Econ- 100

SET A

QUESTIONS
Q1. Peter has the option to work at a library or at a restaurant. He cannot work at both
places at the same time. The hourly wage at library is $10, while it is $15 at the
restaurant. For Peter, what's the opportunity cost of having a 2-hour-party with his
friends?
a. $10
b. $15
c. $20
d. $25
e. $30
Q2. When the price of strawberries decreases (because of an increase in supply), we
speak of an increase in _________ ; whereas when higher incomes make consumers buy
more strawberries, we speak of an increase in ____________
a. quantity demanded; demand
b. quantity demanded; quantity purchased
c. demand; normal goods
d. demand; quantity demanded
e. quantity purchased; normal goods
Q3. If demand is Qd =12-2P and supply is Qs=P. Producer surplus in equilibrium is
a. 4
b. 8
c. 12
d. 16
e. 18
Q4. If a legal price floor is established on a good below the existing equilibrium price, the
effect would be to:
a. Raise the price of the good and lower the quantity purchased
b. Have no effect on the price or quantity of the good
c. Lower the price of the good and lower the quantity purchased
d. Raise the price of the good and raise the quantity purchased
e. Lower the price of the good and increase the quantity purchased
Q5.

Number of workers
0
1
2
3
4
5
6
7
8

Output
0
5
11
19
25
29
31
31
30

Change in Output
___
5
6
8
6
4
2
0
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Econ- 100

SET A

In the above table, the law of diminishing returns sets in with the addition of the _____
worker.
a. 1
b. 2
c. 4
d. 7
e. 8
Q6. Which of the following correctly describes a perfectly competitive firms long run
supply curve?
a. marginal cost curve
b. rising portion of the marginal cost curve
c. rising portion of the marginal cost curve above equilibrium
d. rising portion of the marginal cost curve above average variable cost
e. rising portion of the marginal cost curve above average total cost
Q7. Which of the following correctly describes the profit maximizing position for all
firms regardless of the market structure under which they are operating?
a. P = MC
b. P = ATC
c. MR = MC
d. MR = P
e. MR = AR
Q8. Which of the following is true about the distances between average variable cost and
average total cost when graphed?
a. As output increases the difference between them gets smaller
b. As output increases the difference between them gets larger
c. Is equal to average fixed cost at all levels of output
d. Is zero at all levels of output
e. A and C are both correct
Q9. If the current price for the perfectly competitive firm represented in the following
Figure is $10, what would be the result of an increase in fixed cost on the firms profit
maximizing price and quantity?
a. Price increase and Quantity increase
b. Price increase and Quantity decrease
c. Price constant and Quantity constant
d. Price decrease and Quantity decrease
e. Price decrease and Quantity increase

Econ- 100

SET A

Q10. If the price elasticity of cigarettes is 0.5, then a 20 percent increase in price would
result in a
a. 10 percent decrease in the quantity demanded.
b. 20 percent decrease in the quantity demanded.
c. 50 percent decrease in the quantity demanded.
d. 100 percent decrease in the quantity demanded.
e. No change because we know that the demand of cigarettes is inelastic.
Q11. Markets will NOT allocate resources efficiently if:
a. there are many buyers and sellers.
b. there is perfect competition.
c. there are externalities.
d. the market is allowed to reach equilibrium.
e. All of the above
For the next two questions use the following information:
Chasey Company Inc. is the only producer in a small town. Cost and revenue
information for the Chasey Company are shown in figure on next page.
Q12. What is the profit maximizing quantity and price for Chasey Company?
a. 100 and $7.50
b. 140 and $6.00
c. 100 and $4.50
d. 140 and $3.75
e. 100 and $3.00
Q13. At the profit maximizing quantity, Chasey Company will make a profit of
[2 marks]
a. $750
b. $450

Econ- 100

SET A

c. $300
d. $150
e. $150 loss
Explanation: At profit maximizing quantity (i.e. 100), ATC is $4.50 (see figure).
Profit = (P ATC) * Q = (7.5 4.5) * 100 = 300

Q14. The Figure below shows short run and long run average total cost curves. Section
A, B, and C respectively demonstrate:

a.
b.
c.
d.
e.

economies of scale, diseconomies of scale, constant returns to scale

economies of scale, constant returns to scale, diseconomies of scale
diseconomies of scale, constant returns to scale, economies of scale
diseconomies of scale, economies of scale, constant returns to scale
constant returns to scale, economies of scale, diseconomies of scale
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Econ- 100

SET A

Q15. True or False. If a product has an income elasticity of demand of -0.50, then if
buyers incomes go up by 10%, purchases will fall by 50%.
Q16. Which of the following statement is true, given the information below?
Output = 250 unit, Fixed cost = Rs. 1000
Average variable cost = Rs. 6 per unit
Average total cost = Rs. 10 per unit
Marginal cost = Rs. 12
a. Average fixed cost = Rs 4 per unit and total cost = Rs 25,000
b. Variable cost = Rs 1500 and average fixed cost = Rs 4 per unit
c. Average fixed cost = Rs 4 per unit and variable costs = Rs 6000
d. Average fixed cost = Rs 5 per unit and variable costs = 1500
e. None of the above
Q17. This question considers the short run situation for a firm operating in a perfectly
competitive market.
[3 marks]
(a) Illustrate the optimal output produced by the firm when the market price is P*.
Also illustrate the corresponding economic profit for the firm.[1 mark]
P

SMC

SATC

P*
A

SAVC

ATC

Profit = A+ B

0
Q
(b) Illustrate the producers surplus for
Q*this firm. [2 marks]
P

SMC

P*

SATC
SAVC

6
0

Econ- 100

SET A

Q
Q18. According to the graph above, with a price ceiling present in this market, when the
supply curve for gasoline shifts from S1 to S2

a) the price will increase to P2.

b) a surplus will occur at the new market price of P2.
c) the market price will stay at P1 due to the pricing ceiling.
d) a shortage will occur at the price ceiling of P3.
e) nothing happens to the equilibrium.
Q19. Given the figure below, which of following is true about the elasticity of good X?
[2 marks]
Revenue

Price

Econ- 100

SET A

a. The absolute value of price elasticity of demand for good X is less than one
b. Absolute value of price elasticity of demand for good X is more than one
c. The absolute value of price elasticity of demand for good X is one
d. None of the above
For the next two questions refer to the figure on next page:
Q20. The profit maximizing price for a perfectly competitive firm like the one shown in
the Figure above in the long run would be;
[2 marks]
a.
b.
c.
d.
e.

A
B
C
D
E

Q21. In the Figure above, at a market price of A, the profit-maximizing output for a
perfectly competitive firm is
[2 marks]
a.
b.
c.
d.
e.

0
1
2
3
cannot be determined with the given information

Econ- 100

SET A

Q22. If a profit maximizing monopolist is producing at an output at which marginal cost

exceeds marginal revenue, it should?
a. Lower output and raise price
b. Raise output and lower price
c. Raise output and raise price
d. Not to anything since it is already maximizing profit
e. None of the above is true

Q23. The market for Lays is initially in equilibrium:

[2 marks]

We further know that:

Super crisp is a close substitute for Lays

Pepsi and Lays are complements
Lays, Super crisp and Pepsi are normal goods

Which of the following statement is true with the given information?

I. A rise in income will shift the demand curve for Lays to the right
II. A rise in the price of Super crisp will cause a movement along the demand curve of
Lays
III. A technological advancement in the production of Lays will shift the supply curve of
Lays to the right
IV. A rise in the price of Pepsi will cause the demand curve for Lays to shift to the left
a. I and II
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Econ- 100

SET A

b. I and III
c. III and IV
d. I, II and III
e. I, III and IV
Q24. Which of the following statements is/are true?
[2 marks]
I. If the demand curve is comparatively more elastic than the supply curve, then the
incidence of tax will fall more heavily on buyers
II. If the demand curve is comparatively more elastic than the supply curve, then the
incidence of tax will fall more heavily on sellers
III. If the demand curve is comparatively less elastic than the supply curve, then the
incidence of tax will fall more heavily on buyers
a. I only
b. II only
c. I and II
d. II and III

Q25. Which of the following statements is true regarding the diagram below? [2 marks]
Price
S
$10

A
B

$5

F
300

500

World Price
D
1000

I. The diagram represents the situation of an exporting country

II. C + D represents the deadweight loss of engaging in free international trade
III. The country will be importing 1000 units in the presence of free international trade
a. I and III
b. II and III
c. I only
d. III only
e. None of the above

10

Econ- 100

SET A

Q26. The increase in the price of coke and milk from Rs. 20 to Rs. 30 reduces the
quantity demanded of coke from 2000 to 20 units and the quantity demanded of milk
from 2000 to 1500 units. Which of the following is true regarding the elasticity of coke
and milk?
a. The elasticity of coke is -3.98 and that of milk is -0.5
b. The elasticity of coke is -3.98 and that of milk is -0.98
c. The elasticity of coke is -0.5 and that of milk is -1.98
d. The elasticity of coke is -1.98 and that of milk is -0.5
e. None of the above
Q27.

Buyers of good Z
Asad
Sara
Zunera
Salman

Willingness to pay for good Z

Rs. 60
Rs. 80
Rs. 100
Rs. 200

Given the table above, what is the total consumer surplus in the market if the price of
good Z is Rs 70.
a. 170
b. 0
c. 230
d. 160
e. 130
Q28. What is true regarding the welfare of agents after a tax is levied on a good? (Given
that the demand and supply curves are downward and upward sloping respectively.)
[2 marks]
a. Sum of consumer and producer surplus loss is more than govts gain
b. Sum of consumer and producer surplus loss is less than the governments gain
c. The sum of consumers and producers loss is equal to the governments gain
d. None of the above is true since all agents are worse off after tax.

11

Econ- 100

SET A

Q29. True or False. A product is elastic when the % change in the amount purchased is
less than the % change in the price of the good.
Q30. Given the figure below, which of the following statements are true?

I. The change in consumer surplus after tariff is D + E + F + G

II. The producer surplus after tariff is D + H
III. Deadweight loss due to tariff is F

12

Econ- 100

SET A

IV. Tariff revenue is E + G

a. I only
b. II only
c. I and II
d. II and III
e. III and IV

13