exam version a

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School of Business

and Economics

EXAM version A Knowledge test part

Course : Microeconomics

Code : EBC1010/1011/1012

Date : December 19, 2012

Time : 18.10h – 20.00h

Location : MECC Westhal

Electronic communication devices are not allowed – put them in your bag (under your table) or on the floor, not in your pocket! (otherwise this will be reported as possible fraud). Any writing after the official end of the examination will be considered as possible fraud and reported to the Board of Examiners.

This part of the exam consists of: 14 Pages (including this front page; please check that you received all pages, before you start answering) 80 Multiple Choice Questions You are allowed to make use of: Scrap paper and a non-programmable, non-graphical calculator. Norm: You can obtain at the most 80 marks for this part of the exam (one for each correct answer). This score will be added to your score on the open book part of the exam (40 marks at the most). The sum will be divided by 12 and rounded into half points, subject to the requirement that you need 66 points to get a 5.5. Procedure for objections: - Any comments about the exam must be handed in within five working days after the exam, i.e. before

Wednesday 9 January 2013, 16.00h, at the secretariat of the Department of Quantitative Economics (room A3.10). Each comment should be on a separate page. The standard comment form is available on EleUM, under Course Material > This Year’s Exams. Any other means of objection will not be taken into consideration. If you disagree with a question or an answer, you must give a clear argument as to why you disagree. In your argument you must refer to relevant pages in the basic textbook or the lecture slides. Do not forget to mention your name, ID-number and student email address. Only fully completed forms will be processed. The coordinator’s decisions will be published on Eleum.

- Within ten working days after the exam, i.e. before or on Wednesday 16 January 2013, preliminary grades will be published on Eleum under Course Material > This Year’s Exams. At the same time an inspection session will be scheduled, allowing students e.g. to discuss the grading of the open book part of the exam. The subscription procedures for this inspection are outlined on Eleum under Course Material > This Year’s Exams. Inspection will only be possible after a proper subscription!

- Within fifteen working days after the exam, i.e. before or on Wednesday 23 January 2013, the final grades will be published.

Particulars: - As in any multiple choice exam, there is only one correct answer to each question. - Answer the questions on the answer card provided. - Before you begin, fill out the correct version code (here: version A) on the answer card.

Success!

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VERSION A

Note 1: Always read all the options before choosing one, and then select the best option. Sometimes the final

option may read like “None of the options a), b) or c) is correct” or “All the options a), b) and c) are

correct”.

Note 2: Unless stated otherwise, Q indicates a market quantity, whereas q indicates a quantity at the

individual level (consumer or firm). A price is typically denoted as P.

1) Society faces trade-offs because of ... a) government regulations.

b) the self-interested nature of mankind.

c) scarcity.

d) the profit motive.

2) Most microeconomic models assume that the objective of decision makers is to ... a) make themselves as well off as possible. b) act rationally.

c) make others as well off as possible.

d) None of the options a), b) or c) is correct.

3) In a modern economy, the price of a good is ... a) not affected by the number of buyers and sellers.

b) always higher than the cost of producing the good.

c) usually determined in a market.


4) Which of the following is an example of a normative statement? a) “If you consume this good, you will get sick.”

b) “Everyone should be entitled to a certain amount of this good.”

c) “People usually get smarter after consuming this good.”

d) “This good is red.”

5) In the absence of other changes, an increase in the price of pork will lead to ... a) a movement down along the demand curve for pork. b) a rightward shift of the demand curve for pork.

c) a leftward shift of the demand curve for pork.

d) a movement up along the demand curve for pork.

6) If the price of automobiles were to increase substantially, the demand curve for gasoline would probably ... a) shift rightward.

b) shift leftward.

c) remain unchanged.

d) become steeper.

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7) Typically, the expression “an increase in quantity supplied” is illustrated graphically as a ... a) rightward shift in the supply curve.

b) movement up along the supply curve.

c) movement down along the supply curve.

d) leftward shift in the supply curve.

8) If the supply curve of a product changes so that sellers are now willing to sell 2 additional units at any

given price, the supply curve will ... a) shift rightward by 2 units.

b) shift vertically down by 2 units.

c) shift leftward by 2 units.

d) shift vertically up by 2 units.

9) If price is above the equilibrium level, then … a) excess demand exists.

b) excess supply exists.

c) the supply curve will start to shift leftward.

d) all firms can sell as much as they want.

10) Municipalities that have adopted the policy of “rent control” typically set the rentals on certain apartments

well below equilibrium. As a result, … a) there is a surplus of apartments.

b) landlords have a difficult time finding tenants.

c) prospective tenants have a difficult time finding available apartments.

d) All the options a), b) and c) are correct.

11) In the labor market, if the government imposes a minimum wage that is below the equilibrium wage, then

... a) firms will hire fewer workers than without the minimum wage law.

b) workers who wish to work at the minimum wage will have a difficult time finding jobs.

c) some workers may lose their jobs as a result.

d) nothing will happen to the wage rate or employment.

12) Quotas are most often supported by ... a) foreign consumers.

b) domestic consumers.

c) foreign producers. d) domestic producers.

13) If the demand curve for comic books is expressed as Q = 10,000/P, then demand has a unitary elasticity ... a) only when P = 100.

b) only when P = 5,000.

c) for all values of P.

d) never.

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14) A horizontal demand curve for a good could arise because consumers ... a) are not sensitive to price changes. Figure 1

b) have no equivalent substitutes for this good.

c) view this good as identical to another good.

d) have preferences which violate the “more is better” assumption.

15) Figure 1 shows the demand curve for crude oil. If the market price is

$10 a barrel, what is the price elasticity of demand? a) –1

b) –10

c) –0.02

d) –0.5

16) If a consumer doubles her consumption of ice cream when her income rises by 25%, then the income elasticity of her demand for ice cream is …

a) 8

b) 4

c) 0.08

d) 0.25

17) The cross price elasticity of demand between two goods will be positive if … a) one of the goods is a luxury and the other is a necessity.

b) the two goods are complements.

c) the two goods are luxuries.

d) the two goods are substitutes.

18) Suppose the supply curve and the demand curve for some good both have unitary elasticity at all prices.

The price increase to consumers resulting from a specific tax of € 1 imposed on sellers will be … a) 50 cents.

b) € 1.

c) zero.

d) There is not enough information to choose between the options a), b) and c).

19) If a government wants to maximize revenues from a tax, it should … a) impose it on sellers.

b) impose it on consumers.

c) choose a good with a relatively elastic demand.

d) choose a good with a relatively inelastic demand.

20) Indifference curves are downward sloping because of the assumption of ... a) transitivity.

b) completeness.

c) more is better.


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21) If the utility function for food F and clothing C can be represented as CFU ⋅= , the marginal rate of

substitution of clothing for food equals ... a) CF /−

b) FC /−

c) FC /−

d) CF /−

22) Adrian’s utility function indicates that his utility from bundle A is 50, while his utility from bundle B is

100. This implies that ... a) Adrian likes bundle B twice as much as bundle A.

b) Adrian prefers bundle A over bundle B.

c) Adrian likes bundle A twice as much as bundle B.

d) Adrian prefers bundle B over bundle A.

23) A consumer buys food F and shelter S. If the prices of both goods increase by 50%, … a) the budget constraint will be unchanged.

b) the budget constraint will shift outward in a parallel fashion.

c) the slope of the budget constraint will decrease.

d) the slope of the budget constraint will stay the same.

Figure 2

24) Max has allocated € 100 toward meats for his barbecue. His

budget line and an indifference map are shown in Figure 2. What

is the price of chicken? a) € 5 / pound.

b) € 0.80 / pound.

c) € 1.25 / pound.

d) € 4 / pound.

25) Max has allocated € 100 toward meats for his barbecue. His

budget line and an indifference map are shown in Figure 2. If the

price of burger decreases, … a) Max will buy more burger and less chicken.

b) Max will buy more of both meats.

c) Max will buy more burger and the same quantity of chicken.


26) Suppose Joe’s utility for lobster L and soda S can be represented as SLU ⋅= . Joe walks into a restaurant

with € 72. Lobsters cost € 18 each and sodas cost € 2 each, tax-inclusive; the restaurant accepts no tips. How much lobster and soda will Joe consume if he intends to spend all his money?

a) 4 lobsters and no sodas.

b) 3 lobsters “washed” by 9 sodas.

c) 2 lobsters “washed” by 18 sodas.

d) 1 lobster “washed” by 27 sodas.

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27) “Bounded rationality” suggests that ... a) rational decisions can only be made when there are constraints i.e. “bounds” on the choice set.

b) individuals might make “incorrect” decisions because they are unable to consider all possible

options.

c) individuals would rather have less choice than more choice.

d) individuals are happier when their choices are restricted or “bounded”.

28) In the relevant price range, the demand curve for a Giffen good would be ... a) upward sloping.

b) horizontal.

c) downward sloping.

d) vertical. Figure 3

29) When John was in college and his income was low, he drank “Red Ribbon” beer. As his income increased, he purchased

better-quality beer and less “Red Ribbon”. Which graph in

Figure 3 best represents John’s Engel curve for “Red Ribbon”

beer? a) Graph A.

b) Graph B.

c) Graph C.

d) Graph D.

30) If consumer income and prices increase by the same percentage, … a) the consumer will buy more of both goods.

b) the consumer will buy more of both goods if they are both normal goods.

c) the consumer’s utility maximizing bundle stays the same.

d) the consumer will buy less of both goods if they are both inferior goods.

Figure 4

31) Figure 4 shows Bobby’s indifference map for juice and snacks.

Also shown are three budget lines resulting from different

prices for snacks, assuming he has € 20 to spend on these

goods. Which of the following points are on Bobby’s demand

curve for snacks? a) P = 0.5, q = 7

b) P = 2, q = 5

c) P = 2, q = 7

d) P = 1, q = 20

32) The substitution effect of a price decrease is measured as a

movement along … a) the original budget constraint.

b) the new budget constraint.

c) the original indifference curve.

d) the new indifference curve.

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Figure 5 33) Figure 5 shows Bobby’s indifference map for soda and juice. B1

indicates his original budget line. B2 indicates his budget line

resulting from a decrease in the price of soda. What change in the

soda quantity represents his income effect? a) 7 b) 15

c) 10

d) 3

34) In the long run, all factors of production are ... a) fixed.

b) rented.

c) variable.

d) Both answers b) and c) are correct. Table 1

35) Table 1 depicts the short-run production function for Albert’s

Pretzels. The marginal product of labor ... a) first falls, then rises as the amount of labor increases.

b) is less than or equal to the average product of labor for all

amounts of labor.

c) first rises, then falls as the amount of labor increases.

d) is greater than or equal to the average product of labor for all

amounts of labor.

36) One way to explain the convexity of isoquants is to say that ... a) as labor increases and capital decreases, the marginal product of labor and the marginal product of

capital both rise.

b) as labor increases and capital decreases, the marginal product of labor falls while the marginal product

of capital rises. c) as labor increases and capital decreases, the marginal product of labor and the marginal product of

capital both fall.

d) as labor increases and capital decreases, the marginal product of labor rises while the marginal product

of capital falls.

Figure 6

37) Figure 6 shows the isoquants for producing steel. Increasing

returns to scale are … a) never present.

b) present when producing any amount up to 25,000 tons.

c) present when producing any amount up to 20,000 tons.

d) present when producing up to 10,000 tons.

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38) The marginal rate of technical substitution always equals ... a) the change in output due to a change in the amount of one input.

b) the distance between two isoquants.

c) the slope of the total product curve.

d) minus the ratio of the marginal products of inputs.

39) In the apparel and textile products industry, it is estimated that the elasticity of output with respect to labor

is 0.70 and the elasticity of output with respect to capital is 0.31. These two measures indicate that the

apparel and textile industry is most closely characterized by ... a) strong increasing returns to scale.

b) weak decreasing returns to scale.

c) nearly constant returns to scale.


40) Suppose the original production function for a certain device is KLq += . If a labor-saving technical

change has occurred, which of the following could be the new production function? a) KLq += 2

b) KLq 2+=

c) )(2 KLq +=


41) The Nifty Gum Co. has purchased a large parcel of land for € 1 million. The company recently discovered

that the land is contaminated with toxic waste and therefore worthless to any possible buyer. The

opportunity cost of the land is …

a) € 0

b) € 1 million.

c) some amount greater than € 0 but less than € 1 million.

d) equal to the cost of the factory which Nifty Gum had planned to be built there.

42) In the short run, a specific tax of € 1 per unit of output collected from a firm will affect its ... a) average total cost, average variable cost, average fixed cost, and marginal cost. b) average total cost, average variable cost, and marginal cost.

c) average total cost, average variable cost, and average fixed cost.

d) marginal cost only.

43) Suppose a firm can only vary the quantity of labor hired in the short run, not the quantity of capital. An

increase in the cost of capital will … a) increase the firm’s short-run marginal cost.

b) decrease the firm’s short-run marginal cost.

c) have no effect on the firm’s short-run marginal cost.


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44) Suppose a firm’s short-run production function is q = 10L. If the wage rate is €10 per unit of labor, then

MC equals …

a) q.

b) 10/q.

c) 10.

d) l.

45) If, at some point, the average variable cost (AVC) is rising as a firm produces more of the good, then which

of the following statements about the short-run cost and/or production functions must hold?

a) AFC is rising.

b) APL is falling.

c) AC is rising.

d) MC < AVC.

46) When an isocost line is tangent to a convex isoquant then, at that input bundle, ... a) the last dollar spent on capital yields as much extra output as the last dollar spent on labor.

b) MPL/MPK = w/r.

c) the firm is producing the level of output corresponding with this isoquant at minimum cost. d) All the options a), b) and c) are correct.

47) A cost minimizing firm uses only two inputs: labor and capital. At the cost-minimizing input bundle for

some output level, the marginal rate of technical substitution of capital for labor is –10. If the wage rate for

labor is € 5, what is the rental rate of capital in euro? a) € 10

b) € 2

c) € 0.5

d) € 50

48) Suppose that each worker must use only one shovel to dig a trench, and shovels are useless by themselves

(as are workers). A worker can dig one trench a day. If w indicates the daily wage rate and r the daily rental rate of a shovel, then the firm’s long-run cost function is …

a) qrwTC ⋅+= )(

b) qr

wTC ⋅

=

c) q

rwTC

+=

d) rwTC +=

49) Long-run average cost is never larger than short-run average cost, a.o. because in the long run … a) capital costs equal zero.

b) the firm can move to the lowest possible isoquant for any desired output level.

c) the firm has more flexibility in choosing its inputs.

d) the firm will use less of the variable input.

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Figure 7

50) A market’s structure is determined by … a) the number of firms in the market.

b) the ease with which firms can enter and exit the market.

c) the ability of firms to differentiate their product.


51) If a competitive firm is in short-run equilibrium, then … a) profits equal zero.

b) it will not operate at a loss.

c) an increase in its fixed cost will have no effect on profit.

d) an increase in its fixed cost will have no effect on output.

52) If a competitive firm finds that it maximizes short-run profits by shutting down, then which of the

following must be true? a) The firm will earn zero profit. b) P < AVC only for the level of output at which P = MC.

c) P < AVC only if the firm has no fixed costs.

d) P < AVC for all levels of output.

53) Figure 7 shows the short-run cost curves for a competitive firm. If the firm is to earn economic profit, the

market price must exceed …

a) € 0

b) € 5

c) € 10

d) € 11

54) Reconsider Figure 7. If the market price is € 15 per unit, the competitive firm will earn profits of …

a) € 0

b) € 40

c) € 160

d) There is not enough information to choose between the options

a), b) and c).

55) Suppose the short-run cost curve of a typical firm is given by 21.010 qTC += . If there are 100 identical

firms in the market, the short-run market supply curve is given by … a) PQ 000,1=

b) PQ 500=

c) PQ 100=

d) PQ 10=

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56) An increase in the cost of a variable input will result in ... a) an upward shift of the firm’s short-run marginal cost curve.

b) an upward shift of the short-run market supply curve.

c) an upward shift of the firm’s short-run supply curve.


57) If the long-run market supply curve for some good is upward-sloping, this may be due to the fact that ... a) the number of firms is restricted in the long run.

b) input prices fall as the industry expands.

c) firms are identical.


58) Joe’s demand for spring water can be represented as P = 10 – q (where P is measured in €/liter and q is

measured in liters). He recently discovered a spring where water can be obtained free of charge. His

consumer surplus from this water is ... a) € 100

b) € 50

c) € 0 d) There is not enough information to choose between the options a), b) and c).

59) As the price of a good increases, the loss in consumer surplus is larger, … a) the more money originally spent on the good.

b) the less money originally spent on the good.

c) the smaller the price increase.

d) the more elastic demand is.

60) Suppose the market supply curve for some product reads as Q = P – 5. At a price of 10, producer surplus

equals ... a) 12.50

b) 10

c) 50

d) 25 Figure 8

61) Figure 8 shows supply and demand curves for apartment units in

a large city. If the city government passes a law that establishes

€ 350 per month as the legal maximum rent, the loss in social

welfare equals ... a) i

b) f + g

c) b + c

d) a

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62) Consider a perfectly competitive market for a good which enjoys a specific (i.e. per unit) government

subsidy. Total welfare associated with this market equals … a) consumer surplus plus producer surplus.

b) consumer surplus plus producer surplus plus what the government spends on the subsidy.

c) consumer surplus plus producer surplus minus what the government spends on the subsidy.


63) If the inverse demand curve facing a single-price monopoly is P = 100 – 2Q, and MC is constant at 16,

then the profit maximum ... a) is achieved by setting price equal to 21.

b) is achieved when 21 units are produced.

c) is achieved only by shutting down in the short run.


64) The marginal revenue curve of a single-price monopolist ... a) is identical to the demand curve.

b) doesn’t exist.

c) lies above the demand curve. d) lies below the demand curve.

65) If the demand for a firm’s output is perfectly elastic, then the firm’s Lerner Index equals ... a) one.

b) zero.

c) infinity.

d) one-half.

66) The existence of a deadweight loss associated with a profit-maximizing single-price monopoly is a result of the fact that ...

a) the cost of the last unit produced is more than consumers are willing to pay for it.

b) the producer surplus is larger than in a competitive market.

c) consumers are willing to pay more for the last unit of output than it costs to produce it.


67) If the government forces a natural monopoly to charge a single price equal to marginal cost, then …

a) the natural monopoly will shut down.

b) the natural monopoly will still make high profits.

c) the natural monopoly’s marginal cost curve will shift up.

d) total welfare is maximized.

68) Which of the following conditions must be fulfilled so that a firm can price discriminate?

a) There are no other firms in the market.

b) The good cannot easily be resold.

c) The good is a non-durable good.


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69) Relative to a single-price monopoly, the effect of perfect price discrimination on social welfare is … a) beneficial.

b) detrimental.

c) neutral.

d) ambiguous.

70) Relative to a single-price monopoly, the effect of multimarket price discrimination on social welfare is … a) beneficial.

b) detrimental.

c) neutral.

d) ambiguous.

71) If two identifiable market segments differ with respect to their price elasticity of demand and resale is

impossible, a firm with market power will ... a) set a lower price in the market segment that is more price elastic.

b) set price equal to marginal cost in both market segments.

c) set a higher price in the market segment that is more price elastic.

d) set price so as to equate the elasticity of demand across market segments.

72) Suppose a profit-maximizing monopoly is able to employ multimarket price discrimination. The marginal

cost of providing the good is constant and the same in both markets. The marginal revenue the firm earns

on the last unit sold in the market with the lower price will be ... a) greater than the marginal revenue the firm earns on the last unit sold in the market with the higher

price.

b) greater than the marginal cost of the last unit.

c) equal to the marginal revenue the firm earns on the last unit sold in the market with the higher price.

d) less than the marginal revenue the firm earns on the last unit sold in the market with the higher price.

73) Consider the following thee market structures: monopoly, oligopoly, and monopolistic competition. The

perfectly competitive market structure differs from all these three alternative structures in … a) the producers’ ability to act as price setters.

b) the profit maximization condition.

c) entry conditions.

d) the amount of long run profit.

74) Consider a typical firm in a cartel. Which of the following attitudes is this firm likely to hold? a) If everyone cheats, I’m better off, and so is everyone in the cartel. b) If I alone cheat, I’m better off; if everyone cheats, I’m worse off.

c) If I suspect others are planning to cheat, I’ll do best for myself by deciding not to cheat.

d) I can never do better for myself than following agreed-upon cartel rules.

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75) Suppose two Cournot duopolists both operate at a constant marginal cost of 10. The market demand is

QP 520 −= . Firm 1’s best-response function is … a) 21 1 qq −=

b) 21 2 qq −=

c) 21 5.01 qq −=

d) 21 5.0 qq =

76) In the Cournot model, the output that a firm chooses to produce increases as ... a) the total output of other firms increases.

b) its marginal cost increases.

c) the number of firms in the market increases.

d) the number of firms in the market decreases.

77) Which of the following properties holds in the long-run equilibrium of a monopolistically competitive

market? a) Marginal revenue equals marginal cost.

b) Price equals average cost.

c) No further profitable entry is possible.


Table 2 78) Table 2 shows the payoff matrix for two firms, A and B, selecting an

advertising budget. The firms must choose between a high

advertising budget and a low advertising budget. Firm A’s dominant

strategy ... a) does not exist.

b) is to select a low advertising budget.

c) is to do the opposite of firm B.

d) is to select a high advertising budget.

Table 3

79) Table 3 shows a payoff matrix for two firms, A and B, that

must choose between selling basic computers or advanced

computers. How many Nash equilibria are there? a) 0 b) 1

c) 2

d) 4

80) Consider a static game with two players. Which of the following statements is correct? a) If both players have a dominant strategy, the game has a Nash equilibrium.

b) If one of both players has a dominant strategy and the other does not, the game has a Nash equilibrium.

c) If neither player has a dominant strategy, the game may or may not have a Nash equilibrium.


exam version a

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