Question 1

Which of the following best describes the short run in microeconomic production theory?

Accepted Answer

At least one input is fixed.

Question 2

Suppose the production function is $$q = 3L + 1K$$, where $$w is $$the wage and $$r is $$the rental rate of capital. What is the long-run cost function $$C(q)$$?

Accepted Answer

$$C(q) = (w/3)q if$$ $$(w/3) \leq (r/1)$$, and $$(r/1)q$$ otherwise.

Question 3

A firm claims it charges lower prices than competitors because it bought its land 50 years ago at a low price. From a short-run perspective, is this claim valid?

Accepted Answer

False, because land is a fixed cost in the short run.

Question 4

Suppose the government subsidizes 25% of the wage for workers. For a given output level, how will this affect the firm's input choices?

Accepted Answer

More labor and less capital because the marginal product of the last dollar spent on labor is greater than the marginal product of the last dollar spent on capital.

Question 5

Which of the following is NOT an example of a good with network externalities?

Accepted Answer

Wheat.

Question 6

Suppose the market for residential solar panels is described by $$Q_D = 200 - 4P$$ and $$Q_S = 20 + 2P. $$What is the equilibrium price $$P^*$$ and quantity $$Q^*$$?

Accepted Answer

$$P^* = 30, Q^* = 80$$

Question 7

Kayla's utility function is $$U = q_1$ q_2$, where q_1$ is gasoline and q_2$ is bread. If p_1$ = 10$$, $$p_2 = 20$, and Y = 1800$, what is her optimal bundle $$($$q_1$$^*, $$q_2$$^*)$$?

Accepted Answer

$$(q_1$^*, q_2$^*) = (90, 45)$$

Question 8

Suppose the inverse demand for an industrial insecticide is $$p = 160 - Q$$, and the private marginal cost is $$MC_p = 10 + Q. $$What is the unregulated competitive equilibrium quantity $$Q_c$$ and price $$p_c$$?

Accepted Answer

$$Q_c = 75, p_c = 85$$

Question 9

A monopoly is unlikely to be profitable in the long run when:

Accepted Answer

Its average total cost curve is above the demand curve.

Question 10

Suppose Kayla's utility is $$U = q_1$ q_2$. What is her uncompensated (Marshallian) demand function for gasoline (q_1$)?

Accepted Answer

$$q_1$$ = \frac{Y}{2p_1}$$

Question 11

If the price of gasoline doubles from $$p_1 = 10$ to p_1$ = 20$$ and Kayla's income and the price of bread remain unchanged, what happens to her demand for gasoline and bread?

Accepted Answer

Gasoline demand halves, bread demand stays the same.

Question 12

A firm has the production function $$q = (L$$^{1/3}$$ + K$$^{1/3}$$)^3$. What is the elasticity of substitution for this function?

Accepted Answer

$$E = 3/2$$

Question 13

Which of the following is a necessary condition for Coasian bargaining to achieve the social optimum in the presence of externalities?

Accepted Answer

All of the above.

Question 14

Suppose a monopsony faces a horizontal supply curve. Can it profitably set its price below the competitive level?

Accepted Answer

It cannot set price below the competitive level because the marginal expenditure curve will be horizontal and equal to the supply curve.

Question 15

If the government wants to achieve the socially optimal quantity of a good that generates a negative externality, what policy should it use and what should the fee be if the external marginal cost is $$MC_e = Q$$?

Accepted Answer

Set an emissions fee equal to the marginal external cost at the social optimum, $$t = Q^*.$$

Question 16

A government prefers an ad valorem tax to a specific tax that reduces monopoly output by the same amount because:

Accepted Answer

The ad valorem tax transfers more revenue from the monopoly to the government.

Question 17

Suppose three neighbors must vote on a traffic light costing $$210, shared equally. Voter A values it at 50$$, B at $$50, and C at 200. If $$majority rules, does the light get purchased, and is it efficient?

Accepted Answer

No, it is not purchased but it is efficient.

Question 18

If demand for a good becomes more inelastic, what happens to the incidence of a per-unit subsidy for consumers?

Accepted Answer

Consumers receive a larger share of the subsidy.

ENVECON 100 Practice Final – Microeconomics Study Guidance

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