Chapter 2

True-False Budget Constraint

Topic,Budget Constraint Di#0Eculty,1

#25 Correct Responses,90 Discrimination Index,10

Correct Answer,False

2.1 If there are two goods with positive prices and the price of one good is reduced,while income

and other prices remain constant,then the size of the budget set is reduced.

Topic,Budget Constraint Di#0Eculty,1

#25 Correct Responses,76 Discrimination Index,24

Correct Answer,False

2.2 If good 1 is measured on the horizontal axis and good 2 is measured on the vertical axis,and

if the price of good 1 is p

1

and the price of good 2 is p

2; then the slope of the budget line is,p

2

=p

1

.

Topic,Budget Constraint Di#0Eculty,1

#25 Correct Responses,91 Discrimination Index,13

Correct Answer,False

2.3 If all prices are doubled and money income is left the same,the budget set does not change

because relative prices don't change.

Topic,Budget Constraint Di#0Eculty,1

#25 Correct Responses,93 Discrimination Index,21

Correct Answer,True

2.4 If there are two goods,and if one good has a negative price and the other has a positive

price,then the slope of the budget line will be positive.

Topic,Budget Constraint Di#0Eculty,1

#25 Correct Responses,94 Discrimination Index,12

Correct Answer,False

2.5 If all prices double and income triples,then the budget line will become steeper.

CHAPTER 2 Budget Constraint 2

Topic,Budget Constraint Di#0Eculty,1

#25 Correct Responses,95 Discrimination Index,13

Correct Answer,False

2.6 If Good 1 is on the horizontal axis and Good 2 is on the vertical axis,then an increase in the

price of Good 1 will not change the horizontal intercept of the budget line.

Topic,Budget Constraint Di#0Eculty,1

#25 Correct Responses,98 Discrimination Index,1

Correct Answer,False

2.7 If there are two goods and the prices of both goods rise,then the budget line must become

steeper.

Topic,Budget Constraint Di#0Eculty,1

#25 Correct Responses,97 Discrimination Index,0

Correct Answer,True

2.8 There are two goods,You knowhowmuch of good 1 a consumer can a#0Bord if she spends all

of her income on good 1,If you know the ratio of the prices of the two goods,then you could draw

the consumer's budget line without any more information.

Topic,Budget Constraint Di#0Eculty,1

#25 Correct Responses,91 Discrimination Index,0

Correct Answer,True

2.9 A consumer prefers more to less of every good,Her income rises,and the price of one of the

goods falls while other prices stay constant,These changes must have made her better o#0B.

Topic,Budget Constraint Di#0Eculty,2

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,True

2.10 There are 3 goods,The price of good 1 is,1; the price of good 2 is +1; and the price

of good 3 is +2.Itisphysically possible for a consumer to consume any commodity bundle with

non-negative amounts of each good,A consumer who has income of 10 could a#0Bord to consume

some commodity bundles that include 5 units of good 1 and 6 units of good 2.

Topic,Budget Constraint Di#0Eculty,1

#25 Correct Responses,80 Discrimination Index,49

Correct Answer,False

2.11 A decrease in income pivots the budget line around the bundle initially consumed.

Multiple Choice Budget Constraint

Topic,Budget Constraint Di#0Eculty,1

#25 Correct Responses,97 Discrimination Index,6

Correct Answer,A

2.1

If she spends all of her income on lemons and tangerines,Isabella can just a#0Bord 30 lemons and

8 tangerines per day,She could also use her entire budget to buy 6 lemons and 14 tangerines per

day,The price of lemons is 6 guineas each,Howmuch is Isabella's income per day?

#28a#29 372 guineas

#28b#29 377 guineas

#28c#29 371 guineas

#28d#29 363 guineas

#28e#29 None of the above.

Topic,Budget Constraint Di#0Eculty,1

#25 Correct Responses,97 Discrimination Index,6

Correct Answer,A

2.2

If she spends all of her income on uglifruit and breadfruits,Maria can just a#0Bord 11 uglifruit

and 4 breadfruits per day,She could also use her entire budget to buy 3 uglifruit and 8 breadfruits

per day,The price of uglifruit is 6 pesos each,Howmuch is Maria's income per day?

#28a#29 115 pesos

#28b#29 119 pesos

#28c#29 114 pesos

#28d#29 105 pesos

#28e#29 None of the above.

CHAPTER 2 Budget Constraint 4

Topic,Budget Constraint Di#0Eculty,2

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,A

2.3 Matt lives on popcorn and seafood salads,The price of popcorn is 1 dollar per bag and the

price of seafood salads is 2 dollars each,Matt allows himself to spend no more than 13 dollars a

day on food,He also restricts his consumption to 5,500 calories per day,There are 1,000 calories

in a bag of popcorn and 500 calories in a seafood salad,If he spends his entire money budget each

day and consumes no more calories than his calorie limit:

#28a#29 he can consume up to 3 bags of popcorn per day,but no more.

#28b#29 he can consume up to 1 bags of popcorn per day,butno more.

#28c#29 he can consume up to 5 seafood salads per day,but no more.

#28d#29 he can consume up to 4 bags of popcorn per day,but no more.

#28e#29 None of the above.

Topic,Budget Constraint Di#0Eculty,2

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,A

2.4 Quincy lives on ding dongs and seafood salads,The price of ding dongs is 1 dollar per bag

and the price of seafood salads is 4 dollars each,Quincy allows himself to spend no more than 23

dollars a day on food,He also restricts his consumption to 3,300 calories per day,There are 600

calories in a bag of ding dongs and 300 calories in a seafood salad,If he spends his entire money

budget eachday and consumes no more calories than his calorie limit:

#28a#29 he can consume up to 3 bags of ding dongs per day,but no more.

#28b#29 he can consume up to 1 bags of ding dongs per day,butno more.

#28c#29 he can consume up to 5 seafood salads per day,but no more.

#28d#29 he can consume up to 4 bags of ding dongs per day,but no more.

#28e#29 None of the above.

MULTIPLE CHOICE 5

Topic,Budget Constraint Di#0Eculty,1

#25 Correct Responses,88 Discrimination Index,20

Correct Answer,A

2.5 Teresa spends her entire budget and consumes 6 units of x and 20 units of y,The price of x

is twice the price of y,Her income doubles and the price of y doubles,but the price of x stays the

same,If she continues to buy 20 units of y; what is the largest number of units of x that she can

a#0Bord?

#28a#29 12

#28b#29 6

#28c#29 14

#28d#29 16

#28e#29 There is not enough information to say.

Topic,Budget Constraint Di#0Eculty,1

#25 Correct Responses,88 Discrimination Index,20

Correct Answer,A

2.6 Linda spends her entire budget and consumes 15 units of x and 19 units of y,The price of x

is twice the price of y,Her income doubles and the price of y doubles,but the price of x stays the

same,If she continues to buy 19 units of y; what is the largest number of units of x that she can

a#0Bord?

#28a#29 30

#28b#29 15

#28c#29 32

#28d#29 34

#28e#29 There is not enough information to say.

Topic,Budget Constraint Di#0Eculty,1

#25 Correct Responses,50 Discrimination Index,50

Correct Answer,C

2.7 In year 1,the price of good x was 1,the price of good y was 1,and income was 30,In year

2,the price of x was 6,the price of good y was 5,and income was 30,On a graph with x on the

horizontal axis and y on the vertical,the new budget line is:

#28a#29 #0Datter than the old one and lies below it.

#28b#29 #0Datter than the old one and lies above it.

#28c#29 steeper than the old one and lies below it.

#28d#29 steeper than the old one and lies above it.

#28e#29 none of the above.

CHAPTER 2 Budget Constraint 6

Topic,Budget Constraint Di#0Eculty,1

#25 Correct Responses,50 Discrimination Index,50

Correct Answer,C

2.8 In year 1,the price of good x was 4,the price of good y was 2,and income was 60,In year

2,the price of x was 17,the price of good y was 8,and income was 60,On a graph with x on the

horizontal axis and y on the vertical,the new budget line is:

#28a#29 #0Datter than the old one and lies below it.

#28b#29 #0Datter than the old one and lies above it.

#28c#29 steeper than the old one and lies below it.

#28d#29 steeper than the old one and lies above it.

#28e#29 none of the above.

Topic,Budget Constraint Di#0Eculty,1

#25 Correct Responses,35 Discrimination Index,8

Correct Answer,D

2.9

If she spends her entire budget,Vanessa can a#0Bord 47 apricots and 10 cherries,She can also just

a#0Bord 20 apricots and 19 cherries,The price of apricots is 18 cents,What is the price of cherries

in cents?

#28a#29 64

#28b#29 3

#28c#29 21

#28d#29 54

#28e#29 None of the above.

MULTIPLE CHOICE 7

Topic,Budget Constraint Di#0Eculty,1

#25 Correct Responses,35 Discrimination Index,8

Correct Answer,D

2.10

If she spends her entire budget,Heidi can a#0Bord 39 peaches and 12 pears,She can also just a#0Bord

24 peaches and 17 pears,The price of peaches is 9 cents,What is the price of pears in cents?

#28a#29 37

#28b#29 3

#28c#29 12

#28d#29 27

#28e#29 None of the above.

Topic,Budget Constraint Di#0Eculty,1

#25 Correct Responses,100 Discrimination Index,0

Correct Answer,B

2.11 Heidi thrives on two goods,bananas and apples,The cost of bananas is 30 marks each and

the cost of apples is 15 marks each,If her income is 210 marks,how many bananas can she buy if

she spends all of her income on bananas?

#28a#29 5

#28b#29 7

#28c#29 14

#28d#29 10

#28e#29 None of the above

Topic,Budget Constraint Di#0Eculty,1

#25 Correct Responses,100 Discrimination Index,0

Correct Answer,B

2.12 Teresa thrives on two goods,mangos and melons,The cost of mangos is 30 yen each and

the cost of melons is 15 yen each,If her income is 180 yen,how many mangos can she buy if she

spends all of her income on mangos?

#28a#29 4

#28b#29 6

#28c#29 12

#28d#29 9

#28e#29 None of the above

CHAPTER 2 Budget Constraint 8

Topic,Budget Constraint Di#0Eculty,1

#25 Correct Responses,76 Discrimination Index,34

Correct Answer,B

2.13 Yoram spends his entire income on 11 sacks of acorns and 5 crates of butternuts,The price

of acorns is 4 dollars per sack and his income is 94 dollars,He can just a#0Bord a commodity bundle

with A sacks of acorns and B crates of butternuts which satis#0Ces the budget equation:

#28a#29 4A+12B= 94.

#28b#29 8A+20B= 188.

#28c#29 6A+10B= 94.

#28d#29 4A+14B= 96.

#28e#29 None of the above.

Topic,Budget Constraint Di#0Eculty,1

#25 Correct Responses,76 Discrimination Index,34

Correct Answer,B

2.14 Eduardo spends his entire income on 12 sacks of acorns and 2 crates of butternuts,The

price of acorns is 2 dollars per sack and his income is 34 dollars,He can just a#0Bord a commodity

bundle with A sacks of acorns and B crates of butternuts which satis#0Ces the budget equation:

#28a#29 2A+7B= 34.

#28b#29 4A+10B= 68.

#28c#29 4A+5B= 34.

#28d#29 2A+9B= 36.

#28e#29 None of the above.

Topic,Budget Constraint Di#0Eculty,1

#25 Correct Responses,99 Discrimination Index,5

Correct Answer,C

2.15 Harry thrives on two goods,paperbacknovels and bananas,The cost of paperbacknovels

is 4 dollars each and the cost of bananas is 3 dollars per bunch.If Harry spent all of his income on

bananas,he could a#0Bord 12 bunches of bananas per week,How many paperbacknovels could he

buy if he spent all of his income on paperbacknovels?

#28a#29 36

#28b#29 48

#28c#29 9

#28d#29 16

#28e#29 None of the above.

MULTIPLE CHOICE 9

Topic,Budget Constraint Di#0Eculty,1

#25 Correct Responses,92 Discrimination Index,25

Correct Answer,E

2.16 Suppose that the prices of good x and good y both double,and income triples,On a graph

where the budget line is drawn with x on the horizontal axis and y on the vertical axis:

#28a#29 the budget line becomes steeper and shifts inward.

#28b#29 the budget line becomes #0Datter and shifts outward.

#28c#29 the budget line becomes #0Datter and shifts inward.

#28d#29 the new budget line is parallel to the old budget line and lies below it.

#28e#29 None of the above.

Topic,Budget Constraint Di#0Eculty,1

#25 Correct Responses,96 Discrimination Index,18

Correct Answer,D

2.17 Suppose that the price of good x triples and the price of good y doubles while income

remains constant,On a graph where the budget line is drawn with x on the horizontal axis and y

on the vertical axis,the new budget line:

#28a#29 is #0Datter than the old one and lies below it.

#28b#29 is #0Datter than the old one and lies above it.

#28c#29 crosses the old budget line.

#28d#29 is steeper than the old one and lies below it.

#28e#29 is steeper than the old one and lies above it.

Topic,Budget Constraint Di#0Eculty,3

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,C

2.18 While traveling abroad,Tammyspent all of the money in her purse to buy 5 plates of

spaghetti and 6 oysters,Spaghetti costs 8 units of the local currency per plate and she had 82 units

of currency in her purse,If s denotes the number of plates of spaghetti and o denotes the number

of oysters purchased,the set of commodity bundles that she could just a#0Bord with the money in

her purse is described by the equation:

#28a#29 82+6o= 82.

#28b#29 6s +8o= 82.

#28c#29 8s+7o= 82.

#28d#29 5s +6o= 82.

#28e#29 There is not enough information to determine the answer.

CHAPTER 2 Budget Constraint 10

Topic,Budget Constraint Di#0Eculty,2

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,B

2.19 Billy Bob wants to gain some weight so that he can play football,Billy eats only milkshakes

and spinach,Milkshakes cost him $1 each and spinach costs $2 per serving,A milkshake has 850

calories and a serving of spinach has 200 calories,Billy Bob never spends more than $20 a dayon

food and he always consumes at least 8000 calories per day,Which of the following is necessarily

true?

#28a#29 Billy Bob consumes at least 9 milkshakes a day.

#28b#29 Billy Bob never consumes more than 6 servings of spinachaday.

#28c#29 Billy Bob never consumes positive amounts of both goods.

#28d#29 Billy Bob consumes only milkshakes.

#28e#29 None of the above.

Topic,Budget Constraint Di#0Eculty,2

#25 Correct Responses,81 Discrimination Index,21

Correct Answer,D

2.20 Lars consumes only potatoes and herring,When the price of potatoes was 9 crowns per

sack and the price of herring was 5 crowns per crock,he spent his entire income to buy 5 sacks of

potatoes and 10 crocks of herring per month,Now the government subsidizes potatoes,Market

prices haven't changed,but consumers get a subsidy of 5 crowns for every sack of potatoes con-

sumed,Topay for this subsidy,the governmentintroduced an income tax,Lars pays an income

tax of 20 crowns per month,If s is the number of sacks of potatoes and c is the number of crocks

of herring,what is Lars's NEW budget equation?

#28a#29 9s+5c= 100.

#28b#29 14s+5c= 95.

#28c#29 4s+5c= 95.

#28d#29 4s +5c= 75.

#28e#29 14s+5c= 120.

MULTIPLE CHOICE 11

Topic,Budget Constraint Di#0Eculty,1

#25 Correct Responses,95 Discrimination Index,17

Correct Answer,C

2.21 If you spentyour entire income,you could a#0Bord either 4 units of x and 8 units of y or 8

units ofxand 4 units of y.Ifyou spentyour entire income on x;how many units ofx could you buy?

#28a#29 20

#28b#29 17

#28c#29 12

#28d#29 There is not enough information to determine the amountofx.

#28e#29 None of the above.

Topic,Budget Constraint Di#0Eculty,1

#25 Correct Responses,95 Discrimination Index,17

Correct Answer,C

2.22 If you spentyour entire income,you could a#0Bord either 5 units of x and 15 units of y or 15

units ofxand 5 units of y.Ifyou spentyour entire income on x;how many units ofx could you buy?

#28a#29 35

#28b#29 24

#28c#29 20

#28d#29 There is not enough information to determine the amountofx.

#28e#29 None of the above.

Topic,Budget Constraint Di#0Eculty,1

#25 Correct Responses,95 Discrimination Index,10

Correct Answer,C

2.23 Bella's budget line for x and y depends on all of the following except:

#28a#29 the amount of money she has to spend on x and y.

#28b#29 the price of x.

#28c#29 her preferences between x and y.

#28d#29 the price of y.

#28e#29 none of the above.

CHAPTER 2 Budget Constraint 12

Topic,Budget Constraint Di#0Eculty,1

#25 Correct Responses,94 Discrimination Index,26

Correct Answer,D

2.24 Your budget constraint for the two goods A and B is 12A+4B=Iwhere I is your income.

You are currently consuming more than 45 units of B,In order to get 5 more units of A,how many

units of B would you have to give up?

#28a#29 0.33

#28b#29 0.07

#28c#29 3

#28d#29 15

#28e#29 None of the above.

Topic,Budget Constraint Di#0Eculty,1

#25 Correct Responses,94 Discrimination Index,26

Correct Answer,D

2.25 Your budget constraint for the two goods A and B is 6A +3B=Iwhere I is your income.

You are currently consuming more than 12 units of B,In order to get 2 more units of A,how many

units of B would you have to give up?

#28a#29 0.50

#28b#29 0.25

#28c#29 2

#28d#29 4

#28e#29 None of the above.

MULTIPLE CHOICE 13

Topic,Budget Constraint Di#0Eculty,2

#25 Correct Responses,70 Discrimination Index,32

Correct Answer,A

2.26 Young Alasdair loves lollipops and hates oatmeal,To induce him to eat enough oatmeal

and to restrain him from eating too many lollipops,his mum pays him 10 pence for every quart

of oatmeal that he eats,The only way that he can get lollipops is to buy them at the sweet shop,

where lollipops cost 5 pence each,Besides what he earns from eating oatmeal,Alasdair gets an

allowance of 10 pence per week,If Alasdair consumes only oatmeal and lollipops and if his con-

sumption bundles are graphed with quarts of oatmeal on the horizontal axis and lollipops on the

vertical axis,then Alasdair's budget line:

#28a#29 has a slope of 2.

#28b#29 has a slope of less than,2.

#28c#29 has a slope of,2.

#28d#29 has a slope of 1=2.

#28e#29 has a slope greater than 2.

Topic,Budget Constraint Di#0Eculty,2

#25 Correct Responses,41 Discrimination Index,30

Correct Answer,C

2.27 The Chuzzlewits have an income of $m per week,Let x be food and let y be all other goods.

Let p

x

be the price of food and p

y

be the price of other goods,They can use food stamps to buy

food at a price of p

x

#281,s#29 for up to x* units of food per week,If they buy more food than x*,they

havetopay the full price,p

x

for additional units,Their weekly income is greater than p

x

#281,s#29x#03.

The maximum amount of food that they can buy per week is:

#28a#29 x#03+#28m=p

x

#29

#28b#29 #28m + x#03#29=p

x

#28c#29 #28m=p

x

#29+sx#03

#28d#29 m=#281,s#29p

x

#28e#29 #28m+ p

x

#29=#281,s#29p

x

CHAPTER 2 Budget Constraint 14

Topic,Budget Constraint Di#0Eculty,1

#25 Correct Responses,100 Discrimination Index,0

Correct Answer,C

2.28 Edmund must pay$6each for punk rock video casettes,V,If Edmund is paid $24 per sack

for accepting garbage,G; and if his relatives send him an allowance of $192,then his budget line is

described by the equation:

#28a#29 6V =24G.

#28b#29 6V +24G= 192.

#28c#29 6V,24G = 192.

#28d#29 6V = 192,G.

#28e#29 None of the above.

Topic,Budget Constraint Di#0Eculty,1

#25 Correct Responses,100 Discrimination Index,0

Correct Answer,C

2.29 Edmund must pay$6each for punk rock video casettes,V,If Edmund is paid $24 per sack

for accepting garbage,G; and if his relatives send him an allowance of $168,then his budget line is

described by the equation:

#28a#29 6V =24G.

#28b#29 6V +24G= 168.

#28c#29 6V,24G = 168.

#28d#29 6V = 168,G.

#28e#29 None of the above.

Topic,Budget Constraint Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,C

2.30 If you have an income of $40 to spend,if commodity 1 costs $4 per unit,and commodity2

costs $20 per unit,then the equation for your budget line can be written as:

#28a#29 x

1

=4+x

2

=20 = 40.

#28b#29 #28x

1

+x

2

#29=#2824#29 = 40.

#28c#29 x

1

+5x

2

= 10.

#28d#29 5x

1

+21x

2

= 41.

#28e#29 24#28x

1

+x

2

#29 = 40.

MULTIPLE CHOICE 15

Topic,Budget Constraint Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,C

2.31 If you have an income of $36 to spend,if commodity 1 costs $4 per unit,and commodity2

costs $12 per unit,then the equation for your budget line can be written as:

#28a#29 x

1

=4+x

2

=12 = 36.

#28b#29 #28x

1

+x

2

#29=#2816#29 = 36.

#28c#29 x

1

+3x

2

=9.

#28d#29 5x

1

+13x

2

= 37.

#28e#29 16#28x

1

+x

2

#29 = 36.

Topic,Budget Constraint Di#0Eculty,1

#25 Correct Responses,85 Discrimination Index,20

Correct Answer,A

2.32 If you could exactly a#0Bord either 5 units of x and 17 units of y; or 8 units of x and 5 units

of y; then if you spent all of your income on y; how many units of y could you buy?

#28a#29 37

#28b#29 25

#28c#29 49

#28d#29 13

#28e#29 None of the above.

Topic,Budget Constraint Di#0Eculty,1

#25 Correct Responses,85 Discrimination Index,20

Correct Answer,A

2.33 If you could exactly a#0Bord either 6 units of x and 17 units of y; or 9 units of x and 8 units

of y; then if you spent all of your income on y; how many units of y could you buy?

#28a#29 35

#28b#29 26

#28c#29 44

#28d#29 15

#28e#29 None of the above.

CHAPTER 2 Budget Constraint 16

Topic,Budget Constraint Di#0Eculty,0

#25 Correct Responses,99 Discrimination Index,4

Correct Answer,B

2.34 Murphy used to consume 100 units of X and 50 units of Y when the price of X was 2 and

the price of Y was 4,If the price of X rose to 5 and the price of Y rose to 7,howmuchwould

Murphy's income have to rise so that he could still a#0Bord his original bundle?

#28a#29 600

#28b#29 450

#28c#29 300

#28d#29 900

#28e#29 None of the above.

Topic,Budget Constraint Di#0Eculty,0

#25 Correct Responses,99 Discrimination Index,4

Correct Answer,B

2.35 Murphy used to consume 100 units of X and 50 units of Y when the price of X was 2 and

the price of Y was 4,If the price of X rose to 6 and the price of Y rose to 8,howmuchwould

Murphy's income have to rise so that he could still a#0Bord his original bundle?

#28a#29 800

#28b#29 600

#28c#29 400

#28d#29 1,200

#28e#29 None of the above.

Topic,Budget Constraint Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,C

2.36 This weekend,Martha has time to read 40 pages of economics and 30 pages of sociology.

Alternatively,she could read 20 pages of economics and 70 pages of sociology,Which of these

equations describes all combinations of pages of economics,E; and sociology,S; that she could read

over the weekend?

#28a#29 E + S =70

#28b#29 E=2+S=50

#28c#29 2E +S = 110

#28d#29 E + S =90

#28e#29 All of the above.

MULTIPLE CHOICE 17

Topic,Budget Constraint Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,C

2.37 This weekend,Martha has time to read 40 pages of economics and 30 pages of sociology.

Alternatively,she could read 20 pages of economics and 110 pages of sociology,Which of these

equations describes all combinations of pages of economics,E; and sociology,S; that she could read

over the weekend?

#28a#29 E + S =70

#28b#29 E=2+S=50

#28c#29 4E +S = 190

#28d#29 E + S = 130

#28e#29 All of the above.

Topic,Budget Constraint Di#0Eculty,2

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,A

2.38 Ads in a slick business magazine are read by 300 lawyers and 1000 M.B.A's,Ads in a

consumer publication are read by 250 lawyers and 300 M:B:A:

0

s,If Harry had $ 3,600 to spend

on advertising,if the price of ads in the business magazine were $600 and the price of ads in the

consumer magazine were $300,then the combinations of recent M:B:A:

0

s and lawyers with hot tubs

whom he could reach with his advertising budget would be represented by the integer values along

a line segment that runs between the two points:

#28a#29 #283;000;3;600#29 and #281;800;6;000#29.

#28b#29 #283;600;4;200#29 and #281;800;7;200#29.

#28c#29 #280;3;600#29 and #281;800;0#29.

#28d#29 #283;600;0#29 and #280;7;200#29.

#28e#29 #282;400;0#29 and #280;6;000#29.

CHAPTER 2 Budget Constraint 18

Topic,Budget Constraint Di#0Eculty,2

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,A

2.39 Ads in a slick business magazine are read by 300 lawyers and 1000 M.B.A's,Ads in a

consumer publication are read by 250 lawyers and 300 M:B:A:

0

s,If Harry had $ 2,600 to spend

on advertising,if the price of ads in the business magazine were $400 and the price of ads in the

consumer magazine were $200,then the combinations of recent M:B:A:

0

s and lawyers with hot tubs

whom he could reach with his advertising budget would be represented by the integer values along

a line segment that runs between the two points:

#28a#29 #283;250;3;900#29 and #281;950;6;500#29.

#28b#29 #283;900;4;550#29 and #281;950;7;800#29.

#28c#29 #280;3;900#29 and #281;950;0#29.

#28d#29 #283;900;0#29 and #280;7;800#29.

#28e#29 #282;600;0#29 and #280;6;500#29.

Topic,Budget Constraint Di#0Eculty,2

#25 Correct Responses,60 Discrimination Index,47

Correct Answer,B

2.40 In the economy of Mungo,discussed in your workbook,there is a third person called Ike.

Ike has a red income of 56 and a blue income of 10,#28Recall that blue prices are 1 bcu #5Bblue currency

unit#5D per unit of ambrosia and 1 bcu per unit of bubblegum,Red prices are 2 rcus #5Bred currency

units#5D per unit of ambrosia and 6 rcus per unit of bubblegum,You havetopaytwice for what you

buy,once in red currency,once in blue currency.#29 If Ike spends all of his blue income,but not all

of his red income,then it must be that:

#28a#29 he consumes at least 9 units of bubblegum.

#28b#29 he consumes at least 1 units of ambrosia.

#28c#29 he consumes exactly twice as much bubblegum as ambrosia.

#28d#29 he consumes at least 17 units of bubblegum.

#28e#29 he consumes equal amounts of ambrosia and bubblegum.

MULTIPLE CHOICE 19

Topic,Budget Constraint Di#0Eculty,2

#25 Correct Responses,60 Discrimination Index,47

Correct Answer,B

2.41 In the economy of Mungo,discussed in your workbook,there is a third person called Ike.

Ike has a red income of 40 and a blue income of 10,#28Recall that blue prices are 1 bcu #5Bblue currency

unit#5D per unit of ambrosia and 1 bcu per unit of bubblegum,Red prices are 2 rcus #5Bred currency

units#5D per unit of ambrosia and 6 rcus per unit of bubblegum,You havetopaytwice for what you

buy,once in red currency,once in blue currency.#29 If Ike spends all of his blue income,but not all

of his red income,then it must be that:

#28a#29 he consumes at least 5 units of bubblegum.

#28b#29 he consumes at least 5 units of ambrosia.

#28c#29 he consumes exactly twice as much bubblegum as ambrosia.

#28d#29 he consumes at least 14 units of bubblegum.

#28e#29 he consumes equal amounts of ambrosia and bubblegum.

Topic,Budget Constraint Di#0Eculty,2

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,A

2.42 Deadly Serious,II,studying for his M.B.A.,consumes only two goods,Wheaties and pens.

Each pen costs $1,Eachbox of Wheaties costs $2 but has a "free" pen inside,Pens can be dis-

carded at no cost,If we draw Serious's budget set with pens plotted on the horizontal axis,then

his budget set will be bounded bytwo line segments with slopes:

#28a#29 zero and,1.

#28b#29 zero and,2.

#28c#29 zero and,:5.

#28d#29 zero and in#0Cnity.

#28e#29 zero and +2.

CHAPTER 2 Budget Constraint 20

Topic,Budget Constraint Di#0Eculty,0

#25 Correct Responses,78 Discrimination Index,49

Correct Answer,D

2.43 Suppose there are two goods,the prices of both goods are positive and a consumer's income

is also positive,If the consumer's income doubles and the price of both goods triple,

#28a#29 the consumer's budget line gets steeper and shifts inward.

#28b#29 the slope of the consumer's budget line does not change but the budget line shifts outward away from

the origin.

#28c#29 the consumer's budget line gets steeper and shifts outward.

#28d#29 the slope of the consumer's budget line does not change but the budget line shifts inward toward the

origin.

#28e#29 the consumer's budget line gets #0Datter and shifts inward.

Topic,Budget Constraint Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,B

2.44 Thomas consumes co#0Bee #28C#29 and doughnuts #28D#29,His budget line was described by the

equation D =20,2C.At a later time,his budget line could be described by the equation D =10,C.

The change between the earlier budget line and the later could be explained by the following.

#28a#29 The price of co#0Bee and Thomas's income both increased.

#28b#29 The price of co#0Bee increased and Thomas's income decreased.

#28c#29 The price of co#0Bee decreased and Thomas's income increased.

#28d#29 The price of co#0Bee and Thomas's income both decreased.

#28e#29 Thomas's utility for doughnuts decreased.

Essay Budget Constraint

Topic,Budget Constraint Di#0Eculty,1

#25 Correct Responses,0 Discrimination Index,0

2.1 Perry lives on avocados and beans,The price of avocados is 10,the price of beans is 5,and

his income is 40,ShowPerry's budget line on a graph with avocados on the horizontal axis and

beans on the vertical axis,Label the point where the budget line hits the horizontal axis A and the

point where the budget line hits the vertical axis B,Next to these labels,write down the number

of avocados purchased at A and the number of beans purchased at B,Draw another budget line

showing what Perry's budget would be if his income doubled,the price of avocados doubled,and

the price of beans stayed the same,Label the point where this line hits the vertical axis C and the

point where it hits the horizontal axis D,Next to these labels write the numberofavocados at C

and the number of beans at D.

Answer,At A there are 4 avocados,At B there are 8 units of beans,At C there are 4 avocados.

At D there are 16 units of beans.

Topic,Budget Constraint Di#0Eculty,2

#25 Correct Responses,0 Discrimination Index,0

2.2 Brenda likes hot dogs and Coca-Cola,Hot dogs cost $1 each and Cokes cost $.50 per bottle.

There is a special promotion for Coke that will last for one month,If Brenda sends in the bottle

tops from the Cokes she drinks during the next month,she will get a refund of $.20 for every

bottlecap beyond the #0Crst 12 that she returns,For example,if she returns 25 bottle caps she will

get back $2:60 = $:20#2825,12#29,Brenda has $40 to spend on hot dogs and Coke during the next

month,Draw her budget line with Coke on the horizontal axis and hot dogs on the vertical axis.

Find the points where the budget line hits the axes and the point where it has a kink,At eachof

these three points write down the quantities of each good consumed.

Answer,The budget line runs from #280;40#29 on the vertical axis to a kink point #2812;34#29 and from

#2812;34#29 to about #28125:3;0#29.

CHAPTER 2 Budget Constraint 22

Topic,Budget Constraint Di#0Eculty,2

#25 Correct Responses,0 Discrimination Index,0

2.3 Felicity is studying economics and political science,She can read 30 pages of political science

per hour but only 5 pages of economics per hour,This week she has a 50 page assignmentin

economics and a 150 page assignment in political science,Because of sorority rush,she cannot

devote more than 10 hours to studying these subjects this week,She realizes she cannot complete

all of her assignments but is determined to complete at least 30 pages of her economics reading.

Draw a graph with pages of economics on the horizontal axis and pages of political science on the

vertical axis,On this graph,show the possibilities that are consistent with the constraints that

Felicity has imposed on herself,#28She is allowed to read ahead in either subject.#29 Label key points

on your graph with their numerical values.

Answer,Anything in the triangle bounded by #280;300#29; #2830;120#29 and #2830;0#29 satis#0Ces these constraints.

Topic,Budget Constraint Di#0Eculty,3

#25 Correct Responses,0 Discrimination Index,0

2.4 Ed Moore and his family liveinacity with many private schools and one public school,The

Moores are thinking of sending their only child to private school because they would likeaschool

that has more teachers and other resources per student than the local public school,The Moores

must pay taxes to support local public schools whether or not their child goes to private school.

There is suchavariety of private schools that the Moores can get just about any level of inputs

per studentbychoosing the appropriate private school,Tuition in the private schools equals ex-

penditure per student,Draw a diagram to show the Moores' budget constraint,Put expenditures

per student in the child's school on the horizontal axis and other goods on the vertical.

Answer,One pointis#28x;d#29 where x is expenditures per pupil in public school and d is disposable

income,The rest of the budget is a line with slope,1 from #282s;d,x#29 to the x axis.

Chapter 3

True-False Preferences

Topic,Preferences Di#0Eculty,1

#25 Correct Responses,70 Discrimination Index,31

Correct Answer,False

3.1 If preferences are transitive,more is always preferred to less.

Topic,Preferences Di#0Eculty,1

#25 Correct Responses,89 Discrimination Index,21

Correct Answer,False

3.2 A person with re#0Dexive preferences is someone who does not shop carefully.

Topic,Preferences Di#0Eculty,2

#25 Correct Responses,94 Discrimination Index,6

Correct Answer,True

3.3 If someone has the utility function U = 1000+2minfx;ygthen x and y are perfect complements

for that person.

Topic,Preferences Di#0Eculty,1

#25 Correct Responses,68 Discrimination Index,40

Correct Answer,True

3.4 A consumer with convex preferences who is indi#0Berentbetween the bundles #281;2#29 and #289;6#29

will like the bundle #285;4#29 at least as well as either of the #0Crst two bundles.

Topic,Preferences Di#0Eculty,1

#25 Correct Responses,68 Discrimination Index,40

Correct Answer,True

3.5 A consumer with convex preferences who is indi#0Berentbetween the bundles #282;3#29 and #2810;9#29

will like the bundle #286;6#29 at least as well as either of the #0Crst two bundles.

Topic,Preferences Di#0Eculty,2

#25 Correct Responses,81 Discrimination Index,0

Correct Answer,True

3.6 If there are two goods,if a consumer prefers more of each good to less,and if she has dimin-

ishing marginal rate of substitution,then her preferences are convex.

CHAPTER 3 Preferences 24

Topic,Preferences Di#0Eculty,2

#25 Correct Responses,75 Discrimination Index,11

Correct Answer,False

3.7 If preferences are convex,then for any commodity bundle x; the set of commodity bundles

that are worse than x is a convex set.

Topic,Preferences Di#0Eculty,2

#25 Correct Responses,58 Discrimination Index,0

Correct Answer,False

3.8 Bill Katz prefers more of good 1 to less and he prefers less of good 2 to more,Bill has convex

preferences,If we draw his indi#0Berence curves with good 1 on the horizontal axis and good 2 on

the vertical axis,then his indi#0Berence curves have positive slope but get steeper as they rise.

Topic,Preferences Di#0Eculty,1

#25 Correct Responses,99 Discrimination Index,0

Correct Answer,False

3.9 The marginal rate of substitution measures the distance between one indi#0Berence curve and

the next one.

Topic,Preferences Di#0Eculty,1

#25 Correct Responses,79 Discrimination Index,11

Correct Answer,False

3.10 Ambrose has an indi#0Berence curve with equation x

2

=20,4x

1=2

1

,When Ambrose is con-

suming the bundle #284;16#29; his marginal rate of substitution is,5=4.

Topic,Preferences Di#0Eculty,1

#25 Correct Responses,77 Discrimination Index,34

Correct Answer,False

3.11 Nancy's psychology teacher will give her a course grade that is the maximum of her scores

on three midterm examinations,Nancy has convex preferences over the possible combinations of

midterm scores.

TRUE-FALSE 25

Topic,Preferences Di#0Eculty,3

#25 Correct Responses,39 Discrimination Index,26

Correct Answer,False

3.12 If Melody has more classical records than rock and roll records,she is willing to exchange

exactly 1 classical record for 2 rock and roll records,but if she has more rock and roll records

than classical records,then she is willing to exchange exactly 1 rock and roll record for 2 classical

records,Melody has convex preferences.

Topic,Preferences Di#0Eculty,1

#25 Correct Responses,71 Discrimination Index,17

Correct Answer,False

3.13 Josephine buys 3 quarts of milk and 2 pounds of butter when milk sells for $2 a quart and

butter sells for $1 a pound,Wilma buys 2 quarts of milk and 3 pounds of butter at the same prices.

Josephine's marginal rate of substitution between milk and butter is greater than Wilma's.

Topic,Preferences Di#0Eculty,2

#25 Correct Responses,29 Discrimination Index,29

Correct Answer,True

3.14 A consumer who is unable to detect small di#0Berences in the amountofwater in her beer

could have a transitive strict preference relation but is unlikely to have a transitive indi#0Berence

relation.

Multiple Choice Preferences

Topic,Preferences Di#0Eculty,1

#25 Correct Responses,85 Discrimination Index,23

Correct Answer,B

3.1 Fanny consumes goods x and y,Her indi#0Berence curves are described by the formula y =

k=#28x +7#29,Higher values of k correspond to better indi#0Berence curves,Which of the following is

true?

#28a#29 Fanny likes good y and hates good x.

#28b#29 Fanny prefers bundle #288;9#29 to bundle #289;8#29.

#28c#29 Fanny prefers bundle #289;5#29 to bundle #285;9#29.

#28d#29 Fanny likes good x and hates good y.

#28e#29 More than one of the above statements are true.

Topic,Preferences Di#0Eculty,1

#25 Correct Responses,85 Discrimination Index,23

Correct Answer,B

3.2 Heidi consumes goods x and y,Her indi#0Berence curves are described by the formula y =

k=#28x +6#29,Higher values of k correspond to better indi#0Berence curves,Which of the following is

true?

#28a#29 Heidi likes good y and hates good x.

#28b#29 Heidi prefers bundle #2810;15#29 to bundle #2815;10#29.

#28c#29 Heidi prefers bundle #289;8#29 to bundle #288;9#29.

#28d#29 Heidi likes good x and hates good y.

#28e#29 More than one of the above statements are true.

Topic,Preferences Di#0Eculty,1

#25 Correct Responses,67 Discrimination Index,14

Correct Answer,D

3.3 George's indi#0Berence curves are circles,all of which are centered at #2818;20#29,Of anytwo

indi#0Berence circles,he would rather be on the inner one than the outer one,Which of the following

is true?

#28a#29 George's preferences are not complete.

#28b#29 George prefers #2824;26#29 to #2814;17#29.

#28c#29 George prefers#2814;26#29 to #2814;17#29.

#28d#29 George prefers #2816;19#29 to #2823;26#29.

#28e#29 More than one of the above statements are true.

MULTIPLE CHOICE 27

Topic,Preferences Di#0Eculty,1

#25 Correct Responses,67 Discrimination Index,14

Correct Answer,D

3.4 Yoram's indi#0Berence curves are circles,all of which are centered at #2812;19#29.Ofanytwo in-

di#0Berence circles,he would rather be on the inner one than the outer one,Which of the following

is true?

#28a#29 Yoram's preferences are not complete.

#28b#29 Yoram prefers #2818;25#29 to #288;16#29.

#28c#29 Yoram prefers#288;25#29 to #288;16#29.

#28d#29 Yoram prefers #288;17#29 to #2818;28#29.

#28e#29 More than one of the above statements are true.

Topic,Preferences Di#0Eculty,1

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,B

3.5 Manuel consumes only apples and bananas,He prefers more apples to less,but he gets tired

of bananas,If he consumes fewer than 17 bananas per week,he thinks that one banana is a perfect

substitute for one apple,But you would havetopay him one apple for each banana beyond 17

that he consumes,The indi#0Berence curve that passes through the consumption bundle with 25 ap-

ples and 26 bananas also passes through the bundle with A apples and 11 bananas,where A equals:

#28a#29 21

#28b#29 22

#28c#29 24

#28d#29 26

#28e#29 None of the above.

CHAPTER 3 Preferences 28

Topic,Preferences Di#0Eculty,1

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,B

3.6 Wilbur consumes only apples and bananas,He prefers more apples to less,but he gets tired

of bananas,If he consumes fewer than 18 bananas per week,he thinks that one banana is a perfect

substitute for one apple,But you would havetopay him one apple for each banana beyond 18

that he consumes,The indi#0Berence curve that passes through the consumption bundle with 27 ap-

ples and 30 bananas also passes through the bundle with A apples and 13 bananas,where A equals:

#28a#29 17

#28b#29 20

#28c#29 26

#28d#29 28

#28e#29 None of the above.

Topic,Preferences Di#0Eculty,1

#25 Correct Responses,75 Discrimination Index,50

Correct Answer,E

3.7 If two goods are both desirable and preferences are convex,then:

#28a#29 there must be a kink in the indi#0Berence curves.

#28b#29 indi#0Berence "curves" must be straight lines.

#28c#29 if two bundles are indi#0Berent,then an average of the two bundles is worse than either one.

#28d#29 the marginal rate of substitution is constant along indi#0Berence curves

#28e#29 None of the above.

Topic,Preferences Di#0Eculty,2

#25 Correct Responses,53 Discrimination Index,34

Correct Answer,B

3.8 If there are only two goods,if more of good 1 is always preferred to less,and if less of good

2 is always preferred to more,then:

#28a#29 indi#0Berence curves slope downwards.

#28b#29 indi#0Berence curves slope upwards.

#28c#29 indi#0Berence curves may cross.

#28d#29 indi#0Berence curves could take the form of ellipses.

#28e#29 None of the above.

MULTIPLE CHOICE 29

Topic,Preferences Di#0Eculty,2

#25 Correct Responses,75 Discrimination Index,29

Correct Answer,D

3.9 If two goods are perfect complements:

#28a#29 there is a bliss point and the indi#0Berence curves surround this point.

#28b#29 consumers will only buy the cheaper of the two goods.

#28c#29 indi#0Berence curves have a positive slope.

#28d#29 None of the above.

Topic,Preferences Di#0Eculty,2

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,C

3.10 The relation #5Cis preferred to" between commodity bundles is just one example of a binary

relation,Another example is the relation #5Cis a full brother of" de#0Cned over the set of all human

beings,Let xRy mean person x is a full brother of person y.

#28a#29 The relation R is re#0Dexive,transitive,and complete.

#28b#29 The relation R is transitive and complete but not re#0Dexive.

#28c#29 The relation R is transitive but not complete or re#0Dexive.

#28d#29 The relation R is complete but not transitive or re#0Dexive.

#28e#29 The relation R is neither re#0Dexive,transitive,nor complete.

Topic,Preferences Di#0Eculty,1

#25 Correct Responses,61 Discrimination Index,20

Correct Answer,C

3.11 Preferences are said to be monotonic if:

#28a#29 all goods must be consumed in #0Cxed proportions.

#28b#29 all goods are perfect substitutes.

#28c#29 more is always preferred to less.

#28d#29 there is diminishing marginal rate of substitution.

#28e#29 None of the above.

CHAPTER 3 Preferences 30

Topic,Preferences Di#0Eculty,3

#25 Correct Responses,8 Discrimination Index,0

Correct Answer,C

3.12 TobyTalkalot subscribes to a local phone service that charges a #0Cxed fee of $10 per month

and allows him to place as many local phone calls as he likes without further charge,Let Good

1 be an aggregate of commodities other than local phone use and let Good 2 be local phone use.

#28Measure Good 1 on the horizontal axis and Good 2 on the vertical axis.#29 On Monday,Toby didn't

use the telephone at all,From this we can conclude that the slope m of his indi#0Berence curveat

the consumption bundle he chose on Mondaywas:

#28a#29 positive.

#28b#29 less than or equal to 0.

#28c#29 0.

#28d#29 greater than or equal to 0.

#28e#29 negative.

Topic,Preferences Di#0Eculty,3

#25 Correct Responses,22 Discrimination Index,26

Correct Answer,B

3.13 Professor Goodheart's colleague Dr,Kremepu#0B gives 3 midterm exams,He drops the lowest

and gives each student her average score on the other two exams,Polly Sigh is taking his course

and has a 60 on her #0Crst exam,Let x

2

be her score on the second exam and x

3

be her score on

the third exam,If we draw her indi#0Berence curves for scores on the second and third exams with

x

2

represented by the horizontal axis and x

3

represented by the vertical axis,then her indi#0Berence

curve through the point #28x

2;x

3

#29 = #2850;70#29 is:

#28a#29 L-shaped with a kink where x

2

= x

3

.

#28b#29 three line segments,one vertical,one horizontal,and one running from #2870;60#29 to #2860;70#29.

#28c#29 a straight line,running from #280;120#29 to #28120;0#29.

#28d#29 three line segments,one vertical,one horizontal,and one running from #2870;50#29 to #2850;70#29.

#28e#29 a V-shaped curve with its point at #2850;70#29.

MULTIPLE CHOICE 31

Topic,Preferences Di#0Eculty,0

#25 Correct Responses,92 Discrimination Index,19

Correct Answer,E

3.14 Charlie's indi#0Berence curves have the equation x

B

= constant=x

A; where larger constants

denote better indi#0Berence curves,Charlie strictly prefers the bundle #2810;19#29 to the bundle:

#28a#29 #2819;10#29.

#28b#29 #2811;18#29.

#28c#29 #2815;15#29.

#28d#29 more than one of these bundles.

#28e#29 none of these bundles.

Topic,Preferences Di#0Eculty,0

#25 Correct Responses,92 Discrimination Index,19

Correct Answer,E

3.15 Charlie's indi#0Berence curves have the equation x

B

= constant=x

A; where larger constants

denote better indi#0Berence curves,Charlie strictly prefers the bundle #289;19#29 to the bundle:

#28a#29 #2819;9#29.

#28b#29 #2810;18#29.

#28c#29 #2812;15#29.

#28d#29 more than one of these bundles.

#28e#29 none of these bundles.

Topic,Preferences Di#0Eculty,2

#25 Correct Responses,77 Discrimination Index,17

Correct Answer,C

3.16 Ambrose has indi#0Berence curves with the equation x

2

= constant,4x

1=2

1

where larger con-

stants correspond to higher indi#0Berence curves,If good 1 is drawn on the horizontal axis and good

2 on the vertical axis,what is the slope of Ambrose's indi#0Berence curve when his consumption

bundle is #2816;9#29?

#28a#29,16=9

#28b#29,9=16

#28c#29,0:50

#28d#29,13

#28e#29,4

CHAPTER 3 Preferences 32

Topic,Preferences Di#0Eculty,2

#25 Correct Responses,77 Discrimination Index,17

Correct Answer,C

3.17 Ambrose has indi#0Berence curves with the equation x

2

= constant,4x

1=2

1

where larger con-

stants correspond to higher indi#0Berence curves,If good 1 is drawn on the horizontal axis and good

2 on the vertical axis,what is the slope of Ambrose's indi#0Berence curve when his consumption

bundle is #289;14#29?

#28a#29,9=14

#28b#29,14=9

#28c#29,0:67

#28d#29,17

#28e#29,3

Topic,Preferences Di#0Eculty,2

#25 Correct Responses,93 Discrimination Index,4

Correct Answer,A

3.18 Nancy Lerner is taking a course from Professor Goodheart who will count only her best

midterm grade and from Professor Stern who will count only her worst midterm grade,In one of

her classes,Nancy has scores of 40 on her #0Crst midterm and 50 on her second midterm,When

the #0Crst midterm score is measured on the horizontal axis and her second midterm score on the

vertical,her indi#0Berence curve has a slope of zero at the point #2840;50#29,Therefore it must be that:

#28a#29 this class could be Professor Goodheart's,but couldn't be Professor Stern's.

#28b#29 this class could be Professor Stern's,but couldn't be Professor Goodheart's.

#28c#29 this class couldn't be either Goodheart's or Stern's.

#28d#29 this class could be either Goodheart's or Stern's.

#28e#29 None of the other options are correct.

MULTIPLE CHOICE 33

Topic,Preferences Di#0Eculty,2

#25 Correct Responses,93 Discrimination Index,4

Correct Answer,A

3.19 Nancy Lerner is taking a course from Professor Goodheart who will count only her best

midterm grade and from Professor Stern who will count only her worst midterm grade,In one of

her classes,Nancy has scores of 70 on her #0Crst midterm and 60 on her second midterm,When

the #0Crst midterm score is measured on the horizontal axis and her second midterm score on the

vertical,her indi#0Berence curve has a slope of zero at the point #2870;60#29,Therefore it must be that:

#28a#29 this class could be Professor Goodheart's,but couldn't be Professor Stern's.

#28b#29 this class could be Professor Stern's,but couldn't be Professor Goodheart's.

#28c#29 this class couldn't be either Goodheart's or Stern's.

#28d#29 this class could be either Goodheart's or Stern's.

#28e#29 None of the other options are correct.

Topic,Preferences Di#0Eculty,2

#25 Correct Responses,56 Discrimination Index,65

Correct Answer,D

3.20 If we graph Mary Granola's indi#0Berence curves with avocados on the horizontal axis and

grapefruits on the vertical axis,then whenever she has more grapefruits than avocados,the slope of

her indi#0Berence curveis,2,Whenever she has more avocados than grapefruits,the slope is,1=2.

Mary would be indi#0Berentbetween a bundle with 11 avocados and 23 grapefruits and another

bundle that has 19 avocados and:

#28a#29 15 grapefruits.

#28b#29 19 grapefruits.

#28c#29 11 grapefruits.

#28d#29 13 grapefruits.

#28e#29 14 grapefruits.

CHAPTER 3 Preferences 34

Topic,Preferences Di#0Eculty,2

#25 Correct Responses,56 Discrimination Index,65

Correct Answer,D

3.21 If we graph Mary Granola's indi#0Berence curves with avocados on the horizontal axis and

grapefruits on the vertical axis,then whenever she has more grapefruits than avocados,the slope of

her indi#0Berence curveis,2,Whenever she has more avocados than grapefruits,the slope is,1=2.

Mary would be indi#0Berentbetween a bundle with 24 avocados and 36 grapefruits and another

bundle that has 32 avocados and:

#28a#29 28 grapefruits.

#28b#29 32 grapefruits.

#28c#29 24 grapefruits.

#28d#29 26 grapefruits.

#28e#29 27 grapefruits.

Topic,Preferences Di#0Eculty,2

#25 Correct Responses,75 Discrimination Index,29

Correct Answer,B

3.22 Recall that Tommy Twit's mother measures the departure of any bundle from her favorite

bundle for Tommyby the sum of the absolute values of the di#0Berences,Her favorite bundle for

Tommyis#282;7#29,,that is,2 cookies and 7 glasses of milk,Tommy's mother's indi#0Berence curve

that passes through the point #28c;m#29=#285;4#29 also passes through:

#28a#29 the point#288;1#29.

#28b#29 the points #282;1#29; #288;7#29; and #285;10#29.

#28c#29 the point#282;7#29.

#28d#29 the points #285;7#29; #282;4#29; and #282;10#29.

#28e#29 None of the above.

MULTIPLE CHOICE 35

Topic,Preferences Di#0Eculty,2

#25 Correct Responses,75 Discrimination Index,29

Correct Answer,B

3.23 Recall that Tommy Twit's mother measures the departure of any bundle from her favorite

bundle for Tommyby the sum of the absolute values of the di#0Berences,Her favorite bundle for

Tommyis#282;7#29,,that is,2 cookies and 7 glasses of milk,Tommy's mother's indi#0Berence curve

that passes through the point #28c;m#29=#283;6#29 also passes through:

#28a#29 the point#284;5#29.

#28b#29 the points #282;5#29; #284;7#29; and #283;8#29.

#28c#29 the point#282;7#29.

#28d#29 the points #283;7#29; #282;6#29; and #282;8#29.

#28e#29 None of the above.

Topic,Preferences Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,D

3.24 Scholastica is taking a class from Professor Chaos,Professor Chaos gives two tests in this

course and determines a student's grade as follows,He calculates the smaller of the following two

numbers,half of the score on the #0Crst test #28which is a relatively easy test#29 and the actual score

on the second test,He gives each studentanumerical score equal to the result of this calculation

and then ranks the students,Scholastica would like to be ranked as high as possible in Professor

Chaos' rankings,If we represent her score on the #0Crst exam on the horizontal axis and her score

on the second exam on the vertical axis,then her indi#0Berence curves:

#28a#29 are L-shaped with kinks where the two exam scores are equal.

#28b#29 have sections with a slope,2 and sections with a slope 1=2.

#28c#29 are positively sloped.

#28d#29 are L-shaped with kinks where the exam 1 score is twice the exam 2 score.

#28e#29 are straight lines with a slope of,1=2.

CHAPTER 3 Preferences 36

Topic,Preferences Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,D

3.25 In Professor Meanscore's class,the #0Crst midterm exam and the second midterm exam are

weighted equally toward the #0Cnal grade,With the #0Crst midterm's score on the horizontal axis,and

the second midterm's score on the vertical axis,indi#0Berence curves between the two exam scores are

#28a#29 L-shaped with lines extending upward and to the right.

#28b#29 L-shaped with lines extending downward and to the left.

#28c#29 parabola shaped.

#28d#29 straight lines with slope,1.

#28e#29 straight lines with slope 2.

Topic,Preferences Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,C

3.26 Professor Stern's colleague,Dr,Schmertz,gives one midterm exam and a #0Cnal exam,He

weights the #0Cnal twice as heavily as the midterm to determine the course grade,No grades can

be dropped,If the midterm score is represented on the horizontal axis and the #0Cnal score on the

vertical axis,and if a student in Dr,Schmertz's class cares only about her course grade,her indif-

ference curveis

#28a#29 a line with slope,2.

#28b#29 a line with slope,1.

#28c#29 a line with slope,0:5.

#28d#29 L-shaped with the kink at #28x;2x#29.

#28e#29 L-shaped with the kink at #282x;x#29.

Topic,Preferences Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,E

3.27 I prefer 6 apples and 1 orange to 5 apples and 2 oranges,From this we can conclude that

#28a#29 my preferences are transitive.

#28b#29 my preferences are complete.

#28c#29 my preferences are convex.

#28d#29 my preferences obey the Law of Demand.

#28e#29 none of the above.

Essay Preferences

Topic,Preferences Di#0Eculty,3

#25 Correct Responses,0 Discrimination Index,0

3.1 Draw graphs with quantities of pepperoni pizza on the horizontal axis and anchovy pizza on

the vertical axis to illustrate the following situations,In each case drawtwo di#0Berent indi#0Berence

curves and make a little arrow pointing in the direction of greater preference.

a#29 Marvin loves pepperoni pizza and hates anchovy pizza.

b#29 Mavis hates anchovy pizza and is completely indi#0Berent about pepperoni pizza.

Answer,a#29 Indi#0Berence curves slopes up and to the right,Arrow points down and to the left,b#29

Indi#0Berence curves are horizontal lines,Arrow points down.

CHAPTER 3 Preferences 38

Topic,Preferences Di#0Eculty,3

#25 Correct Responses,0 Discrimination Index,0

3.2 Coach Steroid likes his players to be big,fast,and obedient,If player A is better than player

B in two of these three characteristics,Steroid will prefer A to B,Three players try out for quar-

terback,Wilbur Westinghouse weighs 320 pounds,runs very slowly,and is quite obedient,Harold

Hotpointweighs 240 pounds,runs extremely fast,and is extremely disobedient,Jerry Jacuzzi

weighs 150 pounds,runs at average speed,and is extremely obedient,Does Coach Steroid have

transitive preferences? Explain your answer.

Answer,No,Steroid prefers W to H because W is heavier and more obedient,He preferes H to J

because H is heavier and faster,But he prefers J to W because J is more obedient and faster than

W,Since his preferences have a cycle,they cannot be transitive.

Topic,Preferences Di#0Eculty,3

#25 Correct Responses,0 Discrimination Index,0

3.3 Belinda loves chocolate and always thinks that more is better than less,Belinda thinks that

a few piano lessons would be worse than none at all but if she had enough piano lessons to get

good at playing the piano,she would prefer more lessons to less,Draw a graph with piano lessons

on the horizontal axis and chocolate on the vertical axis,On your graph sketchtwo indi#0Berence

curves for Belinda that would be consistent with this story,Label the better of the two indi#0Berence

curves AA and the worse one BB.

Answer,The indi#0Berence curves would look something likeinverted U

0

s,#28The area under these

curves needn't be necessarily convex.#29 The better of the two curves drawn is the higher one.

ESSAY 39

Topic,Preferences Di#0Eculty,3

#25 Correct Responses,0 Discrimination Index,0

3.4 Mac Rowe doesn't sweat the petty stu#0B,In fact,he just cannot detect small di#0Berences,He

consumes two goods,x and y,He prefers the bundle #28x;y#29 to the bundle #28x

0;y

0

#29if and only if xy,

x

0

y

0

#3E 1,Otherwise he is indi#0Berentbetween the two bundles,Show:

#28a#29 that the relation of indi#0Berence is not transitive for Mac #28Hint,Give an example.#29

#28b#29 that the preferred relation is transitive for Mac.

Answer,Consider the bundles A =#281;1#29;B=#281;1:75#29;C=#281;2:5#29,Then A is indi#0BerenttoBand

B to C but C is preferred to A,To see that strict preference is transitive,suppose wehaveany

three bundles,#28x;y#29; #28x

0;y

0

#29and #28x

00;y

00

#29,If the #0Crst is preferred to the second and the second to the

third,then xy,x

0

y

0

#3E 1 and x

0

y

0

,x

00

y

00

#3E 1,Simple algebra shows that xy,x

00

y

00

#3E 1,Therefore

the #0Crst must be preferred to the third.

Topic,Preferences Di#0Eculty,3

#25 Correct Responses,0 Discrimination Index,0

3.5 Blanche Carter has devised a system for rating the males in her economics class,She cares

about their intelligence and their looks,She has ranked each male on a scale of 1 to 5 for intelligence

and 1 to 3 for looks,She de#0Cnes a preference re lation,R; as follows,xRy if boy x scores at least

as high as boy y in either looks or in intelligence,Give an example to show that Blanche's method

of determining preferences might not lead to transitive preferences.

Answer,Suppose boy x has rankings 1 and 2,boy y has rankings 3 and 1 and boy z has rankings

2 and 3,Then xRy because x is better looking than y and yRz because y is smarter than z,But

it is not true that xRz,In fact z is both smarter and better looking than x.

Topic,Preferences Di#0Eculty,2

#25 Correct Responses,0 Discrimination Index,0

3.6 Explain howitwould be possible to cheat someone who had intransitive preferences,Be

explicit about what you would o#0Ber him if you were trying to exploit his intransitivity and what

he would do in response.

Answer,Suppose that he has bundle C rightnow and prefers A to B; B to C; and C to A,If you

o#0Ber him a trade that leaves him at B instead of C; he will accept the deal,If you now o#0Ber him a

trade that leaves him at A instead of B; he will accept that,But he will prefer to be back where

he originally was to where he is,So you could o#0Ber to give him back his original bundle,minus a

reward to you for your e#0Borts and he would accept the deal.

CHAPTER 3 Preferences 40

Topic,Preferences Di#0Eculty,1

#25 Correct Responses,0 Discrimination Index,0

3.7 If good X is measured on the horizontal axis and good Y on the vertical,what can you

say about the preferences of someone whose indi#0Berence curves are a#29 Parallel to the Y axis? b#29

Positively sloped with more desirable indi#0Bernce curves as one moves to the right? c#29 Negatively

sloped with more desirable indi#0Berence curves as one moves to the left?

Answer,a#29 This person doesn't care howmuch X he has,b#29 This person likes X but hates Y,c#29

This person hates both goods.

Topic,Preferences Di#0Eculty,2

#25 Correct Responses,0 Discrimination Index,0

3.8 Suppose that there are two commodities and a consumer prefers more to less of each good.

If the consumer has transitive preferences,can her indi#0Berence curves cross? Sketch a brief proof

of your answer,and illustrate with a diagram.

Answer,See the textbook.

Chapter 4

True-False Utility

Topic,Utility Di#0Eculty,2

#25 Correct Responses,85 Discrimination Index,10

Correct Answer,False

4.1 With quasilinear preferences,the slope of indi#0Berence curves is constant along all rays through

the origin.

Topic,Utility Di#0Eculty,2

#25 Correct Responses,82 Discrimination Index,45

Correct Answer,False

4.2 Wanda Lott has the utility function U#28x;y#29=maxfx;yg.Wanda's preferences are convex.

Topic,Utility Di#0Eculty,1

#25 Correct Responses,96 Discrimination Index,20

Correct Answer,True

4.3 If someone has a utility function U =2minfx;yg; then x and y are perfect complements for

that person.

Topic,Utility Di#0Eculty,1

#25 Correct Responses,66 Discrimination Index,20

Correct Answer,False

4.4 Maximilian consumes two goods x and y,His utility function is U#28x;y#29=maxfx;yg,There-

fore x and y are perfect substitutes for Max.

Topic,Utility Di#0Eculty,3

#25 Correct Responses,36 Discrimination Index,11

Correct Answer,False

4.5 A person with the utility function U#28x;y#29=y+x

2

has convex preferences.

Topic,Utility Di#0Eculty,3

#25 Correct Responses,25 Discrimination Index,47

Correct Answer,True

4.6 Mr,Surly consumes only two goods and hates them both,His utility function is U#28x;y#29=

,maxfx;yg,Mr,Surly has #28weakly#29 convex preferences.

CHAPTER 4 Utility 42

Topic,Utility Di#0Eculty,2

#25 Correct Responses,71 Discrimination Index,43

Correct Answer,True

4.7 Angela's utility function is U#28x

1;x

2

#29=#28x

1

+x

2

#29

3

,Her indi#0Berence curves are downward-

sloping,parallel straight lines.

Topic,Utility Di#0Eculty,2

#25 Correct Responses,81 Discrimination Index,0

Correct Answer,True

4.8 Henrietta's utility function is U#28x

1;x

2

#29=x

1

x

2

,She has diminishing marginal rate of substi-

tution between goods 1 and 2.

Topic,Utility Di#0Eculty,2

#25 Correct Responses,66 Discrimination Index,8

Correct Answer,False

4.9 Alice's utility function is U#28x;y#29=x

2

y,Steve's utility function is U#28x;y#29=x

2

y+2x,Alice

and Stevehave the same preferences since Steve's utility function is a monotonic transformation of

Alice's.

Topic,Utility Di#0Eculty,3

#25 Correct Responses,78 Discrimination Index,29

Correct Answer,False

4.10 Jean's utility function is U#28x;y#29=x+y

2

,y,If we draw her indi#0Berence curves with x

on the horizontal axis and y on the vertical axis,then these indi#0Berence curves are everywhere

downward-sloping and get #0Datter as one moves from left to right.

Topic,Preferences Di#0Eculty,1

#25 Correct Responses,99 Discrimination Index,4

Correct Answer,True

4.11 The utility function U#28x

1;x

2

#29=2ln x

1

+3ln x

2

represents Cobb-Douglas preferences.

TRUE-FALSE 43

Topic,Preferences Di#0Eculty,1

#25 Correct Responses,92 Discrimination Index,29

Correct Answer,False

4.12 Fiery Demon is a rotgut whisky made in Kentucky,Smoothyisanunblended malt whisky

imported from Scotland,Ed regards these brands as perfect substitutes,When he goes into a bar,

he sometimes buys only Fiery Demon,Other times he buys only Smoothy,This shows that Ed has

unstable preferences.

Topic,Utility Di#0Eculty,1

#25 Correct Responses,93 Discrimination Index,16

Correct Answer,False

4.13 Mark strictly prefers consumption bundle A to consumption bundle B and weakly prefers

bundle B to bundle A,These preferences can be represented by a utility function.

Topic,Utility Di#0Eculty,3

#25 Correct Responses,63 Discrimination Index,80

Correct Answer,True

4.14 A consumer has preferences represented by the utility function U#28x

1;x

2

#29 = 10#28x

2

1

+2x

1

x

2

+

x

2

2

#29,50.For this consumer,goods 1 and 2 are perfect substitutes.

Topic,Utility Di#0Eculty,1

#25 Correct Responses,52 Discrimination Index,38

Correct Answer,True

4.15 A person with utility function U#28x;y#29=5+y

2

+2xhas non-convex preferences.

Topic,Utility Di#0Eculty,2

#25 Correct Responses,64 Discrimination Index,26

Correct Answer,False

4.16 A person with the utility function U#28x;y#29 = 10+y

2

+x has convex preferences.

Topic,Utility Di#0Eculty,2

#25 Correct Responses,43 Discrimination Index,29

Correct Answer,True

4.17 A person with the utility function U#28x

1;x

2

#29=minfx

1

+2x

2;2x

1

+x

2

ghas convex,but not

strictly convex preferences.

CHAPTER 4 Utility 44

Topic,Utility Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,False

4.18 If one utility function is a monotonic transformation of another,then the former must assign

a higher utilitynumber to every bundle than the latter.

Topic,Preferences Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,False

4.19 Quasilinear preferences are homothetic when the optimal amount of good 1 is not a#0Bordable.

Multiple Choice Utility

Topic,Utility Di#0Eculty,2

#25 Correct Responses,28 Discrimination Index,17

Correct Answer,A

4.1 Ike's utility function is U#28x;y#29=25xy,He has 12 units of good x and 8 units of y,Ben's

utility function for the same two goods is U#28x;y#29=4x+4y,Ben has 9 units of x and 13 units of y.

#28a#29 Ike prefers Ben's bundle to his own bundle,but Ben prefers his own bundle to Ike's.

#28b#29 Ben prefers Ike's bundle to his own,but Ike prefers his own bundle to Ben's.

#28c#29 Each prefers the other guy's bundle to his own.

#28d#29 Neither prefers the other guy's bundle to his own.

#28e#29 Since they have di#0Berent preferences,there is not enough information to determine who envies whom.

Topic,Utility Di#0Eculty,2

#25 Correct Responses,28 Discrimination Index,17

Correct Answer,A

4.2 Nick's utility function is U#28x;y#29=33xy,He has 12 units of good x and 6 units of y,Boris's

utility function for the same two goods is U#28x;y#29=2x+5y,Boris has 9 units of x and 13 units of y.

#28a#29 Nick prefers Boris's bundle to his own bundle,but Boris prefers his own bundle to Nick's.

#28b#29 Boris prefers Nick's bundle to his own,but Nick prefers his own bundle to Boris's.

#28c#29 Each prefers the other guy's bundle to his own.

#28d#29 Neither prefers the other guy's bundle to his own.

#28e#29 Since they have di#0Berent preferences,there is not enough information to determine who envies whom.

Topic,Utility Di#0Eculty,2

#25 Correct Responses,58 Discrimination Index,27

Correct Answer,C

4.3 Tim has preferences represented by the utility function,U#28x;y#29=minf6x+y;x+2yg.Ifxis

on the horizontal axis and y is on the vertical axis,what is the slope of his indi#0Berence curveat

the point #288;9#29?

#28a#29 The slope is,6.

#28b#29 The slope is,2=6.

#28c#29 The slope is,1=2.

#28d#29 The slope is,1=6.

#28e#29 The slope is,8=9.

CHAPTER 4 Utility 46

Topic,Utility Di#0Eculty,2

#25 Correct Responses,58 Discrimination Index,27

Correct Answer,C

4.4 Chen has preferences represented by the utility function,U#28x;y#29=minf4x+ y;x+6yg.Ifx

is on the horizontal axis and y is on the vertical axis,what is the slope of his indi#0Berence curveat

the point #289;4#29?

#28a#29 The slope is,4.

#28b#29 The slope is,6=4.

#28c#29 The slope is,1=6.

#28d#29 The slope is,1=4.

#28e#29 The slope is,9=4.

Topic,Utility Di#0Eculty,1

#25 Correct Responses,95 Discrimination Index,9

Correct Answer,C

4.5 Doreen has preferences represented by the utility function U#28x;y#29=10x+5y,She consumes

10 units of good x and 9 units of good y,If her consumption of good x is lowered to 1,how many

units of y must she have in order to be exactly as well o#0B as before?

#28a#29 30 units of good y

#28b#29 30 units of good y

#28c#29 27 units of good y

#28d#29 18 units of good y

#28e#29 None of the above

Topic,Utility Di#0Eculty,1

#25 Correct Responses,95 Discrimination Index,9

Correct Answer,C

4.6 Sheila has preferences represented by the utility function U#28x;y#29=8x+4y,She consumes 12

units of good x and 3 units of good y,If her consumption of good x is lowered to 10,how many

units of y must she have in order to be exactly as well o#0B as before?

#28a#29 12 units of good y

#28b#29 10 units of good y

#28c#29 7 units of good y

#28d#29 5 units of good y

#28e#29 None of the above

MULTIPLE CHOICE 47

Topic,Utility Di#0Eculty,3

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,B

4.7 Mac's utility function is U#28x;y#29=maxf2x,y;2y,xg.

#28a#29 Mac's preferences are quasi-linear.

#28b#29 If Mac has more x than y; any increase in his consumption of y would lower his utility.

#28c#29 If Mac has more x than y; a decrease in his consumption of y would raise his utility.

#28d#29 Mac always prefers more of each good to less.

#28e#29 Goods x and y are perfect substitutes.

Topic,Utility Di#0Eculty,2

#25 Correct Responses,30 Discrimination Index,29

Correct Answer,C

4.8 Charles' utility function is U#28x;y#29=xy,Anne's utility function is U#28x;y#29=1;000xy,Diana's

utility function is,xy,Elizabeth's utility function is U#28x; y#29=,1=#28xy+1#29.Fergie's utility function

is xy,10;000,Margaret's utility function is x=y,Philip's utility function is x#28y +1#29,#28the goods x

and y are twovery expensive goods,We leaveyou to speculate about what they are.#29 Whichof

these persons have the same preferences as Charles?

#28a#29 Everybody except Diana

#28b#29 Anne and Fergie

#28c#29 Anne,Fergie and Elizabeth

#28d#29 None of them

#28e#29 All of them

Topic,Utility Di#0Eculty,3

#25 Correct Responses,55 Discrimination Index,67

Correct Answer,E

4.9 Raymond's preferences are represented by the utility function U#28x;y#29=x=y if y#3E0and

U#28x;y#29=0if y =0.

#28a#29 Raymond has indi#0Berence curves that are rectangular hyperbolas.

#28b#29 Raymond prefers more of each good to less.

#28c#29 Raymond has quasi-linear preferences.

#28d#29 Raymond has a bliss point.

#28e#29 Raymond has indi#0Berence curves that are upward sloping straight lines if y#3E0.

CHAPTER 4 Utility 48

Topic,Utility Di#0Eculty,2

#25 Correct Responses,92 Discrimination Index,17

Correct Answer,C

4.10 Molly's utility function is U#28x;y#29=y+4x

:5

,She has 25 units of x and 12 units of y,If her

consumption of x is reduced to 0,how many units of y would she need in order to be exactly as

well o#0B as before?

#28a#29 48 units.

#28b#29 37 units.

#28c#29 32 units.

#28d#29 112 units.

#28e#29 None of the above.

Topic,Utility Di#0Eculty,2

#25 Correct Responses,21 Discrimination Index,13

Correct Answer,E

4.11 Waldo's utility function is U#28x;y#29=xy.Waldo consumes 5 units of x and 25 units of y.

#28a#29 Waldo would be willing to make small exchanges of x for y in whichhegives up 5 units of x for every

unit of y he gets.

#28b#29 Waldo would be willing to trade away all of his x for y so long he gets more than 5 units of y for every

unit of x he gives up.

#28c#29 Waldo likes x and y equally well so he is always willing to exchange 1 unit of either good for more than

one unit of the other.

#28d#29 Waldo will always be willing to make trades at any price if he does not have equal amounts of the two

goods.

#28e#29 None of the above.

MULTIPLE CHOICE 49

Topic,Utility Di#0Eculty,2

#25 Correct Responses,21 Discrimination Index,13

Correct Answer,E

4.12 Ernie's utility function is U#28x;y#29=xy,Ernie consumes 4 units of x and 16 units of y.

#28a#29 Ernie would be willing to make small exchanges of x for y in whichhegives up 4 units of x for every

unit of y he gets.

#28b#29 Ernie would be willing to trade away all of his x for y so long he gets more than 4 units of y for every

unit of x he gives up.

#28c#29 Ernie likes x and y equally well so he is always willing to exchange 1 unit of either good for more than

one unit of the other.

#28d#29 Ernie will always be willing to make trades at any price if he does not have equal amounts of the two

goods.

#28e#29 None of the above.

Topic,Utility Di#0Eculty,2

#25 Correct Responses,16 Discrimination Index,0

Correct Answer,B

4.13 Henry's utility function is x

2

+16xw +64w

2

where x is his consumption of x and w is his

consumption of w.

#28a#29 Henry's preferences are nonconvex.

#28b#29 Henry's indi#0Berence curves are straight lines.

#28c#29 Henry has a bliss point.

#28d#29 Henry's indi#0Berence curves are hyperbolas.

#28e#29 None of the above.

Topic,Utility Di#0Eculty,1

#25 Correct Responses,92 Discrimination Index,37

Correct Answer,D

4.14 Josephine's utility function is U#28x;y#29=y+5x

:5

,She has one unit of x and two units of y.If

her consumption of x is reduced to zero,howmuch y must she have in order to be exactly as well

o#0B as before?

#28a#29 14 units.

#28b#29 9 units.

#28c#29 11 units.

#28d#29 7 units.

#28e#29 None of the above.

CHAPTER 4 Utility 50

Topic,Utility Di#0Eculty,2

#25 Correct Responses,10 Discrimination Index,0

Correct Answer,C

4.15 Jim's utility function is U#28x;y#29=xy,Jerry's utility function is U#28x;y#29=1;000xy +2;000.

Tammy's utility function is U#28x;y#29=xy#281,xy#29,Oral's utility function is,1=#2810+xy#29,Billy's utility

function is U#28x;y#29=x=y.Pat's utility function is U#28x;y#29=,xy.

#28a#29 No two of these people have the same preferences.

#28b#29 They all have the same preferences except for Billy.

#28c#29 Jim,Jerry,and Pat all have the same indi#0Berence curves,but Jerry and Oral are the only ones with the

same preferences as Jim.

#28d#29 Jim,Tammy,and Oral all have the same preferences.

#28e#29 There is no truth in any of the above statements.

Topic,Utility Di#0Eculty,1

#25 Correct Responses,74 Discrimination Index,15

Correct Answer,A

4.16 Harmon's utility function is U#28x

1;x

2

#29=x

1

x

2

,His income is $100,the price of good 2 is

p

2

=4,Good 1 is priced as follows,The #0Crst 15 units cost $4 per unit and any additional units

cost $2 per unit,What consumption bundle does Harmon choose?

#28a#29 #2812:5;12:5#29

#28b#29 #2825;12:5#29

#28c#29 #2812:5;25#29

#28d#29 #2815;10#29

#28e#29 None of the above.

Topic,Utility Di#0Eculty,1

#25 Correct Responses,61 Discrimination Index,37

Correct Answer,E

4.17 Janet consumes x

1

and x

2

together in #0Cxed proportions,She always consumes 2 units of x

1

for every unit x

2

,One utility function that describes her preferences is:

#28a#29 U#28x

1;x

2

#29=2x

1

x

2

#28b#29 U#28x

1;x

2

#29=2x

1

+x

2

#28c#29 U#28x

1;x

2

#29=x

1

+2x

2

#28d#29 U#28x

1;x

2

#29=minf2x

1;x

2

g

#28e#29 U#28x

1;x

2

#29=minfx

1;2x

2

g

MULTIPLE CHOICE 51

Topic,Utility Di#0Eculty,3

#25 Correct Responses,14 Discrimination Index,36

Correct Answer,C

4.18 Oswald Odd consumes only goods 1 and 2,His utility function is U#28x

1;x

2

#29=x

1

+x

2

+

minfx

1;x

2

g,EachofOswald's indi#0Berence curves is:

#28a#29 L-shaped.

#28b#29 made up of 3 line segments with slopes,2;,1; and,1=2.

#28c#29 made up of two line segments with slopes,2 and,1=2.

#28d#29 is smooth and has no kinks.

#28e#29 is a diamond-shaped #0Cgure consisting of 4 line segments.

Topic,Utility Di#0Eculty,3

#25 Correct Responses,4 Discrimination Index,0

Correct Answer,A

4.19 The absolute value of Mars' MRS at his current consumption bundle is greater than 3,#28That

is; MU

1

=MU

2

#3E 3#29,Mars has convex preferences and is currently consuming positive amounts of

both goods.

#28a#29 Taking away some of Good 1 and giving Mars 3 units of Good 2 for each unit of Good 1 taken away will

necessarily make him worse o#0B.

#28b#29 Taking away some Good 1 and giving Mars 3 units of Good 2 for each unit of Good 1 taken away will

necessarily make him better o#0B.

#28c#29 Giving Mars some Good 1 and taking away 3 units of Good 2 for each unit of Good 1 he is given will

necessarily make him worse o#0B.

#28d#29 Giving Mars some Good 1 and taking away 3 units of Good 2 for each unit of Good 1 he is given will

necessarily make him better o#0B.

#28e#29 More than one of the above is true.

CHAPTER 4 Utility 52

Topic,Utility Di#0Eculty,3

#25 Correct Responses,48 Discrimination Index,84

Correct Answer,B

4.20 Isabella's utility function is U#28x;y#29=4minfx;yg+y.Ifwe draw her indi#0Berence curves with

x on the horizontal axis and y on the vertical axis,these indi#0Berence curves are:

#28a#29 L-shaped with kinks where x = y.

#28b#29 made up of two line segments that meet where x = y,One of these line segments is horizontal and the

other has slope,4.

#28c#29 L-shaped with kinks where x =5y.

#28d#29 made up of two line segments that meet where x =5y,One of these line segments is vertical and the

other has slope,1.

#28e#29 V-shaped with kinks where x =4y.

Topic,Utility Di#0Eculty,3

#25 Correct Responses,48 Discrimination Index,84

Correct Answer,B

4.21 Penelope's utility function is U#28x;y#29=2minfx;yg + y.Ifwe draw her indi#0Berence curves

with x on the horizontal axis and y on the vertical axis,these indi#0Berence curves are:

#28a#29 L-shaped with kinks where x = y.

#28b#29 made up of two line segments that meet where x = y,One of these line segments is horizontal and the

other has slope,2.

#28c#29 L-shaped with kinks where x =3y.

#28d#29 made up of two line segments that meet where x =3y,One of these line segments is vertical and the

other has slope,1.

#28e#29 V-shaped with kinks where x =2y.

Topic,Utility Di#0Eculty,1

#25 Correct Responses,94 Discrimination Index,20

Correct Answer,E

4.22 Charlie has the utility function U#28x

A;x

B

#29=x

A

x

B

,His indi#0Berence curve passing through

32 apples and 8 bananas will also pass through the point where he consumes 4 apples and:

#28a#29 16 bananas.

#28b#29 32 bananas.

#28c#29 68 bananas.

#28d#29 72 bananas.

#28e#29 64 bananas.

MULTIPLE CHOICE 53

Topic,Utility Di#0Eculty,1

#25 Correct Responses,94 Discrimination Index,20

Correct Answer,E

4.23 Charlie has the utility function U#28x

A;x

B

#29=x

A

x

B

,His indi#0Berence curve passing through

10 apples and 35 bananas will also pass through the point where he consumes 2 apples and:

#28a#29 35 bananas.

#28b#29 70 bananas.

#28c#29 177 bananas.

#28d#29 182 bananas.

#28e#29 175 bananas.

Topic,Utility Di#0Eculty,0

#25 Correct Responses,95 Discrimination Index,47

Correct Answer,B

4.24 Charlie's utility function is U#28A;B#29=AB where A and B are the numbers of apples and

bananas,respectively,that he consumes,When Charlie is consuming 15 apples and 90 bananas,if

we put apples on the horizontal axis and bananas on the vertical axis,the slope of his indi#0Berence

curve at his current consumption is:

#28a#29,15.

#28b#29,6.

#28c#29,12.

#28d#29,1=6.

#28e#29,1=12.

Topic,Utility Di#0Eculty,0

#25 Correct Responses,95 Discrimination Index,47

Correct Answer,B

4.25 Charlie's utility function is U#28A;B#29=AB where A and B are the numbers of apples and

bananas,respectively,that he consumes,When Charlie is consuming 25 apples and 100 bananas,if

we put apples on the horizontal axis and bananas on the vertical axis,the slope of his indi#0Berence

curve at his current consumption is:

#28a#29,25.

#28b#29,4.

#28c#29,8.

#28d#29,1=4.

#28e#29,1=8.

CHAPTER 4 Utility 54

Topic,Utility Di#0Eculty,2

#25 Correct Responses,53 Discrimination Index,49

Correct Answer,C

4.26 Ambrose has the utility function U#28x

1;x

2

#29=4x

1=2

1

+x

2

.IfAmbrose is initially consuming

64 units of nuts and 10 units of berries,then what is the largest number of berries that he would

be willing to give up in return for an additional 17 units of nuts.

#28a#29 9

#28b#29 19

#28c#29 4

#28d#29 2

#28e#29 1

Topic,Utility Di#0Eculty,2

#25 Correct Responses,53 Discrimination Index,49

Correct Answer,C

4.27 Ambrose has the utility function U#28x

1;x

2

#29=4x

1=2

1

+x

2

.IfAmbrose is initially consuming 4

units of nuts and 18 units of berries,then what is the largest number of berries that he would be

willing to give up in return for an additional 32 units of nuts.

#28a#29 6

#28b#29 24

#28c#29 16

#28d#29 8

#28e#29 4

Topic,Utility Di#0Eculty,2

#25 Correct Responses,60 Discrimination Index,52

Correct Answer,C

4.28 Joe Bob's cousin Leonard consumes goods 1 and 2,Leonard thinks that 2 units of good 1

is always a perfect substitute for 3 units of good 2,Which of the following utility functions is the

only one that would NOT represent Leonard's preferences?

#28a#29 U#28x

1;x

2

#29=3x

1

+2x

2

+1000.

#28b#29 U#28x

1;x

2

#29=9x

2

1

+12x

1

x

2

+4x

2

2

.

#28c#29 U#28x

1;x

2

#29=Minf3x

1;2x

2

g.

#28d#29 U#28x

1;x

2

#29=30x

1

+20x

2

,10;000.

#28e#29 More than one of the above does NOT represent Leonard's preferences.

MULTIPLE CHOICE 55

Topic,Utility Di#0Eculty,2

#25 Correct Responses,60 Discrimination Index,52

Correct Answer,C

4.29 Joe Bob's cousin Tim consumes goods 1 and 2,Tim thinks that 4 units of good 1 is always

a perfect substitute for 2 units of good 2,Which of the following utility functions is the only one

that would NOT represent Tim's preferences?

#28a#29 U#28x

1;x

2

#29=2x

1

+4x

2

+1000.

#28b#29 U#28x

1;x

2

#29=4x

2

1

+16x

1

x

2

+16x

2

2

.

#28c#29 U#28x

1;x

2

#29=Minf2x

1;4x

2

g.

#28d#29 U#28x

1;x

2

#29=20x

1

+40x

2

,10;000.

#28e#29 More than one of the above does NOT represent Tim's preferences.

Topic,Utility Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,E

4.30 Harry Mazzola has the utility function U#28x

1;x

2

#29=minfx

1

+2x

2;2x

1

+x

2

g,He has $40 to

spend on corn chips and french fries,if the price of corn chips is 3 dollar#28s#29 per unit and the price

of french fries is 4 dollars per unit,then Harry will:

#28a#29 de#0Cnitely spend all of his income on corn chips.

#28b#29 de#0Cnitely spend all of his income on french fries.

#28c#29 consume at least as much corn chips as french fries,but might consume both.

#28d#29 consume at least as much french fries as corn chips,but might consume both.

#28e#29 consume equal amounts of french fries and corn chips.

Topic,Utility Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,E

4.31 Harry Mazzola has the utility function U#28x

1;x

2

#29=minfx

1

+2x

2;2x

1

+x

2

g,He has $40 to

spend on corn chips and french fries,if the price of corn chips is 3 dollar#28s#29 per unit and the price

of french fries is 5 dollars per unit,then Harry will:

#28a#29 de#0Cnitely spend all of his income on corn chips.

#28b#29 de#0Cnitely spend all of his income on french fries.

#28c#29 consume at least as much corn chips as french fries,but might consume both.

#28d#29 consume at least as much french fries as corn chips,but might consume both.

#28e#29 consume equal amounts of french fries and corn chips.

CHAPTER 4 Utility 56

Topic,Utility Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,C

4.32 Phil Rupp's sister Ethel has the utility function U#28x;y#29=minf4x+ y;5yg,Where x is mea-

sured on the horizontal axis and y on the vertical axis,her indi#0Berence curves:

#28a#29 consist of a vertical line segment and a horizontal line segment which meet in a kink along the line y =4x.

#28b#29 consist of a vertical line segment and a horizontal line segment which meet in a kink along the line

x =4y.

#28c#29 consist of a horizontal line segment and a negatively sloped line segment which meet in a kink along the

line x = y.

#28d#29 consist of a positively sloped line segment and a negatively sloped line segment which meet along the

line x = y.

#28e#29 consist of a horizontal line segment and a positively sloped line segment which meet in a kink along the

line x =4y.

Topic,Utility Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,C

4.33 Phil Rupp's sister Ethel has the utility function U#28x;y#29=minf5x+ y;6yg,Where x is mea-

sured on the horizontal axis and y on the vertical axis,her indi#0Berence curves:

#28a#29 consist of a vertical line segment and a horizontal line segment which meet in a kink along the line y =5x.

#28b#29 consist of a vertical line segment and a horizontal line segment which meet in a kink along the line

x =5y.

#28c#29 consist of a horizontal line segment and a negatively sloped line segment which meet in a kink along the

line x = y.

#28d#29 consist of a positively sloped line segment and a negatively sloped line segment which meet along the

line x = y.

#28e#29 consist of a horizontal line segment and a positively sloped line segment which meet in a kink along the

line x =5y.

Essay Utility

Topic,Utility Di#0Eculty,1

#25 Correct Responses,0 Discrimination Index,0

4.1 Jim's utility function is U#28x;y#29=xy,Jerry's utility function is U#28x;y#29 = 1000xy + 2000.

Tammy's utility function is U#28x;y#29=xy#281,xy#29,Oral's utility function is U#28x;y#29=,1=#2810+2xy#29.

Marjoe's utility function is U#28x;y#29=x#28y+ 1000#29.Pat's utility function is U#28x;y#29=:5xy,10000.

Billy's utility function is U#28x;y#29=x=y,F Francis's utility function is U#28x;y#29=,xy,#28a#29 Who has

the same preferences as Jim? #28b#29 Who had the same indi#0Berence curves as Jim? #28c#29 Explain why

the answers to #28a#29 and #28b#29 di#0Ber.

Answer,Jerry,Pat and Oral have the same preferences as Jim since their utility functions are

monotonic transformations of Jim's,Jerry,Pat,Oral,Tammy,and Francis have the same indif-

ference curves as Jim,but Tammy and Francis have di#0Berent preferences,Francis' utility function

is a decreasing transformation of Jim's,so he orders his indi#0Berence curves in the opposite way.

Tammy's utility function is a transformation of Jim's but is sometimes increasing sometimes de-

creasing.

Topic,Utility Di#0Eculty,3

#25 Correct Responses,0 Discrimination Index,0

4.2 A consumer has a utility function of the form U#28x;y#29=x

a

+y

b

where both a and b are non-

negative,What additional restrictions on the values of the parameters a and b are imposed by each

of the following assumptions? #28i#29 Preferences are quasi-linear,convex,and x is a normal good,#28ii#29

Preferences are homothetic,#28iii#29 Preferences are homothetic and convex,#28iv#29 Goods x and y are

perfect substitutes.

Answer,#28i#29 a =1and b is between 0 and 1,#28ii#29 a = b,#28iii#29 a = b and a is between 0 and 1.#28iv#29

a = b =1.

Topic,Utility Di#0Eculty,3

#25 Correct Responses,0 Discrimination Index,0

4.3 Victor Finick likes to have the same amountofxas he has of y,His utility function is

U#28x;y#29=minf2x,y;2y,xg,a#29 Draw the indi#0Berence curve for Victor that passes through the

bundle #280;0#29 and the indi#0Berence curve that passes through #284;4#29,#28Hint,Each indi#0Berence curveis

the intersection of two line segments.#29 b#29 If Victor has a bundle that he likes better than #280;0#29 and

his consumption of both goods is doubled,is Victor better o#0B? c#29 Does Victor always prefer more

of either good to less?

Answer,Victor's indi#0Berence curves are V-shaped,The one through the origin consists of the two

rays y =2xand x =2y,The one through #282;2#29 has tworays going out from #282;2#29,,one with slope

1=2; and the other with slope 2,b#29 Yes c#29 No,If x#3Ey;then an increase in x by itself makes him

worse o#0B and if y#3Ex;an increase in y by itself makes him worse o#0B.

CHAPTER 4 Utility 58

Topic,Utility Di#0Eculty,1

#25 Correct Responses,0 Discrimination Index,0

4.4 Use separate graphs to sketchtwo indi#0Berence curves for people with each of the following

utility functions,a#29 U#28x;y#29=x+2yb#29U#28x;y#29=Minfx;2yg c#29 U#28x;y#29=maxfx;2yg

Answer,a#29 These are straight lines with slope,1=2,b#29 These are L-shaped,The corners lie along

the locus x =2y.c#29Atypical indi#0Berence curve consists of a horizontal line from the y axis to the

locus x =2yand then a vertical line to the y axis from the point where the horiontal line met the

line x =2y.

Topic,Utility Di#0Eculty,2

#25 Correct Responses,0 Discrimination Index,0

4.5 Use separate graphs to draw indi#0Berence curves for each of the following utility functions,a#29

U#28x;y#29=minf2x+y;2y +xg

b#29 U#28x;y#29=maxf2x+ y;2y +xg,c#29 U#28x;y#29=x+minfx;yg,In which of these cases are preferences

convex?

Answer,If you takeapoint on the line x = y and drawtwo lines through it,one with a slope

of,1=2 and the other with a slope of,2; the outer envelope of these lines will be an indi#0Berence

curve for a#29 and the inner envelope will be an indi#0Berence curve for b#29,The indi#0Berence curves for

c#29 passing through a point on the line x = y consist of a line segment going down and to the right

with slope,1 and a line segment going up and to the left with slope,2,Cases a#29 and c#29 display

convex preferences and case b#29 does not.

Chapter 5

True-False Choice

Topic,Choice Di#0Eculty,1

#25 Correct Responses,78 Discrimination Index,21

Correct Answer,False

5.1 At a boundary optimum,a consumer's indi#0Berence curvemust be tangent to her budget line.

Topic,Choice Di#0Eculty,2

#25 Correct Responses,56 Discrimination Index,20

Correct Answer,False

5.2 Max Gross has the utility function U#28x;y#29=maxfx;yg,If the price of x is the same as the

price of y; Max will buy equal amounts of x and y.

Topic,Choice Di#0Eculty,2

#25 Correct Responses,83 Discrimination Index,21

Correct Answer,False

5.3 If a consumer does not have convex preferences,then a point of tangency between her indif-

ference curve and her budget line must be an optimal consumption point.

Topic,Choice Di#0Eculty,2

#25 Correct Responses,46 Discrimination Index,0

Correct Answer,True

5.4 Sharon spends all of her income on peaches and strawberries,Peaches are a normal good for

her,Her income increased by 20 percent and prices did not change,Her consumption of strawber-

ries could not have increased by more than 20 percent.

Topic,Choice Di#0Eculty,2

#25 Correct Responses,32 Discrimination Index,46

Correct Answer,False

5.5 Clara's utility function is U#28x;y#29=#28x+ 2#29#28y +1#29,If her consumption of both x and y are

doubled,then her marginal rate of substitution between x and y remains constant.

CHAPTER 5 Choice 60

Topic,Choice Di#0Eculty,1

#25 Correct Responses,80 Discrimination Index,11

Correct Answer,True

5.6 Charlie's utility function is U#28x;y#29=xy

2

,His marginal rate of substitution between x and y

does not change if you double the amount of both goods.

Topic,Choice Di#0Eculty,2

#25 Correct Responses,64 Discrimination Index,54

Correct Answer,True

5.7 Ambrose's utility function is U#28x;y#29=x+4y

1=2

,The price of x is 1 and the price of y is 2,If

his income rises from 100 to 150,his consumption of y increases by more than 10#25 but less than

50#25.

Topic,Choice Di#0Eculty,2

#25 Correct Responses,91 Discrimination Index,10

Correct Answer,False

5.8 Linus has utility function U#28x;y#29=x+2y,If the price of x is 1 and the price of y is 1=2; then

Linus must consume equal amounts of both goods in order to maximize his utility.

Topic,Choice Di#0Eculty,3

#25 Correct Responses,22 Discrimination Index,3

Correct Answer,True

5.9 Mary Granola's utility function is U#28x;y#29=minfx +2y;y +2xg,Mary maximizes her utility

subject to a budget constraint,If she chooses the bundle #285;6#29; then it must be that the price of x

is exactly twice the price of y.

Topic,Choice Di#0Eculty,2

#25 Correct Responses,62 Discrimination Index,41

Correct Answer,True

5.10 Millie's utility function is U#28x;y#29=minfx;yg,She maximizes her utility subject to a budget

constraint,The price of x is the same as the price of y,If the price of x rises and the price of y

and her income remain constant,then her consumption of y will certainly decrease.

TRUE-FALSE 61

Topic,Choice Di#0Eculty,2

#25 Correct Responses,49 Discrimination Index,25

Correct Answer,True

5.11 Other things being equal,a lump sum tax is at least as good for a consumer as a sales tax

that collects the same revenue from him.

Topic,Choice Di#0Eculty,2

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,False

5.12 If a consumer doesn't consume any snails,but does consume Big Macs,then his marginal

rate of substitution between snails and Big Macs when his snail consumption is zero,must be equal

to the ratio of the price of snails to the price of Big Macs.

Multiple Choice Choice

Topic,Choice Di#0Eculty,1

#25 Correct Responses,13 Discrimination Index,25

Correct Answer,B

5.1 Hans has 27 dollars,which he decides to spend on x and y,Commodity x costs $16 per unit

and commodity y costs $10 per unit,He has the utility function U#28x;y#29=5x

2

+2y

2

and he can

purchase fractional units of x and y.

#28a#29 Hans will choose only x.

#28b#29 Hans will choose only y.

#28c#29 Hans will chose some of each commodity,but more y than x.

#28d#29 Hans will choose some of each commodity,but more x than y.

#28e#29 Hans will choose equal amounts of the two commodities.

Topic,Choice Di#0Eculty,1

#25 Correct Responses,13 Discrimination Index,25

Correct Answer,B

5.2 Ollie has 40 dollars,which he decides to spend on x and y,Commodity x costs $13 per unit

and commodity y costs $11 per unit,He has the utility function U#28x;y#29=6x

2

+4y

2

and he can

purchase fractional units of x and y.

#28a#29 Ollie will choose only x.

#28b#29 Ollie will choose only y.

#28c#29 Ollie will chose some of each commodity,but more y than x.

#28d#29 Ollie will choose some of each commodity,but more x than y.

#28e#29 Ollie will choose equal amounts of the two commodities.

Topic,Choice Di#0Eculty,2

#25 Correct Responses,86 Discrimination Index,36

Correct Answer,E

5.3 Wanda Littlemore's utility function is U#28x;y#29=x+63y,3y

2

,Her income is 184,If the price

of x is 1 and the price of y is 33,how many units of good x will Wanda demand?

#28a#29 17

#28b#29 22

#28c#29 24

#28d#29 0

#28e#29 19

MULTIPLE CHOICE 63

Topic,Choice Di#0Eculty,2

#25 Correct Responses,86 Discrimination Index,36

Correct Answer,E

5.4 Wanda Littlemore's utility function is U#28x;y#29=x+72y,3y

2

,Her income is 207,If the price

of x is 1 and the price of y is 24,how many units of good x will Wanda demand?

#28a#29 13

#28b#29 18

#28c#29 23

#28d#29 0

#28e#29 15

Topic,Choice Di#0Eculty,3

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,B

5.5 Henri's utility function is minfx;5y +2zg,The price of x is 1,the price of y is 15,and the

price of z is 7,Henri's income is 44,How many units of x does Henri demand?

#28a#29 9.78

#28b#29 11

#28c#29 5

#28d#29 3

#28e#29 None of the above.

Topic,Choice Di#0Eculty,3

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,B

5.6 Matt's utility function is minfx;4y+5zg,The price of x is 1,the price of y is 4,and the price

of z is 7,Matt's income is 8,How many units of x does Matt demand?

#28a#29 3.33

#28b#29 4

#28c#29 7

#28d#29 5

#28e#29 None of the above.

CHAPTER 5 Choice 64

Topic,Choice Di#0Eculty,2

#25 Correct Responses,59 Discrimination Index,32

Correct Answer,A

5.7 Peter consumes no commodities other than Miller Lite and Bud Light,His annual budget

for these two commodities is described by the equation 5x+30y= 300 where x is sixpacks of Miller

Lite and y is cases of Bud Light,Peter considers 2 cases of Bud Light to be perfect substitutes for

6 sixpacks of Miller Lite,Which of the following is true?

#28a#29 He will consume 60 sixpacks of Miller Lite per year.

#28b#29 He will consume 10 cases of Bud Light per year.

#28c#29 He will consume 14 cases of Bud Light per year.

#28d#29 He will consume 12 sixpacks of Miller Lite per year.

#28e#29 He is indi#0Berentbetween anytwo bundles that use up his entire income.

Topic,Choice Di#0Eculty,2

#25 Correct Responses,59 Discrimination Index,32

Correct Answer,A

5.8 Harold consumes no commodities other than Miller Lite and Bud Light,His annual budget

for these two commodities is described by the equation 5x+20y= 300 where x is sixpacks of Miller

Lite and y is cases of Bud Light,Harold considers 2 cases of Bud Light to be perfect substitutes

for 10 sixpacks of Miller Lite,Which of the following is true?

#28a#29 He will consume 60 sixpacks of Miller Lite per year.

#28b#29 He will consume 15 cases of Bud Light per year.

#28c#29 He will consume 19 cases of Bud Light per year.

#28d#29 He will consume 12 sixpacks of Miller Lite per year.

#28e#29 He is indi#0Berentbetween anytwo bundles that use up his entire income.

Topic,Choice Di#0Eculty,1

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,A

5.9 Paul's utility function is minfx+3y;3x+yg,Simon's utility function is minf3x+9y;9x+3yg.

Paul and Simon have the same income and face the same prices,Which of the following is true?

#28a#29 Paul and Simon will demand the same amountofgoodx.

#28b#29 Paul will demand more y than Simon.

#28c#29 Simon will demand more y than Paul.

#28d#29 Each will prefer the other's consumption bundle to his own.

#28e#29 None of the above.

MULTIPLE CHOICE 65

Topic,Choice Di#0Eculty,3

#25 Correct Responses,30 Discrimination Index,31

Correct Answer,C

5.10 Mary Granola consumes tomatoes and nectarines,Mary's indi#0Berence curves are kinky.

When she is consuming more tomatoes than nectarines,she is just willing to trade 3 tomatoes for

1 nectarines,When she is consuming more nectarines than tomatoes,she is just willing to trade 4

nectarines for 1 tomatoes,Let P

1

be the price of nectarines and P

2

the price of tomatoes,Mary

maximizes her utility subject to her budget constraint,Which is true? #28Hint,Sketch one of her

indi#0Berence curves.#29

#28a#29 When P

1

#3EP

2;she must consume only tomatoes.

#28b#29 When P

1

#3EP

2;she must consume 3 times as many tomatoes as nectarines.

#28c#29 When P

1

#3E 3P

2; she must consume only tomatoes.

#28d#29 When 4P

1

#3EP

2;she must consume only nectarines.

#28e#29 She must consume equal amounts of both.

Topic,Choice Di#0Eculty,3

#25 Correct Responses,30 Discrimination Index,31

Correct Answer,C

5.11 Mary Granola consumes oranges and apples,Mary's indi#0Berence curves are kinky,When

she is consuming more oranges than apples,she is just willing to trade 5 oranges for 1 apples,When

she is consuming more apples than oranges,she is just willing to trade 2 apples for 1 oranges,Let

P

1

be the price of apples and P

2

the price of oranges,Mary maximizes her utility subject to her

budget constraint,Which is true? #28Hint,Sketch one of her indi#0Berence curves.#29

#28a#29 When P

1

#3EP

2;she must consume only oranges.

#28b#29 When P

1

#3EP

2;she must consume 5 times as many oranges as apples.

#28c#29 When P

1

#3E 5P

2; she must consume only oranges.

#28d#29 When 2P

1

#3EP

2;she must consume only apples.

#28e#29 She must consume equal amounts of both.

CHAPTER 5 Choice 66

Topic,Choice Di#0Eculty,3

#25 Correct Responses,28 Discrimination Index,33

Correct Answer,C

5.12 Badger Madison consumes only beer and sausages,His income is $100,Beer costs him $.50

per can and sausages cost $1 each,Where x is the number of cans of beer and y the number of

sausages he consumes per week,Badger's utility function is U#28x;y#29=,#5B#28x,50#29

2

+#28y,40#29

2

#5D.

#28a#29 Badger must always be unhappy since whatever he consumes,his utility is negative.

#28b#29 He has monotonic preferences.

#28c#29 If his income increases,he won't change the commodity bundle that he buys.

#28d#29 If the price of beer goes down,he will buy more beer.

#28e#29 More than one of the above statements is true.

Topic,Choice Di#0Eculty,3

#25 Correct Responses,70 Discrimination Index,58

Correct Answer,D

5.13 Janet consumes two commodities x and y,Her utility function is minfx +2y;y +2xg,She

chooses to buy 10 units of good x and 20 units of good y,The price of good x is 1,Whichofthe

following is true?

#28a#29 Janet's income is 40.

#28b#29 Janet's income is 50.

#28c#29 Janet's income is 30.

#28d#29 Janet's income is 20.

#28e#29 There is not enough information in the problem to determine her income because we are not told the

price of y.

Topic,Choice Di#0Eculty,2

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,A

5.14 Martha's utility function is U#28x;y#29=minfx +2y;2x + yg,George's utility function is

U#28x;y#29=minf2x +4y;4x+2yg,If George and Martha have the same income and face the same

prices for the goods x and y,

#28a#29 George and Martha will both demand the same amountofy.

#28b#29 Martha will always prefer George's consumption bundle to her own.

#28c#29 George will always prefer Martha's consumption bundle to his own.

#28d#29 George will demand more x than Martha demands.

#28e#29 None of the above.

MULTIPLE CHOICE 67

Topic,Choice Di#0Eculty,2

#25 Correct Responses,69 Discrimination Index,48

Correct Answer,B

5.15 Ollie has a utility function U#28x;y#29=#28x+ 2#29#28y +3#29,The price of x is 1 and the price of y is

1,When he maximizes his utility subject to his budget constraint,he consumes positive amounts

of both goods.

#28a#29 Ollie consumes exactly as much x as y.

#28b#29 Ollie consumes one more unit of x than he consumes of y.

#28c#29 Ollie consumes one more unit of y than he consumes of x.

#28d#29 Ollie consumes two more units of x than he consumes of y.

#28e#29 None of the above.

Topic,Choice Di#0Eculty,2

#25 Correct Responses,69 Discrimination Index,48

Correct Answer,B

5.16 Maurice has a utility function U#28x;y#29=#28x+3#29#28y+2#29,The price of x is 1 and the price of y is

1,When he maximizes his utility subject to his budget constraint,he consumes positive amounts

of both goods.

#28a#29 Maurice consumes exactly as much x as y.

#28b#29 Maurice consumes one more unit of x than he consumes of y.

#28c#29 Maurice consumes one more unit of y than he consumes of x.

#28d#29 Maurice consumes two more units of x than he consumes of y.

#28e#29 None of the above.

CHAPTER 5 Choice 68

Topic,Choice Di#0Eculty,1

#25 Correct Responses,19 Discrimination Index,27

Correct Answer,A

5.17 DannyFeatherweight is taking a tough course in lawschool,His prof agreed to give him

a course grade of maxf2x;3yg where x and y are the number of answers he gets right on the #0Crst

and second midterms,respectively,Danny needs a course grade of 150 to pass,He #0Cnds that for

the #0Crst midterm,for every A minutes of study,he will get one more answer right,For the second

midterm,for every B minutes that he studies,he will get one more answer right,If he doesn't

study at all,Danny will get nothing right on either exam,All Danny cares about is passing,He

doesn't wanttowaste any time getting a higher grade than he needs.

#28a#29 If A=B #3C 2=3; then Danny will not study for the second exam.

#28b#29 The ratio of the time Danny spends on exam 1 to the time he spends on exam 2 will be 2A=3B.

#28c#29 The ratio of the time Danny spends on exam 2 to the time he spends on exam 1 will be 3A=2B.

#28d#29 If A#3CB;then Danny will not study for the #0Crst exam.

#28e#29 Danny will spend 150=#282A+3B#29 minutes studying for each exam.

Topic,Choice Di#0Eculty,2

#25 Correct Responses,75 Discrimination Index,40

Correct Answer,A

5.18 Isobel consumes positive quantities of both jam and and juice,The price of jam is 5 cents

per unit and the price of juice is 10 cents per unit,Her marginal utility of jam is 10 and her

marginal utility of juice is 5.

#28a#29 Without changing her total expenditures,she could increase her utilityby consuming more jam and less

juice.

#28b#29 Without changing her total expenditures,she could increase her utilityby consuming more juice and

less jam.

#28c#29 Without changing her total expenditures on jam and juice,she could not increase her utility.

#28d#29 We can't tell whether any of the other statements are true or false without knowing the quantities she

consumes.

#28e#29 She should spend more money on both jam and juice.

MULTIPLE CHOICE 69

Topic,Choice Di#0Eculty,2

#25 Correct Responses,77 Discrimination Index,0

Correct Answer,A

5.19 Harold's utility function is U#28x;y#29=#28x+ 3#29#28y +2#29,The price of x is 1,The price of y is 2.

At all incomes for which Harold consumes positive amounts of both goods,he will consume:

#28a#29 more than twice as much x as y.

#28b#29 more than twice as much y as x.

#28c#29 one more unit of x than of y.

#28d#29 one more unit of y than of x.

#28e#29 2=3asmuch y as x.

Topic,Choice Di#0Eculty,3

#25 Correct Responses,31 Discrimination Index,14

Correct Answer,C

5.20 Jane's utility function is U#28x;y#29=x+2y; where x is her consumption of good X and y is

her consumption of good Y,Her income is 2,The price of Y is 2,The cost per unit of X depends

on how many units she buys,The total cost of x units of X is the square root of x.

#28a#29 The bundle #281=4;3=4#29 is Jane's utility maximizing choice,given her budget.

#28b#29 The bundle #281;1=2#29 is Jane's utility maximizing choice,given her budget.

#28c#29 Given her budget,Jane would maximize her utilityby spending all of her income on good x.

#28d#29 Given her budget,Jane would maximize her utilityby spending all of her income on good y.

#28e#29 None of the above statements are true.

Topic,Choice Di#0Eculty,2

#25 Correct Responses,62 Discrimination Index,43

Correct Answer,A

5.21 As you may know,Mungoites eachhavetwo left feet and one right foot,Their preferences

for left and right shoes display perfect complementarity,Mungoites #0Cnd shoes useful only in #5Ctrios"

of two lefts and a right,The price of eachtype of shoe is $10 a shoe,and Mungoites consume noth-

ing other than shoes,A Mungoite's Engel curve for right shoes has the equation:

#28a#29 R = m=30

#28b#29 R = m,10.

#28c#29 R =2m.

#28d#29 R =10m.

#28e#29 R = m=10.

CHAPTER 5 Choice 70

Topic,Choice Di#0Eculty,2

#25 Correct Responses,43 Discrimination Index,39

Correct Answer,C

5.22 Howard has the utility function U#28x;y#29=x,#281=y#29,His income is $30.

#28a#29 Howard does not like good y.

#28b#29 Howard has a bliss point.

#28c#29 If the price of x is $4 and the price of y is $1,Howard will buy 2 units of y.

#28d#29 Howard will buy good y only if it is cheaper than good x.

#28e#29 None of the above.

Topic,Choice Di#0Eculty,3

#25 Correct Responses,37 Discrimination Index,31

Correct Answer,A

5.23 Minnie Applesauce is shopping for a summer lake cottage,Minnie hates mosquito bites,

but the cheapest lake cottages have the most mosquitos,The price of a lake cabin is related to b;

the number of mosquito bites you can expect per hour,according to the formula p = $20;000,100b.

Minnie's utility function is u = x,5b

2

where x is her expenditure on all goods other than her lake

cabin,If Minnie makes her best choice of lake cabin,how many mosquito bites per hour will she

get?

#28a#29 10

#28b#29 5

#28c#29 20

#28d#29 25

#28e#29 None of the above.

Topic,Choice Di#0Eculty,2

#25 Correct Responses,63 Discrimination Index,75

Correct Answer,B

5.24 The prices of goods x and y are each $1,Jane has $20 to spend and is considering choosing

10 units of x and 10 units of y,Jane has nice convex preferences and more of both goods is better

for her,Where x is drawn on the horizontal axis and y is drawn on the vertical axis,the slope of

her indi#0Berence curve at the bundle #2810;10#29 is,2.From these facts we can conclude that:

#28a#29 The bundle #2810;10#29 is the best she can a#0Bord.

#28b#29 She would be better o#0B consuming more of good x and less of good y.

#28c#29 She would be better o#0B consuming more of good y and less of good x.

#28d#29 She must dislike one of the goods.

#28e#29 More than one of the above is true.

MULTIPLE CHOICE 71

Topic,Choice Di#0Eculty,1

#25 Correct Responses,56 Discrimination Index,43

Correct Answer,C

5.25 Which of the following could possibly change a rational consumer's demand?

#28a#29 Changing his utility function by cubing it.

#28b#29 Changing his utility function bymultiplying it by 3 and subtracting 100 from it.

#28c#29 Increasing all prices and his income by $3.

#28d#29 Multiplying all prices and income by 2.2.

#28e#29 More than one of the above.

Topic,Choice Di#0Eculty,1

#25 Correct Responses,68 Discrimination Index,23

Correct Answer,C

5.26 Coke and Pepsi are perfect substitutes for Mr,Drinker and the slope of his indi#0Berence

curves is minus 1,One day he bought 2 cans of Coke and 20 cans of Pepsi,#28The cans of both

drinks are the same size.#29

#28a#29 Coke is less expensive than Pepsi.

#28b#29 Coke is more expensive than Pepsi.

#28c#29 Coke and Pepsi cost the same.

#28d#29 Mr,Drinker prefers Pepsi to Coke.

#28e#29 None of the above.

Topic,Choice Di#0Eculty,1

#25 Correct Responses,68 Discrimination Index,30

Correct Answer,C

5.27 Ed and Al both consume only bread and cheese,Both of them always choose to have some

bread and some cheese,and both have strictly convex preferences,However,Ed likes to havea

great deal of bread with a little cheese and Al likes lots of cheese with a little bread,Both face

the same prices for both goods and havechosen bundles to maximize their utilities subject to their

budgets,Which of the following statements is true?

#28a#29 Al's marginal rate of substitution is larger in absolute value than Ed's.

#28b#29 Ed's marginal rate of substitution is larger in absolute value than Al's.

#28c#29 Their marginal rates of substitution are the same.

#28d#29 Who has the larger marginal rate of substitution depends on income levels.

#28e#29 There is not enough informationfor us to be able to tell who has the larger marginalrate of substitution.

CHAPTER 5 Choice 72

Topic,Choice Di#0Eculty,2

#25 Correct Responses,35 Discrimination Index,5

Correct Answer,C

5.28 If his wage rate increases,then a utility maximizing consumer will necessarily:

#28a#29 increase #28or leave constant#29 his labor supply.

#28b#29 increase #28or leave constant#29 his labor supply if leisure is a normal good,but otherwise might reduce his

labor supply.

#28c#29 increase #28or leave constant#29 his labor supply if leisure is an inferior good,but otherwise might reduce his

labor supply.

#28d#29 decrease #28or leave constant#29 his labor supply.

#28e#29 none of the above.

Topic,Choice Di#0Eculty,2

#25 Correct Responses,22 Discrimination Index,29

Correct Answer,E

5.29 Angela consumes only two goods,x and y,Her income doubles and the prices of the two

goods remain unchanged,Assuming that she is a utility maximizer and likes both goods,whichof

the following statements is necessarily true?

#28a#29 She will consume more of both goods.

#28b#29 The ratio of her consumption of x to y remains constant.

#28c#29 Her utility doubles.

#28d#29 If her preferences are convex,she must consume more x.

#28e#29 None of the above.

Topic,Choice Di#0Eculty,2

#25 Correct Responses,74 Discrimination Index,22

Correct Answer,B

5.30 Arthur's preferences are de#0Cned over two basic food groups,beer,x

1; and ice cream,x

2

,His

utility function is u#28x

1;x

2

#29=x

2

1

+x

2

,He has $100 to spend,and each of these goods costs $10 per

quart,Which of the following statements is true?

#28a#29 Arthur will consume 5 quarts of ice cream and 5 quarts of beer.

#28b#29 Arthur will #0Cnd that 10 quarts of beer and no ice cream is the best bundle.

#28c#29 Arthur will #0Cnd that 10 quarts of ice cream and no beer is the best bundle.

#28d#29 Arthur is indi#0Berentbetween anytwo points on the line that connects #285;5#29 and #2810;10#29.

#28e#29 Arthur will spend 2=3 of his income on beer and 1=3 of his income on ice cream.

MULTIPLE CHOICE 73

Topic,Choice Di#0Eculty,3

#25 Correct Responses,19 Discrimination Index,20

Correct Answer,C

5.31 Andrew's utility function is U#28x

1;x

2

#29=4x

2

1

+x

2

,Andrew's income is $32,the price of good 1

is $16 per unit,and the price of good 2 is $1 per unit,What happens if Andrew's income increases

to $80 and prices do not change? #28Hint,Does he have convex preferences?#29

#28a#29 He will consume 48 more units of good 2 and the same amount of good 1 as before.

#28b#29 He will increase his consumption of both goods.

#28c#29 He will reduce his consumption of good 2.

#28d#29 He will consume the same amount of good 2 as before and 3 more units of good 1 than he consumed

before.

#28e#29 None of the above.

Topic,Choice Di#0Eculty,2

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,A

5.32 Lorenzo lives on x and y alone,His utility function is U#28x;y#29=minf3x+4y;7yg,The prices

of both goods are positive,Which of the following statements is necessarily true?

#28a#29 He will never buy more x than y.

#28b#29 He will buy equal amounts of the two goods.

#28c#29 He will always buy more y than x.

#28d#29 He will always buy more x than y.

#28e#29 More than one of the above.

Topic,Choice Di#0Eculty,2

#25 Correct Responses,63 Discrimination Index,65

Correct Answer,A

5.33 Mort's utility function is U#28x

1;x

2

#29=x

1

x

2

,His income is $100; the price of good 2 is $10.

Good 1 is priced as follows,The #0Crst 6 units cost $10 per unit and any additional units cost $5 per

unit,What consumption bundle does Mort choose?

#28a#29 #285;5#29

#28b#29 #287;3:5#29

#28c#29 #289;3#29

#28d#29 #286;4#29

#28e#29 None of the above.

CHAPTER 5 Choice 74

Topic,Choice Di#0Eculty,1

#25 Correct Responses,88 Discrimination Index,11

Correct Answer,D

5.34 Clara's utility function is U#28X;Y#29=#28X+ 2#29#28Y +1#29,If her marginal rate of substitution is

,4 and she is consuming 14 units of Good X; how many units of Good Y must she be consuming?

#28a#29 30

#28b#29 68

#28c#29 18

#28d#29 63

#28e#29 9

Topic,Choice Di#0Eculty,1

#25 Correct Responses,88 Discrimination Index,11

Correct Answer,D

5.35 Clara's utility function is U#28X;Y#29=#28X+ 2#29#28Y +1#29,If her marginal rate of substitution is

,2 and she is consuming 9 units of Good X; how many units of Good Y must she be consuming?

#28a#29 18

#28b#29 26

#28c#29 11

#28d#29 21

#28e#29 5

MULTIPLE CHOICE 75

Topic,Choice Di#0Eculty,2

#25 Correct Responses,75 Discrimination Index,26

Correct Answer,D

5.36

Elmer's utility function is U#28x;y#29=minfx;y

2

g,If the price of x is 25 and the price of y is 15,and

if Elmer chooses to consume 7 units of Y; what must his income be?

#28a#29 2,660

#28b#29 280

#28c#29 1,430

#28d#29 1,330

#28e#29 There is not enough information to determine his income.

Topic,Choice Di#0Eculty,2

#25 Correct Responses,75 Discrimination Index,26

Correct Answer,D

5.37

Elmer's utility function is U#28x;y#29=minfx;y

2

g,If the price of x is 20 and the price of y is 20,and

if Elmer chooses to consume 2 units of Y; what must his income be?

#28a#29 240

#28b#29 80

#28c#29 220

#28d#29 120

#28e#29 There is not enough information to determine his income.

CHAPTER 5 Choice 76

Topic,Choice Di#0Eculty,3

#25 Correct Responses,9 Discrimination Index,21

Correct Answer,C

5.38 Justin consumes goods X and Y and has a utility function U#28x;y#29=x

2

+y,The price per

unit of X is p

x

and the price per unit of Y is p

y

,He has enough money so that he can a#0Bord at

least 1 unit of either good,When he chooses his best a#0Bordable bundle,it must necessarily be that:

#28a#29 his budget line is tangent to the indi#0Berence curve passing through this bundle.

#28b#29 he consumes only x.

#28c#29 he consumes only y if p

2

x

=p

y

exceeds his income.

#28d#29 he consumes some of each good if p

x

= p

y

.

#28e#29 he consumes some of each good if p

y

= p

x

=2.

Topic,Choice Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,A

5.39 Charlie has a utility function U#28x

A;x

B

#29=x

A

x

B;the price of apples is 1 and the price of

bananas is 2,If Charlie's income were 120,how many units of bananas would he consume if he

chose the bundle that maximized his utility subject to his budget constraint?

#28a#29 30

#28b#29 15

#28c#29 60

#28d#29 6

#28e#29 90

Topic,Choice Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,A

5.40 Charlie has a utility function U#28x

A;x

B

#29=x

A

x

B;the price of apples is 1 and the price of

bananas is 2,If Charlie's income were 200,how many units of bananas would he consume if he

chose the bundle that maximized his utility subject to his budget constraint?

#28a#29 50

#28b#29 25

#28c#29 100

#28d#29 10

#28e#29 150

MULTIPLE CHOICE 77

Topic,Choice Di#0Eculty,0

#25 Correct Responses,68 Discrimination Index,30

Correct Answer,E

5.41 Charlie's utility function is U#28X

A;X

B

#29=X

A

X

B

,If Charlie's income is 40,the price of apples

is 4 and the price of bananas is 2,how many apples are there in the best bundle that Charlie can

a#0Bord?

#28a#29 10

#28b#29 12

#28c#29 8

#28d#29 9

#28e#29 5

Topic,Choice Di#0Eculty,0

#25 Correct Responses,68 Discrimination Index,30

Correct Answer,E

5.42 Charlie's utility function is U#28X

A;X

B

#29=X

A

X

B

,If Charlie's income is 40,the price of apples

is 4 and the price of bananas is 3,how many apples are there in the best bundle that Charlie can

a#0Bord?

#28a#29 10

#28b#29 12

#28c#29 8

#28d#29 9

#28e#29 5

Topic,Choice Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,B

5.43 Ambrose's utility function is U#28x

1;x

2

#29=4x

1=2

1

+x

2

,If the price of nuts #28good 1#29 is 1,the

price of berries #28good 2#29 is 6,and his income is 264,how many units of NUTS will Ambrose choose.

#28a#29 20

#28b#29 144

#28c#29 288

#28d#29 147

#28e#29 72

CHAPTER 5 Choice 78

Topic,Choice Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,B

5.44 Ambrose's utility function is U#28x

1;x

2

#29=4x

1=2

1

+x

2

,If the price of nuts #28good 1#29 is 1,the

price of berries #28good 2#29 is 6,and his income is 252,how many units of NUTS will Ambrose choose.

#28a#29 18

#28b#29 144

#28c#29 288

#28d#29 147

#28e#29 72

Topic,Choice Di#0Eculty,2

#25 Correct Responses,97 Discrimination Index,4

Correct Answer,D

5.45 Our old friend,Edmund Stench,of Chapter 2 loves punk rock video tapes,He has no

income and therefore has to accept garbage in his backyard in return for money,Each video tape

cost $2 and each sack of garbage that he accepts brings him $1,His utility function is given by

U#28c;g#29=minf2c;20,gg where c is the number of video tapes and g is the numberofsacks of garbage

that he gets per month,Each month he will choose to accept:

#28a#29 20 sacks of garbage.

#28b#29 no garbage.

#28c#29 5 sacks of garbage.

#28d#29 10 sacks of garbage.

#28e#29 15 sacks of garbage.

MULTIPLE CHOICE 79

Topic,Choice Di#0Eculty,3

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,D

5.46 Joseph's utility function is given by U

J

= x

A

+2x

B;where x

A

denotes his consumption of

apples and x

B

his consumption of bananas,Clara's utility function is given by U

C

=3x

A

+2x

B

.

Joseph and Clara shop at the same grocery store.

#28a#29 When we observe that Joseph leaves the store with some bananas,then we can deduce that Clara also

buys some bananas.

#28b#29 There exist prices of apples and bananas such that both consumers buy strictly positive amounts of both

goods.

#28c#29 When we observe that Joseph leaves the store with some apples and some bananas,then we can deduce

that Clara also buys some apples and some bananas.

#28d#29 When we observe that Joseph leaves the store with some apples,then we can deduce that Clara also

buys some apples.

#28e#29 Apples and bananas are perfect complements for Joseph.

Topic,Choice Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,B

5.47 If a consumer maximizes her preferences subject to her budget bychoosing a consumption

bundle where the ratio of her marginal utilities of shelter and food,MUS#2FMUF,is greater than the

ratio of the prices of shelter and food,p

S

=p

F; then she

#28a#29 must be consuming food but no shelter.

#28b#29 must be consuming shelter but no food.

#28c#29 must be consuming both food and shelter.

#28d#29 must not be spending all of her income.

#28e#29 must believe that shelter is a "bad".

Essay Choice

Topic,Choice Di#0Eculty,2

#25 Correct Responses,0 Discrimination Index,0

5.1 Max has the utility function U#28x;y#29=x#28y+1#29,The price of x is 2 and the price of y is 1.

Income is 10,Howmuch x does Max demand?,Howmuch y? If his income doubles and prices stay

unchanged,will Max's demand for both goods double?

Answer,To set his MRS equal to the price ratio,Max sets #28y +1#29=x =2,His budget constraintis

2x+y=10,Solve these two equations to #0Cnd that x =11=4and y =9=2,If his income doubles and

prices stay unchanged,his demand for both goods does not double,A quickway to see this is to

note that if quantities of both goods doubled,the MRS would not stay the same and hence would

not equal the price ratio,which has stayed constant.

Topic,Choice Di#0Eculty,3

#25 Correct Responses,0 Discrimination Index,0

5.2 Casper consumes cocoa and cheese,Cocoa is sold in an unusual way,There is only one

supplier,and the more cocoa you buy from him,the higher the price you havetopay per unit.

In fact y units of cocoa will cost Casper y

2

dollars,Cheese is sold in the usual way at a price of

2 dollars per unit,Casper's income is 20 dollars and his utility function is U#28x;y#29=x+2ywhere

x is his consumption of cheese and y is his consumption of cocoa,a#29 Sketch Casper's budget set

and shade it in,b#29 Sketch some of his indi#0Berence curves and label the point that he chooses,c#29

Calculate the amountofcheese and the amount of cocoa that Casper demands at these prices and

this income.

Answer,This problem is di#0Berent from those in the text and is designed to see whether the student

can use the tools presented there in a creativeway,The budget set is a convex set and the solution

is a point of tangency,Casper demands 2 units of cocoa and 16 units of cheese.

Topic,Choice Di#0Eculty,1

#25 Correct Responses,0 Discrimination Index,0

5.3 Is the following statement true or false? Brie#0Dy explain your answer,"A utility maximizer

will always choose a bundle at which his indi#0Berence curve is tangent to his budget line."

Answer,False,At a corner solution the indi#0Berence curve need not be tangent to the budget line.

ESSAY 81

Topic,Choice Di#0Eculty,2

#25 Correct Responses,0 Discrimination Index,0

5.4 Max has a utility function U#28x;y#29=2xy +1,The prices of x and y are both $1 and Max has

an income of $20,a#29 Howmuch of each good will he demand? b#29 A tax is placed on x so that x

now costs Max $2 while his income and the price of y stay the same,Howmuch good x does he

now demand? c#29 Would Max be as well o#0B as he was before the tax if when the tax was imposed,

his income rose by an amount equal to $1 times the answer to part b?

Answer,a#29 10 x and 10 y,b#295xc#29No.

Topic,Choice Di#0Eculty,2

#25 Correct Responses,0 Discrimination Index,0

5.5 Harold consumes chardonnay and quiche,His utility function is U#28c;q#29=minfc;q

2

g,Drawa

diagram showing three or four of Harold's indi#0Berence curves,If the price of chardonnayis10and

the price of quiche is 3 and if Harold is consuming 4 units of quiche,how many units of chardonnay

is he consuming?

Answer,The diagram has #0Cxed-coe#0Ecients indi#0Berence curves,but their corners line up along the

locus c = q

2

rather than along a straight line,16 units of chardonnay.

Topic,Choice Di#0Eculty,2

#25 Correct Responses,0 Discrimination Index,0

5.6 Les has the utility function U#28x;y#29=#28x+ 1#29#28y +4#29,The price of y is 1,Les spends all of his

income to buy 6 units of y and no x.From these facts we can tell that the price of x must be at

least howmuch? Explain your answer and draw a diagram to illustrate it.

Answer,Price of x must be at least 10,His marginal rate of substitution at the bundle #286;0#29 is

10,If the price of x is 10 or greater,he will choose that corner.

Chapter 6

True-False Demand

Topic,Demand Di#0Eculty,1

#25 Correct Responses,81 Discrimination Index,15

Correct Answer,True

6.1 If preferences are quasilinear,then for very high incomes the income o#0Ber curve is a straight

line parallel to one of the axes.

Topic,Demand Di#0Eculty,1

#25 Correct Responses,85 Discrimination Index,40

Correct Answer,False

6.2 In economic theory,the demand for a good must depend only on income and its own price

and not on the prices of other goods.

Topic,Demand Di#0Eculty,1

#25 Correct Responses,95 Discrimination Index,11

Correct Answer,True

6.3 If two goods are substitutes,then an increase in the price of one of them will increase the

demand for the other.

Topic,Demand Di#0Eculty,2

#25 Correct Responses,48 Discrimination Index,8

Correct Answer,True

6.4 If consumers spend all of their income,it is impossible for all goods to be inferior goods.

Topic,Demand Di#0Eculty,1

#25 Correct Responses,93 Discrimination Index,8

Correct Answer,False

6.5 An Engel curve is a demand curve with the vertical and horizontal axes reversed.

Topic,Demand Di#0Eculty,2

#25 Correct Responses,92 Discrimination Index,14

Correct Answer,False

6.6 If the demand curveisadownward-sloping straight line,then the price elasticity of demand

is constant all along the demand curve.

TRUE-FALSE 83

Topic,Elasticity Di#0Eculty,2

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,True

6.7 If the price elasticity of demand for a good is,1; then doubling the price of that good will

leave total expenditures on that good unchanged.

Topic,Demand Di#0Eculty,2

#25 Correct Responses,82 Discrimination Index,33

Correct Answer,False

6.8 If preferences are homothetic,then the slope of the Engel curve for any good will decrease

as income increases.

Topic,Elasticity Di#0Eculty,1

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,True

6.9 A good is a luxury good if the income elasticity of demand for it is greater than 1.

Topic,Demand Di#0Eculty,2

#25 Correct Responses,68 Discrimination Index,31

Correct Answer,True

6.10 Prudence was maximizing her utility subject to her budget constraint,Then prices changed.

After the price change she is better o#0B,Therefore the new bundle costs more at the old prices than

the old bundle did.

Topic,Demand Di#0Eculty,1

#25 Correct Responses,67 Discrimination Index,2

Correct Answer,False

6.11 If income is doubled and all prices are doubled,then the demand for luxury goods will more

than double.

Topic,Demand Di#0Eculty,1

#25 Correct Responses,86 Discrimination Index,21

Correct Answer,True

6.12 If preferences are homothetic and all prices double while income remains constant,then

demand for all goods is halved.

CHAPTER 6 Demand 84

Topic,Demand Di#0Eculty,1

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,False

6.13 An inferior good is less durable than a normal good.

Topic,Demand Di#0Eculty,2

#25 Correct Responses,1 Discrimination Index,1

Correct Answer,True

6.14 It is impossible for a person to have a demand curve that slopes upward at all prices.

Topic,Demand Di#0Eculty,2

#25 Correct Responses,52 Discrimination Index,34

Correct Answer,False

6.15 Donald's utility function is U#28x;y#29=x+y

1=2

,Currently he is buying some of both goods.

If his income rises and prices don't change,he will buy more of both goods.

Topic,Demand Di#0Eculty,2

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,True

6.16 Angela's utility function is x+y

1=2

,It is possible that if her income is very high,an increase

in income will not make her spend more on y.

Topic,Demand Di#0Eculty,2

#25 Correct Responses,58 Discrimination Index,0

Correct Answer,False

6.17 When other variables are held #0Cxed,the demand for a Gi#0Ben good rises when income is

increased.

Topic,Demand Di#0Eculty,1

#25 Correct Responses,90 Discrimination Index,5

Correct Answer,False

6.18 A rational consumer spends her entire income,If her income doubles and prices do not

change,then she will necessarily choose to consume twice as muchofevery good as she did before.

TRUE-FALSE 85

Topic,Demand Di#0Eculty,2

#25 Correct Responses,84 Discrimination Index,21

Correct Answer,False

6.19 A consumer has a utility function given by U = minfx

1;2x

2

g,If Good 2 has a price of zero,

the consumer will always prefer more of Good 2 to less.

Topic,Demand Di#0Eculty,2

#25 Correct Responses,61 Discrimination Index,42

Correct Answer,False

6.20 A consumer has the utility function U#28x;y#29=minfx;2yg,If the price of good x is zero and

the price of good y is p; then the consumer's demand function for good y is m=2p.

Topic,Demand Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,False

6.21 Fred has a Cobb-Douglas utility function with exponents that sum to 1,Sally consumes the

same two goods,but the two goods are perfect substitutes for her,Despite these di#0Berences,Fred

and Sally have the same price o#0Ber curves.

Topic,Demand Di#0Eculty,0

#25 Correct Responses,53 Discrimination Index,16

Correct Answer,False

6.22 Darlene's utility function is U#28x;y;z#29=x

3

y

3

z,If her income doubles and prices remain

unchanged,her demand for good Y will more than double.

Topic,Demand Di#0Eculty,0

#25 Correct Responses,53 Discrimination Index,16

Correct Answer,False

6.23 Darlene's utility function is U#28x;y;z#29=x

4

y

7

z,If her income doubles and prices remain

unchanged,her demand for good Y will more than double.

Topic,Demand Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,False

6.24 Quasilinear preferences are homothetic when the optimal amount of one of the goods is not

a#0Bordable.

Multiple Choice Demand

Topic,Demand Di#0Eculty,3

#25 Correct Responses,33 Discrimination Index,42

Correct Answer,A

6.1 Daisy received a tape recorder as a birthday gift and is not able to return it,Her utility

function is U#28x;y;z#29=x+z

1=2

f#28y#29where z is the number of tapes she buys,y is the number of tape

recorders she has and x is the amount of money she has left to spend,f#28y#29=0if y#3C1and f#28y#29=8

if y is 1 or greater,The price of tapes is 2 and she can easily a#0Bord to buy dozens of tapes,How

many tapes will she buy?

#28a#29 4

#28b#29 6

#28c#29 2

#28d#29 8

#28e#29 We need to know the price of tape recorders to solve this problem.

Topic,Demand Di#0Eculty,3

#25 Correct Responses,33 Discrimination Index,42

Correct Answer,A

6.2 Daisy received a tape recorder as a birthday gift and is not able to return it,Her utility

function is U#28x;y;z#29=x+z

1=2

f#28y#29where z is the number of tapes she buys,y is the number of

tape recorders she has and x is the amount of money she has left to spend,f#28y#29=0if y#3C1and

f#28y#29=32if y is 1 or greater,The price of tapes is 4 and she can easily a#0Bord to buy dozens of

tapes,How many tapes will she buy?

#28a#29 16

#28b#29 18

#28c#29 14

#28d#29 20

#28e#29 We need to know the price of tape recorders to solve this problem.

MULTIPLE CHOICE 87

Topic,Demand Di#0Eculty,2

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,B

6.3 Mickey is considering buying a tape recorder,His utility function is U#28x;y; z#29=x+f#28y#29z

:5

where x is the amount of money he spends on other goods,y is the number of tape recorders he

buys,and z is the number of tapes he buys,Let f#28y#29=0if y#3C1and f#28y#29=8if y is greater than

or equal to 1,The price of tape recorders is 20,the price of tapes is 1,and he can easily a#0Bord to

buy a tape recorder and and several tapes,Will he buy a tape recorder?

#28a#29 He should buy a tape recorder at these prices,but if tapes were any more expensive,it would not payto

buy one.

#28b#29 He should not buy a tape recorder.

#28c#29 He is indi#0Berent to buying a tape recorder or not.

#28d#29 There is not enough information here for us to be able to tell.

#28e#29 Even if the price of tapes doubled,he should still buy a tape recorder.

Topic,Demand Di#0Eculty,1

#25 Correct Responses,86 Discrimination Index,20

Correct Answer,D

6.4 Walt consumes strawberries and cream but only in the #0Cxed ratio of three boxes of strawber-

ries to two cartons of cream,Atany other ratio,the excess goods are totally useless to him,The

cost of a box of strawberries is 10 and the cost of a carton of cream is 10,Walt's income is 200.

Which of the following is true?

#28a#29 Walt demands 10 cartons of cream.

#28b#29 Walt demands 10 boxes of strawberries.

#28c#29 Walt considers strawberries and cartons of cream to be perfect substitutes.

#28d#29 Walt demands 12 boxes of strawberries.

#28e#29 None of the above.

CHAPTER 6 Demand 88

Topic,Demand Di#0Eculty,3

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,D

6.5 Mike consumes two commodities,x and y; and his utility function is minfx+2y;y +2xg.He

chooses to buy 8 units of good x and 16 units of good y,The price of good y is 0.50,What is his

income?

#28a#29 32

#28b#29 40

#28c#29 24

#28d#29 16

#28e#29 Mike's income cannot be found unless the price of x is given too.

Topic,Demand Di#0Eculty,2

#25 Correct Responses,68 Discrimination Index,31

Correct Answer,D

6.6

Georgina consumes only grapefruits and pineapples,Her utility function is U#28x;y#29=x

2

y

8;where

x is the number of grapefruits consumed and y is the number of pineapples consumed,Georgina's

income is 105,and the prices of grapefruits and pineapples are 1 and 3,respectively.How many

grapefruits will she consume?

#28a#29 10.50

#28b#29 7

#28c#29 63

#28d#29 21

#28e#29 None of the above.

MULTIPLE CHOICE 89

Topic,Demand Di#0Eculty,2

#25 Correct Responses,68 Discrimination Index,31

Correct Answer,D

6.7

Fanny consumes only grapefruits and grapes,Her utility function is U#28x;y#29=x

3

y

6;where x is the

number of grapefruits consumed and y is the number of grapes consumed,Fanny's income is 48,

and the prices of grapefruits and grapes are 1 and 3,respectively.How many grapefruits will she

consume?

#28a#29 8

#28b#29 5.33

#28c#29 48

#28d#29 16

#28e#29 None of the above.

Topic,Demand Di#0Eculty,2

#25 Correct Responses,55 Discrimination Index,45

Correct Answer,B

6.8 For m#3Ep

2;the demand functions for goods 1 and 2 are given by the equations,x

1

=#28m=p

2

#29,1

and x

2

= p

1

=p

2; where m is income and p

1

and p

2

are prices,Let the horizontal axis represent the

quantity of good 1,Let p

1

=1and p

2

=2,Then for m#3E2;the income o#0Ber curve is:

#28a#29 avertical line.

#28b#29 a horizontal line.

#28c#29 a straight line with slope 2.

#28d#29 a straight line with a slope of 1=2.

#28e#29 none of the above.

CHAPTER 6 Demand 90

Topic,Demand Di#0Eculty,1

#25 Correct Responses,85 Discrimination Index,38

Correct Answer,E

6.9 Harry has ten dollars to spend on cans of Coke and Pepsi,which he regards as perfect substi-

tutes,one-for-one,Pepsi costs $.50 a can and Coke costs $.60 a can,Harry has 20 coupons,eachof

which can be used to buy one can of Coke for 40 cents,Which of the following bundles will Harry

buy?

#28a#29 20 cans of Pepsi and no Coke.

#28b#29 16 and two thirds cans of Coke and no Pepsi.

#28c#29 10 cans of Coke and 8 cans of Pepsi.

#28d#29 10 cans of Coke and 12 cans of Pepsi.

#28e#29 None of the above.

Topic,Demand Di#0Eculty,2

#25 Correct Responses,67 Discrimination Index,18

Correct Answer,D

6.10 Madonna buys only two goods,Her utility function is Cobb-Douglas,Her demand functions

have which of the following properties?

#28a#29 Her demand for one of the two goods does not depend on income.

#28b#29 Her demand for neither good depends on income.

#28c#29 Her demand for each of the goods depends on income and on the prices of both goods.

#28d#29 Her demand for each of the two goods depends only on her income and on the price of that good itself.

#28e#29 One of the goods is an inferior good and the other is a normal good.

MULTIPLE CHOICE 91

Topic,Demand Di#0Eculty,1

#25 Correct Responses,33 Discrimination Index,20

Correct Answer,D

6.11 Seppo consumes brandy and saunas,Neither is an inferior good,Seppo has a total of $30 a

day and 6 hours a day to spend on brandy and saunas,Each brandy costs $2 and takes half an hour

to consume,Each sauna costs $1 and takes 1 hour to consume,#28It is; unfortunately,impossible to

consume a brandy in the sauna.#29 Seppo suddenly inherits a lot of money and now has $50 a day

to spend on brandy and saunas,Since Seppo is a rational consumer,he must have:

#28a#29 increased brandy consumption only.

#28b#29 increased sauna consumption only.

#28c#29 increased consumption of both.

#28d#29 consumed the same amounts of both goods as before.

#28e#29 we can't tell since we are told nothing about his indi#0Berence curves.

Topic,Demand Di#0Eculty,1

#25 Correct Responses,49 Discrimination Index,41

Correct Answer,E

6.12 Where x is the quantity of good X demanded,the inverse demand function for X,

#28a#29 expresses 1=x as a function of prices and income.

#28b#29 expresses demand for x as a function of 1=p

x

and income where p

x

is the price of x.

#28c#29 expresses demand for x as a function of 1=p

x

and 1=m; where m is income.

#28d#29 speci#0Ces 1=x as a function of 1=p

x

and 1=m; where m is income.

#28e#29 None of the above.

Topic,Demand Di#0Eculty,2

#25 Correct Responses,75 Discrimination Index,7

Correct Answer,D

6.13 If there are two goods and if income doubles and the price of good 1 doubles,while the price

of good 2 stays constant:

#28a#29 a consumer's demand for good 1 will increase only if it is a Gi#0Ben good for her.

#28b#29 a consumer's demand for good 2 will decrease only if it is a Gi#0Ben good for her.

#28c#29 a consumer's demand for good 2 will increase only if it is an inferior good for her.

#28d#29 a consumer's demand for good 2 will decrease only if it is an inferior good for her.

#28e#29 None of the above.

CHAPTER 6 Demand 92

Topic,Demand Di#0Eculty,2

#25 Correct Responses,71 Discrimination Index,63

Correct Answer,C

6.14 Clarissa's utility function is U#28r;z#29=z+160r,r

2

where r is the number of rose plants she

has in her garden and z is the number of zinnias,She has 250 square feet to allocate to roses and

zinnias,Roses each take up 4 square feet and zinnias each take up 1 square foot,She gets the

plants for free from a generous friend,If she acquires another 100 square feet of land for her garden

and her utility function remains unchanged she will:

#28a#29 plant 100 more zinnias and no more roses.

#28b#29 plant 25 more roses and no more zinnias.

#28c#29 plant 38 more zinnias and some more roses.

#28d#29 plant 20 more roses and 20 more zinnias.

#28e#29 do none of the above.

Topic,Demand Di#0Eculty,2

#25 Correct Responses,71 Discrimination Index,63

Correct Answer,C

6.15 Clarissa's utility function is U#28r;z#29=z+80r,r

2

where r is the number of rose plants she

has in her garden and z is the number of zinnias,She has 250 square feet to allocate to roses and

zinnias,Roses each take up 4 square feet and zinnias each take up 1 square foot,She gets the

plants for free from a generous friend,If she acquires another 100 square feet of land for her garden

and her utility function remains unchanged she will:

#28a#29 plant 100 more zinnias and no more roses.

#28b#29 plant 25 more roses and no more zinnias.

#28c#29 plant 99 more zinnias and some more roses.

#28d#29 plant 20 more roses and 20 more zinnias.

#28e#29 do none of the above.

Topic,Demand Di#0Eculty,2

#25 Correct Responses,14 Discrimination Index,25

Correct Answer,D

6.16 Regardless of his income and regardless of prices,Smedley always spends 25#25 of his income

on housing,10#25 on clothing,30#25 on food,15#25 on transportation,and 20#25 on recreation,This

behavior is consistent with the following:

#28a#29 All goods are perfect substitutes.

#28b#29 Smedley's demands for commodities do not change when their prices change.

#28c#29 Smedley consumes all goods in #0Cxed proportions.

#28d#29 Smedley has a Cobb-Douglas utility function.

#28e#29 More than one of the above.

MULTIPLE CHOICE 93

Topic,Demand Di#0Eculty,2

#25 Correct Responses,73 Discrimination Index,44

Correct Answer,A

6.17 Ms,Laura Mussel's preferences between golf and tennis are represented by U#28g;t#29=gt

where g is the number of rounds of golf and t is the number of tennis matches she plays per week.

She has $24 per week to spend on these sports,A round of golf and a tennis match each cost $4.

She used to maximize her utility subject to this budget,She decided to limit the time she spends

on these sports to 16 hours a week,A round of golf takes 4 hours,A tennis match takes 2 hours.

As a result of this additional constraint on her choice,you conclude that:

#28a#29 she plays one less round of golf and one more tennis match eachweek.

#28b#29 she plays more golf and less tennis,but can't sayhowmuch.

#28c#29 her choices and her utility are unchanged.

#28d#29 there is too little information to tell about her choices.

#28e#29 she plays 2 less rounds of golf and 3 more rounds of tennis per week.

Topic,Demand Di#0Eculty,1

#25 Correct Responses,85 Discrimination Index,18

Correct Answer,A

6.18 Mary has homothetic preferences,When her income was $1,000,she bought 40 books and

60 newspapers,When her income increased to $1,500 and prices did not change,she bought:

#28a#29 60 books and 90 newspapers.

#28b#29 80 books and 120 newspapers.

#28c#29 60 books and 60 newspapers.

#28d#29 40 books and 120 newspapers.

#28e#29 There is not enough information for us to determine what she would buy.

CHAPTER 6 Demand 94

Topic,Demand Di#0Eculty,2

#25 Correct Responses,46 Discrimination Index,54

Correct Answer,C

6.19 Katie Kwasi's utility function is U#28x

1;x

2

#29=2#28ln x

1

#29+x

2

,Given her current income and the

current relative prices,she consumes 10 units of x

1

and 15 units of x

2

,If her income doubles,while

prices stay constant,how many units of x

1

will she consume after the change in income?

#28a#29 20

#28b#29 18

#28c#29 10

#28d#29 5

#28e#29 There is not enough information to determine howmuch.

Topic,Demand Di#0Eculty,2

#25 Correct Responses,46 Discrimination Index,54

Correct Answer,C

6.20 Katie Kwasi's utility function is U#28x

1;x

2

#29=2#28ln x

1

#29+x

2

,Given her current income and the

current relative prices,she consumes 5 units of x

1

and 20 units of x

2

,If her income doubles,while

prices stay constant,how many units of x

1

will she consume after the change in income?

#28a#29 10

#28b#29 8

#28c#29 5

#28d#29 2.50

#28e#29 There is not enough information to determine howmuch.

Topic,Demand Di#0Eculty,2

#25 Correct Responses,43 Discrimination Index,23

Correct Answer,E

6.21 Will Feckless unexpectedly inherits $10,000 from a rich uncle,He is observed to consume

fewer hamburgers than he used to,We conclude that:

#28a#29 hamburgers are a Gi#0Ben good for Will.

#28b#29 hamburgers are a normal good for Will.

#28c#29 Will's Engel curve for hamburgers is vertical.

#28d#29 Will's Engel curve for hamburgers is horizontal.

#28e#29 Will's preferences are not homothetic.

MULTIPLE CHOICE 95

Topic,Demand Di#0Eculty,3

#25 Correct Responses,11 Discrimination Index,24

Correct Answer,B

6.22 Fred consumes pork chops and lambchops and nothing else,When the price of pork chops

rises with no change in his income or in the price of lambchops,Fred buys fewer lambchops and

fewer pork chops,From this information we can de#0Cnitely conclude that:

#28a#29 pork chops are a normal good for Fred.

#28b#29 lambchops are a normal good for Fred.

#28c#29 pork chops are an inferior good for Fred.

#28d#29 lambchops are an inferior good for Fred.

#28e#29 Fred prefers pork chops to lambchops.

Topic,Demand Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,C

6.23 Cecil consumes x

1

and x

2

in #0Cxed proportions,He consumes A units of good 1 with B units

of good 2,To solve for his demand functionsfor goods 1 and 2:

#28a#29 set MU

1

=MU

2

=p

1

=p

2

and solve for x

1

.

#28b#29 solve the following two equations in two unknowns,Ax

1

= Bx

2

and p

1

x

1

+ p

2

x

2

= m.

#28c#29 solve the following two equations in two unknowns,Bx

1

= Ax

2

and p

1

x

1

+p

2

x

2

= m.

#28d#29 you only need to use the equation given by his budget line.

#28e#29 use the fact that he spends all of his income on good 1 so long as it is the cheaper good.

Topic,Demand Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,B

6.24 Wilma Q,has a utility function,U#28x

1;x

2

#29=x

2

1

+1:5x

1

x

2

+30x

2

,The prices are p

1

=1and

p

2

=1.For incomes between 20 and 60,the Engel curve for good 2 is:

#28a#29 upward-sloping.

#28b#29 downward-sloping.

#28c#29 vertical.

#28d#29 upward-sloping for incomes between 20 and 40 and downward-sloping between 40 and 60.

#28e#29 downward sloping for incomes between 20 and 40 and upward-sloping between 40 and 60.

CHAPTER 6 Demand 96

Topic,Demand Di#0Eculty,2

#25 Correct Responses,48 Discrimination Index,16

Correct Answer,C

6.25 Which of the following utility functions represent preferences of a consumer who does NOT

have homothetic preferences?

#28a#29 U#28x;y#29=xy.

#28b#29 U#28x;y#29=x+2y.

#28c#29 U#28x;y#29=x+y

:5

.

#28d#29 U#28x;y#29=minfx;yg.

#28e#29 More than one of the above.

Topic,Demand Di#0Eculty,2

#25 Correct Responses,78 Discrimination Index,19

Correct Answer,A

6.26 Robert's utility function is U#28x;y#29=minf4x;2x+yg,The price of x is $3 and the price of y

is $1,Robert's income o#0Ber curve is:

#28a#29 aray from the origin with a slope of 2.

#28b#29 a line parallel to the x axis.

#28c#29 a line parallel to the y axis.

#28d#29 the same as his Engel curve for x.

#28e#29 none of the above.

Topic,Demand Di#0Eculty,2

#25 Correct Responses,8 Discrimination Index,35

Correct Answer,B

6.27 Alfredo lives on apples and bananas only,His utility function is U#28a;b#29=minfa + b;2bg.

He maximizes his utility subject to his budget constraint and consumes the bundle #28a;b#29=#284;4#29.

Which of the following statements must be true?

#28a#29 p

a

#3Ep

b

.

#28b#29 p

a

is less than or equal to p

b

.

#28c#29 p

a

= p

b

.

#28d#29 p

a

=2p

b

.

#28e#29 None of the above.

MULTIPLE CHOICE 97

Topic,Demand Di#0Eculty,2

#25 Correct Responses,80 Discrimination Index,42

Correct Answer,E

6.28 Miss Mu#0Bet insists upon consuming 2 units of whey per unit of curds,If the price of curds

is 5 and the price of whey is 3,then if Miss Mu#0Bet's income is M; her demand for curds will be:

#28a#29 M=5.

#28b#29 3M=5.

#28c#29 5c+3w=M.

#28d#29 5M.

#28e#29 M=11.

Topic,Demand Di#0Eculty,2

#25 Correct Responses,80 Discrimination Index,42

Correct Answer,E

6.29 Miss Mu#0Bet insists upon consuming 2 units of whey per unit of curds,If the price of curds

is 4 and the price of whey is 2,then if Miss Mu#0Bet's income is M; her demand for curds will be:

#28a#29 M=4.

#28b#29 2M=4.

#28c#29 4c+2w=M.

#28d#29 4M.

#28e#29 M=8.

Topic,Demand Di#0Eculty,0

#25 Correct Responses,88 Discrimination Index,20

Correct Answer,A

6.30 If Charlie's utility function were X

3

A

X

B; if apples cost 90 cents each and bananas cost 10

cents each,Charlie's budget line would be tangent to one of his indi#0Berence curves whenever the

following equation is satis#0Ced:

#28a#29 3X

B

=9X

A

#28b#29 X

B

= X

A

#28c#29 X

A

=3X

B

#28d#29 X

B

=3X

A

#28e#29 90X

A

+10X

B

=M

CHAPTER 6 Demand 98

Topic,Demand Di#0Eculty,0

#25 Correct Responses,88 Discrimination Index,20

Correct Answer,A

6.31 If Charlie's utility function were X

5

A

X

B; if apples cost 40 cents each and bananas cost 10

cents each,Charlie's budget line would be tangent to one of his indi#0Berence curves whenever the

following equation is satis#0Ced:

#28a#29 5X

B

=4X

A

#28b#29 X

B

= X

A

#28c#29 X

A

=5X

B

#28d#29 X

B

=5X

A

#28e#29 40X

A

+10X

B

=M

Topic,Demand Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,D

6.32 If Charlie's utility function is X

4

A

X

B; if the price of apples is p

A; the price of bananas is p

B;

and his income is m; then Charlie's demand for apples will be:

#28a#29 m=#282p

A

#29

#28b#29 0:25p

A

m

#28c#29 m=#28p

A

+ p

B

#29

#28d#29 0:80m=p

A

#28e#29 1:25p

B

m=p

A

Topic,Demand Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,D

6.33 If Charlie's utility function is X

4

A

X

B; if the price of apples is p

A; the price of bananas is p

B;

and his income is m; then Charlie's demand for apples will be:

#28a#29 m=#282p

A

#29

#28b#29 0:25p

A

m

#28c#29 m=#28p

A

+ p

B

#29

#28d#29 0:80m=p

A

#28e#29 1:25p

B

m=p

A

MULTIPLE CHOICE 99

Topic,Demand Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,D

6.34 Ambrose's brother Patrick has a utility function U#28x

1;x

2

#29=16x

1=2

1

+x

2

,His income is 82,

the price of good 1 #28nuts#29 is 2 and the price of good 2 #28berries#29 is 1,How many units of nuts will

Patrick demand?

#28a#29 26

#28b#29 12

#28c#29 14

#28d#29 16

#28e#29 30

Topic,Demand Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,D

6.35 Ambrose's brother Sebastian has a utility function U#28x

1;x

2

#29=40x

1=2

1

+x

2

,His income is

110,the price of good 1 #28nuts#29 is 4 and the price of good 2 #28berries#29 is 1,How many units of nuts

will Sebastian demand?

#28a#29 35

#28b#29 21

#28c#29 23

#28d#29 25

#28e#29 48

Topic,Demand Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,A

6.36 Ambrose's brother Bartholomew has a utility function U#28x

1;x

2

#29=40x

1=2

1

+x

2;where x

1

is

his consumption of nuts and x

2

is his consumption of berries,His income is 115,the price of nuts

is 5 and the price of berries is 1,How many units of berries will Bartholomew demand?

#28a#29 35

#28b#29 16

#28c#29 70

#28d#29 22

#28e#29 There is not enough information to determine the answer.

CHAPTER 6 Demand 100

Topic,Demand Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,A

6.37 Ambrose's brother Patrick has a utility function U#28x

1;x

2

#29=48x

1=2

1

+x

2;where x

1

is his

consumption of nuts and x

2

is his consumption of berries,His income is 217,the price of nuts is 3

and the price of berries is 1,How many units of berries will Patrick demand?

#28a#29 25

#28b#29 64

#28c#29 50

#28d#29 70

#28e#29 There is not enough information to determine the answer.

Topic,Demand Di#0Eculty,0

#25 Correct Responses,64 Discrimination Index,29

Correct Answer,E

6.38 Miss Mu#0Bet insists on consuming 2 units of whey per unit of curds,If the price of curds is

3 and the price of whey is 3,then if Miss Mu#0Bett's income is m; her demand for curds will be:

#28a#29 m=3

#28b#29 3m=3

#28c#29 3C +3W=m

#28d#29 3m

#28e#29 m=9

Topic,Demand Di#0Eculty,0

#25 Correct Responses,64 Discrimination Index,29

Correct Answer,E

6.39 Miss Mu#0Bet insists on consuming 2 units of whey per unit of curds,If the price of curds is

3 and the price of whey is 6,then if Miss Mu#0Bett's income is m; her demand for curds will be:

#28a#29 m=3

#28b#29 6m=3

#28c#29 3C +6W=m

#28d#29 3m

#28e#29 m=15

MULTIPLE CHOICE 101

Topic,Demand Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,B

6.40 Casper's utility function is 3x+y; where x is his consumption of cocoa and y is his consump-

tion of cheese,If the total cost of x units of cocoa is x

2; if the price of cheese is 10,and Casper's

income is $260,how many units of cocoa will he consume?

#28a#29 12

#28b#29 15

#28c#29 29

#28d#29 14

#28e#29 30

Topic,Demand Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,B

6.41 Casper's utility function is 3x+y; where x is his consumption of cocoa and y is his consump-

tion of cheese,If the total cost of x units of cocoa is x

2; if the price of cheese is 6,and Casper's

income is $101,how many units of cocoa will he consume?

#28a#29 6

#28b#29 9

#28c#29 17

#28d#29 8

#28e#29 18

Topic,Demand Di#0Eculty,2

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,D

6.42 Let w be the number of whips and j the number of leather jackets,If Kinko's utility function

is U#28x;y#29=minf7w;4w+12jg;then if the price of whips is $20 and the price of leather jackets is

$40,Kinko will demand:

#28a#29 6 times as many whips as leather jackets.

#28b#29 5 times as many leather jackets as whips.

#28c#29 3 times as many whips as leather jackets.

#28d#29 4 times as many whips as leather jackets.

#28e#29 only leather jackets.

CHAPTER 6 Demand 102

Topic,Demand Di#0Eculty,2

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,D

6.43 Let w be the number of whips and j the number of leather jackets,If Kinko's utility function

is U#28x;y#29=minf10w;5w+25jg;then if the price of whips is $20 and the price of leather jackets is

$80,Kinko will demand:

#28a#29 7 times as many whips as leather jackets.

#28b#29 6 times as many leather jackets as whips.

#28c#29 4 times as many whips as leather jackets.

#28d#29 5 times as many whips as leather jackets.

#28e#29 only leather jackets.

Topic,Demand Di#0Eculty,3

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,D

6.44 Between 1980 and 1990,a particular consumer's income increased by 25 percent,while the

price of X and of "all other goods" both increased by 10 percent,It was observed that the con-

sumer's consumption of X and of all other goods both increased by 15 percent,From these facts

we can deduce that:

#28a#29 the consumer did not regard X and "all other goods" as perfect complements.

#28b#29 the consumer's preferences cannot be represented by a Cobb-Douglas utility function.

#28c#29 the consumer's preferences can be represented by a Cobb-Douglas utility function.

#28d#29 the consumer's preferences cannot be represented by a quasilinear utility function.

#28e#29 more than one of the above options is true.

MULTIPLE CHOICE 103

Topic,Demand Di#0Eculty,2

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,A

6.45 John Parker Nosey works for the Internal Revenue Service,He is in charge of auditing in-

come of self-employed people,In anyyear,a person divides his total income between consumption

and saving,John cannot determine people's consumptions,but he is able to determine howmuch

people havesaved over the course of a year,From years of experience,he has learned that people

act as if they are maximizing a utility function of the form U#28c;s#29=10;000 ln c+ s; where c is the

number of dollars worth of consumption in a year and s is the number of dollars saved,Whichof

the following is true?

#28a#29 If someone saves at least $1,000,then that person's income is at least $11,000.

#28b#29 If someone saves nothing,then that person must earn less than $1,000.

#28c#29 If someone saves exactly $1,000,then that person's income must be greater than $1,000 and less than

$10,000.

#28d#29 If someone saves exactly $10,000,then that person must earn exactly $21,000.

#28e#29 If someone saves more than $1,000,then that person's income must be more than $20,000.

Topic,Demand Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,E

6.46 Carlos consumes only two goods,apples and bananas,His utility function is U#28a;b#29=

minfa;bg,Before trade,his initial endowmentisw

a

apples and w

b

bananas,After he trades to his

optimal consumption point at these prices,the relative prices change,Carlos is allowed to make

further trades if he wishes.

#28a#29 Carlos will dde#0Cnitely be better o#0B after the price change.

#28b#29 Carlos will be better o#0B if the price of the good he was selling went up and worse o#0B if the price of the

good he was selling wentdown.

#28c#29 Unless the price of both goods wentdown,we can not tell if Carlos is beter o#0B or worse o#0B.

#28d#29 Carlos will be better o#0B if the price of the good he was selling wentdown and worse o#0B if the price of

the good he was selling went up.

#28e#29 Carlos' utility will not be a#0Bected by the change.

CHAPTER 6 Demand 104

Topic,Demand Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,A

6.47 Carlos consumes only two goods,apples and bananas,His utility function is U#28a;b#29=a

3

b

2

.

Before trade,his initial endowmentisw

a

apples and w

b

bananas,After he trades to his optimal

consumption point at these prices,the relative prices change,Carlos is allowed to make further

trades if he wishes.

#28a#29 Carlos will de#0Cnitely be better o#0B after the price change.

#28b#29 Carlos will be better o#0B if the price of the good he was selling went up and worse o#0B if the price of the

good he was selling wentdown.

#28c#29 Unless the prices of both goods wentdown,we can not tell if Carlos is better o#0B or worse o#0B.

#28d#29 Carlos will be better o#0B if the price of the good he was selling wentdown and worse o#0B if the price of

the good he was selling went up.

#28e#29 Carlos' utility will not be a#0Bected by the change.

Essay Demand

Topic,Demand Di#0Eculty,3

#25 Correct Responses,0 Discrimination Index,0

6.1 Is the following statement true or false? "If consumers spend their entire incomes,it is im-

possible for the income elasticity of demand for every good to be bigger than one." Write a brief,

but convincing explanation of your answer.

Answer,True,If income elasticities of demand for all goods exceed 1,then a 1#25 increase in

income would result in a more than 1#25 increase in expenditures for every good,Therefore total

expenditures would rise by more than 1#25,But this is impossible if the entire budget is spent both

before and after the income increase.

Topic,Demand Di#0Eculty,3

#25 Correct Responses,0 Discrimination Index,0

6.2 Wanda Lott's utility function is U#28x;y#29=maxf2x;yg,Draw some of Wanda's indi#0Berence

curves,If the price of x is 1,the price of y is p and her income is m; howmuch y does Wanda

demand?

Answer,Wanda's indi#0Berence curves are rectangles that are twice as high as they are wide,If

p#3E:5;Wanda demands no y,If p#3C:5;Wanda demands m=p units of y,If p =,5; Wanda is

indi#0Berentbetween her two best options which are buying m units of x and no y or buying 2m units

of y and no x.

Topic,Demand Di#0Eculty,3

#25 Correct Responses,0 Discrimination Index,0

6.3 Martha has the utility function U = minf4x;2yg.Write down her demand function for x as a

function of the variables m; p

x; and p

y;where m is income,p

x

is the price of x and p

y

is the price of y.

Answer,x = m=#28p

x

+2p

y

#29.

Topic,Demand Di#0Eculty,1

#25 Correct Responses,0 Discrimination Index,0

6.4 Brie#0Dy explain in a sentence or twohowyou could tell,a#29 whether a good is a normal good

or an inferior good,b#29 whether a good is a luxury or a necessity,c#29 whether two goods are comple-

ments or substitutes.

Answer,a#29 If prices are left constant and income rises,demand for a normal good will rise and

demand for an inferior good will fall,b#29 If income rises,expenditure on it will rise more or less than

proportionately depending on whether the good is a luxury or necessity respectively,c#29 Two goods

are complements or substitutes depending on whether a rise in the price of one of them increases

or decreases demand for the other.

CHAPTER 6 Demand 106

Topic,Demand Di#0Eculty,1

#25 Correct Responses,0 Discrimination Index,0

6.5 De#0Cne each of the following,a#29 Inverse demand function,b#29 Engel curve.

Answer,The inverse demand function expresses for any quantity the price at which that quantity

can be sold,It is simply the inverse function corresponding to the demand function,An Engel

curve is the graph of the function that expresses quantity demanded as a function of income.

Topic,Demand Di#0Eculty,3

#25 Correct Responses,0 Discrimination Index,0

6.6 Ray Starr has the utility function U#28x;y#29=y=#28100,x#29,a#29 Does Ray prefer more to less

of both goods? b#29 Draw a diagram showing Ray's indi#0Berence curves corresponding to the utility

levels U =1=2;U=1;and U =2,c#29How can you describe the set of indi#0Berence curves for Ray?

d#29 If the price of x is 1 and the price of y is 1,#0Cnd Ray's demand for x as a function of his income

and draw a diagram showing his Engel curve for x.

Answer,a#29 Yes,b#29 These curves are straight lines with the equations x=2+y=50;x+y= 100;

2x + y = 200,c#29 The indi#0Berence curve through any bundle is the straight line passing through

that point and through the point #28100;0#29,The set of all indi#0Berence curves is the star,shaped set

of rays passing through the point #28100;0#29 #28to be more precise; the part of that set that is in the

nonnegative quadrant#29,d#29 If Ray's income is less than 100,he buys y and no x,If his income is

more than 100,he buys x and no y.

Topic,Demand Di#0Eculty,2

#25 Correct Responses,0 Discrimination Index,0

6.7 With some services,e.g,checking accounts,phone service,or pay TV,a consumer is o#0Bered

achoice of two or more payment plans,One can either pay a high "entry fee" and get a low price

per unit of service or payalowentry fee and a high price per unit of service,Suppose you havean

income of $100,There are two plans,Plan A has an entry fee of $20 with a price of $2 per unit.

Plan B has an entry fee of $40 with a price of $1 per unit for using the service,Let x be expenditure

on other goods and y be consumption of the service,a#29 Write down the budget equation that you

would have after you paid the entry fee for each of the two plans,b#29 If your utility function is xy,

howmuch y would you choose in each case? c#29 Which plan would you prefer? Explain.

Answer,a#29 x+2y=80;x+y=60.b#2920; 30 c#29 Plan B,The utility of the bundle chosen with A is

20#0340 = 800 and the utility from the Plan B bundle is 30#0330 = 900.

ESSAY 107

Topic,Demand Di#0Eculty,2

#25 Correct Responses,0 Discrimination Index,0

6.8 Marie's utility function is U#28x;y#29=minf3x +2y;2x+5ygwhere x is the number of units of

sugar she consumes and y is the number of units of spice she consumes,She is currently consum-

ing 12 units of sugar and 40 units of spice and she is spending all of her income,Draw a graph

showing her indi#0Berence curve through this point,The price of spice is 1,In order for this to be

her consumption bundle,what must be the price of sugar and what must her income be?

Answer,Her indi#0Berence curve is a broken line consisting of the outer envelope of the two lines

3x+2y= 116 and 2x+5y= 116,The point #2812;40#29 is on the line 3x+2y= 116,The price of sugar

is 1.5 and her income is 58.

Topic,Demand Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

6.9 Murphy's utility function is U#28x;y#29=minf4x + y;2x+2y;x+4yg,Murphy is consuming 12

units of x and 6 units of y,Draw the indi#0Berence curve through this point,At what points does

this indi#0Berence curvehave kinks? The price of good x is 1,What is the highest possible price for

y? What is the lowest possible price for y?

Answer,The indi#0Berence curve is a broken line extending from #2836;0#29 to #2812;6#29 to #286;12#29 to #280;36#29.

The price of y must be between 1 and 4.

Chapter 7

True-False Revealed Preference

Topic,Revealed Preference Di#0Eculty,2

#25 Correct Responses,95 Discrimination Index,30

Correct Answer,True

7.1 The strong axiom of revealed preference requires that if a consumer chooses x when he can

a#0Bord y; and chooses y when he can a#0Bord z; then he will not choose z when he can a#0Bord x.

Topic,Revealed Preference Di#0Eculty,1

#25 Correct Responses,78 Discrimination Index,10

Correct Answer,True

7.2 Rudolf Rational obeys the weak axiom of revealed preferences,His preferences don't change

over time,One year he could a#0Bord bundle x but bought bundle y,If another year he buys bundle

x; then he can't a#0Bord bundle y.

Topic,Revealed Preference Di#0Eculty,2

#25 Correct Responses,46 Discrimination Index,0

Correct Answer,True

7.3 If a consumer maximizes a utility function subject to a budget constraint and has strictly

convex preferences,then his behavior will necessarily satisfy the weak axiom of revealed preference

and the strong axiom of revealed preference.

Topic,Revealed Preference Di#0Eculty,1

#25 Correct Responses,73 Discrimination Index,37

Correct Answer,True

7.4 The Laspeyres index of prices in period 2 relative to period 1 tells us the ratio of the cost of

buying the period 1 bundle at period 2 prices to the cost of buying the period 1 bundle at period

1 prices.

Topic,Revealed Preference Di#0Eculty,1

#25 Correct Responses,83 Discrimination Index,32

Correct Answer,False

7.5 The Laspeyres price index di#0Bers from the Paasche price index because the Laspeyres index

holds prices constant and varies quantities while the Paasche price index holds quantities constant

and varies prices.

TRUE-FALSE 109

Topic,Revealed Preference Di#0Eculty,2

#25 Correct Responses,36 Discrimination Index,0

Correct Answer,False

7.6 Patience was maximizing her utility subject to her budget constraint,Prices changed and

Patience was less well o#0B than before,Therefore,at the old prices her new bundle must cost less

than her old bundle.

Topic,Revealed Preference Di#0Eculty,1

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,False

7.7 It follows from the weak axiom of revealed preference that if a consumer chooses x when he

could a#0Bord y and chooses y when he could a#0Bord x; then his income must havechanged between

the two observations.

Topic,Revealed Preference Di#0Eculty,2

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,False

7.8 The strong axiom of revealed preference says that if a consumer bought x when he could

have a#0Borded y and y when he could have a#0Borded z; then he will buy x whenever he can a#0Bord z.

Topic,Revealed Preference Di#0Eculty,1

#25 Correct Responses,85 Discrimination Index,8

Correct Answer,False

7.9 An increase in the price of an inferior good makes the people who consume that good better

o#0B.

Topic,Revealed Preference Di#0Eculty,2

#25 Correct Responses,53 Discrimination Index,19

Correct Answer,True

7.10 Prudence was maximizing her utility subject to her budget constraint,Then prices changed.

After the change,she is better o#0B,Therefore the new bundle costs more at the old prices than the

old bundle did.

CHAPTER 7 Revealed Preference 110

Topic,Revealed Preference Di#0Eculty,1

#25 Correct Responses,85 Discrimination Index,21

Correct Answer,False

7.11 The Laspeyres price index di#0Bers from the Paasche price index because the Paasche index

holds prices constant and varies quantities,while the Laspeyres index holds quantities constant and

varies prices.

Topic,Revealed Preference Di#0Eculty,2

#25 Correct Responses,78 Discrimination Index,20

Correct Answer,True

7.12 It is possible for a consumer to satisfy the weak axiom of revealed preference,but violate

the strong axiom of revealed preference.

Topic,Revealed Preference Di#0Eculty,0

#25 Correct Responses,83 Discrimination Index,33

Correct Answer,True

7.13 For a consumer who has an allowance to spend and no endowment of goods,a decrease in

the price of an inferior good consumed makes the consumer better o#0B.

Topic,Revealed Preference Di#0Eculty,2

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,True

7.14 There are two goods,bananas and potatoes,The price of bananas increases and the price

of potatoes decreases,If after the price change a consumer #28whose preferences satisfy WARP#29 can

still exactly a#0Bord her old consumption bundle,then she will consume at least as much potatoes

as before,even if potatoes are a Gi#0Ben good.

Multiple Choice Revealed Preference

Topic,Revealed Preference Di#0Eculty,1

#25 Correct Responses,52 Discrimination Index,29

Correct Answer,E

7.1 Let A stand for the bundle #287;9#29;Bstand for the bundle #2810;5#29; and C stand for the bundle

#286;6#29,When prices are #282;4#29; Bettychooses C,When prices are #2812;3#29 she chooses A,Which of the

following is true?

#28a#29 A is directly revealed preferred to B.

#28b#29 A is indirectly revealed preferred to B.

#28c#29 C is directly revealed preferred to A.

#28d#29 B is directly revealed preferred to A.

#28e#29 None of the above.

Topic,Revealed Preference Di#0Eculty,2

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,B

7.2

Remember that the Laspeyres price index uses the old quantities for the weights,In 1971,good x

cost 5 and good y cost 1,The current price of good x is 7 and the current price of good y is 6,In

1971 the consumption bundle was #28x;y#29=#282;4#29,The current consumption bundle is #28x;y#29=#285;3#29.

The Laspeyres index of current prices relative to 1971 prices is closest to which of the following

numbers?

#28a#29 3.79

#28b#29 2.71

#28c#29 0.26

#28d#29 1.89

#28e#29 1.26

CHAPTER 7 Revealed Preference 112

Topic,Revealed Preference Di#0Eculty,2

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,B

7.3

Remember that the Laspeyres price index uses the old quantities for the weights,In 1971,good x

cost 3 and good y cost 1,The current price of good x is 3 and the current price of good y is 5,In

1971 the consumption bundle was #28x;y#29=#283;5#29,The current consumption bundle is #28x;y#29=#289;4#29.

The Laspeyres index of current prices relative to 1971 prices is closest to which of the following

numbers?

#28a#29 3.36

#28b#29 2.43

#28c#29 0.30

#28d#29 1.52

#28e#29 1.30

Topic,Revealed Preference Di#0Eculty,2

#25 Correct Responses,82 Discrimination Index,30

Correct Answer,B

7.4 Twentyyears ago,Dmitri consumed bread which cost him 10 kopeks a loaf and potatoes

which cost him 14 kopeks a sack,With his income of 208,he bought11loaves of bread and 7 sacks

of potatoes,Today he has an income of 393,Bread now costs him 21 kopeks a loaf and potatoes

cost him 16 kopeks a sack,Assuming his preferences haven't changed #28and the sizes of loaves and

sacks haven't changed#29,when was he better o#0B?

#28a#29 Twentyyears ago

#28b#29 Today

#28c#29 He was equally well o#0B in the two periods.

#28d#29 From the information given here we are unable to tell.

#28e#29 None of the above.

MULTIPLE CHOICE 113

Topic,Revealed Preference Di#0Eculty,2

#25 Correct Responses,82 Discrimination Index,30

Correct Answer,B

7.5 Twentyyears ago,Dmitri consumed bread which cost him 10 kopeks a loaf and potatoes

which cost him 13 kopeks a sack,With his income of 266,he bought11loaves of bread and 12

sacks of potatoes,Today he has an income of 510,Bread now costs him 20 kopeks a loaf and

potatoes cost him 20 kopeks a sack,Assuming his preferences haven't changed #28and the sizes of

loaves and sacks haven't changed#29,when was he better o#0B?

#28a#29 Twentyyears ago

#28b#29 Today

#28c#29 He was equally well o#0B in the two periods.

#28d#29 From the information given here we are unable to tell.

#28e#29 None of the above.

Topic,Revealed Preference Di#0Eculty,1

#25 Correct Responses,81 Discrimination Index,31

Correct Answer,A

7.6 At prices #284;12#29;Harry chooses the bundle #289;4#29.At the prices #288;4#29; Harry chooses the bundle

#282;9#29,Is this behavior consistent with the weak axiom of revealed preference?

#28a#29 Yes

#28b#29 No

#28c#29 It depends on his income.

#28d#29 Wewould have to observe a third choice to be able to say.

#28e#29 None of the above.

Topic,Revealed Preference Di#0Eculty,2

#25 Correct Responses,65 Discrimination Index,45

Correct Answer,A

7.7 When prices are #286;3#29; Holly chooses the bundle #289;18#29 and when prices are #281;2#29; she chooses

the bundle #288;14#29,Which of the following is true?

#28a#29 The bundle #289;18#29 is revealed preferred to the bundle #288;14#29 and she does not violate WARP.

#28b#29 She violates SARP but not WARP.

#28c#29 The bundle #288;14#29 is revealed preferred to the bundle #289;18#29 and she does not violate WARP.

#28d#29 She violates WARP.

#28e#29 None of the above.

CHAPTER 7 Revealed Preference 114

Topic,Revealed Preference Di#0Eculty,2

#25 Correct Responses,65 Discrimination Index,45

Correct Answer,A

7.8 When prices are #283;1#29; Yolanda chooses the bundle #289;21#29 and when prices are #281;3#29; she

chooses the bundle #286;14#29,Which of the following is true?

#28a#29 The bundle #289;21#29 is revealed preferred to the bundle #286;14#29 and she does not violate WARP.

#28b#29 She violates SARP but not WARP.

#28c#29 The bundle #286;14#29 is revealed preferred to the bundle #289;21#29 and she does not violate WARP.

#28d#29 She violates WARP.

#28e#29 None of the above.

Topic,Revealed Preference Di#0Eculty,2

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,A

7.9 Maria consumes strawberries which cost her 10 pesos a box and bananas which cost her 9

pesos a bunch,With her income of 192 pesos she buys 12 boxes of strawberries and 8 bananas.

Daphne,with an income of 170 shillings,consumes strawberries at a cost of 6 shillings each and

bananas at a cost of 12 shillings each,Assuming their preferences are identical:

#28a#29 Maria would prefer Daphne's consumption bundle to her own.

#28b#29 Daphne would prefer Maria's consumption bundle to her own.

#28c#29 they would both be indi#0Berentbetween their own bundles and the other person

0

s bundle.

#28d#29 each prefers her own bundle to the other's.

#28e#29 we can't makeany of the above statements without more information.

Topic,Revealed Preference Di#0Eculty,2

#25 Correct Responses,73 Discrimination Index,53

Correct Answer,B

7.10 In 1971,good x cost 5 and good y cost 1,They now cost 9 and 5 respectively,In 1971

the consumption bundle of x and y was 4 x

0

s and 5 y

0

s.Itisnow9x

0

sand 7 y

0

s,Calculate the

Laspeyres index of current prices relative to 1971 prices rounded to one decimal place,#28Remember

the Laspeyres index uses the old quantities for weights.#29

#28a#29,5

#28b#29 2.4

#28c#29 2.5

#28d#29 2.2

#28e#29 None of the above.

MULTIPLE CHOICE 115

Topic,Revealed Preference Di#0Eculty,2

#25 Correct Responses,29 Discrimination Index,58

Correct Answer,B

7.11 Carlos has at one time or another lived in Argentina,Bolivia,and Colombia,He buys only

two goods,x and y,In Argentina the prices were #289;3#29 and he consumed the bundle #286;7#29,In

Bolivia he consumed #289;2#29,In Colombia he consumed the bundle #286;5#29 at the prices #283;3#29,Which

of the following is true?

#28a#29 The Argentine bundle is directly revealed preferred to the Bolivian bundle.

#28b#29 The Argentine bundle is indirectly revealed preferred to the Bolivian bundle.

#28c#29 The Colombian bundle is directly revealed preferred to the Argentine bundle.

#28d#29 The Bolivian bundle is indirectly revealed preferred to the Argentine bundle.

#28e#29 None of the above.

Topic,Revealed Preference Di#0Eculty,2

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,A

7.12 Prudence is careful to plan ahead,She is going to Paris next year to study.To protect

herself from exchange rate #0Ductuations,she bought a futures contract for the number of francs she

plans to spend next year,given current prices,When she arrives in Paris,she can cash in her

contract for this many francs no matter what the exchange rate is,If the value of the franc relative

to the dollar should happen to fall before she gets to Paris:

#28a#29 she will be at least as well o#0B and probably better o#0B than if the exchange rate hadn't changed.

#28b#29 she will be worse o#0B than if exchange rates hadn't changed.

#28c#29 she will be exactly as well o#0B as if exchange rates hadn't changed.

#28d#29 she might be better o#0B or she mightbeworse o#0B,depending on whether she planned to spend more or

less than she does at home.

CHAPTER 7 Revealed Preference 116

Topic,Revealed Preference Di#0Eculty,2

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,B

7.13 Jose consumes rare books which cost him 8 pesos each and pieces of antique furniture which

cost him 10 pesos each,He spends his entire income to buy 9 rare books and 11 pieces of antique

furniture,Nigel has the same preferences as Jose but faces di#0Berent prices and has a di#0Berent

income,Nigel has an income of 162 pounds,He buys rare books at a cost of 4 pounds each and

pieces of antique furniture at a cost of 11 pounds each.

#28a#29 Nigel would prefer Jose's bundle to his own.

#28b#29 Jose would prefer Nigel's bundle to his own.

#28c#29 Neither would prefer the other's bundle to his own.

#28d#29 Each prefers the other's bundle to his own.

#28e#29 We can't tell whether either would prefer the other's bundle without knowing what quantities Nigel

consumes.

Topic,Revealed Preference Di#0Eculty,2

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,D

7.14 Twentyyears ago,Amanda consumed cans of motor oil which cost her 6 pesos each and

gallons of gasoline which cost her 14 pesos each,With her income of 112 pesos,she bought 7 cans

of motor oil and 5 gallons of gasoline,Today she has an income of 230 pesos,Cans of motor oil

now cost 10 pesos each and gallons of gasoline now cost 32 pesos each,Assuming her preferences

haven't changed,she:

#28a#29 is de#0Cnitely better o#0B than she was 20 years ago.

#28b#29 was de#0Cnitely better o#0B 20 years ago than she is now.

#28c#29 is just as well o#0B as she was 20 years ago.

#28d#29 maybe be either better or worse o#0B now than 20 years ago,There is not enough informationto determine

which is the case.

#28e#29 is behaving irrationally.

MULTIPLE CHOICE 117

Topic,Revealed Preference Di#0Eculty,1

#25 Correct Responses,83 Discrimination Index,0

Correct Answer,B

7.15 When prices are #282;4#29; Ms,Consumer chooses the bundle #287;9#29; and when prices are #2815;3#29;

she chooses the bundle #2810;3#29,Is her behavior consistent with the weak axiom of revealed prefer-

ence?

#28a#29 Yes

#28b#29 No

#28c#29 Wewould have to observe a third choice to be able to say.

#28d#29 We can't tell because we are not told her income in the two cases.

#28e#29 None of the above.

Topic,Revealed Preference Di#0Eculty,2

#25 Correct Responses,35 Discrimination Index,20

Correct Answer,B

7.16 Stan Ford currently spends $100 a week on entertainment,A rich uncle o#0Bers him a choice

between a $50 a week allowance and the opportunity to buy all of his entertainment at half price.

Stan has no kinks in his di#0Berence curves,Stan would:

#28a#29 prefer the $50 allowance.

#28b#29 prefer the half-price subsidy.

#28c#29 be indi#0Berentbetween the allowance and the subsidy.

#28d#29 prefer the subsidy if entertainment is a normal good and otherwise be indi#0Berent.

#28e#29 prefer the allowance if entertainment is an inferior good but otherwise prefer the subsidy.

Topic,Revealed Preference Di#0Eculty,2

#25 Correct Responses,81 Discrimination Index,38

Correct Answer,A

7.17 When prices are #282;10#29; Emil chooses the bundle #281;6#29 and when prices are #2812;4#29; he chooses

the bundle #287;2#29,Which of the following is necessarily true?

#28a#29 Emil violates WARP.

#28b#29 Emil has kinked indi#0Berence curves.

#28c#29 The bundle #281;6#29 is revealed preferred to #287;2#29; but #287;2#29 is not revealed preferred to #281;6#29.

#28d#29 The bundle #287;2#29 is revealed preferred to #281;6#29; but #281;6#29 is not revealed preferred to #287;2#29.

#28e#29 None of the above.

CHAPTER 7 Revealed Preference 118

Topic,Revealed Preference Di#0Eculty,2

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,B

7.18 Desmond has lived in Australia,Belgium and Canada,His tastes never changed but his

income and prices did,In Australia his commodity bundle was #28x

1;x

2

#29=#287;8#29; in Belgium it was

#289;4#29 and in Canada it was #287;5#29,Prices in Canada were #28p

1;p

2

#29=#283;3#29 and in Australia prices were

#28p

1;p

2

#29 = #2816;4#29.

#28a#29 Desmond's consumption in Australia is directly revealed prefered to his consumption in Belgium.

#28b#29 His consumption in Australia is indirectly revealed preferred to his consumption in Belgium.

#28c#29 His consumption in Australia is indirectly but not directly revealed preferred to his consumption in

Canada.

#28d#29 We can't tell if he was better o#0B in Belgium or in Australia.

#28e#29 None of the above.

Topic,Revealed Preference Di#0Eculty,1

#25 Correct Responses,87 Discrimination Index,35

Correct Answer,D

7.19 If all prices increase by 20#25:

#28a#29 the Paasche price index increases by more than 20#25 and the Laspeyres price index increases by less than

20#25.

#28b#29 the Laspeyres price index increases by more than 20#25 and the Paasche price index increases by less than

20#25.

#28c#29 both the Paasche price index and the Laspeyres price index increase by more than 20#25.

#28d#29 both the Paasche price index and the Laspeyres price index increase by exactly 20#25.

#28e#29 both the Paasche price index and the Laspeyres price index increase by less than 20#25.

MULTIPLE CHOICE 119

Topic,Revealed Preference Di#0Eculty,3

#25 Correct Responses,26 Discrimination Index,43

Correct Answer,C

7.20 A student spends all of her income on pizza and books,When pizzas cost $3 each and books

cost $10 each,she consumed 30 pizzas and 3 books per month,The price of pizzas fell to $2.90

each while the price of books rose to $11 each,The price change:

#28a#29 made her worse o#0B.

#28b#29 left her exactly as well o#0B as before.

#28c#29 left her at least as well o#0B as before and possibly helped her.

#28d#29 mighthave helped her,mighthave harmed her,We can't tell which unless we observe what she consumed

after the price change.

#28e#29 had the same e#0Bect as a $3 increase in her income.

Topic,Revealed Preference Di#0Eculty,1

#25 Correct Responses,59 Discrimination Index,42

Correct Answer,C

7.21 A consumer's behavior was observed in three situations with di#0Berent prices and incomes.

In Situation 1,she chose a bundle that cost $1,600,In Situation 2,she chose a bundle that cost

$2,500,In Situation 3,she chose a bundle that cost $3,100,The bundle purchased in Situation 2

would cost $1,200 at Situation 1 prices,The bundle purchased in Situation 3 cost $2,000 at Situa-

tion 2 prices,This consumer's behavior is known to satisfy the strong axiom of revealed preference.

Therefore:

#28a#29 the bundle purchased in Situation 1 must cost less than $3,100 at Situation 3 prices.

#28b#29 the bundle purchased in Situation 3 must cost at least $3,100 at Situation 1 prices.

#28c#29 the bundle purchased in Situation 1 can not cost less than $3,100 at Situation 3 prices.

#28d#29 the bundle purchased in Situation 2 must cost at least $3,100 at Situation 1 prices.

#28e#29 None of the above.

CHAPTER 7 Revealed Preference 120

Topic,Revealed Preference Di#0Eculty,2

#25 Correct Responses,51 Discrimination Index,18

Correct Answer,B

7.22 Recall that the Laspeyres price index uses the old bundle as weights and the Paasche price in-

dex uses the new bundle as weights,If the prices of all goods double and your income triples,then:

#28a#29 your income increase has exceeded the increase in the Laspeyres P.I,but may not have exceeded the

increase in the Paasche P.I.

#28b#29 your income increase has exceeded the increase in the Laspeyres P.I,and has also exceeded the increase

in the Paasche P.I.

#28c#29 your incomeincrease has exceeded the increase in the Paasche P.I.but maynot have exceeded the increase

in the Laspeyres P.I.

#28d#29 you would need to know the old and new consumption bundles to compare your income change with the

change in price indexes.

#28e#29 None of the above.

Topic,Revealed Preference Di#0Eculty,1

#25 Correct Responses,64 Discrimination Index,20

Correct Answer,C

7.23 If the governmentgaveyou a subsidy of $100 per month that you had to spend on hous-

ing and if you could spend the remainder of your income in anywayyou wished,the e#0Bect of the

subsidy would di#0Ber from the e#0Bect of a $100 per month unrestricted increase in your income only if:

#28a#29 housing were an inferior good for you.

#28b#29 housing were a normal good for you.

#28c#29 you would spend less than $100 per month on housing when you received the unrestricted $100 monthly

increase in your income.

#28d#29 you would spend more than $100 per month on housing when you received the unrestricted $100 monthly

increase in your income.

#28e#29 your preferences were homothetic.

MULTIPLE CHOICE 121

Topic,Revealed Preference Di#0Eculty,3

#25 Correct Responses,30 Discrimination Index,0

Correct Answer,A

7.24 When the prices were #285;1#29; Vanessa chose the bundle #28x;y#29=#286;3#29.Now at the new prices,

#28p

x;p

y

#29;she chooses the bundle #28x;y#29=#285;7#29.For Vanessa's behavior to be consistent with the weak

axiom of revealed preference,it must be that:

#28a#29 4p

y

#3Cp

x

.

#28b#29 p

x

#3C 4p

y

.

#28c#29 5p

y

#3Cp

x

.

#28d#29 p

y

=5p

x

.

#28e#29 None of the above.

Topic,Revealed Preference Di#0Eculty,3

#25 Correct Responses,30 Discrimination Index,0

Correct Answer,A

7.25 When the prices were #283;1#29; Zelda chose the bundle #28x;y#29=#288;7#29.Now at the new prices,

#28p

x;p

y

#29;she chooses the bundle #28x;y#29=#287;9#29.For Zelda's behavior to be consistent with the weak

axiom of revealed preference,it must be that:

#28a#29 2p

y

#3Cp

x

.

#28b#29 p

x

#3C 2p

y

.

#28c#29 3p

y

#3Cp

x

.

#28d#29 p

y

=3p

x

.

#28e#29 None of the above.

CHAPTER 7 Revealed Preference 122

Topic,Revealed Preference Di#0Eculty,3

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,A

7.26

At prices #28p

1;p

2

#29=#284;1#29; George buys the bundle #28x

1;x

2

#29 = #2810;20#29.At prices #28p

0

1;p

0

2

#29=#281;4#29; he

buys the bundle #28x

0

1;x

0

2

#29=#284;14#29.At prices #28p

00

1;p

00

2

#29; he buys the bundle #28x

00

1;x

00

2

#29 = #2820;10#29,If his

preferences satisfy the strong axiom of revealed preferences,then it must be that:

#28a#29 10p

00

1

#3C 10p

00

2

#28b#29 10p

00

1

#3C 8p

2

#28c#29 8p

1

#3E 8p

2

#28d#29 p

00

1

= p

00

2

#28e#29 None of the above.

Topic,Revealed Preference Di#0Eculty,3

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,A

7.27

At prices #28p

1;p

2

#29=#283;1#29; Chen buys the bundle #28x

1;x

2

#29 = #2810;18#29.At prices #28p

0

1;p

0

2

#29=#281;3#29; he

buys the bundle #28x

0

1;x

0

2

#29=#283;15#29.At prices #28p

00

1;p

00

2

#29; he buys the bundle #28x

00

1;x

00

2

#29 = #2821;9#29,If his

preferences satisfy the strong axiom of revealed preferences,then it must be that:

#28a#29 11p

00

1

#3C 9p

00

2

#28b#29 11p

00

1

#3C 6p

2

#28c#29 6p

1

#3E 9p

2

#28d#29 p

00

1

= p

00

2

#28e#29 None of the above.

MULTIPLE CHOICE 123

Topic,Revealed Preference Di#0Eculty,3

#25 Correct Responses,4 Discrimination Index,0

Correct Answer,B

7.28 Tonal is a travelling substitute orchestra conductor,Eachyear,he starts in Ann Arbor,

moves to Brownsville,then to Carson City,...,and so on until he reaches Zilvania,Ohio,after which

he returns to Ann Arbor,He gets a salary according to the following simple rule,In Brownsville

he is paid what his Ann Arbor consumption bundle would cost in Brownsville,In Carson City,

he is paid what his Brownsville bundle would cost in Carson City,and so on,After 26 two-week

stints,he returns to Ann Arbor,where he is paid the cost in Ann Arbor of his Zilvania bundle,At

each stop,he spends his entire salary on apples #28A#29 and paperback books #28B#29,so as to maximize

the utility U = AB.Over the course of the year,his utility will:

#28a#29 be constantatevery stop.

#28b#29 increase at every stop where relative prices are di#0Berent from the previous stop.

#28c#29 decrease at every stop where relative prices are di#0Berent from the previous stop.

#28d#29 increase or decrease depending on whether the Paasche price index goes down or up between stops.

#28e#29 increase or decrease depending on whether the Laspeyres price index goes down or up between stops.

Topic,Revealed Preference Di#0Eculty,3

#25 Correct Responses,44 Discrimination Index,38

Correct Answer,A

7.29 If the only information wehave about Goldie is that she chooses the bundle #286;6#29 when

prices are #286;6#29 and she chooses the bundle #2810;0#29 when prices are #284;5#29; then we can conclude that:

#28a#29 the bundle #286;6#29 is revealed preferred to #2810;0#29 but there is no evidence that she violates WARP.

#28b#29 neither bundle is revealed preferred to the other.

#28c#29 Goldie violates WARP.

#28d#29 the bundle #2810;0#29 is revealed preferred to #286;6#29 and she violates WARP.

#28e#29 the bundle #2810;0#29 is revealed preferred to #286;6#29 and there is no evidence that she violates WARP.

Topic,Revealed Preference Di#0Eculty,3

#25 Correct Responses,44 Discrimination Index,38

Correct Answer,A

7.30 If the only information wehave about Goldie is that she chooses the bundle #286;6#29 when

prices are #286;7#29 and she chooses the bundle #2810;0#29 when prices are #287;5#29; then we can conclude that:

#28a#29 the bundle #286;6#29 is revealed preferred to #2810;0#29 but there is no evidence that she violates WARP.

#28b#29 neither bundle is revealed preferred to the other.

#28c#29 Goldie violates WARP.

#28d#29 the bundle #2810;0#29 is revealed preferred to #286;6#29 and she violates WARP.

#28e#29 the bundle #2810;0#29 is revealed preferred to #286;6#29 and there is no evidence that she violates WARP.

CHAPTER 7 Revealed Preference 124

Topic,Revealed Preference Di#0Eculty,2

#25 Correct Responses,46 Discrimination Index,6

Correct Answer,C

7.31 Pierre's friend Henri lives in a town where he has to pay 3 francs per glass of wine and 5

francs per loaf of bread,Henri consumes 5 glasses of wine and 4 loaves of bread per day,Bob has

an income of $15 per day and pays $.50 per loaf of bread and $2 per glass of wine,If Bob has the

same tastes as Henri,and if the only thing that either of them cares about is consumption of bread

and wine,we can deduce:

#28a#29 nothing about whether one is better o#0B than the other.

#28b#29 that Henri is better o#0B than Bob.

#28c#29 that Bob is better o#0B than Henri.

#28d#29 that both of them violate the weak axiom of revealed preferences.

#28e#29 that Bob and Henri are equally well o#0B.

Topic,Revealed Preference Di#0Eculty,2

#25 Correct Responses,46 Discrimination Index,6

Correct Answer,C

7.32 Pierre's friend Henri lives in a town where he has to pay 3 francs per glass of wine and 6

francs per loaf of bread,Henri consumes 9 glasses of wine and 4 loaves of bread per day,Bob has

an income of $15 per day and pays $.50 per loaf of bread and $2 per glass of wine,If Bob has the

same tastes as Henri,and if the only thing that either of them cares about is consumption of bread

and wine,we can deduce:

#28a#29 nothing about whether one is better o#0B than the other.

#28b#29 that Henri is better o#0B than Bob.

#28c#29 that Bob is better o#0B than Henri.

#28d#29 that both of them violate the weak axiom of revealed preferences.

#28e#29 that Bob and Henri are equally well o#0B.

MULTIPLE CHOICE 125

Topic,Revealed Preference Di#0Eculty,2

#25 Correct Responses,86 Discrimination Index,31

Correct Answer,A

7.33 Consider the case of Ronald,Let the prices and consumptions in the base year be as in

Situation D; where p

1

=3;p

2

=1;x

1

=5;and x

2

=15,If in the currentyear,the price of good 1

s1 and the price of good 2 is 2,and Ronald's current c consumptions of good 1 and good 2 are 25

and 25 respectively,what is the Laspeyres price index of current prices relative to base year prices?

#28Pick the most nearly correct answer.#29

#28a#29 1.17

#28b#29 2.50

#28c#29 0.75

#28d#29 0.50

#28e#29 1.75

Topic,Revealed Preference Di#0Eculty,2

#25 Correct Responses,86 Discrimination Index,31

Correct Answer,A

7.34 Consider the case of Ronald,Let the prices and consumptions in the base year be as in

Situation D; where p

1

=3;p

2

=1;x

1

=5;and x

2

=15,If in the currentyear,the price of good 1

s1 and the price of good 2 is 1,and Ronald's current c consumptions of good 1 and good 2 are 25

and 10 respectively,what is the Laspeyres price index of current prices relative to base year prices?

#28Pick the most nearly correct answer.#29

#28a#29 0.67

#28b#29 1.17

#28c#29 0.50

#28d#29 0.25

#28e#29 1

CHAPTER 7 Revealed Preference 126

Topic,Revealed Preference Di#0Eculty,2

#25 Correct Responses,86 Discrimination Index,44

Correct Answer,A

7.35 On the planet,Homogenia,every consumer who has ever lived consumes only two goods x

and y and has the utility function U#28x;y#29=xy,The currency in Homogenia is the fragel,In this

country in 1900,the price of good 1 was 1 fragel and the price of good 2 was 2 fragels,Per capita

income was 96 fragels,In 1990,the price of good 1 was 4 fragels and the price of good 2 was 5

fragels,The Laspeyres price index for the price level in 1990 relative to the price level in 1900 is:

#28a#29 3.25.

#28b#29 4.50.

#28c#29 3.

#28d#29 5.25.

#28e#29 not possible to determine from this information.

Topic,Revealed Preference Di#0Eculty,2

#25 Correct Responses,86 Discrimination Index,44

Correct Answer,A

7.36 On the planet,Homogenia,every consumer who has ever lived consumes only two goods x

and y and has the utility function U#28x;y#29=xy,The currency in Homogenia is the fragel,In this

country in 1900,the price of good 1 was 1 fragel and the price of good 2 was 2 fragels,Per capita

income was 84 fragels,In 1990,the price of good 1 was 1 fragels and the price of good 2 was 1

fragels,The Laspeyres price index for the price level in 1990 relative to the price level in 1900 is:

#28a#29 0.75.

#28b#29 1.

#28c#29 0.67.

#28d#29 1.25.

#28e#29 not possible to determine from this information.

MULTIPLE CHOICE 127

Topic,Revealed Preference Di#0Eculty,2

#25 Correct Responses,74 Discrimination Index,56

Correct Answer,A

7.37 On the planet,Hyperion,every consumer who has ever lived has a utility function U#28x;y#29=

minfx;2yg,The currency of Hyperion is the doggerel,In 1850 the price of x was 1 doggerel per

unit and the price of y was 2 doggerels per unit,In 1990,the price of x was 11 doggerels per unit

and the price of y was 4 doggerels per unit,The Paasche price index of prices in 1990 relativeto

prices in 1850 is:

#28a#29 6.50.

#28b#29 5.

#28c#29 2.75.

#28d#29 3.75.

#28e#29 not possible to determine without further information.

Topic,Revealed Preference Di#0Eculty,2

#25 Correct Responses,74 Discrimination Index,56

Correct Answer,A

7.38 On the planet,Hyperion,every consumer who has ever lived has a utility function U#28x;y#29=

minfx;2yg,The currency of Hyperion is the doggerel,In 1850 the price of x was 1 doggerel per

unit and the price of y was 2 doggerels per unit,In 1990,the price of x was 7 doggerels per unit

and the price of y was 4 doggerels per unit,The Paasche price index of prices in 1990 relativeto

prices in 1850 is:

#28a#29 4.50.

#28b#29 3.67.

#28c#29 1.75.

#28d#29 2.75.

#28e#29 not possible to determine without further information.

CHAPTER 7 Revealed Preference 128

Topic,Revealed Preference Di#0Eculty,0

#25 Correct Responses,69 Discrimination Index,32

Correct Answer,D

7.39 Howard Send is deciding whether to keep his car when he moves to New York City.To

operate his car for a year,he would havetopay a #0Dat fee of $6,000 for auto insurance and parking,

plus 20 cents for every mile that he drives for gasoline and repairs,Alternatively,he could give his

car to his brother-in-law in Bu#0Balo #28the market value of the car is negligible#29 and take taxicabs in

New York,which costs $1 a mile,Howard knows that if he took the car to New York,he would

drive 6500 miles per year,If he places no value,positive or negative,on his brother,in,law getting

the car and if he is indi#0Berentbetween riding a cab and driving,he should:

#28a#29 keep his car if he wouldn't want to travel as much as 6500 miles by cab.

#28b#29 give his car awayifhewouldn't travel more than 6000 miles by cab but keep it if he would travel more

than 6000 miles by cab.

#28c#29 keep his car if he would travel more than 6,000 but less than 6,500 miles by cab.

#28d#29 give his car away.

#28e#29 There is not enough information given here to allow one to give him reasonable advice about what to do.

Topic,Budgets Di#0Eculty,0

#25 Correct Responses,2 Discrimination Index,0

Correct Answer,A

7.40 Franco and Gianni have the same tastes and consume only two goods,wine and pizza.

Franco lives in Milano and spends 100,000 lire per week,It costs him 5,000 lire for a bottle of wine

and 5,000 lire for a pizza,Gianni lives in Napoli,It costs him 4,000 lire for a bottle of wine and

6,000 lire for a pizza,At those prices,he chooses to buy 10 bottles of wine and 6 pizzas per week.

From this information,we can deduce that:

#28a#29 Franco is better o#0B with his own budget than he would be with Gianni's.

#28b#29 Gianni is better o#0B with his own budget than he would be with Franco's.

#28c#29 Franco and Gianni violate WARP.

#28d#29 Franco and Gianni are equally well o#0B.

#28e#29 There is not enough information to determine whether either would prefer the other's bundle.

MULTIPLE CHOICE 129

Topic,Revealed Preference Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,C

7.41 Hillary has an initial endowment of $500 and is interested in two things,how many visits

she can make to the doctor,and money left over to spend on other things,When a trip to the

doctor costs $50,Hillary sees the doctor 7 times,After health care reform,a visit to the doctor

will cost $10 but her taxes will rise by $360.

#28a#29 Hillary will be made better o#0B by health care reform.

#28b#29 Hillary will be made worse o#0B by health care reform.

#28c#29 We cannot tell how health care reform will a#0Bect Hillary.

#28d#29 Hillary violates the Weak Axiom of Revealed Preference.

Topic,Revealed Preference Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,C

7.42 Hillary has an initial endowment of $500 and is interested in two things,how many visits

she can make to the doctor,and money left over to spend on other things,When a trip to the

doctor costs $60,Hillary sees the doctor 4 times,After health care reform,a visit to the doctor

will cost $10 but her taxes will rise by $290.

#28a#29 Hillary will be made better o#0B by health care reform.

#28b#29 Hillary will be made worse o#0B by health care reform.

#28c#29 We cannot tell how health care reform will a#0Bect Hillary.

#28d#29 Hillary violates the Weak Axiom of Revealed Preference.

Chapter 8

True-False Slutsky Equation

Topic,Slutsky Equation Di#0Eculty,1

#25 Correct Responses,86 Discrimination Index,24

Correct Answer,True

8.1 A Gi#0Ben good must be an inferior good.

Topic,Slutsky Equation Di#0Eculty,1

#25 Correct Responses,80 Discrimination Index,28

Correct Answer,False

8.2 If a good is an inferior good,then an increase in its price will increase the demand for it.

Topic,Slutsky Equation Di#0Eculty,1

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,False

8.3 The compensated demand function refers to the demand function of someone who is ade-

quately paid for what he or she sells.

Topic,Slutsky Equation Di#0Eculty,2

#25 Correct Responses,55 Discrimination Index,26

Correct Answer,False

8.4 The Slutsky substitution e#0Bect measures the movementbetween two points on the same

indi#0Berence curve.

Topic,Slutsky Equation Di#0Eculty,2

#25 Correct Responses,45 Discrimination Index,9

Correct Answer,False

8.5 In the case of homothetic preferences the entire change in demand from a price change is due

to the substitution e#0Bect.

Topic,Slutsky Equation Di#0Eculty,1

#25 Correct Responses,86 Discrimination Index,28

Correct Answer,True

8.6 If two goods x and y are perfect complements,then if the price of x falls,the entire change

in the demand for x is due to the income e#0Bect.

TRUE-FALSE 131

Topic,Slutsky Equation Di#0Eculty,1

#25 Correct Responses,84 Discrimination Index,19

Correct Answer,True

8.7 If the Engel curve slopes up,then the demand curve slopes down.

Topic,Slutsky Equation Di#0Eculty,1

#25 Correct Responses,54 Discrimination Index,10

Correct Answer,False

8.8 A rational consumer prefers more of good x to less,If the price of good x rises and the prices

of all other goods remain constant,then the consumer must necessarily demand less of x.

Topic,Slutsky Equation Di#0Eculty,1

#25 Correct Responses,69 Discrimination Index,45

Correct Answer,False

8.9 When the price of a good rises and income remains constant,there is a substitution e#0Bect on

demand but there cannot be an income e#0Bect.

Topic,Slutsky Equation Di#0Eculty,2

#25 Correct Responses,65 Discrimination Index,35

Correct Answer,True

8.10 Ivan spends his entire income on two goods,One of them is a Gi#0Ben good,If the price of

the Gi#0Ben good rises,demand for the other good must fall.

Topic,Slutsky Equation Di#0Eculty,1

#25 Correct Responses,85 Discrimination Index,21

Correct Answer,False

8.11 An increase in the price of a Gi#0Ben good makes the people who consume that good better

o#0B.

Topic,Slutsky Equation Di#0Eculty,2

#25 Correct Responses,71 Discrimination Index,2

Correct Answer,True

8.12 Jessica's preferences for peanut butter and jelly are represented by the utility function

U#28p;j#29=minf2p;5jg,If prices and income change,but her old consumption bundle lies somewhere

on her new budget line,she will not change her consumption.

CHAPTER 8 Slutsky Equation 132

Topic,Slutsky Equation Di#0Eculty,2

#25 Correct Responses,67 Discrimination Index,39

Correct Answer,False

8.13 Jimmy's utility function is U#28a;b#29=ab where a is his consumption of apples and b is his

consumption of bananas,If prices and income change in suchaway that Jimmy's old consumption

lies on his new budget line,then Jimmy will not change his consumption bundle.

Topic,Slutsky Equation Di#0Eculty,0

#25 Correct Responses,56 Discrimination Index,8

Correct Answer,True

8.14 Suppose a consumer has strictly convex preferences and her Engel curve for a good is a

vertical line for some range of income,In that same income range,her demand curve for the good

slopes down.

Topic,Slutsky Equation Di#0Eculty,2

#25 Correct Responses,42 Discrimination Index,0

Correct Answer,True

8.15 John purchases two goods,x and y,Good x is an inferior good for some range of income.

There must be another range of income for which good x is a normal good.

Topic,Slutsky Equation Di#0Eculty,2

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,True

8.16 A consumer has the utility function U#28x;y#29=x+2y

1=2

,The price of good x is 2 and the

price of good y is 1,The consumer's income is 20,If the price of good y rises to 2,then entire

change in demand for y is due to the substitution e#0Bect.

Topic,Slutsky Equation Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,True

8.17 The Hicks version of the substitution e#0Bect of a price change measures the change in a

consumer's demand if the consumer's income were changed just enough so the consumer would

remain on the same indi#0Berence curve as before the price change.

Multiple Choice Slutsky Equation

Topic,Slutsky Equation Di#0Eculty,3

#25 Correct Responses,67 Discrimination Index,46

Correct Answer,B

8.1 Cindy consumes goods x and y,Her demand for x is given by x#28p

x;m#29=0:05m,5:15p

x

.Now

her income is 419,the price of x is 3,and the price of y is 1,If the price of x rises to 4 and if we

denote the income e#0Bect on her demand for x by DI and the substitution e#0Bect on her demand for

x by DS,then:

#28a#29 DI =,0:28 and DS =,0:52.

#28b#29 DI =,0:28 and DS =,4:88.

#28c#29 DI =,0:52 and DS =,0:52.

#28d#29 DI = 0 and DS =,2:00.

#28e#29 None of the above.

Topic,Slutsky Equation Di#0Eculty,3

#25 Correct Responses,67 Discrimination Index,46

Correct Answer,B

8.2 Cindy consumes goods x and y,Her demand for x is given by x#28p

x;m#29=0:05m,5:25p

x

.Now

her income is 545,the price of x is 4,and the price of y is 1,If the price of x rises to 5 and if we

denote the income e#0Bect on her demand for x by DI and the substitution e#0Bect on her demand for

x by DS,then:

#28a#29 DI =,0:31 and DS =,0:52.

#28b#29 DI =,0:31 and DS =,4:94.

#28c#29 DI =,0:52 and DS =,0:52.

#28d#29 DI = 0 and DS =,2:00.

#28e#29 None of the above.

CHAPTER 8 Slutsky Equation 134

Topic,Slutsky Equation Di#0Eculty,1

#25 Correct Responses,53 Discrimination Index,30

Correct Answer,C

8.3 Walt considers x and y to be perfect substitutes,They originally cost 10 and 9 respectively.

His income is 720,One day the price of x drops to 8,Which of the following is true?

#28a#29 The income e#0Bect increases the quantityofyby 90.

#28b#29 The substitution e#0Bect increases the quantityofyby 80.

#28c#29 The substitution e#0Bect increases the quantityofxby 90.

#28d#29 The income e#0Bect increases the quantityofxby 80.

#28e#29 None of the above.

Topic,Slutsky Equation Di#0Eculty,2

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,A

8.4 Ernest's income elasticity of demand for natural gas is,4,His price elasticity of demand for

natural gas is,:3; and he spends 10#25 of his income on natural gas,What is his substitution price

elasticity?

#28a#29,:26

#28b#29,:34

#28c#29,20

#28d#29,:12

#28e#29 None of the above.

Topic,Slutsky Equation Di#0Eculty,2

#25 Correct Responses,10 Discrimination Index,2

Correct Answer,A

8.5 Suppose that bananas are a normal good and Woody is currently consuming 100 bananas at

a price of 10 cents each.

#28a#29 His Slutsky compensated demand curve going through this point is steeper than his ordinary demand

curve.

#28b#29 His ordinary demand curve going through this point is steeper than his Slutsky compensated demand

curve.

#28c#29 His ordinary demand curve is steeper to the left and his Slutsky compensated demand curve is steeper

to the right of this point.

#28d#29 Whether his ordinary demand curve or his compensated demand curve is steeper,depends on whether

his price elasticity is greater than 1.

#28e#29 None of the above.

MULTIPLE CHOICE 135

Topic,Slutsky Equation Di#0Eculty,2

#25 Correct Responses,68 Discrimination Index,21

Correct Answer,C

8.6 The following can be said about the income and substitution e#0Bects of a price increase on

the demand for the good whose price rose:

#28a#29 The former is always positive and the latter is always negative.

#28b#29 Both can be either positive or negative.

#28c#29 While the latter is always negative,the former can be either positive or negative.

#28d#29 While the former is always negative,the latter can be either positive or negative.

#28e#29 The former can at times be negative,but it will never overwhelm the latter.

Topic,Slutsky Equation Di#0Eculty,3

#25 Correct Responses,57 Discrimination Index,21

Correct Answer,A

8.7 In 1989,Bruce spent his income on two goods x and y,Between 1989 and 1990,the price of

good x rose by 8 per cent and the price of good y rose by8percent,In 1990,Bruce bought the

same amountofxas he bought in 1989,but he bought more of good y than he had bought in 1989.

From these facts,we conclude that:

#28a#29 y is a normal good.

#28b#29 y is an inferior good.

#28c#29 x is an inferior good.

#28d#29 nothing can be said about inferiority or superiority,since we don't know what happened to income.

#28e#29 Bruce is acting irrationally,since the relative prices of x and y did not change.

Topic,Slutsky Equation Di#0Eculty,1

#25 Correct Responses,36 Discrimination Index,59

Correct Answer,E

8.8 When the price of x rises,Marvin responds bychanging his demand for x,The substitution

e#0Bect is the part of this change that represents his change in demand:

#28a#29 holding the prices of substitutes constant.

#28b#29 if he is allowed to substitute as much x for y as he wishes.

#28c#29 if his money income is held constant when the price of x changes.

#28d#29 if the prices of all other goods are held constant.

#28e#29 none of the above.

CHAPTER 8 Slutsky Equation 136

Topic,Slutsky Equation Di#0Eculty,1

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,B

8.9 Polly consumes crackers and fruit,The price of fruit rose and the price of crackers stayed

constant,The income e#0Bect on Polly's demand is:

#28a#29 zero because Polly's income didn't change.

#28b#29 the change in Polly's demand if her income is decreased by the change in the price of fruit times her old

consumption of fruit.

#28c#29 the change in Polly's demand if her income is decreased by the total amount she used to spend on fruit.

#28d#29 the change in Polly's demand if her income is increased by the amount she used to spend on fruit.

#28e#29 the change in Polly's demand if her income is increased by the change in the price of fruit times the

amount she used to buy.

Topic,Slutsky Equation Di#0Eculty,2

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,A

8.10 Waldo consumes only apples and bananas and bananas are an inferior good for him,The

price of apples increases,but there is an increase in his income that keeps him on the same indif-

ference curve as before,#28Waldo has convex preferences; and he prefers more to less of either good.#29

#28a#29 After the change,Waldo will buy more bananas and less apples.

#28b#29 After the change,Waldo will buy less bananas and more apples.

#28c#29 After the change,Waldo will buy more of both goods.

#28d#29 After the change,Waldo will buy less of both goods.

#28e#29 Wewould need to know his utility function to determine whether any of the above statements are true.

MULTIPLE CHOICE 137

Topic,Slutsky Equation Di#0Eculty,2

#25 Correct Responses,43 Discrimination Index,41

Correct Answer,B

8.11 Charlie consumes apples and bananas,His utility function is U#28X

A;X

B

#29=x

A

x

2

B

,The price

of apples is $1,the price of bananasis $2 and his income is $30 per week,If the price of bananas

falls to $1:

#28a#29 Charlie demands fewer apples and more bananas.

#28b#29 the substitution e#0Bect of the fallin banana prices reduces his APPLE consumption,but the income e#0Bect

increases his apple consumption by the same amount.

#28c#29 the substitution e#0Bect of the fall in the price of bananas reduces his BANANA consumption but the

income e#0Bect increases his banana consumption by enough so that his banana consumption rises.

#28d#29 the income used to calculate the substitution e#0Bect is higher than his original income,since the change

made Charlie better o#0B.

#28e#29 more than one of the above is true.

Topic,Slutsky Equation Di#0Eculty,2

#25 Correct Responses,43 Discrimination Index,58

Correct Answer,B

8.12 Rob consumes two goods,x and y,He has an allowance of $50 per week and is not endowed

with either of the goods,If the price of good x increases and his substitution and income e#0Bects

change demand in opposite directions:

#28a#29 good x must be a Gi#0Ben good.

#28b#29 good x must be an inferior good.

#28c#29 WARP is violated.

#28d#29 good x must be a normal good.

#28e#29 there is not enough information to judge whether good x is a normal or inferior good.

CHAPTER 8 Slutsky Equation 138

Topic,Slutsky Equation Di#0Eculty,1

#25 Correct Responses,54 Discrimination Index,42

Correct Answer,D

8.13 Ben consumes two goods and his utility function is U#28x

1;x

2

#29=x

2

1

x

4

2

,The price of good 2

does not change and his income does not change,but the price of good 1 decreases,It must be that:

#28a#29 the income e#0Bect is zero,since his income remained constant.

#28b#29 the substitution e#0Bect on the demand for good 2 is zero,since the price of good 2 did not change.

#28c#29 the substitution e#0Bect reduces the demand for good 2 and,since the income e#0Bect is zero,demand for

good 2 falls.

#28d#29 the substitution e#0Bect of the price change reduces demand for good 2 and increases demand for good 1.

#28e#29 more than one of the above statements is true.

Topic,Slutsky Equation Di#0Eculty,1

#25 Correct Responses,54 Discrimination Index,42

Correct Answer,D

8.14 David consumes two goods and his utility function is U#28x

1;x

2

#29=x

5

1

x

6

2

,The price of good 2

does not change and his income does not change,but the price of good 1 decreases,It must be that:

#28a#29 the income e#0Bect is zero,since his income remained constant.

#28b#29 the substitution e#0Bect on the demand for good 2 is zero,since the price of good 2 did not change.

#28c#29 the substitution e#0Bect reduces the demand for good 2 and,since the income e#0Bect is zero,demand for

good 2 falls.

#28d#29 the substitution e#0Bect of the price change reduces demand for good 2 and increases demand for good 1.

#28e#29 more than one of the above statements is true.

Topic,Slutsky Equation Di#0Eculty,0

#25 Correct Responses,97 Discrimination Index,9

Correct Answer,A

8.15 Charlie's utility function is x

A

x

B

,The price of apples used to be $1 per unit and the price

of bananas was $2 per unit,His income was $40 per day,If the price of apples increased to $2.25

and the price of bananas fell to $1.25,then in order to be able to just a#0Bord his old bundle,Charlie

would havetohave a daily income of:

#28a#29 57.50.

#28b#29 116.

#28c#29 28.75.

#28d#29 86.25.

#28e#29 230.

MULTIPLE CHOICE 139

Topic,Slutsky Equation Di#0Eculty,0

#25 Correct Responses,97 Discrimination Index,9

Correct Answer,A

8.16 Charlie's utility function is x

A

x

B

,The price of apples used to be $1 per unit and the price

of bananas was $2 per unit,His income was $40 per day,If the price of apples increased to $2 and

the price of bananas fell to $0.50,then in order to be able to just a#0Bord his old bundle,Charlie

would havetohave a daily income of:

#28a#29 45.

#28b#29 91.

#28c#29 22.50.

#28d#29 67.50.

#28e#29 180.

Topic,Slutsky Equation Di#0Eculty,0

#25 Correct Responses,70 Discrimination Index,75

Correct Answer,C

8.17 Charlie's utility function is x

A

x

B

,The price of apples used to be $1,the price of bananas

used to be $2,and his income used to be $40,If the price of apples increased to 6 and the price of

bananas stayed constant,the substitution e#0Bect on Charlie's apple consumption reduces his con-

sumption by:

#28a#29 16.67 apples.

#28b#29 5 apples.

#28c#29 8.33 apples.

#28d#29 13.33 apples.

#28e#29 None of the above.

CHAPTER 8 Slutsky Equation 140

Topic,Slutsky Equation Di#0Eculty,0

#25 Correct Responses,70 Discrimination Index,75

Correct Answer,C

8.18 Charlie's utility function is x

A

x

B

,The price of apples used to be $1,the price of bananas

used to be $2,and his income used to be $40,If the price of apples increased to 5 and the price of

bananas stayed constant,the substitution e#0Bect on Charlie's apple consumption reduces his con-

sumption by:

#28a#29 16 apples.

#28b#29 4 apples.

#28c#29 8 apples.

#28d#29 13 apples.

#28e#29 None of the above.

Topic,Slutsky Equation Di#0Eculty,2

#25 Correct Responses,72 Discrimination Index,81

Correct Answer,C

8.19 Neville from your workbook has a friend named Peregrine,Peregrine has the same demand

function for claret as Neville,namely q =,02m,2p where m is income and p is price,Peregrine's

income is 6,500 and he initially had to pay a price of 50 per bottle of claret,The price of claret

rose to 60,The substitution e#0Bect of the price change:

#28a#29 reduced his demand by 20.

#28b#29 increased his demand by 20.

#28c#29 reduced his demand by 14.

#28d#29 reduced his demand by 26.

#28e#29 reduced his demand by 24.

Topic,Slutsky Equation Di#0Eculty,2

#25 Correct Responses,72 Discrimination Index,81

Correct Answer,C

8.20 Neville from your workbook has a friend named Nigel,Nigel has the same demand function

for claret as Neville,namely q =,02m,2p where m is income and p is price,Nigel's income is 7,000

and he initially had to pay a price of 50 per bottle of claret,The price of claret rose to 80,The

substitution e#0Bect of the price change:

#28a#29 reduced his demand by 60.

#28b#29 increased his demand by 60.

#28c#29 reduced his demand by 36.

#28d#29 reduced his demand by 84.

#28e#29 reduced his demand by 46.

MULTIPLE CHOICE 141

Topic,Slutsky Equation Di#0Eculty,1

#25 Correct Responses,88 Discrimination Index,38

Correct Answer,C

8.21 Goods 1 and 2 are perfect complements and a consumer always consumes them in the ratio

of 2 units of Good 2 per unit of Good 1,If a consumer has income 300 and if the price of good 2

changes from 5 to 6,while the price of good 1 stays at 1,then the income e#0Bect of the price change:

#28a#29 is 6 times as strong as the substitution e#0Bect.

#28b#29 does not change demand for good 1.

#28c#29 accounts for the entire change in demand.

#28d#29 is exactly twice as strong as the substitution e#0Bect.

#28e#29 is 5 times as strong as the substitution e#0Bect.

Topic,Slutsky Equation Di#0Eculty,1

#25 Correct Responses,88 Discrimination Index,38

Correct Answer,C

8.22 Goods 1 and 2 are perfect complements and a consumer always consumes them in the ratio

of 2 units of Good 2 per unit of Good 1,If a consumer has income 720 and if the price of good 2

changes from 8 to 9,while the price of good 1 stays at 1,then the income e#0Bect of the price change:

#28a#29 is 9 times as strong as the substitution e#0Bect.

#28b#29 does not change demand for good 1.

#28c#29 accounts for the entire change in demand.

#28d#29 is exactly twice as strong as the substitution e#0Bect.

#28e#29 is 8 times as strong as the substitution e#0Bect.

CHAPTER 8 Slutsky Equation 142

Topic,Slutsky Equation Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,A

8.23 Suppose that Agatha has $ 465 to spend on tickets for her trip,She intends to spend the

entire amount $465 on tickets and she prefers traveling #0Crst-class to travelling second class,She

needs to travel a total of 1500 miles,Suppose that the price of #0Crst class-tickets is $0.40 per mile

and the price of second-class tickets is $0.10 per mile,How many miles will she travel by second

class?

#28a#29 450

#28b#29 600

#28c#29 225

#28d#29 550

#28e#29 150

Topic,Slutsky Equation Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,A

8.24 Suppose that Agatha has $ 420 to spend on tickets for her trip,She intends to spend the

entire amount $420 on tickets and she prefers traveling #0Crst-class to travelling second class,She

needs to travel a total of 1500 miles,Suppose that the price of #0Crst class-tickets is $0.30 per mile

and the price of second-class tickets is $0.20 per mile,How many miles will she travel by second

class?

#28a#29 300

#28b#29 450

#28c#29 150

#28d#29 400

#28e#29 100

MULTIPLE CHOICE 143

Topic,Slutsky Equation Di#0Eculty,2

#25 Correct Responses,74 Discrimination Index,30

Correct Answer,C

8.25 Maude thinks delphiniums and hollyhocks are perfect substitutes,one-for-one,If Delphini-

ums currently cost $5 per unit and hollyhocks cost $6 per unit,and if the price of delphiniums rises

to $10 per unit:

#28a#29 the income e#0Bect of the change in demand for delphiniums will be bigger than the substitution e#0Bect.

#28b#29 there will be no change in the demand for hollyhocks.

#28c#29 the entire change in demand for delphiniums will be due to the substitution e#0Bect.

#28d#29 1=5 of the change will be due to the income e#0Bect.

#28e#29 4=5 of the change will be due to the income e#0Bect.

Topic,Slutsky Equation Di#0Eculty,2

#25 Correct Responses,74 Discrimination Index,30

Correct Answer,C

8.26 Maude thinks delphiniums and hollyhocks are perfect substitutes,one-for-one,If Delphini-

ums currently cost $4 per unit and hollyhocks cost $5 per unit,and if the price of delphiniums rises

to $9 per unit:

#28a#29 the income e#0Bect of the change in demand for delphiniums will be bigger than the substitution e#0Bect.

#28b#29 there will be no change in the demand for hollyhocks.

#28c#29 the entire change in demand for delphiniums will be due to the substitution e#0Bect.

#28d#29 1=5 of the change will be due to the income e#0Bect.

#28e#29 4=5 of the change will be due to the income e#0Bect.

CHAPTER 8 Slutsky Equation 144

Topic,Slutsky Equation Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,A

8.27 Carlos consumes only two goods,apples and bananas,His utility function is given by

U#28x;y#29=a

3

b

2

,He is endowed with w

a

apples and w

b

bananas,Unaware that prices are about

to change,Carlos buys the quantities of apples and bananas that maximize his utility subject to

his budget constraint,After he has made his purchases,but before he has eaten them,the rela-

tive prices change,Carlos is then free to make further trades at the new relative prices if he wishes.

#28a#29 Carlos will de#0Cnitely be better o#0B after the price change.

#28b#29 Carlos will de#0Cnitely be worse o#0B after the price change.

#28c#29 Carlos will be better o#0B after the price change if the price of the good for which he is a net seller rises

relative to the price of the other good.

#28d#29 Carlos will be better o#0B after the price change if the price of the good for which he is a net buyer rises

relative to the price of the other good.

#28e#29 Carlos' utility will not be a#0Bected by the price change.

Topic,Slutsky Equation Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,E

8.28 Carlos consumes only two goods,apples and bananas,His utility function is given by

U#28x;y#29=minfx;2yg,He is endowed with w

a

apples and w

b

bananas,Unaware that prices are about

to change,Carlos buys the quantities of apples and bananas that maximize his utility subject to

his budget constraint,After he has made his purchases,but before he has eaten them,the rela-

tive prices change,Carlos is then free to make further trades at the new relative prices if he wishes.

#28a#29 Carlos will de#0Cnitely be better o#0B after the price change.

#28b#29 Carlos will de#0Cnitely be worse o#0B after the price change.

#28c#29 Carlos will be better o#0B after the price change if the price of the good for which he is a net seller rises

relative to the price of the other good.

#28d#29 Carlos will be better o#0B after the price change if the price of the good for which he is a net buyer rises

relative to the price of the other good.

#28e#29 Carlos' utility will not be a#0Bected by the price change.

MULTIPLE CHOICE 145

Topic,Slutsky Equation Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,B

8.29 Gladys loves music and spends her money only on tapes and compact disks,She is always

willing to trade 2 tapes for 1 compact disk,Originally,music stores sold compact disks for $9

each and tapes for $5 each,Then the price of compact disks fell to $8 each,The change in the

consumption of compact disks that resulted is:

#28a#29 entirely due to the substitution e#0Bect.

#28b#29 entirely due to the income e#0Bect.

#28c#29 partly due to the income e#0Bect and partly due to the substitution e#0Bect.

#28d#29 will be due to the income e#0Bect for low incomes and the substitution e#0Bect for high incomes.

#28e#29 There is no change in her demand for compact disks.

Essay Slutsky Equation

Topic,Slutsky Equation Di#0Eculty,2

#25 Correct Responses,0 Discrimination Index,0

8.1 A taxpayer says "Sure I pay a lot of income tax,but I don't mind because I get back just as

much money as I pay in." Assuming that his facts are correct,explain why the taxpayer's reasoning

is faulty,Use a diagram to show that an income tax can make a person worse o#0B even if he is

rebated an amount of money equal to what he paid in.

Answer,See page 148 of Varian.

Topic,Slutsky Equation Di#0Eculty,3

#25 Correct Responses,0 Discrimination Index,0

8.2 Use a diagram to prove that in case there are two goods,the substitution e#0Bect of an increase

in the price of good x reduces the demand for good x.

Answer,A good way to proceed is to suppose that the price of x increases and the substitution

e#0Bect increases demand for x,Draw the pivoted budget and notice that the new bundle would have

to be a bundle that was previously rejected in favor of the old bundle,Since the pivoted budget

still allows the old purchase,the weak axiom of revealed preference would be violated.

Topic,Slutsky Equation Di#0Eculty,2

#25 Correct Responses,0 Discrimination Index,0

8.3 Drawtwo di#0Berent diagrams,one illustrating the Slutsky version of income and substitution

e#0Bects and the other illustrating the Hicks version of income and substitution e#0Bects,How do these

two notions di#0Ber?

Answer,The diagrams can be found in Varian's book,The Slutsky version of the substitution

e#0Bect has income adjusted so the consumer is just able to a#0Bord the old bundle at the new prices.

The Hicks version has the consumer's income adjusted so is exactly as well o#0B as he was at the old

prices.

Topic,Slutsky Equation Di#0Eculty,1

#25 Correct Responses,0 Discrimination Index,0

8.4 What conditions ensure that the quantity of a good demanded increases as its price falls?

Explain your answer,using diagrams.

Answer,The standard Slutsky analysis is called for here,See the text.

ESSAY 147

Topic,Slutsky Equation Di#0Eculty,2

#25 Correct Responses,0 Discrimination Index,0

8.5 Suggest at least one reason why it mightbeworth the trouble it takes to learn howtode-

compose the e#0Bects of a price change into an income e#0Bect and a substitution e#0Bect.

Answer,The substitution e#0Bect of a price increase must decrease demand for that good,We know

that if demand for the good increases as income increases,then the income e#0Bect works in the same

direction as the substitution e#0Bect,Therefore the decomposition into income and substitution

e#0Bects allows one to prove that the demand curve slopes down whenever the Engel curve slopes

up,A second reason is that someone who has already purchased his planned consumption bundle

faces only a substitution e#0Bect and not an income e#0Bect when prices change,since in this case his

budget line just pivots around the current consumption.

Chapter 9

True-False Buying and Selling

Topic,Buying and Selling Di#0Eculty,2

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,True

9.1 If a rational utility maximizer is a net demander of a good,and if an increase in its price

causes him to buy more of it,then it must be an inferior good.

Topic,Buying and Selling Di#0Eculty,2

#25 Correct Responses,68 Discrimination Index,22

Correct Answer,False

9.2 If a person is a net supplier of a normal good and its price increases while all other prices

stay the same,then his demand for the good must decrease.

Topic,Buying and Selling Di#0Eculty,1

#25 Correct Responses,70 Discrimination Index,16

Correct Answer,True

9.3 If a consumer is a buyer of some goods and a seller of others,then a change in prices will

generate an extra income e#0Bect in the Slutsky equation due to the revaluation of the consumer's

endowment.

Topic,Buying and Selling Di#0Eculty,1

#25 Correct Responses,97 Discrimination Index,9

Correct Answer,True

9.4 If a consumer is initially endowed with a positive amountoftwo goods and sells some of one

to get more of the other,and if she has no other sources of income,then her budget line will pass

through her endowment point.

Topic,Buying and Selling Di#0Eculty,2

#25 Correct Responses,71 Discrimination Index,29

Correct Answer,False

9.5 If a utility maximizer is a net seller of something and the price of that good rises while other

prices stay constant,her situation might improvesomuch that she becomes a net buyer.

TRUE-FALSE 149

Topic,Buying and Selling Di#0Eculty,2

#25 Correct Responses,93 Discrimination Index,23

Correct Answer,True

9.6 If a person is a net seller of some good and the price of that good decreases,she might

possibly become a net buyer.

Topic,Buying and Selling Di#0Eculty,2

#25 Correct Responses,68 Discrimination Index,14

Correct Answer,False

9.7 Wilhelm consumes only apples and bananas,His endowment is 5 units of apples and 10 units

of bananas,Both goods are normal goods for Wilhelm,At current prices,Wilhelm is a net seller of

apples,If the price of apples rises and the price of bananas stays the same,his demand for apples

must decrease.

Topic,Buying and Selling Di#0Eculty,2

#25 Correct Responses,50 Discrimination Index,0

Correct Answer,False

9.8 Bill receives half of his income in wages and half of his income in dividends,Bill would be

indi#0Berentbetween a 50 percent increase in his wage rate and a 50 percent increase in his dividend

income.

Topic,Buying and Selling Di#0Eculty,1

#25 Correct Responses,72 Discrimination Index,6

Correct Answer,False

9.9 If all goods,including leisure,are normal goods,then an increase in the wage rate will nec-

essarily make people wanttowork more hours.

Topic,Buying and Selling Di#0Eculty,2

#25 Correct Responses,19 Discrimination Index,48

Correct Answer,True

9.10 If someone has a Cobb-Douglas utility function and no income from any source other than

labor earnings,then an increase in wages will not change the amount that person chooses to work.

CHAPTER 9 Buying and Selling 150

Topic,Buying and Selling Di#0Eculty,1

#25 Correct Responses,87 Discrimination Index,5

Correct Answer,True

9.11 If leisure is a normal good,then an increase in non-labor income will reduce labor supply.

Topic,Buying and Selling Di#0Eculty,1

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,False

9.12 A person's full income is the amount of income that he or she would have if there were no

taxes.

Topic,Buying and Selling Di#0Eculty,2

#25 Correct Responses,79 Discrimination Index,29

Correct Answer,False

9.13 If a person has no non-labor income,a decrease in wages causes the budget line between

leisure and other goods to shift downward in a parallel fashion.

Topic,Buying and Selling Di#0Eculty,1

#25 Correct Responses,67 Discrimination Index,24

Correct Answer,True

9.14 If leisure is an inferior good,then an increase in the wage rate will make a person work

more.

Topic,Buying and Selling Di#0Eculty,1

#25 Correct Responses,64 Discrimination Index,31

Correct Answer,False

9.15 Jack has a backward-bending labor supply curve,Atwages of $5 an hour he chooses to

work 50 hours a week,His boss wants him to work more hours per week and o#0Bers him $5 an hour

for the #0Crst 50 hours per week and $7 an hour for every hour beyond 50 hours per week,Because

of his backward bending supply curve,Jack might actually choose to work fewer hours.

Topic,Buying and Selling Di#0Eculty,2

#25 Correct Responses,73 Discrimination Index,26

Correct Answer,True

9.16 Les is allowed to work only 8 hours a day at his main job,although he would liketowork

more hours,He takes a second job,He can work as many hours as he wishes at the second job,

but at a lower wage,If leisure is a normal good,then an increase in the wage rate for his #0Crst job

will reduce the number of hours he chooses to work at his second job.

TRUE-FALSE 151

Topic,Buying and Selling Di#0Eculty,2

#25 Correct Responses,79 Discrimination Index,46

Correct Answer,False

9.17 Suppose a consumer is initially endowed with a positive amountoftwo goods,sells some of

one to get more of the other,and has no other sources of income,If the price of one good falls,his

new budget line is everywhere above his old budget line.

Multiple Choice Buying and Selling

Topic,Buying and Selling Di#0Eculty,1

#25 Correct Responses,88 Discrimination Index,23

Correct Answer,C

9.1 Marsha Mellowisvery #0Dexible,She consumes x and y,She says `Givemexor givemey; I

don't care,I can't tell the di#0Berence between them.' She is currently endowed with 14 units of x

and 6 units of y,The price of x is 4 times the price of y,Marsha can trade x and y at the going

prices,but has no other source of income,How many units of y will Marsha consume?

#28a#29 66

#28b#29 20

#28c#29 62

#28d#29 6

#28e#29 31

Topic,Buying and Selling Di#0Eculty,1

#25 Correct Responses,88 Discrimination Index,23

Correct Answer,C

9.2 Marsha Mellowisvery #0Dexible,She consumes x and y,She says `Givemexor givemey;

I don't care,I can't tell the di#0Berence between them.' She is currently endowed with 4 units of x

and 17 units of y,The price of x is 2 times the price of y,Marsha can trade x and y at the going

prices,but has no other source of income,How many units of y will Marsha consume?

#28a#29 27

#28b#29 21

#28c#29 25

#28d#29 17

#28e#29 13

MULTIPLE CHOICE 153

Topic,Buying and Selling Di#0Eculty,3

#25 Correct Responses,56 Discrimination Index,39

Correct Answer,C

9.3 Yoram insists on consuming 3 times as much y as he consumes of x #28so he always has y =3x#29.

He will consume these goods in no other ratio,The price of x is 2 times the price of y.Yoram has

an endowmentof24x

0

sand 42 y

0

s which he can trade at the going prices,He has no other source

of income,What is Yoram's gross demand for x?

#28a#29 90

#28b#29 66

#28c#29 18

#28d#29 16

#28e#29 We can't determine the answer without knowing the price of x.

Topic,Buying and Selling Di#0Eculty,3

#25 Correct Responses,56 Discrimination Index,39

Correct Answer,C

9.4 Pablo insists on consuming 4 times as much y as he consumes of x #28so he always has y =4x#29.

He will consume these goods in no other ratio,The price of x is 5 times the price of y.Pablo has

an endowmentof15x

0

sand 60 y

0

s which he can trade at the going prices,He has no other source

of income,What is Pablo's gross demand for x?

#28a#29 135

#28b#29 75

#28c#29 15

#28d#29 10

#28e#29 We can't determine the answer without knowing the price of x.

CHAPTER 9 Buying and Selling 154

Topic,Buying and Selling Di#0Eculty,1

#25 Correct Responses,82 Discrimination Index,29

Correct Answer,C

9.5 Diana consumes commodities x and y and her utility function is U#28x;y#29=xy

2

,Good x costs

$2 per unit and good y costs $1 per unit,If she is endowed with 3 units of x and 6 units of y; how

many units of good y will she consume?

#28a#29 11

#28b#29 3

#28c#29 8

#28d#29 14

#28e#29 None of the above.

Topic,Buying and Selling Di#0Eculty,1

#25 Correct Responses,82 Discrimination Index,29

Correct Answer,C

9.6 Maude consumes commodities x and y and her utility function is U#28x;y#29=xy

3

,Good x costs

$3 per unit and good y costs $1 per unit,If she is endowed with 6 units of x and 2 units of y; how

many units of good y will she consume?

#28a#29 18

#28b#29 6

#28c#29 15

#28d#29 17

#28e#29 None of the above.

Topic,Buying and Selling Di#0Eculty,2

#25 Correct Responses,75 Discrimination Index,44

Correct Answer,A

9.7 Donald consumes goods x and y,His utility function is U#28x;y#29=xy

3

,He is endowed with 43

units of x and 7 units of y,The price of x is 1 and the price of y is 3,Find his net demand for x.

#28a#29,27

#28b#29 18

#28c#29,30

#28d#29,20

#28e#29 59

MULTIPLE CHOICE 155

Topic,Buying and Selling Di#0Eculty,2

#25 Correct Responses,75 Discrimination Index,44

Correct Answer,A

9.8 Donald consumes goods x and y,His utility function is U#28x;y#29=xy

4

,He is endowed with 78

units of x and 9 units of y,The price of x is 1 and the price of y is 3,Find his net demand for x.

#28a#29,57

#28b#29 23

#28c#29,60

#28d#29,48

#28e#29 99

Topic,Buying and Selling Di#0Eculty,1

#25 Correct Responses,87 Discrimination Index,6

Correct Answer,D

9.9 Jackie's net demands for x and y are #286;,6#29 and her gross demands are #2815;15#29,What is her

initial endowmentofx?

#28a#29 16

#28b#29 13

#28c#29 5

#28d#29 9

#28e#29 None of the above.

Topic,Buying and Selling Di#0Eculty,2

#25 Correct Responses,71 Discrimination Index,46

Correct Answer,C

9.10 Holly consumes x and y,The price of x is 4 and the price of y is 4,Holly's only source of

income is her endowment of 6 units of x and 6 units of y which she can buy or sell at the going

prices,She plans to consume 7 units of x and 5 units of y,If the prices change to 7 for x and 7 for

y; which of the following is true?

#28a#29 She is better o#0B.

#28b#29 She is worse o#0B.

#28c#29 She is neither better o#0B nor worse o#0B.

#28d#29 We can't tell whether she is better o#0B or worse o#0B unless we know her utility function.

#28e#29 She is better o#0B if she has non-convex preferences.

CHAPTER 9 Buying and Selling 156

Topic,Buying and Selling Di#0Eculty,2

#25 Correct Responses,71 Discrimination Index,46

Correct Answer,C

9.11 Kristina consumes x and y,The price of x is 5 and the price of y is 5,Kristina's only source

of income is her endowment of 6 units of x and 6 units of y which she can buy or sell at the going

prices,She plans to consume 7 units of x and 5 units of y,If the prices change to 8 for x and 8 for

y; which of the following is true?

#28a#29 She is better o#0B.

#28b#29 She is worse o#0B.

#28c#29 She is neither better o#0B nor worse o#0B.

#28d#29 We can't tell whether she is better o#0B or worse o#0B unless we know her utility function.

#28e#29 She is better o#0B if she has non-convex preferences.

Topic,Buying and Selling Di#0Eculty,1

#25 Correct Responses,85 Discrimination Index,19

Correct Answer,D

9.12 Milton consumes two commodities in a perfect market system,The price of x is 5 and the

price of y is 1,His utility function is U#28x;y#29=xy,He is endowed with 40 units of good x and no

y,Find his consumption of good y.

#28a#29 110

#28b#29 105

#28c#29 50

#28d#29 100

#28e#29 None of the above.

Topic,Buying and Selling Di#0Eculty,1

#25 Correct Responses,85 Discrimination Index,19

Correct Answer,D

9.13 Milton consumes two commodities in a perfect market system,The price of x is 5 and the

price of y is 1,His utility function is U#28x;y#29=xy,He is endowed with 24 units of good x and no

y,Find his consumption of good y.

#28a#29 70

#28b#29 65

#28c#29 30

#28d#29 60

#28e#29 None of the above.

MULTIPLE CHOICE 157

Topic,Buying and Selling Di#0Eculty,2

#25 Correct Responses,75 Discrimination Index,47

Correct Answer,A

9.14 Russ Tickman is a dairy farmer,He consumes milk and other goods,His utility function

is given by U#28x;y#29=y#28x+1#29where x is his milk consumption and y is his consumption of other

goods,His initial endowment is 19 units of milk per day and no units of other goods,If the price

of milk is 2 and the price of other goods is 1,howmuch milk does he consume?

#28a#29 9 gallons

#28b#29 38 gallons

#28c#29 20 gallons

#28d#29 14 gallons

#28e#29 12 gallons

Topic,Buying and Selling Di#0Eculty,2

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,A

9.15 Jack earns 5 dollars per hour,He has 100 hours per week which he can use for either labor

or leisure,The government institutes a plan in which eachworker receives a $100 grant from the

government,but has to pay 50#25 of his or her labor income in taxes,If his utility function is

U#28c;r#29=cr where c is dollars worth of consumption of goods and r is hours of leisure per week,

how many hours per week will Jackchoose to work?

#28a#29 30

#28b#29 40

#28c#29 26

#28d#29 20

#28e#29 None of the above.

CHAPTER 9 Buying and Selling 158

Topic,Buying and Selling Di#0Eculty,1

#25 Correct Responses,57 Discrimination Index,15

Correct Answer,E

9.16 Aristotle earns 5 dollars per hour,He has 110 hours per week available for either labor or

leisure,In the old days he paid no taxes and received nothing from the government,Now he gets

a $200 payment per week from the government and he must pay half of his labor income in taxes.

#28His before-tax wages are the same as they were before; and he has no other source of income than

wages and payments from the government.#29 He notices that with the governmentpayment and

his taxes,he can exactly a#0Bord the combination of leisure and consumption goods that he used to

choose,How many hours per week did he work in the old days?

#28a#29 100

#28b#29 20

#28c#29 45

#28d#29 60

#28e#29 None of the above.

Topic,Buying and Selling Di#0Eculty,2

#25 Correct Responses,31 Discrimination Index,40

Correct Answer,C

9.17 Rhoda takes a job with a construction company,She earns $5 an hour for the #0Crst 40

hours of eachweek and then gets "double-time" for overtime,That is,she is paid $10 an hour for

every hour beyond 40 hours a week that she works,Rhoda has 70 hours a week available to divide

between construction work and leisure,She has no other source of income,and her utility function

is U = cr where c is her income to spend on goods and r is the number of hours of leisure that she

has per week,She is allowed toworkas many hours as she wantsto,Howmany hours will she work?

#28a#29 50

#28b#29 30

#28c#29 45

#28d#29 35

#28e#29 None of the above.

MULTIPLE CHOICE 159

Topic,Buying and Selling Di#0Eculty,2

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,C

9.18 Wendy and Mac work in fast-food restaurants,Wendy is paid $4 an hour for the #0Crst

40 hours a week that she works and $6 an hour for every hour beyond 40 hours per week,Mac

gets $5 an hour no matter how many hours he works,Each has 110 hours per week to allocate

between work and leisure,Each has a utility function U = cr where c is expenditure per week on

consumption and r is hours of leisure per week,Each can choose the number of hours to work,If

Wendy works W hours and Mac works M hours,then:

#28a#29 W =1:5M.

#28b#29 W#3CM.

#28c#29 W,M =6:66.

#28d#29 W,M = 10.

#28e#29 None of the above.

Topic,Buying and Selling Di#0Eculty,3

#25 Correct Responses,63 Discrimination Index,36

Correct Answer,B

9.19 Heather and Myrtle have the same tastes,Heather is paid $10 an hour and chooses to work

9 hours a day,Myrtle is paid $9 an hour for the #0Crst 8 hours she works and $18 an hour for any

time she works beyond 8 hours a day.

#28a#29 Since she has the same tastes as Heather and can earn the same income byworking 9 hours a day,she

chooses to work 9 hours a day.

#28b#29 Unless her indi#0Berence curve is kinked,Heather would be better o#0B facing the same payschedule as

Myrtle.

#28c#29 Myrtle would prefer Heather's payschedule to her own.

#28d#29 Myrtle will work less than 9 hours a day.

#28e#29 None of the above.

CHAPTER 9 Buying and Selling 160

Topic,Buying and Selling Di#0Eculty,1

#25 Correct Responses,71 Discrimination Index,10

Correct Answer,C

9.20 MikeTeevee likes to watch television and to eat candy,In fact his utility function is

U#28x;y#29=x

2

ywhere x is the number of hours he spends watching television and y is the number of

dollars per week he spends on candy,Mike's mother doesn't like him to watchsomuch television.

She limits his television watching to 36 hours a week and in addition she pays him $1 an hour for

every hour that he reduces his television watching below 36 hours a week,If this is Mike's only

source of income to buy candy,how many hours of television does he watch per week?

#28a#29 36

#28b#29 12

#28c#29 24

#28d#29 18

#28e#29 16

Topic,Buying and Selling Di#0Eculty,2

#25 Correct Responses,75 Discrimination Index,29

Correct Answer,B

9.21 Georgina earns 6 dollars an hour,She has no non-labor income,She has 100 hours a week

available for either labor or leisure,Her utility function is U#28c;r#29=cr

3

where c is dollars worth of

goods and r is hours of leisure,How many hours per week will she work?

#28a#29 23

#28b#29 25

#28c#29 28

#28d#29 50

#28e#29 None of the above.

MULTIPLE CHOICE 161

Topic,Buying and Selling Di#0Eculty,2

#25 Correct Responses,75 Discrimination Index,29

Correct Answer,B

9.22 Nicole earns 6 dollars an hour,She has no non-labor income,She has 75 hours a week

available for either labor or leisure,Her utility function is U#28c;r#29=cr

2

where c is dollars worth of

goods and r is hours of leisure,How many hours per week will she work?

#28a#29 23

#28b#29 25

#28c#29 28

#28d#29 37.50

#28e#29 None of the above.

Topic,Buying and Selling Di#0Eculty,2

#25 Correct Responses,48 Discrimination Index,23

Correct Answer,A

9.23 Will is paid $10 an hour for the #0Crst 40 hours per week that he works,He can also work as

many hours overtime as he wishes to,He is paid $15 an hour for every hour that he works beyond

40 hours a week,Leisure is a normal good for Will and he is currently working some overtime,If

his hourly wage for the #0Crst 40 hours per week that he works rises to $12 and his wages for overtime

remain at $15 per hour:

#28a#29 he will choose to work fewer hours per week.

#28b#29 he will choose to work more hours per week.

#28c#29 he will choose to work the same number of hours per week.

#28d#29 he will choose to work more hours per week if and only if his income exceeds his labor income.

#28e#29 he will choose to work more hours per day if and only if he works less than 20 hours overtime per week.

CHAPTER 9 Buying and Selling 162

Topic,Buying and Selling Di#0Eculty,2

#25 Correct Responses,48 Discrimination Index,23

Correct Answer,A

9.24 Ben is paid $6 an hour for the #0Crst 40 hours per week that he works,He can also work as

many hours overtime as he wishes to,He is paid $13 an hour for every hour that he works beyond

40 hours a week,Leisure is a normal good for Ben and he is currently working some overtime,If

his hourly wage for the #0Crst 40 hours per week that he works rises to $8 and his wages for overtime

remain at $13 per hour:

#28a#29 he will choose to work fewer hours per week.

#28b#29 he will choose to work more hours per week.

#28c#29 he will choose to work the same number of hours per week.

#28d#29 he will choose to work more hours per week if and only if his income exceeds his labor income.

#28e#29 he will choose to work more hours per day if and only if he works less than 20 hours overtime per week.

Topic,Buying and Selling Di#0Eculty,3

#25 Correct Responses,40 Discrimination Index,28

Correct Answer,B

9.25 There are no taxes on the #0Crst $500 that Debra earns per week,but on income above

$500 per week,she must pay a 60#25 tax,Debra's job pays $10 per hour,Her utility function is

U#28c;r#29=rc

2; where r is hours of leisure and c is dollars worth of consumption,She has 100 hours

to divide between work and leisure,How many hours per week will she choose to work?

#28a#29 66.66

#28b#29 50

#28c#29 40

#28d#29 33.33

#28e#29 20

MULTIPLE CHOICE 163

Topic,Buying and Selling Di#0Eculty,2

#25 Correct Responses,40 Discrimination Index,43

Correct Answer,C

9.26 Susan's utility function is U#28x;y#29=#28x+y#29R

2;where x and y are the quantities of goods X

and Y that she consumes,and R is the number of hours of leisure that she has per day,Good X

costs 4 dollars per unit and good Y costs 2 dollars per unit,Her wage rate is 8 dollars per hour

and she has 15 hours per day to allocate between labor and leisure,She will:

#28a#29 consume equal amounts of X and Y.

#28b#29 consume 10 units of X.

#28c#29 consume 20 units of Y.

#28d#29 work 10 hours a day.

#28e#29 consume twice as muchofgoodXas of good Y.

Topic,Buying and Selling Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,C

9.27 George Goodhands is a life-insurance agent,He can work 40 hours a week for a large national

insurance company and receive a #0Cxed salary of S dollars per week,or he can work independently,

for as many or as few hours per week as he likes and earn w dollars per hour,#28He can not take

both jobs.#29 Which of the following responses to an increase in the salary paid by the insurance

companywould be INCONSISTENT with the weak axiom of revealed preference?

#28a#29 Leaving independentwork for the 40 hour salaried job.

#28b#29 Doing exactly what he was doing before.

#28c#29 More than one of these options.

#28d#29 Continuing to work independently,but working more hours.

#28e#29 None of the above.

CHAPTER 9 Buying and Selling 164

Topic,Buying and Selling Di#0Eculty,3

#25 Correct Responses,24 Discrimination Index,11

Correct Answer,E

9.28 Gladys Goodhands is an insurance agent,She must choose one and only one of two possible

alternative jobs,She can either work for a large national insurance company for which she must

work exactly 40 hours a week and will receive a salary of S dollars per week,or she can work as

an independent insurance agent,in which case she can work exactly as many hours per week as

she wishes and will earn w dollars for every hour that she works,Gladys satis#0Ces the weak axiom

of revealed preference and she cares only about howmuch money she makes and about howmuch

leisure time she has,Which of the following statements is necessarily true?

#28a#29 If #28S=40#29 #3Ew;she will prefer to work for the large national insurance company.

#28b#29 If #28S=40#29 #3Cwand she decides to work independently,then it must be that she chooses to work more

than 40 hours a week.

#28c#29 If #28S=40#29 #3Cwand she decides to work independently,then it must be that she chooses to work less than

40 hours a week.

#28d#29 If #28S=40#29 = w; she will be indi#0Berentbetween working for the large insurance company and working

independently.

#28e#29 None of the above.

Topic,Buying and Selling Di#0Eculty,2

#25 Correct Responses,59 Discrimination Index,58

Correct Answer,A

9.29 Albert consumes only tangerines and bananas,His only source of income is an initial en-

dowment of 30 units of tangerines and 10 units of bananas,Albert insists on consuming tangerines

and bananas in #0Cxed proportions,,one unit of tangerines per unit of bananas,He initially faces

a price of 10 per unit for each fruit,The price of tangerines rose to 30 per unit while the price of

bananas stayed unchanged,After the price change,he would:

#28a#29 increase his consumption of tangerines by exactly 5 units.

#28b#29 decrease his consumption or tangerines by at least 5 units.

#28c#29 increase his consumption of tangerines by exactly 15 units.

#28d#29 decrease his consumption of tangerines by exactly 7 units.

#28e#29 decrease his consumption of bananas by at least 1 unit.

MULTIPLE CHOICE 165

Topic,Buying and Selling Di#0Eculty,2

#25 Correct Responses,59 Discrimination Index,58

Correct Answer,A

9.30 Boris consumes only cherries and pineapples,His only source of income is an initial en-

dowment of 30 units of cherries and 10 units of pineapples,Boris insists on consuming cherries

and pineapples in #0Cxed proportions,,one unit of cherries per unit of pineapples,He initially faces

a price of 25 per unit for each fruit,The price of cherries rose to 75 per unit while the price of

pineapples stayed unchanged,After the price change,he would:

#28a#29 increase his consumption of cherries by exactly 6 units.

#28b#29 decrease his consumption or cherries by at least 6 units.

#28c#29 increase his consumption of cherries by exactly 16 units.

#28d#29 decrease his consumption of cherries by exactly 8 units.

#28e#29 decrease his consumption of pineapples by at least 1 unit.

Topic,Buying and Selling Di#0Eculty,1

#25 Correct Responses,88 Discrimination Index,36

Correct Answer,B

9.31 Yolanda receives a lump sum child-support payment of $150 per week,She has 80 hours a

week to divide between labor and leisure,She earns $5 an hour,The #0Crst $150 per week of her

labor income is untaxed,but all labor income that she earns above $ 150 is taxed at the rate 30

percent,If we graph her budget line with leisure on the horizontal axis and consumption on the

vertical axis,her budget line:

#28a#29 has a kink in it at the point where she takes 60 units of leisure.

#28b#29 has a kink in it where her income is 300 and her leisure is 50.

#28c#29 has a slope of,3:50 everywhere,

#28d#29 has no kinks in the part that corresponds to positive labor supply.

#28e#29 has a piece that is a horizontal straight line.

CHAPTER 9 Buying and Selling 166

Topic,Buying and Selling Di#0Eculty,1

#25 Correct Responses,88 Discrimination Index,36

Correct Answer,B

9.32 Heidi receives a lump sum child-support paymentof$50perweek,She has 80 hours a week

to divide between labor and leisure,She earns $5 an hour,The #0Crst $200 per week of her labor

income is untaxed,but all labor income that she earns above $ 200 is taxed at the rate 30 percent.

If we graph her budget line with leisure on the horizontal axis and consumption on the vertical

axis,her budget line:

#28a#29 has a kink in it at the point where she takes 50 units of leisure.

#28b#29 has a kink in it where her income is 250 and her leisure is 40.

#28c#29 has a slope of,3:50 everywhere,

#28d#29 has no kinks in the part that corresponds to positive labor supply.

#28e#29 has a piece that is a horizontal straight line.

Topic,Buying and Selling Di#0Eculty,0

#25 Correct Responses,99 Discrimination Index,0

Correct Answer,D

9.33 If Abishag owns 16 quinces and 15 kumquats,and if the price of kumquats is 4 times the

price of quinces,how many kumquats can she a#0Bord if she buys as many kumquats as she can?

#28a#29 38

#28b#29 31

#28c#29 15

#28d#29 19

#28e#29 16

Topic,Buying and Selling Di#0Eculty,0

#25 Correct Responses,99 Discrimination Index,0

Correct Answer,D

9.34 If Abishag owns 12 quinces and 10 kumquats,and if the price of kumquats is 3 times the

price of quinces,how many kumquats can she a#0Bord if she buys as many kumquats as she can?

#28a#29 28

#28b#29 22

#28c#29 10

#28d#29 14

#28e#29 11

MULTIPLE CHOICE 167

Topic,Buying and Selling Di#0Eculty,2

#25 Correct Responses,78 Discrimination Index,35

Correct Answer,A

9.35 Mario consumes eggplant and tomatoes in the ratio of one bushel of eggplant per bushel of

tomatoes,His garden yields 30 bushels of eggplant and 10 bushels of tomatoes,He initially faced

prices of $25 per bushel for eachvegetable,but the price of eggplant rose to $100 per bushel,while

the price of tomatoes stayed unchanged,After the price change,he would:

#28a#29 increase his eggplant consumption by 6 bushels.

#28b#29 decrease his eggplant consumption by at least 6 bushels.

#28c#29 increase his consumption of eggplantby 8 bushels.

#28d#29 decrease his consumption of eggplantby 8 bushels.

#28e#29 decrease his tomato consumption by at least 1 bushel.

Topic,Buying and Selling Di#0Eculty,2

#25 Correct Responses,78 Discrimination Index,35

Correct Answer,A

9.36 Mario consumes eggplant and tomatoes in the ratio of one bushel of eggplant per bushel of

tomatoes,His garden yields 30 bushels of eggplant and 10 bushels of tomatoes,He initially faced

prices of $25 per bushel for eachvegetable,but the price of eggplant rose to $50 per bushel,while

the price of tomatoes stayed unchanged,After the price change,he would:

#28a#29 increase his eggplant consumption by 3.33 bushels.

#28b#29 decrease his eggplant consumption by at least 3.33 bushels.

#28c#29 increase his consumption of eggplantby 5.33 bushels.

#28d#29 decrease his consumption of eggplantby 5.33 bushels.

#28e#29 decrease his tomato consumption by at least 1 bushel.

Topic,Buying and Selling Di#0Eculty,2

#25 Correct Responses,88 Discrimination Index,36

Correct Answer,B

9.37 Dr,Johnson receives a lump sum paymentof$150perweek,Suppose that the #0Crst $150 per

week of his labor income is untaxed,but all labor income above $150is taxed at a rate of 10 percent.

#28a#29 Dr,J

0

s budget line has a kink in it at the point where he takes 60 units of leisure.

#28b#29 Dr,J

0

s budget line has a kink where his income is 300 and his leisure is 50.

#28c#29 Dr,J

0

s budget line has slope,4:50 everywhere.

#28d#29 Dr,J

0

s budget line has no kinks in the part of it that corresponds to a positive labor supply.

#28e#29 Dr,J

0

s budget line has a piece that is a horizontal straight line.

CHAPTER 9 Buying and Selling 168

Topic,Buying and Selling Di#0Eculty,2

#25 Correct Responses,88 Discrimination Index,36

Correct Answer,B

9.38 Dr,Johnson receives a lump sum paymentof$150perweek,Suppose that the #0Crst $150 per

week of his labor income is untaxed,but all labor income above $150is taxed at a rate of 50 percent.

#28a#29 Dr,J

0

s budget line has a kink in it at the point where he takes 60 units of leisure.

#28b#29 Dr,J

0

s budget line has a kink where his income is 300 and his leisure is 50.

#28c#29 Dr,J

0

s budget line has slope,2:50 everywhere.

#28d#29 Dr,J

0

s budget line has no kinks in the part of it that corresponds to a positive labor supply.

#28e#29 Dr,J

0

s budget line has a piece that is a horizontal straight line.

Topic,Buying and Selling Di#0Eculty,1

#25 Correct Responses,89 Discrimination Index,25

Correct Answer,E

9.39 Dudley has a utility function U#28C;R#29=C,#2812,R#29

2; where R is leisure and C is consumption

per day,He has 16 hours per day to divide between work and leisure,If Dudley has a nonlabor

income of $20 per day and is paid a wage of $0 per hour,how many hours of leisure will he choose

per day?

#28a#29 9

#28b#29 10

#28c#29 11

#28d#29 13

#28e#29 12

Topic,Buying and Selling Di#0Eculty,1

#25 Correct Responses,89 Discrimination Index,25

Correct Answer,E

9.40 Dudley has a utility function U#28C;R#29=C,#2812,R#29

2; where R is leisure and C is consumption

per day,He has 16 hours per day to divide between work and leisure,If Dudley has a nonlabor

income of $40 per day and is paid a wage of $0 per hour,how many hours of leisure will he choose

per day?

#28a#29 7

#28b#29 8

#28c#29 9

#28d#29 11

#28e#29 10

MULTIPLE CHOICE 169

Topic,Buying and Selling Di#0Eculty,1

#25 Correct Responses,97 Discrimination Index,10

Correct Answer,B

9.41 Mr,Cog has 18 hours per day to divide between labor and leisure,His utility function is

U#28C;R#29=CR; where C is dollars per year spent on consumption and R is hours of leisure,If he

has 19 dollars of nonlabor income per day and gets a wage rate of 15 dollars per hour when he

works,his budget equation,expressing combinations of consumption and leisure that he can a#0Bord

to have,can be written as:

#28a#29 15R+ C = 19.

#28b#29 15R+C = 289.

#28c#29 R+C=15 = 379.

#28d#29 C =289+15R.

#28e#29 C = 346+ 15R.

Topic,Buying and Selling Di#0Eculty,1

#25 Correct Responses,97 Discrimination Index,10

Correct Answer,B

9.42 Mr,Cog has 18 hours per day to divide between labor and leisure,His utility function is

U#28C;R#29=CR;where C is dollars per year spent on consumption and R is hours of leisure,If he has

5 dollars of nonlabor income per day and gets a wage rate of 18 dollars per hour when he works,his

budget equation,expressing combinations of consumption and leisure that he can a#0Bord to have,

can be written as:

#28a#29 18R+ C =5.

#28b#29 18R+C = 329.

#28c#29 R+C=18 = 437.

#28d#29 C =329+18R.

#28e#29 C = 344+ 18R.

CHAPTER 9 Buying and Selling 170

Topic,Buying and Selling Di#0Eculty,0

#25 Correct Responses,47 Discrimination Index,43

Correct Answer,D

9.43 Mr,Cog has 18 hours per day to divide between labor and leisure,His utility function is

U#28C;R#29=CR; where C is dollars per year spent on consumption and R is hours of leisure,If he

has a nonlabor income of 40 dollars per dayandawage rate of 8 dollars per hour,he will choose

a combination of labor and leisure that allows him to spend:

#28a#29 184 dollars per day on consumption.

#28b#29 82 dollars per day on consumption.

#28c#29 112 dollars per day on consumption.

#28d#29 92 dollars per day on consumption.

#28e#29 138 dollars per day on consumption.

Topic,Buying and Selling Di#0Eculty,0

#25 Correct Responses,47 Discrimination Index,43

Correct Answer,D

9.44 Mr,Cog has 18 hours per day to divide between labor and leisure,His utility function is

U#28C;R#29=CR; where C is dollars per year spent on consumption and R is hours of leisure,If he

has a nonlabor income of 44 dollars per dayandawage rate of 19 dollars per hour,he will choose

a combination of labor and leisure that allows him to spend:

#28a#29 386 dollars per day on consumption.

#28b#29 183 dollars per day on consumption.

#28c#29 215 dollars per day on consumption.

#28d#29 193 dollars per day on consumption.

#28e#29 289.50 dollars per day on consumption.

MULTIPLE CHOICE 171

Topic,Buying and Selling Di#0Eculty,3

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,E

9.45 Ollie South has an endowment of 10 guns and 10 pounds of butter,He can buy or sell

butter at $1 a pound,But the world market for guns is more complicated,he can buy guns for $5

each,but he can sell guns for only $2,If we graph his budget line with guns on the horizontal axis

and butter on the vertical axis,then Ollie's budget line is:

#28a#29 a straight line joining #2812;0#29 and #280;30#29.

#28b#29 a straight line joining #2814;0#29 and #280;14#29.

#28c#29 a straight line with slope,2=5 through the point #2810;10#29.

#28d#29 a straight line with slope,5=2 going through the point #2810;10#29.

#28e#29 none of the above.

Topic,Buying and Selling Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,A

9.46 Charlie consumes apples and bananas; his utility function is U#28a;b#29=ab,Charlie's fruit

farm yielded 5 apples and 10 bananas,In addition,Charlie has $10 that he was given by a secret

admirer,Charlie can buy or sell apples at $2 each and he can buy or sell bananas at $1 each.

Charlie will consume:

#28a#29 more apples and more bananas than he grows.

#28b#29 more apples and fewer bananas than he grows.

#28c#29 fewer apples and more bananas than he grows.

#28d#29 fewer apples and more bananas than he grows.

#28e#29 exactly as many apples as he grows and more bananas than he grows.

CHAPTER 9 Buying and Selling 172

Topic,Buying and Selling Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,A

9.47 A farmer gets 20 eggs and 10 tomatoes every week from her chickens and her tomato plants.

She has no other source of income,She has convex,downward-sloping indi#0Berence curves,The

current market prices are $2 per egg and $3 per tomato,At these prices she chooses the same

bundle that she is endowed with #2820 eggs and 10 tomatoes#29.

#28a#29 If relative prices change in anyway whatsoever,she will certainly be no worse o#0B and may be better o#0B

than she was before the price change.

#28b#29 An increase in the price of eggs #28with the price of tomatoes remaining constant#29 will decrease her utility.

#28c#29 An increase in the price of tomatoes #28with the price of eggs remaining constant#29 will make her worse o#0B.

#28d#29 If both prices rise,she will be worse o#0B,but if only one price rises she might be made better o#0B or worse

o#0B,depending on her tastes.

#28e#29 Since she earns her income from tomatoes and eggs only,she treats eggs and tomatoes as perfect substi-

tutes.

Essay Buying and Selling

Topic,Buying and Selling Di#0Eculty,3

#25 Correct Responses,0 Discrimination Index,0

9.1 Mr,and Mrs,Brauer owned their own home,There was a real estate boom in their town

and the price of house doubled,Their income and other prices stayed constant,The Brauer's

complained that "we are being driven from our home,we can't a#0Bord to live here any more",a#29

Draw a diagram that illustrates what happened to the Brauer's budget constraint,b#29 Could they

have been made worse o#0B by the change? Could they have been made better o#0B? Explain whyor

why not.

Answer,A good diagram would show their budget line between housing and other goods pivoting

around their current consumption,They can't be made worse o#0B because they can still a#0Bord their

old consumption bundle,They might be better o#0B because they mightchoose to consume less

housing and more other goods.

Topic,Buying and Selling Di#0Eculty,1

#25 Correct Responses,0 Discrimination Index,0

9.2 Harvey's net demands for goods 1 and 2 are #282;,3#29 and his endowmentis#286;5#29,a#29 What

are his gross demands? b#29 Draw a diagram illustrating his budget line,his endowment,and his

consumption,#28Put good 1 on the horizontal axis.#29 #28c#29 Draw a dotted line to show what his budget

line would be if the price of good 1 doubled and the price of good 2 stayed the same.

Answer,Harvey's gross demands are #288;2#29,The graph is pretty straightforward,Check the text

for similar graphs.

Topic,Buying and Selling Di#0Eculty,2

#25 Correct Responses,0 Discrimination Index,0

9.3 Is it ever possible that if someone is a net seller of a good,and the price of the good he sells

falls,the consumer could wind up better o#0B than he was before by switching from being a seller to

being a buyer? Draw a graph to justify your answer.

Answer,Yes,it is possible,For example,one can draw a budget line and an indi#0Berence curve for a

person who is a net seller of the good on the horizontal axis,The price decrease pivots the budget

line around his initial endowment which is located below and to the right of his consumption.

Draw the pivoted line so that it crosses the indi#0Berence curve,The consumer can now bene#0Ct by

becoming a net buyer of the good on the horizontal axis.

CHAPTER 9 Buying and Selling 174

Topic,Buying and Selling Di#0Eculty,1

#25 Correct Responses,0 Discrimination Index,0

9.4 Is it ever possible that an increase in the price of a good for which a person is a net seller

can make him worse o#0B? Use a diagram to illustrate your answer.

Answer,No,it is not,If one is a net seller of a good and its price rises,one can still a#0Bord the

old consumption bundle and hence can't be made worse o#0B.

Topic,Buying and Selling Di#0Eculty,1

#25 Correct Responses,0 Discrimination Index,0

9.5 Peter has an endowment of 3 units of good x and 5 units of good y,He can buy and sell x at

a price of $100 and y at a price of $200,He receives an income of $700 as alimony from a former

spouse,a#29 DrawPeter's budget line for x and y,Show his initial endowmentofxand y on your

diagram,b#29 Calculate the amountofxthat he could a#0Bord if he bought only x and of y he could

a#0Bord if he bought only y,c#29 Write an equation for Peter's budget.

Answer,He could a#0Bord 20 units of x and no y or 10 units of y and no x,His budget is

100x+ 200y = 2000.

Topic,Buying and Selling Di#0Eculty,2

#25 Correct Responses,0 Discrimination Index,0

9.6 Dudley's utility function for goods and leisure is U#28G;L#29=G,#2820,L#29#2820,L#29 where G is

consumption of goods and L is the number of hours of leisure per day,Goods cost $1 per unit.

#28a#29 If Dudley has an income from nonlabor sources of $25 per day and could work as muchashe

chose to but gets zero wages,howmuchwould he work? #28b#29 Sketch Dudley's indi#0Berence curves on

a graph with leisure on the horizontal axis and income on the vertical axis,If Dudley's non-labor

income were $25 a day and he could work as much as he wished for $10 an hour,how many hours

adaywould he choose to work?

Answer,a#29 4 hours a day,b#299 hours a day.

ESSAY 175

Topic,Buying and Selling Di#0Eculty,2

#25 Correct Responses,0 Discrimination Index,0

9.7 Marilyn is a journalist,She is considering two possible jobs,One job is as an editor for a

magazine,The other job is writing

"free-lance" articles and selling them to whoever buys them,If she works for the magazine,she

must spend 10 hours a dayatwork and commuting,She will be paid $130 a day net of commuting

costs and taxes if she takes this job,If she writes free-lance articles,she can work at home and

work as many hours a day as she pleases,She estimates that she would earn $10 an hour after

taxes if she does this,Her utility function is U =#28R

3

#29Cwhere R

3

is the cube of the number of

hours a day she spends not working or commuting and C is her earnings,a#29 If Marilyn chooses to

free-lance,how many hours will she work? b#29 Calculate her utilityineach job and tell which she

will choose.

Answer,a#29 6 hours,b#29 If she freelances,U = 349;920,If she works for the magazine U = 356;720.

She should choose the magazine.

Topic,Buying and Selling Di#0Eculty,1

#25 Correct Responses,0 Discrimination Index,0

9.8 Ernie's wage rate is $10 an hour,He has no earnings other than his labor income,His utility

function is U#28C;L#29=CR

2

where C is the amount of money he spends on consumption,and R is

the number of hours a day he spends NOT working,a#29 Write an equation that describes Ernie's

budget constraint,b#29 How many hours does Ernie choose to work per day? c#29 Howmuch money

does he spend on consumption per day?

Answer,a#29 C +10R= 240,b#298,c#2980.

Topic,Buying and Selling Di#0Eculty,3

#25 Correct Responses,0 Discrimination Index,0

9.9 May's utility function is U = C +14D

1=2

,:5#28H +J#29

2

where C is dollars spent on goods other

than housecleaning,D is the number of hours per day that somebody spends cleaning her house,

H is the number of hours per dayMay spends cleaning her house,and J is the number of hours

per dayMay spends working at her job,All May's income comes from her job,She can work

as many hours a day as she wishes at a wage of $7 an hour,a#29 If she cannot hire anyone to do

her housecleaning,how many hours will she spend on the job and how many hours will she spend

housecleaning? b#29 If she can hire a housecleaner at $5 an hour,how many hours will she work on

her job,how many hours of housecleaning will she hire,and how many hours will she clean house?

Answer,a#296 hours,1 hour b#297 hours,49=25; 0

CHAPTER 9 Buying and Selling 176

Topic,Buying and Selling Di#0Eculty,2

#25 Correct Responses,0 Discrimination Index,0

9.10 Leo thinks leisure and goods are perfect complements,Goods cost $1 per unit,Leo wants

to consume 5 units of goods per hour of leisure,Leo can work as muchashewants to at the wage

rate of $15 an hour,He has no other source of income,a#29 How many hours a day will Leo choose

to spend at leisure? b#29 Draw a diagram showing Leo's budget and his choice of goods and leisure.

c#29 Will Leo work more or less if his wage rate increases?

Answer,#28a#29 18 hours a day #28c#29 less

Topic,Buying and Selling Di#0Eculty,2

#25 Correct Responses,0 Discrimination Index,0

9.11 Lucetta changes light bulbs,She is paid $10 an hour,She can work as many hours as she

wishes,Lucetta works only 6 hours a day,But she says she loves her job and is happier working at

this job than she would be if she made the same income without working at all,Though this may

sound strange,Lucetta is perfectly rational,Draw a graph showing leisure on the horizontal axis

and income on the vertical axis,Draw a budget line and some indi#0Berence curves for Lucetta that

are consistent with Lucetta's words and actions,Explain in words what happens.

Answer,Work for Lucetta is desirable on average but undesirable at the margin when she is

working 6 hours a day,The diagram will work if you draw a U-shaped indi#0Berence curve tangent

to her budget line at 6 hours,Make sure that this indi#0Berence curveintersects the horizontal line

through her consumption choice somewhere to the right of her choice but to the left of where she

doesn't work at all.

Chapter 10

True-False Intertemporal Choice

Topic,Intertemporal Choice Di#0Eculty,2

#25 Correct Responses,71 Discrimination Index,40

Correct Answer,True

10.1 An increase in the interest rate can not make a lender who satis#0Ces WARP become a

borrower.

Topic,Intertemporal Choice Di#0Eculty,1

#25 Correct Responses,61 Discrimination Index,67

Correct Answer,True

10.2 If the real interest rate is positive,then a unit of future consumption can be had for the

sacri#0Cce of less than one unit of current consumption.

Topic,Intertemporal Choice Di#0Eculty,1

#25 Correct Responses,74 Discrimination Index,23

Correct Answer,False

10.3 The real interest rate is the interest rate that one receives net of brokerage costs or fees

imposed by #0Cnancial intermediaries.

Topic,Intertemporal Choice Di#0Eculty,1

#25 Correct Responses,84 Discrimination Index,8

Correct Answer,True

10.4 An increase in the interest rate will necessarily result in a decrease in the presentvalue of

a given stream of positive incomes.

Topic,Intertemporal Choice Di#0Eculty,1

#25 Correct Responses,83 Discrimination Index,20

Correct Answer,True

10.5 In a graph that has current consumption on the horizontal axis and future consumption on

the vertical axis,the horizontal intercept of the budget line is the presentvalue of all one's income

in the two periods.

CHAPTER 10 Intertemporal Choice 178

Topic,Intertemporal Choice Di#0Eculty,1

#25 Correct Responses,78 Discrimination Index,10

Correct Answer,True

10.6 If a consumer can borrow and lend at the same interest rate,then he can exactly a#0Bord a

consumption plan if the presentvalue of his consumption equals the presentvalue of his income.

Topic,Intertemporal Choice Di#0Eculty,1

#25 Correct Responses,79 Discrimination Index,24

Correct Answer,False

10.7 It would be a mistaketochoose the investment that maximizes the presentvalue of your

income stream unless you planned to spend your entire wealth in the current time period.

Topic,Intertemporal Choice Di#0Eculty,0

#25 Correct Responses,33 Discrimination Index,0

Correct Answer,False

10.8 If the interest rate at whichyou can borrow is higher than the interest rate at whichyou

can lend,your budget for current and future consumption is still a convex set.

Topic,Intertemporal Choice Di#0Eculty,2

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,False

10.9 If apples today are perfect substitutes for bananas today,then apples todaymust also be

perfect substitutes for bananas tomorrow.

Topic,Intertemporal Choice Di#0Eculty,2

#25 Correct Responses,55 Discrimination Index,6

Correct Answer,True

10.10 Isaiah is a net borrower when the interest rate is 5#25 and a net saver when the interest

rate is 25#25,An increase in the interest rate from 5#25 to 25#25 may make Isaiah worse o#0B.

Topic,Intertemporal Choice Di#0Eculty,2

#25 Correct Responses,33 Discrimination Index,15

Correct Answer,False

10.11 If the interest rate is less than the in#0Dation rate,a rational person will never save money.

TRUE-FALSE 179

Topic,Intertemporal Choice Di#0Eculty,0

#25 Correct Responses,87 Discrimination Index,13

Correct Answer,False

10.12 An increase in the interest rate can make a utility-maximizing lender become a borrower.

Topic,Intertemporal Choice Di#0Eculty,1

#25 Correct Responses,56 Discrimination Index,26

Correct Answer,False

10.13 The intertemporal budget constraint for a consumer can be expressed by setting the present

value of her lifetime consumption equal to the future value of her endowment.

Topic,Intertemporal Choice Di#0Eculty,1

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,False

10.14 The nominal interest rate is 5#25 and the in#0Dation rate is 6#25,A rational consumer will not

choose to save.

Topic,Intertemporal Choice Di#0Eculty,1

#25 Correct Responses,70 Discrimination Index,27

Correct Answer,False

10.15 If the in#0Dation rate doubles and the nominal interest rate remains constant,the real inter-

est rate must be halved.

Topic,Intertemporal Choice Di#0Eculty,1

#25 Correct Responses,79 Discrimination Index,13

Correct Answer,True

10.16 If the nominal interest rate is 3#25 and if prices fall by2#25peryear,then the real rate of

interest is approximately 5#25.

Topic,Intertemporal Choice Di#0Eculty,1

#25 Correct Responses,79 Discrimination Index,13

Correct Answer,True

10.17 If the nominal interest rate is 4#25 and if prices fall by4#25peryear,then the real rate of

interest is approximately 8#25.

CHAPTER 10 Intertemporal Choice 180

Topic,Intertemporal Choice Di#0Eculty,1

#25 Correct Responses,73 Discrimination Index,35

Correct Answer,False

10.18 A utility maximizing consumer would not choose the investment that maximizes the present

value of her income stream unless she planned to spend her entire wealth in the #0Crst period.

Topic,Intertemporal Choice Di#0Eculty,2

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,True

10.19 Susan is a net borrower when the interest rate is 10#25 and a net saver when the interest

rate is 20#25,A decrease in the interest rate from 20#25 to 10#25 may make Susan worse o#0B.

Topic,Intertemporal Choice Di#0Eculty,1

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,False

10.20 A newspaper article claims that more students are choosing 1,year MBA programs instead

of 2,year programs because the 2,year programs no longer guarantee a well-paid job,If the length

of your MBA program doesn't matter to employers,and you take a job right after completing your

MBA,the presentvalue of your lifetime earnings is tbe the same whether you takea1,year or

2,year program.

Topic,Intertemporal Choice Di#0Eculty,2

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,True

10.21 If the interest rate is 5#25 and will be 5#25 forever,the presentvalue of an income stream

consisting of $10 a year paid to you on February 11 of every year,starting rightnow,is $210.

Multiple Choice Intertemporal Choice

Topic,Intertemporal Choice Di#0Eculty,3

#25 Correct Responses,42 Discrimination Index,13

Correct Answer,B

10.1 If current and future consumption are both normal goods,an increase in the interest rate

will necessarily:

#28a#29 cause savers to save more.

#28b#29 cause borrowers to borrow less.

#28c#29 reduce everyone's current consumption.

#28d#29 makeeveryone worse o#0B.

#28e#29 none of the above.

Topic,Intertemporal Choice Di#0Eculty,2

#25 Correct Responses,24 Discrimination Index,19

Correct Answer,A

10.2 Harvey Habit has a utility function U#28c

1;c

2

#29=minfc

1;c

2

gwhere c

1

and c

2

are his consump-

tion in periods 1 and 2 respectively,Harvey earns $189 in period 1 and he will earn $63 in period

2,Harvey can borrow or lend at an interest rate of 10#25,There is no in#0Dation.

#28a#29 Harvey will save 60.

#28b#29 Harvey will borrow 60.

#28c#29 Harvey will neither borrow nor lend.

#28d#29 Harvey will save 124.

#28e#29 None of the above.

Topic,Intertemporal Choice Di#0Eculty,2

#25 Correct Responses,24 Discrimination Index,19

Correct Answer,A

10.3 Harvey Habit has a utility function U#28c

1;c

2

#29=minfc

1;c

2

gwhere c

1

and c

2

are his consump-

tion in periods 1 and 2 respectively,Harvey earns $168 in period 1 and he will earn $105 in period

2,Harvey can borrow or lend at an interest rate of 10#25,There is no in#0Dation.

#28a#29 Harvey will save 30.

#28b#29 Harvey will borrow 30.

#28c#29 Harvey will neither borrow nor lend.

#28d#29 Harvey will save 133.

#28e#29 None of the above.

CHAPTER 10 Intertemporal Choice 182

Topic,Intertemporal Choice Di#0Eculty,3

#25 Correct Responses,23 Discrimination Index,21

Correct Answer,D

10.4 O,B,Kandle will live for only two periods,In the #0Crst period he will earn $100,000,In

the second period he will retire and live on his savings,Mr,Kandle has a Cobb-Douglas utility

function U#28c

1;c

2

#29=c

2

1

c

2

where c

1

is his period 1 consumption and c

2

is his period 2 consumption.

The real interest rate is r.

#28a#29 If the interest rate rises,Mr,Kandle will save more.

#28b#29 If the interest rises,Mr,Kandle will save less.

#28c#29 The e#0Bect of the interest rate is ambiguous,but we can tell that he will arrange to consume the same

amount in each period.

#28d#29 The change in the interest rate won't a#0Bect his saving.

#28e#29 None of the above.

Topic,Intertemporal Choice Di#0Eculty,2

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,B

10.5 Suppose that a person can borrow and lend at an interest rate of 10 percent,But there is a

5#25 rate of in#0Dation and one has to pay an income tax of 30 #25 on all interest income,If you borrow

money,you can deduct interest as an expense,Where current consumption is on the horizontal

axis and future consumption is on the vertical axis:

#28a#29 the budget line will have a kink at the pointofnosaving or lending.

#28b#29 the budget line will be a straight line with a slope of about,1:02.

#28c#29 the budget line will be a straight line with a slope of about,1:05.

#28d#29 the budget line will be a straight line with a slope of about,1:35.

#28e#29 None of the above.

MULTIPLE CHOICE 183

Topic,Intertemporal Choice Di#0Eculty,3

#25 Correct Responses,26 Discrimination Index,22

Correct Answer,B

10.6 For every twoboxes of strawberries that she consumes,Millicent insists on having one pitcher

of cream,She does not,however,insist on consuming the same amountevery week,Her utility

function is U = minfs

1;2c

1

gminfs

2;2c

2

g where s

1

and s

2

are the numberofboxes of strawberries she

consumes this week and next week and c

1

and c

2

are the number of pitchers of cream she consumes

this week and next,Strawberries cost $2 a box and cream costs $1 a pitcher,She has a present

value of $100 to spend on these goods in the next twoweeks,The weekly interest rate is 1#25,How

manyboxes of strawberries will she consume this week?

#28a#29 10

#28b#29 20

#28c#29 22

#28d#29 14.1

#28e#29 6.06

Topic,Intertemporal Choice Di#0Eculty,2

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,A

10.7 Roger's utility function is U = minfa

1;a

2

gminfb

1;b

2

g where a

1

and a

2

are the number of

piano lessons he consumes this year and next and b

1

and b

2

are the number of ice skating lessons

he consumes this year and next,The price of piano lessons is $10 each and the price of ice skating

lessons is $4 each,The prices won't change,but the interest rate is 7#25,If Roger consumes 20

piano lessons this year,how many ice-skating lessons will he consume next year?

#28a#29 50

#28b#29 20

#28c#29 40

#28d#29 30

#28e#29 There is not enough information for us to tell.

CHAPTER 10 Intertemporal Choice 184

Topic,Intertemporal Choice Di#0Eculty,2

#25 Correct Responses,21 Discrimination Index,48

Correct Answer,B

10.8 If a consumer views a unit of consumption in period 1 as a perfect substitute #28one-for-one#29

for a unit of consumption in period 2 and if the real interest rate is positive,the consumer will:

#28a#29 consume only in period 1.

#28b#29 consume only in period 2.

#28c#29 consume equal amounts in each period.

#28d#29 consume more in period 1 than in period 2 if income elasticity exceeds 1,else would consume more in

period 2 than in period 1.

#28e#29 equalize expenditures but not consumption in the two periods.

Topic,Intertemporal Choice Di#0Eculty,2

#25 Correct Responses,66 Discrimination Index,39

Correct Answer,A

10.9 If the price level increases by 80#25 in one year,then for the real rate of interest to be 10#25,

the nominal rate of interest would havetobe:

#28a#29 98#25.

#28b#29 70#25.

#28c#29 18#25.

#28d#29 88#25.

#28e#29 72#25.

Topic,Intertemporal Choice Di#0Eculty,2

#25 Correct Responses,51 Discrimination Index,32

Correct Answer,A

10.10 Kenny Kink's utility function is u#28c

1;c

2

#29=minfc

1;c

2

g;where c

1

is his consumption in pe-

riod 1 and c

2

is his consumption in period 2,He earns $200 in period 1 and $220 in period 2.

Kenny can borrow and lend at an interest rate of 10 percent,and there is no in#0Dation,The number

of dollars that Kenny spends on consumption in the #0Crst period must be:

#28a#29 more than 200,but less than 220.

#28b#29 exactly 200.

#28c#29 more than 220.

#28d#29 exactly 180.

#28e#29 more than 180,but less than 200.

MULTIPLE CHOICE 185

Topic,Intertemporal Choice Di#0Eculty,2

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,D

10.11 The nominal interest rate is 5#25 and the in#0Dation rate is 6#25,A rational consumer:

#28a#29 will not save since the real interest rate is negative.

#28b#29 will save less than 1#25 of her income.

#28c#29 will save the same amount regardless of the in#0Dation rate,only the nominal interest rate matters.

#28d#29 mightsave despite the negative real interest rate.

#28e#29 will necessarily save less if the in#0Dation rate rises and the nominal interest rate does not change.

Topic,Intertemporal Choice Di#0Eculty,1

#25 Correct Responses,0 Discrimination Index,1

Correct Answer,A

10.12 If the real rate of interest is 8#25 and the nominal rate of interest is 28#25,then the rate of

in#0Dation must be about #28pick the closest number#29:

#28a#29 36#25.

#28b#29 24.26#25.

#28c#29 3.50#25.

#28d#29 18.52#25.

#28e#29 23 #25.

Topic,Intertemporal Choice Di#0Eculty,1

#25 Correct Responses,0 Discrimination Index,1

Correct Answer,A

10.13 If the real rate of interest is 5#25 and the nominal rate of interest is 31#25,then the rate of

in#0Dation must be about #28pick the closest number#29:

#28a#29 36#25.

#28b#29 27.26#25.

#28c#29 6.20#25.

#28d#29 24.76#25.

#28e#29 29 #25.

CHAPTER 10 Intertemporal Choice 186

Topic,Intertemporal Choice Di#0Eculty,3

#25 Correct Responses,39 Discrimination Index,36

Correct Answer,A

10.14 In an isolated mountain village,the only crop is corn,Villagers plan for two time periods.

In the #0Crst time period each villager will harvest 100 bushels,In the second time period,no corn

will be harvested,There is no trade with the rest of the world and no stocks of corn remain from

before the #0Crst period,Corn can be stored from one time period to the next,but rats eat 25#25

of what is stored,The villagers all have Cobb-Douglas utility functions U#28C

1;C

2

#29=C

1

C

2

and can

allocate their own corn between consumption and storage as they wish,If the introduction of cats

to the village reduces the rats' predations to 10#25 of what is stored:

#28a#29 consumption in the #0Crst time period will not change.

#28b#29 villagers will consume 5#25 more corn in each time period.

#28c#29 consumption in the #0Crst time period will increase,but by less than 5#25.

#28d#29 consumption in the second time period would not change.

#28e#29 consumption in the #0Crst time period will decrease.

Topic,Intertemporal Choice Di#0Eculty,2

#25 Correct Responses,26 Discrimination Index,53

Correct Answer,B

10.15 Minnie has income $300 in period 1 and will have income $625 in period 2,Her utility

function is U#28c

1;c

2

#29=c

0:80

1

c

0:20

2

where c

1

is her consumption in period 1 and c

2

is her consumption

in period 2,The interest rate is 0.25,If she unexpectedly won a lottery whichpays its prize in

period 2 so that her income in period 2 would be $1,250 and her income in period 1 would remain

$300,then her consumption in period 1 would:

#28a#29 double.

#28b#29 increase by the amount 400.

#28c#29 increase by the amount 150.

#28d#29 stay constant.

#28e#29 increase by the amount 120.

MULTIPLE CHOICE 187

Topic,Intertemporal Choice Di#0Eculty,2

#25 Correct Responses,26 Discrimination Index,53

Correct Answer,B

10.16 Heidi has income $500 in period 1 and will have income $625 in period 2,Her utility

function is U#28c

1;c

2

#29=c

0:20

1

c

0:80

2

where c

1

is her consumption in period 1 and c

2

is her consumption

in period 2,The interest rate is 0.25,If she unexpectedly won a lottery whichpays its prize in

period 2 so that her income in period 2 would be $1,250 and her income in period 1 would remain

$500,then her consumption in period 1 would:

#28a#29 double.

#28b#29 increase by the amount 100.

#28c#29 increase by the amount 250.

#28d#29 stay constant.

#28e#29 increase by the amount 50.

Topic,Intertemporal Choice Di#0Eculty,2

#25 Correct Responses,29 Discrimination Index,26

Correct Answer,E

10.17 Holly's utility function is U#28c

1;c

2

#29=c

1=2

1

+0:87c

1=2

2

where c

1

is her consumption in period

1 and c

2

is her consumption in period 2,In period 2,her income is 2 times as large as her income

in period 1,At what interest rate will she choose to consume the same amount in period 2 as in

period 1? #28Choose the closest answer.#29

#28a#29 0.30

#28b#29 0.08

#28c#29 0.23

#28d#29 0

#28e#29 0.15

Topic,Intertemporal Choice Di#0Eculty,2

#25 Correct Responses,29 Discrimination Index,26

Correct Answer,E

10.18 Linda's utility function is U#28c

1;c

2

#29=c

1=2

1

+0:95c

1=2

2

where c

1

is her consumption in period

1 and c

2

is her consumption in period 2,In period 2,her income is 4 times as large as her income

in period 1,At what interest rate will she choose to consume the same amount in period 2 as in

period 1? #28Choose the closest answer.#29

#28a#29 0.20

#28b#29 0.03

#28c#29 0.08

#28d#29 0

#28e#29 0.05

CHAPTER 10 Intertemporal Choice 188

Topic,Intertemporal Choice Di#0Eculty,2

#25 Correct Responses,58 Discrimination Index,32

Correct Answer,B

10.19 Will Wisp will live for exactly two periods,His utility function is U#28c

1;c

2

#29=c

1

c

2

where c

1

is consumption in period 1 and c

2

is consumption in period 2,He will have no income in period 2.

His income in period 1 is 80,000,If the interest rate rises from 10#25 to 12#25:

#28a#29 his savings will increase by 2#25 and his consumption in period 2 will increase.

#28b#29 his savings will not change,but his consumption in period 2 will increase by 800.

#28c#29 his consumption in both periods will increase.

#28d#29 his consumption in both periods will decrease.

#28e#29 his consumption in period 1 will decrease by r#25 and his consumption in period 2 will increase.

Topic,Intertemporal Choice Di#0Eculty,2

#25 Correct Responses,58 Discrimination Index,32

Correct Answer,B

10.20 Will Wisp will live for exactly two periods,His utility function is U#28c

1;c

2

#29=c

1

c

2

where c

1

is consumption in period 1 and c

2

is consumption in period 2,He will have no income in period 2.

His income in period 1 is 30,000,If the interest rate rises from 10#25 to 11#25:

#28a#29 his savings will increase by 1#25 and his consumption in period 2 will increase.

#28b#29 his savings will not change,but his consumption in period 2 will increase by 150.

#28c#29 his consumption in both periods will increase.

#28d#29 his consumption in both periods will decrease.

#28e#29 his consumption in period 1 will decrease by r#25 and his consumption in period 2 will increase.

Topic,Intertemporal Choice Di#0Eculty,0

#25 Correct Responses,24 Discrimination Index,21

Correct Answer,B

10.21 Peregrine consumes #28700;880#29 and earns #28600;990#29,If the interest rate is 0.10,the present

value of his endowment is:

#28a#29 1,590.

#28b#29 1,500.

#28c#29 1,580.

#28d#29 3,150.

#28e#29 3,750.

MULTIPLE CHOICE 189

Topic,Intertemporal Choice Di#0Eculty,0

#25 Correct Responses,24 Discrimination Index,21

Correct Answer,B

10.22 Peregrine consumes #281;200;1;080#29 and earns #28600;1;800#29,If the interest rate is 0.20,the

presentvalue of his endowment is:

#28a#29 2,400.

#28b#29 2,100.

#28c#29 2,280.

#28d#29 4,620.

#28e#29 5,220.

Topic,Intertemporal Choice Di#0Eculty,0

#25 Correct Responses,69 Discrimination Index,39

Correct Answer,B

10.23 Molly has income $400 in period 1 and income $600 in period 2,Her utility function is

c

a

1

c

1,a

2; where a =0:40 and the interest rate is 0.20,If her income in period 1 doubled and her

income in period 2 stayed the same,her consumption in period 1 would:

#28a#29 double.

#28b#29 increase by 160.

#28c#29 increase by80

#28d#29 stay constant.

#28e#29 increase by 400.

Topic,Intertemporal Choice Di#0Eculty,0

#25 Correct Responses,69 Discrimination Index,39

Correct Answer,B

10.24 Molly has income $600 in period 1 and income $230 in period 2,Her utility function is

c

a

1

c

1,a

2; where a =0:20 and the interest rate is 0.15,If her income in period 1 doubled and her

income in period 2 stayed the same,her consumption in period 1 would:

#28a#29 double.

#28b#29 increase by 120.

#28c#29 increase by60

#28d#29 stay constant.

#28e#29 increase by 600.

CHAPTER 10 Intertemporal Choice 190

Topic,Intertemporal Choice Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,B

10.25 Mr,O.B,Kandle has a utility function c

1

c

2

where c

1

is his consumption in period 1 and c

2

is his consumption in period 2,He will have no income in Period 2,If he had an income of 80,000

in period 1 and the interest rate increased from 10#25 to 19#25:

#28a#29 his savings would increase by 9#25 and his consumption in period 2 would also increase.

#28b#29 his savings would not change,but his consumption in period 2 would increase by 3,600.

#28c#29 his consumption in both periods would be increase.

#28d#29 his consumption in both periods would decrease.

#28e#29 his consumption in period 1 would decrease by 19#25 and his consumption in period 2 would also decrease.

Topic,Intertemporal Choice Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,B

10.26 Mr,O.B,Kandle has a utility function c

1

c

2

where c

1

is his consumption in period 1 and c

2

is his consumption in period 2,He will have no income in Period 2,If he had an income of 60,000

in period 1 and the interest rate increased from 10#25 to 12#25:

#28a#29 his savings would increase by 2#25 and his consumption in period 2 would also increase.

#28b#29 his savings would not change,but his consumption in period 2 would increase by 600.

#28c#29 his consumption in both periods would be increase.

#28d#29 his consumption in both periods would decrease.

#28e#29 his consumption in period 1 would decrease by 12#25 and his consumption in period 2 would also decrease.

Topic,Intertemporal Choice Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,E

10.27 Harvey Habit has a utility function U#28c

1;c

2

#29=minfc

1;c

2

g,If he had an income of 880 in

period 1,and 1,320 in period 2,and if the interest rate were 0.20,howmuchwould Harvey choose

to spend on bread in period 1?

#28a#29 1,620

#28b#29 360

#28c#29 540

#28d#29 2,160

#28e#29 1,080

MULTIPLE CHOICE 191

Topic,Intertemporal Choice Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,E

10.28 Harvey Habit has a utility function U#28c

1;c

2

#29=minfc

1;c

2

g,If he had an income of 645 in

period 1,and 860 in period 2,and if the interest rate were 0.15,howmuchwould Harvey choose

to spend on bread in period 1?

#28a#29 1,117.50

#28b#29 248.33

#28c#29 372.50

#28d#29 1,490

#28e#29 745

Topic,Intertemporal Choice Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,A

10.29 In an isolated mountain village,the harvest this year is 3,000 and the harvest next year

will be 1,100,The villagers all have utility functions U#28c

1;c

2

#29=c

1

c

2;where c

1

is consumption this

year and c

2

is consumption next year,Rats eat 10#25 of any grain that is stored for a year,How

much grain could the villagers consume next year if they consume 1000 bushels of grain this year?

#28a#29 2,900

#28b#29 1,800

#28c#29 4,100

#28d#29 4,350

#28e#29 1,200

CHAPTER 10 Intertemporal Choice 192

Topic,Intertemporal Choice Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,A

10.30 In an isolated mountain village,the harvest this year is 4,000 and the harvest next year

will be 800,The villagers all have utility functions U#28c

1;c

2

#29=c

1

c

2;where c

1

is consumption this

year and c

2

is consumption next year,Rats eat 50#25 of any grain that is stored for a year,How

much grain could the villagers consume next year if they consume 1000 bushels of grain this year?

#28a#29 2,300

#28b#29 1,500

#28c#29 4,800

#28d#29 3,450

#28e#29 900

Topic,Intertemporal Choice Di#0Eculty,0

#25 Correct Responses,16 Discrimination Index,55

Correct Answer,C

10.31 Patience has a utility function U#28c

1;c

2

#29=c

1=2

1

+0:80 c

1=2

2;c

1

is her consumption in period

1 and c

2

is her consumption in period 2,Her income in period 1 is 5 times as large as her income

in period 2,At what interest rate will she choose to consume the same amount in period 1 as in

period 2?

#28a#29 1.25

#28b#29 0.13

#28c#29 0.25

#28d#29 0

#28e#29 0.38

MULTIPLE CHOICE 193

Topic,Intertemporal Choice Di#0Eculty,0

#25 Correct Responses,16 Discrimination Index,55

Correct Answer,C

10.32 Patience has a utility function U#28c

1;c

2

#29=c

1=2

1

+0:87 c

1=2

2;c

1

is her consumption in period

1 and c

2

is her consumption in period 2,Her income in period 1 is 6 times as large as her income

in period 2,At what interest rate will she choose to consume the same amount in period 1 as in

period 2?

#28a#29 0.90

#28b#29 0.08

#28c#29 0.15

#28d#29 0

#28e#29 0.23

Topic,Intertemporal Choice Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,C

10.33 Samantha Smoothie's utility function is U#28c

1;c

2

#29=c

1

c

2

where c

1

is her consumption in

period 1 and c

2

is her consumption in period 2,She earns $200 in period 1 and $220 in period

2,Samantha can borrow and lend at an interest rate of 10 percent and there is no in#0Dation,The

number of dollars that Samantha spends in the second period must be

#28a#29 more than 200 but less than 220.

#28b#29 exactly 220.

#28c#29 more than 220.

#28d#29 exactly 200.

#28e#29 less than 200.

Topic,Intertemporal Choice Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,B

10.34 I am always indi#0Berentbetween a unit of consumption today and tomorrow and the interest

rate is 5 percent.

#28a#29 My intertemporal indi#0Berence curve is horizontal.

#28b#29 My intertemporal indi#0Berence curve is a straight line with slope,1.

#28c#29 I will spend all of my current and future income on consumption today.

#28d#29 I will spend 5 percent more on consumption today than on consumption tomorrow.

#28e#29 I will spend 5 percent more on consumption tomorrow than on consumption today.

Essay Intertemporal Choice

Topic,Intertemporal Choice Di#0Eculty,2

#25 Correct Responses,0 Discrimination Index,0

10.1 Ophelia says "If I could lend money at the rates I must pay to borrow,I would,And if I

could borrow money at the rates I receive when I lend,I would again,But forsooth,although I

spend,I neither borrow nor lend." Contrary to common belief,Ophelia is entirely rational,Draw

a diagram to showhow Ophelia's remarks can be consistent with rational behavior and smooth

convex preferences if she pays a di#0Berentinterest rate when she borrows than she gets when she

lends,Explain what happens in words.

Answer,Ophelia's budget between current and future consumption is kinked at the point where

her consumption in each period equals her income,The highest indi#0Berence curve to touch her

budget touches at the kink,The extensions of each of the lines that meet at the kink pass above

this indi#0Berence curveforaways,These lines are the lines she could move along if she could borrow

at the lending rate and lend at the borrowing rate,respectively.

Topic,Intertemporal Choice Di#0Eculty,3

#25 Correct Responses,0 Discrimination Index,0

10.2 Patience has the utility function U#28c

1;c

2

#29=c

1=2

1

+2c

1=2

2

where c

1

is her consumption in period

1 and c

1

is her consumption in period 2,She will earn 100 units of the consumption good in period

1 and 100 units of the consumption good in period 2,She can borrow or lend at an interest rate

of 10#25,a#29 Write an equation that describes Patience's budget,b#29 If Patience neither borrows nor

lends,what will be her marginal rate of substitution between current and future consumption? c#29

If Patience does the optimal amount of borrowing or saving,what will be the ratio of her period 2

consumption to her period 1 consumption?

Answer,a#29 c1+c2=1:1 = 100+ 100=1:1,b#292 c#29 She will consume 4.84 times as much in period 2 as

in period 1.

Topic,Intertemporal Choice Di#0Eculty,2

#25 Correct Responses,0 Discrimination Index,0

10.3 Buzz is a chicken farmer,His earnings will be 100 this year and 100 next year,He can lend

money at an interest rate of 20#25,Because of a subsidized loan program for chicken farmers he can

borrow money at an interest rate of 10#25,No matter what he borrows or lends,his earnings will

still be 100 eachyear,a#29 If he is not allowed to both borrow and lend,draw a graph showing his

budget between consumption this year and consumption next year,Put numerical labels on the

vertical and horizontal intercepts of the budget set,b#29 Suppose that Buzz is allowed to borrowup

to the presentvalue of next year's earnings at 10#25 and is also allowed to make loans,Draw Buzz's

budget constraint in this case.

Answer,a#29 Budget line is kinked at #28100;100#29.Vertical intercept is 220,Horizontal intercept is

100 + 100=1:1,b#29 Budget constraint is a straight line with slope,1:2 passing through horizontal

intercept of previous budget line.

ESSAY 195

Topic,Intertemporal Choice Di#0Eculty,2

#25 Correct Responses,0 Discrimination Index,0

10.4 Ymir Larson farms near Ni#0Feheim,Minnesota,He works 80 hours a week,He can either

grow rutabagas or pigs,Every hour that he spends growing rutabagas gives him $2 of income this

year,Every hour that he spends with the pigs this year will add $4 to his income next year,In

fact,next year's weekly income will be 100+4H dollars where H is the number of hours he spends

with the pigs this year,Ymir's utility function is U#28c1;c2#29 = minfc1;c2gwhere c1 and c2 are his

consumption expenditures this year and next year,Ymir doesn't believe in banks and will neither

lend money nor borrow money,a#29 Draw Ymir's budget line for current and future consumption,

labeling key points on it,b#29 How many hours a week will he choose to spend with the pigs? c#29 How

much money will he spend per week on consumption in eachyear?

Answer,a#29Budget set is bounded by a line from #280;420#29 to #28160;100#29 andavertical line from

#28160;100#29 to the horizontal axis,b#2910 c#29170

Topic,Intertemporal Choice Di#0Eculty,2

#25 Correct Responses,0 Discrimination Index,0

10.5 Luella has to payaninterest rate of 50#25 to borrow,She only gets an interest rate of 5#25 if

she lends,She is currently endowed with $1000 in period 1 and $1050 in period 2,She considers

two alternativeinvestment projects,She can only choose one of them,For project A she would

HAVE TO PAY $500 in period 1 and would BE PAID BACK $630 in period 2,For project B; she

would BE PAID $500 in period 1 and would HAVE TO PAYBACK $525 in period 2,a#29 Diagram

her budget set if she chooses project A,Also show her budget if she chooses project B,b#29 If she

neither borrows nor lends,which project has the higher presentvalue at the interest rate 50#25?

Which has the higher presentvalue at an interest rate of 5#25? c#29 Draw indi#0Berence curves such that

she should choose A,d#29 With di#0Berent preferences might she choose B?

Answer,b#29 B,A d#29 yes

Topic,Intertemporal Choice Di#0Eculty,2

#25 Correct Responses,0 Discrimination Index,0

10.6 In an isolated peasant village,the only crop is corn,Good harvests alternate with bad

harvests,This year the harvest will be 1000 bushels,Next year it will be 150 bushels,There is

no trade with the outside world,Corn can be stored,but rats will eat 25#25 of what is stored in a

year,The villagers have the Cobb-Douglas utility function U#28c1;c2#29 = c1c2 where c1 is consumption

this year and c2 is consumption next year,a#29 Draw a budget line for the village with this year's

consumption on the horizontal axis and next year's consumption on the vertical axis,On your

graph show the quantities at which the budget line intercepts the vertical and horizontal axes,b#29

Howmuch will the villagers consume this year? c#29 Howmuch will the rats eat? d#29 Howmuch will

the villagers consume next year?

Answer,b#29600 c#29100 d#29450

Chapter 11

True-False Asset Markets

Topic,Asset Markets Di#0Eculty,1

#25 Correct Responses,74 Discrimination Index,26

Correct Answer,False

11.1 If the interest rate is 10#25,then an asset that returns $1 a year forever is worth $1=1:1.

Topic,Asset Markets Di#0Eculty,1

#25 Correct Responses,88 Discrimination Index,23

Correct Answer,False

11.2 The interest rate is 6#25 and there is no in#0Dation,A bond is available that can be redeemed

either after one year or after twoyears,If it is redeemed after one year,the investor gets $106,If

it is redeemed after twoyears,the investor gets $109.18,The investor gets no other payments than

what she receives when she redeems the bond,In equilibrium,investors will be willing to pay more

than $100 for this bond.

Topic,Asset Markets Di#0Eculty,1

#25 Correct Responses,88 Discrimination Index,23

Correct Answer,False

11.3 The interest rate is 10#25 and there is no in#0Dation,A bond is available that can be redeemed

either after one year or after twoyears,If it is redeemed after one year,the investor gets $110,If

it is redeemed after twoyears,the investor gets $112.20,The investor gets no other payments than

what she receives when she redeems the bond,In equilibrium,investors will be willing to pay more

than $100 for this bond.

Topic,Asset Markets Di#0Eculty,1

#25 Correct Responses,83 Discrimination Index,29

Correct Answer,False

11.4 In a perfect asset market,it is known with certainty that an asset will sell for $24 in 1 year.

If the annual interest rate is 10#25,then the asset will sell for $26.40 rightnow.

Topic,Asset Markets Di#0Eculty,1

#25 Correct Responses,83 Discrimination Index,38

Correct Answer,True

11.5 A consumer who can borrow and lend at the same interest rate should prefer an endowment

with a higher presentvalue to an endowmentwithalower presentvalue,no matter how he plans

to allocate consumption over the course of his life.

TRUE-FALSE 197

Topic,Asset Markets Di#0Eculty,1

#25 Correct Responses,99 Discrimination Index,7

Correct Answer,True

11.6 If everybody has the same information,then a well-functioning market for assets would,in

equilibrium,leave no opportunities for arbitrage.

Topic,Asset Markets Di#0Eculty,1

#25 Correct Responses,79 Discrimination Index,33

Correct Answer,False

11.7 Suppose that the cost of cutting down a tree is zero and the tree grows on land that is

useless for anything else,The interest rate is constant and the price of lumber does not change.

True or false,The optimal time to cut the tree is when the di#0Berence between its growth rate and

the interest rate is maximized.

Topic,Asset Markets Di#0Eculty,2

#25 Correct Responses,35 Discrimination Index,0

Correct Answer,True

11.8 According to the theory of asset markets,if the interest rate is constant,then the competi-

tive market price of a bottle of wine will rise at a constant rate per year until it is consumed,,even

if the amount that wine-drinkers are willing to pay for it does not rise at a constant rate.

Multiple Choice Asset Markets

Topic,Asset Markets Di#0Eculty,2

#25 Correct Responses,94 Discrimination Index,17

Correct Answer,A

11.1 VincentSmudge's paintings are unappreciated now,Nobody is willing to payanything to

have them on the walls,In 5 years Smudge's work will gain enduring popularity.People will sud-

denly be willing to pay $1,000 a year to have an original Smudge on their walls and will continue

to be willing to do so ever after,If investors realize that this is the case,and if the interest rate is

and always will be r; a painting bySmudge will currently be worth about:

#28a#29 $#281000=r#29#5B1=#281+r#29

4

#5D.

#28b#29 $1000=r,5000=r.

#28c#29 $1000#281+ r#29

5

.

#28d#29 $1000#281=r#29

5

.

#28e#29 $200=r.

Topic,Asset Markets Di#0Eculty,1

#25 Correct Responses,82 Discrimination Index,42

Correct Answer,C

11.2 If the interest rate is r and will remain r forever,then a bond that will pay 25 dollars a year

forever,starting 1 year from now,is worth howmuchtoday?

#28a#29 25=#281+ r#29

#28b#29 25#281+r#29

#28c#29 25=r

#28d#29 25=#281+r + r

2

+,::+r

n

+:::#29

#28e#29 None of the above.

MULTIPLE CHOICE 199

Topic,Asset Markets Di#0Eculty,1

#25 Correct Responses,82 Discrimination Index,42

Correct Answer,C

11.3 If the interest rate is r and will remain r forever,then a bond that will pay 70 dollars a year

forever,starting 1 year from now,is worth howmuchtoday?

#28a#29 70=#281+ r#29

#28b#29 70#281+r#29

#28c#29 70=r

#28d#29 70=#281+r + r

2

+,::+r

n

+:::#29

#28e#29 None of the above.

Topic,Asset Markets Di#0Eculty,2

#25 Correct Responses,46 Discrimination Index,42

Correct Answer,B

11.4 If the nominal interest rate is 80#25 and the rate of in#0Dation is 50#25,then the exact real rate

of interest is:

#28a#29 10#25.

#28b#29 20#25.

#28c#29 30#25.

#28d#29 40#25.

#28e#29 None of the above.

Topic,Asset Markets Di#0Eculty,1

#25 Correct Responses,68 Discrimination Index,38

Correct Answer,C

11.5 The interest rate is 10#25,A certain piece of land can be used either for a parking lot,in

which case there are no construction costs and it will yield a net return of $5,000 per year forever

starting one year from now,Or it can have a house built on it,Building a house would cost $50,000

now,If a house is built on the lot,it will yield a stream of net income equal to $12,000 per year

starting one year from now,No other uses are contemplated,The theory of asset markets markets

predicts that the lot will:

#28a#29 sell for $120,000 and a house will be built on it.

#28b#29 sell for $50,000 and a parking lot will be built on it.

#28c#29 sell for $70,000 and a house will be built on it.

#28d#29 sell for $13,200 and a house will be built on it.

#28e#29 sell for $80,000 and a parking lot will be built on it.

CHAPTER 11 Asset Markets 200

Topic,Asset Markets Di#0Eculty,1

#25 Correct Responses,72 Discrimination Index,39

Correct Answer,D

11.6 Today is January 1,The interest rate is 8#25 and investors are convinced that it will stayat

8#25 for the next 10 years,A corporate bond comes on the market that for the next 7 years will pay

$160 on December31towhoever owns the bond on that date,On January 1,7 years from today,

the issuer of the bond will "redeem" the bond by buying it back from the bondholder for $2,000.

What should this bond sell for?

#28a#29 $3,120

#28b#29 $2,160

#28c#29 $1,600

#28d#29 $2,000

#28e#29 $2,780

Topic,Asset Markets Di#0Eculty,2

#25 Correct Responses,40 Discrimination Index,68

Correct Answer,A

11.7 The interest rate will be 10#25 for one more year,but a year from now,it will fall to 5#25

and stay at 5#25 forever,What is the market value of an investment that is sure to pay $440 a year

forever,starting twoyears from today?

#28a#29 $8,000

#28b#29 $8,800

#28c#29 $4,000

#28d#29 $4,400

#28e#29 $9,000

MULTIPLE CHOICE 201

Topic,Asset Markets Di#0Eculty,2

#25 Correct Responses,40 Discrimination Index,68

Correct Answer,A

11.8 The interest rate will be 10#25 for one more year,but a year from now,it will fall to 5#25

and stay at 5#25 forever,What is the market value of an investment that is sure to pay $440 a year

forever,starting twoyears from today?

#28a#29 $8,000

#28b#29 $8,800

#28c#29 $4,000

#28d#29 $4,400

#28e#29 $9,000

Topic,Asset Markets Di#0Eculty,2

#25 Correct Responses,28 Discrimination Index,24

Correct Answer,B

11.9 A certain wine costs $3 a bottle to produce,It improves in taste if stored properly for a

period of time,When it is newly bottled,people are willing to pay only $2 a bottle to drink it.

But the amount that people are willing to pay to drink a bottle of this wine will rise by$3ayear

for the next 50 years,Storage costs,not including interest,are $.50 per year,If the interest rate

is 5#25 and it is kept by rational investors,how old will it be when it is drunk and what will be its

price at that time?

#28a#29 50 years old and $152.

#28b#29 16 years old and $50.

#28c#29 50 years old and $153.

#28d#29 20 years old and $63.

#28e#29 4years old and $14.

CHAPTER 11 Asset Markets 202

Topic,Asset Markets Di#0Eculty,2

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,B

11.10 The amount people are willing to pay to drink a bottle of a certain certain vintage of wine

when it is t years old is $2+3t,It costs $.50 a bottle per year to store this wine,The interest rate

is 5#25,If the annual cost of storing the wine rises to $1,what will be the e#0Bect on the price of

this wine when it is consumed and on the length of time for which it is stored before it is consumed?

#28a#29 Both will rise.

#28b#29 Both will fall.

#28c#29 The price will rise and the time for which it is stored will fall.

#28d#29 The price will not change but the time for which it is stored will fall.

#28e#29 The price will rise and the time for which it is stored will stay constant.

Topic,Asset Markets Di#0Eculty,2

#25 Correct Responses,13 Discrimination Index,26

Correct Answer,D

11.11 You buy a painting for $1280,Its market value will rise by $80 per year for the next 30

years,It is worth $80 a year to you to have it hanging on the wall,The interest rate is 10#25,In

how manyyears will you sell it?

#28a#29 30

#28b#29 immediately

#28c#29 8

#28d#29 4

#28e#29 5

MULTIPLE CHOICE 203

Topic,Asset Markets Di#0Eculty,3

#25 Correct Responses,84 Discrimination Index,24

Correct Answer,D

11.12 Art Dreck's paintings are terribly unpopular now,In fact nobody would pay a dime to

have one of his paintings on the wall now,But experts believe that 10 years from now there will

be a craze for Dreck paintings,The craze will last for 2 years and then nobody will ever wantto

see a Dreck again,During this 2 year period,people will be willing to pay $1,100 a year to have

an original Dreck on the wall,The interest rate is r,If the experts' belief is widely held among

investors,today's market value of a Dreck should be about:

#28a#29 2;200=r.

#28b#29 2;200=#281+r#29.

#28c#29 1;100#281+ r#29

10

+1;100#281+ r#29

11

.

#28d#29 1;100=#281+r#29

10

+1;100=#281+ r#29

11

.

#28e#29 1;100r+1;100r

2

.

Topic,Asset Markets Di#0Eculty,2

#25 Correct Responses,65 Discrimination Index,0

Correct Answer,B

11.13 A large #28subterranean#29 pool of oil lies in a remote region of Ohio,Oil companies have

explored this region and knowhowmuch oil there is,They have purchased the rights to drill

and extract oil when they wish to do so,Because of the extremely forbidding geography and the

savagery of the natives,the companies have decided to postpone extraction until the price of oil is

higher,The theory of intertemporal arbitrage predicts that the:

#28a#29 companies are behaving irrationally.

#28b#29 price of rights to this oil must rise at the interest rate.

#28c#29 oil companies will not drill unless production costs fall.

#28d#29 price of rights to this oil will stay constantuntil it pays to extract.

#28e#29 None of the above.

CHAPTER 11 Asset Markets 204

Topic,Asset Markets Di#0Eculty,1

#25 Correct Responses,83 Discrimination Index,23

Correct Answer,D

11.14 The interest rate is 10#25 and will remain so forever,You do not drink wine but are

interested in buying some for investment purposes,Assume that there are no transactions costs or

storage costs and a certain bottle of wine will be worth $44 one year from now,$50 twoyears from

now,and $61,three years from now,After that it turns to worthless vinegar,Howmuch should

you be willing to pay for a bottle? #28Pick the closest answer.#29

#28a#29 40

#28b#29 41.32

#28c#29 50.86

#28d#29 45.83

#28e#29 49.47

Topic,Asset Markets Di#0Eculty,1

#25 Correct Responses,83 Discrimination Index,23

Correct Answer,D

11.15 The interest rate is 10#25 and will remain so forever,You do not drink wine but are

interested in buying some for investment purposes,Assume that there are no transactions costs or

storage costs and a certain bottle of wine will be worth $22 one year from now,$28 twoyears from

now,and $35,three years from now,After that it turns to worthless vinegar,Howmuch should

you be willing to pay for a bottle? #28Pick the closest answer.#29

#28a#29 20

#28b#29 23.14

#28c#29 31.32

#28d#29 26.30

#28e#29 32.29

MULTIPLE CHOICE 205

Topic,Asset Markets Di#0Eculty,2

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,B

11.16 Suppose that a dispute in the Persian Gulf halts the sale of oil from Persian Gulf for 1

year,At the same time an important new oil #0Celd is found in a place where nobody expected there

to be oil,What does economic theory predict will be the e#0Bect on the future price of oil to be

delivered 2 years from now?

#28a#29 It will fall if the new pool is larger than the stock of oil in the Persian Gulf and rise otherwise.

#28b#29 It will fall.

#28c#29 It will rise unless the new pool can be broughtinto production before the Persian Gulf supply is resumed.

#28d#29 It will rise.

#28e#29 It will rise if the cost of extraction for the new oil is greater than the cost of extraction in the Gulf,and

fall otherwise.

Topic,Asset Markets Di#0Eculty,2

#25 Correct Responses,65 Discrimination Index,0

Correct Answer,C

11.17 Bank 1 o#0Bers a deal on deposits of $1000 or more,You must leaveyour money in the bank

for 3 years,but Bank 1 will payyou 7#25 interest for the #0Crst year,7#25 interest for the second year,

and for the third year,it will pay 10#25 interest,In response,Bank 2 o#0Bers a deal that it claims is

even better,It also requires you to deposit at least $1,000 and to leave it in the bank for 3 years,

but it will pay 10#25 interest in the #0Crst year and then 7#25 in the second and third years,After 3

years,you can takeyour money out of either bank and do what you want with it,Both banks

compound interest annually,Which of the following is true?

#28a#29 Bank 2 o#0Bers a better deal than Bank 1.

#28b#29 Bank 1 o#0Bers a better deal than Bank 2.

#28c#29 The two o#0Bers are equally valuable.

#28d#29 The o#0Ber of Bank 2 becomes relatively more attractive as the size of your initial deposit is larger.

#28e#29 None of the above.

CHAPTER 11 Asset Markets 206

Topic,Asset Markets Di#0Eculty,2

#25 Correct Responses,65 Discrimination Index,0

Correct Answer,C

11.18 Bank 1 o#0Bers a deal on deposits of $1000 or more,You must leaveyour money in the bank

for 3 years,but Bank 1 will payyou 7#25 interest for the #0Crst year,7#25 interest for the second year,

and for the third year,it will pay 13#25 interest,In response,Bank 2 o#0Bers a deal that it claims is

even better,It also requires you to deposit at least $1,000 and to leave it in the bank for 3 years,

but it will pay 13#25 interest in the #0Crst year and then 7#25 in the second and third years,After 3

years,you can takeyour money out of either bank and do what you want with it,Both banks

compound interest annually,Which of the following is true?

#28a#29 Bank 2 o#0Bers a better deal than Bank 1.

#28b#29 Bank 1 o#0Bers a better deal than Bank 2.

#28c#29 The two o#0Bers are equally valuable.

#28d#29 The o#0Ber of Bank 2 becomes relatively more attractive as the size of your initial deposit is larger.

#28e#29 None of the above.

Topic,Asset Markets Di#0Eculty,2

#25 Correct Responses,19 Discrimination Index,40

Correct Answer,E

11.19 If the rate of in#0Dation is greater than the interest rate:

#28a#29 you should consume all of your wealth in the #0Crst period.

#28b#29 you are better o#0B keeping your money in a mattress at home #28assuming no risk of it being stolen#29 than

at a bank.

#28c#29 you will necessarily consume less this period than you would if the rate of in#0Dation were less than the

interest rate.

#28d#29 you will necessarily consume more this period than you would if the rate of in#0Dation were less than the

interest rate.

#28e#29 None of the above.

MULTIPLE CHOICE 207

Topic,Asset Markets Di#0Eculty,2

#25 Correct Responses,77 Discrimination Index,41

Correct Answer,D

11.20 A zero coupon bond is a bond that pays no return until it comes due and then pays the

holder of the bond its face value,Suppose that a $1,000,zero coupon bond will come due on

January 1,2010,If the interest rate is 5#25 and will remain 5#25 forever,what will this bond be

worth on January 1,1995?

#28a#29 1;000=0:05

#28b#29 1;000=0:05

15

#28c#29 1;000+ 1;000=15

#28d#29 1;000=1:05

15

#28e#29 None of the above.

Topic,Asset Markets Di#0Eculty,2

#25 Correct Responses,77 Discrimination Index,41

Correct Answer,D

11.21 A zero coupon bond is a bond that pays no return until it comes due and then pays the

holder of the bond its face value,Suppose that a $4,000,zero coupon bond will come due on

January 1,2010,If the interest rate is 10#25 and will remain 10#25 forever,what will this bond be

worth on January 1,1995?

#28a#29 4;000=0:10

#28b#29 4;000=0:10

15

#28c#29 4;000+ 4;000=15

#28d#29 4;000=1:10

15

#28e#29 None of the above.

Topic,Asset Markets Di#0Eculty,1

#25 Correct Responses,80 Discrimination Index,20

Correct Answer,C

11.22 The sum of the terms of the in#0Cnite geometric series,1,0.98,0:98

2; 0:98

3;...,is closest to

which of the following numbers?

#28a#29 in#0Cnity

#28b#29 1.98

#28c#29 50

#28d#29 0.51

#28e#29 102.04

CHAPTER 11 Asset Markets 208

Topic,Asset Markets Di#0Eculty,1

#25 Correct Responses,80 Discrimination Index,20

Correct Answer,C

11.23 The sum of the terms of the in#0Cnite geometric series,1,0.95,0:95

2; 0:95

3;...,is closest to

which of the following numbers?

#28a#29 in#0Cnity

#28b#29 1.95

#28c#29 20

#28d#29 0.51

#28e#29 105.26

Topic,Asset Markets Di#0Eculty,2

#25 Correct Responses,32 Discrimination Index,46

Correct Answer,A

11.24 Ashley,from your workbook,has discovered another wine,Wine D,Wine drinkers are

willing to pay 70 dollars to drink it rightnow,The amount that wine drinkers are willing to pay

will rise by 10 dollars eachyear that the wine ages,The interest rate is 10#25,Howmuchwould

Ashley be willing to pay for the wine if he buys it as an investment? #28Pick the closest answer.#29

#28a#29 75

#28b#29 70

#28c#29 100

#28d#29 770

#28e#29 91

Topic,Asset Markets Di#0Eculty,2

#25 Correct Responses,32 Discrimination Index,46

Correct Answer,A

11.25 Ashley,from your workbook,has discovered another wine,Wine D,Wine drinkers are

willing to pay 160 dollars to drink it rightnow,The amount that wine drinkers are willing to pay

will rise by 20 dollars eachyear that the wine ages,The interest rate is 10#25,Howmuchwould

Ashley be willing to pay for the wine if he buys it as an investment? #28Pick the closest answer.#29

#28a#29 165

#28b#29 160

#28c#29 200

#28d#29 1,760

#28e#29 191

MULTIPLE CHOICE 209

Topic,Asset Markets Di#0Eculty,2

#25 Correct Responses,42 Discrimination Index,18

Correct Answer,A

11.26 Shivers' annual fuel bill for home heating is 1,000 dollars per year,He considers three

alternative plans for insulating his house,Plan A will reduce his annual fuel bill by 15#25,plan B

will reduce it by 20#25,and plan C will eliminate his need for heating fuel altogether,The Plan A

insulation job would cost Shivers 1,000 dollars,Plan B would cost him 1,900 dollars and Plan C

would cost him 11,000 dollars,If the interest rate is 10#25 and his house and the insulation job last

forever,which plan is the best for Shivers?

#28a#29 Plan A.

#28b#29 Plan B.

#28c#29 Plan C.

#28d#29 Plans A and B are equally good.

#28e#29 He is best o#0B using none of the plans.

Topic,Asset Markets Di#0Eculty,2

#25 Correct Responses,42 Discrimination Index,18

Correct Answer,A

11.27 Shivers' annual fuel bill for home heating is 800 dollars per year,He considers three

alternative plans for insulating his house,Plan A will reduce his annual fuel bill by 15#25,plan B

will reduce it by 20#25,and plan C will eliminate his need for heating fuel altogether,The Plan

A insulation job would cost Shivers 800 dollars,Plan B would cost him 1,400 dollars and Plan C

would cost him 8,800 dollars,If the interest rate is 10#25 and his house and the insulation job last

forever,which plan is the best for Shivers?

#28a#29 Plan A.

#28b#29 Plan B.

#28c#29 Plan C.

#28d#29 Plans A and B are equally good.

#28e#29 He is best o#0B using none of the plans.

CHAPTER 11 Asset Markets 210

Topic,Asset Markets Di#0Eculty,2

#25 Correct Responses,80 Discrimination Index,37

Correct Answer,D

11.28 The price of an antique is expected to rise by 10#25 during the next year,The interest rate

is 13#25,You are thinking of buying an antique and selling it a year from now,You would be willing

to pay a total of 1,000 dollars for the pleasure of owning the antique for a year,Howmuchwould

you be willing to pay to buy this antique?

#28a#29 7,692.31

#28b#29 21,000

#28c#29 1,000

#28d#29 33,333.33

#28e#29 10,000

Topic,Asset Markets Di#0Eculty,2

#25 Correct Responses,80 Discrimination Index,37

Correct Answer,D

11.29 The price of an antique is expected to rise by 4#25 during the next year,The interest rate

is 7#25,You are thinking of buying an antique and selling it a year from now,You would be willing

to pay a total of 400 dollars for the pleasure of owning the antique for a year,Howmuchwould

you be willing to pay to buy this antique?

#28a#29 5,714.29

#28b#29 8,400

#28c#29 400

#28d#29 13,333.33

#28e#29 4,000

MULTIPLE CHOICE 211

Topic,Asset Markets Di#0Eculty,2

#25 Correct Responses,70 Discrimination Index,37

Correct Answer,A

11.30 A bond has a face value of 4,000 dollars,It will pay 400 dollars in interest at the end of

every year for the next 41 years,At the time of the last interest payment,41 years from now,the

company that issued the bond will #5Credeem the bond at face value",That is,the company will buy

back the bond from its owner at a price equal to the face value of the bond,If the interest rate is 10#25

and is expected to remain at 10#25,howmuchwould a rational investor pay for this bond rightnow?

#28a#29 4,000

#28b#29 20,400

#28c#29 16,400

#28d#29 more than any of the abovenumbers

#28e#29 less than any of the abovenumbers

Topic,Asset Markets Di#0Eculty,2

#25 Correct Responses,70 Discrimination Index,37

Correct Answer,A

11.31 A bond has a face value of 6,000 dollars,It will pay 600 dollars in interest at the end of

every year for the next 50 years,At the time of the last interest payment,50 years from now,the

company that issued the bond will #5Credeem the bond at face value",That is,the company will buy

back the bond from its owner at a price equal to the face value of the bond,If the interest rate is 10#25

and is expected to remain at 10#25,howmuchwould a rational investor pay for this bond rightnow?

#28a#29 6,000

#28b#29 36,000

#28c#29 30,000

#28d#29 more than any of the abovenumbers

#28e#29 less than any of the abovenumbers

CHAPTER 11 Asset Markets 212

Topic,Asset Markets Di#0Eculty,0

#25 Correct Responses,68 Discrimination Index,34

Correct Answer,A

11.32 If the interest rate is 7#25,and will remain 7#25 forever,howmuchwould a rational investor

be willing to pay for an asset that will pay him 5,350 dollars one year from now,1,144 dollars two

years from now,and nothing at any other time?

#28a#29 6,000

#28b#29 5,000

#28c#29 85,714.29

#28d#29 48,000

#28e#29 7,000

Topic,Asset Markets Di#0Eculty,0

#25 Correct Responses,68 Discrimination Index,34

Correct Answer,A

11.33 If the interest rate is 15#25,and will remain 15#25 forever,howmuchwould a rational investor

be willing to pay for an asset that will pay him 3,450 dollars one year from now,1,322 dollars two

years from now,and nothing at any other time?

#28a#29 4,000

#28b#29 3,000

#28c#29 26,666.67

#28d#29 64,000

#28e#29 5,000

Topic,Asset Markets Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,B

11.34 The interest rate is 10 percent and is expected to stay constant at that level forever,The

present discounted value of $50,000 a year forever STARTING TODAYis

#28a#29 $500,000

#28b#29 $550,000

#28c#29 $ in#0Cnity

#28d#29 $1 million

#28e#29 $45,454.45

Essay Asset Markets

Topic,Asset Markets Di#0Eculty,2

#25 Correct Responses,0 Discrimination Index,0

11.1 The interest rate is 10#25 and will remain 10#25 forever,Suppose that you do not drink wine

but are interested in buying it for investment purposes,Howmuchwould you be willing to pay for

each of the following? #28i#29 A bottle of wine that will be worth $22 a year from now and will then go

bad and be worthless,#28ii#29 A bottle of wine that will be worth $22 a year from now and will rise in

value by$1ayear forever? Explain your answer.

Answer,Both are worth $20,Each will be sold and drunk in 1 year,The increase in value of $1

per year on a $22 bottle of wine is not a high enough rate of return for anyone to want to hold it

another year.

Topic,Asset Markets Di#0Eculty,3

#25 Correct Responses,0 Discrimination Index,0

11.2 A certain wine costs $3 a bottle to produce,The amount that people are willing to payto

drink it t years after it has been bottled is $2+3t,Storage costs,not including interest,are $.50

per year,If the interest rate is 5#25,howmuchwould a rational investor be willing to pay for it at

the time it is bottled? Explain howyou get your answer,Feel free to write formulas for present

value calculations without working out the numerical answer if it involves long calculations,#28Hint:

How long would the wine be kept before it is drunk? At what price would it sell?#29

Answer,Wine would be kept for 16 years and sold for $50,The presentvalue of this is 50=#281:05#29

16

.

From this number wehave to subtract the presentvalue of storage costs which is the presentvalue

of paying $.50 a year for 16 years,This is the cost of paying $.50 a year forever,starting now minus

the cost of paying $.50 a year forever starting in 16 years or $:50#281=r#29#281,1=#281+ r#29

16

#29.

Topic,Asset Markets Di#0Eculty,2

#25 Correct Responses,0 Discrimination Index,0

11.3 Suppose that the cost of personal computers falls by 20#25 per year,To make this problem

relatively easy,we will assume that their quality does not change and that computers never wear

out,You plan to get one sometime,What is the rational way to decide when to buy one?

Answer,Figure out what it is worth to you to have the computer for one year,Notice that the

cost to you of having it is approximately the di#0Berence between the price of a computer at the

beginning of the year and the price at the end of the year,If the value to you is V and the current

price is P; you buy if V#3E:2P,Otherwise you wait,Eventually,:2P will be smaller than V,Then

you buy.

CHAPTER 11 Asset Markets 214

Topic,Asset Markets Di#0Eculty,2

#25 Correct Responses,0 Discrimination Index,0

11.4 According to a recent story in the New York Times,the South African gold strike has been

costing South African mining companies about $7.5 million per day,Assuming that this number

is the value of the gold that was not mined because of the strike,minus the labor costs #28and other

operating costs#29 that are saved byshutting down the mines,what is wrong with this calculation?

Answer,The gold that is not mined now will still be there and can be extracted later,The #0Cgure

that was reached would be the cost if the gold that would have been mined had somehow been

destroyed by the strike,The actual costs would be more closely measured by the interest cost of

postponement of the net revenues from the gold mines until the strike is settled.

Chapter 12

True-False Uncertainty

Topic,Uncertainty Di#0Eculty,1

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,False

12.1 Of anytwo gambles,no matter what their expected returns,a risk-averter will choose the

one with the smaller variance.

Topic,Uncertainty Di#0Eculty,2

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,True

12.2 An expected utility maximizer's preferences between two bundles contingentonEvent1

happening must be independent of what he will get if Event 2 happens.

Topic,Uncertainty Di#0Eculty,1

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,True

12.3 If someone has strictly convex preferences between all contingent commodity bundles,then

he or she must be risk averse.

Topic,Uncertainty Di#0Eculty,1

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,True

12.4 Wilma is not risk averse,She is o#0Bered a chance to pay $10 for a lottery ticket that will

give her a prize of $100 with probability,06,a prize of $50 with probability,1,and no prize with

probability,85,If she understands the odds and makes no mistakes in calculation,she will buy the

lottery ticket.

Topic,Uncertainty Di#0Eculty,1

#25 Correct Responses,91 Discrimination Index,15

Correct Answer,False

12.5 If Paul is risk-loving and his basketball team has a probability of,5 of winning,then Paul

would rather bet $10 on his team than $100,#28When Paul bets X; he wins X if his team wins and

loses X if his team loses.#29

CHAPTER 12 Uncertainty 216

Topic,Uncertainty Di#0Eculty,1

#25 Correct Responses,70 Discrimination Index,0

Correct Answer,False

12.6 If the price of insurance goes up,people will become less risk-averse.

Topic,Uncertainty Di#0Eculty,2

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,False

12.7 A consumer has a von Neumann-Morgenstern utility function of the form U#28c

A;c

B;p

A;p

B

#29=

p

A

v#28c

A

#29+p

B

v#28c

B

#29where p

A

and p

B

are the probabilities of events A and B and where c

A

and c

B

are consumptions contingentonevents A and B respectively,This consumer must be a risk lover

if v is an increasing function.

Multiple Choice Uncertainty

Topic,Uncertainty Di#0Eculty,2

#25 Correct Responses,37 Discrimination Index,38

Correct Answer,E

12.1 Prufrock is risk averse,He is o#0Bered a gamble in which with probability 1=4 he will lose

$1000 and with probability 3=4; he will win $500.

#28a#29 Since he is risk averse,he will certainly not take the gamble.

#28b#29 Since the expected value of the gamble is positive,he will certainly take the gamble.

#28c#29 If Prufrock's initial wealth is greater than $1,500,then he will certainly take the gamble.

#28d#29 If Prufrock's initial wealth is smaller than $1,500,he will certainly not take the gamble.

#28e#29 Not enough information is given to determine for sure whether he will take the gamble.

Topic,Uncertainty Di#0Eculty,3

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,B

12.2 Timmy Qualm's uncle gave him a lottery ticket,With probability 1=2 the ticket will be

worth $100 and with probability 1=2 it will be worthless,Let x be Timmy's wealth if the lottery

ticket is a winner and y his wealth if it is a loser,Timmy's preferences over alternative contingent

commodity bundles are represented by the utility function U#28x;y#29=minf2x,y;2y,xg,He has no

risks other than the ticket.

#28a#29 Timmywould sell his lottery ticket for $25 but not for less.

#28b#29 Timmyhates risk so much that he'd be willing to throwaway the lottery ticket rather than worry about

whether he won.

#28c#29 Timmy satis#0Ces the expected utilityhypothesis.

#28d#29 Timmy is misnamed,he is a risk-lover.

#28e#29 None of the above.

CHAPTER 12 Uncertainty 218

Topic,Uncertainty Di#0Eculty,2

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,D

12.3 There are twoevents,1 and 2,The probabilityofevent1ispand the probabilityofevent

2is1,p,Sally Kink is an expected utility maximizer with a utility function is pu#28c

1

#29+#281,p#29u#28c

2

#29

where for anynumber,x; u#28x#29=2xif x#3C1;000 and u#28x#29=1;000+x if x is greater than or equal to

1,000.

#28a#29 Sally is a risk lover.

#28b#29 Sally will be a risk averter if she is poor but will be a risk lover if she is rich.

#28c#29 Sally will be a risk lover if she is poor but a risk averter if she is rich.

#28d#29 If there is no chance of her wealth exceeding 1,000,then she will takeany bet that has positive expected

net winnings.

#28e#29 None of the above.

Topic,Uncertainty Di#0Eculty,2

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,E

12.4 Socrates owns just one ship,The ship is worth $200 million dollars,If the ship sinks,

Socrates loses $200 million,The probability that it will sink is,02,Socrates' total wealth,includ-

ing the value of the ship is $225 million,He is an expected utility maximizer with von Neuman

Morgenstern utility U#28W#29 equal to the square root of W,What is the maximum amount that

Socrates would be willing to pay in order to be fully insured against the risk of losing his ship?

#28a#29 $4 million

#28b#29 $2 million

#28c#29 $3.84 million

#28d#29 $4.82 million

#28e#29 $5.96 million

MULTIPLE CHOICE 219

Topic,Uncertainty Di#0Eculty,2

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,C

12.5 Buck Columbus is thinking of starting a pinball palace near a large Midwestern university.

Buck is an expected utility maximizer with a von Neuman-Morgenstern utility function,U#28W#29=

1,#286;000=W#29 where W is his wealth,Buck's total wealth is $24,000,With probability,2 the palace

will be a failure and he'll lose $18,000,so that his wealth will be just $6,000,With probability

.8 it will succeed and his wealth will growto$x,What is the smallest value of x that would be

su#0Ecient to make Buckwanttoinvest in the pinball palace rather than haveawealth of $24,000

with certainty?

#28a#29 $28,500

#28b#29 $150,000

#28c#29 $96,000

#28d#29 $72,000

#28e#29 $30,000

Topic,Uncertainty Di#0Eculty,2

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,C

12.6 Buck Columbus is thinking of starting a pinball palace near a large Midwestern university.

Buck is an expected utility maximizer with a von Neuman-Morgenstern utility function,U#28W#29=

1,#285;000=W#29 where W is his wealth,Buck's total wealth is $20,000,With probability,2 the palace

will be a failure and he'll lose $15,000,so that his wealth will be just $5,000,With probability

.8 it will succeed and his wealth will growto$x,What is the smallest value of x that would be

su#0Ecient to make Buckwanttoinvest in the pinball palace rather than haveawealth of $20,000

with certainty?

#28a#29 $23,750

#28b#29 $125,000

#28c#29 $80,000

#28d#29 $60,000

#28e#29 $25,000

CHAPTER 12 Uncertainty 220

Topic,Uncertainty Di#0Eculty,2

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,C

12.7 Oskar's preferences over gambles in which the probabilityofevents 1 and 2 are both 1=2

can be represented by the von Neuman-Morgenstern utility function,5y

:5

1

+,5y

:5

2

where y

1

is his

consumption if event 1 happens and y

2

is his consumption if event 2 happens,A gamble that

allows him a consumption of 9 if event 1 happens and 25 if event 2 happens is exactly as good for

Oskar as being sure to have an income of:

#28a#29 12.5.

#28b#29 9.

#28c#29 16.

#28d#29 17.

#28e#29 None of the above.

Topic,Uncertainty Di#0Eculty,2

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,A

12.8 Mabel and Emil were contemplating marriage,They got to talking,Mabel said that she

always acted according to the expected utilityhypothesis,where she tried to maximize the expected

value of the log of her income,Emil said that he too was an expected utility maximizer,but he

tried to maximize the expected value of the square of his income,Mabel said,#5CI fear wemust part.

Our attitudes toward risk are too di#0Berent." Emil said,#5CNever fear,my dear,the square of income

is a monotonic increasing function of the log of income,so we really have the same preferences."

Who is right about whether their preferences toward risk are di#0Berent?

#28a#29 Mabel is right.

#28b#29 Emil is right.

#28c#29 Emil is right about small risks,but wrong about large risks.

#28d#29 Mabel is right about small risks,but wrong about large risks.

#28e#29 They are both wrong.

MULTIPLE CHOICE 221

Topic,Uncertainty Di#0Eculty,1

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,E

12.9 Ronald has $18,000,But he is forced to bet it on the #0Dip of a fair coin,If he wins he has

$36,000,If he loses he has nothing,Ronald's expected utility function is,5x

:5

+:5y

:5

where x is his

wealth if heads comes up and y is his wealth if tails comes up,Since he must make this bet,he is

exactly as well o#0B as if he had a perfectly safe income of:

#28a#29 $16,000.

#28b#29 $15,000.

#28c#29 $12,000.

#28d#29 $11,000.

#28e#29 $9,000.

Topic,Uncertainty Di#0Eculty,1

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,A

12.10 Gary likes to gamble,Donna o#0Bers to bet him $70 on the outcome of a boat race,If

Gary's boat wins,Donna would give him $70,If Gary's boat does not win,Gary would give her

$70,Gary's utility function is U#28c

1;c

2;p

1;p

2

#29=p

1

c

2

1

+p

2

c

2

2

where p

1

and p

2

are the probabilities of

events 1 and 2 and where c

1

and c

2

are his consumption if events 1 and 2 occur respectively,Gary's

total wealth is currently only $80 and he believes that the probability that he will win the race is,3.

#28a#29 Taking the bet would increase his expected utility.

#28b#29 Taking the bet would reduce his expected utility.

#28c#29 Taking the bet would leave his expected utility unchanged.

#28d#29 There is not enough information to determine whether taking the bet would increase or decrease his

expected utility.

#28e#29 The information given in the problem is self-contradictory.

CHAPTER 12 Uncertainty 222

Topic,Uncertainty Di#0Eculty,3

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,A

12.11 Clancy has $1,200,He plans to bet on a boxing matchbetween Sullivan and Flanagan.

For $4,he can buy a coupon that pays $10 if Sullivan wins and nothing otherwise,For $6 he can

buy a coupon that will pay $10 if Flanagan wins and nothing otherwise,Clancy doesn't agree with

these odds,He thinks that the two #0Cghters eachhave a probabilityof1=2of winning,If he is an

expected utility maximizer who tries to maximize the expected value of ln W where ln W is the

natural log of his wealth,it would be rational for him to buy:

#28a#29 50 "Sullivan coupons" and no "Flanagan coupons".

#28b#29 100 "Sullivan coupons" and no "Flanagan coupons".

#28c#29 50 "Flanagan coupons" and no "Sullivan coupons".

#28d#29 100 "Flanagan coupons" and no "Sullivan coupons".

#28e#29 100 of each kind of coupon.

Topic,Uncertainty Di#0Eculty,3

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,E

12.12 Diego has $6,400,He plans to bet on a soccer game,Team A is a favorite to win,Assume

no ties can occur,For $.80 one can buy a ticket that will pay $1 if team A wins and nothing if

B wins,For $.20 one can buy a ticket that pays $1 if team B wins and nothing if A wins,Diego

thinks the two teams are equally likely to win,He buys tickets so as to maximize the expected

value of ln W #28the natural log of his wealth#29,After he buys his tickets,team A loses a star player

and the ticket price moves to $.50 for either team,Diego buys some new tickets and sells some

of his old ones,The game is then played and team A wins,Howmuchwealth does he end up with?

#28a#29 $5,000

#28b#29 $15,000

#28c#29 $6,400

#28d#29 $8,400

#28e#29 $10,000

MULTIPLE CHOICE 223

Topic,Uncertainty Di#0Eculty,1

#25 Correct Responses,64 Discrimination Index,40

Correct Answer,C

12.13 Joe's wealth is $100 and he is an expected utility maximizer with a von Neumann-

Morgenstern utility function U#28W#29=W

1=2

,Joe is afraid of oversleeping his econ exam,He #0Cgures

there is only a 1 in 10 chance that he will,but if he does,it will cost him $100 in fees to the

university for taking an exam late,Joe's neighbor,Mary,never oversleeps,She o#0Bers to wake him

1 hour before the test,but he must pay her for this service,What is the most that Joe would be

willing to pay for this wake-up service?

#28a#29 $10

#28b#29 $15

#28c#29 $19

#28d#29 $100

#28e#29 $50

Topic,Uncertainty Di#0Eculty,2

#25 Correct Responses,68 Discrimination Index,39

Correct Answer,A

12.14 Portia has waited a long time for her ship to come in and she has concluded that it will

arrivetoday with probability 1=4,If it does come,she will receive $16,If it doesn't come in today,

it never will and she will have zero wealth,She has a von Neumann-Morgenstern utility function

equal to the square root of her total income,What is the minimum price at which she would sell

the rights to her ship?

#28a#29 1

#28b#29 2

#28c#29 2

1=2

#28d#29 4

#28e#29 None of the above.

CHAPTER 12 Uncertainty 224

Topic,Uncertainty Di#0Eculty,1

#25 Correct Responses,57 Discrimination Index,31

Correct Answer,B

12.15 Harley's currentwealth is $600,but there is a,25 probability that he will lose $100,Harley

is risk neutral,He has an opportunity to buy insurance that would restore his $100 if he loses it.

#28a#29 Harley would be willing to pay a bit more than $25 for this insurance.

#28b#29 Harley would be willing to pay up to $25 for this insurance.

#28c#29 Since Harley is risk neutral,he wouldn't be willing to payanything for this insurance.

#28d#29 Since Harley's utility function is not speci#0Ced,we can't tell howmuchhewould be willing to pay for this

insurance.

#28e#29 Harley would not be wiling to pay more than $16.66 for this insurance.

Topic,Uncertainty Di#0Eculty,2

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,B

12.16 After graduating,Sallie Handshake's best job o#0Ber will either be with a Big,8 accounting

#0Crm for $160,000 a year or as a State Farm agent in Grand Rapids,Michigan for $40,000 a year.

She can increase the probability of the former outcome by studying more,but such studying has

its costs,If S is represents her amount of studying #28where S =0is no study and S =1is all-out

e#0Bort#29,her probability of getting the job with a Big,8 #0Crm just equals S,Her utility depends on

how hard she studies and her subsequent annual income Y,She tries to maximize the expected

value of the von Neuman-Morgenstern utility function U#28S;Y #29=Y

1=2

,400S

2

,If she chooses S to

maximize her expected utility,howmuch will she study?

#28a#29 S =,1

#28b#29 S =,25

#28c#29 S =,5

#28d#29 S =,75

#28e#29 S =,9

MULTIPLE CHOICE 225

Topic,Uncertainty Di#0Eculty,3

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,D

12.17 Every dollar invested in Safe Sox will yield two dollars for sure,Each dollar invested in

Wobbly Umbrellas will yield $8 with probability 1=2 and zero with probability 1=2.Aninvestor has

$10,000 to invest in these two companies and her von Neumann-Morgenstern utility function is the

expected value of the natural logarithm of the total yield on her investments,If S is the amount

of money that she invests in Safe Sox and $10;000,S the amount that she invests in Wobbly

Umbrellas,what should S be to maximize her expected utility? #28Pick the closest answer.#29

#28a#29 $1,111

#28b#29 $3,333

#28c#29 $5,000

#28d#29 $6,667

#28e#29 $9,111

Topic,Uncertainty Di#0Eculty,2

#25 Correct Responses,47 Discrimination Index,60

Correct Answer,A

12.18 Billy Pigskin from your workbook has a von Neumann-Morgenstern utility function U#28c#29=

c

1=2

,If Billy is not injured this season,he will receive an income of 16 million dollars,If he is

injured,his income will be only $10,000,The probability that he will be injured is,1 and the

probability that he will not be injured is,9,His expected utilityis

#28a#29 3,610

#28b#29 between 15 million and 16 million.

#28c#29 100,000.

#28d#29 7,220

#28e#29 14,440

CHAPTER 12 Uncertainty 226

Topic,Uncertainty Di#0Eculty,2

#25 Correct Responses,47 Discrimination Index,60

Correct Answer,A

12.19 Billy Pigskin from your workbook has a von Neumann-Morgenstern utility function U#28c#29=

c

1=2

,If Billy is not injured this season,he will receive an income of 9 million dollars,If he is injured,

his income will be only $10,000,The probability that he will be injured is,1 and the probability

that he will not be injured is,9,His expected utilityis

#28a#29 2,710

#28b#29 between 8 million and 9 million.

#28c#29 100,000.

#28d#29 5,420

#28e#29 10,840

Topic,Uncertainty Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,B

12.20 Willy's only source of wealth is his chocolate factory,He has the utility function pc

1=2

f

+

#281,p#29c

1=2

nf

where p is the probability of a #0Dood,1,p is the probability of no #0Dood and where c

f

and

c

n

f are his wealth contingent on a #0Dood and on no #0Dood,respectively,The probability of #0Dood is

p =1=10,The value of Willy's factory is $300,000 if there is no #0Dood and 0 if there is a #0Dood,Willy

can buy insurance where if he buys $x worth of insurance,he must pay the insurance company

$2x=11 whether there is a #0Dood or not,but he gets back $x from the company if there is a #0Dood.

Willy should buy:

#28a#29 no insurance since the the cost per dollar of insurance exceeds the probability of a #0Dood.

#28b#29 enough insurance so that if there is a #0Dood,after he collects his insurance,his wealth will be 1=4 of what

it would be if there is no #0Dood.

#28c#29 enough insurance so that if there is a #0Dood,after he collects his insurance,his wealth will be the same

whether there is a #0Dood or not.

#28d#29 enough insurance so that if there is a #0Dood,after he collects his insurance,his wealth will be 1=3 of what

it would be if there is no #0Dood.

#28e#29 enough insurance so that if there is a #0Dood,after he collects his insurance his wealth will be 1=5 of what

it would be if there is no #0Dood.

MULTIPLE CHOICE 227

Topic,Uncertainty Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,B

12.21 Willy's only source of wealth is his chocolate factory,He has the utility function pc

1=2

f

+

#281,p#29c

1=2

nf

where p is the probability of a #0Dood,1,p is the probability of no #0Dood and where c

f

and

c

n

f are his wealth contingent on a #0Dood and on no #0Dood,respectively,The probability of #0Dood is

p =1=16,The value of Willy's factory is $600,000 if there is no #0Dood and 0 if there is a #0Dood,Willy

can buy insurance where if he buys $x worth of insurance,he must pay the insurance company

$3x=18 whether there is a #0Dood or not,but he gets back $x from the company if there is a #0Dood.

Willy should buy:

#28a#29 no insurance since the the cost per dollar of insurance exceeds the probability of a #0Dood.

#28b#29 enough insurance so that if there is a #0Dood,after he collects his insurance,his wealth will be 1=9 of what

it would be if there is no #0Dood.

#28c#29 enough insurance so that if there is a #0Dood,after he collects his insurance,his wealth will be the same

whether there is a #0Dood or not.

#28d#29 enough insurance so that if there is a #0Dood,after he collects his insurance,his wealth will be 1=4 of what

it would be if there is no #0Dood.

#28e#29 enough insurance so that if there is a #0Dood,after he collects his insurance his wealth will be 1=7 of what

it would be if there is no #0Dood.

Topic,Uncertainty Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,C

12.22 Sally Kink is an expected utility maximizer with utility function pu#28c

1

#29+#281,p#29u#28c

2

#29where

for any x#3C9;000;u#28x#29=2xand where u#28x#29=9;000+ x for x greater than or equal to 9,000.

#28a#29 Sally will be risk averse if her income is less than 9,000 but risk loving if her income is more than 9,000.

#28b#29 Sally will be risk neutral if her income is less than 9,000 and risk averse if her income is more than 9,000.

#28c#29 For bets that involvenochance of her wealth exceeding 9,000,Sally will takeany bet that has a positive

expected net payo#0B.

#28d#29 Sally will never take a bet if there is a chance that it leaves her with wealth less than 18,000.

#28e#29 None of the above are true.

CHAPTER 12 Uncertainty 228

Topic,Uncertainty Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,C

12.23 Sally Kink is an expected utility maximizer with utility function pu#28c

1

#29+#281,p#29u#28c

2

#29where

for any x#3C1;000;u#28x#29=2xand where u#28x#29=1;000+ x for x greater than or equal to 1,000.

#28a#29 Sally will be risk averse if her income is less than 1,000 but risk loving if her income is more than 1,000.

#28b#29 Sally will be risk neutral if her income is less than 1,000 and risk averse if her income is more than 1,000.

#28c#29 For bets that involvenochance of her wealth exceeding 1,000,Sally will takeany bet that has a positive

expected net payo#0B.

#28d#29 Sally will never take a bet if there is a chance that it leaves her with wealth less than 2,000.

#28e#29 None of the above are true.

Topic,Uncertainty Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,A

12.24

Pablo's expected utility function is pc

1=2

1

+#281,p#29c

1=2

2

where p is the probability that he consumes

c

1

and 1,p is the probability that he consumes c

2

,Wilbur is o#0Bered a choice between getting a

sure paymentof$Zor a lottery in which he receives $3,600 with probability 0.70 and he receives

$12,100 with probability 0.30,Wilbur will choose the sure payment if:

#28a#29 Z#3E5;625 and the lottery if Z#3C5;625.

#28b#29 Z#3E4;612:50 and the lottery if Z#3C4;612:50.

#28c#29 Z#3E12;100 and the lottery if Z#3C12;100.

#28d#29 Z#3E8;862:50 and the lottery if Z#3C8;862:50.

#28e#29 Z#3E6;150 and the lottery if Z#3C6;150.

MULTIPLE CHOICE 229

Topic,Uncertainty Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,A

12.25

Roger's expected utility function is pc

1=2

1

+#281,p#29c

1=2

2

where p is the probability that he consumes c

1

and 1,p is the probability that he consumes c

2

,Wilbur is o#0Bered a choice between getting a sure

paymentof$Zor a lottery in which he receives $900 with probability 0.80 and he receives $10,000

with probability 0.20,Wilbur will choose the sure payment if:

#28a#29 Z#3E1;936 and the lottery if Z#3C1;936.

#28b#29 Z#3E1;418 and the lottery if Z#3C1;418.

#28c#29 Z#3E10;000 and the lottery if Z#3C10;000.

#28d#29 Z#3E5;968 and the lottery if Z#3C5;968.

#28e#29 Z#3E2;720 and the lottery if Z#3C2;720.

Topic,Uncertainty Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,B

12.26 Clancy has $3,200,He plans to bet on a boxing matchbetween Sullivan and Flanagan.

He #0Cnds that he can buy coupons for $8 that will pay o#0B $10 each if Sullivan wins,He also #0Cnds

in another store some coupons that will pay o#0B $10 if Flanagan wins,The Flanagan tickets cost

$2 each,Clancy believes that the two #0Cghters eachhave a probabilityof1=2of winning,Clancy is

a risk averter who tries to maximize the expected value of the natural log of his wealth,Whichof

the following strategies would maximize his expected utility?

#28a#29 Don't gamble at all.

#28b#29 Buy 200 Sullivan tickets and 800 Flanagan tickets.

#28c#29 Buy exactly as many Flanagan tickets as Sullivan tickets.

#28d#29 Buy 100 Sullivan tickets and 400 Flanagan tickets.

#28e#29 Buy 100 Sullivan tickets and 800 Flanagan tickets.

CHAPTER 12 Uncertainty 230

Topic,Uncertainty Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,B

12.27 Clancy has $4,800,He plans to bet on a boxing matchbetween Sullivan and Flanagan.

He #0Cnds that he can buy coupons for $6 that will pay o#0B $10 each if Sullivan wins,He also #0Cnds

in another store some coupons that will pay o#0B $10 if Flanagan wins,The Flanagan tickets cost

$4 each,Clancy believes that the two #0Cghters eachhave a probabilityof1=2of winning,Clancy is

a risk averter who tries to maximize the expected value of the natural log of his wealth,Whichof

the following strategies would maximize his expected utility?

#28a#29 Don't gamble at all.

#28b#29 Buy 400 Sullivan tickets and 600 Flanagan tickets.

#28c#29 Buy exactly as many Flanagan tickets as Sullivan tickets.

#28d#29 Buy 200 Sullivan tickets and 300 Flanagan tickets.

#28e#29 Buy 200 Sullivan tickets and 600 Flanagan tickets.

Topic,Uncertainty Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,C

12.28 Tom Cruiser's car is worth $100,000,But Tom is careless and leaves the top down and

the keys in the ignition,Consequently his car will be stolen with probability,5,If it is stolen he

will never get it back,Tom has $100,000 in other wealth and his von Neumann-Morgenstern utility

function for wealth is u#28w#29=ln#28w#29,Suppose that Tom can buy $K worth of insurance at a price of

$:6K.Howmuch insurance will Tom buy?

#28a#29 $0.

#28b#29 $100,000.

#28c#29 more than $0 but less than $50,000.

#28d#29 more than $50,000 but less than $100,000.

#28e#29 exactly $50,000.

Essay Uncertainty

Topic,Uncertainty Di#0Eculty,2

#25 Correct Responses,0 Discrimination Index,0

12.1 Gaston Gourmand loves good food,Due to an unusual ailment,he has a probabilityof1=4

of losing his sense of smell,whichwould greatly reduce his enjoyment of food,Gaston #0Cnds an

insurance company that will sell him "insurance" where he gets $3x if he loses his smell and pays

$x if he doesn't,He can also buy "negative insurance" where he pays $3x if he loses his sense of

smell and gets x dollars if he doesn't,Gaston says,"Money will be only half as importanttomeif

I lose my sense of smell." If we look at his expected utility function,we see what he means,Where

c

1

is his consumption if he retains his sense of smell and c

2

is his income if he loses his sense of

smell,Gaston has the expected utility function U#28c

1;c

2

#29=3=4c

1=2

1

+1=8c

1=2

2

,What insurance should

he buy?

Answer,Negative insurance so that his wealth is 4 times as large if he doesn't lose his smell than

if he does.

Topic,Uncertainty Di#0Eculty,2

#25 Correct Responses,0 Discrimination Index,0

12.2 Oliver takes his wealth of $1000 to a casino,He can bet as muchashelikes on the toss of

a coin,but the "house" takes a cut,If Oliver bets $x on heads,then if heads comes up,he gets

$:8x; and if tails comes up he pays $x,Similarly if he bets $x on tails and if tails comes up,he wins

$:8x; and if heads comes up he pays $x,Draw a graph with dollars contingent on heads and dollars

contingent on tails on the two axes,Show Oliver's budget constraint,Oliver is an expected utility

maximizer with the utility function U#28h;t#29=1=2h

2

+1=2t

2

where h is his wealth if heads comes up

and t is his wealth if tails comes up,Draw the highest indi#0Berence curve that Oliver can reach with

his budget,What bets if anydoeshemake?

Answer,Budget kinks at #281000;1000#29;it meets the axes at #281800;0#29 and #280;1800#29,Indi#0Berence curves

are quarter circles,Oliver will gamble his entire wealth,either betting it all on heads or all on tails.

Topic,Uncertainty Di#0Eculty,3

#25 Correct Responses,0 Discrimination Index,0

12.3 Linus Piecewise is an expected utility maximizer,There are twoevents,H and T; which

eachhave probability 1=2,Linus's preferences over lotteries in which his wealth is h if Event H

happens and t if Event T happens are representable by the utility function U#28h;t#29=u#28h#29=2+u#28t#29=2.

The function u takes the following form,For any x; u#28x#29=xif x#3C100 and u#28x#29 = 100 + x=2 if x

is greater than or equal to 100,Draw a graph showing the indi#0Berence curves for Linus that pass

through a#29 the point #2850;0#29 b#29 the point #2850;100#29 c#29 the point #28100;100#29 d#29 the point #28150;100#29.

Answer,Curve a is a line with slope,1,Curve b has 3 linear segments,a line from#28100;50#29 to

#2850;100#29; a line with slope,2 to the left of #2850;100#29; and a line with slope,1=2 to the rightof

#28100;50#29,Curve c has two segments,a line with slope,2 going to the left and a line with slope

,1=2 to the rightof#28100;100#29,Curve d has 3 segments,a line from #28150;100#29 to #28100;150#29; and lines

from #28150;100#29 to #28200;0#29 and from #280;200#29 to #28100;150#29.

CHAPTER 12 Uncertainty 232

Topic,Uncertainty Di#0Eculty,2

#25 Correct Responses,0 Discrimination Index,0

12.4 The "certainty equivalent" of a gamble is de#0Cned to be an the amount of money whichif

you were promised it with certaintywould be indi#0Berent to the gamble,a#29 If an expected utility

maximizer has a von Neuman Morgenstern utility function U#28W#29=W

1=2

#28where W is wealth#29 and

if the probabilityofevents 1 and 2 are both 1=2; write a formula for the certainty equivalentofa

gamble that gives you x if event 1 happens and y if event 2 happens,b#29 Generalize your formula in

part #28a#29 to the case where the probabilityofevent1ispand the probabilityofevent2is1,p.c#29

Generalize the formula in part #28a#29 to the case where U#28W#29=W

a

for a#3E0.

Answer,a#29certainty equivalentis#281=2x

1=2

+1=2y

1=2

#29

2

b#29#28px

1=2

+#281,p#29y

1=2

#29

2

c#29#281=2x

a

+1=2y

a

#29

f

1=ag

Chapter 13

True-False Risky Assets

Topic,Risky Assets Di#0Eculty,1

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,False

13.1 If two assets have the same expected rate of return but di#0Berentvariances,a risk-averse

investor should always choose the one with the smaller variance,no matter what other assets she

holds.

Topic,Risky Assets Di#0Eculty,1

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,True

13.2 If the returns on two assets are negatively correlated,then a portfolio that contains some

of each will have less variance in its return per dollar invested than either asset has by itself.

Topic,Risky Assets Di#0Eculty,1

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,True

13.3 If mean is plotted on the horizontal axis and variance on the vertical,then indi#0Berence

curves for a risk-averter must slope upwards and to the right.

Topic,Risky Assets Di#0Eculty,1

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,True

13.4 If you invest half your money in a risk-free asset and half your money in a risky asset such

that the standard deviation of the return on the risky asset is s; then the standard deviation of the

return on your investment portfolio is s=2.

Multiple Choice Risky Assets

Topic,Risky Assets Di#0Eculty,2

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,D

13.1 Firm A sells lemonade and #0Crm B sells hot chocolate,If you invest $100 if Firm A,in

one year you will get back $#2830+ T#29 where T is the average temperature #28Fahrenheit#29 during the

summer,If you invest $100 in #0Crm B;in one year you will get back $#28150,T#29 where T is the average

temperature during the summer,The expected value of T is 70 and the standard deviation of T is

10,If you invest $50 in Firm A and $50 in Firm B; what is the standard deviation of your return

on your investment?

#28a#29 10

#28b#29 20

#28c#29 5

#28d#29 0

#28e#29 None of the above.

Topic,Risky Assets Di#0Eculty,2

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,A

13.2 A risk-free asset is available at 5#25 interest,Another asset is available with a mean rate

of return of 15#25,but with a standard deviation of 5#25,An investor is considering an investment

portfolio consisting of some of each stock,On a graph with standard deviation on the horizontal

axis and mean on the vertical axis,the budget line that expresses the alternative combinations of

mean return and standard deviation possible with portfolios of these assets is:

#28a#29 a straight line with slope 2.

#28b#29 a straight line with slope,3.

#28c#29 a straight line with increasing slope as you move left.

#28d#29 a straight line with slope,1.

#28e#29 a straight line with slope,1=3.

MULTIPLE CHOICE 235

Topic,Risky Assets Di#0Eculty,2

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,A

13.3 Marvin is an expected utility maximizer,He chooses his portfolio so as to maximize the

expected value of 2;000;000x,x

2

.Ifmis the mean of Marvin's income and s is the standard devi-

ation,we can write Marvin's income as a function of mean and standard deviation in the following

way:

#28a#29 U =2;000;000m,s

2

.

#28b#29 U =2;000;000m,s.

#28c#29 U = m,s=2;000;000.

#28d#29 U =2;000;000+s.

#28e#29 None of the above.

Topic,Risky Assets Di#0Eculty,1

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,E

13.4 You have been hired as a portfolio manager for a stock brokerage,Your #0Crst job is to invest

$100,000 in a portfolio of two assets,The #0Crst asset is a "safe asset" with a sure return of 4#25

interest,The second asset is a risky asset with a 26#25 expected rate of return,but the standard

deviation of this return is 10#25,Your clientwants a portfolio with as high a rate of return as

possible consistent with a standard deviation no larger than 4#25,Howmuch of her money do you

invest in the safe asset?

#28a#29 $22,000

#28b#29 $40,000

#28c#29 $64,000

#28d#29 $36,000

#28e#29 $60,000

CHAPTER 13 Risky Assets 236

Topic,Risky Assets Di#0Eculty,1

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,B

13.5 Bill owns an export business,The expected pro#0Ct from his business is $100,000 a year,For

every 1#25 increase in the value of the Japanese yen relative to the dollar,its pro#0Cts increase by

$20,000,Bill plans to buy one of two #0Crms,One is an import business which returns an expected

pro#0Ct of $70,000,For every 1#25 increase in the value of the Japanese yen relative to the dollar,the

pro#0Cts of this #0Crm shrink by $5,000,The second is a safe domestic #0Crm which is certain to yield

him $70,000 a year,The two #0Crms cost the same,If Bill is risk averse:

#28a#29 he should buy the domestic #0Crm.

#28b#29 he should buy the import #0Crm.

#28c#29 he should buy half of each of these two #0Crms.

#28d#29 it doesn't matter which he buys.

#28e#29 he should buy 80#25 of the domestic #0Crm and 20#25 of the import #0Crm.

Topic,Risky Assets Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,C

13.6 Suppose that Ms,Lynch in Problem 13.1 can make up her portfolio using a risk-free asset

that o#0Bers a sure-#0Cre rate of return of 15#25 and a risky asset with expected rate of return 30#25,

with standard deviation 5,If she chooses a portfolio with expected rate of return 30#25,then the

standard deviation of her return on this portfolio will be:

#28a#29 2.50#25.

#28b#29 8#25.

#28c#29 5#25.

#28d#29 10#25.

#28e#29 None of the above.

MULTIPLE CHOICE 237

Topic,Risky Assets Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,C

13.7 Suppose that Ms,Lynch in Problem 13.1 can make up her portfolio using a risk-free asset

that o#0Bers a sure-#0Cre rate of return of 15#25 and a risky asset with expected rate of return 25#25,

with standard deviation 5,If she chooses a portfolio with expected rate of return 20#25,then the

standard deviation of her return on this portfolio will be:

#28a#29 1.25#25.

#28b#29 5.50#25.

#28c#29 2.50#25.

#28d#29 5#25.

#28e#29 None of the above.

Topic,Risky Assets Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,A

13.8 Suppose that Fenner Smith of Problem 13.2 must divide his portfolio between two assets,

one of which gives him an expected rate of return of 10 with zero standard deviation and one of

which gives him an expected rate of return of 30 and has a standard deviation of 5,He can alter

the expected rate of return and the variance of his portfolio bychanging the proportions in which

he holds the two assets,If we draw a "budget line" with expected return on the vertical axis and

standard deviation on the horizontal axis,depicting the combinations that Smith can obtain,the

slope of this budget line is:

#28a#29 4.

#28b#29,4.

#28c#29 2.

#28d#29,2.

#28e#29 6.

CHAPTER 13 Risky Assets 238

Topic,Risky Assets Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,A

13.9 Suppose that Fenner Smith of Problem 13.2 must divide his portfolio between two assets,

one of which gives him an expected rate of return of 15 with zero standard deviation and one of

which gives him an expected rate of return of 45 and has a standard deviation of 15,He can alter

the expected rate of return and the variance of his portfolio bychanging the proportions in which

he holds the two assets,If we draw a "budget line" with expected return on the vertical axis and

standard deviation on the horizontal axis,depicting the combinations that Smith can obtain,the

slope of this budget line is:

#28a#29 2.

#28b#29,2.

#28c#29 1.

#28d#29,1.

#28e#29 3.

Essay Risky Assets

Topic,Risky Assets Di#0Eculty,3

#25 Correct Responses,0 Discrimination Index,0

13.1 If you invest $100 now in #0Crm A,in one year you will get back $#2830 + T#29 where T is the

average temperature during the next summer,If you invest $100 nowin#0CrmB; in one year you

will get back $#28180,T#29,The expected value of T is 70 and the standard deviation of T is 10,a#29

Draw a graph showing the combinations of expected return and standard deviation that you can

haveby dividing $100 between stock in A and stockinB,#28Hint,Expected value has the property

that E#28ax + b#29=aE#28x#29+band standard deviation has the property that SD#28ax + b#29=#5B#28absolute

value of a#29 times SD#28x#29#5D + b.#29 b#29 What is the expected value and standard deviation of the safest

investment strategy you can makeby this means? #28c#29 What is the highest expected value you can

achieve?

Answer,a#29 The locus includes the line segment from #28S;E#29=#280;105#29 to #28S;E#29 = #2810;110#29 as well

as the line segment from #280;105#29 to #2810;100#29,b#29105 and 0 c#29110.

Chapter 14

True-False Consumer's Surplus

Topic,Consumer's Surplus Di#0Eculty,1

#25 Correct Responses,63 Discrimination Index,22

Correct Answer,False

14.1 Consumer's surplus is another name for excess demand.

Topic,Consumer's Surplus Di#0Eculty,1

#25 Correct Responses,85 Discrimination Index,27

Correct Answer,True

14.2 There is a positive consumer surplus when the total amount one pays for something is less

than the amount one would be willing to pay rather than do without it altogether.

Topic,Consumer's Surplus Di#0Eculty,1

#25 Correct Responses,74 Discrimination Index,46

Correct Answer,False

14.3 The equivalentvariation in income from a tax is the amount of extra income that a consumer

would need in order to be as well o#0B after the tax is imposed as he was originally.

Topic,Consumer's Surplus Di#0Eculty,2

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,True

14.4 With quasilinear preferences,the equivalentvariation and the compensating variation in

income due to a tax are the same.

Topic,Consumer's Surplus Di#0Eculty,1

#25 Correct Responses,76 Discrimination Index,17

Correct Answer,False

14.5 Producer's surplus at price p is the vertical distance between the supply curve and the

demand curve at price p.

TRUE-FALSE 241

Topic,Consumer's Surplus Di#0Eculty,2

#25 Correct Responses,84 Discrimination Index,19

Correct Answer,True

14.6 If somebody is buying 15 units of x and the price of x falls by $2,then that person's net

consumer surplus must increase by at least $30.

Topic,Consumer's Surplus Di#0Eculty,2

#25 Correct Responses,84 Discrimination Index,19

Correct Answer,True

14.7 If somebody is buying 15 units of x and the price of x falls by $4,then that person's net

consumer surplus must increase by at least $60.

Topic,Consumer's Surplus Di#0Eculty,1

#25 Correct Responses,83 Discrimination Index,20

Correct Answer,False

14.8 If there is Cobb-Douglas utility,compensating and equivalentvariation are the same.

Topic,Consumer's Surplus Di#0Eculty,2

#25 Correct Responses,62 Discrimination Index,15

Correct Answer,False

14.9 Bernice has the utility function U#28x;y#29=minfx;yg,The price of x used to be 3,but rose to

4,The price of y remained at 1,Her income is 12,The price increase was as bad for her as a loss

of $3 in income.

Topic,Consumer's Surplus Di#0Eculty,0

#25 Correct Responses,73 Discrimination Index,27

Correct Answer,False

14.10 If there is a price increase for a good that Josephine consumes,her compensating variation is

the change in her income that allows her to purchase her new optimal bundle at the original prices.

Topic,Consumer's Surplus Di#0Eculty,0

#25 Correct Responses,73 Discrimination Index,27

Correct Answer,False

14.11 If there is a price increase for a good that Elsie consumes,her compensating variation is

the change in her income that allows her to purchase her new optimal bundle at the original prices.

CHAPTER 14 Consumer's Surplus 242

Topic,Consumer's Surplus Di#0Eculty,2

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,True

14.12 Bernice's utility function is U#28x;y#29=minfx;yg,The price of x used to be 3,but rose to 4.

The price of y remained at 1,Her income is 12,She would need an income of $15 to be able to

a#0Bord a bundle as good as her old one at the new prices.

Multiple Choice Consumer's Surplus

Topic,Consumer's Surplus Di#0Eculty,1

#25 Correct Responses,56 Discrimination Index,40

Correct Answer,C

14.1 Ella's utility function is minf4x;yg,If the price of x is 15 and the price of y is 20,how

much money would she need to be able to purchase a bundle that she likes as well as the bundle

#28x;y#29=#285;8#29?

#28a#29 92

#28b#29 198

#28c#29 190

#28d#29 235

#28e#29 47

Topic,Consumer's Surplus Di#0Eculty,1

#25 Correct Responses,56 Discrimination Index,40

Correct Answer,C

14.2 Ella's utility function is minf2x;yg,If the price of x is 15 and the price of y is 10,how

much money would she need to be able to purchase a bundle that she likes as well as the bundle

#28x;y#29 = #2810;8#29?

#28a#29 67

#28b#29 148

#28c#29 140

#28d#29 230

#28e#29 70

CHAPTER 14 Consumer's Surplus 244

Topic,Consumer's Surplus Di#0Eculty,3

#25 Correct Responses,33 Discrimination Index,32

Correct Answer,E

14.3 Reginald is fond of cigars,His utility function is U#28x;c#29=x+10c,:5c

2

where c is the number

of cigars he smokes per week and x is the money that he spends on consumption of other goods.

Reginald has $200 a week to spend,Cigars used to cost him $1 each,but their price wentupto$2

each,This price increase was as bad for him as losing the following amount of income:

#28a#29 $5

#28b#29 $7.25

#28c#29 $9

#28d#29 $8

#28e#29 $8.50

Topic,Consumer's Surplus Di#0Eculty,2

#25 Correct Responses,62 Discrimination Index,55

Correct Answer,B

14.4 Sam's utility function is U#28x;y#29=2x+ywhere x is the number of x

0

s he consumes per week

and y is the number of y

0

s he consumes per week,Sam has $200 a week to spend,The price of x is

4,Sam currently doesn't consume any y,Sam has received an invitation to join a club devoted to

consumption of y,If he joins the club,Sam can get a discount on the purchase of y,If he belonged

to the club he could buy y for $1 a unit,Howmuch is the most Sam would be willing to payto

join this club?

#28a#29 nothing

#28b#29 $100 a week

#28c#29 $50aweek

#28d#29 $40 a week

#28e#29 None of the above.

MULTIPLE CHOICE 245

Topic,Consumer's Surplus Di#0Eculty,2

#25 Correct Responses,56 Discrimination Index,77

Correct Answer,A

14.5 Yoram's utility function is U#28x;y#29=2x+5y,The price of x is $4 and the price of y is

$15,Yoram has $150 a week to spend on x and y.Yoram is o#0Bered a chance to join a club of

y-consumers,If he joins,he can get y at a price of $10,What is the most that Yoram would be

willing to pay to join the club?

#28a#29 nothing

#28b#29 $30 a week

#28c#29 $50aweek

#28d#29 $75 a week

#28e#29 None of the above.

Topic,Consumer's Surplus Di#0Eculty,2

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,E

14.6 Minnie gets 4 tapes for her birthday,but they are currently useless to her because she

doesn't have a tape recorder and she cannot return them for a refund,Her utility function is

U#28x;y;z#29=x+f#28y#29z

:5

where z is the number of tapes she has,y is the number of tape recorders

she has,and x is the money she has to spend on other stu#0B,Let f#28y#29=0if y#3C1and f#28y#29=7

otherwise,The price of tapes is $7.99,What is her reservation price for a tape recorder?

#28a#29 20

#28b#29 7

#28c#29 24

#28d#29 0

#28e#29 None of the above.

CHAPTER 14 Consumer's Surplus 246

Topic,Consumer's Surplus Di#0Eculty,1

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,A

14.7 Izaak likes to eat pizza and to #0Csh,The more #0Cshing he does the happier he is,up to 8

hours a day,If he #0Cshes longer than 8 hours he gets a sore back and is less happy than if he hadn't

#0Cshed at all,For y less than or equal to 8,his utility function is U#28x;y#29=x+4ywhere x is money

spent on pizza and y is hours per dayspent #0Cshing,His income is $45 a day and he has no expenses

other than pizza,The Bureau of Fisheries has just decided to allow people without #0Cshing licenses

to #0Csh only 3 hours a day,But if you buy a #0Cshing license,you can #0Csh as many hours as you wish.

Howmuch is Izaak willing pay for a license?

#28a#29 $20

#28b#29 $32

#28c#29 $23

#28d#29 $18

#28e#29 0.

Topic,Consumer's Surplus Di#0Eculty,1

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,A

14.8 Izaak likes to eat pizza and to #0Csh,The more #0Cshing he does the happier he is,up to 8

hours a day,If he #0Cshes longer than 8 hours he gets a sore back and is less happy than if he hadn't

#0Cshed at all,For y less than or equal to 8,his utility function is U#28x;y#29=x+4ywhere x is money

spent on pizza and y is hours per dayspent #0Cshing,His income is $41 a day and he has no expenses

other than pizza,The Bureau of Fisheries has just decided to allow people without #0Cshing licenses

to #0Csh only 4 hours a day,But if you buy a #0Cshing license,you can #0Csh as many hours as you wish.

Howmuch is Izaak willing pay for a license?

#28a#29 $16

#28b#29 $32

#28c#29 $19

#28d#29 $14

#28e#29 0.

MULTIPLE CHOICE 247

Topic,Consumer's Surplus Di#0Eculty,2

#25 Correct Responses,51 Discrimination Index,26

Correct Answer,D

14.9 Ellsworth's utility function is U#28x;y#29=minfx;yg,Ellsworth has $150 and the price of x

and the price of y are both 1,Ellsworth's boss is thinking of sending him to another town where

the price of x is 1 and the price of y is 2,The boss o#0Bers no raise in pay,Ellsworth,who under-

stands compensating and equivalentvariation perfectly,complains bitterly.Hesays that although

he doesn't mind moving for its own sake and the new town is just as pleasant as the old,having to

move is as bad as a cut in pay of $A,He also says he wouldn't mind moving if when he moved he

got a raise of $B,What are A and B?

#28a#29 A =50B=50

#28b#29 A =75B=75

#28c#29 A =75B= 100

#28d#29 A =50B=75

#28e#29 none of the above

Topic,Consumer's Surplus Di#0Eculty,1

#25 Correct Responses,22 Discrimination Index,40

Correct Answer,A

14.10 Holly consumes only goods X and Y,Her income is 600 and her utility function is

U#28x;y#29=maxfx;yg where x is the number of units of X she consumes and y is the number of

units of Y she consumes,The price of good Y is 1,The price of good X used to be 1=2; but is now

2,The equivalentvariation of this price change for Holly is:

#28a#29 300.

#28b#29 600.

#28c#29 150.

#28d#29 800.

#28e#29 None of the above.

CHAPTER 14 Consumer's Surplus 248

Topic,Consumer's Surplus Di#0Eculty,1

#25 Correct Responses,22 Discrimination Index,40

Correct Answer,A

14.11 Zelda consumes only goods X and Y,Her income is 400 and her utility function is

U#28x;y#29=maxfx;yg where x is the number of units of X she consumes and y is the number of units

of Y she consumes,The price of good Y is 1,The price of good X used to be 1=4; but is now2.

The equivalentvariation of this price change for Zelda is:

#28a#29 300.

#28b#29 1,200.

#28c#29 75.

#28d#29 2,000.

#28e#29 None of the above.

Topic,Consumer's Surplus Di#0Eculty,2

#25 Correct Responses,53 Discrimination Index,47

Correct Answer,D

14.12 Poindexter's utility function is U#28x;y#29=minfx+2y;3x+yg where x is butter and y is guns.

If the price of butter is 4 and the price of guns is 5,what would it cost Poindexter to buy the

cheapest bundle that he likes as well as 4 units of butter and 3 units of guns?

#28a#29 31

#28b#29 32

#28c#29 29

#28d#29 28

#28e#29 None of the above.

MULTIPLE CHOICE 249

Topic,Consumer's Surplus Di#0Eculty,3

#25 Correct Responses,82 Discrimination Index,41

Correct Answer,D

14.13 Albin has quasilinear preferences and he loves pretzels,His inverse demand function for

pretzels is p#28x#29=49,6x; where x is the number of pretzels that he consumes,He is currently

consuming 8 pretzels at a price of $1 per pretzel,If the price of pretzels rises to $7 per pretzel,the

change in Albin's consumer surplus is:

#28a#29,$90.

#28b#29,$56.

#28c#29,$42.

#28d#29,$45.

#28e#29,$42.

Topic,Consumer's Surplus Di#0Eculty,2

#25 Correct Responses,44 Discrimination Index,49

Correct Answer,D

14.14 Bernice's preferences can be represented by the utility function,U#28x;y#29=minfx;yg,She

faces prices,#282;1#29; and her income is 12,If prices change to #283;1#29; then:

#28a#29 the compensating variation equals the equivalentvariation.

#28b#29 the compensating variation is $2 greater than the equivalentvariation.

#28c#29 the compensating variation is $2 smaller than the equivalentvariation.

#28d#29 the compensating variation is $1 greater than the equivalentvariation.

#28e#29 there is not enough information to determine which is larger.

Topic,Consumer's Surplus Di#0Eculty,1

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,C

14.15 At the initial prices,Teodoro is a net seller of apples and a net buyer of bananas,If the

price of apples decreases and the price of bananas does not change:

#28a#29 the compensating variation must be negative and the equivalentvariation positive.

#28b#29 the compensating variation must be positive and the equivalentvariation negative.

#28c#29 both the compensating variation and the equivalentvariation must be positive.

#28d#29 both the compensating variation and the equivalentvariation must be negative.

#28e#29 the compensating variation must be negative,but the equivalentvariation could be of either sign.

CHAPTER 14 Consumer's Surplus 250

Topic,Consumer's Surplus Di#0Eculty,1

#25 Correct Responses,74 Discrimination Index,45

Correct Answer,B

14.16 Sam has quasilinear preferences and his demand function for x is D#28p#29=15,p=3,The

price of x is initially $15 per unit and increases to $24 per unit,Sam's change is consumer surplus

is the closest to:

#28a#29,168.

#28b#29,76.

#28c#29,27.

#28d#29 75.

#28e#29 Sam won't consume x at either of the prices.

Topic,Consumer's Surplus Di#0Eculty,1

#25 Correct Responses,87 Discrimination Index,30

Correct Answer,B

14.17 Sir Plus has a demand function for mead that is given by the equation D#28p#29 = 100,p.If

the price of mead is 65,howmuch is Sir Plus's net consumer surplus?

#28a#29 35

#28b#29 612.50

#28c#29 1,225

#28d#29 306.25

#28e#29 4,550

Topic,Consumer's Surplus Di#0Eculty,1

#25 Correct Responses,87 Discrimination Index,30

Correct Answer,B

14.18 Sir Plus has a demand function for mead that is given by the equation D#28p#29 = 100,p.If

the price of mead is 75,howmuch is Sir Plus's net consumer surplus?

#28a#29 25

#28b#29 312.50

#28c#29 625

#28d#29 156.25

#28e#29 6,000

MULTIPLE CHOICE 251

Topic,Consumer's Surplus Di#0Eculty,2

#25 Correct Responses,70 Discrimination Index,83

Correct Answer,A

14.19 Quasimodo from your workbook has the utility function U#28x;m#29 = 100x,x

2

=2+mwhere x

is his consumption of earplugs and m is money left over to spend on other stu#0B,If he has $10,000

to spend on earplugs and other stu#0B,and if the price of earplugs rises from $50 to 65,then his net

consumer's surplus:

#28a#29 falls by 637.50.

#28b#29 falls by 2,637.50.

#28c#29 falls by 525.

#28d#29 increases by 318.75.

#28e#29 increases by 1,275.

Topic,Consumer's Surplus Di#0Eculty,2

#25 Correct Responses,70 Discrimination Index,83

Correct Answer,A

14.20 Quasimodo from your workbook has the utility function U#28x;m#29 = 100x,x

2

=2+mwhere x

is his consumption of earplugs and m is money left over to spend on other stu#0B,If he has $10,000

to spend on earplugs and other stu#0B,and if the price of earplugs rises from $50 to 90,then his net

consumer's surplus:

#28a#29 falls by 1,200.

#28b#29 falls by 3,200.

#28c#29 falls by 400.

#28d#29 increases by 600.

#28e#29 increases by 2,400.

CHAPTER 14 Consumer's Surplus 252

Topic,Consumer's Surplus Di#0Eculty,2

#25 Correct Responses,80 Discrimination Index,50

Correct Answer,B

14.21 Bernice has the utility function u#28x;y#29=minfx;yg where x is the number of pairs of ear-

rings she buys per week and y is the number of dollars per week she has left to spend on other

things,#28We allow the possibility that she buys fractional numbers of pairs of earrings per week.#29

If she originally had an income of $13 per week and was paying a price of $5 per pair of earrings,

then if the price of earrings rose to $8,the comp ensating variation of that price change #28measured

in dollars per w week#29 would be closest to:

#28a#29 $4.33.

#28b#29 $6.50.

#28c#29 $14.

#28d#29 $13.

#28e#29 $12.

Topic,Consumer's Surplus Di#0Eculty,2

#25 Correct Responses,80 Discrimination Index,50

Correct Answer,B

14.22 Bernice has the utility function u#28x;y#29=minfx;yg where x is the number of pairs of ear-

rings she buys per week and y is the number of dollars per week she has left to spend on other

things,#28We allow the possibility that she buys fractional numbers of pairs of earrings per week.#29

If she originally had an income of $11 per week and was paying a price of $3 per pair of earrings,

then if the price of earrings rose to $5,the comp ensating variation of that price change #28measured

in dollars per w week#29 would be closest to:

#28a#29 $3.67.

#28b#29 $5.50.

#28c#29 $12.

#28d#29 $11.

#28e#29 $10.

MULTIPLE CHOICE 253

Topic,Consumer's Surplus Di#0Eculty,2

#25 Correct Responses,60 Discrimination Index,45

Correct Answer,A

14.23 If Bernice #28whose utility function is minfx;yg where x is her consumption of earrings and

y is money left for other stu#0B#29 had an income of $ 12 and was paying a price of $9 for earrings

when the price of earrings went up to $14,then the equivalentvariation of the price change was:

#28a#29 $4.

#28b#29 $6.

#28c#29 $12.

#28d#29 $2.

#28e#29 $5.

Topic,Consumer's Surplus Di#0Eculty,2

#25 Correct Responses,60 Discrimination Index,45

Correct Answer,A

14.24 If Bernice #28whose utility function is minfx;yg where x is her consumption of earrings and

y is money left for other stu#0B#29 had an income of $ 12 and was paying a price of $3 for earrings

when the price of earrings went up to $7,then the equivalentvariation of the price change was:

#28a#29 $6.

#28b#29 $12.

#28c#29 $24.

#28d#29 $3.

#28e#29 $9.

Topic,Consumer's Surplus Di#0Eculty,2

#25 Correct Responses,70 Discrimination Index,82

Correct Answer,A

14.25 Lolita,the Holstein cow,has a utility function is U#28x;y#29=x,x

2

=2+ywhere x is her

consumption of cow feed and y is her consumption of hay,If the price of cow feed is 0.40,the price

of hay is 1,and her income is 3,and if Lolita chooses the combination of hay and cow feed that

she likes best from among those combinations she can a#0Bord,her utility will be:

#28a#29 3.18.

#28b#29 2.60.

#28c#29 0.18.

#28d#29 4.68.

#28e#29 1.68.

CHAPTER 14 Consumer's Surplus 254

Topic,Consumer's Surplus Di#0Eculty,2

#25 Correct Responses,70 Discrimination Index,82

Correct Answer,A

14.26 Lolita,the Holstein cow,has a utility function is U#28x;y#29=x,x

2

=2+ywhere x is her

consumption of cow feed and y is her consumption of hay,If the price of cow feed is 0.10,the price

of hay is 1,and her income is 5,and if Lolita chooses the combination of hay and cow feed that

she likes best from among those combinations she can a#0Bord,her utility will be:

#28a#29 5.40.

#28b#29 4.90.

#28c#29 0.40.

#28d#29 7.90.

#28e#29 2.90.

Topic,Consumer's Surplus Di#0Eculty,2

#25 Correct Responses,28 Discrimination Index,10

Correct Answer,B

14.27 The number of "Quayle in 96" buttons demanded on a certain university campus is given

by D#28p#29 = 100,p; where p is the price of buttons measured in pennies,The supply function is

S#28p#29=p,The current administration manages to enforce a price ceiling of 40 cents per button.

The e#0Bect on net consumers' surplus is:

#28a#29 an increase of $5.50.

#28b#29 an increase of $3.50.

#28c#29 no change.

#28d#29 a decrease of $3.50.

#28e#29 a decrease of $5.50.

MULTIPLE CHOICE 255

Topic,Consumer's Surplus Di#0Eculty,2

#25 Correct Responses,52 Discrimination Index,27

Correct Answer,B

14.28 Chen's utility function is U#28x;y#29=x+6y,y

2

=2;where x is the number of x

0

s he consumes

per week and y is the number of y

0

s he consumes per week,Chen has $200 a week to spend,The

price of x is 1,The price of y is currently $5 per unit,Chen has received an invitation to join a

club devoted to consumption of y,If he joins the club,Chen can get a discount on the purchase of

y,If he belonged to the club he could buy y for $1 a unit,Howmuch is the most Chen would be

willing to pay to join this club?

#28a#29 8

#28b#29 12

#28c#29 20

#28d#29 24

#28e#29 None of the above.

Topic,Consumer's Surplus Di#0Eculty,2

#25 Correct Responses,52 Discrimination Index,27

Correct Answer,B

14.29 Peter's utility function is U#28x;y#29=x+10y,y

2

=2;where x is the number of x

0

s he consumes

per week and y is the number of y

0

s he consumes per week,Peter has $200 a week to spend,The

price of x is 1,The price of y is currently $3 per unit,Peter has received an invitation to join a

club devoted to consumption of y,If he joins the club,Peter can get a discount on the purchase of

y,If he belonged to the club he could buy y for $1 a unit,Howmuch is the most Peter would be

willing to pay to join this club?

#28a#29 2

#28b#29 16

#28c#29 18

#28d#29 32

#28e#29 None of the above.

Essay Consumer's Surplus

Topic,Consumer's Surplus Di#0Eculty,3

#25 Correct Responses,0 Discrimination Index,0

14.1 The "indirect utility function" for a consumer with a utility function U#28x1;x2#29 is de#0Cned

to be a function V #28p1;p2;M#29 such that V#28p1;p2;M#29 is the maximum of U#28x1;x2#29 subject to the

constraint that the consumer can a#0Bord #28x1;x2#29 at the prices #28p1;p2#29 with income M,a#29 Find the

indirect utility function for someone with the utility function U#28x;y#29=2x+y.b#29Find the indirect

utility function for someone with the utility function U#28x;y#29=minf2x;yg,Explain howyou got

your answers.

Answer,a#29 M=#28minfp1=2;p2g,b#29M=#282p1+p2#29.

Chapter 15

True-False Market Demand

Topic,Market Demand Di#0Eculty,1

#25 Correct Responses,86 Discrimination Index,5

Correct Answer,True

15.1 The inverse demand curve P#28x#29 foragoodxmeasures the price per unit at which the quan-

tity x would be demanded.

Topic,Market Demand Di#0Eculty,2

#25 Correct Responses,37 Discrimination Index,0

Correct Answer,False

15.2 In general,aggregate demand depends only on prices and total income and not on income

distribution.

Topic,Market Demand Di#0Eculty,1

#25 Correct Responses,85 Discrimination Index,20

Correct Answer,True

15.3 If consumer 1 has the demand function x

1

=1;000,2p and consumer 2 has the demand

function x

2

= 500,p; then the aggregate demand function for an economy with just these two

consumers would be x =1;500,3p for p#3C500.

Topic,Consumer's Surplus Di#0Eculty,1

#25 Correct Responses,82 Discrimination Index,23

Correct Answer,True

15.4 If a consumer has to pay his reservation price for a good,then he gets no consumer surplus

from purchasing it.

Topic,Market Demand Di#0Eculty,1

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,True

15.5 If a price changes,then changes in consumption at the intensive margin are changes that

happen because consumers alter the amounts that they consume,but do not either stop consuming

or start consuming the good.

CHAPTER 15 Market Demand 258

Topic,Elasticity Di#0Eculty,1

#25 Correct Responses,86 Discrimination Index,25

Correct Answer,False

15.6 If the demand curve is a linear function of price,then the price elasticity of demand is the

same at all prices.

Topic,Elasticity Di#0Eculty,2

#25 Correct Responses,67 Discrimination Index,21

Correct Answer,False

15.7 If the demand function is q =3m=p; where m is income and p is price,then the absolute

value of the price elasticity of demand decreases as price increases.

Topic,Market Demand Di#0Eculty,1

#25 Correct Responses,48 Discrimination Index,10

Correct Answer,False

15.8 If the elasticity of demand curve for millet is,0:50 at all prices higher than the current

price,wewould expect that when bad weather reduces the size of the millet crop,total revenue of

millet producers will fall.

Topic,Market Demand Di#0Eculty,1

#25 Correct Responses,48 Discrimination Index,10

Correct Answer,False

15.9 If the elasticity of demand curve for buckwheat is,0:75 at all prices higher than the current

price,wewould expect that when bad weather reduces the size of the buckwheat crop,total revenue

of buckwheat producers will fall.

Topic,Market Demand Di#0Eculty,2

#25 Correct Responses,51 Discrimination Index,47

Correct Answer,False

15.10 If the equation for the demand curveisq=50,1p; then the ratio of marginal revenue to

price is constant as price changes.

TRUE-FALSE 259

Topic,Market Demand Di#0Eculty,2

#25 Correct Responses,51 Discrimination Index,47

Correct Answer,False

15.11 If the equation for the demand curveisq=40,2p; then the ratio of marginal revenue to

price is constant as price changes.

Topic,Market Demand Di#0Eculty,3

#25 Correct Responses,36 Discrimination Index,0

Correct Answer,True

15.12 If a rational consumer must consume either zero or one unit of a good,then an increase in

the price of that good with no change in income or in other prices can never lead to an increase in

the consumer's demand for it.

Topic,Market Demand Di#0Eculty,1

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,False

15.13 In the reservation price model,either aggregate demand is zero or everyone demands one

unit of the good.

Topic,Market Demand Di#0Eculty,1

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,False

15.14 The La#0Ber e#0Bect occurs only if there is a backward-bending labor supply curve.

Topic,Market Demand Di#0Eculty,2

#25 Correct Responses,64 Discrimination Index,4

Correct Answer,True

15.15 If the demand curvewere plotted on graph paper with logarithmic scales on both axes,

then its slope would be the elasticity of demand.

Topic,Market Demand Di#0Eculty,1

#25 Correct Responses,71 Discrimination Index,8

Correct Answer,True

15.16 The market demand curve is simply the horizontal sum of the individual demand curves.

CHAPTER 15 Market Demand 260

Topic,Market Demand Di#0Eculty,1

#25 Correct Responses,72 Discrimination Index,15

Correct Answer,False

15.17 The demand curve is inelastic for inferior goods and elastic for normal goods.

Topic,Market Demand Di#0Eculty,1

#25 Correct Responses,56 Discrimination Index,20

Correct Answer,True

15.18 Marginal revenue is equal to price if the demand curve is horizontal.

Topic,Market Demand Di#0Eculty,2

#25 Correct Responses,45 Discrimination Index,30

Correct Answer,False

15.19 If the amount of money that people are willing to spend on a good stays the same when

its price doubles,then demand for that good must have a price elasticity of demand smaller in

absolute value than one.

Topic,Elasticity Di#0Eculty,1

#25 Correct Responses,38 Discrimination Index,0

Correct Answer,True

15.20 If the price elasticity of demand for a normal good is constant,then a price increase of 10

cents will reduce demand by more if the original price is $1 than if the original price is $2.

Topic,Market Demand Di#0Eculty,1

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,True

15.21 The demand function for potatoes has the equation q =1;000,10p,As the price of potatoes

changes from 10 to 20,the absolute value of the price elasticity of demand for potatoes increases.

Topic,Elasticity Di#0Eculty,1

#25 Correct Responses,62 Discrimination Index,60

Correct Answer,True

15.22 If the demand curve for a good is given by the equation q =2=p; where q is quantity and p

is price,then at any positive price,the elasticity of demand will be,1.

TRUE-FALSE 261

Topic,Market Demand Di#0Eculty,2

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,True

15.23 If consumer 1 has the inverse demand function given by p =15,xand consumer 2 has

inverse demand function given by p =20,3x; then the total quantity demanded by the two con-

sumers is x =7when the price,p; is 11.

Topic,Market Demand Di#0Eculty,2

#25 Correct Responses,67 Discrimination Index,27

Correct Answer,False

15.24 The inverse demand for a good is given by p =60,2q,Suppose that the number of

consumers doubles,#28For each consumer in the market another consumer with an identical demand

function appears.#29 The demand curve shifts to the right,doubling demand at every price,while

the slope of the demand curve stays unchanged.

Topic,Market Demand Di#0Eculty,1

#25 Correct Responses,68 Discrimination Index,45

Correct Answer,False

15.25 If Castor's demand curve is described by q =40,pand Pollux's demand curve is given by

q =60,2p; then each of their demand curves will pass through the point q =20;p=20,Therefore

if they are the only two consumers in a market,the market demand curve will also pass through

q =20;p=20.

Topic,Elasticity Di#0Eculty,2

#25 Correct Responses,49 Discrimination Index,44

Correct Answer,False

15.26 If the price of broccoli falls by $3 per pound,then the demand for broccoli will rise by15

pounds,Therefore we can conclude that the demand for broccoli is elastic.

Topic,Elasticity Di#0Eculty,2

#25 Correct Responses,49 Discrimination Index,44

Correct Answer,False

15.27 If the price of squash falls by $2 per pound,then the demand for squash will rise by10

pounds,Therefore we can conclude that the demand for squash is elastic.

Multiple Choice Market Demand

Topic,Market Demand Di#0Eculty,1

#25 Correct Responses,77 Discrimination Index,34

Correct Answer,E

15.1 Apeckis1=4of a bushel,If the price elasticity of demand for bran is,0:20 when bran is

measured in bushels,then when bran is measured in pecks,the price elasticity of demand for bran

will be:

#28a#29,0:05.

#28b#29,0:80.

#28c#29,0:10.

#28d#29,0:40.

#28e#29 None of the above.

Topic,Market Demand Di#0Eculty,1

#25 Correct Responses,77 Discrimination Index,34

Correct Answer,E

15.2 Apeckis1=4of a bushel,If the price elasticity of demand for millet is,0:60 when millet

is measured in bushels,then when millet is measured in pecks,the price elasticity of demand for

millet will be:

#28a#29,0:15.

#28b#29,2:40.

#28c#29,0:60.

#28d#29,1:20.

#28e#29 None of the above.

Topic,Market Demand Di#0Eculty,1

#25 Correct Responses,91 Discrimination Index,9

Correct Answer,B

15.3 The demand function is described by the equation q#28p#29 = 190,p=5,The inverse demand

function is described by:

#28a#29 q#28p#29 = 190,5p.

#28b#29 p#28q#29 = 950,5q.

#28c#29 q#28p#29=1=#28190,p=5#29.

#28d#29 p#28q#29=1=190,q=5.

#28e#29 p#28q#29 = 190,q=5.

MULTIPLE CHOICE 263

Topic,Market Demand Di#0Eculty,1

#25 Correct Responses,91 Discrimination Index,9

Correct Answer,B

15.4 The demand function is described by the equation q#28p#29 = 210,p=4,The inverse demand

function is described by:

#28a#29 q#28p#29 = 210,4p.

#28b#29 p#28q#29 = 840,4q.

#28c#29 q#28p#29=1=#28210,p=4#29.

#28d#29 p#28q#29=1=210,q=4.

#28e#29 p#28q#29 = 210,q=4.

Topic,Market Demand Di#0Eculty,3

#25 Correct Responses,37 Discrimination Index,0

Correct Answer,A

15.5 If the demand function is q = m,2#28ln p#29 over some range of values of p; then at all such

values of p the absolute value of the price elasticity of demand:

#28a#29 increases as p increases.

#28b#29 decreases as p increases.

#28c#29 is constantaspchanges.

#28d#29 increases with p at small values and decreases with p at large values.

#28e#29 decreases with p at large values and increases with p at small values.

Topic,Market Demand Di#0Eculty,1

#25 Correct Responses,86 Discrimination Index,27

Correct Answer,C

15.6 If the demand function for tickets to a playisq=3;600,45p;at what price will total revenue

be maximized?

#28a#29 160

#28b#29 80

#28c#29 40

#28d#29 20

#28e#29 None of the above.

CHAPTER 15 Market Demand 264

Topic,Market Demand Di#0Eculty,1

#25 Correct Responses,86 Discrimination Index,27

Correct Answer,C

15.7 If the demand function for tickets to a playisq= 800,20p; at what price will total revenue

be maximized?

#28a#29 80

#28b#29 40

#28c#29 20

#28d#29 10

#28e#29 None of the above.

Topic,Market Demand Di#0Eculty,2

#25 Correct Responses,54 Discrimination Index,54

Correct Answer,D

15.8 Rollo would lovetohave a Mercedes,His preferences for consumption in the next year are

represented by a utility function U#28x;y#29 where x =0if he has no Mercedes and x =1if he has a

Mercedes for the year and where y is the amount of income he has left to spend on other stu#0B,If

U#280;y#29=the square root of y and U#281;y#29 = #2810=9#29#28y

:5

#29 and if Rollo's income is $50,000 a year,how

muchwould he be willing to pay per year to have a Mercedes?

#28a#29 $5,555.55

#28b#29 $5,000

#28c#29 $12,200

#28d#29 $9,500

#28e#29 $10,000

MULTIPLE CHOICE 265

Topic,Market Demand Di#0Eculty,2

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,C

15.9 In Ozone,California people all have the same tastes and they all like hot tubs,Nobody

wants more than one hot tub but a person with wealth $M will be willing to payupto:01M for

a hot tub,The distribution of wealth in Ozone is as follows,The number of people with a wealth

greater than $W for any given W is approximately 1;000;000=W,The price elasticity of demand for

hot tubs in Ozone California is:

#28a#29,:1

#28b#29,:01

#28c#29,1

#28d#29,:4

#28e#29 None of the above.

Topic,Market Demand Di#0Eculty,2

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,B

15.10 In Manifold,Missouri #28pop,1;000#29;people all have the same tastes and they all like Buicks.

Nobody wants more than one Buick,but a person with income $M is willing to pay about,10M

per year to have a Buick,Nobody in Manifold has an income greater than $50,000 and nobody has

an income less than $10,000,For incomes,$M; between $10,000 and $50,000,the number of people

with incomes greater than M is about 1;250,:025M,If it costs $2,000 a year to have a Buick,how

many people in Manifold will demand Buicks?

#28a#29 500

#28b#29 750

#28c#29 100

#28d#29 600

#28e#29 800

CHAPTER 15 Market Demand 266

Topic,Market Demand Di#0Eculty,2

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,C

15.11 Rod cares about the number of cars he has and the amount of money he has to spend

on other stu#0B,The only possibilities of interest for Rod are having 0,1,or 2 cars,Where x is

the number of cars he has and y is the money he has per year for other stu#0B,Rod's utilityis

U#280;y#29=y

:5;U#281;y#29 = #2815=14#29y

:5; and U#282;y#29 = #2810=9#29y

:5

,Rod's income is $25,000 a year,It would

cost Rod $2,500 a year to have 1 car and $3,500 a year to have 2 cars,How many cars will he

choose?

#28a#29 0

#28b#29 1

#28c#29 2

#28d#29 He is indi#0Berentbetween buying 1 and buying 2 cars.

#28e#29 He is indi#0Berentbetween buying 2 and buying 3 cars.

Topic,Market Demand Di#0Eculty,2

#25 Correct Responses,51 Discrimination Index,29

Correct Answer,B

15.12 Dr,Social Science has recently #0Cgured out how to clone consumers,His #0Crst e#0Bort was

done on the population of Walla,Washington,Each original citizen got a clone who had exactly

the same income and preferences,Which of the following statements describes what happened to

the demand function for tuna-#0Csh casseroles in Walla?

#28a#29 The elasticity doubled and the slope remained constant.

#28b#29 The elasticity did not change at any price.

#28c#29 The elasticity of demand doubled and the slope doubled.

#28d#29 The elasticity halved and the slope remained constant.

#28e#29 None of the above.

MULTIPLE CHOICE 267

Topic,Market Demand Di#0Eculty,2

#25 Correct Responses,67 Discrimination Index,0

Correct Answer,A

15.13 At the price of 100,tourists demand 587 airplane tickets,At the same price,business

travelers demand 527,At the price 120,tourists demand 127 tickets and business travelers demand

127,Assuming that the demand curves of business travelers and tourists are both linear over this

price range,what is the price elasticity of demand at the price 100?

#28a#29,3:86

#28b#29,43

#28c#29,4:63

#28d#29,0:04

#28e#29 None of the above.

Topic,Market Demand Di#0Eculty,2

#25 Correct Responses,67 Discrimination Index,0

Correct Answer,A

15.14 At the price of 180,tourists demand 427 airplane tickets,At the same price,business

travelers demand 507,At the price 200,tourists demand 127 tickets and business travelers demand

127,Assuming that the demand curves of business travelers and tourists are both linear over this

price range,what is the price elasticity of demand at the price 180?

#28a#29,6:55

#28b#29,34

#28c#29,7:28

#28d#29,0:04

#28e#29 None of the above.

CHAPTER 15 Market Demand 268

Topic,Market Demand Di#0Eculty,2

#25 Correct Responses,77 Discrimination Index,32

Correct Answer,E

15.15 The inverse demand function for nectarines is described by the equation p = 185,3q; where

p is the price in dollars per crate and where q is the number of crates of nectarines demanded per

week,When p = $20 per crate,what is the price elasticity of demand for nectarines?

#28a#29,60=55

#28b#29,3=185

#28c#29,3=55

#28d#29,55=20

#28e#29,20=165

Topic,Market Demand Di#0Eculty,2

#25 Correct Responses,77 Discrimination Index,32

Correct Answer,E

15.16 The inverse demand function for grapes is described by the equation p = 831,9q; where p

is the price in dollars per crate and where q is the number of crates of grapes demanded per week.

When p = $39 per crate,what is the price elasticity of demand for grapes?

#28a#29,351=88

#28b#29,9=831

#28c#29,9=88

#28d#29,88=39

#28e#29,39=792

Topic,Market Demand Di#0Eculty,3

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,A

15.17 If there are only two goods,an increase in the price of good 1 will increase the demand for

good 2:

#28a#29 if and only if the price elasticity of demand for good 2 is greater than 1 in absolute value.

#28b#29 whenever both goods are normal goods.

#28c#29 only if the two goods are perfect substitutes.

#28d#29 never.

#28e#29 None of the above.

MULTIPLE CHOICE 269

Topic,Market Demand Di#0Eculty,1

#25 Correct Responses,75 Discrimination Index,20

Correct Answer,B

15.18 The demand function for small business computers in the U.S,is given by x = 200,10p

where x is annual sales measured in thousands of computers and p is the price measured in thou-

sands of dollars,Japanese #0Crms supply a big share of these computers,They measure prices in yen

where 150 yen equal 1 dollar,The price of 1 computer is $10,000,Let E

u

be the price elasticity

of demand at this price as calculated by U.S,#0Crms who measure in dollars and let E

j

be the price

elasticity of demand at the same $10,000 price,but measured in yen by the Japanese #0Crms,Which

of the following are the values of E

u

and E

j; respectively?

#28a#29,1,,150

#28b#29,1,,1

#28c#29,2,,2

#28d#29,2,,300

#28e#29,2,,:0133

Topic,Market Demand Di#0Eculty,1

#25 Correct Responses,98 Discrimination Index,25

Correct Answer,A

15.19 An economy has 100 consumers of Type 1 and 200 consumers of Type 2,If the price of the

good is less than 10,then eachType 1 consumer demands 10,p units of the good; otherwise each

Type 1 demands zero,If the price of the good is less than 8,then eachType 2 demands 24,3p;

otherwise eachType 2 demands zero,If the price of the good is 6,then the total amount of the

good demanded will be:

#28a#29 1,600.

#28b#29 1,800.

#28c#29 2,000.

#28d#29 420.

#28e#29 1,200.

CHAPTER 15 Market Demand 270

Topic,Market Demand Di#0Eculty,1

#25 Correct Responses,77 Discrimination Index,36

Correct Answer,A

15.20 Harry's demand function for blueberries is x =20,2pwhere p is the price and x is the

quantity demanded,If the price of blueberries is 3,then what is Harry's price elasticity of demand

for blueberries?

#28a#29,6=14

#28b#29,2=20

#28c#29,2

#28d#29,14=6

#28e#29 None of the above.

Topic,Market Demand Di#0Eculty,1

#25 Correct Responses,93 Discrimination Index,18

Correct Answer,D

15.21 The inverse demand function for ryeisp=31;200,6q.Total revenue in this market will

be maximized when the quantityofrye produced is:

#28a#29 3,711

#28b#29 5,200

#28c#29 1,300

#28d#29 2,600

#28e#29 None of the above.

Topic,Market Demand Di#0Eculty,1

#25 Correct Responses,93 Discrimination Index,18

Correct Answer,D

15.22 The inverse demand function for barley is p =28;800,6q.Total revenue in this market

will be maximized when the quantity of barley produced is:

#28a#29 3,511

#28b#29 4,800

#28c#29 1,200

#28d#29 2,400

#28e#29 None of the above.

MULTIPLE CHOICE 271

Topic,Market Demand Di#0Eculty,2

#25 Correct Responses,49 Discrimination Index,49

Correct Answer,C

15.23 When the price of bananas is 50 cents a pound,the total demand is 100 pounds,If the

price elasticity of demand for bananas is,2; what quantitywould be demanded if the price rose to

60 cents a pound?

#28a#29 50

#28b#29 90

#28c#29 60

#28d#29 80

#28e#29 70

Topic,Market Demand Di#0Eculty,1

#25 Correct Responses,90 Discrimination Index,13

Correct Answer,D

15.24 The inverse demand function for co#0Bee is p =50;000,2q where q is the number of tons

produced and p is the price per ton,Total revenue from co#0Bee sales be maximized when the output

level is:

#28a#29 25,000 tons.

#28b#29 15,000 tons.

#28c#29 17,500 tons.

#28d#29 12,500 tons.

#28e#29 None of the above.

Topic,Market Demand Di#0Eculty,2

#25 Correct Responses,70 Discrimination Index,28

Correct Answer,B

15.25 Jen,Eric,and Kurt are all buyers of chain saws,Jen's demand function is Q

j

= 520,13P;

Eric's demand function is Q

e

=40,P; and Kurt's demand function is Q

k

= 200,5P.Together,

these three constitute the entire demand for chainsaws,At what price will the price elasticityof

market demand be,1?

#28a#29 19

#28b#29 20

#28c#29 25

#28d#29 15

#28e#29 None of the above.

CHAPTER 15 Market Demand 272

Topic,Market Demand Di#0Eculty,2

#25 Correct Responses,48 Discrimination Index,12

Correct Answer,D

15.26 Given his current income,Rico's demand for bagels is related to the price of bagels by the

equation,Q = 160,20P,Rico's income elasticity of demand for bagels is known to be equal to 0.5

at all prices and incomes,If Rico's income quadruples,his demand for bagels will be related to the

price of bagels by the equation:

#28a#29 Q = 160,20P.

#28b#29 Q = 640,80P.

#28c#29 Q = 160,40P.

#28d#29 Q = 320,40P

#28e#29 Q = 320,20P.

Topic,Market Demand Di#0Eculty,2

#25 Correct Responses,48 Discrimination Index,12

Correct Answer,D

15.27 Given his current income,Rico's demand for bagels is related to the price of bagels by the

equation,Q = 520,20P,Rico's income elasticity of demand for bagels is known to be equal to 0.5

at all prices and incomes,If Rico's income quadruples,his demand for bagels will be related to the

price of bagels by the equation:

#28a#29 Q = 520,20P.

#28b#29 Q =2;080,80P.

#28c#29 Q = 520,40P.

#28d#29 Q =1;040,40P

#28e#29 Q =1;040,20P.

Topic,Market Demand Di#0Eculty,3

#25 Correct Responses,18 Discrimination Index,17

Correct Answer,E

15.28 A person with a quasilinear utility function will:

#28a#29 have a price elasticity of demand equal to zero for some goods.

#28b#29 have an income elasticity of demand equal to one for some goods.

#28c#29 necessarily consume zero quantity of some good.

#28d#29 necessarily consume positive amounts of every good.

#28e#29 None of the above.

MULTIPLE CHOICE 273

Topic,Market Demand Di#0Eculty,2

#25 Correct Responses,75 Discrimination Index,24

Correct Answer,C

15.29 In the village of Frankfurter,the demand function for sausages per person is D#28p#29=20,1:5p;

where p is the price of a single sausage,The present population of Frankfurter is 100 persons,Sup-

pose that 10 more people moveinto town,each of whom has the same demand function as the old

residents,At a price of $2 the price elasticity of demand for sausages in Frankfurter is:

#28a#29 increased by 10 percent.

#28b#29 decreased by 10 percent.

#28c#29 unchanged.

#28d#29 increased by 15 percent.

#28e#29 none of the above.

Topic,Market Demand Di#0Eculty,1

#25 Correct Responses,37 Discrimination Index,59

Correct Answer,B

15.30 A #0Crm faces a demand function D#28p#29; for which the revenue maximizing price is $14,The

demand function is altered to 2D#28p#29,What is the new revenue maximizing price?

#28a#29 $7

#28b#29 $14

#28c#29 $28

#28d#29 There is insu#0Ecient information to determine this.

#28e#29 None of the above.

Topic,Market Demand Di#0Eculty,1

#25 Correct Responses,37 Discrimination Index,59

Correct Answer,B

15.31 A #0Crm faces a demand function D#28p#29; for which the revenue maximizing price is $12,The

demand function is altered to 2D#28p#29,What is the new revenue maximizing price?

#28a#29 $6

#28b#29 $12

#28c#29 $24

#28d#29 There is insu#0Ecient information to determine this.

#28e#29 None of the above.

CHAPTER 15 Market Demand 274

Topic,Market Demand Di#0Eculty,1

#25 Correct Responses,98 Discrimination Index,15

Correct Answer,C

15.32 If the supply curve for x is given by x = 100p

2; then the inverse supply curve is given by:

#28a#29 100=p

2

.

#28b#29 x

2

=100.

#28c#29 x

1=2

=10.

#28d#29 p

,2

=100.

#28e#29 None of the above.

Topic,Market Demand Di#0Eculty,1

#25 Correct Responses,50 Discrimination Index,30

Correct Answer,C

15.33 Ed has 100 tons of manure,The lowest price at which he is willing to sell it is $10 per ton.

Fred wants to buy 100 tons of manure,The most he is willing to pay is $8 per ton,The Federal

government o#0Bers to subsidize manure sales at a rate of $1 per ton,If Ed and Fred are the only

people who deal in manure,then the deadweight loss caused by the subsidy is:

#28a#29 $100.

#28b#29 $50.

#28c#29 0.

#28d#29 $200.

#28e#29 None of the above.

Topic,Market Demand Di#0Eculty,2

#25 Correct Responses,64 Discrimination Index,28

Correct Answer,E

15.34 Fred's price elasticity of demand for milk is,2 at today's prices when we measure price

in dollars and quantity of milk in quarts,If the price per quart of milk stays the same but we

measure quantity of milk in gallons and price in dollars,then what will be the elasticity of demand

for gallons of milk? #28A gallon is four quarts.#29

#28a#29,1

#28b#29,1=2

#28c#29,8

#28d#29,4

#28e#29,2

MULTIPLE CHOICE 275

Topic,Market Demand Di#0Eculty,2

#25 Correct Responses,70 Discrimination Index,32

Correct Answer,D

15.35 In a small Kansas town,there are two kinds of gasoline consumers,100 Buickowners and

50 Dodge owners,Each Buickowner has the demand function D

b

#28p#29=maxf0;20,5pg and each

Dodge owner has the demand function D

d

= maxf0;15,3pg,In this town:

#28a#29 the market demand curve has no kinks,but gets steeper as price rises.

#28b#29 the market demand curve has no kinks,but gets #0Datter as price rises.

#28c#29 the market demand curve has constant slope since individual demand curves have constant slope.

#28d#29 the market demand curve has a kink at p = 4 and another at p =5.

#28e#29 the market demand curve has a kink at p =35=8.

Topic,Market Demand Di#0Eculty,2

#25 Correct Responses,16 Discrimination Index,19

Correct Answer,A

15.36 In a certain city,the demand function for crack cocaine is q = 1000,p where p is the "street

price",The cocaine industry is competitive,Cocaine distributors can buy as much cocaine as they

wish at a price of $50 per unit from Colombian sources,Whenever the city narcotics police catcha

cocaine dealer,they con#0Cscate all the cocaine that he has,The jails are full so they do not imprison

the dealers,The police are able to catch the dealers about half the time,so they get about half

the cocaine that enters the city,Instead of destroying con#0Cscated crack,the police simply resell it

on the street,If the original supply curve of cocaine on the streets was horizontal,what is the net

e#0Bect of police activities on the market for crack in this city?

#28a#29 The amount purchased on the street is about 50 units smaller than it would be with no enforcement.

#28b#29 There is no e#0Bect,since all of the drugs reach consumers anyway.

#28c#29 Crack dealers will stop dealing in this city altogther,since they can make more money elsewhere.

#28d#29 The amount of crack purchased on the street decreases by about half.

#28e#29 The quantity purchased by dealers rises to make up for the amount that is con#0Cscated.

CHAPTER 15 Market Demand 276

Topic,Market Demand Di#0Eculty,1

#25 Correct Responses,50 Discrimination Index,36

Correct Answer,C

15.37 If at current prices,the demand for a good is price-elastic,then for movements along the

demand curve:

#28a#29 increasing the price will increase revenue.

#28b#29 decreasing the price will decrease revenue.

#28c#29 increasing the quantity sold will increase revenue.

#28d#29 increasing the quantity sold will decrease revenue.

#28e#29 More than one of the above statements are true.

Topic,Market Demand Di#0Eculty,2

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,D

15.38 The demand curve for a good is given by p = 140,8q where p is the price and q is the

quantity of the good,Suppose that the number of consumers in the economy doubles,with a "clone"

appearing for each consumer,who has exactly the same demand curve as the original consumer.

The demand curve for the doubled economy is described by:

#28a#29 p = 280,8q.

#28b#29 p = 280,16q.

#28c#29 p = 140,16q.

#28d#29 p = 140,4q.

#28e#29 p =70,4q.

Topic,Market Demand Di#0Eculty,2

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,D

15.39 The demand curve for a good is given by p = 240,10q where p is the price and q is

the quantity of the good,Suppose that the number of consumers in the economy doubles,with

a "clone" appearing for each consumer,who has exactly the same demand curve as the original

consumer,The demand curve for the doubled economy is described by:

#28a#29 p = 480,10q.

#28b#29 p = 480,20q.

#28c#29 p = 240,20q.

#28d#29 p = 240,5q.

#28e#29 p = 120,5q.

MULTIPLE CHOICE 277

Topic,Market Demand Di#0Eculty,2

#25 Correct Responses,98 Discrimination Index,7

Correct Answer,E

15.40 The demand for drangles is given by D#28p#29=#28p+1#29

,2

where p is the price of drangles,If

the price of drangles is 1,then the price elasticity of demand for drangles is:

#28a#29,4

#28b#29,2

#28c#29,3

#28d#29,2

#28e#29,1

Topic,Market Demand Di#0Eculty,2

#25 Correct Responses,98 Discrimination Index,7

Correct Answer,E

15.41 The demand for drangles is given by D#28p#29=#28p+1#29

,2

where p is the price of drangles,If

the price of drangles is 18,then the price elasticity of demand for drangles is:

#28a#29,7:58

#28b#29,3:79

#28c#29,5:68

#28d#29,3:79

#28e#29,1:89

Topic,Market Demand Di#0Eculty,2

#25 Correct Responses,59 Discrimination Index,47

Correct Answer,C

15.42 The only quantities of Good 1 that Fanny can buy are 1 unit or zero units,For all positive

values of x

2; Fanny's preferences are represented by the utility function #28x

1

+ 12#29#28x

2

+6#29,If her

income is 16 and the price of good 2 is 1,then Fanny's reservation price for Good 1 is:

#28a#29 3.38.

#28b#29 3.50.

#28c#29 1.69.

#28d#29 2.

#28e#29 0.40.

CHAPTER 15 Market Demand 278

Topic,Market Demand Di#0Eculty,2

#25 Correct Responses,59 Discrimination Index,47

Correct Answer,C

15.43 The only quantities of Good 1 that Anneli can buy are 1 unit or zero units,For all positive

values of x

2; Anneli's preferences are represented by the utility function #28x

1

+ 12#29#28x

2

+ 14#29,If her

income is 28 and the price of good 2 is 1,then Anneli's reservation price for Good 1 is:

#28a#29 6.46.

#28b#29 7.50.

#28c#29 3.23.

#28d#29 0.86.

#28e#29 1.07.

Topic,Market Demand Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,D

15.44 In Gas Pump S.D.,every Buickowner's demand for gasoline is 20,5p for p less than or

equal to 4 and 0 for p#3E4.Every Dodge owner's demand is 15,3p for p less than or equal to 5

and 0 for p#3E5,Suppose that Gas Pump,S.D,has 100 Buickowners and 250 Dodge owners,If

the price of gasoline is 4.50,what is the total amount of gasoline demanded in Gas Pump?

#28a#29 750

#28b#29 187.50

#28c#29 562.50

#28d#29 375

#28e#29 none of the above.

MULTIPLE CHOICE 279

Topic,Market Demand Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,D

15.45 In Gas Pump S.D.,every Buickowner's demand for gasoline is 20,5p for p less than or

equal to 4 and 0 for p#3E4.Every Dodge owner's demand is 15,3p for p less than or equal to 5

and 0 for p#3E5,Suppose that Gas Pump,S.D,has 100 Buickowners and 100 Dodge owners,If

the price of gasoline is 3.25,what is the total amount of gasoline demanded in Gas Pump?

#28a#29 1,800

#28b#29 450

#28c#29 1,350

#28d#29 900

#28e#29 none of the above.

Topic,Market Demand Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,C

15.46 The only quantities of Good 1 that Barbie can buy are 1 unit or zero units,For x

1

equal

to zero or 1 and for all positivevalues of x

2; suppose that Barbie's preferences were represented by

the utility function #28x

1

+ 10#29#28x

2

+6#29,Then if her income were 4,her reservation price for Good 1

would be:

#28a#29 1.82

#28b#29 3.50

#28c#29 0.91

#28d#29 1.67

#28e#29 0.50

CHAPTER 15 Market Demand 280

Topic,Market Demand Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,C

15.47 The only quantities of Good 1 that Barbie can buy are 1 unit or zero units,For x

1

equal

to zero or 1 and for all positivevalues of x

2; suppose that Barbie's preferences were represented by

the utility function #28x

1

+ 2#29#28x

2

+ 10#29,Then if her income were 32,her reservation price for Good 1

would be:

#28a#29 28

#28b#29 5.50

#28c#29 14

#28d#29 0.20

#28e#29 4.90

Topic,Market Demand Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,A

15.48 At a large institution of higher learning,the demand for football tickets at each game is

180;000,6;000p,If the capacity of the stadium at that university is 100,000 seats,what is the

revenue maximizing price for this universitytocharge per ticket.

#28a#29 15

#28b#29 13.33

#28c#29 30

#28d#29 7.50

#28e#29 45

Topic,Market Demand Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,A

15.49 At a large institution of higher learning,the demand for football tickets at each game

is 60;000,10;000p,If the capacity of the stadium at that university is 40,000 seats,what is the

revenue maximizing price for this universitytocharge per ticket.

#28a#29 3

#28b#29 2

#28c#29 6

#28d#29 1.50

#28e#29 9

MULTIPLE CHOICE 281

Topic,Market Demand Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,E

15.50 The demand for tickets to a rock concert is given by D#28p#29 = 200;000,10;000p; where p is

the price of tickets,If the price of tickets is 13,then the price elasticity of demand for tickets is:

#28a#29,3:71.

#28b#29,2:79.

#28c#29,5:57.

#28d#29,0:93.

#28e#29,1:86.

Topic,Market Demand Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,E

15.51 The demand for tickets to a rock concert is given by D#28p#29 = 200;000,10;000p; where p is

the price of tickets,If the price of tickets is 12,then the price elasticity of demand for tickets is:

#28a#29,3.

#28b#29,2:25.

#28c#29,4:50.

#28d#29,0:75.

#28e#29,1:50.

Topic,Market Demand Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,E

15.52 The demand for watches is Q = 1000P

,1:50

I

2

,Assume that per capita income,I,is $2,000.

At a price,P; of $70 the price elasticity of demand is

#28a#29 3.50.

#28b#29 1.0.

#28c#29 2.

#28d#29 0.50.

#28e#29 1.50.

CHAPTER 15 Market Demand 282

Topic,Market Demand Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,E

15.53 The demand for watches is Q = 1000P

,2:50

I

,1

,Assume that per capita income,I,is $3,000.

At a price,P; of $80 the price elasticity of demand is

#28a#29 4.

#28b#29 1.0.

#28c#29,1.

#28d#29,3:50.

#28e#29 2.50.

Topic,Market Demand Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,E

15.54 The demand for voice mail is Q = 1000,150P +15I,Assume that per capita disposable

income,I,is $800,At a price,P; of $50 the income elasticity of demand is

#28a#29 1.50.

#28b#29 5.

#28c#29 1.0.

#28d#29 15.

#28e#29 2.18.

Topic,Market Demand Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,E

15.55 The demand for voice mail is Q = 1000,150P +35I,Assume that per capita disposable

income,I,is $700,At a price,P; of $40 the income elasticity of demand is

#28a#29 3.50.

#28b#29 4.

#28c#29 1.0.

#28d#29 35.

#28e#29 1.26.

MULTIPLE CHOICE 283

Topic,Market Demand Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,E

15.56 If the marginal cost of making a photocopyis2cents and the elasticity of demand is 1.50,

the pro#0Ct maximizing price is

#28a#29 3 cents.

#28b#29 3.33 cents.

#28c#29 4 cents.

#28d#29 5 cents.

#28e#29 6 cents.

Topic,Market Demand Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,C

15.57 If the marginal cost of making a photocopyis2cents and the elasticity of demand is 2.00,

the pro#0Ct maximizing price is

#28a#29 3 cents.

#28b#29 3.33 cents.

#28c#29 4 cents.

#28d#29 5 cents.

#28e#29 6 cents.

Topic,Market Demand Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,D

15.58 If the marginal cost of brewing beer is 40 cents and the pro#0Ct maximizing price is 70 cents,

then the price elasticity of demand is

#28a#29,0:66.

#28b#29,1:8.

#28c#29,2.

#28d#29,2:33.

#28e#29,3.

CHAPTER 15 Market Demand 284

Topic,Market Demand Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,D

15.59 If the marginal cost of brewing beer is 40 cents and the pro#0Ct maximizing price is 80 cents,

then the price elasticity of demand is

#28a#29,0:66.

#28b#29,1:8.

#28c#29,2.

#28d#29,2:33.

#28e#29,3.

Topic,Market Demand Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,C

15.60 The constant elasticity of demand for cigarettes has been estimated to be 0.5,To reduce

smoking by 50#25,approximately howmuch tax needs to be added to a $1 pack?

#28a#29 $0.25.

#28b#29 $0.50.

#28c#29 $1.

#28d#29 $1.50.

#28e#29 $4.00.

Topic,Market Demand Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,C

15.61 The constant elasticity of demand for cigarettes has been estimated to be 0.5,To reduce

smoking by 75#25,approximately howmuch tax needs to be added to a $1 pack?

#28a#29 $0.38.

#28b#29 $0.75.

#28c#29 $1.50

#28d#29 $2.25.

#28e#29 $4.00.

MULTIPLE CHOICE 285

Topic,Market Demand Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,A

15.62 The demand for cable television hookups is Q = 100,10P

0:5

+2I

2;where P is price and I

is per capita income,Cable TV is

#28a#29 a normal good.

#28b#29 a natural monopoly.

#28c#29 an inferior good.

#28d#29 a substitute good.

#28e#29 a complement good.

Topic,Market Demand Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,C

15.63 The demand for cable television hookups is Q = 100,10P

0:5

+2I

,2;where P is price and

I is per capita income,Cable TV is

#28a#29 a normal good.

#28b#29 a natural monopoly.

#28c#29 an inferior good.

#28d#29 a substitute good.

#28e#29 a complement good.

Topic,Market Demand Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,C

15.64 If the demand for The Weekly World News at a local grocery store is described by

Q = 2500,400P,I=10

for I = $15;000 and P =$1:50; the marginal revenue of an additional paper sold at this store is

#28a#29 $1.50

#28b#29 $0.38

#28c#29 $0.50

#28d#29 $0.15

#28e#29 $1

CHAPTER 15 Market Demand 286

Topic,Market Demand Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,C

15.65 If the demand for The Weekly World News at a local grocery store is described by

Q = 2500,400P,I=10

for I = $20;000 and P =$0:75; the marginal revenue of an additional paper sold at this store is

#28a#29 $0.75

#28b#29 $0.19

#28c#29 $0.25

#28d#29 $0.08

#28e#29 $0.50

Topic,Market Demand Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,B

15.66 Demand for Barbara Streisand CD's is equal toQ

s

= P

2:50

s

I

1:80

P

0:60

c

where Q

s

is the number

of CD's,P

s

is the price of a Streisand CD,I is per capita income,and P

c

is the price of a Karen

Carpenter CD,Streisand and Carpenter CD's

#28a#29 are inferior goods.

#28b#29 are substitutes.

#28c#29 are complements.

#28d#29 have diminishing returns to scale.

#28e#29 are not as good as the original 8 track tapes.

Topic,Market Demand Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,B

15.67 Demand for Barbara Streisand CD's is equal toQ

s

= P

2:80

s

I

2:50

P

1

c

where Q

s

is the number

of CD's,P

s

is the price of a Streisand CD,I is per capita income,and P

c

is the price of a Karen

Carpenter CD,Streisand and Carpenter CD's

#28a#29 are inferior goods.

#28b#29 are substitutes.

#28c#29 are complements.

#28d#29 have diminishing returns to scale.

#28e#29 are not as good as the original 8 track tapes.

Essay Market Demand

Topic,Market Demand Di#0Eculty,2

#25 Correct Responses,0 Discrimination Index,0

15.1 Suppose that the inverse demand function for wool is p = A=q for some constant A,Suppose

that 1=4 of the world's wool is produced in Australia,a#29 If Australian wool production increases by

1#25 and the rest of the world holds its output constant,what will be the e#0Bect on the world price

of wool? b#29 How is the marginal revenue to Australia from an extra unit of wool relate to the price

of wool?

Answer,a#29 Price will fall by about one fourth of one percent,b#29 Marginal revenue is three fourths

of price.

Topic,Market Demand Di#0Eculty,2

#25 Correct Responses,0 Discrimination Index,0

15.2 Bart Wurst runs the only hotdog stand in a large park in a large boring town,On Sundays

people in this town all sit in the park and sunbathe,For any t between 0 and 30,the number

of people who are sitting within t minutes of Bart's stand is 10t

2

.People in Bart's town are lazy

and hate to walk,They think that every minute of walking they do is as bad as spending $.10.

Everybody in the park has a reservation price of $1 for a hot dog where the cost of a hot dog

includes the subjective cost of walking as well as the money price they havetopay when they get

there,#28Nobody has ever thought of fetching a hot dog for someone else.#29 Find a formula for the

demand curve for Bart's hot dogs,Explain howyou got it.

Answer,If Bart charges p where 0 #3Cp#3C1;his extensive margin is the customers who are at

distance t* from Bart where p+:10t#03 =1,Then t#03 =10,pand the demand for hot dogs at prices

p is the number,#2810,p#29

2; of people within t* of Bart.

Topic,Market Demand Di#0Eculty,3

#25 Correct Responses,0 Discrimination Index,0

15.3 In Tassel,Illinois #28pop;20;000#29; there are two kinds of families,those who like swimming

pools and those who don't,Half of the population is of eachtype,Families who like swimming

pools are willing to spend up to 5#25 of their income eachyear on a swimming pool,Families who

don't like them would pay nothing for a swimming pool,Nobody wants more than one swimming

pool and nobody has thought of sharing a swimming pool,Incomes in Tassel range between $10,000

and $110,000,For incomes,M; in this range,the number of families in Tassel with income greater

than M is about 22;000,:2M,#28The twotypes of families have the same income distribution.#29 Find

the aggregate demand function for swimming pools in Tassel #28demand for swimming pools as a

function of annual cost of having one#29.

Answer,The number of people willing to pay at least p is half of the number who have income at

least 20p,Therefore the aggregate demand function is 11;000,2p.

CHAPTER 15 Market Demand 288

Topic,Market Demand Di#0Eculty,3

#25 Correct Responses,0 Discrimination Index,0

15.4 Ethel is trying to decide whether to have 0 cars,1 car,or 2 cars,If x is the number of cars she

has and y is the amount of money she has per year to spend on other stu#0B,Ethel's utility function

is U#28x;y#29 where U#280;y#29=y

1=2;U#281;y#29 = #2815=14#29y

1=2; and U#282;y#29 = #2810=9#29y

1=2

,Suppose that it costs

$2000 a year to have 1 car and $4000 a year to have 2 cars,Ethel #0Cnds that the right thing to do de-

pends on her income,What is her willingness to pay for 1 car if her income is M? What is the lowest

income at which she would have a car? What is the lowest income at which she would have 2 cars?

Answer,Her willingness to pay for 1 car is about,129M where M is her income,The lowest income

at which she would get a car is $15,504,If we solve the equation U#281;y,2000#29 = U#282;y,4000#29 we

#0Cnd $55,143,At incomes above that she prefers 2 cars; below that she would be better o#0B to have

1 car.

Topic,Market Demand Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

15.5 Using the graph of a demand curve,explain why marginal revenue is less than price.

Topic,Market Demand Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

15.6 The demand for Craftmatic Adjustable Beds is described by

Q

c

= P

,1:40

c

I

,0:60

P

0:20

m

A

0:25

where Q

c

is the number of Craftmatic Adjustable Beds demanded,P

c

is the price of a Craftmatic

Adjustable Bed,I is per captia income,P

m

is the price of a battery powered massage pillow,and

A is the advertising budget.

a#29 If the marginal cost of producing a Craftmatic Adjustable Bed is $200,what is the pro#0Ct maxi-

mizing price?

b#29 Per capita income in the United States is forecast to rise by 3#25 next year,How will this impact

Craftmatic's sales?

c#29 The price of battery powered massage pillows suddenly fell by 10#25,How will this impace Craft-

matic's sales?

ESSAY 289

Topic,Market Demand Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

15.7 The demand for Craftmatic Adjustable Beds is described by

Q

c

= P

,1:40

c

I

,0:40

P

,1:60

m

A

0:25

where Q

c

is the number of Craftmatic Adjustable Beds demanded,P

c

is the price of a Craftmatic

Adjustable Bed,I is per captia income,P

m

is the price of a battery powered massage pillow,and

A is the advertising budget.

a#29 If the marginal cost of producing a Craftmatic Adjustable Bed is $200,what is the pro#0Ct maxi-

mizing price?

b#29 Per capita income in the United States is forecast to rise by 3#25 next year,How will this impact

Craftmatic's sales?

c#29 The price of battery powered massage pillows suddenly fell by 10#25,How will this impace Craft-

matic's sales?

Chapter 16

True-False Equilibrium

Topic,Equilibrium Di#0Eculty,1

#25 Correct Responses,97 Discrimination Index,5

Correct Answer,True

16.1 If the supply curveisvertical,then the amount supplied is independent of price.

Topic,Equilibrium Di#0Eculty,1

#25 Correct Responses,86 Discrimination Index,17

Correct Answer,False

16.2 If the supply is perfectly elastic,then an upward shift of the demand curve will lead to a

higher price and quantity in equilibrium.

Topic,Equilibrium Di#0Eculty,1

#25 Correct Responses,96 Discrimination Index,0

Correct Answer,True

16.3 The supply curve slopes up and to the right,If the demand curve shifts upward to a new

curve whichiseverywhere higher than the old curve #28but possibly of di#0Berent slope#29 and if the

supply curve does not shift,then the equilibrium price and quantitymust necessarily increase.

Topic,Equilibrium Di#0Eculty,1

#25 Correct Responses,72 Discrimination Index,22

Correct Answer,False

16.4 Supply and demand theory shows us that the burden of a sales tax is shared equally by

suppliers and demanders whether the tax is collected from the sellers or collected from the buyers.

Topic,Monopoly Di#0Eculty,1

#25 Correct Responses,73 Discrimination Index,16

Correct Answer,False

16.5 An economic situation is Pareto optimal only if there is no waytomake someone better o#0B.

TRUE-FALSE 291

Topic,Equilibrium Di#0Eculty,1

#25 Correct Responses,29 Discrimination Index,28

Correct Answer,True

16.6 The amount of a good supplied is independent of the price,If a sales tax is imposed on the

good,then the price paid by consumers will not change at all.

Topic,Equilibrium Di#0Eculty,1

#25 Correct Responses,91 Discrimination Index,14

Correct Answer,False

16.7 If a quantity tax is collected from competitive suppliers of a good,placing a tax on the good

causes the price paid by consumers to increase more than if the tax had been collected directly

from the buyers.

Topic,Budgets Di#0Eculty,2

#25 Correct Responses,50 Discrimination Index,23

Correct Answer,True

16.8 The demand curve,whichisadownward-sloping straight line,crosses the supply curve,

whichisanupward-sloping straight line,If a tax is introduced where sellers must pay a tax of

$2 per unit sold,then the equilibrium price paid by demanders will rise by more than $1 if the

absolute value of the slope of the demand curve is greater than the absolute value of the slope of

the supply curve.

Multiple Choice Equilibrium

Topic,Equilibrium Di#0Eculty,1

#25 Correct Responses,93 Discrimination Index,14

Correct Answer,B

16.1 The demand for pickles is given by p = 131,2q and supply is given by p =5+7q,What is

the equilibrium quantity?

#28a#29 11

#28b#29 14

#28c#29 19

#28d#29 103

#28e#29 None of the above.

Topic,Equilibrium Di#0Eculty,1

#25 Correct Responses,93 Discrimination Index,14

Correct Answer,B

16.2 The demand for pickles is given by p =82,2qand supply is given by p =2+2q,What is

the equilibrium quantity?

#28a#29 17

#28b#29 20

#28c#29 25

#28d#29 42

#28e#29 None of the above.

Topic,Equilibrium Di#0Eculty,1

#25 Correct Responses,99 Discrimination Index,23

Correct Answer,B

16.3 The demand function for fresh strawberries is q = 200,5p and the supply function is

q =60+2p,What is the equilibrium price?

#28a#29 10

#28b#29 20

#28c#29 40

#28d#29 50

#28e#29 None of the above.

MULTIPLE CHOICE 293

Topic,Equilibrium Di#0Eculty,1

#25 Correct Responses,94 Discrimination Index,11

Correct Answer,D

16.4 The inverse demand function for mangos is de#0Cned by the equation,p =91,5q; where q is

the number of crates that are sold,The inverse supply function is de#0Cned by p =3+6q,In the

past there was no tax on mangos but now a tax of $44 per crate has been imposed,What are the

quantities produced before and after the tax was imposed?

#28a#29 5 crates before and 5 crates after

#28b#29 16 crates before and 9 crates after

#28c#29 14 crates before and 7 crates after

#28d#29 8 crates before and 4 crates after

#28e#29 None of the above.

Topic,Equilibrium Di#0Eculty,1

#25 Correct Responses,94 Discrimination Index,11

Correct Answer,D

16.5 The inverse demand function for apples is de#0Cned by the equation,p = 129,12q; where q

is the number of crates that are sold,The inverse supply function is de#0Cned by p =3+6q,In the

past there was no tax on apples but now a tax of $90 per crate has been imposed,What are the

quantities produced before and after the tax was imposed?

#28a#29 4 crates before and 3 crates after

#28b#29 14 crates before and 5 crates after

#28c#29 13 crates before and 5 crates after

#28d#29 7 crates before and 2 crates after

#28e#29 None of the above.

CHAPTER 16 Equilibrium 294

Topic,Equilibrium Di#0Eculty,1

#25 Correct Responses,87 Discrimination Index,9

Correct Answer,B

16.6 The inverse demand for eggs is p =84,9qwhere q is the number of cases of eggs,The

inverse supply is p =7+2q,In the past,eggs were not taxed,but now a tax of 33 dollars per case

has been introduced,What is the e#0Bect of the tax on the quantity of eggs supplied?

#28a#29 Quantity drops by 2 cases.

#28b#29 Quantity drops by 3 cases.

#28c#29 Quantity drops by 6 cases.

#28d#29 Quantity drops by 4 cases.

#28e#29 None of the above.

Topic,Equilibrium Di#0Eculty,1

#25 Correct Responses,87 Discrimination Index,9

Correct Answer,B

16.7 The inverse demand for eggs is p =61,3qwhere q is the number of cases of eggs,The

inverse supply is p =7+6q,In the past,eggs were not taxed,but now a tax of 36 dollars per case

has been introduced,What is the e#0Bect of the tax on the quantity of eggs supplied?

#28a#29 Quantity drops by 3 cases.

#28b#29 Quantity drops by 4 cases.

#28c#29 Quantity drops by 8 cases.

#28d#29 Quantity drops by 5 cases.

#28e#29 None of the above.

Topic,Equilibrium Di#0Eculty,1

#25 Correct Responses,86 Discrimination Index,33

Correct Answer,C

16.8 The inverse demand function for cases of whiskey is de#0Cned by p = 160,6q and the inverse

supply function is de#0Cned by p =61+3q,Originally there was no tax on whiskey,Then the gov-

ernment began to tax suppliers of whiskey $27 for every case they sold,Howmuch did the price

paid by consumers rise when the new equilibrium was reached.

#28a#29 It rose by 27 dollars.

#28b#29 It rose by 29 dollars.

#28c#29 It rose by 18 dollars.

#28d#29 It rose by 16 dollars.

#28e#29 None of the above.

MULTIPLE CHOICE 295

Topic,Equilibrium Di#0Eculty,1

#25 Correct Responses,86 Discrimination Index,33

Correct Answer,C

16.9 The inverse demand function for cases of whiskey is de#0Cned by p = 241,11q and the inverse

supply function is de#0Cned by p =17+5q,Originally there was no tax on whiskey,Then the gov-

ernment began to tax suppliers of whiskey $112 for every case they sold,Howmuch did the price

paid by consumers rise when the new equilibrium was reached.

#28a#29 It rose by 112 dollars.

#28b#29 It rose by 114 dollars.

#28c#29 It rose by 77 dollars.

#28d#29 It rose by 75 dollars.

#28e#29 None of the above.

Topic,Equilibrium Di#0Eculty,1

#25 Correct Responses,62 Discrimination Index,50

Correct Answer,A

16.10 The inverse demand function for cigars is de#0Cned by p = 240,2q and the inverse supply

function is de#0Cned by p =3+q,Cigars are taxed at $4 per box,Which of the following is true?

#28a#29 The after tax price paid by consumers rises by more than $2 and the after tax price received by suppliers

falls by less than $2.

#28b#29 The after tax price paid by consumers goes up by less than $2 and the after tax price received by suppliers

rises.

#28c#29 Consumers and suppliers share the cost of the tax equally.

#28d#29 The after tax price paid by consumers rises by $4 and the after tax price received by suppliers stays

constant.

#28e#29 The after tax price paid by consumers rises by less than $2 and the after tax price received by suppliers

stays constant.

CHAPTER 16 Equilibrium 296

Topic,Equilibrium Di#0Eculty,2

#25 Correct Responses,74 Discrimination Index,49

Correct Answer,D

16.11 Xaquane and Yullare are obscure,but talented,18th century painters,The world's stock

of Xaquanes is 100 and the world's stockofYullares is 70,The demand for each painter's work

depends on its own price and the price of the other painter's work,If P

x

is the price of Xaquanes

and P

y

is the price of Yullares,the demand function for Xaquanes is 101,3P

x

+2P

y

and the demand

function for Yullares is 72+P

x

,P

y

,What is the equilibrium price for Yullare's paintings?

#28a#29 5

#28b#29 11

#28c#29 12

#28d#29 7

#28e#29 None of the above.

Topic,Equilibrium Di#0Eculty,2

#25 Correct Responses,38 Discrimination Index,32767

Correct Answer,C

16.12 In a certain kingdom,the demand function for rye bread was q = 381,3p and the supply

function was q =5+7pwhere p is the price in zlotys and q is loaves of bread,The king made it

illegal to sell rye bread for a price above 32 zlotys per loaf,Toavoid shortages,he agreed to pay

bakers enough of a subsidy for each loaf of bread so as to make supply equal demand,Howmuch

would the subsidy per loaf havetobe?

#28a#29 21 zlotys

#28b#29 14 zlotys

#28c#29 8 zlotys

#28d#29 20 zlotys

#28e#29 None of the above.

MULTIPLE CHOICE 297

Topic,Equilibrium Di#0Eculty,2

#25 Correct Responses,38 Discrimination Index,32767

Correct Answer,C

16.13 In a certain kingdom,the demand function for rye bread was q = 201,4p and the supply

function was q =13+3pwhere p is the price in zlotys and q is loaves of bread,The king made it

illegal to sell rye bread for a price above 23 zlotys per loaf,Toavoid shortages,he agreed to pay

bakers enough of a subsidy for each loaf of bread so as to make supply equal demand,Howmuch

would the subsidy per loaf havetobe?

#28a#29 21 zlotys

#28b#29 14 zlotys

#28c#29 9 zlotys

#28d#29 20 zlotys

#28e#29 None of the above.

Topic,Equilibrium Di#0Eculty,1

#25 Correct Responses,0 Discrimination Index,137

Correct Answer,A

16.14 The demand function for orange juice is q = 269,9p and the supply function is q =9+4p;

where q is the number of units sold per year and p is the price per unit,expressed in dollars,The

government decides to support the price of orange juice at a price #0Door of $24 per unit by buying

orange juice and destroying all that it has purchased,How many units must the government destroy

per year?

#28a#29 52

#28b#29 56

#28c#29 25

#28d#29 61

#28e#29 57

CHAPTER 16 Equilibrium 298

Topic,Equilibrium Di#0Eculty,1

#25 Correct Responses,0 Discrimination Index,137

Correct Answer,A

16.15 The demand function for butter is q = 126,6p and the supply function is q =14+2p;

where q is the number of units sold per year and p is the price per unit,expressed in dollars,The

government decides to support the price of butter at a price #0Door of $20 per unit by buying butter

and destroying all that it has purchased,How many units must the government destroy per year?

#28a#29 48

#28b#29 54

#28c#29 18

#28d#29 57

#28e#29 53

Topic,Equilibrium Di#0Eculty,2

#25 Correct Responses,72 Discrimination Index,19

Correct Answer,B

16.16 The demand function for rental apartments is q = 960,7p and the supply function is

q = 160+ 3p,The government makes it illegal to charge a rent higher than 35,Howmuch excess

demand will there be?

#28a#29 149

#28b#29 450

#28c#29 364

#28d#29 726

#28e#29 245

Topic,Equilibrium Di#0Eculty,1

#25 Correct Responses,65 Discrimination Index,38

Correct Answer,D

16.17 The demand function for abalone is q =30,9pand the supply function is q =6p,Suddenly

the yuppies discover abalone,The quantity demanded at every price doubles,The supply function,

however,remains the same as before,What is the e#0Bect on the equilibrium price and quantity?

#28a#29 The price doubles and the quantity remains constant.

#28b#29 The quantity doubles and the price remains constant.

#28c#29 Both price and quantity double.

#28d#29 Both price and quantity increase,but neither doubles.

#28e#29 None of the above.

MULTIPLE CHOICE 299

Topic,Equilibrium Di#0Eculty,3

#25 Correct Responses,20 Discrimination Index,19

Correct Answer,D

16.18 Remember King Kanuta and his tropical island? The demand function for coconuts by his

subjects on the island is D#28p#29 = 1200,100p and the supply function is S#28p#29 = 100p,The law used to

be that any subject who consumed a coconut had to pay another coconut to the king,King Kanuta

then ate all the coconuts he got,But now the king,apparently fed up with coconuts,decides to

sell the coconuts that he collects in the local market at the going selling price,p

s

,In equilibrium,

the number of coconuts that will now be produced is:

#28a#29 100.

#28b#29 200.

#28c#29 600.

#28d#29 400.

#28e#29 300.

Topic,Equilibrium Di#0Eculty,1

#25 Correct Responses,71 Discrimination Index,13

Correct Answer,A

16.19 The inverse demand function for video games is p = 240,2q and the inverse supply is

p =3+q,When the government imposes a $6 tax on each video game purchased:

#28a#29 consumers' surplus falls by more than producers' surplus.

#28b#29 producers' surplus falls by more than consumers' surplus.

#28c#29 consumers' surplus and producers' surplus fall by the same amount.

#28d#29 comsumers' surplus falls and producers' surplus increases.

#28e#29 producers' surplus falls and consumers' surplus increases.

CHAPTER 16 Equilibrium 300

Topic,Equilibrium Di#0Eculty,1

#25 Correct Responses,89 Discrimination Index,24

Correct Answer,A

16.20 The demand function for corn is q = 200,p and the supply function is q =50+:5p,The

government sets the price of corn at 150 and agrees to purchase and destroyany excess supply of

corn at that price,Howmuch money does it cost the government to buy this corn?

#28a#29 11,250

#28b#29 18,750

#28c#29 7,500

#28d#29 10,750

#28e#29 14,500

Topic,Equilibrium Di#0Eculty,3

#25 Correct Responses,36 Discrimination Index,23

Correct Answer,B

16.21 The market for tennis shoes has a horizontal supply curve and a linear,downward-sloping

demand curve,Currently the government imposes a tax of t on every pair of tennis shoes sold and

does not tax other goods,The government is considering a plan to double the tax on tennis shoes,

while leaving other goods untaxed,If the tax is doubled,then:

#28a#29 the total deadweight loss caused by the doubled tax will be exactly twice the original deadweight loss.

#28b#29 the total deadweight loss caused by the doubled tax will be more than twice the original deadweight loss.

#28c#29 the total deadweight loss caused by the doubled tax will be less than twice the original deadweight loss.

#28d#29 to know if doubling the tax would more than double the deadweight loss,wewould havetoknow the

slope of the demand curve.

#28e#29 None of the above.

Topic,Equilibrium Di#0Eculty,1

#25 Correct Responses,40 Discrimination Index,33

Correct Answer,D

16.22 The demand curve for rutabagas is a straight line with slope,3 and the supply curveisa

straight line with slope 2,Suppose that a new tax of $3 per sack of rutabagas is introduced,Which

of the following must certainly be true of the change in equilibrium prices and#2For quantities?

#28a#29 The total number of rutabagas purchased increases.

#28b#29 The price paid by demanders rises by the same amount as the price received by suppliers falls.

#28c#29 The price received by suppliers falls by more than the price paid by demanders rises.

#28d#29 The price paid by demanders rises by more than the price received by suppliers falls.

#28e#29 The price paid by demanders rises by more than $3.

MULTIPLE CHOICE 301

Topic,Equilibrium Di#0Eculty,1

#25 Correct Responses,40 Discrimination Index,33

Correct Answer,D

16.23 The demand curve for rutabagas is a straight line with slope,2 and the supply curveisa

straight line with slope 2,Suppose that a new tax of $3 per sack of rutabagas is introduced,Which

of the following must certainly be true of the change in equilibrium prices and#2For quantities?

#28a#29 The total number of rutabagas purchased increases.

#28b#29 The price paid by demanders rises by the same amount as the price received by suppliers falls.

#28c#29 The price received by suppliers falls by more than the price paid by demanders rises.

#28d#29 The price paid by demanders rises by more than the price received by suppliers falls.

#28e#29 The price paid by demanders rises by more than $3.

Topic,Equilibrium Di#0Eculty,1

#25 Correct Responses,42 Discrimination Index,40

Correct Answer,A

16.24 The quantity q of grapefruits demanded at price p is given by q =30,3pand the supply

schedule by q =6p,The government imposes a quantity tax at some rate t; which it collects from

buyers,What is the smallest tax rate that will result in no grapefruits being bought or sold?

#28a#29 10

#28b#29 3.33

#28c#29 3.67

#28d#29 11.50

#28e#29 13

Topic,Equilibrium Di#0Eculty,1

#25 Correct Responses,42 Discrimination Index,40

Correct Answer,A

16.25 The quantity q of nectarines demanded at price p is given by q =16,4pand the supply

schedule by q =3p,The government imposes a quantity tax at some rate t; which it collects from

buyers,What is the smallest tax rate that will result in no nectarines being bought or sold?

#28a#29 4

#28b#29 2.29

#28c#29 2.86

#28d#29 5.50

#28e#29 7

CHAPTER 16 Equilibrium 302

Topic,Equilibrium Di#0Eculty,1

#25 Correct Responses,93 Discrimination Index,23

Correct Answer,B

16.26 The demand function for x is D#28p#29=65,2pand the supply function is S#28p#29=20+p,The

price that should be set to restrict quantity supplied to 30 units is closest to:

#28a#29 5.

#28b#29 10.

#28c#29 15.

#28d#29 50.

#28e#29 55.

Topic,Equilibrium Di#0Eculty,2

#25 Correct Responses,89 Discrimination Index,19

Correct Answer,D

16.27 The inverse demand function for apples is de#0Cned by the equation p = 214,5q; where q

is the number of units sold,The inverse supply function is de#0Cned by p =7+4q,A tax of 36 is

imposed on suppliers for each unit of apples that they sell,When the tax is imposed,the quantity

of apples sold falls to:

#28a#29 23.

#28b#29 14.

#28c#29 17.

#28d#29 19.

#28e#29 21.

Topic,Equilibrium Di#0Eculty,2

#25 Correct Responses,89 Discrimination Index,19

Correct Answer,D

16.28 The inverse demand function for melons is de#0Cned by the equation p = 385,10q; where q

is the number of units sold,The inverse supply function is de#0Cned by p =13+2q,A tax of 36 is

imposed on suppliers for each unit of melons that they sell,When the tax is imposed,the quantity

of melons sold falls to:

#28a#29 31.

#28b#29 13.

#28c#29 26.

#28d#29 28.

#28e#29 29.50.

MULTIPLE CHOICE 303

Topic,Equilibrium Di#0Eculty,1

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,C

16.29 In a crowded city far away,the civic authorities decided that rents were too high,The

long run supply function of two-room rental apartments was given by q =14+5pand the long run

demand function was given by q = 329,5p where p is the rental rate in crowns per week,The

authorities made it illegal to rent an apartment for more than 25 crowns per week,Toavoid a

housing shortage,the authorities agreed to pay landlords enough of a subsidy to make supply equal

to demand,Howmuchwould the weekly subsidy per apartmenthave to be to eliminate excess

demand at the ceiling price?

#28a#29 6.50

#28b#29 10

#28c#29 13

#28d#29 26

#28e#29 19.50

Topic,Equilibrium Di#0Eculty,1

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,C

16.30 In a crowded city far away,the civic authorities decided that rents were too high,The

long run supply function of two-room rental apartments was given by q =14+2pand the long

run demand function was given by q =94,2pwhere p is the rental rate in crowns per week,The

authorities made it illegal to rent an apartment for more than 13 crowns per week,Toavoid a

housing shortage,the authorities agreed to pay landlords enough of a subsidy to make supply equal

to demand,Howmuchwould the weekly subsidy per apartmenthave to be to eliminate excess

demand at the ceiling price?

#28a#29 7

#28b#29 11

#28c#29 14

#28d#29 28

#28e#29 21

CHAPTER 16 Equilibrium 304

Topic,Equilibrium Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,B

16.31 The price elasticity of demand for a certain agricultural product is constant#28over the

relevant range of prices#29 and equal to,1:50,The supply elasticity for this product is constant and

equal to 4,Originally the equilibrium price of this good was 15 per unit,Then it was discovered

that consumption of this product was unhealthy,The quantity that would be demanded at any

price fell by 11#25,The percentchange in the long run equilibrium consumption of this good was:

#28a#29,11#25.

#28b#29,8#25.

#28c#29,2#25.

#28d#29,12#25.

#28e#29 There is not enough information to determine the answer.

Topic,Equilibrium Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,B

16.32 The price elasticity of demand for a certain agricultural product is constant#28over the

relevant range of prices#29 and equal to,2:50,The supply elasticity for this product is constant and

equal to 4,Originally the equilibrium price of this good was 50 per unit,Then it was discovered

that consumption of this product was unhealthy,The quantity that would be demanded at any

price fell by 52#25,The percentchange in the long run equilibrium consumption of this good was:

#28a#29,52#25.

#28b#29,32#25.

#28c#29,8#25.

#28d#29,36#25.

#28e#29 There is not enough information to determine the answer.

MULTIPLE CHOICE 305

Topic,Equilibrium Di#0Eculty,0

#25 Correct Responses,52 Discrimination Index,44

Correct Answer,A

16.33 Suppose that King Kanuta,whom you met in your workbook,demands that eachofhis

subjects give him 1 coconuts for every coconut that they consume,The king puts all of the coconuts

that he collects in a large pile and burns them,The supply of coconuts is given by S#28p

s

#29 = 100p

s;

where p

s

is the price received by suppliers,The demand for coconuts by the king's subjects is given

by D#28p

d

#29=1;500,100p

d; where p

d

is the price paid by consumers,In equilibrium,the price received

by suppliers will be:

#28a#29 6

#28b#29 9

#28c#29 7.50

#28d#29 15

#28e#29 None of the above

Topic,Equilibrium Di#0Eculty,0

#25 Correct Responses,52 Discrimination Index,44

Correct Answer,A

16.34 Suppose that King Kanuta,whom you met in your workbook,demands that eachofhis

subjects give him 4 coconuts for every coconut that they consume,The king puts all of the coconuts

that he collects in a large pile and burns them,The supply of coconuts is given by S#28p

s

#29 = 100p

s;

where p

s

is the price received by suppliers,The demand for coconuts by the king's subjects is given

by D#28p

d

#29=9;360,100p

d; where p

d

is the price paid by consumers,In equilibrium,the price received

by suppliers will be:

#28a#29 18

#28b#29 27

#28c#29 46.80

#28d#29 234

#28e#29 None of the above

CHAPTER 16 Equilibrium 306

Topic,Equilibrium Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,A

16.35 Schrecklich and Lamerde are two obscure modernist painters,who are no longer alive,but

whose paintings are still enjoyed by persons of dubious taste,The demand function for Schrecklichs

is 200,4P

S

,2P

L

and the demand function for Lamerdes is 200,3P

L

,P

S; where P

S

and P

L

are

respectively the price of Schrecklichs and Lamerdes,If the world supply of Schrecklichs is 110 and

the world supply of Lamerdes is 110,then the equilibrium price of Schrecklichs is:

#28a#29 9.

#28b#29 22.50.

#28c#29 36.

#28d#29 27.

#28e#29 18.

Topic,Equilibrium Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,A

16.36 Schrecklich and Lamerde are two obscure modernist painters,who are no longer alive,but

whose paintings are still enjoyed by persons of dubious taste,The demand function for Schrecklichs

is 200,4P

S

,2P

L

and the demand function for Lamerdes is 200,3P

L

,P

S; where P

S

and P

L

are

respectively the price of Schrecklichs and Lamerdes,If the world supply of Schrecklichs is 100 and

the world supply of Lamerdes is 80,then the equilibrium price of Schrecklichs is:

#28a#29 6.

#28b#29 25.

#28c#29 44.

#28d#29 38.

#28e#29 12.

MULTIPLE CHOICE 307

Topic,Equilibrium Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,A

16.37

Daily demand for gasoline at Billy-Bob's Mobile Station is described by Q = 776,200p where Q

are gallons of gasoline sold and p is the price in dollars,Billy-Bob's supply is Q =,890+1;500p.

Suppose the state government places a tax of 20 cents on every gallon of gasoline sold,What is the

deadweight loss resulting from this tax?

#28a#29 3.53 dollars.

#28b#29 3.11 dollars.

#28c#29 0.42 dollars.

#28d#29 96.12 dollars.

#28e#29 34.59 dollars.

Topic,Equilibrium Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,A

16.38

Daily demand for gasoline at Billy-Bob's Mobile Station is described by Q =1;870,1;000p where

Q are gallons of gasoline sold and p is the price in dollars,Billy-Bob's supply is Q = 362 + 300p.

Suppose the state government places a tax of 7 cents on every gallon of gasoline sold,What is the

deadweight loss resulting from this tax?

#28a#29 0.57 dollars.

#28b#29 0.13 dollars.

#28c#29 0.43 dollars.

#28d#29 11.21 dollars.

#28e#29 18.74 dollars.

Essay Equilibrium

Topic,Equilibrium Di#0Eculty,1

#25 Correct Responses,0 Discrimination Index,0

16.1 Use supply and demand analysis to examine the following statement,"The practice of giving

food stamps is self-defeating,Food stamps e#0Bectively lower the price of food,When food becomes

available at lower prices,demand will increase thereby forcing the price up to its initial level." Is

this reasoning correct? Draw supply and demand curves to illustrate your answer.

Answer,The subsidy would shift the demand curve to the right,much as the quotation says,but

if the supply curve slopes up,then the new equilibrium should take place with a greater supply

and a lower net price for those who use food stamps,The market price will rise,but not by the

full amount of the discount one gets with food stamps.

Topic,Equilibrium Di#0Eculty,2

#25 Correct Responses,0 Discrimination Index,0

16.2 Long ago,a kindly prince noticed the misery of his subjects,His subjects all had the same

preferences and the same low incomes,The demand function of each subject for bread wasq =26,p

where p is the price of bread and q is the numberofloaves per week,The supply of bread per

capita per week was given by the function q =,3p,The king declared since his subjects did not

even get a loaf of bread per day,hewould help them by making it illegal to sell bread for more

than 10 groschens per loaf,Unhappily,a bread shortage arose and people waited in long lines to

get bread,a#29 Draw a graph to showwhy,Put numerical labels on the important points on your

graph,b#29 If the citizens could earn 4 groschens per hour at work that was exactly as unpleasantas

waiting in line,what would be the equilibrium waiting time for a loaf of bread?

Answer,b#293:25 Hours.

Chapter 17

True-False Auctions

Topic,Auctions Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,True

17.1 In a Dutch auction with rational bidders,it sometimes happens that the object being sold

goes to someone whose value for the object is not as high as that of some other bidder#28s#29.

Topic,Auctions Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,True

17.2 In an English auction,with rational bidders,the object being sold always goes to the bidder

who values it most highly.

Topic,Auctions Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,True

17.3 An auction in which some bidders have di#0Berent information about the value of an object

than others is said to be an auction with private values.

Topic,Auctions Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,True

17.4 In a private-values auction with rational bidders,we can expect the same outcome from an

English auction as from a Vickrey auction.

Topic,Auctions Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,False

17.5 An auctioneer allows bidders to examine a jar of pennies,but he does not allow them to open

the jar and count the pennies,The jar is then sold by means of an English auction,Economists

call an auction of this type a a private-values auction,since opinions di#0Ber.

Topic,Auctions Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,True

17.6 The reserve price in an auction is the lowest price at which the seller of a good will part

with it.

CHAPTER 17 Auctions 310

Topic,Auctions Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,False

17.7 If a good is sold in a Dutch auction and the bidders bid rationally,the price paid for the

good will always be equal to the second-highest willingness to pay of auction participants.

Topic,Auctions Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,False

17.8 The "winner's curse" refers to the fact that in a sealed-bid auction with private values,the

winning bidder often pays more than he would have to in order to win the object auctioned.

Topic,Auctions Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,False

17.9 It is never a pro#0Ct-maximizing strategy for a seller in an English auction to set a reserve

price for the good he is selling,so high that he might not be able to sell it at all.

Topic,Auctions Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,True

17.10 It is often the case that a seller can increase his pro#0Cts from an auction by setting a reserve

price even if he has to destroy the object being auctioned if nobody bids as high as the reserve

price.

Topic,Auctions Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,True

17.11 The pro#0Ct-maximizing strategy for a bidder in a Vickrey auction where there are common

values for the object being sold is to bid less than her estimated value for the object,and the more

bidders there are,the more the pro#0Ct-maximizing bidder should shade her bid below her estimated

value.

Topic,Auctions Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,True

17.12 The optimal strategy for a bidder in a private-values Vickrey auction is to bid his true

valuation.

TRUE-FALSE 311

Topic,Auctions Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,True

17.13 In a common-value auction,the bids of other bidders can in#0Duence the maximum amount

that one is willing to pay for an object,while in a private-value auction this is not the case.

Multiple Choice Auctions

Topic,Auctions Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,A

17.1 A #0Crst-edition of Adam Smith's Wealth of Nations #28published in 1776#29 is being auctioned via

the internet,The currentowner starts by posting his own #5Cbid" for it,Bidders are allowed to

submit bids at any time during a one-week interval,For the following week,bids will be accepted

only if they exceed the currently posted high bid,Throughout the week,the highest bid that

anyone has made so far will be posted,At the end of the week,the book will be sold to the highest

bidder at the price that he or she bid for it,Assuming that bidders understand the rules of the

auction,the outcome of this auction will be similar to that for

#28a#29 an English auction with a reserve price equal to the owner's bid.

#28b#29 a Dutch auction with a reserve price equal to the owner's bid.

#28c#29 a sealed-bid auction in which the book is sold to the highest bidder at the highest bidder's bid price.

#28d#29 a common-value auction.

#28e#29 an English auction with no reserve price.

Topic,Auctions Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,C

17.2 A stamp dealer is holding an auction for an English Penny Black postage stamp,issued

in 1840,Potential buyers are asked to submit written bids for this stamp,and it will be sold to

the highest bidder at a price equal to the bid submitted by the second-highest bidder,If bidders

understand the logic of this auction and bid in their own self-interest,

#28a#29 bidders will shade their bids by approximately 10 percent,and hence the stamp will be sold for about

10 percent less than the second-highest willingness to pay.

#28b#29 bidders will bid more than their true valuation,since they only havetopay the second-highest bid and

not their own bid.

#28c#29 bidders will bid exactly their true valuation.

#28d#29 the highest bidder willoverstate his valuationand the second-highest bidder willunderstate his valuation.

#28e#29 bidders will all bid #28n,1=n#29 of their true valuations,where n is the number of bidders.

MULTIPLE CHOICE 313

Topic,Auctions Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,D

17.3 An antique cabinet is being sold by means of an English auction,There are four bidders,

Natalie,Heidi,Linda,and Eva,These bidders are unacquainted with each other and do not collude.

Natalie values the cabinet at $1,200,Heidi values it at $950,Linda values it at $1,700,and Eva

values it at $700,If the bidders bid in their rational self-interest,the cabinet will be sold to

#28a#29 Linda for about $1,700.

#28b#29 Natalie for about $1,200.

#28c#29 either Linda or Natalie for slightly more than $1,200,Which of them actually gets it is randomly

determined.

#28d#29 Linda for slightly more than $1,200.

#28e#29 None of the above statements are true.

Topic,Auctions Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,D

17.4 An antique cabinet is being sold by means of an English auction,There are four bidders,

Maria,Clara,Holly,and Josephine,These bidders are unacquainted with each other and do not

collude,Maria values the cabinet at $1,600,Clara values it at $1,350,Holly values it at $2,100,

and Josephine values it at $1,100,If the bidders bid in their rational self-interest,the cabinet will

be sold to

#28a#29 Holly for about $2,100.

#28b#29 Maria for about $1,600.

#28c#29 either Holly or Maria for slightly more than $1,600,Which of them actually gets it is randomly deter-

mined.

#28d#29 Holly for slightly more than $1,600.

#28e#29 None of the above statements are true.

CHAPTER 17 Auctions 314

Topic,Auctions Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,D

17.5 An antique cabinet is being sold by means of an English auction,There are four bidders,

Maude,Kristina,Zelda,and Betsy,These bidders are unacquainted with each other and do not

collude,Maude values the cabinet at $800,Kristina values it at $550,Zelda values it at $1,300,and

Betsy values it at $300,If the bidders bid in their rational self-interest,the cabinet will be sold to

#28a#29 Zelda for about $1,300.

#28b#29 Maude for about $800.

#28c#29 either Zelda orMaude forslightlymorethan $800,Which ofthem actuallygets it is randomlydetermined.

#28d#29 Zelda for slightly more than $800.

#28e#29 None of the above statements are true.

Topic,Auctions Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,D

17.6 An antique cabinet is being sold by means of an English auction,There are four bidders,

Colette,Betsy,Doreen,and Elsie,These bidders are unacquainted with each other and do not

collude,Colette values the cabinet at $4,000,Betsy values it at $3,750,Doreen values it at $4,500,

and Elsie values it at $3,500,If the bidders bid in their rational self-interest,the cabinet will be

sold to

#28a#29 Doreen for about $4,500.

#28b#29 Colette for about $4,000.

#28c#29 either Doreen or Colette for slightly more than $4,000,Which of them actually gets it is randomly

determined.

#28d#29 Doreen for slightly more than $4,000.

#28e#29 None of the above statements are true.

MULTIPLE CHOICE 315

Topic,Auctions Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,D

17.7 An antique cabinet is being sold by means of an English auction,There are four bidders,

Susan,Kristina,Katerina,and Heidi,These bidders are unacquainted with each other and do not

collude,Susan values the cabinet at $4,800,Kristina values it at $4,550,Katerina values it at

$5,300,and Heidi values it at $4,300,If the bidders bid in their rational self-interest,the cabinet

will be sold to

#28a#29 Katerina for about $5,300.

#28b#29 Susan for about $4,800.

#28c#29 either Katerina or Susan for slightly more than $4,800,Which of them actually gets it is randomly

determined.

#28d#29 Katerina for slightly more than $4,800.

#28e#29 None of the above statements are true.

Topic,Auctions Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,B

17.8

First Fiddler's Bank has foreclosed on a home mortgage and is selling the house at auction,There

are three bidders for the house,Josh,Sheila,and Elsie,First Fiddler's does not know the willingness

to pay of these three bidders for the house,but on the basis of its previous experience,the bank

believes that each of these bidders has a probabilityof1=3of valuing it at $700,000,a probabilityof

1=3of valuing at $500,000,and a probabilityof1=3of valuing it at $200,000,First Fiddler's believes

that these probabilities are independentbetween buyers,If First Fiddler's sells the house by means

of a second-bidder,sealed-bid auction #28Vickrey auction#29,what will be the bank's expected revenue

from the sale? #28Choose the closest option.#29

#28a#29 $500,000

#28b#29 $474,074

#28c#29 $466,667

#28d#29 $700,000

#28e#29 $200,000

CHAPTER 17 Auctions 316

Topic,Auctions Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,B

17.9

First Fiddler's Bank has foreclosed on a home mortgage and is selling the house at auction,There

are three bidders for the house,Tim,Katerina,and Elsie,First Fiddler's does not know the

willingness to pay of these three bidders for the house,but on the basis of its previous experience,

the bank believes that each of these bidders has a probabilityof1=3of valuing it at $600,000,a

probabilityof1=3of valuing at $500,000,and a probabilityof1=3of valuing it at $300,000,First

Fiddler's believes that these probabilities are independentbetween buyers,If First Fiddler's sells

the house by means of a second-bidder,sealed-bid auction #28Vickrey auction#29,what will be the

bank's expected revenue from the sale? #28Choose the closest option.#29

#28a#29 $500,000

#28b#29 $474,074

#28c#29 $466,667

#28d#29 $600,000

#28e#29 $300,000

Topic,Auctions Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,B

17.10

First Fiddler's Bank has foreclosed on a home mortgage and is selling the house at auction,There

are three bidders for the house,Boris,Emily,and Fanny,First Fiddler's does not know the

willingness to pay of these three bidders for the house,but on the basis of its previous experience,

the bank believes that each of these bidders has a probabilityof1=3of valuing it at $600,000,a

probabilityof1=3of valuing at $400,000,and a probabilityof1=3of valuing it at $300,000,First

Fiddler's believes that these probabilities are independentbetween buyers,If First Fiddler's sells

the house by means of a second-bidder,sealed-bid auction #28Vickrey auction#29,what will be the

bank's expected revenue from the sale? #28Choose the closest option.#29

#28a#29 $400,000

#28b#29 $425,926

#28c#29 $433,333

#28d#29 $600,000

#28e#29 $300,000

MULTIPLE CHOICE 317

Topic,Auctions Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,B

17.11

First Fiddler's Bank has foreclosed on a home mortgage and is selling the house at auction,There

are three bidders for the house,Waldo,Heidi,and Isabella,First Fiddler's does not know the

willingness to pay of these three bidders for the house,but on the basis of its previous experience,

the bank believes that each of these bidders has a probabilityof1=3of valuing it at $600,000,a

probabilityof1=3of valuing at $300,000,and a probabilityof1=3of valuing it at $200,000,First

Fiddler's believes that these probabilities are independentbetween buyers,If First Fiddler's sells

the house by means of a second-bidder,sealed-bid auction #28Vickrey auction#29,what will be the

bank's expected revenue from the sale? #28Choose the closest option.#29

#28a#29 $300,000

#28b#29 $351,852

#28c#29 $366,667

#28d#29 $600,000

#28e#29 $200,000

Topic,Auctions Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,B

17.12

First Fiddler's Bank has foreclosed on a home mortgage and is selling the house at auction,There

are three bidders for the house,Roger,Wendy,and Doreen,First Fiddler's does not know the

willingness to pay of these three bidders for the house,but on the basis of its previous experience,

the bank believes that each of these bidders has a probabilityof1=3of valuing it at $700,000,a

probabilityof1=3of valuing at $400,000,and a probabilityof1=3of valuing it at $200,000,First

Fiddler's believes that these probabilities are independentbetween buyers,If First Fiddler's sells

the house by means of a second-bidder,sealed-bid auction #28Vickrey auction#29,what will be the

bank's expected revenue from the sale? #28Choose the closest option.#29

#28a#29 $400,000

#28b#29 $425,926

#28c#29 $433,333

#28d#29 $700,000

#28e#29 $200,000

CHAPTER 17 Auctions 318

Topic,Auctions Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,D

17.13 A dealer decides to sell an antique automobile by means of an English auction with a

reservation price of $900,There are two bidders,The dealer believes that there are only three

possible values,$6,300,$2,700,and $900,that each bidder's willingness to pay might take,Each

bidder has a probabilityof1=3of having each of these willingnesses to pay,and the probabilities for

each of the two bidders are independent of the other's valuation,Assuming that the two bidders bid

rationally and do not collude,the dealer's expected revenue from selling the car is approximately

#28a#29 $4,500.

#28b#29 $3,300.

#28c#29 $2,700.

#28d#29 $2,100.

#28e#29 $6,300.

Topic,Auctions Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,D

17.14 A dealer decides to sell an antique automobile by means of an English auction with a

reservation price of $3,600,There are two bidders,The dealer believes that there are only three

possible values,$5,400,$4,500,and $3,600,that each bidder's willingness to pay might take,Each

bidder has a probabilityof1=3of having each of these willingnesses to pay,and the probabilities for

each of the two bidders are independent of the other's valuation,Assuming that the two bidders bid

rationally and do not collude,the dealer's expected revenue from selling the car is approximately

#28a#29 $4,950.

#28b#29 $4,500.

#28c#29 $4,500.

#28d#29 $4,100.

#28e#29 $5,400.

MULTIPLE CHOICE 319

Topic,Auctions Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,D

17.15 A dealer decides to sell an antique automobile by means of an English auction with a

reservation price of $2,700,There are two bidders,The dealer believes that there are only three

possible values,$8,100,$5,400,and $2,700,that each bidder's willingness to pay might take,Each

bidder has a probabilityof1=3of having each of these willingnesses to pay,and the probabilities for

each of the two bidders are independent of the other's valuation,Assuming that the two bidders bid

rationally and do not collude,the dealer's expected revenue from selling the car is approximately

#28a#29 $6,750.

#28b#29 $5,400.

#28c#29 $5,400.

#28d#29 $4,200.

#28e#29 $8,100.

Topic,Auctions Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,D

17.16 A dealer decides to sell an antique automobile by means of an English auction with a

reservation price of $900,There are two bidders,The dealer believes that there are only three

possible values,$3,600,$2,700,and $900,that each bidder's willingness to pay might take,Each

bidder has a probabilityof1=3of having each of these willingnesses to pay,and the probabilities for

each of the two bidders are independent of the other's valuation,Assuming that the two bidders bid

rationally and do not collude,the dealer's expected revenue from selling the car is approximately

#28a#29 $3,150.

#28b#29 $2,400.

#28c#29 $2,700.

#28d#29 $1,800.

#28e#29 $3,600.

CHAPTER 17 Auctions 320

Topic,Auctions Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,D

17.17 A dealer decides to sell an antique automobile by means of an English auction with a

reservation price of $900,There are two bidders,The dealer believes that there are only three

possible values,$5,400,$3,600,and $900,that each bidder's willingness to pay might take,Each

bidder has a probabilityof1=3of having each of these willingnesses to pay,and the probabilities for

each of the two bidders are independent of the other's valuation,Assuming that the two bidders bid

rationally and do not collude,the dealer's expected revenue from selling the car is approximately

#28a#29 $4,500.

#28b#29 $3,300.

#28c#29 $3,600.

#28d#29 $2,300.

#28e#29 $5,400.

Topic,Auctions Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,A

17.18 A dealer decides to sell an oil painting by means of an English auction with a reservation

price just slightly below $81,000,If he fails to get his reservation price for the painting,he will

burn it,There are two bidders,The dealer believes that there are only three possible values,

$90,000,$81,000,and $45,000,that each bidder's willingness to pay might take,Each bidder has a

probabilityof1=3of having each of these willingnesses to pay,and the probabilities for each of the

two bidders are independent of the other's valuation,Assuming that the two bidders bid rationally

and do not collude,the dealer's expected revenue from selling the painting is slightly less than

#28a#29 $73,000.

#28b#29 $81,000.

#28c#29 $45,000.

#28d#29 $63,000.

#28e#29 $72,000.

MULTIPLE CHOICE 321

Topic,Auctions Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,A

17.19 A dealer decides to sell an oil painting by means of an English auction with a reservation

price just slightly below $45,000,If he fails to get his reservation price for the painting,he will

burn it,There are two bidders,The dealer believes that there are only three possible values,

$63,000,$45,000,and $27,000,that each bidder's willingness to pay might take,Each bidder has a

probabilityof1=3of having each of these willingnesses to pay,and the probabilities for each of the

two bidders are independent of the other's valuation,Assuming that the two bidders bid rationally

and do not collude,the dealer's expected revenue from selling the painting is slightly less than

#28a#29 $42,000.

#28b#29 $45,000.

#28c#29 $27,000.

#28d#29 $36,000.

#28e#29 $45,000.

Topic,Auctions Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,A

17.20 A dealer decides to sell an oil painting by means of an English auction with a reservation

price just slightly below $90,000,If he fails to get his reservation price for the painting,he will

burn it,There are two bidders,The dealer believes that there are only three possible values,

$117,000,$90,000,and $45,000,that each bidder's willingness to pay might take,Each bidder has

a probabilityof1=3of having each of these willingnesses to pay,and the probabilities for each of the

two bidders are independent of the other's valuation,Assuming that the two bidders bid rationally

and do not collude,the dealer's expected revenue from selling the painting is slightly less than

#28a#29 $83,000.

#28b#29 $90,000.

#28c#29 $45,000.

#28d#29 $67,500.

#28e#29 $84,000.

CHAPTER 17 Auctions 322

Topic,Auctions Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,A

17.21 A dealer decides to sell an oil painting by means of an English auction with a reservation

price just slightly below $72,000,If he fails to get his reservation price for the painting,he will

burn it,There are two bidders,The dealer believes that there are only three possible values,

$117,000,$72,000,and $36,000,that each bidder's willingness to pay might take,Each bidder has

a probabilityof1=3of having each of these willingnesses to pay,and the probabilities for each of the

two bidders are independent of the other's valuation,Assuming that the two bidders bid rationally

and do not collude,the dealer's expected revenue from selling the painting is slightly less than

#28a#29 $69,000.

#28b#29 $72,000.

#28c#29 $36,000.

#28d#29 $54,000.

#28e#29 $75,000.

Topic,Auctions Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,A

17.22 A dealer decides to sell an oil painting by means of an English auction with a reservation

price just slightly below $63,000,If he fails to get his reservation price for the painting,he will

burn it,There are two bidders,The dealer believes that there are only three possible values,

$108,000,$63,000,and $27,000,that each bidder's willingness to pay might take,Each bidder has

a probabilityof1=3of having each of these willingnesses to pay,and the probabilities for each of the

two bidders are independent of the other's valuation,Assuming that the two bidders bid rationally

and do not collude,the dealer's expected revenue from selling the painting is slightly less than

#28a#29 $61,000.

#28b#29 $63,000.

#28c#29 $27,000.

#28d#29 $45,000.

#28e#29 $66,000.

MULTIPLE CHOICE 323

Topic,Auctions Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,A

17.23 Herb's Auction House in Purloined Hubcap,Oregon,holds sealed-bid used-car auctions

every Wednesday,Each car is sold to the highest bidder at the second-highest bidder's bid,On

average,two-thirds of the cars that are auctioned are lemons and one-third are good used cars.

A good car is worth $1,500 to any buyer,A lemon is worth only $150 to a buyer,Most buyers

can do no better than random at picking good cars from the lot,There is only one exception,Al

Crankcase,Al can sometimes but not always detect lemons by means of a subtle test,A good car

will never fail Al's test,but approximately half of the lemons fail his test,Al attends every auction,

tests every car,and always bids his expected value,Normal bidders bid less than the expected

value for a randomly selected car but more than the value of a lemon.

#28a#29 Al will bid $825 for cars that pass his test and $150 for cars that fail his test,Normal bidders will get

only lemons.

#28b#29 Al will bid $750 for cars that pass his test and $500 for cars that fail his test,Normal bidders will get

only lemons

#28c#29 Al will bid $500 for cars that pass his test and $150 for cars that fail his test,Normal bidders will get

good cars only 1=6 of the time.

#28d#29 Al will bid $600 for cars that pass his test and $250 for cars that fail his test,Normal bidders will get

good cars only 1=6 of the time.

#28e#29 Al will bid $300 for cars that pass his test and $150 for cars that fail his test,Normal bidders will get

good cars 1=12 of the time.

Topic,Auctions Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,B

17.24 A seller knows that there are two bidders for the object she is selling,She believes that

with probability 1=2; one has a buyer value of $5 and the other has a buyer value of $10 and,with

probability 1=2; one has a buyer value of $8 and the other has a buyer value of $15,She knows

that bidders will want to buy the object so long as they can get it for their buyer value or less,She

sells it in an English auction with a reserve price which she must set before the auction starts,To

maximize her expected pro#0Cts,she should set the reserve price at

#28a#29 $5.

#28b#29 $10.

#28c#29 $8.

#28d#29 $13.

#28e#29 $15.

CHAPTER 17 Auctions 324

Topic,Auctions Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,A

17.25 A seller knows that there are two bidders for the object he is selling,He believes that

with probability 1=2; one has a buyer value of $5 and the other has a buyer value of $12 and,with

probability 1=2; one has a buyer value of $10 and the other has a buyer value of $30,He knows

that bidders will want to buy the object so long as they can get it for their buyer value or less,He

sells it in an English auction with a reserve price whichhemust set before the auction starts,To

maximize his expected pro#0Cts,he should set the reserve price at

#28a#29 $30.

#28b#29 $5.

#28c#29 $12.

#28d#29 $10.

#28e#29 $20.

Topic,Auctions Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,C

17.26 A seller decides to sell an object by means of a sealed-bid,second-price auction without a

reservation price,There are two bidders,The seller believes that for each of the two bidders there

is a probabilityof1=2that the bidder's value for the object is $500 and a probabilityof1=2that the

bidder's value is $100,The seller believes that these probabilities are independentbetween bidders.

If the bidders bid rationally,what is the seller's expected revenue from the auction?

#28a#29 $500

#28b#29 $300

#28c#29 $200

#28d#29 $180

#28e#29 $260

MULTIPLE CHOICE 325

Topic,Auctions Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,C

17.27 A seller decides to sell an object by means of a sealed-bid,second-price auction without a

reservation price,There are two bidders,The seller believes that for each of the two bidders there

is a probabilityof1=2that the bidder's value for the object is $500 and a probabilityof1=2that the

bidder's value is $100,The seller believes that these probabilities are independentbetween bidders.

If the bidders bid rationally,what is the seller's expected revenue from the auction?

#28a#29 $500

#28b#29 $300

#28c#29 $200

#28d#29 $180

#28e#29 $260

Topic,Auctions Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,C

17.28 A seller decides to sell an object by means of a sealed-bid,second-price auction without a

reservation price,There are two bidders,The seller believes that for each of the two bidders there

is a probabilityof1=2that the bidder's value for the object is $600 and a probabilityof1=2that the

bidder's value is $100,The seller believes that these probabilities are independentbetween bidders.

If the bidders bid rationally,what is the seller's expected revenue from the auction?

#28a#29 $600

#28b#29 $350

#28c#29 $225

#28d#29 $200

#28e#29 $300

CHAPTER 17 Auctions 326

Topic,Auctions Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,C

17.29 A seller decides to sell an object by means of a sealed-bid,second-price auction without a

reservation price,There are two bidders,The seller believes that for each of the two bidders there

is a probabilityof1=2that the bidder's value for the object is $400 and a probabilityof1=2that the

bidder's value is $100,The seller believes that these probabilities are independentbetween bidders.

If the bidders bid rationally,what is the seller's expected revenue from the auction?

#28a#29 $400

#28b#29 $250

#28c#29 $175

#28d#29 $160

#28e#29 $220

Topic,Auctions Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,C

17.30 A seller decides to sell an object by means of a sealed-bid,second-price auction without a

reservation price,There are two bidders,The seller believes that for each of the two bidders there

is a probabilityof1=2that the bidder's value for the object is $500 and a probabilityof1=2that the

bidder's value is $100,The seller believes that these probabilities are independentbetween bidders.

If the bidders bid rationally,what is the seller's expected revenue from the auction?

#28a#29 $500

#28b#29 $300

#28c#29 $200

#28d#29 $180

#28e#29 $260

MULTIPLE CHOICE 327

Topic,Auctions Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,A

17.31 A seller decides to sell an object by means of an English auction without a reservation price.

There are two bidders,The seller believes that for each of the two bidders there is a probabilityof

1=2that the bidder's value for the object is $600 and a probabilityof1=2that the bidder's value is

$300,The seller believes that these probabilities are independentbetween bidders,If the bidders

bid rationally,what is the seller's expected revenue from the auction?

#28a#29 $375

#28b#29 $420

#28c#29 $450

#28d#29 $600

#28e#29 $300

Topic,Auctions Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,A

17.32 A seller decides to sell an object by means of an English auction without a reservation price.

There are two bidders,The seller believes that for each of the two bidders there is a probabilityof

1=2that the bidder's value for the object is $500 and a probabilityof1=2that the bidder's value is

$200,The seller believes that these probabilities are independentbetween bidders,If the bidders

bid rationally,what is the seller's expected revenue from the auction?

#28a#29 $275

#28b#29 $320

#28c#29 $350

#28d#29 $500

#28e#29 $200

CHAPTER 17 Auctions 328

Topic,Auctions Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,A

17.33 A seller decides to sell an object by means of an English auction without a reservation price.

There are two bidders,The seller believes that for each of the two bidders there is a probabilityof

1=2that the bidder's value for the object is $400 and a probabilityof1=2that the bidder's value is

$300,The seller believes that these probabilities are independentbetween bidders,If the bidders

bid rationally,what is the seller's expected revenue from the auction?

#28a#29 $325

#28b#29 $340

#28c#29 $350

#28d#29 $400

#28e#29 $300

Topic,Auctions Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,A

17.34 A seller decides to sell an object by means of an English auction without a reservation price.

There are two bidders,The seller believes that for each of the two bidders there is a probabilityof

1=2that the bidder's value for the object is $400 and a probabilityof1=2that the bidder's value is

$100,The seller believes that these probabilities are independentbetween bidders,If the bidders

bid rationally,what is the seller's expected revenue from the auction?

#28a#29 $175

#28b#29 $220

#28c#29 $250

#28d#29 $400

#28e#29 $100

MULTIPLE CHOICE 329

Topic,Auctions Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,A

17.35 A seller decides to sell an object by means of an English auction without a reservation price.

There are two bidders,The seller believes that for each of the two bidders there is a probabilityof

1=2that the bidder's value for the object is $600 and a probabilityof1=2that the bidder's value is

$300,The seller believes that these probabilities are independentbetween bidders,If the bidders

bid rationally,what is the seller's expected revenue from the auction?

#28a#29 $375

#28b#29 $420

#28c#29 $450

#28d#29 $600

#28e#29 $300

Chapter 18

True-False Technology

Topic,Technology Di#0Eculty,1

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,False

18.1 The production set of a #0Crm is the set of all products the #0Crm can produce.

Topic,Technology Di#0Eculty,1

#25 Correct Responses,72 Discrimination Index,49

Correct Answer,False

18.2 A production isoquant is a locus of combinations of inputs that are equally pro#0Ctable.

Topic,Technology Di#0Eculty,1

#25 Correct Responses,77 Discrimination Index,32

Correct Answer,False

18.3 If there are constant returns to scale,then doubling the amountofany input will exactly

double the amount of output.

Topic,Technology Di#0Eculty,1

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,True

18.4 The economist's distinction between long and short run captures the idea that quantities of

some factor inputs can be varied in the short run but not in the long run.

Topic,Technology Di#0Eculty,2

#25 Correct Responses,79 Discrimination Index,23

Correct Answer,True

18.5 If the production function is f#28x;y#29=minf2x+y;x+2yg;then there are constant returns to

scale.

Topic,Technology Di#0Eculty,2

#25 Correct Responses,84 Discrimination Index,10

Correct Answer,True

18.6 If the production function is f#28x;y#29=x+minfx;yg; then there are constant returns to scale.

TRUE-FALSE 331

Topic,Technology Di#0Eculty,2

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,True

18.7 If the production function is f#28x;y#29=minf12x;3yg; then there is convexity in production.

Topic,Technology Di#0Eculty,1

#25 Correct Responses,76 Discrimination Index,14

Correct Answer,False

18.8 If the production function is f#28x

1;x

2

#29=x

1

x

2;then there are constant returns to scale.

Topic,Technology Di#0Eculty,2

#25 Correct Responses,55 Discrimination Index,38

Correct Answer,True

18.9 It is possible to have decreasing marginal products for all inputs,and yet have increasing

returns to scale.

Topic,Technology Di#0Eculty,1

#25 Correct Responses,83 Discrimination Index,24

Correct Answer,True

18.10 A production function has well-de#0Cned marginal products at every input combination,If

Factor x is shown on the horizontal axis and Factor y is shown on the vertical axis,the slope of the

isoquant through a point #28x#03;y#03#29 is the negative of the ratio of the marginal product of x to the

marginal product of y.

Topic,Technology Di#0Eculty,1

#25 Correct Responses,80 Discrimination Index,10

Correct Answer,False

18.11 The production function f#28x;y#29=x

2=3

+y

2=3

has increasing returns to scale.

Topic,Technology Di#0Eculty,1

#25 Correct Responses,96 Discrimination Index,2

Correct Answer,True

18.12 The production function f#28x;y#29=x+yhas constant returns to scale.

CHAPTER 18 Technology 332

Topic,Technology Di#0Eculty,2

#25 Correct Responses,75 Discrimination Index,27

Correct Answer,True

18.13 If there is one input used in production and if there are decreasing returns to scale,then

the marginal product for the input will be diminishing.

Topic,Technology Di#0Eculty,1

#25 Correct Responses,92 Discrimination Index,7

Correct Answer,False

18.14 A #0Crm's production function is f#28x

1;x

2

#29=x

1

+2x

2

,This means that x

2

is twice as expensive

as x

1

.

Topic,Technology Di#0Eculty,2

#25 Correct Responses,75 Discrimination Index,20

Correct Answer,True

18.15 A #0Crm has twovariable factors and a production function f#28x

1;x

2

#29=#282x

1

+4x

2

#29

1=2

,The

technical rate of substitution between x

1

and x

2

is constant.

Topic,Technology Di#0Eculty,1

#25 Correct Responses,38 Discrimination Index,8

Correct Answer,False

18.16 If the marginal product of each factor decreases as the amount of that factor used increases,

then there must be decreasing returns to scale.

Multiple Choice Technology

Topic,Technology Di#0Eculty,1

#25 Correct Responses,92 Discrimination Index,13

Correct Answer,B

18.1 In any production process,the marginal product of labor equals:

#28a#29 the value of total output minus the cost of the #0Cxed capital stock.

#28b#29 the change in output per unit change in labor input for #5Csmall" changes in the amount of input.

#28c#29 total output divided by total labor inputs.

#28d#29 total output produced with the given labor inputs.

#28e#29 the average output of the least skilled workers employed by the #0Crm.

Topic,Technology Di#0Eculty,2

#25 Correct Responses,67 Discrimination Index,41

Correct Answer,A

18.2 If a #0Crm moves from one point on a production isoquant to another point on the same

isoquant,which of the following will certainly NOT happen?

#28a#29 achange in the level of output

#28b#29 achange in the ratio in which the inputs are combined

#28c#29 achange in the marginal products of the inputs

#28d#29 achange in the rate of technical substitution

#28e#29 achange in pro#0Ctability

Topic,Technology Di#0Eculty,2

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,A

18.3 A #0Crm has the production function f#28x;y#29=x

:5

+ywhere x is the amount of factor x it

uses and y is the amount of factor y,On a diagram we put x on the horizontal axis and y on the

vertical axis,We draw some isoquants,Nowwe draw a straight line on the graph and we notice

that the slopes of all the isoquants that it meets have the same slope at the point where they meet

this line,The straight line we drew was:

#28a#29 vertical.

#28b#29 horizontal.

#28c#29 diagonal through the origin with slope,5.

#28d#29 diagonal with slope 2.

#28e#29 diagonal with slope greater than 2.

CHAPTER 18 Technology 334

Topic,Technology Di#0Eculty,2

#25 Correct Responses,72 Discrimination Index,24

Correct Answer,E

18.4 Which of the following production functions exhibit constant returns to scale? In each

case y is output and K and L are inputs,#281#29 y = K

1=2

L

2=3

#282#29 y =3K

1=2

L

1=2

#283#29 y = K

1=2

+ L

1=2

#284#29y =2K+3L.

#28a#29 1,2,and 4

#28b#29 2,3,and 4

#28c#29 1,3,and 4

#28d#29 2 and 3

#28e#29 2 and 4

Topic,Technology Di#0Eculty,2

#25 Correct Responses,73 Discrimination Index,54

Correct Answer,D

18.5 A #0Crm has the production function,f#28x;y#29=20x

3=5

y

2=5

,The slope of the #0Crm's isoquantat

the point #28x;y#29 = #2880;10#29 is,#28Pick the closest one.#29

#28a#29,8.

#28b#29,1:50.

#28c#29,0:67.

#28d#29,0:19.

#28e#29,4.

Topic,Technology Di#0Eculty,2

#25 Correct Responses,73 Discrimination Index,54

Correct Answer,D

18.6 A #0Crm has the production function,f#28x;y#29=40x

2=5

y

3=5

,The slope of the #0Crm's isoquantat

the point #28x;y#29 = #2870;50#29 is,#28Pick the closest one.#29

#28a#29,1:40.

#28b#29,0:67.

#28c#29,1:50.

#28d#29,0:48.

#28e#29,0:70.

MULTIPLE CHOICE 335

Topic,Technology Di#0Eculty,1

#25 Correct Responses,51 Discrimination Index,11

Correct Answer,C

18.7 A #0Crm uses only two inputs to produce its output,These inputs are perfect substitutes.

This #0Crm:

#28a#29 must have increasing returns to scale.

#28b#29 must have constant returns to scale.

#28c#29 could have increasing returns to scale,constant returns to scale,or decreasing returns to scale.

#28d#29 must have decreasing returns to scale.

#28e#29 must have decreasing returns to scale in the short run and constant returns to scale in the long run.

Topic,Technology Di#0Eculty,2

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,C

18.8 A #0Crm has the production function f#28X;Y#29=X

3=4

Y

1=4

where X is the amount of factor x

used and Y is the amount of factor y used,On a diagram we put X on the horizontal axis and Y on

the vertical axis,We draw some isoquants,Nowwe draw a straight line on the graph and we notice

that wherever this line meets an isoquant,the isoquant has a slope of,3,The straight line we drew:

#28a#29 is vertical.

#28b#29 is horizontal.

#28c#29 is a ray through the origin with slope 1.

#28d#29 isaray through the origin with slope 2.

#28e#29 has a negative slope.

Topic,Technology Di#0Eculty,2

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,C

18.9 A #0Crm has the production function f#28X;Y#29=X

2=3

Y

1=3

where X is the amount of factor x

used and Y is the amount of factor y used,On a diagram we put X on the horizontal axis and Y on

the vertical axis,We draw some isoquants,Nowwe draw a straight line on the graph and we notice

that wherever this line meets an isoquant,the isoquant has a slope of,4,The straight line we drew:

#28a#29 is vertical.

#28b#29 is horizontal.

#28c#29 is a ray through the origin with slope 2.

#28d#29 isaray through the origin with slope 3.

#28e#29 has a negative slope.

CHAPTER 18 Technology 336

Topic,Technology Di#0Eculty,1

#25 Correct Responses,31 Discrimination Index,32767

Correct Answer,C

18.10 If output is produced with two factors of production and with increasing returns to scale:

#28a#29 there cannot be diminishing marginal rate of substitution.

#28b#29 all inputs must have increasing marginal products.

#28c#29 on a graph of production isoquants,moving along a ray from the origin,output more than doubles as

the distance from the origin doubles.

#28d#29 the marginal product of at least one input must be increasing.

#28e#29 all inputs must have decreasing marginal products.

Topic,Technology Di#0Eculty,2

#25 Correct Responses,55 Discrimination Index,46

Correct Answer,B

18.11 A #0Crm has the production function f#28x

1;x

2

#29=#28x

b

1

+x

b

2

#29

c

where b#3E0and c#3E0,This #0Crm

will have:

#28a#29 increasing returns to scale if and only if 2b+ c#3E1.

#28b#29 increasing returns to scale if and only if bc #3E 1.

#28c#29 increasing returns to scale if and only if b+ c#3E1.

#28d#29 constant returns to scale if and only if c =1.

#28e#29 constant returns to scale if and only if b = c.

Topic,Technology Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,C

18.12 A #0Crm has the production function f#28x;y#29=x+minfx;yg,The isoquants for the #0Crm:

#28a#29 are L shaped with the corners of the L on the line y = x.

#28b#29 are L shaped with the corners of the L on the line y = x+1.

#28c#29 consist of two line segments,one vertical and the other with a slope of,1.

#28d#29 consist of two line segments,one horizontal and the other with a slope of,1.

#28e#29 are upside down L shaped.

MULTIPLE CHOICE 337

Topic,Technology Di#0Eculty,3

#25 Correct Responses,32 Discrimination Index,41

Correct Answer,D

18.13 Suppose that the production function is f#28x

1;x

2

#29=#28x

a

1

+x

a

2

#29

b;where a and b are positive

constants,For what values of a and b is there diminishing technical rate of substitution?

#28a#29 for anyvalue of a if b#3C1.

#28b#29 for anyvalues of a and b if ab #3C 1.

#28c#29 for anyvalues of a and b if a#3Eb.

#28d#29 for anyvalue of b if a#3C1.

#28e#29 None of the above.

Topic,Technology Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,D

18.14 A #0Crm has the production function f#28x

1;x

2

#29=x

0:40

1

x

0:20

2

,The isoquant on which output is

40

2=10

has the equation:

#28a#29 x

2

=40x

,2

1

.

#28b#29 x

2

=40x

5

1

.

#28c#29 x

1

=x

2

=2.

#28d#29 x

2

=40x

,0:20

1

#28e#29 x

1

=0:20x

,0:80

2

.

Topic,Technology Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,D

18.15 A #0Crm has the production function f#28x

1;x

2

#29=x

1:20

1

x

0:60

2

,The isoquant on which output is

30

6=10

has the equation:

#28a#29 x

2

=30x

,2

1

.

#28b#29 x

2

=30x

1:67

1

.

#28c#29 x

1

=x

2

=2.

#28d#29 x

2

=30x

,0:60

1

#28e#29 x

1

=0:60x

,0:40

2

.

CHAPTER 18 Technology 338

Topic,Technology Di#0Eculty,1

#25 Correct Responses,94 Discrimination Index,20

Correct Answer,E

18.16 A #0Crm has the production function f#28x;y#29=x

1

y

0:80

,This #0Crm has:

#28a#29 decreasing returns to scale and dimininishing marginal products for factor x.

#28b#29 increasing returns to scale and decreasing marginal product of factor x.

#28c#29 decreasing returns to scale and increasing marginal product for factor x.

#28d#29 constant returns to scale.

#28e#29 none of the above.

Topic,Technology Di#0Eculty,1

#25 Correct Responses,94 Discrimination Index,20

Correct Answer,E

18.17 A #0Crm has the production function f#28x;y#29=x

1:30

y

1

,This #0Crm has:

#28a#29 decreasing returns to scale and dimininishing marginal products for factor x.

#28b#29 increasing returns to scale and decreasing marginal product of factor x.

#28c#29 decreasing returns to scale and increasing marginal product for factor x.

#28d#29 constant returns to scale.

#28e#29 none of the above.

Topic,Technology Di#0Eculty,1

#25 Correct Responses,100 Discrimination Index,0

Correct Answer,B

18.18 A #0Crm uses 3 factors to produce its output,Its production function is f#28x;y;z#29=

minfx

3

=y;y

2;#28z

4

,x

4

#29=y

2

g,If the amountofeach input is multiplied by 6,its output will be multi-

plied by:

#28a#29 216

#28b#29 36

#28c#29 6

#28d#29 0.16

#28e#29 The answer depends on the original choice of x; y; and z.

MULTIPLE CHOICE 339

Topic,Technology Di#0Eculty,1

#25 Correct Responses,100 Discrimination Index,0

Correct Answer,B

18.19 A #0Crm uses 3 factors to produce its output,Its production function is f#28x;y;z#29=

minfx

2

=y;y

1;#28z

3

,x

3

#29=y

2

g,If the amountofeach input is multiplied by 4,its output will be multi-

plied by:

#28a#29 16

#28b#29 4

#28c#29 1

#28d#29 0.80

#28e#29 The answer depends on the original choice of x; y; and z.

Topic,Technology Di#0Eculty,2

#25 Correct Responses,65 Discrimination Index,90

Correct Answer,A

18.20 A #0Crm has a production function f#28x;y#29=1#28x

0:80

+y

0:80

#29

4

whenever x#3E0and y#3E0,When

the amounts of both inputs are positive,this #0Crm has:

#28a#29 increasing returns to scale.

#28b#29 decreasing returns to scale.

#28c#29 constant returns to scale.

#28d#29 increasing returns to scale if x+y#3E1 and decreasing returns to scale otherwise.

#28e#29 increasing returns to scale if output is less than 1 and decreasing returns to scale if output is greater

than 1.

Topic,Technology Di#0Eculty,2

#25 Correct Responses,65 Discrimination Index,90

Correct Answer,A

18.21 A #0Crm has a production function f#28x;y#29=1:10#28x

0:20

+ y

0:20

#29

5

whenever x#3E0and y#3E0.

When the amounts of both inputs are positive,this #0Crm has:

#28a#29 increasing returns to scale.

#28b#29 decreasing returns to scale.

#28c#29 constant returns to scale.

#28d#29 increasing returns to scale if x+y#3E1 and decreasing returns to scale otherwise.

#28e#29 increasing returns to scale if output is less than 1 and decreasing returns to scale if output is greater

than 1.

CHAPTER 18 Technology 340

Topic,Technology Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,A

18.22 The production function Q =50K

0:75

L

0:75

exhibits

#28a#29 increasing returns to scale.

#28b#29 constant returns to scale.

#28c#29 decreasing returns to scale.

#28d#29 increasing,then diminishing returns to scale.

#28e#29 negative returns to scale.

Topic,Technology Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,A

18.23 The production function Q =50K

0:75

L

0:50

exhibits

#28a#29 increasing returns to scale.

#28b#29 constant returns to scale.

#28c#29 decreasing returns to scale.

#28d#29 increasing,then diminishing returns to scale.

#28e#29 negative returns to scale.

Topic,Technology Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,C

18.24 The UJava espresso stand needs two inputs,labor and co#0Bee beans,to produce its only

output,espresso,Producing an espresso always requires the same amount of co#0Bee beans,and the

same amount of time,Which of the following production functions would appropriately describe

the production process at UJava,where B represents ounces of co#0Bee beans,and L represents hours

of labor?

#28a#29 Q = B

0:60

L

0:40

#28b#29 Q = B=2+L=30

#28c#29 Q = min#282B;60L#29

#28d#29 Q =0:5B+0:5L

0:5

$

#28e#29 none of the above.

MULTIPLE CHOICE 341

Topic,Technology Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,C

18.25 The UJava espresso stand needs two inputs,labor and co#0Bee beans,to produce its only

output,espresso,Producing an espresso always requires the same amount of co#0Bee beans,and the

same amount of time,Which of the following production functions would appropriately describe

the production process at UJava,where B represents ounces of co#0Bee beans,and L represents hours

of labor?

#28a#29 Q = B

0:70

L

0:30

#28b#29 Q = B=2+L=30

#28c#29 Q = min#282B;60L#29

#28d#29 Q =0:5B+0:5L

0:5

$

#28e#29 none of the above.

Essay Technology

Topic,Technology Di#0Eculty,2

#25 Correct Responses,0 Discrimination Index,0

18.1 On separate axes,drawtypical production isoquants for each of the following production

functions,a#29 f#28x;y#29=minf2x;x+yg b#29 f#28x;y#29=xy c#29 f#28x;y#29=x+minfx;yg d#29 f#28x;y#29=x+y

1=2

.

Answer,For a#29,the isoquants have a kink at the line x = y.Atatypical point on this line,say

x = y =3;the isoquanthasavertical segment going all the way to the sky and another segment

running from #283;3#29 to #286;0#29,b#29 These are rectangular hyperbolas,c#29If x is on the horizontal axis and

y on the vertical axis,an isoquant has a kink on the line x = y.To the left of this line,an isoquant

has the slope,1; to the right of this line,an isoquant has slope,1.Above this line the isoquant

is vertical,d#29 The isoquants are convex to the origin,If you draw a horizontal line through twoor

more isoquants,they will all have the same slope where they meet this line.

Topic,Technology Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

18.2 For each of the following production functions,comment on the ability to substitute capital

for labor.#28a#29 Q = K + L

#28b#29 Q = K

0:5

L

0:5

#28c#29 Q = min#28K;L#29

#28d#29 Whywould this information be of interest to a manager?

Topic,Technology Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

18.3 For each of the following production functions,draw a diagram showing the general shape

of its corresponding isoquant,Comment on the ease at which labor and capital can be substituted

for one another relative to the other two production functions.

#28a#29 Q = K +L

#28b#29 Q = K

0:5

L

0:5

#28c#29 Q = min#28K;L#29

Chapter 19

True-False Pro#0Ct Maximization

Topic,Pro#0Ct Maximization Di#0Eculty,1

#25 Correct Responses,96 Discrimination Index,25

Correct Answer,False

19.1 The weak axiom of pro#0Ct maximizing behavior states that in a modern mixed economy,

#0Crms have only a weak incentive to maximize pro#0Cts.

Topic,Pro#0Ct Maximization Di#0Eculty,1

#25 Correct Responses,86 Discrimination Index,30

Correct Answer,False

19.2 A #0Cxed factor is a factor of production that is used in #0Cxed proportion to the level of output.

Topic,Pro#0Ct Maximization Di#0Eculty,1

#25 Correct Responses,92 Discrimination Index,7

Correct Answer,True

19.3 The marginal product of a factor is just the derivative of the production function with

respect to the amount of this factor,holding the amounts of other factor inputs constant.

Topic,Pro#0Ct Maximization Di#0Eculty,2

#25 Correct Responses,37 Discrimination Index,19

Correct Answer,False

19.4 If the value of the marginal product of factor x increases as the quantityofxincreases,and

the value of the marginal product of x is equal to the wage rate,then the pro#0Ct maximizing amount

of x is being used.

Topic,Pro#0Ct Maximization Di#0Eculty,2

#25 Correct Responses,43 Discrimination Index,45

Correct Answer,True

19.5 If the price of the output of a pro#0Ct-maximizing,competitive #0Crm rises and all other prices

stay constant,then the #0Crm's output cannot fall.

CHAPTER 19 Pro#0Ct Maximization 344

Topic,Pro#0Ct Maximization Di#0Eculty,1

#25 Correct Responses,78 Discrimination Index,12

Correct Answer,True

19.6 If a pro#0Ct-maximizing competitive #0Crm has constant returns to scale,then its long run

pro#0Cts must be zero.

Topic,Pro#0Ct Maximization Di#0Eculty,2

#25 Correct Responses,58 Discrimination Index,17

Correct Answer,False

19.7 Just as in the theory of utility maximizing consumers,the theory of pro#0Ct maximizing #0Crms

allows the possibility of "Gi#0Ben factors",These are factors for which a fall in price leads to a fall

in demand.

Topic,Pro#0Ct Maximization Di#0Eculty,1

#25 Correct Responses,92 Discrimination Index,15

Correct Answer,False

19.8 If the value of the marginal product of labor exceeds the wage rate,then a competitive,

pro#0Ct-maximizing #0Crm would want to hire less labor.

Topic,Pro#0Ct Maximization Di#0Eculty,2

#25 Correct Responses,63 Discrimination Index,40

Correct Answer,False

19.9 A #0Crm produces one input with one output and has decreasing returns to scale,The price

that it pays per unit of input and the price it gets per unit of output are independent of the

amount that this #0Crm buys or sells,If the government taxes its net pro#0Cts at some percentage rate

and subsidizes its inputs at the same percentage rate,the #0Crm's pro#0Ct maximizing output will not

change.

Multiple Choice Pro#0Ct Maximization

Topic,Pro#0Ct Maximization Di#0Eculty,2

#25 Correct Responses,81 Discrimination Index,36

Correct Answer,D

19.1 A competitive #0Crm produces output using three #0Cxed factors and one variable factor,The

#0Crm's short run production function is q = 163x,2x

2; where x is the amountofvariable factor used.

The price of output is $3 per unit and the price of the variable factor is $9 per unit,In the short

run,how many units of x should the #0Crm use?

#28a#29 20

#28b#29 80

#28c#29 19

#28d#29 40

#28e#29 None of the above.

Topic,Pro#0Ct Maximization Di#0Eculty,2

#25 Correct Responses,81 Discrimination Index,36

Correct Answer,D

19.2 A competitive #0Crm produces output using three #0Cxed factors and one variable factor,The

#0Crm's short run production function is q = 455x,5x

2; where x is the amountofvariable factor used.

The price of output is $3 per unit and the price of the variable factor is $15 per unit,In the short

run,how many units of x should the #0Crm use?

#28a#29 22

#28b#29 90

#28c#29 31

#28d#29 45

#28e#29 None of the above.

CHAPTER 19 Pro#0Ct Maximization 346

Topic,Pro#0Ct Maximization Di#0Eculty,2

#25 Correct Responses,69 Discrimination Index,50

Correct Answer,A

19.3 A competitive #0Crm produces a single output using several inputs,The price of output rises

by $2 per unit,The price of one of the inputs increases by $5 and the quantity of this input that

the #0Crm uses increases by 6 units,The prices of all other inputs stay unchanged,From the weak

axiom of pro#0Ct maximization we can tell that:

#28a#29 the output of the good must have increased by at least 15 units.

#28b#29 the inputs of the other factors must have stayed constant.

#28c#29 the output of the good must have decreased by at least 7.50 units.

#28d#29 the inputs of at least one of the other factors must have decreased by at least 6 units.

#28e#29 the inputs of at least one of the other factors must have increased by at least 6 units.

Topic,Pro#0Ct Maximization Di#0Eculty,2

#25 Correct Responses,69 Discrimination Index,50

Correct Answer,A

19.4 A competitive #0Crm produces a single output using several inputs,The price of output rises

by $3 per unit,The price of one of the inputs increases by $3 and the quantity of this input that

the #0Crm uses increases by 6 units,The prices of all other inputs stay unchanged,From the weak

axiom of pro#0Ct maximization we can tell that:

#28a#29 the output of the good must have increased by at least 6 units.

#28b#29 the inputs of the other factors must have stayed constant.

#28c#29 the output of the good must have decreased by at least 3 units.

#28d#29 the inputs of at least one of the other factors must have decreased by at least 6 units.

#28e#29 the inputs of at least one of the other factors must have increased by at least 6 units.

Topic,Pro#0Ct Maximization Di#0Eculty,2

#25 Correct Responses,13 Discrimination Index,17

Correct Answer,E

19.5 If there is perfect certainty,a competitive #0Crm will necessarily:

#28a#29 seek to maximize its immediate pro#0Cts rather than long run returns because otherwise it will go broke.

#28b#29 maximize the ratio of the presentvalue of its sales to the presentvalue of its costs.

#28c#29 equalize its pro#0Cts in all periods.

#28d#29 equalize its sales in all periods.

#28e#29 None of the above.

MULTIPLE CHOICE 347

Topic,Pro#0Ct Maximization Di#0Eculty,2

#25 Correct Responses,55 Discrimination Index,37

Correct Answer,B

19.6 A #0Crm produces one output using one input,When the cost of the input was 3 and the

price of the output was 3,the #0Crm used 6 units of input to produce 18 units of output,Later,

when the cost of the input was 7 and the price of the output was 4,the #0Crm used 5 units of input

to produce 20 units of output.

#28a#29 This behavior is consistent with WAPM.

#28b#29 This behavior is not consistent with WAPM.

#28c#29 This behavior is impossible no matter what the #0Crm is trying to do.

#28d#29 This behavior suggests the presence of increasing returns to scale.

#28e#29 This behavior suggests the presence of decreasing returns to scale.

Topic,Pro#0Ct Maximization Di#0Eculty,1

#25 Correct Responses,88 Discrimination Index,27

Correct Answer,C

19.7 A pro#0Ct-maximizing competitive #0Crm uses just one input,x,Its production function is

q =8x

1=2

,The price of output is 16 and the factor price is 8,The amount of the factor that the

#0Crm demands is:

#28a#29 10.

#28b#29 22.63.

#28c#29 64.

#28d#29 48.

#28e#29 None of the above.

Topic,Pro#0Ct Maximization Di#0Eculty,1

#25 Correct Responses,88 Discrimination Index,27

Correct Answer,C

19.8 A pro#0Ct-maximizing competitive #0Crm uses just one input,x,Its production function is

q =8x

1=2

,The price of output is 40 and the factor price is 8,The amount of the factor that the

#0Crm demands is:

#28a#29 13.

#28b#29 35.78.

#28c#29 400.

#28d#29 384.

#28e#29 None of the above.

CHAPTER 19 Pro#0Ct Maximization 348

Topic,Pro#0Ct Maximization Di#0Eculty,2

#25 Correct Responses,36 Discrimination Index,28

Correct Answer,A

19.9 A competitive,pro#0Ct-maximizing #0Crm uses two inputs a and b,Its production function is

F#28a;b#29=a

1=2

+b

1=2

,Its output sells for $5 per unit,The price of input a is $1 per unit,If the price

of output rises to $6 per unit but factor prices do not change,

#28a#29 it will increase its purchases of factor a by11=4 units.

#28b#29 it will increase its purchases of factor a by9=4 units.

#28c#29 it will increase its purchases of factor a by3=4 units.

#28d#29 wewould need to know the price of factor b to be able to determine the change in demand for a.

#28e#29 none of the above is true.

Topic,Pro#0Ct Maximization Di#0Eculty,2

#25 Correct Responses,44 Discrimination Index,40

Correct Answer,A

19.10 A competitive #0Crm's production function is f#28x

1;x

2

#29=4x

1=2

1

+10x

1=2

2

,The price of factor 1

is 1 and the price of factor 2 is 1,The price of output is 2,What is the pro#0Ct-maximizing quantity

of output?

#28a#29 116

#28b#29 232

#28c#29 112

#28d#29 244

#28e#29 104

Topic,Pro#0Ct Maximization Di#0Eculty,2

#25 Correct Responses,44 Discrimination Index,40

Correct Answer,A

19.11 A competitive #0Crm's production function is f#28x

1;x

2

#29=4x

1=2

1

+6x

1=2

2

,The price of factor 1

is 1 and the price of factor 2 is 2,The price of output is 4,What is the pro#0Ct-maximizing quantity

of output?

#28a#29 68

#28b#29 136

#28c#29 64

#28d#29 148

#28e#29 56

MULTIPLE CHOICE 349

Topic,Pro#0Ct Maximization Di#0Eculty,2

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,B

19.12 Ji#0By-pol Consultants is paid $1,000,000 for each percent of the vote that Senator Sleaze

receives in the upcoming election,Sleaze's share of the vote is determined by the number of slan-

derous campaign ads run by Ji#0By-Pol according to the function S = 100N=#28N +1#29;where N is the

number of ads,If each ad costs $3,600 approximately how many ads should Ji#0By-pol buy in order

to maximize its pro#0Cts?

#28a#29 3,329

#28b#29 1,666

#28c#29 72

#28d#29 1,702

#28e#29 833

Topic,Pro#0Ct Maximization Di#0Eculty,2

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,B

19.13 Ji#0By-pol Consultants is paid $1,000,000 for each percent of the vote that Senator Sleaze

receives in the upcoming election,Sleaze's share of the vote is determined by the number of slan-

derous campaign ads run by Ji#0By-Pol according to the function S = 100N=#28N +1#29;where N is the

number of ads,If each ad costs $6,400 approximately how many ads should Ji#0By-pol buy in order

to maximize its pro#0Cts?

#28a#29 2,495

#28b#29 1,249

#28c#29 128

#28d#29 1,313

#28e#29 625

CHAPTER 19 Pro#0Ct Maximization 350

Topic,Pro#0Ct Maximization Di#0Eculty,2

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,C

19.14 A competitive #0Crm uses a single input,x; to produce its output,y,The #0Crm's production

function is given by y = x

3=2

for quantities of x between 0 and 4,For quantities of x greater than

4,the #0Crm's output is y =4+x,If the price of the output y is 1 and the price of the input x is 3,

howmuch x should the #0Crm use to maximize its pro#0Ct?

#28a#29 16=9

#28b#29 4

#28c#29 0

#28d#29 4=3

#28e#29 9=2

Topic,Pro#0Ct Maximization Di#0Eculty,1

#25 Correct Responses,80 Discrimination Index,40

Correct Answer,B

19.15 The production function is given by F#28L#29=6L

2=3

,Suppose that the cost per unit of labor

is 12 and the price of output is 6,how many units of labor will the #0Crm hire?

#28a#29 16

#28b#29 8

#28c#29 4

#28d#29 24

#28e#29 None of the above.

Topic,Pro#0Ct Maximization Di#0Eculty,1

#25 Correct Responses,80 Discrimination Index,40

Correct Answer,B

19.16 The production function is given by F#28L#29=6L

2=3

,Suppose that the cost per unit of labor

is 8 and the price of output is 6,how many units of labor will the #0Crm hire?

#28a#29 54

#28b#29 27

#28c#29 13.5

#28d#29 81

#28e#29 None of the above.

MULTIPLE CHOICE 351

Topic,Pro#0Ct Maximization Di#0Eculty,1

#25 Correct Responses,88 Discrimination Index,40

Correct Answer,A

19.17 The production function is given by f#28x#29=4x

1=2

,If the price of the commodity produced

is 80 per unit and the cost of the input is 20 per unit,howmuch pro#0Cts will the #0Crm makeifit

maximizes pro#0Cts?

#28a#29 1,280

#28b#29 638

#28c#29 2,564

#28d#29 1,265

#28e#29 643

Topic,Pro#0Ct Maximization Di#0Eculty,1

#25 Correct Responses,88 Discrimination Index,40

Correct Answer,A

19.18 The production function is given by f#28x#29=4x

1=2

,If the price of the commodity produced

is 80 per unit and the cost of the input is 35 per unit,howmuch pro#0Cts will the #0Crm makeifit

maximizes pro#0Cts?

#28a#29 731.43

#28b#29 363.71

#28c#29 1,466.86

#28d#29 716.43

#28e#29 368.71

Topic,Pro#0Ct Maximization Di#0Eculty,1

#25 Correct Responses,80 Discrimination Index,45

Correct Answer,C

19.19 The production function is f#28x

1;x

2

#29=x

1=2

1

x

1=2

2

,If the price of factor 1 is 8 and the price of

factor 2 is 4,in what proportions should the #0Crm use factors 1 and 2 if it wants to maximize pro#0Cts?

#28a#29 x

1

= x

2

#28b#29 x

1

=2x

2

#28c#29 x

1

=0:50x

2

#28d#29 We can't tell without knowing the price of output.

#28e#29 x

1

=4x

2

CHAPTER 19 Pro#0Ct Maximization 352

Topic,Pro#0Ct Maximization Di#0Eculty,1

#25 Correct Responses,80 Discrimination Index,45

Correct Answer,C

19.20 The production function is f#28x

1;x

2

#29=x

1=2

1

x

1=2

2

,If the price of factor 1 is 16 and the price

of factor 2 is 32,in what proportions should the #0Crm use factors 1 and 2 if it wants to maximize

pro#0Cts?

#28a#29 x

1

= x

2

#28b#29 x

1

=0:50x

2

#28c#29 x

1

=2x

2

#28d#29 We can't tell without knowing the price of output.

#28e#29 x

1

=32x

2

Topic,Pro#0Ct Maximization Di#0Eculty,2

#25 Correct Responses,82 Discrimination Index,20

Correct Answer,A

19.21 When Farmer Hoglund applies N pounds of fertilizer per acre,the marginal product of

fertilizer is 1,#28N=200#29 bushels of corn,If the price of corn is $1 per bushel and the price of fertilizer

is $0.40 per pound,then how many pounds of fertilizer per acre should Farmer Hoglund use in

order to maximize his pro#0Cts?

#28a#29 120

#28b#29 240

#28c#29 64

#28d#29 248

#28e#29 200

MULTIPLE CHOICE 353

Topic,Pro#0Ct Maximization Di#0Eculty,2

#25 Correct Responses,82 Discrimination Index,20

Correct Answer,A

19.22 When Farmer Hoglund applies N pounds of fertilizer per acre,the marginal product of

fertilizer is 1,#28N=200#29 bushels of corn,If the price of corn is $4 per bushel and the price of fertilizer

is $0.40 per pound,then how many pounds of fertilizer per acre should Farmer Hoglund use in

order to maximize his pro#0Cts?

#28a#29 180

#28b#29 360

#28c#29 94

#28d#29 368

#28e#29 200

Topic,Pro#0Ct Maximization Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,E

19.23 If the short run marginal cost of producing a good is $20 for the #0Crst 200 units and $30

for each additional unit beyond 200,then in the short run,if the market price of output is 29,a

pro#0Ct maximizing #0Crm will:

#28a#29 produce a level of output where marginal revenue equals marginal cost.

#28b#29 produce as much output as possible since there are constant returns to scale.

#28c#29 produce up to the point where average cost equals 29.

#28d#29 not produce at all,since marginal cost is increasing.

#28e#29 produce exactly 200 units.

Topic,Pro#0Ct Maximization Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,E

19.24 If the short run marginal cost of producing a good is $20 for the #0Crst 300 units and $30

for each additional unit beyond 300,then in the short run,if the market price of output is 27,a

pro#0Ct maximizing #0Crm will:

#28a#29 produce a level of output where marginal revenue equals marginal cost.

#28b#29 produce as much output as possible since there are constant returns to scale.

#28c#29 produce up to the point where average cost equals 27.

#28d#29 not produce at all,since marginal cost is increasing.

#28e#29 produce exactly 300 units.

CHAPTER 19 Pro#0Ct Maximization 354

Topic,Pro#0Ct Maximization Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,D

19.25 Diesel Dan is a contract truck driver,While his revenue is $2.50 per mile driven,the faster

he drives,the greater the risk of a speeding ticket,The cost of driving his truck one hour at a

speed of S miles per hour is

C#28S#29=e

S,#2860=3#29

To maximize his pro#0Ct,Dan should drive

#28a#29 60 miles per hour.

#28b#29 60.92 miles per hour.

#28c#29 62.75 miles per hour.

#28d#29 66.04 miles per hour.

#28e#29 70.20 miles per hour.

Topic,Pro#0Ct Maximization Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,D

19.26 Diesel Dan is a contract truck driver,While his revenue is $1.50 per mile driven,the faster

he drives,the greater the risk of a speeding ticket,The cost of driving his truck one hour at a

speed of S miles per hour is

C#28S#29=e

S,#2850=3#29

To maximize his pro#0Ct,Dan should drive

#28a#29 50 miles per hour.

#28b#29 50.41 miles per hour.

#28c#29 51.22 miles per hour.

#28d#29 54.51 miles per hour.

#28e#29 58.67 miles per hour.

MULTIPLE CHOICE 355

Topic,Pro#0Ct Maximization Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,B

19.27 During the heightofthepetrock craze in the 1970

0

s; the price elasticity of demand was

estimated to be 1.10,Since pet rocks have a marginal cost of zero,a pro#0Ct maximizing seller of pet

rocks would

#28a#29 increase prices.

#28b#29 decrease prices.

#28c#29 leave prices unchanged.

#28d#29 need more detailed market information before making any pricing changes.

#28e#29 diversify into selling Karen Carpenter LP's.

Topic,Pro#0Ct Maximization Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,B

19.28 During the heightofthepetrock craze in the 1970

0

s; the price elasticity of demand was

estimated to be 1.50,Since pet rocks have a marginal cost of zero,a pro#0Ct maximizing seller of pet

rocks would

#28a#29 increase prices.

#28b#29 decrease prices.

#28c#29 leave prices unchanged.

#28d#29 need more detailed market information before making any pricing changes.

#28e#29 diversify into selling Karen Carpenter LP's.

CHAPTER 19 Pro#0Ct Maximization 356

Topic,Pro#0Ct Maximization Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,B

19.29 Philip owns and operates a gas station,Philip works 40 hours a week managing the station

but doesn't draw a salary,He could earn $700 a week doing the same work for Terrance,The store

owes its bank $100,000 and Philip has invested $100,000 of his own money,If Philip's accounting

pro#0Cts are $1,000 per week while the interest on his bank debt is $400 per week,the business'

economic pro#0Cts are

#28a#29 $0 per week.

#28b#29 $,100 per week.

#28c#29 $600 per week.

#28d#29 $300 per week.

#28e#29 $1,000 per week.

Topic,Pro#0Ct Maximization Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,B

19.30 Philip owns and operates a gas station,Philip works 40 hours a week managing the station

but doesn't draw a salary,He could earn $700 a week doing the same work for Terrance,The store

owes its bank $100,000 and Philip has invested $100,000 of his own money,If Philip's accounting

pro#0Cts are $1,000 per week while the interest on his bank debt is $500 per week,the business'

economic pro#0Cts are

#28a#29 $0 per week.

#28b#29 $,200 per week.

#28c#29 $500 per week.

#28d#29 $300 per week.

#28e#29 $1,000 per week.

Essay Pro#0Ct Maximization

Topic,Pro#0Ct Maximization Di#0Eculty,3

#25 Correct Responses,0 Discrimination Index,0

19.1 A competitive #0Crm has a production function described as follows,"Weekly output is the

square root of the minimum of the number of units of capital and the number of units of labor

employed per week." Suppose that in the short run this #0Crm must use 16 units of capital but can

vary its amount of labor freely.a#29Write down a formula that describes the marginal product of

labor in the short run as a function of the amount of labor used,#28Be careful at the boundaries.#29

b#29 If the wage is w =1and the price of output is p =4;howmuch labor will the #0Crm demand in

the short run? c#29 What if w =1and p = 10? d#29 Write down an equation for the #0Crm's short run

demand for labor as function of w and p.

Answer,a#29 MP =1=#282L

1=2

#29 if L#3C16;MP=0if L#3E16,b#294 c#2916 d#29 L =#28p=2w#29

2

Chapter 20

True-False Cost Minimization

Topic,Cost Minimization Di#0Eculty,2

#25 Correct Responses,96 Discrimination Index,25

Correct Answer,True

20.1 Quasi-#0Cxed costs are those costs that can be avoided if and only if a #0Crm produces zero

output.

Topic,Cost Minimization Di#0Eculty,1

#25 Correct Responses,79 Discrimination Index,21

Correct Answer,True

20.2 If there are increasing returns to scale,then average costs are a decreasing function of

output.

Topic,Cost Minimization Di#0Eculty,2

#25 Correct Responses,33 Discrimination Index,38

Correct Answer,False

20.3 If there are increasing returns to scale,then costs per unit of output decrease as you move

downward and to the right along an isocost line.

Topic,Cost Minimization Di#0Eculty,2

#25 Correct Responses,69 Discrimination Index,45

Correct Answer,False

20.4 If the production function is f#28x

1;x

2

#29=minfx

1;x

2

g;then the cost function is c#28w

1;w

2;y#29=

minfw

1;w

2

gy.

Topic,Cost Minimization Di#0Eculty,1

#25 Correct Responses,46 Discrimination Index,30

Correct Answer,False

20.5 The conditional factor demand function for factor 1 is a function x

1

#28w

1;w

2;y#29that tells the

ratio of price to output for an optimal factor choice of the #0Crm.

TRUE-FALSE 359

Topic,Cost Minimization Di#0Eculty,1

#25 Correct Responses,88 Discrimination Index,30

Correct Answer,False

20.6 The cost function c#28w

1;w

2;y#29 expresses the cost per unit of output of producing y units of

output if equal amounts of both factors are used.

Topic,Cost Minimization Di#0Eculty,2

#25 Correct Responses,36 Discrimination Index,35

Correct Answer,False

20.7 A competitive,cost-minimizing #0Crm has the production function f#28x;y#29=x+2yand uses

positive amounts of both inputs,If the price of x doubles and the price of y triples,then the cost

of production will more than double.

Topic,Cost Minimization Di#0Eculty,2

#25 Correct Responses,37 Discrimination Index,27

Correct Answer,False

20.8 The total cost function c#28w

1;w

2;y#29 expresses the cost per unit of output as a function of

input prices and output.

Topic,Cost Minimization Di#0Eculty,3

#25 Correct Responses,26 Discrimination Index,25

Correct Answer,False

20.9 A #0Crm uses a single variable input x to produce outputs according to the production func-

tion f#28x#29 = 500x,4x

2

,This #0Crm has #0Cxed costs of $300,This #0Crm's short run marginal cost curve

lies below its short run average variable cost curve for all positivevalues of x.

Topic,Cost Minimization Di#0Eculty,3

#25 Correct Responses,26 Discrimination Index,25

Correct Answer,False

20.10 A #0Crm uses a single variable input x to produce outputs according to the production func-

tion f#28x#29 = 300x,5x

2

,This #0Crm has #0Cxed costs of $300,This #0Crm's short run marginal cost curve

lies below its short run average variable cost curve for all positivevalues of x.

Multiple Choice Cost Minimization

Topic,Cost Minimization Di#0Eculty,1

#25 Correct Responses,53 Discrimination Index,30

Correct Answer,A

20.1 George runs a cookie factory,His cookies are made with sugar,peanut oil,and soybean oil.

The number of boxes of cookies that he produces is f#28su;po;so#29=minfsu;po+2sog where su is the

number of bags of sugar,po the number of canisters of peanut oil,and so the number of canisters

of soybean oil that he uses,The price of a bag of sugar is 11,The price of a canister of peanut

oil is 6,The price of a canister of soybean oil is 20,If George makes 254 boxes of cookies in the

cheapest way possible,how many canisters of soybean oil will he use?

#28a#29 127

#28b#29 0

#28c#29 84.67

#28d#29 169.33

#28e#29 42.33

Topic,Cost Minimization Di#0Eculty,1

#25 Correct Responses,53 Discrimination Index,30

Correct Answer,A

20.2 George runs a cookie factory,His cookies are made with sugar,peanut oil,and soybean oil.

The number of boxes of cookies that he produces is f#28su;po;so#29=minfsu;po+2sog where su is the

number of bags of sugar,po the number of canisters of peanut oil,and so the number of canisters

of soybean oil that he uses,The price of a bag of sugar is 5,The price of a canister of peanut oil is

9,The price of a canister of soybean oil is 13,If George makes 254 boxes of cookies in the cheapest

way possible,how many canisters of soybean oil will he use?

#28a#29 127

#28b#29 0

#28c#29 84.67

#28d#29 169.33

#28e#29 42.33

MULTIPLE CHOICE 361

Topic,Cost Minimization Di#0Eculty,1

#25 Correct Responses,66 Discrimination Index,50

Correct Answer,A

20.3 A #0Crm's production function is q =16x

0:50

y

0:50

where x and y are the amounts of factors

x and y that the #0Crm uses as inputs,If the #0Crm is minimizing unit costs,and if the price of fac-

tor x is 6 times the price of factor y; the ratio in which the #0Crm will use factors x and y is closest to:

#28a#29 x=y =0:17.

#28b#29 x=y =0:33.

#28c#29 x=y =1.

#28d#29 x=y =2.

#28e#29 x=y =6.

Topic,Cost Minimization Di#0Eculty,1

#25 Correct Responses,66 Discrimination Index,50

Correct Answer,A

20.4 A #0Crm's production function is q =26x

0:33

y

0:67

where x and y are the amounts of factors

x and y that the #0Crm uses as inputs,If the #0Crm is minimizing unit costs,and if the price of fac-

tor x is 6 times the price of factor y; the ratio in which the #0Crm will use factors x and y is closest to:

#28a#29 x=y =0:08.

#28b#29 x=y =0:25.

#28c#29 x=y =0:50.

#28d#29 x=y =2:40.

#28e#29 x=y = 12.

Topic,Cost Minimization Di#0Eculty,1

#25 Correct Responses,84 Discrimination Index,13

Correct Answer,D

20.5 A #0Crm has #0Cxed costs of 9,000,Its short run production function is y =3x

1=2;where x is

the amountofvariable factor it uses,The price of the variable factor is $ 5,000 per unit,Where y

is the amount of output,the short run total cost function is:

#28a#29 9;000=y+5;000.

#28b#29 14;000y.

#28c#29 9;000+ 5;000y.

#28d#29 9;000+555:56y

2

.

#28e#29 9;000y+0:56y

2

.

CHAPTER 20 Cost Minimization 362

Topic,Cost Minimization Di#0Eculty,1

#25 Correct Responses,84 Discrimination Index,13

Correct Answer,D

20.6 A #0Crm has #0Cxed costs of 7,000,Its short run production function is y =8x

1=2;where x is

the amountofvariable factor it uses,The price of the variable factor is $ 4,000 per unit,Where y

is the amount of output,the short run total cost function is:

#28a#29 7;000=y+4;000.

#28b#29 11;000y.

#28c#29 7;000+ 4;000y.

#28d#29 7;000+62:50y

2

.

#28e#29 7;000y+0:06y

2

.

Topic,Cost Minimization Di#0Eculty,2

#25 Correct Responses,81 Discrimination Index,33

Correct Answer,C

20.7 A #0Crm has two factories,One factory has the cost function c

1

#28y

1

#29=2y

2

1

+90and the other

has the cost function c

2

#28y

2

#29=6y

2

2

+40,If the #0Crm wishes to produce a total of 32 units as cheaply

as possible,how many units will be produced in the second factory?

#28a#29 7

#28b#29 2

#28c#29 8

#28d#29 14

#28e#29 None of the above.

Topic,Cost Minimization Di#0Eculty,1

#25 Correct Responses,82 Discrimination Index,10

Correct Answer,A

20.8 A company can rent one of two copying machines,The #0Crst costs $34 a month to rent

and costs an additional 2 cents per copy to use,The second costs $107 a month to rent and an

additional 1 cent per copy to use,How many copies would the company need to make per month

in order for it to be worthwhile to rent the second machine?

#28a#29 7,300

#28b#29 13,300

#28c#29 12,400

#28d#29 6,900

#28e#29 None of the above.

MULTIPLE CHOICE 363

Topic,Cost Minimization Di#0Eculty,2

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,A

20.9 A #0Crm produces ping pong balls using two inputs,When input prices are #2815;7#29 the #0Crm

uses the input bundle #2817;71#29,When the input prices are #2812;24#29 the #0Crm uses the bundle #2877;4#29.

The amount of output is the same in both cases,Is this behavior consistent with WACM?

#28a#29 Yes.

#28b#29 No.

#28c#29 It depends on the level of #0Cxed costs.

#28d#29 Wehave to know the price of output before we can test WACM.

#28e#29 It depends on the ratio of variable to #0Cxed costs.

Topic,Cost Minimization Di#0Eculty,1

#25 Correct Responses,82 Discrimination Index,45

Correct Answer,B

20.10 As assistant vice-presidentincharge of production for a computer #0Crm,you are asked to

calculate the cost of producing 170 computers,The production function is q = minfx;yg where x

and y are the amounts of two factors used,The price of x is 18 and the price of y is 10,What is

your answer?

#28a#29 2,580

#28b#29 4,760

#28c#29 8,460

#28d#29 6,180

#28e#29 None of the above.

CHAPTER 20 Cost Minimization 364

Topic,Cost Minimization Di#0Eculty,3

#25 Correct Responses,25 Discrimination Index,10

Correct Answer,B

20.11 As head of the planning commission of Eastern Motors,your job is to determine where

to locate a new plant,The only inputs used in your cars are steel and labor and the production

function is Cobb-Douglas where f#28S;L#29=S

:5

L

f

:5gwhere S is tons of steel and L is units of labor.

You can locate your plant either in country A or country B,In country A,steel costs $7 #28U.S.#29 a

ton and labor costs $7 #28U.S.#29 per unit,In country B; steel costs $8 #28U.S.#29 per ton and labor costs

$6 #28U.S.#29 per unit,In which country should the company locate its new plant so as to minimize

costs per unit of output?

#28a#29 Country A

#28b#29 Country B

#28c#29 It doesn't matter,because two locations are equally costly.

#28d#29 Country A if output is greater than 14,otherwise Country B.

#28e#29 There is not enough information to enable us to tell.

Topic,Cost Minimization Di#0Eculty,2

#25 Correct Responses,48 Discrimination Index,59

Correct Answer,D

20.12 A competitive #0Crm uses two inputs,x and y.Total output is the square root of x times

the square root of y,The price of x is 17 and the price of y is 11,The company minimizes its costs

per unit of output and spends $517 on x.Howmuch does it spend on y?

#28a#29 766

#28b#29 480

#28c#29 655

#28d#29 517

#28e#29 None of the above.

MULTIPLE CHOICE 365

Topic,Cost Minimization Di#0Eculty,3

#25 Correct Responses,53 Discrimination Index,44

Correct Answer,B

20.13 A #0Crm has the production function Q = KL where K is the amount of capital and L is the

amount of labor it uses as inputs,The cost per unit of capital is a rental fee r and the cost per

unit of labor is a wage w,The conditional labor demand function,L#28Q;w;r#29 is:

#28a#29 Qwr.

#28b#29 the square root of Qr=w.

#28c#29 Qw=r.

#28d#29 the square root of Q#2Frw.

#28e#29 Q#2Fwr.

Topic,Cost Minimization Di#0Eculty,2

#25 Correct Responses,60 Discrimination Index,32

Correct Answer,C

20.14 Joe's Bar and Grill uses two inputs,beer and pretzels,When the price of beer was $10 a

case and the price of pretzels was $20 a case,Joe used 1 case of beer and 2 cases of pretzels a day.

When the price of beer was $20 a case and the price of pretzels was $10 a case,Joe used 2 cases

of beer and 1 case of pretzels a day,Joe produced the same output in each of these circumstances.

From this information,we can conclude:

#28a#29 Joe has a constant returns to scale production function.

#28b#29 Joe has a cost function that exhibits increasing returns.

#28c#29 Joe is not minimizing costs.

#28d#29 Joe's behavior is consistent with pro#0Ct maximization.

#28e#29 Joe's production function exhibits diminishing marginal product.

CHAPTER 20 Cost Minimization 366

Topic,Cost Minimization Di#0Eculty,3

#25 Correct Responses,41 Discrimination Index,51

Correct Answer,D

20.15 The production function for drangles is,f#28x

1;x

2

#29=#28minfx

1;3x

2

g#29

1=2

wherex

1

is the amount

of sugar and x

2

is the amount of dough used,At the factor prices,w

1

= w

2

=1;the minimum cost

of producing y drangles is:

#28a#29 4y

1=2

.

#28b#29 #283=4#29y

1=2

.

#28c#29 #283=4#29y

2

.

#28d#29 #284=3#29y

2

.

#28e#29 None of the above.

Topic,Cost Minimization Di#0Eculty,1

#25 Correct Responses,69 Discrimination Index,49

Correct Answer,B

20.16 An orange grower has discovered a process for producing oranges that requires two inputs.

The production function is Q = minf4x

1;x

2

g where x

1

and x

2

are the amounts of inputs 1 and 2

that he uses,The prices of these two inputs are w

1

=$4and w

2

=$2;respectively,The minimum

cost of producing 280 units is therefore:

#28a#29 $1,680.

#28b#29 $840.

#28c#29 $2,240.

#28d#29 $560.

#28e#29 $1,120.

MULTIPLE CHOICE 367

Topic,Cost Minimization Di#0Eculty,1

#25 Correct Responses,69 Discrimination Index,49

Correct Answer,B

20.17 An orange grower has discovered a process for producing oranges that requires two inputs.

The production function is Q = minf2x

1;x

2

g where x

1

and x

2

are the amounts of inputs 1 and 2

that he uses,The prices of these two inputs are w

1

=$2and w

2

=$4;respectively,The minimum

cost of producing 80 units is therefore:

#28a#29 $480.

#28b#29 $400.

#28c#29 $640.

#28d#29 $160.

#28e#29 $320.

Topic,Cost Minimization Di#0Eculty,2

#25 Correct Responses,51 Discrimination Index,41

Correct Answer,B

20.18 Roberta runs a dress factory,She produces 50 dresses per day,using labor and electricity.

She uses a combination of labor and electricity that produces 50 dresses per day in the cheapest

possible way,She can hire as much labor as she wants at a cost of 20 cents per minute,She can

use as much electricity as she wants at a cost of 10 cents per minute,Her production isoquants are

smooth curves without kinks and she uses positive amounts of both inputs.

#28a#29 The marginalproduct of a kilowatt-hour of electricityistwice the marginalproduct of a minute of labor.

#28b#29 The marginalproduct of a minute of labor is twice the marginal product of a kilowatt-hour of electricity.

#28c#29 The marginalproduct ofa minuteoflaboris equalto the marginalproduct ofakilowatt-hourofelectricity.

#28d#29 There is not enough information to determine the ratio of marginal products,We'd have to know the

production function to know this.

#28e#29 The marginal product of a minute of labor plus the marginal product of a kilowatt-hour of labor must

equal 50=#2820+10#29.

CHAPTER 20 Cost Minimization 368

Topic,Cost Minimization Di#0Eculty,2

#25 Correct Responses,27 Discrimination Index,46

Correct Answer,D

20.19 A competitive #0Crm has the three-factor production function f#28x;y;z#29=#28x+y#29

1=2

z

1=2

,The

factor prices used to be w

x

=1;w

y

=2;and w

z

=3,Suppose that the price of factor y doubled

while the other two prices stayed the same,Then the cost of production:

#28a#29 increased by more than 10#25 but less than 50#25.

#28b#29 increased by 50#25.

#28c#29 doubled.

#28d#29 stayed the same.

#28e#29 increased by more than 50#25,but did not double.

Topic,Cost Minimization Di#0Eculty,2

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,C

20.20 A competitive #0Crm uses three factors of production,Its production function is f#28x;y;z#29=

#28x+y#29

1=2

z

1=2

,Originally the factor prices were w

x

=1;w

y

=2;and w

z

=3,The prices of factors x

and z decreased to half of their previous levels,but the price of factor y stayed constant,The cost

of production:

#28a#29 decreased by more than half.

#28b#29 decreased by one third.

#28c#29 decreased by exactly one half.

#28d#29 stayed constant.

#28e#29 decreased by less than one third.

Topic,Cost Minimization Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,C

20.21 A competitive #0Crm with output y has a production function,y =#282x

1

+x

2

#29

1=2

where x

1

and

x

2

are inputs used in production,The #0Crm produces output minimizing cost,With input prices w

1

and w

2; which of the following is true?

#28a#29 The #0Crm has L shaped isoquants.

#28b#29 The #0Crm must use the cheaper input.

#28c#29 The #0Crm must use only input x

1

if w

1

#3C 2w

2

.

#28d#29 The technology has increasing returns to scale.

#28e#29 More than one of the above is true.

MULTIPLE CHOICE 369

Topic,Cost Minimization Di#0Eculty,0

#25 Correct Responses,39 Discrimination Index,32

Correct Answer,D

20.22 Suppose that the production function is f#28x

1;x

2

#29=#28minfx

1;2x

2

g#29

:5

,Then:

#28a#29 there are constant returns to scale.

#28b#29 the cost function is a min function.

#28c#29 if the price of x

1

is more than twice the price of x

2; only x

2

is used in production.

#28d#29 a cost minimizing #0Crm producing 5 units of output will use 25 units of x

1

and some x

2

.

#28e#29 the cost function is a linear function of output.

Topic,Cost Minimization Di#0Eculty,2

#25 Correct Responses,30 Discrimination Index,55

Correct Answer,B

20.23 If the production function is given by f#28x

1;x

2;x

3;x

4

#29=minfx

1;x

2

g+minfx

3;x

4

gand the

prices of inputs #28x

1;x

2;x

3;x

4

#29 are #282;1;5;3#29; the minimum cost of producing one unit of output is

closest to:

#28a#29 1.

#28b#29 3.

#28c#29 4.

#28d#29 8.

#28e#29 11.

Topic,Cost Minimization Di#0Eculty,2

#25 Correct Responses,51 Discrimination Index,21

Correct Answer,A

20.24 Two #0Crms,Wickedly E#0Ecient Widgets and Wildy Nepotistic Widgets both produce wid-

gets,using the same production function y = K

1=2

L

1=2

where K is the amount of labor used and

L is the amount of capital used,Each company can hire labor at $1 per unit of labor and capital

at $9 per unit,Each company produces 90 per week,WEW chooses its input combinations to

produce in the cheapest way possible,Although it produces the same output per week as WEW,

WNW is required by its dotty CEO to use twice as much labor as WEW,Howmuch higher are

WNW's total costs per week than WEW's?

#28a#29 $135

#28b#29 $270

#28c#29 $275

#28d#29 $67.50

#28e#29 $132

CHAPTER 20 Cost Minimization 370

Topic,Cost Minimization Di#0Eculty,2

#25 Correct Responses,51 Discrimination Index,21

Correct Answer,A

20.25 Two #0Crms,Wickedly E#0Ecient Widgets and Wildy Nepotistic Widgets both produce wid-

gets,using the same production function y = K

1=2

L

1=2

where K is the amount of labor used and

L is the amount of capital used,Each company can hire labor at $1 per unit of labor and capital

at $4 per unit,Each company produces 40 per week,WEW chooses its input combinations to

produce in the cheapest way possible,Although it produces the same output per week as WEW,

WNW is required by its dotty CEO to use twice as much labor as WEW,Howmuch higher are

WNW's total costs per week than WEW's?

#28a#29 $40

#28b#29 $80

#28c#29 $85

#28d#29 $20

#28e#29 $37

Topic,Cost Minimization Di#0Eculty,2

#25 Correct Responses,89 Discrimination Index,15

Correct Answer,C

20.26 A new metal alloy is discovered that uses copper and zinc in #0Cxed proportions where each

unit of the alloy requires 5 units of zinc and 5 units of copper,If no other inputs are required,if

the price of zinc is 3 per unit,and the price of copper is 4 per unit and if total output is 2,000

units,what is the average cost per unit of output?

#28a#29 0.60

#28b#29 2.40

#28c#29 35

#28d#29 38

#28e#29 42

MULTIPLE CHOICE 371

Topic,Cost Minimization Di#0Eculty,2

#25 Correct Responses,89 Discrimination Index,15

Correct Answer,C

20.27 A new metal alloy is discovered that uses copper and zinc in #0Cxed proportions where each

unit of the alloy requires 2 units of zinc and 5 units of copper,If no other inputs are required,if

the price of zinc is 2 per unit,and the price of copper is 5 per unit and if total output is 2,000

units,what is the average cost per unit of output?

#28a#29 1

#28b#29 4

#28c#29 29

#28d#29 31

#28e#29 36

Topic,Cost Minimization Di#0Eculty,0

#25 Correct Responses,78 Discrimination Index,21

Correct Answer,A

20.28 The production function is f#28L;M#29=2L

1=2

M

1=2

where L is the number of units of labor

and M is the number of machines,If the amounts of both factors can be varied,and if the cost

of labor is $16 per unit and the cost of using machines is $49 per machine,then the total cost of

producing 12 units of output is:

#28a#29 336.

#28b#29 390.

#28c#29 192.

#28d#29 672.

#28e#29 168.

CHAPTER 20 Cost Minimization 372

Topic,Cost Minimization Di#0Eculty,0

#25 Correct Responses,78 Discrimination Index,21

Correct Answer,A

20.29 The production function is f#28L;M#29=4L

1=2

M

1=2

where L is the number of units of labor

and M is the number of machines,If the amounts of both factors can be varied,and if the cost

of labor is $25 per unit and the cost of using machines is $16 per machine,then the total cost of

producing 16 units of output is:

#28a#29 160.

#28b#29 328.

#28c#29 256.

#28d#29 640.

#28e#29 80.

Topic,Cost Minimization Di#0Eculty,2

#25 Correct Responses,22 Discrimination Index,27

Correct Answer,D

20.30 Dou#0Belberry juice is a mild intoxicant,prized for facilitating conversation among university

administrators,but not otherwise valued,The berry does not travel well,so it must be squeezed on

the farm where it is grown,Baskets of berries are produced using ounces of seeds,S; and hours la-

bor,L; according to a production function B = S

1=2

L

1=2

,Gallons of Juice,J; are made from baskets

of berries and hours of labor according to the production function J = minfB;Lg,If seeds cost 9

per ounce and labor costs 1 per hour,what is the cost of producing each gallon of dou#0Belberry juice?

#28a#29 14

#28b#29 6

#28c#29 3

#28d#29 7

#28e#29 Since there are not constant returns to scale,the cost per gallon depends on the number of gallons

produced.

MULTIPLE CHOICE 373

Topic,Cost Minimization Di#0Eculty,2

#25 Correct Responses,22 Discrimination Index,27

Correct Answer,D

20.31 Dou#0Belberry juice is a mild intoxicant,prized for facilitating conversation among university

administrators,but not otherwise valued,The berry does not travel well,so it must be squeezed on

the farm where it is grown,Baskets of berries are produced using ounces of seeds,S; and hours la-

bor,L; according to a production function B = S

1=2

L

1=2

,Gallons of Juice,J; are made from baskets

of berries and hours of labor according to the production function J = minfB;Lg,If seeds cost 4

per ounce and labor costs 4 per hour,what is the cost of producing each gallon of dou#0Belberry juice?

#28a#29 24

#28b#29 8

#28c#29 4

#28d#29 12

#28e#29 Since there are not constant returns to scale,the cost per gallon depends on the number of gallons

produced.

Topic,Cost Minimization Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,B

20.32 Nadine has a production function 4x

1

+x

2

,If the factor prices are 12 for factor 1 and 2 for

factor 2,howmuch will it cost her to produce 60 units of output?

#28a#29 3,000

#28b#29 120

#28c#29 180

#28d#29 1,590

#28e#29 150

CHAPTER 20 Cost Minimization 374

Topic,Cost Minimization Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,B

20.33 Nadine has a production function 3x

1

+x

2

,If the factor prices are 3 for factor 1 and 5 for

factor 2,howmuch will it cost her to produce 20 units of output?

#28a#29 280

#28b#29 20

#28c#29 100

#28d#29 190

#28e#29 60

Topic,Cost Minimization Di#0Eculty,2

#25 Correct Responses,76 Discrimination Index,60

Correct Answer,A

20.34 The production function is f#28L;M#29=4L

1=2

M

1=2;where L is the number of units of labor

and M is the number of machines used,If the cost of labor is $36 per unit and the cost of machines

is $64 per unit,then the total cost of producing 6 units of output will be:

#28a#29 144.

#28b#29 300.

#28c#29 216.

#28d#29 288.

#28e#29 None of the above.

Topic,Cost Minimization Di#0Eculty,2

#25 Correct Responses,76 Discrimination Index,60

Correct Answer,A

20.35 The production function is f#28L;M#29=4L

1=2

M

1=2;where L is the number of units of labor

and M is the number of machines used,If the cost of labor is $25 per unit and the cost of machines

is $64 per unit,then the total cost of producing 6 units of output will be:

#28a#29 120.

#28b#29 267.

#28c#29 150.

#28d#29 240.

#28e#29 None of the above.

MULTIPLE CHOICE 375

Topic,Cost Minimization Di#0Eculty,2

#25 Correct Responses,82 Discrimination Index,40

Correct Answer,E

20.36 In the short run,a #0Crm which has production function F#28L;M#29=4L

1=2

M

1=2

must use 25

machines,If the cost of labor is 10 per unit and the cost of machines is 4 per unit,the short run

total cost of producing 100 units of output is:

#28a#29 700.

#28b#29 400.

#28c#29 1,000.

#28d#29 700.

#28e#29 350.

Topic,Cost Minimization Di#0Eculty,2

#25 Correct Responses,82 Discrimination Index,40

Correct Answer,E

20.37 In the short run,a #0Crm which has production function F#28L;M#29=4L

1=2

M

1=2

must use 9

machines,If the cost of labor is 11 per unit and the cost of machines is 5 per unit,the short run

total cost of producing 132 units of output is:

#28a#29 1,056.

#28b#29 660.

#28c#29 1,452.

#28d#29 2,752.

#28e#29 1,376.

CHAPTER 20 Cost Minimization 376

Topic,Cost Minimization Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,A

20.38

Al's production function for deer is f#28x

1;x

2

#29=#282x

1

+x

2

#29

1=2

where x

1

is the amount of plastic and

x

2

is the amountofwood used,If the cost of plastic is $8 per unit and the cost of wood is $2 per

unit,then the cost of producing 6 deer is:

#28a#29 72.

#28b#29 108.

#28c#29 144.

#28d#29 12.

#28e#29 24.

Topic,Cost Minimization Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,A

20.39

Al's production function for deer is f#28x

1;x

2

#29=#282x

1

+x

2

#29

1=2

where x

1

is the amount of plastic and

x

2

is the amountofwood used,If the cost of plastic is $10 per unit and the cost of wood is $2 per

unit,then the cost of producing 9 deer is:

#28a#29 162.

#28b#29 198.

#28c#29 405.

#28d#29 18.

#28e#29 45.

MULTIPLE CHOICE 377

Topic,Cost Minimization Di#0Eculty,0

#25 Correct Responses,55 Discrimination Index,39

Correct Answer,D

20.40 A #0Crm has production function f#28x

1;x

2;x

3;x

4

#29=minfx

1;x

2

g+minfx

3;x

4

g,This #0Crm faces

competitive factor markets where the prices for the four factors are w

1

=3;w

2

=8;w

3

=3and

w

4

=7,The #0Crm must use at least 20 units of factor 2,The cost of producing 100 units in the

cheapest possible way is:

#28a#29 1,500

#28b#29 600

#28c#29 1,180

#28d#29 1,020

#28e#29 300

Topic,Cost Minimization Di#0Eculty,0

#25 Correct Responses,55 Discrimination Index,39

Correct Answer,D

20.41 A #0Crm has production function f#28x

1;x

2;x

3;x

4

#29=minfx

1;x

2

g+minfx

3;x

4

g,This #0Crm faces

competitive factor markets where the prices for the four factors are w

1

=6;w

2

=8;w

3

=6and

w

4

=3,The #0Crm must use at least 20 units of factor 2,The cost of producing 100 units in the

cheapest possible way is:

#28a#29 1,400

#28b#29 900

#28c#29 1,160

#28d#29 1,000

#28e#29 300

CHAPTER 20 Cost Minimization 378

Topic,Cost Minimization Di#0Eculty,0

#25 Correct Responses,47 Discrimination Index,31

Correct Answer,C

20.42 The law #0Crm of Dewey,Cheatham,and Howe specializes in accident injury claims,The

#0Crm charges its clients 25#25 of any damage award given,The only cost to the #0Crm of produc-

ing an accident injury claim is the time spentby a junior partner working on the case,Junior

partners are paid $100 per hour for this drudgery,If the #0Crm is suing for damages of $250,000

and if its chances of winning a case are 1,#281=25h#29; where h is the number of hours spentwork-

ing on the case,then to maximize its pro#0Cts,how many hours should it spend working on the case?

#28a#29 15

#28b#29 25

#28c#29 5

#28d#29 7.50

#28e#29 None of the above.

Topic,Cost Minimization Di#0Eculty,0

#25 Correct Responses,47 Discrimination Index,31

Correct Answer,C

20.43 The law #0Crm of Dewey,Cheatham,and Howe specializes in accident injury claims,The

#0Crm charges its clients 25#25 of any damage award given,The only cost to the #0Crm of produc-

ing an accident injury claim is the time spentby a junior partner working on the case,Junior

partners are paid $100 per hour for this drudgery,If the #0Crm is suing for damages of $490,000

and if its chances of winning a case are 1,#281=25h#29; where h is the number of hours spentwork-

ing on the case,then to maximize its pro#0Cts,how many hours should it spend working on the case?

#28a#29 21

#28b#29 35

#28c#29 7

#28d#29 10.50

#28e#29 None of the above.

MULTIPLE CHOICE 379

Topic,Cost Minimization Di#0Eculty,3

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,B

20.44 A #0Crm with the production function f#28x

1;x

2;x

3;x

4

#29=minfx

1;x

2;x

3;x

4

gfaces input prices

w

1

=1;w

2

=5;w

3

=5;w

4

=4for factors 1,2,3 and 4,The #0Crm must use at least 10 units of factor

2,The lowest cost at which it can produce 100 units of output is:

#28a#29 900.

#28b#29 540

#28c#29 1,500

#28d#29 860

#28e#29 500

Topic,Cost Minimization Di#0Eculty,3

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,B

20.45 A #0Crm with the production function f#28x

1;x

2;x

3;x

4

#29=minfx

1;x

2;x

3;x

4

gfaces input prices

w

1

=5;w

2

=6;w

3

=4;w

4

=2for factors 1,2,3 and 4,The #0Crm must use at least 15 units of factor

2,The lowest cost at which it can produce 100 units of output is:

#28a#29 800.

#28b#29 715

#28c#29 1,700

#28d#29 600

#28e#29 700

Topic,Cost Minimization Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,E

20.46 If output is produced according to Q =4L+6K; the price of K is $12,and the price of L

is $4,then the cost minimizing combination of K and L capable of producing 72 units of output is

#28a#29 L = 9 and K =6.

#28b#29 L = 4 and K = 12.

#28c#29 L = 18 and K = 12.

#28d#29 L = 0 and K = 12.

#28e#29 L = 18 and K =0.

CHAPTER 20 Cost Minimization 380

Topic,Cost Minimization Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,E

20.47 If output is produced according to Q =4L+6K; the price of K is $12,and the price of L is

$12,then the cost minimizing combination of K and L capable of producing 24 units of output is

#28a#29 L = 3 and K =2.

#28b#29 L = 12 and K = 12.

#28c#29 L = 6 and K =4.

#28d#29 L = 0 and K =4.

#28e#29 L = 6 and K =0.

Topic,Cost Minimization Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,B

20.48 If output is produced according to Q =4LK; the price of K is $10,and the price of L is

$10,then the cost minimizing combination of K and L capable of producing 16 units of output is

#28a#29 L = 4 and K =1.

#28b#29 L = 2 and K =2.

#28c#29 L = 1 and K =1.

#28d#29 L = 8 and K =8.

#28e#29 L = 1 and K =4.

Topic,Cost Minimization Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,B

20.49 If output is produced according to Q =4LK; the price of K is $10,and the price of L is

$40,then the cost minimizing combination of K and L capable of producing 64 units of output is

#28a#29 L = 16 and K =1.

#28b#29 L = 2 and K =8.

#28c#29 L = 2 and K =2.

#28d#29 L = 32 and K = 32.

#28e#29 L = 1 and K = 16.

MULTIPLE CHOICE 381

Topic,Cost Minimization Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,C

20.50 If it costs $30 to set up and later clean a bagel press and bagels cost $1 per week,per

bagel,to store,how many times should the bagel press be run eachweek to produce 540 bagels a

week to be sold continuously?

#28a#29 Once.

#28b#29 Twice.

#28c#29 3 times.

#28d#29 4 times.

#28e#29 5 times.

Topic,Cost Minimization Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,C

20.51 If it costs $10 to set up and later clean a bagel press and bagels cost $1 per week,per

bagel,to store,how many times should the bagel press be run eachweek to produce 500 bagels a

week to be sold continuously?

#28a#29 Once.

#28b#29 Twice.

#28c#29 3 times.

#28d#29 4 times.

#28e#29 5 times.

Topic,Cost Minimization Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,C

20.52 A politician facing re-election can win votes according to the following process:

V = 500S

0:30

M

0:50

where S is hours of making campaign speeches,and M is the number of #0Dyers mailed,If making

speeches costs $10 per hour,mailing #0Dyers costs $0.50 per #0Dyer,and $8,000 are available to spend

on the campaign,Assuming the politician wants to maximize votes,how should the budget be

allocated between speeches and mailing #0Dyers?

#28a#29 No speeches should be given,16,000 #0Dyers should be mailed.

#28b#29 400 hours of speeches should be given,8,000 #0Dyers should be mailed out.

#28c#29 300 hours of speeches should be given,10,000 #0Dyers should be mailed out.

#28d#29 3,000 hours of speeches should be given,5,000 #0Dyers should be mailed out.

#28e#29 800 hours speeches should be given,no #0Dyers should be mailed out.

CHAPTER 20 Cost Minimization 382

Topic,Cost Minimization Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,C

20.53 A politician facing re-election can win votes according to the following process:

V = 500S

0:30

M

0:60

where S is hours of making campaign speeches,and M is the number of #0Dyers mailed,If making

speeches costs $10 per hour,mailing #0Dyers costs $0.50 per #0Dyer,and $3,000 are available to spend

on the campaign,Assuming the politician wants to maximize votes,how should the budget be

allocated between speeches and mailing #0Dyers?

#28a#29 No speeches should be given,6,000 #0Dyers should be mailed.

#28b#29 150 hours of speeches should be given,3,000 #0Dyers should be mailed out.

#28c#29 100 hours of speeches should be given,4,000 #0Dyers should be mailed out.

#28d#29 1,000 hours of speeches should be given,2,000 #0Dyers should be mailed out.

#28e#29 300 hours speeches should be given,no #0Dyers should be mailed out.

Topic,Cost Minimization Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,D

20.54 The Chrysler Belvedere Truck Plant is attempting to minimize production costs,Over one

month,3,200 fenders are needed on the production line,which runs continuously,If it costs $100

to set up the stamping press to produce fenders,and $1 per month to store produced fenders,how

many times should the stamping press be run per month?

#28a#29 Once.

#28b#29 Twice.

#28c#29 Three times.

#28d#29 Four times.

#28e#29 Five times.

MULTIPLE CHOICE 383

Topic,Cost Minimization Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,B

20.55 The Chrysler Belvedere Truck Plant is attempting to minimize production costs,Over one

month,1,600 fenders are needed on the production line,which runs continuously,If it costs $200

to set up the stamping press to produce fenders,and $1 per month to store produced fenders,how

many times should the stamping press be run per month?

#28a#29 Once.

#28b#29 Twice.

#28c#29 Three times.

#28d#29 Four times.

#28e#29 Five times.

Topic,Cost Minimization Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,A

20.56 A lobbyist in our nation's capitol must buy 250 votes in the House of Representatives

and Senate to win passage of a bill to add Millard Fillmore's face to Mount Rushmore,Votes in

Congress can be purchased according to the following process:

V = CM=100;000

where C is the number of dollars contributed to campaign funds,and M is the number of three-

martini lunches,If three-martini lunches cost $64 each,what is the smallest expenditure the

lobbyist could make to insure Mr,Fillmore's proper place in history?

#28a#29 $80,000

#28b#29 $390,625

#28c#29 $25,000,064

#28d#29 $325,000

#28e#29 $25,000,000

CHAPTER 20 Cost Minimization 384

Topic,Cost Minimization Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,A

20.57 A lobbyist in our nation's capitol must buy 250 votes in the House of Representatives

and Senate to win passage of a bill to add Millard Fillmore's face to Mount Rushmore,Votes in

Congress can be purchased according to the following process:

V = CM=100;000

where C is the number of dollars contributed to campaign funds,and M is the number of three-

martini lunches,If three-martini lunches cost $16 each,what is the smallest expenditure the

lobbyist could make to insure Mr,Fillmore's proper place in history?

#28a#29 $40,000

#28b#29 $1,562,500

#28c#29 $25,000,016

#28d#29 $85,000

#28e#29 $25,000,000

Topic,Cost Minimization Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,B

20.58

The editors at Snoozeweek,a news magazine,constantly alter the proportion of celebrity pho-

tographs and mundane news stories so as to maximize the number of copies sold,A statistical

consultant has estimated sales to be S =1;000C

0:50

N

0:50

#28where C is the number of celebrity pho-

tographs and N is column inches of news stories#29,If the editors only have $12,000 to spend on each

edition with celebrity photos costing $1,000 each and news stories costing $10 per column inch,

what should the editors do?

#28a#29 Purchase 8 celebrity photos and 400 column inches of news stories.

#28b#29 Purchase 6 celebrity photos and 600 column inches of news stories.

#28c#29 Purchase 2 celebrity photos and 1,000 column inches of news stories.

#28d#29 Purchase 4 celebrity photos and 800 column inches of news stories.

#28e#29 Purchase 10 celebrity photos and 200 column inches of news stories.

MULTIPLE CHOICE 385

Topic,Cost Minimization Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,B

20.59

The editors at Snoozeweek,a news magazine,constantly alter the proportion of celebrity pho-

tographs and mundane news stories so as to maximize the number of copies sold,A statistical

consultant has estimated sales to be S =1;000C

0:50

N

0:50

#28where C is the number of celebrity pho-

tographs and N is column inches of news stories#29,If the editors only have $12,000 to spend on each

edition with celebrity photos costing $1,000 each and news stories costing $10 per column inch,

what should the editors do?

#28a#29 Purchase 8 celebrity photos and 400 column inches of news stories.

#28b#29 Purchase 6 celebrity photos and 600 column inches of news stories.

#28c#29 Purchase 2 celebrity photos and 1,000 column inches of news stories.

#28d#29 Purchase 3 celebrity photos and 900 column inches of news stories.

#28e#29 Purchase 5 celebrity photos and 700 column inches of news stories.

Topic,Cost Minimization Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,C

20.60 VincentSmudge,an avant-guard New York artist,creates #5Cliving sculpture" by smearing

paint slowly all over himself,S hours of #5Cliving sculpture" can be created by

S = min#28L;T=5#29

where L are hours of labor by Mr,Smudge,and T are tubes of water soluble paint,Since Mr.

Smudge is a highly renowned artist,his labor costs $50 per hour,while paint costs $40 per tube.

Using a $3,000 grant from the National Endowment for the Arts,how many hours of #5Cliving sculp-

ture" can Mr,Smudge create?

#28a#29 33.33

#28b#29 51.72

#28c#29 12

#28d#29 500

#28e#29 2,500

CHAPTER 20 Cost Minimization 386

Topic,Cost Minimization Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,C

20.61 VincentSmudge,an avant-guard New York artist,creates #5Cliving sculpture" by smearing

paint slowly all over himself,S hours of #5Cliving sculpture" can be created by

S = min#28L;T=4#29

where L are hours of labor by Mr,Smudge,and T are tubes of water soluble paint,Since Mr.

Smudge is a highly renowned artist,his labor costs $200 per hour,while paint costs $30 per tube.

Using a $2,000 grant from the National Endowment for the Arts,how many hours of #5Cliving sculp-

ture" can Mr,Smudge create?

#28a#29 8.70

#28b#29 9.64

#28c#29 6.25

#28d#29 400

#28e#29 1,600

Topic,Cost Minimization Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,A

20.62 Using existing plant and equipment,Priceless Moments Figurines can be manufactured

using plastic,clay,orany combination of these materials,A #0Cgurine can be manufactured by

F =3P+2C

where P are pounds of plastic,and C are pounds of clay,Plastic costs $4 per pound and clay costs

$3 per pound,What would be the lowest cost of producing 10,000 #0Cgurines?

#28a#29 $13,333.33

#28b#29 $15,000

#28c#29 $14,166.67

#28d#29 $3,333.33

#28e#29 $10,000

MULTIPLE CHOICE 387

Topic,Cost Minimization Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,A

20.63 Using existing plant and equipment,Priceless Moments Figurines can be manufactured

using plastic,clay,orany combination of these materials,A #0Cgurine can be manufactured by

F =3P+2C

where P are pounds of plastic,and C are pounds of clay,Plastic costs $2 per pound and clay costs

$4 per pound,What would be the lowest cost of producing 10,000 #0Cgurines?

#28a#29 $6,666.67

#28b#29 $20,000

#28c#29 $13,333.33

#28d#29 $3,333.33

#28e#29 $10,000

Topic,Cost Minimization Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,C

20.64 Rocco's Pasta Bar makes manacotti according to an old family recipe where

M = min#285=4#03C;5P#29

M; C; and P are pounds of manicotti,cheese,and pasta respectively.Ifcheese costs $2 per pound,

and pasta costs $5 per pound,howmuchwould it cost to produce 30 pounds of manicotti in the

cheapest way possible?

#28a#29 30.

#28b#29 48.

#28c#29 78

#28d#29 48.75

#28e#29 30

CHAPTER 20 Cost Minimization 388

Topic,Cost Minimization Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,C

20.65 Rocco's Pasta Bar makes manacotti according to an old family recipe where

M = min#283=2#03C;3P#29

M; C; and P are pounds of manicotti,cheese,and pasta respectively.Ifcheese costs $5 per pound,

and pasta costs $2 per pound,howmuchwould it cost to produce 30 pounds of manicotti in the

cheapest way possible?

#28a#29 20.

#28b#29 100.

#28c#29 120

#28d#29 54

#28e#29 30

Essay Cost Minimization

Topic,Cost Minimization Di#0Eculty,1

#25 Correct Responses,0 Discrimination Index,0

20.1 A #0Crm has a production function described as follows,"Weekly output is equal to the square

root of the minimum of the amount of capital and the number of hours of labor used per week."

Suppose that the cost of a unit of capital is r and the price of a unit of labor is w and the level of

output is y.Write down the long run total cost as a function of w; r; and y.

Answer,c#28w;r;y#29=#28w+r#29y

2

.

Topic,Cost Minimization Di#0Eculty,2

#25 Correct Responses,0 Discrimination Index,0

20.2 The production function for good y is y = maxf10x

1;4x

2

g where x

1

and x

2

are the amounts

of factors 1 and 2,Find the cost function for good y.

Answer,The cost function is minfp1y=10;p2y=4g.

Topic,Cost Minimization Di#0Eculty,2

#25 Correct Responses,0 Discrimination Index,0

20.3 If the production function for tuna casseroles is minfx

1;x

2

2

g;where x

1

is the amount of factor

1 and x

2

is the amount of factor x

2; #0Cnd the cost function for tuna casseroles.

Answer,c#28w

1;w

2

#29=p

1

x+p

2

y

1=2

.

Topic,Cost Minimization Di#0Eculty,2

#25 Correct Responses,0 Discrimination Index,0

20.4 The cost function,c#28w1;w2;y#29; of a #0Crm,gives the cost of producing y units of output

when the wage of factor 1 is w1 and the wage of factor 2 is w2,Find the cost functions for the

following #0Crms,a#29 a #0Crm with production function f#28x1;x2#29 = minf2x1;3x2g;b#29a #0Crm with produc-

tion function f#28x1;x2#29 = 2x1+3x2;and c#29 a #0Crm with production function f#28x1;x2#29 = maxf2x1;3x2g.

Answer,a#29w1=2+w2=3b#29minfw1=2;w2=3gc#29minfw1=2;w2=3g

Chapter 21

True-False Cost Curves

Topic,Cost Curves Di#0Eculty,1

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,False

21.1 The average variable cost curvemust always be U shaped.

Topic,Cost Curves Di#0Eculty,1

#25 Correct Responses,82 Discrimination Index,34

Correct Answer,False

21.2 The marginal cost curve passes through the minimum point of the average #0Cxed cost curve.

Topic,Cost Curves Di#0Eculty,1

#25 Correct Responses,82 Discrimination Index,26

Correct Answer,True

21.3 If the average cost curveisUshaped,then the marginal cost curvemust cross the average

cost curve at the bottom of the U.

Topic,Cost Curves Di#0Eculty,1

#25 Correct Responses,89 Discrimination Index,25

Correct Answer,True

21.4 The cost function C#28y#29=10+3yhas marginal cost less than average cost for all levels of

output.

Topic,Cost Curves Di#0Eculty,1

#25 Correct Responses,92 Discrimination Index,10

Correct Answer,False

21.5 The cost function C#28y#29 = 100+ 3y

2

has marginal cost less than average cost for all positive

levels of output.

Topic,Cost Curves Di#0Eculty,1

#25 Correct Responses,78 Discrimination Index,28

Correct Answer,False

21.6 If a competitive #0Crm uses twoinputs and it has the production function F#28x

1;x

2

#29=x

1=2

1

+x

1=2

2;

then its marginal cost curve is horizontal.

TRUE-FALSE 391

Topic,Cost Curves Di#0Eculty,2

#25 Correct Responses,13 Discrimination Index,20

Correct Answer,False

21.7 Average cost can never rise while marginal costs are declining.

Topic,Cost Curves Di#0Eculty,1

#25 Correct Responses,89 Discrimination Index,21

Correct Answer,False

21.8 The area under the marginal cost curve measures total #0Cxed costs.

Topic,Cost Curves Di#0Eculty,1

#25 Correct Responses,80 Discrimination Index,23

Correct Answer,False

21.9 If marginal costs increase as output increases,then the average #0Cxed cost curve will be

U-shaped.

Topic,Cost Curves Di#0Eculty,1

#25 Correct Responses,74 Discrimination Index,27

Correct Answer,False

21.10 Average #0Cxed cost curves will be U-shaped if the marginal cost curveisupward-sloping.

Multiple Choice Cost Curves

Topic,Cost Curves Di#0Eculty,1

#25 Correct Responses,94 Discrimination Index,13

Correct Answer,B

21.1 The marginal cost curve of a #0Crm is MC =8y.Total variable costs to produce 7 units of

output are:

#28a#29 112.

#28b#29 196.

#28c#29 56.

#28d#29 196.

#28e#29 22.

Topic,Cost Curves Di#0Eculty,1

#25 Correct Responses,94 Discrimination Index,13

Correct Answer,B

21.2 The marginal cost curve of a #0Crm is MC =6y.Total variable costs to produce 8 units of

output are:

#28a#29 96.

#28b#29 192.

#28c#29 64.

#28d#29 256.

#28e#29 22.

Topic,Cost Curves Di#0Eculty,1

#25 Correct Responses,75 Discrimination Index,18

Correct Answer,D

21.3 The following relationship must hold between the average total cost #28ATC#29 curve and the

marginal cost curve #28MC#29:

#28a#29 if MC is rising,ATC must be rising.

#28b#29 if MC is rising,ATC must be greater than MC.

#28c#29 if MC is rising,ATC must be less than MC.

#28d#29 if ATC is rising,MC must be greater than ATC.

#28e#29 if ATC is rising,MC must be less than ATC.

MULTIPLE CHOICE 393

Topic,Cost Curves Di#0Eculty,1

#25 Correct Responses,94 Discrimination Index,20

Correct Answer,C

21.4 A goatherd has the cost function c#28y#29=5y

2

where y is the number of tubs of goat cheese

she makes per month,She faces a competitive market for goat cheese,with a price of $100 a tub.

How many tubs should she produce per month?

#28a#29 the square root of 100

#28b#29 25

#28c#29 10

#28d#29 the square root of 20

#28e#29 5

Topic,Cost Curves Di#0Eculty,1

#25 Correct Responses,94 Discrimination Index,20

Correct Answer,C

21.5 A goatherd has the cost function c#28y#29=3y

2

where y is the number of tubs of goat cheese

she makes per month,She faces a competitive market for goat cheese,with a price of $42 a tub.

How many tubs should she produce per month?

#28a#29 the square root of 42

#28b#29 9

#28c#29 7

#28d#29 the square root of 14

#28e#29 3.50

Topic,Cost Curves Di#0Eculty,2

#25 Correct Responses,72 Discrimination Index,17

Correct Answer,C

21.6 A #0Crm has a short run cost function c#28y#29=3y+11for y#3E0and c#280#29 = 7,The #0Crm's

quasi-#0Cxed costs are:

#28a#29 7.

#28b#29 11.

#28c#29 4.

#28d#29 7.50.

#28e#29 impossible to determine from this information.

CHAPTER 21 Cost Curves 394

Topic,Cost Curves Di#0Eculty,2

#25 Correct Responses,72 Discrimination Index,17

Correct Answer,C

21.7 A #0Crm has a short run cost function c#28y#29=3y+16for y#3E0and c#280#29 = 6,The #0Crm's

quasi-#0Cxed costs are:

#28a#29 6.

#28b#29 16.

#28c#29 10.

#28d#29 13.

#28e#29 impossible to determine from this information.

Topic,Cost Curves Di#0Eculty,3

#25 Correct Responses,70 Discrimination Index,37

Correct Answer,C

21.8 A competitive #0Crm has the short run cost function c#28y#29=3y

3

,36y

2

+ 128y +35,The #0Crm

will produce a positive amount in the short run if and only if the price is greater than:

#28a#29 10.

#28b#29 40.

#28c#29 20.

#28d#29 23.

#28e#29 19.

Topic,Cost Curves Di#0Eculty,3

#25 Correct Responses,70 Discrimination Index,37

Correct Answer,C

21.9 A competitive #0Crm has the short run cost function c#28y#29=2y

3

,16y

2

+96y+50,The #0Crm

will produce a positive amount in the short run if and only if the price is greater than:

#28a#29 32.

#28b#29 128.

#28c#29 64.

#28d#29 67.

#28e#29 63.

MULTIPLE CHOICE 395

Topic,Cost Curves Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,A

21.10 The production function of a competitive #0Crm is described by the equation y =5x

1=2

1

x

1=2

2

.

The factor prices are p

1

=1and p

2

=4and the #0Crm can hire as much of either factor it wants at

these prices,The #0Crm's marginal cost is:

#28a#29 constant and equal to 0.80.

#28b#29 constant and equal to 3.

#28c#29 increasing.

#28d#29 decreasing.

#28e#29 none of the above.

Topic,Cost Curves Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,A

21.11 The production function of a competitive #0Crm is described by the equation y =6x

1=2

1

x

1=2

2

.

The factor prices are p

1

=1and p

2

=4and the #0Crm can hire as much of either factor it wants at

these prices,The #0Crm's marginal cost is:

#28a#29 constant and equal to 0.67.

#28b#29 constant and equal to 3.

#28c#29 increasing.

#28d#29 decreasing.

#28e#29 none of the above.

Topic,Cost Curves Di#0Eculty,2

#25 Correct Responses,90 Discrimination Index,18

Correct Answer,A

21.12 A #0Crm has the short run total cost function c#28y#29=9y

2

+ 441.At what quantity of output

is short run average cost minimized?

#28a#29 7

#28b#29 3

#28c#29 49

#28d#29 0.43

#28e#29 None of the above.

CHAPTER 21 Cost Curves 396

Topic,Cost Curves Di#0Eculty,2

#25 Correct Responses,90 Discrimination Index,18

Correct Answer,A

21.13 A #0Crm has the short run total cost function c#28y#29=4y

2

+ 100.At what quantity of output

is short run average cost minimized?

#28a#29 5

#28b#29 2

#28c#29 25

#28d#29 0.40

#28e#29 None of the above.

Topic,Cost Curves Di#0Eculty,2

#25 Correct Responses,31 Discrimination Index,40

Correct Answer,A

21.14 A #0Crm has the production function Q = X

1=2

1

X

2

,In the short run it must use exactly 20

units of factor 2,The price of factor 1 is $60 per unit and the price of factor 2 is $2 per unit,The

#0Crm's short run marginal cost function is:

#28a#29 MC#28Q#29=6Q=20.

#28b#29 MC#28Q#29=40Q

,1=2

.

#28c#29 MC#28Q#29=40+60Q

2

.

#28d#29 MC#28Q#29=2Q.

#28e#29 MC#28Q#29=20Q

,1=2

.

Topic,Cost Curves Di#0Eculty,2

#25 Correct Responses,31 Discrimination Index,40

Correct Answer,A

21.15 A #0Crm has the production function Q = X

1=2

1

X

2

,In the short run it must use exactly 10

units of factor 2,The price of factor 1 is $40 per unit and the price of factor 2 is $6 per unit,The

#0Crm's short run marginal cost function is:

#28a#29 MC#28Q#29=8Q=10.

#28b#29 MC#28Q#29=60Q

,1=2

.

#28c#29 MC#28Q#29=60+40Q

2

.

#28d#29 MC#28Q#29=6Q.

#28e#29 MC#28Q#29=10Q

,1=2

.

MULTIPLE CHOICE 397

Topic,Cost Curves Di#0Eculty,1

#25 Correct Responses,82 Discrimination Index,36

Correct Answer,A

21.16 Mr,Dent Carr's total costs are 2s

2

+75s+ 100,If he repairs 25 cars,his average variable

costs will be:

#28a#29 125.

#28b#29 129.

#28c#29 175.

#28d#29 250.

#28e#29 87.50.

Topic,Cost Curves Di#0Eculty,1

#25 Correct Responses,82 Discrimination Index,36

Correct Answer,A

21.17 Mr,Dent Carr's total costs are 4s

2

+ 100s+60,If he repairs 20 cars,his average variable

costs will be:

#28a#29 180.

#28b#29 183.

#28c#29 260.

#28d#29 360.

#28e#29 130.

Topic,Cost Curves Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,A

21.18 Rex Carr could pay $10 for a shovel that lasts one year and pay $5 a car to his brother

Scoop to bury the cars,or he could buy a low-quality car smasher that costs $200 a year to own and

that smashes cars at a marginal cost of $1 per car,If it is also possible for Rex to buy a high-quality

hydraulic car smasher that cost $350 per year to own and if with this smasher he could dispose

of cars at a cost of $0.67 per car,it would be worthwhile for him to buy this high-quality smasher if

#28a#29 he plans to dispose of at least 450 cars per year.

#28b#29 he plans to dispose of no more than 225 cars per year.

#28c#29 he plans to dispose of at least 460 cars per year.

#28d#29 he plans to dispose of no more than 450 cars per year.

#28e#29 he plans to dispose of at least 225 cars per year.

CHAPTER 21 Cost Curves 398

Topic,Cost Curves Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,A

21.19 Rex Carr could pay $10 for a shovel that lasts one year and pay $5 a car to his brother

Scoop to bury the cars,or he could buy a low-quality car smasher that costs $200 a year to own and

that smashes cars at a marginal cost of $1 per car,If it is also possible for Rex to buy a high-quality

hydraulic car smasher that cost $450 per year to own and if with this smasher he could dispose

of cars at a cost of $0.67 per car,it would be worthwhile for him to buy this high-quality smasher if

#28a#29 he plans to dispose of at least 750 cars per year.

#28b#29 he plans to dispose of no more than 375 cars per year.

#28c#29 he plans to dispose of at least 760 cars per year.

#28d#29 he plans to dispose of no more than 750 cars per year.

#28e#29 he plans to dispose of at least 375 cars per year.

Topic,Cost Curves Di#0Eculty,0

#25 Correct Responses,75 Discrimination Index,41

Correct Answer,C

21.20 Mary Magnolia from your workbook has variable costs equal to y

2

=F where y is the number

of bouquets she sells per month and where F is the number of square feet of space in her shop,If

Mary has signed a lease for a shop with 1,200 square feet and if she is not able to get out of the

lease or to expand her store in the short run,and if the price of a bouquet is $ 4 per unit,how

many bouquets per month should she sell in the short run?

#28a#29 1,200

#28b#29 600

#28c#29 2,400

#28d#29 3,600

#28e#29 2,640

MULTIPLE CHOICE 399

Topic,Cost Curves Di#0Eculty,0

#25 Correct Responses,75 Discrimination Index,41

Correct Answer,C

21.21 Mary Magnolia from your workbook has variable costs equal to y

2

=F where y is the number

of bouquets she sells per month and where F is the number of square feet of space in her shop,If

Mary has signed a lease for a shop with 800 square feet and if she is not able to get out of the lease

or to expand her store in the short run,and if the price of a bouquet is $ 5 per unit,how many

bouquets per month should she sell in the short run?

#28a#29 800

#28b#29 400

#28c#29 2,000

#28d#29 3,000

#28e#29 2,200

Topic,Cost Curves Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,A

21.22 Touchie McFeelie from your workbook has a production function,1J

1=2

L

3=4; where J is the

number of old jokes used and L is the number of hours of cartoonists' labor.

Touchie is stuck with 900 old jokes for which he paid 4 dollars each,If the hourly wage rate for

cartoonists is 3,then the total cost of producing 24 comics books is:

#28a#29 3,648.

#28b#29 1,824.

#28c#29 5,472.

#28d#29 3,672.

#28e#29 912.

CHAPTER 21 Cost Curves 400

Topic,Cost Curves Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,A

21.23 Touchie McFeelie from your workbook has a production function,1J

1=2

L

3=4; where J is the

number of old jokes used and L is the number of hours of cartoonists' labor.

Touchie is stuck with 1,600 old jokes for which he paid 3 dollars each,If the hourly wage rate for

cartoonists is 4,then the total cost of producing 108 comics books is:

#28a#29 5,124.

#28b#29 2,562.

#28c#29 7,686.

#28d#29 5,232.

#28e#29 1,281.

Topic,Cost Curves Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,E

21.24 Touchie McFeelie's production function for comic books is,1J

1=2

L

3=4; where J is the num-

ber of jokes and L is the number of hours of cartoonists labor that he uses,If Touchie can vary

both jokes and cartoonists' labor and if old jokes cost $ 4 each and cartoonists' labor costs $36 per

hour,then the cheapest way to produce comics books requires using jokes and labor in the ratio

J=L=

#28a#29 9.

#28b#29 12.

#28c#29 3.

#28d#29 2=3.

#28e#29 6.

MULTIPLE CHOICE 401

Topic,Cost Curves Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,E

21.25 Touchie McFeelie's production function for comic books is,1J

1=2

L

3=4; where J is the num-

ber of jokes and L is the number of hours of cartoonists labor that he uses,If Touchie can vary

both jokes and cartoonists' labor and if old jokes cost $ 1 each and cartoonists' labor costs $6 per

hour,then the cheapest way to produce comics books requires using jokes and labor in the ratio

J=L=

#28a#29 6.

#28b#29 8.

#28c#29 2.

#28d#29 2=3.

#28e#29 4.

Topic,Cost Curves Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,A

21.26 A #0Crm's production function is given by q = minfM;L

1=2

g; where M is the number of ma-

chines and L is the amount of labor that it uses,The price of labor is 2 and the price of machines

is 3 per unit,The #0Crm's long run marginal cost curve is:

#28a#29 a straight line with slope 4.

#28b#29 upward-sloping and gets #0Datter as Q increases.

#28c#29 upward-sloping and gets steeper as Q increases.

#28d#29 a straight line with slope 2.

#28e#29 a straight line with slope 3.

CHAPTER 21 Cost Curves 402

Topic,Cost Curves Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,A

21.27 A #0Crm's production function is given by q = minfM;L

1=2

g; where M is the number of ma-

chines and L is the amount of labor that it uses,The price of labor is 4 and the price of machines

is 2 per unit,The #0Crm's long run marginal cost curve is:

#28a#29 a straight line with slope 8.

#28b#29 upward-sloping and gets #0Datter as Q increases.

#28c#29 upward-sloping and gets steeper as Q increases.

#28d#29 a straight line with slope 4.

#28e#29 a straight line with slope 2.

Topic,Cost Curves Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,D

21.28

In the reclining chair industry #28which is perfectly competitive#29,two di#0Berent technologies of pro-

duction exist,These technologies exhibit the following total cost functions:

C

1

#28Q#29 = 500+ 260Q,20Q

2

+Q

3

C

2

#28Q#29=1;000+ 145Q,10Q

2

+Q

3

Due to foreign competition,the market price of reclining chairs has fallen to 110,In the short run,

#28a#29 #0Crms using technology 1 will remain in business and #0Crms using technology 2 will remain in business.

#28b#29 #0Crms using technology 1 will remain in business and #0Crms using technology 2 will shut down.

#28c#29 #0Crms using technology 1 will shut down and #0Crms using technology 2 will remain in business.

#28d#29 #0Crms using technology 1 will shut down and #0Crms using technology 2 will shut down.

#28e#29 more information is needed to make a judgment.

MULTIPLE CHOICE 403

Topic,Cost Curves Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,D

21.29

In the reclining chair industry #28which is perfectly competitive#29,two di#0Berent technologies of pro-

duction exist,These technologies exhibit the following total cost functions:

C

1

#28Q#29=1;500+ 600Q,40Q

2

+Q

3

C

2

#28Q#29 = 200+ 205Q,10Q

2

+Q

3

Due to foreign competition,the market price of reclining chairs has fallen to 190,In the short run,

#28a#29 #0Crms using technology 1 will remain in business and #0Crms using technology 2 will remain in business.

#28b#29 #0Crms using technology 1 will remain in business and #0Crms using technology 2 will shut down.

#28c#29 #0Crms using technology 1 will shut down and #0Crms using technology 2 will remain in business.

#28d#29 #0Crms using technology 1 will shut down and #0Crms using technology 2 will shut down.

#28e#29 more information is needed to make a judgment.

Topic,Cost Curves Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,D

21.30 A #0Crm has the long run cost function C#28Q#29=7Q

2

+ 252,In the long run,it will supply a

positive amount of output,so long as the price is greater than:

#28a#29 168

#28b#29 176

#28c#29 42

#28d#29 84

#28e#29 89

Topic,Cost Curves Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,D

21.31 A #0Crm has the long run cost function C#28Q#29=5Q

2

+ 245,In the long run,it will supply a

positive amount of output,so long as the price is greater than:

#28a#29 140

#28b#29 148

#28c#29 35

#28d#29 70

#28e#29 75

CHAPTER 21 Cost Curves 404

Topic,Cost Curves Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,C

21.32 The VCR manufacturing business is perfectly competitive,Suppose that currently,#0Crms

which manufacture VCR's utilize either technology 1 or technology 2,whose cost functions are

given below:

TC

1

#28Q#29=1;060,60Q+Q

2

TC

2

#28Q#29 = 220,20Q+ Q

2

In the long run,assuming no new manufacturing technologies,what will happen in this industry?

#28a#29 Firms utilizing technology 1 will stay in business,and #0Crms utilizing technology 2 will also stayin

business.

#28b#29 Firms utilizing technology 1 will stay in business,but #0Crms utilizing technology 2 will shut down.

#28c#29 Firms utilizing technology 1 will shut down,but #0Crms utilizing technology 2 will stay in business.

#28d#29 Firms utilizing technology 1 will shut down,and #0Crms utilizing technology 2 will also shut down.

#28e#29 None of the above.

Topic,Cost Curves Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,C

21.33 The VCR manufacturing business is perfectly competitive,Suppose that currently,#0Crms

which manufacture VCR's utilize either technology 1 or technology 2,whose cost functions are

given below:

TC

1

#28Q#29=1;060,60Q+Q

2

TC

2

#28Q#29 = 560,40Q+ Q

2

In the long run,assuming no new manufacturing technologies,what will happen in this industry?

#28a#29 Firms utilizing technology 1 will stay in business,and #0Crms utilizing technology 2 will also stayin

business.

#28b#29 Firms utilizing technology 1 will stay in business,but #0Crms utilizing technology 2 will shut down.

#28c#29 Firms utilizing technology 1 will shut down,but #0Crms utilizing technology 2 will stay in business.

#28d#29 Firms utilizing technology 1 will shut down,and #0Crms utilizing technology 2 will also shut down.

#28e#29 None of the above.

MULTIPLE CHOICE 405

Topic,Cost Curves Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,B

21.34 The snow removal business in East Iceicle,Minnesota is a competitive industry,All snow-

plow operators have the cost function C = Q

2

+25;where Q is the number of driveways cleared.

Demand for snow removal in the town is given by Q

d

= 120,P,The long run equilibrium number

of #0Crms in this industry is

#28a#29 11

#28b#29 22

#28c#29 14

#28d#29 120

#28e#29 23

Topic,Cost Curves Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,B

21.35 The snow removal business in East Iceicle,Minnesota is a competitive industry,All snow-

plow operators have the cost function C = Q

2

+16;where Q is the number of driveways cleared.

Demand for snow removal in the town is given by Q

d

= 120,P,The long run equilibrium number

of #0Crms in this industry is

#28a#29 14

#28b#29 28

#28c#29 22

#28d#29 120

#28e#29 29

Topic,Cost Curves Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,E

21.36 Florence's Restaurant estimates that its total cost of providing Q meals per month is given

byTC=4;000+ 4Q,If Florence charges $10 per meal,what is its break-even level of output?

#28a#29 1,000 meals

#28b#29 400 meals

#28c#29 285.71 meals

#28d#29 1,333.33 meals

#28e#29 666.67 meals

CHAPTER 21 Cost Curves 406

Topic,Cost Curves Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,E

21.37 Florence's Restaurant estimates that its total cost of providing Q meals per month is given

byTC=5;000+ 3Q,If Florence charges $10 per meal,what is its break-even level of output?

#28a#29 1,666.67 meals

#28b#29 500 meals

#28c#29 384.62 meals

#28d#29 1,428.57 meals

#28e#29 714.29 meals

Topic,Cost Curves Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,D

21.38 If Green Acres Turf Farm's total cost of producing acres of sod is TC =3Q

2

+20Q+60;

the marginal cost of producing the 10th acre of sod is

#28a#29 $60.

#28b#29 $20.

#28c#29 $50.

#28d#29 $80.

#28e#29 $110.

Topic,Cost Curves Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,D

21.39 If Green Acres Turf Farm's total cost of producing acres of sod is TC =3Q

2

+5Q+70;the

marginal cost of producing the 10th acre of sod is

#28a#29 $70.

#28b#29 $5.

#28c#29 $35.

#28d#29 $65.

#28e#29 $95.

Essay Cost Curves

Topic,Cost Curves Di#0Eculty,1

#25 Correct Responses,0 Discrimination Index,0

21.1 Not long ago,the Canadian edition of a famous textbook on principles of economics had

a diagram depicting a U-shaped average #0Cxed cost curve,This occasioned great mirth around

the camp#0Cres of some economists in the Great White North and did much to shorten a long hard

winter,Explain what is wrong with drawing a U-shaped average #0Cxed cost curve.

Answer,Average #0Cxed cost must decline monotonically with output and would asymptotically

approach zero,Remember that average #0Cxed cost is just a constant divided by output.

Topic,Cost Curves Di#0Eculty,3

#25 Correct Responses,0 Discrimination Index,0

21.2 Hildegard,an intelligent and charming Holstein cow,grazes in a very large,mostly barren

pasture with a few lush patches of grass,When she #0Cnds a new grassy area,the amount of grass

she gets from it is equal to the square root of the number of hours,h; that she spends grazing

there,Finding a new patch of grass on which to graze takes her one hour,Since Hildegard does not

have pockets,the currency in which her costs are measured is time,a#29 What is the total cost to

Hildegard of #0Cnding a new plot of grass and getting y units of grass from it? b#29 Find an expression

for her marginal costs and her average cost per patch of grass as a function of the amount of grass

she gets from each patch,c#29 Howmuch time would she spend in each plot if she wanted to maximize

her food intake? #28Hint,Minimize average costs per unit of grass eaten.#29

Answer,a#29 1+y

2

b#292y; 1=y + yc#291 hour.

Topic,Cost Curves Di#0Eculty,2

#25 Correct Responses,0 Discrimination Index,0

21.3 A competitive #0Crm has the short run cost function c#28y#29=y

3

,2y

2

+5y+6.Write down

equations for a#29 the #0Crm's average variable cost function,b#29 the #0Crm's marginal cost function,c#29 At

what level of output is average variable cost minimized? d#29 Graph the short-run supply function

for this #0Crm,being careful to label the key points on the graph with the numbers specifying the

exact prices and quantities at these points.

Answer,a#29 y

2

,2y +5b#293y

2

,4y +5c#29y=1d#29The AVC curve is U-shaped with its bottom at

y =1;c=2,The marginal cost curve is also U-shaped,It bottoms out at y =2=3and crosses the

AVC curve from belowaty=1.

CHAPTER 21 Cost Curves 408

Topic,Cost Curves Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

21.4 North American Manufacturing has the following production function Q = min#280:25K;0:5L#29

where K is units of capital,and L is hours of labor.

a#29 Without anywarning,the price of capital doubles,What should North American do in re-

sponse?

b#29 If North American were planning a new manufacturing plant,are there any advantages to a

larger facility?

Chapter 22

True-False Firm Supply

Topic,Firm Supply Di#0Eculty,2

#25 Correct Responses,53 Discrimination Index,32

Correct Answer,False

22.1 A #0Crm in a competitive industry takes account of the fact that the demand curve it confronts

has a signi#0Ccant negative slope.

Topic,Firm Supply Di#0Eculty,1

#25 Correct Responses,73 Discrimination Index,25

Correct Answer,True

22.2 In a perfectly competitive industry,the demand curve for the total output of the industry

maybedownward sloping.

Topic,Firm Supply Di#0Eculty,1

#25 Correct Responses,81 Discrimination Index,22

Correct Answer,False

22.3 Price equals marginal cost is a su#0Ecient condition for pro#0Ct maximization.

Topic,Firm Supply Di#0Eculty,3

#25 Correct Responses,21 Discrimination Index,2

Correct Answer,True

22.4 A #0Crm faces competitive markets both for its inputs and its outputs,If its long run supply

curveisq=3p; then it can not have constant returns to scale.

Topic,Firm Supply Di#0Eculty,1

#25 Correct Responses,84 Discrimination Index,20

Correct Answer,True

22.5 A #0Crm with the cost function c#28y#29=20y

2

+500 has a U-shaped cost curve.

Topic,Firm Supply Di#0Eculty,2

#25 Correct Responses,44 Discrimination Index,19

Correct Answer,False

22.6 Mr,O,Carr has the cost function c#28y#29=y

2

+ 144 if his output,y; is positive and c#280#29 = 0.

If the price of output is 30,Mr,Carr' s pro#0Ct-maximizing output is zero.

CHAPTER 22 Firm Supply 410

Topic,Firm Supply Di#0Eculty,2

#25 Correct Responses,44 Discrimination Index,19

Correct Answer,False

22.7 Mr,O,Carr has the cost function c#28y#29=y

2

+36if his output,y; is positive and c#280#29 = 0.If

the price of output is 18,Mr,Carr' s pro#0Ct-maximizing output is zero.

Topic,Firm Supply Di#0Eculty,2

#25 Correct Responses,25 Discrimination Index,40

Correct Answer,True

22.8 A #0Crm produces one output,using one input,with the production function f#28x#29=2x

1=3

where x is the amount of input,The cost function for this #0Crm is proportional to the price of the

input times the cube of the amount of output.

Topic,Firm Supply Di#0Eculty,2

#25 Correct Responses,62 Discrimination Index,15

Correct Answer,True

22.9 A competitive #0Crm has a continuous marginal cost curve,It #0Cnds that as output increases,

its marginal cost curve #0Crst rises,then falls,then rises again,If it wants to maximize pro#0Cts,the

#0Crm should never produce at a positive output where price equals marginal cost and marginal cost

decreases as output increases.

Topic,Firm Supply Di#0Eculty,2

#25 Correct Responses,78 Discrimination Index,17

Correct Answer,False

22.10 Two #0Crms have the same technology and must pay the same wages for labor,They have

identical factories,but Firm 1 paid a higher price for its factory than did Firm 2,If they are both

pro#0Ct maximizers and haveupward sloping marginal cost curves,then wewould expect Firm 1 to

have a higher output than Firm 2.

Topic,Firm Supply Di#0Eculty,2

#25 Correct Responses,55 Discrimination Index,9

Correct Answer,True

22.11 The area under the marginal cost curve measures total variable costs.

TRUE-FALSE 411

Topic,Firm Supply Di#0Eculty,1

#25 Correct Responses,71 Discrimination Index,0

Correct Answer,True

22.12 Average #0Cxed costs never increase with output.

Topic,Firm Supply Di#0Eculty,1

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,False

22.13 The change in producer's surplus when the market price changes from p

1

to p

2

is half of

the area to the left of the marginal cost curvebetween p

1

and p

2

.

Multiple Choice Firm Supply

Topic,Firm Supply Di#0Eculty,2

#25 Correct Responses,59 Discrimination Index,33

Correct Answer,D

22.1 A pro#0Ct maximizing #0Crm continues to operate even though it is losing money,It sells its

product at a price of $100,From these facts we deduce that:

#28a#29 average total cost is less than $100.

#28b#29 average #0Cxed cost is less than $100.

#28c#29 marginal cost is increasing.

#28d#29 average variable cost is less than $100.

#28e#29 marginal cost is decreasing.

Topic,Firm Supply Di#0Eculty,1

#25 Correct Responses,54 Discrimination Index,27

Correct Answer,C

22.2 A pro#0Ct maximizing dairy farm is currently producing 10,000 gallons of milk per day,The

government is considering two alternative policies,One is to give the farm a lump sum subsidy of

$500 per month,The other policy is to give the farm a subsidy of $.05 per gallon of output.

#28a#29 Both kinds of subsidy will increase production at this farm.

#28b#29 Neither subsidy will a#0Bect production at this farm,since output is determined by pro#0Ct maximization.

#28c#29 Production at this farm will be increased if the per unit subsidy is adopted,but not if the lump-sum

subsidy is adopted.

#28d#29 Which subsidy has the greater e#0Bect on production at this farm depends on whether #0Cxed costs are

greater than variable costs.

#28e#29 Production will be increased by either kind of subsidy if and only if there are not decreasing returns to

scale.

MULTIPLE CHOICE 413

Topic,Firm Supply Di#0Eculty,1

#25 Correct Responses,72 Discrimination Index,14

Correct Answer,C

22.3 Marge Costa produces plastic dog dishes using a process that requires only labor and plastic

as inputs and has constant returns to scale,With the process she is currently using,a laborer can

turn out 30 dog dishes an hour,The wage rate is $9 per hour,The plastic in a dog dish costs

Marge $.10,She has no other costs besides labor and plastic,Marge faces a perfectly competitive

market for plastic dog dishes,and she decides that she is maximizing pro#0Cts when she makes 300

dog dishes an hour,What is the market price of dog dishes?

#28a#29 $.21

#28b#29 $.32

#28c#29 $.40

#28d#29 $.27

#28e#29 $.28

Topic,Firm Supply Di#0Eculty,3

#25 Correct Responses,57 Discrimination Index,43

Correct Answer,E

22.4 A competitive #0Crm uses twovariable factors to produces its output,with a production

function q = minfx

1;x

2

g,The price of factor 1 is 2 and the price of factor 2 is 5,Due to a lackof

warehouse space,the company cannot use more than 22 units of x

1

,The #0Crm must pay a #0Cxed cost

of 88 if it produces any positive amount,but doesn't havetopay this cost if it produces no output.

What is the smallest integer price that would make a #0Crm willing to produce a positive amount?

#28a#29 24

#28b#29 21

#28c#29 13

#28d#29 7

#28e#29 11

CHAPTER 22 Firm Supply 414

Topic,Firm Supply Di#0Eculty,3

#25 Correct Responses,57 Discrimination Index,43

Correct Answer,E

22.5 A competitive #0Crm uses twovariable factors to produces its output,with a production

function q = minfx

1;x

2

g,The price of factor 1 is 5 and the price of factor 2 is 1,Due to a lackof

warehouse space,the company cannot use more than 18 units of x

1

,The #0Crm must pay a #0Cxed cost

of 72 if it produces any positive amount,but doesn't havetopay this cost if it produces no output.

What is the smallest integer price that would make a #0Crm willing to produce a positive amount?

#28a#29 22

#28b#29 19

#28c#29 15

#28d#29 6

#28e#29 10

Topic,Firm Supply Di#0Eculty,1

#25 Correct Responses,85 Discrimination Index,33

Correct Answer,A

22.6 A competitive #0Crm has a single factory with the cost function c#28y#29=4y

2

+89and produces

28 units in order to maximize pro#0Cts,Although the price of output does not change,the #0Crm

decides to build a second factory with the cost function c#28y#29=8y

2

+39.To maximize its pro#0Cts,

how many units should it produce in the second factory?

#28a#29 14

#28b#29 21

#28c#29 9

#28d#29 13

#28e#29 None of the above.

MULTIPLE CHOICE 415

Topic,Firm Supply Di#0Eculty,2

#25 Correct Responses,73 Discrimination Index,51

Correct Answer,B

22.7 A competitive #0Crm is choosing an output level to maximize its pro#0Cts in the short run.

Which of the following is not necessarily true? #28Assume that marginal cost is not constant and is

well-de#0Cned at all levels of output.#29

#28a#29 Marginal cost is at least as large as average variable cost.

#28b#29 Total revenues are at least as large as total costs.

#28c#29 Price is at least as large as average variable cost.

#28d#29 Price equals marginal cost.

#28e#29 The marginal cost curve is rising.

Topic,Firm Supply Di#0Eculty,2

#25 Correct Responses,55 Discrimination Index,32

Correct Answer,D

22.8 A competitive,capitalistic #0Crm produces gift-wrapped pieces of the Berlin wall,using the

standard Marxian inputs,K and L,The production function is y =#28K+L#29

1=2;where y is the

number of pieces produced,Neglect the use of the wall itself,The price of capital,K; is r; and the

price of labor,L; is w,Which of the following is true?

#28a#29 Regardless of w and r; cost minimization requires that K = L.

#28b#29 The technology has increasing returns to scale.

#28c#29 If r#3Ew;then L =0.

#28d#29 If r#3Ew;then K =0.

#28e#29 None of the above.

Topic,Firm Supply Di#0Eculty,2

#25 Correct Responses,63 Discrimination Index,60

Correct Answer,A

22.9 A competitive #0Crm has a long run total cost function c#28y#29=3y

2

+243 for y#3E0and c#280#29=0.

Its long run supply function is described as follows:

#28a#29 y = p=6ifp#3E54;y=0ifp#3C54.

#28b#29 y = p=3ifp#3E52;y=0ifp#3C52.

#28c#29 y = p=3ifp#3E57;y=0ifp#3C63.

#28d#29 y = p=6ifp#3E57;y=0ifp#3C57.

#28e#29 y = p=3ifp#3E59;y=0ifp#3C49.

CHAPTER 22 Firm Supply 416

Topic,Firm Supply Di#0Eculty,2

#25 Correct Responses,63 Discrimination Index,60

Correct Answer,A

22.10 A competitive #0Crm has a long run total cost function c#28y#29=5y

2

+1;280 for y#3E0and

c#280#29 = 0,Its long run supply function is described as follows:

#28a#29 y = p=10 if p#3E160;y=0ifp#3C160.

#28b#29 y = p=5ifp#3E158;y=0ifp#3C158.

#28c#29 y = p=5ifp#3E163;y=0ifp#3C175.

#28d#29 y = p=10 if p#3E163;y=0ifp#3C163.

#28e#29 y = p=5ifp#3E165;y=0ifp#3C155.

Topic,Firm Supply Di#0Eculty,2

#25 Correct Responses,51 Discrimination Index,49

Correct Answer,A

22.11 A competitive #0Crm uses two inputs and has a production function f#28x

1;x

2

#29=22x

:25

1

x

:25

2

.

The #0Crm can buy as much of either factor as it likes at factor prices w

1

= w

2

=1,The cost of

producing y units of ouput for this #0Crm is:

#28a#29 2#28y=22#29

2

.

#28b#29 22#28x

1

+ x

2

#29y.

#28c#29 #28x

1

+ x

2

#29=22.

#28d#29 y=44.

#28e#29 y

2

=44.

Topic,Firm Supply Di#0Eculty,2

#25 Correct Responses,51 Discrimination Index,49

Correct Answer,A

22.12 A competitive #0Crm uses two inputs and has a production function f#28x

1;x

2

#29=19x

:25

1

x

:25

2

.

The #0Crm can buy as much of either factor as it likes at factor prices w

1

= w

2

=1,The cost of

producing y units of ouput for this #0Crm is:

#28a#29 2#28y=19#29

2

.

#28b#29 19#28x

1

+ x

2

#29y.

#28c#29 #28x

1

+ x

2

#29=19.

#28d#29 y=38.

#28e#29 y

2

=38.

MULTIPLE CHOICE 417

Topic,Firm Supply Di#0Eculty,0

#25 Correct Responses,65 Discrimination Index,67

Correct Answer,A

22.13 A #0Crm's production function is f#28x

1;x

2

#29=#28minfx

1;5x

2

g#29

1=2

,If the price of factor 1 is

w

1

=4per unit and the price of factor 2 is w

2

=15per unit,then its supply function is given by

the equation S#28p#29=

#28a#29 p=14.

#28b#29 p#28maxfw

1;5w

2

g#29.

#28c#29 p#28minfw

1;5w

2

g#29.

#28d#29 7p.

#28e#29 pminf4p;75pg.

Topic,Firm Supply Di#0Eculty,0

#25 Correct Responses,65 Discrimination Index,67

Correct Answer,A

22.14 A #0Crm's production function is f#28x

1;x

2

#29=#28minfx

1;4x

2

g#29

1=2

,If the price of factor 1 is

w

1

=2per unit and the price of factor 2 is w

2

=8per unit,then its supply function is given by the

equation S#28p#29=

#28a#29 p=8.

#28b#29 p#28maxfw

1;4w

2

g#29.

#28c#29 p#28minfw

1;4w

2

g#29.

#28d#29 4p.

#28e#29 pminf2p;32pg.

Topic,Firm Supply Di#0Eculty,0

#25 Correct Responses,78 Discrimination Index,41

Correct Answer,A

22.15 Suppose that Dent Carr's long run total cost of repairing s cars per week is c#28s#29=3s

2

+27.

If the price he receives for repairing a car is 30,then in the long run,how many cars will he #0Cx per

week if he maximizes pro#0Cts?

#28a#29 5.

#28b#29 0.

#28c#29 10.

#28d#29 7.50.

#28e#29 15.

CHAPTER 22 Firm Supply 418

Topic,Firm Supply Di#0Eculty,0

#25 Correct Responses,78 Discrimination Index,41

Correct Answer,A

22.16 Suppose that Dent Carr's long run total cost of repairing s cars per week is c#28s#29=4s

2

+16.

If the price he receives for repairing a car is 48,then in the long run,how many cars will he #0Cx per

week if he maximizes pro#0Cts?

#28a#29 6.

#28b#29 0.

#28c#29 12.

#28d#29 9.

#28e#29 18.

Topic,Firm Supply Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,A

22.17 Irma's production function is f#28x

1;x

2

#29=#28minfx

1;4x

2

g#29

1=2

,If the price of factor 1 is w

1

=6

and the price of factor 2 is w

2

=12;then her supply function is given by the equation:

#28a#29 S#28p#29=p=18.

#28b#29 S#28p#29=p#28maxfw

1;4w

2

g#29

2

.

#28c#29 S#28p#29=p#28minfw

1;4w

2

g#29

2

.

#28d#29 S#28p#29=9p.

#28e#29 S#28p#29=minf6p;48p#29.

Topic,Firm Supply Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,A

22.18 Irma's production function is f#28x

1;x

2

#29=#28minfx

1;4x

2

g#29

1=2

,If the price of factor 1 is w

1

=3

and the price of factor 2 is w

2

=12;then her supply function is given by the equation:

#28a#29 S#28p#29=p=12.

#28b#29 S#28p#29=p#28maxfw

1;4w

2

g#29

2

.

#28c#29 S#28p#29=p#28minfw

1;4w

2

g#29

2

.

#28d#29 S#28p#29=6p.

#28e#29 S#28p#29=minf3p;48p#29.

MULTIPLE CHOICE 419

Topic,Firm Supply Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,D

22.19 A #0Crm has the long run cost function C#28q#29=7q

2

+ 112,In the long run,it will supply a

positive amount of output,so long as the price is greater than:

#28a#29 112

#28b#29 120

#28c#29 28

#28d#29 56

#28e#29 61

Topic,Firm Supply Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,D

22.20 A #0Crm has the long run cost function C#28q#29=4q

2

+4,In the long run,it will supply a

positive amount of output,so long as the price is greater than:

#28a#29 16

#28b#29 24

#28c#29 4

#28d#29 8

#28e#29 13

Topic,Firm Supply Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,D

22.21 A competitive #0Crm produces output according to the production function y = min#28x

3;1000#29.

Let p be the price of output,and let the price of input x be 1,The pro#0Ct-maximizing output for

this #0Crm is:

#28a#29 1000 if p#3E1 and 0 otherwise.

#28b#29 10 for all p.

#28c#29 1000 for all p.

#28d#29 0ifp#3C1=100 and 1000 otherwise.

#28e#29 none of the above.

CHAPTER 22 Firm Supply 420

Topic,Firm Supply Di#0Eculty,0

#25 Correct Responses,39 Discrimination Index,21

Correct Answer,D

22.22 A competitive #0Crm produces output according to the production function y = min#28x

2;100#29.

Let w be the price of the factor x; and let the price of output be 1,The demand for x when the

price of x is w is given by the function:

#28a#29 10 when w#3C1 and 100 otherwise.

#28b#29 100 for all w.

#28c#29 10 for all w.

#28d#29 0ifw#3E10 and 10 otherwise.

#28e#29 none of the above.

Topic,Firm Supply Di#0Eculty,0

#25 Correct Responses,40 Discrimination Index,5

Correct Answer,C

22.23 A competitive #0Crm produces output according to the production function y = min#28x

1=2;10#29.

Let w be the price of the factor x; and let the price of output be 1,The demand for factor x when

the factor price is w is given by:

#28a#29 x = min#28w

1=2;10#29

#28b#29 x = max#28w

1=2

=2;100#29.

#28c#29 x = min#281=4w

2;100#29.

#28d#29 x =10+x

2

=2.

#28e#29 none of the above.

Essay Firm Supply

Topic,Firm Supply Di#0Eculty,3

#25 Correct Responses,0 Discrimination Index,0

22.1 The Lost Mountains of northern Iowa are inhabited by the rare Marshallian deer,Patches

of grass are far apart in this rugged land,If a deer #0Cnds a fresh patch of grass and spends h hours

grazing it,it gets the square root of h units of grass,The deer compete for grass,When there are n

deer,it takes a deer n squared minutes to #0Cnd a fresh patch,A deer can survive if it gets 1 unit of

grass every 200 minutes,a#29 Find the average cost in time of a unit of grass if a deer gets y units of

grass from each patch,b#29 Howmuch time will an e#0Ecient deer spend in each patch when there are

n deer? #28Hint,Min,Avg,Cost#29 c#29Since there is free entry into the deer business,the equilibrium

population is the maximum number of e#0Ecient deer who can survive,How many is this?

Answer,a#29y +#28n squared#29=y b#29n minutes,c#29100

Chapter 23

True-False Industry Supply

Topic,Industry Supply Di#0Eculty,1

#25 Correct Responses,86 Discrimination Index,9

Correct Answer,True

23.1 The short run industry supply curve can be found by horizontally summing the short run

supply curves of all the individual #0Crms in the industry.

Topic,Industry Supply Di#0Eculty,2

#25 Correct Responses,98 Discrimination Index,12

Correct Answer,True

23.2 It is possible to have an industry in which all #0Crms make zero economic pro#0Cts in long run

equilibrium.

Topic,Industry Supply Di#0Eculty,1

#25 Correct Responses,73 Discrimination Index,14

Correct Answer,True

23.3 The possibility of more #0Crms entering an industry in the long run tends to make long run

industry supply more price elastic than short run industry supply.

Topic,Monopoly Di#0Eculty,2

#25 Correct Responses,80 Discrimination Index,14

Correct Answer,True

23.4 In a competitive market,if both demand and supply curves are linear,then a per unit tax

of $10 will generate exactly the same deadweight loss as a per unit subsidy of $10.

Topic,Industry Supply Di#0Eculty,2

#25 Correct Responses,74 Discrimination Index,26

Correct Answer,True

23.5 If there are constant returns to scale in a competitive industry,then the long run industry

supply curve for that industry is horizontal.

TRUE-FALSE 423

Topic,Industry Supply Di#0Eculty,2

#25 Correct Responses,52 Discrimination Index,11

Correct Answer,True

23.6 If some #0Crm in an industry has the production function F#28x;y#29=x

3=4

y

3=4

where x and y are

the only two inputs in producing the good,then that industry can not be competitive in the long

run.

Topic,Industry Supply Di#0Eculty,1

#25 Correct Responses,67 Discrimination Index,21

Correct Answer,False

23.7 The market for a good is in equilibrium when the government unexpectedly imposes a quan-

tity tax of $2 per unit,In the short run,the price will rise by $2 per unit so that #0Crms can regain

their lost revenue and continue to produce.

Multiple Choice Industry Supply

Topic,Industry Supply Di#0Eculty,2

#25 Correct Responses,32 Discrimination Index,18

Correct Answer,C

23.1 In East Icicle,Minnesota,on the northern edge of the corn belt,the growing season is short

and the soil is poor,Corn yields are meager unless a great deal of expensive fertilizer is used,In

Corncrib,Illinois the land is fertile and #0Dat and the growing season is 20 days longer,For any given

expenditure per acre,corn yields are far greater than in East Icicle,Farmers in both places are

pro#0Ct maximizers who grow corn,We deduce that:

#28a#29 marginal costs are higher in E,Icicle than in Corncrib.

#28b#29 more fertilizer is used per acre in E,Icicle than in Corncrib.

#28c#29 marginal costs are the same in both places.

#28d#29 more fertilizer is used per acre in Corncrib than in E,Icicle.

#28e#29 more than one of the above.

Topic,Industry Supply Di#0Eculty,3

#25 Correct Responses,32 Discrimination Index,13

Correct Answer,E

23.2 A competitive industry has 10,000 identical #0Crms,For each #0Crm in the industry,the long

run cost of producing y units of output is c#28y#29 = $100+ y

2

if y#3E0and c#280#29=0,The government

imposes a lump sum tax of $300 on each #0Crm in the industry,Firms can avoid this tax only by

going out of business,There is free entry and exit into this industry,In the long run:

#28a#29 the number of #0Crms stays constant and the price of output rises by $30.

#28b#29 the number of #0Crms doubles and the price of output doubles.

#28c#29 the number of #0Crms is halved and the price of output is doubled.

#28d#29 the number of #0Crms stays constant and the price of output rises by less than $30.

#28e#29 None of the above.

MULTIPLE CHOICE 425

Topic,Industry Supply Di#0Eculty,2

#25 Correct Responses,44 Discrimination Index,59

Correct Answer,B

23.3 The bicycle industry is made up of 100 #0Crms with the long run cost curve c#28y#29=2+#28y

2

=2#29

and 80 #0Crms with the long run cost curve c#28y#29=y

2

=6,No new #0Crms can enter the industry,What

is the long run industry supply curve at prices greater than 2?

#28a#29 y = 360p

#28b#29 y = 340p

#28c#29 y = 170p

#28d#29 y = 240p

#28e#29 y = 375p

Topic,Industry Supply Di#0Eculty,2

#25 Correct Responses,44 Discrimination Index,59

Correct Answer,B

23.4 The bicycle industry is made up of 100 #0Crms with the long run cost curve c#28y#29=2+#28y

2

=2#29

and 160 #0Crms with the long run cost curve c#28y#29=y

2

=10,No new #0Crms can enter the industry,What

is the long run industry supply curve at prices greater than 2?

#28a#29 y = 920p

#28b#29 y = 900p

#28c#29 y = 450p

#28d#29 y = 800p

#28e#29 y = 935p

Topic,Industry Supply Di#0Eculty,2

#25 Correct Responses,24 Discrimination Index,2

Correct Answer,B

23.5 Two #0Crms constitute the entire doghouse industry,One has a long run cost curveof

3+4#28y

2

#29=3#29 and the other has a long run cost curveof10 + #28y

2

=10#29,If no new #0Crms enter the

industry,at which of the following prices will exactly one #0Crm operate?

#28a#29 1

#28b#29 3

#28c#29 5

#28d#29 7

#28e#29 None of the above.

CHAPTER 23 Industry Supply 426

Topic,Industry Supply Di#0Eculty,1

#25 Correct Responses,84 Discrimination Index,1

Correct Answer,B

23.6 On a small island,papayas can only be sold in the market in the center of the island.

Although papayas only cost 1 to raise,they can be sold in the market for 3,But it costs,1 per

kilometer to transport each papaya to market,If an acre of land grows 200 papayas,howmuch

rent does an acre of land 4 kilometers from the market command?

#28a#29 302

#28b#29 320

#28c#29 240

#28d#29 262

#28e#29 None of the above.

Topic,Industry Supply Di#0Eculty,3

#25 Correct Responses,26 Discrimination Index,33

Correct Answer,A

23.7 On a tropical island there are 100 potential boat builders,numbered 1 through 100,Each

can build up to 12 boats a year,but anyone who goes into the boat-building business has to pay

a #0Cxed cost of 11,Marginal costs di#0Ber from person to person,Where y denotes the number of

boats built per year,boat builder 1 has a total cost function c#28y#29=11+y,Boat builder 2 has

a total cost function c#28y#29=11+2yand,more generally,for each i; from 1 to 100,boat builder i

has a cost function c#28y#29=11+iy,If the price of boats is 40,how many boats will be built per year?

#28a#29 468

#28b#29 348

#28c#29 174

#28d#29 702

#28e#29 Anynumber between 480 and 492 is possible.

MULTIPLE CHOICE 427

Topic,Industry Supply Di#0Eculty,3

#25 Correct Responses,26 Discrimination Index,33

Correct Answer,A

23.8 On a tropical island there are 100 potential boat builders,numbered 1 through 100,Each

can build up to 12 boats a year,but anyone who goes into the boat-building business has to pay

a #0Cxed cost of 11,Marginal costs di#0Ber from person to person,Where y denotes the number of

boats built per year,boat builder 1 has a total cost function c#28y#29=11+y,Boat builder 2 has

a total cost function c#28y#29=11+2yand,more generally,for each i; from 1 to 100,boat builder i

has a cost function c#28y#29=11+iy,If the price of boats is 20,how many boats will be built per year?

#28a#29 228

#28b#29 108

#28c#29 54

#28d#29 342

#28e#29 Anynumber between 240 and 252 is possible.

Topic,Industry Supply Di#0Eculty,3

#25 Correct Responses,46 Discrimination Index,52

Correct Answer,B

23.9 Consider a competitive industry with several #0Crms all of whichhave the same cost function,

c#28y#29=y

2

+4for y#3E0and c#280#29=0,The demand curve for this industry is D#28p#29=50,p; where p is

the price,The long run equilibrium number of #0Crms in this industry is:

#28a#29 4.

#28b#29 23.

#28c#29 25.

#28d#29 46.

#28e#29 2.

CHAPTER 23 Industry Supply 428

Topic,Industry Supply Di#0Eculty,1

#25 Correct Responses,80 Discrimination Index,15

Correct Answer,C

23.10 Brand X is one of many #0Crms in a competitive industry where each #0Crm has a constant

marginal cost of 2 dollars per unit of output,If marginal cost for Brand X rises to 4 dollars per

unit and marginal costs of all other #0Crms in the industry stay constant,byhowmuch does the price

in the industry increase?

#28a#29 2

#28b#29 1

#28c#29 0

#28d#29 2=n where n is the number of #0Crms in the industry

#28e#29 None of the above.

Topic,Industry Supply Di#0Eculty,3

#25 Correct Responses,40 Discrimination Index,21

Correct Answer,B

23.11 A #0Crm uses a single input to produce its output,which is sold in a competitive market,It

gets quantity discounts on purchases of its input,If it buys x units of the input,the price it must

pay per unit of input is #2836=x#29+5,If it buys no inputs it doesn't havetopayanything,The #0Crm's

production function is f#28x#29=13x,x

2

,If the price of the #0Crm's output is 1,the pro#0Ct-maximizing

amount of input to buy is:

#28a#29 4.

#28b#29 0.

#28c#29 8.

#28d#29 6.

#28e#29 None of the above.

MULTIPLE CHOICE 429

Topic,Industry Supply Di#0Eculty,3

#25 Correct Responses,40 Discrimination Index,21

Correct Answer,B

23.12 A #0Crm uses a single input to produce its output,which is sold in a competitive market,It

gets quantity discounts on purchases of its input,If it buys x units of the input,the price it must

pay per unit of input is #28441=x#29+3,If it buys no inputs it doesn't havetopayanything,The #0Crm's

production function is f#28x#29=15x,x

2

,If the price of the #0Crm's output is 1,the pro#0Ct-maximizing

amount of input to buy is:

#28a#29 6.

#28b#29 0.

#28c#29 12.

#28d#29 9.

#28e#29 None of the above.

Topic,Industry Supply Di#0Eculty,2

#25 Correct Responses,49 Discrimination Index,22

Correct Answer,A

23.13 Chirimollas grow only on the island of Socorro,o#0B the coast of Mexico,They need very

little soil,so virtually an unlimited supply can be grown at a cost of $4 per unit,When they are

exported to the U.S.,half of the chirimollas that are shipped rot on the boat and are dumped in the

ocean,Shipping costs are $1 for every unit that is put on board a ship,The demand function for

chirimollas in the U.S,is given by the equation q =10;000,20p

2

.Ifchirimollas are competitively

supplied,the number of units that are sold in the United States will be:

#28a#29 8000.

#28b#29 9500.

#28c#29 9680.

#28d#29 9190.

#28e#29 9000.

CHAPTER 23 Industry Supply 430

Topic,Industry Supply Di#0Eculty,2

#25 Correct Responses,38 Discrimination Index,37

Correct Answer,C

23.14 An industry has 1000 #0Crms,each with the production function f#28x

1;x

2

#29=x

1=2

1

x

1=2

2

,The

price of factor 1 is 1 and the price of factor 2 is 1,In the long run,both factors are variable,but in

the short run,each #0Crm is stuck with using 100 units of factor2.The long run industry supply curve:

#28a#29 is upward sloping with zero supply if price is less than 10.

#28b#29 is downward sloping for outputs less than 10.

#28c#29 is horizontal with zero supply for prices less than 2 and in#0Cnite supply for prices greater than 2.

#28d#29 is horizontal with zero supply for prices less than 10 and in#0Cnite supply for prices greater than 10.

#28e#29 is upward sloping with zero supply if price is less than 20.

Topic,Industry Supply Di#0Eculty,3

#25 Correct Responses,56 Discrimination Index,40

Correct Answer,C

23.15 Suppose that all #0Crms in a given industry have the same supply curve given by S

i

#28p#29=2p

when p is greater than or equal to $2 and S

i

#28p#29=0when p is less than $2,Suppose that market

demand is given by D#28p#29=12,p,If #0Crms continue to enter the industry so long as they can do so

pro#0Ctably,the equilibrium price must be closest to:

#28a#29 $5.

#28b#29 $4.

#28c#29 $2.40.

#28d#29 $2.

#28e#29 $1.75.

MULTIPLE CHOICE 431

Topic,Industry Supply Di#0Eculty,2

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,B

23.16 In the absence of governmentinterference,there is a constant marginal cost of $6 per ounce

for growing marijuana and delivering it to buyers,Suppose that government authorities seize ship-

ments whenever they #0Cnd them and resell the marijuana that they seize on the open market,The

probability that any shipment of marijuana is seized is 0.20,If a shipment is seized,there is no

other punishment besides loss of the marijuana that is seized,The e#0Bect of the government action

is:

#28a#29 to leave prices unchanged.

#28b#29 raise the equilibrium price by 1.50.

#28c#29 lower the equilibrium price by 0.75.

#28d#29 raise the equilibrium price by3

#28e#29 raise the equilibrium price by 1.20

Topic,Industry Supply Di#0Eculty,2

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,B

23.17 In the absence of governmentinterference,there is a constant marginal cost of $7 per ounce

for growing marijuana and delivering it to buyers,Suppose that government authorities seize ship-

ments whenever they #0Cnd them and resell the marijuana that they seize on the open market,The

probability that any shipment of marijuana is seized is 0.10,If a shipment is seized,there is no

other punishment besides loss of the marijuana that is seized,The e#0Bect of the government action

is:

#28a#29 to leave prices unchanged.

#28b#29 raise the equilibrium price by 0.78.

#28c#29 lower the equilibrium price by 0.39.

#28d#29 raise the equilibrium price by 1.56

#28e#29 raise the equilibrium price by 0.70

CHAPTER 23 Industry Supply 432

Topic,Industry Supply Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,A

23.18 In the problem discussed in your workbook,the cost of capturing a cockatoo and trans-

porting him to the U.S,is about $40 per bird,Cockatoos are drugged and smuggled in suitcases

to the U.S,Half of the smuggled cockatoos die in transit,Eachsmuggled cockatoo has a 10#25

probability of being discovered,in which case the smuggler is #0Cned,If the #0Cne imposed for each

smuggled cockatoo is increased to $900,then the equilibrium price of cockatoos in the U.S,will be:

#28a#29 288.89.

#28b#29 130.

#28c#29 85.

#28d#29 67.

#28e#29 200.

Topic,Industry Supply Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,A

23.19 In the problem discussed in your workbook,the cost of capturing a cockatoo and trans-

porting him to the U.S,is about $40 per bird,Cockatoos are drugged and smuggled in suitcases

to the U.S,Half of the smuggled cockatoos die in transit,Eachsmuggled cockatoo has a 10#25

probability of being discovered,in which case the smuggler is #0Cned,If the #0Cne imposed for each

smuggled cockatoo is increased to $1,400,then the equilibrium price of cockatoos in the U.S,will be:

#28a#29 400.

#28b#29 180.

#28c#29 110.

#28d#29 82.

#28e#29 311.11.

MULTIPLE CHOICE 433

Topic,Industry Supply Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,A

23.20 In the absence of governmentinterference,there is a constant marginal cost of $5 per

ounce for growing marijuana and delivering it to buyers,If the probability that any shipmentof

marijuana is seized is 0.10 and the #0Cne if a shipper is caught is $50 per ounce,then the equilibrium

price of marijuana per ounce is:

#28a#29 11.11.

#28b#29 10.

#28c#29 55.

#28d#29 4.50.

#28e#29 5.50.

Topic,Industry Supply Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,A

23.21 In the absence of governmentinterference,there is a constant marginal cost of $5 per

ounce for growing marijuana and delivering it to buyers,If the probability that any shipmentof

marijuana is seized is 0.30 and the #0Cne if a shipper is caught is $15 per ounce,then the equilibrium

price of marijuana per ounce is:

#28a#29 13.57.

#28b#29 9.50.

#28c#29 20.

#28d#29 3.50.

#28e#29 6.50.

Topic,Industry Supply Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,D

23.22 In a certain industry,the supply curveofany #0Crm is S

i

#28p#29=p=2,If a #0Crm produces 3 units

of output,what is its total variable costs?

#28a#29 $18

#28b#29 $7

#28c#29 $13.50

#28d#29 $9

#28e#29 There is not enough information given to determine total variable costs.

CHAPTER 23 Industry Supply 434

Topic,Industry Supply Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,D

23.23 In a certain industry,the supply curveofany #0Crm is S

i

#28p#29=p=2,If a #0Crm produces 6 units

of output,what is its total variable costs?

#28a#29 $72

#28b#29 $34

#28c#29 $54

#28d#29 $36

#28e#29 There is not enough information given to determine total variable costs.

Topic,Industry Supply Di#0Eculty,0

#25 Correct Responses,12 Discrimination Index,15

Correct Answer,A

23.24 An industry has 100 #0Crms,These #0Crms have identical production functions,In the short

run,each #0Crm has #0Cxed costs of $400,There are twovariable factors in the short run and output

is given by y =#28min#28x

1;4x

2

#29#29

1=2

,The cost of factor 1 is $4 per unit and the cost of factor 2 is $2

per unit,In the short run,the industry supply curve is given by:

#28a#29 Q = 100p=9

#28b#29 Q = 100p=8

#28c#29 Q = 600p

1=2

#28d#29 the part of the line Q = 50#28min#284;8#29#29 for which pQ #3E 400=Q.

#28e#29 None of the above.

Topic,Industry Supply Di#0Eculty,0

#25 Correct Responses,12 Discrimination Index,15

Correct Answer,A

23.25 An industry has 100 #0Crms,These #0Crms have identical production functions,In the short

run,each #0Crm has #0Cxed costs of $200,There are twovariable factors in the short run and output

is given by y =#28min#28x

1;4x

2

#29#29

1=2

,The cost of factor 1 is $5 per unit and the cost of factor 2 is $3

per unit,In the short run,the industry supply curve is given by:

#28a#29 Q = 100p=11:50

#28b#29 Q = 100p=10

#28c#29 Q = 633:33p

1=2

#28d#29 the part of the line Q = 50#28min#285;12#29#29 for which pQ #3E 200=Q.

#28e#29 None of the above.

MULTIPLE CHOICE 435

Topic,Industry Supply Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,B

23.26 The cheese business in LakeFon-du-lac,Wisconsin is a competitive industry,All cheese

manufacturers have the cost function C = Q

2

+9;while demand for cheese in the town is given by

Q

d

= 120,P,The long run equilibrium number of #0Crms in this industry is

#28a#29 19

#28b#29 38

#28c#29 34

#28d#29 120

#28e#29 39

Topic,Industry Supply Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,B

23.27 The cheese business in LakeFon-du-lac,Wisconsin is a competitive industry,All cheese

manufacturers have the cost function C = Q

2

+16;while demand for cheese in the town is given by

Q

d

= 120,P,The long run equilibrium number of #0Crms in this industry is

#28a#29 14

#28b#29 28

#28c#29 22

#28d#29 120

#28e#29 29

CHAPTER 23 Industry Supply 436

Topic,Industry Supply Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,C

23.28 In Baggs,Wyoming,cattle can be produced according to the following process:

C =#28G=10#29+ #28P=30#29

where C is the number of cattle,G are bushels of grain,and P are acres of pasture,If grain costs

$5 per bushel,and pasture costs $4 per acre,how many cattle can Rancher Roy produce with a

budget of $9,000?

#28a#29 1,800

#28b#29 225

#28c#29 180

#28d#29 75

#28e#29 900

Topic,Industry Supply Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,C

23.29 In Baggs,Wyoming,cattle can be produced according to the following process:

C =#28G=10#29+ #28P=40#29

where C is the number of cattle,G are bushels of grain,and P are acres of pasture,If grain costs

$2 per bushel,and pasture costs $3 per acre,how many cattle can Rancher Roy produce with a

budget of $9,000?

#28a#29 3,000

#28b#29 180

#28c#29 450

#28d#29 75

#28e#29 900

Essay Industry Supply

Topic,Industry Supply Di#0Eculty,2

#25 Correct Responses,0 Discrimination Index,0

23.1 The cost per bushel of growing corn on a given acre of land depends partly on howintensely

the land is farmed and partly on the quality of the soil,the amount of rainfall and the length of

the growing season,Suppose that the last three factors are summarized by a single index "f" for

fertility,Suppose that the long run total cost of producing y hundred bushels of corn on an acre

of land of fertility f is c#28y;f#29 where c#28y;f#29 = #281 + y

2

#29=f for y#3E0and c#280;f#29=0.a#29Write down a

formula for the long run average cost function per hundred bushels of corn from an acre of land

of quality f? b#29 At what level of output is long run average cost minimized on an acre of land of

quality f? c#29 What is the lowest price per hundred bushels at which an acre of land of quality f

will be used to produce corn?

Answer,a#29LRAC =#28y+1=y#29=f b#291 hundred bushels c#292=f.

Topic,Industry Supply Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

23.2 The price elasticity of gasoline in the United States has been estimated to be 0.15,If this

is so,should pro#0Ct maximizing gasoline stations raise their prices? #28Explain whyorwhy not.#29

Answer,Individual station's price elasticities of demand are quite elastic because of competition

between stations.

Topic,Industry Supply Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

23.3 The price elasticity of demand for gasoline in the United States is equal to 0.15,How should

the price elasticity of demand for the individual #0Crm compare to 0.15 #28higher; lower,same,can't

tell#29? Explain why.

Chapter 24

True-False Monopoly

Topic,Monopoly Di#0Eculty,1

#25 Correct Responses,76 Discrimination Index,37

Correct Answer,True

24.1 Since a monopoly charges a price higher than marginal cost,it will produce an ine#0Ecient

amount of output.

Topic,Monopoly Di#0Eculty,2

#25 Correct Responses,45 Discrimination Index,22

Correct Answer,False

24.2 If the interest rate is 10#25,a monopolist will choose a markup of price over marginal cost of

at least 10#25.

Topic,Monopoly Di#0Eculty,1

#25 Correct Responses,73 Discrimination Index,13

Correct Answer,False

24.3 A natural monopoly occurs when a #0Crm gains ownership of the entire stock of some natural

resource and thus is able to exclude other producers.

Topic,Monopoly Di#0Eculty,1

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,False

24.4 Since a monopoly makes excess pro#0Cts beyond the normal rate of return on investment,an

investor is likely to get a higher rate of return in the stock market byinvesting in monopolistic

rather than competitive industries.

Topic,Monopoly Di#0Eculty,1

#25 Correct Responses,90 Discrimination Index,3

Correct Answer,True

24.5 If he produces anything at all,a pro#0Ct-maximizing monopolist with some #0Cxed costs and

no variable costs will set price and output so as to maximize revenue.

TRUE-FALSE 439

Topic,Monopoly Di#0Eculty,1

#25 Correct Responses,85 Discrimination Index,29

Correct Answer,True

24.6 For a monopolist who faces a downward sloping demand curve,marginal revenue is less

than price whenever quantity sold is positive.

Topic,Monopoly Di#0Eculty,2

#25 Correct Responses,46 Discrimination Index,32

Correct Answer,True

24.7 A monopolist with constant marginal costs faces a demand curve with a constant elasticity

of demand and does not practice price discrimination,If the government imposes a tax of $1 per

unit of goods sold by the monopolist,the monopolist will increase his price by more than $1 per

unit.

Topic,Monopoly Di#0Eculty,1

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,True

24.8 A monopolist will always equate marginal revenue and marginal cost when maximizing

pro#0Ct.

Multiple Choice Monopoly

Topic,Monopoly Di#0Eculty,2

#25 Correct Responses,20 Discrimination Index,33

Correct Answer,C

24.1 A monopolist faces the inverse demand function described by p =32,5qwhere q is output.

The monopolist has no #0Cxed cost and his marginal cost is 7 at all levels of output,Which of the

following expresses the monopolist's pro#0Cts as a function of his output?

#28a#29 32,5q,7

#28b#29 32,10q

#28c#29 25q,5q

2

#28d#29 32q,5q

2

,7

#28e#29 None of the above.

Topic,Monopoly Di#0Eculty,2

#25 Correct Responses,20 Discrimination Index,33

Correct Answer,C

24.2 A monopolist faces the inverse demand function described by p =29,2qwhere q is output.

The monopolist has no #0Cxed cost and his marginal cost is 6 at all levels of output,Which of the

following expresses the monopolist's pro#0Cts as a function of his output?

#28a#29 29,2q,6

#28b#29 29,4q

#28c#29 23q,2q

2

#28d#29 29q,2q

2

,6

#28e#29 None of the above.

Topic,Monopoly Di#0Eculty,1

#25 Correct Responses,91 Discrimination Index,23

Correct Answer,E

24.3 A monopolist faces the inverse demand curve p = 192,4q.At what level of output is his

total revenue maximized?

#28a#29 36

#28b#29 34

#28c#29 12

#28d#29 48

#28e#29 24

MULTIPLE CHOICE 441

Topic,Monopoly Di#0Eculty,1

#25 Correct Responses,91 Discrimination Index,23

Correct Answer,E

24.4 A monopolist faces the inverse demand curve p = 288,6q.At what level of output is his

total revenue maximized?

#28a#29 36

#28b#29 34

#28c#29 12

#28d#29 48

#28e#29 24

Topic,Monopoly Di#0Eculty,2

#25 Correct Responses,69 Discrimination Index,23

Correct Answer,B

24.5 The demand for a monopolist's output is 7000 divided by the square of the price in dollars

that it charges per unit,The #0Crm has constant marginal costs equal to 1 dollar per unit,To

maximize its pro#0Cts it should charge a price of:

#28a#29 1.

#28b#29 2.

#28c#29 3.

#28d#29 1.5.

#28e#29 2.5.

Topic,Monopoly Di#0Eculty,2

#25 Correct Responses,68 Discrimination Index,27

Correct Answer,A

24.6 A pro#0Ct-maximizing monopolist faces the demand curve,q = 100,3p,It produces at a con-

stant marginal cost of $20 per unit,A quantity tax of $10 per unit is imposed on the monopolist's

product,The price of the monopolist's product:

#28a#29 rises by $5.

#28b#29 rises by $10.

#28c#29 rises by $20.

#28d#29 rises by $12.

#28e#29 stays constant.

CHAPTER 24 Monopoly 442

Topic,Monopoly Di#0Eculty,2

#25 Correct Responses,39 Discrimination Index,44

Correct Answer,C

24.7 The demand for a monopolist's output is 10,000 divided by the square of the price he

charges,The monopolist produces at a constant marginal cost of $5,If the government imposes a

sales tax of $10 per unit on the monopolist's output,the monopolists price will rise by:

#28a#29 $5.

#28b#29 $10.

#28c#29 $20.

#28d#29 $12.

#28e#29 None of the above.

Topic,Monopoly Di#0Eculty,2

#25 Correct Responses,56 Discrimination Index,35

Correct Answer,C

24.8 The demand for a monopolist's output is 2;000=#28p+1#29

2

where p is the price she charges,At

a price of 3,the elasticity of demand for the monopolist's output is:

#28a#29,1.

#28b#29,2:50.

#28c#29,1:50.

#28d#29,2.

#28e#29,1.

Topic,Monopoly Di#0Eculty,2

#25 Correct Responses,56 Discrimination Index,35

Correct Answer,C

24.9 The demand for a monopolist's output is 4;000=#28p+5#29

2

where p is the price she charges,At

a price of 9,the elasticity of demand for the monopolist's output is:

#28a#29,1.

#28b#29,2:29.

#28c#29,1:29.

#28d#29,1:79.

#28e#29,0:79.

MULTIPLE CHOICE 443

Topic,Monopoly Di#0Eculty,3

#25 Correct Responses,57 Discrimination Index,33

Correct Answer,D

24.10 The demand for a monopolist's output is 3;000=#28p +1#29

2

where p is her price,She has

constant marginal costs equal to $5 per unit,What price will she charge to maximize her pro#0Cts?

#28a#29 15

#28b#29 6

#28c#29 14

#28d#29 11

#28e#29 5

Topic,Monopoly Di#0Eculty,3

#25 Correct Responses,57 Discrimination Index,33

Correct Answer,D

24.11 The demand for a monopolist's output is 6;000=#28p +3#29

2

where p is her price,She has

constant marginal costs equal to $5 per unit,What price will she charge to maximize her pro#0Cts?

#28a#29 20

#28b#29 8

#28c#29 17

#28d#29 13

#28e#29 5

Topic,Monopoly Di#0Eculty,2

#25 Correct Responses,60 Discrimination Index,36

Correct Answer,D

24.12 A monopolist faces a constant marginal cost of $1 per unit,If at the price he is charging,

the price elasticity of demand for the monopolist's output is,:5; then:

#28a#29 the price he is charging must be 2.

#28b#29 the price he is charging must exceed 2.

#28c#29 the price he is charging must be less than 2.

#28d#29 the monopolist can not be maximizing pro#0Cts.

#28e#29 the monopolist must use price discrimination.

CHAPTER 24 Monopoly 444

Topic,Monopoly Di#0Eculty,1

#25 Correct Responses,95 Discrimination Index,0

Correct Answer,E

24.13 A pro#0Ct-maximizing monopolist sets:

#28a#29 price equal to average cost.

#28b#29 price equal to marginal cost.

#28c#29 price equal to marginal cost plus a pro-rated share of overhead.

#28d#29 price equal to marginal revenue.

#28e#29 marginal revenue equal to marginal cost.

Topic,Monopoly Di#0Eculty,2

#25 Correct Responses,38 Discrimination Index,32

Correct Answer,C

24.14 A monopolist has decreasing average costs as output increases,If the monopolist sets price

equal to average cost,it will:

#28a#29 produce too much output from the standpoint of e#0Eciency.

#28b#29 lose money.

#28c#29 produce too little output from the standpoint of e#0Eciency.

#28d#29 maximize its pro#0Cts.

#28e#29 face excess demand.

Topic,Monopoly Di#0Eculty,1

#25 Correct Responses,87 Discrimination Index,24

Correct Answer,D

24.15 A pro#0Ct maximizing monopolist faces a downward sloping demand curve thathas a constant

elasticityof,4,The #0Crm #0Cnds it optimal to charge a price of 60 for its output,What is its marginal

cost at this level of output?

#28a#29 23.50

#28b#29 136

#28c#29 120

#28d#29 45

#28e#29 60

MULTIPLE CHOICE 445

Topic,Monopoly Di#0Eculty,1

#25 Correct Responses,87 Discrimination Index,24

Correct Answer,D

24.16 A pro#0Ct maximizing monopolist faces a downward sloping demand curve thathas a constant

elasticityof,2,The #0Crm #0Cnds it optimal to charge a price of 60 for its output,What is its marginal

cost at this level of output?

#28a#29 16

#28b#29 91

#28c#29 120

#28d#29 30

#28e#29 60

Topic,Monopoly Di#0Eculty,2

#25 Correct Responses,82 Discrimination Index,3

Correct Answer,D

24.17 A monopolist has constant marginal costs of $1 per unit,The demand for her output is

1000=p if p is less than or equal to 50,The demand is 0 if p#3E50,What is her pro#0Ct maximizing

level of output?

#28a#29 5

#28b#29 10

#28c#29 15

#28d#29 20

#28e#29 25

Topic,Monopoly Di#0Eculty,2

#25 Correct Responses,42 Discrimination Index,32

Correct Answer,B

24.18 The demand curve for the output of a certain industry is linear,q = A,Bp,There are

constantmarginal costs ofC.Forall values of A,B;and C such thatA#3E0;B#3E0;and 0 #3CC#3CA=B:

#28a#29 if the industry is monopolized,prices will be exactly twice as high as they would be if the industry were

competitive.

#28b#29 if the industry is competitive,output will be exactly twice as great as it would be if the industry were

monopolized.

#28c#29 if the industry is monopolized,prices will be more than twice as high as if the industry is competitive.

#28d#29 if the industry is monopolized,output will be more than half as large as it would be if the industry were

competitive.

#28e#29 None of the above.

CHAPTER 24 Monopoly 446

Topic,Monopoly Di#0Eculty,3

#25 Correct Responses,15 Discrimination Index,0

Correct Answer,B

24.19 A monopolist receives a subsidy from the government for every unit of output that is con-

sumed,He has constant marginal costs and the subsidy that he gets per unit of output is greater

than his marginal cost of production,But to get the subsidy on a unit of output,somebody has to

consume it,From these facts we can conclude that:

#28a#29 he will pay consumers to consume his product.

#28b#29 if he sells at a positive price,demand must be inelastic at that price.

#28c#29 he will sell at a price where demand is elastic.

#28d#29 he will give the good away.

#28e#29 None of the above.

Topic,Monopoly Di#0Eculty,2

#25 Correct Responses,59 Discrimination Index,24

Correct Answer,C

24.20 A monopolist faces the demand curve q = 110,p=2 where q is the number of units sold and

p is the price in dollars,He has quasi-#0Cxed costs,C; and constant marginal costs of $20 per unit of

output,Therefore his total costs are C +20qif q#3E0and0ifq=0,What is the largest value of C

for whichhewould be willing to produce positive output?

#28a#29 $20

#28b#29 $4,000

#28c#29 $5,000

#28d#29 $7,500

#28e#29 $6,000

MULTIPLE CHOICE 447

Topic,Monopoly Di#0Eculty,2

#25 Correct Responses,59 Discrimination Index,24

Correct Answer,C

24.21 A monopolist faces the demand curve q = 115,p=2 where q is the number of units sold and

p is the price in dollars,He has quasi-#0Cxed costs,C; and constant marginal costs of $30 per unit of

output,Therefore his total costs are C +30qif q#3E0and0ifq=0,What is the largest value of C

for whichhewould be willing to produce positive output?

#28a#29 $30

#28b#29 $4,000

#28c#29 $5,000

#28d#29 $7,500

#28e#29 $6,000

Topic,Monopoly Di#0Eculty,2

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,C

24.22 A natural monopolist has the a total cost function c#28q#29 = 350+ 20q where q is its output.

The inverse demand function for the monopolist's product is p = 100,2q.Government regulations

require this #0Crm to produce a positive amount and to set price equal to average cost,To comply

with these requirements:

#28a#29 is impossible for this #0Crm.

#28b#29 the #0Crm must produce 40 units.

#28c#29 the #0Crm could produce either 5 units or 35 units.

#28d#29 the #0Crm must charge a price of 70.

#28e#29 the #0Crm must produce 20 units.

CHAPTER 24 Monopoly 448

Topic,Monopoly Di#0Eculty,2

#25 Correct Responses,69 Discrimination Index,20

Correct Answer,D

24.23 A monopolist has the total cost function,c#28q#29=1;300+ 7q,The inverse demand function

is 110,2q; where prices and costs are measured in dollars,If the #0Crm is required bylaw to meet

demand at a price equal to its marginal cost:

#28a#29 the #0Crm's pro#0Cts will be zero.

#28b#29 the #0Crm will lose $650.

#28c#29 the #0Crm will make positive pro#0Ct,but not as much pro#0Ct as it would makeifitwere allowed to choose

its own price.

#28d#29 the #0Crm will lose $1,300

#28e#29 the #0Crm will lose $780

Topic,Monopoly Di#0Eculty,2

#25 Correct Responses,69 Discrimination Index,20

Correct Answer,D

24.24 A monopolist has the total cost function,c#28q#29 = 850 + 4q,The inverse demand function

is 190,5q; where prices and costs are measured in dollars,If the #0Crm is required bylaw to meet

demand at a price equal to its marginal cost:

#28a#29 the #0Crm's pro#0Cts will be zero.

#28b#29 the #0Crm will lose $425.

#28c#29 the #0Crm will make positive pro#0Ct,but not as much pro#0Ct as it would makeifitwere allowed to choose

its own price.

#28d#29 the #0Crm will lose $850

#28e#29 the #0Crm will lose $510

MULTIPLE CHOICE 449

Topic,Monopoly Di#0Eculty,2

#25 Correct Responses,61 Discrimination Index,10

Correct Answer,B

24.25 A monopolist enjoys a monopoly over the right to sell automobiles on a certain island.

He imports automobiles from abroad at a cost of $10,000 each and sells them at the price that

maximizes pro#0Cts,One day,the island's government annexes a neighboring island and extends the

monopolist's monopoly rights to this island,People on the annexed island have the same tastes

and incomes and there are just as many people as on the #0Crst.

#28a#29 The monopolist doubles his price and his sales stay constant.

#28b#29 The monopolist keeps his price constant and his sales double.

#28c#29 The monopolist raises his price but does not necessarily double it.

#28d#29 The monopolist's pro#0Cts more than double.

#28e#29 None of the above.

Topic,Monopoly Di#0Eculty,3

#25 Correct Responses,41 Discrimination Index,53

Correct Answer,D

24.26 An airline has exclusive landing rights at the local airport,The airline #0Dies one #0Dightper

day to New York with a plane that has a seating capacity of 100,The cost of #0Dying the plane

per day is $4,000 +10q where q is the number of passengers,The number of #0Dights to New York

demanded is q = 165,:5p,If the airline maximizes its monopoly pro#0Cts,the di#0Berence between the

marginal cost of #0Dying an extra passenger and the amount the marginal passenger is willing to pay

to #0Dy to New York is:

#28a#29 $10.

#28b#29 $100.

#28c#29 $140.

#28d#29 $160.

#28e#29 None of the above.

CHAPTER 24 Monopoly 450

Topic,Monopoly Di#0Eculty,2

#25 Correct Responses,65 Discrimination Index,25

Correct Answer,D

24.27 A monopoly has the demand curve q =10;000,100p,Its total cost function is c#28q#29=

1000+ 10q,The government plans to tax the monopoly's pro#0Cts at a rate of 50#25,If it does so:

#28a#29 the monopoly will increase its price by 50#25.

#28b#29 the monopoly will increase its price by more than 50#25.

#28c#29 the monopoly will recover some,but not all of the tax it pays by increasing its price.

#28d#29 the monopoly will not change its price or the quantity it sells.

#28e#29 none of the above.

Topic,Monopoly Di#0Eculty,2

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,E

24.28 A monopolist faces a downward-sloping demand curve and has #0Cxed costs so large that

when he maximizes pro#0Cts with a positive amount of output,he earns exactly zero pro#0Cts,At this

positive,pro#0Ct-maximizing output,it must be that:

#28a#29 there are decreasing returns to scale.

#28b#29 demand is price inelastic.

#28c#29 marginal revenue is greater than marginal cost.

#28d#29 price equals marginal cost.

#28e#29 average total cost is greater than marginal cost.

MULTIPLE CHOICE 451

Topic,Monopoly Di#0Eculty,2

#25 Correct Responses,70 Discrimination Index,45

Correct Answer,D

24.29 A computer software #0Crm has developed a new and better spreadsheet program,The pro-

gram is protected by copyrights,so the #0Crm can act as a monopolist for this product,The demand

function for the spreadsheet is q =50;000,100p.Any single consumer will want only one copy.

The marginal cost of producing and distributing another copy and its documentation is just $10

per copy,If the company sells this software at the pro#0Ct maximizing monopoly price,the number

of consumers who would not buy the software at the monopoly price but would be willing to pay

at least the marginal cost is:

#28a#29 50,000.

#28b#29 12,000.

#28c#29 14,000.

#28d#29 25,000.

#28e#29 None of the above.

Topic,Monopoly Di#0Eculty,3

#25 Correct Responses,21 Discrimination Index,9

Correct Answer,D

24.30 The town council of Frostbite,Ontario is trying to decide whether to build an outdoor

skating rink whichwould cost $1 million and last for only one season,Operating costs would be

zero,Yearly passes would be sold to anyone who wanted to use the rink,If p is the price of the

pass in dollars,the number demanded would be q = 1200,:6p,The council has asked you to advise

them on building the rink,You should tell them:

#28a#29 revenues won't cover construction costs at any ticket price,There is no way to increase total consumer

surplus by building the rink.

#28b#29 if the rink is built and price is set to maximize pro#0Cts,the town makes a pro#0Ct and consumers will be

better o#0B.

#28c#29 if the rink is built and price set to maximize pro#0Cts,the town makes a pro#0Ct but consumers are worse

o#0B than without a rink.

#28d#29 there is no price at which ticket revenues still cover costs,but total consumer surplus from the rink

exceeds costs.

#28e#29 None of the above.

CHAPTER 24 Monopoly 452

Topic,Monopoly Di#0Eculty,2

#25 Correct Responses,58 Discrimination Index,35

Correct Answer,C

24.31 A monopolist produces at a point where the price elasticity of demand is,:7 and the

marginal cost is 2,If you were hired to advise this monopolist on how to increase his pro#0Cts,you

would #0Cnd that the way to increase his pro#0Cts is to:

#28a#29 increase his output.

#28b#29 lower the price.

#28c#29 decrease his output.

#28d#29 produce the output level where marginal cost equals price.

#28e#29 increase his advertising e#0Borts.

Topic,Monopoly Di#0Eculty,2

#25 Correct Responses,46 Discrimination Index,22

Correct Answer,C

24.32 The Hard Times Concrete company is a monopolist in the concrete market,It uses two

inputs,cement and gravel,which it buys in competitive markets,The company's production func-

tion is q = c

1=2

g

1=2

where q is its output,c is the amount of cement it uses,and g is the amountof

gravel it uses,If the price of cement goes up the #0Crm's demand for cement:

#28a#29 goes down and its demand for gravel goes up.

#28b#29 goes down and its demand for gravel goes down.

#28c#29 goes down and its demand for gravel may go up,down,or remain the same,depending on the demand

function for concrete.

#28d#29 may go up,down,or not change,based on whether the cement's elasticity of demand is less than,equal

to,or greater than,1.

#28e#29 could go up or down,but must move in the opposite direction from its demand for gravel.

MULTIPLE CHOICE 453

Topic,Monopoly Di#0Eculty,1

#25 Correct Responses,80 Discrimination Index,41

Correct Answer,B

24.33 In a market with inverse demand curve P =10,Q; Brand X is a monopolist with no #0Cxed

costs and with a marginal cost of 2,If marginal cost rises to 4,byhowmuch will the price of Brand

X rise?

#28a#29 2

#28b#29 1

#28c#29 3

#28d#29 No change,the #0Crm is already charging the monopoly price.

#28e#29 None of the above.

Topic,Monopoly Di#0Eculty,2

#25 Correct Responses,43 Discrimination Index,23

Correct Answer,C

24.34 Charlie can work as many hours as he wishes at a local fast food restaurant for a wage

of $4 per hour,Charlie also does standup comedy,Since Charlie lives in a quiet,rather solemn

midwestern town,he is the town's only comedian and has a local monopoly for standup comedy.

The demand for comedy is Q =40,Pwhere Q is the number of hours of comedy performed per

week and P is the price charged per hour of comedy,When Charlie maximizes his utility,he spends

at least one hour per week working at the restaurant and he gets at least one hour of leisure time.

His utility depends only on income and leisure,How many hours per week does he perform standup

comedy?

#28a#29 36

#28b#29 40

#28c#29 18

#28d#29 20

#28e#29 We can't tell without knowing his utility function.

CHAPTER 24 Monopoly 454

Topic,Monopoly Di#0Eculty,2

#25 Correct Responses,63 Discrimination Index,23

Correct Answer,D

24.35 A certain monopolist has a positive marginal cost of production,Despite this fact,the

monopolist decides to produce a quantity of output that maximizes total revenues,Assume that

the marginal revenue curve for this monopolist always has a negative slope,Then the monopolist:

#28a#29 is minimizing its pro#0Cts.

#28b#29 produces the same output that it would if it maximized pro#0Cts.

#28c#29 produces less output than it would if it maximized pro#0Cts.

#28d#29 produces more output than it would if it were maximizing pro#0Cts.

#28e#29 produces an output where marginal revenue is strictly less than 1.

Topic,Monopoly Di#0Eculty,2

#25 Correct Responses,46 Discrimination Index,9

Correct Answer,D

24.36 The demand curve facing a monopolist is D#28p#29 = 100=p if p is 20 or smaller and D#28p#29=0

if p#3E20,The monopolist has a constant marginal cost of $1 per unit produced,What is the

pro#0Ct-maximizing quantity of output for this monopolist?

#28a#29 4

#28b#29 3

#28c#29 2

#28d#29 5

#28e#29 Cannot be determined.

MULTIPLE CHOICE 455

Topic,Monopoly Di#0Eculty,2

#25 Correct Responses,74 Discrimination Index,37

Correct Answer,B

24.37 An industry has two #0Crms,a leader and a follower,The demand curve for the industry's

output is given by the function p = 320,4q; where q is total industry output,Each #0Crm has zero

marginal cost,The leader chooses his quantity #0Crst,knowing that the follower will observe the

leader's choice and choose his quantity to maximize pro#0Cts,given the quantity produced by the

leader,The leader will choose an output of:

#28a#29 26.67.

#28b#29 40.

#28c#29 20.

#28d#29 80.

#28e#29 None of the above.

Topic,Monopoly Di#0Eculty,2

#25 Correct Responses,74 Discrimination Index,37

Correct Answer,B

24.38 An industry has two #0Crms,a leader and a follower,The demand curve for the industry's

output is given by the function p =80,2q; where q is total industry output,Each #0Crm has zero

marginal cost,The leader chooses his quantity #0Crst,knowing that the follower will observe the

leader's choice and choose his quantity to maximize pro#0Cts,given the quantity produced by the

leader,The leader will choose an output of:

#28a#29 13.33.

#28b#29 20.

#28c#29 10.

#28d#29 40.

#28e#29 None of the above.

CHAPTER 24 Monopoly 456

Topic,Monopoly Di#0Eculty,1

#25 Correct Responses,72 Discrimination Index,19

Correct Answer,A

24.39 A monopolist faces a constant marginal cost of $1 per unit and has no #0Cxed costs,If the

price elasticity of demand for this product is constant and equal to,3; then:

#28a#29 to maximize pro#0Cts,he should charge a price of 1.50.

#28b#29 to maximize pro#0Cts,he should charge a price of 3.

#28c#29 to maximize pro#0Cts,he should charge a price of 1.33.

#28d#29 he is not maximizing pro#0Cts.

#28e#29 none of the above

Topic,Monopoly Di#0Eculty,1

#25 Correct Responses,72 Discrimination Index,19

Correct Answer,A

24.40 A monopolist faces a constant marginal cost of $1 per unit and has no #0Cxed costs,If the

price elasticity of demand for this product is constant and equal to,5; then:

#28a#29 to maximize pro#0Cts,he should charge a price of 1.25.

#28b#29 to maximize pro#0Cts,he should charge a price of 5.

#28c#29 to maximize pro#0Cts,he should charge a price of 1.20.

#28d#29 he is not maximizing pro#0Cts.

#28e#29 none of the above

Topic,Monopoly Di#0Eculty,2

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,C

24.41 A pro#0Ct-maximizing monopolist has the cost schedule,c#28y#29=10y,The demand for her

product is given by y = 800=p

3

where p is her price,Suppose that the government tries to get her

to increase her output by giving her a subsidy of 18 dollars for every unit that she sells,Giving her

the subsidy would make her:

#28a#29 decrease her price by 9 dollars.

#28b#29 decrease her price by 18 dollars.

#28c#29 decrease her price by 27 dollars.

#28d#29 decrease her price by 45 dollars.

#28e#29 leave her price unchanged.

MULTIPLE CHOICE 457

Topic,Monopoly Di#0Eculty,2

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,C

24.42 A pro#0Ct-maximizing monopolist has the cost schedule,c#28y#29=30y,The demand for her

product is given by y = 700=p

2

where p is her price,Suppose that the government tries to get her

to increase her output by giving her a subsidy of 8 dollars for every unit that she sells,Giving her

the subsidy would make her:

#28a#29 decrease her price by 4 dollars.

#28b#29 decrease her price by 8 dollars.

#28c#29 decrease her price by 16 dollars.

#28d#29 decrease her price by 24 dollars.

#28e#29 leave her price unchanged.

Topic,Monopoly Di#0Eculty,2

#25 Correct Responses,74 Discrimination Index,22

Correct Answer,B

24.43 A pro#0Ct-maximizing monopolist faces a demand function given by q = 1000,20p where p is

the price of her output in dollars,She has a constant marginal cost of 20 dollars per unit of output.

In an e#0Bort to induce her to increase her output,the government agrees to pay her a subsidy of 10

dollars for every unit that she produces,In response to the subsidy,she will:

#28a#29 increase her price and lower her output.

#28b#29 decrease her price by $5 per unit.

#28c#29 decrease her price by $10 per unit.

#28d#29 decrease her price by more than $10 per unit,but by less than $16 per unit.

#28e#29 decrease her price by more than $16 per unit.

CHAPTER 24 Monopoly 458

Topic,Monopoly Di#0Eculty,2

#25 Correct Responses,69 Discrimination Index,36

Correct Answer,A

24.44 A #0Crm has discovered a new kind of non-fattening,non-habit forming dessert called zwi#0Fe.

It doesn't taste very good,but some people like it and it can be produced from old newspapers at

zero marginal cost,Before any zwi#0Fe can be produced,the #0Crm would have to spend a #0Cxed cost

of $F,Demand for zwi#0Fe is given by the equation q =20,p,The #0Crm has a patent on zwi#0Fe,so

it can have a monopoly in this market.

#28a#29 The #0Crm will produce zwi#0Fe only if F is less than or equal to 100.

#28b#29 The #0Crm will not produce zwi#0Fe if F#3E20.

#28c#29 The #0Crm will produce 20 units of zwi#0Fe.

#28d#29 The #0Crm will produce 15 units of zwi#0Fe.

#28e#29 None of the above.

Topic,Monopoly Di#0Eculty,2

#25 Correct Responses,69 Discrimination Index,36

Correct Answer,A

24.45 A #0Crm has discovered a new kind of non-fattening,non-habit forming dessert called zwi#0Fe.

It doesn't taste very good,but some people like it and it can be produced from old newspapers at

zero marginal cost,Before any zwi#0Fe can be produced,the #0Crm would have to spend a #0Cxed cost

of $F,Demand for zwi#0Fe is given by the equation q =22,p,The #0Crm has a patent on zwi#0Fe,so

it can have a monopoly in this market.

#28a#29 The #0Crm will produce zwi#0Fe only if F is less than or equal to 121.

#28b#29 The #0Crm will not produce zwi#0Fe if F#3E22.

#28c#29 The #0Crm will produce 22 units of zwi#0Fe.

#28d#29 The #0Crm will produce 16.50 units of zwi#0Fe.

#28e#29 None of the above.

MULTIPLE CHOICE 459

Topic,Monopoly Di#0Eculty,3

#25 Correct Responses,23 Discrimination Index,22

Correct Answer,B

24.46 A #0Crm has invented a new beverage called Slops,It doesn't taste very good,but it gives

people a craving for Lawrence Welk's music and Professor Johnson's jokes,Some people are willing

to pay money for this e#0Bect,so the demand for Slops is given by the equation q =18,p,Slops can

be made at zero marginal cost from old-fashioned macroeconomics books dissolved in bathwater.

But before any Slops can be produced,the #0Crm must undertake a #0Cxed cost of 86,Since the in-

ventor has a patent on Slops,it can be a monopolist in this new industry.

#28a#29 The #0Crm will produce 9 units of Slops.

#28b#29 APareto improvement could be achieved byhaving the governmentpay the #0Crm a subsidy of 91 and

insisting that the #0Crm o#0Ber Slops at zero price.

#28c#29 From the point of view of social e#0Eciency,it is best that no Slops be produced.

#28d#29 The #0Crm will produce 18 units of Slops.

#28e#29 None of the above.

Topic,Monopoly Di#0Eculty,3

#25 Correct Responses,23 Discrimination Index,22

Correct Answer,B

24.47 A #0Crm has invented a new beverage called Slops,It doesn't taste very good,but it gives

people a craving for Lawrence Welk's music and Professor Johnson's jokes,Some people are willing

to pay money for this e#0Bect,so the demand for Slops is given by the equation q =20,p,Slops can

be made at zero marginal cost from old-fashioned macroeconomics books dissolved in bathwater.

But before any Slops can be produced,the #0Crm must undertake a #0Cxed cost of 105,Since the

inventor has a patent on Slops,it can be a monopolist in this new industry.

#28a#29 The #0Crm will produce 10 units of Slops.

#28b#29 APareto improvement could be achieved byhaving the governmentpay the #0Crm a subsidy of 110 and

insisting that the #0Crm o#0Ber Slops at zero price.

#28c#29 From the point of view of social e#0Eciency,it is best that no Slops be produced.

#28d#29 The #0Crm will produce 20 units of Slops.

#28e#29 None of the above.

CHAPTER 24 Monopoly 460

Topic,Monopoly Di#0Eculty,2

#25 Correct Responses,57 Discrimination Index,21

Correct Answer,A

24.48 The demand for Professor Bongmore's new book is given by the function Q =5;000,100p.

If the cost of having the book typeset is 7,000,if the marginal cost of printing an extra copyis4,

and if he has no other costs,then he would maximize his pro#0Cts by:

#28a#29 having it typeset and selling 2,300 copies.

#28b#29 having it typeset and selling 2,500 copies.

#28c#29 not having it typeset and not selling any copies.

#28d#29 having it typeset and selling 4,600 copies.

#28e#29 having it typeset and selling 1,150 copies.

Topic,Monopoly Di#0Eculty,2

#25 Correct Responses,57 Discrimination Index,21

Correct Answer,A

24.49 The demand for Professor Bongmore's new book is given by the function Q =1;000,100p.

If the cost of having the book typeset is 12,000,if the marginal cost of printing an extra copyis4,

and if he has no other costs,then he would maximize his pro#0Cts by:

#28a#29 having it typeset and selling 300 copies.

#28b#29 having it typeset and selling 500 copies.

#28c#29 not having it typeset and not selling any copies.

#28d#29 having it typeset and selling 600 copies.

#28e#29 having it typeset and selling 150 copies.

Topic,Monopoly Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,A

24.50 Peter Morgan sells pigeon pies from his pushcart in Central Park,Due to the abundant

supplies of raw materials,his costs are zero,The demand schedule for his pigeon pies is p#28y#29=

90,y=4,What level of output will maximize Peter's pro#0Cts?

#28a#29 180

#28b#29 36

#28c#29 360

#28d#29 540

#28e#29 None of the above

MULTIPLE CHOICE 461

Topic,Monopoly Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,A

24.51 Peter Morgan sells pigeon pies from his pushcart in Central Park,Due to the abundant

supplies of raw materials,his costs are zero,The demand schedule for his pigeon pies is p#28y#29=

70,y=3,What level of output will maximize Peter's pro#0Cts?

#28a#29 105

#28b#29 21

#28c#29 210

#28d#29 315

#28e#29 None of the above

Topic,Monopoly Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,C

24.52 A pro#0Ct-maximizing monopoly faces an inverse demand function described by the equation

p#28y#29=40,yand its total costs are c#28y#29=9y; where prices and costs are measured in dollars,In

the past it was not taxed,but nowitmust pay a tax of 8 dollars per unit of output,After the tax,

the monopoly will:

#28a#29 increase its price by8.

#28b#29 increase its price by 12.

#28c#29 increase its price by4.

#28d#29 leave its price constant.

#28e#29 none of the above.

Topic,Monopoly Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,C

24.53 A pro#0Ct-maximizing monopoly faces an inverse demand function described by the equation

p#28y#29 = 100,y and its total costs are c#28y#29=7y; where prices and costs are measured in dollars,In

the past it was not taxed,but nowitmust pay a tax of 4 dollars per unit of output,After the tax,

the monopoly will:

#28a#29 increase its price by4.

#28b#29 increase its price by6.

#28c#29 increase its price by2.

#28d#29 leave its price constant.

#28e#29 none of the above.

CHAPTER 24 Monopoly 462

Topic,Monopoly Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,C

24.54 A monopolist faces a demand function Q =4;000=#28p+7#29

,2

,If she charges a price of p; her

marginal revenue will be:

#28a#29 p=2+7

#28b#29 2p+3:50

#28c#29 p=2,7=2.

#28d#29,2#28p+7#29

,3

#28e#29 #28p+B#29

,

2

Topic,Monopoly Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,C

24.55 A monopolist faces a demand function Q =2;000=#28p+8#29

,2

,If she charges a price of p; her

marginal revenue will be:

#28a#29 p=2+8

#28b#29 2p+4

#28c#29 p=2,8=2.

#28d#29,2#28p+8#29

,3

#28e#29 #28p+B#29

,

2

Topic,Monopoly Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,E

24.56 The demand for copies of the softwarepackage MacrosoftDoors is given by Q =10;000P

,32

.

The cost to produce Doors is C = 100;000+5Q,If Macrosoft practices cost plus pricing,what would

be the pro#0Ct maximizing markup?

#28a#29 100#25.

#28b#29 33.33#25.

#28c#29 14.29#25.

#28d#29 6.67#25.

#28e#29 3.23#25.

MULTIPLE CHOICE 463

Topic,Monopoly Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,E

24.57 The demand for copies of the softwarepackage MacrosoftDoors is given by Q =10;000P

,16

.

The cost to produce Doors is C = 100;000+ 10Q,If Macrosoft practices cost plus pricing,what

would be the pro#0Ct maximizing markup?

#28a#29 100#25.

#28b#29 33.33#25.

#28c#29 14.29#25.

#28d#29 6.67#25.

#28e#29 3.23#25.

Topic,Monopoly Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,C

24.58 A major software developer has estimated the demand for its new personal #0Cnance software

package to be Q =1;000;000P

,1:10

while the total cost of the package is C = 400;000+ 20Q,If this

#0Crm wishes to maximize pro#0Ct,what percentage markup should it place on this product?

#28a#29 1,020#25.

#28b#29 1,100#25.

#28c#29 1,000#25.

#28d#29 850#25.

#28e#29 1,150#25.

Topic,Monopoly Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,C

24.59 A major software developer has estimated the demand for its new personal #0Cnance software

package to be Q =1;000;000P

,1:40

while the total cost of the package is C = 100;000+ 20Q,If this

#0Crm wishes to maximize pro#0Ct,what percentage markup should it place on this product?

#28a#29 230#25.

#28b#29 150#25.

#28c#29 250#25.

#28d#29 340#25.

#28e#29 200#25.

CHAPTER 24 Monopoly 464

Topic,Monopoly Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,D

24.60

The Fabulous 50

0

s Decor Company is the only producer of pink #0Damingo lawn statues,While

business is not a good as it used to be,in recent times the annual demand has been Q = 400,4P.

Flamingo lawn statues are hand crafted by artisans using the process Q = min#28L;P=9#29; where L is

hours of labor,and P is pounds of pink plastic,P

L

=20and P

P

=4,What would be the pro#0Ct

maximizing output and price?

#28a#29 Q = 180;P=55

#28b#29 Q = 189:78;P=52:56

#28c#29 Q = 199:44;P=50:14

#28d#29 Q =88;P=78

#28e#29 Q = 176;P=56

Topic,Monopoly Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,D

24.61

The Fabulous 50

0

s Decor Company is the only producer of pink #0Damingo lawn statues,While

business is not a good as it used to be,in recent times the annual demand has been Q = 800,2P.

Flamingo lawn statues are hand crafted by artisans using the process Q = min#28L;P=6#29; where L is

hours of labor,and P is pounds of pink plastic,P

L

=15and P

P

=2,What would be the pro#0Ct

maximizing output and price?

#28a#29 Q = 393;P= 203:50

#28b#29 Q = 392:33;P= 203:83

#28c#29 Q = 399:42;P= 200:29

#28d#29 Q = 373;P= 213:50

#28e#29 Q = 746;P=27

MULTIPLE CHOICE 465

Topic,Monopoly Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,D

24.62 An obscure inventor in Strasburg,North Dakota has a monopoly on a new beverage called

Bubbles,which produces an unexplained craving for Lawrence Welk music,Bubbles is produced

by the following process,Q = min#28R=5;W#29 where R is pulverized Lawrence Welk records,and W

is gallons of North Dakota well water,P

R

= P

W

=1,Demand for Bubbles is Q =2;304P

,2

A

0:5

.If

the advertising budget for Bubbles is $81,the pro#0Ct maximizing quantity of Bubbles is

#28a#29 0

#28b#29 36

#28c#29 864

#28d#29 144

#28e#29 140

Topic,Monopoly Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,D

24.63 An obscure inventor in Strasburg,North Dakota has a monopoly on a new beverage called

Bubbles,which produces an unexplained craving for Lawrence Welk music,Bubbles is produced

by the following process,Q = min#28R=5;W#29 where R is pulverized Lawrence Welk records,and W

is gallons of North Dakota well water,P

R

= P

W

=1,Demand for Bubbles is Q =3;600P

,2

A

0:5

.If

the advertising budget for Bubbles is $64,the pro#0Ct maximizing quantity of Bubbles is

#28a#29 0

#28b#29 40

#28c#29 1,200

#28d#29 200

#28e#29 196

CHAPTER 24 Monopoly 466

Topic,Monopoly Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,A

24.64 The Cleveland Visitors Bureau is the exclusive national marketer of weekend getawayva-

cations in Cleveland,Ohio,At current market prices,the price elasticity of demand is 0.50,To

maximize pro#0Cts,the bureau should

#28a#29 Raise prices.

#28b#29 Lower prices.

#28c#29 Do not change prices.

#28d#29 More information is needed to make an accurate judgement.

#28e#29 Run new TV commercials.

Topic,Monopoly Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,A

24.65 The Cleveland Visitors Bureau is the exclusive national marketer of weekend getaway

vacations in Cleveland,Ohio,At current market prices,the price elasticity of demand is 1,To

maximize pro#0Cts,the bureau should

#28a#29 Raise prices.

#28b#29 Lower prices.

#28c#29 Do not change prices.

#28d#29 More information is needed to make an accurate judgement.

#28e#29 Run new TV commercials.

MULTIPLE CHOICE 467

Topic,Monopoly Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,D

24.66 In some parts of the world,Red Lizzard Wine is alleged to increase one's longevity.Itis

produced by the following process:

Q = min#28#281=4#29L;R#29

where L is the number of spotted red lizzards,and R is gallons of rice wine,P

L

= P

R

=1,Demand

for Red Lizzard Wine in the United States is Q =1;600P

,2

A

1

2

,If the advertising budget is $100,

the quantity of wine which should be imported into the US is

#28a#29 0

#28b#29 40

#28c#29 800

#28d#29 160

#28e#29 156

Topic,Monopoly Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,D

24.67 In some parts of the world,Red Lizzard Wine is alleged to increase one's longevity.Itis

produced by the following process:

Q = min#28#281=5#29L;R#29

where L is the number of spotted red lizzards,and R is gallons of rice wine,P

L

= P

R

=1,Demand

for Red Lizzard Wine in the United States is Q = 576P

,2

A

1

2

,If the advertising budget is $81,the

quantity of wine which should be imported into the US is

#28a#29 0

#28b#29 18

#28c#29 216

#28d#29 36

#28e#29 32

Essay Monopoly

Topic,Monopoly Di#0Eculty,3

#25 Correct Responses,0 Discrimination Index,0

24.1 A baseball team's attendance depends on the number of games it wins per season and on

the price of its tickets,The demand function it faces is Q = N#2820,p#29 where Q is the number of

tickets #28in hundred thousands#29 sold per year,p is the price per ticket and N is the fraction of its

games that the team wins,The team can increase the number of games it wins by hiring better

players,If the team spends C million dollars on players it will win the fraction,7,1=C of its games.

Over the relevant range,marginal cost of selling an extra ticket is zero,a#29 Write an expression

for the #0Crm's pro#0Cts as a function of ticket price and expenditure on players,b#29Find the ticket

price that maximizes revenue,c#29 Find the pro#0Ct maximizing expenditure on players and the pro#0Ct

maximizing fraction of games to win.

Answer,a#29#28:7,1=C#29#2820,p#29p,Cb#29p=10c#29C=10

Chapter 25

True-False Monopoly Behavior

Topic,Monopoly Behavior Di#0Eculty,2

#25 Correct Responses,82 Discrimination Index,35

Correct Answer,True

25.1 Third degree price discrimination occurs when a monopolist sells output to di#0Berent people

at di#0Berent prices,but every unit that an individual buys costs the same amount.

Topic,Monopoly Behavior Di#0Eculty,1

#25 Correct Responses,79 Discrimination Index,19

Correct Answer,False

25.2 A monopolist who is able to practice third degree price discrimination will make greater

pro#0Cts than a monopolist who is able to practice #0Crst degree price discrimination.

Topic,Monopoly Behavior Di#0Eculty,2

#25 Correct Responses,86 Discrimination Index,3

Correct Answer,False

25.3 A discriminating monopolist is able to charge di#0Berent prices in two di#0Berent markets,If

when the same price is charged in both markets,the quantity demanded in market 1 is always

greater than the quantity demanded in market 2,then in order to maximize pro#0Cts,the monopolist

should charge a higher price in market 1 than in market 2.

Topic,Monopoly Behavior Di#0Eculty,2

#25 Correct Responses,28 Discrimination Index,11

Correct Answer,True

25.4 In a monopolistically competitive industry with zero pro#0Cts,each #0Crm will produce less than

the amount that minimizes average costs.

Topic,Monopoly Behavior Di#0Eculty,3

#25 Correct Responses,61 Discrimination Index,22

Correct Answer,True

25.5 It is possible that a pro#0Ct-maximizing monopolist who is able to practice #0Crst degree #28perfect#29

price discrimination would sell a quantity x such that the demand curve for his product is inelastic

when the quantity sold is x.

CHAPTER 25 Monopoly Behavior 470

Topic,Monopoly Behavior Di#0Eculty,1

#25 Correct Responses,80 Discrimination Index,15

Correct Answer,True

25.6 In order to maximize his pro#0Cts,a monopolist who practices third degree price discrimina-

tion with two or more markets should charge higher prices in markets with more inelastic demand

functions.

Topic,Monopoly Behavior Di#0Eculty,1

#25 Correct Responses,71 Discrimination Index,20

Correct Answer,False

25.7 A pro#0Ct-maximizing monopolist is able to practice third degree price discrimination,If he

charges p

1

in market 1 and p

2

in market 2,where p

1

#3Ep

2;it must be that the quantity sold in

market 1 is smaller than the quantity sold in market 2.

Topic,Monopoly Behavior Di#0Eculty,2

#25 Correct Responses,32 Discrimination Index,24

Correct Answer,False

25.8 A pro#0Ct-maximizing monopolist practices third degree price discrimination,If he charges

p

1

in market 1 and p

2

in market 2,where p

1

#3Ep

2;then if the law forced him to charge the same

price in both markets,more would be demanded in market 1 than in market 2.

Topic,Monopoly Behavior Di#0Eculty,2

#25 Correct Responses,74 Discrimination Index,27

Correct Answer,True

25.9 A price discriminating monopolist charges p

1

in market 1 and p

2

in market 2,If p

1

#3Ep

2;it

must be that the absolute value of the price elasticity in market 1 at price p

1

is smaller than the

absolute value of the price elasticity in market 2 at price p

2

.

Topic,Monopoly Behavior Di#0Eculty,1

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,False

25.10 A monopolist who is able to practice third degree price discrimination charges a higher

price in the market that is more elastic.

Multiple Choice Monopoly Behavior

Topic,Monopoly Behavior Di#0Eculty,2

#25 Correct Responses,31 Discrimination Index,23

Correct Answer,C

25.1 A monopolist is able to practice third degree price discrimination between two markets.

The demand function in the #0Crst market is q = 500,2p and the demand function in the second

market is q = 1500,6p.To maximize his pro#0Cts,he should:

#28a#29 charge a higher price in the second market than in the #0Crst.

#28b#29 charge a higher price in the #0Crst market than in the second.

#28c#29 charge the same price in both markets.

#28d#29 sell only in one of the two markets.

#28e#29 none of the above.

Topic,Monopoly Behavior Di#0Eculty,2

#25 Correct Responses,45 Discrimination Index,0

Correct Answer,B

25.2 A monopolist #0Cnds that a person's demand for its product depends on the person's age,The

inverse demand function of someone of age y; can be written p = A#28y#29,q where A#28y#29 is an increasing

function of y,The product cannot be resold from one buyer to another and the monopolist knows

the ages of its consumers,If the monopolist maximizes its pro#0Cts:

#28a#29 older people will pay higher prices and purchase less of this product.

#28b#29 older people will pay higher prices and purchase more of this product.

#28c#29 older people will paylower prices and purchase more of this product.

#28d#29 everyone pays the same price but old people consume more.

#28e#29 None of the above.

CHAPTER 25 Monopoly Behavior 472

Topic,Monopoly Behavior Di#0Eculty,3

#25 Correct Responses,17 Discrimination Index,24

Correct Answer,A

25.3 A monopolist has discovered that the inverse demand function of a person with income M

for the monopolist's product is p =,002M,q,The monopolist is able to observe the incomes of its

consumers and to practice price discrimination according to income #28second-degree price discrimi-

nation#29,The monopolist has a total cost function,c#28q#29 = 100q,The price it will charge a consumer

depends on the consumer's income,M; according to the formula:

#28a#29 p =,001M +50.

#28b#29 p =,002M,100.

#28c#29 p = M

2

.

#28d#29 p =,01M

2

+ 100.

#28e#29 None of the above.

Topic,Monopoly Behavior Di#0Eculty,2

#25 Correct Responses,59 Discrimination Index,41

Correct Answer,A

25.4 Wobble's Weebles is the only producer of weebles,It makes weebles at constant marginal

cost c #28where c#3E0#29 and sells them at a price of p

1

per weeble in Market 1 and at a price of p

2

per weeble in Market 2,The demand curve for weebles in Market 1 has a constant price elasticity

of demand equal to,2,The demand curve for weebles in Market 2 has a constant price elasticity

equal to,3=2,The ratio of the pro#0Ct maximizing price in Market 1 to the pro#0Ct maximizing price

in Market 2 is:

#28a#29 2=3.

#28b#29 1=3.

#28c#29 3=2.

#28d#29 3.

#28e#29 dependent on the value of c.

MULTIPLE CHOICE 473

Topic,Monopoly Behavior Di#0Eculty,2

#25 Correct Responses,24 Discrimination Index,22

Correct Answer,B

25.5 A monopolist sells in two markets,The demand curve for her product is given by p

1

=

303,3x

1

in the #0Crst market and p

2

= 253,5x

2

in the second market,where x

i

is the quantity

sold in Market i and p

i

is the price charged in Market i,She has a constant marginal cost of

production,c =3;and no #0Cxed costs,She can charge di#0Berent prices in the two markets,What is

the pro#0Ct-maximizing combination of quantities for this monopolist?

#28a#29 x

1

= 100 and x

2

=27

#28b#29 x

1

= 50 and x

2

=25

#28c#29 x

1

= 75 and x

2

=50

#28d#29 x

1

= 60 and x

2

=23

#28e#29 x

1

= 70 and x

2

=35

Topic,Monopoly Behavior Di#0Eculty,2

#25 Correct Responses,24 Discrimination Index,22

Correct Answer,B

25.6 A monopolist sells in two markets,The demand curve for her product is given by p

1

=

119,2x

1

in the #0Crst market and p

2

= 123,5x

2

in the second market,where x

i

is the quantity

sold in Market i and p

i

is the price charged in Market i,She has a constant marginal cost of

production,c =3;and no #0Cxed costs,She can charge di#0Berent prices in the two markets,What is

the pro#0Ct-maximizing combination of quantities for this monopolist?

#28a#29 x

1

= 58 and x

2

=14

#28b#29 x

1

= 29 and x

2

=12

#28c#29 x

1

= 41 and x

2

=29

#28d#29 x

1

= 39 and x

2

=10

#28e#29 x

1

= 49 and x

2

=22

CHAPTER 25 Monopoly Behavior 474

Topic,Monopoly Behavior Di#0Eculty,2

#25 Correct Responses,36 Discrimination Index,46

Correct Answer,B

25.7 A price-discriminating monopolist sells in two separate markets such that goods sold in one

market are never resold in the other,It charges p

1

=3in one market and p

2

=7in the other

market,At these prices,the price elasticity in the #0Crst market is,2:50 and the price elasticityin

the second market is,0:80,Which of the following actions is sure to raise the monopolists pro#0Cts?

#28a#29 Lower p

2

.

#28b#29 Raise p

2

.

#28c#29 Raise p

1

and lower p

2

.

#28d#29 Raise both p

1

and p

2

.

#28e#29 Raise p

2

and lower p

1

.

Topic,Monopoly Behavior Di#0Eculty,2

#25 Correct Responses,36 Discrimination Index,46

Correct Answer,B

25.8 A price-discriminating monopolist sells in two separate markets such that goods sold in one

market are never resold in the other,It charges p

1

=3in one market and p

2

=9in the other

market,At these prices,the price elasticity in the #0Crst market is,2:50 and the price elasticityin

the second market is,0:90,Which of the following actions is sure to raise the monopolists pro#0Cts?

#28a#29 Lower p

2

.

#28b#29 Raise p

2

.

#28c#29 Raise p

1

and lower p

2

.

#28d#29 Raise both p

1

and p

2

.

#28e#29 Raise p

2

and lower p

1

.

MULTIPLE CHOICE 475

Topic,Monopoly Behavior Di#0Eculty,0

#25 Correct Responses,75 Discrimination Index,47

Correct Answer,A

25.9 A monopolist has a constant marginal cost of $2 per unit and no #0Cxed costs,He faces

separate markets in the U.S,and England,He can set one price p

1

for the American market and

another price p

2

for the English market,If demand in the U.S,is given by Q

1

=8;400,700p

1; and

demand in England is given by Q

2

=5;000,500p

2; then the price in America will:

#28a#29 be larger than the price in England by1.

#28b#29 be smaller than the price in England by1.

#28c#29 equal the price in England.

#28d#29 be larger than the price in England by3.

#28e#29 be smaller than the price in England by3.

Topic,Monopoly Behavior Di#0Eculty,0

#25 Correct Responses,75 Discrimination Index,47

Correct Answer,A

25.10 A monopolist has a constant marginal cost of $2 per unit and no #0Cxed costs,He faces

separate markets in the U.S,and England,He can set one price p

1

for the American market and

another price p

2

for the English market,If demand in the U.S,is given by Q

1

=6;400,800p

1; and

demand in England is given by Q

2

=6;400,400p

2; then the price in America will:

#28a#29 be larger than the price in England by4.

#28b#29 be smaller than the price in England by4.

#28c#29 equal the price in England.

#28d#29 be larger than the price in England by6.

#28e#29 be smaller than the price in England by6.

CHAPTER 25 Monopoly Behavior 476

Topic,Monopoly Behavior Di#0Eculty,0

#25 Correct Responses,42 Discrimination Index,48

Correct Answer,C

25.11 Roach Motors has a monopoly on used cars in Enigma,Ohio,By installing secret mi-

crophones in the showroom,the friendly salespersons at Roach are able to learn each customer's

willingness to pay and can therefore practice #0Crst degree price discrimination,extracting from

each customer his entire consumer surplus,The inverse demand function for cars in Enigma is

P = 2000,10Q,Roach Motors purchases its stock of used cars at an auction in Cleveland for $400

each,Roach motors will

#28a#29 sell 80 cars for a total pro#0Ct of $64,000.

#28b#29 sell 160 cars at a price of $300 a car.

#28c#29 sell 160 cars for a total pro#0Ct of $12,8000.

#28d#29 sell 192 cars and make a total pro#0Ct of $20,4800

#28e#29 shut down since revenue will not cover variable costs.

Topic,Monopoly Behavior Di#0Eculty,0

#25 Correct Responses,42 Discrimination Index,48

Correct Answer,C

25.12 Roach Motors has a monopoly on used cars in Enigma,Ohio,By installing secret mi-

crophones in the showroom,the friendly salespersons at Roach are able to learn each customer's

willingness to pay and can therefore practice #0Crst degree price discrimination,extracting from

each customer his entire consumer surplus,The inverse demand function for cars in Enigma is

P = 2000,10Q,Roach Motors purchases its stock of used cars at an auction in Cleveland for $700

each,Roach motors will

#28a#29 sell 65 cars for a total pro#0Ct of $42,250.

#28b#29 sell 130 cars at a price of $300 a car.

#28c#29 sell 130 cars for a total pro#0Ct of $8,4500.

#28d#29 sell 156 cars and make a total pro#0Ct of $13,5200

#28e#29 shut down since revenue will not cover variable costs.

MULTIPLE CHOICE 477

Topic,Monopoly Behavior Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,E

25.13 BMW #28Bayerische Motoren Werk#29 charges a considerably higher price for its automobiles

in the North American market than it does in its home market of Europe,Assuming that the

goal of BMW's pricing policy is pro#0Ct maximization,which of the following would be a plausible

explanation for BMW's pricing policy?

#28a#29 The income elasticity of demand in North America must be greater than 1,makingBMWs a luxury good

in North America; and between 0 and 1 in Europe,making BMWs a normal good.

#28b#29 The income elasticity of demand in North America must be between 0 and 1,making BMWs a normal

good in North America; and between and less than 1 in Europe,making BMWs an inferior good.

#28c#29 The price elasticity of demand in North America must be greater than 1,making demand for BMWs

price elastic in North America; and between 0 and 1 in Europe,making demand for BMWs price inelastic.

#28d#29 The income elasticity of demand in both North America and Europe are greater than 1,since BMWs

are a luxury good; but per capita income in North America is much higher than in Europe.

#28e#29 The price elasticity of demand is greater than 1 in both North America and Europe,makingBMWs price

elastic; but must be higher in Europe.

Topic,Monopoly Behavior Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,A

25.14 A careful analysis of demand for Bubbles in Strasburg,ND reveals a strange segmentation

in the market,#28Recall Bubbles is the beverage which produces an unexplained craving for Lawrence

Welk's music,It is produced by the process Q = min#28R=4;W#29;where R is the number of pulverized

Lawrence Welk records,and W is gallons of North Dakota well water,P

R

=1;P

W

=3.#29 If demand

for Bubbles by senior citizens is described by Q

o

= 500P

f,3=2g

while demand by those under 65

years old is Q

y

=50P

,2;how should Bubbles be priced to maximize pro#0Cts?

#28a#29 $21 for senior citizens,$14 for those younger.

#28b#29 $10.50 for senior citizens,$14 for those younger.

#28c#29 $7 for senior citizens,$9.33 for those younger.

#28d#29 $16.33 for all citizens of Strasburg.

#28e#29 $36 for senior citizens,$24 for those younger.

CHAPTER 25 Monopoly Behavior 478

Topic,Monopoly Behavior Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,A

25.15 A careful analysis of demand for Bubbles in Strasburg,ND reveals a strange segmentation

in the market,#28Recall Bubbles is the beverage which produces an unexplained craving for Lawrence

Welk's music,It is produced by the process Q = min#28R=5;W#29;where R is the number of pulverized

Lawrence Welk records,and W is gallons of North Dakota well water,P

R

=1;P

W

=4.#29 If demand

for Bubbles by senior citizens is described by Q

o

= 500P

f,3=2g

while demand by those under 65

years old is Q

y

=50P

,3;how should Bubbles be priced to maximize pro#0Cts?

#28a#29 $27 for senior citizens,$13.50 for those younger.

#28b#29 $13.50 for senior citizens,$27 for those younger.

#28c#29 $9 for senior citizens,$18 for those younger.

#28d#29 $16.20 for all citizens of Strasburg.

#28e#29 $60 for senior citizens,$30 for those younger.

Topic,Monopoly Behavior Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,A

25.16 Miron Floren,of The Lawrence Welk Show fame,now tours the country performing at ac-

cordion concerts,A careful analysis of demand for tickets to Mr,Floren's concerts reveals a strange

segmentation in the market,Demand for tickets by senior citizens is described by Q

o

= 500P

f,3=2g

while demand by those under 65 years old is Q

y

=50P

,5

,If the marginal cost of a ticket is $4,how

should tickets to Mr,Floren's concerts be priced to maximize pro#0Cts?

#28a#29 $12 for senior citizens,$5for those younger.

#28b#29 $20 for senior citizens,$6for those younger.

#28c#29 $4 for senior citizens,$13.33for those younger.

#28d#29 $5.78 for all tickets.

#28e#29 $8 for senior citizens,$16for those younger.

MULTIPLE CHOICE 479

Topic,Monopoly Behavior Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,A

25.17 Miron Floren,of The Lawrence Welk Show fame,now tours the country performing at ac-

cordion concerts,A careful analysis of demand for tickets to Mr,Floren's concerts reveals a strange

segmentation in the market,Demand for tickets by senior citizens is described by Q

o

= 500P

f,3=2g

while demand by those under 65 years old is Q

y

=50P

,2

,If the marginal cost of a ticket is $2,how

should tickets to Mr,Floren's concerts be priced to maximize pro#0Cts?

#28a#29 $6 for senior citizens,$4for those younger.

#28b#29 $4 for senior citizens,$3for those younger.

#28c#29 $2 for senior citizens,$2.67for those younger.

#28d#29 $4.67 for all tickets.

#28e#29 $4 for senior citizens,$8for those younger.

Essay Monopoly Behavior

Topic,Monopoly Behavior Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

25.1 Disneyland has two possibilities for pricing rides at its theme parks,1#29 Set MR=MC for

each ride and charge the maximum price consumers would bear,2#29 Charge an admission fee to the

theme park,but allow unlimited rides for free,Using graphs,show which pricing scheme is more

pro#0Ctable for Disneyland.

Chapter 26

True-False Factor Markets

Topic,Factor Markets Di#0Eculty,1

#25 Correct Responses,93 Discrimination Index,0

Correct Answer,False

26.1 A monopsony occurs when two previously competing #0Crms reach an agreement to collude

on price.

Topic,Factor Markets Di#0Eculty,1

#25 Correct Responses,56 Discrimination Index,0

Correct Answer,False

26.2 A monopsonist's market power enables him to hire labor at a marginal cost that is lower

than the wage rate.

Topic,Factor Markets Di#0Eculty,1

#25 Correct Responses,38 Discrimination Index,40

Correct Answer,True

26.3 For a monopsonist,the supply curve of a factor of production is less steep than the marginal

cost curve.

Topic,Factor Markets Di#0Eculty,2

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,False

26.4 A coal producer has a monopoly on coal,A di#0Berent monopoly controls the railroad that

takes the coal to market,Each monopolist chooses prices to maximize its pro#0Cts,If the coal mo-

nopolist buys the railroad then it will increase its pro#0Cts by raising the market price of coal.

Topic,Factor Markets Di#0Eculty,2

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,False

26.5 For a monopsonist,the more elastic the supply of labor,the greater the di#0Berence between

the marginal cost of labor and the wage rate.

CHAPTER 26 Factor Markets 482

Topic,Factor Markets Di#0Eculty,2

#25 Correct Responses,31 Discrimination Index,20

Correct Answer,False

26.6 If a monopolist faces a competitive labor market,it will hire labor up to the point where

the price of output times the marginal product of labor equals the wage rate.

Topic,Factor Markets Di#0Eculty,1

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,True

26.7 A monopolist who faces a horizontal labor supply curve will demand less labor than he

would if he acted competitively.

Topic,Factor Markets Di#0Eculty,1

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,False

26.8 If an upstream monopolist sells to a downstream monopolist,the price to consumers will

be higher than the competitive price,but not so high as it would be if the downstream monopolist

took control of the upstream monopolist's business and ran both the upstream and downstream

markets to maximize total pro#0Cts.

Topic,Factor Markets Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,True

26.9 If a labor market is dominated by a monopolist,it is possible that the imposition of a

minimum wage law could INCREASE the amount of employment in that market.

Multiple Choice Factor Markets

Topic,Factor Markets Di#0Eculty,1

#25 Correct Responses,31 Discrimination Index,60

Correct Answer,D

26.1 A monopolist produces a good using only one factor,labor,There are constant returns to

scale in production,and the demand for the monopolist's product is described byadownward-

sloping straight line with slope,1,The monopolist faces a horizontal labor supply curve,If the

monopolist chooses output to maximize pro#0Cts,then the:

#28a#29 marginal cost of labor to the monopolist exceeds the wage.

#28b#29 marginal product of labor times price of output equals the wage.

#28c#29 marginal product of labor times price of output is less than the wage.

#28d#29 marginal product of labor times price of output exceeds the wage.

#28e#29 marginal revenue product of labor is less than the wage.

Topic,Factor Markets Di#0Eculty,1

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,B

26.2 If a monopsonist pays the wage rate w; then the amount of labor that he can hire is

L#28w#29=Aw; where A is a positive constant,The marginal cost of labor to the monopsonist is:

#28a#29 equal to the wage rate.

#28b#29 twice the wage rate.

#28c#29 half the wage rate.

#28d#29 greater than the wage rate but less than twice as great.

#28e#29 less than the wage rate but more than half as great.

CHAPTER 26 Factor Markets 484

Topic,Factor Markets Di#0Eculty,1

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,C

26.3 A pro#0Ct-maximizing monopsonist hires both men and women to do a certain task,The two

sexes are equally good at this task and are regarded as perfect substitutes,Labor supply curves for

both sexes are upward-sloping,In order to hire M men,the #0Crm would havetopay men a wage of

AM,where A is a positive constant,In order to hire F women,the monopsonist would havetopay

awage of BF

c

where B and c are positive constants,Which,if any,of these conditions necessarily

implies that he paysalower wage to women than to men?

#28a#29 A#3EB.

#28b#29 A#3Cc.

#28c#29 c#3C1.

#28d#29 Bc#3CA.

#28e#29 C#3E2.

Topic,Factor Markets Di#0Eculty,3

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,E

26.4 The frangle industry is a monopoly,with a demand curve 100,p; where p is the price of

frangles,It takes one unit of labor and no other inputs to produce a frangle,The Frangle-makers

Guild is a strong union,The Guild sets a wage and prevents anyone from working for less than

that wage,The frangle monopoly must pay that wage but can hire as much labor as it chooses to.

If the guild chooses a wage so as to maximize the total earnings #28wage times number of units of

labor hired#29 of frangle-makers,then:

#28a#29 the price of frangles will be 50.

#28b#29 the price of frangles will be 25.

#28c#29 the price of frangles will equal the wage rate.

#28d#29 the wage rate will be 25.

#28e#29 the wage will be 50.

MULTIPLE CHOICE 485

Topic,Factor Markets Di#0Eculty,2

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,C

26.5 The bauble industry is competitive with free entry,There is a #0Cxed-coe#0Ecient technology.

One unit of labor and one unit of plastic are required for each bauble,Workers in the bauble

industry must all belong to the Bauble-makers Union,The union sets the wage that will be paid to

all bauble-makers,The price of plastic is 10 dollars per unit and the demand function for baubles

is 1000,10p,Long run equilibrium requires that the price of baubles equals the cost of production.

The wage per unit of labor that maximizes total revenue of workers is:

#28a#29 100.

#28b#29 10.

#28c#29 45.

#28d#29 20.

#28e#29 in#0Cnity.

Topic,Factor Markets Di#0Eculty,2

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,A

26.6 Suppose that the demand curve for mineral water is given by p =20,8qwhere p is the price

per bottle paid by consumers and q is the number of bottles purchased by consumers,Mineral wa-

ter is supplied to consumers by a monopolistic distributor who buys from a monopolistic producer,

who is able to produce mineral water at zero cost,The producer charges the distributor a price of

c per bottle,Given his marginal cost of c per unit,the distributor chooses an output to maximize

his own pro#0Cts,Knowing that this is what the distributor will do,the producer sets his price c so

as to maximize his revenue,The price paid by consumers under this arrangement is:

#28a#29 15

#28b#29 2.50

#28c#29 10

#28d#29 5

#28e#29 1.25

CHAPTER 26 Factor Markets 486

Topic,Factor Markets Di#0Eculty,2

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,A

26.7 Suppose that the demand curve for mineral water is given by p =60,8qwhere p is the price

per bottle paid by consumers and q is the number of bottles purchased by consumers,Mineral wa-

ter is supplied to consumers by a monopolistic distributor who buys from a monopolistic producer,

who is able to produce mineral water at zero cost,The producer charges the distributor a price of

c per bottle,Given his marginal cost of c per unit,the distributor chooses an output to maximize

his own pro#0Cts,Knowing that this is what the distributor will do,the producer sets his price c so

as to maximize his revenue,The price paid by consumers under this arrangement is:

#28a#29 45

#28b#29 7.50

#28c#29 30

#28d#29 15

#28e#29 3.75

Topic,Factor Markets Di#0Eculty,2

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,D

26.8 The labor supply curve faced by a large #0Crm in a small cityisgiven by w =40+0:05L where

L is the number of units of labor per week hired by the large #0Crm and w is the weekly wage rate

that it pays,If the #0Crm is currently hiring 1000 units of labor per week,then the marginal cost of

a unit of labor to the #0Crm is:

#28a#29 equal to the wage rate.

#28b#29 is twice the wage rate.

#28c#29 equals the wage rate plus 100.

#28d#29 equals the wage rate plus 50.

#28e#29 equals the wage rate plus 150.

MULTIPLE CHOICE 487

Topic,Factor Markets Di#0Eculty,2

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,D

26.9 The labor supply curve faced by a large #0Crm in a small cityisgiven by w =60+0:09L where

L is the number of units of labor per week hired by the large #0Crm and w is the weekly wage rate

that it pays,If the #0Crm is currently hiring 1000 units of labor per week,then the marginal cost of

a unit of labor to the #0Crm is:

#28a#29 equal to the wage rate.

#28b#29 is twice the wage rate.

#28c#29 equals the wage rate plus 180.

#28d#29 equals the wage rate plus 90.

#28e#29 equals the wage rate plus 270.

Topic,Factor Markets Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,A

26.10

Rabelaisian Restaurants has a monopoly in the town of Upper Glutton,Its production function is

Q =10Lwhere L is the amount of labor it uses and Q is the number of meals produced,In order to

hire L units of labor,Rabelaisian Restaurants must payawage of 20+,1L per unit of labor,The

demand curve for meals at Rabelaisian Restaurants is given by

P =50,Q=1000,The pro#0Ct maximizing output for

Rabelasian Restaurants is:

#28a#29 12,000.

#28b#29 24,000.

#28c#29 3,000.

#28d#29 2,000.

#28e#29 1,500.

CHAPTER 26 Factor Markets 488

Topic,Factor Markets Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,A

26.11

Rabelaisian Restaurants has a monopoly in the town of Upper Glutton,Its production function is

Q =40Lwhere L is the amount of labor it uses and Q is the number of meals produced,In order

to hire L units of labor,Rabelaisian Restaurants must payawage of 120 +,1L per unit of labor.

The demand curve for meals at Rabelaisian Restaurants is given by

P =20,Q=1000,The pro#0Ct maximizing output for

Rabelasian Restaurants is:

#28a#29 8,000.

#28b#29 16,000.

#28c#29 2,000.

#28d#29 500.

#28e#29 1,000.

Essay Factor Markets

Topic,Factor Markets Di#0Eculty,3

#25 Correct Responses,0 Discrimination Index,0

26.1 This comes from an actual newspaper story,"The average price of a home in W,county

rose more than 12#25 last year...but the number of sales fell nearly 15#25,`It's the old law of supply

and demand',said a spokesman for the Board of Realtors,`The number of sales is down because

there's a higher demand for properties but there isn't a corresponding number to sell.'" a#29 What

does the "old law of supply and demand" predict would happen to price and quantity if the demand

curve shifts outward and the supply curve does not change? b#29 Draw a diagram to illustrate the

case of a shift in demand and or supply curves that is consistent with the observed change in prices

and quantities.

Answer,a#29The price would rise and the quantitywould rise,Even if the supply were very inelastic,

the number of sales would not fall if the supply curve did not shift,b#29 One simple case would be a

leftward shift in the supply curve and no change in the demand curve.

Chapter 27

True-False Oligopoly

Topic,Oligopoly Di#0Eculty,1

#25 Correct Responses,72 Discrimination Index,31

Correct Answer,False

27.1 In Cournot equilibrium each #0Crm chooses the quantity that maximizes its own pro#0Cts as-

suming that the #0Crm's rival will continue to sell at the same price as before.

Topic,Oligopoly Di#0Eculty,1

#25 Correct Responses,61 Discrimination Index,14

Correct Answer,False

27.2 In Bertrand competition between two #0Crms,each #0Crm believes that if it changes its output,

the rival #0Crm will change its output by the same amount.

Topic,Oligopoly Di#0Eculty,1

#25 Correct Responses,96 Discrimination Index,0

Correct Answer,True

27.3 Suppose that the demand curve for an industry's output is a downward sloping straight line

and there is constant marginal cost,Then the larger the number of identical #0Crms producing in

Cournot equilibrium,the lower will be the price.

Topic,Oligopoly Di#0Eculty,1

#25 Correct Responses,96 Discrimination Index,0

Correct Answer,True

27.4 A Stackelberg leader chooses his actions on the assumption that his rival will adjust to the

leader's actions in suchaway as to maximize the rival's pro#0Cts.

Topic,Oligopoly Di#0Eculty,1

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,False

27.5 Conjectural variation refers to the fact that in a single market there is variation among #0Crms

in their estimates of the demand function in future periods.

TRUE-FALSE 491

Topic,Oligopoly Di#0Eculty,1

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,True

27.6 A duopoly in whichtwo identical #0Crms are engaged in Bertrand competition will not distort

prices from their competitive levels.

Topic,Oligopoly Di#0Eculty,2

#25 Correct Responses,92 Discrimination Index,21

Correct Answer,True

27.7 A Stackelberg leader will necessarily make at least as much pro#0Ct as he would if he acted

as a Cournot oligopolist.

Topic,Oligopoly Di#0Eculty,2

#25 Correct Responses,37 Discrimination Index,22

Correct Answer,False

27.8 In the Cournot model,each #0Crm chooses its actions on the assumption that its rivals will

react bychanging their quantities in suchaway as to maximize their own pro#0Cts.

Topic,Oligopoly Di#0Eculty,0

#25 Correct Responses,54 Discrimination Index,10

Correct Answer,True

27.9 In the Bertrand model of duopoly,each #0Crm sets its price,believing that the other's price

will not change,When both #0Crms have identical production functions and produce with constant

returns to scale,the Bertrand equilibrium price is equal to marginal cost.

Multiple Choice Oligopoly

Topic,Oligopoly Di#0Eculty,3

#25 Correct Responses,3 Discrimination Index,3

Correct Answer,D

27.1 An industry has two #0Crms each of which produces output at a constant unit cost of $10 per

unit,The demand function for the industry is q =1;000;000=p,The Cournot equilibrium price for

this industry is:

#28a#29 5.

#28b#29 10.

#28c#29 15.

#28d#29 20.

#28e#29 25.

Topic,Oligopoly Di#0Eculty,2

#25 Correct Responses,21 Discrimination Index,29

Correct Answer,C

27.2 An industry has two #0Crms,The inverse demand function for this industry is p = 320,4q.

Both #0Crms produce at a constant unit cost of $20 per unit,What is the Cournot equilibrium price

for this industry?

#28a#29 20

#28b#29 22

#28c#29 120

#28d#29 60

#28e#29 None of the above.

MULTIPLE CHOICE 493

Topic,Oligopoly Di#0Eculty,2

#25 Correct Responses,21 Discrimination Index,29

Correct Answer,C

27.3 An industry has two #0Crms,The inverse demand function for this industry is p =92,2q.

Both #0Crms produce at a constant unit cost of $32 per unit,What is the Cournot equilibrium price

for this industry?

#28a#29 32

#28b#29 34

#28c#29 52

#28d#29 26

#28e#29 None of the above.

Topic,Oligopoly Di#0Eculty,3

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,C

27.4 One unit of zinc and one unit of copper are needed to produce a unit of brass,The world's

supply of zinc and the world's supply of copper are owned bytwo di#0Berent monopolists,For sim-

plicity assume that it costs nothing to mine zinc and copper,that no other inputs are needed to

produce brass and that the brass industry operates competitively,Then the price of a unit of brass

equals the cost of the inputs used to make it,The demand function for brass is q = 900,2p where

p is the price of brass,The zinc and copper monopolists each set a price,believing that the other

monopolist will not change his price,What is the equilibrium price of brass?

#28a#29 100

#28b#29 200

#28c#29 300

#28d#29 50

#28e#29 25

CHAPTER 27 Oligopoly 494

Topic,Oligopoly Di#0Eculty,2

#25 Correct Responses,57 Discrimination Index,33

Correct Answer,C

27.5 A duopoly faces the inverse demand curve p = 160,2q,Both #0Crms in the industry have

constant costs of $10 per unit of output,In a Cournot equilibrium howmuch output will each

duopolist sell?

#28a#29 75

#28b#29 54

#28c#29 25

#28d#29 35

#28e#29 48

Topic,Oligopoly Di#0Eculty,2

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,B

27.6 Suppose that the price elasticity of demand for airline #0Dights betweem two cities is constant

and equal to,1:5,If 4 airlines with equal costs are in Cournot equilibrium for this industry,then

the ratio of price to marginal cost in the industry is:

#28a#29 8=7.

#28b#29 9=8.

#28c#29 7=6.

#28d#29 3=2.

#28e#29 None of the above.

MULTIPLE CHOICE 495

Topic,Oligopoly Di#0Eculty,2

#25 Correct Responses,66 Discrimination Index,44

Correct Answer,A

27.7 A city has two major league baseball teams,A and B,The numberoftickets sold by either

team depends on the price of the team's own tickets and the price of the other team's ticket,If

team A charges P

a

for its tickets and team B charges P

b

for its tickets,then ticket sales,measured

in hundreds of thousands per season are 20,2P

a

+P

b

for team A and 10+P

a

,2P

b

for team B,The

marginal cost of an extra spectator is zero for both teams,Each team believes the other's price

is independent of its own choice of price and each team sets its own price so as to maximize its

revenue,What price do they charge per ticket?

#28a#29 Team A charges 6 and team B charges 4.

#28b#29 Team A charges 8 and team B charges 3.

#28c#29 Team A charges 7 and team B charges 6.

#28d#29 Team A charges 6 and team B charges 8.

#28e#29 None of the above.

Topic,Oligopoly Di#0Eculty,2

#25 Correct Responses,66 Discrimination Index,44

Correct Answer,A

27.8 A city has two major league baseball teams,A and B,The numberoftickets sold by either

team depends on the price of the team's own tickets and the price of the other team's ticket,If

team A charges P

a

for its tickets and team B charges P

b

for its tickets,then ticket sales,measured

in hundreds of thousands per season are 21,2P

a

+P

b

for team A and 6+P

a

,2P

b

for team B,The

marginal cost of an extra spectator is zero for both teams,Each team believes the other's price

is independent of its own choice of price and each team sets its own price so as to maximize its

revenue,What price do they charge per ticket?

#28a#29 Team A charges 6 and team B charges 3.

#28b#29 Team A charges 8 and team B charges 2.

#28c#29 Team A charges 7 and team B charges 5.

#28d#29 Team A charges 6 and team B charges 6.

#28e#29 None of the above.

CHAPTER 27 Oligopoly 496

Topic,Oligopoly Di#0Eculty,3

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,D

27.9 A city has two newspapers,Demand for either paper depends on its own price and the price

of its rival,Demand functions for papers A and B respectively,measured in tens of thousands of

subscriptions,are 21,2P

a

+P

b

and 21+P

a

,2P

b

,The marginal cost of printing and distributing an

extra paper just equals the extra advertising revenue one gets from another reader,so each paper

treats marginal costs as zero,Each paper maximizes its revenue assuming that the other's price is

independent of its own choice of price,If the papers enter a joint operating agreement where they

set prices to maximize total revenue,byhowmuch will newspaper prices rise?

#28a#29 3

#28b#29 2

#28c#29 0

#28d#29 3.5

#28e#29 2.5

Topic,Oligopoly Di#0Eculty,1

#25 Correct Responses,77 Discrimination Index,35

Correct Answer,C

27.10 There are two major producers of corncob pipes in the world,both located in Herman,

Missouri,Suppose that the inverse demand function for corncob pipes is described by p = 120,4q

where q is total industry output and suppose that marginal costs are zero,What is the Cournot

reaction function of #0Crm 1 to the output,q

2; of #0Crm 2?

#28a#29 120,4q

2

2

#28b#29 120,4q

2

#28c#29 15,:5q

2

#28d#29 30,4q

2

#28e#29 124,8q

2

MULTIPLE CHOICE 497

Topic,Oligopoly Di#0Eculty,1

#25 Correct Responses,77 Discrimination Index,35

Correct Answer,C

27.11 There are two major producers of corncob pipes in the world,both located in Herman,

Missouri,Suppose that the inverse demand function for corncob pipes is described by p = 180,3q

where q is total industry output and suppose that marginal costs are zero,What is the Cournot

reaction function of #0Crm 1 to the output,q

2; of #0Crm 2?

#28a#29 180,3q

2

2

#28b#29 180,3q

2

#28c#29 30,:5q

2

#28d#29 60,3q

2

#28e#29 183,6q

2

Topic,Oligopoly Di#0Eculty,2

#25 Correct Responses,61 Discrimination Index,52

Correct Answer,D

27.12 An industry has two #0Crms producing at a constant unit cost of $10 per unit,The inverse

demand curve for the industry is p = 110,:5q,Suppose that #0Crm 1 is a Stackleberg leader in

choosing its quantity #28i.e,#0Crm 1 chooses it's quantity #0Crst,knowing that #0Crm 2 will observe #0Crm

1

0

s quantity when it chooses its own output.#29 Howmuch output will #0Crm 2,the follower,produce?

#28a#29 40

#28b#29 15

#28c#29 20

#28d#29 50

#28e#29 30

CHAPTER 27 Oligopoly 498

Topic,Oligopoly Di#0Eculty,3

#25 Correct Responses,28 Discrimination Index,32

Correct Answer,C

27.13 The cartel of copper exporting countries is called COPEC,As part of an international

marketing agreement,the United States has agreed to buy all the copper that COPEC wants to

sell the U.S,at a constant price of $100 per ton,COPEC also sells copper in Europe at a price of

$150 per ton,COPEC acts just like a monopolist,If COPEC #0Cnds it pro#0Ctable to sell in the U.S.

at $100 per ton and simultaneously to sell in Europe for $150 a ton,what is the price elasticityof

demand of COPEC's copper in the European market? #28Hint,What is COPEC's marginal revenue

in the U.S,market?#29

#28a#29,1

#28b#29,2

#28c#29,3

#28d#29,1=3

#28e#29,2=3

Topic,Oligopoly Di#0Eculty,2

#25 Correct Responses,61 Discrimination Index,17

Correct Answer,E

27.14 Two #0Crms decide to form a cartel and collude in a way that maximizes industry pro#0Cts.

Each #0Crm has zero production costs and each #0Crm is given a positive output quota by the cartel.

Which of the following statements is NOT true?

#28a#29 Each #0Crm would want to produce more than its quota if it knew that the other would continue to produce

at its quota.

#28b#29 The price elasticity of demand will be,1 at the output level chosen.

#28c#29 Output will be lower than if the #0Crms behaved as Cournot #0Crms.

#28d#29 Output will be lower than if the #0Crms behaved as competitors.

#28e#29 All of the other statements are false.

MULTIPLE CHOICE 499

Topic,Oligopoly Di#0Eculty,2

#25 Correct Responses,49 Discrimination Index,42

Correct Answer,D

27.15 The inverse demand function for fuzzy dice is p =20,q,There are constant returns to

scale in this industry with unit costs of $8,Which of the following statements is completely true?

#28a#29 Monopoly output is 6,Cournot duopoly total output is 8,A Stackelberg leader's output is 8.

#28b#29 Monopoly output is 8,Cournot duopoly total output is 8,A Stackelberg leader's output is 8.

#28c#29 Monopoly output is 6,Cournot duopoly total output is 6,A Stackelberg follower's output is 3.

#28d#29 Monopoly output is 6,Cournot duopoly total output is 8,A Stackelberg follower's output is 3.

#28e#29 Monopoly output is 6,Cournot duopoly total output is 8,A Stackelberg follower's output is 4.

Topic,Oligopoly Di#0Eculty,2

#25 Correct Responses,69 Discrimination Index,80

Correct Answer,C

27.16 An industry has two #0Crms,Firm 1

0

s cost function is c#28y#29=2y+ 500 and #0Crm 2

0

s cost

function is c#28y#29=2y+400,The demand curve for the outputof this industry is a downward-sloping

straight line,In a Cournot equilibrium,where both #0Crms produce positive amounts of output:

#28a#29 the #0Crm with lower #0Cxed costs produces more.

#28b#29 the #0Crm with higher #0Cxed costs produces more.

#28c#29 both #0Crms produce the same amount of output.

#28d#29 there is less output than there would be if the #0Crms colluded to maximize joint pro#0Cts.

#28e#29 #0Crm 1 always operates in the region where the demand curve is inelastic.

Topic,Oligopoly Di#0Eculty,3

#25 Correct Responses,26 Discrimination Index,0

Correct Answer,A

27.17 The price elasticity of demand for melocotones is constant and equal to,2,The meloco-

tone market is controlled bytwo Cournot duopolists who have di#0Berent cost functions,One of the

duopolists has a constant marginal cost of $980 per ton and he produces 60#25 of the total number

of melocotones sold,The equilibrium price of a ton of melocotones must be:

#28a#29 1,400.

#28b#29 700.

#28c#29 980.

#28d#29 2,800.

#28e#29 2,100.

CHAPTER 27 Oligopoly 500

Topic,Oligopoly Di#0Eculty,3

#25 Correct Responses,26 Discrimination Index,0

Correct Answer,A

27.18 The price elasticity of demand for melocotones is constant and equal to,3,The meloco-

tone market is controlled bytwo Cournot duopolists who have di#0Berent cost functions,One of the

duopolists has a constant marginal cost of $720 per ton and he produces 60#25 of the total number

of melocotones sold,The equilibrium price of a ton of melocotones must be:

#28a#29 900.

#28b#29 450.

#28c#29 720.

#28d#29 1,800.

#28e#29 1,350.

Topic,Oligopoly Di#0Eculty,3

#25 Correct Responses,62 Discrimination Index,10

Correct Answer,A

27.19 The demand for y is given by y = 256=p

2

,Only two #0Crms produce y,They have identical

costs c#28y#29=y

2

,If they agree to collude and maximize their joint pro#0Cts,howmuch output will

each #0Crm produce?

#28a#29 2

#28b#29 5

#28c#29 10

#28d#29 12

#28e#29 16

MULTIPLE CHOICE 501

Topic,Oligopoly Di#0Eculty,3

#25 Correct Responses,25 Discrimination Index,21

Correct Answer,E

27.20 A certain type of mushroom used to be produced on 50 farms,each of which had a cost

function c#28y#29=y

2

+1where y#3E0and c#280#29=0,The #0Crms operated as competitors,The demand

curve for this kind of mushroom is given by D#28p#29=52,p,Marauding deviant Ninja turtles invaded

many of the mushroom farms leaving absolute devastation and loathsome slime in their wake,#28The

turtles had no e#0Bect on the cost functions of farms that were not invaded.#29

#28a#29 If all of the farms but one were invaded and that farm became a monopolist,total output of mushrooms

would fall to half of the preinvasion output.

#28b#29 If all of the farms but one were invaded and that farm became a monopolist,total output of mushrooms

would fall to 1=50th of the preinvasion output.

#28c#29 If all of the farms but twowere invaded and the two undamaged farms became Cournot duopolists,total

output of mushrooms would be 2=3 of the preinvasion output.

#28d#29 If half of the farms were invaded and the industry remained competitive,industry output would fall to

half of the preinvasion output.

#28e#29 If half of the farms were invaded and the industry remained compeitive,industry output would fall,but

would be greater than half of the preinvasion output.

Topic,Oligopoly Di#0Eculty,2

#25 Correct Responses,69 Discrimination Index,40

Correct Answer,C

27.21 A duopoly faces the demand curve D#28p#29=30,:5p,Both #0Crms in the industry havea

total cost function given by C#28q#29=4q,Suppose that Firm 1 is a Stackelberg leader in choosing its

quantity #0Crst,Firm 1

0

s pro#0Ct function can be written as:

#28a#29 q

1

=14,:5q

2

.

#28b#29 q

2

=14,:5q

1

.

#28c#29 28q

1

,q

2

1

.

#28d#29 56q

1

,q

2

1

.

#28e#29 60q,q

2

.

CHAPTER 27 Oligopoly 502

Topic,Oligopoly Di#0Eculty,0

#25 Correct Responses,63 Discrimination Index,67

Correct Answer,A

27.22 A duopoly faces the inverse demand curve p = 160,2q,Firm 1

0

s total cost function is given

by C

1

#28q

1

#29=8q

1

and Firm 2

0

s total cost function is given by C

2

#28q

2

#29=10q

2

,In a Cournot equilibrium:

#28a#29 the #0Crm with the lower marginal cost produces more.

#28b#29 both #0Crms will produce the same amount.

#28c#29 the #0Crm with the higher marginal cost produces more to cover the higher costs.

#28d#29 the reaction function for both #0Crms is the same since both #0Crms have a constant marginal cost.

#28e#29 more than one of the above is correct.

Topic,Oligopoly Di#0Eculty,0

#25 Correct Responses,63 Discrimination Index,67

Correct Answer,B

27.23 Consider a market with one large #0Crm and many small #0Crms,The supply function of

all of the small #0Crms together is given by S#28p#29 = 200 + p; the market demand curve is given by

D#28p#29 = 400,p; and the cost function for the large #0Crm is C#28y#29=20y,The residual demand curve

for the large #0Crm #28where D

L

is large #0Crm's demand and y

L

is large #0Crm's output#29 is given by:

#28a#29 D

L

#28p#29 = 400,21y

L

.

#28b#29 D

L

#28p#29 = 200,2p.

#28c#29 D

L

#28p#29 = 600,2p.

#28d#29 D

L

#28y

L

#29 = 200,2p,20y

L

.

#28e#29 D

L

#28y

L

#29 = 200+ p+20y

L

.

MULTIPLE CHOICE 503

Topic,Oligopoly Di#0Eculty,0

#25 Correct Responses,77 Discrimination Index,48

Correct Answer,A

27.24 The duopolists Carl and Simon face a demand function for pumpkins of Q =5;600,800P

where Q is the total number of pumpkins that reach the market and P is the price of pumpkins.

Suppose further that each farmer has a constant marginal cost of $1 for each pumpkin produced.

If Carl believes that Simon is going to produce Q

s

pumpkins this year,then the reaction function

tells us how many pumpkins Carl should produce in order to maximize his pro#0Cts,Carl's reaction

function is R

C

#28Q

s

#29=

#28a#29 2;400,Q

s

=2.

#28b#29 5;600,800Q

s

.

#28c#29 5;600,1;600Q

s

.

#28d#29 1;200,Q

s

=2.

#28e#29 3;600,Q

s

.

Topic,Oligopoly Di#0Eculty,0

#25 Correct Responses,77 Discrimination Index,48

Correct Answer,A

27.25 The duopolists Carl and Simon face a demand function for pumpkins of Q =3;600,400P

where Q is the total number of pumpkins that reach the market and P is the price of pumpkins.

Suppose further that each farmer has a constant marginal cost of $1 for each pumpkin produced.

If Carl believes that Simon is going to produce Q

s

pumpkins this year,then the reaction function

tells us how many pumpkins Carl should produce in order to maximize his pro#0Cts,Carl's reaction

function is R

C

#28Q

s

#29=

#28a#29 1;600,Q

s

=2.

#28b#29 3;600,400Q

s

.

#28c#29 3;600,800Q

s

.

#28d#29 800,Q

s

=2.

#28e#29 2;400,Q

s

.

CHAPTER 27 Oligopoly 504

Topic,Oligopoly Di#0Eculty,2

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,D

27.26 Supose that the inverse demand for bean sprouts is given by P#28Y#29 = 520,2Y and the total

cost of producing Y units for any #0Crm is TC#28Y#29=40Y,If the industry consists of two Cournot

duopolists,then in equilibrium each #0Crm's production is:

#28a#29 120 units.

#28b#29 60 units.

#28c#29 40 units.

#28d#29 80 units.

#28e#29 65 units.

Topic,Oligopoly Di#0Eculty,2

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,D

27.27 Supose that the inverse demand for bean sprouts is given by P#28Y#29 = 390,2Y and the total

cost of producing Y units for any #0Crm is TC#28Y#29=30Y,If the industry consists of two Cournot

duopolists,then in equilibrium each #0Crm's production is:

#28a#29 90 units.

#28b#29 45 units.

#28c#29 30 units.

#28d#29 60 units.

#28e#29 48.75 units.

MULTIPLE CHOICE 505

Topic,Oligopoly Di#0Eculty,0

#25 Correct Responses,72 Discrimination Index,56

Correct Answer,A

27.28 Suppose that Grinch and Grubb go into the wine business in a small country where wine is

di#0Ecult to grow,The demand for wine is given by p = $420,:2Q where p is the price and Q is the

total quantity sold,The industry consists of just the two Cournot duopolists,Grinch and Grubb.

Imports are prohibited,Grinch has constant marginal costs of $15 and Grubb has marginal costs

of $15,Howmuch is Grinch's output in equilibrium?

#28a#29 675

#28b#29 1,350

#28c#29 337.50

#28d#29 1,012.50

#28e#29 2,025

Topic,Oligopoly Di#0Eculty,0

#25 Correct Responses,72 Discrimination Index,56

Correct Answer,A

27.29 Suppose that Grinch and Grubb go into the wine business in a small country where wine is

di#0Ecult to grow,The demand for wine is given by p = $600,:2Q where p is the price and Q is the

total quantity sold,The industry consists of just the two Cournot duopolists,Grinch and Grubb.

Imports are prohibited,Grinch has constant marginal costs of $60 and Grubb has marginal costs

of $75,Howmuch is Grinch's output in equilibrium?

#28a#29 925

#28b#29 1,850

#28c#29 462.50

#28d#29 1,387.50

#28e#29 2,775

CHAPTER 27 Oligopoly 506

Topic,Oligopoly Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,A

27.30

Suppose that two airlines are Cournot duopolists serving the Peoria-Dubuque route,and the de-

mand curve for tickets per dayisQ= 180,2p #28so p =90,Q=2#29.Total costs of running a #0Dighton

this route are 200+30qwhere q is the number of passengers on the #0Dight,Each #0Dight has a capacity

of 80 passengers,In Cournot equilibrium,each duopolist will run one #0Dight per day and will make

a daily pro#0Ct of:

#28a#29 600

#28b#29 100

#28c#29 180

#28d#29 1,200

#28e#29 2,000

Topic,Oligopoly Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,A

27.31

Suppose that two airlines are Cournot duopolists serving the Peoria-Dubuque route,and the de-

mand curve for tickets per dayisQ= 140,2p #28so p =70,Q=2#29.Total costs of running a #0Dighton

this route are 100+40qwhere q is the number of passengers on the #0Dight,Each #0Dight has a capacity

of 80 passengers,In Cournot equilibrium,each duopolist will run one #0Dight per day and will make

a daily pro#0Ct of:

#28a#29 100

#28b#29 50

#28c#29 140

#28d#29 200

#28e#29 1,000

MULTIPLE CHOICE 507

Topic,Oligopoly Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,C

27.32 Suppose that the market demand curve for bean sprouts is given by

P =3;580,5Q; where P is the price and Q is total industry output,Suppose that the industry has

two #0Crms,a Stackleberg leader and a follower,Each #0Crm has a constant marginal cost of $80 per

unit of output,In equilibrium,total output by the two #0Crms will be:

#28a#29 350.

#28b#29 175.

#28c#29 525.

#28d#29 700.

#28e#29 87.50.

Topic,Oligopoly Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,C

27.33 Suppose that the market demand curve for bean sprouts is given by

P =3;520,5Q; where P is the price and Q is total industry output,Suppose that the industry has

two #0Crms,a Stackleberg leader and a follower,Each #0Crm has a constant marginal cost of $20 per

unit of output,In equilibrium,total output by the two #0Crms will be:

#28a#29 350.

#28b#29 175.

#28c#29 525.

#28d#29 700.

#28e#29 87.50.

CHAPTER 27 Oligopoly 508

Topic,Oligopoly Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,A

27.34 There are two #0Crms in the blastopheme industry,The demand curve for blastophemes is

given by p =1;000,2q,Each #0Crm has one manufacturing plant and each #0Crm i has a cost function

C#28q

i

#29=q

2

i

where q

i

is the output of #0Crm i,The two #0Crms form a cartel and arrange to split total

industry pro#0Cts equally,Under this cartel arrangement,they will maximize joint pro#0Cts if:

#28a#29 and only if each #0Crm produces 100 units in its plant.

#28b#29 they produce a total of 200 units,no matter which #0Crm produces them.

#28c#29 and only if they each produce a total of 250 units.

#28d#29 they produce a total of 166.67 units,no matter which #0Crm produces them.

#28e#29 they shut down one of the two plants,having the other operate as a monopoly,and splitting the pro#0Cts.

Topic,Oligopoly Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,A

27.35 There are two #0Crms in the blastopheme industry,The demand curve for blastophemes is

given by p =5;400,4q,Each #0Crm has one manufacturing plant and each #0Crm i has a cost function

C#28q

i

#29=q

2

i

where q

i

is the output of #0Crm i,The two #0Crms form a cartel and arrange to split total

industry pro#0Cts equally,Under this cartel arrangement,they will maximize joint pro#0Cts if:

#28a#29 and only if each #0Crm produces 300 units in its plant.

#28b#29 they produce a total of 600 units,no matter which #0Crm produces them.

#28c#29 and only if they each produce a total of 675 units.

#28d#29 they produce a total of 450 units,no matter which #0Crm produces them.

#28e#29 they shut down one of the two plants,having the other operate as a monopoly,and splitting the pro#0Cts.

MULTIPLE CHOICE 509

Topic,Oligopoly Di#0Eculty,0

#25 Correct Responses,55 Discrimination Index,30

Correct Answer,D

27.36 A Stackleberg leader and follower eachchoose their outputs to maximize their own pro#0Cts.

Local property taxes which constitute a lump sum tax for each of them are reduced by $500 per

year for the leader and by $200 a year for the follower,In consequence,the #0Crms:

#28a#29 both increase output,with the leader increasing output by more.

#28b#29 both increase output,with the follower increasing output by more.

#28c#29 increase output by equal amounts for each #0Crm.

#28d#29 leave their outputs unchanged.

#28e#29 There is not enough information in the question to determine what the #0Crms will do.

Topic,Oligopoly Di#0Eculty,0

#25 Correct Responses,40 Discrimination Index,25

Correct Answer,B

27.37 An industry has two colluding #0Crms,who act so as to maximize total pro#0Ct in the industry

and then split the pro#0Cts equally,Firm 1 has cost function c#28y#29=8y,Firm 2 has cost function

c#28y#29=y

2

,Each #0Crm produces an integer number of units,Market demand is given by Y#28p#29=80,p.

#28a#29 Firm 1 should produce 16 units and #0Crm 2 should produce 16 units.

#28b#29 Firm 1 should produce 32 units and #0Crm 2 should produce 4 units.

#28c#29 Each #0Crm should produce 18 units.

#28d#29 Firm 1 should produce 36 units and #0Crm 2 should produce 2 units.

#28e#29 None of the above.

Topic,Oligopoly Di#0Eculty,0

#25 Correct Responses,40 Discrimination Index,25

Correct Answer,B

27.38 An industry has two colluding #0Crms,who act so as to maximize total pro#0Ct in the industry

and then split the pro#0Cts equally,Firm 1 has cost function c#28y#29=8y,Firm 2 has cost function

c#28y#29=y

2

,Each #0Crm produces an integer number of units,Market demand is given by Y#28p#29=48,p.

#28a#29 Firm 1 should produce 8 units and #0Crm 2 should produce 8 units.

#28b#29 Firm 1 should produce 16 units and #0Crm 2 should produce 4 units.

#28c#29 Each #0Crm should produce 10 units.

#28d#29 Firm 1 should produce 20 units and #0Crm 2 should produce 2 units.

#28e#29 None of the above.

CHAPTER 27 Oligopoly 510

Topic,Oligopoly Di#0Eculty,0

#25 Correct Responses,63 Discrimination Index,40

Correct Answer,C

27.39 An industry has two firms,,aStackleberg leader and a follower,The price of the indus-

try output is given by P =48,Qwhere Q is the total output of the two #0Crms,The follower has a

marginal cost of 0,The leader has a marginal cost of 12,Howmuch should the leader produce in

order to maximize pro#0Cts?

#28a#29 15

#28b#29 24

#28c#29 12

#28d#29 10

#28e#29 None of the above.

Topic,Oligopoly Di#0Eculty,0

#25 Correct Responses,63 Discrimination Index,40

Correct Answer,C

27.40 An industry has two firms,,aStackleberg leader and a follower,The price of the indus-

try output is given by P =24,Qwhere Q is the total output of the two #0Crms,The follower has a

marginal cost of 0,The leader has a marginal cost of 6,Howmuch should the leader produce in

order to maximize pro#0Cts?

#28a#29 9

#28b#29 12

#28c#29 6

#28d#29 4

#28e#29 None of the above.

MULTIPLE CHOICE 511

Topic,Oligopoly Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,A

27.41 Roach Motors is the dominant used car dealer in a small midwestern city,After paying

$50,000 for overhead,Roach Motors' cost per car is $500,There are 4 other small used car lots in

this town,but since they are not large enough to purchase cars through the same discount sources

as Roach,each #0Crm faces the cost function C =5;000+ 600Q+5Q

2

,The demand for used cars is

Q = 400,P2=10,Assuming Roachisaware of its competitors' costs,what price should Roach set

for a used car?

#28a#29 $783.33

#28b#29 $816.67

#28c#29 $600

#28d#29 $641.67

#28e#29 $1,016.67

Topic,Oligopoly Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,A

27.42 Roach Motors is the dominant used car dealer in a small midwestern city,After paying

$50,000 for overhead,Roach Motors' cost per car is $500,There are 5 other small used car lots in

this town,but since they are not large enough to purchase cars through the same discount sources

as Roach,each #0Crm faces the cost function C =5;000+ 600Q+5Q

2

,The demand for used cars is

Q = 200,P1=10,Assuming Roachisaware of its competitors' costs,what price should Roach set

for a used car?

#28a#29 $666.67

#28b#29 $600

#28c#29 $600

#28d#29 $583.33

#28e#29 $900

CHAPTER 27 Oligopoly 512

Topic,Oligopoly Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,B

27.43

Roach Motors is the dominant used car dealer in a small midwestern city,After paying $50,000

for overhead,Roach Motors' cost per car is $500,There are 4 other small used car lots in this

town,but since they are not large enough to purchase cars through the same discount sources as

Roach,each #0Crm faces the cost function C =5;000 + 700Q +5Q

2

,The demand for used cars is

Q = 500,P2=10,Assuming Roach sets the market price so as to maximize its pro#0Ct,how many

cars will each of the follower #0Crms supply?

#28a#29 12

#28b#29 20

#28c#29 27

#28d#29 17

#28e#29 15

Topic,Oligopoly Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,B

27.44

Roach Motors is the dominant used car dealer in a small midwestern city,After paying $50,000

for overhead,Roach Motors' cost per car is $500,There are 4 other small used car lots in this

town,but since they are not large enough to purchase cars through the same discount sources as

Roach,each #0Crm faces the cost function C =5;000 + 700Q +5Q

2

,The demand for used cars is

Q = 500,P2=10,Assuming Roach sets the market price so as to maximize its pro#0Ct,how many

cars will each of the follower #0Crms supply?

#28a#29 29

#28b#29 20

#28c#29 26

#28d#29 19

#28e#29 14

MULTIPLE CHOICE 513

Topic,Oligopoly Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,D

27.45

North Bend currently has one McDonald's fast food franchise,Demand for hamburgers in North

Bend is given by Q = 200,40P.Any McDonald's franchise has costs of C =80+2Qfor producing

Q hamburgers,If a second McDonald's franchise were to moveinto North Bend #28and both behave

as duopolists#29,the pro#0Ct of the original McDonald's would

#28a#29 fall from $10 to $,80.

#28b#29 fall from $210 to $120.

#28c#29 fall from $90 to $,80.

#28d#29 fall from $10 to $,40.

#28e#29 fall from $90 to $0.

Topic,Oligopoly Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,D

27.46

North Bend currently has one McDonald's fast food franchise,Demand for hamburgers in North

Bend is given by Q = 400,10P.Any McDonald's franchise has costs of C =60+4Qfor producing

Q hamburgers,If a second McDonald's franchise were to moveinto North Bend #28and both behave

as duopolists#29,the pro#0Ct of the original McDonald's would

#28a#29 fall from $3,180 to $2,760.

#28b#29 fall from $3,960 to $1,920.

#28c#29 fall from $3,240 to $2,760.

#28d#29 fall from $3,180 to $1,380.

#28e#29 fall from $3,240 to $2,820.

CHAPTER 27 Oligopoly 514

Topic,Oligopoly Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,B

27.47 Ann and Bruce eachown a pizza store in Frostbite Falls,MN,Demand for pizza is given by

Q = 200,40P,Being the only two pizza stores in Frostbite Falls,they attempt to pro#0Ctably split

the market without violating the Sherman Antitrust Act,Each has the cost function C =60+3Q.

If Ann and Bruce behave as duopolists each earns a pro#0Ct of

#28a#29 $0.

#28b#29 $,42:22.

#28c#29 $35.56.

#28d#29 $97.78.

#28e#29 $40.

Topic,Oligopoly Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,B

27.48 Ann and Bruce eachown a pizza store in Frostbite Falls,MN,Demand for pizza is given by

Q = 300,40P,Being the only two pizza stores in Frostbite Falls,they attempt to pro#0Ctably split

the market without violating the Sherman Antitrust Act,Each has the cost function C =60+4Q.

If Ann and Bruce behave as duopolists each earns a pro#0Ct of

#28a#29 $0.

#28b#29 $,5:56.

#28c#29 $108.89.

#28d#29 $241.11.

#28e#29 $122.50.

Chapter 28

True-False Game Theory

Topic,Game Theory Di#0Eculty,2

#25 Correct Responses,76 Discrimination Index,13

Correct Answer,True

28.1 A situation where everyone is playing a dominant strategy must be a Nash equilibrium.

Topic,Game Theory Di#0Eculty,2

#25 Correct Responses,87 Discrimination Index,40

Correct Answer,False

28.2 In a Nash equilibrium,everyone must be playing a dominant strategy.

Topic,Game Theory Di#0Eculty,2

#25 Correct Responses,39 Discrimination Index,14

Correct Answer,False

28.3 In the prisoners' dilemma game,if each prisoner believed that the other prisoner would deny

the crime,then both would deny the crime.

Topic,Game Theory Di#0Eculty,1

#25 Correct Responses,56 Discrimination Index,41

Correct Answer,False

28.4 A general has the two possible pure strategies,sending all of his troops by land or all of his

troops by sea,An example of a mixed strategy is where he sends 1=4 of his troops by land and 3=4

of his troops by sea.

Topic,Game Theory Di#0Eculty,1

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,False

28.5 While game theory predicts noncooperative behavior for a single play of prisoners' dilemma,

it would predict cooperative tit-for-tat behavior if the same people play prisoners' dilemma together

for,say,20 rounds.

CHAPTER 28 Game Theory 516

Topic,Game Theory Di#0Eculty,1

#25 Correct Responses,80 Discrimination Index,33

Correct Answer,False

28.6 Atwo-person game in which each person has access to only two possible strategies will have

at most one Nash equilibrium.

Topic,Game Theory Di#0Eculty,1

#25 Correct Responses,93 Discrimination Index,13

Correct Answer,True

28.7 A dominant strategy equilibrium is a set of choices such that each player's choices are op-

timal regardless of what the other players choose.

Topic,Game Theory Di#0Eculty,1

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,True

28.8 In Nash equilibrium,each player is making an optimal choice for herself,given the choices

of the other players.

Topic,Game Theory Di#0Eculty,1

#25 Correct Responses,79 Discrimination Index,2

Correct Answer,False

28.9 If a game does not have an equilibrium in pure strategies,then it will not have an equilib-

rium in mixed strategies either.

Topic,Game Theory Di#0Eculty,2

#25 Correct Responses,82 Discrimination Index,15

Correct Answer,False

28.10 A game has two players and each has two strategies,The strategies are Be Nice and Be

Mean,If both players play Be Nice,both get a payo#0B of 5,If both players play Be Mean,both get

apayo#0B of,3,If one player plays Be Nice and the other plays Be Mean,the player who played Be

Nice gets 0 and the player who played Be Mean gets 10,Playing Be Mean is a dominant strategy

for both players.

Multiple Choice Game Theory

Topic,Game Theory Di#0Eculty,2

#25 Correct Responses,74 Discrimination Index,57

Correct Answer,C

28.1 A game has two players,Each player has two possible strategies,One strategy is called

#5Ccooperate",the other is called #5Cdefect",Each player writes on a piece of paper either a C for

cooperate or a D for defect,If both players write C; they both get a payo#0B of $100,If both

players defect they each get a payo#0B of 0,If one player cooperates and the other player defects,

the cooperating player gets a payo#0B of S and the defecting player gets a payo#0B of T.To defect will

be a dominant strategy for both players if:

#28a#29 S +T#3E100

#28b#29 T#3E2S

#28c#29 S#3C0 and T#3E100.

#28d#29 S#3CTand T#3E100.

#28e#29 S amd T are any positivenumbers.

Topic,Game Theory Di#0Eculty,1

#25 Correct Responses,89 Discrimination Index,33

Correct Answer,C

28.2 In the game matrix below,the #0Crst payo#0B in each pair goes to Player A who chooses the

row,and the second payo#0B goes to Player B; who chooses the column,Let a,b; c; and d be positive

constants,If PlayerAchooses bottom and Player B chooses right in a Nash equilibrium then we

know that,!ta game1.tab!

#28a#29 b#3E1 and d#3C1.

#28b#29 c#3C1 and b#3C1.

#28c#29 b#3C1 and c#3Cd.

#28d#29 b#3Ccand d#3C1.

#28e#29 a#3C1 and b#3Cd.

CHAPTER 28 Game Theory 518

Topic,Game Theory Di#0Eculty,2

#25 Correct Responses,36 Discrimination Index,35

Correct Answer,A

28.3 In the town of Torrelodones,eachoftheN#3E2inhabitants has $100,They are told that

they can all voluntarily contribute to a fund that will be evenly divided among all residents,If $F

are contributed to the fund,the local K-Mart will match the private contributions so that the total

amount to be divided is $2F,That is,each resident will get backapaymentof$2F=N when the

fund is divided,If people in town care only about their own net incomes,in Nash equilibrium,how

much will each person contribute to the fund?

#28a#29 0

#28b#29 $10

#28c#29 $20

#28d#29 $50

#28e#29 $100

Topic,Game Theory Di#0Eculty,3

#25 Correct Responses,43 Discrimination Index,35

Correct Answer,C

28.4 Frank and Nancy met at a sororitysock-hop,They agreed to meet for a date at a local bar

the next week,Regrettably,they were so fraught with passion that they forgot to agree on which

bar would be the site of their rendezvous,Luckily,the town has only two bars,Rizotti's and the

Oasis,Having discussed their tastes in bars at the sock-hop,both are aware that Frank prefers

Rizotti's to the Oasis and Nancy prefer the Oasis to Rizottis,In fact,the payo#0Bs are as follows,If

both go to the Oasis,Nancy's utility is 3 and Frank's utility is 2,If both go to Rizotti's,Frank's

utility is 3 and Nancy's utility is 2,If they don't both go to the same bar,both have a utilityof0.

#28a#29 This game has no Nash equilibrium in pure strategies.

#28b#29 This game has a dominant strategy equilibrium.

#28c#29 There are two Nash equilibria in pure strategies and a Nash equilibrium in mixed strategies where the

probability that Frank and Nancy go to the same bar is 12=25.

#28d#29 This game has two Nash equilibria in pure strategies and a Nash equilbrium in mixed strategies where

each person has a probabilityof1=2 of going to each bar.

#28e#29 This game has exactly one Nash equilibrium.

MULTIPLE CHOICE 519

Topic,Game Theory Di#0Eculty,2

#25 Correct Responses,28 Discrimination Index,16

Correct Answer,C

28.5 George and Sam have taken their fathers' cars out on a lonely road and are engaged in a game

of "Chicken",George has his father's Mercedes and Sam has his father's rattly little Yugoslavian-

built subcompact car,Each of the players can choose either to SwerveortoNotSwerve,If both

choose Swerve,both get a payo#0B of zero,If one chooses Swerve and the other chooses Not Swerve,

the one who chooses Not Swerve gets a payo#0B of 10 and the one who chooses Swerve gets zero,If

both choose Not Swerve,the damage to George's car is fairly minor and he gets a payo#0B of,5;

while for Sam the results are disastrous and he gets a payo#0B of,100.

#28a#29 This game has a dominant strategy equilibrium in which George does not swerve and Sam swerves.

#28b#29 This game has two pure strategy Nash equilibria and no mixed-strategy equilibrium.

#28c#29 This game has three di#0Berent Nash equilibria,two of which are pure strategy equilibria and one of which

is a mixed strategy equilibrium in which George is more likely to swerve than Sam is.

#28d#29 The one and only Nash equilibrium in this game is where George does not swerve and Sam swerves.

#28e#29 This game has two pure strategy equilibria and a mixed strategy equilibrium in which Sam randomizes

his strategy and George chooses Not Swerve with certainty.

Topic,Game Theory Di#0Eculty,0

#25 Correct Responses,75 Discrimination Index,0

Correct Answer,E

28.6 Big Pig and Little Pig havetwo possible strategies,Press the Button,and Wait at the

trough,If both pigs choose Wait,both get 2,If both pigs press the button then Big Pig gets 7 and

Little Pig gets 3,If Little Pig presses the button and Big Pig waits at the trough,then Big Pig

gets 10 and Little Pig gets 0,Finally,if Big Pig presses the button and Little Pig waits,then Big

Pig gets 6 and Little Pig gets 1,In Nash equilibrium,

#28a#29 Little Pig will get a payo#0B of 1 and Big Pig will get a payo#0B of 6.

#28b#29 Little Pig will get a payo#0B of 3 and Big Pig will get a payo#0B of 7.

#28c#29 Both pigs will wait at the trough.

#28d#29 Little pig will get a payo#0B of zero.

#28e#29 The pigs must be using mixed strategies.

CHAPTER 28 Game Theory 520

Topic,Game Theory Di#0Eculty,0

#25 Correct Responses,75 Discrimination Index,0

Correct Answer,E

28.7 Big Pig and Little Pig havetwo possible strategies,Press the Button,and Wait at the

trough,If both pigs choose Wait,both get 1,If both pigs press the button then Big Pig gets 8 and

Little Pig gets 2,If Little Pig presses the button and Big Pig waits at the trough,then Big Pig

gets 10 and Little Pig gets 0,Finally,if Big Pig presses the button and Little Pig waits,then Big

Pig gets 4 and Little Pig gets 3,In Nash equilibrium,

#28a#29 Little Pig will get a payo#0B of 3 and Big Pig will get a payo#0B of 4.

#28b#29 Little Pig will get a payo#0B of 2 and Big Pig will get a payo#0B of 8.

#28c#29 Both pigs will wait at the trough.

#28d#29 Little pig will get a payo#0B of zero.

#28e#29 The pigs must be using mixed strategies.

Topic,Game Theory Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,A

28.8 Two players are engaged in a game of "Chicken",There are two possible strategies,Swerve

and Drive Straight,A player who chooses to Swerve is called "Chicken" and gets a payo#0B of zero,

regardless of what the other player does,A player who chooses to Drive Straight gets a payo#0B of

12 if the other player swerves and a payo#0B of,12 if the other player also chooses to Drive Straight.

This game has two pure strategy equilibria and:

#28a#29 a mixed strategy equilibrium in which each player swerves with probability 0.50 and drives straight with

probability 0.50.

#28b#29 two mixed strategies in which players alternate between swerving and driving straight.

#28c#29 a mixed strategy equilibrium in which one player swerves with probability 0.50 and the other swerves

with probability 0.50.

#28d#29 a mixed strategy in which each player swerves with probability 0.25 and drives straight with probability

0.75.

#28e#29 no mixed strategies.

MULTIPLE CHOICE 521

Topic,Game Theory Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,A

28.9 Two players are engaged in a game of "Chicken",There are two possible strategies,Swerve

and Drive Straight,A player who chooses to Swerve is called "Chicken" and gets a payo#0B of zero,

regardless of what the other player does,A player who chooses to Drive Straight gets a payo#0B of

9 if the other player swerves and a payo#0B of,36 if the other player also chooses to Drive Straight.

This game has two pure strategy equilibria and:

#28a#29 a mixed strategy equilibrium in which each player swerves with probability 0.80 and drives straight with

probability 0.20.

#28b#29 two mixed strategies in which players alternate between swerving and driving straight.

#28c#29 a mixed strategy equilibrium in which one player swerves with probability 0.80 and the other swerves

with probability 0.20.

#28d#29 a mixed strategy in which each player swerves with probability 0.40 and drives straight with probability

0.60.

#28e#29 no mixed strategies.

Topic,Game Theory Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,B

28.10 A famous Big Ten football coach had only two strategies,Run the ball to the left side

of the line,Run the ball to the right side,The defense can concentrate forces on the left side or

the right side,If the opponent concentrates on the wrong side,his o#0Bense is sure to gain at least

5yards,If the defense defended the left side and the o#0Bense ran left,it gain only 1 yard,If the

opponent defended the right side when the o#0Bense ran right,the o#0Bense would still gain at least

5yards with probability 0.70,It is the last play of the game and the famous coach's team is on

o#0Bense,If it makes5yards or more it wins,if not it loses,Both sides choose Nash equilibrium

strategies,In equilibrium the o#0Bense:

#28a#29 is sure to run to the right side.

#28b#29 will run to the right side with probability 0.77.

#28c#29 will run to the right side with probability 0.87.

#28d#29 will run to the two sides with equal probability.

#28e#29 will run to the right side with probability 0.70.

CHAPTER 28 Game Theory 522

Topic,Game Theory Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,B

28.11 A famous Big Ten football coach had only two strategies,Run the ball to the left side

of the line,Run the ball to the right side,The defense can concentrate forces on the left side or

the right side,If the opponent concentrates on the wrong side,his o#0Bense is sure to gain at least

5yards,If the defense defended the left side and the o#0Bense ran left,it gain only 1 yard,If the

opponent defended the right side when the o#0Bense ran right,the o#0Bense would still gain at least

5yards with probability 0.30,It is the last play of the game and the famous coach's team is on

o#0Bense,If it makes5yards or more it wins,if not it loses,Both sides choose Nash equilibrium

strategies,In equilibrium the o#0Bense:

#28a#29 is sure to run to the right side.

#28b#29 will run to the right side with probability 0.59.

#28c#29 will run to the right side with probability 0.74.

#28d#29 will run to the two sides with equal probability.

#28e#29 will run to the right side with probability 0.70.

Topic,Game Theory Di#0Eculty,0

#25 Correct Responses,74 Discrimination Index,56

Correct Answer,A

28.12 Suppose that in a Hawk-Dove game similar to the one discussed in your workbook,the

payo#0B to each player is,4 if both playhawk,If both playdove,the payo#0B to each player is 1 and

if one plays hawk and the other plays dove,the one that plays hawk gets a payo#0B of 4 and the one

that plays dove gets 0,In equilibrium,wewould expect hawks and doves to do equally well,This

happens when the fraction of the total population that plays hawk is:

#28a#29 0.43.

#28b#29 0.21.

#28c#29 0.11.

#28d#29 0.71.

#28e#29 1.

MULTIPLE CHOICE 523

Topic,Game Theory Di#0Eculty,0

#25 Correct Responses,74 Discrimination Index,56

Correct Answer,A

28.13 Suppose that in a Hawk-Dove game similar to the one discussed in your workbook,the

payo#0B to each player is,9 if both playhawk,If both playdove,the payo#0B to each player is 5 and

if one plays hawk and the other plays dove,the one that plays hawk gets a payo#0B of 7 and the one

that plays dove gets 0,In equilibrium,wewould expect hawks and doves to do equally well,This

happens when the fraction of the total population that plays hawk is:

#28a#29 0.18.

#28b#29 0.09.

#28c#29 0.05.

#28d#29 0.59.

#28e#29 1.

Topic,Game Theory Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,D

28.14

If the number of persons who attend the club meeting this week is X; then the number of people

who will attend next week is 77+0:30X,What is a long run equilibrium attendance for this club?

#28a#29 77

#28b#29 256.67

#28c#29 154

#28d#29 110

#28e#29 33

CHAPTER 28 Game Theory 524

Topic,Game Theory Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,D

28.15

If the number of persons who attend the club meeting this week is X; then the number of people

who will attend next week is 21+0:70X,What is a long run equilibrium attendance for this club?

#28a#29 21

#28b#29 30

#28c#29 42

#28d#29 70

#28e#29 49

Topic,Game Theory Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,E

28.16 Professor Binmore has a monopoly in the market for undergraduate game theory textbooks.

The time discounted value of Professor Binmore's future earnings is $2,000,Professor Ditt is

considering writing a book to compete with Professor Binmore's book,With two books amicably

splitting the market,the time discounted value of each professor's future earnings would be $200.

If there is full information #28each professor knows the pro#0Cts of the other#29,under what conditions

could Professor Binmore deter the entry of Professor Ditt into his market? #28More than one answer

may be correct,Full credit will be given only if all correct choices are selected.#29

#28a#29 Professor Binmore threatens to cut his price so that Professor Ditt would loose $200,In so doing,

Professor Binmore would loose $20 over time.

#28b#29 Professor Binmore threatens to cut his price so that Professor Ditt wouldloose $20,In so doing,Professor

Binmore would just break even over time.

#28c#29 Professor Binmore threatens to cut his price and attack the credibility of Professor Ditt's book so that

Professor Ditt would loose $2,In so doing,Professor Binmore would still make $190 over time.

#28d#29 Professor Binmore threatens to cut his price and attack the credibility of Professor Ditt's book so that

Professor Ditt would only make $2,In so doing,Professor Binmore would still make $100 over time.

#28e#29 None of the above.

MULTIPLE CHOICE 525

Topic,Game Theory Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,E

28.17 Professor Binmore has a monopoly in the market for undergraduate game theory textbooks.

The time discounted value of Professor Binmore's future earnings is $1,000,Professor Ditt is

considering writing a book to compete with Professor Binmore's book,With two books amicably

splitting the market,the time discounted value of each professor's future earnings would be $100.

If there is full information #28each professor knows the pro#0Cts of the other#29,under what conditions

could Professor Binmore deter the entry of Professor Ditt into his market? #28More than one answer

may be correct,Full credit will be given only if all correct choices are selected.#29

#28a#29 Professor Binmore threatens to cut his price so that Professor Ditt would loose $200,In so doing,

Professor Binmore would loose $20 over time.

#28b#29 Professor Binmore threatens to cut his price so that Professor Ditt wouldloose $20,In so doing,Professor

Binmore would just break even over time.

#28c#29 Professor Binmore threatens to cut his price and attack the credibility of Professor Ditt's book so that

Professor Ditt would loose $2,In so doing,Professor Binmore would still make $90 over time.

#28d#29 Professor Binmore threatens to cut his price and attack the credibility of Professor Ditt's book so that

Professor Ditt would only make $2,In so doing,Professor Binmore would still make $50 over time.

#28e#29 None of the above.

Essay Game Theory

Topic,Game Theory Di#0Eculty,2

#25 Correct Responses,0 Discrimination Index,0

28.1 The coach of the o#0Bensive football team has two options on the next play,He can run the

ball or he can pass,His rival can defend either against the run or against the pass,Suppose that

the o#0Bense passes,Then if the defense defends against the pass,it will make zero yards and if

the defense defends against the run,it will make25yards,Suppose that the o#0Bense runs,If the

defense defends against the pass,the o#0Bense will make10yards and if the defense defends against

a run,the o#0Bense will gain 2 yards,a#29 Write downapayo#0B matrix for this game,b#29 Is there a

Nash equilibrium in pure strategies for this game? If so,what is it? If not,demonstrate that there

is none.

Answer,This game does not have a Nash equilibrium in pure strategies,The best response to a

pass #28run#29 is a defense against the pass #28run#29,But the best response to a defense against the pass

#28run#29 is to run #28pass#29.

Chapter 29

True-False Exchange

Topic,Exchange Di#0Eculty,1

#25 Correct Responses,62 Discrimination Index,5

Correct Answer,False

29.1 Partial equilibrium analysis concerns only supply or only demand while general equilibrium

analysis deals with supply and demand at the same time.

Topic,Exchange Di#0Eculty,1

#25 Correct Responses,52 Discrimination Index,31

Correct Answer,True

29.2 A pure exchange economy is an economy where goods are traded but there is no production.

Topic,Exchange Di#0Eculty,1

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,False

29.3 In general equilibrium analysis,an allocation is a feasible allocation if every consumer is

consuming a bundle that costs no more than his or her income.

Topic,Exchange Di#0Eculty,2

#25 Correct Responses,53 Discrimination Index,31

Correct Answer,True

29.4 From Walras' law it follows that in a market with two goods,if demand equals supply in

one market,then demand must equal supply in the other market.

Topic,Exchange Di#0Eculty,1

#25 Correct Responses,89 Discrimination Index,14

Correct Answer,True

29.5 If the assumptions of the #0Crst theorem of welfare economics apply,and if the economyis

in a competitive equilibrium,then any reallocation that bene#0Cts someone must harm someone else.

CHAPTER 29 Exchange 528

Topic,Exchange Di#0Eculty,1

#25 Correct Responses,95 Discrimination Index,0

Correct Answer,True

29.6 If there are consumption externalities,then a competitive equilibrium is not necessarily

Pareto optimal.

Topic,Exchange Di#0Eculty,1

#25 Correct Responses,88 Discrimination Index,0

Correct Answer,True

29.7 A competitive equilibrium allocation must be a feasible allocation.

Topic,Exchange Di#0Eculty,2

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,True

29.8 The second welfare theorem states that if preferences are convex,then anyPareto optimal

allocation could be achieved as a competitive equilibrium after some reallocation of initial endow-

ments.

Topic,Exchange Di#0Eculty,1

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,True

29.9 In a competitive pure exchange economy,if the total value of excess demand for all types

of food is zero,then the total value of excess demand for all nonfood commodities must be zero.

Topic,Exchange Di#0Eculty,1

#25 Correct Responses,84 Discrimination Index,18

Correct Answer,True

29.10 Every allocation on the contract curveisPareto optimal.

Topic,Exchange Di#0Eculty,2

#25 Correct Responses,75 Discrimination Index,10

Correct Answer,True

29.11 In a pure exchange economy with two goods,if there is a competitive equilibrium with

prices p

1

=12;p

2

=27;then there must also be a competitive equilibrium with prices p

1

=24;

p

2

=54.

TRUE-FALSE 529

Topic,Exchange Di#0Eculty,2

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,True

29.12 If demand varies continuously with price,then even if there are thousands of goods there

will be at least one set of prices such that demand equals supply in every market.

Topic,Exchange Di#0Eculty,3

#25 Correct Responses,43 Discrimination Index,23

Correct Answer,True

29.13 If allocation x is a competitive equilibrium at prices p and if everybody likes his bundle in

allocation y better than his bundle in allocation x; then the total value of allocation y at prices p

exceeds the total value of allocation x at prices p.

Topic,Exchange Di#0Eculty,2

#25 Correct Responses,58 Discrimination Index,16

Correct Answer,True

29.14 If the initial endowment is on the contract curve,then there must always be a competitive

equilibrium in which no trade takes place.

Topic,Exchange Di#0Eculty,2

#25 Correct Responses,57 Discrimination Index,40

Correct Answer,True

29.15 Jack Spratt's utility function is U#28F;L#29=L,His wife's utility function is U#28F;L#29=F.If

Jack's initial endowment is 70 units of F and 35 units of L and if Jack's wife's initial endowment

is 42 units of F and 70 units of L; then in an Edgeworth box for Jack and his wife,an allocation of

F and L will be Pareto optimal only if it is

at a corner of the box.

Topic,Exchange Di#0Eculty,2

#25 Correct Responses,57 Discrimination Index,40

Correct Answer,True

29.16 Jack Spratt's utility function is U#28F;L#29=L,His wife's utility function is U#28F;L#29=F.If

Jack's initial endowment is 50 units of F and 25 units of L and if Jack's wife's initial endowment

is 30 units of F and 50 units of L; then in an Edgeworth box for Jack and his wife,an allocation of

F and L will be Pareto optimal only if it is

at a corner of the box.

CHAPTER 29 Exchange 530

Topic,Exchange Di#0Eculty,3

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,True

29.17 If two people have identical Cobb-Douglas utility functions,then in every Pareto optimal

allocation,they must consume all goods in the same proportions as each other.

Topic,Exchange Di#0Eculty,2

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,True

29.18 If two people have identical homothetic preferences and if their indi#0Berence curves have

diminishing marginal rate of substitution,then in an Edgeworth box,the locus of Pareto optimal

allocations between them is a diagonal straight line.

Topic,Exchange Di#0Eculty,1

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,False

29.19 In a model with two consumers,two goods,and no production,the contract curvemust

be a line going from one consumer's origin to the other consumer's origin.

Topic,Exchange Di#0Eculty,2

#25 Correct Responses,40 Discrimination Index,20

Correct Answer,False

29.20 In a competitive pure exchange economy,if the initial endowment is on the diagonal line

between the two origins,then,according to the #0Crst welfare theorem,there must always be a com-

petitive equilibrium in which no trade takes place.

Multiple Choice Exchange

Topic,Exchange Di#0Eculty,2

#25 Correct Responses,12 Discrimination Index,8

Correct Answer,E

29.1 In a pure exchange economy with two persons and two goods,one person always prefers

more to less of both goods and one person likes one of the goods and hates the other so much that

she would have to be paid to consume it,Both are initially endowed with positive amounts of both

goods,The competitive equilibrium price of the good that one person hates must be:

#28a#29 negative.

#28b#29 smaller than the price of the good both people like.

#28c#29 less than 1.

#28d#29 could be positive or negative,depending on details of tastes and technology.

#28e#29 positive.

Topic,Exchange Di#0Eculty,2

#25 Correct Responses,65 Discrimination Index,35

Correct Answer,A

29.2 If an allocation is Pareto optimal and if indi#0Berence curves between the twogoodshaveno

kinks,then it must be that:

#28a#29 two consumers who consume both goods must have the same MRS between them but consumers may

consume the goods in di#0Berent ratios.

#28b#29 two consumers with the same income who consume both goods must have the same MRS,but if their

incomes di#0Ber their MRS's may di#0Ber.

#28c#29 anytwo consumers who consume both goods must consume them in the same ratio.

#28d#29 for anytwo consumers who consume both goods,neither will prefer the other consumer's bundle to his

own.

#28e#29 all consumers receive the bundle that they prefer to any other bundle the economy could produce for

them.

CHAPTER 29 Exchange 532

Topic,Exchange Di#0Eculty,2

#25 Correct Responses,55 Discrimination Index,35

Correct Answer,E

29.3 According to the First Theorem of Welfare Economics:

#28a#29 Every competitive equilibrium is fair.

#28b#29 If the economy is in a competitive equilibrium,there is no way to makeanyone better o#0B.

#28c#29 A competitive equilibrium always exists.

#28d#29 AtaPareto optimum,all consumers must be equally wealthy.

#28e#29 None of the above.

Topic,Exchange Di#0Eculty,2

#25 Correct Responses,76 Discrimination Index,47

Correct Answer,A

29.4 A small economy has only two consumers,Ben and Penelope,Ben's utility function is

U#28x;y#29=x+84y

1=2

.Penelope's utility function is U#28x;y#29=x+7y.AtaPareto optimal allocation

in which both individuals consume some of eachgood,howmuch y does Ben consume?

#28a#29 36

#28b#29 6.50

#28c#29 12

#28d#29 13

#28e#29 We can't tell without knowing the initial endowments.

Topic,Exchange Di#0Eculty,2

#25 Correct Responses,76 Discrimination Index,47

Correct Answer,A

29.5 A small economy has only two consumers,Leonard and Katerina,Leonard's utility function

is U#28x;y#29=x+144y

1=2

,Katerina's utility function is U#28x;y#29=x+6y.AtaPareto optimal allocation

in which both individuals consume some of eachgood,howmuch y does Leonard consume?

#28a#29 144

#28b#29 9

#28c#29 24

#28d#29 18

#28e#29 We can't tell without knowing the initial endowments.

MULTIPLE CHOICE 533

Topic,Exchange Di#0Eculty,2

#25 Correct Responses,59 Discrimination Index,37

Correct Answer,C

29.6 Eduardo and Francisca participate in an economy that is in competitive equilibrium,Al-

though they are unacquainted with each other,both purchase strawberries and champagne,Ed-

uardo's utility function is U#28s;c#29=2s+cwhere s is the numberofboxes of strawberries he consumes

per month and c is the number of bottles of champagne,Francisca's utility function is U#28s;c#29=sc.

From this information we can conclude that:

#28a#29 Francisca consumes equal amounts of strawberries and champagne.

#28b#29 Eduardo consumes more strawberries than champagne.

#28c#29 Francisca consumes twice as many bottles of champagne as boxes of strawberries.

#28d#29 Francisca consumes twice as manyboxes of strawberries as bottles of champange.

#28e#29 Eduardo consumes more champagne than strawberries.

Topic,Exchange Di#0Eculty,3

#25 Correct Responses,75 Discrimination Index,29

Correct Answer,D

29.7 Tomoko and Matt both consume the same goods in a pure exchange economy.Tomokois

originally endowed with 16 units of good 1 and 14 units of good 2,Matt is originally endowed with

216 units of good 1 and 15 units of good 2,They both have the utility function U#28x

1;x

2

#29=x

1=3

1

x

2=3

2

.

If we let good 1 be the numeraire,so that p

1

=1;then what will be the equilibrium price of good 2?

#28a#29 2

#28b#29 32

#28c#29 1

#28d#29 16

#28e#29 8

CHAPTER 29 Exchange 534

Topic,Exchange Di#0Eculty,3

#25 Correct Responses,75 Discrimination Index,29

Correct Answer,D

29.8 Holly and Steven both consume the same goods in a pure exchange economy,Holly is

originally endowed with 5 units of good 1 and 3 units of good 2,Steven is originally endowed with

5 units of good 1 and 2 units of good 2,They both have the utility function U#28x

1;x

2

#29=x

1=3

1

x

2=3

2

.

If we let good 1 be the numeraire,so that p

1

=1;then what will be the equilibrium price of good 2?

#28a#29 2

#28b#29 8

#28c#29 1

#28d#29 4

#28e#29 2

Topic,Exchange Di#0Eculty,2

#25 Correct Responses,93 Discrimination Index,32

Correct Answer,C

29.9 Pete and Dud liveinatwo-commodityworld,Pete's utility function is U

P

#28x

P

1;x

P

2

#29=x

P

1

x

P

2

.

Dud's utility function is U

D

#28x

D

1;x

D

2

#29=minfx

D

1;x

d

2

g.Pete is initially endowed with 3 units of com-

modity 1 and 4 units of commodity 2,Dud is initially endowed with 7 units of commodity 1 and

6 units of commodity 2,Which of the following is true?

#28a#29 Both consume 5 units of each good in competitive equilibrium.

#28b#29 At competitive equilibrium,Dud consumes 6 units of each,since the 7th unit of his endowmentof

commodity 1 gives him no added utility

#28c#29 At a competitive equilibrium,Dud must consume equal amounts of both goods,so the price of good 1

must equal the price of good 2.

#28d#29 The prices of the two goods cannot be equal in equilibrium since Pete and Dud do not have equal

endowments.

#28e#29 All of the above statements are false.

MULTIPLE CHOICE 535

Topic,Exchange Di#0Eculty,1

#25 Correct Responses,95 Discrimination Index,17

Correct Answer,C

29.10 A situation is Pareto e#0Ecient if:

#28a#29 there is no way to makeeveryone worse o#0B without making someone better o#0B.

#28b#29 aggregate pro#0Cts are maximized.

#28c#29 there is no way to make someone better o#0B without making someone else worse o#0B.

#28d#29 there is some way to makeeveryone better o#0B.

#28e#29 there is no way to makeanyone better o#0B.

Topic,Elasticity Di#0Eculty,2

#25 Correct Responses,46 Discrimination Index,26

Correct Answer,E

29.11 Dan and Marilyn consume two goods,x and y,They have identical Cobb-Douglas utility

functions,Initially Dan owns 10 units of x and 10 units of y,Initially Marilyn owns 40 units of

x and 20 units of y,They make exchanges to reachaPareto optimal allocation which is better

for both than the no-trade allocation,Which of the following is NOT necessarily true about the

allocation they trade to?

#28a#29 Marilyn consumes 5 units of x for every 3 units of y that she consumes.

#28b#29 The locus of Pareto optimal allocations is a diagonal straight line in the Edgeworth box.

#28c#29 Dan's consumption of x is greater than his consumption of y.

#28d#29 Dan consumes more than 10 units of x.

#28e#29 Marilyn consumes at least 40 units of x.

Topic,Exchange Di#0Eculty,3

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,D

29.12 Xavier and Yvette are the only two persons on a desert island,There are only two

goods,nuts and berries,Xavier's utility function is U#28N

x;B

x

#29=N

x

B

x

.Yvette's utility function is

U#28N

y;B

y

#29=6N

y

+B

y

.Xavier is endowed with 4 units of berries and 10 units of nuts,Yvette is

endowed with 6 units of berries and 8 units of nuts,In a competitive equilibrium for this economy,

how many units of berries does Xavier consume?

#28a#29 35

#28b#29 64

#28c#29 30

#28d#29 32

#28e#29 None of the above.

CHAPTER 29 Exchange 536

Topic,Exchange Di#0Eculty,3

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,D

29.13 Xavier and Yvette are the only two persons on a desert island,There are only two

goods,nuts and berries,Xavier's utility function is U#28N

x;B

x

#29=N

x

B

x

.Yvette's utility function is

U#28N

y;B

y

#29=3N

y

+B

y

.Xavier is endowed with 3 units of berries and 10 units of nuts,Yvette is

endowed with 6 units of berries and 8 units of nuts,In a competitive equilibrium for this economy,

how many units of berries does Xavier consume?

#28a#29 19.50

#28b#29 33

#28c#29 14.50

#28d#29 16.50

#28e#29 None of the above.

Topic,Exchange Di#0Eculty,2

#25 Correct Responses,57 Discrimination Index,9

Correct Answer,B

29.14 Eva and Ollie live in an isolated valley and trade with no one but each other,They con-

sume only grapefruits and lemons,Eva has an initial endowment of 10 grapefruits and 15 lemons.

Ollie has an initial endowment of 14 grapefruits and 26 lemons,For Eva,the two goods are per-

fect substitutes,one-for-one,For Ollie,they are perfect complements,one-for-one,At all Pareto

e#0Ecient allocations:

#28a#29 Evamust consume at least 25 lemons.

#28b#29 Evamust consume at least 17 lemons.

#28c#29 Ollie must consume 17.50 grapefruits.

#28d#29 the slopes of the two traders' indi#0Berence curves are the same.

#28e#29 Ollie must consume all of the grapefruits.

MULTIPLE CHOICE 537

Topic,Exchange Di#0Eculty,2

#25 Correct Responses,57 Discrimination Index,9

Correct Answer,B

29.15 Isabella and Horace live in an isolated valley and trade with no one but each other,They

consume only tomatoes and grapes,Isabella has an initial endowment of 20 tomatoes and 2 grapes.

Horace has an initial endowment of 4 tomatoes and 38 grapes,For Isabella,the two goods are per-

fect substitutes,one-for-one,For Horace,they are perfect complements,one-for-one,At all Pareto

e#0Ecient allocations:

#28a#29 Isabella must consume at least 22 grapes.

#28b#29 Isabella must consume at least 16 grapes.

#28c#29 Horace must consume 19 tomatoes.

#28d#29 the slopes of the two traders' indi#0Berence curves are the same.

#28e#29 Horace must consume all of the tomatoes.

Topic,Exchange Di#0Eculty,3

#25 Correct Responses,11 Discrimination Index,35

Correct Answer,C

29.16 Amaranda and Bartolo consume only two goods,X and Y,They can trade only with each

other and there is no production,The total endowment of Good X equals the total endowment

of Good Y,Amaranda's utility function is U#28x

A;y

A

#29=minfx

A;y

A

gand Bartolo's utility function

is U#28x

B;y

B

#29=maxfx

A;y

B

g,In an Edgeworth box for Amaranda and Bartolo,the set of Pareto

optimal allocations is:

#28a#29 the main diagonal.

#28b#29 both diagonals.

#28c#29 the whole Edgeworth box.

#28d#29 the edges of the box and the main diagonal.

#28e#29 the edges of the box.

CHAPTER 29 Exchange 538

Topic,Exchange Di#0Eculty,3

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,C

29.17 Adelino and Benito consume only two goods X and Y,They trade only with each other

and there is no production,Adelino's utility function is given by U#28x

A;y

A

#29=2x

A

+5y

A

and Benito's

utility function is given by U#28x

B;y

B

#29 = 2#286x

B

+15y

B

#29

1=2

,In the Edgeworth box constructed for

Adelino and Benito,the set of Pareto optimal allocations is:

#28a#29 the main diagonal.

#28b#29 both diagonals.

#28c#29 the entire contents of the Edgeworth box.

#28d#29 the right and left edges of the box.

#28e#29 the upper and lower edges of the box.

Topic,Exchange Di#0Eculty,2

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,D

29.18 Tamara and Julio consume only bread and wine,They trade only with each other and

there is no production,They both have strictly convex preferences,Tamara's initial endowmentof

bread and wine is the same as Julio's.

#28a#29 At the initial endowment their marginal rates of substitution must be the same.

#28b#29 In a competitive equilibrium,the ratio of the two prices must be 1.

#28c#29 In a competitive equilibrium,they must consume identical consumption bundles.

#28d#29 If they have identical utility functions,then the initial allocation is Pareto optimal.

#28e#29 None of the above.

MULTIPLE CHOICE 539

Topic,Exchange Di#0Eculty,2

#25 Correct Responses,53 Discrimination Index,49

Correct Answer,E

29.19 Arturo and Belen consume only two goods,X and Y,They have strictly convex preferences

and no kinks in their indi#0Berence curves,At the initial allocation,the ratio of Arturo's marginal

utilityofXto his marginal utilityofYis A and the ratio of Belen's marginal utilityofXto his

marginal utilityofYis B; where A#3CB,The competitive equilibrium price ratio is p

x

=p

y

= C.

Then:

#28a#29 C#3EB.

#28b#29 C#3CA.

#28c#29 C = A.

#28d#29 C = B.

#28e#29 A#3CC#3CB.

Topic,Exchange Di#0Eculty,2

#25 Correct Responses,30 Discrimination Index,20

Correct Answer,B

29.20 In a two-person,two-good,exchange economy,both consumers have quasilinear utility

functions,linear in Good 2,If quantities of Good 1 are measured horizontally and quantities of

Good 2 are measured vertically in the Edgeworth box,the set of Pareto optimal allocations includes

#28a#29 a horizontal line through the interior of the box.

#28b#29 avertical line.

#28c#29 a straight line from the lower left to the upper right corner of the box.

#28d#29 a curved line from the lower left to the upper right corner of the box.

#28e#29 all four edges of the box.

CHAPTER 29 Exchange 540

Topic,Exchange Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,B

29.21 A small economy has only two consumers,Roger and Heidi,Roger's utility function is

U#28x;y#29=x+50y

1=2

,Heidi's utility function is U#28x;y#29=x+5y,Roger is endowed with 625 units of

x and 60 units of y,They make trades to reachaPareto optimal allocation of resources in which

both persons consume positive amounts,Howmuch y does Roger consume?

#28a#29 50

#28b#29 25

#28c#29 28

#28d#29 23

#28e#29 There is not enough information to determine howmuch y he will consume.

Topic,Exchange Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,B

29.22 A small economy has only two consumers,George and Penelope,George's utility function

is U#28x;y#29=x+16y

1=2

.Penelope's utility function is U#28x;y#29=x+4y,George is endowed with 64

units of x and 60 units of y,They make trades to reachaPareto optimal allocation of resources in

which both persons consume positive amounts,Howmuch y does George consume?

#28a#29 8

#28b#29 4

#28c#29 7

#28d#29 2

#28e#29 There is not enough information to determine howmuch y he will consume.

MULTIPLE CHOICE 541

Topic,Exchange Di#0Eculty,2

#25 Correct Responses,20 Discrimination Index,37

Correct Answer,A

29.23 Abdul's utilityisU#28X

A;Y

A

#29=minfX

A;Y

A

gwhere X

A

and Y

A

are his consumptions of goods

X and Y respectively,Babette's utility function is U#28X

B;Y

B

#29=X

B

Y

B

where X

B

and Y

B

are her

consumptions of goods X and Y,Abdul's initial endowment is no units of Y and 10 units of X.

Babette's initial endowment is no units of X and 12 units of Y.IfXis the numeraire good and p

is the price of good Y; then supply will equal demand in the market for Y if the following equation

is satis#0Ced.

#28a#29 10=#28p+1#29+6=12

#28b#29 12=10 = p

#28c#29 12=#28p+1#29+5=12

#28d#29 Minf10;12g+10=#282p#29=12

#28e#29 Minf10;12g+12=2p=12

Topic,Exchange Di#0Eculty,2

#25 Correct Responses,20 Discrimination Index,37

Correct Answer,A

29.24 Abdul's utilityisU#28X

A;Y

A

#29=minfX

A;Y

A

g where X

A

and Y

A

are his consumptions of

goods X and Y respectively,Babette's utility function is U#28X

B;Y

B

#29=X

B

Y

B

where X

B

and Y

B

are

her consumptions of goods X and Y,Abdul's initial endowment is no units of Y and 4 units of X.

Babette's initial endowment is no units of X and 14 units of Y.IfXis the numeraire good and p

is the price of good Y; then supply will equal demand in the market for Y if the following equation

is satis#0Ced.

#28a#29 4=#28p+1#29+7=14

#28b#29 14=4=p

#28c#29 14=#28p+1#29+2=14

#28d#29 Minf4;14g+4=#282p#29=14

#28e#29 Minf4;14g+14=2p=14

CHAPTER 29 Exchange 542

Topic,Exchange Di#0Eculty,2

#25 Correct Responses,63 Discrimination Index,38

Correct Answer,B

29.25 Professor Nightsoil's utility function is U

N

#28B

N;P

M

#29=B

N

+4P

1=2

N

and Dean Interface's

utility function is U

I

#28B

I;P

I

#29=B

I

+2P

1=2

I

where B

N

and B

I

are the number of bromides and P

N

and

P

I

are the number of platitudes consumed by Nightsoil and Interface respectively,If Nightsoil's

initial endowment is 4 bromides and 15 platitudes and if Interface's initial endowment is 5 bromides

and 20 platitudes,then at anyPareto e#0Ecient allocation in which both persons consume positive

amounts of both goods,it must be that:

#28a#29 Nightsoil consumes the same ratio of bromides to platitudes as Interface.

#28b#29 Interface consumes 7 platitudes.

#28c#29 Interface consumes 4.50 bromides.

#28d#29 Interface consumes 3 bromides.

#28e#29 Interface consumes 4 bromides.

Topic,Exchange Di#0Eculty,2

#25 Correct Responses,63 Discrimination Index,38

Correct Answer,B

29.26 Professor Nightsoil's utility function is U

N

#28B

N;P

M

#29=B

N

+4P

1=2

N

and Dean Interface's

utility function is U

I

#28B

I;P

I

#29=B

I

+2P

1=2

I

where B

N

and B

I

are the number of bromides and P

N

and

P

I

are the number of platitudes consumed by Nightsoil and Interface respectively,If Nightsoil's

initial endowment is 2 bromides and 10 platitudes and if Interface's initial endowment is 3 bromides

and 25 platitudes,then at anyPareto e#0Ecient allocation in which both persons consume positive

amounts of both goods,it must be that:

#28a#29 Nightsoil consumes the same ratio of bromides to platitudes as Interface.

#28b#29 Interface consumes 7 platitudes.

#28c#29 Interface consumes 2.50 bromides.

#28d#29 Interface consumes 2 bromides.

#28e#29 Interface consumes 5 bromides.

MULTIPLE CHOICE 543

Topic,Exchange Di#0Eculty,2

#25 Correct Responses,61 Discrimination Index,58

Correct Answer,B

29.27 An economy has two people Charlie and Doris,There are two goods,apples and bananas.

Charlie has an initial endowment of 5 apples and 4 bananas,Doris has an initial endowmentof

10 apples and 2 bananas,Charlie's utility function is U#28A

C;B

C

#29=A

C

B

C

where A

C

is his apple

consumption and B

C

is his banana consumption,Doris's utility function is U#28A

D;B

D

#29=A

D

B

D

where A

D

and B

D

are her apple and banana consumptions,Atevery Pareto optimal allocation:

#28a#29 Charlie consumes the same number of apples as Doris.

#28b#29 Charlie consumes 15 apples for every 6 bananas that he consumes.

#28c#29 Doris consumes equal numbers of apples and bananas.

#28d#29 Charlie consumes more bananas per apple than Doris does.

#28e#29 Doris consumes apples and bananas in the ratio of 10 apples for every 2 bananas that she consumes.

Topic,Exchange Di#0Eculty,2

#25 Correct Responses,61 Discrimination Index,58

Correct Answer,B

29.28 An economy has two people Charlie and Doris,There are two goods,apples and bananas.

Charlie has an initial endowment of 3 apples and 12 bananas,Doris has an initial endowmentof

6 apples and 6 bananas,Charlie's utility function is U#28A

C;B

C

#29=A

C

B

C

where A

C

is his apple

consumption and B

C

is his banana consumption,Doris's utility function is U#28A

D;B

D

#29=A

D

B

D

where A

D

and B

D

are her apple and banana consumptions,Atevery Pareto optimal allocation:

#28a#29 Charlie consumes the same number of apples as Doris.

#28b#29 Charlie consumes 9 apples for every 18 bananas that he consumes.

#28c#29 Doris consumes equal numbers of apples and bananas.

#28d#29 Charlie consumes more bananas per apple than Doris does.

#28e#29 Doris consumes apples and bananas in the ratio of 6 apples for every 6 bananas that she consumes.

CHAPTER 29 Exchange 544

Topic,Exchange Di#0Eculty,2

#25 Correct Responses,55 Discrimination Index,41

Correct Answer,C

29.29 Ken's utility function is U#28Q

K;W

K

#29=Q

K

W

K

and Barbie's utility function is U#28Q

B;W

B

#29=

Q

B

W

B

,If Ken's initial endowmentwere 3 units of quiche and 9 units of wine and Barbie's endow-

mentwere 6 units of quiche and 9 units of wine,then at anyPareto optimal allocation where both

persons consume some of each good:

#28a#29 Ken would consume 3 units of quiche for every 9 units of wine.

#28b#29 Barbie would consume twice as much quiche as Ken.

#28c#29 Ken would consume 9 units of quiche for every 18 units of wine that he consumes.

#28d#29 Barbie would consume 6 units of quiche for every 9 units of wine that she consumes.

#28e#29 None of the above.

Topic,Exchange Di#0Eculty,2

#25 Correct Responses,55 Discrimination Index,41

Correct Answer,C

29.30 Ken's utility function is U#28Q

K;W

K

#29=Q

K

W

K

and Barbie's utility function is U#28Q

B;W

B

#29=

Q

B

W

B

,If Ken's initial endowmentwere 3 units of quiche and 12 units of wine and Barbie's en-

dowmentwere 6 units of quiche and 12 units of wine,then at anyPareto optimal allocation where

both persons consume some of each good:

#28a#29 Ken would consume 3 units of quiche for every 12 units of wine.

#28b#29 Barbie would consume twice as much quiche as Ken.

#28c#29 Ken would consume 9 units of quiche for every 24 units of wine that he consumes.

#28d#29 Barbie would consume 6 units of quiche for every 12 units of wine that she consumes.

#28e#29 None of the above.

MULTIPLE CHOICE 545

Topic,Exchange Di#0Eculty,3

#25 Correct Responses,20 Discrimination Index,12

Correct Answer,D

29.31 Morris has the utility function U#28b;w#29=3b+12wand Philip has the utility function

U#28b;w#29=bw; where b is the number of books consumed per month and w is bottles of wine con-

sumed per month,If we draw an Edgeworth box with books on the horizontal axis and wine on the

vertical axis and if we measure Morris' consumptions from the lower left corner of the box,then

the contract curve contains:

#28a#29 a straight line running from the upper right corner of the box to the lower left.

#28b#29 a curve that gets steeper as you move from left to right.

#28c#29 a straight line with slope 1=4 passing through the lower left corner of the box.

#28d#29 a straight line with slope 1=4 passing through the upper right corner of the box.

#28e#29 a curve that gets #0Datter as you move from left to right.

Topic,Exchange Di#0Eculty,3

#25 Correct Responses,20 Discrimination Index,12

Correct Answer,D

29.32 Morris has the utility function U#28b;w#29=4b+12wand Philip has the utility function

U#28b;w#29=bw; where b is the number of books consumed per month and w is bottles of wine con-

sumed per month,If we draw an Edgeworth box with books on the horizontal axis and wine on the

vertical axis and if we measure Morris' consumptions from the lower left corner of the box,then

the contract curve contains:

#28a#29 a straight line running from the upper right corner of the box to the lower left.

#28b#29 a curve that gets steeper as you move from left to right.

#28c#29 a straight line with slope 1=3 passing through the lower left corner of the box.

#28d#29 a straight line with slope 1=3 passing through the upper right corner of the box.

#28e#29 a curve that gets #0Datter as you move from left to right.

CHAPTER 29 Exchange 546

Topic,Exchange Di#0Eculty,2

#25 Correct Responses,62 Discrimination Index,39

Correct Answer,A

29.33 Astrid's utility function is U#28H

A;C

A

#29=H

A

C

A

,Birger's utility function is minfH

B;C

B

g.If

Astrid's initial endowmentisnocheese and 8 units of herring and if Birger's initial endowments

are 8 units of cheese and no herring,then where p is a competitive equilibrium price of herring and

cheese is the numeraire,it must be that demand equals supply in the herring market,This implies

that:

#28a#29 8=#28p+1#29+4=8

#28b#29 8=8=p

#28c#29 8=8=p

#28d#29 8=p+8=2p=8

#28e#29 Minf8;8g=p

Topic,Exchange Di#0Eculty,2

#25 Correct Responses,62 Discrimination Index,39

Correct Answer,A

29.34 Astrid's utility function is U#28H

A;C

A

#29=H

A

C

A

,Birger's utility function is minfH

B;C

B

g.If

Astrid's initial endowmentisnocheese and 12 units of herring and if Birger's initial endowments

are 8 units of cheese and no herring,then where p is a competitive equilibrium price of herring and

cheese is the numeraire,it must be that demand equals supply in the herring market,This implies

that:

#28a#29 8=#28p+1#29+6=12

#28b#29 8=12 = p

#28c#29 12=8=p

#28d#29 8=p+12=2p=12

#28e#29 Minf12;8g= p

MULTIPLE CHOICE 547

Topic,Exchange Di#0Eculty,2

#25 Correct Responses,29 Discrimination Index,27

Correct Answer,B

29.35 Mutt's utility function is U#28m;j#29=maxf4m;jg and Je#0B's utility function is U#28m;j#29=2m+j.

Mutt is initially endowed with 3 units of milk and 2 units of juice and Je#0B is initially endowed with

5 units of milk and 6 units of juice.If we draw an Edgeworth box with milk on the horizontal axis

and juice on the vertical axis and if we measure goods for Mutt by the distance from the lower left

corner of the box,then the set of Pareto optimal allocations includes the:

#28a#29 left edge of the Edgeworth box,but no other edges.

#28b#29 bottom edge of the Edgeworth box,but no other edges.

#28c#29 left edge and bottom edge of the Edgeworth box.

#28d#29 right edge of the Edgeworth box,but no other edges.

#28e#29 right edge and top edge of the Edgeworth box.

Topic,Exchange Di#0Eculty,2

#25 Correct Responses,29 Discrimination Index,27

Correct Answer,B

29.36 Mutt's utility function is U#28m;j#29=maxf4m;jg and Je#0B's utility function is U#28m;j#29=3m+j.

Mutt is initially endowed with 3 units of milk and 2 units of juice and Je#0B is initially endowed with

5 units of milk and 6 units of juice.If we draw an Edgeworth box with milk on the horizontal axis

and juice on the vertical axis and if we measure goods for Mutt by the distance from the lower left

corner of the box,then the set of Pareto optimal allocations includes the:

#28a#29 left edge of the Edgeworth box,but no other edges.

#28b#29 bottom edge of the Edgeworth box,but no other edges.

#28c#29 left edge and bottom edge of the Edgeworth box.

#28d#29 right edge of the Edgeworth box,but no other edges.

#28e#29 right edge and top edge of the Edgeworth box.

Essay Exchange

Topic,Exchange Di#0Eculty,2

#25 Correct Responses,0 Discrimination Index,0

29.1 In a pure exchange economy,Ollie's utility function is U#28x;y#29=3x+yand Fawn's utility

function is U#28x;y#29=xy,Ollie's initial allocation is 1 x and no y

0

s.Fawn's initial allocation is no x

0

s

and 2 y

0

s,Draw an Edgeworth box for Fawn and Ollie,Put x

0

s on the horizontal axis and y

0

s on

the vertical axis,Measure goods for Ollie from the lower left and goods for Fawn from the upper

right,Mark the initial allocation with the letter W,The locus of Pareto optimal points consists of

twoline segments,Describe these line segments in words or formulas and show them on your graph.

Answer,The Edgeworth box is 1 unit wide and 2 units high,Along the contract curve,Fawn

consumes 3 times as much y as x,The contract curve consists of a line running from the upper

right corner of the box to the point on the bottom of the box where Fawn consumes all of the y

and 2=3 units of x and a line from this point to the lower left of the box.

Topic,Exchange Di#0Eculty,3

#25 Correct Responses,0 Discrimination Index,0

29.2 An economy has 2000 people,1000 of them have utility functions U#28x;y#29=x+yand 1000 of

them have utility functions U#28x;y#29=minf2x;yg.Everybody has an initial allocation of 1 unit of x

and 1 unit of y,Find the competitive equilibrium prices and consumptions for eachtype of person.

Answer,Prices are 1 and 1,The #0Crst type of person will consume 2=3 units of y and 4=3 units of

x and the second type of person will consume 4=3 units of y and 2=3 units of x.

Topic,Exchange Di#0Eculty,2

#25 Correct Responses,0 Discrimination Index,0

29.3 Will likes apples and hates bananas,Wanda likes both apples and bananas,Both of them

have convex preferences,Will's initial endowment is 10 apples and 5 bananas,Wanda's initial

endowment is 5 bananas and 10 apples,a#29 Draw an Edgeworth box with apples on the horizontal

axis,Label the initial endowment point,W,b#29 Showtwo indi#0Berence curves for each person,c#29

Show where on your diagram the Pareto optimal allocations are.

Answer,The Pareto optimal allocations include all of the allocations where Will has no bananas.

If stu#0B for Will is measured from the lower left corner,then these allocations are all along the

bottom of the box.

Chapter 30

True-False Production

Topic,Production Di#0Eculty,2

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,True

30.1 If there are constant returns to scale in an industry,then in competitive equilibrium,pro#0Cts

in that industry must necessarily be zero.

Topic,Production Di#0Eculty,1

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,False

30.2 When there is production,a competitive equilibrium is not Pareto optimal unless there are

increasing returns to scale.

Topic,Production Di#0Eculty,1

#25 Correct Responses,82 Discrimination Index,14

Correct Answer,True

30.3 The marginal rate of transformation between two goods indicates the rate at whichane#0E-

cient economywould havetogive up one good to obtain more of the other.

Topic,Production Di#0Eculty,2

#25 Correct Responses,68 Discrimination Index,25

Correct Answer,False

30.4 There are two people and two goods,person A has comparative advantage in the production

of good 1 if and only if it takes person A less time to produce good 1 than it takes person B.

Multiple Choice Production

Topic,Production Di#0Eculty,1

#25 Correct Responses,77 Discrimination Index,22

Correct Answer,A

30.1 A small company produces two goods,swords and plowshares,The company has 100 Type

Alpha employees and 100 Type Beta employees,If an Alpha devotes all his time to producing

swords,he can make4swords per week,If he devotes all his time to producing plowshares,he can

make20plowshares per week,A Beta can produce either 1 plowshare per week or 1 sword per

week,The companywants to produce 425 swords and as many plowshares as it can,How many

type Betas should it employ at making swords?

#28a#29 100

#28b#29 25

#28c#29 80

#28d#29 0

#28e#29 None of the above.

Topic,Production Di#0Eculty,1

#25 Correct Responses,77 Discrimination Index,22

Correct Answer,A

30.2 A small company produces two goods,swords and plowshares,The company has 100 Type

Alpha employees and 100 Type Beta employees,If an Alpha devotes all his time to producing

swords,he can make3swords per week,If he devotes all his time to producing plowshares,he

can make 6 plowshares per week,A Beta can produce either 1 plowshare per week or 1 sword per

week,The companywants to produce 314 swords and as many plowshares as it can,How many

type Betas should it employ at making swords?

#28a#29 100

#28b#29 14

#28c#29 85

#28d#29 0

#28e#29 None of the above.

MULTIPLE CHOICE 551

Topic,Production Di#0Eculty,2

#25 Correct Responses,64 Discrimination Index,32

Correct Answer,B

30.3 Ernie and Burt both make pizzas for a living,Making a pizza consists of two tasks,making

the crust and applying toppings,Ernie can make crusts at the rate of 30 crusts per hour,He can

apply toppings at the rate of 15 toppings per hour,Burt can make crusts at the rate of 15 crusts

per hour,He can apply toppings at the rate of 30 toppings per hour,After years of operating

separate,one-man shops,they realize they can produce more e#0Eciently by combining operations

and dividing the tasks between them,How many more pizzas per hour can they make if they work

together and allocate tasks e#0Eciently than they made when they worked separately?

#28a#29 5

#28b#29 10

#28c#29 14

#28d#29 25

#28e#29 8

Topic,Production Di#0Eculty,2

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,A

30.4 Mandy is a master woodcarver and Jerry is her apprentice,They will eachwork the same

number of hours making toy cars,Each car requires 4 wheels and 1 body,Mandy makes wheels

at the rate of 25 per hour and bodies at the rate of 10 per hour,Jerry makes wheels at the rate

of 10 per hour and bodies at the rate of 10 per hour,If they wish to maximize output,how many

wheels should Jerry make per hour?

#28a#29 3

#28b#29 2

#28c#29 10

#28d#29 6

#28e#29 There is not enough information to determine the answer.

CHAPTER 30 Production 552

Topic,Production Di#0Eculty,1

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,C

30.5 Amy Canvas is an artist who produces sketches and paintings,She can produce 12 sketches

aweek if she spends all of her workdaysketching,She can produce 3 paintings per week if she

spends all of her workdays painting,The rate at which she produces either sketches or paintings

is independentofhow many she makes,She can divide her time in anyway she wishes between

sketching and painting,If you draw her production possibility frontier with sketches on the hori-

zontal axis and paintings on the vertical axis,the production possibility frontier will be

#28a#29 the outer two sides of a rectangle.

#28b#29 adownward sloping curve that gets steeper as you move to the left.

#28c#29 adownward sloping straight line.

#28d#29 an upward sloping straight line.

#28e#29 an upward sloping curve that gets steeper as you move to the left.

Topic,Production Di#0Eculty,2

#25 Correct Responses,49 Discrimination Index,25

Correct Answer,D

30.6 Last year a pestilential fungus ravaged the cocoa #0Celds,The price of chocolate has risen

abruptly to $1 per ounce,The government is considering emergency measures to aid su#0Bering

chocolate addicts,One plan being considered is the Chocolate Relief Plan #28CRP#29,This plan would

set a price ceiling of $.80 per ounce on chocolate,This would cause a shortage,so the CRP will

limit consumption to no more than 10 ounces of chocolate per person per week,At $.80 per ounce,

enough chocolate would be produced for everyone to have 10 ounces,Jill buys less than 10 ounces

per week at $1 per ounce,but would buy more than 10 ounces if the price dropped to $.80.

#28a#29 Jill is de#0Cnitely better o#0B without the CRP.

#28b#29 Jill is better o#0B without the CRP if $1 is the competitive equilibrium price without the CRP.

#28c#29 Jill is better o#0B with CRP only if the industry is monopolized and the price exceeds marginal cost in the

absence of the CRP.

#28d#29 Jill is de#0Cnitely better o#0B with the CRP.

#28e#29 None of the above.

MULTIPLE CHOICE 553

Topic,Production Di#0Eculty,2

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,C

30.7 Robinson Crusoe's preferences over coconut consumption,C; and leisure,R; are represented

by the utility function,U#28C;R#29=CR,There are 48 hours available for Robinson to allocate be-

tween labor and leisure,If he works L hours,he will produce the square root of L coconuts,He

will choose to work:

#28a#29 8 hours.

#28b#29 12 hours.

#28c#29 16 hours.

#28d#29 20 hours.

#28e#29 24 hours.

Topic,Production Di#0Eculty,2

#25 Correct Responses,76 Discrimination Index,23

Correct Answer,C

30.8 Robinson Crusoe spends 4 hours a day catching #0Csh and picking coconuts,He can always

catch 2 #0Csh per hour and he can always gather 3 coconuts per hour,His utility function is CF

where C is the number of coconuts he eats per day and F is the number of #0Csh he eats per day.

How many #0Csh will he choose to eat per day?

#28a#29 8

#28b#29 6

#28c#29 4

#28d#29 2

#28e#29 1

CHAPTER 30 Production 554

Topic,Production Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,A

30.9 Tip can write 5 pages of term paper or solve20workbook problems in an hour,while Spot

can write 4 pages of term paper or solve12workbook problems in an hour,If they each decide

to work a total of 8 hours and to share their output,then if they produce as many pages of term

paper as possible given that they produce 35 workbook problems:

#28a#29 Spot will spend all of his time writing term papers and Tip will spend some time at each task.

#28b#29 Tip will spend all of his time writing term papers and Spot will spend some time at each task.

#28c#29 Both students will spend some time at each task.

#28d#29 Spot will write term papers only and Tip will do workbook problems only.

#28e#29 Tip will write term papers only and Spot will do workbook problems only.

Topic,Production Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,A

30.10 Tip can write 2 pages of term paper or solve2workbook problems in an hour,while Spot

can write 5 pages of term paper or solve20workbook problems in an hour,If they each decide

to work a total of 6 hours and to share their output,then if they produce as many pages of term

paper as possible given that they produce 10 workbook problems:

#28a#29 Spot will spend all of his time writing term papers and Tip will spend some time at each task.

#28b#29 Tip will spend all of his time writing term papers and Spot will spend some time at each task.

#28c#29 Both students will spend some time at each task.

#28d#29 Spot will write term papers only and Tip will do workbook problems only.

#28e#29 Tip will write term papers only and Spot will do workbook problems only.

Topic,Production Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,A

30.11 Al and Bill are the only workers in a small factory which makes geegaws and doodads,Al

can make 5 geegaws per hour or 20 doodads per hour,Bill can make 4 geegaws per hour or 24

doodads per hour,Assuming that neither of them #0Cnds one task more odious than the other:

#28a#29 Al has comparative advantage in producing geegaws and Bill has comparative advantage in producing

doodads.

#28b#29 Bill has comparative advantage in producing geegaws and Al has comparative advantage in producing

doodads.

#28c#29 Al has comparative advantage in producing both geegaws and doodads.

#28d#29 Bill has comparative advantage in producing both geegaws and doodads.

#28e#29 Both persons have comparative advantage in producing doodads.

MULTIPLE CHOICE 555

Topic,Production Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,A

30.12 Al and Bill are the only workers in a small factory which makes geegaws and doodads.

Al can make 3 geegaws per hour or 15 doodads per hour,Bill can make 2 geegaws per hour or 6

doodads per hour,Assuming that neither of them #0Cnds one task more odious than the other:

#28a#29 Al has comparative advantage in producing geegaws and Bill has comparative advantage in producing

doodads.

#28b#29 Bill has comparative advantage in producing geegaws and Al has comparative advantage in producing

doodads.

#28c#29 Al has comparative advantage in producing both geegaws and doodads.

#28d#29 Bill has comparative advantage in producing both geegaws and doodads.

#28e#29 Both persons have comparative advantage in producing doodads.

Topic,Production Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,A

30.13

Every consumer has a red-money income and a blue-money income and each commodity has a red

price and a blue price,You can buy a good bypaying for it either with blue money at the blue

price,or with red money at the red price,Harold has 30 units of red money to spend and 48 units

of blue money to spend,The red price of ambrosia is 3 and the blue price of ambrosia is 8,The

red price of bubblegum is 1 and the blue price of bubblegum is 2,If ambrosia is on the horizontal

axis,and bubblegum on the vertical,axis,then Harold's budget set is bounded:

#28a#29 bytwo line segments,one running from #280;54#29 to #2810;24#29 and another running from #2810;24#29 to #2816;0#29.

#28b#29 bytwo line segments one running from #280;54#29 to #286;30#29 and the other running from #286;30#29 to #2816;0#29.

#28c#29 bytwo line segments,one running from #280;30#29to #2810;24#29 and the other running from #2810;24#29 to #2840;0#29.

#28d#29 avertical line segment and a horizontal line segement,intersecting at #2810;24#29.

#28e#29 avertical line segment and a horizontal line segment,intersecting at #286;30#29.

CHAPTER 30 Production 556

Topic,Production Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,A

30.14

Every consumer has a red-money income and a blue-money income and each commodity has a red

price and a blue price,You can buy a good bypaying for it either with blue money at the blue

price,or with red money at the red price,Harold has 20 units of red money to spend and 48 units

of blue money to spend,The red price of ambrosia is 2 and the blue price of ambrosia is 6,The

red price of bubblegum is 1 and the blue price of bubblegum is 2,If ambrosia is on the horizontal

axis,and bubblegum on the vertical,axis,then Harold's budget set is bounded:

#28a#29 bytwo line segments,one running from #280;44#29 to #2810;24#29 and another running from #2810;24#29 to #2818;0#29.

#28b#29 bytwo line segments one running from #280;44#29 to #288;20#29 and the other running from #288;20#29 to #2818;0#29.

#28c#29 bytwo line segments,one running from #280;32#29to #2810;24#29 and the other running from #2810;24#29 to #2830;0#29.

#28d#29 avertical line segment and a horizontal line segement,intersecting at #2810;24#29.

#28e#29 avertical line segment and a horizontal line segment,intersecting at #288;20#29.

Topic,Production Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,A

30.15 Robinson Crusoe has exactly 10 hours per day to spend gathering coconuts or catching

#0Csh,He can catch 5 #0Csh per hour or he can pick 15 coconuts per hour,His utility function is

U#28F;C#29=FC where F is his consumption of #0Csh and C is his consumption of coconuts,If he allo-

cates his time in the best possible waybetween catching #0Csh and picking coconuts,his consumption

will be the same as it would be if he could buy #0Csh and coconuts in a competitive market where

the price of coconuts is 1.

#28a#29 His income is 150,and the price of #0Csh is 3.

#28b#29 His income is 50,and the price of #0Csh is 5.

#28c#29 His income is 200 and the price of #0Csh is 5.

#28d#29 His income is 150 and the price of #0Csh is 0.20.

#28e#29 His income is 100 and the price of #0Csh is 0.20.

MULTIPLE CHOICE 557

Topic,Production Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,A

30.16 Robinson Crusoe has exactly 10 hours per day to spend gathering coconuts or catching #0Csh.

He can catch 3 #0Csh per hour or he can pick9coconuts per hour,His utility function is U#28F;C#29=FC

where F is his consumption of #0Csh and C is his consumption of coconuts,If he allocates his time

in the best possible waybetween catching #0Csh and picking coconuts,his consumption will be the

same as it would be if he could buy #0Csh and coconuts in a competitive market where the price of

coconuts is 1.

#28a#29 His income is 90,and the price of #0Csh is 3.

#28b#29 His income is 30,and the price of #0Csh is 3.

#28c#29 His income is 120 and the price of #0Csh is 3.

#28d#29 His income is 90 and the price of #0Csh is 0.33.

#28e#29 His income is 60 and the price of #0Csh is 0.33.

Topic,Production Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,B

30.17 On a certain island there are only two goods,wheat and milk,The only scarce resource is

land,There are 1000 acres of land,An acre of land will produce either 20 units of milk or 30 units

of wheat,Some citizens have lots of land,some have just a little bit,The citizens of the island all

have utility functions of the form U#28M;W#29=MW.Atevery Pareto optimal allocation:

#28a#29 the number of units of milk produced equals the number of units of wheat produced.

#28b#29 total milk production is 10,000.

#28c#29 all citizens consume the same commodity bundle.

#28d#29 every consumer's marginal rate of substitution between milk and wheat is,1.

#28e#29 None of the above is true at EVERYPareto optimal allocation.

CHAPTER 30 Production 558

Topic,Production Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,B

30.18 On a certain island there are only two goods,wheat and milk,The only scarce resource is

land,There are 1000 acres of land,An acre of land will produce either 11 units of milk or 31 units

of wheat,Some citizens have lots of land,some have just a little bit,The citizens of the island all

have utility functions of the form U#28M;W#29=MW.Atevery Pareto optimal allocation:

#28a#29 the number of units of milk produced equals the number of units of wheat produced.

#28b#29 total milk production is 5,500.

#28c#29 all citizens consume the same commodity bundle.

#28d#29 every consumer's marginal rate of substitution between milk and wheat is,1.

#28e#29 None of the above is true at EVERYPareto optimal allocation.

Topic,Production Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,C

30.19 In the process of producing one hormone-free,stress-free,happycow,the New Age Cattle

Ranch produces one ton of natural,organic plant fertilizer,Demand for the ranch's cattle is given

by P

c

=2;000,10Q

c; and demand for fertilizer is given by P

f

= 500,3Q

f

,The cost of producing

Q cow-fertilizer bundles is C =5;000+300Q.To maximize pro#0Cts,the ranch should

#28a#29 produce 85 cow-fertilizer units; sell 85 cattle,and sell 85 tons of fertilizer.

#28b#29 produce 85 cow-fertilizer units; sell 85 cattle,and sell 33.33 tons of fertilizer.

#28c#29 produce 85 cow-fertilizer units; sell 85 cattle,and sell 83.33 tons of fertilizer.

#28d#29 produce 84.62 cow-fertilizer units; sell 84.62 cattle,and sell 84.62 tons of fertilizer.

#28e#29 produce 100 cow-fertilizer units; sell 100 cattle,and dispose of all the fertilizer in an environmentally

friendly manner.

MULTIPLE CHOICE 559

Topic,Production Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,C

30.20 In the process of producing one hormone-free,stress-free,happycow,the New Age Cattle

Ranch produces one ton of natural,organic plant fertilizer,Demand for the ranch's cattle is given

by P

c

=2;000,20Q

c; and demand for fertilizer is given by P

f

= 500,4Q

f

,The cost of producing

Q cow-fertilizer bundles is C =5;000+400Q.To maximize pro#0Cts,the ranch should

#28a#29 produce 40 cow-fertilizer units; sell 40 cattle,and sell 40 tons of fertilizer.

#28b#29 produce 40 cow-fertilizer units; sell 40 cattle,and sell 12.50 tons of fertilizer.

#28c#29 produce 62.50 cow-fertilizer units; sell 40 cattle,and sell 62.50 tons of fertilizer.

#28d#29 produce 43.75 cow-fertilizer units; sell 43.75 cattle,and sell 43.75 tons of fertilizer.

#28e#29 produce 50 cow-fertilizer units; sell 50 cattle,and dispose of allthe fertilizer in an environmentallyfriendly

manner.

Topic,Production Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,A

30.21

For each carload of ore removed from the Matchless Mine,one pound of lead and one ounce of

silver is smelted,The cost of mining and processing one carload of ore is C#28Q#29 = 500+2Q+0:03Q

2

.

The demand for silver #28per ounce#29 is P

s

=50,0:40Q

s

and the demand for lead #28per pound#29 is

P

l

=5,0:03Q

l

,What should the owners of the Matchless Mine do to maximize pro#0Cts #28in the long

run#29?

#28a#29 Mine and process 57.61 carloads of ore,sell 57.61 ounces of silver,and sell 57.61 pounds of lead.

#28b#29 Mine and process 62.50 carloads of ore,sell 62.50 ounces of silver,and sell 25 pounds of lead.

#28c#29 Mine and process 83.33 carloads of ore,sell 55.81 ounces of silver,and sell 83.33 pounds of lead.

#28d#29 Mine and process 83.33 carloads of ore,sell 62.50 ounces of silver,and sell 83.33 pounds of lead.

#28e#29 Shut down the mine.

CHAPTER 30 Production 560

Topic,Production Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,A

30.22

For each carload of ore removed from the Matchless Mine,one pound of lead and one ounce of

silver is smelted,The cost of mining and processing one carload of ore is C#28Q#29 = 700+5Q+0:01Q

2

.

The demand for silver #28per ounce#29 is P

s

=40,0:50Q

s

and the demand for lead #28per pound#29 is

P

l

=6,0:04Q

l

,What should the owners of the Matchless Mine do to maximize pro#0Cts #28in the long

run#29?

#28a#29 Mine and process 37.27 carloads of ore,sell 37.27 ounces of silver,and sell 37.27 pounds of lead.

#28b#29 Mine and process 40 carloads of ore,sell 40 ounces of silver,and sell 10 pounds of lead.

#28c#29 Mine and process 75 carloads of ore,sell 34.31 ounces of silver,and sell 75 pounds of lead.

#28d#29 Mine and process 75 carloads of ore,sell 40 ounces of silver,and sell 75 pounds of lead.

#28e#29 Shut down the mine.

Essay Production

Topic,Production Di#0Eculty,2

#25 Correct Responses,0 Discrimination Index,0

30.1 On a certain small island,there are 100 units of labor and 200 units of capital,Two goods

can be produced,Good A is produced with #0Cxed coe#0Ecients,using 1 unit of labor and 3 units of

capital per unit of output,Good B is produced with #0Cxed coe#0Ecients,using 1 unit of labor and 1

unit of capital per unit of ouput,Let Xa denote the quantity of good A and Xb be the quantityof

good B that is produced,The set of feasible outputs combinations for this economy is restricted by

the fact that it cannot use more than 100 units of labor or 200 units of capital,a#29 Write down two

inequalities expressed in terms of Xa and Xb that must be satis#0Ced at feasible output combinations.

b#29 Draw a graph showing the economy's production possibility set,Put numerical labels on your

graph so that this graph is precisely described.

Answer,a#29 Xa+Xb #3C= 100; 3Xa+Xb #3C= 200 b#29 Production possibility set is the area in the

intersection of the halfspaces from a.

Chapter 31

True-False Welfare

Topic,Welfare Di#0Eculty,1

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,False

31.1 According to Arrow's impossibility theorem,it is impossible to #0Cnd a social ordering that

is complete,re#0Dexive,and transitive.

Topic,Welfare Di#0Eculty,1

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,False

31.2 An allocation is fair if whenever one person envies another,the envied person does not envy

the envier.

Topic,Welfare Di#0Eculty,2

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,False

31.3 In a pure exchange economy if the initial allocation is Pareto optimal,then competitive

equilibrium is fair.

Topic,Welfare Di#0Eculty,2

#25 Correct Responses,60 Discrimination Index,28

Correct Answer,True

31.4 In a competitive equilibrium,no matter how di#0Berent their preferences may be,no two

people with the same income will envy each other's consumption bundles.

Topic,Welfare Di#0Eculty,1

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,False

31.5 An allocation whichisworse for somebody than the initial allocation can not be Pareto

optimal.

TRUE-FALSE 563

Topic,Welfare Di#0Eculty,2

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,False

31.6 If allocation x is Pareto optimal and allocation y is not,then everyone is at least as well o#0B

with x as with y; and someone is better o#0B with x than with y.

Topic,Welfare Di#0Eculty,1

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,False

31.7 The utility possibilities frontier is the boundary of the production possibility set.

Topic,Welfare Di#0Eculty,1

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,True

31.8 In a pure exchange economy,if an allocation is Pareto e#0Ecient,it is impossible to havetwo

people who prefer each other's consumption bundles to their own.

Topic,Welfare Di#0Eculty,2

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,True

31.9 If a social welfare function is an increasing function of each person's utility,then every

allocation that maximizes this social welfare function must be a Pareto optimum.

Multiple Choice Welfare

Topic,Welfare Di#0Eculty,1

#25 Correct Responses,84 Discrimination Index,13

Correct Answer,B

31.1 Mr,Angst has twochildren,Dick and Jane,Dickisaslow learner and Jane is very bright.

If Mr,Angst spends $X per month on Dick's education,Dick will score a total of X=2 points on

his SAT tests,If Mr,Angst spends $Y per month on Jane's education,she will score a total of 2Y

on her SAT tests,Mr,Angst has a utility function U#28D;J#29=minfD;Jg where D is Dick's SAT

score and J is Jane's SAT score,To maximize his utility,he will:

#28a#29 spend equal amounts of money on the twochildren.

#28b#29 spend 4 times as much money on Dick's education as on Jane's.

#28c#29 spend 4 times as much money on Jane's education as on Dick's.

#28d#29 spend between 1 and 2 times as much money on Dick's education as on Jane's.

#28e#29 spend between 1 and 2 times as much money on Jane's education as on Dick's.

Topic,Welfare Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,C

31.2 A Borda count is used to decide an election between 3 candidates,x,y,and z; where a score

of1isawarded to a #0Crst choice,2 to a second choice,and 3 to a third choice,There are 21 voters.

2voters rank the candidates x #0Crst,y second,z third; 2 voters rank the candidates x #0Crst,z second,

y third; 7 rank the candidates z #0Crst,y second,x third; 10 voters rank the candidates y #0Crst,z

second,xxxthird,Which candidate wins?

#28a#29 Candidate x.

#28b#29 Candidate y.

#28c#29 Candidate z.

#28d#29 There is a tie between x and y; with z coming in third.

#28e#29 There is a tie between y and z; with x coming in third.

MULTIPLE CHOICE 565

Topic,Welfare Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,C

31.3 A Borda count is used to decide an election between 3 candidates,x,y,and z; where a score

of1isawarded to a #0Crst choice,2 to a second choice,and 3 to a third choice,There are 16 voters,4

voters rank the candidates x #0Crst,y second,z third; 3 voters rank the candidates x #0Crst,z second,y

third; 5 rank the candidates z #0Crst,y second,x third; 4 voters rank the candidates y #0Crst,z second,

xxxthird,Which candidate wins?

#28a#29 Candidate x.

#28b#29 Candidate y.

#28c#29 Candidate z.

#28d#29 There is a tie between x and y; with z coming in third.

#28e#29 There is a tie between y and z; with x coming in third.

Topic,Welfare Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,A

31.4 A parent has twochildren living in cities with di#0Berent costs of living,The cost of living

in city B is 2 times the cost of living in city A,The child in city A has an income of 4,000 and

the child in city B has an income of 8,000,The parentwants to give a total of $4,000 to her two

children,Her utility function is U#28C

A;C

B

#29=C

A

C

B;where C

A

and C

B

are the consumptions of the

children living in cities A and B respectively,She will choose to:

#28a#29 give eachchild $2,000,even though this will buy less goods for the child in city B.

#28b#29 give the child in city B2 times as much money as the child in city B.

#28c#29 Give the child in city A 2 times as much money as the child in city B.

#28d#29 Give the child in city B1 times as much money as the child in cityA.

#28e#29 Give the child in city A 1 times as much money as the child in city B.

CHAPTER 31 Welfare 566

Topic,Welfare Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,A

31.5 A parent has twochildren living in cities with di#0Berent costs of living,The cost of living

in city B is 4 times the cost of living in city A,The child in city A has an income of 5,000 and

the child in city B has an income of 20,000,The parentwants to give a total of $4,000 to her two

children,Her utility function is U#28C

A;C

B

#29=C

A

C

B;where C

A

and C

B

are the consumptions of the

children living in cities A and B respectively,She will choose to:

#28a#29 give eachchild $2,000,even though this will buy less goods for the child in city B.

#28b#29 give the child in city B4 times as much money as the child in city B.

#28c#29 Give the child in city A 4 times as much money as the child in city B.

#28d#29 Give the child in city B2 times as much money as the child in cityA.

#28e#29 Give the child in city A 2 times as much money as the child in city B.

Topic,Welfare Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,B

31.6 Suppose that Paul and David have utility functions U =2A

P

+O

P

and U = A

D

+2O

D;

respectively,where A

P

and O

P

are Paul's consumptions of apples and oranges and A

D

and O

D

are

David's consumptions of apples and oranges,The total supply of apples and oranges to be divided

between them is 14 apples and 18 oranges,The "fair" allocations consist of all allocations satisfying

the following conditions.

#28a#29 A

D

= A

P

and O

D

= O

P

.

#28b#29 4A

P

+2O

P

is at least 46 and 2A

D

+4O

D

is at least 50.

#28c#29 2A

P

+ O

P

is at least 46 and 2A

D

+2O

D

is at least 50.

#28d#29 A

D

+O

D

is at least 16 and A

S

+O

S

is at least 16.

#28e#29 2A

P

+ O

P

is at least A

D

+2O

D

and A

D

+2O

D

is at least 2A

P

+ O

P

.

MULTIPLE CHOICE 567

Topic,Welfare Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,B

31.7 Suppose that Paul and David have utility functions U =4A

P

+O

P

and U = A

D

+2O

D;

respectively,where A

P

and O

P

are Paul's consumptions of apples and oranges and A

D

and O

D

are

David's consumptions of apples and oranges,The total supply of apples and oranges to be divided

between them is 14 apples and 14 oranges,The "fair" allocations consist of all allocations satisfying

the following conditions.

#28a#29 A

D

= A

P

and O

D

= O

P

.

#28b#29 8A

P

+2O

P

is at least 70 and 2A

D

+4O

D

is at least 42.

#28c#29 4A

P

+ O

P

is at least 70 and 2A

D

+2O

D

is at least 42.

#28d#29 A

D

+O

D

is at least 14 and A

S

+O

S

is at least 14.

#28e#29 4A

P

+ O

P

is at least A

D

+2O

D

and A

D

+2O

D

is at least 4A

P

+ O

P

.

Topic,Welfare Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,E

31.8 Suppose that Romeo has the utility function U = S

3

R

S

2

J

and Juliet has the utility function

U = S

2

R

S

3

J

where S

R

is Romeo's spaghetti consumption and S

J

is Juliet's,They have 45 units of

spaghetti to divide between them.

#28a#29 Romeo would want to give Juliet some spaghetti if he had more than 22.50 units of spaghetti.

#28b#29 Juliet would want to give Romeo some spaghetti if she has more than 25 units.

#28c#29 Romeo and Juliet would never disagree about how to divide the spaghetti.

#28d#29 Romeo would want to give Juliet some spaghetti if he has more than 23 units of spaghetti.

#28e#29 Juliet would want to give Romeo some spaghetti if she has more than 27 units of spaghetti.

CHAPTER 31 Welfare 568

Topic,Welfare Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,E

31.9 Suppose that Romeo has the utility function U = S

3

R

S

2

J

and Juliet has the utility function

U = S

2

R

S

3

J

where S

R

is Romeo's spaghetti consumption and S

J

is Juliet's,They have 30 units of

spaghetti to divide between them.

#28a#29 Romeo would want to give Juliet some spaghetti if he had more than 15 units of spaghetti.

#28b#29 Juliet would want to give Romeo some spaghetti if she has more than 16 units.

#28c#29 Romeo and Juliet would never disagree about how to divide the spaghetti.

#28d#29 Romeo would want to give Juliet some spaghetti if he has more than 14 units of spaghetti.

#28e#29 Juliet would want to give Romeo some spaghetti if she has more than 18 units of spaghetti.

Topic,Welfare Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,B

31.10 Hat#0Celd and McCoy burn with hatred for each other,They both consume corn whisky.

Hat#0Celd's utility function is U = W

H

,W

2

M

=40 and McCoy's utilityisU=W

M

,W

2

H

=40; where W

H

is Hat#0Celd's whisky consumption and W

M

is McCoy's whisky consumption,measured in gallons.

The sheri#0B has a total of 80 units of con#0Cscated whisky which he could give back to them,For

some reason,the sheri#0B wants them both to be as happy as possible and he wants to treat them

equally,The sheri#0B should give them each:

#28a#29 40 gallons.

#28b#29 20 gallons and spill 40 gallons in the creek.

#28c#29 10 gallons and spill 60 gallons in the creek.

#28d#29 24 gallons and spill the rest in the creek.

#28e#29 5 gallons and spill the rest in the creek.

MULTIPLE CHOICE 569

Topic,Welfare Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,B

31.11 Hat#0Celd and McCoy burn with hatred for each other,They both consume corn whisky.

Hat#0Celd's utility function is U = W

H

,W

2

M

=16 and McCoy's utilityisU=W

M

,W

2

H

=16; where W

H

is Hat#0Celd's whisky consumption and W

M

is McCoy's whisky consumption,measured in gallons.

The sheri#0B has a total of 36 units of con#0Cscated whisky which he could give back to them,For

some reason,the sheri#0B wants them both to be as happy as possible and he wants to treat them

equally,The sheri#0B should give them each:

#28a#29 18 gallons.

#28b#29 8 gallons and spill 20 gallons in the creek.

#28c#29 4 gallons and spill 28 gallons in the creek.

#28d#29 12 gallons and spill the rest in the creek.

#28e#29 2 gallons and spill the rest in the creek.

Essay Welfare

Topic,Welfare Di#0Eculty,2

#25 Correct Responses,0 Discrimination Index,0

31.1 No one is meaner and uglier than Gladys,Someone is meaner and uglier than Harold.

Therefore Gladys is meaner and uglier than Harold,Is this reasoning correct? If so,explain why.If

not,explain why not,#28Assume that people can be ranked from ugliest to least ugly by a complete

transitive ordering and that there are no ties,Likewise assume that people can be ranked from

meanest to least mean by a complete transitive ordering and that there are no ties.#29

Answer,The reasoning is incorrect,Consider the following example,There are 3 people,Fred,

Gladys and Harold,The rankings for ugly are Gladys is ugliest,Fred is second ugliest and Harold

is least ugly,The rankings for mean are Fred is meanest,Harold is second meanest and Gladys

is least mean,Then nobody is meaner and uglier than Gladys,Fred is meaner and uglier than

Harold,but Gladys is not meaner and uglier than Harold.

Chapter 32

True-False Externalities

Topic,Externalities Di#0Eculty,1

#25 Correct Responses,93 Discrimination Index,11

Correct Answer,False

32.1 A trade between two people is an example of an externality.

Topic,Externalities Di#0Eculty,1

#25 Correct Responses,80 Discrimination Index,0

Correct Answer,False

32.2 The only known way to eliminate externalities is through taxes or subsidies.

Topic,Externalities Di#0Eculty,1

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,False

32.3 The e#0Ecient amount of air pollution is in general independent of whether polluters or pol-

lutees pay to reduce pollution.

Topic,Externalities Di#0Eculty,1

#25 Correct Responses,52 Discrimination Index,45

Correct Answer,False

32.4 A Pigouvian tax on pollution is designed to collect enough revenue to pay for pollution

detection by the government.

Topic,Externalities Di#0Eculty,2

#25 Correct Responses,84 Discrimination Index,29

Correct Answer,False

32.5 If there are negative externalities in production or consumption,competitive equilibrium is

unlikely to be Pareto e#0Ecient,but positive externalities enhance the e#0Eciency of the market.

Topic,Externalities Di#0Eculty,1

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,True

32.6 The #5Ctragedy of the commons" refers to the tendency for common propertytobeoverused.

CHAPTER 32 Externalities 572

Topic,Externalities Di#0Eculty,1

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,False

32.7 If preferences are quasilinear,then the delineation of property rights has no distributional

consequences.

Topic,Externalities Di#0Eculty,1

#25 Correct Responses,70 Discrimination Index,5

Correct Answer,True

32.8 If your consumption of toothpaste produces positive externalities for your neighbors #28which

you ignore#29,then you are consuming less toothpaste than is Pareto optimal.

Topic,Externalities Di#0Eculty,1

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,False

32.9 Mobil Oil Corporation recently bought the right to emit an additional 900 pounds of noxious

gas vapors per day at its Torrance,California re#0Cnery,This suggests that allowing pollution rights

to be marketed is likely to lead to more pollution than there would be if there were no restrictions

on polluting.

Multiple Choice Externalities

Topic,Externalities Di#0Eculty,2

#25 Correct Responses,12 Discrimination Index,18

Correct Answer,E

32.1 A mountain village owns a common pasture where villagers graze their goats,The cost to a

goat owner of owning and caring for a goat is 4 groschens,The pasture gets overgrazed if too many

goats share the pasture,The total revenue from all goats on the common pasture is f#28g#29=48g,2g

2;

where g is the number of goats on the pasture,The town council notices that total pro#0Ct from the

pasture is not maximized if villagers are allowed to pasture goats for free,The council decides to

allow a goat to use the common pasture only if its owner buys it a goat license,To maximize total

pro#0Ct #28of villagers and council#29,how many groschens per goat should the council charge?

#28a#29 12

#28b#29 20

#28c#29 24

#28d#29 26

#28e#29 22

Topic,Externalities Di#0Eculty,2

#25 Correct Responses,84 Discrimination Index,30

Correct Answer,A

32.2 The 130 campers at Bear Creek Campground love their own camp#0Cres,but hate the smoke

from their neighbors' camp#0Cres,Each camper's utility function is U =22f,f

2

,swhere f is the

number of hours her own camp#0Cre burns per day and where s is the amount of smoke in the air.

It happens that s is 12 times the average amount of hours that campers use their #0Cres,The camp-

ground authority could make all campers better o#0B by limiting the number of hours of camp#0Cre per

day for everyone,How many hours of camp#0Cres per day should the authority allow each camper

in order to make the typical camper as well o#0B as possible?

#28a#29 5

#28b#29 11

#28c#29 3

#28d#29 6

#28e#29 Campers will be best o#0B if they are free to choose their own amounts of camp#0Cre.

CHAPTER 32 Externalities 574

Topic,Externalities Di#0Eculty,2

#25 Correct Responses,84 Discrimination Index,30

Correct Answer,A

32.3 The 130 campers at Bear Creek Campground love their own camp#0Cres,but hate the smoke

from their neighbors' camp#0Cres,Each camper's utility function is U =17f,f

2

,swhere f is the

number of hours her own camp#0Cre burns per day and where s is the amount of smoke in the air.

It happens that s is 9 times the average amount of hours that campers use their #0Cres,The camp-

ground authority could make all campers better o#0B by limiting the number of hours of camp#0Cre per

day for everyone,How many hours of camp#0Cres per day should the authority allow each camper

in order to make the typical camper as well o#0B as possible?

#28a#29 4

#28b#29 8.50

#28c#29 2

#28d#29 5

#28e#29 Campers will be best o#0B if they are free to choose their own amounts of camp#0Cre.

Topic,Externalities Di#0Eculty,2

#25 Correct Responses,57 Discrimination Index,28

Correct Answer,A

32.4 Two stores are located side by side,They attract customers to each other and to them-

selves by advertising,The pro#0Ct functions of the two stores are #2875 + x

2

#29x

1

,2x

2

1

for store 1,and

#28120+ x

1

#29x

2

,2x

2

2

for store 2,where x

1

and x

2

are total advertising expenditures by stores 1 and 2

respectively,If each store sets its advertising expenditures independently #28as in Nash equilibrium#29,

howmuchwould store 1 spend on advertising?

#28a#29 28

#28b#29 30

#28c#29 25

#28d#29 33

#28e#29 None of the above.

MULTIPLE CHOICE 575

Topic,Externalities Di#0Eculty,2

#25 Correct Responses,57 Discrimination Index,28

Correct Answer,A

32.5 Two stores are located side by side,They attract customers to each other and to them-

selves by advertising,The pro#0Ct functions of the two stores are #28120+ x

2

#29x

1

,2x

2

1

for store 1,and

#2860+ x

1

#29x

2

,2x

2

2

for store 2,where x

1

and x

2

are total advertising expenditures by stores 1 and 2

respectively,If each store sets its advertising expenditures independently #28as in Nash equilibrium#29,

howmuchwould store 1 spend on advertising?

#28a#29 36

#28b#29 38

#28c#29 33

#28d#29 41

#28e#29 None of the above.

Topic,Externalities Di#0Eculty,3

#25 Correct Responses,62 Discrimination Index,57

Correct Answer,C

32.6 Two stores are located side by side and attract customers to each other and to themselves

by advertising,Where x

1

and x

2

are the advertising expenditures of stores 1 and 2,the pro#0Cts of

the #0Crms are #2848 + x

2

#29x

1

,2#28x

1

#29

2

for store 1 and #2854 + x

1

#29x

2

,2#28x

2

#29

2

for store 2,Knowing these

functions,one investor buys both stores,In order to maximize his total pro#0Cts,howmuch should

he spend on advertising for store 1?

#28a#29 10

#28b#29 26

#28c#29 25

#28d#29 35

#28e#29 None of the above.

CHAPTER 32 Externalities 576

Topic,Externalities Di#0Eculty,2

#25 Correct Responses,18 Discrimination Index,34

Correct Answer,A

32.7 A small co#0Bee company roasts co#0Bee beans in its shop,The unroasted beans cost the com-

pany 200 cents per pound,The MARGINAL cost of roasting co#0Bee beans is 150,10q + q

2

cents

per pound when q pounds are roasted,The smell of roasting beans imposes costs on the company's

neighbors,The total amount that neighbors would be willing to paytohave the shop stop roasting

altogether is 5q

2; where q is the number of pounds being roasted,The company sells its output in

a competitive market at 450 cents per pound,What is the socially e#0Ecient amount of co#0Bee for

the company to roast?

#28a#29 10 lbs.

#28b#29 15 lbs.

#28c#29 the square root of 10 lbs.

#28d#29 45 lbs.

#28e#29 None of the above.

Topic,Externalities Di#0Eculty,2

#25 Correct Responses,40 Discrimination Index,20

Correct Answer,B

32.8 Firm 1 produces output x with a cost function c

1

#28x#29=x

2

+10,Firm 2 produces output y

with a cost function c

2

#28y;x#29=y

2

+x.Thus,the more that #0Crm 1 produces,the greater are #0Crm

2

0

s costs,Both #0Crms face competitive product markets,The competitive price of x is 20 and the

competitive price of y is 40,No new #0Crms can enter the industry and the old ones must remain.

The e#0Ecient Pigouvian tax on the x good is:

#28a#29 0.

#28b#29 1.

#28c#29 2.

#28d#29 3.

#28e#29 4.

MULTIPLE CHOICE 577

Topic,Externalities Di#0Eculty,2

#25 Correct Responses,25 Discrimination Index,21

Correct Answer,A

32.9 Mike's utility function is U#28c;d;h#29=4c+6d,d

2

,6h; where d is the number of hours per

day that he spends driving around,h is the average number of hours per dayspent driving around

by other citizens of his town,and c is the amount of money he has to spend on other things than

gasoline and auto repairs,There are 1001 identical citizens in Mike's home town,Mike's expenses

for gasoline and auto repairs amount to $.50 per hour for the time he spends driving,If Mike

believes that his amount of driving won't a#0Bect the amount that others drive,how many hours per

day will he choose to drive?

#28a#29 2

#28b#29 3

#28c#29 4

#28d#29 1

#28e#29 0.50

Topic,Externalities Di#0Eculty,2

#25 Correct Responses,25 Discrimination Index,21

Correct Answer,A

32.10 Mike's utility function is U#28c;d;h#29=4c+12d,d

2

,6h; where d is the number of hours per

day that he spends driving around,h is the average number of hours per dayspent driving around

by other citizens of his town,and c is the amount of money he has to spend on other things than

gasoline and auto repairs,There are 1001 identical citizens in Mike's home town,Mike's expenses

for gasoline and auto repairs amount to $.50 per hour for the time he spends driving,If Mike

believes that his amount of driving won't a#0Bect the amount that others drive,how many hours per

day will he choose to drive?

#28a#29 5

#28b#29 6

#28c#29 7

#28d#29 2.50

#28e#29 0.50

CHAPTER 32 Externalities 578

Topic,Externalities Di#0Eculty,2

#25 Correct Responses,22 Discrimination Index,0

Correct Answer,C

32.11 Marbella has 101 residents,All wear the same fancy clothes and each has the same utility

function,u#28m;b;B#29=m+16b,b

2

,B=50; where m is the amount of maccaroni #28in kilograms#29

that he or she eats per day,b is the number of hours that he or she spends on the beachper

day,and B is the total number of person-hours spent per day on the beachby other residents of

Marbella,Each has an income of $10 per day and maccaroni costs $1 per kilogram,City council

is considering a law that would limit the amount of time that any person can spend on the beach.

How many hours per day should they allow in order to maximize the utilityofatypical Marbellite?

#28a#29 8 hours

#28b#29 10 hours

#28c#29 7 hours

#28d#29 11 hours

#28e#29 They could not possibly be made better o#0B by legislation that limits their freedom to choose.

Topic,Externalities Di#0Eculty,2

#25 Correct Responses,22 Discrimination Index,0

Correct Answer,C

32.12 Marbella has 101 residents,All wear the same fancy clothes and each has the same utility

function,u#28m;b;B#29=m+22b,b

2

,B=50; where m is the amount of maccaroni #28in kilograms#29

that he or she eats per day,b is the number of hours that he or she spends on the beachper

day,and B is the total number of person-hours spent per day on the beachby other residents of

Marbella,Each has an income of $10 per day and maccaroni costs $1 per kilogram,City council

is considering a law that would limit the amount of time that any person can spend on the beach.

How many hours per day should they allow in order to maximize the utilityofatypical Marbellite?

#28a#29 11 hours

#28b#29 13 hours

#28c#29 10 hours

#28d#29 14 hours

#28e#29 They could not possibly be made better o#0B by legislation that limits their freedom to choose.

MULTIPLE CHOICE 579

Topic,Externalities Di#0Eculty,0

#25 Correct Responses,83 Discrimination Index,28

Correct Answer,C

32.13 Suppose that in Horsehead,Massachusetts,the cost of operating a lobster boat is $3,000

per month,Suppose that if x lobster boats operate in the bay,the total monthly revenue from

lobster boats in the bayis$1000#2819x,x

2

#29,If there are no restrictions on entry and new boats come

into the bayuntil there is no pro#0Ct to be made by a new entrant,then the number of boats who

enter will be X1,If the number of boats that operate in the bay is regulated to maximize total

pro#0Cts,the number of boats in the bay will be X2.

#28a#29 X1=16andX2 = 16.

#28b#29 X1=8andX2=6

#28c#29 X1 = 16 and X2=8

#28d#29 X1=20andX2=12

#28e#29 None of the above.

Topic,Externalities Di#0Eculty,0

#25 Correct Responses,83 Discrimination Index,28

Correct Answer,C

32.14 Suppose that in Horsehead,Massachusetts,the cost of operating a lobster boat is $2,000

per month,Suppose that if x lobster boats operate in the bay,the total monthly revenue from

lobster boats in the bayis$1000#2814x,x

2

#29,If there are no restrictions on entry and new boats come

into the bayuntil there is no pro#0Ct to be made by a new entrant,then the number of boats who

enter will be X1,If the number of boats that operate in the bay is regulated to maximize total

pro#0Cts,the number of boats in the bay will be X2.

#28a#29 X1=12andX2 = 12.

#28b#29 X1=6andX2=4

#28c#29 X1 = 12 and X2=6

#28d#29 X1=16andX2=10

#28e#29 None of the above.

CHAPTER 32 Externalities 580

Topic,Externalities Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,D

32.15 An apiary is located next to an apple orchard,The apiary produces honey and the apple

orchard produces apples,The cost function of the apiary is C

H

#28H;A#29=H

2

=100,2A and the cost

function of the apple orchard is C

A

#28H;A#29=A

2

=100 where H and A are the number of units of honey

and apples produced respectively,The price of honey is 4 and the price of apples is 1 per unit,Let

A1 be the output of apples if the #0Crms operate independently,and let A2 be the output of apples

if the #0Crms are operated by a single owner so as to maximize total pro#0Ct.

#28a#29 A1 = 25 and A2=50

#28b#29 A1=A2=50

#28c#29 A1 = 75 and A2=50

#28d#29 A1 = 50 and A2 = 150

#28e#29 A1 = 200 and A2=50

Topic,Externalities Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,D

32.16 An apiary is located next to an apple orchard,The apiary produces honey and the apple

orchard produces apples,The cost function of the apiary is C

H

#28H;A#29=H

2

=100,3A and the cost

function of the apple orchard is C

A

#28H;A#29=A

2

=100 where H and A are the number of units of honey

and apples produced respectively,The price of honey is 3 and the price of apples is 4 per unit,Let

A1 be the output of apples if the #0Crms operate independently,and let A2 be the output of apples

if the #0Crms are operated by a single owner so as to maximize total pro#0Ct.

#28a#29 A1 = 100 and A2 = 200

#28b#29 A1=A2 = 200

#28c#29 A1 = 175 and A2 = 200

#28d#29 A1 = 200 and A2 = 350

#28e#29 A1 = 150 and A2 = 200

MULTIPLE CHOICE 581

Topic,Externalities Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,A

32.17 Will's utilityisU#28c;d;h#29=8c+18d,d

2

,6h; where d is the number of hours per day that

he spends driving around,h is the number of hours per dayspent driving around by other people

in his home town and c is the amount of money he has left to spend on other stu#0B besides gasoline

and auto repairs,Gas and auto repairs cost $.50 per hour of driving,All the people in Will's

home town have the same tastes,If each citizen believes that his own driving will not a#0Bect the

amount of driving done by others,they will all drive D1 hours per day,If they are all drive the

same amount,they would all be best o#0B if each drove D2 hours per day where:

#28a#29 D1=7andD2=4.

#28b#29 D1=D2=7.

#28c#29 D1 = 9 and D2=5.

#28d#29 D1=10andD2=0.

#28e#29 D1=7D2=2.

Topic,Externalities Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,A

32.18 Chen's utilityisU#28c;d;h#29=4c+8d,d

2

,2h; where d is the number of hours per day that

he spends driving around,h is the number of hours per dayspent driving around by other people

in his home town and c is the amount of money he has left to spend on other stu#0B besides gasoline

and auto repairs,Gas and auto repairs cost $.50 per hour of driving,All the people in Chen's

home town have the same tastes,If each citizen believes that his own driving will not a#0Bect the

amount of driving done by others,they will all drive D1 hours per day,If they are all drive the

same amount,they would all be best o#0B if each drove D2 hours per day where:

#28a#29 D1=3andD2=2.

#28b#29 D1=D2=3.

#28c#29 D1 = 5 and D2=3.

#28d#29 D1=6andD2=1.

#28e#29 D1=3D2=0.

CHAPTER 32 Externalities 582

Topic,Externalities Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,B

32.19 An airport is located next to a housing development,Where X is the number of planes

that land per day and Y is the number of houses in the housing development,pro#0Cts of the airport

are 30X,X

2

and pro#0Cts of the developer are 36Y,Y

2

,XY,Let H1 be the number of houses built

if a single pro#0Ct-maximizing companyowns the airport and the housing development,Let H2 be

the number of houses built if the airport and the housing development are operated independently

and the airport has to pay the developer the total "damages" XY done by the planes to the pro#0Cts

of the developer.

#28a#29 H1=H2 = 14.

#28b#29 H1 = 14 and H2 = 18.

#28c#29 H1 = 18 and H2=14

#28d#29 H1 = 16 and H2=17

#28e#29 H1 = 17 and H2=21

Topic,Externalities Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,B

32.20 An airport is located next to a housing development,Where X is the number of planes

that land per day and Y is the number of houses in the housing development,pro#0Cts of the airport

are 34X,X

2

and pro#0Cts of the developer are 32Y,Y

2

,XY,Let H1 be the number of houses built

if a single pro#0Ct-maximizing companyowns the airport and the housing development,Let H2 be

the number of houses built if the airport and the housing development are operated independently

and the airport has to pay the developer the total "damages" XY done by the planes to the pro#0Cts

of the developer.

#28a#29 H1=H2 = 10.

#28b#29 H1 = 10 and H2 = 16.

#28c#29 H1 = 16 and H2=10

#28d#29 H1 = 12 and H2=15

#28e#29 H1 = 15 and H2=19

MULTIPLE CHOICE 583

Topic,Externalities Di#0Eculty,2

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,A

32.21 A clothing store and a jeweler are located side by side in a shopping mall,If the clothing

store spend C dollars on advertising and the jeweler spends J dollars on advertising,then the pro#0Cts

of the clothing store will be #2812+ J#29C,2C

2

and the pro#0Cts of the jeweler will be #28 60+C#29J,2J

2

.

The clothing store gets to choose his amount of advertising #0Crst,knowing that the jeweler will #0Cnd

out howmuch the clothing store advertised before deciding howmuch to spend,The amountspent

by the clothing store will be:

#28a#29 14.

#28b#29 28.

#28c#29 42.

#28d#29 7.

#28e#29 21.

Topic,Externalities Di#0Eculty,2

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,A

32.22 A clothing store and a jeweler are located side by side in a shopping mall,If the clothing

store spend C dollars on advertising and the jeweler spends J dollars on advertising,then the pro#0Cts

of the clothing store will be #2830+ J#29C,2C

2

and the pro#0Cts of the jeweler will be #28 72+C#29J,2J

2

.

The clothing store gets to choose his amount of advertising #0Crst,knowing that the jeweler will #0Cnd

out howmuch the clothing store advertised before deciding howmuch to spend,The amountspent

by the clothing store will be:

#28a#29 22.

#28b#29 44.

#28c#29 66.

#28d#29 11.

#28e#29 33.

CHAPTER 32 Externalities 584

Topic,Externalities Di#0Eculty,2

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,E

32.23 Millie Bush has written a best-seller,Revenues net of production costs are $300T

1=3

A

1=3

where T is the number of publicity trips Millie takes and A is the number of ads for the book that

appear,Millie has to pay for all of her own publicity trips,which cost $100 each,Her publisher

pays for the advertising,which costs $100 per ad,Revenues from the book are split equally between

Millie and her publisher,Let T1 be the number of trips that Millie would choose to makeina

Nash equilibrium where she chooses the number of trips and the publisher chooses the amountof

advertising,Let T2 be the number of trips that Millie should make if trips and advertising are

determined so as to maximize total pro#0Cts net of trip and ad costs.

#28a#29 T1 = 1 and T2=1.

#28b#29 T1 = 1 and T2=2.

#28c#29 T1 = 2 amd T2=1.

#28d#29 T1 = 1 and T2=1=8.

#28e#29 T1=1=8 and T2=1.

Essay Externalities

Topic,Externalities Di#0Eculty,3

#25 Correct Responses,0 Discrimination Index,0

32.1 Two #0Crms in a grimy Ohio town produce the same product in a competitive industry,Each

has an old factory using an old technology,It still pays to operate these factories but it would not

pay to expand them,The only variable factor used by either #0Crm is labor,Each #0Crm pollutes the

other and thus reduces the output of the other #0Crm,The production functions of #0Crms A and B

respectively are Qa = La

:

5,#282=3#29Qb and Qb = Lb

:

5,#281=3#29Qa where La

:

5 and Lb

:

5 are the square

roots respectively of the amount of labor used by #0Crms A and B,The wage rate of labor is 1 and

the price of the #0Crms' output is 12,a#29If the two #0Crms each maximize pro#0Cts independently,what

is there total output and howmuch quasi-rents do their factories earn? b#29 If someone buys them

both and maximizes joint pro#0Cts,howmuch quasi-rents are earned in total?

Answer,Each produces 48 and quasirents are 12 for each,Each produces 36 and quasirents total

40.

Chapter 33

True-False Law and Economics

Topic,Law and Economics Di#0Eculty,1

#25 Correct Responses,93 Discrimination Index,12

Correct Answer,False

33.1 If detection of a crime is very unlikely,then economic analysis suggests that the penalty for

this crime should be small.

Topic,Law and Economics Di#0Eculty,2

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,True

33.2 Economic analysis suggests that the severity of penalty for a crime should be greater the

more serious the crime and also be greater the less likely it is to be detected.

Topic,Law and Economics Di#0Eculty,1

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,True

33.3 If the probability of an accident depends on the actions of the victim as well as those of

the perpetrator,then strict liability rules are likely to lead potential victims to take too many risks.

Topic,Law and Economics Di#0Eculty,2

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,False

33.4 "Negligence rules" whichsay that the injurer is liable for all damages unless he has taken

"due care",are likely to lead to ine#0Eciency regardless of the standards of due care,because they

do not takeinto account the incentives of the victim to avoid an accident.

Topic,Law and Economics Di#0Eculty,1

#25 Correct Responses,59 Discrimination Index,43

Correct Answer,False

33.5 Under strict liability rules,potential victims are likely to spend too much resources on

avoiding accidents.

TRUE-FALSE 587

Topic,Law and Economics Di#0Eculty,2

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,False

33.6 Economic analysis suggests that it is ine#0Ecient to make the punishment for an anti-social

action greater than the cost of that action to society.

Topic,Law and Economics Di#0Eculty,1

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,False

33.7 Tort law is the branchofantitrust law that is concerned with damages for monopolistic

practices,unfair practices and price-#0Cxing.

Topic,Law and Economics Di#0Eculty,1

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,False

33.8 No-fault automobile insurance appears to be a mistaken policy,because the appropriate

punishment for dangerous driving is restitution for the damage done in the event of an accident.

Topic,Law and Economics Di#0Eculty,1

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,True

33.9 Socially optimal punishment and optimal compensation in the event of an accident need

not be equal.

Topic,Law and Economics Di#0Eculty,3

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,False

33.10 Economic analysis suggests that if the two participants in an automobile accident are de-

termined to be equally at fault and if the damages to the two parties are equal,then there is no

economic justi#0Ccation for punishing either of them beyond the damage they have already received.

Multiple Choice Law and Economics

Topic,Law and Economics Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,D

33.1 Madame N,gets a total paymentof$24logxif she delivers x stolen buttons to her "fence".

She has to pay a #0Cne of $F if she is caught,but there is no other cost of getting caught,How big

should the #0Cne be if wewant to limit Madame N,to taking 6 buttons?

#28a#29 $20

#28b#29 $400

#28c#29 $44

#28d#29 $40

#28e#29 $60

Topic,Law and Economics Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,D

33.2 Madame N,gets a total paymentof$4logxif she delivers x stolen buttons to her "fence".

She has to pay a #0Cne of $F if she is caught,but there is no other cost of getting caught,How big

should the #0Cne be if wewant to limit Madame N,to taking 4 buttons?

#28a#29 $5

#28b#29 $100

#28c#29 $14

#28d#29 $10

#28e#29 $15

MULTIPLE CHOICE 589

Topic,Law and Economics Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,B

33.3 Jim rides his bicycle at speed s and has money m

J; his utility function if he does not collide

with Dickis20s+m

J

,Dickwalks at speed w and has money m

D; his utility function if Jim does

not collide with him is 10 w+m

D

,The probability and severity of a collision depends on both their

speeds,In fact,if Jim rides at speed s and Dickwalks at speed w; the probability of an accident

times the cost of an accident will be s

2

+ w

2; for each of them,If there are no rules about liability

and no deals are made between Jim and Dick,how fast will they travel?

#28a#29 s = 10 and w =10

#28b#29 s = 10 and w =5

#28c#29 s = 20 and w =10

#28d#29 s = 15 and w =5

#28e#29 s = 5 and w =2:50

Topic,Law and Economics Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,B

33.4 Jim rides his bicycle at speed s and has money m

J; his utility function if he does not collide

with Dickis16s+m

J

,Dickwalks at speed w and has money m

D; his utility function if Jim does

not collide with him is 10 w+m

D

,The probability and severity of a collision depends on both their

speeds,In fact,if Jim rides at speed s and Dickwalks at speed w; the probability of an accident

times the cost of an accident will be s

2

+ w

2; for each of them,If there are no rules about liability

and no deals are made between Jim and Dick,how fast will they travel?

#28a#29 s = 8 and w =10

#28b#29 s = 8 and w =5

#28c#29 s = 16 and w =10

#28d#29 s = 13 and w =5

#28e#29 s = 4 and w =2:50

Essay Law and Economics

Topic,Law and Economics Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

33.1 Discuss the relation between e#0Ecient punishments for those who "cause" accidents and ef-

#0Ccient compensation for accident victims.

Answer:

Chapter 34

Multiple Choice Information Technology

Topic,Information Technology Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,C

34.1 If the demand curve for DoorKnobs operating system is related to perceived market share

s and actual market share t by the equation p = 245s#281,x#29; then in the long run,the highest price

at which DoorKnobs would maintain a market share of 6=7 would be

#28a#29 $45.

#28b#29 $39.

#28c#29 $30.

#28d#29 $27.

#28e#29 $36.

Topic,Information Technology Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,C

34.2 If the demand curve for DoorKnobs operating system is related to perceived market share

s and actual market share t by the equation p = 196s#281,x#29; then in the long run,the highest price

at which DoorKnobs would maintain a market share of 4=7 would be

#28a#29 $72.

#28b#29 $62.40.

#28c#29 $48.

#28d#29 $43.20.

#28e#29 $57.60.

Topic,Information Technology Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,C

34.3 If the demand curve for DoorKnobs operating system is related to perceived market share

s and actual market share t by the equation p = 128s#281,x#29; then in the long run,the highest price

at which DoorKnobs would maintain a market share of 6=8 would be

#28a#29 $36.

#28b#29 $31.20.

#28c#29 $24.

#28d#29 $21.60.

#28e#29 $28.80.

CHAPTER 34 Information Technology 592

Topic,Information Technology Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,C

34.4 If the demand curve for DoorKnobs operating system is related to perceived market share

s and actual market share t by the equation p = 486s#281,x#29; then in the long run,the highest price

at which DoorKnobs would maintain a market share of 6=9 would be

#28a#29 $162.

#28b#29 $140.40.

#28c#29 $108.

#28d#29 $97.20.

#28e#29 $129.60.

Topic,Information Technology Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,C

34.5 If the demand curve for DoorKnobs operating system is related to perceived market share

s and actual market share t by the equation p = 216s#281,x#29; then in the long run,the highest price

at which DoorKnobs would maintain a market share of 4=6 would be

#28a#29 $72.

#28b#29 $62.40.

#28c#29 $48.

#28d#29 $43.20.

#28e#29 $57.60.

MULTIPLE CHOICE 593

Topic,Information Technology Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,E

34.6 Professor Kremepu#0B has published a new textbook,This book will be used in classes for

twoyears,at which time it will be replaced by a new edition,The publisher charges a price of $p

1

in the #0Crst year and $p

2

in the second year,After the #0Crst year,bookstores buy back copies from

students for $p

2

=2 and resell them to students in the second year for $p

2

,#28Students are indi#0Berent

between new and used copies.#29 The cost to a student in the #0Crst year of owning the book for a

year is therefore $p

1

,#28p

2

=2#29,In the #0Crst year of publication,the number of students willing to pay

$v to own the book for a year is 60;000,1;000v,The number of students taking the course in the

#0Crst year who are willing to pay at least $w to keep the book for reference rather than resell it is

60;000,5;000w,In the second year,the number of students who have not previously taken the

course and are willing to pay at least $p for a copy of the book is 50;000,1;000p,If the publisher

sets a price of p

1

in the #0Crst year and p

2

in the second year,with p

1

#15 p

2; then the total number of

copies that the publisher sells over twoyears will be equal to

#28a#29 110;000,1;000#28p

1

+p

2

=2#29.

#28b#29 120;000,1;000#28p

1

,#28p

2

=2#29#29.

#28c#29 120;000,3;000p

2

.

#28d#29 120;000,1;000p

1

,1;000p

2

.

#28e#29 110;000,1;500p

2

.

Topic,Information Technology Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,E

34.7 Professor Kremepu#0B has published a new textbook,This book will be used in classes for

twoyears,at which time it will be replaced by a new edition,The publisher charges a price of $p

1

in the #0Crst year and $p

2

in the second year,After the #0Crst year,bookstores buy back copies from

students for $p

2

=2 and resell them to students in the second year for $p

2

,#28Students are indi#0Berent

between new and used copies.#29 The cost to a student in the #0Crst year of owning the book for a

year is therefore $p

1

,#28p

2

=2#29,In the #0Crst year of publication,the number of students willing to pay

$v to own the book for a year is 60;000,1;000v,The number of students taking the course in the

#0Crst year who are willing to pay at least $w to keep the book for reference rather than resell it is

60;000,5;000w,In the second year,the number of students who have not previously taken the

course and are willing to pay at least $p for a copy of the book is 50;000,1;000p,If the publisher

sets a price of p

1

in the #0Crst year and p

2

in the second year,with p

1

#15 p

2; then the total number of

copies that the publisher sells over twoyears will be equal to

#28a#29 110;000,1;000#28p

1

+p

2

=2#29.

#28b#29 120;000,1;000#28p

1

,#28p

2

=2#29#29.

#28c#29 120;000,3;000p

2

.

#28d#29 120;000,1;000p

1

,1;000p

2

.

#28e#29 110;000,1;500p

2

.

CHAPTER 34 Information Technology 594

Topic,Information Technology Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,E

34.8 Professor Kremepu#0B has published a new textbook,This book will be used in classes for

twoyears,at which time it will be replaced by a new edition,The publisher charges a price of $p

1

in the #0Crst year and $p

2

in the second year,After the #0Crst year,bookstores buy back copies from

students for $p

2

=2 and resell them to students in the second year for $p

2

,#28Students are indi#0Berent

between new and used copies.#29 The cost to a student in the #0Crst year of owning the book for a

year is therefore $p

1

,#28p

2

=2#29,In the #0Crst year of publication,the number of students willing to pay

$v to own the book for a year is 40;000,1;000v,The number of students taking the course in the

#0Crst year who are willing to pay at least $w to keep the book for reference rather than resell it is

40;000,5;000w,In the second year,the number of students who have not previously taken the

course and are willing to pay at least $p for a copy of the book is 30;000,1;000p,If the publisher

sets a price of p

1

in the #0Crst year and p

2

in the second year,with p

1

#15 p

2; then the total number of

copies that the publisher sells over twoyears will be equal to

#28a#29 70;000,1;000#28p

1

+ p

2

=2#29.

#28b#29 80;000,1;000#28p

1

,#28p

2

=2#29#29.

#28c#29 80;000,3;000p

2

.

#28d#29 80;000,1;000p

1

,1;000p

2

.

#28e#29 70;000,1;500p

2

.

Topic,Information Technology Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,E

34.9 Professor Kremepu#0B has published a new textbook,This book will be used in classes for

twoyears,at which time it will be replaced by a new edition,The publisher charges a price of $p

1

in the #0Crst year and $p

2

in the second year,After the #0Crst year,bookstores buy back copies from

students for $p

2

=2 and resell them to students in the second year for $p

2

,#28Students are indi#0Berent

between new and used copies.#29 The cost to a student in the #0Crst year of owning the book for a

year is therefore $p

1

,#28p

2

=2#29,In the #0Crst year of publication,the number of students willing to pay

$v to own the book for a year is 50;000,1;000v,The number of students taking the course in the

#0Crst year who are willing to pay at least $w to keep the book for reference rather than resell it is

50;000,5;000w,In the second year,the number of students who have not previously taken the

course and are willing to pay at least $p for a copy of the book is 40;000,1;000p,If the publisher

sets a price of p

1

in the #0Crst year and p

2

in the second year,with p

1

#15 p

2; then the total number of

copies that the publisher sells over twoyears will be equal to

#28a#29 90;000,1;000#28p

1

+ p

2

=2#29.

#28b#29 100;000,1;000#28p

1

,#28p

2

=2#29#29.

#28c#29 100;000,3;000p

2

.

#28d#29 100;000,1;000p

1

,1;000p

2

.

#28e#29 90;000,1;500p

2

.

MULTIPLE CHOICE 595

Topic,Information Technology Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,E

34.10 Professor Kremepu#0B has published a new textbook,This book will be used in classes for

twoyears,at which time it will be replaced by a new edition,The publisher charges a price of $p

1

in the #0Crst year and $p

2

in the second year,After the #0Crst year,bookstores buy back copies from

students for $p

2

=2 and resell them to students in the second year for $p

2

,#28Students are indi#0Berent

between new and used copies.#29 The cost to a student in the #0Crst year of owning the book for a

year is therefore $p

1

,#28p

2

=2#29,In the #0Crst year of publication,the number of students willing to pay

$v to own the book for a year is 50;000,1;000v,The number of students taking the course in the

#0Crst year who are willing to pay at least $w to keep the book for reference rather than resell it is

50;000,5;000w,In the second year,the number of students who have not previously taken the

course and are willing to pay at least $p for a copy of the book is 40;000,1;000p,If the publisher

sets a price of p

1

in the #0Crst year and p

2

in the second year,with p

1

#15 p

2; then the total number of

copies that the publisher sells over twoyears will be equal to

#28a#29 90;000,1;000#28p

1

+ p

2

=2#29.

#28b#29 100;000,1;000#28p

1

,#28p

2

=2#29#29.

#28c#29 100;000,3;000p

2

.

#28d#29 100;000,1;000p

1

,1;000p

2

.

#28e#29 90;000,1;500p

2

.

Topic,Information Technology Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,E

34.11 A group of 11 consumers are trying to decide whether to connect to a new communications

network,Consumer 1 is of type 1,consumer 2 of type 2,Consumer 3 of type 3,and so on,Each

consumer's willingness to pay to belong to the network is proportional to the number of consumers

who belong,Where k is the number of consumers who belong,the willingness to payofatype n

consumer is equal to k times n,What is the highest price at which 7 consumers could all connect

to the network and either make a pro#0Ct or at least break even?

#28a#29 37

#28b#29 33

#28c#29 32

#28d#29 40

#28e#29 35

CHAPTER 34 Information Technology 596

Topic,Information Technology Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,E

34.12 A group of 9 consumers are trying to decide whether to connect to a new communications

network,Consumer 1 is of type 1,consumer 2 of type 2,Consumer 3 of type 3,and so on,Each

consumer's willingness to pay to belong to the network is proportional to the number of consumers

who belong,Where k is the number of consumers who belong,the willingness to payofatype n

consumer is equal to k times n,What is the highest price at which 7 consumers could all connect

to the network and either make a pro#0Ct or at least break even?

#28a#29 23

#28b#29 19

#28c#29 18

#28d#29 26

#28e#29 21

Topic,Information Technology Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,E

34.13 A group of 11 consumers are trying to decide whether to connect to a new communications

network,Consumer 1 is of type 1,consumer 2 of type 2,Consumer 3 of type 3,and so on,Each

consumer's willingness to pay to belong to the network is proportional to the number of consumers

who belong,Where k is the number of consumers who belong,the willingness to payofatype n

consumer is equal to k times n,What is the highest price at which 7 consumers could all connect

to the network and either make a pro#0Ct or at least break even?

#28a#29 37

#28b#29 33

#28c#29 32

#28d#29 40

#28e#29 35

MULTIPLE CHOICE 597

Topic,Information Technology Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,E

34.14 A group of 11 consumers are trying to decide whether to connect to a new communications

network,Consumer 1 is of type 1,consumer 2 of type 2,Consumer 3 of type 3,and so on,Each

consumer's willingness to pay to belong to the network is proportional to the number of consumers

who belong,Where k is the number of consumers who belong,the willingness to payofatype n

consumer is equal to k times n,What is the highest price at which 9 consumers could all connect

to the network and either make a pro#0Ct or at least break even?

#28a#29 29

#28b#29 25

#28c#29 24

#28d#29 32

#28e#29 27

Topic,Information Technology Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,E

34.15 A group of 11 consumers are trying to decide whether to connect to a new communications

network,Consumer 1 is of type 1,consumer 2 of type 2,Consumer 3 of type 3,and so on,Each

consumer's willingness to pay to belong to the network is proportional to the number of consumers

who belong,Where k is the number of consumers who belong,the willingness to payofatype n

consumer is equal to k times n,What is the highest price at which 9 consumers could all connect

to the network and either make a pro#0Ct or at least break even?

#28a#29 29

#28b#29 25

#28c#29 24

#28d#29 32

#28e#29 27

Chapter 35

True-False Public Goods

Topic,Public Goods Di#0Eculty,1

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,False

35.1 Tosay that preferences are single peaked means that everybody either prefers more public

goods to less or everybody prefers less public goods to more.

Topic,Public Goods Di#0Eculty,1

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,True

35.2 If preferences are single peaked,then pairwise majorityvoting among alternative options

will not lead to voting cycles.

Topic,Public Goods Di#0Eculty,1

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,False

35.3 A tax imposed on polluters to give them an incentive to make an e#0Ecient reduction in

pollution is called a Clarke tax.

Topic,Public Goods Di#0Eculty,1

#25 Correct Responses,80 Discrimination Index,20

Correct Answer,True

35.4 If a pure public good is provided byvoluntary contributions,economic theory predicts that

in general too little will be supplied.

Topic,Public Goods Di#0Eculty,2

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,False

35.5 APareto optimal amount of public goods is shown on a graph #28with quantities of public

goods on the x axis#29 by the point at which the horizontal sum of the marginal rate of substitution

curves meets the marginal cost curve.

TRUE-FALSE 599

Topic,Public Goods Di#0Eculty,2

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,False

35.6 One of the problems with the Clarke tax mechanism is that when it is used,people havean

incentive to lie about their preferences.

Topic,Public Goods Di#0Eculty,1

#25 Correct Responses,80 Discrimination Index,28

Correct Answer,False

35.7 Economists de#0Cne public goods to be those goods that are supplied by the government and

private goods to be those goods that are supplied by the private sector.

Topic,Public Goods Di#0Eculty,2

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,False

35.8 If the supply of public goods is determined by majorityvote,then the outcome must be

Pareto optimal.

Topic,Public Goods Di#0Eculty,1

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,False

35.9 If preferences are single-peaked,then everyone will agree about the right amount of public

goods to be supplied.

Multiple Choice Public Goods

Topic,Public Goods Di#0Eculty,2

#25 Correct Responses,4 Discrimination Index,3503

Correct Answer,E

35.1 A quiet town in Kansas has 2000 people,all of whom have the same preferences,There is

one private good and one public good,Each person,i; in town has utility U#28x

i;y#29=x

i

+y

:5;where

x

i

is private good for person i and y is the amount of public good that the town provides,If the

private good costs $1 per unit and the public good costs $10 per unit,then the Pareto optimal

amount of public good for the town to provide is:

#28a#29 100 units.

#28b#29 500 units.

#28c#29 2000 units

#28d#29 8000 units.

#28e#29 10000 units

Topic,Public Goods Di#0Eculty,2

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,C

35.2 The Sons of Knute had a hunting lodge up on Loon Lake which burned down last winter.

They plan to rebuild it this summer and are trying to decide how large the new lodge should be.

The organization has 50 members,The marginal rate of substitution of each of them between

square feet of hunting lodge and money for other goods is 1:2,:0004y where y is the size of the

hunting lodge in square feet,What is the e#0Ecient size for the new hunting lodge?

#28a#29 1,000 square feet

#28b#29 1,200 square feet

#28c#29 2,000 square feet

#28d#29 2,400 square feet

#28e#29 None of the above.

MULTIPLE CHOICE 601

Topic,Public Goods Di#0Eculty,2

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,D

35.3 Anton,Bertha,and Cecilia all consume crackers and music,Crackers are a pure private good

and music is a pure public good,Their utility functions are,U

A

#28c

A;m#29=c

A

m; U

B

#28c

B;m#29=c

B

m;

and U

B

#28c

C;m#29=2c

C

m; where c

A

is Anton's cracker consumption,c

B

is Bertha's cracker consump-

tion,and c

C

is Cecilia's cracker consumption and where m is the amountofmusic jointly consumed

by all three of them,Music is measured in hours,Crackers cost $1 each,Music costs $10 an hour.

Anton's wealth is $30,Bertha's wealth is $50,and Cecilia's wealth is $20,What is the e#0Ecient

amountofmusic for them to consume?

#28a#29 2 hours

#28b#29 3 hours

#28c#29 4 hours

#28d#29 5 hours

#28e#29 6 hours

Topic,Public Goods Di#0Eculty,3

#25 Correct Responses,85 Discrimination Index,0

Correct Answer,C

35.4 Which of the following is the best example of a public good as de#0Cned in your text?

#28a#29 cable television

#28b#29 day care

#28c#29 radio broadcasts

#28d#29 medical care

#28e#29 Disneyland

CHAPTER 35 Public Goods 602

Topic,Public Goods Di#0Eculty,2

#25 Correct Responses,39 Discrimination Index,24

Correct Answer,A

35.5 A small co#0Bee company roasts co#0Bee beans in its shop,The unroasted beans cost the com-

pany 200 cents per pound,The marginal cost of roasting co#0Bee beans is 150,10q + q

2

cents per

pound when q pounds are roasted,The smell of roasting beans imposes costs on the company's

neighbors,The total amount that neighbors would be willing to paytohave the shop stop roasting

altogether is 5q

2; where q is the number of pounds being roasted,The company sells its output in

a competitive market at 450 cents per pound,What is the socially e#0Ecient amount of co#0Bee for

the company to roast?

#28a#29 10 lbs.

#28b#29 15 lbs.

#28c#29 the square root of 10 lbs.

#28d#29 45 lbs.

#28e#29 None of the above.

Topic,Public Goods Di#0Eculty,2

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,A

35.6 Nadia Comeneci and Mr,X have preferences de#0Cned over pizza,p; and trampolines,t,They

have identical utility functions,U#28p;t#29=p+2;000t

1=2

,Each pizza costs $1 and each trampoline

costs $1,000,Nadia and Mr,X like to share,and indeed trampolines are a public good for them.

Pizza,however,is a private good,We don't know their exact incomes,but wedoknow that each

of them earns at least $10,000,Which of the following is true?

#28a#29 The Pareto e#0Ecientnumber of trampolines for them is 4.

#28b#29 The Pareto e#0Ecientnumber of trampolines for them is 1.

#28c#29 The Pareto e#0Ecientnumber of trampolines for them cannot be determined without knowing how the

costs will be shared.

#28d#29 The Pareto e#0Ecientnumber of trampolines for them is 2.

#28e#29 Since their preferences are homothetic,their income elasticity of demand for pizza is,1.

MULTIPLE CHOICE 603

Topic,Public Goods Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,A

35.7 Just north of the town of Muskrat,Ontario,is the town of Brass Monkey,population 6400.

Brass Monkey,like Muskrat,has a single public good,the town skating rink,and a single private

good,Labatts ale,Everyone's utility function is U

i

#28X

i;Y#29=X

i

,81=Y; where X

i

is the number of

bottles of ale consumed by i and Y is the size of the skating rink in square meters,The price of ale

is $1 per bottle,The cost of the skating rink to the city is $4 per square meter,Everyone has an

income of at least $5,000,What is the Pareto e#0Ecient size for the town skating rink?

#28a#29 360 square meters

#28b#29 480 square meters

#28c#29 240 square meters

#28d#29 725 square meters

#28e#29 None of the above.

Topic,Public Goods Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,D

35.8 Bob and Ray are thinking of buying a sofa,Bob's utility function is U

B

#28S;M

B

#29=#281+S#29M

B

and Ray's utility function is U

R

#28S;M

R

#29 = #284 + S#29M

R; where S =0if they don't get the sofa and

S =1if they do and where M

B

and M

R

are the amounts of money they have respectively to spend

on their private consumptions,Bob has a total of $800 to spend on the sofa and other stu#0B,Ray

has a total of $ 3,000 to spend on the sofa and other stu#0B,The maximum amount that they could

pay for the sofa and still arrange to both be better o#0B than without it is:

#28a#29 1,500.

#28b#29 750.

#28c#29 550.

#28d#29 1,000.

#28e#29 2,000.

CHAPTER 35 Public Goods 604

Topic,Public Goods Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,D

35.9 Bob and Ray are thinking of buying a sofa,Bob's utility function is U

B

#28S;M

B

#29=#281+S#29M

B

and Ray's utility function is U

R

#28S;M

R

#29 = #283 + S#29M

R; where S =0if they don't get the sofa and

S =1if they do and where M

B

and M

R

are the amounts of money they have respectively to spend

on their private consumptions,Bob has a total of $2,000 to spend on the sofa and other stu#0B,Ray

has a total of $ 4,000 to spend on the sofa and other stu#0B,The maximum amount that they could

pay for the sofa and still arrange to both be better o#0B than without it is:

#28a#29 3,000.

#28b#29 1,333.33.

#28c#29 1,050.

#28d#29 2,000.

#28e#29 4,000.

Topic,Public Goods Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,C

35.10 Remember Bonnie and Clyde from your workbook? Suppose that their total pro#0Cts are

84H where H is the number of hours they work per year,Their utility functions are,respectively,U

B

#28C

B;H#29=C

B

,0:03H

2; and U

C

#28C

C;H#29=C

C

,0:04H

2; where C

B

a and C

C

are their private goods

consumptions and H is the number of hours they work per year,If they #0Cnd a Pareto optimal choice

of hours of work and income distribution,it must be that the number of hours they workper year is:

#28a#29 700.

#28b#29 600.

#28c#29 250.

#28d#29 350.

MULTIPLE CHOICE 605

Topic,Public Goods Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,C

35.11 Remember Bonnie and Clyde from your workbook? Suppose that their total pro#0Cts are

128H where H is the number of hours they work per year,Their utility functions are,respectively,

U

B

#28C

B;H#29=C

B

,0:02H

2; and U

C

#28C

C;H#29=C

C

,0:02H

2; where C

B

a and C

C

are their private goods

consumptions and H is the number of hours they work per year,If they #0Cnd a Pareto optimal choice

of hours of work and income distribution,it must be that the number of hours they workper year is:

#28a#29 1,700.

#28b#29 1,600.

#28c#29 750.

#28d#29 850.

Topic,Public Goods Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,B

35.12 Lucy's utility function is 2X

L

+ G and Melvin's utility function is X

M

G where G is their

expenditures on the public goods they share in their apartment and where X

L

and X

M

are their

respective private consumption expenditures,The total amount they have to spend on private

goods and public goods is 29,000,They agree on a Pareto optimal pattern of expenditures in which

the amount that is spent on Lucy's private consumption is 5,000,Howmuch do they spenton

public goods?

#28a#29 8,000

#28b#29 16,000

#28c#29 6,550

#28d#29 4,000

#28e#29 There is not enough information here to be able to determine the answer.

CHAPTER 35 Public Goods 606

Topic,Public Goods Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,B

35.13 Lucy's utility function is 2X

L

+ G and Melvin's utility function is X

M

G where G is their

expenditures on the public goods they share in their apartment and where X

L

and X

M

are their

respective private consumption expenditures,The total amount they have to spend on private

goods and public goods is 36,000,They agree on a Pareto optimal pattern of expenditures in which

the amount that is spent on Lucy's private consumption is 9,000,Howmuch do they spenton

public goods?

#28a#29 9,000

#28b#29 18,000

#28c#29 9,050

#28d#29 4,500

#28e#29 There is not enough information here to be able to determine the answer.

Essay Public Goods

Topic,Public Goods Di#0Eculty,3

#25 Correct Responses,0 Discrimination Index,0

35.1 An otherwise charming island is inhabited bytwo religious groups who hate each other,The

island is presided over by a benevolent monarch who is extremely concerned about envy between

groups,He chooses the distribution of income on the island so as to maximize the social welfare

function,W#28x;y#29=minf2x,y;2y,xg where x is the utility of the average member of group X and y

is the utility of the average member of group Y,a#29 If the monarch can accomplish any distribution

of utility such that x+3y=24;diagram the utility possibility frontier and the monarch's isowelfare

lines,b#29 What income distribution maximizes W? c#29 Show that an equal increase in both groups

income will always please the monarch,d#29If the initial incomes are equal,when do increases in

both groups' utility reduce W?

Answer,a#29 see prob 99 b#296;6 c#29 Adding a constanttobothxand y increases 2x-y and 2y-x,d#29

when either's income increases by more than twice the increase in the other's.

Chapter 36

True-False Information

Topic,Information Di#0Eculty,1

#25 Correct Responses,60 Discrimination Index,13

Correct Answer,True

36.1 An insurance companymust be concerned about the possibility that someone will buy #0Cre

insurance on a building and then set #0Cre to it,This is an example of moral hazard.

Topic,Information Di#0Eculty,1

#25 Correct Responses,90 Discrimination Index,13

Correct Answer,True

36.2 A life insurance companymust be concerned about the possibility that the people who buy

life insurance may tend to be less healthy than those who do not,This is an example of adverse

selection.

Topic,Information Di#0Eculty,1

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,False

36.3 In a market where there is signalling,a separating equilibrium occurs when economic agents

separate their actions as consumers from their actions as producers.

Topic,Information Di#0Eculty,1

#25 Correct Responses,51 Discrimination Index,34

Correct Answer,True

36.4 In a market where there is a separating equilibrium,di#0Berenttypes of agents make di#0Berent

choices of actions.

Topic,Information Di#0Eculty,1

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,True

36.5 In a market where there is a pooling equilibrium,di#0Berenttypes of agents choose the same

action.

TRUE-FALSE 609

Topic,Information Di#0Eculty,1

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,False

36.6 The incentive compatibility constraint requires that incentives be consistent with a con-

sumer's budget constraint.

Topic,Information Di#0Eculty,1

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,False

36.7 An example of adverse selection is where someone chooses a car that is not as good as it is

claimed to be.

Multiple Choice Information

Topic,Information Di#0Eculty,2

#25 Correct Responses,64 Discrimination Index,58

Correct Answer,D

36.1 A #0Crm hires two kinds of workers,alphas and betas.The population at large has equal num-

ber of alphas and betas,One can't tell a beta from an alpha by looking at her,but an alpha will

produce $3,000 worth of output per month and a beta will produce $2,500 worth of output in a

month,The #0Crm decides to distinguish alphas from betas by making them pass an examination.

For each question that they get right on the exam,alphas have to spend 1=2 hour studying and

betas have to spend 1 hour,A worker will be paid $3,000 if she gets at least 60 answers right and

$2,500 otherwise,For either type,an hour's studying is as bad as giving up $20 income per month.

This scheme leads to:

#28a#29 a separating equilibrium where alphas score 60 and betas score 0.

#28b#29 a pooling equilibrium where alphas score 60 and betas score 0.

#28c#29 a pooling equilibrium where everybody scores 60.

#28d#29 a pooling equilibrium where everybody scores 0.

#28e#29 a separating equilibrium where everybody scores 60.

Topic,Information Di#0Eculty,1

#25 Correct Responses,38 Discrimination Index,31

Correct Answer,A

36.2 Ten workers work jointly on a project,All 10 workers are equally skilled,The total value

of the output produced is $40 times the sum of the number of hours worked by all 10 workers.

Eachworker's utility is equal to his income minus the square of the number of hours he works.

Eachworker is sel#0Csh,They havenowayofkeeping trackofany individual's work e#0Bort,so they

decide to let each person work as long as he wants to and they divide the total value of their output

equally among them,Howmuch income will eachworker get?

#28a#29 $80

#28b#29 $800

#28c#29 $20

#28d#29 $95

#28e#29 None of the above.

MULTIPLE CHOICE 611

Topic,Information Di#0Eculty,1

#25 Correct Responses,38 Discrimination Index,31

Correct Answer,A

36.3 Ten workers work jointly on a project,All 10 workers are equally skilled,The total value

of the output produced is $50 times the sum of the number of hours worked by all 10 workers.

Eachworker's utility is equal to his income minus the square of the number of hours he works.

Eachworker is sel#0Csh,They havenowayofkeeping trackofany individual's work e#0Bort,so they

decide to let each person work as long as he wants to and they divide the total value of their output

equally among them,Howmuch income will eachworker get?

#28a#29 $125

#28b#29 $1,250

#28c#29 $25

#28d#29 $140

#28e#29 None of the above.

Topic,Information Di#0Eculty,1

#25 Correct Responses,74 Discrimination Index,37

Correct Answer,A

36.4 Which of the following is the best example of adverse selection?

#28a#29 People who face the highest risks are the people most likely to buy insurance against these risks.

#28b#29 The residual claimant will have to bear the consequences of the most adverse outcomes.

#28c#29 An individual can in#0Duence the probability that she has an accident.

#28d#29 Items in the most popular styles sell out the quickest.

#28e#29 People sometimes mistakenly choose low quality products.

CHAPTER 36 Information 612

Topic,Information Di#0Eculty,2

#25 Correct Responses,34 Discrimination Index,38

Correct Answer,C

36.5 A certain city has two kinds of workers,alphas and betas,An alpha can produce $100 worth

of output per dayworking for himself,If he works in the local factory,he produces $120 worth of

ouput a day,A beta produces $60 worth of ouput per dayworking for himself and he produces

$80 worth of output per dayifheworks for the local factory.Workers either work for themselves

or work in the factory,The factory owner can't tell alphas from betas,He paysawage equal to

the average product of his labor force and he has at least some alphas working for him,Work-

ers are free to choose to work for themselves or the factory,depending on which o#0Bers more money.

#28a#29 At least 5=6 of the factory's employees must be alphas.

#28b#29 At least half of the factory's employees must be betas.

#28c#29 At least half of the factory's employees must be alphas.

#28d#29 None of the factory's employees can be betas.

#28e#29 No more than 5=6 of the betas can work in the factory.

Topic,Information Di#0Eculty,0

#25 Correct Responses,29 Discrimination Index,25

Correct Answer,A

36.6 Enigma,Ohio,has two kinds of workers,klutzes whose labor is worth $1,000 a month and

kandos whose labor is worth $2,500 a month,Enigma has exactly twice as many klutzes as kandos.

Klutzes look just likekandos and are accomplished liars,so if you ask,they claim to be kandos,It

is too expensive to monitor anybody's work,A professor who likes to talk o#0Bers to give free lectures

on personal hygiene and macroeconomics,Klutzes and kandos #0Cnd these lectures excruciatingly

dull,An hour's lecture is as bad as losing $50 for a kando and as bad as losing $100 for a klutz,If

all other #0Crms paywages equal to the productivityofanaverage citizen of Enigma,which of these

strategies would be most pro#0Ctable for a new #0Crm?

#28a#29 O#0Ber a wage of $2000 per month and require its workers to listen to 6 hours of lectures per month.

#28b#29 O#0Ber a wage of $2000 per month and require its workers to listen to 4 hours of lectures per month.

#28c#29 O#0Ber a wage of $1750 per month and require its workers to listen to 6 hours of lectures per month.

#28d#29 O#0Ber a wage of $1660 per month and require its workers to attend 1 hour of lectures per month.

#28e#29 O#0Ber a wage of $2600 per month and require its workers to attend 8 hours of lectures per month.

MULTIPLE CHOICE 613

Topic,Information Di#0Eculty,3

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,D

36.7 Jan's utility function is C,H

2; where C is consumption and H is hours worked per day.

She can work in the city for 8 hours per day,earning$100 a day,Alternatively,she can rent a small

farm from the landlord,Mr,Porksni#0Ber,If she rents the farm,she can work as many hours a day

as she wishes,If she works H hours per day,she can sell her crops for a total of $20H per day,but

she must pay Mr,Porksni#0Ber an annual rentof$R,Mr,Porksni#0Ber wants to charge the highest

rent $R that he can and still be able to get Jan to work for him,What is the highest renthecan

charge? A penny less than:

#28a#29 $100 per day.

#28b#29 $64 per day.

#28c#29 $60 per day.

#28d#29 $50 per day.

#28e#29 $36 per day.

Topic,Information Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,C

36.8 Suppose that low productivityworkers all have marginal products of 10 and high produc-

tivityworkers have marginal products of 14,The community has equal numbers of eachtype of

worker,The local community college o#0Bers a course in microeconomics,High productivityworkers

think taking this course is as bad

as a cut in wages of 4 and low productivityworkers think it is as bad as a wage cut of 9.

#28a#29 There is a separating equilibrium in which high-productivityworkers take the course and are paid 14

and low-productivityworkers do not take the course and are paid 10.

#28b#29 There is no separating equilibrium and no pooling equilibrium.

#28c#29 There is no separating equilibrium,but there is a pooling equilibrium in whicheverybody is paid 12.

#28d#29 There is a separating equilibrium in which high-productivityworkers take the course and are paid 18

and low productivityworkers do not take the course and are paid 10.

#28e#29 There is a separating equilibrium in which high-productivityworkers take the course and are paid 14

and low productivityworkers are paid 12.

CHAPTER 36 Information 614

Topic,Information Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,C

36.9 Suppose that low productivityworkers all have marginal products of 10 and high produc-

tivityworkers have marginal products of 13,The community has equal numbers of eachtype of

worker,The local community college o#0Bers a course in microeconomics,High productivityworkers

think taking this course is as bad

as a cut in wages of 2 and low productivityworkers think it is as bad as a wage cut of 7.

#28a#29 There is a separating equilibrium in which high-productivityworkers take the course and are paid 13

and low-productivityworkers do not take the course and are paid 10.

#28b#29 There is no separating equilibrium and no pooling equilibrium.

#28c#29 There is no separating equilibrium,but there is a pooling equilibrium in whicheverybody is paid 11.50.

#28d#29 There is a separating equilibrium in which high-productivityworkers take the course and are paid 15

and low productivityworkers do not take the course and are paid 10.

#28e#29 There is a separating equilibrium in which high-productivityworkers take the course and are paid 13

and low productivityworkers are paid 11.50.

Topic,Information Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,A

36.10 Suppose that in Enigma,Ohio,Klutzes have productivity of $1000 and Kandos have pro-

ductivity of $4,000 per month,You can't tell Klutzes from Kandos by looking at them or asking

them and it is too expensive to monitor individual productivity,Kandos,however,have more

patience than Klutzes,Listening to an hour of dull lectures is as bad losing $300 for a Klutz and

$150 for a Kando,There will be a separating equilibrium in whichanybody who attends a course

of H hours of lectures is paid 4,000 per month and anybody who does not is paid $1000 per month:

#28a#29 if H#3C20 and H#3E10.

#28b#29 if H#3C40 and H#3E10.

#28c#29 for all positivevalues of H.

#28d#29 only in the limit as H approaches in#0Cnity.

#28e#29 if H#3C16:67 and H#3E8:33.

MULTIPLE CHOICE 615

Topic,Information Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,A

36.11 Suppose that in Enigma,Ohio,Klutzes have productivity of $1000 and Kandos have pro-

ductivity of $5,000 per month,You can't tell Klutzes from Kandos by looking at them or asking

them and it is too expensive to monitor individual productivity,Kandos,however,have more

patience than Klutzes,Listening to an hour of dull lectures is as bad losing $200 for a Klutz and

$100 for a Kando,There will be a separating equilibrium in whichanybody who attends a course

of H hours of lectures is paid 5,000 per month and anybody who does not is paid $1000 per month:

#28a#29 if H#3C40 and H#3E20.

#28b#29 if H#3C80 and H#3E20.

#28c#29 for all positivevalues of H.

#28d#29 only in the limit as H approaches in#0Cnity.

#28e#29 if H#3C35 and H#3E17:50.

Topic,Information Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,A

36.12 In Rustbucket,Michigan,there are 200 used cars for sale; half of these cars are good and

half of them are lemons,Owners of lemons are willing to sell them for $300,Owners of good used

cars are willing to sell them for prices above $900 but will keep them if the price is lower than $900.

There is a large number of potential buyers who are willing to pay $500 for a lemon and $1,900 for

a good car,Buyers can't tell good cars from bad,but original owners know.

#28a#29 There will be an equilibrium in which all used cars sell for $1,200.

#28b#29 The only equilibrium is one in which all used cars on the market are lemons and they sell for $500.

#28c#29 There will be an equilibrium in which lemons sell for $300 and good used cars sell for $900.

#28d#29 There will be an equilibrium in which all used cars sell for $600.

#28e#29 There will be an equilibrium in which lemons sell for $500 and good used cars sell for $1,900.

CHAPTER 36 Information 616

Topic,Information Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,A

36.13 In Rustbucket,Michigan,there are 200 used cars for sale; half of these cars are good and

half of them are lemons,Owners of lemons are willing to sell them for $300,Owners of good used

cars are willing to sell them for prices above $900 but will keep them if the price is lower than $900.

There is a large number of potential buyers who are willing to pay $600 for a lemon and $1,300 for

a good car,Buyers can't tell good cars from bad,but original owners know.

#28a#29 There will be an equilibrium in which all used cars sell for $950.

#28b#29 The only equilibrium is one in which all used cars on the market are lemons and they sell for $600.

#28c#29 There will be an equilibrium in which lemons sell for $300 and good used cars sell for $900.

#28d#29 There will be an equilibrium in which all used cars sell for $600.

#28e#29 There will be an equilibrium in which lemons sell for $600 and good used cars sell for $1,300.

Topic,Information Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,D

36.14 Suppose that in New Crankshaft,Pennsylvania,the quality distribution of the 5,000 used

cars on the market is such that the number of used cars of value less than V is V=2,Original

owners must sell their used cars,Original owners know what their cars are worth,but buyers can't

determine a car's qualityuntil they buy it,An owner can either take his car to an appraiser and

pay the appraiser $200 to appraise the car #28accurately and credibly#29 or he can sell the car unap-

praised,In equilibrium,car ownerswill have their cars appraised if and only if their value is atleast:

#28a#29 200.

#28b#29 2,500.

#28c#29 600.

#28d#29 400.

#28e#29 800.

MULTIPLE CHOICE 617

Topic,Information Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,D

36.15 Suppose that in New Crankshaft,Pennsylvania,the quality distribution of the 4,000 used

cars on the market is such that the number of used cars of value less than V is V=2,Original

owners must sell their used cars,Original owners know what their cars are worth,but buyers can't

determine a car's qualityuntil they buy it,An owner can either take his car to an appraiser and

pay the appraiser $200 to appraise the car #28accurately and credibly#29 or he can sell the car unap-

praised,In equilibrium,car ownerswill have their cars appraised if and only if their value is atleast:

#28a#29 200.

#28b#29 2,000.

#28c#29 600.

#28d#29 400.

#28e#29 800.

Topic,Information Di#0Eculty,0

#25 Correct Responses,77 Discrimination Index,37

Correct Answer,D

36.16 There are twotypes of used cars,high-quality and low-quality,Buyers can not tell dis-

tinguish the twotypes until after they have purchased them,Owners of high-quality cars will sell

them if the price is $2000 or higher,Owners of low-quality cars will sell them if the price is $1000

or higher,Buyers value a high-quality used car at $2,142 and a low-quality used car at $1200.

Suppose that the fraction 0.70 of used cars are of high quality and the fraction 0.30 of used cars

are of low quality,In equilibrium

#28a#29 Only high-quality used cars are sold.

#28b#29 Only low-quality used cars are sold.

#28c#29 All used cars are sold.

#28d#29 No used cars are sold.

#28e#29 High-quality used cars will sell for a uniformly higher price than low-quality used cars.

CHAPTER 36 Information 618

Topic,Information Di#0Eculty,0

#25 Correct Responses,77 Discrimination Index,37

Correct Answer,D

36.17 There are twotypes of used cars,high-quality and low-quality,Buyers can not tell dis-

tinguish the twotypes until after they have purchased them,Owners of high-quality cars will sell

them if the price is $2000 or higher,Owners of low-quality cars will sell them if the price is $1000

or higher,Buyers value a high-quality used car at $1,800 and a low-quality used car at $1200.

Suppose that the fraction 0.80 of used cars are of high quality and the fraction 0.20 of used cars

are of low quality,In equilibrium

#28a#29 Only high-quality used cars are sold.

#28b#29 Only low-quality used cars are sold.

#28c#29 All used cars are sold.

#28d#29 No used cars are sold.

#28e#29 High-quality used cars will sell for a uniformly higher price than low-quality used cars.

Chapter 2

Multiple Choice Budget Constraint

Topic,Budget Constraint Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,C

2.1A In Problem 2.1,if you have an income of $18 to spend,if commodity 1 costs $3 per unit,

and if commodity 2 costs $9 per unit,then the equation for your budget line can be written as

#28a#29 x

1

=3+x

2

=9 = 18.

#28b#29 #28x

1

+x

2

#29=#2812#29 = 18.

#28c#29 x

1

+3x

2

=6.

#28d#29 4x

1

+10x

2

= 19.

#28e#29 12#28x

1

+x

2

#29 = 18.

Topic,Budget Constraint Di#0Eculty,1

#25 Correct Responses,86 Discrimination Index,33

Correct Answer,A

2.2A In Problem 2.3,if you could exactly a#0Bord either 2 units of x and 7 units of y; or 4 units

of x and 3 units of y; then if you spent all of your income on y; how many units of y could you buy?

#28a#29 11

#28b#29 7

#28c#29 15

#28d#29 6

#28e#29 None of the other options are correct.

CHAPTER 2 Budget Constraint 620

Topic,Budget Constraint Di#0Eculty,0

#25 Correct Responses,100 Discrimination Index,0

Correct Answer,B

2.3A In Problem 2.4,Murphy used to consume 100 units of X and 50 units of Y when the price

of X was 2 and the price of Y was 4,If the price of X rose to 5 and the price of Y rose to 5,how

muchwould Murphy's income have to rise so that he could still a#0Bord his original bundle?

#28a#29 400

#28b#29 350

#28c#29 200

#28d#29 600

#28e#29 None of the other options are correct.

Topic,Budget Constraint Di#0Eculty,0

#25 Correct Responses,88 Discrimination Index,38

Correct Answer,C

2.4A In Problem 2.7,Edmund must pay$6each for punk rock video cassettes,If Edmund is

paid $48 per sack for accepting garbage and if his relatives send him an allowance of $432,then his

budget line is described by the equation

#28a#29 6V =48G.

#28b#29 6V +48G= 432.

#28c#29 6V,48G = 432.

#28d#29 6V = 432,G.

#28e#29 None of the other options are correct.

Topic,Budget Constraint Di#0Eculty,0

#25 Correct Responses,84 Discrimination Index,13

Correct Answer,C

2.5A In Problem 2.10,if in the same amount of time that it takes her to read 40 pages of eco-

nomics and 30 pages of sociology,Martha could read 10 pages of economics and 90 pages of sociol-

ogy,then which of these equations describes combinations of pages of economics,E; and sociology,

S; that she could read in the time it takes to read 40 pages of economics and 30 pages of sociology?

#28a#29 E + S =70

#28b#29 E=2+S=50

#28c#29 2E +S = 110

#28d#29 E + S = 100

#28e#29 All of the above.

MULTIPLE CHOICE 621

Topic,Budget Constraint Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,A

2.6A In Problem 2.11,ads in the boring business magazine are read by 300 lawyers and 1,000

M.B.A's,Ads in the consumer publication are read by 250 lawyers and 300 M.B.A.s,If Harry had

$3,000 to spend on advertising,if the price of ads in the boring business magazine were 600 and

the price of ads in the consumer magazine were 300,then the combinations of recent M.B.A.s and

lawyers with hot tubs whom he could reach with his advertising budget would be represented by

the integer values along a line segment that runs between the two points

#28a#29 #282;500;3;000#29 and #281;500;5;000#29.

#28b#29 #283;000;3;500#29 and #281;500;6;000#29.

#28c#29 #280;3;000#29 and #281;500;0#29.

#28d#29 #283;000;0#29 and #280;6;000#29.

#28e#29 #282;000;0#29 and #280;5;000#29.

Topic,Budget Constraint Di#0Eculty,2

#25 Correct Responses,68 Discrimination Index,75

Correct Answer,B

2.7A In the economy of Mungo,discussed in Problem 2.12,there is a third person called Ike,Ike

has a red income of 82 and a blue income of 25,#28Recall that blue ices are 1 bcu #28blue currency

unit#29 per unit of ambrosia and 1 bcu ppper unit of bubblegum,Red prices are 2 rcus #28red currency

units#29 per unit of ambrosia and 6 rcus per unit of bubblegum,You havetopaytwice for what you

buy,once in red currency,once in blue currency.#29 If Ike spends all of its blue income,but not all

of its red income,then it must be that

#28a#29 it consumes at least 8 units of bubblegum.

#28b#29 it consumes at least 17 units of ambrosia.

#28c#29 it consumes exactly twice as much bubblegum as ambrosia.

#28d#29 it consumes at least 13 units of bubblegum.

#28e#29 it consumes equal amounts of ambrosia and bubblegum.

Multiple Choice Budget Constraint

Topic,Budget Constraint Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,C

2.1B In Problem 2.1,if you have an income of $18 to spend,if commodity 1 costs $3 per unit,

and if commodity 2 costs $9 per unit,then the equation for your budget line can be written as

#28a#29 x

1

=3+x

2

=9 = 18.

#28b#29 #28x

1

+x

2

#29=#2812#29 = 18.

#28c#29 x

1

+3x

2

=6.

#28d#29 4x

1

+10x

2

= 19.

#28e#29 12#28x

1

+x

2

#29 = 18.

Topic,Budget Constraint Di#0Eculty,1

#25 Correct Responses,86 Discrimination Index,33

Correct Answer,A

2.2B In Problem 2.3,if you could exactly a#0Bord either 2 units of x and 7 units of y; or 4 units

of x and 3 units of y; then if you spent all of your income on y; how many units of y could you buy?

#28a#29 11

#28b#29 7

#28c#29 15

#28d#29 6

#28e#29 None of the other options are correct.

Topic,Budget Constraint Di#0Eculty,0

#25 Correct Responses,100 Discrimination Index,0

Correct Answer,B

2.3B In Problem 2.4,Murphy used to consume 100 units of X and 50 units of Y when the price

of X was 2 and the price of Y was 4,If the price of X rose to 5 and the price of Y rose to 5,how

muchwould Murphy's income have to rise so that he could still a#0Bord his original bundle?

#28a#29 400

#28b#29 350

#28c#29 200

#28d#29 600

#28e#29 None of the other options are correct.

MULTIPLE CHOICE 623

Topic,Budget Constraint Di#0Eculty,0

#25 Correct Responses,88 Discrimination Index,38

Correct Answer,C

2.4B In Problem 2.7,Edmund must pay $6 each for punk rock video cassettes,If Edmund is

paid $48 per sack for accepting garbage and if his relatives send him an allowance of $432,then his

budget line is described by the equation

#28a#29 6V =48G.

#28b#29 6V +48G= 432.

#28c#29 6V,48G = 432.

#28d#29 6V = 432,G.

#28e#29 None of the other options are correct.

Topic,Budget Constraint Di#0Eculty,0

#25 Correct Responses,84 Discrimination Index,13

Correct Answer,C

2.5B In Problem 2.10,if in the same amount of time that it takes her to read 40 pages of eco-

nomics and 30 pages of sociology,Martha could read 10 pages of economics and 90 pages of sociol-

ogy,then which of these equations describes combinations of pages of economics,E; and sociology,

S; that she could read in the time it takes to read 40 pages of economics and 30 pages of sociology?

#28a#29 E + S =70

#28b#29 E=2+S=50

#28c#29 2E +S = 110

#28d#29 E + S = 100

#28e#29 All of the above.

CHAPTER 2 Budget Constraint 624

Topic,Budget Constraint Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,A

2.6B In Problem 2.11,ads in the boring business magazine are read by 300 lawyers and 1,000

M.B.A's,Ads in the consumer publication are read by 250 lawyers and 300 M.B.A.s,If Harry had

$3,000 to spend on advertising,if the price of ads in the boring business magazine were 600 and

the price of ads in the consumer magazine were 300,then the combinations of recent M.B.A.s and

lawyers with hot tubs whom he could reach with his advertising budget would be represented by

the integer values along a line segment that runs between the two points

#28a#29 #282;500;3;000#29 and #281;500;5;000#29.

#28b#29 #283;000;3;500#29 and #281;500;6;000#29.

#28c#29 #280;3;000#29 and #281;500;0#29.

#28d#29 #283;000;0#29 and #280;6;000#29.

#28e#29 #282;000;0#29 and #280;5;000#29.

Topic,Budget Constraint Di#0Eculty,2

#25 Correct Responses,68 Discrimination Index,75

Correct Answer,B

2.7B In the economy of Mungo,discussed in Problem 2.12,there is a third person called Ike,Ike

has a red income of 82 and a blue income of 25,#28Recall that blue ices are 1 bcu #28blue currency

unit#29 per unit of ambrosia and 1 bcu ppper unit of bubblegum,Red prices are 2 rcus #28red currency

units#29 per unit of ambrosia and 6 rcus per unit of bubblegum,You havetopaytwice for what you

buy,once in red currency,once in blue currency.#29 If Ike spends all of its blue income,but not all

of its red income,then it must be that

#28a#29 it consumes at least 8 units of bubblegum.

#28b#29 it consumes at least 17 units of ambrosia.

#28c#29 it consumes exactly twice as much bubblegum as ambrosia.

#28d#29 it consumes at least 13 units of bubblegum.

#28e#29 it consumes equal amounts of ambrosia and bubblegum.

Multiple Choice Budget Constraint

Topic,Budget Constraint Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,C

2.1C In Problem 2.1,if you have an income of $40 to spend,if commodity 1 costs $5 per unit,

and if commodity 2 costs $20 per unit,then the equation for your budget line can be written as

#28a#29 x

1

=5+x

2

=20 = 40.

#28b#29 #28x

1

+x

2

#29=#2825#29 = 40.

#28c#29 x

1

+4x

2

=8.

#28d#29 6x

1

+21x

2

= 41.

#28e#29 25#28x

1

+x

2

#29 = 40.

Topic,Budget Constraint Di#0Eculty,1

#25 Correct Responses,86 Discrimination Index,33

Correct Answer,A

2.2C In Problem 2.3,if you could exactly a#0Bord either 2 units of x and 15 units of y; or 7 units

of x and 5 units of y; then if you spent all of your income on y; how many units of y could you buy?

#28a#29 19

#28b#29 9

#28c#29 29

#28d#29 9

#28e#29 None of the other options are correct.

Topic,Budget Constraint Di#0Eculty,0

#25 Correct Responses,100 Discrimination Index,0

Correct Answer,B

2.3C In Problem 2.4,Murphy used to consume 100 units of X and 50 units of Y when the price

of X was 2 and the price of Y was 4,If the price of X rose to 5 and the price of Y rose to 10,how

muchwould Murphy's income have to rise so that he could still a#0Bord his original bundle?

#28a#29 900

#28b#29 600

#28c#29 450

#28d#29 1,350

#28e#29 None of the other options are correct.

CHAPTER 2 Budget Constraint 626

Topic,Budget Constraint Di#0Eculty,0

#25 Correct Responses,88 Discrimination Index,38

Correct Answer,C

2.4C In Problem 2.7,Edmund must pay$6each for punk rock video cassettes,If Edmund is

paid $48 per sack for accepting garbage and if his relatives send him an allowance of $192,then his

budget line is described by the equation

#28a#29 6V =48G.

#28b#29 6V +48G= 192.

#28c#29 6V,48G = 192.

#28d#29 6V = 192,G.

#28e#29 None of the other options are correct.

Topic,Budget Constraint Di#0Eculty,0

#25 Correct Responses,84 Discrimination Index,13

Correct Answer,C

2.5C In Problem 2.10,if in the same amount of time that it takes her to read 40 pages of eco-

nomics and 30 pages of sociology,Martha could read 20 pages of economics and 90 pages of sociol-

ogy,then which of these equations describes combinations of pages of economics,E; and sociology,

S; that she could read in the time it takes to read 40 pages of economics and 30 pages of sociology?

#28a#29 E + S =70

#28b#29 E=2+S=50

#28c#29 3E +S = 150

#28d#29 E + S = 110

#28e#29 All of the above.

MULTIPLE CHOICE 627

Topic,Budget Constraint Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,A

2.6C In Problem 2.11,ads in the boring business magazine are read by 300 lawyers and 1,000

M.B.A's,Ads in the consumer publication are read by 250 lawyers and 300 M.B.A.s,If Harry had

$3,600 to spend on advertising,if the price of ads in the boring business magazine were 600 and

the price of ads in the consumer magazine were 300,then the combinations of recent M.B.A.s and

lawyers with hot tubs whom he could reach with his advertising budget would be represented by

the integer values along a line segment that runs between the two points

#28a#29 #283;000;3;600#29 and #281;800;6;000#29.

#28b#29 #283;600;4;200#29 and #281;800;7;200#29.

#28c#29 #280;3;600#29 and #281;800;0#29.

#28d#29 #283;600;0#29 and #280;7;200#29.

#28e#29 #282;400;0#29 and #280;6;000#29.

Topic,Budget Constraint Di#0Eculty,2

#25 Correct Responses,68 Discrimination Index,75

Correct Answer,B

2.7C In the economy of Mungo,discussed in Problem 2.12,there is a third person called Ike,Ike

has a red income of 80 and a blue income of 30,#28Recall that blue ices are 1 bcu #28blue currency

unit#29 per unit of ambrosia and 1 bcu ppper unit of bubblegum,Red prices are 2 rcus #28red currency

units#29 per unit of ambrosia and 6 rcus per unit of bubblegum,You havetopaytwice for what you

buy,once in red currency,once in blue currency.#29 If Ike spends all of its blue income,but not all

of its red income,then it must be that

#28a#29 it consumes at least 5 units of bubblegum.

#28b#29 it consumes at least 25 units of ambrosia.

#28c#29 it consumes exactly twice as much bubblegum as ambrosia.

#28d#29 it consumes at least 9 units of bubblegum.

#28e#29 it consumes equal amounts of ambrosia and bubblegum.

Multiple Choice Budget Constraint

Topic,Budget Constraint Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,C

2.1D In Problem 2.1,if you have an income of $80 to spend,if commodity 1 costs $5 per unit,

and if commodity 2 costs $20 per unit,then the equation for your budget line can be written as

#28a#29 x

1

=5+x

2

=20 = 80.

#28b#29 #28x

1

+x

2

#29=#2825#29 = 80.

#28c#29 x

1

+4x

2

= 16.

#28d#29 6x

1

+21x

2

= 81.

#28e#29 25#28x

1

+x

2

#29 = 80.

Topic,Budget Constraint Di#0Eculty,1

#25 Correct Responses,86 Discrimination Index,33

Correct Answer,A

2.2D In Problem 2.3,if you could exactly a#0Bord either 2 units of x and 13 units of y; or 4 units

of x and 5 units of y; then if you spent all of your income on y; how many units of y could you buy?

#28a#29 21

#28b#29 13

#28c#29 29

#28d#29 6

#28e#29 None of the other options are correct.

Topic,Budget Constraint Di#0Eculty,0

#25 Correct Responses,100 Discrimination Index,0

Correct Answer,B

2.3D In Problem 2.4,Murphy used to consume 100 units of X and 50 units of Y when the price

of X was 2 and the price of Y was 4,If the price of X rose to 3 and the price of Y rose to 8,how

muchwould Murphy's income have to rise so that he could still a#0Bord his original bundle?

#28a#29 500

#28b#29 300

#28c#29 250

#28d#29 750

#28e#29 None of the other options are correct.

MULTIPLE CHOICE 629

Topic,Budget Constraint Di#0Eculty,0

#25 Correct Responses,88 Discrimination Index,38

Correct Answer,C

2.4D In Problem 2.7,Edmund must pay $6 each for punk rock video cassettes,If Edmund is

paid $36 per sack for accepting garbage and if his relatives send him an allowance of $144,then his

budget line is described by the equation

#28a#29 6V =36G.

#28b#29 6V +36G= 144.

#28c#29 6V,36G = 144.

#28d#29 6V = 144,G.

#28e#29 None of the other options are correct.

Topic,Budget Constraint Di#0Eculty,0

#25 Correct Responses,84 Discrimination Index,13

Correct Answer,C

2.5D In Problem 2.10,if in the same amount of time that it takes her to read 40 pages of eco-

nomics and 30 pages of sociology,Martha could read 10 pages of economics and 180 pages of sociol-

ogy,then which of these equations describes combinations of pages of economics,E; and sociology,

S; that she could read in the time it takes to read 40 pages of economics and 30 pages of sociology?

#28a#29 E + S =70

#28b#29 E=2+S=50

#28c#29 5E +S = 230

#28d#29 E + S = 190

#28e#29 All of the above.

CHAPTER 2 Budget Constraint 630

Topic,Budget Constraint Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,A

2.6D In Problem 2.11,ads in the boring business magazine are read by 300 lawyers and 1,000

M.B.A's,Ads in the consumer publication are read by 250 lawyers and 300 M.B.A.s,If Harry had

$4,550 to spend on advertising,if the price of ads in the boring business magazine were 700 and

the price of ads in the consumer magazine were 350,then the combinations of recent M.B.A.s and

lawyers with hot tubs whom he could reach with his advertising budget would be represented by

the integer values along a line segment that runs between the two points

#28a#29 #283;250;3;900#29 and #281;950;6;500#29.

#28b#29 #283;900;4;550#29 and #281;950;7;800#29.

#28c#29 #280;3;900#29 and #281;950;0#29.

#28d#29 #283;900;0#29 and #280;7;800#29.

#28e#29 #282;600;0#29 and #280;6;500#29.

Topic,Budget Constraint Di#0Eculty,2

#25 Correct Responses,68 Discrimination Index,75

Correct Answer,B

2.7D In the economy of Mungo,discussed in Problem 2.12,there is a third person called Ike,Ike

has a red income of 84 and a blue income of 20,#28Recall that blue ices are 1 bcu #28blue currency

unit#29 per unit of ambrosia and 1 bcu ppper unit of bubblegum,Red prices are 2 rcus #28red currency

units#29 per unit of ambrosia and 6 rcus per unit of bubblegum,You havetopaytwice for what you

buy,once in red currency,once in blue currency.#29 If Ike spends all of its blue income,but not all

of its red income,then it must be that

#28a#29 it consumes at least 11 units of bubblegum.

#28b#29 it consumes at least 9 units of ambrosia.

#28c#29 it consumes exactly twice as much bubblegum as ambrosia.

#28d#29 it consumes at least 21 units of bubblegum.

#28e#29 it consumes equal amounts of ambrosia and bubblegum.

Multiple Choice Budget Constraint

Topic,Budget Constraint Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,C

2.1E In Problem 2.1,if you have an income of $24 to spend,if commodity 1 costs $2 per unit,

and if commodity 2 costs $8 per unit,then the equation for your budget line can be written as

#28a#29 x

1

=2+x

2

=8 = 24.

#28b#29 #28x

1

+x

2

#29=#2810#29 = 24.

#28c#29 x

1

+4x

2

= 12.

#28d#29 3x

1

+9x

2

= 25.

#28e#29 10#28x

1

+x

2

#29 = 24.

Topic,Budget Constraint Di#0Eculty,1

#25 Correct Responses,86 Discrimination Index,33

Correct Answer,A

2.2E In Problem 2.3,if you could exactly a#0Bord either 3 units of x and 24 units of y; or 7 units

of x and 8 units of y; then if you spent all of your income on y; how many units of y could you buy?

#28a#29 36

#28b#29 20

#28c#29 52

#28d#29 10

#28e#29 None of the other options are correct.

Topic,Budget Constraint Di#0Eculty,0

#25 Correct Responses,100 Discrimination Index,0

Correct Answer,B

2.3E In Problem 2.4,Murphy used to consume 100 units of X and 50 units of Y when the price

of X was 2 and the price of Y was 4,If the price of X rose to 3 and the price of Y rose to 5,how

muchwould Murphy's income have to rise so that he could still a#0Bord his original bundle?

#28a#29 200

#28b#29 150

#28c#29 100

#28d#29 300

#28e#29 None of the other options are correct.

CHAPTER 2 Budget Constraint 632

Topic,Budget Constraint Di#0Eculty,0

#25 Correct Responses,88 Discrimination Index,38

Correct Answer,C

2.4E In Problem 2.7,Edmund must pay$6each for punk rock video cassettes,If Edmund is

paid $24 per sack for accepting garbage and if his relatives send him an allowance of $168,then his

budget line is described by the equation

#28a#29 6V =24G.

#28b#29 6V +24G= 168.

#28c#29 6V,24G = 168.

#28d#29 6V = 168,G.

#28e#29 None of the other options are correct.

Topic,Budget Constraint Di#0Eculty,0

#25 Correct Responses,84 Discrimination Index,13

Correct Answer,C

2.5E In Problem 2.10,if in the same amount of time that it takes her to read 40 pages of eco-

nomics and 30 pages of sociology,Martha could read 20 pages of economics and 110 pages of sociol-

ogy,then which of these equations describes combinations of pages of economics,E; and sociology,

S; that she could read in the time it takes to read 40 pages of economics and 30 pages of sociology?

#28a#29 E + S =70

#28b#29 E=2+S=50

#28c#29 4E +S = 190

#28d#29 E + S = 130

#28e#29 All of the above.

MULTIPLE CHOICE 633

Topic,Budget Constraint Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,A

2.6E In Problem 2.11,ads in the boring business magazine are read by 300 lawyers and 1,000

M.B.A's,Ads in the consumer publication are read by 250 lawyers and 300 M.B.A.s,If Harry had

$3,850 to spend on advertising,if the price of ads in the boring business magazine were 700 and

the price of ads in the consumer magazine were 350,then the combinations of recent M.B.A.s and

lawyers with hot tubs whom he could reach with his advertising budget would be represented by

the integer values along a line segment that runs between the two points

#28a#29 #282;750;3;300#29 and #281;650;5;500#29.

#28b#29 #283;300;3;850#29 and #281;650;6;600#29.

#28c#29 #280;3;300#29 and #281;650;0#29.

#28d#29 #283;300;0#29 and #280;6;600#29.

#28e#29 #282;200;0#29 and #280;5;500#29.

Topic,Budget Constraint Di#0Eculty,2

#25 Correct Responses,68 Discrimination Index,75

Correct Answer,B

2.7E In the economy of Mungo,discussed in Problem 2.12,there is a third person called Ike,Ike

has a red income of 58 and a blue income of 15,#28Recall that blue ices are 1 bcu #28blue currency

unit#29 per unit of ambrosia and 1 bcu ppper unit of bubblegum,Red prices are 2 rcus #28red currency

units#29 per unit of ambrosia and 6 rcus per unit of bubblegum,You havetopaytwice for what you

buy,once in red currency,once in blue currency.#29 If Ike spends all of its blue income,but not all

of its red income,then it must be that

#28a#29 it consumes at least 7 units of bubblegum.

#28b#29 it consumes at least 8 units of ambrosia.

#28c#29 it consumes exactly twice as much bubblegum as ambrosia.

#28d#29 it consumes at least 16 units of bubblegum.

#28e#29 it consumes equal amounts of ambrosia and bubblegum.

Chapter 3

Multiple Choice Preferences

Topic,Preferences Di#0Eculty,1

#25 Correct Responses,83 Discrimination Index,33

Correct Answer,C

3.1A In Problem 3.1,Charlie's indi#0Berence curves have the equation x

B

= constant=x

A; where

larger constants correspond to better indi#0Berence curves,Charlie strictly prefers the bundle #289;17#29

to the following bundle

#28a#29 #2817;9#29.

#28b#29 #2810;16#29.

#28c#29 #2811;11#29.

#28d#29 all three of these bundles.

#28e#29 none of these bundles.

Topic,Preferences Di#0Eculty,2

#25 Correct Responses,90 Discrimination Index,22

Correct Answer,C

3.2A In Problem 3.2,Ambrose has indi#0Berence curves with the equation x

2

= constant,4x

1=2

1;

where larger constants correspond to higher indi#0Berence curves,If good 1 is drawn on the horizon-

tal axis and good 2 on the vertical axis,what is the slope of Ambrose's indi#0Berence curve when his

consumption bundle is #281;13#29?

#28a#29,1=13

#28b#29,13=1

#28c#29,2

#28d#29,14

#28e#29,1

MULTIPLE CHOICE 635

Topic,Preferences Di#0Eculty,2

#25 Correct Responses,62 Discrimination Index,22

Correct Answer,A

3.3A In Problem 3.8,Nancy Lerner is taking a course from Professor Goodheart who will count

only her best midterm grade and from Professor Stern who will count only her worst midterm

grade,In one of her classes,Nancy has scores of 70 on her #0Crst midterm and 80 on her second

midterm,When the #0Crst midterm score is measured on the horizontal axis and her second midterm

score on the vertical,her indi#0Berence curve has a slope of zero at the point #2870;80#29,Therefore it

must be that

#28a#29 this class could be Professor Goodheart's,but couldn't be Professor Stern's.

#28b#29 this class could be Professor Stern's,but couldn't be Professor Goodheart's.

#28c#29 this class couldn't be either Goodheart's or Stern's.

#28d#29 this class could be either Goodheart's or Stern's.

#28e#29 there is not enough information to tell whose class it could or couldn't be

Topic,Preferences Di#0Eculty,2

#25 Correct Responses,79 Discrimination Index,0

Correct Answer,D

3.4A In Problem 3.9,if we graph Mary Granola's indi#0Berence curves with avocados on the hor-

izontal axis and grapefruits on the vertical axis,then whenever she has more grapefruits than

avocados,the slope of her indi#0Berence curveis,2,Whenever she has more avocados than grape-

fruits,the slope is,1=2,Mary would be indi#0Berentbetween a bundle with 24 avocados and 30

grapefruits and another bundle that has 34 avocados and

#28a#29 26 grapefruits.

#28b#29 28 grapefruits.

#28c#29 18 grapefruits.

#28d#29 22 grapefruits.

#28e#29 24 grapefruits.

CHAPTER 3 Preferences 636

Topic,Preferences Di#0Eculty,2

#25 Correct Responses,68 Discrimination Index,63

Correct Answer,B

3.5A In Problem 3.12,recall that Tommy Twit's mother measures the departure of any bundle

from her favorite bundle for Tommyby the sum of the absolute values of the di#0Berences,Her

favorite bundle for Tommyis#282;7#29,,that is,2 cookies and 7 glasses of milk,Tommy's mother's

indi#0Berence curve that passes through the point #28c;m#29=#284;5#29 also passes through

#28a#29 #286;3#29.

#28b#29 the points #282;3#29; #286;7#29; and #284;9#29.

#28c#29 #282;7#29.

#28d#29 the points #284;7#29; #282;5#29; and #282;9#29.

#28e#29 None of the other options are correct.

Topic,Preferences Di#0Eculty,0

#25 Correct Responses,52 Discrimination Index,38

Correct Answer,E

3.6A In Problem 3.1,Charlie's indi#0Berence curves have the equation x

B

= constant=x

A; where

larger constants correspond to better indi#0Berence curves,Charlie strictly prefers the bundle #288;15#29

to the following bundle:

#28a#29 #2815;8#29

#28b#29 #289;14#29

#28c#29 #2814;14#29

#28d#29 more than one of these options are correct.

#28e#29 none of the above are correct.

Multiple Choice Preferences

Topic,Preferences Di#0Eculty,1

#25 Correct Responses,83 Discrimination Index,33

Correct Answer,C

3.1B In Problem 3.1,Charlie's indi#0Berence curves have the equation x

B

= constant=x

A; where

larger constants correspond to better indi#0Berence curves,Charlie strictly prefers the bundle #289;19#29

to the following bundle

#28a#29 #2819;9#29.

#28b#29 #2810;18#29.

#28c#29 #2812;15#29.

#28d#29 all three of these bundles.

#28e#29 none of these bundles.

Topic,Preferences Di#0Eculty,2

#25 Correct Responses,90 Discrimination Index,22

Correct Answer,C

3.2B In Problem 3.2,Ambrose has indi#0Berence curves with the equation x

2

= constant,4x

1=2

1;

where larger constants correspond to higher indi#0Berence curves,If good 1 is drawn on the horizon-

tal axis and good 2 on the vertical axis,what is the slope of Ambrose's indi#0Berence curve when his

consumption bundle is #289;14#29?

#28a#29,9=14

#28b#29,14=9

#28c#29,0:67

#28d#29,17

#28e#29,3

CHAPTER 3 Preferences 638

Topic,Preferences Di#0Eculty,2

#25 Correct Responses,62 Discrimination Index,22

Correct Answer,A

3.3B In Problem 3.8,Nancy Lerner is taking a course from Professor Goodheart who will count

only her best midterm grade and from Professor Stern who will count only her worst midterm

grade,In one of her classes,Nancy has scores of 70 on her #0Crst midterm and 60 on her second

midterm,When the #0Crst midterm score is measured on the horizontal axis and her second midterm

score on the vertical,her indi#0Berence curve has a slope of zero at the point #2870;60#29,Therefore it

must be that

#28a#29 this class could be Professor Goodheart's,but couldn't be Professor Stern's.

#28b#29 this class could be Professor Stern's,but couldn't be Professor Goodheart's.

#28c#29 this class couldn't be either Goodheart's or Stern's.

#28d#29 this class could be either Goodheart's or Stern's.

#28e#29 there is not enough information to tell whose class it could or couldn't be

Topic,Preferences Di#0Eculty,2

#25 Correct Responses,79 Discrimination Index,0

Correct Answer,D

3.4B In Problem 3.9,if we graph Mary Granola's indi#0Berence curves with avocados on the hor-

izontal axis and grapefruits on the vertical axis,then whenever she has more grapefruits than

avocados,the slope of her indi#0Berence curveis,2,Whenever she has more avocados than grape-

fruits,the slope is,1=2,Mary would be indi#0Berentbetween a bundle with 24 avocados and 36

grapefruits and another bundle that has 32 avocados and

#28a#29 28 grapefruits.

#28b#29 32 grapefruits.

#28c#29 24 grapefruits.

#28d#29 26 grapefruits.

#28e#29 27 grapefruits.

MULTIPLE CHOICE 639

Topic,Preferences Di#0Eculty,2

#25 Correct Responses,68 Discrimination Index,63

Correct Answer,B

3.5B In Problem 3.12,recall that Tommy Twit's mother measures the departure of any bundle

from her favorite bundle for Tommyby the sum of the absolute values of the di#0Berences,Her

favorite bundle for Tommyis#282;7#29,,that is,2 cookies and 7 glasses of milk,Tommy's mother's

indi#0Berence curve that passes through the point #28c;m#29=#283;6#29 also passes through

#28a#29 #284;5#29.

#28b#29 the points #282;5#29; #284;7#29; and #283;8#29.

#28c#29 #282;7#29.

#28d#29 the points #283;7#29; #282;6#29; and #282;8#29.

#28e#29 None of the other options are correct.

Topic,Preferences Di#0Eculty,0

#25 Correct Responses,52 Discrimination Index,38

Correct Answer,E

3.6B In Problem 3.1,Charlie's indi#0Berence curves have the equation x

B

= constant=x

A; where

larger constants correspond to better indi#0Berence curves,Charlie strictly prefers the bundle #287;12#29

to the following bundle:

#28a#29 #2812;7#29

#28b#29 #288;11#29

#28c#29 #2813;8#29

#28d#29 more than one of these options are correct.

#28e#29 none of the above are correct.

Multiple Choice Preferences

Topic,Preferences Di#0Eculty,1

#25 Correct Responses,83 Discrimination Index,33

Correct Answer,C

3.1C In Problem 3.1,Charlie's indi#0Berence curves have the equation x

B

= constant=x

A; where

larger constants correspond to better indi#0Berence curves,Charlie strictly prefers the bundle #287;14#29

to the following bundle

#28a#29 #2814;7#29.

#28b#29 #288;13#29.

#28c#29 #2813;8#29.

#28d#29 all three of these bundles.

#28e#29 none of these bundles.

Topic,Preferences Di#0Eculty,2

#25 Correct Responses,90 Discrimination Index,22

Correct Answer,C

3.2C In Problem 3.2,Ambrose has indi#0Berence curves with the equation x

2

= constant,4x

1=2

1;

where larger constants correspond to higher indi#0Berence curves,If good 1 is drawn on the horizon-

tal axis and good 2 on the vertical axis,what is the slope of Ambrose's indi#0Berence curve when his

consumption bundle is #289;16#29?

#28a#29,9=16

#28b#29,16=9

#28c#29,0:67

#28d#29,19

#28e#29,3

MULTIPLE CHOICE 641

Topic,Preferences Di#0Eculty,2

#25 Correct Responses,62 Discrimination Index,22

Correct Answer,A

3.3C In Problem 3.8,Nancy Lerner is taking a course from Professor Goodheart who will count

only her best midterm grade and from Professor Stern who will count only her worst midterm

grade,In one of her classes,Nancy has scores of 30 on her #0Crst midterm and 60 on her second

midterm,When the #0Crst midterm score is measured on the horizontal axis and her second midterm

score on the vertical,her indi#0Berence curve has a slope of zero at the point #2830;60#29,Therefore it

must be that

#28a#29 this class could be Professor Goodheart's,but couldn't be Professor Stern's.

#28b#29 this class could be Professor Stern's,but couldn't be Professor Goodheart's.

#28c#29 this class couldn't be either Goodheart's or Stern's.

#28d#29 this class could be either Goodheart's or Stern's.

#28e#29 there is not enough information to tell whose class it could or couldn't be

Topic,Preferences Di#0Eculty,2

#25 Correct Responses,79 Discrimination Index,0

Correct Answer,D

3.4C In Problem 3.9,if we graph Mary Granola's indi#0Berence curves with avocados on the hor-

izontal axis and grapefruits on the vertical axis,then whenever she has more grapefruits than

avocados,the slope of her indi#0Berence curveis,2,Whenever she has more avocados than grape-

fruits,the slope is,1=2,Mary would be indi#0Berentbetween a bundle with 15 avocados and 30

grapefruits and another bundle that has 24 avocados and

#28a#29 20 grapefruits.

#28b#29 25 grapefruits.

#28c#29 16 grapefruits.

#28d#29 18 grapefruits.

#28e#29 19 grapefruits.

CHAPTER 3 Preferences 642

Topic,Preferences Di#0Eculty,2

#25 Correct Responses,68 Discrimination Index,63

Correct Answer,B

3.5C In Problem 3.12,recall that Tommy Twit's mother measures the departure of any bundle

from her favorite bundle for Tommyby the sum of the absolute values of the di#0Berences,Her

favorite bundle for Tommyis#282;7#29,,that is,2 cookies and 7 glasses of milk,Tommy's mother's

indi#0Berence curve that passes through the point #28c;m#29=#285;4#29 also passes through

#28a#29 #288;1#29.

#28b#29 the points #282;1#29; #288;7#29; and #285;10#29.

#28c#29 #282;7#29.

#28d#29 the points #285;7#29; #282;4#29; and #282;10#29.

#28e#29 None of the other options are correct.

Topic,Preferences Di#0Eculty,0

#25 Correct Responses,52 Discrimination Index,38

Correct Answer,E

3.6C In Problem 3.1,Charlie's indi#0Berence curves have the equation x

B

= constant=x

A; where

larger constants correspond to better indi#0Berence curves,Charlie strictly prefers the bundle #289;16#29

to the following bundle:

#28a#29 #2816;9#29

#28b#29 #2810;15#29

#28c#29 #2815;13#29

#28d#29 more than one of these options are correct.

#28e#29 none of the above are correct.

Multiple Choice Preferences

Topic,Preferences Di#0Eculty,1

#25 Correct Responses,83 Discrimination Index,33

Correct Answer,C

3.1D In Problem 3.1,Charlie's indi#0Berence curves have the equation x

B

= constant=x

A; where

larger constants correspond to better indi#0Berence curves,Charlie strictly prefers the bundle #287;12#29

to the following bundle

#28a#29 #2812;7#29.

#28b#29 #288;11#29.

#28c#29 #2813;8#29.

#28d#29 all three of these bundles.

#28e#29 none of these bundles.

Topic,Preferences Di#0Eculty,2

#25 Correct Responses,90 Discrimination Index,22

Correct Answer,C

3.2D In Problem 3.2,Ambrose has indi#0Berence curves with the equation x

2

= constant,4x

1=2

1;

where larger constants correspond to higher indi#0Berence curves,If good 1 is drawn on the horizon-

tal axis and good 2 on the vertical axis,what is the slope of Ambrose's indi#0Berence curve when his

consumption bundle is #2825;12#29?

#28a#29,25=12

#28b#29,12=25

#28c#29,0:40

#28d#29,17

#28e#29,5

CHAPTER 3 Preferences 644

Topic,Preferences Di#0Eculty,2

#25 Correct Responses,62 Discrimination Index,22

Correct Answer,A

3.3D In Problem 3.8,Nancy Lerner is taking a course from Professor Goodheart who will count

only her best midterm grade and from Professor Stern who will count only her worst midterm

grade,In one of her classes,Nancy has scores of 20 on her #0Crst midterm and 40 on her second

midterm,When the #0Crst midterm score is measured on the horizontal axis and her second midterm

score on the vertical,her indi#0Berence curve has a slope of zero at the point #2820;40#29,Therefore it

must be that

#28a#29 this class could be Professor Goodheart's,but couldn't be Professor Stern's.

#28b#29 this class could be Professor Stern's,but couldn't be Professor Goodheart's.

#28c#29 this class couldn't be either Goodheart's or Stern's.

#28d#29 this class could be either Goodheart's or Stern's.

#28e#29 there is not enough information to tell whose class it could or couldn't be

Topic,Preferences Di#0Eculty,2

#25 Correct Responses,79 Discrimination Index,0

Correct Answer,D

3.4D In Problem 3.9,if we graph Mary Granola's indi#0Berence curves with avocados on the hor-

izontal axis and grapefruits on the vertical axis,then whenever she has more grapefruits than

avocados,the slope of her indi#0Berence curveis,2,Whenever she has more avocados than grape-

fruits,the slope is,1=2,Mary would be indi#0Berentbetween a bundle with 26 avocados and 38

grapefruits and another bundle that has 34 avocados and

#28a#29 30 grapefruits.

#28b#29 34 grapefruits.

#28c#29 26 grapefruits.

#28d#29 28 grapefruits.

#28e#29 29 grapefruits.

MULTIPLE CHOICE 645

Topic,Preferences Di#0Eculty,2

#25 Correct Responses,68 Discrimination Index,63

Correct Answer,B

3.5D In Problem 3.12,recall that Tommy Twit's mother measures the departure of any bundle

from her favorite bundle for Tommyby the sum of the absolute values of the di#0Berences,Her

favorite bundle for Tommyis#282;7#29,,that is,2 cookies and 7 glasses of milk,Tommy's mother's

indi#0Berence curve that passes through the point #28c;m#29=#285;4#29 also passes through

#28a#29 #288;1#29.

#28b#29 the points #282;1#29; #288;7#29; and #285;10#29.

#28c#29 #282;7#29.

#28d#29 the points #285;7#29; #282;4#29; and #282;10#29.

#28e#29 None of the other options are correct.

Topic,Preferences Di#0Eculty,0

#25 Correct Responses,52 Discrimination Index,38

Correct Answer,E

3.6D In Problem 3.1,Charlie's indi#0Berence curves have the equation x

B

= constant=x

A; where

larger constants correspond to better indi#0Berence curves,Charlie strictly prefers the bundle #287;15#29

to the following bundle:

#28a#29 #2815;7#29

#28b#29 #288;14#29

#28c#29 #2812;12#29

#28d#29 more than one of these options are correct.

#28e#29 none of the above are correct.

Multiple Choice Preferences

Topic,Preferences Di#0Eculty,1

#25 Correct Responses,83 Discrimination Index,33

Correct Answer,C

3.1E In Problem 3.1,Charlie's indi#0Berence curves have the equation x

B

= constant=x

A; where

larger constants correspond to better indi#0Berence curves,Charlie strictly prefers the bundle #2810;16#29

to the following bundle

#28a#29 #2816;10#29.

#28b#29 #2811;15#29.

#28c#29 #2814;13#29.

#28d#29 all three of these bundles.

#28e#29 none of these bundles.

Topic,Preferences Di#0Eculty,2

#25 Correct Responses,90 Discrimination Index,22

Correct Answer,C

3.2E In Problem 3.2,Ambrose has indi#0Berence curves with the equation x

2

= constant,4x

1=2

1;

where larger constants correspond to higher indi#0Berence curves,If good 1 is drawn on the horizon-

tal axis and good 2 on the vertical axis,what is the slope of Ambrose's indi#0Berence curve when his

consumption bundle is #2849;11#29?

#28a#29,49=11

#28b#29,11=49

#28c#29,0:29

#28d#29,18

#28e#29,7

MULTIPLE CHOICE 647

Topic,Preferences Di#0Eculty,2

#25 Correct Responses,62 Discrimination Index,22

Correct Answer,A

3.3E In Problem 3.8,Nancy Lerner is taking a course from Professor Goodheart who will count

only her best midterm grade and from Professor Stern who will count only her worst midterm

grade,In one of her classes,Nancy has scores of 70 on her #0Crst midterm and 40 on her second

midterm,When the #0Crst midterm score is measured on the horizontal axis and her second midterm

score on the vertical,her indi#0Berence curve has a slope of zero at the point #2870;40#29,Therefore it

must be that

#28a#29 this class could be Professor Goodheart's,but couldn't be Professor Stern's.

#28b#29 this class could be Professor Stern's,but couldn't be Professor Goodheart's.

#28c#29 this class couldn't be either Goodheart's or Stern's.

#28d#29 this class could be either Goodheart's or Stern's.

#28e#29 there is not enough information to tell whose class it could or couldn't be

Topic,Preferences Di#0Eculty,2

#25 Correct Responses,79 Discrimination Index,0

Correct Answer,D

3.4E In Problem 3.9,if we graph Mary Granola's indi#0Berence curves with avocados on the hor-

izontal axis and grapefruits on the vertical axis,then whenever she has more grapefruits than

avocados,the slope of her indi#0Berence curveis,2,Whenever she has more avocados than grape-

fruits,the slope is,1=2,Mary would be indi#0Berentbetween a bundle with 9 avocados and 15

grapefruits and another bundle that has 15 avocados and

#28a#29 11 grapefruits.

#28b#29 13 grapefruits.

#28c#29 7 grapefruits.

#28d#29 9 grapefruits.

#28e#29 10 grapefruits.

CHAPTER 3 Preferences 648

Topic,Preferences Di#0Eculty,2

#25 Correct Responses,68 Discrimination Index,63

Correct Answer,B

3.5E In Problem 3.12,recall that Tommy Twit's mother measures the departure of any bundle

from her favorite bundle for Tommyby the sum of the absolute values of the di#0Berences,Her

favorite bundle for Tommyis#282;7#29,,that is,2 cookies and 7 glasses of milk,Tommy's mother's

indi#0Berence curve that passes through the point #28c;m#29=#284;5#29 also passes through

#28a#29 #286;3#29.

#28b#29 the points #282;3#29; #286;7#29; and #284;9#29.

#28c#29 #282;7#29.

#28d#29 the points #284;7#29; #282;5#29; and #282;9#29.

#28e#29 None of the other options are correct.

Topic,Preferences Di#0Eculty,0

#25 Correct Responses,52 Discrimination Index,38

Correct Answer,E

3.6E In Problem 3.1,Charlie's indi#0Berence curves have the equation x

B

= constant=x

A; where

larger constants correspond to better indi#0Berence curves,Charlie strictly prefers the bundle #286;14#29

to the following bundle:

#28a#29 #2814;6#29

#28b#29 #287;13#29

#28c#29 #2810;13#29

#28d#29 more than one of these options are correct.

#28e#29 none of the above are correct.

Chapter 4

Multiple Choice Utility

Topic,Utility Di#0Eculty,1

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,E

4.1A In Problem 4.1,Charlie has the utility function U#28x

A;x

B

#29=x

A

x

B

,His indi#0Berence curve

passing through 16 apples and 12 bananas will also pass through the point where he consumes 2

apples and

#28a#29 16 bananas.

#28b#29 32 bananas.

#28c#29 98 bananas.

#28d#29 104 bananas.

#28e#29 96 bananas.

Topic,Utility Di#0Eculty,0

#25 Correct Responses,86 Discrimination Index,33

Correct Answer,B

4.2A In Problem 4.1,Charlie's utility function is U#28A;B#29=AB where A and B are the numbers

of apples and bananas,respectively,that he consumes,When Charlie is consuming 30 apples and

120 bananas,then if we put apples on the horizontal axis and bananas on the vertical axis,the

slope of his indi#0Berence curve at his current consumption is

#28a#29,31.

#28b#29,4.

#28c#29,8.

#28d#29,1=4.

#28e#29,1=8.

CHAPTER 4 Utility 650

Topic,Utility Di#0Eculty,2

#25 Correct Responses,76 Discrimination Index,44

Correct Answer,C

4.3A In Problem 4.2,Ambrose has the utility function U#28x

1;x

2

#29=4x

1=2

1

+x

2

.IfAmbrose were

initially consuming 4 units of nuts #28good 1#29 and 20 units of berries #28good 2#29; then what is the largest

number of berries that he would be willing to give up in return for an additional 5 units of nuts.

#28a#29 3

#28b#29 23

#28c#29 4

#28d#29 2

#28e#29 1

Topic,Utility Di#0Eculty,2

#25 Correct Responses,72 Discrimination Index,67

Correct Answer,C

4.4A Joe Bob,from Problem 4.12 has a cousin Wilfred who consume goods 1 and 2,Wilfred

thinks that 2 units of good 1 is always a perfect substitute for 3 units of good 2,Which of the

following utility functions is the only one that would NOT represent Wilfred's preferences?

#28a#29 U#28x

1;x

2

#29=3x

1

+2x

2

+1000.

#28b#29 U#28x

1;x

2

#29=9x

2

1

+

True-False Budget Constraint

Topic,Budget Constraint Di#0Eculty,1

#25 Correct Responses,90 Discrimination Index,10

Correct Answer,False

2.1 If there are two goods with positive prices and the price of one good is reduced,while income

and other prices remain constant,then the size of the budget set is reduced.

Topic,Budget Constraint Di#0Eculty,1

#25 Correct Responses,76 Discrimination Index,24

Correct Answer,False

2.2 If good 1 is measured on the horizontal axis and good 2 is measured on the vertical axis,and

if the price of good 1 is p

1

and the price of good 2 is p

2; then the slope of the budget line is,p

2

=p

1

.

Topic,Budget Constraint Di#0Eculty,1

#25 Correct Responses,91 Discrimination Index,13

Correct Answer,False

2.3 If all prices are doubled and money income is left the same,the budget set does not change

because relative prices don't change.

Topic,Budget Constraint Di#0Eculty,1

#25 Correct Responses,93 Discrimination Index,21

Correct Answer,True

2.4 If there are two goods,and if one good has a negative price and the other has a positive

price,then the slope of the budget line will be positive.

Topic,Budget Constraint Di#0Eculty,1

#25 Correct Responses,94 Discrimination Index,12

Correct Answer,False

2.5 If all prices double and income triples,then the budget line will become steeper.

CHAPTER 2 Budget Constraint 2

Topic,Budget Constraint Di#0Eculty,1

#25 Correct Responses,95 Discrimination Index,13

Correct Answer,False

2.6 If Good 1 is on the horizontal axis and Good 2 is on the vertical axis,then an increase in the

price of Good 1 will not change the horizontal intercept of the budget line.

Topic,Budget Constraint Di#0Eculty,1

#25 Correct Responses,98 Discrimination Index,1

Correct Answer,False

2.7 If there are two goods and the prices of both goods rise,then the budget line must become

steeper.

Topic,Budget Constraint Di#0Eculty,1

#25 Correct Responses,97 Discrimination Index,0

Correct Answer,True

2.8 There are two goods,You knowhowmuch of good 1 a consumer can a#0Bord if she spends all

of her income on good 1,If you know the ratio of the prices of the two goods,then you could draw

the consumer's budget line without any more information.

Topic,Budget Constraint Di#0Eculty,1

#25 Correct Responses,91 Discrimination Index,0

Correct Answer,True

2.9 A consumer prefers more to less of every good,Her income rises,and the price of one of the

goods falls while other prices stay constant,These changes must have made her better o#0B.

Topic,Budget Constraint Di#0Eculty,2

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,True

2.10 There are 3 goods,The price of good 1 is,1; the price of good 2 is +1; and the price

of good 3 is +2.Itisphysically possible for a consumer to consume any commodity bundle with

non-negative amounts of each good,A consumer who has income of 10 could a#0Bord to consume

some commodity bundles that include 5 units of good 1 and 6 units of good 2.

Topic,Budget Constraint Di#0Eculty,1

#25 Correct Responses,80 Discrimination Index,49

Correct Answer,False

2.11 A decrease in income pivots the budget line around the bundle initially consumed.

Multiple Choice Budget Constraint

Topic,Budget Constraint Di#0Eculty,1

#25 Correct Responses,97 Discrimination Index,6

Correct Answer,A

2.1

If she spends all of her income on lemons and tangerines,Isabella can just a#0Bord 30 lemons and

8 tangerines per day,She could also use her entire budget to buy 6 lemons and 14 tangerines per

day,The price of lemons is 6 guineas each,Howmuch is Isabella's income per day?

#28a#29 372 guineas

#28b#29 377 guineas

#28c#29 371 guineas

#28d#29 363 guineas

#28e#29 None of the above.

Topic,Budget Constraint Di#0Eculty,1

#25 Correct Responses,97 Discrimination Index,6

Correct Answer,A

2.2

If she spends all of her income on uglifruit and breadfruits,Maria can just a#0Bord 11 uglifruit

and 4 breadfruits per day,She could also use her entire budget to buy 3 uglifruit and 8 breadfruits

per day,The price of uglifruit is 6 pesos each,Howmuch is Maria's income per day?

#28a#29 115 pesos

#28b#29 119 pesos

#28c#29 114 pesos

#28d#29 105 pesos

#28e#29 None of the above.

CHAPTER 2 Budget Constraint 4

Topic,Budget Constraint Di#0Eculty,2

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,A

2.3 Matt lives on popcorn and seafood salads,The price of popcorn is 1 dollar per bag and the

price of seafood salads is 2 dollars each,Matt allows himself to spend no more than 13 dollars a

day on food,He also restricts his consumption to 5,500 calories per day,There are 1,000 calories

in a bag of popcorn and 500 calories in a seafood salad,If he spends his entire money budget each

day and consumes no more calories than his calorie limit:

#28a#29 he can consume up to 3 bags of popcorn per day,but no more.

#28b#29 he can consume up to 1 bags of popcorn per day,butno more.

#28c#29 he can consume up to 5 seafood salads per day,but no more.

#28d#29 he can consume up to 4 bags of popcorn per day,but no more.

#28e#29 None of the above.

Topic,Budget Constraint Di#0Eculty,2

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,A

2.4 Quincy lives on ding dongs and seafood salads,The price of ding dongs is 1 dollar per bag

and the price of seafood salads is 4 dollars each,Quincy allows himself to spend no more than 23

dollars a day on food,He also restricts his consumption to 3,300 calories per day,There are 600

calories in a bag of ding dongs and 300 calories in a seafood salad,If he spends his entire money

budget eachday and consumes no more calories than his calorie limit:

#28a#29 he can consume up to 3 bags of ding dongs per day,but no more.

#28b#29 he can consume up to 1 bags of ding dongs per day,butno more.

#28c#29 he can consume up to 5 seafood salads per day,but no more.

#28d#29 he can consume up to 4 bags of ding dongs per day,but no more.

#28e#29 None of the above.

MULTIPLE CHOICE 5

Topic,Budget Constraint Di#0Eculty,1

#25 Correct Responses,88 Discrimination Index,20

Correct Answer,A

2.5 Teresa spends her entire budget and consumes 6 units of x and 20 units of y,The price of x

is twice the price of y,Her income doubles and the price of y doubles,but the price of x stays the

same,If she continues to buy 20 units of y; what is the largest number of units of x that she can

a#0Bord?

#28a#29 12

#28b#29 6

#28c#29 14

#28d#29 16

#28e#29 There is not enough information to say.

Topic,Budget Constraint Di#0Eculty,1

#25 Correct Responses,88 Discrimination Index,20

Correct Answer,A

2.6 Linda spends her entire budget and consumes 15 units of x and 19 units of y,The price of x

is twice the price of y,Her income doubles and the price of y doubles,but the price of x stays the

same,If she continues to buy 19 units of y; what is the largest number of units of x that she can

a#0Bord?

#28a#29 30

#28b#29 15

#28c#29 32

#28d#29 34

#28e#29 There is not enough information to say.

Topic,Budget Constraint Di#0Eculty,1

#25 Correct Responses,50 Discrimination Index,50

Correct Answer,C

2.7 In year 1,the price of good x was 1,the price of good y was 1,and income was 30,In year

2,the price of x was 6,the price of good y was 5,and income was 30,On a graph with x on the

horizontal axis and y on the vertical,the new budget line is:

#28a#29 #0Datter than the old one and lies below it.

#28b#29 #0Datter than the old one and lies above it.

#28c#29 steeper than the old one and lies below it.

#28d#29 steeper than the old one and lies above it.

#28e#29 none of the above.

CHAPTER 2 Budget Constraint 6

Topic,Budget Constraint Di#0Eculty,1

#25 Correct Responses,50 Discrimination Index,50

Correct Answer,C

2.8 In year 1,the price of good x was 4,the price of good y was 2,and income was 60,In year

2,the price of x was 17,the price of good y was 8,and income was 60,On a graph with x on the

horizontal axis and y on the vertical,the new budget line is:

#28a#29 #0Datter than the old one and lies below it.

#28b#29 #0Datter than the old one and lies above it.

#28c#29 steeper than the old one and lies below it.

#28d#29 steeper than the old one and lies above it.

#28e#29 none of the above.

Topic,Budget Constraint Di#0Eculty,1

#25 Correct Responses,35 Discrimination Index,8

Correct Answer,D

2.9

If she spends her entire budget,Vanessa can a#0Bord 47 apricots and 10 cherries,She can also just

a#0Bord 20 apricots and 19 cherries,The price of apricots is 18 cents,What is the price of cherries

in cents?

#28a#29 64

#28b#29 3

#28c#29 21

#28d#29 54

#28e#29 None of the above.

MULTIPLE CHOICE 7

Topic,Budget Constraint Di#0Eculty,1

#25 Correct Responses,35 Discrimination Index,8

Correct Answer,D

2.10

If she spends her entire budget,Heidi can a#0Bord 39 peaches and 12 pears,She can also just a#0Bord

24 peaches and 17 pears,The price of peaches is 9 cents,What is the price of pears in cents?

#28a#29 37

#28b#29 3

#28c#29 12

#28d#29 27

#28e#29 None of the above.

Topic,Budget Constraint Di#0Eculty,1

#25 Correct Responses,100 Discrimination Index,0

Correct Answer,B

2.11 Heidi thrives on two goods,bananas and apples,The cost of bananas is 30 marks each and

the cost of apples is 15 marks each,If her income is 210 marks,how many bananas can she buy if

she spends all of her income on bananas?

#28a#29 5

#28b#29 7

#28c#29 14

#28d#29 10

#28e#29 None of the above

Topic,Budget Constraint Di#0Eculty,1

#25 Correct Responses,100 Discrimination Index,0

Correct Answer,B

2.12 Teresa thrives on two goods,mangos and melons,The cost of mangos is 30 yen each and

the cost of melons is 15 yen each,If her income is 180 yen,how many mangos can she buy if she

spends all of her income on mangos?

#28a#29 4

#28b#29 6

#28c#29 12

#28d#29 9

#28e#29 None of the above

CHAPTER 2 Budget Constraint 8

Topic,Budget Constraint Di#0Eculty,1

#25 Correct Responses,76 Discrimination Index,34

Correct Answer,B

2.13 Yoram spends his entire income on 11 sacks of acorns and 5 crates of butternuts,The price

of acorns is 4 dollars per sack and his income is 94 dollars,He can just a#0Bord a commodity bundle

with A sacks of acorns and B crates of butternuts which satis#0Ces the budget equation:

#28a#29 4A+12B= 94.

#28b#29 8A+20B= 188.

#28c#29 6A+10B= 94.

#28d#29 4A+14B= 96.

#28e#29 None of the above.

Topic,Budget Constraint Di#0Eculty,1

#25 Correct Responses,76 Discrimination Index,34

Correct Answer,B

2.14 Eduardo spends his entire income on 12 sacks of acorns and 2 crates of butternuts,The

price of acorns is 2 dollars per sack and his income is 34 dollars,He can just a#0Bord a commodity

bundle with A sacks of acorns and B crates of butternuts which satis#0Ces the budget equation:

#28a#29 2A+7B= 34.

#28b#29 4A+10B= 68.

#28c#29 4A+5B= 34.

#28d#29 2A+9B= 36.

#28e#29 None of the above.

Topic,Budget Constraint Di#0Eculty,1

#25 Correct Responses,99 Discrimination Index,5

Correct Answer,C

2.15 Harry thrives on two goods,paperbacknovels and bananas,The cost of paperbacknovels

is 4 dollars each and the cost of bananas is 3 dollars per bunch.If Harry spent all of his income on

bananas,he could a#0Bord 12 bunches of bananas per week,How many paperbacknovels could he

buy if he spent all of his income on paperbacknovels?

#28a#29 36

#28b#29 48

#28c#29 9

#28d#29 16

#28e#29 None of the above.

MULTIPLE CHOICE 9

Topic,Budget Constraint Di#0Eculty,1

#25 Correct Responses,92 Discrimination Index,25

Correct Answer,E

2.16 Suppose that the prices of good x and good y both double,and income triples,On a graph

where the budget line is drawn with x on the horizontal axis and y on the vertical axis:

#28a#29 the budget line becomes steeper and shifts inward.

#28b#29 the budget line becomes #0Datter and shifts outward.

#28c#29 the budget line becomes #0Datter and shifts inward.

#28d#29 the new budget line is parallel to the old budget line and lies below it.

#28e#29 None of the above.

Topic,Budget Constraint Di#0Eculty,1

#25 Correct Responses,96 Discrimination Index,18

Correct Answer,D

2.17 Suppose that the price of good x triples and the price of good y doubles while income

remains constant,On a graph where the budget line is drawn with x on the horizontal axis and y

on the vertical axis,the new budget line:

#28a#29 is #0Datter than the old one and lies below it.

#28b#29 is #0Datter than the old one and lies above it.

#28c#29 crosses the old budget line.

#28d#29 is steeper than the old one and lies below it.

#28e#29 is steeper than the old one and lies above it.

Topic,Budget Constraint Di#0Eculty,3

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,C

2.18 While traveling abroad,Tammyspent all of the money in her purse to buy 5 plates of

spaghetti and 6 oysters,Spaghetti costs 8 units of the local currency per plate and she had 82 units

of currency in her purse,If s denotes the number of plates of spaghetti and o denotes the number

of oysters purchased,the set of commodity bundles that she could just a#0Bord with the money in

her purse is described by the equation:

#28a#29 82+6o= 82.

#28b#29 6s +8o= 82.

#28c#29 8s+7o= 82.

#28d#29 5s +6o= 82.

#28e#29 There is not enough information to determine the answer.

CHAPTER 2 Budget Constraint 10

Topic,Budget Constraint Di#0Eculty,2

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,B

2.19 Billy Bob wants to gain some weight so that he can play football,Billy eats only milkshakes

and spinach,Milkshakes cost him $1 each and spinach costs $2 per serving,A milkshake has 850

calories and a serving of spinach has 200 calories,Billy Bob never spends more than $20 a dayon

food and he always consumes at least 8000 calories per day,Which of the following is necessarily

true?

#28a#29 Billy Bob consumes at least 9 milkshakes a day.

#28b#29 Billy Bob never consumes more than 6 servings of spinachaday.

#28c#29 Billy Bob never consumes positive amounts of both goods.

#28d#29 Billy Bob consumes only milkshakes.

#28e#29 None of the above.

Topic,Budget Constraint Di#0Eculty,2

#25 Correct Responses,81 Discrimination Index,21

Correct Answer,D

2.20 Lars consumes only potatoes and herring,When the price of potatoes was 9 crowns per

sack and the price of herring was 5 crowns per crock,he spent his entire income to buy 5 sacks of

potatoes and 10 crocks of herring per month,Now the government subsidizes potatoes,Market

prices haven't changed,but consumers get a subsidy of 5 crowns for every sack of potatoes con-

sumed,Topay for this subsidy,the governmentintroduced an income tax,Lars pays an income

tax of 20 crowns per month,If s is the number of sacks of potatoes and c is the number of crocks

of herring,what is Lars's NEW budget equation?

#28a#29 9s+5c= 100.

#28b#29 14s+5c= 95.

#28c#29 4s+5c= 95.

#28d#29 4s +5c= 75.

#28e#29 14s+5c= 120.

MULTIPLE CHOICE 11

Topic,Budget Constraint Di#0Eculty,1

#25 Correct Responses,95 Discrimination Index,17

Correct Answer,C

2.21 If you spentyour entire income,you could a#0Bord either 4 units of x and 8 units of y or 8

units ofxand 4 units of y.Ifyou spentyour entire income on x;how many units ofx could you buy?

#28a#29 20

#28b#29 17

#28c#29 12

#28d#29 There is not enough information to determine the amountofx.

#28e#29 None of the above.

Topic,Budget Constraint Di#0Eculty,1

#25 Correct Responses,95 Discrimination Index,17

Correct Answer,C

2.22 If you spentyour entire income,you could a#0Bord either 5 units of x and 15 units of y or 15

units ofxand 5 units of y.Ifyou spentyour entire income on x;how many units ofx could you buy?

#28a#29 35

#28b#29 24

#28c#29 20

#28d#29 There is not enough information to determine the amountofx.

#28e#29 None of the above.

Topic,Budget Constraint Di#0Eculty,1

#25 Correct Responses,95 Discrimination Index,10

Correct Answer,C

2.23 Bella's budget line for x and y depends on all of the following except:

#28a#29 the amount of money she has to spend on x and y.

#28b#29 the price of x.

#28c#29 her preferences between x and y.

#28d#29 the price of y.

#28e#29 none of the above.

CHAPTER 2 Budget Constraint 12

Topic,Budget Constraint Di#0Eculty,1

#25 Correct Responses,94 Discrimination Index,26

Correct Answer,D

2.24 Your budget constraint for the two goods A and B is 12A+4B=Iwhere I is your income.

You are currently consuming more than 45 units of B,In order to get 5 more units of A,how many

units of B would you have to give up?

#28a#29 0.33

#28b#29 0.07

#28c#29 3

#28d#29 15

#28e#29 None of the above.

Topic,Budget Constraint Di#0Eculty,1

#25 Correct Responses,94 Discrimination Index,26

Correct Answer,D

2.25 Your budget constraint for the two goods A and B is 6A +3B=Iwhere I is your income.

You are currently consuming more than 12 units of B,In order to get 2 more units of A,how many

units of B would you have to give up?

#28a#29 0.50

#28b#29 0.25

#28c#29 2

#28d#29 4

#28e#29 None of the above.

MULTIPLE CHOICE 13

Topic,Budget Constraint Di#0Eculty,2

#25 Correct Responses,70 Discrimination Index,32

Correct Answer,A

2.26 Young Alasdair loves lollipops and hates oatmeal,To induce him to eat enough oatmeal

and to restrain him from eating too many lollipops,his mum pays him 10 pence for every quart

of oatmeal that he eats,The only way that he can get lollipops is to buy them at the sweet shop,

where lollipops cost 5 pence each,Besides what he earns from eating oatmeal,Alasdair gets an

allowance of 10 pence per week,If Alasdair consumes only oatmeal and lollipops and if his con-

sumption bundles are graphed with quarts of oatmeal on the horizontal axis and lollipops on the

vertical axis,then Alasdair's budget line:

#28a#29 has a slope of 2.

#28b#29 has a slope of less than,2.

#28c#29 has a slope of,2.

#28d#29 has a slope of 1=2.

#28e#29 has a slope greater than 2.

Topic,Budget Constraint Di#0Eculty,2

#25 Correct Responses,41 Discrimination Index,30

Correct Answer,C

2.27 The Chuzzlewits have an income of $m per week,Let x be food and let y be all other goods.

Let p

x

be the price of food and p

y

be the price of other goods,They can use food stamps to buy

food at a price of p

x

#281,s#29 for up to x* units of food per week,If they buy more food than x*,they

havetopay the full price,p

x

for additional units,Their weekly income is greater than p

x

#281,s#29x#03.

The maximum amount of food that they can buy per week is:

#28a#29 x#03+#28m=p

x

#29

#28b#29 #28m + x#03#29=p

x

#28c#29 #28m=p

x

#29+sx#03

#28d#29 m=#281,s#29p

x

#28e#29 #28m+ p

x

#29=#281,s#29p

x

CHAPTER 2 Budget Constraint 14

Topic,Budget Constraint Di#0Eculty,1

#25 Correct Responses,100 Discrimination Index,0

Correct Answer,C

2.28 Edmund must pay$6each for punk rock video casettes,V,If Edmund is paid $24 per sack

for accepting garbage,G; and if his relatives send him an allowance of $192,then his budget line is

described by the equation:

#28a#29 6V =24G.

#28b#29 6V +24G= 192.

#28c#29 6V,24G = 192.

#28d#29 6V = 192,G.

#28e#29 None of the above.

Topic,Budget Constraint Di#0Eculty,1

#25 Correct Responses,100 Discrimination Index,0

Correct Answer,C

2.29 Edmund must pay$6each for punk rock video casettes,V,If Edmund is paid $24 per sack

for accepting garbage,G; and if his relatives send him an allowance of $168,then his budget line is

described by the equation:

#28a#29 6V =24G.

#28b#29 6V +24G= 168.

#28c#29 6V,24G = 168.

#28d#29 6V = 168,G.

#28e#29 None of the above.

Topic,Budget Constraint Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,C

2.30 If you have an income of $40 to spend,if commodity 1 costs $4 per unit,and commodity2

costs $20 per unit,then the equation for your budget line can be written as:

#28a#29 x

1

=4+x

2

=20 = 40.

#28b#29 #28x

1

+x

2

#29=#2824#29 = 40.

#28c#29 x

1

+5x

2

= 10.

#28d#29 5x

1

+21x

2

= 41.

#28e#29 24#28x

1

+x

2

#29 = 40.

MULTIPLE CHOICE 15

Topic,Budget Constraint Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,C

2.31 If you have an income of $36 to spend,if commodity 1 costs $4 per unit,and commodity2

costs $12 per unit,then the equation for your budget line can be written as:

#28a#29 x

1

=4+x

2

=12 = 36.

#28b#29 #28x

1

+x

2

#29=#2816#29 = 36.

#28c#29 x

1

+3x

2

=9.

#28d#29 5x

1

+13x

2

= 37.

#28e#29 16#28x

1

+x

2

#29 = 36.

Topic,Budget Constraint Di#0Eculty,1

#25 Correct Responses,85 Discrimination Index,20

Correct Answer,A

2.32 If you could exactly a#0Bord either 5 units of x and 17 units of y; or 8 units of x and 5 units

of y; then if you spent all of your income on y; how many units of y could you buy?

#28a#29 37

#28b#29 25

#28c#29 49

#28d#29 13

#28e#29 None of the above.

Topic,Budget Constraint Di#0Eculty,1

#25 Correct Responses,85 Discrimination Index,20

Correct Answer,A

2.33 If you could exactly a#0Bord either 6 units of x and 17 units of y; or 9 units of x and 8 units

of y; then if you spent all of your income on y; how many units of y could you buy?

#28a#29 35

#28b#29 26

#28c#29 44

#28d#29 15

#28e#29 None of the above.

CHAPTER 2 Budget Constraint 16

Topic,Budget Constraint Di#0Eculty,0

#25 Correct Responses,99 Discrimination Index,4

Correct Answer,B

2.34 Murphy used to consume 100 units of X and 50 units of Y when the price of X was 2 and

the price of Y was 4,If the price of X rose to 5 and the price of Y rose to 7,howmuchwould

Murphy's income have to rise so that he could still a#0Bord his original bundle?

#28a#29 600

#28b#29 450

#28c#29 300

#28d#29 900

#28e#29 None of the above.

Topic,Budget Constraint Di#0Eculty,0

#25 Correct Responses,99 Discrimination Index,4

Correct Answer,B

2.35 Murphy used to consume 100 units of X and 50 units of Y when the price of X was 2 and

the price of Y was 4,If the price of X rose to 6 and the price of Y rose to 8,howmuchwould

Murphy's income have to rise so that he could still a#0Bord his original bundle?

#28a#29 800

#28b#29 600

#28c#29 400

#28d#29 1,200

#28e#29 None of the above.

Topic,Budget Constraint Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,C

2.36 This weekend,Martha has time to read 40 pages of economics and 30 pages of sociology.

Alternatively,she could read 20 pages of economics and 70 pages of sociology,Which of these

equations describes all combinations of pages of economics,E; and sociology,S; that she could read

over the weekend?

#28a#29 E + S =70

#28b#29 E=2+S=50

#28c#29 2E +S = 110

#28d#29 E + S =90

#28e#29 All of the above.

MULTIPLE CHOICE 17

Topic,Budget Constraint Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,C

2.37 This weekend,Martha has time to read 40 pages of economics and 30 pages of sociology.

Alternatively,she could read 20 pages of economics and 110 pages of sociology,Which of these

equations describes all combinations of pages of economics,E; and sociology,S; that she could read

over the weekend?

#28a#29 E + S =70

#28b#29 E=2+S=50

#28c#29 4E +S = 190

#28d#29 E + S = 130

#28e#29 All of the above.

Topic,Budget Constraint Di#0Eculty,2

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,A

2.38 Ads in a slick business magazine are read by 300 lawyers and 1000 M.B.A's,Ads in a

consumer publication are read by 250 lawyers and 300 M:B:A:

0

s,If Harry had $ 3,600 to spend

on advertising,if the price of ads in the business magazine were $600 and the price of ads in the

consumer magazine were $300,then the combinations of recent M:B:A:

0

s and lawyers with hot tubs

whom he could reach with his advertising budget would be represented by the integer values along

a line segment that runs between the two points:

#28a#29 #283;000;3;600#29 and #281;800;6;000#29.

#28b#29 #283;600;4;200#29 and #281;800;7;200#29.

#28c#29 #280;3;600#29 and #281;800;0#29.

#28d#29 #283;600;0#29 and #280;7;200#29.

#28e#29 #282;400;0#29 and #280;6;000#29.

CHAPTER 2 Budget Constraint 18

Topic,Budget Constraint Di#0Eculty,2

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,A

2.39 Ads in a slick business magazine are read by 300 lawyers and 1000 M.B.A's,Ads in a

consumer publication are read by 250 lawyers and 300 M:B:A:

0

s,If Harry had $ 2,600 to spend

on advertising,if the price of ads in the business magazine were $400 and the price of ads in the

consumer magazine were $200,then the combinations of recent M:B:A:

0

s and lawyers with hot tubs

whom he could reach with his advertising budget would be represented by the integer values along

a line segment that runs between the two points:

#28a#29 #283;250;3;900#29 and #281;950;6;500#29.

#28b#29 #283;900;4;550#29 and #281;950;7;800#29.

#28c#29 #280;3;900#29 and #281;950;0#29.

#28d#29 #283;900;0#29 and #280;7;800#29.

#28e#29 #282;600;0#29 and #280;6;500#29.

Topic,Budget Constraint Di#0Eculty,2

#25 Correct Responses,60 Discrimination Index,47

Correct Answer,B

2.40 In the economy of Mungo,discussed in your workbook,there is a third person called Ike.

Ike has a red income of 56 and a blue income of 10,#28Recall that blue prices are 1 bcu #5Bblue currency

unit#5D per unit of ambrosia and 1 bcu per unit of bubblegum,Red prices are 2 rcus #5Bred currency

units#5D per unit of ambrosia and 6 rcus per unit of bubblegum,You havetopaytwice for what you

buy,once in red currency,once in blue currency.#29 If Ike spends all of his blue income,but not all

of his red income,then it must be that:

#28a#29 he consumes at least 9 units of bubblegum.

#28b#29 he consumes at least 1 units of ambrosia.

#28c#29 he consumes exactly twice as much bubblegum as ambrosia.

#28d#29 he consumes at least 17 units of bubblegum.

#28e#29 he consumes equal amounts of ambrosia and bubblegum.

MULTIPLE CHOICE 19

Topic,Budget Constraint Di#0Eculty,2

#25 Correct Responses,60 Discrimination Index,47

Correct Answer,B

2.41 In the economy of Mungo,discussed in your workbook,there is a third person called Ike.

Ike has a red income of 40 and a blue income of 10,#28Recall that blue prices are 1 bcu #5Bblue currency

unit#5D per unit of ambrosia and 1 bcu per unit of bubblegum,Red prices are 2 rcus #5Bred currency

units#5D per unit of ambrosia and 6 rcus per unit of bubblegum,You havetopaytwice for what you

buy,once in red currency,once in blue currency.#29 If Ike spends all of his blue income,but not all

of his red income,then it must be that:

#28a#29 he consumes at least 5 units of bubblegum.

#28b#29 he consumes at least 5 units of ambrosia.

#28c#29 he consumes exactly twice as much bubblegum as ambrosia.

#28d#29 he consumes at least 14 units of bubblegum.

#28e#29 he consumes equal amounts of ambrosia and bubblegum.

Topic,Budget Constraint Di#0Eculty,2

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,A

2.42 Deadly Serious,II,studying for his M.B.A.,consumes only two goods,Wheaties and pens.

Each pen costs $1,Eachbox of Wheaties costs $2 but has a "free" pen inside,Pens can be dis-

carded at no cost,If we draw Serious's budget set with pens plotted on the horizontal axis,then

his budget set will be bounded bytwo line segments with slopes:

#28a#29 zero and,1.

#28b#29 zero and,2.

#28c#29 zero and,:5.

#28d#29 zero and in#0Cnity.

#28e#29 zero and +2.

CHAPTER 2 Budget Constraint 20

Topic,Budget Constraint Di#0Eculty,0

#25 Correct Responses,78 Discrimination Index,49

Correct Answer,D

2.43 Suppose there are two goods,the prices of both goods are positive and a consumer's income

is also positive,If the consumer's income doubles and the price of both goods triple,

#28a#29 the consumer's budget line gets steeper and shifts inward.

#28b#29 the slope of the consumer's budget line does not change but the budget line shifts outward away from

the origin.

#28c#29 the consumer's budget line gets steeper and shifts outward.

#28d#29 the slope of the consumer's budget line does not change but the budget line shifts inward toward the

origin.

#28e#29 the consumer's budget line gets #0Datter and shifts inward.

Topic,Budget Constraint Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,B

2.44 Thomas consumes co#0Bee #28C#29 and doughnuts #28D#29,His budget line was described by the

equation D =20,2C.At a later time,his budget line could be described by the equation D =10,C.

The change between the earlier budget line and the later could be explained by the following.

#28a#29 The price of co#0Bee and Thomas's income both increased.

#28b#29 The price of co#0Bee increased and Thomas's income decreased.

#28c#29 The price of co#0Bee decreased and Thomas's income increased.

#28d#29 The price of co#0Bee and Thomas's income both decreased.

#28e#29 Thomas's utility for doughnuts decreased.

Essay Budget Constraint

Topic,Budget Constraint Di#0Eculty,1

#25 Correct Responses,0 Discrimination Index,0

2.1 Perry lives on avocados and beans,The price of avocados is 10,the price of beans is 5,and

his income is 40,ShowPerry's budget line on a graph with avocados on the horizontal axis and

beans on the vertical axis,Label the point where the budget line hits the horizontal axis A and the

point where the budget line hits the vertical axis B,Next to these labels,write down the number

of avocados purchased at A and the number of beans purchased at B,Draw another budget line

showing what Perry's budget would be if his income doubled,the price of avocados doubled,and

the price of beans stayed the same,Label the point where this line hits the vertical axis C and the

point where it hits the horizontal axis D,Next to these labels write the numberofavocados at C

and the number of beans at D.

Answer,At A there are 4 avocados,At B there are 8 units of beans,At C there are 4 avocados.

At D there are 16 units of beans.

Topic,Budget Constraint Di#0Eculty,2

#25 Correct Responses,0 Discrimination Index,0

2.2 Brenda likes hot dogs and Coca-Cola,Hot dogs cost $1 each and Cokes cost $.50 per bottle.

There is a special promotion for Coke that will last for one month,If Brenda sends in the bottle

tops from the Cokes she drinks during the next month,she will get a refund of $.20 for every

bottlecap beyond the #0Crst 12 that she returns,For example,if she returns 25 bottle caps she will

get back $2:60 = $:20#2825,12#29,Brenda has $40 to spend on hot dogs and Coke during the next

month,Draw her budget line with Coke on the horizontal axis and hot dogs on the vertical axis.

Find the points where the budget line hits the axes and the point where it has a kink,At eachof

these three points write down the quantities of each good consumed.

Answer,The budget line runs from #280;40#29 on the vertical axis to a kink point #2812;34#29 and from

#2812;34#29 to about #28125:3;0#29.

CHAPTER 2 Budget Constraint 22

Topic,Budget Constraint Di#0Eculty,2

#25 Correct Responses,0 Discrimination Index,0

2.3 Felicity is studying economics and political science,She can read 30 pages of political science

per hour but only 5 pages of economics per hour,This week she has a 50 page assignmentin

economics and a 150 page assignment in political science,Because of sorority rush,she cannot

devote more than 10 hours to studying these subjects this week,She realizes she cannot complete

all of her assignments but is determined to complete at least 30 pages of her economics reading.

Draw a graph with pages of economics on the horizontal axis and pages of political science on the

vertical axis,On this graph,show the possibilities that are consistent with the constraints that

Felicity has imposed on herself,#28She is allowed to read ahead in either subject.#29 Label key points

on your graph with their numerical values.

Answer,Anything in the triangle bounded by #280;300#29; #2830;120#29 and #2830;0#29 satis#0Ces these constraints.

Topic,Budget Constraint Di#0Eculty,3

#25 Correct Responses,0 Discrimination Index,0

2.4 Ed Moore and his family liveinacity with many private schools and one public school,The

Moores are thinking of sending their only child to private school because they would likeaschool

that has more teachers and other resources per student than the local public school,The Moores

must pay taxes to support local public schools whether or not their child goes to private school.

There is suchavariety of private schools that the Moores can get just about any level of inputs

per studentbychoosing the appropriate private school,Tuition in the private schools equals ex-

penditure per student,Draw a diagram to show the Moores' budget constraint,Put expenditures

per student in the child's school on the horizontal axis and other goods on the vertical.

Answer,One pointis#28x;d#29 where x is expenditures per pupil in public school and d is disposable

income,The rest of the budget is a line with slope,1 from #282s;d,x#29 to the x axis.

Chapter 3

True-False Preferences

Topic,Preferences Di#0Eculty,1

#25 Correct Responses,70 Discrimination Index,31

Correct Answer,False

3.1 If preferences are transitive,more is always preferred to less.

Topic,Preferences Di#0Eculty,1

#25 Correct Responses,89 Discrimination Index,21

Correct Answer,False

3.2 A person with re#0Dexive preferences is someone who does not shop carefully.

Topic,Preferences Di#0Eculty,2

#25 Correct Responses,94 Discrimination Index,6

Correct Answer,True

3.3 If someone has the utility function U = 1000+2minfx;ygthen x and y are perfect complements

for that person.

Topic,Preferences Di#0Eculty,1

#25 Correct Responses,68 Discrimination Index,40

Correct Answer,True

3.4 A consumer with convex preferences who is indi#0Berentbetween the bundles #281;2#29 and #289;6#29

will like the bundle #285;4#29 at least as well as either of the #0Crst two bundles.

Topic,Preferences Di#0Eculty,1

#25 Correct Responses,68 Discrimination Index,40

Correct Answer,True

3.5 A consumer with convex preferences who is indi#0Berentbetween the bundles #282;3#29 and #2810;9#29

will like the bundle #286;6#29 at least as well as either of the #0Crst two bundles.

Topic,Preferences Di#0Eculty,2

#25 Correct Responses,81 Discrimination Index,0

Correct Answer,True

3.6 If there are two goods,if a consumer prefers more of each good to less,and if she has dimin-

ishing marginal rate of substitution,then her preferences are convex.

CHAPTER 3 Preferences 24

Topic,Preferences Di#0Eculty,2

#25 Correct Responses,75 Discrimination Index,11

Correct Answer,False

3.7 If preferences are convex,then for any commodity bundle x; the set of commodity bundles

that are worse than x is a convex set.

Topic,Preferences Di#0Eculty,2

#25 Correct Responses,58 Discrimination Index,0

Correct Answer,False

3.8 Bill Katz prefers more of good 1 to less and he prefers less of good 2 to more,Bill has convex

preferences,If we draw his indi#0Berence curves with good 1 on the horizontal axis and good 2 on

the vertical axis,then his indi#0Berence curves have positive slope but get steeper as they rise.

Topic,Preferences Di#0Eculty,1

#25 Correct Responses,99 Discrimination Index,0

Correct Answer,False

3.9 The marginal rate of substitution measures the distance between one indi#0Berence curve and

the next one.

Topic,Preferences Di#0Eculty,1

#25 Correct Responses,79 Discrimination Index,11

Correct Answer,False

3.10 Ambrose has an indi#0Berence curve with equation x

2

=20,4x

1=2

1

,When Ambrose is con-

suming the bundle #284;16#29; his marginal rate of substitution is,5=4.

Topic,Preferences Di#0Eculty,1

#25 Correct Responses,77 Discrimination Index,34

Correct Answer,False

3.11 Nancy's psychology teacher will give her a course grade that is the maximum of her scores

on three midterm examinations,Nancy has convex preferences over the possible combinations of

midterm scores.

TRUE-FALSE 25

Topic,Preferences Di#0Eculty,3

#25 Correct Responses,39 Discrimination Index,26

Correct Answer,False

3.12 If Melody has more classical records than rock and roll records,she is willing to exchange

exactly 1 classical record for 2 rock and roll records,but if she has more rock and roll records

than classical records,then she is willing to exchange exactly 1 rock and roll record for 2 classical

records,Melody has convex preferences.

Topic,Preferences Di#0Eculty,1

#25 Correct Responses,71 Discrimination Index,17

Correct Answer,False

3.13 Josephine buys 3 quarts of milk and 2 pounds of butter when milk sells for $2 a quart and

butter sells for $1 a pound,Wilma buys 2 quarts of milk and 3 pounds of butter at the same prices.

Josephine's marginal rate of substitution between milk and butter is greater than Wilma's.

Topic,Preferences Di#0Eculty,2

#25 Correct Responses,29 Discrimination Index,29

Correct Answer,True

3.14 A consumer who is unable to detect small di#0Berences in the amountofwater in her beer

could have a transitive strict preference relation but is unlikely to have a transitive indi#0Berence

relation.

Multiple Choice Preferences

Topic,Preferences Di#0Eculty,1

#25 Correct Responses,85 Discrimination Index,23

Correct Answer,B

3.1 Fanny consumes goods x and y,Her indi#0Berence curves are described by the formula y =

k=#28x +7#29,Higher values of k correspond to better indi#0Berence curves,Which of the following is

true?

#28a#29 Fanny likes good y and hates good x.

#28b#29 Fanny prefers bundle #288;9#29 to bundle #289;8#29.

#28c#29 Fanny prefers bundle #289;5#29 to bundle #285;9#29.

#28d#29 Fanny likes good x and hates good y.

#28e#29 More than one of the above statements are true.

Topic,Preferences Di#0Eculty,1

#25 Correct Responses,85 Discrimination Index,23

Correct Answer,B

3.2 Heidi consumes goods x and y,Her indi#0Berence curves are described by the formula y =

k=#28x +6#29,Higher values of k correspond to better indi#0Berence curves,Which of the following is

true?

#28a#29 Heidi likes good y and hates good x.

#28b#29 Heidi prefers bundle #2810;15#29 to bundle #2815;10#29.

#28c#29 Heidi prefers bundle #289;8#29 to bundle #288;9#29.

#28d#29 Heidi likes good x and hates good y.

#28e#29 More than one of the above statements are true.

Topic,Preferences Di#0Eculty,1

#25 Correct Responses,67 Discrimination Index,14

Correct Answer,D

3.3 George's indi#0Berence curves are circles,all of which are centered at #2818;20#29,Of anytwo

indi#0Berence circles,he would rather be on the inner one than the outer one,Which of the following

is true?

#28a#29 George's preferences are not complete.

#28b#29 George prefers #2824;26#29 to #2814;17#29.

#28c#29 George prefers#2814;26#29 to #2814;17#29.

#28d#29 George prefers #2816;19#29 to #2823;26#29.

#28e#29 More than one of the above statements are true.

MULTIPLE CHOICE 27

Topic,Preferences Di#0Eculty,1

#25 Correct Responses,67 Discrimination Index,14

Correct Answer,D

3.4 Yoram's indi#0Berence curves are circles,all of which are centered at #2812;19#29.Ofanytwo in-

di#0Berence circles,he would rather be on the inner one than the outer one,Which of the following

is true?

#28a#29 Yoram's preferences are not complete.

#28b#29 Yoram prefers #2818;25#29 to #288;16#29.

#28c#29 Yoram prefers#288;25#29 to #288;16#29.

#28d#29 Yoram prefers #288;17#29 to #2818;28#29.

#28e#29 More than one of the above statements are true.

Topic,Preferences Di#0Eculty,1

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,B

3.5 Manuel consumes only apples and bananas,He prefers more apples to less,but he gets tired

of bananas,If he consumes fewer than 17 bananas per week,he thinks that one banana is a perfect

substitute for one apple,But you would havetopay him one apple for each banana beyond 17

that he consumes,The indi#0Berence curve that passes through the consumption bundle with 25 ap-

ples and 26 bananas also passes through the bundle with A apples and 11 bananas,where A equals:

#28a#29 21

#28b#29 22

#28c#29 24

#28d#29 26

#28e#29 None of the above.

CHAPTER 3 Preferences 28

Topic,Preferences Di#0Eculty,1

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,B

3.6 Wilbur consumes only apples and bananas,He prefers more apples to less,but he gets tired

of bananas,If he consumes fewer than 18 bananas per week,he thinks that one banana is a perfect

substitute for one apple,But you would havetopay him one apple for each banana beyond 18

that he consumes,The indi#0Berence curve that passes through the consumption bundle with 27 ap-

ples and 30 bananas also passes through the bundle with A apples and 13 bananas,where A equals:

#28a#29 17

#28b#29 20

#28c#29 26

#28d#29 28

#28e#29 None of the above.

Topic,Preferences Di#0Eculty,1

#25 Correct Responses,75 Discrimination Index,50

Correct Answer,E

3.7 If two goods are both desirable and preferences are convex,then:

#28a#29 there must be a kink in the indi#0Berence curves.

#28b#29 indi#0Berence "curves" must be straight lines.

#28c#29 if two bundles are indi#0Berent,then an average of the two bundles is worse than either one.

#28d#29 the marginal rate of substitution is constant along indi#0Berence curves

#28e#29 None of the above.

Topic,Preferences Di#0Eculty,2

#25 Correct Responses,53 Discrimination Index,34

Correct Answer,B

3.8 If there are only two goods,if more of good 1 is always preferred to less,and if less of good

2 is always preferred to more,then:

#28a#29 indi#0Berence curves slope downwards.

#28b#29 indi#0Berence curves slope upwards.

#28c#29 indi#0Berence curves may cross.

#28d#29 indi#0Berence curves could take the form of ellipses.

#28e#29 None of the above.

MULTIPLE CHOICE 29

Topic,Preferences Di#0Eculty,2

#25 Correct Responses,75 Discrimination Index,29

Correct Answer,D

3.9 If two goods are perfect complements:

#28a#29 there is a bliss point and the indi#0Berence curves surround this point.

#28b#29 consumers will only buy the cheaper of the two goods.

#28c#29 indi#0Berence curves have a positive slope.

#28d#29 None of the above.

Topic,Preferences Di#0Eculty,2

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,C

3.10 The relation #5Cis preferred to" between commodity bundles is just one example of a binary

relation,Another example is the relation #5Cis a full brother of" de#0Cned over the set of all human

beings,Let xRy mean person x is a full brother of person y.

#28a#29 The relation R is re#0Dexive,transitive,and complete.

#28b#29 The relation R is transitive and complete but not re#0Dexive.

#28c#29 The relation R is transitive but not complete or re#0Dexive.

#28d#29 The relation R is complete but not transitive or re#0Dexive.

#28e#29 The relation R is neither re#0Dexive,transitive,nor complete.

Topic,Preferences Di#0Eculty,1

#25 Correct Responses,61 Discrimination Index,20

Correct Answer,C

3.11 Preferences are said to be monotonic if:

#28a#29 all goods must be consumed in #0Cxed proportions.

#28b#29 all goods are perfect substitutes.

#28c#29 more is always preferred to less.

#28d#29 there is diminishing marginal rate of substitution.

#28e#29 None of the above.

CHAPTER 3 Preferences 30

Topic,Preferences Di#0Eculty,3

#25 Correct Responses,8 Discrimination Index,0

Correct Answer,C

3.12 TobyTalkalot subscribes to a local phone service that charges a #0Cxed fee of $10 per month

and allows him to place as many local phone calls as he likes without further charge,Let Good

1 be an aggregate of commodities other than local phone use and let Good 2 be local phone use.

#28Measure Good 1 on the horizontal axis and Good 2 on the vertical axis.#29 On Monday,Toby didn't

use the telephone at all,From this we can conclude that the slope m of his indi#0Berence curveat

the consumption bundle he chose on Mondaywas:

#28a#29 positive.

#28b#29 less than or equal to 0.

#28c#29 0.

#28d#29 greater than or equal to 0.

#28e#29 negative.

Topic,Preferences Di#0Eculty,3

#25 Correct Responses,22 Discrimination Index,26

Correct Answer,B

3.13 Professor Goodheart's colleague Dr,Kremepu#0B gives 3 midterm exams,He drops the lowest

and gives each student her average score on the other two exams,Polly Sigh is taking his course

and has a 60 on her #0Crst exam,Let x

2

be her score on the second exam and x

3

be her score on

the third exam,If we draw her indi#0Berence curves for scores on the second and third exams with

x

2

represented by the horizontal axis and x

3

represented by the vertical axis,then her indi#0Berence

curve through the point #28x

2;x

3

#29 = #2850;70#29 is:

#28a#29 L-shaped with a kink where x

2

= x

3

.

#28b#29 three line segments,one vertical,one horizontal,and one running from #2870;60#29 to #2860;70#29.

#28c#29 a straight line,running from #280;120#29 to #28120;0#29.

#28d#29 three line segments,one vertical,one horizontal,and one running from #2870;50#29 to #2850;70#29.

#28e#29 a V-shaped curve with its point at #2850;70#29.

MULTIPLE CHOICE 31

Topic,Preferences Di#0Eculty,0

#25 Correct Responses,92 Discrimination Index,19

Correct Answer,E

3.14 Charlie's indi#0Berence curves have the equation x

B

= constant=x

A; where larger constants

denote better indi#0Berence curves,Charlie strictly prefers the bundle #2810;19#29 to the bundle:

#28a#29 #2819;10#29.

#28b#29 #2811;18#29.

#28c#29 #2815;15#29.

#28d#29 more than one of these bundles.

#28e#29 none of these bundles.

Topic,Preferences Di#0Eculty,0

#25 Correct Responses,92 Discrimination Index,19

Correct Answer,E

3.15 Charlie's indi#0Berence curves have the equation x

B

= constant=x

A; where larger constants

denote better indi#0Berence curves,Charlie strictly prefers the bundle #289;19#29 to the bundle:

#28a#29 #2819;9#29.

#28b#29 #2810;18#29.

#28c#29 #2812;15#29.

#28d#29 more than one of these bundles.

#28e#29 none of these bundles.

Topic,Preferences Di#0Eculty,2

#25 Correct Responses,77 Discrimination Index,17

Correct Answer,C

3.16 Ambrose has indi#0Berence curves with the equation x

2

= constant,4x

1=2

1

where larger con-

stants correspond to higher indi#0Berence curves,If good 1 is drawn on the horizontal axis and good

2 on the vertical axis,what is the slope of Ambrose's indi#0Berence curve when his consumption

bundle is #2816;9#29?

#28a#29,16=9

#28b#29,9=16

#28c#29,0:50

#28d#29,13

#28e#29,4

CHAPTER 3 Preferences 32

Topic,Preferences Di#0Eculty,2

#25 Correct Responses,77 Discrimination Index,17

Correct Answer,C

3.17 Ambrose has indi#0Berence curves with the equation x

2

= constant,4x

1=2

1

where larger con-

stants correspond to higher indi#0Berence curves,If good 1 is drawn on the horizontal axis and good

2 on the vertical axis,what is the slope of Ambrose's indi#0Berence curve when his consumption

bundle is #289;14#29?

#28a#29,9=14

#28b#29,14=9

#28c#29,0:67

#28d#29,17

#28e#29,3

Topic,Preferences Di#0Eculty,2

#25 Correct Responses,93 Discrimination Index,4

Correct Answer,A

3.18 Nancy Lerner is taking a course from Professor Goodheart who will count only her best

midterm grade and from Professor Stern who will count only her worst midterm grade,In one of

her classes,Nancy has scores of 40 on her #0Crst midterm and 50 on her second midterm,When

the #0Crst midterm score is measured on the horizontal axis and her second midterm score on the

vertical,her indi#0Berence curve has a slope of zero at the point #2840;50#29,Therefore it must be that:

#28a#29 this class could be Professor Goodheart's,but couldn't be Professor Stern's.

#28b#29 this class could be Professor Stern's,but couldn't be Professor Goodheart's.

#28c#29 this class couldn't be either Goodheart's or Stern's.

#28d#29 this class could be either Goodheart's or Stern's.

#28e#29 None of the other options are correct.

MULTIPLE CHOICE 33

Topic,Preferences Di#0Eculty,2

#25 Correct Responses,93 Discrimination Index,4

Correct Answer,A

3.19 Nancy Lerner is taking a course from Professor Goodheart who will count only her best

midterm grade and from Professor Stern who will count only her worst midterm grade,In one of

her classes,Nancy has scores of 70 on her #0Crst midterm and 60 on her second midterm,When

the #0Crst midterm score is measured on the horizontal axis and her second midterm score on the

vertical,her indi#0Berence curve has a slope of zero at the point #2870;60#29,Therefore it must be that:

#28a#29 this class could be Professor Goodheart's,but couldn't be Professor Stern's.

#28b#29 this class could be Professor Stern's,but couldn't be Professor Goodheart's.

#28c#29 this class couldn't be either Goodheart's or Stern's.

#28d#29 this class could be either Goodheart's or Stern's.

#28e#29 None of the other options are correct.

Topic,Preferences Di#0Eculty,2

#25 Correct Responses,56 Discrimination Index,65

Correct Answer,D

3.20 If we graph Mary Granola's indi#0Berence curves with avocados on the horizontal axis and

grapefruits on the vertical axis,then whenever she has more grapefruits than avocados,the slope of

her indi#0Berence curveis,2,Whenever she has more avocados than grapefruits,the slope is,1=2.

Mary would be indi#0Berentbetween a bundle with 11 avocados and 23 grapefruits and another

bundle that has 19 avocados and:

#28a#29 15 grapefruits.

#28b#29 19 grapefruits.

#28c#29 11 grapefruits.

#28d#29 13 grapefruits.

#28e#29 14 grapefruits.

CHAPTER 3 Preferences 34

Topic,Preferences Di#0Eculty,2

#25 Correct Responses,56 Discrimination Index,65

Correct Answer,D

3.21 If we graph Mary Granola's indi#0Berence curves with avocados on the horizontal axis and

grapefruits on the vertical axis,then whenever she has more grapefruits than avocados,the slope of

her indi#0Berence curveis,2,Whenever she has more avocados than grapefruits,the slope is,1=2.

Mary would be indi#0Berentbetween a bundle with 24 avocados and 36 grapefruits and another

bundle that has 32 avocados and:

#28a#29 28 grapefruits.

#28b#29 32 grapefruits.

#28c#29 24 grapefruits.

#28d#29 26 grapefruits.

#28e#29 27 grapefruits.

Topic,Preferences Di#0Eculty,2

#25 Correct Responses,75 Discrimination Index,29

Correct Answer,B

3.22 Recall that Tommy Twit's mother measures the departure of any bundle from her favorite

bundle for Tommyby the sum of the absolute values of the di#0Berences,Her favorite bundle for

Tommyis#282;7#29,,that is,2 cookies and 7 glasses of milk,Tommy's mother's indi#0Berence curve

that passes through the point #28c;m#29=#285;4#29 also passes through:

#28a#29 the point#288;1#29.

#28b#29 the points #282;1#29; #288;7#29; and #285;10#29.

#28c#29 the point#282;7#29.

#28d#29 the points #285;7#29; #282;4#29; and #282;10#29.

#28e#29 None of the above.

MULTIPLE CHOICE 35

Topic,Preferences Di#0Eculty,2

#25 Correct Responses,75 Discrimination Index,29

Correct Answer,B

3.23 Recall that Tommy Twit's mother measures the departure of any bundle from her favorite

bundle for Tommyby the sum of the absolute values of the di#0Berences,Her favorite bundle for

Tommyis#282;7#29,,that is,2 cookies and 7 glasses of milk,Tommy's mother's indi#0Berence curve

that passes through the point #28c;m#29=#283;6#29 also passes through:

#28a#29 the point#284;5#29.

#28b#29 the points #282;5#29; #284;7#29; and #283;8#29.

#28c#29 the point#282;7#29.

#28d#29 the points #283;7#29; #282;6#29; and #282;8#29.

#28e#29 None of the above.

Topic,Preferences Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,D

3.24 Scholastica is taking a class from Professor Chaos,Professor Chaos gives two tests in this

course and determines a student's grade as follows,He calculates the smaller of the following two

numbers,half of the score on the #0Crst test #28which is a relatively easy test#29 and the actual score

on the second test,He gives each studentanumerical score equal to the result of this calculation

and then ranks the students,Scholastica would like to be ranked as high as possible in Professor

Chaos' rankings,If we represent her score on the #0Crst exam on the horizontal axis and her score

on the second exam on the vertical axis,then her indi#0Berence curves:

#28a#29 are L-shaped with kinks where the two exam scores are equal.

#28b#29 have sections with a slope,2 and sections with a slope 1=2.

#28c#29 are positively sloped.

#28d#29 are L-shaped with kinks where the exam 1 score is twice the exam 2 score.

#28e#29 are straight lines with a slope of,1=2.

CHAPTER 3 Preferences 36

Topic,Preferences Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,D

3.25 In Professor Meanscore's class,the #0Crst midterm exam and the second midterm exam are

weighted equally toward the #0Cnal grade,With the #0Crst midterm's score on the horizontal axis,and

the second midterm's score on the vertical axis,indi#0Berence curves between the two exam scores are

#28a#29 L-shaped with lines extending upward and to the right.

#28b#29 L-shaped with lines extending downward and to the left.

#28c#29 parabola shaped.

#28d#29 straight lines with slope,1.

#28e#29 straight lines with slope 2.

Topic,Preferences Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,C

3.26 Professor Stern's colleague,Dr,Schmertz,gives one midterm exam and a #0Cnal exam,He

weights the #0Cnal twice as heavily as the midterm to determine the course grade,No grades can

be dropped,If the midterm score is represented on the horizontal axis and the #0Cnal score on the

vertical axis,and if a student in Dr,Schmertz's class cares only about her course grade,her indif-

ference curveis

#28a#29 a line with slope,2.

#28b#29 a line with slope,1.

#28c#29 a line with slope,0:5.

#28d#29 L-shaped with the kink at #28x;2x#29.

#28e#29 L-shaped with the kink at #282x;x#29.

Topic,Preferences Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,E

3.27 I prefer 6 apples and 1 orange to 5 apples and 2 oranges,From this we can conclude that

#28a#29 my preferences are transitive.

#28b#29 my preferences are complete.

#28c#29 my preferences are convex.

#28d#29 my preferences obey the Law of Demand.

#28e#29 none of the above.

Essay Preferences

Topic,Preferences Di#0Eculty,3

#25 Correct Responses,0 Discrimination Index,0

3.1 Draw graphs with quantities of pepperoni pizza on the horizontal axis and anchovy pizza on

the vertical axis to illustrate the following situations,In each case drawtwo di#0Berent indi#0Berence

curves and make a little arrow pointing in the direction of greater preference.

a#29 Marvin loves pepperoni pizza and hates anchovy pizza.

b#29 Mavis hates anchovy pizza and is completely indi#0Berent about pepperoni pizza.

Answer,a#29 Indi#0Berence curves slopes up and to the right,Arrow points down and to the left,b#29

Indi#0Berence curves are horizontal lines,Arrow points down.

CHAPTER 3 Preferences 38

Topic,Preferences Di#0Eculty,3

#25 Correct Responses,0 Discrimination Index,0

3.2 Coach Steroid likes his players to be big,fast,and obedient,If player A is better than player

B in two of these three characteristics,Steroid will prefer A to B,Three players try out for quar-

terback,Wilbur Westinghouse weighs 320 pounds,runs very slowly,and is quite obedient,Harold

Hotpointweighs 240 pounds,runs extremely fast,and is extremely disobedient,Jerry Jacuzzi

weighs 150 pounds,runs at average speed,and is extremely obedient,Does Coach Steroid have

transitive preferences? Explain your answer.

Answer,No,Steroid prefers W to H because W is heavier and more obedient,He preferes H to J

because H is heavier and faster,But he prefers J to W because J is more obedient and faster than

W,Since his preferences have a cycle,they cannot be transitive.

Topic,Preferences Di#0Eculty,3

#25 Correct Responses,0 Discrimination Index,0

3.3 Belinda loves chocolate and always thinks that more is better than less,Belinda thinks that

a few piano lessons would be worse than none at all but if she had enough piano lessons to get

good at playing the piano,she would prefer more lessons to less,Draw a graph with piano lessons

on the horizontal axis and chocolate on the vertical axis,On your graph sketchtwo indi#0Berence

curves for Belinda that would be consistent with this story,Label the better of the two indi#0Berence

curves AA and the worse one BB.

Answer,The indi#0Berence curves would look something likeinverted U

0

s,#28The area under these

curves needn't be necessarily convex.#29 The better of the two curves drawn is the higher one.

ESSAY 39

Topic,Preferences Di#0Eculty,3

#25 Correct Responses,0 Discrimination Index,0

3.4 Mac Rowe doesn't sweat the petty stu#0B,In fact,he just cannot detect small di#0Berences,He

consumes two goods,x and y,He prefers the bundle #28x;y#29 to the bundle #28x

0;y

0

#29if and only if xy,

x

0

y

0

#3E 1,Otherwise he is indi#0Berentbetween the two bundles,Show:

#28a#29 that the relation of indi#0Berence is not transitive for Mac #28Hint,Give an example.#29

#28b#29 that the preferred relation is transitive for Mac.

Answer,Consider the bundles A =#281;1#29;B=#281;1:75#29;C=#281;2:5#29,Then A is indi#0BerenttoBand

B to C but C is preferred to A,To see that strict preference is transitive,suppose wehaveany

three bundles,#28x;y#29; #28x

0;y

0

#29and #28x

00;y

00

#29,If the #0Crst is preferred to the second and the second to the

third,then xy,x

0

y

0

#3E 1 and x

0

y

0

,x

00

y

00

#3E 1,Simple algebra shows that xy,x

00

y

00

#3E 1,Therefore

the #0Crst must be preferred to the third.

Topic,Preferences Di#0Eculty,3

#25 Correct Responses,0 Discrimination Index,0

3.5 Blanche Carter has devised a system for rating the males in her economics class,She cares

about their intelligence and their looks,She has ranked each male on a scale of 1 to 5 for intelligence

and 1 to 3 for looks,She de#0Cnes a preference re lation,R; as follows,xRy if boy x scores at least

as high as boy y in either looks or in intelligence,Give an example to show that Blanche's method

of determining preferences might not lead to transitive preferences.

Answer,Suppose boy x has rankings 1 and 2,boy y has rankings 3 and 1 and boy z has rankings

2 and 3,Then xRy because x is better looking than y and yRz because y is smarter than z,But

it is not true that xRz,In fact z is both smarter and better looking than x.

Topic,Preferences Di#0Eculty,2

#25 Correct Responses,0 Discrimination Index,0

3.6 Explain howitwould be possible to cheat someone who had intransitive preferences,Be

explicit about what you would o#0Ber him if you were trying to exploit his intransitivity and what

he would do in response.

Answer,Suppose that he has bundle C rightnow and prefers A to B; B to C; and C to A,If you

o#0Ber him a trade that leaves him at B instead of C; he will accept the deal,If you now o#0Ber him a

trade that leaves him at A instead of B; he will accept that,But he will prefer to be back where

he originally was to where he is,So you could o#0Ber to give him back his original bundle,minus a

reward to you for your e#0Borts and he would accept the deal.

CHAPTER 3 Preferences 40

Topic,Preferences Di#0Eculty,1

#25 Correct Responses,0 Discrimination Index,0

3.7 If good X is measured on the horizontal axis and good Y on the vertical,what can you

say about the preferences of someone whose indi#0Berence curves are a#29 Parallel to the Y axis? b#29

Positively sloped with more desirable indi#0Bernce curves as one moves to the right? c#29 Negatively

sloped with more desirable indi#0Berence curves as one moves to the left?

Answer,a#29 This person doesn't care howmuch X he has,b#29 This person likes X but hates Y,c#29

This person hates both goods.

Topic,Preferences Di#0Eculty,2

#25 Correct Responses,0 Discrimination Index,0

3.8 Suppose that there are two commodities and a consumer prefers more to less of each good.

If the consumer has transitive preferences,can her indi#0Berence curves cross? Sketch a brief proof

of your answer,and illustrate with a diagram.

Answer,See the textbook.

Chapter 4

True-False Utility

Topic,Utility Di#0Eculty,2

#25 Correct Responses,85 Discrimination Index,10

Correct Answer,False

4.1 With quasilinear preferences,the slope of indi#0Berence curves is constant along all rays through

the origin.

Topic,Utility Di#0Eculty,2

#25 Correct Responses,82 Discrimination Index,45

Correct Answer,False

4.2 Wanda Lott has the utility function U#28x;y#29=maxfx;yg.Wanda's preferences are convex.

Topic,Utility Di#0Eculty,1

#25 Correct Responses,96 Discrimination Index,20

Correct Answer,True

4.3 If someone has a utility function U =2minfx;yg; then x and y are perfect complements for

that person.

Topic,Utility Di#0Eculty,1

#25 Correct Responses,66 Discrimination Index,20

Correct Answer,False

4.4 Maximilian consumes two goods x and y,His utility function is U#28x;y#29=maxfx;yg,There-

fore x and y are perfect substitutes for Max.

Topic,Utility Di#0Eculty,3

#25 Correct Responses,36 Discrimination Index,11

Correct Answer,False

4.5 A person with the utility function U#28x;y#29=y+x

2

has convex preferences.

Topic,Utility Di#0Eculty,3

#25 Correct Responses,25 Discrimination Index,47

Correct Answer,True

4.6 Mr,Surly consumes only two goods and hates them both,His utility function is U#28x;y#29=

,maxfx;yg,Mr,Surly has #28weakly#29 convex preferences.

CHAPTER 4 Utility 42

Topic,Utility Di#0Eculty,2

#25 Correct Responses,71 Discrimination Index,43

Correct Answer,True

4.7 Angela's utility function is U#28x

1;x

2

#29=#28x

1

+x

2

#29

3

,Her indi#0Berence curves are downward-

sloping,parallel straight lines.

Topic,Utility Di#0Eculty,2

#25 Correct Responses,81 Discrimination Index,0

Correct Answer,True

4.8 Henrietta's utility function is U#28x

1;x

2

#29=x

1

x

2

,She has diminishing marginal rate of substi-

tution between goods 1 and 2.

Topic,Utility Di#0Eculty,2

#25 Correct Responses,66 Discrimination Index,8

Correct Answer,False

4.9 Alice's utility function is U#28x;y#29=x

2

y,Steve's utility function is U#28x;y#29=x

2

y+2x,Alice

and Stevehave the same preferences since Steve's utility function is a monotonic transformation of

Alice's.

Topic,Utility Di#0Eculty,3

#25 Correct Responses,78 Discrimination Index,29

Correct Answer,False

4.10 Jean's utility function is U#28x;y#29=x+y

2

,y,If we draw her indi#0Berence curves with x

on the horizontal axis and y on the vertical axis,then these indi#0Berence curves are everywhere

downward-sloping and get #0Datter as one moves from left to right.

Topic,Preferences Di#0Eculty,1

#25 Correct Responses,99 Discrimination Index,4

Correct Answer,True

4.11 The utility function U#28x

1;x

2

#29=2ln x

1

+3ln x

2

represents Cobb-Douglas preferences.

TRUE-FALSE 43

Topic,Preferences Di#0Eculty,1

#25 Correct Responses,92 Discrimination Index,29

Correct Answer,False

4.12 Fiery Demon is a rotgut whisky made in Kentucky,Smoothyisanunblended malt whisky

imported from Scotland,Ed regards these brands as perfect substitutes,When he goes into a bar,

he sometimes buys only Fiery Demon,Other times he buys only Smoothy,This shows that Ed has

unstable preferences.

Topic,Utility Di#0Eculty,1

#25 Correct Responses,93 Discrimination Index,16

Correct Answer,False

4.13 Mark strictly prefers consumption bundle A to consumption bundle B and weakly prefers

bundle B to bundle A,These preferences can be represented by a utility function.

Topic,Utility Di#0Eculty,3

#25 Correct Responses,63 Discrimination Index,80

Correct Answer,True

4.14 A consumer has preferences represented by the utility function U#28x

1;x

2

#29 = 10#28x

2

1

+2x

1

x

2

+

x

2

2

#29,50.For this consumer,goods 1 and 2 are perfect substitutes.

Topic,Utility Di#0Eculty,1

#25 Correct Responses,52 Discrimination Index,38

Correct Answer,True

4.15 A person with utility function U#28x;y#29=5+y

2

+2xhas non-convex preferences.

Topic,Utility Di#0Eculty,2

#25 Correct Responses,64 Discrimination Index,26

Correct Answer,False

4.16 A person with the utility function U#28x;y#29 = 10+y

2

+x has convex preferences.

Topic,Utility Di#0Eculty,2

#25 Correct Responses,43 Discrimination Index,29

Correct Answer,True

4.17 A person with the utility function U#28x

1;x

2

#29=minfx

1

+2x

2;2x

1

+x

2

ghas convex,but not

strictly convex preferences.

CHAPTER 4 Utility 44

Topic,Utility Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,False

4.18 If one utility function is a monotonic transformation of another,then the former must assign

a higher utilitynumber to every bundle than the latter.

Topic,Preferences Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,False

4.19 Quasilinear preferences are homothetic when the optimal amount of good 1 is not a#0Bordable.

Multiple Choice Utility

Topic,Utility Di#0Eculty,2

#25 Correct Responses,28 Discrimination Index,17

Correct Answer,A

4.1 Ike's utility function is U#28x;y#29=25xy,He has 12 units of good x and 8 units of y,Ben's

utility function for the same two goods is U#28x;y#29=4x+4y,Ben has 9 units of x and 13 units of y.

#28a#29 Ike prefers Ben's bundle to his own bundle,but Ben prefers his own bundle to Ike's.

#28b#29 Ben prefers Ike's bundle to his own,but Ike prefers his own bundle to Ben's.

#28c#29 Each prefers the other guy's bundle to his own.

#28d#29 Neither prefers the other guy's bundle to his own.

#28e#29 Since they have di#0Berent preferences,there is not enough information to determine who envies whom.

Topic,Utility Di#0Eculty,2

#25 Correct Responses,28 Discrimination Index,17

Correct Answer,A

4.2 Nick's utility function is U#28x;y#29=33xy,He has 12 units of good x and 6 units of y,Boris's

utility function for the same two goods is U#28x;y#29=2x+5y,Boris has 9 units of x and 13 units of y.

#28a#29 Nick prefers Boris's bundle to his own bundle,but Boris prefers his own bundle to Nick's.

#28b#29 Boris prefers Nick's bundle to his own,but Nick prefers his own bundle to Boris's.

#28c#29 Each prefers the other guy's bundle to his own.

#28d#29 Neither prefers the other guy's bundle to his own.

#28e#29 Since they have di#0Berent preferences,there is not enough information to determine who envies whom.

Topic,Utility Di#0Eculty,2

#25 Correct Responses,58 Discrimination Index,27

Correct Answer,C

4.3 Tim has preferences represented by the utility function,U#28x;y#29=minf6x+y;x+2yg.Ifxis

on the horizontal axis and y is on the vertical axis,what is the slope of his indi#0Berence curveat

the point #288;9#29?

#28a#29 The slope is,6.

#28b#29 The slope is,2=6.

#28c#29 The slope is,1=2.

#28d#29 The slope is,1=6.

#28e#29 The slope is,8=9.

CHAPTER 4 Utility 46

Topic,Utility Di#0Eculty,2

#25 Correct Responses,58 Discrimination Index,27

Correct Answer,C

4.4 Chen has preferences represented by the utility function,U#28x;y#29=minf4x+ y;x+6yg.Ifx

is on the horizontal axis and y is on the vertical axis,what is the slope of his indi#0Berence curveat

the point #289;4#29?

#28a#29 The slope is,4.

#28b#29 The slope is,6=4.

#28c#29 The slope is,1=6.

#28d#29 The slope is,1=4.

#28e#29 The slope is,9=4.

Topic,Utility Di#0Eculty,1

#25 Correct Responses,95 Discrimination Index,9

Correct Answer,C

4.5 Doreen has preferences represented by the utility function U#28x;y#29=10x+5y,She consumes

10 units of good x and 9 units of good y,If her consumption of good x is lowered to 1,how many

units of y must she have in order to be exactly as well o#0B as before?

#28a#29 30 units of good y

#28b#29 30 units of good y

#28c#29 27 units of good y

#28d#29 18 units of good y

#28e#29 None of the above

Topic,Utility Di#0Eculty,1

#25 Correct Responses,95 Discrimination Index,9

Correct Answer,C

4.6 Sheila has preferences represented by the utility function U#28x;y#29=8x+4y,She consumes 12

units of good x and 3 units of good y,If her consumption of good x is lowered to 10,how many

units of y must she have in order to be exactly as well o#0B as before?

#28a#29 12 units of good y

#28b#29 10 units of good y

#28c#29 7 units of good y

#28d#29 5 units of good y

#28e#29 None of the above

MULTIPLE CHOICE 47

Topic,Utility Di#0Eculty,3

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,B

4.7 Mac's utility function is U#28x;y#29=maxf2x,y;2y,xg.

#28a#29 Mac's preferences are quasi-linear.

#28b#29 If Mac has more x than y; any increase in his consumption of y would lower his utility.

#28c#29 If Mac has more x than y; a decrease in his consumption of y would raise his utility.

#28d#29 Mac always prefers more of each good to less.

#28e#29 Goods x and y are perfect substitutes.

Topic,Utility Di#0Eculty,2

#25 Correct Responses,30 Discrimination Index,29

Correct Answer,C

4.8 Charles' utility function is U#28x;y#29=xy,Anne's utility function is U#28x;y#29=1;000xy,Diana's

utility function is,xy,Elizabeth's utility function is U#28x; y#29=,1=#28xy+1#29.Fergie's utility function

is xy,10;000,Margaret's utility function is x=y,Philip's utility function is x#28y +1#29,#28the goods x

and y are twovery expensive goods,We leaveyou to speculate about what they are.#29 Whichof

these persons have the same preferences as Charles?

#28a#29 Everybody except Diana

#28b#29 Anne and Fergie

#28c#29 Anne,Fergie and Elizabeth

#28d#29 None of them

#28e#29 All of them

Topic,Utility Di#0Eculty,3

#25 Correct Responses,55 Discrimination Index,67

Correct Answer,E

4.9 Raymond's preferences are represented by the utility function U#28x;y#29=x=y if y#3E0and

U#28x;y#29=0if y =0.

#28a#29 Raymond has indi#0Berence curves that are rectangular hyperbolas.

#28b#29 Raymond prefers more of each good to less.

#28c#29 Raymond has quasi-linear preferences.

#28d#29 Raymond has a bliss point.

#28e#29 Raymond has indi#0Berence curves that are upward sloping straight lines if y#3E0.

CHAPTER 4 Utility 48

Topic,Utility Di#0Eculty,2

#25 Correct Responses,92 Discrimination Index,17

Correct Answer,C

4.10 Molly's utility function is U#28x;y#29=y+4x

:5

,She has 25 units of x and 12 units of y,If her

consumption of x is reduced to 0,how many units of y would she need in order to be exactly as

well o#0B as before?

#28a#29 48 units.

#28b#29 37 units.

#28c#29 32 units.

#28d#29 112 units.

#28e#29 None of the above.

Topic,Utility Di#0Eculty,2

#25 Correct Responses,21 Discrimination Index,13

Correct Answer,E

4.11 Waldo's utility function is U#28x;y#29=xy.Waldo consumes 5 units of x and 25 units of y.

#28a#29 Waldo would be willing to make small exchanges of x for y in whichhegives up 5 units of x for every

unit of y he gets.

#28b#29 Waldo would be willing to trade away all of his x for y so long he gets more than 5 units of y for every

unit of x he gives up.

#28c#29 Waldo likes x and y equally well so he is always willing to exchange 1 unit of either good for more than

one unit of the other.

#28d#29 Waldo will always be willing to make trades at any price if he does not have equal amounts of the two

goods.

#28e#29 None of the above.

MULTIPLE CHOICE 49

Topic,Utility Di#0Eculty,2

#25 Correct Responses,21 Discrimination Index,13

Correct Answer,E

4.12 Ernie's utility function is U#28x;y#29=xy,Ernie consumes 4 units of x and 16 units of y.

#28a#29 Ernie would be willing to make small exchanges of x for y in whichhegives up 4 units of x for every

unit of y he gets.

#28b#29 Ernie would be willing to trade away all of his x for y so long he gets more than 4 units of y for every

unit of x he gives up.

#28c#29 Ernie likes x and y equally well so he is always willing to exchange 1 unit of either good for more than

one unit of the other.

#28d#29 Ernie will always be willing to make trades at any price if he does not have equal amounts of the two

goods.

#28e#29 None of the above.

Topic,Utility Di#0Eculty,2

#25 Correct Responses,16 Discrimination Index,0

Correct Answer,B

4.13 Henry's utility function is x

2

+16xw +64w

2

where x is his consumption of x and w is his

consumption of w.

#28a#29 Henry's preferences are nonconvex.

#28b#29 Henry's indi#0Berence curves are straight lines.

#28c#29 Henry has a bliss point.

#28d#29 Henry's indi#0Berence curves are hyperbolas.

#28e#29 None of the above.

Topic,Utility Di#0Eculty,1

#25 Correct Responses,92 Discrimination Index,37

Correct Answer,D

4.14 Josephine's utility function is U#28x;y#29=y+5x

:5

,She has one unit of x and two units of y.If

her consumption of x is reduced to zero,howmuch y must she have in order to be exactly as well

o#0B as before?

#28a#29 14 units.

#28b#29 9 units.

#28c#29 11 units.

#28d#29 7 units.

#28e#29 None of the above.

CHAPTER 4 Utility 50

Topic,Utility Di#0Eculty,2

#25 Correct Responses,10 Discrimination Index,0

Correct Answer,C

4.15 Jim's utility function is U#28x;y#29=xy,Jerry's utility function is U#28x;y#29=1;000xy +2;000.

Tammy's utility function is U#28x;y#29=xy#281,xy#29,Oral's utility function is,1=#2810+xy#29,Billy's utility

function is U#28x;y#29=x=y.Pat's utility function is U#28x;y#29=,xy.

#28a#29 No two of these people have the same preferences.

#28b#29 They all have the same preferences except for Billy.

#28c#29 Jim,Jerry,and Pat all have the same indi#0Berence curves,but Jerry and Oral are the only ones with the

same preferences as Jim.

#28d#29 Jim,Tammy,and Oral all have the same preferences.

#28e#29 There is no truth in any of the above statements.

Topic,Utility Di#0Eculty,1

#25 Correct Responses,74 Discrimination Index,15

Correct Answer,A

4.16 Harmon's utility function is U#28x

1;x

2

#29=x

1

x

2

,His income is $100,the price of good 2 is

p

2

=4,Good 1 is priced as follows,The #0Crst 15 units cost $4 per unit and any additional units

cost $2 per unit,What consumption bundle does Harmon choose?

#28a#29 #2812:5;12:5#29

#28b#29 #2825;12:5#29

#28c#29 #2812:5;25#29

#28d#29 #2815;10#29

#28e#29 None of the above.

Topic,Utility Di#0Eculty,1

#25 Correct Responses,61 Discrimination Index,37

Correct Answer,E

4.17 Janet consumes x

1

and x

2

together in #0Cxed proportions,She always consumes 2 units of x

1

for every unit x

2

,One utility function that describes her preferences is:

#28a#29 U#28x

1;x

2

#29=2x

1

x

2

#28b#29 U#28x

1;x

2

#29=2x

1

+x

2

#28c#29 U#28x

1;x

2

#29=x

1

+2x

2

#28d#29 U#28x

1;x

2

#29=minf2x

1;x

2

g

#28e#29 U#28x

1;x

2

#29=minfx

1;2x

2

g

MULTIPLE CHOICE 51

Topic,Utility Di#0Eculty,3

#25 Correct Responses,14 Discrimination Index,36

Correct Answer,C

4.18 Oswald Odd consumes only goods 1 and 2,His utility function is U#28x

1;x

2

#29=x

1

+x

2

+

minfx

1;x

2

g,EachofOswald's indi#0Berence curves is:

#28a#29 L-shaped.

#28b#29 made up of 3 line segments with slopes,2;,1; and,1=2.

#28c#29 made up of two line segments with slopes,2 and,1=2.

#28d#29 is smooth and has no kinks.

#28e#29 is a diamond-shaped #0Cgure consisting of 4 line segments.

Topic,Utility Di#0Eculty,3

#25 Correct Responses,4 Discrimination Index,0

Correct Answer,A

4.19 The absolute value of Mars' MRS at his current consumption bundle is greater than 3,#28That

is; MU

1

=MU

2

#3E 3#29,Mars has convex preferences and is currently consuming positive amounts of

both goods.

#28a#29 Taking away some of Good 1 and giving Mars 3 units of Good 2 for each unit of Good 1 taken away will

necessarily make him worse o#0B.

#28b#29 Taking away some Good 1 and giving Mars 3 units of Good 2 for each unit of Good 1 taken away will

necessarily make him better o#0B.

#28c#29 Giving Mars some Good 1 and taking away 3 units of Good 2 for each unit of Good 1 he is given will

necessarily make him worse o#0B.

#28d#29 Giving Mars some Good 1 and taking away 3 units of Good 2 for each unit of Good 1 he is given will

necessarily make him better o#0B.

#28e#29 More than one of the above is true.

CHAPTER 4 Utility 52

Topic,Utility Di#0Eculty,3

#25 Correct Responses,48 Discrimination Index,84

Correct Answer,B

4.20 Isabella's utility function is U#28x;y#29=4minfx;yg+y.Ifwe draw her indi#0Berence curves with

x on the horizontal axis and y on the vertical axis,these indi#0Berence curves are:

#28a#29 L-shaped with kinks where x = y.

#28b#29 made up of two line segments that meet where x = y,One of these line segments is horizontal and the

other has slope,4.

#28c#29 L-shaped with kinks where x =5y.

#28d#29 made up of two line segments that meet where x =5y,One of these line segments is vertical and the

other has slope,1.

#28e#29 V-shaped with kinks where x =4y.

Topic,Utility Di#0Eculty,3

#25 Correct Responses,48 Discrimination Index,84

Correct Answer,B

4.21 Penelope's utility function is U#28x;y#29=2minfx;yg + y.Ifwe draw her indi#0Berence curves

with x on the horizontal axis and y on the vertical axis,these indi#0Berence curves are:

#28a#29 L-shaped with kinks where x = y.

#28b#29 made up of two line segments that meet where x = y,One of these line segments is horizontal and the

other has slope,2.

#28c#29 L-shaped with kinks where x =3y.

#28d#29 made up of two line segments that meet where x =3y,One of these line segments is vertical and the

other has slope,1.

#28e#29 V-shaped with kinks where x =2y.

Topic,Utility Di#0Eculty,1

#25 Correct Responses,94 Discrimination Index,20

Correct Answer,E

4.22 Charlie has the utility function U#28x

A;x

B

#29=x

A

x

B

,His indi#0Berence curve passing through

32 apples and 8 bananas will also pass through the point where he consumes 4 apples and:

#28a#29 16 bananas.

#28b#29 32 bananas.

#28c#29 68 bananas.

#28d#29 72 bananas.

#28e#29 64 bananas.

MULTIPLE CHOICE 53

Topic,Utility Di#0Eculty,1

#25 Correct Responses,94 Discrimination Index,20

Correct Answer,E

4.23 Charlie has the utility function U#28x

A;x

B

#29=x

A

x

B

,His indi#0Berence curve passing through

10 apples and 35 bananas will also pass through the point where he consumes 2 apples and:

#28a#29 35 bananas.

#28b#29 70 bananas.

#28c#29 177 bananas.

#28d#29 182 bananas.

#28e#29 175 bananas.

Topic,Utility Di#0Eculty,0

#25 Correct Responses,95 Discrimination Index,47

Correct Answer,B

4.24 Charlie's utility function is U#28A;B#29=AB where A and B are the numbers of apples and

bananas,respectively,that he consumes,When Charlie is consuming 15 apples and 90 bananas,if

we put apples on the horizontal axis and bananas on the vertical axis,the slope of his indi#0Berence

curve at his current consumption is:

#28a#29,15.

#28b#29,6.

#28c#29,12.

#28d#29,1=6.

#28e#29,1=12.

Topic,Utility Di#0Eculty,0

#25 Correct Responses,95 Discrimination Index,47

Correct Answer,B

4.25 Charlie's utility function is U#28A;B#29=AB where A and B are the numbers of apples and

bananas,respectively,that he consumes,When Charlie is consuming 25 apples and 100 bananas,if

we put apples on the horizontal axis and bananas on the vertical axis,the slope of his indi#0Berence

curve at his current consumption is:

#28a#29,25.

#28b#29,4.

#28c#29,8.

#28d#29,1=4.

#28e#29,1=8.

CHAPTER 4 Utility 54

Topic,Utility Di#0Eculty,2

#25 Correct Responses,53 Discrimination Index,49

Correct Answer,C

4.26 Ambrose has the utility function U#28x

1;x

2

#29=4x

1=2

1

+x

2

.IfAmbrose is initially consuming

64 units of nuts and 10 units of berries,then what is the largest number of berries that he would

be willing to give up in return for an additional 17 units of nuts.

#28a#29 9

#28b#29 19

#28c#29 4

#28d#29 2

#28e#29 1

Topic,Utility Di#0Eculty,2

#25 Correct Responses,53 Discrimination Index,49

Correct Answer,C

4.27 Ambrose has the utility function U#28x

1;x

2

#29=4x

1=2

1

+x

2

.IfAmbrose is initially consuming 4

units of nuts and 18 units of berries,then what is the largest number of berries that he would be

willing to give up in return for an additional 32 units of nuts.

#28a#29 6

#28b#29 24

#28c#29 16

#28d#29 8

#28e#29 4

Topic,Utility Di#0Eculty,2

#25 Correct Responses,60 Discrimination Index,52

Correct Answer,C

4.28 Joe Bob's cousin Leonard consumes goods 1 and 2,Leonard thinks that 2 units of good 1

is always a perfect substitute for 3 units of good 2,Which of the following utility functions is the

only one that would NOT represent Leonard's preferences?

#28a#29 U#28x

1;x

2

#29=3x

1

+2x

2

+1000.

#28b#29 U#28x

1;x

2

#29=9x

2

1

+12x

1

x

2

+4x

2

2

.

#28c#29 U#28x

1;x

2

#29=Minf3x

1;2x

2

g.

#28d#29 U#28x

1;x

2

#29=30x

1

+20x

2

,10;000.

#28e#29 More than one of the above does NOT represent Leonard's preferences.

MULTIPLE CHOICE 55

Topic,Utility Di#0Eculty,2

#25 Correct Responses,60 Discrimination Index,52

Correct Answer,C

4.29 Joe Bob's cousin Tim consumes goods 1 and 2,Tim thinks that 4 units of good 1 is always

a perfect substitute for 2 units of good 2,Which of the following utility functions is the only one

that would NOT represent Tim's preferences?

#28a#29 U#28x

1;x

2

#29=2x

1

+4x

2

+1000.

#28b#29 U#28x

1;x

2

#29=4x

2

1

+16x

1

x

2

+16x

2

2

.

#28c#29 U#28x

1;x

2

#29=Minf2x

1;4x

2

g.

#28d#29 U#28x

1;x

2

#29=20x

1

+40x

2

,10;000.

#28e#29 More than one of the above does NOT represent Tim's preferences.

Topic,Utility Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,E

4.30 Harry Mazzola has the utility function U#28x

1;x

2

#29=minfx

1

+2x

2;2x

1

+x

2

g,He has $40 to

spend on corn chips and french fries,if the price of corn chips is 3 dollar#28s#29 per unit and the price

of french fries is 4 dollars per unit,then Harry will:

#28a#29 de#0Cnitely spend all of his income on corn chips.

#28b#29 de#0Cnitely spend all of his income on french fries.

#28c#29 consume at least as much corn chips as french fries,but might consume both.

#28d#29 consume at least as much french fries as corn chips,but might consume both.

#28e#29 consume equal amounts of french fries and corn chips.

Topic,Utility Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,E

4.31 Harry Mazzola has the utility function U#28x

1;x

2

#29=minfx

1

+2x

2;2x

1

+x

2

g,He has $40 to

spend on corn chips and french fries,if the price of corn chips is 3 dollar#28s#29 per unit and the price

of french fries is 5 dollars per unit,then Harry will:

#28a#29 de#0Cnitely spend all of his income on corn chips.

#28b#29 de#0Cnitely spend all of his income on french fries.

#28c#29 consume at least as much corn chips as french fries,but might consume both.

#28d#29 consume at least as much french fries as corn chips,but might consume both.

#28e#29 consume equal amounts of french fries and corn chips.

CHAPTER 4 Utility 56

Topic,Utility Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,C

4.32 Phil Rupp's sister Ethel has the utility function U#28x;y#29=minf4x+ y;5yg,Where x is mea-

sured on the horizontal axis and y on the vertical axis,her indi#0Berence curves:

#28a#29 consist of a vertical line segment and a horizontal line segment which meet in a kink along the line y =4x.

#28b#29 consist of a vertical line segment and a horizontal line segment which meet in a kink along the line

x =4y.

#28c#29 consist of a horizontal line segment and a negatively sloped line segment which meet in a kink along the

line x = y.

#28d#29 consist of a positively sloped line segment and a negatively sloped line segment which meet along the

line x = y.

#28e#29 consist of a horizontal line segment and a positively sloped line segment which meet in a kink along the

line x =4y.

Topic,Utility Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,C

4.33 Phil Rupp's sister Ethel has the utility function U#28x;y#29=minf5x+ y;6yg,Where x is mea-

sured on the horizontal axis and y on the vertical axis,her indi#0Berence curves:

#28a#29 consist of a vertical line segment and a horizontal line segment which meet in a kink along the line y =5x.

#28b#29 consist of a vertical line segment and a horizontal line segment which meet in a kink along the line

x =5y.

#28c#29 consist of a horizontal line segment and a negatively sloped line segment which meet in a kink along the

line x = y.

#28d#29 consist of a positively sloped line segment and a negatively sloped line segment which meet along the

line x = y.

#28e#29 consist of a horizontal line segment and a positively sloped line segment which meet in a kink along the

line x =5y.

Essay Utility

Topic,Utility Di#0Eculty,1

#25 Correct Responses,0 Discrimination Index,0

4.1 Jim's utility function is U#28x;y#29=xy,Jerry's utility function is U#28x;y#29 = 1000xy + 2000.

Tammy's utility function is U#28x;y#29=xy#281,xy#29,Oral's utility function is U#28x;y#29=,1=#2810+2xy#29.

Marjoe's utility function is U#28x;y#29=x#28y+ 1000#29.Pat's utility function is U#28x;y#29=:5xy,10000.

Billy's utility function is U#28x;y#29=x=y,F Francis's utility function is U#28x;y#29=,xy,#28a#29 Who has

the same preferences as Jim? #28b#29 Who had the same indi#0Berence curves as Jim? #28c#29 Explain why

the answers to #28a#29 and #28b#29 di#0Ber.

Answer,Jerry,Pat and Oral have the same preferences as Jim since their utility functions are

monotonic transformations of Jim's,Jerry,Pat,Oral,Tammy,and Francis have the same indif-

ference curves as Jim,but Tammy and Francis have di#0Berent preferences,Francis' utility function

is a decreasing transformation of Jim's,so he orders his indi#0Berence curves in the opposite way.

Tammy's utility function is a transformation of Jim's but is sometimes increasing sometimes de-

creasing.

Topic,Utility Di#0Eculty,3

#25 Correct Responses,0 Discrimination Index,0

4.2 A consumer has a utility function of the form U#28x;y#29=x

a

+y

b

where both a and b are non-

negative,What additional restrictions on the values of the parameters a and b are imposed by each

of the following assumptions? #28i#29 Preferences are quasi-linear,convex,and x is a normal good,#28ii#29

Preferences are homothetic,#28iii#29 Preferences are homothetic and convex,#28iv#29 Goods x and y are

perfect substitutes.

Answer,#28i#29 a =1and b is between 0 and 1,#28ii#29 a = b,#28iii#29 a = b and a is between 0 and 1.#28iv#29

a = b =1.

Topic,Utility Di#0Eculty,3

#25 Correct Responses,0 Discrimination Index,0

4.3 Victor Finick likes to have the same amountofxas he has of y,His utility function is

U#28x;y#29=minf2x,y;2y,xg,a#29 Draw the indi#0Berence curve for Victor that passes through the

bundle #280;0#29 and the indi#0Berence curve that passes through #284;4#29,#28Hint,Each indi#0Berence curveis

the intersection of two line segments.#29 b#29 If Victor has a bundle that he likes better than #280;0#29 and

his consumption of both goods is doubled,is Victor better o#0B? c#29 Does Victor always prefer more

of either good to less?

Answer,Victor's indi#0Berence curves are V-shaped,The one through the origin consists of the two

rays y =2xand x =2y,The one through #282;2#29 has tworays going out from #282;2#29,,one with slope

1=2; and the other with slope 2,b#29 Yes c#29 No,If x#3Ey;then an increase in x by itself makes him

worse o#0B and if y#3Ex;an increase in y by itself makes him worse o#0B.

CHAPTER 4 Utility 58

Topic,Utility Di#0Eculty,1

#25 Correct Responses,0 Discrimination Index,0

4.4 Use separate graphs to sketchtwo indi#0Berence curves for people with each of the following

utility functions,a#29 U#28x;y#29=x+2yb#29U#28x;y#29=Minfx;2yg c#29 U#28x;y#29=maxfx;2yg

Answer,a#29 These are straight lines with slope,1=2,b#29 These are L-shaped,The corners lie along

the locus x =2y.c#29Atypical indi#0Berence curve consists of a horizontal line from the y axis to the

locus x =2yand then a vertical line to the y axis from the point where the horiontal line met the

line x =2y.

Topic,Utility Di#0Eculty,2

#25 Correct Responses,0 Discrimination Index,0

4.5 Use separate graphs to draw indi#0Berence curves for each of the following utility functions,a#29

U#28x;y#29=minf2x+y;2y +xg

b#29 U#28x;y#29=maxf2x+ y;2y +xg,c#29 U#28x;y#29=x+minfx;yg,In which of these cases are preferences

convex?

Answer,If you takeapoint on the line x = y and drawtwo lines through it,one with a slope

of,1=2 and the other with a slope of,2; the outer envelope of these lines will be an indi#0Berence

curve for a#29 and the inner envelope will be an indi#0Berence curve for b#29,The indi#0Berence curves for

c#29 passing through a point on the line x = y consist of a line segment going down and to the right

with slope,1 and a line segment going up and to the left with slope,2,Cases a#29 and c#29 display

convex preferences and case b#29 does not.

Chapter 5

True-False Choice

Topic,Choice Di#0Eculty,1

#25 Correct Responses,78 Discrimination Index,21

Correct Answer,False

5.1 At a boundary optimum,a consumer's indi#0Berence curvemust be tangent to her budget line.

Topic,Choice Di#0Eculty,2

#25 Correct Responses,56 Discrimination Index,20

Correct Answer,False

5.2 Max Gross has the utility function U#28x;y#29=maxfx;yg,If the price of x is the same as the

price of y; Max will buy equal amounts of x and y.

Topic,Choice Di#0Eculty,2

#25 Correct Responses,83 Discrimination Index,21

Correct Answer,False

5.3 If a consumer does not have convex preferences,then a point of tangency between her indif-

ference curve and her budget line must be an optimal consumption point.

Topic,Choice Di#0Eculty,2

#25 Correct Responses,46 Discrimination Index,0

Correct Answer,True

5.4 Sharon spends all of her income on peaches and strawberries,Peaches are a normal good for

her,Her income increased by 20 percent and prices did not change,Her consumption of strawber-

ries could not have increased by more than 20 percent.

Topic,Choice Di#0Eculty,2

#25 Correct Responses,32 Discrimination Index,46

Correct Answer,False

5.5 Clara's utility function is U#28x;y#29=#28x+ 2#29#28y +1#29,If her consumption of both x and y are

doubled,then her marginal rate of substitution between x and y remains constant.

CHAPTER 5 Choice 60

Topic,Choice Di#0Eculty,1

#25 Correct Responses,80 Discrimination Index,11

Correct Answer,True

5.6 Charlie's utility function is U#28x;y#29=xy

2

,His marginal rate of substitution between x and y

does not change if you double the amount of both goods.

Topic,Choice Di#0Eculty,2

#25 Correct Responses,64 Discrimination Index,54

Correct Answer,True

5.7 Ambrose's utility function is U#28x;y#29=x+4y

1=2

,The price of x is 1 and the price of y is 2,If

his income rises from 100 to 150,his consumption of y increases by more than 10#25 but less than

50#25.

Topic,Choice Di#0Eculty,2

#25 Correct Responses,91 Discrimination Index,10

Correct Answer,False

5.8 Linus has utility function U#28x;y#29=x+2y,If the price of x is 1 and the price of y is 1=2; then

Linus must consume equal amounts of both goods in order to maximize his utility.

Topic,Choice Di#0Eculty,3

#25 Correct Responses,22 Discrimination Index,3

Correct Answer,True

5.9 Mary Granola's utility function is U#28x;y#29=minfx +2y;y +2xg,Mary maximizes her utility

subject to a budget constraint,If she chooses the bundle #285;6#29; then it must be that the price of x

is exactly twice the price of y.

Topic,Choice Di#0Eculty,2

#25 Correct Responses,62 Discrimination Index,41

Correct Answer,True

5.10 Millie's utility function is U#28x;y#29=minfx;yg,She maximizes her utility subject to a budget

constraint,The price of x is the same as the price of y,If the price of x rises and the price of y

and her income remain constant,then her consumption of y will certainly decrease.

TRUE-FALSE 61

Topic,Choice Di#0Eculty,2

#25 Correct Responses,49 Discrimination Index,25

Correct Answer,True

5.11 Other things being equal,a lump sum tax is at least as good for a consumer as a sales tax

that collects the same revenue from him.

Topic,Choice Di#0Eculty,2

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,False

5.12 If a consumer doesn't consume any snails,but does consume Big Macs,then his marginal

rate of substitution between snails and Big Macs when his snail consumption is zero,must be equal

to the ratio of the price of snails to the price of Big Macs.

Multiple Choice Choice

Topic,Choice Di#0Eculty,1

#25 Correct Responses,13 Discrimination Index,25

Correct Answer,B

5.1 Hans has 27 dollars,which he decides to spend on x and y,Commodity x costs $16 per unit

and commodity y costs $10 per unit,He has the utility function U#28x;y#29=5x

2

+2y

2

and he can

purchase fractional units of x and y.

#28a#29 Hans will choose only x.

#28b#29 Hans will choose only y.

#28c#29 Hans will chose some of each commodity,but more y than x.

#28d#29 Hans will choose some of each commodity,but more x than y.

#28e#29 Hans will choose equal amounts of the two commodities.

Topic,Choice Di#0Eculty,1

#25 Correct Responses,13 Discrimination Index,25

Correct Answer,B

5.2 Ollie has 40 dollars,which he decides to spend on x and y,Commodity x costs $13 per unit

and commodity y costs $11 per unit,He has the utility function U#28x;y#29=6x

2

+4y

2

and he can

purchase fractional units of x and y.

#28a#29 Ollie will choose only x.

#28b#29 Ollie will choose only y.

#28c#29 Ollie will chose some of each commodity,but more y than x.

#28d#29 Ollie will choose some of each commodity,but more x than y.

#28e#29 Ollie will choose equal amounts of the two commodities.

Topic,Choice Di#0Eculty,2

#25 Correct Responses,86 Discrimination Index,36

Correct Answer,E

5.3 Wanda Littlemore's utility function is U#28x;y#29=x+63y,3y

2

,Her income is 184,If the price

of x is 1 and the price of y is 33,how many units of good x will Wanda demand?

#28a#29 17

#28b#29 22

#28c#29 24

#28d#29 0

#28e#29 19

MULTIPLE CHOICE 63

Topic,Choice Di#0Eculty,2

#25 Correct Responses,86 Discrimination Index,36

Correct Answer,E

5.4 Wanda Littlemore's utility function is U#28x;y#29=x+72y,3y

2

,Her income is 207,If the price

of x is 1 and the price of y is 24,how many units of good x will Wanda demand?

#28a#29 13

#28b#29 18

#28c#29 23

#28d#29 0

#28e#29 15

Topic,Choice Di#0Eculty,3

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,B

5.5 Henri's utility function is minfx;5y +2zg,The price of x is 1,the price of y is 15,and the

price of z is 7,Henri's income is 44,How many units of x does Henri demand?

#28a#29 9.78

#28b#29 11

#28c#29 5

#28d#29 3

#28e#29 None of the above.

Topic,Choice Di#0Eculty,3

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,B

5.6 Matt's utility function is minfx;4y+5zg,The price of x is 1,the price of y is 4,and the price

of z is 7,Matt's income is 8,How many units of x does Matt demand?

#28a#29 3.33

#28b#29 4

#28c#29 7

#28d#29 5

#28e#29 None of the above.

CHAPTER 5 Choice 64

Topic,Choice Di#0Eculty,2

#25 Correct Responses,59 Discrimination Index,32

Correct Answer,A

5.7 Peter consumes no commodities other than Miller Lite and Bud Light,His annual budget

for these two commodities is described by the equation 5x+30y= 300 where x is sixpacks of Miller

Lite and y is cases of Bud Light,Peter considers 2 cases of Bud Light to be perfect substitutes for

6 sixpacks of Miller Lite,Which of the following is true?

#28a#29 He will consume 60 sixpacks of Miller Lite per year.

#28b#29 He will consume 10 cases of Bud Light per year.

#28c#29 He will consume 14 cases of Bud Light per year.

#28d#29 He will consume 12 sixpacks of Miller Lite per year.

#28e#29 He is indi#0Berentbetween anytwo bundles that use up his entire income.

Topic,Choice Di#0Eculty,2

#25 Correct Responses,59 Discrimination Index,32

Correct Answer,A

5.8 Harold consumes no commodities other than Miller Lite and Bud Light,His annual budget

for these two commodities is described by the equation 5x+20y= 300 where x is sixpacks of Miller

Lite and y is cases of Bud Light,Harold considers 2 cases of Bud Light to be perfect substitutes

for 10 sixpacks of Miller Lite,Which of the following is true?

#28a#29 He will consume 60 sixpacks of Miller Lite per year.

#28b#29 He will consume 15 cases of Bud Light per year.

#28c#29 He will consume 19 cases of Bud Light per year.

#28d#29 He will consume 12 sixpacks of Miller Lite per year.

#28e#29 He is indi#0Berentbetween anytwo bundles that use up his entire income.

Topic,Choice Di#0Eculty,1

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,A

5.9 Paul's utility function is minfx+3y;3x+yg,Simon's utility function is minf3x+9y;9x+3yg.

Paul and Simon have the same income and face the same prices,Which of the following is true?

#28a#29 Paul and Simon will demand the same amountofgoodx.

#28b#29 Paul will demand more y than Simon.

#28c#29 Simon will demand more y than Paul.

#28d#29 Each will prefer the other's consumption bundle to his own.

#28e#29 None of the above.

MULTIPLE CHOICE 65

Topic,Choice Di#0Eculty,3

#25 Correct Responses,30 Discrimination Index,31

Correct Answer,C

5.10 Mary Granola consumes tomatoes and nectarines,Mary's indi#0Berence curves are kinky.

When she is consuming more tomatoes than nectarines,she is just willing to trade 3 tomatoes for

1 nectarines,When she is consuming more nectarines than tomatoes,she is just willing to trade 4

nectarines for 1 tomatoes,Let P

1

be the price of nectarines and P

2

the price of tomatoes,Mary

maximizes her utility subject to her budget constraint,Which is true? #28Hint,Sketch one of her

indi#0Berence curves.#29

#28a#29 When P

1

#3EP

2;she must consume only tomatoes.

#28b#29 When P

1

#3EP

2;she must consume 3 times as many tomatoes as nectarines.

#28c#29 When P

1

#3E 3P

2; she must consume only tomatoes.

#28d#29 When 4P

1

#3EP

2;she must consume only nectarines.

#28e#29 She must consume equal amounts of both.

Topic,Choice Di#0Eculty,3

#25 Correct Responses,30 Discrimination Index,31

Correct Answer,C

5.11 Mary Granola consumes oranges and apples,Mary's indi#0Berence curves are kinky,When

she is consuming more oranges than apples,she is just willing to trade 5 oranges for 1 apples,When

she is consuming more apples than oranges,she is just willing to trade 2 apples for 1 oranges,Let

P

1

be the price of apples and P

2

the price of oranges,Mary maximizes her utility subject to her

budget constraint,Which is true? #28Hint,Sketch one of her indi#0Berence curves.#29

#28a#29 When P

1

#3EP

2;she must consume only oranges.

#28b#29 When P

1

#3EP

2;she must consume 5 times as many oranges as apples.

#28c#29 When P

1

#3E 5P

2; she must consume only oranges.

#28d#29 When 2P

1

#3EP

2;she must consume only apples.

#28e#29 She must consume equal amounts of both.

CHAPTER 5 Choice 66

Topic,Choice Di#0Eculty,3

#25 Correct Responses,28 Discrimination Index,33

Correct Answer,C

5.12 Badger Madison consumes only beer and sausages,His income is $100,Beer costs him $.50

per can and sausages cost $1 each,Where x is the number of cans of beer and y the number of

sausages he consumes per week,Badger's utility function is U#28x;y#29=,#5B#28x,50#29

2

+#28y,40#29

2

#5D.

#28a#29 Badger must always be unhappy since whatever he consumes,his utility is negative.

#28b#29 He has monotonic preferences.

#28c#29 If his income increases,he won't change the commodity bundle that he buys.

#28d#29 If the price of beer goes down,he will buy more beer.

#28e#29 More than one of the above statements is true.

Topic,Choice Di#0Eculty,3

#25 Correct Responses,70 Discrimination Index,58

Correct Answer,D

5.13 Janet consumes two commodities x and y,Her utility function is minfx +2y;y +2xg,She

chooses to buy 10 units of good x and 20 units of good y,The price of good x is 1,Whichofthe

following is true?

#28a#29 Janet's income is 40.

#28b#29 Janet's income is 50.

#28c#29 Janet's income is 30.

#28d#29 Janet's income is 20.

#28e#29 There is not enough information in the problem to determine her income because we are not told the

price of y.

Topic,Choice Di#0Eculty,2

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,A

5.14 Martha's utility function is U#28x;y#29=minfx +2y;2x + yg,George's utility function is

U#28x;y#29=minf2x +4y;4x+2yg,If George and Martha have the same income and face the same

prices for the goods x and y,

#28a#29 George and Martha will both demand the same amountofy.

#28b#29 Martha will always prefer George's consumption bundle to her own.

#28c#29 George will always prefer Martha's consumption bundle to his own.

#28d#29 George will demand more x than Martha demands.

#28e#29 None of the above.

MULTIPLE CHOICE 67

Topic,Choice Di#0Eculty,2

#25 Correct Responses,69 Discrimination Index,48

Correct Answer,B

5.15 Ollie has a utility function U#28x;y#29=#28x+ 2#29#28y +3#29,The price of x is 1 and the price of y is

1,When he maximizes his utility subject to his budget constraint,he consumes positive amounts

of both goods.

#28a#29 Ollie consumes exactly as much x as y.

#28b#29 Ollie consumes one more unit of x than he consumes of y.

#28c#29 Ollie consumes one more unit of y than he consumes of x.

#28d#29 Ollie consumes two more units of x than he consumes of y.

#28e#29 None of the above.

Topic,Choice Di#0Eculty,2

#25 Correct Responses,69 Discrimination Index,48

Correct Answer,B

5.16 Maurice has a utility function U#28x;y#29=#28x+3#29#28y+2#29,The price of x is 1 and the price of y is

1,When he maximizes his utility subject to his budget constraint,he consumes positive amounts

of both goods.

#28a#29 Maurice consumes exactly as much x as y.

#28b#29 Maurice consumes one more unit of x than he consumes of y.

#28c#29 Maurice consumes one more unit of y than he consumes of x.

#28d#29 Maurice consumes two more units of x than he consumes of y.

#28e#29 None of the above.

CHAPTER 5 Choice 68

Topic,Choice Di#0Eculty,1

#25 Correct Responses,19 Discrimination Index,27

Correct Answer,A

5.17 DannyFeatherweight is taking a tough course in lawschool,His prof agreed to give him

a course grade of maxf2x;3yg where x and y are the number of answers he gets right on the #0Crst

and second midterms,respectively,Danny needs a course grade of 150 to pass,He #0Cnds that for

the #0Crst midterm,for every A minutes of study,he will get one more answer right,For the second

midterm,for every B minutes that he studies,he will get one more answer right,If he doesn't

study at all,Danny will get nothing right on either exam,All Danny cares about is passing,He

doesn't wanttowaste any time getting a higher grade than he needs.

#28a#29 If A=B #3C 2=3; then Danny will not study for the second exam.

#28b#29 The ratio of the time Danny spends on exam 1 to the time he spends on exam 2 will be 2A=3B.

#28c#29 The ratio of the time Danny spends on exam 2 to the time he spends on exam 1 will be 3A=2B.

#28d#29 If A#3CB;then Danny will not study for the #0Crst exam.

#28e#29 Danny will spend 150=#282A+3B#29 minutes studying for each exam.

Topic,Choice Di#0Eculty,2

#25 Correct Responses,75 Discrimination Index,40

Correct Answer,A

5.18 Isobel consumes positive quantities of both jam and and juice,The price of jam is 5 cents

per unit and the price of juice is 10 cents per unit,Her marginal utility of jam is 10 and her

marginal utility of juice is 5.

#28a#29 Without changing her total expenditures,she could increase her utilityby consuming more jam and less

juice.

#28b#29 Without changing her total expenditures,she could increase her utilityby consuming more juice and

less jam.

#28c#29 Without changing her total expenditures on jam and juice,she could not increase her utility.

#28d#29 We can't tell whether any of the other statements are true or false without knowing the quantities she

consumes.

#28e#29 She should spend more money on both jam and juice.

MULTIPLE CHOICE 69

Topic,Choice Di#0Eculty,2

#25 Correct Responses,77 Discrimination Index,0

Correct Answer,A

5.19 Harold's utility function is U#28x;y#29=#28x+ 3#29#28y +2#29,The price of x is 1,The price of y is 2.

At all incomes for which Harold consumes positive amounts of both goods,he will consume:

#28a#29 more than twice as much x as y.

#28b#29 more than twice as much y as x.

#28c#29 one more unit of x than of y.

#28d#29 one more unit of y than of x.

#28e#29 2=3asmuch y as x.

Topic,Choice Di#0Eculty,3

#25 Correct Responses,31 Discrimination Index,14

Correct Answer,C

5.20 Jane's utility function is U#28x;y#29=x+2y; where x is her consumption of good X and y is

her consumption of good Y,Her income is 2,The price of Y is 2,The cost per unit of X depends

on how many units she buys,The total cost of x units of X is the square root of x.

#28a#29 The bundle #281=4;3=4#29 is Jane's utility maximizing choice,given her budget.

#28b#29 The bundle #281;1=2#29 is Jane's utility maximizing choice,given her budget.

#28c#29 Given her budget,Jane would maximize her utilityby spending all of her income on good x.

#28d#29 Given her budget,Jane would maximize her utilityby spending all of her income on good y.

#28e#29 None of the above statements are true.

Topic,Choice Di#0Eculty,2

#25 Correct Responses,62 Discrimination Index,43

Correct Answer,A

5.21 As you may know,Mungoites eachhavetwo left feet and one right foot,Their preferences

for left and right shoes display perfect complementarity,Mungoites #0Cnd shoes useful only in #5Ctrios"

of two lefts and a right,The price of eachtype of shoe is $10 a shoe,and Mungoites consume noth-

ing other than shoes,A Mungoite's Engel curve for right shoes has the equation:

#28a#29 R = m=30

#28b#29 R = m,10.

#28c#29 R =2m.

#28d#29 R =10m.

#28e#29 R = m=10.

CHAPTER 5 Choice 70

Topic,Choice Di#0Eculty,2

#25 Correct Responses,43 Discrimination Index,39

Correct Answer,C

5.22 Howard has the utility function U#28x;y#29=x,#281=y#29,His income is $30.

#28a#29 Howard does not like good y.

#28b#29 Howard has a bliss point.

#28c#29 If the price of x is $4 and the price of y is $1,Howard will buy 2 units of y.

#28d#29 Howard will buy good y only if it is cheaper than good x.

#28e#29 None of the above.

Topic,Choice Di#0Eculty,3

#25 Correct Responses,37 Discrimination Index,31

Correct Answer,A

5.23 Minnie Applesauce is shopping for a summer lake cottage,Minnie hates mosquito bites,

but the cheapest lake cottages have the most mosquitos,The price of a lake cabin is related to b;

the number of mosquito bites you can expect per hour,according to the formula p = $20;000,100b.

Minnie's utility function is u = x,5b

2

where x is her expenditure on all goods other than her lake

cabin,If Minnie makes her best choice of lake cabin,how many mosquito bites per hour will she

get?

#28a#29 10

#28b#29 5

#28c#29 20

#28d#29 25

#28e#29 None of the above.

Topic,Choice Di#0Eculty,2

#25 Correct Responses,63 Discrimination Index,75

Correct Answer,B

5.24 The prices of goods x and y are each $1,Jane has $20 to spend and is considering choosing

10 units of x and 10 units of y,Jane has nice convex preferences and more of both goods is better

for her,Where x is drawn on the horizontal axis and y is drawn on the vertical axis,the slope of

her indi#0Berence curve at the bundle #2810;10#29 is,2.From these facts we can conclude that:

#28a#29 The bundle #2810;10#29 is the best she can a#0Bord.

#28b#29 She would be better o#0B consuming more of good x and less of good y.

#28c#29 She would be better o#0B consuming more of good y and less of good x.

#28d#29 She must dislike one of the goods.

#28e#29 More than one of the above is true.

MULTIPLE CHOICE 71

Topic,Choice Di#0Eculty,1

#25 Correct Responses,56 Discrimination Index,43

Correct Answer,C

5.25 Which of the following could possibly change a rational consumer's demand?

#28a#29 Changing his utility function by cubing it.

#28b#29 Changing his utility function bymultiplying it by 3 and subtracting 100 from it.

#28c#29 Increasing all prices and his income by $3.

#28d#29 Multiplying all prices and income by 2.2.

#28e#29 More than one of the above.

Topic,Choice Di#0Eculty,1

#25 Correct Responses,68 Discrimination Index,23

Correct Answer,C

5.26 Coke and Pepsi are perfect substitutes for Mr,Drinker and the slope of his indi#0Berence

curves is minus 1,One day he bought 2 cans of Coke and 20 cans of Pepsi,#28The cans of both

drinks are the same size.#29

#28a#29 Coke is less expensive than Pepsi.

#28b#29 Coke is more expensive than Pepsi.

#28c#29 Coke and Pepsi cost the same.

#28d#29 Mr,Drinker prefers Pepsi to Coke.

#28e#29 None of the above.

Topic,Choice Di#0Eculty,1

#25 Correct Responses,68 Discrimination Index,30

Correct Answer,C

5.27 Ed and Al both consume only bread and cheese,Both of them always choose to have some

bread and some cheese,and both have strictly convex preferences,However,Ed likes to havea

great deal of bread with a little cheese and Al likes lots of cheese with a little bread,Both face

the same prices for both goods and havechosen bundles to maximize their utilities subject to their

budgets,Which of the following statements is true?

#28a#29 Al's marginal rate of substitution is larger in absolute value than Ed's.

#28b#29 Ed's marginal rate of substitution is larger in absolute value than Al's.

#28c#29 Their marginal rates of substitution are the same.

#28d#29 Who has the larger marginal rate of substitution depends on income levels.

#28e#29 There is not enough informationfor us to be able to tell who has the larger marginalrate of substitution.

CHAPTER 5 Choice 72

Topic,Choice Di#0Eculty,2

#25 Correct Responses,35 Discrimination Index,5

Correct Answer,C

5.28 If his wage rate increases,then a utility maximizing consumer will necessarily:

#28a#29 increase #28or leave constant#29 his labor supply.

#28b#29 increase #28or leave constant#29 his labor supply if leisure is a normal good,but otherwise might reduce his

labor supply.

#28c#29 increase #28or leave constant#29 his labor supply if leisure is an inferior good,but otherwise might reduce his

labor supply.

#28d#29 decrease #28or leave constant#29 his labor supply.

#28e#29 none of the above.

Topic,Choice Di#0Eculty,2

#25 Correct Responses,22 Discrimination Index,29

Correct Answer,E

5.29 Angela consumes only two goods,x and y,Her income doubles and the prices of the two

goods remain unchanged,Assuming that she is a utility maximizer and likes both goods,whichof

the following statements is necessarily true?

#28a#29 She will consume more of both goods.

#28b#29 The ratio of her consumption of x to y remains constant.

#28c#29 Her utility doubles.

#28d#29 If her preferences are convex,she must consume more x.

#28e#29 None of the above.

Topic,Choice Di#0Eculty,2

#25 Correct Responses,74 Discrimination Index,22

Correct Answer,B

5.30 Arthur's preferences are de#0Cned over two basic food groups,beer,x

1; and ice cream,x

2

,His

utility function is u#28x

1;x

2

#29=x

2

1

+x

2

,He has $100 to spend,and each of these goods costs $10 per

quart,Which of the following statements is true?

#28a#29 Arthur will consume 5 quarts of ice cream and 5 quarts of beer.

#28b#29 Arthur will #0Cnd that 10 quarts of beer and no ice cream is the best bundle.

#28c#29 Arthur will #0Cnd that 10 quarts of ice cream and no beer is the best bundle.

#28d#29 Arthur is indi#0Berentbetween anytwo points on the line that connects #285;5#29 and #2810;10#29.

#28e#29 Arthur will spend 2=3 of his income on beer and 1=3 of his income on ice cream.

MULTIPLE CHOICE 73

Topic,Choice Di#0Eculty,3

#25 Correct Responses,19 Discrimination Index,20

Correct Answer,C

5.31 Andrew's utility function is U#28x

1;x

2

#29=4x

2

1

+x

2

,Andrew's income is $32,the price of good 1

is $16 per unit,and the price of good 2 is $1 per unit,What happens if Andrew's income increases

to $80 and prices do not change? #28Hint,Does he have convex preferences?#29

#28a#29 He will consume 48 more units of good 2 and the same amount of good 1 as before.

#28b#29 He will increase his consumption of both goods.

#28c#29 He will reduce his consumption of good 2.

#28d#29 He will consume the same amount of good 2 as before and 3 more units of good 1 than he consumed

before.

#28e#29 None of the above.

Topic,Choice Di#0Eculty,2

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,A

5.32 Lorenzo lives on x and y alone,His utility function is U#28x;y#29=minf3x+4y;7yg,The prices

of both goods are positive,Which of the following statements is necessarily true?

#28a#29 He will never buy more x than y.

#28b#29 He will buy equal amounts of the two goods.

#28c#29 He will always buy more y than x.

#28d#29 He will always buy more x than y.

#28e#29 More than one of the above.

Topic,Choice Di#0Eculty,2

#25 Correct Responses,63 Discrimination Index,65

Correct Answer,A

5.33 Mort's utility function is U#28x

1;x

2

#29=x

1

x

2

,His income is $100; the price of good 2 is $10.

Good 1 is priced as follows,The #0Crst 6 units cost $10 per unit and any additional units cost $5 per

unit,What consumption bundle does Mort choose?

#28a#29 #285;5#29

#28b#29 #287;3:5#29

#28c#29 #289;3#29

#28d#29 #286;4#29

#28e#29 None of the above.

CHAPTER 5 Choice 74

Topic,Choice Di#0Eculty,1

#25 Correct Responses,88 Discrimination Index,11

Correct Answer,D

5.34 Clara's utility function is U#28X;Y#29=#28X+ 2#29#28Y +1#29,If her marginal rate of substitution is

,4 and she is consuming 14 units of Good X; how many units of Good Y must she be consuming?

#28a#29 30

#28b#29 68

#28c#29 18

#28d#29 63

#28e#29 9

Topic,Choice Di#0Eculty,1

#25 Correct Responses,88 Discrimination Index,11

Correct Answer,D

5.35 Clara's utility function is U#28X;Y#29=#28X+ 2#29#28Y +1#29,If her marginal rate of substitution is

,2 and she is consuming 9 units of Good X; how many units of Good Y must she be consuming?

#28a#29 18

#28b#29 26

#28c#29 11

#28d#29 21

#28e#29 5

MULTIPLE CHOICE 75

Topic,Choice Di#0Eculty,2

#25 Correct Responses,75 Discrimination Index,26

Correct Answer,D

5.36

Elmer's utility function is U#28x;y#29=minfx;y

2

g,If the price of x is 25 and the price of y is 15,and

if Elmer chooses to consume 7 units of Y; what must his income be?

#28a#29 2,660

#28b#29 280

#28c#29 1,430

#28d#29 1,330

#28e#29 There is not enough information to determine his income.

Topic,Choice Di#0Eculty,2

#25 Correct Responses,75 Discrimination Index,26

Correct Answer,D

5.37

Elmer's utility function is U#28x;y#29=minfx;y

2

g,If the price of x is 20 and the price of y is 20,and

if Elmer chooses to consume 2 units of Y; what must his income be?

#28a#29 240

#28b#29 80

#28c#29 220

#28d#29 120

#28e#29 There is not enough information to determine his income.

CHAPTER 5 Choice 76

Topic,Choice Di#0Eculty,3

#25 Correct Responses,9 Discrimination Index,21

Correct Answer,C

5.38 Justin consumes goods X and Y and has a utility function U#28x;y#29=x

2

+y,The price per

unit of X is p

x

and the price per unit of Y is p

y

,He has enough money so that he can a#0Bord at

least 1 unit of either good,When he chooses his best a#0Bordable bundle,it must necessarily be that:

#28a#29 his budget line is tangent to the indi#0Berence curve passing through this bundle.

#28b#29 he consumes only x.

#28c#29 he consumes only y if p

2

x

=p

y

exceeds his income.

#28d#29 he consumes some of each good if p

x

= p

y

.

#28e#29 he consumes some of each good if p

y

= p

x

=2.

Topic,Choice Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,A

5.39 Charlie has a utility function U#28x

A;x

B

#29=x

A

x

B;the price of apples is 1 and the price of

bananas is 2,If Charlie's income were 120,how many units of bananas would he consume if he

chose the bundle that maximized his utility subject to his budget constraint?

#28a#29 30

#28b#29 15

#28c#29 60

#28d#29 6

#28e#29 90

Topic,Choice Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,A

5.40 Charlie has a utility function U#28x

A;x

B

#29=x

A

x

B;the price of apples is 1 and the price of

bananas is 2,If Charlie's income were 200,how many units of bananas would he consume if he

chose the bundle that maximized his utility subject to his budget constraint?

#28a#29 50

#28b#29 25

#28c#29 100

#28d#29 10

#28e#29 150

MULTIPLE CHOICE 77

Topic,Choice Di#0Eculty,0

#25 Correct Responses,68 Discrimination Index,30

Correct Answer,E

5.41 Charlie's utility function is U#28X

A;X

B

#29=X

A

X

B

,If Charlie's income is 40,the price of apples

is 4 and the price of bananas is 2,how many apples are there in the best bundle that Charlie can

a#0Bord?

#28a#29 10

#28b#29 12

#28c#29 8

#28d#29 9

#28e#29 5

Topic,Choice Di#0Eculty,0

#25 Correct Responses,68 Discrimination Index,30

Correct Answer,E

5.42 Charlie's utility function is U#28X

A;X

B

#29=X

A

X

B

,If Charlie's income is 40,the price of apples

is 4 and the price of bananas is 3,how many apples are there in the best bundle that Charlie can

a#0Bord?

#28a#29 10

#28b#29 12

#28c#29 8

#28d#29 9

#28e#29 5

Topic,Choice Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,B

5.43 Ambrose's utility function is U#28x

1;x

2

#29=4x

1=2

1

+x

2

,If the price of nuts #28good 1#29 is 1,the

price of berries #28good 2#29 is 6,and his income is 264,how many units of NUTS will Ambrose choose.

#28a#29 20

#28b#29 144

#28c#29 288

#28d#29 147

#28e#29 72

CHAPTER 5 Choice 78

Topic,Choice Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,B

5.44 Ambrose's utility function is U#28x

1;x

2

#29=4x

1=2

1

+x

2

,If the price of nuts #28good 1#29 is 1,the

price of berries #28good 2#29 is 6,and his income is 252,how many units of NUTS will Ambrose choose.

#28a#29 18

#28b#29 144

#28c#29 288

#28d#29 147

#28e#29 72

Topic,Choice Di#0Eculty,2

#25 Correct Responses,97 Discrimination Index,4

Correct Answer,D

5.45 Our old friend,Edmund Stench,of Chapter 2 loves punk rock video tapes,He has no

income and therefore has to accept garbage in his backyard in return for money,Each video tape

cost $2 and each sack of garbage that he accepts brings him $1,His utility function is given by

U#28c;g#29=minf2c;20,gg where c is the number of video tapes and g is the numberofsacks of garbage

that he gets per month,Each month he will choose to accept:

#28a#29 20 sacks of garbage.

#28b#29 no garbage.

#28c#29 5 sacks of garbage.

#28d#29 10 sacks of garbage.

#28e#29 15 sacks of garbage.

MULTIPLE CHOICE 79

Topic,Choice Di#0Eculty,3

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,D

5.46 Joseph's utility function is given by U

J

= x

A

+2x

B;where x

A

denotes his consumption of

apples and x

B

his consumption of bananas,Clara's utility function is given by U

C

=3x

A

+2x

B

.

Joseph and Clara shop at the same grocery store.

#28a#29 When we observe that Joseph leaves the store with some bananas,then we can deduce that Clara also

buys some bananas.

#28b#29 There exist prices of apples and bananas such that both consumers buy strictly positive amounts of both

goods.

#28c#29 When we observe that Joseph leaves the store with some apples and some bananas,then we can deduce

that Clara also buys some apples and some bananas.

#28d#29 When we observe that Joseph leaves the store with some apples,then we can deduce that Clara also

buys some apples.

#28e#29 Apples and bananas are perfect complements for Joseph.

Topic,Choice Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,B

5.47 If a consumer maximizes her preferences subject to her budget bychoosing a consumption

bundle where the ratio of her marginal utilities of shelter and food,MUS#2FMUF,is greater than the

ratio of the prices of shelter and food,p

S

=p

F; then she

#28a#29 must be consuming food but no shelter.

#28b#29 must be consuming shelter but no food.

#28c#29 must be consuming both food and shelter.

#28d#29 must not be spending all of her income.

#28e#29 must believe that shelter is a "bad".

Essay Choice

Topic,Choice Di#0Eculty,2

#25 Correct Responses,0 Discrimination Index,0

5.1 Max has the utility function U#28x;y#29=x#28y+1#29,The price of x is 2 and the price of y is 1.

Income is 10,Howmuch x does Max demand?,Howmuch y? If his income doubles and prices stay

unchanged,will Max's demand for both goods double?

Answer,To set his MRS equal to the price ratio,Max sets #28y +1#29=x =2,His budget constraintis

2x+y=10,Solve these two equations to #0Cnd that x =11=4and y =9=2,If his income doubles and

prices stay unchanged,his demand for both goods does not double,A quickway to see this is to

note that if quantities of both goods doubled,the MRS would not stay the same and hence would

not equal the price ratio,which has stayed constant.

Topic,Choice Di#0Eculty,3

#25 Correct Responses,0 Discrimination Index,0

5.2 Casper consumes cocoa and cheese,Cocoa is sold in an unusual way,There is only one

supplier,and the more cocoa you buy from him,the higher the price you havetopay per unit.

In fact y units of cocoa will cost Casper y

2

dollars,Cheese is sold in the usual way at a price of

2 dollars per unit,Casper's income is 20 dollars and his utility function is U#28x;y#29=x+2ywhere

x is his consumption of cheese and y is his consumption of cocoa,a#29 Sketch Casper's budget set

and shade it in,b#29 Sketch some of his indi#0Berence curves and label the point that he chooses,c#29

Calculate the amountofcheese and the amount of cocoa that Casper demands at these prices and

this income.

Answer,This problem is di#0Berent from those in the text and is designed to see whether the student

can use the tools presented there in a creativeway,The budget set is a convex set and the solution

is a point of tangency,Casper demands 2 units of cocoa and 16 units of cheese.

Topic,Choice Di#0Eculty,1

#25 Correct Responses,0 Discrimination Index,0

5.3 Is the following statement true or false? Brie#0Dy explain your answer,"A utility maximizer

will always choose a bundle at which his indi#0Berence curve is tangent to his budget line."

Answer,False,At a corner solution the indi#0Berence curve need not be tangent to the budget line.

ESSAY 81

Topic,Choice Di#0Eculty,2

#25 Correct Responses,0 Discrimination Index,0

5.4 Max has a utility function U#28x;y#29=2xy +1,The prices of x and y are both $1 and Max has

an income of $20,a#29 Howmuch of each good will he demand? b#29 A tax is placed on x so that x

now costs Max $2 while his income and the price of y stay the same,Howmuch good x does he

now demand? c#29 Would Max be as well o#0B as he was before the tax if when the tax was imposed,

his income rose by an amount equal to $1 times the answer to part b?

Answer,a#29 10 x and 10 y,b#295xc#29No.

Topic,Choice Di#0Eculty,2

#25 Correct Responses,0 Discrimination Index,0

5.5 Harold consumes chardonnay and quiche,His utility function is U#28c;q#29=minfc;q

2

g,Drawa

diagram showing three or four of Harold's indi#0Berence curves,If the price of chardonnayis10and

the price of quiche is 3 and if Harold is consuming 4 units of quiche,how many units of chardonnay

is he consuming?

Answer,The diagram has #0Cxed-coe#0Ecients indi#0Berence curves,but their corners line up along the

locus c = q

2

rather than along a straight line,16 units of chardonnay.

Topic,Choice Di#0Eculty,2

#25 Correct Responses,0 Discrimination Index,0

5.6 Les has the utility function U#28x;y#29=#28x+ 1#29#28y +4#29,The price of y is 1,Les spends all of his

income to buy 6 units of y and no x.From these facts we can tell that the price of x must be at

least howmuch? Explain your answer and draw a diagram to illustrate it.

Answer,Price of x must be at least 10,His marginal rate of substitution at the bundle #286;0#29 is

10,If the price of x is 10 or greater,he will choose that corner.

Chapter 6

True-False Demand

Topic,Demand Di#0Eculty,1

#25 Correct Responses,81 Discrimination Index,15

Correct Answer,True

6.1 If preferences are quasilinear,then for very high incomes the income o#0Ber curve is a straight

line parallel to one of the axes.

Topic,Demand Di#0Eculty,1

#25 Correct Responses,85 Discrimination Index,40

Correct Answer,False

6.2 In economic theory,the demand for a good must depend only on income and its own price

and not on the prices of other goods.

Topic,Demand Di#0Eculty,1

#25 Correct Responses,95 Discrimination Index,11

Correct Answer,True

6.3 If two goods are substitutes,then an increase in the price of one of them will increase the

demand for the other.

Topic,Demand Di#0Eculty,2

#25 Correct Responses,48 Discrimination Index,8

Correct Answer,True

6.4 If consumers spend all of their income,it is impossible for all goods to be inferior goods.

Topic,Demand Di#0Eculty,1

#25 Correct Responses,93 Discrimination Index,8

Correct Answer,False

6.5 An Engel curve is a demand curve with the vertical and horizontal axes reversed.

Topic,Demand Di#0Eculty,2

#25 Correct Responses,92 Discrimination Index,14

Correct Answer,False

6.6 If the demand curveisadownward-sloping straight line,then the price elasticity of demand

is constant all along the demand curve.

TRUE-FALSE 83

Topic,Elasticity Di#0Eculty,2

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,True

6.7 If the price elasticity of demand for a good is,1; then doubling the price of that good will

leave total expenditures on that good unchanged.

Topic,Demand Di#0Eculty,2

#25 Correct Responses,82 Discrimination Index,33

Correct Answer,False

6.8 If preferences are homothetic,then the slope of the Engel curve for any good will decrease

as income increases.

Topic,Elasticity Di#0Eculty,1

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,True

6.9 A good is a luxury good if the income elasticity of demand for it is greater than 1.

Topic,Demand Di#0Eculty,2

#25 Correct Responses,68 Discrimination Index,31

Correct Answer,True

6.10 Prudence was maximizing her utility subject to her budget constraint,Then prices changed.

After the price change she is better o#0B,Therefore the new bundle costs more at the old prices than

the old bundle did.

Topic,Demand Di#0Eculty,1

#25 Correct Responses,67 Discrimination Index,2

Correct Answer,False

6.11 If income is doubled and all prices are doubled,then the demand for luxury goods will more

than double.

Topic,Demand Di#0Eculty,1

#25 Correct Responses,86 Discrimination Index,21

Correct Answer,True

6.12 If preferences are homothetic and all prices double while income remains constant,then

demand for all goods is halved.

CHAPTER 6 Demand 84

Topic,Demand Di#0Eculty,1

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,False

6.13 An inferior good is less durable than a normal good.

Topic,Demand Di#0Eculty,2

#25 Correct Responses,1 Discrimination Index,1

Correct Answer,True

6.14 It is impossible for a person to have a demand curve that slopes upward at all prices.

Topic,Demand Di#0Eculty,2

#25 Correct Responses,52 Discrimination Index,34

Correct Answer,False

6.15 Donald's utility function is U#28x;y#29=x+y

1=2

,Currently he is buying some of both goods.

If his income rises and prices don't change,he will buy more of both goods.

Topic,Demand Di#0Eculty,2

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,True

6.16 Angela's utility function is x+y

1=2

,It is possible that if her income is very high,an increase

in income will not make her spend more on y.

Topic,Demand Di#0Eculty,2

#25 Correct Responses,58 Discrimination Index,0

Correct Answer,False

6.17 When other variables are held #0Cxed,the demand for a Gi#0Ben good rises when income is

increased.

Topic,Demand Di#0Eculty,1

#25 Correct Responses,90 Discrimination Index,5

Correct Answer,False

6.18 A rational consumer spends her entire income,If her income doubles and prices do not

change,then she will necessarily choose to consume twice as muchofevery good as she did before.

TRUE-FALSE 85

Topic,Demand Di#0Eculty,2

#25 Correct Responses,84 Discrimination Index,21

Correct Answer,False

6.19 A consumer has a utility function given by U = minfx

1;2x

2

g,If Good 2 has a price of zero,

the consumer will always prefer more of Good 2 to less.

Topic,Demand Di#0Eculty,2

#25 Correct Responses,61 Discrimination Index,42

Correct Answer,False

6.20 A consumer has the utility function U#28x;y#29=minfx;2yg,If the price of good x is zero and

the price of good y is p; then the consumer's demand function for good y is m=2p.

Topic,Demand Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,False

6.21 Fred has a Cobb-Douglas utility function with exponents that sum to 1,Sally consumes the

same two goods,but the two goods are perfect substitutes for her,Despite these di#0Berences,Fred

and Sally have the same price o#0Ber curves.

Topic,Demand Di#0Eculty,0

#25 Correct Responses,53 Discrimination Index,16

Correct Answer,False

6.22 Darlene's utility function is U#28x;y;z#29=x

3

y

3

z,If her income doubles and prices remain

unchanged,her demand for good Y will more than double.

Topic,Demand Di#0Eculty,0

#25 Correct Responses,53 Discrimination Index,16

Correct Answer,False

6.23 Darlene's utility function is U#28x;y;z#29=x

4

y

7

z,If her income doubles and prices remain

unchanged,her demand for good Y will more than double.

Topic,Demand Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,False

6.24 Quasilinear preferences are homothetic when the optimal amount of one of the goods is not

a#0Bordable.

Multiple Choice Demand

Topic,Demand Di#0Eculty,3

#25 Correct Responses,33 Discrimination Index,42

Correct Answer,A

6.1 Daisy received a tape recorder as a birthday gift and is not able to return it,Her utility

function is U#28x;y;z#29=x+z

1=2

f#28y#29where z is the number of tapes she buys,y is the number of tape

recorders she has and x is the amount of money she has left to spend,f#28y#29=0if y#3C1and f#28y#29=8

if y is 1 or greater,The price of tapes is 2 and she can easily a#0Bord to buy dozens of tapes,How

many tapes will she buy?

#28a#29 4

#28b#29 6

#28c#29 2

#28d#29 8

#28e#29 We need to know the price of tape recorders to solve this problem.

Topic,Demand Di#0Eculty,3

#25 Correct Responses,33 Discrimination Index,42

Correct Answer,A

6.2 Daisy received a tape recorder as a birthday gift and is not able to return it,Her utility

function is U#28x;y;z#29=x+z

1=2

f#28y#29where z is the number of tapes she buys,y is the number of

tape recorders she has and x is the amount of money she has left to spend,f#28y#29=0if y#3C1and

f#28y#29=32if y is 1 or greater,The price of tapes is 4 and she can easily a#0Bord to buy dozens of

tapes,How many tapes will she buy?

#28a#29 16

#28b#29 18

#28c#29 14

#28d#29 20

#28e#29 We need to know the price of tape recorders to solve this problem.

MULTIPLE CHOICE 87

Topic,Demand Di#0Eculty,2

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,B

6.3 Mickey is considering buying a tape recorder,His utility function is U#28x;y; z#29=x+f#28y#29z

:5

where x is the amount of money he spends on other goods,y is the number of tape recorders he

buys,and z is the number of tapes he buys,Let f#28y#29=0if y#3C1and f#28y#29=8if y is greater than

or equal to 1,The price of tape recorders is 20,the price of tapes is 1,and he can easily a#0Bord to

buy a tape recorder and and several tapes,Will he buy a tape recorder?

#28a#29 He should buy a tape recorder at these prices,but if tapes were any more expensive,it would not payto

buy one.

#28b#29 He should not buy a tape recorder.

#28c#29 He is indi#0Berent to buying a tape recorder or not.

#28d#29 There is not enough information here for us to be able to tell.

#28e#29 Even if the price of tapes doubled,he should still buy a tape recorder.

Topic,Demand Di#0Eculty,1

#25 Correct Responses,86 Discrimination Index,20

Correct Answer,D

6.4 Walt consumes strawberries and cream but only in the #0Cxed ratio of three boxes of strawber-

ries to two cartons of cream,Atany other ratio,the excess goods are totally useless to him,The

cost of a box of strawberries is 10 and the cost of a carton of cream is 10,Walt's income is 200.

Which of the following is true?

#28a#29 Walt demands 10 cartons of cream.

#28b#29 Walt demands 10 boxes of strawberries.

#28c#29 Walt considers strawberries and cartons of cream to be perfect substitutes.

#28d#29 Walt demands 12 boxes of strawberries.

#28e#29 None of the above.

CHAPTER 6 Demand 88

Topic,Demand Di#0Eculty,3

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,D

6.5 Mike consumes two commodities,x and y; and his utility function is minfx+2y;y +2xg.He

chooses to buy 8 units of good x and 16 units of good y,The price of good y is 0.50,What is his

income?

#28a#29 32

#28b#29 40

#28c#29 24

#28d#29 16

#28e#29 Mike's income cannot be found unless the price of x is given too.

Topic,Demand Di#0Eculty,2

#25 Correct Responses,68 Discrimination Index,31

Correct Answer,D

6.6

Georgina consumes only grapefruits and pineapples,Her utility function is U#28x;y#29=x

2

y

8;where

x is the number of grapefruits consumed and y is the number of pineapples consumed,Georgina's

income is 105,and the prices of grapefruits and pineapples are 1 and 3,respectively.How many

grapefruits will she consume?

#28a#29 10.50

#28b#29 7

#28c#29 63

#28d#29 21

#28e#29 None of the above.

MULTIPLE CHOICE 89

Topic,Demand Di#0Eculty,2

#25 Correct Responses,68 Discrimination Index,31

Correct Answer,D

6.7

Fanny consumes only grapefruits and grapes,Her utility function is U#28x;y#29=x

3

y

6;where x is the

number of grapefruits consumed and y is the number of grapes consumed,Fanny's income is 48,

and the prices of grapefruits and grapes are 1 and 3,respectively.How many grapefruits will she

consume?

#28a#29 8

#28b#29 5.33

#28c#29 48

#28d#29 16

#28e#29 None of the above.

Topic,Demand Di#0Eculty,2

#25 Correct Responses,55 Discrimination Index,45

Correct Answer,B

6.8 For m#3Ep

2;the demand functions for goods 1 and 2 are given by the equations,x

1

=#28m=p

2

#29,1

and x

2

= p

1

=p

2; where m is income and p

1

and p

2

are prices,Let the horizontal axis represent the

quantity of good 1,Let p

1

=1and p

2

=2,Then for m#3E2;the income o#0Ber curve is:

#28a#29 avertical line.

#28b#29 a horizontal line.

#28c#29 a straight line with slope 2.

#28d#29 a straight line with a slope of 1=2.

#28e#29 none of the above.

CHAPTER 6 Demand 90

Topic,Demand Di#0Eculty,1

#25 Correct Responses,85 Discrimination Index,38

Correct Answer,E

6.9 Harry has ten dollars to spend on cans of Coke and Pepsi,which he regards as perfect substi-

tutes,one-for-one,Pepsi costs $.50 a can and Coke costs $.60 a can,Harry has 20 coupons,eachof

which can be used to buy one can of Coke for 40 cents,Which of the following bundles will Harry

buy?

#28a#29 20 cans of Pepsi and no Coke.

#28b#29 16 and two thirds cans of Coke and no Pepsi.

#28c#29 10 cans of Coke and 8 cans of Pepsi.

#28d#29 10 cans of Coke and 12 cans of Pepsi.

#28e#29 None of the above.

Topic,Demand Di#0Eculty,2

#25 Correct Responses,67 Discrimination Index,18

Correct Answer,D

6.10 Madonna buys only two goods,Her utility function is Cobb-Douglas,Her demand functions

have which of the following properties?

#28a#29 Her demand for one of the two goods does not depend on income.

#28b#29 Her demand for neither good depends on income.

#28c#29 Her demand for each of the goods depends on income and on the prices of both goods.

#28d#29 Her demand for each of the two goods depends only on her income and on the price of that good itself.

#28e#29 One of the goods is an inferior good and the other is a normal good.

MULTIPLE CHOICE 91

Topic,Demand Di#0Eculty,1

#25 Correct Responses,33 Discrimination Index,20

Correct Answer,D

6.11 Seppo consumes brandy and saunas,Neither is an inferior good,Seppo has a total of $30 a

day and 6 hours a day to spend on brandy and saunas,Each brandy costs $2 and takes half an hour

to consume,Each sauna costs $1 and takes 1 hour to consume,#28It is; unfortunately,impossible to

consume a brandy in the sauna.#29 Seppo suddenly inherits a lot of money and now has $50 a day

to spend on brandy and saunas,Since Seppo is a rational consumer,he must have:

#28a#29 increased brandy consumption only.

#28b#29 increased sauna consumption only.

#28c#29 increased consumption of both.

#28d#29 consumed the same amounts of both goods as before.

#28e#29 we can't tell since we are told nothing about his indi#0Berence curves.

Topic,Demand Di#0Eculty,1

#25 Correct Responses,49 Discrimination Index,41

Correct Answer,E

6.12 Where x is the quantity of good X demanded,the inverse demand function for X,

#28a#29 expresses 1=x as a function of prices and income.

#28b#29 expresses demand for x as a function of 1=p

x

and income where p

x

is the price of x.

#28c#29 expresses demand for x as a function of 1=p

x

and 1=m; where m is income.

#28d#29 speci#0Ces 1=x as a function of 1=p

x

and 1=m; where m is income.

#28e#29 None of the above.

Topic,Demand Di#0Eculty,2

#25 Correct Responses,75 Discrimination Index,7

Correct Answer,D

6.13 If there are two goods and if income doubles and the price of good 1 doubles,while the price

of good 2 stays constant:

#28a#29 a consumer's demand for good 1 will increase only if it is a Gi#0Ben good for her.

#28b#29 a consumer's demand for good 2 will decrease only if it is a Gi#0Ben good for her.

#28c#29 a consumer's demand for good 2 will increase only if it is an inferior good for her.

#28d#29 a consumer's demand for good 2 will decrease only if it is an inferior good for her.

#28e#29 None of the above.

CHAPTER 6 Demand 92

Topic,Demand Di#0Eculty,2

#25 Correct Responses,71 Discrimination Index,63

Correct Answer,C

6.14 Clarissa's utility function is U#28r;z#29=z+160r,r

2

where r is the number of rose plants she

has in her garden and z is the number of zinnias,She has 250 square feet to allocate to roses and

zinnias,Roses each take up 4 square feet and zinnias each take up 1 square foot,She gets the

plants for free from a generous friend,If she acquires another 100 square feet of land for her garden

and her utility function remains unchanged she will:

#28a#29 plant 100 more zinnias and no more roses.

#28b#29 plant 25 more roses and no more zinnias.

#28c#29 plant 38 more zinnias and some more roses.

#28d#29 plant 20 more roses and 20 more zinnias.

#28e#29 do none of the above.

Topic,Demand Di#0Eculty,2

#25 Correct Responses,71 Discrimination Index,63

Correct Answer,C

6.15 Clarissa's utility function is U#28r;z#29=z+80r,r

2

where r is the number of rose plants she

has in her garden and z is the number of zinnias,She has 250 square feet to allocate to roses and

zinnias,Roses each take up 4 square feet and zinnias each take up 1 square foot,She gets the

plants for free from a generous friend,If she acquires another 100 square feet of land for her garden

and her utility function remains unchanged she will:

#28a#29 plant 100 more zinnias and no more roses.

#28b#29 plant 25 more roses and no more zinnias.

#28c#29 plant 99 more zinnias and some more roses.

#28d#29 plant 20 more roses and 20 more zinnias.

#28e#29 do none of the above.

Topic,Demand Di#0Eculty,2

#25 Correct Responses,14 Discrimination Index,25

Correct Answer,D

6.16 Regardless of his income and regardless of prices,Smedley always spends 25#25 of his income

on housing,10#25 on clothing,30#25 on food,15#25 on transportation,and 20#25 on recreation,This

behavior is consistent with the following:

#28a#29 All goods are perfect substitutes.

#28b#29 Smedley's demands for commodities do not change when their prices change.

#28c#29 Smedley consumes all goods in #0Cxed proportions.

#28d#29 Smedley has a Cobb-Douglas utility function.

#28e#29 More than one of the above.

MULTIPLE CHOICE 93

Topic,Demand Di#0Eculty,2

#25 Correct Responses,73 Discrimination Index,44

Correct Answer,A

6.17 Ms,Laura Mussel's preferences between golf and tennis are represented by U#28g;t#29=gt

where g is the number of rounds of golf and t is the number of tennis matches she plays per week.

She has $24 per week to spend on these sports,A round of golf and a tennis match each cost $4.

She used to maximize her utility subject to this budget,She decided to limit the time she spends

on these sports to 16 hours a week,A round of golf takes 4 hours,A tennis match takes 2 hours.

As a result of this additional constraint on her choice,you conclude that:

#28a#29 she plays one less round of golf and one more tennis match eachweek.

#28b#29 she plays more golf and less tennis,but can't sayhowmuch.

#28c#29 her choices and her utility are unchanged.

#28d#29 there is too little information to tell about her choices.

#28e#29 she plays 2 less rounds of golf and 3 more rounds of tennis per week.

Topic,Demand Di#0Eculty,1

#25 Correct Responses,85 Discrimination Index,18

Correct Answer,A

6.18 Mary has homothetic preferences,When her income was $1,000,she bought 40 books and

60 newspapers,When her income increased to $1,500 and prices did not change,she bought:

#28a#29 60 books and 90 newspapers.

#28b#29 80 books and 120 newspapers.

#28c#29 60 books and 60 newspapers.

#28d#29 40 books and 120 newspapers.

#28e#29 There is not enough information for us to determine what she would buy.

CHAPTER 6 Demand 94

Topic,Demand Di#0Eculty,2

#25 Correct Responses,46 Discrimination Index,54

Correct Answer,C

6.19 Katie Kwasi's utility function is U#28x

1;x

2

#29=2#28ln x

1

#29+x

2

,Given her current income and the

current relative prices,she consumes 10 units of x

1

and 15 units of x

2

,If her income doubles,while

prices stay constant,how many units of x

1

will she consume after the change in income?

#28a#29 20

#28b#29 18

#28c#29 10

#28d#29 5

#28e#29 There is not enough information to determine howmuch.

Topic,Demand Di#0Eculty,2

#25 Correct Responses,46 Discrimination Index,54

Correct Answer,C

6.20 Katie Kwasi's utility function is U#28x

1;x

2

#29=2#28ln x

1

#29+x

2

,Given her current income and the

current relative prices,she consumes 5 units of x

1

and 20 units of x

2

,If her income doubles,while

prices stay constant,how many units of x

1

will she consume after the change in income?

#28a#29 10

#28b#29 8

#28c#29 5

#28d#29 2.50

#28e#29 There is not enough information to determine howmuch.

Topic,Demand Di#0Eculty,2

#25 Correct Responses,43 Discrimination Index,23

Correct Answer,E

6.21 Will Feckless unexpectedly inherits $10,000 from a rich uncle,He is observed to consume

fewer hamburgers than he used to,We conclude that:

#28a#29 hamburgers are a Gi#0Ben good for Will.

#28b#29 hamburgers are a normal good for Will.

#28c#29 Will's Engel curve for hamburgers is vertical.

#28d#29 Will's Engel curve for hamburgers is horizontal.

#28e#29 Will's preferences are not homothetic.

MULTIPLE CHOICE 95

Topic,Demand Di#0Eculty,3

#25 Correct Responses,11 Discrimination Index,24

Correct Answer,B

6.22 Fred consumes pork chops and lambchops and nothing else,When the price of pork chops

rises with no change in his income or in the price of lambchops,Fred buys fewer lambchops and

fewer pork chops,From this information we can de#0Cnitely conclude that:

#28a#29 pork chops are a normal good for Fred.

#28b#29 lambchops are a normal good for Fred.

#28c#29 pork chops are an inferior good for Fred.

#28d#29 lambchops are an inferior good for Fred.

#28e#29 Fred prefers pork chops to lambchops.

Topic,Demand Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,C

6.23 Cecil consumes x

1

and x

2

in #0Cxed proportions,He consumes A units of good 1 with B units

of good 2,To solve for his demand functionsfor goods 1 and 2:

#28a#29 set MU

1

=MU

2

=p

1

=p

2

and solve for x

1

.

#28b#29 solve the following two equations in two unknowns,Ax

1

= Bx

2

and p

1

x

1

+ p

2

x

2

= m.

#28c#29 solve the following two equations in two unknowns,Bx

1

= Ax

2

and p

1

x

1

+p

2

x

2

= m.

#28d#29 you only need to use the equation given by his budget line.

#28e#29 use the fact that he spends all of his income on good 1 so long as it is the cheaper good.

Topic,Demand Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,B

6.24 Wilma Q,has a utility function,U#28x

1;x

2

#29=x

2

1

+1:5x

1

x

2

+30x

2

,The prices are p

1

=1and

p

2

=1.For incomes between 20 and 60,the Engel curve for good 2 is:

#28a#29 upward-sloping.

#28b#29 downward-sloping.

#28c#29 vertical.

#28d#29 upward-sloping for incomes between 20 and 40 and downward-sloping between 40 and 60.

#28e#29 downward sloping for incomes between 20 and 40 and upward-sloping between 40 and 60.

CHAPTER 6 Demand 96

Topic,Demand Di#0Eculty,2

#25 Correct Responses,48 Discrimination Index,16

Correct Answer,C

6.25 Which of the following utility functions represent preferences of a consumer who does NOT

have homothetic preferences?

#28a#29 U#28x;y#29=xy.

#28b#29 U#28x;y#29=x+2y.

#28c#29 U#28x;y#29=x+y

:5

.

#28d#29 U#28x;y#29=minfx;yg.

#28e#29 More than one of the above.

Topic,Demand Di#0Eculty,2

#25 Correct Responses,78 Discrimination Index,19

Correct Answer,A

6.26 Robert's utility function is U#28x;y#29=minf4x;2x+yg,The price of x is $3 and the price of y

is $1,Robert's income o#0Ber curve is:

#28a#29 aray from the origin with a slope of 2.

#28b#29 a line parallel to the x axis.

#28c#29 a line parallel to the y axis.

#28d#29 the same as his Engel curve for x.

#28e#29 none of the above.

Topic,Demand Di#0Eculty,2

#25 Correct Responses,8 Discrimination Index,35

Correct Answer,B

6.27 Alfredo lives on apples and bananas only,His utility function is U#28a;b#29=minfa + b;2bg.

He maximizes his utility subject to his budget constraint and consumes the bundle #28a;b#29=#284;4#29.

Which of the following statements must be true?

#28a#29 p

a

#3Ep

b

.

#28b#29 p

a

is less than or equal to p

b

.

#28c#29 p

a

= p

b

.

#28d#29 p

a

=2p

b

.

#28e#29 None of the above.

MULTIPLE CHOICE 97

Topic,Demand Di#0Eculty,2

#25 Correct Responses,80 Discrimination Index,42

Correct Answer,E

6.28 Miss Mu#0Bet insists upon consuming 2 units of whey per unit of curds,If the price of curds

is 5 and the price of whey is 3,then if Miss Mu#0Bet's income is M; her demand for curds will be:

#28a#29 M=5.

#28b#29 3M=5.

#28c#29 5c+3w=M.

#28d#29 5M.

#28e#29 M=11.

Topic,Demand Di#0Eculty,2

#25 Correct Responses,80 Discrimination Index,42

Correct Answer,E

6.29 Miss Mu#0Bet insists upon consuming 2 units of whey per unit of curds,If the price of curds

is 4 and the price of whey is 2,then if Miss Mu#0Bet's income is M; her demand for curds will be:

#28a#29 M=4.

#28b#29 2M=4.

#28c#29 4c+2w=M.

#28d#29 4M.

#28e#29 M=8.

Topic,Demand Di#0Eculty,0

#25 Correct Responses,88 Discrimination Index,20

Correct Answer,A

6.30 If Charlie's utility function were X

3

A

X

B; if apples cost 90 cents each and bananas cost 10

cents each,Charlie's budget line would be tangent to one of his indi#0Berence curves whenever the

following equation is satis#0Ced:

#28a#29 3X

B

=9X

A

#28b#29 X

B

= X

A

#28c#29 X

A

=3X

B

#28d#29 X

B

=3X

A

#28e#29 90X

A

+10X

B

=M

CHAPTER 6 Demand 98

Topic,Demand Di#0Eculty,0

#25 Correct Responses,88 Discrimination Index,20

Correct Answer,A

6.31 If Charlie's utility function were X

5

A

X

B; if apples cost 40 cents each and bananas cost 10

cents each,Charlie's budget line would be tangent to one of his indi#0Berence curves whenever the

following equation is satis#0Ced:

#28a#29 5X

B

=4X

A

#28b#29 X

B

= X

A

#28c#29 X

A

=5X

B

#28d#29 X

B

=5X

A

#28e#29 40X

A

+10X

B

=M

Topic,Demand Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,D

6.32 If Charlie's utility function is X

4

A

X

B; if the price of apples is p

A; the price of bananas is p

B;

and his income is m; then Charlie's demand for apples will be:

#28a#29 m=#282p

A

#29

#28b#29 0:25p

A

m

#28c#29 m=#28p

A

+ p

B

#29

#28d#29 0:80m=p

A

#28e#29 1:25p

B

m=p

A

Topic,Demand Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,D

6.33 If Charlie's utility function is X

4

A

X

B; if the price of apples is p

A; the price of bananas is p

B;

and his income is m; then Charlie's demand for apples will be:

#28a#29 m=#282p

A

#29

#28b#29 0:25p

A

m

#28c#29 m=#28p

A

+ p

B

#29

#28d#29 0:80m=p

A

#28e#29 1:25p

B

m=p

A

MULTIPLE CHOICE 99

Topic,Demand Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,D

6.34 Ambrose's brother Patrick has a utility function U#28x

1;x

2

#29=16x

1=2

1

+x

2

,His income is 82,

the price of good 1 #28nuts#29 is 2 and the price of good 2 #28berries#29 is 1,How many units of nuts will

Patrick demand?

#28a#29 26

#28b#29 12

#28c#29 14

#28d#29 16

#28e#29 30

Topic,Demand Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,D

6.35 Ambrose's brother Sebastian has a utility function U#28x

1;x

2

#29=40x

1=2

1

+x

2

,His income is

110,the price of good 1 #28nuts#29 is 4 and the price of good 2 #28berries#29 is 1,How many units of nuts

will Sebastian demand?

#28a#29 35

#28b#29 21

#28c#29 23

#28d#29 25

#28e#29 48

Topic,Demand Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,A

6.36 Ambrose's brother Bartholomew has a utility function U#28x

1;x

2

#29=40x

1=2

1

+x

2;where x

1

is

his consumption of nuts and x

2

is his consumption of berries,His income is 115,the price of nuts

is 5 and the price of berries is 1,How many units of berries will Bartholomew demand?

#28a#29 35

#28b#29 16

#28c#29 70

#28d#29 22

#28e#29 There is not enough information to determine the answer.

CHAPTER 6 Demand 100

Topic,Demand Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,A

6.37 Ambrose's brother Patrick has a utility function U#28x

1;x

2

#29=48x

1=2

1

+x

2;where x

1

is his

consumption of nuts and x

2

is his consumption of berries,His income is 217,the price of nuts is 3

and the price of berries is 1,How many units of berries will Patrick demand?

#28a#29 25

#28b#29 64

#28c#29 50

#28d#29 70

#28e#29 There is not enough information to determine the answer.

Topic,Demand Di#0Eculty,0

#25 Correct Responses,64 Discrimination Index,29

Correct Answer,E

6.38 Miss Mu#0Bet insists on consuming 2 units of whey per unit of curds,If the price of curds is

3 and the price of whey is 3,then if Miss Mu#0Bett's income is m; her demand for curds will be:

#28a#29 m=3

#28b#29 3m=3

#28c#29 3C +3W=m

#28d#29 3m

#28e#29 m=9

Topic,Demand Di#0Eculty,0

#25 Correct Responses,64 Discrimination Index,29

Correct Answer,E

6.39 Miss Mu#0Bet insists on consuming 2 units of whey per unit of curds,If the price of curds is

3 and the price of whey is 6,then if Miss Mu#0Bett's income is m; her demand for curds will be:

#28a#29 m=3

#28b#29 6m=3

#28c#29 3C +6W=m

#28d#29 3m

#28e#29 m=15

MULTIPLE CHOICE 101

Topic,Demand Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,B

6.40 Casper's utility function is 3x+y; where x is his consumption of cocoa and y is his consump-

tion of cheese,If the total cost of x units of cocoa is x

2; if the price of cheese is 10,and Casper's

income is $260,how many units of cocoa will he consume?

#28a#29 12

#28b#29 15

#28c#29 29

#28d#29 14

#28e#29 30

Topic,Demand Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,B

6.41 Casper's utility function is 3x+y; where x is his consumption of cocoa and y is his consump-

tion of cheese,If the total cost of x units of cocoa is x

2; if the price of cheese is 6,and Casper's

income is $101,how many units of cocoa will he consume?

#28a#29 6

#28b#29 9

#28c#29 17

#28d#29 8

#28e#29 18

Topic,Demand Di#0Eculty,2

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,D

6.42 Let w be the number of whips and j the number of leather jackets,If Kinko's utility function

is U#28x;y#29=minf7w;4w+12jg;then if the price of whips is $20 and the price of leather jackets is

$40,Kinko will demand:

#28a#29 6 times as many whips as leather jackets.

#28b#29 5 times as many leather jackets as whips.

#28c#29 3 times as many whips as leather jackets.

#28d#29 4 times as many whips as leather jackets.

#28e#29 only leather jackets.

CHAPTER 6 Demand 102

Topic,Demand Di#0Eculty,2

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,D

6.43 Let w be the number of whips and j the number of leather jackets,If Kinko's utility function

is U#28x;y#29=minf10w;5w+25jg;then if the price of whips is $20 and the price of leather jackets is

$80,Kinko will demand:

#28a#29 7 times as many whips as leather jackets.

#28b#29 6 times as many leather jackets as whips.

#28c#29 4 times as many whips as leather jackets.

#28d#29 5 times as many whips as leather jackets.

#28e#29 only leather jackets.

Topic,Demand Di#0Eculty,3

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,D

6.44 Between 1980 and 1990,a particular consumer's income increased by 25 percent,while the

price of X and of "all other goods" both increased by 10 percent,It was observed that the con-

sumer's consumption of X and of all other goods both increased by 15 percent,From these facts

we can deduce that:

#28a#29 the consumer did not regard X and "all other goods" as perfect complements.

#28b#29 the consumer's preferences cannot be represented by a Cobb-Douglas utility function.

#28c#29 the consumer's preferences can be represented by a Cobb-Douglas utility function.

#28d#29 the consumer's preferences cannot be represented by a quasilinear utility function.

#28e#29 more than one of the above options is true.

MULTIPLE CHOICE 103

Topic,Demand Di#0Eculty,2

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,A

6.45 John Parker Nosey works for the Internal Revenue Service,He is in charge of auditing in-

come of self-employed people,In anyyear,a person divides his total income between consumption

and saving,John cannot determine people's consumptions,but he is able to determine howmuch

people havesaved over the course of a year,From years of experience,he has learned that people

act as if they are maximizing a utility function of the form U#28c;s#29=10;000 ln c+ s; where c is the

number of dollars worth of consumption in a year and s is the number of dollars saved,Whichof

the following is true?

#28a#29 If someone saves at least $1,000,then that person's income is at least $11,000.

#28b#29 If someone saves nothing,then that person must earn less than $1,000.

#28c#29 If someone saves exactly $1,000,then that person's income must be greater than $1,000 and less than

$10,000.

#28d#29 If someone saves exactly $10,000,then that person must earn exactly $21,000.

#28e#29 If someone saves more than $1,000,then that person's income must be more than $20,000.

Topic,Demand Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,E

6.46 Carlos consumes only two goods,apples and bananas,His utility function is U#28a;b#29=

minfa;bg,Before trade,his initial endowmentisw

a

apples and w

b

bananas,After he trades to his

optimal consumption point at these prices,the relative prices change,Carlos is allowed to make

further trades if he wishes.

#28a#29 Carlos will dde#0Cnitely be better o#0B after the price change.

#28b#29 Carlos will be better o#0B if the price of the good he was selling went up and worse o#0B if the price of the

good he was selling wentdown.

#28c#29 Unless the price of both goods wentdown,we can not tell if Carlos is beter o#0B or worse o#0B.

#28d#29 Carlos will be better o#0B if the price of the good he was selling wentdown and worse o#0B if the price of

the good he was selling went up.

#28e#29 Carlos' utility will not be a#0Bected by the change.

CHAPTER 6 Demand 104

Topic,Demand Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,A

6.47 Carlos consumes only two goods,apples and bananas,His utility function is U#28a;b#29=a

3

b

2

.

Before trade,his initial endowmentisw

a

apples and w

b

bananas,After he trades to his optimal

consumption point at these prices,the relative prices change,Carlos is allowed to make further

trades if he wishes.

#28a#29 Carlos will de#0Cnitely be better o#0B after the price change.

#28b#29 Carlos will be better o#0B if the price of the good he was selling went up and worse o#0B if the price of the

good he was selling wentdown.

#28c#29 Unless the prices of both goods wentdown,we can not tell if Carlos is better o#0B or worse o#0B.

#28d#29 Carlos will be better o#0B if the price of the good he was selling wentdown and worse o#0B if the price of

the good he was selling went up.

#28e#29 Carlos' utility will not be a#0Bected by the change.

Essay Demand

Topic,Demand Di#0Eculty,3

#25 Correct Responses,0 Discrimination Index,0

6.1 Is the following statement true or false? "If consumers spend their entire incomes,it is im-

possible for the income elasticity of demand for every good to be bigger than one." Write a brief,

but convincing explanation of your answer.

Answer,True,If income elasticities of demand for all goods exceed 1,then a 1#25 increase in

income would result in a more than 1#25 increase in expenditures for every good,Therefore total

expenditures would rise by more than 1#25,But this is impossible if the entire budget is spent both

before and after the income increase.

Topic,Demand Di#0Eculty,3

#25 Correct Responses,0 Discrimination Index,0

6.2 Wanda Lott's utility function is U#28x;y#29=maxf2x;yg,Draw some of Wanda's indi#0Berence

curves,If the price of x is 1,the price of y is p and her income is m; howmuch y does Wanda

demand?

Answer,Wanda's indi#0Berence curves are rectangles that are twice as high as they are wide,If

p#3E:5;Wanda demands no y,If p#3C:5;Wanda demands m=p units of y,If p =,5; Wanda is

indi#0Berentbetween her two best options which are buying m units of x and no y or buying 2m units

of y and no x.

Topic,Demand Di#0Eculty,3

#25 Correct Responses,0 Discrimination Index,0

6.3 Martha has the utility function U = minf4x;2yg.Write down her demand function for x as a

function of the variables m; p

x; and p

y;where m is income,p

x

is the price of x and p

y

is the price of y.

Answer,x = m=#28p

x

+2p

y

#29.

Topic,Demand Di#0Eculty,1

#25 Correct Responses,0 Discrimination Index,0

6.4 Brie#0Dy explain in a sentence or twohowyou could tell,a#29 whether a good is a normal good

or an inferior good,b#29 whether a good is a luxury or a necessity,c#29 whether two goods are comple-

ments or substitutes.

Answer,a#29 If prices are left constant and income rises,demand for a normal good will rise and

demand for an inferior good will fall,b#29 If income rises,expenditure on it will rise more or less than

proportionately depending on whether the good is a luxury or necessity respectively,c#29 Two goods

are complements or substitutes depending on whether a rise in the price of one of them increases

or decreases demand for the other.

CHAPTER 6 Demand 106

Topic,Demand Di#0Eculty,1

#25 Correct Responses,0 Discrimination Index,0

6.5 De#0Cne each of the following,a#29 Inverse demand function,b#29 Engel curve.

Answer,The inverse demand function expresses for any quantity the price at which that quantity

can be sold,It is simply the inverse function corresponding to the demand function,An Engel

curve is the graph of the function that expresses quantity demanded as a function of income.

Topic,Demand Di#0Eculty,3

#25 Correct Responses,0 Discrimination Index,0

6.6 Ray Starr has the utility function U#28x;y#29=y=#28100,x#29,a#29 Does Ray prefer more to less

of both goods? b#29 Draw a diagram showing Ray's indi#0Berence curves corresponding to the utility

levels U =1=2;U=1;and U =2,c#29How can you describe the set of indi#0Berence curves for Ray?

d#29 If the price of x is 1 and the price of y is 1,#0Cnd Ray's demand for x as a function of his income

and draw a diagram showing his Engel curve for x.

Answer,a#29 Yes,b#29 These curves are straight lines with the equations x=2+y=50;x+y= 100;

2x + y = 200,c#29 The indi#0Berence curve through any bundle is the straight line passing through

that point and through the point #28100;0#29,The set of all indi#0Berence curves is the star,shaped set

of rays passing through the point #28100;0#29 #28to be more precise; the part of that set that is in the

nonnegative quadrant#29,d#29 If Ray's income is less than 100,he buys y and no x,If his income is

more than 100,he buys x and no y.

Topic,Demand Di#0Eculty,2

#25 Correct Responses,0 Discrimination Index,0

6.7 With some services,e.g,checking accounts,phone service,or pay TV,a consumer is o#0Bered

achoice of two or more payment plans,One can either pay a high "entry fee" and get a low price

per unit of service or payalowentry fee and a high price per unit of service,Suppose you havean

income of $100,There are two plans,Plan A has an entry fee of $20 with a price of $2 per unit.

Plan B has an entry fee of $40 with a price of $1 per unit for using the service,Let x be expenditure

on other goods and y be consumption of the service,a#29 Write down the budget equation that you

would have after you paid the entry fee for each of the two plans,b#29 If your utility function is xy,

howmuch y would you choose in each case? c#29 Which plan would you prefer? Explain.

Answer,a#29 x+2y=80;x+y=60.b#2920; 30 c#29 Plan B,The utility of the bundle chosen with A is

20#0340 = 800 and the utility from the Plan B bundle is 30#0330 = 900.

ESSAY 107

Topic,Demand Di#0Eculty,2

#25 Correct Responses,0 Discrimination Index,0

6.8 Marie's utility function is U#28x;y#29=minf3x +2y;2x+5ygwhere x is the number of units of

sugar she consumes and y is the number of units of spice she consumes,She is currently consum-

ing 12 units of sugar and 40 units of spice and she is spending all of her income,Draw a graph

showing her indi#0Berence curve through this point,The price of spice is 1,In order for this to be

her consumption bundle,what must be the price of sugar and what must her income be?

Answer,Her indi#0Berence curve is a broken line consisting of the outer envelope of the two lines

3x+2y= 116 and 2x+5y= 116,The point #2812;40#29 is on the line 3x+2y= 116,The price of sugar

is 1.5 and her income is 58.

Topic,Demand Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

6.9 Murphy's utility function is U#28x;y#29=minf4x + y;2x+2y;x+4yg,Murphy is consuming 12

units of x and 6 units of y,Draw the indi#0Berence curve through this point,At what points does

this indi#0Berence curvehave kinks? The price of good x is 1,What is the highest possible price for

y? What is the lowest possible price for y?

Answer,The indi#0Berence curve is a broken line extending from #2836;0#29 to #2812;6#29 to #286;12#29 to #280;36#29.

The price of y must be between 1 and 4.

Chapter 7

True-False Revealed Preference

Topic,Revealed Preference Di#0Eculty,2

#25 Correct Responses,95 Discrimination Index,30

Correct Answer,True

7.1 The strong axiom of revealed preference requires that if a consumer chooses x when he can

a#0Bord y; and chooses y when he can a#0Bord z; then he will not choose z when he can a#0Bord x.

Topic,Revealed Preference Di#0Eculty,1

#25 Correct Responses,78 Discrimination Index,10

Correct Answer,True

7.2 Rudolf Rational obeys the weak axiom of revealed preferences,His preferences don't change

over time,One year he could a#0Bord bundle x but bought bundle y,If another year he buys bundle

x; then he can't a#0Bord bundle y.

Topic,Revealed Preference Di#0Eculty,2

#25 Correct Responses,46 Discrimination Index,0

Correct Answer,True

7.3 If a consumer maximizes a utility function subject to a budget constraint and has strictly

convex preferences,then his behavior will necessarily satisfy the weak axiom of revealed preference

and the strong axiom of revealed preference.

Topic,Revealed Preference Di#0Eculty,1

#25 Correct Responses,73 Discrimination Index,37

Correct Answer,True

7.4 The Laspeyres index of prices in period 2 relative to period 1 tells us the ratio of the cost of

buying the period 1 bundle at period 2 prices to the cost of buying the period 1 bundle at period

1 prices.

Topic,Revealed Preference Di#0Eculty,1

#25 Correct Responses,83 Discrimination Index,32

Correct Answer,False

7.5 The Laspeyres price index di#0Bers from the Paasche price index because the Laspeyres index

holds prices constant and varies quantities while the Paasche price index holds quantities constant

and varies prices.

TRUE-FALSE 109

Topic,Revealed Preference Di#0Eculty,2

#25 Correct Responses,36 Discrimination Index,0

Correct Answer,False

7.6 Patience was maximizing her utility subject to her budget constraint,Prices changed and

Patience was less well o#0B than before,Therefore,at the old prices her new bundle must cost less

than her old bundle.

Topic,Revealed Preference Di#0Eculty,1

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,False

7.7 It follows from the weak axiom of revealed preference that if a consumer chooses x when he

could a#0Bord y and chooses y when he could a#0Bord x; then his income must havechanged between

the two observations.

Topic,Revealed Preference Di#0Eculty,2

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,False

7.8 The strong axiom of revealed preference says that if a consumer bought x when he could

have a#0Borded y and y when he could have a#0Borded z; then he will buy x whenever he can a#0Bord z.

Topic,Revealed Preference Di#0Eculty,1

#25 Correct Responses,85 Discrimination Index,8

Correct Answer,False

7.9 An increase in the price of an inferior good makes the people who consume that good better

o#0B.

Topic,Revealed Preference Di#0Eculty,2

#25 Correct Responses,53 Discrimination Index,19

Correct Answer,True

7.10 Prudence was maximizing her utility subject to her budget constraint,Then prices changed.

After the change,she is better o#0B,Therefore the new bundle costs more at the old prices than the

old bundle did.

CHAPTER 7 Revealed Preference 110

Topic,Revealed Preference Di#0Eculty,1

#25 Correct Responses,85 Discrimination Index,21

Correct Answer,False

7.11 The Laspeyres price index di#0Bers from the Paasche price index because the Paasche index

holds prices constant and varies quantities,while the Laspeyres index holds quantities constant and

varies prices.

Topic,Revealed Preference Di#0Eculty,2

#25 Correct Responses,78 Discrimination Index,20

Correct Answer,True

7.12 It is possible for a consumer to satisfy the weak axiom of revealed preference,but violate

the strong axiom of revealed preference.

Topic,Revealed Preference Di#0Eculty,0

#25 Correct Responses,83 Discrimination Index,33

Correct Answer,True

7.13 For a consumer who has an allowance to spend and no endowment of goods,a decrease in

the price of an inferior good consumed makes the consumer better o#0B.

Topic,Revealed Preference Di#0Eculty,2

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,True

7.14 There are two goods,bananas and potatoes,The price of bananas increases and the price

of potatoes decreases,If after the price change a consumer #28whose preferences satisfy WARP#29 can

still exactly a#0Bord her old consumption bundle,then she will consume at least as much potatoes

as before,even if potatoes are a Gi#0Ben good.

Multiple Choice Revealed Preference

Topic,Revealed Preference Di#0Eculty,1

#25 Correct Responses,52 Discrimination Index,29

Correct Answer,E

7.1 Let A stand for the bundle #287;9#29;Bstand for the bundle #2810;5#29; and C stand for the bundle

#286;6#29,When prices are #282;4#29; Bettychooses C,When prices are #2812;3#29 she chooses A,Which of the

following is true?

#28a#29 A is directly revealed preferred to B.

#28b#29 A is indirectly revealed preferred to B.

#28c#29 C is directly revealed preferred to A.

#28d#29 B is directly revealed preferred to A.

#28e#29 None of the above.

Topic,Revealed Preference Di#0Eculty,2

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,B

7.2

Remember that the Laspeyres price index uses the old quantities for the weights,In 1971,good x

cost 5 and good y cost 1,The current price of good x is 7 and the current price of good y is 6,In

1971 the consumption bundle was #28x;y#29=#282;4#29,The current consumption bundle is #28x;y#29=#285;3#29.

The Laspeyres index of current prices relative to 1971 prices is closest to which of the following

numbers?

#28a#29 3.79

#28b#29 2.71

#28c#29 0.26

#28d#29 1.89

#28e#29 1.26

CHAPTER 7 Revealed Preference 112

Topic,Revealed Preference Di#0Eculty,2

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,B

7.3

Remember that the Laspeyres price index uses the old quantities for the weights,In 1971,good x

cost 3 and good y cost 1,The current price of good x is 3 and the current price of good y is 5,In

1971 the consumption bundle was #28x;y#29=#283;5#29,The current consumption bundle is #28x;y#29=#289;4#29.

The Laspeyres index of current prices relative to 1971 prices is closest to which of the following

numbers?

#28a#29 3.36

#28b#29 2.43

#28c#29 0.30

#28d#29 1.52

#28e#29 1.30

Topic,Revealed Preference Di#0Eculty,2

#25 Correct Responses,82 Discrimination Index,30

Correct Answer,B

7.4 Twentyyears ago,Dmitri consumed bread which cost him 10 kopeks a loaf and potatoes

which cost him 14 kopeks a sack,With his income of 208,he bought11loaves of bread and 7 sacks

of potatoes,Today he has an income of 393,Bread now costs him 21 kopeks a loaf and potatoes

cost him 16 kopeks a sack,Assuming his preferences haven't changed #28and the sizes of loaves and

sacks haven't changed#29,when was he better o#0B?

#28a#29 Twentyyears ago

#28b#29 Today

#28c#29 He was equally well o#0B in the two periods.

#28d#29 From the information given here we are unable to tell.

#28e#29 None of the above.

MULTIPLE CHOICE 113

Topic,Revealed Preference Di#0Eculty,2

#25 Correct Responses,82 Discrimination Index,30

Correct Answer,B

7.5 Twentyyears ago,Dmitri consumed bread which cost him 10 kopeks a loaf and potatoes

which cost him 13 kopeks a sack,With his income of 266,he bought11loaves of bread and 12

sacks of potatoes,Today he has an income of 510,Bread now costs him 20 kopeks a loaf and

potatoes cost him 20 kopeks a sack,Assuming his preferences haven't changed #28and the sizes of

loaves and sacks haven't changed#29,when was he better o#0B?

#28a#29 Twentyyears ago

#28b#29 Today

#28c#29 He was equally well o#0B in the two periods.

#28d#29 From the information given here we are unable to tell.

#28e#29 None of the above.

Topic,Revealed Preference Di#0Eculty,1

#25 Correct Responses,81 Discrimination Index,31

Correct Answer,A

7.6 At prices #284;12#29;Harry chooses the bundle #289;4#29.At the prices #288;4#29; Harry chooses the bundle

#282;9#29,Is this behavior consistent with the weak axiom of revealed preference?

#28a#29 Yes

#28b#29 No

#28c#29 It depends on his income.

#28d#29 Wewould have to observe a third choice to be able to say.

#28e#29 None of the above.

Topic,Revealed Preference Di#0Eculty,2

#25 Correct Responses,65 Discrimination Index,45

Correct Answer,A

7.7 When prices are #286;3#29; Holly chooses the bundle #289;18#29 and when prices are #281;2#29; she chooses

the bundle #288;14#29,Which of the following is true?

#28a#29 The bundle #289;18#29 is revealed preferred to the bundle #288;14#29 and she does not violate WARP.

#28b#29 She violates SARP but not WARP.

#28c#29 The bundle #288;14#29 is revealed preferred to the bundle #289;18#29 and she does not violate WARP.

#28d#29 She violates WARP.

#28e#29 None of the above.

CHAPTER 7 Revealed Preference 114

Topic,Revealed Preference Di#0Eculty,2

#25 Correct Responses,65 Discrimination Index,45

Correct Answer,A

7.8 When prices are #283;1#29; Yolanda chooses the bundle #289;21#29 and when prices are #281;3#29; she

chooses the bundle #286;14#29,Which of the following is true?

#28a#29 The bundle #289;21#29 is revealed preferred to the bundle #286;14#29 and she does not violate WARP.

#28b#29 She violates SARP but not WARP.

#28c#29 The bundle #286;14#29 is revealed preferred to the bundle #289;21#29 and she does not violate WARP.

#28d#29 She violates WARP.

#28e#29 None of the above.

Topic,Revealed Preference Di#0Eculty,2

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,A

7.9 Maria consumes strawberries which cost her 10 pesos a box and bananas which cost her 9

pesos a bunch,With her income of 192 pesos she buys 12 boxes of strawberries and 8 bananas.

Daphne,with an income of 170 shillings,consumes strawberries at a cost of 6 shillings each and

bananas at a cost of 12 shillings each,Assuming their preferences are identical:

#28a#29 Maria would prefer Daphne's consumption bundle to her own.

#28b#29 Daphne would prefer Maria's consumption bundle to her own.

#28c#29 they would both be indi#0Berentbetween their own bundles and the other person

0

s bundle.

#28d#29 each prefers her own bundle to the other's.

#28e#29 we can't makeany of the above statements without more information.

Topic,Revealed Preference Di#0Eculty,2

#25 Correct Responses,73 Discrimination Index,53

Correct Answer,B

7.10 In 1971,good x cost 5 and good y cost 1,They now cost 9 and 5 respectively,In 1971

the consumption bundle of x and y was 4 x

0

s and 5 y

0

s.Itisnow9x

0

sand 7 y

0

s,Calculate the

Laspeyres index of current prices relative to 1971 prices rounded to one decimal place,#28Remember

the Laspeyres index uses the old quantities for weights.#29

#28a#29,5

#28b#29 2.4

#28c#29 2.5

#28d#29 2.2

#28e#29 None of the above.

MULTIPLE CHOICE 115

Topic,Revealed Preference Di#0Eculty,2

#25 Correct Responses,29 Discrimination Index,58

Correct Answer,B

7.11 Carlos has at one time or another lived in Argentina,Bolivia,and Colombia,He buys only

two goods,x and y,In Argentina the prices were #289;3#29 and he consumed the bundle #286;7#29,In

Bolivia he consumed #289;2#29,In Colombia he consumed the bundle #286;5#29 at the prices #283;3#29,Which

of the following is true?

#28a#29 The Argentine bundle is directly revealed preferred to the Bolivian bundle.

#28b#29 The Argentine bundle is indirectly revealed preferred to the Bolivian bundle.

#28c#29 The Colombian bundle is directly revealed preferred to the Argentine bundle.

#28d#29 The Bolivian bundle is indirectly revealed preferred to the Argentine bundle.

#28e#29 None of the above.

Topic,Revealed Preference Di#0Eculty,2

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,A

7.12 Prudence is careful to plan ahead,She is going to Paris next year to study.To protect

herself from exchange rate #0Ductuations,she bought a futures contract for the number of francs she

plans to spend next year,given current prices,When she arrives in Paris,she can cash in her

contract for this many francs no matter what the exchange rate is,If the value of the franc relative

to the dollar should happen to fall before she gets to Paris:

#28a#29 she will be at least as well o#0B and probably better o#0B than if the exchange rate hadn't changed.

#28b#29 she will be worse o#0B than if exchange rates hadn't changed.

#28c#29 she will be exactly as well o#0B as if exchange rates hadn't changed.

#28d#29 she might be better o#0B or she mightbeworse o#0B,depending on whether she planned to spend more or

less than she does at home.

CHAPTER 7 Revealed Preference 116

Topic,Revealed Preference Di#0Eculty,2

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,B

7.13 Jose consumes rare books which cost him 8 pesos each and pieces of antique furniture which

cost him 10 pesos each,He spends his entire income to buy 9 rare books and 11 pieces of antique

furniture,Nigel has the same preferences as Jose but faces di#0Berent prices and has a di#0Berent

income,Nigel has an income of 162 pounds,He buys rare books at a cost of 4 pounds each and

pieces of antique furniture at a cost of 11 pounds each.

#28a#29 Nigel would prefer Jose's bundle to his own.

#28b#29 Jose would prefer Nigel's bundle to his own.

#28c#29 Neither would prefer the other's bundle to his own.

#28d#29 Each prefers the other's bundle to his own.

#28e#29 We can't tell whether either would prefer the other's bundle without knowing what quantities Nigel

consumes.

Topic,Revealed Preference Di#0Eculty,2

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,D

7.14 Twentyyears ago,Amanda consumed cans of motor oil which cost her 6 pesos each and

gallons of gasoline which cost her 14 pesos each,With her income of 112 pesos,she bought 7 cans

of motor oil and 5 gallons of gasoline,Today she has an income of 230 pesos,Cans of motor oil

now cost 10 pesos each and gallons of gasoline now cost 32 pesos each,Assuming her preferences

haven't changed,she:

#28a#29 is de#0Cnitely better o#0B than she was 20 years ago.

#28b#29 was de#0Cnitely better o#0B 20 years ago than she is now.

#28c#29 is just as well o#0B as she was 20 years ago.

#28d#29 maybe be either better or worse o#0B now than 20 years ago,There is not enough informationto determine

which is the case.

#28e#29 is behaving irrationally.

MULTIPLE CHOICE 117

Topic,Revealed Preference Di#0Eculty,1

#25 Correct Responses,83 Discrimination Index,0

Correct Answer,B

7.15 When prices are #282;4#29; Ms,Consumer chooses the bundle #287;9#29; and when prices are #2815;3#29;

she chooses the bundle #2810;3#29,Is her behavior consistent with the weak axiom of revealed prefer-

ence?

#28a#29 Yes

#28b#29 No

#28c#29 Wewould have to observe a third choice to be able to say.

#28d#29 We can't tell because we are not told her income in the two cases.

#28e#29 None of the above.

Topic,Revealed Preference Di#0Eculty,2

#25 Correct Responses,35 Discrimination Index,20

Correct Answer,B

7.16 Stan Ford currently spends $100 a week on entertainment,A rich uncle o#0Bers him a choice

between a $50 a week allowance and the opportunity to buy all of his entertainment at half price.

Stan has no kinks in his di#0Berence curves,Stan would:

#28a#29 prefer the $50 allowance.

#28b#29 prefer the half-price subsidy.

#28c#29 be indi#0Berentbetween the allowance and the subsidy.

#28d#29 prefer the subsidy if entertainment is a normal good and otherwise be indi#0Berent.

#28e#29 prefer the allowance if entertainment is an inferior good but otherwise prefer the subsidy.

Topic,Revealed Preference Di#0Eculty,2

#25 Correct Responses,81 Discrimination Index,38

Correct Answer,A

7.17 When prices are #282;10#29; Emil chooses the bundle #281;6#29 and when prices are #2812;4#29; he chooses

the bundle #287;2#29,Which of the following is necessarily true?

#28a#29 Emil violates WARP.

#28b#29 Emil has kinked indi#0Berence curves.

#28c#29 The bundle #281;6#29 is revealed preferred to #287;2#29; but #287;2#29 is not revealed preferred to #281;6#29.

#28d#29 The bundle #287;2#29 is revealed preferred to #281;6#29; but #281;6#29 is not revealed preferred to #287;2#29.

#28e#29 None of the above.

CHAPTER 7 Revealed Preference 118

Topic,Revealed Preference Di#0Eculty,2

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,B

7.18 Desmond has lived in Australia,Belgium and Canada,His tastes never changed but his

income and prices did,In Australia his commodity bundle was #28x

1;x

2

#29=#287;8#29; in Belgium it was

#289;4#29 and in Canada it was #287;5#29,Prices in Canada were #28p

1;p

2

#29=#283;3#29 and in Australia prices were

#28p

1;p

2

#29 = #2816;4#29.

#28a#29 Desmond's consumption in Australia is directly revealed prefered to his consumption in Belgium.

#28b#29 His consumption in Australia is indirectly revealed preferred to his consumption in Belgium.

#28c#29 His consumption in Australia is indirectly but not directly revealed preferred to his consumption in

Canada.

#28d#29 We can't tell if he was better o#0B in Belgium or in Australia.

#28e#29 None of the above.

Topic,Revealed Preference Di#0Eculty,1

#25 Correct Responses,87 Discrimination Index,35

Correct Answer,D

7.19 If all prices increase by 20#25:

#28a#29 the Paasche price index increases by more than 20#25 and the Laspeyres price index increases by less than

20#25.

#28b#29 the Laspeyres price index increases by more than 20#25 and the Paasche price index increases by less than

20#25.

#28c#29 both the Paasche price index and the Laspeyres price index increase by more than 20#25.

#28d#29 both the Paasche price index and the Laspeyres price index increase by exactly 20#25.

#28e#29 both the Paasche price index and the Laspeyres price index increase by less than 20#25.

MULTIPLE CHOICE 119

Topic,Revealed Preference Di#0Eculty,3

#25 Correct Responses,26 Discrimination Index,43

Correct Answer,C

7.20 A student spends all of her income on pizza and books,When pizzas cost $3 each and books

cost $10 each,she consumed 30 pizzas and 3 books per month,The price of pizzas fell to $2.90

each while the price of books rose to $11 each,The price change:

#28a#29 made her worse o#0B.

#28b#29 left her exactly as well o#0B as before.

#28c#29 left her at least as well o#0B as before and possibly helped her.

#28d#29 mighthave helped her,mighthave harmed her,We can't tell which unless we observe what she consumed

after the price change.

#28e#29 had the same e#0Bect as a $3 increase in her income.

Topic,Revealed Preference Di#0Eculty,1

#25 Correct Responses,59 Discrimination Index,42

Correct Answer,C

7.21 A consumer's behavior was observed in three situations with di#0Berent prices and incomes.

In Situation 1,she chose a bundle that cost $1,600,In Situation 2,she chose a bundle that cost

$2,500,In Situation 3,she chose a bundle that cost $3,100,The bundle purchased in Situation 2

would cost $1,200 at Situation 1 prices,The bundle purchased in Situation 3 cost $2,000 at Situa-

tion 2 prices,This consumer's behavior is known to satisfy the strong axiom of revealed preference.

Therefore:

#28a#29 the bundle purchased in Situation 1 must cost less than $3,100 at Situation 3 prices.

#28b#29 the bundle purchased in Situation 3 must cost at least $3,100 at Situation 1 prices.

#28c#29 the bundle purchased in Situation 1 can not cost less than $3,100 at Situation 3 prices.

#28d#29 the bundle purchased in Situation 2 must cost at least $3,100 at Situation 1 prices.

#28e#29 None of the above.

CHAPTER 7 Revealed Preference 120

Topic,Revealed Preference Di#0Eculty,2

#25 Correct Responses,51 Discrimination Index,18

Correct Answer,B

7.22 Recall that the Laspeyres price index uses the old bundle as weights and the Paasche price in-

dex uses the new bundle as weights,If the prices of all goods double and your income triples,then:

#28a#29 your income increase has exceeded the increase in the Laspeyres P.I,but may not have exceeded the

increase in the Paasche P.I.

#28b#29 your income increase has exceeded the increase in the Laspeyres P.I,and has also exceeded the increase

in the Paasche P.I.

#28c#29 your incomeincrease has exceeded the increase in the Paasche P.I.but maynot have exceeded the increase

in the Laspeyres P.I.

#28d#29 you would need to know the old and new consumption bundles to compare your income change with the

change in price indexes.

#28e#29 None of the above.

Topic,Revealed Preference Di#0Eculty,1

#25 Correct Responses,64 Discrimination Index,20

Correct Answer,C

7.23 If the governmentgaveyou a subsidy of $100 per month that you had to spend on hous-

ing and if you could spend the remainder of your income in anywayyou wished,the e#0Bect of the

subsidy would di#0Ber from the e#0Bect of a $100 per month unrestricted increase in your income only if:

#28a#29 housing were an inferior good for you.

#28b#29 housing were a normal good for you.

#28c#29 you would spend less than $100 per month on housing when you received the unrestricted $100 monthly

increase in your income.

#28d#29 you would spend more than $100 per month on housing when you received the unrestricted $100 monthly

increase in your income.

#28e#29 your preferences were homothetic.

MULTIPLE CHOICE 121

Topic,Revealed Preference Di#0Eculty,3

#25 Correct Responses,30 Discrimination Index,0

Correct Answer,A

7.24 When the prices were #285;1#29; Vanessa chose the bundle #28x;y#29=#286;3#29.Now at the new prices,

#28p

x;p

y

#29;she chooses the bundle #28x;y#29=#285;7#29.For Vanessa's behavior to be consistent with the weak

axiom of revealed preference,it must be that:

#28a#29 4p

y

#3Cp

x

.

#28b#29 p

x

#3C 4p

y

.

#28c#29 5p

y

#3Cp

x

.

#28d#29 p

y

=5p

x

.

#28e#29 None of the above.

Topic,Revealed Preference Di#0Eculty,3

#25 Correct Responses,30 Discrimination Index,0

Correct Answer,A

7.25 When the prices were #283;1#29; Zelda chose the bundle #28x;y#29=#288;7#29.Now at the new prices,

#28p

x;p

y

#29;she chooses the bundle #28x;y#29=#287;9#29.For Zelda's behavior to be consistent with the weak

axiom of revealed preference,it must be that:

#28a#29 2p

y

#3Cp

x

.

#28b#29 p

x

#3C 2p

y

.

#28c#29 3p

y

#3Cp

x

.

#28d#29 p

y

=3p

x

.

#28e#29 None of the above.

CHAPTER 7 Revealed Preference 122

Topic,Revealed Preference Di#0Eculty,3

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,A

7.26

At prices #28p

1;p

2

#29=#284;1#29; George buys the bundle #28x

1;x

2

#29 = #2810;20#29.At prices #28p

0

1;p

0

2

#29=#281;4#29; he

buys the bundle #28x

0

1;x

0

2

#29=#284;14#29.At prices #28p

00

1;p

00

2

#29; he buys the bundle #28x

00

1;x

00

2

#29 = #2820;10#29,If his

preferences satisfy the strong axiom of revealed preferences,then it must be that:

#28a#29 10p

00

1

#3C 10p

00

2

#28b#29 10p

00

1

#3C 8p

2

#28c#29 8p

1

#3E 8p

2

#28d#29 p

00

1

= p

00

2

#28e#29 None of the above.

Topic,Revealed Preference Di#0Eculty,3

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,A

7.27

At prices #28p

1;p

2

#29=#283;1#29; Chen buys the bundle #28x

1;x

2

#29 = #2810;18#29.At prices #28p

0

1;p

0

2

#29=#281;3#29; he

buys the bundle #28x

0

1;x

0

2

#29=#283;15#29.At prices #28p

00

1;p

00

2

#29; he buys the bundle #28x

00

1;x

00

2

#29 = #2821;9#29,If his

preferences satisfy the strong axiom of revealed preferences,then it must be that:

#28a#29 11p

00

1

#3C 9p

00

2

#28b#29 11p

00

1

#3C 6p

2

#28c#29 6p

1

#3E 9p

2

#28d#29 p

00

1

= p

00

2

#28e#29 None of the above.

MULTIPLE CHOICE 123

Topic,Revealed Preference Di#0Eculty,3

#25 Correct Responses,4 Discrimination Index,0

Correct Answer,B

7.28 Tonal is a travelling substitute orchestra conductor,Eachyear,he starts in Ann Arbor,

moves to Brownsville,then to Carson City,...,and so on until he reaches Zilvania,Ohio,after which

he returns to Ann Arbor,He gets a salary according to the following simple rule,In Brownsville

he is paid what his Ann Arbor consumption bundle would cost in Brownsville,In Carson City,

he is paid what his Brownsville bundle would cost in Carson City,and so on,After 26 two-week

stints,he returns to Ann Arbor,where he is paid the cost in Ann Arbor of his Zilvania bundle,At

each stop,he spends his entire salary on apples #28A#29 and paperback books #28B#29,so as to maximize

the utility U = AB.Over the course of the year,his utility will:

#28a#29 be constantatevery stop.

#28b#29 increase at every stop where relative prices are di#0Berent from the previous stop.

#28c#29 decrease at every stop where relative prices are di#0Berent from the previous stop.

#28d#29 increase or decrease depending on whether the Paasche price index goes down or up between stops.

#28e#29 increase or decrease depending on whether the Laspeyres price index goes down or up between stops.

Topic,Revealed Preference Di#0Eculty,3

#25 Correct Responses,44 Discrimination Index,38

Correct Answer,A

7.29 If the only information wehave about Goldie is that she chooses the bundle #286;6#29 when

prices are #286;6#29 and she chooses the bundle #2810;0#29 when prices are #284;5#29; then we can conclude that:

#28a#29 the bundle #286;6#29 is revealed preferred to #2810;0#29 but there is no evidence that she violates WARP.

#28b#29 neither bundle is revealed preferred to the other.

#28c#29 Goldie violates WARP.

#28d#29 the bundle #2810;0#29 is revealed preferred to #286;6#29 and she violates WARP.

#28e#29 the bundle #2810;0#29 is revealed preferred to #286;6#29 and there is no evidence that she violates WARP.

Topic,Revealed Preference Di#0Eculty,3

#25 Correct Responses,44 Discrimination Index,38

Correct Answer,A

7.30 If the only information wehave about Goldie is that she chooses the bundle #286;6#29 when

prices are #286;7#29 and she chooses the bundle #2810;0#29 when prices are #287;5#29; then we can conclude that:

#28a#29 the bundle #286;6#29 is revealed preferred to #2810;0#29 but there is no evidence that she violates WARP.

#28b#29 neither bundle is revealed preferred to the other.

#28c#29 Goldie violates WARP.

#28d#29 the bundle #2810;0#29 is revealed preferred to #286;6#29 and she violates WARP.

#28e#29 the bundle #2810;0#29 is revealed preferred to #286;6#29 and there is no evidence that she violates WARP.

CHAPTER 7 Revealed Preference 124

Topic,Revealed Preference Di#0Eculty,2

#25 Correct Responses,46 Discrimination Index,6

Correct Answer,C

7.31 Pierre's friend Henri lives in a town where he has to pay 3 francs per glass of wine and 5

francs per loaf of bread,Henri consumes 5 glasses of wine and 4 loaves of bread per day,Bob has

an income of $15 per day and pays $.50 per loaf of bread and $2 per glass of wine,If Bob has the

same tastes as Henri,and if the only thing that either of them cares about is consumption of bread

and wine,we can deduce:

#28a#29 nothing about whether one is better o#0B than the other.

#28b#29 that Henri is better o#0B than Bob.

#28c#29 that Bob is better o#0B than Henri.

#28d#29 that both of them violate the weak axiom of revealed preferences.

#28e#29 that Bob and Henri are equally well o#0B.

Topic,Revealed Preference Di#0Eculty,2

#25 Correct Responses,46 Discrimination Index,6

Correct Answer,C

7.32 Pierre's friend Henri lives in a town where he has to pay 3 francs per glass of wine and 6

francs per loaf of bread,Henri consumes 9 glasses of wine and 4 loaves of bread per day,Bob has

an income of $15 per day and pays $.50 per loaf of bread and $2 per glass of wine,If Bob has the

same tastes as Henri,and if the only thing that either of them cares about is consumption of bread

and wine,we can deduce:

#28a#29 nothing about whether one is better o#0B than the other.

#28b#29 that Henri is better o#0B than Bob.

#28c#29 that Bob is better o#0B than Henri.

#28d#29 that both of them violate the weak axiom of revealed preferences.

#28e#29 that Bob and Henri are equally well o#0B.

MULTIPLE CHOICE 125

Topic,Revealed Preference Di#0Eculty,2

#25 Correct Responses,86 Discrimination Index,31

Correct Answer,A

7.33 Consider the case of Ronald,Let the prices and consumptions in the base year be as in

Situation D; where p

1

=3;p

2

=1;x

1

=5;and x

2

=15,If in the currentyear,the price of good 1

s1 and the price of good 2 is 2,and Ronald's current c consumptions of good 1 and good 2 are 25

and 25 respectively,what is the Laspeyres price index of current prices relative to base year prices?

#28Pick the most nearly correct answer.#29

#28a#29 1.17

#28b#29 2.50

#28c#29 0.75

#28d#29 0.50

#28e#29 1.75

Topic,Revealed Preference Di#0Eculty,2

#25 Correct Responses,86 Discrimination Index,31

Correct Answer,A

7.34 Consider the case of Ronald,Let the prices and consumptions in the base year be as in

Situation D; where p

1

=3;p

2

=1;x

1

=5;and x

2

=15,If in the currentyear,the price of good 1

s1 and the price of good 2 is 1,and Ronald's current c consumptions of good 1 and good 2 are 25

and 10 respectively,what is the Laspeyres price index of current prices relative to base year prices?

#28Pick the most nearly correct answer.#29

#28a#29 0.67

#28b#29 1.17

#28c#29 0.50

#28d#29 0.25

#28e#29 1

CHAPTER 7 Revealed Preference 126

Topic,Revealed Preference Di#0Eculty,2

#25 Correct Responses,86 Discrimination Index,44

Correct Answer,A

7.35 On the planet,Homogenia,every consumer who has ever lived consumes only two goods x

and y and has the utility function U#28x;y#29=xy,The currency in Homogenia is the fragel,In this

country in 1900,the price of good 1 was 1 fragel and the price of good 2 was 2 fragels,Per capita

income was 96 fragels,In 1990,the price of good 1 was 4 fragels and the price of good 2 was 5

fragels,The Laspeyres price index for the price level in 1990 relative to the price level in 1900 is:

#28a#29 3.25.

#28b#29 4.50.

#28c#29 3.

#28d#29 5.25.

#28e#29 not possible to determine from this information.

Topic,Revealed Preference Di#0Eculty,2

#25 Correct Responses,86 Discrimination Index,44

Correct Answer,A

7.36 On the planet,Homogenia,every consumer who has ever lived consumes only two goods x

and y and has the utility function U#28x;y#29=xy,The currency in Homogenia is the fragel,In this

country in 1900,the price of good 1 was 1 fragel and the price of good 2 was 2 fragels,Per capita

income was 84 fragels,In 1990,the price of good 1 was 1 fragels and the price of good 2 was 1

fragels,The Laspeyres price index for the price level in 1990 relative to the price level in 1900 is:

#28a#29 0.75.

#28b#29 1.

#28c#29 0.67.

#28d#29 1.25.

#28e#29 not possible to determine from this information.

MULTIPLE CHOICE 127

Topic,Revealed Preference Di#0Eculty,2

#25 Correct Responses,74 Discrimination Index,56

Correct Answer,A

7.37 On the planet,Hyperion,every consumer who has ever lived has a utility function U#28x;y#29=

minfx;2yg,The currency of Hyperion is the doggerel,In 1850 the price of x was 1 doggerel per

unit and the price of y was 2 doggerels per unit,In 1990,the price of x was 11 doggerels per unit

and the price of y was 4 doggerels per unit,The Paasche price index of prices in 1990 relativeto

prices in 1850 is:

#28a#29 6.50.

#28b#29 5.

#28c#29 2.75.

#28d#29 3.75.

#28e#29 not possible to determine without further information.

Topic,Revealed Preference Di#0Eculty,2

#25 Correct Responses,74 Discrimination Index,56

Correct Answer,A

7.38 On the planet,Hyperion,every consumer who has ever lived has a utility function U#28x;y#29=

minfx;2yg,The currency of Hyperion is the doggerel,In 1850 the price of x was 1 doggerel per

unit and the price of y was 2 doggerels per unit,In 1990,the price of x was 7 doggerels per unit

and the price of y was 4 doggerels per unit,The Paasche price index of prices in 1990 relativeto

prices in 1850 is:

#28a#29 4.50.

#28b#29 3.67.

#28c#29 1.75.

#28d#29 2.75.

#28e#29 not possible to determine without further information.

CHAPTER 7 Revealed Preference 128

Topic,Revealed Preference Di#0Eculty,0

#25 Correct Responses,69 Discrimination Index,32

Correct Answer,D

7.39 Howard Send is deciding whether to keep his car when he moves to New York City.To

operate his car for a year,he would havetopay a #0Dat fee of $6,000 for auto insurance and parking,

plus 20 cents for every mile that he drives for gasoline and repairs,Alternatively,he could give his

car to his brother-in-law in Bu#0Balo #28the market value of the car is negligible#29 and take taxicabs in

New York,which costs $1 a mile,Howard knows that if he took the car to New York,he would

drive 6500 miles per year,If he places no value,positive or negative,on his brother,in,law getting

the car and if he is indi#0Berentbetween riding a cab and driving,he should:

#28a#29 keep his car if he wouldn't want to travel as much as 6500 miles by cab.

#28b#29 give his car awayifhewouldn't travel more than 6000 miles by cab but keep it if he would travel more

than 6000 miles by cab.

#28c#29 keep his car if he would travel more than 6,000 but less than 6,500 miles by cab.

#28d#29 give his car away.

#28e#29 There is not enough information given here to allow one to give him reasonable advice about what to do.

Topic,Budgets Di#0Eculty,0

#25 Correct Responses,2 Discrimination Index,0

Correct Answer,A

7.40 Franco and Gianni have the same tastes and consume only two goods,wine and pizza.

Franco lives in Milano and spends 100,000 lire per week,It costs him 5,000 lire for a bottle of wine

and 5,000 lire for a pizza,Gianni lives in Napoli,It costs him 4,000 lire for a bottle of wine and

6,000 lire for a pizza,At those prices,he chooses to buy 10 bottles of wine and 6 pizzas per week.

From this information,we can deduce that:

#28a#29 Franco is better o#0B with his own budget than he would be with Gianni's.

#28b#29 Gianni is better o#0B with his own budget than he would be with Franco's.

#28c#29 Franco and Gianni violate WARP.

#28d#29 Franco and Gianni are equally well o#0B.

#28e#29 There is not enough information to determine whether either would prefer the other's bundle.

MULTIPLE CHOICE 129

Topic,Revealed Preference Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,C

7.41 Hillary has an initial endowment of $500 and is interested in two things,how many visits

she can make to the doctor,and money left over to spend on other things,When a trip to the

doctor costs $50,Hillary sees the doctor 7 times,After health care reform,a visit to the doctor

will cost $10 but her taxes will rise by $360.

#28a#29 Hillary will be made better o#0B by health care reform.

#28b#29 Hillary will be made worse o#0B by health care reform.

#28c#29 We cannot tell how health care reform will a#0Bect Hillary.

#28d#29 Hillary violates the Weak Axiom of Revealed Preference.

Topic,Revealed Preference Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,C

7.42 Hillary has an initial endowment of $500 and is interested in two things,how many visits

she can make to the doctor,and money left over to spend on other things,When a trip to the

doctor costs $60,Hillary sees the doctor 4 times,After health care reform,a visit to the doctor

will cost $10 but her taxes will rise by $290.

#28a#29 Hillary will be made better o#0B by health care reform.

#28b#29 Hillary will be made worse o#0B by health care reform.

#28c#29 We cannot tell how health care reform will a#0Bect Hillary.

#28d#29 Hillary violates the Weak Axiom of Revealed Preference.

Chapter 8

True-False Slutsky Equation

Topic,Slutsky Equation Di#0Eculty,1

#25 Correct Responses,86 Discrimination Index,24

Correct Answer,True

8.1 A Gi#0Ben good must be an inferior good.

Topic,Slutsky Equation Di#0Eculty,1

#25 Correct Responses,80 Discrimination Index,28

Correct Answer,False

8.2 If a good is an inferior good,then an increase in its price will increase the demand for it.

Topic,Slutsky Equation Di#0Eculty,1

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,False

8.3 The compensated demand function refers to the demand function of someone who is ade-

quately paid for what he or she sells.

Topic,Slutsky Equation Di#0Eculty,2

#25 Correct Responses,55 Discrimination Index,26

Correct Answer,False

8.4 The Slutsky substitution e#0Bect measures the movementbetween two points on the same

indi#0Berence curve.

Topic,Slutsky Equation Di#0Eculty,2

#25 Correct Responses,45 Discrimination Index,9

Correct Answer,False

8.5 In the case of homothetic preferences the entire change in demand from a price change is due

to the substitution e#0Bect.

Topic,Slutsky Equation Di#0Eculty,1

#25 Correct Responses,86 Discrimination Index,28

Correct Answer,True

8.6 If two goods x and y are perfect complements,then if the price of x falls,the entire change

in the demand for x is due to the income e#0Bect.

TRUE-FALSE 131

Topic,Slutsky Equation Di#0Eculty,1

#25 Correct Responses,84 Discrimination Index,19

Correct Answer,True

8.7 If the Engel curve slopes up,then the demand curve slopes down.

Topic,Slutsky Equation Di#0Eculty,1

#25 Correct Responses,54 Discrimination Index,10

Correct Answer,False

8.8 A rational consumer prefers more of good x to less,If the price of good x rises and the prices

of all other goods remain constant,then the consumer must necessarily demand less of x.

Topic,Slutsky Equation Di#0Eculty,1

#25 Correct Responses,69 Discrimination Index,45

Correct Answer,False

8.9 When the price of a good rises and income remains constant,there is a substitution e#0Bect on

demand but there cannot be an income e#0Bect.

Topic,Slutsky Equation Di#0Eculty,2

#25 Correct Responses,65 Discrimination Index,35

Correct Answer,True

8.10 Ivan spends his entire income on two goods,One of them is a Gi#0Ben good,If the price of

the Gi#0Ben good rises,demand for the other good must fall.

Topic,Slutsky Equation Di#0Eculty,1

#25 Correct Responses,85 Discrimination Index,21

Correct Answer,False

8.11 An increase in the price of a Gi#0Ben good makes the people who consume that good better

o#0B.

Topic,Slutsky Equation Di#0Eculty,2

#25 Correct Responses,71 Discrimination Index,2

Correct Answer,True

8.12 Jessica's preferences for peanut butter and jelly are represented by the utility function

U#28p;j#29=minf2p;5jg,If prices and income change,but her old consumption bundle lies somewhere

on her new budget line,she will not change her consumption.

CHAPTER 8 Slutsky Equation 132

Topic,Slutsky Equation Di#0Eculty,2

#25 Correct Responses,67 Discrimination Index,39

Correct Answer,False

8.13 Jimmy's utility function is U#28a;b#29=ab where a is his consumption of apples and b is his

consumption of bananas,If prices and income change in suchaway that Jimmy's old consumption

lies on his new budget line,then Jimmy will not change his consumption bundle.

Topic,Slutsky Equation Di#0Eculty,0

#25 Correct Responses,56 Discrimination Index,8

Correct Answer,True

8.14 Suppose a consumer has strictly convex preferences and her Engel curve for a good is a

vertical line for some range of income,In that same income range,her demand curve for the good

slopes down.

Topic,Slutsky Equation Di#0Eculty,2

#25 Correct Responses,42 Discrimination Index,0

Correct Answer,True

8.15 John purchases two goods,x and y,Good x is an inferior good for some range of income.

There must be another range of income for which good x is a normal good.

Topic,Slutsky Equation Di#0Eculty,2

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,True

8.16 A consumer has the utility function U#28x;y#29=x+2y

1=2

,The price of good x is 2 and the

price of good y is 1,The consumer's income is 20,If the price of good y rises to 2,then entire

change in demand for y is due to the substitution e#0Bect.

Topic,Slutsky Equation Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,True

8.17 The Hicks version of the substitution e#0Bect of a price change measures the change in a

consumer's demand if the consumer's income were changed just enough so the consumer would

remain on the same indi#0Berence curve as before the price change.

Multiple Choice Slutsky Equation

Topic,Slutsky Equation Di#0Eculty,3

#25 Correct Responses,67 Discrimination Index,46

Correct Answer,B

8.1 Cindy consumes goods x and y,Her demand for x is given by x#28p

x;m#29=0:05m,5:15p

x

.Now

her income is 419,the price of x is 3,and the price of y is 1,If the price of x rises to 4 and if we

denote the income e#0Bect on her demand for x by DI and the substitution e#0Bect on her demand for

x by DS,then:

#28a#29 DI =,0:28 and DS =,0:52.

#28b#29 DI =,0:28 and DS =,4:88.

#28c#29 DI =,0:52 and DS =,0:52.

#28d#29 DI = 0 and DS =,2:00.

#28e#29 None of the above.

Topic,Slutsky Equation Di#0Eculty,3

#25 Correct Responses,67 Discrimination Index,46

Correct Answer,B

8.2 Cindy consumes goods x and y,Her demand for x is given by x#28p

x;m#29=0:05m,5:25p

x

.Now

her income is 545,the price of x is 4,and the price of y is 1,If the price of x rises to 5 and if we

denote the income e#0Bect on her demand for x by DI and the substitution e#0Bect on her demand for

x by DS,then:

#28a#29 DI =,0:31 and DS =,0:52.

#28b#29 DI =,0:31 and DS =,4:94.

#28c#29 DI =,0:52 and DS =,0:52.

#28d#29 DI = 0 and DS =,2:00.

#28e#29 None of the above.

CHAPTER 8 Slutsky Equation 134

Topic,Slutsky Equation Di#0Eculty,1

#25 Correct Responses,53 Discrimination Index,30

Correct Answer,C

8.3 Walt considers x and y to be perfect substitutes,They originally cost 10 and 9 respectively.

His income is 720,One day the price of x drops to 8,Which of the following is true?

#28a#29 The income e#0Bect increases the quantityofyby 90.

#28b#29 The substitution e#0Bect increases the quantityofyby 80.

#28c#29 The substitution e#0Bect increases the quantityofxby 90.

#28d#29 The income e#0Bect increases the quantityofxby 80.

#28e#29 None of the above.

Topic,Slutsky Equation Di#0Eculty,2

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,A

8.4 Ernest's income elasticity of demand for natural gas is,4,His price elasticity of demand for

natural gas is,:3; and he spends 10#25 of his income on natural gas,What is his substitution price

elasticity?

#28a#29,:26

#28b#29,:34

#28c#29,20

#28d#29,:12

#28e#29 None of the above.

Topic,Slutsky Equation Di#0Eculty,2

#25 Correct Responses,10 Discrimination Index,2

Correct Answer,A

8.5 Suppose that bananas are a normal good and Woody is currently consuming 100 bananas at

a price of 10 cents each.

#28a#29 His Slutsky compensated demand curve going through this point is steeper than his ordinary demand

curve.

#28b#29 His ordinary demand curve going through this point is steeper than his Slutsky compensated demand

curve.

#28c#29 His ordinary demand curve is steeper to the left and his Slutsky compensated demand curve is steeper

to the right of this point.

#28d#29 Whether his ordinary demand curve or his compensated demand curve is steeper,depends on whether

his price elasticity is greater than 1.

#28e#29 None of the above.

MULTIPLE CHOICE 135

Topic,Slutsky Equation Di#0Eculty,2

#25 Correct Responses,68 Discrimination Index,21

Correct Answer,C

8.6 The following can be said about the income and substitution e#0Bects of a price increase on

the demand for the good whose price rose:

#28a#29 The former is always positive and the latter is always negative.

#28b#29 Both can be either positive or negative.

#28c#29 While the latter is always negative,the former can be either positive or negative.

#28d#29 While the former is always negative,the latter can be either positive or negative.

#28e#29 The former can at times be negative,but it will never overwhelm the latter.

Topic,Slutsky Equation Di#0Eculty,3

#25 Correct Responses,57 Discrimination Index,21

Correct Answer,A

8.7 In 1989,Bruce spent his income on two goods x and y,Between 1989 and 1990,the price of

good x rose by 8 per cent and the price of good y rose by8percent,In 1990,Bruce bought the

same amountofxas he bought in 1989,but he bought more of good y than he had bought in 1989.

From these facts,we conclude that:

#28a#29 y is a normal good.

#28b#29 y is an inferior good.

#28c#29 x is an inferior good.

#28d#29 nothing can be said about inferiority or superiority,since we don't know what happened to income.

#28e#29 Bruce is acting irrationally,since the relative prices of x and y did not change.

Topic,Slutsky Equation Di#0Eculty,1

#25 Correct Responses,36 Discrimination Index,59

Correct Answer,E

8.8 When the price of x rises,Marvin responds bychanging his demand for x,The substitution

e#0Bect is the part of this change that represents his change in demand:

#28a#29 holding the prices of substitutes constant.

#28b#29 if he is allowed to substitute as much x for y as he wishes.

#28c#29 if his money income is held constant when the price of x changes.

#28d#29 if the prices of all other goods are held constant.

#28e#29 none of the above.

CHAPTER 8 Slutsky Equation 136

Topic,Slutsky Equation Di#0Eculty,1

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,B

8.9 Polly consumes crackers and fruit,The price of fruit rose and the price of crackers stayed

constant,The income e#0Bect on Polly's demand is:

#28a#29 zero because Polly's income didn't change.

#28b#29 the change in Polly's demand if her income is decreased by the change in the price of fruit times her old

consumption of fruit.

#28c#29 the change in Polly's demand if her income is decreased by the total amount she used to spend on fruit.

#28d#29 the change in Polly's demand if her income is increased by the amount she used to spend on fruit.

#28e#29 the change in Polly's demand if her income is increased by the change in the price of fruit times the

amount she used to buy.

Topic,Slutsky Equation Di#0Eculty,2

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,A

8.10 Waldo consumes only apples and bananas and bananas are an inferior good for him,The

price of apples increases,but there is an increase in his income that keeps him on the same indif-

ference curve as before,#28Waldo has convex preferences; and he prefers more to less of either good.#29

#28a#29 After the change,Waldo will buy more bananas and less apples.

#28b#29 After the change,Waldo will buy less bananas and more apples.

#28c#29 After the change,Waldo will buy more of both goods.

#28d#29 After the change,Waldo will buy less of both goods.

#28e#29 Wewould need to know his utility function to determine whether any of the above statements are true.

MULTIPLE CHOICE 137

Topic,Slutsky Equation Di#0Eculty,2

#25 Correct Responses,43 Discrimination Index,41

Correct Answer,B

8.11 Charlie consumes apples and bananas,His utility function is U#28X

A;X

B

#29=x

A

x

2

B

,The price

of apples is $1,the price of bananasis $2 and his income is $30 per week,If the price of bananas

falls to $1:

#28a#29 Charlie demands fewer apples and more bananas.

#28b#29 the substitution e#0Bect of the fallin banana prices reduces his APPLE consumption,but the income e#0Bect

increases his apple consumption by the same amount.

#28c#29 the substitution e#0Bect of the fall in the price of bananas reduces his BANANA consumption but the

income e#0Bect increases his banana consumption by enough so that his banana consumption rises.

#28d#29 the income used to calculate the substitution e#0Bect is higher than his original income,since the change

made Charlie better o#0B.

#28e#29 more than one of the above is true.

Topic,Slutsky Equation Di#0Eculty,2

#25 Correct Responses,43 Discrimination Index,58

Correct Answer,B

8.12 Rob consumes two goods,x and y,He has an allowance of $50 per week and is not endowed

with either of the goods,If the price of good x increases and his substitution and income e#0Bects

change demand in opposite directions:

#28a#29 good x must be a Gi#0Ben good.

#28b#29 good x must be an inferior good.

#28c#29 WARP is violated.

#28d#29 good x must be a normal good.

#28e#29 there is not enough information to judge whether good x is a normal or inferior good.

CHAPTER 8 Slutsky Equation 138

Topic,Slutsky Equation Di#0Eculty,1

#25 Correct Responses,54 Discrimination Index,42

Correct Answer,D

8.13 Ben consumes two goods and his utility function is U#28x

1;x

2

#29=x

2

1

x

4

2

,The price of good 2

does not change and his income does not change,but the price of good 1 decreases,It must be that:

#28a#29 the income e#0Bect is zero,since his income remained constant.

#28b#29 the substitution e#0Bect on the demand for good 2 is zero,since the price of good 2 did not change.

#28c#29 the substitution e#0Bect reduces the demand for good 2 and,since the income e#0Bect is zero,demand for

good 2 falls.

#28d#29 the substitution e#0Bect of the price change reduces demand for good 2 and increases demand for good 1.

#28e#29 more than one of the above statements is true.

Topic,Slutsky Equation Di#0Eculty,1

#25 Correct Responses,54 Discrimination Index,42

Correct Answer,D

8.14 David consumes two goods and his utility function is U#28x

1;x

2

#29=x

5

1

x

6

2

,The price of good 2

does not change and his income does not change,but the price of good 1 decreases,It must be that:

#28a#29 the income e#0Bect is zero,since his income remained constant.

#28b#29 the substitution e#0Bect on the demand for good 2 is zero,since the price of good 2 did not change.

#28c#29 the substitution e#0Bect reduces the demand for good 2 and,since the income e#0Bect is zero,demand for

good 2 falls.

#28d#29 the substitution e#0Bect of the price change reduces demand for good 2 and increases demand for good 1.

#28e#29 more than one of the above statements is true.

Topic,Slutsky Equation Di#0Eculty,0

#25 Correct Responses,97 Discrimination Index,9

Correct Answer,A

8.15 Charlie's utility function is x

A

x

B

,The price of apples used to be $1 per unit and the price

of bananas was $2 per unit,His income was $40 per day,If the price of apples increased to $2.25

and the price of bananas fell to $1.25,then in order to be able to just a#0Bord his old bundle,Charlie

would havetohave a daily income of:

#28a#29 57.50.

#28b#29 116.

#28c#29 28.75.

#28d#29 86.25.

#28e#29 230.

MULTIPLE CHOICE 139

Topic,Slutsky Equation Di#0Eculty,0

#25 Correct Responses,97 Discrimination Index,9

Correct Answer,A

8.16 Charlie's utility function is x

A

x

B

,The price of apples used to be $1 per unit and the price

of bananas was $2 per unit,His income was $40 per day,If the price of apples increased to $2 and

the price of bananas fell to $0.50,then in order to be able to just a#0Bord his old bundle,Charlie

would havetohave a daily income of:

#28a#29 45.

#28b#29 91.

#28c#29 22.50.

#28d#29 67.50.

#28e#29 180.

Topic,Slutsky Equation Di#0Eculty,0

#25 Correct Responses,70 Discrimination Index,75

Correct Answer,C

8.17 Charlie's utility function is x

A

x

B

,The price of apples used to be $1,the price of bananas

used to be $2,and his income used to be $40,If the price of apples increased to 6 and the price of

bananas stayed constant,the substitution e#0Bect on Charlie's apple consumption reduces his con-

sumption by:

#28a#29 16.67 apples.

#28b#29 5 apples.

#28c#29 8.33 apples.

#28d#29 13.33 apples.

#28e#29 None of the above.

CHAPTER 8 Slutsky Equation 140

Topic,Slutsky Equation Di#0Eculty,0

#25 Correct Responses,70 Discrimination Index,75

Correct Answer,C

8.18 Charlie's utility function is x

A

x

B

,The price of apples used to be $1,the price of bananas

used to be $2,and his income used to be $40,If the price of apples increased to 5 and the price of

bananas stayed constant,the substitution e#0Bect on Charlie's apple consumption reduces his con-

sumption by:

#28a#29 16 apples.

#28b#29 4 apples.

#28c#29 8 apples.

#28d#29 13 apples.

#28e#29 None of the above.

Topic,Slutsky Equation Di#0Eculty,2

#25 Correct Responses,72 Discrimination Index,81

Correct Answer,C

8.19 Neville from your workbook has a friend named Peregrine,Peregrine has the same demand

function for claret as Neville,namely q =,02m,2p where m is income and p is price,Peregrine's

income is 6,500 and he initially had to pay a price of 50 per bottle of claret,The price of claret

rose to 60,The substitution e#0Bect of the price change:

#28a#29 reduced his demand by 20.

#28b#29 increased his demand by 20.

#28c#29 reduced his demand by 14.

#28d#29 reduced his demand by 26.

#28e#29 reduced his demand by 24.

Topic,Slutsky Equation Di#0Eculty,2

#25 Correct Responses,72 Discrimination Index,81

Correct Answer,C

8.20 Neville from your workbook has a friend named Nigel,Nigel has the same demand function

for claret as Neville,namely q =,02m,2p where m is income and p is price,Nigel's income is 7,000

and he initially had to pay a price of 50 per bottle of claret,The price of claret rose to 80,The

substitution e#0Bect of the price change:

#28a#29 reduced his demand by 60.

#28b#29 increased his demand by 60.

#28c#29 reduced his demand by 36.

#28d#29 reduced his demand by 84.

#28e#29 reduced his demand by 46.

MULTIPLE CHOICE 141

Topic,Slutsky Equation Di#0Eculty,1

#25 Correct Responses,88 Discrimination Index,38

Correct Answer,C

8.21 Goods 1 and 2 are perfect complements and a consumer always consumes them in the ratio

of 2 units of Good 2 per unit of Good 1,If a consumer has income 300 and if the price of good 2

changes from 5 to 6,while the price of good 1 stays at 1,then the income e#0Bect of the price change:

#28a#29 is 6 times as strong as the substitution e#0Bect.

#28b#29 does not change demand for good 1.

#28c#29 accounts for the entire change in demand.

#28d#29 is exactly twice as strong as the substitution e#0Bect.

#28e#29 is 5 times as strong as the substitution e#0Bect.

Topic,Slutsky Equation Di#0Eculty,1

#25 Correct Responses,88 Discrimination Index,38

Correct Answer,C

8.22 Goods 1 and 2 are perfect complements and a consumer always consumes them in the ratio

of 2 units of Good 2 per unit of Good 1,If a consumer has income 720 and if the price of good 2

changes from 8 to 9,while the price of good 1 stays at 1,then the income e#0Bect of the price change:

#28a#29 is 9 times as strong as the substitution e#0Bect.

#28b#29 does not change demand for good 1.

#28c#29 accounts for the entire change in demand.

#28d#29 is exactly twice as strong as the substitution e#0Bect.

#28e#29 is 8 times as strong as the substitution e#0Bect.

CHAPTER 8 Slutsky Equation 142

Topic,Slutsky Equation Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,A

8.23 Suppose that Agatha has $ 465 to spend on tickets for her trip,She intends to spend the

entire amount $465 on tickets and she prefers traveling #0Crst-class to travelling second class,She

needs to travel a total of 1500 miles,Suppose that the price of #0Crst class-tickets is $0.40 per mile

and the price of second-class tickets is $0.10 per mile,How many miles will she travel by second

class?

#28a#29 450

#28b#29 600

#28c#29 225

#28d#29 550

#28e#29 150

Topic,Slutsky Equation Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,A

8.24 Suppose that Agatha has $ 420 to spend on tickets for her trip,She intends to spend the

entire amount $420 on tickets and she prefers traveling #0Crst-class to travelling second class,She

needs to travel a total of 1500 miles,Suppose that the price of #0Crst class-tickets is $0.30 per mile

and the price of second-class tickets is $0.20 per mile,How many miles will she travel by second

class?

#28a#29 300

#28b#29 450

#28c#29 150

#28d#29 400

#28e#29 100

MULTIPLE CHOICE 143

Topic,Slutsky Equation Di#0Eculty,2

#25 Correct Responses,74 Discrimination Index,30

Correct Answer,C

8.25 Maude thinks delphiniums and hollyhocks are perfect substitutes,one-for-one,If Delphini-

ums currently cost $5 per unit and hollyhocks cost $6 per unit,and if the price of delphiniums rises

to $10 per unit:

#28a#29 the income e#0Bect of the change in demand for delphiniums will be bigger than the substitution e#0Bect.

#28b#29 there will be no change in the demand for hollyhocks.

#28c#29 the entire change in demand for delphiniums will be due to the substitution e#0Bect.

#28d#29 1=5 of the change will be due to the income e#0Bect.

#28e#29 4=5 of the change will be due to the income e#0Bect.

Topic,Slutsky Equation Di#0Eculty,2

#25 Correct Responses,74 Discrimination Index,30

Correct Answer,C

8.26 Maude thinks delphiniums and hollyhocks are perfect substitutes,one-for-one,If Delphini-

ums currently cost $4 per unit and hollyhocks cost $5 per unit,and if the price of delphiniums rises

to $9 per unit:

#28a#29 the income e#0Bect of the change in demand for delphiniums will be bigger than the substitution e#0Bect.

#28b#29 there will be no change in the demand for hollyhocks.

#28c#29 the entire change in demand for delphiniums will be due to the substitution e#0Bect.

#28d#29 1=5 of the change will be due to the income e#0Bect.

#28e#29 4=5 of the change will be due to the income e#0Bect.

CHAPTER 8 Slutsky Equation 144

Topic,Slutsky Equation Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,A

8.27 Carlos consumes only two goods,apples and bananas,His utility function is given by

U#28x;y#29=a

3

b

2

,He is endowed with w

a

apples and w

b

bananas,Unaware that prices are about

to change,Carlos buys the quantities of apples and bananas that maximize his utility subject to

his budget constraint,After he has made his purchases,but before he has eaten them,the rela-

tive prices change,Carlos is then free to make further trades at the new relative prices if he wishes.

#28a#29 Carlos will de#0Cnitely be better o#0B after the price change.

#28b#29 Carlos will de#0Cnitely be worse o#0B after the price change.

#28c#29 Carlos will be better o#0B after the price change if the price of the good for which he is a net seller rises

relative to the price of the other good.

#28d#29 Carlos will be better o#0B after the price change if the price of the good for which he is a net buyer rises

relative to the price of the other good.

#28e#29 Carlos' utility will not be a#0Bected by the price change.

Topic,Slutsky Equation Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,E

8.28 Carlos consumes only two goods,apples and bananas,His utility function is given by

U#28x;y#29=minfx;2yg,He is endowed with w

a

apples and w

b

bananas,Unaware that prices are about

to change,Carlos buys the quantities of apples and bananas that maximize his utility subject to

his budget constraint,After he has made his purchases,but before he has eaten them,the rela-

tive prices change,Carlos is then free to make further trades at the new relative prices if he wishes.

#28a#29 Carlos will de#0Cnitely be better o#0B after the price change.

#28b#29 Carlos will de#0Cnitely be worse o#0B after the price change.

#28c#29 Carlos will be better o#0B after the price change if the price of the good for which he is a net seller rises

relative to the price of the other good.

#28d#29 Carlos will be better o#0B after the price change if the price of the good for which he is a net buyer rises

relative to the price of the other good.

#28e#29 Carlos' utility will not be a#0Bected by the price change.

MULTIPLE CHOICE 145

Topic,Slutsky Equation Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,B

8.29 Gladys loves music and spends her money only on tapes and compact disks,She is always

willing to trade 2 tapes for 1 compact disk,Originally,music stores sold compact disks for $9

each and tapes for $5 each,Then the price of compact disks fell to $8 each,The change in the

consumption of compact disks that resulted is:

#28a#29 entirely due to the substitution e#0Bect.

#28b#29 entirely due to the income e#0Bect.

#28c#29 partly due to the income e#0Bect and partly due to the substitution e#0Bect.

#28d#29 will be due to the income e#0Bect for low incomes and the substitution e#0Bect for high incomes.

#28e#29 There is no change in her demand for compact disks.

Essay Slutsky Equation

Topic,Slutsky Equation Di#0Eculty,2

#25 Correct Responses,0 Discrimination Index,0

8.1 A taxpayer says "Sure I pay a lot of income tax,but I don't mind because I get back just as

much money as I pay in." Assuming that his facts are correct,explain why the taxpayer's reasoning

is faulty,Use a diagram to show that an income tax can make a person worse o#0B even if he is

rebated an amount of money equal to what he paid in.

Answer,See page 148 of Varian.

Topic,Slutsky Equation Di#0Eculty,3

#25 Correct Responses,0 Discrimination Index,0

8.2 Use a diagram to prove that in case there are two goods,the substitution e#0Bect of an increase

in the price of good x reduces the demand for good x.

Answer,A good way to proceed is to suppose that the price of x increases and the substitution

e#0Bect increases demand for x,Draw the pivoted budget and notice that the new bundle would have

to be a bundle that was previously rejected in favor of the old bundle,Since the pivoted budget

still allows the old purchase,the weak axiom of revealed preference would be violated.

Topic,Slutsky Equation Di#0Eculty,2

#25 Correct Responses,0 Discrimination Index,0

8.3 Drawtwo di#0Berent diagrams,one illustrating the Slutsky version of income and substitution

e#0Bects and the other illustrating the Hicks version of income and substitution e#0Bects,How do these

two notions di#0Ber?

Answer,The diagrams can be found in Varian's book,The Slutsky version of the substitution

e#0Bect has income adjusted so the consumer is just able to a#0Bord the old bundle at the new prices.

The Hicks version has the consumer's income adjusted so is exactly as well o#0B as he was at the old

prices.

Topic,Slutsky Equation Di#0Eculty,1

#25 Correct Responses,0 Discrimination Index,0

8.4 What conditions ensure that the quantity of a good demanded increases as its price falls?

Explain your answer,using diagrams.

Answer,The standard Slutsky analysis is called for here,See the text.

ESSAY 147

Topic,Slutsky Equation Di#0Eculty,2

#25 Correct Responses,0 Discrimination Index,0

8.5 Suggest at least one reason why it mightbeworth the trouble it takes to learn howtode-

compose the e#0Bects of a price change into an income e#0Bect and a substitution e#0Bect.

Answer,The substitution e#0Bect of a price increase must decrease demand for that good,We know

that if demand for the good increases as income increases,then the income e#0Bect works in the same

direction as the substitution e#0Bect,Therefore the decomposition into income and substitution

e#0Bects allows one to prove that the demand curve slopes down whenever the Engel curve slopes

up,A second reason is that someone who has already purchased his planned consumption bundle

faces only a substitution e#0Bect and not an income e#0Bect when prices change,since in this case his

budget line just pivots around the current consumption.

Chapter 9

True-False Buying and Selling

Topic,Buying and Selling Di#0Eculty,2

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,True

9.1 If a rational utility maximizer is a net demander of a good,and if an increase in its price

causes him to buy more of it,then it must be an inferior good.

Topic,Buying and Selling Di#0Eculty,2

#25 Correct Responses,68 Discrimination Index,22

Correct Answer,False

9.2 If a person is a net supplier of a normal good and its price increases while all other prices

stay the same,then his demand for the good must decrease.

Topic,Buying and Selling Di#0Eculty,1

#25 Correct Responses,70 Discrimination Index,16

Correct Answer,True

9.3 If a consumer is a buyer of some goods and a seller of others,then a change in prices will

generate an extra income e#0Bect in the Slutsky equation due to the revaluation of the consumer's

endowment.

Topic,Buying and Selling Di#0Eculty,1

#25 Correct Responses,97 Discrimination Index,9

Correct Answer,True

9.4 If a consumer is initially endowed with a positive amountoftwo goods and sells some of one

to get more of the other,and if she has no other sources of income,then her budget line will pass

through her endowment point.

Topic,Buying and Selling Di#0Eculty,2

#25 Correct Responses,71 Discrimination Index,29

Correct Answer,False

9.5 If a utility maximizer is a net seller of something and the price of that good rises while other

prices stay constant,her situation might improvesomuch that she becomes a net buyer.

TRUE-FALSE 149

Topic,Buying and Selling Di#0Eculty,2

#25 Correct Responses,93 Discrimination Index,23

Correct Answer,True

9.6 If a person is a net seller of some good and the price of that good decreases,she might

possibly become a net buyer.

Topic,Buying and Selling Di#0Eculty,2

#25 Correct Responses,68 Discrimination Index,14

Correct Answer,False

9.7 Wilhelm consumes only apples and bananas,His endowment is 5 units of apples and 10 units

of bananas,Both goods are normal goods for Wilhelm,At current prices,Wilhelm is a net seller of

apples,If the price of apples rises and the price of bananas stays the same,his demand for apples

must decrease.

Topic,Buying and Selling Di#0Eculty,2

#25 Correct Responses,50 Discrimination Index,0

Correct Answer,False

9.8 Bill receives half of his income in wages and half of his income in dividends,Bill would be

indi#0Berentbetween a 50 percent increase in his wage rate and a 50 percent increase in his dividend

income.

Topic,Buying and Selling Di#0Eculty,1

#25 Correct Responses,72 Discrimination Index,6

Correct Answer,False

9.9 If all goods,including leisure,are normal goods,then an increase in the wage rate will nec-

essarily make people wanttowork more hours.

Topic,Buying and Selling Di#0Eculty,2

#25 Correct Responses,19 Discrimination Index,48

Correct Answer,True

9.10 If someone has a Cobb-Douglas utility function and no income from any source other than

labor earnings,then an increase in wages will not change the amount that person chooses to work.

CHAPTER 9 Buying and Selling 150

Topic,Buying and Selling Di#0Eculty,1

#25 Correct Responses,87 Discrimination Index,5

Correct Answer,True

9.11 If leisure is a normal good,then an increase in non-labor income will reduce labor supply.

Topic,Buying and Selling Di#0Eculty,1

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,False

9.12 A person's full income is the amount of income that he or she would have if there were no

taxes.

Topic,Buying and Selling Di#0Eculty,2

#25 Correct Responses,79 Discrimination Index,29

Correct Answer,False

9.13 If a person has no non-labor income,a decrease in wages causes the budget line between

leisure and other goods to shift downward in a parallel fashion.

Topic,Buying and Selling Di#0Eculty,1

#25 Correct Responses,67 Discrimination Index,24

Correct Answer,True

9.14 If leisure is an inferior good,then an increase in the wage rate will make a person work

more.

Topic,Buying and Selling Di#0Eculty,1

#25 Correct Responses,64 Discrimination Index,31

Correct Answer,False

9.15 Jack has a backward-bending labor supply curve,Atwages of $5 an hour he chooses to

work 50 hours a week,His boss wants him to work more hours per week and o#0Bers him $5 an hour

for the #0Crst 50 hours per week and $7 an hour for every hour beyond 50 hours per week,Because

of his backward bending supply curve,Jack might actually choose to work fewer hours.

Topic,Buying and Selling Di#0Eculty,2

#25 Correct Responses,73 Discrimination Index,26

Correct Answer,True

9.16 Les is allowed to work only 8 hours a day at his main job,although he would liketowork

more hours,He takes a second job,He can work as many hours as he wishes at the second job,

but at a lower wage,If leisure is a normal good,then an increase in the wage rate for his #0Crst job

will reduce the number of hours he chooses to work at his second job.

TRUE-FALSE 151

Topic,Buying and Selling Di#0Eculty,2

#25 Correct Responses,79 Discrimination Index,46

Correct Answer,False

9.17 Suppose a consumer is initially endowed with a positive amountoftwo goods,sells some of

one to get more of the other,and has no other sources of income,If the price of one good falls,his

new budget line is everywhere above his old budget line.

Multiple Choice Buying and Selling

Topic,Buying and Selling Di#0Eculty,1

#25 Correct Responses,88 Discrimination Index,23

Correct Answer,C

9.1 Marsha Mellowisvery #0Dexible,She consumes x and y,She says `Givemexor givemey; I

don't care,I can't tell the di#0Berence between them.' She is currently endowed with 14 units of x

and 6 units of y,The price of x is 4 times the price of y,Marsha can trade x and y at the going

prices,but has no other source of income,How many units of y will Marsha consume?

#28a#29 66

#28b#29 20

#28c#29 62

#28d#29 6

#28e#29 31

Topic,Buying and Selling Di#0Eculty,1

#25 Correct Responses,88 Discrimination Index,23

Correct Answer,C

9.2 Marsha Mellowisvery #0Dexible,She consumes x and y,She says `Givemexor givemey;

I don't care,I can't tell the di#0Berence between them.' She is currently endowed with 4 units of x

and 17 units of y,The price of x is 2 times the price of y,Marsha can trade x and y at the going

prices,but has no other source of income,How many units of y will Marsha consume?

#28a#29 27

#28b#29 21

#28c#29 25

#28d#29 17

#28e#29 13

MULTIPLE CHOICE 153

Topic,Buying and Selling Di#0Eculty,3

#25 Correct Responses,56 Discrimination Index,39

Correct Answer,C

9.3 Yoram insists on consuming 3 times as much y as he consumes of x #28so he always has y =3x#29.

He will consume these goods in no other ratio,The price of x is 2 times the price of y.Yoram has

an endowmentof24x

0

sand 42 y

0

s which he can trade at the going prices,He has no other source

of income,What is Yoram's gross demand for x?

#28a#29 90

#28b#29 66

#28c#29 18

#28d#29 16

#28e#29 We can't determine the answer without knowing the price of x.

Topic,Buying and Selling Di#0Eculty,3

#25 Correct Responses,56 Discrimination Index,39

Correct Answer,C

9.4 Pablo insists on consuming 4 times as much y as he consumes of x #28so he always has y =4x#29.

He will consume these goods in no other ratio,The price of x is 5 times the price of y.Pablo has

an endowmentof15x

0

sand 60 y

0

s which he can trade at the going prices,He has no other source

of income,What is Pablo's gross demand for x?

#28a#29 135

#28b#29 75

#28c#29 15

#28d#29 10

#28e#29 We can't determine the answer without knowing the price of x.

CHAPTER 9 Buying and Selling 154

Topic,Buying and Selling Di#0Eculty,1

#25 Correct Responses,82 Discrimination Index,29

Correct Answer,C

9.5 Diana consumes commodities x and y and her utility function is U#28x;y#29=xy

2

,Good x costs

$2 per unit and good y costs $1 per unit,If she is endowed with 3 units of x and 6 units of y; how

many units of good y will she consume?

#28a#29 11

#28b#29 3

#28c#29 8

#28d#29 14

#28e#29 None of the above.

Topic,Buying and Selling Di#0Eculty,1

#25 Correct Responses,82 Discrimination Index,29

Correct Answer,C

9.6 Maude consumes commodities x and y and her utility function is U#28x;y#29=xy

3

,Good x costs

$3 per unit and good y costs $1 per unit,If she is endowed with 6 units of x and 2 units of y; how

many units of good y will she consume?

#28a#29 18

#28b#29 6

#28c#29 15

#28d#29 17

#28e#29 None of the above.

Topic,Buying and Selling Di#0Eculty,2

#25 Correct Responses,75 Discrimination Index,44

Correct Answer,A

9.7 Donald consumes goods x and y,His utility function is U#28x;y#29=xy

3

,He is endowed with 43

units of x and 7 units of y,The price of x is 1 and the price of y is 3,Find his net demand for x.

#28a#29,27

#28b#29 18

#28c#29,30

#28d#29,20

#28e#29 59

MULTIPLE CHOICE 155

Topic,Buying and Selling Di#0Eculty,2

#25 Correct Responses,75 Discrimination Index,44

Correct Answer,A

9.8 Donald consumes goods x and y,His utility function is U#28x;y#29=xy

4

,He is endowed with 78

units of x and 9 units of y,The price of x is 1 and the price of y is 3,Find his net demand for x.

#28a#29,57

#28b#29 23

#28c#29,60

#28d#29,48

#28e#29 99

Topic,Buying and Selling Di#0Eculty,1

#25 Correct Responses,87 Discrimination Index,6

Correct Answer,D

9.9 Jackie's net demands for x and y are #286;,6#29 and her gross demands are #2815;15#29,What is her

initial endowmentofx?

#28a#29 16

#28b#29 13

#28c#29 5

#28d#29 9

#28e#29 None of the above.

Topic,Buying and Selling Di#0Eculty,2

#25 Correct Responses,71 Discrimination Index,46

Correct Answer,C

9.10 Holly consumes x and y,The price of x is 4 and the price of y is 4,Holly's only source of

income is her endowment of 6 units of x and 6 units of y which she can buy or sell at the going

prices,She plans to consume 7 units of x and 5 units of y,If the prices change to 7 for x and 7 for

y; which of the following is true?

#28a#29 She is better o#0B.

#28b#29 She is worse o#0B.

#28c#29 She is neither better o#0B nor worse o#0B.

#28d#29 We can't tell whether she is better o#0B or worse o#0B unless we know her utility function.

#28e#29 She is better o#0B if she has non-convex preferences.

CHAPTER 9 Buying and Selling 156

Topic,Buying and Selling Di#0Eculty,2

#25 Correct Responses,71 Discrimination Index,46

Correct Answer,C

9.11 Kristina consumes x and y,The price of x is 5 and the price of y is 5,Kristina's only source

of income is her endowment of 6 units of x and 6 units of y which she can buy or sell at the going

prices,She plans to consume 7 units of x and 5 units of y,If the prices change to 8 for x and 8 for

y; which of the following is true?

#28a#29 She is better o#0B.

#28b#29 She is worse o#0B.

#28c#29 She is neither better o#0B nor worse o#0B.

#28d#29 We can't tell whether she is better o#0B or worse o#0B unless we know her utility function.

#28e#29 She is better o#0B if she has non-convex preferences.

Topic,Buying and Selling Di#0Eculty,1

#25 Correct Responses,85 Discrimination Index,19

Correct Answer,D

9.12 Milton consumes two commodities in a perfect market system,The price of x is 5 and the

price of y is 1,His utility function is U#28x;y#29=xy,He is endowed with 40 units of good x and no

y,Find his consumption of good y.

#28a#29 110

#28b#29 105

#28c#29 50

#28d#29 100

#28e#29 None of the above.

Topic,Buying and Selling Di#0Eculty,1

#25 Correct Responses,85 Discrimination Index,19

Correct Answer,D

9.13 Milton consumes two commodities in a perfect market system,The price of x is 5 and the

price of y is 1,His utility function is U#28x;y#29=xy,He is endowed with 24 units of good x and no

y,Find his consumption of good y.

#28a#29 70

#28b#29 65

#28c#29 30

#28d#29 60

#28e#29 None of the above.

MULTIPLE CHOICE 157

Topic,Buying and Selling Di#0Eculty,2

#25 Correct Responses,75 Discrimination Index,47

Correct Answer,A

9.14 Russ Tickman is a dairy farmer,He consumes milk and other goods,His utility function

is given by U#28x;y#29=y#28x+1#29where x is his milk consumption and y is his consumption of other

goods,His initial endowment is 19 units of milk per day and no units of other goods,If the price

of milk is 2 and the price of other goods is 1,howmuch milk does he consume?

#28a#29 9 gallons

#28b#29 38 gallons

#28c#29 20 gallons

#28d#29 14 gallons

#28e#29 12 gallons

Topic,Buying and Selling Di#0Eculty,2

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,A

9.15 Jack earns 5 dollars per hour,He has 100 hours per week which he can use for either labor

or leisure,The government institutes a plan in which eachworker receives a $100 grant from the

government,but has to pay 50#25 of his or her labor income in taxes,If his utility function is

U#28c;r#29=cr where c is dollars worth of consumption of goods and r is hours of leisure per week,

how many hours per week will Jackchoose to work?

#28a#29 30

#28b#29 40

#28c#29 26

#28d#29 20

#28e#29 None of the above.

CHAPTER 9 Buying and Selling 158

Topic,Buying and Selling Di#0Eculty,1

#25 Correct Responses,57 Discrimination Index,15

Correct Answer,E

9.16 Aristotle earns 5 dollars per hour,He has 110 hours per week available for either labor or

leisure,In the old days he paid no taxes and received nothing from the government,Now he gets

a $200 payment per week from the government and he must pay half of his labor income in taxes.

#28His before-tax wages are the same as they were before; and he has no other source of income than

wages and payments from the government.#29 He notices that with the governmentpayment and

his taxes,he can exactly a#0Bord the combination of leisure and consumption goods that he used to

choose,How many hours per week did he work in the old days?

#28a#29 100

#28b#29 20

#28c#29 45

#28d#29 60

#28e#29 None of the above.

Topic,Buying and Selling Di#0Eculty,2

#25 Correct Responses,31 Discrimination Index,40

Correct Answer,C

9.17 Rhoda takes a job with a construction company,She earns $5 an hour for the #0Crst 40

hours of eachweek and then gets "double-time" for overtime,That is,she is paid $10 an hour for

every hour beyond 40 hours a week that she works,Rhoda has 70 hours a week available to divide

between construction work and leisure,She has no other source of income,and her utility function

is U = cr where c is her income to spend on goods and r is the number of hours of leisure that she

has per week,She is allowed toworkas many hours as she wantsto,Howmany hours will she work?

#28a#29 50

#28b#29 30

#28c#29 45

#28d#29 35

#28e#29 None of the above.

MULTIPLE CHOICE 159

Topic,Buying and Selling Di#0Eculty,2

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,C

9.18 Wendy and Mac work in fast-food restaurants,Wendy is paid $4 an hour for the #0Crst

40 hours a week that she works and $6 an hour for every hour beyond 40 hours per week,Mac

gets $5 an hour no matter how many hours he works,Each has 110 hours per week to allocate

between work and leisure,Each has a utility function U = cr where c is expenditure per week on

consumption and r is hours of leisure per week,Each can choose the number of hours to work,If

Wendy works W hours and Mac works M hours,then:

#28a#29 W =1:5M.

#28b#29 W#3CM.

#28c#29 W,M =6:66.

#28d#29 W,M = 10.

#28e#29 None of the above.

Topic,Buying and Selling Di#0Eculty,3

#25 Correct Responses,63 Discrimination Index,36

Correct Answer,B

9.19 Heather and Myrtle have the same tastes,Heather is paid $10 an hour and chooses to work

9 hours a day,Myrtle is paid $9 an hour for the #0Crst 8 hours she works and $18 an hour for any

time she works beyond 8 hours a day.

#28a#29 Since she has the same tastes as Heather and can earn the same income byworking 9 hours a day,she

chooses to work 9 hours a day.

#28b#29 Unless her indi#0Berence curve is kinked,Heather would be better o#0B facing the same payschedule as

Myrtle.

#28c#29 Myrtle would prefer Heather's payschedule to her own.

#28d#29 Myrtle will work less than 9 hours a day.

#28e#29 None of the above.

CHAPTER 9 Buying and Selling 160

Topic,Buying and Selling Di#0Eculty,1

#25 Correct Responses,71 Discrimination Index,10

Correct Answer,C

9.20 MikeTeevee likes to watch television and to eat candy,In fact his utility function is

U#28x;y#29=x

2

ywhere x is the number of hours he spends watching television and y is the number of

dollars per week he spends on candy,Mike's mother doesn't like him to watchsomuch television.

She limits his television watching to 36 hours a week and in addition she pays him $1 an hour for

every hour that he reduces his television watching below 36 hours a week,If this is Mike's only

source of income to buy candy,how many hours of television does he watch per week?

#28a#29 36

#28b#29 12

#28c#29 24

#28d#29 18

#28e#29 16

Topic,Buying and Selling Di#0Eculty,2

#25 Correct Responses,75 Discrimination Index,29

Correct Answer,B

9.21 Georgina earns 6 dollars an hour,She has no non-labor income,She has 100 hours a week

available for either labor or leisure,Her utility function is U#28c;r#29=cr

3

where c is dollars worth of

goods and r is hours of leisure,How many hours per week will she work?

#28a#29 23

#28b#29 25

#28c#29 28

#28d#29 50

#28e#29 None of the above.

MULTIPLE CHOICE 161

Topic,Buying and Selling Di#0Eculty,2

#25 Correct Responses,75 Discrimination Index,29

Correct Answer,B

9.22 Nicole earns 6 dollars an hour,She has no non-labor income,She has 75 hours a week

available for either labor or leisure,Her utility function is U#28c;r#29=cr

2

where c is dollars worth of

goods and r is hours of leisure,How many hours per week will she work?

#28a#29 23

#28b#29 25

#28c#29 28

#28d#29 37.50

#28e#29 None of the above.

Topic,Buying and Selling Di#0Eculty,2

#25 Correct Responses,48 Discrimination Index,23

Correct Answer,A

9.23 Will is paid $10 an hour for the #0Crst 40 hours per week that he works,He can also work as

many hours overtime as he wishes to,He is paid $15 an hour for every hour that he works beyond

40 hours a week,Leisure is a normal good for Will and he is currently working some overtime,If

his hourly wage for the #0Crst 40 hours per week that he works rises to $12 and his wages for overtime

remain at $15 per hour:

#28a#29 he will choose to work fewer hours per week.

#28b#29 he will choose to work more hours per week.

#28c#29 he will choose to work the same number of hours per week.

#28d#29 he will choose to work more hours per week if and only if his income exceeds his labor income.

#28e#29 he will choose to work more hours per day if and only if he works less than 20 hours overtime per week.

CHAPTER 9 Buying and Selling 162

Topic,Buying and Selling Di#0Eculty,2

#25 Correct Responses,48 Discrimination Index,23

Correct Answer,A

9.24 Ben is paid $6 an hour for the #0Crst 40 hours per week that he works,He can also work as

many hours overtime as he wishes to,He is paid $13 an hour for every hour that he works beyond

40 hours a week,Leisure is a normal good for Ben and he is currently working some overtime,If

his hourly wage for the #0Crst 40 hours per week that he works rises to $8 and his wages for overtime

remain at $13 per hour:

#28a#29 he will choose to work fewer hours per week.

#28b#29 he will choose to work more hours per week.

#28c#29 he will choose to work the same number of hours per week.

#28d#29 he will choose to work more hours per week if and only if his income exceeds his labor income.

#28e#29 he will choose to work more hours per day if and only if he works less than 20 hours overtime per week.

Topic,Buying and Selling Di#0Eculty,3

#25 Correct Responses,40 Discrimination Index,28

Correct Answer,B

9.25 There are no taxes on the #0Crst $500 that Debra earns per week,but on income above

$500 per week,she must pay a 60#25 tax,Debra's job pays $10 per hour,Her utility function is

U#28c;r#29=rc

2; where r is hours of leisure and c is dollars worth of consumption,She has 100 hours

to divide between work and leisure,How many hours per week will she choose to work?

#28a#29 66.66

#28b#29 50

#28c#29 40

#28d#29 33.33

#28e#29 20

MULTIPLE CHOICE 163

Topic,Buying and Selling Di#0Eculty,2

#25 Correct Responses,40 Discrimination Index,43

Correct Answer,C

9.26 Susan's utility function is U#28x;y#29=#28x+y#29R

2;where x and y are the quantities of goods X

and Y that she consumes,and R is the number of hours of leisure that she has per day,Good X

costs 4 dollars per unit and good Y costs 2 dollars per unit,Her wage rate is 8 dollars per hour

and she has 15 hours per day to allocate between labor and leisure,She will:

#28a#29 consume equal amounts of X and Y.

#28b#29 consume 10 units of X.

#28c#29 consume 20 units of Y.

#28d#29 work 10 hours a day.

#28e#29 consume twice as muchofgoodXas of good Y.

Topic,Buying and Selling Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,C

9.27 George Goodhands is a life-insurance agent,He can work 40 hours a week for a large national

insurance company and receive a #0Cxed salary of S dollars per week,or he can work independently,

for as many or as few hours per week as he likes and earn w dollars per hour,#28He can not take

both jobs.#29 Which of the following responses to an increase in the salary paid by the insurance

companywould be INCONSISTENT with the weak axiom of revealed preference?

#28a#29 Leaving independentwork for the 40 hour salaried job.

#28b#29 Doing exactly what he was doing before.

#28c#29 More than one of these options.

#28d#29 Continuing to work independently,but working more hours.

#28e#29 None of the above.

CHAPTER 9 Buying and Selling 164

Topic,Buying and Selling Di#0Eculty,3

#25 Correct Responses,24 Discrimination Index,11

Correct Answer,E

9.28 Gladys Goodhands is an insurance agent,She must choose one and only one of two possible

alternative jobs,She can either work for a large national insurance company for which she must

work exactly 40 hours a week and will receive a salary of S dollars per week,or she can work as

an independent insurance agent,in which case she can work exactly as many hours per week as

she wishes and will earn w dollars for every hour that she works,Gladys satis#0Ces the weak axiom

of revealed preference and she cares only about howmuch money she makes and about howmuch

leisure time she has,Which of the following statements is necessarily true?

#28a#29 If #28S=40#29 #3Ew;she will prefer to work for the large national insurance company.

#28b#29 If #28S=40#29 #3Cwand she decides to work independently,then it must be that she chooses to work more

than 40 hours a week.

#28c#29 If #28S=40#29 #3Cwand she decides to work independently,then it must be that she chooses to work less than

40 hours a week.

#28d#29 If #28S=40#29 = w; she will be indi#0Berentbetween working for the large insurance company and working

independently.

#28e#29 None of the above.

Topic,Buying and Selling Di#0Eculty,2

#25 Correct Responses,59 Discrimination Index,58

Correct Answer,A

9.29 Albert consumes only tangerines and bananas,His only source of income is an initial en-

dowment of 30 units of tangerines and 10 units of bananas,Albert insists on consuming tangerines

and bananas in #0Cxed proportions,,one unit of tangerines per unit of bananas,He initially faces

a price of 10 per unit for each fruit,The price of tangerines rose to 30 per unit while the price of

bananas stayed unchanged,After the price change,he would:

#28a#29 increase his consumption of tangerines by exactly 5 units.

#28b#29 decrease his consumption or tangerines by at least 5 units.

#28c#29 increase his consumption of tangerines by exactly 15 units.

#28d#29 decrease his consumption of tangerines by exactly 7 units.

#28e#29 decrease his consumption of bananas by at least 1 unit.

MULTIPLE CHOICE 165

Topic,Buying and Selling Di#0Eculty,2

#25 Correct Responses,59 Discrimination Index,58

Correct Answer,A

9.30 Boris consumes only cherries and pineapples,His only source of income is an initial en-

dowment of 30 units of cherries and 10 units of pineapples,Boris insists on consuming cherries

and pineapples in #0Cxed proportions,,one unit of cherries per unit of pineapples,He initially faces

a price of 25 per unit for each fruit,The price of cherries rose to 75 per unit while the price of

pineapples stayed unchanged,After the price change,he would:

#28a#29 increase his consumption of cherries by exactly 6 units.

#28b#29 decrease his consumption or cherries by at least 6 units.

#28c#29 increase his consumption of cherries by exactly 16 units.

#28d#29 decrease his consumption of cherries by exactly 8 units.

#28e#29 decrease his consumption of pineapples by at least 1 unit.

Topic,Buying and Selling Di#0Eculty,1

#25 Correct Responses,88 Discrimination Index,36

Correct Answer,B

9.31 Yolanda receives a lump sum child-support payment of $150 per week,She has 80 hours a

week to divide between labor and leisure,She earns $5 an hour,The #0Crst $150 per week of her

labor income is untaxed,but all labor income that she earns above $ 150 is taxed at the rate 30

percent,If we graph her budget line with leisure on the horizontal axis and consumption on the

vertical axis,her budget line:

#28a#29 has a kink in it at the point where she takes 60 units of leisure.

#28b#29 has a kink in it where her income is 300 and her leisure is 50.

#28c#29 has a slope of,3:50 everywhere,

#28d#29 has no kinks in the part that corresponds to positive labor supply.

#28e#29 has a piece that is a horizontal straight line.

CHAPTER 9 Buying and Selling 166

Topic,Buying and Selling Di#0Eculty,1

#25 Correct Responses,88 Discrimination Index,36

Correct Answer,B

9.32 Heidi receives a lump sum child-support paymentof$50perweek,She has 80 hours a week

to divide between labor and leisure,She earns $5 an hour,The #0Crst $200 per week of her labor

income is untaxed,but all labor income that she earns above $ 200 is taxed at the rate 30 percent.

If we graph her budget line with leisure on the horizontal axis and consumption on the vertical

axis,her budget line:

#28a#29 has a kink in it at the point where she takes 50 units of leisure.

#28b#29 has a kink in it where her income is 250 and her leisure is 40.

#28c#29 has a slope of,3:50 everywhere,

#28d#29 has no kinks in the part that corresponds to positive labor supply.

#28e#29 has a piece that is a horizontal straight line.

Topic,Buying and Selling Di#0Eculty,0

#25 Correct Responses,99 Discrimination Index,0

Correct Answer,D

9.33 If Abishag owns 16 quinces and 15 kumquats,and if the price of kumquats is 4 times the

price of quinces,how many kumquats can she a#0Bord if she buys as many kumquats as she can?

#28a#29 38

#28b#29 31

#28c#29 15

#28d#29 19

#28e#29 16

Topic,Buying and Selling Di#0Eculty,0

#25 Correct Responses,99 Discrimination Index,0

Correct Answer,D

9.34 If Abishag owns 12 quinces and 10 kumquats,and if the price of kumquats is 3 times the

price of quinces,how many kumquats can she a#0Bord if she buys as many kumquats as she can?

#28a#29 28

#28b#29 22

#28c#29 10

#28d#29 14

#28e#29 11

MULTIPLE CHOICE 167

Topic,Buying and Selling Di#0Eculty,2

#25 Correct Responses,78 Discrimination Index,35

Correct Answer,A

9.35 Mario consumes eggplant and tomatoes in the ratio of one bushel of eggplant per bushel of

tomatoes,His garden yields 30 bushels of eggplant and 10 bushels of tomatoes,He initially faced

prices of $25 per bushel for eachvegetable,but the price of eggplant rose to $100 per bushel,while

the price of tomatoes stayed unchanged,After the price change,he would:

#28a#29 increase his eggplant consumption by 6 bushels.

#28b#29 decrease his eggplant consumption by at least 6 bushels.

#28c#29 increase his consumption of eggplantby 8 bushels.

#28d#29 decrease his consumption of eggplantby 8 bushels.

#28e#29 decrease his tomato consumption by at least 1 bushel.

Topic,Buying and Selling Di#0Eculty,2

#25 Correct Responses,78 Discrimination Index,35

Correct Answer,A

9.36 Mario consumes eggplant and tomatoes in the ratio of one bushel of eggplant per bushel of

tomatoes,His garden yields 30 bushels of eggplant and 10 bushels of tomatoes,He initially faced

prices of $25 per bushel for eachvegetable,but the price of eggplant rose to $50 per bushel,while

the price of tomatoes stayed unchanged,After the price change,he would:

#28a#29 increase his eggplant consumption by 3.33 bushels.

#28b#29 decrease his eggplant consumption by at least 3.33 bushels.

#28c#29 increase his consumption of eggplantby 5.33 bushels.

#28d#29 decrease his consumption of eggplantby 5.33 bushels.

#28e#29 decrease his tomato consumption by at least 1 bushel.

Topic,Buying and Selling Di#0Eculty,2

#25 Correct Responses,88 Discrimination Index,36

Correct Answer,B

9.37 Dr,Johnson receives a lump sum paymentof$150perweek,Suppose that the #0Crst $150 per

week of his labor income is untaxed,but all labor income above $150is taxed at a rate of 10 percent.

#28a#29 Dr,J

0

s budget line has a kink in it at the point where he takes 60 units of leisure.

#28b#29 Dr,J

0

s budget line has a kink where his income is 300 and his leisure is 50.

#28c#29 Dr,J

0

s budget line has slope,4:50 everywhere.

#28d#29 Dr,J

0

s budget line has no kinks in the part of it that corresponds to a positive labor supply.

#28e#29 Dr,J

0

s budget line has a piece that is a horizontal straight line.

CHAPTER 9 Buying and Selling 168

Topic,Buying and Selling Di#0Eculty,2

#25 Correct Responses,88 Discrimination Index,36

Correct Answer,B

9.38 Dr,Johnson receives a lump sum paymentof$150perweek,Suppose that the #0Crst $150 per

week of his labor income is untaxed,but all labor income above $150is taxed at a rate of 50 percent.

#28a#29 Dr,J

0

s budget line has a kink in it at the point where he takes 60 units of leisure.

#28b#29 Dr,J

0

s budget line has a kink where his income is 300 and his leisure is 50.

#28c#29 Dr,J

0

s budget line has slope,2:50 everywhere.

#28d#29 Dr,J

0

s budget line has no kinks in the part of it that corresponds to a positive labor supply.

#28e#29 Dr,J

0

s budget line has a piece that is a horizontal straight line.

Topic,Buying and Selling Di#0Eculty,1

#25 Correct Responses,89 Discrimination Index,25

Correct Answer,E

9.39 Dudley has a utility function U#28C;R#29=C,#2812,R#29

2; where R is leisure and C is consumption

per day,He has 16 hours per day to divide between work and leisure,If Dudley has a nonlabor

income of $20 per day and is paid a wage of $0 per hour,how many hours of leisure will he choose

per day?

#28a#29 9

#28b#29 10

#28c#29 11

#28d#29 13

#28e#29 12

Topic,Buying and Selling Di#0Eculty,1

#25 Correct Responses,89 Discrimination Index,25

Correct Answer,E

9.40 Dudley has a utility function U#28C;R#29=C,#2812,R#29

2; where R is leisure and C is consumption

per day,He has 16 hours per day to divide between work and leisure,If Dudley has a nonlabor

income of $40 per day and is paid a wage of $0 per hour,how many hours of leisure will he choose

per day?

#28a#29 7

#28b#29 8

#28c#29 9

#28d#29 11

#28e#29 10

MULTIPLE CHOICE 169

Topic,Buying and Selling Di#0Eculty,1

#25 Correct Responses,97 Discrimination Index,10

Correct Answer,B

9.41 Mr,Cog has 18 hours per day to divide between labor and leisure,His utility function is

U#28C;R#29=CR; where C is dollars per year spent on consumption and R is hours of leisure,If he

has 19 dollars of nonlabor income per day and gets a wage rate of 15 dollars per hour when he

works,his budget equation,expressing combinations of consumption and leisure that he can a#0Bord

to have,can be written as:

#28a#29 15R+ C = 19.

#28b#29 15R+C = 289.

#28c#29 R+C=15 = 379.

#28d#29 C =289+15R.

#28e#29 C = 346+ 15R.

Topic,Buying and Selling Di#0Eculty,1

#25 Correct Responses,97 Discrimination Index,10

Correct Answer,B

9.42 Mr,Cog has 18 hours per day to divide between labor and leisure,His utility function is

U#28C;R#29=CR;where C is dollars per year spent on consumption and R is hours of leisure,If he has

5 dollars of nonlabor income per day and gets a wage rate of 18 dollars per hour when he works,his

budget equation,expressing combinations of consumption and leisure that he can a#0Bord to have,

can be written as:

#28a#29 18R+ C =5.

#28b#29 18R+C = 329.

#28c#29 R+C=18 = 437.

#28d#29 C =329+18R.

#28e#29 C = 344+ 18R.

CHAPTER 9 Buying and Selling 170

Topic,Buying and Selling Di#0Eculty,0

#25 Correct Responses,47 Discrimination Index,43

Correct Answer,D

9.43 Mr,Cog has 18 hours per day to divide between labor and leisure,His utility function is

U#28C;R#29=CR; where C is dollars per year spent on consumption and R is hours of leisure,If he

has a nonlabor income of 40 dollars per dayandawage rate of 8 dollars per hour,he will choose

a combination of labor and leisure that allows him to spend:

#28a#29 184 dollars per day on consumption.

#28b#29 82 dollars per day on consumption.

#28c#29 112 dollars per day on consumption.

#28d#29 92 dollars per day on consumption.

#28e#29 138 dollars per day on consumption.

Topic,Buying and Selling Di#0Eculty,0

#25 Correct Responses,47 Discrimination Index,43

Correct Answer,D

9.44 Mr,Cog has 18 hours per day to divide between labor and leisure,His utility function is

U#28C;R#29=CR; where C is dollars per year spent on consumption and R is hours of leisure,If he

has a nonlabor income of 44 dollars per dayandawage rate of 19 dollars per hour,he will choose

a combination of labor and leisure that allows him to spend:

#28a#29 386 dollars per day on consumption.

#28b#29 183 dollars per day on consumption.

#28c#29 215 dollars per day on consumption.

#28d#29 193 dollars per day on consumption.

#28e#29 289.50 dollars per day on consumption.

MULTIPLE CHOICE 171

Topic,Buying and Selling Di#0Eculty,3

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,E

9.45 Ollie South has an endowment of 10 guns and 10 pounds of butter,He can buy or sell

butter at $1 a pound,But the world market for guns is more complicated,he can buy guns for $5

each,but he can sell guns for only $2,If we graph his budget line with guns on the horizontal axis

and butter on the vertical axis,then Ollie's budget line is:

#28a#29 a straight line joining #2812;0#29 and #280;30#29.

#28b#29 a straight line joining #2814;0#29 and #280;14#29.

#28c#29 a straight line with slope,2=5 through the point #2810;10#29.

#28d#29 a straight line with slope,5=2 going through the point #2810;10#29.

#28e#29 none of the above.

Topic,Buying and Selling Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,A

9.46 Charlie consumes apples and bananas; his utility function is U#28a;b#29=ab,Charlie's fruit

farm yielded 5 apples and 10 bananas,In addition,Charlie has $10 that he was given by a secret

admirer,Charlie can buy or sell apples at $2 each and he can buy or sell bananas at $1 each.

Charlie will consume:

#28a#29 more apples and more bananas than he grows.

#28b#29 more apples and fewer bananas than he grows.

#28c#29 fewer apples and more bananas than he grows.

#28d#29 fewer apples and more bananas than he grows.

#28e#29 exactly as many apples as he grows and more bananas than he grows.

CHAPTER 9 Buying and Selling 172

Topic,Buying and Selling Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,A

9.47 A farmer gets 20 eggs and 10 tomatoes every week from her chickens and her tomato plants.

She has no other source of income,She has convex,downward-sloping indi#0Berence curves,The

current market prices are $2 per egg and $3 per tomato,At these prices she chooses the same

bundle that she is endowed with #2820 eggs and 10 tomatoes#29.

#28a#29 If relative prices change in anyway whatsoever,she will certainly be no worse o#0B and may be better o#0B

than she was before the price change.

#28b#29 An increase in the price of eggs #28with the price of tomatoes remaining constant#29 will decrease her utility.

#28c#29 An increase in the price of tomatoes #28with the price of eggs remaining constant#29 will make her worse o#0B.

#28d#29 If both prices rise,she will be worse o#0B,but if only one price rises she might be made better o#0B or worse

o#0B,depending on her tastes.

#28e#29 Since she earns her income from tomatoes and eggs only,she treats eggs and tomatoes as perfect substi-

tutes.

Essay Buying and Selling

Topic,Buying and Selling Di#0Eculty,3

#25 Correct Responses,0 Discrimination Index,0

9.1 Mr,and Mrs,Brauer owned their own home,There was a real estate boom in their town

and the price of house doubled,Their income and other prices stayed constant,The Brauer's

complained that "we are being driven from our home,we can't a#0Bord to live here any more",a#29

Draw a diagram that illustrates what happened to the Brauer's budget constraint,b#29 Could they

have been made worse o#0B by the change? Could they have been made better o#0B? Explain whyor

why not.

Answer,A good diagram would show their budget line between housing and other goods pivoting

around their current consumption,They can't be made worse o#0B because they can still a#0Bord their

old consumption bundle,They might be better o#0B because they mightchoose to consume less

housing and more other goods.

Topic,Buying and Selling Di#0Eculty,1

#25 Correct Responses,0 Discrimination Index,0

9.2 Harvey's net demands for goods 1 and 2 are #282;,3#29 and his endowmentis#286;5#29,a#29 What

are his gross demands? b#29 Draw a diagram illustrating his budget line,his endowment,and his

consumption,#28Put good 1 on the horizontal axis.#29 #28c#29 Draw a dotted line to show what his budget

line would be if the price of good 1 doubled and the price of good 2 stayed the same.

Answer,Harvey's gross demands are #288;2#29,The graph is pretty straightforward,Check the text

for similar graphs.

Topic,Buying and Selling Di#0Eculty,2

#25 Correct Responses,0 Discrimination Index,0

9.3 Is it ever possible that if someone is a net seller of a good,and the price of the good he sells

falls,the consumer could wind up better o#0B than he was before by switching from being a seller to

being a buyer? Draw a graph to justify your answer.

Answer,Yes,it is possible,For example,one can draw a budget line and an indi#0Berence curve for a

person who is a net seller of the good on the horizontal axis,The price decrease pivots the budget

line around his initial endowment which is located below and to the right of his consumption.

Draw the pivoted line so that it crosses the indi#0Berence curve,The consumer can now bene#0Ct by

becoming a net buyer of the good on the horizontal axis.

CHAPTER 9 Buying and Selling 174

Topic,Buying and Selling Di#0Eculty,1

#25 Correct Responses,0 Discrimination Index,0

9.4 Is it ever possible that an increase in the price of a good for which a person is a net seller

can make him worse o#0B? Use a diagram to illustrate your answer.

Answer,No,it is not,If one is a net seller of a good and its price rises,one can still a#0Bord the

old consumption bundle and hence can't be made worse o#0B.

Topic,Buying and Selling Di#0Eculty,1

#25 Correct Responses,0 Discrimination Index,0

9.5 Peter has an endowment of 3 units of good x and 5 units of good y,He can buy and sell x at

a price of $100 and y at a price of $200,He receives an income of $700 as alimony from a former

spouse,a#29 DrawPeter's budget line for x and y,Show his initial endowmentofxand y on your

diagram,b#29 Calculate the amountofxthat he could a#0Bord if he bought only x and of y he could

a#0Bord if he bought only y,c#29 Write an equation for Peter's budget.

Answer,He could a#0Bord 20 units of x and no y or 10 units of y and no x,His budget is

100x+ 200y = 2000.

Topic,Buying and Selling Di#0Eculty,2

#25 Correct Responses,0 Discrimination Index,0

9.6 Dudley's utility function for goods and leisure is U#28G;L#29=G,#2820,L#29#2820,L#29 where G is

consumption of goods and L is the number of hours of leisure per day,Goods cost $1 per unit.

#28a#29 If Dudley has an income from nonlabor sources of $25 per day and could work as muchashe

chose to but gets zero wages,howmuchwould he work? #28b#29 Sketch Dudley's indi#0Berence curves on

a graph with leisure on the horizontal axis and income on the vertical axis,If Dudley's non-labor

income were $25 a day and he could work as much as he wished for $10 an hour,how many hours

adaywould he choose to work?

Answer,a#29 4 hours a day,b#299 hours a day.

ESSAY 175

Topic,Buying and Selling Di#0Eculty,2

#25 Correct Responses,0 Discrimination Index,0

9.7 Marilyn is a journalist,She is considering two possible jobs,One job is as an editor for a

magazine,The other job is writing

"free-lance" articles and selling them to whoever buys them,If she works for the magazine,she

must spend 10 hours a dayatwork and commuting,She will be paid $130 a day net of commuting

costs and taxes if she takes this job,If she writes free-lance articles,she can work at home and

work as many hours a day as she pleases,She estimates that she would earn $10 an hour after

taxes if she does this,Her utility function is U =#28R

3

#29Cwhere R

3

is the cube of the number of

hours a day she spends not working or commuting and C is her earnings,a#29 If Marilyn chooses to

free-lance,how many hours will she work? b#29 Calculate her utilityineach job and tell which she

will choose.

Answer,a#29 6 hours,b#29 If she freelances,U = 349;920,If she works for the magazine U = 356;720.

She should choose the magazine.

Topic,Buying and Selling Di#0Eculty,1

#25 Correct Responses,0 Discrimination Index,0

9.8 Ernie's wage rate is $10 an hour,He has no earnings other than his labor income,His utility

function is U#28C;L#29=CR

2

where C is the amount of money he spends on consumption,and R is

the number of hours a day he spends NOT working,a#29 Write an equation that describes Ernie's

budget constraint,b#29 How many hours does Ernie choose to work per day? c#29 Howmuch money

does he spend on consumption per day?

Answer,a#29 C +10R= 240,b#298,c#2980.

Topic,Buying and Selling Di#0Eculty,3

#25 Correct Responses,0 Discrimination Index,0

9.9 May's utility function is U = C +14D

1=2

,:5#28H +J#29

2

where C is dollars spent on goods other

than housecleaning,D is the number of hours per day that somebody spends cleaning her house,

H is the number of hours per dayMay spends cleaning her house,and J is the number of hours

per dayMay spends working at her job,All May's income comes from her job,She can work

as many hours a day as she wishes at a wage of $7 an hour,a#29 If she cannot hire anyone to do

her housecleaning,how many hours will she spend on the job and how many hours will she spend

housecleaning? b#29 If she can hire a housecleaner at $5 an hour,how many hours will she work on

her job,how many hours of housecleaning will she hire,and how many hours will she clean house?

Answer,a#296 hours,1 hour b#297 hours,49=25; 0

CHAPTER 9 Buying and Selling 176

Topic,Buying and Selling Di#0Eculty,2

#25 Correct Responses,0 Discrimination Index,0

9.10 Leo thinks leisure and goods are perfect complements,Goods cost $1 per unit,Leo wants

to consume 5 units of goods per hour of leisure,Leo can work as muchashewants to at the wage

rate of $15 an hour,He has no other source of income,a#29 How many hours a day will Leo choose

to spend at leisure? b#29 Draw a diagram showing Leo's budget and his choice of goods and leisure.

c#29 Will Leo work more or less if his wage rate increases?

Answer,#28a#29 18 hours a day #28c#29 less

Topic,Buying and Selling Di#0Eculty,2

#25 Correct Responses,0 Discrimination Index,0

9.11 Lucetta changes light bulbs,She is paid $10 an hour,She can work as many hours as she

wishes,Lucetta works only 6 hours a day,But she says she loves her job and is happier working at

this job than she would be if she made the same income without working at all,Though this may

sound strange,Lucetta is perfectly rational,Draw a graph showing leisure on the horizontal axis

and income on the vertical axis,Draw a budget line and some indi#0Berence curves for Lucetta that

are consistent with Lucetta's words and actions,Explain in words what happens.

Answer,Work for Lucetta is desirable on average but undesirable at the margin when she is

working 6 hours a day,The diagram will work if you draw a U-shaped indi#0Berence curve tangent

to her budget line at 6 hours,Make sure that this indi#0Berence curveintersects the horizontal line

through her consumption choice somewhere to the right of her choice but to the left of where she

doesn't work at all.

Chapter 10

True-False Intertemporal Choice

Topic,Intertemporal Choice Di#0Eculty,2

#25 Correct Responses,71 Discrimination Index,40

Correct Answer,True

10.1 An increase in the interest rate can not make a lender who satis#0Ces WARP become a

borrower.

Topic,Intertemporal Choice Di#0Eculty,1

#25 Correct Responses,61 Discrimination Index,67

Correct Answer,True

10.2 If the real interest rate is positive,then a unit of future consumption can be had for the

sacri#0Cce of less than one unit of current consumption.

Topic,Intertemporal Choice Di#0Eculty,1

#25 Correct Responses,74 Discrimination Index,23

Correct Answer,False

10.3 The real interest rate is the interest rate that one receives net of brokerage costs or fees

imposed by #0Cnancial intermediaries.

Topic,Intertemporal Choice Di#0Eculty,1

#25 Correct Responses,84 Discrimination Index,8

Correct Answer,True

10.4 An increase in the interest rate will necessarily result in a decrease in the presentvalue of

a given stream of positive incomes.

Topic,Intertemporal Choice Di#0Eculty,1

#25 Correct Responses,83 Discrimination Index,20

Correct Answer,True

10.5 In a graph that has current consumption on the horizontal axis and future consumption on

the vertical axis,the horizontal intercept of the budget line is the presentvalue of all one's income

in the two periods.

CHAPTER 10 Intertemporal Choice 178

Topic,Intertemporal Choice Di#0Eculty,1

#25 Correct Responses,78 Discrimination Index,10

Correct Answer,True

10.6 If a consumer can borrow and lend at the same interest rate,then he can exactly a#0Bord a

consumption plan if the presentvalue of his consumption equals the presentvalue of his income.

Topic,Intertemporal Choice Di#0Eculty,1

#25 Correct Responses,79 Discrimination Index,24

Correct Answer,False

10.7 It would be a mistaketochoose the investment that maximizes the presentvalue of your

income stream unless you planned to spend your entire wealth in the current time period.

Topic,Intertemporal Choice Di#0Eculty,0

#25 Correct Responses,33 Discrimination Index,0

Correct Answer,False

10.8 If the interest rate at whichyou can borrow is higher than the interest rate at whichyou

can lend,your budget for current and future consumption is still a convex set.

Topic,Intertemporal Choice Di#0Eculty,2

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,False

10.9 If apples today are perfect substitutes for bananas today,then apples todaymust also be

perfect substitutes for bananas tomorrow.

Topic,Intertemporal Choice Di#0Eculty,2

#25 Correct Responses,55 Discrimination Index,6

Correct Answer,True

10.10 Isaiah is a net borrower when the interest rate is 5#25 and a net saver when the interest

rate is 25#25,An increase in the interest rate from 5#25 to 25#25 may make Isaiah worse o#0B.

Topic,Intertemporal Choice Di#0Eculty,2

#25 Correct Responses,33 Discrimination Index,15

Correct Answer,False

10.11 If the interest rate is less than the in#0Dation rate,a rational person will never save money.

TRUE-FALSE 179

Topic,Intertemporal Choice Di#0Eculty,0

#25 Correct Responses,87 Discrimination Index,13

Correct Answer,False

10.12 An increase in the interest rate can make a utility-maximizing lender become a borrower.

Topic,Intertemporal Choice Di#0Eculty,1

#25 Correct Responses,56 Discrimination Index,26

Correct Answer,False

10.13 The intertemporal budget constraint for a consumer can be expressed by setting the present

value of her lifetime consumption equal to the future value of her endowment.

Topic,Intertemporal Choice Di#0Eculty,1

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,False

10.14 The nominal interest rate is 5#25 and the in#0Dation rate is 6#25,A rational consumer will not

choose to save.

Topic,Intertemporal Choice Di#0Eculty,1

#25 Correct Responses,70 Discrimination Index,27

Correct Answer,False

10.15 If the in#0Dation rate doubles and the nominal interest rate remains constant,the real inter-

est rate must be halved.

Topic,Intertemporal Choice Di#0Eculty,1

#25 Correct Responses,79 Discrimination Index,13

Correct Answer,True

10.16 If the nominal interest rate is 3#25 and if prices fall by2#25peryear,then the real rate of

interest is approximately 5#25.

Topic,Intertemporal Choice Di#0Eculty,1

#25 Correct Responses,79 Discrimination Index,13

Correct Answer,True

10.17 If the nominal interest rate is 4#25 and if prices fall by4#25peryear,then the real rate of

interest is approximately 8#25.

CHAPTER 10 Intertemporal Choice 180

Topic,Intertemporal Choice Di#0Eculty,1

#25 Correct Responses,73 Discrimination Index,35

Correct Answer,False

10.18 A utility maximizing consumer would not choose the investment that maximizes the present

value of her income stream unless she planned to spend her entire wealth in the #0Crst period.

Topic,Intertemporal Choice Di#0Eculty,2

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,True

10.19 Susan is a net borrower when the interest rate is 10#25 and a net saver when the interest

rate is 20#25,A decrease in the interest rate from 20#25 to 10#25 may make Susan worse o#0B.

Topic,Intertemporal Choice Di#0Eculty,1

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,False

10.20 A newspaper article claims that more students are choosing 1,year MBA programs instead

of 2,year programs because the 2,year programs no longer guarantee a well-paid job,If the length

of your MBA program doesn't matter to employers,and you take a job right after completing your

MBA,the presentvalue of your lifetime earnings is tbe the same whether you takea1,year or

2,year program.

Topic,Intertemporal Choice Di#0Eculty,2

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,True

10.21 If the interest rate is 5#25 and will be 5#25 forever,the presentvalue of an income stream

consisting of $10 a year paid to you on February 11 of every year,starting rightnow,is $210.

Multiple Choice Intertemporal Choice

Topic,Intertemporal Choice Di#0Eculty,3

#25 Correct Responses,42 Discrimination Index,13

Correct Answer,B

10.1 If current and future consumption are both normal goods,an increase in the interest rate

will necessarily:

#28a#29 cause savers to save more.

#28b#29 cause borrowers to borrow less.

#28c#29 reduce everyone's current consumption.

#28d#29 makeeveryone worse o#0B.

#28e#29 none of the above.

Topic,Intertemporal Choice Di#0Eculty,2

#25 Correct Responses,24 Discrimination Index,19

Correct Answer,A

10.2 Harvey Habit has a utility function U#28c

1;c

2

#29=minfc

1;c

2

gwhere c

1

and c

2

are his consump-

tion in periods 1 and 2 respectively,Harvey earns $189 in period 1 and he will earn $63 in period

2,Harvey can borrow or lend at an interest rate of 10#25,There is no in#0Dation.

#28a#29 Harvey will save 60.

#28b#29 Harvey will borrow 60.

#28c#29 Harvey will neither borrow nor lend.

#28d#29 Harvey will save 124.

#28e#29 None of the above.

Topic,Intertemporal Choice Di#0Eculty,2

#25 Correct Responses,24 Discrimination Index,19

Correct Answer,A

10.3 Harvey Habit has a utility function U#28c

1;c

2

#29=minfc

1;c

2

gwhere c

1

and c

2

are his consump-

tion in periods 1 and 2 respectively,Harvey earns $168 in period 1 and he will earn $105 in period

2,Harvey can borrow or lend at an interest rate of 10#25,There is no in#0Dation.

#28a#29 Harvey will save 30.

#28b#29 Harvey will borrow 30.

#28c#29 Harvey will neither borrow nor lend.

#28d#29 Harvey will save 133.

#28e#29 None of the above.

CHAPTER 10 Intertemporal Choice 182

Topic,Intertemporal Choice Di#0Eculty,3

#25 Correct Responses,23 Discrimination Index,21

Correct Answer,D

10.4 O,B,Kandle will live for only two periods,In the #0Crst period he will earn $100,000,In

the second period he will retire and live on his savings,Mr,Kandle has a Cobb-Douglas utility

function U#28c

1;c

2

#29=c

2

1

c

2

where c

1

is his period 1 consumption and c

2

is his period 2 consumption.

The real interest rate is r.

#28a#29 If the interest rate rises,Mr,Kandle will save more.

#28b#29 If the interest rises,Mr,Kandle will save less.

#28c#29 The e#0Bect of the interest rate is ambiguous,but we can tell that he will arrange to consume the same

amount in each period.

#28d#29 The change in the interest rate won't a#0Bect his saving.

#28e#29 None of the above.

Topic,Intertemporal Choice Di#0Eculty,2

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,B

10.5 Suppose that a person can borrow and lend at an interest rate of 10 percent,But there is a

5#25 rate of in#0Dation and one has to pay an income tax of 30 #25 on all interest income,If you borrow

money,you can deduct interest as an expense,Where current consumption is on the horizontal

axis and future consumption is on the vertical axis:

#28a#29 the budget line will have a kink at the pointofnosaving or lending.

#28b#29 the budget line will be a straight line with a slope of about,1:02.

#28c#29 the budget line will be a straight line with a slope of about,1:05.

#28d#29 the budget line will be a straight line with a slope of about,1:35.

#28e#29 None of the above.

MULTIPLE CHOICE 183

Topic,Intertemporal Choice Di#0Eculty,3

#25 Correct Responses,26 Discrimination Index,22

Correct Answer,B

10.6 For every twoboxes of strawberries that she consumes,Millicent insists on having one pitcher

of cream,She does not,however,insist on consuming the same amountevery week,Her utility

function is U = minfs

1;2c

1

gminfs

2;2c

2

g where s

1

and s

2

are the numberofboxes of strawberries she

consumes this week and next week and c

1

and c

2

are the number of pitchers of cream she consumes

this week and next,Strawberries cost $2 a box and cream costs $1 a pitcher,She has a present

value of $100 to spend on these goods in the next twoweeks,The weekly interest rate is 1#25,How

manyboxes of strawberries will she consume this week?

#28a#29 10

#28b#29 20

#28c#29 22

#28d#29 14.1

#28e#29 6.06

Topic,Intertemporal Choice Di#0Eculty,2

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,A

10.7 Roger's utility function is U = minfa

1;a

2

gminfb

1;b

2

g where a

1

and a

2

are the number of

piano lessons he consumes this year and next and b

1

and b

2

are the number of ice skating lessons

he consumes this year and next,The price of piano lessons is $10 each and the price of ice skating

lessons is $4 each,The prices won't change,but the interest rate is 7#25,If Roger consumes 20

piano lessons this year,how many ice-skating lessons will he consume next year?

#28a#29 50

#28b#29 20

#28c#29 40

#28d#29 30

#28e#29 There is not enough information for us to tell.

CHAPTER 10 Intertemporal Choice 184

Topic,Intertemporal Choice Di#0Eculty,2

#25 Correct Responses,21 Discrimination Index,48

Correct Answer,B

10.8 If a consumer views a unit of consumption in period 1 as a perfect substitute #28one-for-one#29

for a unit of consumption in period 2 and if the real interest rate is positive,the consumer will:

#28a#29 consume only in period 1.

#28b#29 consume only in period 2.

#28c#29 consume equal amounts in each period.

#28d#29 consume more in period 1 than in period 2 if income elasticity exceeds 1,else would consume more in

period 2 than in period 1.

#28e#29 equalize expenditures but not consumption in the two periods.

Topic,Intertemporal Choice Di#0Eculty,2

#25 Correct Responses,66 Discrimination Index,39

Correct Answer,A

10.9 If the price level increases by 80#25 in one year,then for the real rate of interest to be 10#25,

the nominal rate of interest would havetobe:

#28a#29 98#25.

#28b#29 70#25.

#28c#29 18#25.

#28d#29 88#25.

#28e#29 72#25.

Topic,Intertemporal Choice Di#0Eculty,2

#25 Correct Responses,51 Discrimination Index,32

Correct Answer,A

10.10 Kenny Kink's utility function is u#28c

1;c

2

#29=minfc

1;c

2

g;where c

1

is his consumption in pe-

riod 1 and c

2

is his consumption in period 2,He earns $200 in period 1 and $220 in period 2.

Kenny can borrow and lend at an interest rate of 10 percent,and there is no in#0Dation,The number

of dollars that Kenny spends on consumption in the #0Crst period must be:

#28a#29 more than 200,but less than 220.

#28b#29 exactly 200.

#28c#29 more than 220.

#28d#29 exactly 180.

#28e#29 more than 180,but less than 200.

MULTIPLE CHOICE 185

Topic,Intertemporal Choice Di#0Eculty,2

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,D

10.11 The nominal interest rate is 5#25 and the in#0Dation rate is 6#25,A rational consumer:

#28a#29 will not save since the real interest rate is negative.

#28b#29 will save less than 1#25 of her income.

#28c#29 will save the same amount regardless of the in#0Dation rate,only the nominal interest rate matters.

#28d#29 mightsave despite the negative real interest rate.

#28e#29 will necessarily save less if the in#0Dation rate rises and the nominal interest rate does not change.

Topic,Intertemporal Choice Di#0Eculty,1

#25 Correct Responses,0 Discrimination Index,1

Correct Answer,A

10.12 If the real rate of interest is 8#25 and the nominal rate of interest is 28#25,then the rate of

in#0Dation must be about #28pick the closest number#29:

#28a#29 36#25.

#28b#29 24.26#25.

#28c#29 3.50#25.

#28d#29 18.52#25.

#28e#29 23 #25.

Topic,Intertemporal Choice Di#0Eculty,1

#25 Correct Responses,0 Discrimination Index,1

Correct Answer,A

10.13 If the real rate of interest is 5#25 and the nominal rate of interest is 31#25,then the rate of

in#0Dation must be about #28pick the closest number#29:

#28a#29 36#25.

#28b#29 27.26#25.

#28c#29 6.20#25.

#28d#29 24.76#25.

#28e#29 29 #25.

CHAPTER 10 Intertemporal Choice 186

Topic,Intertemporal Choice Di#0Eculty,3

#25 Correct Responses,39 Discrimination Index,36

Correct Answer,A

10.14 In an isolated mountain village,the only crop is corn,Villagers plan for two time periods.

In the #0Crst time period each villager will harvest 100 bushels,In the second time period,no corn

will be harvested,There is no trade with the rest of the world and no stocks of corn remain from

before the #0Crst period,Corn can be stored from one time period to the next,but rats eat 25#25

of what is stored,The villagers all have Cobb-Douglas utility functions U#28C

1;C

2

#29=C

1

C

2

and can

allocate their own corn between consumption and storage as they wish,If the introduction of cats

to the village reduces the rats' predations to 10#25 of what is stored:

#28a#29 consumption in the #0Crst time period will not change.

#28b#29 villagers will consume 5#25 more corn in each time period.

#28c#29 consumption in the #0Crst time period will increase,but by less than 5#25.

#28d#29 consumption in the second time period would not change.

#28e#29 consumption in the #0Crst time period will decrease.

Topic,Intertemporal Choice Di#0Eculty,2

#25 Correct Responses,26 Discrimination Index,53

Correct Answer,B

10.15 Minnie has income $300 in period 1 and will have income $625 in period 2,Her utility

function is U#28c

1;c

2

#29=c

0:80

1

c

0:20

2

where c

1

is her consumption in period 1 and c

2

is her consumption

in period 2,The interest rate is 0.25,If she unexpectedly won a lottery whichpays its prize in

period 2 so that her income in period 2 would be $1,250 and her income in period 1 would remain

$300,then her consumption in period 1 would:

#28a#29 double.

#28b#29 increase by the amount 400.

#28c#29 increase by the amount 150.

#28d#29 stay constant.

#28e#29 increase by the amount 120.

MULTIPLE CHOICE 187

Topic,Intertemporal Choice Di#0Eculty,2

#25 Correct Responses,26 Discrimination Index,53

Correct Answer,B

10.16 Heidi has income $500 in period 1 and will have income $625 in period 2,Her utility

function is U#28c

1;c

2

#29=c

0:20

1

c

0:80

2

where c

1

is her consumption in period 1 and c

2

is her consumption

in period 2,The interest rate is 0.25,If she unexpectedly won a lottery whichpays its prize in

period 2 so that her income in period 2 would be $1,250 and her income in period 1 would remain

$500,then her consumption in period 1 would:

#28a#29 double.

#28b#29 increase by the amount 100.

#28c#29 increase by the amount 250.

#28d#29 stay constant.

#28e#29 increase by the amount 50.

Topic,Intertemporal Choice Di#0Eculty,2

#25 Correct Responses,29 Discrimination Index,26

Correct Answer,E

10.17 Holly's utility function is U#28c

1;c

2

#29=c

1=2

1

+0:87c

1=2

2

where c

1

is her consumption in period

1 and c

2

is her consumption in period 2,In period 2,her income is 2 times as large as her income

in period 1,At what interest rate will she choose to consume the same amount in period 2 as in

period 1? #28Choose the closest answer.#29

#28a#29 0.30

#28b#29 0.08

#28c#29 0.23

#28d#29 0

#28e#29 0.15

Topic,Intertemporal Choice Di#0Eculty,2

#25 Correct Responses,29 Discrimination Index,26

Correct Answer,E

10.18 Linda's utility function is U#28c

1;c

2

#29=c

1=2

1

+0:95c

1=2

2

where c

1

is her consumption in period

1 and c

2

is her consumption in period 2,In period 2,her income is 4 times as large as her income

in period 1,At what interest rate will she choose to consume the same amount in period 2 as in

period 1? #28Choose the closest answer.#29

#28a#29 0.20

#28b#29 0.03

#28c#29 0.08

#28d#29 0

#28e#29 0.05

CHAPTER 10 Intertemporal Choice 188

Topic,Intertemporal Choice Di#0Eculty,2

#25 Correct Responses,58 Discrimination Index,32

Correct Answer,B

10.19 Will Wisp will live for exactly two periods,His utility function is U#28c

1;c

2

#29=c

1

c

2

where c

1

is consumption in period 1 and c

2

is consumption in period 2,He will have no income in period 2.

His income in period 1 is 80,000,If the interest rate rises from 10#25 to 12#25:

#28a#29 his savings will increase by 2#25 and his consumption in period 2 will increase.

#28b#29 his savings will not change,but his consumption in period 2 will increase by 800.

#28c#29 his consumption in both periods will increase.

#28d#29 his consumption in both periods will decrease.

#28e#29 his consumption in period 1 will decrease by r#25 and his consumption in period 2 will increase.

Topic,Intertemporal Choice Di#0Eculty,2

#25 Correct Responses,58 Discrimination Index,32

Correct Answer,B

10.20 Will Wisp will live for exactly two periods,His utility function is U#28c

1;c

2

#29=c

1

c

2

where c

1

is consumption in period 1 and c

2

is consumption in period 2,He will have no income in period 2.

His income in period 1 is 30,000,If the interest rate rises from 10#25 to 11#25:

#28a#29 his savings will increase by 1#25 and his consumption in period 2 will increase.

#28b#29 his savings will not change,but his consumption in period 2 will increase by 150.

#28c#29 his consumption in both periods will increase.

#28d#29 his consumption in both periods will decrease.

#28e#29 his consumption in period 1 will decrease by r#25 and his consumption in period 2 will increase.

Topic,Intertemporal Choice Di#0Eculty,0

#25 Correct Responses,24 Discrimination Index,21

Correct Answer,B

10.21 Peregrine consumes #28700;880#29 and earns #28600;990#29,If the interest rate is 0.10,the present

value of his endowment is:

#28a#29 1,590.

#28b#29 1,500.

#28c#29 1,580.

#28d#29 3,150.

#28e#29 3,750.

MULTIPLE CHOICE 189

Topic,Intertemporal Choice Di#0Eculty,0

#25 Correct Responses,24 Discrimination Index,21

Correct Answer,B

10.22 Peregrine consumes #281;200;1;080#29 and earns #28600;1;800#29,If the interest rate is 0.20,the

presentvalue of his endowment is:

#28a#29 2,400.

#28b#29 2,100.

#28c#29 2,280.

#28d#29 4,620.

#28e#29 5,220.

Topic,Intertemporal Choice Di#0Eculty,0

#25 Correct Responses,69 Discrimination Index,39

Correct Answer,B

10.23 Molly has income $400 in period 1 and income $600 in period 2,Her utility function is

c

a

1

c

1,a

2; where a =0:40 and the interest rate is 0.20,If her income in period 1 doubled and her

income in period 2 stayed the same,her consumption in period 1 would:

#28a#29 double.

#28b#29 increase by 160.

#28c#29 increase by80

#28d#29 stay constant.

#28e#29 increase by 400.

Topic,Intertemporal Choice Di#0Eculty,0

#25 Correct Responses,69 Discrimination Index,39

Correct Answer,B

10.24 Molly has income $600 in period 1 and income $230 in period 2,Her utility function is

c

a

1

c

1,a

2; where a =0:20 and the interest rate is 0.15,If her income in period 1 doubled and her

income in period 2 stayed the same,her consumption in period 1 would:

#28a#29 double.

#28b#29 increase by 120.

#28c#29 increase by60

#28d#29 stay constant.

#28e#29 increase by 600.

CHAPTER 10 Intertemporal Choice 190

Topic,Intertemporal Choice Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,B

10.25 Mr,O.B,Kandle has a utility function c

1

c

2

where c

1

is his consumption in period 1 and c

2

is his consumption in period 2,He will have no income in Period 2,If he had an income of 80,000

in period 1 and the interest rate increased from 10#25 to 19#25:

#28a#29 his savings would increase by 9#25 and his consumption in period 2 would also increase.

#28b#29 his savings would not change,but his consumption in period 2 would increase by 3,600.

#28c#29 his consumption in both periods would be increase.

#28d#29 his consumption in both periods would decrease.

#28e#29 his consumption in period 1 would decrease by 19#25 and his consumption in period 2 would also decrease.

Topic,Intertemporal Choice Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,B

10.26 Mr,O.B,Kandle has a utility function c

1

c

2

where c

1

is his consumption in period 1 and c

2

is his consumption in period 2,He will have no income in Period 2,If he had an income of 60,000

in period 1 and the interest rate increased from 10#25 to 12#25:

#28a#29 his savings would increase by 2#25 and his consumption in period 2 would also increase.

#28b#29 his savings would not change,but his consumption in period 2 would increase by 600.

#28c#29 his consumption in both periods would be increase.

#28d#29 his consumption in both periods would decrease.

#28e#29 his consumption in period 1 would decrease by 12#25 and his consumption in period 2 would also decrease.

Topic,Intertemporal Choice Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,E

10.27 Harvey Habit has a utility function U#28c

1;c

2

#29=minfc

1;c

2

g,If he had an income of 880 in

period 1,and 1,320 in period 2,and if the interest rate were 0.20,howmuchwould Harvey choose

to spend on bread in period 1?

#28a#29 1,620

#28b#29 360

#28c#29 540

#28d#29 2,160

#28e#29 1,080

MULTIPLE CHOICE 191

Topic,Intertemporal Choice Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,E

10.28 Harvey Habit has a utility function U#28c

1;c

2

#29=minfc

1;c

2

g,If he had an income of 645 in

period 1,and 860 in period 2,and if the interest rate were 0.15,howmuchwould Harvey choose

to spend on bread in period 1?

#28a#29 1,117.50

#28b#29 248.33

#28c#29 372.50

#28d#29 1,490

#28e#29 745

Topic,Intertemporal Choice Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,A

10.29 In an isolated mountain village,the harvest this year is 3,000 and the harvest next year

will be 1,100,The villagers all have utility functions U#28c

1;c

2

#29=c

1

c

2;where c

1

is consumption this

year and c

2

is consumption next year,Rats eat 10#25 of any grain that is stored for a year,How

much grain could the villagers consume next year if they consume 1000 bushels of grain this year?

#28a#29 2,900

#28b#29 1,800

#28c#29 4,100

#28d#29 4,350

#28e#29 1,200

CHAPTER 10 Intertemporal Choice 192

Topic,Intertemporal Choice Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,A

10.30 In an isolated mountain village,the harvest this year is 4,000 and the harvest next year

will be 800,The villagers all have utility functions U#28c

1;c

2

#29=c

1

c

2;where c

1

is consumption this

year and c

2

is consumption next year,Rats eat 50#25 of any grain that is stored for a year,How

much grain could the villagers consume next year if they consume 1000 bushels of grain this year?

#28a#29 2,300

#28b#29 1,500

#28c#29 4,800

#28d#29 3,450

#28e#29 900

Topic,Intertemporal Choice Di#0Eculty,0

#25 Correct Responses,16 Discrimination Index,55

Correct Answer,C

10.31 Patience has a utility function U#28c

1;c

2

#29=c

1=2

1

+0:80 c

1=2

2;c

1

is her consumption in period

1 and c

2

is her consumption in period 2,Her income in period 1 is 5 times as large as her income

in period 2,At what interest rate will she choose to consume the same amount in period 1 as in

period 2?

#28a#29 1.25

#28b#29 0.13

#28c#29 0.25

#28d#29 0

#28e#29 0.38

MULTIPLE CHOICE 193

Topic,Intertemporal Choice Di#0Eculty,0

#25 Correct Responses,16 Discrimination Index,55

Correct Answer,C

10.32 Patience has a utility function U#28c

1;c

2

#29=c

1=2

1

+0:87 c

1=2

2;c

1

is her consumption in period

1 and c

2

is her consumption in period 2,Her income in period 1 is 6 times as large as her income

in period 2,At what interest rate will she choose to consume the same amount in period 1 as in

period 2?

#28a#29 0.90

#28b#29 0.08

#28c#29 0.15

#28d#29 0

#28e#29 0.23

Topic,Intertemporal Choice Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,C

10.33 Samantha Smoothie's utility function is U#28c

1;c

2

#29=c

1

c

2

where c

1

is her consumption in

period 1 and c

2

is her consumption in period 2,She earns $200 in period 1 and $220 in period

2,Samantha can borrow and lend at an interest rate of 10 percent and there is no in#0Dation,The

number of dollars that Samantha spends in the second period must be

#28a#29 more than 200 but less than 220.

#28b#29 exactly 220.

#28c#29 more than 220.

#28d#29 exactly 200.

#28e#29 less than 200.

Topic,Intertemporal Choice Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,B

10.34 I am always indi#0Berentbetween a unit of consumption today and tomorrow and the interest

rate is 5 percent.

#28a#29 My intertemporal indi#0Berence curve is horizontal.

#28b#29 My intertemporal indi#0Berence curve is a straight line with slope,1.

#28c#29 I will spend all of my current and future income on consumption today.

#28d#29 I will spend 5 percent more on consumption today than on consumption tomorrow.

#28e#29 I will spend 5 percent more on consumption tomorrow than on consumption today.

Essay Intertemporal Choice

Topic,Intertemporal Choice Di#0Eculty,2

#25 Correct Responses,0 Discrimination Index,0

10.1 Ophelia says "If I could lend money at the rates I must pay to borrow,I would,And if I

could borrow money at the rates I receive when I lend,I would again,But forsooth,although I

spend,I neither borrow nor lend." Contrary to common belief,Ophelia is entirely rational,Draw

a diagram to showhow Ophelia's remarks can be consistent with rational behavior and smooth

convex preferences if she pays a di#0Berentinterest rate when she borrows than she gets when she

lends,Explain what happens in words.

Answer,Ophelia's budget between current and future consumption is kinked at the point where

her consumption in each period equals her income,The highest indi#0Berence curve to touch her

budget touches at the kink,The extensions of each of the lines that meet at the kink pass above

this indi#0Berence curveforaways,These lines are the lines she could move along if she could borrow

at the lending rate and lend at the borrowing rate,respectively.

Topic,Intertemporal Choice Di#0Eculty,3

#25 Correct Responses,0 Discrimination Index,0

10.2 Patience has the utility function U#28c

1;c

2

#29=c

1=2

1

+2c

1=2

2

where c

1

is her consumption in period

1 and c

1

is her consumption in period 2,She will earn 100 units of the consumption good in period

1 and 100 units of the consumption good in period 2,She can borrow or lend at an interest rate

of 10#25,a#29 Write an equation that describes Patience's budget,b#29 If Patience neither borrows nor

lends,what will be her marginal rate of substitution between current and future consumption? c#29

If Patience does the optimal amount of borrowing or saving,what will be the ratio of her period 2

consumption to her period 1 consumption?

Answer,a#29 c1+c2=1:1 = 100+ 100=1:1,b#292 c#29 She will consume 4.84 times as much in period 2 as

in period 1.

Topic,Intertemporal Choice Di#0Eculty,2

#25 Correct Responses,0 Discrimination Index,0

10.3 Buzz is a chicken farmer,His earnings will be 100 this year and 100 next year,He can lend

money at an interest rate of 20#25,Because of a subsidized loan program for chicken farmers he can

borrow money at an interest rate of 10#25,No matter what he borrows or lends,his earnings will

still be 100 eachyear,a#29 If he is not allowed to both borrow and lend,draw a graph showing his

budget between consumption this year and consumption next year,Put numerical labels on the

vertical and horizontal intercepts of the budget set,b#29 Suppose that Buzz is allowed to borrowup

to the presentvalue of next year's earnings at 10#25 and is also allowed to make loans,Draw Buzz's

budget constraint in this case.

Answer,a#29 Budget line is kinked at #28100;100#29.Vertical intercept is 220,Horizontal intercept is

100 + 100=1:1,b#29 Budget constraint is a straight line with slope,1:2 passing through horizontal

intercept of previous budget line.

ESSAY 195

Topic,Intertemporal Choice Di#0Eculty,2

#25 Correct Responses,0 Discrimination Index,0

10.4 Ymir Larson farms near Ni#0Feheim,Minnesota,He works 80 hours a week,He can either

grow rutabagas or pigs,Every hour that he spends growing rutabagas gives him $2 of income this

year,Every hour that he spends with the pigs this year will add $4 to his income next year,In

fact,next year's weekly income will be 100+4H dollars where H is the number of hours he spends

with the pigs this year,Ymir's utility function is U#28c1;c2#29 = minfc1;c2gwhere c1 and c2 are his

consumption expenditures this year and next year,Ymir doesn't believe in banks and will neither

lend money nor borrow money,a#29 Draw Ymir's budget line for current and future consumption,

labeling key points on it,b#29 How many hours a week will he choose to spend with the pigs? c#29 How

much money will he spend per week on consumption in eachyear?

Answer,a#29Budget set is bounded by a line from #280;420#29 to #28160;100#29 andavertical line from

#28160;100#29 to the horizontal axis,b#2910 c#29170

Topic,Intertemporal Choice Di#0Eculty,2

#25 Correct Responses,0 Discrimination Index,0

10.5 Luella has to payaninterest rate of 50#25 to borrow,She only gets an interest rate of 5#25 if

she lends,She is currently endowed with $1000 in period 1 and $1050 in period 2,She considers

two alternativeinvestment projects,She can only choose one of them,For project A she would

HAVE TO PAY $500 in period 1 and would BE PAID BACK $630 in period 2,For project B; she

would BE PAID $500 in period 1 and would HAVE TO PAYBACK $525 in period 2,a#29 Diagram

her budget set if she chooses project A,Also show her budget if she chooses project B,b#29 If she

neither borrows nor lends,which project has the higher presentvalue at the interest rate 50#25?

Which has the higher presentvalue at an interest rate of 5#25? c#29 Draw indi#0Berence curves such that

she should choose A,d#29 With di#0Berent preferences might she choose B?

Answer,b#29 B,A d#29 yes

Topic,Intertemporal Choice Di#0Eculty,2

#25 Correct Responses,0 Discrimination Index,0

10.6 In an isolated peasant village,the only crop is corn,Good harvests alternate with bad

harvests,This year the harvest will be 1000 bushels,Next year it will be 150 bushels,There is

no trade with the outside world,Corn can be stored,but rats will eat 25#25 of what is stored in a

year,The villagers have the Cobb-Douglas utility function U#28c1;c2#29 = c1c2 where c1 is consumption

this year and c2 is consumption next year,a#29 Draw a budget line for the village with this year's

consumption on the horizontal axis and next year's consumption on the vertical axis,On your

graph show the quantities at which the budget line intercepts the vertical and horizontal axes,b#29

Howmuch will the villagers consume this year? c#29 Howmuch will the rats eat? d#29 Howmuch will

the villagers consume next year?

Answer,b#29600 c#29100 d#29450

Chapter 11

True-False Asset Markets

Topic,Asset Markets Di#0Eculty,1

#25 Correct Responses,74 Discrimination Index,26

Correct Answer,False

11.1 If the interest rate is 10#25,then an asset that returns $1 a year forever is worth $1=1:1.

Topic,Asset Markets Di#0Eculty,1

#25 Correct Responses,88 Discrimination Index,23

Correct Answer,False

11.2 The interest rate is 6#25 and there is no in#0Dation,A bond is available that can be redeemed

either after one year or after twoyears,If it is redeemed after one year,the investor gets $106,If

it is redeemed after twoyears,the investor gets $109.18,The investor gets no other payments than

what she receives when she redeems the bond,In equilibrium,investors will be willing to pay more

than $100 for this bond.

Topic,Asset Markets Di#0Eculty,1

#25 Correct Responses,88 Discrimination Index,23

Correct Answer,False

11.3 The interest rate is 10#25 and there is no in#0Dation,A bond is available that can be redeemed

either after one year or after twoyears,If it is redeemed after one year,the investor gets $110,If

it is redeemed after twoyears,the investor gets $112.20,The investor gets no other payments than

what she receives when she redeems the bond,In equilibrium,investors will be willing to pay more

than $100 for this bond.

Topic,Asset Markets Di#0Eculty,1

#25 Correct Responses,83 Discrimination Index,29

Correct Answer,False

11.4 In a perfect asset market,it is known with certainty that an asset will sell for $24 in 1 year.

If the annual interest rate is 10#25,then the asset will sell for $26.40 rightnow.

Topic,Asset Markets Di#0Eculty,1

#25 Correct Responses,83 Discrimination Index,38

Correct Answer,True

11.5 A consumer who can borrow and lend at the same interest rate should prefer an endowment

with a higher presentvalue to an endowmentwithalower presentvalue,no matter how he plans

to allocate consumption over the course of his life.

TRUE-FALSE 197

Topic,Asset Markets Di#0Eculty,1

#25 Correct Responses,99 Discrimination Index,7

Correct Answer,True

11.6 If everybody has the same information,then a well-functioning market for assets would,in

equilibrium,leave no opportunities for arbitrage.

Topic,Asset Markets Di#0Eculty,1

#25 Correct Responses,79 Discrimination Index,33

Correct Answer,False

11.7 Suppose that the cost of cutting down a tree is zero and the tree grows on land that is

useless for anything else,The interest rate is constant and the price of lumber does not change.

True or false,The optimal time to cut the tree is when the di#0Berence between its growth rate and

the interest rate is maximized.

Topic,Asset Markets Di#0Eculty,2

#25 Correct Responses,35 Discrimination Index,0

Correct Answer,True

11.8 According to the theory of asset markets,if the interest rate is constant,then the competi-

tive market price of a bottle of wine will rise at a constant rate per year until it is consumed,,even

if the amount that wine-drinkers are willing to pay for it does not rise at a constant rate.

Multiple Choice Asset Markets

Topic,Asset Markets Di#0Eculty,2

#25 Correct Responses,94 Discrimination Index,17

Correct Answer,A

11.1 VincentSmudge's paintings are unappreciated now,Nobody is willing to payanything to

have them on the walls,In 5 years Smudge's work will gain enduring popularity.People will sud-

denly be willing to pay $1,000 a year to have an original Smudge on their walls and will continue

to be willing to do so ever after,If investors realize that this is the case,and if the interest rate is

and always will be r; a painting bySmudge will currently be worth about:

#28a#29 $#281000=r#29#5B1=#281+r#29

4

#5D.

#28b#29 $1000=r,5000=r.

#28c#29 $1000#281+ r#29

5

.

#28d#29 $1000#281=r#29

5

.

#28e#29 $200=r.

Topic,Asset Markets Di#0Eculty,1

#25 Correct Responses,82 Discrimination Index,42

Correct Answer,C

11.2 If the interest rate is r and will remain r forever,then a bond that will pay 25 dollars a year

forever,starting 1 year from now,is worth howmuchtoday?

#28a#29 25=#281+ r#29

#28b#29 25#281+r#29

#28c#29 25=r

#28d#29 25=#281+r + r

2

+,::+r

n

+:::#29

#28e#29 None of the above.

MULTIPLE CHOICE 199

Topic,Asset Markets Di#0Eculty,1

#25 Correct Responses,82 Discrimination Index,42

Correct Answer,C

11.3 If the interest rate is r and will remain r forever,then a bond that will pay 70 dollars a year

forever,starting 1 year from now,is worth howmuchtoday?

#28a#29 70=#281+ r#29

#28b#29 70#281+r#29

#28c#29 70=r

#28d#29 70=#281+r + r

2

+,::+r

n

+:::#29

#28e#29 None of the above.

Topic,Asset Markets Di#0Eculty,2

#25 Correct Responses,46 Discrimination Index,42

Correct Answer,B

11.4 If the nominal interest rate is 80#25 and the rate of in#0Dation is 50#25,then the exact real rate

of interest is:

#28a#29 10#25.

#28b#29 20#25.

#28c#29 30#25.

#28d#29 40#25.

#28e#29 None of the above.

Topic,Asset Markets Di#0Eculty,1

#25 Correct Responses,68 Discrimination Index,38

Correct Answer,C

11.5 The interest rate is 10#25,A certain piece of land can be used either for a parking lot,in

which case there are no construction costs and it will yield a net return of $5,000 per year forever

starting one year from now,Or it can have a house built on it,Building a house would cost $50,000

now,If a house is built on the lot,it will yield a stream of net income equal to $12,000 per year

starting one year from now,No other uses are contemplated,The theory of asset markets markets

predicts that the lot will:

#28a#29 sell for $120,000 and a house will be built on it.

#28b#29 sell for $50,000 and a parking lot will be built on it.

#28c#29 sell for $70,000 and a house will be built on it.

#28d#29 sell for $13,200 and a house will be built on it.

#28e#29 sell for $80,000 and a parking lot will be built on it.

CHAPTER 11 Asset Markets 200

Topic,Asset Markets Di#0Eculty,1

#25 Correct Responses,72 Discrimination Index,39

Correct Answer,D

11.6 Today is January 1,The interest rate is 8#25 and investors are convinced that it will stayat

8#25 for the next 10 years,A corporate bond comes on the market that for the next 7 years will pay

$160 on December31towhoever owns the bond on that date,On January 1,7 years from today,

the issuer of the bond will "redeem" the bond by buying it back from the bondholder for $2,000.

What should this bond sell for?

#28a#29 $3,120

#28b#29 $2,160

#28c#29 $1,600

#28d#29 $2,000

#28e#29 $2,780

Topic,Asset Markets Di#0Eculty,2

#25 Correct Responses,40 Discrimination Index,68

Correct Answer,A

11.7 The interest rate will be 10#25 for one more year,but a year from now,it will fall to 5#25

and stay at 5#25 forever,What is the market value of an investment that is sure to pay $440 a year

forever,starting twoyears from today?

#28a#29 $8,000

#28b#29 $8,800

#28c#29 $4,000

#28d#29 $4,400

#28e#29 $9,000

MULTIPLE CHOICE 201

Topic,Asset Markets Di#0Eculty,2

#25 Correct Responses,40 Discrimination Index,68

Correct Answer,A

11.8 The interest rate will be 10#25 for one more year,but a year from now,it will fall to 5#25

and stay at 5#25 forever,What is the market value of an investment that is sure to pay $440 a year

forever,starting twoyears from today?

#28a#29 $8,000

#28b#29 $8,800

#28c#29 $4,000

#28d#29 $4,400

#28e#29 $9,000

Topic,Asset Markets Di#0Eculty,2

#25 Correct Responses,28 Discrimination Index,24

Correct Answer,B

11.9 A certain wine costs $3 a bottle to produce,It improves in taste if stored properly for a

period of time,When it is newly bottled,people are willing to pay only $2 a bottle to drink it.

But the amount that people are willing to pay to drink a bottle of this wine will rise by$3ayear

for the next 50 years,Storage costs,not including interest,are $.50 per year,If the interest rate

is 5#25 and it is kept by rational investors,how old will it be when it is drunk and what will be its

price at that time?

#28a#29 50 years old and $152.

#28b#29 16 years old and $50.

#28c#29 50 years old and $153.

#28d#29 20 years old and $63.

#28e#29 4years old and $14.

CHAPTER 11 Asset Markets 202

Topic,Asset Markets Di#0Eculty,2

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,B

11.10 The amount people are willing to pay to drink a bottle of a certain certain vintage of wine

when it is t years old is $2+3t,It costs $.50 a bottle per year to store this wine,The interest rate

is 5#25,If the annual cost of storing the wine rises to $1,what will be the e#0Bect on the price of

this wine when it is consumed and on the length of time for which it is stored before it is consumed?

#28a#29 Both will rise.

#28b#29 Both will fall.

#28c#29 The price will rise and the time for which it is stored will fall.

#28d#29 The price will not change but the time for which it is stored will fall.

#28e#29 The price will rise and the time for which it is stored will stay constant.

Topic,Asset Markets Di#0Eculty,2

#25 Correct Responses,13 Discrimination Index,26

Correct Answer,D

11.11 You buy a painting for $1280,Its market value will rise by $80 per year for the next 30

years,It is worth $80 a year to you to have it hanging on the wall,The interest rate is 10#25,In

how manyyears will you sell it?

#28a#29 30

#28b#29 immediately

#28c#29 8

#28d#29 4

#28e#29 5

MULTIPLE CHOICE 203

Topic,Asset Markets Di#0Eculty,3

#25 Correct Responses,84 Discrimination Index,24

Correct Answer,D

11.12 Art Dreck's paintings are terribly unpopular now,In fact nobody would pay a dime to

have one of his paintings on the wall now,But experts believe that 10 years from now there will

be a craze for Dreck paintings,The craze will last for 2 years and then nobody will ever wantto

see a Dreck again,During this 2 year period,people will be willing to pay $1,100 a year to have

an original Dreck on the wall,The interest rate is r,If the experts' belief is widely held among

investors,today's market value of a Dreck should be about:

#28a#29 2;200=r.

#28b#29 2;200=#281+r#29.

#28c#29 1;100#281+ r#29

10

+1;100#281+ r#29

11

.

#28d#29 1;100=#281+r#29

10

+1;100=#281+ r#29

11

.

#28e#29 1;100r+1;100r

2

.

Topic,Asset Markets Di#0Eculty,2

#25 Correct Responses,65 Discrimination Index,0

Correct Answer,B

11.13 A large #28subterranean#29 pool of oil lies in a remote region of Ohio,Oil companies have

explored this region and knowhowmuch oil there is,They have purchased the rights to drill

and extract oil when they wish to do so,Because of the extremely forbidding geography and the

savagery of the natives,the companies have decided to postpone extraction until the price of oil is

higher,The theory of intertemporal arbitrage predicts that the:

#28a#29 companies are behaving irrationally.

#28b#29 price of rights to this oil must rise at the interest rate.

#28c#29 oil companies will not drill unless production costs fall.

#28d#29 price of rights to this oil will stay constantuntil it pays to extract.

#28e#29 None of the above.

CHAPTER 11 Asset Markets 204

Topic,Asset Markets Di#0Eculty,1

#25 Correct Responses,83 Discrimination Index,23

Correct Answer,D

11.14 The interest rate is 10#25 and will remain so forever,You do not drink wine but are

interested in buying some for investment purposes,Assume that there are no transactions costs or

storage costs and a certain bottle of wine will be worth $44 one year from now,$50 twoyears from

now,and $61,three years from now,After that it turns to worthless vinegar,Howmuch should

you be willing to pay for a bottle? #28Pick the closest answer.#29

#28a#29 40

#28b#29 41.32

#28c#29 50.86

#28d#29 45.83

#28e#29 49.47

Topic,Asset Markets Di#0Eculty,1

#25 Correct Responses,83 Discrimination Index,23

Correct Answer,D

11.15 The interest rate is 10#25 and will remain so forever,You do not drink wine but are

interested in buying some for investment purposes,Assume that there are no transactions costs or

storage costs and a certain bottle of wine will be worth $22 one year from now,$28 twoyears from

now,and $35,three years from now,After that it turns to worthless vinegar,Howmuch should

you be willing to pay for a bottle? #28Pick the closest answer.#29

#28a#29 20

#28b#29 23.14

#28c#29 31.32

#28d#29 26.30

#28e#29 32.29

MULTIPLE CHOICE 205

Topic,Asset Markets Di#0Eculty,2

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,B

11.16 Suppose that a dispute in the Persian Gulf halts the sale of oil from Persian Gulf for 1

year,At the same time an important new oil #0Celd is found in a place where nobody expected there

to be oil,What does economic theory predict will be the e#0Bect on the future price of oil to be

delivered 2 years from now?

#28a#29 It will fall if the new pool is larger than the stock of oil in the Persian Gulf and rise otherwise.

#28b#29 It will fall.

#28c#29 It will rise unless the new pool can be broughtinto production before the Persian Gulf supply is resumed.

#28d#29 It will rise.

#28e#29 It will rise if the cost of extraction for the new oil is greater than the cost of extraction in the Gulf,and

fall otherwise.

Topic,Asset Markets Di#0Eculty,2

#25 Correct Responses,65 Discrimination Index,0

Correct Answer,C

11.17 Bank 1 o#0Bers a deal on deposits of $1000 or more,You must leaveyour money in the bank

for 3 years,but Bank 1 will payyou 7#25 interest for the #0Crst year,7#25 interest for the second year,

and for the third year,it will pay 10#25 interest,In response,Bank 2 o#0Bers a deal that it claims is

even better,It also requires you to deposit at least $1,000 and to leave it in the bank for 3 years,

but it will pay 10#25 interest in the #0Crst year and then 7#25 in the second and third years,After 3

years,you can takeyour money out of either bank and do what you want with it,Both banks

compound interest annually,Which of the following is true?

#28a#29 Bank 2 o#0Bers a better deal than Bank 1.

#28b#29 Bank 1 o#0Bers a better deal than Bank 2.

#28c#29 The two o#0Bers are equally valuable.

#28d#29 The o#0Ber of Bank 2 becomes relatively more attractive as the size of your initial deposit is larger.

#28e#29 None of the above.

CHAPTER 11 Asset Markets 206

Topic,Asset Markets Di#0Eculty,2

#25 Correct Responses,65 Discrimination Index,0

Correct Answer,C

11.18 Bank 1 o#0Bers a deal on deposits of $1000 or more,You must leaveyour money in the bank

for 3 years,but Bank 1 will payyou 7#25 interest for the #0Crst year,7#25 interest for the second year,

and for the third year,it will pay 13#25 interest,In response,Bank 2 o#0Bers a deal that it claims is

even better,It also requires you to deposit at least $1,000 and to leave it in the bank for 3 years,

but it will pay 13#25 interest in the #0Crst year and then 7#25 in the second and third years,After 3

years,you can takeyour money out of either bank and do what you want with it,Both banks

compound interest annually,Which of the following is true?

#28a#29 Bank 2 o#0Bers a better deal than Bank 1.

#28b#29 Bank 1 o#0Bers a better deal than Bank 2.

#28c#29 The two o#0Bers are equally valuable.

#28d#29 The o#0Ber of Bank 2 becomes relatively more attractive as the size of your initial deposit is larger.

#28e#29 None of the above.

Topic,Asset Markets Di#0Eculty,2

#25 Correct Responses,19 Discrimination Index,40

Correct Answer,E

11.19 If the rate of in#0Dation is greater than the interest rate:

#28a#29 you should consume all of your wealth in the #0Crst period.

#28b#29 you are better o#0B keeping your money in a mattress at home #28assuming no risk of it being stolen#29 than

at a bank.

#28c#29 you will necessarily consume less this period than you would if the rate of in#0Dation were less than the

interest rate.

#28d#29 you will necessarily consume more this period than you would if the rate of in#0Dation were less than the

interest rate.

#28e#29 None of the above.

MULTIPLE CHOICE 207

Topic,Asset Markets Di#0Eculty,2

#25 Correct Responses,77 Discrimination Index,41

Correct Answer,D

11.20 A zero coupon bond is a bond that pays no return until it comes due and then pays the

holder of the bond its face value,Suppose that a $1,000,zero coupon bond will come due on

January 1,2010,If the interest rate is 5#25 and will remain 5#25 forever,what will this bond be

worth on January 1,1995?

#28a#29 1;000=0:05

#28b#29 1;000=0:05

15

#28c#29 1;000+ 1;000=15

#28d#29 1;000=1:05

15

#28e#29 None of the above.

Topic,Asset Markets Di#0Eculty,2

#25 Correct Responses,77 Discrimination Index,41

Correct Answer,D

11.21 A zero coupon bond is a bond that pays no return until it comes due and then pays the

holder of the bond its face value,Suppose that a $4,000,zero coupon bond will come due on

January 1,2010,If the interest rate is 10#25 and will remain 10#25 forever,what will this bond be

worth on January 1,1995?

#28a#29 4;000=0:10

#28b#29 4;000=0:10

15

#28c#29 4;000+ 4;000=15

#28d#29 4;000=1:10

15

#28e#29 None of the above.

Topic,Asset Markets Di#0Eculty,1

#25 Correct Responses,80 Discrimination Index,20

Correct Answer,C

11.22 The sum of the terms of the in#0Cnite geometric series,1,0.98,0:98

2; 0:98

3;...,is closest to

which of the following numbers?

#28a#29 in#0Cnity

#28b#29 1.98

#28c#29 50

#28d#29 0.51

#28e#29 102.04

CHAPTER 11 Asset Markets 208

Topic,Asset Markets Di#0Eculty,1

#25 Correct Responses,80 Discrimination Index,20

Correct Answer,C

11.23 The sum of the terms of the in#0Cnite geometric series,1,0.95,0:95

2; 0:95

3;...,is closest to

which of the following numbers?

#28a#29 in#0Cnity

#28b#29 1.95

#28c#29 20

#28d#29 0.51

#28e#29 105.26

Topic,Asset Markets Di#0Eculty,2

#25 Correct Responses,32 Discrimination Index,46

Correct Answer,A

11.24 Ashley,from your workbook,has discovered another wine,Wine D,Wine drinkers are

willing to pay 70 dollars to drink it rightnow,The amount that wine drinkers are willing to pay

will rise by 10 dollars eachyear that the wine ages,The interest rate is 10#25,Howmuchwould

Ashley be willing to pay for the wine if he buys it as an investment? #28Pick the closest answer.#29

#28a#29 75

#28b#29 70

#28c#29 100

#28d#29 770

#28e#29 91

Topic,Asset Markets Di#0Eculty,2

#25 Correct Responses,32 Discrimination Index,46

Correct Answer,A

11.25 Ashley,from your workbook,has discovered another wine,Wine D,Wine drinkers are

willing to pay 160 dollars to drink it rightnow,The amount that wine drinkers are willing to pay

will rise by 20 dollars eachyear that the wine ages,The interest rate is 10#25,Howmuchwould

Ashley be willing to pay for the wine if he buys it as an investment? #28Pick the closest answer.#29

#28a#29 165

#28b#29 160

#28c#29 200

#28d#29 1,760

#28e#29 191

MULTIPLE CHOICE 209

Topic,Asset Markets Di#0Eculty,2

#25 Correct Responses,42 Discrimination Index,18

Correct Answer,A

11.26 Shivers' annual fuel bill for home heating is 1,000 dollars per year,He considers three

alternative plans for insulating his house,Plan A will reduce his annual fuel bill by 15#25,plan B

will reduce it by 20#25,and plan C will eliminate his need for heating fuel altogether,The Plan A

insulation job would cost Shivers 1,000 dollars,Plan B would cost him 1,900 dollars and Plan C

would cost him 11,000 dollars,If the interest rate is 10#25 and his house and the insulation job last

forever,which plan is the best for Shivers?

#28a#29 Plan A.

#28b#29 Plan B.

#28c#29 Plan C.

#28d#29 Plans A and B are equally good.

#28e#29 He is best o#0B using none of the plans.

Topic,Asset Markets Di#0Eculty,2

#25 Correct Responses,42 Discrimination Index,18

Correct Answer,A

11.27 Shivers' annual fuel bill for home heating is 800 dollars per year,He considers three

alternative plans for insulating his house,Plan A will reduce his annual fuel bill by 15#25,plan B

will reduce it by 20#25,and plan C will eliminate his need for heating fuel altogether,The Plan

A insulation job would cost Shivers 800 dollars,Plan B would cost him 1,400 dollars and Plan C

would cost him 8,800 dollars,If the interest rate is 10#25 and his house and the insulation job last

forever,which plan is the best for Shivers?

#28a#29 Plan A.

#28b#29 Plan B.

#28c#29 Plan C.

#28d#29 Plans A and B are equally good.

#28e#29 He is best o#0B using none of the plans.

CHAPTER 11 Asset Markets 210

Topic,Asset Markets Di#0Eculty,2

#25 Correct Responses,80 Discrimination Index,37

Correct Answer,D

11.28 The price of an antique is expected to rise by 10#25 during the next year,The interest rate

is 13#25,You are thinking of buying an antique and selling it a year from now,You would be willing

to pay a total of 1,000 dollars for the pleasure of owning the antique for a year,Howmuchwould

you be willing to pay to buy this antique?

#28a#29 7,692.31

#28b#29 21,000

#28c#29 1,000

#28d#29 33,333.33

#28e#29 10,000

Topic,Asset Markets Di#0Eculty,2

#25 Correct Responses,80 Discrimination Index,37

Correct Answer,D

11.29 The price of an antique is expected to rise by 4#25 during the next year,The interest rate

is 7#25,You are thinking of buying an antique and selling it a year from now,You would be willing

to pay a total of 400 dollars for the pleasure of owning the antique for a year,Howmuchwould

you be willing to pay to buy this antique?

#28a#29 5,714.29

#28b#29 8,400

#28c#29 400

#28d#29 13,333.33

#28e#29 4,000

MULTIPLE CHOICE 211

Topic,Asset Markets Di#0Eculty,2

#25 Correct Responses,70 Discrimination Index,37

Correct Answer,A

11.30 A bond has a face value of 4,000 dollars,It will pay 400 dollars in interest at the end of

every year for the next 41 years,At the time of the last interest payment,41 years from now,the

company that issued the bond will #5Credeem the bond at face value",That is,the company will buy

back the bond from its owner at a price equal to the face value of the bond,If the interest rate is 10#25

and is expected to remain at 10#25,howmuchwould a rational investor pay for this bond rightnow?

#28a#29 4,000

#28b#29 20,400

#28c#29 16,400

#28d#29 more than any of the abovenumbers

#28e#29 less than any of the abovenumbers

Topic,Asset Markets Di#0Eculty,2

#25 Correct Responses,70 Discrimination Index,37

Correct Answer,A

11.31 A bond has a face value of 6,000 dollars,It will pay 600 dollars in interest at the end of

every year for the next 50 years,At the time of the last interest payment,50 years from now,the

company that issued the bond will #5Credeem the bond at face value",That is,the company will buy

back the bond from its owner at a price equal to the face value of the bond,If the interest rate is 10#25

and is expected to remain at 10#25,howmuchwould a rational investor pay for this bond rightnow?

#28a#29 6,000

#28b#29 36,000

#28c#29 30,000

#28d#29 more than any of the abovenumbers

#28e#29 less than any of the abovenumbers

CHAPTER 11 Asset Markets 212

Topic,Asset Markets Di#0Eculty,0

#25 Correct Responses,68 Discrimination Index,34

Correct Answer,A

11.32 If the interest rate is 7#25,and will remain 7#25 forever,howmuchwould a rational investor

be willing to pay for an asset that will pay him 5,350 dollars one year from now,1,144 dollars two

years from now,and nothing at any other time?

#28a#29 6,000

#28b#29 5,000

#28c#29 85,714.29

#28d#29 48,000

#28e#29 7,000

Topic,Asset Markets Di#0Eculty,0

#25 Correct Responses,68 Discrimination Index,34

Correct Answer,A

11.33 If the interest rate is 15#25,and will remain 15#25 forever,howmuchwould a rational investor

be willing to pay for an asset that will pay him 3,450 dollars one year from now,1,322 dollars two

years from now,and nothing at any other time?

#28a#29 4,000

#28b#29 3,000

#28c#29 26,666.67

#28d#29 64,000

#28e#29 5,000

Topic,Asset Markets Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,B

11.34 The interest rate is 10 percent and is expected to stay constant at that level forever,The

present discounted value of $50,000 a year forever STARTING TODAYis

#28a#29 $500,000

#28b#29 $550,000

#28c#29 $ in#0Cnity

#28d#29 $1 million

#28e#29 $45,454.45

Essay Asset Markets

Topic,Asset Markets Di#0Eculty,2

#25 Correct Responses,0 Discrimination Index,0

11.1 The interest rate is 10#25 and will remain 10#25 forever,Suppose that you do not drink wine

but are interested in buying it for investment purposes,Howmuchwould you be willing to pay for

each of the following? #28i#29 A bottle of wine that will be worth $22 a year from now and will then go

bad and be worthless,#28ii#29 A bottle of wine that will be worth $22 a year from now and will rise in

value by$1ayear forever? Explain your answer.

Answer,Both are worth $20,Each will be sold and drunk in 1 year,The increase in value of $1

per year on a $22 bottle of wine is not a high enough rate of return for anyone to want to hold it

another year.

Topic,Asset Markets Di#0Eculty,3

#25 Correct Responses,0 Discrimination Index,0

11.2 A certain wine costs $3 a bottle to produce,The amount that people are willing to payto

drink it t years after it has been bottled is $2+3t,Storage costs,not including interest,are $.50

per year,If the interest rate is 5#25,howmuchwould a rational investor be willing to pay for it at

the time it is bottled? Explain howyou get your answer,Feel free to write formulas for present

value calculations without working out the numerical answer if it involves long calculations,#28Hint:

How long would the wine be kept before it is drunk? At what price would it sell?#29

Answer,Wine would be kept for 16 years and sold for $50,The presentvalue of this is 50=#281:05#29

16

.

From this number wehave to subtract the presentvalue of storage costs which is the presentvalue

of paying $.50 a year for 16 years,This is the cost of paying $.50 a year forever,starting now minus

the cost of paying $.50 a year forever starting in 16 years or $:50#281=r#29#281,1=#281+ r#29

16

#29.

Topic,Asset Markets Di#0Eculty,2

#25 Correct Responses,0 Discrimination Index,0

11.3 Suppose that the cost of personal computers falls by 20#25 per year,To make this problem

relatively easy,we will assume that their quality does not change and that computers never wear

out,You plan to get one sometime,What is the rational way to decide when to buy one?

Answer,Figure out what it is worth to you to have the computer for one year,Notice that the

cost to you of having it is approximately the di#0Berence between the price of a computer at the

beginning of the year and the price at the end of the year,If the value to you is V and the current

price is P; you buy if V#3E:2P,Otherwise you wait,Eventually,:2P will be smaller than V,Then

you buy.

CHAPTER 11 Asset Markets 214

Topic,Asset Markets Di#0Eculty,2

#25 Correct Responses,0 Discrimination Index,0

11.4 According to a recent story in the New York Times,the South African gold strike has been

costing South African mining companies about $7.5 million per day,Assuming that this number

is the value of the gold that was not mined because of the strike,minus the labor costs #28and other

operating costs#29 that are saved byshutting down the mines,what is wrong with this calculation?

Answer,The gold that is not mined now will still be there and can be extracted later,The #0Cgure

that was reached would be the cost if the gold that would have been mined had somehow been

destroyed by the strike,The actual costs would be more closely measured by the interest cost of

postponement of the net revenues from the gold mines until the strike is settled.

Chapter 12

True-False Uncertainty

Topic,Uncertainty Di#0Eculty,1

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,False

12.1 Of anytwo gambles,no matter what their expected returns,a risk-averter will choose the

one with the smaller variance.

Topic,Uncertainty Di#0Eculty,2

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,True

12.2 An expected utility maximizer's preferences between two bundles contingentonEvent1

happening must be independent of what he will get if Event 2 happens.

Topic,Uncertainty Di#0Eculty,1

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,True

12.3 If someone has strictly convex preferences between all contingent commodity bundles,then

he or she must be risk averse.

Topic,Uncertainty Di#0Eculty,1

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,True

12.4 Wilma is not risk averse,She is o#0Bered a chance to pay $10 for a lottery ticket that will

give her a prize of $100 with probability,06,a prize of $50 with probability,1,and no prize with

probability,85,If she understands the odds and makes no mistakes in calculation,she will buy the

lottery ticket.

Topic,Uncertainty Di#0Eculty,1

#25 Correct Responses,91 Discrimination Index,15

Correct Answer,False

12.5 If Paul is risk-loving and his basketball team has a probability of,5 of winning,then Paul

would rather bet $10 on his team than $100,#28When Paul bets X; he wins X if his team wins and

loses X if his team loses.#29

CHAPTER 12 Uncertainty 216

Topic,Uncertainty Di#0Eculty,1

#25 Correct Responses,70 Discrimination Index,0

Correct Answer,False

12.6 If the price of insurance goes up,people will become less risk-averse.

Topic,Uncertainty Di#0Eculty,2

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,False

12.7 A consumer has a von Neumann-Morgenstern utility function of the form U#28c

A;c

B;p

A;p

B

#29=

p

A

v#28c

A

#29+p

B

v#28c

B

#29where p

A

and p

B

are the probabilities of events A and B and where c

A

and c

B

are consumptions contingentonevents A and B respectively,This consumer must be a risk lover

if v is an increasing function.

Multiple Choice Uncertainty

Topic,Uncertainty Di#0Eculty,2

#25 Correct Responses,37 Discrimination Index,38

Correct Answer,E

12.1 Prufrock is risk averse,He is o#0Bered a gamble in which with probability 1=4 he will lose

$1000 and with probability 3=4; he will win $500.

#28a#29 Since he is risk averse,he will certainly not take the gamble.

#28b#29 Since the expected value of the gamble is positive,he will certainly take the gamble.

#28c#29 If Prufrock's initial wealth is greater than $1,500,then he will certainly take the gamble.

#28d#29 If Prufrock's initial wealth is smaller than $1,500,he will certainly not take the gamble.

#28e#29 Not enough information is given to determine for sure whether he will take the gamble.

Topic,Uncertainty Di#0Eculty,3

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,B

12.2 Timmy Qualm's uncle gave him a lottery ticket,With probability 1=2 the ticket will be

worth $100 and with probability 1=2 it will be worthless,Let x be Timmy's wealth if the lottery

ticket is a winner and y his wealth if it is a loser,Timmy's preferences over alternative contingent

commodity bundles are represented by the utility function U#28x;y#29=minf2x,y;2y,xg,He has no

risks other than the ticket.

#28a#29 Timmywould sell his lottery ticket for $25 but not for less.

#28b#29 Timmyhates risk so much that he'd be willing to throwaway the lottery ticket rather than worry about

whether he won.

#28c#29 Timmy satis#0Ces the expected utilityhypothesis.

#28d#29 Timmy is misnamed,he is a risk-lover.

#28e#29 None of the above.

CHAPTER 12 Uncertainty 218

Topic,Uncertainty Di#0Eculty,2

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,D

12.3 There are twoevents,1 and 2,The probabilityofevent1ispand the probabilityofevent

2is1,p,Sally Kink is an expected utility maximizer with a utility function is pu#28c

1

#29+#281,p#29u#28c

2

#29

where for anynumber,x; u#28x#29=2xif x#3C1;000 and u#28x#29=1;000+x if x is greater than or equal to

1,000.

#28a#29 Sally is a risk lover.

#28b#29 Sally will be a risk averter if she is poor but will be a risk lover if she is rich.

#28c#29 Sally will be a risk lover if she is poor but a risk averter if she is rich.

#28d#29 If there is no chance of her wealth exceeding 1,000,then she will takeany bet that has positive expected

net winnings.

#28e#29 None of the above.

Topic,Uncertainty Di#0Eculty,2

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,E

12.4 Socrates owns just one ship,The ship is worth $200 million dollars,If the ship sinks,

Socrates loses $200 million,The probability that it will sink is,02,Socrates' total wealth,includ-

ing the value of the ship is $225 million,He is an expected utility maximizer with von Neuman

Morgenstern utility U#28W#29 equal to the square root of W,What is the maximum amount that

Socrates would be willing to pay in order to be fully insured against the risk of losing his ship?

#28a#29 $4 million

#28b#29 $2 million

#28c#29 $3.84 million

#28d#29 $4.82 million

#28e#29 $5.96 million

MULTIPLE CHOICE 219

Topic,Uncertainty Di#0Eculty,2

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,C

12.5 Buck Columbus is thinking of starting a pinball palace near a large Midwestern university.

Buck is an expected utility maximizer with a von Neuman-Morgenstern utility function,U#28W#29=

1,#286;000=W#29 where W is his wealth,Buck's total wealth is $24,000,With probability,2 the palace

will be a failure and he'll lose $18,000,so that his wealth will be just $6,000,With probability

.8 it will succeed and his wealth will growto$x,What is the smallest value of x that would be

su#0Ecient to make Buckwanttoinvest in the pinball palace rather than haveawealth of $24,000

with certainty?

#28a#29 $28,500

#28b#29 $150,000

#28c#29 $96,000

#28d#29 $72,000

#28e#29 $30,000

Topic,Uncertainty Di#0Eculty,2

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,C

12.6 Buck Columbus is thinking of starting a pinball palace near a large Midwestern university.

Buck is an expected utility maximizer with a von Neuman-Morgenstern utility function,U#28W#29=

1,#285;000=W#29 where W is his wealth,Buck's total wealth is $20,000,With probability,2 the palace

will be a failure and he'll lose $15,000,so that his wealth will be just $5,000,With probability

.8 it will succeed and his wealth will growto$x,What is the smallest value of x that would be

su#0Ecient to make Buckwanttoinvest in the pinball palace rather than haveawealth of $20,000

with certainty?

#28a#29 $23,750

#28b#29 $125,000

#28c#29 $80,000

#28d#29 $60,000

#28e#29 $25,000

CHAPTER 12 Uncertainty 220

Topic,Uncertainty Di#0Eculty,2

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,C

12.7 Oskar's preferences over gambles in which the probabilityofevents 1 and 2 are both 1=2

can be represented by the von Neuman-Morgenstern utility function,5y

:5

1

+,5y

:5

2

where y

1

is his

consumption if event 1 happens and y

2

is his consumption if event 2 happens,A gamble that

allows him a consumption of 9 if event 1 happens and 25 if event 2 happens is exactly as good for

Oskar as being sure to have an income of:

#28a#29 12.5.

#28b#29 9.

#28c#29 16.

#28d#29 17.

#28e#29 None of the above.

Topic,Uncertainty Di#0Eculty,2

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,A

12.8 Mabel and Emil were contemplating marriage,They got to talking,Mabel said that she

always acted according to the expected utilityhypothesis,where she tried to maximize the expected

value of the log of her income,Emil said that he too was an expected utility maximizer,but he

tried to maximize the expected value of the square of his income,Mabel said,#5CI fear wemust part.

Our attitudes toward risk are too di#0Berent." Emil said,#5CNever fear,my dear,the square of income

is a monotonic increasing function of the log of income,so we really have the same preferences."

Who is right about whether their preferences toward risk are di#0Berent?

#28a#29 Mabel is right.

#28b#29 Emil is right.

#28c#29 Emil is right about small risks,but wrong about large risks.

#28d#29 Mabel is right about small risks,but wrong about large risks.

#28e#29 They are both wrong.

MULTIPLE CHOICE 221

Topic,Uncertainty Di#0Eculty,1

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,E

12.9 Ronald has $18,000,But he is forced to bet it on the #0Dip of a fair coin,If he wins he has

$36,000,If he loses he has nothing,Ronald's expected utility function is,5x

:5

+:5y

:5

where x is his

wealth if heads comes up and y is his wealth if tails comes up,Since he must make this bet,he is

exactly as well o#0B as if he had a perfectly safe income of:

#28a#29 $16,000.

#28b#29 $15,000.

#28c#29 $12,000.

#28d#29 $11,000.

#28e#29 $9,000.

Topic,Uncertainty Di#0Eculty,1

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,A

12.10 Gary likes to gamble,Donna o#0Bers to bet him $70 on the outcome of a boat race,If

Gary's boat wins,Donna would give him $70,If Gary's boat does not win,Gary would give her

$70,Gary's utility function is U#28c

1;c

2;p

1;p

2

#29=p

1

c

2

1

+p

2

c

2

2

where p

1

and p

2

are the probabilities of

events 1 and 2 and where c

1

and c

2

are his consumption if events 1 and 2 occur respectively,Gary's

total wealth is currently only $80 and he believes that the probability that he will win the race is,3.

#28a#29 Taking the bet would increase his expected utility.

#28b#29 Taking the bet would reduce his expected utility.

#28c#29 Taking the bet would leave his expected utility unchanged.

#28d#29 There is not enough information to determine whether taking the bet would increase or decrease his

expected utility.

#28e#29 The information given in the problem is self-contradictory.

CHAPTER 12 Uncertainty 222

Topic,Uncertainty Di#0Eculty,3

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,A

12.11 Clancy has $1,200,He plans to bet on a boxing matchbetween Sullivan and Flanagan.

For $4,he can buy a coupon that pays $10 if Sullivan wins and nothing otherwise,For $6 he can

buy a coupon that will pay $10 if Flanagan wins and nothing otherwise,Clancy doesn't agree with

these odds,He thinks that the two #0Cghters eachhave a probabilityof1=2of winning,If he is an

expected utility maximizer who tries to maximize the expected value of ln W where ln W is the

natural log of his wealth,it would be rational for him to buy:

#28a#29 50 "Sullivan coupons" and no "Flanagan coupons".

#28b#29 100 "Sullivan coupons" and no "Flanagan coupons".

#28c#29 50 "Flanagan coupons" and no "Sullivan coupons".

#28d#29 100 "Flanagan coupons" and no "Sullivan coupons".

#28e#29 100 of each kind of coupon.

Topic,Uncertainty Di#0Eculty,3

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,E

12.12 Diego has $6,400,He plans to bet on a soccer game,Team A is a favorite to win,Assume

no ties can occur,For $.80 one can buy a ticket that will pay $1 if team A wins and nothing if

B wins,For $.20 one can buy a ticket that pays $1 if team B wins and nothing if A wins,Diego

thinks the two teams are equally likely to win,He buys tickets so as to maximize the expected

value of ln W #28the natural log of his wealth#29,After he buys his tickets,team A loses a star player

and the ticket price moves to $.50 for either team,Diego buys some new tickets and sells some

of his old ones,The game is then played and team A wins,Howmuchwealth does he end up with?

#28a#29 $5,000

#28b#29 $15,000

#28c#29 $6,400

#28d#29 $8,400

#28e#29 $10,000

MULTIPLE CHOICE 223

Topic,Uncertainty Di#0Eculty,1

#25 Correct Responses,64 Discrimination Index,40

Correct Answer,C

12.13 Joe's wealth is $100 and he is an expected utility maximizer with a von Neumann-

Morgenstern utility function U#28W#29=W

1=2

,Joe is afraid of oversleeping his econ exam,He #0Cgures

there is only a 1 in 10 chance that he will,but if he does,it will cost him $100 in fees to the

university for taking an exam late,Joe's neighbor,Mary,never oversleeps,She o#0Bers to wake him

1 hour before the test,but he must pay her for this service,What is the most that Joe would be

willing to pay for this wake-up service?

#28a#29 $10

#28b#29 $15

#28c#29 $19

#28d#29 $100

#28e#29 $50

Topic,Uncertainty Di#0Eculty,2

#25 Correct Responses,68 Discrimination Index,39

Correct Answer,A

12.14 Portia has waited a long time for her ship to come in and she has concluded that it will

arrivetoday with probability 1=4,If it does come,she will receive $16,If it doesn't come in today,

it never will and she will have zero wealth,She has a von Neumann-Morgenstern utility function

equal to the square root of her total income,What is the minimum price at which she would sell

the rights to her ship?

#28a#29 1

#28b#29 2

#28c#29 2

1=2

#28d#29 4

#28e#29 None of the above.

CHAPTER 12 Uncertainty 224

Topic,Uncertainty Di#0Eculty,1

#25 Correct Responses,57 Discrimination Index,31

Correct Answer,B

12.15 Harley's currentwealth is $600,but there is a,25 probability that he will lose $100,Harley

is risk neutral,He has an opportunity to buy insurance that would restore his $100 if he loses it.

#28a#29 Harley would be willing to pay a bit more than $25 for this insurance.

#28b#29 Harley would be willing to pay up to $25 for this insurance.

#28c#29 Since Harley is risk neutral,he wouldn't be willing to payanything for this insurance.

#28d#29 Since Harley's utility function is not speci#0Ced,we can't tell howmuchhewould be willing to pay for this

insurance.

#28e#29 Harley would not be wiling to pay more than $16.66 for this insurance.

Topic,Uncertainty Di#0Eculty,2

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,B

12.16 After graduating,Sallie Handshake's best job o#0Ber will either be with a Big,8 accounting

#0Crm for $160,000 a year or as a State Farm agent in Grand Rapids,Michigan for $40,000 a year.

She can increase the probability of the former outcome by studying more,but such studying has

its costs,If S is represents her amount of studying #28where S =0is no study and S =1is all-out

e#0Bort#29,her probability of getting the job with a Big,8 #0Crm just equals S,Her utility depends on

how hard she studies and her subsequent annual income Y,She tries to maximize the expected

value of the von Neuman-Morgenstern utility function U#28S;Y #29=Y

1=2

,400S

2

,If she chooses S to

maximize her expected utility,howmuch will she study?

#28a#29 S =,1

#28b#29 S =,25

#28c#29 S =,5

#28d#29 S =,75

#28e#29 S =,9

MULTIPLE CHOICE 225

Topic,Uncertainty Di#0Eculty,3

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,D

12.17 Every dollar invested in Safe Sox will yield two dollars for sure,Each dollar invested in

Wobbly Umbrellas will yield $8 with probability 1=2 and zero with probability 1=2.Aninvestor has

$10,000 to invest in these two companies and her von Neumann-Morgenstern utility function is the

expected value of the natural logarithm of the total yield on her investments,If S is the amount

of money that she invests in Safe Sox and $10;000,S the amount that she invests in Wobbly

Umbrellas,what should S be to maximize her expected utility? #28Pick the closest answer.#29

#28a#29 $1,111

#28b#29 $3,333

#28c#29 $5,000

#28d#29 $6,667

#28e#29 $9,111

Topic,Uncertainty Di#0Eculty,2

#25 Correct Responses,47 Discrimination Index,60

Correct Answer,A

12.18 Billy Pigskin from your workbook has a von Neumann-Morgenstern utility function U#28c#29=

c

1=2

,If Billy is not injured this season,he will receive an income of 16 million dollars,If he is

injured,his income will be only $10,000,The probability that he will be injured is,1 and the

probability that he will not be injured is,9,His expected utilityis

#28a#29 3,610

#28b#29 between 15 million and 16 million.

#28c#29 100,000.

#28d#29 7,220

#28e#29 14,440

CHAPTER 12 Uncertainty 226

Topic,Uncertainty Di#0Eculty,2

#25 Correct Responses,47 Discrimination Index,60

Correct Answer,A

12.19 Billy Pigskin from your workbook has a von Neumann-Morgenstern utility function U#28c#29=

c

1=2

,If Billy is not injured this season,he will receive an income of 9 million dollars,If he is injured,

his income will be only $10,000,The probability that he will be injured is,1 and the probability

that he will not be injured is,9,His expected utilityis

#28a#29 2,710

#28b#29 between 8 million and 9 million.

#28c#29 100,000.

#28d#29 5,420

#28e#29 10,840

Topic,Uncertainty Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,B

12.20 Willy's only source of wealth is his chocolate factory,He has the utility function pc

1=2

f

+

#281,p#29c

1=2

nf

where p is the probability of a #0Dood,1,p is the probability of no #0Dood and where c

f

and

c

n

f are his wealth contingent on a #0Dood and on no #0Dood,respectively,The probability of #0Dood is

p =1=10,The value of Willy's factory is $300,000 if there is no #0Dood and 0 if there is a #0Dood,Willy

can buy insurance where if he buys $x worth of insurance,he must pay the insurance company

$2x=11 whether there is a #0Dood or not,but he gets back $x from the company if there is a #0Dood.

Willy should buy:

#28a#29 no insurance since the the cost per dollar of insurance exceeds the probability of a #0Dood.

#28b#29 enough insurance so that if there is a #0Dood,after he collects his insurance,his wealth will be 1=4 of what

it would be if there is no #0Dood.

#28c#29 enough insurance so that if there is a #0Dood,after he collects his insurance,his wealth will be the same

whether there is a #0Dood or not.

#28d#29 enough insurance so that if there is a #0Dood,after he collects his insurance,his wealth will be 1=3 of what

it would be if there is no #0Dood.

#28e#29 enough insurance so that if there is a #0Dood,after he collects his insurance his wealth will be 1=5 of what

it would be if there is no #0Dood.

MULTIPLE CHOICE 227

Topic,Uncertainty Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,B

12.21 Willy's only source of wealth is his chocolate factory,He has the utility function pc

1=2

f

+

#281,p#29c

1=2

nf

where p is the probability of a #0Dood,1,p is the probability of no #0Dood and where c

f

and

c

n

f are his wealth contingent on a #0Dood and on no #0Dood,respectively,The probability of #0Dood is

p =1=16,The value of Willy's factory is $600,000 if there is no #0Dood and 0 if there is a #0Dood,Willy

can buy insurance where if he buys $x worth of insurance,he must pay the insurance company

$3x=18 whether there is a #0Dood or not,but he gets back $x from the company if there is a #0Dood.

Willy should buy:

#28a#29 no insurance since the the cost per dollar of insurance exceeds the probability of a #0Dood.

#28b#29 enough insurance so that if there is a #0Dood,after he collects his insurance,his wealth will be 1=9 of what

it would be if there is no #0Dood.

#28c#29 enough insurance so that if there is a #0Dood,after he collects his insurance,his wealth will be the same

whether there is a #0Dood or not.

#28d#29 enough insurance so that if there is a #0Dood,after he collects his insurance,his wealth will be 1=4 of what

it would be if there is no #0Dood.

#28e#29 enough insurance so that if there is a #0Dood,after he collects his insurance his wealth will be 1=7 of what

it would be if there is no #0Dood.

Topic,Uncertainty Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,C

12.22 Sally Kink is an expected utility maximizer with utility function pu#28c

1

#29+#281,p#29u#28c

2

#29where

for any x#3C9;000;u#28x#29=2xand where u#28x#29=9;000+ x for x greater than or equal to 9,000.

#28a#29 Sally will be risk averse if her income is less than 9,000 but risk loving if her income is more than 9,000.

#28b#29 Sally will be risk neutral if her income is less than 9,000 and risk averse if her income is more than 9,000.

#28c#29 For bets that involvenochance of her wealth exceeding 9,000,Sally will takeany bet that has a positive

expected net payo#0B.

#28d#29 Sally will never take a bet if there is a chance that it leaves her with wealth less than 18,000.

#28e#29 None of the above are true.

CHAPTER 12 Uncertainty 228

Topic,Uncertainty Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,C

12.23 Sally Kink is an expected utility maximizer with utility function pu#28c

1

#29+#281,p#29u#28c

2

#29where

for any x#3C1;000;u#28x#29=2xand where u#28x#29=1;000+ x for x greater than or equal to 1,000.

#28a#29 Sally will be risk averse if her income is less than 1,000 but risk loving if her income is more than 1,000.

#28b#29 Sally will be risk neutral if her income is less than 1,000 and risk averse if her income is more than 1,000.

#28c#29 For bets that involvenochance of her wealth exceeding 1,000,Sally will takeany bet that has a positive

expected net payo#0B.

#28d#29 Sally will never take a bet if there is a chance that it leaves her with wealth less than 2,000.

#28e#29 None of the above are true.

Topic,Uncertainty Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,A

12.24

Pablo's expected utility function is pc

1=2

1

+#281,p#29c

1=2

2

where p is the probability that he consumes

c

1

and 1,p is the probability that he consumes c

2

,Wilbur is o#0Bered a choice between getting a

sure paymentof$Zor a lottery in which he receives $3,600 with probability 0.70 and he receives

$12,100 with probability 0.30,Wilbur will choose the sure payment if:

#28a#29 Z#3E5;625 and the lottery if Z#3C5;625.

#28b#29 Z#3E4;612:50 and the lottery if Z#3C4;612:50.

#28c#29 Z#3E12;100 and the lottery if Z#3C12;100.

#28d#29 Z#3E8;862:50 and the lottery if Z#3C8;862:50.

#28e#29 Z#3E6;150 and the lottery if Z#3C6;150.

MULTIPLE CHOICE 229

Topic,Uncertainty Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,A

12.25

Roger's expected utility function is pc

1=2

1

+#281,p#29c

1=2

2

where p is the probability that he consumes c

1

and 1,p is the probability that he consumes c

2

,Wilbur is o#0Bered a choice between getting a sure

paymentof$Zor a lottery in which he receives $900 with probability 0.80 and he receives $10,000

with probability 0.20,Wilbur will choose the sure payment if:

#28a#29 Z#3E1;936 and the lottery if Z#3C1;936.

#28b#29 Z#3E1;418 and the lottery if Z#3C1;418.

#28c#29 Z#3E10;000 and the lottery if Z#3C10;000.

#28d#29 Z#3E5;968 and the lottery if Z#3C5;968.

#28e#29 Z#3E2;720 and the lottery if Z#3C2;720.

Topic,Uncertainty Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,B

12.26 Clancy has $3,200,He plans to bet on a boxing matchbetween Sullivan and Flanagan.

He #0Cnds that he can buy coupons for $8 that will pay o#0B $10 each if Sullivan wins,He also #0Cnds

in another store some coupons that will pay o#0B $10 if Flanagan wins,The Flanagan tickets cost

$2 each,Clancy believes that the two #0Cghters eachhave a probabilityof1=2of winning,Clancy is

a risk averter who tries to maximize the expected value of the natural log of his wealth,Whichof

the following strategies would maximize his expected utility?

#28a#29 Don't gamble at all.

#28b#29 Buy 200 Sullivan tickets and 800 Flanagan tickets.

#28c#29 Buy exactly as many Flanagan tickets as Sullivan tickets.

#28d#29 Buy 100 Sullivan tickets and 400 Flanagan tickets.

#28e#29 Buy 100 Sullivan tickets and 800 Flanagan tickets.

CHAPTER 12 Uncertainty 230

Topic,Uncertainty Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,B

12.27 Clancy has $4,800,He plans to bet on a boxing matchbetween Sullivan and Flanagan.

He #0Cnds that he can buy coupons for $6 that will pay o#0B $10 each if Sullivan wins,He also #0Cnds

in another store some coupons that will pay o#0B $10 if Flanagan wins,The Flanagan tickets cost

$4 each,Clancy believes that the two #0Cghters eachhave a probabilityof1=2of winning,Clancy is

a risk averter who tries to maximize the expected value of the natural log of his wealth,Whichof

the following strategies would maximize his expected utility?

#28a#29 Don't gamble at all.

#28b#29 Buy 400 Sullivan tickets and 600 Flanagan tickets.

#28c#29 Buy exactly as many Flanagan tickets as Sullivan tickets.

#28d#29 Buy 200 Sullivan tickets and 300 Flanagan tickets.

#28e#29 Buy 200 Sullivan tickets and 600 Flanagan tickets.

Topic,Uncertainty Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,C

12.28 Tom Cruiser's car is worth $100,000,But Tom is careless and leaves the top down and

the keys in the ignition,Consequently his car will be stolen with probability,5,If it is stolen he

will never get it back,Tom has $100,000 in other wealth and his von Neumann-Morgenstern utility

function for wealth is u#28w#29=ln#28w#29,Suppose that Tom can buy $K worth of insurance at a price of

$:6K.Howmuch insurance will Tom buy?

#28a#29 $0.

#28b#29 $100,000.

#28c#29 more than $0 but less than $50,000.

#28d#29 more than $50,000 but less than $100,000.

#28e#29 exactly $50,000.

Essay Uncertainty

Topic,Uncertainty Di#0Eculty,2

#25 Correct Responses,0 Discrimination Index,0

12.1 Gaston Gourmand loves good food,Due to an unusual ailment,he has a probabilityof1=4

of losing his sense of smell,whichwould greatly reduce his enjoyment of food,Gaston #0Cnds an

insurance company that will sell him "insurance" where he gets $3x if he loses his smell and pays

$x if he doesn't,He can also buy "negative insurance" where he pays $3x if he loses his sense of

smell and gets x dollars if he doesn't,Gaston says,"Money will be only half as importanttomeif

I lose my sense of smell." If we look at his expected utility function,we see what he means,Where

c

1

is his consumption if he retains his sense of smell and c

2

is his income if he loses his sense of

smell,Gaston has the expected utility function U#28c

1;c

2

#29=3=4c

1=2

1

+1=8c

1=2

2

,What insurance should

he buy?

Answer,Negative insurance so that his wealth is 4 times as large if he doesn't lose his smell than

if he does.

Topic,Uncertainty Di#0Eculty,2

#25 Correct Responses,0 Discrimination Index,0

12.2 Oliver takes his wealth of $1000 to a casino,He can bet as muchashelikes on the toss of

a coin,but the "house" takes a cut,If Oliver bets $x on heads,then if heads comes up,he gets

$:8x; and if tails comes up he pays $x,Similarly if he bets $x on tails and if tails comes up,he wins

$:8x; and if heads comes up he pays $x,Draw a graph with dollars contingent on heads and dollars

contingent on tails on the two axes,Show Oliver's budget constraint,Oliver is an expected utility

maximizer with the utility function U#28h;t#29=1=2h

2

+1=2t

2

where h is his wealth if heads comes up

and t is his wealth if tails comes up,Draw the highest indi#0Berence curve that Oliver can reach with

his budget,What bets if anydoeshemake?

Answer,Budget kinks at #281000;1000#29;it meets the axes at #281800;0#29 and #280;1800#29,Indi#0Berence curves

are quarter circles,Oliver will gamble his entire wealth,either betting it all on heads or all on tails.

Topic,Uncertainty Di#0Eculty,3

#25 Correct Responses,0 Discrimination Index,0

12.3 Linus Piecewise is an expected utility maximizer,There are twoevents,H and T; which

eachhave probability 1=2,Linus's preferences over lotteries in which his wealth is h if Event H

happens and t if Event T happens are representable by the utility function U#28h;t#29=u#28h#29=2+u#28t#29=2.

The function u takes the following form,For any x; u#28x#29=xif x#3C100 and u#28x#29 = 100 + x=2 if x

is greater than or equal to 100,Draw a graph showing the indi#0Berence curves for Linus that pass

through a#29 the point #2850;0#29 b#29 the point #2850;100#29 c#29 the point #28100;100#29 d#29 the point #28150;100#29.

Answer,Curve a is a line with slope,1,Curve b has 3 linear segments,a line from#28100;50#29 to

#2850;100#29; a line with slope,2 to the left of #2850;100#29; and a line with slope,1=2 to the rightof

#28100;50#29,Curve c has two segments,a line with slope,2 going to the left and a line with slope

,1=2 to the rightof#28100;100#29,Curve d has 3 segments,a line from #28150;100#29 to #28100;150#29; and lines

from #28150;100#29 to #28200;0#29 and from #280;200#29 to #28100;150#29.

CHAPTER 12 Uncertainty 232

Topic,Uncertainty Di#0Eculty,2

#25 Correct Responses,0 Discrimination Index,0

12.4 The "certainty equivalent" of a gamble is de#0Cned to be an the amount of money whichif

you were promised it with certaintywould be indi#0Berent to the gamble,a#29 If an expected utility

maximizer has a von Neuman Morgenstern utility function U#28W#29=W

1=2

#28where W is wealth#29 and

if the probabilityofevents 1 and 2 are both 1=2; write a formula for the certainty equivalentofa

gamble that gives you x if event 1 happens and y if event 2 happens,b#29 Generalize your formula in

part #28a#29 to the case where the probabilityofevent1ispand the probabilityofevent2is1,p.c#29

Generalize the formula in part #28a#29 to the case where U#28W#29=W

a

for a#3E0.

Answer,a#29certainty equivalentis#281=2x

1=2

+1=2y

1=2

#29

2

b#29#28px

1=2

+#281,p#29y

1=2

#29

2

c#29#281=2x

a

+1=2y

a

#29

f

1=ag

Chapter 13

True-False Risky Assets

Topic,Risky Assets Di#0Eculty,1

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,False

13.1 If two assets have the same expected rate of return but di#0Berentvariances,a risk-averse

investor should always choose the one with the smaller variance,no matter what other assets she

holds.

Topic,Risky Assets Di#0Eculty,1

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,True

13.2 If the returns on two assets are negatively correlated,then a portfolio that contains some

of each will have less variance in its return per dollar invested than either asset has by itself.

Topic,Risky Assets Di#0Eculty,1

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,True

13.3 If mean is plotted on the horizontal axis and variance on the vertical,then indi#0Berence

curves for a risk-averter must slope upwards and to the right.

Topic,Risky Assets Di#0Eculty,1

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,True

13.4 If you invest half your money in a risk-free asset and half your money in a risky asset such

that the standard deviation of the return on the risky asset is s; then the standard deviation of the

return on your investment portfolio is s=2.

Multiple Choice Risky Assets

Topic,Risky Assets Di#0Eculty,2

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,D

13.1 Firm A sells lemonade and #0Crm B sells hot chocolate,If you invest $100 if Firm A,in

one year you will get back $#2830+ T#29 where T is the average temperature #28Fahrenheit#29 during the

summer,If you invest $100 in #0Crm B;in one year you will get back $#28150,T#29 where T is the average

temperature during the summer,The expected value of T is 70 and the standard deviation of T is

10,If you invest $50 in Firm A and $50 in Firm B; what is the standard deviation of your return

on your investment?

#28a#29 10

#28b#29 20

#28c#29 5

#28d#29 0

#28e#29 None of the above.

Topic,Risky Assets Di#0Eculty,2

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,A

13.2 A risk-free asset is available at 5#25 interest,Another asset is available with a mean rate

of return of 15#25,but with a standard deviation of 5#25,An investor is considering an investment

portfolio consisting of some of each stock,On a graph with standard deviation on the horizontal

axis and mean on the vertical axis,the budget line that expresses the alternative combinations of

mean return and standard deviation possible with portfolios of these assets is:

#28a#29 a straight line with slope 2.

#28b#29 a straight line with slope,3.

#28c#29 a straight line with increasing slope as you move left.

#28d#29 a straight line with slope,1.

#28e#29 a straight line with slope,1=3.

MULTIPLE CHOICE 235

Topic,Risky Assets Di#0Eculty,2

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,A

13.3 Marvin is an expected utility maximizer,He chooses his portfolio so as to maximize the

expected value of 2;000;000x,x

2

.Ifmis the mean of Marvin's income and s is the standard devi-

ation,we can write Marvin's income as a function of mean and standard deviation in the following

way:

#28a#29 U =2;000;000m,s

2

.

#28b#29 U =2;000;000m,s.

#28c#29 U = m,s=2;000;000.

#28d#29 U =2;000;000+s.

#28e#29 None of the above.

Topic,Risky Assets Di#0Eculty,1

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,E

13.4 You have been hired as a portfolio manager for a stock brokerage,Your #0Crst job is to invest

$100,000 in a portfolio of two assets,The #0Crst asset is a "safe asset" with a sure return of 4#25

interest,The second asset is a risky asset with a 26#25 expected rate of return,but the standard

deviation of this return is 10#25,Your clientwants a portfolio with as high a rate of return as

possible consistent with a standard deviation no larger than 4#25,Howmuch of her money do you

invest in the safe asset?

#28a#29 $22,000

#28b#29 $40,000

#28c#29 $64,000

#28d#29 $36,000

#28e#29 $60,000

CHAPTER 13 Risky Assets 236

Topic,Risky Assets Di#0Eculty,1

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,B

13.5 Bill owns an export business,The expected pro#0Ct from his business is $100,000 a year,For

every 1#25 increase in the value of the Japanese yen relative to the dollar,its pro#0Cts increase by

$20,000,Bill plans to buy one of two #0Crms,One is an import business which returns an expected

pro#0Ct of $70,000,For every 1#25 increase in the value of the Japanese yen relative to the dollar,the

pro#0Cts of this #0Crm shrink by $5,000,The second is a safe domestic #0Crm which is certain to yield

him $70,000 a year,The two #0Crms cost the same,If Bill is risk averse:

#28a#29 he should buy the domestic #0Crm.

#28b#29 he should buy the import #0Crm.

#28c#29 he should buy half of each of these two #0Crms.

#28d#29 it doesn't matter which he buys.

#28e#29 he should buy 80#25 of the domestic #0Crm and 20#25 of the import #0Crm.

Topic,Risky Assets Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,C

13.6 Suppose that Ms,Lynch in Problem 13.1 can make up her portfolio using a risk-free asset

that o#0Bers a sure-#0Cre rate of return of 15#25 and a risky asset with expected rate of return 30#25,

with standard deviation 5,If she chooses a portfolio with expected rate of return 30#25,then the

standard deviation of her return on this portfolio will be:

#28a#29 2.50#25.

#28b#29 8#25.

#28c#29 5#25.

#28d#29 10#25.

#28e#29 None of the above.

MULTIPLE CHOICE 237

Topic,Risky Assets Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,C

13.7 Suppose that Ms,Lynch in Problem 13.1 can make up her portfolio using a risk-free asset

that o#0Bers a sure-#0Cre rate of return of 15#25 and a risky asset with expected rate of return 25#25,

with standard deviation 5,If she chooses a portfolio with expected rate of return 20#25,then the

standard deviation of her return on this portfolio will be:

#28a#29 1.25#25.

#28b#29 5.50#25.

#28c#29 2.50#25.

#28d#29 5#25.

#28e#29 None of the above.

Topic,Risky Assets Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,A

13.8 Suppose that Fenner Smith of Problem 13.2 must divide his portfolio between two assets,

one of which gives him an expected rate of return of 10 with zero standard deviation and one of

which gives him an expected rate of return of 30 and has a standard deviation of 5,He can alter

the expected rate of return and the variance of his portfolio bychanging the proportions in which

he holds the two assets,If we draw a "budget line" with expected return on the vertical axis and

standard deviation on the horizontal axis,depicting the combinations that Smith can obtain,the

slope of this budget line is:

#28a#29 4.

#28b#29,4.

#28c#29 2.

#28d#29,2.

#28e#29 6.

CHAPTER 13 Risky Assets 238

Topic,Risky Assets Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,A

13.9 Suppose that Fenner Smith of Problem 13.2 must divide his portfolio between two assets,

one of which gives him an expected rate of return of 15 with zero standard deviation and one of

which gives him an expected rate of return of 45 and has a standard deviation of 15,He can alter

the expected rate of return and the variance of his portfolio bychanging the proportions in which

he holds the two assets,If we draw a "budget line" with expected return on the vertical axis and

standard deviation on the horizontal axis,depicting the combinations that Smith can obtain,the

slope of this budget line is:

#28a#29 2.

#28b#29,2.

#28c#29 1.

#28d#29,1.

#28e#29 3.

Essay Risky Assets

Topic,Risky Assets Di#0Eculty,3

#25 Correct Responses,0 Discrimination Index,0

13.1 If you invest $100 now in #0Crm A,in one year you will get back $#2830 + T#29 where T is the

average temperature during the next summer,If you invest $100 nowin#0CrmB; in one year you

will get back $#28180,T#29,The expected value of T is 70 and the standard deviation of T is 10,a#29

Draw a graph showing the combinations of expected return and standard deviation that you can

haveby dividing $100 between stock in A and stockinB,#28Hint,Expected value has the property

that E#28ax + b#29=aE#28x#29+band standard deviation has the property that SD#28ax + b#29=#5B#28absolute

value of a#29 times SD#28x#29#5D + b.#29 b#29 What is the expected value and standard deviation of the safest

investment strategy you can makeby this means? #28c#29 What is the highest expected value you can

achieve?

Answer,a#29 The locus includes the line segment from #28S;E#29=#280;105#29 to #28S;E#29 = #2810;110#29 as well

as the line segment from #280;105#29 to #2810;100#29,b#29105 and 0 c#29110.

Chapter 14

True-False Consumer's Surplus

Topic,Consumer's Surplus Di#0Eculty,1

#25 Correct Responses,63 Discrimination Index,22

Correct Answer,False

14.1 Consumer's surplus is another name for excess demand.

Topic,Consumer's Surplus Di#0Eculty,1

#25 Correct Responses,85 Discrimination Index,27

Correct Answer,True

14.2 There is a positive consumer surplus when the total amount one pays for something is less

than the amount one would be willing to pay rather than do without it altogether.

Topic,Consumer's Surplus Di#0Eculty,1

#25 Correct Responses,74 Discrimination Index,46

Correct Answer,False

14.3 The equivalentvariation in income from a tax is the amount of extra income that a consumer

would need in order to be as well o#0B after the tax is imposed as he was originally.

Topic,Consumer's Surplus Di#0Eculty,2

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,True

14.4 With quasilinear preferences,the equivalentvariation and the compensating variation in

income due to a tax are the same.

Topic,Consumer's Surplus Di#0Eculty,1

#25 Correct Responses,76 Discrimination Index,17

Correct Answer,False

14.5 Producer's surplus at price p is the vertical distance between the supply curve and the

demand curve at price p.

TRUE-FALSE 241

Topic,Consumer's Surplus Di#0Eculty,2

#25 Correct Responses,84 Discrimination Index,19

Correct Answer,True

14.6 If somebody is buying 15 units of x and the price of x falls by $2,then that person's net

consumer surplus must increase by at least $30.

Topic,Consumer's Surplus Di#0Eculty,2

#25 Correct Responses,84 Discrimination Index,19

Correct Answer,True

14.7 If somebody is buying 15 units of x and the price of x falls by $4,then that person's net

consumer surplus must increase by at least $60.

Topic,Consumer's Surplus Di#0Eculty,1

#25 Correct Responses,83 Discrimination Index,20

Correct Answer,False

14.8 If there is Cobb-Douglas utility,compensating and equivalentvariation are the same.

Topic,Consumer's Surplus Di#0Eculty,2

#25 Correct Responses,62 Discrimination Index,15

Correct Answer,False

14.9 Bernice has the utility function U#28x;y#29=minfx;yg,The price of x used to be 3,but rose to

4,The price of y remained at 1,Her income is 12,The price increase was as bad for her as a loss

of $3 in income.

Topic,Consumer's Surplus Di#0Eculty,0

#25 Correct Responses,73 Discrimination Index,27

Correct Answer,False

14.10 If there is a price increase for a good that Josephine consumes,her compensating variation is

the change in her income that allows her to purchase her new optimal bundle at the original prices.

Topic,Consumer's Surplus Di#0Eculty,0

#25 Correct Responses,73 Discrimination Index,27

Correct Answer,False

14.11 If there is a price increase for a good that Elsie consumes,her compensating variation is

the change in her income that allows her to purchase her new optimal bundle at the original prices.

CHAPTER 14 Consumer's Surplus 242

Topic,Consumer's Surplus Di#0Eculty,2

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,True

14.12 Bernice's utility function is U#28x;y#29=minfx;yg,The price of x used to be 3,but rose to 4.

The price of y remained at 1,Her income is 12,She would need an income of $15 to be able to

a#0Bord a bundle as good as her old one at the new prices.

Multiple Choice Consumer's Surplus

Topic,Consumer's Surplus Di#0Eculty,1

#25 Correct Responses,56 Discrimination Index,40

Correct Answer,C

14.1 Ella's utility function is minf4x;yg,If the price of x is 15 and the price of y is 20,how

much money would she need to be able to purchase a bundle that she likes as well as the bundle

#28x;y#29=#285;8#29?

#28a#29 92

#28b#29 198

#28c#29 190

#28d#29 235

#28e#29 47

Topic,Consumer's Surplus Di#0Eculty,1

#25 Correct Responses,56 Discrimination Index,40

Correct Answer,C

14.2 Ella's utility function is minf2x;yg,If the price of x is 15 and the price of y is 10,how

much money would she need to be able to purchase a bundle that she likes as well as the bundle

#28x;y#29 = #2810;8#29?

#28a#29 67

#28b#29 148

#28c#29 140

#28d#29 230

#28e#29 70

CHAPTER 14 Consumer's Surplus 244

Topic,Consumer's Surplus Di#0Eculty,3

#25 Correct Responses,33 Discrimination Index,32

Correct Answer,E

14.3 Reginald is fond of cigars,His utility function is U#28x;c#29=x+10c,:5c

2

where c is the number

of cigars he smokes per week and x is the money that he spends on consumption of other goods.

Reginald has $200 a week to spend,Cigars used to cost him $1 each,but their price wentupto$2

each,This price increase was as bad for him as losing the following amount of income:

#28a#29 $5

#28b#29 $7.25

#28c#29 $9

#28d#29 $8

#28e#29 $8.50

Topic,Consumer's Surplus Di#0Eculty,2

#25 Correct Responses,62 Discrimination Index,55

Correct Answer,B

14.4 Sam's utility function is U#28x;y#29=2x+ywhere x is the number of x

0

s he consumes per week

and y is the number of y

0

s he consumes per week,Sam has $200 a week to spend,The price of x is

4,Sam currently doesn't consume any y,Sam has received an invitation to join a club devoted to

consumption of y,If he joins the club,Sam can get a discount on the purchase of y,If he belonged

to the club he could buy y for $1 a unit,Howmuch is the most Sam would be willing to payto

join this club?

#28a#29 nothing

#28b#29 $100 a week

#28c#29 $50aweek

#28d#29 $40 a week

#28e#29 None of the above.

MULTIPLE CHOICE 245

Topic,Consumer's Surplus Di#0Eculty,2

#25 Correct Responses,56 Discrimination Index,77

Correct Answer,A

14.5 Yoram's utility function is U#28x;y#29=2x+5y,The price of x is $4 and the price of y is

$15,Yoram has $150 a week to spend on x and y.Yoram is o#0Bered a chance to join a club of

y-consumers,If he joins,he can get y at a price of $10,What is the most that Yoram would be

willing to pay to join the club?

#28a#29 nothing

#28b#29 $30 a week

#28c#29 $50aweek

#28d#29 $75 a week

#28e#29 None of the above.

Topic,Consumer's Surplus Di#0Eculty,2

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,E

14.6 Minnie gets 4 tapes for her birthday,but they are currently useless to her because she

doesn't have a tape recorder and she cannot return them for a refund,Her utility function is

U#28x;y;z#29=x+f#28y#29z

:5

where z is the number of tapes she has,y is the number of tape recorders

she has,and x is the money she has to spend on other stu#0B,Let f#28y#29=0if y#3C1and f#28y#29=7

otherwise,The price of tapes is $7.99,What is her reservation price for a tape recorder?

#28a#29 20

#28b#29 7

#28c#29 24

#28d#29 0

#28e#29 None of the above.

CHAPTER 14 Consumer's Surplus 246

Topic,Consumer's Surplus Di#0Eculty,1

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,A

14.7 Izaak likes to eat pizza and to #0Csh,The more #0Cshing he does the happier he is,up to 8

hours a day,If he #0Cshes longer than 8 hours he gets a sore back and is less happy than if he hadn't

#0Cshed at all,For y less than or equal to 8,his utility function is U#28x;y#29=x+4ywhere x is money

spent on pizza and y is hours per dayspent #0Cshing,His income is $45 a day and he has no expenses

other than pizza,The Bureau of Fisheries has just decided to allow people without #0Cshing licenses

to #0Csh only 3 hours a day,But if you buy a #0Cshing license,you can #0Csh as many hours as you wish.

Howmuch is Izaak willing pay for a license?

#28a#29 $20

#28b#29 $32

#28c#29 $23

#28d#29 $18

#28e#29 0.

Topic,Consumer's Surplus Di#0Eculty,1

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,A

14.8 Izaak likes to eat pizza and to #0Csh,The more #0Cshing he does the happier he is,up to 8

hours a day,If he #0Cshes longer than 8 hours he gets a sore back and is less happy than if he hadn't

#0Cshed at all,For y less than or equal to 8,his utility function is U#28x;y#29=x+4ywhere x is money

spent on pizza and y is hours per dayspent #0Cshing,His income is $41 a day and he has no expenses

other than pizza,The Bureau of Fisheries has just decided to allow people without #0Cshing licenses

to #0Csh only 4 hours a day,But if you buy a #0Cshing license,you can #0Csh as many hours as you wish.

Howmuch is Izaak willing pay for a license?

#28a#29 $16

#28b#29 $32

#28c#29 $19

#28d#29 $14

#28e#29 0.

MULTIPLE CHOICE 247

Topic,Consumer's Surplus Di#0Eculty,2

#25 Correct Responses,51 Discrimination Index,26

Correct Answer,D

14.9 Ellsworth's utility function is U#28x;y#29=minfx;yg,Ellsworth has $150 and the price of x

and the price of y are both 1,Ellsworth's boss is thinking of sending him to another town where

the price of x is 1 and the price of y is 2,The boss o#0Bers no raise in pay,Ellsworth,who under-

stands compensating and equivalentvariation perfectly,complains bitterly.Hesays that although

he doesn't mind moving for its own sake and the new town is just as pleasant as the old,having to

move is as bad as a cut in pay of $A,He also says he wouldn't mind moving if when he moved he

got a raise of $B,What are A and B?

#28a#29 A =50B=50

#28b#29 A =75B=75

#28c#29 A =75B= 100

#28d#29 A =50B=75

#28e#29 none of the above

Topic,Consumer's Surplus Di#0Eculty,1

#25 Correct Responses,22 Discrimination Index,40

Correct Answer,A

14.10 Holly consumes only goods X and Y,Her income is 600 and her utility function is

U#28x;y#29=maxfx;yg where x is the number of units of X she consumes and y is the number of

units of Y she consumes,The price of good Y is 1,The price of good X used to be 1=2; but is now

2,The equivalentvariation of this price change for Holly is:

#28a#29 300.

#28b#29 600.

#28c#29 150.

#28d#29 800.

#28e#29 None of the above.

CHAPTER 14 Consumer's Surplus 248

Topic,Consumer's Surplus Di#0Eculty,1

#25 Correct Responses,22 Discrimination Index,40

Correct Answer,A

14.11 Zelda consumes only goods X and Y,Her income is 400 and her utility function is

U#28x;y#29=maxfx;yg where x is the number of units of X she consumes and y is the number of units

of Y she consumes,The price of good Y is 1,The price of good X used to be 1=4; but is now2.

The equivalentvariation of this price change for Zelda is:

#28a#29 300.

#28b#29 1,200.

#28c#29 75.

#28d#29 2,000.

#28e#29 None of the above.

Topic,Consumer's Surplus Di#0Eculty,2

#25 Correct Responses,53 Discrimination Index,47

Correct Answer,D

14.12 Poindexter's utility function is U#28x;y#29=minfx+2y;3x+yg where x is butter and y is guns.

If the price of butter is 4 and the price of guns is 5,what would it cost Poindexter to buy the

cheapest bundle that he likes as well as 4 units of butter and 3 units of guns?

#28a#29 31

#28b#29 32

#28c#29 29

#28d#29 28

#28e#29 None of the above.

MULTIPLE CHOICE 249

Topic,Consumer's Surplus Di#0Eculty,3

#25 Correct Responses,82 Discrimination Index,41

Correct Answer,D

14.13 Albin has quasilinear preferences and he loves pretzels,His inverse demand function for

pretzels is p#28x#29=49,6x; where x is the number of pretzels that he consumes,He is currently

consuming 8 pretzels at a price of $1 per pretzel,If the price of pretzels rises to $7 per pretzel,the

change in Albin's consumer surplus is:

#28a#29,$90.

#28b#29,$56.

#28c#29,$42.

#28d#29,$45.

#28e#29,$42.

Topic,Consumer's Surplus Di#0Eculty,2

#25 Correct Responses,44 Discrimination Index,49

Correct Answer,D

14.14 Bernice's preferences can be represented by the utility function,U#28x;y#29=minfx;yg,She

faces prices,#282;1#29; and her income is 12,If prices change to #283;1#29; then:

#28a#29 the compensating variation equals the equivalentvariation.

#28b#29 the compensating variation is $2 greater than the equivalentvariation.

#28c#29 the compensating variation is $2 smaller than the equivalentvariation.

#28d#29 the compensating variation is $1 greater than the equivalentvariation.

#28e#29 there is not enough information to determine which is larger.

Topic,Consumer's Surplus Di#0Eculty,1

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,C

14.15 At the initial prices,Teodoro is a net seller of apples and a net buyer of bananas,If the

price of apples decreases and the price of bananas does not change:

#28a#29 the compensating variation must be negative and the equivalentvariation positive.

#28b#29 the compensating variation must be positive and the equivalentvariation negative.

#28c#29 both the compensating variation and the equivalentvariation must be positive.

#28d#29 both the compensating variation and the equivalentvariation must be negative.

#28e#29 the compensating variation must be negative,but the equivalentvariation could be of either sign.

CHAPTER 14 Consumer's Surplus 250

Topic,Consumer's Surplus Di#0Eculty,1

#25 Correct Responses,74 Discrimination Index,45

Correct Answer,B

14.16 Sam has quasilinear preferences and his demand function for x is D#28p#29=15,p=3,The

price of x is initially $15 per unit and increases to $24 per unit,Sam's change is consumer surplus

is the closest to:

#28a#29,168.

#28b#29,76.

#28c#29,27.

#28d#29 75.

#28e#29 Sam won't consume x at either of the prices.

Topic,Consumer's Surplus Di#0Eculty,1

#25 Correct Responses,87 Discrimination Index,30

Correct Answer,B

14.17 Sir Plus has a demand function for mead that is given by the equation D#28p#29 = 100,p.If

the price of mead is 65,howmuch is Sir Plus's net consumer surplus?

#28a#29 35

#28b#29 612.50

#28c#29 1,225

#28d#29 306.25

#28e#29 4,550

Topic,Consumer's Surplus Di#0Eculty,1

#25 Correct Responses,87 Discrimination Index,30

Correct Answer,B

14.18 Sir Plus has a demand function for mead that is given by the equation D#28p#29 = 100,p.If

the price of mead is 75,howmuch is Sir Plus's net consumer surplus?

#28a#29 25

#28b#29 312.50

#28c#29 625

#28d#29 156.25

#28e#29 6,000

MULTIPLE CHOICE 251

Topic,Consumer's Surplus Di#0Eculty,2

#25 Correct Responses,70 Discrimination Index,83

Correct Answer,A

14.19 Quasimodo from your workbook has the utility function U#28x;m#29 = 100x,x

2

=2+mwhere x

is his consumption of earplugs and m is money left over to spend on other stu#0B,If he has $10,000

to spend on earplugs and other stu#0B,and if the price of earplugs rises from $50 to 65,then his net

consumer's surplus:

#28a#29 falls by 637.50.

#28b#29 falls by 2,637.50.

#28c#29 falls by 525.

#28d#29 increases by 318.75.

#28e#29 increases by 1,275.

Topic,Consumer's Surplus Di#0Eculty,2

#25 Correct Responses,70 Discrimination Index,83

Correct Answer,A

14.20 Quasimodo from your workbook has the utility function U#28x;m#29 = 100x,x

2

=2+mwhere x

is his consumption of earplugs and m is money left over to spend on other stu#0B,If he has $10,000

to spend on earplugs and other stu#0B,and if the price of earplugs rises from $50 to 90,then his net

consumer's surplus:

#28a#29 falls by 1,200.

#28b#29 falls by 3,200.

#28c#29 falls by 400.

#28d#29 increases by 600.

#28e#29 increases by 2,400.

CHAPTER 14 Consumer's Surplus 252

Topic,Consumer's Surplus Di#0Eculty,2

#25 Correct Responses,80 Discrimination Index,50

Correct Answer,B

14.21 Bernice has the utility function u#28x;y#29=minfx;yg where x is the number of pairs of ear-

rings she buys per week and y is the number of dollars per week she has left to spend on other

things,#28We allow the possibility that she buys fractional numbers of pairs of earrings per week.#29

If she originally had an income of $13 per week and was paying a price of $5 per pair of earrings,

then if the price of earrings rose to $8,the comp ensating variation of that price change #28measured

in dollars per w week#29 would be closest to:

#28a#29 $4.33.

#28b#29 $6.50.

#28c#29 $14.

#28d#29 $13.

#28e#29 $12.

Topic,Consumer's Surplus Di#0Eculty,2

#25 Correct Responses,80 Discrimination Index,50

Correct Answer,B

14.22 Bernice has the utility function u#28x;y#29=minfx;yg where x is the number of pairs of ear-

rings she buys per week and y is the number of dollars per week she has left to spend on other

things,#28We allow the possibility that she buys fractional numbers of pairs of earrings per week.#29

If she originally had an income of $11 per week and was paying a price of $3 per pair of earrings,

then if the price of earrings rose to $5,the comp ensating variation of that price change #28measured

in dollars per w week#29 would be closest to:

#28a#29 $3.67.

#28b#29 $5.50.

#28c#29 $12.

#28d#29 $11.

#28e#29 $10.

MULTIPLE CHOICE 253

Topic,Consumer's Surplus Di#0Eculty,2

#25 Correct Responses,60 Discrimination Index,45

Correct Answer,A

14.23 If Bernice #28whose utility function is minfx;yg where x is her consumption of earrings and

y is money left for other stu#0B#29 had an income of $ 12 and was paying a price of $9 for earrings

when the price of earrings went up to $14,then the equivalentvariation of the price change was:

#28a#29 $4.

#28b#29 $6.

#28c#29 $12.

#28d#29 $2.

#28e#29 $5.

Topic,Consumer's Surplus Di#0Eculty,2

#25 Correct Responses,60 Discrimination Index,45

Correct Answer,A

14.24 If Bernice #28whose utility function is minfx;yg where x is her consumption of earrings and

y is money left for other stu#0B#29 had an income of $ 12 and was paying a price of $3 for earrings

when the price of earrings went up to $7,then the equivalentvariation of the price change was:

#28a#29 $6.

#28b#29 $12.

#28c#29 $24.

#28d#29 $3.

#28e#29 $9.

Topic,Consumer's Surplus Di#0Eculty,2

#25 Correct Responses,70 Discrimination Index,82

Correct Answer,A

14.25 Lolita,the Holstein cow,has a utility function is U#28x;y#29=x,x

2

=2+ywhere x is her

consumption of cow feed and y is her consumption of hay,If the price of cow feed is 0.40,the price

of hay is 1,and her income is 3,and if Lolita chooses the combination of hay and cow feed that

she likes best from among those combinations she can a#0Bord,her utility will be:

#28a#29 3.18.

#28b#29 2.60.

#28c#29 0.18.

#28d#29 4.68.

#28e#29 1.68.

CHAPTER 14 Consumer's Surplus 254

Topic,Consumer's Surplus Di#0Eculty,2

#25 Correct Responses,70 Discrimination Index,82

Correct Answer,A

14.26 Lolita,the Holstein cow,has a utility function is U#28x;y#29=x,x

2

=2+ywhere x is her

consumption of cow feed and y is her consumption of hay,If the price of cow feed is 0.10,the price

of hay is 1,and her income is 5,and if Lolita chooses the combination of hay and cow feed that

she likes best from among those combinations she can a#0Bord,her utility will be:

#28a#29 5.40.

#28b#29 4.90.

#28c#29 0.40.

#28d#29 7.90.

#28e#29 2.90.

Topic,Consumer's Surplus Di#0Eculty,2

#25 Correct Responses,28 Discrimination Index,10

Correct Answer,B

14.27 The number of "Quayle in 96" buttons demanded on a certain university campus is given

by D#28p#29 = 100,p; where p is the price of buttons measured in pennies,The supply function is

S#28p#29=p,The current administration manages to enforce a price ceiling of 40 cents per button.

The e#0Bect on net consumers' surplus is:

#28a#29 an increase of $5.50.

#28b#29 an increase of $3.50.

#28c#29 no change.

#28d#29 a decrease of $3.50.

#28e#29 a decrease of $5.50.

MULTIPLE CHOICE 255

Topic,Consumer's Surplus Di#0Eculty,2

#25 Correct Responses,52 Discrimination Index,27

Correct Answer,B

14.28 Chen's utility function is U#28x;y#29=x+6y,y

2

=2;where x is the number of x

0

s he consumes

per week and y is the number of y

0

s he consumes per week,Chen has $200 a week to spend,The

price of x is 1,The price of y is currently $5 per unit,Chen has received an invitation to join a

club devoted to consumption of y,If he joins the club,Chen can get a discount on the purchase of

y,If he belonged to the club he could buy y for $1 a unit,Howmuch is the most Chen would be

willing to pay to join this club?

#28a#29 8

#28b#29 12

#28c#29 20

#28d#29 24

#28e#29 None of the above.

Topic,Consumer's Surplus Di#0Eculty,2

#25 Correct Responses,52 Discrimination Index,27

Correct Answer,B

14.29 Peter's utility function is U#28x;y#29=x+10y,y

2

=2;where x is the number of x

0

s he consumes

per week and y is the number of y

0

s he consumes per week,Peter has $200 a week to spend,The

price of x is 1,The price of y is currently $3 per unit,Peter has received an invitation to join a

club devoted to consumption of y,If he joins the club,Peter can get a discount on the purchase of

y,If he belonged to the club he could buy y for $1 a unit,Howmuch is the most Peter would be

willing to pay to join this club?

#28a#29 2

#28b#29 16

#28c#29 18

#28d#29 32

#28e#29 None of the above.

Essay Consumer's Surplus

Topic,Consumer's Surplus Di#0Eculty,3

#25 Correct Responses,0 Discrimination Index,0

14.1 The "indirect utility function" for a consumer with a utility function U#28x1;x2#29 is de#0Cned

to be a function V #28p1;p2;M#29 such that V#28p1;p2;M#29 is the maximum of U#28x1;x2#29 subject to the

constraint that the consumer can a#0Bord #28x1;x2#29 at the prices #28p1;p2#29 with income M,a#29 Find the

indirect utility function for someone with the utility function U#28x;y#29=2x+y.b#29Find the indirect

utility function for someone with the utility function U#28x;y#29=minf2x;yg,Explain howyou got

your answers.

Answer,a#29 M=#28minfp1=2;p2g,b#29M=#282p1+p2#29.

Chapter 15

True-False Market Demand

Topic,Market Demand Di#0Eculty,1

#25 Correct Responses,86 Discrimination Index,5

Correct Answer,True

15.1 The inverse demand curve P#28x#29 foragoodxmeasures the price per unit at which the quan-

tity x would be demanded.

Topic,Market Demand Di#0Eculty,2

#25 Correct Responses,37 Discrimination Index,0

Correct Answer,False

15.2 In general,aggregate demand depends only on prices and total income and not on income

distribution.

Topic,Market Demand Di#0Eculty,1

#25 Correct Responses,85 Discrimination Index,20

Correct Answer,True

15.3 If consumer 1 has the demand function x

1

=1;000,2p and consumer 2 has the demand

function x

2

= 500,p; then the aggregate demand function for an economy with just these two

consumers would be x =1;500,3p for p#3C500.

Topic,Consumer's Surplus Di#0Eculty,1

#25 Correct Responses,82 Discrimination Index,23

Correct Answer,True

15.4 If a consumer has to pay his reservation price for a good,then he gets no consumer surplus

from purchasing it.

Topic,Market Demand Di#0Eculty,1

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,True

15.5 If a price changes,then changes in consumption at the intensive margin are changes that

happen because consumers alter the amounts that they consume,but do not either stop consuming

or start consuming the good.

CHAPTER 15 Market Demand 258

Topic,Elasticity Di#0Eculty,1

#25 Correct Responses,86 Discrimination Index,25

Correct Answer,False

15.6 If the demand curve is a linear function of price,then the price elasticity of demand is the

same at all prices.

Topic,Elasticity Di#0Eculty,2

#25 Correct Responses,67 Discrimination Index,21

Correct Answer,False

15.7 If the demand function is q =3m=p; where m is income and p is price,then the absolute

value of the price elasticity of demand decreases as price increases.

Topic,Market Demand Di#0Eculty,1

#25 Correct Responses,48 Discrimination Index,10

Correct Answer,False

15.8 If the elasticity of demand curve for millet is,0:50 at all prices higher than the current

price,wewould expect that when bad weather reduces the size of the millet crop,total revenue of

millet producers will fall.

Topic,Market Demand Di#0Eculty,1

#25 Correct Responses,48 Discrimination Index,10

Correct Answer,False

15.9 If the elasticity of demand curve for buckwheat is,0:75 at all prices higher than the current

price,wewould expect that when bad weather reduces the size of the buckwheat crop,total revenue

of buckwheat producers will fall.

Topic,Market Demand Di#0Eculty,2

#25 Correct Responses,51 Discrimination Index,47

Correct Answer,False

15.10 If the equation for the demand curveisq=50,1p; then the ratio of marginal revenue to

price is constant as price changes.

TRUE-FALSE 259

Topic,Market Demand Di#0Eculty,2

#25 Correct Responses,51 Discrimination Index,47

Correct Answer,False

15.11 If the equation for the demand curveisq=40,2p; then the ratio of marginal revenue to

price is constant as price changes.

Topic,Market Demand Di#0Eculty,3

#25 Correct Responses,36 Discrimination Index,0

Correct Answer,True

15.12 If a rational consumer must consume either zero or one unit of a good,then an increase in

the price of that good with no change in income or in other prices can never lead to an increase in

the consumer's demand for it.

Topic,Market Demand Di#0Eculty,1

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,False

15.13 In the reservation price model,either aggregate demand is zero or everyone demands one

unit of the good.

Topic,Market Demand Di#0Eculty,1

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,False

15.14 The La#0Ber e#0Bect occurs only if there is a backward-bending labor supply curve.

Topic,Market Demand Di#0Eculty,2

#25 Correct Responses,64 Discrimination Index,4

Correct Answer,True

15.15 If the demand curvewere plotted on graph paper with logarithmic scales on both axes,

then its slope would be the elasticity of demand.

Topic,Market Demand Di#0Eculty,1

#25 Correct Responses,71 Discrimination Index,8

Correct Answer,True

15.16 The market demand curve is simply the horizontal sum of the individual demand curves.

CHAPTER 15 Market Demand 260

Topic,Market Demand Di#0Eculty,1

#25 Correct Responses,72 Discrimination Index,15

Correct Answer,False

15.17 The demand curve is inelastic for inferior goods and elastic for normal goods.

Topic,Market Demand Di#0Eculty,1

#25 Correct Responses,56 Discrimination Index,20

Correct Answer,True

15.18 Marginal revenue is equal to price if the demand curve is horizontal.

Topic,Market Demand Di#0Eculty,2

#25 Correct Responses,45 Discrimination Index,30

Correct Answer,False

15.19 If the amount of money that people are willing to spend on a good stays the same when

its price doubles,then demand for that good must have a price elasticity of demand smaller in

absolute value than one.

Topic,Elasticity Di#0Eculty,1

#25 Correct Responses,38 Discrimination Index,0

Correct Answer,True

15.20 If the price elasticity of demand for a normal good is constant,then a price increase of 10

cents will reduce demand by more if the original price is $1 than if the original price is $2.

Topic,Market Demand Di#0Eculty,1

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,True

15.21 The demand function for potatoes has the equation q =1;000,10p,As the price of potatoes

changes from 10 to 20,the absolute value of the price elasticity of demand for potatoes increases.

Topic,Elasticity Di#0Eculty,1

#25 Correct Responses,62 Discrimination Index,60

Correct Answer,True

15.22 If the demand curve for a good is given by the equation q =2=p; where q is quantity and p

is price,then at any positive price,the elasticity of demand will be,1.

TRUE-FALSE 261

Topic,Market Demand Di#0Eculty,2

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,True

15.23 If consumer 1 has the inverse demand function given by p =15,xand consumer 2 has

inverse demand function given by p =20,3x; then the total quantity demanded by the two con-

sumers is x =7when the price,p; is 11.

Topic,Market Demand Di#0Eculty,2

#25 Correct Responses,67 Discrimination Index,27

Correct Answer,False

15.24 The inverse demand for a good is given by p =60,2q,Suppose that the number of

consumers doubles,#28For each consumer in the market another consumer with an identical demand

function appears.#29 The demand curve shifts to the right,doubling demand at every price,while

the slope of the demand curve stays unchanged.

Topic,Market Demand Di#0Eculty,1

#25 Correct Responses,68 Discrimination Index,45

Correct Answer,False

15.25 If Castor's demand curve is described by q =40,pand Pollux's demand curve is given by

q =60,2p; then each of their demand curves will pass through the point q =20;p=20,Therefore

if they are the only two consumers in a market,the market demand curve will also pass through

q =20;p=20.

Topic,Elasticity Di#0Eculty,2

#25 Correct Responses,49 Discrimination Index,44

Correct Answer,False

15.26 If the price of broccoli falls by $3 per pound,then the demand for broccoli will rise by15

pounds,Therefore we can conclude that the demand for broccoli is elastic.

Topic,Elasticity Di#0Eculty,2

#25 Correct Responses,49 Discrimination Index,44

Correct Answer,False

15.27 If the price of squash falls by $2 per pound,then the demand for squash will rise by10

pounds,Therefore we can conclude that the demand for squash is elastic.

Multiple Choice Market Demand

Topic,Market Demand Di#0Eculty,1

#25 Correct Responses,77 Discrimination Index,34

Correct Answer,E

15.1 Apeckis1=4of a bushel,If the price elasticity of demand for bran is,0:20 when bran is

measured in bushels,then when bran is measured in pecks,the price elasticity of demand for bran

will be:

#28a#29,0:05.

#28b#29,0:80.

#28c#29,0:10.

#28d#29,0:40.

#28e#29 None of the above.

Topic,Market Demand Di#0Eculty,1

#25 Correct Responses,77 Discrimination Index,34

Correct Answer,E

15.2 Apeckis1=4of a bushel,If the price elasticity of demand for millet is,0:60 when millet

is measured in bushels,then when millet is measured in pecks,the price elasticity of demand for

millet will be:

#28a#29,0:15.

#28b#29,2:40.

#28c#29,0:60.

#28d#29,1:20.

#28e#29 None of the above.

Topic,Market Demand Di#0Eculty,1

#25 Correct Responses,91 Discrimination Index,9

Correct Answer,B

15.3 The demand function is described by the equation q#28p#29 = 190,p=5,The inverse demand

function is described by:

#28a#29 q#28p#29 = 190,5p.

#28b#29 p#28q#29 = 950,5q.

#28c#29 q#28p#29=1=#28190,p=5#29.

#28d#29 p#28q#29=1=190,q=5.

#28e#29 p#28q#29 = 190,q=5.

MULTIPLE CHOICE 263

Topic,Market Demand Di#0Eculty,1

#25 Correct Responses,91 Discrimination Index,9

Correct Answer,B

15.4 The demand function is described by the equation q#28p#29 = 210,p=4,The inverse demand

function is described by:

#28a#29 q#28p#29 = 210,4p.

#28b#29 p#28q#29 = 840,4q.

#28c#29 q#28p#29=1=#28210,p=4#29.

#28d#29 p#28q#29=1=210,q=4.

#28e#29 p#28q#29 = 210,q=4.

Topic,Market Demand Di#0Eculty,3

#25 Correct Responses,37 Discrimination Index,0

Correct Answer,A

15.5 If the demand function is q = m,2#28ln p#29 over some range of values of p; then at all such

values of p the absolute value of the price elasticity of demand:

#28a#29 increases as p increases.

#28b#29 decreases as p increases.

#28c#29 is constantaspchanges.

#28d#29 increases with p at small values and decreases with p at large values.

#28e#29 decreases with p at large values and increases with p at small values.

Topic,Market Demand Di#0Eculty,1

#25 Correct Responses,86 Discrimination Index,27

Correct Answer,C

15.6 If the demand function for tickets to a playisq=3;600,45p;at what price will total revenue

be maximized?

#28a#29 160

#28b#29 80

#28c#29 40

#28d#29 20

#28e#29 None of the above.

CHAPTER 15 Market Demand 264

Topic,Market Demand Di#0Eculty,1

#25 Correct Responses,86 Discrimination Index,27

Correct Answer,C

15.7 If the demand function for tickets to a playisq= 800,20p; at what price will total revenue

be maximized?

#28a#29 80

#28b#29 40

#28c#29 20

#28d#29 10

#28e#29 None of the above.

Topic,Market Demand Di#0Eculty,2

#25 Correct Responses,54 Discrimination Index,54

Correct Answer,D

15.8 Rollo would lovetohave a Mercedes,His preferences for consumption in the next year are

represented by a utility function U#28x;y#29 where x =0if he has no Mercedes and x =1if he has a

Mercedes for the year and where y is the amount of income he has left to spend on other stu#0B,If

U#280;y#29=the square root of y and U#281;y#29 = #2810=9#29#28y

:5

#29 and if Rollo's income is $50,000 a year,how

muchwould he be willing to pay per year to have a Mercedes?

#28a#29 $5,555.55

#28b#29 $5,000

#28c#29 $12,200

#28d#29 $9,500

#28e#29 $10,000

MULTIPLE CHOICE 265

Topic,Market Demand Di#0Eculty,2

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,C

15.9 In Ozone,California people all have the same tastes and they all like hot tubs,Nobody

wants more than one hot tub but a person with wealth $M will be willing to payupto:01M for

a hot tub,The distribution of wealth in Ozone is as follows,The number of people with a wealth

greater than $W for any given W is approximately 1;000;000=W,The price elasticity of demand for

hot tubs in Ozone California is:

#28a#29,:1

#28b#29,:01

#28c#29,1

#28d#29,:4

#28e#29 None of the above.

Topic,Market Demand Di#0Eculty,2

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,B

15.10 In Manifold,Missouri #28pop,1;000#29;people all have the same tastes and they all like Buicks.

Nobody wants more than one Buick,but a person with income $M is willing to pay about,10M

per year to have a Buick,Nobody in Manifold has an income greater than $50,000 and nobody has

an income less than $10,000,For incomes,$M; between $10,000 and $50,000,the number of people

with incomes greater than M is about 1;250,:025M,If it costs $2,000 a year to have a Buick,how

many people in Manifold will demand Buicks?

#28a#29 500

#28b#29 750

#28c#29 100

#28d#29 600

#28e#29 800

CHAPTER 15 Market Demand 266

Topic,Market Demand Di#0Eculty,2

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,C

15.11 Rod cares about the number of cars he has and the amount of money he has to spend

on other stu#0B,The only possibilities of interest for Rod are having 0,1,or 2 cars,Where x is

the number of cars he has and y is the money he has per year for other stu#0B,Rod's utilityis

U#280;y#29=y

:5;U#281;y#29 = #2815=14#29y

:5; and U#282;y#29 = #2810=9#29y

:5

,Rod's income is $25,000 a year,It would

cost Rod $2,500 a year to have 1 car and $3,500 a year to have 2 cars,How many cars will he

choose?

#28a#29 0

#28b#29 1

#28c#29 2

#28d#29 He is indi#0Berentbetween buying 1 and buying 2 cars.

#28e#29 He is indi#0Berentbetween buying 2 and buying 3 cars.

Topic,Market Demand Di#0Eculty,2

#25 Correct Responses,51 Discrimination Index,29

Correct Answer,B

15.12 Dr,Social Science has recently #0Cgured out how to clone consumers,His #0Crst e#0Bort was

done on the population of Walla,Washington,Each original citizen got a clone who had exactly

the same income and preferences,Which of the following statements describes what happened to

the demand function for tuna-#0Csh casseroles in Walla?

#28a#29 The elasticity doubled and the slope remained constant.

#28b#29 The elasticity did not change at any price.

#28c#29 The elasticity of demand doubled and the slope doubled.

#28d#29 The elasticity halved and the slope remained constant.

#28e#29 None of the above.

MULTIPLE CHOICE 267

Topic,Market Demand Di#0Eculty,2

#25 Correct Responses,67 Discrimination Index,0

Correct Answer,A

15.13 At the price of 100,tourists demand 587 airplane tickets,At the same price,business

travelers demand 527,At the price 120,tourists demand 127 tickets and business travelers demand

127,Assuming that the demand curves of business travelers and tourists are both linear over this

price range,what is the price elasticity of demand at the price 100?

#28a#29,3:86

#28b#29,43

#28c#29,4:63

#28d#29,0:04

#28e#29 None of the above.

Topic,Market Demand Di#0Eculty,2

#25 Correct Responses,67 Discrimination Index,0

Correct Answer,A

15.14 At the price of 180,tourists demand 427 airplane tickets,At the same price,business

travelers demand 507,At the price 200,tourists demand 127 tickets and business travelers demand

127,Assuming that the demand curves of business travelers and tourists are both linear over this

price range,what is the price elasticity of demand at the price 180?

#28a#29,6:55

#28b#29,34

#28c#29,7:28

#28d#29,0:04

#28e#29 None of the above.

CHAPTER 15 Market Demand 268

Topic,Market Demand Di#0Eculty,2

#25 Correct Responses,77 Discrimination Index,32

Correct Answer,E

15.15 The inverse demand function for nectarines is described by the equation p = 185,3q; where

p is the price in dollars per crate and where q is the number of crates of nectarines demanded per

week,When p = $20 per crate,what is the price elasticity of demand for nectarines?

#28a#29,60=55

#28b#29,3=185

#28c#29,3=55

#28d#29,55=20

#28e#29,20=165

Topic,Market Demand Di#0Eculty,2

#25 Correct Responses,77 Discrimination Index,32

Correct Answer,E

15.16 The inverse demand function for grapes is described by the equation p = 831,9q; where p

is the price in dollars per crate and where q is the number of crates of grapes demanded per week.

When p = $39 per crate,what is the price elasticity of demand for grapes?

#28a#29,351=88

#28b#29,9=831

#28c#29,9=88

#28d#29,88=39

#28e#29,39=792

Topic,Market Demand Di#0Eculty,3

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,A

15.17 If there are only two goods,an increase in the price of good 1 will increase the demand for

good 2:

#28a#29 if and only if the price elasticity of demand for good 2 is greater than 1 in absolute value.

#28b#29 whenever both goods are normal goods.

#28c#29 only if the two goods are perfect substitutes.

#28d#29 never.

#28e#29 None of the above.

MULTIPLE CHOICE 269

Topic,Market Demand Di#0Eculty,1

#25 Correct Responses,75 Discrimination Index,20

Correct Answer,B

15.18 The demand function for small business computers in the U.S,is given by x = 200,10p

where x is annual sales measured in thousands of computers and p is the price measured in thou-

sands of dollars,Japanese #0Crms supply a big share of these computers,They measure prices in yen

where 150 yen equal 1 dollar,The price of 1 computer is $10,000,Let E

u

be the price elasticity

of demand at this price as calculated by U.S,#0Crms who measure in dollars and let E

j

be the price

elasticity of demand at the same $10,000 price,but measured in yen by the Japanese #0Crms,Which

of the following are the values of E

u

and E

j; respectively?

#28a#29,1,,150

#28b#29,1,,1

#28c#29,2,,2

#28d#29,2,,300

#28e#29,2,,:0133

Topic,Market Demand Di#0Eculty,1

#25 Correct Responses,98 Discrimination Index,25

Correct Answer,A

15.19 An economy has 100 consumers of Type 1 and 200 consumers of Type 2,If the price of the

good is less than 10,then eachType 1 consumer demands 10,p units of the good; otherwise each

Type 1 demands zero,If the price of the good is less than 8,then eachType 2 demands 24,3p;

otherwise eachType 2 demands zero,If the price of the good is 6,then the total amount of the

good demanded will be:

#28a#29 1,600.

#28b#29 1,800.

#28c#29 2,000.

#28d#29 420.

#28e#29 1,200.

CHAPTER 15 Market Demand 270

Topic,Market Demand Di#0Eculty,1

#25 Correct Responses,77 Discrimination Index,36

Correct Answer,A

15.20 Harry's demand function for blueberries is x =20,2pwhere p is the price and x is the

quantity demanded,If the price of blueberries is 3,then what is Harry's price elasticity of demand

for blueberries?

#28a#29,6=14

#28b#29,2=20

#28c#29,2

#28d#29,14=6

#28e#29 None of the above.

Topic,Market Demand Di#0Eculty,1

#25 Correct Responses,93 Discrimination Index,18

Correct Answer,D

15.21 The inverse demand function for ryeisp=31;200,6q.Total revenue in this market will

be maximized when the quantityofrye produced is:

#28a#29 3,711

#28b#29 5,200

#28c#29 1,300

#28d#29 2,600

#28e#29 None of the above.

Topic,Market Demand Di#0Eculty,1

#25 Correct Responses,93 Discrimination Index,18

Correct Answer,D

15.22 The inverse demand function for barley is p =28;800,6q.Total revenue in this market

will be maximized when the quantity of barley produced is:

#28a#29 3,511

#28b#29 4,800

#28c#29 1,200

#28d#29 2,400

#28e#29 None of the above.

MULTIPLE CHOICE 271

Topic,Market Demand Di#0Eculty,2

#25 Correct Responses,49 Discrimination Index,49

Correct Answer,C

15.23 When the price of bananas is 50 cents a pound,the total demand is 100 pounds,If the

price elasticity of demand for bananas is,2; what quantitywould be demanded if the price rose to

60 cents a pound?

#28a#29 50

#28b#29 90

#28c#29 60

#28d#29 80

#28e#29 70

Topic,Market Demand Di#0Eculty,1

#25 Correct Responses,90 Discrimination Index,13

Correct Answer,D

15.24 The inverse demand function for co#0Bee is p =50;000,2q where q is the number of tons

produced and p is the price per ton,Total revenue from co#0Bee sales be maximized when the output

level is:

#28a#29 25,000 tons.

#28b#29 15,000 tons.

#28c#29 17,500 tons.

#28d#29 12,500 tons.

#28e#29 None of the above.

Topic,Market Demand Di#0Eculty,2

#25 Correct Responses,70 Discrimination Index,28

Correct Answer,B

15.25 Jen,Eric,and Kurt are all buyers of chain saws,Jen's demand function is Q

j

= 520,13P;

Eric's demand function is Q

e

=40,P; and Kurt's demand function is Q

k

= 200,5P.Together,

these three constitute the entire demand for chainsaws,At what price will the price elasticityof

market demand be,1?

#28a#29 19

#28b#29 20

#28c#29 25

#28d#29 15

#28e#29 None of the above.

CHAPTER 15 Market Demand 272

Topic,Market Demand Di#0Eculty,2

#25 Correct Responses,48 Discrimination Index,12

Correct Answer,D

15.26 Given his current income,Rico's demand for bagels is related to the price of bagels by the

equation,Q = 160,20P,Rico's income elasticity of demand for bagels is known to be equal to 0.5

at all prices and incomes,If Rico's income quadruples,his demand for bagels will be related to the

price of bagels by the equation:

#28a#29 Q = 160,20P.

#28b#29 Q = 640,80P.

#28c#29 Q = 160,40P.

#28d#29 Q = 320,40P

#28e#29 Q = 320,20P.

Topic,Market Demand Di#0Eculty,2

#25 Correct Responses,48 Discrimination Index,12

Correct Answer,D

15.27 Given his current income,Rico's demand for bagels is related to the price of bagels by the

equation,Q = 520,20P,Rico's income elasticity of demand for bagels is known to be equal to 0.5

at all prices and incomes,If Rico's income quadruples,his demand for bagels will be related to the

price of bagels by the equation:

#28a#29 Q = 520,20P.

#28b#29 Q =2;080,80P.

#28c#29 Q = 520,40P.

#28d#29 Q =1;040,40P

#28e#29 Q =1;040,20P.

Topic,Market Demand Di#0Eculty,3

#25 Correct Responses,18 Discrimination Index,17

Correct Answer,E

15.28 A person with a quasilinear utility function will:

#28a#29 have a price elasticity of demand equal to zero for some goods.

#28b#29 have an income elasticity of demand equal to one for some goods.

#28c#29 necessarily consume zero quantity of some good.

#28d#29 necessarily consume positive amounts of every good.

#28e#29 None of the above.

MULTIPLE CHOICE 273

Topic,Market Demand Di#0Eculty,2

#25 Correct Responses,75 Discrimination Index,24

Correct Answer,C

15.29 In the village of Frankfurter,the demand function for sausages per person is D#28p#29=20,1:5p;

where p is the price of a single sausage,The present population of Frankfurter is 100 persons,Sup-

pose that 10 more people moveinto town,each of whom has the same demand function as the old

residents,At a price of $2 the price elasticity of demand for sausages in Frankfurter is:

#28a#29 increased by 10 percent.

#28b#29 decreased by 10 percent.

#28c#29 unchanged.

#28d#29 increased by 15 percent.

#28e#29 none of the above.

Topic,Market Demand Di#0Eculty,1

#25 Correct Responses,37 Discrimination Index,59

Correct Answer,B

15.30 A #0Crm faces a demand function D#28p#29; for which the revenue maximizing price is $14,The

demand function is altered to 2D#28p#29,What is the new revenue maximizing price?

#28a#29 $7

#28b#29 $14

#28c#29 $28

#28d#29 There is insu#0Ecient information to determine this.

#28e#29 None of the above.

Topic,Market Demand Di#0Eculty,1

#25 Correct Responses,37 Discrimination Index,59

Correct Answer,B

15.31 A #0Crm faces a demand function D#28p#29; for which the revenue maximizing price is $12,The

demand function is altered to 2D#28p#29,What is the new revenue maximizing price?

#28a#29 $6

#28b#29 $12

#28c#29 $24

#28d#29 There is insu#0Ecient information to determine this.

#28e#29 None of the above.

CHAPTER 15 Market Demand 274

Topic,Market Demand Di#0Eculty,1

#25 Correct Responses,98 Discrimination Index,15

Correct Answer,C

15.32 If the supply curve for x is given by x = 100p

2; then the inverse supply curve is given by:

#28a#29 100=p

2

.

#28b#29 x

2

=100.

#28c#29 x

1=2

=10.

#28d#29 p

,2

=100.

#28e#29 None of the above.

Topic,Market Demand Di#0Eculty,1

#25 Correct Responses,50 Discrimination Index,30

Correct Answer,C

15.33 Ed has 100 tons of manure,The lowest price at which he is willing to sell it is $10 per ton.

Fred wants to buy 100 tons of manure,The most he is willing to pay is $8 per ton,The Federal

government o#0Bers to subsidize manure sales at a rate of $1 per ton,If Ed and Fred are the only

people who deal in manure,then the deadweight loss caused by the subsidy is:

#28a#29 $100.

#28b#29 $50.

#28c#29 0.

#28d#29 $200.

#28e#29 None of the above.

Topic,Market Demand Di#0Eculty,2

#25 Correct Responses,64 Discrimination Index,28

Correct Answer,E

15.34 Fred's price elasticity of demand for milk is,2 at today's prices when we measure price

in dollars and quantity of milk in quarts,If the price per quart of milk stays the same but we

measure quantity of milk in gallons and price in dollars,then what will be the elasticity of demand

for gallons of milk? #28A gallon is four quarts.#29

#28a#29,1

#28b#29,1=2

#28c#29,8

#28d#29,4

#28e#29,2

MULTIPLE CHOICE 275

Topic,Market Demand Di#0Eculty,2

#25 Correct Responses,70 Discrimination Index,32

Correct Answer,D

15.35 In a small Kansas town,there are two kinds of gasoline consumers,100 Buickowners and

50 Dodge owners,Each Buickowner has the demand function D

b

#28p#29=maxf0;20,5pg and each

Dodge owner has the demand function D

d

= maxf0;15,3pg,In this town:

#28a#29 the market demand curve has no kinks,but gets steeper as price rises.

#28b#29 the market demand curve has no kinks,but gets #0Datter as price rises.

#28c#29 the market demand curve has constant slope since individual demand curves have constant slope.

#28d#29 the market demand curve has a kink at p = 4 and another at p =5.

#28e#29 the market demand curve has a kink at p =35=8.

Topic,Market Demand Di#0Eculty,2

#25 Correct Responses,16 Discrimination Index,19

Correct Answer,A

15.36 In a certain city,the demand function for crack cocaine is q = 1000,p where p is the "street

price",The cocaine industry is competitive,Cocaine distributors can buy as much cocaine as they

wish at a price of $50 per unit from Colombian sources,Whenever the city narcotics police catcha

cocaine dealer,they con#0Cscate all the cocaine that he has,The jails are full so they do not imprison

the dealers,The police are able to catch the dealers about half the time,so they get about half

the cocaine that enters the city,Instead of destroying con#0Cscated crack,the police simply resell it

on the street,If the original supply curve of cocaine on the streets was horizontal,what is the net

e#0Bect of police activities on the market for crack in this city?

#28a#29 The amount purchased on the street is about 50 units smaller than it would be with no enforcement.

#28b#29 There is no e#0Bect,since all of the drugs reach consumers anyway.

#28c#29 Crack dealers will stop dealing in this city altogther,since they can make more money elsewhere.

#28d#29 The amount of crack purchased on the street decreases by about half.

#28e#29 The quantity purchased by dealers rises to make up for the amount that is con#0Cscated.

CHAPTER 15 Market Demand 276

Topic,Market Demand Di#0Eculty,1

#25 Correct Responses,50 Discrimination Index,36

Correct Answer,C

15.37 If at current prices,the demand for a good is price-elastic,then for movements along the

demand curve:

#28a#29 increasing the price will increase revenue.

#28b#29 decreasing the price will decrease revenue.

#28c#29 increasing the quantity sold will increase revenue.

#28d#29 increasing the quantity sold will decrease revenue.

#28e#29 More than one of the above statements are true.

Topic,Market Demand Di#0Eculty,2

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,D

15.38 The demand curve for a good is given by p = 140,8q where p is the price and q is the

quantity of the good,Suppose that the number of consumers in the economy doubles,with a "clone"

appearing for each consumer,who has exactly the same demand curve as the original consumer.

The demand curve for the doubled economy is described by:

#28a#29 p = 280,8q.

#28b#29 p = 280,16q.

#28c#29 p = 140,16q.

#28d#29 p = 140,4q.

#28e#29 p =70,4q.

Topic,Market Demand Di#0Eculty,2

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,D

15.39 The demand curve for a good is given by p = 240,10q where p is the price and q is

the quantity of the good,Suppose that the number of consumers in the economy doubles,with

a "clone" appearing for each consumer,who has exactly the same demand curve as the original

consumer,The demand curve for the doubled economy is described by:

#28a#29 p = 480,10q.

#28b#29 p = 480,20q.

#28c#29 p = 240,20q.

#28d#29 p = 240,5q.

#28e#29 p = 120,5q.

MULTIPLE CHOICE 277

Topic,Market Demand Di#0Eculty,2

#25 Correct Responses,98 Discrimination Index,7

Correct Answer,E

15.40 The demand for drangles is given by D#28p#29=#28p+1#29

,2

where p is the price of drangles,If

the price of drangles is 1,then the price elasticity of demand for drangles is:

#28a#29,4

#28b#29,2

#28c#29,3

#28d#29,2

#28e#29,1

Topic,Market Demand Di#0Eculty,2

#25 Correct Responses,98 Discrimination Index,7

Correct Answer,E

15.41 The demand for drangles is given by D#28p#29=#28p+1#29

,2

where p is the price of drangles,If

the price of drangles is 18,then the price elasticity of demand for drangles is:

#28a#29,7:58

#28b#29,3:79

#28c#29,5:68

#28d#29,3:79

#28e#29,1:89

Topic,Market Demand Di#0Eculty,2

#25 Correct Responses,59 Discrimination Index,47

Correct Answer,C

15.42 The only quantities of Good 1 that Fanny can buy are 1 unit or zero units,For all positive

values of x

2; Fanny's preferences are represented by the utility function #28x

1

+ 12#29#28x

2

+6#29,If her

income is 16 and the price of good 2 is 1,then Fanny's reservation price for Good 1 is:

#28a#29 3.38.

#28b#29 3.50.

#28c#29 1.69.

#28d#29 2.

#28e#29 0.40.

CHAPTER 15 Market Demand 278

Topic,Market Demand Di#0Eculty,2

#25 Correct Responses,59 Discrimination Index,47

Correct Answer,C

15.43 The only quantities of Good 1 that Anneli can buy are 1 unit or zero units,For all positive

values of x

2; Anneli's preferences are represented by the utility function #28x

1

+ 12#29#28x

2

+ 14#29,If her

income is 28 and the price of good 2 is 1,then Anneli's reservation price for Good 1 is:

#28a#29 6.46.

#28b#29 7.50.

#28c#29 3.23.

#28d#29 0.86.

#28e#29 1.07.

Topic,Market Demand Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,D

15.44 In Gas Pump S.D.,every Buickowner's demand for gasoline is 20,5p for p less than or

equal to 4 and 0 for p#3E4.Every Dodge owner's demand is 15,3p for p less than or equal to 5

and 0 for p#3E5,Suppose that Gas Pump,S.D,has 100 Buickowners and 250 Dodge owners,If

the price of gasoline is 4.50,what is the total amount of gasoline demanded in Gas Pump?

#28a#29 750

#28b#29 187.50

#28c#29 562.50

#28d#29 375

#28e#29 none of the above.

MULTIPLE CHOICE 279

Topic,Market Demand Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,D

15.45 In Gas Pump S.D.,every Buickowner's demand for gasoline is 20,5p for p less than or

equal to 4 and 0 for p#3E4.Every Dodge owner's demand is 15,3p for p less than or equal to 5

and 0 for p#3E5,Suppose that Gas Pump,S.D,has 100 Buickowners and 100 Dodge owners,If

the price of gasoline is 3.25,what is the total amount of gasoline demanded in Gas Pump?

#28a#29 1,800

#28b#29 450

#28c#29 1,350

#28d#29 900

#28e#29 none of the above.

Topic,Market Demand Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,C

15.46 The only quantities of Good 1 that Barbie can buy are 1 unit or zero units,For x

1

equal

to zero or 1 and for all positivevalues of x

2; suppose that Barbie's preferences were represented by

the utility function #28x

1

+ 10#29#28x

2

+6#29,Then if her income were 4,her reservation price for Good 1

would be:

#28a#29 1.82

#28b#29 3.50

#28c#29 0.91

#28d#29 1.67

#28e#29 0.50

CHAPTER 15 Market Demand 280

Topic,Market Demand Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,C

15.47 The only quantities of Good 1 that Barbie can buy are 1 unit or zero units,For x

1

equal

to zero or 1 and for all positivevalues of x

2; suppose that Barbie's preferences were represented by

the utility function #28x

1

+ 2#29#28x

2

+ 10#29,Then if her income were 32,her reservation price for Good 1

would be:

#28a#29 28

#28b#29 5.50

#28c#29 14

#28d#29 0.20

#28e#29 4.90

Topic,Market Demand Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,A

15.48 At a large institution of higher learning,the demand for football tickets at each game is

180;000,6;000p,If the capacity of the stadium at that university is 100,000 seats,what is the

revenue maximizing price for this universitytocharge per ticket.

#28a#29 15

#28b#29 13.33

#28c#29 30

#28d#29 7.50

#28e#29 45

Topic,Market Demand Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,A

15.49 At a large institution of higher learning,the demand for football tickets at each game

is 60;000,10;000p,If the capacity of the stadium at that university is 40,000 seats,what is the

revenue maximizing price for this universitytocharge per ticket.

#28a#29 3

#28b#29 2

#28c#29 6

#28d#29 1.50

#28e#29 9

MULTIPLE CHOICE 281

Topic,Market Demand Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,E

15.50 The demand for tickets to a rock concert is given by D#28p#29 = 200;000,10;000p; where p is

the price of tickets,If the price of tickets is 13,then the price elasticity of demand for tickets is:

#28a#29,3:71.

#28b#29,2:79.

#28c#29,5:57.

#28d#29,0:93.

#28e#29,1:86.

Topic,Market Demand Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,E

15.51 The demand for tickets to a rock concert is given by D#28p#29 = 200;000,10;000p; where p is

the price of tickets,If the price of tickets is 12,then the price elasticity of demand for tickets is:

#28a#29,3.

#28b#29,2:25.

#28c#29,4:50.

#28d#29,0:75.

#28e#29,1:50.

Topic,Market Demand Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,E

15.52 The demand for watches is Q = 1000P

,1:50

I

2

,Assume that per capita income,I,is $2,000.

At a price,P; of $70 the price elasticity of demand is

#28a#29 3.50.

#28b#29 1.0.

#28c#29 2.

#28d#29 0.50.

#28e#29 1.50.

CHAPTER 15 Market Demand 282

Topic,Market Demand Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,E

15.53 The demand for watches is Q = 1000P

,2:50

I

,1

,Assume that per capita income,I,is $3,000.

At a price,P; of $80 the price elasticity of demand is

#28a#29 4.

#28b#29 1.0.

#28c#29,1.

#28d#29,3:50.

#28e#29 2.50.

Topic,Market Demand Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,E

15.54 The demand for voice mail is Q = 1000,150P +15I,Assume that per capita disposable

income,I,is $800,At a price,P; of $50 the income elasticity of demand is

#28a#29 1.50.

#28b#29 5.

#28c#29 1.0.

#28d#29 15.

#28e#29 2.18.

Topic,Market Demand Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,E

15.55 The demand for voice mail is Q = 1000,150P +35I,Assume that per capita disposable

income,I,is $700,At a price,P; of $40 the income elasticity of demand is

#28a#29 3.50.

#28b#29 4.

#28c#29 1.0.

#28d#29 35.

#28e#29 1.26.

MULTIPLE CHOICE 283

Topic,Market Demand Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,E

15.56 If the marginal cost of making a photocopyis2cents and the elasticity of demand is 1.50,

the pro#0Ct maximizing price is

#28a#29 3 cents.

#28b#29 3.33 cents.

#28c#29 4 cents.

#28d#29 5 cents.

#28e#29 6 cents.

Topic,Market Demand Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,C

15.57 If the marginal cost of making a photocopyis2cents and the elasticity of demand is 2.00,

the pro#0Ct maximizing price is

#28a#29 3 cents.

#28b#29 3.33 cents.

#28c#29 4 cents.

#28d#29 5 cents.

#28e#29 6 cents.

Topic,Market Demand Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,D

15.58 If the marginal cost of brewing beer is 40 cents and the pro#0Ct maximizing price is 70 cents,

then the price elasticity of demand is

#28a#29,0:66.

#28b#29,1:8.

#28c#29,2.

#28d#29,2:33.

#28e#29,3.

CHAPTER 15 Market Demand 284

Topic,Market Demand Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,D

15.59 If the marginal cost of brewing beer is 40 cents and the pro#0Ct maximizing price is 80 cents,

then the price elasticity of demand is

#28a#29,0:66.

#28b#29,1:8.

#28c#29,2.

#28d#29,2:33.

#28e#29,3.

Topic,Market Demand Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,C

15.60 The constant elasticity of demand for cigarettes has been estimated to be 0.5,To reduce

smoking by 50#25,approximately howmuch tax needs to be added to a $1 pack?

#28a#29 $0.25.

#28b#29 $0.50.

#28c#29 $1.

#28d#29 $1.50.

#28e#29 $4.00.

Topic,Market Demand Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,C

15.61 The constant elasticity of demand for cigarettes has been estimated to be 0.5,To reduce

smoking by 75#25,approximately howmuch tax needs to be added to a $1 pack?

#28a#29 $0.38.

#28b#29 $0.75.

#28c#29 $1.50

#28d#29 $2.25.

#28e#29 $4.00.

MULTIPLE CHOICE 285

Topic,Market Demand Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,A

15.62 The demand for cable television hookups is Q = 100,10P

0:5

+2I

2;where P is price and I

is per capita income,Cable TV is

#28a#29 a normal good.

#28b#29 a natural monopoly.

#28c#29 an inferior good.

#28d#29 a substitute good.

#28e#29 a complement good.

Topic,Market Demand Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,C

15.63 The demand for cable television hookups is Q = 100,10P

0:5

+2I

,2;where P is price and

I is per capita income,Cable TV is

#28a#29 a normal good.

#28b#29 a natural monopoly.

#28c#29 an inferior good.

#28d#29 a substitute good.

#28e#29 a complement good.

Topic,Market Demand Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,C

15.64 If the demand for The Weekly World News at a local grocery store is described by

Q = 2500,400P,I=10

for I = $15;000 and P =$1:50; the marginal revenue of an additional paper sold at this store is

#28a#29 $1.50

#28b#29 $0.38

#28c#29 $0.50

#28d#29 $0.15

#28e#29 $1

CHAPTER 15 Market Demand 286

Topic,Market Demand Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,C

15.65 If the demand for The Weekly World News at a local grocery store is described by

Q = 2500,400P,I=10

for I = $20;000 and P =$0:75; the marginal revenue of an additional paper sold at this store is

#28a#29 $0.75

#28b#29 $0.19

#28c#29 $0.25

#28d#29 $0.08

#28e#29 $0.50

Topic,Market Demand Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,B

15.66 Demand for Barbara Streisand CD's is equal toQ

s

= P

2:50

s

I

1:80

P

0:60

c

where Q

s

is the number

of CD's,P

s

is the price of a Streisand CD,I is per capita income,and P

c

is the price of a Karen

Carpenter CD,Streisand and Carpenter CD's

#28a#29 are inferior goods.

#28b#29 are substitutes.

#28c#29 are complements.

#28d#29 have diminishing returns to scale.

#28e#29 are not as good as the original 8 track tapes.

Topic,Market Demand Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,B

15.67 Demand for Barbara Streisand CD's is equal toQ

s

= P

2:80

s

I

2:50

P

1

c

where Q

s

is the number

of CD's,P

s

is the price of a Streisand CD,I is per capita income,and P

c

is the price of a Karen

Carpenter CD,Streisand and Carpenter CD's

#28a#29 are inferior goods.

#28b#29 are substitutes.

#28c#29 are complements.

#28d#29 have diminishing returns to scale.

#28e#29 are not as good as the original 8 track tapes.

Essay Market Demand

Topic,Market Demand Di#0Eculty,2

#25 Correct Responses,0 Discrimination Index,0

15.1 Suppose that the inverse demand function for wool is p = A=q for some constant A,Suppose

that 1=4 of the world's wool is produced in Australia,a#29 If Australian wool production increases by

1#25 and the rest of the world holds its output constant,what will be the e#0Bect on the world price

of wool? b#29 How is the marginal revenue to Australia from an extra unit of wool relate to the price

of wool?

Answer,a#29 Price will fall by about one fourth of one percent,b#29 Marginal revenue is three fourths

of price.

Topic,Market Demand Di#0Eculty,2

#25 Correct Responses,0 Discrimination Index,0

15.2 Bart Wurst runs the only hotdog stand in a large park in a large boring town,On Sundays

people in this town all sit in the park and sunbathe,For any t between 0 and 30,the number

of people who are sitting within t minutes of Bart's stand is 10t

2

.People in Bart's town are lazy

and hate to walk,They think that every minute of walking they do is as bad as spending $.10.

Everybody in the park has a reservation price of $1 for a hot dog where the cost of a hot dog

includes the subjective cost of walking as well as the money price they havetopay when they get

there,#28Nobody has ever thought of fetching a hot dog for someone else.#29 Find a formula for the

demand curve for Bart's hot dogs,Explain howyou got it.

Answer,If Bart charges p where 0 #3Cp#3C1;his extensive margin is the customers who are at

distance t* from Bart where p+:10t#03 =1,Then t#03 =10,pand the demand for hot dogs at prices

p is the number,#2810,p#29

2; of people within t* of Bart.

Topic,Market Demand Di#0Eculty,3

#25 Correct Responses,0 Discrimination Index,0

15.3 In Tassel,Illinois #28pop;20;000#29; there are two kinds of families,those who like swimming

pools and those who don't,Half of the population is of eachtype,Families who like swimming

pools are willing to spend up to 5#25 of their income eachyear on a swimming pool,Families who

don't like them would pay nothing for a swimming pool,Nobody wants more than one swimming

pool and nobody has thought of sharing a swimming pool,Incomes in Tassel range between $10,000

and $110,000,For incomes,M; in this range,the number of families in Tassel with income greater

than M is about 22;000,:2M,#28The twotypes of families have the same income distribution.#29 Find

the aggregate demand function for swimming pools in Tassel #28demand for swimming pools as a

function of annual cost of having one#29.

Answer,The number of people willing to pay at least p is half of the number who have income at

least 20p,Therefore the aggregate demand function is 11;000,2p.

CHAPTER 15 Market Demand 288

Topic,Market Demand Di#0Eculty,3

#25 Correct Responses,0 Discrimination Index,0

15.4 Ethel is trying to decide whether to have 0 cars,1 car,or 2 cars,If x is the number of cars she

has and y is the amount of money she has per year to spend on other stu#0B,Ethel's utility function

is U#28x;y#29 where U#280;y#29=y

1=2;U#281;y#29 = #2815=14#29y

1=2; and U#282;y#29 = #2810=9#29y

1=2

,Suppose that it costs

$2000 a year to have 1 car and $4000 a year to have 2 cars,Ethel #0Cnds that the right thing to do de-

pends on her income,What is her willingness to pay for 1 car if her income is M? What is the lowest

income at which she would have a car? What is the lowest income at which she would have 2 cars?

Answer,Her willingness to pay for 1 car is about,129M where M is her income,The lowest income

at which she would get a car is $15,504,If we solve the equation U#281;y,2000#29 = U#282;y,4000#29 we

#0Cnd $55,143,At incomes above that she prefers 2 cars; below that she would be better o#0B to have

1 car.

Topic,Market Demand Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

15.5 Using the graph of a demand curve,explain why marginal revenue is less than price.

Topic,Market Demand Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

15.6 The demand for Craftmatic Adjustable Beds is described by

Q

c

= P

,1:40

c

I

,0:60

P

0:20

m

A

0:25

where Q

c

is the number of Craftmatic Adjustable Beds demanded,P

c

is the price of a Craftmatic

Adjustable Bed,I is per captia income,P

m

is the price of a battery powered massage pillow,and

A is the advertising budget.

a#29 If the marginal cost of producing a Craftmatic Adjustable Bed is $200,what is the pro#0Ct maxi-

mizing price?

b#29 Per capita income in the United States is forecast to rise by 3#25 next year,How will this impact

Craftmatic's sales?

c#29 The price of battery powered massage pillows suddenly fell by 10#25,How will this impace Craft-

matic's sales?

ESSAY 289

Topic,Market Demand Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

15.7 The demand for Craftmatic Adjustable Beds is described by

Q

c

= P

,1:40

c

I

,0:40

P

,1:60

m

A

0:25

where Q

c

is the number of Craftmatic Adjustable Beds demanded,P

c

is the price of a Craftmatic

Adjustable Bed,I is per captia income,P

m

is the price of a battery powered massage pillow,and

A is the advertising budget.

a#29 If the marginal cost of producing a Craftmatic Adjustable Bed is $200,what is the pro#0Ct maxi-

mizing price?

b#29 Per capita income in the United States is forecast to rise by 3#25 next year,How will this impact

Craftmatic's sales?

c#29 The price of battery powered massage pillows suddenly fell by 10#25,How will this impace Craft-

matic's sales?

Chapter 16

True-False Equilibrium

Topic,Equilibrium Di#0Eculty,1

#25 Correct Responses,97 Discrimination Index,5

Correct Answer,True

16.1 If the supply curveisvertical,then the amount supplied is independent of price.

Topic,Equilibrium Di#0Eculty,1

#25 Correct Responses,86 Discrimination Index,17

Correct Answer,False

16.2 If the supply is perfectly elastic,then an upward shift of the demand curve will lead to a

higher price and quantity in equilibrium.

Topic,Equilibrium Di#0Eculty,1

#25 Correct Responses,96 Discrimination Index,0

Correct Answer,True

16.3 The supply curve slopes up and to the right,If the demand curve shifts upward to a new

curve whichiseverywhere higher than the old curve #28but possibly of di#0Berent slope#29 and if the

supply curve does not shift,then the equilibrium price and quantitymust necessarily increase.

Topic,Equilibrium Di#0Eculty,1

#25 Correct Responses,72 Discrimination Index,22

Correct Answer,False

16.4 Supply and demand theory shows us that the burden of a sales tax is shared equally by

suppliers and demanders whether the tax is collected from the sellers or collected from the buyers.

Topic,Monopoly Di#0Eculty,1

#25 Correct Responses,73 Discrimination Index,16

Correct Answer,False

16.5 An economic situation is Pareto optimal only if there is no waytomake someone better o#0B.

TRUE-FALSE 291

Topic,Equilibrium Di#0Eculty,1

#25 Correct Responses,29 Discrimination Index,28

Correct Answer,True

16.6 The amount of a good supplied is independent of the price,If a sales tax is imposed on the

good,then the price paid by consumers will not change at all.

Topic,Equilibrium Di#0Eculty,1

#25 Correct Responses,91 Discrimination Index,14

Correct Answer,False

16.7 If a quantity tax is collected from competitive suppliers of a good,placing a tax on the good

causes the price paid by consumers to increase more than if the tax had been collected directly

from the buyers.

Topic,Budgets Di#0Eculty,2

#25 Correct Responses,50 Discrimination Index,23

Correct Answer,True

16.8 The demand curve,whichisadownward-sloping straight line,crosses the supply curve,

whichisanupward-sloping straight line,If a tax is introduced where sellers must pay a tax of

$2 per unit sold,then the equilibrium price paid by demanders will rise by more than $1 if the

absolute value of the slope of the demand curve is greater than the absolute value of the slope of

the supply curve.

Multiple Choice Equilibrium

Topic,Equilibrium Di#0Eculty,1

#25 Correct Responses,93 Discrimination Index,14

Correct Answer,B

16.1 The demand for pickles is given by p = 131,2q and supply is given by p =5+7q,What is

the equilibrium quantity?

#28a#29 11

#28b#29 14

#28c#29 19

#28d#29 103

#28e#29 None of the above.

Topic,Equilibrium Di#0Eculty,1

#25 Correct Responses,93 Discrimination Index,14

Correct Answer,B

16.2 The demand for pickles is given by p =82,2qand supply is given by p =2+2q,What is

the equilibrium quantity?

#28a#29 17

#28b#29 20

#28c#29 25

#28d#29 42

#28e#29 None of the above.

Topic,Equilibrium Di#0Eculty,1

#25 Correct Responses,99 Discrimination Index,23

Correct Answer,B

16.3 The demand function for fresh strawberries is q = 200,5p and the supply function is

q =60+2p,What is the equilibrium price?

#28a#29 10

#28b#29 20

#28c#29 40

#28d#29 50

#28e#29 None of the above.

MULTIPLE CHOICE 293

Topic,Equilibrium Di#0Eculty,1

#25 Correct Responses,94 Discrimination Index,11

Correct Answer,D

16.4 The inverse demand function for mangos is de#0Cned by the equation,p =91,5q; where q is

the number of crates that are sold,The inverse supply function is de#0Cned by p =3+6q,In the

past there was no tax on mangos but now a tax of $44 per crate has been imposed,What are the

quantities produced before and after the tax was imposed?

#28a#29 5 crates before and 5 crates after

#28b#29 16 crates before and 9 crates after

#28c#29 14 crates before and 7 crates after

#28d#29 8 crates before and 4 crates after

#28e#29 None of the above.

Topic,Equilibrium Di#0Eculty,1

#25 Correct Responses,94 Discrimination Index,11

Correct Answer,D

16.5 The inverse demand function for apples is de#0Cned by the equation,p = 129,12q; where q

is the number of crates that are sold,The inverse supply function is de#0Cned by p =3+6q,In the

past there was no tax on apples but now a tax of $90 per crate has been imposed,What are the

quantities produced before and after the tax was imposed?

#28a#29 4 crates before and 3 crates after

#28b#29 14 crates before and 5 crates after

#28c#29 13 crates before and 5 crates after

#28d#29 7 crates before and 2 crates after

#28e#29 None of the above.

CHAPTER 16 Equilibrium 294

Topic,Equilibrium Di#0Eculty,1

#25 Correct Responses,87 Discrimination Index,9

Correct Answer,B

16.6 The inverse demand for eggs is p =84,9qwhere q is the number of cases of eggs,The

inverse supply is p =7+2q,In the past,eggs were not taxed,but now a tax of 33 dollars per case

has been introduced,What is the e#0Bect of the tax on the quantity of eggs supplied?

#28a#29 Quantity drops by 2 cases.

#28b#29 Quantity drops by 3 cases.

#28c#29 Quantity drops by 6 cases.

#28d#29 Quantity drops by 4 cases.

#28e#29 None of the above.

Topic,Equilibrium Di#0Eculty,1

#25 Correct Responses,87 Discrimination Index,9

Correct Answer,B

16.7 The inverse demand for eggs is p =61,3qwhere q is the number of cases of eggs,The

inverse supply is p =7+6q,In the past,eggs were not taxed,but now a tax of 36 dollars per case

has been introduced,What is the e#0Bect of the tax on the quantity of eggs supplied?

#28a#29 Quantity drops by 3 cases.

#28b#29 Quantity drops by 4 cases.

#28c#29 Quantity drops by 8 cases.

#28d#29 Quantity drops by 5 cases.

#28e#29 None of the above.

Topic,Equilibrium Di#0Eculty,1

#25 Correct Responses,86 Discrimination Index,33

Correct Answer,C

16.8 The inverse demand function for cases of whiskey is de#0Cned by p = 160,6q and the inverse

supply function is de#0Cned by p =61+3q,Originally there was no tax on whiskey,Then the gov-

ernment began to tax suppliers of whiskey $27 for every case they sold,Howmuch did the price

paid by consumers rise when the new equilibrium was reached.

#28a#29 It rose by 27 dollars.

#28b#29 It rose by 29 dollars.

#28c#29 It rose by 18 dollars.

#28d#29 It rose by 16 dollars.

#28e#29 None of the above.

MULTIPLE CHOICE 295

Topic,Equilibrium Di#0Eculty,1

#25 Correct Responses,86 Discrimination Index,33

Correct Answer,C

16.9 The inverse demand function for cases of whiskey is de#0Cned by p = 241,11q and the inverse

supply function is de#0Cned by p =17+5q,Originally there was no tax on whiskey,Then the gov-

ernment began to tax suppliers of whiskey $112 for every case they sold,Howmuch did the price

paid by consumers rise when the new equilibrium was reached.

#28a#29 It rose by 112 dollars.

#28b#29 It rose by 114 dollars.

#28c#29 It rose by 77 dollars.

#28d#29 It rose by 75 dollars.

#28e#29 None of the above.

Topic,Equilibrium Di#0Eculty,1

#25 Correct Responses,62 Discrimination Index,50

Correct Answer,A

16.10 The inverse demand function for cigars is de#0Cned by p = 240,2q and the inverse supply

function is de#0Cned by p =3+q,Cigars are taxed at $4 per box,Which of the following is true?

#28a#29 The after tax price paid by consumers rises by more than $2 and the after tax price received by suppliers

falls by less than $2.

#28b#29 The after tax price paid by consumers goes up by less than $2 and the after tax price received by suppliers

rises.

#28c#29 Consumers and suppliers share the cost of the tax equally.

#28d#29 The after tax price paid by consumers rises by $4 and the after tax price received by suppliers stays

constant.

#28e#29 The after tax price paid by consumers rises by less than $2 and the after tax price received by suppliers

stays constant.

CHAPTER 16 Equilibrium 296

Topic,Equilibrium Di#0Eculty,2

#25 Correct Responses,74 Discrimination Index,49

Correct Answer,D

16.11 Xaquane and Yullare are obscure,but talented,18th century painters,The world's stock

of Xaquanes is 100 and the world's stockofYullares is 70,The demand for each painter's work

depends on its own price and the price of the other painter's work,If P

x

is the price of Xaquanes

and P

y

is the price of Yullares,the demand function for Xaquanes is 101,3P

x

+2P

y

and the demand

function for Yullares is 72+P

x

,P

y

,What is the equilibrium price for Yullare's paintings?

#28a#29 5

#28b#29 11

#28c#29 12

#28d#29 7

#28e#29 None of the above.

Topic,Equilibrium Di#0Eculty,2

#25 Correct Responses,38 Discrimination Index,32767

Correct Answer,C

16.12 In a certain kingdom,the demand function for rye bread was q = 381,3p and the supply

function was q =5+7pwhere p is the price in zlotys and q is loaves of bread,The king made it

illegal to sell rye bread for a price above 32 zlotys per loaf,Toavoid shortages,he agreed to pay

bakers enough of a subsidy for each loaf of bread so as to make supply equal demand,Howmuch

would the subsidy per loaf havetobe?

#28a#29 21 zlotys

#28b#29 14 zlotys

#28c#29 8 zlotys

#28d#29 20 zlotys

#28e#29 None of the above.

MULTIPLE CHOICE 297

Topic,Equilibrium Di#0Eculty,2

#25 Correct Responses,38 Discrimination Index,32767

Correct Answer,C

16.13 In a certain kingdom,the demand function for rye bread was q = 201,4p and the supply

function was q =13+3pwhere p is the price in zlotys and q is loaves of bread,The king made it

illegal to sell rye bread for a price above 23 zlotys per loaf,Toavoid shortages,he agreed to pay

bakers enough of a subsidy for each loaf of bread so as to make supply equal demand,Howmuch

would the subsidy per loaf havetobe?

#28a#29 21 zlotys

#28b#29 14 zlotys

#28c#29 9 zlotys

#28d#29 20 zlotys

#28e#29 None of the above.

Topic,Equilibrium Di#0Eculty,1

#25 Correct Responses,0 Discrimination Index,137

Correct Answer,A

16.14 The demand function for orange juice is q = 269,9p and the supply function is q =9+4p;

where q is the number of units sold per year and p is the price per unit,expressed in dollars,The

government decides to support the price of orange juice at a price #0Door of $24 per unit by buying

orange juice and destroying all that it has purchased,How many units must the government destroy

per year?

#28a#29 52

#28b#29 56

#28c#29 25

#28d#29 61

#28e#29 57

CHAPTER 16 Equilibrium 298

Topic,Equilibrium Di#0Eculty,1

#25 Correct Responses,0 Discrimination Index,137

Correct Answer,A

16.15 The demand function for butter is q = 126,6p and the supply function is q =14+2p;

where q is the number of units sold per year and p is the price per unit,expressed in dollars,The

government decides to support the price of butter at a price #0Door of $20 per unit by buying butter

and destroying all that it has purchased,How many units must the government destroy per year?

#28a#29 48

#28b#29 54

#28c#29 18

#28d#29 57

#28e#29 53

Topic,Equilibrium Di#0Eculty,2

#25 Correct Responses,72 Discrimination Index,19

Correct Answer,B

16.16 The demand function for rental apartments is q = 960,7p and the supply function is

q = 160+ 3p,The government makes it illegal to charge a rent higher than 35,Howmuch excess

demand will there be?

#28a#29 149

#28b#29 450

#28c#29 364

#28d#29 726

#28e#29 245

Topic,Equilibrium Di#0Eculty,1

#25 Correct Responses,65 Discrimination Index,38

Correct Answer,D

16.17 The demand function for abalone is q =30,9pand the supply function is q =6p,Suddenly

the yuppies discover abalone,The quantity demanded at every price doubles,The supply function,

however,remains the same as before,What is the e#0Bect on the equilibrium price and quantity?

#28a#29 The price doubles and the quantity remains constant.

#28b#29 The quantity doubles and the price remains constant.

#28c#29 Both price and quantity double.

#28d#29 Both price and quantity increase,but neither doubles.

#28e#29 None of the above.

MULTIPLE CHOICE 299

Topic,Equilibrium Di#0Eculty,3

#25 Correct Responses,20 Discrimination Index,19

Correct Answer,D

16.18 Remember King Kanuta and his tropical island? The demand function for coconuts by his

subjects on the island is D#28p#29 = 1200,100p and the supply function is S#28p#29 = 100p,The law used to

be that any subject who consumed a coconut had to pay another coconut to the king,King Kanuta

then ate all the coconuts he got,But now the king,apparently fed up with coconuts,decides to

sell the coconuts that he collects in the local market at the going selling price,p

s

,In equilibrium,

the number of coconuts that will now be produced is:

#28a#29 100.

#28b#29 200.

#28c#29 600.

#28d#29 400.

#28e#29 300.

Topic,Equilibrium Di#0Eculty,1

#25 Correct Responses,71 Discrimination Index,13

Correct Answer,A

16.19 The inverse demand function for video games is p = 240,2q and the inverse supply is

p =3+q,When the government imposes a $6 tax on each video game purchased:

#28a#29 consumers' surplus falls by more than producers' surplus.

#28b#29 producers' surplus falls by more than consumers' surplus.

#28c#29 consumers' surplus and producers' surplus fall by the same amount.

#28d#29 comsumers' surplus falls and producers' surplus increases.

#28e#29 producers' surplus falls and consumers' surplus increases.

CHAPTER 16 Equilibrium 300

Topic,Equilibrium Di#0Eculty,1

#25 Correct Responses,89 Discrimination Index,24

Correct Answer,A

16.20 The demand function for corn is q = 200,p and the supply function is q =50+:5p,The

government sets the price of corn at 150 and agrees to purchase and destroyany excess supply of

corn at that price,Howmuch money does it cost the government to buy this corn?

#28a#29 11,250

#28b#29 18,750

#28c#29 7,500

#28d#29 10,750

#28e#29 14,500

Topic,Equilibrium Di#0Eculty,3

#25 Correct Responses,36 Discrimination Index,23

Correct Answer,B

16.21 The market for tennis shoes has a horizontal supply curve and a linear,downward-sloping

demand curve,Currently the government imposes a tax of t on every pair of tennis shoes sold and

does not tax other goods,The government is considering a plan to double the tax on tennis shoes,

while leaving other goods untaxed,If the tax is doubled,then:

#28a#29 the total deadweight loss caused by the doubled tax will be exactly twice the original deadweight loss.

#28b#29 the total deadweight loss caused by the doubled tax will be more than twice the original deadweight loss.

#28c#29 the total deadweight loss caused by the doubled tax will be less than twice the original deadweight loss.

#28d#29 to know if doubling the tax would more than double the deadweight loss,wewould havetoknow the

slope of the demand curve.

#28e#29 None of the above.

Topic,Equilibrium Di#0Eculty,1

#25 Correct Responses,40 Discrimination Index,33

Correct Answer,D

16.22 The demand curve for rutabagas is a straight line with slope,3 and the supply curveisa

straight line with slope 2,Suppose that a new tax of $3 per sack of rutabagas is introduced,Which

of the following must certainly be true of the change in equilibrium prices and#2For quantities?

#28a#29 The total number of rutabagas purchased increases.

#28b#29 The price paid by demanders rises by the same amount as the price received by suppliers falls.

#28c#29 The price received by suppliers falls by more than the price paid by demanders rises.

#28d#29 The price paid by demanders rises by more than the price received by suppliers falls.

#28e#29 The price paid by demanders rises by more than $3.

MULTIPLE CHOICE 301

Topic,Equilibrium Di#0Eculty,1

#25 Correct Responses,40 Discrimination Index,33

Correct Answer,D

16.23 The demand curve for rutabagas is a straight line with slope,2 and the supply curveisa

straight line with slope 2,Suppose that a new tax of $3 per sack of rutabagas is introduced,Which

of the following must certainly be true of the change in equilibrium prices and#2For quantities?

#28a#29 The total number of rutabagas purchased increases.

#28b#29 The price paid by demanders rises by the same amount as the price received by suppliers falls.

#28c#29 The price received by suppliers falls by more than the price paid by demanders rises.

#28d#29 The price paid by demanders rises by more than the price received by suppliers falls.

#28e#29 The price paid by demanders rises by more than $3.

Topic,Equilibrium Di#0Eculty,1

#25 Correct Responses,42 Discrimination Index,40

Correct Answer,A

16.24 The quantity q of grapefruits demanded at price p is given by q =30,3pand the supply

schedule by q =6p,The government imposes a quantity tax at some rate t; which it collects from

buyers,What is the smallest tax rate that will result in no grapefruits being bought or sold?

#28a#29 10

#28b#29 3.33

#28c#29 3.67

#28d#29 11.50

#28e#29 13

Topic,Equilibrium Di#0Eculty,1

#25 Correct Responses,42 Discrimination Index,40

Correct Answer,A

16.25 The quantity q of nectarines demanded at price p is given by q =16,4pand the supply

schedule by q =3p,The government imposes a quantity tax at some rate t; which it collects from

buyers,What is the smallest tax rate that will result in no nectarines being bought or sold?

#28a#29 4

#28b#29 2.29

#28c#29 2.86

#28d#29 5.50

#28e#29 7

CHAPTER 16 Equilibrium 302

Topic,Equilibrium Di#0Eculty,1

#25 Correct Responses,93 Discrimination Index,23

Correct Answer,B

16.26 The demand function for x is D#28p#29=65,2pand the supply function is S#28p#29=20+p,The

price that should be set to restrict quantity supplied to 30 units is closest to:

#28a#29 5.

#28b#29 10.

#28c#29 15.

#28d#29 50.

#28e#29 55.

Topic,Equilibrium Di#0Eculty,2

#25 Correct Responses,89 Discrimination Index,19

Correct Answer,D

16.27 The inverse demand function for apples is de#0Cned by the equation p = 214,5q; where q

is the number of units sold,The inverse supply function is de#0Cned by p =7+4q,A tax of 36 is

imposed on suppliers for each unit of apples that they sell,When the tax is imposed,the quantity

of apples sold falls to:

#28a#29 23.

#28b#29 14.

#28c#29 17.

#28d#29 19.

#28e#29 21.

Topic,Equilibrium Di#0Eculty,2

#25 Correct Responses,89 Discrimination Index,19

Correct Answer,D

16.28 The inverse demand function for melons is de#0Cned by the equation p = 385,10q; where q

is the number of units sold,The inverse supply function is de#0Cned by p =13+2q,A tax of 36 is

imposed on suppliers for each unit of melons that they sell,When the tax is imposed,the quantity

of melons sold falls to:

#28a#29 31.

#28b#29 13.

#28c#29 26.

#28d#29 28.

#28e#29 29.50.

MULTIPLE CHOICE 303

Topic,Equilibrium Di#0Eculty,1

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,C

16.29 In a crowded city far away,the civic authorities decided that rents were too high,The

long run supply function of two-room rental apartments was given by q =14+5pand the long run

demand function was given by q = 329,5p where p is the rental rate in crowns per week,The

authorities made it illegal to rent an apartment for more than 25 crowns per week,Toavoid a

housing shortage,the authorities agreed to pay landlords enough of a subsidy to make supply equal

to demand,Howmuchwould the weekly subsidy per apartmenthave to be to eliminate excess

demand at the ceiling price?

#28a#29 6.50

#28b#29 10

#28c#29 13

#28d#29 26

#28e#29 19.50

Topic,Equilibrium Di#0Eculty,1

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,C

16.30 In a crowded city far away,the civic authorities decided that rents were too high,The

long run supply function of two-room rental apartments was given by q =14+2pand the long

run demand function was given by q =94,2pwhere p is the rental rate in crowns per week,The

authorities made it illegal to rent an apartment for more than 13 crowns per week,Toavoid a

housing shortage,the authorities agreed to pay landlords enough of a subsidy to make supply equal

to demand,Howmuchwould the weekly subsidy per apartmenthave to be to eliminate excess

demand at the ceiling price?

#28a#29 7

#28b#29 11

#28c#29 14

#28d#29 28

#28e#29 21

CHAPTER 16 Equilibrium 304

Topic,Equilibrium Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,B

16.31 The price elasticity of demand for a certain agricultural product is constant#28over the

relevant range of prices#29 and equal to,1:50,The supply elasticity for this product is constant and

equal to 4,Originally the equilibrium price of this good was 15 per unit,Then it was discovered

that consumption of this product was unhealthy,The quantity that would be demanded at any

price fell by 11#25,The percentchange in the long run equilibrium consumption of this good was:

#28a#29,11#25.

#28b#29,8#25.

#28c#29,2#25.

#28d#29,12#25.

#28e#29 There is not enough information to determine the answer.

Topic,Equilibrium Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,B

16.32 The price elasticity of demand for a certain agricultural product is constant#28over the

relevant range of prices#29 and equal to,2:50,The supply elasticity for this product is constant and

equal to 4,Originally the equilibrium price of this good was 50 per unit,Then it was discovered

that consumption of this product was unhealthy,The quantity that would be demanded at any

price fell by 52#25,The percentchange in the long run equilibrium consumption of this good was:

#28a#29,52#25.

#28b#29,32#25.

#28c#29,8#25.

#28d#29,36#25.

#28e#29 There is not enough information to determine the answer.

MULTIPLE CHOICE 305

Topic,Equilibrium Di#0Eculty,0

#25 Correct Responses,52 Discrimination Index,44

Correct Answer,A

16.33 Suppose that King Kanuta,whom you met in your workbook,demands that eachofhis

subjects give him 1 coconuts for every coconut that they consume,The king puts all of the coconuts

that he collects in a large pile and burns them,The supply of coconuts is given by S#28p

s

#29 = 100p

s;

where p

s

is the price received by suppliers,The demand for coconuts by the king's subjects is given

by D#28p

d

#29=1;500,100p

d; where p

d

is the price paid by consumers,In equilibrium,the price received

by suppliers will be:

#28a#29 6

#28b#29 9

#28c#29 7.50

#28d#29 15

#28e#29 None of the above

Topic,Equilibrium Di#0Eculty,0

#25 Correct Responses,52 Discrimination Index,44

Correct Answer,A

16.34 Suppose that King Kanuta,whom you met in your workbook,demands that eachofhis

subjects give him 4 coconuts for every coconut that they consume,The king puts all of the coconuts

that he collects in a large pile and burns them,The supply of coconuts is given by S#28p

s

#29 = 100p

s;

where p

s

is the price received by suppliers,The demand for coconuts by the king's subjects is given

by D#28p

d

#29=9;360,100p

d; where p

d

is the price paid by consumers,In equilibrium,the price received

by suppliers will be:

#28a#29 18

#28b#29 27

#28c#29 46.80

#28d#29 234

#28e#29 None of the above

CHAPTER 16 Equilibrium 306

Topic,Equilibrium Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,A

16.35 Schrecklich and Lamerde are two obscure modernist painters,who are no longer alive,but

whose paintings are still enjoyed by persons of dubious taste,The demand function for Schrecklichs

is 200,4P

S

,2P

L

and the demand function for Lamerdes is 200,3P

L

,P

S; where P

S

and P

L

are

respectively the price of Schrecklichs and Lamerdes,If the world supply of Schrecklichs is 110 and

the world supply of Lamerdes is 110,then the equilibrium price of Schrecklichs is:

#28a#29 9.

#28b#29 22.50.

#28c#29 36.

#28d#29 27.

#28e#29 18.

Topic,Equilibrium Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,A

16.36 Schrecklich and Lamerde are two obscure modernist painters,who are no longer alive,but

whose paintings are still enjoyed by persons of dubious taste,The demand function for Schrecklichs

is 200,4P

S

,2P

L

and the demand function for Lamerdes is 200,3P

L

,P

S; where P

S

and P

L

are

respectively the price of Schrecklichs and Lamerdes,If the world supply of Schrecklichs is 100 and

the world supply of Lamerdes is 80,then the equilibrium price of Schrecklichs is:

#28a#29 6.

#28b#29 25.

#28c#29 44.

#28d#29 38.

#28e#29 12.

MULTIPLE CHOICE 307

Topic,Equilibrium Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,A

16.37

Daily demand for gasoline at Billy-Bob's Mobile Station is described by Q = 776,200p where Q

are gallons of gasoline sold and p is the price in dollars,Billy-Bob's supply is Q =,890+1;500p.

Suppose the state government places a tax of 20 cents on every gallon of gasoline sold,What is the

deadweight loss resulting from this tax?

#28a#29 3.53 dollars.

#28b#29 3.11 dollars.

#28c#29 0.42 dollars.

#28d#29 96.12 dollars.

#28e#29 34.59 dollars.

Topic,Equilibrium Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,A

16.38

Daily demand for gasoline at Billy-Bob's Mobile Station is described by Q =1;870,1;000p where

Q are gallons of gasoline sold and p is the price in dollars,Billy-Bob's supply is Q = 362 + 300p.

Suppose the state government places a tax of 7 cents on every gallon of gasoline sold,What is the

deadweight loss resulting from this tax?

#28a#29 0.57 dollars.

#28b#29 0.13 dollars.

#28c#29 0.43 dollars.

#28d#29 11.21 dollars.

#28e#29 18.74 dollars.

Essay Equilibrium

Topic,Equilibrium Di#0Eculty,1

#25 Correct Responses,0 Discrimination Index,0

16.1 Use supply and demand analysis to examine the following statement,"The practice of giving

food stamps is self-defeating,Food stamps e#0Bectively lower the price of food,When food becomes

available at lower prices,demand will increase thereby forcing the price up to its initial level." Is

this reasoning correct? Draw supply and demand curves to illustrate your answer.

Answer,The subsidy would shift the demand curve to the right,much as the quotation says,but

if the supply curve slopes up,then the new equilibrium should take place with a greater supply

and a lower net price for those who use food stamps,The market price will rise,but not by the

full amount of the discount one gets with food stamps.

Topic,Equilibrium Di#0Eculty,2

#25 Correct Responses,0 Discrimination Index,0

16.2 Long ago,a kindly prince noticed the misery of his subjects,His subjects all had the same

preferences and the same low incomes,The demand function of each subject for bread wasq =26,p

where p is the price of bread and q is the numberofloaves per week,The supply of bread per

capita per week was given by the function q =,3p,The king declared since his subjects did not

even get a loaf of bread per day,hewould help them by making it illegal to sell bread for more

than 10 groschens per loaf,Unhappily,a bread shortage arose and people waited in long lines to

get bread,a#29 Draw a graph to showwhy,Put numerical labels on the important points on your

graph,b#29 If the citizens could earn 4 groschens per hour at work that was exactly as unpleasantas

waiting in line,what would be the equilibrium waiting time for a loaf of bread?

Answer,b#293:25 Hours.

Chapter 17

True-False Auctions

Topic,Auctions Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,True

17.1 In a Dutch auction with rational bidders,it sometimes happens that the object being sold

goes to someone whose value for the object is not as high as that of some other bidder#28s#29.

Topic,Auctions Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,True

17.2 In an English auction,with rational bidders,the object being sold always goes to the bidder

who values it most highly.

Topic,Auctions Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,True

17.3 An auction in which some bidders have di#0Berent information about the value of an object

than others is said to be an auction with private values.

Topic,Auctions Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,True

17.4 In a private-values auction with rational bidders,we can expect the same outcome from an

English auction as from a Vickrey auction.

Topic,Auctions Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,False

17.5 An auctioneer allows bidders to examine a jar of pennies,but he does not allow them to open

the jar and count the pennies,The jar is then sold by means of an English auction,Economists

call an auction of this type a a private-values auction,since opinions di#0Ber.

Topic,Auctions Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,True

17.6 The reserve price in an auction is the lowest price at which the seller of a good will part

with it.

CHAPTER 17 Auctions 310

Topic,Auctions Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,False

17.7 If a good is sold in a Dutch auction and the bidders bid rationally,the price paid for the

good will always be equal to the second-highest willingness to pay of auction participants.

Topic,Auctions Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,False

17.8 The "winner's curse" refers to the fact that in a sealed-bid auction with private values,the

winning bidder often pays more than he would have to in order to win the object auctioned.

Topic,Auctions Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,False

17.9 It is never a pro#0Ct-maximizing strategy for a seller in an English auction to set a reserve

price for the good he is selling,so high that he might not be able to sell it at all.

Topic,Auctions Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,True

17.10 It is often the case that a seller can increase his pro#0Cts from an auction by setting a reserve

price even if he has to destroy the object being auctioned if nobody bids as high as the reserve

price.

Topic,Auctions Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,True

17.11 The pro#0Ct-maximizing strategy for a bidder in a Vickrey auction where there are common

values for the object being sold is to bid less than her estimated value for the object,and the more

bidders there are,the more the pro#0Ct-maximizing bidder should shade her bid below her estimated

value.

Topic,Auctions Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,True

17.12 The optimal strategy for a bidder in a private-values Vickrey auction is to bid his true

valuation.

TRUE-FALSE 311

Topic,Auctions Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,True

17.13 In a common-value auction,the bids of other bidders can in#0Duence the maximum amount

that one is willing to pay for an object,while in a private-value auction this is not the case.

Multiple Choice Auctions

Topic,Auctions Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,A

17.1 A #0Crst-edition of Adam Smith's Wealth of Nations #28published in 1776#29 is being auctioned via

the internet,The currentowner starts by posting his own #5Cbid" for it,Bidders are allowed to

submit bids at any time during a one-week interval,For the following week,bids will be accepted

only if they exceed the currently posted high bid,Throughout the week,the highest bid that

anyone has made so far will be posted,At the end of the week,the book will be sold to the highest

bidder at the price that he or she bid for it,Assuming that bidders understand the rules of the

auction,the outcome of this auction will be similar to that for

#28a#29 an English auction with a reserve price equal to the owner's bid.

#28b#29 a Dutch auction with a reserve price equal to the owner's bid.

#28c#29 a sealed-bid auction in which the book is sold to the highest bidder at the highest bidder's bid price.

#28d#29 a common-value auction.

#28e#29 an English auction with no reserve price.

Topic,Auctions Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,C

17.2 A stamp dealer is holding an auction for an English Penny Black postage stamp,issued

in 1840,Potential buyers are asked to submit written bids for this stamp,and it will be sold to

the highest bidder at a price equal to the bid submitted by the second-highest bidder,If bidders

understand the logic of this auction and bid in their own self-interest,

#28a#29 bidders will shade their bids by approximately 10 percent,and hence the stamp will be sold for about

10 percent less than the second-highest willingness to pay.

#28b#29 bidders will bid more than their true valuation,since they only havetopay the second-highest bid and

not their own bid.

#28c#29 bidders will bid exactly their true valuation.

#28d#29 the highest bidder willoverstate his valuationand the second-highest bidder willunderstate his valuation.

#28e#29 bidders will all bid #28n,1=n#29 of their true valuations,where n is the number of bidders.

MULTIPLE CHOICE 313

Topic,Auctions Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,D

17.3 An antique cabinet is being sold by means of an English auction,There are four bidders,

Natalie,Heidi,Linda,and Eva,These bidders are unacquainted with each other and do not collude.

Natalie values the cabinet at $1,200,Heidi values it at $950,Linda values it at $1,700,and Eva

values it at $700,If the bidders bid in their rational self-interest,the cabinet will be sold to

#28a#29 Linda for about $1,700.

#28b#29 Natalie for about $1,200.

#28c#29 either Linda or Natalie for slightly more than $1,200,Which of them actually gets it is randomly

determined.

#28d#29 Linda for slightly more than $1,200.

#28e#29 None of the above statements are true.

Topic,Auctions Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,D

17.4 An antique cabinet is being sold by means of an English auction,There are four bidders,

Maria,Clara,Holly,and Josephine,These bidders are unacquainted with each other and do not

collude,Maria values the cabinet at $1,600,Clara values it at $1,350,Holly values it at $2,100,

and Josephine values it at $1,100,If the bidders bid in their rational self-interest,the cabinet will

be sold to

#28a#29 Holly for about $2,100.

#28b#29 Maria for about $1,600.

#28c#29 either Holly or Maria for slightly more than $1,600,Which of them actually gets it is randomly deter-

mined.

#28d#29 Holly for slightly more than $1,600.

#28e#29 None of the above statements are true.

CHAPTER 17 Auctions 314

Topic,Auctions Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,D

17.5 An antique cabinet is being sold by means of an English auction,There are four bidders,

Maude,Kristina,Zelda,and Betsy,These bidders are unacquainted with each other and do not

collude,Maude values the cabinet at $800,Kristina values it at $550,Zelda values it at $1,300,and

Betsy values it at $300,If the bidders bid in their rational self-interest,the cabinet will be sold to

#28a#29 Zelda for about $1,300.

#28b#29 Maude for about $800.

#28c#29 either Zelda orMaude forslightlymorethan $800,Which ofthem actuallygets it is randomlydetermined.

#28d#29 Zelda for slightly more than $800.

#28e#29 None of the above statements are true.

Topic,Auctions Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,D

17.6 An antique cabinet is being sold by means of an English auction,There are four bidders,

Colette,Betsy,Doreen,and Elsie,These bidders are unacquainted with each other and do not

collude,Colette values the cabinet at $4,000,Betsy values it at $3,750,Doreen values it at $4,500,

and Elsie values it at $3,500,If the bidders bid in their rational self-interest,the cabinet will be

sold to

#28a#29 Doreen for about $4,500.

#28b#29 Colette for about $4,000.

#28c#29 either Doreen or Colette for slightly more than $4,000,Which of them actually gets it is randomly

determined.

#28d#29 Doreen for slightly more than $4,000.

#28e#29 None of the above statements are true.

MULTIPLE CHOICE 315

Topic,Auctions Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,D

17.7 An antique cabinet is being sold by means of an English auction,There are four bidders,

Susan,Kristina,Katerina,and Heidi,These bidders are unacquainted with each other and do not

collude,Susan values the cabinet at $4,800,Kristina values it at $4,550,Katerina values it at

$5,300,and Heidi values it at $4,300,If the bidders bid in their rational self-interest,the cabinet

will be sold to

#28a#29 Katerina for about $5,300.

#28b#29 Susan for about $4,800.

#28c#29 either Katerina or Susan for slightly more than $4,800,Which of them actually gets it is randomly

determined.

#28d#29 Katerina for slightly more than $4,800.

#28e#29 None of the above statements are true.

Topic,Auctions Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,B

17.8

First Fiddler's Bank has foreclosed on a home mortgage and is selling the house at auction,There

are three bidders for the house,Josh,Sheila,and Elsie,First Fiddler's does not know the willingness

to pay of these three bidders for the house,but on the basis of its previous experience,the bank

believes that each of these bidders has a probabilityof1=3of valuing it at $700,000,a probabilityof

1=3of valuing at $500,000,and a probabilityof1=3of valuing it at $200,000,First Fiddler's believes

that these probabilities are independentbetween buyers,If First Fiddler's sells the house by means

of a second-bidder,sealed-bid auction #28Vickrey auction#29,what will be the bank's expected revenue

from the sale? #28Choose the closest option.#29

#28a#29 $500,000

#28b#29 $474,074

#28c#29 $466,667

#28d#29 $700,000

#28e#29 $200,000

CHAPTER 17 Auctions 316

Topic,Auctions Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,B

17.9

First Fiddler's Bank has foreclosed on a home mortgage and is selling the house at auction,There

are three bidders for the house,Tim,Katerina,and Elsie,First Fiddler's does not know the

willingness to pay of these three bidders for the house,but on the basis of its previous experience,

the bank believes that each of these bidders has a probabilityof1=3of valuing it at $600,000,a

probabilityof1=3of valuing at $500,000,and a probabilityof1=3of valuing it at $300,000,First

Fiddler's believes that these probabilities are independentbetween buyers,If First Fiddler's sells

the house by means of a second-bidder,sealed-bid auction #28Vickrey auction#29,what will be the

bank's expected revenue from the sale? #28Choose the closest option.#29

#28a#29 $500,000

#28b#29 $474,074

#28c#29 $466,667

#28d#29 $600,000

#28e#29 $300,000

Topic,Auctions Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,B

17.10

First Fiddler's Bank has foreclosed on a home mortgage and is selling the house at auction,There

are three bidders for the house,Boris,Emily,and Fanny,First Fiddler's does not know the

willingness to pay of these three bidders for the house,but on the basis of its previous experience,

the bank believes that each of these bidders has a probabilityof1=3of valuing it at $600,000,a

probabilityof1=3of valuing at $400,000,and a probabilityof1=3of valuing it at $300,000,First

Fiddler's believes that these probabilities are independentbetween buyers,If First Fiddler's sells

the house by means of a second-bidder,sealed-bid auction #28Vickrey auction#29,what will be the

bank's expected revenue from the sale? #28Choose the closest option.#29

#28a#29 $400,000

#28b#29 $425,926

#28c#29 $433,333

#28d#29 $600,000

#28e#29 $300,000

MULTIPLE CHOICE 317

Topic,Auctions Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,B

17.11

First Fiddler's Bank has foreclosed on a home mortgage and is selling the house at auction,There

are three bidders for the house,Waldo,Heidi,and Isabella,First Fiddler's does not know the

willingness to pay of these three bidders for the house,but on the basis of its previous experience,

the bank believes that each of these bidders has a probabilityof1=3of valuing it at $600,000,a

probabilityof1=3of valuing at $300,000,and a probabilityof1=3of valuing it at $200,000,First

Fiddler's believes that these probabilities are independentbetween buyers,If First Fiddler's sells

the house by means of a second-bidder,sealed-bid auction #28Vickrey auction#29,what will be the

bank's expected revenue from the sale? #28Choose the closest option.#29

#28a#29 $300,000

#28b#29 $351,852

#28c#29 $366,667

#28d#29 $600,000

#28e#29 $200,000

Topic,Auctions Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,B

17.12

First Fiddler's Bank has foreclosed on a home mortgage and is selling the house at auction,There

are three bidders for the house,Roger,Wendy,and Doreen,First Fiddler's does not know the

willingness to pay of these three bidders for the house,but on the basis of its previous experience,

the bank believes that each of these bidders has a probabilityof1=3of valuing it at $700,000,a

probabilityof1=3of valuing at $400,000,and a probabilityof1=3of valuing it at $200,000,First

Fiddler's believes that these probabilities are independentbetween buyers,If First Fiddler's sells

the house by means of a second-bidder,sealed-bid auction #28Vickrey auction#29,what will be the

bank's expected revenue from the sale? #28Choose the closest option.#29

#28a#29 $400,000

#28b#29 $425,926

#28c#29 $433,333

#28d#29 $700,000

#28e#29 $200,000

CHAPTER 17 Auctions 318

Topic,Auctions Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,D

17.13 A dealer decides to sell an antique automobile by means of an English auction with a

reservation price of $900,There are two bidders,The dealer believes that there are only three

possible values,$6,300,$2,700,and $900,that each bidder's willingness to pay might take,Each

bidder has a probabilityof1=3of having each of these willingnesses to pay,and the probabilities for

each of the two bidders are independent of the other's valuation,Assuming that the two bidders bid

rationally and do not collude,the dealer's expected revenue from selling the car is approximately

#28a#29 $4,500.

#28b#29 $3,300.

#28c#29 $2,700.

#28d#29 $2,100.

#28e#29 $6,300.

Topic,Auctions Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,D

17.14 A dealer decides to sell an antique automobile by means of an English auction with a

reservation price of $3,600,There are two bidders,The dealer believes that there are only three

possible values,$5,400,$4,500,and $3,600,that each bidder's willingness to pay might take,Each

bidder has a probabilityof1=3of having each of these willingnesses to pay,and the probabilities for

each of the two bidders are independent of the other's valuation,Assuming that the two bidders bid

rationally and do not collude,the dealer's expected revenue from selling the car is approximately

#28a#29 $4,950.

#28b#29 $4,500.

#28c#29 $4,500.

#28d#29 $4,100.

#28e#29 $5,400.

MULTIPLE CHOICE 319

Topic,Auctions Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,D

17.15 A dealer decides to sell an antique automobile by means of an English auction with a

reservation price of $2,700,There are two bidders,The dealer believes that there are only three

possible values,$8,100,$5,400,and $2,700,that each bidder's willingness to pay might take,Each

bidder has a probabilityof1=3of having each of these willingnesses to pay,and the probabilities for

each of the two bidders are independent of the other's valuation,Assuming that the two bidders bid

rationally and do not collude,the dealer's expected revenue from selling the car is approximately

#28a#29 $6,750.

#28b#29 $5,400.

#28c#29 $5,400.

#28d#29 $4,200.

#28e#29 $8,100.

Topic,Auctions Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,D

17.16 A dealer decides to sell an antique automobile by means of an English auction with a

reservation price of $900,There are two bidders,The dealer believes that there are only three

possible values,$3,600,$2,700,and $900,that each bidder's willingness to pay might take,Each

bidder has a probabilityof1=3of having each of these willingnesses to pay,and the probabilities for

each of the two bidders are independent of the other's valuation,Assuming that the two bidders bid

rationally and do not collude,the dealer's expected revenue from selling the car is approximately

#28a#29 $3,150.

#28b#29 $2,400.

#28c#29 $2,700.

#28d#29 $1,800.

#28e#29 $3,600.

CHAPTER 17 Auctions 320

Topic,Auctions Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,D

17.17 A dealer decides to sell an antique automobile by means of an English auction with a

reservation price of $900,There are two bidders,The dealer believes that there are only three

possible values,$5,400,$3,600,and $900,that each bidder's willingness to pay might take,Each

bidder has a probabilityof1=3of having each of these willingnesses to pay,and the probabilities for

each of the two bidders are independent of the other's valuation,Assuming that the two bidders bid

rationally and do not collude,the dealer's expected revenue from selling the car is approximately

#28a#29 $4,500.

#28b#29 $3,300.

#28c#29 $3,600.

#28d#29 $2,300.

#28e#29 $5,400.

Topic,Auctions Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,A

17.18 A dealer decides to sell an oil painting by means of an English auction with a reservation

price just slightly below $81,000,If he fails to get his reservation price for the painting,he will

burn it,There are two bidders,The dealer believes that there are only three possible values,

$90,000,$81,000,and $45,000,that each bidder's willingness to pay might take,Each bidder has a

probabilityof1=3of having each of these willingnesses to pay,and the probabilities for each of the

two bidders are independent of the other's valuation,Assuming that the two bidders bid rationally

and do not collude,the dealer's expected revenue from selling the painting is slightly less than

#28a#29 $73,000.

#28b#29 $81,000.

#28c#29 $45,000.

#28d#29 $63,000.

#28e#29 $72,000.

MULTIPLE CHOICE 321

Topic,Auctions Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,A

17.19 A dealer decides to sell an oil painting by means of an English auction with a reservation

price just slightly below $45,000,If he fails to get his reservation price for the painting,he will

burn it,There are two bidders,The dealer believes that there are only three possible values,

$63,000,$45,000,and $27,000,that each bidder's willingness to pay might take,Each bidder has a

probabilityof1=3of having each of these willingnesses to pay,and the probabilities for each of the

two bidders are independent of the other's valuation,Assuming that the two bidders bid rationally

and do not collude,the dealer's expected revenue from selling the painting is slightly less than

#28a#29 $42,000.

#28b#29 $45,000.

#28c#29 $27,000.

#28d#29 $36,000.

#28e#29 $45,000.

Topic,Auctions Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,A

17.20 A dealer decides to sell an oil painting by means of an English auction with a reservation

price just slightly below $90,000,If he fails to get his reservation price for the painting,he will

burn it,There are two bidders,The dealer believes that there are only three possible values,

$117,000,$90,000,and $45,000,that each bidder's willingness to pay might take,Each bidder has

a probabilityof1=3of having each of these willingnesses to pay,and the probabilities for each of the

two bidders are independent of the other's valuation,Assuming that the two bidders bid rationally

and do not collude,the dealer's expected revenue from selling the painting is slightly less than

#28a#29 $83,000.

#28b#29 $90,000.

#28c#29 $45,000.

#28d#29 $67,500.

#28e#29 $84,000.

CHAPTER 17 Auctions 322

Topic,Auctions Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,A

17.21 A dealer decides to sell an oil painting by means of an English auction with a reservation

price just slightly below $72,000,If he fails to get his reservation price for the painting,he will

burn it,There are two bidders,The dealer believes that there are only three possible values,

$117,000,$72,000,and $36,000,that each bidder's willingness to pay might take,Each bidder has

a probabilityof1=3of having each of these willingnesses to pay,and the probabilities for each of the

two bidders are independent of the other's valuation,Assuming that the two bidders bid rationally

and do not collude,the dealer's expected revenue from selling the painting is slightly less than

#28a#29 $69,000.

#28b#29 $72,000.

#28c#29 $36,000.

#28d#29 $54,000.

#28e#29 $75,000.

Topic,Auctions Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,A

17.22 A dealer decides to sell an oil painting by means of an English auction with a reservation

price just slightly below $63,000,If he fails to get his reservation price for the painting,he will

burn it,There are two bidders,The dealer believes that there are only three possible values,

$108,000,$63,000,and $27,000,that each bidder's willingness to pay might take,Each bidder has

a probabilityof1=3of having each of these willingnesses to pay,and the probabilities for each of the

two bidders are independent of the other's valuation,Assuming that the two bidders bid rationally

and do not collude,the dealer's expected revenue from selling the painting is slightly less than

#28a#29 $61,000.

#28b#29 $63,000.

#28c#29 $27,000.

#28d#29 $45,000.

#28e#29 $66,000.

MULTIPLE CHOICE 323

Topic,Auctions Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,A

17.23 Herb's Auction House in Purloined Hubcap,Oregon,holds sealed-bid used-car auctions

every Wednesday,Each car is sold to the highest bidder at the second-highest bidder's bid,On

average,two-thirds of the cars that are auctioned are lemons and one-third are good used cars.

A good car is worth $1,500 to any buyer,A lemon is worth only $150 to a buyer,Most buyers

can do no better than random at picking good cars from the lot,There is only one exception,Al

Crankcase,Al can sometimes but not always detect lemons by means of a subtle test,A good car

will never fail Al's test,but approximately half of the lemons fail his test,Al attends every auction,

tests every car,and always bids his expected value,Normal bidders bid less than the expected

value for a randomly selected car but more than the value of a lemon.

#28a#29 Al will bid $825 for cars that pass his test and $150 for cars that fail his test,Normal bidders will get

only lemons.

#28b#29 Al will bid $750 for cars that pass his test and $500 for cars that fail his test,Normal bidders will get

only lemons

#28c#29 Al will bid $500 for cars that pass his test and $150 for cars that fail his test,Normal bidders will get

good cars only 1=6 of the time.

#28d#29 Al will bid $600 for cars that pass his test and $250 for cars that fail his test,Normal bidders will get

good cars only 1=6 of the time.

#28e#29 Al will bid $300 for cars that pass his test and $150 for cars that fail his test,Normal bidders will get

good cars 1=12 of the time.

Topic,Auctions Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,B

17.24 A seller knows that there are two bidders for the object she is selling,She believes that

with probability 1=2; one has a buyer value of $5 and the other has a buyer value of $10 and,with

probability 1=2; one has a buyer value of $8 and the other has a buyer value of $15,She knows

that bidders will want to buy the object so long as they can get it for their buyer value or less,She

sells it in an English auction with a reserve price which she must set before the auction starts,To

maximize her expected pro#0Cts,she should set the reserve price at

#28a#29 $5.

#28b#29 $10.

#28c#29 $8.

#28d#29 $13.

#28e#29 $15.

CHAPTER 17 Auctions 324

Topic,Auctions Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,A

17.25 A seller knows that there are two bidders for the object he is selling,He believes that

with probability 1=2; one has a buyer value of $5 and the other has a buyer value of $12 and,with

probability 1=2; one has a buyer value of $10 and the other has a buyer value of $30,He knows

that bidders will want to buy the object so long as they can get it for their buyer value or less,He

sells it in an English auction with a reserve price whichhemust set before the auction starts,To

maximize his expected pro#0Cts,he should set the reserve price at

#28a#29 $30.

#28b#29 $5.

#28c#29 $12.

#28d#29 $10.

#28e#29 $20.

Topic,Auctions Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,C

17.26 A seller decides to sell an object by means of a sealed-bid,second-price auction without a

reservation price,There are two bidders,The seller believes that for each of the two bidders there

is a probabilityof1=2that the bidder's value for the object is $500 and a probabilityof1=2that the

bidder's value is $100,The seller believes that these probabilities are independentbetween bidders.

If the bidders bid rationally,what is the seller's expected revenue from the auction?

#28a#29 $500

#28b#29 $300

#28c#29 $200

#28d#29 $180

#28e#29 $260

MULTIPLE CHOICE 325

Topic,Auctions Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,C

17.27 A seller decides to sell an object by means of a sealed-bid,second-price auction without a

reservation price,There are two bidders,The seller believes that for each of the two bidders there

is a probabilityof1=2that the bidder's value for the object is $500 and a probabilityof1=2that the

bidder's value is $100,The seller believes that these probabilities are independentbetween bidders.

If the bidders bid rationally,what is the seller's expected revenue from the auction?

#28a#29 $500

#28b#29 $300

#28c#29 $200

#28d#29 $180

#28e#29 $260

Topic,Auctions Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,C

17.28 A seller decides to sell an object by means of a sealed-bid,second-price auction without a

reservation price,There are two bidders,The seller believes that for each of the two bidders there

is a probabilityof1=2that the bidder's value for the object is $600 and a probabilityof1=2that the

bidder's value is $100,The seller believes that these probabilities are independentbetween bidders.

If the bidders bid rationally,what is the seller's expected revenue from the auction?

#28a#29 $600

#28b#29 $350

#28c#29 $225

#28d#29 $200

#28e#29 $300

CHAPTER 17 Auctions 326

Topic,Auctions Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,C

17.29 A seller decides to sell an object by means of a sealed-bid,second-price auction without a

reservation price,There are two bidders,The seller believes that for each of the two bidders there

is a probabilityof1=2that the bidder's value for the object is $400 and a probabilityof1=2that the

bidder's value is $100,The seller believes that these probabilities are independentbetween bidders.

If the bidders bid rationally,what is the seller's expected revenue from the auction?

#28a#29 $400

#28b#29 $250

#28c#29 $175

#28d#29 $160

#28e#29 $220

Topic,Auctions Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,C

17.30 A seller decides to sell an object by means of a sealed-bid,second-price auction without a

reservation price,There are two bidders,The seller believes that for each of the two bidders there

is a probabilityof1=2that the bidder's value for the object is $500 and a probabilityof1=2that the

bidder's value is $100,The seller believes that these probabilities are independentbetween bidders.

If the bidders bid rationally,what is the seller's expected revenue from the auction?

#28a#29 $500

#28b#29 $300

#28c#29 $200

#28d#29 $180

#28e#29 $260

MULTIPLE CHOICE 327

Topic,Auctions Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,A

17.31 A seller decides to sell an object by means of an English auction without a reservation price.

There are two bidders,The seller believes that for each of the two bidders there is a probabilityof

1=2that the bidder's value for the object is $600 and a probabilityof1=2that the bidder's value is

$300,The seller believes that these probabilities are independentbetween bidders,If the bidders

bid rationally,what is the seller's expected revenue from the auction?

#28a#29 $375

#28b#29 $420

#28c#29 $450

#28d#29 $600

#28e#29 $300

Topic,Auctions Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,A

17.32 A seller decides to sell an object by means of an English auction without a reservation price.

There are two bidders,The seller believes that for each of the two bidders there is a probabilityof

1=2that the bidder's value for the object is $500 and a probabilityof1=2that the bidder's value is

$200,The seller believes that these probabilities are independentbetween bidders,If the bidders

bid rationally,what is the seller's expected revenue from the auction?

#28a#29 $275

#28b#29 $320

#28c#29 $350

#28d#29 $500

#28e#29 $200

CHAPTER 17 Auctions 328

Topic,Auctions Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,A

17.33 A seller decides to sell an object by means of an English auction without a reservation price.

There are two bidders,The seller believes that for each of the two bidders there is a probabilityof

1=2that the bidder's value for the object is $400 and a probabilityof1=2that the bidder's value is

$300,The seller believes that these probabilities are independentbetween bidders,If the bidders

bid rationally,what is the seller's expected revenue from the auction?

#28a#29 $325

#28b#29 $340

#28c#29 $350

#28d#29 $400

#28e#29 $300

Topic,Auctions Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,A

17.34 A seller decides to sell an object by means of an English auction without a reservation price.

There are two bidders,The seller believes that for each of the two bidders there is a probabilityof

1=2that the bidder's value for the object is $400 and a probabilityof1=2that the bidder's value is

$100,The seller believes that these probabilities are independentbetween bidders,If the bidders

bid rationally,what is the seller's expected revenue from the auction?

#28a#29 $175

#28b#29 $220

#28c#29 $250

#28d#29 $400

#28e#29 $100

MULTIPLE CHOICE 329

Topic,Auctions Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,A

17.35 A seller decides to sell an object by means of an English auction without a reservation price.

There are two bidders,The seller believes that for each of the two bidders there is a probabilityof

1=2that the bidder's value for the object is $600 and a probabilityof1=2that the bidder's value is

$300,The seller believes that these probabilities are independentbetween bidders,If the bidders

bid rationally,what is the seller's expected revenue from the auction?

#28a#29 $375

#28b#29 $420

#28c#29 $450

#28d#29 $600

#28e#29 $300

Chapter 18

True-False Technology

Topic,Technology Di#0Eculty,1

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,False

18.1 The production set of a #0Crm is the set of all products the #0Crm can produce.

Topic,Technology Di#0Eculty,1

#25 Correct Responses,72 Discrimination Index,49

Correct Answer,False

18.2 A production isoquant is a locus of combinations of inputs that are equally pro#0Ctable.

Topic,Technology Di#0Eculty,1

#25 Correct Responses,77 Discrimination Index,32

Correct Answer,False

18.3 If there are constant returns to scale,then doubling the amountofany input will exactly

double the amount of output.

Topic,Technology Di#0Eculty,1

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,True

18.4 The economist's distinction between long and short run captures the idea that quantities of

some factor inputs can be varied in the short run but not in the long run.

Topic,Technology Di#0Eculty,2

#25 Correct Responses,79 Discrimination Index,23

Correct Answer,True

18.5 If the production function is f#28x;y#29=minf2x+y;x+2yg;then there are constant returns to

scale.

Topic,Technology Di#0Eculty,2

#25 Correct Responses,84 Discrimination Index,10

Correct Answer,True

18.6 If the production function is f#28x;y#29=x+minfx;yg; then there are constant returns to scale.

TRUE-FALSE 331

Topic,Technology Di#0Eculty,2

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,True

18.7 If the production function is f#28x;y#29=minf12x;3yg; then there is convexity in production.

Topic,Technology Di#0Eculty,1

#25 Correct Responses,76 Discrimination Index,14

Correct Answer,False

18.8 If the production function is f#28x

1;x

2

#29=x

1

x

2;then there are constant returns to scale.

Topic,Technology Di#0Eculty,2

#25 Correct Responses,55 Discrimination Index,38

Correct Answer,True

18.9 It is possible to have decreasing marginal products for all inputs,and yet have increasing

returns to scale.

Topic,Technology Di#0Eculty,1

#25 Correct Responses,83 Discrimination Index,24

Correct Answer,True

18.10 A production function has well-de#0Cned marginal products at every input combination,If

Factor x is shown on the horizontal axis and Factor y is shown on the vertical axis,the slope of the

isoquant through a point #28x#03;y#03#29 is the negative of the ratio of the marginal product of x to the

marginal product of y.

Topic,Technology Di#0Eculty,1

#25 Correct Responses,80 Discrimination Index,10

Correct Answer,False

18.11 The production function f#28x;y#29=x

2=3

+y

2=3

has increasing returns to scale.

Topic,Technology Di#0Eculty,1

#25 Correct Responses,96 Discrimination Index,2

Correct Answer,True

18.12 The production function f#28x;y#29=x+yhas constant returns to scale.

CHAPTER 18 Technology 332

Topic,Technology Di#0Eculty,2

#25 Correct Responses,75 Discrimination Index,27

Correct Answer,True

18.13 If there is one input used in production and if there are decreasing returns to scale,then

the marginal product for the input will be diminishing.

Topic,Technology Di#0Eculty,1

#25 Correct Responses,92 Discrimination Index,7

Correct Answer,False

18.14 A #0Crm's production function is f#28x

1;x

2

#29=x

1

+2x

2

,This means that x

2

is twice as expensive

as x

1

.

Topic,Technology Di#0Eculty,2

#25 Correct Responses,75 Discrimination Index,20

Correct Answer,True

18.15 A #0Crm has twovariable factors and a production function f#28x

1;x

2

#29=#282x

1

+4x

2

#29

1=2

,The

technical rate of substitution between x

1

and x

2

is constant.

Topic,Technology Di#0Eculty,1

#25 Correct Responses,38 Discrimination Index,8

Correct Answer,False

18.16 If the marginal product of each factor decreases as the amount of that factor used increases,

then there must be decreasing returns to scale.

Multiple Choice Technology

Topic,Technology Di#0Eculty,1

#25 Correct Responses,92 Discrimination Index,13

Correct Answer,B

18.1 In any production process,the marginal product of labor equals:

#28a#29 the value of total output minus the cost of the #0Cxed capital stock.

#28b#29 the change in output per unit change in labor input for #5Csmall" changes in the amount of input.

#28c#29 total output divided by total labor inputs.

#28d#29 total output produced with the given labor inputs.

#28e#29 the average output of the least skilled workers employed by the #0Crm.

Topic,Technology Di#0Eculty,2

#25 Correct Responses,67 Discrimination Index,41

Correct Answer,A

18.2 If a #0Crm moves from one point on a production isoquant to another point on the same

isoquant,which of the following will certainly NOT happen?

#28a#29 achange in the level of output

#28b#29 achange in the ratio in which the inputs are combined

#28c#29 achange in the marginal products of the inputs

#28d#29 achange in the rate of technical substitution

#28e#29 achange in pro#0Ctability

Topic,Technology Di#0Eculty,2

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,A

18.3 A #0Crm has the production function f#28x;y#29=x

:5

+ywhere x is the amount of factor x it

uses and y is the amount of factor y,On a diagram we put x on the horizontal axis and y on the

vertical axis,We draw some isoquants,Nowwe draw a straight line on the graph and we notice

that the slopes of all the isoquants that it meets have the same slope at the point where they meet

this line,The straight line we drew was:

#28a#29 vertical.

#28b#29 horizontal.

#28c#29 diagonal through the origin with slope,5.

#28d#29 diagonal with slope 2.

#28e#29 diagonal with slope greater than 2.

CHAPTER 18 Technology 334

Topic,Technology Di#0Eculty,2

#25 Correct Responses,72 Discrimination Index,24

Correct Answer,E

18.4 Which of the following production functions exhibit constant returns to scale? In each

case y is output and K and L are inputs,#281#29 y = K

1=2

L

2=3

#282#29 y =3K

1=2

L

1=2

#283#29 y = K

1=2

+ L

1=2

#284#29y =2K+3L.

#28a#29 1,2,and 4

#28b#29 2,3,and 4

#28c#29 1,3,and 4

#28d#29 2 and 3

#28e#29 2 and 4

Topic,Technology Di#0Eculty,2

#25 Correct Responses,73 Discrimination Index,54

Correct Answer,D

18.5 A #0Crm has the production function,f#28x;y#29=20x

3=5

y

2=5

,The slope of the #0Crm's isoquantat

the point #28x;y#29 = #2880;10#29 is,#28Pick the closest one.#29

#28a#29,8.

#28b#29,1:50.

#28c#29,0:67.

#28d#29,0:19.

#28e#29,4.

Topic,Technology Di#0Eculty,2

#25 Correct Responses,73 Discrimination Index,54

Correct Answer,D

18.6 A #0Crm has the production function,f#28x;y#29=40x

2=5

y

3=5

,The slope of the #0Crm's isoquantat

the point #28x;y#29 = #2870;50#29 is,#28Pick the closest one.#29

#28a#29,1:40.

#28b#29,0:67.

#28c#29,1:50.

#28d#29,0:48.

#28e#29,0:70.

MULTIPLE CHOICE 335

Topic,Technology Di#0Eculty,1

#25 Correct Responses,51 Discrimination Index,11

Correct Answer,C

18.7 A #0Crm uses only two inputs to produce its output,These inputs are perfect substitutes.

This #0Crm:

#28a#29 must have increasing returns to scale.

#28b#29 must have constant returns to scale.

#28c#29 could have increasing returns to scale,constant returns to scale,or decreasing returns to scale.

#28d#29 must have decreasing returns to scale.

#28e#29 must have decreasing returns to scale in the short run and constant returns to scale in the long run.

Topic,Technology Di#0Eculty,2

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,C

18.8 A #0Crm has the production function f#28X;Y#29=X

3=4

Y

1=4

where X is the amount of factor x

used and Y is the amount of factor y used,On a diagram we put X on the horizontal axis and Y on

the vertical axis,We draw some isoquants,Nowwe draw a straight line on the graph and we notice

that wherever this line meets an isoquant,the isoquant has a slope of,3,The straight line we drew:

#28a#29 is vertical.

#28b#29 is horizontal.

#28c#29 is a ray through the origin with slope 1.

#28d#29 isaray through the origin with slope 2.

#28e#29 has a negative slope.

Topic,Technology Di#0Eculty,2

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,C

18.9 A #0Crm has the production function f#28X;Y#29=X

2=3

Y

1=3

where X is the amount of factor x

used and Y is the amount of factor y used,On a diagram we put X on the horizontal axis and Y on

the vertical axis,We draw some isoquants,Nowwe draw a straight line on the graph and we notice

that wherever this line meets an isoquant,the isoquant has a slope of,4,The straight line we drew:

#28a#29 is vertical.

#28b#29 is horizontal.

#28c#29 is a ray through the origin with slope 2.

#28d#29 isaray through the origin with slope 3.

#28e#29 has a negative slope.

CHAPTER 18 Technology 336

Topic,Technology Di#0Eculty,1

#25 Correct Responses,31 Discrimination Index,32767

Correct Answer,C

18.10 If output is produced with two factors of production and with increasing returns to scale:

#28a#29 there cannot be diminishing marginal rate of substitution.

#28b#29 all inputs must have increasing marginal products.

#28c#29 on a graph of production isoquants,moving along a ray from the origin,output more than doubles as

the distance from the origin doubles.

#28d#29 the marginal product of at least one input must be increasing.

#28e#29 all inputs must have decreasing marginal products.

Topic,Technology Di#0Eculty,2

#25 Correct Responses,55 Discrimination Index,46

Correct Answer,B

18.11 A #0Crm has the production function f#28x

1;x

2

#29=#28x

b

1

+x

b

2

#29

c

where b#3E0and c#3E0,This #0Crm

will have:

#28a#29 increasing returns to scale if and only if 2b+ c#3E1.

#28b#29 increasing returns to scale if and only if bc #3E 1.

#28c#29 increasing returns to scale if and only if b+ c#3E1.

#28d#29 constant returns to scale if and only if c =1.

#28e#29 constant returns to scale if and only if b = c.

Topic,Technology Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,C

18.12 A #0Crm has the production function f#28x;y#29=x+minfx;yg,The isoquants for the #0Crm:

#28a#29 are L shaped with the corners of the L on the line y = x.

#28b#29 are L shaped with the corners of the L on the line y = x+1.

#28c#29 consist of two line segments,one vertical and the other with a slope of,1.

#28d#29 consist of two line segments,one horizontal and the other with a slope of,1.

#28e#29 are upside down L shaped.

MULTIPLE CHOICE 337

Topic,Technology Di#0Eculty,3

#25 Correct Responses,32 Discrimination Index,41

Correct Answer,D

18.13 Suppose that the production function is f#28x

1;x

2

#29=#28x

a

1

+x

a

2

#29

b;where a and b are positive

constants,For what values of a and b is there diminishing technical rate of substitution?

#28a#29 for anyvalue of a if b#3C1.

#28b#29 for anyvalues of a and b if ab #3C 1.

#28c#29 for anyvalues of a and b if a#3Eb.

#28d#29 for anyvalue of b if a#3C1.

#28e#29 None of the above.

Topic,Technology Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,D

18.14 A #0Crm has the production function f#28x

1;x

2

#29=x

0:40

1

x

0:20

2

,The isoquant on which output is

40

2=10

has the equation:

#28a#29 x

2

=40x

,2

1

.

#28b#29 x

2

=40x

5

1

.

#28c#29 x

1

=x

2

=2.

#28d#29 x

2

=40x

,0:20

1

#28e#29 x

1

=0:20x

,0:80

2

.

Topic,Technology Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,D

18.15 A #0Crm has the production function f#28x

1;x

2

#29=x

1:20

1

x

0:60

2

,The isoquant on which output is

30

6=10

has the equation:

#28a#29 x

2

=30x

,2

1

.

#28b#29 x

2

=30x

1:67

1

.

#28c#29 x

1

=x

2

=2.

#28d#29 x

2

=30x

,0:60

1

#28e#29 x

1

=0:60x

,0:40

2

.

CHAPTER 18 Technology 338

Topic,Technology Di#0Eculty,1

#25 Correct Responses,94 Discrimination Index,20

Correct Answer,E

18.16 A #0Crm has the production function f#28x;y#29=x

1

y

0:80

,This #0Crm has:

#28a#29 decreasing returns to scale and dimininishing marginal products for factor x.

#28b#29 increasing returns to scale and decreasing marginal product of factor x.

#28c#29 decreasing returns to scale and increasing marginal product for factor x.

#28d#29 constant returns to scale.

#28e#29 none of the above.

Topic,Technology Di#0Eculty,1

#25 Correct Responses,94 Discrimination Index,20

Correct Answer,E

18.17 A #0Crm has the production function f#28x;y#29=x

1:30

y

1

,This #0Crm has:

#28a#29 decreasing returns to scale and dimininishing marginal products for factor x.

#28b#29 increasing returns to scale and decreasing marginal product of factor x.

#28c#29 decreasing returns to scale and increasing marginal product for factor x.

#28d#29 constant returns to scale.

#28e#29 none of the above.

Topic,Technology Di#0Eculty,1

#25 Correct Responses,100 Discrimination Index,0

Correct Answer,B

18.18 A #0Crm uses 3 factors to produce its output,Its production function is f#28x;y;z#29=

minfx

3

=y;y

2;#28z

4

,x

4

#29=y

2

g,If the amountofeach input is multiplied by 6,its output will be multi-

plied by:

#28a#29 216

#28b#29 36

#28c#29 6

#28d#29 0.16

#28e#29 The answer depends on the original choice of x; y; and z.

MULTIPLE CHOICE 339

Topic,Technology Di#0Eculty,1

#25 Correct Responses,100 Discrimination Index,0

Correct Answer,B

18.19 A #0Crm uses 3 factors to produce its output,Its production function is f#28x;y;z#29=

minfx

2

=y;y

1;#28z

3

,x

3

#29=y

2

g,If the amountofeach input is multiplied by 4,its output will be multi-

plied by:

#28a#29 16

#28b#29 4

#28c#29 1

#28d#29 0.80

#28e#29 The answer depends on the original choice of x; y; and z.

Topic,Technology Di#0Eculty,2

#25 Correct Responses,65 Discrimination Index,90

Correct Answer,A

18.20 A #0Crm has a production function f#28x;y#29=1#28x

0:80

+y

0:80

#29

4

whenever x#3E0and y#3E0,When

the amounts of both inputs are positive,this #0Crm has:

#28a#29 increasing returns to scale.

#28b#29 decreasing returns to scale.

#28c#29 constant returns to scale.

#28d#29 increasing returns to scale if x+y#3E1 and decreasing returns to scale otherwise.

#28e#29 increasing returns to scale if output is less than 1 and decreasing returns to scale if output is greater

than 1.

Topic,Technology Di#0Eculty,2

#25 Correct Responses,65 Discrimination Index,90

Correct Answer,A

18.21 A #0Crm has a production function f#28x;y#29=1:10#28x

0:20

+ y

0:20

#29

5

whenever x#3E0and y#3E0.

When the amounts of both inputs are positive,this #0Crm has:

#28a#29 increasing returns to scale.

#28b#29 decreasing returns to scale.

#28c#29 constant returns to scale.

#28d#29 increasing returns to scale if x+y#3E1 and decreasing returns to scale otherwise.

#28e#29 increasing returns to scale if output is less than 1 and decreasing returns to scale if output is greater

than 1.

CHAPTER 18 Technology 340

Topic,Technology Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,A

18.22 The production function Q =50K

0:75

L

0:75

exhibits

#28a#29 increasing returns to scale.

#28b#29 constant returns to scale.

#28c#29 decreasing returns to scale.

#28d#29 increasing,then diminishing returns to scale.

#28e#29 negative returns to scale.

Topic,Technology Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,A

18.23 The production function Q =50K

0:75

L

0:50

exhibits

#28a#29 increasing returns to scale.

#28b#29 constant returns to scale.

#28c#29 decreasing returns to scale.

#28d#29 increasing,then diminishing returns to scale.

#28e#29 negative returns to scale.

Topic,Technology Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,C

18.24 The UJava espresso stand needs two inputs,labor and co#0Bee beans,to produce its only

output,espresso,Producing an espresso always requires the same amount of co#0Bee beans,and the

same amount of time,Which of the following production functions would appropriately describe

the production process at UJava,where B represents ounces of co#0Bee beans,and L represents hours

of labor?

#28a#29 Q = B

0:60

L

0:40

#28b#29 Q = B=2+L=30

#28c#29 Q = min#282B;60L#29

#28d#29 Q =0:5B+0:5L

0:5

$

#28e#29 none of the above.

MULTIPLE CHOICE 341

Topic,Technology Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,C

18.25 The UJava espresso stand needs two inputs,labor and co#0Bee beans,to produce its only

output,espresso,Producing an espresso always requires the same amount of co#0Bee beans,and the

same amount of time,Which of the following production functions would appropriately describe

the production process at UJava,where B represents ounces of co#0Bee beans,and L represents hours

of labor?

#28a#29 Q = B

0:70

L

0:30

#28b#29 Q = B=2+L=30

#28c#29 Q = min#282B;60L#29

#28d#29 Q =0:5B+0:5L

0:5

$

#28e#29 none of the above.

Essay Technology

Topic,Technology Di#0Eculty,2

#25 Correct Responses,0 Discrimination Index,0

18.1 On separate axes,drawtypical production isoquants for each of the following production

functions,a#29 f#28x;y#29=minf2x;x+yg b#29 f#28x;y#29=xy c#29 f#28x;y#29=x+minfx;yg d#29 f#28x;y#29=x+y

1=2

.

Answer,For a#29,the isoquants have a kink at the line x = y.Atatypical point on this line,say

x = y =3;the isoquanthasavertical segment going all the way to the sky and another segment

running from #283;3#29 to #286;0#29,b#29 These are rectangular hyperbolas,c#29If x is on the horizontal axis and

y on the vertical axis,an isoquant has a kink on the line x = y.To the left of this line,an isoquant

has the slope,1; to the right of this line,an isoquant has slope,1.Above this line the isoquant

is vertical,d#29 The isoquants are convex to the origin,If you draw a horizontal line through twoor

more isoquants,they will all have the same slope where they meet this line.

Topic,Technology Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

18.2 For each of the following production functions,comment on the ability to substitute capital

for labor.#28a#29 Q = K + L

#28b#29 Q = K

0:5

L

0:5

#28c#29 Q = min#28K;L#29

#28d#29 Whywould this information be of interest to a manager?

Topic,Technology Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

18.3 For each of the following production functions,draw a diagram showing the general shape

of its corresponding isoquant,Comment on the ease at which labor and capital can be substituted

for one another relative to the other two production functions.

#28a#29 Q = K +L

#28b#29 Q = K

0:5

L

0:5

#28c#29 Q = min#28K;L#29

Chapter 19

True-False Pro#0Ct Maximization

Topic,Pro#0Ct Maximization Di#0Eculty,1

#25 Correct Responses,96 Discrimination Index,25

Correct Answer,False

19.1 The weak axiom of pro#0Ct maximizing behavior states that in a modern mixed economy,

#0Crms have only a weak incentive to maximize pro#0Cts.

Topic,Pro#0Ct Maximization Di#0Eculty,1

#25 Correct Responses,86 Discrimination Index,30

Correct Answer,False

19.2 A #0Cxed factor is a factor of production that is used in #0Cxed proportion to the level of output.

Topic,Pro#0Ct Maximization Di#0Eculty,1

#25 Correct Responses,92 Discrimination Index,7

Correct Answer,True

19.3 The marginal product of a factor is just the derivative of the production function with

respect to the amount of this factor,holding the amounts of other factor inputs constant.

Topic,Pro#0Ct Maximization Di#0Eculty,2

#25 Correct Responses,37 Discrimination Index,19

Correct Answer,False

19.4 If the value of the marginal product of factor x increases as the quantityofxincreases,and

the value of the marginal product of x is equal to the wage rate,then the pro#0Ct maximizing amount

of x is being used.

Topic,Pro#0Ct Maximization Di#0Eculty,2

#25 Correct Responses,43 Discrimination Index,45

Correct Answer,True

19.5 If the price of the output of a pro#0Ct-maximizing,competitive #0Crm rises and all other prices

stay constant,then the #0Crm's output cannot fall.

CHAPTER 19 Pro#0Ct Maximization 344

Topic,Pro#0Ct Maximization Di#0Eculty,1

#25 Correct Responses,78 Discrimination Index,12

Correct Answer,True

19.6 If a pro#0Ct-maximizing competitive #0Crm has constant returns to scale,then its long run

pro#0Cts must be zero.

Topic,Pro#0Ct Maximization Di#0Eculty,2

#25 Correct Responses,58 Discrimination Index,17

Correct Answer,False

19.7 Just as in the theory of utility maximizing consumers,the theory of pro#0Ct maximizing #0Crms

allows the possibility of "Gi#0Ben factors",These are factors for which a fall in price leads to a fall

in demand.

Topic,Pro#0Ct Maximization Di#0Eculty,1

#25 Correct Responses,92 Discrimination Index,15

Correct Answer,False

19.8 If the value of the marginal product of labor exceeds the wage rate,then a competitive,

pro#0Ct-maximizing #0Crm would want to hire less labor.

Topic,Pro#0Ct Maximization Di#0Eculty,2

#25 Correct Responses,63 Discrimination Index,40

Correct Answer,False

19.9 A #0Crm produces one input with one output and has decreasing returns to scale,The price

that it pays per unit of input and the price it gets per unit of output are independent of the

amount that this #0Crm buys or sells,If the government taxes its net pro#0Cts at some percentage rate

and subsidizes its inputs at the same percentage rate,the #0Crm's pro#0Ct maximizing output will not

change.

Multiple Choice Pro#0Ct Maximization

Topic,Pro#0Ct Maximization Di#0Eculty,2

#25 Correct Responses,81 Discrimination Index,36

Correct Answer,D

19.1 A competitive #0Crm produces output using three #0Cxed factors and one variable factor,The

#0Crm's short run production function is q = 163x,2x

2; where x is the amountofvariable factor used.

The price of output is $3 per unit and the price of the variable factor is $9 per unit,In the short

run,how many units of x should the #0Crm use?

#28a#29 20

#28b#29 80

#28c#29 19

#28d#29 40

#28e#29 None of the above.

Topic,Pro#0Ct Maximization Di#0Eculty,2

#25 Correct Responses,81 Discrimination Index,36

Correct Answer,D

19.2 A competitive #0Crm produces output using three #0Cxed factors and one variable factor,The

#0Crm's short run production function is q = 455x,5x

2; where x is the amountofvariable factor used.

The price of output is $3 per unit and the price of the variable factor is $15 per unit,In the short

run,how many units of x should the #0Crm use?

#28a#29 22

#28b#29 90

#28c#29 31

#28d#29 45

#28e#29 None of the above.

CHAPTER 19 Pro#0Ct Maximization 346

Topic,Pro#0Ct Maximization Di#0Eculty,2

#25 Correct Responses,69 Discrimination Index,50

Correct Answer,A

19.3 A competitive #0Crm produces a single output using several inputs,The price of output rises

by $2 per unit,The price of one of the inputs increases by $5 and the quantity of this input that

the #0Crm uses increases by 6 units,The prices of all other inputs stay unchanged,From the weak

axiom of pro#0Ct maximization we can tell that:

#28a#29 the output of the good must have increased by at least 15 units.

#28b#29 the inputs of the other factors must have stayed constant.

#28c#29 the output of the good must have decreased by at least 7.50 units.

#28d#29 the inputs of at least one of the other factors must have decreased by at least 6 units.

#28e#29 the inputs of at least one of the other factors must have increased by at least 6 units.

Topic,Pro#0Ct Maximization Di#0Eculty,2

#25 Correct Responses,69 Discrimination Index,50

Correct Answer,A

19.4 A competitive #0Crm produces a single output using several inputs,The price of output rises

by $3 per unit,The price of one of the inputs increases by $3 and the quantity of this input that

the #0Crm uses increases by 6 units,The prices of all other inputs stay unchanged,From the weak

axiom of pro#0Ct maximization we can tell that:

#28a#29 the output of the good must have increased by at least 6 units.

#28b#29 the inputs of the other factors must have stayed constant.

#28c#29 the output of the good must have decreased by at least 3 units.

#28d#29 the inputs of at least one of the other factors must have decreased by at least 6 units.

#28e#29 the inputs of at least one of the other factors must have increased by at least 6 units.

Topic,Pro#0Ct Maximization Di#0Eculty,2

#25 Correct Responses,13 Discrimination Index,17

Correct Answer,E

19.5 If there is perfect certainty,a competitive #0Crm will necessarily:

#28a#29 seek to maximize its immediate pro#0Cts rather than long run returns because otherwise it will go broke.

#28b#29 maximize the ratio of the presentvalue of its sales to the presentvalue of its costs.

#28c#29 equalize its pro#0Cts in all periods.

#28d#29 equalize its sales in all periods.

#28e#29 None of the above.

MULTIPLE CHOICE 347

Topic,Pro#0Ct Maximization Di#0Eculty,2

#25 Correct Responses,55 Discrimination Index,37

Correct Answer,B

19.6 A #0Crm produces one output using one input,When the cost of the input was 3 and the

price of the output was 3,the #0Crm used 6 units of input to produce 18 units of output,Later,

when the cost of the input was 7 and the price of the output was 4,the #0Crm used 5 units of input

to produce 20 units of output.

#28a#29 This behavior is consistent with WAPM.

#28b#29 This behavior is not consistent with WAPM.

#28c#29 This behavior is impossible no matter what the #0Crm is trying to do.

#28d#29 This behavior suggests the presence of increasing returns to scale.

#28e#29 This behavior suggests the presence of decreasing returns to scale.

Topic,Pro#0Ct Maximization Di#0Eculty,1

#25 Correct Responses,88 Discrimination Index,27

Correct Answer,C

19.7 A pro#0Ct-maximizing competitive #0Crm uses just one input,x,Its production function is

q =8x

1=2

,The price of output is 16 and the factor price is 8,The amount of the factor that the

#0Crm demands is:

#28a#29 10.

#28b#29 22.63.

#28c#29 64.

#28d#29 48.

#28e#29 None of the above.

Topic,Pro#0Ct Maximization Di#0Eculty,1

#25 Correct Responses,88 Discrimination Index,27

Correct Answer,C

19.8 A pro#0Ct-maximizing competitive #0Crm uses just one input,x,Its production function is

q =8x

1=2

,The price of output is 40 and the factor price is 8,The amount of the factor that the

#0Crm demands is:

#28a#29 13.

#28b#29 35.78.

#28c#29 400.

#28d#29 384.

#28e#29 None of the above.

CHAPTER 19 Pro#0Ct Maximization 348

Topic,Pro#0Ct Maximization Di#0Eculty,2

#25 Correct Responses,36 Discrimination Index,28

Correct Answer,A

19.9 A competitive,pro#0Ct-maximizing #0Crm uses two inputs a and b,Its production function is

F#28a;b#29=a

1=2

+b

1=2

,Its output sells for $5 per unit,The price of input a is $1 per unit,If the price

of output rises to $6 per unit but factor prices do not change,

#28a#29 it will increase its purchases of factor a by11=4 units.

#28b#29 it will increase its purchases of factor a by9=4 units.

#28c#29 it will increase its purchases of factor a by3=4 units.

#28d#29 wewould need to know the price of factor b to be able to determine the change in demand for a.

#28e#29 none of the above is true.

Topic,Pro#0Ct Maximization Di#0Eculty,2

#25 Correct Responses,44 Discrimination Index,40

Correct Answer,A

19.10 A competitive #0Crm's production function is f#28x

1;x

2

#29=4x

1=2

1

+10x

1=2

2

,The price of factor 1

is 1 and the price of factor 2 is 1,The price of output is 2,What is the pro#0Ct-maximizing quantity

of output?

#28a#29 116

#28b#29 232

#28c#29 112

#28d#29 244

#28e#29 104

Topic,Pro#0Ct Maximization Di#0Eculty,2

#25 Correct Responses,44 Discrimination Index,40

Correct Answer,A

19.11 A competitive #0Crm's production function is f#28x

1;x

2

#29=4x

1=2

1

+6x

1=2

2

,The price of factor 1

is 1 and the price of factor 2 is 2,The price of output is 4,What is the pro#0Ct-maximizing quantity

of output?

#28a#29 68

#28b#29 136

#28c#29 64

#28d#29 148

#28e#29 56

MULTIPLE CHOICE 349

Topic,Pro#0Ct Maximization Di#0Eculty,2

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,B

19.12 Ji#0By-pol Consultants is paid $1,000,000 for each percent of the vote that Senator Sleaze

receives in the upcoming election,Sleaze's share of the vote is determined by the number of slan-

derous campaign ads run by Ji#0By-Pol according to the function S = 100N=#28N +1#29;where N is the

number of ads,If each ad costs $3,600 approximately how many ads should Ji#0By-pol buy in order

to maximize its pro#0Cts?

#28a#29 3,329

#28b#29 1,666

#28c#29 72

#28d#29 1,702

#28e#29 833

Topic,Pro#0Ct Maximization Di#0Eculty,2

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,B

19.13 Ji#0By-pol Consultants is paid $1,000,000 for each percent of the vote that Senator Sleaze

receives in the upcoming election,Sleaze's share of the vote is determined by the number of slan-

derous campaign ads run by Ji#0By-Pol according to the function S = 100N=#28N +1#29;where N is the

number of ads,If each ad costs $6,400 approximately how many ads should Ji#0By-pol buy in order

to maximize its pro#0Cts?

#28a#29 2,495

#28b#29 1,249

#28c#29 128

#28d#29 1,313

#28e#29 625

CHAPTER 19 Pro#0Ct Maximization 350

Topic,Pro#0Ct Maximization Di#0Eculty,2

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,C

19.14 A competitive #0Crm uses a single input,x; to produce its output,y,The #0Crm's production

function is given by y = x

3=2

for quantities of x between 0 and 4,For quantities of x greater than

4,the #0Crm's output is y =4+x,If the price of the output y is 1 and the price of the input x is 3,

howmuch x should the #0Crm use to maximize its pro#0Ct?

#28a#29 16=9

#28b#29 4

#28c#29 0

#28d#29 4=3

#28e#29 9=2

Topic,Pro#0Ct Maximization Di#0Eculty,1

#25 Correct Responses,80 Discrimination Index,40

Correct Answer,B

19.15 The production function is given by F#28L#29=6L

2=3

,Suppose that the cost per unit of labor

is 12 and the price of output is 6,how many units of labor will the #0Crm hire?

#28a#29 16

#28b#29 8

#28c#29 4

#28d#29 24

#28e#29 None of the above.

Topic,Pro#0Ct Maximization Di#0Eculty,1

#25 Correct Responses,80 Discrimination Index,40

Correct Answer,B

19.16 The production function is given by F#28L#29=6L

2=3

,Suppose that the cost per unit of labor

is 8 and the price of output is 6,how many units of labor will the #0Crm hire?

#28a#29 54

#28b#29 27

#28c#29 13.5

#28d#29 81

#28e#29 None of the above.

MULTIPLE CHOICE 351

Topic,Pro#0Ct Maximization Di#0Eculty,1

#25 Correct Responses,88 Discrimination Index,40

Correct Answer,A

19.17 The production function is given by f#28x#29=4x

1=2

,If the price of the commodity produced

is 80 per unit and the cost of the input is 20 per unit,howmuch pro#0Cts will the #0Crm makeifit

maximizes pro#0Cts?

#28a#29 1,280

#28b#29 638

#28c#29 2,564

#28d#29 1,265

#28e#29 643

Topic,Pro#0Ct Maximization Di#0Eculty,1

#25 Correct Responses,88 Discrimination Index,40

Correct Answer,A

19.18 The production function is given by f#28x#29=4x

1=2

,If the price of the commodity produced

is 80 per unit and the cost of the input is 35 per unit,howmuch pro#0Cts will the #0Crm makeifit

maximizes pro#0Cts?

#28a#29 731.43

#28b#29 363.71

#28c#29 1,466.86

#28d#29 716.43

#28e#29 368.71

Topic,Pro#0Ct Maximization Di#0Eculty,1

#25 Correct Responses,80 Discrimination Index,45

Correct Answer,C

19.19 The production function is f#28x

1;x

2

#29=x

1=2

1

x

1=2

2

,If the price of factor 1 is 8 and the price of

factor 2 is 4,in what proportions should the #0Crm use factors 1 and 2 if it wants to maximize pro#0Cts?

#28a#29 x

1

= x

2

#28b#29 x

1

=2x

2

#28c#29 x

1

=0:50x

2

#28d#29 We can't tell without knowing the price of output.

#28e#29 x

1

=4x

2

CHAPTER 19 Pro#0Ct Maximization 352

Topic,Pro#0Ct Maximization Di#0Eculty,1

#25 Correct Responses,80 Discrimination Index,45

Correct Answer,C

19.20 The production function is f#28x

1;x

2

#29=x

1=2

1

x

1=2

2

,If the price of factor 1 is 16 and the price

of factor 2 is 32,in what proportions should the #0Crm use factors 1 and 2 if it wants to maximize

pro#0Cts?

#28a#29 x

1

= x

2

#28b#29 x

1

=0:50x

2

#28c#29 x

1

=2x

2

#28d#29 We can't tell without knowing the price of output.

#28e#29 x

1

=32x

2

Topic,Pro#0Ct Maximization Di#0Eculty,2

#25 Correct Responses,82 Discrimination Index,20

Correct Answer,A

19.21 When Farmer Hoglund applies N pounds of fertilizer per acre,the marginal product of

fertilizer is 1,#28N=200#29 bushels of corn,If the price of corn is $1 per bushel and the price of fertilizer

is $0.40 per pound,then how many pounds of fertilizer per acre should Farmer Hoglund use in

order to maximize his pro#0Cts?

#28a#29 120

#28b#29 240

#28c#29 64

#28d#29 248

#28e#29 200

MULTIPLE CHOICE 353

Topic,Pro#0Ct Maximization Di#0Eculty,2

#25 Correct Responses,82 Discrimination Index,20

Correct Answer,A

19.22 When Farmer Hoglund applies N pounds of fertilizer per acre,the marginal product of

fertilizer is 1,#28N=200#29 bushels of corn,If the price of corn is $4 per bushel and the price of fertilizer

is $0.40 per pound,then how many pounds of fertilizer per acre should Farmer Hoglund use in

order to maximize his pro#0Cts?

#28a#29 180

#28b#29 360

#28c#29 94

#28d#29 368

#28e#29 200

Topic,Pro#0Ct Maximization Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,E

19.23 If the short run marginal cost of producing a good is $20 for the #0Crst 200 units and $30

for each additional unit beyond 200,then in the short run,if the market price of output is 29,a

pro#0Ct maximizing #0Crm will:

#28a#29 produce a level of output where marginal revenue equals marginal cost.

#28b#29 produce as much output as possible since there are constant returns to scale.

#28c#29 produce up to the point where average cost equals 29.

#28d#29 not produce at all,since marginal cost is increasing.

#28e#29 produce exactly 200 units.

Topic,Pro#0Ct Maximization Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,E

19.24 If the short run marginal cost of producing a good is $20 for the #0Crst 300 units and $30

for each additional unit beyond 300,then in the short run,if the market price of output is 27,a

pro#0Ct maximizing #0Crm will:

#28a#29 produce a level of output where marginal revenue equals marginal cost.

#28b#29 produce as much output as possible since there are constant returns to scale.

#28c#29 produce up to the point where average cost equals 27.

#28d#29 not produce at all,since marginal cost is increasing.

#28e#29 produce exactly 300 units.

CHAPTER 19 Pro#0Ct Maximization 354

Topic,Pro#0Ct Maximization Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,D

19.25 Diesel Dan is a contract truck driver,While his revenue is $2.50 per mile driven,the faster

he drives,the greater the risk of a speeding ticket,The cost of driving his truck one hour at a

speed of S miles per hour is

C#28S#29=e

S,#2860=3#29

To maximize his pro#0Ct,Dan should drive

#28a#29 60 miles per hour.

#28b#29 60.92 miles per hour.

#28c#29 62.75 miles per hour.

#28d#29 66.04 miles per hour.

#28e#29 70.20 miles per hour.

Topic,Pro#0Ct Maximization Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,D

19.26 Diesel Dan is a contract truck driver,While his revenue is $1.50 per mile driven,the faster

he drives,the greater the risk of a speeding ticket,The cost of driving his truck one hour at a

speed of S miles per hour is

C#28S#29=e

S,#2850=3#29

To maximize his pro#0Ct,Dan should drive

#28a#29 50 miles per hour.

#28b#29 50.41 miles per hour.

#28c#29 51.22 miles per hour.

#28d#29 54.51 miles per hour.

#28e#29 58.67 miles per hour.

MULTIPLE CHOICE 355

Topic,Pro#0Ct Maximization Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,B

19.27 During the heightofthepetrock craze in the 1970

0

s; the price elasticity of demand was

estimated to be 1.10,Since pet rocks have a marginal cost of zero,a pro#0Ct maximizing seller of pet

rocks would

#28a#29 increase prices.

#28b#29 decrease prices.

#28c#29 leave prices unchanged.

#28d#29 need more detailed market information before making any pricing changes.

#28e#29 diversify into selling Karen Carpenter LP's.

Topic,Pro#0Ct Maximization Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,B

19.28 During the heightofthepetrock craze in the 1970

0

s; the price elasticity of demand was

estimated to be 1.50,Since pet rocks have a marginal cost of zero,a pro#0Ct maximizing seller of pet

rocks would

#28a#29 increase prices.

#28b#29 decrease prices.

#28c#29 leave prices unchanged.

#28d#29 need more detailed market information before making any pricing changes.

#28e#29 diversify into selling Karen Carpenter LP's.

CHAPTER 19 Pro#0Ct Maximization 356

Topic,Pro#0Ct Maximization Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,B

19.29 Philip owns and operates a gas station,Philip works 40 hours a week managing the station

but doesn't draw a salary,He could earn $700 a week doing the same work for Terrance,The store

owes its bank $100,000 and Philip has invested $100,000 of his own money,If Philip's accounting

pro#0Cts are $1,000 per week while the interest on his bank debt is $400 per week,the business'

economic pro#0Cts are

#28a#29 $0 per week.

#28b#29 $,100 per week.

#28c#29 $600 per week.

#28d#29 $300 per week.

#28e#29 $1,000 per week.

Topic,Pro#0Ct Maximization Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,B

19.30 Philip owns and operates a gas station,Philip works 40 hours a week managing the station

but doesn't draw a salary,He could earn $700 a week doing the same work for Terrance,The store

owes its bank $100,000 and Philip has invested $100,000 of his own money,If Philip's accounting

pro#0Cts are $1,000 per week while the interest on his bank debt is $500 per week,the business'

economic pro#0Cts are

#28a#29 $0 per week.

#28b#29 $,200 per week.

#28c#29 $500 per week.

#28d#29 $300 per week.

#28e#29 $1,000 per week.

Essay Pro#0Ct Maximization

Topic,Pro#0Ct Maximization Di#0Eculty,3

#25 Correct Responses,0 Discrimination Index,0

19.1 A competitive #0Crm has a production function described as follows,"Weekly output is the

square root of the minimum of the number of units of capital and the number of units of labor

employed per week." Suppose that in the short run this #0Crm must use 16 units of capital but can

vary its amount of labor freely.a#29Write down a formula that describes the marginal product of

labor in the short run as a function of the amount of labor used,#28Be careful at the boundaries.#29

b#29 If the wage is w =1and the price of output is p =4;howmuch labor will the #0Crm demand in

the short run? c#29 What if w =1and p = 10? d#29 Write down an equation for the #0Crm's short run

demand for labor as function of w and p.

Answer,a#29 MP =1=#282L

1=2

#29 if L#3C16;MP=0if L#3E16,b#294 c#2916 d#29 L =#28p=2w#29

2

Chapter 20

True-False Cost Minimization

Topic,Cost Minimization Di#0Eculty,2

#25 Correct Responses,96 Discrimination Index,25

Correct Answer,True

20.1 Quasi-#0Cxed costs are those costs that can be avoided if and only if a #0Crm produces zero

output.

Topic,Cost Minimization Di#0Eculty,1

#25 Correct Responses,79 Discrimination Index,21

Correct Answer,True

20.2 If there are increasing returns to scale,then average costs are a decreasing function of

output.

Topic,Cost Minimization Di#0Eculty,2

#25 Correct Responses,33 Discrimination Index,38

Correct Answer,False

20.3 If there are increasing returns to scale,then costs per unit of output decrease as you move

downward and to the right along an isocost line.

Topic,Cost Minimization Di#0Eculty,2

#25 Correct Responses,69 Discrimination Index,45

Correct Answer,False

20.4 If the production function is f#28x

1;x

2

#29=minfx

1;x

2

g;then the cost function is c#28w

1;w

2;y#29=

minfw

1;w

2

gy.

Topic,Cost Minimization Di#0Eculty,1

#25 Correct Responses,46 Discrimination Index,30

Correct Answer,False

20.5 The conditional factor demand function for factor 1 is a function x

1

#28w

1;w

2;y#29that tells the

ratio of price to output for an optimal factor choice of the #0Crm.

TRUE-FALSE 359

Topic,Cost Minimization Di#0Eculty,1

#25 Correct Responses,88 Discrimination Index,30

Correct Answer,False

20.6 The cost function c#28w

1;w

2;y#29 expresses the cost per unit of output of producing y units of

output if equal amounts of both factors are used.

Topic,Cost Minimization Di#0Eculty,2

#25 Correct Responses,36 Discrimination Index,35

Correct Answer,False

20.7 A competitive,cost-minimizing #0Crm has the production function f#28x;y#29=x+2yand uses

positive amounts of both inputs,If the price of x doubles and the price of y triples,then the cost

of production will more than double.

Topic,Cost Minimization Di#0Eculty,2

#25 Correct Responses,37 Discrimination Index,27

Correct Answer,False

20.8 The total cost function c#28w

1;w

2;y#29 expresses the cost per unit of output as a function of

input prices and output.

Topic,Cost Minimization Di#0Eculty,3

#25 Correct Responses,26 Discrimination Index,25

Correct Answer,False

20.9 A #0Crm uses a single variable input x to produce outputs according to the production func-

tion f#28x#29 = 500x,4x

2

,This #0Crm has #0Cxed costs of $300,This #0Crm's short run marginal cost curve

lies below its short run average variable cost curve for all positivevalues of x.

Topic,Cost Minimization Di#0Eculty,3

#25 Correct Responses,26 Discrimination Index,25

Correct Answer,False

20.10 A #0Crm uses a single variable input x to produce outputs according to the production func-

tion f#28x#29 = 300x,5x

2

,This #0Crm has #0Cxed costs of $300,This #0Crm's short run marginal cost curve

lies below its short run average variable cost curve for all positivevalues of x.

Multiple Choice Cost Minimization

Topic,Cost Minimization Di#0Eculty,1

#25 Correct Responses,53 Discrimination Index,30

Correct Answer,A

20.1 George runs a cookie factory,His cookies are made with sugar,peanut oil,and soybean oil.

The number of boxes of cookies that he produces is f#28su;po;so#29=minfsu;po+2sog where su is the

number of bags of sugar,po the number of canisters of peanut oil,and so the number of canisters

of soybean oil that he uses,The price of a bag of sugar is 11,The price of a canister of peanut

oil is 6,The price of a canister of soybean oil is 20,If George makes 254 boxes of cookies in the

cheapest way possible,how many canisters of soybean oil will he use?

#28a#29 127

#28b#29 0

#28c#29 84.67

#28d#29 169.33

#28e#29 42.33

Topic,Cost Minimization Di#0Eculty,1

#25 Correct Responses,53 Discrimination Index,30

Correct Answer,A

20.2 George runs a cookie factory,His cookies are made with sugar,peanut oil,and soybean oil.

The number of boxes of cookies that he produces is f#28su;po;so#29=minfsu;po+2sog where su is the

number of bags of sugar,po the number of canisters of peanut oil,and so the number of canisters

of soybean oil that he uses,The price of a bag of sugar is 5,The price of a canister of peanut oil is

9,The price of a canister of soybean oil is 13,If George makes 254 boxes of cookies in the cheapest

way possible,how many canisters of soybean oil will he use?

#28a#29 127

#28b#29 0

#28c#29 84.67

#28d#29 169.33

#28e#29 42.33

MULTIPLE CHOICE 361

Topic,Cost Minimization Di#0Eculty,1

#25 Correct Responses,66 Discrimination Index,50

Correct Answer,A

20.3 A #0Crm's production function is q =16x

0:50

y

0:50

where x and y are the amounts of factors

x and y that the #0Crm uses as inputs,If the #0Crm is minimizing unit costs,and if the price of fac-

tor x is 6 times the price of factor y; the ratio in which the #0Crm will use factors x and y is closest to:

#28a#29 x=y =0:17.

#28b#29 x=y =0:33.

#28c#29 x=y =1.

#28d#29 x=y =2.

#28e#29 x=y =6.

Topic,Cost Minimization Di#0Eculty,1

#25 Correct Responses,66 Discrimination Index,50

Correct Answer,A

20.4 A #0Crm's production function is q =26x

0:33

y

0:67

where x and y are the amounts of factors

x and y that the #0Crm uses as inputs,If the #0Crm is minimizing unit costs,and if the price of fac-

tor x is 6 times the price of factor y; the ratio in which the #0Crm will use factors x and y is closest to:

#28a#29 x=y =0:08.

#28b#29 x=y =0:25.

#28c#29 x=y =0:50.

#28d#29 x=y =2:40.

#28e#29 x=y = 12.

Topic,Cost Minimization Di#0Eculty,1

#25 Correct Responses,84 Discrimination Index,13

Correct Answer,D

20.5 A #0Crm has #0Cxed costs of 9,000,Its short run production function is y =3x

1=2;where x is

the amountofvariable factor it uses,The price of the variable factor is $ 5,000 per unit,Where y

is the amount of output,the short run total cost function is:

#28a#29 9;000=y+5;000.

#28b#29 14;000y.

#28c#29 9;000+ 5;000y.

#28d#29 9;000+555:56y

2

.

#28e#29 9;000y+0:56y

2

.

CHAPTER 20 Cost Minimization 362

Topic,Cost Minimization Di#0Eculty,1

#25 Correct Responses,84 Discrimination Index,13

Correct Answer,D

20.6 A #0Crm has #0Cxed costs of 7,000,Its short run production function is y =8x

1=2;where x is

the amountofvariable factor it uses,The price of the variable factor is $ 4,000 per unit,Where y

is the amount of output,the short run total cost function is:

#28a#29 7;000=y+4;000.

#28b#29 11;000y.

#28c#29 7;000+ 4;000y.

#28d#29 7;000+62:50y

2

.

#28e#29 7;000y+0:06y

2

.

Topic,Cost Minimization Di#0Eculty,2

#25 Correct Responses,81 Discrimination Index,33

Correct Answer,C

20.7 A #0Crm has two factories,One factory has the cost function c

1

#28y

1

#29=2y

2

1

+90and the other

has the cost function c

2

#28y

2

#29=6y

2

2

+40,If the #0Crm wishes to produce a total of 32 units as cheaply

as possible,how many units will be produced in the second factory?

#28a#29 7

#28b#29 2

#28c#29 8

#28d#29 14

#28e#29 None of the above.

Topic,Cost Minimization Di#0Eculty,1

#25 Correct Responses,82 Discrimination Index,10

Correct Answer,A

20.8 A company can rent one of two copying machines,The #0Crst costs $34 a month to rent

and costs an additional 2 cents per copy to use,The second costs $107 a month to rent and an

additional 1 cent per copy to use,How many copies would the company need to make per month

in order for it to be worthwhile to rent the second machine?

#28a#29 7,300

#28b#29 13,300

#28c#29 12,400

#28d#29 6,900

#28e#29 None of the above.

MULTIPLE CHOICE 363

Topic,Cost Minimization Di#0Eculty,2

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,A

20.9 A #0Crm produces ping pong balls using two inputs,When input prices are #2815;7#29 the #0Crm

uses the input bundle #2817;71#29,When the input prices are #2812;24#29 the #0Crm uses the bundle #2877;4#29.

The amount of output is the same in both cases,Is this behavior consistent with WACM?

#28a#29 Yes.

#28b#29 No.

#28c#29 It depends on the level of #0Cxed costs.

#28d#29 Wehave to know the price of output before we can test WACM.

#28e#29 It depends on the ratio of variable to #0Cxed costs.

Topic,Cost Minimization Di#0Eculty,1

#25 Correct Responses,82 Discrimination Index,45

Correct Answer,B

20.10 As assistant vice-presidentincharge of production for a computer #0Crm,you are asked to

calculate the cost of producing 170 computers,The production function is q = minfx;yg where x

and y are the amounts of two factors used,The price of x is 18 and the price of y is 10,What is

your answer?

#28a#29 2,580

#28b#29 4,760

#28c#29 8,460

#28d#29 6,180

#28e#29 None of the above.

CHAPTER 20 Cost Minimization 364

Topic,Cost Minimization Di#0Eculty,3

#25 Correct Responses,25 Discrimination Index,10

Correct Answer,B

20.11 As head of the planning commission of Eastern Motors,your job is to determine where

to locate a new plant,The only inputs used in your cars are steel and labor and the production

function is Cobb-Douglas where f#28S;L#29=S

:5

L

f

:5gwhere S is tons of steel and L is units of labor.

You can locate your plant either in country A or country B,In country A,steel costs $7 #28U.S.#29 a

ton and labor costs $7 #28U.S.#29 per unit,In country B; steel costs $8 #28U.S.#29 per ton and labor costs

$6 #28U.S.#29 per unit,In which country should the company locate its new plant so as to minimize

costs per unit of output?

#28a#29 Country A

#28b#29 Country B

#28c#29 It doesn't matter,because two locations are equally costly.

#28d#29 Country A if output is greater than 14,otherwise Country B.

#28e#29 There is not enough information to enable us to tell.

Topic,Cost Minimization Di#0Eculty,2

#25 Correct Responses,48 Discrimination Index,59

Correct Answer,D

20.12 A competitive #0Crm uses two inputs,x and y.Total output is the square root of x times

the square root of y,The price of x is 17 and the price of y is 11,The company minimizes its costs

per unit of output and spends $517 on x.Howmuch does it spend on y?

#28a#29 766

#28b#29 480

#28c#29 655

#28d#29 517

#28e#29 None of the above.

MULTIPLE CHOICE 365

Topic,Cost Minimization Di#0Eculty,3

#25 Correct Responses,53 Discrimination Index,44

Correct Answer,B

20.13 A #0Crm has the production function Q = KL where K is the amount of capital and L is the

amount of labor it uses as inputs,The cost per unit of capital is a rental fee r and the cost per

unit of labor is a wage w,The conditional labor demand function,L#28Q;w;r#29 is:

#28a#29 Qwr.

#28b#29 the square root of Qr=w.

#28c#29 Qw=r.

#28d#29 the square root of Q#2Frw.

#28e#29 Q#2Fwr.

Topic,Cost Minimization Di#0Eculty,2

#25 Correct Responses,60 Discrimination Index,32

Correct Answer,C

20.14 Joe's Bar and Grill uses two inputs,beer and pretzels,When the price of beer was $10 a

case and the price of pretzels was $20 a case,Joe used 1 case of beer and 2 cases of pretzels a day.

When the price of beer was $20 a case and the price of pretzels was $10 a case,Joe used 2 cases

of beer and 1 case of pretzels a day,Joe produced the same output in each of these circumstances.

From this information,we can conclude:

#28a#29 Joe has a constant returns to scale production function.

#28b#29 Joe has a cost function that exhibits increasing returns.

#28c#29 Joe is not minimizing costs.

#28d#29 Joe's behavior is consistent with pro#0Ct maximization.

#28e#29 Joe's production function exhibits diminishing marginal product.

CHAPTER 20 Cost Minimization 366

Topic,Cost Minimization Di#0Eculty,3

#25 Correct Responses,41 Discrimination Index,51

Correct Answer,D

20.15 The production function for drangles is,f#28x

1;x

2

#29=#28minfx

1;3x

2

g#29

1=2

wherex

1

is the amount

of sugar and x

2

is the amount of dough used,At the factor prices,w

1

= w

2

=1;the minimum cost

of producing y drangles is:

#28a#29 4y

1=2

.

#28b#29 #283=4#29y

1=2

.

#28c#29 #283=4#29y

2

.

#28d#29 #284=3#29y

2

.

#28e#29 None of the above.

Topic,Cost Minimization Di#0Eculty,1

#25 Correct Responses,69 Discrimination Index,49

Correct Answer,B

20.16 An orange grower has discovered a process for producing oranges that requires two inputs.

The production function is Q = minf4x

1;x

2

g where x

1

and x

2

are the amounts of inputs 1 and 2

that he uses,The prices of these two inputs are w

1

=$4and w

2

=$2;respectively,The minimum

cost of producing 280 units is therefore:

#28a#29 $1,680.

#28b#29 $840.

#28c#29 $2,240.

#28d#29 $560.

#28e#29 $1,120.

MULTIPLE CHOICE 367

Topic,Cost Minimization Di#0Eculty,1

#25 Correct Responses,69 Discrimination Index,49

Correct Answer,B

20.17 An orange grower has discovered a process for producing oranges that requires two inputs.

The production function is Q = minf2x

1;x

2

g where x

1

and x

2

are the amounts of inputs 1 and 2

that he uses,The prices of these two inputs are w

1

=$2and w

2

=$4;respectively,The minimum

cost of producing 80 units is therefore:

#28a#29 $480.

#28b#29 $400.

#28c#29 $640.

#28d#29 $160.

#28e#29 $320.

Topic,Cost Minimization Di#0Eculty,2

#25 Correct Responses,51 Discrimination Index,41

Correct Answer,B

20.18 Roberta runs a dress factory,She produces 50 dresses per day,using labor and electricity.

She uses a combination of labor and electricity that produces 50 dresses per day in the cheapest

possible way,She can hire as much labor as she wants at a cost of 20 cents per minute,She can

use as much electricity as she wants at a cost of 10 cents per minute,Her production isoquants are

smooth curves without kinks and she uses positive amounts of both inputs.

#28a#29 The marginalproduct of a kilowatt-hour of electricityistwice the marginalproduct of a minute of labor.

#28b#29 The marginalproduct of a minute of labor is twice the marginal product of a kilowatt-hour of electricity.

#28c#29 The marginalproduct ofa minuteoflaboris equalto the marginalproduct ofakilowatt-hourofelectricity.

#28d#29 There is not enough information to determine the ratio of marginal products,We'd have to know the

production function to know this.

#28e#29 The marginal product of a minute of labor plus the marginal product of a kilowatt-hour of labor must

equal 50=#2820+10#29.

CHAPTER 20 Cost Minimization 368

Topic,Cost Minimization Di#0Eculty,2

#25 Correct Responses,27 Discrimination Index,46

Correct Answer,D

20.19 A competitive #0Crm has the three-factor production function f#28x;y;z#29=#28x+y#29

1=2

z

1=2

,The

factor prices used to be w

x

=1;w

y

=2;and w

z

=3,Suppose that the price of factor y doubled

while the other two prices stayed the same,Then the cost of production:

#28a#29 increased by more than 10#25 but less than 50#25.

#28b#29 increased by 50#25.

#28c#29 doubled.

#28d#29 stayed the same.

#28e#29 increased by more than 50#25,but did not double.

Topic,Cost Minimization Di#0Eculty,2

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,C

20.20 A competitive #0Crm uses three factors of production,Its production function is f#28x;y;z#29=

#28x+y#29

1=2

z

1=2

,Originally the factor prices were w

x

=1;w

y

=2;and w

z

=3,The prices of factors x

and z decreased to half of their previous levels,but the price of factor y stayed constant,The cost

of production:

#28a#29 decreased by more than half.

#28b#29 decreased by one third.

#28c#29 decreased by exactly one half.

#28d#29 stayed constant.

#28e#29 decreased by less than one third.

Topic,Cost Minimization Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,C

20.21 A competitive #0Crm with output y has a production function,y =#282x

1

+x

2

#29

1=2

where x

1

and

x

2

are inputs used in production,The #0Crm produces output minimizing cost,With input prices w

1

and w

2; which of the following is true?

#28a#29 The #0Crm has L shaped isoquants.

#28b#29 The #0Crm must use the cheaper input.

#28c#29 The #0Crm must use only input x

1

if w

1

#3C 2w

2

.

#28d#29 The technology has increasing returns to scale.

#28e#29 More than one of the above is true.

MULTIPLE CHOICE 369

Topic,Cost Minimization Di#0Eculty,0

#25 Correct Responses,39 Discrimination Index,32

Correct Answer,D

20.22 Suppose that the production function is f#28x

1;x

2

#29=#28minfx

1;2x

2

g#29

:5

,Then:

#28a#29 there are constant returns to scale.

#28b#29 the cost function is a min function.

#28c#29 if the price of x

1

is more than twice the price of x

2; only x

2

is used in production.

#28d#29 a cost minimizing #0Crm producing 5 units of output will use 25 units of x

1

and some x

2

.

#28e#29 the cost function is a linear function of output.

Topic,Cost Minimization Di#0Eculty,2

#25 Correct Responses,30 Discrimination Index,55

Correct Answer,B

20.23 If the production function is given by f#28x

1;x

2;x

3;x

4

#29=minfx

1;x

2

g+minfx

3;x

4

gand the

prices of inputs #28x

1;x

2;x

3;x

4

#29 are #282;1;5;3#29; the minimum cost of producing one unit of output is

closest to:

#28a#29 1.

#28b#29 3.

#28c#29 4.

#28d#29 8.

#28e#29 11.

Topic,Cost Minimization Di#0Eculty,2

#25 Correct Responses,51 Discrimination Index,21

Correct Answer,A

20.24 Two #0Crms,Wickedly E#0Ecient Widgets and Wildy Nepotistic Widgets both produce wid-

gets,using the same production function y = K

1=2

L

1=2

where K is the amount of labor used and

L is the amount of capital used,Each company can hire labor at $1 per unit of labor and capital

at $9 per unit,Each company produces 90 per week,WEW chooses its input combinations to

produce in the cheapest way possible,Although it produces the same output per week as WEW,

WNW is required by its dotty CEO to use twice as much labor as WEW,Howmuch higher are

WNW's total costs per week than WEW's?

#28a#29 $135

#28b#29 $270

#28c#29 $275

#28d#29 $67.50

#28e#29 $132

CHAPTER 20 Cost Minimization 370

Topic,Cost Minimization Di#0Eculty,2

#25 Correct Responses,51 Discrimination Index,21

Correct Answer,A

20.25 Two #0Crms,Wickedly E#0Ecient Widgets and Wildy Nepotistic Widgets both produce wid-

gets,using the same production function y = K

1=2

L

1=2

where K is the amount of labor used and

L is the amount of capital used,Each company can hire labor at $1 per unit of labor and capital

at $4 per unit,Each company produces 40 per week,WEW chooses its input combinations to

produce in the cheapest way possible,Although it produces the same output per week as WEW,

WNW is required by its dotty CEO to use twice as much labor as WEW,Howmuch higher are

WNW's total costs per week than WEW's?

#28a#29 $40

#28b#29 $80

#28c#29 $85

#28d#29 $20

#28e#29 $37

Topic,Cost Minimization Di#0Eculty,2

#25 Correct Responses,89 Discrimination Index,15

Correct Answer,C

20.26 A new metal alloy is discovered that uses copper and zinc in #0Cxed proportions where each

unit of the alloy requires 5 units of zinc and 5 units of copper,If no other inputs are required,if

the price of zinc is 3 per unit,and the price of copper is 4 per unit and if total output is 2,000

units,what is the average cost per unit of output?

#28a#29 0.60

#28b#29 2.40

#28c#29 35

#28d#29 38

#28e#29 42

MULTIPLE CHOICE 371

Topic,Cost Minimization Di#0Eculty,2

#25 Correct Responses,89 Discrimination Index,15

Correct Answer,C

20.27 A new metal alloy is discovered that uses copper and zinc in #0Cxed proportions where each

unit of the alloy requires 2 units of zinc and 5 units of copper,If no other inputs are required,if

the price of zinc is 2 per unit,and the price of copper is 5 per unit and if total output is 2,000

units,what is the average cost per unit of output?

#28a#29 1

#28b#29 4

#28c#29 29

#28d#29 31

#28e#29 36

Topic,Cost Minimization Di#0Eculty,0

#25 Correct Responses,78 Discrimination Index,21

Correct Answer,A

20.28 The production function is f#28L;M#29=2L

1=2

M

1=2

where L is the number of units of labor

and M is the number of machines,If the amounts of both factors can be varied,and if the cost

of labor is $16 per unit and the cost of using machines is $49 per machine,then the total cost of

producing 12 units of output is:

#28a#29 336.

#28b#29 390.

#28c#29 192.

#28d#29 672.

#28e#29 168.

CHAPTER 20 Cost Minimization 372

Topic,Cost Minimization Di#0Eculty,0

#25 Correct Responses,78 Discrimination Index,21

Correct Answer,A

20.29 The production function is f#28L;M#29=4L

1=2

M

1=2

where L is the number of units of labor

and M is the number of machines,If the amounts of both factors can be varied,and if the cost

of labor is $25 per unit and the cost of using machines is $16 per machine,then the total cost of

producing 16 units of output is:

#28a#29 160.

#28b#29 328.

#28c#29 256.

#28d#29 640.

#28e#29 80.

Topic,Cost Minimization Di#0Eculty,2

#25 Correct Responses,22 Discrimination Index,27

Correct Answer,D

20.30 Dou#0Belberry juice is a mild intoxicant,prized for facilitating conversation among university

administrators,but not otherwise valued,The berry does not travel well,so it must be squeezed on

the farm where it is grown,Baskets of berries are produced using ounces of seeds,S; and hours la-

bor,L; according to a production function B = S

1=2

L

1=2

,Gallons of Juice,J; are made from baskets

of berries and hours of labor according to the production function J = minfB;Lg,If seeds cost 9

per ounce and labor costs 1 per hour,what is the cost of producing each gallon of dou#0Belberry juice?

#28a#29 14

#28b#29 6

#28c#29 3

#28d#29 7

#28e#29 Since there are not constant returns to scale,the cost per gallon depends on the number of gallons

produced.

MULTIPLE CHOICE 373

Topic,Cost Minimization Di#0Eculty,2

#25 Correct Responses,22 Discrimination Index,27

Correct Answer,D

20.31 Dou#0Belberry juice is a mild intoxicant,prized for facilitating conversation among university

administrators,but not otherwise valued,The berry does not travel well,so it must be squeezed on

the farm where it is grown,Baskets of berries are produced using ounces of seeds,S; and hours la-

bor,L; according to a production function B = S

1=2

L

1=2

,Gallons of Juice,J; are made from baskets

of berries and hours of labor according to the production function J = minfB;Lg,If seeds cost 4

per ounce and labor costs 4 per hour,what is the cost of producing each gallon of dou#0Belberry juice?

#28a#29 24

#28b#29 8

#28c#29 4

#28d#29 12

#28e#29 Since there are not constant returns to scale,the cost per gallon depends on the number of gallons

produced.

Topic,Cost Minimization Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,B

20.32 Nadine has a production function 4x

1

+x

2

,If the factor prices are 12 for factor 1 and 2 for

factor 2,howmuch will it cost her to produce 60 units of output?

#28a#29 3,000

#28b#29 120

#28c#29 180

#28d#29 1,590

#28e#29 150

CHAPTER 20 Cost Minimization 374

Topic,Cost Minimization Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,B

20.33 Nadine has a production function 3x

1

+x

2

,If the factor prices are 3 for factor 1 and 5 for

factor 2,howmuch will it cost her to produce 20 units of output?

#28a#29 280

#28b#29 20

#28c#29 100

#28d#29 190

#28e#29 60

Topic,Cost Minimization Di#0Eculty,2

#25 Correct Responses,76 Discrimination Index,60

Correct Answer,A

20.34 The production function is f#28L;M#29=4L

1=2

M

1=2;where L is the number of units of labor

and M is the number of machines used,If the cost of labor is $36 per unit and the cost of machines

is $64 per unit,then the total cost of producing 6 units of output will be:

#28a#29 144.

#28b#29 300.

#28c#29 216.

#28d#29 288.

#28e#29 None of the above.

Topic,Cost Minimization Di#0Eculty,2

#25 Correct Responses,76 Discrimination Index,60

Correct Answer,A

20.35 The production function is f#28L;M#29=4L

1=2

M

1=2;where L is the number of units of labor

and M is the number of machines used,If the cost of labor is $25 per unit and the cost of machines

is $64 per unit,then the total cost of producing 6 units of output will be:

#28a#29 120.

#28b#29 267.

#28c#29 150.

#28d#29 240.

#28e#29 None of the above.

MULTIPLE CHOICE 375

Topic,Cost Minimization Di#0Eculty,2

#25 Correct Responses,82 Discrimination Index,40

Correct Answer,E

20.36 In the short run,a #0Crm which has production function F#28L;M#29=4L

1=2

M

1=2

must use 25

machines,If the cost of labor is 10 per unit and the cost of machines is 4 per unit,the short run

total cost of producing 100 units of output is:

#28a#29 700.

#28b#29 400.

#28c#29 1,000.

#28d#29 700.

#28e#29 350.

Topic,Cost Minimization Di#0Eculty,2

#25 Correct Responses,82 Discrimination Index,40

Correct Answer,E

20.37 In the short run,a #0Crm which has production function F#28L;M#29=4L

1=2

M

1=2

must use 9

machines,If the cost of labor is 11 per unit and the cost of machines is 5 per unit,the short run

total cost of producing 132 units of output is:

#28a#29 1,056.

#28b#29 660.

#28c#29 1,452.

#28d#29 2,752.

#28e#29 1,376.

CHAPTER 20 Cost Minimization 376

Topic,Cost Minimization Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,A

20.38

Al's production function for deer is f#28x

1;x

2

#29=#282x

1

+x

2

#29

1=2

where x

1

is the amount of plastic and

x

2

is the amountofwood used,If the cost of plastic is $8 per unit and the cost of wood is $2 per

unit,then the cost of producing 6 deer is:

#28a#29 72.

#28b#29 108.

#28c#29 144.

#28d#29 12.

#28e#29 24.

Topic,Cost Minimization Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,A

20.39

Al's production function for deer is f#28x

1;x

2

#29=#282x

1

+x

2

#29

1=2

where x

1

is the amount of plastic and

x

2

is the amountofwood used,If the cost of plastic is $10 per unit and the cost of wood is $2 per

unit,then the cost of producing 9 deer is:

#28a#29 162.

#28b#29 198.

#28c#29 405.

#28d#29 18.

#28e#29 45.

MULTIPLE CHOICE 377

Topic,Cost Minimization Di#0Eculty,0

#25 Correct Responses,55 Discrimination Index,39

Correct Answer,D

20.40 A #0Crm has production function f#28x

1;x

2;x

3;x

4

#29=minfx

1;x

2

g+minfx

3;x

4

g,This #0Crm faces

competitive factor markets where the prices for the four factors are w

1

=3;w

2

=8;w

3

=3and

w

4

=7,The #0Crm must use at least 20 units of factor 2,The cost of producing 100 units in the

cheapest possible way is:

#28a#29 1,500

#28b#29 600

#28c#29 1,180

#28d#29 1,020

#28e#29 300

Topic,Cost Minimization Di#0Eculty,0

#25 Correct Responses,55 Discrimination Index,39

Correct Answer,D

20.41 A #0Crm has production function f#28x

1;x

2;x

3;x

4

#29=minfx

1;x

2

g+minfx

3;x

4

g,This #0Crm faces

competitive factor markets where the prices for the four factors are w

1

=6;w

2

=8;w

3

=6and

w

4

=3,The #0Crm must use at least 20 units of factor 2,The cost of producing 100 units in the

cheapest possible way is:

#28a#29 1,400

#28b#29 900

#28c#29 1,160

#28d#29 1,000

#28e#29 300

CHAPTER 20 Cost Minimization 378

Topic,Cost Minimization Di#0Eculty,0

#25 Correct Responses,47 Discrimination Index,31

Correct Answer,C

20.42 The law #0Crm of Dewey,Cheatham,and Howe specializes in accident injury claims,The

#0Crm charges its clients 25#25 of any damage award given,The only cost to the #0Crm of produc-

ing an accident injury claim is the time spentby a junior partner working on the case,Junior

partners are paid $100 per hour for this drudgery,If the #0Crm is suing for damages of $250,000

and if its chances of winning a case are 1,#281=25h#29; where h is the number of hours spentwork-

ing on the case,then to maximize its pro#0Cts,how many hours should it spend working on the case?

#28a#29 15

#28b#29 25

#28c#29 5

#28d#29 7.50

#28e#29 None of the above.

Topic,Cost Minimization Di#0Eculty,0

#25 Correct Responses,47 Discrimination Index,31

Correct Answer,C

20.43 The law #0Crm of Dewey,Cheatham,and Howe specializes in accident injury claims,The

#0Crm charges its clients 25#25 of any damage award given,The only cost to the #0Crm of produc-

ing an accident injury claim is the time spentby a junior partner working on the case,Junior

partners are paid $100 per hour for this drudgery,If the #0Crm is suing for damages of $490,000

and if its chances of winning a case are 1,#281=25h#29; where h is the number of hours spentwork-

ing on the case,then to maximize its pro#0Cts,how many hours should it spend working on the case?

#28a#29 21

#28b#29 35

#28c#29 7

#28d#29 10.50

#28e#29 None of the above.

MULTIPLE CHOICE 379

Topic,Cost Minimization Di#0Eculty,3

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,B

20.44 A #0Crm with the production function f#28x

1;x

2;x

3;x

4

#29=minfx

1;x

2;x

3;x

4

gfaces input prices

w

1

=1;w

2

=5;w

3

=5;w

4

=4for factors 1,2,3 and 4,The #0Crm must use at least 10 units of factor

2,The lowest cost at which it can produce 100 units of output is:

#28a#29 900.

#28b#29 540

#28c#29 1,500

#28d#29 860

#28e#29 500

Topic,Cost Minimization Di#0Eculty,3

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,B

20.45 A #0Crm with the production function f#28x

1;x

2;x

3;x

4

#29=minfx

1;x

2;x

3;x

4

gfaces input prices

w

1

=5;w

2

=6;w

3

=4;w

4

=2for factors 1,2,3 and 4,The #0Crm must use at least 15 units of factor

2,The lowest cost at which it can produce 100 units of output is:

#28a#29 800.

#28b#29 715

#28c#29 1,700

#28d#29 600

#28e#29 700

Topic,Cost Minimization Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,E

20.46 If output is produced according to Q =4L+6K; the price of K is $12,and the price of L

is $4,then the cost minimizing combination of K and L capable of producing 72 units of output is

#28a#29 L = 9 and K =6.

#28b#29 L = 4 and K = 12.

#28c#29 L = 18 and K = 12.

#28d#29 L = 0 and K = 12.

#28e#29 L = 18 and K =0.

CHAPTER 20 Cost Minimization 380

Topic,Cost Minimization Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,E

20.47 If output is produced according to Q =4L+6K; the price of K is $12,and the price of L is

$12,then the cost minimizing combination of K and L capable of producing 24 units of output is

#28a#29 L = 3 and K =2.

#28b#29 L = 12 and K = 12.

#28c#29 L = 6 and K =4.

#28d#29 L = 0 and K =4.

#28e#29 L = 6 and K =0.

Topic,Cost Minimization Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,B

20.48 If output is produced according to Q =4LK; the price of K is $10,and the price of L is

$10,then the cost minimizing combination of K and L capable of producing 16 units of output is

#28a#29 L = 4 and K =1.

#28b#29 L = 2 and K =2.

#28c#29 L = 1 and K =1.

#28d#29 L = 8 and K =8.

#28e#29 L = 1 and K =4.

Topic,Cost Minimization Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,B

20.49 If output is produced according to Q =4LK; the price of K is $10,and the price of L is

$40,then the cost minimizing combination of K and L capable of producing 64 units of output is

#28a#29 L = 16 and K =1.

#28b#29 L = 2 and K =8.

#28c#29 L = 2 and K =2.

#28d#29 L = 32 and K = 32.

#28e#29 L = 1 and K = 16.

MULTIPLE CHOICE 381

Topic,Cost Minimization Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,C

20.50 If it costs $30 to set up and later clean a bagel press and bagels cost $1 per week,per

bagel,to store,how many times should the bagel press be run eachweek to produce 540 bagels a

week to be sold continuously?

#28a#29 Once.

#28b#29 Twice.

#28c#29 3 times.

#28d#29 4 times.

#28e#29 5 times.

Topic,Cost Minimization Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,C

20.51 If it costs $10 to set up and later clean a bagel press and bagels cost $1 per week,per

bagel,to store,how many times should the bagel press be run eachweek to produce 500 bagels a

week to be sold continuously?

#28a#29 Once.

#28b#29 Twice.

#28c#29 3 times.

#28d#29 4 times.

#28e#29 5 times.

Topic,Cost Minimization Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,C

20.52 A politician facing re-election can win votes according to the following process:

V = 500S

0:30

M

0:50

where S is hours of making campaign speeches,and M is the number of #0Dyers mailed,If making

speeches costs $10 per hour,mailing #0Dyers costs $0.50 per #0Dyer,and $8,000 are available to spend

on the campaign,Assuming the politician wants to maximize votes,how should the budget be

allocated between speeches and mailing #0Dyers?

#28a#29 No speeches should be given,16,000 #0Dyers should be mailed.

#28b#29 400 hours of speeches should be given,8,000 #0Dyers should be mailed out.

#28c#29 300 hours of speeches should be given,10,000 #0Dyers should be mailed out.

#28d#29 3,000 hours of speeches should be given,5,000 #0Dyers should be mailed out.

#28e#29 800 hours speeches should be given,no #0Dyers should be mailed out.

CHAPTER 20 Cost Minimization 382

Topic,Cost Minimization Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,C

20.53 A politician facing re-election can win votes according to the following process:

V = 500S

0:30

M

0:60

where S is hours of making campaign speeches,and M is the number of #0Dyers mailed,If making

speeches costs $10 per hour,mailing #0Dyers costs $0.50 per #0Dyer,and $3,000 are available to spend

on the campaign,Assuming the politician wants to maximize votes,how should the budget be

allocated between speeches and mailing #0Dyers?

#28a#29 No speeches should be given,6,000 #0Dyers should be mailed.

#28b#29 150 hours of speeches should be given,3,000 #0Dyers should be mailed out.

#28c#29 100 hours of speeches should be given,4,000 #0Dyers should be mailed out.

#28d#29 1,000 hours of speeches should be given,2,000 #0Dyers should be mailed out.

#28e#29 300 hours speeches should be given,no #0Dyers should be mailed out.

Topic,Cost Minimization Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,D

20.54 The Chrysler Belvedere Truck Plant is attempting to minimize production costs,Over one

month,3,200 fenders are needed on the production line,which runs continuously,If it costs $100

to set up the stamping press to produce fenders,and $1 per month to store produced fenders,how

many times should the stamping press be run per month?

#28a#29 Once.

#28b#29 Twice.

#28c#29 Three times.

#28d#29 Four times.

#28e#29 Five times.

MULTIPLE CHOICE 383

Topic,Cost Minimization Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,B

20.55 The Chrysler Belvedere Truck Plant is attempting to minimize production costs,Over one

month,1,600 fenders are needed on the production line,which runs continuously,If it costs $200

to set up the stamping press to produce fenders,and $1 per month to store produced fenders,how

many times should the stamping press be run per month?

#28a#29 Once.

#28b#29 Twice.

#28c#29 Three times.

#28d#29 Four times.

#28e#29 Five times.

Topic,Cost Minimization Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,A

20.56 A lobbyist in our nation's capitol must buy 250 votes in the House of Representatives

and Senate to win passage of a bill to add Millard Fillmore's face to Mount Rushmore,Votes in

Congress can be purchased according to the following process:

V = CM=100;000

where C is the number of dollars contributed to campaign funds,and M is the number of three-

martini lunches,If three-martini lunches cost $64 each,what is the smallest expenditure the

lobbyist could make to insure Mr,Fillmore's proper place in history?

#28a#29 $80,000

#28b#29 $390,625

#28c#29 $25,000,064

#28d#29 $325,000

#28e#29 $25,000,000

CHAPTER 20 Cost Minimization 384

Topic,Cost Minimization Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,A

20.57 A lobbyist in our nation's capitol must buy 250 votes in the House of Representatives

and Senate to win passage of a bill to add Millard Fillmore's face to Mount Rushmore,Votes in

Congress can be purchased according to the following process:

V = CM=100;000

where C is the number of dollars contributed to campaign funds,and M is the number of three-

martini lunches,If three-martini lunches cost $16 each,what is the smallest expenditure the

lobbyist could make to insure Mr,Fillmore's proper place in history?

#28a#29 $40,000

#28b#29 $1,562,500

#28c#29 $25,000,016

#28d#29 $85,000

#28e#29 $25,000,000

Topic,Cost Minimization Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,B

20.58

The editors at Snoozeweek,a news magazine,constantly alter the proportion of celebrity pho-

tographs and mundane news stories so as to maximize the number of copies sold,A statistical

consultant has estimated sales to be S =1;000C

0:50

N

0:50

#28where C is the number of celebrity pho-

tographs and N is column inches of news stories#29,If the editors only have $12,000 to spend on each

edition with celebrity photos costing $1,000 each and news stories costing $10 per column inch,

what should the editors do?

#28a#29 Purchase 8 celebrity photos and 400 column inches of news stories.

#28b#29 Purchase 6 celebrity photos and 600 column inches of news stories.

#28c#29 Purchase 2 celebrity photos and 1,000 column inches of news stories.

#28d#29 Purchase 4 celebrity photos and 800 column inches of news stories.

#28e#29 Purchase 10 celebrity photos and 200 column inches of news stories.

MULTIPLE CHOICE 385

Topic,Cost Minimization Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,B

20.59

The editors at Snoozeweek,a news magazine,constantly alter the proportion of celebrity pho-

tographs and mundane news stories so as to maximize the number of copies sold,A statistical

consultant has estimated sales to be S =1;000C

0:50

N

0:50

#28where C is the number of celebrity pho-

tographs and N is column inches of news stories#29,If the editors only have $12,000 to spend on each

edition with celebrity photos costing $1,000 each and news stories costing $10 per column inch,

what should the editors do?

#28a#29 Purchase 8 celebrity photos and 400 column inches of news stories.

#28b#29 Purchase 6 celebrity photos and 600 column inches of news stories.

#28c#29 Purchase 2 celebrity photos and 1,000 column inches of news stories.

#28d#29 Purchase 3 celebrity photos and 900 column inches of news stories.

#28e#29 Purchase 5 celebrity photos and 700 column inches of news stories.

Topic,Cost Minimization Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,C

20.60 VincentSmudge,an avant-guard New York artist,creates #5Cliving sculpture" by smearing

paint slowly all over himself,S hours of #5Cliving sculpture" can be created by

S = min#28L;T=5#29

where L are hours of labor by Mr,Smudge,and T are tubes of water soluble paint,Since Mr.

Smudge is a highly renowned artist,his labor costs $50 per hour,while paint costs $40 per tube.

Using a $3,000 grant from the National Endowment for the Arts,how many hours of #5Cliving sculp-

ture" can Mr,Smudge create?

#28a#29 33.33

#28b#29 51.72

#28c#29 12

#28d#29 500

#28e#29 2,500

CHAPTER 20 Cost Minimization 386

Topic,Cost Minimization Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,C

20.61 VincentSmudge,an avant-guard New York artist,creates #5Cliving sculpture" by smearing

paint slowly all over himself,S hours of #5Cliving sculpture" can be created by

S = min#28L;T=4#29

where L are hours of labor by Mr,Smudge,and T are tubes of water soluble paint,Since Mr.

Smudge is a highly renowned artist,his labor costs $200 per hour,while paint costs $30 per tube.

Using a $2,000 grant from the National Endowment for the Arts,how many hours of #5Cliving sculp-

ture" can Mr,Smudge create?

#28a#29 8.70

#28b#29 9.64

#28c#29 6.25

#28d#29 400

#28e#29 1,600

Topic,Cost Minimization Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,A

20.62 Using existing plant and equipment,Priceless Moments Figurines can be manufactured

using plastic,clay,orany combination of these materials,A #0Cgurine can be manufactured by

F =3P+2C

where P are pounds of plastic,and C are pounds of clay,Plastic costs $4 per pound and clay costs

$3 per pound,What would be the lowest cost of producing 10,000 #0Cgurines?

#28a#29 $13,333.33

#28b#29 $15,000

#28c#29 $14,166.67

#28d#29 $3,333.33

#28e#29 $10,000

MULTIPLE CHOICE 387

Topic,Cost Minimization Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,A

20.63 Using existing plant and equipment,Priceless Moments Figurines can be manufactured

using plastic,clay,orany combination of these materials,A #0Cgurine can be manufactured by

F =3P+2C

where P are pounds of plastic,and C are pounds of clay,Plastic costs $2 per pound and clay costs

$4 per pound,What would be the lowest cost of producing 10,000 #0Cgurines?

#28a#29 $6,666.67

#28b#29 $20,000

#28c#29 $13,333.33

#28d#29 $3,333.33

#28e#29 $10,000

Topic,Cost Minimization Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,C

20.64 Rocco's Pasta Bar makes manacotti according to an old family recipe where

M = min#285=4#03C;5P#29

M; C; and P are pounds of manicotti,cheese,and pasta respectively.Ifcheese costs $2 per pound,

and pasta costs $5 per pound,howmuchwould it cost to produce 30 pounds of manicotti in the

cheapest way possible?

#28a#29 30.

#28b#29 48.

#28c#29 78

#28d#29 48.75

#28e#29 30

CHAPTER 20 Cost Minimization 388

Topic,Cost Minimization Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,C

20.65 Rocco's Pasta Bar makes manacotti according to an old family recipe where

M = min#283=2#03C;3P#29

M; C; and P are pounds of manicotti,cheese,and pasta respectively.Ifcheese costs $5 per pound,

and pasta costs $2 per pound,howmuchwould it cost to produce 30 pounds of manicotti in the

cheapest way possible?

#28a#29 20.

#28b#29 100.

#28c#29 120

#28d#29 54

#28e#29 30

Essay Cost Minimization

Topic,Cost Minimization Di#0Eculty,1

#25 Correct Responses,0 Discrimination Index,0

20.1 A #0Crm has a production function described as follows,"Weekly output is equal to the square

root of the minimum of the amount of capital and the number of hours of labor used per week."

Suppose that the cost of a unit of capital is r and the price of a unit of labor is w and the level of

output is y.Write down the long run total cost as a function of w; r; and y.

Answer,c#28w;r;y#29=#28w+r#29y

2

.

Topic,Cost Minimization Di#0Eculty,2

#25 Correct Responses,0 Discrimination Index,0

20.2 The production function for good y is y = maxf10x

1;4x

2

g where x

1

and x

2

are the amounts

of factors 1 and 2,Find the cost function for good y.

Answer,The cost function is minfp1y=10;p2y=4g.

Topic,Cost Minimization Di#0Eculty,2

#25 Correct Responses,0 Discrimination Index,0

20.3 If the production function for tuna casseroles is minfx

1;x

2

2

g;where x

1

is the amount of factor

1 and x

2

is the amount of factor x

2; #0Cnd the cost function for tuna casseroles.

Answer,c#28w

1;w

2

#29=p

1

x+p

2

y

1=2

.

Topic,Cost Minimization Di#0Eculty,2

#25 Correct Responses,0 Discrimination Index,0

20.4 The cost function,c#28w1;w2;y#29; of a #0Crm,gives the cost of producing y units of output

when the wage of factor 1 is w1 and the wage of factor 2 is w2,Find the cost functions for the

following #0Crms,a#29 a #0Crm with production function f#28x1;x2#29 = minf2x1;3x2g;b#29a #0Crm with produc-

tion function f#28x1;x2#29 = 2x1+3x2;and c#29 a #0Crm with production function f#28x1;x2#29 = maxf2x1;3x2g.

Answer,a#29w1=2+w2=3b#29minfw1=2;w2=3gc#29minfw1=2;w2=3g

Chapter 21

True-False Cost Curves

Topic,Cost Curves Di#0Eculty,1

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,False

21.1 The average variable cost curvemust always be U shaped.

Topic,Cost Curves Di#0Eculty,1

#25 Correct Responses,82 Discrimination Index,34

Correct Answer,False

21.2 The marginal cost curve passes through the minimum point of the average #0Cxed cost curve.

Topic,Cost Curves Di#0Eculty,1

#25 Correct Responses,82 Discrimination Index,26

Correct Answer,True

21.3 If the average cost curveisUshaped,then the marginal cost curvemust cross the average

cost curve at the bottom of the U.

Topic,Cost Curves Di#0Eculty,1

#25 Correct Responses,89 Discrimination Index,25

Correct Answer,True

21.4 The cost function C#28y#29=10+3yhas marginal cost less than average cost for all levels of

output.

Topic,Cost Curves Di#0Eculty,1

#25 Correct Responses,92 Discrimination Index,10

Correct Answer,False

21.5 The cost function C#28y#29 = 100+ 3y

2

has marginal cost less than average cost for all positive

levels of output.

Topic,Cost Curves Di#0Eculty,1

#25 Correct Responses,78 Discrimination Index,28

Correct Answer,False

21.6 If a competitive #0Crm uses twoinputs and it has the production function F#28x

1;x

2

#29=x

1=2

1

+x

1=2

2;

then its marginal cost curve is horizontal.

TRUE-FALSE 391

Topic,Cost Curves Di#0Eculty,2

#25 Correct Responses,13 Discrimination Index,20

Correct Answer,False

21.7 Average cost can never rise while marginal costs are declining.

Topic,Cost Curves Di#0Eculty,1

#25 Correct Responses,89 Discrimination Index,21

Correct Answer,False

21.8 The area under the marginal cost curve measures total #0Cxed costs.

Topic,Cost Curves Di#0Eculty,1

#25 Correct Responses,80 Discrimination Index,23

Correct Answer,False

21.9 If marginal costs increase as output increases,then the average #0Cxed cost curve will be

U-shaped.

Topic,Cost Curves Di#0Eculty,1

#25 Correct Responses,74 Discrimination Index,27

Correct Answer,False

21.10 Average #0Cxed cost curves will be U-shaped if the marginal cost curveisupward-sloping.

Multiple Choice Cost Curves

Topic,Cost Curves Di#0Eculty,1

#25 Correct Responses,94 Discrimination Index,13

Correct Answer,B

21.1 The marginal cost curve of a #0Crm is MC =8y.Total variable costs to produce 7 units of

output are:

#28a#29 112.

#28b#29 196.

#28c#29 56.

#28d#29 196.

#28e#29 22.

Topic,Cost Curves Di#0Eculty,1

#25 Correct Responses,94 Discrimination Index,13

Correct Answer,B

21.2 The marginal cost curve of a #0Crm is MC =6y.Total variable costs to produce 8 units of

output are:

#28a#29 96.

#28b#29 192.

#28c#29 64.

#28d#29 256.

#28e#29 22.

Topic,Cost Curves Di#0Eculty,1

#25 Correct Responses,75 Discrimination Index,18

Correct Answer,D

21.3 The following relationship must hold between the average total cost #28ATC#29 curve and the

marginal cost curve #28MC#29:

#28a#29 if MC is rising,ATC must be rising.

#28b#29 if MC is rising,ATC must be greater than MC.

#28c#29 if MC is rising,ATC must be less than MC.

#28d#29 if ATC is rising,MC must be greater than ATC.

#28e#29 if ATC is rising,MC must be less than ATC.

MULTIPLE CHOICE 393

Topic,Cost Curves Di#0Eculty,1

#25 Correct Responses,94 Discrimination Index,20

Correct Answer,C

21.4 A goatherd has the cost function c#28y#29=5y

2

where y is the number of tubs of goat cheese

she makes per month,She faces a competitive market for goat cheese,with a price of $100 a tub.

How many tubs should she produce per month?

#28a#29 the square root of 100

#28b#29 25

#28c#29 10

#28d#29 the square root of 20

#28e#29 5

Topic,Cost Curves Di#0Eculty,1

#25 Correct Responses,94 Discrimination Index,20

Correct Answer,C

21.5 A goatherd has the cost function c#28y#29=3y

2

where y is the number of tubs of goat cheese

she makes per month,She faces a competitive market for goat cheese,with a price of $42 a tub.

How many tubs should she produce per month?

#28a#29 the square root of 42

#28b#29 9

#28c#29 7

#28d#29 the square root of 14

#28e#29 3.50

Topic,Cost Curves Di#0Eculty,2

#25 Correct Responses,72 Discrimination Index,17

Correct Answer,C

21.6 A #0Crm has a short run cost function c#28y#29=3y+11for y#3E0and c#280#29 = 7,The #0Crm's

quasi-#0Cxed costs are:

#28a#29 7.

#28b#29 11.

#28c#29 4.

#28d#29 7.50.

#28e#29 impossible to determine from this information.

CHAPTER 21 Cost Curves 394

Topic,Cost Curves Di#0Eculty,2

#25 Correct Responses,72 Discrimination Index,17

Correct Answer,C

21.7 A #0Crm has a short run cost function c#28y#29=3y+16for y#3E0and c#280#29 = 6,The #0Crm's

quasi-#0Cxed costs are:

#28a#29 6.

#28b#29 16.

#28c#29 10.

#28d#29 13.

#28e#29 impossible to determine from this information.

Topic,Cost Curves Di#0Eculty,3

#25 Correct Responses,70 Discrimination Index,37

Correct Answer,C

21.8 A competitive #0Crm has the short run cost function c#28y#29=3y

3

,36y

2

+ 128y +35,The #0Crm

will produce a positive amount in the short run if and only if the price is greater than:

#28a#29 10.

#28b#29 40.

#28c#29 20.

#28d#29 23.

#28e#29 19.

Topic,Cost Curves Di#0Eculty,3

#25 Correct Responses,70 Discrimination Index,37

Correct Answer,C

21.9 A competitive #0Crm has the short run cost function c#28y#29=2y

3

,16y

2

+96y+50,The #0Crm

will produce a positive amount in the short run if and only if the price is greater than:

#28a#29 32.

#28b#29 128.

#28c#29 64.

#28d#29 67.

#28e#29 63.

MULTIPLE CHOICE 395

Topic,Cost Curves Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,A

21.10 The production function of a competitive #0Crm is described by the equation y =5x

1=2

1

x

1=2

2

.

The factor prices are p

1

=1and p

2

=4and the #0Crm can hire as much of either factor it wants at

these prices,The #0Crm's marginal cost is:

#28a#29 constant and equal to 0.80.

#28b#29 constant and equal to 3.

#28c#29 increasing.

#28d#29 decreasing.

#28e#29 none of the above.

Topic,Cost Curves Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,A

21.11 The production function of a competitive #0Crm is described by the equation y =6x

1=2

1

x

1=2

2

.

The factor prices are p

1

=1and p

2

=4and the #0Crm can hire as much of either factor it wants at

these prices,The #0Crm's marginal cost is:

#28a#29 constant and equal to 0.67.

#28b#29 constant and equal to 3.

#28c#29 increasing.

#28d#29 decreasing.

#28e#29 none of the above.

Topic,Cost Curves Di#0Eculty,2

#25 Correct Responses,90 Discrimination Index,18

Correct Answer,A

21.12 A #0Crm has the short run total cost function c#28y#29=9y

2

+ 441.At what quantity of output

is short run average cost minimized?

#28a#29 7

#28b#29 3

#28c#29 49

#28d#29 0.43

#28e#29 None of the above.

CHAPTER 21 Cost Curves 396

Topic,Cost Curves Di#0Eculty,2

#25 Correct Responses,90 Discrimination Index,18

Correct Answer,A

21.13 A #0Crm has the short run total cost function c#28y#29=4y

2

+ 100.At what quantity of output

is short run average cost minimized?

#28a#29 5

#28b#29 2

#28c#29 25

#28d#29 0.40

#28e#29 None of the above.

Topic,Cost Curves Di#0Eculty,2

#25 Correct Responses,31 Discrimination Index,40

Correct Answer,A

21.14 A #0Crm has the production function Q = X

1=2

1

X

2

,In the short run it must use exactly 20

units of factor 2,The price of factor 1 is $60 per unit and the price of factor 2 is $2 per unit,The

#0Crm's short run marginal cost function is:

#28a#29 MC#28Q#29=6Q=20.

#28b#29 MC#28Q#29=40Q

,1=2

.

#28c#29 MC#28Q#29=40+60Q

2

.

#28d#29 MC#28Q#29=2Q.

#28e#29 MC#28Q#29=20Q

,1=2

.

Topic,Cost Curves Di#0Eculty,2

#25 Correct Responses,31 Discrimination Index,40

Correct Answer,A

21.15 A #0Crm has the production function Q = X

1=2

1

X

2

,In the short run it must use exactly 10

units of factor 2,The price of factor 1 is $40 per unit and the price of factor 2 is $6 per unit,The

#0Crm's short run marginal cost function is:

#28a#29 MC#28Q#29=8Q=10.

#28b#29 MC#28Q#29=60Q

,1=2

.

#28c#29 MC#28Q#29=60+40Q

2

.

#28d#29 MC#28Q#29=6Q.

#28e#29 MC#28Q#29=10Q

,1=2

.

MULTIPLE CHOICE 397

Topic,Cost Curves Di#0Eculty,1

#25 Correct Responses,82 Discrimination Index,36

Correct Answer,A

21.16 Mr,Dent Carr's total costs are 2s

2

+75s+ 100,If he repairs 25 cars,his average variable

costs will be:

#28a#29 125.

#28b#29 129.

#28c#29 175.

#28d#29 250.

#28e#29 87.50.

Topic,Cost Curves Di#0Eculty,1

#25 Correct Responses,82 Discrimination Index,36

Correct Answer,A

21.17 Mr,Dent Carr's total costs are 4s

2

+ 100s+60,If he repairs 20 cars,his average variable

costs will be:

#28a#29 180.

#28b#29 183.

#28c#29 260.

#28d#29 360.

#28e#29 130.

Topic,Cost Curves Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,A

21.18 Rex Carr could pay $10 for a shovel that lasts one year and pay $5 a car to his brother

Scoop to bury the cars,or he could buy a low-quality car smasher that costs $200 a year to own and

that smashes cars at a marginal cost of $1 per car,If it is also possible for Rex to buy a high-quality

hydraulic car smasher that cost $350 per year to own and if with this smasher he could dispose

of cars at a cost of $0.67 per car,it would be worthwhile for him to buy this high-quality smasher if

#28a#29 he plans to dispose of at least 450 cars per year.

#28b#29 he plans to dispose of no more than 225 cars per year.

#28c#29 he plans to dispose of at least 460 cars per year.

#28d#29 he plans to dispose of no more than 450 cars per year.

#28e#29 he plans to dispose of at least 225 cars per year.

CHAPTER 21 Cost Curves 398

Topic,Cost Curves Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,A

21.19 Rex Carr could pay $10 for a shovel that lasts one year and pay $5 a car to his brother

Scoop to bury the cars,or he could buy a low-quality car smasher that costs $200 a year to own and

that smashes cars at a marginal cost of $1 per car,If it is also possible for Rex to buy a high-quality

hydraulic car smasher that cost $450 per year to own and if with this smasher he could dispose

of cars at a cost of $0.67 per car,it would be worthwhile for him to buy this high-quality smasher if

#28a#29 he plans to dispose of at least 750 cars per year.

#28b#29 he plans to dispose of no more than 375 cars per year.

#28c#29 he plans to dispose of at least 760 cars per year.

#28d#29 he plans to dispose of no more than 750 cars per year.

#28e#29 he plans to dispose of at least 375 cars per year.

Topic,Cost Curves Di#0Eculty,0

#25 Correct Responses,75 Discrimination Index,41

Correct Answer,C

21.20 Mary Magnolia from your workbook has variable costs equal to y

2

=F where y is the number

of bouquets she sells per month and where F is the number of square feet of space in her shop,If

Mary has signed a lease for a shop with 1,200 square feet and if she is not able to get out of the

lease or to expand her store in the short run,and if the price of a bouquet is $ 4 per unit,how

many bouquets per month should she sell in the short run?

#28a#29 1,200

#28b#29 600

#28c#29 2,400

#28d#29 3,600

#28e#29 2,640

MULTIPLE CHOICE 399

Topic,Cost Curves Di#0Eculty,0

#25 Correct Responses,75 Discrimination Index,41

Correct Answer,C

21.21 Mary Magnolia from your workbook has variable costs equal to y

2

=F where y is the number

of bouquets she sells per month and where F is the number of square feet of space in her shop,If

Mary has signed a lease for a shop with 800 square feet and if she is not able to get out of the lease

or to expand her store in the short run,and if the price of a bouquet is $ 5 per unit,how many

bouquets per month should she sell in the short run?

#28a#29 800

#28b#29 400

#28c#29 2,000

#28d#29 3,000

#28e#29 2,200

Topic,Cost Curves Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,A

21.22 Touchie McFeelie from your workbook has a production function,1J

1=2

L

3=4; where J is the

number of old jokes used and L is the number of hours of cartoonists' labor.

Touchie is stuck with 900 old jokes for which he paid 4 dollars each,If the hourly wage rate for

cartoonists is 3,then the total cost of producing 24 comics books is:

#28a#29 3,648.

#28b#29 1,824.

#28c#29 5,472.

#28d#29 3,672.

#28e#29 912.

CHAPTER 21 Cost Curves 400

Topic,Cost Curves Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,A

21.23 Touchie McFeelie from your workbook has a production function,1J

1=2

L

3=4; where J is the

number of old jokes used and L is the number of hours of cartoonists' labor.

Touchie is stuck with 1,600 old jokes for which he paid 3 dollars each,If the hourly wage rate for

cartoonists is 4,then the total cost of producing 108 comics books is:

#28a#29 5,124.

#28b#29 2,562.

#28c#29 7,686.

#28d#29 5,232.

#28e#29 1,281.

Topic,Cost Curves Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,E

21.24 Touchie McFeelie's production function for comic books is,1J

1=2

L

3=4; where J is the num-

ber of jokes and L is the number of hours of cartoonists labor that he uses,If Touchie can vary

both jokes and cartoonists' labor and if old jokes cost $ 4 each and cartoonists' labor costs $36 per

hour,then the cheapest way to produce comics books requires using jokes and labor in the ratio

J=L=

#28a#29 9.

#28b#29 12.

#28c#29 3.

#28d#29 2=3.

#28e#29 6.

MULTIPLE CHOICE 401

Topic,Cost Curves Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,E

21.25 Touchie McFeelie's production function for comic books is,1J

1=2

L

3=4; where J is the num-

ber of jokes and L is the number of hours of cartoonists labor that he uses,If Touchie can vary

both jokes and cartoonists' labor and if old jokes cost $ 1 each and cartoonists' labor costs $6 per

hour,then the cheapest way to produce comics books requires using jokes and labor in the ratio

J=L=

#28a#29 6.

#28b#29 8.

#28c#29 2.

#28d#29 2=3.

#28e#29 4.

Topic,Cost Curves Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,A

21.26 A #0Crm's production function is given by q = minfM;L

1=2

g; where M is the number of ma-

chines and L is the amount of labor that it uses,The price of labor is 2 and the price of machines

is 3 per unit,The #0Crm's long run marginal cost curve is:

#28a#29 a straight line with slope 4.

#28b#29 upward-sloping and gets #0Datter as Q increases.

#28c#29 upward-sloping and gets steeper as Q increases.

#28d#29 a straight line with slope 2.

#28e#29 a straight line with slope 3.

CHAPTER 21 Cost Curves 402

Topic,Cost Curves Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,A

21.27 A #0Crm's production function is given by q = minfM;L

1=2

g; where M is the number of ma-

chines and L is the amount of labor that it uses,The price of labor is 4 and the price of machines

is 2 per unit,The #0Crm's long run marginal cost curve is:

#28a#29 a straight line with slope 8.

#28b#29 upward-sloping and gets #0Datter as Q increases.

#28c#29 upward-sloping and gets steeper as Q increases.

#28d#29 a straight line with slope 4.

#28e#29 a straight line with slope 2.

Topic,Cost Curves Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,D

21.28

In the reclining chair industry #28which is perfectly competitive#29,two di#0Berent technologies of pro-

duction exist,These technologies exhibit the following total cost functions:

C

1

#28Q#29 = 500+ 260Q,20Q

2

+Q

3

C

2

#28Q#29=1;000+ 145Q,10Q

2

+Q

3

Due to foreign competition,the market price of reclining chairs has fallen to 110,In the short run,

#28a#29 #0Crms using technology 1 will remain in business and #0Crms using technology 2 will remain in business.

#28b#29 #0Crms using technology 1 will remain in business and #0Crms using technology 2 will shut down.

#28c#29 #0Crms using technology 1 will shut down and #0Crms using technology 2 will remain in business.

#28d#29 #0Crms using technology 1 will shut down and #0Crms using technology 2 will shut down.

#28e#29 more information is needed to make a judgment.

MULTIPLE CHOICE 403

Topic,Cost Curves Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,D

21.29

In the reclining chair industry #28which is perfectly competitive#29,two di#0Berent technologies of pro-

duction exist,These technologies exhibit the following total cost functions:

C

1

#28Q#29=1;500+ 600Q,40Q

2

+Q

3

C

2

#28Q#29 = 200+ 205Q,10Q

2

+Q

3

Due to foreign competition,the market price of reclining chairs has fallen to 190,In the short run,

#28a#29 #0Crms using technology 1 will remain in business and #0Crms using technology 2 will remain in business.

#28b#29 #0Crms using technology 1 will remain in business and #0Crms using technology 2 will shut down.

#28c#29 #0Crms using technology 1 will shut down and #0Crms using technology 2 will remain in business.

#28d#29 #0Crms using technology 1 will shut down and #0Crms using technology 2 will shut down.

#28e#29 more information is needed to make a judgment.

Topic,Cost Curves Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,D

21.30 A #0Crm has the long run cost function C#28Q#29=7Q

2

+ 252,In the long run,it will supply a

positive amount of output,so long as the price is greater than:

#28a#29 168

#28b#29 176

#28c#29 42

#28d#29 84

#28e#29 89

Topic,Cost Curves Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,D

21.31 A #0Crm has the long run cost function C#28Q#29=5Q

2

+ 245,In the long run,it will supply a

positive amount of output,so long as the price is greater than:

#28a#29 140

#28b#29 148

#28c#29 35

#28d#29 70

#28e#29 75

CHAPTER 21 Cost Curves 404

Topic,Cost Curves Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,C

21.32 The VCR manufacturing business is perfectly competitive,Suppose that currently,#0Crms

which manufacture VCR's utilize either technology 1 or technology 2,whose cost functions are

given below:

TC

1

#28Q#29=1;060,60Q+Q

2

TC

2

#28Q#29 = 220,20Q+ Q

2

In the long run,assuming no new manufacturing technologies,what will happen in this industry?

#28a#29 Firms utilizing technology 1 will stay in business,and #0Crms utilizing technology 2 will also stayin

business.

#28b#29 Firms utilizing technology 1 will stay in business,but #0Crms utilizing technology 2 will shut down.

#28c#29 Firms utilizing technology 1 will shut down,but #0Crms utilizing technology 2 will stay in business.

#28d#29 Firms utilizing technology 1 will shut down,and #0Crms utilizing technology 2 will also shut down.

#28e#29 None of the above.

Topic,Cost Curves Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,C

21.33 The VCR manufacturing business is perfectly competitive,Suppose that currently,#0Crms

which manufacture VCR's utilize either technology 1 or technology 2,whose cost functions are

given below:

TC

1

#28Q#29=1;060,60Q+Q

2

TC

2

#28Q#29 = 560,40Q+ Q

2

In the long run,assuming no new manufacturing technologies,what will happen in this industry?

#28a#29 Firms utilizing technology 1 will stay in business,and #0Crms utilizing technology 2 will also stayin

business.

#28b#29 Firms utilizing technology 1 will stay in business,but #0Crms utilizing technology 2 will shut down.

#28c#29 Firms utilizing technology 1 will shut down,but #0Crms utilizing technology 2 will stay in business.

#28d#29 Firms utilizing technology 1 will shut down,and #0Crms utilizing technology 2 will also shut down.

#28e#29 None of the above.

MULTIPLE CHOICE 405

Topic,Cost Curves Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,B

21.34 The snow removal business in East Iceicle,Minnesota is a competitive industry,All snow-

plow operators have the cost function C = Q

2

+25;where Q is the number of driveways cleared.

Demand for snow removal in the town is given by Q

d

= 120,P,The long run equilibrium number

of #0Crms in this industry is

#28a#29 11

#28b#29 22

#28c#29 14

#28d#29 120

#28e#29 23

Topic,Cost Curves Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,B

21.35 The snow removal business in East Iceicle,Minnesota is a competitive industry,All snow-

plow operators have the cost function C = Q

2

+16;where Q is the number of driveways cleared.

Demand for snow removal in the town is given by Q

d

= 120,P,The long run equilibrium number

of #0Crms in this industry is

#28a#29 14

#28b#29 28

#28c#29 22

#28d#29 120

#28e#29 29

Topic,Cost Curves Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,E

21.36 Florence's Restaurant estimates that its total cost of providing Q meals per month is given

byTC=4;000+ 4Q,If Florence charges $10 per meal,what is its break-even level of output?

#28a#29 1,000 meals

#28b#29 400 meals

#28c#29 285.71 meals

#28d#29 1,333.33 meals

#28e#29 666.67 meals

CHAPTER 21 Cost Curves 406

Topic,Cost Curves Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,E

21.37 Florence's Restaurant estimates that its total cost of providing Q meals per month is given

byTC=5;000+ 3Q,If Florence charges $10 per meal,what is its break-even level of output?

#28a#29 1,666.67 meals

#28b#29 500 meals

#28c#29 384.62 meals

#28d#29 1,428.57 meals

#28e#29 714.29 meals

Topic,Cost Curves Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,D

21.38 If Green Acres Turf Farm's total cost of producing acres of sod is TC =3Q

2

+20Q+60;

the marginal cost of producing the 10th acre of sod is

#28a#29 $60.

#28b#29 $20.

#28c#29 $50.

#28d#29 $80.

#28e#29 $110.

Topic,Cost Curves Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,D

21.39 If Green Acres Turf Farm's total cost of producing acres of sod is TC =3Q

2

+5Q+70;the

marginal cost of producing the 10th acre of sod is

#28a#29 $70.

#28b#29 $5.

#28c#29 $35.

#28d#29 $65.

#28e#29 $95.

Essay Cost Curves

Topic,Cost Curves Di#0Eculty,1

#25 Correct Responses,0 Discrimination Index,0

21.1 Not long ago,the Canadian edition of a famous textbook on principles of economics had

a diagram depicting a U-shaped average #0Cxed cost curve,This occasioned great mirth around

the camp#0Cres of some economists in the Great White North and did much to shorten a long hard

winter,Explain what is wrong with drawing a U-shaped average #0Cxed cost curve.

Answer,Average #0Cxed cost must decline monotonically with output and would asymptotically

approach zero,Remember that average #0Cxed cost is just a constant divided by output.

Topic,Cost Curves Di#0Eculty,3

#25 Correct Responses,0 Discrimination Index,0

21.2 Hildegard,an intelligent and charming Holstein cow,grazes in a very large,mostly barren

pasture with a few lush patches of grass,When she #0Cnds a new grassy area,the amount of grass

she gets from it is equal to the square root of the number of hours,h; that she spends grazing

there,Finding a new patch of grass on which to graze takes her one hour,Since Hildegard does not

have pockets,the currency in which her costs are measured is time,a#29 What is the total cost to

Hildegard of #0Cnding a new plot of grass and getting y units of grass from it? b#29 Find an expression

for her marginal costs and her average cost per patch of grass as a function of the amount of grass

she gets from each patch,c#29 Howmuch time would she spend in each plot if she wanted to maximize

her food intake? #28Hint,Minimize average costs per unit of grass eaten.#29

Answer,a#29 1+y

2

b#292y; 1=y + yc#291 hour.

Topic,Cost Curves Di#0Eculty,2

#25 Correct Responses,0 Discrimination Index,0

21.3 A competitive #0Crm has the short run cost function c#28y#29=y

3

,2y

2

+5y+6.Write down

equations for a#29 the #0Crm's average variable cost function,b#29 the #0Crm's marginal cost function,c#29 At

what level of output is average variable cost minimized? d#29 Graph the short-run supply function

for this #0Crm,being careful to label the key points on the graph with the numbers specifying the

exact prices and quantities at these points.

Answer,a#29 y

2

,2y +5b#293y

2

,4y +5c#29y=1d#29The AVC curve is U-shaped with its bottom at

y =1;c=2,The marginal cost curve is also U-shaped,It bottoms out at y =2=3and crosses the

AVC curve from belowaty=1.

CHAPTER 21 Cost Curves 408

Topic,Cost Curves Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

21.4 North American Manufacturing has the following production function Q = min#280:25K;0:5L#29

where K is units of capital,and L is hours of labor.

a#29 Without anywarning,the price of capital doubles,What should North American do in re-

sponse?

b#29 If North American were planning a new manufacturing plant,are there any advantages to a

larger facility?

Chapter 22

True-False Firm Supply

Topic,Firm Supply Di#0Eculty,2

#25 Correct Responses,53 Discrimination Index,32

Correct Answer,False

22.1 A #0Crm in a competitive industry takes account of the fact that the demand curve it confronts

has a signi#0Ccant negative slope.

Topic,Firm Supply Di#0Eculty,1

#25 Correct Responses,73 Discrimination Index,25

Correct Answer,True

22.2 In a perfectly competitive industry,the demand curve for the total output of the industry

maybedownward sloping.

Topic,Firm Supply Di#0Eculty,1

#25 Correct Responses,81 Discrimination Index,22

Correct Answer,False

22.3 Price equals marginal cost is a su#0Ecient condition for pro#0Ct maximization.

Topic,Firm Supply Di#0Eculty,3

#25 Correct Responses,21 Discrimination Index,2

Correct Answer,True

22.4 A #0Crm faces competitive markets both for its inputs and its outputs,If its long run supply

curveisq=3p; then it can not have constant returns to scale.

Topic,Firm Supply Di#0Eculty,1

#25 Correct Responses,84 Discrimination Index,20

Correct Answer,True

22.5 A #0Crm with the cost function c#28y#29=20y

2

+500 has a U-shaped cost curve.

Topic,Firm Supply Di#0Eculty,2

#25 Correct Responses,44 Discrimination Index,19

Correct Answer,False

22.6 Mr,O,Carr has the cost function c#28y#29=y

2

+ 144 if his output,y; is positive and c#280#29 = 0.

If the price of output is 30,Mr,Carr' s pro#0Ct-maximizing output is zero.

CHAPTER 22 Firm Supply 410

Topic,Firm Supply Di#0Eculty,2

#25 Correct Responses,44 Discrimination Index,19

Correct Answer,False

22.7 Mr,O,Carr has the cost function c#28y#29=y

2

+36if his output,y; is positive and c#280#29 = 0.If

the price of output is 18,Mr,Carr' s pro#0Ct-maximizing output is zero.

Topic,Firm Supply Di#0Eculty,2

#25 Correct Responses,25 Discrimination Index,40

Correct Answer,True

22.8 A #0Crm produces one output,using one input,with the production function f#28x#29=2x

1=3

where x is the amount of input,The cost function for this #0Crm is proportional to the price of the

input times the cube of the amount of output.

Topic,Firm Supply Di#0Eculty,2

#25 Correct Responses,62 Discrimination Index,15

Correct Answer,True

22.9 A competitive #0Crm has a continuous marginal cost curve,It #0Cnds that as output increases,

its marginal cost curve #0Crst rises,then falls,then rises again,If it wants to maximize pro#0Cts,the

#0Crm should never produce at a positive output where price equals marginal cost and marginal cost

decreases as output increases.

Topic,Firm Supply Di#0Eculty,2

#25 Correct Responses,78 Discrimination Index,17

Correct Answer,False

22.10 Two #0Crms have the same technology and must pay the same wages for labor,They have

identical factories,but Firm 1 paid a higher price for its factory than did Firm 2,If they are both

pro#0Ct maximizers and haveupward sloping marginal cost curves,then wewould expect Firm 1 to

have a higher output than Firm 2.

Topic,Firm Supply Di#0Eculty,2

#25 Correct Responses,55 Discrimination Index,9

Correct Answer,True

22.11 The area under the marginal cost curve measures total variable costs.

TRUE-FALSE 411

Topic,Firm Supply Di#0Eculty,1

#25 Correct Responses,71 Discrimination Index,0

Correct Answer,True

22.12 Average #0Cxed costs never increase with output.

Topic,Firm Supply Di#0Eculty,1

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,False

22.13 The change in producer's surplus when the market price changes from p

1

to p

2

is half of

the area to the left of the marginal cost curvebetween p

1

and p

2

.

Multiple Choice Firm Supply

Topic,Firm Supply Di#0Eculty,2

#25 Correct Responses,59 Discrimination Index,33

Correct Answer,D

22.1 A pro#0Ct maximizing #0Crm continues to operate even though it is losing money,It sells its

product at a price of $100,From these facts we deduce that:

#28a#29 average total cost is less than $100.

#28b#29 average #0Cxed cost is less than $100.

#28c#29 marginal cost is increasing.

#28d#29 average variable cost is less than $100.

#28e#29 marginal cost is decreasing.

Topic,Firm Supply Di#0Eculty,1

#25 Correct Responses,54 Discrimination Index,27

Correct Answer,C

22.2 A pro#0Ct maximizing dairy farm is currently producing 10,000 gallons of milk per day,The

government is considering two alternative policies,One is to give the farm a lump sum subsidy of

$500 per month,The other policy is to give the farm a subsidy of $.05 per gallon of output.

#28a#29 Both kinds of subsidy will increase production at this farm.

#28b#29 Neither subsidy will a#0Bect production at this farm,since output is determined by pro#0Ct maximization.

#28c#29 Production at this farm will be increased if the per unit subsidy is adopted,but not if the lump-sum

subsidy is adopted.

#28d#29 Which subsidy has the greater e#0Bect on production at this farm depends on whether #0Cxed costs are

greater than variable costs.

#28e#29 Production will be increased by either kind of subsidy if and only if there are not decreasing returns to

scale.

MULTIPLE CHOICE 413

Topic,Firm Supply Di#0Eculty,1

#25 Correct Responses,72 Discrimination Index,14

Correct Answer,C

22.3 Marge Costa produces plastic dog dishes using a process that requires only labor and plastic

as inputs and has constant returns to scale,With the process she is currently using,a laborer can

turn out 30 dog dishes an hour,The wage rate is $9 per hour,The plastic in a dog dish costs

Marge $.10,She has no other costs besides labor and plastic,Marge faces a perfectly competitive

market for plastic dog dishes,and she decides that she is maximizing pro#0Cts when she makes 300

dog dishes an hour,What is the market price of dog dishes?

#28a#29 $.21

#28b#29 $.32

#28c#29 $.40

#28d#29 $.27

#28e#29 $.28

Topic,Firm Supply Di#0Eculty,3

#25 Correct Responses,57 Discrimination Index,43

Correct Answer,E

22.4 A competitive #0Crm uses twovariable factors to produces its output,with a production

function q = minfx

1;x

2

g,The price of factor 1 is 2 and the price of factor 2 is 5,Due to a lackof

warehouse space,the company cannot use more than 22 units of x

1

,The #0Crm must pay a #0Cxed cost

of 88 if it produces any positive amount,but doesn't havetopay this cost if it produces no output.

What is the smallest integer price that would make a #0Crm willing to produce a positive amount?

#28a#29 24

#28b#29 21

#28c#29 13

#28d#29 7

#28e#29 11

CHAPTER 22 Firm Supply 414

Topic,Firm Supply Di#0Eculty,3

#25 Correct Responses,57 Discrimination Index,43

Correct Answer,E

22.5 A competitive #0Crm uses twovariable factors to produces its output,with a production

function q = minfx

1;x

2

g,The price of factor 1 is 5 and the price of factor 2 is 1,Due to a lackof

warehouse space,the company cannot use more than 18 units of x

1

,The #0Crm must pay a #0Cxed cost

of 72 if it produces any positive amount,but doesn't havetopay this cost if it produces no output.

What is the smallest integer price that would make a #0Crm willing to produce a positive amount?

#28a#29 22

#28b#29 19

#28c#29 15

#28d#29 6

#28e#29 10

Topic,Firm Supply Di#0Eculty,1

#25 Correct Responses,85 Discrimination Index,33

Correct Answer,A

22.6 A competitive #0Crm has a single factory with the cost function c#28y#29=4y

2

+89and produces

28 units in order to maximize pro#0Cts,Although the price of output does not change,the #0Crm

decides to build a second factory with the cost function c#28y#29=8y

2

+39.To maximize its pro#0Cts,

how many units should it produce in the second factory?

#28a#29 14

#28b#29 21

#28c#29 9

#28d#29 13

#28e#29 None of the above.

MULTIPLE CHOICE 415

Topic,Firm Supply Di#0Eculty,2

#25 Correct Responses,73 Discrimination Index,51

Correct Answer,B

22.7 A competitive #0Crm is choosing an output level to maximize its pro#0Cts in the short run.

Which of the following is not necessarily true? #28Assume that marginal cost is not constant and is

well-de#0Cned at all levels of output.#29

#28a#29 Marginal cost is at least as large as average variable cost.

#28b#29 Total revenues are at least as large as total costs.

#28c#29 Price is at least as large as average variable cost.

#28d#29 Price equals marginal cost.

#28e#29 The marginal cost curve is rising.

Topic,Firm Supply Di#0Eculty,2

#25 Correct Responses,55 Discrimination Index,32

Correct Answer,D

22.8 A competitive,capitalistic #0Crm produces gift-wrapped pieces of the Berlin wall,using the

standard Marxian inputs,K and L,The production function is y =#28K+L#29

1=2;where y is the

number of pieces produced,Neglect the use of the wall itself,The price of capital,K; is r; and the

price of labor,L; is w,Which of the following is true?

#28a#29 Regardless of w and r; cost minimization requires that K = L.

#28b#29 The technology has increasing returns to scale.

#28c#29 If r#3Ew;then L =0.

#28d#29 If r#3Ew;then K =0.

#28e#29 None of the above.

Topic,Firm Supply Di#0Eculty,2

#25 Correct Responses,63 Discrimination Index,60

Correct Answer,A

22.9 A competitive #0Crm has a long run total cost function c#28y#29=3y

2

+243 for y#3E0and c#280#29=0.

Its long run supply function is described as follows:

#28a#29 y = p=6ifp#3E54;y=0ifp#3C54.

#28b#29 y = p=3ifp#3E52;y=0ifp#3C52.

#28c#29 y = p=3ifp#3E57;y=0ifp#3C63.

#28d#29 y = p=6ifp#3E57;y=0ifp#3C57.

#28e#29 y = p=3ifp#3E59;y=0ifp#3C49.

CHAPTER 22 Firm Supply 416

Topic,Firm Supply Di#0Eculty,2

#25 Correct Responses,63 Discrimination Index,60

Correct Answer,A

22.10 A competitive #0Crm has a long run total cost function c#28y#29=5y

2

+1;280 for y#3E0and

c#280#29 = 0,Its long run supply function is described as follows:

#28a#29 y = p=10 if p#3E160;y=0ifp#3C160.

#28b#29 y = p=5ifp#3E158;y=0ifp#3C158.

#28c#29 y = p=5ifp#3E163;y=0ifp#3C175.

#28d#29 y = p=10 if p#3E163;y=0ifp#3C163.

#28e#29 y = p=5ifp#3E165;y=0ifp#3C155.

Topic,Firm Supply Di#0Eculty,2

#25 Correct Responses,51 Discrimination Index,49

Correct Answer,A

22.11 A competitive #0Crm uses two inputs and has a production function f#28x

1;x

2

#29=22x

:25

1

x

:25

2

.

The #0Crm can buy as much of either factor as it likes at factor prices w

1

= w

2

=1,The cost of

producing y units of ouput for this #0Crm is:

#28a#29 2#28y=22#29

2

.

#28b#29 22#28x

1

+ x

2

#29y.

#28c#29 #28x

1

+ x

2

#29=22.

#28d#29 y=44.

#28e#29 y

2

=44.

Topic,Firm Supply Di#0Eculty,2

#25 Correct Responses,51 Discrimination Index,49

Correct Answer,A

22.12 A competitive #0Crm uses two inputs and has a production function f#28x

1;x

2

#29=19x

:25

1

x

:25

2

.

The #0Crm can buy as much of either factor as it likes at factor prices w

1

= w

2

=1,The cost of

producing y units of ouput for this #0Crm is:

#28a#29 2#28y=19#29

2

.

#28b#29 19#28x

1

+ x

2

#29y.

#28c#29 #28x

1

+ x

2

#29=19.

#28d#29 y=38.

#28e#29 y

2

=38.

MULTIPLE CHOICE 417

Topic,Firm Supply Di#0Eculty,0

#25 Correct Responses,65 Discrimination Index,67

Correct Answer,A

22.13 A #0Crm's production function is f#28x

1;x

2

#29=#28minfx

1;5x

2

g#29

1=2

,If the price of factor 1 is

w

1

=4per unit and the price of factor 2 is w

2

=15per unit,then its supply function is given by

the equation S#28p#29=

#28a#29 p=14.

#28b#29 p#28maxfw

1;5w

2

g#29.

#28c#29 p#28minfw

1;5w

2

g#29.

#28d#29 7p.

#28e#29 pminf4p;75pg.

Topic,Firm Supply Di#0Eculty,0

#25 Correct Responses,65 Discrimination Index,67

Correct Answer,A

22.14 A #0Crm's production function is f#28x

1;x

2

#29=#28minfx

1;4x

2

g#29

1=2

,If the price of factor 1 is

w

1

=2per unit and the price of factor 2 is w

2

=8per unit,then its supply function is given by the

equation S#28p#29=

#28a#29 p=8.

#28b#29 p#28maxfw

1;4w

2

g#29.

#28c#29 p#28minfw

1;4w

2

g#29.

#28d#29 4p.

#28e#29 pminf2p;32pg.

Topic,Firm Supply Di#0Eculty,0

#25 Correct Responses,78 Discrimination Index,41

Correct Answer,A

22.15 Suppose that Dent Carr's long run total cost of repairing s cars per week is c#28s#29=3s

2

+27.

If the price he receives for repairing a car is 30,then in the long run,how many cars will he #0Cx per

week if he maximizes pro#0Cts?

#28a#29 5.

#28b#29 0.

#28c#29 10.

#28d#29 7.50.

#28e#29 15.

CHAPTER 22 Firm Supply 418

Topic,Firm Supply Di#0Eculty,0

#25 Correct Responses,78 Discrimination Index,41

Correct Answer,A

22.16 Suppose that Dent Carr's long run total cost of repairing s cars per week is c#28s#29=4s

2

+16.

If the price he receives for repairing a car is 48,then in the long run,how many cars will he #0Cx per

week if he maximizes pro#0Cts?

#28a#29 6.

#28b#29 0.

#28c#29 12.

#28d#29 9.

#28e#29 18.

Topic,Firm Supply Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,A

22.17 Irma's production function is f#28x

1;x

2

#29=#28minfx

1;4x

2

g#29

1=2

,If the price of factor 1 is w

1

=6

and the price of factor 2 is w

2

=12;then her supply function is given by the equation:

#28a#29 S#28p#29=p=18.

#28b#29 S#28p#29=p#28maxfw

1;4w

2

g#29

2

.

#28c#29 S#28p#29=p#28minfw

1;4w

2

g#29

2

.

#28d#29 S#28p#29=9p.

#28e#29 S#28p#29=minf6p;48p#29.

Topic,Firm Supply Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,A

22.18 Irma's production function is f#28x

1;x

2

#29=#28minfx

1;4x

2

g#29

1=2

,If the price of factor 1 is w

1

=3

and the price of factor 2 is w

2

=12;then her supply function is given by the equation:

#28a#29 S#28p#29=p=12.

#28b#29 S#28p#29=p#28maxfw

1;4w

2

g#29

2

.

#28c#29 S#28p#29=p#28minfw

1;4w

2

g#29

2

.

#28d#29 S#28p#29=6p.

#28e#29 S#28p#29=minf3p;48p#29.

MULTIPLE CHOICE 419

Topic,Firm Supply Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,D

22.19 A #0Crm has the long run cost function C#28q#29=7q

2

+ 112,In the long run,it will supply a

positive amount of output,so long as the price is greater than:

#28a#29 112

#28b#29 120

#28c#29 28

#28d#29 56

#28e#29 61

Topic,Firm Supply Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,D

22.20 A #0Crm has the long run cost function C#28q#29=4q

2

+4,In the long run,it will supply a

positive amount of output,so long as the price is greater than:

#28a#29 16

#28b#29 24

#28c#29 4

#28d#29 8

#28e#29 13

Topic,Firm Supply Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,D

22.21 A competitive #0Crm produces output according to the production function y = min#28x

3;1000#29.

Let p be the price of output,and let the price of input x be 1,The pro#0Ct-maximizing output for

this #0Crm is:

#28a#29 1000 if p#3E1 and 0 otherwise.

#28b#29 10 for all p.

#28c#29 1000 for all p.

#28d#29 0ifp#3C1=100 and 1000 otherwise.

#28e#29 none of the above.

CHAPTER 22 Firm Supply 420

Topic,Firm Supply Di#0Eculty,0

#25 Correct Responses,39 Discrimination Index,21

Correct Answer,D

22.22 A competitive #0Crm produces output according to the production function y = min#28x

2;100#29.

Let w be the price of the factor x; and let the price of output be 1,The demand for x when the

price of x is w is given by the function:

#28a#29 10 when w#3C1 and 100 otherwise.

#28b#29 100 for all w.

#28c#29 10 for all w.

#28d#29 0ifw#3E10 and 10 otherwise.

#28e#29 none of the above.

Topic,Firm Supply Di#0Eculty,0

#25 Correct Responses,40 Discrimination Index,5

Correct Answer,C

22.23 A competitive #0Crm produces output according to the production function y = min#28x

1=2;10#29.

Let w be the price of the factor x; and let the price of output be 1,The demand for factor x when

the factor price is w is given by:

#28a#29 x = min#28w

1=2;10#29

#28b#29 x = max#28w

1=2

=2;100#29.

#28c#29 x = min#281=4w

2;100#29.

#28d#29 x =10+x

2

=2.

#28e#29 none of the above.

Essay Firm Supply

Topic,Firm Supply Di#0Eculty,3

#25 Correct Responses,0 Discrimination Index,0

22.1 The Lost Mountains of northern Iowa are inhabited by the rare Marshallian deer,Patches

of grass are far apart in this rugged land,If a deer #0Cnds a fresh patch of grass and spends h hours

grazing it,it gets the square root of h units of grass,The deer compete for grass,When there are n

deer,it takes a deer n squared minutes to #0Cnd a fresh patch,A deer can survive if it gets 1 unit of

grass every 200 minutes,a#29 Find the average cost in time of a unit of grass if a deer gets y units of

grass from each patch,b#29 Howmuch time will an e#0Ecient deer spend in each patch when there are

n deer? #28Hint,Min,Avg,Cost#29 c#29Since there is free entry into the deer business,the equilibrium

population is the maximum number of e#0Ecient deer who can survive,How many is this?

Answer,a#29y +#28n squared#29=y b#29n minutes,c#29100

Chapter 23

True-False Industry Supply

Topic,Industry Supply Di#0Eculty,1

#25 Correct Responses,86 Discrimination Index,9

Correct Answer,True

23.1 The short run industry supply curve can be found by horizontally summing the short run

supply curves of all the individual #0Crms in the industry.

Topic,Industry Supply Di#0Eculty,2

#25 Correct Responses,98 Discrimination Index,12

Correct Answer,True

23.2 It is possible to have an industry in which all #0Crms make zero economic pro#0Cts in long run

equilibrium.

Topic,Industry Supply Di#0Eculty,1

#25 Correct Responses,73 Discrimination Index,14

Correct Answer,True

23.3 The possibility of more #0Crms entering an industry in the long run tends to make long run

industry supply more price elastic than short run industry supply.

Topic,Monopoly Di#0Eculty,2

#25 Correct Responses,80 Discrimination Index,14

Correct Answer,True

23.4 In a competitive market,if both demand and supply curves are linear,then a per unit tax

of $10 will generate exactly the same deadweight loss as a per unit subsidy of $10.

Topic,Industry Supply Di#0Eculty,2

#25 Correct Responses,74 Discrimination Index,26

Correct Answer,True

23.5 If there are constant returns to scale in a competitive industry,then the long run industry

supply curve for that industry is horizontal.

TRUE-FALSE 423

Topic,Industry Supply Di#0Eculty,2

#25 Correct Responses,52 Discrimination Index,11

Correct Answer,True

23.6 If some #0Crm in an industry has the production function F#28x;y#29=x

3=4

y

3=4

where x and y are

the only two inputs in producing the good,then that industry can not be competitive in the long

run.

Topic,Industry Supply Di#0Eculty,1

#25 Correct Responses,67 Discrimination Index,21

Correct Answer,False

23.7 The market for a good is in equilibrium when the government unexpectedly imposes a quan-

tity tax of $2 per unit,In the short run,the price will rise by $2 per unit so that #0Crms can regain

their lost revenue and continue to produce.

Multiple Choice Industry Supply

Topic,Industry Supply Di#0Eculty,2

#25 Correct Responses,32 Discrimination Index,18

Correct Answer,C

23.1 In East Icicle,Minnesota,on the northern edge of the corn belt,the growing season is short

and the soil is poor,Corn yields are meager unless a great deal of expensive fertilizer is used,In

Corncrib,Illinois the land is fertile and #0Dat and the growing season is 20 days longer,For any given

expenditure per acre,corn yields are far greater than in East Icicle,Farmers in both places are

pro#0Ct maximizers who grow corn,We deduce that:

#28a#29 marginal costs are higher in E,Icicle than in Corncrib.

#28b#29 more fertilizer is used per acre in E,Icicle than in Corncrib.

#28c#29 marginal costs are the same in both places.

#28d#29 more fertilizer is used per acre in Corncrib than in E,Icicle.

#28e#29 more than one of the above.

Topic,Industry Supply Di#0Eculty,3

#25 Correct Responses,32 Discrimination Index,13

Correct Answer,E

23.2 A competitive industry has 10,000 identical #0Crms,For each #0Crm in the industry,the long

run cost of producing y units of output is c#28y#29 = $100+ y

2

if y#3E0and c#280#29=0,The government

imposes a lump sum tax of $300 on each #0Crm in the industry,Firms can avoid this tax only by

going out of business,There is free entry and exit into this industry,In the long run:

#28a#29 the number of #0Crms stays constant and the price of output rises by $30.

#28b#29 the number of #0Crms doubles and the price of output doubles.

#28c#29 the number of #0Crms is halved and the price of output is doubled.

#28d#29 the number of #0Crms stays constant and the price of output rises by less than $30.

#28e#29 None of the above.

MULTIPLE CHOICE 425

Topic,Industry Supply Di#0Eculty,2

#25 Correct Responses,44 Discrimination Index,59

Correct Answer,B

23.3 The bicycle industry is made up of 100 #0Crms with the long run cost curve c#28y#29=2+#28y

2

=2#29

and 80 #0Crms with the long run cost curve c#28y#29=y

2

=6,No new #0Crms can enter the industry,What

is the long run industry supply curve at prices greater than 2?

#28a#29 y = 360p

#28b#29 y = 340p

#28c#29 y = 170p

#28d#29 y = 240p

#28e#29 y = 375p

Topic,Industry Supply Di#0Eculty,2

#25 Correct Responses,44 Discrimination Index,59

Correct Answer,B

23.4 The bicycle industry is made up of 100 #0Crms with the long run cost curve c#28y#29=2+#28y

2

=2#29

and 160 #0Crms with the long run cost curve c#28y#29=y

2

=10,No new #0Crms can enter the industry,What

is the long run industry supply curve at prices greater than 2?

#28a#29 y = 920p

#28b#29 y = 900p

#28c#29 y = 450p

#28d#29 y = 800p

#28e#29 y = 935p

Topic,Industry Supply Di#0Eculty,2

#25 Correct Responses,24 Discrimination Index,2

Correct Answer,B

23.5 Two #0Crms constitute the entire doghouse industry,One has a long run cost curveof

3+4#28y

2

#29=3#29 and the other has a long run cost curveof10 + #28y

2

=10#29,If no new #0Crms enter the

industry,at which of the following prices will exactly one #0Crm operate?

#28a#29 1

#28b#29 3

#28c#29 5

#28d#29 7

#28e#29 None of the above.

CHAPTER 23 Industry Supply 426

Topic,Industry Supply Di#0Eculty,1

#25 Correct Responses,84 Discrimination Index,1

Correct Answer,B

23.6 On a small island,papayas can only be sold in the market in the center of the island.

Although papayas only cost 1 to raise,they can be sold in the market for 3,But it costs,1 per

kilometer to transport each papaya to market,If an acre of land grows 200 papayas,howmuch

rent does an acre of land 4 kilometers from the market command?

#28a#29 302

#28b#29 320

#28c#29 240

#28d#29 262

#28e#29 None of the above.

Topic,Industry Supply Di#0Eculty,3

#25 Correct Responses,26 Discrimination Index,33

Correct Answer,A

23.7 On a tropical island there are 100 potential boat builders,numbered 1 through 100,Each

can build up to 12 boats a year,but anyone who goes into the boat-building business has to pay

a #0Cxed cost of 11,Marginal costs di#0Ber from person to person,Where y denotes the number of

boats built per year,boat builder 1 has a total cost function c#28y#29=11+y,Boat builder 2 has

a total cost function c#28y#29=11+2yand,more generally,for each i; from 1 to 100,boat builder i

has a cost function c#28y#29=11+iy,If the price of boats is 40,how many boats will be built per year?

#28a#29 468

#28b#29 348

#28c#29 174

#28d#29 702

#28e#29 Anynumber between 480 and 492 is possible.

MULTIPLE CHOICE 427

Topic,Industry Supply Di#0Eculty,3

#25 Correct Responses,26 Discrimination Index,33

Correct Answer,A

23.8 On a tropical island there are 100 potential boat builders,numbered 1 through 100,Each

can build up to 12 boats a year,but anyone who goes into the boat-building business has to pay

a #0Cxed cost of 11,Marginal costs di#0Ber from person to person,Where y denotes the number of

boats built per year,boat builder 1 has a total cost function c#28y#29=11+y,Boat builder 2 has

a total cost function c#28y#29=11+2yand,more generally,for each i; from 1 to 100,boat builder i

has a cost function c#28y#29=11+iy,If the price of boats is 20,how many boats will be built per year?

#28a#29 228

#28b#29 108

#28c#29 54

#28d#29 342

#28e#29 Anynumber between 240 and 252 is possible.

Topic,Industry Supply Di#0Eculty,3

#25 Correct Responses,46 Discrimination Index,52

Correct Answer,B

23.9 Consider a competitive industry with several #0Crms all of whichhave the same cost function,

c#28y#29=y

2

+4for y#3E0and c#280#29=0,The demand curve for this industry is D#28p#29=50,p; where p is

the price,The long run equilibrium number of #0Crms in this industry is:

#28a#29 4.

#28b#29 23.

#28c#29 25.

#28d#29 46.

#28e#29 2.

CHAPTER 23 Industry Supply 428

Topic,Industry Supply Di#0Eculty,1

#25 Correct Responses,80 Discrimination Index,15

Correct Answer,C

23.10 Brand X is one of many #0Crms in a competitive industry where each #0Crm has a constant

marginal cost of 2 dollars per unit of output,If marginal cost for Brand X rises to 4 dollars per

unit and marginal costs of all other #0Crms in the industry stay constant,byhowmuch does the price

in the industry increase?

#28a#29 2

#28b#29 1

#28c#29 0

#28d#29 2=n where n is the number of #0Crms in the industry

#28e#29 None of the above.

Topic,Industry Supply Di#0Eculty,3

#25 Correct Responses,40 Discrimination Index,21

Correct Answer,B

23.11 A #0Crm uses a single input to produce its output,which is sold in a competitive market,It

gets quantity discounts on purchases of its input,If it buys x units of the input,the price it must

pay per unit of input is #2836=x#29+5,If it buys no inputs it doesn't havetopayanything,The #0Crm's

production function is f#28x#29=13x,x

2

,If the price of the #0Crm's output is 1,the pro#0Ct-maximizing

amount of input to buy is:

#28a#29 4.

#28b#29 0.

#28c#29 8.

#28d#29 6.

#28e#29 None of the above.

MULTIPLE CHOICE 429

Topic,Industry Supply Di#0Eculty,3

#25 Correct Responses,40 Discrimination Index,21

Correct Answer,B

23.12 A #0Crm uses a single input to produce its output,which is sold in a competitive market,It

gets quantity discounts on purchases of its input,If it buys x units of the input,the price it must

pay per unit of input is #28441=x#29+3,If it buys no inputs it doesn't havetopayanything,The #0Crm's

production function is f#28x#29=15x,x

2

,If the price of the #0Crm's output is 1,the pro#0Ct-maximizing

amount of input to buy is:

#28a#29 6.

#28b#29 0.

#28c#29 12.

#28d#29 9.

#28e#29 None of the above.

Topic,Industry Supply Di#0Eculty,2

#25 Correct Responses,49 Discrimination Index,22

Correct Answer,A

23.13 Chirimollas grow only on the island of Socorro,o#0B the coast of Mexico,They need very

little soil,so virtually an unlimited supply can be grown at a cost of $4 per unit,When they are

exported to the U.S.,half of the chirimollas that are shipped rot on the boat and are dumped in the

ocean,Shipping costs are $1 for every unit that is put on board a ship,The demand function for

chirimollas in the U.S,is given by the equation q =10;000,20p

2

.Ifchirimollas are competitively

supplied,the number of units that are sold in the United States will be:

#28a#29 8000.

#28b#29 9500.

#28c#29 9680.

#28d#29 9190.

#28e#29 9000.

CHAPTER 23 Industry Supply 430

Topic,Industry Supply Di#0Eculty,2

#25 Correct Responses,38 Discrimination Index,37

Correct Answer,C

23.14 An industry has 1000 #0Crms,each with the production function f#28x

1;x

2

#29=x

1=2

1

x

1=2

2

,The

price of factor 1 is 1 and the price of factor 2 is 1,In the long run,both factors are variable,but in

the short run,each #0Crm is stuck with using 100 units of factor2.The long run industry supply curve:

#28a#29 is upward sloping with zero supply if price is less than 10.

#28b#29 is downward sloping for outputs less than 10.

#28c#29 is horizontal with zero supply for prices less than 2 and in#0Cnite supply for prices greater than 2.

#28d#29 is horizontal with zero supply for prices less than 10 and in#0Cnite supply for prices greater than 10.

#28e#29 is upward sloping with zero supply if price is less than 20.

Topic,Industry Supply Di#0Eculty,3

#25 Correct Responses,56 Discrimination Index,40

Correct Answer,C

23.15 Suppose that all #0Crms in a given industry have the same supply curve given by S

i

#28p#29=2p

when p is greater than or equal to $2 and S

i

#28p#29=0when p is less than $2,Suppose that market

demand is given by D#28p#29=12,p,If #0Crms continue to enter the industry so long as they can do so

pro#0Ctably,the equilibrium price must be closest to:

#28a#29 $5.

#28b#29 $4.

#28c#29 $2.40.

#28d#29 $2.

#28e#29 $1.75.

MULTIPLE CHOICE 431

Topic,Industry Supply Di#0Eculty,2

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,B

23.16 In the absence of governmentinterference,there is a constant marginal cost of $6 per ounce

for growing marijuana and delivering it to buyers,Suppose that government authorities seize ship-

ments whenever they #0Cnd them and resell the marijuana that they seize on the open market,The

probability that any shipment of marijuana is seized is 0.20,If a shipment is seized,there is no

other punishment besides loss of the marijuana that is seized,The e#0Bect of the government action

is:

#28a#29 to leave prices unchanged.

#28b#29 raise the equilibrium price by 1.50.

#28c#29 lower the equilibrium price by 0.75.

#28d#29 raise the equilibrium price by3

#28e#29 raise the equilibrium price by 1.20

Topic,Industry Supply Di#0Eculty,2

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,B

23.17 In the absence of governmentinterference,there is a constant marginal cost of $7 per ounce

for growing marijuana and delivering it to buyers,Suppose that government authorities seize ship-

ments whenever they #0Cnd them and resell the marijuana that they seize on the open market,The

probability that any shipment of marijuana is seized is 0.10,If a shipment is seized,there is no

other punishment besides loss of the marijuana that is seized,The e#0Bect of the government action

is:

#28a#29 to leave prices unchanged.

#28b#29 raise the equilibrium price by 0.78.

#28c#29 lower the equilibrium price by 0.39.

#28d#29 raise the equilibrium price by 1.56

#28e#29 raise the equilibrium price by 0.70

CHAPTER 23 Industry Supply 432

Topic,Industry Supply Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,A

23.18 In the problem discussed in your workbook,the cost of capturing a cockatoo and trans-

porting him to the U.S,is about $40 per bird,Cockatoos are drugged and smuggled in suitcases

to the U.S,Half of the smuggled cockatoos die in transit,Eachsmuggled cockatoo has a 10#25

probability of being discovered,in which case the smuggler is #0Cned,If the #0Cne imposed for each

smuggled cockatoo is increased to $900,then the equilibrium price of cockatoos in the U.S,will be:

#28a#29 288.89.

#28b#29 130.

#28c#29 85.

#28d#29 67.

#28e#29 200.

Topic,Industry Supply Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,A

23.19 In the problem discussed in your workbook,the cost of capturing a cockatoo and trans-

porting him to the U.S,is about $40 per bird,Cockatoos are drugged and smuggled in suitcases

to the U.S,Half of the smuggled cockatoos die in transit,Eachsmuggled cockatoo has a 10#25

probability of being discovered,in which case the smuggler is #0Cned,If the #0Cne imposed for each

smuggled cockatoo is increased to $1,400,then the equilibrium price of cockatoos in the U.S,will be:

#28a#29 400.

#28b#29 180.

#28c#29 110.

#28d#29 82.

#28e#29 311.11.

MULTIPLE CHOICE 433

Topic,Industry Supply Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,A

23.20 In the absence of governmentinterference,there is a constant marginal cost of $5 per

ounce for growing marijuana and delivering it to buyers,If the probability that any shipmentof

marijuana is seized is 0.10 and the #0Cne if a shipper is caught is $50 per ounce,then the equilibrium

price of marijuana per ounce is:

#28a#29 11.11.

#28b#29 10.

#28c#29 55.

#28d#29 4.50.

#28e#29 5.50.

Topic,Industry Supply Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,A

23.21 In the absence of governmentinterference,there is a constant marginal cost of $5 per

ounce for growing marijuana and delivering it to buyers,If the probability that any shipmentof

marijuana is seized is 0.30 and the #0Cne if a shipper is caught is $15 per ounce,then the equilibrium

price of marijuana per ounce is:

#28a#29 13.57.

#28b#29 9.50.

#28c#29 20.

#28d#29 3.50.

#28e#29 6.50.

Topic,Industry Supply Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,D

23.22 In a certain industry,the supply curveofany #0Crm is S

i

#28p#29=p=2,If a #0Crm produces 3 units

of output,what is its total variable costs?

#28a#29 $18

#28b#29 $7

#28c#29 $13.50

#28d#29 $9

#28e#29 There is not enough information given to determine total variable costs.

CHAPTER 23 Industry Supply 434

Topic,Industry Supply Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,D

23.23 In a certain industry,the supply curveofany #0Crm is S

i

#28p#29=p=2,If a #0Crm produces 6 units

of output,what is its total variable costs?

#28a#29 $72

#28b#29 $34

#28c#29 $54

#28d#29 $36

#28e#29 There is not enough information given to determine total variable costs.

Topic,Industry Supply Di#0Eculty,0

#25 Correct Responses,12 Discrimination Index,15

Correct Answer,A

23.24 An industry has 100 #0Crms,These #0Crms have identical production functions,In the short

run,each #0Crm has #0Cxed costs of $400,There are twovariable factors in the short run and output

is given by y =#28min#28x

1;4x

2

#29#29

1=2

,The cost of factor 1 is $4 per unit and the cost of factor 2 is $2

per unit,In the short run,the industry supply curve is given by:

#28a#29 Q = 100p=9

#28b#29 Q = 100p=8

#28c#29 Q = 600p

1=2

#28d#29 the part of the line Q = 50#28min#284;8#29#29 for which pQ #3E 400=Q.

#28e#29 None of the above.

Topic,Industry Supply Di#0Eculty,0

#25 Correct Responses,12 Discrimination Index,15

Correct Answer,A

23.25 An industry has 100 #0Crms,These #0Crms have identical production functions,In the short

run,each #0Crm has #0Cxed costs of $200,There are twovariable factors in the short run and output

is given by y =#28min#28x

1;4x

2

#29#29

1=2

,The cost of factor 1 is $5 per unit and the cost of factor 2 is $3

per unit,In the short run,the industry supply curve is given by:

#28a#29 Q = 100p=11:50

#28b#29 Q = 100p=10

#28c#29 Q = 633:33p

1=2

#28d#29 the part of the line Q = 50#28min#285;12#29#29 for which pQ #3E 200=Q.

#28e#29 None of the above.

MULTIPLE CHOICE 435

Topic,Industry Supply Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,B

23.26 The cheese business in LakeFon-du-lac,Wisconsin is a competitive industry,All cheese

manufacturers have the cost function C = Q

2

+9;while demand for cheese in the town is given by

Q

d

= 120,P,The long run equilibrium number of #0Crms in this industry is

#28a#29 19

#28b#29 38

#28c#29 34

#28d#29 120

#28e#29 39

Topic,Industry Supply Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,B

23.27 The cheese business in LakeFon-du-lac,Wisconsin is a competitive industry,All cheese

manufacturers have the cost function C = Q

2

+16;while demand for cheese in the town is given by

Q

d

= 120,P,The long run equilibrium number of #0Crms in this industry is

#28a#29 14

#28b#29 28

#28c#29 22

#28d#29 120

#28e#29 29

CHAPTER 23 Industry Supply 436

Topic,Industry Supply Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,C

23.28 In Baggs,Wyoming,cattle can be produced according to the following process:

C =#28G=10#29+ #28P=30#29

where C is the number of cattle,G are bushels of grain,and P are acres of pasture,If grain costs

$5 per bushel,and pasture costs $4 per acre,how many cattle can Rancher Roy produce with a

budget of $9,000?

#28a#29 1,800

#28b#29 225

#28c#29 180

#28d#29 75

#28e#29 900

Topic,Industry Supply Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,C

23.29 In Baggs,Wyoming,cattle can be produced according to the following process:

C =#28G=10#29+ #28P=40#29

where C is the number of cattle,G are bushels of grain,and P are acres of pasture,If grain costs

$2 per bushel,and pasture costs $3 per acre,how many cattle can Rancher Roy produce with a

budget of $9,000?

#28a#29 3,000

#28b#29 180

#28c#29 450

#28d#29 75

#28e#29 900

Essay Industry Supply

Topic,Industry Supply Di#0Eculty,2

#25 Correct Responses,0 Discrimination Index,0

23.1 The cost per bushel of growing corn on a given acre of land depends partly on howintensely

the land is farmed and partly on the quality of the soil,the amount of rainfall and the length of

the growing season,Suppose that the last three factors are summarized by a single index "f" for

fertility,Suppose that the long run total cost of producing y hundred bushels of corn on an acre

of land of fertility f is c#28y;f#29 where c#28y;f#29 = #281 + y

2

#29=f for y#3E0and c#280;f#29=0.a#29Write down a

formula for the long run average cost function per hundred bushels of corn from an acre of land

of quality f? b#29 At what level of output is long run average cost minimized on an acre of land of

quality f? c#29 What is the lowest price per hundred bushels at which an acre of land of quality f

will be used to produce corn?

Answer,a#29LRAC =#28y+1=y#29=f b#291 hundred bushels c#292=f.

Topic,Industry Supply Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

23.2 The price elasticity of gasoline in the United States has been estimated to be 0.15,If this

is so,should pro#0Ct maximizing gasoline stations raise their prices? #28Explain whyorwhy not.#29

Answer,Individual station's price elasticities of demand are quite elastic because of competition

between stations.

Topic,Industry Supply Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

23.3 The price elasticity of demand for gasoline in the United States is equal to 0.15,How should

the price elasticity of demand for the individual #0Crm compare to 0.15 #28higher; lower,same,can't

tell#29? Explain why.

Chapter 24

True-False Monopoly

Topic,Monopoly Di#0Eculty,1

#25 Correct Responses,76 Discrimination Index,37

Correct Answer,True

24.1 Since a monopoly charges a price higher than marginal cost,it will produce an ine#0Ecient

amount of output.

Topic,Monopoly Di#0Eculty,2

#25 Correct Responses,45 Discrimination Index,22

Correct Answer,False

24.2 If the interest rate is 10#25,a monopolist will choose a markup of price over marginal cost of

at least 10#25.

Topic,Monopoly Di#0Eculty,1

#25 Correct Responses,73 Discrimination Index,13

Correct Answer,False

24.3 A natural monopoly occurs when a #0Crm gains ownership of the entire stock of some natural

resource and thus is able to exclude other producers.

Topic,Monopoly Di#0Eculty,1

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,False

24.4 Since a monopoly makes excess pro#0Cts beyond the normal rate of return on investment,an

investor is likely to get a higher rate of return in the stock market byinvesting in monopolistic

rather than competitive industries.

Topic,Monopoly Di#0Eculty,1

#25 Correct Responses,90 Discrimination Index,3

Correct Answer,True

24.5 If he produces anything at all,a pro#0Ct-maximizing monopolist with some #0Cxed costs and

no variable costs will set price and output so as to maximize revenue.

TRUE-FALSE 439

Topic,Monopoly Di#0Eculty,1

#25 Correct Responses,85 Discrimination Index,29

Correct Answer,True

24.6 For a monopolist who faces a downward sloping demand curve,marginal revenue is less

than price whenever quantity sold is positive.

Topic,Monopoly Di#0Eculty,2

#25 Correct Responses,46 Discrimination Index,32

Correct Answer,True

24.7 A monopolist with constant marginal costs faces a demand curve with a constant elasticity

of demand and does not practice price discrimination,If the government imposes a tax of $1 per

unit of goods sold by the monopolist,the monopolist will increase his price by more than $1 per

unit.

Topic,Monopoly Di#0Eculty,1

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,True

24.8 A monopolist will always equate marginal revenue and marginal cost when maximizing

pro#0Ct.

Multiple Choice Monopoly

Topic,Monopoly Di#0Eculty,2

#25 Correct Responses,20 Discrimination Index,33

Correct Answer,C

24.1 A monopolist faces the inverse demand function described by p =32,5qwhere q is output.

The monopolist has no #0Cxed cost and his marginal cost is 7 at all levels of output,Which of the

following expresses the monopolist's pro#0Cts as a function of his output?

#28a#29 32,5q,7

#28b#29 32,10q

#28c#29 25q,5q

2

#28d#29 32q,5q

2

,7

#28e#29 None of the above.

Topic,Monopoly Di#0Eculty,2

#25 Correct Responses,20 Discrimination Index,33

Correct Answer,C

24.2 A monopolist faces the inverse demand function described by p =29,2qwhere q is output.

The monopolist has no #0Cxed cost and his marginal cost is 6 at all levels of output,Which of the

following expresses the monopolist's pro#0Cts as a function of his output?

#28a#29 29,2q,6

#28b#29 29,4q

#28c#29 23q,2q

2

#28d#29 29q,2q

2

,6

#28e#29 None of the above.

Topic,Monopoly Di#0Eculty,1

#25 Correct Responses,91 Discrimination Index,23

Correct Answer,E

24.3 A monopolist faces the inverse demand curve p = 192,4q.At what level of output is his

total revenue maximized?

#28a#29 36

#28b#29 34

#28c#29 12

#28d#29 48

#28e#29 24

MULTIPLE CHOICE 441

Topic,Monopoly Di#0Eculty,1

#25 Correct Responses,91 Discrimination Index,23

Correct Answer,E

24.4 A monopolist faces the inverse demand curve p = 288,6q.At what level of output is his

total revenue maximized?

#28a#29 36

#28b#29 34

#28c#29 12

#28d#29 48

#28e#29 24

Topic,Monopoly Di#0Eculty,2

#25 Correct Responses,69 Discrimination Index,23

Correct Answer,B

24.5 The demand for a monopolist's output is 7000 divided by the square of the price in dollars

that it charges per unit,The #0Crm has constant marginal costs equal to 1 dollar per unit,To

maximize its pro#0Cts it should charge a price of:

#28a#29 1.

#28b#29 2.

#28c#29 3.

#28d#29 1.5.

#28e#29 2.5.

Topic,Monopoly Di#0Eculty,2

#25 Correct Responses,68 Discrimination Index,27

Correct Answer,A

24.6 A pro#0Ct-maximizing monopolist faces the demand curve,q = 100,3p,It produces at a con-

stant marginal cost of $20 per unit,A quantity tax of $10 per unit is imposed on the monopolist's

product,The price of the monopolist's product:

#28a#29 rises by $5.

#28b#29 rises by $10.

#28c#29 rises by $20.

#28d#29 rises by $12.

#28e#29 stays constant.

CHAPTER 24 Monopoly 442

Topic,Monopoly Di#0Eculty,2

#25 Correct Responses,39 Discrimination Index,44

Correct Answer,C

24.7 The demand for a monopolist's output is 10,000 divided by the square of the price he

charges,The monopolist produces at a constant marginal cost of $5,If the government imposes a

sales tax of $10 per unit on the monopolist's output,the monopolists price will rise by:

#28a#29 $5.

#28b#29 $10.

#28c#29 $20.

#28d#29 $12.

#28e#29 None of the above.

Topic,Monopoly Di#0Eculty,2

#25 Correct Responses,56 Discrimination Index,35

Correct Answer,C

24.8 The demand for a monopolist's output is 2;000=#28p+1#29

2

where p is the price she charges,At

a price of 3,the elasticity of demand for the monopolist's output is:

#28a#29,1.

#28b#29,2:50.

#28c#29,1:50.

#28d#29,2.

#28e#29,1.

Topic,Monopoly Di#0Eculty,2

#25 Correct Responses,56 Discrimination Index,35

Correct Answer,C

24.9 The demand for a monopolist's output is 4;000=#28p+5#29

2

where p is the price she charges,At

a price of 9,the elasticity of demand for the monopolist's output is:

#28a#29,1.

#28b#29,2:29.

#28c#29,1:29.

#28d#29,1:79.

#28e#29,0:79.

MULTIPLE CHOICE 443

Topic,Monopoly Di#0Eculty,3

#25 Correct Responses,57 Discrimination Index,33

Correct Answer,D

24.10 The demand for a monopolist's output is 3;000=#28p +1#29

2

where p is her price,She has

constant marginal costs equal to $5 per unit,What price will she charge to maximize her pro#0Cts?

#28a#29 15

#28b#29 6

#28c#29 14

#28d#29 11

#28e#29 5

Topic,Monopoly Di#0Eculty,3

#25 Correct Responses,57 Discrimination Index,33

Correct Answer,D

24.11 The demand for a monopolist's output is 6;000=#28p +3#29

2

where p is her price,She has

constant marginal costs equal to $5 per unit,What price will she charge to maximize her pro#0Cts?

#28a#29 20

#28b#29 8

#28c#29 17

#28d#29 13

#28e#29 5

Topic,Monopoly Di#0Eculty,2

#25 Correct Responses,60 Discrimination Index,36

Correct Answer,D

24.12 A monopolist faces a constant marginal cost of $1 per unit,If at the price he is charging,

the price elasticity of demand for the monopolist's output is,:5; then:

#28a#29 the price he is charging must be 2.

#28b#29 the price he is charging must exceed 2.

#28c#29 the price he is charging must be less than 2.

#28d#29 the monopolist can not be maximizing pro#0Cts.

#28e#29 the monopolist must use price discrimination.

CHAPTER 24 Monopoly 444

Topic,Monopoly Di#0Eculty,1

#25 Correct Responses,95 Discrimination Index,0

Correct Answer,E

24.13 A pro#0Ct-maximizing monopolist sets:

#28a#29 price equal to average cost.

#28b#29 price equal to marginal cost.

#28c#29 price equal to marginal cost plus a pro-rated share of overhead.

#28d#29 price equal to marginal revenue.

#28e#29 marginal revenue equal to marginal cost.

Topic,Monopoly Di#0Eculty,2

#25 Correct Responses,38 Discrimination Index,32

Correct Answer,C

24.14 A monopolist has decreasing average costs as output increases,If the monopolist sets price

equal to average cost,it will:

#28a#29 produce too much output from the standpoint of e#0Eciency.

#28b#29 lose money.

#28c#29 produce too little output from the standpoint of e#0Eciency.

#28d#29 maximize its pro#0Cts.

#28e#29 face excess demand.

Topic,Monopoly Di#0Eculty,1

#25 Correct Responses,87 Discrimination Index,24

Correct Answer,D

24.15 A pro#0Ct maximizing monopolist faces a downward sloping demand curve thathas a constant

elasticityof,4,The #0Crm #0Cnds it optimal to charge a price of 60 for its output,What is its marginal

cost at this level of output?

#28a#29 23.50

#28b#29 136

#28c#29 120

#28d#29 45

#28e#29 60

MULTIPLE CHOICE 445

Topic,Monopoly Di#0Eculty,1

#25 Correct Responses,87 Discrimination Index,24

Correct Answer,D

24.16 A pro#0Ct maximizing monopolist faces a downward sloping demand curve thathas a constant

elasticityof,2,The #0Crm #0Cnds it optimal to charge a price of 60 for its output,What is its marginal

cost at this level of output?

#28a#29 16

#28b#29 91

#28c#29 120

#28d#29 30

#28e#29 60

Topic,Monopoly Di#0Eculty,2

#25 Correct Responses,82 Discrimination Index,3

Correct Answer,D

24.17 A monopolist has constant marginal costs of $1 per unit,The demand for her output is

1000=p if p is less than or equal to 50,The demand is 0 if p#3E50,What is her pro#0Ct maximizing

level of output?

#28a#29 5

#28b#29 10

#28c#29 15

#28d#29 20

#28e#29 25

Topic,Monopoly Di#0Eculty,2

#25 Correct Responses,42 Discrimination Index,32

Correct Answer,B

24.18 The demand curve for the output of a certain industry is linear,q = A,Bp,There are

constantmarginal costs ofC.Forall values of A,B;and C such thatA#3E0;B#3E0;and 0 #3CC#3CA=B:

#28a#29 if the industry is monopolized,prices will be exactly twice as high as they would be if the industry were

competitive.

#28b#29 if the industry is competitive,output will be exactly twice as great as it would be if the industry were

monopolized.

#28c#29 if the industry is monopolized,prices will be more than twice as high as if the industry is competitive.

#28d#29 if the industry is monopolized,output will be more than half as large as it would be if the industry were

competitive.

#28e#29 None of the above.

CHAPTER 24 Monopoly 446

Topic,Monopoly Di#0Eculty,3

#25 Correct Responses,15 Discrimination Index,0

Correct Answer,B

24.19 A monopolist receives a subsidy from the government for every unit of output that is con-

sumed,He has constant marginal costs and the subsidy that he gets per unit of output is greater

than his marginal cost of production,But to get the subsidy on a unit of output,somebody has to

consume it,From these facts we can conclude that:

#28a#29 he will pay consumers to consume his product.

#28b#29 if he sells at a positive price,demand must be inelastic at that price.

#28c#29 he will sell at a price where demand is elastic.

#28d#29 he will give the good away.

#28e#29 None of the above.

Topic,Monopoly Di#0Eculty,2

#25 Correct Responses,59 Discrimination Index,24

Correct Answer,C

24.20 A monopolist faces the demand curve q = 110,p=2 where q is the number of units sold and

p is the price in dollars,He has quasi-#0Cxed costs,C; and constant marginal costs of $20 per unit of

output,Therefore his total costs are C +20qif q#3E0and0ifq=0,What is the largest value of C

for whichhewould be willing to produce positive output?

#28a#29 $20

#28b#29 $4,000

#28c#29 $5,000

#28d#29 $7,500

#28e#29 $6,000

MULTIPLE CHOICE 447

Topic,Monopoly Di#0Eculty,2

#25 Correct Responses,59 Discrimination Index,24

Correct Answer,C

24.21 A monopolist faces the demand curve q = 115,p=2 where q is the number of units sold and

p is the price in dollars,He has quasi-#0Cxed costs,C; and constant marginal costs of $30 per unit of

output,Therefore his total costs are C +30qif q#3E0and0ifq=0,What is the largest value of C

for whichhewould be willing to produce positive output?

#28a#29 $30

#28b#29 $4,000

#28c#29 $5,000

#28d#29 $7,500

#28e#29 $6,000

Topic,Monopoly Di#0Eculty,2

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,C

24.22 A natural monopolist has the a total cost function c#28q#29 = 350+ 20q where q is its output.

The inverse demand function for the monopolist's product is p = 100,2q.Government regulations

require this #0Crm to produce a positive amount and to set price equal to average cost,To comply

with these requirements:

#28a#29 is impossible for this #0Crm.

#28b#29 the #0Crm must produce 40 units.

#28c#29 the #0Crm could produce either 5 units or 35 units.

#28d#29 the #0Crm must charge a price of 70.

#28e#29 the #0Crm must produce 20 units.

CHAPTER 24 Monopoly 448

Topic,Monopoly Di#0Eculty,2

#25 Correct Responses,69 Discrimination Index,20

Correct Answer,D

24.23 A monopolist has the total cost function,c#28q#29=1;300+ 7q,The inverse demand function

is 110,2q; where prices and costs are measured in dollars,If the #0Crm is required bylaw to meet

demand at a price equal to its marginal cost:

#28a#29 the #0Crm's pro#0Cts will be zero.

#28b#29 the #0Crm will lose $650.

#28c#29 the #0Crm will make positive pro#0Ct,but not as much pro#0Ct as it would makeifitwere allowed to choose

its own price.

#28d#29 the #0Crm will lose $1,300

#28e#29 the #0Crm will lose $780

Topic,Monopoly Di#0Eculty,2

#25 Correct Responses,69 Discrimination Index,20

Correct Answer,D

24.24 A monopolist has the total cost function,c#28q#29 = 850 + 4q,The inverse demand function

is 190,5q; where prices and costs are measured in dollars,If the #0Crm is required bylaw to meet

demand at a price equal to its marginal cost:

#28a#29 the #0Crm's pro#0Cts will be zero.

#28b#29 the #0Crm will lose $425.

#28c#29 the #0Crm will make positive pro#0Ct,but not as much pro#0Ct as it would makeifitwere allowed to choose

its own price.

#28d#29 the #0Crm will lose $850

#28e#29 the #0Crm will lose $510

MULTIPLE CHOICE 449

Topic,Monopoly Di#0Eculty,2

#25 Correct Responses,61 Discrimination Index,10

Correct Answer,B

24.25 A monopolist enjoys a monopoly over the right to sell automobiles on a certain island.

He imports automobiles from abroad at a cost of $10,000 each and sells them at the price that

maximizes pro#0Cts,One day,the island's government annexes a neighboring island and extends the

monopolist's monopoly rights to this island,People on the annexed island have the same tastes

and incomes and there are just as many people as on the #0Crst.

#28a#29 The monopolist doubles his price and his sales stay constant.

#28b#29 The monopolist keeps his price constant and his sales double.

#28c#29 The monopolist raises his price but does not necessarily double it.

#28d#29 The monopolist's pro#0Cts more than double.

#28e#29 None of the above.

Topic,Monopoly Di#0Eculty,3

#25 Correct Responses,41 Discrimination Index,53

Correct Answer,D

24.26 An airline has exclusive landing rights at the local airport,The airline #0Dies one #0Dightper

day to New York with a plane that has a seating capacity of 100,The cost of #0Dying the plane

per day is $4,000 +10q where q is the number of passengers,The number of #0Dights to New York

demanded is q = 165,:5p,If the airline maximizes its monopoly pro#0Cts,the di#0Berence between the

marginal cost of #0Dying an extra passenger and the amount the marginal passenger is willing to pay

to #0Dy to New York is:

#28a#29 $10.

#28b#29 $100.

#28c#29 $140.

#28d#29 $160.

#28e#29 None of the above.

CHAPTER 24 Monopoly 450

Topic,Monopoly Di#0Eculty,2

#25 Correct Responses,65 Discrimination Index,25

Correct Answer,D

24.27 A monopoly has the demand curve q =10;000,100p,Its total cost function is c#28q#29=

1000+ 10q,The government plans to tax the monopoly's pro#0Cts at a rate of 50#25,If it does so:

#28a#29 the monopoly will increase its price by 50#25.

#28b#29 the monopoly will increase its price by more than 50#25.

#28c#29 the monopoly will recover some,but not all of the tax it pays by increasing its price.

#28d#29 the monopoly will not change its price or the quantity it sells.

#28e#29 none of the above.

Topic,Monopoly Di#0Eculty,2

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,E

24.28 A monopolist faces a downward-sloping demand curve and has #0Cxed costs so large that

when he maximizes pro#0Cts with a positive amount of output,he earns exactly zero pro#0Cts,At this

positive,pro#0Ct-maximizing output,it must be that:

#28a#29 there are decreasing returns to scale.

#28b#29 demand is price inelastic.

#28c#29 marginal revenue is greater than marginal cost.

#28d#29 price equals marginal cost.

#28e#29 average total cost is greater than marginal cost.

MULTIPLE CHOICE 451

Topic,Monopoly Di#0Eculty,2

#25 Correct Responses,70 Discrimination Index,45

Correct Answer,D

24.29 A computer software #0Crm has developed a new and better spreadsheet program,The pro-

gram is protected by copyrights,so the #0Crm can act as a monopolist for this product,The demand

function for the spreadsheet is q =50;000,100p.Any single consumer will want only one copy.

The marginal cost of producing and distributing another copy and its documentation is just $10

per copy,If the company sells this software at the pro#0Ct maximizing monopoly price,the number

of consumers who would not buy the software at the monopoly price but would be willing to pay

at least the marginal cost is:

#28a#29 50,000.

#28b#29 12,000.

#28c#29 14,000.

#28d#29 25,000.

#28e#29 None of the above.

Topic,Monopoly Di#0Eculty,3

#25 Correct Responses,21 Discrimination Index,9

Correct Answer,D

24.30 The town council of Frostbite,Ontario is trying to decide whether to build an outdoor

skating rink whichwould cost $1 million and last for only one season,Operating costs would be

zero,Yearly passes would be sold to anyone who wanted to use the rink,If p is the price of the

pass in dollars,the number demanded would be q = 1200,:6p,The council has asked you to advise

them on building the rink,You should tell them:

#28a#29 revenues won't cover construction costs at any ticket price,There is no way to increase total consumer

surplus by building the rink.

#28b#29 if the rink is built and price is set to maximize pro#0Cts,the town makes a pro#0Ct and consumers will be

better o#0B.

#28c#29 if the rink is built and price set to maximize pro#0Cts,the town makes a pro#0Ct but consumers are worse

o#0B than without a rink.

#28d#29 there is no price at which ticket revenues still cover costs,but total consumer surplus from the rink

exceeds costs.

#28e#29 None of the above.

CHAPTER 24 Monopoly 452

Topic,Monopoly Di#0Eculty,2

#25 Correct Responses,58 Discrimination Index,35

Correct Answer,C

24.31 A monopolist produces at a point where the price elasticity of demand is,:7 and the

marginal cost is 2,If you were hired to advise this monopolist on how to increase his pro#0Cts,you

would #0Cnd that the way to increase his pro#0Cts is to:

#28a#29 increase his output.

#28b#29 lower the price.

#28c#29 decrease his output.

#28d#29 produce the output level where marginal cost equals price.

#28e#29 increase his advertising e#0Borts.

Topic,Monopoly Di#0Eculty,2

#25 Correct Responses,46 Discrimination Index,22

Correct Answer,C

24.32 The Hard Times Concrete company is a monopolist in the concrete market,It uses two

inputs,cement and gravel,which it buys in competitive markets,The company's production func-

tion is q = c

1=2

g

1=2

where q is its output,c is the amount of cement it uses,and g is the amountof

gravel it uses,If the price of cement goes up the #0Crm's demand for cement:

#28a#29 goes down and its demand for gravel goes up.

#28b#29 goes down and its demand for gravel goes down.

#28c#29 goes down and its demand for gravel may go up,down,or remain the same,depending on the demand

function for concrete.

#28d#29 may go up,down,or not change,based on whether the cement's elasticity of demand is less than,equal

to,or greater than,1.

#28e#29 could go up or down,but must move in the opposite direction from its demand for gravel.

MULTIPLE CHOICE 453

Topic,Monopoly Di#0Eculty,1

#25 Correct Responses,80 Discrimination Index,41

Correct Answer,B

24.33 In a market with inverse demand curve P =10,Q; Brand X is a monopolist with no #0Cxed

costs and with a marginal cost of 2,If marginal cost rises to 4,byhowmuch will the price of Brand

X rise?

#28a#29 2

#28b#29 1

#28c#29 3

#28d#29 No change,the #0Crm is already charging the monopoly price.

#28e#29 None of the above.

Topic,Monopoly Di#0Eculty,2

#25 Correct Responses,43 Discrimination Index,23

Correct Answer,C

24.34 Charlie can work as many hours as he wishes at a local fast food restaurant for a wage

of $4 per hour,Charlie also does standup comedy,Since Charlie lives in a quiet,rather solemn

midwestern town,he is the town's only comedian and has a local monopoly for standup comedy.

The demand for comedy is Q =40,Pwhere Q is the number of hours of comedy performed per

week and P is the price charged per hour of comedy,When Charlie maximizes his utility,he spends

at least one hour per week working at the restaurant and he gets at least one hour of leisure time.

His utility depends only on income and leisure,How many hours per week does he perform standup

comedy?

#28a#29 36

#28b#29 40

#28c#29 18

#28d#29 20

#28e#29 We can't tell without knowing his utility function.

CHAPTER 24 Monopoly 454

Topic,Monopoly Di#0Eculty,2

#25 Correct Responses,63 Discrimination Index,23

Correct Answer,D

24.35 A certain monopolist has a positive marginal cost of production,Despite this fact,the

monopolist decides to produce a quantity of output that maximizes total revenues,Assume that

the marginal revenue curve for this monopolist always has a negative slope,Then the monopolist:

#28a#29 is minimizing its pro#0Cts.

#28b#29 produces the same output that it would if it maximized pro#0Cts.

#28c#29 produces less output than it would if it maximized pro#0Cts.

#28d#29 produces more output than it would if it were maximizing pro#0Cts.

#28e#29 produces an output where marginal revenue is strictly less than 1.

Topic,Monopoly Di#0Eculty,2

#25 Correct Responses,46 Discrimination Index,9

Correct Answer,D

24.36 The demand curve facing a monopolist is D#28p#29 = 100=p if p is 20 or smaller and D#28p#29=0

if p#3E20,The monopolist has a constant marginal cost of $1 per unit produced,What is the

pro#0Ct-maximizing quantity of output for this monopolist?

#28a#29 4

#28b#29 3

#28c#29 2

#28d#29 5

#28e#29 Cannot be determined.

MULTIPLE CHOICE 455

Topic,Monopoly Di#0Eculty,2

#25 Correct Responses,74 Discrimination Index,37

Correct Answer,B

24.37 An industry has two #0Crms,a leader and a follower,The demand curve for the industry's

output is given by the function p = 320,4q; where q is total industry output,Each #0Crm has zero

marginal cost,The leader chooses his quantity #0Crst,knowing that the follower will observe the

leader's choice and choose his quantity to maximize pro#0Cts,given the quantity produced by the

leader,The leader will choose an output of:

#28a#29 26.67.

#28b#29 40.

#28c#29 20.

#28d#29 80.

#28e#29 None of the above.

Topic,Monopoly Di#0Eculty,2

#25 Correct Responses,74 Discrimination Index,37

Correct Answer,B

24.38 An industry has two #0Crms,a leader and a follower,The demand curve for the industry's

output is given by the function p =80,2q; where q is total industry output,Each #0Crm has zero

marginal cost,The leader chooses his quantity #0Crst,knowing that the follower will observe the

leader's choice and choose his quantity to maximize pro#0Cts,given the quantity produced by the

leader,The leader will choose an output of:

#28a#29 13.33.

#28b#29 20.

#28c#29 10.

#28d#29 40.

#28e#29 None of the above.

CHAPTER 24 Monopoly 456

Topic,Monopoly Di#0Eculty,1

#25 Correct Responses,72 Discrimination Index,19

Correct Answer,A

24.39 A monopolist faces a constant marginal cost of $1 per unit and has no #0Cxed costs,If the

price elasticity of demand for this product is constant and equal to,3; then:

#28a#29 to maximize pro#0Cts,he should charge a price of 1.50.

#28b#29 to maximize pro#0Cts,he should charge a price of 3.

#28c#29 to maximize pro#0Cts,he should charge a price of 1.33.

#28d#29 he is not maximizing pro#0Cts.

#28e#29 none of the above

Topic,Monopoly Di#0Eculty,1

#25 Correct Responses,72 Discrimination Index,19

Correct Answer,A

24.40 A monopolist faces a constant marginal cost of $1 per unit and has no #0Cxed costs,If the

price elasticity of demand for this product is constant and equal to,5; then:

#28a#29 to maximize pro#0Cts,he should charge a price of 1.25.

#28b#29 to maximize pro#0Cts,he should charge a price of 5.

#28c#29 to maximize pro#0Cts,he should charge a price of 1.20.

#28d#29 he is not maximizing pro#0Cts.

#28e#29 none of the above

Topic,Monopoly Di#0Eculty,2

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,C

24.41 A pro#0Ct-maximizing monopolist has the cost schedule,c#28y#29=10y,The demand for her

product is given by y = 800=p

3

where p is her price,Suppose that the government tries to get her

to increase her output by giving her a subsidy of 18 dollars for every unit that she sells,Giving her

the subsidy would make her:

#28a#29 decrease her price by 9 dollars.

#28b#29 decrease her price by 18 dollars.

#28c#29 decrease her price by 27 dollars.

#28d#29 decrease her price by 45 dollars.

#28e#29 leave her price unchanged.

MULTIPLE CHOICE 457

Topic,Monopoly Di#0Eculty,2

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,C

24.42 A pro#0Ct-maximizing monopolist has the cost schedule,c#28y#29=30y,The demand for her

product is given by y = 700=p

2

where p is her price,Suppose that the government tries to get her

to increase her output by giving her a subsidy of 8 dollars for every unit that she sells,Giving her

the subsidy would make her:

#28a#29 decrease her price by 4 dollars.

#28b#29 decrease her price by 8 dollars.

#28c#29 decrease her price by 16 dollars.

#28d#29 decrease her price by 24 dollars.

#28e#29 leave her price unchanged.

Topic,Monopoly Di#0Eculty,2

#25 Correct Responses,74 Discrimination Index,22

Correct Answer,B

24.43 A pro#0Ct-maximizing monopolist faces a demand function given by q = 1000,20p where p is

the price of her output in dollars,She has a constant marginal cost of 20 dollars per unit of output.

In an e#0Bort to induce her to increase her output,the government agrees to pay her a subsidy of 10

dollars for every unit that she produces,In response to the subsidy,she will:

#28a#29 increase her price and lower her output.

#28b#29 decrease her price by $5 per unit.

#28c#29 decrease her price by $10 per unit.

#28d#29 decrease her price by more than $10 per unit,but by less than $16 per unit.

#28e#29 decrease her price by more than $16 per unit.

CHAPTER 24 Monopoly 458

Topic,Monopoly Di#0Eculty,2

#25 Correct Responses,69 Discrimination Index,36

Correct Answer,A

24.44 A #0Crm has discovered a new kind of non-fattening,non-habit forming dessert called zwi#0Fe.

It doesn't taste very good,but some people like it and it can be produced from old newspapers at

zero marginal cost,Before any zwi#0Fe can be produced,the #0Crm would have to spend a #0Cxed cost

of $F,Demand for zwi#0Fe is given by the equation q =20,p,The #0Crm has a patent on zwi#0Fe,so

it can have a monopoly in this market.

#28a#29 The #0Crm will produce zwi#0Fe only if F is less than or equal to 100.

#28b#29 The #0Crm will not produce zwi#0Fe if F#3E20.

#28c#29 The #0Crm will produce 20 units of zwi#0Fe.

#28d#29 The #0Crm will produce 15 units of zwi#0Fe.

#28e#29 None of the above.

Topic,Monopoly Di#0Eculty,2

#25 Correct Responses,69 Discrimination Index,36

Correct Answer,A

24.45 A #0Crm has discovered a new kind of non-fattening,non-habit forming dessert called zwi#0Fe.

It doesn't taste very good,but some people like it and it can be produced from old newspapers at

zero marginal cost,Before any zwi#0Fe can be produced,the #0Crm would have to spend a #0Cxed cost

of $F,Demand for zwi#0Fe is given by the equation q =22,p,The #0Crm has a patent on zwi#0Fe,so

it can have a monopoly in this market.

#28a#29 The #0Crm will produce zwi#0Fe only if F is less than or equal to 121.

#28b#29 The #0Crm will not produce zwi#0Fe if F#3E22.

#28c#29 The #0Crm will produce 22 units of zwi#0Fe.

#28d#29 The #0Crm will produce 16.50 units of zwi#0Fe.

#28e#29 None of the above.

MULTIPLE CHOICE 459

Topic,Monopoly Di#0Eculty,3

#25 Correct Responses,23 Discrimination Index,22

Correct Answer,B

24.46 A #0Crm has invented a new beverage called Slops,It doesn't taste very good,but it gives

people a craving for Lawrence Welk's music and Professor Johnson's jokes,Some people are willing

to pay money for this e#0Bect,so the demand for Slops is given by the equation q =18,p,Slops can

be made at zero marginal cost from old-fashioned macroeconomics books dissolved in bathwater.

But before any Slops can be produced,the #0Crm must undertake a #0Cxed cost of 86,Since the in-

ventor has a patent on Slops,it can be a monopolist in this new industry.

#28a#29 The #0Crm will produce 9 units of Slops.

#28b#29 APareto improvement could be achieved byhaving the governmentpay the #0Crm a subsidy of 91 and

insisting that the #0Crm o#0Ber Slops at zero price.

#28c#29 From the point of view of social e#0Eciency,it is best that no Slops be produced.

#28d#29 The #0Crm will produce 18 units of Slops.

#28e#29 None of the above.

Topic,Monopoly Di#0Eculty,3

#25 Correct Responses,23 Discrimination Index,22

Correct Answer,B

24.47 A #0Crm has invented a new beverage called Slops,It doesn't taste very good,but it gives

people a craving for Lawrence Welk's music and Professor Johnson's jokes,Some people are willing

to pay money for this e#0Bect,so the demand for Slops is given by the equation q =20,p,Slops can

be made at zero marginal cost from old-fashioned macroeconomics books dissolved in bathwater.

But before any Slops can be produced,the #0Crm must undertake a #0Cxed cost of 105,Since the

inventor has a patent on Slops,it can be a monopolist in this new industry.

#28a#29 The #0Crm will produce 10 units of Slops.

#28b#29 APareto improvement could be achieved byhaving the governmentpay the #0Crm a subsidy of 110 and

insisting that the #0Crm o#0Ber Slops at zero price.

#28c#29 From the point of view of social e#0Eciency,it is best that no Slops be produced.

#28d#29 The #0Crm will produce 20 units of Slops.

#28e#29 None of the above.

CHAPTER 24 Monopoly 460

Topic,Monopoly Di#0Eculty,2

#25 Correct Responses,57 Discrimination Index,21

Correct Answer,A

24.48 The demand for Professor Bongmore's new book is given by the function Q =5;000,100p.

If the cost of having the book typeset is 7,000,if the marginal cost of printing an extra copyis4,

and if he has no other costs,then he would maximize his pro#0Cts by:

#28a#29 having it typeset and selling 2,300 copies.

#28b#29 having it typeset and selling 2,500 copies.

#28c#29 not having it typeset and not selling any copies.

#28d#29 having it typeset and selling 4,600 copies.

#28e#29 having it typeset and selling 1,150 copies.

Topic,Monopoly Di#0Eculty,2

#25 Correct Responses,57 Discrimination Index,21

Correct Answer,A

24.49 The demand for Professor Bongmore's new book is given by the function Q =1;000,100p.

If the cost of having the book typeset is 12,000,if the marginal cost of printing an extra copyis4,

and if he has no other costs,then he would maximize his pro#0Cts by:

#28a#29 having it typeset and selling 300 copies.

#28b#29 having it typeset and selling 500 copies.

#28c#29 not having it typeset and not selling any copies.

#28d#29 having it typeset and selling 600 copies.

#28e#29 having it typeset and selling 150 copies.

Topic,Monopoly Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,A

24.50 Peter Morgan sells pigeon pies from his pushcart in Central Park,Due to the abundant

supplies of raw materials,his costs are zero,The demand schedule for his pigeon pies is p#28y#29=

90,y=4,What level of output will maximize Peter's pro#0Cts?

#28a#29 180

#28b#29 36

#28c#29 360

#28d#29 540

#28e#29 None of the above

MULTIPLE CHOICE 461

Topic,Monopoly Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,A

24.51 Peter Morgan sells pigeon pies from his pushcart in Central Park,Due to the abundant

supplies of raw materials,his costs are zero,The demand schedule for his pigeon pies is p#28y#29=

70,y=3,What level of output will maximize Peter's pro#0Cts?

#28a#29 105

#28b#29 21

#28c#29 210

#28d#29 315

#28e#29 None of the above

Topic,Monopoly Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,C

24.52 A pro#0Ct-maximizing monopoly faces an inverse demand function described by the equation

p#28y#29=40,yand its total costs are c#28y#29=9y; where prices and costs are measured in dollars,In

the past it was not taxed,but nowitmust pay a tax of 8 dollars per unit of output,After the tax,

the monopoly will:

#28a#29 increase its price by8.

#28b#29 increase its price by 12.

#28c#29 increase its price by4.

#28d#29 leave its price constant.

#28e#29 none of the above.

Topic,Monopoly Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,C

24.53 A pro#0Ct-maximizing monopoly faces an inverse demand function described by the equation

p#28y#29 = 100,y and its total costs are c#28y#29=7y; where prices and costs are measured in dollars,In

the past it was not taxed,but nowitmust pay a tax of 4 dollars per unit of output,After the tax,

the monopoly will:

#28a#29 increase its price by4.

#28b#29 increase its price by6.

#28c#29 increase its price by2.

#28d#29 leave its price constant.

#28e#29 none of the above.

CHAPTER 24 Monopoly 462

Topic,Monopoly Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,C

24.54 A monopolist faces a demand function Q =4;000=#28p+7#29

,2

,If she charges a price of p; her

marginal revenue will be:

#28a#29 p=2+7

#28b#29 2p+3:50

#28c#29 p=2,7=2.

#28d#29,2#28p+7#29

,3

#28e#29 #28p+B#29

,

2

Topic,Monopoly Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,C

24.55 A monopolist faces a demand function Q =2;000=#28p+8#29

,2

,If she charges a price of p; her

marginal revenue will be:

#28a#29 p=2+8

#28b#29 2p+4

#28c#29 p=2,8=2.

#28d#29,2#28p+8#29

,3

#28e#29 #28p+B#29

,

2

Topic,Monopoly Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,E

24.56 The demand for copies of the softwarepackage MacrosoftDoors is given by Q =10;000P

,32

.

The cost to produce Doors is C = 100;000+5Q,If Macrosoft practices cost plus pricing,what would

be the pro#0Ct maximizing markup?

#28a#29 100#25.

#28b#29 33.33#25.

#28c#29 14.29#25.

#28d#29 6.67#25.

#28e#29 3.23#25.

MULTIPLE CHOICE 463

Topic,Monopoly Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,E

24.57 The demand for copies of the softwarepackage MacrosoftDoors is given by Q =10;000P

,16

.

The cost to produce Doors is C = 100;000+ 10Q,If Macrosoft practices cost plus pricing,what

would be the pro#0Ct maximizing markup?

#28a#29 100#25.

#28b#29 33.33#25.

#28c#29 14.29#25.

#28d#29 6.67#25.

#28e#29 3.23#25.

Topic,Monopoly Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,C

24.58 A major software developer has estimated the demand for its new personal #0Cnance software

package to be Q =1;000;000P

,1:10

while the total cost of the package is C = 400;000+ 20Q,If this

#0Crm wishes to maximize pro#0Ct,what percentage markup should it place on this product?

#28a#29 1,020#25.

#28b#29 1,100#25.

#28c#29 1,000#25.

#28d#29 850#25.

#28e#29 1,150#25.

Topic,Monopoly Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,C

24.59 A major software developer has estimated the demand for its new personal #0Cnance software

package to be Q =1;000;000P

,1:40

while the total cost of the package is C = 100;000+ 20Q,If this

#0Crm wishes to maximize pro#0Ct,what percentage markup should it place on this product?

#28a#29 230#25.

#28b#29 150#25.

#28c#29 250#25.

#28d#29 340#25.

#28e#29 200#25.

CHAPTER 24 Monopoly 464

Topic,Monopoly Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,D

24.60

The Fabulous 50

0

s Decor Company is the only producer of pink #0Damingo lawn statues,While

business is not a good as it used to be,in recent times the annual demand has been Q = 400,4P.

Flamingo lawn statues are hand crafted by artisans using the process Q = min#28L;P=9#29; where L is

hours of labor,and P is pounds of pink plastic,P

L

=20and P

P

=4,What would be the pro#0Ct

maximizing output and price?

#28a#29 Q = 180;P=55

#28b#29 Q = 189:78;P=52:56

#28c#29 Q = 199:44;P=50:14

#28d#29 Q =88;P=78

#28e#29 Q = 176;P=56

Topic,Monopoly Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,D

24.61

The Fabulous 50

0

s Decor Company is the only producer of pink #0Damingo lawn statues,While

business is not a good as it used to be,in recent times the annual demand has been Q = 800,2P.

Flamingo lawn statues are hand crafted by artisans using the process Q = min#28L;P=6#29; where L is

hours of labor,and P is pounds of pink plastic,P

L

=15and P

P

=2,What would be the pro#0Ct

maximizing output and price?

#28a#29 Q = 393;P= 203:50

#28b#29 Q = 392:33;P= 203:83

#28c#29 Q = 399:42;P= 200:29

#28d#29 Q = 373;P= 213:50

#28e#29 Q = 746;P=27

MULTIPLE CHOICE 465

Topic,Monopoly Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,D

24.62 An obscure inventor in Strasburg,North Dakota has a monopoly on a new beverage called

Bubbles,which produces an unexplained craving for Lawrence Welk music,Bubbles is produced

by the following process,Q = min#28R=5;W#29 where R is pulverized Lawrence Welk records,and W

is gallons of North Dakota well water,P

R

= P

W

=1,Demand for Bubbles is Q =2;304P

,2

A

0:5

.If

the advertising budget for Bubbles is $81,the pro#0Ct maximizing quantity of Bubbles is

#28a#29 0

#28b#29 36

#28c#29 864

#28d#29 144

#28e#29 140

Topic,Monopoly Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,D

24.63 An obscure inventor in Strasburg,North Dakota has a monopoly on a new beverage called

Bubbles,which produces an unexplained craving for Lawrence Welk music,Bubbles is produced

by the following process,Q = min#28R=5;W#29 where R is pulverized Lawrence Welk records,and W

is gallons of North Dakota well water,P

R

= P

W

=1,Demand for Bubbles is Q =3;600P

,2

A

0:5

.If

the advertising budget for Bubbles is $64,the pro#0Ct maximizing quantity of Bubbles is

#28a#29 0

#28b#29 40

#28c#29 1,200

#28d#29 200

#28e#29 196

CHAPTER 24 Monopoly 466

Topic,Monopoly Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,A

24.64 The Cleveland Visitors Bureau is the exclusive national marketer of weekend getawayva-

cations in Cleveland,Ohio,At current market prices,the price elasticity of demand is 0.50,To

maximize pro#0Cts,the bureau should

#28a#29 Raise prices.

#28b#29 Lower prices.

#28c#29 Do not change prices.

#28d#29 More information is needed to make an accurate judgement.

#28e#29 Run new TV commercials.

Topic,Monopoly Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,A

24.65 The Cleveland Visitors Bureau is the exclusive national marketer of weekend getaway

vacations in Cleveland,Ohio,At current market prices,the price elasticity of demand is 1,To

maximize pro#0Cts,the bureau should

#28a#29 Raise prices.

#28b#29 Lower prices.

#28c#29 Do not change prices.

#28d#29 More information is needed to make an accurate judgement.

#28e#29 Run new TV commercials.

MULTIPLE CHOICE 467

Topic,Monopoly Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,D

24.66 In some parts of the world,Red Lizzard Wine is alleged to increase one's longevity.Itis

produced by the following process:

Q = min#28#281=4#29L;R#29

where L is the number of spotted red lizzards,and R is gallons of rice wine,P

L

= P

R

=1,Demand

for Red Lizzard Wine in the United States is Q =1;600P

,2

A

1

2

,If the advertising budget is $100,

the quantity of wine which should be imported into the US is

#28a#29 0

#28b#29 40

#28c#29 800

#28d#29 160

#28e#29 156

Topic,Monopoly Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,D

24.67 In some parts of the world,Red Lizzard Wine is alleged to increase one's longevity.Itis

produced by the following process:

Q = min#28#281=5#29L;R#29

where L is the number of spotted red lizzards,and R is gallons of rice wine,P

L

= P

R

=1,Demand

for Red Lizzard Wine in the United States is Q = 576P

,2

A

1

2

,If the advertising budget is $81,the

quantity of wine which should be imported into the US is

#28a#29 0

#28b#29 18

#28c#29 216

#28d#29 36

#28e#29 32

Essay Monopoly

Topic,Monopoly Di#0Eculty,3

#25 Correct Responses,0 Discrimination Index,0

24.1 A baseball team's attendance depends on the number of games it wins per season and on

the price of its tickets,The demand function it faces is Q = N#2820,p#29 where Q is the number of

tickets #28in hundred thousands#29 sold per year,p is the price per ticket and N is the fraction of its

games that the team wins,The team can increase the number of games it wins by hiring better

players,If the team spends C million dollars on players it will win the fraction,7,1=C of its games.

Over the relevant range,marginal cost of selling an extra ticket is zero,a#29 Write an expression

for the #0Crm's pro#0Cts as a function of ticket price and expenditure on players,b#29Find the ticket

price that maximizes revenue,c#29 Find the pro#0Ct maximizing expenditure on players and the pro#0Ct

maximizing fraction of games to win.

Answer,a#29#28:7,1=C#29#2820,p#29p,Cb#29p=10c#29C=10

Chapter 25

True-False Monopoly Behavior

Topic,Monopoly Behavior Di#0Eculty,2

#25 Correct Responses,82 Discrimination Index,35

Correct Answer,True

25.1 Third degree price discrimination occurs when a monopolist sells output to di#0Berent people

at di#0Berent prices,but every unit that an individual buys costs the same amount.

Topic,Monopoly Behavior Di#0Eculty,1

#25 Correct Responses,79 Discrimination Index,19

Correct Answer,False

25.2 A monopolist who is able to practice third degree price discrimination will make greater

pro#0Cts than a monopolist who is able to practice #0Crst degree price discrimination.

Topic,Monopoly Behavior Di#0Eculty,2

#25 Correct Responses,86 Discrimination Index,3

Correct Answer,False

25.3 A discriminating monopolist is able to charge di#0Berent prices in two di#0Berent markets,If

when the same price is charged in both markets,the quantity demanded in market 1 is always

greater than the quantity demanded in market 2,then in order to maximize pro#0Cts,the monopolist

should charge a higher price in market 1 than in market 2.

Topic,Monopoly Behavior Di#0Eculty,2

#25 Correct Responses,28 Discrimination Index,11

Correct Answer,True

25.4 In a monopolistically competitive industry with zero pro#0Cts,each #0Crm will produce less than

the amount that minimizes average costs.

Topic,Monopoly Behavior Di#0Eculty,3

#25 Correct Responses,61 Discrimination Index,22

Correct Answer,True

25.5 It is possible that a pro#0Ct-maximizing monopolist who is able to practice #0Crst degree #28perfect#29

price discrimination would sell a quantity x such that the demand curve for his product is inelastic

when the quantity sold is x.

CHAPTER 25 Monopoly Behavior 470

Topic,Monopoly Behavior Di#0Eculty,1

#25 Correct Responses,80 Discrimination Index,15

Correct Answer,True

25.6 In order to maximize his pro#0Cts,a monopolist who practices third degree price discrimina-

tion with two or more markets should charge higher prices in markets with more inelastic demand

functions.

Topic,Monopoly Behavior Di#0Eculty,1

#25 Correct Responses,71 Discrimination Index,20

Correct Answer,False

25.7 A pro#0Ct-maximizing monopolist is able to practice third degree price discrimination,If he

charges p

1

in market 1 and p

2

in market 2,where p

1

#3Ep

2;it must be that the quantity sold in

market 1 is smaller than the quantity sold in market 2.

Topic,Monopoly Behavior Di#0Eculty,2

#25 Correct Responses,32 Discrimination Index,24

Correct Answer,False

25.8 A pro#0Ct-maximizing monopolist practices third degree price discrimination,If he charges

p

1

in market 1 and p

2

in market 2,where p

1

#3Ep

2;then if the law forced him to charge the same

price in both markets,more would be demanded in market 1 than in market 2.

Topic,Monopoly Behavior Di#0Eculty,2

#25 Correct Responses,74 Discrimination Index,27

Correct Answer,True

25.9 A price discriminating monopolist charges p

1

in market 1 and p

2

in market 2,If p

1

#3Ep

2;it

must be that the absolute value of the price elasticity in market 1 at price p

1

is smaller than the

absolute value of the price elasticity in market 2 at price p

2

.

Topic,Monopoly Behavior Di#0Eculty,1

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,False

25.10 A monopolist who is able to practice third degree price discrimination charges a higher

price in the market that is more elastic.

Multiple Choice Monopoly Behavior

Topic,Monopoly Behavior Di#0Eculty,2

#25 Correct Responses,31 Discrimination Index,23

Correct Answer,C

25.1 A monopolist is able to practice third degree price discrimination between two markets.

The demand function in the #0Crst market is q = 500,2p and the demand function in the second

market is q = 1500,6p.To maximize his pro#0Cts,he should:

#28a#29 charge a higher price in the second market than in the #0Crst.

#28b#29 charge a higher price in the #0Crst market than in the second.

#28c#29 charge the same price in both markets.

#28d#29 sell only in one of the two markets.

#28e#29 none of the above.

Topic,Monopoly Behavior Di#0Eculty,2

#25 Correct Responses,45 Discrimination Index,0

Correct Answer,B

25.2 A monopolist #0Cnds that a person's demand for its product depends on the person's age,The

inverse demand function of someone of age y; can be written p = A#28y#29,q where A#28y#29 is an increasing

function of y,The product cannot be resold from one buyer to another and the monopolist knows

the ages of its consumers,If the monopolist maximizes its pro#0Cts:

#28a#29 older people will pay higher prices and purchase less of this product.

#28b#29 older people will pay higher prices and purchase more of this product.

#28c#29 older people will paylower prices and purchase more of this product.

#28d#29 everyone pays the same price but old people consume more.

#28e#29 None of the above.

CHAPTER 25 Monopoly Behavior 472

Topic,Monopoly Behavior Di#0Eculty,3

#25 Correct Responses,17 Discrimination Index,24

Correct Answer,A

25.3 A monopolist has discovered that the inverse demand function of a person with income M

for the monopolist's product is p =,002M,q,The monopolist is able to observe the incomes of its

consumers and to practice price discrimination according to income #28second-degree price discrimi-

nation#29,The monopolist has a total cost function,c#28q#29 = 100q,The price it will charge a consumer

depends on the consumer's income,M; according to the formula:

#28a#29 p =,001M +50.

#28b#29 p =,002M,100.

#28c#29 p = M

2

.

#28d#29 p =,01M

2

+ 100.

#28e#29 None of the above.

Topic,Monopoly Behavior Di#0Eculty,2

#25 Correct Responses,59 Discrimination Index,41

Correct Answer,A

25.4 Wobble's Weebles is the only producer of weebles,It makes weebles at constant marginal

cost c #28where c#3E0#29 and sells them at a price of p

1

per weeble in Market 1 and at a price of p

2

per weeble in Market 2,The demand curve for weebles in Market 1 has a constant price elasticity

of demand equal to,2,The demand curve for weebles in Market 2 has a constant price elasticity

equal to,3=2,The ratio of the pro#0Ct maximizing price in Market 1 to the pro#0Ct maximizing price

in Market 2 is:

#28a#29 2=3.

#28b#29 1=3.

#28c#29 3=2.

#28d#29 3.

#28e#29 dependent on the value of c.

MULTIPLE CHOICE 473

Topic,Monopoly Behavior Di#0Eculty,2

#25 Correct Responses,24 Discrimination Index,22

Correct Answer,B

25.5 A monopolist sells in two markets,The demand curve for her product is given by p

1

=

303,3x

1

in the #0Crst market and p

2

= 253,5x

2

in the second market,where x

i

is the quantity

sold in Market i and p

i

is the price charged in Market i,She has a constant marginal cost of

production,c =3;and no #0Cxed costs,She can charge di#0Berent prices in the two markets,What is

the pro#0Ct-maximizing combination of quantities for this monopolist?

#28a#29 x

1

= 100 and x

2

=27

#28b#29 x

1

= 50 and x

2

=25

#28c#29 x

1

= 75 and x

2

=50

#28d#29 x

1

= 60 and x

2

=23

#28e#29 x

1

= 70 and x

2

=35

Topic,Monopoly Behavior Di#0Eculty,2

#25 Correct Responses,24 Discrimination Index,22

Correct Answer,B

25.6 A monopolist sells in two markets,The demand curve for her product is given by p

1

=

119,2x

1

in the #0Crst market and p

2

= 123,5x

2

in the second market,where x

i

is the quantity

sold in Market i and p

i

is the price charged in Market i,She has a constant marginal cost of

production,c =3;and no #0Cxed costs,She can charge di#0Berent prices in the two markets,What is

the pro#0Ct-maximizing combination of quantities for this monopolist?

#28a#29 x

1

= 58 and x

2

=14

#28b#29 x

1

= 29 and x

2

=12

#28c#29 x

1

= 41 and x

2

=29

#28d#29 x

1

= 39 and x

2

=10

#28e#29 x

1

= 49 and x

2

=22

CHAPTER 25 Monopoly Behavior 474

Topic,Monopoly Behavior Di#0Eculty,2

#25 Correct Responses,36 Discrimination Index,46

Correct Answer,B

25.7 A price-discriminating monopolist sells in two separate markets such that goods sold in one

market are never resold in the other,It charges p

1

=3in one market and p

2

=7in the other

market,At these prices,the price elasticity in the #0Crst market is,2:50 and the price elasticityin

the second market is,0:80,Which of the following actions is sure to raise the monopolists pro#0Cts?

#28a#29 Lower p

2

.

#28b#29 Raise p

2

.

#28c#29 Raise p

1

and lower p

2

.

#28d#29 Raise both p

1

and p

2

.

#28e#29 Raise p

2

and lower p

1

.

Topic,Monopoly Behavior Di#0Eculty,2

#25 Correct Responses,36 Discrimination Index,46

Correct Answer,B

25.8 A price-discriminating monopolist sells in two separate markets such that goods sold in one

market are never resold in the other,It charges p

1

=3in one market and p

2

=9in the other

market,At these prices,the price elasticity in the #0Crst market is,2:50 and the price elasticityin

the second market is,0:90,Which of the following actions is sure to raise the monopolists pro#0Cts?

#28a#29 Lower p

2

.

#28b#29 Raise p

2

.

#28c#29 Raise p

1

and lower p

2

.

#28d#29 Raise both p

1

and p

2

.

#28e#29 Raise p

2

and lower p

1

.

MULTIPLE CHOICE 475

Topic,Monopoly Behavior Di#0Eculty,0

#25 Correct Responses,75 Discrimination Index,47

Correct Answer,A

25.9 A monopolist has a constant marginal cost of $2 per unit and no #0Cxed costs,He faces

separate markets in the U.S,and England,He can set one price p

1

for the American market and

another price p

2

for the English market,If demand in the U.S,is given by Q

1

=8;400,700p

1; and

demand in England is given by Q

2

=5;000,500p

2; then the price in America will:

#28a#29 be larger than the price in England by1.

#28b#29 be smaller than the price in England by1.

#28c#29 equal the price in England.

#28d#29 be larger than the price in England by3.

#28e#29 be smaller than the price in England by3.

Topic,Monopoly Behavior Di#0Eculty,0

#25 Correct Responses,75 Discrimination Index,47

Correct Answer,A

25.10 A monopolist has a constant marginal cost of $2 per unit and no #0Cxed costs,He faces

separate markets in the U.S,and England,He can set one price p

1

for the American market and

another price p

2

for the English market,If demand in the U.S,is given by Q

1

=6;400,800p

1; and

demand in England is given by Q

2

=6;400,400p

2; then the price in America will:

#28a#29 be larger than the price in England by4.

#28b#29 be smaller than the price in England by4.

#28c#29 equal the price in England.

#28d#29 be larger than the price in England by6.

#28e#29 be smaller than the price in England by6.

CHAPTER 25 Monopoly Behavior 476

Topic,Monopoly Behavior Di#0Eculty,0

#25 Correct Responses,42 Discrimination Index,48

Correct Answer,C

25.11 Roach Motors has a monopoly on used cars in Enigma,Ohio,By installing secret mi-

crophones in the showroom,the friendly salespersons at Roach are able to learn each customer's

willingness to pay and can therefore practice #0Crst degree price discrimination,extracting from

each customer his entire consumer surplus,The inverse demand function for cars in Enigma is

P = 2000,10Q,Roach Motors purchases its stock of used cars at an auction in Cleveland for $400

each,Roach motors will

#28a#29 sell 80 cars for a total pro#0Ct of $64,000.

#28b#29 sell 160 cars at a price of $300 a car.

#28c#29 sell 160 cars for a total pro#0Ct of $12,8000.

#28d#29 sell 192 cars and make a total pro#0Ct of $20,4800

#28e#29 shut down since revenue will not cover variable costs.

Topic,Monopoly Behavior Di#0Eculty,0

#25 Correct Responses,42 Discrimination Index,48

Correct Answer,C

25.12 Roach Motors has a monopoly on used cars in Enigma,Ohio,By installing secret mi-

crophones in the showroom,the friendly salespersons at Roach are able to learn each customer's

willingness to pay and can therefore practice #0Crst degree price discrimination,extracting from

each customer his entire consumer surplus,The inverse demand function for cars in Enigma is

P = 2000,10Q,Roach Motors purchases its stock of used cars at an auction in Cleveland for $700

each,Roach motors will

#28a#29 sell 65 cars for a total pro#0Ct of $42,250.

#28b#29 sell 130 cars at a price of $300 a car.

#28c#29 sell 130 cars for a total pro#0Ct of $8,4500.

#28d#29 sell 156 cars and make a total pro#0Ct of $13,5200

#28e#29 shut down since revenue will not cover variable costs.

MULTIPLE CHOICE 477

Topic,Monopoly Behavior Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,E

25.13 BMW #28Bayerische Motoren Werk#29 charges a considerably higher price for its automobiles

in the North American market than it does in its home market of Europe,Assuming that the

goal of BMW's pricing policy is pro#0Ct maximization,which of the following would be a plausible

explanation for BMW's pricing policy?

#28a#29 The income elasticity of demand in North America must be greater than 1,makingBMWs a luxury good

in North America; and between 0 and 1 in Europe,making BMWs a normal good.

#28b#29 The income elasticity of demand in North America must be between 0 and 1,making BMWs a normal

good in North America; and between and less than 1 in Europe,making BMWs an inferior good.

#28c#29 The price elasticity of demand in North America must be greater than 1,making demand for BMWs

price elastic in North America; and between 0 and 1 in Europe,making demand for BMWs price inelastic.

#28d#29 The income elasticity of demand in both North America and Europe are greater than 1,since BMWs

are a luxury good; but per capita income in North America is much higher than in Europe.

#28e#29 The price elasticity of demand is greater than 1 in both North America and Europe,makingBMWs price

elastic; but must be higher in Europe.

Topic,Monopoly Behavior Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,A

25.14 A careful analysis of demand for Bubbles in Strasburg,ND reveals a strange segmentation

in the market,#28Recall Bubbles is the beverage which produces an unexplained craving for Lawrence

Welk's music,It is produced by the process Q = min#28R=4;W#29;where R is the number of pulverized

Lawrence Welk records,and W is gallons of North Dakota well water,P

R

=1;P

W

=3.#29 If demand

for Bubbles by senior citizens is described by Q

o

= 500P

f,3=2g

while demand by those under 65

years old is Q

y

=50P

,2;how should Bubbles be priced to maximize pro#0Cts?

#28a#29 $21 for senior citizens,$14 for those younger.

#28b#29 $10.50 for senior citizens,$14 for those younger.

#28c#29 $7 for senior citizens,$9.33 for those younger.

#28d#29 $16.33 for all citizens of Strasburg.

#28e#29 $36 for senior citizens,$24 for those younger.

CHAPTER 25 Monopoly Behavior 478

Topic,Monopoly Behavior Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,A

25.15 A careful analysis of demand for Bubbles in Strasburg,ND reveals a strange segmentation

in the market,#28Recall Bubbles is the beverage which produces an unexplained craving for Lawrence

Welk's music,It is produced by the process Q = min#28R=5;W#29;where R is the number of pulverized

Lawrence Welk records,and W is gallons of North Dakota well water,P

R

=1;P

W

=4.#29 If demand

for Bubbles by senior citizens is described by Q

o

= 500P

f,3=2g

while demand by those under 65

years old is Q

y

=50P

,3;how should Bubbles be priced to maximize pro#0Cts?

#28a#29 $27 for senior citizens,$13.50 for those younger.

#28b#29 $13.50 for senior citizens,$27 for those younger.

#28c#29 $9 for senior citizens,$18 for those younger.

#28d#29 $16.20 for all citizens of Strasburg.

#28e#29 $60 for senior citizens,$30 for those younger.

Topic,Monopoly Behavior Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,A

25.16 Miron Floren,of The Lawrence Welk Show fame,now tours the country performing at ac-

cordion concerts,A careful analysis of demand for tickets to Mr,Floren's concerts reveals a strange

segmentation in the market,Demand for tickets by senior citizens is described by Q

o

= 500P

f,3=2g

while demand by those under 65 years old is Q

y

=50P

,5

,If the marginal cost of a ticket is $4,how

should tickets to Mr,Floren's concerts be priced to maximize pro#0Cts?

#28a#29 $12 for senior citizens,$5for those younger.

#28b#29 $20 for senior citizens,$6for those younger.

#28c#29 $4 for senior citizens,$13.33for those younger.

#28d#29 $5.78 for all tickets.

#28e#29 $8 for senior citizens,$16for those younger.

MULTIPLE CHOICE 479

Topic,Monopoly Behavior Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,A

25.17 Miron Floren,of The Lawrence Welk Show fame,now tours the country performing at ac-

cordion concerts,A careful analysis of demand for tickets to Mr,Floren's concerts reveals a strange

segmentation in the market,Demand for tickets by senior citizens is described by Q

o

= 500P

f,3=2g

while demand by those under 65 years old is Q

y

=50P

,2

,If the marginal cost of a ticket is $2,how

should tickets to Mr,Floren's concerts be priced to maximize pro#0Cts?

#28a#29 $6 for senior citizens,$4for those younger.

#28b#29 $4 for senior citizens,$3for those younger.

#28c#29 $2 for senior citizens,$2.67for those younger.

#28d#29 $4.67 for all tickets.

#28e#29 $4 for senior citizens,$8for those younger.

Essay Monopoly Behavior

Topic,Monopoly Behavior Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

25.1 Disneyland has two possibilities for pricing rides at its theme parks,1#29 Set MR=MC for

each ride and charge the maximum price consumers would bear,2#29 Charge an admission fee to the

theme park,but allow unlimited rides for free,Using graphs,show which pricing scheme is more

pro#0Ctable for Disneyland.

Chapter 26

True-False Factor Markets

Topic,Factor Markets Di#0Eculty,1

#25 Correct Responses,93 Discrimination Index,0

Correct Answer,False

26.1 A monopsony occurs when two previously competing #0Crms reach an agreement to collude

on price.

Topic,Factor Markets Di#0Eculty,1

#25 Correct Responses,56 Discrimination Index,0

Correct Answer,False

26.2 A monopsonist's market power enables him to hire labor at a marginal cost that is lower

than the wage rate.

Topic,Factor Markets Di#0Eculty,1

#25 Correct Responses,38 Discrimination Index,40

Correct Answer,True

26.3 For a monopsonist,the supply curve of a factor of production is less steep than the marginal

cost curve.

Topic,Factor Markets Di#0Eculty,2

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,False

26.4 A coal producer has a monopoly on coal,A di#0Berent monopoly controls the railroad that

takes the coal to market,Each monopolist chooses prices to maximize its pro#0Cts,If the coal mo-

nopolist buys the railroad then it will increase its pro#0Cts by raising the market price of coal.

Topic,Factor Markets Di#0Eculty,2

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,False

26.5 For a monopsonist,the more elastic the supply of labor,the greater the di#0Berence between

the marginal cost of labor and the wage rate.

CHAPTER 26 Factor Markets 482

Topic,Factor Markets Di#0Eculty,2

#25 Correct Responses,31 Discrimination Index,20

Correct Answer,False

26.6 If a monopolist faces a competitive labor market,it will hire labor up to the point where

the price of output times the marginal product of labor equals the wage rate.

Topic,Factor Markets Di#0Eculty,1

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,True

26.7 A monopolist who faces a horizontal labor supply curve will demand less labor than he

would if he acted competitively.

Topic,Factor Markets Di#0Eculty,1

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,False

26.8 If an upstream monopolist sells to a downstream monopolist,the price to consumers will

be higher than the competitive price,but not so high as it would be if the downstream monopolist

took control of the upstream monopolist's business and ran both the upstream and downstream

markets to maximize total pro#0Cts.

Topic,Factor Markets Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,True

26.9 If a labor market is dominated by a monopolist,it is possible that the imposition of a

minimum wage law could INCREASE the amount of employment in that market.

Multiple Choice Factor Markets

Topic,Factor Markets Di#0Eculty,1

#25 Correct Responses,31 Discrimination Index,60

Correct Answer,D

26.1 A monopolist produces a good using only one factor,labor,There are constant returns to

scale in production,and the demand for the monopolist's product is described byadownward-

sloping straight line with slope,1,The monopolist faces a horizontal labor supply curve,If the

monopolist chooses output to maximize pro#0Cts,then the:

#28a#29 marginal cost of labor to the monopolist exceeds the wage.

#28b#29 marginal product of labor times price of output equals the wage.

#28c#29 marginal product of labor times price of output is less than the wage.

#28d#29 marginal product of labor times price of output exceeds the wage.

#28e#29 marginal revenue product of labor is less than the wage.

Topic,Factor Markets Di#0Eculty,1

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,B

26.2 If a monopsonist pays the wage rate w; then the amount of labor that he can hire is

L#28w#29=Aw; where A is a positive constant,The marginal cost of labor to the monopsonist is:

#28a#29 equal to the wage rate.

#28b#29 twice the wage rate.

#28c#29 half the wage rate.

#28d#29 greater than the wage rate but less than twice as great.

#28e#29 less than the wage rate but more than half as great.

CHAPTER 26 Factor Markets 484

Topic,Factor Markets Di#0Eculty,1

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,C

26.3 A pro#0Ct-maximizing monopsonist hires both men and women to do a certain task,The two

sexes are equally good at this task and are regarded as perfect substitutes,Labor supply curves for

both sexes are upward-sloping,In order to hire M men,the #0Crm would havetopay men a wage of

AM,where A is a positive constant,In order to hire F women,the monopsonist would havetopay

awage of BF

c

where B and c are positive constants,Which,if any,of these conditions necessarily

implies that he paysalower wage to women than to men?

#28a#29 A#3EB.

#28b#29 A#3Cc.

#28c#29 c#3C1.

#28d#29 Bc#3CA.

#28e#29 C#3E2.

Topic,Factor Markets Di#0Eculty,3

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,E

26.4 The frangle industry is a monopoly,with a demand curve 100,p; where p is the price of

frangles,It takes one unit of labor and no other inputs to produce a frangle,The Frangle-makers

Guild is a strong union,The Guild sets a wage and prevents anyone from working for less than

that wage,The frangle monopoly must pay that wage but can hire as much labor as it chooses to.

If the guild chooses a wage so as to maximize the total earnings #28wage times number of units of

labor hired#29 of frangle-makers,then:

#28a#29 the price of frangles will be 50.

#28b#29 the price of frangles will be 25.

#28c#29 the price of frangles will equal the wage rate.

#28d#29 the wage rate will be 25.

#28e#29 the wage will be 50.

MULTIPLE CHOICE 485

Topic,Factor Markets Di#0Eculty,2

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,C

26.5 The bauble industry is competitive with free entry,There is a #0Cxed-coe#0Ecient technology.

One unit of labor and one unit of plastic are required for each bauble,Workers in the bauble

industry must all belong to the Bauble-makers Union,The union sets the wage that will be paid to

all bauble-makers,The price of plastic is 10 dollars per unit and the demand function for baubles

is 1000,10p,Long run equilibrium requires that the price of baubles equals the cost of production.

The wage per unit of labor that maximizes total revenue of workers is:

#28a#29 100.

#28b#29 10.

#28c#29 45.

#28d#29 20.

#28e#29 in#0Cnity.

Topic,Factor Markets Di#0Eculty,2

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,A

26.6 Suppose that the demand curve for mineral water is given by p =20,8qwhere p is the price

per bottle paid by consumers and q is the number of bottles purchased by consumers,Mineral wa-

ter is supplied to consumers by a monopolistic distributor who buys from a monopolistic producer,

who is able to produce mineral water at zero cost,The producer charges the distributor a price of

c per bottle,Given his marginal cost of c per unit,the distributor chooses an output to maximize

his own pro#0Cts,Knowing that this is what the distributor will do,the producer sets his price c so

as to maximize his revenue,The price paid by consumers under this arrangement is:

#28a#29 15

#28b#29 2.50

#28c#29 10

#28d#29 5

#28e#29 1.25

CHAPTER 26 Factor Markets 486

Topic,Factor Markets Di#0Eculty,2

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,A

26.7 Suppose that the demand curve for mineral water is given by p =60,8qwhere p is the price

per bottle paid by consumers and q is the number of bottles purchased by consumers,Mineral wa-

ter is supplied to consumers by a monopolistic distributor who buys from a monopolistic producer,

who is able to produce mineral water at zero cost,The producer charges the distributor a price of

c per bottle,Given his marginal cost of c per unit,the distributor chooses an output to maximize

his own pro#0Cts,Knowing that this is what the distributor will do,the producer sets his price c so

as to maximize his revenue,The price paid by consumers under this arrangement is:

#28a#29 45

#28b#29 7.50

#28c#29 30

#28d#29 15

#28e#29 3.75

Topic,Factor Markets Di#0Eculty,2

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,D

26.8 The labor supply curve faced by a large #0Crm in a small cityisgiven by w =40+0:05L where

L is the number of units of labor per week hired by the large #0Crm and w is the weekly wage rate

that it pays,If the #0Crm is currently hiring 1000 units of labor per week,then the marginal cost of

a unit of labor to the #0Crm is:

#28a#29 equal to the wage rate.

#28b#29 is twice the wage rate.

#28c#29 equals the wage rate plus 100.

#28d#29 equals the wage rate plus 50.

#28e#29 equals the wage rate plus 150.

MULTIPLE CHOICE 487

Topic,Factor Markets Di#0Eculty,2

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,D

26.9 The labor supply curve faced by a large #0Crm in a small cityisgiven by w =60+0:09L where

L is the number of units of labor per week hired by the large #0Crm and w is the weekly wage rate

that it pays,If the #0Crm is currently hiring 1000 units of labor per week,then the marginal cost of

a unit of labor to the #0Crm is:

#28a#29 equal to the wage rate.

#28b#29 is twice the wage rate.

#28c#29 equals the wage rate plus 180.

#28d#29 equals the wage rate plus 90.

#28e#29 equals the wage rate plus 270.

Topic,Factor Markets Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,A

26.10

Rabelaisian Restaurants has a monopoly in the town of Upper Glutton,Its production function is

Q =10Lwhere L is the amount of labor it uses and Q is the number of meals produced,In order to

hire L units of labor,Rabelaisian Restaurants must payawage of 20+,1L per unit of labor,The

demand curve for meals at Rabelaisian Restaurants is given by

P =50,Q=1000,The pro#0Ct maximizing output for

Rabelasian Restaurants is:

#28a#29 12,000.

#28b#29 24,000.

#28c#29 3,000.

#28d#29 2,000.

#28e#29 1,500.

CHAPTER 26 Factor Markets 488

Topic,Factor Markets Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,A

26.11

Rabelaisian Restaurants has a monopoly in the town of Upper Glutton,Its production function is

Q =40Lwhere L is the amount of labor it uses and Q is the number of meals produced,In order

to hire L units of labor,Rabelaisian Restaurants must payawage of 120 +,1L per unit of labor.

The demand curve for meals at Rabelaisian Restaurants is given by

P =20,Q=1000,The pro#0Ct maximizing output for

Rabelasian Restaurants is:

#28a#29 8,000.

#28b#29 16,000.

#28c#29 2,000.

#28d#29 500.

#28e#29 1,000.

Essay Factor Markets

Topic,Factor Markets Di#0Eculty,3

#25 Correct Responses,0 Discrimination Index,0

26.1 This comes from an actual newspaper story,"The average price of a home in W,county

rose more than 12#25 last year...but the number of sales fell nearly 15#25,`It's the old law of supply

and demand',said a spokesman for the Board of Realtors,`The number of sales is down because

there's a higher demand for properties but there isn't a corresponding number to sell.'" a#29 What

does the "old law of supply and demand" predict would happen to price and quantity if the demand

curve shifts outward and the supply curve does not change? b#29 Draw a diagram to illustrate the

case of a shift in demand and or supply curves that is consistent with the observed change in prices

and quantities.

Answer,a#29The price would rise and the quantitywould rise,Even if the supply were very inelastic,

the number of sales would not fall if the supply curve did not shift,b#29 One simple case would be a

leftward shift in the supply curve and no change in the demand curve.

Chapter 27

True-False Oligopoly

Topic,Oligopoly Di#0Eculty,1

#25 Correct Responses,72 Discrimination Index,31

Correct Answer,False

27.1 In Cournot equilibrium each #0Crm chooses the quantity that maximizes its own pro#0Cts as-

suming that the #0Crm's rival will continue to sell at the same price as before.

Topic,Oligopoly Di#0Eculty,1

#25 Correct Responses,61 Discrimination Index,14

Correct Answer,False

27.2 In Bertrand competition between two #0Crms,each #0Crm believes that if it changes its output,

the rival #0Crm will change its output by the same amount.

Topic,Oligopoly Di#0Eculty,1

#25 Correct Responses,96 Discrimination Index,0

Correct Answer,True

27.3 Suppose that the demand curve for an industry's output is a downward sloping straight line

and there is constant marginal cost,Then the larger the number of identical #0Crms producing in

Cournot equilibrium,the lower will be the price.

Topic,Oligopoly Di#0Eculty,1

#25 Correct Responses,96 Discrimination Index,0

Correct Answer,True

27.4 A Stackelberg leader chooses his actions on the assumption that his rival will adjust to the

leader's actions in suchaway as to maximize the rival's pro#0Cts.

Topic,Oligopoly Di#0Eculty,1

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,False

27.5 Conjectural variation refers to the fact that in a single market there is variation among #0Crms

in their estimates of the demand function in future periods.

TRUE-FALSE 491

Topic,Oligopoly Di#0Eculty,1

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,True

27.6 A duopoly in whichtwo identical #0Crms are engaged in Bertrand competition will not distort

prices from their competitive levels.

Topic,Oligopoly Di#0Eculty,2

#25 Correct Responses,92 Discrimination Index,21

Correct Answer,True

27.7 A Stackelberg leader will necessarily make at least as much pro#0Ct as he would if he acted

as a Cournot oligopolist.

Topic,Oligopoly Di#0Eculty,2

#25 Correct Responses,37 Discrimination Index,22

Correct Answer,False

27.8 In the Cournot model,each #0Crm chooses its actions on the assumption that its rivals will

react bychanging their quantities in suchaway as to maximize their own pro#0Cts.

Topic,Oligopoly Di#0Eculty,0

#25 Correct Responses,54 Discrimination Index,10

Correct Answer,True

27.9 In the Bertrand model of duopoly,each #0Crm sets its price,believing that the other's price

will not change,When both #0Crms have identical production functions and produce with constant

returns to scale,the Bertrand equilibrium price is equal to marginal cost.

Multiple Choice Oligopoly

Topic,Oligopoly Di#0Eculty,3

#25 Correct Responses,3 Discrimination Index,3

Correct Answer,D

27.1 An industry has two #0Crms each of which produces output at a constant unit cost of $10 per

unit,The demand function for the industry is q =1;000;000=p,The Cournot equilibrium price for

this industry is:

#28a#29 5.

#28b#29 10.

#28c#29 15.

#28d#29 20.

#28e#29 25.

Topic,Oligopoly Di#0Eculty,2

#25 Correct Responses,21 Discrimination Index,29

Correct Answer,C

27.2 An industry has two #0Crms,The inverse demand function for this industry is p = 320,4q.

Both #0Crms produce at a constant unit cost of $20 per unit,What is the Cournot equilibrium price

for this industry?

#28a#29 20

#28b#29 22

#28c#29 120

#28d#29 60

#28e#29 None of the above.

MULTIPLE CHOICE 493

Topic,Oligopoly Di#0Eculty,2

#25 Correct Responses,21 Discrimination Index,29

Correct Answer,C

27.3 An industry has two #0Crms,The inverse demand function for this industry is p =92,2q.

Both #0Crms produce at a constant unit cost of $32 per unit,What is the Cournot equilibrium price

for this industry?

#28a#29 32

#28b#29 34

#28c#29 52

#28d#29 26

#28e#29 None of the above.

Topic,Oligopoly Di#0Eculty,3

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,C

27.4 One unit of zinc and one unit of copper are needed to produce a unit of brass,The world's

supply of zinc and the world's supply of copper are owned bytwo di#0Berent monopolists,For sim-

plicity assume that it costs nothing to mine zinc and copper,that no other inputs are needed to

produce brass and that the brass industry operates competitively,Then the price of a unit of brass

equals the cost of the inputs used to make it,The demand function for brass is q = 900,2p where

p is the price of brass,The zinc and copper monopolists each set a price,believing that the other

monopolist will not change his price,What is the equilibrium price of brass?

#28a#29 100

#28b#29 200

#28c#29 300

#28d#29 50

#28e#29 25

CHAPTER 27 Oligopoly 494

Topic,Oligopoly Di#0Eculty,2

#25 Correct Responses,57 Discrimination Index,33

Correct Answer,C

27.5 A duopoly faces the inverse demand curve p = 160,2q,Both #0Crms in the industry have

constant costs of $10 per unit of output,In a Cournot equilibrium howmuch output will each

duopolist sell?

#28a#29 75

#28b#29 54

#28c#29 25

#28d#29 35

#28e#29 48

Topic,Oligopoly Di#0Eculty,2

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,B

27.6 Suppose that the price elasticity of demand for airline #0Dights betweem two cities is constant

and equal to,1:5,If 4 airlines with equal costs are in Cournot equilibrium for this industry,then

the ratio of price to marginal cost in the industry is:

#28a#29 8=7.

#28b#29 9=8.

#28c#29 7=6.

#28d#29 3=2.

#28e#29 None of the above.

MULTIPLE CHOICE 495

Topic,Oligopoly Di#0Eculty,2

#25 Correct Responses,66 Discrimination Index,44

Correct Answer,A

27.7 A city has two major league baseball teams,A and B,The numberoftickets sold by either

team depends on the price of the team's own tickets and the price of the other team's ticket,If

team A charges P

a

for its tickets and team B charges P

b

for its tickets,then ticket sales,measured

in hundreds of thousands per season are 20,2P

a

+P

b

for team A and 10+P

a

,2P

b

for team B,The

marginal cost of an extra spectator is zero for both teams,Each team believes the other's price

is independent of its own choice of price and each team sets its own price so as to maximize its

revenue,What price do they charge per ticket?

#28a#29 Team A charges 6 and team B charges 4.

#28b#29 Team A charges 8 and team B charges 3.

#28c#29 Team A charges 7 and team B charges 6.

#28d#29 Team A charges 6 and team B charges 8.

#28e#29 None of the above.

Topic,Oligopoly Di#0Eculty,2

#25 Correct Responses,66 Discrimination Index,44

Correct Answer,A

27.8 A city has two major league baseball teams,A and B,The numberoftickets sold by either

team depends on the price of the team's own tickets and the price of the other team's ticket,If

team A charges P

a

for its tickets and team B charges P

b

for its tickets,then ticket sales,measured

in hundreds of thousands per season are 21,2P

a

+P

b

for team A and 6+P

a

,2P

b

for team B,The

marginal cost of an extra spectator is zero for both teams,Each team believes the other's price

is independent of its own choice of price and each team sets its own price so as to maximize its

revenue,What price do they charge per ticket?

#28a#29 Team A charges 6 and team B charges 3.

#28b#29 Team A charges 8 and team B charges 2.

#28c#29 Team A charges 7 and team B charges 5.

#28d#29 Team A charges 6 and team B charges 6.

#28e#29 None of the above.

CHAPTER 27 Oligopoly 496

Topic,Oligopoly Di#0Eculty,3

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,D

27.9 A city has two newspapers,Demand for either paper depends on its own price and the price

of its rival,Demand functions for papers A and B respectively,measured in tens of thousands of

subscriptions,are 21,2P

a

+P

b

and 21+P

a

,2P

b

,The marginal cost of printing and distributing an

extra paper just equals the extra advertising revenue one gets from another reader,so each paper

treats marginal costs as zero,Each paper maximizes its revenue assuming that the other's price is

independent of its own choice of price,If the papers enter a joint operating agreement where they

set prices to maximize total revenue,byhowmuch will newspaper prices rise?

#28a#29 3

#28b#29 2

#28c#29 0

#28d#29 3.5

#28e#29 2.5

Topic,Oligopoly Di#0Eculty,1

#25 Correct Responses,77 Discrimination Index,35

Correct Answer,C

27.10 There are two major producers of corncob pipes in the world,both located in Herman,

Missouri,Suppose that the inverse demand function for corncob pipes is described by p = 120,4q

where q is total industry output and suppose that marginal costs are zero,What is the Cournot

reaction function of #0Crm 1 to the output,q

2; of #0Crm 2?

#28a#29 120,4q

2

2

#28b#29 120,4q

2

#28c#29 15,:5q

2

#28d#29 30,4q

2

#28e#29 124,8q

2

MULTIPLE CHOICE 497

Topic,Oligopoly Di#0Eculty,1

#25 Correct Responses,77 Discrimination Index,35

Correct Answer,C

27.11 There are two major producers of corncob pipes in the world,both located in Herman,

Missouri,Suppose that the inverse demand function for corncob pipes is described by p = 180,3q

where q is total industry output and suppose that marginal costs are zero,What is the Cournot

reaction function of #0Crm 1 to the output,q

2; of #0Crm 2?

#28a#29 180,3q

2

2

#28b#29 180,3q

2

#28c#29 30,:5q

2

#28d#29 60,3q

2

#28e#29 183,6q

2

Topic,Oligopoly Di#0Eculty,2

#25 Correct Responses,61 Discrimination Index,52

Correct Answer,D

27.12 An industry has two #0Crms producing at a constant unit cost of $10 per unit,The inverse

demand curve for the industry is p = 110,:5q,Suppose that #0Crm 1 is a Stackleberg leader in

choosing its quantity #28i.e,#0Crm 1 chooses it's quantity #0Crst,knowing that #0Crm 2 will observe #0Crm

1

0

s quantity when it chooses its own output.#29 Howmuch output will #0Crm 2,the follower,produce?

#28a#29 40

#28b#29 15

#28c#29 20

#28d#29 50

#28e#29 30

CHAPTER 27 Oligopoly 498

Topic,Oligopoly Di#0Eculty,3

#25 Correct Responses,28 Discrimination Index,32

Correct Answer,C

27.13 The cartel of copper exporting countries is called COPEC,As part of an international

marketing agreement,the United States has agreed to buy all the copper that COPEC wants to

sell the U.S,at a constant price of $100 per ton,COPEC also sells copper in Europe at a price of

$150 per ton,COPEC acts just like a monopolist,If COPEC #0Cnds it pro#0Ctable to sell in the U.S.

at $100 per ton and simultaneously to sell in Europe for $150 a ton,what is the price elasticityof

demand of COPEC's copper in the European market? #28Hint,What is COPEC's marginal revenue

in the U.S,market?#29

#28a#29,1

#28b#29,2

#28c#29,3

#28d#29,1=3

#28e#29,2=3

Topic,Oligopoly Di#0Eculty,2

#25 Correct Responses,61 Discrimination Index,17

Correct Answer,E

27.14 Two #0Crms decide to form a cartel and collude in a way that maximizes industry pro#0Cts.

Each #0Crm has zero production costs and each #0Crm is given a positive output quota by the cartel.

Which of the following statements is NOT true?

#28a#29 Each #0Crm would want to produce more than its quota if it knew that the other would continue to produce

at its quota.

#28b#29 The price elasticity of demand will be,1 at the output level chosen.

#28c#29 Output will be lower than if the #0Crms behaved as Cournot #0Crms.

#28d#29 Output will be lower than if the #0Crms behaved as competitors.

#28e#29 All of the other statements are false.

MULTIPLE CHOICE 499

Topic,Oligopoly Di#0Eculty,2

#25 Correct Responses,49 Discrimination Index,42

Correct Answer,D

27.15 The inverse demand function for fuzzy dice is p =20,q,There are constant returns to

scale in this industry with unit costs of $8,Which of the following statements is completely true?

#28a#29 Monopoly output is 6,Cournot duopoly total output is 8,A Stackelberg leader's output is 8.

#28b#29 Monopoly output is 8,Cournot duopoly total output is 8,A Stackelberg leader's output is 8.

#28c#29 Monopoly output is 6,Cournot duopoly total output is 6,A Stackelberg follower's output is 3.

#28d#29 Monopoly output is 6,Cournot duopoly total output is 8,A Stackelberg follower's output is 3.

#28e#29 Monopoly output is 6,Cournot duopoly total output is 8,A Stackelberg follower's output is 4.

Topic,Oligopoly Di#0Eculty,2

#25 Correct Responses,69 Discrimination Index,80

Correct Answer,C

27.16 An industry has two #0Crms,Firm 1

0

s cost function is c#28y#29=2y+ 500 and #0Crm 2

0

s cost

function is c#28y#29=2y+400,The demand curve for the outputof this industry is a downward-sloping

straight line,In a Cournot equilibrium,where both #0Crms produce positive amounts of output:

#28a#29 the #0Crm with lower #0Cxed costs produces more.

#28b#29 the #0Crm with higher #0Cxed costs produces more.

#28c#29 both #0Crms produce the same amount of output.

#28d#29 there is less output than there would be if the #0Crms colluded to maximize joint pro#0Cts.

#28e#29 #0Crm 1 always operates in the region where the demand curve is inelastic.

Topic,Oligopoly Di#0Eculty,3

#25 Correct Responses,26 Discrimination Index,0

Correct Answer,A

27.17 The price elasticity of demand for melocotones is constant and equal to,2,The meloco-

tone market is controlled bytwo Cournot duopolists who have di#0Berent cost functions,One of the

duopolists has a constant marginal cost of $980 per ton and he produces 60#25 of the total number

of melocotones sold,The equilibrium price of a ton of melocotones must be:

#28a#29 1,400.

#28b#29 700.

#28c#29 980.

#28d#29 2,800.

#28e#29 2,100.

CHAPTER 27 Oligopoly 500

Topic,Oligopoly Di#0Eculty,3

#25 Correct Responses,26 Discrimination Index,0

Correct Answer,A

27.18 The price elasticity of demand for melocotones is constant and equal to,3,The meloco-

tone market is controlled bytwo Cournot duopolists who have di#0Berent cost functions,One of the

duopolists has a constant marginal cost of $720 per ton and he produces 60#25 of the total number

of melocotones sold,The equilibrium price of a ton of melocotones must be:

#28a#29 900.

#28b#29 450.

#28c#29 720.

#28d#29 1,800.

#28e#29 1,350.

Topic,Oligopoly Di#0Eculty,3

#25 Correct Responses,62 Discrimination Index,10

Correct Answer,A

27.19 The demand for y is given by y = 256=p

2

,Only two #0Crms produce y,They have identical

costs c#28y#29=y

2

,If they agree to collude and maximize their joint pro#0Cts,howmuch output will

each #0Crm produce?

#28a#29 2

#28b#29 5

#28c#29 10

#28d#29 12

#28e#29 16

MULTIPLE CHOICE 501

Topic,Oligopoly Di#0Eculty,3

#25 Correct Responses,25 Discrimination Index,21

Correct Answer,E

27.20 A certain type of mushroom used to be produced on 50 farms,each of which had a cost

function c#28y#29=y

2

+1where y#3E0and c#280#29=0,The #0Crms operated as competitors,The demand

curve for this kind of mushroom is given by D#28p#29=52,p,Marauding deviant Ninja turtles invaded

many of the mushroom farms leaving absolute devastation and loathsome slime in their wake,#28The

turtles had no e#0Bect on the cost functions of farms that were not invaded.#29

#28a#29 If all of the farms but one were invaded and that farm became a monopolist,total output of mushrooms

would fall to half of the preinvasion output.

#28b#29 If all of the farms but one were invaded and that farm became a monopolist,total output of mushrooms

would fall to 1=50th of the preinvasion output.

#28c#29 If all of the farms but twowere invaded and the two undamaged farms became Cournot duopolists,total

output of mushrooms would be 2=3 of the preinvasion output.

#28d#29 If half of the farms were invaded and the industry remained competitive,industry output would fall to

half of the preinvasion output.

#28e#29 If half of the farms were invaded and the industry remained compeitive,industry output would fall,but

would be greater than half of the preinvasion output.

Topic,Oligopoly Di#0Eculty,2

#25 Correct Responses,69 Discrimination Index,40

Correct Answer,C

27.21 A duopoly faces the demand curve D#28p#29=30,:5p,Both #0Crms in the industry havea

total cost function given by C#28q#29=4q,Suppose that Firm 1 is a Stackelberg leader in choosing its

quantity #0Crst,Firm 1

0

s pro#0Ct function can be written as:

#28a#29 q

1

=14,:5q

2

.

#28b#29 q

2

=14,:5q

1

.

#28c#29 28q

1

,q

2

1

.

#28d#29 56q

1

,q

2

1

.

#28e#29 60q,q

2

.

CHAPTER 27 Oligopoly 502

Topic,Oligopoly Di#0Eculty,0

#25 Correct Responses,63 Discrimination Index,67

Correct Answer,A

27.22 A duopoly faces the inverse demand curve p = 160,2q,Firm 1

0

s total cost function is given

by C

1

#28q

1

#29=8q

1

and Firm 2

0

s total cost function is given by C

2

#28q

2

#29=10q

2

,In a Cournot equilibrium:

#28a#29 the #0Crm with the lower marginal cost produces more.

#28b#29 both #0Crms will produce the same amount.

#28c#29 the #0Crm with the higher marginal cost produces more to cover the higher costs.

#28d#29 the reaction function for both #0Crms is the same since both #0Crms have a constant marginal cost.

#28e#29 more than one of the above is correct.

Topic,Oligopoly Di#0Eculty,0

#25 Correct Responses,63 Discrimination Index,67

Correct Answer,B

27.23 Consider a market with one large #0Crm and many small #0Crms,The supply function of

all of the small #0Crms together is given by S#28p#29 = 200 + p; the market demand curve is given by

D#28p#29 = 400,p; and the cost function for the large #0Crm is C#28y#29=20y,The residual demand curve

for the large #0Crm #28where D

L

is large #0Crm's demand and y

L

is large #0Crm's output#29 is given by:

#28a#29 D

L

#28p#29 = 400,21y

L

.

#28b#29 D

L

#28p#29 = 200,2p.

#28c#29 D

L

#28p#29 = 600,2p.

#28d#29 D

L

#28y

L

#29 = 200,2p,20y

L

.

#28e#29 D

L

#28y

L

#29 = 200+ p+20y

L

.

MULTIPLE CHOICE 503

Topic,Oligopoly Di#0Eculty,0

#25 Correct Responses,77 Discrimination Index,48

Correct Answer,A

27.24 The duopolists Carl and Simon face a demand function for pumpkins of Q =5;600,800P

where Q is the total number of pumpkins that reach the market and P is the price of pumpkins.

Suppose further that each farmer has a constant marginal cost of $1 for each pumpkin produced.

If Carl believes that Simon is going to produce Q

s

pumpkins this year,then the reaction function

tells us how many pumpkins Carl should produce in order to maximize his pro#0Cts,Carl's reaction

function is R

C

#28Q

s

#29=

#28a#29 2;400,Q

s

=2.

#28b#29 5;600,800Q

s

.

#28c#29 5;600,1;600Q

s

.

#28d#29 1;200,Q

s

=2.

#28e#29 3;600,Q

s

.

Topic,Oligopoly Di#0Eculty,0

#25 Correct Responses,77 Discrimination Index,48

Correct Answer,A

27.25 The duopolists Carl and Simon face a demand function for pumpkins of Q =3;600,400P

where Q is the total number of pumpkins that reach the market and P is the price of pumpkins.

Suppose further that each farmer has a constant marginal cost of $1 for each pumpkin produced.

If Carl believes that Simon is going to produce Q

s

pumpkins this year,then the reaction function

tells us how many pumpkins Carl should produce in order to maximize his pro#0Cts,Carl's reaction

function is R

C

#28Q

s

#29=

#28a#29 1;600,Q

s

=2.

#28b#29 3;600,400Q

s

.

#28c#29 3;600,800Q

s

.

#28d#29 800,Q

s

=2.

#28e#29 2;400,Q

s

.

CHAPTER 27 Oligopoly 504

Topic,Oligopoly Di#0Eculty,2

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,D

27.26 Supose that the inverse demand for bean sprouts is given by P#28Y#29 = 520,2Y and the total

cost of producing Y units for any #0Crm is TC#28Y#29=40Y,If the industry consists of two Cournot

duopolists,then in equilibrium each #0Crm's production is:

#28a#29 120 units.

#28b#29 60 units.

#28c#29 40 units.

#28d#29 80 units.

#28e#29 65 units.

Topic,Oligopoly Di#0Eculty,2

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,D

27.27 Supose that the inverse demand for bean sprouts is given by P#28Y#29 = 390,2Y and the total

cost of producing Y units for any #0Crm is TC#28Y#29=30Y,If the industry consists of two Cournot

duopolists,then in equilibrium each #0Crm's production is:

#28a#29 90 units.

#28b#29 45 units.

#28c#29 30 units.

#28d#29 60 units.

#28e#29 48.75 units.

MULTIPLE CHOICE 505

Topic,Oligopoly Di#0Eculty,0

#25 Correct Responses,72 Discrimination Index,56

Correct Answer,A

27.28 Suppose that Grinch and Grubb go into the wine business in a small country where wine is

di#0Ecult to grow,The demand for wine is given by p = $420,:2Q where p is the price and Q is the

total quantity sold,The industry consists of just the two Cournot duopolists,Grinch and Grubb.

Imports are prohibited,Grinch has constant marginal costs of $15 and Grubb has marginal costs

of $15,Howmuch is Grinch's output in equilibrium?

#28a#29 675

#28b#29 1,350

#28c#29 337.50

#28d#29 1,012.50

#28e#29 2,025

Topic,Oligopoly Di#0Eculty,0

#25 Correct Responses,72 Discrimination Index,56

Correct Answer,A

27.29 Suppose that Grinch and Grubb go into the wine business in a small country where wine is

di#0Ecult to grow,The demand for wine is given by p = $600,:2Q where p is the price and Q is the

total quantity sold,The industry consists of just the two Cournot duopolists,Grinch and Grubb.

Imports are prohibited,Grinch has constant marginal costs of $60 and Grubb has marginal costs

of $75,Howmuch is Grinch's output in equilibrium?

#28a#29 925

#28b#29 1,850

#28c#29 462.50

#28d#29 1,387.50

#28e#29 2,775

CHAPTER 27 Oligopoly 506

Topic,Oligopoly Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,A

27.30

Suppose that two airlines are Cournot duopolists serving the Peoria-Dubuque route,and the de-

mand curve for tickets per dayisQ= 180,2p #28so p =90,Q=2#29.Total costs of running a #0Dighton

this route are 200+30qwhere q is the number of passengers on the #0Dight,Each #0Dight has a capacity

of 80 passengers,In Cournot equilibrium,each duopolist will run one #0Dight per day and will make

a daily pro#0Ct of:

#28a#29 600

#28b#29 100

#28c#29 180

#28d#29 1,200

#28e#29 2,000

Topic,Oligopoly Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,A

27.31

Suppose that two airlines are Cournot duopolists serving the Peoria-Dubuque route,and the de-

mand curve for tickets per dayisQ= 140,2p #28so p =70,Q=2#29.Total costs of running a #0Dighton

this route are 100+40qwhere q is the number of passengers on the #0Dight,Each #0Dight has a capacity

of 80 passengers,In Cournot equilibrium,each duopolist will run one #0Dight per day and will make

a daily pro#0Ct of:

#28a#29 100

#28b#29 50

#28c#29 140

#28d#29 200

#28e#29 1,000

MULTIPLE CHOICE 507

Topic,Oligopoly Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,C

27.32 Suppose that the market demand curve for bean sprouts is given by

P =3;580,5Q; where P is the price and Q is total industry output,Suppose that the industry has

two #0Crms,a Stackleberg leader and a follower,Each #0Crm has a constant marginal cost of $80 per

unit of output,In equilibrium,total output by the two #0Crms will be:

#28a#29 350.

#28b#29 175.

#28c#29 525.

#28d#29 700.

#28e#29 87.50.

Topic,Oligopoly Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,C

27.33 Suppose that the market demand curve for bean sprouts is given by

P =3;520,5Q; where P is the price and Q is total industry output,Suppose that the industry has

two #0Crms,a Stackleberg leader and a follower,Each #0Crm has a constant marginal cost of $20 per

unit of output,In equilibrium,total output by the two #0Crms will be:

#28a#29 350.

#28b#29 175.

#28c#29 525.

#28d#29 700.

#28e#29 87.50.

CHAPTER 27 Oligopoly 508

Topic,Oligopoly Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,A

27.34 There are two #0Crms in the blastopheme industry,The demand curve for blastophemes is

given by p =1;000,2q,Each #0Crm has one manufacturing plant and each #0Crm i has a cost function

C#28q

i

#29=q

2

i

where q

i

is the output of #0Crm i,The two #0Crms form a cartel and arrange to split total

industry pro#0Cts equally,Under this cartel arrangement,they will maximize joint pro#0Cts if:

#28a#29 and only if each #0Crm produces 100 units in its plant.

#28b#29 they produce a total of 200 units,no matter which #0Crm produces them.

#28c#29 and only if they each produce a total of 250 units.

#28d#29 they produce a total of 166.67 units,no matter which #0Crm produces them.

#28e#29 they shut down one of the two plants,having the other operate as a monopoly,and splitting the pro#0Cts.

Topic,Oligopoly Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,A

27.35 There are two #0Crms in the blastopheme industry,The demand curve for blastophemes is

given by p =5;400,4q,Each #0Crm has one manufacturing plant and each #0Crm i has a cost function

C#28q

i

#29=q

2

i

where q

i

is the output of #0Crm i,The two #0Crms form a cartel and arrange to split total

industry pro#0Cts equally,Under this cartel arrangement,they will maximize joint pro#0Cts if:

#28a#29 and only if each #0Crm produces 300 units in its plant.

#28b#29 they produce a total of 600 units,no matter which #0Crm produces them.

#28c#29 and only if they each produce a total of 675 units.

#28d#29 they produce a total of 450 units,no matter which #0Crm produces them.

#28e#29 they shut down one of the two plants,having the other operate as a monopoly,and splitting the pro#0Cts.

MULTIPLE CHOICE 509

Topic,Oligopoly Di#0Eculty,0

#25 Correct Responses,55 Discrimination Index,30

Correct Answer,D

27.36 A Stackleberg leader and follower eachchoose their outputs to maximize their own pro#0Cts.

Local property taxes which constitute a lump sum tax for each of them are reduced by $500 per

year for the leader and by $200 a year for the follower,In consequence,the #0Crms:

#28a#29 both increase output,with the leader increasing output by more.

#28b#29 both increase output,with the follower increasing output by more.

#28c#29 increase output by equal amounts for each #0Crm.

#28d#29 leave their outputs unchanged.

#28e#29 There is not enough information in the question to determine what the #0Crms will do.

Topic,Oligopoly Di#0Eculty,0

#25 Correct Responses,40 Discrimination Index,25

Correct Answer,B

27.37 An industry has two colluding #0Crms,who act so as to maximize total pro#0Ct in the industry

and then split the pro#0Cts equally,Firm 1 has cost function c#28y#29=8y,Firm 2 has cost function

c#28y#29=y

2

,Each #0Crm produces an integer number of units,Market demand is given by Y#28p#29=80,p.

#28a#29 Firm 1 should produce 16 units and #0Crm 2 should produce 16 units.

#28b#29 Firm 1 should produce 32 units and #0Crm 2 should produce 4 units.

#28c#29 Each #0Crm should produce 18 units.

#28d#29 Firm 1 should produce 36 units and #0Crm 2 should produce 2 units.

#28e#29 None of the above.

Topic,Oligopoly Di#0Eculty,0

#25 Correct Responses,40 Discrimination Index,25

Correct Answer,B

27.38 An industry has two colluding #0Crms,who act so as to maximize total pro#0Ct in the industry

and then split the pro#0Cts equally,Firm 1 has cost function c#28y#29=8y,Firm 2 has cost function

c#28y#29=y

2

,Each #0Crm produces an integer number of units,Market demand is given by Y#28p#29=48,p.

#28a#29 Firm 1 should produce 8 units and #0Crm 2 should produce 8 units.

#28b#29 Firm 1 should produce 16 units and #0Crm 2 should produce 4 units.

#28c#29 Each #0Crm should produce 10 units.

#28d#29 Firm 1 should produce 20 units and #0Crm 2 should produce 2 units.

#28e#29 None of the above.

CHAPTER 27 Oligopoly 510

Topic,Oligopoly Di#0Eculty,0

#25 Correct Responses,63 Discrimination Index,40

Correct Answer,C

27.39 An industry has two firms,,aStackleberg leader and a follower,The price of the indus-

try output is given by P =48,Qwhere Q is the total output of the two #0Crms,The follower has a

marginal cost of 0,The leader has a marginal cost of 12,Howmuch should the leader produce in

order to maximize pro#0Cts?

#28a#29 15

#28b#29 24

#28c#29 12

#28d#29 10

#28e#29 None of the above.

Topic,Oligopoly Di#0Eculty,0

#25 Correct Responses,63 Discrimination Index,40

Correct Answer,C

27.40 An industry has two firms,,aStackleberg leader and a follower,The price of the indus-

try output is given by P =24,Qwhere Q is the total output of the two #0Crms,The follower has a

marginal cost of 0,The leader has a marginal cost of 6,Howmuch should the leader produce in

order to maximize pro#0Cts?

#28a#29 9

#28b#29 12

#28c#29 6

#28d#29 4

#28e#29 None of the above.

MULTIPLE CHOICE 511

Topic,Oligopoly Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,A

27.41 Roach Motors is the dominant used car dealer in a small midwestern city,After paying

$50,000 for overhead,Roach Motors' cost per car is $500,There are 4 other small used car lots in

this town,but since they are not large enough to purchase cars through the same discount sources

as Roach,each #0Crm faces the cost function C =5;000+ 600Q+5Q

2

,The demand for used cars is

Q = 400,P2=10,Assuming Roachisaware of its competitors' costs,what price should Roach set

for a used car?

#28a#29 $783.33

#28b#29 $816.67

#28c#29 $600

#28d#29 $641.67

#28e#29 $1,016.67

Topic,Oligopoly Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,A

27.42 Roach Motors is the dominant used car dealer in a small midwestern city,After paying

$50,000 for overhead,Roach Motors' cost per car is $500,There are 5 other small used car lots in

this town,but since they are not large enough to purchase cars through the same discount sources

as Roach,each #0Crm faces the cost function C =5;000+ 600Q+5Q

2

,The demand for used cars is

Q = 200,P1=10,Assuming Roachisaware of its competitors' costs,what price should Roach set

for a used car?

#28a#29 $666.67

#28b#29 $600

#28c#29 $600

#28d#29 $583.33

#28e#29 $900

CHAPTER 27 Oligopoly 512

Topic,Oligopoly Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,B

27.43

Roach Motors is the dominant used car dealer in a small midwestern city,After paying $50,000

for overhead,Roach Motors' cost per car is $500,There are 4 other small used car lots in this

town,but since they are not large enough to purchase cars through the same discount sources as

Roach,each #0Crm faces the cost function C =5;000 + 700Q +5Q

2

,The demand for used cars is

Q = 500,P2=10,Assuming Roach sets the market price so as to maximize its pro#0Ct,how many

cars will each of the follower #0Crms supply?

#28a#29 12

#28b#29 20

#28c#29 27

#28d#29 17

#28e#29 15

Topic,Oligopoly Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,B

27.44

Roach Motors is the dominant used car dealer in a small midwestern city,After paying $50,000

for overhead,Roach Motors' cost per car is $500,There are 4 other small used car lots in this

town,but since they are not large enough to purchase cars through the same discount sources as

Roach,each #0Crm faces the cost function C =5;000 + 700Q +5Q

2

,The demand for used cars is

Q = 500,P2=10,Assuming Roach sets the market price so as to maximize its pro#0Ct,how many

cars will each of the follower #0Crms supply?

#28a#29 29

#28b#29 20

#28c#29 26

#28d#29 19

#28e#29 14

MULTIPLE CHOICE 513

Topic,Oligopoly Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,D

27.45

North Bend currently has one McDonald's fast food franchise,Demand for hamburgers in North

Bend is given by Q = 200,40P.Any McDonald's franchise has costs of C =80+2Qfor producing

Q hamburgers,If a second McDonald's franchise were to moveinto North Bend #28and both behave

as duopolists#29,the pro#0Ct of the original McDonald's would

#28a#29 fall from $10 to $,80.

#28b#29 fall from $210 to $120.

#28c#29 fall from $90 to $,80.

#28d#29 fall from $10 to $,40.

#28e#29 fall from $90 to $0.

Topic,Oligopoly Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,D

27.46

North Bend currently has one McDonald's fast food franchise,Demand for hamburgers in North

Bend is given by Q = 400,10P.Any McDonald's franchise has costs of C =60+4Qfor producing

Q hamburgers,If a second McDonald's franchise were to moveinto North Bend #28and both behave

as duopolists#29,the pro#0Ct of the original McDonald's would

#28a#29 fall from $3,180 to $2,760.

#28b#29 fall from $3,960 to $1,920.

#28c#29 fall from $3,240 to $2,760.

#28d#29 fall from $3,180 to $1,380.

#28e#29 fall from $3,240 to $2,820.

CHAPTER 27 Oligopoly 514

Topic,Oligopoly Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,B

27.47 Ann and Bruce eachown a pizza store in Frostbite Falls,MN,Demand for pizza is given by

Q = 200,40P,Being the only two pizza stores in Frostbite Falls,they attempt to pro#0Ctably split

the market without violating the Sherman Antitrust Act,Each has the cost function C =60+3Q.

If Ann and Bruce behave as duopolists each earns a pro#0Ct of

#28a#29 $0.

#28b#29 $,42:22.

#28c#29 $35.56.

#28d#29 $97.78.

#28e#29 $40.

Topic,Oligopoly Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,B

27.48 Ann and Bruce eachown a pizza store in Frostbite Falls,MN,Demand for pizza is given by

Q = 300,40P,Being the only two pizza stores in Frostbite Falls,they attempt to pro#0Ctably split

the market without violating the Sherman Antitrust Act,Each has the cost function C =60+4Q.

If Ann and Bruce behave as duopolists each earns a pro#0Ct of

#28a#29 $0.

#28b#29 $,5:56.

#28c#29 $108.89.

#28d#29 $241.11.

#28e#29 $122.50.

Chapter 28

True-False Game Theory

Topic,Game Theory Di#0Eculty,2

#25 Correct Responses,76 Discrimination Index,13

Correct Answer,True

28.1 A situation where everyone is playing a dominant strategy must be a Nash equilibrium.

Topic,Game Theory Di#0Eculty,2

#25 Correct Responses,87 Discrimination Index,40

Correct Answer,False

28.2 In a Nash equilibrium,everyone must be playing a dominant strategy.

Topic,Game Theory Di#0Eculty,2

#25 Correct Responses,39 Discrimination Index,14

Correct Answer,False

28.3 In the prisoners' dilemma game,if each prisoner believed that the other prisoner would deny

the crime,then both would deny the crime.

Topic,Game Theory Di#0Eculty,1

#25 Correct Responses,56 Discrimination Index,41

Correct Answer,False

28.4 A general has the two possible pure strategies,sending all of his troops by land or all of his

troops by sea,An example of a mixed strategy is where he sends 1=4 of his troops by land and 3=4

of his troops by sea.

Topic,Game Theory Di#0Eculty,1

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,False

28.5 While game theory predicts noncooperative behavior for a single play of prisoners' dilemma,

it would predict cooperative tit-for-tat behavior if the same people play prisoners' dilemma together

for,say,20 rounds.

CHAPTER 28 Game Theory 516

Topic,Game Theory Di#0Eculty,1

#25 Correct Responses,80 Discrimination Index,33

Correct Answer,False

28.6 Atwo-person game in which each person has access to only two possible strategies will have

at most one Nash equilibrium.

Topic,Game Theory Di#0Eculty,1

#25 Correct Responses,93 Discrimination Index,13

Correct Answer,True

28.7 A dominant strategy equilibrium is a set of choices such that each player's choices are op-

timal regardless of what the other players choose.

Topic,Game Theory Di#0Eculty,1

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,True

28.8 In Nash equilibrium,each player is making an optimal choice for herself,given the choices

of the other players.

Topic,Game Theory Di#0Eculty,1

#25 Correct Responses,79 Discrimination Index,2

Correct Answer,False

28.9 If a game does not have an equilibrium in pure strategies,then it will not have an equilib-

rium in mixed strategies either.

Topic,Game Theory Di#0Eculty,2

#25 Correct Responses,82 Discrimination Index,15

Correct Answer,False

28.10 A game has two players and each has two strategies,The strategies are Be Nice and Be

Mean,If both players play Be Nice,both get a payo#0B of 5,If both players play Be Mean,both get

apayo#0B of,3,If one player plays Be Nice and the other plays Be Mean,the player who played Be

Nice gets 0 and the player who played Be Mean gets 10,Playing Be Mean is a dominant strategy

for both players.

Multiple Choice Game Theory

Topic,Game Theory Di#0Eculty,2

#25 Correct Responses,74 Discrimination Index,57

Correct Answer,C

28.1 A game has two players,Each player has two possible strategies,One strategy is called

#5Ccooperate",the other is called #5Cdefect",Each player writes on a piece of paper either a C for

cooperate or a D for defect,If both players write C; they both get a payo#0B of $100,If both

players defect they each get a payo#0B of 0,If one player cooperates and the other player defects,

the cooperating player gets a payo#0B of S and the defecting player gets a payo#0B of T.To defect will

be a dominant strategy for both players if:

#28a#29 S +T#3E100

#28b#29 T#3E2S

#28c#29 S#3C0 and T#3E100.

#28d#29 S#3CTand T#3E100.

#28e#29 S amd T are any positivenumbers.

Topic,Game Theory Di#0Eculty,1

#25 Correct Responses,89 Discrimination Index,33

Correct Answer,C

28.2 In the game matrix below,the #0Crst payo#0B in each pair goes to Player A who chooses the

row,and the second payo#0B goes to Player B; who chooses the column,Let a,b; c; and d be positive

constants,If PlayerAchooses bottom and Player B chooses right in a Nash equilibrium then we

know that,!ta game1.tab!

#28a#29 b#3E1 and d#3C1.

#28b#29 c#3C1 and b#3C1.

#28c#29 b#3C1 and c#3Cd.

#28d#29 b#3Ccand d#3C1.

#28e#29 a#3C1 and b#3Cd.

CHAPTER 28 Game Theory 518

Topic,Game Theory Di#0Eculty,2

#25 Correct Responses,36 Discrimination Index,35

Correct Answer,A

28.3 In the town of Torrelodones,eachoftheN#3E2inhabitants has $100,They are told that

they can all voluntarily contribute to a fund that will be evenly divided among all residents,If $F

are contributed to the fund,the local K-Mart will match the private contributions so that the total

amount to be divided is $2F,That is,each resident will get backapaymentof$2F=N when the

fund is divided,If people in town care only about their own net incomes,in Nash equilibrium,how

much will each person contribute to the fund?

#28a#29 0

#28b#29 $10

#28c#29 $20

#28d#29 $50

#28e#29 $100

Topic,Game Theory Di#0Eculty,3

#25 Correct Responses,43 Discrimination Index,35

Correct Answer,C

28.4 Frank and Nancy met at a sororitysock-hop,They agreed to meet for a date at a local bar

the next week,Regrettably,they were so fraught with passion that they forgot to agree on which

bar would be the site of their rendezvous,Luckily,the town has only two bars,Rizotti's and the

Oasis,Having discussed their tastes in bars at the sock-hop,both are aware that Frank prefers

Rizotti's to the Oasis and Nancy prefer the Oasis to Rizottis,In fact,the payo#0Bs are as follows,If

both go to the Oasis,Nancy's utility is 3 and Frank's utility is 2,If both go to Rizotti's,Frank's

utility is 3 and Nancy's utility is 2,If they don't both go to the same bar,both have a utilityof0.

#28a#29 This game has no Nash equilibrium in pure strategies.

#28b#29 This game has a dominant strategy equilibrium.

#28c#29 There are two Nash equilibria in pure strategies and a Nash equilibrium in mixed strategies where the

probability that Frank and Nancy go to the same bar is 12=25.

#28d#29 This game has two Nash equilibria in pure strategies and a Nash equilbrium in mixed strategies where

each person has a probabilityof1=2 of going to each bar.

#28e#29 This game has exactly one Nash equilibrium.

MULTIPLE CHOICE 519

Topic,Game Theory Di#0Eculty,2

#25 Correct Responses,28 Discrimination Index,16

Correct Answer,C

28.5 George and Sam have taken their fathers' cars out on a lonely road and are engaged in a game

of "Chicken",George has his father's Mercedes and Sam has his father's rattly little Yugoslavian-

built subcompact car,Each of the players can choose either to SwerveortoNotSwerve,If both

choose Swerve,both get a payo#0B of zero,If one chooses Swerve and the other chooses Not Swerve,

the one who chooses Not Swerve gets a payo#0B of 10 and the one who chooses Swerve gets zero,If

both choose Not Swerve,the damage to George's car is fairly minor and he gets a payo#0B of,5;

while for Sam the results are disastrous and he gets a payo#0B of,100.

#28a#29 This game has a dominant strategy equilibrium in which George does not swerve and Sam swerves.

#28b#29 This game has two pure strategy Nash equilibria and no mixed-strategy equilibrium.

#28c#29 This game has three di#0Berent Nash equilibria,two of which are pure strategy equilibria and one of which

is a mixed strategy equilibrium in which George is more likely to swerve than Sam is.

#28d#29 The one and only Nash equilibrium in this game is where George does not swerve and Sam swerves.

#28e#29 This game has two pure strategy equilibria and a mixed strategy equilibrium in which Sam randomizes

his strategy and George chooses Not Swerve with certainty.

Topic,Game Theory Di#0Eculty,0

#25 Correct Responses,75 Discrimination Index,0

Correct Answer,E

28.6 Big Pig and Little Pig havetwo possible strategies,Press the Button,and Wait at the

trough,If both pigs choose Wait,both get 2,If both pigs press the button then Big Pig gets 7 and

Little Pig gets 3,If Little Pig presses the button and Big Pig waits at the trough,then Big Pig

gets 10 and Little Pig gets 0,Finally,if Big Pig presses the button and Little Pig waits,then Big

Pig gets 6 and Little Pig gets 1,In Nash equilibrium,

#28a#29 Little Pig will get a payo#0B of 1 and Big Pig will get a payo#0B of 6.

#28b#29 Little Pig will get a payo#0B of 3 and Big Pig will get a payo#0B of 7.

#28c#29 Both pigs will wait at the trough.

#28d#29 Little pig will get a payo#0B of zero.

#28e#29 The pigs must be using mixed strategies.

CHAPTER 28 Game Theory 520

Topic,Game Theory Di#0Eculty,0

#25 Correct Responses,75 Discrimination Index,0

Correct Answer,E

28.7 Big Pig and Little Pig havetwo possible strategies,Press the Button,and Wait at the

trough,If both pigs choose Wait,both get 1,If both pigs press the button then Big Pig gets 8 and

Little Pig gets 2,If Little Pig presses the button and Big Pig waits at the trough,then Big Pig

gets 10 and Little Pig gets 0,Finally,if Big Pig presses the button and Little Pig waits,then Big

Pig gets 4 and Little Pig gets 3,In Nash equilibrium,

#28a#29 Little Pig will get a payo#0B of 3 and Big Pig will get a payo#0B of 4.

#28b#29 Little Pig will get a payo#0B of 2 and Big Pig will get a payo#0B of 8.

#28c#29 Both pigs will wait at the trough.

#28d#29 Little pig will get a payo#0B of zero.

#28e#29 The pigs must be using mixed strategies.

Topic,Game Theory Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,A

28.8 Two players are engaged in a game of "Chicken",There are two possible strategies,Swerve

and Drive Straight,A player who chooses to Swerve is called "Chicken" and gets a payo#0B of zero,

regardless of what the other player does,A player who chooses to Drive Straight gets a payo#0B of

12 if the other player swerves and a payo#0B of,12 if the other player also chooses to Drive Straight.

This game has two pure strategy equilibria and:

#28a#29 a mixed strategy equilibrium in which each player swerves with probability 0.50 and drives straight with

probability 0.50.

#28b#29 two mixed strategies in which players alternate between swerving and driving straight.

#28c#29 a mixed strategy equilibrium in which one player swerves with probability 0.50 and the other swerves

with probability 0.50.

#28d#29 a mixed strategy in which each player swerves with probability 0.25 and drives straight with probability

0.75.

#28e#29 no mixed strategies.

MULTIPLE CHOICE 521

Topic,Game Theory Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,A

28.9 Two players are engaged in a game of "Chicken",There are two possible strategies,Swerve

and Drive Straight,A player who chooses to Swerve is called "Chicken" and gets a payo#0B of zero,

regardless of what the other player does,A player who chooses to Drive Straight gets a payo#0B of

9 if the other player swerves and a payo#0B of,36 if the other player also chooses to Drive Straight.

This game has two pure strategy equilibria and:

#28a#29 a mixed strategy equilibrium in which each player swerves with probability 0.80 and drives straight with

probability 0.20.

#28b#29 two mixed strategies in which players alternate between swerving and driving straight.

#28c#29 a mixed strategy equilibrium in which one player swerves with probability 0.80 and the other swerves

with probability 0.20.

#28d#29 a mixed strategy in which each player swerves with probability 0.40 and drives straight with probability

0.60.

#28e#29 no mixed strategies.

Topic,Game Theory Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,B

28.10 A famous Big Ten football coach had only two strategies,Run the ball to the left side

of the line,Run the ball to the right side,The defense can concentrate forces on the left side or

the right side,If the opponent concentrates on the wrong side,his o#0Bense is sure to gain at least

5yards,If the defense defended the left side and the o#0Bense ran left,it gain only 1 yard,If the

opponent defended the right side when the o#0Bense ran right,the o#0Bense would still gain at least

5yards with probability 0.70,It is the last play of the game and the famous coach's team is on

o#0Bense,If it makes5yards or more it wins,if not it loses,Both sides choose Nash equilibrium

strategies,In equilibrium the o#0Bense:

#28a#29 is sure to run to the right side.

#28b#29 will run to the right side with probability 0.77.

#28c#29 will run to the right side with probability 0.87.

#28d#29 will run to the two sides with equal probability.

#28e#29 will run to the right side with probability 0.70.

CHAPTER 28 Game Theory 522

Topic,Game Theory Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,B

28.11 A famous Big Ten football coach had only two strategies,Run the ball to the left side

of the line,Run the ball to the right side,The defense can concentrate forces on the left side or

the right side,If the opponent concentrates on the wrong side,his o#0Bense is sure to gain at least

5yards,If the defense defended the left side and the o#0Bense ran left,it gain only 1 yard,If the

opponent defended the right side when the o#0Bense ran right,the o#0Bense would still gain at least

5yards with probability 0.30,It is the last play of the game and the famous coach's team is on

o#0Bense,If it makes5yards or more it wins,if not it loses,Both sides choose Nash equilibrium

strategies,In equilibrium the o#0Bense:

#28a#29 is sure to run to the right side.

#28b#29 will run to the right side with probability 0.59.

#28c#29 will run to the right side with probability 0.74.

#28d#29 will run to the two sides with equal probability.

#28e#29 will run to the right side with probability 0.70.

Topic,Game Theory Di#0Eculty,0

#25 Correct Responses,74 Discrimination Index,56

Correct Answer,A

28.12 Suppose that in a Hawk-Dove game similar to the one discussed in your workbook,the

payo#0B to each player is,4 if both playhawk,If both playdove,the payo#0B to each player is 1 and

if one plays hawk and the other plays dove,the one that plays hawk gets a payo#0B of 4 and the one

that plays dove gets 0,In equilibrium,wewould expect hawks and doves to do equally well,This

happens when the fraction of the total population that plays hawk is:

#28a#29 0.43.

#28b#29 0.21.

#28c#29 0.11.

#28d#29 0.71.

#28e#29 1.

MULTIPLE CHOICE 523

Topic,Game Theory Di#0Eculty,0

#25 Correct Responses,74 Discrimination Index,56

Correct Answer,A

28.13 Suppose that in a Hawk-Dove game similar to the one discussed in your workbook,the

payo#0B to each player is,9 if both playhawk,If both playdove,the payo#0B to each player is 5 and

if one plays hawk and the other plays dove,the one that plays hawk gets a payo#0B of 7 and the one

that plays dove gets 0,In equilibrium,wewould expect hawks and doves to do equally well,This

happens when the fraction of the total population that plays hawk is:

#28a#29 0.18.

#28b#29 0.09.

#28c#29 0.05.

#28d#29 0.59.

#28e#29 1.

Topic,Game Theory Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,D

28.14

If the number of persons who attend the club meeting this week is X; then the number of people

who will attend next week is 77+0:30X,What is a long run equilibrium attendance for this club?

#28a#29 77

#28b#29 256.67

#28c#29 154

#28d#29 110

#28e#29 33

CHAPTER 28 Game Theory 524

Topic,Game Theory Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,D

28.15

If the number of persons who attend the club meeting this week is X; then the number of people

who will attend next week is 21+0:70X,What is a long run equilibrium attendance for this club?

#28a#29 21

#28b#29 30

#28c#29 42

#28d#29 70

#28e#29 49

Topic,Game Theory Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,E

28.16 Professor Binmore has a monopoly in the market for undergraduate game theory textbooks.

The time discounted value of Professor Binmore's future earnings is $2,000,Professor Ditt is

considering writing a book to compete with Professor Binmore's book,With two books amicably

splitting the market,the time discounted value of each professor's future earnings would be $200.

If there is full information #28each professor knows the pro#0Cts of the other#29,under what conditions

could Professor Binmore deter the entry of Professor Ditt into his market? #28More than one answer

may be correct,Full credit will be given only if all correct choices are selected.#29

#28a#29 Professor Binmore threatens to cut his price so that Professor Ditt would loose $200,In so doing,

Professor Binmore would loose $20 over time.

#28b#29 Professor Binmore threatens to cut his price so that Professor Ditt wouldloose $20,In so doing,Professor

Binmore would just break even over time.

#28c#29 Professor Binmore threatens to cut his price and attack the credibility of Professor Ditt's book so that

Professor Ditt would loose $2,In so doing,Professor Binmore would still make $190 over time.

#28d#29 Professor Binmore threatens to cut his price and attack the credibility of Professor Ditt's book so that

Professor Ditt would only make $2,In so doing,Professor Binmore would still make $100 over time.

#28e#29 None of the above.

MULTIPLE CHOICE 525

Topic,Game Theory Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,E

28.17 Professor Binmore has a monopoly in the market for undergraduate game theory textbooks.

The time discounted value of Professor Binmore's future earnings is $1,000,Professor Ditt is

considering writing a book to compete with Professor Binmore's book,With two books amicably

splitting the market,the time discounted value of each professor's future earnings would be $100.

If there is full information #28each professor knows the pro#0Cts of the other#29,under what conditions

could Professor Binmore deter the entry of Professor Ditt into his market? #28More than one answer

may be correct,Full credit will be given only if all correct choices are selected.#29

#28a#29 Professor Binmore threatens to cut his price so that Professor Ditt would loose $200,In so doing,

Professor Binmore would loose $20 over time.

#28b#29 Professor Binmore threatens to cut his price so that Professor Ditt wouldloose $20,In so doing,Professor

Binmore would just break even over time.

#28c#29 Professor Binmore threatens to cut his price and attack the credibility of Professor Ditt's book so that

Professor Ditt would loose $2,In so doing,Professor Binmore would still make $90 over time.

#28d#29 Professor Binmore threatens to cut his price and attack the credibility of Professor Ditt's book so that

Professor Ditt would only make $2,In so doing,Professor Binmore would still make $50 over time.

#28e#29 None of the above.

Essay Game Theory

Topic,Game Theory Di#0Eculty,2

#25 Correct Responses,0 Discrimination Index,0

28.1 The coach of the o#0Bensive football team has two options on the next play,He can run the

ball or he can pass,His rival can defend either against the run or against the pass,Suppose that

the o#0Bense passes,Then if the defense defends against the pass,it will make zero yards and if

the defense defends against the run,it will make25yards,Suppose that the o#0Bense runs,If the

defense defends against the pass,the o#0Bense will make10yards and if the defense defends against

a run,the o#0Bense will gain 2 yards,a#29 Write downapayo#0B matrix for this game,b#29 Is there a

Nash equilibrium in pure strategies for this game? If so,what is it? If not,demonstrate that there

is none.

Answer,This game does not have a Nash equilibrium in pure strategies,The best response to a

pass #28run#29 is a defense against the pass #28run#29,But the best response to a defense against the pass

#28run#29 is to run #28pass#29.

Chapter 29

True-False Exchange

Topic,Exchange Di#0Eculty,1

#25 Correct Responses,62 Discrimination Index,5

Correct Answer,False

29.1 Partial equilibrium analysis concerns only supply or only demand while general equilibrium

analysis deals with supply and demand at the same time.

Topic,Exchange Di#0Eculty,1

#25 Correct Responses,52 Discrimination Index,31

Correct Answer,True

29.2 A pure exchange economy is an economy where goods are traded but there is no production.

Topic,Exchange Di#0Eculty,1

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,False

29.3 In general equilibrium analysis,an allocation is a feasible allocation if every consumer is

consuming a bundle that costs no more than his or her income.

Topic,Exchange Di#0Eculty,2

#25 Correct Responses,53 Discrimination Index,31

Correct Answer,True

29.4 From Walras' law it follows that in a market with two goods,if demand equals supply in

one market,then demand must equal supply in the other market.

Topic,Exchange Di#0Eculty,1

#25 Correct Responses,89 Discrimination Index,14

Correct Answer,True

29.5 If the assumptions of the #0Crst theorem of welfare economics apply,and if the economyis

in a competitive equilibrium,then any reallocation that bene#0Cts someone must harm someone else.

CHAPTER 29 Exchange 528

Topic,Exchange Di#0Eculty,1

#25 Correct Responses,95 Discrimination Index,0

Correct Answer,True

29.6 If there are consumption externalities,then a competitive equilibrium is not necessarily

Pareto optimal.

Topic,Exchange Di#0Eculty,1

#25 Correct Responses,88 Discrimination Index,0

Correct Answer,True

29.7 A competitive equilibrium allocation must be a feasible allocation.

Topic,Exchange Di#0Eculty,2

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,True

29.8 The second welfare theorem states that if preferences are convex,then anyPareto optimal

allocation could be achieved as a competitive equilibrium after some reallocation of initial endow-

ments.

Topic,Exchange Di#0Eculty,1

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,True

29.9 In a competitive pure exchange economy,if the total value of excess demand for all types

of food is zero,then the total value of excess demand for all nonfood commodities must be zero.

Topic,Exchange Di#0Eculty,1

#25 Correct Responses,84 Discrimination Index,18

Correct Answer,True

29.10 Every allocation on the contract curveisPareto optimal.

Topic,Exchange Di#0Eculty,2

#25 Correct Responses,75 Discrimination Index,10

Correct Answer,True

29.11 In a pure exchange economy with two goods,if there is a competitive equilibrium with

prices p

1

=12;p

2

=27;then there must also be a competitive equilibrium with prices p

1

=24;

p

2

=54.

TRUE-FALSE 529

Topic,Exchange Di#0Eculty,2

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,True

29.12 If demand varies continuously with price,then even if there are thousands of goods there

will be at least one set of prices such that demand equals supply in every market.

Topic,Exchange Di#0Eculty,3

#25 Correct Responses,43 Discrimination Index,23

Correct Answer,True

29.13 If allocation x is a competitive equilibrium at prices p and if everybody likes his bundle in

allocation y better than his bundle in allocation x; then the total value of allocation y at prices p

exceeds the total value of allocation x at prices p.

Topic,Exchange Di#0Eculty,2

#25 Correct Responses,58 Discrimination Index,16

Correct Answer,True

29.14 If the initial endowment is on the contract curve,then there must always be a competitive

equilibrium in which no trade takes place.

Topic,Exchange Di#0Eculty,2

#25 Correct Responses,57 Discrimination Index,40

Correct Answer,True

29.15 Jack Spratt's utility function is U#28F;L#29=L,His wife's utility function is U#28F;L#29=F.If

Jack's initial endowment is 70 units of F and 35 units of L and if Jack's wife's initial endowment

is 42 units of F and 70 units of L; then in an Edgeworth box for Jack and his wife,an allocation of

F and L will be Pareto optimal only if it is

at a corner of the box.

Topic,Exchange Di#0Eculty,2

#25 Correct Responses,57 Discrimination Index,40

Correct Answer,True

29.16 Jack Spratt's utility function is U#28F;L#29=L,His wife's utility function is U#28F;L#29=F.If

Jack's initial endowment is 50 units of F and 25 units of L and if Jack's wife's initial endowment

is 30 units of F and 50 units of L; then in an Edgeworth box for Jack and his wife,an allocation of

F and L will be Pareto optimal only if it is

at a corner of the box.

CHAPTER 29 Exchange 530

Topic,Exchange Di#0Eculty,3

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,True

29.17 If two people have identical Cobb-Douglas utility functions,then in every Pareto optimal

allocation,they must consume all goods in the same proportions as each other.

Topic,Exchange Di#0Eculty,2

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,True

29.18 If two people have identical homothetic preferences and if their indi#0Berence curves have

diminishing marginal rate of substitution,then in an Edgeworth box,the locus of Pareto optimal

allocations between them is a diagonal straight line.

Topic,Exchange Di#0Eculty,1

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,False

29.19 In a model with two consumers,two goods,and no production,the contract curvemust

be a line going from one consumer's origin to the other consumer's origin.

Topic,Exchange Di#0Eculty,2

#25 Correct Responses,40 Discrimination Index,20

Correct Answer,False

29.20 In a competitive pure exchange economy,if the initial endowment is on the diagonal line

between the two origins,then,according to the #0Crst welfare theorem,there must always be a com-

petitive equilibrium in which no trade takes place.

Multiple Choice Exchange

Topic,Exchange Di#0Eculty,2

#25 Correct Responses,12 Discrimination Index,8

Correct Answer,E

29.1 In a pure exchange economy with two persons and two goods,one person always prefers

more to less of both goods and one person likes one of the goods and hates the other so much that

she would have to be paid to consume it,Both are initially endowed with positive amounts of both

goods,The competitive equilibrium price of the good that one person hates must be:

#28a#29 negative.

#28b#29 smaller than the price of the good both people like.

#28c#29 less than 1.

#28d#29 could be positive or negative,depending on details of tastes and technology.

#28e#29 positive.

Topic,Exchange Di#0Eculty,2

#25 Correct Responses,65 Discrimination Index,35

Correct Answer,A

29.2 If an allocation is Pareto optimal and if indi#0Berence curves between the twogoodshaveno

kinks,then it must be that:

#28a#29 two consumers who consume both goods must have the same MRS between them but consumers may

consume the goods in di#0Berent ratios.

#28b#29 two consumers with the same income who consume both goods must have the same MRS,but if their

incomes di#0Ber their MRS's may di#0Ber.

#28c#29 anytwo consumers who consume both goods must consume them in the same ratio.

#28d#29 for anytwo consumers who consume both goods,neither will prefer the other consumer's bundle to his

own.

#28e#29 all consumers receive the bundle that they prefer to any other bundle the economy could produce for

them.

CHAPTER 29 Exchange 532

Topic,Exchange Di#0Eculty,2

#25 Correct Responses,55 Discrimination Index,35

Correct Answer,E

29.3 According to the First Theorem of Welfare Economics:

#28a#29 Every competitive equilibrium is fair.

#28b#29 If the economy is in a competitive equilibrium,there is no way to makeanyone better o#0B.

#28c#29 A competitive equilibrium always exists.

#28d#29 AtaPareto optimum,all consumers must be equally wealthy.

#28e#29 None of the above.

Topic,Exchange Di#0Eculty,2

#25 Correct Responses,76 Discrimination Index,47

Correct Answer,A

29.4 A small economy has only two consumers,Ben and Penelope,Ben's utility function is

U#28x;y#29=x+84y

1=2

.Penelope's utility function is U#28x;y#29=x+7y.AtaPareto optimal allocation

in which both individuals consume some of eachgood,howmuch y does Ben consume?

#28a#29 36

#28b#29 6.50

#28c#29 12

#28d#29 13

#28e#29 We can't tell without knowing the initial endowments.

Topic,Exchange Di#0Eculty,2

#25 Correct Responses,76 Discrimination Index,47

Correct Answer,A

29.5 A small economy has only two consumers,Leonard and Katerina,Leonard's utility function

is U#28x;y#29=x+144y

1=2

,Katerina's utility function is U#28x;y#29=x+6y.AtaPareto optimal allocation

in which both individuals consume some of eachgood,howmuch y does Leonard consume?

#28a#29 144

#28b#29 9

#28c#29 24

#28d#29 18

#28e#29 We can't tell without knowing the initial endowments.

MULTIPLE CHOICE 533

Topic,Exchange Di#0Eculty,2

#25 Correct Responses,59 Discrimination Index,37

Correct Answer,C

29.6 Eduardo and Francisca participate in an economy that is in competitive equilibrium,Al-

though they are unacquainted with each other,both purchase strawberries and champagne,Ed-

uardo's utility function is U#28s;c#29=2s+cwhere s is the numberofboxes of strawberries he consumes

per month and c is the number of bottles of champagne,Francisca's utility function is U#28s;c#29=sc.

From this information we can conclude that:

#28a#29 Francisca consumes equal amounts of strawberries and champagne.

#28b#29 Eduardo consumes more strawberries than champagne.

#28c#29 Francisca consumes twice as many bottles of champagne as boxes of strawberries.

#28d#29 Francisca consumes twice as manyboxes of strawberries as bottles of champange.

#28e#29 Eduardo consumes more champagne than strawberries.

Topic,Exchange Di#0Eculty,3

#25 Correct Responses,75 Discrimination Index,29

Correct Answer,D

29.7 Tomoko and Matt both consume the same goods in a pure exchange economy.Tomokois

originally endowed with 16 units of good 1 and 14 units of good 2,Matt is originally endowed with

216 units of good 1 and 15 units of good 2,They both have the utility function U#28x

1;x

2

#29=x

1=3

1

x

2=3

2

.

If we let good 1 be the numeraire,so that p

1

=1;then what will be the equilibrium price of good 2?

#28a#29 2

#28b#29 32

#28c#29 1

#28d#29 16

#28e#29 8

CHAPTER 29 Exchange 534

Topic,Exchange Di#0Eculty,3

#25 Correct Responses,75 Discrimination Index,29

Correct Answer,D

29.8 Holly and Steven both consume the same goods in a pure exchange economy,Holly is

originally endowed with 5 units of good 1 and 3 units of good 2,Steven is originally endowed with

5 units of good 1 and 2 units of good 2,They both have the utility function U#28x

1;x

2

#29=x

1=3

1

x

2=3

2

.

If we let good 1 be the numeraire,so that p

1

=1;then what will be the equilibrium price of good 2?

#28a#29 2

#28b#29 8

#28c#29 1

#28d#29 4

#28e#29 2

Topic,Exchange Di#0Eculty,2

#25 Correct Responses,93 Discrimination Index,32

Correct Answer,C

29.9 Pete and Dud liveinatwo-commodityworld,Pete's utility function is U

P

#28x

P

1;x

P

2

#29=x

P

1

x

P

2

.

Dud's utility function is U

D

#28x

D

1;x

D

2

#29=minfx

D

1;x

d

2

g.Pete is initially endowed with 3 units of com-

modity 1 and 4 units of commodity 2,Dud is initially endowed with 7 units of commodity 1 and

6 units of commodity 2,Which of the following is true?

#28a#29 Both consume 5 units of each good in competitive equilibrium.

#28b#29 At competitive equilibrium,Dud consumes 6 units of each,since the 7th unit of his endowmentof

commodity 1 gives him no added utility

#28c#29 At a competitive equilibrium,Dud must consume equal amounts of both goods,so the price of good 1

must equal the price of good 2.

#28d#29 The prices of the two goods cannot be equal in equilibrium since Pete and Dud do not have equal

endowments.

#28e#29 All of the above statements are false.

MULTIPLE CHOICE 535

Topic,Exchange Di#0Eculty,1

#25 Correct Responses,95 Discrimination Index,17

Correct Answer,C

29.10 A situation is Pareto e#0Ecient if:

#28a#29 there is no way to makeeveryone worse o#0B without making someone better o#0B.

#28b#29 aggregate pro#0Cts are maximized.

#28c#29 there is no way to make someone better o#0B without making someone else worse o#0B.

#28d#29 there is some way to makeeveryone better o#0B.

#28e#29 there is no way to makeanyone better o#0B.

Topic,Elasticity Di#0Eculty,2

#25 Correct Responses,46 Discrimination Index,26

Correct Answer,E

29.11 Dan and Marilyn consume two goods,x and y,They have identical Cobb-Douglas utility

functions,Initially Dan owns 10 units of x and 10 units of y,Initially Marilyn owns 40 units of

x and 20 units of y,They make exchanges to reachaPareto optimal allocation which is better

for both than the no-trade allocation,Which of the following is NOT necessarily true about the

allocation they trade to?

#28a#29 Marilyn consumes 5 units of x for every 3 units of y that she consumes.

#28b#29 The locus of Pareto optimal allocations is a diagonal straight line in the Edgeworth box.

#28c#29 Dan's consumption of x is greater than his consumption of y.

#28d#29 Dan consumes more than 10 units of x.

#28e#29 Marilyn consumes at least 40 units of x.

Topic,Exchange Di#0Eculty,3

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,D

29.12 Xavier and Yvette are the only two persons on a desert island,There are only two

goods,nuts and berries,Xavier's utility function is U#28N

x;B

x

#29=N

x

B

x

.Yvette's utility function is

U#28N

y;B

y

#29=6N

y

+B

y

.Xavier is endowed with 4 units of berries and 10 units of nuts,Yvette is

endowed with 6 units of berries and 8 units of nuts,In a competitive equilibrium for this economy,

how many units of berries does Xavier consume?

#28a#29 35

#28b#29 64

#28c#29 30

#28d#29 32

#28e#29 None of the above.

CHAPTER 29 Exchange 536

Topic,Exchange Di#0Eculty,3

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,D

29.13 Xavier and Yvette are the only two persons on a desert island,There are only two

goods,nuts and berries,Xavier's utility function is U#28N

x;B

x

#29=N

x

B

x

.Yvette's utility function is

U#28N

y;B

y

#29=3N

y

+B

y

.Xavier is endowed with 3 units of berries and 10 units of nuts,Yvette is

endowed with 6 units of berries and 8 units of nuts,In a competitive equilibrium for this economy,

how many units of berries does Xavier consume?

#28a#29 19.50

#28b#29 33

#28c#29 14.50

#28d#29 16.50

#28e#29 None of the above.

Topic,Exchange Di#0Eculty,2

#25 Correct Responses,57 Discrimination Index,9

Correct Answer,B

29.14 Eva and Ollie live in an isolated valley and trade with no one but each other,They con-

sume only grapefruits and lemons,Eva has an initial endowment of 10 grapefruits and 15 lemons.

Ollie has an initial endowment of 14 grapefruits and 26 lemons,For Eva,the two goods are per-

fect substitutes,one-for-one,For Ollie,they are perfect complements,one-for-one,At all Pareto

e#0Ecient allocations:

#28a#29 Evamust consume at least 25 lemons.

#28b#29 Evamust consume at least 17 lemons.

#28c#29 Ollie must consume 17.50 grapefruits.

#28d#29 the slopes of the two traders' indi#0Berence curves are the same.

#28e#29 Ollie must consume all of the grapefruits.

MULTIPLE CHOICE 537

Topic,Exchange Di#0Eculty,2

#25 Correct Responses,57 Discrimination Index,9

Correct Answer,B

29.15 Isabella and Horace live in an isolated valley and trade with no one but each other,They

consume only tomatoes and grapes,Isabella has an initial endowment of 20 tomatoes and 2 grapes.

Horace has an initial endowment of 4 tomatoes and 38 grapes,For Isabella,the two goods are per-

fect substitutes,one-for-one,For Horace,they are perfect complements,one-for-one,At all Pareto

e#0Ecient allocations:

#28a#29 Isabella must consume at least 22 grapes.

#28b#29 Isabella must consume at least 16 grapes.

#28c#29 Horace must consume 19 tomatoes.

#28d#29 the slopes of the two traders' indi#0Berence curves are the same.

#28e#29 Horace must consume all of the tomatoes.

Topic,Exchange Di#0Eculty,3

#25 Correct Responses,11 Discrimination Index,35

Correct Answer,C

29.16 Amaranda and Bartolo consume only two goods,X and Y,They can trade only with each

other and there is no production,The total endowment of Good X equals the total endowment

of Good Y,Amaranda's utility function is U#28x

A;y

A

#29=minfx

A;y

A

gand Bartolo's utility function

is U#28x

B;y

B

#29=maxfx

A;y

B

g,In an Edgeworth box for Amaranda and Bartolo,the set of Pareto

optimal allocations is:

#28a#29 the main diagonal.

#28b#29 both diagonals.

#28c#29 the whole Edgeworth box.

#28d#29 the edges of the box and the main diagonal.

#28e#29 the edges of the box.

CHAPTER 29 Exchange 538

Topic,Exchange Di#0Eculty,3

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,C

29.17 Adelino and Benito consume only two goods X and Y,They trade only with each other

and there is no production,Adelino's utility function is given by U#28x

A;y

A

#29=2x

A

+5y

A

and Benito's

utility function is given by U#28x

B;y

B

#29 = 2#286x

B

+15y

B

#29

1=2

,In the Edgeworth box constructed for

Adelino and Benito,the set of Pareto optimal allocations is:

#28a#29 the main diagonal.

#28b#29 both diagonals.

#28c#29 the entire contents of the Edgeworth box.

#28d#29 the right and left edges of the box.

#28e#29 the upper and lower edges of the box.

Topic,Exchange Di#0Eculty,2

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,D

29.18 Tamara and Julio consume only bread and wine,They trade only with each other and

there is no production,They both have strictly convex preferences,Tamara's initial endowmentof

bread and wine is the same as Julio's.

#28a#29 At the initial endowment their marginal rates of substitution must be the same.

#28b#29 In a competitive equilibrium,the ratio of the two prices must be 1.

#28c#29 In a competitive equilibrium,they must consume identical consumption bundles.

#28d#29 If they have identical utility functions,then the initial allocation is Pareto optimal.

#28e#29 None of the above.

MULTIPLE CHOICE 539

Topic,Exchange Di#0Eculty,2

#25 Correct Responses,53 Discrimination Index,49

Correct Answer,E

29.19 Arturo and Belen consume only two goods,X and Y,They have strictly convex preferences

and no kinks in their indi#0Berence curves,At the initial allocation,the ratio of Arturo's marginal

utilityofXto his marginal utilityofYis A and the ratio of Belen's marginal utilityofXto his

marginal utilityofYis B; where A#3CB,The competitive equilibrium price ratio is p

x

=p

y

= C.

Then:

#28a#29 C#3EB.

#28b#29 C#3CA.

#28c#29 C = A.

#28d#29 C = B.

#28e#29 A#3CC#3CB.

Topic,Exchange Di#0Eculty,2

#25 Correct Responses,30 Discrimination Index,20

Correct Answer,B

29.20 In a two-person,two-good,exchange economy,both consumers have quasilinear utility

functions,linear in Good 2,If quantities of Good 1 are measured horizontally and quantities of

Good 2 are measured vertically in the Edgeworth box,the set of Pareto optimal allocations includes

#28a#29 a horizontal line through the interior of the box.

#28b#29 avertical line.

#28c#29 a straight line from the lower left to the upper right corner of the box.

#28d#29 a curved line from the lower left to the upper right corner of the box.

#28e#29 all four edges of the box.

CHAPTER 29 Exchange 540

Topic,Exchange Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,B

29.21 A small economy has only two consumers,Roger and Heidi,Roger's utility function is

U#28x;y#29=x+50y

1=2

,Heidi's utility function is U#28x;y#29=x+5y,Roger is endowed with 625 units of

x and 60 units of y,They make trades to reachaPareto optimal allocation of resources in which

both persons consume positive amounts,Howmuch y does Roger consume?

#28a#29 50

#28b#29 25

#28c#29 28

#28d#29 23

#28e#29 There is not enough information to determine howmuch y he will consume.

Topic,Exchange Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,B

29.22 A small economy has only two consumers,George and Penelope,George's utility function

is U#28x;y#29=x+16y

1=2

.Penelope's utility function is U#28x;y#29=x+4y,George is endowed with 64

units of x and 60 units of y,They make trades to reachaPareto optimal allocation of resources in

which both persons consume positive amounts,Howmuch y does George consume?

#28a#29 8

#28b#29 4

#28c#29 7

#28d#29 2

#28e#29 There is not enough information to determine howmuch y he will consume.

MULTIPLE CHOICE 541

Topic,Exchange Di#0Eculty,2

#25 Correct Responses,20 Discrimination Index,37

Correct Answer,A

29.23 Abdul's utilityisU#28X

A;Y

A

#29=minfX

A;Y

A

gwhere X

A

and Y

A

are his consumptions of goods

X and Y respectively,Babette's utility function is U#28X

B;Y

B

#29=X

B

Y

B

where X

B

and Y

B

are her

consumptions of goods X and Y,Abdul's initial endowment is no units of Y and 10 units of X.

Babette's initial endowment is no units of X and 12 units of Y.IfXis the numeraire good and p

is the price of good Y; then supply will equal demand in the market for Y if the following equation

is satis#0Ced.

#28a#29 10=#28p+1#29+6=12

#28b#29 12=10 = p

#28c#29 12=#28p+1#29+5=12

#28d#29 Minf10;12g+10=#282p#29=12

#28e#29 Minf10;12g+12=2p=12

Topic,Exchange Di#0Eculty,2

#25 Correct Responses,20 Discrimination Index,37

Correct Answer,A

29.24 Abdul's utilityisU#28X

A;Y

A

#29=minfX

A;Y

A

g where X

A

and Y

A

are his consumptions of

goods X and Y respectively,Babette's utility function is U#28X

B;Y

B

#29=X

B

Y

B

where X

B

and Y

B

are

her consumptions of goods X and Y,Abdul's initial endowment is no units of Y and 4 units of X.

Babette's initial endowment is no units of X and 14 units of Y.IfXis the numeraire good and p

is the price of good Y; then supply will equal demand in the market for Y if the following equation

is satis#0Ced.

#28a#29 4=#28p+1#29+7=14

#28b#29 14=4=p

#28c#29 14=#28p+1#29+2=14

#28d#29 Minf4;14g+4=#282p#29=14

#28e#29 Minf4;14g+14=2p=14

CHAPTER 29 Exchange 542

Topic,Exchange Di#0Eculty,2

#25 Correct Responses,63 Discrimination Index,38

Correct Answer,B

29.25 Professor Nightsoil's utility function is U

N

#28B

N;P

M

#29=B

N

+4P

1=2

N

and Dean Interface's

utility function is U

I

#28B

I;P

I

#29=B

I

+2P

1=2

I

where B

N

and B

I

are the number of bromides and P

N

and

P

I

are the number of platitudes consumed by Nightsoil and Interface respectively,If Nightsoil's

initial endowment is 4 bromides and 15 platitudes and if Interface's initial endowment is 5 bromides

and 20 platitudes,then at anyPareto e#0Ecient allocation in which both persons consume positive

amounts of both goods,it must be that:

#28a#29 Nightsoil consumes the same ratio of bromides to platitudes as Interface.

#28b#29 Interface consumes 7 platitudes.

#28c#29 Interface consumes 4.50 bromides.

#28d#29 Interface consumes 3 bromides.

#28e#29 Interface consumes 4 bromides.

Topic,Exchange Di#0Eculty,2

#25 Correct Responses,63 Discrimination Index,38

Correct Answer,B

29.26 Professor Nightsoil's utility function is U

N

#28B

N;P

M

#29=B

N

+4P

1=2

N

and Dean Interface's

utility function is U

I

#28B

I;P

I

#29=B

I

+2P

1=2

I

where B

N

and B

I

are the number of bromides and P

N

and

P

I

are the number of platitudes consumed by Nightsoil and Interface respectively,If Nightsoil's

initial endowment is 2 bromides and 10 platitudes and if Interface's initial endowment is 3 bromides

and 25 platitudes,then at anyPareto e#0Ecient allocation in which both persons consume positive

amounts of both goods,it must be that:

#28a#29 Nightsoil consumes the same ratio of bromides to platitudes as Interface.

#28b#29 Interface consumes 7 platitudes.

#28c#29 Interface consumes 2.50 bromides.

#28d#29 Interface consumes 2 bromides.

#28e#29 Interface consumes 5 bromides.

MULTIPLE CHOICE 543

Topic,Exchange Di#0Eculty,2

#25 Correct Responses,61 Discrimination Index,58

Correct Answer,B

29.27 An economy has two people Charlie and Doris,There are two goods,apples and bananas.

Charlie has an initial endowment of 5 apples and 4 bananas,Doris has an initial endowmentof

10 apples and 2 bananas,Charlie's utility function is U#28A

C;B

C

#29=A

C

B

C

where A

C

is his apple

consumption and B

C

is his banana consumption,Doris's utility function is U#28A

D;B

D

#29=A

D

B

D

where A

D

and B

D

are her apple and banana consumptions,Atevery Pareto optimal allocation:

#28a#29 Charlie consumes the same number of apples as Doris.

#28b#29 Charlie consumes 15 apples for every 6 bananas that he consumes.

#28c#29 Doris consumes equal numbers of apples and bananas.

#28d#29 Charlie consumes more bananas per apple than Doris does.

#28e#29 Doris consumes apples and bananas in the ratio of 10 apples for every 2 bananas that she consumes.

Topic,Exchange Di#0Eculty,2

#25 Correct Responses,61 Discrimination Index,58

Correct Answer,B

29.28 An economy has two people Charlie and Doris,There are two goods,apples and bananas.

Charlie has an initial endowment of 3 apples and 12 bananas,Doris has an initial endowmentof

6 apples and 6 bananas,Charlie's utility function is U#28A

C;B

C

#29=A

C

B

C

where A

C

is his apple

consumption and B

C

is his banana consumption,Doris's utility function is U#28A

D;B

D

#29=A

D

B

D

where A

D

and B

D

are her apple and banana consumptions,Atevery Pareto optimal allocation:

#28a#29 Charlie consumes the same number of apples as Doris.

#28b#29 Charlie consumes 9 apples for every 18 bananas that he consumes.

#28c#29 Doris consumes equal numbers of apples and bananas.

#28d#29 Charlie consumes more bananas per apple than Doris does.

#28e#29 Doris consumes apples and bananas in the ratio of 6 apples for every 6 bananas that she consumes.

CHAPTER 29 Exchange 544

Topic,Exchange Di#0Eculty,2

#25 Correct Responses,55 Discrimination Index,41

Correct Answer,C

29.29 Ken's utility function is U#28Q

K;W

K

#29=Q

K

W

K

and Barbie's utility function is U#28Q

B;W

B

#29=

Q

B

W

B

,If Ken's initial endowmentwere 3 units of quiche and 9 units of wine and Barbie's endow-

mentwere 6 units of quiche and 9 units of wine,then at anyPareto optimal allocation where both

persons consume some of each good:

#28a#29 Ken would consume 3 units of quiche for every 9 units of wine.

#28b#29 Barbie would consume twice as much quiche as Ken.

#28c#29 Ken would consume 9 units of quiche for every 18 units of wine that he consumes.

#28d#29 Barbie would consume 6 units of quiche for every 9 units of wine that she consumes.

#28e#29 None of the above.

Topic,Exchange Di#0Eculty,2

#25 Correct Responses,55 Discrimination Index,41

Correct Answer,C

29.30 Ken's utility function is U#28Q

K;W

K

#29=Q

K

W

K

and Barbie's utility function is U#28Q

B;W

B

#29=

Q

B

W

B

,If Ken's initial endowmentwere 3 units of quiche and 12 units of wine and Barbie's en-

dowmentwere 6 units of quiche and 12 units of wine,then at anyPareto optimal allocation where

both persons consume some of each good:

#28a#29 Ken would consume 3 units of quiche for every 12 units of wine.

#28b#29 Barbie would consume twice as much quiche as Ken.

#28c#29 Ken would consume 9 units of quiche for every 24 units of wine that he consumes.

#28d#29 Barbie would consume 6 units of quiche for every 12 units of wine that she consumes.

#28e#29 None of the above.

MULTIPLE CHOICE 545

Topic,Exchange Di#0Eculty,3

#25 Correct Responses,20 Discrimination Index,12

Correct Answer,D

29.31 Morris has the utility function U#28b;w#29=3b+12wand Philip has the utility function

U#28b;w#29=bw; where b is the number of books consumed per month and w is bottles of wine con-

sumed per month,If we draw an Edgeworth box with books on the horizontal axis and wine on the

vertical axis and if we measure Morris' consumptions from the lower left corner of the box,then

the contract curve contains:

#28a#29 a straight line running from the upper right corner of the box to the lower left.

#28b#29 a curve that gets steeper as you move from left to right.

#28c#29 a straight line with slope 1=4 passing through the lower left corner of the box.

#28d#29 a straight line with slope 1=4 passing through the upper right corner of the box.

#28e#29 a curve that gets #0Datter as you move from left to right.

Topic,Exchange Di#0Eculty,3

#25 Correct Responses,20 Discrimination Index,12

Correct Answer,D

29.32 Morris has the utility function U#28b;w#29=4b+12wand Philip has the utility function

U#28b;w#29=bw; where b is the number of books consumed per month and w is bottles of wine con-

sumed per month,If we draw an Edgeworth box with books on the horizontal axis and wine on the

vertical axis and if we measure Morris' consumptions from the lower left corner of the box,then

the contract curve contains:

#28a#29 a straight line running from the upper right corner of the box to the lower left.

#28b#29 a curve that gets steeper as you move from left to right.

#28c#29 a straight line with slope 1=3 passing through the lower left corner of the box.

#28d#29 a straight line with slope 1=3 passing through the upper right corner of the box.

#28e#29 a curve that gets #0Datter as you move from left to right.

CHAPTER 29 Exchange 546

Topic,Exchange Di#0Eculty,2

#25 Correct Responses,62 Discrimination Index,39

Correct Answer,A

29.33 Astrid's utility function is U#28H

A;C

A

#29=H

A

C

A

,Birger's utility function is minfH

B;C

B

g.If

Astrid's initial endowmentisnocheese and 8 units of herring and if Birger's initial endowments

are 8 units of cheese and no herring,then where p is a competitive equilibrium price of herring and

cheese is the numeraire,it must be that demand equals supply in the herring market,This implies

that:

#28a#29 8=#28p+1#29+4=8

#28b#29 8=8=p

#28c#29 8=8=p

#28d#29 8=p+8=2p=8

#28e#29 Minf8;8g=p

Topic,Exchange Di#0Eculty,2

#25 Correct Responses,62 Discrimination Index,39

Correct Answer,A

29.34 Astrid's utility function is U#28H

A;C

A

#29=H

A

C

A

,Birger's utility function is minfH

B;C

B

g.If

Astrid's initial endowmentisnocheese and 12 units of herring and if Birger's initial endowments

are 8 units of cheese and no herring,then where p is a competitive equilibrium price of herring and

cheese is the numeraire,it must be that demand equals supply in the herring market,This implies

that:

#28a#29 8=#28p+1#29+6=12

#28b#29 8=12 = p

#28c#29 12=8=p

#28d#29 8=p+12=2p=12

#28e#29 Minf12;8g= p

MULTIPLE CHOICE 547

Topic,Exchange Di#0Eculty,2

#25 Correct Responses,29 Discrimination Index,27

Correct Answer,B

29.35 Mutt's utility function is U#28m;j#29=maxf4m;jg and Je#0B's utility function is U#28m;j#29=2m+j.

Mutt is initially endowed with 3 units of milk and 2 units of juice and Je#0B is initially endowed with

5 units of milk and 6 units of juice.If we draw an Edgeworth box with milk on the horizontal axis

and juice on the vertical axis and if we measure goods for Mutt by the distance from the lower left

corner of the box,then the set of Pareto optimal allocations includes the:

#28a#29 left edge of the Edgeworth box,but no other edges.

#28b#29 bottom edge of the Edgeworth box,but no other edges.

#28c#29 left edge and bottom edge of the Edgeworth box.

#28d#29 right edge of the Edgeworth box,but no other edges.

#28e#29 right edge and top edge of the Edgeworth box.

Topic,Exchange Di#0Eculty,2

#25 Correct Responses,29 Discrimination Index,27

Correct Answer,B

29.36 Mutt's utility function is U#28m;j#29=maxf4m;jg and Je#0B's utility function is U#28m;j#29=3m+j.

Mutt is initially endowed with 3 units of milk and 2 units of juice and Je#0B is initially endowed with

5 units of milk and 6 units of juice.If we draw an Edgeworth box with milk on the horizontal axis

and juice on the vertical axis and if we measure goods for Mutt by the distance from the lower left

corner of the box,then the set of Pareto optimal allocations includes the:

#28a#29 left edge of the Edgeworth box,but no other edges.

#28b#29 bottom edge of the Edgeworth box,but no other edges.

#28c#29 left edge and bottom edge of the Edgeworth box.

#28d#29 right edge of the Edgeworth box,but no other edges.

#28e#29 right edge and top edge of the Edgeworth box.

Essay Exchange

Topic,Exchange Di#0Eculty,2

#25 Correct Responses,0 Discrimination Index,0

29.1 In a pure exchange economy,Ollie's utility function is U#28x;y#29=3x+yand Fawn's utility

function is U#28x;y#29=xy,Ollie's initial allocation is 1 x and no y

0

s.Fawn's initial allocation is no x

0

s

and 2 y

0

s,Draw an Edgeworth box for Fawn and Ollie,Put x

0

s on the horizontal axis and y

0

s on

the vertical axis,Measure goods for Ollie from the lower left and goods for Fawn from the upper

right,Mark the initial allocation with the letter W,The locus of Pareto optimal points consists of

twoline segments,Describe these line segments in words or formulas and show them on your graph.

Answer,The Edgeworth box is 1 unit wide and 2 units high,Along the contract curve,Fawn

consumes 3 times as much y as x,The contract curve consists of a line running from the upper

right corner of the box to the point on the bottom of the box where Fawn consumes all of the y

and 2=3 units of x and a line from this point to the lower left of the box.

Topic,Exchange Di#0Eculty,3

#25 Correct Responses,0 Discrimination Index,0

29.2 An economy has 2000 people,1000 of them have utility functions U#28x;y#29=x+yand 1000 of

them have utility functions U#28x;y#29=minf2x;yg.Everybody has an initial allocation of 1 unit of x

and 1 unit of y,Find the competitive equilibrium prices and consumptions for eachtype of person.

Answer,Prices are 1 and 1,The #0Crst type of person will consume 2=3 units of y and 4=3 units of

x and the second type of person will consume 4=3 units of y and 2=3 units of x.

Topic,Exchange Di#0Eculty,2

#25 Correct Responses,0 Discrimination Index,0

29.3 Will likes apples and hates bananas,Wanda likes both apples and bananas,Both of them

have convex preferences,Will's initial endowment is 10 apples and 5 bananas,Wanda's initial

endowment is 5 bananas and 10 apples,a#29 Draw an Edgeworth box with apples on the horizontal

axis,Label the initial endowment point,W,b#29 Showtwo indi#0Berence curves for each person,c#29

Show where on your diagram the Pareto optimal allocations are.

Answer,The Pareto optimal allocations include all of the allocations where Will has no bananas.

If stu#0B for Will is measured from the lower left corner,then these allocations are all along the

bottom of the box.

Chapter 30

True-False Production

Topic,Production Di#0Eculty,2

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,True

30.1 If there are constant returns to scale in an industry,then in competitive equilibrium,pro#0Cts

in that industry must necessarily be zero.

Topic,Production Di#0Eculty,1

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,False

30.2 When there is production,a competitive equilibrium is not Pareto optimal unless there are

increasing returns to scale.

Topic,Production Di#0Eculty,1

#25 Correct Responses,82 Discrimination Index,14

Correct Answer,True

30.3 The marginal rate of transformation between two goods indicates the rate at whichane#0E-

cient economywould havetogive up one good to obtain more of the other.

Topic,Production Di#0Eculty,2

#25 Correct Responses,68 Discrimination Index,25

Correct Answer,False

30.4 There are two people and two goods,person A has comparative advantage in the production

of good 1 if and only if it takes person A less time to produce good 1 than it takes person B.

Multiple Choice Production

Topic,Production Di#0Eculty,1

#25 Correct Responses,77 Discrimination Index,22

Correct Answer,A

30.1 A small company produces two goods,swords and plowshares,The company has 100 Type

Alpha employees and 100 Type Beta employees,If an Alpha devotes all his time to producing

swords,he can make4swords per week,If he devotes all his time to producing plowshares,he can

make20plowshares per week,A Beta can produce either 1 plowshare per week or 1 sword per

week,The companywants to produce 425 swords and as many plowshares as it can,How many

type Betas should it employ at making swords?

#28a#29 100

#28b#29 25

#28c#29 80

#28d#29 0

#28e#29 None of the above.

Topic,Production Di#0Eculty,1

#25 Correct Responses,77 Discrimination Index,22

Correct Answer,A

30.2 A small company produces two goods,swords and plowshares,The company has 100 Type

Alpha employees and 100 Type Beta employees,If an Alpha devotes all his time to producing

swords,he can make3swords per week,If he devotes all his time to producing plowshares,he

can make 6 plowshares per week,A Beta can produce either 1 plowshare per week or 1 sword per

week,The companywants to produce 314 swords and as many plowshares as it can,How many

type Betas should it employ at making swords?

#28a#29 100

#28b#29 14

#28c#29 85

#28d#29 0

#28e#29 None of the above.

MULTIPLE CHOICE 551

Topic,Production Di#0Eculty,2

#25 Correct Responses,64 Discrimination Index,32

Correct Answer,B

30.3 Ernie and Burt both make pizzas for a living,Making a pizza consists of two tasks,making

the crust and applying toppings,Ernie can make crusts at the rate of 30 crusts per hour,He can

apply toppings at the rate of 15 toppings per hour,Burt can make crusts at the rate of 15 crusts

per hour,He can apply toppings at the rate of 30 toppings per hour,After years of operating

separate,one-man shops,they realize they can produce more e#0Eciently by combining operations

and dividing the tasks between them,How many more pizzas per hour can they make if they work

together and allocate tasks e#0Eciently than they made when they worked separately?

#28a#29 5

#28b#29 10

#28c#29 14

#28d#29 25

#28e#29 8

Topic,Production Di#0Eculty,2

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,A

30.4 Mandy is a master woodcarver and Jerry is her apprentice,They will eachwork the same

number of hours making toy cars,Each car requires 4 wheels and 1 body,Mandy makes wheels

at the rate of 25 per hour and bodies at the rate of 10 per hour,Jerry makes wheels at the rate

of 10 per hour and bodies at the rate of 10 per hour,If they wish to maximize output,how many

wheels should Jerry make per hour?

#28a#29 3

#28b#29 2

#28c#29 10

#28d#29 6

#28e#29 There is not enough information to determine the answer.

CHAPTER 30 Production 552

Topic,Production Di#0Eculty,1

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,C

30.5 Amy Canvas is an artist who produces sketches and paintings,She can produce 12 sketches

aweek if she spends all of her workdaysketching,She can produce 3 paintings per week if she

spends all of her workdays painting,The rate at which she produces either sketches or paintings

is independentofhow many she makes,She can divide her time in anyway she wishes between

sketching and painting,If you draw her production possibility frontier with sketches on the hori-

zontal axis and paintings on the vertical axis,the production possibility frontier will be

#28a#29 the outer two sides of a rectangle.

#28b#29 adownward sloping curve that gets steeper as you move to the left.

#28c#29 adownward sloping straight line.

#28d#29 an upward sloping straight line.

#28e#29 an upward sloping curve that gets steeper as you move to the left.

Topic,Production Di#0Eculty,2

#25 Correct Responses,49 Discrimination Index,25

Correct Answer,D

30.6 Last year a pestilential fungus ravaged the cocoa #0Celds,The price of chocolate has risen

abruptly to $1 per ounce,The government is considering emergency measures to aid su#0Bering

chocolate addicts,One plan being considered is the Chocolate Relief Plan #28CRP#29,This plan would

set a price ceiling of $.80 per ounce on chocolate,This would cause a shortage,so the CRP will

limit consumption to no more than 10 ounces of chocolate per person per week,At $.80 per ounce,

enough chocolate would be produced for everyone to have 10 ounces,Jill buys less than 10 ounces

per week at $1 per ounce,but would buy more than 10 ounces if the price dropped to $.80.

#28a#29 Jill is de#0Cnitely better o#0B without the CRP.

#28b#29 Jill is better o#0B without the CRP if $1 is the competitive equilibrium price without the CRP.

#28c#29 Jill is better o#0B with CRP only if the industry is monopolized and the price exceeds marginal cost in the

absence of the CRP.

#28d#29 Jill is de#0Cnitely better o#0B with the CRP.

#28e#29 None of the above.

MULTIPLE CHOICE 553

Topic,Production Di#0Eculty,2

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,C

30.7 Robinson Crusoe's preferences over coconut consumption,C; and leisure,R; are represented

by the utility function,U#28C;R#29=CR,There are 48 hours available for Robinson to allocate be-

tween labor and leisure,If he works L hours,he will produce the square root of L coconuts,He

will choose to work:

#28a#29 8 hours.

#28b#29 12 hours.

#28c#29 16 hours.

#28d#29 20 hours.

#28e#29 24 hours.

Topic,Production Di#0Eculty,2

#25 Correct Responses,76 Discrimination Index,23

Correct Answer,C

30.8 Robinson Crusoe spends 4 hours a day catching #0Csh and picking coconuts,He can always

catch 2 #0Csh per hour and he can always gather 3 coconuts per hour,His utility function is CF

where C is the number of coconuts he eats per day and F is the number of #0Csh he eats per day.

How many #0Csh will he choose to eat per day?

#28a#29 8

#28b#29 6

#28c#29 4

#28d#29 2

#28e#29 1

CHAPTER 30 Production 554

Topic,Production Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,A

30.9 Tip can write 5 pages of term paper or solve20workbook problems in an hour,while Spot

can write 4 pages of term paper or solve12workbook problems in an hour,If they each decide

to work a total of 8 hours and to share their output,then if they produce as many pages of term

paper as possible given that they produce 35 workbook problems:

#28a#29 Spot will spend all of his time writing term papers and Tip will spend some time at each task.

#28b#29 Tip will spend all of his time writing term papers and Spot will spend some time at each task.

#28c#29 Both students will spend some time at each task.

#28d#29 Spot will write term papers only and Tip will do workbook problems only.

#28e#29 Tip will write term papers only and Spot will do workbook problems only.

Topic,Production Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,A

30.10 Tip can write 2 pages of term paper or solve2workbook problems in an hour,while Spot

can write 5 pages of term paper or solve20workbook problems in an hour,If they each decide

to work a total of 6 hours and to share their output,then if they produce as many pages of term

paper as possible given that they produce 10 workbook problems:

#28a#29 Spot will spend all of his time writing term papers and Tip will spend some time at each task.

#28b#29 Tip will spend all of his time writing term papers and Spot will spend some time at each task.

#28c#29 Both students will spend some time at each task.

#28d#29 Spot will write term papers only and Tip will do workbook problems only.

#28e#29 Tip will write term papers only and Spot will do workbook problems only.

Topic,Production Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,A

30.11 Al and Bill are the only workers in a small factory which makes geegaws and doodads,Al

can make 5 geegaws per hour or 20 doodads per hour,Bill can make 4 geegaws per hour or 24

doodads per hour,Assuming that neither of them #0Cnds one task more odious than the other:

#28a#29 Al has comparative advantage in producing geegaws and Bill has comparative advantage in producing

doodads.

#28b#29 Bill has comparative advantage in producing geegaws and Al has comparative advantage in producing

doodads.

#28c#29 Al has comparative advantage in producing both geegaws and doodads.

#28d#29 Bill has comparative advantage in producing both geegaws and doodads.

#28e#29 Both persons have comparative advantage in producing doodads.

MULTIPLE CHOICE 555

Topic,Production Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,A

30.12 Al and Bill are the only workers in a small factory which makes geegaws and doodads.

Al can make 3 geegaws per hour or 15 doodads per hour,Bill can make 2 geegaws per hour or 6

doodads per hour,Assuming that neither of them #0Cnds one task more odious than the other:

#28a#29 Al has comparative advantage in producing geegaws and Bill has comparative advantage in producing

doodads.

#28b#29 Bill has comparative advantage in producing geegaws and Al has comparative advantage in producing

doodads.

#28c#29 Al has comparative advantage in producing both geegaws and doodads.

#28d#29 Bill has comparative advantage in producing both geegaws and doodads.

#28e#29 Both persons have comparative advantage in producing doodads.

Topic,Production Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,A

30.13

Every consumer has a red-money income and a blue-money income and each commodity has a red

price and a blue price,You can buy a good bypaying for it either with blue money at the blue

price,or with red money at the red price,Harold has 30 units of red money to spend and 48 units

of blue money to spend,The red price of ambrosia is 3 and the blue price of ambrosia is 8,The

red price of bubblegum is 1 and the blue price of bubblegum is 2,If ambrosia is on the horizontal

axis,and bubblegum on the vertical,axis,then Harold's budget set is bounded:

#28a#29 bytwo line segments,one running from #280;54#29 to #2810;24#29 and another running from #2810;24#29 to #2816;0#29.

#28b#29 bytwo line segments one running from #280;54#29 to #286;30#29 and the other running from #286;30#29 to #2816;0#29.

#28c#29 bytwo line segments,one running from #280;30#29to #2810;24#29 and the other running from #2810;24#29 to #2840;0#29.

#28d#29 avertical line segment and a horizontal line segement,intersecting at #2810;24#29.

#28e#29 avertical line segment and a horizontal line segment,intersecting at #286;30#29.

CHAPTER 30 Production 556

Topic,Production Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,A

30.14

Every consumer has a red-money income and a blue-money income and each commodity has a red

price and a blue price,You can buy a good bypaying for it either with blue money at the blue

price,or with red money at the red price,Harold has 20 units of red money to spend and 48 units

of blue money to spend,The red price of ambrosia is 2 and the blue price of ambrosia is 6,The

red price of bubblegum is 1 and the blue price of bubblegum is 2,If ambrosia is on the horizontal

axis,and bubblegum on the vertical,axis,then Harold's budget set is bounded:

#28a#29 bytwo line segments,one running from #280;44#29 to #2810;24#29 and another running from #2810;24#29 to #2818;0#29.

#28b#29 bytwo line segments one running from #280;44#29 to #288;20#29 and the other running from #288;20#29 to #2818;0#29.

#28c#29 bytwo line segments,one running from #280;32#29to #2810;24#29 and the other running from #2810;24#29 to #2830;0#29.

#28d#29 avertical line segment and a horizontal line segement,intersecting at #2810;24#29.

#28e#29 avertical line segment and a horizontal line segment,intersecting at #288;20#29.

Topic,Production Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,A

30.15 Robinson Crusoe has exactly 10 hours per day to spend gathering coconuts or catching

#0Csh,He can catch 5 #0Csh per hour or he can pick 15 coconuts per hour,His utility function is

U#28F;C#29=FC where F is his consumption of #0Csh and C is his consumption of coconuts,If he allo-

cates his time in the best possible waybetween catching #0Csh and picking coconuts,his consumption

will be the same as it would be if he could buy #0Csh and coconuts in a competitive market where

the price of coconuts is 1.

#28a#29 His income is 150,and the price of #0Csh is 3.

#28b#29 His income is 50,and the price of #0Csh is 5.

#28c#29 His income is 200 and the price of #0Csh is 5.

#28d#29 His income is 150 and the price of #0Csh is 0.20.

#28e#29 His income is 100 and the price of #0Csh is 0.20.

MULTIPLE CHOICE 557

Topic,Production Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,A

30.16 Robinson Crusoe has exactly 10 hours per day to spend gathering coconuts or catching #0Csh.

He can catch 3 #0Csh per hour or he can pick9coconuts per hour,His utility function is U#28F;C#29=FC

where F is his consumption of #0Csh and C is his consumption of coconuts,If he allocates his time

in the best possible waybetween catching #0Csh and picking coconuts,his consumption will be the

same as it would be if he could buy #0Csh and coconuts in a competitive market where the price of

coconuts is 1.

#28a#29 His income is 90,and the price of #0Csh is 3.

#28b#29 His income is 30,and the price of #0Csh is 3.

#28c#29 His income is 120 and the price of #0Csh is 3.

#28d#29 His income is 90 and the price of #0Csh is 0.33.

#28e#29 His income is 60 and the price of #0Csh is 0.33.

Topic,Production Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,B

30.17 On a certain island there are only two goods,wheat and milk,The only scarce resource is

land,There are 1000 acres of land,An acre of land will produce either 20 units of milk or 30 units

of wheat,Some citizens have lots of land,some have just a little bit,The citizens of the island all

have utility functions of the form U#28M;W#29=MW.Atevery Pareto optimal allocation:

#28a#29 the number of units of milk produced equals the number of units of wheat produced.

#28b#29 total milk production is 10,000.

#28c#29 all citizens consume the same commodity bundle.

#28d#29 every consumer's marginal rate of substitution between milk and wheat is,1.

#28e#29 None of the above is true at EVERYPareto optimal allocation.

CHAPTER 30 Production 558

Topic,Production Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,B

30.18 On a certain island there are only two goods,wheat and milk,The only scarce resource is

land,There are 1000 acres of land,An acre of land will produce either 11 units of milk or 31 units

of wheat,Some citizens have lots of land,some have just a little bit,The citizens of the island all

have utility functions of the form U#28M;W#29=MW.Atevery Pareto optimal allocation:

#28a#29 the number of units of milk produced equals the number of units of wheat produced.

#28b#29 total milk production is 5,500.

#28c#29 all citizens consume the same commodity bundle.

#28d#29 every consumer's marginal rate of substitution between milk and wheat is,1.

#28e#29 None of the above is true at EVERYPareto optimal allocation.

Topic,Production Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,C

30.19 In the process of producing one hormone-free,stress-free,happycow,the New Age Cattle

Ranch produces one ton of natural,organic plant fertilizer,Demand for the ranch's cattle is given

by P

c

=2;000,10Q

c; and demand for fertilizer is given by P

f

= 500,3Q

f

,The cost of producing

Q cow-fertilizer bundles is C =5;000+300Q.To maximize pro#0Cts,the ranch should

#28a#29 produce 85 cow-fertilizer units; sell 85 cattle,and sell 85 tons of fertilizer.

#28b#29 produce 85 cow-fertilizer units; sell 85 cattle,and sell 33.33 tons of fertilizer.

#28c#29 produce 85 cow-fertilizer units; sell 85 cattle,and sell 83.33 tons of fertilizer.

#28d#29 produce 84.62 cow-fertilizer units; sell 84.62 cattle,and sell 84.62 tons of fertilizer.

#28e#29 produce 100 cow-fertilizer units; sell 100 cattle,and dispose of all the fertilizer in an environmentally

friendly manner.

MULTIPLE CHOICE 559

Topic,Production Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,C

30.20 In the process of producing one hormone-free,stress-free,happycow,the New Age Cattle

Ranch produces one ton of natural,organic plant fertilizer,Demand for the ranch's cattle is given

by P

c

=2;000,20Q

c; and demand for fertilizer is given by P

f

= 500,4Q

f

,The cost of producing

Q cow-fertilizer bundles is C =5;000+400Q.To maximize pro#0Cts,the ranch should

#28a#29 produce 40 cow-fertilizer units; sell 40 cattle,and sell 40 tons of fertilizer.

#28b#29 produce 40 cow-fertilizer units; sell 40 cattle,and sell 12.50 tons of fertilizer.

#28c#29 produce 62.50 cow-fertilizer units; sell 40 cattle,and sell 62.50 tons of fertilizer.

#28d#29 produce 43.75 cow-fertilizer units; sell 43.75 cattle,and sell 43.75 tons of fertilizer.

#28e#29 produce 50 cow-fertilizer units; sell 50 cattle,and dispose of allthe fertilizer in an environmentallyfriendly

manner.

Topic,Production Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,A

30.21

For each carload of ore removed from the Matchless Mine,one pound of lead and one ounce of

silver is smelted,The cost of mining and processing one carload of ore is C#28Q#29 = 500+2Q+0:03Q

2

.

The demand for silver #28per ounce#29 is P

s

=50,0:40Q

s

and the demand for lead #28per pound#29 is

P

l

=5,0:03Q

l

,What should the owners of the Matchless Mine do to maximize pro#0Cts #28in the long

run#29?

#28a#29 Mine and process 57.61 carloads of ore,sell 57.61 ounces of silver,and sell 57.61 pounds of lead.

#28b#29 Mine and process 62.50 carloads of ore,sell 62.50 ounces of silver,and sell 25 pounds of lead.

#28c#29 Mine and process 83.33 carloads of ore,sell 55.81 ounces of silver,and sell 83.33 pounds of lead.

#28d#29 Mine and process 83.33 carloads of ore,sell 62.50 ounces of silver,and sell 83.33 pounds of lead.

#28e#29 Shut down the mine.

CHAPTER 30 Production 560

Topic,Production Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,A

30.22

For each carload of ore removed from the Matchless Mine,one pound of lead and one ounce of

silver is smelted,The cost of mining and processing one carload of ore is C#28Q#29 = 700+5Q+0:01Q

2

.

The demand for silver #28per ounce#29 is P

s

=40,0:50Q

s

and the demand for lead #28per pound#29 is

P

l

=6,0:04Q

l

,What should the owners of the Matchless Mine do to maximize pro#0Cts #28in the long

run#29?

#28a#29 Mine and process 37.27 carloads of ore,sell 37.27 ounces of silver,and sell 37.27 pounds of lead.

#28b#29 Mine and process 40 carloads of ore,sell 40 ounces of silver,and sell 10 pounds of lead.

#28c#29 Mine and process 75 carloads of ore,sell 34.31 ounces of silver,and sell 75 pounds of lead.

#28d#29 Mine and process 75 carloads of ore,sell 40 ounces of silver,and sell 75 pounds of lead.

#28e#29 Shut down the mine.

Essay Production

Topic,Production Di#0Eculty,2

#25 Correct Responses,0 Discrimination Index,0

30.1 On a certain small island,there are 100 units of labor and 200 units of capital,Two goods

can be produced,Good A is produced with #0Cxed coe#0Ecients,using 1 unit of labor and 3 units of

capital per unit of output,Good B is produced with #0Cxed coe#0Ecients,using 1 unit of labor and 1

unit of capital per unit of ouput,Let Xa denote the quantity of good A and Xb be the quantityof

good B that is produced,The set of feasible outputs combinations for this economy is restricted by

the fact that it cannot use more than 100 units of labor or 200 units of capital,a#29 Write down two

inequalities expressed in terms of Xa and Xb that must be satis#0Ced at feasible output combinations.

b#29 Draw a graph showing the economy's production possibility set,Put numerical labels on your

graph so that this graph is precisely described.

Answer,a#29 Xa+Xb #3C= 100; 3Xa+Xb #3C= 200 b#29 Production possibility set is the area in the

intersection of the halfspaces from a.

Chapter 31

True-False Welfare

Topic,Welfare Di#0Eculty,1

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,False

31.1 According to Arrow's impossibility theorem,it is impossible to #0Cnd a social ordering that

is complete,re#0Dexive,and transitive.

Topic,Welfare Di#0Eculty,1

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,False

31.2 An allocation is fair if whenever one person envies another,the envied person does not envy

the envier.

Topic,Welfare Di#0Eculty,2

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,False

31.3 In a pure exchange economy if the initial allocation is Pareto optimal,then competitive

equilibrium is fair.

Topic,Welfare Di#0Eculty,2

#25 Correct Responses,60 Discrimination Index,28

Correct Answer,True

31.4 In a competitive equilibrium,no matter how di#0Berent their preferences may be,no two

people with the same income will envy each other's consumption bundles.

Topic,Welfare Di#0Eculty,1

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,False

31.5 An allocation whichisworse for somebody than the initial allocation can not be Pareto

optimal.

TRUE-FALSE 563

Topic,Welfare Di#0Eculty,2

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,False

31.6 If allocation x is Pareto optimal and allocation y is not,then everyone is at least as well o#0B

with x as with y; and someone is better o#0B with x than with y.

Topic,Welfare Di#0Eculty,1

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,False

31.7 The utility possibilities frontier is the boundary of the production possibility set.

Topic,Welfare Di#0Eculty,1

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,True

31.8 In a pure exchange economy,if an allocation is Pareto e#0Ecient,it is impossible to havetwo

people who prefer each other's consumption bundles to their own.

Topic,Welfare Di#0Eculty,2

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,True

31.9 If a social welfare function is an increasing function of each person's utility,then every

allocation that maximizes this social welfare function must be a Pareto optimum.

Multiple Choice Welfare

Topic,Welfare Di#0Eculty,1

#25 Correct Responses,84 Discrimination Index,13

Correct Answer,B

31.1 Mr,Angst has twochildren,Dick and Jane,Dickisaslow learner and Jane is very bright.

If Mr,Angst spends $X per month on Dick's education,Dick will score a total of X=2 points on

his SAT tests,If Mr,Angst spends $Y per month on Jane's education,she will score a total of 2Y

on her SAT tests,Mr,Angst has a utility function U#28D;J#29=minfD;Jg where D is Dick's SAT

score and J is Jane's SAT score,To maximize his utility,he will:

#28a#29 spend equal amounts of money on the twochildren.

#28b#29 spend 4 times as much money on Dick's education as on Jane's.

#28c#29 spend 4 times as much money on Jane's education as on Dick's.

#28d#29 spend between 1 and 2 times as much money on Dick's education as on Jane's.

#28e#29 spend between 1 and 2 times as much money on Jane's education as on Dick's.

Topic,Welfare Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,C

31.2 A Borda count is used to decide an election between 3 candidates,x,y,and z; where a score

of1isawarded to a #0Crst choice,2 to a second choice,and 3 to a third choice,There are 21 voters.

2voters rank the candidates x #0Crst,y second,z third; 2 voters rank the candidates x #0Crst,z second,

y third; 7 rank the candidates z #0Crst,y second,x third; 10 voters rank the candidates y #0Crst,z

second,xxxthird,Which candidate wins?

#28a#29 Candidate x.

#28b#29 Candidate y.

#28c#29 Candidate z.

#28d#29 There is a tie between x and y; with z coming in third.

#28e#29 There is a tie between y and z; with x coming in third.

MULTIPLE CHOICE 565

Topic,Welfare Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,C

31.3 A Borda count is used to decide an election between 3 candidates,x,y,and z; where a score

of1isawarded to a #0Crst choice,2 to a second choice,and 3 to a third choice,There are 16 voters,4

voters rank the candidates x #0Crst,y second,z third; 3 voters rank the candidates x #0Crst,z second,y

third; 5 rank the candidates z #0Crst,y second,x third; 4 voters rank the candidates y #0Crst,z second,

xxxthird,Which candidate wins?

#28a#29 Candidate x.

#28b#29 Candidate y.

#28c#29 Candidate z.

#28d#29 There is a tie between x and y; with z coming in third.

#28e#29 There is a tie between y and z; with x coming in third.

Topic,Welfare Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,A

31.4 A parent has twochildren living in cities with di#0Berent costs of living,The cost of living

in city B is 2 times the cost of living in city A,The child in city A has an income of 4,000 and

the child in city B has an income of 8,000,The parentwants to give a total of $4,000 to her two

children,Her utility function is U#28C

A;C

B

#29=C

A

C

B;where C

A

and C

B

are the consumptions of the

children living in cities A and B respectively,She will choose to:

#28a#29 give eachchild $2,000,even though this will buy less goods for the child in city B.

#28b#29 give the child in city B2 times as much money as the child in city B.

#28c#29 Give the child in city A 2 times as much money as the child in city B.

#28d#29 Give the child in city B1 times as much money as the child in cityA.

#28e#29 Give the child in city A 1 times as much money as the child in city B.

CHAPTER 31 Welfare 566

Topic,Welfare Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,A

31.5 A parent has twochildren living in cities with di#0Berent costs of living,The cost of living

in city B is 4 times the cost of living in city A,The child in city A has an income of 5,000 and

the child in city B has an income of 20,000,The parentwants to give a total of $4,000 to her two

children,Her utility function is U#28C

A;C

B

#29=C

A

C

B;where C

A

and C

B

are the consumptions of the

children living in cities A and B respectively,She will choose to:

#28a#29 give eachchild $2,000,even though this will buy less goods for the child in city B.

#28b#29 give the child in city B4 times as much money as the child in city B.

#28c#29 Give the child in city A 4 times as much money as the child in city B.

#28d#29 Give the child in city B2 times as much money as the child in cityA.

#28e#29 Give the child in city A 2 times as much money as the child in city B.

Topic,Welfare Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,B

31.6 Suppose that Paul and David have utility functions U =2A

P

+O

P

and U = A

D

+2O

D;

respectively,where A

P

and O

P

are Paul's consumptions of apples and oranges and A

D

and O

D

are

David's consumptions of apples and oranges,The total supply of apples and oranges to be divided

between them is 14 apples and 18 oranges,The "fair" allocations consist of all allocations satisfying

the following conditions.

#28a#29 A

D

= A

P

and O

D

= O

P

.

#28b#29 4A

P

+2O

P

is at least 46 and 2A

D

+4O

D

is at least 50.

#28c#29 2A

P

+ O

P

is at least 46 and 2A

D

+2O

D

is at least 50.

#28d#29 A

D

+O

D

is at least 16 and A

S

+O

S

is at least 16.

#28e#29 2A

P

+ O

P

is at least A

D

+2O

D

and A

D

+2O

D

is at least 2A

P

+ O

P

.

MULTIPLE CHOICE 567

Topic,Welfare Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,B

31.7 Suppose that Paul and David have utility functions U =4A

P

+O

P

and U = A

D

+2O

D;

respectively,where A

P

and O

P

are Paul's consumptions of apples and oranges and A

D

and O

D

are

David's consumptions of apples and oranges,The total supply of apples and oranges to be divided

between them is 14 apples and 14 oranges,The "fair" allocations consist of all allocations satisfying

the following conditions.

#28a#29 A

D

= A

P

and O

D

= O

P

.

#28b#29 8A

P

+2O

P

is at least 70 and 2A

D

+4O

D

is at least 42.

#28c#29 4A

P

+ O

P

is at least 70 and 2A

D

+2O

D

is at least 42.

#28d#29 A

D

+O

D

is at least 14 and A

S

+O

S

is at least 14.

#28e#29 4A

P

+ O

P

is at least A

D

+2O

D

and A

D

+2O

D

is at least 4A

P

+ O

P

.

Topic,Welfare Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,E

31.8 Suppose that Romeo has the utility function U = S

3

R

S

2

J

and Juliet has the utility function

U = S

2

R

S

3

J

where S

R

is Romeo's spaghetti consumption and S

J

is Juliet's,They have 45 units of

spaghetti to divide between them.

#28a#29 Romeo would want to give Juliet some spaghetti if he had more than 22.50 units of spaghetti.

#28b#29 Juliet would want to give Romeo some spaghetti if she has more than 25 units.

#28c#29 Romeo and Juliet would never disagree about how to divide the spaghetti.

#28d#29 Romeo would want to give Juliet some spaghetti if he has more than 23 units of spaghetti.

#28e#29 Juliet would want to give Romeo some spaghetti if she has more than 27 units of spaghetti.

CHAPTER 31 Welfare 568

Topic,Welfare Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,E

31.9 Suppose that Romeo has the utility function U = S

3

R

S

2

J

and Juliet has the utility function

U = S

2

R

S

3

J

where S

R

is Romeo's spaghetti consumption and S

J

is Juliet's,They have 30 units of

spaghetti to divide between them.

#28a#29 Romeo would want to give Juliet some spaghetti if he had more than 15 units of spaghetti.

#28b#29 Juliet would want to give Romeo some spaghetti if she has more than 16 units.

#28c#29 Romeo and Juliet would never disagree about how to divide the spaghetti.

#28d#29 Romeo would want to give Juliet some spaghetti if he has more than 14 units of spaghetti.

#28e#29 Juliet would want to give Romeo some spaghetti if she has more than 18 units of spaghetti.

Topic,Welfare Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,B

31.10 Hat#0Celd and McCoy burn with hatred for each other,They both consume corn whisky.

Hat#0Celd's utility function is U = W

H

,W

2

M

=40 and McCoy's utilityisU=W

M

,W

2

H

=40; where W

H

is Hat#0Celd's whisky consumption and W

M

is McCoy's whisky consumption,measured in gallons.

The sheri#0B has a total of 80 units of con#0Cscated whisky which he could give back to them,For

some reason,the sheri#0B wants them both to be as happy as possible and he wants to treat them

equally,The sheri#0B should give them each:

#28a#29 40 gallons.

#28b#29 20 gallons and spill 40 gallons in the creek.

#28c#29 10 gallons and spill 60 gallons in the creek.

#28d#29 24 gallons and spill the rest in the creek.

#28e#29 5 gallons and spill the rest in the creek.

MULTIPLE CHOICE 569

Topic,Welfare Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,B

31.11 Hat#0Celd and McCoy burn with hatred for each other,They both consume corn whisky.

Hat#0Celd's utility function is U = W

H

,W

2

M

=16 and McCoy's utilityisU=W

M

,W

2

H

=16; where W

H

is Hat#0Celd's whisky consumption and W

M

is McCoy's whisky consumption,measured in gallons.

The sheri#0B has a total of 36 units of con#0Cscated whisky which he could give back to them,For

some reason,the sheri#0B wants them both to be as happy as possible and he wants to treat them

equally,The sheri#0B should give them each:

#28a#29 18 gallons.

#28b#29 8 gallons and spill 20 gallons in the creek.

#28c#29 4 gallons and spill 28 gallons in the creek.

#28d#29 12 gallons and spill the rest in the creek.

#28e#29 2 gallons and spill the rest in the creek.

Essay Welfare

Topic,Welfare Di#0Eculty,2

#25 Correct Responses,0 Discrimination Index,0

31.1 No one is meaner and uglier than Gladys,Someone is meaner and uglier than Harold.

Therefore Gladys is meaner and uglier than Harold,Is this reasoning correct? If so,explain why.If

not,explain why not,#28Assume that people can be ranked from ugliest to least ugly by a complete

transitive ordering and that there are no ties,Likewise assume that people can be ranked from

meanest to least mean by a complete transitive ordering and that there are no ties.#29

Answer,The reasoning is incorrect,Consider the following example,There are 3 people,Fred,

Gladys and Harold,The rankings for ugly are Gladys is ugliest,Fred is second ugliest and Harold

is least ugly,The rankings for mean are Fred is meanest,Harold is second meanest and Gladys

is least mean,Then nobody is meaner and uglier than Gladys,Fred is meaner and uglier than

Harold,but Gladys is not meaner and uglier than Harold.

Chapter 32

True-False Externalities

Topic,Externalities Di#0Eculty,1

#25 Correct Responses,93 Discrimination Index,11

Correct Answer,False

32.1 A trade between two people is an example of an externality.

Topic,Externalities Di#0Eculty,1

#25 Correct Responses,80 Discrimination Index,0

Correct Answer,False

32.2 The only known way to eliminate externalities is through taxes or subsidies.

Topic,Externalities Di#0Eculty,1

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,False

32.3 The e#0Ecient amount of air pollution is in general independent of whether polluters or pol-

lutees pay to reduce pollution.

Topic,Externalities Di#0Eculty,1

#25 Correct Responses,52 Discrimination Index,45

Correct Answer,False

32.4 A Pigouvian tax on pollution is designed to collect enough revenue to pay for pollution

detection by the government.

Topic,Externalities Di#0Eculty,2

#25 Correct Responses,84 Discrimination Index,29

Correct Answer,False

32.5 If there are negative externalities in production or consumption,competitive equilibrium is

unlikely to be Pareto e#0Ecient,but positive externalities enhance the e#0Eciency of the market.

Topic,Externalities Di#0Eculty,1

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,True

32.6 The #5Ctragedy of the commons" refers to the tendency for common propertytobeoverused.

CHAPTER 32 Externalities 572

Topic,Externalities Di#0Eculty,1

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,False

32.7 If preferences are quasilinear,then the delineation of property rights has no distributional

consequences.

Topic,Externalities Di#0Eculty,1

#25 Correct Responses,70 Discrimination Index,5

Correct Answer,True

32.8 If your consumption of toothpaste produces positive externalities for your neighbors #28which

you ignore#29,then you are consuming less toothpaste than is Pareto optimal.

Topic,Externalities Di#0Eculty,1

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,False

32.9 Mobil Oil Corporation recently bought the right to emit an additional 900 pounds of noxious

gas vapors per day at its Torrance,California re#0Cnery,This suggests that allowing pollution rights

to be marketed is likely to lead to more pollution than there would be if there were no restrictions

on polluting.

Multiple Choice Externalities

Topic,Externalities Di#0Eculty,2

#25 Correct Responses,12 Discrimination Index,18

Correct Answer,E

32.1 A mountain village owns a common pasture where villagers graze their goats,The cost to a

goat owner of owning and caring for a goat is 4 groschens,The pasture gets overgrazed if too many

goats share the pasture,The total revenue from all goats on the common pasture is f#28g#29=48g,2g

2;

where g is the number of goats on the pasture,The town council notices that total pro#0Ct from the

pasture is not maximized if villagers are allowed to pasture goats for free,The council decides to

allow a goat to use the common pasture only if its owner buys it a goat license,To maximize total

pro#0Ct #28of villagers and council#29,how many groschens per goat should the council charge?

#28a#29 12

#28b#29 20

#28c#29 24

#28d#29 26

#28e#29 22

Topic,Externalities Di#0Eculty,2

#25 Correct Responses,84 Discrimination Index,30

Correct Answer,A

32.2 The 130 campers at Bear Creek Campground love their own camp#0Cres,but hate the smoke

from their neighbors' camp#0Cres,Each camper's utility function is U =22f,f

2

,swhere f is the

number of hours her own camp#0Cre burns per day and where s is the amount of smoke in the air.

It happens that s is 12 times the average amount of hours that campers use their #0Cres,The camp-

ground authority could make all campers better o#0B by limiting the number of hours of camp#0Cre per

day for everyone,How many hours of camp#0Cres per day should the authority allow each camper

in order to make the typical camper as well o#0B as possible?

#28a#29 5

#28b#29 11

#28c#29 3

#28d#29 6

#28e#29 Campers will be best o#0B if they are free to choose their own amounts of camp#0Cre.

CHAPTER 32 Externalities 574

Topic,Externalities Di#0Eculty,2

#25 Correct Responses,84 Discrimination Index,30

Correct Answer,A

32.3 The 130 campers at Bear Creek Campground love their own camp#0Cres,but hate the smoke

from their neighbors' camp#0Cres,Each camper's utility function is U =17f,f

2

,swhere f is the

number of hours her own camp#0Cre burns per day and where s is the amount of smoke in the air.

It happens that s is 9 times the average amount of hours that campers use their #0Cres,The camp-

ground authority could make all campers better o#0B by limiting the number of hours of camp#0Cre per

day for everyone,How many hours of camp#0Cres per day should the authority allow each camper

in order to make the typical camper as well o#0B as possible?

#28a#29 4

#28b#29 8.50

#28c#29 2

#28d#29 5

#28e#29 Campers will be best o#0B if they are free to choose their own amounts of camp#0Cre.

Topic,Externalities Di#0Eculty,2

#25 Correct Responses,57 Discrimination Index,28

Correct Answer,A

32.4 Two stores are located side by side,They attract customers to each other and to them-

selves by advertising,The pro#0Ct functions of the two stores are #2875 + x

2

#29x

1

,2x

2

1

for store 1,and

#28120+ x

1

#29x

2

,2x

2

2

for store 2,where x

1

and x

2

are total advertising expenditures by stores 1 and 2

respectively,If each store sets its advertising expenditures independently #28as in Nash equilibrium#29,

howmuchwould store 1 spend on advertising?

#28a#29 28

#28b#29 30

#28c#29 25

#28d#29 33

#28e#29 None of the above.

MULTIPLE CHOICE 575

Topic,Externalities Di#0Eculty,2

#25 Correct Responses,57 Discrimination Index,28

Correct Answer,A

32.5 Two stores are located side by side,They attract customers to each other and to them-

selves by advertising,The pro#0Ct functions of the two stores are #28120+ x

2

#29x

1

,2x

2

1

for store 1,and

#2860+ x

1

#29x

2

,2x

2

2

for store 2,where x

1

and x

2

are total advertising expenditures by stores 1 and 2

respectively,If each store sets its advertising expenditures independently #28as in Nash equilibrium#29,

howmuchwould store 1 spend on advertising?

#28a#29 36

#28b#29 38

#28c#29 33

#28d#29 41

#28e#29 None of the above.

Topic,Externalities Di#0Eculty,3

#25 Correct Responses,62 Discrimination Index,57

Correct Answer,C

32.6 Two stores are located side by side and attract customers to each other and to themselves

by advertising,Where x

1

and x

2

are the advertising expenditures of stores 1 and 2,the pro#0Cts of

the #0Crms are #2848 + x

2

#29x

1

,2#28x

1

#29

2

for store 1 and #2854 + x

1

#29x

2

,2#28x

2

#29

2

for store 2,Knowing these

functions,one investor buys both stores,In order to maximize his total pro#0Cts,howmuch should

he spend on advertising for store 1?

#28a#29 10

#28b#29 26

#28c#29 25

#28d#29 35

#28e#29 None of the above.

CHAPTER 32 Externalities 576

Topic,Externalities Di#0Eculty,2

#25 Correct Responses,18 Discrimination Index,34

Correct Answer,A

32.7 A small co#0Bee company roasts co#0Bee beans in its shop,The unroasted beans cost the com-

pany 200 cents per pound,The MARGINAL cost of roasting co#0Bee beans is 150,10q + q

2

cents

per pound when q pounds are roasted,The smell of roasting beans imposes costs on the company's

neighbors,The total amount that neighbors would be willing to paytohave the shop stop roasting

altogether is 5q

2; where q is the number of pounds being roasted,The company sells its output in

a competitive market at 450 cents per pound,What is the socially e#0Ecient amount of co#0Bee for

the company to roast?

#28a#29 10 lbs.

#28b#29 15 lbs.

#28c#29 the square root of 10 lbs.

#28d#29 45 lbs.

#28e#29 None of the above.

Topic,Externalities Di#0Eculty,2

#25 Correct Responses,40 Discrimination Index,20

Correct Answer,B

32.8 Firm 1 produces output x with a cost function c

1

#28x#29=x

2

+10,Firm 2 produces output y

with a cost function c

2

#28y;x#29=y

2

+x.Thus,the more that #0Crm 1 produces,the greater are #0Crm

2

0

s costs,Both #0Crms face competitive product markets,The competitive price of x is 20 and the

competitive price of y is 40,No new #0Crms can enter the industry and the old ones must remain.

The e#0Ecient Pigouvian tax on the x good is:

#28a#29 0.

#28b#29 1.

#28c#29 2.

#28d#29 3.

#28e#29 4.

MULTIPLE CHOICE 577

Topic,Externalities Di#0Eculty,2

#25 Correct Responses,25 Discrimination Index,21

Correct Answer,A

32.9 Mike's utility function is U#28c;d;h#29=4c+6d,d

2

,6h; where d is the number of hours per

day that he spends driving around,h is the average number of hours per dayspent driving around

by other citizens of his town,and c is the amount of money he has to spend on other things than

gasoline and auto repairs,There are 1001 identical citizens in Mike's home town,Mike's expenses

for gasoline and auto repairs amount to $.50 per hour for the time he spends driving,If Mike

believes that his amount of driving won't a#0Bect the amount that others drive,how many hours per

day will he choose to drive?

#28a#29 2

#28b#29 3

#28c#29 4

#28d#29 1

#28e#29 0.50

Topic,Externalities Di#0Eculty,2

#25 Correct Responses,25 Discrimination Index,21

Correct Answer,A

32.10 Mike's utility function is U#28c;d;h#29=4c+12d,d

2

,6h; where d is the number of hours per

day that he spends driving around,h is the average number of hours per dayspent driving around

by other citizens of his town,and c is the amount of money he has to spend on other things than

gasoline and auto repairs,There are 1001 identical citizens in Mike's home town,Mike's expenses

for gasoline and auto repairs amount to $.50 per hour for the time he spends driving,If Mike

believes that his amount of driving won't a#0Bect the amount that others drive,how many hours per

day will he choose to drive?

#28a#29 5

#28b#29 6

#28c#29 7

#28d#29 2.50

#28e#29 0.50

CHAPTER 32 Externalities 578

Topic,Externalities Di#0Eculty,2

#25 Correct Responses,22 Discrimination Index,0

Correct Answer,C

32.11 Marbella has 101 residents,All wear the same fancy clothes and each has the same utility

function,u#28m;b;B#29=m+16b,b

2

,B=50; where m is the amount of maccaroni #28in kilograms#29

that he or she eats per day,b is the number of hours that he or she spends on the beachper

day,and B is the total number of person-hours spent per day on the beachby other residents of

Marbella,Each has an income of $10 per day and maccaroni costs $1 per kilogram,City council

is considering a law that would limit the amount of time that any person can spend on the beach.

How many hours per day should they allow in order to maximize the utilityofatypical Marbellite?

#28a#29 8 hours

#28b#29 10 hours

#28c#29 7 hours

#28d#29 11 hours

#28e#29 They could not possibly be made better o#0B by legislation that limits their freedom to choose.

Topic,Externalities Di#0Eculty,2

#25 Correct Responses,22 Discrimination Index,0

Correct Answer,C

32.12 Marbella has 101 residents,All wear the same fancy clothes and each has the same utility

function,u#28m;b;B#29=m+22b,b

2

,B=50; where m is the amount of maccaroni #28in kilograms#29

that he or she eats per day,b is the number of hours that he or she spends on the beachper

day,and B is the total number of person-hours spent per day on the beachby other residents of

Marbella,Each has an income of $10 per day and maccaroni costs $1 per kilogram,City council

is considering a law that would limit the amount of time that any person can spend on the beach.

How many hours per day should they allow in order to maximize the utilityofatypical Marbellite?

#28a#29 11 hours

#28b#29 13 hours

#28c#29 10 hours

#28d#29 14 hours

#28e#29 They could not possibly be made better o#0B by legislation that limits their freedom to choose.

MULTIPLE CHOICE 579

Topic,Externalities Di#0Eculty,0

#25 Correct Responses,83 Discrimination Index,28

Correct Answer,C

32.13 Suppose that in Horsehead,Massachusetts,the cost of operating a lobster boat is $3,000

per month,Suppose that if x lobster boats operate in the bay,the total monthly revenue from

lobster boats in the bayis$1000#2819x,x

2

#29,If there are no restrictions on entry and new boats come

into the bayuntil there is no pro#0Ct to be made by a new entrant,then the number of boats who

enter will be X1,If the number of boats that operate in the bay is regulated to maximize total

pro#0Cts,the number of boats in the bay will be X2.

#28a#29 X1=16andX2 = 16.

#28b#29 X1=8andX2=6

#28c#29 X1 = 16 and X2=8

#28d#29 X1=20andX2=12

#28e#29 None of the above.

Topic,Externalities Di#0Eculty,0

#25 Correct Responses,83 Discrimination Index,28

Correct Answer,C

32.14 Suppose that in Horsehead,Massachusetts,the cost of operating a lobster boat is $2,000

per month,Suppose that if x lobster boats operate in the bay,the total monthly revenue from

lobster boats in the bayis$1000#2814x,x

2

#29,If there are no restrictions on entry and new boats come

into the bayuntil there is no pro#0Ct to be made by a new entrant,then the number of boats who

enter will be X1,If the number of boats that operate in the bay is regulated to maximize total

pro#0Cts,the number of boats in the bay will be X2.

#28a#29 X1=12andX2 = 12.

#28b#29 X1=6andX2=4

#28c#29 X1 = 12 and X2=6

#28d#29 X1=16andX2=10

#28e#29 None of the above.

CHAPTER 32 Externalities 580

Topic,Externalities Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,D

32.15 An apiary is located next to an apple orchard,The apiary produces honey and the apple

orchard produces apples,The cost function of the apiary is C

H

#28H;A#29=H

2

=100,2A and the cost

function of the apple orchard is C

A

#28H;A#29=A

2

=100 where H and A are the number of units of honey

and apples produced respectively,The price of honey is 4 and the price of apples is 1 per unit,Let

A1 be the output of apples if the #0Crms operate independently,and let A2 be the output of apples

if the #0Crms are operated by a single owner so as to maximize total pro#0Ct.

#28a#29 A1 = 25 and A2=50

#28b#29 A1=A2=50

#28c#29 A1 = 75 and A2=50

#28d#29 A1 = 50 and A2 = 150

#28e#29 A1 = 200 and A2=50

Topic,Externalities Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,D

32.16 An apiary is located next to an apple orchard,The apiary produces honey and the apple

orchard produces apples,The cost function of the apiary is C

H

#28H;A#29=H

2

=100,3A and the cost

function of the apple orchard is C

A

#28H;A#29=A

2

=100 where H and A are the number of units of honey

and apples produced respectively,The price of honey is 3 and the price of apples is 4 per unit,Let

A1 be the output of apples if the #0Crms operate independently,and let A2 be the output of apples

if the #0Crms are operated by a single owner so as to maximize total pro#0Ct.

#28a#29 A1 = 100 and A2 = 200

#28b#29 A1=A2 = 200

#28c#29 A1 = 175 and A2 = 200

#28d#29 A1 = 200 and A2 = 350

#28e#29 A1 = 150 and A2 = 200

MULTIPLE CHOICE 581

Topic,Externalities Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,A

32.17 Will's utilityisU#28c;d;h#29=8c+18d,d

2

,6h; where d is the number of hours per day that

he spends driving around,h is the number of hours per dayspent driving around by other people

in his home town and c is the amount of money he has left to spend on other stu#0B besides gasoline

and auto repairs,Gas and auto repairs cost $.50 per hour of driving,All the people in Will's

home town have the same tastes,If each citizen believes that his own driving will not a#0Bect the

amount of driving done by others,they will all drive D1 hours per day,If they are all drive the

same amount,they would all be best o#0B if each drove D2 hours per day where:

#28a#29 D1=7andD2=4.

#28b#29 D1=D2=7.

#28c#29 D1 = 9 and D2=5.

#28d#29 D1=10andD2=0.

#28e#29 D1=7D2=2.

Topic,Externalities Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,A

32.18 Chen's utilityisU#28c;d;h#29=4c+8d,d

2

,2h; where d is the number of hours per day that

he spends driving around,h is the number of hours per dayspent driving around by other people

in his home town and c is the amount of money he has left to spend on other stu#0B besides gasoline

and auto repairs,Gas and auto repairs cost $.50 per hour of driving,All the people in Chen's

home town have the same tastes,If each citizen believes that his own driving will not a#0Bect the

amount of driving done by others,they will all drive D1 hours per day,If they are all drive the

same amount,they would all be best o#0B if each drove D2 hours per day where:

#28a#29 D1=3andD2=2.

#28b#29 D1=D2=3.

#28c#29 D1 = 5 and D2=3.

#28d#29 D1=6andD2=1.

#28e#29 D1=3D2=0.

CHAPTER 32 Externalities 582

Topic,Externalities Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,B

32.19 An airport is located next to a housing development,Where X is the number of planes

that land per day and Y is the number of houses in the housing development,pro#0Cts of the airport

are 30X,X

2

and pro#0Cts of the developer are 36Y,Y

2

,XY,Let H1 be the number of houses built

if a single pro#0Ct-maximizing companyowns the airport and the housing development,Let H2 be

the number of houses built if the airport and the housing development are operated independently

and the airport has to pay the developer the total "damages" XY done by the planes to the pro#0Cts

of the developer.

#28a#29 H1=H2 = 14.

#28b#29 H1 = 14 and H2 = 18.

#28c#29 H1 = 18 and H2=14

#28d#29 H1 = 16 and H2=17

#28e#29 H1 = 17 and H2=21

Topic,Externalities Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,B

32.20 An airport is located next to a housing development,Where X is the number of planes

that land per day and Y is the number of houses in the housing development,pro#0Cts of the airport

are 34X,X

2

and pro#0Cts of the developer are 32Y,Y

2

,XY,Let H1 be the number of houses built

if a single pro#0Ct-maximizing companyowns the airport and the housing development,Let H2 be

the number of houses built if the airport and the housing development are operated independently

and the airport has to pay the developer the total "damages" XY done by the planes to the pro#0Cts

of the developer.

#28a#29 H1=H2 = 10.

#28b#29 H1 = 10 and H2 = 16.

#28c#29 H1 = 16 and H2=10

#28d#29 H1 = 12 and H2=15

#28e#29 H1 = 15 and H2=19

MULTIPLE CHOICE 583

Topic,Externalities Di#0Eculty,2

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,A

32.21 A clothing store and a jeweler are located side by side in a shopping mall,If the clothing

store spend C dollars on advertising and the jeweler spends J dollars on advertising,then the pro#0Cts

of the clothing store will be #2812+ J#29C,2C

2

and the pro#0Cts of the jeweler will be #28 60+C#29J,2J

2

.

The clothing store gets to choose his amount of advertising #0Crst,knowing that the jeweler will #0Cnd

out howmuch the clothing store advertised before deciding howmuch to spend,The amountspent

by the clothing store will be:

#28a#29 14.

#28b#29 28.

#28c#29 42.

#28d#29 7.

#28e#29 21.

Topic,Externalities Di#0Eculty,2

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,A

32.22 A clothing store and a jeweler are located side by side in a shopping mall,If the clothing

store spend C dollars on advertising and the jeweler spends J dollars on advertising,then the pro#0Cts

of the clothing store will be #2830+ J#29C,2C

2

and the pro#0Cts of the jeweler will be #28 72+C#29J,2J

2

.

The clothing store gets to choose his amount of advertising #0Crst,knowing that the jeweler will #0Cnd

out howmuch the clothing store advertised before deciding howmuch to spend,The amountspent

by the clothing store will be:

#28a#29 22.

#28b#29 44.

#28c#29 66.

#28d#29 11.

#28e#29 33.

CHAPTER 32 Externalities 584

Topic,Externalities Di#0Eculty,2

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,E

32.23 Millie Bush has written a best-seller,Revenues net of production costs are $300T

1=3

A

1=3

where T is the number of publicity trips Millie takes and A is the number of ads for the book that

appear,Millie has to pay for all of her own publicity trips,which cost $100 each,Her publisher

pays for the advertising,which costs $100 per ad,Revenues from the book are split equally between

Millie and her publisher,Let T1 be the number of trips that Millie would choose to makeina

Nash equilibrium where she chooses the number of trips and the publisher chooses the amountof

advertising,Let T2 be the number of trips that Millie should make if trips and advertising are

determined so as to maximize total pro#0Cts net of trip and ad costs.

#28a#29 T1 = 1 and T2=1.

#28b#29 T1 = 1 and T2=2.

#28c#29 T1 = 2 amd T2=1.

#28d#29 T1 = 1 and T2=1=8.

#28e#29 T1=1=8 and T2=1.

Essay Externalities

Topic,Externalities Di#0Eculty,3

#25 Correct Responses,0 Discrimination Index,0

32.1 Two #0Crms in a grimy Ohio town produce the same product in a competitive industry,Each

has an old factory using an old technology,It still pays to operate these factories but it would not

pay to expand them,The only variable factor used by either #0Crm is labor,Each #0Crm pollutes the

other and thus reduces the output of the other #0Crm,The production functions of #0Crms A and B

respectively are Qa = La

:

5,#282=3#29Qb and Qb = Lb

:

5,#281=3#29Qa where La

:

5 and Lb

:

5 are the square

roots respectively of the amount of labor used by #0Crms A and B,The wage rate of labor is 1 and

the price of the #0Crms' output is 12,a#29If the two #0Crms each maximize pro#0Cts independently,what

is there total output and howmuch quasi-rents do their factories earn? b#29 If someone buys them

both and maximizes joint pro#0Cts,howmuch quasi-rents are earned in total?

Answer,Each produces 48 and quasirents are 12 for each,Each produces 36 and quasirents total

40.

Chapter 33

True-False Law and Economics

Topic,Law and Economics Di#0Eculty,1

#25 Correct Responses,93 Discrimination Index,12

Correct Answer,False

33.1 If detection of a crime is very unlikely,then economic analysis suggests that the penalty for

this crime should be small.

Topic,Law and Economics Di#0Eculty,2

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,True

33.2 Economic analysis suggests that the severity of penalty for a crime should be greater the

more serious the crime and also be greater the less likely it is to be detected.

Topic,Law and Economics Di#0Eculty,1

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,True

33.3 If the probability of an accident depends on the actions of the victim as well as those of

the perpetrator,then strict liability rules are likely to lead potential victims to take too many risks.

Topic,Law and Economics Di#0Eculty,2

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,False

33.4 "Negligence rules" whichsay that the injurer is liable for all damages unless he has taken

"due care",are likely to lead to ine#0Eciency regardless of the standards of due care,because they

do not takeinto account the incentives of the victim to avoid an accident.

Topic,Law and Economics Di#0Eculty,1

#25 Correct Responses,59 Discrimination Index,43

Correct Answer,False

33.5 Under strict liability rules,potential victims are likely to spend too much resources on

avoiding accidents.

TRUE-FALSE 587

Topic,Law and Economics Di#0Eculty,2

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,False

33.6 Economic analysis suggests that it is ine#0Ecient to make the punishment for an anti-social

action greater than the cost of that action to society.

Topic,Law and Economics Di#0Eculty,1

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,False

33.7 Tort law is the branchofantitrust law that is concerned with damages for monopolistic

practices,unfair practices and price-#0Cxing.

Topic,Law and Economics Di#0Eculty,1

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,False

33.8 No-fault automobile insurance appears to be a mistaken policy,because the appropriate

punishment for dangerous driving is restitution for the damage done in the event of an accident.

Topic,Law and Economics Di#0Eculty,1

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,True

33.9 Socially optimal punishment and optimal compensation in the event of an accident need

not be equal.

Topic,Law and Economics Di#0Eculty,3

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,False

33.10 Economic analysis suggests that if the two participants in an automobile accident are de-

termined to be equally at fault and if the damages to the two parties are equal,then there is no

economic justi#0Ccation for punishing either of them beyond the damage they have already received.

Multiple Choice Law and Economics

Topic,Law and Economics Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,D

33.1 Madame N,gets a total paymentof$24logxif she delivers x stolen buttons to her "fence".

She has to pay a #0Cne of $F if she is caught,but there is no other cost of getting caught,How big

should the #0Cne be if wewant to limit Madame N,to taking 6 buttons?

#28a#29 $20

#28b#29 $400

#28c#29 $44

#28d#29 $40

#28e#29 $60

Topic,Law and Economics Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,D

33.2 Madame N,gets a total paymentof$4logxif she delivers x stolen buttons to her "fence".

She has to pay a #0Cne of $F if she is caught,but there is no other cost of getting caught,How big

should the #0Cne be if wewant to limit Madame N,to taking 4 buttons?

#28a#29 $5

#28b#29 $100

#28c#29 $14

#28d#29 $10

#28e#29 $15

MULTIPLE CHOICE 589

Topic,Law and Economics Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,B

33.3 Jim rides his bicycle at speed s and has money m

J; his utility function if he does not collide

with Dickis20s+m

J

,Dickwalks at speed w and has money m

D; his utility function if Jim does

not collide with him is 10 w+m

D

,The probability and severity of a collision depends on both their

speeds,In fact,if Jim rides at speed s and Dickwalks at speed w; the probability of an accident

times the cost of an accident will be s

2

+ w

2; for each of them,If there are no rules about liability

and no deals are made between Jim and Dick,how fast will they travel?

#28a#29 s = 10 and w =10

#28b#29 s = 10 and w =5

#28c#29 s = 20 and w =10

#28d#29 s = 15 and w =5

#28e#29 s = 5 and w =2:50

Topic,Law and Economics Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,B

33.4 Jim rides his bicycle at speed s and has money m

J; his utility function if he does not collide

with Dickis16s+m

J

,Dickwalks at speed w and has money m

D; his utility function if Jim does

not collide with him is 10 w+m

D

,The probability and severity of a collision depends on both their

speeds,In fact,if Jim rides at speed s and Dickwalks at speed w; the probability of an accident

times the cost of an accident will be s

2

+ w

2; for each of them,If there are no rules about liability

and no deals are made between Jim and Dick,how fast will they travel?

#28a#29 s = 8 and w =10

#28b#29 s = 8 and w =5

#28c#29 s = 16 and w =10

#28d#29 s = 13 and w =5

#28e#29 s = 4 and w =2:50

Essay Law and Economics

Topic,Law and Economics Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

33.1 Discuss the relation between e#0Ecient punishments for those who "cause" accidents and ef-

#0Ccient compensation for accident victims.

Answer:

Chapter 34

Multiple Choice Information Technology

Topic,Information Technology Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,C

34.1 If the demand curve for DoorKnobs operating system is related to perceived market share

s and actual market share t by the equation p = 245s#281,x#29; then in the long run,the highest price

at which DoorKnobs would maintain a market share of 6=7 would be

#28a#29 $45.

#28b#29 $39.

#28c#29 $30.

#28d#29 $27.

#28e#29 $36.

Topic,Information Technology Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,C

34.2 If the demand curve for DoorKnobs operating system is related to perceived market share

s and actual market share t by the equation p = 196s#281,x#29; then in the long run,the highest price

at which DoorKnobs would maintain a market share of 4=7 would be

#28a#29 $72.

#28b#29 $62.40.

#28c#29 $48.

#28d#29 $43.20.

#28e#29 $57.60.

Topic,Information Technology Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,C

34.3 If the demand curve for DoorKnobs operating system is related to perceived market share

s and actual market share t by the equation p = 128s#281,x#29; then in the long run,the highest price

at which DoorKnobs would maintain a market share of 6=8 would be

#28a#29 $36.

#28b#29 $31.20.

#28c#29 $24.

#28d#29 $21.60.

#28e#29 $28.80.

CHAPTER 34 Information Technology 592

Topic,Information Technology Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,C

34.4 If the demand curve for DoorKnobs operating system is related to perceived market share

s and actual market share t by the equation p = 486s#281,x#29; then in the long run,the highest price

at which DoorKnobs would maintain a market share of 6=9 would be

#28a#29 $162.

#28b#29 $140.40.

#28c#29 $108.

#28d#29 $97.20.

#28e#29 $129.60.

Topic,Information Technology Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,C

34.5 If the demand curve for DoorKnobs operating system is related to perceived market share

s and actual market share t by the equation p = 216s#281,x#29; then in the long run,the highest price

at which DoorKnobs would maintain a market share of 4=6 would be

#28a#29 $72.

#28b#29 $62.40.

#28c#29 $48.

#28d#29 $43.20.

#28e#29 $57.60.

MULTIPLE CHOICE 593

Topic,Information Technology Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,E

34.6 Professor Kremepu#0B has published a new textbook,This book will be used in classes for

twoyears,at which time it will be replaced by a new edition,The publisher charges a price of $p

1

in the #0Crst year and $p

2

in the second year,After the #0Crst year,bookstores buy back copies from

students for $p

2

=2 and resell them to students in the second year for $p

2

,#28Students are indi#0Berent

between new and used copies.#29 The cost to a student in the #0Crst year of owning the book for a

year is therefore $p

1

,#28p

2

=2#29,In the #0Crst year of publication,the number of students willing to pay

$v to own the book for a year is 60;000,1;000v,The number of students taking the course in the

#0Crst year who are willing to pay at least $w to keep the book for reference rather than resell it is

60;000,5;000w,In the second year,the number of students who have not previously taken the

course and are willing to pay at least $p for a copy of the book is 50;000,1;000p,If the publisher

sets a price of p

1

in the #0Crst year and p

2

in the second year,with p

1

#15 p

2; then the total number of

copies that the publisher sells over twoyears will be equal to

#28a#29 110;000,1;000#28p

1

+p

2

=2#29.

#28b#29 120;000,1;000#28p

1

,#28p

2

=2#29#29.

#28c#29 120;000,3;000p

2

.

#28d#29 120;000,1;000p

1

,1;000p

2

.

#28e#29 110;000,1;500p

2

.

Topic,Information Technology Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,E

34.7 Professor Kremepu#0B has published a new textbook,This book will be used in classes for

twoyears,at which time it will be replaced by a new edition,The publisher charges a price of $p

1

in the #0Crst year and $p

2

in the second year,After the #0Crst year,bookstores buy back copies from

students for $p

2

=2 and resell them to students in the second year for $p

2

,#28Students are indi#0Berent

between new and used copies.#29 The cost to a student in the #0Crst year of owning the book for a

year is therefore $p

1

,#28p

2

=2#29,In the #0Crst year of publication,the number of students willing to pay

$v to own the book for a year is 60;000,1;000v,The number of students taking the course in the

#0Crst year who are willing to pay at least $w to keep the book for reference rather than resell it is

60;000,5;000w,In the second year,the number of students who have not previously taken the

course and are willing to pay at least $p for a copy of the book is 50;000,1;000p,If the publisher

sets a price of p

1

in the #0Crst year and p

2

in the second year,with p

1

#15 p

2; then the total number of

copies that the publisher sells over twoyears will be equal to

#28a#29 110;000,1;000#28p

1

+p

2

=2#29.

#28b#29 120;000,1;000#28p

1

,#28p

2

=2#29#29.

#28c#29 120;000,3;000p

2

.

#28d#29 120;000,1;000p

1

,1;000p

2

.

#28e#29 110;000,1;500p

2

.

CHAPTER 34 Information Technology 594

Topic,Information Technology Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,E

34.8 Professor Kremepu#0B has published a new textbook,This book will be used in classes for

twoyears,at which time it will be replaced by a new edition,The publisher charges a price of $p

1

in the #0Crst year and $p

2

in the second year,After the #0Crst year,bookstores buy back copies from

students for $p

2

=2 and resell them to students in the second year for $p

2

,#28Students are indi#0Berent

between new and used copies.#29 The cost to a student in the #0Crst year of owning the book for a

year is therefore $p

1

,#28p

2

=2#29,In the #0Crst year of publication,the number of students willing to pay

$v to own the book for a year is 40;000,1;000v,The number of students taking the course in the

#0Crst year who are willing to pay at least $w to keep the book for reference rather than resell it is

40;000,5;000w,In the second year,the number of students who have not previously taken the

course and are willing to pay at least $p for a copy of the book is 30;000,1;000p,If the publisher

sets a price of p

1

in the #0Crst year and p

2

in the second year,with p

1

#15 p

2; then the total number of

copies that the publisher sells over twoyears will be equal to

#28a#29 70;000,1;000#28p

1

+ p

2

=2#29.

#28b#29 80;000,1;000#28p

1

,#28p

2

=2#29#29.

#28c#29 80;000,3;000p

2

.

#28d#29 80;000,1;000p

1

,1;000p

2

.

#28e#29 70;000,1;500p

2

.

Topic,Information Technology Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,E

34.9 Professor Kremepu#0B has published a new textbook,This book will be used in classes for

twoyears,at which time it will be replaced by a new edition,The publisher charges a price of $p

1

in the #0Crst year and $p

2

in the second year,After the #0Crst year,bookstores buy back copies from

students for $p

2

=2 and resell them to students in the second year for $p

2

,#28Students are indi#0Berent

between new and used copies.#29 The cost to a student in the #0Crst year of owning the book for a

year is therefore $p

1

,#28p

2

=2#29,In the #0Crst year of publication,the number of students willing to pay

$v to own the book for a year is 50;000,1;000v,The number of students taking the course in the

#0Crst year who are willing to pay at least $w to keep the book for reference rather than resell it is

50;000,5;000w,In the second year,the number of students who have not previously taken the

course and are willing to pay at least $p for a copy of the book is 40;000,1;000p,If the publisher

sets a price of p

1

in the #0Crst year and p

2

in the second year,with p

1

#15 p

2; then the total number of

copies that the publisher sells over twoyears will be equal to

#28a#29 90;000,1;000#28p

1

+ p

2

=2#29.

#28b#29 100;000,1;000#28p

1

,#28p

2

=2#29#29.

#28c#29 100;000,3;000p

2

.

#28d#29 100;000,1;000p

1

,1;000p

2

.

#28e#29 90;000,1;500p

2

.

MULTIPLE CHOICE 595

Topic,Information Technology Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,E

34.10 Professor Kremepu#0B has published a new textbook,This book will be used in classes for

twoyears,at which time it will be replaced by a new edition,The publisher charges a price of $p

1

in the #0Crst year and $p

2

in the second year,After the #0Crst year,bookstores buy back copies from

students for $p

2

=2 and resell them to students in the second year for $p

2

,#28Students are indi#0Berent

between new and used copies.#29 The cost to a student in the #0Crst year of owning the book for a

year is therefore $p

1

,#28p

2

=2#29,In the #0Crst year of publication,the number of students willing to pay

$v to own the book for a year is 50;000,1;000v,The number of students taking the course in the

#0Crst year who are willing to pay at least $w to keep the book for reference rather than resell it is

50;000,5;000w,In the second year,the number of students who have not previously taken the

course and are willing to pay at least $p for a copy of the book is 40;000,1;000p,If the publisher

sets a price of p

1

in the #0Crst year and p

2

in the second year,with p

1

#15 p

2; then the total number of

copies that the publisher sells over twoyears will be equal to

#28a#29 90;000,1;000#28p

1

+ p

2

=2#29.

#28b#29 100;000,1;000#28p

1

,#28p

2

=2#29#29.

#28c#29 100;000,3;000p

2

.

#28d#29 100;000,1;000p

1

,1;000p

2

.

#28e#29 90;000,1;500p

2

.

Topic,Information Technology Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,E

34.11 A group of 11 consumers are trying to decide whether to connect to a new communications

network,Consumer 1 is of type 1,consumer 2 of type 2,Consumer 3 of type 3,and so on,Each

consumer's willingness to pay to belong to the network is proportional to the number of consumers

who belong,Where k is the number of consumers who belong,the willingness to payofatype n

consumer is equal to k times n,What is the highest price at which 7 consumers could all connect

to the network and either make a pro#0Ct or at least break even?

#28a#29 37

#28b#29 33

#28c#29 32

#28d#29 40

#28e#29 35

CHAPTER 34 Information Technology 596

Topic,Information Technology Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,E

34.12 A group of 9 consumers are trying to decide whether to connect to a new communications

network,Consumer 1 is of type 1,consumer 2 of type 2,Consumer 3 of type 3,and so on,Each

consumer's willingness to pay to belong to the network is proportional to the number of consumers

who belong,Where k is the number of consumers who belong,the willingness to payofatype n

consumer is equal to k times n,What is the highest price at which 7 consumers could all connect

to the network and either make a pro#0Ct or at least break even?

#28a#29 23

#28b#29 19

#28c#29 18

#28d#29 26

#28e#29 21

Topic,Information Technology Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,E

34.13 A group of 11 consumers are trying to decide whether to connect to a new communications

network,Consumer 1 is of type 1,consumer 2 of type 2,Consumer 3 of type 3,and so on,Each

consumer's willingness to pay to belong to the network is proportional to the number of consumers

who belong,Where k is the number of consumers who belong,the willingness to payofatype n

consumer is equal to k times n,What is the highest price at which 7 consumers could all connect

to the network and either make a pro#0Ct or at least break even?

#28a#29 37

#28b#29 33

#28c#29 32

#28d#29 40

#28e#29 35

MULTIPLE CHOICE 597

Topic,Information Technology Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,E

34.14 A group of 11 consumers are trying to decide whether to connect to a new communications

network,Consumer 1 is of type 1,consumer 2 of type 2,Consumer 3 of type 3,and so on,Each

consumer's willingness to pay to belong to the network is proportional to the number of consumers

who belong,Where k is the number of consumers who belong,the willingness to payofatype n

consumer is equal to k times n,What is the highest price at which 9 consumers could all connect

to the network and either make a pro#0Ct or at least break even?

#28a#29 29

#28b#29 25

#28c#29 24

#28d#29 32

#28e#29 27

Topic,Information Technology Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,E

34.15 A group of 11 consumers are trying to decide whether to connect to a new communications

network,Consumer 1 is of type 1,consumer 2 of type 2,Consumer 3 of type 3,and so on,Each

consumer's willingness to pay to belong to the network is proportional to the number of consumers

who belong,Where k is the number of consumers who belong,the willingness to payofatype n

consumer is equal to k times n,What is the highest price at which 9 consumers could all connect

to the network and either make a pro#0Ct or at least break even?

#28a#29 29

#28b#29 25

#28c#29 24

#28d#29 32

#28e#29 27

Chapter 35

True-False Public Goods

Topic,Public Goods Di#0Eculty,1

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,False

35.1 Tosay that preferences are single peaked means that everybody either prefers more public

goods to less or everybody prefers less public goods to more.

Topic,Public Goods Di#0Eculty,1

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,True

35.2 If preferences are single peaked,then pairwise majorityvoting among alternative options

will not lead to voting cycles.

Topic,Public Goods Di#0Eculty,1

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,False

35.3 A tax imposed on polluters to give them an incentive to make an e#0Ecient reduction in

pollution is called a Clarke tax.

Topic,Public Goods Di#0Eculty,1

#25 Correct Responses,80 Discrimination Index,20

Correct Answer,True

35.4 If a pure public good is provided byvoluntary contributions,economic theory predicts that

in general too little will be supplied.

Topic,Public Goods Di#0Eculty,2

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,False

35.5 APareto optimal amount of public goods is shown on a graph #28with quantities of public

goods on the x axis#29 by the point at which the horizontal sum of the marginal rate of substitution

curves meets the marginal cost curve.

TRUE-FALSE 599

Topic,Public Goods Di#0Eculty,2

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,False

35.6 One of the problems with the Clarke tax mechanism is that when it is used,people havean

incentive to lie about their preferences.

Topic,Public Goods Di#0Eculty,1

#25 Correct Responses,80 Discrimination Index,28

Correct Answer,False

35.7 Economists de#0Cne public goods to be those goods that are supplied by the government and

private goods to be those goods that are supplied by the private sector.

Topic,Public Goods Di#0Eculty,2

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,False

35.8 If the supply of public goods is determined by majorityvote,then the outcome must be

Pareto optimal.

Topic,Public Goods Di#0Eculty,1

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,False

35.9 If preferences are single-peaked,then everyone will agree about the right amount of public

goods to be supplied.

Multiple Choice Public Goods

Topic,Public Goods Di#0Eculty,2

#25 Correct Responses,4 Discrimination Index,3503

Correct Answer,E

35.1 A quiet town in Kansas has 2000 people,all of whom have the same preferences,There is

one private good and one public good,Each person,i; in town has utility U#28x

i;y#29=x

i

+y

:5;where

x

i

is private good for person i and y is the amount of public good that the town provides,If the

private good costs $1 per unit and the public good costs $10 per unit,then the Pareto optimal

amount of public good for the town to provide is:

#28a#29 100 units.

#28b#29 500 units.

#28c#29 2000 units

#28d#29 8000 units.

#28e#29 10000 units

Topic,Public Goods Di#0Eculty,2

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,C

35.2 The Sons of Knute had a hunting lodge up on Loon Lake which burned down last winter.

They plan to rebuild it this summer and are trying to decide how large the new lodge should be.

The organization has 50 members,The marginal rate of substitution of each of them between

square feet of hunting lodge and money for other goods is 1:2,:0004y where y is the size of the

hunting lodge in square feet,What is the e#0Ecient size for the new hunting lodge?

#28a#29 1,000 square feet

#28b#29 1,200 square feet

#28c#29 2,000 square feet

#28d#29 2,400 square feet

#28e#29 None of the above.

MULTIPLE CHOICE 601

Topic,Public Goods Di#0Eculty,2

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,D

35.3 Anton,Bertha,and Cecilia all consume crackers and music,Crackers are a pure private good

and music is a pure public good,Their utility functions are,U

A

#28c

A;m#29=c

A

m; U

B

#28c

B;m#29=c

B

m;

and U

B

#28c

C;m#29=2c

C

m; where c

A

is Anton's cracker consumption,c

B

is Bertha's cracker consump-

tion,and c

C

is Cecilia's cracker consumption and where m is the amountofmusic jointly consumed

by all three of them,Music is measured in hours,Crackers cost $1 each,Music costs $10 an hour.

Anton's wealth is $30,Bertha's wealth is $50,and Cecilia's wealth is $20,What is the e#0Ecient

amountofmusic for them to consume?

#28a#29 2 hours

#28b#29 3 hours

#28c#29 4 hours

#28d#29 5 hours

#28e#29 6 hours

Topic,Public Goods Di#0Eculty,3

#25 Correct Responses,85 Discrimination Index,0

Correct Answer,C

35.4 Which of the following is the best example of a public good as de#0Cned in your text?

#28a#29 cable television

#28b#29 day care

#28c#29 radio broadcasts

#28d#29 medical care

#28e#29 Disneyland

CHAPTER 35 Public Goods 602

Topic,Public Goods Di#0Eculty,2

#25 Correct Responses,39 Discrimination Index,24

Correct Answer,A

35.5 A small co#0Bee company roasts co#0Bee beans in its shop,The unroasted beans cost the com-

pany 200 cents per pound,The marginal cost of roasting co#0Bee beans is 150,10q + q

2

cents per

pound when q pounds are roasted,The smell of roasting beans imposes costs on the company's

neighbors,The total amount that neighbors would be willing to paytohave the shop stop roasting

altogether is 5q

2; where q is the number of pounds being roasted,The company sells its output in

a competitive market at 450 cents per pound,What is the socially e#0Ecient amount of co#0Bee for

the company to roast?

#28a#29 10 lbs.

#28b#29 15 lbs.

#28c#29 the square root of 10 lbs.

#28d#29 45 lbs.

#28e#29 None of the above.

Topic,Public Goods Di#0Eculty,2

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,A

35.6 Nadia Comeneci and Mr,X have preferences de#0Cned over pizza,p; and trampolines,t,They

have identical utility functions,U#28p;t#29=p+2;000t

1=2

,Each pizza costs $1 and each trampoline

costs $1,000,Nadia and Mr,X like to share,and indeed trampolines are a public good for them.

Pizza,however,is a private good,We don't know their exact incomes,but wedoknow that each

of them earns at least $10,000,Which of the following is true?

#28a#29 The Pareto e#0Ecientnumber of trampolines for them is 4.

#28b#29 The Pareto e#0Ecientnumber of trampolines for them is 1.

#28c#29 The Pareto e#0Ecientnumber of trampolines for them cannot be determined without knowing how the

costs will be shared.

#28d#29 The Pareto e#0Ecientnumber of trampolines for them is 2.

#28e#29 Since their preferences are homothetic,their income elasticity of demand for pizza is,1.

MULTIPLE CHOICE 603

Topic,Public Goods Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,A

35.7 Just north of the town of Muskrat,Ontario,is the town of Brass Monkey,population 6400.

Brass Monkey,like Muskrat,has a single public good,the town skating rink,and a single private

good,Labatts ale,Everyone's utility function is U

i

#28X

i;Y#29=X

i

,81=Y; where X

i

is the number of

bottles of ale consumed by i and Y is the size of the skating rink in square meters,The price of ale

is $1 per bottle,The cost of the skating rink to the city is $4 per square meter,Everyone has an

income of at least $5,000,What is the Pareto e#0Ecient size for the town skating rink?

#28a#29 360 square meters

#28b#29 480 square meters

#28c#29 240 square meters

#28d#29 725 square meters

#28e#29 None of the above.

Topic,Public Goods Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,D

35.8 Bob and Ray are thinking of buying a sofa,Bob's utility function is U

B

#28S;M

B

#29=#281+S#29M

B

and Ray's utility function is U

R

#28S;M

R

#29 = #284 + S#29M

R; where S =0if they don't get the sofa and

S =1if they do and where M

B

and M

R

are the amounts of money they have respectively to spend

on their private consumptions,Bob has a total of $800 to spend on the sofa and other stu#0B,Ray

has a total of $ 3,000 to spend on the sofa and other stu#0B,The maximum amount that they could

pay for the sofa and still arrange to both be better o#0B than without it is:

#28a#29 1,500.

#28b#29 750.

#28c#29 550.

#28d#29 1,000.

#28e#29 2,000.

CHAPTER 35 Public Goods 604

Topic,Public Goods Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,D

35.9 Bob and Ray are thinking of buying a sofa,Bob's utility function is U

B

#28S;M

B

#29=#281+S#29M

B

and Ray's utility function is U

R

#28S;M

R

#29 = #283 + S#29M

R; where S =0if they don't get the sofa and

S =1if they do and where M

B

and M

R

are the amounts of money they have respectively to spend

on their private consumptions,Bob has a total of $2,000 to spend on the sofa and other stu#0B,Ray

has a total of $ 4,000 to spend on the sofa and other stu#0B,The maximum amount that they could

pay for the sofa and still arrange to both be better o#0B than without it is:

#28a#29 3,000.

#28b#29 1,333.33.

#28c#29 1,050.

#28d#29 2,000.

#28e#29 4,000.

Topic,Public Goods Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,C

35.10 Remember Bonnie and Clyde from your workbook? Suppose that their total pro#0Cts are

84H where H is the number of hours they work per year,Their utility functions are,respectively,U

B

#28C

B;H#29=C

B

,0:03H

2; and U

C

#28C

C;H#29=C

C

,0:04H

2; where C

B

a and C

C

are their private goods

consumptions and H is the number of hours they work per year,If they #0Cnd a Pareto optimal choice

of hours of work and income distribution,it must be that the number of hours they workper year is:

#28a#29 700.

#28b#29 600.

#28c#29 250.

#28d#29 350.

MULTIPLE CHOICE 605

Topic,Public Goods Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,C

35.11 Remember Bonnie and Clyde from your workbook? Suppose that their total pro#0Cts are

128H where H is the number of hours they work per year,Their utility functions are,respectively,

U

B

#28C

B;H#29=C

B

,0:02H

2; and U

C

#28C

C;H#29=C

C

,0:02H

2; where C

B

a and C

C

are their private goods

consumptions and H is the number of hours they work per year,If they #0Cnd a Pareto optimal choice

of hours of work and income distribution,it must be that the number of hours they workper year is:

#28a#29 1,700.

#28b#29 1,600.

#28c#29 750.

#28d#29 850.

Topic,Public Goods Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,B

35.12 Lucy's utility function is 2X

L

+ G and Melvin's utility function is X

M

G where G is their

expenditures on the public goods they share in their apartment and where X

L

and X

M

are their

respective private consumption expenditures,The total amount they have to spend on private

goods and public goods is 29,000,They agree on a Pareto optimal pattern of expenditures in which

the amount that is spent on Lucy's private consumption is 5,000,Howmuch do they spenton

public goods?

#28a#29 8,000

#28b#29 16,000

#28c#29 6,550

#28d#29 4,000

#28e#29 There is not enough information here to be able to determine the answer.

CHAPTER 35 Public Goods 606

Topic,Public Goods Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,B

35.13 Lucy's utility function is 2X

L

+ G and Melvin's utility function is X

M

G where G is their

expenditures on the public goods they share in their apartment and where X

L

and X

M

are their

respective private consumption expenditures,The total amount they have to spend on private

goods and public goods is 36,000,They agree on a Pareto optimal pattern of expenditures in which

the amount that is spent on Lucy's private consumption is 9,000,Howmuch do they spenton

public goods?

#28a#29 9,000

#28b#29 18,000

#28c#29 9,050

#28d#29 4,500

#28e#29 There is not enough information here to be able to determine the answer.

Essay Public Goods

Topic,Public Goods Di#0Eculty,3

#25 Correct Responses,0 Discrimination Index,0

35.1 An otherwise charming island is inhabited bytwo religious groups who hate each other,The

island is presided over by a benevolent monarch who is extremely concerned about envy between

groups,He chooses the distribution of income on the island so as to maximize the social welfare

function,W#28x;y#29=minf2x,y;2y,xg where x is the utility of the average member of group X and y

is the utility of the average member of group Y,a#29 If the monarch can accomplish any distribution

of utility such that x+3y=24;diagram the utility possibility frontier and the monarch's isowelfare

lines,b#29 What income distribution maximizes W? c#29 Show that an equal increase in both groups

income will always please the monarch,d#29If the initial incomes are equal,when do increases in

both groups' utility reduce W?

Answer,a#29 see prob 99 b#296;6 c#29 Adding a constanttobothxand y increases 2x-y and 2y-x,d#29

when either's income increases by more than twice the increase in the other's.

Chapter 36

True-False Information

Topic,Information Di#0Eculty,1

#25 Correct Responses,60 Discrimination Index,13

Correct Answer,True

36.1 An insurance companymust be concerned about the possibility that someone will buy #0Cre

insurance on a building and then set #0Cre to it,This is an example of moral hazard.

Topic,Information Di#0Eculty,1

#25 Correct Responses,90 Discrimination Index,13

Correct Answer,True

36.2 A life insurance companymust be concerned about the possibility that the people who buy

life insurance may tend to be less healthy than those who do not,This is an example of adverse

selection.

Topic,Information Di#0Eculty,1

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,False

36.3 In a market where there is signalling,a separating equilibrium occurs when economic agents

separate their actions as consumers from their actions as producers.

Topic,Information Di#0Eculty,1

#25 Correct Responses,51 Discrimination Index,34

Correct Answer,True

36.4 In a market where there is a separating equilibrium,di#0Berenttypes of agents make di#0Berent

choices of actions.

Topic,Information Di#0Eculty,1

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,True

36.5 In a market where there is a pooling equilibrium,di#0Berenttypes of agents choose the same

action.

TRUE-FALSE 609

Topic,Information Di#0Eculty,1

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,False

36.6 The incentive compatibility constraint requires that incentives be consistent with a con-

sumer's budget constraint.

Topic,Information Di#0Eculty,1

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,False

36.7 An example of adverse selection is where someone chooses a car that is not as good as it is

claimed to be.

Multiple Choice Information

Topic,Information Di#0Eculty,2

#25 Correct Responses,64 Discrimination Index,58

Correct Answer,D

36.1 A #0Crm hires two kinds of workers,alphas and betas.The population at large has equal num-

ber of alphas and betas,One can't tell a beta from an alpha by looking at her,but an alpha will

produce $3,000 worth of output per month and a beta will produce $2,500 worth of output in a

month,The #0Crm decides to distinguish alphas from betas by making them pass an examination.

For each question that they get right on the exam,alphas have to spend 1=2 hour studying and

betas have to spend 1 hour,A worker will be paid $3,000 if she gets at least 60 answers right and

$2,500 otherwise,For either type,an hour's studying is as bad as giving up $20 income per month.

This scheme leads to:

#28a#29 a separating equilibrium where alphas score 60 and betas score 0.

#28b#29 a pooling equilibrium where alphas score 60 and betas score 0.

#28c#29 a pooling equilibrium where everybody scores 60.

#28d#29 a pooling equilibrium where everybody scores 0.

#28e#29 a separating equilibrium where everybody scores 60.

Topic,Information Di#0Eculty,1

#25 Correct Responses,38 Discrimination Index,31

Correct Answer,A

36.2 Ten workers work jointly on a project,All 10 workers are equally skilled,The total value

of the output produced is $40 times the sum of the number of hours worked by all 10 workers.

Eachworker's utility is equal to his income minus the square of the number of hours he works.

Eachworker is sel#0Csh,They havenowayofkeeping trackofany individual's work e#0Bort,so they

decide to let each person work as long as he wants to and they divide the total value of their output

equally among them,Howmuch income will eachworker get?

#28a#29 $80

#28b#29 $800

#28c#29 $20

#28d#29 $95

#28e#29 None of the above.

MULTIPLE CHOICE 611

Topic,Information Di#0Eculty,1

#25 Correct Responses,38 Discrimination Index,31

Correct Answer,A

36.3 Ten workers work jointly on a project,All 10 workers are equally skilled,The total value

of the output produced is $50 times the sum of the number of hours worked by all 10 workers.

Eachworker's utility is equal to his income minus the square of the number of hours he works.

Eachworker is sel#0Csh,They havenowayofkeeping trackofany individual's work e#0Bort,so they

decide to let each person work as long as he wants to and they divide the total value of their output

equally among them,Howmuch income will eachworker get?

#28a#29 $125

#28b#29 $1,250

#28c#29 $25

#28d#29 $140

#28e#29 None of the above.

Topic,Information Di#0Eculty,1

#25 Correct Responses,74 Discrimination Index,37

Correct Answer,A

36.4 Which of the following is the best example of adverse selection?

#28a#29 People who face the highest risks are the people most likely to buy insurance against these risks.

#28b#29 The residual claimant will have to bear the consequences of the most adverse outcomes.

#28c#29 An individual can in#0Duence the probability that she has an accident.

#28d#29 Items in the most popular styles sell out the quickest.

#28e#29 People sometimes mistakenly choose low quality products.

CHAPTER 36 Information 612

Topic,Information Di#0Eculty,2

#25 Correct Responses,34 Discrimination Index,38

Correct Answer,C

36.5 A certain city has two kinds of workers,alphas and betas,An alpha can produce $100 worth

of output per dayworking for himself,If he works in the local factory,he produces $120 worth of

ouput a day,A beta produces $60 worth of ouput per dayworking for himself and he produces

$80 worth of output per dayifheworks for the local factory.Workers either work for themselves

or work in the factory,The factory owner can't tell alphas from betas,He paysawage equal to

the average product of his labor force and he has at least some alphas working for him,Work-

ers are free to choose to work for themselves or the factory,depending on which o#0Bers more money.

#28a#29 At least 5=6 of the factory's employees must be alphas.

#28b#29 At least half of the factory's employees must be betas.

#28c#29 At least half of the factory's employees must be alphas.

#28d#29 None of the factory's employees can be betas.

#28e#29 No more than 5=6 of the betas can work in the factory.

Topic,Information Di#0Eculty,0

#25 Correct Responses,29 Discrimination Index,25

Correct Answer,A

36.6 Enigma,Ohio,has two kinds of workers,klutzes whose labor is worth $1,000 a month and

kandos whose labor is worth $2,500 a month,Enigma has exactly twice as many klutzes as kandos.

Klutzes look just likekandos and are accomplished liars,so if you ask,they claim to be kandos,It

is too expensive to monitor anybody's work,A professor who likes to talk o#0Bers to give free lectures

on personal hygiene and macroeconomics,Klutzes and kandos #0Cnd these lectures excruciatingly

dull,An hour's lecture is as bad as losing $50 for a kando and as bad as losing $100 for a klutz,If

all other #0Crms paywages equal to the productivityofanaverage citizen of Enigma,which of these

strategies would be most pro#0Ctable for a new #0Crm?

#28a#29 O#0Ber a wage of $2000 per month and require its workers to listen to 6 hours of lectures per month.

#28b#29 O#0Ber a wage of $2000 per month and require its workers to listen to 4 hours of lectures per month.

#28c#29 O#0Ber a wage of $1750 per month and require its workers to listen to 6 hours of lectures per month.

#28d#29 O#0Ber a wage of $1660 per month and require its workers to attend 1 hour of lectures per month.

#28e#29 O#0Ber a wage of $2600 per month and require its workers to attend 8 hours of lectures per month.

MULTIPLE CHOICE 613

Topic,Information Di#0Eculty,3

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,D

36.7 Jan's utility function is C,H

2; where C is consumption and H is hours worked per day.

She can work in the city for 8 hours per day,earning$100 a day,Alternatively,she can rent a small

farm from the landlord,Mr,Porksni#0Ber,If she rents the farm,she can work as many hours a day

as she wishes,If she works H hours per day,she can sell her crops for a total of $20H per day,but

she must pay Mr,Porksni#0Ber an annual rentof$R,Mr,Porksni#0Ber wants to charge the highest

rent $R that he can and still be able to get Jan to work for him,What is the highest renthecan

charge? A penny less than:

#28a#29 $100 per day.

#28b#29 $64 per day.

#28c#29 $60 per day.

#28d#29 $50 per day.

#28e#29 $36 per day.

Topic,Information Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,C

36.8 Suppose that low productivityworkers all have marginal products of 10 and high produc-

tivityworkers have marginal products of 14,The community has equal numbers of eachtype of

worker,The local community college o#0Bers a course in microeconomics,High productivityworkers

think taking this course is as bad

as a cut in wages of 4 and low productivityworkers think it is as bad as a wage cut of 9.

#28a#29 There is a separating equilibrium in which high-productivityworkers take the course and are paid 14

and low-productivityworkers do not take the course and are paid 10.

#28b#29 There is no separating equilibrium and no pooling equilibrium.

#28c#29 There is no separating equilibrium,but there is a pooling equilibrium in whicheverybody is paid 12.

#28d#29 There is a separating equilibrium in which high-productivityworkers take the course and are paid 18

and low productivityworkers do not take the course and are paid 10.

#28e#29 There is a separating equilibrium in which high-productivityworkers take the course and are paid 14

and low productivityworkers are paid 12.

CHAPTER 36 Information 614

Topic,Information Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,C

36.9 Suppose that low productivityworkers all have marginal products of 10 and high produc-

tivityworkers have marginal products of 13,The community has equal numbers of eachtype of

worker,The local community college o#0Bers a course in microeconomics,High productivityworkers

think taking this course is as bad

as a cut in wages of 2 and low productivityworkers think it is as bad as a wage cut of 7.

#28a#29 There is a separating equilibrium in which high-productivityworkers take the course and are paid 13

and low-productivityworkers do not take the course and are paid 10.

#28b#29 There is no separating equilibrium and no pooling equilibrium.

#28c#29 There is no separating equilibrium,but there is a pooling equilibrium in whicheverybody is paid 11.50.

#28d#29 There is a separating equilibrium in which high-productivityworkers take the course and are paid 15

and low productivityworkers do not take the course and are paid 10.

#28e#29 There is a separating equilibrium in which high-productivityworkers take the course and are paid 13

and low productivityworkers are paid 11.50.

Topic,Information Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,A

36.10 Suppose that in Enigma,Ohio,Klutzes have productivity of $1000 and Kandos have pro-

ductivity of $4,000 per month,You can't tell Klutzes from Kandos by looking at them or asking

them and it is too expensive to monitor individual productivity,Kandos,however,have more

patience than Klutzes,Listening to an hour of dull lectures is as bad losing $300 for a Klutz and

$150 for a Kando,There will be a separating equilibrium in whichanybody who attends a course

of H hours of lectures is paid 4,000 per month and anybody who does not is paid $1000 per month:

#28a#29 if H#3C20 and H#3E10.

#28b#29 if H#3C40 and H#3E10.

#28c#29 for all positivevalues of H.

#28d#29 only in the limit as H approaches in#0Cnity.

#28e#29 if H#3C16:67 and H#3E8:33.

MULTIPLE CHOICE 615

Topic,Information Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,A

36.11 Suppose that in Enigma,Ohio,Klutzes have productivity of $1000 and Kandos have pro-

ductivity of $5,000 per month,You can't tell Klutzes from Kandos by looking at them or asking

them and it is too expensive to monitor individual productivity,Kandos,however,have more

patience than Klutzes,Listening to an hour of dull lectures is as bad losing $200 for a Klutz and

$100 for a Kando,There will be a separating equilibrium in whichanybody who attends a course

of H hours of lectures is paid 5,000 per month and anybody who does not is paid $1000 per month:

#28a#29 if H#3C40 and H#3E20.

#28b#29 if H#3C80 and H#3E20.

#28c#29 for all positivevalues of H.

#28d#29 only in the limit as H approaches in#0Cnity.

#28e#29 if H#3C35 and H#3E17:50.

Topic,Information Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,A

36.12 In Rustbucket,Michigan,there are 200 used cars for sale; half of these cars are good and

half of them are lemons,Owners of lemons are willing to sell them for $300,Owners of good used

cars are willing to sell them for prices above $900 but will keep them if the price is lower than $900.

There is a large number of potential buyers who are willing to pay $500 for a lemon and $1,900 for

a good car,Buyers can't tell good cars from bad,but original owners know.

#28a#29 There will be an equilibrium in which all used cars sell for $1,200.

#28b#29 The only equilibrium is one in which all used cars on the market are lemons and they sell for $500.

#28c#29 There will be an equilibrium in which lemons sell for $300 and good used cars sell for $900.

#28d#29 There will be an equilibrium in which all used cars sell for $600.

#28e#29 There will be an equilibrium in which lemons sell for $500 and good used cars sell for $1,900.

CHAPTER 36 Information 616

Topic,Information Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,A

36.13 In Rustbucket,Michigan,there are 200 used cars for sale; half of these cars are good and

half of them are lemons,Owners of lemons are willing to sell them for $300,Owners of good used

cars are willing to sell them for prices above $900 but will keep them if the price is lower than $900.

There is a large number of potential buyers who are willing to pay $600 for a lemon and $1,300 for

a good car,Buyers can't tell good cars from bad,but original owners know.

#28a#29 There will be an equilibrium in which all used cars sell for $950.

#28b#29 The only equilibrium is one in which all used cars on the market are lemons and they sell for $600.

#28c#29 There will be an equilibrium in which lemons sell for $300 and good used cars sell for $900.

#28d#29 There will be an equilibrium in which all used cars sell for $600.

#28e#29 There will be an equilibrium in which lemons sell for $600 and good used cars sell for $1,300.

Topic,Information Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,D

36.14 Suppose that in New Crankshaft,Pennsylvania,the quality distribution of the 5,000 used

cars on the market is such that the number of used cars of value less than V is V=2,Original

owners must sell their used cars,Original owners know what their cars are worth,but buyers can't

determine a car's qualityuntil they buy it,An owner can either take his car to an appraiser and

pay the appraiser $200 to appraise the car #28accurately and credibly#29 or he can sell the car unap-

praised,In equilibrium,car ownerswill have their cars appraised if and only if their value is atleast:

#28a#29 200.

#28b#29 2,500.

#28c#29 600.

#28d#29 400.

#28e#29 800.

MULTIPLE CHOICE 617

Topic,Information Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,D

36.15 Suppose that in New Crankshaft,Pennsylvania,the quality distribution of the 4,000 used

cars on the market is such that the number of used cars of value less than V is V=2,Original

owners must sell their used cars,Original owners know what their cars are worth,but buyers can't

determine a car's qualityuntil they buy it,An owner can either take his car to an appraiser and

pay the appraiser $200 to appraise the car #28accurately and credibly#29 or he can sell the car unap-

praised,In equilibrium,car ownerswill have their cars appraised if and only if their value is atleast:

#28a#29 200.

#28b#29 2,000.

#28c#29 600.

#28d#29 400.

#28e#29 800.

Topic,Information Di#0Eculty,0

#25 Correct Responses,77 Discrimination Index,37

Correct Answer,D

36.16 There are twotypes of used cars,high-quality and low-quality,Buyers can not tell dis-

tinguish the twotypes until after they have purchased them,Owners of high-quality cars will sell

them if the price is $2000 or higher,Owners of low-quality cars will sell them if the price is $1000

or higher,Buyers value a high-quality used car at $2,142 and a low-quality used car at $1200.

Suppose that the fraction 0.70 of used cars are of high quality and the fraction 0.30 of used cars

are of low quality,In equilibrium

#28a#29 Only high-quality used cars are sold.

#28b#29 Only low-quality used cars are sold.

#28c#29 All used cars are sold.

#28d#29 No used cars are sold.

#28e#29 High-quality used cars will sell for a uniformly higher price than low-quality used cars.

CHAPTER 36 Information 618

Topic,Information Di#0Eculty,0

#25 Correct Responses,77 Discrimination Index,37

Correct Answer,D

36.17 There are twotypes of used cars,high-quality and low-quality,Buyers can not tell dis-

tinguish the twotypes until after they have purchased them,Owners of high-quality cars will sell

them if the price is $2000 or higher,Owners of low-quality cars will sell them if the price is $1000

or higher,Buyers value a high-quality used car at $1,800 and a low-quality used car at $1200.

Suppose that the fraction 0.80 of used cars are of high quality and the fraction 0.20 of used cars

are of low quality,In equilibrium

#28a#29 Only high-quality used cars are sold.

#28b#29 Only low-quality used cars are sold.

#28c#29 All used cars are sold.

#28d#29 No used cars are sold.

#28e#29 High-quality used cars will sell for a uniformly higher price than low-quality used cars.

Chapter 2

Multiple Choice Budget Constraint

Topic,Budget Constraint Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,C

2.1A In Problem 2.1,if you have an income of $18 to spend,if commodity 1 costs $3 per unit,

and if commodity 2 costs $9 per unit,then the equation for your budget line can be written as

#28a#29 x

1

=3+x

2

=9 = 18.

#28b#29 #28x

1

+x

2

#29=#2812#29 = 18.

#28c#29 x

1

+3x

2

=6.

#28d#29 4x

1

+10x

2

= 19.

#28e#29 12#28x

1

+x

2

#29 = 18.

Topic,Budget Constraint Di#0Eculty,1

#25 Correct Responses,86 Discrimination Index,33

Correct Answer,A

2.2A In Problem 2.3,if you could exactly a#0Bord either 2 units of x and 7 units of y; or 4 units

of x and 3 units of y; then if you spent all of your income on y; how many units of y could you buy?

#28a#29 11

#28b#29 7

#28c#29 15

#28d#29 6

#28e#29 None of the other options are correct.

CHAPTER 2 Budget Constraint 620

Topic,Budget Constraint Di#0Eculty,0

#25 Correct Responses,100 Discrimination Index,0

Correct Answer,B

2.3A In Problem 2.4,Murphy used to consume 100 units of X and 50 units of Y when the price

of X was 2 and the price of Y was 4,If the price of X rose to 5 and the price of Y rose to 5,how

muchwould Murphy's income have to rise so that he could still a#0Bord his original bundle?

#28a#29 400

#28b#29 350

#28c#29 200

#28d#29 600

#28e#29 None of the other options are correct.

Topic,Budget Constraint Di#0Eculty,0

#25 Correct Responses,88 Discrimination Index,38

Correct Answer,C

2.4A In Problem 2.7,Edmund must pay$6each for punk rock video cassettes,If Edmund is

paid $48 per sack for accepting garbage and if his relatives send him an allowance of $432,then his

budget line is described by the equation

#28a#29 6V =48G.

#28b#29 6V +48G= 432.

#28c#29 6V,48G = 432.

#28d#29 6V = 432,G.

#28e#29 None of the other options are correct.

Topic,Budget Constraint Di#0Eculty,0

#25 Correct Responses,84 Discrimination Index,13

Correct Answer,C

2.5A In Problem 2.10,if in the same amount of time that it takes her to read 40 pages of eco-

nomics and 30 pages of sociology,Martha could read 10 pages of economics and 90 pages of sociol-

ogy,then which of these equations describes combinations of pages of economics,E; and sociology,

S; that she could read in the time it takes to read 40 pages of economics and 30 pages of sociology?

#28a#29 E + S =70

#28b#29 E=2+S=50

#28c#29 2E +S = 110

#28d#29 E + S = 100

#28e#29 All of the above.

MULTIPLE CHOICE 621

Topic,Budget Constraint Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,A

2.6A In Problem 2.11,ads in the boring business magazine are read by 300 lawyers and 1,000

M.B.A's,Ads in the consumer publication are read by 250 lawyers and 300 M.B.A.s,If Harry had

$3,000 to spend on advertising,if the price of ads in the boring business magazine were 600 and

the price of ads in the consumer magazine were 300,then the combinations of recent M.B.A.s and

lawyers with hot tubs whom he could reach with his advertising budget would be represented by

the integer values along a line segment that runs between the two points

#28a#29 #282;500;3;000#29 and #281;500;5;000#29.

#28b#29 #283;000;3;500#29 and #281;500;6;000#29.

#28c#29 #280;3;000#29 and #281;500;0#29.

#28d#29 #283;000;0#29 and #280;6;000#29.

#28e#29 #282;000;0#29 and #280;5;000#29.

Topic,Budget Constraint Di#0Eculty,2

#25 Correct Responses,68 Discrimination Index,75

Correct Answer,B

2.7A In the economy of Mungo,discussed in Problem 2.12,there is a third person called Ike,Ike

has a red income of 82 and a blue income of 25,#28Recall that blue ices are 1 bcu #28blue currency

unit#29 per unit of ambrosia and 1 bcu ppper unit of bubblegum,Red prices are 2 rcus #28red currency

units#29 per unit of ambrosia and 6 rcus per unit of bubblegum,You havetopaytwice for what you

buy,once in red currency,once in blue currency.#29 If Ike spends all of its blue income,but not all

of its red income,then it must be that

#28a#29 it consumes at least 8 units of bubblegum.

#28b#29 it consumes at least 17 units of ambrosia.

#28c#29 it consumes exactly twice as much bubblegum as ambrosia.

#28d#29 it consumes at least 13 units of bubblegum.

#28e#29 it consumes equal amounts of ambrosia and bubblegum.

Multiple Choice Budget Constraint

Topic,Budget Constraint Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,C

2.1B In Problem 2.1,if you have an income of $18 to spend,if commodity 1 costs $3 per unit,

and if commodity 2 costs $9 per unit,then the equation for your budget line can be written as

#28a#29 x

1

=3+x

2

=9 = 18.

#28b#29 #28x

1

+x

2

#29=#2812#29 = 18.

#28c#29 x

1

+3x

2

=6.

#28d#29 4x

1

+10x

2

= 19.

#28e#29 12#28x

1

+x

2

#29 = 18.

Topic,Budget Constraint Di#0Eculty,1

#25 Correct Responses,86 Discrimination Index,33

Correct Answer,A

2.2B In Problem 2.3,if you could exactly a#0Bord either 2 units of x and 7 units of y; or 4 units

of x and 3 units of y; then if you spent all of your income on y; how many units of y could you buy?

#28a#29 11

#28b#29 7

#28c#29 15

#28d#29 6

#28e#29 None of the other options are correct.

Topic,Budget Constraint Di#0Eculty,0

#25 Correct Responses,100 Discrimination Index,0

Correct Answer,B

2.3B In Problem 2.4,Murphy used to consume 100 units of X and 50 units of Y when the price

of X was 2 and the price of Y was 4,If the price of X rose to 5 and the price of Y rose to 5,how

muchwould Murphy's income have to rise so that he could still a#0Bord his original bundle?

#28a#29 400

#28b#29 350

#28c#29 200

#28d#29 600

#28e#29 None of the other options are correct.

MULTIPLE CHOICE 623

Topic,Budget Constraint Di#0Eculty,0

#25 Correct Responses,88 Discrimination Index,38

Correct Answer,C

2.4B In Problem 2.7,Edmund must pay $6 each for punk rock video cassettes,If Edmund is

paid $48 per sack for accepting garbage and if his relatives send him an allowance of $432,then his

budget line is described by the equation

#28a#29 6V =48G.

#28b#29 6V +48G= 432.

#28c#29 6V,48G = 432.

#28d#29 6V = 432,G.

#28e#29 None of the other options are correct.

Topic,Budget Constraint Di#0Eculty,0

#25 Correct Responses,84 Discrimination Index,13

Correct Answer,C

2.5B In Problem 2.10,if in the same amount of time that it takes her to read 40 pages of eco-

nomics and 30 pages of sociology,Martha could read 10 pages of economics and 90 pages of sociol-

ogy,then which of these equations describes combinations of pages of economics,E; and sociology,

S; that she could read in the time it takes to read 40 pages of economics and 30 pages of sociology?

#28a#29 E + S =70

#28b#29 E=2+S=50

#28c#29 2E +S = 110

#28d#29 E + S = 100

#28e#29 All of the above.

CHAPTER 2 Budget Constraint 624

Topic,Budget Constraint Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,A

2.6B In Problem 2.11,ads in the boring business magazine are read by 300 lawyers and 1,000

M.B.A's,Ads in the consumer publication are read by 250 lawyers and 300 M.B.A.s,If Harry had

$3,000 to spend on advertising,if the price of ads in the boring business magazine were 600 and

the price of ads in the consumer magazine were 300,then the combinations of recent M.B.A.s and

lawyers with hot tubs whom he could reach with his advertising budget would be represented by

the integer values along a line segment that runs between the two points

#28a#29 #282;500;3;000#29 and #281;500;5;000#29.

#28b#29 #283;000;3;500#29 and #281;500;6;000#29.

#28c#29 #280;3;000#29 and #281;500;0#29.

#28d#29 #283;000;0#29 and #280;6;000#29.

#28e#29 #282;000;0#29 and #280;5;000#29.

Topic,Budget Constraint Di#0Eculty,2

#25 Correct Responses,68 Discrimination Index,75

Correct Answer,B

2.7B In the economy of Mungo,discussed in Problem 2.12,there is a third person called Ike,Ike

has a red income of 82 and a blue income of 25,#28Recall that blue ices are 1 bcu #28blue currency

unit#29 per unit of ambrosia and 1 bcu ppper unit of bubblegum,Red prices are 2 rcus #28red currency

units#29 per unit of ambrosia and 6 rcus per unit of bubblegum,You havetopaytwice for what you

buy,once in red currency,once in blue currency.#29 If Ike spends all of its blue income,but not all

of its red income,then it must be that

#28a#29 it consumes at least 8 units of bubblegum.

#28b#29 it consumes at least 17 units of ambrosia.

#28c#29 it consumes exactly twice as much bubblegum as ambrosia.

#28d#29 it consumes at least 13 units of bubblegum.

#28e#29 it consumes equal amounts of ambrosia and bubblegum.

Multiple Choice Budget Constraint

Topic,Budget Constraint Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,C

2.1C In Problem 2.1,if you have an income of $40 to spend,if commodity 1 costs $5 per unit,

and if commodity 2 costs $20 per unit,then the equation for your budget line can be written as

#28a#29 x

1

=5+x

2

=20 = 40.

#28b#29 #28x

1

+x

2

#29=#2825#29 = 40.

#28c#29 x

1

+4x

2

=8.

#28d#29 6x

1

+21x

2

= 41.

#28e#29 25#28x

1

+x

2

#29 = 40.

Topic,Budget Constraint Di#0Eculty,1

#25 Correct Responses,86 Discrimination Index,33

Correct Answer,A

2.2C In Problem 2.3,if you could exactly a#0Bord either 2 units of x and 15 units of y; or 7 units

of x and 5 units of y; then if you spent all of your income on y; how many units of y could you buy?

#28a#29 19

#28b#29 9

#28c#29 29

#28d#29 9

#28e#29 None of the other options are correct.

Topic,Budget Constraint Di#0Eculty,0

#25 Correct Responses,100 Discrimination Index,0

Correct Answer,B

2.3C In Problem 2.4,Murphy used to consume 100 units of X and 50 units of Y when the price

of X was 2 and the price of Y was 4,If the price of X rose to 5 and the price of Y rose to 10,how

muchwould Murphy's income have to rise so that he could still a#0Bord his original bundle?

#28a#29 900

#28b#29 600

#28c#29 450

#28d#29 1,350

#28e#29 None of the other options are correct.

CHAPTER 2 Budget Constraint 626

Topic,Budget Constraint Di#0Eculty,0

#25 Correct Responses,88 Discrimination Index,38

Correct Answer,C

2.4C In Problem 2.7,Edmund must pay$6each for punk rock video cassettes,If Edmund is

paid $48 per sack for accepting garbage and if his relatives send him an allowance of $192,then his

budget line is described by the equation

#28a#29 6V =48G.

#28b#29 6V +48G= 192.

#28c#29 6V,48G = 192.

#28d#29 6V = 192,G.

#28e#29 None of the other options are correct.

Topic,Budget Constraint Di#0Eculty,0

#25 Correct Responses,84 Discrimination Index,13

Correct Answer,C

2.5C In Problem 2.10,if in the same amount of time that it takes her to read 40 pages of eco-

nomics and 30 pages of sociology,Martha could read 20 pages of economics and 90 pages of sociol-

ogy,then which of these equations describes combinations of pages of economics,E; and sociology,

S; that she could read in the time it takes to read 40 pages of economics and 30 pages of sociology?

#28a#29 E + S =70

#28b#29 E=2+S=50

#28c#29 3E +S = 150

#28d#29 E + S = 110

#28e#29 All of the above.

MULTIPLE CHOICE 627

Topic,Budget Constraint Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,A

2.6C In Problem 2.11,ads in the boring business magazine are read by 300 lawyers and 1,000

M.B.A's,Ads in the consumer publication are read by 250 lawyers and 300 M.B.A.s,If Harry had

$3,600 to spend on advertising,if the price of ads in the boring business magazine were 600 and

the price of ads in the consumer magazine were 300,then the combinations of recent M.B.A.s and

lawyers with hot tubs whom he could reach with his advertising budget would be represented by

the integer values along a line segment that runs between the two points

#28a#29 #283;000;3;600#29 and #281;800;6;000#29.

#28b#29 #283;600;4;200#29 and #281;800;7;200#29.

#28c#29 #280;3;600#29 and #281;800;0#29.

#28d#29 #283;600;0#29 and #280;7;200#29.

#28e#29 #282;400;0#29 and #280;6;000#29.

Topic,Budget Constraint Di#0Eculty,2

#25 Correct Responses,68 Discrimination Index,75

Correct Answer,B

2.7C In the economy of Mungo,discussed in Problem 2.12,there is a third person called Ike,Ike

has a red income of 80 and a blue income of 30,#28Recall that blue ices are 1 bcu #28blue currency

unit#29 per unit of ambrosia and 1 bcu ppper unit of bubblegum,Red prices are 2 rcus #28red currency

units#29 per unit of ambrosia and 6 rcus per unit of bubblegum,You havetopaytwice for what you

buy,once in red currency,once in blue currency.#29 If Ike spends all of its blue income,but not all

of its red income,then it must be that

#28a#29 it consumes at least 5 units of bubblegum.

#28b#29 it consumes at least 25 units of ambrosia.

#28c#29 it consumes exactly twice as much bubblegum as ambrosia.

#28d#29 it consumes at least 9 units of bubblegum.

#28e#29 it consumes equal amounts of ambrosia and bubblegum.

Multiple Choice Budget Constraint

Topic,Budget Constraint Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,C

2.1D In Problem 2.1,if you have an income of $80 to spend,if commodity 1 costs $5 per unit,

and if commodity 2 costs $20 per unit,then the equation for your budget line can be written as

#28a#29 x

1

=5+x

2

=20 = 80.

#28b#29 #28x

1

+x

2

#29=#2825#29 = 80.

#28c#29 x

1

+4x

2

= 16.

#28d#29 6x

1

+21x

2

= 81.

#28e#29 25#28x

1

+x

2

#29 = 80.

Topic,Budget Constraint Di#0Eculty,1

#25 Correct Responses,86 Discrimination Index,33

Correct Answer,A

2.2D In Problem 2.3,if you could exactly a#0Bord either 2 units of x and 13 units of y; or 4 units

of x and 5 units of y; then if you spent all of your income on y; how many units of y could you buy?

#28a#29 21

#28b#29 13

#28c#29 29

#28d#29 6

#28e#29 None of the other options are correct.

Topic,Budget Constraint Di#0Eculty,0

#25 Correct Responses,100 Discrimination Index,0

Correct Answer,B

2.3D In Problem 2.4,Murphy used to consume 100 units of X and 50 units of Y when the price

of X was 2 and the price of Y was 4,If the price of X rose to 3 and the price of Y rose to 8,how

muchwould Murphy's income have to rise so that he could still a#0Bord his original bundle?

#28a#29 500

#28b#29 300

#28c#29 250

#28d#29 750

#28e#29 None of the other options are correct.

MULTIPLE CHOICE 629

Topic,Budget Constraint Di#0Eculty,0

#25 Correct Responses,88 Discrimination Index,38

Correct Answer,C

2.4D In Problem 2.7,Edmund must pay $6 each for punk rock video cassettes,If Edmund is

paid $36 per sack for accepting garbage and if his relatives send him an allowance of $144,then his

budget line is described by the equation

#28a#29 6V =36G.

#28b#29 6V +36G= 144.

#28c#29 6V,36G = 144.

#28d#29 6V = 144,G.

#28e#29 None of the other options are correct.

Topic,Budget Constraint Di#0Eculty,0

#25 Correct Responses,84 Discrimination Index,13

Correct Answer,C

2.5D In Problem 2.10,if in the same amount of time that it takes her to read 40 pages of eco-

nomics and 30 pages of sociology,Martha could read 10 pages of economics and 180 pages of sociol-

ogy,then which of these equations describes combinations of pages of economics,E; and sociology,

S; that she could read in the time it takes to read 40 pages of economics and 30 pages of sociology?

#28a#29 E + S =70

#28b#29 E=2+S=50

#28c#29 5E +S = 230

#28d#29 E + S = 190

#28e#29 All of the above.

CHAPTER 2 Budget Constraint 630

Topic,Budget Constraint Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,A

2.6D In Problem 2.11,ads in the boring business magazine are read by 300 lawyers and 1,000

M.B.A's,Ads in the consumer publication are read by 250 lawyers and 300 M.B.A.s,If Harry had

$4,550 to spend on advertising,if the price of ads in the boring business magazine were 700 and

the price of ads in the consumer magazine were 350,then the combinations of recent M.B.A.s and

lawyers with hot tubs whom he could reach with his advertising budget would be represented by

the integer values along a line segment that runs between the two points

#28a#29 #283;250;3;900#29 and #281;950;6;500#29.

#28b#29 #283;900;4;550#29 and #281;950;7;800#29.

#28c#29 #280;3;900#29 and #281;950;0#29.

#28d#29 #283;900;0#29 and #280;7;800#29.

#28e#29 #282;600;0#29 and #280;6;500#29.

Topic,Budget Constraint Di#0Eculty,2

#25 Correct Responses,68 Discrimination Index,75

Correct Answer,B

2.7D In the economy of Mungo,discussed in Problem 2.12,there is a third person called Ike,Ike

has a red income of 84 and a blue income of 20,#28Recall that blue ices are 1 bcu #28blue currency

unit#29 per unit of ambrosia and 1 bcu ppper unit of bubblegum,Red prices are 2 rcus #28red currency

units#29 per unit of ambrosia and 6 rcus per unit of bubblegum,You havetopaytwice for what you

buy,once in red currency,once in blue currency.#29 If Ike spends all of its blue income,but not all

of its red income,then it must be that

#28a#29 it consumes at least 11 units of bubblegum.

#28b#29 it consumes at least 9 units of ambrosia.

#28c#29 it consumes exactly twice as much bubblegum as ambrosia.

#28d#29 it consumes at least 21 units of bubblegum.

#28e#29 it consumes equal amounts of ambrosia and bubblegum.

Multiple Choice Budget Constraint

Topic,Budget Constraint Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,C

2.1E In Problem 2.1,if you have an income of $24 to spend,if commodity 1 costs $2 per unit,

and if commodity 2 costs $8 per unit,then the equation for your budget line can be written as

#28a#29 x

1

=2+x

2

=8 = 24.

#28b#29 #28x

1

+x

2

#29=#2810#29 = 24.

#28c#29 x

1

+4x

2

= 12.

#28d#29 3x

1

+9x

2

= 25.

#28e#29 10#28x

1

+x

2

#29 = 24.

Topic,Budget Constraint Di#0Eculty,1

#25 Correct Responses,86 Discrimination Index,33

Correct Answer,A

2.2E In Problem 2.3,if you could exactly a#0Bord either 3 units of x and 24 units of y; or 7 units

of x and 8 units of y; then if you spent all of your income on y; how many units of y could you buy?

#28a#29 36

#28b#29 20

#28c#29 52

#28d#29 10

#28e#29 None of the other options are correct.

Topic,Budget Constraint Di#0Eculty,0

#25 Correct Responses,100 Discrimination Index,0

Correct Answer,B

2.3E In Problem 2.4,Murphy used to consume 100 units of X and 50 units of Y when the price

of X was 2 and the price of Y was 4,If the price of X rose to 3 and the price of Y rose to 5,how

muchwould Murphy's income have to rise so that he could still a#0Bord his original bundle?

#28a#29 200

#28b#29 150

#28c#29 100

#28d#29 300

#28e#29 None of the other options are correct.

CHAPTER 2 Budget Constraint 632

Topic,Budget Constraint Di#0Eculty,0

#25 Correct Responses,88 Discrimination Index,38

Correct Answer,C

2.4E In Problem 2.7,Edmund must pay$6each for punk rock video cassettes,If Edmund is

paid $24 per sack for accepting garbage and if his relatives send him an allowance of $168,then his

budget line is described by the equation

#28a#29 6V =24G.

#28b#29 6V +24G= 168.

#28c#29 6V,24G = 168.

#28d#29 6V = 168,G.

#28e#29 None of the other options are correct.

Topic,Budget Constraint Di#0Eculty,0

#25 Correct Responses,84 Discrimination Index,13

Correct Answer,C

2.5E In Problem 2.10,if in the same amount of time that it takes her to read 40 pages of eco-

nomics and 30 pages of sociology,Martha could read 20 pages of economics and 110 pages of sociol-

ogy,then which of these equations describes combinations of pages of economics,E; and sociology,

S; that she could read in the time it takes to read 40 pages of economics and 30 pages of sociology?

#28a#29 E + S =70

#28b#29 E=2+S=50

#28c#29 4E +S = 190

#28d#29 E + S = 130

#28e#29 All of the above.

MULTIPLE CHOICE 633

Topic,Budget Constraint Di#0Eculty,0

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,A

2.6E In Problem 2.11,ads in the boring business magazine are read by 300 lawyers and 1,000

M.B.A's,Ads in the consumer publication are read by 250 lawyers and 300 M.B.A.s,If Harry had

$3,850 to spend on advertising,if the price of ads in the boring business magazine were 700 and

the price of ads in the consumer magazine were 350,then the combinations of recent M.B.A.s and

lawyers with hot tubs whom he could reach with his advertising budget would be represented by

the integer values along a line segment that runs between the two points

#28a#29 #282;750;3;300#29 and #281;650;5;500#29.

#28b#29 #283;300;3;850#29 and #281;650;6;600#29.

#28c#29 #280;3;300#29 and #281;650;0#29.

#28d#29 #283;300;0#29 and #280;6;600#29.

#28e#29 #282;200;0#29 and #280;5;500#29.

Topic,Budget Constraint Di#0Eculty,2

#25 Correct Responses,68 Discrimination Index,75

Correct Answer,B

2.7E In the economy of Mungo,discussed in Problem 2.12,there is a third person called Ike,Ike

has a red income of 58 and a blue income of 15,#28Recall that blue ices are 1 bcu #28blue currency

unit#29 per unit of ambrosia and 1 bcu ppper unit of bubblegum,Red prices are 2 rcus #28red currency

units#29 per unit of ambrosia and 6 rcus per unit of bubblegum,You havetopaytwice for what you

buy,once in red currency,once in blue currency.#29 If Ike spends all of its blue income,but not all

of its red income,then it must be that

#28a#29 it consumes at least 7 units of bubblegum.

#28b#29 it consumes at least 8 units of ambrosia.

#28c#29 it consumes exactly twice as much bubblegum as ambrosia.

#28d#29 it consumes at least 16 units of bubblegum.

#28e#29 it consumes equal amounts of ambrosia and bubblegum.

Chapter 3

Multiple Choice Preferences

Topic,Preferences Di#0Eculty,1

#25 Correct Responses,83 Discrimination Index,33

Correct Answer,C

3.1A In Problem 3.1,Charlie's indi#0Berence curves have the equation x

B

= constant=x

A; where

larger constants correspond to better indi#0Berence curves,Charlie strictly prefers the bundle #289;17#29

to the following bundle

#28a#29 #2817;9#29.

#28b#29 #2810;16#29.

#28c#29 #2811;11#29.

#28d#29 all three of these bundles.

#28e#29 none of these bundles.

Topic,Preferences Di#0Eculty,2

#25 Correct Responses,90 Discrimination Index,22

Correct Answer,C

3.2A In Problem 3.2,Ambrose has indi#0Berence curves with the equation x

2

= constant,4x

1=2

1;

where larger constants correspond to higher indi#0Berence curves,If good 1 is drawn on the horizon-

tal axis and good 2 on the vertical axis,what is the slope of Ambrose's indi#0Berence curve when his

consumption bundle is #281;13#29?

#28a#29,1=13

#28b#29,13=1

#28c#29,2

#28d#29,14

#28e#29,1

MULTIPLE CHOICE 635

Topic,Preferences Di#0Eculty,2

#25 Correct Responses,62 Discrimination Index,22

Correct Answer,A

3.3A In Problem 3.8,Nancy Lerner is taking a course from Professor Goodheart who will count

only her best midterm grade and from Professor Stern who will count only her worst midterm

grade,In one of her classes,Nancy has scores of 70 on her #0Crst midterm and 80 on her second

midterm,When the #0Crst midterm score is measured on the horizontal axis and her second midterm

score on the vertical,her indi#0Berence curve has a slope of zero at the point #2870;80#29,Therefore it

must be that

#28a#29 this class could be Professor Goodheart's,but couldn't be Professor Stern's.

#28b#29 this class could be Professor Stern's,but couldn't be Professor Goodheart's.

#28c#29 this class couldn't be either Goodheart's or Stern's.

#28d#29 this class could be either Goodheart's or Stern's.

#28e#29 there is not enough information to tell whose class it could or couldn't be

Topic,Preferences Di#0Eculty,2

#25 Correct Responses,79 Discrimination Index,0

Correct Answer,D

3.4A In Problem 3.9,if we graph Mary Granola's indi#0Berence curves with avocados on the hor-

izontal axis and grapefruits on the vertical axis,then whenever she has more grapefruits than

avocados,the slope of her indi#0Berence curveis,2,Whenever she has more avocados than grape-

fruits,the slope is,1=2,Mary would be indi#0Berentbetween a bundle with 24 avocados and 30

grapefruits and another bundle that has 34 avocados and

#28a#29 26 grapefruits.

#28b#29 28 grapefruits.

#28c#29 18 grapefruits.

#28d#29 22 grapefruits.

#28e#29 24 grapefruits.

CHAPTER 3 Preferences 636

Topic,Preferences Di#0Eculty,2

#25 Correct Responses,68 Discrimination Index,63

Correct Answer,B

3.5A In Problem 3.12,recall that Tommy Twit's mother measures the departure of any bundle

from her favorite bundle for Tommyby the sum of the absolute values of the di#0Berences,Her

favorite bundle for Tommyis#282;7#29,,that is,2 cookies and 7 glasses of milk,Tommy's mother's

indi#0Berence curve that passes through the point #28c;m#29=#284;5#29 also passes through

#28a#29 #286;3#29.

#28b#29 the points #282;3#29; #286;7#29; and #284;9#29.

#28c#29 #282;7#29.

#28d#29 the points #284;7#29; #282;5#29; and #282;9#29.

#28e#29 None of the other options are correct.

Topic,Preferences Di#0Eculty,0

#25 Correct Responses,52 Discrimination Index,38

Correct Answer,E

3.6A In Problem 3.1,Charlie's indi#0Berence curves have the equation x

B

= constant=x

A; where

larger constants correspond to better indi#0Berence curves,Charlie strictly prefers the bundle #288;15#29

to the following bundle:

#28a#29 #2815;8#29

#28b#29 #289;14#29

#28c#29 #2814;14#29

#28d#29 more than one of these options are correct.

#28e#29 none of the above are correct.

Multiple Choice Preferences

Topic,Preferences Di#0Eculty,1

#25 Correct Responses,83 Discrimination Index,33

Correct Answer,C

3.1B In Problem 3.1,Charlie's indi#0Berence curves have the equation x

B

= constant=x

A; where

larger constants correspond to better indi#0Berence curves,Charlie strictly prefers the bundle #289;19#29

to the following bundle

#28a#29 #2819;9#29.

#28b#29 #2810;18#29.

#28c#29 #2812;15#29.

#28d#29 all three of these bundles.

#28e#29 none of these bundles.

Topic,Preferences Di#0Eculty,2

#25 Correct Responses,90 Discrimination Index,22

Correct Answer,C

3.2B In Problem 3.2,Ambrose has indi#0Berence curves with the equation x

2

= constant,4x

1=2

1;

where larger constants correspond to higher indi#0Berence curves,If good 1 is drawn on the horizon-

tal axis and good 2 on the vertical axis,what is the slope of Ambrose's indi#0Berence curve when his

consumption bundle is #289;14#29?

#28a#29,9=14

#28b#29,14=9

#28c#29,0:67

#28d#29,17

#28e#29,3

CHAPTER 3 Preferences 638

Topic,Preferences Di#0Eculty,2

#25 Correct Responses,62 Discrimination Index,22

Correct Answer,A

3.3B In Problem 3.8,Nancy Lerner is taking a course from Professor Goodheart who will count

only her best midterm grade and from Professor Stern who will count only her worst midterm

grade,In one of her classes,Nancy has scores of 70 on her #0Crst midterm and 60 on her second

midterm,When the #0Crst midterm score is measured on the horizontal axis and her second midterm

score on the vertical,her indi#0Berence curve has a slope of zero at the point #2870;60#29,Therefore it

must be that

#28a#29 this class could be Professor Goodheart's,but couldn't be Professor Stern's.

#28b#29 this class could be Professor Stern's,but couldn't be Professor Goodheart's.

#28c#29 this class couldn't be either Goodheart's or Stern's.

#28d#29 this class could be either Goodheart's or Stern's.

#28e#29 there is not enough information to tell whose class it could or couldn't be

Topic,Preferences Di#0Eculty,2

#25 Correct Responses,79 Discrimination Index,0

Correct Answer,D

3.4B In Problem 3.9,if we graph Mary Granola's indi#0Berence curves with avocados on the hor-

izontal axis and grapefruits on the vertical axis,then whenever she has more grapefruits than

avocados,the slope of her indi#0Berence curveis,2,Whenever she has more avocados than grape-

fruits,the slope is,1=2,Mary would be indi#0Berentbetween a bundle with 24 avocados and 36

grapefruits and another bundle that has 32 avocados and

#28a#29 28 grapefruits.

#28b#29 32 grapefruits.

#28c#29 24 grapefruits.

#28d#29 26 grapefruits.

#28e#29 27 grapefruits.

MULTIPLE CHOICE 639

Topic,Preferences Di#0Eculty,2

#25 Correct Responses,68 Discrimination Index,63

Correct Answer,B

3.5B In Problem 3.12,recall that Tommy Twit's mother measures the departure of any bundle

from her favorite bundle for Tommyby the sum of the absolute values of the di#0Berences,Her

favorite bundle for Tommyis#282;7#29,,that is,2 cookies and 7 glasses of milk,Tommy's mother's

indi#0Berence curve that passes through the point #28c;m#29=#283;6#29 also passes through

#28a#29 #284;5#29.

#28b#29 the points #282;5#29; #284;7#29; and #283;8#29.

#28c#29 #282;7#29.

#28d#29 the points #283;7#29; #282;6#29; and #282;8#29.

#28e#29 None of the other options are correct.

Topic,Preferences Di#0Eculty,0

#25 Correct Responses,52 Discrimination Index,38

Correct Answer,E

3.6B In Problem 3.1,Charlie's indi#0Berence curves have the equation x

B

= constant=x

A; where

larger constants correspond to better indi#0Berence curves,Charlie strictly prefers the bundle #287;12#29

to the following bundle:

#28a#29 #2812;7#29

#28b#29 #288;11#29

#28c#29 #2813;8#29

#28d#29 more than one of these options are correct.

#28e#29 none of the above are correct.

Multiple Choice Preferences

Topic,Preferences Di#0Eculty,1

#25 Correct Responses,83 Discrimination Index,33

Correct Answer,C

3.1C In Problem 3.1,Charlie's indi#0Berence curves have the equation x

B

= constant=x

A; where

larger constants correspond to better indi#0Berence curves,Charlie strictly prefers the bundle #287;14#29

to the following bundle

#28a#29 #2814;7#29.

#28b#29 #288;13#29.

#28c#29 #2813;8#29.

#28d#29 all three of these bundles.

#28e#29 none of these bundles.

Topic,Preferences Di#0Eculty,2

#25 Correct Responses,90 Discrimination Index,22

Correct Answer,C

3.2C In Problem 3.2,Ambrose has indi#0Berence curves with the equation x

2

= constant,4x

1=2

1;

where larger constants correspond to higher indi#0Berence curves,If good 1 is drawn on the horizon-

tal axis and good 2 on the vertical axis,what is the slope of Ambrose's indi#0Berence curve when his

consumption bundle is #289;16#29?

#28a#29,9=16

#28b#29,16=9

#28c#29,0:67

#28d#29,19

#28e#29,3

MULTIPLE CHOICE 641

Topic,Preferences Di#0Eculty,2

#25 Correct Responses,62 Discrimination Index,22

Correct Answer,A

3.3C In Problem 3.8,Nancy Lerner is taking a course from Professor Goodheart who will count

only her best midterm grade and from Professor Stern who will count only her worst midterm

grade,In one of her classes,Nancy has scores of 30 on her #0Crst midterm and 60 on her second

midterm,When the #0Crst midterm score is measured on the horizontal axis and her second midterm

score on the vertical,her indi#0Berence curve has a slope of zero at the point #2830;60#29,Therefore it

must be that

#28a#29 this class could be Professor Goodheart's,but couldn't be Professor Stern's.

#28b#29 this class could be Professor Stern's,but couldn't be Professor Goodheart's.

#28c#29 this class couldn't be either Goodheart's or Stern's.

#28d#29 this class could be either Goodheart's or Stern's.

#28e#29 there is not enough information to tell whose class it could or couldn't be

Topic,Preferences Di#0Eculty,2

#25 Correct Responses,79 Discrimination Index,0

Correct Answer,D

3.4C In Problem 3.9,if we graph Mary Granola's indi#0Berence curves with avocados on the hor-

izontal axis and grapefruits on the vertical axis,then whenever she has more grapefruits than

avocados,the slope of her indi#0Berence curveis,2,Whenever she has more avocados than grape-

fruits,the slope is,1=2,Mary would be indi#0Berentbetween a bundle with 15 avocados and 30

grapefruits and another bundle that has 24 avocados and

#28a#29 20 grapefruits.

#28b#29 25 grapefruits.

#28c#29 16 grapefruits.

#28d#29 18 grapefruits.

#28e#29 19 grapefruits.

CHAPTER 3 Preferences 642

Topic,Preferences Di#0Eculty,2

#25 Correct Responses,68 Discrimination Index,63

Correct Answer,B

3.5C In Problem 3.12,recall that Tommy Twit's mother measures the departure of any bundle

from her favorite bundle for Tommyby the sum of the absolute values of the di#0Berences,Her

favorite bundle for Tommyis#282;7#29,,that is,2 cookies and 7 glasses of milk,Tommy's mother's

indi#0Berence curve that passes through the point #28c;m#29=#285;4#29 also passes through

#28a#29 #288;1#29.

#28b#29 the points #282;1#29; #288;7#29; and #285;10#29.

#28c#29 #282;7#29.

#28d#29 the points #285;7#29; #282;4#29; and #282;10#29.

#28e#29 None of the other options are correct.

Topic,Preferences Di#0Eculty,0

#25 Correct Responses,52 Discrimination Index,38

Correct Answer,E

3.6C In Problem 3.1,Charlie's indi#0Berence curves have the equation x

B

= constant=x

A; where

larger constants correspond to better indi#0Berence curves,Charlie strictly prefers the bundle #289;16#29

to the following bundle:

#28a#29 #2816;9#29

#28b#29 #2810;15#29

#28c#29 #2815;13#29

#28d#29 more than one of these options are correct.

#28e#29 none of the above are correct.

Multiple Choice Preferences

Topic,Preferences Di#0Eculty,1

#25 Correct Responses,83 Discrimination Index,33

Correct Answer,C

3.1D In Problem 3.1,Charlie's indi#0Berence curves have the equation x

B

= constant=x

A; where

larger constants correspond to better indi#0Berence curves,Charlie strictly prefers the bundle #287;12#29

to the following bundle

#28a#29 #2812;7#29.

#28b#29 #288;11#29.

#28c#29 #2813;8#29.

#28d#29 all three of these bundles.

#28e#29 none of these bundles.

Topic,Preferences Di#0Eculty,2

#25 Correct Responses,90 Discrimination Index,22

Correct Answer,C

3.2D In Problem 3.2,Ambrose has indi#0Berence curves with the equation x

2

= constant,4x

1=2

1;

where larger constants correspond to higher indi#0Berence curves,If good 1 is drawn on the horizon-

tal axis and good 2 on the vertical axis,what is the slope of Ambrose's indi#0Berence curve when his

consumption bundle is #2825;12#29?

#28a#29,25=12

#28b#29,12=25

#28c#29,0:40

#28d#29,17

#28e#29,5

CHAPTER 3 Preferences 644

Topic,Preferences Di#0Eculty,2

#25 Correct Responses,62 Discrimination Index,22

Correct Answer,A

3.3D In Problem 3.8,Nancy Lerner is taking a course from Professor Goodheart who will count

only her best midterm grade and from Professor Stern who will count only her worst midterm

grade,In one of her classes,Nancy has scores of 20 on her #0Crst midterm and 40 on her second

midterm,When the #0Crst midterm score is measured on the horizontal axis and her second midterm

score on the vertical,her indi#0Berence curve has a slope of zero at the point #2820;40#29,Therefore it

must be that

#28a#29 this class could be Professor Goodheart's,but couldn't be Professor Stern's.

#28b#29 this class could be Professor Stern's,but couldn't be Professor Goodheart's.

#28c#29 this class couldn't be either Goodheart's or Stern's.

#28d#29 this class could be either Goodheart's or Stern's.

#28e#29 there is not enough information to tell whose class it could or couldn't be

Topic,Preferences Di#0Eculty,2

#25 Correct Responses,79 Discrimination Index,0

Correct Answer,D

3.4D In Problem 3.9,if we graph Mary Granola's indi#0Berence curves with avocados on the hor-

izontal axis and grapefruits on the vertical axis,then whenever she has more grapefruits than

avocados,the slope of her indi#0Berence curveis,2,Whenever she has more avocados than grape-

fruits,the slope is,1=2,Mary would be indi#0Berentbetween a bundle with 26 avocados and 38

grapefruits and another bundle that has 34 avocados and

#28a#29 30 grapefruits.

#28b#29 34 grapefruits.

#28c#29 26 grapefruits.

#28d#29 28 grapefruits.

#28e#29 29 grapefruits.

MULTIPLE CHOICE 645

Topic,Preferences Di#0Eculty,2

#25 Correct Responses,68 Discrimination Index,63

Correct Answer,B

3.5D In Problem 3.12,recall that Tommy Twit's mother measures the departure of any bundle

from her favorite bundle for Tommyby the sum of the absolute values of the di#0Berences,Her

favorite bundle for Tommyis#282;7#29,,that is,2 cookies and 7 glasses of milk,Tommy's mother's

indi#0Berence curve that passes through the point #28c;m#29=#285;4#29 also passes through

#28a#29 #288;1#29.

#28b#29 the points #282;1#29; #288;7#29; and #285;10#29.

#28c#29 #282;7#29.

#28d#29 the points #285;7#29; #282;4#29; and #282;10#29.

#28e#29 None of the other options are correct.

Topic,Preferences Di#0Eculty,0

#25 Correct Responses,52 Discrimination Index,38

Correct Answer,E

3.6D In Problem 3.1,Charlie's indi#0Berence curves have the equation x

B

= constant=x

A; where

larger constants correspond to better indi#0Berence curves,Charlie strictly prefers the bundle #287;15#29

to the following bundle:

#28a#29 #2815;7#29

#28b#29 #288;14#29

#28c#29 #2812;12#29

#28d#29 more than one of these options are correct.

#28e#29 none of the above are correct.

Multiple Choice Preferences

Topic,Preferences Di#0Eculty,1

#25 Correct Responses,83 Discrimination Index,33

Correct Answer,C

3.1E In Problem 3.1,Charlie's indi#0Berence curves have the equation x

B

= constant=x

A; where

larger constants correspond to better indi#0Berence curves,Charlie strictly prefers the bundle #2810;16#29

to the following bundle

#28a#29 #2816;10#29.

#28b#29 #2811;15#29.

#28c#29 #2814;13#29.

#28d#29 all three of these bundles.

#28e#29 none of these bundles.

Topic,Preferences Di#0Eculty,2

#25 Correct Responses,90 Discrimination Index,22

Correct Answer,C

3.2E In Problem 3.2,Ambrose has indi#0Berence curves with the equation x

2

= constant,4x

1=2

1;

where larger constants correspond to higher indi#0Berence curves,If good 1 is drawn on the horizon-

tal axis and good 2 on the vertical axis,what is the slope of Ambrose's indi#0Berence curve when his

consumption bundle is #2849;11#29?

#28a#29,49=11

#28b#29,11=49

#28c#29,0:29

#28d#29,18

#28e#29,7

MULTIPLE CHOICE 647

Topic,Preferences Di#0Eculty,2

#25 Correct Responses,62 Discrimination Index,22

Correct Answer,A

3.3E In Problem 3.8,Nancy Lerner is taking a course from Professor Goodheart who will count

only her best midterm grade and from Professor Stern who will count only her worst midterm

grade,In one of her classes,Nancy has scores of 70 on her #0Crst midterm and 40 on her second

midterm,When the #0Crst midterm score is measured on the horizontal axis and her second midterm

score on the vertical,her indi#0Berence curve has a slope of zero at the point #2870;40#29,Therefore it

must be that

#28a#29 this class could be Professor Goodheart's,but couldn't be Professor Stern's.

#28b#29 this class could be Professor Stern's,but couldn't be Professor Goodheart's.

#28c#29 this class couldn't be either Goodheart's or Stern's.

#28d#29 this class could be either Goodheart's or Stern's.

#28e#29 there is not enough information to tell whose class it could or couldn't be

Topic,Preferences Di#0Eculty,2

#25 Correct Responses,79 Discrimination Index,0

Correct Answer,D

3.4E In Problem 3.9,if we graph Mary Granola's indi#0Berence curves with avocados on the hor-

izontal axis and grapefruits on the vertical axis,then whenever she has more grapefruits than

avocados,the slope of her indi#0Berence curveis,2,Whenever she has more avocados than grape-

fruits,the slope is,1=2,Mary would be indi#0Berentbetween a bundle with 9 avocados and 15

grapefruits and another bundle that has 15 avocados and

#28a#29 11 grapefruits.

#28b#29 13 grapefruits.

#28c#29 7 grapefruits.

#28d#29 9 grapefruits.

#28e#29 10 grapefruits.

CHAPTER 3 Preferences 648

Topic,Preferences Di#0Eculty,2

#25 Correct Responses,68 Discrimination Index,63

Correct Answer,B

3.5E In Problem 3.12,recall that Tommy Twit's mother measures the departure of any bundle

from her favorite bundle for Tommyby the sum of the absolute values of the di#0Berences,Her

favorite bundle for Tommyis#282;7#29,,that is,2 cookies and 7 glasses of milk,Tommy's mother's

indi#0Berence curve that passes through the point #28c;m#29=#284;5#29 also passes through

#28a#29 #286;3#29.

#28b#29 the points #282;3#29; #286;7#29; and #284;9#29.

#28c#29 #282;7#29.

#28d#29 the points #284;7#29; #282;5#29; and #282;9#29.

#28e#29 None of the other options are correct.

Topic,Preferences Di#0Eculty,0

#25 Correct Responses,52 Discrimination Index,38

Correct Answer,E

3.6E In Problem 3.1,Charlie's indi#0Berence curves have the equation x

B

= constant=x

A; where

larger constants correspond to better indi#0Berence curves,Charlie strictly prefers the bundle #286;14#29

to the following bundle:

#28a#29 #2814;6#29

#28b#29 #287;13#29

#28c#29 #2810;13#29

#28d#29 more than one of these options are correct.

#28e#29 none of the above are correct.

Chapter 4

Multiple Choice Utility

Topic,Utility Di#0Eculty,1

#25 Correct Responses,0 Discrimination Index,0

Correct Answer,E

4.1A In Problem 4.1,Charlie has the utility function U#28x

A;x

B

#29=x

A

x

B

,His indi#0Berence curve

passing through 16 apples and 12 bananas will also pass through the point where he consumes 2

apples and

#28a#29 16 bananas.

#28b#29 32 bananas.

#28c#29 98 bananas.

#28d#29 104 bananas.

#28e#29 96 bananas.

Topic,Utility Di#0Eculty,0

#25 Correct Responses,86 Discrimination Index,33

Correct Answer,B

4.2A In Problem 4.1,Charlie's utility function is U#28A;B#29=AB where A and B are the numbers

of apples and bananas,respectively,that he consumes,When Charlie is consuming 30 apples and

120 bananas,then if we put apples on the horizontal axis and bananas on the vertical axis,the

slope of his indi#0Berence curve at his current consumption is

#28a#29,31.

#28b#29,4.

#28c#29,8.

#28d#29,1=4.

#28e#29,1=8.

CHAPTER 4 Utility 650

Topic,Utility Di#0Eculty,2

#25 Correct Responses,76 Discrimination Index,44

Correct Answer,C

4.3A In Problem 4.2,Ambrose has the utility function U#28x

1;x

2

#29=4x

1=2

1

+x

2

.IfAmbrose were

initially consuming 4 units of nuts #28good 1#29 and 20 units of berries #28good 2#29; then what is the largest

number of berries that he would be willing to give up in return for an additional 5 units of nuts.

#28a#29 3

#28b#29 23

#28c#29 4

#28d#29 2

#28e#29 1

Topic,Utility Di#0Eculty,2

#25 Correct Responses,72 Discrimination Index,67

Correct Answer,C

4.4A Joe Bob,from Problem 4.12 has a cousin Wilfred who consume goods 1 and 2,Wilfred

thinks that 2 units of good 1 is always a perfect substitute for 3 units of good 2,Which of the

following utility functions is the only one that would NOT represent Wilfred's preferences?

#28a#29 U#28x

1;x

2

#29=3x

1

+2x

2

+1000.

#28b#29 U#28x

1;x

2

#29=9x

2

1

+