| 1. Harley's current wealth 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. | |
| a) | Harley would be willing to pay a bit more than $25 for this insurance. | b) | Harley would be willing to pay up to $25 for this insurance. |
c) | Since Harley is risk neutral, he wouldn't be willing to pay anything for this insurance. |
d) | Since Harley's utility function is not specified, we can't tell how much he would be willing to pay for this insurance. |
| 2. If a firm moves from one point on a production isoquant to another point on the same isoquant, which of the following will certainly NOT happen? | |
| a) | the level of output will change | b) | the ratio in which the inputs are combined will change | c) | the marginal products of the inputs will change |
d) | the firm's profitability will change |
| 3. A firm has the production function f(L,K)=12min{2L, L+K}. At the point, (L,K)=(20,50), the firm's production isoquant: | |
| a) | has slope -1. | b) | is vertical. | c) | has a kink. |
d) | has slope -2/1. |
| 4. Which of the following production functions exhibit constant returns to scale? In each case y is output and K and L are inputs. (1) y = K1/2L2/3 (2) y = 3K1/2L1/2 (3) y = K1/2+L1/2 (4) y = 2K+3L. | |
| a) | 2 and 3 | b) | 1,2, and 4 | c) | 1,3, and 4 |
d) | 2 and 4 |
| 5. A firm has the production function f(L,K)=(Lb+Kb)c where b>0 and c>0. This firm will have: | |
| a) | increasing returns to scale if and only if 2b+c>1. | b) | increasing returns to scale if and only if bc>1. | c) | increasing returns to scale if and only if b+c>1. |
d) | constant returns to scale if and only if c=1. |
| 6. A firm's production function is f(L,K)=L+2K. This means that | |
| a) | K is twice as expensive as L | b) | MPL=1 and MPK=2 | c) | the slope of each isoquant is -2/1 | d) | each isoquant is horizontal |