Question 1

1. A firm’s cost of production is £12 per unit of output. If P is the price of the output good and Q is the number of units produced, which of the following statements is correct?

   • choice a. Point (Q, P) = (2,000, 20) is on the isoprofit curve representing the profit level £20,000.
   • choice b. Point (Q, P) = (2,000, 20) is on a lower isoprofit curve than point (Q, P) = (1,200, 24).
   • choice c. Point (Q, P) = (5,000, 12) is not on any isoprofit curve.
   • choice d. Points (Q, P) = (2,000, 20) and (4,000, 16) are on the same isoprofit curve. #ans

Question 2

2. Consider a firm whose unit cost (the cost of producing one unit of output) is the same at all output levels. Which of the following statements are correct?

   • choice a. Each isoprofit curve depicts the firm’s profit for different outputs for a given price of the output good.
   • choice b. Isoprofit curves can be upward-sloping when at high profit levels.
   • choice c. Every price-quantity combination lies on an isoprofit curve. #ans
   • choice d. Isoprofit curves slope downward when the price is above the unit cost. #ans

Question 3

3. The table represents market demand Q for a good at different prices P. \(~\)

   	X1	X2	X3	X4	X5	X6	X7	X8	X9	X10	X11
   Quantity	Q	100	200	300	400	500	600	700	800	900	1000
   Price	P	270	240	210	180	150	120	90	60	30	0

• The firm’s unit cost of production is £60. Based on this information, which of the following is correct?

  • choice a. At Q = 100, the firm’s profit is £20,000.
  • choice b. The profit-maximizing output is Q = 400. #ans
  • choice c. The maximum profit that can be attained is £50,000.
  • choice d. The firm will make a loss at all outputs of 800 and above.

Question 4.

4. Which of the following statements is correct?

   • choice a. If a firm’s technology exhibits constant returns to scale, doubling the inputs leads to doubling of the output level. #ans
   • choice b. If a firm’s technology exhibits decreasing returns to scale, doubling the inputs leads to less than doubling of the output. #ans
   • choice c. If a firm’s technology exhibits economies of scale, costs per unit will fall as the firm expands its production. #ans
   • choice d. If a firm’s technology exhibits diseconomies of scale, doubling the inputs leads to less than doubling of the output level. #ans

Question 5.

5. Consider a firm with fixed costs of production. Which of the following statements about its average cost (AC) and marginal cost (MC) is correct?

   • choice a. When AC = MC, the AC curve has a zero slope. #ans
   • choice b. When AC < MC, the AC curve is upward-sloping. #ans
   • choice c. When AC < MC, the AC curve is downward-sloping.
   • choice d. The MC curve cannot be horizontal.

Question 6.

6. Suppose that the unit cost of producing a pound of cereal is $2, irrespective of the level of output. (This means there are no fixed costs, that is, costs that are present for any level of output, including zero.) Which of the following statements is correct?

   • choice a. The total cost curve is a horizontal straight line.
   • choice b. The average cost curve is downward-sloping.
   • choice c. The average cost and marginal cost are horizontal lines. #ans
   • choice d. The average cost and the marginal cost curves coincide. #ans

Question 7

• Figure 1 depicts the demand curve for Beautiful Cars, together with the marginal cost and isoprofit curves. The quantity-price combination at point E is (Q, P) = (32, 5,440). The average cost of producing 50 cars is the same as the average cost of producing 32. Suppose that the firm keeps the price at P = $5,440 but now produces 50 cars instead of 32. Which of the following is correct?

Figure 1. Price to Maximize Profit

- choice a. The firm will now sell all 50 cars at $5,440.
- choice b. The firm can choose to set prices as they are producing differentiated product. #ans
- choice c. The firm’s profit remains the same.
- choice d. The firm’s profit is now reduced. #ans

Question 8

• Figure 1 depicts the demand curve for Beautiful Cars, together with the marginal cost and isoprofit curves. At point E, the quantity-price combination is (Q, P) = (32, 5,440) and the profit is $63,360.

Suppose that the firm chooses instead to produce Q = 32 cars and sets the price at P = $5,400. Which of the following statements is correct?

- choice a. The profit remains the same at $63,360.
- choice b. The profit is reduced to $62,080. #ans
- choice c. The average cost of production is $3,400.
- choice d. The firm is unable to sell all the cars.

Question 9

• Figure 1 depicts the demand curve for Beautiful Cars, together with the marginal cost and isoprofit curves.

Suppose that the firm decides to switch from P* = $5,440 and Q* = 32 to a higher price, and chooses the profit-maximizing level of output at the new price. Which of the following statements is correct?

- choice a. The quantity of cars produced is reduced. #ans 
- choice b. The marginal cost of producing an extra car is higher.
- choice c. The total cost of production is higher.
- choice d. The profit is increased due to the new higher price.

Question 10

• This Figure 2 below shows the marginal cost and marginal revenue curves for Beautiful Cars. Which of the following statements is correct, based on the information shown?

Figure 2. Profit Maximizing Price and Quantity

- choice a. When Q = 40, the marginal cost is greater than the marginal revenue so the firm’s profit must be negative.
- choice b. Revenue is greater when Q = 10 than if Q = 20.
- choice c. If the firm is producing at Q=40, the firm can increase profit by producing at Q = 30. #ans
- choice d. Profit is greater when Q = 10 than when Q = 20. #ans

Question 11. Choose the correct answer(s)

• A shop sells 20 hats per week at $10 each. When it increases the price to $12, the number of hats sold falls to 15 per week. Which of the following statements are correct?

  • choice a. When the price increases from $10 to $12, demand increases by 25%.
  • choice b. A 20% increase in the price causes a 25% fall in demand. #ans
  • choice c. The demand for hats is inelastic.
  • choice d. The elasticity of demand is approximately 1.25. #ans

Question 12. Choose the correct answer(s)

• Based on this figure, which of the following statements are correct?

  • choice a. At E, demand curve D₁ is less elastic than D₂. #ans
  • choice b. The elasticity is the same at A and C.
  • choice c. At E, both demand curves have the same elasticity.
  • choice d. The elasticity is higher at B than at E.

Figure 3.

Question 13. Choose the correct answer(s)

• Suppose that in a small town a multinational retailer is planning to build a new superstore. Which of the following arguments could be correct?

  • choice a. The local protestors argue that the close substitutability of some of the goods sold between the new retailer and existing ones means that the new retailer faces inelastic demand for those goods, giving it excessive market power.
  • choice b. The new retailer argues that the close substitutability of some of the goods implies a high elasticity of demand, leading to healthy competition and lower prices for consumers. #ans
  • choice c. The local protestors argue that once the local retailers are driven out, there will be no competition, giving the multinational retailer more market power and driving up prices. #ans
  • choice d. The new retailer argues that most of the goods sold by local retailers are sufficiently differentiated from its own goods that their elasticity of demand will be high enough to protect the local retailers’ profits.

Question 14. Choose the correct answer(s)

• Which of the following is true about the deadweight loss?

  • choice a. Deadweight loss is a consequence of market faliure. #ans
  • choice b. Deadweight loss is larger if the firm faces a relatively inelastic demand curve.
  • choice c. Deadweight loss is smaller if the firm faces a relatively inelastic demand curve. #ans
  • choice d. Deadweight loss occurs when price that is set is greater than the marginal cost and as the profit margin increases, the deadweight loss increases further.

Question 15. Choose the correct answer(s)

• Policy makers have used cigarette taxes to curb smoking. However, cigarettes are an inelastic product. This means that

  • choice a. An increase in cigarette taxes will lead to a small reduction in sales. #ans
  • choice b. An increase in cigarette taxes will most likely increase tax revenue. #ans
  • choice c. An increase in cigarette taxes will lead to a large reduction in sales.
  • choice d. An increase in cigarette taxes will most likely decrease tax revenue.

Question 16.

• Consider the supply for second hand books among students. It depends on your reservation price, which tells about the value you attach to the book as a seller. If market price of the book for your course is $15, the quantity you are willing to sell is ___________
  • choice a. 10
  • choice b. 20
  • choice c. 30
  • choice d. 32

Figure 4. Shows demand curve

Figure 5. Shows supply curve

Question 17.

• As a student representative, one of your roles is to organize a second-hand textbook market between the current and former first-year students. After a survey, you estimate the demand and supply curves to be the ones shown in Figures 1 and 2. For example, you estimate that pricing the book at $7 would lead to a supply of 20 books and a demand of 26 books. Which of the following statements is correct?

  • choice a. A rumour that the textbook may be required again in Year 2 would change the demand curve, shifting it downwards.
  • choice b. Doubling the price to $14 would double the supply.
  • choice c. A rumour that the textbook may no longer be on the reading list for the first-year students would change the demand curve, shifting it downwards. #ans
  • choice d. Demand would double if the price were reduced sufficiently.

Question 18

• The diagram shows the demand and the supply curves for a textbook. The curves intersect at (Q, P) = (24, 8). Which of the following is correct?

Figure 6. Demand and Supply together

- choice a. At price $10, there is an excess supply for the textbook. #ans
- choice b. At $8 (equilibrium price), some of the sellers have an incentive to increase their selling price to $9.
- choice c. At $10, the market clears. 
- choice d. 20 books will be sold in total.

Question 19 Choose the correct answer(s)

Figure 4 shows a price-taking bakery’s marginal and average cost curves, and its isoprofit curves. The market price for bread is P*= €2.35. Which of the following statements is correct?

Figure 7. Firm’s decision

- choice a. The firm’s supply curve is horizontal.
- choice b. At the market price of €2.35, the firm will supply 62 loaves, at the point where the firm makes zero profit.
- choice c. At any market price, the firm’s supply is given by the corresponding point on the average cost curve.
- choice d. The marginal cost curve is the firm’s supply curve. #ans  

Question 20

There are two different types of producers of a good in an industry where firms are price-takers. The marginal cost curves of the two types are given below:

Figure 8

Type A is more efficient than Type B: for example, as shown, at the output of 20 units, the Type A firms have a marginal cost of \(\$2\), as opposed to a marginal cost of \(\$3\) for the Type B firms. There are 10 Type A firms and 8 Type B firms in the market. Which of the following statements is correct?

- choice a. At price $2, the market supply is 450 units.
- choice b. The market will supply 510 units at price $3. #ans  
- choice c. At price $2, the market’s marginal cost of supplying one extra unit of the good will depend on the type of the firm that produces it.
- choice d. With different types of firms, we cannot determine the marginal cost curve for the market.

Question 21. Choose the correct answer(s)

• Figure 9 shows the equilibrium of the bread market to be 5,000 loaves per day at price €2. A year later, we find that the market equilibrium price has fallen to €1.50. What can we conclude?

Figure 9

- choice a. The fall in the price must have been caused by a downward shift in the demand curve.
- choice b. The fall in the price must have been caused by a downward shift in the supply curve.
- choice c. The fall in price could have been caused by a shift in either curve. #ans
- choice d. At a price of €1.50, there will be an excess demand for bread.

Question 22

• Which of the following statements are correct?

  • choice a. A fall in the mortgage interest rate would shift up the demand curve for new houses. #ans
  • choice b. The launch of a new Sony smartphone would shift up the demand curve for existing iPhones.
  • choice c. A fall in the oil price would shift up the demand curve for oil.
  • choice d. A fall in the oil price would shift down the supply curve for plastics. #ans

Question 23

• In Figure 10, the market equilibrium output and price of the bread market is shown to be at (Q, P) = (5,000, €2). Suppose that the mayor decrees that bakeries must sell as much bread as consumers want, at a price of €1.50. Which of the following statements are correct?

Figure 10

- choice a. The consumer and producer surpluses both increase.
- choice b. The producer surplus increases but the consumer surplus decreases.
- choice c. The consumer surplus increases but the producer surplus decreases. #ans
- choice d. The total surplus is higher than at the market equilibrium. 

Question 24

• Which of the following statements about a competitive equilibrium allocation are correct?

  • choice a. Quantity demanded equals quantity supplied #ans
  • choice b. No buyer’s or seller’s surplus can be increased without reducing someone else’s surplus.
  • choice c. The allocation must be Pareto efficient.
  • choice d. The total surplus from trade is minimized.

Question 25.

• For a competitive firm that is a price taker,

  • choice a. the profit maximization happens at MC=P* #ans
    
  • choice b. the firms demand curve is flat
    
  • choice c. the average cost at the profit maximization point is equal to price
  • choice d. the price taking behavior ensures that the firm is never in loss.

Question 26.

• Figure 11 shows the demand and supply curves for salt, and the shift in the supply curve due to the implementation of a 30% tax on the price of salt. Which of the following statements are correct?

Figure 11

- choice a. In the post-tax equilibrium, the consumers pay P₁ and the producers receive P*.
- choice b. The government’s tax revenue is given by (P* – P0)Q1.
- choice c. The government's tax revenue is given by (P1-P0)Q1. #ans  
- choice d. As a result of the tax, the consumer surplus is reduced by (1/2)(Q1 + Q*)(P1 – P*). 

Question 27

27. A firm’s cost of production is $10 per unit of output. If P is the price of the output good and Q is the number of units produced, which of the following statements is correct?

    • choice a. Point (Q, P) = (2,000, 20) is on the isoprofit curve representing the profit level £20,000.
    • choice b. Point (Q, P) = (2,000, 20) is on a lower isoprofit curve than point (Q, P) = (1,200, 24).
    • choice c. Points (Q, P) = (2,000, 20) and (1,000, 30) are on the same isoprofit curve. #ans
    • choice d. Point (Q, P) = (5,000, 12) is not on any isoprofit curve.