1.

When the income-consumption curve has a positive slope throughout its entire length, we can conclude that: A) B) C) D) Both goods are inferior. Both goods are normal. The good on the vertical (y) axis is inferior. The good on the horizontal (x) axis is inferior.

2.

Suppose Px = price of X, and Py = price of Y. Suppose also that a consumer is willing to give up good Y to obtain an additional unit of X. A consumer maximises her satisfaction at the point where her valuation of good X equals, A) Px/Py B) Py/Px C) Px D) Py

3.

The price of lemonade is $1.00; the price of popcorn is $0.50. If Luke has maximised his utility by purchasing lemonade and popcorn, his marginal rate of substitution of popcorn for lemonade will be: A) B) C) D) 2 lemonades given up for each popcorn gained. 1 lemonades given up for each popcorn gained. 1/2 lemonade given up for each popcorn gained. Indeterminate unless more information on Lukes marginal utilities is provided.

Figure 1 4. Refer to the indifference curve in Figure 1. Which of the following statements is correct? [MU=Marginal utility] A) B) C) D) MU(A) is negative. MU(B) is negative. MU(A) = 0. MU(B) = 0.

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Table 1 A B C 5. Clothing 8 6 5 Food 5 3 8

Consider the three market baskets shown in Table 1. If preferences satisfy all three of the usual assumptions then, A) B) C) D) A is on the same indifference curve as B. B is on the same indifference curve as C. A is preferred to C. A is preferred to B.

6.

Which of the following is NOT an example of consumer behaviour consistent with the traditional assumptions of microeconomic theory? A) B) C) D) A concern for fairness can influence purchasing patterns. When demand increases, all else being equal, consumers expect price to rise. During a rainy season, the demand for umbrellas increases. None of the above.

7.

A firm employs 100 workers at a wage rate of $10 per hour, and 50 units of capital at a rate of $21 per hour. The marginal product of labour is 3, and the marginal product of capital is 5. The firm A) is producing its current output level at the minimum cost. B) could reduce the cost of producing its current output level by employing more capital and less labour. C) could reduce the cost of producing its current output level by employing more labour and less capital. D) could increase its output at no extra cost by employing more capital and less labour.

8.

Use the following two statements to answer this question: I. According to the three basic assumptions regarding peoples preferences (completeness, transitivity and more is preferred to less), a person will always prefer to earn a living through a life of crime rather than honest work. II. When we say that preferences are transitive, we mean that if a consumer prefers market basket A to market basket B, and prefers market basket B to market basket C, then the consumer prefers market basket A to market basket C. A) B) C) D) Both I and II are true. Both I and II are false. I is true and II is false. I is false and II is true.

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Figure 2 9. The individual pictured in Figure 2 A) must be risk-averse. B) must be risk-neutral. C) must be risk-loving. D) could be risk-averse, risk-neutral, or risk-loving. E) could be risk-averse or risk-loving, but not risk-neutral. 10. A team of researchers has conducted a study of the well-being of the citizens of the island nation of Zarasa. Using a scale from 1 (least happy) to 10 (most happy), the researchers find that citizens who earn 100 Zarutas per year have a mean happiness of 2.0, those who earn 200 Zarutas per year have a mean happiness of 6.0, and those who earn 300 Zarutas per year have a mean happiness of 7.0. The researchers should make which of the following conclusions? A) B) C) D) E) The utility of Zarasians increases with income. The marginal utility of Zarasians increases with income. The marginal utility of Zarasians decreases with income. Both A. and B. Both A. and C.

11. A risk-averse individual prefers: A) the utility of expected income of a risky gamble to the expected utility of income of the same risky gamble. B) the expected utility of income of a risky gamble to the utility of expected income of the same risky gamble. C) outcomes with 50-50 odds to those with more divergent probabilities, no matter what the dollar outcomes. D) outcomes with higher probabilities assigned to more favourable outcomes, no matter what the outcomes are.

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12. Pencils sell for 10 cents and pens sell for 50 cents. Suppose Phillip, whose preferences satisfy all of the usual assumptions, 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) B) C) D) Phillip could increase his utility by buying more pens and fewer pencils. Phillip could increase his utility by buying more pencils and fewer pens. Phillip could increase his utility by buying more pencils and more pens. Phillip could increase his utility by buying fewer pencils and fewer pens.

Clothing (units)

C B A

Food (units)

Figure 3

13. A consumers original utility maximising market basket of goods is shown in Figure 3 as point A. Following a price change, the consumers utility maximising market basket changes is at point B. Refer to Figure 3. The income effect of the price change in food on the quantity of food purchased is A) B) C) D) the change from A to B. the change from A to C. the change from C to B. the change from B to C.

14. Refer to Figure 3. The substitution effect of the price change in food on the quantity of food purchased is A) B) C) D) the change from C to A. the change from A to C. the change from C to B. the change from B to C.

15. If capital is measured on the horizontal axis and labour is measured on the vertical axis, the slope of an isoquant can be interpreted as the: A) rate at which the firm can substitute labour for capital without changing the output rate. B) rate at which the firm can substitute capital for labour without changing the output rate. C) marginal product of labour. D) marginal product of capital. 16. An effluent fee is imposed on a steel firm to reduce the amount of waste materials that it dumps in a river. Use the following two statements to answer this question: I. The more easily factors of production can be substituted for one another (for example, capital can be used to reduce waste water), the more effective the fee will be in reducing effluent. II. The greater the degree of substitution of capital for waste water, the less the firm will have to pay in effluent fees. A) B) C) D) Both I and II are true. I is true, and II is false. I is false, and II is true. Both I and II are false.

17. Paul and Samantha are shopping for new cars (one each). Samantha expects to pay $15,000 with 1/5 probability and $20,000 with 4/5 probability. Paul expects to pay $12,000 with 1/4 probability and $20,000 with 3/4 probability. Which of the following is true? A) Paul has a higher expected expense than Samantha for the car. B) Paul has a lower expected expense than Samantha for the car. C) Paul and Samantha have the same expected expense for the car, and it is somewhat less than $20,000. D) Paul and Samantha have the same expected expense for the car: $20,000. Scenario 1: Daniel derives utility from only two goods, cake (Qc) and donuts (Qd). The marginal utility that Daniel receives from cake (MUc) and donuts (MUd) are given as follows: MUc = Qd; MUd = Qc

Daniel has an income of $180 and the price of cake (Pc) and donuts (Pd) are both $6. 18. See Scenario 1. What is Daniels budget constraint? A) B) C) D) 180 = 6Pc + 6Pd 180 = 6Qc + 6Qd 180 = (Pc)(Qc) 180 = (Qc)(Qd)

19. Kellys utility of income function is U = log(I), where I represents income. From this information you can say that A) Kelly is risk neutral. B) Kelly is risk loving. C) Kelly is risk averse. D) we need more information before we can determine Kellys preference for risk. 20. The production function: Q = 2L K exhibits: A) B) C) D) Decreasing returns to scale. Constant returns to scale. Increasing returns to scale. All of the above at various levels of output.
2 2

Increasi ng utility

Figure 4 21. Refer to the indifference map in Figure 4. Which of the four basic assumptions about consumer preferences are violated by this indifference map? A) B) C) D) More is better than less. Transitivity. Diminishing MRS. A. and C.

22. Suppose that the price of labour (PL) is $10 and the price of capital (PK) is $20. What is the equation of the isocost line corresponding to a total cost of $100? A) B) C) D) PL + 20PK 100 = 10L + 20K 100 = 30(L+K) 100 + 30(PL + PK)

23. With its current levels of input use, a firms MRTS of labour for capital is 3. This implies A) the firm could produce 3 more units of output if it increased its use of capital by one unit (holding labour constant). B) the firm could produce 3 more units of output if it increased its use of labour by one unit (holding capital constant). C) if the firm reduced its capital stock by one unit, it would have to hire 3 more workers to maintain its current level of output. D) the marginal product of labour is 3 times the marginal product of capital. 24. If Jills MRS of bread for cake is 5, Jill would willingly give up: A) B) C) D) 5, but no more than 5, units of bread for an additional unit of cake. 5, but no more than 5, units of cake for an additional unit of bread. 1, but no more than 1, unit of cake for an additional 5 units of bread. 5, but no more than 5, units of bread for an additional 5 units of cake.

25. A firms marginal product of labour is 6 and its marginal product of capital is 5. If the firm adds one unit of labour, but does not want its output quantity to change, the firm should A) B) C) D) use 1.25 fewer units of capital. use 0.8 fewer units of capital. use 1.2 fewer units of capital. add 1 unit of capital.

26. Which of the following is an expression for the cost minimising combination of inputs? A) B) C) D) MPL/r = MPK/w MPL/w = MPK/r MPL/MPK = r/w None of the above

27. Suppose the price of rice increases and you view rice as an inferior good. The substitution effect results in a change in rice consumption, and the income effect leads to a A) B) C) D) change in rice consumption. positive, positive positive, negative negative, positive negative, negative

28. The function which shows combinations of inputs that can be purchased from a given level of expenditure is called a(n): A) B) C) D) Isoquant curve. Isocost curve. Production function. Production possibilities frontier.

Figure 5 29. Kathryns budget line has changed from A to B (see Figure 5). Which of the following explains the change in Kathryns budget line? A) B) C) D) The price of food and the price of clothing increased. The price of food increased, and the price of clothing decreased. The price of food decreased, and the price of clothing increased. The price of food and the price of clothing decreased.

30. If a consumer is always indifferent between an additional one grapefruit or an additional two oranges, then when oranges are on the horizontal axis the indifference curves A) B) C) D) will be straight lines with a slope of -1/2. will be straight lines with a slope of -1. will be straight lines with a slope of +1/2. will be right angles whose corners occur on a ray from the origin with a slope of +2.

31. To simplify our consumption models, suppose consumers only purchase food and all other goods, where food is plotted along the vertical axis of the indifference map. Suppose also that the government initially imposes a sales tax on food. How does this sales tax alter the consumers budget line? A) B) C) D) Makes the budget line steeper. Makes the budget line flatter. Parallel rightward shift. Parallel leftward shift.

32. Consider a production process where there are two inputs. The law of diminishing marginal returns assumes that: A) B) C) D) Both inputs are changed by the same percentage. There is one fixed input and one variable input. Both inputs are added in smaller and smaller increments. Both inputs are held constant.

33. Figure 6 below shows an isoquant for the production of wheat:

Figure 6 Refer to Figure 6. Which point has the highest marginal productivity of labour? A) Point A. B) Point B. C) Point C. D) Point D. 34. Suppose an individual is considering an investment in which there are exactly two possible outcomes, whose probabilities and pay-offs are given below: Table 2 Outcome A B Probability .5 ? Pay-offs $100 $?

Although all the information is correct, information is missing. Refer to Table 2. What is the probability of outcome B? A) B) C) D) 0 0.5 0.7 0.4

35. Refer to Table 2. The expected value of the investment is $55. What is the pay-off of outcome B? A) B) C) D) $20 $10 $25 $100

36. Envision a graph with meat on the horizontal axis and vegetables on the vertical axis. Shauna is a strict vegetarian. Hence, Shauna will just throw away any meat served to her. Shauna would have indifference curves that are A) B) C) D) vertical lines. horizontal lines. diagonal straight lines. upward sloping.

37. The endpoints (horizontal and vertical intercepts) of the budget line A) B) C) D) measure its slope. measure the rate at which one good can be substituted for another. measure the rate at which a consumer is willing to trade one good for another. represent the quantity of each good that could be purchased if all of the budget were allocated to that good.

38. Use the following two statements to answer this question: I. Production functions describe what is technically feasible when the firm operates efficiently. II. The production function shows the least cost method of producing a given level of output. A) B) C) C) Both I and II are true. I is true, and II is false. I is false, and II is true. Both I and II are false.

39. Use the following two statements to answer this question: I. Isoquants cannot cross one another. II. An isoquant that is twice the distance from the origin represents twice the level of output. A) B) C) D) Both I and II are true. I is true, and II is false. I is false, and II is true. Both I and II are false.

40. An investment opportunity is a sure thing; it will pay off $100 regardless of which of the two possible outcomes comes to pass. The variance of this investment opportunity A) B) C) D) is 0 is 1 is 2 is -1

END OF TEST