MICRO FINAL REVIEW

There are five students who are looking to buy one second-hand textbook each. Their willingness-to-pay are £5, £6, £8, £12, and £15, respectively. Based on this information, which of the following statements is correct? A. The student with a willingness-to-pay of £15 is the richest. B. Their willingness-to-pay indicates an upward-sloping demand curve. C. To sell three books, the maximum price that can be charged is £8 D. If a seller is one of many identical sellers and his reservation price is £8, then he is guaranteed to sell his textbook.

C. To sell three books, the maximum price that can be charged is £8 WHY? - If the price is £8, the demand is 3 books, and demand is less than 3 books for prices higher than £8.

Which of the following statements about the outcome of an economic interaction is correct? A. All participants are happy with what they get if the allocation is Pareto efficient. B. According to the Pareto criterion, a Pareto-efficient outcome is always better than an inefficient one. C. There cannot be more than one Pareto-efficient outcome. D. If the allocation is Pareto efficient, then you cannot make anyone better off without making someone else worse off.

D. If the allocation is Pareto efficient, then you cannot make anyone better off without making someone else worse off.

Why are do firms seem keen to cut cost via labour cuts in the face of reduced demand?

1) Supply cuts could restore some profitability. 2) It can maintain prices instead of having prices bottoming as predicted by a competitive market equilibrium model. 3) Labour discipline model where job losses could induce more productivity from remaining workforce.

Which of the following statements regarding social preferences are correct? (2 Answers) A. "Keeping up with the Joneses" is an example of behaviour that could be motivated by social preferences. B. An individual has social preferences if he does not care about the outcomes of others in society. C. They are the preferences of society as a whole. D. Altruism is an example of social preferences.

A. "Keeping up with the Joneses" is an example of behaviour that could be motivated by social preferences. D. Altruism is an example of social preferences.

Ceteris paribus, in which of the following cases would the wage-setting curve shift up? A. A more generous unemployment insurance scheme. B. Better monitoring by the employer. C. A sudden influx of immigration. D. A lower unemployment rate.

A. A more generous unemployment insurance scheme. WHY? - A more generous unemployment insurance scheme improves workers' outside option, so their best response function curve shifts to the right. This raises the firm's profit-maximising wage level (the wage at which the firm's isocost is tangent to the best response function curve) at each employment rate, so the wage-setting curve shifts up.

Only one out of the following statements is correct. Select the statement. A. A production function describes the amount of output that will result for different combinations of inputs. B. Factors of production are the factories in which the goods are produced. C. Average product of labour is the average quality of the goods produced by the workers. D. Diminishing average product of labour refers to the diminishing quality of goods produced.

A. A production function describes the amount of output that will result for different combinations of inputs.

Which of the following statements is correct regarding the effects of a rise in the real wage on the labour supply of a worker? A. At high wage levels, the income effect dominates the substitution effect, leading to lower labour supply. B. The income and substitution effects always enhance each other, leading to higher labour supply. C. The income effect means that the worker will increase his labour supply. D. The substitution effect means that the worker will increase his consumption of free time.

A. At high wage levels, the income effect dominates the substitution effect, leading to lower labour supply. WHY? - The negative income effect and the positive substitution effect always work against each other. At high wages the former more than offsets the latter, implying that the worker reduces his labour supply (he already earns enough).

A U-shaped average cost function implies that which of the following are possible at any given output more than zero: A. Average cost is higher than the marginal cost. B. Total cost decreases C. Average cost is lower than the marginal cost. D. Marginal costs increase but average costs decrease.

A. Average cost is higher than the marginal cost. C. Average cost is lower than the marginal cost. D. Marginal costs increase but average costs decrease.

Consider a market in which multiple bakeries supply bread to the restaurant trade.However, due to Russia's invasion of Ukraine, less wheat is now available to the bakeries. Which of the following statements is correct? A. In the long term, less bakeries will remain in the market B. In the long term, bakeries that remain in the market will be charging a lower price for bread. C. Initially, total cost increases D. In the long term, bakeries that remain will earn dynamic economic rents.

A. In the long term, less bakeries will remain in the market

In an economy with a population of 100, there are 80 farmers and 20 lenders. The farmers use the funds to finance the planting and tending of their crops. The rate of profit for the harvest is 12.5%, while the interest rate charged is 10%. Compare the following two cases: Case A: All farmers are able to borrow. Case B: Only 50 farmers are able to borrow. Based on this information, which of the following statements is correct? A. The Gini coefficient for Case B is 0.6. B. The Gini coefficient for Case A is 0.5. C. The share of total output received by the farmers who can borrow is 25%. D. There is a 16.7% increase in the Gini coefficient in Case B compared to Case.

A. The Gini coefficient for Case B is 0.6.

You have two choices for how you are going to spend Saturday evening. You can go to the pub with your friends, which will cost you £30 for the evening. The pleasure you anticipate from this experience is worth £50 to you. Or you can go to the theatre. The ticket will cost you £50, but you value the experience at £60. Based on this information, which of the following statements is correct? A. The economic rent of going to the theatre is -£10. B. The opportunity cost of an evening at the theatre is £10. C. The economic cost of going to the theatre is £60. D. Based on economic rent alone, you would choose to go to the theatre.

A. The economic rent of going to the theatre is -£10. WHY? The economic rent is the difference between the value of the experience and its economic cost, which here is £60 - £70 = -£10.

Consider an economy with firms selling differentiated products, where the only input to production is labour. Which of the following statements is correct? A. The more inelastic the demand curve faced by the firm, the higher the markup set by the firm. B. Firms make no economic rent. C. Firms choose the level of nominal wage that corresponds to the workers' maximum effort. D. Workers receive no employment rent.

A. The more inelastic the demand curve faced by the firm, the higher the markup set by the firm.

Which of the following is an example of a social dilemma? (2 answers) A. Traffic jams due to a sub-optimally high level of car usage. B. The problem of how to look after the elderly in society. C. Dirty dishes piling up in the kitchen sink of your shared student accommodation. D. Dilemmas discussed on social media.

A. Traffic jams due to a sub-optimally high level of car usage. C. Dirty dishes piling up in the kitchen sink of your shared student accommodation. why A? This is a social dilemma because drivers fail to take into account the effects of their driving on other drivers.

Peter, John, and James are discussing how to share three apples and three oranges. Which of the following statements regarding Pareto efficient allocations is correct? A. Assuming that at least one of them likes both apples and oranges, a Pareto efficient allocation may not exist. B. Assuming that Peter likes both apples and oranges, there is no possible Pareto improvement to an allocation in which he has all the apples and oranges. C. It is always Pareto efficient for Peter, John, and James to have one apple and one orange each. D. There cannot be more than one Pareto efficient allocation.

B. Assuming that Peter likes both apples and oranges, there is no possible Pareto improvement to an allocation in which he has all the apples and oranges.

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? (2 answers) A. Forced labour where the workers receive some daily allowance is an example of a market. B. Employee-owned cooperatives are not firms. C. The knowledge you attain from the CORE program is considered private property. D. An economic system is a way of organizing the production and distribution of goods and services in an entire economy.

B. Employee-owned cooperatives are not firms. WHY? - Employee-owned cooperatives are productive organisations, but are not firms because the owners are not private individuals who own the assets of the firm and employ others to work there. D. An economic system is a way of organizing the production and distribution of goods and services in an entire economy.

Allocations can be judged as an unfair outcome only by substantive judgements. A. True B. False

B. False

A car manufacturer is a monopolist and notices that they can sell 11 cars at a price of £18,200, but in order to sell 12 cars they have to drop the price to £17,400. Which of the following statements is correct? A. Marginal revenue falls by £800 when the firm sets the price such that it can sell 12 cars. B. If the firm considers setting the price so as to sell 12 cars, it calculates that revenue is £800 per sale less on eleven cars sold and that it gains £17,400 in revenue on the additional car sold, leading to a net gain of revenue of £8,600. C. The elasticity of demand when the firm produces 11 cars is smaller (in absolute value) than the elasticity of demand when the firm produces 12 cars. D. If the marginal cost of the 12th car is £8,700, the firm will choose to sell it.

B. If the firm considers setting the price so as to sell 12 cars, it calculates that revenue is £800 per sale less on eleven cars sold and that it gains £17,400 in revenue on the additional car sold, leading to a net gain of revenue of £8,600. WHY? - The loss in revenue from lowering the price is £800*11=£8,800, while the gain in revenue from selling the 12th car is £17,400. So, the net gain in revenue is £17,400-£8,800=8,600.

For production to take place in the firm, the workers must supply some effort. Suppose that with the status quo best response curve in the figure below, the firm chooses the wage to minimize the cost of effort, and the worker's best response is an effort level of 0.6. Which of the following statement must be true in equilibrium? A. If the disutility of effort rises, then effort will fall. B. If unemployment rises, then the wage will fall. C. Any combination of e and w that is both on the isocost line and the best response curve is a Nash equilibrium.

B. If unemployment rises, then the wage will fall. WHY? Only points where the isocost line is tangent to the best response curve are a Nash equilibrium (points of intersection are not Nash equilibria).

Evaluate the following statements and choose the correct statement(s) (2 Answers) A. Contracts are complete in both competitive goods markets and labour markets. B. In a competitive goods market the buyers are price-takers, while in a labour market the buyers of employment (the firms) are price-setters. C. There is no economic rent for either the buyers or the sellers in competitive goods markets. In contrast, in labour markets the sellers receive economic rents. D. Social norms do not affect the outcomes in either goods markets or in labour markets.

B. In a competitive goods market the buyers are price-takers, while in a labour market the buyers of employment (the firms) are price-setters. C. There is no economic rent for either the buyers or the sellers in competitive goods markets. In contrast, in labour markets the sellers receive economic rents.

Which of the following are stationary rents? A. Innovation rent where firms make positive economic profits from a new invention. B. Monopoly rent where firms make excess profits due to limited competition. C. Speculative rent where profits are made by correctly betting on the price changes in a bubble. D. Employment rent where the wage is set high to induce workers to work hard.

B. Monopoly rent where firms make excess profits due to limited competition. D. Employment rent where the wage is set high to induce workers to work hard.

Which of the following statements regarding economic rents is correct? A. There is no rent earned in the perfectly competitive goods market. B. The employment rent received by workers is an equilibrium rent. C. All economic rents are bad and should be eliminated. D. In a renting market with a rent ceiling below the market clearing level, the economic rent earned by the tenants is a stationary rent.

B. The employment rent received by workers is an equilibrium rent. WHY? - A contract to work hard is not enforceable and therefore there is no way that the employer or the employees would benefit by changing the wage level.

Consider an economy with firms selling differentiated products, where the only input to production is labour. Which of the following statements is correct? A. Firms make no economic rent. B. The more inelastic the demand curve faced by the firm, the higher the markup set by the firm. C. Workers receive no employment rent. D. Firms choose the level of nominal wage that corresponds to the workers' maximum effort.

B. The more inelastic the demand curve faced by the firm, the higher the markup set by the firm. WHY? Inelastic demand means a steeper demand curve, so the firm has more market power. Therefore it is able to set a higher markup.

Consider the labour discipline model applied to two countries, a high-wage country and a low-wage country. Assume that the high-wage country has a higher unemployment benefit. Consider a firm producing the same product in both countries. Which of the following statements is correct? A. The efficiency wage offered in the low-wage country is higher than that in the high-wage country. B. The threat of outsourcing from the high-wage country to the low-wage country would raise the workers' best response curve in the high-wage country. C. The workers' best response curve in the high-wage country is to the left of that in the low-wage country. D. Firms would make lower profits in the low-wage country than in the high-wage country.

B. The threat of outsourcing from the high-wage country to the low-wage country would raise the workers' best response curve in the high-wage country.

Which of the following statements are correct? (2 Answers) A. Contracts are complete in both competitive goods markets and labour markets. B. There is no economic rent for either the buyers or the sellers in competitive goods markets. In contrast, in labour markets the sellers receive economic rents. C. Social norms do not affect the outcomes in either goods markets or in labour markets. D. In a competitive goods market the buyers are price-takers, while in a labour market the buyers of employment (the firms) are price-setters.

B. There is no economic rent for either the buyers or the sellers in competitive goods markets. In contrast, in labour markets the sellers receive economic rents. WHY B? - In a competitive goods market, the buyers' next best alternative is to buy at another shop, while the sellers' next best alternative is to sell to another customer. Neither party is any worse off from leaving and therefore they do not receive economic rents. In contrast, in the labour market the sellers (the employees) are worse off in their alternative of being unemployed. Hence they receive employment rents. D. In a competitive goods market the buyers are price-takers, while in a labour market the buyers of employment (the firms) are price-setters. WHY D? - In a competitive goods market, individual buyers cannot bargain for a lower price than others are willing to pay. Therefore they are price-takers. In the labour market the firms set the wage to minimize the cost of getting the worker to work and would not benefit by offering the lowest wage at which the worker (the seller) would accept the job. Hence they are price-setters.

Which of the following statements about how a firm sets prices is correct? A. If the real wage is below the price-setting curve, firms can increase their profits by increasing the price. B. When all firms have set their profit-maximizing price, the real wage in the economy depends on the elasticity of demand and the average product of labour. C. If the real wage is above the price-setting curve, firms can increase their profits by increasing wages D. The firm's unit labour cost is equal to the nominal wage minus output per worker.

B. When all firms have set their profit-maximizing price, the real wage in the economy depends on the elasticity of demand and the average product of labour. WHY? This principle underlies the price-setting curve and labour market model in Unit 9 (see Section 9.4).

Evaluate each of the following employment situations. Select the employment situations where the employment rent be high, ceteris paribus. (2 Answers) A. In an economic boom, when the ratio of job-seekers to vacancies is low. B. When the worker is paid a high salary because the firm's customers know and trust her. C. In a job that provides many benefits not provided by the government of the day, such as housing and medical insurance. D. When the worker is paid a high salary because she is a qualified accountant and there is a shortage of accountancy skills.

B. When the worker is paid a high salary because the firm's customers know and trust her. C. In a job that provides many benefits not provided by the government of the day, such as housing and medical insurance.

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 free hours per week will increase by 25%. B. Your total number of free hours per week will increase by 6.25%. C. Your total number of working hours per week will be 30 hours. D. Your total number of working hours per week will fall by 25%.

B. Your total number of free hours per week will increase by 6.25%. WHY? The new wage rate is 20 x 1.25 = £25. Your total weekly income is 20 x 40 hours = £800. Therefore your new total number of working hours is 800 / 25 = 32 hours.

Peter and John are discussing how to share two apples and two oranges. Which of the following statements regarding Pareto efficient allocations is correct? A. There cannot be more than one Pareto efficient allocation. B. Assuming that at least one of them likes both apples and oranges, a Pareto efficient allocation may not exist. C. Assuming that Peter likes both apples and oranges, there is no possible Pareto improvement to an allocation in which he has all the apples and oranges. D. It is always Pareto efficient for Peter and John, and James to have one apple and one orange each.

C. Assuming that Peter likes both apples and oranges, there is no possible Pareto improvement to an allocation in which he has all the apples and oranges.

Only one of the following statements is true about a monopoly. Select the true statement. A. A monopolist is interested in increasing demand elasticity. B. A monopolist will never innovate C. If marginal revenue is larger than marginal cost, its profits would increase if quantity increased. D. The deadweight loss of the monopolist depends on the difference between marginal revenue and marginal cost at the optimal choice.

C. If marginal revenue is larger than marginal cost, its profits would increase if quantity increased.

Which following statements regarding monopoly and perfectly competitive markets are correct? (2 Answers) A. In a perfectly competitive market, firms invest in research and innovation. B. In a perfectly competitive market, there is little advertising. C. In a monopoly market, the firm is a price-maker. D. In a monopoly market, owners receive no economic rent.

C. In a monopoly market, the firm is a price-maker. D. In a monopoly market, owners receive no economic rent

The GDP in current US$ for selected countries and the world are given below in $ billions (source: World Bank). Based on this information, which of the following statements is correct? (no image) A. The UK GDP growth rate was higher than that of the US. B. The world GDP grew by over 10% per year on average. C. Of the four countries, Nigeria was the only country that had a higher growth rate than that of the world over the 15 years. D. The GDP of Japan grew by 10.3% over the 15 years.

C. Of the four countries, Nigeria was the only country that had a higher growth rate than that of the world over the 15 years.

Consider an employee with a reservation wage of $6 an hour. The employee chooses an effort level between zero and one. Which of the following statements regarding her best response curve is correct? A. The curve crosses the horizontal axis at the origin. B. The average effort per hour is increasing in wages. C. The best response curve describes the effort that the employee would choose for each level of the hourly wage. D. The best response curve is upward-sloping and convex.

C. The best response curve describes the effort that the employee would choose for each level of the hourly wage.

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 firm chooses the price that equals its marginal cost. B. A price-taking firm cannot be profit-maximising. C. The demand curve faced by the firm is downward-sloping. D. The firm chooses its output such that the marginal cost equals the price.

C. The demand curve faced by the firm is downward-sloping. D. The firm chooses its output such that the marginal cost equals the price

Which of the following events would contribute to economies of scale? (2 answers) A. A merger of two firms leading to savings on the costs of HR, IT, and legal departments. B. The expansion of the workforce requiring extra layers of management for better performance monitoring. C. 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. D. Large supermarkets being able to drive down the cost of purchasing milk as it increases its scale of business.

C. 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. D. Large supermarkets being able to drive down the cost of purchasing milk as it increases its scale of business.

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, ceteris paribus: A. If the income effect dominates the substitution effect, then the consumer would consume more bread. B. If the income effect dominates the substitution effect, then the consumer would consume more petrol. C. The income effect on the consumption of bread is negative, i.e. the consumer would consume less bread. D. 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.

C. The income effect on the consumption of bread is negative, i.e. the consumer would consume less bread. why? because the substitution effect means that the consumer would consume more bread because bread has become relatively cheaper. The income effect means that the consumer would consume less bread. If the latter effect dominates the former, then the consumer would consume less bread). Therefore, goods consumption will unambiguously increase.

In the period before 1870, in Britain both wages and hours worked rose, while in the 20th century, working hours fell even though wages continued to rise. Based on this information, evaluate the following statements and choose the correct statement (only one is correct) A. In the 20th century, the substitution effect dominated the income effect, so that hours of free time rose. B. In the period before 1870, the positive substitution and income effects of rising wages led to workers taking less free time. C. The marginal rate of transformation between consumption and free time rose from the pre-1870s to the 20th century. D. From the pre-1870s to the 20th century, the substitution effect of a rise in the wage rate on the hours of free time changed from negative to positive.

C. The marginal rate of transformation between consumption and free time rose from the pre-1870s to the 20th century.

Which of the following statements about economic rents is correct? A. Family businesses are the type of productive organization that can reap the most benefits from the economic rents earned from their new innovations. B. Economic rents provide strong incentives for innovation even in a centrally planned economy. C. You and your employees have worked overtime this month to produce a record monthly profit. This is the economic rent achieved by your firm. D. Markets provide a competitive environment where those unable to copy others' innovations would fail. This provides the 'stick' that drives the innovation process.

D. Markets provide a competitive environment where those unable to copy others' innovations would fail. This provides the 'stick' that drives the innovation process.

Evaluate the following statements about the separation of ownership and control. Choose the statement that is correct. A. When the ownership and control of a firm is separated, the manager will always be lazy B. It is effective for shareholders to monitor the performance of the management, in a firm owned by a large number of shareholders. C. Managers always work to maximize the firm's profit. D. 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. 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.

Which of the following statements regarding the marginal rate of substitution (MRS) and the marginal rate of transformation (MRT) of a profit-maximising firm is correct? A. The MRT is the slope of the isoprofit curves. B. The MRS is how much in price you are willing to give up for an incremental increase in the quantity, holding profits constant. C. If MRT > MRS then firms can increase their profit by increasing output. D. The MRT is how much in price the consumers are willing to give up for an incremental increase in the quantity consumed, keeping their utility constant.

D. The MRT is how much in price the consumers are willing to give up for an incremental increase in the quantity consumed, keeping their utility constant.

A bakery is one of many that operate in the bread industry. The market demand curve for bread is downward-sloping. The bakery incurs fixed costs and has an upward-sloping marginal cost curve. Which of the following statements is correct? A. The bakery can ensure that the price is above its average cost. B. The bakery always makes a positive economic rent. C. The bakery's supply curve is horizontal. D. The bakery faces a flat firm demand curve.

D. The bakery faces a flat firm demand curve.

You currently work for 40 hours a week at wage rate of £12 an hour. Your free hours are defined as the number of hours not in work, which in this case is 24 hours × 7 days - 40 hours = 128 hours per week. Suppose that you are happy to keep your total weekly income constant. Then: A. If your wage rate increases to £16 an hour, then your free time will increase by 6%. B. Doubling the wage rate would decrease your working hours by a third. C. A wage cut of 25% leaves you with only 100 hours of free time. D. To have 12.5% more free time, your wage rate needs to increase by £8.

D. To have 12.5% more free time, your wage rate needs to increase by £8. WHY? - The current total weekly income is £12 × 40 hours = £480. 12.5% extra free time means 128 hours × 1.125 = 144 hours of free time, or 24 hours of work. To keep your weekly income constant, your wage rate needs to increase to £480 / 24 = £20 an hour, which is an increase of £8.

Social Dilemma Definition

Defined as actions taken independently by individuals in pursuit of their own private objectives resulting in an outcome that is inferior to some other feasible outcomes that could have resulted had people acted together

Pareto Efficiency Definition

Pareto efficiency is when you cannot make anyone better off without making someone else worse off. This is true when one person has all the wealth.

Marginal Rate of Substitution (MRS) Definition

The MRS is how much in price you are willing to give up for an incremental increase in the quantity, holding profits constant. It represents the slope of the isoprofit curves.