Practice Exam

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Practice Exam
Multiple choice questions.

1) Which of the following statements about natural monopoly is correct? A) A natural monopoly’s average cost is decreasing.
B) A natural monopoly’s marginal cost is decreasing.
C) A natural monopoly usually has a small fix cost.
D) Governments usually want to ban natural monopoly.

2) Which of the following statements about perfect price discrimination is correct? A) A firm in a perfect competitive market can apply perfect price discrimination. B) A firm charges a single price when it applies perfect price discrimination. C) Consumers’ consumption is inefficient when a firm applies perfect price discrimination. D) In order to apply perfect price discrimination, a firm should know each individual consumer’s maximum willingness to pay.

3) Which of the following statements is incorrect?
A) A firm’s profit maximizing output is determined by MR(Q)=MC(Q) both in a perfect competitive market and a monopoly market. B) Consumers favor perfect price discrimination because the consumption is efficient. C) When monopoly practices perfect price discrimination, marginal consumer’s valuation equals to the marginal cost of the last unit.

D) A monopoly’s marginal revenue curve lies below its demand curve because it has to cut the price to sell more units of the good.

4) A monopoly sells to two different groups of consumers. The monopoly charges group 1 price $20 while the elasticity of demand for group 1 is -2. Suppose the elasticity of demand for group 2 is -5. What is the monopoly’s optimal price for group 2? A) $12

B) $ 22
C) $12.5
D) Impossible to tell.

5) Suppose two people are trading their endowments. Which of the following statements is correct? A) The equilibrium after trade results in one person being worse off than with his or her endowment. B) The equilibrium after trade results in unequal marginal rates of substitution for the two people. C) The equilibrium after trade is on contract curve.

D) The equilibrium after trade is Pareto inefficient.

6) What are necessary conditions for price discrimination?
A) Consumers must differ in their sensitivity to price and a firm must be able to identify it B) A firm is able to limit resale among consumers.
C) A firm must have market power.
D) All of the above.

7) A monopoly sells 1000 units of its product at optimal price P=$250. The monopoly’s marginal cost is $50. How much is the monopoly’s elasticity of demand at the optimal output? A) We do not have enough information to solve for the elasticity of demand. B) -1.25

C) -0.8
D) -1

8) This question is a continuation on question 7). Suppose the demand curve is linear. What is the market demand facing the monopoly? A) We need more information to pin down market demand.
B) Qd=2250-5p
C) Qd=1800-3.2p
D) Qd=-4p

9) Which of the following statements is correct?
A) Market with asymmetric information may collapse because both sellers and buyers are equally ignorant. B) Market with asymmetric information is efficient as long as there are enough high quality products. C) Market with asymmetric information is always inefficient regardless of the fraction of high quality products. D) Market with asymmetric information is efficient as long as there are enough low quality products.

10) Consider a used car market characterized by the above diagram. Buyers are willing to pay $500 for a lemon and $1500 for a good car. A seller’s reservation price is $800 for a lemon and $1000 for a good used car. If both a seller and a buyer can tell the quality of a car, which type of cars will be sold? A) Both types of cars will be sold.

B) Only good cars will be sold.
C) Only lemons will be sold.
D) Neither type of cars will be sold.

11) This question is a continuation on question 10). Suppose sellers and buyers are equally ignorant about used cars’ qualities. Which of the following statements is correct? A) All cars are traded in the market place when both...
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