NCC 502
Sample Exemption Examination
QUESTIONS 1-2 REFER TO THE DIAGRAM
BELOW.
$
60
MC
45
40
30
20
15
2.
3.
Richard and Charlotte are prospectors for gold. If
they search in different locations, they will both be
rewarded with plentiful discoveries. However, if
they both go to the same location, they will have to
share the gold there. Without communicating with
one another, they must decide simultaneously
between locations A or B. If their payoff matrix is as
given below, which of the following statements is
true?
D
15
1.
4.
30
20
Quantity
60
Go to A
Richard
Go to B
Relative to the consumer surplus that would result at
the socially optimal quantity and price, how much
consumer surplus is lost from Kevin selling at the
monopolist’s profit-maximizing quantity and price?
a. $450
b. $250
c. $125
d. $0
e. None of the above.
If Kevin’s only costs are the marginal costs shown,
what amount of total surplus would result if he could
act as a perfectly price discriminating monopolist?
a. $900
b. $200
c. $450
d. $0
e. None of the above.
Consider the diagram below. Player 1 makes his/her
decision at A and player 2 makes his/her decision at
B or C depending on what player one decided. If
the payoffs for each are as shown, what is the
equilibrium of this game? (U is Up and D is Down)
U
B
Up
a.
b.
c.
d.
e.
-50 for 1
155 for 2
U
150 for 1
200 for 2
If Charlotte and Richard could negotiate costlessly
with one another before deciding, which combination
would they choose?
a. Both will go to A.
b. Richard goes to B and Charlotte to A.
c. Richard goes to A and Charlotte to B.
d. Both will go to B.
e. There is no reason for them to negotiate.
6.
A single-price, profit-maximizing monopolist faces a
demand curve of P=16-3Q and a marginal cost curve
of MC=2Q . What are the monopolist’s optimal
price and quantity?
a. P=$4, Q=2
b. P=$7, Q=3
c. P=$3, Q=3
d. P=$10, Q=2
e. None of the above.
7.
In the above question what is the monopolist’s
economic profit if fixed costs are $10?
a. $16
b. $10
c. $6
d. $0
e. None of the above.
D
500 for 1
-5 for 2
A
Down
C
a.
b.
c.
d.
e.
1 goes Up, 2 goes Down.
1 goes Up, 2 goes Up.
1 goes Down, 2 goes Up.
1 goes Down, 2 goes Down.
There is no equilibrium.
The only Nash equilibrium of this game is
that both go to A.
The only Nash equilibrium of this game is
that Richard goes to B and Charlotte to A.
The only Nash equilibrium of this game is
that Richard goes to A and Charlotte to B.
This game has no Nash equilibrium.
This game has more than one Nash
equilibrium.
5.
100 for 1
105 for 2
D
Charlotte
Go to A
Go to B
3 for Richard
8 for Richard
3 for Charlotte
4 for Charlotte
4 for Richard
2 for Richard
6 for Charlotte
2 for Charlotte
2
8.
9.
Consider the demand curve PD=20-Q, and the supply
curve PS=Q. By how much would economic surplus
be reduced by the imposition of a price ceiling of 6 in
this market?
a. 8
b. 12
c. 16
d. 20
e. None of the above
For the same demand and supply as in the question
above, what is the price elasticity of supply at the
market equilibrium?
a. 1/2
b. 2
c. 1
d. 3/2
e. 3
10. You enter a store and see an item you want to
purchase. This is the first time you have seen the
item. You can buy it now for $200, or you can
search for a lower price. You estimate that prices are
equally likely to be any number between $100 and
$200. If the cost to you of searching at another store
is $8 each time, at what price should you stop
searching?
a. $200
b. $180
c. $175
d. $140
e. $120
11. A casino offers the following lottery: with
probability 0.6, you win $2,000; with probability 0.2,
you win $1,000; with probability 0.1 you win $0; and
with probability 0.1 you lose $1,500. If you were
risk neutral, what is the most you would be willing to
pay for this gamble?
a. $1700
b. $1600
c. $1550
d. $1250
e. None of the above.
QUESTIONS 12-14 REFER TO THE
INFORMATION IN THE TABLE BELOW
Two firms, X and Y, have access to five different
production processes, each one of which gives off a
different amount of pollution. The daily costs of the
processes and the corresponding number of tons of daily
smoke emissions are listed in the table (e.g., process A
emits 4 tons per day, B emits 3 tons per day, etc.):
Process A (4)
Total 2500
Cost
to X
B (3)
3000
C (2)
3700
D (1)
4500
E (0)
6500
Total
Cost
to Y
105
110
200
750
100
12. Pollution is currently unregulated, but the
government is considering a plan to require a daily
permit for each ton of smoke emitted. Among the
following prices for each one-ton-per-day pollution
permit, which is the smallest the government could
charge if its goal were to cut total pollution in half?
a. $400
b. $500
c. $600
d. $700
e. none of the above will result in the desired
pollution reduction.
13. Suppose that instead of following the permit
approach, the government simply required each firm
to cut its current pollution by half. How much
economic surplus would be lost by using this plan
instead of the permit plan?
a. $610
b. $750
c. $510
d. $450
e. None of the above.
14. If the government uses the permit plan, which among
the following permit prices would maximize the
government's total permit revenues while achieving
the 50 percent overall reduction in pollution?
a. $89
b. $399
c. $499
d. $549
e. $1999
15. Doug and Mike are considering sharing an apartment
in Fall Creek for $400/mo. If they don't share they
can live separately for $300/mo. each. Apart from
the rent they are indifferent between living together
and living apart, except for one problem: Doug hates
Mike's taste in music. Doug would be willing to pay
up to $150 a month to avoid hearing Mike's music.
Mike would give up listening to his beloved Wayne
Newton for $400/mo. Which, if any, of the following
ways of splitting the total monthly rent would induce
them to live together?
a. Doug pays $50/mo., Mike pays $350/mo.
b. Doug pays $75/mo., Mike pays $325/mo.
c. Doug pays $125/mo., Mike pays $275/mo.
d. Doug pays $200/mo., Mike pays $200/mo.
e. There is no distribution of rents that will
work.
3
QUESTIONS 16-17 REFER TO THE
INFORMATION BELOW
A Yorkshire village has four residents and a common
grazing land. Her Majesty's Government of Great Britain
has just given each of the four residents 200 pounds
sterling from the "Yorkshire Small Village Benefits
Fund." Each of the four villagers can invest the 200
pounds and earn a return of 15 percent in one year, or can
purchase a one-year-old sheep to graze on the commons.
After one year the villagers can sell their sheep, but the
price their sheep will command depends on how much it
ate in the past year and that, in turn, depends on how
many sheep were grazing on the commons. The price for
a sheep as a function of the total number of sheep on the
commons is given in the table below.
Number of
grazing sheep
1
2
3

Price per 2-yearold sheep
(pounds Sterling)
250
235
220
205
16. If the villagers decide individually, how many sheep
will be sent to graze on the commons?
a. 0
b. 1
c. 2
d. 3
e. 4
17. If villagers could decide collectively, how many
sheep would they send onto the commons?
a. 0
b. 1
c. 2
d. 3
e. 4
QUESTIONS 18-20 REFER TO THE
INFORMATON BELOW
Pequeno is a tiny village in Brazil that has a total of 4
inhabitants. Each of the residents can earn a living in
either of two ways: by working on a neighboring cocoa
plantation or by playing soccer. A cocoa plantation
worker can earn $10,000 a year, and only the best soccer
player will be awarded a contract with the local
professional team, Bahia, in accordance with the player’s
ability. In order to have a chance to play for Bahia,
contestants must go and train with the team, which
prevents them from working on the cocoa plantation.
From among those who train with Bahia, the best is
chosen and paid accordingly. Each person perceives the
same chance of being chosen, and the payment to the one
chosen rises in accordance with the number of people
who train, as shown in the table below.
Number of people
training
1
2
3
4
Payment to the
winner
$15,000
$24,000
$33,000
$36,000
18. How many villagers will go and train with Bahia?
a. 0
b. 1
c. 2
d. 3
e. 4
19. What is the socially optimal number of villagers to
train with Bahia?
a. 0
b. 1
c. 2
d. 3
e. 4
20. Among the following lump-sum taxes levied on the
winner's earnings, which is the smallest that would
ensure the optimal number of villagers trained with
Bahia?
a. $5,001
b. $8,001
c. $3,501
d. $2,501
e. $4,001
21. You purchase your CD's through MBG Music
Service, which offers you any three CD's free
provided you choose a total of at least four CD's.
The CD's you definitely want and their prices are:
The Burt Bacharach Experience ($15), Soundtrack to
the World's Scariest Police Chases ($10), William
Shatner Sings Rock Standards ($8), The John
Maynard Keynes Trio ($60), and The Kenny G Box
Set ($50). What is the marginal cost of selecting
The Teletubby Album! ($20) as well?
a. $6
b. $8
c. $10
d. $15
e. $20
22. Leo and Kate are stranded on an iceberg in the North
Atlantic after their luxury cruise ship sinks. On this
iceberg they find that they can each produce two
things: fish and drinking water. The following table
shows the amount of time it takes each to produce
one unit of fish or one unit of drinking water.
Leo
Kate
Time to produce
one unit of fish
6 hours
1 hour
Time to produce
one unit of water
3 hours
2 hours
Which of the following statements are true?
4
a.
b.
c.
d.
e.
Kate should specialize in the production of
fish because she can catch 6 fish in the same
time it takes Leo to catch one.
Kate should produce both and Leo none,
because she is better at doing both.
Kate should specialize in fish because she
has a comparative advantage in fish.
Leo has an absolute advantage in water
production.
None of the above is correct.
23. Each widget producer has a constant marginal cost
curve. If the demand curve for widgets is a downward
sloping straight line, a tax of $1 per widget, collected
from sellers, will
a. raise the price of widgets by exactly $1.
b. raise the price of widgets by some positive amount
less than $1.
c. be borne entirely by buyers of widgets.
d. be borne entirely by sellers of widgets.
e. more than one of the above.
24. Pat and Chris have arranged to meet for a date tonight
and have sent e-mails to one another proposing locations
for their meeting: Pat suggests Rulloff's and Chris
suggests Joe's. Before they can agree on a location, the
school’s e-mail and phone systems go down, so they each
have to choose their meeting place without further
communication. Their payoffs for each potential outcome
are as given in the matrix below. If each is rational and
self-interested, and each knows the other’s payoffs and
understands the theory of games, what will happen?
Chris
Rulloff's
Rulloff's
20 for Pat
10 for Chris
Joe's
0 for Pat
15 for Chris
Pat
Joe's
5 for Pat
5 for Chris
10 for Pat
20 for Chris
a.
b.
c.
They will meet at Joe's.
They will meet at Rulloff's.
Pat will go to Joe's and Chris will go to
Rulloff's.
d. Pat will go to Rulloff's and Chris will go to
Joe's.
e. There is no equilibrium.
25. Firm X and Firm Y both face the decision of whether
to invest in a new process. Games 1, 2, and 3 show how
their profits depend on the combination of decisions they
make under three different scenarios. Which of the three
games is a prisoner’s dilemma?
Game 1:
Firm X
Don’t
invest
Invest
Firm Y
Don’t invest
Invest
4 for each
2 for X
10 for Y
10 for X
8 for each
2 for Y
Game 2:
Firm X
Don’t
invest
Invest
Firm Y
Don’t invest
Invest
10 for X
4 for each
2 for Y
8 for each
2 for X
10 for Y
Game 3:
Firm X
Don’t
invest
Invest
Don’t invest
8 for each
10 for X
2 for Y
Invest
2 for X
10 for Y
4 for each
a. Games 1, 2, and 3.
b. Game 1 and 3 only.
c. Game 2 and 3 only.
d. Games 1 and 2 only.
e. None of the above answers is correct.
26. The maximum amount that a risk-neutral individual
would pay to participate in a gamble that gives a gain of
$20 with probability of 40%, a gain of $30 with
probability of 20% and a loss of $10 with a probability of
40% is
a. $0
b. $10
c. $18
d. $40
e. none of the above.
27. Joe and Al are scaffolding erectors. They are the only
two members of a community. They get satisfaction from
three things: their income, their safety at work, and their
income relative to their neighbor’s income. Joe’s utility is
given by U = X + R + S, where X = Joe’s monthly income
in dollars, R = 30 if Joe’s income exceeds Al’s, and -30 if
Al’s income exceeds his. R = 0 if Joe and Al earn the
same salary. S = 40 if Joe’s job is safe, and 0 if his job is
unsafe. Al’s utility function is symmetrically defined.
Each must choose between a safe job that pays $100 per
month, and an unsafe job that pays $130 per month. If it
is impractical for them to negotiate about their choice,
what is the maximum amount each would be willing to
pay for a regulation that required them to choose the safe
job?
a. $0 per month.
b. $10 per month
c. $20 per month
d. $30 per month
e. none of the above.
5
28. Gainesville, Florida, has two potential sources of
water: an underground spring and a nearby lake. The
spring can supply up to 2 million gallons per day at a cost
of 0.1 cents per gallon. The lake can supply an additional
4 million gallons per day at a cost of 0.2 cents per gallon.
If the demand curve for water is as shown in the diagram
below, how much should Gainesville charge a citizen
whose water comes from the spring, and how much
should it charge someone whose water comes from the
lake?
30. Philip Morris and RJR must each decide whether to
advertise their products. The payoffs for each
combination of strategy choices are as follows.
Philip Morris
Advertise
Advertise
$10 million
each
Don't Advertise
$35 million for RJR
$5 million for PM
RJR
P
(cents/gal)
0.6
$5 million for RJR
Don't Advertise $10 million for PM
Q
4
(millions of gallons/day)
a. 0.1 cents/gal for water from the spring, and 0.1
cents/gal for water from the lake.
b. 0.1 cents/gal for water from the spring and 0.2
cents/gal for water from the lake.
c. 0.2 cents/gal for water from the spring and 0.1
cents/gal for water from the lake.
d. 0.2 cents/gal for water from the spring and 0.2
cents/gal for water from the lake.
e. None of the above is correct.
29. In the previous question, suppose the demand curve
shown represents the demand curve for water use on a
mid-summer day. The demand curve for a mid-winter
day is given by P = 0.4 – 0.2Q, where P is the price in
cents per gallon and Q is the quantity of water demanded
in millions of gallons per day. How much should
Gainesville charge for water on a mid-summer day and
how much should it charge on a mid-winter day?
a. 0.1 cents/gal during both periods.
b. 0.2 cents/gal during both periods
c. 0.1 cent/gal during winter, 0.2 cent/gal during
summer.
d. 0.1 cent/gal during summer, 0.2 cent/gal during
winter.
e. none of the above
$20 million
each
If executives in each company know that executives in the
other company also see this payoff matrix, and if
executives in both companies are rational, what
combination of strategies will they choose?
a. PM: Advertise, RJR: Advertise
b. PM: Don't advertise, RJR: Don't Advertise
c. PM: Advertise, RJR: Don't Advertise
d. PM: Don't Advertise, RJR: Advertise
d. They can not be determined.