Mult_choice_Feb2009

EXAM IN MICROECONOMICS

(February, 2009)

RETAKE

VARIANT 1

SOLUTIONS

Section 1. Multiple choice questions

You have 60 minutes to do this part of the exam.

Marking scheme: 1 point for a correct answer, -0.25 for a wrong answer, 0 if the answer has not been given.

1. The fundamental reason the production possibilities curve has a downward slope is

1. workers are inefficient

2. resources are of low quality

3. resources are fixed and therefore tradeoffs must be made

4. it has empirical support but why it is so is still a mystery

5. companies are reluctant to fully exhaust their resources

2. If Lemonade and Cola are substitutes, a decrease in the price of Lemonade will cause:

1. the equilibrium price of Cola to increase and the quantity to decrease;

2. the equilibrium price of Cola to decrease and the quantity to increase;

3. both the equilibrium price and quantity of Cola to decrease;

4. both the equilibrium price and quantity of Cola to increase;

5. none of the above.

3. If the income elasticity of demand for candy bars is 1.5, then candy bars are a ____ good and a 2% decrease in income will cause a______ decrease in the quantity demanded:

1. normal; 1.333%;

2. luxury; 3%;

3. inferior; 3%;

4. Giffen; 3%

5. inferior; 1.333%.

4. If the price of watches falls by 3% and the quantity demanded of clocks increases by 2%, then the cross-price elasticity of demand for clocks with respect to the price of watches is ____ and clocks and watches are_______:

1. 1,5; substitutes;

2. 0,67; complements;

3. -1,5; substitutes;

4. - 0,67; complements;

5. none of the above.

5. Under perfect competition, the long run equilibrium occurs where firms:

I. have no motives for entry or exit

II. receive normal profits

III. produce where P=LMC=LAC

1. I only

2. II only

3. III only

4. I, II and III

5. I and III only

6. A competitive firm’s profit-maximizing level of output generates a total revenue of $2000. The firm’s costs are as follows: total cost =$4000, total variable cost =$1500. In the short run the firm should:

1. decrease output

2. shut down

3. leave output at its current level

4. increase output

5. not enough information to answer the question.

7. If producer surplus is unaffected by the imposition of a per unit tax, this means that:

1. demand is perfectly inelastic

2. supply is perfectly elastic

3. demand is perfectly elastic

4. supply is perfectly inelastic

5. either (A) or (B) are true

8. Which of the following is not a feature of the pure monopoly?

1. downward sloping demand curve

2. elastic demand at the optimal output level

3. barriers to entry

4. profit in the long run

5. none of the above; all are the features of the pure monopoly.

9. For a perfectly discriminating monopoly, the marginal revenue curve

1. lies below the demand curve

2. lies above the demand curve

3. coincides with the demand curve

4. crosses the demand curve

5. there is not enough information to draw a conclusion about the marginal revenue curve and the demand curve

11. What will be an example of monopolistic competition:

1. OPEC countries

2. Big steel producers

3. Restaurants

4. Small farmers

5. None of the above

13. To which market structure we can apply a “Prisoner’s Dilemma”

1. to oligopoly

2. to any monopoly

3. to natural monopoly only

4. to monopolistic competition

5. to perfect competition

14. In case of monopolistic competition firms have market power because of:

1. barriers to entry

2. downward sloping demand curve for each company

3. downward sloping demand curve for the whole industry

4. upward sloping supply curve for each company

5. upward sloping supply curve for the whole industry

16. A payoff matrix is used to show

1. the payoff to being a monopolist relative to a competitive firm

2. the demand curve faced by two competing firms

3. each player’s payoffs in each possible combination of strategies

4. the sequence of strategies played in a game over time

5. the different pairings of players in a game

	Masha: Strategy A	Masha: Strategy B
Sasha: Strategy A	5 5	0 -5
Sasha: Strategy B	10 0	-5 10

17. In the matrix above,

1. Sasha has a dominant strategy, but Masha does not

2. Masha has a dominant strategy, but Sasha does not

3. both Sasha and Masha have the same dominant strategy

4. neither Sasha nor Masha has a dominant strategy

5. Sasha and Masha have different dominant strategies

18. In the matrix above, Masha’s best response to a decision by Sasha to play Strategy A is

1. no existent

2. to also choose Strategy A

3. to choose Strategy B

4. to choose Strategy B if it is a repeated game

5. to choose the cell in which Masha’s payoff is 10.

19. The “Prisoner’s Dilemma” refers to games where

1. neither player has a dominant strategy

2. one player has a dominant strategy and the other does not

3. both players have a dominant strategy

4. both players have a dominant strategy which results in the largest possible payoff

5. both players have a dominant strategy which results in a lower payoff than their dominated strategies

23. If a given production combination is efficient, then it must be

1. Beyond the production possibilities curve

2. possible to expand production of one good without lowering the amount of the other

3. on the production possibilities curve

4. either an attainable or unattainable point

5. the best combination out of all possible combinations

24. With perfect competition, market equilibrium is considered efficient because

1. prices are low

2. the price consumers pay equals the profit producers receive

3. no more trades remain that benefit some without harming others

4. excess supply is positive

5. excess demand is negative

26. If the slope of the demand curve is zero, the price elasticity of that demand curve will be

1. 0

2. between -1 and 0

3. -1

4. between -1 and -2

5. - infinity

27. The long run is defined as

1. one year or more

2. a period in which all factors of production are variable

3. the period of time between accounting reports

4. a period in which only one factor of production is fixed

5. a period in which at least one factor of production is fixed

28. Which of the following is most likely to be a fixed factor of production at a university?

1. the number of personal computers

2. the number of books in the library

3. the number of professors and lecturers

4. the amount of chalk (or markers)

5. the number of lecture halls

29. Which of the following is most likely to be a variable factor of production at a university?

1. the number of administrative staff and assistants

2. the size and number of the athletic facilities

3. the university brand

4. the location of the university

5. the number and size of university buildings

30. In general, if the price of a fixed factor of production increases,

1. total costs are unchanged

2. price rises

3. marginal costs are unchanged

4. marginal costs increase

5. the profit maximizing level of output falls

Questions 32 through 35 refer to the graph below:

32. When the demand is P₁=$7, what is the profit maximizing output?

1. 475

2. 400

3. 300

4. 250

5. 150

33. When the demand is P₁=$7, what is the total cost?

1. $960

2. $1200

3. $1500

4. $1600

5. $1800

34. When the demand is P₁=$7, how much profit (loss) this producer is making?

1. $800

2. $900

3. $1300

4. $1600

5. $2400

35. When the demand is P₃=$1, this firm should____________

1. continue to operate in the short run and think about shutting down in the long run

2. discontinue operation in the short run since there is a loss when operating

3. keep operating as long as the loss is not greater than total cost

4. discontinue operation in the short run since average variable cost is greater than price

5. discontinue operation in the short run since average total cost is greater than price.

36. Normal profits occur when

1. accounting profits are zero

2. economic profits are positive

3. accounting profits are positive and economic profits are negative

4. economic profits are zero

5. total revenues are greater than explicit and implicit costs

37. Assume the supply curve is of normal shape. If a per unit tax is imposed, the more elastic demand is, the

1. less likely the deadweight loss will be affected

2. smaller the deadweight loss

3. larger the deadweight loss to consumers

4. smaller the deadweight loss to producers

5. larger the deadweight loss

38. If demand is perfectly price elastic

1. the burden of a tax is shared equally

2. the burden of a tax falls entirely on the seller

3. the burden of a tax falls entirely on the buyer

4. the burden of a tax will depend on the legal assignment of duty to pay

5. deadweight loss will be infinite

39. If you were to open a business in an industry that is approximately perfectly competitive, you would expect that

1. you would earn little or no profit in the short run, but higher profits eventually

2. your competition would respond to your entry into the industry by aggressively advertising

3. you would earn zero economic profits in the short run, and zero accounting profits in the long run

4. in the long run you would earn zero economic profits and zero accounting profits.

5. in the long run you would earn zero economic profits and positive accounting profits.

40. Economic rent is

1. the amount you pay to rent an apartment in a free market

2. the payment made to suppliers of an input

3. what a landowner receives from farmers

4. the difference between the payment made to the supplier of an input and the supplier’s reservation price

5. the same as the input supplier’s reservation price

41. The common feature in pure monopoly, oligopoly, and monopolistic competition is

1. the absence of close substitutes

2. barriers to entry

3. interdependent decision making by firms

4. price discrimination

5. downward sloping demand

42. Suppose a competitive firm and a monopolist are both charging $5 for their respective outputs. One can infer that

1. marginal revenue is $5 for both firms

2. marginal revenue is $5 for the competitive firm and less than $5 for the monopolist

3. marginal revenue is less that $5 for both firms

4. the competitive firm is charging too much and the monopolist too little

5. both firms are earning profits

43. A firm is most likely to experience economies of scale if it has _________ start up costs and __________ marginal costs.

1. high; increasing

2. high; low

3. low; high

4. low; decreasing

5. decreasing; increasing

44. Economies of scale exist when

1. constant returns to scale are present

2. input prices are falling

3. average costs fall as the scale of production grows

4. a 10% increase in all inputs causes a 9% increase in output

5. firms become extremely large.

45. A firm that emerges as the only seller in an industry with economies of scale is termed a(n)

1. cartel

2. oligopoly

3. monopsony

4. natural monopoly

5. either (A) or (D)

46. If a monopolist finds that its marginal revenue exceeds its marginal costs at the current level of output, it should

1. do nothing; it has maximized profits

2. contract production and raise price

3. expand output while keeping price constant

4. expand output and reduce price

5. set price equal to marginal cost

47. The profit maximizing rule MR=MC applies to

1. all firms

2. monopolists only

3. perfect competitors only

4. all firms except perfect competitors

5. all firms except oligopolists

48. When a monopolist sells additional units,

1. total revenues always rise

2. marginal revenues are constant

3. total revenues always fall

4. marginal revenues rise

5. total revenues may rise, fall, or remain unchanged

49. Price discrimination means charging

1. the same consumers the same price

2. different prices to different consumers because production costs are different

3. the same price to all consumers because production costs are different

4. different prices to different consumers when production costs are the same

5. higher prices to consumers with lower incomes

50. Patents and copyrights, which confer market power, exist to

1. protect the consumer from low quality imitations

2. ensure excessive profits to holders

3. protect and encourage research, development and creative expression

4. reduce competition in all sectors of the economy

5. magnify the dominance of large firms

8