LESSON 7: THEORY OF GENERAL EQUILIBRIUM

PART 0. TAKE NOTE

PART A. MULTIPLE CHOICES

Question 1. Deadweight loss in economics primarily represents:

A. The total cost of production incurred by firms.

B. The reduction in total surplus (economic efficiency) resulting from a market
distortion.
C. The consumer surplus lost due to higher prices.
D. The producer surplus gained due to market power.

Question 2. Allocative efficiency occurs when:

A. Production is organized at the lowest possible cost.

B. All resources are fully employed in the economy.
C. The marginal benefit of production equals the marginal cost of production (P =
MC).
D. Goods and services are distributed equally among consumers.

Question 3. Consumer surplus is defined as:

A. The difference between the price consumers pay and the cost of production.
B. The total revenue received by producers from selling a good.
C. The difference between the maximum price consumers are willing to pay and the
actual price paid.
D. The extra satisfaction a consumer gets from consuming an additional unit of a

good. Question 4. A negative externality exists when:

A. The production or consumption of a good imposes a cost on a third party not

involved in the transaction.
 B. The consumption of a good by one person diminishes its availability for others.
C. The government intervenes in a market to correct for a market failure.\

D. Producers bear all the costs of production, but not all the benefits.

Question 5. A Pigouvian tax is specifically designed to:

A. Reduce the quantity produced in markets with positive externalities.

B. Increase the quantity produced in markets with negative externalities.
C. Internalize the external costs associated with a negative externality.
D. Generate revenue for the government, regardless of market efficiency.

Question 6. The two key characteristics of a pure public good are:

A. Rivalry and Excludability.

B. Non-rivalry and Excludability.
C. Rivalry and Non-excludability.
D. Non-rivalry and Non-excludability.

Question 7. The free-rider problem is most strongly associated with:

A. Goods that are excludable but non-rivalrous.

B. Goods that are rivalrous and excludable.
C. Pure public goods, due to their non-excludable nature.
D. Goods produced by monopolies, leading to underproduction.

Question 8. Moral hazard arises when:

A. One party in a transaction has more information than the other before the
transaction occurs.
B. One party in a transaction changes their behavior after the transaction has
occurred, in a way that is detrimental to the other party.
C. Buyers are unable to distinguish between high-quality and low-quality goods.
D. Governments fail to set optimal taxes on polluting industries.
Question 9. Adverse selection is a problem that arises due to:

A. The inability of consumers to accurately assess the quality of products after

purchase.
B. Hidden actions of one party after a contract is signed.
C. Asymmetric information before a transaction, leading to a market for "lemons."
D. The presence of positive externalities in consumption.

Question 10. The Coase Theorem suggests that, under certain conditions, an efficient
outcome to an externality problem can be achieved without government intervention if:

A. Transaction costs are high and property rights are clearly defined.
B. Transaction costs are low and property rights are clearly defined.
C. The externality is a public good.
D. The number of affected parties is very large.

Question 11. A situation is considered Pareto efficient if:

A. Resources are distributed equally among all members of society.

B. It is impossible to make anyone better off without making someone else worse
off.
C. Total consumer surplus equals total producer surplus.
D. The economy operates at its maximum production possibilities frontier.

Question 12. Among the following market structures, which one typically results in the
largest deadweight loss due to restricted output and higher prices, assuming constant
marginal costs?

A. Perfect Competition.
B. Monopolistic Competition.
C. Oligopoly (e.g., Cournot)
D. Pure Monopoly

PART B. TRUE/FALSE EVALUATION

Cluster 1. Consider a market with a downward-sloping demand curve and an
upwardsloping marginal cost curve.

Under perfect competition, the equilibrium occurs where price equals marginal
cost, leading to an allocatively efficient outcome.

Under monopoly, the firm produces less output and charges a higher price
compared to perfect competition, maximizing its own profit.

a) The monopoly outcome demonstrates allocative inefficiency compared to a

perfectly competitive outcome.

b) Consumer surplus is always higher under perfect competition than it would be

under monopoly in the same market.

c) The existence of a monopoly in this market leads to a deadweight loss,

representing a reduction in total societal welfare.

d) Producers generally prefer a perfectly competitive market structure over a

monopoly structure due to higher output.

Cluster 2. A good is produced in a competitive market. In addition to the private costs of

production borne by firms, the production process generates pollution, which imposes
costs on society (e.g., health costs, environmental damage) that are not borne by the
producers or consumers of the good.

a) The existence of such external costs indicates a negative externality in production.

b) In the absence of any government intervention, the private market equilibrium

quantity for this good will be less than the socially optimal quantity.

c) A Pigouvian tax, if set correctly, aims to internalize the external cost, making the
private cost reflect the true social cost.
d) According to theory, the socially optimal quantity for this good would be determined
where the marginal social cost of production equals the marginal social benefit
(demand).

Cluster 3. Two individuals live in a community. They both benefit from the provision of
a public good, such as national defense or clean air. The cost of providing additional
units of this good is known.

a) For a pure public good, the social marginal benefit curve is derived by vertically
summing the individual demand curves.

b) Due to the non-excludable nature of pure public goods, individuals typically have
an incentive to free-ride on others' contributions.

c) If the public good were left solely to private provision through voluntary
contributions, it would likely be over-provided compared to the socially optimal level.

d) The free-rider problem implies that individuals tend to understate their true
valuation of a public good when asked to contribute voluntarily.

Cluster 4. Consider a market for used cars where sellers know the true quality of their
cars (either high or low quality), but buyers cannot distinguish between high-quality and
lowquality cars before purchasing.

a) This scenario is a classic example of adverse selection, a type of market failure.

b) If buyers cannot differentiate quality, high-quality cars ("peaches") may be driven out
of the market, leading to only low-quality cars ("lemons") being traded.

c) If sellers of high-quality cars could offer a credible warranty, this would be an

example of "screening" by the buyers.

d) The problem described is primarily one of moral hazard, where hidden actions lead to
inefficient outcomes.

PART C. SHORT ANSWER FILL-IN (NO MORE THAN 3 WORDS)

Question 1. A per-unit tax imposed on a competitive market creates a deadweight loss
because it typically leads to ____ than the socially optimal quantity.

A) more production B) less production C) an unchanged quantity

Question 2. An optimal Pigouvian tax aims to make the ____ of production equal to the
social marginal cost.

A) private marginal benefit B) private marginal cost C) external marginal benefit

Question 3. To find the socially optimal quantity of a pure public good, individual
marginal benefit curves (or demand curves) are ____ to derive the aggregate social
demand.

A) summed horizontally B) multiplied C) summed vertically

Question 4. In a perfectly competitive market equilibrium, the total surplus (sum of

consumer surplus and producer surplus) is ____.

A) maximized B) minimized C) always zero

Question 5. In a market with severe adverse selection, the lack of information for buyers
can ultimately lead to ____ high-quality goods from the market.

A) an oversupply of B) the exclusion of C) a balanced supply of

Question 6. According to the Coase Theorem, when transaction costs are negligible,
efficient outcomes to externality problems can be reached through private bargaining
regardless of ____.

A) initial property rights B) externality's level C) parties' number

PART D. ESSAYS

Question 1. Define both positive and negative externalities, providing a distinct real-
world example for each. Explain, using appropriate economic diagrams (e.g.,
supply/demand with social cost/benefit curves), why the presence of externalities leads
to market inefficiency (over-production or under-production relative to the socially
optimal level).

Question 2. Clearly define the two defining characteristics of pure public goods
(nonrivalry and non-excludability). Explain, with an example, how these characteristics
lead to the "free-rider problem" in a private market. Illustrate how the free-rider problem
prevents private markets from providing the socially optimal level of public goods.
Describe at least two non-market mechanisms (e.g., government provision, private
clubs/crowdfunding) for providing public goods. For each, discuss its potential
advantages and inherent challenges in achieving efficient provision.

Question 3. Distinguish clearly between "adverse selection" and "moral hazard,"

providing a distinct real-world example for each to illustrate the concept. Explain how
each type of information asymmetry can lead to market failure or the complete collapse
of a market. Discuss various market-based mechanisms (e.g., signaling, screening,
reputation, deductibles in insurance) that arise to mitigate these problems, detailing how
they attempt to reduce information asymmetry and restore efficiency.

Question 4. Define Pareto efficiency. Explain the three conditions that must be met for an
economy to achieve overall Pareto efficiency (efficiency in exchange, efficiency in
production, and efficiency in the output mix), using economic principles to elaborate on
each condition. Discuss why a perfectly competitive market structure, under ideal
conditions, is often considered Pareto efficient. Critically evaluate whether Pareto
efficiency is a sufficient criterion for a desirable social outcome. Consider arguments
related to equity, initial endowments, and the potential for market failures that prevent its
achievement.

LESSON 6: SPECILIZATION CASES IN

PRODUCING BEHAVIOR
GAME THEORY – MIXED STRATEGIES – EQUILIBRIUM IN OLIGOPOLY
PART 0. TAKE NOTE

PART A. MULTIPLE CHOICE

Producer Optimization

Question 1. A firm has a production function Q = 8K + 4L. If the rental rate of capital (r)
is $16 and the wage rate (w) is $4, to produce a given level of output at minimum cost,
the firm should use:

A. Only capital (K).

B. Only labor (L).
C. Both capital and labor in a fixed ratio.
D. It depends on the specific output level.

Question 2. For a production function Q = aK + bL, the condition for a firm exclusively
use capital (K) to minimize cost is:

A. MPK/r > MPL/w.

B. MPK/r < MPL/w.
C. MPK/r = MPL/w.
D. a/b > r/w.

Question 3. The production function Q = aK + bL implies that the inputs are:

A. Perfect complements.
B. Perfect substitutes.
C. Imperfect substitutes.
D. Independent in production.

Question 4. A firm with a production function Q = 3K + 6L has a budget of 300. If the

rental rate of capital (r) is $15 and the wage rate (w) is $10. The maximum output the
firm can produce is:

A. 60 units.
 B. 90 units.
C. 120 units.
D. 180 units.

Question 5. If a firm’s production function is Q = L0.5K0.5, and the wage rate (w) is $10
while the rental rate (r) is $40. To minimize cost for a given output, the firm should
employ L and K such that:

A. L = 4K
B. K = 4L
C. L = 2K
D. K = 2L

Game Theory and Mixed Strategies

Question 6. In game theory, a mixed strategty refers to a situation where a player:

A. Choose a single action with certainty.

B. Randomly selects among several available actions with predetermined
probabilities.
C. Changes their action based on their opponent’s previous move.
D. Collaborates with the opponent to maximize joint payoff.

Question 7. Consider a 2x2 game where Player A chooses Row 1 or Row 2, and Player B
chooses Column 1 or Column 2. If the game has no pure strategy Nash equilibrium, a
mixed strategy equilibriumm will exist where players choose their actions with certain
probabilities. In this equilibrium, each player’s expected payoff from their chosen actions
must be:

A. Maximized.

B. Minimized.
C. Equal across all pure strategies they play with positive probability.
D. Equal to the average payoff of all possible outcomes.
Question 8. Consider the following game where two friends, Alice and Bob, are deciding
whether to “Study” or “Go out”. Payoffs are:
Bob
Study Go out
Study (3,3) (0,2)
Alice
Go out (2,0) (1,1)
Which of the following represents the equilibrium for this game?

A. (Alice, Bob) = (Study, Go out)

B. (Alice, Bob) = (Go out, Study)
C. (Alice, Bob) = (Study, Study)
D. (Alice, Bob) = (Go out, Go out)

Question 9. Two companies, LuxCorp and ValueMart, are deciding on their pricing
strategy: “High Price” or “Low Price”. Payoffs are:
ValueMart
High Price Low Price
High Price (10,10) (2,12)
LuxCorp
Low Price (12,2) (5,5)
Which of the following correctly identifies all Pure Strategy Nash Equilibria in this
game?

A. (LuxCorp: High Price, ValueMart: High Price) only.

B. (LuxCorp: Low Price, ValueMart: Low Price) only.
C. Both (LuxCorp: High Price, ValueMart: High Price) and (LuxCorp: Low Price,
ValueMart: Low Price).
D. There are no Pure Strategy Nash Equilibria in this game.

Question 10. In game theory, what is a strategy?

A. A specific action a player takes at a particular moment in the game.

B. A complete plan of action that specifies what a player will do in every possible
situation.
 C. The final outcome or payoff a player receives at the end of the game.
D. A player's belief about the other players' intentions.

Question 11. A zero-sum game is characterized by:

A. Players being able to communicate and form binding agreements.

B. The sum of payoffs for all players in every outcome always equaling zero.
C. Players having multiple Nash Equilibria to choose from.
D. Each player having a dominant strategy that leads to the optimal outcome.

Question 12. Two competing firms, Firm A and Firm B, are deciding whether to spend
heavily on advertising “Advertise” or “Don’t Advertise”. The payoffs represent the
profits for each firm in millions of dollars.
Firm B
Advertise Don’t Advertise
Advertise (10,10) (2,12)
Firm A
Don’t Advertise (12,2) (5,5)
Which of the following represents the Equilibrium for this game?

A. (Firm A: Advertise, Firm B: Advertise).

B. (Firm A: Don't Advertise, Firm B: Don't Advertise)
C. Both (Firm A: Advertise, Firm B: Advertise) and (Firm A: Don't Advertise, Firm
B:
Don't Advertise).
D. There is no Pure Strategy Nash Equilibrium in this game.

THEORY OF OLIGOPOLY

Question 13. Which of the following is a significant challenge to the stability of a cartel?

A. High barriers to entry for new firms.

B. The incentive for individual members to cheat by increasing output.
C. Legal enforcement of cartel agreements.
D. The absence of product differentiation.
Question 14. Deadweight loss in an oligopoly (when not perfectly competitive) arises
because:

A. Firms produce at a quantity where Marginal Cost equals Average Total Cost.
B. The price charged is above marginal cost, leading to an underproduction relative
to the socially efficient level.
C. Firms engage in excessive advertising.
D. Consumers are unable to find substitute products.

Question 15. The key distinguishing feature of the Stackelberg model of oligopoly is:

A. Simultaneous quantity choice by all firms.

B. Simultaneous price choice by all firms.
C. A sequential decision-making process, with a leader and a follower.
D. Explicit collusion among firms to maximize joint profits.

PART B. TRUE/FALSE EVALUATION

Cluster 1. A firm has a production function Q = 20K + 5L. The rental rate of capital (r) is
$10, and the wage rate (w) is $4. The firm wants to produce 400 units of output.

a) To produce 400 units of output at minimum cost, the firm should use only capital (K).

b) The marginal product per dollar for capital (MPK)/r) is 5 units/$.

c) The marginal product per dollar for labor (MPL/w) is 1.25 units/$.

d) The minimum total cost to produce 400 units of output is $200.

Cluster 2. Consider a game between Player A (choosing Rows) and Player B (choosing
Columns). The payoff matrix is:
B
Left Right
Up (3,1) (0,0)
A
Down (0,0) (1,3)
 a) This game has pure equilibrium points.
b) For player B to be indifferent between Left and Right, player A must play Up.
c) For player A to be indifferent between Up and Down, player B must play Left.
d) This game has more than a pure equilibrium.

Cluster 3. Two firms (Firm 1 and firm 2) compete in a Cournot oligopoly. The market
demand function is P = 150 – Q, where Q = q1 + q2. The marginal cost for both firms is
MC1 = MC2 = $30.

a) Firm 1’s reaction function is q1 = 60 – 0.5q2.

b) In the Bertrand equilibrium, each firm produces 40 units of output.
c) The total market output at the Cournot equilibrium is 90 units.
d) The market price at the Cournot equilibrium is $70.

Cluster 4. Two firms (Firm 1 is the leader, Firm 2 is the follower) compete in a
Stackelberg oligopoly. The market demand functiion is P = 150 – Q, where Q = q1 + q2.
The marginal cost for both firms is MC1 = MC2 = $30. The follower’s reaction function
is q2 = 60 – 0.5q1.

a) The leader (Firm 1) will maximize its profit by producing 60 units of output.
b) The follower (Firm 2) will produce 30 units of output.
c) The total market output at the Stackelberg equilibrium is 90 units.
d) The market price at the Stackelberg equilibrium is $60.

PART C. SHORT ANSWER FILL-IN

Question 1. A firm has a production function Q = 20L0.5K0.5. The wage rate (w) is $50,
and the rental rate (r) is $200. To produce 4000 units of output at minimum cost, the firm
should employ ___ units of Labor (L) and ___ units of Capital (K). The minimum total
cost will be $ ___.

Question 2. A firm has a budget of $2,000 to spend on inputs. Its production function is
Q = 5L0.5K0.5. The wage rate (w) is $20, and the rental rate (r) is $10. To maximize
output, the firm should employ ____ units of Labor (L) and ____ units of Capital (K).
The maximum output (Q) will be ____ units.

Question 3. In a Cournot duopoly, the market demand is P = 200 − Q, and both firms
have constant marginal costs MC1 = MC2 = $40. In equilibrium, Firm 1 will produce
____ units, Firm 2 will produce ____ units, and the market price will be $____.

Question 4. Two firms compete in Bertrand. The market demand is P = 160 − Q. Firm 1
has a constant marginal cost MC1 = $20, and MC2 = $10. In equilibrium, the market
price will be $____, and the total market quantity supplied will be ____ units.

Question 5. A monopolist faces a demand curve P = 200 − Q and has a total cost function
TC = 500 + 20Q. The monopolist will maximize profit by producing ____ units of output
and selling them at a price of $____. The maximum total profit will be $____.

Question 6. Consider a market with demand P = 120 − Q and marginal cost MC = $20. If
this market were perfectly competitive, the equilibrium quantity would be ____ units. If
firms in this market form a cartel (acting as a monopoly), the cartel would produce ____
units. The deadweight loss to society caused by this cartel will be $____.

PART D. SHORT ESSAYS

Producing Optimal Behavior

Question 1. Explain the dual nature of cost minimization and output maximization for a
firm. Discuss how these two optimization problems are related, how their solutions differ
in terms of their primary objectives and constraints, and illustrate their connections using
isoquant-isocost analysis.

Question 2. Analyze the impact of different degrees of input substitutability on a firm's

optimal input choice and its long-run cost structure. Compare and contrast the optimal
input decisions for a production function where inputs are perfect substitutes (e.g., Q =
aK + bL) versus one where inputs exhibit continuously diminishing marginal rates of
technical substitution (e.g., Cobb-Douglas).
Question 3. Discuss how a significant and permanent change in the price of a key input
(e.g., a substantial increase in wage rates) affects a firm's short-run and long-run cost
curves (Marginal Cost, Average Total Cost, etc.). Explain the underlying adjustments in
the firm's input mix and scale of operation that lead to these changes in cost functions.

GAME THEORY AND MIXED-STRATEGIES

Question 4. Choose a real-world scenario (e.g., a penalty kick in soccer, a police patrol
route, a tax audit strategy). Describe the strategic interaction and explain why a mixed
strategy approach might be relevant. Analyze how the players would determine their
optimal mixed strategies in this context.

EQUILIBRIUM IN OLIGOPOLY
Question 5. Define a cartel and explain the conditions under which oligopolistic firms
might be motivated to form one. Analyze the fundamental economic incentives that make
cartels inherently unstable and prone to breakdown. What factors can potentially increase
the stability and longevity of a cartel, and what are their limitations?

Question 6. From a public policy perspective, what are the primary concerns associated
with oligopoly markets? Discuss various policy interventions (e.g., antitrust laws, price
regulation, promotion of entry) that governments might consider implementing to
address these concerns and promote greater economic efficiency or consumer welfare.

LESSON 4 - 5: COST FUNCTION AND ALL TYPES OF MARKET

REVISION: CALCULATION QUESTION

PART 0. TAKE NOTE

PART A. MULTIPLE CHOICE

Question 1. Which of the following statements accurately describes the Law of

Diminishing Marginal Product?
A. In the long run, increasing all inputs proportionally leads to a less than
proportional increase in output.

B. As successive units of a variable input are added to a fixed input, total output will
inevitably decrease.

C. As successive units of a variable input are added to a fixed input, beyond some
point, the marginal product of the variable input will decline.

D. When a firm doubles all its inputs, its output less than doubles due to management
inefficiencies.

Question 2. Which of the following scenarios best illustrates the Law of Diminishing
Marginal Product?

A. A shoe factory doubles its factory size and hires twice as many workers, resulting
in three times the output.

B. A single chef in a small restaurant struggles to cook 50 meals a night, but with
two additional chefs, they can cook 150 meals.

C. A bakery with a fixed number of ovens bakes 100 loaves with 5 bakers, 115
loaves with 6 bakers, and 125 loaves with 7 bakers.

D. A tech company experiences lower production costs per unit as it expands its
operations globally.

Question 3. Which of the following is true regarding the Law of Diminishing Marginal
Product?

A. It primarily applies in the long run when all factors of production are variable.

B. It implies that every additional unit of a variable input will always result in a smaller
increase in total output.
C. It states that eventually, total output will begin to decline if more variable input is
added to fixed input.

D. It is a short-run concept that assumes at least one input in the production process is
held constant.

Question 4. For a bakery producing bread, which of the following is most likely
classified as a variable cost in the short run?

A. The monthly rent for the bakery building.

B. The annual premium for the bakery's property insurance.

C. The wages paid to bakers, which are calculated per loaf of bread produced.

D. The straight-line depreciation of the industrial ovens.

Question 5. A firm's total cost increases from $500 to $620 when its output increases
from 20 units to 21 units. What is the marginal cost (MC) of the 21st unit?

A. $120

B. $60

C. $12

D. $30

Question 6. If the Marginal Cost (MC) curve is currently above the Average Total Cost
(ATC) curve, what does this imply about the Average Total Cost?

A. ATC must be decreasing.

B. ATC must be increasing.

C. ATC is at its minimum point.

D. ATC is equal to MC.

Question 7. A firm is earning zero economic profit. Which of the following statements
best describes its financial situation?

A. The firm is making no accounting profit.

B. The firm's total revenue is less than its explicit costs.

C. The firm is earning a normal rate of return on its capital and entrepreneurial effort.

D. The firm is operating at a loss and should immediately exit the industry.

Question 8. A firm has a total cost function given by TC = 100 + 5Q. If the market price
is $15 per unit and the firm produces 10 units of output, what is its total profit?

A. $50

B. $150

C. $0

D. -$100

Question 9. Which of the following is NOT a characteristic of a perfectly competitive

market?

A. Many buyers and sellers.

B. Firms are price makers.

C. Free entry and exit in the long run.

D. Homogeneous (identical) products.

Question 10. A natural monopoly typically arises due to: A.

Exclusive ownership of a key resource.

B. Government-granted exclusive rights.

C. Economies of scale over the relevant range of output.

D. Aggressive advertising campaigns.

Question 11. In a monopolistically competitive market, firms typically engage in product

differentiation. This means:

A. They sell identical products at the lowest possible price.

B. They attempt to make their products slightly different from competitors' products.

C. They collude with other firms to set prices and output levels.

D. They face significant barriers to entry for new firms.

Question 12. In the short run, a firm's Fixed Costs (FC) are best described as: A.

Costs that increase as production increases.

B. Costs that must be paid even if no output is produced.

C. Costs that can be completely avoided if the firm decides not to produce.

D. Costs that vary directly with the level of technology used.

Question 13. If a firm knows its Total Cost (TC) and Total Fixed Cost (FC) at a given
level of output, which formula can be used to calculate its Total Variable Cost (VC)?

A. VC = TC / Q

B. VC = FC - TC

C. VC = TC - FC

D. VC = Marginal Cost (MC) × Q

Question 14. A company incurs total fixed costs of $2,000. When it produces 50 units of
output, its total variable costs are $3,000. What is the Average Total Cost (ATC) for 50
units?

A. $40
B. $60

C. $100

D. $200

Question 15. A firm sells its product at a price of $25 per unit. If its Total Cost (TC) at an

output of 150 units is $3,000, what is the firm's Total Revenue (TR) at this output level?

A. $3,000

B. $3,750

C. $4,500

D. $5,000

Question 16. A firm experiences decreasing returns to scale when:

A. Doubling its output leads to a more than doubling of its average costs.

B. Increasing all inputs by 10% results in exactly a 10% increase in output.

C. A proportional increase in all inputs leads to a less than proportional increase in

output.
D. Its long-run average total cost curve is upward sloping.

Question 17. If a firm's production function is given by Q = A.L0.7K0.4 , where Q is

output, L is labor, K is capital, and A is a technology parameter. This production function

exhibits: A. Increasing returns to scale.

B. Decreasing returns to scale.

C. Constant returns to scale.

D. Returns to scale cannot be determined from this function.

Question 18. Which of the following is a defining characteristic of a pure monopoly? A.

Many small firms producing differentiated products.

B. Firms are price takers.

C. Significant barriers to entry for new firms.

D. Intense price competition among a few large firms.

Question 19. A key characteristic that distinguishes an oligopoly from other market
structures is:

A. The presence of a single dominant firm that faces no competition.

B. Products are always identical across all firms.

C. Mutual interdependence among firms in their decision-making.

D. Firms operate with zero economic profit in the long run.

Question 20. When firms in an oligopoly explicitly agree to limit output or fix prices to

maximize their joint profits, they are engaging in: A. Price leadership.

B. Non-price competition.

C. A cartel.

D. Nash equilibrium.

PART B. TRUE/ FALSE EVALUATION

Cluster 1. A small T-shirt printing business uses a fixed number of printing machines.
The table below shows the total number of T-shirts printed (Total Product, TP) per hour
as the number of workers (variable input) increases.
 Number of Workers (L) Total Product (TP) (T-shirts/hour)

0 0
1 10
2 25
3 38
4 48
5 55
6 60
a) The Marginal Product of the 3rd worker is 13 T-shirts/hour.

b) The Law of Diminishing Marginal Product begins to set in with the addition of the 3rd
worker.

c) The Average Product of labor for 5 workers is 11 T-shirts/hour.

d) Adding the 7th worker would likely result in a decrease in total output (TP).

Cluster 2. A firm’s total cost (TC) function is given by    , where Q is

the quantity of output.

a) The firm's Total Fixed Cost (FC) is $100.

b) If the firm produces 10 units of output (Q=10), its Average Total Cost (ATC) is $30.

c) The Marginal Cost (MC) of increasing production from 9 units to 10 units is $29.

d) When the firm's Marginal Cost (MC) is above its Average Variable Cost (AVC), the
AVC must be decreasing.

Cluster 3. Consider a firm with a production function given by  where Q is

output, L is units of labor, and K is units of capital.

a) This production function exhibits increasing returns to scale.

b) If the firm doubles both its labor (L) and capital (K) inputs, its output (Q) will exactly
double.

c) If this firm operates with constant returns to scale, its long-run average total cost
(LRATC) curve would be upward sloping.

d) Returns to scale refer to how total output changes when only one input is varied,
holding others constant.

Cluster 4. Given: “This industry consists of a single large firm that sells a unique product
for which there are no close substitutes. The firm has complete control over the market
price, and entry into this market is extremely difficult due to high startup costs, patent
protection, and network effects.”

a) The described market structure is a monopolistic competition.

b) The firm in this market is a price taker.

c) This market is characterized by significant barriers to entry.

d) The firm in this market is likely to produce the allocatively efficient quantity of
output.

Cluster 5. Given: “In the global smartphone industry, a few dominant companies (e.g.,
Apple, Samsung, Xiaomi) control the majority of the market share. While their products
offer similar functionalities, they are heavily differentiated through branding, operating
systems, and unique features. New firms find it extremely challenging to enter due to
immense R&D costs, established supply chains, and strong brand loyalty. These firms
closely monitor each other's pricing, advertising, and product launch strategies.”

a) The described market structure is a perfect competition.

b) Firms in this market primarily compete solely on price, offering identical products.
c) There are significant barriers to entry for new firms in this industry.

d) The firms in this industry exhibit mutual interdependence in their strategic decisions.

Cluster 6. A firm’s total cost function is given by     , where Q

is the quantity of output.

a) The firm’s total fixed cost is $50.

b) If the firm produces 10 units of output, its Total Variable Cost is $100.

c) At Q = 10, the Marginal Cost is greater than the Average Variable Cost.

d) The Average Fixed Cost increases as the quantity of output increases.

PART C. SHORT ANSWER FILL-IN

Question 1. A small garment factory with a fixed number of sewing machines observes
that its Total Product (TP) is 20 shirts with 1 worker, 50 shirts with 2 workers, and 75
shirts with 3 workers. The Marginal Product (MP) of the 2nd worker is ____ shirts, and
the MP of the 3rd worker is ____ shirts. This change indicates that the Law of
Diminishing Marginal Product began with the addition of the ____ worker, as the
marginal product of labor started to ____.

Question 2. A firm has a Total Fixed Cost (FC) of $200. Its Total Variable Cost (VC) is
$5 per unit of output. If the firm produces 40 units, its FC is ____, its VC is $____, its
Total Cost (TC) is $____, and its Average Total Cost (ATC) is ____.

Question 3. Consider a production process described by the function  . The

sum of the exponents on labor and capital is ___. This production function therefore
exhibits ___ returns to scale. If the firm doubles all its inputs, its output will (less
than/exactly/more than) ___ double.
Question 4. A market structure characterized by ____ buyers and sellers, ____ products,
and ____ entry and exit is known as ____ competition. In such a market, individual firms
are price (takers/makers) ____.

Question 5. A firm in a perfectly competitive market faces a market price of $25 per unit.
Its Marginal Cost (MC) is given by MC = 5+2Q, and its Total Cost (TC) by

TC = 50 + 5Q + Q2

To maximize profit, the firm should produce ____ units. At this output level, its Total
Revenue (TR) will be ___, its Total Cost (TC) will be $____, and its total economic
profit will be ____.

Question 6. A firm wishes to maximize its output subject to a total budget of $1000 for
inputs. Its production function is Q=10.L0.5K0.5, where L is labor and K is capital. The
wage rate (w) for labor is $10 per unit, and the rental rate of capital (r) is $40 per unit. To
achieve optimal production, the firm should employ ____ units of labor and ____ units
of capital. This combination allows the firm to produce a maximum output of ____ units,
which is achieved when the marginal product per dollar spent on each input is ____.

PART D. SHORT ESSAY

Question 1.

a) Define the Law of Diminishing Marginal Product. Explain why this law is
considered a short-run phenomenon and discuss its implications for the shape of a
firm's short-run cost curves.
b) Differentiate between Fixed Costs (FC) and Variable Costs (VC) in the short run.
Provide at least two distinct examples for each type of cost for a manufacturing
firm.
c) Define and clearly distinguish between increasing, constant, and decreasing
returns to scale. How does the concept of returns to scale relate to a firm's Long-
 Run Average Total Cost (LRATC) curve? What should the firm do in each case of
returns to scale?

Question 2.

a) Describe the key characteristics of a perfectly competitive market. Explain why

firms in perfect competition earn zero economic profit in the long run.
b) What are the primary sources of monopoly power? Explain why a monopolist is
considered a "price maker" and how this differs from a firm in perfect
competition.
c) Compare and contrast the market structures of Oligopoly and Monopolistic
Competition. Highlight at least three key differences regarding the number of
firms, product differentiation, and the nature of competition.

Question 3. For each table, calculate the Marginal Product (MP) and Average Product
(AP) for each level of labor, and determine when the Law of Diminishing Marginal
Product begins:
Table 1 2 3 4 5 6 7 8
Labor (L) Total Output (Q) Labor (L) Total Output (Q)
0 0 0 0 0 0 0 0 0 0
1 10 8 12 5 1 20 15 7 30
2 25 19 26 12 2 45 32 17 70
3 35 28 36 18 3 65 45 24 100
4 45 34 42 22 4 80 55 29 120
5 42 38 45 24
Question 4. For each total cost function, identify fixed cost, derive the formulas for VC,
MC, ATC, AVC, AFC. Then, calculate all these costs at a given output level.

a) TC = 150 + 10Q + 0.2Q2. Calculate for Q = 10.

b) TC = 200 + 8Q + 0.5Q2. Calculate for Q = 5.

c) TC = 120 + 25Q – Q2 + 0.1Q3. Calculate for Q = 5.

d) TC = 1000 + 50Q. Calculate for Q = 20.

e) TC = 75 + 12Q + 0.8Q2. Calculate for Q = 8.

Question 5.

a) A firm has a Total Fixed Cost (FC) of $500. Its Total Variable Cost (VC) is given by
VC = 10Q + 0.5Q2. The market price (P) for its product is $40 per unit. What is the
firm's break-even quantity of output? Calculate the firm's shut-down price in the short
run.

b) A firm has a total function is given    . The market price for its
product is $20 per unit. What is the firm's break-even quantity of output? Calculate the
firm's shut-down price in the short run.

c) A firm has a total function is given    . The market price for its
product is $52 per unit. What is the firm's break-even quantity of output? Calculate the
firm's shut-down price in the short run.

Question 6.

a) A firm wants to produce 500 units of output at the lowest possible cost. Its
production function is Q = 10L0.5K0.5. The wage rate (w) for labor is $20 per unit, and
the rental rate of capital (r) is $80 per unit. Determine the optimal combination of labor
(L) and capital (K) the firm should use to minimize its cost. Calculate the minimum total
cost of producing 500 units.

b) A firm has a budget of $1,200 to spend on inputs. Its production function is Q =

2L0.6K0.4. The wage rate (w) for labor is $10 per unit, and the rental rate of capital (r) is
$15 per unit. Determine the optimal combination of labor and capital the firm should
employ to maximize its output within the given budget. Calculate the maximum output
(Q) the firm can produce with this budget.
c) A firm wants to produce 1000 units of output at the lowest possible cost. Its
production function is Q = 12L0.5K0.5. The wage rate (w) for labor is $50 per unit, and
the rental rate of capital (r) is $200 per unit. Determine the optimal combination of labor
(L) and capital (K) the firm should use to minimize its cost. Calculate the minimum total
cost of producing 500 units.

d) A firm has a budget of $1,500 to spend on inputs. Its production function is Q =

5L0.5K0.5. The wage rate (w) for labor is $15 per unit, and the rental rate of capital (r) is
$15 per unit. Determine the optimal combination of labor and capital the firm should
employ to maximize its output within the given budget. Calculate the maximum output
(Q) the firm can produce with this budget.

Question 7.

a) A firm operates in a perfectly competitive market where the market price (P) is
$12 per unit. The firm's total cost (TC) function is TC = 10 + 2Q + 0.5Q2. Calculate the
firm's Marginal Cost (MC) function. Determine the profit-maximizing quantity of output
for this firm. Calculate the maximum total profit the firm can earn.

b) A firm operates in a perfectly competitive market where the market price is $20
per unit. The firm's total cost function is TC = 50 + 5Q + 0.5Q2. Calculate the firm's
Marginal Cost function. Determine the profit-maximizing quantity of output for this
firm. Calculate the maximum total profit the firm can earn.

c) A firm operates in a perfectly competitive market where the market price is $25
per unit. The firm's total cost function is TC = 60 + 10Q + Q2. Calculate the firm's
Marginal Cost function. Determine the profit-maximizing quantity of output for this
firm. Calculate the maximum total profit the firm can earn.

d) A firm operates in a perfectly competitive market where the market price is $70
per unit. The firm's total cost function is TC = 150 + 10Q + 2Q2. Calculate the firm's
Marginal Cost function. Determine the profit-maximizing quantity of output for this
firm. Calculate the maximum total profit the firm can earn.

Question 8.

a) A monopolist faces a demand curve given by P = 100 − 0.5Q. Its Total Cost function
is TC = 200 + 10Q + 0.25Q2. Derive the monopolist's Marginal Revenue function and
Marginal Cost (MC) function. Calculate the profit-maximizing quantity of output for the
monopolist. Determine the price the monopolist will charge at this output level. Calculate
the monopolist's maximum total profit and the deadweight loss created by the monopoly
compared to the perfectly competitive outcome.

b) A monopolist faces a demand curve given by P = 90 − 3Q. Its Total Cost function is
TC
= 30 + 5Q. Derive the monopolist's Marginal Revenue function and Marginal Cost
function. Calculate the revenue-maximizing quantity. Calculate the profit-maximizing
quantity of output for the monopolist. Determine the price the monopolist will charge at
this output level. Calculate the monopolist's maximum total profit and the deadweight
loss created by the monopoly compared to the perfectly competitive outcome.

c) A monopolist faces a demand curve given by P = 300 − 2Q. Its Total Cost function is
TC = 100 + 50Q + Q2. Derive the monopolist's Marginal Revenue function and
Marginal Cost function. Calculate the revenue-maximizing quantity. Calculate the
profitmaximizing quantity of output for the monopolist. Determine the price the
monopolist will charge at this output level. Calculate the monopolist's maximum total
profit and the deadweight loss created by the monopoly compared to the perfectly
competitive outcome.

d) A monopolist faces a demand curve given by P = 100 − Q. Its Total Cost function is
TC = 50 + 10Q + Q2. Derive the monopolist's Marginal Revenue function and
Marginal Cost function. Calculate the revenue-maximizing quantity. Calculate the
profit-maximizing quantity of output for the monopolist. Determine the price the
 monopolist will charge at this output level. Calculate the monopolist's maximum total
profit and the deadweight loss created by the monopoly compared to the perfectly
competitive outcome.

LESSON 3: CHOICES IN RISKY –

INTERTEMPORAL CHOICES
PART 0. TAKE NOTE

PART A. MULTIPLE CHOICES

Question 1. If a lottery has two possible outcomes: Outcome A with value VA and
probability PA, and Outcome B with value VB and probabilty PB. The expected
monetary value (EMV/EV) of this lottery is given by:

A. EMV = VA + VB

B. EMV = ([Link])/(PA + PB)

C. EMV = (VA + VB)/(PA + PB)

D. EMV = ([Link]) + ([Link])

Question 2. To calculate the Present Value (PV) of a future amount (FV) that will be
received in n years, given an annual interest rate r, the correct formula is:

A. PV = FV.(1 + r)n

B. PV = FV/(1 + rn)

C. PV = FV/(1 + r)n
D. PV = FV + r.n

Question 3. The absolute value of the slope of the intertemporal budget constrant, when
current consumption is on the horizontal axis and future consumption on the vertical
axis, represents:

A. The consumer’s marginal rate of time preference.

B. The rate of inflation.

C. (1 + r), where r is the interest rate, signifying the price of current consumption in
terms of future consumption.

D. The total lifetime income.

Question 4. Intertemporal choice is the study of how individuals make decisions that
involve:

A. Immediate costs and benefits

B. Costs and benefits spread over time

C. Costs and benefits with uncertain outcomes

D. None of the above

Question 5. Risk aversion is the tendency to:

A. Prefer risky options over certain ones

B. Avoid risky options in favor of certain ones

C. Be indifferent between risky and certain options

D. None of the above

Question 6. Intertemporal choice and uncertainty choice are often intertwined in

realworld decisions, such as:
A. Choosing a career path

B. Investing in stocks

C. Saving for retirement

D. All of the above

Question 7. What is intertemporal choice?

A. Choosing between different goods at the same time.

B. Choosing between different quantities of a good at different points in time.

C. Choosing between different qualities of a good at the same time.

D. Choosing between different brands of a good at different prices.

Question 8. A person with a high discount rate is more likely to: A.

Save money for the future.

B. Spend money impulsively.

C. Invest in long-term projects.

D. Delay gratification.

Question 9. Which of the following best describes Expected Utility Theory?

A. A theory that suggests people make decisions based on the highest expected payoff.

B. A theory that suggests people make decisions based on the highest potential gain.

C. A theory that suggests people make decisions based on the weighted average of the
utility of possible outcomes.

D. A theory that suggests people make decisions based on the lowest possible loss.

Question 10. Intertemporal choice is relevant to a wide range of decisions, including: A.

Saving for retirement.

B. Investing in education.

C. Making healthy lifestyle choices.

D. All of the above.

Question 11. The concept of time preference suggests that people:

A. Value future rewards more than present rewards

B. Value present rewards more than future rewards

C. Are indifferent to the timing of rewards

D. Are unable to delay gratification

Question 12. How does the compound interest effect affect the present value of a future
cash flow?

A. Increases the present value.

B. Decreases the present value.

C. Does not affect the present value.

D. The effect is unknown.

PART B. TRUE/FALSE EVALUATION

Cluster 1. Economic theory generally assumes that consumers are rational

decisionmakers.

a) This assumption implies that consumers always make choices that maximize their
perceived utility within their given constraints.

b) Rational consumers are never influenced by marketing or advertising in their

purchasing decisions.

c) This assumption suggests that consumers have perfect information about all
available goods, services, and their prices.
d) Even rational consumers might make decisions that turn out to be suboptimal due
to unforeseen circumstances or imperfect information.

Cluster 2. You invest $1,000 today in a savings account that offers an annual interest rate
of 5%.

a) The future value of this investment after exactly 3 years will be $1,157.625.

b) To have $1,000 in this account exactly 5 years from now, you would need to deposit
less than $800 today.

c) If the annual interest rate were to increase to 6%, the future value of the $1,000 after 3
years would be less than $1,170.

d) Due to compounding, the investment grows at a constant monetary amount each year.

Cluster 3. A person faces a gamble with two possible outcomes: a 60% chance of
winning $200, and a 40% chance of winning $50.

The person's utility function for money is U = X0,5.

a) The expected monetary value (EMV) of this gamble is exactly $140.

b) The expected utility (EU) of this gamble is approximately 11.31.

c) The utility of the expected monetary value (U(EMV)) for this gamble is
approximately
11.83.

d) Since the expected utility (EU) is greater than the utility of the expected monetary
value (U(EMV)), this person is risk-loving.

Cluster 4. A consumer has current income Y1 = $100 and future income Y2 = $121. The
market interest rate is r = 10% per period. The consumer's intertemporal utility function
is U(C1,C2) = C1⋅C2, where C1 is current consumption and C2 is future consumption.
a) The absolute value of the slope of the consumer's intertemporal budget constraint is
1.1.

b) The consumer's optimal current consumption (C1) is $105.

c) The consumer's optimal future consumption (C2) is $115.50.

d) At the optimal consumption bundle, this consumer is a saver.

Cluster 5. A person is faced with a gamble: a 50% chance of winning $200 and a 50%
chance of winning $0. Their current wealth is $100.

a) The expected value of this gamble is $100.

b) A risk-averse individual would prefer to take this gamble over receiving a certain
payment of $100.

c) If a person has a utility function U(W) = √𝑊, their expected utility from the gamble
(starting with $100) is .

d) For a risk-neutral individual, the expected utility of the gamble is equal to the utility
of the expected value of the gamble.

PART C. SHORT ANSWER FILL-IN

Question 1. A decision-maker faces a lottery with a 50% chance of winning $100 and a
50% chance of winning $0. If their utility function is U(x) = x2, their expected utility
from this lottery is ____, and they are considered ____ (attitude towards risk).

Question 2. A company is evaluating a project with two outcomes: a 70% chance of a $1

million profit and a 30% chance of a $200,000 loss. The expected monetary value of this
project is ____ dollars. Given this project's uncertainty, a manager who is generally
riskaverse would likely demand a positive ____ to undertake it.

Question 3. Consider a fair coin toss where you win $100 for heads and lose $100 for
tails. The expected monetary value of this gamble is ____ dollars. For a risk-neutral
individual, their expected utility from this gamble would be ____ to the utility of the
expected monetary value.

Question 4. A recent graduate, with a concave utility function U = C0.5, has to choose
how to manage their current savings of $50,000 to cover a potential future expense of
$20,000 that may occur exactly one year from now with a 40% probability. They can
invest their savings in a risk-free bond yielding 5% interest per year, or they can use part
of their savings to buy insurance for the future expense, where the insurance premium is
$0.40 for every $1 of coverage, paid today. To maximize their expected utility over the
next year (by managing the future risk), the optimal amount of insurance coverage they
should purchase for the $20,000 expense is ____ dollars. If they purchase this optimal
amount of insurance and invest the remaining funds in the risk-free bond, the expected
value of their total savings at the end of the year (after considering the investment returns
and potential loss/payout) will be exactly ____ dollars.

Question 5. A decision-maker faces a gamble where there is a 60% chance of winning

$200 and a 40% chance of losing $100. The expected value of this gamble is _________.

Question 6. You are offered an investment that promises to pay you $1,210 in two years.
If the annual interest rate is 10%, the present value of this future payment is ______. If
you instead invest $1,000 today at an annual interest rate of 5%, the future value of your
investment in three years will be ________.

PART D. SHORT ESSAY

Question 1. What is a risk averse person? Why does one person seem to dislike risk,
while another likes risk? How to diversify your portfolio to avoid risk?

Question 2.

a) A consumer has initial wealth of $100,000. There is a 25% probability that they
will incur a loss (e.g., medical expense) of $30,000. Their utility function is U = C0,5,
where C is their consumption level. They can purchase insurance at a premium of $0.30
for every $1 worth of coverage. Calculate the optimal amount of insurance coverage this
consumer should purchase to maximize their expected utility. Then, determine their
consumption levels in both the "loss" and "no loss" states given this optimal coverage.
Show your detailed calculations.

b) A consumer has current income (Y1) of $50,000 and expects to earn $60,500 next
year (Y2). The market interest rate is 10% per year. The consumer's intertemporal utility
function is U = C10.5C20.5, where C1 is current consumption and C2 is future
consumption. Calculate the consumer's optimal consumption levels for both the current
period (C1*) and the future period (C2*). Show your detailed calculations, including the
derivation of the intertemporal budget constraint and the application of the optimality
condition. Based on your results, explain whether this consumer will be a net saver or a
net borrower in the current period, and by how much.

Question 3. A risk-averse individual with a utility function U(x) = ln(x) is offered a

choice between two gambles. Assume the individual's current wealth is $150, which is
the starting point for consumption in each scenario:

Gamble A: Win $100 (net gain) with 75% probability, or lose $20 (net loss) with 25%
probability.

Gamble B: Win $50 (net gain) with 90% probability, or lose $5 (net loss) with 10%
probability.

Calculate the expected utility for the individual if they choose Gamble A, and if
they choose Gamble B. Based on your calculations, which gamble would the individual
choose?

Question 4.

a) You have the option to invest in two stocks:

- Stock A: 60% chance of a 10% return, 40% chance of a 5% loss.
- Stock B: 50% chance of a 15% return, 50% chance of a 10% loss.
 Assuming your utility function for return is U(R) = R0.5, which stock would you
choose based on expected utility?

b) You need a new car and are considering two options:

- Option A: Purchase a new car for $25,000 with no loan (pay upfront).
- Option B: Finance a used car for $18,000 with a 4% interest rate for 4 years.
You'd need a down payment of $3,000 today.

Considering only the loan amount, what will be the total amount you'd pay for the
used car after 4 years with the loan (including interest)? If you expect the new car to hold
its value better than the used car, explain which option might be financially preferable
using the concept of present value.

LESSON 2: PREFERENCES – UTILITY

AND OPTIMAL CHOICE OF THE CONSUMER

PART 0. TAKE NOTE

PART A. MULTIPLE CHOICE

Question 1. Which of the following best defines an indifference curve?

A) A curve that shows the different quantities of two goods a consumer can buy given
their income and prices.

B) A curve that shows all consumption bundles that yield the same level of utility or
satisfaction to the consumer.

C) A curve that represents the consumer's demand for a single good at different prices.

D) A curve that illustrates the production possibilities frontier for a firm.

Question 2. One of the key properties of a standard indifference curve is that it: A)

Is always upward-sloping.
B) Can intersect another indifference curve at multiple points.

C) Is typically bowed inward (convex to the origin).

D) Represents increasing levels of satisfaction as you move along the curve.

Question 3. Why do indifference curves typically slope downward? A)

Because consumers prefer more of both goods.

B) Because to maintain the same level of utility, if you consume more of one good, you
must consume less of the other.

C) Because the marginal rate of substitution is constant along the curve.

D) Because prices of goods are usually positive.

Question 4. Which of the following utility functions represents perfect substitutes?

A) U(X,Y) = min{2X;3Y}

B) U(X,Y) = X2Y3

C) U(X,Y) = 4X + 5Y

D) U(X,Y) = √𝑋𝑌

Question 5. Suppose a consumer views left shoes (L) and right shoes (R) as perfect
complements, consumed in a 1:1 ratio. If they have a utility function U(L,R) = min{L,R}
and they possess 5 left shoes and 3 right shoes, what is their utility level?

A) 8

B) 5

C) 3

D) It cannot be determined without prices.

Question 6. Graphically, indifference curves for perfect complements are represented by:

A) Downward-sloping straight lines.

B) L-shaped curves with the kink at the optimal consumption ratio.

C) Curves bowed outward from the origin.

D) Horizontal straight lines.

Question 7. Which of the following statements is true regarding a standard Cobb-

Douglas utility function, U(X,Y) = XY where  > 0 and  > 0.

A) It exhibits increasing marginal utility for both goods.

B) It always represents preferences for perfect substitutes.

C) The sum of the exponents (α + β) must equal 1 for the function to be valid.

D) It implies that a consumer will always spend a constant proportion of their income on
each good.

Question 8. A person consumes slices of pizza and reports the following utility:

1st slice: 20 utils

2nd slice: 15 utils

3rd slice: 10 utils

4th slice: 5 utils

5th slice: 0 utils

6th slice: -5 utils

What is the Total Utility after consuming 4 slices of pizza, and what is the Marginal
Utility of the 5th slice?

A) Total Utility: 45 utils; Marginal Utility: 5 utils

B) Total Utility: 50 utils; Marginal Utility: 0 utils

C) Total Utility: 45 utils; Marginal Utility: 0 utils

D) Total Utility: 50 utils; Marginal Utility: -5 utils

Question 9. Which of the following statements accurately describes the implication of

strictly convex preferences in consumer theory?

A) Indifference curves are straight lines, indicating a constant marginal rate of

substitution.

B) A consumer would prefer extreme bundles over a balanced combination of goods.

C) The marginal rate of substitution is increasing as the consumer consumes more of one
good.

D) Averages are preferred to extremes; consumers generally prefer variety in their

consumption bundles.

Question 10. The "saturation point" in consumption for a particular good is best
described as the point where:

A) Total Utility begins to increase at an increasing rate.

B) Marginal Utility becomes negative.

C) Marginal Utility reaches its maximum value.

D) Total Utility is maximized, and Marginal Utility is zero.

Refer to the provided thread to answer from question 11 to question 12: Consider
a consumer whose preferences are represented by indifference curves that are typically
bowed inward (convex to the origin).

Question 11. The property of diminishing marginal rate of substitution means that as a
consumer consumes more of good X and less of good Y, the amount of good Y they are
willing to give up to get one more unit of good X: A) increases.
B) decreases.

C) remains constant.

D) cannot be determined without specific utility values.

Question 12. If a consumer exhibits diminishing marginal rate of substitution, it implies

that they generally:

A) prefer extreme bundles over balanced bundles of goods.

B) value variety and a mix of goods in their consumption.

C) are willing to trade away increasing amounts of one good for an additional unit of
another.

D) have preferences for perfect complements.

PART B. TRUE/FALSE EVALUATION

Cluster 1. A consumer's demand for Good A and Good B changes as their income (M)
fluctuates:

When M = $100, the consumer buys 5 units of Good A and 10 units of Good B.

When M = $150, the consumer buys 8 units of Good A and 8 units of Good B.

When M = $200, the consumer buys 10 units of Good A and 7 units of Good B.

The prices of Good A and Good B remain constant.

a) Based on the data, Good A is a normal good

b) Based on the data, Good B is an inferior good.

c) If a good is a normal good, its income elasticity of demand is positive.

d) If Good B were a neutral good, the quantity demanded would remain constant as
income increases.
Cluster 2. A consumer has an income of $100. The price of Good X is $10, and the price
of Good Y is $5. The consumer's preferences are represented by the utility function

U(X,Y) = XY.

a) The marginal utility of X (MUX) is Y and the marginal utility of Y (MUY) is X.

b) The consumer's optimal consumption bundle is X = 5 units and Y = 10 units.

c) If the consumer buys 4 units of Good X, they can afford to buy 12 units of Good Y.

d) If the consumer's income were to increase to $120, the new optimal consumption of
Good X would be 6 units.

Cluster 3. A consumer has a utility function U(X,Y) = X0.5Y0.5. The consumer's

income is I = $200. The price of good X is PX = $4, and the price of good Y is PY = $5.

a) At the optimal consumption bundle, the quantity of good X consumed is 25 units.

b) At the optimal consumption bundle, the marginal utility per dollar spent on good X
equals the marginal utility per dollar spent on good Y.

c) If the price of good X increases to PX = $8, the consumer will consume less than 20
units of good X at the new optimal choice.

d) At the point (X = 10, Y = 30), the Marginal Rate of Substitution of X for Y (MRSXY)
is
3.

Cluster 4. The market for a specific good (Good X) is characterized by the following
demand and supply equations:

Demand: QD = 100 – 2P Supply: QS = 3P

Additionally, a consumer has a utility function U(X,Y) = 2X + Y.

The price of Good Y (PY) is $10, and the consumer's income (M) is $100.
a) The equilibrium price in the market for Good X is $20.

b) At the equilibrium price, the equilibrium quantity of Good X is 60 units.

c) Given the consumer's utility function U(X,Y) = 2X + Y, and assuming the market
price of Good X is its equilibrium price, the consumer's optimal choice would involve
consuming only Good X and no Good Y.

d) If the market price of Good X were $30 instead of the equilibrium price, the consumer
(with PY = $10 and M = $100) would optimally choose to consume 0 units of Good
X.

PART C. SHORT ANSWER FILL-IN - Complete the following blank with the suitable
figure/phrase (NO MORE THAN 3 WORDS OR 1 NUMBER).

Question 1. An indifference curve represents all combinations of two goods that yield the
same level of _________ to a consumer. A higher indifference curve represents a
_________ level of utility. The slope of an indifference curve at any point is called the
_________, which shows the rate at which a consumer is willing to substitute one good
for another while maintaining the same level of utility.

Question 2. For goods that are _________, consumers always consume them in fixed
proportions, and their indifference curves are L-shaped. An example would be tea (T)
and honey (H). If the utility function is U(T,H) = min{2T;H}, and you have 3 teas and 7
honey spoons, your utility is _________. For goods that are _______, consumers are
willing to substitute one for another at a constant rate, and their indifference curves are
straight lines. An example would be red pens and blue pens, where one red pen provides
the same utility as one blue pen. If the utility function is U(R,B) = R + B, and you have 4
red pens and 6 blue pens, your utility is _______.

Question 3. If a consumer's total utility function for good X is given by

TU(X) = 10X − 0.5X2, the marginal utility of consuming the 5th unit of X is ________.
Question 4. A consumer has an income of I = $100. The price of good X is PX = $10 and
the price of good Y is PY = $5. If the consumer's utility function is U(X,Y) = XY, the
optimal quantity of good X consumed is ____________________.

Question 5. For a consumer with the utility function that U(X,Y) = XY2. The utility level
achieved at the point (X = 4; Y = 5) is ______. The marginal rate of substitution of X for
Y is given by the expression _________.

Question 6. For a consumer with the utility function U(X,Y) = min{X;2Y}. To achieve a
utility level of U = 10, without X, the minimum quantity of Y required is ____ units. If
the consumer has 8 units of X and 3 units of Y, their utility level is ____.

PART D. SHORT ESSAY

Question 1. Explain the law of diminishing marginal utility? What is the difference
between total utility and marginal utility?

Question 2. Using a clearly labeled graph, illustrate how a consumer determines their
optimal consumption bundle given their fixed income and the prices of two goods (X and
Y). Your graph should include at least two indifference curves and a budget constraint.
Explain the economic significance of the point where the consumer achieves optimality.
In your explanation, discuss how the slope of the indifference curve (Marginal Rate of
Substitution) and the slope of the budget constraint (price ratio) are related at this
optimal point, and what this relationship implies about the consumer's decision-making.

Question 3. Explain how a rational consumer determines their optimal consumption

bundle for two goods, utilizing the concepts of indifference curves and budget
constraints. Clearly describe what each component represents and how their interaction
identifies the utility-maximizing point. Furthermore, analyze how a significant decrease
in the price of one of these goods would affect the consumer's optimal choice. In your
explanation, explicitly differentiate and discuss the roles of the substitution effect and the
income effect in determining the new equilibrium quantity of the cheaper good.
Question 4. Suppose a consumer is currently consuming a bundle of goods X and Y such
that the ratio of the marginal utility of X to its price is greater than the ratio of the
marginal
utility of Y to its price (MUX / PX > MUY / PY). Explain, using the concept of utility
maximization and the consumer's budget constraint, why this consumer is not at their
optimal consumption bundle. Graphically illustrate this non-optimal point on a budget
constraint and indifference curve diagram. Then, describe the specific adjustments in
consumption that the consumer should make to reach their utility-maximizing bundle,
and explain the economic reasoning behind these adjustments, assuming the consumer
aims to maximize utility given their budget.

LESSON 1: THE BUDGET CONSTRAINT AND THE FACTORS’

AFFECTING
Part O. TAKE NOTES

Part A. MULTIPLE CHOICE

Question 1. What does the budget constraint represent for a consumer? A.

The maximum satisfaction a consumer can achieve.

B. The limit on the consumption bundles a consumer can afford given their income and
prices.

C. The optimal combination of goods a consumer will choose.

D. The difference between a consumer’s wants and needs.

Question 2. The budget line graphically illustrates:

A. All possible consumption bundles that provide the same level of utility.

B. The boundary between affordable and unaffordable consumption bundles.

C. The income elasticity of demand for different goods.

D. The price elasticity of supply for different goods.

Question 3. Assuming a consumer has two goods, X and Y, with respective prices PX and
PY, and an income I. What is the budget equation in this situation?

A. PX + PY = I
B. PX * X + PY * Y = I
C. X/PX + Y/PY = I
D. I = X + Y
Question 4. The standard budget line for two goods, with constant prices, is typically:

A. Convex to the origin

B. Concave to the origin

C. A straight, downward-sloping line

D. A straight, upward-sloping line

Question 5. A point on the budget line represents a consumption bundle where the
consumer:

A. Has spent less than their total income.

B. Has save a portion of their income.

C. Has spent exactly their total income.

D. Has spent more than their total income.

Question 6. The slope of the budget line is determined by: A.

The consumer’s income.

B. The consumer’s preferences.

C. The quantity consumed of the two goods.

D. The relative prices of the two goods.

Question 7. Points located outside the budget line represent:

A. Consumption bundles that are unaffordable with the current income and prices.

B. Efficient allocations of resources.

C. Consumption bundles that are affordable with the current income and prices.

D. Consumer surplus.

Refer to the provided thread to answer from

question 8 to question 12
Mai Linh has a budget of 300,000 VND to allocate between the purchase of soft
drinks and cakes. The price of each can of soft drink is 15,000 VND, and the price of
each cake is 30,000 VND.
Question 8. The maximum number of cakes she can purchase if she buys no soft drinks
is:

A. 10 B. 15 C. 20 D. 30

Question 10. The budget line for Mai Linh, with soft drinks (S) on the horizontal axis
and cakes (C) on the vertical axis, can be represented by the equation:

A. 15 000S + 30 000C = 300 000 C. S + C = 300 000

B. 30 000S + 15 000C = 300 000 D. 45 000 (S + C) = 300 000

Question 11. The slope of Mai Linh's budget line (with soft drinks on the horizontal axis
and cakes on the vertical axis) is:

A. -2, indicating that for every additional soft drink purchased, 2 cakes must be foregone.

B. -0.5, indicating that for every additional soft drink purchased, 0.5 of a cake must be
foregone.
C. 2, indicating that for every additional cake purchased, 2 soft drinks must be foregone.

D. 0.5, indicating that for every additional cake purchased, 0.5 of a soft drink must be
foregone.

Question 12. Which of the following factors would cause Mai Linh's budget line to shift
inward and parallel to the original line?

A. An increase in the price of soft drinks.

B. A decrease in the price of cakes.

C. A decrease in Mai Linh's total budget.

D. An equal proportional increase in the prices of both soft drinks and cakes.

Part B. True/False Evaluation

Cluster 1. Given the following propositions:

a) A college student with a fixed monthly allowance faces a budget constraint,

limiting their spending on textbooks, food, and entertainment.

b) A per-unit tax on groceries would shift the budget line outward, parallel to the
original line.

c) A government with a limited budget must decide how much to allocate to

healthcare and education, demonstrating a real-world application of budget constraints.

d) A company with a fixed marketing budget may choose between TV and social
media advertising, illustrating the concept of opportunity cost.

Cluster 2. Trang has a monthly budget of 500,000 VND for entertainment. She enjoys
two main activities: going to the cinema (costing 50,000 VND per visit) and eating out at
her favorite cafe (costing 100,000 VND per visit).
a) Trang's budget line for cinema visits and cafe visits represents all the
combinations of these two activities that she can afford with her 500,000 VND
entertainment budget.

b) If Trang goes to the cinema 5 times this month, she will have 250,000 VND
remaining to spend at the cafe, allowing her to visit it 2.5 times.

c) If the price of cinema tickets increases to 75,000 VND per visit, while the cost of
visiting the cafe remains the same, Trang's budget line will pivot inward along the
"cinema visits" axis, reducing the maximum number of cinema trips she can afford.

d) Any combination of cinema visits and cafe visits that costs Trang exactly 500,000
VND lies on her budget line, representing that she has fully exhausted her entertainment
budget.

Cluster 3. Analyze how changes in income and prices affect a consumer's budget line for
two commoduties, commodity 1 and commodity 2.

a) An increase in the price of Good 1, with income and the price of Good 2 held
constant, will cause the budget line to rotate inward along the axis representing Good 1.

b) If both the price of Good 1 and the price of Good 2 increase by the same
percentage, and income also increases by the same percentage, the budget line will
remain unchanged.

c) A non-parallel shift of the budget line always indicates a change in the consumer's
income.

d) If the government imposes a per-unit tax on Good 2, the budget line will become
steeper if Good 2 is plotted on the vertical axis.

Cluster 4. A consumer has a budget line defined by the equation: 3X + 6Y = 180.

a) Any consumption bundle that satisfies the inequality 3X + 6Y  180 lies within the
affordable region.
b) The bundle on (X;Y) = (40;10) is unaffordable for this consumer.

c) The intercept on the X-axis of the budget line indicates that the consumer can afford a
maximum of 60 units of good X if no units of good Y are purchased.

d) The slope of this budget line is 2.

Part C. Short Answer Fill-in

Complete the following blank with the suitable figure/phrase (NO MORE THAN
3 WORDS OR 1 NUMBER).

Question 1. Linh has ₫600,000 per month for entertainment. Movie tickets cost ₫60,000
each, and snacks at the cinema cost ₫30,000 per visit. If Linh goes to the cinema 4 times
this month and buys snacks each time, the remaining amount of her budget available for
other entertainment is: ________________.

Question 2. The price of good X is PX = $5 and the price of good Y is PY=$10. If a

consumer's income is M = $100, the slope of their budget line with good X on the
horizontal axis is: ________________.

Question 3. Khanh initially could afford a maximum of 20 units of good A if she spent
her entire income on it, or 30 units of good B if she spent all her income on good B. If
her income remains the same but the price of good A doubles, the new maximum number
of units of good A she can afford is: ________________.

Question 4. Minh's budget line for apples (A) and bananas (B) is given by the equation
2A+1B=20. If the price of bananas doubles, the new equation for his budget line
(assuming income remains constant) will have the coefficient of B as:
________________.

Question 5. A consumer has a fixed income and faces constant positive prices for two
goods. If their income increases by 10% and the prices of both goods also increase by
10%, the overall change in the size of their budget set (increase, decrease, or no change)
is: ________________.

Question 6. Huy allocates his weekly food budget between rice and vegetables. Suppose
the price of vegetables increases. To determine the new maximum amount of rice Huy
can buy if he buys no vegetables, you would need to know his total food budget and the
price of ________________.

Part D. Short Essay

Question 1. How the Budget Line Changes?

Question 2. Sarah has a monthly transportation budget of $100. Her options are taking
the bus (costing $2 per ride) or using a ride-sharing service (costing $10 per ride).

a) Draw a hypothetical budget line for Sarah, with bus rides on one axis and ride-
sharing rides on the other. Label the axes and intercepts.

b) Explain what the slope of this budget line represents in the context of Sarah's
transportation choices.

c) Suppose the local government offers a subsidy that reduces the cost of each bus
ride to $1. Analyze how this subsidy would affect Sarah's budget line and her affordable
transportation options.

Question 3. Consider a student with a limited amount of time each week to allocate
between studying and working a part-time job to earn income.

a) Explain how the student's total available time acts as a budget constraint. What
are the "prices" in this scenario?

b) If the student's wage rate increases, how does this affect their "time budget
constraint" and the opportunity cost of studying?
c) Discuss how the student might reallocate their time between studying and
working in response to the wage increase, considering the concept of the budget
constraint.

Question 4. Many developing countries face challenges with access to clean water and
electricity. For a low-income household in such a country, their limited income acts as a
severe budget constraint when deciding how much to spend on these essential resources
versus other necessities. Discuss the trade-offs this household might face. How might
government or non-profit interventions (e.g., subsidies for solar power, community water
wells) affect their budget constraint and improve their access to these essential goods?