Kebri Dehar University

Department of Economics
Microeconomics I (Econ 1012) Model Exam
Complied By Bantalem

March 31, 2013

Kebri Dehar, Ethiopia

… As human population increase, the earth become narrow; let us learn how to accept
and love each other.
Instruction
This exam contains 100 multiple choice questions. Read carefully and choose the best from the
given alternatives and write your answers on specified answer sheet only.

1. Hana has ETB 600 a week to spend on clothing (X) and food (Y). The price of clothing is
ETB 30 and the price of food is ETB 5. What is the equation for Hanaʹs budget constraint?
A. 𝑋 + 𝑌 = 600
B. 30𝑋 + 5𝑌 = 600
C. 5𝑋 + 30𝑌 = 600
D. 6𝑋 + 𝑌 = 600
2. If a household’s income doubles, its budget constraint will__________.
A. Shifts out parallel to the old one
B. Shifts in parallel to the old one
C. Pivot at Y-intercept
D. Pivot at X-intercept
3. In indifference curve analysis, an increase in total utility is represented by
A. A movement down along the indifference curve.
B. A rightward shift of the indifference curve.
C. A leftward shift of the indifference curve.
D. A movement up along the indifference curve.
4. A graph which shows the different combinations of two goods that produce the same amount
of utility is termed:
A. A budget line
B. An indifference curve
C. A demand curve
D. Income utility curve
5. In indifference curve analysis, the budget line will become steeper if the___.
A. price of the good along the vertical axis increases
B. income of the consumer decreases
C. indifference curve moves to the left
D. indifference curve moves to the right
6. For indifference map, the highest level of total utility is given by__________.
A. the point which is furthest down along a given indifference curve
B. the indifference curve which lies furthest away from the origin
C. the point which is furthest up along a given indifference curve
D. the indifference curve which lies closest to the origin

Answer the following questions based on the graph below

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7. The consumer equilibrium is observed to be____________________.
A. point D
B. point B
C. point A
D. point E
8. Given the budget line AB, the highest level of total utility attainable is_____________.
A. indifference curve u2
B. indifference curve u3
C. point B
D. indifference curve u1
9. Given the budget line AB, if the consumer was at point D, the consumer should_______.
A. do nothing as the consumer is at equilibrium
B. purchase more bananas and fewer oranges
C. purchase more of both bananas and oranges
D. purchase more oranges and fewer bananas
10. The consumer's budget line is constructed under the assumption that
A. diminishing marginal utility has not been encountered by the consumer
B. the consumer's income is fixed and that the prices are fixed
C. diminishing marginal utility has been encountered by the consumer
D. the consumer knows what his/her neighbors will do
11. The income effect indicates that
A. a rise in money income will cause consumers to buy smaller quantities of normal goods
B. when the price of a product falls, the lower price will induce the consumer to buy more of
that product now that it is relatively cheaper
C. consumers should substitute among various products until the marginal utility from the
last unit of each product purchased is the same

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 D. when the price of a product falls, a consumer will be able to buy more of it with a specific
money income
12. If the price of normal good X rises, the income
A. and substitution effects will both induce the consumer to buy less of X
B. and substitution effects will both induce the consumer to buy more of X
C. effect will induce the consumer to buy more of X and the substitution effect will induce
him to buy less
D. effect will induce the consumer to buy less of X and the substitution will induce him to
buy more
13. Which of the following is correct? When the price of normal good Z falls:
A. both income and substitution effects cause the consumer to buy more.
B. both income and substitution effects cause the consumer to buy less.
C. the income effect causes the consumer to buy less, but the substitution effect causes
her to buy more.
D. the income effect causes the consumer to buy more, but the substitution effect causes
her to buy less.
14. The substitution effect indicates that:
A. a decline in money income will cause the consumer to buy more inferior goods and fewer
superior goods
B. consumer equilibrium can only be achieved when the consumer is buying substitute
goods
C. when the price of a product falls, the lower price will induce the consumer to buy more of
that product at the expense of other products
D. when the price of a product falls, a consumer will be able to buy more of it with a specific
money income
15. Utility_________________.
A. is synonymous with usefulness
B. is easy to quantify
C. is want-satisfying power
D. rarely varies from person to person
16. Marginal utility can be_________
A. positive, but not negative
B. positive, negative, or zero
C. positive or negative, but not zero
D. decreasing, but not negative
17. The first Pepsi yields Ahmed 18 units of utility and the second yields him an additional 12
units of utility. His total utility from three Pepsis is 38 units of utility. The marginal utility of
the third Pepsi is:
A. 26 units of utility. B. 6 units of utility. C. 8 units of utility D 38 units of utility.
18. Which of the following is correct?
A. There is no strong mathematical relationship between marginal utility and total utility.
B. Total utility is equal to the change in marginal utility from consuming an additional unit

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 of a product.
C. If marginal utility is diminishing and is a positive amount, total utility will increase.
D. If marginal utility is diminishing, total utility must also be diminishing
19. The theory of consumer behavior assumes that
A. consumers behave rationally, maximizing their satisfactions.
B. consumers have unlimited money incomes.
C. consumers do not know how much marginal utility they obtain from successive units of
various products.
D. marginal utility is constant.
20. To maximize utility a consumer should allocate money income so that the:
A. elasticity of demand on all products purchased is the same.
B. marginal utility obtained from the last Birr spent on each product is the same.
C. total utility derived from each product consumed is the same.
D. marginal utility of the last unit of each product consumed is the same.
21. Diminishing marginal utility explains why:
A. the income effect exceeds the substitution effect.
B. the substitution effect exceeds the income effect.
C. supply curves are upward sloping.
D. demand curves are downward sloping
22. What do the income effect, the substitution effect, and diminishing marginal utility have in
common?
A. All are required to explain the utility-maximizing position of a consumer.
B. They are all empirically measurable.
C. They all help explain the upward sloping supply curve.
D. They all help explain the downward sloping demand curve
23. The utility-maximizing rule:
A. is inconsistent with the law of demand.
B. implies a leftward shifting demand curve.
C. implies a perfectly elastic demand curve.
D. is consistent with the law of demand
24. The diamond-water paradox occurs because:
A. the price of a product is related to its total utility, not its marginal utility.
B. the price of a product is related to its marginal utility, not its total utility.
C. water is, in fact, very scarce in certain regions of the world.
D. diamonds are more useful than water
25. A consumer's demand curve for a product is downward sloping because:
A. total utility falls below marginal utility as more of a product is consumed.
B. marginal utility diminishes as more of a product is consumed.
C. time becomes less valuable as more of a product is consumed.
D. the income and substitution effects precisely offset each other.
26. Assume Mamo consumes product X, Y and Z and the equilibrium condition is given
𝑀𝑈𝑥 100 𝑀𝑈𝑦 300 𝑀𝑈𝑧 400
by = = = = = . What will the prices of product Y and Z?
𝑃𝑥 35 𝑃𝑦 ? 𝑃𝑧 ?

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 A. They cannot be determined from the information given.
B. They ETB 105 and ETB 140 respectively.
C. They are ETB 105 and ETB 175 respectively.
D. They are ETB 100 and ETB 200 respectively
27. Suppose you have a limited money income and you are purchasing products A and B whose
prices happen to be the same. To maximize your utility you should purchase A and B in such
amounts that:
A. their marginal utilities are the same.
B. their total utilities are the same.
C. their marginal and total utilities are proportionate.
D. the income and substitution effects associated with each are equal
𝑀𝑈𝑥 𝑀𝑈𝑦
28. Suppose exceeds . To maximize utility the consumer who is spending all her money
𝑃𝑥 𝑃𝑦
income should buy:
A. less of X only if its price rises
B. more of Y and less of X
C. more of Y only if its price rises
D. more of X and less of Y
29. Which of the following statements is correct?
A. Utility and usefulness are synonymous.
B. The marginal utility derived from successive units of a product tends to be similar for all
consumers.
C. Because utility is not measurable, the utility-maximizing rule provides no useful insights
as to consumer behavior.
D. A product may yield utility, but not be functionally useful.
30. Marginal utility___________.
A. is equal to total utility divided by the number of units consumed
B. is equal to total utility if the demand curve is linear
C. increases as more of a product is consumed
D. diminishes as more of a product is consumed
31. Where total utility is at a maximum, marginal utility is_____________.
A. Negative B. positive and increasing C. zero D. positive but decreasing
32. The basic characteristic of the long run in production is that
A. there are only fixed costs and no variable costs of production
B. the firm is not able to alter the amount of any resources which is employed
C. there are only variable costs and no fixed costs of production
D. some of the costs are fixed and some of the costs of production are variable
33. The act of combining inputs to product outputs is called:
A. profit B. a sole-proprietorship C. The short run D. production
34. At the economically efficient level of production :

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 A. price equals marginal cost
B. marginal cost equals average variable cost
C. the iso-cost and isoquant lines intersect one another
D. the iso-cost and isoquant lines are tangent to one another
35. The period of time in which all costs are variable is called the:
A. profit period. C. implicit period.
B. long run. D. short run
36. The period of time in which some of the costs of production are fixed is called the:
A. profit period. C. implicit period.
B. long run. D. short run
37. Which of the following constitutes an implicit cost to the Adama steel manufacturing
company?
A. payments of wages to its office workers
B. rent paid for the use of equipment
C. depreciation charges on company-owned equipment
D. economic profits resulting from current production
38. What is the curve showing all possible combination inputs that yield the same level of
output?
A. Iso cost line C. Iso quant curve
B. Production possibility curve D. Total cost curve
39. For iso quant map, the highest level of total production is given by__________.
A. the point which is furthest down along a given iso quant curve
B. the iso quant curve which lies furthest away from the origin
C. the point which is furthest up along a given iso quant curve
D. the iso quant curve which lies closest to the origin
40. the slope of production function is_____________
A. Marginal cost C. Average cost
B. Marginal product D. Average product
41. In short run production period when as the labor units used in the production processes goes
on increasing______________.
A. output initially increases at an increasing rate, then starts rising at a decreasing rate,
reaches a maximum and then starts falling
B. output initially increases at an decreasing rate, then starts rising at an increasing rate,

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 reaches a maximum and then starts falling
C. output initially, reaches a maximum and then starts falling then starts rising at a
decreasing rate, and increases at an increasing rate
D. output initially increases at an increasing rate, then starts falling at an increasing rate,
reaches a maximum and then starts falling
42. Which one of the following statement is correct?
A. At the first stage of production, APL is less than MPL and both are rising.
B. At the second stage of production, APL is less than MPL and both are declining.
C. At third stage of production, APL is greater than MPL and APL is negative.
D. Production at stage one is the most efficient in terms of resource allocation.
43. What the rate of technical substitution?
A. It the case in which the firm must cut the employment of one input in order to employ
one more unit another input so that it produces the same level of output.
B. It is the slope production
C. It is the slope marginal production
D. It the case in which the firm must cut the employment of one input in order to employ
one more unit of another input so that it produces the higher level of output.
44. Costs to an economist:
A. consist only of explicit costs
B. never reflect monetary outlays
C. may or may not involve monetary outlays
D. always reflect monetary outlays
45. The law of diminishing returns indicates that:
A. as extra units of a variable resource are added to a fixed resource, marginal product will
decline beyond some point.
B. because of economies and diseconomies of scale a competitive firm's long-run average
total cost curve will be U-shaped.
C. the demand for goods produced by purely competitive industries is downward sloping.
D. beyond some point the extra utility derived from additional units of a product will yield
the consumer smaller and smaller extra amounts of satisfaction.
46. Which of the following statements concerning the relationships between total product (TP),
average product (AP), and marginal product (MP) is not correct?
A. AP continues to rise so long as TP is rising.

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 B. AP reaches a maximum before TP reaches a maximum.
C. TP reaches a maximum when the MP of the variable input becomes zero.
D. MP cuts AP at the maximum AP.
47. Marginal product:
A. diminishes at all levels of production.
B. may initially increase, then diminish, but never become negative.
C. may initially increase, then diminish, and ultimately become negative.
D. is always less than average product.
48. Which of the following is correct?
A. When total product is rising, both average product and marginal product must also be
rising.
B. When marginal product is falling, total product must be falling.
C. When marginal product is falling; average product must also be falling.
D. Marginal product rises faster than average product and also falls faster than average
product.

Answer questions 49-52 referring from the above diagram

49. In the above diagram the range of diminishing marginal returns is:
A. 0Q1 B. 0Q3 C. Q1Q3 D. Q2Q3
50. Refer to the above diagram, where variable inputs of labor are being added to a constant
amount of property resources. The total output of this firm will cease to expand:
A. if a labor force in excess of Q1 is employed.
B. if a labor force in excess of Q2 is employed.
C. if a labor force in excess of Q3 is employed.
D. only if the marginal product curve becomes negative at all levels of output.
51. Refer to the above diagram, where variable inputs of labor are being added to a constant
amount of property resources. Marginal cost will be at a minimum for this firm when it is
hiring:

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 A. Q3 workers. C. Q1 workers.
B. Q2 workers. D. more than Q3 workers.
52. Refer to the above diagram, where variable inputs of labor are being added to a constant
amount of property resources. Average variable cost will be at a minimum when the firm is
hiring:
A. Q3 workers. B. Q2 workers. C. Q1 workers. D) more than Q3 workers.
53. Marginal cost is the:
A. rate of change in total fixed cost that results from producing one more unit of output.
B. change in total cost that results from producing one more unit of output.
C. change in average variable cost that results from producing one more unit of output.
D. change in average total cost that results from producing one more unit of output
54. Average fixed cost:
A. equals marginal cost when average total cost is at its minimum.
B. may be found for any output by adding average variable cost and average total cost.
C. graphs as a U-shaped curve.
D. declines continually as output increases.
55. Which of the following is correct as it relates to cost curves?
A. Average variable cost intersects marginal cost at the latter's minimum point.
B. Marginal cost intersects average total cost at the latter's minimum point.
C. Average fixed cost intersects marginal cost at the latter's minimum point.
D. Marginal cost intersects average fixed cost at the latter's minimum point.
56. Fixed costs are associated with:
A. highly adjustable inputs such as labor.
B. the short run only.
C. both the short run and the long run.
D. the long run only.
57. Which of the following is correct?
A. There is no relationship between MP and MC.
B. When AP is rising MC is falling, and when AP is falling MC is rising.
C. When MP is rising MC is rising, and when MP is falling MC is falling.
D. When MP is rising MC is falling, and when MP is falling MC is rising.
58. Average fixed costs can be determined graphically by:
A. summing the marginal costs of any number of units of output and dividing the sum by
 that output.
B. the vertical distance between TC and TVC.
C. the vertical distance between AVC and MC.
D. the vertical distance between ATC and AVC
59. Graphically, the vertical distance between a firm's ATC and AVC curves represents:
A. AFC, which increases as output increases.
B. AFC, which decreases as output increases.
C. marginal costs, which decrease as output decreases.
D. marginal costs, which increase as output increases.
60. If a profitable firm's fixed costs fortunately were zero:
A. MC and ATC would be equal at all levels of output.
B. AFC would become negative as output increases.
C. AVC and ATC would coincide.
D. ATC would be zero at all output levels.
61. In the short run the T-Shirt Company is producing 500 units of output. Its average variable
costs are $2.00 and its average fixed costs are $0.50. The firm's total costs is:
A. $2.50 B. $1250 C. $750 D. $1100
62. The short-run average total cost curve is U-shaped because:
A. average fixed costs decline continuously as output increases.
B. of increasing and diminishing returns.
C. of economies and diseconomies of scale.
D. minimum efficient scale is encountered.
63. If a firm increases all of its inputs by 10 percent and its output increases by 10 percent, then:
A. it is encountering diseconomies of scale.
B. it is encountering constant returns to scale.
C. it is encountering economies of scale.
D. the marginal products of all inputs are falling.

Chapter five perfect competitions (16)

64. Which of the following statements applies to a purely competitive producer?
A. It will not advertise its product.
B. In long-run equilibrium it will earn an economic profit.

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 C. Its product will have a brand name.
D. Its product is slightly different from those of its competitors.
65. Price is constant or given to the individual firm selling in a purely competitive market
because:
A. the firm's demand curve is downward sloping.
B. of product differentiation reinforced by extensive advertising.
C. each seller supplies a negligible fraction of total supply.
D. there are no good substitutes for its product.
66. A firm reaches a break-even point (normal profit position) where:
A. marginal revenue cuts the horizontal axis.
B. marginal cost intersects the average variable cost curve.
C. total revenue equals total variable cost.
D. total revenue and total cost are equal.
67. If a purely competitive firm shuts down in the short run:
A. its loss will be zero.
B. it will realize a loss equal to its total variable costs.
C. it will realize a loss equal to its total fixed costs.
D. it will realize a loss equal to its total costs.
68. Suppose that at 500 units of output marginal revenue is equal to marginal cost. The firm is
selling its output at $5 per unit and average total cost at 500 units of output is $6. On the
basis of this information we:
A. can say that the firm should close down in the short run.
B. can say that the firm can produce and realize an economic profit in the short run.
C. cannot determine whether the firm should produce or shut down in the short run.
D. can assume the firm is not using the most efficient technology.
69. In the short run a purely competitive seller will shut down if:
A. it cannot produce at an economic profit.
B. price is less than average variable cost at all outputs.
C. price is less than average fixed cost at all outputs.
D. there is no point at which marginal revenue and marginal cost are equal.

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 Answer the following questions based on above diagram
70. Refer to the above diagram. This firm will earn only a normal profit if product price is:
A. P1 B. P2 C. P3 D. P4
71. Refer to the above diagram. The firm will realize an economic profit if price is:
A. P1 B. P2 C. P3 D. P4
72. Refer to the above diagram. The firm will produce at a loss if price is:
A. P1 B. P2 C. P3 D. P4
73. Refer to the above diagram. The firm will shut down at any price less than:
A. P1 B. P2 C. P3 D. P4
74. Refer to the above diagram. The firm's supply curve is the segment of the:
A. MC curve above its intersection with the AVC curve.
B. MC curve above its intersection with the ATC curve.
C. AVC curve above its intersection with the MC curve.
D. ATC curve above its intersection with the MC curve
75. Which of the following statements is correct?
A. Economic profits induce firms to enter an industry; losses encourage firms to leave.
B. Economic profits induce firms to leave an industry; profits encourage firms to leave.
C. Economic profits and losses have no significant impact on the growth or decline of an
industry.
D. Normal profits will cause an industry to expand.
76. Which of the following will not hold true for a competitive firm in long-run equilibrium?
A. P equals AFC B. P equals minimum ATC

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 C. MC equals minimum ATC D. P equals MC
77. A purely monopolistic industry:
A. has no entry barriers.
B. has a downward sloping demand curve.
C. produces a product or service for which there are many close substitutes.
D. earns only a normal profit in the long run.
78. Pure monopolists may obtain economic profits in the long run because:
A. of advertising.
B. of barriers to entry.
C. marginal revenue is constant as sales increase.
D. of rising average fixed costs
79. Which of the following approximates a pure monopoly?
A. the telecommunication market
B. the diamond market
C. the garment market
D. the soft drink market
80. A natural monopoly occurs when:
A. long-run average costs decline continuously through the range of demand.
B. a firm owns or controls some resource essential to production.
C. long-run average costs rise continuously as output is increased.
D. economies of scale are obtained at relatively low levels of output.
81. The non-discriminating monopolist's demand curve:
A. is less elastic than a purely competitive firm's demand curve.
B. is perfectly elastic.
C. coincides with its marginal revenue curve.
D. is perfectly inelastic
82. The demand curve faced by a pure monopolist:
A. may be either more or less elastic than that faced by a single purely competitive firm.
B. is less elastic than that faced by a single purely competitive firm.
C. has the same elasticity as that faced by a single purely competitive firm.
D. is more elastic than that faced by a single purely competitive firm.

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 Answer questions 83-86 based on the above diagram
83. Refer to the above diagram. To maximize profits or minimize losses this firm should
produce:
A) E units and charge price C.
C) M units and charge price N.
B) E units and charge price A.
D) L units and charge price LK..
84. Refer to the above diagram. In equilibrium total revenue will be the area:
A. NM times 0M. B. 0AJE. C.0EGC. D. 0EHB.
85. Refer to the above diagram. In equilibrium total cost will be:
A. NM times 0M. B. 0AJE. C. 0CGC. D. 0BHE.
86. Refer to the above diagram. In equilibrium the firm will realize:
A. an economic profit of ABHJ.
B. a loss of GH per unit.
C. an economic profit of ACGJ.
D. a loss of JH per unit.
87. Which of the following statements is correct?

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 A. The pure monopolist will maximize profit by producing at that point on the demand curve
where elasticity is zero.
B. In seeking the profit-maximizing output the pure monopolist under-allocates resources to
its production.
C. The pure monopolist maximizes profits by producing that output at which the differential
between price and average cost is the greatest.
D. Purely monopolistic sellers earn only normal profits in the long run.
88. An important economic problem associated with pure monopoly is that, at the profit
maximizing outputs, resources are:
A. over allocated because price exceeds marginal cost.
B. over allocated because marginal cost exceeds price.
C. under allocated because price exceeds marginal cost.
D. under allocated because marginal cost exceeds price
89. Price discrimination refers to:
A. selling a given product for different prices at two different points in time.
B. any price above that which is equal to a minimum average total cost.
C. the selling of a given product at different prices that do not reflect cost differences.
D. the difference between the prices a purely competitive seller and a purely monopolistic
seller would charge.
90. If a monopolist engages in perfect price discrimination, it will:
A. realize a smaller profit.
B. charge a higher price where individual demand is inelastic and a lower price where
individual demand is elastic.
C. produce a smaller output than when it did not discriminate.
D. charge a competitive price to all its customers.
91. A situation where consumers faces more than one possible outcomes without known
probabilities best describes
A. Risk C. Uncertainty
B. Certainty D. Utility
92. Which of the following is correct?
A. For risk lover consumers, loses are important than gains in changing consumption
pattern
B. For risk averse consumers, loses are important than gains in changing consumption

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 pattern
C. For risk neutral consumers, loses are important than gains in changing consumption
pattern
D. For risk lover consumers, there is no difference between loses and gains in changing
consumption pattern
93. Which one of the following is not among ways of reducing risk?
A. Diversification C. Value information
B. Insurance D. Gambling
94. A consumer purchases two goods, food and clothing with an income M amount. The utility
function is 𝑈(𝑋, 𝑌) = 𝑋𝑌 where x denotes the amount of food consumed and y the amount
of clothing. The price of food is 𝑃𝑥 , the price of clothing is 𝑃𝑦 , and income is M. Which of the
following is the demand curve of food (X)?
𝑀 𝑀
A. 𝑋 = 𝑃 C. 𝑋 = 2𝑃
𝑥 𝑥

𝑀 𝑀
B. 𝑋 = 2𝑃 D. 𝑋 = 4𝑃
𝑥 𝑃𝑦 𝑥

95. David is considering his purchases of food (x) and clothing (y). He has the utility function
(𝑋, 𝑌) = 𝑋𝑌 + 10𝑋 . His income is 𝑀 = 10. He faces a price of food Px =ETB 1 and a
price of clothing Py= ETB 2. What is David’s optimal basket?
A. 𝑥 = 10 𝑎𝑛𝑑 𝑦 = 12 C. 𝑥 = 0 𝑎𝑛𝑑 𝑦 = 10
B. 𝑥 = 10 𝑎𝑛𝑑 𝑦 = 0 D. 𝑥 = 0 𝑎𝑛𝑑 𝑦 = 12
96. Which of the following is correct?
A. For linear production function the elasticity of substitution is ∞.
B. For Fixed-proportions production function elasticity of substitution is 1.
C. For Cobb—Douglas production function elasticity of substitution is zero.
D. Elasticity of substitution is not appropriate ingredient to identify the types of production
functions.
97. A firm’s total product is 𝑄 = 6, 000 units and unit price is ETB 2. The firm incurs fixed
cost of ETB 5000 and variable cost 0.5𝑄. Then the profit of the firm is _________
A. ETB 5, 000 B. ETB 4,000 C. ETB 2,000 D. ETB 3,000
98. Implicit costs are:
A. regarded as costs by accountants but not by economists.
B. payments that a firm makes to other firms or individuals who supply resources to it.
C. Non-expenditure costs.
D. costs that vary proportionately with output.

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99. Normal profit is:
A. determined by subtracting implicit costs from total revenue.
B. determined by subtracting explicit costs from total revenue.
C. the return to the entrepreneur when economic profits are zero.
D. the return to the entrepreneur when accounting profits are zero.
100. The basic difference between the short run and the long run is that:
A. all costs are fixed in the short run, but all costs are variable in the long run.
B. the law of diminishing returns applies in the long run, but not in the short run.
C. at least one resource is fixed in the short run, while all resources are variable in the long
run.
D. economies of scale may be present in the short run, but not in the long run.

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