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RULE Dual Degree Economics Entrance study materials
RULE Dual Degree Economics Entrance study resources

RULE Dual Degree Economics Entrance practice questions

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Question 1Microeconomics

A consumer's budget is 120 and the price of good X is 6 while the price of good Y is 4. What is the maximum quantity of good Y the consumer can buy if the entire budget is spent on Y?

  1. 40
  2. 20
  3. 24
  4. 30 Correct answer.

Explanation

The budget constraint is Px·X + Py·Y = M. Spending everything on Y means X = 0, so Y = M/Py = 120/4 = 30. Dividing by the price of the good on the axis gives the intercept of the budget line.

Question 2Microeconomics

In a standard indifference-curve diagram with good X on the horizontal axis, the marginal rate of substitution of X for Y (MRSxy) at a point equals which of the following?

  1. The slope of the budget line at that point
  2. The absolute value of the slope of the indifference curve at that point Correct answer.
  3. The ratio of the prices of X and Y
  4. The total utility obtained from the bundle

Explanation

The MRSxy is defined as the amount of Y the consumer will give up for one more unit of X while staying on the same indifference curve. Geometrically this is the absolute value of the indifference curve's slope, equal to MUx/MUy.

Question 3Microeconomics

A firm's total cost function is TC = 200 + 10Q + 2Q². What is the marginal cost at Q = 5?

  1. 10
  2. 20
  3. 30 Correct answer.
  4. 40

Explanation

Marginal cost is the derivative of total cost with respect to Q: MC = 10 + 4Q. At Q = 5, MC = 10 + 20 = 30. The fixed term 200 disappears on differentiation.

Question 4Microeconomics

If a good has an income elasticity of demand equal to −0.6, the good is best classified as which of the following?

  1. An inferior good Correct answer.
  2. A normal good
  3. A Giffen good
  4. A luxury good

Explanation

Income elasticity measures the percentage change in quantity demanded for a percentage change in income. A negative value means quantity demanded falls as income rises, which defines an inferior good.

Question 5Microeconomics

A perfectly competitive firm faces a market price of 25 and has marginal cost MC = 5 + 2Q. What is the profit-maximizing output level?

  1. 10 Correct answer.
  2. 12.5
  3. 15
  4. 20

Explanation

A competitive firm maximizes profit where price equals marginal cost. Setting 25 = 5 + 2Q gives 2Q = 20, so Q = 10. At this output marginal revenue equals marginal cost.

Question 6Microeconomics

In a Cournot duopoly with two identical firms facing linear demand, each firm's reaction function shows its best-response output as a function of which variable?

  1. The market price set by a regulator
  2. The number of consumers in the market
  3. The fixed cost of the rival firm
  4. The output chosen by the rival firm Correct answer.

Explanation

In Cournot competition each firm chooses quantity taking the rival's quantity as given. The reaction function expresses the profit-maximizing output of one firm for each possible output of the other.

Question 7Microeconomics

A consumer's utility is U = X^0.5 · Y^0.5, with income 100, Px = 2 and Py = 2. What is the optimal quantity of X?

  1. 50
  2. 25 Correct answer.
  3. 20
  4. 10

Explanation

With Cobb-Douglas utility of the form X^a·Y^b, the consumer spends the fraction a/(a+b) of income on X. Here a = b = 0.5, so half of income goes to X: 50/2 = 25 units.

Question 8Microeconomics

A price ceiling set below the equilibrium price in a competitive market will typically produce which outcome?

  1. No change in quantity traded
  2. A surplus of the good
  3. A shortage of the good Correct answer.
  4. An increase in producer surplus

Explanation

A binding price ceiling holds price below equilibrium, so quantity demanded exceeds quantity supplied. The gap between them is a shortage, and the quantity actually traded falls to the supplied amount.

Question 9Microeconomics

The cross-price elasticity of demand between two goods is positive. This indicates that the goods are which of the following?

  1. Complements
  2. Substitutes Correct answer.
  3. Inferior goods
  4. Unrelated in consumption

Explanation

A positive cross-price elasticity means that when the price of one good rises, demand for the other rises too. Consumers switch toward the other good, which characterizes substitutes.

Question 10Microeconomics

A monopolist faces demand P = 100 − 2Q and has constant marginal cost of 20 with no fixed costs. What is the profit-maximizing quantity?

  1. 10
  2. 20 Correct answer.
  3. 40
  4. 30

Explanation

Total revenue is (100 − 2Q)Q, so marginal revenue is 100 − 4Q. Setting MR = MC gives 100 − 4Q = 20, hence Q = 20. The monopolist restricts output below the competitive level.

Question 11Microeconomics

In the short run, a firm should continue producing even at a loss as long as price covers which of the following?

  1. Total fixed cost
  2. Average variable cost Correct answer.
  3. Marginal fixed cost
  4. Average total cost

Explanation

If price exceeds average variable cost, revenue covers all variable costs and part of fixed costs, so producing limits losses relative to shutting down. Shutdown occurs when price falls below minimum average variable cost.

Question 12Microeconomics

Diminishing marginal returns to labor imply that, as more labor is added with capital fixed, which of the following occurs?

  1. Marginal product of labor eventually declines Correct answer.
  2. Average product of labor rises without limit
  3. The marginal rate of technical substitution becomes constant
  4. Total product eventually falls immediately

Explanation

Diminishing marginal returns mean each additional unit of labor adds less to output than the previous unit, so marginal product declines. Total product may still rise, but at a decreasing rate.

Question 13Microeconomics

A consumer is at an interior optimum consuming two goods. If the marginal utility of the last unit of X is 30 and its price is 5, while the price of Y is 2, what must the marginal utility of Y be for the consumer to be optimizing?

  1. 15
  2. 60
  3. 6
  4. 12 Correct answer.

Explanation

At an interior optimum the ratio of marginal utility to price is equal across goods: MUx/Px = MUy/Py. Here 30/5 = 6, so MUy must equal 6 × 2 = 12.

Question 14Microeconomics

Which of the following best describes the deadweight loss from a monopoly relative to perfect competition?

  1. The loss of total surplus from output restricted below the competitive level Correct answer.
  2. The transfer of consumer surplus to the monopolist
  3. The monopolist's total fixed cost
  4. The difference between price and average total cost

Explanation

A monopolist produces where price exceeds marginal cost, so units that would be worth more to consumers than their cost are not produced. The resulting loss of total surplus is the deadweight loss; the transfer to the monopolist is not a loss to society.

Question 15Microeconomics

Two goods are perfect complements consumed in fixed proportions. The indifference curves for these goods are which shape?

  1. Upward sloping
  2. Straight downward-sloping lines
  3. Convex to the origin
  4. L-shaped right angles Correct answer.

Explanation

Perfect complements are consumed together in fixed ratios, so extra units of one good without the other add no utility. Indifference curves therefore take an L-shape with the corner at the fixed proportion.

Question 16Microeconomics

A firm's production function is Q = min(2L, 3K). If the firm employs 4 units of labor and 2 units of capital, what is output?

  1. 12
  2. 6
  3. 4
  4. 8 Correct answer.

Explanation

For a Leontief production function the output is the smaller of the two terms. Here 2L = 8 and 3K = 6, so output is min(8, 6) = 6...

Question 17Microeconomics

In a second-price sealed-bid auction, what is a weakly dominant strategy for a bidder with a private valuation?

  1. Bidding exactly the true valuation Correct answer.
  2. Bidding half of the true valuation
  3. Bidding slightly above the true valuation
  4. Bidding the expected value of rivals' bids

Explanation

In a second-price auction the winner pays the second-highest bid, so bidding one's true value ensures winning exactly when the price is below value. Any other bid either risks overpaying or losing a profitable win, making truthful bidding weakly dominant.

Question 18Microeconomics

The law of demand states that, all else equal, quantity demanded of a normal good moves in which direction relative to price?

  1. Only in the same direction when income rises
  2. In the opposite direction to price Correct answer.
  3. Independently of price
  4. In the same direction as price

Explanation

The law of demand asserts an inverse relationship between price and quantity demanded, holding other factors constant. A higher price reduces the quantity consumers are willing and able to buy.

Question 19Microeconomics

A firm operating in a monopolistically competitive market in long-run equilibrium will most likely have which characteristic?

  1. Positive economic profit protected by entry barriers
  2. Marginal cost equal to price
  3. Zero economic profit with excess capacity Correct answer.
  4. Price equal to minimum average total cost

Explanation

Free entry drives economic profit to zero in long-run monopolistic competition, and the demand curve is downward sloping so it is tangent to average total cost to the left of the minimum. The firm therefore produces below efficient scale, leaving excess capacity.

Question 20Microeconomics

An isoquant shows which of the following?

  1. The cost-minimizing input mix for each output
  2. The firm's total revenue at each price
  3. All output levels achievable at a given cost
  4. All input combinations that produce a given level of output Correct answer.

Explanation

An isoquant is a contour of the production function, tracing combinations of inputs yielding the same output. Its slope, the marginal rate of technical substitution, reflects input substitutability.

Question 21Microeconomics

A consumer's demand curve is derived from utility maximization. When the price of a good falls, the total change in quantity demanded can be decomposed into which two effects?

  1. Scale effect and factor substitution effect
  2. Price effect and elasticity effect
  3. Substitution effect and income effect Correct answer.
  4. Marginal effect and average effect

Explanation

The Slutsky decomposition splits the price change into a substitution effect, from the change in relative prices holding utility constant, and an income effect, from the change in purchasing power. Together they give the total effect.

Question 22Microeconomics

A natural monopoly arises primarily because of which market feature?

  1. Strategic interaction among a few large firms
  2. Product differentiation and brand loyalty
  3. High fixed costs and declining average cost over the relevant range of output Correct answer.
  4. Perfectly elastic market demand

Explanation

When fixed costs are large relative to variable costs, average cost declines over a wide range of output. A single firm can then supply the market at lower cost than multiple firms, which is the defining feature of a natural monopoly.

Question 23Microeconomics

The marginal rate of technical substitution of labor for capital (MRTSlk) equals which of the following?

  1. The ratio of the wage rate to the rental rate of capital
  2. The slope of the total product curve
  3. The ratio of total cost to total output
  4. The ratio of the marginal product of labor to the marginal product of capital Correct answer.

Explanation

The MRTSlk measures how much capital can be reduced when labor is increased while output stays constant. It equals MPl/MPk, the ratio of marginal products, and at cost-minimization it equals the input price ratio.

Question 24Microeconomics

A good has a price elasticity of demand of −2. If the price rises by 10 percent, what happens to the quantity demanded?

  1. It falls by 5 percent
  2. It falls by 20 percent Correct answer.
  3. It falls by 2 percent
  4. It rises by 20 percent

Explanation

Price elasticity of demand equals the percentage change in quantity divided by the percentage change in price. With elasticity −2 and a 10 percent price rise, quantity falls by 2 × 10 = 20 percent.

Question 25Microeconomics

In a market with a negative externality from production, the socially efficient output is which of the following?

  1. Undefined without knowing consumer preferences
  2. Less than the competitive equilibrium output Correct answer.
  3. Equal to the competitive equilibrium output
  4. Greater than the competitive equilibrium output

Explanation

Producers ignore the external cost, so private marginal cost lies below social marginal cost. The socially efficient quantity equates social marginal cost with marginal benefit, which is below the unregulated competitive output.

Question 26Microeconomics

A consumer spends her entire income of 120 on goods X and Y, with Px = 4 and Py = 3. If she is maximizing utility, which condition must hold at an interior optimum?

  1. MUx/Px = Py/MUy
  2. MUx/MUy = 3/4
  3. MUx/MUy = 4/3 Correct answer.
  4. MUx = MUy

Explanation

At an interior optimum the consumer equates marginal utility per currency unit across goods, so MUx/Px = MUy/Py. Rearranging gives MUx/MUy = Px/Py = 4/3. The marginal rate of substitution therefore equals the price ratio.

Question 27Microeconomics

A firm's total cost function is TC = 50 + 10Q + Q². What is the marginal cost of producing the 5th unit (moving from Q = 4 to Q = 5)?

  1. 10
  2. 15
  3. 19 Correct answer.
  4. 20

Explanation

Marginal cost is the change in total cost from producing one more unit. TC at Q = 4 is 50 + 40 + 16 = 106, and TC at Q = 5 is 50 + 50 + 25 = 125, so the difference is 19. Taking the derivative, MC = 10 + 2Q, gives 20 at Q = 5, which is the cost of the next unit, not the fifth.

Question 28Microeconomics

In a perfectly competitive market, a firm's short-run supply curve is best described as which portion of its marginal cost curve?

  1. The portion above minimum average total cost
  2. The portion above minimum average variable cost Correct answer.
  3. The portion below minimum average variable cost
  4. The entire marginal cost curve

Explanation

A competitive firm supplies where price equals marginal cost, but only if price covers average variable cost; otherwise it shuts down. Thus the short-run supply curve is the MC curve above the minimum of AVC. The segment above minimum ATC describes long-run supply behavior.

Question 29Microeconomics

A monopsonist is the sole buyer of labor in a local market facing an upward-sloping labor supply curve. Compared with a competitive labor market, the monopsonist will hire:

  1. Fewer workers and pay a lower wage Correct answer.
  2. More workers and pay a higher wage
  3. The same number of workers at the same wage
  4. Fewer workers and pay a higher wage

Explanation

Because the monopsonist faces an upward-sloping supply curve, its marginal cost of labor exceeds the wage. It hires where marginal revenue product equals marginal factor cost, which yields lower employment and a lower wage than the competitive outcome.

Question 30Microeconomics

A consumer's preferences exhibit a diminishing marginal rate of substitution between two goods. This implies the indifference curves are:

  1. Convex to the origin Correct answer.
  2. Concave to the origin
  3. Straight lines
  4. L-shaped right angles

Explanation

A diminishing MRS means the consumer gives up fewer units of Y for each additional unit of X as X rises. This flattening slope produces indifference curves that are convex to the origin, reflecting a preference for balanced bundles.

Question 31Microeconomics

A firm uses two inputs and faces input prices w = 10 for labor and r = 20 for capital. At its cost-minimizing input combination, the marginal rate of technical substitution of labor for capital (MRTSlk) equals:

  1. 10
  2. 0.5 Correct answer.
  3. 2
  4. 20

Explanation

Cost minimization requires the MRTS to equal the ratio of input prices w/r. Here w/r = 10/20 = 0.5, so the firm equates the technical rate of substitution to the relative price of the inputs.

Question 32Microeconomics

A firm faces a linear downward-sloping demand curve. At the quantity where demand is unit elastic, marginal revenue is:

  1. Equal to price
  2. Positive and rising
  3. Negative
  4. Zero Correct answer.

Explanation

Marginal revenue equals zero where demand is unit elastic, because total revenue is at a maximum there. To the left of that point demand is elastic and MR is positive; to the right demand is inelastic and MR is negative.

Question 33Microeconomics

In a simultaneous-move game, a Nash equilibrium is a strategy profile in which:

  1. No player can gain by unilaterally changing strategy Correct answer.
  2. Players cooperate to maximize total surplus
  3. Each player obtains the highest possible joint payoff
  4. The first mover commits to a strategy before others

Explanation

A Nash equilibrium requires that each player's strategy is a best response to the others, so no single player benefits from deviating alone. It does not require efficiency or cooperation, and it is defined for simultaneous choices.

Question 34Microeconomics

A risk-averse individual with wealth 100 faces a 50 percent chance of losing 40. What is the maximum amount this person would pay for actuarially fair insurance covering the full loss?

  1. 40
  2. 0
  3. 10
  4. 20 Correct answer.

Explanation

Actuarially fair insurance has a premium equal to the expected loss, which is 0.5 × 40 = 20. A risk-averse person would pay at least this amount, and possibly more, to eliminate the risk. The fair premium is therefore 20.

Question 35Microeconomics

A firm's production function exhibits constant returns to scale. If all inputs are doubled, output will:

  1. Double Correct answer.
  2. Less than double
  3. Remain unchanged
  4. More than double

Explanation

Constant returns to scale means that scaling all inputs by a factor scales output by the same factor. Doubling every input therefore doubles output, which corresponds to a homogeneous production function of degree one.

Question 36Microeconomics

A price-discriminating monopolist separates customers into two groups and charges each group a different price. To maximize profit, the firm should allocate output so that:

  1. Prices are equal across groups
  2. Marginal revenue is equal across groups Correct answer.
  3. The group with the higher price receives all output
  4. Average revenue is equal across groups

Explanation

Profit maximization under third-degree price discrimination requires equal marginal revenue in every market, since otherwise output could be shifted to raise revenue. The group with less elastic demand receives the higher price.

Question 37Microeconomics

The substitution effect of a wage increase on labor supply is generally:

  1. Zero, because wages do not affect preferences
  2. Equal in size to the income effect
  3. Negative for hours worked, since leisure becomes more expensive Correct answer.
  4. Positive for hours worked, since income rises

Explanation

A higher wage raises the opportunity cost of leisure, so the substitution effect pushes workers to substitute leisure with work, reducing leisure and increasing hours worked. The income effect works in the opposite direction, making the net effect ambiguous.

Question 38Microeconomics

In an Edgeworth box economy, a Pareto-efficient allocation of two goods between two consumers requires that:

  1. Their marginal rates of substitution are equal Correct answer.
  2. Each consumer receives an equal share of both goods
  3. Each consumer is on her lowest indifference curve
  4. Total utility is equalized across consumers

Explanation

Pareto efficiency in exchange requires that no mutually beneficial trade remains, which occurs where indifference curves are tangent. At that tangency the two consumers' marginal rates of substitution are equal, defining the contract curve.

Question 39Microeconomics

A firm in a perfectly competitive constant-cost industry is in long-run equilibrium. If market demand increases permanently, the long-run market price will:

  1. Return to its original level Correct answer.
  2. Rise indefinitely without limit
  3. Settle permanently above the original level
  4. Settle permanently below the original level

Explanation

In a constant-cost industry, entry and exit do not change input prices, so the long-run supply curve is horizontal. After a demand increase, price rises in the short run but returns to the original level once entry restores zero economic profit.

Question 40Microeconomics

A government imposes a per-unit tax on a good with perfectly inelastic demand and upward-sloping supply. The economic incidence of the tax falls:

  1. Equally on consumers and producers
  2. On neither party
  3. Entirely on producers
  4. Entirely on consumers Correct answer.

Explanation

When demand is perfectly inelastic, quantity does not adjust to price, so the full tax is passed forward to consumers as a higher price. Producers bear none of the burden because they can sell the same quantity at the higher price.

Question 41Microeconomics

A firm's short-run total cost is 200 when output is zero and 260 when output is 10. What is the average fixed cost at output of 10?

  1. 6
  2. 20 Correct answer.
  3. 26
  4. 60

Explanation

Total cost at zero output equals total fixed cost, which is 200. Average fixed cost is fixed cost divided by output, so 200/10 = 20. The remaining 60 of cost is variable cost.

Question 42Microeconomics

In a Stackelberg duopoly with identical firms and linear demand, the leader produces a larger quantity than the follower. This occurs because the leader:

  1. Benefits from a binding price floor
  2. Has lower marginal cost than the follower
  3. Anticipates the follower's reaction function and commits first Correct answer.
  4. Faces a more elastic residual demand curve

Explanation

The Stackelberg leader chooses output first, knowing the follower will best-respond along its reaction function. By incorporating that reaction into its decision, the leader captures a first-mover advantage and produces more than the follower.

Question 43Microeconomics

A consumer's income rises and she reduces her consumption of a good. For this consumer, the good is:

  1. A Giffen good
  2. An inferior good Correct answer.
  3. A luxury good
  4. A normal good

Explanation

A good whose consumption falls when income rises is inferior, because income and quantity demanded move in opposite directions. A normal good, by contrast, has consumption rising with income. Inferiority concerns income effects, not price effects.

Question 44Microeconomics

A firm operates as a monopolist with demand P = 60 − Q and constant marginal cost of 10. If the government imposes a lump-sum tax of 100, the firm's profit-maximizing quantity will:

  1. Rise to 30
  2. Fall to 20
  3. Remain unchanged at 25 Correct answer.
  4. Fall to 10

Explanation

A lump-sum tax is a fixed cost and does not affect marginal revenue or marginal cost, so the profit-maximizing quantity remains where MR = MC. Setting 60 − 2Q = 10 gives Q = 25. The tax reduces profit but not the optimal output.

Question 45Microeconomics

In the market for a good with a positive externality in consumption, the free-market equilibrium quantity is:

  1. Above the socially optimal quantity
  2. Always zero
  3. Below the socially optimal quantity Correct answer.
  4. Equal to the socially optimal quantity

Explanation

A positive consumption externality means social marginal benefit exceeds private marginal benefit, so the market underprovides the good. The equilibrium quantity is therefore below the socially optimal level, and a subsidy can move output toward that optimum.

Question 46Microeconomics

A firm has the production function Q = L^0.5 K^0.5. If labor is 16 and capital is 4, the marginal product of labor is:

  1. 0.5
  2. 2
  3. 8
  4. 0.25 Correct answer.

Explanation

The marginal product of labor is the partial derivative of output with respect to L, which is 0.5 L^−0.5 K^0.5. Substituting L = 16 and K = 4 gives 0.5 × 0.25 × 2 = 0.25. This measures the extra output from one additional unit of labor.

Question 47Microeconomics

A consumer's budget line shifts outward in a parallel fashion. This change is caused by:

  1. A reduction in income
  2. A rise in the price of one good
  3. An increase in income with prices unchanged Correct answer.
  4. A fall in the price of one good

Explanation

A parallel outward shift of the budget line preserves its slope, which equals the price ratio. This occurs when income rises while both prices stay constant, expanding the affordable set uniformly. Price changes, by contrast, rotate the line.

Question 48Microeconomics

Two firms play a repeated prisoner's dilemma game with an uncertain end date. Sustained cooperation is most likely supported when:

  1. The discount factor is high and the game is expected to continue Correct answer.
  2. The discount factor is low and the game ends soon
  3. Players cannot observe past actions
  4. The stage game is played only once

Explanation

In a repeated game, cooperation can be sustained by the threat of future punishment if players value future payoffs enough. A high discount factor and a high probability of continuation make that threat credible. This is the logic of trigger strategies in repeated games.

Question 49Microeconomics

A firm's long-run average cost curve declines continuously as output expands over the relevant range. This pattern indicates:

  1. Perfect competition
  2. Constant returns to scale
  3. Diseconomies of scale
  4. Economies of scale Correct answer.

Explanation

A falling long-run average cost curve means unit costs decline as the scale of production grows, which is the definition of economies of scale. Diseconomies of scale would produce a rising curve, and constant returns would produce a flat one.

Question 50Microeconomics

A consumer's expenditure on a good is maximized when the price elasticity of demand (in absolute value) equals:

  1. Infinity
  2. 0
  3. 2
  4. 1 Correct answer.

Explanation

Total expenditure equals price times quantity, and it is maximized where demand is unit elastic. At that point a small price change leaves total spending unchanged because the quantity response exactly offsets the price change.