Intermediate Microeconomics Practice Problems - Custom Scholars
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# Intermediate Microeconomics Practice Problems

question
Suppose Nia states that she always prefers a course with fewer exams to a course with more exams. She is also indifferent between any two courses with the same number of exams. She states that she can't compare two courses that both have no exams. Which of the following statements about Nias'preferences are true?

a)Nia's preferences are complete;
b)Nia's preferences are transitive;
c)Both of the above.
b)Nia's preferences are transitive;

=> If she can't make a choice between two courses with no exams, it means that her preferences are not complete.
question
Which of the following satisfy more is better assumption?
B. Family time;
C. Grade on the midterm exam.
C. Grade on the midterm exam.

=> presumably the higher the grade the better.
question
Indifference curves slope downward because of:
A. More is better property;
B. Completeness property;
C. Transitivity.
A. More is better property;
question
When will indifference curve slope upward?
A. When both goods are "goods";
B. When one good is a "good" and another is a "bad";
C. When both goods are "bads"
D. Never;
B. When one good is a "good" and another is a "bad";
question
Indifference curves can't be thick because of the following property of preferences:
A. Transitivity;
B. Completeness;
C. More is better;
D. Convexity;
E. None of the above.
C. More is better;
question
Suppose a utility function U(x) represents your preferences and U(x)>0. Let V be come function transforming U(x) such as: V=f(U(x)). Suppose V also represents your preferences. Which of the following could NOT be the function f?
A. f=7U-10
B. f=0.001U
C. f=10-7U
D. f=logU
C. f=10-7U

=>The order of ranking would not be preferred for f=10-7U. It is not a positive monotonic transformation;
=>Check for an example utility function U(x)=x1.For U: U(1)=1<U(2)=2.
for V=f(U(x))=10-7U: V(1)=3 > V(2)=-4. The order of ranking is reversed! Hence it does not represent your preferences.
question
Suppose Zening has a utility of 10 from a textbook and Scott has a utility of 100 from the same textbook. Will Scott be happier than Zening from acquiring a copy of the book?
A. Yes;
B. No.
C. We can't conclude based on information given.
C. We can't conclude based on information given.
=> Comparisons across people are impossible because utility is ordinal.
question
Find MRS for a Cobb-Douglas utility function:
𝑈=(𝑞1^𝛼)(𝑞2^(1-𝛼))
𝑀𝑅𝑆 = (𝛼/(1-𝛼))*q2/q1
question
How will the indifference curves look like for goods that are perfect substitutes:
A. Bowing towards the origin (convex);
B. Straight lines;
C. Right angles;
B. Straight lines;
question
How will the indifference curves look like for goods that are perfect complements:
A. Bowing towards the origin (convex);
B. Straight lines;
C. Right angles;
C. Right angles;
question
Are quasiliner preferences convex?
A. Yes;
B. No.
A. Yes;
=>Draw a graph to see the mixture bundle on higher indifference curve.
question
Suppose your utility function is U(x1;x2)=3x1+x2Which of the following statements is true:
A. You are indifferent between consuming 3 units of good 1 and consuming one unit of good 2;
B. You are indifferent between consuming 1 unit of good 1 and consuming 3 units of good 2;
B. You are indifferent between consuming 1 unit of good 1 and consuming 3 units of good 2;

=> A: U(3;0)=9 < U(0;1)=1
=> B: U (1;0)=3 = U(0:3)=3.
question
Suppose your utility function is U(x1;x2)=3x1+x2Which of the following statements is true:
A. Goods 1 and 2 are perfect complements, you always consume 3 units of good one with 1 unit of good two;
B. Goods 1 and 2 are perfect complements, you always consume 1 unit of good one with 3 units of good two;
C. None of the above.
C. None of the above.

=> The goods are substitutes, not complements.
question
What will happen to the original budget line if income increased?
A. It will make a parallel shift away from the origin;
B. It will make a parallel shift closer to the origin;
C. It will change the slope of the constraint;
A. It will make a parallel shift away from the origin;
question
Suppose that the prices of good A and good B were to suddenly double. If good A is plotted along the horizontal axis,
A. the budget line will become steeper.
B. the budget line will become flatter.
C. the slope of the budget line will not change.
D. the slope of the budget line will change, but in an indeterminate way.
C. the slope of the budget line will not change.

=> The relative prices remained the same, and the slope is only affected by relative prices.
question
Consider the following Utility Function: U=X1+X2Consider the following Budget constrained:100=1X1+2X2.Where on the graph will the optimal solution lay?
A. In the middle of the budget constraint;
B. On the horizontal access;
C. On the vertical access;
D. There is not enough information.
B. On the horizontal access;

=> There is a corner solution here! The indifference curves and budget constrained are NOT tangent here. MRS=-1, MRT=1/2.
question
Pencils sell for 10 cents and pens sell for 50 cents. Suppose Jack, whose preferences satisfy all of the basic assumptions (complete, transitive, more is better and convex), buys 5 pens and one pencil each semester. With this consumption bundle, his MRS of pencils for pens is -3. Which of the following is true?
A. Jack could increase his utility by buying more pens and fewer pencils.
B. Jack could increase his utility by buying more pencils and fewer pens.
C. Jack could increase his utility by buying more pencils and more pens.
D. Jack could increase his utility by buying fewer pencils and fewer pens.
E. Jack is at a corner solution and is maximizing his utility.
B. Jack could increase his utility by buying more pencils and fewer pens.

=> If preferences are well behaved the solution is interior, MRS=MRT
=> MRT=-0.1/0.5=-0.2 < MRS=-3 => we need to lower MRS for optimality
=> When we move to the right (and down the indifference curve), the MRS is decreasing. Hence more pencils and less pens will make it more likely that MRS=MRT.
question
Where will the optimal bundle lay in this case:
A. Horizontal part of the indifference curve;
B. Vertical part of the indifference curve;
C. The corner of the indifference curve.
C. The corner of the indifference curve.
question
Practice question Demand curves typically are:
A. Upward Sloping;
B. Downward Sloping.
B. Downward Sloping.
question
How does demand curve look like for goods which are perfect complements?
A. Upward sloping curve;
B. Downward sloping curve;
C. Horizontal line;
D. Vertical line;
E. A line which is first vertical, then horizontal, then downward sloping.
F. A line is first vertical, then horizontal, then vertical again.
B. Downward sloping curve;
question
How does demand curve look like for goods which are perfect substitutes?
A. Upward sloping curve;
B. Downward sloping curve;
C. Horizontal line;
D. Vertical line;
E. A line which is first vertical, then horizontal, then downward sloping.
F. A line is first vertical, then horizontal, then vertical again.
E. A line which is first vertical, then horizontal, then downward sloping.
question
What will be the Engel curve for perfect complements?
A. Upward sloping line;
B. Downward sloping line;
C. Horizontal line;
D. Vertical line;
E. Some other oddly shaped line.
A. Upward sloping line;
question
Consider the following graph of an Engel curve (where y is income):

|)___ looks something like this

Good x1 in this example is:
A. Inferior;
B. Normal;
C. Is normal when income is relatively small and then inferior
D. Is inferior when income is relatively small and then normal.
C. Is normal when income is relatively small and then inferior
=> first positive and then negative slope.
question
The change in demand resulting from this change in real purchasing power is called:
A. the income effect.
B. the substitution effect.
C. the wealth effect.
D. the price effect.
A. the income effect.
question
Consider an inferior good. Which of the following statements is correct:
A. Income and substitution effect will move in the same direction;
B. Income and substitution effects move in the opposite direction.
B. Income and substitution effects move in the opposite direction.
question
Consider two goods which are perfect complements U(x1;x2)=min(x1;x2). Suppose the price of good x1 decreased. Which of the following statements is true?
A. Income effect will be zero;
B. Substitution effect will be zero;
C. Both income and substitution effect will be positive.
B. Substitution effect will be zero;

=> Consumer refuses to substitute between two goods, they only consume the goods in a one to one ratio.
question
Which of the following statements is true for Giffen Goods:
A .Substitution effect dominates income effect;
B. Income effect dominates substitution effect;
C. Sometimes income effect dominates and sometimes substitution effect dominates.
B. Income effect dominates substitution effect;
question
Which of the following is true concerning the substitution effect of a decrease in price?
A. It will lead to an increase in consumption only for a normal good.
B. It will lead to an increase in consumption for most goods.
C. It will lead to an increase in consumption only for an inferior good.
D. It will lead to an increase in consumption only for a Giffen good.
B. It will lead to an increase in consumption for most goods.
question
Which of the following goods has more elastic demand?
A. Medicine for a sick pet;
B. Gas;
D. Cocaine.

=>Demand for luxury goods is very elastic.
question
The demand for insulin is perfectly inelastic. Suppose the costs of producing insulin increased rapidly. The following is likely to happen on the insulin market:
A. Equilibrium price will increase and equilibrium quantity will decrease;
B. Equilibrium price will stay the same and equilibrium quantity will decrease;
C. Equilibrium quantity will stay the same and equilibrium price will increase
D. Equilibrium price will increase and equilibrium quantity can increase, decrease, or stay the same.
C. Equilibrium quantity will stay the same and equilibrium price will increase

=> Perfectly inelastic means vertical demand curve (the quantity demanded stays the same no matter what happens with the price).
question
You are in class when you could be reading a book. Later tonight you will read a book when you could watch the game on TV. Which is true?
A: Class >(D) watching game
B: Class >(I) watching game
B: Class >(I) watching game
question
Suppose that Natasha's utility function is given by 𝑈=10sqrt(𝐼), where I represents annual income in thousands of dollars. Is Natasha risk loving, risk neutral, or risk averse?
A. She is risk neutral because her utility function exhibits constant marginal utility
B. She is risk loving because her utility function exhibits increasing marginal utility.
C. She is risk averse because her utility function exhibits diminishing marginal utility.
D. She is risk averse because her utility function exhibits constant marginal utility.
E. She is risk averse because her utility function exhibits increasing marginal utility.
C. She is risk averse because her utility function exhibits diminishing marginal utility.
question
Suppose that Luis's utility function is given by 𝑈=3𝐼^2, where I represents annual income in thousands of dollars. Is Luis risk loving, risk neutral, or risk averse?
A. He is risk neutral because his utility function exhibits constant marginal utility
B. He is risk loving because his utility function exhibits increasing marginal utility.
C. He is risk averse because his utility function exhibits diminishing marginal utility.
D. He is risk averse because his utility function exhibits constant marginal utility.
E. He is risk averse because his utility function exhibits increasing marginal utility.
B. He is risk loving because his utility function exhibits increasing marginal utility.
question
Which of the following is an example of short-run?
A. A period less than a month;
B. A period less than a year;
C. None of the above.
C. None of the above.
question
Suppose a bakery has a fixed input in production of candy. This means that the bakery is operating in:
A. Short run;
B. Long run;
C. We can't tell.
A. Short run;
question
Joe runs a burger restaurant. If Joe hires the first worker, the restaurant can produce 10 burgers in an hour. If Joe hires the second worker, the restaurant can produce 25 burgers in an hour. If Joe hires the third worker, the restaurants can produce 45 burgers in an hour. What is the marginal product of labor of the second worker?
A. 10;
B. 12.5;
C. 15;
D. 25;
E. 20;
C. 15;

=> (25-10)/(2-1)
question
Joe runs a burger restaurant. If Joe hires the first worker, the restaurant can produce 10 burgers in an hour. If Joe hires the second worker, the restaurant can produce 25 burgers in an hour. If Joe hires the third worker, the restaurants can produce 45 burgers in an hour. What is the average product of labor of the second worker?
A. 10;
B. 12.5;
C. 15;
D. 25;
E. 20;
B. 12.5;

=> 25/2=12.5
question
The slope of the total product curve is the:
A. average product.
B. slope of a line from the origin to the point.
C. marginal product.
D. marginal rate of technical substitution.
C. marginal product.
question
Suppose Marginal Product is currently below the average product. The firm increased production. As a results:
A. Average product will increase;
B. Average product will decrease;
C. We can't tell what will happen to the average product.
B. Average product will decrease;
question
When a firm experiences diminishing returns
A. Its total output is falling;
B. Marginal product is negative;
C. Marginal product is decreasing with higher production, yet it is still positive;
C. Marginal product is decreasing with higher production, yet it is still positive;
question
As more high-speed trains are built, each additional engineer hired to manage the construction is likely to increase production
a) at a rising pace due to diminishing returns.
b) at a rising pace due to constant returns.
c) at a slower pace due to diminishing returns.
d) a slower pace due to negative returns.
c) at a slower pace due to diminishing returns.

=> There are diminishing returns to any input, including engineers. The law of diminishing returns is a universal law.
question
Suppose Variable Costs of producing 10 units of output are \$100 and Variable Costs of producing 11 units of output are \$110. What are the marginal costs of producing 11thunit of output?
A. \$10;
B. There is not enough information to answer this question.
A. \$10;

MC11=(TC11-TC10)/(11-10)==FC11+VC11-FC10-VC10=VC11-VC10=110-100=10
=> Marginal cost only depends on variable costs!
question
The firm increased output. The following is true about average costs:
A. ATC Increase;
B. ATC Decrease;
C. ATC Could increase or decrease.
C. ATC Could increase or decrease.

Decreasing part: Spreading effect. Spreading the same fixed cost over a larger and larger output;
Increasing part: Diminishing returns effect. The larger the output, the greater the amount of variable input required to produce additional units (because of law of diminishing returns).
question
A firm has a fixed production cost of \$1000 and a constant marginal cost of production of \$10 per unit produced so their cost function is:
𝐶=1000+10𝑞
Now suppose a lump sum tax of \$500, independent of production is to be placed on the firm. This firm's cost function is now:
A. 𝐶= 1500 + 10𝑞
B. 𝐶= 500 + 10𝑞
C. 𝐶= 1000 + 510𝑞
D. 𝐶= 1000 -490𝑞
B. 𝐶= 500 + 10𝑞
question
A firm has a fixed production cost of \$1000 and a constant marginal cost of production of \$10 per unit produced so their cost function is:
𝐶=1000+10𝑞
Now suppose a per unit tax of \$2 is to be placed on the firm. This firm's cost function is now:
A. 𝐶= 998 + 10𝑞
B. 𝐶= 1002 + 10𝑞
C. 𝐶= 1000 + 12𝑞
D. 𝐶= 1000 + 8𝑞
C. 𝐶= 1000 + 12𝑞
question
Consider a firm which uses two inputs. If the firm has MP1/w1 > MP2/w2, what can it do to reduce costs but maintain the same output?
A. Nothing, costs are minimized;
B. It can decrease the use of input 1 and increase the use of input 2;
C. It can decrease the use of input 2 and increase the use of input 1.
C. It can decrease the use of input 2 and increase the use of input 1.

=> This implies that an additional dollar spent on input 1 produces more output than an additional dollar spent on input 2. Therefore the firm can reduce costs while keeping the same output by increasing its use of input 1 while decreasing its use of input 2.
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question
Suppose Nia states that she always prefers a course with fewer exams to a course with more exams. She is also indifferent between any two courses with the same number of exams. She states that she can't compare two courses that both have no exams. Which of the following statements about Nias'preferences are true?

a)Nia's preferences are complete;
b)Nia's preferences are transitive;
c)Both of the above.
b)Nia's preferences are transitive;

=> If she can't make a choice between two courses with no exams, it means that her preferences are not complete.
question
Which of the following satisfy more is better assumption?
B. Family time;
C. Grade on the midterm exam.
C. Grade on the midterm exam.

=> presumably the higher the grade the better.
question
Indifference curves slope downward because of:
A. More is better property;
B. Completeness property;
C. Transitivity.
A. More is better property;
question
When will indifference curve slope upward?
A. When both goods are "goods";
B. When one good is a "good" and another is a "bad";
C. When both goods are "bads"
D. Never;
B. When one good is a "good" and another is a "bad";
question
Indifference curves can't be thick because of the following property of preferences:
A. Transitivity;
B. Completeness;
C. More is better;
D. Convexity;
E. None of the above.
C. More is better;
question
Suppose a utility function U(x) represents your preferences and U(x)>0. Let V be come function transforming U(x) such as: V=f(U(x)). Suppose V also represents your preferences. Which of the following could NOT be the function f?
A. f=7U-10
B. f=0.001U
C. f=10-7U
D. f=logU
C. f=10-7U

=>The order of ranking would not be preferred for f=10-7U. It is not a positive monotonic transformation;
=>Check for an example utility function U(x)=x1.For U: U(1)=1<U(2)=2.
for V=f(U(x))=10-7U: V(1)=3 > V(2)=-4. The order of ranking is reversed! Hence it does not represent your preferences.
question
Suppose Zening has a utility of 10 from a textbook and Scott has a utility of 100 from the same textbook. Will Scott be happier than Zening from acquiring a copy of the book?
A. Yes;
B. No.
C. We can't conclude based on information given.
C. We can't conclude based on information given.
=> Comparisons across people are impossible because utility is ordinal.
question
Find MRS for a Cobb-Douglas utility function:
𝑈=(𝑞1^𝛼)(𝑞2^(1-𝛼))
𝑀𝑅𝑆 = (𝛼/(1-𝛼))*q2/q1
question
How will the indifference curves look like for goods that are perfect substitutes:
A. Bowing towards the origin (convex);
B. Straight lines;
C. Right angles;
B. Straight lines;
question
How will the indifference curves look like for goods that are perfect complements:
A. Bowing towards the origin (convex);
B. Straight lines;
C. Right angles;
C. Right angles;
question
Are quasiliner preferences convex?
A. Yes;
B. No.
A. Yes;
=>Draw a graph to see the mixture bundle on higher indifference curve.
question
Suppose your utility function is U(x1;x2)=3x1+x2Which of the following statements is true:
A. You are indifferent between consuming 3 units of good 1 and consuming one unit of good 2;
B. You are indifferent between consuming 1 unit of good 1 and consuming 3 units of good 2;
B. You are indifferent between consuming 1 unit of good 1 and consuming 3 units of good 2;

=> A: U(3;0)=9 < U(0;1)=1
=> B: U (1;0)=3 = U(0:3)=3.
question
Suppose your utility function is U(x1;x2)=3x1+x2Which of the following statements is true:
A. Goods 1 and 2 are perfect complements, you always consume 3 units of good one with 1 unit of good two;
B. Goods 1 and 2 are perfect complements, you always consume 1 unit of good one with 3 units of good two;
C. None of the above.
C. None of the above.

=> The goods are substitutes, not complements.
question
What will happen to the original budget line if income increased?
A. It will make a parallel shift away from the origin;
B. It will make a parallel shift closer to the origin;
C. It will change the slope of the constraint;
A. It will make a parallel shift away from the origin;
question
Suppose that the prices of good A and good B were to suddenly double. If good A is plotted along the horizontal axis,
A. the budget line will become steeper.
B. the budget line will become flatter.
C. the slope of the budget line will not change.
D. the slope of the budget line will change, but in an indeterminate way.
C. the slope of the budget line will not change.

=> The relative prices remained the same, and the slope is only affected by relative prices.
question
Consider the following Utility Function: U=X1+X2Consider the following Budget constrained:100=1X1+2X2.Where on the graph will the optimal solution lay?
A. In the middle of the budget constraint;
B. On the horizontal access;
C. On the vertical access;
D. There is not enough information.
B. On the horizontal access;

=> There is a corner solution here! The indifference curves and budget constrained are NOT tangent here. MRS=-1, MRT=1/2.
question
Pencils sell for 10 cents and pens sell for 50 cents. Suppose Jack, whose preferences satisfy all of the basic assumptions (complete, transitive, more is better and convex), buys 5 pens and one pencil each semester. With this consumption bundle, his MRS of pencils for pens is -3. Which of the following is true?
A. Jack could increase his utility by buying more pens and fewer pencils.
B. Jack could increase his utility by buying more pencils and fewer pens.
C. Jack could increase his utility by buying more pencils and more pens.
D. Jack could increase his utility by buying fewer pencils and fewer pens.
E. Jack is at a corner solution and is maximizing his utility.
B. Jack could increase his utility by buying more pencils and fewer pens.

=> If preferences are well behaved the solution is interior, MRS=MRT
=> MRT=-0.1/0.5=-0.2 < MRS=-3 => we need to lower MRS for optimality
=> When we move to the right (and down the indifference curve), the MRS is decreasing. Hence more pencils and less pens will make it more likely that MRS=MRT.
question
Where will the optimal bundle lay in this case:
A. Horizontal part of the indifference curve;
B. Vertical part of the indifference curve;
C. The corner of the indifference curve.
C. The corner of the indifference curve.
question
Practice question Demand curves typically are:
A. Upward Sloping;
B. Downward Sloping.
B. Downward Sloping.
question
How does demand curve look like for goods which are perfect complements?
A. Upward sloping curve;
B. Downward sloping curve;
C. Horizontal line;
D. Vertical line;
E. A line which is first vertical, then horizontal, then downward sloping.
F. A line is first vertical, then horizontal, then vertical again.
B. Downward sloping curve;
question
How does demand curve look like for goods which are perfect substitutes?
A. Upward sloping curve;
B. Downward sloping curve;
C. Horizontal line;
D. Vertical line;
E. A line which is first vertical, then horizontal, then downward sloping.
F. A line is first vertical, then horizontal, then vertical again.
E. A line which is first vertical, then horizontal, then downward sloping.
question
What will be the Engel curve for perfect complements?
A. Upward sloping line;
B. Downward sloping line;
C. Horizontal line;
D. Vertical line;
E. Some other oddly shaped line.
A. Upward sloping line;
question
Consider the following graph of an Engel curve (where y is income):

|)___ looks something like this

Good x1 in this example is:
A. Inferior;
B. Normal;
C. Is normal when income is relatively small and then inferior
D. Is inferior when income is relatively small and then normal.
C. Is normal when income is relatively small and then inferior
=> first positive and then negative slope.
question
The change in demand resulting from this change in real purchasing power is called:
A. the income effect.
B. the substitution effect.
C. the wealth effect.
D. the price effect.
A. the income effect.
question
Consider an inferior good. Which of the following statements is correct:
A. Income and substitution effect will move in the same direction;
B. Income and substitution effects move in the opposite direction.
B. Income and substitution effects move in the opposite direction.
question
Consider two goods which are perfect complements U(x1;x2)=min(x1;x2). Suppose the price of good x1 decreased. Which of the following statements is true?
A. Income effect will be zero;
B. Substitution effect will be zero;
C. Both income and substitution effect will be positive.
B. Substitution effect will be zero;

=> Consumer refuses to substitute between two goods, they only consume the goods in a one to one ratio.
question
Which of the following statements is true for Giffen Goods:
A .Substitution effect dominates income effect;
B. Income effect dominates substitution effect;
C. Sometimes income effect dominates and sometimes substitution effect dominates.
B. Income effect dominates substitution effect;
question
Which of the following is true concerning the substitution effect of a decrease in price?
A. It will lead to an increase in consumption only for a normal good.
B. It will lead to an increase in consumption for most goods.
C. It will lead to an increase in consumption only for an inferior good.
D. It will lead to an increase in consumption only for a Giffen good.
B. It will lead to an increase in consumption for most goods.
question
Which of the following goods has more elastic demand?
A. Medicine for a sick pet;
B. Gas;
D. Cocaine.

=>Demand for luxury goods is very elastic.
question
The demand for insulin is perfectly inelastic. Suppose the costs of producing insulin increased rapidly. The following is likely to happen on the insulin market:
A. Equilibrium price will increase and equilibrium quantity will decrease;
B. Equilibrium price will stay the same and equilibrium quantity will decrease;
C. Equilibrium quantity will stay the same and equilibrium price will increase
D. Equilibrium price will increase and equilibrium quantity can increase, decrease, or stay the same.
C. Equilibrium quantity will stay the same and equilibrium price will increase

=> Perfectly inelastic means vertical demand curve (the quantity demanded stays the same no matter what happens with the price).
question
You are in class when you could be reading a book. Later tonight you will read a book when you could watch the game on TV. Which is true?
A: Class >(D) watching game
B: Class >(I) watching game
B: Class >(I) watching game
question
Suppose that Natasha's utility function is given by 𝑈=10sqrt(𝐼), where I represents annual income in thousands of dollars. Is Natasha risk loving, risk neutral, or risk averse?
A. She is risk neutral because her utility function exhibits constant marginal utility
B. She is risk loving because her utility function exhibits increasing marginal utility.
C. She is risk averse because her utility function exhibits diminishing marginal utility.
D. She is risk averse because her utility function exhibits constant marginal utility.
E. She is risk averse because her utility function exhibits increasing marginal utility.
C. She is risk averse because her utility function exhibits diminishing marginal utility.
question
Suppose that Luis's utility function is given by 𝑈=3𝐼^2, where I represents annual income in thousands of dollars. Is Luis risk loving, risk neutral, or risk averse?
A. He is risk neutral because his utility function exhibits constant marginal utility
B. He is risk loving because his utility function exhibits increasing marginal utility.
C. He is risk averse because his utility function exhibits diminishing marginal utility.
D. He is risk averse because his utility function exhibits constant marginal utility.
E. He is risk averse because his utility function exhibits increasing marginal utility.
B. He is risk loving because his utility function exhibits increasing marginal utility.
question
Which of the following is an example of short-run?
A. A period less than a month;
B. A period less than a year;
C. None of the above.
C. None of the above.
question
Suppose a bakery has a fixed input in production of candy. This means that the bakery is operating in:
A. Short run;
B. Long run;
C. We can't tell.
A. Short run;
question
Joe runs a burger restaurant. If Joe hires the first worker, the restaurant can produce 10 burgers in an hour. If Joe hires the second worker, the restaurant can produce 25 burgers in an hour. If Joe hires the third worker, the restaurants can produce 45 burgers in an hour. What is the marginal product of labor of the second worker?
A. 10;
B. 12.5;
C. 15;
D. 25;
E. 20;
C. 15;

=> (25-10)/(2-1)
question
Joe runs a burger restaurant. If Joe hires the first worker, the restaurant can produce 10 burgers in an hour. If Joe hires the second worker, the restaurant can produce 25 burgers in an hour. If Joe hires the third worker, the restaurants can produce 45 burgers in an hour. What is the average product of labor of the second worker?
A. 10;
B. 12.5;
C. 15;
D. 25;
E. 20;
B. 12.5;

=> 25/2=12.5
question
The slope of the total product curve is the:
A. average product.
B. slope of a line from the origin to the point.
C. marginal product.
D. marginal rate of technical substitution.
C. marginal product.
question
Suppose Marginal Product is currently below the average product. The firm increased production. As a results:
A. Average product will increase;
B. Average product will decrease;
C. We can't tell what will happen to the average product.
B. Average product will decrease;
question
When a firm experiences diminishing returns
A. Its total output is falling;
B. Marginal product is negative;
C. Marginal product is decreasing with higher production, yet it is still positive;
C. Marginal product is decreasing with higher production, yet it is still positive;
question
As more high-speed trains are built, each additional engineer hired to manage the construction is likely to increase production
a) at a rising pace due to diminishing returns.
b) at a rising pace due to constant returns.
c) at a slower pace due to diminishing returns.
d) a slower pace due to negative returns.
c) at a slower pace due to diminishing returns.

=> There are diminishing returns to any input, including engineers. The law of diminishing returns is a universal law.
question
Suppose Variable Costs of producing 10 units of output are \$100 and Variable Costs of producing 11 units of output are \$110. What are the marginal costs of producing 11thunit of output?
A. \$10;
B. There is not enough information to answer this question.
A. \$10;

MC11=(TC11-TC10)/(11-10)==FC11+VC11-FC10-VC10=VC11-VC10=110-100=10
=> Marginal cost only depends on variable costs!
question
The firm increased output. The following is true about average costs:
A. ATC Increase;
B. ATC Decrease;
C. ATC Could increase or decrease.
C. ATC Could increase or decrease.

Decreasing part: Spreading effect. Spreading the same fixed cost over a larger and larger output;
Increasing part: Diminishing returns effect. The larger the output, the greater the amount of variable input required to produce additional units (because of law of diminishing returns).
question
A firm has a fixed production cost of \$1000 and a constant marginal cost of production of \$10 per unit produced so their cost function is:
𝐶=1000+10𝑞
Now suppose a lump sum tax of \$500, independent of production is to be placed on the firm. This firm's cost function is now:
A. 𝐶= 1500 + 10𝑞
B. 𝐶= 500 + 10𝑞
C. 𝐶= 1000 + 510𝑞
D. 𝐶= 1000 -490𝑞
B. 𝐶= 500 + 10𝑞
question
A firm has a fixed production cost of \$1000 and a constant marginal cost of production of \$10 per unit produced so their cost function is:
𝐶=1000+10𝑞
Now suppose a per unit tax of \$2 is to be placed on the firm. This firm's cost function is now:
A. 𝐶= 998 + 10𝑞
B. 𝐶= 1002 + 10𝑞
C. 𝐶= 1000 + 12𝑞
D. 𝐶= 1000 + 8𝑞
C. 𝐶= 1000 + 12𝑞
question
Consider a firm which uses two inputs. If the firm has MP1/w1 > MP2/w2, what can it do to reduce costs but maintain the same output?
A. Nothing, costs are minimized;
B. It can decrease the use of input 1 and increase the use of input 2;
C. It can decrease the use of input 2 and increase the use of input 1.
C. It can decrease the use of input 2 and increase the use of input 1.

=> This implies that an additional dollar spent on input 1 produces more output than an additional dollar spent on input 2. Therefore the firm can reduce costs while keeping the same output by increasing its use of input 1 while decreasing its use of input 2.

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