Dr. Neupane/ADMicro/Mphill.

Test yourself
Part I: Multiple Choice (20 points)

Read each question carefully and select the best response. Circle the appropriate letter of the response
and fill in the corresponding circle on your answer sheet.

1. Which of the following is an explicit cost?

a. The wages a firm pays to its workers.
b. The opportunity cost of an owner/entrepreneur's time invested in the firm.
c. The opportunity cost of the money the business owner/entrepreneur has invested in the
firm.
d. None of the above.
2. When parents’ own objectives include the best interests of their children, this is an example of
a. full rationality.
b. bounded rationality.
c. self-regarding preferences.
d. other-regarding preferences.
3. When the consumption of a good has external benefits (positive externalities), then
a. its provision requires a natural monopoly.
b. the market will not provide enough of the good (relative to the optimal quantity).
c. it is a public good and should be provided by the government.
d. the market will provide too much of the good (relative to the optimal quantity).
4. I pay only NRs. 305 for a large cheese pizza at Little Caesar’s even though I am willing to pay 270.
My consumer surplus is
a. 50 b) 35 c) 37.50 d) 55
5. For a perfectly competitive firm, marginal revenue (MR)
a. is constant, given that the firm is a price taker.
b. is less than price, given that selling additional units pulls down the price of all units.
c. is greater than price since the firms demand is perfectly elastic.
d. is u-shaped due to the law of diminishing marginal returns.

6. Use the table below to answer the following TWO questions.

Units of Total
labor product
1 10
2 20
3 27
4 25
7. According to the table above, the average product (AP) of 3 units of labor is
a. 7 b) 9 c) 10 d) 27
rd
8. According to the table above, the marginal product (MP) of 3 unit of labor is
a. 7 b) 9 c) 10 d) 27
9. Assume that the total utilities for the 7th and 8th units of a good consumed are 55 and 67,
respectively. The marginal utility (MU) for the 8th unit is
a. 122 b) 67 c) 61 d) 12
 Dr. Neupane/ADMicro/Mphill.

10. Suppose the first four units of an output produced have total costs of 50, 150, 300, 500,
respectively. The marginal cost (MC) of the SECOND unit of output is
a. 200 b) 150. C) 100 d) 75
11. In the short run, a perfectly competitive firm will produce even with an economic loss, as long as
a. marginal revenue equals marginal cost. (MR=MC)
b. price is less than average total cost. (P < ATC)
c. price is greater than average variable cost. (P > AVC)
d. price is greater than marginal revenue. (P > MR)
12. With diminishing marginal utility,
a. as more and more units of a good or service are consumed, total utility becomes smaller
and smaller.
b. as more and more units of a good or service are consumed, marginal utility becomes smaller
and smaller.
c. the marginal utility curve is always upward sloping.
d. marginal utility is constant.
13. Which of the following correctly explains why sellers in a perfectly competitive market are price-
takers?
a. There are few sellers, and so they have the power to take whatever price they want.
b. Sellers in a competitive market have the power to influence price by colluding with one
another and using quotas to limit overall market output and thus raise price.
c. Individual buyers in a competitive market have the power to influence price, and thus can
impose prices and other conditions on powerless sellers.
d. There are many small sellers, and so the market process generates an equilibrium price that
cannot be influenced by any one seller. Thus they have no choice but to take the price
generated by the market process.
14. Total utility rises
a. when marginal utility is negative.
b. as indifference curves move up and to the right.
c. along the same indifference curve, moving from left to right.
d. all of the above.
15. In an economic theory, the production possibilities curve (PPC) and the budget line are examples of
a. the outcome or choice resulting from objectives and constraints.
b. firm and consumer objectives.
c. physical and financial constraints.
d. none of the above.
16. Which of the following represents the key difference between the short run and the long run?
a. In the short run at least one of a firm's resources is fixed, while in the long run all resources
under the firm's control are variable.
b. The short run corresponds to the anticipated remaining life span of the
owner/entrepreneur.
c. In the long run at least one of a firm's resources is fixed, while in the short run all resources
under the firm's control are variable.
d. None of the above.
17. When a firm is experiencing economies of scale
a. the long-run average cost curve is declining.
b. the long-run average cost curve is constant.
c. the long-run average cost curve is rising.
 Dr. Neupane/ADMicro/Mphill.

18. The profit-maximizing rate of output for a firm in a perfectly competitive market is found when
which of the following occurs?
a. Total revenue equals total cost. (TR =TC)
b. Price equals average total cost. (P=TC)
c. Marginal revenue equals marginal cost. (MR=MC)
d. Price equals average variable cost. (P=AVC)
19. Economics is best defined as the study of
a. financial decision-making.
b. how consumers make purchasing decisions.
c. choices made by people faced with scarcity.
d. inflation, unemployment, and economic growth
20. Marginalism is
a. the best alternative that we forego when making a decision
b. the study of how societies choose to use scarce resources.
c. a market situation in which profit opportunities are eliminated almost instantaneously.
d. the process of analyzing the additional costs or benefits arising from a decision.

Part 2: Short Answer Questions (80 p0ints)

Note: Answer the following questions precisely. Do not write unnecessary argument.

21. What do we mean by scarcity and opportunity cost? How are the two terms related?
22. If your tuition is NPR 20,000 this semester, your books cost NPR 2,000, you can only work 10 rather
than 40 hours per week during the 15 weeks you are taking classes and you make NPR15 per hour,
and your room and board is NPR.8,000 this semester, then calculate your opportunity cost of
attending college this semester.
23. Consider the table below
Price of lemonade liter = NRs 80
Units of Total Product (# of liter Marginal Product (MP) Marginal Revenue
Labor per hour) of labor Product (MRP)
0 0 -- --
1 10
2 22
3 32
4 40
5 48
6 53
7 57
8 60

a) Fill in the MP and MRP columns in the table above.

b) How much labor will the firm hire if the wage = NRs.7/hour? if the wage = NRs. 12/hour?
24. Consider the demand schedule for oranges in Kathmandu below.

Price per pack (RS) Quantity

1000 70
1500 60
2000 50
2500 40
 Dr. Neupane/ADMicro/Mphill.

a. Calculate the price elasticity of demand for oranges when the price per pack rises from NRs
1000 to 2000. Show your work to receive full credit.
b. Suppose government of Nepal has proposed an increase in the tax for next year’s budget.
Given you answer in (a), what is your prediction of how this tax hike would affect tax
revenue (rise or fall)? Explain your answer.

25. Refer to the information provided in Figure 1.2 below to answer the questions that follow.

a. Refer to Figure 1.2. The slope of the line between Points A and B is……………………….
b. Refer to Figure 1.2. The slope of the line between Points A and B is ……………………….

26. Why is a monopoly inefficient? What are the potential benefits to monopolies?

27. Consider the graph below:

P, cost

P2

P1 ATC MC

MR D

Q (households)
Q1 Q2

a. Why does the graph above depict a natural monopoly?

b. In the absence of regulation, what is the profit-maximizing price and quantity for this
monopoly?
 Dr. Neupane/ADMicro/Mphill.

c. What price and quantity would result under regulation?

28. Contrast monopoly and monopolistic competition in terms of the number of firms, the product, firm
entry/exit, and long run economic profit. (You can do this with a table if you wish.)
29. Consider the graph below:
sweaters

3
IC3
IC2
IC1
cups
40 100 of coffee

Suppose the price of coffee is $1/cup and the price of sweaters is $20.

a. How much is the consumer’s budget? (show your work)

b. Which indifference curve (IC1, IC2, IC3) represents the LOWEST total utility?
c. What is the quantity of sweaters and coffee consumed in equilibrium?

30. Consider the graphs of a perfectly competitive market below:

P
MC
ATC

$7 D = MR = P
$5
$3

Q
150 200

d. What is the profit maximizing price and quantity of the FIRM?

e. Is the firm earning an economic profit or loss? How much is it? (show your work)
f. What will happen to the market supply and firm demand curve in the long run? SHOW THIS
ON THE GRAPH.
31. What is the difference between explicit and implicit costs? Does zero economic profit mean a firm
is earning no money? Why or why not?
32. Consider the graph below:
 Dr. Neupane/ADMicro/Mphill.

sweaters

3
IC3
IC2
IC1
cups
40 100 of coffee

Suppose the price of coffee is $1/cup and the price of sweaters is $20.

a. How much is the consumer’s budget? (show your work)

b. Which indifference curve (IC1, IC2, IC3) represents the LOWEST total utility?
c. What is the quantity of sweaters and coffee consumed in equilibrium?

33. Consider the graphs of a perfectly competitive market below:

P
MC
ATC

$7 D = MR = P
$5
$3

Q
150 200

a. What is the profit maximizing price and quantity of the FIRM?

b. Is the firm earning an economic profit or loss? How much is it? (show your work)
c. What will happen to the market supply and firm demand curve in the long run? SHOW
THIS ON THE GRAPH.
34. What is the difference between explicit and implicit costs? Does zero economic profit mean a firm
is earning no money? Why or why not?
35. Can you differentiate the following functions with respect to x?
a. y = exp(x)
b. y = a + bx + cx2
c. y = exp(x) bx
 Dr. Neupane/ADMicro/Mphill.

36. To produce x units of some product a company spends

C(x)=ax2+bx(NRP),
where a and b are real numbers. The product is sold at price p per unit. Determine the sales volume at
which profit reaches its maximum. The sales of the Company R(X) and When selling x units of the
product, the company has income equal to
R(x)=px.
37. Suppose an economy produces only two goods: oranges and sweaters. The production possibilities
curve is graphed below.

a) Consider the four points labeled on the diagram. Describe each point in terms of its attainability
(is it possible?) and desirability (is it efficient?).
b) Is there one “best” point for the economy to produce at this time?
c) On the graph above, show how economic growth will affect production possibilities.

38. Suppose the wealth of the consumer is W and he wish to spend his wealth to buy X1 and X2
Commodities. The price of the X1 is P1 and price of the X2 is P2. Consider the following questions.
a. What is consumer’s utility function?
b. What is consumer’s budget constraints?
c. The price of X1= NRs, 25, Price of X2 = NRs. 20 and wealth is 500. If the consumer decided to
buy 10 units of the X1, find the volume of X2 he can purchase within his budget limit.

Good Luck