Advanced Microeconomics
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Course Introduction
Advanced Microeconomics delves into the theoretical foundations and analytical tools necessary to understand complex decision-making processes by individuals, firms, and institutions. The course covers topics such as consumer and producer theory, general equilibrium, game theory, market failures, information economics, and mechanism design. Emphasis is placed on mathematical modeling, proof-based analysis, and the application of microeconomic principles to real-world issues and policy debates. Students will build expertise in constructing and analyzing abstract models, critically evaluating economic assumptions, and utilizing advanced techniques to explore the implications of microeconomic theory in diverse economic environments.
Recommended Textbook Microeconomics 5th Edition by David Besanko
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Chapter 1: Analyzing Economic Problems
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Sample Questions
Q1) The analytical tools underlying nearly all microeconomic studies are:
A) Unconstrained optimization and comparative statics.
B) Comparative statics and game theory.
C) Opportunity cost and equilibrium analysis.
D) Constrained optimization, equilibrium analysis, and comparative statics.
Answer: D
Q2) Suppose that we illustrate demand and supply with quantity on the horizontal axis and income on the vertical axis. Let demand be a function of price and income, Q<sup>d</sup> (P, I). Which of the following statements is true?
A) A change in income will cause a shift in the demand curve.
B) A change in income level is represented by a movement along the demand curve.
C) Income is treated as an exogenous variable in the graphical analysis.
D) Price and income together must change in order to create a shift in the demand curve.
Answer: B
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Chapter 2: Demand and Supply Analysis
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Q1) Which of the following explanations supports the statement that long-run supply curves are likely to be more elastic than short-run supply curves?
A) Firms are able to adjust fixed inputs in the long-run but not in the short-run.
B) Firms are able to adjust variable inputs in the short-run.
C) Firms prefer to hire workers rather than capital.
D) Firms have more flexibility in the short-run.
Answer: A
Q2) Indicate whether each of the following events will shift the monthly demand curve for the Ford Taurus (a midsize car) to the right, to the left, or not at all: (a) GM introduces a new line of small, fuel-efficient cars; (b) Following an agreement between the US and Japan, Japanese car manufacturers will ''voluntarily'' reduce their exports of medium sized cars to the US; (c) The cost of steel increases.
Answer: (a) shifts demand to the left: at a given price for the Ford Taurus, some of its potential buyers will now purchase the new model; (b) shifts demand to the right: as the price of Japanese imports increases more people are willing to purchase US-made cars; (c) does not affect the demand curve.
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Chapter 3: Consumer Preferences and the Concept of Utility
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Sample Questions
Q1) Consider the utility function U = min (5x, 7y). To increase satisfaction the consumer must consume
A) at least 5 units more of \(x\)
B) at least 7 units more of y
C) more of both x and y
D) more of either x or y
Answer: C
Q2) Which of the following utility functions is an example of preferences for perfect complements?
A) \(U ( x , y ) = y \sqrt { x }\)
B) \(U ( x , y ) = \min \{ 2 x , y \}\)
C) \(U ( x , y ) = 3 x + 5 y\)
D) \(U ( x , y ) = 2 x ^ { 2 } + 4 y\)
Answer: B
Q3) An illustration of an indifference curve has:
A) prices of the goods on the axes.
B) quantities of the goods on the axes.
C) price on the vertical axis, quantity on the horizontal axis.
D) Price on the horizontal axis, quantity on the vertical axis.
Answer: B
Page 5
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Chapter 4: Consumer Choice
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Sample Questions
Q1) The tangency condition for the optimal choice for a consumer is given by
A) MRS<sub>x,y</sub> = P<sub>y</sub>/P<sub>x</sub>
B) MU<sub>x</sub>/MU<sub>y</sub> = 1
C) MRS<sub>x,y</sub> = P<sub>x</sub>/P<sub>y</sub>
D) MU<sub>x</sub>/MU<sub>y</sub> = P<sub>y</sub>/P<sub>x</sub>
Q2) If a consumer purchases two goods, food (measured along the \(x\) axis) and housing (measured along the \(y\) axis), and if the price of food is $3 per unit and the price of housing is $400 per unit, then what is the slope of the consumer's budget constraint if the consumer has an income of $600?
A) -3/600.
B) -3/400
C) -400/600
D) -400/3
Q3) If good \(x\) is measured along the horizontal axis and good \(y\) is measured along the vertical axis, then the slope of the budget constraint can be expressed as
A) - \(P _ { x } / P _ { y }\)
B) - \(I / P _ { y }\)
C) - \(I / P _ { x }\)
D) - \(P _ { y } / P _ { x }\)
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Chapter 5: The Theory of Demand
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Sample Questions
Q1) An Engel curve for good \(x\) describes
A) how the consumption of good \(x\) varies as the price of good \(x\) changes.
B) how the consumption of good \(x\) varies as the consumer's income changes.
C) how the consumption of good \(x\) varies as the consumption of good \(y\) changes.
D) how the consumption of good \(x\) varies as price-consumption curve changes.
Q2) Under what circumstances is the demand curve upward-sloping?
A) When the good is a normal good.
B) When the good is an inferior good and the substitution effect outweighs the income effect.
C) When the good is an inferior good and the income effect outweighs the substitution effect.
D) The demand curve can never be upward-sloping.
Q3) If a consumer's preferences for two goods, say food and clothing, are such that as income increases, consumption of food and clothing both increase, we can say that
A) food and clothing are inferior goods.
B) food is a normal good and clothing is an inferior good.
C) food is an inferior good and clothing is a normal good.
D) food and clothing are both normal goods.
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Chapter 6: Inputs and Production Functions
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Sample Questions
Q1) Assuming a firm uses capital and labor to produce output, which of the following is not always a true statement?
A) Assuming the marginal products of labor and capital are greater than zero, doubling the inputs of capital and labor will lead to greater output.
B) Assuming the marginal products of labor and capital are less than zero, doubling the inputs of capital and labor will lead to less output.
C) Assuming the marginal products of labor and capital are greater than zero, doubling the inputs of capital and labor will lead to double the output.
D) Assuming the marginal products of labor and capital are greater than zero, doubling the input of capital and keeping the input of labor constant will lead to greater output.
Q2) A fixed proportions production function
A) is not observed in practice.
B) has straight line isoquants.
C) has L-shaped isoquants.
D) has a constant marginal rate of technical substitution as the firm substitutes labor for capital.
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Chapter 7: Costs and Cost Minimization
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Sample Questions
Q1) The short-run is
A) a time period in which all input levels are fixed.
B) a time period in which at least one input level is fixed.
C) three months.
D) a time period in which no input levels are fixed.
Q2) A firm's production function is given by Q = KL. The marginal products of labor and capital are, respectively, MP<sub>L</sub> = K and MP<sub>K</sub> = L. The wage rate of labor is w = $10 and the rental rate of capital is r = $20. The firm wants to produce 1,800 units of output. What is the most efficient combination of labor and capital \( (L, K) \) ?
A) (10, 20)
B) (20, 90)
C) (60, 30)
D) (90, 20)
Q3) Economic costs
A) are the same as accounting costs.
B) are the same as implicit costs.
C) are the same as opportunity costs.
D) are the same as the sum of all past explicit costs
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Chapter 8: Cost Curves
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Sample Questions
Q1) Suppose a firm's total cost curve is given by the equation \(T C = Q ^ { 2 } + 2 Q + 100\) . The firm's marginal cost is \(M C = 2 Q + 2\) . At what level of \(Q\) does the firm's average cost curve reach a minimum?
A) 100
B) 2
C) 10
D) 20
Q2) The short-run total cost curve is the sum of two components
A) Short-run and long-run
B) Total variable cost curve and total fixed cost curve
C) Average cost curve and marginal cost curve
D) Economies of scale and economies of scope
Q3) Let a firm's long run total cost be described by the constant elasticity total cost function. The coefficient of the log of output in this function is interpreted as the A) average cost.
B) marginal cost.
C) output elasticity of total cost.
D) cost driver.
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Chapter 9: Perfectly Competitive Markets
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Q1) In a perfectly competitive industry, individual firms act as A) price makers.
B) a single, cooperative entity.
C) profit minimizers.
D) price takers.
Q2) Short-run perfectly competitive equilibrium is defined as
A) The market price and quantity at which quantity demanded equals quantity supplied in the short term.
B) The output level and price where all firms in the market are profit maximizing.
C) The point at which all firms earn zero profits.
D) The point where there is no incentive to enter the market.
Q3) In an increasing cost industry, the long-run market supply curve is
A) downward sloping
B) horizontal
C) upward sloping
D) vertical
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Chapter 10: Competitive Markets: Applications
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Sample Questions
Q1) Identify the truthfulness of the following statements.
I. The profit in a perfectly competitive market is the one that maximizes the economic benefits (the sum of consumer and producer surplus).
II. In a way, statement I represents the "invisible hand" of the marketplace that Adam Smith was discussing in his 1776 classic treatise sometimes referred to as "The Wealth of Nations."
A) Both I and II are true.
B) Both I and II are false.
C) I is true; II is false.
D) I is false; II is true.
Q2) Which of the following statements is not generally true of a production quota?
A) The market will not clear due to the excess supply of that good.
B) Consumer surplus increases when compared to the market before the quota.
C) Producer surplus may increase or decrease.
D) Some of the consumer surplus will be transferred to producers.
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Chapter 11: Monopoly and Monopsony
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Sample Questions
Q1) To maximize profit, the monopolist sets
A) price equal to marginal cost.
B) total revenue equal to total cost.
C) marginal revenue equal to marginal cost.
D) marginal revenue equal to average cost.
Q2) The total economic benefit under monopoly would be
A) 300
B) 600
C) 900
D) 1,200
Q3) Identify the truthfulness of the following statements.
I. IEPR applies to any firm facing a downward-sloping demand curve for its products, not just a monopolist.
II. Firms producing differentiated products face downward-sloping demand
A) I and II are true.
B) I and II are false.
C) I is true; II is false.
D) II is true; I is false.
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Chapter 12: Capturing Surplus
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Sample Questions
Q1) A monopolist faces inverse demand \(P = 400 - 4 Q ^ { d }\) and has constant marginal cost \(M C = 80\) . If this monopolist engages in first-degree price discrimination, total output will equal
A) 20 units
B) 40 units
C) 60 units
D) 80 units
Q2) Suppose you sign-up for a membership at a video rental store. When you sign-up you are charged a subscription fee, and in addition you will be charged for each video you rent. This is an example of
A) first-degree price discrimination.
B) second-degree price discrimination.
C) third-degree price discrimination.
D) bundling.
Q3) Bundling is a form of
A) first-degree price discrimination.
B) second-degree price discrimination.
C) third-degree price discrimination.
D) tying.
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Page 14
Chapter 13: Market Structure and Competition
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Sample Questions
Q1) Suppose in a Cournot duopoly that two firms, Firm 1 and Firm 2, face market demand \(P = 50 - Q\) and both have marginal cost, \(M C = \$ 20\) . The equilibrium industry profits in this market will be
A) 150
B) 200
C) 250
D) 300
Q2) Let firm A face demand curve Q<sub>A</sub> = 100 - P<sub>A</sub> + .5P<sub>B </sub>and firm B face demand curve Q<sub>B</sub> = 100 - P<sub>B</sub> + .5P<sub>A</sub>. Products A and B both have constant marginal cost of production of 10 per unit (and no fixed cost). Each firm acts as a Bertrand competitor. What are the Bertrand Equilibrium prices in this market?
A) P<sub>B</sub> = 72.5; P<sub>A</sub> = 70
B) P<sub>B</sub> = P<sub>A</sub> = 73.33
C) P<sub>B</sub> = 74; P<sub>A</sub> = 87
D) P<sub>B</sub> = P<sub>A</sub> = 74
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Chapter 14: Game Theory and Strategic Behavior
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Sample Questions
Q1) Game 8 shows the payoff matrix in terms of profit (in millions of dollars) for two possible strategies: advertise or do not advertise. If they legally could, why might the two companies agree to a binding contract committing both to not advertise?
A) Because advertising is ineffective.
B) Because advertising is too expensive.
C) Because not advertising would lower the costs and therefore increase the profits to each firm.
D) Because not advertising would lower profits.
Q2) In Game 3 above,
A) A1 is a dominated strategy for Player A
B) A2 is a dominated strategy for Player A
C) A3 is a dominated strategy for Player A
D) Player A has no dominated strategies.
Q3) Games with structures like Game 9 above have been used to describe A) bank runs.
B) collusion in Sumo wrestling.
C) dominant strategy equilibria.
D) the decision to hire a lawyer.
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Chapter 15: Risk and Information
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Sample Questions
Q1) If the decision maker chooses Decision A and Event 1 occurs, which decision alternative should the decision maker choose at node D?
A) Decision 1
B) Decision 2
C) Either Decision; they both have the same expected value.
D) Neither Decision; more information is needed.
Q2) In economics, a lottery is
A) the likelihood that a particular outcome occurs.
B) a depiction of all possible outcomes of an event and their associated probabilities.
C) any event for which the outcome is uncertain.
D) a measure of risk associated with some event.
Q3) Suppose you purchase a collectible baseball card from an acquaintance for $50. You think it could be worth $1,000 with a 10% probability and $0 with a 90% probability. What is your expected value for the baseball card?
A) $150
B) $100
C) $1000
D) $50
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Chapter 16: General Equilibrium Theory
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Sample Questions
Q1) When a fixed stock of inputs cannot be reallocated in such a way to make all consumers better off by producing more of one product and less of another product, the allocation satisfies
A) exchange efficiency.
B) input efficiency.
C) substitution efficiency.
D) Walras' Law.
Q2) According to Walras' Law, in a general competitive equilibrium with a total of ____ markets, if supply equals demand in the first _____ markets, then supply will equal demand in the _____ market as well.
A) three; two; first
B) three; three; third
C) three; two; third
D) three; three; first
Q3) Gains from free trade are realized when countries specialize in the production of goods
A) for which they have a comparative advantage.
B) which they can produce for low costs.
C) for which they have an international reputation for excellence.
D) which they can produce for a profit.
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Chapter 17: Externalities and Public Goods
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Q1) ________________ states that regardless of how property rights are assigned with an externality, the allocation of resources will be will be efficient when the parties can costlessly bargain with each other.
A) Bargaining power
B) Opportunity cost
C) The Coase Theorem
D) Common Property
Q2) A governmental limit on the amount of pollution that may be emitted is referred to as
A) a public good.
B) an emissions standard.
C) an emissions fee.
D) a positive externality.
Q3) When the market for product X includes a negative externality,
A) marginal social cost exceeds marginal private cost.
B) marginal private cost exceeds marginal social cost.
C) marginal social benefit exceeds marginal private benefit.
D) marginal private benefit exceeds marginal social benefit.
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