Advanced Microeconomics
Chapter Exam Questions
Course Introduction
Advanced Microeconomics delves into the rigorous analysis of individual and firm behavior, focusing on topics such as consumer and producer theory, general equilibrium, game theory, and market failures due to asymmetric information and externalities. The course emphasizes mathematical modeling and formal proof techniques to develop a deeper understanding of strategic decision-making, competitive and non-competitive market structures, and the efficiency and welfare implications of various market outcomes. Through a combination of theoretical exploration and applied problem-solving, students gain advanced analytical tools to critically assess complex economic models and policy issues.
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Microeconomics Theory and Applications 12th Edition by Edgar K. Browning
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Chapter 1: An Introduction to Microeconomics
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Q1) Macroeconomics deals primarily with:
A)aggregate economic factors.
B)the behavior of rational consumers.
C)the role of politics in economics.
D)a society's economic and cultural environment.
Answer: A
Q2) Compare the behavior of a person who has a hobby of stamp collection with that of an athlete who undergoes regular training.Who do you think is more rational and why?
Answer: The stamp collector will go to any extent to collect the stamps,irrespective of what costs he has to bear.He will not weigh the materialistic cost and benefit associated with the transaction but will mainly consider personal satisfaction.Therefore his behavior cannot be classified as rational.However,the athlete is well aware of the expected benefits he would receive from this routine exercise and possibly weighs it with the costs that he has to incur.Since this is a more careful and deliberative process it is considered to be rational.
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Chapter 2: Supply and Demand
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Q1) An increase in quantity supplied:
A)shifts the supply curve to the right.
B)shifts the supply curve to the left.
C)indicates a movement along the supply curve.
D)makes the supply curve flatter.
Answer: C
Q2) The cross price elasticity of demand for Good X with respect to Good Y is 1.2 and that with respect to Good Z is -0.3.This implies:
A)Good X and Good Y are complements.
B)Good X and Good Z are substitutes.
C)Good Y and Good Z are substitutes.
D)Good X and Good Z are complements.
Answer: D
Q3) At every point on an individual's demand curve,the height to the demand curve measures:
A)the quantity demanded of the good.
B)the marginal benefit of the good to the consumer.
C)the real income of the consumer.
D)the consumer surplus.
Answer: B
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Chapter 3: The Theory of Consumer Choice
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Sample Questions
Q1) You buy only apples and bananas.Your budget is such that you can purchase 3 apples and 4 bananas or 9 apples and 2 bananas.Write down the equation for the budget line with bananas on the Y-axis.Is that equation unique?
Answer: 11ea857e_d767_f7cb_a433_67d630fafa28_TB1826_11_TB1826_11 or equivalently, 11ea857e_d768_1edc_a433_f7c9fc14b9fb_TB1826_11_TB1826_11
No,this is not unique.As written,it indicates that income is $15,the price of apples is $1,and the price of bananas is $3.However,if income and the prices doubled,the line would not change but the equation would be 11ea857e_d768_1edd_a433_732076b6c436_TB1826_00_TB1826_00 .
Q2) Which of the following best explains the concept of a corner solution?
A)Peter likes peanut butter and jelly and consumes both in positive amounts.
B)Jane prefers more cheese with her bagel than less.
C)Tony feels that the price of BMW does not justify what he would have to give up to buy one.
D)Rebecca likes both apples and pears equally and is willing to substitute one apple for one pear.
Answer: C
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Chapter 4: Individual and Market Demand
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Q1) For the average consumer,the combination of an excise tax and a tax rebate:
A)increases consumption of the taxed good but lowers welfare.
B)increases consumption of the taxed good and raises welfare.
C)decreases consumption of the taxed good and lowers welfare.
D)decreases consumption of the taxed good but raises welfare.
Q2) A consumer considers apples and oranges to be perfect substitutes,one for one.If apples currently cost $5 per unit and oranges $6 per unit,and if the price of apples increases to $9 per unit:
A)the income effect of the change in demand for apples will be bigger than the substitution effect.
B)there will be no change in demand for oranges.
C)the entire change in demand for apples will be due to the substitution effect.
D)one-quarter of the change in demand for apples will be due to the income effect.
Q3) A network effect exists when an individual consumer's demand for a good is affected by other individuals':
A)incomes.
B)purchases.
C)preferences.
D)consumer surplus.
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Chapter 5: Using Consumer Choice Theory
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Q1) In which of the following cases can a subsidy possibly harm its recipients?
A)When consumption of the subsidized good is mandatory
B)When the subsidy is fully funded by the government
C)When the subsidy is targeted at low-income groups
D)When the good that is subsidized is a luxury good
Q2) Comparing the original budget line with the budget line for an excise subsidy and a cash grant:
A)the budget line for a cash grant shifts such that it is tangent to the same indifference curve so that the well-being of the consumer is the same.
B)the slope of the budget line for a cash grant is positive.
C)the budget line for a cash grant is parallel to the original budget line.
D)the budget line for an excise subsidy shifts such that it is tangent to the same indifference curve so that the well-being of the consumer is the same.
Q3) Which of the following leads to the diversification of risk?
A)Investing in assets that give the highest possible returns
B)Investing in safe assets that may give low returns
C)Investing in multiple assets rather than a single asset
D)Investing in assets that are highly risky but give high returns
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Chapter 6: Exchange, Efficiency, and Prices
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Q1) Compared to rationing by prices,non-price rationing by queuing:
A)is more efficient in that those who value the good or service most are more likely to get some.
B)is less efficient in that waiting in line imposes a cost on those waiting in line,with no offsetting benefit to the seller.
C)is less efficient in that in order to sell more of the good or service,suppliers will have to increase the quality of their product beyond what the consumer desires.
D)is more efficient in that in order to sell more of the good or service,suppliers will have to increase the quality of their product beyond what the consumer desires.
Q2) Two goods are said to be allocated efficiently between consumers when _____.
A)both goods give the consumers the same total utility
B)there are no trades that will make one of the consumers strictly worse off C)one consumer is as well off as possible,given the utility of the other consumer D)both the consumers are maximizing utility
Q3) How are prices of goods that you buy in an auction,at a garage sale,and at a drugstore determined? Is the price discovery process the same in all these markets?
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Chapter 7: Production
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Q1) Suppose that at a point on an isoquant,the following information is true: L increases by 5;K falls by 3;MP<sub>L</sub> = 4,then MP<sub>K</sub> must be:
A)3.33.
B)0.67.
C)1.67.
D)6.67.
Q2) Refer to Table 7-3.Assume that labor remains fixed while capital is the only variable input used in production.If the firm is currently producing 26 units of output using three units of labor,what is the marginal product of capital at this point?
A)2
B)4
C)6
D)8
Q3) A firm that is operating in a technologically inefficient way: A)is getting the maximum output from its inputs. B)is making zero economic profits.
C)is not making as much money as it potentially can. D)should shut down immediately to reduce its losses.
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Chapter 8: The Cost of Production
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Q1) Consider a firm that uses labor and capital as the only inputs.Suppose labor is on the horizontal axis and capital is on the vertical axis.Further,the expansion path has shifted down and average cost curves have shifted up.Which of following provides the most likely explanation for what has happened?
A)The wage rate decreased
B)The wage rate increased
C)The price of capital decreased
D)The price of capital increased
Q2) If the marginal cost of pollution abatement differs between two firms,the total cost of pollution abatement can be lowered by:
A)increasing abatement where its marginal cost is high and reducing it where marginal cost is lower.
B)decreasing abatement where its average cost is high and reducing it where average cost is lower.
C)increasing abatement where its marginal cost is less and reducing it where marginal cost is greater.
D)decreasing abatement where its marginal cost is less and increasing it where marginal cost is greater.
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Chapter 9: Profit Maximization in Perfectly Competitive Markets
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Q1) Refer to Figure 9-3.At the output level OB,total profits equal the area given by _____. A)FTDE
B)GMLR
C)FHSR
D)FBOR
Q2) As long as there is free entry into a market:
A)firms in that market can sustain prices above average total cost.
B)firms in that market can maintain market power.
C)economic profits are not sustainable.
D)accounting profits will be zero.
Q3) Refer to Figure 9-3.At the output level OC,average fixed cost is equal to _____. A)ZM
B)GZ
C)GM
D)MC
Q4) Derive the first-order and second-order conditions for perfect competition.
Q5) Explain the difference between diminishing marginal returns to factor and a decreasing-cost industry.
11
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Chapter 10: Using the Competitive Model
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Q1) In Figure 10-3,trade increases consumer surplus in the U.S.by _____.
A)P<sub>3</sub>EKP<sub>2</sub>
B)P<sub>3</sub>EP<sub>0</sub>
C)EKL
D)P<sub>2</sub>LMP<sub>1</sub>
Q2) Suppose an increasing-cost competitive industry is in equilibrium at a price of $100 and an output of 1,000 units.When a price ceiling of $80 is imposed the quantity traded in the market reduces to 800 units.Which of the following is true?
A)Consumer surplus will increase and producer surplus will fall,but total surplus stays the same.
B)Consumer surplus will fall and producer surplus will increase,keeping total surplus unchanged.
C)Consumer surplus may or may not fall but producer surplus will fall.
D)Consumer surplus will remain unchanged,but producer surplus and total surplus will fall.
Q3) Is the outcome of a competitive market efficient? Explain with the help of a graph.
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Chapter 11: Monopoly
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Q1) The U.S.Postal Service [USPS] has a legal monopoly over first-class mail in the U.S.However,it has been running losses over the recent years.
a)Is this fact consistent with the fact that USPS operates with significant monopoly power?
b)What are the factors that could possibly be leading to USPS' losses?
Q2) Explain why a profit-maximizing monopolist will always sell at a price where demand is elastic.
Q3) A monopolist will never operate on the lower half of the demand curve because for this range of output:
A)average revenue is negative.
B)marginal cost exceeds marginal revenue.
C)total revenue can be increased further.
D)marginal revenue is positive.
Q4) The marginal revenue curve of a monopolist:
A)is the same as the monopolist's demand curve.
B)is downward-sloping.
C)is horizontal.
D)has a slope that is equal to half the slope of the demand curve.
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Chapter 12: Product Pricing With Monopoly Power
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Q1) With peak-load pricing,a firm charges a different price in each period,because:
A)its supply is perfectly inelastic.
B)its marginal cost of production varies in each period.
C)the number of consumers change every period.
D)the demand for the good is perfectly price elastic.
Q2) A profit-maximizing monopolist employing a two-part tariff on consumers having different demands,_____.
A)should simply set price to maximize total revenue
B)should charge a single price,with no entry fee,like a regular monopolist
C)should set price equal to average cost plus a constant profit margin
D)does not have a clearly defined profit-maximizing pricing scheme
Q3) Consider a monopolist selling her output in two markets,A and B.The price elasticity of demand in market A is 1.5,while the same in market B is 2.5.Calculate the price charged in each market,if the marginal revenue [MR] from market A is 15 while the same from market B is 30.
A)P<sub>A</sub> = 200;P<sub>B</sub> = 169.89
B)P<sub>A</sub> = 500;P<sub>B</sub> = 208.29
C)P<sub>A</sub> = 105;P<sub>B</sub> = 108.39
D)P<sub>A</sub> = 405;P<sub>B</sub> = 138.89
Q4) Why is it difficult to implement first-degree price discrimination?
Page 14
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Chapter 13: Monopolistic Competition and Oligopoly
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Q1) Assume that there are only two full-service airline firms in a country.The service provided to the consumers by each of them is marginally different.Given that the full-service airline industry has high entry costs,the _____ model of the market is most applicable to this industry.
A)oligopoly
B)monopoly
C)dominant firm model
D)perfectly competitive
Q2) Which of the following is true of monopolistically competitive markets?
A)The economic profits of firms in a monopolistically competitive market are positive in the long run.
B)The cost of government regulation is small relative to the social losses from monopolistic competition.
C)Since the price and output combination in a monopolistically competitive market is efficient,there is no need for government regulation.
D)It is possible that the value created through product differentiation outweighs the efficiency loss from monopolistic competition.
Q3) What is a cartel and why are cartels considered to be inherently unstable?
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Chapter 14: Game Theory and the Economics of Information
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Q1) An analysis of the relationship between advertising and price indicates that advertising:
A)can lower the price of the product.
B)increases price dispersion.
C)has no impact on a product's price.
D)makes the demand for the product highly price elastic.
Q2) In Table 14-5,what values will not make this payoff matrix a prisoner's dilemma?
A)X = 7 years,Y = 7 years
B)X = 6 years,Y = 6 years
C)X = 5 years,Y = 5 years
D)X = 1 years,Y = 1 years
Q3) Adverse selection describes a situation in which:
A)the buyers of insurance consistently make the wrong decision and buy too much insurance.
B)insurance companies find most of their customers coming from high risk groups.
C)insurance companies find most of their customers coming from low risk groups.
D)the buyers of insurance can reduce the probability of occurrence of the risky event against which they are insured.
Q4) What is a prisoner's dilemma? Draw a payoff matrix which illustrates this game.
Q5) Compare the benefits and the costs of advertising.
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Chapter 15: Using Noncompetitive Market Models
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Q1) Which of the following is not a problem associated with regulation of a natural monopoly?
A)Regulation using average-cost pricing reduces a firm's incentive to keep costs down.
B)Regulation stifles the incentive that firms have to innovate.
C)Regulators do not have full information about a firm's demand and cost functions.
D)Regulation increases collusion and cartelization among firms.
Q2) Which of the following is a consequence of a monopoly?
A)An expansion of output beyond the efficient level
B)A redistribution of income from consumers to producers
C)A fall in price below the efficient level
D)An increase in the total surplus in the market
Q3) Refer to Figure 15-3.If the firm practices marginal-cost pricing,the equilibrium price would be _____.
A)P<sub>1</sub>
B)P2
C)P<sub>3</sub>
D)P<sub>4</sub>
Q4) Define and illustrate iterated dominance and commitment strategy.
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Chapter 16: Employment and Pricing of Inputs
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Q1) Refer to Table 16-1.Marginal product becomes negative from the _____ worker.
A)third
B)fourth
C)sixth
D)seventh
Q2) Define monopsony in an input market and graphically illustrate equilibrium employment and wages under a monopsony.
Q3) In Figure 16-1.The move from point A to point B represents the _____ of an input price change.
A)substitution effect
B)output effect
C)income effect
D)effect of diminishing returns
Q4) Refer to Figure 16-1.The firm was initially at point A.It will move to point B if:
A)the price of the final product increases.
B)the wage rate increases.
C)the cost of capital rises.
D)the demand for the final product falls.
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Chapter 17: Wages, Rent, Interest, and Profit
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Q1) Refer to Figure 17-1.If the number of leisure hours is OL<sub>2</sub> after a change in the wage rate,it implies that:
A)the income effect of the wage change is greater than the substitution effect.
B)the income effect of the wage change is less than the substitution effect.
C)the income effect of the wage change exactly offsets the substitution effect.
D)the income and substitution effects of a wage change operate in the same direction.
Q2) What does the height of the demand curve in a labor market represent?
A)The value of output produced by an incremental worker
B)The increase in revenue from the sale of an additional unit of output
C)The marginal cost of hiring an additional worker
D)The payment made to an individual worker
Q3) Which of the following is an implicit cost of a college education?
A)The cost of tuition
B)The cost of foregone earnings
C)The cost of housing and dining at a dorm
D)The cost of commuting to college and back
Q4) Using an indifference curve and budget line,explain the effect of a wage increase on the income and leisure choices of an individual who considers leisure a normal good.
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Chapter 18: Using Input Market Analysis
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Q1) Empirical evidence suggests that a large majority of the poor,in the U.S. ,are not directly affected by the minimum wage.This is because most poor workers:
A)do not have a job.
B)earn a below subsistence wage.
C)do not receive any government aid.
D)live in households with income above the poverty line.
Q2) Which of the following is true for a competitive firm operating in an input market cartel?
A)The individual firm's demand curve for the input is downward sloping when it acts alone.
B)The individual firm's supply curve is horizontal when it acts alone and upward sloping with coordinated hiring.
C)The individual firm's supply curve is upward sloping when the firm acts alone but horizontal otherwise.
D)The individual firm's supply curve is horizontal when it acts alone and downward sloping with coordinated hiring.
Q3) What is the long run effect of a pay-as-you-go Social Security program on the gross domestic product [GDP] of a country?
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Chapter 19: General Equilibrium Analysis and Economic Efficiency
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Q1) Assume that the clothing (c.market is a monopoly but perfect competition prevails in the market for food (F).Which of the following is true in this context?
A)The price ratio of clothing and food equals the ratio of their marginal costs.
B)The price ratio of clothing and food is greater than the ratio of their marginal costs.
C)The price ratio of clothing and food is less than the ratio of their marginal costs.
D)The price ratio of clothing and food equals unity.
Q2) Suppose an economy produces two goods,corn and wine.The marginal rate of substitution between corn and wine for consumers is 1C/3W and the marginal rate transformation is 1C/1W.What can be said about the output mix?
A)The output mix is inefficient;more wine and less corn should be produced.
B)The output mix is inefficient;less of both the commodities should be produced.
C)The output mix is inefficient;more corn and less wine should be produced.
D)The output mix is efficient.
Q3) According to Hayek,can there ever be an objectively defined efficient outcome other than what currently exists? Explain.
Q4) What is the difference between partial and general equilibrium analysis?
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Chapter 20: Public Goods and Externalities
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Q1) If there is an external cost associated with the production or consumption of a good in a competitive industry,then:
A)the output of the good produced will be too small compared to its demand in the market.
B)in equilibrium,the social marginal cost of production will be greater than the private marginal benefit to the consumers.
C)private benefits derived from the consumption of the good will exceed the private cost of producing the good.
D)the efficient level of output is given by the point where the private marginal cost curve intersects the private marginal benefit curve.
Q2) In Figure 20-2,if the efficient output is being produced,the market price of the commodity must be:
A)$12.
B)$17.
C)$20.
D)$24.
Q3) Explain with the help of a suitable real life example how common resources are depleted if property rights are not ensured?
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