MSc Business Economics

PRACTICE EXAM PAPER

CLOSED BOOK TIME ALLOWED: 90 Minutes

Instructions

There are 50 questions. Answer all questions

The system for multiple choice is as follows:

 You must choose only ONE answer per question
 Choose what you think is the best answer from the available options
 You score 1 point for each correct answer
 You score zero for each blank answer
 You lose ¼ point for each incorrect answer

1. If the production possibility frontier is drawn as a straight line, it implies that:

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 a) marginal cost remains constant in both sectors of activity as production levels
change
b) marginal cost must be rising in both sectors of activity as production expands
because of diminishing returns
c) marginal cost must be declining in both sectors of activity as production expands
because of the cost advantages associated with economies of scale
d) the optimal allocation of resources can only be achieved via a system of state
planning
e) there are no opportunities for specialisation and trade

2. Portugal can produce 1 unit of cloth using 9 hours of labour and 1 unit of wine using
3 hours. In Spain it takes 6 hours of labour to produce 1 unit of cloth and 3 hours to
produce 1 unit of wine. These productivity conditions imply:
a) Spain has a comparative advantage in cloth production
b) Portugal has an absolute advantage in cloth production
c) Spain has a comparative advantage in wine production
d) Portugal has a comparative advantage in cloth production
e) Portugal has an absolute advantage in wine production

3. Suppose the market for product X is described by the standard market model, with
upward-sloping supply curve and downward-sloping demand curve. Now suppose
we observe a fall in the market price of X together with a fall in the quantity of X
bought and sold. A possible explanation for this price and quantity adjustment is:

a) a leftward shift in the position of the demand curve and no shift in the position
of the supply curve
b) a rightward shift in the position of the demand curve and a rightward shift in the
position of the supply curve
c) a leftward shift in the position of the supply curve and no shift in the position of
the demand curve
d) a rightward shift in the position of the demand curve and a leftward shift in the
position of supply curve
e) a rightward shift in the position of the demand curve and no shift in the position
of the supply curve

4. Assume that market demand is given by the equation D(p) = 20 – 2p and that market
supply is given by S(p) = 10 + 3p. It follows that the market equilibrium quantity is:
a) 16
b) 2
c) 13

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 d) 25
e) 4

5. If a profit-maximising monopoly firm can produce additional units of output at a

constant marginal cost of $120, we can deduce that it will operate at the rate of
production where:
a) P = $120
b) MR = $120
c) ATC = $120
d) MR > $120
e) MR – MC = $120

6. A firm calculates that the price elasticity of demand for its product is − 0.75. If this
calculation is correct, we can deduce that a reduction in price will generate:
a) higher sales and lower total revenue
b) lower sales and lower total revenue
c) higher sales, but no change in total revenue
d) higher sales and higher total revenue
e) lower sales and higher total revenue

7. If a firm faces a downward-sloping demand curve, and aims to maximize total

profits, it should set price and output at the point where:

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 a) MR < 0
b) P = MC
c) MR – MC = 0
d) MR > P
e) MR = 0

8. The cross-price elasticity of demand is measure of:

a) how the demand for a product changes in response to a change in the product’s
own price
b) how the demand for a product changes in response to a change in the price of an
alternative product that might be purchased
c) how the demand for a product changes in response to a change in household
money incomes
d) how the demand for a product changes in response to a change in consumer
preferences
e) how the price elasticity of demand changes when there is a cross-over between
one market and another

9. Consider a monopoly firm that faces a downward-sloping market demand curve and
aims to maximise profits. The firm has zero fixed costs and can produce additional
units of output at a constant marginal cost of $25. The firm’s marginal revenue at
the current rate of production is $35. From this information, we can deduce the
following:

a) the firm is incurring losses and should raise price and reduce output
b) the firm is operating at the profit-maximising production rate and economic
profits are positive
c) the firm is operating below the profit-maximising production rate and should cut
price and raise output
d) the firm is incurring losses and should cut price and raise output
e) the firm is operating above the profit-maximising output rate and should raise
price and reduce output

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10. In the standard market model, with upward-sloping supply curve and downward-
sloping demand curve, which of the following would generate an unambiguous fall
in market price?
a) a shift to the right of the supply curve and a shift to the left of the demand curve
b) a shift to the right of the supply curve and a shift to the right of the demand
curve
c) a shift to the left of the supply curve and a shift to the right of the demand curve
d) a shift to the left of the supply curve and a shift to the left of the demand curve
e) a shift to the right of the demand curve and no change in the position of the
supply curve

11. If quantity demanded falls by 2% in response to a 4% increase in price, price

elasticity of demand is:
a) – 2.0
b) – 4.0
c) – 8.0
d) – 2.4
e) – 0.5
12. Price elasticity of demand is calculated as:
a) (dQ/Q) / (dP/P)
b) (dQ/dP) × (Q/P)
c) (dQ/Q) / (P/Q)
d) (dQ/Q) × (Q/P)
e) (dQ x Q)/(dP x P)

13. If market supply is perfectly inelastic with respect to price, we would expect an
increase in market demand to generate:
a) a fall in the market price
b) a fall in the market price and an increase in market output
c) a rise in the market price
d) a rise in the market price and a fall in output
e) a rise in output with no change in market price

14. Consider two products, X and Y. If the demand for product Y falls by 5% in response
to a 5% rise in the price of product X, we can infer that:

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 a) the price elasticity of demand for product X is equal to 1.0
b) product X is an inferior good
c) products X and Y are substitute goods
d) preferences must have shifted from product Y towards product X
e) products X and Y are complementary goods

15. Suppose a firm’s total production costs are described by the cost function TC = 80 +
3Q2. Next suppose that the fixed cost component rises from 80 to 110, so that
production costs are now TC = 110 + 3Q2. This increase in fixed cost implies:
a) marginal cost is higher at each level of output
b) marginal cost must be lower at each level of output because fixed cost is higher
in relation to variable costs
c) marginal cost is unaffected by the increase in fixed cost
d) marginal cost must rise in the same proportion as fixed cost
e) marginal cost no longer falls as output rises

16. Consider the following game in which two firms (Alpha and Omega) are considering
whether to advertise or not advertise to increase sales. Each firm knows that the
impact on profits depends in part on what the other firm does. The expected profit
outcomes of the game are shown below, with Alpha’s profit shown as the first
number in each pair and Omega’s profit shown as the second number:

Omega

Advertise Not Advertise

Advertise 20, 10 30, 2

Alpha

Not Advertise 10, 16 40, 6

Which of the following is TRUE for the game?

a) Alpha’s dominant strategy is not to advertise
b) Alpha’s dominant strategy is to advertise
c) Omega’s dominant strategy is to advertise
d) Omega’s dominant strategy is not to advertise
e) neither firm has a dominant strategy

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17. Suppose you observe that the demand for product X falls by 10% in response to a
10% fall in consumer incomes. From this information we can deduce that:
a) the income elasticity of demand for product X is negative
b) the income elasticity of demand for product X is 10
c) X is a normal good
d) preferences must have shifted in favour of product X
e) X is an inferior good

18. Suppose a firm sells units of output at a common market price P and faces a
downward-sloping demand curve given by the equation P = 100 - 5Q. In this case,
marginal revenue at any output level Q can be calculated as:

a) 100Q − 5Q2
b) 100 − 10Q
c) 95
d) 5
e) 500 – 25Q

19. For a monopoly firm operating in the short run, profits are maximized at the output
rate for which:
a) P = ATC
b) P = MR
c) MR = MC
d) P < MR
e) MR = 0

20. Suppose a firm faces a demand curve described by the equation P = 1000 − 4Q and
the firm’s total production costs (TC) are given by TC = 800 + 120Q. These revenue
and cost conditions imply that the firm maximizes profits by setting production Q at:
a) 120
b) 30
c) 55
d) 200

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 e) 110

21. Conditions of oligopoly prevail within an industry when:

a) the industry contains only a single firm
b) the industry contains a large number of small firms
c) the industry has low entry barriers
d) the industry output is limited by market demand
e) the industry contains a small number of large firms

22. The following table shows total variable cost per month for a firm at different
output levels

Output Variable Cost

1 $1200
2 $1400
3 $1650
4 $1950
5 $2350
6 $2800
7 $3300
8 $4000

Assuming that the firm incurs fixed capital costs of $2100 per month, the marginal
cost of the 5th unit produced is:
a) $2350
b) $450
c) $80
d) $400
e) $2500

23. A firm purchased computer software to upgrade its IT system at a non-refundable

cost of £12,000. It then discovered a deficiency in the program and calculated that it
would need to spend an additional £3000 to make the program useable for its
purposes, implying a total cost of £15,000. The firm also discovered that it could buy
a useable program from another supplier at a cost of £7000. Should the firm buy the
new software from the other supplier?
a) yes, because £7000 is less than £15,000

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 b) yes, because £7000 is less than £12,000
c) yes, because £12,000 is more than £10,000
d) no, because £7000 is more than £3000
e) no, because £7000 is more than £0

24. Consider the (inverse) demand curve P = 400 – 10Q. If consumers purchase 25 units
of output, what is the marginal value attached to the last unit purchased?
a) 250
b) 375
c) 150
d) 390
e) 125

25. In the analysis of production costs, it is usual to suppose that marginal cost rises in
the short run as production expands because:
a) the marginal product of labour eventually falls as employment and output rise
b) an increase in production requires a reduction in price in order to sell the extra
output
c) average fixed cost must fall as production expands in the short run
d) variable costs become less significant as production expands
e) all of the above

26. Consider the market for wheat and the following changes in demand and supply
conditions. Starting from an initial equilibrium position, in which supply and
demand are in balance, suppose there is both an increase in the demand for wheat
(a rightward shift of the demand curve) and an increase in the supply of wheat (a
rightward shift of the supply curve). After price and quantity have adjusted to the
new equilibrium, we would expect to observe:
a) a higher price and a larger quantity sold
b) a higher price, but the change in quantity sold is ambiguous
c) a lower price and a smaller quantity sold
d) a larger quantity sold, but the change in price is ambiguous

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 e) neither price nor quantity change because the shifts in supply and demand
would offset each other

27. Suppose a firm faces a demand curve described by the equation P = 100 − Q and its
total production costs (TC) are given by TC = 5 + 20Q. With this revenue and cost
information, if the firm aims to maximise profits it should set price P at:
a) 40
b) 20
c) 80
d) 60
e) 75
28. In game theory, if a firm has a dominant pricing strategy, we can deduce that:
a) the firm’s optimal pricing decision is not affected by the pricing decisions of its
competitors
b) the firm’s optimal pricing decision depends on the pricing decisions of its
competitors
c) the firm effectively faces a kinked demand curve
d) the firm would be unlikely to reach a Nash equilibrium
e) none of the above

29. Suppose the total cost (TC) of producing Q units of output is given by the equation
TC = 50 + 9Q. It follows that marginal cost is:
a) 68
b) 9Q
c) 59
d) 50Q + 9
e) 9

30. Consider the following game in which two firms (RED and GREEN) are considering
whether to Invest or Not Invest to increase capacity. Each firm knows that the
impact on profits depends on what the other firm chooses to do. The possible profit
outcomes of the game are shown below, with Red’s profits shown as the first
number in each pair and Green’s profits shown as the second number:

GREEN
Invest Not Invest

Invest 20, 10 40, 20

RED

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 Not Invest 10, 16 22, 6

Assuming that the firms aim to earn as much profit as possible, which of the
following is TRUE for the game?
a) Red’s dominant strategy is to invest
b) Red’s dominant strategy is not to invest
c) Greens dominant strategy is to invest
d) Green’s dominant strategy is not to invest
e) the dominant strategy for both firms is to invest

31. A firm estimates that the price elasticity of demand for its product is equal to −1. If
the firm’s estimate is correct, we would expect an increase in price to generate:
a) higher sales and an increase in total revenue
b) lower sales and an increase in total revenue
c) higher sales and a reduction in total revenue
d) lower sales and a reduction in total revenue
e) lower sales and no change in total revenue

32. If a profit -maximising 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:
a) P > MC
b) P > MR
c) P > ATC
d) P < MR
e) (P − MC) > 0

33. If a firm can substitute labour and capital in the production process, other things
being equal, we would expect the firm to respond to a long-run fall in the cost of
capital by:
a) adopting a more labour-intensive method of production
b) reducing output to compensate for the lower cost of capital
c) hiring a larger amount of labour to work with the existing capital input
d) adopting a more capital-intensive production method
e) raising the market price

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34. The production function exhibits increasing returns to scale when:
a) a given proportionate increase in output requires a proportionately larger
increase in the labour and capital inputs
b) a given proportionate increase in the labour input requires a larger
proportionate increase in the capital input to achieve an increase in production
c) a given proportionate increase in the labour and capital inputs yields a
proportionately larger increase in output
d) the marginal products of both labour and capital are falling as output rises
e) an increase in the scale of production can be achieved only with an increase in
total factor productivity

35. Consider a competitive market in which units of output are produced at a total
private cost (TC) described by the equation TC = 3Q 2. There is also an externality cost
attached to production and the total externality cost (TEC) at any level of output is
described by the equation TEC = 2Q2. The marginal benefits that consumers attach to
additional units of output are shown by the (inverse) market demand curve P = 60 
2Q and there are no additional externality benefits. From this information we can
deduce that the socially efficient output level is:
a) Q = 8
b) Q = 62
c) Q = 5
d) Q = 12
e) Q = 6

36. In a competitive market with no entry barriers, it is usual to suppose that all firms in
the industry will in the long run:
a) earn above-normal profits
b) earn zero economic profits
c) earn profits above the break-even level
d) earn zero accounting profits
e) incur losses until demand eventually rises back to its normal level

37. The short-run aggregate production function shows the relationship between:
a) output and the capital input, holding employment and the technology constant
b) output and employment, allowing all factor inputs to change
c) output and employment, holding capital and technology constant
d) output and technology, holding capital and employment constant
e) output and the real wage, holding all factor inputs constant

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38. The demand for labor is negatively related to the real wage over the short run
because:
a) the marginal product of labour declines as employment rises
b) a fall in the real wage causes labour supply to rise
c) a fall in the real wage reduces the profitability of production
d) labour and capital are substitutes in the production process
e) marginal cost in practice is constant for most firms

39. 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:
a) the poorer sections of society are made better off by the change
b) at least one person can be made better off by the change
c) the gainers from the change can compensate the losers to accept the change
and still be left better off
d) the majority of people are made better off by the change
e) the social welfare function is convex to the origin

40. Assuming no change in the capital stock or technology, the analysis of the labour
market suggests that a reduction in the supply of labour will generate:
a) a rise in the level of employment
b) a rise in the real wage
c) a fall in the marginal product of labour
d) an increase in real GDP
e) a reduction in the rate of capital accumulation

41. Consider a market supplied by a single firm which exercises first degree price
discrimination (perfect price discrimination). In this market we can deduce that the
value of consumer surplus will be:
a) zero
b) positive and falling
c) positive
d) negative
e) negative and rising

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42. A key difference between a pure private good and a pure public good is that:
a) a private good is non-excludable in consumption
b) a public good has lower production costs
c) a public good is non-rival in consumption
d) a private good is a common resource
e) a private good is both excludable and non-rival

43. Consider a production function which exhibits constant returns to scale, with
diminishing marginal productivities for both capital and labour. For this function, if
there is no change in the capital stock or the level of technology, we can infer that a
fall in employment would generate:
(a) a fall in aggregate output and rise in output per person employed
(b) no change in aggregate output because there is no change in capital or
technology
(c) a rise in aggregate output and a fall in output per person employed
(d) a fall in aggregate output and a fall in output per person employed
(e) a fall in aggregate output and no change in output per person employed

44. If a negative externality is present in a market, the competitive equilibrium is such

that:
a) marginal private cost is greater than marginal private benefit
b) marginal social cost is equal to the market price
c) marginal private benefit is greater than marginal social cost
d) marginal private cost is less than marginal social cost
e) marginal private cost is equal to marginal social cost

45. Suppose Argentina can produce 1 unit of wine using 4 hours of labour time and 1
unit of cloth using 8 hours of labour time. Suppose also that Paraguay can produce 1
unit of wine with 30 hours of labour time and 1 unit of cloth using 10 hours of labour
time. From this productivity information we can deduce that:
a) Argentina has a comparative advantage in cloth production
b) Paraguay has an absolute advantage in cloth production
c) Paraguay has a comparative in wine production
d) Argentina has a comparative advantage in wine production
e) Paraguay has a comparative advantage in both wine and cloth production

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46. Assume that market demand is given by the equation D(p) = 60 – 4p and that market
supply is given by S(p) = 20 + 6p. It follows that the market equilibrium price is:
a) 2
b) 4
c) 6
d) 8
e) 10

47. The long run is usually defined as a period during which:

a) the capital stock is fixed, but technology and the labour input are variable
b) the capital stock and technology are fixed, but the labour input is variable
c) the capital stock, technology and the labour input are all fixed
d) the ratio of capital to labour is fixed
e) the capital stock, technology and labour are all variable

48. The kinked demand curve model of oligopoly pricing assumes that:
a) each firm believes that its competitors will match a price reduction
b) each firm believes that its competitors will increase price in response to a price
reduction
c) each firm believes that its competitors will match any price increase
d) each firm faces a perfectly inelastic demand curve
e) each firm faces constant marginal production costs

49. A collusive aarrangement to raise price and hold it at the higher level in an
oligopolistic market is:
a) a Nash equilibrium, because the participating firms all have an incentive to hold
price at the profit-maximising level
b) a Nash equilibrium, because any reduction in price would eventually drive the
market price down to the competitive level
c) not a Nash equilibrium, because each individual firm has an incentive to cut price
to increase profits
d) a dominant strategy because tacit collusion is not illegal
e) equivalent to the long-run equilibrium outcome in a competitive market

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50. When a firm offers a discount to customers who buy in bulk, the pricing strategy is
known as:
a) first degree price discrimination
b) enhanced price discrimination
c) second degree price discrimination
d) third degree price discrimination
e) zero order price discrimination

End of Paper

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