I.

Write true if the statement is correct and false if incorrect (1 point each)
1. If average product is rising, marginal product will also be rising and it may rise above
the average product.
2. A rational firm produces at a stage where the variable inputs are under-utilized and
fixed inputs are under employed. .
3. The type of market that mostly exists at this time is pure monopoly.
4. Average product is the change in total output of a firm due to the use of one more unit
of a product.
5. The law of diminishing marginal return starts to operate after AP reaches maximum
6. AVC, AC and MC curves have a tendency to first decline reaches their respective
minimum and then rises as output rises.
7. The segment of the short run MC curve above the minimum of the AVC constitutes
the short run supply curve.
8. Fixed costs are constant irrespective of the level of output.
9. Short run marginal and average variable cost curves are a mirror reflection of the
marginal product and average product of the variable input respectively.
10. Firms in perfectly competitive market are price takers and quantity setters.

II. Multiple Choose (1.5 point each)

1. When a perfectly competitive firm makes a decision to shut down, it is most likely
that
A. Marginal cost is above average variable cost.
B. Marginal cost is above average total cost.
C. Fixed costs exceed variable costs.
D. Price is below the minimum of average variable cost.
2. The main decision for a profit maximizing perfectly competitive firm is NOT
what ________but what ________.
A. Level of output to produce; price to charge
B. Level of output to produce; total revenue to achieve
C. Price to charge; total cost to achieve
D. Price to charge; level of output to produce
3. In a competitive market, no single producer can influence the market price because
A. Consumers have more influence over the market price than producers do.
B. Many other sellers are offering a product that is essentially identical.
C. Government intervention prevents firms from influencing price.
D. Producers agree not to change the price.

1|Page
4. One of the following is not true about perfectly competitive firm
A. Large number of buyers
B. Standardized product.
C. Asymmetric information
D. AR=MR
E. None

5. Consider a short run production function, when MP rises,

A. AP also rises C. AP declines
B. TP is also rises D. A & B

2|Page
6. Which of the following is/are true about the first stage of production
A. There is under employment of the variable input
B. The fixed input under utilized
C. MP is above the AP of the variable input
D. All
7. One of the following is not true regarding the short run different optimum price output
combination in perfectly competitive market
A. When P> min point of AC, the firm attains abnormal profit
B. When P<AVC, the firm becomes indifferent
C. When p=min AC, the firm is at break -even point
D. When P is in between AC and AVC, the firm should continue producing and supplying
the product
8. Which of the following is/true about short run production function
A. When MP is rising, AP is also rising
B. When AP reaches maximum, MP is declining
C. When AP is declining, MP is declining below the average
D. All
9. Identify the wrong statement
A. When MP is declining, MC is declining
B. When AP is declining, AVC is rising
C. When MP reaches maximum, MC reaches minimum
D. When AVC reaches minimum AP reaches maximum

Consider the following short run production function Q=6L2-0.4L3

Based on the above information answer question 11-13
10. What is the value of L that maximizes output?
A. 8
B. 11
C. 10
D. 12.4
E. None
11. What is the value of L that maximizes MP?
A. 6
B. 5
C. 4
D. 7
E. None
12. What is the value of L that maximizes AP
A. 4
B. 6
C. 8
3|Page
 D. 9
E. 11

1000 1
14 . If the average cost function is given by +100 - 80Q+ Q2 what is the level of
Q 3
output at which average variable cost is minimum

A. 120
B. 110
C. 130
D. 115
E. None
15 . what would be the marginal cost function in Question number 14
A. 100-160Q2+Q3
B. 1000-160Q+Q2
C. 100-160Q+Q2
D. 100-160+Q2
E. None
16 If the total cost function is given by TC=625-5Q+Q2 what is the level of output at which
MC=minimum point of AC function.
A. 15
B. 25
C. 35
D. 10
E. None

17 Which one of the following is correct about the relationship between total utility and
marginal utility?
A. Total utility increases by increasing rate when marginal utility decreases.
B. Total utility increases by decreasing rate when marginal utility decreases.
C. Total utility reaches maximum when marginal utility becomes zero.
D. Total utility increases by increasing rate when marginal utility becomes zero.
E. All of the above
Based on the information given below, answer question 18-19
Suppose that Mr.Kebede have a budget of birr 600 and he wants to purchase two
commodities(X&Y) with a price of birr 10 and 14 for commodity x and commodity y
respectively. Then, given the above information,
18. Which of the following is true if the price of commodity Y decrease by 75% given
income and price of commodity X constant?

4|Page
 A. The budget line shift to the right on X commodity.
B. The slope of the budget line decrease.
C. The budget line shift to the right on Y commodity.
D. Only the position of the budget line is change but the slope remains the same and
unchanged.
E. The budget line shift to the right on both X and Y commodity.
19. Given the above statement, which of the following is correct if both price of X and Y are
increase by 50% given income of the consumer constant?
A. The budget line shift to the left on Y commodity and to the right on X commodity.
B. The slope of the budget line unchanged and remain constant.
C. Both the slope and intercept of the budget line is change and shift to the left.
D. The budge line shift to the right on both two commodities.
E. All of the above.
20. Which of the following is wrong about the ordinalist approach?
A. The consumers are said to be in equilibrium, when indifference curve and budget
line tangent together.
B. Any indifference curve beyond the budget line is irrelevant for Equilibrium
condition.
C. A consumer is said to be in equilibrium, when marginal utility of the
commodity equal with price of the commodity for single commodity.
D. The preference of the commodity is subjective and marginal utility of money is not
constant.
E. None

III. Workout. {Show the steps}

1. A consumer consuming two commodities X and Y has the utility functionU =x2 y andthe
prices of the two commodities are 4 birr and 5 birr respectively. The consumer has a total
income of 60 birr to be spent on the two goods.Then,
a. Find the utility maximizing values of x and y? (1.5pts)
b. Obtain the maximum utility? (0.5pt)
c. Find marginal rate of substitution x for y? (1pt)

2. In a perfectly competitive market, the total revenue and total cost of a firm is given by
TR=20Q and TC= Q2+4Q+20 , then , find
a) The profit maximizing output.(1.5 pt)
b) The maximum profit at the profit maximizing level of output.(1pt)
c) The break- even level of output.(1pt)
d) Check the second order condition.(0.5pt)

5|Page
IV. short answer
a. List and discuss at least four sources of monopoly power? 1.5pt
b. List down the major characteristics of oligopoly market 1.5 pt

Answer sheet
Name:-__________________________Id No.:-__________________ Section: …………
Part-I: True/ False Part

1 6
2 7
3 8
4 9
5 1
0

Part-II: Choice Part

1 6 11 11 16
2 7 12 12 17
3 8 13 13 18
4 9 14 14 19
5 10 15 15 20

6|Page
7|Page