RESIT EXAM version A - Econometrics World

1

School of Businessand Economics

RESIT EXAM version AKnowledge test part

Course : Microeconomics Code : EBC1010/1011/1012 (formerly 103BE/BF/BX) Date : April 7, 2010 Time : 10.05h – 12.05h Location : MECC

Electronic communication devices are not allowed – put them in your bag or on thefloor, not in your pocket! (otherwise this will be reported as possible fraud)

This part of the exam consists of:15 Pages (front page included)80 Multiple Choice Questions

You are allowed to make use of:Scrap paper and a non-programmable, non-graphical calculator.

Norm:You can obtain at the most 80 marks for this part of the exam (one for each correct answer). Thisscore will be added to your score on the open book part of the exam (40 marks at the most). Thesum will be divided by 12 and rounded into half points, subject to the requirement that you need66 points to get a 5.5.

Procedure for objections:Objections should be submitted in writing to the course coordinator, Christian Kerckhoffs, beforeMonday April 12, 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 yourID-number and e-mail address. Objections in any other form (e.g. through e-mail) will be ignored.Together with the publication of the preliminary exam results, an inspection session will beannounced. The final exam results will then be published within 15 workdays after the exam.

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, and fill out the correct version code (here:version A) on the answer card.

Success!

2

VERSION A

Note 1: Always read all the options before choosing one, and then select the best option. Sometimes the finaloption may read like “None of the options a), b) or c) is correct” or “All the options a), b) and c) arecorrect”.

Note 2: Unless stated otherwise, Q indicates a market quantity, whereas q indicates a quantity at theindividual level (consumer or firm). A price is typically denoted as P.

1) Most microeconomic models assume that decision makers wish to …

a) make themselves as well off as possible. b) act selfishly. c) make others as worse off as possible. d) None of the options a), b) or c) is correct.

2) Which of the following statement(s) is (are) correct?

I. The application of taxes on goods does not affect how goods are produced.II. Most modern financial centers use computers to match buyers and sellers. This absence of personal

contact contradicts the definition of a market.

a) Statement I is correct, statement II incorrect. b) Statement I is incorrect, statement II correct. c) Both statements I and II are correct. d) Both statements I and II are incorrect.

3) If a model’s predictions are correct, then …

a) its underlying assumptions must have been correct. b) this proves that the model correctly captures the causal mechanisms involved. c) Both options a) and b) are correct. d) Neither of the options a) or b) is correct.

4) Which of the following is an example of a normative statement?

a) A higher price of penicillin causes people to want to buy less of it. b) A lower price of penicillin causes people to want to buy more of it. c) To make penicillin available to more people, a lower price should be set. d) Taking penicillin helps to cure bacterial infections.

5) Market equilibrium is defined as a situation in which …

a) neither buyers nor sellers want to change their behavior. b) no government regulations exist. c) demand curves are perfectly horizontal. d) suppliers will supply any amount that buyers wish to buy.

3

6) Consider the demand function Qd = 150 – 2P. The combined effect of demand determinants other thanprice P is reflected in …

a) the slope of the function. b) the intercept of the function. c) both the slope and the intercept of the function. d) neither the slope nor the intercept of the function.

7) If the price of automobiles were to decrease substantially, the demand curve for public transportationwould most likely …

a) shift rightward.b) shift leftward.

c) remain unchanged, as will the quantity demanded of public transportation. d) remain unchanged, but the quantity demanded of public transportation will change.

8) Figure 1 shows a graph of the market for pizzas in a largetown. In the absence of any government interference,what are the equilibrium price and quantity?

a) P = 8, Q = 60 b) P = 7, Q = 40 c) P = 7, Q = 70 d) P = 10, Q = 40

9) Again consider Figure 1. Suppose that concern overdietary habits has led the government to impose arestriction that limits suppliers to produce no more than40 pizzas. What will the equilibrium price of pizza be as a result of this quota?

a) P = 2 b) P = 10 c) P = 7 d) P = 8

10) Again consider Figure 1. As a result of concern over the affordability of pizza, the government restrictssellers from charging a price over €7. As a result, the equilibrium quantity of pizzas consumed will be …

a) Q = 0 b) Q = 40 c) Q = 60 d) Q = 70

11) Costs that pertain to finding a trading partner and making a trade are called …

a) transaction costs. b) transgression costs. c) consumption costs. d) transaction taxes.

Figure 1

4

12) The percentage change in the quantity demanded in response to a percentage change in the price is knownas the …

a) slope of the demand curve. b) price elasticity of demand. c) quantity elasticity of demand. d) price elasticity of the equilibrium quantity.

13) Along a linear demand curve, the lower the price, …

a) the less elastic (in absolute value) is demand. b) the more elastic (in absolute value) is demand. c) the more the demand elasticity tends towards –1. d) the more the demand elasticity tends towards minus infinity.

14) A given linear supply curve has a zero intercept. What does this imply for the price elasticity of supply?

a) The price elasticity of supply increases as we move along the supply curve. b) The price elasticity of supply decreases as we move along the supply curve. c) The price elasticity of supply is constant at +1 as we move along the supply curve. d) There is not enough information to choose between the options a), b) and c).

15) Why is the supply of oil more price elastic in the long run?

a) A higher oil price stimulates the discovery of new deposits. b) A higher oil price stimulates the invention and application of better extraction technology. c) In the long run, the oil firms are able to adjust the amount of all inputs. d) All the options a), b) and c) are correct.

16) For a given positively sloped supply curve, the price increase to consumers resulting from a specific taximposed on sellers will be …

a) greater the more price elastic demand is. b) greater the less price elastic demand is. c) equal to the entire tax when demand is perfectly elastic. d) equal to half of the tax whenever demand is unit elastic.

17) Imagine that the government decides to levy an ad valorem tax on a product with a perfectly inelasticsupply. The tax incidence on consumers will be …

a) 0 b) 0.5 c) 1 d) There is not enough information to choose between the options a), b) and c).

5

18) The assumption of completeness means that …

a) the consumer can rank all possible consumption bundles. b) more of a good is always better. c) the consumers can rank all affordable consumption bundles. d) all preference conditions are met.

19) If an indifference curve were “thick”, this would violate the assumption of …

a) completeness. b) transitivity. c) more is better. d) None of the options a), b) or c) is correct.

20) If Johnny likes homework (H) but hates exercise (E), which of the following might best represent hisutility function for homework and exercise?

a) EHU +=

b) EHU += 2

c) EHU ⋅= 2

d) EHU /=

21) By selecting a consumption bundle where MRS = MRT, the consumer is saying …

a) “I value my last unit of each good equally.” b) “I am willing to trade one good for the other at the same rate as the market allows me to.” c) “I will equate the amounts spent on all goods consumed.” d) All the options a), b) and c) are correct.

22) Johnny has allocated €30 toward coffee and tea and feels that coffee and tea are perfect substitutes. Due todifferences in caffeine levels, his MRS of tea for coffee equals 2. If coffee and tea sell for the same price,Johnny will …

a) spend all €30 on tea. b) spend all €30 on coffee. c) spend €20 on coffee and €10 on tea. d) be indifferent between any bundle of coffee and tea costing €30.

23) Assume Sam and Jenn exchange gifts. Sam gives a gift that cost €20 but is only worth €10 to Jenn. Jenngives a gift that cost €25 but which Sam values at €15. Ignoring any benefits Sam and Jenn receive in theact of giving gifts, this exchange of gifts …

a) yields a net decrease in total utility to Sam and Jenn. b) yields a net increase in total utility to Sam and Jenn. c) yields no change in total utility to Sam and Jenn. d) yields an increase in Sam’s utility but a decrease in Jenn’s utility.

6

24) Suppose a graph is drawn to show a consumer’s preferences for football tickets and basketball tickets. Thequantity of football tickets is measured on the horizontal axis. If the price-consumption curve is horizontalwhen the price of football tickets changes, then …

a) football tickets are an inferior good. b) the demand for football tickets is perfectly elastic. c) the demand for football tickets is unit elastic. d) the demand curve for football tickets will be vertical.

25) In the relevant price range, the demand curve for a Giffen good would be …

a) upward sloping. b) downward sloping. c) horizontal. d) vertical.

26) Figure 2 depicts a part of an income-consumption curve. Which of thefollowing statements is true?

a) Both goods C and F are normal. b) Both goods C and F are inferior. c) Good C is a normal good; beyond some income level, good F turns

from normal to inferior. d) Good F is a normal good; beyond some income level, good C turns

from normal to inferior.

27) When the price of a good changes, the income effect can be found by comparing the equilibrium quantitiespurchased …

a) on the old budget line and the new budget line. b) on the original indifference curve when faced with the original prices and when faced with the new

prices. c) on the new budget line and a hypothetical budget line that is a shift back to the original indifference

curve parallel to the new budget line. d) on the new indifference curve.

28) In the case of a normal good …

a) demand curves always slope downward. b) the income effect and substitution effect are in the same direction. c) the Engel curve slopes upward. d) All the options a), b) and c) are correct.


I. If a consumer is compensated for the income effect that occurs when the price of a good increases, thenhis demand curves can never slope upward.

II. A good may be inferior at some income levels and normal at others.

FFigure 2

C

7


30) Suppose a consumer’s utility function is U(X,Y) = X. The substitution effect on good X, resulting from achange in the price of X is …

a) 0 b) negative. c) positive. d) sometimes negative, sometimes positive.

31) Efficient production occurs if a firm …

a) cannot produce its current level of output with fewer inputs. b) cannot produce more output, given the quantity of inputs. c) maximizes profit. d) All the options a), b) and c) are correct.

32) In the long run, all factors of production are …

a) variable. b) fixed. c) materials. d) rented.

33) Figure 3 depicts a short-run production function for Albert’sPretzels. The marginal productivity of labor …

a) rises then falls as the amount of labor increases. b) falls then rises as the amount of labor increases. c) is greater than or equal to the average productivity of

labor for all amounts of labor. d) is less than or equal to the average productivity of labor

for all amounts of labor.

34) Consider Figure 3 again. The marginal productivity of labor equals the average productivity of labor …

a) for all levels of labor. b) at none of the levels of labor. c) only for the first worker. d) only for the fifth worker.

Figure 3

8

35) One way to explain the convexity of isoquants is to say that …

a) as labor increases and capital decreases, MPL rises while MPK falls. b) as labor increases and capital decreases, MPL falls while MPK rises. c) as labor increases and capital decreases, MPL and MPK both fall. d) as labor increases and capital decreases, MPL and MPK both rise.

36) Let the production function be baKALq = . Returns to scale are determined by …

a) ab b) a+b c) A d) Aa+b


I. Unlike indifference curves, isoquants can intersect.II. If inputs into production cannot be substituted for each other but have to be employed in fixed

proportions, then the isoquants are straight, downward-sloping lines.


38) Sarah earns €40,000 per year working for a large corporation. She is thinking of quitting this job to workfull time in her own business. She will invest her savings of €50,000 (which currently has an annual 10%rate of return) into the business. Her annual opportunity cost of this new business is …

a) €0 b) €40,000 c) €45,000 d) €90,000

39) Imagine that input bundle A costs €40 and yields 20 units of output, while input bundle B costs €50 andyields 30 units of output.

a) Input bundle A is economically efficient; input bundle B is not. b) Input bundle B is economically efficient; input bundle A is not. c) Neither input bundle A nor input bundle B can be economically efficient. d) There is not enough information to decide whether input bundles A and/or B are economically efficient.

40) Whenever average cost is positive, …

a) marginal cost equals average cost. b) marginal cost exceeds average cost. c) marginal cost is less than average cost. d) None of the options a), b) or c) is correct.

9

41) If a particular production process is subject to diminishing marginal returns to the variable productionfactor labor at every level of output, then at every level of output …

a) short-run AC is upward sloping. b) short-run MC exceeds AVC. c) AFC is constant. d) All the options a), b) and c) are correct.

42) Consider a firm that wants to produce a specific output level at minimum cost. If an isocost line crosses theappropriate isoquant twice, the firm…

a) will choose an input bundle along a different isocost line. b) will use the input bundle associated with the intersection on the higher point of the isoquant. c) will use the input bundle associated with the intersection on the lower point of the isoquant. d) will choose an input bundle along a different isoquant.

43) Consider a cost minimizing firm. The marginal rate of technical substitution of capital for labour is 10 atthe cost-minimizing input bundle. If the wage rate for labor is €5, then what is the rental rate for capital ineuro?

a) 0.5 b) 1 c) 2 d) 10

44) Long-run average cost is never greater than short-run average cost because in the long run …

a) capital costs equal zero. b) the firm can move to the lowest possible isoquant for any desired output level. c) the firm has more flexibility in choosing its inputs. d) the firm will use less of the variable input.

45) If all conditions for a perfectly competitive market are met, then …

a) firms face sunk costs when entering the market. b) individual firms face horizontal demand curves. c) the market demand curve is horizontal. d) individual firms face a downward-sloping demand curve.

46) If a firm makes zero economic profit, then the firm …

a) has total revenues greater than its economic costs. b) must shut down. c) can be earning positive business profit. d) must have no fixed costs.

10

47) Consider long-run profit maximization by a firm. If marginal revenue equals marginal cost at some outputlevel, then the firm is maximizing its profits by producing this output level, provided that …

a) marginal cost is smaller than marginal revenue for smaller levels of output. b) marginal cost exceeds marginal revenue for greater levels of output. c) Both options a) and b) are correct. d) Neither option a) nor b) is correct.

48) A firm operating in a perfectly competitive market has a marginal cost curve given by qMC 5= , andaverage variable costs are given by qAVC 5.2= . Besides the variable costs, the firm has fixed costs of100. When the price of the good is P, the short-run supply curve of the firm is given by …

a) q = 5P for all P.b) q = 5P for P ≥ 5.c) q = P/5 for all P.d) q = P/5 for P ≥ 2.5.

49) Each of an unlimited number of potential entrants into a competitive industry has a long-run average costfunction of 2042 +−= qqLRAC . Factor prices remain constant when industry output changes. The long-run equilibrium price is …

a) P = 10 .b) P = 16 .c) P = 26 .d) P = 32 .

50) Which important property of a perfectly competitive market is decisive for the process from short-run tolong-run equilibrium?

a) Perfect information. b) Freedom of entry and exit. c) Price taking behavior. d) Homogeneous products.

51) A binding price ceiling is set on a perfectly competitive market. In the short run, this policy …

a) increases consumer surplus; the effect on producer surplus is ambiguous. b) increases producer surplus; the effect on consumer surplus is ambiguous. c) decreases consumer surplus; the effect on producer surplus is ambiguous. d) decreases producer surplus; the effect on consumer surplus is ambiguous.

52) Suppose consumers of cigarettes can be classified into two groups: heavy users and light users. Heavyusers purchase more cigarettes and are less sensitive to price changes relative to light users. To determinewhether a heavy user suffers a greater loss of consumer surplus than a light user does when the price ofcigarettes increases, one would need to know …

a) each group’s average income. b) the actual quantities purchased by each. c) each individual’s price elasticity of demand. d) no additional information.

11

53) Figure 4 shows the market demand curve for mobilephone conversations, with price in $ per minute. Thecurrent price is $0.35 per minute. If the price were toincrease by ten cents per minute, consumer surpluswould …

a) fall to $820. b) fall by $84. c) fall by $58. d) fall to $369.

54) When the price of a good increases, the loss in consumersurplus 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.

55) In the long-run market equilibrium under perfect competition …

a) producer surplus is positive. b) producer surplus is negative. c) producer surplus is zero. d) consumer surplus is zero.

56) Assume government increases the demand for corn by building up a strategic corn reserve. In the shortrun, …

a) the consumer surplus enjoyed by private corn buyers will increase. b) the producer surplus enjoyed by corn growers will decrease. c) the producer surplus enjoyed by corn growers will increase. d) the producer surplus enjoyed by corn growers will not change.

57) If a single-price monopoly faces the inverse demand curve QxP 2−= , where x is an unspecifiedparameter, then profit maximization …

a) is achieved when x/4 units are produced. b) is achieved by setting price equal to x/4. c) is achieved only by shutting down in the short run. d) cannot be determined solely from the information provided.

58) Marginal Revenue is …

a) the increase in total revenue from selling one more unit of output. b) equal to P(1+1/İ) when a firm does not engage in perfect price discrimination. c) equal to P when the firm’s demand curve is infinitely elastic. d) All the options a), b) and c) are correct.

Figure 4

12

59) If the demand for a single-price monopoly’s output is perfectly elastic, then the firm’s Lerner Index equals…

a) zero. b) one. c) infinity. d) one-half.

60) For a monopolistic firm, the supply curve …

a) coincides with its average cost curve. b) coincides with its marginal cost curve. c) coincides with its marginal revenue curve. d) does not exist.

61) For a single-price monopoly, marginal revenue is less than price because …

a) the demand curve for the firm’s output is downward sloping. b) the firm has no supply curve. c) the firm’s supply curve coincides with its marginal cost curve. d) the demand for the firm’s output is perfectly elastic.

62) If the inverse demand curve a single-price monopoly faces is P = 100 – 2Q, and MC is constant at 16, thenthe profit-maximizing quantity equals …

a) 42 b) 32 c) 21 d) 16

63) When firms price discriminate they turn …

a) producer surplus into revenue. b) consumer surplus or deadweight loss into profit. c) total cost into profit. d) producer surplus into consumer surplus.

64) If a firm faces a horizontal demand curve, …

a) it can successfully engage in perfect price discrimination. b) it can successfully engage in quantity discrimination. c) it can successfully engage in multimarket price discrimination. d) None of the options a), b) or c) is correct.

65) A perfect price discriminator …

a) charges each buyer his or her reservation price. b) charges different prices to each customer based upon different costs of delivery. c) generates a deadweight loss to society. d) charges lower prices to customers who buy greater quantities.

13

66) If a monopoly charges higher prices to consumers who buy smaller quantities than to consumers who buylarger quantities, then …

a) consumer surplus is larger than under perfect competition. b) social welfare is larger than under perfect competition. c) the monopoly’s profits are larger than under perfect price discrimination. d) None of the options a), b) or c) is correct.

67) Bob is the only carpet installer in a small isolated town.Figure 5 shows the demand curves of two distinctgroups of customers: residential and business. If themarginal cost of installing carpet is a constant €1 persquare meter, what price does Bob charge eachsegment?

a) €1 in each market. b) €5.50 in the residential market and €8 in the business

market. c) €1 in the residential market and €5 in the business

market. d) €10 in the residential market and €15 in the business

market.

68) Consider Figure 5 again. Bob is likely to price discriminate because …

a) the price elasticity differs across both market segments. b) the installation of carpets cannot be resold. c) Bob can probably identify which consumers belong to which market segment. d) All the options a), b) and c) are correct.


I. Contrary to a perfect competitor, lack of free entry enables a monopolistic competitor to act as a pricesetter.

II. Cartels are inherently unstable because each member firm has the incentive to cheat on the cartelagreement.


70) Two firms sell pure orange juice in 1.5 liter bottles. The juice can only be consumed within a week afterproduction. The two firms have contracts for all the oranges produced in a large geographic area. Eachfirm independently decides how many bottles of juice to produce at the same time. This market is probablybest described by …

a) the model of perfect competition. b) the model of monopolistic competition. c) the cartel model. d) the Cournot model.

Figure 5

14

71) In the Cournot model, a firm maximizes profit by selecting …

a) its output, assuming that other firms keep their output constant. b) its price, assuming that other firms keep their price constant. c) its output, assuming that other firms will retaliate. d) its price, assuming that other firms will retaliate.

72) Suppose two Cournot duopolists operate at zero marginal cost. The market demand for their homogeneousproduct is P = 10 – Q. Firm 1’s best-response function is …

a) q1 = 10 – 0.5q2

b) q1 = 5 – 0.5q2

c) q1 = 10 – q2

d) q1 = 5 – q2

73) Consider two Cournot duopolists, both operating with marginal cost of MC = 2. The market demand fortheir homogeneous product is P = 10 – Q. If the firms decide to maximize their joint profits by forming acartel, then their total output will be …

a) Q = 10 b) Q = 8 c) Q = 5 d) Q = 4

74) Monopolistically competitive firms face downward sloping residual demand curves because these firms …

a) have relatively few rivals (compared to perfect competition). b) sell differentiated products. c) Both options a) and b) may constitute a correct motivation. d) Neither option a) nor b) may constitute a correct motivation.

75) The equilibrium number of firms in a monopolistically competitive market will be smaller if …

a) the minimum efficient scale is lower. b) the market demand curve shifts rightward. c) fixed costs are smaller. d) fixed costs are larger.

76) One interesting feature of a prisoner’s dilemma game is that …

a) non-cooperative behavior leads to lower payoffs than cooperative behavior. b) it was only valid before the invention of the mobile phone, so that the prisoners could not

communicate. c) individuals behave irrationally when they behave non-cooperatively. d) cooperative behavior leads to lower payoffs than non-cooperative behavior.

15

77) Which of the following activities is (are) part of solving a game?

a) Write down all possible combinations of strategies. b) Write down all possible payoffs and eliminate dominated strategies. c) Solve for any Nash equilibrium. d) All the options a), b) and c) are correct.

78) In a two-player simultaneous game, if player A has a dominant strategy and player B does not, player Bwill …

a) refuse to play the game. b) choose his best response strategy assuming that player A plays his or her dominant strategy. c) not achieve a Nash equilibrium. d) assume that player A does not play his or her dominant strategy.

79) A normal form representation of a static game of complete information specifies …

a) the players and their possible strategies. b) the players, their possible strategies and their payoffs for each combination of strategies. c) the players, their possible strategies, their payoffs for each combination of strategies, and their best

responses. d) the players, their possible strategies, their payoffs for each combination of strategies, their best

responses, and any Nash equilibria.

80) Consider the game represented by Table 1. The numbers in the lower-left and upper-right of the cells referto the payoffs of players A and B respectively. Which of the following statements is true?

a) (Top, Right) is a Nash equilibrium.b) (Top, Right) is a Nash equilibrium; furthermore, Top is a dominant strategy of player A.c) (Top, Right) is a Nash equilibrium; furthermore, Right is a dominant strategy of player B.d) (Top, Right) is a not a Nash equilibrium, since

neither Top nor Right is a dominant strategy.

Table 1 Player BLeft Right

Player ATop 3

04

3

Bottom 31

22

Documents

RESIT EXAM version A - Econometrics World