I.

STATE WHETHER THE FOLLOWING STATEMENTS ARE TRUE OR FALSE, CORRECT THE
FALSE STATEMENT AND JUSTIFY YOUR ANSWER, AND PLOT DIAGRAM WHENEVER
NECESSARY [11 MARKS]:

1. As the government increases the tax size, the tax revenue increases.
2. A free market is efficient in the allocation of resources.
3. The whole MC curve represents the supply curve, in the long run, in a perfectly competitive
firm.
4. Assume that Zaid spends his entire income on the purchase of two goods, X and Y. If his
income and the prices of goods X and Y all double, Zaid will double the purchase of both
goods.
5. The amount of power that a monopoly has is a function of whether there are close
substitutes for its product.
6. In the short run, the MC curve intersects the AFC curve at its minimum.

II. CHOOSE THE CORRECT ANSWER [8 MARKS]:

1. If a market is allowed to move freely to its equilibrium price and quantity, then an increase
in supply will
A) increase consumer surplus.
B) reduce consumer surplus.
1. not affect consumer surplus.
2. possibly increase, decrease or not affect consumer surplus.

3. A per unit tax on pollution produced be a firm will affect the firm’s output and pollution
levels in
A) Increase, increase
B) Increase, decrease
C) Decrease, increase
D) Decrease, decrease

4. According to the law of diminishing marginal utility, which of the following statements is
true?
A) Total satisfaction decreases as more units of a good are consumed.
B) The additional satisfaction received from consuming extra units of a good decreases, as
consumption of the good increases.
C) The additional satisfaction received from consuming extra units of a good decreases as
consumption of the good decreases.
D) The additional satisfaction received from consuming extra units of a good increases as
consumption of the good decreases.

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5. The profit maximizing firm depicted In the graph above should
A) Exit if conditions do not improve in the long run
B) Produce the output that minimizes average total cost
C) Increase price to maximize profits
D) Increase output t maximize profits
E) Use less capital and more labor to reduce cost

6. If the average variable cost of producing 5 untis of a good is $100 and the average variable
cost of producing 6 units is $150, then the marginal cost of increasing output from 5 to 6
units is
A) $50
B) $250
C) $300
D) $400

7. Which of the following statements is true of a monopoly but not true of a perfectly
competitive firm?
A. Other firms can easily enter the market.
B. The demand for the product is price inelastic.
C. The firm will earn zero economic profit.
D. The market price is affected by decisions made by the firm.

8. If a firm’s production process exhibits economies of scale, when the firm’s output
increases,
A) Its short-run average total cost will rise.
B) Its long-run average total cost will rise.
C) Its long-run average total cost will fall.
D) Its long run total costs will fall.
9. Up until what point do competitive profit maximizing firms hire workers?
A. Marginal Product of Labor = Wage level
B. Value of Marginal Product of Labor = Wage level
C. Value of Marginal Product of Labor = Marginal Product of Labor
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 D. Price = Labor

10. Which of the following are properties of indifference curves?

11. All the following statements are true for a monopolist that wants to maximize profits,
except:
A. The monopolist should produce where ATC intersects the demand curve.
B. The monopolist should increase production because it is producing at an inefficient rate.
C. The quantity produced and sold is determined by the firm.
D. The monopolist is earning economic profit.

12. Why is a firm in a perfectly competitive market also known as a price taking firm?
A. Price is constant at any quantity produced.
B. The cost of their inputs is fixed.
C. Their marginal cost is constant at any quantity.
D. It is impossible for them to receive economic profit.

1) Which of the following helps explain why the demand curve is downward sloping in case
of a normal good?
A) The income effect and substitution effect move the quantity demanded in the same
direction.
B) The income effect moves the quantity demanded in the opposite direction of the
substitution effect.
C) The income effect dominates the substitution effect.
D) The substitution effect dominates the income effect.

13. If social costs are higher than private costs, what could be the cause?
a) There is a positive externality.
b) Producers are paying too high a cost to make their product.
c) Producers are not bearing enough of a cost to make their product.
d) Buyers are not bearing enough of the cost.

14. The difference between the consumer’s valuation of a product and its full costs of
production for the firm is
a) consumer surplus.

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 b) producer surplus.
c) market surplus.
d) nonprice surplus.

15. When the government internalizes the negative externalities, ________ is produced and in
the presence of positive externalities, ________ is produced than the market equilibrium.
a) more of the good; less of the good
b) less of the good; more of the good
c) more of the good; the right amount of the good
d) the right amount of the good; too little of the good

If total revenue is increasing as output increases, marginal revenue is always

SHORT ANSWER:
1. Explain how a perfect competitive firm and a monopolist in the determination of their
output level and price level that maximize their profit level.
2. If the production of a good generates a positive externality, the government can increase
allocative efficiency by ding what?
3. Show how the tax per unit on consumers affect the society welfare in terms of consumer
surplus, producer surplus and total surplus? Explain your answer.

4. What is the socially optimum quantity and the tax per unit that will achieve the socially
optimal quantity?
5. [2 marks] What is the production function? What is the marginal product? What is the
average product? What is the shape of the production function and why does it take it?
Plot it and label it.

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 6. [4.5 marks] Given the demand and supply
diagram for the labor market, where wages
are in $ and labor in thousands of hours per
month,
a) [1.5 marks] Suppose the government imposes
$8 tax per labor. Determine the new worked
labor, price of labor (sellers receive), and price
firms pay (consumers pay).
b) [2 marks] Post-tax, calculate the total surplus
of the market.
c) [1 mark] Explain the reasons behind the
deadweight loss.

III. PROBLEM SOLVING [11 MARKS]:

2. [6 marks] Suppose that Karim has an after-tax income of LE40 per week and must spend
it all on bread and cheese. If the price of food is LE5 per pound and accessories are LE10
per piece. Show the following points on the same graph.
a) [1.5 marks] Draw the budget line label it “BC(I=40)”, where the amount of bread is
measured along the vertical axis and the amount of cheese is measured along the
horizontal axis.
b) [1.5 marks] What is the value of the slope of the budget constraint? Give two
interpretations of the slope’s value.
c) [1.5 marks] Show graphically and explain how the budget line changes if the income
increases to LE50, while the prices of bread and cheese remain constant.
d) [1.5 marks] After Karim’s income increase, what will be the change in his optimal
consumption bundle that maximizes his level of utility if bread is a normal good and
cheese is an inferior good? Explain your answer and show it graphically by comparing
before and after the income increase. [hint: without any values].

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3. If you know that with 8 units of output, average fixed cost is $12.50 and average variable
cost is $81.25, then total cost at this output level is:
4. At a firm’s current rate of output, the marginal cost id $65, the average variable cost is $35,
the average fixed cost id $30, and the product price is $65. What is the economic proft of
the firm?
5. Plot an ad hoc budget line with good x on the x-axis and good y on the y-axis, then show
an optimal consumption bundle for the consumer by plotting his indifference curve.
6. Suppose the consumer income decreases, show on the same graph how the consumer’s
consumption bundle changes if good x is a normal good while good y is an inferior good.

Good Luck ☺