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. Compared with firms in a perfectly competitive industry, firms in a monopolistically competitive industry are inefficient because they
A. Make economic profits in the long run
B. Do not lower the product price if input prices fall
C. Restrict their output level to maximize profits
D. Charge the highest price that consumers will pay
E. Waste resources by producing an excess amount of output
Use the information below to answer Questions 2-3:
Suppose that a monopolistic competitor producing an output of 100 units faces the following revenues and costs: Price = $100; marginal revenue = $50; marginal cost = $75, and average total cost = $90.
2. In order to maximize profit, the firm should:
A. Reduce output and raise price.
B. Increase output and raise price.
C. Increase output and lower price.
D. Keep output and price the same.
E. Keep output the same but raise price.
3. At its current output of 100 units, the firm:
A. Realizes a loss of $4,000.
B. Realizes a loss of $2,500.
C. Just breaks even.
D. Earns a profit of $ 1,000.
E. Earns a profit of $2,500.
4. A kinked demand curve, under oligopoly, necessarily implies
A. A gap in the marginal revenue schedule
B. A gap in the marginal cost schedule
C. That price need not be above marginal revenue
D. "Satisficing" rather than optimizing behavior
E. Formal collusion in price determination
5. Which of the following would you NOT expect to characterize a monopolistically competitive industry?
A. Positive short-run profits
B. Zero long run profits
C. Marginal revenue equal to marginal cost
D. Price equal to marginal cost
E. Location used to differentiate products.
6. Which of the following payoff matrices represents the “prisoner’s dilemma” game?
A. (6;2) (1;7)
(5;3) (0;0)
B. (4;4) (3;6)
(6;3) (2;2)
C. (1;1) (3;2)
(2;3) (0;0)
D. (4;4) (2;3)
(3;2) (5;5)
E. (2;2) (4;1)
(1;4) (3;3)
Use the following data for Questions 7 -8.
A monopolistic competitor is in the long-run equilibrium at an output of 5,000. Price is $30, and marginal revenue is $10.
7. The marginal cost of the 5,000th unit of output is:
A. $10.
B. $30.
C. $50,000.
D. $150,000.
E. Equal to the ATC.
8. Average total cost is:
A. At a minimum at $30.
B. Above its minimum point at $30.
C. At a minimum at $10.
D. Above its minimum at $10.
E. Indeterminate without additional information.
9. The diagram above shows the cost and the revenue curves for a monopolistic competitor. Which of the following is correct?
A. The profit maximizing output is OA.
B. The long-run equilibrium price is OT
C. In the long-run the monopolistic competitor will not operate
D. The economic profit earned by the monopolistic competitor is SRMK
E. The long-run average total cost is OS
10. Long-run profit is zero for monopolistic competitors because:
A. New competitors drive profit to zero in the long run.
B. They are innovative firms that use their economic profit to develop new products.
C. They produce at an average total cost greater than the minimum.
D. They fail to operate at the efficient scale.
E. All of the above.
11. A monopolistic competitor
A. Faces horizontal demand curve and earns zero long-run economic profit
B. Faces downward slopped demand curve and earns zero long-run economic profit
C. Faces horizontal demand curve and earns positive long-run economic profit
D. Faces downward slopped demand curve and earns positive long-run economic profit
E. Faces homogeneous supply curve.
12. The essential characteristic of all cases of imperfect competition is that the single firm's:
A. Demand curve has a downward slope.
B. Marginal revenue exceeds the price it charges.
C. Average cost curve falls over a substantial or large range of outputs.
D. Product is "differentiated" from one firm to the next.
E. Average cost curve rises over a substantial or large range of outputs.
13. Which of the following does not represent a barrier to entry into a market?
A. Import quotas
B. Patent laws
C. Government franchises
D. Anti-trust legislation
E. Environmental regulation imposed on all producers in a given industry
14. Consider a perfectly competitive market for bananas. In equilibrium:
- There is a shortage of bananas
- At market price, an individual seller can sell as much bananas as he wants
- Quantity of bananas demanded equals quantity of bananas supplied
- There is a surplus of bananas
- More than one answer is correct
15. Consider a perfectly competitive market for milk, with supply and demand curves of usual shape. Which of the following would most likely increase consumer surplus?
- The government introduces a new per-unit tax on milk production
- The government introduces a binding price floor on milk market
- An improvement in farming technology lowers milk production costs
- A successful advertising campaign induces more kids to prefer Coca-Cola
- The Public Health Service bans imports of powdered milk
The following figure illustrates the short-run cost curves of a typical perfectly competitive firm:
16. Given the graph above, the minimal output that a profit-maximizing firm would produce is:
- q1
- q2
- q3
- anything between q2 and q3
- greater than q3
17. Given the graph above, we can say that if a profit-maximizing firm produces more than q3:
- The firm behaves irrationally, since for any q > q3 average costs are not at their minimum
- The firm should increase its output even further
- The government should intervene to correct this situation
D. The market price will likely decrease in the future.
- There must be too many firms in the industry now
18. Consider a perfectly competitive wheat market with demand and supply curves of typical shape. If the government introduced a per-unit subsidy on wheat production, in long-run equilibrium:
A. A typical farmer would earn positive economic profit
B. A typical farmer would not break even
C. For a ton of wheat, a consumer would pay more than what a farmer would get from selling it
D. Equilibrium quantity of wheat would not be Pareto-optimal
E. More than one answer is correct
19. How should a competitive firm decide, whether it should shut down in the short run?
A. Compare TR to TC
B. Compare P to ATC
C. Do not produce if TR does not cover FC
D. Compare AVC to MR
E. Produce the highest quantity demanded, regardless of price
20. Which of the following statements about SR and LR cost curves are true?
A. SMC curves are typically flatter than the LMC curve
B. SAC curves are typically flatter than the LAC curve
C. SAC curves intersect the LAC curve at its minimum
D. SAC curves touch the LAC curve at their minimums
E. If the LAC curve reaches its minimum at some point, one of the SAC curves must also reach its minimum at this point.
21. The graph above depicts a perfectly competitive industry with initial equilibrium at (q2, p2). After government intervention, deadweight loss emerged. Which of the following policies could have caused such a loss?
A. A price ceiling set at p4
B. A price floor set at p1
C. A per-unit tax of (p4 – p1) on the good’s production
D. A per-unit subsidy of (p4 – p1) on the good’s production
E. A lump-sum tax of (p4 – p1)q2 on the good’s production
22. Which of the following could indicate that there are economies of scale in an industry?
A. Two firms can produce any amount of output with lower cost, than one firm
B. MC is constant for all levels of output
C. Whenever output increases by 1%, TC increases by 2%
D. When a typical firm doubles the quantity of all inputs used, its output rises by 200%
E. No right answer
23. A perfectly competitive firm and a monopoly are the same in that:
A. They cease production when MR < min(AVC)
B. Their technologies are equally likely to have economies of scale
C. A binding price ceiling would increase their profits
D. At the profit-maximizing level of output, market demand for their output is elastic
E. More than one answer is correct
24. Which of these situations is NOT an example of price discrimination?
A. Policeman Boots works night shifts, so he chooses to buy bread at 7 a.m. rather than 7 p.m.
B. Sean buys 6 bottles of Coke for $6, while Sheila buys them one at a time, paying $1.50 for each.
C. At weekends, John prefers to go to the movies in the morning, when tickets are cheaper. Jane, however, likes to stay in bed till noon, so she goes to the movies in the evening, paying a higher price.
D. Mary and Susan are offered 5% discount at a sports shop, if they fill a marketing questionnaire. Mary wastes 1 hour to fill it – and receives the discount, while Susan chooses not to.
E. Bill has to pay $50 to enter a nightclub, but his girlfriend is let in for free.
25. If, at some level of output q, P(q) > MC(q), motive of profit maximization would require that:
A. A firm should increase output, no matter whether it is a monopoly, or a competitive firm
B. A competitive firm should increase output; a monopoly may not.
C. A monopoly should increase output, a competitive firm may not.
D. A monopoly should decrease output, a competitive firm may not.
E. None of the above.
26. Which of the following levels of output (q1,…, q5) would maximize a non-discriminating monopoly’s profit?
A. q1, such that P(q1) = MC(q1)
B. q2, such that P(q2) = ATC(q2)
C. Any q3, such that P(q3) > MR(q3)
D. q4, such that TR(q4) – TC(q4) > TR(q) – TC(q) for any q ≠ q4
E. q5, such that MR(q5) = 0
27. Which of the following levels of output (q6,…, q10) would maximize a discriminating monopoly’s profit?
A. q6, such that P(q6) = MC(q6)
B. q7, such that P(q7) = ATC(q7)
C. Any q8, such that P(q8) > MR(q8)
D. q9, such that MR(q9) = MC(q9)
E. More than one answer is correct
28. Which of these statements about monopolies is wrong?
A. For any given level of output, a monopoly would normally charge a higher price than a price-taking firm with the same cost schedule
B. Monopolization usually entails social losses
C. A monopoly does not have a supply function
D. In a monopolized market, discrimination can actually increase social welfare
E. A monopoly would produce at such level of output q, that the difference between price and marginal cost would be highest
29. The graph above describes a non-discriminating monopoly. According to the graph, economic profit of this monopoly would be equal to:
A. (p4 – p1)q1
B. (p2 – p1)q3
C. (p6 – p4)q1
D. (p5 – p1)q2
E. (p5 – p3)q2
30. Suppose that ATC curve of a natural monopolist crosses the demand curve at 666 units of output. This firm would:
A. always produce more than 666 units
B. always produce less than 666 units
C. always produce 666 units
D. always produce less than 333 units
E. cannot tell from the information given
31. If demand for a monopoly’s output is perfectly inelastic, imposing a per-unit tax on this monopoly will:
A. Increase the equilibrium price, and decrease the equilibrium quantity
B. Increase consumer surplus, but decrease social welfare
C. Decrease consumer surplus, and cause a deadweight loss
D. Increase both average and marginal cost
E. Increase monopoly profits
32. With respect to price elasticity, it is true that:
A. In general, a monopoly faces less elastic demand than a competitive firm
B. If a competitive industry gets monopolized, price elasticity of market demand for this industry’s output won’t necessarily change
C. A monopoly should not produce where demand is inelastic
D. Statements A and C are correct
E. All statements are correct
33. Which of the following is true when the production of a good results in negative externalities?
A. The government must produce the good.
B. Private firms will produce too little of the good in the absence of government regulation.
C. The competitive market price will be too low.
D. The competitive market price will be too high.
E. More than one answer is correct.
34. If a firm that polluted a river had to pay all social costs the result would be
A. A larger output
B. A smaller output
C. A marginal cost curve which would be above the marginal private cost curve
D. A marginal cost curve which would be below the marginal private cost curve
E. None of the above.
35. According to the graph, the private equilibrium quantity of the good and social cost of the externality are equal to
A. F; SEABF
B. F; SABC
C. F; SADC
D. E; SADC
E. E; SABC
36. Characteristics of pure public good are:
A. Would never be produced in an unregulated competitive equilibrium.
B. Good produced by natural monopolies.
C. Good for which the law of diminishing marginal utility doesn’t hold.
D. All of the above.
E. None of the above.
37. Laffer (tax rate on horizontal axis) curve function is usually
A. Has an extreme
B. Increasing
C. Decreasing
D. A and B correct
E. A and C correct
38. Consider an industry that is perfectly competitive in its output market and in all input markets. Then the industry demand curve for labour is given by:
A. The horizontal sum of individual MRPL
B. The horizontal sum of individual MVPL
C. The vertical sum of individual MRPL
D. More than one applies
E. None applies
The answer is E, as neither of the sums captures the feedback from output market.
39. Which of the following should be true for a perfectly competitive firm using labour and capital as its inputs in the short run?
A. Total costs per unit of output are minimized at the chosen output level
B. MPL=MPK
C. MVPL=MVPK
D. Wage rate is minimized
E. More than one applies
The answer is A, which implies technological efficiency.
40. For a given output level, a competitive firm's total costs in the long run are, ceteris paribus:
A. Always higher than in short run
B. Always lower than in short run
C. Always the same as in short run
D. May be higher than in short run
E. May be lower than in short run
The answer is E, due to the possibility of choosing a better mix of inputs.
41. If the individual labour supply curve is NOT backward-bending, this implies that:
A. Leisure is inferior
B. Consumption is inferior
C. Leisure is normal
D. More than one possibility exists
E. None applies
The answer is D, as a strictly upward-sloping individual labour supply curve can be obtained with both normal and inferior leisure.
42. Assume that a person obtains a non-working income (such as a retirement pension) that he/she did not receive before, with the wage rate and preferences being unchanged. In this case:
A. The individual labour supply will necessarily decrease
B. The individual labour supply will necessarily increase
C. The individual labour supply will increase, only if the income effect is positive
D. The individual labour supply will increase, only if the income effect is negative
E. The individual labour supply will not change
The answer is D, as leisure is inferior in this case.
43. In the following situations, the economic rent to labour is the highest when (ceteris paribus):
A. Labour supply is absolutely elastic and the industry is competitive
B. A trade union exists, and employers compete in the labour market
C. A trade union exists and confronts a single employer
D. A single employer is a monopolist in its output market, and no trade union exists
E. A trade union exists nominally, but has no real bargaining power
The answer is B, as in this case the trade union is not constrained in maximizing the total wage bill and thus economic rents of its members.
44. Which of the following is NOT an explanation to involuntary unemployment?
A. High efficiency wages
B. High reservation wages
C. High equilibrium wages
D. Both A and C
E. Both B and C
The answer is E, by definition.
45. Signalling theories suggest that:
A. More educated workers are likely to be more skillful
B. More educated workers are likely to acquire skills easier
C. Potential employees' education is irrelevant to the employers
D. Employers can determine the potential employees' productivity easily
E. Receiving education is a signal of being unable to get employed instead for some reason
The answer is B, by definition.
46. When evaluating investment decisions, present values of cash flows are typically considered rather than their direct sums, because:
A. Capital depreciates, so its value today is not the same as tomorrow
B. For today's investment, only present cash flows are relevant, but not future ones
C. Cash to be invested has alternative applications that may yield some payoff
D. Nominal and real interest rates usually differ
E. None of the above
The answer is C.
47. Assume that all land in a country is used for either agriculture or industries. If technological progress induces higher productivity of land in the industries, which of the following would you expect to happen in the long run?
A. Higher rental rates for land in the industrial sector only
B. Lower rental rates for land in the industrial sector only
C. Higher rental rates for land in both sectors
D. Lower rental rates for land in both sectors
E. Higher rental rates for land in agriculture only
The answer is C, due to higher demand for land in the industrial sector and tougher competition for land between sectors.
48. Assume that rental rates for capital suddenly rise for a competitive firm using it in production. Then in the short run:
A. Optimal output will decrease
B. Optimal labour employment will decrease
C. Output price of this firm will increase
D. More than one of the above
E. None of the above
The answer is E, as capital is fixed in the short run, and the firm is a price-taker.
49. Assume that a new tool is invented that allows labour to produce what very expensive capital equipment should have been used for before. Then:
A. Wage rates should rise in the long run
B. Rental rates for capital equipment should rise in the long run
C. Short-run supply of the specific capital equipment should decrease
D. Short-run demand for labour should decrease
E. None of the above
The answer is A, due to increasing demand for labour.
50. Marginal revenue product of a factor is measured in:
A. Units of output
B. Units of output per unit of the factor
C. Units of money per unit of output
D. Units of money
E. Units of money per unit of the factor
The answer is E, by definition.
51. A firm that is a monopolist in its output market, but a perfect competitor in the input markets, will determine labour employment according to:
A. w=MVPL
B. MCL=MVPL
C. MCL=w
D. MRPL=w
E. MRPL=MVPL
The answer is D.
52. In which of the following cases there will be NO deadweight loss?
A. Minimum wage is set at the level of reservation wage for the equilibrium employment
B. Minimum wage is set above equilibrium, with absolutely inelastic labour supply
C. A trade union is created to overcome miserable wages prevailing in the market
D. Both A and B apply
E. Both B and C apply
The answer is A.
53. The point of tangency of an isocost and an isoquant shows (provided a concave production function and perfectly competitive input markets):
A. The least-cost combination of inputs necessary to produce given output level
B. The profit-maximizing level of output
C. The maximum output attainable at the given cost
D. All of the above are correct
E. Only A and C are correct
The answer is E.
54. Suppose that a small industry creates an innovation that makes capital more productive, but only in this industry. Then (Note: Assume that in the short run the supply of capital services is perfectly inelastic):
A. Short run rental prices of capital rise
B. Short run employment of capital rises
C. Long run rental prices of capital rise
D. More than one of the above is correct
E. None of the above is correct
The answer is A, due to an increase in demand and horizontal long-run supply.
