Suppose that Albania can produce 1 unit of machinery using 3 hours of labour and 1 unit of cloth using 9 hours of labour. It follows that the opportunity cost of producing 1 unit of cloth in Albania is:
27 units of machinery
3 units of machinery
9 units of machinery
1 unit of machinery
If market supply is perfectly inelastic with respect to price, we would expect an increase in market demand to generate:
a fall in the market price
a fall in the market price and an increase in market output
a rise in the market price
a rise in the market price and a fall in output
a rise in output with no change in market price
Price elasticity of demand is calculated as:
(dQ/Q) / (dP/P)
(dQ/dP) × (Q/P)
(dQ/Q) / (P/Q)
(dQ/Q) × (Q/P)
Suppose you observe that the demand for product X rises by 10% in response to a 20% fall in household incomes. From this information we can deduce that:
X is a luxury good
the income elasticity of demand for X is 2
X is a necessity
the income elasticity of demand for X is 20
X is an inferior good
A firm is considering whether to increase price. It estimates that the price elasticity of demand for its product is approximately -0.87. If this estimate is accurate, the increase in price will generate:
higher sales, but lower total revenue
higher sales and higher total revenue
lower sales, but higher total revenue
lower sales and lower total revenue
lower sales, but no change in total revenue
A perfectly elastic demand curve is represented by:
a shallowly sloped demand curve
a vertical demand curve
a steeply sloped demand curve
a horizontal demand curve
a rectangular hyperbola
Suppose that conditions in the market for wheat are such that consumers wish to buy 140 tons of wheat per period and 165 tons are actually supplied by farmers. From this information, we can deduce that:
the market price is currently above its equilibrium level
farmers are incurring losses
the market price is currently below its equilibrium level
farmers are earning above normal profits
the market price is fixed
Suppose you observe a fall in the price of apples relative to the prices of other competing fruits. Which of the following would cause an unambiguous decrease in the relative price of apples?
a shift to the right in the supply curve for apples and a shift to the right in the demand curve for apples
a shift to the right in the supply curve for apples and a shift to the left in the
a shift to the left in the supply curve for apples and a shift to the right in the demand curve for apples
a shift to the left in the supply curve for apples and a shift to the left in the demand curve for apples
A rightward shift in the economy’s production possibility frontier occurs when the economy experiences
rising opportunity costs in production
a fall in resource utilization
falling opportunity costs in production
economic growth
a misallocation of productive resources
If two goods are substitutes, the cross-price elasticity of demand must be:
negative
positive
zero
infinite
one (unity)
The slope of an indifference curve shows:
the transitivity of consumer preferences
the marginal rate of substitution between one good and another
the ratio of market prices
all of the above
If a consumer prefers bundle A to bundle B, and bundle B to bundle C, then we can conclude that bundle A is preferred to bundle C. This conclusion relies on the assumption that:
consumer preferences are transitive
the consumer’s indifference curve is convex to the origin
consumers prefer more goods to fewer goods
consumer equilibrium is reached at the point where utility is maximised
The consumer’s budget line shows :
the marginal benefit derived from the consumption of an additional unit of output when household incomes and prices are given
the structure of consumer preferences when budgets are constrained
the combinations of output that the consumer can purchase at current prices
the cost-benefit ratio of each additional unit of output consumed
none of the above
Suppose the total cost (TC) of producing Q units of output is given as: TC = 100 + 6Q. It follows that average variable cost is:
100/Q + 6Q
106/Q
106
100
6
Consumer surplus is measured as:
the difference between the maximum amount that consumers would be prepared to pay to obtain units of output and the amount they actually pay
the total money value of all units of output consumed
the difference between the marginal cost of producing units of output and the marginal benefit obtained from their consumption
the surplus value of the last unit purchased at the margin of consumption
Suppose a firm is able to produce 100 units of output per month when 10 workers are employed, 180 units of output per month when 11 workers are employed, and 240 units of output when 12 workers are employed. From this information we can deduce that:
marginal cost is falling as production expands
the marginal product of labour is declining as employment rises
the marginal product of labour is 240 for the last unit of labour employed
profits are maximized when the firm produces 10 units of output
If production conditions for a firm are such that the marginal rate of technical substitution (MRTS) is always constant, we can infer that:
the firm’s isoquant shows that the factor inputs can only be used in fixed proportions
the firm’s isoquant is a straight line
the firm’s isoquant map exhibits constant returns to scale
The production function exhibits increasing returns to scale when:
a given proportionate increase in output requires a proportionately larger increase in the labour and capital inputs
a given proportionate increase in the labour input requires a larger proportionate increase in the capital input to achieve an increase in production
a given proportionate increase in the labour and capital inputs yields a proportionately larger increase in output
the marginal products of both labour and capital are falling as output rises
Suppose total production costs are described by the cost function: TC = 40 + 7Q2 . Next suppose that the fixed cost component rises from 40 to 90, so that production costs are now TC = 90 + 7Q2. This increase in fixed cost implies:
marginal cost is higher at each level of output
marginal cost must be lower at each level of output because fixed cost is higher in relation to variable costs
marginal cost is always higher than fixed cost at each output level
marginal cost must rise in the same proportion as fixed cost
The short run is usually defined as a period during which:
the firm is not able to change the price at which units of output are sold
all inputs into the production process are fixed
at least one of the inputs into the production process is fixed
the labour input is fixed, but capital and technology can change
Long-run equilibrium in a monopolistically competitive industry is characterised by:
P = MC
P = ATC
P = MR
Suppose a monopoly firm faces a downward-sloping demand curve described by the equation P = 100 - 2Q. Suppose also that it can produce additional units of output at a constant marginal cost of 40 and that total fixed costs are 1000. Under these demand and cost conditions, the firm maximizes profits by producing:
10 units of output
15 units of output
40 units of output
50 units of output
20 units of output
Using the same information about demand and cost conditions provided in the previous question (question 2), and again assuming that the firm maximizes profits, we can deduce that the firm will set its price at:
70
20
60
80
A perfectively competitive industry is characterized by:
a large number of small firms
homogenous (identical) products
no significant entry barriers to the industry
If the representative firm in a perfectly competitive market incurs losses, which of the following conditions must hold in the short run:
MC > P
MC > AR
ATC > P
MC > MR
The individual demand curve for a perfectly competitive firm is:
upward-sloping with respect to price
vertical with respect to price
horizontal at the prevailing market price
downward-sloping with respect to price
equivalent to the market demand curve
If a firm faces a downward-sloping demand curve, it maximizes profits by operating at the point where:
MC = P
MR = P
P = AR
If a firm is a price-taker and it can earn economic profits (above-normal profits) we can deduce that the firm must be operating at a rate of production for which:
P > MC
P > MR
P > ATC
For a monopoly firm, a limit pricing strategy is designed to:
limit the price paid for labour and capital inputs
deter the entry of new competitors
ensure that short-run profits are maximized
ration output when conditions of excess demand prevail
For a profit-maximising firm in a perfectly competitive market, the decision to shut down production in the short run is made when:
P < ATC
P < AFC
P < MC
P < AVC
The key difference between the Cournot model of oligopoly and the Stackelberg model is:
the Cournot model assumes the firms compete over price
the Stackelberg model assumes the firms compete over price
the Cournot model assumes that one of the firms has a first-mover advantage
the Stackelberg model assumes that the firms have the same cost conditions
The Cournot model of symmetric duopoly suggests that the market equilibrium position is such that:
one firm is larger than the other in the final equilibrium and the largest firm produces the largest quantity of output
economic profits are zero for both firms
total industry output is the same as it would have been in a perfectly competitive market
In game theory, a player has a dominant strategy when:
the pay-off to the player is greater than for any other strategy regardless of what the others are doing
the pay-off to the player is dominated by all other strategies
each player has full information about the pay-offs for the other players
The final equilibrium position in the Bertrand model of oligopoly pricing is:
a Nash equilibrium, because the participating firms collude to hold price above ATC
not a Nash equilibrium because any reduction in price would eventually drive the market price down to the competitive level
not a Nash equilibrium because each individual firm has an incentive to cut price to increase profits
a Nash equilibrium because price falls to the competitive equilibrium level and no firm then has an incentive to increase the price above the competitive level
The analysis of oligopoly suggests that total industry profits will be greatest if:
the competing firms collude
fixed costs are low
entry barriers can be removed
new entrants can achieve costs reductions via learning by doing
product differentiation is low
The dominant firm model of price leadership assumes:
the follower firms set the market price and the dominant firm adds a mark-up to that price
marginal cost is lower for the dominant firm than it is for the follower firms
the dominant firm colludes with the follower firms to maximise industry profits
the follower firms attempt to undercut the price set by the dominant firm
the dominant firm faces a horizontal demand curve
The characteristic of a Nash equilibrium is that:
there are no dominant strategies for any of the players in a game
all players have access to at least one dominant strategy
there is no incentive for any player to deviate from the strategy currently played
The kinked demand curve model of oligopoly pricing assumes:
each firm believes that its competitors will not match a price reduction
each firm believes that its competitors will increase price in response to a price reduction
each firm believes that its competitors will match any price increase
each firm takes the market price as given
An oligopolistic industry is typically characterized by:
the industry contains just a few large firms
the industry has low entry barriers
the pricing decisions of the firms are independent of each other
During the short run, when the capital stock and technology are fixed, it is usual to suppose that:
the marginal product of labour is constant
the marginal product of labour is positive and rising
the marginal product of labour is zero
the marginal product of labour is negative and falling
the marginal product of labour is positive and declining
When full employment equilibrium prevails in the aggregate labour market it is usual to suppose that unemployment will be positive in part because:
real wages are normally above their equilibrium level
in a dynamic economy there are always some people moving between jobs
real wages are sticky in a downward direction
interest rates can never be zero
From the analysis of the labour market, we would expect an increase in the capital stock to be associated with:
a fall in the level of employment
an increase in structural unemployment
an increase in voluntary unemployment
an increase in the marginal product of labour
The long run is usually defined as a period during which:
the capital stock is fixed, but the labor input is variable
the capital stock and technology are fixed, but the labor input is variable
the capital stock, technology and the labor input are all fixed
the ratio of capital to labour is fixed
In the analysis of public policy decisions, the compensation principle suggests that a policy change should be regarded as leading to an improvement in welfare if:
the poorer sections of society are made better off by the change
at least one person can be made better off by the change
the gainers from the change can compensate the losers to accept the change and still be left better off
the majority of people are made better off by the change
If a negative externality is present in a market, the competitive equilibrium is such that:
marginal private cost is greater than marginal private benefit
marginal social cost is equal to the market price
marginal private benefit is greater than marginal social cost
marginal social cost is greater than marginal private benefit
A comparison of long-run equilibrium under perfect competition and monopolistic competition suggests that:
the perfectly competitive firms operate at P < MR
the monopolistically competitive firms operate at P < MR
the perfectly competitive firms operate at P > the minimum of ATC
the monopolistically competitive firms operate at P > the minimum of ATC
In a competitive labour market we would expect firms to hire labour up to the point where:
the marginal revenue product of labour is equal to the prevailing wage rate
the marginal revenue product of labour exceeds the prevailing wage rate by the extent of the profit margin
the marginal revenue product of labour exceeds the prevailing wage rate by the greatest sustainable amount
the marginal revenue product of labour is zero
the marginal revenue product of labour begins to fall as employment rises
The analysis of monopoly power suggests that a perfectly discriminating monopolist (a monopoly exercising first degree price discrimination) will produce at an output level which is:
below the competitive output level
designed to deter the entry of new competitors
greater than the competitive output level
below the profit-maximizing output level
the same as the competitive output level
The aggregate production function suggests that the potential sources of output growth for an economy are:
increased labour supply
capital accumulation
technological progress
