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UNIVERSITY OF ZIMBABWE

DEPARTMENT OF ECONOMICS

ECON104: Principles of Microeconomics

In-class Test 2: 22 April 2016 – M u l t i p l e C h o i c e Q u e s t i o n s

1. Consumption of a free good will be carried to the point at which


a) the marginal utility derived from the good equals the marginal utility derived from the
consumption of all other goods.
b) the total utility derived from the good is maximised.
c) the total utility derived from the good equals the total utility derived from the
consumption of all other goods.
d) the marginal utility derived from the good begins to decline.

2. Which of the following statements is NOT TRUE of indifference curves?


a) They may intersect.
b) They are convex to the origin.
c) They are downward sloping.
d) They exhibit higher levels of utility as you move from the origin.

3. Imagine a budget constraint between ‘good y’ on the vertical axis and ‘good x’ on the horizontal. If
that budget line were to become more shallow it could be due to:
a) an increase in income.
b) an increase in the price of both goods, yet with the price of ‘good y’ increasing more than
that of ‘good x’.
c) a change in consumer preference towards ‘good x’.
d) an increase in the price of ‘good x’.

4. Imagine the same budget line as in the above question. How would that budget line be effected if both
income and the price of both goods fell?
a) The budget line would not shift.
b) The budget line must become shallower.
c) The new budget line must be parallel to the old budget line.
d) The new budget line will have the same slope as the original so long as the price of both
goods change in the same proportion.

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5. A consumer with a given income will maximise their utility when:
a) the total utility derived from each commodity consumed is equal.
b) the marginal utility derived from each product consumed is zero.
c) the marginal utilities derived from each commodity consumed are proportional to their
prices.
d) the marginal utility derived from each commodity is equal.

6. The table below shows the willingness to pay for product for four individuals.

Buyer Willingness To
Pay
Mike $50.00
Sandy $30.00
Jonathan $20.00
Haley $10.00

If the price of the product is $51, then who would be willing to purchase the product?
a) Mike
b) Mike and Sandy
c) Mike, Sandy, and Jonathan
d) No one

7. On the basis of information in question 6 above, if the price of the product was $18, then the
total consumer surplus is:
a) $38
b) $42
c) $46
d) $72

8. Producer surplus is the


a) area under the supply curve to the left of the amount sold.
b) amount a seller is paid minus the cost of production.
c) area between the supply and demand curves, above the equilibrium price.
d) cost to sellers of participating in a market.

9. Before taxes, the price is P1. After tax, the price paid by consumers and received by sellers is
listed below. Use information in the diagram below to answer questions i to ix below.

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Price

A Supply

Price paid by
Consumers B
C
P1
D E
Price received
by Sellers F

G H
Demand

Q0 Q1 Quantity

i. What is the consumer surplus before imposition of tax?

ii. What is the consumer surplus after imposition of tax?

iii. What is the change in consumer surplus as a result of the tax?

iv. What is the producer surplus before imposition of tax?

v. What is the producer surplus after imposition of tax?

vi. What is total surplus before imposition of tax?

vii. What is total surplus after imposition of tax?

viii. What is government tax revenue?

ix. What is the dead weight loss?

10. Suppose that the government imposes a tax on dairy products. The deadweight loss from this
tax will likely be greater in the:
a) first year after it is imposed than in the fifth year after it is imposed because demand and
supply will be more elastic in the first year than in the fifth year.
b) first year after it is imposed than in the fifth year after it is imposed because demand and
supply will be less elastic in the first year than in the fifth year.

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c) fifth year after it is imposed than in the first year after it is imposed because demand and
supply will be more elastic in the first year than in the fifth year.
d) fifth year after it is imposed than in the first year after it is imposed because demand and
supply will be less elastic in the first year than in the fifth year.

11. Market failure can be caused by


a) too much competition.
b) externalities.
c) low consumer demand.
d) scarcity.

12. An externality arises when a person engages in an activity that influences the well-being of:
a) buyers in the market for that activity and yet neither pays nor receives any compensation
for that effect.
b) sellers in the market for that activity and yet neither pays nor receives any compensation
for that effect.
c) bystanders in the market for that activity and yet neither pays nor receives any
compensation for that effect.
d) Both (a) and (b) are correct.

13. Suppose that elementary education creates a positive externality. If the government does not
subsidize education, then:
a) the equilibrium quantity of education will be equal to the socially optimal quantity of
education.
b) the equilibrium quantity of education will be greater than the socially optimal quantity of
education.
c) the equilibrium quantity of education will be less than the socially optimal quantity of
education.
d) There is not enough information to answer the question.

14. Bill owns 3 acres of beautiful wooded land. When Bill decides to move to be closer to his
grandchildren, he donates the land to the state with the understanding that the land will be
used as a state park. This state park is large enough that it is not congested. It is an example
of a good that is:
a) both rival in consumption and excludable.
b) neither rival in consumption nor excludable.
c) nonrival in consumption and excludable.
d) rival in consumption and nonexcludable.

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15. Four roommates share an off-campus house and equally share the cost of rent. Everyone says
that she values a clean house, yet the house is usually dirty. To an economist, a clean house
in this case represents:
a) a common resource problem.
b) a public good.
c) a natural monopoly.
d) All of the above are correct.

16. If the social cost of producing chickens is greater than the private cost, then we can be sure
that
a) a positive externality exists
b) chicken is healthful and more should be produced
c) a negative externality exists
d) chicken productions should be subsidized

17. Pollution is an example of market failure because


a) the equilibrium price is higher than the efficient price
b) the equilibrium price is less than the efficient price
c) property rights are poorly distributed
d) those who suffer from pollution are compensated outside the market

18. In order for someone to be a free rider, an activity must be undertaken that
a) arranges for ride-sharing at rush hour
b) creates benefits for people who can't be forced to pay for them
c) improves national defense
d) identifies the beneficiaries and forces them to pay

19. All of the following are goods for which property rights are hard to identify except
a) a river running along a field of corn
b) the atmosphere over a field of corn
c) crows that eat the corn on the field
d) a field of corn

20. If a per unit tax is imposed on a producer of a good with a negative externality, then the tax
shifts the producer's
a) marginal cost curve to the right
b) marginal cost curve to the left
c) total fixed cost to the left
d) price downward

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21. The private market will not provide enough of a pure public good because of
a) negative externalities
b) obligatory controls over production methods
c) public choice not to produce the good
d) the free rider problem

22. The pursuit of self-interest in a “commons” where everyone has access to a valuable resource
will cause
a) the common good of society to be realized
b) careful conservation of the resource
c) overuse of the resource
d) individuals to make sure they bear the full costs of their actions