Faculty of Economics and Business Administration

EXAM, RESIT

Knowledge test part Course : Microeconomics Code : 103BE, 103BF, 103BX Date : April 5, 2006 Time : 10.15h – 12.15h Location : Geusselt This part of the exam consists of: 17 Pages (front page included) 80 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: Objections should be submitted in writing to the course coordinator, Christian Kerckhoffs, before Thursday April 13, 15.00h. Christian’s pigeon hole is at the Quantitative Economics secretariat, TS53, third floor, room A3.10: if closed, you can use the mailbox outside. Be sure to include your ID-number and e-mail address. Objections in any other form (e.g. through e-mail) will be ignored. 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, make sure your exam is complete.

Good luck!

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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). A price is typically denoted as P or p.

1) If government regulations prohibit the production of a particular good, the demand curve for that good will most likely … A) shift leftward. B) shift rightward. C) remain unchanged. D) disappear.

2) To determine the total demand curve for some good by all consumers, one should … A) add up the quantities each consumer demands at any given price. B) add up the prices the consumers are willing to pay for any given quantity. C) Both A) and B) will generate the correct total demand curve. D) Neither A nor B) will generate the correct total demand curve.

3) Suppose there are 10 identical firms in an industry, and each firm has a supply function expressed as 62 � qP . The market supply curve is given by the equation …

A) 6020 � QP . B) 35 � PQ . C) 3010 � PQ . D) 62.0 � QP .

4) If the demand for a product changes so that consumers are now willing to buy 2 additional units at any given price, the demand curve will … A) shift leftward by 2 units. B) shift rightward by 2 units. C) shift vertically up by 2 units. D) shift vertically down by 2 units.

5) Restricting imports of some product tends to … A) shift the demand curve for that product to the left. B) shift the demand curve for that product to the right. C) change the shape of the supply curve for that product. D) increase the quantity supplied of that product.

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6) A vertical demand curve for a particular good implies that … A) demand is perfectly elastic. B) the consumers are not sensitive to changes in the price of that good. C) the consumers are not interested in that good. D) Both A) and B) are correct.

7) Suppose the demand curve for a good is PQ 1280 � . If the good currently sells for € 5, then the price elasticity of demand is … A) –12 . B) –4 . C) –3 . D) –0.6 .

8) Figure 1 shows the demand curve for crude oil. The demand curve is unitary elastic when the price equals … A) € 0 . B) € 3 . C) € 6 . D) € 12 .

9) Figure 1 shows the demand curve for crude oil. If the market price is € 8 a barrel, then what is the price elasticity of demand? A) –1/6. B) –1/2. C) –1. D) �2.

10) Imagine that a decrease in income results in a leftward 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 remained unchanged. It cannot be determined.

11) If the demand curve for a particular good is P

Q 100 , then demand is unitary elastic ...

A) only when P = 100 . B) only when P = 10 . C) always. D) never.

Q 3

12

P Figure 1

4

12) Suppose that, for some good, the price elasticity of demand is H = –2 and the price elasticity of supply is K

= 3. The increase of the consumer price resulting from a specific tax of € 1 imposed on the sellers of the good will be … A) 60 cents. B) 30 cents. C) 20 cents. D) impossible to calculate without knowing the slope of the supply curve.

13) Producers will always pay the entire amount of a specific tax whenever … A) demand is perfectly elastic. B) supply is perfectly inelastic. C) Both A) and B) are correct. D) Neither A) nor B) is correct.

14) Indifference curves that are thick violate … A) the assumption that more is better. B) the assumption of transitivity. C) the assumption of completeness. D) none of the standard assumptions on preferences.

15) If the utility function (U) between commodities X and Z can be represented as ZXU , then …

A) the indifference curves are thick. B) the indifference curves intersect. C) the indifference curves are L-shaped. D) the indifference curves are upward sloping.

16) If two goods are perfect substitutes, then … A) the marginal rate of substitution between the two goods is zero. B) the marginal rate of substitution between the two goods is constant along any indifference curve. C) the indifference curves are L-shaped. D) All of the above.

17) If two goods X and Y are perfect substitutes, then which of the following best represents the utility function for the two goods? A) XYU . B) YXU � . C) XYU . D) Any of the above.

5

Figure 3 Z

12 48 20 24 X

30 35

60

18) If the utility function (U) between food (F) and clothing (C) can be represented as FCU 2 , the marginal utility of food equals … A) FC / .

B) CF / . C) FC / . D) CF / .

19) If a consumer’s budget line for food (F) and shelter (S) is represented as 1206 � SF , we know that … A) the consumer’s income is 120. B) the price of shelter is 6. C) the price of shelter is 6 times the price of food. D) All of the above.

20) Consider a family of indifference curves as depicted in Figure 2. If the consumer has an income of € 10 and the price of good Z is € 1, then which of the following equations represent the demand for good X?

A) XP

X 10 .

B) XP

X 5 .

C) XP

X�

1

5 .

D) XP

X�

1

10 .

21) If the utility function (U) between goods X and Z can be represented as 3/13/2 ZXU , then what fraction of income is optimally allocated to the purchase of good X? A) 0 . B) 1/2 . C) 2/3 . D) The given information is insufficient to answer the question.

22) Figure 3 shows Arkadi’s indifference map for goods X and Z. Also shown are two budget lines resulting from different prices for good X, assuming he has € 240 to spend on these goods. Which of the following points are on Arkadi’s demand curve for good X ? A) PX

10, X 12 . B) PX

5, X 20 . C) Neither A) nor A). D) Both A) and B).

X1

1

2

2

Z

Figure 2

6

23) Figure 3 shows Arkadi’s indifference map for goods X and Z. Also shown are two budget lines resulting from different prices for good X, assuming he has € 240 to spend on these goods. Taking the bundle X = 12, Z = 30 as starting point, the cross price elasticity of the demand for good Z with respect to the price of good X is … A) 1/3 . B) –1/3 . C) 1/4 . D) –1/4 .

24) Figure 4 illustrates Kirsten’s price-consumption

curve when the price of good X changes. With X on the horizontal axis, the price-consumption curve is a horizontal line. This implies that Kirsten’s demand for good X is … A) horizontal. B) vertical. C) unitary elastic. D) a straight line with a slope of –1.

25) Figure 4 illustrates Kirsten’s price-consumption curve when the price of good X changes. With X on the horizontal axis, the price-consumption curve is a horizontal line. This implies that the cross-price elasticity of Kirsten’s demand for good Z with respect to the price of good X is … A) zero. B) positive. C) negative. D) The sign of the elasticity cannot be determined from the graph.

26) Suppose the quantity of X is measured on the horizontal axis. If the income-consumption curve is vertical, then the income elasticity of the demand for X is … A) 0 . B) 1 . C) �1 . D) There is not enough information to determine the income elasticity of demand for X.

27) An inferior good exhibits … A) a negative income elasticity. B) a downward sloping Engel curve. C) a decline in the quantity demanded as income rises. D) All of the above.

Z

X

Figure 4

7

28) Figure 5 illustrates the substitution and income effects of a decrease in the price of good X. Which of the following statement is true? A) The substitution effect is 14, while the

income effect is 10 . B) The substitution effect is 10, while the

income effect is 4 . C) The substitution effect is 4, while the

income effect is 10 . D) The substitution effect is –4, while the

income effect is 14 .

29) Figure 5 illustrates the results of a decrease in the price of good X, decomposing the total change in the quantity demanded of X into the substitution and income effects. From the graph, one can conclude that … A) the demand curve for good X shifts rightward when the income increases. B) the income elasticity of demand for X is greater than zero. C) X is a normal good. D) All of the above.

30) Under which of the following conditions is a firm engaged in efficient production? A) If the firm cannot produce its current level of output with fewer inputs. B) If the firm, given the quantity of inputs, cannot produce more output. C) If the firm maximizes profit. D) All of the above.

31) The average product of labour will fall as long as … A) the marginal product of labour is falling. B) it exceeds the marginal product of labour. C) it is less than the marginal product of labour. D) the number of workers is increasing.

32) Consider the isoquant in Figure 6. As one moves along this isoquant from point A to point B … A) the marginal product of labour falls. B) the marginal product of capital falls. C) output falls. D) total costs fall.

Figure 5 Z

10 20 X6

Figure 6

L

A

B

K

8

33) An isocost line represents levels of capital and labor that …

A) have constant marginal productivity. B) yield the same level of output. C) incur the same total cost. D) All of the above.

34) Suppose the production function of a firm can be represented as ȕĮKLq . The firm currently produces 1 unit of output. If all inputs doubled, the new level of output will equal … A) )(2 ȕĮ � . B) Įȕ2 .

C) Įȕ2 . D) ȕĮ�2 .

35) If the isoquants of a production process are as in Figure 7, then the

production function can be given by the equation … A) LKq 2 .

B) KLq � 2 . C) Both A) and A). D) Neither A) nor B).

36) Suppose that the marginal product of labor of a firm is expressed as LKMPL / and the marginal

product of capital is expressed is KLMPK /3 . If the factor prices are w = 1 and r = 2, then which of the following equations describes the long-run expansion path of the firm? A) LK

23 .

B) LK32 .

C) LK 3 . D) LK 2 .

37) Suppose the total cost of production of a firm can be represented as TC 12 � 6q. Which of the following statements is TRUE at all levels of production q? A) MC ��AVC . B) MC � AFC . C) MC < AC . D) All of the above.

K

4 L

8

Figure 7

9

38) If the average cost (AC) of producing a good is increasing as a firm produces more of the good, then … A) AVC is increasing. B) MC > AVC . C) MC > AC . D) All of the above.

39) When a firm uses a bundle of inputs such that an isocost line is tangent to an isoquant, then … A) the firm produces its current level of output with minimum cost. B) the marginal product of labor equals marginal product of capital. C) the firm enjoys positive profits. D) the firm maximizes the economies of scale.

40) Figure 8 illustrates the family of isoquants that characterizes

the production process of a firm. In the long run, with w the price of a unit of labor and r the price of a unit of capital, the firm’s total cost function can be expressed as … A) qrwTC )2( � . B) qrwTC )2( � . C) wrqTC 2 . D) rwTC � 2 .

41) Figure 9 illustrates the family of isoquants that characterizes the production process of a firm. Let w be the price of a unit of labor and r the price of a unit of capital. Then if w > r, the firm’s long run total cost function can be expressed as … A) qrwTC )( � . B) rqTC . C) wqTC . D) wTC .

42) As a firm moves along its long-run expansion path away from the origin, … A) both the marginal rate of technical substitution and the total cost of production increase. B) the marginal rate of technical substitution increases, while the total cost of production remains

constant. C) both the marginal rate of technical substitution and the total cost of production remain constant. D) the marginal rate of technical substitution remains constant, whereas the total cost of production

increases.

Figure 8 K

L2 4

1

2

q=1 q=2

Figure 9 K

L2 4

2 q=2 q=4

4

10

43) A firm has isoquants of the usual shape, i.e. convex to the origin. Suppose labor as an input is measured along the horizontal axis and capital along the vertical axis. What are (is) the effect of an increase in the wage rate, w, if the price of capital, r, remains unchanged? A) All isocost lines become steeper. B) The long-run expansion path shifts upward. C) The average cost curve shifts upward. D) All of the above.

44) In a competitive market, the demand curve faced by an individual firm is … A) vertical. B) horizontal. C) identical to the market demand curve. D) identical to that firm’s marginal cost curve.

45) In a competitive market, the marginal revenue curve faced by an individual firm is … A) horizontal. B) upward-sloping. C) downward-sloping. D) U-shaped.

46) In the short-run, a firm chooses to shut down … A) only if the price is lower than the minimum of its marginal cost. B) only if the price is lower than the minimum of its average cost. C) only if the price is lower than the minimum of its average variable cost. D) only if the price is lower than the minimum of its average fixed cost.

47) A firm is operating in a perfectly competitive market and its short-run total cost is given by the equation 2212 qTC � . The firm’s short-run supply curve is …

A) Pq 25.0 for all P � 2 . B) Pq 25.0 for all P. C) Pq 4 for all P � 2 . D) Pq 4 for all P.

48) The long-run average cost curve of each firm in a competitive market is given by the equation 2)4(212 �� qLRAC . Suppose entry is free, there is a large number of potential entrants with the same

cost structure and input prices are constant. In the long run-equilibrium, … A) each firm makes a profit of zero. B) each firm produces an output of q = 4 units. C) the equilibrium price is P = 12 . D) All of the above.

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49) The long-run average cost curve of each firm in a competitive market is given by the equation 2)8(210 �� qLRAC , and market demand is expressed as PQ /400 . If the long-run market supply

curve is horizontal, then how many firms will be active in this industry in the long-run? A) 0 . B) 5 . C) 8 . D) 40 .

50) Figure 10 depicts the average variable cost, average cost and marginal cost curves of a firm in a perfectly competitive market. The firm has a fixed cost of A) € 40 . B) € 60 . C) € 80 . D) € 100 .

51) Figure 10 depicts the average variable cost, average cost and marginal cost curves of a firm in a perfectly competitive market. If the market price is € 2, the firm … A) makes a loss of € 60 . B) makes a loss of € 20 . C) makes a profit of € 20 . D) makes a profit of € 60 .

52) If, in a competitive market, the government provides a subsidy to the producers per unit of output produced, then … A) the producer surplus increases. B) the consumer surplus increases. C) total welfare falls. D) All of the above.

53) If a government regulates a competitive market by introducing a legal maximum price, then … A) both the producer surplus and the consumer surplus decrease. B) the producer surplus decreases, while the consumer surplus increases. C) the producer surplus decreases, but the consumer surplus can increase or decrease, depending on the

shape of the supply and demand curves. D) the consumer surplus decreases, while the producer surplus can increase or decrease, depending on

the shape of the supply and demand curves.

Figure 10

q 20

AVC

AC

MC

1 2

5

12

54) If a government introduces a price support (i.e. a price floor with the government buying up any excess

supply), then … A) both the producer surplus and the consumer surplus increase. B) the producer consumer increases while the consumer surplus falls. C) the producer surplus increases, but the consumer surplus can increase or decrease, depending on the

shape of the supply and demand curves. D) the consumer surplus decreases, while the producer surplus can increase or decrease, depending on

the shape of the supply and demand curves.

55) Consider Figure 11. If the government establishes a subsidy of € 10 per unit of output produced, the increase in producer surplus equals … A) F . B) F + G . C) B + C . D) B + C + G .

56) Consider Figure 11. If the government establishes a subsidy of € 10 per unit of output produced, the increase in consumer surplus equals … A) E + F . B) B + C + E + F + G . C) B + E . D) –B .

57) Consider Figure 11. If the government establishes a subsidy of € 10 per unit of output produced, the total cost of the subsidy to the government equals … A) B + C + E + F . B) B + C + E + F + G . C) C + G + F . D) G .

58) Consider Figure 12. If the government introduces a

specific tax of € 12 per unit, the consumer surplus falls by … A) € 16 . B) € 48 . C) € 64 . D) € 72 .

Q

S

18

P

28

D

A

B C

E F G

H

Figure 11

Figure 12

Q

10

P

18

D S

6

10 6

13

59) Consider Figure 12. If the government introduces a specific tax of € 12 per unit, it will collect a total tax revenue of … A) € 24 . B) € 48 . C) € 64 . D) € 72 .

60) Consider Figure 12. If the government introduces a specific tax of € 12 per unit, total welfare falls by … A) € 8 . B) € 16 . C) € 24 . D) € 48 .

61) The profit maximizing condition for a monopoly is that … A) the price equals marginal cost. B) the price equals the minimum of its average variable cost. C) the price equals marginal revenue. D) marginal revenue equals marginal cost.

62) Suppose that at a price of P = 8, a monopolist faces a demand elasticity of H = –2. Then at the corresponding output level, his marginal revenue … A) cannot be computed using the information given. B) equals 8 . C) equals 4 . D) equals 2 .

63) If at the current price and output the elasticity of demand faced by a monopolist is –0.5, then this monopolist can increase his profits by … A) increasing the price and decreasing the output. B) increasing the price and increasing the output. C) decreasing the price and increasing the output. D) decreasing the price and decreasing the output.

64) If the demand function a monopoly faces is PQ 2100 � and marginal cost is constant at 20, then the profit-maximizing monopoly price is … A) 20 . B) 25 . C) 30 . D) 35 .

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65) Figure 13 depicts the demand function and the associated marginal revenue that a monopoly faces. If the

monopoly has zero marginal cost and sets a uniform profit-maximizing monopoly price, then what is the deadweight loss created by this monopoly? A) 50 . B) 100 . C) 150 . D) 200 .

66) Figure 13 depicts the demand function and the associated marginal revenue that a monopoly faces. The monopoly is assumed to have zero marginal cost and sets a uniform profit-maximizing monopoly price. If the government introduces a specific tax of € 10 per unit, what price will the monopoly set? A) 10 . B) 15 . C) 18 . D) 20 .

67) Suppose a monopoly can quantity discriminate by selling two blocks of output at different prices. In comparison to uniform monopoly pricing, quantity discrimination … A) increases the profit of the monopoly. B) reduces the consumer surplus. C) improves total welfare. D) All of the above.

68) Figure 14 depicts the demand curve of a monopoly that quantity discriminates by selling two blocks of output at different prices (the first block at the price of 12 and the second block at the price of 6). What is the consumer surplus? A) 50 . B) 68 . C) 32 . D) 0 .

69) Figure 14 depicts a monopoly that quantity discriminates by selling two blocks of output at different prices (the first block at the price of 12 and the second block at the price of 6). Assuming that production is costless, what is the total social welfare? A) 128 . B) 132 . C) 182 . D) 200 .

Figure 13

Q

10

10 20

D MR

20

Figure 14

Q

6

14

D

20

8

12

15

70) The marginal revenue curve of a perfectly price discriminating monopoly … A) is horizontal. B) is twice as steep as the demand curve. C) coincides with the demand curve. D) cannot be depicted.

71) Figure 15 depicts the demand and marginal cost curves of a monopoly. If the monopoly applies perfect price discrimination, the producer surplus equals … A) 0 . B) 50 . C) 100 . D) 200 .

72) Figure 15 depicts the demand and marginal cost curves of a monopoly. If the monopoly applies perfect price discrimination, the deadweight loss created by this monopoly is … A) 0 . B) 50 . C) 100 . D) 200 .

73) Suppose a monopoly sells its product in two different markets, A and B. Let AMR and BMR denote the marginal revenue from sales in markets A and B, respectively, and let m denote the firm’s constant marginal cost. If resales are not possible, then which of the following is the profit-maximization condition? A) mMRMR BA � B) mMRMR BA . C) mMRMR BA � . D) mMRMR BA / .

74) Consider the game represented by Table 1. The numbers in the lower-left and upper-right of the cells refer to the payoffs of players A and B respectively. How many Nash equilibria does this game have? A) 0 . B) 1 . C) 2 . D) 3 .

Table 1 Player B Left Right

Top 10 20

20 10 Player A

Bottom 20 30

40 5

Figure 15

Q

10

10

D

MC

20

20

16

75) Consider the game represented by Table 1. The numbers in the lower-left and upper-right of the cells

refer to the payoffs of players A and B respectively. The pair of strategies (Bottom, Right) is not a Nash equilibrium, because … A) Top is not a dominant strategy for player A. B) Right is not a dominant strategy for player B. C) the sum of payoffs is higher if player B chooses Left. D) given that player B plays Right, player A can increase his payoff by choosing Top.

76) Consider the game represented by Table 2. The

numbers in the lower-left and upper-right of the cells refer to the payoffs of players A and B respectively. Which of the following statements is true?

A) Player A has a dominant strategy but Player B has none. B) Player B has a dominant strategy but Player A has none. C) Both players have dominant strategies. D) Neither player has a dominant strategy.

77) Consider a Cournot model with two firms called A and B having a constant marginal cost of 40. Suppose market demand is given by QP 2200 � . What is the best response of firm A to firm B producing 80 units of output? A) Stop producing. B) Produce 20 units. C) Produce 40 units. D) Produce 80 units.

78) Consider a Cournot model with two firms called A and B having a constant marginal cost of zero. Suppose market demand is given by P = 200 – 2Q. Which of the following equations is the best response of firm A? A) BA qq � 50 . B) BA qq � 100 . C) BA qq 5.050 � . D) BA qq 5.0100 � .

79) Suppose there are only two firms active in a market. If these two firms form a cartel, then ... A) their aggregate output will be higher than under Cournot competition. B) the consumer surplus will be higher than under Cournot competition. C) their total costs will be higher than under Cournot competition. D) their aggregate profits will be higher than under Cournot competition.

Table 2 Player B Left Right

Top 3 1

2 1 Player A

Bottom 5 0

2 2

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80) In a monopolistically competitive market, the marginal revenue curve for a given firm …

A) is horizontal. B) is twice as steep as the residual demand curve for that firm. C) coincides with the residual demand curve for that firm. D) coincides with the market demand curve.