Q1. You currently work for 40 hours a week at wage rate of £12 an hour.

Your free hours are

defined as the number of hours not in work, which in this case is 24 hours × 7 days – 40 hours =
128 hours per week. Suppose that you are happy to keep your total weekly income constant.
Then:
a. If your wage rate increases to £16 an hour, then your free time will increase by 6%.
b. To have 12.5% more free time, your wage rate needs to increase by £8.
c. Doubling the wage rate would decrease your working hours by a third.
d. A wage cut of 25% leaves you with only 100 hours of free time.

a. The current total weekly income is £12 × 40 hours = £480. At the wage rate of £16, you
will only need to work for 480 /16 = 30 hours a week. This will increase your free time to
138 hours, which is an increase of (138 – 128) / 128 = 7.8%.
b. The current total weekly income is £12 × 40 hours = £480. 12.5% extra free time means
128 hours × 1.125 = 144 hours of free time, or 24 hours of work. To keep your weekly
income constant, your wage rate needs to increase to £480 / 24 = £20 an hour, which is an
increase of £8.
c. The current total weekly income is £12 × 40 hours = £480. If the wage rate doubles to
£24, your working hours fall to 480 /24 = 20 hours a week, i.e. it halves.
d. The current total weekly income is £12 × 40 hours = £480. A wage cut of 25% means
your new hourly wage is £12 × (1 – 0.25) = £9. To keep the weekly income constant, you
will have to work 480 ÷ 9 = 53 hours and 20 minutes, which leaves you with 114 hours
and 40 minutes of free time.

Q2. Your current wage rate is £W per hour and you work hours a week. Your free time is
therefore 24 × 7 – H= 168 – H hours, or (24 – 8)× 7 – H= 112 – Hours, if you spend 8 hours a
day sleeping. Over the years, your wage rate has increased six-fold to £6W. As a result, you have
reduced your working hours by a third. Based on this information, which of the following
statements is correct?
A. Your total income has tripled after the wage rate increase.
b. If your free time including sleeping hours has reduced by one-fifth, then you originally
worked H= 63 hours a week.
c. If you originally worked H= 63 hours, then your free time excluding sleeping hours has
increased by 50%.
d. The proportional increase in free time after the wage rise is smaller when sleeping hours are
excluded from the free time.

a. Your total income has increased from £WH to £6W × (2/3)H= £4WH. It has therefore
quadrupled.
b. If H= 63 hours, then after the wage rise you now work 63 × 2/3 = 42 hours. Then free
time including sleeping hours has increased from 168 – 63 = 105 hours to 168 – 42 = 126
hours. This is indeed a (126 – 105) / 105 = 1/5 increase.
 c. If H= 63 hours, then after the wage rise you now work 63 × 2/3 = 42 hours. Then free
time excluding sleeping hours has increased from 112 – 63 = 49 hours to 112 – 42 = 70
hours. This is an increase of (70 – 49) / 49 = 42.9%.
d. The absolute increase in free time is the same whether sleeping hours are included or not.
As excluding sleeping time means that the denominator of the ratio is smaller, the
proportional change would be larger.

Q3. The figure shows the indifference curves of a student for the two ‘goods’, free time and final
grade. Based on this information, which of the following statements is correct?

a. At A, the student is willing to give up 34 grade points for five extra hours of free time.
b. A is the student’s most preferred choice as she would be attaining the highest grade.
c. The student strictly prefers a grade of 54 with 19 hours of free time to a grade of 67 with
18 hours of free time.
d. If at B the number of free hours is 10, then the student is 50% happier at A than at B.

a. This is true, as points A and D are on the same indifference curve.

b. The student is indifferent between A and all the other points on the same indifference
curve i.e. E, F, G, H, and D.
c. A grade of 54 with 19 hours of free time is point H. The student is indifferent between
this point and point F, where she gets a grade of 67 with 17 hours of free time. She would
therefore strictly prefer a grade of 67 with 18 hours of free time to H.
d. Higher indifference curves imply higher levels of utility, but the specific level of utility
depends on the student’s relative preferences for both goods. It is not necessarily true that
50% additional free time would make the student 50% happier.
Q4. You have a choice between two ‘goods’. Which of the following graphs can be an
indifference curve that represents strictly monotonic preferences (having more of a good is
strictly better)?

(a) A
(b) B
(c) C
(d) D

a. This means that you are happy to trade one good for the other at the same ratio
irrespective of however many of each good you have. These goods are called perfect
substitutes.
b. The upward-sloping section of the indifference curve implies that you remain indifferent
when you have strictly more of both goods, so strict monotonicity does not hold.
c. Here, the two goods are perfect complements. An example is a bicycle frame and wheels:
with one frame, once you have two wheels any extra wheels give you no extra utility, and
with two wheels, any more than one frame gives you no extra utility.
d. This indifference curve has a vertical segment, meaning that for a fixed number of one
good, your utility does not increase by having more of the other. If your preferences were
strictly monotonic, your utility would increase if the amount of either good increases.

Q5. The average product of labour is diminishing when:

a. The marginal product of labour is diminishing.

b. The production function is concave.
c. The marginal product of labour is smaller than the average product of labour.
d. The marginal product of labour is negative.
 a. The average product of labour is diminishing as long as the marginal product of labour is
smaller than the average product of labour (adding something smaller than the average
reduces the average).
b. With a concave function, the slope of rays from the origin to the curve decrease when
moving along the curve, meaning that the average product of labour is diminishing.
c. Adding something smaller than the average reduces the average.
d. In this case, adding an extra worker would reduce output, which in turn reduces the
average product of labour.

6. Consider an individual’s indifference curves for the consumption of two goods (things you
would like to have more of). In this case, which of the following statements are true?

a. The indifference curves are downward-sloping.

b. The indifference curves can sometimes cross.
c. The indifference curves cannot have sections that are straight lines.
d. The indifference curves cannot have kinks.

a. Since having more of each good is better, to keep utility at the same level it is necessary
to have less of one good if you have more of the other. The downward slope indicates this
tradeoff.
b. Indifference curves that represent different utility levels cannot cross, because any point
of intersection would imply that the utility levels are the same.
c. Indifference curves can have straight-line sections. For example, if you are always happy
to swap one unit of a good for one unit of another (they are perfect substitutes), then the
indifference curves would be 45-degree downward-sloping straight lines.
d. Indifference curves can have kinks. For example, if the goods are perfect complements
(one without the other is useless, e.g. right shoes and left shoes), then the indifference
curves are L-shaped.

Q7. Figure 3.5 shows Alexei’s production function, with the final grade (the output) related to
the number of hours spent studying (the input).
Which of the following is true?
 a. The marginal product and average product are approximately the same for the initial
hour.
b. The marginal product and the average product are both constant beyond 15 hours.
c. The horizontal production function beyond 15 hours means that studying for more than
15 hours is detrimental to Alexei’s performance.
d. The marginal product and the average product at 20 hours are both 4.5.

a. Because there are no previous hours to consider, the average product for the initial hour is
just the improvement produced by a single hour, which in turn approximates to the
marginal product from 0 to 1 hours (the precise marginal product changes over this
interval, reflected in the decreasing slope of the production function).
b. The marginal product is constant beyond 15 hours, but the average product continues to
diminish. This is because the marginal product (zero) is less than the average product,
which remains positive but is decreasing (more hours with no additional improvement
reduces the average).
c. If studying for more than 15 hours had a negative effect on Alexei’s grade, then the
marginal product would be negative, implying a downward-sloping curve beyond 15
hours.
d. The average product at 20 hours is 90 grade points/20 hours = 4.5 points per hour. The
marginal product, however, is zero – as indicated by the production function being flat
beyond 15 hours.

Q8. Consider a student whose final grade increases with the number of hours spent studying. Her
choice is between more free time and higher grades, both of which are ‘goods’. Which of the
following are the same as her marginal rate of transformation between the two goods?
 A. The number of percentage points the student would gain by giving up another hour of
free time.
b. The opportunity cost of free time.
c. The number of percentage points the student would lose by taking another hour of free time.
d. The slope of the student’s feasible frontier.

a. The marginal rate of transformation is equal to all of these.

b. The marginal rate of transformation is equal to all of these.
c. The marginal rate of transformation is equal to all of these.
d. The marginal rate of transformation is equal to all of these.

Q9. The figure shows a student’s feasible frontier and her indifference curves for her final exam
grade and the hours of free time per day. Based on this information, which of the following
statements is correct?

a. The student prefers D to C, as D is on the feasible frontier.

b. A or B may be chosen over C despite being on a lower indifference curve, as the student
would never choose a point below the feasible frontier.
c. Any points above IC_3 are strictly preferred to the student’s final choice but are
unattainable.
d. The student should try to attain as high a grade as possible.