MOCK EXAM MICROECONOMICS FOR IBA - 1

QUESTION 1
Which of the following statements is true?
A) The true cost of any good is the money it costs to buy.
B) An efficient economy cannot produce more of one good without producing less of other goods.
C) You always face trade-offs unless you are the richest person on the planet.
D) People maximize their income and wealth, that is, they make themselves better off.

QUESTION 2
Consider the linear production possibility frontier of a farmer shown in the figure below.

wheat
(tons)
40

40 corn (tons)

Which of the following statements is true?

A) The slope of the production possibility frontier equals 1.
B) The opportunity cost of producing 1 ton of wheat is equal to 1 ton of corn.
C) Producing a combination of 20 tons of wheat and 20 tons of corn is not feasible.
D) Producing a combination of 30 tons of wheat and 10 tons of corn is not efficient.

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QUESTION 3
The table below shows the productivity of a student studying for an exam in microeconomics.
Hours of reading Pages read in total
1 4
2 7
3 9
4 10

Consider the following two statements:

I. The student’s marginal productivity is decreasing over time.
II. The average number of pages read per hour during the first two hours of study is higher
than the average number of pages read per hour during the first three hours of study.

Which of the following claims holds true for these two statements?
A) Statements I and II are both true
B) Statement I is true and statement II is false
C) Statement I is false and statement II is true
D) Statements I and II are both false

QUESTION 4
Consider the markets for bikes and bike locks. An increase in the rate of petty crimes in Tilburg pushes
the demand for bike locks up. At the same time, the price of steel (the main input to produce bike locks)
increases, decreasing the supply. Assume the increase in petty crimes does not affect the demand for
bikes and that the price of steel has no effect on the supply for bikes.

These changes will generate the following changes in the market for bikes:
A) An increase in both the equilibrium price and quantity of bikes.
B) A decrease in the equilibrium price and an uncertain effect on the equilibrium quantity of bikes.
C) A decrease in both the equilibrium price and quantity in the market for bikes.
D) An increase in the equilibrium quantity and an uncertain effect on the equilibrium price of bikes.

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QUESTION 5
Consider the following two statements:
I. An increase in the number of suppliers results in a shift of the supply curve.
II. Assume that after graduation when taking up well-paid jobs, former students' demand for
second-hand cars decreases. This indicates that second-hand cars are a normal good.

Which of the following claims holds true for these two statements?
A) Statements I and II are both true
B) Statement I is true and statement II is false
C) Statement I is false and statement II is true
D) Statements I and II are both false

QUESTION 6
#
The demand for some good X is given by 𝑄! = 80 − 2𝑃" − $ 𝑃% where 𝑃" is the price of good X and
'
𝑃% is the price of some other good Y. The supply of good X is given by 𝑄 & = 𝑃" and the price of
$
good Y is currently 𝑃% = 20.

Consider the following two statements:

I. Goods X and Y are substitutes.
'
II. The price elasticity of supply for good X in equilibrium is equal to 𝜖(! ,*" = $.

Which of the following claims holds true for these two statements?
A) Statements I and II are both true
B) Statement I is true and statement II is false
C) Statement I is false and statement II is true
D) Statements I and II are both false

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QUESTION 7
Stan works at the local supermarket where he receives 40 euro per shift worked. He is initially planning
to work a shift next Saturday. His friend Jackie has a spare ticket for the next football match of the local
team, which would normally cost 25 euro. Jackie offers the ticket to Stan (for free). Stan can either go
to match or work one shift, but not do both.

What are Stan’s opportunity costs of going to the football match?

A) 0 euros
B) 15 euros
C) 25 euros
D) 40 euros

QUESTION 8
The figure on the right shows the individual demand curves for
cinema tickets of Laura and Yuting. The solid line corresponds
to Laura’s demand and the dashed line corresponds to Yuting’s
demand.

Consider the following two statements:

I. In point A, Laura’s and Yuting’s price elasticities
of demand are equal.
II. At 𝑃 = 15 the total demand equals 0.

Which of the following claims holds true for these two statements?
A) Statements I and II are both true
B) Statement I is true and statement II is false
C) Statement I is false and statement II is true
D) Statements I and II are both false

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QUESTION 9
Consider the market for roses. Supply is given by 𝑄 & = 2𝑃 − 2 and demand is given by 𝑄! = 10 −
2𝑃.

What is the consumer surplus (CS), producer surplus (PS) and total surplus (W) at the market
equilibrium?
A) 𝐶𝑆 = 8; 𝑃𝑆 = 12; 𝑊 = 20
B) 𝐶𝑆 = 8; 𝑃𝑆 = 8; 𝑊 = 16
C) 𝐶𝑆 = 4; 𝑃𝑆 = 4; 𝑊 = 8
D) 𝐶𝑆 = 12; 𝑃𝑆 = 12; 𝑊 = 24

QUESTION 10
Again, consider the market for roses. Supply is still given by 𝑄 & = 2𝑃 − 2 and demand is still given by
𝑄! = 10 − 2𝑃. Assume that the government aims to control the price of roses to ensure a solid income
for florists. The government considers two price floors: a price floor of 𝑃+# = 4 per rose (case 1) or a
price floor of 𝑃+$ = 5 per rose (case 2).

For each case, what is the effect on the quantity sold in the market compared to the unregulated
market outcome?
A) Case 1: Decrease in quantity; Case 2: No effect on quantity
B) Case 1: Increase in quantity; Case 2: Increase in quantity
C) Case 1: No effect on quantity; Case 2: No effect on quantity
D) Case 1: Decrease in quantity; Case 2: Decrease in quantity

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QUESTION 11
Again, consider the market for roses. Supply is still given by 𝑄 & = 2𝑃 − 2 and demand is still given by
𝑄! = 10 − 2𝑃. Suppose the government introduces a price floor of 𝑃+# = 4 per rose.

Given the price floor of 𝑃+# = 4 per rose, what is the change in consumer surplus compared to the
unregulated equilibrium?
Note: always assume that the most efficient sellers/high-value buyers are active in markets in case it is
not unambiguously clear which of the buyers/sellers do actually buy/sell.
A) Consumer surplus does not change
B) Consumer decreases by 4
C) Consumer decreases by 2.5
D) Consumer decreases by 3

QUESTION 12
Again, consider the market for roses. Supply is still given by 𝑄 & = 2𝑃 − 2 and demand is still given by
𝑄! = 10 − 2𝑃. Suppose the government introduces a price floor of 𝑃+# = 4 per rose.

Given the price floor of 𝑃+# = 4 per rose, what is the deadweight loss (DWL) from introducing the
price floor?
Note: always assume that the most efficient sellers/high-value buyers are active in markets in case it is
not unambiguously clear which of the buyers/sellers do actually buy/sell.
A) DWL = 0
B) DWL = 1.25
C) DWL = 2
D) DWL = 4

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QUESTION 13
Supply is given by 𝑄 & = 4𝑃 and demand is given by 𝑄! = 42 − 2𝑃.
Consider the following two statements:
I. The price elasticity of demand and the price elasticity of supply are equal at the equilibrium
price.
II. One cannot find a unique price level at which the price elasticity of demand equals 𝜖(# ,* =
2 because there might be multiple points on the demand curve where 𝜖(# ,* = 2.

Which of the following claims holds true for these two statements?

A) Statements I and II are both true

B) Statement I is true and statement II is false
C) Statement I is false and statement II is true
D) Statements I and II are both false

QUESTION 14
Consider the graph of the total costs of the years of schooling for some individual.

Total
costs

Years of schooling
Which of the statements below is correct?

A) The marginal costs of schooling are always decreasing.

B) The marginal costs of schooling are always increasing.
C) The marginal costs of schooling are initially decreasing and then increasing.
D) The marginal costs of schooling are initially increasing and then decreasing.

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QUESTION 15
Maria is considering taking a short-term job during her summer break. The job pays €60 per day,
irrespective of the number of days worked (you can ignore taxes). The summer break lasts 60 days.
$
Suppose her total costs function (from taking the job) is given by 𝑇𝐶 = ' 𝑒 $ , where e denote the number
of days worked.

How many days will Maria work?

A) 0
B) 30
C) 45
D) 60

QUESTION 16
Consider a consumer who has to decide on how to
optimally allocate his budget between two goods (X
and Y). Assume X is a normal good. His indifference
curves are shaped like the one in the figure:

Which of the following statements about this consumer

is false?
A) The consumer’s willingness to give up X in
exchange of an extra unit of Y changes along
his indifference curve.
B) Both an income change and a price change entail an income effect.
C) The optimal consumption bundle should be located at a point where the highest attainable
indifference curve crosses the budget line.
D) If X becomes cheaper, other things equal, both the income and substitution effect associated
with the price change will lead the consumer to buy more of X.

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QUESTION 17
Emma has to allocate her budget between goods A and B. The
following figure shows Emma’s optimal consumption bundle
under her original budget line BL1. E’ indicates her optimal
consumption bundle after a change that moves her budget line
to BL2.

Which of the following statements is true?

A) The change entails a decrease in Emma’s income.
B) Both goods A and B are normal goods.
C) We cannot determine whether good A is a normal or inferior good.
D) The move from E to E’ entails a (non-zero) substitution effect and an income effect.

QUESTION 18
Assume an insurance firm offers insurance for a cellphone worth €800, valid for one year. We assume
that the cellphone is either fully lost with probability 0.025, or there is no loss. The insurance covers
the full loss.

Consider the following two statements about insurance buyers:

I. A risk-averse insurance buyer is never willing to buy the insurance at any price higher than
€20.
II. A risk-neutral insurance buyer is never willing to buy the insurance at any price higher than
€20.

Which of the following claims holds true for these two statements?
A) Statements I and II are both true
B) Statement I is true and statement II is false
C) Statement I is false and statement II is true
D) Statements I and II are both false

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QUESTION 19
Which of the following statements about the effects of asymmetric information is false?
A) Insurance market may fail when there is asymmetric information.
B) Markets may fail due to adverse selection and moral hazard.
C) Adverse selection in the insurance market means that buyers have incentives to behave
carelessly once they are insured.
D) The second hand car market is a classic example of adverse selection.

QUESTION 20
Consider a market for second-hand cellphones. The sellers in this market know the quality of the
cellphone that they sell, but the buyers cannot observe the quality of a cellphone when they buy. That
is, there is asymmetric information.
There are three types of second-hand cellphones: low, middle and high quality. A buyer values a low-
quality cellphone at 50, she values a middle quality cellphone at 100 and a high-quality cellphone at
200. Buyers are risk neutral. A seller of a low-quality cellphone values the cellphone at 40, a seller of a
middle quality cellphone values it at 80 and the seller of the high-quality cellphone values it at 150. The
proportion of low-quality cellphone sellers among all (potential) cellphone sellers equals 0.3, the
proportion of middle quality cellphone sellers equals 0.3 and the proportion of high-quality cellphone
sellers equals 0.4.

Consider the following two statements about this market:

I. There does not exist an equilibrium in which all types of cellphones are traded.
II. The equilibrium price will be between 40 and 50 and there is no market failure.

Which of the following claims holds true for these two statements?
A) Statements I and II are both true
B) Statement I is true and statement II is false
C) Statement I is false and statement II is true
D) Statements I and II are both false

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QUESTION 21
Which of the following statements about the cost function of a firm is true?
A) The total cost function is usually increasing and convex (i.e. the slope gets steeper as the firm
produces more).
B) The marginal cost function is usually decreasing.
C) The fixed costs cannot be adjusted in the long run.
D) Both variable costs and fixed costs increase with the amount of output.

QUESTION 22
Consider the information on a firm’s costs given in the table below. The total cost column is left (for
the most part) intentionally blank for you to complete if needed.

Quantity Total cost Marginal cost

0 20 -
1 20
2 10
3 16
4 20
5 24

Which of the following statements about the costs of this firm is true?
A) The ATC is minimized at 𝑄 = 3 and the AVC is minimized at 𝑄 = 2.
B) Both ATC and AVC are minimized at 𝑄 = 3.
C) The ATC is minimized at 𝑄 = 4 and the AVC is minimized at 𝑄 = 2.
D) The ATC is minimized at 𝑄 = 2 and the AVC is minimized at 𝑄 = 4.

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QUESTION 23
Consider a perfectly competitive firm. Which of the following statements is false?
A) In the long run there are no fixed inputs.
B) A firm’s decision to operate or not depends on accounting profits, which are similar to
economic profits.
C) Positive profits cannot be sustained in the long run.
D) Given that the firm must pay the fixed cost in the short run, it may be optimal to get negative
profits.

QUESTION 24
Which of the following statements about the cost functions and optimal decision of a firm is true?
A) The average variable cost (AVC) curve must intersect with the average total cost (ATC) curve
at the minimum ATC.
B) In a perfectly competitive market, the long-run equilibrium requires that the price is equal to
the ATC and the marginal cost.
C) In the long run the firm adjusts the variable costs to minimize ATC.
D) If fixed costs are positive, the level of output that minimizes ATC is smaller than the level of
output that minimizes AVC.

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QUESTION 25
Consider a perfectly competitive industry with identical firms. Each firm has total costs of the form
𝐶(𝑞) = 10𝑞$ + 100𝑞 + 160.

What is the long-run equilibrium quantity of each firm?

A) 100
B) 16
C) 0
D) 4

QUESTION 26
Consider a monopolist firm called Iamtheone. The demand curve for the market is given by 𝑄 =
200 – 𝑃. The total costs are given by 𝑇𝐶 = 20𝑄.

Which of the following statements about maximum profit is true?

A) The maximum profit is 8100.
B) The maximum profit is 3200.
C) The maximum profit is 28800.
D) The maximum profit is 0.

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QUESTION 27
Consider again the monopolist Iamtheone. The demand curve for the market is still given by 𝑄 =
200 – 𝑃 and the total costs are still given by 𝑇𝐶 = 20𝑄.

Which of the following statements about welfare in equilibrium is true?

A) The consumer surplus equals 4050 and the producer surplus equals 4050.
B) The consumer surplus equals 8100 and the producer surplus equals 8100.
C) The consumer surplus equals 4050 and the producer surplus equals 8100.
D) The consumer surplus equals 0 and the producer surplus equals 8100.

QUESTION 28
Assume that two firms are engaged in Bertrand competition. The demand curve for the market is given
by 𝑄 = 200 − 𝑃, where 𝑄 = 𝑞# + 𝑞$ . The total costs of the two firms are the same: 𝑇𝐶# = 20𝑞# ,
𝑇𝐶$ = 20𝑞$ . Suppose that the firms interact only once with each other.

Which of the following statement is true?

A) Collusion will be successful in equilibrium and the price at equilibrium will be 20.
B) Collusion will be successful in equilibrium and the price at equilibrium will be zero.
C) Collusion will be unsuccessful in equilibrium and the price at equilibrium will be 20.
D) Collusion will be unsuccessful in equilibrium and the price at equilibrium will be zero.

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QUESTION 29
Assume again that two firms are engaged in Bertrand competition. The demand curve for the market is
still given by 𝑄 = 200 − 𝑃, where 𝑄 = 𝑞# + 𝑞$ . Suppose now that the total costs of the two firms
are different: 𝑇𝐶# = 20𝑞# and 𝑇𝐶$ = 10𝑞$ .

Consider the following two statements about the equilibrium in this market:
i) The equilibrium price will be below 20.
ii) Both firms will be active in the market.

Which of the following claims holds true for these two statements?
A) Statements I and II are both true
B) Statement I is true and statement II is false
C) Statement I is false and statement II is true
D) Statements I and II are both false

QUESTION 30
Which of the following statements about different market structures is false?
A) Marginal revenue is equal to market price for a perfectly competitive firm.
B) Marginal revenue might be equal to market price for an oligopoly under Bertrand competition.
C) Marginal revenue is equal to market price for a monopolist.
D) In a perfectly competitive market profit must be zero in the long-run.

END OF THE EXAM

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