MICROECONOMICS 1 - OMIK

SUMMER SEMESTER 2023/2024

MOCK EXAM 1.3
Filling the blank:

1. For most people, as their income increases, their utility from that income ________ at a(n)
________ rate.

2. John's utility from an additional dollar increases more when he has $1,000 than when he has
$10,000. From this, we can conclude that John is a ________

3. Suppose Terri has a 25% chance of becoming disabled in any given year. If she does become
disabled, she will earn $0.

If Terri does not become disabled, she will earn her usual salary of
$80,000. Terri has the opportunity to purchase disability insurance for
$20,000 which will pay her her full salary in the event she becomes
disabled.

Terri's utility with the policy is _____ and her expected utility without the policy is _____.

4. An increase in a consumer's income will cause the budget line to ________

5. If an individual has a constant MRS of shoes for sneakers of 3/4 (that is, he or she is always
willing to give up 3 pairs of sneakers to get 4 pairs of shoes) then, if sneakers and shoes are
equally costly, he or she will buy ________

6. Sue views hot dogs and hot dog buns as perfect complements in her consumption, and the
corners of her indifference curves follow the 45-degree line. Initially, the price of hot dogs is $3
per package (8 hot dogs), the price of buns is $3 per package (8 hot dog buns), and Sue's budget
is $48 per month. She ________ her consumption of __ packages of hot dogs and _______
packages of hot dog buns.

7. The budget constraint for a consumer who only buys apples a. and bananas b. is PAA + PBB = I
where consumer income is I, the price of apples is PA, and the price of bananas is PB. To plot this
budget constraint in a figure with apples on the horizontal axis, we should use a budget line
represented by the slope-intercept equation: ________
8. Suppose a consumer's MRS is given by the formula MRSPT = T/P, where P stands for the
number of pieces of pizza and T stands for the number of tacos. Starting at 12 tacos and 4 pizzas,
the consumer must receive __ tacos to compensate them for the loss of __ piece of pizza

9. Jiaxiu used to consume 8 hot dogs and 4 hamburgers a day. Now she consumes 12 hot dogs
and 2 hamburgers daily in order to maintain the same level of wellbeing as before. The MRS for
hot dogs with hamburgers is: ________

10. Eliza used to consume 5 cookies and 6 cupcakes a day. Now she consumes 6 cookies and 3
cupcakes daily in order to maintain the same level of happiness as before. The MRS for cookies
with cupcakes is: ________

11. If prices and income all change by the same proportion, the budget line ________

12. Felix always consumes exactly four cookies with a glass of milk. Felix's indifference curves
for cookies and milk would be ________

13. An Engel curve is backward-bending when the good is ________ after a certain level of
income.

14. A Giffen good must have a downward sloping demand curve is the special subset of inferior
goods in which the income effect ________ the substitution effect.

15. Nervous Norman holds 70% of his assets in cash, earning 0%, and 30% of his assets in an
insured savings account, earning 2%. The expected return on his portfolio: ________

16. A "risky" asset will earn a rate of return close to that of "riskless" assets if its risk is:
________

17. When the optimal point on an indifference curve and budget line diagram is a corner
solution, the ________ usually does not equal the ________for the two goods.

18. Pencils sell for 10 cents and pens sell for 50 cents. Suppose Jack, whose preferences satisfy
all of the basic assumptions, buys 5 pens and one pencil each semester. With this consumption
bundle, his MRS of pencils for pens is 3. Jack could increase his utility by buying ________
pencils and ________ pens.

19. When Joe maximizes utility, he finds that his MRS of X for Y is greater than Px/Py, Joe is
not consuming good ______
20. Jane is trying to decide which courses to take next semester. She has narrowed down her
choice to two courses, Econ 1 and Econ 2. Now she is having trouble and cannot decide which of
the two courses to take. It's not that she is indifferent between the two courses, she just cannot
decide. An economist would say that this is an example of preferences are ________

21. An increase in income, holding prices constant, can be represented as a parallel ________ in
the budget line.

22. Assume that food is measured on the horizontal axis and clothing on the vertical axis. If the
price of food falls relative to that of clothing, the budget line will become ________

23. If prices and income in a two-good society double, there is ________ effect on the budget
line

24. A perfectly competitive firm produces where marginal cost _____________________ price,
while a monopolist produces where price _____________________ marginal cost.

25. If the quantity demanded of a certain good responds only slightly to a change in the price of
the good, then the demand for the good is said to be _____________________

26. The following graph illustrates a representative consumer’s preferences for marshmallows
and chocolate chip cookies:

Assume that the consumer has an income of $40, the price of a bag of marshmallows is $2, and
The price of a bag of chocolate chips is $2. The consumer will choose a bundle
_________________ to purchase the optimal bundle of marshmallows and chocolate chips.

27. The labor supply curve is fundamentally a representation of the trade-off people face
between _________________ and _________________.
28. Dallas buys strawberries, and he would be willing to pay more than he now pays. Suppose
that Dallas has a change in his tastes such that he values strawberries more than before. If the
market price is the same as before, then Dallas's consumer surplus would _________________.

29. The graph below illustrates the market for bakers who make homemade breads and breakfast
pastries

If the bakery profession becomes more attractive to young women and men because of a new
reality television show, _____________________ will increase from _____________________
to _____________________.

30. Suppose that a firm operating in perfectly competitive market sells 400 units of output at a
price of $4 each. Average revenue equals $_________________.

31. Given the table below:

Whose demand does not obey the law of demand? __________________

32. Given the graph below:

If 40 units of the goods are bought and sold, then

the marginal value to buyers is ________________
the marginal cost to sellers.
33. Given the graph below:

The per-unit burden of the tax on buyers is $_______________

Multiple choice
1. Assuming that there are ten identical companies producing computer processors by means of
capital (K) and labour (L). All of the companies have the following production function:
Q = 10KL0.5. What is the production function of the entire industry?
a. Q = 10K10L5
b. Q = 100KL0.5
c. Q = 100L0.5
d. None of the above.

2. If the average product decreases, then the marginal product will

a. equal the average product.
b. increase.
c. exceed the average product.
d. decrease.
e. be lower than the average product.

3. Decreasing returns to scale imply that

a. an input increase of more than 10% is required to increase output by 10%.
b. less than twice as much input is required to double the output.
c. more than twice as much an input factor is required to double the output.
d. the isoquants must be linear.

4. Which of the following scenarios leads to lower profits if the input factors are doubled?
a. Increasing returns to scale with constant input prices
b. Constant returns to scale with constant input prices
c. Constant returns to scale with rising input prices
d. All of the above
5. Which of the following statements is FALSE?
a. Rising marginal costs imply decreasing average total costs.
b. If marginal costs are below the average total costs, the latter will decrease.
c. If marginal costs are above the average total costs, the latter will increase.
d. None of the above.

6. Which of the following costs always fall when the output rises?
a. Average costs
b. Marginal costs
c. Fixed costs
d. Average fixed costs if additional output does not imply additional fixed costs
e. Average variable costs

7. What does always rise when output increases?

a. Only the marginal costs.
b. Only the fixed costs.
c. Only the total costs.
d. Only the variable costs.
e. The total and variable costs.

8. If the current output is lower than the profit-maximizing price, which statement is true?
a. The total turnover is lower than total costs.
b. The average turnover is lower than average costs.
c. The average turnover is higher than average costs.
d. The marginal turnover is lower than marginal costs.
e. The marginal turnover is higher than marginal costs.

9. The demand curve of a company in perfect competition

a. is equal to the market demand curve.
b. has a downward slope and is not as flat as the market demand curve.
c. has a downward slope but is flatter than the market demand curve.
d. is horizontally sloped.
e. is vertically sloped.

10. Assume that the average total costs in the short term are a horizontal line and the marginal
costs are positive and constant. As a result of this, fixed costs
a. fall with increasing output.
b. must be positive.
c. must equal nil.
d. change in some way – but we do not how
11. The producer benefit is equal the economic profit if
 a. the average variable costs and fixed costs are minimized.
b. the average fixed costs have been minimized.
c. the marginal costs are equal to the marginal sales.
d. the fixed costs are 0.
e. the marginal sales are equal to the total variable costs.

12. Assume all companies have constant and equal marginal costs in the short term. In that case,
the market supply curve is _________ and the producer benefit is _______ .
a. completely inelastic, equivalent of the fixed costs
b. completely inelastic, equivalent of nil
c. completely elastic, equivalent of the fixed costs
d. completely elastic, equivalent of nil

13. In answering the question, notice the following two statements:

I. If the production costs of a perfectly competitive good fall by 5 euro with each produced unit,
the market price will fall by 5 euro in the short term.
II. If the production costs of a perfectly competitive good fall by 5 euro with each produced unit,
the market price will fall by 5 euro in the long term.
a. I and II are true.
b. I is true, II is false.
c. I is false, II is true.
d. I and II are false.

14. The imposition of an output tax on all companies of an industry in perfect competition will
be reflected in
a. a downward shift of the marginal cost curve of all companies.
b. a downward shift of the average cost curve of all companies.
c. a leftward shift of the supply curve.
d. the entry of new companies into this industry.
e. profits higher than the price increases in this industry

15.
Refer to Figure 4.2.2 above. The effect of a decrease in the price of food, as depicted in the
figure, leads us to believe that:
a. both food and clothing are inferior goods.
b. food in an inferior good and clothing a normal good.
c. food in a normal good and clothing an inferior good.
d. both food and clothing are normal goods.

16. Refer to Figure 4.2.2 above. Starting from point A, after the price of food decreases,, the
quantity of food purchased:
a. decreases.
b. increases, due to the substitution effect but decreases due to the income effect.
c. increases, due to the income effect but decreases due to the substitution effect.
d. increases from A to B due to the income effect, and then to C due to the substitution
effect.

17. An Engel curve:

a. slopes downward for both normal and inferior goods.
b. slopes upward for normal goods and downward for inferior goods.
c. slopes upward for both normal and inferior goods.
d. slopes upward for inferior goods and downward for normal goods.

18.

Refer to Figure 4.2.3 above. The effect of a decrease in the price of food, as depicted in the
figure, leads us to believe that:
a. food is a Giffen good and clothing a normal good.
b. food is an inferior good and clothing a Giffen good.
c. food is a Giffen good and clothing an inferior good.
d. food is a normal good and clothing a Giffen good

19. After a good fall in price, consumers will tend to buy more of the goods that have become
cheaper and less of those goods that are now relatively more expensive. This fact is called:
 a. the income effect.
b. the substitution effect.
c. the wealth effect.
d. the price effect.

20. John Brown's utility of income function is U = log(I+1), where I represent income. From this
information you can say that:
a. John Brown is risk neutral.
b. John Brown is risk loving.
c. John Brown is risk averse.
d. We need more information before we can determine John Brown's preference for risk.

21. The substitution effect of a price decrease:

a. is a shift of the indifference curve indicating higher consumption of both the goods.
b. is a movement along the indifference curve to consume more of the lower priced good.
c. reflects an increase in real income.
d. allows the consumer to obtain a higher level of well being.

22. The substitution effect causes more consumption of a good at a lower price. When does this
statement hold true?
a. This statement is always true regardless of the type of good.
b. This statement is sometimes true for inferior goods, but never for normal goods.
c. This statement is true only for Giffen goods.
d. This statement is always true for normal goods, but never for inferior goods.

23. A case where a consumer buys less of a good when its price falls:
a. gives rise to a positively sloped price-consumption curve.
b. cannot occur if the indifference curves are convex to the origin.
c. refers to an inferior good with a substitution effect that dominates the income effect.
d. is an example of a Giffen good and will produce an upward-sloping market demand
curve.

24. Traci consumes two goods, lemonade and pretzels. Lemonade costs $2 per glass, and she
consumes it to the point where the marginal utility she receives from her last glass of lemonade
is 4. Pretzels cost $3 per bag. The relationship between the marginal utility Tracy get from eating
a bag of pretzels and the number of bags she eats per month is as follows:
Bags of pretzels 1 2 3 4 5 6
Marginal utility 30 20 12 6 2 0

If Traci is maximizing her utility, how many bags of pretzels does she buy each month?
a. 3
 b. 4
c. 5
d. 6

25. Listed in the table are the long-run total costs for three different firms.
Quantity 1 2 3 4 5
Firm A 100 100 100 100 100
Firm B 100 200 300 400 500
Firm C 100 300 600 1,000 1,500
Which firm is experiencing constant returns to scale?
a. Firm A only
b. Firm B only
c. Firm C only
d. Firm A and Firm B only

26. For a particular good, a 5 percent increase in price causes a 15 percent decrease in quantity
demanded. Which of the following statements is most likely applicable to this good?
a. There are many substitutes for this good.
b. The good is a necessity.
c. The market for the good is broadly defined.
d. The relevant time horizon is short.

27. A monopolist's profits with price discrimination will be

a. lower than if the firm charged a single, profit-maximizing price
b. the same as if the firm charged a single, profit-maximizing price.
c. higher than if the firm charged just one price because the firm will capture more
consumer surplus.
d. higher than if the firm charged a single price because the costs of selling the good will
be lower.

28. Given the graph below

What is the consumer’s marginal rate of substitution as she moves from A to B?

 a. 12
b. 6
c. 4
d. 1

29. During the last two days, Chad purchased a latte from two different stores. The table below
shows Chad’s willingness to pay on each day and his consumer surplus from each purchase.
Chad’s Willingness to Pay Chad’s Consumer Surplus
First Day $5.00 $1.25
Second Day $4.00 $0.75
The price that Chad paid for a latte on the first day is
a. $3.75.
b. $6.25.
c. $5.00.
d. $5.50.

30. A 10 percent increase in gasoline prices reduces gasoline consumption by about

a. 6 percent after one year and 2.5 percent after five years.
b. 2.5 percent after one year and 6 percent after five years.
c. 10 percent after one year and 20 percent after five years.
d. 0 percent after one year and 1 percent after five years.

31. Assume that fixed costs are $500, and variable costs are $100 per worker. For this firm, what
are the shapes of the production function and the total-cost curve?
a. Both the production function and total-cost curve are increasing at an increasing rate.
b. Both the production function and total-cost curve are increasing at a decreasing rate.
c. The production function is increasing at an increasing rate, whereas the total-cost
function is increasing at a decreasing rate.
d. The production function is increasing at a decreasing rate, whereas the total-cost
function is increasing at an increasing rate.

32. If the government passes a law requiring buyers of college textbooks to send $5 to the
government for every textbook they buy, then
a. the demand curve for textbooks shifts downward by $5.
b. buyers of textbooks pay $5 more per textbook than they were paying before the tax.
c. sellers of textbooks are unaffected by the tax.
d. All of the above are correct.

33. A monopolistically competitive firm faces the following demand schedule for its product:
Price ($) 30 27 24 21 18 15 12 9 6 3
Quantity 3 6 9 12 15 18 21 24 27 30
The firm has total fixed costs of $9 and a constant marginal cost of $3 per unit. The firm will
maximize profit with
a. 9 units of output.
b. 15 units of output.
c. 21 units of output.
d. 30 units of output.

Exercise 1. John has two job offers when he graduates from college. John views the offers as
identical, except for the salary terms. The first offer is at a fixed annual salary of $50,000. The
second offer is at a fixed salary of $20,000 plus a possible bonus of $60,000. John believes that
he has a 50-50 chance of earning the bonus. What is the expected value of John's income for
each job offer?

Exercise 2. John Gardner is the city planner in a medium-sized southeastern city. The city is
considering a proposal to award an exclusive contract to Clear Vision, Inc., a cable television
carrier. Mr. Gardner has discovered that an economic planner hired a year before has generated
the demand, marginal revenue, total cost and marginal cost functions given below:
P = 28 − 0.0008Q
MR = 28 − 0.0016Q
TC = 120,000 + 0.0006Q2
MC = 0.0012Q
where Q is the number of cable subscribers and P is the price of basic monthly cable service.
Conditions change very slowly in the community so that Mr. Gardner considers the cost and
demand functions to be reasonably valid for present conditions. Mr. Gardner knows relatively
little economics and has hired you to answer the questions listed below.

a. What price and quantity would be expected if the firm is allowed to operate completely
unregulated?

b. Mr. Gardner has asked you to recommend a price and quantity that would be socially efficient.
Recommend a price and quantity to Mr. Gardner using economic theory to justify your answer.

c. Compare the economic efficiency implications of (a) and (b) above. Your answer need not
include numerical calculations, but should include relevant diagrams to demonstrate deadweight
loss.
Exercise 3. Assume an economy in which only two consumer goods exist, 𝑥 and 𝑦 (with the
corresponding prices px and py). There are in total 10 households, 5 from type A with the
corresponding utility function UA (x, y) and 5 from type B with the corresponding utility
function UB(x,y). Both types of households have an income of 15. The utility functions are
defined as follows:
UA (x, y)= x2/3 y 1/3
UB(x,y) = 2/3x + 1/3y

a. Derive the demand functions for good x for both households and calculate the aggregated
market demand for x.

b. Assume that x is produced in a competitive market with marginal costs of 2. What is the
equilibrium quantity? How high is the market elasticity of demand in market equilibrium?
Interpret the elasticity.
c. Categorize commodity x for both types of households as a normal or inferior commodity.

Exercise 4. Bartels and Jaymes are two individuals who one day discover a stream that flows
wine cooler instead of water. Bartels and Jaymes decide to bottle the wine cooler and sell it. The
marginal cost of bottling wine cooler and the fixed cost to bottle wine cooler are both zero. The
market demand for bottled wine cooler is given as:
P = 90 − 0.25Q
where Q is the total quantity of bottled wine cooler produced and P is the market price of bottled
wine cooler.

a. If Bartels and Jaymes where to collude with one another and produce the profit-maximizing
monopoly quantity of bottled wine cooler, how much bottled wine cooler will they produce?
Given the output level that you have just figured out, what price will Bartels and Jaymes charge
for a bottled wine cooler?
b. At the output level in (a), what is the welfare loss?

c. Suppose that Bartels and Jaymes act as Cournot duopolists, what are the reaction functions for
Bartels and for Jaymes? In the long run, what level of output will Bartels produce if Bartels and
Jaymes act as Cournot duopolists? In the long run, what will be the price of wine coolers be if
Bartels and Jaymes act as Cournot duopolists?

Exercise 5. The consumer-equilibrium model can be used to examine the tradeoff between
leisure and labor (or leisure and the goods that can be bought with one’s labor earnings). To do
this, we put weekly hours of leisure (non-work time) on the horizontal axis and the generic
commodity “goods” on the vertical axis (measured in dollars). There are 168 hours in a week, so
the number of leisure hours equals 168 minus the number of hours worked.

a. Suppose that a consumer, Colin, can work as many hours as he wishes during the week for a
wage of $20/hour, but that he needs to sleep at least 42 hours per week (which counts as leisure).
Show the graph of his budget constraint.
b. Colin and his friend Hugh face the same budget constraint, but they have very different
preferences: Colin chooses to work 40 hours per week, but Hugh chooses zero. Show (on
separate graphs) Colin and Hugh’s indifference maps and their respective points of utility-
maximizing equilibrium.

c. Suppose that overtime work (all hours above 40 per week) earns a doubled wage ($40/hour).
Show how the budget constraint changes. Can you be sure that Colin will work overtime? Might
Hugh choose to work now, and if so, will he work overtime?
Exercise 6. The MegaZap Electric Company produces and distributes electricity to
residential customers in the metropolitan area. This monopoly firm is regulated, as are other
investor owned electric companies. The company faces the following demand and marginal
revenue functions:
P = 0.04 – 0.01Q
MR = 0.04 – 0.02Q
MC = 0.005 + 0.0075Q
where Q is in millions of kilowatt hours and P is in dollars per kilowatt hour.

a. How much will MegaZap produce and what price will it charge if it is unregulated?

b. What would be the efficient price and quantity? Is it feasible for a well-informed regulator to
set this price?

c. How much additional social benefit will be achieved through regulation? Regulation is not
free; analysts and monitors must be paid. What is the most that the citizenry should pay to
regulate MegaZap?

Exercise 7. The industry demand curve for a particular market is:

Q = 1800 – 200P.
The industry exhibits constant long-run average cost of $1.50 per unit at all levels of output,
regardless of the market structure. Calculate market output, price (if applicable), consumer
surplus, and producer surplus (profit) for each of the scenarios below. Compare the
economic efficiency of each possibility

a. Perfect Competition

b. Pure Monopoly (Hint: MR = 9 – 0.01Q)

c. First-Degree Price Discrimination