Advanced Microeconomics Practice Questions
Course Introduction
Advanced Microeconomics explores the theoretical foundations of economic behavior at the individual and firm levels, examining concepts such as consumer and producer theory, general equilibrium, market structures, and game theory. The course delves into the mathematical modeling of decision-making, the implications of market imperfections, and the role of information in economic interactions. Students gain an in-depth understanding of key microeconomic principles while developing analytical tools essential for tackling complex economic problems and conducting research in the field.
Recommended Textbook
Microeconomics Theory and Applications with Calculus 3rd Edition by Jeffrey M. Perloff
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Page 2
Chapter 1: Introduction
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Sample Questions
Q1) Which of the following is an example of a normative statement?
A) Since this good is bad for you, you should not consume it.
B) This good has bad health effects.
C) If you consume this good, you will get sick.
D) People usually get sick after consuming this good.
Answer: A
Q2) Which of the following statements is a normative statement?
A) Minimum wage reduces employment.
B) Minimum wages causes surplus in labor market.
C) Minimum wage will improve the living of junior works more than senior workers.
D) Minimum wage should be welcomed by the low income class.
Answer: D
Q3) Explain how a market helps determine which goods and services will be produced,how to produce them,and who gets them.
Answer: A market promotes interaction between consumers and firms.This interaction will result in prices that influence the decisions of consumers and firms.
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3
Chapter 2: Supply and Demand
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Sample Questions
Q1) Suppose the supply curve and the demand curve both have unitary elasticity at all prices.The price increase to consumers resulting from a specific tax of $1 imposed on sellers will be
A) $1.
B) 50 cents.
C) zero.
D) impossible to calculate without knowing the slope of the supply curve.
Answer: B
Q2) Only in the case of perfectly inelastic demand will consumers pay the full amount of a specific tax or ad valorem tax.
A)True
B)False
Answer: False
Q3) When the price of beef rises,consumers switch consumption to substitutes such as chicken and fish,thereby decreasing the demand for beef.
A)True
B)False
Answer: False
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Chapter 3: A Consumers Constrained Choice
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Sample Questions
Q1) If both prices increases by 50%,
A) budget constraint will be unchanged.
B) slope of the budget constraint stay the same.
C) slope of the budget constraint will decrease.
D) budget constraint will shift outward in a parallel fashion.
Answer: B
Q2) Clifford lives by the motto "Eat drink and be merry today,for tomorrow doesn't matter." If today's consumption is represented by "x" and tomorrow's consumption is represented by "y",then which of the following best represents Clifford's utility function?
A) U = x - y
B) U = x/y
C) U = x
D) U = y
Answer: C
Q3) If MRS > MRT,then the consumer is better off than at equilibrium.
A)True
B)False
Answer: False
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Chapter 4: Demand
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Q1) A Californian student consumes Internet services (I)and books (B).Her preferences are represented by a Cobb-Douglas utility function of the type: U(I,B)= I. B. .Initially Y = 100,PI = PB = 1.Lately,however,because of the electricity shortage,the price of the Internet services has increased to 2.The government has decided to give a transfer to the student so that she can recover her initial welfare.In order to determine the transfer the government has hired three consultants who have made the following suggestions:
Consultant A: The transfer should allow the student to buy her initial bundle.
Consultant B: The transfer should allow the student to get her initial level of utility.
Consultant C: The government should give her a transfer of 20.
a.Using the expenditure function,find the amount of the transfer implied by consultant A.
b.Find the amount of the transfer implied by consultant B.
c.Determine whether the consumer is better or worse off from Consultant C's suggestion than before the price increases.
Q2) When income increases by 1%,the quantity demanded of a good decreases by 2%.What is the income elasticity of the good? Is the good normal or inferior? Why?
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Chapter 5: Consumer Welfare and Policy Analysis
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Sample Questions
Q1) You enter a store and buy a bottle of soda.Do you usually receive consumer surplus?
A) Yes, because you wouldn't buy the soda if your willingness to pay would be less than the price.
B) Yes, because you are thirsty.
C) No, because you value other drinks more.
D) No, because you have less money after the transaction.
Q2) In response to an increase in the wage rate,the substitution effect will cause a person to
A) supply fewer hours of labor.
B) supply more hours of labor.
C) supply the same hours of labor.
D) have a backward bend in her labor supply curve.
Q3) Sarah's demand curve for whiskey has the same slope as Pete's; however,it lies to the right of Pete's.An increase in the price of whiskey will cause
A) Sarah to incur a greater loss of consumer surplus than Pete will.
B) Pete to incur a greater loss of consumer surplus than Sarah will.
C) Sarah and Pete to incur the same loss of consumer surplus.
D) Sarah's demand curve to shift closer to Pete's.
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Page 7
Chapter 6: Firms and Production
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Sample Questions
Q1) The returns to scale of the production function Q = 50 L . K .² are
A) 50.
B) .6.
C) .8.
D) 50 . .
Q2) Explain why labor might not always be a variable input.
Q3) Which of the following statements best describes a production function?
A) the maximum profit generated from given levels of inputs
B) the maximum level of output generated from given levels of inputs
C) all levels of output that can be generated from given levels of inputs
D) all levels of inputs that could produce a given level of output
Q4) The production function Q = 0.8X + 0.6Y exhibits
A) increasing return to scale.
B) decreasing returns to scale.
C) constant returns to scale.
D) economies of scale.
Q5) Suppose the production function for T-shirts can be represented as q = L .² K . .When K = 1 and q = 2,what is the slope of the isoquant? If there is insufficient information to answer the question,describe what information is needed.
Q6) When do we mean by efficient production?
Page 8
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Chapter 7: Costs
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Sample Questions
Q1) Suppose each worker must use only one shovel to dig a trench,and shovels are useless by themselves.In the short run,an increase in the price of shovels will result in
A) fewer shovels being purchased.
B) more workers being hired.
C) a decrease in the firm's output.
D) no change in the firm's output.
Q2) A specific tax of $1 per unit of output will affect a firm's
A) average total cost, average variable cost, average fixed cost, and marginal cost.
B) average total cost, average variable cost, and average fixed cost.
C) average total cost, average variable cost, and marginal cost.
D) marginal cost only.
Q3) What are the functions for MC and AC if TC = 100q + 100q²? Are the returns to scale increasing,decreasing,or constant?
Q4) Ed's construction company has the following short-run cost function: q³ - 10q² + 36q.
a.What level of output will minimize the average cost? What is the AC at this point?
b.Does the production process indicate diminishing returns? How can you tell?
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Page 9
Chapter 8: Competitive Firms and Markets
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Sample Questions
Q1) The above figure shows the cost curves for a typical firm in a competitive market.If there are 200 identical firms,estimate the market quantity supplied when p = 4,8,and 10.
Q2) Suppose there are 1000 identical wheat farmers.For each,TC = 10 + q².Derive the market supply curve.
Q3) The above figure shows the cost curves for a typical firm in a competitive market.From the graph,estimate the firm's profits when price equals $10 per unit.
Q4) Suppose an industry has no fixed costs.Draw two graphs side by side for the industry.In the left graph draw a U-shaped average cost curve and the corresponding marginal cost curve.In the right graph,draw a downward-sloping market demand curve.Also in the right graph,draw a short-run supply curve that would generate positive profit,and the long-run supply curve that would result.
Q5) Suppose a firm has the following total cost function TC = 100 + 2 q².If price equals $20,what is the firm's output decision? What are its short-run profits?
Q6) Draw a graph that shows how the short-run shut-down price changes when an input price increases.
Q7) Explain why shutting down and going out-of-business are different concepts.
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Chapter 9: Properties and Applications of the Competitive Model
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Sample Questions
Q1) Producer surplus is the sum of the profits earned by all firms in a market.
A)True
B)False
Q2) The above figure shows supply and demand curves for milk.If amount Q2 is produced in the market
A) producer surplus is maximized.
B) consumer surplus is minimized.
C) a deadweight loss is generated.
D) All of the above.
Q3) The above figure shows supply and demand curves for apartment units in a large city.If the city government passes a law that establishes $350 per month as the legal maximum rent,the loss in social welfare equals
A) b + c.
B) f.
C) a.
D) f + g.
Q4) Even if two competitive firms in the same market have different production technologies,they will each earn long-run zero profits.Why?
Q5) When is the profit a firm earns equal to the producer surplus? Explain.
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Chapter 10: General Equilibrium and Economic Welfare
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Sample Questions
Q1) Explain why a government may select an inefficient allocation.
Q2) When two people trade their initial endowments to a point on the contract curve,only the level of the endowments will determine the new allocation.
A)True
B)False
Q3) If price support policy increases producer surplus more than reducing consumer surplus,then
A) the policy leads to a Pareto-superior allocation.
B) the policy leads to an increase in social welfare.
C) the policy improves the efficiency of society.
D) None of above.
Q4) If society were to maximize the utility of its worst-off member,the final allocation would most likely be
A) relatively egalitarian.
B) on the contract curve.
C) Pareto efficient.
D) one in which one person gets everything.
Q5) Explain the logic behind the First Theorem of Welfare Economics.
Q6) How does competition ensure that the efficient product mix is attained?
Page 12
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Chapter 11: Monopoly and Monopsony
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Sample Questions
Q1) If the government sets a specific tax and an ad valorem tax so that they raise the same amount of tax revenue,why does the ad valorem tax reduce output less than the specific tax?
Q2) The above figure shows the demand and cost curves facing a monopoly.If the firm is a profit maximizer,its Lerner Index will equal A) 1.
B) 1/3.
C) 1.5.
D) 3.
Q3) A monopolist faces the (inverse)demand for its product: p = 50 - 2Q.The monopolist has a marginal cost of 10/unit and a fixed cost given by F.
a.Assume that F is sufficiently small such that the monopolist produces a strictly positive level of output.What is the profit-maximizing price and quantity?
b.Compute the maximum profit for the monopolist in terms of F.
c.For what values of F will the monopolists profit be negative?
Q4) Draw a graph that shows a shift in the demand curve that causes the optimal monopoly price to change,while the quantity remains the same.
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13
Chapter 12: Pricing and Advertising
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Sample Questions
Q1) Suppose a monopoly produces film and cameras.Consumers demand pictures,which require film and one camera.Two different types of consumers have the following demand for film,qA = 100 - 10p and ?qB = 80 - 10p.The monopoly cannot price discriminate in the market for film or the market for cameras,but it can bundle the products.The monopoly produces film at a constant marginal cost of $1 per roll.What price will the monopoly set for film and for cameras?
Q2) Which of the following is an example for group price discrimination?
A) a BMW selling for more than a VW
B) local residents receiving a discount at the local golf course
C) the fact that a razor is cheap and blades are expensive
D) a hotel charging more for a room if the customers bring pets
Q3) Which of the following is NOT an example of firms trying to prevent resale?
A) Movie theatres check student ID for students' discounted tickets.
B) An aluminum company starts its own wire production firm to sell to the aircraft parts at a higher price.
C) Government limits the sale of international edition textbooks in the U.S. market.
D) Milk producers sell the milk to processed dairy products producers at a lower price.
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Chapter 13: Game Theory
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Sample Questions
Q1) After analyzing his opponent a tennis player decides to serve 10% of his serves to the left,50% of his serves to the right,and 40% of his serves at the body of his opponent.This illustrates a
A) deterministic strategy.
B) dominant strategy.
C) mixed strategy.
D) non-game theoretic problem.
Q2) Suppose two firms,A and B,are simultaneously considering entry into a new market.If neither enters,both earn zero.If both enter,they both lose 100.If one firm enters,it gains 50 while the other earns zero.Set up the payoff matrix for this game and determine if any Nash equilibria exist.Can you predict the outcome? What if firm A gets to decide first?
Q3) The above figure shows the payoff to two airlines,A and B,of serving a particular route.If the two airlines must decide simultaneously,which one of the following statements is true?
A) Since firm B has no dominant strategy, its decision is unpredictable.
B) Since firm B's decision is unpredictable, firm A's decision is unpredictable.
C) Neither firm entering is a Nash equilibrium.
D) Firm B will not enter because it knows firm A will.
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15
Chapter 14: Oligopoly and Monopolistic Competition
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Sample Questions
Q1) Two identical firms that share a market and produce a homogeneous good will find the Bertrand Oligopoly LEAST attractive because
A) Cartels generate the highest joint profit.
B) a Cournot Oligopoly will generate more profit than a Bertrand Oligopoly.
C) they want to avoid a price war that leads to profit erosion and P = MC.
D) All of the above.
Q2) Monopolistic competition and monopoly have all of the following in common EXCEPT A) P > MC.
B) Firms are price setters.
C) Barriers to entry.
D) MR = MC.
Q3) The Stackelberg model is more appropriate than the Cournot model in situations where
A) there are more than two firms.
B) all firms enter the market simultaneously.
C) one firm makes its output decision before the other.
D) firms will be likely to collude.
Q4) What happens in a duopoly if both firms try to act as the Stackelberg leader?
Q5) Explain why the intersection of the best-response functions is the Cournot equilibrium.
Page 16
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Chapter 15: Factor Markets
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Sample Questions
Q1) If the competitive firm maximizes profit by selecting labor rather than output,it will earn greater economic profit.
A)True
B)False
Q2) In a perfectly competitive resource market,the labor supply curve facing the single firm is
A) vertical.
B) horizontal.
C) downward sloping.
D) upward sloping.
Q3) At age 40,Joe is considering quitting his job and going back for a college degree.He needs two more years full-time.Tuition is $10,000 per year.He earns $30,000 per year.A college degree would raise his annual income by $10,000 per year.He will retire at age 70.Which of the following makes it more likely that Joe will decide to go back to college full-time?
A) The rate of interest increases.
B) The rate of interest decreases.
C) The government enacts mandatory retirement at age 60.
D) Tuition increases.
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Page 17
Chapter 16: Uncertainty
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Sample Questions
Q1) If Ann's utility function is U =3W . ,and she invests in a business which can yield $6,400 with probability 1/5,and $3600 with probability 4/5,then her Arrow-Pratt measure of risk aversion is
A) 0.5/w.
B) 1/w.
C) 1.5w.
D) 3/w.
Q2) Expected value represents
A) the actual payment one expects to receive.
B) the average of all payments one would receive if one undertook the risky event many times.
C) the payment one receives if he or she makes the correct decision.
D) the payment that is most likely to occur.
Q3) Bob's utility function is shown in the above Figure.He currently has $100 worth of property,but there is a 50% chance that all of it will be stolen.An insurance company offers to reimburse Bob for his loss if the money is stolen.What is the most that Bob would pay for such a policy? Explain.
Q4) Distinguish between risk that can be reduced through diversification and risk that cannot be reduced through diversification.
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Chapter 17: Property Rights, externalities, rivalry, and Exclusion
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Sample Questions
Q1) According to the Coase approach,to achieve socially optimal outcome,two sides must bargain.The bargaining might not be successful because
A) transaction costs are ignorable.
B) firms engage in strategic bargaining.
C) both sides have perfect information.
D) None of the above.
Q2) Suppose two neighbors share a park.One neighbor,Al,leaves trash in the park.This bothers the other neighbor,Bert.According to Coase's theorem,one necessary condition to alleviate the externality is that
A) Al is fined by the government.
B) Al has the right to leave trash and Bert cannot do anything about it.
C) Bert has the right to a clean park and Al cannot leave trash.
D) Either Al or Bert owns the park.
Q3) If a production process generates pollution,then a competitive market will
A) produce more of the good than is socially optimal.
B) produce less of the good than is socially optimal.
C) produce the socially optimal quantity of that good.
D) produce zero output.
Q4) Explain why the optimal amount of pollution is often not zero.
Page 19
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Chapter 18: Asymmetric Information
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Sample Questions
Q1) The market for used cars is shown in the above figure.Ten percent (10%)of all cars are lemons.A mechanic is offering to inspect a car for sale and certify that a car is not a lemon.If car sellers are risk neutral,what is the highest price that a car seller would pay for such a service? Who would buy this service?
Q2) In a company,if high-ability workers get paid $80,000,while low-ability workers get paid $50,000,the education (MBA)that can qualify the workers as high-ability ones cost $20,000.What's the highest share of high-ability workers to get a separating equilibrium? A) 1/4
B) 1/3
C) 1/2
D) 1
Q3) The XYZ Co.is hiring salespersons.They will be paid a very attractive hourly rate that is independent of how much they sell.Describe an adverse selection that would take place.Describe a moral hazard that would take place.
Q4) Explain how product liability laws can reduce adverse selection.
Q5) Adverse selection occurs when an agreement encourages undesirable behavior.
A)True B)False
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Chapter 19: Contracts and Moral Hazards
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Q1) With full information,any contract will lead to production efficiency.
A)True
B)False
Q2) Monitoring is often used by firms in an attempt to decrease A) shirking.
B) piece rates.
C) adverse selection.
D) signaling.
Q3) Suppose a plaintiff hires a lawyer to represent her in a court case.Under which of the following contracts is production efficiency assured?
A) The lawyer is paid by the hour.
B) The lawyer receives a share of the settlement.
C) The lawyer receives a fixed fee.
D) The lawyer pays the client a fee for the right to the entire settlement.
Q4) Workers prefer layoffs to wage reductions during economic downturns because A) layoffs benefit workers more than the firms.
B) workers try to provide firms with incentives to report true economic conditions.
C) firms will keep workers even during economic downturns to avoid more costs.
D) there is symmetric information.
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