MicroEconomics Practice Test/Study Guide

1.Which of the following would not shift the demand for good A?
A. drop in price of good A.
b. drop in price of good B.
c. consumer income.
d. change in the level of advertising of good A.
2. For a steel factory, a decrease in the cost of electricity to the plant will cause the supply
curve to:
a. become flatter.
b. shift to the left.
C. shift to the right.
d. become parallel to the price axis.
3. Suppose market demand and supply are given by Qd = 100 - 2P and QS = 5 + 3P. The
equilibrium quantity is:
A. 62.
b. 81.
c. 45.
d. 92.
4. The demand for video recorders has been estimated to be Qv = 134 - 1.07Pf + 46Pm
-2.1Pv - 5I, where Qv is the quantity of video recorders, Pf denotes the price of video
recorder film, Pm is the price of attending a movie, Pv is the price of video recorders, and I
is income. Based on the estimated demand equation we can conclude:
A. video recorders are inferior goods.
b. video recorder film is a substitute for video recorders.
c. the demand for video recorders is inelastic.
d. none of the above.
5. The manager can be 95% confident that the true value of the underlying parameters in
a regression is not zero if the absolute value of t-statistic is
a. less than 1.
b. less than 2.
c. greater than 1.
D. greater than 2.

6. Each week Bill buys exactly 7 bottles of cola regardless of its price. Bill's own price
elasticity of demand for cola in absolute value is:

a. greater than one.

b. less than one.
C. zero
d. one.
7. You are an efficiency expert hired by a manufacturing firm that uses K and L as inputs.
The firm produces and sells a given output. If w = $40, r = $100, MPL = 20, and MPK =
40:
a. the firm is cost minimizing.
b. the firm should use less L and more K to cost minimize.
C. the firm should use more L and less K to cost minimize.
d. the firm is profit maximizing but not cost minimizing.
8. Total product begins to fall when:
a. Marginal product is maximized.
b. Average product is below zero.
c. Average product is negative.
D. Marginal product is zero.
9. What is implied when the total cost of producing Q1 and Q2 together is less than the
total cost of producing Q1and Q2 separately?
a. Economies of scale.
B. Economies of scope.
c. Diminishing average fixed costs.
d. Cost complementarity.
10. When marginal cost curve is below an average cost curve, average cost is:
a. increasing with output.
B. declining with output.
c. not varying with output.
d. none of the above.
11. Cost complementary exits in a multiproduct cost function when:
a. the average cost of producing one output is reduced when the output of another product
is increased.
b. the average cost of producing one output is increased when the output of another
product is increased.
c. the marginal cost of producing one output is increased when the output of another
product is decreased.
D. the marginal cost of producing one output is reduced when the output of another
product is increased.
12. Which of the following statements is incorrect?
a. Fixed costs do not vary with output.
b. Sunk costs are those costs that are forever lost after they have been paid.

C. Fixed costs are always greater than sunk costs.

d. Fixed costs could be positive when sunk costs are zero.
13. Which of the following is true under monopoly?
a. profits are always positive.
B. P > MC.
c. P = MR.
d. all of the above are true for monopoly.
14. Which of the following features is common to both perfectly competitive markets and
monopolistically competitive markets?
a. Firms produce homogeneous goods.
b. There is free entry.
c. Long run profits are zero.
D. both b and c.
15. Let the demand function for a product be Q = 100 - 2P. The inverse demand function
of this demand function is:
a. Q = 100 + 2P.
B. P = 50 - 0.5Q.
c. P = 50 + 0.5Q.
d. none of the above.
16. A perfectly competitive firm faces:
A. a perfectly elastic demand function.
b. a perfectly inelastic demand function.
c. a demand function with unitary elasticity.
d. none of the above.
17. "An oligopoly is an oligopoly. Firms behave the same no matter what type of
oligopoly it is." This statement is:
a. true.
B. false.
c. true of homogeneous product industries.
d. none of the above.
18. Two identical firms compete as a Cournot duopoly. The demand they face is P = 100 2Q. The cost function for each firm is C(Q) = 4Q. The equilibrium output of each firm is:
a. 8
B. 16
c. 32
d. 36
19. With a linear inverse demand function and the same constant marginal costs for both
firms in a homogeneous product Stackelberg duopoly, which of the following will result?
a. Profits of leader will be higher than under Cournot

b. Profits of the follower will be lower than under Cournot

c. PL> PF.
D. both (a) and (b).
20. Two firms compete as a Stackelberg duopoly. The demand they face is P = 100 - 3Q.
The cost function for each firm is C(Q) = 4Q. The outputs of the two firms are:
A. QL = 16; QF = 8.
b. QL = 24; QF = 12.
c. QL = 12; QF = 8.
d. QL = 20; QF = 15.
21. Collusion in oligopoly is difficult to achieve because:
a. it is prohibited by law.
b. every firm has an incentive to cheat given that others follow the agreement.
c. firms usually take care of consumers' interests as a decision priority.
D. both a and b.
22. Which firm would you expect to make the lowest profits, other things equal:
A. Bertrand oligopolist.
b. Cournot oligopolist.
c. Sweezy oligopolist.
d. Stackelberg leader.
23. Firm one and firm two compete as a Cournot oligopoly. There is an increase in
marginal cost for firm one. Which of the following is not true?
a. Firm one will produce less.
b. Firm two will produce more.
C. Both firm one's and firm two's reaction functions are shifted.
d. Profits of firm one will decrease.
24. Which of the following is true?
a. In Bertrand oligopoly each firm reacts optimally to price changes.
b. In Cournot oligopoly firms engage in quantity competition.
c. In Stackelberg oligopoly the follower produce the Cournot output.
D. All of the above are true.
25. Two firms compete as a Stackelberg duopoly. The inverse market demand they face is
P = 62 - 4.5Q. The cost function for each firm is C(Q) = 8Q. The outputs of the two firms
are:
a. QL = 48; QF = 24
b. QL = 35; QF = 6
C. QL = 6; QF = 3
d. None of the above

26. Consider the following information for a simultaneous move game: If you advertise
and your rival advertises, you each will earn $5 million in profits. If neither of you
advertise, you will each earn $10 million in profits. However, if one of you advertises and
the other does not, the firm that advertises will earn $15 million and the non-advertising
firm will earn $1 million. If you and your rival plan to be in business for only one year,
the Nash equilibrium is
A. For each firm to advertise.
b. For neither firm to advertise.
c. For your firm to advertise and the other not to advertise.
d. None of the above.
27. Consider the following information for a simultaneous move game: If you advertise
and your rival advertises, you each will earn $5 million in profits. If neither of you
advertise, you will each earn $10 million in profits. However, if one of you advertises and
the other does not, the firm that advertises will earn $15 million and the non-advertising
firm will earn $1 million. If you and your rival plan to be in business for 10 years, then
the Nash equilibrium is
A. For each firm to advertise every year.
b. For neither firm to advertise in early years, but to advertise in later years.
c. For each firm to not advertise in any year.
d. For each firm to advertise in early years, but not advertise in later years.
28. Which of the following are Nash equilibrium payoffs in the one-shot game?
a. (0, 0)
b. (5, -5)
c. (-5, 5)
D. (10, 10)
29. What are dominant strategies for Firm A and Firm B respectively?
a. (low price, high price)
b. (high price, low price)
c. (high price, high price)
D. (low price, low price)
30. What are the Nash equilibrium strategies for firm A and B respectively?
a. (low price, high price)
b. (high price, low price)
c. (high price, high price)
D. (low price, low price)
31. Suppose the game is infinitely repeated, and the interest rate is 10%. Both firms agree
to charge a high price, provided no player has charged in low price in the past. If both
firms stick to this agreement, then the present value of Firm A's payoffs are:

A. 220.
b. 110.
c. 330.
d. 550.
32. Which of the following is not a condition for a firm to engage in price discrimination?
a. Consumers are partitioned into two or more types, with one type having a more elastic
demand than the other.
b. The firm has a means of identifying consumer types.
C. The consumers are assured to be sincere in telling their true natures.
d. There is no resale market for the good.
33. Which of the following statements is true?
a. The more elastic the demand, the higher is the profit-maximizing markup.
B. The more elastic the demand, the lower is the profit-maximizing markup.
c. The higher the marginal cost, the lower the profit-maximizing price.
d. The higher the average cost, the lower the profit-maximizing price.
34. In a Cournot oligopoly with N-firms and identical marginal costs, the relationship
between the price elasticity of market demand and that of the firm is:
a. EM = EF.
b. EM = NEF.
C. EM = EF/N.
d. No deterministic relationship.
35. The special demand structure that induces a firm to use a cross subsidization strategy
is:
a. perfect substitution among products.
b. imperfect substitution among products.
c. independent demand for products.
D. interdependent demand for products.
36. Second-degree price discrimination
A. is the practice of posting a discrete schedule of declining prices for different ranges of
quantities.
b. eliminates the problem of double marginalization.
c. results in transfer pricing.
d. none of the above.
37. You are the manager of a gas station and your goal is to maximize profits. Based on
your past experience, the elasticity of demand by Texans for a car wash is -4, while the
elasticity of demand by non-Texans for a car wash is -6. If you charge Texans $20 for a
car wash, how much should you charge a man with Oklahoma license plates for a car
wash?

a. 1.50.
b. 15.00.
C. 18.00.
d. 20.00.
38. You are the manager of a Mom and Pop store that can buy milk from a supplier at
$2.00 per gallon. If you believe the elasticity of demand for milk by customers at your
store is -3, then your profit-maximizing price is
a. $1.33
b. $2.75
C. $3.00
d. $4.50
39. The main purpose of antitrust policy is to:
A. control negative externalities.
B. reduce market power.
c. help make information easily obtainable for producers and consumers.
d. All of the above.
40. Which of the following is incorrect?
A. Predatory pricing is easy to prove in court.
b. Predatory pricing is generally only advantageous if the predator has "deep pockets."
c. A firm can benefit from strategies that raise the marginal costs its rivals.
d. A firm can benefit from strategies that raise the fixed costs of all the firms in the
industry.