There are 50 multiple-choice questions, worth 1 points each (for a total of 50 points), plus 5 long-answer questions, worth a total of 50 points. You have two hours to complete the exam. 1. The following problem often appears when production is under-centralized:
a. High opportunity costs.
b. People may keep expertise to themselves.
c. A lack of accountability.
d. A diminishing marginal product.
2. If firms in a monopolistically competitive industry were somehow forced to sell at the Pareto efficient price, we would expect the following to happen:
a. The output of each firm would fall in the long run.
b. The price would rise in the long run.
c. Firms would make profits in the long run.
d. The variety of goods in the industry would fall in the long run.
3. All of the following are true about the Nash-equilibrium of a Prisoner's Dilemma game, except:
a. The outcome will worsen for all players if the game is repeated.
b. Retaliation is more credible when the discount factor is higher.
c. Retaliation is more credible when the discount rate is lower.
d. The one-shot equilibrium avoids the worst possible outcome for somebody.
4. Which of the following is true in the long run?
a. All inputs are fixed.
b. The output-expansion path is flat.
c. We expect marginal costs to be (eventually) rising in output.
d. All inputs are variable.
5. A bowed-out indifference curve violates which of the following assumptions:
a. A diminishing marginal rate of substitution.
b. No assumptions are violated by this.
6. A consumer has to choose between various quantities of Benedictions and Du'as. She has been asked about her preferences over three different bundles of goods:
Bundle Benedictions Du'as
A 8 24 B 6 21 C 12 18
The consumer has stated that she prefers bundle B to bundle A, and bundle A to bundle C. Which of the five assumptions about consumer preferences do her stated preferences violate? Hint: It may help to try drawing some indifference curves running through these points and seeing what they look like.
b. Non-satiation or transitivity.
c. Diminishing MRS.
d. None of the above.
7. The following describes a a puppy dog investment strategy investment strategy in an oligopoly:
a. strategies are substitutes.
b. a firm will over-invest so that its competitors will under-invest.
c. firms are Cournot competitors.
d. strategies are complements.
8. All of the following are features of rate of return regulation, except:
a. The policy attempts to break up a monopolist into two or more firms.
b. The policy attempts to get firms to sell at a price close to average cost.
c. The policy is intended for firms who would go out of business at the Pareto optimal price.
d. The policy attempts to keep the firm's output above the unregulated monopoly output.
9. A firm produces 6 chairs and sells them at a price of 15. Its average cost is 10, and its marginal cost is 13. Its total profit must be:
a. 5 b. 90 c. 30 d. 12
10. The following table shows the payoffs of a two-player game, where player 1's payoff is listed first in each cell and player 2's payoff is listed second:
Player 2's strategy A B Player 1's A 6,13 13,6
strategy B 13,6 6,13
Which of the following is true?
a. It is a Nash equilibrium when player 1 plays A and player 2 plays A.
b. It is a Nash equilibrium when player 1 plays B and player 2 plays B.
c. Both of the above are Nash equilibria.
d. None of the above is a Nash equilibrium.
11. A firm should shut down in the long run if, at all levels of output,
a. The price is less than the average fixed cost.
b. It is making a loss.
c. The price is less than the marginal cost.
d. The average variable cost is less than the marginal cost.
12. All of the following are features of natural monopoly, except:
a. Breaking the monopoly into two or more firms would raise average cost.
b. There are increasing returns to scale at all relevant quantities.
c. Firms would make losses if they set the output at the Pareto optimal level.
d. Production of the good by more than one firm is impossible.
13. A firm produces 26 landings using instruments and controllers, with a total cost of 45. Each instrument costs $2, and each controller costs $6. If we put instruments on the X axis and
controllers on the Y axis, what will be the slope of the isocost line?
a. 3 b. -0.333 c. 0.333 d. -3
14. Abraham buys 5 chains and 4 whips. If his marginal utility for chains is 8, and chains cost 2,
and whips cost 5, then his marginal utility for whips must be: a. 5b. 6.4c. 20d. 4
15. The curve representing labor supply to an industry:
a. is downward-sloping and highly elastic.
b. is upward-sloping.
c. is more or less vertical.
d. is perfectly elastic if labor markets are perfectly competitive.
16. An excise tax on a monopolist has all of the following features, except:
a. It may raise the price less than the size of the tax.
b. It will always raise the price less than the size of the tax.
c. It will move the firm's output away from the Pareto optimal quantity.
d. The government revenue will be less than the loss of consumer and producer surplus.
17. The following is a feature of monopolistic competition in the short run:
a. Price is below marginal cost.
b. The price is equal to the marginal cost.
c. Each firm's output is Pareto optimal.
d. Firms may make profits or loss.
18. Firms will be more concerned with maximizing profits when the following factors are present:
a. Shareholders have good information about managerial decisions.
b. Empire building.
c. Firm executives attempt foremost to maximize their own incomes.
d. Shareholders have social concerns.
19. If we know that a firm faces a perfectly elastic demand curve, and is operating where its
marginal cost curve meets its demand curve, then
a. Output should be increased.
b. We cannot determine from this fact if the level of output is optimal.
c. Output is at the profit-maximizing level.
d. Output should be reduced.
20. The following are examples of tacit collusion:
a. Firms avoid price wars.
b. Cournot competition.
c. Firms copy the prices set by other producers because they are price takers.
d. Firms are price takers.
21. The anti-competitive practice of requiring customers to buy one good in order to buy a second, unrelated good is known as
a. plugging b. predatory pricing c. tying d. vertical integration
22. An industry with free entry and exit definitely has all of the following features in the long-run equilibrium, except:
a. Firms earn zero profits.
b. Price equals average cost.
c. There are increasing returns to scale at all quantities.
d. There is no entry or exit.
23. If a good has a positive income elasticity of demand, what can we conclude?
a. Demand for the good is inelastic.
b. The good is a Giffen good.
c. The income effect is negative.
d. The good is normal.
24. If demand for a good is price-inelastic, then what is true about the demand curve?
a. As the price drops, consumer expenditure drops.
b. As the quantity drops, consume expenditure drops.
c. As the price rises, consumer expenditure is unchanged.
d. As income increases, the curve shifts in.
25. If an industry is a monopoly, then:
a. All firms are price takers.
b. More than one firm is not a price taker.
c. No firm is a price taker.
d. Exactly one firm is not a price taker.
26. The following is true about first-degree price discrimination:
a. Firms are generally able to capture the full consumer surplus for some range of quantities.
b. It is only observed for firms without monopoly power.
c. Consumers with less elastic demand curves will face a higher price for the good.
d. The outcome is Pareto efficient.
27. Which of the following is not true about the production possibilities frontier?
a. Points above and to the right of the frontier are not attainable with current economic resources.
b. Points on the frontier that are higher and to the left are more efficient.
c. At any point on the frontier, all resources of a society are being deployed efficiently.
d. When the slope of the frontier is steeper, the good on the X axis has a higher opportunity cost.
28. A company produces sodas. Its production function is Y = 5[F0.5+J0.5]2, where J is the
number of jerks it uses, and F is the number of fountains. If we put jerks on the X axis and fountains on the Y axis, what is the firm's marginal rate of technical substitution when it is using 11 jerks and 7 fountains?
a. 0.11 b. 0.79 c. 1.27 d. 9.08
29. A company produces 21 houses. Its production function is Y = 2T0.2B0.8, where B is the number of builders it uses, and T is the number of tools. The price of builders is 4 each, and the price of tools is 3 each. If we put builders on the X axis and tools on the Y axis, then the firm's marginal rate of technical substitution is 4T/B. How many builders will the company use?
a. 13.08b. 1.33c. 0.33d. 4.36
30. The discount rate will be positive whenever
a. people have a quasiconcave utility function.
b. people have difficulty borrowing money.
c. preferences exhibit non-satiation.
d. the elasticity of substitution is positive.
31. Which of the following is an argument against relying on comparative advantage?
a. Infant industries may not thrive unless they are protected.
b. Policies that promote self-sufficiency can leave a country isolated from knowledge about new technologies and methods of production developed in the rest or the world.
c. Free trade can work well without governments having to implement sophisticated policies.
d. By relying on trade, countries can achieve consumption levels outside their production possibilities frontiers.
32. Anish spends all of his income on chains and whips. When chains cost 5 and whips cost 8, Anish buys 15 chains and 12 whips. Then, the price of a whip drops to 4, and Anish buys 11 chains and 29 whips. If Anish's substitution effect resulting from the price change is 22, then his income effect is:
a. -26b. -5c. -18 d. 5
33. Which of the following is a notable feature of an increasing-cost industry?
a. The long-run supply curve is upward-sloping.
b. Each firm has an upward-sloping supply curve.
c. Firms produce on the upward-sloping portion of their long-run average cost curve.
d. Average cost is increasing at all levels of output.
34. Under perfect competition, like under a monopoly,
a. there is free entry and exit.
b. the marginal revenue curve does not depend on the strategic behavior of the firm.
c. there are barriers to entry.
d. more than one firm is not a price taker.
35. For some goods, when incomes go up, demand for the goods shifts in. Such goods are called:
a. inferior goods. b. complements. c. substitutes. d. normal goods.
36. Which of the following will cause the supply curve to be less elastic?
a. The good is habit-forming.
b. The firm can find inputs easily.
c. The firm can easily substitute capital for labor.
d. The firm has difficulty finding inputs.
37. If two goods have a negative cross-price elasticity, what can we conclude?
a. An increase in the price of one good will cause demand for the other to shift out.
b. An increase in the price of one good will cause demand for the other to shift in.
c. One of the goods is a Giffen good.
d. At least one good is inferior.
38. Marginal cost rises with output
a. under no circumstances if cost functions are well-behaved.
b. whenever there are decreasing returns to scale.
c. in the short run.
d. whenever there are increasing returns to scale.
39. Ina global oligopoly, unlike a competitive world market:
a. International trade is driven by increasing returns to scale rather than comparative advantage.
b. Import restrictions will not create deadweight loss.
c. A quantitative restriction will be more beneficial to a country than a tariff.
d. Import restructions will increase the surplus of domestic consumers.
40. In the long run, under perfect competition,
a. the supply curve will be unaffected by changes in variable cost.
b. the industry supply cuve will equal the average cost curve of firms that are in the industry at
c. the supply curve will be below the firm-level demand curve at the output level where a firm produces.
d. the short-run supply curve will be determined in part by consumer demand.
41. The following are true about cartels:
a. Cartels create all of the benefits and problems that monopolies create. b. Cartels are illegal in many countries, including the United States.
c. If every member of a cartel cheats, the outcome is improved.
d. No member of a cartel has an incentive to cheat.
42. The following will create an inward shift in demand:
a. A change in tastes leading to an increase in the marginal utility of the good.
b. An increase in the number of consumers in a market.
c. An improvement in firm technology.
d. A rise in the price of a complement.
43. If a firm is not a price taker, then:
a. Marginal revenue is equal to the price.
b. The marginal revenue curve is above the demand curve.
c. The marginal revenue curve is below the demand curve.
d. The marginal revenue curve has the same slope as the firm-level demand curve.
44. In a perfectly competitive market where the laws of supply and demand both hold, if the demand curve shifts out, then which of the following will happen? i. the quantity sold will fall
ii. the quantity sold will rise
iii. the price will fall
iv. the price will rise
a. iii only. b. ii only. c. iii and ii. d. iv and ii.
45. If the production of a good generates a positive externality, then at the level of output
produced by a perfectly competitive market with no government intervention,
a. the marginal social cost will be greater than the marginal private cost.
b. the marginal benefit to consumers will be less than the price.
c. the good will be over-produced
d. the marginal social cost will be less than the marginal private cost.
46. If average cost is below marginal cost, then:
a. Marginal cost is falling b. Marginal cost is rising c. Average cost is fallingd. Average cost is rising.
47. If there are decreasing returns to scale, then:
a. Long-run average cost is decreasing in output.
b. Long-run marginal cost is decreasing in output.
c. Long-run average cost is increasing in output.
d. Long-run marginal cost is less than long-run average cost.
48. The following is true of neither a merely ordinal utility function, nor of a cardinal utility
a. It cannot be used to compare one person's gain with another's loss.
b. It can tell us how many units of good x are required to increase the consumer's well-being as
much as one unit of good y.
c. It does not allow us to make conclusions about anyone's well being.
d. It cannot easily be determined based on observed behavior.
49. The following is a barrier to entry:
a. Licensing restrictions. b. Excess variety.
c. Increasing marginal costs. d. A price that is below the average cost.
50. Which of the following is not a property of a Giffen good?
a. The income effect is larger in magnitude than the substitution effect.
b. The Engel curve for the good is upward-sloping.
c. The income effect is negative.
d. The good is likely to comprise a large portion of a consumer's total expenditure.
51. The market for smoothies is perfectly competitive. Demand for the product is given by the equation qd = 8 - 1.3333333333333p, while supply is given by the equation qs = -8 + 4p.
i (1 points). What is the equilibrium price in this market?
a. 6b. 2c. 4d. 3
ii (1 points). What is the equilibrium quantity?
a. 4b. 1c. 2 d. 8
iii (1 points). At this price, what is the consumer surplus?
a. 12b. 4 c. 18d. 6
iv (1 points). What is the producer surplus?
a. 2.6667b. 6c. 14 d. 2
v (1 points). Suppose that the government imposes a tax on buyers of 0.5 per unit sold. What is the new equilibrium price, excluding the tax?
a.3 b.5.5 c.2.875 d.3.75
vi (1 points). What is the new equilibrium quantity?
a. 3.5 b. 8 c. 7.3333 d. 3.6667
vii (1 points). What is the new consumer surplus?
a. 10.0625 b. 3.0625 c. 6.125 d. 4.5938
viii (1 points). What is the new producer surplus?
a. 12.0625 b. 5.0313 c. 2.1979 d. 1.5313
ix (1 points). What is the government revenue from this tax?
a. 10.0625 b. 0.5 c. 2 d. 1.75
x (1 points). What is the deadweight loss from this tax?
a. 0.0625 b. 0.25 c. 0.125 d. 0.875
52. Saleem buys only hopes and prayers. Saleem's demand function for hopes is QD = 0.0004I2 - 0.25p, where I is Saleem's income and p is the price of hopes, no matter what the price of prayers is. Currently, the price of prayers is 5, the price of hopes is 9
i (1.25 points). If Saleem has a budget of 90, how many hopes does he buy? a. 9.01 b. 3.24 c. 2.115 d. 0.99
ii (1.25 points). How many prayers does he buy with the same budget? a. 0.495 b. 73.782 c. 45 d. 16.218
iii (1.25 points). If his budget then rises to 100, how many hopes does Saleem buy? a. 8.425 b. 9.3611 c. 1.75 d. 2.875
iv (1.25 points). And how many prayers does he buy?
a. 0.875 b. 50 c. 16.85 d. 83.15
v (1.25 points). If his budget then rises to 110, how many hopes does Saleem buy? a. 9.6322 b. 2.59 c. 8.669 d. 3.715
vi (1.25 points). And how many prayers does he buy?
a. 17.338 b. 55 c. 92.662 d. 1.295
vii (1.25 points). Based on the above, between a budget of 90 and 100, prayers are: a. A (gross) substitute of hopes. b. A normal good.
c. A (gross) complement of hopes. d. An inferior good.
viii (1.25 points). Based on the above, between a budget of 100 and 110, prayers are:
a. A normal good. b. A (gross) substitute of hopes.
c. A (gross) complement of hopes. d. An inferior good.
53. A monopolist produces operations. It has a total cost function of C(q) = 300 + 1.6875q, where q is its output. The daily demand for its products is qd = 800 - 237.03703703704p.
i (1 points). What is the profit-maximizing quantity for this firm to produce? a.200 b.400 c. 1.6875 d. 337.5
ii (1 points). What price will the firm sell at?
a. 3.375 b. 2.5313 c. 0.8438 d. 1.6875
iii (1 points). What will the firm's profit be?
a. -0.6563 b. -131.25 c. 168.75 d. 506.25
iv (1 points). What will the consumer surplus be?
a. 84.375 b. 337.5 c. 421.875 d. 1.6875
v (1 points). Suppose that the government imposes an excise tax on the monopolist of 0.421875 per unit sold. What will the profit-maximizing output be after the tax? a. 337.9219 b. 300 c. 150 d. 2.1094
vi (1 points). What will the new price be, inclusive of the tax?
a. 1.0547 b. 2.7422 c. 2.1094 d. 3.7969
vii (1 points). What will the firm's profit be after the tax?
a. -1.3672 b. 94.9219 c. 411.3281 d. -205.0781
viii (1 points). What will the cosnumer surplus be after the tax?
a. 469.3359 b. 47.4609 c. 1.2656 d. 189.8438
ix (1 points). What will the government's tax revenue be?
a. 126.5625 b. 63.2813 c. 316.4063 d. 0.4219
x (1 points). What is the size of the the deadweight loss resulting from the tax? a. 73.8281 b. 47.4609 c. 36.9141 d. 50
54. The cars industry is a Bertrand duopoly consisting of Firm 1 and Firm 2. The daily market-wide demand for cars is qd = 20 - 0.27777777777778p. Each firm has a total cost function of C(q) = 5q2, where q is the firm's output. This cost function corresponds to a marginal cost function of MC(q) = 10q.
i (0.90909090909091 points). What will the equilibrium market price be? a. 20.16 b. 41.8605 c. 56.9302 d. 50.7541
ii (0.90909090909091 points). How much will be produced by each firm in this market? a. 4.186 b. 2.9508 c. 2.093 d. 7.2
iii (0.90909090909091 points). What will each firm's profit be?
a. 87.6149 b. 106.2295 c. -114.048 d. 75.3488
iv (0.90909090909091 points). Now, suppose that there is a technology that each firm can develop at a cost of 15 per day. It lowers the firm's variable cost to 1.6666666666667q2, which
corresponds to a marginal cost function of MC(q) = 3.3333333333333q. If Firm 1 decides to innovate and Firm 2 does not, what will be the equilibrium price?
a. 59.6962 b. 29.5082 c. -31.68 d. 53.3077
v (0.90909090909091 points). In the above scenario, what will Firm 1's output be? a. 7.2 b. 3.8942 c. 5.1266 d. 8.8525
vi (0.90909090909091 points). In the above scenario, what will Firm 2's output be? a. 2.9508 b. 1.2981 c. 21.6 d. 1.7089
vii (0.90909090909091 points). In the above scenario, what will Firm 1's profit be? a. 173.8924 b. 276.8354 c. 115.6101 d. -314.496
viii (0.90909090909091 points). In the above scenario, what will Firm 2's profit be? a. 43.5367 b. 72.8104 c. 35.4974 d. -314.496
ix (0.90909090909091 points). Now, suppose that both firm 1 and firm 2 choose to develop the technology. In this case, what will be the equilibrium price?
a. 42.7669 b. 47.3924 c. 22.7848 d. -83.52
x (0.90909090909091 points). What will each firm's output be?
a. 3.4177 b. 21.6 c. 6.8354 d. 4.0602
(0.90909090909091 points). What will each firm's profit be?
a. 123.038 b. -2581.632 c. 62.8721 d. 146.1654
55. Sameera buys only cases and bags. Sameera has a budget of 1800, and Sameera's demand function for cases is QD = 200 - 45p, where p is the price of cases, no matter what the price of bags is.
i (1.25 points). If the price of cases is 5 and the price of bags is 9, how many cases does Sameera buy?
a. 87.5 b. -25 c. 385 d.200
ii (1.25 points). How many bags does she buy at these same prices?
a. -12.5 b. -13.8889 c. 213.8889 d.200
iii (1.25 points). If the price of cases then drops to 4, how many cases does Sameera buy? a.20 b.425 c.87.5 d.95.5556
iv (1.25 points). And how many bags does she buy?
a. 191.1111 b.10 c.100 d.8.8889
v (1.25 points). If the price of cases then drops to 3, how many cases does Sameera buy? a. 89.1667 b. 491.6667 c. 65 d. 132.5
vi (1.25 points). And how many bags does she buy?
a. 178.3333 b. 32.5 c. 21.6667 d. 66.6667
vii (1.25 points). Based on the above, between a price of 5 and 4, bags are:
a. A (gross) substitute of cases. b. An inferior good.
c. A normal good. d. A (gross) complement of cases.
viii (1.25 points). Based on the above, between a price of 4 and 3, bags are:
a. A (gross) substitute of cases. b. A (gross) complement of cases.
c. An inferior good. d. A normal good.