Economics for Majors II
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Course Introduction
Economics for Majors II builds upon foundational economic principles explored in introductory courses by delving deeper into both microeconomic and macroeconomic theory and their applications. The course examines advanced topics such as market structures, pricing strategies, game theory, externalities, public goods, fiscal and monetary policy, economic growth, and international trade. Through analytical tools, problem-solving exercises, and real-world case studies, students gain a more comprehensive understanding of how economic agents interact in various market environments and how economic policies influence business cycles and societal welfare. This course is designed to solidify core economic concepts and prepare students for upper-level coursework in the economics major.
Recommended Textbook
Microeconomics 2nd Edition by B. Douglas Bernheim
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Page 2
Chapter 1: Introduction
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Q1) A theory
A) is usually based on a set of value judgments.
B) cannot be tested.
C) is a possible explanation for a natural phenomenon.
D) always fits with real-world data.
Answer: C
Q2) In conducting positive economic analysis,economists apply
A) subjective value judgments.
B) the principle of individual sovereignty.
C) moral values.
D) the scientific method.
Answer: D
Q3) Questions that involve value judgments are
A) Positive questions.
B) Normative questions.
C) Not relevant to microeconomics.
D) Objective.
Answer: B
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Chapter 2: Supply and Demand
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Q1) Suppose that the demand for movies is given by Q<sup>d</sup> = 30 - 2 × P<sub>Movies</sub> and the supply is given by Q<sup>s</sup> = 2 + 2 × P<sub>Movies</sub>.What is the equilibrium price and quantity of movies?
A) P<sub>Movies</sub> = $7, Q = 30
B) P<sub>Movies</sub> = $2, Q = 30
C) P<sub>Movies</sub> = $4, Q = 28
D) P<sub>Movies</sub> = $7, Q = 16
Answer: D
Q2) Which of the following would result from an increase in the supply of 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: D
Q3) What can cause the equilibrium quantity of a good to fall?
A) An increase in demand or an increase in supply
B) A decrease in demand or a decrease in supply
C) An increase in demand or a decrease in supply
D) A decrease in demand or an increase in supply
Answer: B
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Chapter 3: Balancing Benefits and Costs
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Q1) Use cost benefit analysis to explain the decision whether or not to attend college.Why do some people choose not to attend college?
Answer: The decision whether or not to attend college is based on a comparison of the costs and benefits associated with attending college.The benefit of attending college is the extra earnings that result from a college education.The costs of attending college include tuition,board and books.An important opportunity cost of attending college is the lost opportunity to earn income by working instead of attending college.For people who decide to attend college,the benefits exceed the costs,including the opportunity cost of lost wages.Some individuals will decide not to attend college if they perceive that the benefits will not exceed the costs.For some individuals,such as Bill Gates and LeBron James,the opportunity cost of attending college is so high that the costs exceed the benefits,so they rationally choose not to attend (or finish)college.
Q2) If MB grows smaller and MC grows larger as the activity level grows,then:
A) an interior action for which MB = MC is the best choice.
B) net benefit can be increased by increasing the action.
C) net benefit can be increased by decreasing the action.
D) there is no best choice.
Answer: A
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Page 5
Chapter 4: Consumer Preferences
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Q1) Owen and Simon both like playing with balls and cars.Suppose B represents the number of balls,and C represents the number of cars.If Owen's utility function can be given by U(B,C)= 10B + 5C,and Simon's utility function can be given by U(B,C)= 6B + 6C,which of the following trades would be mutually beneficial?
A) Owen gives Simon 3 cars in exchange for 2 balls
B) Owen gives Simon 2 cars in exchange for 3 balls
C) Owen gives Simon 3 balls in exchange for 2 cars
D) Owen gives Simon 2 balls in exchange for 3 cars
Q2) When there is a low degree of complementarity between two products,then their indifference curves will:
A) be relatively straight.
B) be perfectly straight lines.
C) bend sharply.
D) be positively sloped.
Q3) Compare and contrast cardinal utility and ordinal utility.Which concept is sufficient for ranking consumers' preferences? Why?
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Chapter 5: Constraints, Choices, and Demand
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Q1) An increase in the price of the good measured along the vertical axis will cause the budget line to
A) shift outward.
B) shift inward.
C) become steeper.
D) become flatter.
Q2) Which of the following goods is given in the textbook as an example of a good whose price is subject to volume discounts?
A) Electricity
B) Pizza
C) Gasoline
D) Yogurt
Q3) Nicole's income is $1,000 per month.She spends all of it on shoes (S)and books (B).Shoes cost $50 and books cost $25.Her marginal rate of substitution for shoes with books is MRS<sub>SB</sub> = 2B/3S.Illustrate her utility-maximizing combination of shoes and books and draw her price-consumption curve if the price of books rises to $30.
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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Sample Questions
Q1) What must occur for a good to violate the Law of Demand?
A) The good must be normal and the income effect must be larger than the substitution effect.
B) The good must be normal and the substitution effect must be larger than the income effect.
C) The good must be inferior and the income effect must be larger than the substitution effect.
D) The good must be inferior and the substitution effect must be larger than the income effect.
Q2) If a good is _______,the income effect is negative for a price increase and positive for a price decrease.
A) inferior
B) superior
C) normal
D) Giffen
Q3) Using a graph,explain both the substitution effect and income effect that result from an increase in the price of a normal good.
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Chapter 7: Technology and Production
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Q1) Returns to scale is a ______ concept because ______.
A) short-run; it's related to the law of diminishing marginal returns
B) short-run; it deals with varying the level of one input while holding other inputs constant
C) long-run; a firm can change its output level only in the long run
D) long-run; it refers to changes in all of the firm's inputs
Q2) 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.
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) Isoquants are the ______ created by the ______.
A) contour lines; production function
B) contour lines; efficient production frontier
C) tangent lines; production function
D) tangent lines; production possibilities curve
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Chapter 8: Cost
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Q1) ______ occur when a single firm can produce two or more products more cheaply than can two separate firms.
A) Economies of scale
B) Economies of scope
C) Diseconomies of scale
D) Increasing returns to scale
Q2) A ______ cost is ______ if the firm doesn't incur the cost if it produces no output.
A) fixed; sunk
B) fixed; explicit
C) variable; sunk
D) fixed; avoidable
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) Suppose a firm's technology is represented by the function Q = F(L,K)= 5L<sup>0.25</sup>K<sup>0.75</sup>.Does this firm experience economies of scale,diseconomies of scale or neither?
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Chapter 9: Profit Maximization
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Sample Questions
Q1) The relationship between a firm's price and sales quantity is described by the ______ for its product.
A) demand curve
B) supply curve
C) marginal cost curve
D) average cost curve
Q2) How would a $10 increase in per-unit input costs affect a price-taking firm's supply curve?
A) MC would increase by $10, and AC would decrease by $10.
B) AC would increase by $10, and MC would decrease by $10.
C) MC and AC would both decrease by $10.
D) MC and AC would both increase by $10.
Q3) The price reduction effect of the sale of a firm's last Q units of output is:
A) the additional revenue from selling Q units at price P(Q).
B) the reduced revenue from selling (Q - Q) units at a lower price of P(Q).
C) the additional revenue from selling Q units at price P(Q + Q).
D) the reduced revenue from selling (Q - Q) units at a lower price of P(Q - Q).
Q4) Graphically illustrate the quantity rule and the shutdown rule for a price-taking firm.
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Page 11
Chapter 10: Choices Involving Time
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Q1) If a project has an initial investment of $20,000 and consecutive yearly cash inflows of $5,000,$8000,$10,000 and $7,000,respectively,what is its payback period?
A) 2 years
B) 2.5 years
C) 2.7 years
D) 3 years
Q2) When the interest rate rises,saving becomes ______ rewarding and borrowing becomes ______ costly.
A) less; less
B) less; more
C) more; less
D) more; more
Q3) Suppose you borrow $1,000 at 8% for 2 years.If the interest is compounded annually,how much money will you owe at the end of those 2 years?
A) $1,080.00
B) $1,160.00
C) $1,166.40
D) $1,345.60
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Chapter 11: Choices Involving Risk
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Q1) Assume Brandon's benefit function for water is S(W)= W and he consumes water both in droughts,W<sub>D</sub>,or in the rainy season,W<sub>R</sub>.Assume his current consumption bundle is W<sub>D</sub> = 36 and W<sub>R</sub> = 25 and the probability of drought is 0.75.What is Brandon's expected utility?
A) 5.75
B) 33.25
C) 11
D) 30.5
Q2) Explain why a risk averse individual will purchase full insure if a policy is actuarially fair,but only partially insure or not insure at all,if it is not.Use graphs to support your answer.
Q3) Assume Brandon's benefit function for water is S(W)= W and he consumes water both in droughts,W<sub>D</sub>,or in the rainy season,W<sub>R</sub>.Assume his current consumption bundle is W<sub>D</sub> = 400 and W<sub>R</sub> = 100 and the probability of drought is 0.75.Brandon's risk premium is:
A) 250 units of water.
B) 325 units of water.
C) 17.5 units of water.
D) 18.75 units of water.
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Page 13
Chapter 12: Choices Involving Strategy
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Q1) 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.
Q2) A game is:
A) a situation in which each member of a group makes at least one decision and cares both about his own choice and about others' choices.
B) describes a situation in which strategy plays a role.
C) provides the foundation for understanding competition in industries with only a few producers.
D) All of these are correct.
Q3) A player is playing a pure strategy when:
A) he chooses a rule to randomize over the choice of a strategy.
B) he chooses a strategy without randomizing.
C) there is uncertainty in his choice.
D) it is not perfectly predictable.
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Page 14
Chapter 13: Behavioral Economics
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Q1) Suppose Hillary was offered the following choice: Option 1 is to win $10 for sure and Option 2 is to win $20,000 with odds of 1 in 2,000 and otherwise to win nothing.If Hillary is risk averse she:
A) will choose Option 1.
B) will choose Option 2.
C) is indifferent between the two.
D) will choose Option 1 or Option 2 with equal probability.
Q2) Suppose Hillary was offered the following choice: Option 1 is to win $10 for sure and Option 2 is to win $20,000 with odds of 1 in 2,000 and otherwise to win nothing.If Hillary is risk loving she:
A) will choose Option 1.
B) will choose Option 2.
C) is indifferent between the two.
D) will choose Option 1 or Option 2 with equal probability.
Q3) Prospect theory was proposed by:
A) John Nash.
B) Milton Friedman and George Stigler.
C) Amos Tversky and Daniel Kahneman.
D) Gary Becker.
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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.What is the new long-run equilibrium price?
A) $20 per unit
B) $40 per unit
C) $24 per unit
D) $2 per unit
Q2) With free entry:
A) the long run market supply curve is horizontal at the market price.
B) the long run market supply curve is vertical at the market price.
C) the short and long run market supply curves are the same.
D) there is a known and limited number of potential suppliers that can produce a good in the long run.
Q3) Suppose the wiz-pop market is in long-run equilibrium.Suddenly,fixed costs decrease,although variable costs remain unchanged.Discuss the short-run and long-run changes in market equilibrium.
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Page 16
Chapter 15: Market Intervention
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Q1) Suppose 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,both measured in millions of gallons of ice cream per year.Suppose the government imposes a $0.50 tax on each gallon of ice cream.The loss in consumer surplus due to the tax is:
A) $3.56 million.
B) $1.89 million.
C) $7.11 million.
D) $944,444.
Q2) Suppose 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,both measured in millions of gallons of ice cream per year.Suppose the government imposes a $0.50 tax on each gallon of ice cream.The price paid by buyers with the tax is:
A) $2.00.
B) $2.33.
C) $2.50.
D) $2.25.
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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) Each of the following is a challenge that society's would face in trying to use the second welfare theorem to achieve equity without sacrificing efficiency EXCEPT:
A) endowments aren't always easily observable.
B) wealth isn't an endowment.
C) lump-sum transfers distort choices.
D) transfers based on wealth aren't lump-sum transfers.
Q3) The idea that every Pareto efficient allocation is the competitive equilibrium for some initial allocation of resources is known as:
A) the first welfare theorem.
B) the second welfare theorem.
C) the third welfare theorem.
D) the exchange efficiency condition.
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18
Chapter 17: Monopoly
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Q1) Because the monopolist doesn't pay attention to the willingness to pay of inframarginal consumers:
A) there can sometimes be a difference between what level of product quality is profitable for the monopolist and what level of product quality maximizes aggregate surplus.
B) the monopolist will choose the optimal level of product quality.
C) the quantity chosen by the monopolist will sometimes maximize aggregate surplus.
D) there can never be a difference between the marginal cost of higher product quality and the marginal value to consumers of higher product quality.
Q2) A firm's Lerner Index:
A) is the amount by which its price exceeds its marginal cost, expressed as a percentage of its price.
B) is the amount by which its marginal cost exceeds its average cost.
C) is the amount by which its average cost exceeds its marginal cost.
D) is the value of its profit.
Q3) Discuss the difference between first-best and second-best price regulation.In your answer,you should address why governments regulate markets and the difficulties faced when doing so.
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19
Chapter 18: Pricing Policies
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Q1) Under a perfectly price discriminating monopolist,each consumer consumes ________ a perfectly competitive market.
A) the same amount of output as they would under a non-discriminating monopolist as well as
B) less output than they would under an imperfectly price discriminating monopolist, but more than under
C) more output than they would under an imperfectly price discriminating monopolist, but less than under D) the same amount of output as they would under
Q2) 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
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Page 20
Chapter 19: Oligopoly
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Q1) Suppose the daily demand for Coke and Pepsi in a small city are given by Q<sub>C</sub> = 90 - 100P<sub>C</sub> + 400(P<sub>P</sub> - P<sub>C</sub>)and Q<sub>P</sub> = 90 - 100P<sub>P</sub> + 400(P<sub>C</sub> - P<sub>P</sub>),where Q<sub>C</sub> and Q<sub>P</sub> are the number of cans Coke and Pepsi sell,respectively,in thousands per day.P<sub>C</sub> and P<sub>P</sub> are the prices of a can of Coke and Pepsi,respectively,measured in dollars.The marginal cost is $0.45 per can for both Coke and Pepsi.What is the Nash equilibrium price for Coke?
A) $0.016
B) $0.45
C) $0.53
D) $0.38
Q2) An individual firm's best response:
A) is the firm's most profitable choice given the actions of its rivals.
B) is not necessarily selected by all firms in a Nash equilibrium.
C) is always the option with the highest price for each firm.
D) is to set the same price and quantity as all of its rivals.
Q3) Define the Bertrand model and its assumptions.Explain why the model predicts the perfectly competitive outcome despite the number of sellers.Discuss the limitations of the model.
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Page 21
Chapter 20: Externalities and Public Goods
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Q1) A good is nonrival if:
A) there is no way to prevent a person from consuming or using it.
B) more than one person can consume it at the same time without affecting its value to others.
C) consumption of it involves perfect rivalry.
D) consumption is completely excludable.
Q2) A good is nonexcludable if:
A) there is no way to prevent a person from consuming or using it.
B) more than one person can consume it at the same time without affecting its value to others.
C) consumption of it involves perfect rivalry.
D) consumption is completely excludable.
Q3) The median voter is:
A) the voter who has the median income policy among all voters.
B) the voter who has the median policy among all voters.
C) the voter who has the average policy among all voters.
D) the voter who has the mean policy among all voters.
Q4) Explain ways in which the government can remedy an externality.
Q5) Why might bargaining break down when parties negotiate to remedy a market failure and its associated externality?
Page 22
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Chapter 21: Asymmetric Information
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Q1) Adverse selection can cause attractive trading partners to be driven from a market by unattractive trading partners,whose presence alters prices at which attractive trading partners could trade.This unfortunate result is known as:
A) market unraveling.
B) signal confusion.
C) moral hazard.
D) conspicuous consumption.
Q2) If a person takes a costly action simply to influence others' beliefs then this person is engaged in what economists call:
A) market unraveling.
B) adverse selection.
C) moral hazard.
D) signaling.
Q3) Mandated minimum quality standards can be a way to:
A) reduce information asymmetry.
B) promote information asymmetry.
C) provide a public good.
D) screen.
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