Set of flashcards Microeconomics Mock Questions (Page 2 of 2)

Flashcards	73
Language	English
Category	Micro-Economics
Level	University
Created / Updated	24.06.2020 / 20.12.2024
Weblink	https://card2brain.ch/cards/20200624_microeconomics?max=40&offset=40
Embed	<iframe src="https://card2brain.ch/box/20200624_microeconomics/embed" width="780" height="150" scrolling="no" frameborder="0"></iframe>

Which one of the following statements is correct?

The Cournot model pertains to a homogeneous products oligopoly. In that model, the only decision each firm needs to make is to determine the maximum level of marginal cost which is compatible with maximising profit.

The Herfindahl-Hirschman Index HHI is a useful measure to determine the share of industry sales revenue generated by the four firms with the largest sales revenue in the industry.

The Cournot and Bertrand models make different predictions about the quantities, prices, and profits that will arise under oligopolistic competition. This is partly due to the fact that they make different assumptions about how a firm expects its rival to react to its competitive moves.

Which one of the following statements is correct?

reaction function shows a firm’s best response (i.e., profit-maximising output choice) to the output level of a rival firm.

In the Cournot model, each firm’s output choice depends on the market price, and the market price depends solely on the output of the dominant, leading firm.

In homogenous products oligopoly markets, a small number of firms sell products that are substitutes for each other but also differ from each other in significant ways.

ROLEY is a high-end producer of smoothies. It is well known, and its products are truly sought-after. With respect to a box containing 10 bottles each, each of their clients has the following inverse demand function:
P = 12 – 0.5 Qd
Qd : quantity demanded
P : unit price
The marginal cost of producing one box of 10 bottles is 2. ROLEY now follows a pricing strategy based on block pricing. If the price of the first block is equal to the price charged in the absence of price discrimination, the unit price for the second block and the quantity of the second block (for each individual commercial client) are as follows:

unit price for 2. block 4.5 / quantity of the 2nd block 5

unit price for 2. block 2 / quantity of the 2nd block 20

unit price for 2. block 7 / quantity of the 2nd block 10

none of the above

Which one of the following statements is correct? 2 points
I. A Nash equilibrium describes a situation in which there exists at least one dominant strategy for one player.
II. In a Nash equilibrium the aggregate payoff of the players is maximised.
III. At the Nash equilibrium, expected behaviour and actual behaviour converge.

Only the statements I and III are true.

Only the statements II and III are true.

Only statement III is true.

None of the above

In a repeated prisoner’s dilemma game, the likelihood of a cooperative outcome increases if: 2 point

Cheating is hard to detect.

Interactions between players are frequent.

Players can earn a comparatively large one-time game from cheating.

AtlanticWings is a nationall airline that was recently granted a new route. It estimates that the aggregate annual market demand function for that route is as follows:
Qdair travel = 25,000 – 50 P air travel
Qd air travel : number of one-way tickets bought in one year
P air travel : unit price for a one-way air ticket

Assume the marginal cost of the transportation of one passenger is constant and amounts to CHF 40. For the purpose of this question, neglect fixed cost (i.e. assume that there is no fixed cost).
If fixed cost is not taken into account, how much profit would AtlanticWings earn with that route? 2

With marginal cost at 40 and a unit price of 270 a profit of 230 is generated by each ticket sold. With a quantity of 11,500, total profit amounts to
11,500 x 230 = 2,645,000

AtlanticWings is a nationall airline that was recently granted a new route. It estimates that the aggregate annual market demand function for that route is as follows:
Qdair travel = 25,000 – 50 P air travel
Qd air travel : number of one-way tickets bought in one year
P air travel : unit price for a one-way air ticket

AtlanticWings has conducted some market research and found out that its clients can be grouped into business clients who indicate a willingness to pay extra to fly business class, and holiday travellers choosing “economy class”. The aggregate demand curve of business travellers is P business = 4500 – 0.5Q business and the aggregate demand curve of economy class passengers is
P economy = 333 – 0.021 Q economy.
The marginal cost for transporting both types of passengers is 40.
AtlanticWings now decides to switch to third degree-price discrimination.
b1) Find the profit maximising price and quantity for business class passengers.

MR = MC = 40 = 4500 – 1Q
Q = 4,460
P business = 4500 – 0.5 Q business
P business = 4500 – 2230 = 2,270

AtlanticWings is a nationall airline that was recently granted a new route. It estimates that the aggregate annual market demand function for that route is as follows:
Qdair travel = 25,000 – 50 P air travel
Qd air travel : number of one-way tickets bought in one year
P air travel : unit price for a one-way air ticket

AtlanticWings has conducted some market research and found out that its clients can be grouped into business clients who indicate a willingness to pay extra to fly business class, and holiday travellers choosing “economy class”. The aggregate demand curve of business travellers is P business = 4500 – 0.5Q business and the aggregate demand curve of economy class passengers is
P economy = 333 – 0.021 Q economy.
The marginal cost for transporting both types of passengers is 40.
AtlanticWings now decides to switch to third degree-price discrimination.

b2)Find the profit maximising price and quantity for economy class passenger

MR = MC = 40 = 333 – 0.042 Q
293 = 0.042 Q
Q = 6,976
P economy = 333 – 0.021 Q economy
P economy = 333 – 0.021 x 6,976 = 186.5

AtlanticWings is a nationall airline that was recently granted a new route. It estimates that the aggregate annual market demand function for that route is as follows:
Qdair travel = 25,000 – 50 P air travel
Qd air travel : number of one-way tickets bought in one year
P air travel : unit price for a one-way air ticket

AtlanticWings has conducted some market research and found out that its clients can be grouped into business clients who indicate a willingness to pay extra to fly business class, and holiday travellers choosing “economy class”. The aggregate demand curve of business travellers is P business = 4500 – 0.5Q business and the aggregate demand curve of economy class passengers is
P economy = 333 – 0.021 Q economy.
The marginal cost for transporting both types of passengers is 40.
AtlanticWings now decides to switch to third degree-price discrimination.

If fixed costs are not taken into account, how much total profit would AtlanticWings make with third-degree price differentiation?

Profit made in the business class:
(2,270 – 40) x 4,460 = 9,945,800
Profit made in the economy class:
(186.5 – 40) x 6,976 = 1,021,984
Total profit: 10,967,784

AtlanticWings is a nationall airline that was recently granted a new route. It estimates that the aggregate annual market demand function for that route is as follows:
Qdair travel = 25,000 – 50 P air travel
Qd air travel : number of one-way tickets bought in one year
P air travel : unit price for a one-way air ticket

Please compare your answers to questions a) and b3). Comment!

10,967,784 – 2,645,000 = 8,322,784
Due to third degree price discrimination profit could be much increased (by 314%).

In your job for the private office of a wealthy family, you have to make rational investment decisions. Presently, you are faced with two investment opportunities. The first is an investment project with a sure payoff of 5,200,000. As your second option, you could invest the same amount in a highly risky investment project. If that project goes well, the return would be 12,800,000. However, if it fails, there will be no return whatsoever. According to your estimates, the probability of earning the 12,800,000 is 35 percent only.
a) In the case of the highly risky investment project (i.e., the lottery), what is the probability that there will be no return whatsoever?

65%

In your job for the private office of a wealthy family, you have to make rational investment decisions. Presently, you are faced with two investment opportunities. The first is an investment project with a sure payoff of 5,200,000. As your second option, you could invest the same amount in a highly risky investment project. If that project goes well, the return would be 12,800,000. However, if it fails, there will be no return whatsoever. According to your estimates, the probability of earning the 12,800,000 is 35 percent only.

Calculate the expected value of the highly risky investment project (i.e., the lottery

EV lottery = 0.35 12,800,000 + 0.65 0 = 4,480,000

In your job for the private office of a wealthy family, you have to make rational investment decisions. Presently, you are faced with two investment opportunities. The first is an investment project with a sure payoff of 5,200,000. As your second option, you could invest the same amount in a highly risky investment project. If that project goes well, the return would be 12,800,000. However, if it fails, there will be no return whatsoever. According to your estimates, the probability of earning the 12,800,000 is 35 percent only.

C) Given the family office (i.e., your employer) is risk averse and has a utility function determined by U = (Expected Value)0.5 , find the risk premium associated with the highly risky investment project (i.e., the lottery).

0.35 12,800,0000.5 + 0.65 0 = (5,200,000 – RP) 0.5
1,252.2 = (5,200,000 – RP) 0.5
1,568,004.85 = 5,200,000 – RP
RP = 3,631,995.15

In your job for the private office of a wealthy family, you have to make rational investment decisions. Presently, you are faced with two investment opportunities. The first is an investment project with a sure payoff of 5,200,000. As your second option, you could invest the same amount in a highly risky investment project. If that project goes well, the return would be 12,800,000. However, if it fails, there will be no return whatsoever. According to your estimates, the probability of earning the 12,800,000 is 35 percent only

Explicate what is meant by the term “risk premium”.

The term “risk premium” describes the necessary difference between the expected value of a lottery and the payoff of a sure thing to make a risk averse decision maker indifferent between the lottery and the sure thing. It is the amount by which the payoff of the sure thing must decrease to make the decision maker indifferent between it and the lottery.

Which-one(s) of the following statement(s) is/are correct?

I. According to the theory of comparative advantage, free trade between two countries is mutually beneficial, if each country specialises in the production of those goods where the opportunity cost of producing another unit is only marginally higher than in the other country.
II. According to the theory of comparative advantage, free trade between two countries is mutually beneficial, if each country specialises in the production of those goods where the opportunity cost of producing another unit is lower than in the other country.
III. According to the theory of comparative advantage, free trade between two countries is mutually beneficial only, if at least one country has an absolute advantage in the production of one good.

None of the statements is correct.

Only statement II is correct.

Statements II and III are correct.

1. Which of the following statements is true?

More is Better implies that indifference curves have a negative slope.

Transitivity implies that indifference curves have a negative slope.

Completeness implies that indifference curves cannot cross.

Transitivity implies that indifference curves must be convex to the origin.

Suppose that a consumer has utility function U = .1h + f. Which of the following is true?

The marginal utility of h is .1

The marginal utility of h is decreasing.

The marginal rate of substitution between h and f is .1.

A utility function written as U = Axy, where x and y are goods and and are constants represents:

quasilinear preferences.

Perfect complements.

Perfect substitutes.

Cobb-Douglas preferences.

Which of the following does not represent the same preferences as U = xy?

U = x^2y^2

U = 10 + xy

U = lnx + lny

U = 25x + xy

U = xy – 10

Suppose that the price of good A is $4, the price of good B is $2 and the consumer's
income is $60. Which of the following baskets is not on the consumer's budget line?

A = 20, B = 5

A = 10, B = 10

A = 5, B = 20

A = 15, B = 0

At a consumer's interior optimum solution, which of the following will not necessarily
hold true when the consumer can purchase goods x and y?

MUx = MUy

MUx/MUy = Px/Py

MRSx,y = MUx/MUy

MRSx,y = Px/Py

Identify the statement that is false:

An increase in the amount of income changes the intercepts of the budget constraint but not the slope.

An increase in the price of good x changes both the x-intercept and the slope of the budget constraint.

An increase in the price of good x and an equal percentage increases in the price of good y changes the x-intercept, the y-intercept and the slope of the budget constraint.

An increase in the price of good x and an increase in the price of good y may or may not change the slope of the budget constraint.

Economists describe consumer choice as a constrained optimization problem. What is the
consumer trying to do?

Maximize income subject to the budget constraint.

Maximize the budget constraint.

Maximize utility subject to the budget constraint.

Maximize utility.

Which of the following is NOT a characteristic of a perfectly competitive market?

All firms have equal access to technology in the long run.

All consumers have perfect information about prices.

All firms must be identical.

ach buyer's purchases must have an imperceptible effect on market price.

Which of the following statements could be true for a perfectly competitive industry?

Exit and entry occur only in the short run.

Exit and entry may occur in either the short or the long run.

The firm's supply curve is flat in the long run.

The industry's supply curve is flat in the long run.

A firm's total cost function is: TC = 100 + q. What is the shut-down condition of this
firm?

P> AVC(q)

P > ANSC(q)

P ³> AC(q)

Each firm in a perfectly competitive industry has the total cost curve: TC(q) = q2 + 100.
The associated marginal cost is MC = $2q. What is the short run firm supply curve for this
industry?

P = 2q above PS = $20

P= 2q above PS = $0

P = $100 + q2 above PS = $20

Is the following true or false? "It is not possible for consumers' surplus and producers'
surplus to rise and for a deadweight loss to occur, simultaneously."

Ans: False
Response: Consider the case of a subsidy. In this case, you can see from the diagram that
producers' surplus and consumers' surplus rise, but a deadweight loss is created because
production past the point where the willingness to pay of consumers equals the opportunity
cost of resources. For units between Q* and Q2, the subsidy causes consumers to demand the
product even though their willingness to pay falls below the opportunity cost. [Image:
Fig10001.gif] Another way to think of the problem is the following: while total surplus is
producers' surplus plus consumers' surplus, we must also factor in the cost of the program
that is put in place. Here, the deadweight loss occurs because the government must pay
consumers to purchase past the equilibrium point and this money must come from
somewhere. The deadweight loss occurs because the cost of this program exceeds its benefits
by causing a misallocation of resources towards purchase of this product.
Section: 10.4 Subsidies

When we say that the perfectly competitive market equilibrium is efficient, we mean that:

There are no unrealized gains from trade.

There is no deadweight loss.

Total surplus is maximized.

Any consumer who is willing to pay the opportunity cost of resources is able to buy; any consumer who is not willing to pay the opportunity cost of resources does not buy.

All of the above.

The equilibrium conditions in a perfectly competitive market where a subsidy, T, is paid
to producers are:

QD = QS

QD = QS and PD - T = PS.

QD = QS and PD + T = PS

PD + T = PS.

Consider a perfectly competitive market with market supply QS = 5P and QD = 200 - 5P.
What is consumer surplus in this market?

100

1000

2000

Consider a perfectly competitive market with market supply QS = 10P and market demand
QD = 420 – 60P. What is total surplus in this market?

420

120

210

Which of the following statements is false?

With a price floor, the market will not clear.

With a price floor, consumers will buy less of the good than they would in a free market.

With a price floor, producer surplus will always increase.

With a price floor, there will be excess supply.

Microeconomics Mock Questions

Create or copy sets of flashcards

Create or copy sets of flashcards

Log in to see all the cards.

SWITCHaai

Office 365

Edulog

Apple ID

Google