# Problem Set #4

24 Questions | Total Attempts: 62

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Gains from Trade, General and Specific Knowledge, Contracting Costs in Markets, Advantages of a Firm

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• 1.
Professor Curtis recently bought "Thumb Piano Woman" at an art auction. The source of her gain from trade most likely is
• A.

Preferences

• B.

Uniqueness

• C.

A thin market

• D.

• E.

None of the above

• 2.
Palo Alto, Inc., located in South Carolina near a textile mill, manufactures and sells fabric carriers used to transport dogs on passenger airliners. The source of its gain is most likely
• A.

Preferences

• B.

Uniqueness

• C.

A thin market

• D.

• E.

None of the above

• 3.
Tammy owns Amazing Fantasy Fifteen, the first comic book in which Spiderman appeared. The comic book is in near mint condition. Jayson wants to purchase the comic book. Tammy and Jayson bargain over the price and Jayson agrees to pay Tammy  \$42,600 for the book. If the trade is mutually advantageous and Tammy's gain on the trade is \$100, what is the seller's minimum asking price?
• A.

\$42,700

• B.

\$42,600

• C.

\$42,500

• D.

Cannot determine with the information available

• E.

None of the above

• 4.
Clark and Robert negotiated a price of \$300 for a set of baseball cards. Privately, Robert was willing to pay as much \$350. The trade was mututally advantageous. Which of following is true?
• A.

Clark was willing to sell for as little as \$250

• B.

Clark was willing to sell for an amount greater than \$300

• C.

Clark was willing to sell for an amount less than \$300

• D.

• E.

None of the above

• 5.
John and Ellen bargain over an item John is trying to sell. They negotiate a price of \$1,000. John's gain \$300. Ellen's gain is \$200. Which of the following is true?
• A.

John's private price was \$1,200

• B.

John's private price was \$700

• C.

• D.

Two of the above

• E.

None of above

• 6.
Seller is willing to sell an item for as little as X. Buyer is willing to pay as much as Y for that item. At which price (P) will a trade take place?
• A.

P-X = Y- P ; P-X>0

• B.

P-X > Y-P; Y-P> 0

• C.

Y-P > P-X; P-X>0

• D.

All of the above

• E.

None of the above

• 7.
Annie is willing to sell a valuable porcelain doll for at least \$175. Helen would like to buy the doll and is willing to pay as much as \$225. At which of the following prices could a mutually advantageous trade occur?
• A.

\$220

• B.

\$200

• C.

\$195

• D.

All of the above

• E.

None of the above

• 8.
Jimmy M. is selling some of his collection of vintage vinyl albums on e-bay. His collection includes vintage recordings of Sting, The Rolling Stones and YES from the 1970s. Listening to vinyl records requires old-fashioned equipment that is owned in relatively few households. Jimmy expects to earn gain on his album trades because he has
• A.

A comparative advantage over the buyers due to his knowledge of the album quality

• B.

A comparative advantage over the buyers due to his lower selling costs

• C.

Different preferences than the buyers over a unique market

• D.

Different preferences than the buyers in a thin market

• E.

None of the above

• 9.
John and Ellen bargain over an item John is trying to sell. They negotiate a price of \$1,000. John's gain is \$300. Ellen's gain is \$200. Which of the following is true?
• A.

Ellen's private price was \$800

• B.

Ellen's private price was \$900

• C.

• D.

Two of the above

• E.

None of the above

• 10.
A company that sells widgets recently entered into a long-term purchasing agreement with two of its key suppliers. The company's gain from trades arise due to
• A.

Differences in consumer preferences

• B.

The thin market for widgets

• C.

The one of a kind nature of its business

• D.

• E.

None of the above

• 11.
Tammy owns Amazing Fantasy Fifteen, the first comic book in which Spiderman appeared. The comic book is in near mint condition. Jayson wants to purchase the comic book. Tammy and Jayson bargain over the price and Jayson agrees to pay Tammy \$42,600 for the book. If the trade was mutually advantageious and Jayson's gain on the trade is \$200, what is the buyer's maximum willing to pay price?
• A.

\$42,800

• B.

\$42,600

• C.

\$42,400

• D.

Cannot be determined

• E.

None of the above

• 12.
Mark refurbishes old motorcycles and sells them at auction. For Mark, this is a hobby, but he is considering quitting his job and doing this as a business. He is analyzing his gains from trade. He shows you his analysis, excited because he is going to "make it big!". Thanks to your Accy 201 training, you notice that Mark has not factored in the cost of his time. In his analysis this will result in which of the following?
• A.

The seller's gain from trade will be overestimated

• B.

The seller's gain from trade will be underestimated

• C.

• D.

• 13.
John owns a classic Fender guitar. He is willing to sell it, along with his amps, speakers and WaWa pedal for as little as \$2,000. Paul is interested in buying John's music equipment. He is willing to pay as much as \$3,000. If the two men bargain with each other to a bid price of \$2,300, will the trade take place?
• A.

No! It is unfair. Paul would have a \$700 gain while John would have only a \$300 gain.

• B.

No! It is unfair. Paul would have only a \$300 gain while John would have a \$700 gain.

• C.

Sure! It's mutually advantageous. Paul would have a \$700 gain while John would have a \$300 gain.

• D.

Sure! It's mutually advantageous. Paul would have a \$300 gain while John would have a \$700 gain.

• 14.
Martin is the CEO of his own business. He holds a master's degree in computer science and an MBA. For 25 years Martin's company has helped other companies customize packaged software for their use. The knowledge Martin uses to create value at his company can best be described as
• A.

General

• B.

Idiosyncratic

• C.

Scientific

• D.

Assembled

• E.

None of the above

• 15.
Some intellectual property attorneys prosecute patents for clients with the US Patent Office. Large intellectual property law firms work with the same clients for many years on hundreds or thousands of patents. When these attorneys work for their clients the knowledge they use can best be described as
• A.

Idiosyncratic

• B.

Scientific

• C.

Assembled

• D.

General

• E.

None of the above

• 16.
This semester Professor Curtis will be teaching two days of the CPA review course for students at the U of I. Students are taking the course to increase the extent of their
• A.

General knowledge

• B.

Idiosyncratic knowledge

• C.

Scientific knowledge

• D.

Specific knowledge

• E.

None of the above

• 17.
Professor Curtis' husband is an intellectual property attorney. He writes patents for a number of clients, though most of his work comes from a few companies. While most of his clients are US companies, this summer he visited a very important client in Korea. Why is the knowledge he needs to work with his Korean client more specific than he needs to work with his other clients?
• A.

The knowledge is assembled--both scientific and idiosyncratic

• B.

Technology, like email and web cameras, makes communication lest costly

• C.

The nature of the patents is difficult to comprehend and summarize

• D.

Differences in the language and culture increase the difficulty of communication

• E.

None of the above

• 18.
A sorority at the U of I is planning a philanthropy to raise money for the Crisis Nursery in Urbana. Three women were given the task of investigating two possible fundraisers and making a recommendation to the whole sorority. The time that these women spend on their task is a
• A.

Search or information cost

• B.

Bargaining or decision cost

• C.

Policing or enforcing cost

• D.

Opportunity cost

• E.

None of the above

• 19.
A certain company holds a patent for a particular business process. The company licenses the right to use this process to other businesses. Routinely the company enters lawsuits against companies who are using the process without paying a fee. What cost of contracting do these lawsuits represent?
• A.

Search costs

• B.

Information costs

• C.

Decision costs

• D.

Enforcing costs

• E.

None of the above

• 20.
Which of the following occurs before a contract is made?
• A.

Information costs

• B.

Policing costs

• C.

Enforcing costs

• D.

Opportunity costs

• E.

None of the above

• 21.
A wocket is made using 10 factors of production. P.D. Eastman estimates the consumer market for wockets in downstate Illinois is 5,000. Transaction costs are \$3. How much will transaction costs be if P.D. Eastment opens a wocket factory?
• A.

\$150,000

• B.

\$15,030

• C.

\$50,000

• D.

\$5,010

• E.

None of the above

• 22.
Tom is considering opening a restaurant in a small southern Illinois town. Tom's specialty is jambalaya, which he serves family-style. The recipe for jambalaya includes 10 ingredients. Tom estimates that each of the 300 families in the area would come to his restaurant twice a year to eat jambalaya rather than make it at home. Contracting costs average \$2 per transaction. How much will it cost the community to eat jambalaya twice a year if Tom does not open the restaurant?
• A.

(300x10x2) = \$6000

• B.

2x (300 x10x2) = \$12,000

• C.

(300+10) = \$310

• D.

2x (300+10) = \$620

• E.

None of the above

• 23.
A certain product is comprised of 10 factors of production. The market in which this product is used has 100 customers. Transaction costs in this market are \$5 per transaction. How many transactions will take palce in this market if no firm exists?
• A.

10x100

• B.

10+100

• C.

(10x100)x5

• D.

(10+100)x5

• E.

None of the above

• 24.
A certain product is comprised of 10 factors of production. The market in which this product is used has 100 customers. Transaction costs in this market are \$5 per transaction. How much is the total transaction cost in this market if a firm exists?
• A.

10x100

• B.

10+100

• C.

(10x100)x5

• D.

(10+100)x5

• E.

None of the above