Question Pool Flashcards
You suddenly have an increase in your wage and you decide to buy less tuna, but more caviar. What
kind of goods are those?
A. Tuna is an inferior good and Caviar a normal good
B. Both are substitutes
C. Both are complements
D. Tuna is a normal good and Caviar an inferior good
A
Complements
Demand of good A decrease with an increase in
price of good B (and vice versa)
Examples: Coffee – Milk, Printer – Ink
cartridges
Substitutes
Demand of good A increases with an increase in
price of good B (and vice versa)
Examples: Coca Cola – Pepsi, Beef - Pork
Normal Goods
Demand of a good goes UP if income of buyer
goes up.
Example: Fuel (travel more), Cocktails
Inferior Goods
Demand of a good goes DOWN if income of buyer
goes up
Example: Canned food, Albert Heijn’s wine
You’ve been offered a job interview in Berlin for after graduation, but the company does not cover your
travel expenses. You really want the job, so you have to decide between four options of getting there.
At the moment you work at your current flexible student job for 10€ per hour instead of traveling.
Which one should you take?
1. Car: 6h travel; 50€ fuel
2. Plane: 3h travel; 100€ ticket
3. Train: 5h travel; 70€ ticket
4. Bus: 8h travel; 40€ ticket
A. Go by car
B. Go by plane
C. Go by train
D. Go by bus
A
Optimization
Calculate the total net benefit among the different alternatives and then choose the best one
• Total cost = direct cost + indirect cost
• 3 steps to optimum:
1. Convert all costs and benefits to the same units
2. Calculate total net benefit
3. Pick alternative with highest net benefit
If taxes are imposed on the supplier, in what direction does the supply curve shift?
If the government pays a subsidy to the supplier, in what direction does the supply curve shift?
A. Supply curve shifts to the left; supply curve shifts to the left.
B. Supply curve shifts to the right, supply curve shifts to the left.
C. Supply curve shifts to the left; supply curve shifts to the right.
D. Supply curve shifts to the right, supply curve shifts to the right.
C
Supply Curves
Suppliers have a higher cost of production because of the tax and therefore supply less.
Suppliers have a lower cost of production because of the subsidy and therefore supply more.
Consider the exam including both economics and accounting questions all of the same difficulty. You
have studied more for accounting than economics, so you are able to answer 3 accounting questions in
the same time as 2 economics questions. What is your opportunity cost of answering 1 economics
question?
A. 3 accounting questions.
B. 3/2
accounting questions.
C. 2 accounting questions.
D. 2/3
accounting questions.
B
Opportunity Cost
Opportunity Cost A = Loss in B /Gain in A
In this case, when considering the opportunity costs of answering economics questions (A), Loss in B is
defined as the number of accounting questions not answered (3). Gain in A is defined as the economics
questions you answer (2). This results in an opportunity cost of answering economics questions of: 3
2
accounting questions
Perfect competitive markets
Markets that are competitive are usually analyzed as perfectly competitive markets
• All buyers and sellers are price-takers, i.e. the market price is the only acceptable price
• Sellers produce identical goods
• Free entry and exit in the markets
• Invisible hand: in a perfectly competitive market, trying to focus only on self-interest is the option
that helps the well-being of society as a whole
The price of a phone decreases from 250€ to 200€, and the demand for that phone increases from
10,000 units to 10,500. What is the demand elasticity of that phone?
A. 0.25
B. 0.20
C. 4
D. 5
A
The income elasticity of a good A is 0.9. The income elasticity of a good B is -0.9. The cross-price
elasticity between these two goods is -1.2. Which statements are correct?
I. Good A is a normal good
II. Good B is a normal good
III. The goods are complements
A. I and III
B. II and III
C. I only
D. II only
A
Elasticity
Cross El < 0: the goods are complements
• Cross El > 0: the goods are substitutes
• Cross El = 0: there is no correlation between the goods
- Income El < 0: the good is inferior
- Income El > 0: the good is normal
- Income El > 1: the good is a luxury good
Two tutors at Success Formula, Giorgio and Niclas, decide to work together to prepare for the exam.
Giorgio can write 2 Marketing summaries per 1 hour, while Niclas can do 1. Niclas can summarize 2
Global Business articles in 1 hour, while Giorgio can do 3. Does it make sense for them to work together
and trade? (Assuming that all the summaries have the same quality)
A. No, as Giorgio has an absolute advantage in writing both Marketing and Global Business
summaries.
B. Yes, as Giorgio has a lower opportunity cost in writing Global Business summaries.
C. Yes, as Niclas should specialize in writing Global Business summaries.
D. Yes, as Niclas and Giorgio should both be writing Global Business and Marketing summaries.
C
To be able to provide tutoring, Success Formula has to rent the building it teaches in for 2000€ a
month. Let’s assume these fixed costs are unavoidable, as we cannot anticipate the demand
beforehand. During the month, Success Formula incurs variable costs of 20𝑄2 + 200𝑄. Let’s assume
Success Formula earns 37.5€ revenue per crash course, for each of the 8 students participating. At the
beginning of the month, after paying the fixed costs, Success Formula knows it could provide 10 crash
courses to students. Should Success Formula shutdown, or continue operating?
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A. Success Formula should shutdown, as the company will make losses.
B. Success Formula should not shutdown, as the company will make profits.
C. Success Formula should not shutdown, as the company will recover part of its fixed costs.
D. Success Formula should not shutdown, as it has built up cash reserves to cover the losses.
A
Shutdown
- Shutdown Condition: Variable Costs > Revenue
- Variable Costs: 20€ ∗ 102 + 200€ ∗ 10 = 4,000€ & Revenues: 8 * 37.5 * 10 = 3,000€
- Variable costs are higher than revenues → Shutdown.
Imagine tutoring is a perfectly competitive market anywhere in the Netherlands. Under which
conditions would Success Formula still consider to expand to the Rotterdam market? Also, if Success
Formula decides to enter, until which point would tutoring companies enter the market?
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A. As the markets are perfectly competitive, Success Formula would never consider to expand to the
Rotterdam market.
B. Tutoring companies would rather exit the Rotterdam market than enter it, as there are no profits to
be made in a perfectly competitive market under any condition.
C. Success Formula would enter the market when the average total cost curve is higher than marginal
revenue and the price, as there are still profits to be earned.
D. Success Formula would enter the market only when the average total cost curve is lower than
marginal revenue and the price, as there are still profits to be earned.
D
Let’s consider tutoring crash courses being a perfectly competitive market again. We face the same
demand and supply curves as before: 𝐷(𝑃) = 100 – 2𝑃 and supply S P = 2𝑃 / 3
. What would be the
consumer surplus in this case?
A. 12.5
B. 312.5
C. 156.25
D. Cannot be calculated given the information above
C
Consumer Surplus
1. Inverse Demand: 𝑃 𝑄 = 50 − 0.5𝑄 2. Price at Quantity 0: 𝑃(0) = 50 3. Consumer Surplus = (50 − 37.5) x 21 / 2 = 156.25
The following curves are given
D(P) = 200 – 20P
S(P) = 30P
What is the deadweight loss occuring from a 1€ tax imposed on the buyer?
A. 6
B. 12
C. 18
D. 24
A
Deadweight Loss
Given the curves:
D(P) = 200-20P
S(P) = 30P
D(P+t) = 200-20(P+t)
Calculate Equilibrium before tax:
200-20P = 30P
P = 4
Q = 120
Calculate new equilibrium prices and quantity 200-20(P+1) = 30P Price the seller gets = 3.6 Price the buyer pays = 3.6+1 = 4.6 Q = 108
Calculate deadweight loss
½ * (120 – 108) * 1 = 6
Two players are playing a simultaneous game. Both can choose between strategy A and B. If both select
strategy A, both get a payoff of 2. If both select strategy B, both get a payoff of 3. If both select a
different strategy, both get a payoff of 1. Is there a Nash Equilibrium (NE)?
A. 1 NE: (B,B)
B. 2 NE: (A,A), (B,B)
C. 1 NE: (A,A)
D. 4 NE: All strategies
B
Consider Success Formula is in a monopoly. To sell one more crash course Success Formula would have
to decrease the price for all of its crash courses. What happens if the price effect dominates the
quantity effect?
A. Total revenue increases
B. Total revenue decreases
C. After selling this crash course, equilibrium will certainly be reached
D. Total revenue will be maximized
B
Consider a fierce competition between two sandwich shops in Maastricht. Both use exactly the same
kind of bread, toppings, and have the same quality. That means they provide identical products.
Providing homogeneous products and paying rent in the same area also means they have the same cost
function. As the number of students is fixed and they only provide sandwiches to students with a
student card, they compete on prices. Where does this price war end?
A. As there are only two suppliers in the market, they will charge a higher price (P) than marginal cost
(MC).
B. It ends when P is equal to MC, as both want the whole demand in the market for themselves.
C. There is no price war, as both will work out a price together.
D. It is not possible to determine an exact price
B
In the long run, economic profits in a monopolistic competition will be _________ because of the shift of
the __________ as opposed to a shift in the __________ in perfect competition.
A. Negative, demand curve, supply curve
B. Zero, supply curve, demand curve
C. Zero, demand curve, supply curve
D. Positive, demand curve, supply curve
C
Monopolistic Competition
In a perfectly competitive industry, shifts in the supply curve cause
market changes.
In a monopolistic competition, the demand curve becomes flatter with
market entry. Market entry (exit) stops when average total cost is equal
to the profit-maximizing price, resulting in no economic profits.
Considering a binding price ceiling, what statement is wrong?
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A. A price ceiling will result in an equilibrium with a shortage of quantity supplied for the quantity
demanded
B. The price will be lower than the actual equilibrium price
C. A price ceiling can cause black markets
D. The quantity supplied in the market will be equal to the quantity demanded for that price
D
Andreas works at Success Formula and earns a wage of 100€ this year. Niclas works at Success Formula
as well and earns 50€ throughout the year. Success Formula has made a revenue of 650€ the same year.
What is the GDP of that small economy? (Assume that Andreas’ and Niclas’ wages, are the only
expenditures Success Formula has to pay)
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A. 650€
B. 800€
C. 700€
D. 550€
A
GDP Calculation
- Final goods approach
- Value added approach
- Income Approach: Add up all incomes of individuals including firms
100€ + 50€ + (650-150€) = 650€
All approaches lead to the same GDP.
GDP Deflator
GDP deflator = 𝑁𝑜𝑚𝑖𝑛𝑎𝑙 𝐺𝐷𝑃 / 𝑅𝑒𝑎𝑙 𝐺𝐷𝑃 ∗ 100
