Intermediate Microeconomics 23567 Practice Exam
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Practice Exam
Intermediate Microeconomics 23567
Questions
1. If all the consumers are price takers and face the same prices, then their budget lines will all have the same slope. [2 points]
a. True
b. False
2. The following changes in a consumer’s economic circumstances result in a steeper budget line with the vertical intercept unchanged. (Denote the good on the horizontal axis as good 1 and the good on the vertical axis as good 2). [2 points]
a. A k per cent decrease in the price of good 2 combined with a k per cent increase in income
b. A k per cent increase in the price of good 2 combined with a k per cent decrease in income
c. A k per cent decrease in the price of good 2 combined with a k per cent decrease in income
d. A k percent increase in the price of good 2 combined with a k percent increase in income
3. If monotonicity of preferences is satisfied, then indifference curves must be upward sloping. [2 points]
a. True
b. False
4. Suppose the tastes of an individual are represented by the following map of indifference curves:
Which of the following statements is correct? [2 points]
a. This individual receives no satisfaction from good A
b. For this individual, goods A and B are perfect complements
c. For this individual, goods A and B are perfect substitutes
d. This individual receives no satisfaction from good B
5. A change in the price of one good can never leave the utility of a consumer unchanged unless the price change is accompanied by a change in the consumer’s income. [2 points]
a. True
b. False
6. Except for the case of Giffen goods, the substitution effect always tells us that a consumer will consume less (or at least no more) of a good whose price has increased. [2 points]
a. True
b. False
7. The graph below represents the change in the consumption of goods 1 and 2 in response to an increase in the price of good 1 (A is the initial bundle and C the final bundle). The dashed line represents the compensated budget constraint.
What can we say about goods 1 and 2? [2 points]
a. Both good 1 and good 2 are normal
b. Both good 1 and good 2 are inferior
c. Good 1 is normal and good 2 is inferior
d. Good 1 is inferior and good 2 is normal
8. The price of peaches goes up and I observe you buying more strawberries. This implies that for you strawberries must be a normal good. [2 points]
a. True
b. False
9. Just as maps of indifference curves represent consumer tastes, isoquant maps represent producer tastes. [2 points]
a. True
b. False
10. Suppose you measure labour on the horizontal axis and capital on the vertical axis. And suppose you find that at a given bundle of inputs the TRS=‐4. Then you can conclude that at that bundle: [2 points]
a. labour is more productive than capital
b. capital is more productive than labour
c. labour and capital are equally productive
d. None of these
11. In the short run we can ignore the fixed cost of capital (assuming k is the fixed input) when solving the profit maximisation problem of a producer. [2 points]
a. True
b. False
12. Long‐ run average cost curves are downward sloping for increasing returns to scale production technologies. [2 points]
a. True
b. False
13. If the production technology has increasing returns to scale, then the short‐ run marginal cost curve must be downward sloping. [2 points]
a. True
b. False
14. When the production technology is characterized by increasing returns to scale and the firm faces long‐ run quasi‐fixed costs (e.g., a licence fee), the long‐ run average cost curve of the firm is U‐shaped. [2 points]
a. True
b. False
15. If labour and capital are perfect complements in production, short‐ run supply curves are vertical. [2 points]
a. True
b. False
16. Suppose all the firms in a competitive industry use the same production technology and their long‐ run average cost curves are U shaped. Then, an increase in license fees ‐‐ a long run quasi‐fixed cost ‐‐ will lead to a reduction in the number of firms operating in this industry. [2 points]
a. True
b. False
17. Suppose that in a competitive industry all the firms have the same production technology and each firm has a long‐ run cost function C(x) = x2 + 4 if x > 0 and C = 0 if x = 0. The marginal costs of each firm is MC(x) = 2x. The demand for the industry’s output is xd =
120 一p. What is the long‐ run equilibrium price in this industry? [2 points]
a. 2
b. 4
c. 6
d. 8
18. The First Welfare Theorem states that, invariably, a competitive market results in an efficient allocation of resources and thus maximises social surplus. [2 points]
a. True
b. False
19. A risk‐averse individual will always fully insure to avoid risk. [2 points]
a. True
b. False
20. Two related ways of quantifying a person’s degree of risk aversion are the certainty equivalent and the risk premium. [2 points]
a. True
b. False
21.
Problem 1: Janis has $12 per month to spend on good 1 and good 2. Janis’ tastes are 1 3 described by the utility function u(x1,x2) = x1(4)x2(4), where x1 denotes the quantity of good 1 and x2 the quantity of good 2. Given this utility function, the marginal utilities are: 3 3 1 1 MU1 = x1(一)4x2(4) and MU2 = x1(4)x2(一)4 . The price of good 1 is p1=$1. The price of good 2 is initially p2=$1, but then it increases to p2=$1.5. |
Consider the situation described in Problem 1. What is the optimal quantity of good 1 purchased by Janis when p2=$1? [3 points]
22. Consider the situation described in Problem 1.
What is the optimal quantity of good 2 purchased by Janis when p2=$1? [3 points]
23. Consider the situation described in Problem 1.
What is the new optimal quantity of good 2 purchased by Janis when the price of good 2 increases to p2=$1.5? [3 points]
24. Consider the situation described in Problem 1.
What is the size of the substitution effect for good 2 associated with the increase in p2 from $1 to $1.5?
[Note: To answer this question, you can assume that the consumer would choose the bundle (x1,x2)= (4,8) if he was compensated for the income loss associated with the price increase. Insert a negative number if the quantity of good 2 decreases as a result of the substitution effect.] [3 points]
25. Consider the situations described in Problem 1.
What is the size of the income effect for good 2 associated with the increase in p2 from $1 to $1.5?
[Note: To answer this question, you can assume that the consumer would choose the bundle (x1,x2)= (4,8) if he was compensated for the income loss associated with the price increase. Insert a negative number if the quantity of good 2 decreases as a result of the income effect.] [3 points]
26.
Problem 2: A consumer has $8 to spend on good 1 and good 2. The prices of good 1 and good 2 are p1=$2 and p2=$2 respectively. The tastes of the consumer over good 1 and good 2 are described by the utility function u(x1,x2) = 2x1 +x2. |
Consider the situation described in Problem 2. What is the opportunity cost of good 1 in terms of good 2? [Note: enter a positive number.] [2 points]
27. Consider the situation described in Problem 2.
Suppose that you represent the budget constraint of this consumer in a graph with good 1 on the horizontal axis and good 2 on the vertical axis. What is the value of the horizontal intercept of the budget constraint? [2 points]
28. Consider the situation described in Problem 2.
Suppose that you represent the budget constraint of this consumer in a graph with good 1 on the horizontal axis and good 2 on the vertical axis. What is the value of the vertical intercept of the budget constraint? [2 points]
29. Consider the situation described in Problem 2.
What is the optimal quantity of good 1 purchased by the consumer? [2 points]
30. Consider the situations described in Problem 2.
Suppose now that a discount is introduced on good 1. In particular, the discount is such that p1 drops to $1 for any unit of good 1 that is purchased in excess of 2 units of good 1. What is the new optimal quantity of good 1 purchased by the consumer? [2 points]
31.
Problem 3: The graph below shows the least‐cost input combination to produce 200 units of output for a given producer. |
|
Consider the situation described in Problem 3. What is the level of capital in the least‐cost input combination to produce 400 units of output for this producer? [4 points]
32. Consider the situation described in Problem 3.
Suppose that the cost of producing 200 units of output for this producer is $1000. What is the cost of producing 400 units of output? [4 points]
33. Consider the situation described in Problem 3. [4 points]
The marginal cost of production for this producer:
a. Increases with the level of output
b. Decreases with the level of output
c. Does not depend on the level of output
d. First decreases with the level of output and then increases with the level of output
34.
Problem 4: Suppose the short‐ run cost of a firm is described by the short‐ run cost function C(x) = 50 + x2, where x denotes the level of output. Hence, the marginal cost of production for this firms is MC(x) = x. The firm operates in a perfectly competitive market in which output is sold at price p=$6 |
Consider the situation described in Problem 4. What is the profit maximising level of output for this firm in the short run? [4 points]
35. Consider the situation described in Problem 4.
What is the maximum profit the producer can make in the short‐ run? [4 points]
36.
Problem 5: Lisa just graduated and got a job offer from a bank. If she accepts the bank’s offer she will receive a yearly income of $81 with certainty. However, Lisa is also a good tennis player and is thinking of refusing the offer from the bank to pursue a career in tennis. If she decides to do so, two outcomes are possible. She may become famous and earn a yearly income of $400. Or she may fail and have |
2023-06-05