Mock midterm exam Spring 2021

1) Which is ONE of the key institutions of capitalism?

a. Government
b. Family
c. Money
d. Firms
2) The extra profit that a successful innovator makes on bringing a new product to the
market before its competitors is ______
a. Technology
b. Economic Rent
c. Opportunity Cost
d. Relative prices
3) Isocost line represents
a. The prices of inputs
b. All combinations of inputs that have the same total cost.
c. All superior technologies
d. None of the above.
4) What a worker would get either in alternative employment, or from an unemployment
benefit or other support is:
a. Allocation
b. Marginal Revenue
c. Reservation Wage
d. Profit
5) A firm's total revenue minus total costs (including the opportunity cost of capital) is the
definition of:
a. Marginal Revenue
b. Economic Profit
c. Producer Surplus
d. Employment Rent
6) The consumer's willingness to pay for a good minus the price at which the consumer buys
the good is
a. Marginal Revenue
b. Consumer Surplus
c. Market Price
d. Producer surplus

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7) “At each point on the production function, the …….. is the additional amount of output
that could be produced if the input was increased by one extra unit, while holding others
constant”. Fill in the blank.
a. Average Product
b. Marginal Rate of Substitution
c. Total Output
d. Marginal Product
8) If economic profit equals to zero then which of the following must be TRUE for a firm?
a. Average Cost equals to Marginal Cost
b. Price is greater than Average Cost
c. Price equals to Marginal Revenue
d. Price equals to Average Cost
9) Fixed costs are:
a. All costs that do not change as we produce more bicycles
b. All costs are that greater than zero even if there is no production
c. All costs that do not vary with the number of units produced
d. All of the above is correct
10) _____ is the total cost divided by the number of goods produced and it _____if the firm
faces economies of scale. Fill in the blank.
a) Marginal Cost; falls
b) Average Cost; rises
c) Average Cost; falls
d) Marginal Cost; rises
11) Suppose that the marginal cost of producing a DVD is $1, irrespective of the level of
output, but there are also some fixed costs of production. Which of the following
statements is CORRECT?
a. The marginal cost curve is a horizontal straight line (slope is 0).
b. Total cost decreases as we produce more DVD
c. The marginal cost curve has a negative slope.
d. The marginal cost curve has a positive slope.
12) Which of the following statements is CORRECT regarding a price-taking firm?
a) In order to sell more goods the firm has to lower the price
b) The firm will produce goods only if the price is greater than the average cost
c) The firm can sell as many goods as possible at the market price
d) The firm will leave the market if there are positive economic profits

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 13) One unit of worker is available at the price of $10 and the price of one unit of machinery
is $20. What is the relative price of machinery in terms of worker according to these
values?
a. 1/2
b. 10
c. 20
d. 2
Answer the following two questions according to the above table. A firm’s cost structure is given
in the following table.
Quantity Total Cost Average Cost
0 60 -
1 80 80
2 A 55
3 150 50

14) What is the missing value for A?

a. 80
b. 120
c. 110
d. 135
15) What are the fixed costs of the above firm?
a. 0
b. 60
c. We do not have enough information
d. 20
16) The GDP in current US$ for selected countries and the world are given below in $ billions
Based on this information, which of the following statements is correct?

a. The GDP of Japan grew by 8% per year over the 15 years.

b. The GDP of US grew by 8% per year over the 15 years.
c. The GDP of Nigeria grew by 8% per year over the 15 years.
d. The world GDP grew by over 8% per year over the 15 years.

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 17) The graph depicts the feasibility set and a set of indifference curves for a student who
would like to decide upon the combination of free time and final grade that would yield
him the maximum utility

Which of the following is NOT TRUE according to the above figure

a. E is the best choice because MRS= MRT
b. MRS is the slope of the indifference curve and MRT is the slope of the feasible
frontier
c. At point D, MRS is greater than MRT
d. At point D, MRS is less than MRT
18) The following table gives different technologies that produce 100 meters of cloth. Based
on this information, which of the following statements is correct?

a. You would never choose technology B.

b. Technology C is more energy-intensive than technology A.
c. Shifting from technology C to technology D is labor saving.
d. Technology D uses the least total number of workers and tonnes of coal. Therefore,
this is the technology you would choose.
19) The following figure depicts an employee’s best response to wage when the expected
unemployment duration is 44 weeks. Which of the following statements is correct?

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 a. In order to induce an extra effort of 0.1 per hour at any particular wage level, the
employer needs to increase the hourly wage by $3.
b. The slope of the best response curve is the employer’s marginal rate of
transformation of higher wages into worker effort.
c. A fall in the unemployment rate would reduce the reservation wage to below $6.
d. The employer would still have to pay $24 per hour to have the effort level of 0.8 even
if there is an increase in the unemployment benefit.
20) The figure depicts the isocost lines of a firm. Which of the following statements is
correct?

a. The cost of production is constant along an isocost line.

b. Isocost A has the lowest cost per unit of effort of the three isocosts.
c. The units of effort per dollar of wage cost for isocost B are 0.45.
d. For the hourly wage of $12, the effort per hour is 0.8 on isocost A.
21) Pınar earns 3000 TL/month in her current job. Her disutility of effort is equivalent to a cost
of 500 TL per month. If she loses her job, she will receive unemployment benefit equivalent
to 1500 TL per month. Additionally, her expected duration of unemployment is 6 months.
What is her total employment rent?
a. 6000 TL
b. 3000 TL
c. 1000 TL
d. 12000 TL

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Essay Questions

Q1. Suppose there is only two goods in a country Dreamland. The following
table shows the prices and quantities of Burgers and Computers.
2018 2019 2020
Item Quantity Price Quantity Price Quantity Price
Burgers 10 2 20 3 15 4
Computers 20 8 40 5 30 6

A. Calculate nominal GDP for 2018. 180

B. Calculate nominal GDP for 2019. 260
C. Calculate nominal GDP for 2020. 240
D. Calculate real GDP for 2018 (base year: 2018). 180
E. Calculate real GDP for 2019. 360
F. Calculate real GDP for 2020. 270
G. Calculate growth rate from year 2018 to 2019. 100.00
H. Calculate growth rate from year 2019 to 2020. -25.00

Q2. The following table shows the production conditions for a sandwich shop
Number of Total product Average product Marginal
Workers Product
0 0 0 5
1 A 5 4
2 9 4.5 3
3 12 4 C
4 14 B

a. What is the total product of labor at point A? Show your work.

Total Product = 1*5 = 5
b. What is the average product at point B? Show your work.

Average product =14/4= 3.5

c. What is the marginal product at point C? Show your work
Marginal Product = (14-12)/ (4-3) = 2
d. What happens to the average product of labor as the number of workers increases? Why
might this occur? Discuss.
The average product diminishes. The cause of it is constancy of other factors of
production. It leads to the law of diminishing average product.

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 e. How does the average product change at each level of output if there is a better
technology used in this shop to prepare sandwich?

There will be rise in average product at each level of production, as the average
product curve will shift to the right.

Q3. The following figure depicts the market demand curve and isoprofit
curves for a bus company

Price

C Isoprofit Curve 1
E Isoprofit Curve 2
A
Isoprofit Curve 3
D B
Isoprofit Curve 4
G (Average Cost Curve)

Market Demand Curve

F Quantity

a) Profits at A, B and C will be the same for the company because they are on the same
market demand curve
No, each of them is on a different profit curve although they are all feasible
combinations of P and Q
b) The distance between A and F is the profit for one unit of bus
The distance between A and F is the price for one unit of good and AG is the
profit per unit of good
c) E represents the profit-maximizing choice for the firm because it is on the highest
isoprofit curve
No. E is on the highest profit curve and is not feasible A is the highest possible
profit for the firm
d) Isoprofit curve 3 has zero economic profits
No, it has more than zero economic profits because it is above the average cost
curve

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Q.4 Suppose that there is a perfectly competitive market and equilibrium is at c.

Price

Supply

A
B
C

D E
Demand

Quantity

Suppose that there is an increase in demand. Do you expect excess demand of excess
supply? Where would be the new equilibrium? Compared to the original equilibrium, would
the new equilibrium price and quantity be higher or lower? Discuss.

Excess demand. New equilibrium will be at B. Higher price and higher quantity.

Suppose that there is a perfectly competitive market and equilibrium is at c. Suppose that
there is an increase in supply. Do you expect excess demand of excess supply? Where
would be the new equilibrium? Compared to the original equilibrium, would the new
equilibrium price and quantity be higher or lower? Discuss.

Excess supply. New equilibrium will be at E. Lower price and higher quantity.