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INSTANT DOWNLOAD COMPLETE TEST BANK WITH ANSWERS
Microeconomics An Intuitive Approach With Calculus 2nd Edition by Thomas Nechyba – Test Bank
Sample Questions
True / False 
1. A decrease in a wage taxes causes the opportunity cost of leisure to increase.

2. In the typical leisure/consumption model, an increase in the wage is equivalent to a decrease in the price of the composite consumption good.

3. Changes in interest rates cause the same rotations of intertemporal budget lines regardless of whether you are a borrower or a saver.

4. An increase in the interest rate is an increase in the opportunity cost of consuming in the future.

5. The opportunity cost of current consumption differs for borrowers and savers only if the interest rate for savers differs from the interest rate for borrowers.

6. In the worker’s leisure/consumption model, the wage is the same as the price of consumption.

7. A bond that promises to pay $X in 10 years must be worth less than $X now.

8. Progressive wage taxes cause worker leisure/consumption budgets (with leisure on the horizontal axis) to become steeper as leisure increases.

9. Since interest rates for borrowing are usually higher than interest rates for savings, the intertemporal budget constraint has an inward kink for individuals that earn income now and in the future.

10. In choice sets, intertemporal budget constraints illustrate consumption tradeoffs over time.

11. An “endowment” is something whose value is unknown.

Multiple Choice 
12. Suppose you earn annually compounding interest of 10% (per year) on an initial investment of $1,000. Rounded to the nearest 100, what will your balance in 10 years be?

13. A bond will pay $10,000 to its owner in 5 years. If the relevant annual interest rate is 5%, what is the bond worth today (rounded to the nearest 100)?

Subjective Short Answer 
14. Write down the budget constraint equation as well as the choice set for a worker who has 100 possible hours of leisure per week and can earn a wage of $25 per hour.

15. Suppose a worker gets a weekly check equal to $1,000 from a riskfree investment, has 60 hours of weekly leisure that can be devoted to work and can earn a wage of $40 per hour.
a. Illustrate this worker’s budget constraint, with weekly leisure hours on the horizontal and weekly consumption (in dollars) on the vertical. b Illustrate what happens to this worker’s budget constraint when the weekly investment check increases to $1,500. c. Illustrate what happens to this worker’s budget constraint when instead the wage increases to $50 per hour. d. Suppose the worker can hire help at $20 per hour, and each hour of help adds a half an hour to his available leisure. Will the budget constraint described in (a) change?

True / False 
1. Homothetic tastes are always tastes over essential goods.

2. Tastes for perfect substitutes are both homothetic and quasilinear.

3. Tastes for perfect complements are both homothetic and quasilinear.

4. There are no quasilinear tastes that have elasticity of substitution equal to 1 everywhere.

5. There are no quasilinear tastes that have constant elasticity of substitution.

6. There is no elasticity of substitution that is inconsistent with tastes being homothetic.

7. Consider the utility function . If , the elasticity of substitution is equal to 1. The elasticity of substitution for CES utility functions is .

8. Consider the utility function . If , the elasticity of substitution is equal to .

9. All homogeneous functions (of any degree) are homothetic but not all homothetic functions are homogeneous (of some degree).

10. If tastes are CobbDouglas, they can be represented by a utility function that is homogeneous of degree k where k can take on any positive value.

11. When two goods are perfect substitutes, averages are better than extremes, resulting a diminishing marginal rate of substitution.

12. In the case of perfect complements, more is not necessarily better.

Multiple Choice 
13. Suppose consumer cannot taste the difference between Miller Lite and Bud Light, but Miller Lite is sold in 12 ounce cans while Bud Light is sold in 8 ounce cans. In a graph with cans of Miller Lite on the horizontal and cans of Bud Light on the vertical axis, which of the following is the correct slope for this consumer’s indifference curves:

14. Consider the utility function . Which of the following are true statements about the indifference maps represented by this function.

Subjective Short Answer 
15. Suppose our tastes are homothetic. It is often observed that people become more rigid — more set in their ways — as they get older. Can you translate this observation into “economicsspeak” by discussing which feature of our tastes is likely the be changing as we get older?

16. Suppose our tastes can be represented by the function . It is often observed that people become more rigid — more set in their ways — as they get older. What parameter is changing as we get older — and how is it changing? (Explain.)

17. Suppose the only characteristic of beer that a consumer cares about is alcohol content. Currently, Bud Light and Miller Lite both have the same alcohol content.
a. Illustrate the consumer’s indifference curves in a graph with ounces of Miller Lite on the horizontal and ounces of Bud Light on the vertical axis. b. Suppose that the producers of Bud Light lower the price of Bud Light. How will your answer to (a) change? c. Suppose that the producers of Bud Light lower the alcohol content of their beer by 50%. How will your answer to (a) change? d. Since we identify tastes with indifference maps, would you say that the consumer’s tastes have changed in (b) or (c)? e. How could we change the units we use to measure Miller Lite in order to get the indifference map in (c) to again look like the one in (a)?

18. Suppose the only characteristic of beer that a consumer cares about is alcohol content. Currently, Bud Light and Miller Lite have the same alcohol content.
a. Using to denote ounces of Miller Lite and to denote ounces of Bud Light, what’s the simplest possible utility function that can describe this consumer’s tastes over the two products. b. Suppose Bud Light lowers its alcohol content by 50%. How would you change the utility function to account for this? c. Derive the MRS for the functions in (a) and (b) — and interpret your answer.

19. Suppose you are very picky about your outdoor BBQ experiences — and you need exactly 1 cup of lighter fluid for each bag of charcoal you use. If you have either leftover charcoal or leftover lighter fluid, you simply discard it.
a. With cups of lighter fluid on the horizontal and bags of charcoal on the vertical axis, illustrate some of your indifference curves. b. Suppose that your favorite charcoal has just gotten better because the producer has infused the charcoal with half a cup of lighter fluid per bag. How does your answer to (a) change? c. How could you change the units in which lighter fluid is measured on the horizontal axis to get your graph from (b) to look the same as you original graph in (a)?

20. Suppose you are very picky about your outdoor BBQ experiences — and you need exactly 1 cup of lighter fluid for each bag of charcoal you use. If you have either leftover charcoal or leftover lighter fluid, you simply discard it.
a. Letting cups of lighter fluid be denoted as and bags of charcoal as , give the simplest possible utility function that captures your tastes. b. Suppose that your favorite charcoal has just gotten better because the producer has infused the charcoal with half a cup of lighter fluid per bag. How does your answer to (a) change?

True / False 
1. Conditional input demand curves always slope down, but unconditional input demand curves can slope up.

2. Short run economic costs must be lower than long run economic costs because long run economic costs include the cost of inputs that are fixed in the short run (and thus are not part of short run cost).

3. The fixed expense on a fixed level of capital in the short run becomes a fixed cost for the firm in the long run.

4. Except for the output level for which shortrun fixed capital is long run costminimizing, shortrun average expenses incurred by the firm are higher than long run average costs.

5. Long run average cost curves are downward sloping for increasing returns to scale production technologies.

6. Long run marginal cost curves are increasing for decreasing returns to scale production technologies.

7. If the production technology has increasing returns to scale, short run marginal cost curves must be downward sloping.

8. Short run average expenditure curves are tangent at their lowest point to the long run average cost curve.

9. (Long run) average cost curves are Ushaped when the production technology has decreasing returns to scale and the firm faces recurring fixed costs.

10. (Long run) average cost curves are Ushaped when the production technology has increasing returns to scale and the firm faces recurring fixed costs.

11. Suppose the AC curve is Ushaped. Then an increase in a recurring fixed cost will cause the AC curve to shift up, with its lowest point shifting to the right.

12. If labor and capital are perfect complements in production, short run supply curves are vertical.

13. When output price rises, the long run increase in labor input will be larger than the short run increase in labor input.

14. The greater the degree of substitutability between capital and labor, the greater will be the downward shift in the cost curve when wage falls.

15. If the wage falls, we know for sure that the firm will produce more in the long run but we cannot be sure whether it will use more or less capital.

16. If the rental rate increases, we know for sure that the firm will produce less and will (in the long run) use less capital.

17. If the rental rate increases, we know that output and labor input will fall in the long run.

18. The crossprice demand for capital (relative to the wage) may slope up or down.

19. The more substitutable capital and labor are in production, the more likely it is that the crossprice demand curve for capital (relative to the wage) is upward sloping.

20. If the crossprice demand curve for capital (relative to the wage) is vertical, the short run response by a firm to an increase in the wage is the same as its long run response.

21. If a firm’s labor input response to a decrease in the wage differs between the short and the long run, we know that more workers will be hired after the initial short run adjustment.

22. The production function can have increasing returns to scale or decreasing returns to scale — but it cannot have initially increasing and eventually decreasing returns to scale.

23. The parameter A rescales the production function — allowing us to transform a decreasing returns to scale production function to an increasing returns to scale production function.

24. Output supply is more responsive to price in the short run than in the long run.

25. Output price changes cause substitution effects and scale effects.

Multiple Choice 
26. Which of the following are true in a graph of isoquants (with capital on the vertical and labor on the horizontal) assuming a given wage and rental rate.

27. After a firm makes shortrun adjustments in its production plan following a wage increase,

28. After a firm makes both short and long run adjustments in its production plan following a reduction in the wage,

29. After a firm makes both short and long run adjustments to its production plan following an increase in the output price,

Subjective Short Answer 
30. Suppose there are different ways of producing computer chips. If you hire one worker (for the day) for each machine that you rent (for the day), you can produce 10 chips per day with each worker/machine pair for the first 60 machine/worker pairs. For the next 60 worker/machine pairs (assuming still that you hire them as pairs for the day), you are able to produce 20 chips per day with each of the additional pairs. Once you have 120 worker/machine pairs, you can only get 5 additional chips per day for each additional pair.
But hiring 1 worker for each machine is not the only way to produce computer chips. Suppose you are starting from a production plan where you are using exactly as many workers as machines to produce a given level of chips. The technology is such that, starting at the production plan where you are using the same number of workers as machines, you can replace 1 or more workers with two machines (for each worker) and get just as many chips produced. Alternatively (and again starting at the production plan where you use exactly as many workers as machines), you can replace 1 or more machines with 2 workers (for each machine) and get just as many chips produced. Suppose the daily wage and rental rate are both equal to $100 and the firm currently has 120 units of capital.

31. Suppose GE produces 1 million light bulbs per month While labor is variable both in the short run and the long run, capital is fixed in the short run. Labor is sold at a rate w and capital is rented at a rate r.
a. On a graph with labor on the horizontal axis, illustrate the current isocost and isoquant for GE. Carefully label the slope of the isocost.

True / False 
1. Unlike perfectly competitive firms, monopolists produce where marginal revenue intersects marginal cost.

2. Since revenue increases with increases in price when demand is relatively inelastic, monopolists produce on the inelastic part of demand.

3. A monopolist will not produce at all if the intersection of marginal revenue and marginal cost occurs at a quantity at which average cost lies above the demand curve.

4. Suppose a monopolist produces a positive level of output. If marginal costs are zero, this output level will occur where price elasticity of demand is exactly 1 unless there are recurring fixed costs.

5. Depending on the shape of the marginal cost curve, a monopolist might produce an output level on the elastic or the inelastic part of demand.

6. In the presence of positive production externalities, a monopolist might produce the efficient output level.

7. First degree price discrimination is efficient and therefore preferred by everyone to no price discrimination on the part of a monopolist.

8. When perfect price discrimination comes in the form of a twopart tariff, one part of the “tariff” just covers marginal costs.

9. Consumers prefer inefficient third degree price discrimination to efficient first degree price discrimination.

10. Low demand consumers are indifferent between second degree and first degree price discrimination.

11. The more profit a monopolist makes, the more inefficient is the monopoly outcome.

12. The more consumer surplus is generated in a market dominated by a single monopoly, the more efficient the outcome.

13. If a monopolist were allowed (and able) to first degree price discrimination, there would be no efficiency/equity tradeoff so long as the government can tax the profits of the firm and redistribute the tax revenues in a lump sum way.

14. Under second degree price discrimination, the average price per unit paid by high demand consumers is not equal to marginal willingness to pay for one additional unit.

15. If the market demand curve has constant price elasticity of 1, the monopolist’s price should approach infinity.

16. If a monopolist has no marginal costs and only recurring fixed costs, then, if he produces, any quantity that he produces is profit maximizing if the price elasticity of market demand is 1.

17. For any constantelasticity market demand curve, a monopolist is profit maximizing regardless of what quantity he produces so long as marginal costs are zero.

18. Suppose a monopolist has zero marginal cost. If he faces a market demand curve with constant price elasticity of 2, the profit maximizing output level approaches infinity.

19. In the absence of recurring fixed costs, a monopolist will always produce a positive output quantity.

20. A (nonprice discriminating) monopolist with zero marginal cost but recurring fixed costs may end up not producing even if it would be efficient for him to produce.

21. Suppose a monopolist has marginal cost of zero but recurring fixed costs. Then the monopolist will produce the efficient level of output so long as he can first degree price discriminate.

22. If a monopolist has downward sloping average costs, he will not produce if he cannot price discriminate.

23. If a monopolist faced a downward sloping average cost curve that lies fully above market demand, he will not produce if he can only charge a single perunit price, but it would also be inefficient for him to produce.

24. Suppose a monopolist has zero marginal cost but positive recurring fixed costs. Then, if it is efficient to produce, the efficient quantity to produce occurs where demand crosses the horizontal (quantity) axis.

25. One way to deal with the efficiency problem of monopolies is to tax the profits of monopolists.

26. Because of the monopoly power that comes with being the only firm to produce a product, it is always more efficient to have multiple firms in an industry.

27. Consider a commonly owned fishery in a market with no other fisheries. Given the Tragedy of the Commons, it is more efficient to let a single firm take over the fishery even if that gives the firm monopoly power.

28. Monopoly power can last only if there are legal barriers to entry for other firms.

29. There are many policies that can discipline market power, but often the most powerful discipline comes from potential consumers.

Multiple Choice 
30. Under which of the following monopoly pricing methods is the average price paid by a consumer equal to the marginal willingness to pay by that consumer:

31. Suppose you observe that output in an industry occurs on the inelastic part of the market demand curve. Which of the following can you conclude from this?

32. Suppose market demand facing a monopolist is given by . Then the monopolist’s marginal revenue curve (in the absence of price discrimination) is

33. Suppose a monopolist faces a constant elasticity market demand curve with price elasticity equal to 2. What will be the price charged by this monopolist assuming constant marginal cost of 10.

Subjective Short Answer 
34. Explain why the deadweight loss from monopoly power may be exacerbated if the barrier to entry that creates monopoly power is created through exclusive government granting of a monopoly. For what types of government grants of monopoly power might this not be the case?

35. How would a regulator of a monopoly think differently about regulating price discrimination depending on whether the regulator’s objective is to maximize efficiency or to maximize consumer surplus?

36. Explain what the Saudi oil minister meant when he warned OPEC of using its market power too much by saying “Remember, the Stone Age did not end because we ran out of stones.”

37. What are some obstacles to price discrimination that a monopolist who is protected by high barriers to entry might face?

38. Suppose a single firm has constant marginal cost and faced the demand curve
a. Illustrate in this graph how a monopolist who cannot price discriminate would price this good. What is the monopoly price and quantity?

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