Honors Microeconomics Exam Solutions
Course Introduction
Honors Microeconomics offers an in-depth exploration of the foundational principles that govern individual and firm decision-making in markets. The course examines topics such as supply and demand, consumer behavior, production costs, market structures (including perfect competition, monopoly, and oligopoly), market failures, and the role of government intervention. Through rigorous analysis, mathematical modeling, and real-world applications, students will develop critical thinking and analytical skills. Suitable for those seeking a challenging introduction to microeconomic theory, this course prepares students for advanced study in economics and related fields.
Recommended Textbook
Microeconomics Theory and Applications with Calculus 4th Edition by Jeffrey M. Perloff(equations)
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Chapter 1: Introduction
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Sample Questions
Q1) Consumers choose their cellphone plans according to their needs and package features.This is an example of
A)importance of information to consumers' choices.
B)importance of making personal budget.
C)maximizing an objective that is subject to a constraint.
D)minimize the cost of cellphone usage.
Answer: C
Q2) What links the decisions of consumers and firms in a market?
A)the government
B)prices
C)coordination officials
D)microeconomics
Answer: B
Q3) 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
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Page 3
Chapter 2: Supply and Demand
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Q1) The above figure shows a graph of the market for pizzas in a large town.No pizzas will be supplied unless the price is above
A)$0.
B)$5.
C)$12.
D)$14.
Answer: B
Q2) From the 1970s through the 1990s,the relative price of a college education has increased greatly.During the same time period,college enrollment has also increased.This evidence suggests that during this time period
A)the demand curve for a college education has shifted leftward.
B)the demand curve for a college education has shifted rightward.
C)the supply curve for a college education has shifted leftward.
D)the supply curve for a college education has shifted rightward.
Answer: B
Q3) The Law of Supply insures that supply curves slope upward.
A)True
B)False
Answer: False
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Page 4
Chapter 3: A Consumers Constrained Choice
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Sample Questions
Q1) Draw the indifference curves for nickels and dimes.Would they ever have a non-constant slope? Explain.
Answer: 11ea6e7c_825c_ef08_8f54_2956ea8c5ea7_TB3096_00 See the above figure.Two nickels are worth 1 dime.Yet for extremely large amounts of money,people might prefer dimes to nickels for carrying purposes.That is why people often pay with exact change or don't like to break a twenty.
Q2) Explain the difference between the marginal rate of substitution and the marginal rate of transformation.
Answer: The marginal rate of substitution is a consumer's willingness to trade one good for another based on utility.The marginal rate of transformation is the consumer's ability to trade one good for another based on prices.
Q3) An indifference curve represents bundles of goods that a consumer
A)views as equally desirable.
B)ranks from most preferred to least preferred.
C)refers to any other bundle of goods.
D)All of the above.
Answer: A
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Page 5
Chapter 4: Demand
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Sample Questions
Q1) A true cost-of-living adjustment in response to a change in prices would compensate consumers so that they would be able to
A)purchase the same bundle they purchased before prices changed.
B)achieve the same level of utility they did before prices changed.
C)face the same choices they did before prices changed.
D)achieve an increase in utility that is equal to the rate of inflation.
Q2) Suppose the quantity of x is measured on the horizontal axis.If the income consumption curve is vertical,then the income elasticity of demand for x is
A)0.
B)1.
C)-1.
D)There is not enough information to determine the income elasticity of demand for x.
Q3) A Giffen good has
A)a positive substitution effect.
B)a negative income effect.
C)a larger income effect than substitution effect.
D)All of the above.
Q4) Why can't all goods be inferior?
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Chapter 5: Consumer Welfare and Policy Analysis
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Sample Questions
Q1) A tax cut will unambiguously lower income-tax revenue.
A)True
B)False
Q2) A consumer has the quasi-linear utility function
U(q<sub>1</sub>,q<sub>2</sub>)= 64q<sub>1</sub><sup>1/2</sup> + q<sub>2</sub> Assume p<sub>2 </sub>= 1 and Y = 100.Find the consumer's compensating and equivalent variations for an increase in p<sub>1</sub> from 1 to 2.
Q3) Ian views playing Wartcraft and drinking soda as perfect complements (one soda with one hour of playing Wartcraft).Currently,sodas are $1 each and Wartcraft costs $1 per hour.Ian has $12 of income.
a.Compute Ian's Compensating Variation if the price of Wartcraft rises to $2.
b.Compute Ian's Equivalent Variation if the price of Wartcraft rises to $2.
c.Compute Ian's change in Consumer Surplus if the price of Wartcraft rises to $2.
Q4) The Equivalent Variation resulting from a quota is best defined as
A)the amount a consumer would pay to have the quota removed.
B)the amount the consumer would need to voluntarily accept the quota.
C)the amount a consumer would pay for the quantity specified by the quota.
D)the loss in utility resulting from the quota.
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Chapter 6: Firms and Production
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Sample Questions
Q1) If marginal productivity is increasing,then total product is
A)increasing at an increasing speed.
B)increasing at a constant speed.
C)increasing at a decreasing speed.
D)decreasing at an increasing speed.
Q2) Joey cuts grass during the summer.He rents a lawn mower from his dad.Which of the following statements best illustrates the difference between the short run and the long run for Joey?
A)Joey's friends say they will help him,but when he calls them,they say they have other things to do.
B)When Joey acquires more customers,he responds by working more hours.Next year,he will buy a lawn mower and split the work with his brother.
C)Some customers pay Joey immediately;others wait till the following week.
D)Joey has had to turn away some customers because he is already too busy.
Q3) Average productivity will fall as long as
A)marginal productivity is falling.
B)it exceeds marginal productivity.
C)it is less than marginal productivity.
D)the number of workers is increasing.
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Page 8
Chapter 7: Costs
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Sample Questions
Q1) If the total cost of production for 1000 widgets is $2000 and marginal cost is constant at $1,what is the average cost if 2000 widgets are produced?
A)$2
B)$1.50
C)$1
D)$0.50
Q2) Which of the following statements best explains why long-run average cost is never greater than short-run average cost?
A)In the long run,tangency of the isocost and isoquant is attainable.This is not necessarily true in the short run.
B)In the long run,diseconomies of scale might not occur,but in the short run diminishing marginal returns do.
C)In the long run,the cost of capital declines because the firm is able to pay down some of its debts.
D)In the long run,the average cost curve need not be U-shaped,but in the short run it is.
Q3) Explain why the marginal cost curve intersects a U-shaped average cost curve at its minimum point.
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Chapter 8: Competitive Firms and Markets
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Sample Questions
Q1) A market is perfectly competitive even if firms have the ability to set their own price as long as the price difference reflects differences in the product.
A)True
B)False
Q2) A small business owner earns $50,000 in revenue annually.The explicit annual costs equal $30,000.The owner could work for someone else and earn $25,000 annually.The owner's business profit is ________ and the economic profit is ________.
A)$20,000,$5,000
B)$20,000,-$5,000
C)$25,000,-$5,000
D)$45,000,-$5,000
Q3) There are 10 identical internet service providers (ISPs)in a city serving a market demand with an elasticity of -1.5.The elasticity of supply for each firm is 3.0.The elasticity of demand faced by an individual ISP is A)-42.
B)-15.
C)-1.5.
D)-27.
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Chapter 9: Properties and Applications of the Competitive Model
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Sample Questions
Q1) A firm that generates zero economic profit usually faces
A)negative business profit.
B)zero business profit.
C)positive business profit.
D)business profit equal to half the total revenue.
Q2) Firms are ________ with an economic profit of zero,they will ________ in the industry because they ________ be better off in another industry.
A)satisfied,stay,won't
B)unsatisfied,leave,will
C)satisfied,leave,will
D)unsatisfied,stay,won't
Q3) The above figure shows the market for rice in Japan.S<sub>Domestic</sub> represents the domestic supply curve,and S<sub>world</sub> represents the world supply curve.An import quota of 35 units would
A)cause consumer surplus to fall by "g."
B)cause social welfare to fall by $35.
C)increase domestic producer surplus by "g."
D)have no effect.
Q4) When is the profit a firm earns equal to the producer surplus? Explain.
Page 11
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Chapter 10: General Equilibrium and Economic Welfare
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Sample Questions
Q1) Consider a society consisting of just a farmer and a tailor.The farmer has 10 units of food but no clothing.The tailor has 40 units of clothing but no food.Suppose each has the utility function U = F<sup>1</sup><sup>/2</sup><sup>C</sup><sup>1/2</sup>.If the price of clothing is always $1,and the food price is currently $3,then we can conclude
A)the market is at a competitive equilibrium.
B)the price of food will drop towards a competitive equilibrium.
C)the price of food will increase towards a competitive equilibrium.
D)None of the above.
Q2) When comparing partial-equilibrium effects to general-equilibrium effects,one can conclude that
A)general-equilibrium effects are always larger.
B)partial-equilibrium effects are always larger.
C)the effects are of equal size.
D)one cannot determine before the fact which effect is greater.
Q3) Gains from trade can only occur when
A)marginal rates of substitutions differ across people.
B)marginal rates of substitution are equal across people.
C)indifference curves are convex.
D)people find themselves on the contract curve.
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Page 12
Chapter 11: Monopoly and Monopsony
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Sample Questions
Q1) When attempting price regulation,a government faces what problem(s)?
A)limited information
B)bribes
C)uncooperative firms
D)All of the above
Q2) If the government attempts to force a natural monopoly to charge a price equal to marginal cost,
A)the natural monopoly will shut down.
B)the natural monopoly will still make high profits.
C)the natural monopoly's marginal cost curve will shift up.
D)total welfare is maximized.
Q3) Why do patents stimulate research?
A)Patents give firms time to do research.
B)Patents give firms the opportunity to recover research costs and thus a profit motive.
C)Firms would research as much even without patents.
D)Patents don't stimulate research.
Q4) Since a monopoly can set any price it wants,it always makes a profit.
A)True
B)False
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Chapter 12: Pricing and Advertising
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Sample Questions
Q1) Explain why a firm can earn more profit by price discrimination than from setting a uniform price.
Q2) When a firm has a monopoly in a market and also perfectly price discriminates,total welfare
A)is maximized.
B)is lower than in a perfectly competitive market.
C)is higher than in a perfectly competitive market.
D)is minimized.
Q3) The deadweight loss generated by a perfect-price-discriminating monopoly
A)equals the deadweight loss of a single-price monopoly.
B)is greater than the deadweight loss of a single-price monopoly.
C)equals zero.
D)equals the sum of all lost consumer surplus.
Q4) The above figure shows the market for a particular good.If the market is controlled by a perfect-price-discriminating monopoly,compared to a perfectly competitive market,the change in producer surplus is
A)B + C.
B)D + E.
C)A + B + C.
D)A + B + C + D + E.
Page 14
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Chapter 13: Game Theory
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Sample Questions
Q1) In a two-player simultaneous game,if player A has a dominant strategy and player B does not,player B will
A)employ a mixed strategy.
B)choose his best strategy assuming that player A plays her dominant strategy.
C)not achieve a Nash equilibrium.
D)assume that player A does not choose her dominant strategy.
Q2) A sale in which property or a service is sold to the highest bidder is called a(n) A)auction.
B)bidder sale.
C)competitive market.
D)Austrian bundle.
Q3) Which of the following statements about winner's curse is wrong?
A)Overbidding occurs when bidders are uncertain about the true value of the good.
B)The phenomenon occurs in common value auctions.
C)When intelligent bidders shade their bids,sellers receive more money with a sealed-bid auction than an English auction
D)The phenomenon will not occur in private value auctions.
Q4) How can a firm be made better off by limiting its options?
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Page 15
Chapter 14: Oligopoly and Monopolistic Competition
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Q1) Monopolistically competitive firms
A)have market power because they can set price above marginal cost.
B)have no market power because they earn zero economic profit.
C)have no market power because of free entry.
D)have no market power because price equals marginal cost.
Q2) Assuming Cournot behavior,what happens to the market output,the price of the output,and each firm's output as the number of firms in a market increases?
Q3) Because firms selling a homogeneous product set price in response to the (perceived)pricing decision of other firms in the Bertrand Model of oligopoly in equilibrium price exceeds marginal cost.
A)True
B)False
Q4) Collusion is more successful in a game that will continue forever or in a game with an uncertain ending time,than in a game with a known ending time.
A)True
B)False
Q5) Explain why the intersection of the best-response functions is the Cournot equilibrium.
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Page 16
Chapter 15: Factor Markets
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Sample Questions
Q1) Why is the price of a scarce exhaustible resource in a competitive market above the marginal cost of providing a unit of the resource?
Q2) In an economy with no inflation,explain why interest rates are positive.
Q3) A firm's demand for labor is downward sloping because of
A)diminishing marginal productivity of labor.
B)diminishing marginal utility.
C)price pressure.
D)workers' increased willingness to work at a higher wage.
Q4) As the interest rate rises,the present value of a given perpetual stream of income A)increases.
B)decreases.
C)does not change.
D)approaches infinity.
Q5) For a monopoly,the value of the next worker equals
A)MR MPL.
B)p MPL.
C)MPL.
D)w/MPL.
Q6) Why is the short-run demand curve for labor downward sloping?
Page 17
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Chapter 16: Uncertainty
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Q1) The above figure shows Bob's utility function.He currently has $100 of wealth,but there is a 50% chance that it could all be stolen.If Bob could keep $50 with certainty,his utility would be
A)a.
B)b.
C)c.
D)d.
Q2) The above figure shows Bob's utility function.He currently has $100 of wealth,but there is a 50% chance that it could all be stolen.Bob is risk averse because A)his utility function is convex.
B)he has negative marginal utility of wealth.
C)he is willing to pay a premium to avoid a risky situation.
D)All of the above.
Q3) Sarah buys little stuffed animals for $5 each.They come in different varieties.If the producer stops making (retires)a certain variety,a stuffed animal of that variety will be worth $100;otherwise it is worth $0.There is 25% chance that any variety will be retired.For the purchase of an individual animal,what is the value to Sarah of knowing ahead of time whether or not that variety will be retired?
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Page 18
Chapter 17: Property Rights, Externalities, Rivalry, and Exclusion
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Sample Questions
Q1) Which of the following goods has the property of rivalry?
A)national defense
B)a highway
C)a public beach
D)a movie screening
Q2) The above figure shows the marginal benefit to a firm of polluting in the local river while producing its output,and the marginal cost to the surrounding neighbors.The marginal cost of production is zero for the firm.If the firm owns the river and there are thousands of surrounding neighbors,how much pollution is likely to occur?
A)0 units
B)500 units
C)1000 units
D)more than 1000 units
Q3) Because a monopoly will produce less of a good than a competitive market will,welfare is always greater under monopoly than under competition in the presence of a negative externality.
A)True
B)False
Q4) Explain why the optimal amount of pollution is often not zero.
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Chapter 18: Asymmetric Information
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Q1) Government mandated safety standard within firms
A)will always decrease efficiency.
B)can increase efficiency by avoiding a prisoners' dilemma outcome.
C)are unnecessary because of asymmetric information.
D)will create unfair competition among firms.
Q2) Workers do not know the safety records at individual firms;they only know industry averages.As a result,
A)each firm tries to outdo each other in making safety improvements.
B)each firm has the incentive to be the safest in its industry.
C)the equilibrium level of safety is less than optimal.
D)the optimal level of safety is achieved.
Q3) Adverse selection occurs when there is
A)full information.
B)unobserved behavior.
C)an unobserved characteristic.
D)a worker who shirks because his boss does not watch him.
Q4) The market for used cars is shown in the above figure.Buyers cannot tell whether any given car is a lemon.The percent of all cars that are lemons is .What value of is necessary for all cars to be sold?
Q5) Explain how product liability laws can reduce adverse selection.
Page 20
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Chapter 19: Contracts and Moral Hazards
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Q1) Jacko's rock band is putting out a new CD with its music label.The contract between the band and the label specifies that the band receive 25% of the gross revenues plus another $10,000 up front.The record label projects the demand for the album p = 50 - 0.003Q where p is the price per CD (in $)and Q is the number of CDs demanded.The cost (not including the band's salary)of producing the CD is constant at $5 per disc.
a.Compute the joint-profit-maximizing price and quantity.
b.Compute the profit maximizing price that the label will wish to set.
c.What price will Jacko want his band's CD sold for? (Assume he only cares about money earned from the CDs. )
Q2) Suppose employees pay a bond of $1,000 to an employer.The gain from shirking is $400.Monitoring devices have been installed so that there is a 50% chance of being caught if you are shirking.The company is considering the installation of additional monitoring devices to increase the chance of catching a shirker to 100%.They feel this is needed to deter all shirking.What is your recommendation to the company? Explain.
Q3) Describe the characteristics of an efficient contract between a principal and an agent.
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