Name: _________________Class:________Date: __________ ID: _________
Multiple Choice
Identify the letter of the choice that best completes the statement or answers the question.
____ 1. In general, marginal revenue cannot be
a. equal to marginal cost.
b. equal to average cost.
c. lower than the price.
d. greater than the price.
____ 2. An increases from £ 1.00 to £.1.10 in the price of milk has caused the demand for milk to
decrease from 1200 to 900 pints. The demand for milk is
a. elastic.
b. inelastic.
c. unit elastic.
d. infinitely elastic.
____ 3 When total revenue is largest, the elasticity of demand is equal to
a. one.
b. zero.
c. infinity.
d. none of the above is correct.
____ 4. In monopolistic markets
a. firms have no market power.
b. the degree of market power is always infinite.
c. the degree of market power depends on whether firm ownership is more or less
concentrated.
d. the degree of market power depends on the elasticity of demand.
____ 5. In a prisoners’ dilemma, cooperation can be sustained if prisoners
a. are altruistic.
b. are rational and self-interested.
c. adopt dominant strategies.
d. can communicate before making their choice.
Table 1
PRICE
£12
£10
£8
£6
£4
£2
QUANTITY DEMANDED
0
4
8
12
16
20
____ 6. A monopolist faces the linear demand schedule represented in Table 1. The monopolist has a
constant unit cost and no fixed cost. If the unit cost increases from £2 to £4, the monopoly price
a. does not change.
b. increases by £1.
c. increases by £2.
d. is indeterminate.
____ 7. Consider again a monopolist that faces the demand schedule in Table 1. The constant unit cost
is equal to £2. The market is a natural monopoly if
a. there are no fixed cost.
b. the fixed cost is equal to £100.
c. the fixed cost is equal to £30.
d. the fixed cost is equal to £ 3.
____ 8. Under monopoly, an increase in the fixed cost
a. increases the equilibrium price.
b. does not affect the equilibrium price.
c. decreases the equilibrium price.
d. may either increase or decrease the equilibrium price.
____ 9. The efficient scale of a firm is the level of output such that
a. price equals marginal cost.
b. price equals average cost.
c. marginal cost equals average cost.
d. marginal cost equals marginal revenue.
____ 10. The consumer surplus is
a. the extra price a consumer pays under monopoly.
b. the difference between a consumer’s willingness to pay and what he pays.
c. the amount a consumer saves by not purchasing the good.
d. the profit a consumer makes by reselling the good in a secondary market.
____ 11. In oligopoly, for any given percentage increase in a firm’s output, the price effect is
a. decreasing in the number of firms.
b. increasing in the number of firms.
c. always equal to zero.
d. independent of the number of firms but not necessarily zero.
____ 12. In a monopolistically competitive market, which of the following statements is false?
a. Firms have market power in the short run.
b. Firms operate at the efficient scale.
c. There is free entry and exit.
d. The products are differentiated.
____ 13. Refer to Figure 1. The fiscal revenue raised in this market is
a. £300.
b. £250.
c. £200.
d. £160.
D
price
D after
S
tax
£12
£9
£7
D
£4
S
D after tax
40
50
quantity
Figure 1
____ 14. The excess burden (or deadweight loss) of taxation is lowest
a. when supply is rigid.
b. when supply is elastic.
c. when the tax is levied on the sellers.
d. when the tax is levied on the buyers.
price
£16
D
S
£4
S
D
24
quantity
Figure 2
____ 15. Refer to Figure 2. At the equilibrium price, the sum of producers’ and consumers’ surplus is
a. £96.
b. £144.
c. £192.
d. £212.
____ 17. A tax placed on the sellers of a good
a. hurts only the sellers.
b. always hurts the sellers more than the buyers.
c. always hurts the sellers less than the buyers.
d. may hurt the sellers more or less than the buyers.
____ 18. If an increase in the consumption of good A decreases the demand for good B, the two goods
are
a. inferior.
b. normal.
c. substitutes.
d. complements.
price
A
marginal cost
P1
C
B
D
quantity
Figure 3
____ 19. Refer to Figure 3. When the price is P1, the total gain from trade (i.e., the sum of producers’
and consumers’ surplus) is
a. A.
b. A + B.
c. A + B + C.
d. A + B + D.
a.
b.
c.
d.
Figure 4
____ 20. Which of the budget sets in Figure 4 may represent a situation in which the consumer faces
quantity discounts (i.e., lower prices for large purchases)?
a.
b.
c.
d.
Figure 5
____ 21. Which of the indifference curves in Figure 5 may represent the case in which the goods are
perfect substitutes?
____ 22. Consider a short run production function with only one variable input. If the marginal
productivity of the input is initially increasing and then decreasing, the marginal cost curve is
a. U-shaped.
b. inverse U-shaped.
c. increasing.
d. flat.
____ 23. If the technology of a firm exhibits constant returns to scale, the firm’s long run average cost
curve is
a. flat
b. increasing
c. U-shaped.
d. inverse U-shaped.
____ 24. If a farmer started raising pigs, his profits would increase by £3,500. However, the stink
would negatively affect a nearby hotel, the profit of which would decrease by £5,000. According to
Coase’s theorem
a. the farmer would raise pigs irrespective of his legal rights.
b. the farmer would raise pigs only if he is legally entitled to.
c. the farmer would not raise pig and would not be compensated by the owner of the hotel,
irrespective of his legal rights.
d. the farmer would not raise pigs but he would be compensated by the owner of the hotel if
he is legally entitled to raise pigs.
____ 25. Which of the following statements is true?
a. Tap water is a public good as it is supplied by a public agency.
b. Encrypted TV channels are not public goods as they are not free.
c. Encrypted TV channels are not public goods as they are rival.
d. Education is a public good as it increases the students’ human capital.
____ 26. In George Akerlof’s “market for lemons,” market inefficiency is due to
a. the market power of the sellers of second-hand cars.
b. uncertainty over the quality of second-hand cars.
c. the irrational behaviour of the buyers of second-hand cars.
d. asymmetric information over the quality of second-hand cars.
____ 27. Consider a two-country, two-good world with only one factor of production. If country A is
twice as productive as country B in the production of both goods, then opening up trade will
a. benefit both countries.
b. disrupt the economy of country B.
c. have no effects.
d. create a trade surplus in country A and a trade deficit in country B.
good 2
A
B 6
Figure
good 1
____ 28. Refer to the production possibility frontier in Figure 6. A technological advance in the
production of good 1 will
a. shift point B right, leaving point A unchanged.
b. shift point A up, leaving point B unchanged.
c. shift point B right and point A up .
d. shift point B right and point A down.
____ 29. Consider an indivisible public good. There are three potential consumers of the good, whose
willingness to pay are, in increasing order, £10, £15 and £ 25. To maximise social benefits, the good
should be produced if the total cost of production is
a. less than £50
b. less than £10.
c. less than £25.
d. greater than £10 but less than £25.
____ 30. A household consumes two goods, 1 and 2. If the household’s income doubles, the
household will necessarily
a. double the consumption of both goods.
b. increase the consumption of both goods.
c. increase the consumption of at least one good.
d. it’s impossible to tell without knowing the household’s preferences.
A. What is the meaning of short and long run in economics? Discuss two problems of your
choice in which the distinction between short- and long-run matters.
B. First efficiency, then equity. Discuss.
C. The Browne report suggests abolishing the cap on university fees. What is the effect of
abolishing a price cap in a perfectly competitive market? What special features of the market
for higher education are missing in the simple textbook analysis of price caps?
D. What is market power? How can it be measured? What are the key determinants of the degree
of market power?