Microeconomics: Chapters 6-10

Which of the following is NOT an example of the hurdle method of price discrimination?

Permanently reducing all prices by 10 percent.

Which of the following is the most likely to be a fixed factor of production at a pizza restaurant?

The size of the seating area

Evidence suggests that as the importance of what's at stake grows, loss aversion:

becomes even more pronounced.

Entry into a perfectly competitive industry occurs whenever:

economic profit is greater than zero.

A credible threat is:

in the threatener's interest to carry out.

Fungibility is the property of an entity whose individual units:

are interchangeable.

If a natural monopoly increases the quantity of output it produces, then:

its average cost will decrease.

According to the adaptive rationality standard, individuals:

might rationally choose to have preferences that are not self-interested.

Refer to the figure below. What is the Nash equilibrium of this game?

A choose Up, B chooses Left

Status quo bias is the:

general resistance to change, often stemming from loss aversion.

According to the textbook, the owners of restaurants encourage tipping in order to:

solve a commitment problem with their wait staff.

According to the representative heuristic, you are more likely to assume that someone you just met is an architect if:

that person has many of the characteristics of an architect.

The relationship according to which the perceived change in any stimulus varies according to the size of the change measured as a proportion of the original stimulus is known as:

the Weber-Fechner law.

Consumer surplus is the cumulative difference between:

the amount consumers are willing to pay and the price they actually pay.

Suppose the accompanying table describes the relationship between price and quantity demanded for a monopolist. If the marginal cost of producing each unit of output is $5, then at the monopolist's profit-maximizing level of output, the monopolist produces ______ units of output than is socially optimal.

3 fewer

Imagine that you are an entrepreneur, making designer t-shirts in your garage. Your total cost (in dollars) is given by the equation TC = 300 + 10Q, where Q represents the number of t-shirts you make. Your fixed cost is $______, and your marginal cost is $______.

300; 10

The _______ is a rule of thumb that estimates the frequency of an event by the ease with which it is possible to summon examples from memory.

Availability heuristic

Suppose the accompanying figure shows the demand curve, marginal revenue curve and marginal cost curve for a monopolist. The profit-maximizing price for this monopolist to charge is:

B

Hotelling's model has been used to describe differentiation in the political "market." Suppose that 100 voters are evenly distributed between the extreme left and the extreme right on the political spectrum, and that all voters vote, and they always vote for the candidate closest to them on this spectrum. The numbers on this spectrum represent the number of voters lying to the left of the number. So, at the midpoint, fifty voters lie to the left and fifty to the right. If Candidate Y is running against Candidate Z:

Both candidates will have an incentive to move toward each other's position.

The fact that people sometimes regret having made a decision with perfectly predictable consequences:

cannot be explained by traditional economic models.

Traditional economic models _______ the fact that people sometimes regret making decisions with perfectly predictable consequences.

cannot explain

An imperfectly competitive firm faces a demand curve that is:

downward-sloping.

The market for bagels contains two firms: BagelWorld (BW) and Bagels'R'Us (BRU). The owners of the two firms decide to fix the price of bagels. The table below shows how each firm's profit (in dollars) depends on whether they abide by the agreement or cheat on the agreement. For Bagel World, ______ is a ______.

cheating on the agreement; dominant strategy

In situations where people make decisions with perfectly predictable consequences, traditional economic models cannot explain:

why people experience regret.

Assume that all firms in this industry have identical cost curves, and that the market is perfectly competitive. In the long run, how much profit will each firm in this industry earn each week?

$0

The payoff matrix below shows the payoffs (in millions of dollars) for two firms, A and B, for two different strategies, investing in new capital or not investing in new capital. An industry spy comes to firm B and claims to know what firm A has decided. Given that each firm already knows the payoff matrix, how much would this information be worth to firm B?

$0

Patents, which confer market power, are intended to:

encourage innovation by helping firms recoup the costs of research and development.

Suppose Lydia owns the only lawn-mowing business in the small town of Pleasant Pastures. There are 8 people each week whose lawns she might cut, each with a reservation price given in the accompanying table. Assume that the marginal cost of mowing each lawn is constant and equal to $25. If Lydia charges the same price to all of her customers, then what price should she charge if she wants to maximize her profit.

$32

Assume that all firms in this industry have identical cost curves, and that the market is perfectly competitive. In the long run, there will be ______ firms in this market.

10

The accompanying figure shows the demand curve, marginal revenue curve, marginal cost curve and average total cost curve for a monopolist. This monopolist maximizes its profit by producing ______ units per day and charging a price of ______ per unit.

4; $18

Suppose Island Bikes, a profit-maximizing firm, is the only bike rental company in a small resort town. The marginal cost to Island Bikes of renting out a bike is $3, and Island Bikes has no fixed costs. Each day Island Bikes has six potential customers, whose reservation prices are listed in the table. What is the socially optimal number of bikes for Island Bikes to rent out each day?

6

Suppose Campus Books, a profit-maximizing firm, is the only supplier of the textbook for a given class. The marginal cost of supplying each book is constant and equal to $10, and Campus Books has no fixed costs. The table shows the reservation prices of the eight students enrolled in the class. If Campus Books is permitted to charge 2 prices, and the bookstore knows customers with a reservation price above $30 never bother with coupons, whereas those with a reservation price of $30 or less always use them, then how many in total books will the bookstore sell?

7

A coalition of firms who agree to restrict output for the purpose of earning an economic profit is called a(n):

cartel.

Suppose the accompanying figure shows the demand curve, marginal revenue curve and marginal cost curve for a monopolist. When this monopolist maximizes its profit, consumer surplus equals the area:

ABJ

Which of the following statements is true?

Accounting profit is greater than or equal to economic profit.

Assume that all firms in this industry have identical cost curves, and that the market is perfectly competitive. If the market supply curve is given by S3, then what will happen to the market supply curve in the long run?

It will shift to S2.

_______ is the general resistance to change, often stemming from loss aversion.

Status quo bias

_______ is the relationship according to which the perceived change in any stimulus varies according to the size of the change measured as a proportion of the original stimulus.

The Weber-Fechner law

Consider two coupons: one offers 10 percent off a pair of jeans that costs $100, and the other offers 50 percent off a pair of sunglasses that costs $20. Using either coupon requires driving to the shopping mall across town. According to the Weber-Fechner law, which coupon will people tend to perceive as being more valuable?

The coupon for the sunglasses since 50 percent is greater than 10 percent.

Suppose a firm produces the level of output at which the marginal cost of the last unit produced equals the price of the good. Which of the following statements is always true?

The firm should shutdown if its total revenue is less than its variable cost.

Which of the following best explains why you are more likely to see a poor person than a wealthy person picking up aluminum cans to sell?

The opportunity cost of picking up cans is higher for wealthy people than for poor people.

Which of the following statements about explicit costs is true?

They appear on the firm's balance sheet.

Given the demand curve it faces, if an imperfectly competitive firm wants to sell another unit of output, it must:

lower its price.

According to the availability heuristic, which of the following will make Katie more likely believe that she will win a lot of money if she buys a lottery ticket?

Watching a news report about someone winning 2 millions dollars playing the lottery.

A pure monopoly exists when:

a single firm produces a good with no close substitutes.

The supplier of a factor of production has a reservation price of $100. The purchaser of the factor of production has a reservation price of $200. If the factor of production is unique, then:

a transaction will occur, and the price paid for the factor of production will be $200.

Traditional economic models assume that people care about:

absolute consumption.

Psychological incentives:

can serve as commitment devices.

Homo economicus is all of the following EXCEPT:

cognitively naive.

Angelina Jolie's economic rent from starring in a movie is equal to the difference between:

her final salary and the least she would be willing to accept to star in the movie.

Traditional economic models cannot explain why:

people donate money to charity completely anonymously.

Imperfect price discrimination occurs when a monopolist:

price discriminates but some buyers pay less than their reservation price.

The payoff matrix below shows the payoffs (in millions of dollars) for two firms, A and B, for two different strategies, investing in new capital or not investing in new capital. This game is an example of a:

prisoner's dilemma.

Refer to the accompanying figure. If the market for doughnuts is perfectly competitive, and the price of a doughnut is 25 cents, then this firm should:

produce 80 doughnuts.

The reason economists consider monopoly to be socially undesirable is that monopolists:

produce less than the socially optimal level of output.

Subsidies are most likely to:

reduce total economic surplus.

The essential feature that differentiates imperfectly competitive firms from perfectly competitive firms is that an imperfectly competitive firm:

faces a downward-sloping demand curve.

If a firm is experiencing economies of scale, then as the firm's output rises, its average total cost _____.

falls

Suppose Whitney is willing to pay $200 to buy a new phone. Loss aversion implies that if Whitney already had just bought the phone, you would:

have to pay her more than $200 to part with it.

Loss aversion is the tendency to experience losses as:

more painful than the pleasures that result from gains of the same magnitude.

A price ceiling that is set below the equilibrium price will cause:

producer surplus to fall.

The cumulative difference between the price producers actually receive for a good and the lowest price for which they would have been willing to sell it is called:

producer surplus.

Suppose a monopolist faces the following demand curve. The monopolist maximizes its profits by:

producing the level of output at which marginal revenue equals marginal cost.

Total revenue minus both explicit and implicit costs defines a firm's:

profit.

According to the theory of the invisible hand, if buyers and sellers are free to pursue their own self-interest, the result often will be:

an efficient allocation of resources.

If the demand curve facing a monopolist shifts, then the monopolist's:

marginal revenue curve and profit-maximizing level of output will change.

If a firm functions in an oligopoly, it is:

one of a small number of firms that produce goods that are either close or perfect substitutes.

If you were to start your own business, your implicit costs would include the:

opportunity cost of the time you spend working at the business.

A monopolistically competitive firm:

something distinguishes its output from that of its competitors by locating in a more convenient place.

When a pharmaceutical company introduces a new drug, its research and development costs are ______, and the cost of the chemicals used in manufacturing the drug are ______.

start-up costs; variable costs

Game theory provides tools that are used to model:

strategic interdependencies.

The figure below shows the supply and demand curves for jeans in Smallville. At a price of $60 per pair, there will be an excess ______ of ______ pairs of jeans per day.

supply; 16

Suppose a small island nation imports sugar for its population at the world price of $1,500 per ton. The domestic market for sugar is shown below. With no subsidy, what is producer surplus?

$0 per day

Suppose a monopolist faces the following demand curve. If the monopolist were to sell 20 units of output, its total revenue would be:

$1,000

Suppose a monopolist faces the following demand curve. If the monopolist were to sell 20 units of output, its total revenue would be:

$1,000

Suppose the accompanying figure shows the demand curve, marginal revenue curve and marginal cost curve for a monopolist. At this monopolist's profit-maximizing level of output, deadweight loss equals ______.

$1,000

Imagine that you are an entrepreneur, making designer t-shirts in your garage. Your total cost (in dollars) is given by the equation TC = 300 + 10Q, where Q represents the number of t-shirts you make. If you make 100 t-shirts, your average total cost is ______.

$13

Refer to the figure below. If this market is unregulated, the economic surplus received by producers is:

$16

Refer to the figure below. If this market is unregulated, the economic surplus received by producers is:

$16

Pat used to work as an aerobics instructor at the local gym earning $35,000 a year. Pat quit that job and started working as a personal trainer. Pat makes $50,000 in total annual revenue. Pat's only out-of-pocket costs are $12,000 per year for rent and utilities, $1,000 per year for advertising and $3,000 per year for equipment. Pat's accounting profit is _______, and Pat's economic profit is _______.

$34,000; -$1,000

The figure below shows the supply and demand curves for oranges in Smallville. What is the marginal cost of producing the tenth pound of oranges?

$4

Refer to the figure below. In this game, how many dominant strategies does Player A have?

1

One thousand adults live in Milltown. Every day, they all leave work at 4:30 p.m., arrive home at exactly 5:00 p.m., and go to bed at 9:00 p.m. Three fundraisers, Alpha, Beta, and Charlie, have targeted Milltown's population. To get a donation, they must call Milltown's residents after they get home from work but before they go to bed. Because the charities raising the funds are identical, the first to call a willing donor will get the donation. Beta's manager has decided that the best time to call is 7:00 p.m. because it is exactly halfway between 5:00 p.m. and bedtime. Which of the following is true?

Beta's manager did not choose wisely.

Hotelling's model has been used to describe differentiation in the political "market." Suppose that 100 voters are evenly distributed between the extreme left and the extreme right on the political spectrum, and that all voters vote, and they always vote for the candidate closest to them on this spectrum. The numbers on this spectrum represent the number of voters lying to the left of the number. So, at the midpoint, fifty voters lie to the left and fifty to the right. If Candidate X is running for office against Candidate Z, then:

Candidate Z will win.

Which of the following is NOT an example of an explicit cost?

The income the owner could have earned in his or her next best employment opportunity.

When researchers compare people who are asked to imagine that, having previously purchased a ticket for $10, they arrive at the theater to discover they have lost their ticket to people who are asked to imagine that they arrive just before the performance to buy a ticket and find they have lost $10 from their wallets, which group is more likely to say that they would still attend the performance?

The lost $10 group

The allocative function of price cannot operate unless there is:

both free entry and free exit.

A market equilibrium is only efficient if:

all relevant costs and benefits are reflected in the market supply and demand curves.

The payoff matrix below shows the daily profit for two firms, Row Restaurant and Column Cafe, for two different strategies, publishing coupons in the student paper and not publishing coupons in the student paper. If Row Restaurant publishes coupons, Column Cafe would earn the highest profit if it:

also published coupons.

In traditional economic models, homo economicus is assumed to be all of the following EXCEPT:

altruistic.

An estimation technique that begins with an initial approximation, which is then modified in accordance with additional information, is known as:

anchoring and adjustment.

The rule of thumb that estimates the frequency of an event by the ease with which it is possible to summon examples from memory is the:

availability heuristic.

Relative to a world in which some people are motivated by nonmaterial incentives, if all people were motivated solely by financial incentives, then:

both business transactions and personal interactions would be different.

In the realm of public policy, loss aversion makes it:

difficult to enact policy changes.

According to the adaptive rationality standard, people might choose to have unselfish preferences because:

doing so could be in their own best interest.

According to the adaptive rationality standard, one reason people might rationally choose to have preferences that are not narrowly self-interested is that:

doing so could help them solve commitment problems.

The last time you went on a road trip, you noticed that there were several fast food outlets clustered near some freeway exits, but none at the others. Now that you are familiar with Hotelling's model, you know that the reason for this is:

firms vying for a favorable location.

Commitment devices are necessary when:

following through on a threat or promise is not in a player's best interest.

In a free market economy, the decisions of buyers and sellers are:

guided by prices.

A price setter is a firm that:

has some degree of control over its price.

The most important challenge facing a firm in a perfectly competitive market is deciding:

how much to produce.

In order to effectively price discriminate, one requirement is that a seller must be able to:

identify customers with different reservation prices.

One implication of the shape of the demand curve facing a perfectly competitive firm is that:

if the firm increases its price above the market price, it will earn zero revenue.

In traditional economic models, which of the following does NOT describe homo economicus:

implusive.

If people care about relative consumption rather than absolute consumption, then:

individuals' decisions need not lead to socially optimal outcomes.

According to the Weber-Fechner law, the perceived size of a change in a stimulus will be large when the change in the stimulus:

is large in proportion to the original stimulus.

Jenny sells lemonade in front of her house in the summer. Several other kids in Jenny's neighborhood also run lemonade stands in the summer. If the lemonade market is perfectly competitive, and Jenny is charging the equilibrium price, then Jenny can increase her revenue if she:

keeps the price of her lemonade the same and increase the output.

Tracy and Amy are playing a game in which Tracy has the first move at X in the decision tree shown below. Once Tracy has chosen either the top or bottom branch at X, Amy, who can see what Tracy has chosen, must choose the top or bottom branch at Y or Z. Both players know the payoffs at the end of each branch. The equilibrium to the game results in ______ for Amy and Tracy relative to what they could get if they could solve their ______.

lower payoffs; commitment problem

Studies have shown that when people are asked to imagine a hypothetical illness, the amount of money they say they would be willing to pay to avoid getting the illness is _______ they would be willing to pay for a cure if they were already sick.

more than

Most cartels cease to be effective because:

of the incentive to cheat on the cartel agreement.

Consider the accompanying payoff matrix. If Row Resorts keeps its rates high, then Column Cruises would receive the highest payoff if it:

offered reduced rates.

The phenomenon that unusual events are likely to be followed by more nearly normal is known as:

regression to the mean.

Economic rent is:

the difference between the payment made to the owner of a factor of production and the owner's reservation price.

According to the availability heuristic, we often estimate the frequency of an event by:

the ease with which we can recall relevant examples.

If a firm is earning zero economic profit, then:

the firm's accounting profit is equal to the firm's implicit costs.

Suppose there are two small island countries: Avarice, which is populated by people who are completely self-interested, and Altruism, which is populated by people who have adopted social norms of generosity and cooperation. Suppose residents of each island often play prisoner's dilemma games, always matched with a person from the same island, but not a person who they know or will play with again. If the same number of games is played on each island, you would expect:

the residents of Altruism to have higher average payoffs than the residents of Avarice.

If a Proposer and a Responder are asked to split $100 in the ultimatum bargaining game, standard economic theory would predict that the Proposer should offer the Responder:

the smallest dollar amount possible.

The _______ is a game in which the first player has the power to confront the second player with a take-it-or-leave-it offer.

ultimatum bargaining game

A game in which the first player has the power to confront the second player with a take-it-or-leave-it offer is the:

ultimatum bargaining game.

Individual supply curves generally slope ______ because ______.

upward; of increasing opportunity costs.

Widespread behavioral evidence suggests that people:

weigh losses more heavily than gains.

A good is characterized by network economies if it:

becomes more valuable as more people own it.

Rules of thumb that reduce computation costs are known as:

judgmental and decision heuristics.

Refer to the table below. Suppose all firms in this industry have identical costs to this firm and are producing 15 units of output. One can predict that:

new firms will enter the industry.

When Tversky and Khaneman asked one group of people to imagine that, having previously purchased a ticket for $10, they arrive at the theater to discover they have lost their ticket and a second group to imagine that they arrive just before the performance to buy a ticket and find they have lost $10 from their wallets, they found that people in the lost ticket group were more likely to say they would ______ the performance, even though the rational choice model predicts that people in _____.

no longer attend; both groups should be equally likely to say they would still attend

If the firms in a market are earning an economic profit, then, in the long run, the market ______ curve will shift to the ______.

supply; right

Last week, Gina's bakery sold fewer cupcakes than ever before. Regression to the mean implies that the bakery:

will sell more cupcakes this week.

The fact that price subsidies reduce economic surplus implies that:

we can find an alternative policy that will make both the rich and the poor better off.

The accompanying table shows a pizzeria's fixed cost and variable cost at different levels of output. Pizzas sell for $20 each. When the pizzeria makes 25 pizzas a day, its average fixed cost is ______.

$20

Suppose that only 2 percent of all people are geniuses. If an IQ test indicates that Albert is a genius, but the test is only accurate 90 percent of the time, then the probability that Albert really is a genius is roughly:

16 percent.

Suppose one group of people is asked to imagine that, having previously purchased a ticket for $10, they arrive at the theater to discover they have lost their ticket, and a second group of people is asked to imagine that they arrive just before the performance to buy a ticket and find they have lost $10 from their wallets. According to the rational choice model, which group should be more likely to say they would still attend the performance?

Both groups should be equally likely to say they would attend.

Which of the following is NOT necessarily true in a market equilibrium?

Both rich and poor have adequate access to the good.

According to the representative heuristic, people will tend to think that Karen is a vegetarian if:

Karen has many of the characteristics of a stereotypical vegetarian.

Consider an industry with two firms producing similar products. Each firm's total cost (in dollars) is given below. Mega Corp: TC = 5,000 + 100Q Big Inc: TC = 4,000 + 200Q ______ has a higher fixed cost and ______ has a higher marginal cost.

Mega Corp; Big Inc

Player 1 and Player 2 are playing a game in which Player 1 has the first move at A in the decision tree shown below. Once Player 1 has chosen either Up or Down, Player 2, who can see what Player 1 has chosen, must choose Up or Down at B or C. Both players know the payoffs at the end of each branch. What is the equilibrium outcome of this game?

Player 1 chooses Down and Player 2 chooses Up.

Consider to the accompanying payoff matrix. If player A makes his or her choice before player B, then what will be the equilibrium outcome of this game?

Player A and player B both get 60.

_______ is the phenomenon that unusual events are likely to be followed by more nearly normal ones.

Regression to the mean

A firm whose production process exhibits constant returns to scale would find that if it doubled all of its inputs, its output would ______.

double

Suppose that you have noticed that almost all of the car dealers in your city are located along a three-block stretch of the same street. A likely reason for this clustering of car dealers is that:

each dealer is attempting to locate closest to the customers.

Natural monopolies are most likely to arise when firms have:

high start-up costs and low marginal costs.

The accompanying figure shows the demand curve, marginal revenue curve, marginal cost curve and average total cost curve for a monopolist. At this monopolist's profit-maximizing level of output, it:

incurs an economic loss of $16 per day.

If it is possible to make a change that will help some people without harming others, then the situation is:

inefficient.

Suppose the production of cotton causes substantial environmental damage because the pesticides used by cotton farmers often make their way into nearby rivers and streams, and are very harmful to fish and other wildlife. If cotton farmers do not have to pay for the environmental damage caused by the pesticides used to grow cotton, then the market equilibrium price will be ______ and the market equilibrium quantity will be ______.

inefficiently low; inefficiently high

Assume that all firms in this industry have identical cost curves, and that the market is perfectly competitive. In the short run, firms in this market will shut down if the market price is:

less than $5

Regression to the mean refers to the phenomenon in which unusual events are:

likely to be followed by events that are more normal.

Barriers to entry are forces that:

limit new firms from joining an industry.

The tendency to experience losses as more painful than the pleasures that result from gains of the same magnitude is known as:

loss aversion.

Refer to the accompanying graph. If this firm is a price taker and the price of each unit of output is $9, then at its profit-maximizing level of output, this firm will earn a ______ of ______.

loss; $300

A firm is most likely to experience economies of scale if its start-up costs are high and its marginal cost is ______.

low

Assume that each day a firm uses 13 employee-hours per day and an office to produce 100 units of output. The price of each unit output is $5, the hourly wage rate is $10, and rent on the office is $200 per day. Each day the firm earns a ______ of ______.

profit; $170

According to the availability heuristic, the more easily we can recall examples of an event:

the more likely we judge the event to be.

When people use anchoring and adjustment to estimate something, the adjustment they make when they receive new information is typically:

too small.

When a perfectly competitive firm sells additional units of output, ______, and when a monopolist sells additional units of output, ______.

total revenue always rises; total revenue could rise, fall, or remain unchanged

Economic profit is equal to:

total revenue minus the sum of the explicit and implicit costs.

The sum of producer surplus and consumer surplus is:

total surplus.

Economies of scale arise from:

increasing returns to scale.

Assume that all firms in this industry have identical cost curves, and that the market is perfectly competitive. The long-run equilibrium price in this industry is:

$10

Suppose you own a small business. Last month, your total revenue was $6,000. In addition, you paid: $1,000 in monthly rent for office space, $200 in monthly rent for equipment, $3,000 to your workers in wages for the month, and $1,000 for the supplies you used that month. If you correctly determine that your economic profit last month was negative $200, then it must be true that:

your implicit costs are $1,000 per month.

Suppose Lydia owns the only lawn-mowing business in the small town of Pleasant Pastures. There are 8 people each week whose lawns she might cut, each with a reservation price given in the accompanying table. Assume that the marginal cost of mowing each lawn is constant and equal to $25. If Lydia charges the same price to all of her customers, then what price should she charge if she wants to maximize her profit.

$32

If an individual producer is willing to produce one unit of a good for $2.50 but is able to sell it for $7.50, then his or her producer surplus from the sale of that unit would be:

$5

Suppose a firm uses workers and office space to produce output. The firm is locked into a year-long lease on its office space, but it can easily vary the number of employee-hours it uses each day. The accompanying table describes the relationship between the number of employee-hours the firm uses each day and the firm's daily output. Each unit of output sells for $2, the hourly wage rate is $14, and the rent on the office space is $50 per day. This firm's fixed cost each day is:

$50

The payoff matrix below shows the payoffs (in millions of dollars) for two firms, A and B, for two different strategies, investing in new capital or not investing in new capital. An industry spy from firm A comes to firm B and offers to pay B in exchange for B's certain and enforceable promise to not invest. What is the most that firm A will be willing to pay B to not invest?

$50 million

Last year Christine worked as a consultant. She hired an administrative assistant for $15,000 per year and rented office space (utilities included) for $3,000 per month. Her total revenue for the year was $100,000. If Christine hadn't worked as a consultant, she would have worked at a real estate firm earning $40,000 a year. Last year, Christine's explicit costs were ______, and her implicit costs were ______.

$51,000; $40,000

Suppose a small island nation imports sugar for its population at the world price of $1,500 per ton. The domestic market for sugar is shown below. If the government provides a subsidy of $500 per ton, then the cost of subsidy, which must be borne by taxpayers, will be ______ per day.

$6,000

In which of the following markets do firms sell the same standardized product?

2% milk

The figure below shows the supply and demand curves for jeans in Smallville. At the price of $60 per pair, sellers offer _____ pairs of jeans per day, and buyers wish to purchase ______ pairs of jeans a day.

24; 8

Suppose Island Bikes, a profit-maximizing firm, is the only bike rental company in a small resort town. The marginal cost to Island Bikes of renting out a bike is $3, and Island Bikes has no fixed costs. Each day Island Bikes has six potential customers, whose reservations prices are listed in the table. Suppose Island Bikes knows that customers whose reservation prices are at least $10 always rent bikes before noon, while those whose reservation prices are below $10 never do so. If Island bikes can charge a different price in the morning and in the afternoon, then in the afternoon, it will rent out ______ bike(s) and charge ______ per bike.

2; $6

Suppose the accompanying table describes the relationship between price and quantity demanded for a monopolist. If the marginal cost of producing each unit of output is $5, then this monopolist's profit-maximizing level of output is ______.

3

Suppose Campus Books, a profit-maximizing firm, is the only supplier of the textbook for a given class. The marginal cost of supplying each book is constant and equal to $10, and Campus Books has no fixed costs. The table shows the reservation prices of the eight students enrolled in the class. What is the socially optimal number of books?

8

Which of the following is NOT an example of the hurdle method of price discrimination?

A lower price on strawberries when they are in season.

Which of the following will cause a decrease in the supply of jeans?

An increase in the wages paid to workers who make jeans.

_______ is an estimation technique that begins with an initial approximation, which is then modified in accordance with additional information.

Anchoring and adjustment

Suppose two companies, Macrosoft and Apricot, are considering whether to develop a new product, a touch-screen t-shirt. The payoffs to each of developing a touch-screen t-shirt depend upon the actions of the other, as shown in the payoff matrix below (the payoffs are given in millions of dollars). Suppose Apricot makes its decision first, and then Macrosoft makes its decision after seeing Apricot's choice. What will happen if, before Apricot chooses, Macrosoft announces that it is going to develop a touch-screen t-shirt no matter what Apricot does?

Apricot will develop a touch-screen t-shirt, and Macrosoft will not because Macrosoft's threat is not credible.

_______ is the property of an entity whose individual units are interchangeable.

Fungibility

Refer to the figure below. If a price ceiling were imposed at point G, the consumer surplus would be represented by the area ______.

GAEF

Suppose the accompanying figure shows the demand curve, marginal revenue curve and marginal cost curve for a monopolist. The socially optimal level of output is ______ units per day.

H

Suppose Jordan and Lee are trying to decide what to do on a Friday. Jordan would prefer to see a comedy while Lee would prefer to see a documentary. One documentary and one comedy are showing at the local cinema. The payoffs they receive from seeing the films either together or separately are shown in the payoff matrix below. Both Jordan and Lee know the information contained in the payoff matrix. They purchase their tickets simultaneously, ignorant of the other's choice. Which of the following statements is true?

Jordan does not have a dominant strategy.

Mexico and the members of OPEC produce crude oil. Realizing that it would be in their best interests to form an agreement on production goals, a meeting is arranged and an informal, verbal agreement is reached. If both Mexico and OPEC abide by the agreement, then OPEC's profit will be $200 million and Mexico's profit will be $100 million. If both Mexico and OPEC cheat on the agreement, then OPEC's profit will be $175 million and Mexico's profit will be $80 million. If only OPEC cheats, then OPEC's profit will be $185 million, and Mexico's profit will be $60 million. If only Mexico cheats, then Mexico's profit will be $110 million, and OPEC's profit will be $150 million. Which of the following statements is correct?

Mexico's dominant strategy is to cheat on the agreement.

Suppose Firm A and Firm B are considering whether to invest in a new production technology. For each firm, the payoff to investing (given in thousands of dollars per day) depends upon whether the other firm invests, as shown in the payoff matrix below. Is this game a prisoner's dilemma?

No.

Suppose Evan and Robert are each filling out a separate survey about parking on campus. On Evan's survey, the first question asks about whether he thinks the fine for parking illegally on campus should be $50, and on Robert's survey the first question asks about whether he thinks the fine should be $100. For both Evan and Robert, the second question asks how much each thinks the fine currently is. If Evan and Robert know nothing about the parking fines on campus, but each uses anchoring and adjustment to form his assessment, then, all else equal, you would expect:

Robert's estimate of the current fine to be higher than Evan's.

The price equals marginal cost rule for profit maximization is a specific example of which core principle?

The Cost-Benefit Principle

If a firm is earning zero economic profit, then its accounting profit will:

be positive.

Which of the following statements about implicit costs is true?

They measure the forgone opportunities of the firm's owners.

Suppose Chelsea reads two news articles about future house prices. The first article predicts that house prices will fall next month, and the second predicts that house prices will rise next month. Valerie reads the same two articles, but she first reads the one that predicts that house prices will rise, and then reads the one that predicts that house prices will fall. If Chelsea and Valerie know very little about future house prices, and each uses anchoring and adjustment to form her assessment, then, all else equal, which of them is more likely to think that house prices will rise next month?

Valerie

The market for bagels contains two firms: BagelWorld (BW) and Bagels'R'Us (BRU). The owners of the two firms decide to fix the price of bagels. The table below shows how each firm's profit (in dollars) depends on whether they abide by the agreement or cheat on the agreement. Is this game a prisoner's dilemma?

Yes, because if both firms played their dominated strategy, they each would earn a higher payoff than when they both play their dominant strategy.

Lee and Cody are playing a game in which Lee has the first move at A in the decision tree shown below. Once Lee has chosen either aggression or cooperation, Cody, who can see what Lee has chosen, must choose either aggression or cooperation at B or C. Both players know the payoffs at the end of each branch. In the equilibrium of this game, Lee chooses ______, and then Cody chooses ______.

aggression; cooperation

Satisficing is the decision-making strategy that:

aims for adequate results when achieving optimal results may necessitate an excessive expenditure of resources.

The market for bagels contains two firms: BagelWorld (BW) and Bagels'R'Us (BRU). The owners of the two firms decide to fix the price of bagels. The table below shows how each firm's profit (in dollars) depends on whether they abide by the agreement or cheat on the agreement. In the Nash equilibrium of this game:

both firms cheat on the agreement.

The payoff matrix below shows the daily profit for two firms, Row Restaurant and Column Cafe, for two different strategies, publishing coupons in the student paper and not publishing coupons in the student paper. The payoffs of this game are such that:

both firms would benefit from a law that made publishing coupons illegal.

P-TV and QRS-TV are trying to decide whether to air a sitcom or a reality show in a given time slot. Viewers like both sitcoms and reality shows, but sitcoms are more expensive to produce than reality shows since real actors need to be hired. QRS-TV makes its decision first, and then P-TV observes that choice before making its decision. Both stations know all of the information in the decision tree below. In the equilibrium of this game:

both stations will air reality shows.

Tracy and Amy are playing a game in which Tracy has the first move at X in the decision tree shown below. Once Tracy has chosen either the top or bottom branch at X, Amy, who can see what Tracy has chosen, must choose the top or bottom branch at Y or Z. Both players know the payoffs at the end of each branch. If before Tracy chose, Amy could make a credible commitment to choose either the top or bottom branch when her turn came, then Amy would commit to the ______ branch and Tracy would choose the ______ branch.

bottom; top

When players cannot achieve their goals because they are unable to make credible threats or promises, the situation is called a:

commitment problem.

Joe is the owner of the 7-11 Mini Mart, Sam is the owner of the SuperAmerica Mini Mart, and together they are the only two gas stations in town. Currently, they both charge $3 per gallon, and each earns a profit of $1,000. If Joe cuts his price to $2.90 and Sam continues to charge $3, then Joe's profit will be $1,350, and Sam's profit will be $500. Similarly, if Sam cuts his price to $2.90 and Joe continues to charge $3, then Sam's profit will be $1,350, and Joe's profit will be $500. If Sam and Joe both cut their price to $2.90, then they will each earn a profit of $900. For both Joe and Sam, ______ is a ______.

cutting the price to $2.90; dominant strategy

Consider an industry with two firms producing similar products. Each firm's total cost (in dollars) is given below. Mega Corp: TC = 5,000 + 100Q Big Inc: TC = 4,000 + 200Q For both firms, average total cost:

declines as quantity increases.

Suppose a small island nation imports sugar for its population at the world price of $1,500 per ton. The domestic market for sugar is shown below. If the government provides a subsidy of $500 per ton, then relative to before the subsidy, total economic surplus will ______ by ______ per day.

decrease; $1,000

Imagine that you are an entrepreneur, making designer t-shirts in your garage. Your total cost (in dollars) is given by the equation TC = 300 + 10Q, where Q represents the number of t-shirts you make. As you increase your production of t-shirts, your average fixed cost ______ and your marginal cost ______.

decreases; stays the same

In traditional economic models, the narrowly self-interested, well-informed, highly disciplined and cognitively formidable decision maker is often referred to as:

homo economicus.

Brandon is having difficulty deciding between two jobs, X and Y. As shown in the accompanying diagram, X entails a greater risk of injury than Y, but pays more. Ideally, Brandon would like a job that both pays well and does not entail a high risk of injury. If Brandon behaves like most decision-makers, then the addition of option Z would:

increase his likelihood of picking Y.

Suppose a perfectly competitive firm is producing 37 units output, and the marginal cost of the 37th unit is $3. If the firm can sell each unit of output for $5 and the firm's revenue is sufficient to cover its variable cost, the firm should:

increase production.

According to the representative heuristic, people's belief about the likelihood that something belongs to a given category _______ the extent to which it shares characteristics with the stereotypical members of that category.

increases with

Relative to a monopoly charging a single price to all consumers, perfect price discrimination ______ producer surplus and ______ consumer surplus.

increases; decreases

In traditional economic models, homo economicus refers to a decision maker who:

is narrowly self-interest, well-informed, highly disciplined, and cognitively capable enough to solve optimization problems.

Refer to the figure below. In this game, the dominated strategy for Player A:

is to play down.

Suppose Danielle receives the highest grade in the class on the first exam in her economics course. Regression to the mean implies that Danielle:

isn't likely to do as well on the second exam.

Suppose the accompanying table describes the demand for a good produced by monopolist. The monopolist's marginal revenue from selling the 4th unit of output is less than $7 because:

it has to charge $1 less for each of the first 3 units of output.

According to the representative heuristic, people are more likely to believe that something belongs to a given category if:

it shares characteristics with the stereotypical members of that category.

If a natural monopoly decreases the quantity of output it produces, then:

its average cost will increase.

Joe is the owner of the 7-11 Mini Mart, Sam is the owner of the SuperAmerica Mini Mart, and together they are the only two gas stations in town. Currently, they both charge $3 per gallon, and each earns a profit of $1,000. If Joe cuts his price to $2.90 and Sam continues to charge $3, then Joe's profit will be $1,350, and Sam's profit will be $500. Similarly, if Sam cuts his price to $2.90 and Joe continues to charge $3, then Sam's profit will be $1,350, and Joe's profit will be $500. If Sam and Joe both cut their price to $2.90, then they will each earn a profit of $900. In this situation, the Nash equilibrium yields a:

lower payoff than each would receive if each played his dominated strategy.

Consider an industry with two firms producing similar products. Each firm's total cost (in dollars) is given below. Acme Manufacturing: TC = 100 + 3Q Generic Industries: TC = 500 + 3Q When each firm is producing the same quantity, Acme's average total cost is:

lower than Generic's average total cost.

The monopolist will maximize profits at the output level for which:

marginal revenue equals marginal cost.

For all firms, the additional revenue collected from the sale of one additional unit of output is termed:

marginal revenue.

Unlike economic profit, economic rent:

may not be driven to zero by competition.

In numerous experiments, researchers have found that if a Proposer and a Responder are asked to split a fixed sum on money in the ultimatum bargaining game, the Proposer will, on average, offer the Responder:

more than would be predicted by standard economic theory.

Relative to a single price monopolist, a price discriminating monopolist generates:

more total surplus.

P-TV and QRS-TV are trying to decide whether to air a sitcom or a reality show in a given time slot. Viewers like both sitcoms and reality shows, but sitcoms are more expensive to produce than reality shows since real actors need to be hired. QRS-TV makes its decision first, and then P-TV observes that choice before making its decision. Both stations know all of the information in the decision tree below. Suppose QRS-TV enters into an agreement with P-TV that gives QRS-TV the exclusive right to air a reality show during this time slot. QRS-TV would be willing to pay P-TV _______ in order to persuade P-TV to enter into this agreement.

no more than $10 million

Lee and Cody are playing a game in which Lee has the first move at A in the decision tree shown below. Once Lee has chosen either aggression or cooperation, Cody, who can see what Lee has chosen, must choose either aggression or cooperation at B or C. Both players know the payoffs at the end of each branch. Suppose Cody tells Lee that if Lee chooses aggression, then Cody will also choose aggression, and if Lee chooses cooperation, then Cody will also choose cooperation. Cody's statement is:

not credible.

Hotelling's model has been used to describe differentiation in the political "market." Suppose that 100 voters are evenly distributed between the extreme left and the extreme right on the political spectrum, and that all voters vote, and they always vote for the candidate closest to them on this spectrum. The numbers on this spectrum represent the number of voters lying to the left of the number. So, at the midpoint, fifty voters lie to the left and fifty to the right. If Candidate X is running against Candidate Z, by moving to the right Candidate X would:

not lose any votes from voters on the left and gain some votes from Z.

The present aim standard of rationality:

takes people's goals as given and assumes that people are efficient at pursuing whatever goals they happen to hold at the moment of action.

Typically, when people use anchoring and adjustment to estimate something, the importance of _______ in influencing their assessment is too large.

the anchor

Economies of scale exist when:

the average cost of production falls as output rises.

The ultimatum bargaining game is a game in which:

the first player confronts the second player with a take-it-or-leave-it offer.

The dilemma in a prisoner's dilemma is that:

the players would be better off if they both played a dominated strategy.

The figure below shows the supply and demand curves for jeans in Smallville. The equilibrium price will NOT lead to the largest possible total economic surplus if:

the production of jeans generates air pollution.

An example of an implicit cost is:

the value of a spare bedroom turned into a home office.

Suppose the market for bottled water is served by two oligopolists. If they reach an agreement to restrict production and charge a price above marginal cost, then:

their agreement is likely to eventually collapse.

Efficiency is an important goal because when markets are efficient:

there are more resources available to achieve other goals.

A prisoner's dilemma illustrates situations in which:

there is a conflict between the narrow self-interest of individuals and the broader interests of a group.

One reason that variable factors of production tend to show diminishing returns in the short run is that:

there is only so much that can be produced using additional variable inputs when some factors of production are fixed.

A commitment problem exists when people cannot achieve their goals because:

they cannot make credible threats or promises.

Suppose Anna just received a parking ticket. According to the availability heuristic, this will tend to make Anna:

think people frequently receive parking tickets.

Refer to the figure below. If Jess chooses A, then Cory's best response is:

to choose A.

In laboratory experiments, the behavior of players in the ultimatum game suggests that people:

value fairness.

The Weber-Fechner law is the relationship according to which the perceived change in any stimulus:

varies according to the size of the change measured as a proportion of the original stimulus.

Suppose Stephen's first novel makes the New York Times bestseller list. Regression to the mean implies that his second novel:

won't be as popular as his first novel.

Suppose you would have to pay Troy at least $12 to get him to part with his new water bottle. Loss aversion implies that if Troy had not yet purchased the water bottle, he would:

be willing to pay less than $12 to buy it.

Before it became illegal, cigarette manufacturers once relied heavily on TV advertising. According to the textbook, when the government banned TV advertising, the cigarette manufacturers:

benefited because the decision about whether to advertise on TV was a prisoner's dilemma.

The table below shows how the payoffs to two political candidates depend on whether the candidates run a positive or negative campaign. The payoffs are given in terms of the percentage change in the number of votes received. In the Nash equilibrium of this game:

both candidates run negative campaigns.

Hotelling's model has been used to describe differentiation in the political "market." Suppose that 100 voters are evenly distributed between the extreme left and the extreme right on the political spectrum, and that all voters vote, and they always vote for the candidate closest to them on this spectrum. The numbers on this spectrum represent the number of voters lying to the left of the number. So, at the midpoint, fifty voters lie to the left and fifty to the right. To an economic naturalist, this model helps explain why political candidates:

move toward more centrist positions during campaign season.

Suppose that when a perfectly competitive firm produces 1,000 units of output, its total variable cost is $1,900. If the marginal cost of producing the 1,000th unit is $1.70, and if the market price of each unit of output is $1.70, then the firm should:

shut down.

John is trying to decide how to divide his time between his job as a stocker in the local grocery store, which pays $7 per hour for as many hours as he chooses to work, and cleaning windows for the businesses downtown. He makes $2 for every window he cleans. John is indifferent between the two tasks, and the number of windows he can clean depends on how many hours he spends cleaning in a day, as shown in the accompanying table. What is the lowest price per window that would induce John to spend at least one hour per day cleaning windows?

$1

Last year Christine worked as a consultant. She hired an administrative assistant for $15,000 per year and rented office space (utilities included) for $3,000 per month. Her total revenue for the year was $100,000. If Christine hadn't worked as a consultant, she would have worked at a real estate firm earning $40,000 a year. For Christine to earn a normal profit as a consultant, her accounting profit would have to be ______.

$40,000

Suppose Island Bikes, a profit-maximizing firm, is the only bike rental company in a small resort town. The marginal cost to Island Bikes of renting out a bike is $3, and Island Bikes has no fixed costs. Each day Island Bikes has six potential customers, whose reservations prices are listed in the table. Suppose Island Bikes knows that customers whose reservation prices are at least $10 always rent bikes before noon, while those whose reservation prices are below $10 never do so. If Island Bikes charges a different price in the morning and in the afternoon, then what will be the total economic surplus?

$49

Suppose Sarah owns a small company that makes wedding cakes. The accompanying table shows how Sarah's total cost varies depending on the number of wedding cakes she makes each day. When Sarah produces 2 cakes per day, her average variable cost is ______.

$60

Refer to the figure below. In this game, how many dominant strategies does Player B have?

0

Something that changes incentives so as to make otherwise empty threats or promises credible is called a:

commitment device.

Suppose a market is in equilibrium. The area below the demand curve and above the market price is:

consumer surplus.

P-TV and QRS-TV are trying to decide whether to air a sitcom or a reality show in a given time slot. Viewers like both sitcoms and reality shows, but sitcoms are more expensive to produce than reality shows since real actors need to be hired. QRS-TV makes its decision first, and then P-TV observes that choice before making its decision. Both stations know all of the information in the decision tree below. Given the information in this decision tree, if QRS-TV announces that it will air a sitcom, it can expect to:

earn $5 million.

If the owners of a business are receiving total revenues just sufficient to cover all of their explicit and implicit costs, then they are:

earning a normal profit.

In the long run, in a perfectly competitive industry:

economic profit and loss are driven to zero by entry and exit.

Suppose farmers in a given market can either grow soy beans or corn on their land. In addition, suppose an increase in the demand for corn causes the price of corn to increase. As a result of the increase in the price of corn, farmers who were already growing corn will earn an:

economic profit in the short run.

Refer to the figure below. In the matrix above:

neither Cory nor Jess has a dominant strategy.

The No-Cash-on-the-Table Principle states that there are:

never unexploited opportunities available to individuals in equilibrium.

A situation is efficient if it is:

not possible to find a transaction that will make at least one person better off without harming others.

Airlines that charge higher prices for seats in the first class cabin are:

not price discriminating because the product is not the same.

According to the text, everyone shouts at a party in order to be heard. If instead everyone spoke at a normal volume people would still be heard, but people continue to shout because:

shouting is a dominant strategy.

Assume that all firms in this industry have identical cost curves, and that the market is perfectly competitive. The long-run equilibrium price in this industry is:

$10

Judgmental and decision heuristics are:

rules of thumb that reduce consumption costs.

Joe is the owner of the 7-11 Mini Mart, Sam is the owner of the SuperAmerica Mini Mart, and together they are the only two gas stations in town. Currently, they both charge $3 per gallon, and each earns a profit of $1,000. If Joe cuts his price to $2.90 and Sam continues to charge $3, then Joe's profit will be $1,350, and Sam's profit will be $500. Similarly, if Sam cuts his price to $2.90 and Joe continues to charge $3, then Sam's profit will be $1,350, and Joe's profit will be $500. If Sam and Joe both cut their price to $2.90, then they will each earn a profit of $900. If both players choose their dominated strategy they will each earn ______, and if both players choose their dominant strategy they will each earn______.

$1,000; $900

Suppose a small island nation imports sugar for its population at the world price of $1,500 per ton. The domestic market for sugar is shown below. If the government provides a subsidy of $500 per ton, the equilibrium price of sugar will be ______ per ton, and the equilibrium quantity will be ______ tons per day.

$1,000; 12

Quick Buck and Pushy Sales produce and sell identical products and face zero marginal and average cost. Below is the market demand curve for their product. Suppose Quick Buck and Pushy Sales decide to collude and work together as a monopolist with each firm producing half the quantity demanded by the market at the monopoly price. If Quick Buck cheats by reducing its price to $1 and Pushy Sales matches the price cut, then if consumers are evenly split between the two firms, what will be Quick Buck's economic profit?

$1,500

Imagine that you are an entrepreneur, making designer t-shirts in your garage. Your total cost (in dollars) is given by the equation TC = 300 + 10Q, where Q represents the number of t-shirts you make. If you make 1,000 t-shirts, your average total cost is ______.

$10.30

Suppose Sarah owns a small company that makes wedding cakes. The accompanying table shows how Sarah's total cost varies depending on the number of wedding cakes she makes each day. Sarah's fixed cost is ______ per day.

$100

Suppose Sarah owns a small company that makes wedding cakes. The accompanying table shows how Sarah's total cost varies depending on the number of wedding cakes she makes each day. The marginal cost of the 4th wedding cake per day is ______.

$100

Suppose Sarah owns a small company that makes wedding cakes. The accompanying table shows how Sarah's total cost varies depending on the number of wedding cakes she makes each day. If the market for wedding cakes is perfectly competitive, and wedding cakes sell for $125 each, then at her profit-maximizing level of output, Sarah's profit will be ______ per day.

$105

The payoff matrix below shows the daily profit for two firms, Row Restaurant and Column Cafe, for two different strategies, publishing coupons in the student paper and not publishing coupons in the student paper. If Column Cafe publishes coupons and Row Restaurant does not, then Row Restaurant will earn ______, and Column Cafe will earn ______.

$10; $200

The figure below shows the supply and demand curves for oranges in Smallville. The marginal buyer values the tenth pound of oranges at ______.

$12

Suppose Ben owns a small company that makes kites. The market for kites is perfectly competitive, and kites sell for $25 each. Ben's total production costs vary depending on the number of kites he makes each day, as shown in the accompanying table. When Ben makes 2 kites per day, what is his average variable cost?

$13

The figure below shows the supply and demand curves for oranges in Smallville. When this market is in equilibrium, total economic surplus is ______ per day.

$160

Suppose the accompanying table describes the relationship between price and quantity demanded for a monopolist. The marginal revenue of the fifth unit of output is:

$2

Assume that all firms in this industry have identical cost curves, and that the market is perfectly competitive. If S3 is the market supply curve, then each firm in this market will earn an economic loss of ______ per week.

$2,000

Suppose the accompanying figure shows the demand curve, marginal revenue curve and marginal cost curve for a monopolist. At this monopolist's profit-maximizing level of output, consumer surplus is ______.

$2,000

Suppose the accompanying figure shows the demand curve, marginal revenue curve and marginal cost curve for a monopolist. At this monopolist's profit-maximizing level of output, consumer surplus is ______.

$2,000

Suppose a firm uses workers and office space to produce output. The firm is locked into a year-long lease on its office space, but it can easily vary the number of employee-hours it uses each day. The accompanying table describes the relationship between the number of employee-hours the firm uses each day and the firm's daily output. Each unit of output sells for $2, the hourly wage rate is $14, and the rent on the office space is $50 per day. Suppose a firm uses workers and office space to produce output. The firm is locked into a year-long lease on its office space, but it can easily vary the number of employee-hours it uses each day. The accompanying table describes the relationship between the number of employee-hours the firm uses each day and the firm's daily output. Each unit of output sells for $2, the hourly wage rate is $14, and the rent on the office space is $50 per day. Suppose a firm uses workers and office space to produce output. The firm is locked into a year-long lease on its office space, but it can easily vary the number of employee-hours it uses each day. The accompanying table describes the relationship between the number of employee-hours the firm uses each day and the firm's daily output. Each unit of output sells for $2, the hourly wage rate is $14, and the rent on the office space is $50 per day. Suppose a firm uses workers and office space to produce output. The firm is locked into a year-long lease on its office space, but it can easily vary the number of employee-hours it uses each day. The accompanying table describes the relationship between the number of employee-hours the firm uses each day and the firm's daily output. Each unit of output sells for $2, the hourly wage rate is $14, and the rent on the office space is $50 per day. When the firm uses 9 employee-hours per day, its total revenue each day is:

$240

Suppose Island Bikes, a profit-maximizing firm, is the only bike rental company in a small resort town. The marginal cost to Island Bikes of renting out a bike is $3, and Island Bikes has no fixed costs. Each day Island Bikes has six potential customers, whose reservations prices are listed in the table. Suppose Island Bikes knows that customers whose reservation prices are at least $10 always rent bikes before noon, while those whose reservation prices are below $10 never do so. If Island Bikes charges a different price in the morning and in the afternoon, then what will be its daily economic profit?

$33

Suppose Campus Books, a profit-maximizing firm, is the only supplier of the textbook for a given class. The marginal cost of supplying each book is constant and equal to $10, and Campus Books has no fixed costs. The table shows the reservation prices of the eight students enrolled in the class. If Campus Books is permitted to charge 2 prices, and the bookstore knows customers with a reservation price above $30 never bother with coupons, whereas those with a reservation price of $30 or less always use them, then the bookstore will set the list price of the book to be ______ and the discounted price of the book to be ______.

$36; $24

Suppose Acme and Mega produce and sell identical products and face zero marginal and average cost. Below is the market demand curve for their product. Suppose Acme and Mega decide to collude and work together as a monopolist with each firm producing half the quantity demanded by the market at the monopoly price. If Mega cheats on the agreement by reducing its price to $1 and Acme matches the price cut, then if consumers are evenly split between the two firms, Acme's economic profit will be ______.

$75

John is trying to decide how to divide his time between his job as a stocker in the local grocery store, which pays $7 per hour for as many hours as he chooses to work, and cleaning windows for the businesses downtown. He makes $2 for every window he cleans. John is indifferent between the two tasks, and the number of windows he can clean depends on how many hours he spends cleaning in a day, as shown in the accompanying table. A second hour cleaning windows will yield additional earnings of ______.

$8

Miniville is an isolated town located on the southern shore of Lake Condescending, a very large lake. The western edge of Miniville is adjacent to impassable mountains and there are no towns or businesses for many miles to the east. The 300 residents of Miniville are evenly distributed along 3 miles of shoreline on the lake, east of the mountains. Lake Shore Drive, the only street in town, provides access to Miniville's homes and businesses. All residents live between the lake and the street; businesses locate on the other side of the street. Lake Shore Drive is 3 miles long, and the points labeled A, B, and C are 1, 2, and 3 miles from the western end of Lake Shore Drive, respectively. All residents of Miniville shop at the store located closest to their homes. If one store is located at A and the other store is located at C:

200 people will shop at the store at A, and 100 people will shop at the store at C.

Suppose two companies, Macrosoft and Apricot, are considering whether to develop a new product, a touch-screen t-shirt. The payoffs to each of developing a touch-screen t-shirt depend upon the actions of the other, as shown in the payoff matrix below (the payoffs are given in millions of dollars). Which of the following statements is correct?

Apricot does not have a dominant strategy.

Suppose two companies, Macrosoft and Apricot, are considering whether to develop a new product, a touch-screen t-shirt. The payoffs to each of developing a touch-screen t-shirt depend upon the actions of the other, as shown in the payoff matrix below (the payoffs are given in millions of dollars). Suppose Apricot makes its decision first, and then Macrosoft makes its decision after seeing Apricot's choice. What will be the equilibrium outcome of this game?

Apricot will develop touch-screen t-shirt, and Macrosoft will not.

Player 1 and Player 2 are playing a game in which Player 1 has the first move at A in the decision tree shown below. Once Player 1 has chosen either Up or Down, Player 2, who can see what Player 1 has chosen, must choose Up or Down at B or C. Both players know the payoffs at the end of each branch. Suppose Player 1 and Player 2 enter into a binding agreement in which Player 1 agrees to pay Player 2 a fixed amount of money to get Player 2 to play Up when it is Player 2's turn. How much will Player 1 have to pay Player 2 to get Player 2 to play Up?

At least $20.

Suppose the accompanying figure shows the demand curve, marginal revenue curve and marginal cost curve for a monopolist. At the monopolist's profit-maximizing level of output, deadweight loss equals the area:

JLN

According to the Weber-Fechner law, when the change in a stimulus is large in proportion to the original stimulus, the perceived size of the change will be:

Large.

John is trying to decide how to divide his time between his job as a stocker in the local grocery store, which pays $7 per hour for as many hours as he chooses to work, and cleaning windows for the businesses downtown. He makes $2 for every window he cleans. John is indifferent between the two tasks, and the number of windows he can clean depends on how many hours he spends cleaning in a day, as shown in the accompanying table. Should John spend a third hour cleaning windows?

No, because the additional amount he would earn is $6, which is less than his opportunity cost of $7.

Mexico and the members of OPEC produce crude oil. Realizing that it would be in their best interests to form an agreement on production goals, a meeting is arranged and an informal, verbal agreement is reached. If both Mexico and OPEC abide by the agreement, then OPEC's profit will be $200 million and Mexico's profit will be $100 million. If both Mexico and OPEC cheat on the agreement, then OPEC's profit will be $175 million and Mexico's profit will be $80 million. If only OPEC cheats, then OPEC's profit will be $185 million, and Mexico's profit will be $60 million. If only Mexico cheats, then Mexico's profit will be $110 million, and OPEC's profit will be $150 million. Which of the following statements is correct?

OPEC does not have dominant strategy.

The _______ accommodates a much broader range of observed behavior than traditional economic models, but has been criticized because virtually any bizarre behavior can be explained by assuming people have a sufficiently strong taste for it.

Present aim standard of rationality

According to the _______, if Carla has many of the characteristics of a stereotypical basketball player (for example, she is tall), then people will be more likely to assume she plays basketball.

Representative heuristic

The market for bagels contains two firms: BagelWorld (BW) and Bagels'R'Us (BRU). The owners of the two firms decide to fix the price of bagels. The table below shows how each firm's profit (in dollars) depends on whether they abide by the agreement or cheat on the agreement. Suppose the game above is repeated every day, and both firms adopt the following strategy: cooperate on the first day, then if the other firm cheats, cheat the next day, and if the other firm abides, abide the next day. This type of strategy is known as:

a tit-for-tat strategy.

Mexico and the members of OPEC produce crude oil. Realizing that it would be in their best interests to form an agreement on production goals, a meeting is arranged and an informal, verbal agreement is reached. If both Mexico and OPEC abide by the agreement, then OPEC's profit will be $200 million and Mexico's profit will be $100 million. If both Mexico and OPEC cheat on the agreement, then OPEC's profit will be $175 million and Mexico's profit will be $80 million. If only OPEC cheats, then OPEC's profit will be $185 million, and Mexico's profit will be $60 million. If only Mexico cheats, then Mexico's profit will be $110 million, and OPEC's profit will be $150 million. Suppose Mexico chooses first, and then OPEC, after seeing Mexico's choice, chooses second. Before Mexico chooses, OPEC tells Mexico that if Mexico cheats on the agreement, then OPEC will also cheat, and if Mexico abides by the agreement, then OPEC will also abide. This is an example of a ______, and the outcome is that ______.

credible threat; neither will cheat

Joe is the owner of the 7-11 Mini Mart, Sam is the owner of the SuperAmerica Mini Mart, and together they are the only two gas stations in town. Currently, they both charge $3 per gallon, and each earns a profit of $1,000. If Joe cuts his price to $2.90 and Sam continues to charge $3, then Joe's profit will be $1,350, and Sam's profit will be $500. Similarly, if Sam cuts his price to $2.90 and Joe continues to charge $3, then Sam's profit will be $1,350, and Joe's profit will be $500. If Sam and Joe both cut their price to $2.90, then they will each earn a profit of $900. For Joe, keeping his price at $3 per gallon is a:

dominated strategy.

Generally, ______ motivates firms to enter an industry, while ______ motivates firms to exit an industry.

economic profit; economic loss

A cost-saving innovation in a perfectly competitive industry will lead to:

economic profits for a few firms for a short time.

According to the textbook, the most important and enduring source of market power is:

economies of sale.

Suppose Vincent is willing to pay $350 to buy a new bike. Loss aversion implies that if Vincent had just bought the bike, you would:

have to pay him more than $350 to part with it.

Suppose the accompanying figure illustrates the demand curve facing a monopolist. If the monopolist decreases its price from $12 to $10, its total revenue will ______.

increase by $600

Natasha is having difficulty deciding between two jobs, A and B. As shown in the accompanying diagram, A is closer to home than B, but doesn't pay as well. Ideally, Natasha would like a job that both pays well and is close to her home. If Natasha behaves like most decision-makers, then the addition of option C would:

increase her likelihood of picking B.

Corey is having difficulty deciding between two dishwashers, A and B. As shown in the accompanying diagram, A makes more noise than B, but is cheaper. Ideally, Corey would like a dishwasher that is both quiet and inexpensive. If Corey behaves like most decision-makers, then the addition of option C would:

increase his likelihood of picking A.

The accompanying figure shows the demand curve, marginal revenue curve, marginal cost curve and average total cost curve for a monopolist. At this monopolist's profit-maximizing level of output, it:

incurs an economic loss of $16 per day.

Miniville is an isolated town located on the southern shore of Lake Condescending, a very large lake. The western edge of Miniville is adjacent to impassable mountains and there are no towns or businesses for many miles to the east. The 300 residents of Miniville are evenly distributed along 3 miles of shoreline on the lake, east of the mountains. Lake Shore Drive, the only street in town, provides access to Miniville's homes and businesses. All residents live between the lake and the street; businesses locate on the other side of the street. Lake Shore Drive is 3 miles long, and the points labeled A, B, and C are 1, 2, and 3 miles from the western end of Lake Shore Drive, respectively. All residents of Miniville shop at the store located closest to their homes. If the first store to open in Miniville is located at A, to maximize the number of customers it attracts, the next store to open should locate:

just east of A.

Suppose there are two small island countries: Avarice, which is populated by people who are completely self-interested, and Altruism, which is populated by people who have adopted social norms of generosity and cooperation. Commitment problems will be:

largely avoided in Altruism, but prevalent in Avarice.

Suppose a perfectly competitive firm is producing 1,000 units of output and the marginal cost of the 1,000th unit is $7. If the firm can sell each unit of output for $7 and the firm's revenue is sufficient to cover its variable cost, the firm should:

leave production unchanged.

Suppose a firm uses workers and office space to produce output. The firm is locked into a year-long lease on its office space, but it can easily vary the number of employee-hours it uses each day. The accompanying table describes the relationship between the number of employee-hours the firm uses each day and the firm's daily output. Each unit of output sells for $2, the hourly wage rate is $14, and the rent on the office space is $50 per day. When the firm uses 9 employee-hours per day, it earns a daily ______ of ______.

profit; $64

Ingrid has been waiting for the show "Mamma Mia!" to come to town. When it finally does come, tickets cost $60. Ingrid's reservation price is $75. But when Ingrid tries to buy a ticket, they are sold out. Ingrid decides to try to buy a ticket from a scalper (a person who purchased extra tickets at the box office with the intent to resell them at a higher price). If Ingrid finds someone who is willing to sell her a ticket for $70, she should:

purchase the ticket because doing so will make her $5 better off.

The figure below depicts the short-run market equilibrium in a perfectly competitive market and the cost curves for a representative firm in that market. Assume that all firms in this market have identical cost curves. A starting assumption about this industry was that all of the firms in the market had identical cost curves. This assumption is:

realistic because any cost-saving innovation adopted by one firm will be quickly adopted by others.

Suppose the production of cotton causes substantial environmental damage because the pesticides used by cotton farmers often make their way into nearby rivers and streams, and are very harmful to fish and other wildlife. Economists would consider the environmental damage that results from the production of cotton to be a(n):

relevant cost of production.

The rule of thumb according to which people are more likely to assume something belongs to a given category if it shares many characteristics with the stereotypical members of that category is the:

representative heuristic.

Suppose all firms in a perfectly competitive industry are earning an economic profit. One would expect that, over time, the number of firms in the industry will ______ and the market price will ______.

rise; fall