Economic subjects | General economics » Economics and Business Practice Exam, Maastricht University

Source: http://www.doksinet VERSION E Student id. r School of Business and Economics EXAMINATION Course : Version: E Economics and Business Coordinator(s): Matthias Wibral Date : 15.122015 Location : Code: EBC1009 Time: 13:00 – 16:00 MECC Westhal Communications devices and watches are not allowed – put them in your bag (under your table) or on the floor, not within arm’s reach! Otherwise this will be reported as possible fraud to the Board of Examiners. Any changes to the examination after the official end of the examination will be reported as possible fraud to the Board of Examiners. Sanctions by the Board of Examiners on fraud or irregularities include such measures as: - complete or partial voidance or annulment of the relevant examination; - exclusion from participation or further participation of one or more examinations or exams at the SBE for a period of time to be determined by the Board of Examiners, with a maximum period of one year; - termination of

the student’s registration for the concerning study programme. This examination consists of: (please check if you received all pages, before you start answering) 14 Pages (Front page included) 60 Questions You are allowed to make use of: Non-programmable calculators Norm: You obtain 1 point for each correctly answered question. For each unanswered question and for each incorrectly answered question, you obtain 0 points. Consequently, the maximum score you can obtain is 60 points. Because of guess correction, your final grade is determined by subtracting 15 points from the sum of points that you scored and dividing the result by 4.5 This means that in order to pass the exam, you have to answer correctly at least 40 questions. Publication of the results: within 15 workdays Procedure for objections: This exam and an answer key for the exam will be available on eleUM by Wednesday, December 16, 2015, 16:00. Any objection to this examination must be delivered to the secretarial office of

the Department of Economics AE1 (room A1.06) before Friday, January 08, 2016, 16:00; if closed, you can use the mailbox located next to the office door. The standard objection form is available on eleUM, under “Course Material”, “Examination”. Any other means of complaint, in particular by email, will not be taken into consideration. If you disagree with a question or an answer, you must give a clear argument as to why you disagree. In your argument you must refer to relevant slides of the lecture andor tutorial tasks. Only fully completed forms will be processed. By Friday, January 15, 2016, 16:00, there will be an announcement that lists all Page 1 of 14 Source: http://www.doksinet VERSION E valid objections on eleUM. If your objection is not listed there, it was not considered to be valid You will not receive a personalized response from the course coordinator regarding your objections. The details with regard to the inspection procedure are also available on eleUM, under

“Announcements”. Particulars: For each question, there is only one correct answer. Indicate your solution on the ANSWER FORM that is provided separately. Answer forms are electronically scanned and automatically corrected. You have to hand in the entire examination set. It is not allowed to take home, copy or photograph the examination or parts of it! (You can write your answers of MC questions on a piece of scrap paper and take it home). Page 2 of 14 Source: http://www.doksinet VERSION E Question 1: Adele receives $100 as a birthday gift. In deciding how to spend the money, she narrows her options down to four choices: Option A, Option B, Option C, and Option D. Each option costs $100 Finally she decides on Option B. The opportunity cost of this decision is (A) (B) (C) (D) the value to Adele of Options A, C and D combined. $100. $300. the value to Adele of the option she would have chosen had Option B not been available. Question 2: Microeconomics is best described as the

study of (A) (B) (C) (D) how households and firms make decisions and how they interact in specific markets. the flows of dollars between households and firms. markets for land, labor, and capital. economy-wide phenomena. Question 3: The marginal cost of an activity is the (A) (B) (C) (D) ratio of total costs to the level of the activity. change in the level of the activity divided by the change in the costs of the activity. reservation costs. change in the costs of the activity that results from an extra unit of the activity. Question 4: The scarcity principle indicates that (A) (B) (C) (D) compared to 100 years ago, individuals have less time today. with limited resources, having more of one good or service means having less of another. because tradeoffs must be made, resources are therefore scarce. no matter how much one has, it is never enough. Question 5: Consider an industry with only 2 firms, A and B. Both have the option to expand or maintain production. If both maintain

current levels they each receive a payoff of 12 If they both expand they each get a payoff of 10. If one expands and the other doesnt, the expander gets 20 and the one who doesnt gets 5. It may be useful to represent this information in a payoff matrix What is firm As dominant strategy? (A) (B) (C) (D) maintain does not have a dominant strategy do the opposite to firm B expand Question 6: A Nash equilibrium is (A) (B) (C) (D) maintain , maintain maintain , expand expand , expand expand , maintain Page 3 of 14 Source: http://www.doksinet VERSION E Question 7: Which of the following statements is correct? (A) In a Nash equilibrium, players maximize the difference between their own payoff and the payoff of the other players. (B) In a Nash equilibrium, the sum of all players’ payoffs does not have to be maximal. (C) A Nash equilibrium does not have to be a profile of mutual best responses. (D) A Nash equilibrium always involves a dominant strategy. Question 8: Peter and Paul

both produce apples and oranges. Which of the following statements is true? (A) Peter must have an absolute advantage in the production of either apples or oranges. (B) Peter must have a comparative advantage in the production of apples. (C) It is possible that Peter has a comparative advantage in the production of apples and a comparative advantage in the production of oranges. (D) Peter can have a comparative advantage in the production of apples and an absolute advantage in the production of oranges. Question 9: The principle of comparative advantage does not provide answers to certain questions. One of those questions is as follows: (A) (B) (C) (D) Is it possible for specialization and trade to increase total output of traded goods? Do opportunity costs play a role in people’s decisions to specialize in certain activities? What determines the price at which trade takes place? Is it possible for specialization and trade to benefit more than one party to a trade? Question 10:

When the price of a zoo entrance is 25 Euro, 30000 entrances are sold every month. After increasing the price to 30 Euro each, 20000 entrances are sold every month. At the original price, what is the absolute value of the price elasticity of demand for zoo entrances (assume linear demand)? (A) (B) (C) (D) 1 + (2/3) 1 3/5 2000 Question 11: A relatively steep inverse demand curve indicates that (A) (B) (C) (D) quantity demanded will adjust significantly to a price change. quantity demanded will not adjust to a price change. the change in quantity demanded will exactly equal a change in price. quantity demanded will adjust only slightly to a price change. Question 12: How does revenue change during a movement (to the right and down, i.e, starting from a quantity of zero) along a linear inverse demand curve? (A) (B) (C) (D) Revenue always decreases. Revenue first increases and then decreases. Revenue does not change at all. Revenue always increases. Page 4 of 14 Source:

http://www.doksinet VERSION E Question 13: A person depends on a life-saving drug. This person’s demand for this drug is probably: (A) (B) (C) (D) unit-elastic. elastic. strongly dependent on changes in income. inelastic. Question 14: Which of the following events could shift the demand curve for gasoline to the left? (A) Income of gasoline buyers falls, and gasoline is an inferior good. (B) Public service announcements are run on television, encouraging people to walk or ride bicycles instead of driving cars. (C) The price of gasoline rises. (D) Income of gasoline buyers rises, and gasoline is a normal good. Question 15: When supply and demand both increase, equilibrium (A) (B) (C) (D) price will decrease. quantity may increase, decrease, or remain unchanged. price may increase, decrease, or remain unchanged. price will increase. Question 16: A decrease in supply will cause the largest increase in price when (A) (B) (C) (D) both supply and demand are elastic. demand is elastic

and supply is inelastic. demand is inelastic and supply is elastic. both supply and demand are inelastic. Question 17: Consider a perfectly competitive market with market demand D(P)=15 – 3P market supply S(P) = 2P. How large is the consumer surplus in the competitive equilibrium? (A) (B) (C) (D) 6 9 15 cannot be determined with the information given Question 18: A consumer decides to allocate all of his income to two goods, A and B, such that MUA/PA= 25 and MUB/PB=20. Given convex indifference curves, if he were perfectly rational the consumer would (A) (B) (C) (D) purchase less of A and more of B purchase more of A and less of B do none of the above. The answer depends on PA and PB purchase less of both A and B Page 5 of 14 Source: http://www.doksinet VERSION E Question 19: Anna’s utility function is defined by U(xA, xB) = 4xA + 4xB. Given that good B is 25% cheaper than good A, in her optimal bundle Anna will consume (A) (B) (C) (D) only good B only good A any bundle

such that A = ¾ B the same amounts of A and B Question 20: For any consumer, the MRS indicates (A) (B) (C) (D) the (absolute value of) the slope of the budget constraint the (absolute value of) the slope of the indifference curve the point at which the budget constraint intersects the indifference curve the optimal consumption bundle Question 21: For two complement goods, A and B, if the price of A , the B falls. (A) (B) (C) (D) rises, supply of rises, demand for rises, price of falls, demand for Question 22: B A The figure above shows how Julie’s consumption bundle changes after a change in her budget constraint. From the figure, we can infer that the price of A . Moreover, it is clear from the figure that A is good. (A) (B) (C) (D) falls, a normal falls, an inferior rises, a complement rises, an inferior Page 6 of 14 Source: http://www.doksinet VERSION E Question 23: One assumption that distinguishes short-run cost analysis from long-run

cost analysis for a profit-maximizing firm is that in the short run (A) (B) (C) (D) the number of workers used to produce the firms product is fixed. the size of the factory is fixed. there are no fixed costs. output is not variable. Question 24: When marginal cost is less than average total cost, (A) (B) (C) (D) average variable cost must be falling. average total cost is falling. average total cost is rising. marginal cost must be falling. Question 25: Consider the graph above depicts a firm in a perfectly competitive market. When the demand is P2 = €15, what is the total revenue? (A) (B) (C) (D) € 720 € 900 €960 € -60 Question 26: Which of the following is not a characteristic of a perfectly competitive market? (A) (B) (C) (D) There are many sellers. Sellers must accept the price the market determines. In the long-run equilibrium average costs exceed the minimum level of average costs. Different sellers sell identical products. Page 7 of 14 Source:

http://www.doksinet VERSION E Question 27: The average total cost when 5 units of output are produced is $30, and the marginal cost of the sixth unit of output is $60. What is the average total cost when six units are produced? (A) (B) (C) (D) $25 $30 $35 $10 Question 28: An allocation is Pareto-efficient when (A) (B) (C) (D) trades that make some better off without harming others exist. trades have benefited some and harmed others. any further trades will harm someone or leave everyone indifferent. no one is made better off. Question 29: Which of the following statements is not true when the supply for a good or service increases? (A) (B) (C) (D) Some new buyers, who are now willing to buy, enter the market. The total consumer surplus in the market increases. The total value of purchases before and after the price change is necessarily the same. Buyers who were already buying the good or service are better off. Question 30: Refer to the figure below. A binding price ceiling is

shown in (A) (B) (C) (D) panel (b) but not panel (a). both panel (a) and panel (b). neither panel (a) nor panel (b). panel (a) but not panel (b). Page 8 of 14 Source: http://www.doksinet VERSION E Question 31: Suppose a tax of $4 per unit is imposed on a good, and the tax causes the equilibrium quantity of the good to decrease from 2,000 units to 1,700 units. The tax decreases consumer surplus by $3,000 and it decreases producer surplus by $4,400. The deadweight loss of the tax is (A) (B) (C) (D) $600. $1,200. $6,200. $300. Question 32: Assume all firms in a particular perfectly competitive industry are earning economic profits. This will cause firms to the industry, which will continue until . (A) (B) (C) (D) exit; economic profits are zero. enter; economic profits are negative. enter; accounting profits are zero. enter; economic profits are zero. Question 33: A monopolys marginal cost will (A) (B) (C) (D) be less than the price per unit of its product. exceed

its marginal revenue. equal its average total cost. be less than its average fixed cost. Question 34: The problem with monopolies is their ability (i) (ii) (iii) (A) (B) (C) (D) to do away with barriers to entry. to price their product at a level that exceeds marginal cost. to restrict output below the socially efficient level of production. (ii) and (iii) (iii) only (i), (ii), and (iii) (i) and (ii) Question 35: When a monopolist increases the amount of output that it produces and sells, the price of its output (A) (B) (C) (D) increases. decreases. may increase or decrease depending on the price elasticity of demand. stays the same. Page 9 of 14 Source: http://www.doksinet VERSION E Question 36: Refer to the figure below. To maximize its profit, a monopolist would choose which of the following outcomes? (A) (B) (C) (D) 100 units of output and a price of $20 per unit 150 units of output and a price of $15 per unit 200 units of output and a price of $20 per unit 100 units of

output and a price of $10 per unit Question 37: The distinguishing feature of a cartel is (A) (B) (C) (D) firms agree to restrict output to earn economic profit. inelastic consumer demand. a formal, written document. two firms are involved. Question 38: Consider an oligopoly with two identical firms. The cost function of each firm is Ci(Qi) = 6Qi The inverse demand function is given by P(Q1+Q2) = 66 - 6(Q1+Q2). Which quantity will each firm produce in the symmetric Nash equilibrium? (A) (B) (C) (D) 3 + (1/3) 3 + (2/3) 5 2 + (1/2) Question 39: Assume that the two firms from the previous question merge. The new firm is a monopolist Assume that the cost function of the new firm is C(Q)=6Q. The inverse demand function is P(Q) = 66 - 6(Q) What is the profit maximizing output of the monopolist? (A) (B) (C) (D) 5 10 11 3 Page 10 of 14 Source: http://www.doksinet VERSION E Question 40: What is the welfare loss caused by the monopolist in the previous question? (A) (B) (C) (D) 75 150

360 30 Question 41: A monopolistically competitive firm is one (A) (B) (C) (D) of many firms that produce slightly different but very similar goods. of many firms that produce goods with no close substitutes. that behaves like a perfect competitor. that behaves like a monopolist. Question 42: In the long run, a firm in a perfectly competitive market operates (A) (B) (C) (D) at its efficient scale and a monopolistically competitive firm operates with excess capacity. with excess capacity and a monopolistically competitive firm operates with excess capacity. with excess capacity and a monopolistically competitive firm operates at its efficient scale. at its efficient scale and a monopolistically competitive firm operates at efficient scale. Question 43: When part of the cost of an activity falls on people not pursuing the activity, it is called a(n) (A) (B) (C) (D) Positive externality. prisoners dilemma. negative externality external benefit. Question 44: The reason the marginal

benefit of information curve is downward sloping is because (A) (B) (C) (D) information is subject to the law of diminishing marginal return. there is only so much to learn about a product. consumers prefer blissful ignorance. some information is useless. Question 45: Frank is considering moving to Warsaw. There is a 70% chance that he will find a job that pays €1,000 more than what he currently earns and a 30% chance he will find one that pays €3,000 less. The net expected value of moving to Warsaw is (A) (B) (C) (D) €200. €700. €900. - €200. Page 11 of 14 Source: http://www.doksinet VERSION E Question 46: If a gamble is taken by a risk averse person, then one can infer that (A) (B) (C) (D) no risk neutral persons will take the gamble. no other risk averse person will take the gamble. the gamble is not very risky. all risk neutral persons will also take the gamble. Question 47: The major prediction of the lemons model is that (A) (B) (C) (D) people will generally

choose the low hanging fruit. if one sells a used car in good condition, one will not be penalized. if one buys a used car, one can expect it to be in good condition. the presence of asymmetric information reduces the average quality of goods for sale. Question 48: Some people reduce their effort to prevent their insured goods from being damaged or stolen. This behavior is known as (A) (B) (C) (D) free-rider problem. moral hazard. commitment problem. adverse selection. Question 49: Consider the following matrix. Player 1 chooses between action A and B, player 2 chooses between C and D. If this game is played simultaneously, there is/are Nash equilibrium/equilibria If the game is played sequentially with player 1 moving first and player 2 observing the action of player 1 before making his choice, there is/are subgame perfect Nash Equilibrium/equilibria. Player 2 C A Player 1 B (A) (B) (C) (D) 6 5 D 6 3 3 4 5 4 one, two two, one two, two one, zero. Question 50: The

tragedy of the commons refers to the (A) (B) (C) (D) underproduction of external benefits. overproduction of external benefits overuse of resources that have no cost. overuse of resources that have no price. Page 12 of 14 Source: http://www.doksinet VERSION E Question 51: Consider a perfectly competitive market. The market supply for pizza is given by S(P) = 4P and the market demand is given by D(P) = 120 – P. Now the government implements a new law that every seller has to pay a tax of 15 on each pizza sold. What is the change in producer surplus induced by the tax? (A) (B) (C) (D) -90 360 1260 -270 Question 52: The rate at which prices in general are increasing is called (A) (B) (C) (D) the standard of living the trade balance average labour productivity the inflation rate Question 53: For a given nominal interest rate, an unexpected increase in the inflation rate the real interest rate (A) (B) (C) (D) increases may either increase or decrease decreases has no

impact on Question 54: If the marginal propensity to consume equals 0.65, then a €50 increase in after-tax disposable income leads to a increase in consumption (A) (B) (C) (D) €65 €32.50 €0.65 €35 Question 55: In an economy, Consumption expenditure (C) equals 6000, Investment (I) equals 1500, Government purchases (G) equal 2000 and exports are less than imports. Given these numbers, output Y (A) (B) (C) (D) is more than 9500 depends on the interest rate is less than 9500 is less than potential output Question 56: The main assumption in the Keynesian model (so-called Keynesian cross) is that in the short-run (A) (B) (C) (D) demand does not change. Therefore, firms can increase the price and thus increase revenues firms meet demand at given market prices, by adjusting the quantity they supply elasticity of demand is constant firms meet market demand by adjusting their price Page 13 of 14 Source: http://www.doksinet VERSION E Question 57: If velocity of money and

GDP are constant, then an increase in the growth rate of the money stock will (A) (B) (C) (D) decrease the inflation rate increase the unemployment rate increase the inflation rate increase productivity Question 58: Which of the following is an example of monetary policy? (A) (B) (C) (D) A purchase of government bonds by the central bank The introduction of a price ceiling in the market for pizzas A government plan to stabilize output through increased public investment An increase in the income tax rate Question 59: If workers and employers agree to a three-year wage contract expecting 2% inflation and inflation turns out to be 5%, then (A) (B) (C) (D) workers gain and employers lose workers lose and employers gain neither workers nor employers are affected both workers and employers gain Question 60: PAE Expenditure line 45° Y’ Y Based on the Keynesian cross diagram above where Y’ denotes potential output, at short-run equilibrium output (A) (B) (C) (D) there is an

expansionary gap output equals potential output firms will be producing more than they can sell there is a recessionary gap In case you finish the exam before 16.00: please leave the examination hall as quietly as possible, so you will not disturb the students who still are trying to concentrate on their work! Page 14 of 14