tax of $60, levied on consumers.

b. The government provide a consumption subsidy of $60 per unit, provided to consumers.

c. The government subsidize producer by $60 per unit.

d. Both b and c.

e. None of the above.

8. Consider a competitive market with a MPB = 22 – q and a MPC = 10 +q. There is a negative production externality of e = q, where q is the level of output in the market. Which statement is true?

a. The efficient level of output is 4 units.

b. The efficient level of output is 6 units.

c. The efficient level of output is 8 units.

d. The efficient level of output is 12 units.

e. The efficient level of output is 0 units.

9. Consider a competitive market with a MPB = 22 – q and a MPC = 10 +q. There is a negative production externality of e = q, where q is the level of output in the market. Which statement is true?

a. The DWL in the market outcome is $4.

b. The DWL in the market outcome is $16.

c. The DWL in the market outcome is $12.

d. The DWL in the market outcome is $8.

e. The DWL in the market outcome is $6.

10. Consider a competitive market with a MPB = 22 – q and a MPC = 10 +q. There is a negative production externality of e = q, where q is the level of output in the market, the government can achieve the efficient level of output by:

a. Implementing a per-unit tax of $4 on suppliers.

b. Implementing a per-unit tax of $6 on suppliers.

c. Implementing a per-unit tax of $8 on suppliers.

d. Implementing a per-unit tax of $10 on suppliers.

e. None of the above.

Chapter 18

1. A public good is:

a. A good that is both rival and excludable.

b. A good that is rival and non-excludable.

c. A good that is non-excludable and non-rival.

d. A good that is both excludable and non-rival.

e. Any good provided by the government.

2. The tragedy of the common arises when:

a. A good is rival but non-excludable.

b. Property rights can be used to allocate good or services via the price mechanism.

c. A good is non-rival and non-excludable.

d. A good is rival but non-excludable.

e. None of the above.

3. An inefficiency can arise in the provision of public good:

a. Because the good is non-rival.

b. As a private sector firm cannot enforcement payment for the good.

c. Because the marginal benefit curve for society is the vertical summation of individual MB curves.

d. a and c.

e. None of the above.

4. Consider an economy with three consumers, each with a marginal benefit for a public good of MB = 10 – q. What is society’s marginal benefit (MB_T) for the public good?

a. MB_T = 10 – 3q

b. MB_T =30- 3q

c. MB_T =10 – 1/3.q

d. MB_T =30 – 1/3q

e. None of the above.

5. Consider an economy with three consumers, each with a marginal benefit for a public good of MB = 10 – q. If the marginal cost of providing the good is $0 per unit, what is the DWL arising in the market outcome?

a. DWL = $150

b. DWL = $75

c. DWL = $50

d. DWL = $300

e. DWL = $200

6. Consider an economy with three consumers, each with a marginal benefit for a public good of MB = 10 – q. If the marginal cost of providing the good is $15 per unit, what is the efficient level of output?

a. 30

b. 20

c. 10

d. 5

e. 15

7. Consider an economy with two consumers, each with a marginal benefit for a public good of MB = 20 – 1/2q. What is society’s marginal benefit (MB_T) for the public good?

a. MB_T = 10 – q

b. MB_T =40- 2q

c. MB_T =40 – q

d. MB_T =20 – 1/2q

e. None of the above.

8. Consider an economy with two consumers, each with a marginal benefit for a public good of MB = 20 – 1/2q. The marginal cost of providing the good is $10 per unit. How many units are supplied in the private-sector market?

a. 0

b. 10

c. 20

d. 40

e. 5

9. Consider an economy with two consumers, each with a marginal benefit for a public good of MB = 20 – 1/2q. If the marginal cost of provision is $30 per unit, what is the efficient level of output?

a. 0

b. 10

c. 20

d. 40

e. 5

10. Consider an economy with two consumers, each with a marginal benefit for a public good of MB = 20 – 1/2q. If the marginal cost of provision is $30 per unit, what is DWL in the market outcome?

a. 10

b. 20

c. 30

d. 40

e. 50

Chapter 19

1. A lesson to policy makers from the Theory of Second Best is that:

a. Care is needed removing any one distortion in the economy, given the possible interaction between various distortions in the economy.

b. Total surplus will increase if all distortions can be simultaneously eliminated.

c. The largest market failures need to removed first.

d. a and b.

e. None of the above.

2. The Theory of Second Best suggests:

a. The government should only remove small market failures in the economy.

b. The government should never attempt to remove market failures in the economy.

c. Some market failures can help offset other market failures, increasing overall welfare.

d. All of the above.

e. None of the above.

3. Consider a monopolist with a private MC of $20 per unit who faces a demand curve of P = 100 – q. There is also a negative consumption externality in the market of $40 per unit. What is the DWL in the market outcome?

a. DWL = $800

b. DWL = $1600

c. DWL = $200

d. DWL = $400

e. DWL = $0

4. Consider a monopolist with a private MC of $20 per unit who faces a demand curve of P = 100 – q. There is also a negative consumption externality in the market of $40 per unit. The government successively introduces competition into the supply side of the market, so now instead of a monopolist there are many price-taking firms. Which statement is true?

a. The government intervention increases the DWL in the market from 0 to $800.

b. The government intervention in the market decreases the DWL from $800 to $0.

c. The government intervention reduces but does not eliminate DWL in the market.

d. The government intervention increases DWL from $0 to $1600.

e. None of the above.

5. Consider a monopolist with a private MC of $20 per unit who faces a demand curve of P = 100 – q. There is also a negative consumption externality in the market of $40 per unit. What is the most appropriate policy response if the government wishes to maximize surplus in the market.

a. The government should implement a Pigovian tax of $40 on consumers.

b. The government should implement a Pigovian tax of $40 levied on the monopolist.

c. The government should subsidize production by $40 per unit.

d. Either a or b.

e. The government should do nothing.

Chapter 20

1. Which statement is true?

a. In a small country, if the world price is below the domestic no-trade price, the country has a comparative advantage in that good.

b. In a small country, if the world price is above the domestic no-trade price, the country has a comparative disadvantage in that good.

c. In a small country, if the world price is below the domestic no-trade price, the country has a comparative disadvantage in that good.

d. Both a and b are true.

e. None of the above statements above.

2. Consider a market in a small country with a domestic demand curve of P = 28 – q and a domestic supply curve of P = 3q. The world price is $9 per unit. If the country opens itself up to international trade:

a. There will be 16 unit of the good imported.

b. There will be 20 unit of the good imported.

c. There will be 9 unit of the good imported.

d. There will be 10 unit of the good exported.

e. None of the above.

3. Consider a market in a small country with a domestic demand curve of P = 28 – q and a domestic supply curve of P = 3q. The world price is $9 per unit. If the country opens itself up to international trade:

a. Total surplus increases by $60.

b. Total surplus increases by $56.

c. Total surplus increases by $88.

d. Total surplus increases by $36.

e. None of the above.

4. Consider a market in a small country with a domestic demand curve of P = 28 – q and a domestic supply curve of P = 3q. The world price is $9 per unit. If the country opens itself up to international trade:

a. PS decreases by $35.

b. PS decreases by $55.

c. PS decreases by $70.

d. PS decreases by $75.

e. None of the above.

5. Consider a market in a small country with a domestic demand curve of P = 28 – q and a domestic supply curve of P = 3q. The world price is $9 per unit. If the country opens itself up to international trade:

a. CS increases by $55.

b. CS increases by $37.

c. CS increases by $98.

d. CS increases by $143.

e. None of the above.

6. Consider a market in a small country with a domestic demand curve of P = 60 – 2q and P = q. The world price for the good is $5. The government imposes an import tariff of $10 per unit. Which statement is true?

a. Imports fall by 15 units due to the imposition of the tariff.

b. Imports fall by 25 units due to the imposition of the tariff.

c. Imports fall by 10 units due to the imposition of the tariff.

d. Imports fall by 5 units due to the imposition of the tariff.

e. None of the above.

7. Consider a market in a small country with a domestic demand curve of P = 60 – 2q and P = q. The world price for the good is $5. The government imposes an import tariff of $10 per unit. The DWL from the imposition of the tariff is:

a. $50

b. $25

c. $75

d. $30

e. None of the above.

8. Consider a market in a small country with a domestic demand curve of P = 60 -2q and P = q. The world price for the good is $5. The government imposes an import tariff of $10 per unit, what is the tariff revenue collected by the government?

a. $50

b. $25

c. $75

d. $30

e. None of the above.

9. Consider a market in a small country with a domestic demand curve of P = 10 – q and a domestic supply curve of P = q. The world price for the good is $8 per unit. If the government bans international trade, what is the amount of surplus forgone?

a. $5

b. $6

c. $7

d. $8

e. $9

10. Consider a market in a small country with a domestic demand curve of P = 10 – q and a domestic supply curve of P = q. The world price for the good is $8 per unit. If the government opens the market up to international trade:

a. Consumer surplus increases by $10 and producer surplus increases by $20.

b. Consumer surplus falls by $8 and producer surplus increases by $9.

c. Consumer surplus falls by $10.5 and producer surplus increases by $19.5.

d. Consumer surplus falls by $9 and producer surplus increases by $9.

e. Consumer surplus falls by $5 and producer surplus increases by $10.