MOCK EXAM MICROECONOMICS FOR IBA– 1

ANSWER KEY
QUESTION 1
Answer key: B

QUESTION 2
Answer key: B
A) The slope of the PPF is -1 and not 1.
B) The producer needs to give up 1 ton of corn to produce 1 more ton of wheat, so correct.
The points in C and D both lie on the PPF so they are feasible and efficient.

QUESTION 3
Answer key: A

Hours of reading Pages read in total Marginal productivity Average pages read
1 4 4 4
2 7 3 3.5
3 9 2 3
4 10 1 2.5

QUESTION 4
Answer key: C

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In the market for locks, demand shifts right and supply shift left. The price of locks will go up (quantity is
uncertain). Locks and bikes are complements, hence a price increase for locks will lower demand for
bikes (demand shifts to the left). As a result, the equilibrium price and quantity in the market for bikes
must decrease.

QUESTION 5
Answer key: B

QUESTION 6
Answer key: D
If the price of Y goes up, demand for X falls so X and Y are complements.
# &
Equilibrium: 𝑄 ! = 𝑄" → 𝑃% = 80 − 2𝑃% − 20 → 𝑃%∗ = 20 → 𝑄∗ = 30.
$ $

+( ! * # $,
𝜖(! ,*" = +* ⋅ ("! = $ ⋅ #, = 1
"

QUESTION 7
Answer key: D

QUESTION 8
Answer key: D
QUESTION 9
Answer key: C

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 & &
𝐶𝑆 = $ (5 − 3)(4 − 0) = 4 & 𝑃𝑆 = $ (3 − 1)(4 − 0) = 4 & W = CS + PS = 8.

QUESTION 10
Answer key: D
At 𝑃-& = 4 demand equals 2 and at 𝑃-$ = 5 demand equals zero (there will be excess supply). Both are
lower than the unregulated equilibrium quantity of 4.

QUESTION 11
Answer key: D

&
𝐶𝑆 = $ (5 − 4)(2 − 0) = 1, so it decreases by 3 (see Q9).

QUESTION 12
Answer key: C
&
𝐷𝑊𝐿 = $ (4 − 2)(4 − 2) = 2 (see figure at Q11).

QUESTION 13
Answer key: D
Statement I: Equilibrium: 𝑄 ! = 𝑄" → 4𝑃 = 42 − 2𝑃 → 𝑃∗ = 7 → 𝑄∗ = 28.
+( # * . & +( ! * .
𝜖(# ,* = 7 +* ⋅ (# 7 = 7−2 ⋅ $/7 = $ & 𝜖(! ,* = +*
⋅ (! = 4 ⋅ $/ = 1

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 +( # * *
Statement II: 𝜖(# ,* = 7 +* ⋅ (# 7 = 7−2 ⋅ 0$1$*7 = 2 → 𝑃 = 42 − 2𝑃 → 3𝑃 = 42 → 𝑃 = 14. Only at 𝑃 =
14, 𝜖(# ,* = 2 holds. (Note: along a linear demand curve, the price elasticity of demand always changes.)

QUESTION 14
Answer key: B
Total costs are increasing, and the slope becomes increasingly steeper. Hence, each additional year of
schooling has larger marginal costs than the preceding year. So, marginal costs are always increasing.
(the second order condition is positive).

QUESTION 15
Answer key: C
+23 +25 0
In the optimum, MB = MC. TB=60e (as each day e pays 60 euros). 𝑀𝐵 = = 60, 𝑀𝐶 = = 𝑒, so
+4 +4 #
0 ∗ #
𝑀𝐵 = 𝑀𝐶 → 60 = 𝑒 → 𝑒 = 60 = 45.
# 0

QUESTION 16
Answer key: C
C) False. The optimal consumption bundle might be located at a point where the highest attainable
indifference curve is tangent to the budget line.

QUESTION 17
Answer key: B
B) True. When Emma’s income increases, she consumes more of both goods. Thus, both A and B are
normal goods.

QUESTION 18
Answer key: C
Let’s compute the fair premium: 𝑃 = 800 × 0.025 = 20.

Statement I is false. A risk-averse buyer is willing to pay to get rid of risk. Thus, he is willing to buy
insurance at some price higher than €20, i.e. when the premium is unfair.
Statement II is true. A risk-neutral buyer is insensitive to risk. Thus, he is not willing to buy insurance when
the premium is not fair.

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QUESTION 19
Answer key: C
C) False. Moral hazard in the insurance market means that buyers have incentives to behave carelessly
once they are insured.

QUESTION 20
Answer key: B

𝐸(𝑊𝑇𝑃) = 0.3 × 50 + 0.3 × 100 + 0.4 × 200 = 125

High-quality cellphones won’t be sold.

Thus, the shares of cellphones are re-adjusted as follows: ½ and ½.

𝐸(𝑊𝑇𝑃) = 0.5 × 50 + 0.5 × 100 = 75

Again, mid-quality cellphones won’t be sold.

Thus, only low-quality cellphones will be sold in this market. The price will be between 40 and 50, i.e. the
value of buyers and sellers for low-quality cellphones. There is market failure in this market.

QUESTION 21
Answer key: A
A) True. Given that marginal productivity of input is usually decreasing, it takes more units of input to
produce each additional unit of output. Thus, the total cost function is usually increasing (producing more
requires more inputs and thus more costs) and convex (each additional unit of output is more costly to
produce).

QUESTION 22
Answer key: C

Quantity Total cost Marginal cost Fixed cost Variable costs ATC AVC
0 20 20 0 - -
1 40 20 20 20 40.0 20.0
2 50 10 20 30 25.0 15.0
3 66 16 20 46 22.0 15.3
4 86 20 20 66 21.5 16.5
5 110 24 20 90 22.0 18.0

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QUESTION 23
Answer key: B
B) False. A firm’s decision to operate depends on economic profits, which unlike accounting profits, include
the opportunity cost of capital and time.

QUESTION 24
Answer key: B
B) True. In the long-run profits must be zero. Thus, the price must be equal to the minimum ATC, which
must be equal to the marginal cost. Recall that the marginal cost intersects the ATC at its minimum.

QUESTION 25
Answer key: D
In the long-run, price must be equal to the minimum of the ATC and to the marginal cost.
𝑝 = 𝑀𝐶 ⟺ 𝑝 = 20𝑞 + 100
160
𝑝 = 𝐴𝑇𝐶 ⟺ 𝑝 = 10𝑞 + 100 +
𝑞
&6, &6,
Thus, 20𝑞 + 100 = 10𝑞 + 100 + 7
⟺ 10𝑞 = 7
⟺ 𝑞$ = 16 ⟺ 𝑞 = 4

QUESTION 26
Answer key: A

Let’s compute the equilibrium price and profits of the monopolist.

The inverse demand function is: 𝑃 = 200 − 𝑄

𝜕[(200 − 𝑄)𝑄]
𝑀𝑅 = = 200 − 2𝑄
𝜕𝑄
𝑀𝐶 = 20
𝑀𝐶 = 𝑀𝑅 ⇔ 20 = 200 − 2𝑄 ⇔ 2𝑄 = 180 ⇔ 𝑄 = 90
⟹ 𝑃 = 200 − 90 = 110
⟹ 𝑃𝑟𝑜𝑓𝑖𝑡 = 110 × 90 − (20 × 90) = 90 × 90 = 8100

QUESTION 27
Answer key: C

𝑀𝑅(90) = 200 − 2(90) = 20

1 1
𝐶𝑆 = × (200 − 110) × 90 = 90 × 90 = 4050
2 2
𝑃𝑆 = (110 − 20) × 90 = 90 × 90 = 8100

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 P

200

110

MC
20
MR
D

90 Q

QUESTION 28
Answer key: C

C) True. We know that if firms interact only once, they won’t cooperate. Thus, the market price will be
equal to the marginal cost of the firms, which in this case is equal to 20.

QUESTION 29
Answer key: B
Statement I is true. Firm 2 will set the price slightly below 20 in order to force firm 1 to leave the market.
Statement II is false. Given that firm 2 will set the price slightly below 20, firm 1 won’t be able to stay in
the market.

QUESTION 30
Answer key: C

C) False. Marginal revenue is below market price for a monopolist.

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