Advanced Microeconomics Final Exam
Course Introduction
Advanced Microeconomics delves into the theoretical foundations of individual and firm behavior, focusing on complex models of consumer choice, producer theory, and market equilibrium. The course explores general equilibrium analysis, welfare economics, game theory, information economics, and behavioral insights that challenge traditional assumptions. By leveraging mathematical tools and rigorous analytical techniques, students gain a deeper understanding of the mechanisms driving resource allocation, market failures, and strategic interactions among economic agents, equipping them with the skills to tackle real-world economic problems and frontier research topics.
Recommended Textbook
Microeconomics 2nd Edition by B. Douglas Bernheim
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Page 2
Chapter 1: Introduction
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Q1) Positive economic analysis
A) involves value judgments.
B) concerns what ought to happen.
C) addresses factual issues.
D) is subjective.
Answer: C
Q2) A model
A) is a complete representation of some phenomenon.
B) is a simplified representation of some phenomenon.
C) is always expressed mathematically.
D) cannot be qualitative in nature.
Answer: B
Q3) Which of the follow is NOT an example of a market?
A) Retail trade of chocolate ice cream in Boston.
B) The buying and selling of homes in Kansas City.
C) The farmer's market in Madison, Wisconsin.
D) The buying and selling of used cars.
Answer: C
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Chapter 2: Supply and Demand
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Q1) Which of the following would result from an increase in the demand for a good?
A) Both equilibrium price and quantity would rise.
B) Both equilibrium price and quantity would fall.
C) Equilibrium price would rise, and equilibrium quantity would fall.
D) Equilibrium quantity would rise, and equilibrium price would fall.
Answer: A
Q2) The relationship that shows how much buyers of a product want to buy at each possible price,holding fixed all other factors is called:
A) a demand curve.
B) elasticity of demand.
C) demand function.
D) an indifference curve.
Answer: A
Q3) A change in demand of a good is shown by a:
A) movement along a demand curve.
B) shift of a demand curve.
C) movement along the demand function.
D) shift of the demand function.
Answer: B
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Page 4
Chapter 3: Balancing Benefits and Costs
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Q1) Consider a consumer choosing between spending her money on food,F,or clothing,C. Assume that a unit of food and a unit of clothing have the same price, and that the consumer can afford a total of 20 units of either food or clothing. This is an example of:
A) a constrained optimization problem.
B) a sunk cost.
C) a sinking cost.
D) the No Marginal Improvement Principle.
Answer: A
Q2) Suppose that the marginal benefit of an activity is less than the marginal cost,then:
A) the net benefit would be increased by reducing the amount of the activity.
B) the net benefit would be decreased by reducing the amount of the activity.
C) the net benefit would be increased by increasing the amount of the activity.
D) there can be no marginal improvement by changing the amount of the activity.
Answer: A
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5
Chapter 4: Consumer Preferences
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Q1) In modern microeconomic theory,utility functions summarize:
A) cardinal information about preferences.
B) ordinal information about preferences.
C) absolute information about preferences.
D) both cardinal and ordinal information about preferences.
Q2) Ultimately,the opportunity for mutually beneficial trade between two individuals is based on:
A) the marginal utilities each consumer derives from each good.
B) the price each consumer is will to pay for each good.
C) the degree of substitutability of each good.
D) a comparison of the individuals' utility function.
Q3) Which of the following is NOT a reason why economists are interested in understanding consumer behavior?
A) Economists are often called upon to evaluate public policies that impact the well-being of consumers.
B) It is important for businesses to be able to accurately predict consumers' choices.
C) Economists want to understand the conditions under which trade will take place.
D) Economists want to predict the value of a company's stock.
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Chapter 5: Constraints, Choices, and Demand
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Q1) Suppose that steak is a normal good and vegetables are inferior goods.Using a carefully-labeled diagram,illustrate the income-consumption curve that would result from an increase in a consumer's income.
Q2) If an increase in the price of one good causes the demand curve for another good to shift to the right,then the two goods are:
A) substitutes.
B) complements.
C) normal.
D) unrelated.
Q3) When the price elasticity of demand is large in magnitude,a _____ increase in the price leads to a _____ reduction in the amount purchased and the demand curve is relatively ____.
A) slight; substantial; steep
B) slight; slight; flat
C) large; slight; steep
D) slight; substantial; flat
Q4) Using carefully-labeled graphs,explain how an individual demand curve is derived from the utility-maximizing behavior of a consumer.
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Chapter 6: Demand and Welfare
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Q1) The change in the cost of living over time is referred to as:
A) inflation.
B) substitution bias.
C) a fixed-weight price index.
D) real income.
Q2) What is the difference between approximate and exact consumer surplus?
A) Approximate consumer surplus is calculated using an uncompensated demand curve, while exact consumer surplus is calculated using a compensated demand curve.
B) Approximate consumer surplus is calculated using a compensated demand curve, while exact consumer surplus is calculated using an uncompensated demand curve.
C) There is no difference between approximate and exact consumer surplus.
D) Approximate consumer surplus can be measured, while exact consumer surplus cannot be measured.
Q3) Suppose an individual consumes just pizza and soda.Using a graph,explain how the substitution bias causes the Lespeyres price index to overstate the true change in the cost of living resulting from an increase in the price of pizza.
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Chapter 7: Technology and Production
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Q1) If technological change is factor neutral,then the firm's isoquants:
A) shift out away from the origin.
B) shift in toward the origin.
C) do not change in appearance.
D) become flatter.
Q2) Suppose you manage a firm with two production plants.The marginal product of labor at plant 1 is MP<sub>1</sub> = 1400 - L<sub>1</sub> where L<sub>1</sub> is the number of workers employed in plant 1.The marginal product of labor at plant 2 is MP<sub>2</sub> = 2000 - L<sub>2</sub> where L<sub>2</sub> is the number of workers employed in plant 2.Given that you have 1,000 workers,what is the best allocation of workers between the two plants?
Q3) Using two carefully-labeled diagrams,explain how MP<sub>L</sub> and AP<sub>L</sub> can be derived from a firm's production function.In your answer,explain the relationship between average and marginal product.
Q4) Which of the following is NOT a property of isoquants?
A) Isoquants curves are thin.
B) Isoquants may slope upward or downward.
C) Isoquants for the same technology never cross.
D) Higher-level isoquants lie farther from the origin.
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Chapter 8: Cost
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Q1) A firm's ______ cost is equal to the sum of the ______ costs of the individual units it produces.
A) total; average
B) variable; average
C) total; marginal
D) variable; marginal
Q2) If Q represents a firm's level of output,W represents the wage paid to labor (L)and R is the cost of capital (K),then which of the following represents the firm's cost function?
A) C(Q) = FC + VC(Q)
B) C(Q) = FC(Q) + VC(Q)
C) C(Q) = WL + RK
D) C(Q) = (W + R)Q
Q3) The strategy whereby a firm makes most of its own inputs is called:
A) economies of scope.
B) horizontal integration.
C) economies of scale.
D) vertical integration.
Q4) Using a graph,explain the relationship between average cost and marginal cost.
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Page 10
Chapter 9: Profit Maximization
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Q1) When actions are finely divisible marginal benefit is ______ marginal cost at an interior best choice.
A) greater than
B) less than
C) equal to D) greater than or equal to
Q2) The Law of Supply ______ holds for price-taking firms.
A) always
B) usually
C) occasionally
D) never
Q3) Any price ______ will cause the firm to shut down production.
A) below the minimum of MC
B) above the maximum of AC
C) below the minimum of AC
D) between MC and AC
Q4) Using a graph,explain why the law of supply holds for a competitive firm.
Q5) Define producer surplus.Using a graph,illustrate producer surplus for a firm with an avoidable fixed cost.Why is it convenient to focus on producer surplus when analyzing policy changes?
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Chapter 10: Choices Involving Time
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Q1) The amount of money borrowed in a transaction is called:
A) interest.
B) principal.
C) internal rate of return.
D) present discounted value.
Q2) Which of following statements about bonds is NOT true?
A) Bonds have a variable term.
B) The face value of a bond is the amount to be paid at maturity.
C) The maturity of a bond refers to the period over which payments are made.
D) When interest rates rise, the present discounted value of a bond falls.
Q3) Jennifer has just finished high school and is deciding whether to start working or go to college.She has already been offered a job that pays $35,000 a year.Four years of college will cost $12,000 each year.She would earn an extra $20,000 each year after she graduates for the 45 years she plans on working until she retires.Assume that the interest rate is 8.5%.What is Jennifer's opportunity cost of one year of college?
A) $12,000
B) $17,000
C) $35,000
D) $47,000
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Page 12
Chapter 11: Choices Involving Risk
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Q1) An insurance premium is:
A) the contract that reduces the financial loss associated with some risky event.
B) the amount of money a policy holder pays for the insurance policy.
C) the amount of money a policy holder receives if a specific loss occurs.
D) the probability of loss from a specific event.
Q2) Suppose Lily's indifference curves are defined as U = F<sub>S</sub> + F<sub>H</sub>,where F<sub>S</sub> is consumption during sunny weather and F<sub>H</sub> is consumption during a hurricane.Lily receives 64 units of food when it is sunny and 16 units of food when there is a hurricane.If the probability of sunshine is = 0.5,the expected consumption is:
A) 52
B) 28
C) 40
D) 5
Q3) Risk:
A) is inherent in every action or decision.
B) exists whenever the consequences of a decision are uncertain. C) exists when outcomes are certain.
D) is a good that can be purchased.
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Page 13
Chapter 12: Choices Involving Strategy
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Q1) Use the concepts of reputation and asymmetric information to explain why some faculty members become less productive after gaining tenure.
Q2) Cooperation:
A) is sustained by the threat of punishment for bad behavior.
B) is sustained by the promise of reward for good behavior.
C) will fail to be established if threats/promises are not credible.
D) All of these are true about cooperation.
Q3) A player's best response is:
A) a strategy that provides him with a minimum payoff, assuming that other players behave in a specified way.
B) a strategy that provides him with the highest possible payoff, assuming that other players behave in a specified way.
C) a strategy that provides him with some payoff defined by a probability.
D) None of these is correct.
Q4) Which of the following is a game of perfect information?
A) Chess
B) Poker
C) Rock-Paper-Scissors
D) Both chess and poker are games of perfect information.
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Chapter 13: Behavioral Economics
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Q1) Behavioral economists view the standard economic theory of decisions involving time as being too restrictive because people:
A) have lapses in self-control.
B) make systematic errors in forecasting the future.
C) are reluctant to abandon projects after incurring substantial sunk costs, despite low probabilities of success.
D) All of these describe reasons why the standard economic theory of decisions over time can be too restrictive.
Q2) A dieter who prefers to eat small portions at his next meal,but chooses a large portion at mealtime when it arrives is:
A) dynamically consistent.
B) dynamically inconsistent.
C) exhibiting self-control.
D) exhibiting a past bias.
Q3) Pre-commitment is:
A) a solution for dynamic inconsistency.
B) a choice that increases the number of future options.
C) a way to force "bad" choices by removing future good options.
D) All of these are true about pre-commitment.
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Page 15
Chapter 14: Equilibrium and Efficiency
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Q1) Suppose the market demand for milk is Q<sup>d</sup> = 1505P.Additionally,suppose that a dairy's variable costs are VC = 2Q<sup>2</sup> (where Q is the number of gallons of milk produced each day),its marginal cost is MC = 4Q and there is an avoidable fixed cost of $50 per day.In the long run there is free entry into the market.Suppose the demand for milk doubles.If in the short run the number of firms is fixed and their fixed costs are sunk,how much does each of the active firms produce in the short run equilibrium?
A) 5 units
B) 6 units
C) 10 units
D) 20 units
Q2) The market demand function for ice cream is Q<sup>d</sup> = 10 - 2P and the market supply function for ice cream is Q<sup>s</sup> = 4P - 2,where both quantities are measured in millions of gallons per year.What is the aggregate surplus at the competitive market equilibrium?
A) $4.5 million
B) $9 million
C) $13.5 million
D) $27 million
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Chapter 15: Market Intervention
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Q1) The market demand function for wheat is Q<sup>d</sup> = 10 - 2P and the market supply function is Q<sup>s</sup> = 4P - 2,both measured in billions of bushels per year.Suppose the government wants to increase the price of wheat to $3/bushel and they impose a price floor to achieve their goal.How much wheat goes to waste under the program?
A) 10 billion bushels per year
B) 4 billion bushels per year
C) 6 billion bushels per year
D) No wheat goes to waste.
Q2) Suppose the domestic market demand function in a certain market where Q is measured in thousands of units is Q<sup>d</sup> = 20 - 2.5P,and the domestic market supply function is Q<sup>s</sup> = 2.5P - 7.5.Suppose further that the world price for the good in question is $3.40 per unit.Under conditions of free trade,how much producer surplus will there be?
A) $26,450
B) $200
C) $400
D) $600
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Page 17
Chapter 16: General Equilibrium, Efficiency, and Equity
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Q1) A society can use competitive markets to achieve efficiency without sacrificing equity if it can:
A) derive its social welfare function.
B) reallocate the society's goods.
C) eliminate market failures.
D) change the initial distribution of resources.
Q2) A market-clearing curve for a good:
A) shows the quantities supplied and demanded for a particular product.
B) shows the combinations of prices, both for that good and for other related goods, that bring supply and demand for the good into balance.
C) shows the quantities supplied and demanded for all goods.
D) shows equilibrium in a particular market.
Q3) A market failure:
A) is a source of inefficiency in an imperfectly competitive economy.
B) can always be corrected by government intervention.
C) cannot be corrected.
D) is a theoretical proposition that has never been proven to exist.
Q4) Discuss the second welfare theorem.How can societies use competitive markets to achieve both efficiency and equity?
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Chapter 17: Monopoly
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Q1) Suppose a firm has a variable cost function VC = 20Q with avoidable fixed cost of $50,000.What is the firm's average cost function?
A) AC = 50,000 + 20Q
B) AC = (50,000/Q) + 20
C) AC = 50,000 + 40Q
D) AC = 20
Q2) The ________ consumers make decisions about whether to purchase that ________ affected by small changes in price or quality,therefore a quality improvement for these consumers is not profitable.
A) inframarginal; are
B) inframarginal; are not
C) marginal; are
D) marginal; are not
Q3) The difference between a monopsonist's marginal expenditure and that of a price taker is:
A) the marginal cost of the input.
B) the input expansion effect.
C) the price increase effect.
D) the marginal substitution effect.
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Chapter 18: Pricing Policies
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Q1) A movie monopolist sells to students and adults.The demand function for students is Q<sup>d</sup><sub>S</sub> = 600 - 100P and the demand function for adults is Q<sup>d</sup><sub>A</sub> = 1,200 - 100P.The marginal cost is $2 per ticket.Suppose the movie theater can price discriminate.What price per ticket does the theater charge adults to maximize profits?
A) $4
B) $7
C) $6
D) $12
Q2) Suppose Always There Wireless serves 100 high-demand wireless consumers,who each have a monthly demand curve for wireless minutes of Q<sup>d</sup><sub>H</sub> = 200 - 100P,and 300 low-demand consumers,who each have a monthly demand curve for wireless minutes of Q<sup>d</sup><sub>L</sub> = 100 - 100P,where P is the per-minute price in dollars.The marginal cost is $0.25 per minute.Suppose Always There Wireless charges $0.25 per minute.What are Always There Wireless's total profits?
A) $3,750
B) $11,250
C) $61,250
D) $400
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Page 20
Chapter 19: Oligopoly
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Q1) As products become more differentiated:
A) consumers are less willing to switch in response to price changes and competition becomes more intense.
B) consumers are more willing to switch in response to price changes and competition becomes more intense.
C) consumers are less willing to switch in response to price changes and competition becomes less intense.
D) consumers are more willing to switch in response to price changes and competition becomes less intense.
Q2) One of the most notable features of the main provisions of the Sherman Act is that they are:
A) strict.
B) weak.
C) vague.
D) obsolete.
Q3) Compare and contrast the Bertrand and Cournot models of oligopoly.Your discussion should include assumptions made,goals of the firms and the resulting outcomes.
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21
Chapter 20: Externalities and Public Goods
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Q1) The median voter theorem states that:
A) if voters have multi-peaked preferences, all of them prefer the median ideal policy.
B) if voters have single-peaked preferences, none of them prefer the median ideal policy.
C) if voters have single-peaked preferences, a majority of them prefer the median ideal policy to all other policies.
D) if voters have multi-peaked preferences, a majority of them prefer the median of those preferences.
Q2) Four stores have a problem with theft and security is a public good.Let S stand for the number of person-hours of security patrols per week.The marginal benefit of security patrols to each of the stores is given by the formula MB = 200 - 2S.Patrols cost $20 per hour.What is the socially efficient level of security?
A) 90 person-hours of patrols per week
B) 100 person-hours of patrols per week
C) 92.5 person-hours of patrols per week
D) 97.5 person-hours of patrols per week
Q3) Explain ways in which the government can remedy an externality.
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Page 22
Chapter 21: Asymmetric Information
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Q1) Suppose all workers in a certain labor market are of either high quality or low quality.Potential employers value a high-quality worker at $15,000 per month and a low-quality worker at $7,500 per month.The monthly supply of high-quality workers is Q<sup>s</sup><sub>H</sub> = 0.04(W - 1,500)and the supply of low-quality workers is Q<sup>s</sup><sub>L</sub> = 0.08(W - 1,500),where W is the monthly wage.If workers' abilities are not observable to employers,how many workers of each type do employers hire?
A) Q<sub>H</sub> = 540; Q<sub>L</sub> = 480
B) Q<sub>H</sub> = 510; Q<sub>L</sub> = 510
C) Q<sub>H</sub> = 680; Q<sub>L</sub> = 340
D) Q<sub>H</sub> = 340; Q<sub>L</sub> = 680
Q2) People with different information choose different alternatives in ________ equilibria; they choose the same alternatives,despite having different information,in ________ equilibria.
A) asymmetric; pooling
B) separating; pooling
C) asymmetric; coordinating D) separating; coordinating
Q3) Explain the differences and similarities between screening and signaling.Is one better than the other?
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