Economics of Markets Practice Exam
Course Introduction
This course explores the fundamental principles and mechanisms that govern the functioning of markets in various economic systems. Students will examine how individual choices, supply and demand dynamics, market equilibrium, and government intervention shape market outcomes. Topics include price formation, competition, market efficiency, market failures, and the impact of externalities. By integrating real-world examples and theoretical frameworks, the course aims to equip students with analytical skills to assess market behavior and understand the broader economic forces influencing decision-making in both local and global contexts.
Recommended Textbook
Intermediate Microeconomics and Its Application 12th Edition by Walter Nicholson
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Page 2
Chapter 1: Economic Models
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Q1) Suppose you can write generic supply and demand curves such that \(\mathrm { Q } _ { \mathrm { S } } = \mathrm { A } + \mathrm { BP }\) and \(Q _ { D } = D + C P\)
.Equilibrium price is given bY.
A) \(( A - D ) / ( C - B )\)
B) \(A - D\)
C) \(( A - D ) / ( B - C )\)
D) \(A\)
Answer: A
Q2) If the production possibilities frontier can be expressed as \(4 X ^ { 2 } + Y ^ { 2 } = 16\) then the point \(X = \sqrt { 3 }\) ; \(Y = 2\) is.
A)outside the production possibilities frontier
B)on the production possibilities frontier
C)inside the production possibilities frontier
D)in the wrong quadrant to be on the graph
Answer: B
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Chapter 2: Utility and Choice
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Q1) Suppose a cup of coffee at the campus coffee shop is $2.50 and a cup of hot tea is $1.25 and that a student's beverage budget is $20 per week.What is the algebraic expression of the budget?
A) \(20 = 2.5 C + 1.25 T\)
B) \(20 = 2.5 C\)
C) \(20 = = 1.5 T\)
D) \(20 = 1.25 C + 2.5 C\)
Answer: A
Q2) Suppose a cup of coffee at the campus coffee shop is $2.50 and a cup of hot tea is $1.25 and that a student's beverage budget is $20 per week.If you were going to write an algebraic expression of this budget line of the form \(\text { Coffee } =
.B would be
A)16
B)2
C)-2
D)-1/2
Answer: D
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Chapter 3: Demand Curves
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Q1) The relationship between changes in income and purchase of a good indicates
A)whether the good is a luxury or necessity.
B)whether the good is normal or inferior.
C)whether the good is a complement or substitute.
D)Both a and b
Answer: D
Q2) If good X is a normal good and its price rises,then quantity demanded
A)may or may not fall.
B)will always fall.
C)will always rise.
D)will remain unchanged.
Answer: B
Q3) With only two goods,if the income effect is in the opposite direction as the substitution effect but the income effect dominates then the good is A)normal
B)inferior but not Giffen
C)Giffen
D)There is not enough information to answer.
Answer: C
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Page 5
Chapter 4: Uncertainty
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Q1) Continuing with the power plant from the previous question,suppose instead the price of coal next month could be $54 or $66 (with equal probability).Now how much would it be willing to pay for an option to buy a ton of coal oil next month at today's price?
A)5
B)4
C)3
D)0
Q2) Probability is sometimes defined as
A)the expected profit of a fair bet.
B)the most likely outcome of a given experiment.
C)the outcome that will occur on average for a given experiment.
D)the relative frequency with which an event will occur.
Q3) Continuing with the family from the preceding question,what is their expected utility?
A) \(.8 \sqrt { 10 } + .2 \times \sqrt { 2 }\)
B) \(.8 \times \sqrt { 10 }\)
C) \(\sqrt { 8 }\)
D) \(\sqrt { 2 }\)
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Chapter 5: Game Theory
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Q1) A subgame-perfect equilibrium is a Nash equilibrium that A)cannot persist through several periods.
B)involves only credible threats.
C)consists only of dominant strategies.
D)is unique.
Q2) The beauty of Nash's equilibrium concept is that
A)all games have one.
B)all games have no more than one.
C)all games have a rich set to choose from.
D)it is a Pareto optimum.
Q3) Consider the game between the teens from the previous question.The pure-strategy Nash equilibrium is (equilibria are)
A)Both Declare.
B)Both Ignore/Rebuff.
C)There are two: in one,both Declare,and in the other,both Rebuff/Ignore.
D)There are two: in both,the teens do the opposite of each other.
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Chapter 6: Production
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Sample Questions
Q1) A fixed-proportion production function has isoquants that are A)almost flat (i.e.,the isoquants are almost straight lines).
B)L-shaped.
C)normally shaped (rectangular hyperbolas).
D)None of the above.
Q2) When isoquants get progressively closer together there is A)increasing returns to scale
B)decreasing returns to scale
C)constant returns to scale
Q3) The marginal rate of technical substitution of labor for capital measures
A)the amount by which capital input can be reduced while holding quantity produced constant when one more unit of labor is used.
B)the amount by which labor input can be reduced while holding quantity produced constant when one more unit of capital is used.
C)the ratio of total labor to total capital.
D)the ratio of total capital to total labor.
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8
Chapter 7: Costs
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Sample Questions
Q1) Suppose the production function for coffee (C)is C = min(B,W),where B = beans in pounds and W = water in gallons. Suppose the price of water is $.10 per gallon and the price of beans is $10 per pound.The expansion path is
A)B = 10W
B)B = .1W
C)B = W
D)-10 = B + W
Q2) The shape of a firm's long-run average cost curve is determined by
A)the degree to which each input encounters diminishing marginal productivity.
B)the underlying nature of the firm's production function when all inputs are able to be varied.
C)how much the firm decides to produce.
D)the way in which the firm's expansion path reacts to changes in the rental rate on capital.
Q3) In the long run
A)all inputs are fixed.
B)all inputs are variable.
C)some inputs are fixed.
D)production levels never change.
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Page 9
Chapter 8: Profit Maximization and Supply
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Q1) Suppose a farmer is a price taker for soybean sales with cost functions given by TC = .1q<sup>2</sup> + 2q + 30
MC = .2q + 2
If P = 6 the profit-maximizing level of profits is
A)10
B)20
C)30 D)-10
Q2) If the demand curve a firm faces shifts to the right,usually
A)it would be impossible to tell whether the marginal revenue curve shifts.
B)the marginal revenue curve would shift to the left.
C)the marginal revenue curve would shift to the right.
D)the marginal revenue curve would not shift.
Q3) Which of the following conditions would result in the short run marginal cost curve not correctly reflecting the supply behavior of a profit maximizing firm?
A)The firm is a price taker.
B)Price exceeds average total cost.
C)The elasticity of demand facing the firm is ?3.
D)the firm can vary several inputs in the short run.
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Page 10
Chapter 9: Perfect Competition in a Single Market
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Sample Questions
Q1) Suppose demand for a good is Q<sub>D</sub> = 100 - P and supply is Q<sub>S</sub> = -20 + P.Suppose that a nationwide quota (of 20)is enforced so that more can be used in a war effort.What is the price?
A)20
B)40
C)60
D)80
Q2) Under perfect competition,if an industry is characterized by positive economic profits in the short run
A)firms will leave the market in the long run and the short-run supply curve will shift outward.
B)firms will enter the market in the long run and the short-run supply curve will shift outward.
C)firms will enter the market in the long run and the short-run supply curve will shift inward.
D)firms will leave the market in the long run and the short-run supply curve will shift inward.
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11
Chapter 10: General Equilibrium and Welfare
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Q1) Suppose two goods (X and Y )are being produced efficiently and that the production of X is always more labor intensive than the production of Y.Production depends only on two factors (capital and labor); these may be smoothly substituted for each other.The total quantities of these inputs are fixed.An increase in the production of X and a decrease in the production of Y will
A)increase the capital-labor ratio in each firm.
B)decrease the capital-labor ratio in each firm.
C)leave the capital-labor ratio for each firm unchanged. D)increase the capital-labor ratio in Y production and decrease the capital-labor ratio in X production.
Q2) Suppose goods X and Y are produced along a production possibilities frontier 4X<sup>2</sup> + Y<sup>2</sup> = 500 and they are perfect substitutes such that U = X + Y.The slope of the production possibilities frontier is \(\frac { - X } { 2 \sqrt { 500 - X ^ { 2 } } }\) .What is this slope at the utility-maximizing point?
A)0
B)-1
C)-4
D)-5
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Chapter 11: Monopoly
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Q1) A monopolist with constant average and marginal cost equal to 8 (AC = MC = 8)faces demand Q = 100 - P,implying that its marginal revenue is MR = 100 - 2Q. Its profit maximizing quantity is
A)8
B)46
C)50
D)92
Q2) Which of the following is not a legal barrier to entry in a monopolized market?
A)A patent.
B)An exclusive franchise.
C)Decreasing average cost.
D)An exclusive license.
Q3) Which of the following is not a technical barrier to entry in a monopolized market? A)A patent.
B)Decreasing average cost.
C)A low cost method of production known only by monopolist.
D)Increasing returns to scale.
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Page 13
Chapter 12: Imperfect Competition
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Q1) Suppose there are two firms,Boors and Cudweiser,each selling identical-tasting nonalcoholic beer.Consumers of this beer have no brand loyalty so market demand can be expressed as \(P = 5 - .001 \left( Q _ { B } + Q _ { C } \right)\) .Boors' marginal revenue function can be written \(M R = 5 - .001 \left( 2 Q _ { B } + Q _ { C } \right)\) and symmetrically for Cudweiser. Boors operates with out-of-date technology and has constant cost of $4 per unit \(( M C = A C = 4 )\) whereas Cudweiser has constant cost of $2 per unit. Assuming thefirmsbehave as Cournot competitors,in the Nash equilibrium,Cudweiser will produce
A)1,333
B)2,333
C)3,333
D)4,333
Q2) In the long run,in the model of monopolistic competition,for a typical firm,price is A)above average cost but equal to marginal cost.
B)above marginal cost but equal to average cost.
C)above marginal cost.
D)equal to marginal cost and equal to or greater than average cost.
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Chapter 13: Pricing in Input Markets
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Q1) In the study of labor supply,"leisure" refers to
A)time spent sleeping.
B)time spent doing absolutely nothing (except breathing).
C)time spent in one's place of residence.
D)time spent that is not spent in market work.
Q2) The size of the reduction in quantity of labor hired by a firm due to an increase in the wage rate depends upon all of the following except
A)what percentage of total costs are made up of labor costs.
B)how much quantity demanded in the output market will be reduced by a higher price.
C)the capital to labor ratio before the wage increase.
D)how easily other inputs can be substituted for labor.
Q3) If a firm is a monopsonistic hirer of labor,
A)its marginal expense for labor is greater than the market wage.
B)its marginal expense for labor is equal to the market wage.
C)its marginal expense for labor is less than the market wage.
D)it is a price taker in the labor market.
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Chapter 14: Capital and Time
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Sample Questions
Q1) Draw a two period budget line where the borrow/lending rate of interest,r,allows consumers to choose consumption in each of the two periods.C1 and C2 given their anticipated income on two periods,Y1 and Y2.The one point on the budget line not affected by the interest rate is
A) \(C _ { 1 } = Y _ { 1 } ; C _ { 2 } = Y _ { 2 }\)
B)the horizontal intercept.
C)the vertical intercept
Q2) For a given interest rate,r,which of the following expressions is smallest?
A)1 + r.
B)(1 + r/2)2.
C)(1 + r/12)12
D)(1 + r/365)365.
Q3) Accelerated depreciation laws may increase firms' investment in equipment because
A)machines will wear out more rapidly.
B)profits will be increased.
C)the rental rate on capital will be lowered.
D)the price of machines will fall.
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Chapter 15: Asymmetric Information
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Sample Questions
Q1) Concerning auctions,what is the definition of a "common-values setting"?
A)Bids are submitted using open outcries.
B)Bids are submitted simultaneously,and the highest is selected as the winner.
C)Bidders value the object the same,but are uncertain as to what that value is.
D)Bids are submitted by syndicates of cooperating bidders.
Q2) Which of the following are potential problems faced by a firm that wants to provide warranties for its lawnmowers? (Select all that apply.)
A)A moral hazard problem might arise,in that homeowners may be less careful with the mower,since they can always return it if it breaks.
B)The warranty may select for homeowners that don't have a lot of mowing to do,or have smooth lawns,because they won't have to pay as much for a warranty.
C)The warranty will increase demand by assuring customers of the product's quality.
D)The warranty will reduce demand because only makers of low-quality goods would need to reassure consumers in this way.
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Chapter 16: Externalities and Public Goods
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Q1) A nonrival good is a good that
A)is produced by a monopoly.
B)is produced by a cartel.
C)can provide benefits to additional users at a zero marginal cost.
D)is sold in a single market.
Q2) A nonexclusive good is a good that
A)is sold in low price markets.
B)is impossible to keep people from enjoying the benefits the good provides.
C)is produced by a perfectly competitive firm.
D)is produced at the lowest possible cost.
Q3) The opportunity cost doctrine suggests that which of the following are not costs of government educational programs?
A)The wages of teachers.
B)The foregone earnings of participants.
C)Stipends paid to participants.
D)Materials used by students.
Q4) Left to their own,private markets tend to
A)under-allocate resources to public goods.
B)allocate the economically efficient amount of resources to public goods.
C)over-allocate resources to public goods.
Page 18
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Chapter 17: Behavioral Economics
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Q1) Consider the same ultimatum game as in the previous question but consider some new preferences reflecting a desire for fairness. In particular,now assume players get 1 util per dollar earned but lose 1/4 util for the absolute difference between their monetary payoffs. Which of the following is an offer that arises in a subgame-perfect equilibrium with these new preferences?
A)1.
B)2.
C)4.
D)5.
Q2) Return to the case of Jan,the hyperbolic discounter from the previous question. Suppose she can sign a contract that requires her to give up money equivalent to a loss of X utils if she does not undertake the action. Assume she does not behave consistent with her plans without this contract. How high would the contractual value of X have to be to prevent her inconsistency?
A)C - B/2.
B)B.
C)C.
D)B + C.
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