# 2003/2004 SECOND EXAM 103BE/BX/BF Microeconomics, Closed part

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1 1 2003/2004 SECOND 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) Microeconomic models assume that decision makers A) act selfishly. B) do not cooperate with others. C) wish to make themselves as well off as possible. D) All of the above. 2) The expression increase in quantity supplied is illustrated graphically as a A) leftward shift in the supply curve. B) rightward shift in the supply curve. C) movement up along the supply curve. D) movement down along the supply curve. 3) According to the Law of Demand, the demand curve for a good will A) shift leftward when the price of the good increases. B) shift rightward when the price of the good increases. C) slope upward. D) slope downward. 4) Figure 1 shows a graph of the market for pizzas in a large town. At a price of 7, what is the amount of excess demand? A) 10 units. B) 30 units. C) 70 units. D) 0 units; there is excess supply at 7. Figure 1 5) Figure 1 shows a graph of the market for pizzas in a large town. Suppose that concern over dietary habits has led the government to impose a restriction that limits suppliers to produce only 40 pizzas. As a result, for prices greater than 7, the A) supply curve is unchanged. B) supply curve becomes vertical. C) demand curve becomes vertical. D) demand curve becomes horizontal. 6) Assuming that pizzas and tacos are substitutes, a decrease in the price of tacos would lead to a A) leftward shift in the demand curve for pizza. B) decrease in the equilibrium quantity of pizza. C) decrease in the equilibrium price of pizza. D) All of the above.

2 7) Aluminium is an important input in the production of cars. Suppose that the market for luxury automobiles is currently in equilibrium. What effect would a sharp drop in aluminium prices have in this market for luxury cars? 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. 8) If the price elasticity of demand for a good is less than minus one, we say that demand is A) elastic. B) inelastic. C) perfect. D) vertical. 9) Figure 2 shows the demand curve for crude oil. The demand curve has unitary price elasticity when price equals A) 0. B) 1. C) 10. D) ) If an increase in income results in a rightward parallel shift of the demand curve, then, at any given price, the price elasticity of demand will have A) increased in absolute terms. B) decreased in absolute terms. C) remained unchanged. D) increased, decreased or stayed the same. It cannot be determined. 11) The cross price elasticity of demand between two goods will be positive if A) the two goods are complements. B) the two goods are substitutes. C) the two goods are luxuries. D) one of the goods is a luxury and the other is a necessity. 12) As prices change, the price elasticity of supply describes A) the movement along the supply curve. B) the shift of the supply curve. C) the change in the equilibrium price. D) the shift from a necessity to a luxury good. Figure 2 2

3 3 13) Electricity accounts for almost 20% of the cost of making steel. A 10% increase in electricity prices results in steel firms decreasing production and thereby demanding 5% less electricity. Over many years, technological innovations can change the way steel firms make steel and reduce the industry s energy requirements. This suggests that the steel industry s short-run elasticity of demand for electricity is probably A) less than one in absolute terms. B) less than its long-run elasticity of demand for electricity. C) Neither A nor B above. D) Both A and B above. 14) An indifference curve represents bundles of goods that a consumer A) views as equally desirable. B) ranks from most preferred to least preferred. C) prefers to any other bundle of goods. D) All of the above. 15) If two indifference curves were to intersect at a point, this would violate the assumption of A) transitivity. B) completeness. C) Both A and B above. D) Neither A nor B above. 16) If Fred s marginal rate of substitution of salad for pizza equals 5, then A) he would give up 5 pizzas to get the next salad. B) he would give up 5 salads to get the next pizza. C) he will eat five times as much pizza as salad. D) he will eat five times as much salad as pizza. 17) The marginal rate of transformation of y for x represents A) the slope of the budget constraint. B) the rate at which the consumer must give up x to get one more y. C) P y /P x. D) All of the above. 18) With respect to consuming food and shelter, two consumers face the same prices and both claim to be in equilibrium. We therefore know that A) they both have the same marginal utility for food. B) they both have the same marginal utility for shelter. C) they both have the same MRS of food for shelter. D) All of the above. 19) Lisa maximizes her utility by eating both pizzas and burritos. The price of a pizza is 10 and the price of a burrito is 5. When Lisa s utility is maximized, A) the marginal utility of a pizza is larger than the marginal utility of a burrito. B) the marginal utility of a burrito is larger than the marginal utility of a pizza. C) the marginal utility of both goods is the same. D) the good with a larger marginal utility cannot be determined without more information.

4 4 20) Max has allocated 100 towards meat for his barbecue. His budget constraint and an indifference map are shown in Figure 3. Chicken and burger are both normal goods to Max. His mother wants to sponsor the event, but she is in doubt whether to give Max 10 pounds of burger, or the corresponding euro value. A) Max would prefer receiving the euro value of the burger. B) Max is indifferent between the gift and the euro value of the burger. C) Max prefers the gift to the euro value of the burger. D) There is not enough information to answer the question. Figure 3 21) If Erik s marginal rate of substitution of wine for cheese is 3, while the price of wine is 4 per unit and the price of cheese 2 per unit, then Erik will A) be happy and consider himself to be in equilibrium. B) reduce his wine consumption and eat more cheese. C) reduce his cheese consumption and drink more wine. D) change his behaviour, but more information is needed to determine how. 22) Suppose that the quantity of food is measured on the horizontal axis and the quantity of clothing is measured on the vertical axis. If the price consumption path for food is vertical then A) food is a Giffen good. B) the demand for clothing is perfectly inelastic. C) the demand for food is perfectly elastic. D) the demand for food is perfectly inelastic. 23) Suppose that the substitution effect of a decline in the price of food is the same for both Harry and Sally. However, Harry feels that food is an inferior good while Sally feels that food is a normal good. As a result, A) Harry s demand curve for food will be flatter than Sally s. B) Harry s demand curve for food will be steeper than Sally s. C) the slopes of Harry s and Sally s demand curves are the same. D) there is not enough information to conclude anything. 24) When the price of food increases, Jimmy spends more money on food than he did before. Therefore, Jimmy s demand for food A) violates the law of demand. B) is relatively elastic. C) is unitary elastic. D) is relatively inelastic.

5 5 25) Figure 4 shows Larry s indifference map and budget constraints for ham and pork. Which of the following statements is true? A) Larry s Engel curve for pork will be upward sloping. B) Larry s Engel curve for pork will be downward sloping. C) Larry s Engel curve for ham will be upward sloping. D) From the information provided here, one cannot determine whether Larry s Engel curve for ham is upward- or downward-sloping. Figure 4 26) Figure 4 shows Larry s indifference map and budget constraints for ham and pork. Which of the following statements is true? A) Larry s demand curve for pork shifts rightward when his income increases. B) Larry s income elasticity of demand for pork is greater than zero. C) Pork is a normal good. D) All of the above. Figure 5 27) Figure 5 shows Bobby s indifference map for soda and juice. B 1 indicates his original budget constraint; B 2 indicates his budget constraint resulting from a decrease in the price of soda. What change in quantity best represents his substitution effect? A) 3 units of soda. B) 7 units of soda. C) 10 units of soda. D) 15 units of soda. 28) Consider a line combining points e 2 and e 1 in Figure 5. This is the A) Engel curve for soda. B) income-consumption curve for soda. C) price-consumption curve for soda. D) demand curve for soda. 29) Martha s demand for spring water has a price elasticity of 3.0. A recent tax that caused the price of spring water to increase by 3% will cause Martha to decrease her consumption of spring water by A) 1 unit. B) 9 units. C) 1%. D) 9%.

6 6 30) 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) A change in the marginal products of the inputs. B) A change in the rate of technical substitution. C) A change in the level of output. D) A change in profitability. 31) Let y be output and let K and L be inputs. Which of the following production functions exhibit constant returns to scale? (1) y = K 1/2 L 2/3 (2) y = 3K 1/2 L 1/2 (3) y = K 1/2 + L 1/2 (4) y = 2K + 3L A) 2, 3, and 4. B) 1, 3, and 4. C) 2 and 3. D) 2 and 4. 32) In describing a given production technology, the short run is best defined as lasting A) up to six months from now. B) up to five years from now. C) as long as all inputs are fixed. D) as long as at least one input is fixed. 33) If decreasing returns to scale are present, then if all inputs are increased by 10%, output will A) decrease by 10%. B) increase by 10%. C) increase by more than 10%. D) increase by less than 10%. 34) If the marginal product of labour is below the average product of labour, it must be true that A) the marginal product of labour is negative. B) the marginal product of labour is zero. C) the average product of labour is falling. D) the average product of labour is negative. 35) Suppose the production function for a certain device is q = L + K. If neutral technical change has occurred, which of the following could be the new production function? A) q L 5K. B) q 5 (L K). C) q 5L K. D) q 0.5 (L K).

7 7 36) The following relationship must hold between the average total cost (ATC) curve and the marginal cost curve (MC): A) If MC is rising, ATC must be rising. B) If MC is rising, ATC must be greater than MC. C) If MC is rising, ATC must be less than MC. D) None of the above. 37) A competitive firm uses two inputs, x and y. Total output is given by xy. The price of x is 20 and the price of y is 10. The company minimizes its costs per unit of output and spends 200 on x. How much does it spend on y? A) More than 200. B) 200. C) Less than 200. D) There is insufficient information to choose between the options A), B) and C). 38) Tommy rents office space for 12,000 per year. He uses the office to fill out tax return forms for his clients. He fills out 1,000 tax forms per year. If the owner of the building raises Tommy s rent to 13,000 per year, the marginal cost of filling out tax forms will A) not change. B) increase by 1. C) increase by 1,000. D) increase by some amount that cannot be computed without more information. 39) Suppose the short-run production function is q = 10L. If the wage rate is 4 per unit of labour L, then average variable cost equals A) 4L B) 0.4 C) 4 D) 40 40) Suppose each worker must use only one shovel to dig a trench, and shovels are useless by themselves. In the short run, the number of shovels is fixed. Consequently, in the short run, an increase in the price of shovels will result in A) fewer shovels being purchased. B) more workers being hired. C) a decrease in the firm s output. D) no change in the firm s output. 41) Imagine that we draw the amount of labour along the horizontal axis and the amount of capital along the vertical axis. Then the slope of the isocost line tells the firm how much A) capital must be reduced to keep total cost constant when hiring one more unit of labour. B) capital must be increased to keep total cost constant when hiring one more unit of labour. C) a unit of capital costs relative to a unit of labour. D) the isoquant will shift outward if the firm wishes to produce more.

8 8 42) At the XYZ Co., a unit of capital K costs 3 times as much as a unit of labour L. If the isoquants are convex, and the firm chooses the cost-minimizing input bundle, we can conclude that A) MP K 3 * MP L. B) the firm will not hire any capital. C) the firm will hire 3 times as much labour as capital. D) the firm will hire 3 times as much capital as labour. 43) A firm produces output with capital and labour. The expansion path of the firm is a 45-degree upward sloping line. Which of the following statements is true? A) The firm has constant returns to scale. B) The firm spends the same amount of money on capital and labour. C) The marginal rate of substitution of capital for labour is equal to one. D) None of the above. 44) Suppose that for the individual firm in a competitive market, LRAC = q + 2q 2. Input prices are constant and entry is free. Hence in the long-run market equilibrium the firm will supply A) 0 units. B) 1 unit. C) 5 units. D) 50 units. 45) Which of the following statement is true for a perfectly competitive market? A) The individual firm s demand curve is downward sloping. B) The individual firm s demand curve is horizontal. C) The market demand curve is horizontal. D) The individual firm s supply curve is horizontal. 46) Figure 6 shows the cost curves for a typical firm in a competitive market. The short-run supply of the firm is given by P Figure 6 MC AC A) the MC-curve. B) the MC-curve above a price P 1. C) the MC-curve above a price P 2 D) the MC-curve above a price P 3. P 3 AVC 47) A competitive firm is currently in short-run equilibrium and earning a profit. Now imagine that government imposes a lump-sum tax which is smaller than this profit level. What impact will this tax have on the firm s production decision? P 2 P 1 q 1 q 2 q 3 q A) The firm will decrease output but earn a higher profit. B) The firm will increase output but earn a lower profit. C) The firm will not change output but earn a lower profit. D) The firm will increase output and earn a higher profit.

9 9 48) A firm in a perfectly competitive market will not be able to A) leave the industry if it wishes. B) obtain information about the market price. C) charge whatever price it wishes. D) ever earn economic profit. 49) When the production of a good involves several inputs, an increase in the cost of one input will cause total costs to A) rise more than in proportion. B) rise less than in proportion. C) remain unchanged. D) rise by the exact amount of the input price increase. Figure 7 P MC AC P D S SR P 2 P 2 P 1 P 1 S LR q 1 q 2 q Q 2 Q 1 Q 50) Figure 7 describes a competitive market. The left graph illustrates the cost curves of a typical firm; the right graph refers to the competitive market as a whole, where the subscripts SR and LR refer to the short and long run, respectively. Suppose that the current price is P 2. In the long run A) new firms will enter the market. B) the typical firm will reduce its output. C) Neither A nor B above. D) Both A and B above. 51) In a competitive market, the long run market supply is downward sloping if A) input prices increase as the industry expands. B) input prices fall as the industry expands. C) entry is restricted. D) firms are different. 52) Figure 8 represents the market for student rooms in a large city. At the equilibrium price the producer surplus equals A) 0. B) d + e. C) d + e + h. D) d + e + f + h + i + j. P a b d h i Q 2 c e f g j Figure 8 k Q 1 Q 3 S D Q

10 53) Figure 8 represents the market for student rooms in a large city. The city council sets the maximum rental at 175. The deadweight loss of the policy measure is: A) c + e. B) d + e. C) c + e + f + g. D) f + g d e. 54) The difference between producer surplus and profit is always the associated A) opportunity costs. B) fixed costs. C) variable costs. D) there is no difference between producer surplus and profit. 55) Mark s demand for spring water can be represented as P 10 q (where P is measured in /litre and q is measured litres). He recently discovered a spring where water can be obtained free of charge. His consumer surplus from spring water consumption is A) 18. B) 36. C) 50. D) None of the above, as the consumer surplus is not measured in euros. 56) As the price of a good increases, the loss in consumer surplus is larger, A) the more elastic demand is. B) the more money previously spent on the good. C) the less money previously spent on the good. D) the smaller the price increase. 57) The market for tennis shoes has a horizontal supply curve and a linear, downward sloping demand curve. The government imposes a tax of t on every pair of tennis shoes sold. If this tax is doubled, then A) the deadweight loss from the tax will more than double. B) the deadweight loss from the tax will exactly double. C) the deadweight loss from the tax will less than double. D) the deadweight loss from the tax will remain the same. 58) Figure 9 shows supply and demand curves for milk. In an effort to help farmers, the government passes a law that establishes a 3 per gallon price support. To maintain the price support, government expenditures must equal A) k i j. B) f g h i j. C) f g h i j k. D) f g h i j k e. Figure 9 10

11 11 59) As a result of the 3 price support in Figure 9, consumer surplus falls by A) b f. B) b f h. C) f g. D) b f c g. 60) A monopolist faces a constant marginal cost of 1 per unit. If at the price he is charging the price elasticity of demand for his output is 0.5, then: A) the monopoly price must exceed 2. B) the monopoly price must be less than 2. C) the monopolist cannot be maximising profits. D) the monopolist must use price discrimination. 61) A monopolist retailer sets prices in a very simple fashion: he sells his goods to consumers at twice the price that he paid to his suppliers. Such behaviour is profit maximizing provided that the price elasticity of demand is A) 1/2. B) 1. C) 2. D) 3. 62) A monopolist has a demand function Q = 1 2P. Its marginal revenue is given by A) 1 4P. B) 1 P. C) ½ ¼ Q. D) ½ Q. 63) A monopolist faces decreasing average costs as output increases. If the monopolist sets price equal to average cost, it will : A) produce too much output from a social welfare perspective. B) produce too little output from a social welfare perspective. C) maximize its profits. D) maximize social welfare. 64) Figure 10 shows the demand, marginal revenue and marginal cost curves for a profit maximizing monopoly. The consumer surplus in this monopolistic market is P Figure 10 A) a + b. B) a + b + c + d. C) a + b + c + d + e. D) c + d + f. P 1 P 2 P 3 a b c f h i d e g j k MC D Q 1 Q 2 MR Q

12 12 65) Figure 10 shows the demand, marginal revenue and marginal cost curves for a profit maximizing monopoly. Which of the following statements is true? A) The area i is a rent of the monopolist. B) The area c + d + f is the economic profit of the monopolist. C) The area e + g + j + k is the deadweight loss caused by the monopolist. D) None of the above. 66) The dominant firm model is sometimes used to describe the oil market. The OPEC is then seen as the dominant firm, whereas non-opec countries are labelled the competitive fringe. Which of the following statements is true? A) The residual demand of the dominant firm is less elastic than the market demand. B) The competitive fringe firms are price takers. C) The dominant firm takes the quantity supplied by the competitive fringe as given. D) None of the above. 67) Consider a public utility with constant marginal costs and huge fixed costs. The public utility acts as a monopolist. Second-degree price discrimination makes sense for this public utility because A) extra units reduce average fixed costs. B) public utilities tend to be regulated. C) demand tends to become more elastic as quantity sold increases. D) None of the above. 68) If a firm practices first-degree price discrimination, then which of the following is true? A) A deadweight loss is generated. B) Consumer surplus is maximized. C) Consumer surplus is minimized. D) Output is less than that of a single price monopolist. 69) Like some other textbooks, Perloff s 3 rd edition of Microeconomics is published in different versions. For example, there is an international edition, not sold in the USA or Canada; the American edition is not for sale in Europe or Asia; some editions include free access the Student Access Kit of MyEconLab, etc. The differences in marginal costs of such different editions are negligible. The practice of using various editions is an example of A) a natural monopoly. B) quantity discrimination. C) multimarket price discrimination. D) abuse of market power. 70) A multimarket monopolist sells its output in two different markets. The inverse demand in market A is P A = 10 Q A, whereas the inverse demand in market B is P B = 20 2Q B. The firm has constant marginal cost of 4 per unit. The firm will set its quantities such that A) marginal revenue is higher in market A. B) marginal revenue is equal in both markets. C) marginal revenue is higher in market B. D) quantities sold are the same in both markets.

13 13 71) Compared to uniform pricing as practiced by a single-price monopolist, the multimarket monopolist of the previous question increases its output. Compared to uniform pricing A) his profits have increased. B) consumer surplus has increased in both submarkets. C) deadweight is reduced in both submarkets. D) All of the above. 72) Oligopoly differs from monopolistic competition in that an oligopoly includes A) product differentiation. B) barriers to entry. C) ability to set prices. D) downward-sloping demand curves facing the firm. 73) In a monopolistically competitive market equilibrium, the Lerner index of an individual firm is A) not defined. B) strictly between 0 and 1. C) 0. D) 1. 74) Which of the following statements is not true in the long run for a monopolistically competitive firm? A) It produces at the minimum efficient scale. B) It prices above marginal costs. C) Its price is equal to average costs. D) It has a downward sloping demand curve. 75) Under which of the following conditions is a cartel going to be most successful? A) Market demand is very price elastic and the supply of noncartel members is perfectly inelastic. B) Market demand is not very price elastic and the supply of noncartel members is perfectly elastic. C) Market demand is very price elastic and the supply of noncartel members is perfectly elastic. D) Market demand is not very price elastic and the supply of noncartel members is perfectly inelastic. 76) Figure 11 is a graphical representation of a standard Cournot model with two firms A and B. The quantity produced by firm A is measured along the horizontal axis. The equilibrium allocation is E, where both firms produce a quantity q 1. The curve R 1 is q B q 3 R 1 Figure 11 A) the best-response curve of firm A. B) the best-response curve of firm B. C) the residual demand curve of firm A. D) the residual demand curve of firm B. q 2 q 1 E R 2 q 1 q 2 q 3 q A

14 14 77) Figure 11 is a graphical representation of a standard Cournot model with two firms A and B. The quantity produced by firm A is measured along the horizontal axis. The equilibrium allocation is E, where both firms produce a quantity q 1. In point E A) joint profits are maximized. B) consumer surplus is minimized. C) no firm has an incentive to change its behaviour. D) deadweight loss is zero. 78) Figure 11 is a graphical representation of a standard Cournot model with two firms A and B. The quantity produced by firm A is measured along the horizontal axis. The equilibrium allocation is E, where both firms produce a quantity q 1. Let the marginal cost of both firms rise. As a consequence, the best-response curve A) of both firms shifts towards the origin. B) of both firms remains the same. C) of both firms shifts away from the origin. D) of one firm shifts out, whereas the other shifts in. 79) Table 1 presents the payoff matrix of the socalled chicken game. The players choose their moves simultaneously. The chicken game has A) No Nash equilibrium. B) 1 Nash equilibrium. C) 2 Nash equilibria. D) 4 Nash equilibria. Table 1 Player 1 Fight Retreat Player 2 Fight Retreat ) Table 2 presents the payoff matrix of a simultaneous move game. Player 1 plays Up or Down, whereas player 2 plays Left or Right. Player 1 s payoff x is a positive number. Which of the following statements is true? A) Player 1 has a dominant strategy for x = 3. B) Player 2 has a dominant strategy for x = 3. C) Player 1 has a dominant strategy for x = 8. D) Player 2 has a dominant strategy for x = 8. Table 2 Player 1 U D Player 2 L R 10 1 x