Economics Past Paper PDF

Some questions in multiple choice format Questions 1-4: Consider the demand curve given by p = 28 – 4Q. [You can use the following results: for the demand curve given p = a – bQ, the elasticity at quantity Q is e(Q) = (a – bQ)/bQ. Also, under this demand curve, the marginal revenue (MR) of a monop...

Some questions in multiple choice format Questions 1-4: Consider the demand curve given by p = 28 – 4Q. [You can use the following results: for the demand curve given p = a – bQ, the elasticity at quantity Q is e(Q) = (a – bQ)/bQ. Also, under this demand curve, the marginal revenue (MR) of a monopolist at quantity Q is MR(Q) = a – 2bQ.] 1. When the price is p = 20, the elasticity is: (a) 3 (b) 10/4 (c) 2/3 (d) do not have sufficient information to determine elasticity at p = 20 2. The elasticity at Q = 6 is: (a) 1/6 (b) 9 (c) 2/3 (d) 1/3 3. The marginal revenue (MR) at Q = 3 is (a) 1 (b) 4 (c) 3 (d) 16 4. Suppose it is known that MR(Q) = 8 at a certain quantity Q. Then Q is (a) 4 (b) 5 (c) 2.5 (d) do not have sufficient information to determine Q Questions 5-18: Consider the market for a good that has 6 buyers. Each buyer has the same income $600. Let q denote the amount of the good, p the price of the good and m the money left after buying the good. Buyers 1,2 have utility function u1 = 3q − q2 + m, buyer 3,4 have the utility function u3 = 4q − q2 + m and buyers 5,6 have the function u5 = 8q − q2 + m. [You can use the following general result: for a buyer who has utility function u = aq − q2 + m, the individual demand at price p is given by q = (a − p)/2 if p < a and q = 0 if p ≥ a.] 5. Suppose p < 2. Then the individual demand of buyer 1 is given by (a) q = 0 (b) q = (3 – p)/2 (c) q = (2 – p)/2 (d) do not have sufficient information to determine the individual demand of buyer 1 6. Suppose p ≥ 5. Then the individual demand of buyer 3 is given by (a) q = 0 (b) q = (2 – p)/2 (c) q = (4 – p)/2 (d) none of the above 7. Suppose p < 7. Then the individual demand of buyer 4 is given by (a) q = (4 – p)/2 (b) q = 0 (c) q = (7 – p)/2 (d) do not have sufficient information to determine the individual demand of buyer 4 8. Suppose p < 10. Then the individual demand of buyer 6 is given by (a) q = (10 – p)/2 (b) q = (8 – p)/2 (c) q = 0 (d) do not have sufficient information to determine the individual demand of buyer 6 9. Suppose 3 ≤ p < 4. Then the market demand for the good is given by (a) Q = 0 (b) Q = (18 – p)/2 (c) Q = 12 – 2p (d) Q = (28 – 3p)/2 10. Suppose 6 ≤ p < 7. Then the market demand for the good is given by (a) Q = 0 (b) Q = 8 – p (c) Q = (30 – 6p)/2 (d) do not have sufficient information to determine the market demand 11. Suppose p ≥ 10. Then the market demand for the good is given by (a) Q = 0 (b) Q = (18 – p)/2 (c) Q = (30 – 6p)/2 (d) none of the above 12. Suppose p = 3. Then the market demand for the good is given by (a) Q = 0 (b) Q = 9 (c) Q = 6 (d) Q = 3.5 13. Suppose p = 1. Then the market demand for the good is given by (a) Q = 0 (b) Q = 12 (c) Q = 6 (d) Q = 13.5 14. Suppose p = 3.5. Then the market demand for the good is given by (a) Q = 0 (b) Q = 12 (c) Q = 13.5 (d) Q = 5 15. At price p = 7: (a) buyers 5,6 buy the good, the remaining buyers do not buy (b) buyers 3,4,5,6 buy the good, the remaining buyers do not buy (c) buyers 1,2 buy the good, the remaining buyers do not buy (d) all buyers buy the good 16. At price p = 8.5: (a) buyers 4,5 buy the good, the remaining buyers do not buy (b) buyers 3,4,5 buy the good, the remaining buyers do not buy (c) buyers 1,2 buy the good, the remaining buyers do not buy (d) no buyer buys the good 17. At price p = 10: (a) buyers 3,4,5,6 buy the good, the remaining buyers do not buy (b) buyers 5,6 buy the good, the remaining buyers do not buy (c) all buyers buy the good (d) no buyer buys the good  Questions 18-29: Consider a firm that operates under perfect competition. The firm takes the price as given and chooses quantity to maximize its profit. In Figure 2, the average cost (AC), average variable cost (AVC) and marginal cost (MC) curves of this firm are drawn. Two different levels of price p1 and p2 are drawn in Figure 2. Figure 2(b)(ii) cost, price AC MC E AVC D p2 T S G A U F Z V p1 quantity O Q1 Q0 18. When price is p1, the quantity that maximizes the profit of the firm is given by (a) Q0 (b) Q1 (c) none of the above 19. When price is p1, under the profit-maximizing quantity of the firm, its total revenue is given by the area (a) OAFQ0 (b) OVZQ1 (c) ODEQ0 (d) OGTQ1 20. When price is p1, under the profit-maximizing quantity of the firm, its total cost is given by the area (a) OAFQ0 (b) OVZQ1 (c) ODEQ0 (d) OGTQ1 21. When price is p1, under the profit-maximizing quantity of the firm, it makes (a) positive profit (b) zero profit (c) loss (negative profit) (d) none of the above 22. When price is p1, under the profit-maximizing quantity of the firm, its profit/loss is given by the area (a) AGTU (b) VGTZ (c) ADEF (d) AGSF 23. When price is p1, the best choice for the firm is (a) continue production (b) stop production (c) do not have sufficient information to conclude what is the best choice (d) none of the above 24. When price is p2, the quantity that maximizes the profit of the firm is given by (a) Q0 (b) Q1 (c) none of the above 25. When price is p2, under the profit-maximizing quantity of the firm, its total revenue is given by the area (a) OAFQ0 (b) OVZQ1 (c) ODEQ0 (d) OGTQ1 26. When price is p2, under the profit-maximizing quantity of the firm, its total cost is given by the area (a) OAFQ0 (b) OVZQ1 (c) ODEQ0 (d) OGTQ1 27. When price is p2, under the profit-maximizing quantity of the firm, the firm makes (a) positive profit (b) zero profit (c) loss (negative profit) (d) none of the above 28. When price is p2, under the profit-maximizing quantity of the firm, its profit or loss is given by the area (a) AGTU (b) VGTZ (c) ADEF (d) AGSF 29. When price is p2, the best choice for the firm is (a) continue production (b) stop production (c) do not sufficient information to conclude what is the best choice (d) none of the above Questions 30-39: A risk averse individual faces uncertainty with two outcomes: good, bad. The individual has income $1260 at good and $720 at bad outcome. The probability of good outcome is 7/9 (so the probability of bad outcome is 1 – 7/9 = 2/9). The individual can buy any non- negative x units of insurance. Every unit of insurance has price $p and it pays $1 in the event of bad outcome. Assume that the insurance market is competitive. 30. The unit price p equals (a) 7/9 (b) 2/9 (c) 0 (d) 100 31. Suppose the individual buys x units of insurance. Under good outcome, his net income is (a) 1260 − 2x/9 (b) 1260 − 7x/9 (c) 720 + 7x/9 (d) 1140 32. Suppose the individual buys x units of insurance. Under bad outcome, his net income is (a) 1260 − 2x/9 (b) 1260 − 7x/9 (c) 720 + 7x/9 (d) 1140 33. When the individual buys x units of insurance, then on the average he obtains (a) 1260 − 2x/9 (b) 1260 − 7x/9 (c) 720 + 7x/9 (d) 1140 34. For this example, full insurance corresponds to (a) x = 540 (b) x = 200 (c) x = 720 (d) none of the above 35. For this example, partial insurance corresponds to (a) x > 200 (b) 0 < x < 540 (c) 0 < x < 2/9 (d) none of the above 36. For this example, over insurance corresponds to (a) x > 540 (b) x > 200 (c) x > 720 (d) none of the above 37. Suppose x = 400. Then for the individual, the net income under good outcome is (a) higher than the net income under bad outcome (b) lower than the net income under bad outcome (c) same as the net income under bad outcome (d) do not have sufficient information to conclude 38. Suppose x = 540. Then for the individual, the net income under good outcome is (a) higher than the net income under bad outcome (b) lower than the net income under bad outcome (c) same as the net income under bad outcome (d) do not have sufficient information to conclude 39. For the individual, it is optimal to choose (a) x = 720 (b) x = 1260 (c) x = 540 (d) do not have sufficient information to conclude Questions 40-50: Consider a Cournot duopoly with two firms 1 and 2. Let q1 and q2 be quantity produced by firms 1, 2 and let the inverse demand given by p = 15 − q1− q2 where p = price of the good. Both firms have identical constant unit cost 3. Assume each firm can produce only one of the following levels of quantity: 1, 3 or 5. Table 1: Price q2 = 1 q2 = 3 q2 = 5 q1 = 1 13 q1 = 3 7 q1 = 5 Table 1 presents the price of the good for different values of (q1,q2). Filling up the missing values, answer the following questions. 40. When (q1= 1, q2= 3), the price equals (a) 7 (b) 11 (c) 10 (d) 9 41. When (q1= 3, q2= 3), the price equals (a) 6 (b) 11 (c) 10 (d) 9 Table 2: Unit Profit q2 = 1 q2 = 3 q2 = 5 q1 = 1 10 6 q1 = 3 4 q1 = 5 Table 2 presents the unit profit of a firm for different values of (q1,q2). Filling up the missing values, answer the following questions. 42. When (q1= 3, q2= 3), the unit profit equals (a) 2 (b) 6 (c) 7 (d) 4 43. When (q1= 5, q2= 5), the unit profit equals (a) 2 (b) 6 (c) 7 (d) 4 Table 3: Profit and best response of firm 1 q2 = 1 q2 = 3 q2 = 5 q1 = 1 10 q1 = 3 24 q1 = 5 30* Table 3 presents the profit of firm 1 and its best response for specific q2. The profits at q2 = 1 have been derived and best response has been identified by *. Fill up the missing values and identify best response for 1 for other values of q2. Then answer the following questions. 44. Best response of firm 1 to q2= 3: (a) only q1= 5 (b) both q1= 1 and q1= 5 (c) only q1= 3 (d) only q1= 1 45. Best response of firm 1 to q2= 5: (a) only q1= 5 (b) both q1= 1 and q1= 5 (c) only q1= 3 (d) only q1= 1 Table 4: Profit and best response of firm 2 q2 = 1 q2 = 3 q2 = 5 q1 = 1 q1 = 3 8 18 20* q1 = 5 Table 4 presents the profit of firm 2 and its best response for specific q1. The profits at q1 = 3 have been derived and best response has been identified by *. Fill up the missing values and identify best response for 2 for other values of q1. Then answer the following questions. 46. Best response of firm 2 to q1= 1: (a) only q2= 3 (b) both q2= 3 and q1= 5 (c) only q2= 1 (d) only q2= 5 47. Best response of firm 2 to q1= 5: (a) only q2= 1 (b) both q2= 1 and q2= 5 (c) only q2= 3 (d) both q2= 3 and q2= 5 Table 5: Profits and best responses of both firms q2 = 1 q2 = 3 q2 = 5 q1 = 1 q1 = 3 q1 = 5 Using the information from Tables 3 and 4, present the profits of firms in Table 5 together with best responses. For each cell, write the profit of firm 1 in the left box and profit of firm 2 in the right box. Then answer the following questions. 48. At the cell (q1= 3, q2= 5), mutual best responses occur. (a) true (b) false 49. Which one of the following is an NE of this Cournot duopoly? (a) (q1= 3, q2= 1) (b) (q1= 1, q2= 3) (c) (q1= 3, q2= 5) (d) (q1= 4, q2= 5) 50. NE of this Cournot duopoly are: (a) (q1= 3, q2= 5) and (q1= 5, q2= 3) (b) only (q1= 3, q2= 5) (c) (q1= 3, q2= 5), (q1= 5, q2= 3) and (q1= 1, q2= 3) (d) (q1= 3, q2= 5), (q1= 1, q2= 5) and (q1= 5, q2= 1) Questions 51-59: Consider a Bertrand duopoly with two firms 1 and 2. They sell the same good that has demand given by Q = 24 – p. Let p1, p2 be the prices set by firms 1,2. Firms 1,2 have the same unit cost 4. Assume each firm can set only one of the following price: 2, 4, 6. The firm that offers the lowest price receives the entire demand at that price and the other firm sells nothing. In the event the two firms set exactly the same price, they equally split the demand at that price. Table 1: Demand D1 received by firm 1 p2 = 2 p2 = 4 p2 = 6 p1 = 2 11 22 p1 = 4 p1 = 6 0 Table 1 presents demand received by firm 1 for different values of (p1,p2). Filling up the missing values, answer the following questions. 51. When (p1= 4, p2= 2), the demand received by firm 1 is (a) 0 (b) 3 (c) 9 (d) 6 52. When (p1= 6, p2= 6), the demand received by firm 1 is (a) 0 (b) 3 (c) 9 (d) 6 Table 2: Demand D2 received by firm 2 p2 = 2 p2 = 4 p2 = 6 p1 = 2 0 0 p1 = 4 4 p1 = 6 22 Table 2 presents demand received by firm 2 for different values of (p1,p2). Filling up the missing values, answer the following questions. 53. When (p1= 4, p2= 2), the demand received by firm 2 is (a) 0 (b) 22 (c) 11 (d) 12 54. When (p1= 4, p2= 6), the demand received by firm 2 is (a) 0 (b) 22 (c) 11 (d) 12 Table 3: Unit profit of firm 1 p2 = 2 p2 = 4 p2 = 6 p1 = 2 p1 = 4 0 p1 = 6 2 Table 3 presents the unit profit of firm 1 for different values of (p1,p2). Filling up the missing values, answer the following questions. 55. When (p1= 2, p2= 4), the unit profit of firm 1 is (a) 2 (b) −2 (c) 4 (d) 0 Table 4: Unit profit of firm 2 p2 = 2 p2 = 4 p2 = 6 p1 = 2 p1 = 4 −2 p1 = 6 −2 Table 4 presents the unit profit of firm 2 for different values of (p1,p2). Filling up the missing values, answer the following questions. 56. When (p1= 2, p2= 4), the unit profit of firm 1 is (a) 2 (b) −2 (c) 4 (d) 0 Table 5: Profit and best response of firm 1 p2 = 2 p2 = 4 p2 = 6 p1 = 2 −22 p1 = 4 0* p1 = 6 0* Table 5 presents the profit of firm 1 and its best response for specific p2. The profits at p2 = 2 have been derived and best response has been identified by *. Fill up the missing values and identify best response for 1 for other values of p2. Then answer the following questions. 57. Best response of firm 1 to p2= 4: (a) only p1= 2 (b) p1= 4 and p1= 6 (c) p1= 2, p1= 4 and p1= 6 (d) only p1= 4 Table 6: Profit and best response of firm 2 p2 = 2 p2 = 4 p2 = 6 p1 = 2 p1 = 4 −44 0 0 p1 = 6 Table 6 presents the profit of firm 2 and its best response for specific p1. The profits at p1 = 4 have been derived and best response has been identified by *. Fill up the missing values and identify best response for 2 for other values of p1. Then answer the following questions. 58. Best response of firm 2 to p1= 6: (a) only p2= 6 (b) p2= 4 and p2= 6 (c) p2= 2, p2= 4 and p2= 6 (d) only p2= 4 Table 7: Profits and best responses of both firms p2 = 2 p2 = 4 p2 = 6 p1 = 2 p1 = 4 p1 = 6  Using the information from Tables 5 and 6, present the profits of firms in Table 7 together with best responses. For each cell, write the profit of firm 1 in the left box and profit of firm 2 in the right box. Then answer the following questions. 59. NE of this Bertrand duopoly are: (a) only (p1= 4, p2= 4) (b) (p1= 2, p2= 2), (p1= 4, p2= 4) and (p1= 6, p2= 6) (c) only (p1= 6, p2= 6) (d) (p1= 4, p2= 4) and (p1= 6, p2= 6) Questions 60-65: Consider a monopolist M that faces a linear demand curve and operates under increasing marginal cost of production. The demand curve, marginal revenue (MR) curve and marginal cost (MC) curve of M are drawn in the following diagram. Diagram 1 price, cost A L D N K M H demand curve E cost G F MC O quantity Q1 Q2 B A A MR 60. The monopoly quantity (quantity that maximizes profit of M) is (a) Q1 (b) Q2 (c) none of the above 61. The monopoly price (the price at monopoly quantity) is given by (a) OA (b) OD (c) OE (d) none of the above 62. The total revenue of M is given by the area (a) OEKQ2 (b) ODLQ1 (c) OALQ1 (d) OGQ1 63. The total profit of M is given by the area (a) OEKQ2 (b) ADL (c) FDLG (d) OALQ1 64. The consumer surplus under monopoly is given by the area (a) OEKQ2 (b) ADL (c) OALG (d) OALQ1 65. The total surplus under monopoly is given by the area (a) OEKQ2 (b) ADL (c) FALG (d) OEHQ1