School of Economics BUSS1040 Practice Questions 1 Practice exam BUSS 1040 – Answers 1. The Reserve Bank of Australia is responsible for: *a. monetary policy, issuing Australia’s banknotes and maintaining the stability of the financial sector b. monetary policy only c. the Federal government’s fiscal policy d. maintaining Australia’s fixed exchange rate e. none of the above 2. Which statement is true a. GDP measures the total quantity of goods and services produced in an economy in a given period. b. GDP measures the market value of all goods and services produced in an economy in a given period. *c. GDP measures the sum of the value added of all goods and services produced in an economy over a given period of time. d. GDP measures the total quantity of final goods and services produced in an economy in a given period. e. None of the above. GDP is the value of all final goods and services (not the number, not all goods etc) School of Economics BUSS1040 Practice Questions 2 3. Consider the following table. Steel firm Car company Revenue 100 Revenue 210 Costs 80 Costs wages 80 wages 70 steel 100 Profits 20 Profits 40 What is GDP in this economy a. 200 *b. 210 c. 220 d. 230 e. 240 Add all wages and profits 4. Long-run growth in standard of living depends on a. increasing population b. increasing nominal GDP *c. increasing technology and human capital d. increases in the GDP deflator e. increasing the total inputs used in the production process. School of Economics BUSS1040 Practice Questions 3 Long-run increases in the standard of living depend on increasing output per person – which really depends on making better use of our resources 5. Which statement is true a. Unemployment can fall during a recession. b. Participation rates can fall in a recession. c. Unemployment can rise during an expansionary period of economic activity. *d. All of the above. e. None of the above Note the definition of Unemployment rate depends on U/LF, so can be affected by changes in the participation rate as well as the number of unemployed 6. The price of beer increases. As a result total revenue in the market rises from $100 million to $120 million. In this case demand is: a. Elastic *b. Inelastic c. Unit elastic d. A constant-elasticity e. It is not possible to assess. For the revenue to rise the percentage quantity increase in price must be larger than the percentage decrease in quantity – hence the price elasticity of demand in that range must be inelastic. 7. A party has the comparative disadvantage of producing a good if: a. they have the lowest opportunity cost b. they use the least amount of resources *c. they have the highest opportunity cost School of Economics BUSS1040 Practice Questions 4 d. they have the highest opportunity costs and use the most resources e. they have a lowest opportunity cost but use the most amount of resources Opposite to definition of comparative advantage. 8. Which statement is true a. A tax that raises no revenue causes no deadweight loss b. A tax that has no deadweight loss cannot raise any revenue *c. Tax revenue may increase or decrease as the per-unit tax rate on a good rises. d. Market output is too low compared with the socially optimal level when there is a negative production externality. e. None of the above C follows from the fact that revenue can go up or down depending on whether the price elasticity of demand is inelastic or elastic. 9. Consider the markets for corn chips and potato chips, two substitutes. We observe the following facts: The price rises and the quantity demanded falls in the corn chip market The price rises and the quantity demanded rises in the market for potato chips Which of the following could explain these observations a. Dry conditions in potato growing areas hinder the cultivation of potato crops. *b. Frost in corn growing areas hinder the growing of corn c. Good rains assist potato cultivation d. Damp conditions and warm weather assist corn production School of Economics BUSS1040 Practice Questions 5 e. None of the above Set up two demand and supply diagrams and follow the changes through. The frost in the corn growing area shifts the supply curve of corn chips to the left (higher marginal cost of production), raising the price and decreasing the quantity demand of corn chips; in the other related market the demand curve for potato chips increases (a substitute product for corn chips) 10. Which statement is true a. To realise the gains from trade, parties specialize in producing the good in which they have an absolute advantage. b. To realise the gains from trade, parties specialize in producing the good in which they are more productive. c. To realise the gains from trade, parties can specialize in producing either the good d. To realise the gains from trade, the more productive party should specialise in producing the more costly good and the less productive party should specialize in the other good. *e. None of the above (that is, all the other statements are false) To realise the gains from trade, parties specialise in producing goods that they have a comparative advantage in. 11. Which statement is true *a. The cross-price elasticity for complementary goods is negative. b. The party with the lowest opportunity cost has the comparative disadvantage in producing a good. c. The price elasticity of demand is constant along a linear demand curve. d. A non-binding price ceiling results in excess demand. e. None of the above (that is all the statements are false). For complementary products, if the price of one good rises, the quantity demanded for the other good will fall – giving a negative cross-price elasticity. School of Economics BUSS1040 Practice Questions 6 12. This table shows the units of output a worker can produce per month in United States and Korea. Sugar (tonnes) Steel (tonnes) United States 9 3 Korea 8 2 The opportunity cost of 1 tonne of steel in United States is: a. 9 tonnes of sugar b. 1 tonnes of sugar c. 1/3 tonnes of sugar d. 6 tonnes of sugar *e. None of the above The opp cost in the US of 1 tonne of steel is 3 tonnes of sugar. 13. This table shows the units of output a worker can produce per month in United States and Korea. Sugar (tonnes) Steel (tonnes) United States 9 3 Korea 8 2 The opportunity cost of 1 tonne of steel in Korea is a. 2 tonnes of sugar b. a tonne of sugar *c. 4 tonnes of sugar d. tonnes of sugar School of Economics BUSS1040 Practice Questions 7 e. None of the above In Korea to make a tonne of steel you give up making 4 tonnes of sugar. 14. What is the range of prices for a tonne of steel that allows both countries to gain from trade a. The price must be greater than 3 tonnes of sugar but less than a 9 of a tonne of sugar. b. The price must be greater than 2 tonnes of sugar but less than 8 tonnes of sugar. c. The price must be greater than 1/3 tonnes of sugar but less than 3 tonnes of sugar *d. The price must be greater than 3 tonnes of sugar but less than 4 tonnes of sugar. e. None of the above. The price must be between what the two countries could ‘buy’ the products of themselves for – that is their respective opportunity costs. The price for a tonne of steel must be between 3 and 4 tonnes of sugar. 15. For good Y, when the price is P1 = $60 the quantity demanded is q1 = 10 units. When the price falls to P2 = $40 it is determined formula that the elasticity is 3 (in absolute terms) according to the initial point elasticity method. What is the quantity demanded, q2, when the price is $40. a. q2 = 0 *b. q2 = 20 c. q2 = 30 d. q2 = 40 e. None of the above Use the formula e = (q2 – q1)/q1/(p2 – p1)/p1. In the formula you know everything except for q2. 16. The short-run marginal and average variable cost curves for a competitive firm are given by MC = 8+ 8Q and AVC = 8 + 4Q, respectively. The profit maximizing level of output (Q) is 2 and the total fixed cost (TFC) is $64. Which of the following must be true about the firm School of Economics BUSS1040 Practice Questions 8 a. The firm is charging a price of $40 and covering its average variable cost, hence it should continue operating in the short-run. b. The firm is charging a price of $40 and making a short-run loss, and hence the firm must shut down immediately. c. The firm is charging a price of $24 and making a zero profit, and hence the firm should shut down eventually. *d. The firm is charging a price of $24, covering its average variable costs, but in the long run at this price the should exit in the long-run. e. None of the above. This is a difficult question. Substitute in for Q into MC. MC = 24 which must equal price for a competitive firm. Now work out AVC = 16. Thus the firm will produce in the Short Run. However, note the FC = $64. Compared with revenue of just 48 the firm will exit in the LR. 17. The government issues tradeable pollution permits to deal with an externality. With tradeable pollution permits: *a. The cost of reducing pollution is minimised, regardless of their initial distribution amongst polluting firms. b. The firms that are allocated permits will continue to emit more pollution than firms with fewer, or zero, permits. c. Although the price of permits reflects the opportunity cost of polluting, this only applies to firms without permits. d. The firms that are allocated permits will trade all their permits to other firms, and keep the money. e. The cost of reducing pollution is minimised, although firms receiving permits will emit more pollution than other firms. See the lecture notes – creating a market for permits should see their value maximised (as in a normal market), regardless as to who has the permits initially. 18. Which statement is true a. Marginal cost intersects average fixed cost when average fixed cost is at its minimum. School of Economics BUSS1040 Practice Questions 9 b. In the short run, a perfectly competitive profit maximising firm that has not shut down is not operating on the upward-sloping portion of its AVC c. A perfectly competitive profit maximizing firm whose long run economic profit is exactly zero should expand production to try to earn a positive profit d. It is possible for average variable cost to be greater than average total cost at high levels of output. *e. None of the above. Draw the diagram of a competitive firm’s cost curve. All of the statements are false. 19. Consider a market in which there is a demand curve of qd = 10 – P, where qd is the quantity demanded and P is the price. The market supply curve is given by qs = P, where qs is the quantity supplied. There is, however, a negative production externality of $2 per unit produced. What is the deadweight loss (the loss of surplus) in the market outcome *a. $1 b. $2 c. $3 d. $4 e. It is not possible to ascertain with the information provided The true marginal cost from the firm’s MC and the externality is given by the curve SMC = qs + 2. To work out the efficient quantity q* equate the SMC curve with the PMB curve (the demand curve). The market output is 5, the efficient output q* is 4, resulting in a DWL of $1. See the lecture notes for the correct DWL triangle. 20. Which of the following is true a. A profit-maximising monopoly with a straight-line demand will always produce where demand is inelastic because higher prices raise total revenue. b. A profit-maximising monopoly with a straight-line demand will always produce where demand is unit elastic because raising prices further would reduce total revenue. School of Economics BUSS1040 Practice Questions 10 c. A profit-maximising monopoly with a straight-line demand will never produce where demand is elastic because cutting prices would increase total revenue. d. All of the above are true. *e. All of the above are false. A monopolist with a positive marginal cost of production will produce on the elastic part of the a linear demand curve 21. In monopoly and monopolistic competition, price is greater than marginal cost. This tells us that a. both make economic profits in the long run. b. marginal costs must be very low in both types of industry. c. there are barriers to entry in both types of industry. *d. both result in deadweight loss. e. None of the above. The diagram is essential the same – as P > MC = MR there must be a DWL 22. You are a monopolist in a market with a market demand curve q = 10 – P, where q is the quantity demanded and P is the price (in dollars). You also have no costs of production. At what price do you sell the good in order to maximise your profit and what is your total profit a. a price of $2; total profit is $16 *b. a price of $5; $25 c. a price of $10; $30 d. None of the above. With this demand curve MR = 10 – 2q. Equate MR = MC = 0 to get q = 5, and so on. Also note, when MC = 0 the monopolist produces in the middle of a linear demand curve (where e = -1). School of Economics BUSS1040 Practice Questions 11 23. What of the following is a characteristic of a monopoly *a. Price-maker b. Homogenous product offering compared to its rivals c. Free entry d. None of the above Price maker – not a price taker. It sets a price (or quantity). It does not have a supply curve. 24. What of the following is a characteristic of a monopoly a. Price-taker b. Same product offering as its rivals c. Free entry *d. None of the above Same question 25. What of the following is a characteristic of a monopolistic competitive industry a. Profits are zero in the long run b. Product differentiation by firms c. Free entry *d. All of the above See the definition of the monopolistically competitive firm 26. What is the monopolist’s profit under the following conditions The profit-maximising price charged for goods produced is $16. The intersection of the marginal revenue and marginal cost curves occurs where output is 10 units and average total cost is $8. a. Not enough information is given to answer this question. School of Economics BUSS1040 Practice Questions 12 b. $8 c. $16 *d. $80 Profit = 16×10 – 10×8 = 80 27. Consider a monopolist that can practice first degree price discrimination. Assume that marginal costs are constant and equal to 20, and that the demand curve faced by the monopolist is given by the following: p=100-Q. What is the monopolist’s profit maximizing level of output a. 20 b. 40 *c. 80 d. Not enough information is given to answer the question With first-degree PD, the monopolist will produce up to where MC = MB; ie when 20 = 100 – q, or where q = 80 28. Which of the following is an example of second degree price discrimination a. a theatre that offers lower prices for children *b. a computer firm that offer a computer and a printer in a package at a lower price than it would cost to purchase both separately c. City rail offering lower priced tickets to students. d. all of the above 2nd degree PD is where the consumer’s type is hidden information and the monopolist uses different product packages/bundles to get the consumer to reveal their true valuation for the product. Answer (b) fits this definition best. 29. Which of the following is an example of third degree price discrimination a. a theatre that offers lower prices for children School of Economics BUSS1040 Practice Questions 13 b. a computer firm that offer a computer and a printer in a package at a special price to students from the University of Sydney compared to non student buyers c. City rail offering lower priced tickets to students. *d. all of the above 3rd-degree PD is where the consumer types are known by the monopolist, who can discriminate between consumer types (but now within consumer groups). All are examples of 3rd-degree PD. 30. Consider the following model. Firm 1 and 2 are producing the same good and are rivals. Both simultaneously decide on their price. There are two choices – they can either price High or Low. If both price High, the profits are $4 to each firm. If Firm 1 prices Low and Firm 2 prices High, Firm 1 makes $5 and Firm 2 makes $1. If Firm 1 prices High and Firm 2 Low, the firms make $1 and $5 to Firms 1 and 2 respectively. Finally, if both firms price Low they each make $3. What is the Nash equilibrium of the game a. (High, Low) where the first strategy is for Firm 1 and the second strategy is Firm 2’s. b. (High, Low) and (Low, High) c. (High, High) d. (Low, High) *e. (Low, Low) Draw the game and work through the boxes. 31. The entry and exit of firms in a monopolistically competitive market guarantees that: *a. economic profits and economic losses disappear in the long run. b. economic profits can survive in the long run, but not economic losses. c. economic losses will exist in the long run, but not economic profits. d. both economic profits and economic losses will exist in the long run. There is free entry and exit in the long run pusing profits back to zero. School of Economics BUSS1040 Practice Questions 14 32. A market formed by many buyers and a first degree price discriminating monopolist a. achieves full efficiency b. gets to an equilibrium quantity equal to the equilibrium quantity in perfect competition c. achieves a total surplus equal to the total surplus in perfect competition *d. all of the above As the MC for the last unit sold equals its MB, the quantity sold by a perfectly price discriminating monopolist is efficient. 33. Consider a monopolist producing a good with zero marginal costs and $20 fixed costs. There are two consumers in the market. Consumer 1 has a demand curve q1 = 10 – P, where q1 is the quantity demanded and P is the per-unit price. Consumer 2 has a demand curve q2 = 15 – P, where q2 is the quantity demanded by consumer 2. If the monopolist perfectly price discriminates between two consumers using a two-part tariff. a. The monopolist will charge a fixed fee of $100 to consumer 1 and a per unit fee of $0; and the fixed fee of $225 to consumer 2 and a per-unit fee of $0. b. The monopolist will charge a fixed fee of $12.5 to consumer 1 and a per unit fee of $5; and a fixed fee of $25 to consumer 2 and a per-unit fee of $5. c. The monopolist will not produce as it makes negative profits if it does. *d. None of the above. e. This is a ridiculous question. Draw the diagram. The monopolist charges a fixed fee equal to each consumer’s total surplus. The per-unit fee charged is equal to MC = $0. The fixed fee is then 15×15/2=112.5 for consumer 2 and 10×10/2 = 50 for consumer 1. 34. Consider a monopolist with a MC curve of MC = q, where q is the quantity produced. The demand curve in the market is given by qd = 20 – 2P, where P is the market price. If the monopolist charges a linear price (that is, does not engage in price discrimination and just charges the same price to everyone), what is the deadweight loss a. 2.5 b. 5 School of Economics BUSS1040 Practice Questions 15 *c. 2.083 d. 7.5 e. 10 Draw the diagram. The efficient quantity is where P = MC. The monopoly quantity is where MR = MC. Here MR = 10 – qd. Equate MR = MC to get qM = 5. The efficient quantity is q* = 20/3. Draw the diagram. The DWL triangle is where MB > MC. I calculate this to be 2.083. 35. A Nash equilibrium is when a. Total surplus is maximised *b. each player is doing the best they can given what the other players are doing. c. each player always plays their dominant strategy d. all of the above e. none of the above See the lecture notes – follows from the definition. You will need to remember this definition and be able to apply it in the exam. 36. A prisoners’ dilemma is when: a. Each player has a dominant strategy b. There is a unique Nash equilibrium c. In the Nash equilibrium surplus is not maximized *d. All of the above e. None of the above True by definition 37. Consider the following game. Amazon can choose to either Enter of Not Enter into the market for e-books. If Amazon chooses Not Enter then the payoffs are $1 to Amazon and $6 to Apple. If Amazon School of Economics BUSS1040 Practice Questions 16 chooses to Enter then Apple observes this and chooses to either Punish or Accommodate. If Apple chooses to Punish the payoffs are $1 to Apple and -$1 to Amazon. If Apple Accommodates the payoffs are $2 to each party. What are all of the Nash equilibria in this game a. (Enter, Accommodate) b. (Not Enter, Punish) c. (Enter, Punish) *d. (Not Enter, Punish) and (Enter, Accommodate) e. (Not Enter, Punish), (Not Enter, Punish) and (Enter, Accommodate) Draw the game and solve for all Nash equilibria. In both proposed outcomes neither party has an incentive to deviate. 38. Consider the following game. Amazon can choose to either Enter of Not Enter into the market for e-books. If Amazon chooses Not Enter then the payoffs are $1 to Amazon and $6 to Apple. If Amazon chooses to Enter then Apple observes this and chooses to either Punish or Accommodate. If Apple chooses to Punish the payoffs are $1 to Apple and -$1 to Amazon. If Apple Accommodates the payoffs are $2 to each party. Eliminating any equilibria that rely on incredible threats, what are all the possible credible equilibria (That is, using backwards induction what are the subgame perfect equilibria ) *a. (Enter, Accommodate) b. (Not Enter, Punish) c. (Enter, Punish) d. (Not Enter, Punish) and (Enter, Accommodate) e. (Not Enter, Punish), (Not Enter, Punish) and (Enter, Accommodate) See the lecture notes – draw the game tree and solve the game backwards. In the SPE all incredible threats are eliminated. School of Economics BUSS1040 Practice Questions 17 39. There are 5 identical consumers in a market, each with a demand curve of P = 100 – 5q. The market demand curve is: *a. P = 100 – Q b. P = 500 – 5Q c. P = 20 – 5Q d. P = 20 – Q e. None of the above. 40. Consider a public good that has a marginal benefit for consumer 1 of MB = 20 – q and a marginal benefit for consumer 2 of MB = 30 – 3/2.q. If the marginal cost of provision is $10 per unit, what is the socially optimal level of output a.4 units b. 20 units c. 8 units d. 10 units *e. 16 units 41. In this unit I will get a: a. High Distinction b. Distinction. c. Credit d. All of the above Short answer questions 1. Consider a monopolist selling into a market with a demand curve of P = 100 – q. The monopolist has a marginal cost of $20 per unit and a fixed cost of $100. School of Economics BUSS1040 Practice Questions 18 a. If the monopolist charges a linear or single price, what are its price, quantity and profit What is the resulting DWL Show on a diagram. b. What if the monopolist gets taxed by the government at a per unit rate of $20. Now what are the monopolist’s price, quantity and profit What is the resulting DWL Explain your answer. c. Now assume that instead of the per-unit tax, the government imposes a profits tax at a rate of 50%. What is the outcome in this case Explain. a. q = 40, p = 60, Profit = $1500, DWL = $800 b. Now, q = 30, P (to consumers) = 70, profit = 800 and DWL = 1250. c. The output, price and DWL are the same as in part (a). The firm’s profits are $750. 2. Consider the market for guns in Australia. Assume that because some of these guns fall into the hands of criminals, there is a negative consumption externality. Illustrate this market on a diagram, and explain the resulting DWL from the market outcome. What is a possible government intervention from the government Under what circumstances would the optimal level of guns traded be zero Explain. See lecture notes on negative consumption externalities. For zero trade to be optimal the negative consumption externality at q = 0 needs to be at least as large as the gap between the PMB curve and the PMC curve. 3. Define Nash equilibrium. Give an example of a prisoners’ dilemma in a business context. Explain why your game is a prisoners dilemma. Nash equilibrium – every player has adopted their best response to the strategies of all the other players in the game. Prisoners’ dilemma – every player has a strictly dominant strategy; there is a unique nash equilibrium; in the NE total surplus is not maximised.
