Mock exam 1 – BMIK 2022

Exercise 1:
Assume an economy in which only two consumer goods exist, x and y (with the corresponding prices px
and py). There are in total 10 households, 5 from type A with the corresponding utility function U A(x, y)
and 5 from type B with the corresponding utility function UB(x, y). Both types of households have an
income of 15. The utility functions are defined as follows:
2/ 3 1 /3
U A ( x , y )=x y
2 1
U B ( x , y )= lnx+ lny
3 3
a) Derive the demand functions for good x for both households and calculate the aggregated market
demand for x.
b) Assume that x is produced in a competitive market with marginal costs of 2. What is the equilibrium
quantity? How high is the market elasticity of demand in market equilibrium? Interpret the elasticity.
c) Determine market demand for x (when marginal utilities are the same) if households from type A now
have an income amounting to 18. Categorize commodity x for both types of households as a normal or
inferior commodity. What is now the price elasticity of demand in market equilibrium? Explain your
findings.

Exercise 2:
A company produces with the following production function:
3/ 2 3 /2
Y =K L
where K and L represent the capital and labor factors with the corresponding factor costs r and w, which
are given exogenously.
a) Assume that the capital function is fixed to K = 16 in the short term, and only the labor factor can be
freely selected. Derive the average product and the marginal product of the labor factor and make a rough
sketch.
b) Furthermore, capital is fixed to K = 16 in the short term. The factor costs amount to r = 4 and w = 16.
Derive the short-term cost function.
c) Assume the following: both factors (capital and labor) are variable in the long term. Demonstrate
which kind of returns of scale are present and explain shortly the economic implication.
d) Explain, in general, the concept of cost minimization by means of a sketch. Then determine the long-
term cost functions. The factor prices still amount to r = 4 and w = 16.

Exercise 3:
A monopolist produces with constant marginal costs c and is faced with the demand function with x being
the demanded quantity, p the price and b the elasticity of demand:
−1
p=x b and b>0

a) Deduce analytically the profit maximizing price and the maximum profit. Also provide a sketch to your
solution.
b) Justify intuitively and economically why the monopolist never produces in the inelastic range (b < 1).

Exercise 4: Filling the blanks

Fill in the gaps in the following questions.
1. Nguyen’s marginal utility function of income is as follows: MU = I1,5. Based on this information we
can say that Nguyen is _________________.

2. Tran would prefer a safe income of 20,000 Euro against a lottery with a 50% income of 9,999 Euro or
30,000 Euro. Tran's risk tolerance is _____________________.

3. After an analysis of the price of wheat, an investor realizes that he can make profit if he buys wheat
cheap in one town and sells it for a higher price in a different town. Assuming there are no transportation
costs, this method is called______________.

4. Increasing economies of scale means that output increases by _____________than 10% when the input
increases by 10%.

5. Toyota would like to forecast the effects of a five-percent price decrease of the Prius in different
countries. The Prius is sold in the USA, Japan and in Europe at different prices. Before the price
reduction, three times as many Prius models were sold in Japan as in the USA and Europe respectively. If
the elasticity of demand amounts to 2 in the USA, 4 in Japan, and 1 in Europe, then worldwide sales of
Toyota cars will change by____________________%.

6. The price elasticity of supply for a horizontal supply curve amounts to________________.

7. The cross-price elasticity between two substitutes is _________________zero.

8. An industry consists of 200 companies, each producing 50 tons of output. There is perfect competition
between the companies. At the current market price of 10 Euro per ton, half of the companies have a
supply curve with a slope of 2 in the short term, the other half has a slope of 3. The price elasticity of
supply in the short-term amounts to: ___________________.

9. A tennis instructor charges 20 Euro per hour for women and 30 Euro per hour for men for lessons. The
tennis instructor operates ___________-degree price discrimination.

10. If Huynh starts skydiving after taking out a life insurance policy, this situation is called ___________

Exercise 5: MCQ
1. Pham's Brunch, a completely competitive breakfast restaurant, sells breakfast at the competitive price
of 5.25 Euro. Costs for waiting staff, power, food etc. amount to 3.95 Euro per breakfast on average; the
costs for shop rental, insurances and other fixed expenses amount to 1.25 Euro per breakfast on average.
What should Pham do?
(a) Close his restaurant as soon as possible.
(b) Continue to o er breakfast in the short term and in the long term.
(c) Continue to o er his breakfast in the short term but close his restaurant in the long term.
(d) Increase his prices to the level of a completely competitive market.
(e) Reduce the quantity offered.

2. Applying the Lagrange method in utility maximization problems, the optimal value of the Lagrange
multiplier corresponds to the
(a) marginal utility of every commodity.
(b) marginal utility per euro, which was spent for the last unit of every commodity.
(c) marginal utility of leisure.
(d) A and B are correct.
(e) A and C are correct.

3. Given that we invest 9 labor units, and we receive 45 output units, we can claim that
(a) the marginal product of labor amounts to 3.
(b) the total labor product amounts to 1.
(c) the average product of labor amounts to 3.
(d) the marginal product of labor amounts to 5.
(e) none of the above statements is correct.

4. If the average product increases, then the marginal product will

(a) correspond to the average product.
(b) increase.
(c) exceed the average product.
(d) decrease.
(e) be smaller than the average product.

5. If a disposal problem of fuel rods arises during the production of nuclear energy and the producers do
not have to pay for arising costs,
(a) the supply curve for nuclear power lies higher than the true costs.
(b) the supply curve for nuclear power lies lower than the true costs.
(c) the demand curve for nuclear power lies higher than the true utility.
(d) the demand curve for nuclear power lies lower than the true utility.
(e) the market for nuclear power will always be out of equilibrium by the amount of the negative
externalities.

6. The imposition of a subsidy on domestic companies in an industry with perfect competition will be
reflected in
(a) a shift of the marginal cost curve of all companies (domestic and foreign) to the right.
(b) a shift of the average cost curve of all companies (domestic and foreign) to the left.
(c) a shift of the supply curve to the right.
(d) higher profits than price increases of all companies (domestic and foreign) in this industry
(e) None of the above statements are correct.

7. Beekeeping helps neighboring farmers in planting sunflowers. Thus, the quantity of honey produced
(bee output)
(a) and the equilibrium price lie below the optimal level.
(b) and the equilibrium price lie above the optimal level.
(c) is too low and the equilibrium price is too high.
(d) is too high and the equilibrium price is too low.
(e) is optimal, but the equilibrium price is too high.

8. If the current output is larger than the profit-maximizing price, which statement is true? (Assume both
concave sales curves and convex cost curves.)
(a) Total sales are lower than total costs.
(b) Marginal sales are lower than marginal costs.
(c) Marginal sales are larger than marginal costs.
(d) Average sales are lower than average costs.
(e) Average sales are larger than average costs.

9. If, ceteris paribus, raw materials which are used as an input in an industry become cheaper, then
(a) the demand curve shifts to the left.
(b) the demand curve shifts to the right.
(c) output increases, independent of the market price and the demand curve shifts to the left.
(d) the supply curve shifts to the left.
(e) the supply curve shifts to the right.

10. Pencils cost 10 cents, pens 50 cents. Assume that Kim, whose preferences satisfy all basic
assumptions, uses her complete income to buy five pencils and one pen per semester. With this bundle of
goods, her marginal utility for pencils amounts to 1 and for pens amounts to 5. Which of the following
statements is true?
(a) Kim can increase her utility by buying more pens and fewer pencils.
(b) Kim can increase her utility by buying more pencils and fewer pens.
(c) Kim can increase her utility by buying more pens and more pencils without spending more.
(d) Kim can increase her utility by buying fewer pens and fewer pencils.
(e) Kim already maximizes her utility.