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QUESTION 1.1 CHOOSE THE CORRECT ANSWER(S) What does UK GDP per capita measure? A.
the total output of London’s economy
B.
the average disposable income of a UK resident
C.
the total output of the UK residents, divided by the number of the residents D.
the total output of the UK’s economy, divided by the country’s population QUESTION 1.2 CHOOSE THE CORRECT ANSWER(S) The GDP per capita of Greece was $22,494 in 2012 and $21,966 in 2013. Based on these figures, the growth rate of GDP between 2012 and 2013 (to two decimal places) was: A.
–2.40% B.
2.35% C.
–2.35% D.
–0.24% QUESTION 1.3 CHOOSE THE CORRECT ANSWER(S) Imagine that the GDP per capita of a country had doubled every 100 years. You are asked to draw both linear and ratio scale graphs that plot GDP on the vertical axis, and the year on the horizontal axis. What will be the shapes of the curves? Linear scale graph Ratio scale graph A.
An upward-sloping curve with increasing slope (called convex shape) An upward-sloping
straight line B.
An upward-sloping straight line Astraight horizontal line
C.
An upward-sloping straight line An upward-sloping curve with decreasing slope (called concave shape) An upward-sloping convexcurve D.
An upward-sloping convexcurve Note
: Linear scale graphs are ‘normal’ graphs in which the difference in height between 1 and 2, and the difference between 2 and 3, would be the same on the vertical axis. QUESTION 1.4 CHOOSE THE CORRECT ANSWER(S) Which of the following variables have followed the so-called ‘hockey-stick’ trajectory—that is, little to no growth for most of history followed by a sudden and sharp change to a positive growth rate? A.
GDP per capita B.
labour productivity C.
inequality D.
atmospheric CO
2 QUESTION 1.5 CHOOSE THE CORRECT ANSWER(S) Which of the following are examples of private property? A.
computers belonging to your college B.
a farmer’s land in Soviet Russia C.
shares in a company
D.
a worker’s skills QUESTION 1.6 CHOOSE THE CORRECT ANSWER(S) Which of the following are examples of markets? A.
wartime food rationing
B.
auction websites such as eBay
C.
touts selling tickets outside concert halls D.
sale of illegal arms
QUESTION 1.7 CHOOSE THE CORRECT ANSWER(S) Look again at Figure 1.10
, which shows a graph of GDP per capita for West and East Germany,
Japan and Spain between 1950 and 1990. Which of the following statements is correct? A.
Having a much lower starting point in 1950 was the main reason for East Germany’s poor performance compared to West Germany.
B.
The fact that Japan and West Germany have the highest GDP per capita in 1990 implies
that they found the optimal economic system. C.
Spain was able to grow at a higher growth rate than Germany between 1950 and 1990.
D.
The difference in East and West Germany’s performance proves that capitalism always promotes rapid economic growth while central planning is a recipe for stagnation. QUESTION 1.8 CHOOSE THE CORRECT ANSWER(S) Look again at Figure 1.11
. Which of these conclusions is suggested by the graph? A.
The Communist Party rule in the former Soviet Union before 1990 was a complete failure.
B.
The contrasting performances of Botswana and Nigeria illustrate that rich natural resources alone do not guarantee higher economic growth, but that higher quality institutions (government, markets and firms) may also be necessary.
C.
The impressive performance of South Korea’s economy implies that other countries should copy their economic system. D.
The evidence from the Russian Federation and the former Soviet Union after 1990 shows that the replacement of central planning by capitalism led to immediate economic growth.
QUESTION 2.1 CHOOSE THE CORRECT ANSWER(S) Figure 2.1 shows an index of average real wages of skilled workers in London between 1264 and 2001. What can we conclude from this graph? A.
Skilled workers were paid about £100 in 1408.
B.
The average wage in 1850 was about the same as that in 1408 in nominal terms (pounds). C.
The average real wage was more or less constant between 1264 and 1850.
D.
The average real wage increased by around 600% between 1850 and 2001. QUESTION 2.2 CHOOSE THE CORRECT ANSWER(S) Which of the following is an economic rent? A.
The amount you pay your landlord for the use of an apartment.
B.
The amount you pay to hire a car for a weekend.
C.
The extra profit that a successful innovator makes on bringing a new product to the market before its competitors.
D.
The extra profit that a firm makes when it doubles in size and there are no changes to costs or the price for each unit of its output. QUESTION 2.3 CHOOSE THE CORRECT ANSWER(S) Figure 2.3 shows different technologies for producing 100 metres of cloth. From the graph, what
can we conclude? A.
Technology D is more energy-intensive than technology C.
B.
Technology B dominates technology D.
C.
Technology A is the cost-minimizing technology at all prices of coal and wages. D.
Technology C can sometimes be a cheaper technology than A. QUESTION 2.4 CHOOSE THE CORRECT ANSWER(S) Look at the three isocost lines in Figure 2.8
. Based on this information, what can we conclude? A.
When the wage is £10 and the price of coal is £5, the combination of inputs at point N is more costly than the inputs at point B.
B.
Isocosts MN and FG represent the same price ratio (wage/price of coal) but different total costs of production.
C.
Isocost HJ represents a higher (wage/price of coal) ratio than isocost FG.
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D.
Isocost HJ represents all points that can produce 100 metres of cloth at a particular price
ratio. QUESTION 2.5 CHOOSE THE CORRECT ANSWER(S) Look again at Figure 2.12 which depicts isocost lines for the 1600s and the 1700s in Britain. Which of the following is true? A.
The flatter isocost line HJ for 1600s Britain indicates higher wages relative to the price of
coal.
B.
The increase in wages relative to the cost of energy in the 1700s is represented by the outward shift of the isocost line from HJ to the parallel isocost line going through A.
C.
Had the wage level fallen together with the falling energy costs (due for example to cheaper transportation), then 1700s Britain would definitely have stayed with technology B.
D.
The comparison between isocost line FG and the parallel isocost going through B suggests that an innovation rent was earned in 1700s Britain when firms moved from technology B to A. QUESTION 2.6 CHOOSE THE CORRECT ANSWER(S) Look again at Figure 2.14b which depicts the production function of grain for farmers under average growing conditions with the currently available technology. We can ascertain that: A.
In a year with exceptionally good weather conditions, the production function curve will be higher and parallel to the curve above.
B.
A discovery of new high-yielding crop seeds would tilt the production function curve higher, pivoted anti-clockwise at the origin. C.
In a year of bad drought, the production curve can slope downwards for large numbers of farmers.
D.
If there is an upper limit on the amount of grain that can be produced, then the curve will end up horizontal for large numbers of farmers. QUESTION 2.7 CHOOSE THE CORRECT ANSWER(S) Look again at Figure 2.1 and Figure 2.19 showing graphs of real wages in England between 1300 and 2000. You are also told the following facts: During the bubonic plague of 1348 and 1351, between one-quarter and one-third of Europe’s population died. In the seventeenth and eighteenth centuries, the wages of unskilled workers relative to the incomes of land owners were only one-fifth of what they had been in the sixteenth century. What can we conclude from this information? A.
According to the Malthusian model, the fall in the population due to the bubonic plague would have led to an increase in the average productivity of workers, causing the observed rise in the real wage post-plague.
B.
The doubling and halving of the real wage index over 250 years from around 1350 is contrary to the Malthusian model.
C.
The fall in the unskilled workers’ share of total output in the seventeenth and eighteenth centuries was due to the fall in their average product of labour. D.
The fall in the relative wages of the unskilled workers in the seventeenth and eighteenth centuries was one of the factors that led to the eventual shooting up of the real wage in the nineteenth century, seen in the graph.
QUESTION 2.8 CHOOSE THE CORRECT ANSWER(S) Look again at Figure 2.20
, which plots real wages against population in England from the 1280s
to the 1860s. According to Malthus, with diminishing average product of labour in production and population growth in response to increases in real wages, an increase in productivity will result in a larger population but not higher real wages in the long run. Based on the information above, which of the following statements is correct? A.
Between the 1800s and the 1860s, population grows as real wages rise. This is entirely in line with Malthus’s description of the economy’s growth.
B.
There is a clear evidence of a persistent and continuous Malthusian trap between the 1280s and the 1800s.
C.
The Malthusian traps seem to occur in a cycle of 60 years. D.
The Malthusian model does not take into account the possibility of a persistent positive technology shock that may offset the diminishing average product of labour.
QUESTION 3.1 CHOOSE THE CORRECT ANSWER(S) Currently you work for 40 hours per week at the wage rate of £20 an hour. Your free hours are defined as the number of hours not spent in work per week, which in this case is 24 hours × 7 days − 40 hours = 128 hours per week. Suppose now that your wage rate has increased by 25%. If you are happy to keep your total weekly income constant, then: A.
Your total number of working hours per week will fall by 25%. B.
Your total number of working hours per week will be 30 hours. C.
Your total number of free hours per week will increase by 25%. D.
Your total number of free hours per week will increase by 6.25% QUESTION 3.2 CHOOSE THE CORRECT ANSWER(S) Look again at Figure 3.1
, which depicts the annual number of hours worked against GDP per capita in the US, France and the Netherlands, between 1870 and 2000. Which of the following is true? A.
An increase in GDP per capita causes a reduction in the number of hours worked.
B.
The GDP per capita in the Netherlands is lower than that in the US because Dutch people work fewer hours.
C.
Between 1870 and 2000, French people have managed to increase their GDP per capita
more than ten-fold while more than halving the number of hours worked.
D.
On the basis of the evidence in the graph, one day French people will be able to produce
a GDP per capita of over $30,000 with less than 1,000 hours of work. QUESTION 3.3 CHOOSE THE CORRECT ANSWER(S) Figure 3.5 shows Alexei’s production function, with the final grade (the output) related to the number of hours spent studying (the input). Which of the following is true? A.
The marginal product and average product are approximately the same for the initial hour.
B.
The marginal product and the average product are both constant beyond 15 hours.
C.
The horizontal production function beyond 15 hours means that studying for more than 15 hours is detrimental to Alexei’s performance.
D.
The marginal product and the average product at 20 hours are both 4.5. QUESTION 3.4 CHOOSE THE CORRECT ANSWER(S) Figure 3.6 shows Alexei’s indifference curves for free time and final grade. Which of the following is true? A.
Alexei prefers C to B because at C he has more free time.
B.
Alexei is indifferent between the grade of 84 with 15 hours of free time, and the grade of 50 with 20 hours of free time. C.
Alexei prefers D to C, because at D he has the same grade and more free time.
D.
At G, Alexei is willing to give up 2 hours of free time for 10 extra grade points. QUESTION 3.5 CHOOSE THE CORRECT ANSWER(S) What is the marginal rate of substitution (MRS)? A.
The ratio of the amounts of the two goods at a point on the indifference curve.
B.
The amount of one good that the consumer is willing to trade for one unit of the other. C.
The change in the consumer’s utility when one good is substituted for another.
D.
The slope of the indifference curve.
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QUESTION 3.6 CHOOSE THE CORRECT ANSWER(S) You are a taxi driver in Melbourne who earns A$50 for a day’s work. You have been offered a one-day ticket to the Australian Open for A$40. As a tennis fan, you value the experience at A$100. With this information, what can we say? A.
The opportunity cost of the day at the Open is A$40. B.
The economic cost of the day at the Open is A$40. C.
The economic rent of the day at the Open is A$10. D.
You would have paid up to A$100 for the ticket. QUESTION 3.7 CHOOSE THE CORRECT ANSWER(S) Look at Figure 3.5 which shows Alexei’s production function: how the final grade (the output) depends on the number of hours spent studying (the input). Free time per day is given by 24 hours minus the hours of study per day. Consider Alexei’s feasible set of combinations of final grade and hours of free time per day. What can we conclude? A.
To find the feasible set one needs to know the number of hours that Alexei sleeps per day.
B.
The feasible frontier is a mirror image of the production function above.
C.
The feasible frontier is horizontal between 0 and 10 hours of free time per day.
D.
The marginal product of labour at 10 hours of study equals the marginal rate of transformation at 14 hours of free time. QUESTION 3.8 CHOOSE THE CORRECT ANSWER(S) Figure 3.10a shows Alexei’s feasible frontier and his indifference curves for final grade and hours of free time per day. Suppose that all students have the same feasible frontier, but their indifference curves may differ in shape and slope depending on their preferences. Use the diagram to decide which of the following is (are) correct. A.
Alexei will choose a point where the marginal rate of substitution equals the marginal rate of transformation.
B.
C is below the feasible frontier but D is on the feasible frontier. Therefore, Alexei may select point D as his optimal choice. C.
All students with downward-sloping indifference curves, whatever the slope, would choose point E.
D.
At E, Alexei has the highest ratio of final grade per hour of free time per day.
QUESTION 3.9 CHOOSE THE CORRECT ANSWER(S) The figures show Alexei’s production function and his corresponding feasible frontier for final grade and hours of work or free time per day. They show the effect of an improvement in his studying technique, represented by the tilting up of the two curves. Consider now two cases of further changes in Alexei’s study environment: Case A
. He suddenly finds himself needing to spend 4 hours a day caring for a family member. (You may assume that his marginal product of labour is unaffected for the hours that he studies.) Case B
. For health reasons his marginal product of labour for all hours is reduced by 10%. Then: A.
For case A, Alexei’s production function shifts to the right.
B.
For case A, Alexei’s feasible frontier shifts to the left.
C.
For case B, Alexei’s production function shifts down in a parallel manner.
D.
For case B, Alexei’s feasible frontier rotates downwards, pivoted at the intercept with the
horizontal axis QUESTION 3.10 CHOOSE THE CORRECT ANSWER(S) Figure 3.15 depicts your budget constraint when the hourly wage is $15. Which of the following is (are) true? A.
The slope of the budget constraint is the negative of the wage rate (–15).
B.
The budget constraint is a feasible frontier with a constant marginal rate of transformation.
C.
An increase in the wage rate would cause a parallel upward shift in the budget constraint.
D.
A gift of $60 would make the budget constraint steeper, with the intercept on the vertical axis increasing to $300 QUESTION 3.11 CHOOSE THE CORRECT ANSWER(S) Figure 3.20 depicts a model of labour supply and consumption for the US in 1900 and 2013. The wage rate is shown to have increased between the two years. Which of the following are true? A.
The substitution effect corresponds to the steepening of the budget constraint. This is represented by the move from point A to point D.
B.
The income effect corresponds to the parallel shift in the budget constraint outwards due
to the higher income. This is represented by the move from point A to C. C.
As shown, the income effect dominates the substitution effect, leading to a reduction in the hours of work.
D.
If Americans had had different preferences, they might have responded to this wage rise
by reducing their free time
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QUESTION 4.1 CHOOSE THE CORRECT ANSWER(S) In a simultaneous one-shot game: A.
A player observes what others do before deciding how to act.
B.
A player decides his or her action, taking into account what other players may do after knowing his or her move. C.
Players coordinate to find the actions that lead to the optimal outcome for society.
D.
A player chooses an action taking into account the possible actions that other players can take. QUESTION 4.2 CHOOSE THE CORRECT ANSWER(S) Brian likes going to the cinema more than watching football. Anna, on the other hand, prefers watching football to going to the cinema. Either way, they both prefer to be together rather than spending an afternoon apart. The following table represents the happiness levels (payoffs) of Anna and Brian, depending on their choice of activity (the first number is Brian’s happiness level
while the second number is Anna’s):
Based on the information above, we can conclude that: A.
The dominant strategy for both players is Football.
B.
There is no dominant strategy equilibrium.
C.
The dominant strategy equilibrium yields the highest possible happiness for both. D.
Neither player would want to deviate from the dominant strategy equilibrium. QUESTION 4.3 CHOOSE THE CORRECT ANSWER(S) Dimitrios and Ameera work for an international investment bank as foreign exchange traders. They are being questioned by the police on their suspected involvement in a series of market manipulation trades. The table below shows the cost of each strategy (in terms of the length in years of jail sentences they will receive), depending on whether they accuse each other or deny the crime. The first number is the payoff to Dimitrios, while the second number is the payoff to Ameera (the negative numbers signify losses). Assume that the game is a simultaneous one-
shot game.
Based on this information, we can conclude that: A.
Both traders will hold out and deny their involvement.
B.
Both traders will accuse each other, even though they will end up being in jail for eight years. C.
Ameera will accuse, whatever she expects Dimitrios to do.
D.
There is a small possibility that both traders will get away with two years each. QUESTION 4.4 CHOOSE THE CORRECT ANSWER(S) In Figure 4.5 Anil has just won the lottery and has received 10,000 rupees. He is considering how much (if at all) he would like to share this sum with his friend Bala. Before he manages to share his winnings, Anil receives a tax bill for these winnings of 3,000 rupees. Based on this information, which of the following statements is true? A.
Bala will receive 3,000 rupees if Anil is somewhat altruistic.
If Anil was somewhat altruistic and kept 7,000 rupees before the tax bill, he will still keep
B.
7,000 rupees after the tax bill by turning completely selfish.
C.
Anil will be on a lower indifference curve after the tax bill.
D.
Had Anil been so extremely altruistic that he only cared about Bala’s share, then Bala would have received the same income before and after the tax bill. QUESTION 4.5 CHOOSE THE CORRECT ANSWER(S) Figure 4.6 shows Anil’s preferences when he is completely selfish, and also when he is somewhat altruistic, when he and Bala participate in the prisoners’ dilemma game. Based on the graph, we can say that: A.
When Anil is completely selfish, using Terminator is his dominant strategy.
B.
When Anil is somewhat altruistic, using Terminator is his dominant strategy.
C.
When Anil is completely selfish, (T, T) is the dominant strategy equilibrium even though it is on a lower indifference curve for him than (T, I).
D.
If Anil is somewhat altruistic, and Bala’s preferences are the same as Anil’s, (I, I) is attained as the dominant strategy equilibrium. QUESTION 4.6 CHOOSE THE CORRECT ANSWER(S)
Four farmers are deciding whether to contribute to the maintenance of an irrigation project. For each farmer, the cost of contributing to the project is $10. But for each farmer who contributes, all four of them will benefit from an increase in their crop yields, so they will each gain $8. Which of the following statements is correct? A.
If all the farmers are selfish, none of them will contribute.
B.
If one of the farmers, Kim, cares about her neighbour Jim just as much as herself, she will contribute $10.
C.
If Kim is altruistic and contributes $10, the others might contribute too, even if they are selfish.
D.
If the farmers have to reconsider this decision every year, they might choose to contribute to the project even if they are selfish. QUESTION 4.7 CHOOSE THE CORRECT ANSWER(S) According to the ‘Economist in action’ video of Juan Camilo Cárdenas
, which of the following have economists discovered using experiments simulating public goods scenarios? A.
The imposition of external regulation sometimes erodes the willingness of participants to cooperate. B.
Populations with greater inequality exhibit a greater tendency to cooperate.
C.
Once real cash is used instead of tokens of hypothetical sums of money, people cease to act cooperatively. D.
People are often willing to cooperate rather than free ride. QUESTION 4.8 CHOOSE THE CORRECT ANSWER(S) Figure 4.10 depicts the average number of late-coming parents per week in day-care centres, where a fine was introduced in some centres and not in others. The fines were eventually abolished, as indicated on the graph. Based on this information, which of the following statements is correct? A.
The introduction of the fine successfully reduced the number of late-coming parents.
B.
The fine can be considered as the ‘price’ for collecting a child.
C.
The graph suggests that the experiment may have permanently increased the parents’ tendency to be late. D.
The crowding out of the social preference did not occur until the fines ended. QUESTION 4.9 CHOOSE THE CORRECT ANSWER(S) Anastasia and Belinda’s favourite hobby is to go metal detecting. On one occasion Anastasia finds four Roman coins while Belinda is unsuccessful. Both women have reciprocal preferences.
From this, can we say that: A.
If both women are altruistic, then they will definitely share the find 50–50.
B.
If Anastasia is altruistic and Belinda is selfish, then Anastasia may not share the find.
C.
If Anastasia is selfish and Belinda is altruistic, then Anastasia will definitely not share the
find.
D.
If Anastasia is altruistic and Belinda believes in fairness, then they may or may not share
the find 50–50. QUESTION 4.10 CHOOSE THE CORRECT ANSWER(S) Consider an ultimatum game where the Proposer offers a proportion of $100 to the Responder, who can either accept or reject the offer. If the Responder accepts, both the Proposer and the Responder keep the agreed share, while if the Responder rejects, then both receive nothing. Figure 4.12 shows the results of a study that compares the responses of US university students and Kenyan farmers.
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A.
From this information, we can conclude that: Kenyans are more likely to reject low offers than Americans.
B.
Just over 50% of Kenyan farmers rejected the offer of the Proposer keeping 30%.
C.
Both groups of Responders are indifferent between accepting and rejecting an offer of receiving nothing. D.
Kenyan farmers place higher importance on fairness than US students. QUESTION 4.11 CHOOSE THE CORRECT ANSWER(S) The following table shows the percentage of the Responders who rejected the amount offered by the Proposers in the ultimatum game played by Kenyan farmers and US university students. The pie is $100. From this information, we can say that: A.
The expected payoff of offering $30 is $4.50 for the US students.
B.
The expected payoff of offering $40 is $6 for the US students.
C.
The expected payoff of offering $20 is $8 for the Kenyan farmers.
D.
The expected payoff of offering $10 is higher for the Kenyan farmers than for the US student
QUESTION 4.12 CHOOSE THE CORRECT ANSWER(S) This table shows the payoff matrix for a simultaneous one-shot game in which Anil and Bala choose their crops. We can conclude that: A.
There are two Nash equilibria: (Cassava, Rice) and (Rice, Cassava).
B.
The choice of Cassava is a dominant strategy for Anil.
C.
The choice of Rice is a dominant strategy for Bala.
D.
There are two dominant strategy equilibria: (Cassava, Rice) and (Rice, Cassava).
QUESTION 5.1 CHOOSE THE CORRECT ANSWER(S) Which of the following statements about the outcome of an economic interaction is correct? A.
If the allocation is Pareto efficient, then you cannot make anyone better off without making someone else worse off. B.
All participants are happy with what they get if the allocation is Pareto efficient.
C.
There cannot be more than one Pareto-efficient outcome.
D.
According to the Pareto criterion, a Pareto-efficient outcome is always better than an inefficient one. QUESTION 5.2 CHOOSE THE CORRECT ANSWER(S) Figure 5.3 shows Angela and Bruno’s combined feasible set, and four allocations that might result from an interaction between them. From the figure, we can conclude that: A.
If Angela has very flat indifference curves, she may prefer G to the other three allocations.
B.
If Angela has very steep indifference curves, she may prefer F to the other three allocations.
C.
Allocation G is the best of the four for Bruno.
D.
It is possible that Angela is indifferent between G and E. QUESTION 5.3 CHOOSE THE CORRECT ANSWER(S) Figure 5.4 shows Angela and Bruno’s feasible frontier, and Angela’s biological survival constraint. Based on this figure, which of the following is correct? A.
If Angela works 24 hours she can survive.
B.
There is a technically feasible allocation in which Angela does not work.
C.
A new technology that boosted grain production would result in a bigger technically feasible set. D.
If Angela did not need so much grain to survive the technically feasible set would be smaller. QUESTION 5.4 CHOOSE THE CORRECT ANSWER(S) Figure 5.5 shows Angela and Bruno’s feasible frontier, and Angela’s biological survival constraint. If Bruno can impose the allocation: A.
He will choose the technically feasible allocation where Angela produces the most grain.
B.
His preferred choice will be where the marginal rate of transformation (MRT) on the feasible frontier equals the marginal rate of substitution (MRS) on the biological survival constraint.
C.
He will not choose 8 hours of work, because the MRS between Angela’s work hours and
subsistence requirements exceeds the MRT between work hours and grain output.
D.
He will choose 13 hours of free time for Angela, and consume 10 bushels of grain. QUESTION 5.5 CHOOSE THE CORRECT ANSWER(S) Figure 5.6 shows Angela and Bruno’s feasible frontier, Angela’s biological survival constraint, and her reservation indifference curve. Based on this figure, which of the following is correct? A.
The economically feasible set is the same as the technically feasible set.
B.
For any given number of hours of free time, the marginal rate of substitution on the reservation indifference curve is smaller than that on the biological survival constraint.
C.
Some points are economically feasible but not technically feasible.
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D.
If the ration Angela gets from the government increases from 2 to 3 bushels of grain, her
reservation indifference curve will be above her biological survival constraint whatever her working hours. QUESTION 5.6 CHOOSE THE CORRECT ANSWER(S) Figure 5.7a shows Angela and Bruno’s feasible frontier, Angela’s biological survival constraint and her reservation indifference curve. B is the outcome under coercion, while D is the outcome
under voluntary exchange when Bruno makes a take-it-or- leave-it offer. Looking at this graph, we can conclude that: A.
With a take-it-or-leave-it offer, Bruno’s economic rent is equal to the joint surplus.
B.
Both Bruno and Angela are better off under voluntary exchange than under coercion.
C.
When Bruno makes a take-it-or-leave-it offer, Angela accepts because she receives an economic rent. D.
Angela works longer under voluntary exchange than under coercion. QUESTION 5.7 CHOOSE THE CORRECT ANSWER(S) Figure 5.8 shows the Pareto efficiency curve CD for the interaction between Angela and Bruno. Which of the following statements is correct? A.
The allocation at C Pareto dominates the one at D.
B.
Angela’s marginal rate of substitution is equal to the marginal rate of transformation at all
points on the Pareto efficiency curve.
C.
The mid-point of CD is the most Pareto-efficient allocation.
D.
Angela and Bruno are indifferent between all the points on CD, because they are all Pareto efficient. QUESTION 5.8 CHOOSE THE CORRECT ANSWER(S) In Figure 5.9
, D and F are the outcomes before and after the introduction of a new law that limits
Angela’s work time to four hours a day while requiring a minimum pay of 4.5 bushels. Based on this information, which of the following statements are correct? A.
The change from D to F is a Pareto improvement.
B.
The new outcome F is Pareto efficient.
C.
Both Angela and Bruno receive economic rents at F.
D.
As a result of the new law, Bruno has less bargaining power. QUESTION 5.9 CHOOSE THE CORRECT ANSWER(S) In Figure 5.10
, Angela and Bruno are at allocation F, where she receives 4.5 bushels of grain for 4 hours of work. From the figure, we can conclude that: A.
All the points on EF are Pareto efficient.
B.
Any point in the area between G, H and F would be a Pareto improvement. C.
Any point between G and D would be a Pareto improvement.
D.
They would both be indifferent between all points on GH. QUESTION 5.10 CHOOSE THE CORRECT ANSWER(S) Figure 5.15 shows the Lorenz curve for market income in the Netherlands in 2010. Which of the following is true? A.
If area A increases, income inequality falls.
B.
The Gini coefficient can be calculated as the proportion of area A to area A + B. C.
Countries with lower Gini coefficients have less equal income distributions. D.
The Gini coefficient takes the value 1 when everyone has the same income.
QUESTION 6.1 CHOOSE THE CORRECT ANSWER(S) Which of the following statements is true? A.
A labour contract transfers ownership of the employee from the employee to the employer.
B.
The office where the employee works is a relation-specific asset, because the employee cannot use it after leaving the firm. C.
In a labour contract, one side of the contract has the power to issue orders to the other side, but this power is absent from a sale contract.
D.
A firm is a structure that involves decentralization of power to the employees. QUESTION 6.2 CHOOSE THE CORRECT ANSWER(S) Which of the following statements about the separation of ownership and control is true? A.
When the ownership and control of a firm is separated, the managers become the residual claimants.
B.
Managers always work to maximize the firm’s profit.
C.
One way to address the problem associated with the separation of ownership and control is to pay the managers a salary that depends on the performance of the firm’s share price.
D.
It is effective for shareholders to monitor the performance of the management, in a firm owned by a large number of shareholders. QUESTION 6.3 CHOOSE THE CORRECT ANSWER(S) Which of the following are reasons why employment contracts are incomplete? A.
The firm cannot contract an employee not to leave.
B.
The firm cannot specify every eventuality in a contract.
C.
The firm is unable to observe exactly how an employee is fulfilling the contract. D.
The contract is unfinished. QUESTION 6.4 CHOOSE THE CORRECT ANSWER(S) In which of the following employment situations would the employment rent be high, ceteris paribus
? A.
In a job that provides many benefits, such as housing and medical insurance.
B.
In an economic boom, when the ratio of job-seekers to vacancies is low.
C.
When the worker is paid a high salary because she is a qualified accountant and there is
a shortage of accountancy skills. D.
When the worker is paid a high salary because the firm’s customers know and trust her. QUESTION 6.5 CHOOSE THE CORRECT ANSWER(S) Maria earns $12 per hour in her current job and works 35 hours a week. Her disutility of effort is equivalent to a cost of $2 per hour of work. If she loses her job, she will receive unemployment benefit equivalent to $6 per hour. Additionally, being unemployed has psychological and social costs equivalent to $1 per hour. Then: A.
The employment rent per hour is $3.
B.
Maria’s reservation wage is $6 per hour.
C.
Maria’s employment rent if she can get another job with the same wage rate after 44 weeks of being unemployed is $6,160. D.
Maria’s employment rent if she can only get a job at a lower wage rate after 44 weeks of being unemployed is more than $7,700. QUESTION 6.6 CHOOSE THE CORRECT ANSWER(S)
Figure 6.4 depicted Maria’s best response curve when the expected duration of unemployment was 44 weeks. Which of the following statements is correct? A.
If the expected unemployment duration increased to 50 weeks, Maria’s best response to a wage of $12 would be an effort level above 0.5.
B.
If the unemployment benefit was reduced, then Maria’s reservation wage would be higher than $6.
C.
Over the range of wages shown in the figure, Maria would never exert the maximum possible effort per hour. D.
Increasing effort from 0.5 to 0.6 requires a bigger wage increase than increasing effort from 0.8 to 0.9. QUESTION 6.7 CHOOSE THE CORRECT ANSWER(S) Figure 6.6 depicts the efficiency wage equilibrium of a worker and a firm. According to this figure: A.
Along the isocost line tangent to the best response curve, doubling of the per-hour effort from 0.45 to 0.90 would lead to an increased profit for the firm.
B.
The slope of each isocost line is the number of units of effort per dollar.
C.
At the equilibrium point, the marginal rate of transformation on the isocost line equals the
marginal rate of substitution on the worker’s best response curve. D.
Points C and A both represent Nash equilibria because they are on the best response curve. QUESTION 6.8 CHOOSE THE CORRECT ANSWER(S) Which of the following statements are true? A.
If unemployment benefits are increased, the minimum cost of a unit of effort for the employer will rise.
B.
If the wage doesn’t change, employees will work harder in periods of high unemployment.
C.
If workers continue to receive benefits however long they remained unemployed, an increase in the level of unemployment will have no effect on the best response curve.
D.
If an employee’s disutility of effort increases, the reservation wage will rise.
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QUESTION 7.1 CHOOSE THE CORRECT ANSWER(S) A firm’s cost of production is £12 per unit of output. If P is the price of the output good and Q is the number of units produced, which of the following statements is correct? A.
Point (
Q
, P
) = (2,000, 20) is on the isoprofit curve representing the profit level £20,000.
B.
Point (
Q
, P
) = (2,000, 20) is on a lower isoprofit curve than point (
Q
, P
) = (1,200, 24). C.
Points (
Q
, P
) = (2,000, 20) and (4,000, 16) are on the same isoprofit curve.
D.
Point (
Q
, P
) = (5,000, 12) is not on any isoprofit curve. QUESTION 7.2 CHOOSE THE CORRECT ANSWER(S) Consider a firm whose unit cost (the cost of producing one unit of output) is the same at all output levels. Which of the following statements are correct? A.
Each isoprofit curve depicts the firm’s profit for different outputs for a given price of the output good. B.
Isoprofit curves can be upward-sloping when at high profit levels.
C.
Every price-quantity combination lies on an isoprofit curve.
D.
Isoprofit curves slope downward when the price is above the unit cost. QUESTION 7.3 CHOOSE THE CORRECT ANSWER(S) The table represents market demand Q for a good at different prices P
.
The firm’s unit cost of production is £60. Based on this information, which of the following is correct? A.
At Q = 100, the firm’s profit is £20,000.
B.
The profit-maximizing output is Q = 400.
C.
The maximum profit that can be attained is £50,000.
D.
The firm will make a loss at all outputs of 800 and above. QUESTION 7.4 CHOOSE THE CORRECT ANSWER(S) Which of the following statements is correct? A.
If a firm’s technology exhibits constant returns to scale, doubling the inputs leads to doubling of the output level.
B.
If a firm’s technology exhibits decreasing returns to scale, doubling the inputs more than doubles the output level.
C.
If a firm’s technology exhibits economies of scale, costs per unit will fall as the firm expands its production.
D.
If a firm’s technology exhibits diseconomies of scale, doubling the inputs leads to less than doubling of the output level.
QUESTION 7.5 CHOOSE THE CORRECT ANSWER(S) Consider a firm with fixed costs of production. Which of the following statements about its average cost (AC) and marginal cost (MC) is correct? A.
When AC = MC, the AC curve has a zero slope. B.
When AC > MC, the MC curve is downward-sloping. C.
When AC < MC, the AC curve is downward-sloping. D.
The MC curve cannot be horizontal.
QUESTION 7.6 CHOOSE THE CORRECT ANSWER(S) Suppose that the unit cost of producing a pound of cereal is $2, irrespective of the level of output. (This means there are no fixed costs, that is, costs that are present for any level of output, including zero.) Which of the following statements is correct? A.
The total cost curve is a horizontal straight line.
B.
The average cost curve is downward-sloping.
C.
The marginal cost curve is upward-sloping.
D.
The average cost and the marginal cost curves coincide. QUESTION 7.7 CHOOSE THE CORRECT ANSWER(S) The diagram depicts two alternative demand curves, D and D′, for a product. Based on this graph, which of the following are correct? A.
On demand curve D, when the price is £5,000, the firm can sell 15 units of the product. B.
On demand curve D′, the firm can sell 70 units at a price of £3,000.
C.
At price £1,000, the firm can sell 40 more units of the product on D′ than on D.
D.
With an output of 30 units, the firm can charge £2,000 more on D′ than on D. QUESTION 7.8 CHOOSE THE CORRECT ANSWER(S) The diagram depicts the marginal cost curve (MC), the average cost curve (AC), and the isoprofit curves of a firm. What can we deduce from the information in the diagram? A.
The profit level at A is 500. B.
The profit level at B is 150. C.
The price at C is 50.
D.
The price at B is 36. QUESTION 7.9 CHOOSE THE CORRECT ANSWER(S)
Figure 7.11 depicts the demand curve for Beautiful Cars, together with the marginal cost and isoprofit curves. The quantity- price combination at point E is (
Q
*, P
*) = (32, 5,440). The average cost of producing 50 cars is the same as the average cost of producing 32. Suppose that the firm keeps the price at P = $5,440 but now produces 50 cars instead of 32. Which of the
following is correct? A.
The firm will now sell all 50 cars at $5,440. B.
The firm’s profit will increase.
C.
The firm’s profit remains the same.
D.
The firm’s profit is now reduced. QUESTION 7.10 CHOOSE THE CORRECT ANSWER(S) Figure 7.11 depicts the demand curve for Beautiful Cars, together with the marginal cost and isoprofit curves. At point E, the quantity-price combination is (
Q
*, P
*) = (32, 5,440) and the profit
is $63,360. Suppose that the firm chooses instead to produce Q = 32 cars and sets the price at P = $5,400. Which of the following statements is correct? A.
The profit remains the same at $63,360. B.
The profit is reduced to $62,080.
C.
The average cost of production is $3,400. D.
The firm is unable to sell all the cars. QUESTION 7.11 CHOOSE THE CORRECT ANSWER(S) Figure 7.11 depicts the demand curve for Beautiful Cars, together with the marginal cost and isoprofit curves.
Suppose that the firm decides to switch from P
* = $5,440 and Q
* = 32 to a higher price, and chooses the profit-maximizing level of output at the new price. Which of the following statements
is correct? A.
The quantity of cars produced is reduced.
B.
The marginal cost of producing an extra car is higher. C.
The total cost of production is higher.
D.
The profit is increased due to the new higher price QUESTION 7.12 CHOOSE THE CORRECT ANSWER(S) This figure shows the marginal cost and marginal revenue curves for Beautiful Cars. Which of the following statements is correct, based on the information shown? A.
When Q = 40, the marginal cost is greater than the marginal revenue so the firm’s profit must be negative. B.
Revenue is greater when Q = 10 than if Q = 20.
C.
The firm would not choose to produce at point E because marginal profit is zero.
D.
Profit is greater when Q = 20 than when Q = 10.
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QUESTION 7.13 CHOOSE THE CORRECT ANSWER(S) Which of the following statements is correct? A.
Consumer surplus is the difference between the consumers’ willingness to pay and what
they actually pay. B.
Producer surplus equals the firm’s profit.
C.
Deadweight loss is the loss incurred by the producer for not selling more cars.
D.
All possible gains from trade are achieved when the firm chooses its profit-maximizing output and price. QUESTION 7.14 CHOOSE THE CORRECT ANSWER(S) A shop sells 20 hats per week at $10 each. When it increases the price to $12, the number of hats sold falls to 15 per week. Which of the following statements are correct? A.
When the price increases from $10 to $12, demand increases by 25%. B.
A 20% increase in the price causes a 25% fall in demand.
C.
The demand for hats is inelastic.
D.
The elasticity of demand is approximately 1.25. QUESTION 7.15 CHOOSE THE CORRECT ANSWER(S) The figure depicts two demand curves, D and D.
Based on this figure, which of the following statements are correct? A.
At E, demand curve D is less elastic than D.
B.
The elasticity is the same at A and C.
C.
At E, both demand curves have the same elasticity. D.
The elasticity is higher at E than at B. QUESTION 7.16 CHOOSE THE CORRECT ANSWER(S) Suppose that in a small town a multinational retailer is planning to build a new superstore. Which of the following arguments could be correct? A.
The local protestors argue that the close substitutability of some of the goods sold between the new retailer and existing ones means that the new retailer faces inelastic demand for those goods, giving it excessive market power.
B.
The new retailer argues that the close substitutability of some of the goods implies a high elasticity of demand, leading to healthy competition and lower prices for consumers.
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C.
The local protestors argue that once the local retailers are driven out, there will be no competition, giving the multinational retailer more market power and driving up prices.
D.
The new retailer argues that most of the goods sold by local retailers are sufficiently differentiated from its own goods that their elasticity of demand will be high enough to protect the local retailers’ profits.
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QUESTION 8.1 CHOOSE THE CORRECT ANSWER(S) As a student representative, one of your roles is to organize a second-hand textbook market between the current and former first-year students. After a survey, you estimate the demand and supply curves to be the ones shown in Figures 8.1 and 8.2. For example, you estimate that pricing the book at $7 would lead to a supply of 20 books and a demand of 26 books. Which of the following statements is correct? A.
A rumour that the textbook may be required again in Year 2 would change the supply curve, shifting it upwards.
B.
Doubling the price to $14 would double the supply.
C.
A rumour that the textbook may no longer be on the reading list for the first-year students would change the demand curve, shifting it upwards.
D.
Demand would double if the price were reduced sufficiently. QUESTION 8.2 CHOOSE THE CORRECT ANSWER(S) The diagram shows the demand and the supply curves for a textbook. The curves intersect at (
Q
, P
) = (24, 8). Which of the following is correct? A.
At price $10, there is an excess demand for the textbook.
B.
At $8, some of the sellers have an incentive to increase their selling price to $9. C.
At $8, the market clears.
D.
40 books will be sold in total. QUESTION 8.3 CHOOSE THE CORRECT ANSWER(S) Figure 8.5 shows a price-taking bakery’s marginal and average cost curves, and its isoprofit curves. The market price for bread is P
*= €2.35. Which of the following statements is correct? A.
The firm’s supply curve is horizontal.
B.
At the market price of €2.35, the firm will supply 62 loaves, at the point where the firm makes zero profit. C.
At any market price, the firm’s supply is given by the corresponding point on the average
cost curve. D.
The marginal cost curve is the firm’s supply curve.
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QUESTION 8.4 CHOOSE THE CORRECT ANSWER(S) There are two different types of producers of a good in an industry where firms are price-takers. The marginal cost curves of the two types are given below: Type A is more efficient than Type B: for example, as shown, at the output of 20 units, the Type A firms have a marginal cost of $2, as opposed to a marginal cost of $3 for the Type B firms. There are 10 Type A firms and 8 Type B firms in the market. Which of the following statements is correct? A.
At price $2, the market supply is 450 units.
B.
The market will supply 510 units at price $3.
C.
At price $2, the market’s marginal cost of supplying one extra unit of the good will depend on the type of the firm that produces it.
D.
With different types of firms, we cannot determine the marginal cost curve for the market. QUESTION 8.5 CHOOSE THE CORRECT ANSWER(S) In Figure 8.9a
, the market equilibrium output and price of the bread market is shown to be at (
Q
*, P
*) = (5,000, €2). Suppose that the mayor decrees that bakeries must sell as much bread as consumers want, at a price of €1.50. Which of the following statements are correct? A.
The consumer and producer surpluses both increase.
B.
The producer surplus increases but the consumer surplus decreases. C.
The consumer surplus increases but the producer surplus decreases. D.
The total surplus is lower than at the market equilibrium. QUESTION 8.6 CHOOSE THE CORRECT ANSWER(S) Which of the following statements about a competitive equilibrium allocation are correct? A.
It is the best possible allocation.
B.
No buyer’s or seller’s surplus can be increased without reducing someone else’s surplus.
C.
The allocation must be Pareto efficient.
D.
The total surplus from trade is maximized. QUESTION 8.7 CHOOSE THE CORRECT ANSWER(S)
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Figure 8.8 shows the equilibrium of the bread market to be 5,000 loaves per day at price €2. A year later, we find that the market equilibrium price has fallen to €1.50. What can we conclude? A.
The fall in the price must have been caused by a downward shift in the demand curve. B.
The fall in the price must have been caused by a downward shift in the supply curve. C.
The fall in price could have been caused by a shift in either curve.
D.
At a price of €1.50, there will be an excess demand for bread. QUESTION 8.8 CHOOSE THE CORRECT ANSWER(S) Which of the following statements are correct? A.
A fall in the mortgage interest rate would shift up the demand curve for new houses.
B.
The launch of a new Sony smartphone would shift up the demand curve for existing iPhones. C.
A fall in the oil price would shift up the demand curve for oil.
D.
A fall in the oil price would shift down the supply curve for plastics. QUESTION 8.9 CHOOSE THE CORRECT ANSWER(S) Figure 8.14 shows the demand and supply curves for salt, and the shift in the supply curve due to the implementation of a 30% tax on the price of salt. Which of the following statements are correct? A.
In the post-tax equilibrium, the consumers pay P and the producers receive P
*. B.
The government’s tax revenue is given by (
P
* – P
0
)
Q
1
.
C.
The deadweight loss is given by (1/2)(
P
1 – P
0
)(
Q
* – Q
1
).
D.
As a result of the tax, the consumer surplus is reduced by (1/2)(
Q
1 + Q
*)(
P
1 – P
*). QUESTION 8.10 CHOOSE THE CORRECT ANSWER(S) Figure 8.17 shows the effect of a tax intended to reduce the consumption of butter. The before-
tax equilibrium is at A = (2.0 kg, 45 kr) and the after-tax equilibrium is at B = (1.6 kg, 54 kr). The tax imposed is 10 kr per kg of butter. Which of the following statements is correct? A.
The producers receive 45 kr per kg of butter.
B.
The tax policy would be more effective if the supply curve were less elastic.
C.
The very elastic supply curve implies that the incidence of the tax falls mainly on consumers. D.
The loss of consumer surplus due to tax is (1/2) × 10 × (2.0 – 1.6) = 2.0. QUESTION 8.11 CHOOSE THE CORRECT ANSWER(S) Look again at Figure 8.18
, which shows the market for Choccos and for all chocolate bars. Based on the two diagrams, which of the following statements is correct? A.
The firm that makes Choccos chooses to produce at the bottom of the U-shaped isoprofit curve.
B.
All chocolate bars will be sold at the same price P
*.
C.
The existence of many competitors means that the firm is a price-taker.
D.
The market marginal cost (MC) curve is approximately the sum of the MC curves of all the producers of the chocolate bars.
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QUESTION 11.1 CHOOSE THE CORRECT ANSWER(S) Figure 11.1 shows how bargaining power affected prices in Kerala beach markets on 14 January 1997. Based on this information, what can we conclude? A.
The higher the excess supply, the lower the price of fish.
B.
The price of fish in all markets with excess demand is 9.3.
C.
The data satisfy the law of one price.
D.
The data demonstrate that buyers have bargaining power when there is excess supply. QUESTION 11.2 CHOOSE THE CORRECT ANSWER(S) Figure 11.2 shows the hat market before and after a demand shift. Based on this information, which of the following statements are correct? A.
After the demand increase, sellers will initially sell more hats at $8.
B.
The adjustment to the new equilibrium is driven by the rent-seeking behaviour of the buyers and the sellers. C.
While the market adjusts, some buyers may pay more for a hat than others.
D.
The new equilibrium price may be anywhere between A and B. QUESTION 11.3 CHOOSE THE CORRECT ANSWER(S) Figure 11.6 shows the market for bread in the short run, with 50 bakeries, and in the long run when more bakeries can enter. All bakeries are identical. Which of the following statements is correct? A.
The supply curve of each bakery shifts as more bakeries enter the market.
B.
A and B cannot be long-run equilibria, as the bakeries are making a positive economic rent.
C.
More bakeries will want to enter the market when C is reached.
D.
Bakeries will want to leave the market when C is reached, because they don’t make any profit. QUESTION 11.4 CHOOSE THE CORRECT ANSWER(S) Which of the following statements is correct? A.
The fundamental value of the shares in a firm is determined by expected future profits and systematic risk.
B.
If there is no new information regarding the future profitability or systematic risk of a firm,
but its share price keeps rising, the fundamental value must be increasing.
C.
Buying a share at a price above its fundamental value in the hope that someone else would buy it from you at an even higher price is guaranteed to lose money.
D.
All investors always agree on the fundamental value of the shares in a firm. QUESTION 11.5 CHOOSE THE CORRECT ANSWER(S) The figure shows an order book for News Corp shares. Which of the following statements about this order book is correct?
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A.
A buyer wants 500 shares at $16.59.
B.
A limit buy order at $16.56 means that the buyer would pay at least $16.56 per share.
C.
A limit sell order for 100 shares at $16.58 will be unfilled.
D.
A limit buy order for 600 shares at $16.59 will be filled with 500 shares bought at $16.59 and the remaining 100 shares at $16.60. QUESTION 11.6 CHOOSE THE CORRECT ANSWER(S) Which of the following statements about bubbles is correct? A.
A bubble occurs when the fundamental value of a share rises too quickly.
B.
A bubble is less likely to occur in a market where people can easily switch from buying to
selling. C.
Momentum trading strategies make bubbles more likely to occur.
D.
Bubbles can only occur in financial markets. QUESTION 11.7 CHOOSE THE CORRECT ANSWER(S) Which of the following statements about asset prices are correct? A.
A bubble occurs when beliefs about future prices amplify a price rise.
B.
When positive feedback occurs, the market is quickly restored to equilibrium.
C.
Negative feedback is when prices give traders the wrong information about the fundamental value. D.
When beliefs dampen price rises, the market equilibrium is stable. QUESTION 11.8 CHOOSE THE CORRECT ANSWER(S) Which of the following statements about short selling (shorting) is correct? A.
Shorting is used to benefit from a price fall.
B.
Shorting involves selling shares that you currently own.
C.
The maximum loss a trader can incur by shorting is the price he receives from the sale of the shares. D.
Shorting is a sure way of profiting from a suspected bubble. QUESTION 11.9 CHOOSE THE CORRECT ANSWER(S) Figure 11.21 is a stylized representation of the market for an event at the 2012 London Olympic Games. 40,000 tickets were allocated by lottery, at £100 each. Assume that buyers could resell their tickets in the secondary market. Which of the following statements is correct? A.
The market cleared at £100.
B.
The probability of obtaining a ticket was 4/7.
C.
The economic rent earned by those selling in the secondary market was £100. D.
The lottery organizers should have chosen a price of £225.
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QUESTION 11.10 CHOOSE THE CORRECT ANSWER(S) Figure 11.22 illustrates the rental housing market. Initially, the market clears at €500 with 8,000 tenancies. Then, there is an outward shift in the demand curve, as shown in the diagram. In response, the city authority imposes a rent ceiling of €500 and prohibits subletting. Based on this information, which of the following statements are correct? A.
There are 4,000 potential tenants who are left unhoused.
B.
The market would clear at €1,100.
C.
If subletting was possible, then those renting could earn an economic rent of €330. D.
Excess demand could be eliminated in the long run by building more houses. QUESTION 11.11 CHOOSE THE CORRECT ANSWER(S) Which of the following are stationary rents? A.
Innovation rent where firms make positive economic profits from a new invention.
B.
Employment rent where the wage is set high to induce workers to work hard.
C.
Monopoly rent where firms make excess profits due to limited competition.
D.
Speculative rent where profits are made by correctly betting on the price changes in a bubble. Anil's has a downward sloping indifference curve over the spoils of a lottery going to him and/or Bala.
Anil's preference are such that the indifference curve goes through IT, continues above TT, but then lies below T, I, reflecting the assumption that Anil values (1,4) more than (4,1).
Which of the following statements is *not* true.
A.
Anil values an allocation very disadvantageous to him more than the (2.2) fair allocation.
B.
Anil values the fair allocation more than an allocation disadvantageous to him.
C.
Anil values a fair allocation less than an allocation advantageous to Bala.
D.
Anil values the sum of payoffs over fairness.
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Unit 1
The following table shows the nominal GDP (in 2015 US dollars) and the population of Japan in 2013 and 2014 (source: The World Bank). Based on this information, which of the following statements regarding GDP per capita is correct?
A.
The GDP per capita in 2013 was $36,194.41.
B.
The GDP per capita fell by 6.74% between 2013 and 2014.
C.
The fall in the population was enough to offset the fall in the GDP for an overall growth in
GDP per capita between 2013 and 2014.
D.
The GDP per capita fell by 6.31% between 2013 and 2014.
Eden, a country, produces just two output goods: apples and snakeskin handbags. In 2014 the prices of apples and handbags were $10 and $24, respectively. In 2015, the prices increased to $12 and $25. The quantities produced of the two goods were 100 and 20, respectively, in
both 2014 and 2015. From this information, we can conclude that:
A.
The nominal GDP in 2014 is $1,480.
B.
The real GDP is unchanged between 2014 and 2015.
C.
The nominal GDP growth rate between 2014 and 2015 is 14.9%.
D.
The economy of Eden grew between 2014 and 2015 in real terms.
Capitalism is an economic system in which, private property, markets, and firms play an important role. Which of the following statements related to the terms in this definition are correct?
A.
An economic system is a way of organising the production and distribution of goods and services in an entire economy.
B.
The knowledge you attain from the CORE programme is considered private property.
C.
Forced labour where the workers receive some daily allowance is an example of a market.
D.
Employee-owned cooperatives are not firms.
Which of the following is correct:
A.
Greta only has an absolute advantage in apple
B.
Carlos has an absolute disadvantage
C.
Greta has a comparative advantage in wheat
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D.
Carlos has a comparative advantage in apple
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Unit 2
Which of the following statements are correct?
A.
In economics, a model is a simplified representation (diagrammatical or physical) that helps us to understand what is going on by focusing attention on what is important.
B.
Ceteris paribus is an assumption used in economic models where the important variables that you are focusing on are kept constant.
C.
An equilibrium is a self-perpetuating situation that does not change, even when a force for change is introduced from the outside that alters the basic data describing the situation.
D.
An economic rent is the benefit you receive above what you would have earned from your reservation option.
The following diagram depicts the production function of the farmers, where diminishing average
product of labour is assumed. At A the average product of labour is 500,000/800 = 625 kg of grain per farmer. At B the average product of labour is 732,000/1,600 = 458 kg of grain per farmer. If you know that the grain output for 2,800 farmers is 894,000kg, then which of the following statements are correct?
A.
When the labour input is 2,800, the average product of labour is 300 kg.
B.
The slopes of the rays from the origin to the production function decrease along the curve, indicating that the average product of labour is decreasing.
C.
If the production function curve is an upward-sloping straight line, then there is no diminishing average product of labour.
D.
It is possible that initially there are economies of scale (for example,n when there are two farmers instead of one, the average output increases as they efficiently share the workload
The following figures show the real wage index in England from 1750 to 2000, and the explanation of how England escaped the Malthusian trap in the period up to 1900. Based on this
information, which of the following statements are correct?
A.
These figures shows evidence that increased productivity of labor increases wages immediately.
B.
Throughout the 1800s, political developments led to a fall in the workers' bargaining power, keeping the real wage low.
C.
England was able to escape from the Malthusian trap after the 1830s by being able to increase the workers' share of the rising output, due to an increase in the workers' bargaining power.
D.
These figures demonstrate that the size of pie (the total output) does not determine the wage rate, but it merely sets a limit on how high the wage could possibly be.
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Unit 3
Currently, you work for 40 hours per week for a wage of £20 an hour. Your free hours are defined as the number of hours per week not spent working, which in this case is (24 hours x 7 days) - 40 hours = 128 hours per week. Suppose now that your wage rate has increased by 25%. If you are happy to keep your total weekly income constant, then:
A.
Your total number of working hours per week will fall by 25%.
B.
Your total number of working hours per week will be 30 hours.
C.
Your total number of free hours per week will increase by 25%.
D.
Your total number of free hours per week will increase by 6.25%.
Which of the following statements are correct regarding hours of work and income?
A.
The "price" of an hour of free time is the hourly wage rate. B.
From Figure 3.2 (Unit 3.0), we can infer that Norway has a higher GDP per capita than the US, as the Norwegians work more hours than the Americans.
C.
An increase in the real wage rate would encourage you to work more as the opportunity cost of leisure becomes higher.
D.
An increase in the real wage rate would encourage you to work less as your income from working a given number of hours is now higher than before.
Consider an individual's indifference curves for the consumption of two goods (things you would
like to have more of). In this case, which of the following statements are true?
A.
The indifference curves are downward-sloping.
B.
The indifference curves can sometimes cross.
C.
The indifference curves cannot have sections that are straight lines.
D.
The indifference curves cannot have kinks.
A consumer, who has a fixed income in dollars, consumes petrol and bread. Suppose that demand for each good increases with income. When the price of petrol increases:
A.
The substitution effect on the consumption of petrol is positive, as the consumer would have to increase his expenditure on petrol due to its higher price.
B.
The income effect on the consumption of bread is negative, i.e. the consumer would consume less bread.
C.
If the income effect dominates the substitution effect, then the consumer would consume
more bread.
D.
If the income effect dominates the substitution effect, then the consumer would consume
more petrol.
The average product of labour is diminishing when:
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A.
The marginal product of labour is diminishing.
B.
The production function is concave.
C.
The marginal product of labour is smaller than the average product of labour.
D.
The marginal product of labour is negative.
Consider indifference curves for the consumption of milk and chocolates (you may assume that both are "goods"). The indifference curves are drawn with the number of chocolate bars on the horizontal axis and pints of milk on the vertical axis. Suppose consumer A has a flatter indifference curve than consumer B. In this case, we can conclude that:
A.
Consumer A likes chocolate more than consumer B.
B.
The price of milk relative to the price of chocolates is higher for consumer A than for consumer B.
C.
The indifference curves of the two consumers cannot cross.
D.
Given the same amount of chocolates, consumer A is willing to swap one bar of chocolate for a smaller amount of milk than consumer B.
The following diagram is the feasible set of a student, showing the combinations of her final grade and the hours of free time per day. Based on this information, we can say that:
A.
Points A and C are on the same feasible frontier, while at B she can get a higher grade for the same hours of free time compared to C. Therefore the student will choose B.
B.
At D, the student is able to attain a higher grade but has less free time compared to C. Whether she would choose C or D then depends on her preferences.
C.
The marginal rate of transformation at A is 3, meaning that the student can "transform" one hour of free time into 3 extra points on her grade.
D.
At C, the student can attain the grade of 50 for 20 hours of free time. Therefore for one extra hour of studying, she can increase her grade by 2.5 points.
A worker has two jobs, and he can choose to work any number of hours in a day on each job, up to the upper limit (if any), but can only work on one job at a time. The first job pays £10 an hour and has an upper limit of 6 hours a day. The second job pays £6 an hour and has no upper
limit. The worker will always choose the first job if he can. Consider his budget constraint with the amount of free time on horizontal axis and his consumption expenditure (which equals his daily income) on the vertical axis. Based on this information, which of the following is correct?
A.
The worker's budget constraint is kinked at 6 hours of free time.
B.
The worker will never choose to consume exactly 18 hours of free time.
C.
The slope of the budget constraint is -6 when the hours of free time is small, and -10 when the hours of free time is large.
D.
For the choice of 8 hours of free time, the maximum expenditure for the day is £96.
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Unit 4
In a simultaneous one-shot prisoners' dilemma game:
A.
The players' payoffs are lower in the dominant strategy equilibrium than in some other outcomes.
B.
The players will choose to cooperate to attain the socially optimal outcome.
C.
Each player's payoff is the highest in the socially optimal outcome, which would be attained by cooperation.
D.
Each player would choose to cooperate if he or she knew that the other player would definitely also choose to cooperate.
The following diagram shows Anil's preferences when he is either completely selfish or somewhat altruistic, when he and Bala participate in the prisoners dilemma game with the payoffs shown below. Based on the graph, which of the following statements are correct?
A.
The outcome (I, T) is attained as the dominant strategy equilibrium if Anil is completely selfish and Bala is somewhat altruistic.
B.
The outcome (I, T) is attained as the dominant strategy equilibrium if Anil is somewhat altruistic and Bala is completely selfish.
C.
The outcome (I, T) cannot be attained as the dominant strategy.
D.
The outcome (I. I) is attained as the dominant strategy equilibrium only if both Anil and Bala are somewhat altruistic.
Bruce owns a cooperative project with two other members. Any member that chooses to put in a
full day of work faces a cost of £50 but produces a total income of £120, which is shared amongst the three. So, for example, if Bruce and one other member do a full day of work, then the income per member is (£120 x 2)/3 = £80, leaving Bruce with a net income of £80 - £50 = £30. Assume that a member must either put in a full day of work or none at all. Based on this information, we can conclude that:
A.
The socially optimal outcome (one with the highest total net income) is when all work.
B.
The dominant strategy equilibrium of this public goods game is when no one works.
C.
Bruce is better off not working, irrespective of the actions of the other members.
D.
Bruce's net income when all three members work is £80.
You are the Responder in an ultimatum game. The social norm is a (100 - x*): x* split, meaning the Proposer keeps 100 - x* and the Responder receives ×*. Let R represent the strength of your private reciprocity motive. Based on this information, we can conclude that:
A.
A higher R implies that you are less likely to accept a particular. offer.
B.
If R = 1, then you would reject any offers of less than x*.
C.
If R =1, then you would reject any offers of less than half of x*
D.
If R =0, then you would reject all offers of less than 100.
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The following game represents the interaction between two software engineers, Astrid and Bettina, who are working together to write code as a part of a project. Astrid is better at writing Java code, while Bettina prefers C++. The numbers represent the pay in thousands of dollars for completion of the project. Based on this information, which of the following are true?
A.
There are two Nash equilibria: (Java, Java) and (C++, C++).
B.
If Astrid can choose the format first and commit to it, then (Java, Java) will be chosen.
C.
If the two can make an agreement beforehand, including a transfer of $500 from Bettina to Astrid, then (C++, C++) will be chosen.
D.
If the two cannot make an agreement beforehand, then they may end up with the (Java, C++) outcome.
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Unit 5
Anil and Bala have the choice of using either Integrated Pest Control (IPC) or Terminator (T) to solve the problem of pest insects. The table below shows their payoffs depending on their choice. The following diagram shows these possible outcomes on a graph. Based on the information above, which of the following is correct?
A.
(I, I) is the unique Pareto efficient outcome.
B.
(T, I) Pareto-dominates (T, T).
C.
(T, T) is the only Pareto inefficient outcome.
D.
Anil and Bala will both be happy to move from the Pareto efficient (I, T) to the "fairer" Pareto efficient outcome (I, I)
The figure below shows Angela and Bruno's feasible frontier, Angela's biological survival constraint, and her reservation indifference curve. The total amount of grain produced is 8 bushels if Angela works for 8 hours, and 10 bushels if she works for 11 hours. From this information, we can conclude that:
A.
Bruno can devise a take-it-or-leave-it offer under voluntary exchange such that he is just as well off as the best outcome under coercion.
B.
Under Bruno's best voluntary exchange outcome, he can claim an economic rent of 5 out of the total surplus of 6.
C.
Under voluntary exchange, Angela will choose not to work if she is offered 2 bushels of grain for 16 hours of free time.
D.
Bruno can increase his share by 2 bushels if he could coerce Angela to work 11 hours, compared to under the voluntary exchange outcome.
The figure below shows Angela and Bruno's feasible frontier, Angela's biological survival constraint, and her reservation indifference curve, when Angela would accept any offers strictly better than her reservation position of no work and 2 bushels of survival rations from the government. Now consider the case where Angela cares about the fairness of distribution, such that she can reject an offer that she considers unfair and choose not to work. In such a case Bruno will also receive no income. Then, compared to the reservation indifference curve depicted above, Angela's new reservation indifference curve is:
A.
Shifted higher at all points.
B.
The same.
C.
Steeper and goes through Z.
D.
The midpoint between the feasible frontier and the biological survival constraint.
The figure shown gives the Lorenz curves when 90 farmers and 10 landowners share the crop 50:50 (the kinked solid line) and 75:25 (the kinked dotted line). Recall that the Gini coefficient is calculated by A/(A
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+ B), where A is the area between the 45-degree line and the Lorenz curve, and B is the area below the Lorenz curve. Based on this information, which of the following are correct?
A.
A + B= 10,000.
B.
Under the 50:50 sharing, A = 2,000.
C.
Under the 75:25 sharing, A = 1;500.
D.
The Gini coefficient under 75:25 sharing is A/(A + B) = 750/5,000 = 0.15.
You are given the following graph of Gini coefficients over the past three centuries for Britain, the United States, and the Netherlands. The information in the figure suggests that:
A.
Capitalist economies tend to have similar degrees of equality.
B.
Of these three countries, the Netherlands was the most equal country over the past three centuries.
C.
The US and British economies are currently at their most unequal level since the 1750s.
D.
Over time, capitalist economies can become less as well as more equal.
The following diagram shows the Lorenz curves for market income and disposable income for the Netherlands in 2010. Disposable income is market income minus any taxes and plus any government transfers. A is the area between the perfect equality line and the disposable income
Lorenz curve, while B'is the area under the disposable income Lorenz curve. Based on this information, which of the following statements are correct?
A.
The Gini coefficient for disposable income is the ratio A B'.
B.
The Gini coefficient for market income is higher than that for disposable income.
C.
Taxes and transfers reduce income inequality in the Netherlands.
D.
After taxes and transfers, the poorest 50% of the population receive about 20% of the total income.
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Unit 6
Which of the following statements are correct regarding the difference between markets and firms?
A.
Transactions within firms operate as contracts. Market transactions are not contracts.
B.
Working in a firm involves accumulation of firm-specific assets that will be lost if the connection to the firm is severed.
C.
Markets involve a decentralisation of power, while firms represent a concentration of economic power.
D.
It is possible to employ division of labour within firms, while it is not possible in markets.
Which of the following statements best describes the game played by the employer and the employee in the labour discipline model?
A.
The game is a simultaneous game where the employer chooses the wage level and the employee chooses the effort level simultaneously.
B.
The game is a one-off game where the wage and effort levels are determined once and for all.
C.
The worker selects the effort level that balances his desire to keep his job with his desire
to not exhaust himself on the job.
D.
The employer will attempt to maximise the firm's profits by offering a wage equal to the worker's reservation wage.
Which of the following statements is correct regarding involuntary unemployment?
A.
When a firm sacks a worker against her wishes but she can get another job immediately,
there is involuntary unemployment.
B.
When there is involuntary unemployment, the employment rent is zero.
C.
When there is no involuntary unemployment, firms must be employing workers without ever dismissing them.
D.
There must be involuntary unemployment in an efficiency wage equilibrium.
The figure below depicts the effect of an increase in the unemployment benefit on the workers' best response curve, when the unemployment rate is 12%. Which of the following statements is correct following a rise in the unemployment benefit?
A.
The firm's profit level falls,
B.
The workers' reservation wage falls.
C.
The efficiency wage at any given level of employment falls.
D.
The firm sets a lower efficiency wage.
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Unit 7
The following diagram shows the market demand curve of Apple Cinnamon Cheerios, the isoprofit curves of the producer firm, and the firm's profit function curve. Based on the graph, which of the following statements are correct?
A.
The highest profit that the firm can make is $60,000.
B.
The profit-maximising choice for the firm is where the highest attainable isoprofit curve is
tangent to the demand curve.
C.
The profit-maximising choice for the firm is where its marginal rate of substitution between the price charged and the quantity produced is equal to its marginal rate of transformation.
D.
The profit-maximising choice for the firm is at the peak of its profit function curve.
Suppose that the marginal cost of producing a pound of cereal is $2, irrespective of the level of output, but there are also some fixed costs of production. Which of the following statements is correct?
A.
The total cost curve is an upward-sloping straight line through the origin.
B.
The average cost curve is U-shaped.
C.
The marginal cost curve is a horizontal straight line.
D.
The marginal cost curve intersects the average cost curve at its minimum point.
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Which of the following events would contribute to economies of scale?
A.
Large supermarkets being able to drive down the cost of purchasing milk as it increases its scale of business.
B.
The expansion of the workforce requiring extra layers of management for better performance monitoring.
C.
A merger of two firms leading to savings on the costs of HR, IT, and legal departments.
D.
The higher the number of users of Windows 10, the more likely it is that Microsoft will be able to achieve a higher sale of its operating system.
The following is a table of the total cost (TC) of producing output Q for a particular firm. Based on this information, which of the following statements is correct?
A.
The average cost at Q = 40 is £7.
B.
The marginal cost at Q = 80 is £9.50.
C.
The marginal cost is higher than the average cost at Q=50.
D.
The marginal cost curve intersects the average cost curve at Q=60.
The following figure depicts a firm's profit-maximising choice at point E, given the market demand curve and the firm's marginal cost curve. You are given that the firm's marginal costs are $400, $2,960 and $4,200 at output levels Q= 0, Q*= 32 (point E) and Q, = 48 (point F), respectively. Based on this information, which of the following statements is correct?
A.
The consumer surplus at E is $41,000.
B.
The producer surplus at E is $126,720.
C.
The deadweight loss at E is $19,840.
D.
The gains from trade at E are $120,320.
The following information is the data on a survey of demand elasticity for low calorie fruit and vegetables. The total expenditure of the consumer is $80 per week. Suppose now that the price of low-calorie fruit and vegetables increases by 10%. Based on this information, we can conclude that:
A.
The demand for low-calorie fruit and vegetables rises by 8.3%.
B.
The quantity the consumer consumes before the price change is 344g per week.
C.
The quantity the consumer consumes after the price change is 876.24g per week.
D.
The consumer's expenditure on low calorie fruit and vegetables increases by $0.08.
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Unit 8
The market demand curve of a particular good is downward sloping. Based on this information, which of the following statements is correct regarding a price-taking firm producing that good?
A.
The demand curve faced by the firm is downward sloping. B.
The firm chooses the price that equals its marginal cost. C.
The firm chooses its output such that the marginal cost equals the price.
D.
A price-taking firm cannot be profit-maximising.
The following diagram shows the consumer and producer surplus in the
market for bread. Consider changes in the elasticities of the demand and supply curves. Assuming that the market equilibrium output and price are unchanged, which of the following statements is correct?
A.
A less elastic supply curve will lead to a larger producer surplus.
B.
A more elastic demand curve will lead to a smaller producer surplus.
C.
A less elastic demand curve will lead to a smaller consumer surplus.
D.
Consumer and producer surplus do not depend on the elasticities of the demand and supply curves.
The following diagram depicts the demand and supply curves in the salt market. It also depicts the shift in the supply curve due to a 30% tax on the price of salt. Now suppose that the market demand curve for salt is less elastic than in the diagram. The equilibrium before tax is still at (Q*
P*). Let the post-tax equilibrium be denoted by (Q2, P2) (not shown on the diagram). Based on this information, which of the following statements is correct?
A.
For the prices, P* < P1 <P2
B.
For the outputs, Q1 < Q2 < Q*.
C.
The tax revenue raised would be lower if the demand curve were less elastic.
D.
Proportionally, more of the burden of the tax would be on the producer if the demand curve were less elastic.
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Unit 11
Which of the following statements is correct? According to Friedrich Hayek:
A.
Prices convey the scarcity of a good under a centrally planned economy.
B.
Perfect competition can be attained without activities such as advertising, undercutting, and improving (" differentiating") the goods or services produced.
C.
The advantage of capitalism is that it provides the right information to the right people.
D.
A single central authority can collate and make use of the information available in the economy better,than the market.
The following diagram depicts the competitive market for hats before and after a demand shift. Based on this information, which of the following statements is correct?
A.
After the demand shift, the market initially moves from A to E, before settling to the new equilibrium at F.
B.
At E, the sellers are on the short side of the market.
C.
At E, lowering the price to $7 results in a Nash equilibrium for the buyers and sellers.
D.
In the adjustment process from E to the new market equilibrium F, the sellers behave as price-makers while the buyers remain price-takers.
In the market for a particular good there are two types of producers: Type A and Type B. Type A
producers use a better production technology than Type B producers, so Type A's average cost curve is lower than Type B's. Both types have upward-sloping marginal cost curves. Assume that the market demand is large enough so that both types of firms produce in the short-run (when the number of firms is fixed) and in the long-run (when the number of firms can change). Which of the following statements is correct regarding the short-run and the long-run equilibria of this market?
A.
In the short-run equilibrium, Type B firms produce at where the price equals their marginal cost (MC), while Type A firms produce at where the price is above its MC.
B.
In the long-run equilibrium, all firms produce at where the price equals their average cost
(AC).
C.
All firms produce more in the long-run equilibrium than in the short-run equilibrium.
D.
In the long-run equilibrium, MC > AC for Type A firms and MC = AC for Type B firms.
The following is an order book for News Corp shares. Consider the case where there is a limit buy order for 650 shares at $16.59, followed by a limit sell order for 600 shares at $16.55. Based on this information, which of the following statements is correct?
A.
After the initial limit buy order, there will be 150 shares at $16.59 on the bid side of the order book.
B.
The subsequent limit sell order will be filled with 400 shares at $16.56 and 200 shares at
$16.55.
C.
After the two trades, the first buyer will have bought 500 shares at $16.59 and the remaining 150 shares at $16.55.
D.
The last traded price would be $16.56.
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Which of the following statements regarding asset price bubbles is correct?
A.
Some economists believe that bubbles do not exist.
B.
According to the efficient market hypothesis, bubbles occur when the market misprices the value of an asset.
C.
The market can easily know that it is in a bubble by comparing the market price with the fundamental value of the asset.
D.
For a bubble to occur, market participants must disagree about the fundamental value of
the asset.
The UK introduced a national minimum wage in 1998. Which of the following statements regarding minimum wages is correct?
A.
A minimum wage is a form of price ceiling.
B.
The introduction of a minimum wage would always lead to a fall in the demand for labour
by firms.
C.
A minimum wage would not lead to increased unemployment if it is set low enough.
D.
Instead of a minimum wage, the government can promote increased labour participation to encourage higher wages.
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