Identify the letter of the choice that best completes the statement or answers the question.
1. Consider a profit?maximizing monopoly pricing under the following conditions. The
profit?maximizing price charged for goods produced is $12. The intersection of the marginal
revenue and marginal cost curves occurs where output is 10 units and marginal cost is $6. The
socially efficient level of production is 12 units. The demand curve and marginal cost curves are
linear. What is the deadweight loss?
a. $4
b. $6
c. $12
d. $16
2. Which of the following curves is not affected by the existence of diminishing returns?
a. the average fixed cost curve
b. the average variable cost curve
c. the average total cost curve
d. the marginal cost curve
3. Assume the federal government determines the total level of pollutants that can be discharged
by city industries. A city is able to exchange the rights to this total discharge level with other
cities. This is an example of:
a. emissions taxes.
b.Pigouvian taxes.
c.tradable emissions permits.
d.environmental standards.
4.Table 2.The Chicken Game is named for a contest in which drivers test their courage by driving straight at each other. John and Paul have a common interest to avoid crashing into each other, but they also have a personal, competing interest to not turn first to demonstrate their courage to those observing the contest. The payoff table for this situation is provided below. The payoffs are shown as (John, Paul).
Paul
Turn Drive Straight
John
Turn(10, 10) (5, 20)
Drive Straight(20, 5) (0, 0)
Refer to Table 2.
What is (are) the Nash equilibrium (equilibria) in this Chicken game?
a.John: Turn
Paul: Turn
b.John: Turn
Paul: Drive Straight
c.John: Drive Straight
Paul: Turn
d.Both b and c are Nash equilibria
5.In 1992, New Zealand sheep herders slaughtered 10,000 sheep and buried them in large open pits rather than truck them to the market to be sold. This behavior is most likely explained by
a.irrational behavior of sheep herders.
b.average revenue per sheep was less than average cost of transporting it to
market.
c.sheep herders trying to use sheep carcasses as fertilizer to enhance the
productivity of the land.
d.the marginal cost of producing sheep was rising.
6.Farm programs that pay farmers not to plant crops on all their land
a.hurt farmers by lowering their total revenue, and hurt consumers by causing
shortages of some food items.
b.help farmers by cutting costs, which helps consumers by lowering food prices
c.help farmers by increasing total revenue in the market, but hurt consumers by
raising prices.
d.help farmers directly since they receive government payments, But has no real effect on consumers.
7.When we compare economic welfare in a monopoly market to a competitive market, the profits earned by the monopolist represent
a.a transfer of benefits from the consumer to the producer.
b.a loss in total welfare.
c.the higher marginal costs incurred by the monopolists in comparison to competitive firms.d.the higher marginal revenues gained by the monopolists in comparison to competitive firms.
8.Suppose that 50 candy bars are demanded at a particular price. If the price of candy bars rises from that price by 5 percent, the number of candy bars demanded falls to 48. Using the
midpoint approach to calculate the price elasticity of demand, it follows that the
a.demand for candy bars in this price range is unit elastic.
b.price increase will decrease the total revenue of candy bar sellers.
c.price elasticity of demand for candy bars in this price range is about 1.22.
d.price elasticity of demand for candy bars in this price range is about 0.82.
9.When firm are said to be price takers, it implies that if a firm raises its price,
a.buyers will go elsewhere.
b.buyers will pay the higher price in the short run.
c.competitors will also raise their prices.
d.firms in the industry will exercise market power.
10.Dick owns a dog whose barking annoys Dick’s neighbor Jane. Suppose that the benefit of
owning the dog is worth $700 to Dick and that Jane bears a cost of $500 from the barking.
Assuming Dick has the legal right to keep the dog, a possible private solution to this problem is that
a.There is no private solution that would improve this situation.
b.Jane pays Dick $650 to get rid of the dog.
c.Jane pays Dick $800 to get rid of the dog.
d.Dick pays Jane $600 for her inconvenience.
11.Which one of the following descriptions about a Giffen good is incorrect?
a.A Giffen good has a negative income effect.
b.The demand curve for a Giffen good has a negative slope.
c.A Giffen good is an inferior good.
d.The Engel curve for a Giffen good has a negative slope.
12.The fundamental reason that marginal cost eventually rises as output increases is because of
a.economies of scale.
b.diseconomies of scale.
c.diminishing marginal product.
d.rising average fixed cost.
