1 1 2003/2004 FIRST EXAM 103BE/BX/BF Microeconomics, Closed part Note 1: Always read all the options before choosing one, and then select the best option. Sometimes the final option may read like all the previous options are correct or none of the above. Note 2: Unless stated otherwise, Q indicates a market quantity, whereas q indicates a quantity at the individual level (consumer or firm). 1) Suppose that the market for luxury automobiles is currently in equilibrium. What effect would a sharp drop in consumers income have in this market? A) Both the equilibrium price and the equilibrium quantity will fall. B) The equilibrium price will fall, but the equilibrium quantity will rise. C) The equilibrium price will rise, but the equilibrium quantity will fall. D) Both the equilibrium price and the equilibrium quantity will rise. 2) Consider the following two related markets: the market for computer programmers and the market for computer programs. A rightward shift of the demand curve for computer programmers will result in a A) shift in the supply curve for programmers. B) movement along the supply curve for computer programs. C) movement along the supply curve for computer programmers and a shift in the supply curve for computer programs. D) movement along the supply curve for programmers and a decrease in the price of computer programs. 3) As the price of DVD players falls, A) the demand curve for CD players will shift to the right. B) the demand curve for DVDs will shift to the right. C) the demand curve for DVD players will shift to the right. D) the quantity demanded for DVD players will fall. 4) The term inverse demand curve refers to A) the demand for inverses. B) a demand curve that slopes upward. C) the difference between quantity demanded and supplied at each price. D) expressing the demand curve in terms of price as a function of quantity. 5) A sharp and lasting decrease in the demand for ice cream would result in A) a greater price decrease in the short run than in the long run. B) a greater price decrease in the long run than in the short run. C) a price decrease in the short run but a price increase in the long run. D) a price increase in the short run but a price decrease in the long run. 6) Assume that government regulators set a price ceiling on a good, 10% below the unregulated equilibrium price. Under which of the following settings will the size of the resulting shortage be greatest? A) Demand and supply are both very inelastic. B) Demand is very elastic, but supply is very inelastic. C) Demand is very inelastic, but supply is very elastic. D) Demand and supply are both very elastic.
2 2 7) Assume that the good vacations on the moon is produced in a competitive market. Figure 1 shows three different supply-anddemand graphs. Which graph best represents the market for vacations on the moon? A) Graph A. B) Graph B. C) Graph C. D) None of the above. Figure 1 8) Suppose that 1000 liters of ice cream sold on the boardwalk each day at a price of 1. Suppose a 10 cent price increase causes the quantity demanded to fall by 50 liters. The price elasticity of demand is equal to A) B) 0.5 C) 2.0 D) ) If the cross-price elasticity between home personal computers and video game units for TV is positive, one can conclude that A) these products are substitutes for one another. B) these products complement one another. C) these products are over-priced. D) consumers are irrational. 10) Consider the following two related markets: the market for oranges, and the market for orange juice. As the price of oranges rises because of an increase in demand, A) the supply curve for orange juice shifts upward. B) the supply curve for orange juice shifts downward. C) the supply curve for orange juice remains stable, but there is movement along the curve. D) none of the above. 11) A vertical supply curve implies A) that the elasticity of supply is constant. B) that the supply curve is perfectly inelastic. C) both A and B are true. D) Neither A nor B is true.
3 12) Imagine a demand-and-supply diagram representing a competitive market, with the price paid by consumers along the vertical axis. If the government imposes a specific tax of t per unit on the producers, then A) the supply curve will shift up by an amount t. B) the supply curve will shift down by an amount t. C) the supply curve will shift left by an amount t. D) the size of the shift of the supply curve depends on the incidence of the tax. 13) John derives utility from the consumption of food (F) and clothing (C). His utility function can be represented as U = F*C. John currently consumes 20 units of food and 4 units of clothing. What is his marginal rate of substitution of food for clothing? A) 5 B) 0.2 C) 80 D) 0 14) If a consumer s budget line for food (F) and clothing (C) can be written as F = 500 4C, then we know that A) the consumer s nominal income is 500. B) clothing costs 4 times as much as food. C) food costs 4 times as much as clothing. D) the consumer s nominal income is ) Suppose Tim enjoys coffee (C) but is sickened by tea (T). Which of the following utility functions would best represent Tim s preferences for coffee and tea? A) U = C * T B) U = C / T C) U = T / C D) U = C 0.5 * T 16) If Tim has the preferences described in question 15), then which of the following assumptions is violated? A) Completeness. B) Transitivity. C) More is better. D) None of the above. 3 17) The vertical intercept of a consumer s budget line represents A) the consumer s nominal income. B) the consumer s purchasing power in terms of the good measured on the horizontal axis. C) the consumer s purchasing power in terms of the good measured on the vertical axis. D) the most money the consumer can spend on the good measured on the vertical axis.
4 18) Rocky thinks that a sip of Coke and a sip of Pepsi are perfect substitutes. If Coke sells for 4 per 2 litre bottle and Pepsi sells for 2 per 2 litre bottle, then A) Rocky will buy twice as much Pepsi as Coke. B) Rocky will spend twice as much on Coke as he does on Pepsi. C) Rocky will buy equal amounts of Coke and Pepsi. D) Rocky will not buy any Coke. 19) If Liz s marginal rate of substitution of apples for chocolate is 3, while the price of chocolate is 6 per unit and the price of apples is 1 per unit, then Liz will A) consider herself to be in equilibrium. B) reduce her apple consumption and buy more chocolate. C) reduce her chocolate consumption and buy more apples. D) change her behaviour, but more information is needed to determine how. 20) Along an individual consumer s demand curve for food, which of the following is not held constant? A) The consumer s income. B) The consumer s level of utility. C) The prices of all other goods. D) The consumer s utility function. 21) If pork meat is an inferior good, then A) its demand curve must be positively sloped. B) its income effect will reinforce its substitution effect. C) its Engel curve must be negatively sloped. D) All of the above. 22) The price of grapes is different each week at the supermarket. Despite this, Marge spends exactly 10 on grapes each week. It must be true that Marge s demand for grapes A) violates the law of demand. B) is perfectly elastic. C) is perfectly inelastic. D) is unit elastic. 23) 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) 0.80 / pound B) 1.25 / pound C) 4 / pound D) 5 / pound 4 Figure 2
5 5 24) Figure 3 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. Denoting p as the price of snacks and q as the corresponding quantity, which of the following points are on Bobby s demand curve for snacks? A) p 2, q 10 B) p 2, q 13 C) p 2, q 5 D) p 1, q 20 Figure 3 25) Let hamburgers be a normal good. This means that A) the demand curve for hamburgers is downward sloping. B) the substitution effect of a price increase is negative. C) the income effect of a price increase dominates the substitution effect. D) an increase in income increases the demand for hamburgers. 26) Martin spends all his income on books (B) and videos (V). Figure 4 depicts a number of possible allocations. The line going through the allocations A 1 and A 2 is A) the price consumption curve for videos. B) the price-consumption curve for books. C) the Engel curve. D) the demand curve for videos. V Figure 4 27) Martin spends all his income on books (B) and videos (V). Figure 4 depicts a number of possible allocations. Starting from allocation A 1, consider a price change of books leading to allocation A 2. The substitution effect for books is measured by the distance A) B 1 to B 2 B) B* to B 2 C) B 1 to B* D) None of the above A 2 V 2 V 1 V* A 1 B 1 B* B 2 B 28) Greg, Bobby, and Peter are the only consumers of camera film in a certain small town. Greg s demand is q G = 100 4P; Bobby s demand is q B = 25 P; Peter s demand is q P = 75 3P. The market demand for camera film in that town is A) Q = 200 8P. B) Q = 100 8P. C) Q = 8 100P. D) Q = 8 200P.
6 29) The market demand for photo film in a given town is Q = P where Q is measured as rolls of film consumed per week and P is measured as /roll. If the price of film is 5 per roll, how much is the consumer surplus in the market for photo film? A) 2,250 B) 10,125 C) 11,250 D) 20,250 30) Suppose the short-run production function at Skip s Pottery can be represented as q = 100L L 2 where q is clay pots produced per week and L is the number of hours Skip works per week. If Skip works 40 hours per week, what is his marginal product of labour? A) 20 B) 40 C) 60 D) 80 31) The average product of labour is maximized when the marginal product of labour A) is maximized. B) equals zero. C) equals the average product of labour. D) none of the above. 32) A certain trench-digging company utilizes the following technology: Each man has a shovel and digs. A man without a shovel is useless, and shovels, of course, cannot dig on their own. The isoquants for this company are A) negatively sloped straight lines. B) negatively sloped and convex. C) negatively sloped and concave. D) L-shaped. 33) Consider the production function q = L 1/3 K 1/3. What are the properties of this production function in terms of returns to scale? A) increasing returns to scale at all levels of production. B) constant returns to scale at all levels of production. C) decreasing returns to scale at all levels of production. D) increasing returns to scale initially, then decreasing returns to scale. 34) Figure 5 shows the isoquants for producing steel. When producing more than 20,000 tons there are A) increasing returns to scale. B) decreasing returns to scale. C) constant returns to scale. D) There is not enough information to answer this question. 6 Figure 5
7 35) Carson inherited 1 acre of land from his grandfather who had paid 1,000 cash for the land back in Today, land in that area sells for 200,000 per acre. What is the opportunity cost to Carson of keeping the land? A) Nothing, since the land was inherited. B) Nothing, since the grandfather paid cash. C) 1,000, since this is what it cost Carson s grandfather. D) 200,000, since this is what Carson is giving up by keeping the land. 36) Suppose the short-run cost function of a certain firm can be written as TC = q. Average fixed cost equals A) 250. B) 10. C) 250/q D) 250/q. 37) Suppose the short-run total cost function of a certain firm is TC = q. Which of the following statements is true at all levels of production? A) AFC > MC B) MC = ATC C) AFC < AVC D) MC = AVC 7 38) Figure 6 shows the long-run expansion path of a firm. The long-run average cost curve of this firm will be A) horizontal. B) downward sloping. C) upward sloping. D) vertical. Figure 6 39) Suppose that for some firm, short-run total cost can be written as TC = q 10q 2 + q 3. Then, average variable cost AVC is minimized at what level of production? A) q = 0. B) q = 5. C) q = 10. D) q = ) Suppose that the production function of a certain firm can be written as q = K 0.6 L 0.3, where K is capital and L is labour. The long run average cost curve LRAC is A) positively sloped for all levels of output. B) U-shaped. C) horizontal. D) negatively sloped for all levels of output.
8 41) Suppose that the production function of a certain firm can be written as q = K 2 L, where K is capital and L is labour. Let r be the user cost of capital and w the wage rate. If the firm minimizes its cost and w / r = 2, then which of the following must be true? A) The firm will hire four times as much capital as labour. B) The firm will hire twice as much capital as labour. C) The firm will hire just as much capital as labour. A) The firm will hire half as much capital as labour. 42) Consider a firm using capital (K) and labour (L) as the only two production factors, with marginal products MP K and MP L, respectively. Let r be the user cost of capital and w the wage rate. Along a U-shaped long-run average cost curve, it is always true that A) short-run average cost is minimized. B) MP K / MP L = w / r C) MP K = MP L. D) MP K / r = MP L / w. 8 43) Figure 7 shows the short-run cost curves for a typical firm in a competitive market. Which of the following statements is NOT true? A) When the price is P = 4, the firm makes a loss. B) When the price is P = 8.5 the firm breaks even. C) When the price is P = 8 the firm shuts down. D) All the statements above are true. Figure 7 44) Suppose that the short-run cost curve for a firm in a competitive market is TC = q + q 2. What is the minimum price necessary for this firm to produce any output q? A) any positive price B) P at least 10 C) P at least 12 D) P at least 20 45) Suppose that the short-run cost curve for a firm in a competitive market is TC = q + q 2. Suppose that its output sells for a price of P = 90. How much output will the firm produce to maximize profit? A) 0 B) 20 C) 40 D) 90
9 46) Suppose that MC = 3q for a perfectly competitive firm. The firm maximizes profit by producing 12 units of output q. It sells these at a per unit price of A) 3. B) 36. C) 432. D) More information is required to answer the question. 47) Suppose that in the short-run, MC = q for an individual firm in a competitive market. If there are 100 identical firms in this market, and we denote the market quantity by Q, then the short-run supply curve in this market can be written as A) Q = 0.005P 5 B) Q = P C) Q = 0.5P D) Q = 50P ) If a perfectly competitive firm notices that ATC > P > AVC, the firm will A) shut down in the short run. B) earn zero economic profit. C) operate at a loss in the short run. D) select a level of output where P > MC. 49) Suppose that for each individual firm in a competitive market, LRAC = q + 2q 2. If input prices are constant in this industry, and entry is free, then the long-run market supply curve will be A) vertical at q = 5. B) horizontal at P = 50. C) horizontal at P = 10. D) undetermined without knowing the number of firms in the market. 50) Consider a competitive market with free entry, where each individual firm faces the same U- shaped long-run average cost curve. If input prices increase as the industry expands, then the longrun supply curve will be A) horizontal. B) vertical. C) negatively sloped. D) positively sloped. Figure ) Figure 8 describes a competitive market. The left graph illustrates a typical firm; the right graph depicts the whole market (the subscripts SR and LR refer to the short and long run respectively). Which of the following statements is NOT true? A) The market is in its long-run equilibrium. B) Along the short-run supply curve S SR the number of firms is fixed. C) There must be free entry and exit in this market. D) The firm earns an economic profit.
10 52) Suppose the demand for natural gas can be expressed as Q = 30 P and the supply can be expressed as Q = 4P, where Q is measured in million mcf and price P is measured in /mcf. What is the consumer surplus if government sets a price ceiling of 1/mcf? A) Less than 120 million B) Between 120 million and 240 million C) Between 240 million and 400 million D) More than 400 million 53) The market demand curve for duct tape is P = 100 9Q. Ten competitive firms supply the tape and each has a marginal cost function MC = 10q. What is the total market quantity produced? A) Q = 5.26 B) Q = 10 C) Q = 1 D) None of the above answers is correct. 54) Suppose that the demand for playing cards can be expressed as Q = 10 P and market supply is perfectly elastic at a price of P = 1. What is the deadweight loss to society of a tax of 2 per unit? A) 16 B) 8 C) 4 D) 2 Figure ) Figure 9 shows the demand and supply curves in the market for milk. Currently the market is in equilibrium. The government imposes a 2 per gallon tax to be collected from sellers. The deadweight loss associated with the tax is A) 500 B) 1000 C) 1500 D) Cannot be determined from the graph. 56) Figure 9 shows the demand and supply curves in the market for milk. Currently the market is in equilibrium. The government imposes a 4 per gallon price support (this means: a price floor of 4 per gallon, plus the obligation for the government to buy and destroy the resulting excess supply). Compared to the competitive outcome, the loss in social welfare is A) 500 B) 1500 C) 3500 D) ) The XYZ Company is a monopolist in the market for a new IQ-enhancing pill. The demand curve for the pill is Q = P. XYZ s marginal revenue function is A) MR = Q. B) MR = Q. C) MR = P. D) MR = Q.
11 58) Assuming a stable demand curve, if a profit maximizing monopolist suddenly discovers that MR > MC, it will respond by A) increasing output and lowering price. B) decreasing output and lowering price. C) increasing both output and price. D) decreasing both output and price. 59) The price elasticity of demand for a monopolist s output is 3. If the monopolist produces its output at a marginal cost of 5 per unit, what price will it charge? A) 5 B) 7.50 C) 10 D) 15 Figure ) Figure 10 shows the linear demand and horizontal cost curves facing a monopoly. The monopoly maximizes profit. The consumer surplus at the monopoly price is A) B) C) D) ) Figure 11 shows the demand, marginal revenue and marginal cost curves for a profitmaximizing monopoly. The producer surplus of this monopoly equals A) g + h. B) d + e + f. C) c + f. D) None of the above. Figure 11 62) Figure 11 shows the demand, marginal revenue and marginal cost curves for a profitmaximizing monopoly. The deadweight loss of this monopoly equals A) a + b. B) c. C) c + f. D) c + d + e + f.
12 63) The total cost function for a monopolist is TC = Q 2. If the demand curve for the monopolist s output can be expressed as P = 120 2Q, the profit-maximizing price that the monopoly charges is equal to A) 80. B) 100. C) 120. D) ) The Lerner Index of monopoly power of the monopolist in the previous question is equal to A) B) C) 4. D) 5. 65) Which one of the following long-run total cost curves definitely describes the cost structure of a natural monopolist? A) TC = 10Q 2 B) TC = 10Q C) TC = 10Q Q 2 + Q 3 D) TC = 10Q 1/2 66) A multimarket price discriminator sells the same eau de toilette under two different labels. The price elasticity of demand for High Class is 2. The price elasticity of demand for Splash-This- Stuff-On is 5. Which one of the following statements is true? A) The price of High Class will be 2/5 times the price of Splash-This-Stuff-On. B) The price of High Class will be 5/2 times the price of Splash-This-Stuff-On. C) The price of High Class will be 5/8 times the price of Splash-This-Stuff-On. D) The price of High Class will be 8/5 times the price of Splash-This-Stuff-On. 67) Bob is the only carpet installer in a small isolated town. Figure 12 shows the demand curves of two distinct groups of customers residential and business. If his marginal cost of installing carpet is 0 per square meter meter, then what prices does Bob charge each segment? A) 5 in each market segment. B) 5 in the residential segment and 7.5 in the business segment. C) 7.50 in each segment. D) None of the above. Figure 12 12
13 68) At a local theatre, the general public pays 5 for a movie ticket while college students receive a 1 discount when they show a college ID card. What does this practice say about the theatre s perception of the price elasticity of demand? A) College students demand for movie tickets is less price elastic than that of the general public. B) College students demand for movie tickets is more price elastic than that of the general public. C) College students demand for movie tickets is equally price elastic as that of the general public. D) There is insufficient information to answer this question. 69) Price discrimination is the practice of A) discriminating against consumers on the basis of race, sex, religion, or national origin. B) dividing consumers into two or more groups, but charging the same price to each group. C) dividing consumers into two or more groups and charging different prices to each group. D) undercutting your rival. 70) A monopolist being able to perfectly price discriminate A) increases the deadweight loss compared to a monopolist with a uniform price. B) reduces the consumer surplus to zero. C) treats all customers alike. D) none of the above. 71) Academic publishers typically provide price discounts to university libraries when they buy larger numbers of journal subscriptions. This is an example of A) quantity discrimination B) perfect price discrimination C) multi-market discrimination D) collusion. 72) In the long run, the monopolistically competitive firm earns zero economic profit because A) of free entry and exit. B) it has excess capacity. C) it has the ability to set price. D) other firms produce a perfect substitute. 73) In a market with only two firms (say: A and B), under which of the following settings is consumer surplus the greatest? A) The two firms behave as Cournot duopolists. B) The two firms perfectly collude. C) The two firms face the threat of entry by a third firm. D) Firm A buys firm B and then behaves as a profit-maximizing monopolist. 74) There are only two gasoline stations in a small isolated town. If they each set a high price, they each earn 50. If they each set a low price, they each earn 25. If one firm sets a low price while the other sets a high price, the low-price firm earns 70 while the high-price firm earns 10. If the two firms set their prices independently and simultaneously, and the decision is made just once, what outcome will result? 13
14 14 A) Both firms will set a high price. B) Both firms will set a low price. C) One firm sets a high price; the other sets a low price. D) There is no Nash equilibrium 75) Figure 13 shows a payoff matrix for two firms, A and B, that must choose between selling basic computers or advanced computers. Firm B s dominant strategy A) is to make basic computers. B) is to make advanced computers. C) is to adopt firm A s strategy. D) does not exist in this game. Figure 13 76) Figure 13 shows a payoff matrix for two firms, A and B, that must choose between selling basic computers or advanced computers. Which of the following is a Nash equilibrium? A) Both firms make advanced computers. B) Both firms make basic computers. C) Firm A makes basic computers and firm B makes advanced computers. D) There are no Nash equilibria. 77) Market demand for a good can be written as Q D = 100 P. Supply from the competitive fringe can be written as Q S = 20 + P. If the dominant firm has constant marginal cost of 20, how many units will it produce in order to maximize its profits? A) 80 B) 60 C) 40 D) 20 78) Figure 14 shows the reaction functions for two pizza shops in a small isolated town. Firm B producing 100 pizzas and firm A producing 50 pizzas is not a Cournot equilibrium because A) Cournot duopolists agree to share the market equally. B) firm A is not on its best-response function. C) firm B is not on its best-response function. D) neither firm is on its best-response function. Figure 14
15 79) Figure 14 shows the reaction functions for two pizza shops in a small isolated town. How much would these firms produce if they managed to form a cartel, i.e. to collude? A) Less than 66.7 pizzas each. B) 66.7 pizzas each. C) Between 66.7 and 100 pizzas each. D) More than 100 pizzas each. 80) Which of the following conditions can help prolong the life of a cartel? A) There are only a few firms in the market and they all belong to the cartel. B) There are many firms in the market that are not members of the cartel. C) It is difficult to know what price any cartel member is actually charging. D) The cartel has no ability to punish members who cheat on the cartel. 15 ORIGINAL ANSWER KEY Question Answ. Ch. Question Answ. Ch. Question Answ. Ch. Question Answ. Ch. 1) A 2 21) C 5 41) A 7 61) D 11 2) C 2 22) D 3, 5 42) D 7 62) C 11 3) B 2 23) D 4 43) C 8 63) B 11 4) D 2 24) C 5 44) B 8 64) A 11 5) A 3, 8 25) D 5 45) C 8 65) D 11 6) D 2, 3 26) B 5 46) B 8 66) D 12 7) A 2 27) C 5 47) D 8 67) B 12 8) B 3 28) A 2 48) C 8 68) B 12 9) A 3 29) B 9 49) B 8 69) C 12 10) A 2 30) A 6 50) D 8 70) B 12 11) C 3 31) C 6 51) A 8 71) A 12 12) A 3 32) D 6 52) A 9 72) A 13 13) A 4 33) C 6 53) B 8 73) C 13 14) B 4 34) B 6 54) D 9 74) B 13 15) B 4 35) D 7 55) A 9 75) D 13 16) C 4 36) D 7 56) C 9 76) C 13 17) C 4 37) D 7 57) D 11 77) C 11 18) D 4 38) B 7 58) A 11 78) C 13 19) C 4 39) B 7 59) B 11 79) A 13 20) B 5 40) A 7 60) A 11 80) A 13 MODIFICATIONS TO THE ANSWER KEY During the consultation session, complaints were raised about several questions. In response, the course coordinator decided to count all answers as correct for the following five questions: 7, 10, 41, 43 and 51. The motivations for these decisions are presented below.
16 Question 7) Some very clever and even amusing complaints were received. One student noted that vacations on the moon might as well be a videogame Apart from this possibility, there s little wrong with this question, as long as you take the given information ( assume that ) for granted. Probably, many students failed to do so, and brought in their knowledge about the actual features of the market for space travel. Since the results for this question were very bad, the course coordinator decided to count all answers as correct. Question 10) The basic idea here is that oranges are an input to the production of orange juice. But in Perloff, whenever the markets for two goods are related, they are always both pure consumer goods, and typically either substitutes or complements. In this respect, one clever chap noted that oranges and orange juice can be viewed as substitutes, since people can squeeze juice out of oranges at home. This would imply that when the price of oranges rises, the demand curve for orange juice shifts to the right. It is still true that the supply curve will shift as well, but choosing answer D on these grounds seems defensible. Question 41) This question contains a typo: there are two options A). Let s be fair: no ambiguity is created by this trivial mistake. But several students complained about it, and strictly speaking they are right. Question 43) Several students noted the logical inconsistency in this question: it asks for statements being NOT true, and then option D) reads All the statements above are true. Elaborate analyses, involving sophisticated Boolean logic, have been received, all of them variations on the theme The Greek farmer said: All Greek farmers are liars. Question 51) No complaints were received about this question. However, the course coordinator noted that the score was very bad (less than 25% had it right) and, even more troublesome, the good students tended to have it wrong. That s unacceptable. 16