24. If an individual only consumes two goods, always spending all of his income, and one of the goods is inferior, the other should be:

    1. A substitute to the first

    2. A complement to the first

    3. A necessity

    4. An inferior good

    5. None of the above

The correct answer is (e). The other good should be a luxury (its share in income should rise as income rises), which is not among the answers. Cross-price effects are indeterminate.

24. Suppose that the marginal utility from the first 5 units of good X consumed is 10, 8, 6, 5 and 4, respectively. Then:

    1. Total utility when 5 units of X are consumed is 33

    2. The utility function is decreasing with X

    3. Consumer does not strictly prefer large quantities of X

    4. All of the above statements are true

    5. None of the above statements is true

The correct answer is (e). TU is indeterminate, as utility in the absence of X is not given (which may be non-zero, especially if we consume other goods as well). MU is positive, thus the utility function is increasing. The utility function is increasing, thus (c) is also not true.

24. For a given nominal income and goods prices, the budget set comprises:

    1. All bundles of goods that the consumer wishes to buy

    2. All bundles of goods that the consumer can afford

    3. All bundles of goods that yield the highest utility to the consumer

    4. All bundles of goods that firms are willing to sell at given prices

    5. All income levels at which the consumer attains the same utility level or lower than for the given income, under given prices

The correct answer is (b), by definition.

24. Suppose that you multiply a utility function by two. How will the results of utility maximization be affected by this change?

    1. The optimal bundle should increase in both goods

    2. The optimal bundle should decrease in both goods

    3. The optimal bundle may increase in one good, but decrease in the other

    4. The optimal bundle should not change

    5. The effect on the optimal bundle is undetermined in the general case

The correct answer is (d), as it is only the value of the utility that will be affected, but not the relationships between marginal utilities of goods. Thus, these utility functions represent the same preferences, so the optimal choice of consumer is unaffected by the change.

24. Firm Y sells 900 units of output, receiving total revenue of 2,700. When it sells 901 units, total revenue is 2,702. In this case:

    1. marginal revenue is 2

    2. average revenue is 2

    3. marginal revenue is unknown

    4. price of the last unit sold is 2

The correct answer is (a). Marginal revenue is an increase in total revenue from producing one extra unit of output. We don’t know anything about the price.

24. Consider the following production function f(K,L)=AK^0.4L^0.4 (A – constant, K-capital, L - labor). Does this production technology obey the law of diminishing returns to labor?

    1. Yes

    2. No

    3. Impossible to determine

The correct answer is (a), which you can see by taking the second derivative of f.

24. Which of the following is not a basic assumption of perfect competition?

    1. free entry and exit

    2. many small sellers and buyers

    3. perfect information

    4. homogeneous product

    5. short-run

The correct answer is (e)

24. The demand curve faced by perfectly competitive firm:

    1. is perfectly inelastic

    2. is horizontal

    3. is downward sloping

    4. is perfectly elastic

    5. b and d

The correct answer is (e).

24. ICEF&Co is a perfectly competitive firm producing where MR=3.62 and MC= 2.87. To maximize profit, the firm should:

    1. expand output;

    2. cut back on output;

    3. keep doing what it is doing;

    4. raise price to increase total revenue;

    5. cut price to increase total revenue.

The correct answer (a): as long as MR>MC, the firm should raise its output.

24. A firm operating in conditions of perfect competition is producing a daily output such that its total revenue is $5000.That output is the profit-maximizing output. The firm's average cost is $8 and its marginal cost is $10. Its daily output is:

    1. 200 units.

    2. 500 units.

    3. 625 units.

    4. 1000 units.

    5. 1500 units.

The correct answer is (b). The profit maximizing condition in P=MC, that means that P=$10, which gives us output $5000/$10=500.

24. Which of the following is not a fixed cost in a given year?

    1. monthly rent of $1 000 contracted for a year

    2. an insurance premium of $50 per year, paid last month

    3. business registration and legal fees of $5 000 per year, paid in advance

    4. manager’s salary of $60 000 per year.

The correct answer is (d). If the firm shuts down in the current year, it does not need to pay the manager.

24. The question is based on the following information:

The ABC company, at the output level where P=MR=MC= $11, has costs

ATC =$16 and AVC =$10.

The ABC company:

1. gets economic profit;

2. has to stop the production immediately;

3. has economic losses;

4. is in the break-even point.

5. gets zero economic profit

The correct answer is (c). The firm producers, since AVC<P. But it does not cover its ATC at price P and makes economic loss.

24. The cost function of a firm producing widgets in a perfectly competitive environment is C=8q+q², where q is the quantity of widgets. The firm maximizes profit when it produces 14 widgets. What is the market price for widgets?

    1. 22

    2. 36

    3. 10

    4. 16

    5. 24

The correct answer is (b). The MC at 14 widgets is equal to 8+2*(14)=36.