Sample examination paper for familiarity and practice only

London Business School

Emre Ozdenoren
Applied Microeconomics Sample B
Total Points: 100
Questions 1 – 10: 4 points each Question 11 – 13: 20 points each

Examination Description and Instructions:

This is an open-book and individual exam. The actual final exam will have a similar format but
it will be implemented on Canvas. The exam covers all the topics we study during the course.
As a result, the actual exam questions might cover different topics.

There are 10 multiple choice questions and 3 open questions. Each multiple choice question
has only one correct answer. If several answers seem possible, answer with the best answer.
A correct answer is worth 4 points. No answer or a wrong answer is worth 0 points.

Good Luck!
1) Assume that the market for instant noodles is competitive. Suppose the incomes of buyers
of instant noodles fall. If instant noodles are an inferior good, in the short run, this will lead to

a) A lower price and lower quantity sold for instant noodles.

b) A higher price and higher quantity sold for instant noodles.
c) A lower price for instant noodles but the effect on quantity sold is ambiguous.
d) A higher price for instant noodles but the effect on quantity sold is ambiguous.

2) Assume that caustic soda industry is competitive. Which of the following events would
result in a decrease in equilibrium price and an ambiguous change in equilibrium quantity for
caustic soda?

a) Supply shifts right and demand shifts right

b) Supply shifts right and demand shifts left
c) Supply shifts left and demand shifts right
d) Supply shifts left and demand shifts left

3) The bagel industry is perfectly competitive. Under a long term contract a bagel shop has
the option to buy up to QA bagels from a supplier at price cA each week. It can also produce
QH bagels per week at its own facility at a constant cost cH per bagel. Consider the following
statements:
(i) If cA > cH then the bagel shop will never exercise the option to purchase bagels from the
supplier.
(ii) If cH > cA, the bagel shop may or may not produce at its own facility.
(iii) If market price of bagels exceeds cH the bagel shop will not exercise the option to
purchase bagels from the supplier.

a) Only (i) is true.

b) Only (ii) is true.
c) Only (iii) is true.
d) None of the statements is true.

4) A monopolist produces a product with a (constant) marginal cost equal to £500 per unit
and it has no other costs. The demand for the product is Q=1500-P. The monopolist’s profits
are equal to

a) £100000
b) £150000
c) £200000
d) £250000

5) An industry faces a demand curve D(P)=900-3P. The short-run market supply curve is
S(P)=3P. Suppose firms in this industry have constant MC which equals AVC. Suppose a
firm has AVC of £120/unit and ATC of £200. (Assume that there is zero salvage value for the
firm’s assets and no exit costs.)
a) This firm will suspend production in the short run and exit in the long run.
b) This firm will produce up to capacity in the short run and exit in the long run.
c) This firm will suspend production in the short run and stay in the industry in the long run.
d) This firm will produce up to capacity in the short run and stay in the industry in the long
run.

6) A consulting firm has just agreed to pay a higher rent for its office space. As a result of
this increase in rent, the firm should:

a) Charge more for its consulting services.

b) Charge less for its consulting services.
c) Charge either more or less, depending on the elasticity of demand.
d) Not make any change to the consulting fee it charges.

7) The (short-run) market supply curve for flax is S(P) = 2P, where P is the price in euros per
units and S(P) is the units of flax supplied per year. Suppose P=10. Producer surplus is:

a) 100
b) 200
c) 300
d) 400

8) A profit-maximizing monopolist faces a downward sloping demand curve and charges £12
for its product. Then:

a) Monopolist’s marginal revenue is £12

b) Marginal revenue is greater than 12
c) Marginal revenue is less than 12
d) All of the above are possible depending on its marginal cost

9) You are told that the price elasticity of demand is -3. You are also told that the market
price is 8 and the quantity demanded is 48. You also happen to know that the equation of the
demand curve is linear and given by Q = a+ bP where a and b are constants. The value of b
is:

a) -6
b) -18
c) -24
d) -48

10) Full-reinvestment average total cost is important to know when deciding

a) whether to enter the industry

b) whether to suspend production
c) whether to exit the industry
d) about the firm’s hiring decisions
Question 11

Lead is a commodity that is traded in a perfectly competitive global market that consists of
many small price-taking firms. The firms fall in two categories: Type 1 firms, located in the
U.S., and Type 2 firms, located in China. There are also potential entrants located in China.
Due to recent improvements in technology, these potential entrants have lower marginal cost
and higher capacity then the existing firms. The cost profiles of the existing firms and the
potential entrants are shown below:

Number of Marginal cost Average fixed Capacity of each

firms ($ per unit) cost at full firm (units per
capacity output year)
($/unit)
Type 1 (U.S.) 150 $10 $8 10,000
Type 2 100 $8 $6 15,000
(China)
Potential ---- $6 $6 20,000
Entrants in
China

Other information:
• For potential entrants, the investment required would be $1,000,000, and the cost of
capital is 10 percent.
• The world demand for lead is given by the equation: Q = 3,500,000 – 100,000P,
where P is $ per unit and Q is measured in units per year. This curve is also plotted in
the graph on the next page.

a) Plot the short run supply curve for the industry.

b) Given the number of producers currently in the market:

What is the short-run equilibrium price of lead?
What is the short-run market demand for lead at this equilibrium?
What is the equilibrium quantity of lead supplied by all Type 1 (U.S.) firms combined?
What is the equilibrium quantity of lead supplied by all Type 2 (Chinese) firms combined?

c) What is the exit price of a Type 1 (U.S.) firm?

d) What is the entry price (for potential entrants in China) into this market?

e) Now suppose that the Chinese government provides existing Chinese firms (Type 2) with
a subsidy of $6 per unit. Given the existing set of firms in the industry, what is the short-
run equilibrium price of lead?

f) Now assume that the Chinese government provides the subsidy to both existing Chinese
producers and any Chinese entrant. Everything else is unchanged.

What will be the long-run equilibrium price of lead?

How many Type 1 (U.S.) firms will be active in the market in the long run?
How many existing Type 2 (Chinese) firms will be active in the market in the long run? How
many new Chinese firms will enter in the market in the long run?
Question 12

A firm sells its product to two micro markets. Micro market 1 is characterized by the demand
curve Q1 = 7,500 – 500 P1, while micro market 2 is characterized by the demand curve Q2 =
40,000 – 2,000 P2. The marginal cost of production for this firm is equal to £5.

a) What is the inverse demand curve for the total market?

b) What is the optimal (profit maximizing) uniform price?

c) Suppose that the firm can perfectly distinguish customers from the two different micro
markets and can charge different prices in the two micro markets. What are the optimal
(profit maximizing) customized prices?

d) Suppose that the firm has total production capacity equal to 10,000 units, i.e., the amount
that it sells in total to the two micro markets cannot exceed its capacity which is 10,000 units.

(i) Find the optimal uniform price.

(ii) Under the assumptions of part c What are the optimal (profit maximizing) customized
prices?
Question 13

Two countries engage in the production of flax (an agricultural product). The market for flax
in each country is perfectly competitive. Producers within a country are identical, but they
differ across countries. Each producer has a constant marginal cost up to a particular level of
capacity. Throughout this analysis, let’s assume that there is no transportation cost between
the two countries.
The following table summarizes supply and demand information across these countries:

Country Marginal cost Total flax capacity Market demand

of country curve
Country 1 $40/unit 100 units D(P) = 200 – P
Country 2 $20/unit 200 units D(P) = 120 – P

a. What are the short-run market equilibrium prices and quantities of flax in country 1 and
country 2 if the two countries cannot trade with each other?
b. On a graph draw the world demand (i.e. combined demand from Country 1 and Country
2) for flax? (You will have world price on the vertical axis and the quantity demanded in the
two countries on the horizontal axis.)
c. Draw the short run world supply curve for flax. (You will have world price on the vertical
axis and the quantity supplied by the firms in the two countries on the horizontal axis.)
d. If the two countries engage in trade then the price of flax will be the same in both
countries. What is the short-run market equilibrium price and quantity of flax in the world
market if the two countries can engage in free trade with each other?
e. What is the producer surplus for the firms in Country 1 with and without free trade? Do
the firms in Country 1 win or lose from free trade? What is the producer surplus for the firms
in Country 2 with and without free trade? Do the firms in Country 2 win or lose from free
trade?