To login with Google, please enable popups

or

Don’t have an account? Sign up

To signup with Google, please enable popups

or

Sign up with Google or Facebook

or

By signing up I agree to StudyBlue's

Terms of Use and Privacy Policy

Already have an account? Log in

Extra.pdf

Ankur S.

File Size:
24
Name My Name Is... Practice Fill in the bubbles on your scantron with your id number (starting from the left side of the box), your name, and the form type. True-False Questions–Answer A for True, B for false. Each correct answer is worth 2 points. Each wrong answer is worth zero. Answers left blank are worth 1 point. 1. A decrease in income pivots the budget line around the bundle initially consumed. 2. If preferences are transitive, more is always preferred to less. 3. A consumer with convex preferences who is indifferent between the bundles (2, 2) and (6, 6) will like the bundle (4, 4) at least as well as either of the first two bundles. 4. With quasilinear preferences, the slope of indifference curves is constant along all rays through the origin. 5. Clara’s utility function is U(x, y) = (x + 2)(y + 1). If her consumption of both x and y are doubled, then her marginal rate of substitution between x and y remains constant. 6. 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. 7. The strong axiom of revealed preference requires that if a consumer chooses x when he can afford y, and chooses y when he can afford z, then he will not choose z when he can afford x. 8. If a good is an inferior good, then an increase in its price will increase the demand for it. Economics 2 9. The real interest rate is the interest rate that one receives net of brokerage costs or fees imposed by financial intermediaries. 10. If the interest rate is 10%, then an asset that returns $1 a year forever is worth $1/1.1. 11. Producer’s surplus at price p is the vertical distance between the supply curve and the demand curve at price p. 12. Marginal revenue is equal to price if the demand curve is horizontal. 13. A production isoquant is a locus of combinations of inputs that are equally profitable. 14. A fixed factor is a factor of production that is used in fixed proportion to the level of output. 15. The marginal cost curve passes through the minimum point of the average fixed cost curve. 16. The short run industry supply curve can be found by horizontally summing the short run supply curves of all the individual firms in the industry. 17. It is possible that a profit-maximizing monopolist who is able to practice first degree (perfect) price discrimination would sell a quantity x at which the demand curve for his product is inelastic. 18. A two-person game in which each person has access to only two possible strategies will have at most one Nash equilibrium. 19. The efficient amount of air pollution is in general independent of whether polluters have to pay to pollute or sufferers of pollution have to pay to reduce pollution. 20. A life insurance company must 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. 3 Multiple-Choice Questions–Each correct answer is worth 5 points. Each blank answer is worth 1 point. Each wrong answer is worth 0 points. 21. In year 1, the price of good x was 2, the price of good y was 3, and income was 80. In year 2, the price of x was 9, the price of good y was 12, and income was 80. On a graph with x on the horizontal axis and y on the vertical, the new budget line is: (a) flatter than the old one and lies below it. (b) flatter than the old one and lies above it. (c) steeper than the old one and lies below it. (d) steeper than the old one and lies above it. (e) none of the above. 22. 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, (a) the consumer’s budget line gets steeper and shifts inward. (b) the slope of the consumer’s budget line does not change but the budget line shifts outward away from the origin. (c) the consumer’s budget line gets steeper and shifts outward. (d) the slope of the consumer’s budget line does not change but the budget line shifts inward toward the origin. (e) the consumer’s budget line gets flatter and shifts inward. 23. 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: (a) indifference curves slope downwards. (b) indifference curves slope upwards. (c) indifference curves may cross. (d) indifference curves could take the form of ellipses. (e) None of the above. Economics 4 24. Henry’s utility function is x2 + 16xw + 64w2 where x is his consumption of x and w is his consumption of w. (a) Henry’s preferences are nonconvex. (b) Henry’s indifference curves are straight lines. (c) Henry has a bliss point. (d) Henry’s indifference curves are hyperbolas. (e) None of the above. 25. Waldo’s utility function is U(x, y) = xy. Waldo consumes 5 units of x and 25 units of y. (a) Waldo would be willing to make small exchanges of x for y in which he gives up 5 units of x for every unit of y he gets. (b) Waldo would be willing to trade away all of his x for y so long he gets more than 5 units of y for every unit of x he gives up. (c) Waldo likes x and y equally well so he is always willing to exchange 1 unit of either good for more than one unit of the other. (d) Waldo will always be willing to make trades at any price if he does not have equal amounts of the two goods. (e) None of the above. 26. Charlie’s utility function is U(A,B) = AB where A and B are the numbers of apples and bananas, respectively, that he consumes. When Charlie is consuming 40 apples and 80 ba- nanas, if we put apples on the horizontal axis and bananas on the vertical axis, the slope of his indifference curve at his current consumption is: (a) −40. (b) −2. (c) −4. (d) −1/2. (e) −1/4. 5 27. Mort’s utility function is U(x1, x2) = x1x2. His income is $100; the price of good 2 is $10. Good 1 is priced as follows. The first 6 units cost $10 per unit and any additional units cost $5 per unit. What consumption bundle does Mort choose? (a) (5, 5) (b) (7, 3.5) (c) (9, 3) (d) (6, 4) (e) None of the above. 28. Arthur’s preferences are defined over two basic food groups, beer, x1, and ice cream, x2. His utility function is u(x1, x2) = x21 + x2. He has $100 to spend, and each of these goods costs $10 per quart. Which of the following statements is true? (a) Arthur will consume 5 quarts of ice cream and 5 quarts of beer. (b) Arthur will find that 10 quarts of beer and no ice cream is the best bundle. (c) Arthur will find that 10 quarts of ice cream and no beer is the best bundle. (d) Arthur is indifferent between any two points on the line that connects (5, 5) and (10, 10). (e) Arthur will spend 2/3 of his income on beer and 1/3 of his income on ice cream. 29. Miss Muffet insists on consuming 2 units of whey per unit of curds. If the price of curds is 4 and the price of whey is 6, then if Miss Muffett’s income is m, her demand for curds will be: (a) m/4 (b) 6m/4 (c) 4C + 6W = m (d) 4m (e) m/16 Economics 6 30. Georgina consumes only grapefruits and pineapples. Her utility function is U(x, y) = x3y9, where x is the number of grapefruits consumed and y is the number of pineapples consumed. Georgina’s income is 300, and the prices of grapefruits and pineapples are 5 and 3, respec- tively. How many grapefruits will she consume? (a) 7.50 (b) 25 (c) 45 (d) 15 (e) None of the above. 31. 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 have to pay a flat 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 Buffalo (the market value of the car is negligible) 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 indifferent between riding a cab and driving, he should: (a) keep his car if he wouldn’t want to travel as much as 6500 miles by cab. (b) give his car away if he wouldn’t travel more than 6000 miles by cab but keep it if he would travel more than 6000 miles by cab. (c) keep his car if he would travel more than 6,000 but less than 6,500 miles by cab. (d) give his car away. (e) There is not enough information given here to allow one to give him reasonable advice about what to do. 32. When the prices were (5, 1), Vanessa chose the bundle (x, y) = (6, 3). Now at the new prices, (px, py), she chooses the bundle (x, y) = (5, 7). For Vanessa’s behavior to be consistent with the weak axiom of revealed preference, it must be that: (a) 4py < px. (b) px < 4py. (c) 5py < px. (d) py = 5px. (e) None of the above. 7 33. Walt considers x and y to be perfect substitutes. They originally cost 10 and 9 respectively. His income is 720. One day the price of x drops to 8. Which of the following is true? (a) The income effect increases the quantity of y by 90. (b) The substitution effect increases the quantity of y by 80. (c) The substitution effect increases the quantity of x by 90. (d) The income effect increases the quantity of x by 80. (e) None of the above. 34. When the price of x rises, Marvin responds by changing his demand for x. The substitution effect is the part of this change that represents his change in demand: (a) holding the prices of substitutes constant. (b) if he is allowed to substitute as much x for y as he wishes. (c) if his money income is held constant when the price of x changes. (d) if the prices of all other goods are held constant. (e) none of the above. 35. Mr. Cog has 18 hours per day to divide between labor and leisure. His utility function is U(C, R) = CR, where C is dollars per day spent on consumption and R is hours of leisure. If he has a nonlabor income of 40 dollars per day and a wage rate of 8 dollars per hour, he will choose a combination of labor and leisure that allows him to spend: (a) 184 dollars per day on consumption. (b) 82 dollars per day on consumption. (c) 112 dollars per day on consumption. (d) 92 dollars per day on consumption. (e) 138 dollars per day on consumption. Economics 8 36. There are no taxes on the first $500 that Debra earns per week, but on income above $500 per week, she must pay a 60% tax. Debra’s job pays $10 per hour. Her utility function is U(c, r) = rc2, 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? (a) 66.66 (b) 50 (c) 40 (d) 33.33 (e) 20 37. If current and future consumption are both normal goods, an increase in the interest rate will necessarily: (a) cause savers to save more. (b) cause borrowers to borrow less. (c) reduce everyone’s current consumption. (d) make everyone worse off. (e) none of the above. 38. If a consumer views a unit of consumption in period 1 as a perfect substitute (one-for-one) for a unit of consumption in period 2 and if the real interest rate is positive, the consumer will: (a) consume only in period 1. (b) consume only in period 2. (c) consume equal amounts in each period. (d) consume more in period 1 than in period 2 if income elasticity exceeds 1, else would consume more in period 2 than in period 1. (e) equalize expenditures but not consumption in the two periods. 9 39. Minnie has income $600 in period 1 and will have income $220 in period 2. Her utility function is U(c1, c2) = c0.201 c 0.80 2 where c1 is her consumption in period 1 and c2 is her consumption in period 2. The interest rate is 0.10. If she unexpectedly won a lottery which pays its prize in period 2 so that her income in period 2 would be $440 and her income in period 1 would remain $600, then her consumption in period 1 would: (a) double. (b) increase by the amount 40. (c) increase by the amount 300. (d) stay constant. (e) increase by the amount 60. 40. If the interest rate is 7%, and will remain 7% forever, how much would a rational investor be willing to pay for an asset that will pay him 5,350 dollars one year from now, 1,145 dollars two years from now, and nothing at any other time? (a) 6,000 (b) 5,000 (c) 85,714.29 (d) 48,000 (e) 7,000 41. Shivers’ annual fuel bill for home heating is 1,100 dollars per year. He considers three alter- native plans for insulating his house. Plan A will reduce his annual fuel bill by 15%, plan B will reduce it by 20%, and plan C will eliminate his need for heating fuel altogether. The Plan A insulation job would cost Shivers 1,100 dollars, Plan B would cost him 1,500 dollars and Plan C would cost him 12,100 dollars. Shivers must pay for the insulation job in May, and his heating bill is paid at the end of the winter in April. If the interest rate is 10% and his house and the insulation job last forever, which plan is the best for Shivers? (a) Plan A. (b) Plan B. (c) Plan C. (d) Plans A and B are equally good. (e) He is best off using none of the plans. Economics 10 42. Ashley, from your workbook, has discovered another wine, Wine D. Wine drinkers are willing to pay 200 dollars to drink it right now. The amount that wine drinkers are willing to pay will rise by 25 dollars each year that the wine ages. The interest rate is 10%. How much would Ashley be willing to pay for the wine if he buys it as an investment? (Pick the closest answer.) (a) 206 (b) 200 (c) 250 (d) 2,200 (e) 236 43. Billy Pigskin from your workbook has a von Neumann-Morgenstern utility function U(c) = c1/2. If Billy is not injured this season, he will receive an income of 4 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 utility is (a) 1,810 (b) between 3 million and 4 million. (c) 100,000. (d) 3,620 (e) 7,240 44. Joe’s wealth is $100 and he is an expected utility maximizer with a von Neumann-Morgenstern utility function U(W ) = W 1/2. Joe is afraid of oversleeping his econ exam. He figures 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 offers 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? (a) $10 (b) $15 (c) $19 (d) $100 (e) $50 11 45. In a two-person, two-good, exchange economy, both consumers have quasilinear utility func- tions, 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 (a) a horizontal line through the interior of the box. (b) a vertical line. (c) a straight line from the lower left to the upper right corner of the box. (d) a curved line from the lower left to the upper right corner of the box. (e) all four edges of the box. 46. Arturo and Belen consume only two goods, X and Y . They have strictly convex preferences and no kinks in their indifference curves. At the initial allocation, the ratio of Arturo’s marginal utility of X to his marginal utility of Y is A and the ratio of Belen’s marginal utility of X to his marginal utility of Y is B, where A < B. The competitive equilibrium price ratio is px/py = C. Then: (a) C > B. (b) C < A. (c) C = A. (d) C = B. (e) A < C < B. 47. Ambrose has the utility function U(x1, x2) = 4x 1/2 1 + x2, where x1 is nuts and x2 is berries. If Ambrose 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. (a) 9 (b) 19 (c) 4 (d) 2 (e) 1 Economics 12 48. Charlie’s utility function is U(XA, XB) = XAXB. If Charlie’s income is 40, the price of apples is 2 and the price of bananas is 6, how many apples are there in the best bundle that Charlie can afford? (a) 20 (b) 6 (c) 4 (d) 5 (e) 10 49. 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: (a) the income effect of the change in demand for delphiniums will be bigger than the substitution effect. (b) there will be no change in the demand for hollyhocks. (c) the entire change in demand for delphiniums will be due to the substitution effect. (d) 1/5 of the change will be due to the income effect. (e) 4/5 of the change will be due to the income effect. 50. Patience has a utility function U(c1, c2) = c 1/2 1 + 0.80 c 1/2 2 , c1 is her consumption in period 1 and c2 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? (a) 1.25 (b) 0.13 (c) 0.25 (d) 0 (e) 0.38 13 51. Yoram’s utility function is U(x, y) = 2x + 5y. The price of x is $4 and the price of y is $15. Yoram has $150 a week to spend on x and y. Yoram is offered 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? (a) nothing (b) $30 a week (c) $50 a week (d) $75 a week (e) None of the above. 52. Albin has quasilinear preferences and he loves pretzels. His inverse demand function for pret- zels is p(x) = 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: (a) −$90 (b) −$56 (c) −$42 (d) −$45 (e) −$40 53. Demand for Barbara Streisand CD’s is equal to Qs = P 2.50s I 1.80P 0.60c where Qs is the number of CD’s, Ps is the price of a Streisand CD, I is per capita income, and Pc is the price of a Karen Carpenter CD. Streisand and Carpenter CD’s (a) are inferior goods. (b) are substitutes. (c) are complements. (d) have diminishing returns to scale. (e) are not as good as the original 8 track tapes. Economics 14 54. If the marginal cost of making a photocopy is 2 cents and the elasticity of demand is −1.50, the profit maximizing price is (a) 3 cents. (b) 3.33 cents. (c) 4 cents. (d) 5 cents. (e) 6 cents. 55. Xaquane and Yullare are obscure, but talented, 18th century painters. The world’s stock of Xaquanes is 100 and the world’s stock of Yullares is 70. The demand for each painter’s work depends on its own price and the price of the other painter’s work. If Px is the price of Xaquanes and Py is the price of Yullares, the demand function for Xaquanes is 101−3Px+2Py and the demand function for Yullares is 72 + Px − Py. What is the equilibrium price for Yullare’s paintings? (a) 5 (b) 11 (c) 12 (d) 7 (e) None of the above. 56. Daily demand for gasoline in Hale, MI is described by Q = 776 − 200p where Q are gallons of gasoline sold and p is the price in DOLLARS. The supply in Hale 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? (a) 3.53 dollars. (b) 3.11 dollars. (c) 0.42 dollars. (d) 96.12 dollars. (e) 34.59 dollars. 15 57. A firm uses 3 factors to produce its output. Its production function is f(x, y, z) = min{x3/y, y2, (z4 − x4)/y2}. If the amount of each input is multiplied by 6, its output will be multiplied by: (a) 216 (b) 36 (c) 6 (d) 0.16 (e) The answer depends on the original choice of x, y, and z. 58. A firm has the production function, f(x, y) = 20x3/5y2/5. When x is graphed on the horizon- tal axis, and y is graphed on the vertical axis, the slope of the firm’s isoquant at the point (x, y) = (80, 10) is: (Pick the closest one.) (a) −8. (b) −1.50. (c) −0.67. (d) −0.19. (e) −4. 59. If the short run marginal cost of producing a good is $20 for the first 200 units and $30 for each additional unit beyond 200, then in the short run, if the market price of output is 29, a profit maximizing firm will: (a) produce a level of output where marginal revenue equals marginal cost. (b) produce as much output as possible since there are constant returns to scale. (c) produce up to the point where average cost equals 29. (d) not produce at all, since marginal cost is increasing. (e) produce exactly 200 units. Economics 16 60. A competitive firm’s production function is f(x1, x2) = 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 profit-maximizing quantity of output? (a) 116 (b) 232 (c) 112 (d) 244 (e) 104 61. Rocco’s Pasta Bar makes manacotti according to an old family recipe, M = min(3C/2, 3P ), where M, C, and P are pounds of manicotti, cheese, and pasta respectively. If cheese costs $3 per pound, and pasta costs $4 per pound, how much would it cost to produce 30 pounds of manicotti in the cheapest way possible? (a) 40. (b) 60. (c) 100 (d) 37.50 (e) 30 62. A politician facing re-election can win votes according to the process V = 500S0.30M0.50, where S is hours of making campaign speeches, and M is the number of flyers mailed. Suppose mak- ing speeches costs $10 per hour, mailing flyers costs $0.50 per flyer, 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 flyers? (a) No speeches should be given, 16,000 flyers should be mailed. (b) 400 hours of speeches should be given, 8,000 flyers should be mailed out. (c) 300 hours of speeches should be given, 10,000 flyers should be mailed out. (d) 3,000 hours of speeches should be given, 5,000 flyers should be mailed out. (e) 800 hours speeches should be given, no flyers should be mailed out. 17 63. If Green Acres Turf Farm’s total cost of producing acres of sod is TC = 3Q2 + 20Q + 60, the marginal cost of producing the 10th acre of sod is (a) $60. (b) $20. (c) $50. (d) $80. (e) $110. 64. The snow removal business in East Iceicle, Minnesota is a competitive industry. All snowplow operators have the cost function C = Q2 + 25, where Q is the number of driveways cleared. Demand for snow removal in the town is given by Qd = 120 − P . The long run equilibrium number of firms in this industry is (a) 11 (b) 22 (c) 14 (d) 120 (e) 23 65. A firm has the long run cost function C(q) = 7q2 + 112. In the long run, it will supply a positive amount of output, so long as the price is greater than: (a) 112 (b) 120 (c) 28 (d) 56 (e) 61 66. Suppose that Dent Carr’s long run total cost of repairing s cars per week is c(s) = 3s2 + 27. If the price he receives for repairing a car is 30, then in the long run, how many cars will he fix per week if he maximizes profits? (a) 5 (b) 0 (c) 10 (d) 7.50 (e) 15 Economics 18 67. An industry has 100 firms. These firms have identical production functions. In the short run, each firm has fixed costs of $400. There are two variable factors in the short run and output is given by y = (min(x1, 4x2))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: (a) Q = 100p/9 (b) Q = 100p/8 (c) Q = 600p1/2 (d) the part of the line Q = 50(min(4, 8)) for which pQ > 400/Q. (e) None of the above. 68. In a certain industry, the supply curve of any firm is Si(p) = p/2. If a firm produces 3 units of output, what is its total variable costs? (a) $18 (b) $7 (c) $13.50 (d) $9 (e) There is not enough information given to determine total variable costs. 69. The Cleveland Visitors Bureau is the exclusive national marketer of weekend getaway vaca- tions in Cleveland, Ohio. At current market prices, the price elasticity of demand is −0.50. To maximize profits, the bureau should (a) Raise prices. (b) Lower prices. (c) Do not change prices. (d) More information is needed to make an accurate judgement. (e) Run new TV commercials. 19 70. The Fabulous 50′s Decor Company is the only producer of pink flamingo 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 pro- cess Q = min(L,P/9), where L is hours of labor, and P is pounds of pink plastic. PL = 20 and PP = 4. What is be the profit maximizing output and price? (a) Q = 180, P = 55 (b) Q = 189.78, P = 52.56 (c) Q = 199.44, P = 50.14 (d) Q = 88, P = 78 (e) Q = 176, P = 56 71. 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(y) = 90− y/4. What level of output will maximize Peter’s profits? (a) 180 (b) 36 (c) 360 (d) 540 (e) None of the above. 72. 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 (third-degree price discrimination). The monopolist has a total cost function, c(q) = 100q. The price it will charge a consumer depends on the consumer’s income, M, according to the formula: (a) p = .001M + 50. (b) p = .002M − 100. (c) p = M2. (d) p = .01M2 + 100. (e) None of the above. Economics 20 73. 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(q) = 80 + 2q for producing q hamburgers. If a second McDonald’s franchise were to move into North Bend (and both behave as Cournot duopolists), the profit of the original McDonald’s would (a) fall from $10 to $− 80. (b) fall from $210 to $120. (c) fall from $90 to $− 80. (d) fall from $10 to $− 40. (e) fall from $90 to $0. 74. An industry has two firms − a Stackleberg leader and a follower. The price of the industry output is given by P = 48 − Q where Q is the total output of the two firms. The follower has a marginal cost of 0. The leader has a marginal cost of 12. How much should the leader produce in order to maximize profits? (a) 15 (b) 24 (c) 12 (d) 10 (e) None of the above. 75. The demand for y is given by y = 256/p2. Only two firms produce y. They have identical costs c(y) = y2. If they agree to collude and maximize their joint profits, how much output will each firm produce? (a) 2 (b) 5 (c) 10 (d) 12 (e) 16 21 76. A game has two players. Each player has two possible strategies. One strategy is called “cooperate”, the other is called “defect”. 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 payoff of $100. If both players defect they each get a payoff of 0. If one player cooperates and the other player defects, the cooperating player gets a payoff of S and the defecting player gets a payoff of T . To defect will be a dominant strategy for both players if: (a) S + T > 100 (b) T > 2S (c) S < 0 and T > 100. (d) S < T and T > 100. (e) S and T are any positive numbers. 77. 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(g) = 48g − 2g2, where g is the number of goats on the pasture. The town council notices that total profit 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 profit (of villagers and council), how many groschens per goat should the council charge? (a) 12 (b) 20 (c) 24 (d) 26 (e) 22 78. Two stores are located side by side. They attract customers to each other and to themselves by advertising. The profit functions of the two stores are (75 + x2)x1 − 2x21 for store 1, and (120 + x1)x2 − 2x22 for store 2, where x1 and x2 are total advertising expenditures by stores 1 and 2 respectively. If each store sets its advertising expenditures independently (as in Nash equilibrium), how much would store 1 spend on advertising? (a) 28 (b) 30 (c) 25 (d) 33 (e) None of the above. Economics 22 79. 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(xi, y) = xi+y.5, where xi 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 efficient amount of public good for the town to provide is: (a) 100 units. (b) 500 units. (c) 2000 units (d) 8000 units. (e) 10000 units 80. A firm hires two kinds of workers, alphas and betas.The population at large has equal number 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 firm 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: (a) a separating equilibrium where alphas score 60 and betas score 0. (b) a pooling equilibrium where alphas score 60 and betas score 0. (c) a pooling equilibrium where everybody scores 60. (d) a pooling equilibrium where everybody scores 0. (e) a separating equilibrium where everybody scores 60. ANSWER KEY Exam Question Number Answer 1 F 2 F 3 T 4 F 5 F 6 F 7 T 8 F 9 F 10 F 11 F 12 T 13 F 14 F 15 F 16 T 17 T 18 F 19 F 20 T 21 C 22 D 23 B 24 B 25 E 26 B 27 A 28 B 29 E 30 D 31 D 32 A 33 C 34 E 35 D 36 B 37 B 38 B 39 B 40 A 41 B 42 A 43 A 2 44 C 45 B 46 E 47 C 48 E 49 C 50 C 51 A 52 D 53 B 54 E 55 D 56 A 57 B 58 D 59 E 60 A 61 C 62 C 63 D 64 B 65 D 66 A 67 A 68 D 69 A 70 D 71 A 72 A 73 D 74 C 75 A 76 C 77 E 78 A 79 E 80 D