Honors Microeconomics Exam Bank
Course Introduction
Honors Microeconomics is an advanced undergraduate course that delves into the foundational principles of microeconomic theory, emphasizing analytical rigor and critical thinking. Students explore key concepts such as demand and supply, consumer and producer behavior, market structures, game theory, and the role of government in market outcomes. The course employs mathematical tools and real-world applications to examine topics including efficiency, welfare, market failures, and the impact of public policy. Ideal for students seeking a deeper and more challenging engagement with economic ideas, the class encourages independent research, group projects, and in-depth discussions to sharpen problem-solving and analytical skills.
Recommended Textbook Microeconomics A Modern Approach 1st Edition by Andrew Schotter
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Page 2
Chapter 1: Economics and Institutions: a Shift of Emphasis
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Q1) Microeconomics asks how individuals create a set of economic institutions to maximize their self-interest.
A)True
B)False
Answer: True
Q2) If Mark Kimura develops an economic theory, but cannot observe the predicted behavior during lab experiments, he should
A) ignore the results and stick with his idea
B) rethink the validity of the theory
C) keep running the lab experiments and hope for different resutls
Answer: B
Q3) Which of the following is an institutional process that a family could use to make allocation decisions?
A) dictatorial
B) democratic
C) market-based
D) All the answers are correct
Answer: D
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3
Chapter 2: Consumers and Their Preferences
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Q1) Transitivity is an assumption on consumer preferences that states that any bundle is at least as good as itself.
A)True
B)False
Answer: False
Q2) Which of the following institutions exists in a primitive state of nature?
A) the state
B) banks
C) corporations
Answer: A
Q3) The reduced set of consumption bundles, each of which satisfies the budget constraint, is called the economically feasible consumption set.
A)True
B)False
Answer: True
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Page 4
Chapter 3: Utilities Indifference Curves
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Q1) A microeconomic method that a student could use to decide how to study for final exams is
A) the selfishness assumption
B) optimal allocation of time
C) the concavity principle
Answer: B
Q2) Understanding tipping requires analysis of
A) only the customer's utility
B) both the customer's and the server's utilities
C) only the server's utility
Answer: B
Q3) Indifference curves cannot slope
A) downward
B) horizontally
C) upward
Answer: C
Q4) A set of indifference curves for a consumer is called a convex map.
A)True
B)False
Answer: False
Page 5
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Chapter 4: Demand and Behavior in Markets
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Q1) Refer to Exhibit 4-4. Which curve represents the compensated demand function?
A) (a)
B) (b)
C) There is not enough information to give an answer.
Q2) Demand curves are generated by the
A) utility-maximizing behavior of agents
B) income-maximizing behavior of agents
C) nonconvexity behavior of agents
Q3) If a demand curve has flat segments, the agent most likely has
A) convex preferences
B) nonconvex preferences
C) nonstrictly convex preferences
Q4) When markets are large and competitive, the consumer merely chooses the bundle of goods that provides the most utility given
A) income and tastes only
B) income, tastes, and the prices prevailing in the market
C) the prices prevailing in the market only
Q5) How is the price-consumption path derived?
Q6) What happens to the substitution and income effects to cause a normal good to have a downward-sloping demand curve?
Page 6
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Chapter 5: Some Applications of Consumer Demand, and Welfare Analysis
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Q1) A measure of how much income must be given to a consumer after a price change to leave the consumer at the same level of utility the consumer had attained before the price change occurred is called
A) opportunity cost
B) price-compensating variation in income
C) the Slutsky equation
Q2) According to the price and income multiplication property of demand, if we multiply all the prices in an economy and the income of its agents by the same factor, then the demand for any given good will
A) not change
B) increase
C) decrease
Q3) What is the difference between the exact measure and the approximate measure of consumer surplus?
Q4) As Calvin Yoshino purchases more leisure, he devotes _______ time to work.
A) less
B) more
C) a constant amount of
Q5) List the three properties of demand functions.
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Chapter 6: Uncertainty and the Emergence of Insurance
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Q1) A probability distribution is a measure that tries to capture the variability of a random variable by looking at the expected squared deviation of the random variable from its mean.
A)True
B)False
Q2) A risk-averse agent will
A) reject a "fair gamble"
B) be indifferent to a "fair gamble"
C) accept a "fair gamble"
Q3) The hypothesis that states that, when people are faced with risk, they assess the possible payoffs in terms of utility and then choose the gamble that yields the payoff with the highest expected utility is known as the expected utility hypothesis.
A)True
B)False
Q4) The analogy of Fahrenheit and Celsius temperature scales best fits
A) additive utility
B) ordinal utility
C) cardinal utility
Q5) Why not maximize expected monetary returns?
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Chapter 7: Uncertainty Applications and Criticisms
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Q1) A decrease in variance makes a gamble _______ attractive.
A) less
B) equally
C) more
Q2) The Ellsberg Paradox illustrates ambiguity aversion.
A)True
B)False
Q3) The proposition that states that, if a risk-averse agent is faced with two gambles, both of which have the same expected monetary return but different variances, the agent will choose the gamble whose variance is smaller is known as the mean-preserving spread proposition.
A)True
B)False
Q4) Refer to Exhibit 7-1. Elizabeth is risk preferring; therefore, her utility function most likely looks like Curve (c).
A)True
B)False
Q5) Describe the difference between linear and nonlinear probability weights.
Q6) Why use the expected utility theory?
Q7) What is Linda's problem?
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Chapter 8: The Discovery of Production and Its Technology
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Q1) If all inputs are doubled and the resulting output increases by more than a factor to two, the technology features
A) increasing returns to scale B) decreasing returns to scale C) constant returns to scale
Q2) The decrease in the rate that output grows when we increase the usage of one factor, but hold the usage of all others constant is known as A) decreasing returns to factor B) decreasing returns to scale C) elasticity of substitution
Q3) Any return above the normal profit to an entrepreneur is known as A) opportunity cost
B) extra-normal profit C) free lunch
Q4) The short run is the time period during which at least one factor of production is fixed.
A)True
B)False
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Chapter 9: Cost and Choice
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Q1) The mixture of inputs that produces a particular level of output at the lowest cost is called the optimal combination of inputs.
A)True
B)False
Q2) Isocost curves are curves in which all combinations of inputs on the curve are equally expensive.
A)True
B)False
Q3) With a Cobb-Douglas technology, when + > 1, we have A) constant returns to scale
B) increasing returns to scale C) decreasing returns to scale
Q4) State the geometric and algebraic conditions for optimal input combinations.
Q5) The negative of the relative costs of the inputs is represented by the _________ of an isocost curve.
A) slope
B) length
C) thickness
Q6) Describe the reasons for input substitution.
Page 11
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Chapter 10: Cost Curves
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Q1) Refer to Exhibit 10-1. This graph is most likely a
A) short-run cost function
B) short-run production function
C) long-run production function
Q2) The _______-run total cost of producing any quantity of output is simply the ___________ possible ________-run total cost of producing that quantity.
A) short, smallest, long
B) long, smallest, short
C) long, greatest, short
Q3) Costs that change with the level of output are
A) variable costs
B) fixed costs
C) constant returns to scale
Q4) Fixed costs
A) increase with the level of output
B) do not change with the level of output
C) decrease with the level of output
Q5) How should a producer decide how much capital to use in the long run?
Q6) What can short-run marginal cost tell us about short-run average cost?
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Chapter 11: Game Theory and the Tools of Strategic
Business Analysis
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Q1) A refinement concept places a set of extra constraints on a Nash equilibrium in order to select among multiple equilibria if they exist or to simply make the equilibrium more plausible.
A)True
B)False
Q2) Backward induction is a description of a game of strategy that provides a detailed description of the rules of the game.
A)True
B)False
Q3) A game in which, when any player reaches a decision point, the player does not know all the choices of the other players who preceded is called a game of
A) perfect information
B) imperfect information
C) zero information
Q4) Extensive form is a
A) matrix showing the players, strategies, and payoffs of a game
B) long game with at least ten strategies and ten players
C) description of a game of strategy that provides a detailed description of the rules of the game
13
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Chapter 12: Decision Making Over Time
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Q1) When calculating present value, as t becomes larger and because r 0, a<sub>t</sub> / (1 + r) goes to
A) zero
B) positive infinity
C) negative infinity
Q2) In the Loewenstein and Sicherman survey specifying different wage streams, what percentage of respondents exhibited present value maximization behavior?
A) 77.3%
B) 50.0%
C) 7.3%
Q3) A decision maker has D pesos and puts this amount in the bank for one year at an interest rate of r percent a year. At the end of one year, the decision maker will have
A) D(1 + r) pesos
B) D(1 + r)<sup>2</sup> pesos
C) D(1 + r) dollars
Q4) Explain the important points about discounting.
Q5) Describe the stationarity axiom.
Q6) Describe a commitment device designed to counteract time-inconsistent behavior.
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Chapter 13: The Internal Organization of the Firm
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Q1) Which of the following situations is most realistic in principal-agent situations?
A) writing contracts when actions are unobservable
B) taking actions when contracts are unannounced
C) writing contracts when actions are observable
Q2) The wage an agent could earn at the next-best work opportunity is called the opportunity wage.
A)True
B)False
Q3) Describe what laboratory tests of affirmative action programs found when the amount of historical discrimination is not great, that is, the cost asymmetry of the agents is not too large.
Q4) One result of testing laboratory affirmative action programs is that
A) workers who are highly discriminated against always remain discouraged and exert zero effort
B) organization output declines if the amount of historical discrimination has been great C) nondisadvantaged workers, in an effort to maintain their promotion rate, work hard and the output of the organization rises
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15
Chapter 14: Perfectly Competitive Markets: Short-Run Analysis
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Q1) When is a tougher drug enforcement policy beneficial to society on the whole?
Q2) Refer to Exhibit 14-7. In such a market, on whom does the tax incidence fall?
A) both consumers and producers
B) producers only
C) consumers only
Q3) Do you favor minimum wage laws or government-subsidized wages? Why?
Q4) An analysis in which the economist examines the path that the market will follow in moving from one equilibrium to another is known as dynamic analysis.
A)True
B)False
Q5) Refer to Exhibit 14-6. In such a market, on whom does the tax incidence fall?
A) both consumers and producers
B) producers only
C) consumers only
Q6) Refer to Exhibit 14-4. At which price will there be excess supply?
A) p<sup>1</sup>
B) p<sup>e</sup>
C) p<sup>2</sup>
Page 16
Q7) In the short run, can a perfectly competitive firm earn an extra-normal profit?
Q8) What does a market supply curve reveal about costs?
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Page 17
Chapter 15: Competitive Markets in the Long Run
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Q1) Pecuniary externalities exist when the action of one agent increases the price of a good to other agents.
A)True
B)False
Q2) Industries in which the long-run supply curve is downward sloping are
A) constant-cost industries
B) increasing-cost industries
C) decreasing-cost industries
Q3) In constant-cost industires, the long-run supply curve is flat.
A)True
B)False
Q4) The price-quantity combination that will prevail in a perfectly competitive market in the long run is called
A) short-run equilibrium
B) Nash equilibrium
C) long-run equilibrium
Q5) Constant-cost rent is the average cost of the firm when economic rent is included as a cost.
A)True
B)False
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Chapter 16: Market Institutions and Auctions
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Q1) The only difference among the three Smith and Plott experiments is the A) induced demand curves of the subjects
B) market institution used
C) induced supply curves of the subjects
Q2) Collusion among firms bidding in an auction is known as A) the winners' curse
B) bid rigging
C) an uncommon value auction
Q3) In a first-price sealed-bid auction, the optimal bid will be _______________ the expected value of the second-highest bidder.
A) equal to B) less than
C) greater than
Q4) Under what conditions does the Revenue Equivalence Theorem not hold true?
Q5) A sealed-bid auction is an auction in which bidders enter their bids privately and the winner is that bidder whose bid is A) highest
B) lowest C) zero
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Chapter 17: The Age of Entrepreneurship: Monopoly
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Q1) When the demand curve is downward sloping, a monopolist will produce units of a good until the point where the marginal revenue of the last unit sold is equal to its A) marginal cost
B) average cost
C) fixed cost
Q2) Explain the Elasticity Rule for Monopoly Pricing.
Q3) For the firm, the demand curve shows average A) revenue
B) cost
C) profit
Q4) In relation to the downward-sloping, straight-line demand curve, the MR curve falls A) below
B) sometimes above and sometimes below C) above
Q5) A monopolist would use a two-part tariff to transfer A) consumer surplus to the monopolist
B) producer surplus to the consumers
C) Both answers are correct
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Page 20
Chapter 18: Natural Monopoly and the Economics of Regulation
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Q1) If a firm can prevent competitors from entering its market, its ATC will ___________ over a ________ amount of output.
A) decline, large
B) decline, small
C) increase, large
Q2) If an entrepreneur wants a natural monopoly to be sustainable, the entrepreneur must set a price and quantity at which demand equals average
A) revenue
B) profit
C) cost
Q3) What assumptions must be true for the theory of contestable markets to be valid?
Q4) Regulation in which a regulatory commission must allow any firm under its jurisdiction to earn a rate of return for the firm's investors that is sufficient to warrant their keeping their capital investment in the firm is called
A) overregulation
B) rate-of-return regulation
C) insider trading
Q5) Explain why the inertia shopping rule provides a defensive pricing strategy.
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Chapter 19: The World of Oligopoly: Preliminaries to
Successful Entry
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Q1) The advantage the leader has in the Stackelberg model, which allows the leader to produce a higher level of output than in the Cournot equilibrium, thus receiving greater profits, is known as the
A) first-mover advantage
B) Stackelberg follower dominance
C) unstable equilibrium
Q2) The final step in the simultaneous-move quantity-setting duopoly game is
A) both firms choose their output levels simultaneously, with neither firm knowing what level the other firm has chosen
B) the demand curve tells the players what the price will be
C) each firm calculates its payoffs (profits)
Q3) The Stackelberg equilibrium is defined by the equilibrium prices and quantities of a Stackelberg game.
A)True
B)False
Q4) At a Bertrand equilibrium, the quantity sold in the market is the
A) same as in a Cournot equilibrium
B) welfare-optimal quantity
C) monopoly quantity
Page 22
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Chapter 20: Market Entry and the Emergence of Perfect Competition
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Q1) A model of entry prevention where the strategy of the incumbent monopolist is to overinvest in production capacity in order to make entry unprofitable is called the Bain, Modigliani, Sylos-Labini model.
A)True
B)False
Q2) An overinvestment strategy is an entry-prevention strategy for an incumbent firm in which the incumbent monopolist overinvests in production capacity to make a credible threat to increase its output beyond the limit quantity (and thereby sell the goods at a price below the limit price) if any competitor enters the market.
A)True
B)False
Q3) Explain the difference between blockaded entry and impeded entry.
Q4) As an increasing number of firms enter a market, the demand curve facing any given firm must have an elasticity approaching A) infinity
B) zero
C) one
Q5) List the characteristics of a perfectly competitive market.
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Chapter 21: The Problem of Exchange
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Q1) What are the characteristics implied by the existence of a competitive equilibrium?
Q2) An individually rational trade offers a trader a higher level of utility than he or she could receive by not trading.
A)True
B)False
Q3) Prices that equate the supply and demand for each good are called
A) competitive prices
B) blocked prices
C) Cournot prices
Q4) A feasible allocation does not allocate more than the total amount of goods available in the economy.
A)True
B)False
Q5) Does the contract curve define the set of equilibrium trades?
Q6) What does the marginal rate of substitution have to do with efficient allocations?
Q7) What is the implication of assuming that the agents in an economy are selfish and nonsatiated?
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Chapter 22: General Equilibrium and the Origins of the Free
Market and Interventionist
Ideologies
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Q1) People who feel strongly that the government should not interfere with the functioning of perfectly competitive markets are
A) interventionists
B) free-market advocates
C) monopolists
Q2) The idea that performances of perfectly competitive economies and other types of economies should be judged not on the basis of the outcomes they determine, but rather on the basis of the process by which those outcomes are determined is known as envy-free justice.
A)True
B)False
Q3) Compare efficiency and equity.
Q4) The interventionist argument centers on the belief that free-market advocates give _________________ weight to Pareto optimality as the criterion for judging the outcomes of an economy.
A) just the right
B) too much
C) too little
Q5) Why must the condition for efficiency in production be satisfied?
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Chapter 23: Moral Hazard and Adverse Selection:
Informational Market Failures
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Q1) If insurance companies cannot distinguish between the safe people and the risky people in a population because of a lack of information, the companies must charge everyone the same average premium.
A)True
B)False
Q2) By allowing tipping, a restaurant can solve adverse selection in employing waiters by creating a
A) separating equilibrium
B) symmetric equilibrium
C) pooling equilibrium
Q3) If an insurance company selects its risks from the population in an adverse way, the company will probably
A) earn extra-normal profits
B) suffer severe losses
C) barely break even
Q4) Explain why we cannot trust that all car repair experts are both competent and honest.
Q5) What are the pros and cons of market signaling?
Q6) Explain why insurance markets fail.
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Chapter 24: Externalities: the Free Market Interventionist
Battle Continues
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Q1) An externality can lead to A) market failure
B) an inefficient outcome for society
C) Both answers are correct
Q2) Why do you think that the Coase theorem depends on costless negotiation?
Q3) Externalities consist of
A) both costs and benefits
B) only benefits
C) only costs
Q4) Because the market does not take into account the costs imposed on water treatment by the paper mill, the economy will not satisfy the Pareto-optimal condition that the marginal rate of substitution of paper for water must be the same for each individual in the society.
A)True
B)False
Q5) Social marginal cost represents private marginal cost _____________ external costs.
A) minus B) plus C) divided by
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Chapter 25: Public Goods, the Consequences of Strategic
Voting Behavior, and the Role of Government
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Q1) What is the key assumption on which the Lindahl solution depends?
Q2) When members of a society have incentives to take advantage of a public good by not contributing to paying its costs, society experiences the A) free-rider problem
B) Pareto problem
C) strategic-voting problem
Q3) Give some examples that support the Gibbard-Satterthwaite theorem.
Q4) A theorem that demonstrates that there is no voting mechanism that determines transitive social preferences and also satisfies the five conditions for a desirable voting mechanism is called
A) Arrow's impossibility theorem
B) Arrow's possibility theorem
C) Arrow's straight-shot theorem
Q5) The voting paradox holds that, even if all the people in a society have transitive preferences, the preferences of society taken as a whole
A) need not be transitive
B) must be transitive
C) will never be transitive
Q6) What is so bad about rent seeking behavior?
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Chapter 26: Input Markets and the Origins of Class Conflict
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Q1) For most firms, the revenues the firms earn are _______________ the total wages the firms pay their workers.
A) greater than B) less than C) equal to
Q2) Monopsonistic exploitation occurs in any situation in which a factor of production is paid ______________ the value of its MRP.
A) the same as B) less than C) more than
Q3) At the equilibrium of the market for loanable funds, the marginal rate of return is just equal to the
A) rate of return on the last profitable project undertaken by society B) market rate of interest
C) Both answers are correct
Q4) A market with only one seller and one buyer is a bilateral monopoly.
A)True
B)False
Q5) Why is the price of land entirely determined by the demand curve?
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