Page 1

1. Suppose in a market with Q

d
= 100 - 5P and Q
s
= 5P, the government imposes a price
floor of $15. If the government is required to purchase any excess supply at the price
floor, how much will the government have to pay to purchase the excess in this market?
A) Nothing; there is no surplus
B) $1,000
C) $1,500
D) $750


2.
A cross price elasticity of demand for product
A
with respect to the price of
product
B
of 0.3 means that
A) an increase in the price of A by 10 percent gives rise to an increase in quantity
demanded of B by 3 percent.
B) an increase in the price of B by 10 percent gives rise to an increase in the quantity
demanded of A by 3 percent.
C) an increase in the price of B by 10 percent gives rise to a decrease in the quantity
demanded of A by 3 percent.
D) an increase in the price of A by 10 percent gives rise to a decrease in the quantity
demanded of B by 3 percent.


3. Factors that could cause a demand curve to shift to the left include all of the following
except
A) a change in preferences away from the product in question.
B) an increase in the price of substitute products.
C) a growing awareness of a health risk associated with the product.
D) a decrease in the general level of income in the country.


4. Suppose that the market for computers is initially in equilibrium. Further suppose that
there is an increase in the price of computer software. Which of the following
accurately describes the new equilibrium in the computer market?
A) The equilibrium price will rise; the equilibrium quantity will fall.
B) The equilibrium price will rise; the equilibrium quantity will rise.
C) The equilibrium price will fall; the equilibrium quantity will fall.
D) The equilibrium price will fall; the equilibrium quantity will rise.



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5. Marginal utility is
A) the slope of the total utility function.
B) the slope of a ray from the origin to the total utility function.
C) always less than average utility.
D) always greater than average utility.


6. Identify the truthfulness of the following statements.
I. Diminishing marginal utility and increasing total utility are incompatible with
each other.
II. When marginal utility is negative, total utility is decreasing.
A) Both I and II are true.
B) Both I and II are false.
C) I is true; II is false.
D) I is false; II is true.


7. Suppose that MRS
x, y
= 10.
A)
The consumer is willing to substitute 10 units of
x
for 1 unit of
y
to leave utility
unchanged.
B)
The consumer is willing to substitute 10 units of
y
for 1 unit of
x
to leave utility
unchanged.
C)
Regardless of prices, the consumer will consume only
y
.
D) Regardless of prices, the consumer will consume only
x
.


8. Two goods are perfect substitutes. The marginal rate of substitution for these two
goods is:
A) parabolic.
B) exponential.
C) a constant.
D) shows diminishing marginal utility.


9. When total utility, U(x) is maximized, marginal utility, MU
x
is
A) constant.
B) rising.
C) maximized.
D) zero.



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10. If indifference curves are upward sloping, this violates the assumption that preferences
A) are complete
B) are transitive.
C) require that more to be better.
D) Upward sloping indifference curves do not violate any of the assumptions about
preferences.


11.
Suppose the marginal rate of substitution of
x
for
y
is given by
MRS
x, y
= 5x/7y

A) The indifference curves will be bowed away from the origin.
B) The indifference curves will be bowed in towards the origin.
C) The indifference curves will be straight lines.
D) It is not possible to tell the shape of the indifference curves with only this
information.


12. An agent consumes goods x and y, with prices P
x
= $5 per unit and P
y
= $8 per unit.
The consumer's income is I = $48. The government imposes a tax of $1 per unit on
good x. What is the new equation for the budget constraint?
A) y = 6 (5/8)x
B) y = 6 - .75x
C) y = 8 (6/8)x
D) y = 48 8x


13. Let I be the income of the consumer, P
x
be the price of good x and P
y
be the price of
good y. If good
x
is measured along the horizontal axis and good
y
is measured
along the vertical axis, then the '
x
-intercept measures the maximum amount oI good
x
that the consumer can afford, which can be expressed as
A)
x
y
P
P

B)
y
I
P

C)
x
I
P

D)
x
P
I




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14. A corner point solution is always the optimum for a consumer when
A) a unique point of tangency exists between the consumer's indifference curve and
the budget line
B) the consumer has straight line (constant slope) indifference curves
C) there is no unique point of tangency between the consumer's indifference curves
and the budget line and the consumer does not have straight line indifference
curves.
D) the consumer is indifferent to both goods equally.


15. Suppose that MU
x
= 10 and MU
y
= 20. Further suppose that the consumer's budget
constraint can be expressed as 20x + 10y = 400. For this consumer, the optimal amount
of good
x
to buy would be
A) 5.
B) 0.
C) 20.
D) 40.


16. The tangency condition for the optimal choice for a consumer is given by
A) MRS
x,y
= P
y
/P
x

B) MU
x
/MU
y
= 1
C) MRS
x,y
= P
x
/P
y

D) MU
x
/MU
y
= P
y
/P
x



17. If a consumer's preferences for two goods, say food and clothing, are such that as
income decreases, consumption of food increases but consumption of clothing
decreases, we can say that
A) food and clothing are inferior goods.
B) food is a normal good and clothing is an inferior good.
C) food is an inferior good and clothing is a normal good.
D) food and clothing are both normal goods.


18. An Engel curve for good
x
describes
A) how the consumption of good
x
varies as the price of good
x
changes.
B) how the consumption of good
x
varies as the consumer's income changes.
C)
how the consumption of good
x
varies as the consumption of good
y
changes.
D) how the consumption of good
x
varies as price-consumption curve changes.



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19. Suppose when the consumer's income rises by 100%, the consumer's consumption of
good
x
only increases by 1%. We can infer that the consumer's income elasticity for
good
x
is
A) 0.01
B) 1
C) 0.01
D) 1


20. The consumer's demand curve can be obtained analytically by solving which two
equations?
A)
y x y x
P P MU MU
;
U U
where
U
is the initial level of utility.
B)
y x y x
P P MU MU
;
I Y P X P
y x


C) I Y P X P
y x

;
U U
where
U
is the initial level of utility.
D)
y x y x
P P MU MU
;
U U
where
U
is the final level of utility.


21.
Suppose the consumer's utility function is given by
( , ) U x y xy
where

2 2
x y
y x
MU MU
x y


The equation for this consumer's demand curve for
x
is
A) x I

B)
2
x
I
x
P

C)
2
x
x P

D)
4
x
I
x
P

22. Suppose the consumer's utility function is given by U(x,y) = xy + y where
MU
x
= y MU
y
= x+1
The equation for this consumer's demand curve for
x
when I > P
x
is
A) x
d
= 0
B)
x
d
=
2
x
I
P

C)
x
d
=
x
P
I
2
-
1
2

D) x
d
= 1/2



Page 6
23. A positively-sloped Engel curve implies a(n)
A) inferior good.
B) normal good.
C) Giffen good.
D) marginal good.


24. The substitution effect is
A) the change in the amount of the good consumed holding the level of income
constant.
B) the change in the amount of the good consumed as the price of the good changes
holding income constant.
C) the change in the amount of the good consumed as the price of the good changes
holding utility constant.
D) the change in the amount of the good consumed holding relative prices constant
and changing the level of income.


25. The income effect is
A) the change in the amount of the good consumed holding the level of income
constant.
B) the change in the amount of the good consumed as the price of the good changes
holding income constant.
C) the change in the amount of the good consumed as the price of the good changes
holding utility constant.
D) the change in the amount of the good consumed as the consumer's utility changes
holding the price of the good constant.


26. Giffen goods
A) are normal goods with a negative income effect.
B) are inferior goods with an income effect that is smaller in magnitude than the
substitution effect.
C) are inferior goods with an income effect that is greater in magnitude than the
substitution effect.
D) have downward sloping demand curves.



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27. Which of the following statements is false?
A) If the price of a good falls, the substitution effect will always induce the consumer
to consume at least as much of the good as before the price change.
B) All Giffen good are inferior goods.
C) As the price of an inferior good increases, the income effect will induce the
consumer to consume less of the good.
D) As the price of a normal good falls, the income effect will result in an increase in
consumption of the good.


28. In order to identify a consumer's demand curve from an optimal choice diagram we
A) change the consumer's income, holding the prices of both goods constant, and
identify the baskets the consumer chooses with each income level.
B) change the price's of both goods, holding income constant, and identify the baskets
the consumer chooses with each price level.
C) change the price of one good, holding income and the price of the other good
constant, and identify the baskets the consumer chooses with each price level.
D) change the price of one good and then change the income level so that the
consumer achieves the same level of utility as before the price change and then
identify the optimal consumption baskets at each price level.


29. The production set represents
A) the set of all technically feasible combinations of inputs and outputs.
B) the technically efficient combinations of inputs and outputs.
C) the maximum output the firm can produce from a given level of inputs.
D) the minimum amounts of inputs necessary to produce a given level of output.


30. When labor is the only input to the production function, why must it be true that when
the marginal product of labor is greater than the average product of labor, the average
product of labor is increasing and vice versa?
A) When the marginal product of labor is above the average product of labor, an
additional unit of labor will produce a greater marginal product than average, thus
raising the average.
B) When the marginal product of labor is below the average product of labor, an
additional unit of labor will produce a greater marginal product than average, thus
raising the average.
C) When the marginal product of labor is above the average product of labor, an
additional unit of labor will produce a smaller marginal product than average, thus
reducing the average.
D) When the marginal product of labor is above the average product of labor, an
additional unit of labor will produce a zero marginal product.



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31. If marginal product is greater than average product
A) total product must be increasing.
B) marginal product must be decreasing.
C) marginal product must be increasing.
D) average product may be increasing or decreasing.


32. The expression given below explains:


A) Product hill
B) Marginal product of labor
C) Non-marginal product
D) Total product


33.
The
, L K
MRTS

A)
K
L
MP
MP

B)
L
K
'
'

C)
L
K
MP
MP

D)
K
L
MP
MP

34.
Consider a production function of the form
2 2
Q K L
with marginal products MP
K
=
2KL
2
and MP
L
= 2K
2
L. What is the marginal rate of technical substitution of labor for
capital at the point where K = 5 and L = 5?
A) 5
B) 25
C) 50
D) 1



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35. The slope of the isoquant can be expressed as
A) the ratio of the input prices.
B) the ratio of the inputs.
C) the ratio of the marginal productivities of the inputs.
D) the sum of the marginal productivities of the inputs.


36.
When a production function can be expressed as
^ ` min , Q aK BL
, the relationship
between capital and labor in the production function is that
A) capital and labor are perfect substitutes, and the isoquants are linear.
B) capital and labor must be combined in fixed proportions, and the isoquants are
L-shaped.
C) capital and labor are easily substituted, and the isoquants are convex to the origin.
D) capital and labor are perfect substitutes, and the isoquants are L-shaped.


37.
For the production function
Q aK bL
, the equation for a typical isoquant is
A) Q bL
K
a

B) Q aK
L
b

C)
2
Q
K
L

D) K aQ bL



38. Returns to scale refers to
A) the increase in output that accompanies an increase in one input, all other inputs
held constant.
B) a change in a production process that enables a firm to achieve more output from a
given combination of inputs.
C) the number of units of increase in output that can be obtained from an increase in
one unit of input.
D) the percentage by which output will increase when all inputs are increased by a
given percentage.


39.
The production function
Q KL
exhibits
A) increasing returns to scale.
B) constant returns to scale.
C) decreasing returns to scale.
D) undefined returns to scale.



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40. Given a production function Q = 3LK, we can say that
A) this production function is not Cobb-Douglas.
B) this production function is Cobb-Douglas and exhibits decreasing returns to scale.
C) this Cobb-Douglas production function does not exhibit a constant elasticity of
substitution.
D) this production function is Cobb-Douglas and exhibits increasing returns to scale.


41. Opportunity cost for a firm is
A) Costs that involve a direct monetary outlay
B) The sum of the firm's implicit costs
C) The total of explicit costs that have been incurred in the past
D) The value of the next best alternative that is forgone when another alternative is
chosen


42. The cost-minimization problem of the firm is to
A) minimize total costs.
B) minimize average costs.
C) minimize total cost of producing a particular amount of output.
D) maximize output subject to a cost constraint.



Page 11
Answer Key

1. D
2. B
3. B
4. C
5. A
6. D
7. B
8. C
9. D
10. C
11. A
12. B
13. C
14. C
15. B
16. C
17. C
18. B
19. C
20. B
21. B
22. C
23. B
24. C
25. D
26. C
27. C
28. C
29. A
30. A
31. A
32. B
33. C
34. D
35. C
36. B
37. A
38. D
39. A
40. D
41. D
42. C