ECON 3357 Intermediate Microeconomics Comprehensive

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Scenario 10.1: Barbara is a producer in a monopoly industry. Her demand curve, total revenue curve, marginal revenue curve and total cost curve are given as follows: Q = 160 - 4P TR = 40Q - 0.25Q2 MR = 40 - 0.5Q TC = 4Q MC = 4 Refer to Scenario 10.1. How much profit will she make?

$1,296

Table 5.4 Job Outcome 1 Deviation Outcome 2 Deviation A $40 W $60 X B $20 Y $50 Z Refer to Table 5.4. If outcomes 1 and 2 are equally likely at Job A, then the standard deviation of payoffs at Job A is:

$10

After the imposition of a tax of $2 per unit of output, what is the profit maximizing price?

$11

Assume that one of two possible outcomes will follow a decision. One outcome yields a $75 payoff and has a probability of 0.3; the other outcome has a $125 payoff and has a probability of 0.7. In this case the expected value is:

$110.

Scenario 5.8: Risk-neutral Icarus Airlines must commit now to leasing 1, 2, or 3 new airplanes. It knows with certainty that on the basis of business travel alone, it will need at least 1 airplane. The marketing division says that there is a 50% chance that tourism will be big enough for a second plane only. Otherwise, tourism will be big enough for a third plane. This, plus revenue information, yields the following table: Refer to Scenario 5.8. Given that the two outcomes are equally likely, Icarus Airlines' expected profit under complete information would be:

$115 million.

Bancroft Pharmaceuticals has a patent on a new medication used to treat high blood pressure, so it is the monopoly seller of this new drug product. The marginal cost of producing one dose of the drug is $10, and the elasticity of demand for the product is -3. What is the profit maximizing monopoly price for this patented drug product?

$15

Scenario 5.3: Wanting to invest in the computer games industry, you select Whizbo, Yowzo and Zowiebo as the three best firms. Over the past 10 years, the three firms have had good years and bad years. The following table shows their performance: Company Good Year Revenue Bad Year Revenue Number of Good Years Whizbo $8 million $6 million 8 Yowzo $10 million $4 million 4 Zowiebo $30 million $1 million 1 Refer to Scenario 5.3. The expected revenue from all three companies combined is:

$17.9 million.

Scenario 5.2: Randy and Samantha are shopping for new cars (one each). Randy expects to pay $15,000 with 1/5 probability and $20,000 with 4/5 probability. Samantha expects to pay $12,000 with 1/4 probability and $20,000 with 3/4 probability. Refer to Scenario 5.2. Randy's expected expense for his car is:

$19,000.

Scenario 7.1: The average total cost to produce 100 cookies is $0.25 per cookie. The marginal cost is constant at $0.10 for all cookies produced. Refer to Scenario 7.1. The total cost to produce 50 cookies is:

$20

Scenario 10.1: Barbara is a producer in a monopoly industry. Her demand curve, total revenue curve, marginal revenue curve and total cost curve are given as follows: Q = 160 - 4P TR = 40Q - 0.25Q2 MR = 40 - 0.5Q TC = 4Q MC = 4 Refer to Scenario 10.1. The price of her product will be:

$22

An investment opportunity has two possible outcomes. The expected value of the investment opportunity is $250. One outcome yields a $100 payoff and has a probability of 0.25. What is the payoff of the other outcome?

$300

Scenario 5.8: Risk-neutral Icarus Airlines must commit now to leasing 1, 2, or 3 new airplanes. It knows with certainty that on the basis of business travel alone, it will need at least 1 airplane. The marketing division says that there is a 50% chance that tourism will be big enough for a second plane only. Otherwise, tourism will be big enough for a third plane. This, plus revenue information, yields the following table: Planes Tourism Revenue Expected Leased Light Heavy Profit 2 $90 million $30 million $60 million 3 $10 million $140 million $75 million Refer to Scenario 5.8. The value to Icarus Airlines of complete information is:

$40 million.

Scenario 10.2:A monopolist faces the following demand curve, marginal revenue curve, total cost curve and marginal cost curve for its product: Q = 200 - 2P MR = 100 - Q TC = 5Q MC = 5 Refer to Scenario 10.2. Suppose that a tax of $5 for each unit produced is imposed by state government. How much profit does the monopolist earn?

$4050

Refer to Scenario 10.9. What is the maximum amount that Maui Macadamia would be willing to spend in order to maintain its monopoly through rent seeking?

$5,400

The marginal cost of a monopolist is constant and is $10. The marginal revenue curve is given as follows: MR = 100 - 2Q The profit maximizing price is:

$55.

Figure 8.4.2 Refer to Figure 8.4.2 above. When the farmer's profit is maximized, total cost equals:

$6226

Figure 8.4.2 Refer to Figure 8.4.2 above. When profit is maximized, the total revenue of the farmer equals:

$8.360

What is the profit maximizing price?

10

Suppose that a tax of $2 per unit of output is imposed on red rubber ball producers. What level of output maximizes profit?

5

The total cost (TC) of producing computer software diskettes (Q) is given as: What is the marginal cost?

5

The total cost (TC) of producing computer software diskettes (Q) is given as: . What is the variable cost?

5Q

Scenario 5.4: Suppose an individual is considering an investment in which there are exactly three possible outcomes, whose probabilities and payoffs are given below: Outcome Probability Payoffs A .3 $100 B ? 50 C .2 ? The expected value of the investment is $25. Although all the information is correct, information is missing. Refer to Scenario 5.4. What is the standard deviation of the investment?

90.14

Refer to Figure 3.3.1 above. Which of the market baskets, A, B or C is preferred to the others?

A

Which of the following will result in a decrease in a consumer's purchasing power?

A decrease in the consumer's income An increase in the price of the good on the vertical axis An increase in the price of the good on the horizontal axis >All of these

Figure 8.4.2 Refer to Figure 8.4.2 above. When average variable cost ( AVC) is minimum,

AVC = MC.

Figure 8.3.1 Refer to Figure 8.3.1 above. At which point or range is profit maximized?

At point B

Scenario 5.7: As president and CEO of MegaWorld Industries, Natasha must decide on some very risky alternative investments. Consider the following: Refer to Scenario 5.7. Since Natasha is a risk-neutral executive, she would choose:

B

What is the advantage of the standard deviation over the average deviation?

Because the standard deviation requires squaring of deviations before further computation, positive and negative deviations do not cancel out.

Refer to Figure 4.1.4 above. Which of the following goods is an inferior good?

Hamburger

Which of the following is true concerning the substitution effect of a decrease in price?

It always will lead to an increase in consumption.

In the figure below, what is true about the two jobs?

Job 1 has a lower standard deviation than Job 2.

If Px = Py, then when the consumer maximizes utility,

MU(X) must equal MU(Y).

Which of the following goods is an inferior good in the United States?

Rental housing

Which of the following relationships is NOT valid?

Rising marginal cost implies that average total cost is also rising.

Refer to Figure 10.2.1 above. Which monopoly charges a greater price markup?

The monopoly in panel (b).

Refer to Figure 10.2.1 above. Which monopoly has greater monopoly power?

The monopoly in panel (b).

Which of the following claims is true at each point along a price-consumption curve?

Utility is maximized, and all income is spent.

Table 5.4 Job Outcome 1 Deviation Outcome 2 Deviation A $40 W $60 X B $20 Y $50 Z Refer to Table 5.4. If outcomes 1 and 2 are equally likely at Job A, then in absolute value:

W = X = $10.

Under which of the following scenarios is it most likely that monopoly power will be exhibited by firms?

When there are few firms in the market and the demand curve faced by each firm is relatively inelastic

In 1985, Alice paid $20,000 for an option to purchase ten acres of land. By paying the $20,000, she bought the right to buy the land for $100,000 in 1992. When she acquired the option in 1985, the land was worth $120,000. In 1992, it is worth $110,000. Should Alice exercise the option and pay $100,000 for the land?

Yes

Refer to Figure 4.1.2. The connection of points B and D forms:

a price-consumption curve.

Figure 8.4.3 Refer to Figure 8.4.3 above. When the firm produces the loss-minimizing level of output, it can recover:

all of the variable cost and part of the fixed cost.

Firms often use patent rights as a:

barrier to entry.

A price taker is:

both a perfectly competitive firm and a firm that cannot influence the market price

Scenario 10.7: The marginal revenue of green ink pads is given as follows: MR = 2500 - 5Q The marginal cost of green ink pads is 5Q. Refer to Scenario 10.7. Suppose that the firm chooses to produce 200 ink pads. At this level of output the demand for ink pads is:

elastic

The perfectly competitive firm's marginal revenue curve is:

horizontal.

Refer to Figure 3.2.1 above. The slope of the budget line equals:

-0.5

Your local grocery store offers a coupon that reduces the price of milk during the coming week. The regular retail price of milk in the store is $3.00 per gallon, and the coupon price is $2.00 per gallon for the next week. If the store maximizes profits and the price elasticity of demand for milk is -2 for coupon users, what is the price elasticity of demand for non-users?

-1.5

Scenario 5.4: Suppose an individual is considering an investment in which there are exactly three possible outcomes, whose probabilities and payoffs are given below: Outcome Probability Payoffs A .3 $100 B ? 50 C .2 ? The expected value of the investment is $25. Although all the information is correct, information is missing. Refer to Scenario 5.4. What is the payoff of outcome C?

-150

Refer to Figure 3.1.4 above. The value of the marginal rate of substitution between points B and D is:

-4

A consumer has $100 per day to spend on product A, which has a unit price of $7, and product B, which has a unit price of $15. What is the slope of the budget line if good A is on the horizontal axis and good B is on the vertical axis?

-7/15

If the quantity of good A (QA) is plotted along the horizontal axis, the quantity of good B (QB) is plotted along the vertical axis, the price of good A is PA, the price of good B is PB and the consumer's income is I, then the slope of the consumer's budget constraint is:

-PA/PB.

Scenario 5.6: Consider the information in the table below, describing choices for a new doctor. The outcomes represent different macroeconomic environments, which the individual cannot predict. ​ Outcome 1 Outcome 2 Job Choice Prob. Income Prob. Income Work for HMO 0.95 $100,000 0.05 $60,000 Own practice 0.2 $250,000 0.8 $30,000 Research 0.1 $500,000 0.9 $50,000 Refer to Scenario 5.6. The expected utility of income from research is:

.1 u($500,000) + .9 u($50,000).

What is the value of the Lerner index under perfect competition?

0

Scenario 5.3: Wanting to invest in the computer games industry, you select Whizbo, Yowzo and Zowiebo as the three best firms. Over the past 10 years, the three firms have had good years and bad years. The following table shows their performance: Company Good Year Revenue Bad Year Revenue Number of Good Years Whizbo $8 million $6 million 8 Yowzo $10 million $4 million 4 Zowiebo $30 million $1 million 1 Refer to Scenario 5.3. Based on the 10 years' past performance, what is the probability of a good year for Zowiebo?

0.1

A 10 percent decrease in advertising results in a 5 percent sales decrease. The advertising elasticity of demand is:

0.5

Scenario 5.4: Suppose an individual is considering an investment in which there are exactly three possible outcomes, whose probabilities and payoffs are given below: Outcome Probability Payoffs A .3 $100 B ? 50 C .2 ? The expected value of the investment is $25. Although all the information is correct, information is missing. Refer to Scenario 5.4. What is the probability of outcome B?

0.5

Scenario 10.2: A monopolist faces the following demand curve, marginal revenue curve, total cost curve and marginal cost curve for its product: Q = 200 - 2P MR = 100 - Q TC = 5Q MC = 5 Refer to Scenario 10.2. What level of output maximizes total revenue?

100

Monica consumes only goods A and B. Suppose that her marginal utility from consuming good A is equal to 1/Qa, and her marginal utility from consuming good B is 1/Qb. If the price of A is $0.50, the price of B is $4.00, and the Monica's income is $120.00, how much of good A will she purchase?

120

Bob views apples and oranges as perfect substitutes in his consumption, and MRS = 1 for all combinations of the two goods in his indifference map. Suppose the price of apples is $2 per pound, the price of oranges is $3 per pound, and Bob's budget is $30 per week. What is Bob's utility maximizing choice between these two goods?

15 pounds of apples and no oranges

The price of lemonade is $0.50; the price of popcorn is $1.00. If Fred has maximized his utility by purchasing lemonade and popcorn, his marginal rate of substitution will be:

2 lemonades for each popcorn.

Scenario 4.1: Daniel derives utility from only two goods, cake (Qc) and donuts (Qd). The marginal utility that Daniel receives from cake (MUc) and donuts (MUd) are given as follows: MUc = Qd MUd = Qc Daniel has an income of $240 and the price of cake (Pc) and donuts (Pd) are both $3. See Scenario 4.1. What is Daniel's budget constraint?

240 = 3Qc + 3Qd

Scenario 4.1: Daniel derives utility from only two goods, cake (Qc) and donuts (Qd). The marginal utility that Daniel receives from cake (MUc) and donuts (MUd) are given as follows: MUc = Qd MUd = Qc Daniel has an income of $240 and the price of cake (Pc) and donuts (Pd) are both $3. See Scenario 4.1. What is Daniel's budget constraint?

240 = 3Qc + 3Qd

Scenario 10.7: The marginal revenue of green ink pads is given as follows: MR = 2500 - 5Q The marginal cost of green ink pads is 5Q. Refer to Scenario 10.7. How many ink pads will be produced to maximize profit?

250

Scenario 10.5: A firm produces garden hoses in California and in Ohio. The marginal cost of producing garden hoses in the two states and the marginal revenue from producing garden hoses are given in the following table: Refer to Scenario 10.5. How many garden hoses should be produced in California in order to maximize profits?

3

Maui Macadamia Inc. has a monopoly in the macadamia nut industry. The demand curve, marginal revenue and marginal cost curve for macadamia nuts are given as follows: P = 360 - 4Q MR = 360 - 8Q MC = 4Q Refer to Scenario 10.9. What is the profit maximizing level of output?

30

Scenario 10.6: John is the manufacturer of red rubber balls (Q). He has a red rubber ball manufacturing plant in California, Florida and Montana. The total cost of producing red rubber balls at each of the three plants is given by the following table: Refer to Scenario 10.6. If red rubber balls can be produced at any of the three plants, what is the marginal cost of 5th red rubber ball?

4

The price elasticity of demand for nursery products is -10. The advertising elasticity of demand is 0.4. Using the "Rule of Thumb for Advertising," the profit maximizing level of advertising will be set at ________ of sales.

4 percent

Scenario 4.1: Daniel derives utility from only two goods, cake (Qc) and donuts (Qd). The marginal utility that Daniel receives from cake (MUc) and donuts (MUd) are given as follows: MUc = Qd MUd = Qc Daniel has an income of $240 and the price of cake (Pc) and donuts (Pd) are both $3. See Scenario 4.1. What quantity Qc will maximize Daniel's utility given the information above?

40

Scenario 4.1: Daniel derives utility from only two goods, cake (Qc) and donuts (Qd). The marginal utility that Daniel receives from cake (MUc) and donuts (MUd) are given as follows: MUc = Qd MUd = Qc Daniel has an income of $240 and the price of cake (Pc) and donuts (Pd) are both $3. See Scenario 4.1. What quantity Qc will maximize Daniel's utility given the information above?

40

Scenario 3.1: Andy derives utility from two goods, potato chips (Qp) and Cola (Qc). Andy receives zero utility unless he consumes some of at least one good. The marginal utility that he receives from the two goods is given as follows: Refer to Scenario 3.1. What is the total utility that Andy will receive if he consumes 5 units of potato chips (Qp) and no Cola drink (Qc)?

40 utils

Scenario 10.9: Maui Macadamia Inc. has a monopoly in the macadamia nut industry. The demand curve, marginal revenue and marginal cost curve for macadamia nuts are given as follows: P = 360 - 4Q MR = 360 - 8Q MC = 4Q Refer to Scenario 10.9. What level of output maximizes the sum of consumer surplus and producer surplus?

45

Scenario 10.5: A firm produces garden hoses in California and in Ohio. The marginal cost of producing garden hoses in the two states and the marginal revenue from producing garden hoses are given in the following table: Refer to Scenario 10.5. From the perspective of the firm, what is the marginal cost of the 5th garden hose?

5

Scenario 3.1: Andy derives utility from two goods, potato chips (Qp) and Cola (Qc). Andy receives zero utility unless he consumes some of at least one good. The marginal utility that he receives from the two goods is given as follows: Refer to Scenario 3.1. If the price of potato chips is $0.50 and the price of Cola is $4.00, and Andy has an income of $14.50, how many units of potato chips will he consume?

5

Maui Macadamia Inc. has a monopoly in the macadamia nut industry. The demand curve, marginal revenue and marginal cost curve for macadamia nuts are given as follows: P = 360 -4Q MR = 360 - 8Q MC = 4Q Refer to Scenario 10.9. At the profit maximizing level of output, what is the level of producer surplus?

5,400

Johnny's Shop-and-Pay is a regional grocery chain, and their marketing manager is trying to determine the profit-maximizing coupon program for the store's laundry detergent brand. Coupon users at the store have an elasticity of demand for this product that equals -3, and the elasticity of demand for non-users of the coupon for the store brand equals -1.5. If the full retail (undiscounted) price of the detergent is $10 per box, what is the optimal discount to provide for coupon users?

50% off

Scenario 3.1: Andy derives utility from two goods, potato chips (Qp) and Cola (Qc). Andy receives zero utility unless he consumes some of at least one good. The marginal utility that he receives from the two goods is given as follows: Refer to Scenario 3.1. If the price of potato chips is $0.50 and the price of Cola is $4.00, and Andy has an unlimited income, how many units of potato chips will he consume?

6

Scenario 5.4: Suppose an individual is considering an investment in which there are exactly three possible outcomes, whose probabilities and payoffs are given below: Outcome Probability Payoffs A .3 $100 B ? 50 C .2 ? The expected value of the investment is $25. Although all the information is correct, information is missing. Refer to Scenario 5.4. What is the deviation of outcome A?

75

Suppose your utility function for food (F) and clothing (C) is u(F,C) = F + 4C. If you reduce your clothing consumption by 2 units, how much do you have to increase your food consumption in order to maintain the same utility level?

8 units

Scenario 5.4: Suppose an individual is considering an investment in which there are exactly three possible outcomes, whose probabilities and payoffs are given below: Outcome Probability Payoffs A .3 $100 B ? 50 C .2 ? The expected value of the investment is $25. Although all the information is correct, information is missing. Refer to Scenario 5.4. What is the variance of the investment?

8,125

Suppose there are seven firms in a market where the three largest firms supply 20% of the market-clearing quantity and the other four firms supply 10% of the market-clearing quantity. What is the five-firm concentration ratio (i.e., the share of total sales controlled by the five largest firms in the market)?

80%

From Example 7.2, most pizza restaurants have large fixed costs and relatively low variable costs. What does this tell us about the average variable cost (AVC) of producing pizza?

AVC is relatively low.

Alvin's preferences for good X and good Y are shown in the diagram below. Based on Figure 3.1.6 above, it can be inferred that:

Alvin regards good X and good Y as perfect complements.

Alvin's preferences for good X and good Y are shown in the diagram below. Based on Figure 3.1.6 above, it can be inferred that:

Alvin regards good X and good Y as perfect complements.

Which of the following costs always declines as output increases?

Average fixed cost

Suppose a technological innovation shifts the marginal cost curve downward. Which one of the following cost curves does NOT shift?

Average fixed cost curve

The budget constraint for a consumer who only buys apples (A) and bananas (B) is PAA + PBB = I where consumer income is I, the price of apples is PA, and the price of bananas is PB. To plot this budget constraint in a figure with apples on the horizontal axis, we should use a budget line represented by the slope-intercept equation:

B = I/PB - (PA/PB)A

Refer to Figure 3.1.1 above. Relative to market basket A, which market baskets would compensate for the loss of one good with the gain in the other, so that total utility from any of these baskets would be the same?

B and D

Figure 7.3.5 Refer to Figure 7.3.5. A technological change that allows for the same amount of output to be produced using less inputs is illustrated by a move from:

B to A.

Use the following two statements to answer this question: I. A firm can exert monopoly power if and only if it is the sole producer of a good. II. The degree of monopoly power a firm possesses can be measured using the Lerner Index:

Both I and II are false.

Use the following two statements to answer this question: I. The average cost curve and the average variable cost curve reach their minima at the same level of output. II. The average cost curve and the marginal cost curve reach their minima at the same level of output.

Both I and II are false.

Use the following statements to answer this question. I. To maximize profit, a firm will advertise more when the advertising elasticity is larger. II. To maximize profit, a firm will advertise more when the price elasticity of demand is smaller.

Both I and II are true.

Use the following two statements to answer this question: I. The average total cost of a given level of output is the slope of the line from the origin to the total cost curve at that level of output. II. The marginal cost of a given level of output is the slope of the line that is tangent to the variable cost curve at that level of output.

Both I and II are true.

Club Med, which operates a number of vacation resorts, offers vacation packages at a lower price in the winter (i.e., the "off season") than in the summer. This practice is an example of:

Both peak-load pricing and intertemporal price discrimination are correct.

Mixed bundling is more profitable than pure bundling when:

Both the marginal cost of each good being sold is positive and the consumers' reservation values of each good being sold are not perfectly negatively correlated with one or another are correct.

Albatross Software has two main products: WindSong is a program that can be used to edit audio files and SunBurst is a program that can be used to edit digital photos. The two major types of customers are small businesses and home users. The small business customers have a reservation price of $300 for WindSong and $450 for SunBurst. The home users have a reservation price of $100 for WindSong and $125 for SunBurst. Which of the following statements is true?

Bundling the two software products is not likely to be profitable because the demands are positively correlated.

Carolyn knows average total cost and average variable cost for a given level of output. Which of the following costs can she not determine given this information?

Carolyn can determine All of these costs given the information provided.

Which of the following examples represents a fixed-proportion production system with capital and labor inputs?

Clerical staff and computers Airplanes and pilots Horse-drawn carriages and carriage drivers >All of these

The field of behavioral economics has been built around which of the following assertions?

Consumers have preferences among the various goods and services available to them.

What do cooperative firms do if they make a profit?

Cooperatives generally return the profits to their members as a dividend.

BioMed Pharmaceutical has held a patent on an important heart medication called Heartex, but the patent will expire in the coming year. After the patent expires, other firms can legally sell the same medication as a generic drug product. What will happens to the demand for Heartex and to the Lerner index for this product as the generic drugs enter the market?

Demand becomes more elastic; Lerner index declines.

Suppose a firm produces identical goods for two separate markets and practices third-degree price discrimination. In the first market the firm charges $30 per unit, and it charges $22 per unit in the second market. Which of the following represents the ratio of price elasticities of demand in the two markets?

E2 = (21/29)E1 E2 = (29/21)E1 E2 = E1 E2 = (22/30)E1 >none of these

Which of the following is NOT a condition for third degree price discrimination?

Economies of scale

In the long run, which of the following is considered a variable cost?

Expenditures for wages Expenditures for research and development Expenditures for raw materials Expenditures for capital machinery and equipment >All of these

Which of the following equations based on capital (K) and labor (L) inputs does not represent a plausible production function?

F(K,L) = K + L - 1

Suppose a plant manager ignores some implicit marginal costs of production so that the perceived MC curve is below the actual MC curve. What is the likely outcome from this error?

Firm produces more than optimal quantity and earns lower profits.

Which of the following statements about natural monopolies is true?

For natural monopolies, marginal cost is always below average cost.

Upon graduation, you are offered three jobs. Company Salary Bonus Probability of Receiving Bonus Samsa Exterminators 100,000 20,000 .90 Gradgrind Tech 100,000 30,000 .70 Goblin Fruits 115,000 -------- ------- Rank the three job offers in terms of expected income, from the highest to the lowest.

Gradgrind Tech, Samsa Exterminators, Goblin Fruits

Consider the following statements when answering this question. I. Increases in the rate of income tax decrease the opportunity cost of attending college. II. The introduction of distance learning, which enables students to watch lectures at home, decreases the opportunity cost of attending college.

I and II are both true.

Use the following statements to answer this question: I. The equal marginal principle may be used to characterize the maximum utility consumption decision even if the diminishing MRS assumption does not hold. II. The equal marginal principle implies that the MRS at the optimal consumption bundle is always equal to the price ratio.

I and II are false.

Use the following statements to answer this question: I. An increase in the firm's fixed costs will also shift the firm's short-run supply curve to the left. II. An increase in the firm's fixed costs will not shift the firm's short-run supply curve to the right or left, but it may alter how much of the marginal cost curve is used to form the short-run supply curve.

I and II are false.

Use the following statements to answer this question: I. The firm's decision to produce zero output when the price is less than the average variable cost of production is known as the shutdown rule. II. The firm's supply decision is to generate zero output for all prices below the minimum AVC.

I and II are true.

Consider the following statements when answering this question: I. Whenever a firm's average variable costs are falling as output rises, marginal costs must be falling too. II. Whenever a firm's average total costs are rising as output rises, average variable costs must be rising too.

I is false, and II is true.

Use the following statements to answer this question. I. To maximize profit, a firm will increase its advertising expenditures until the last dollar of advertising generates an additional dollar of revenue. II. The full marginal cost of advertising is the sum of the dollar spent directly on advertising and the marginal production cost that results from the increased sales that advertising brings about.

I is false, and II is true.

Use the following statements to answer this question: I. Subjective probabilities are based on individual perceptions about the relative likelihood of an event. II. To be useful in microeconomic analysis, all interested parties should agree on the values of the relevant subjective probabilities for a particular problem.

I is true and II is false.

Use the following two statements to answer this question: I. If the marginal product of labor is zero, the total product of labor is at its maximum. II If the marginal product of labor is at its maximum, the average product of labor is falling.

I is true, and II is false.

Use the following two statements to answer this question: I. Isoquants cannot cross one another. II. An isoquant that is twice the distance from the origin represents twice the level of output.

I is true, and II is false.

Refer to Figure 3.2.1 above. Let I = income, PF the price of food, and PC the price of clothing. The vertical intercept of the budget line equals 40, which is equivalent to:

I/PC.

Which of the following statements demonstrates an understanding of the importance of sunk costs for decision making? I. "Even though I hate my MBA classes, I can't quit because I've spent so much money on tuition." II. "To break into the market for soap our firm needs to spend $10M on creating an image that is unique to our new product. When deciding whether to develop the new soap, we need to take this marketing cost into account."

II only

Which of the following is true regarding income along a price-consumption curve?

Income is constant.

Which of the following is true regarding utility along a price-consumption curve?

It changes from point to point.

Refer to Figure 3.1.5. Which of the following is true concerning the consumer's marginal rate of substitution?

It is constant.

Pencils sell for 10 cents and pens sell for 50 cents. Suppose Jack, whose preferences satisfy all of the basic assumptions, buys 5 pens and one pencil each semester. With this consumption bundle, his MRS of pencils for pens is 3. Which of the following is true?

Jack could increase his utility by buying more pencils and fewer pens

Refer to Figure 5.1.2 above. When Job 1 is compared to Job 2, we come to the following conclusion:

Job 1 has a higher expected return, but is more risky.

In figure below, what is true about the two jobs?

Job 1 has the same expected income as Job 2.

Table 5.4 Job Outcome 1 Deviation Outcome 2 Deviation A $40 W $60 X B $20 Y $50 Z Refer to Table 5.4. If outcomes 1 and 2 are equally likely at Job A, and if at Job B the $20 outcome occurs with probability .1, and the $50 outcome occurs with probability .9, then:

Job A is riskier because the standard deviation is higher.

When Joe maximizes utility, he finds that his MRS of X for Y is greater than Px/Py. It is most likely that:

Joe is not consuming good Y.

John Brown's utility of income function is U = log(I+1), where I represents income. From this information you can say that:

John Brown is risk averse.

Which of the following inputs are variable in the long run?

Labor Capital and equipment Plant size >all of these

A system of rationing:

Leaves some consumers better off and others worse off.

DVDs can be produced at a constant marginal cost, and Roaring Lion Studios is releasing the DVDs for its last two major films. The DVD for Rambeau 17 is priced at $20 per disk, and the DVD for Schreck 10 is priced at $30 per disk. If the Lerner indices for Rambeau 17 divided by the Lerner index for Schreck 10 equals 0.5, what is the constant marginal cost of producing both DVDs?

MC = $15

You operate a car detailing business with a fixed amount of machinery (capital), but you have recently altered the number of workers that you employ per hour. Three employees can generate an average product of 4 cars per person in each hour, and five employees can generate an average product of 3 cars per person in each hour. What is the marginal product of labor as you increase the labor from three to five employees?

MP = 1.5 cars

A firm sells an identical product to two groups of consumers, A and B. The firm has decided that third-degree price discrimination is feasible and wishes to set prices that maximize profits. Which of the following best describes the price and output strategy that will maximize profits?

MRA = MRB = MC.

You may consume ice cream or frozen yogurt, and ice cream consumption is plotted along the horizontal axis of your indifference map. The prices are denoted PY for frozen yogurt and PIC for ice cream. Under what condition will you only consume frozen yogurt?

MRS is less than PIC/PY.

An individual consumes only two goods, X and Y. Which of the following expressions represents the utility maximizing market basket?

MRSxy = PX/PY.

To simplify our consumption models, suppose U.S. consumers only purchase food and all other goods where food is plotted along the horizontal axis of the indifference map. Also, suppose that all states initially impose state sales taxes on all goods (including food), but then the states exempt food from the state sales tax. How does this tax policy change alter the consumer's budget line?

Makes the budget line flatter

What describes the graphical relationship between average product and marginal product?

Marginal product cuts average product from above, at the maximum point of average product.

Suppose your firm operates in a perfectly competitive market and decides to double its output. How does this affect the firm's marginal profit?

Marginal revenue increases but marginal cost remains the same

Which of the following is true when the government imposes a price ceiling on a monopolist?

Marginal revenue is kinked-horizontal and then downward sloping

Which of the following statements is NOT compatible with explanations for why peak-load pricing is more profitable than charging a single price?

Marginal revenue must be the same across different time periods.

Roaring Lion Studios can produce DVDs at a constant marginal cost of $5 per disk, and the studio has just releasing the DVD for its latest hit film, Ernest Goes to the Hamptons. The retail price of the DVD is $25, and the elasticity of demand for this film is -2. Has the studio selected the profit-maximizing retail price for this DVD?

No, the retail price is too high

Figure 7.2.1 Refer to Figure 7.2.1 above. At what level of output are average total cost, average cost, average fixed cost and marginal cost increasing?

None of these

The monopoly supply curve is the:

None of these

Which of these is NOT a generally accepted means of reducing risk?

None of these

Refer to Figure 3.1.1 above. On the assumption that the consumer prefers more to less, which of the following baskets are preferred to market basket A?

Only E

Which of the following statements is true about a consumer's optimal decision when indifference curves are concave?

Only one of the goods is consumed.

Because of the relationship between a perfectly competitive firm's demand curve and its marginal revenue curve, the profit maximization condition for the firm can be written as:

P = MC.

Refer to Figure 10.4.2 above. If the monopolist is not regulated, the price will be set at:

P2

Refer to Figure 10.4.2 above. Suppose that the government decides to limit monopoly power with price regulation. If the government sets the price at the competitive level, it will set the price at:

P4

A consumer maximizes satisfaction at the point where his valuation of good X, measured as the amount of good Y he would willingly give up to obtain an additional unit of X, equals:

PX/PY

To simplify our consumption models, suppose U.S. consumers only purchase food and all other goods where food is plotted along the horizontal axis of the indifference map. If the U.S. Congress passes an economic stimulus package that pays $300 to each person, how does this affect the budget line for each consumer?

Parallel outward (rightward) shift

Which of the following strategies are used by business firms to capture consumer surplus?

Price discrimination Bundling Two-part tariffs >>All of these

MNO Limited publishes a magazine targeted at urban professionals who live on the east and west coasts of the U.S., and all of the magazines are printed at a marginal cost of $0.50 per copy at a publishing plant in Kansas. If the East Coast elasticity of demand for the magazine is -1.25 and the West Coast elasticity of demand is -1.50, what prices should MNO Limited charge for the magazines in these two markets in order to maximize profits?

Price should be $1.50 on the West Coast and $2.50 on the East Coast

Oscar consumes only two goods, X and Y. Assume that Oscar is not at a corner solution, but he is maximizing utility. Which of the following is NOT necessarily true?

Px/Py = money income

Scenario 4.1: Daniel derives utility from only two goods, cake (Qc) and donuts (Qd). The marginal utility that Daniel receives from cake (MUc) and donuts (MUd) are given as follows: MUc = Qd MUd = Qc Daniel has an income of $240 and the price of cake (Pc) and donuts (Pd) are both $3. See Scenario 4.1. Holding Daniel's income and Pd constant at $240 and $3 respectively, what is Daniel's demand curve for cake?

Qc = 240/(3 + Pc)

Scenario 4.1: Daniel derives utility from only two goods, cake (Qc) and donuts (Qd). The marginal utility that Daniel receives from cake (MUc) and donuts (MUd) are given as follows: MUc = Qd MUd = Qc Daniel has an income of $240 and the price of cake (Pc) and donuts (Pd) are both $3. See Scenario 4.1. Holding Daniel's income and Pd constant at $240 and $3 respectively, what is Daniel's demand curve for cake?

Qc = 240/(3 + Pc)

Ronny's Pizza House is a profit maximizing firm in a perfectly competitive local restaurant market, and their optimal output is 80 pizzas per day. The local government imposes a new tax of $250 per year on all restaurants that operate in the city. How does this affect Ronny's profit maximizing decisions?

Ronny's decision depends on the circumstances-if their profits are larger than $250 per year, then the tax does not impact output; otherwise, Ronny's Pizza House will shut down.

Sue views hot dogs and hot dog buns as perfect complements in her consumption, and the corners of her indifference curves follow the 45-degree line. Initially, the price of hot dogs is $3 per package (8 hot dogs), the price of buns is $3 per package (8 hot dog buns), and Sue's budget is $48 per month. How does her optimal consumption bundle change if the price of hot dog buns increases to $5 per package?

She reduces her consumption by 2 packages of hot dogs and 2 packages of hot dog buns.

Suppose that the marginal cost of an additional ton of steel produced by a Japanese firm is the same whether the steel is set aside for domestic use or exported abroad. If the price elasticity of demand for steel is greater abroad than it is in Japan, which of the following will be correct?

The Japanese firm will sell steel at a lower price abroad than they will charge domestic users.

Suppose you only consume food and clothing, and clothing is plotted on the vertical axis. Also, you purchase food at a fixed price (PF), but the price of clothing declines as you buy in larger quantities (i.e., quantity discounts). What does the budget line look like in this case?

The budget line is now convex to (bows in toward) the origin.

Suppose your utility from consuming X and Y is expressed as u(X,Y) = ln(XY) where ln() is the natural logarithm operator. Given this information, which of the following statements is NOT true?

The marginal utility of X may be positive or negative (depending on the quantity of X and Y consumed).

You view tea and scones as perfect complements, and the corners of the indifference curves lie on the 45-degree line. Tea is plotted along the horizontal axis of the indifference map. Also, at your current point of consumption, you have not fully exhausted the available budget, and you consume more tea than scones. Based on this information, which of the following statements is NOT true?

The marginal utility of scones equals zero for your current consumption bundle.

Refer to Figure 4.2.2 above. Starting at point A, which of the following represents the substitution effect of an increase in the price of food?

The move from A to B

Refer to Figure 4.2.1 above. Which of the following moves represents the substitution effect?

The move from F1 to E

Refer to Figure 4.2.1 above. Starting at point A, which of the following moves represents the total effect of a price change?

The move from F1 to F2

Refer to Figure 3.2.4. Theodore's budget line has changed from A to B. Which of the following explains the change in Theodore's budget line?

The price of food decreased, and the price of clothing increased

Figure 7.3.2 Refer to Figure 7.3.2 above. Which of the following changes, which causes the move from A to B?

The price of one of the inputs

At the profit-maximizing level of output, what is relationship between the total revenue (TR) and total cost (TC) curves?

They must have the same slope.

Refer to Figure 11.2.3 above. In this case, the firm charges two different prices. This pricing scheme corresponds to:

Third degree price discrimination.

Consider two upward sloping income-utility curves with income on the horizontal axis. The steeper curve represents risk preferences that are more:

We cannot answer this question without more information about the shapes of the curves.

Scenario 5.3: Wanting to invest in the computer games industry, you select Whizbo, Yowzo and Zowiebo as the three best firms. Over the past 10 years, the three firms have had good years and bad years. The following table shows their performance: Company Good Year Revenue Bad Year Revenue Number of Good Years Whizbo $8 million $6 million 8 Yowzo $10 million $4 million 4 Zowiebo $30 million $1 million 1 Refer to Scenario 5.3. Where is the highest expected revenue, based on the 10 years' past performance?

Whizbo

Scenario 5.3: Wanting to invest in the computer games industry, you select Whizbo, Yowzo and Zowiebo as the three best firms. Over the past 10 years, the three firms have had good years and bad years. The following table shows their performance: Refer to Scenario 5.3. Based on the 10 years' past performance, rank the companies' expected revenue, highest to lowest.

Whizbo, Yowzo, Zowiebo

Smith just bought a house for $250,000. Earthquake insurance, which would pay $250,000 in the event of a major earthquake, is available for $25,000. Smith estimates that the probability of a major earthquake in the coming year is 10 percent, and that in the event of such a quake, the property would be worth nothing. The utility (U) that Smith gets from income (I) is given as follows: U(I) = I0.5. Should Smith buy the insurance?

Yes

Bill uses his entire budget to purchase Pepsi and hamburgers, and he currently purchases no Pepsi and 6 hamburgers per week. The price of Pepsi is $1 per can, the price of a hamburger is $2, Bill's marginal utility from Pepsi is 2, and his marginal utility from hamburgers is 6. Is Bill's current consumption decision optimal?

Yes, the corner solution is best because his MRS is less than the price ratio.

Which of the following statements is not true?

You view coffee and donuts as perfect complements, and the corners of your indifference curves follow the 45-degree line. You will consume coffee and donuts at some point along the 45-degree line where your MRS equals the price ratio for the two goods.

A utility function describing by how much one market basket is preferred to another is called:

a cardinal utility function.

Refer to Figure 3.2.3 above. The rotation of the budget line could have been caused by:

a decrease in the price of food

Refer to Figure 3.1.4 above. When computing the marginal rate of substitution from point to point as we move downward across the curve, we discover:

a diminishing marginal rate of substitution.

Refer to Figure 11.1.1 above. To capture the consumer surplus along the B range, the firm would ideally charge:

a higher price to consumers willing to pay more and a lower price to those willing to pay less.

Imposition of an output tax on all firms in a competitive industry will result in:

a leftward shift in the market supply curve.

Figure 7.3.3 Refer to Figure 7.3.3 above. The expansion path in the figure leads to the construction of:

a long run total cost curve.

An increase in income, holding prices constant, can be represented as:

a parallel outward shift in the budget line.

Refer to Figure 4.1.1 above. From the information in the figure we can obtain:

a point on a demand curve.

Suppose we plot the total revenue curve with quantity on the horizontal axis and revenue on the vertical axis (as in Figure 8.1 in the book). Under price-taking behavior, the total revenue curve should be:

a straight line from the origin with slope equal to the market price.

For most residential telephone service, people pay a monthly fee to have a hookup to the telephone company's line plus a fee for each call actually made. Under this pricing scheme, the telephone company is using:

a two-part tariff.

The local cable TV company charges a "hook-up" fee of $30 per month. Customers can then watch programs on a "pay-per-view" basis (a fee is charged for every program watched). This is an example of:

a two-part tariff.

Scenario 5.1: Aline and Sarah decide to go into business together as economic consultants. Aline believes they have a 50-50 chance of earning $200,000 a year, and that if they don't, they'll earn $0. Sarah believes they have a 75% chance of earning $100,000 and a 25% chance of earning $10,000. Refer to Scenario 5.1. The expected value of the undertaking,

according to Aline, is $100,000.

Refer to Figure 4.1.3 above. The connection of points A and B on the graph yields:

an income-consumption curve.

A curve that represents all combinations of market baskets that provide the same level of utility to a consumer is called:

an indifference curve.

If we take the production function and hold the level of output constant, allowing the amounts of capital and labor to vary, the curve that is traced out is called:

an isoquant.

A utility function that generates a ranking of market baskets in order of most to least preferred is called:

an ordinal utility function.

Jane is trying to decide which courses to take next semester. She has narrowed down her choice to two courses, Econ 1 and Econ 2. Now she is having trouble and cannot decide which of the two courses to take. It's not that she is indifferent between the two courses, she just cannot decide. An economist would say that this is an example of preferences that:

are incomplete.

Prospective sunk costs:

are relevant to economic decision-making.

For consideration of such issues as labor's productivity growth nationwide, the relevant measure is the:

average product of labor.

A manufacturer of digital music players uses a proprietary file format that is not used by the other firms in the market. This action by the firm may be an example of using a ________ to reduce the number of firms in the market and to maintain a relatively inelastic demand for its products.

barrier to entry

The Malthusian dilemma relates to marginal product in that:

because of diminishing marginal product, the amount of food produced by each additional member of the population decreases.

Alvin's preferences for good X and good Y are shown in the diagram below. Refer to Figure 3.1.6. Which assumption concerning preferences do Alvin's indifference curves violate?

both Diminishing marginal rates of substitution and More is preferred to less

Alvin's preferences for good X and good Y are shown in the diagram below. Refer to Figure 3.1.6. Which assumption concerning preferences do Alvin's indifference curves violate?

both Diminishing marginal rates of substitution and More is preferred to less

A team of researchers has conducted a study of the well-being of the citizens of the island nation of Zarasa. Using a scale from 1 (least happy) to 10 (most happy), the researchers find that citizens who earn 100 Zarutas per year have a mean happiness of 2.0, those who earn 200 Zarutas per year have a mean happiness of 6.0, and those who earn 300 Zarutas per year have a mean happiness of 7.0. The researchers should make which of the following conclusions?

both The utility of Zarasians increases with income and The marginal utility of Zarasians decreases with income

Bundling products makes sense for the seller when:

both consumers have heterogeneous demands and firms cannot price discriminate

Season ticket holders for the St. Louis Rams received a surprise when they read the applications forms to renew their season tickets. In order to get their season ticket to the Rams' home games, they also had to buy tickets to the preseason games. Many season ticket holders grumbled about this practice as an underhanded way for the St. Louis Rams to get more money from its season ticket holders. This practice is an example of:

bundling

The price of on-campus parking from 8:00 AM to 5:00 PM, Monday through Friday, is $3.00. From 5:00 PM to 10:00 PM, Monday through Friday, the price is $1.00. At all other times parking is free. This is an example of:

bundling. second-degree price discrimination. a two-part tariff. tying. >None of these

Alfred derives utility from consuming iced tea and lemonade. For the bundle he currently consumes, the marginal utility he receives from iced tea is 16 utils, and the marginal utility he receives from lemonade is 8 utils. Instead of consuming this bundle, Alfred should:

buy more iced tea and less lemonade. buy more lemonade and less iced tea. buy more iced tea and lemonade. buy less iced tea and lemonade. >None of these

One reason individuals are willing to pay for information in uncertain situations is that information:

can reduce uncertainty.

Refer to Figure 11.3.1 above. The price-discriminating firm earns a higher profit by:

charging a lower price as time goes by.

Bindy, an 18-year-old high school graduate, and Luciana, a 40-year-old college graduate, just purchased identical hot new sports cars. Acme Insurance charges a higher rate to insure Bindy than Luciana. This practice is an example of:

collusion. price discrimination. two-part tariff. bundling. >>None of these

Refer to Figure 4.1.5 above. In the upward-sloping portion of the curve that connects points A, B and D, the two goods, food and clothing, are:

complements

Refer to Table 8.1. That the firm is perfectly competitive is evident from its:

constant marginal revenue.

For a two-part tariff imposed on two consumers, the entry fee is based on the:

consumer surplus of the customer with lower willingness-to-pay

Refer to Figure 11.5.1 above. The points on the figure represent the reservation prices of four different consumers. With mixed bundling:

consumers A and D pay $90 for a single good, and consumers B and C pay $120 for a bundle.

Bette's Breakfast, a perfectly competitive eatery, sells its "Breakfast Special" (the only item on the menu) for $5.00. The costs of waiters, cooks, power, food etc. average out to $3.95 per meal; the costs of the lease, insurance and other such expenses average out to $1.25 per meal. Bette should:

continue producing in the short run, but plan to go out of business in the long run.

Scenario 5.9: Torrid Texts, a risk-neutral new firm that specializes in making college textbooks more interesting by inserting contemporary material wherever possible, is planning for next year's production and must decide how many paper producers to contract with. It knows fairly well what the general demand for textbooks is, but is uncertain how faculty will react to this new material. If faculty react very negatively, the firm expects course orders to be down. The executives at Torrid believe that the likelihood of a positive faculty response is 75%. The table below contains profit information under the different possible outcomes. Producers Faculty Reaction Expected Contracted Negative Positive Profit 1 $3 million $30 million $23.25 million 2 $1 million $60 million $45.25 million Refer to Scenario 5.9. Without additional information, Torrid Texts would:

contract with two paper producers because $45.25 million is greater than $23.25 million.

An association of businesses that are jointly owned and operated by members for mutual benefit is a:

cooperative.

A multiplant firm has equated marginal costs at each plant. By doing this:

costs are minimized given the level of output.

Suppose a consumer only purchases food and clothing, and food is plotted along the horizontal axis of the consumer's indifference map. If the price of clothing increases and the price of food and income do not change, then the budget line changes by rotating:

counter-clockwise about the fixed horizontal axis intercept.

Suppose a consumer only purchases food and clothing, and food is plotted along the horizontal axis of the consumer's indifference map. If the price of food and clothing increase and income does not change, then the budget line changes by rotating:

counter-clockwise about the fixed vertical axis intercept. clockwise about the fixed vertical axis intercept. counter-clockwise about the fixed horizontal axis intercept. clockwise about the fixed horizontal axis intercept. >None of these

Bundling raises higher revenues than selling the goods separately when:

demands for two products are negatively correlated.

You interview with an athletic footwear manufacturer that has annual advertising expenditures of $32 million and total sales revenue of $100 million, and the firm selects the profit maximizing level of advertising expenditures. If the advertising elasticity of demand is 0.4, then you know that "Rule of Thumb for Advertising" implies that the demand for the firm's products is:

elastic

At the profit-maximizing level of output, demand is:

elastic, but not infinitely elastic

Scenario 10.3: The demand curve and marginal revenue curve for red herrings are given as follows: Q = 250 - 5P MR = 50 - 0.4Q Refer to Scenario 10.3. At the profit-maximizing level of output, demand is:

elastic, but not infinitely elastic.

When a firm charges each customer the maximum price that the customer is willing to pay, the firm:

engages in first-degree price discrimination.

For a perfect first-degree price discriminator, incremental revenue is:

equal to the price paid for each unit of output.

Figure 6.2.2 Refer to Figure 6.2.2 above. This figure shows the impact of technological improvements and conveys the idea that:

even though any given production process exhibits diminishing returns, labor productivity increases with technological improvements.

Suppose you cannot buy information that completely removes the uncertainty from a business decision that you face, but you could buy information that reduces the degree of uncertainty. Based on the discussion in this chapter, the value of this partial information could be determined as the:

expected outcome under the partially uncertain case minus the expected outcome under the completely uncertain case.

The weighted average of all possible outcomes of a project, with the probabilities of the outcomes used as weights, is known as the:

expected value.

Scenario 7.1: The average total cost to produce 100 cookies is $0.25 per cookie. The marginal cost is constant at $0.10 for all cookies produced. Refer to Scenario 7.1. For 100 cookies, the average total cost is:

falling

Assume that a profit maximizing monopolist is producing a quantity such that marginal revenue exceeds marginal cost. We can conclude that the:

firm's output is smaller than the profit maximizing quantity.

A firm's producer surplus equals its economic profit when:

fixed costs are zero.

Suppose our firm produces chartered business flights with capital (planes) and labor (pilots) in fixed proportion (i.e., one pilot for each plane). The expansion path for this business will:

follow the 45-degree line from the origin.

Refer to Figure 4.2.2 above. The effect of a decrease in the price of food, as depicted in the figure, leads us to believe that:

food in an inferior good and clothing a normal good.

Refer to Figure 4.2.3 above. The effect of a decrease in the price of food, as depicted in the figure, leads us to believe that:

food is a Giffen good and clothing a normal good.

A study of satisfaction with life across income classes in the United States showed that:

happiness increases with income, at a decreasing rate.

A third-degree price discriminating monopolist can sell its output either in the local market or on an internet auction site (or both). After selling all of its output, the firm discovers that the marginal revenue earned in the local market was $20 while its marginal revenue on the internet auction site was $30. To maximize profits the firm should:

have sold less output in the local market and more on the internet auction site.

Consider the following information about job opportunities for new college graduates in Megalopolis: Table 5.1 Major Probability of Receivingan Offer in One Year Average Salary Offer Accounting .95 $25,000 Economics .90 $30,000 English .70 $24,000 Poli Sci .60 $18,000 Mathematics 1.00 $21,000 Refer to Table 5.1. Expected income for the first year is:

highest in economics.

Envision a graph with meat on the horizontal axis and vegetables on the vertical axis. A strict vegetarian would have indifference curves that are:

horizontal lines.

Scenario 5.5: Engineers at Jalopy Automotive have discovered a safety flaw in their new model car. It would cost $500 per car to fix the flaw, and 10,000 cars have been sold. The company works out the following possible scenarios for what might happen if the car is not fixed, and assigns probabilities to those events: Scenario Probability Cost A. No one discovers flaw .15 $0 B. Government fines firm .40 $10 million (no lawsuits) C. Resulting lawsuits are lost .30 $12 million (no government fine) D. Resulting lawsuits are won .15 $2 million (no government fine) Refer to Scenario 5.5. Jalopy Automotive's executives,

if risk-neutral, would fix the flaw because the cost of fixing the flaw is less than the expected cost of not fixing it.

The income-consumption curve

illustrates the utility-maximizing combinations of goods associated with every income level.

The fact that Alice spends no money on travel:

implies that she does not derive any satisfaction from travel. implies that she is at a corner solution. implies that her MRS does not equal the price ratio. >Any of these are possible.

An Engel curve shows combinations of:

income and the quantity consumed of one good.

Scenario 10.3: The demand curve and marginal revenue curve for red herrings are given as follows: Q = 250 - 5P MR = 50 - 0.4Q Refer to Scenario 10.3. Suppose that a tax of $5 per unit of output is imposed on red herring producers. The price of red herring will:

increase by less than $5.

Scenario 10.3: The demand curve and marginal revenue curve for red herrings are given as follows: Q = 250 - 5P MR = 50 - 0.4Q Refer to Scenario 10.3. Suppose that a tax of $5 per unit of output is imposed on red herring producers. The price of red herring will:

increase by less than $5.

Refer to Figure 4.2.2 above. Starting from point A, after the price of food decreases,, the quantity of food purchased:

increases, due to the substitution effect but decreases due to the income effect.

Bill currently uses his entire budget to purchase 5 cans of Pepsi and 3 hamburgers per week. The price of Pepsi is $1 per can, the price of a hamburger is $2, Bill's marginal utility from Pepsi is 4, and his marginal utility from hamburgers is 6. Bill could increase his utility by:

increasing Pepsi consumption and reducing hamburger consumption.

If a monopolist's profits were taxed away and redistributed to its consumers,

inefficiency would remain because output would be lower than under competitive conditions.

If a factory has a short-run capacity constraint (e.g., an auto plant can only produce 800 cars per day at maximum capacity), the marginal cost of production becomes ________ at the capacity constraint.

infinite

An isocost line reveals the

input combinations that can be purchased for a given total cost.

When a company introduces new audio products, it often initially sets the price high and lowers the price about a year later. This is an example of:

intertemporal price discrimination.

An investment opportunity is a sure thing; it will pay off $100 regardless of which of the three possible outcomes comes to pass. The variance of this investment opportunity:

is 0.

Average cost for the firm in Table 8.1:

is U-shaped.

An isoquant:

is a curve that shows all the combinations of inputs that yield the same total output.

A system of rationing:

is a system where everyone has equal chance to purchase a rationed good.

In the short run, a perfectly competitive profit maximizing firm that has not shut down:

is operating on the upward-sloping portion of its AVC curve.

At the profit-maximizing level of output, marginal profit

is zero.

The function which shows combinations of inputs that yield the same output is called a(n):

isoquant curve.

Three hundred firms supply the market for paint. For fifty of the firms, their short-run average variable costs are minimized at $10 and short-run total costs are minimized at $15. For the remaining firms, the short-run average variable costs and short-run average total costs are minimized at $20 and $25, respectively. If each firm has a U-shaped marginal cost curve then the short-run market supply curve is:

kinked at $20.

A construction company builds roads with machinery (capital, K) and labor (L). If we plot the isoquants for the production function so that labor is on the horizontal axis, then a point on the isoquant with a small MRTS (in absolute value) is associated with high ________ use and low ________ use.

labor, capital

Scenario 5.8: Risk-neutral Icarus Airlines must commit now to leasing 1, 2, or 3 new airplanes. It knows with certainty that on the basis of business travel alone, it will need at least 1 airplane. The marketing division says that there is a 50% chance that tourism will be big enough for a second plane only. Otherwise, tourism will be big enough for a third plane. This, plus revenue information, yields the following table: Planes Tourism Revenue Expected Leased Light Heavy Profit 2 $90 million $30 million $60 million 3 $10 million $140 million $75 million Refer to Scenario 5.8. Without additional information, Icarus Airlines would:

lease 3 airplanes because $75 million is greater than $60 million.

Assume that beer is a normal good. If the price of beer rises, then the substitution effect results in the person buying ________ of the good and the income effect results in the person buying ________ of the good.

less; less

The total revenue graph consistent with Table 8.1 is:

linear and upward-sloping.

A production function in which the inputs are perfectly substitutable would have isoquants that are:

linear.

Figure 8.6.1 Refer to Figure 8.6.1 above. The minimum variable cost of the firms in this competitive market is:

lower for firm 3.

Satisfaction from consumption is maximized when:

marginal benefit equals marginal cost.

In a short-run production process, the marginal cost is rising, and the average variable cost is falling as output is increased. Thus,

marginal cost is below average variable cost.

Figure 7.2.1 Refer to Figure 7.2.1 above. When 2 units of output are produced:

marginal cost is falling. average total cost is falling. average variable cost is less than average fixed cost. marginal cost is less than average total cost. >All of these

We may be tempted to determine the optimal level of advertising expenditures at the point where the last dollar spent on advertising generates an additional dollar of sales revenue (i.e, the marginal revenue of advertising equals one). In general, this rule will not allow the firm to maximize profits because it ignores the:

marginal cost of additional sales generated by the advertising

The slope of the total product curve is the:

marginal product.

The rate at which one input can be reduced per additional unit of the other input, while holding output constant, is measured by the:

marginal rate of technical substitution.

A monopolist has equated marginal revenue to zero. The firm has:

maximized revenue

Owners and managers:

may be different people with different goals, but in the long run firms that do best are those in which the managers pursue the goals of the owners.

Scenario 8.1: Two soft-drink firms, Fizzle & Sizzle, operate on a river. Fizzle is farther upstream, and gets cleaner water, so its cost of purifying water for use in the soft drinks is lower than Sizzle's by $500,000 yearly. According to Scenario 8.1, Fizzle and Sizzle:

may or may not be perfect competitors, but their position on the river has nothing to do with it.

The total cost of producing a given level of output is:

minimized when the ratio of marginal product to input price is equal for all inputs.

Suppose we advertise up to the point where the last dollar spent on advertising generates an additional dollar of sales revenue (i.e, the marginal revenue of advertising equals one). If the full marginal cost of advertising is greater than one, then we will generate:

more output than the profit maximizing level

Assume that beer is an inferior good. If the price of beer falls, then the substitution effect results in the person buying ________ of the good and the income effect results in the person buying ________ of the good.

more; less

Suppose the price of rice increases and you view rice as an inferior good. The substitution effect results in a ________ change in rice consumption, and the income effect leads to a ________ change in rice consumption.

negative; positive

When a per unit tax is imposed on the sale of a product of a monopolist, the resulting price increase will:

not always be less than the tax.

In the short run, a perfectly competitive firm earning negative economic profit is:

on the downward-sloping portion of its ATC curve.

A firm has two customers and creates a two-part tariff with a usage fee (P) that exceeds the marginal cost of production and leaves each customer with positive consumer surplus such that CS2 > CS1 > 0. If the firm sets the entry fee equal to CS2, then the number of customers that actually buy the product is equal to:

one

To understand consumer behavior and how consumer decisions are made, it is necessary and/or sufficient to work with:

ordinal utility functions only.

A local restaurant offers "early bird" price discounts for dinners ordered from 4:30 to 6:30 PM. This is an example of

peak-load pricing

Refer to Figure 11.3.2 above. This figure is a representation of

peak-load pricing, which is different from third-degree price discrimination

A local restaurant offers an "all-you-can-eat" salad bar for $3.49. However, with any sandwich, a customer can add the "all-you-can-eat" salad bar for $1.49. This is an example of:

peak-load pricing. second-degree price discrimination. a two-part tariff. tying. >>None of these

When the movie Jurassic Park debuted in Westwood, California, the price of tickets was $7.50. After several months the ticket price had fallen to $4.00. This is an example of:

peak-load pricing. second-degree price discrimination. a two-part tariff. tying. >None of these

Suppose all firms have constant marginal costs that are the same for each firm in the short run. In this case, the market level supply curve is ________ and producer surplus equals ________.

perfectly elastic; zero

The demand curve facing a perfectly competitive firm is

perfectly horizontal.

The pricing technique known as tying:

permits a firm to meter demand. permits a firm to practice price discrimination. enables a firm to extend its monopoly power to new markets. >All of these

If a monopolist sets her output such that marginal revenue, marginal cost and average total cost are equal, economic profit must be:

positive

If a competitive firm's marginal costs always increase with output, then at the profit maximizing output level, producer surplus is:

positive because price exceeds average variable costs.

Refer to Figure 3.1.7 above. This indifference map shows that: this consumer:

prefers a car with more acceleration and less space.

McDonald's restaurant located near the high school offered a Tuesday special for high school students. If high school students showed their student ID cards, they would be given 50 cents off any medium combination meal. This practice is an example of

price discrimination

McDonald's restaurant located near the high school offered a Tuesday special for high school students. If high school students showed their student ID cards, they would be given 50 cents off any medium combination meal. This practice is an example of:

price discrimination.

Revenue is equal to:

price times quantity.

An individual demand curve can be derived from the ________ curve.

price-consumption

A budget line shows the combinations of:

prices that place a limit on the purchase and consumption of two goods.

Scenario 10.3: The demand curve and marginal revenue curve for red herrings are given as follows: Q = 250 - 5P MR = 50 - 0.4Q Refer to Scenario 10.3. Compared to a competitive red herring industry, the monopolistic red herring industry:

produces less output at a higher price.

If capital is measured on the vertical axis and labor is measured on the horizontal axis, the slope of an isoquant can be interpreted as the:

rate at which the firm can replace capital with labor without changing the output rate.

As the manager of a firm you calculate the marginal revenue is $152 and marginal cost is $200. You should:

reduce output until marginal revenue equals marginal cost.

The cartel of oil-producing nations (OPEC) once controlled about 80% of the world petroleum market, but OPEC's market share has declined to about half of its former level. This outcome is a good example of how firms may have:

relatively high short-run monopoly power that declines in the long run.

The concept of a risk premium applies to a person that is:

risk averse.

Bill's utility function takes the form U(I) = exp(I) where I is Bill's income. Based on this utility function, we can see that Bill is:

risk loving.

An individual with a constant marginal utility of income will be:

risk neutral.

Discrimination based upon the quantity consumed is referred to as ________ price discrimination.

second-degree

Many cellular phone rate plans are structured as a combination of ________ price discrimination.

second-degree and third-degree

An electric power company uses block pricing for electricity sales. Block pricing is an example of:

second-degree price discrimination.

To optimally deter crime, law enforcement authorities should:

set higher fines for crimes that have a lower probability of being caught.

An Engel curve:

slopes upward for normal goods and downward for inferior goods.

If an increase in the price of one good leads to an increase in the quantity demanded of another, the two goods are:

substitutes.

The concerns about world food production raised by Malthus have not materialized because:

technological improvements have increased our ability to produce food over time.

We manufacturer automobiles given the production function q = 5KL where q is the number of autos assembled per eight-hour shift, K is the number of robots used on the assembly line (capital) and L is the number of workers hired per hour (labor). If we use K=10 robots and L=10 workers in order to produce q = 450 autos per shift, then we know that production is:

technologically inefficient.

A production function assumes a given:

technology.

The difference between the utility of expected income and expected utility from income is:

that expected utility from income is calculated by summing the utilities of possible incomes, weighted by their probability of occurring, and the utility of expected income is calculated by summing the possible incomes, weighted by their probability of occurring, and finding the utility of that figure.

The marginal product of an input is:

the addition to total output due to the addition of the last unit of an input, holding all other inputs constant.

Marginal utility measures:

the additional satisfaction from consuming one more unit of a good

Grocery store chains advertise more than convenience stores because:

the advertising elasticity of demand for convenience stores is near zero and is much smaller than for grocery store chains

Refer to Figure 10.4.3. In moving from the competitive level of output and price to the monopoly level of output and price, the monopolist is able to add to producer surplus:

the area BCEF less the area GFH.

When labor usage is at 12 units, output is 36 units. From this we may infer that:

the average product of labor is 3.

In a certain textile firm, labor is the only short term variable input. The manager notices that the marginal product of labor is the same for each unit of labor, which implies that:

the average product of labor is always equal to the marginal product of labor.

Based on Figure 3.1.5, it can be inferred that:

the consumer regards orange juice and apple juice as perfect substitutes.

When a monopolist engages in perfect price discrimination,

the demand curve and the marginal revenue curve are identical.

Producer surplus in a perfectly competitive industry is:

the difference between revenue and variable cost.

If a graph of a perfectly competitive firm shows that the mr=mc point occurs where MR is above AVC but below ATC,

the firm is earning negative profit but will continue to produce where mr=mc in the short run.

The amount of output that a firm decides to sell has no effect on the market price in a competitive industry because:

the firm's output is a small fraction of the entire industry's output.

An Engel curve is backward-bending when:

the good is inferior after a certain level of income.

A change in consumption of a good resulting from an increase in purchasing power, with relative prices held constant, is referred to as:

the income effect.

After a good falls in price, consumers are better off because they can buy the same amount of the good for less money, and thus have money left over for additional purchases. This fact is called:

the income effect.

The more elastic the demand facing a firm,

the lower the value of the Lerner index.

The slope of an indifference curve reveals:

the marginal rate of substitution of one good for another good.

One practical implication of a kinked market supply curve is that:

the market supply elasticity for a price increase may be different than the market supply elasticity for a price decrease at the kink point.

The difference between the economic and accounting costs of a firm are:

the opportunity costs of the factors of production that the firm owns.

If a consumer must spend her entire income on some combination of two commodities and chooses to spend it all on just one of the commodities then:

the other commodity generates less utility per dollar spent on the good.

Figure 8.4.1 Refer to Figure 8.4.1 above. The shaded area in the graph shows:

the profit that could be made if output increases from 7 to 8 units of output.

If a competitive firm has a U-shaped marginal cost curve then:

the profit-maximizing output is found where MC = MR and MC is increasing.

When a person consumes two goods (A and B), that person's utility is maximized when the budget is allocated such that:

the ratio of the marginal utility of A to the price of A equals the ratio of the marginal utility of B to the price of B.

When different indifference curves are placed in the Cartesian plane,

the result is called an indifference map. the curves cannot intersect. the curves that occupy a place farther away from the origin yield more utility than curves closer to the origin. >All of these

Suppose that the prices of good A and good B were to suddenly double. If good A is plotted along the horizontal axis,

the slope of the budget line will not change.

Marginal revenue, graphically, is:

the slope of the total revenue curve at a given point.

The information in the table below describes choices for a new doctor. The outcomes represent different macroeconomic environments, which the individual cannot predict. Table 5.3 ​ Outcome 1 Outcome 2 Job Choice Prob. Income Prob. Income Work for HMO 0.95 $100,000 0.05 $60,000 Own practice 0.2 $250,000 0.8 $30,000 Research 0.1 $500,000 0.9 $50,000 Refer to Table 5.3. In order to weigh which of the job choices is riskiest, an individual should look at:

the standard deviation, which is the square root of the average squared deviation.

A change in consumption of a good associated with a change in its price, with the level of utility held constant, is referred to as:

the substitution effect.

After a good falls in price, consumers will tend to buy more of the good that has become cheaper and less of those goods that are now relatively more expensive. This fact is called:

the substitution effect.

After a good falls in price, consumers will tend to buy more of the good that has become cheaperand less of those goods that are now relatively more expensive. This fact is called:

the substitution effect.

The response to a change in the relative prices of goods is called:

the substitution effect.

To answer the question: Can money buy happiness?, a study of the relationship between GDP per capita and satisfaction with life demonstrates that:

there is a direct relationship between money and happiness. People in countries with higher GDP per capita tend to be happier than people in countries with lower GDP per capita.

If any of the assumptions of perfect competition are violated,

there may still be enough competition in the industry to make the model of perfect competition usable.

If managers do not choose to maximize profit, but pursue some other goal such as revenue maximization or growth,

they are more likely to become takeover targets of profit-maximizing firms.

When the TR and TC curves have the same slope,

they are the furthest from each other.

A tennis pro charges $15 per hour for tennis lessons for children and $30 per hour for tennis lessons for adults. The tennis pro is practicing:

third-degree price discrimination.

Suppose that the competitive market for rice in Japan was suddenly monopolized. The effect of such a change would be:

to decrease the consumer surplus of Japanese rice consumers

The object of diversification is:

to reduce risk and fluctuations in income.

Jane is attempting to maximize utility by selecting a market basket of goods. For each of the goods in the market basket the marginal utility per dollar spent is equal. There are some goods which are affordable but do not appear in the Jane's market basket. If Jane has maximized utility, the marginal utility per dollar spent on each of the goods that does not appear in the market basket is:

too low.

If a consumer prefers basket A to basket B and basket B to basket C, then the consumer also prefers A to C. This assumption is called:

transitivity

You are currently using three printing presses and five employees to print 100 sales manuals per hour. If the MRTS at this point is 0.5 (capital is on the vertical axis of the isoquant map), then you would be willing to exchange ________ employees for one more printing press in order to maintain current output.

two

Refer to Figure 4.1.2. From the information on the figure, we can obtain:

two points on a downward-sloping individual demand curve.

A pricing strategy that requires consumers pay an up-front fee plus an additional fee for each unit of product purchased is a:

two-part tariff.

Higher input prices result in:

upward shifts of MC and reductions in output.

A numerical score that represents the satisfaction that a consumer gets from a given market basket is called:

utility.

Refer to Figure 3.1.2. The shape of an indifference curve like the one in this figure:

violates the assumption that more is preferred to less

Refer to Figure 3.1.3 above. The way in which the indifference curves are drawn in this figure:

violates the principle of transitivity in the model of consumer behavior.

Blanca would prefer a certain income of $20,000 to a gamble with a 0.5 probability of $10,000 and a 0.5 probability of $30,000. Based on this information:

we can infer that Blanca is risk averse.

The expected value of a project is always the:

weighted average of the outcomes, with probabilities of the outcomes used as weights.

A person with a diminishing marginal utility of income:

will be risk averse.

For an inferior good, the income and substitution effects

work against each other.

An L-shaped isoquant:

would indicate that capital and labor cannot be substituted for each other in production.

When facing a 50% chance of receiving $50 and a 50% chance of receiving $100, the individual pictured in Figure 5.2.2:

would pay a risk premium of $7.50 to avoid facing the two outcomes.

The individual pictured in Figure 5.2.2:

would receive a utility of 250 from a sure $75.


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