Honors Microeconomics Pre-Test Questions

Course Introduction

Honors Microeconomics is an advanced course that explores the foundational principles governing individual and firm decision-making processes within markets. Students analyze concepts such as supply and demand, consumer and producer theory, market structures, and the impact of government intervention, using mathematical models and analytical tools to deepen their understanding. The course emphasizes critical thinking and quantitative skills, preparing students for further studies in economics and related fields, while encouraging engagement with real-world policy debates and applications of microeconomic theory.

Recommended Textbook Microeconomics 2nd Edition by B. Douglas Bernheim

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Page 2

Chapter 1: Introduction

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Q1) Which of the following best exemplifies the theorizing step in the scientific process?

A) Observing a line of cars outside of a gas station.

B) Suggesting that lower gasoline prices are encouraging consumers to buy more gas.

C) Collecting data on the amount of gasoline sold at different prices.

D) Drawing a graph of the relationship between gasoline prices and the amount of gasoline sold at each price.

Answer: B

Q2) In a communist economy,

A) the state controls the means of production.

B) individuals decide what to produce, how to produce it and who gets it.

C) economic decisions are decentralized.

D) the market system is used to allocate resources.

Answer: A

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Chapter 2: Supply and Demand

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Q1) Suppose the demand function for cable TV service is given by QCTV = 15 - 0.25 × PCTV + 0.0005 × M + 0.3 × PSTV,where QCTV is the quantity of cable TV demanded (thousands of households),PCTV is the price of cable TV,M is income and PSTV is the price of satellite TV service.We can see that:

A) cable TV and satellite TV are substitutes.

B) cable TV and satellite TV are complements.

C) satellite TV is a normal good.

D) satellite TV is an inferior good.

Answer: A

Q2) For a linear demand curve,demand is ____ elastic at _____ prices.

A) more; higher

B) less; higher

C) more; lower D) constantly; all

Answer: A

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Chapter 3: Balancing Benefits and Costs

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Q1) Suppose that you can schedule a worker for up to 4 hours per day.The total benefit and total cost functions are B(H)= 300H - 20H2 and C(H)= 500H + 60H2.The corresponding formulas for marginal benefit and marginal cost are MB(H)= 300 - 40H and MC(H)= 500 + 120H.For how many hours should you schedule the worker?

A) 1.25 hours

B) 0.8 hours

C) 4 hours

D) 0 hours

Answer: D

Q2) An action at which it is possible to change the activity level in only one direction is called:

A) an interior action.

B) a boundary action.

C) a limited action.

D) a marginal action.

Answer: B

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Page 5

Chapter 4: Consumer Preferences

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Q1) A marginal rate of substitution formula tells us:

A) the rate at which the consumer is willing to exchange one good for another, given the level of utility.

B) the rate at which the consumer is willing to exchange one good for another, given the amounts consumed.

C) the rate at which the consumer is willing to exchange one good for another, given the consumer's income.

D) the rate at which the consumer is willing to exchange one good for another, given the prices of the goods.

Q2) Suppose a consumer's MRS is given by the formula MRSPT = T/P,where P stands for the number of pieces of pizza and T stands for the number of tacos.Starting at 12 tacos and 4 pizzas,the consumer must receive:

A) 3 tacos to compensate them for the loss of one piece of pizza.

B) 3 pieces of pizza to compensate them for the loss of one taco.

C) 1/3 taco to compensate them for the loss of one piece of pizza.

D) 1/3 piece of pizza to compensate them for the loss of one taco.

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) Suppose a consumer buy books and DVDs.The price of a book is $10,the price of a DVD is $20 and the consumer's income is $400.If books are measured on the vertical axis and DVDs are measured on the horizontal axis,then the slope of the budget line is:

A) 2.

B) -2.

C) 1/2.

D) -1/2.

Q2) Hailey's income is $40 per week.She spends all of it on coffee (C)and doughnuts (D).Coffee costs $2 per cup and doughnuts cost $1 each.Her marginal rate of substitution for coffee with doughnuts is D/C.How many cups of coffee and how many doughnuts will she purchase each week?

A) 15 cups of coffee and 10 doughnuts

B) 10 cups of coffee and 20 doughnuts

C) 20 cups of coffee and 10 doughnuts

D) 5 cups of coffee and 30 doughnuts

Q3) The price of CDs is $15 and the price of pizzas is $10.Derek spends all of his income buying 2 CDs and 6 pizzas per week (and nothing else).Determine Derek's income,draw his budget line and represent his utility-maximizing point using an indifference curve.

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Chapter 6: Demand and Welfare

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Sample Questions

Q1) Define consumer surplus.Using a graph,explain the change in consumer surplus that would result from a decrease in the price of a gasoline.

Q2) If leisure is drawn on the horizontal axis and labor is drawn on the vertical axis,then a person who attaches more importance to leisure than to labor will have indifference curves that:

A) tend to be steeper.

B) tend to be flatter.

C) will be positively-sloped.

D) will be L-shaped.

Q3) What effect does a compensated price change have on a consumer's well-being?

A) The consumer's well-being increases.

B) The consumer's well-being decreases.

C) The consumer's well-being is unaffected.

D) The effect on the consumer's well-being cannot be determined without knowing the direction of the price change.

Q4) 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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Sample Questions

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) A firm's _______ shows the amount of output a firm can produce from given amounts of inputs using efficient production methods.

A) production possibilities set

B) efficient production frontier

C) production function

D) production possibilities curve

Q3) If hiring one more worker causes the average product of labor to fall,then:

A) the marginal product of labor is less than the average product of labor.

B) the marginal product of labor is equal to the average product of labor.

C) the marginal product of labor is greater than the average product of labor.

D) the marginal product of labor is negative.

Q4) Define decreasing returns to scale,illustrating your definition with isoquants.What are some reasons why firms might experience decreasing returns to scale?

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Chapter 8: Cost

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Q1) A ______ cost is ______ if the firm incurs the cost even if it produces no output.

A) fixed; sunk

B) fixed; explicit

C) variable; sunk

D) fixed; avoidable

Q2) 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.

Q3) The marginal cost curve:

A) intersects the average cost curve from above at the efficient scale of production.

B) lies below the average cost curve.

C) intersects the average cost curve from below at the highest point on the average cost curve.

D) intersects the average cost curve from below at the efficient scale of production.

Q4) Using a graph,explain the relationship between average cost and marginal cost.

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Chapter 9: Profit Maximization

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Q1) Dan is the owner of a price-taking company that manufactures sporting goods.One particular facility Dan owns produces baseball bats and baseball gloves.His cost function for baseball bats is CB(QB,QG)= 100QB + QB2 + QBQG and the marginal cost is MCB = 100 + 2QB + QG,where QB is the output level for bats and QG is the output level for gloves.Dan's cost function for baseball gloves is CG(QB,QG)= 50QG + QG2 + QGQB,and the marginal cost is MCG = 50 + 2QG + QB.The price of a baseball bat is $240 and the price of a baseball glove is $150.If Dan were to shut down his production of bats and only produce gloves,what would be his profit-maximizing sales quantity of gloves?

A) 20

B) 25

C) 30

D) 50

Q2) Define producer surplus.Using a graph,illustrate producer surplus for a firm with an avoidable fixed cost.Why is it convenient to focus on producer surplus when analyzing policy changes?

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Chapter 10: Choices Involving Time

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Sample Questions

Q1) Suppose you lend $2,500 at 11.5% for 3 years.If the interest is compounded annually,how much interest will you receive in those 3 years?

A) $862.50

B) $965.49

C) $3,362.50

D) $2,465.49

Q2) Given the formula PDV = $F/(1 + R)T,the PDV is smaller when the number of years is ______ and when the interest rate is ______.

A) smaller; lower

B) smaller; higher

C) larger; lower

D) larger; higher

Q3) If the real interest rate is 7.5% and the rate of inflation is 3%,what is the nominal interest rate?

A) 4.50%

B) 4.57%

C) 10.50%

D) 10.73%

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Chapter 11: Choices Involving Risk

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Sample Questions

Q1) If an insurance policy is actuarially fair,then:

A) M = (1 - B)

B) = B(1 - M)

C) B = M(1 - )

D) M = B(1 - )

Q2) If two investments are uncorrelated:

A) there is no benefit from diversification.

B) there is no benefit to hedging.

C) diversification reduces risk without changing the expected payoff.

D) diversification reduces both risk and the expected payoff.

Q3) Two variables are uncorrelated if:

A) they move in the same direction.

B) they move in the opposite direction.

C) their movements tend to be unrelated.

D) one is simply a multiple of the other.

Q4) If two investments are perfectly positively correlated:

A) there is no benefit from diversification.

B) bets are perfectly hedged and risks are canceled out.

C) diversification reduces risk without changing the expected payoff.

D) diversification reduces both risk and the expected payoff.

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Chapter 12: Choices Involving Strategy

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Sample Questions

Q1) Cooperation:

A) is sustained by the threat of punishment for bad behavior.

B) is sustained by the promise of punishment for good behavior.

C) can be established even if threats/promises are not credible.

D) All of these are true about cooperation.

Q2) In a one-stage game:

A) at least one participant observes a choice by another participant before making some decision.

B) each participant makes all of his choices before observing any choice by any other participant.

C) at least one participant makes his choice before observing the choices made by other participants.

D) one participant has full information of the other players' choices before making his choice.

Q3) Cooperation:

A) is a mixed strategy.

B) fails when the temptation to cheat is sufficiently strong.

C) eliminates the temptation to cheat.

D) is always a Nash equilibrium.

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Page 14

Chapter 13: Behavioral Economics

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Sample Questions

Q1) Behavioral economists view the standard economic theory of decisions involving time as being too restrictive because people:

A) have lapses in self-control.

B) make systematic errors in forecasting the future.

C) are reluctant to abandon projects after incurring substantial sunk costs, despite low probabilities of success.

D) All of these describe reasons why the standard economic theory of decisions over time can be too restrictive.

Q2) A person is dynamically consistent if:

A) his preferences over the alternatives available at some future date change as the date approaches.

B) his preferences over the alternatives available at some future date do not change as the date approaches.

C) he is also statically consistent.

D) None of these is correct.

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Chapter 14: Equilibrium and Efficiency

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Q1) Suppose Julia and Zach are the only consumers of milk.Julia's demand for milk is defined as QdJulia = 12 - 3P at prices below $4 and zero for prices above $4.Zach's demand for milk is defined as QdZach = 10 - 2P at prices below $5 and zero for prices above $5.In this case,the market demand curve for milk is:

A) upward sloping.

B) a downward sloping straight line.

C) kinked at a quantity of 2 units.

D) kinked at a quantity of 1 unit.

Q2) Suppose the market demand for milk is Qd = 1505P.Additionally,suppose that a dairy's variable costs are VC = 2Q2 (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.What is the market equilibrium quantity?

A) 5 gallons per day

B) 35 gallons per day

C) 50 gallons per day

D) 100 gallons per day

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Chapter 15: Market Intervention

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Q1) All of the following statements are true regarding voluntary production reduction programs EXCEPT:

A) they offer firms incentives to reduce their production voluntarily.

B) they include payments to producers who reduce production.

C) they are an attempt to limit supply.

D) they are an attempt to protect consumers from high prices.

Q2) Suppose the market demand function for ice cream is Qd = 10 - 2P and the market supply function for ice cream is Qs = 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 change in producer surplus due to the tax is:

A) $3.56 million.

B) $1.89 million.

C) $7.11 million.

D) $944,444.

Q3) A sales tax is an example of:

A) a specific tax.

B) an ad valorem tax.

C) a lump sum tax.

D) an income tax.

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Page 17

Chapter 16: General Equilibrium, Efficiency, and Equity

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Q1) 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.

Q2) General equilibrium analysis:

A) concerns competitive equilibrium only in the factor markets.

B) concerns competitive equilibrium only in the product markets.

C) concerns competitive equilibrium in a single market, considered in isolation.

D) is the study of competitive equilibrium in many markets at the same time.

Q3) 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.

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Chapter 17: Monopoly

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Q1) A market is a natural monopoly when:

A) a good is produced most economically by several firms.

B) a good is produced most economically by one firm.

C) the government grants a firm a patent on a good.

D) the firm's average cost function is everywhere upward sloping.

Q2) The deadweight loss from monopoly pricing is:

A) the amount by which aggregate surplus falls short of its minimum possible value, which is attained in a perfectly competitive market.

B) the amount by which consumer surplus exceeds producer surplus.

C) the amount by which aggregate surplus falls short of its maximum possible value, which is attained in a perfectly competitive market.

D) the amount by which producer surplus exceeds consumer surplus.

Q3) Explain the difference between a monopoly and a monopsony.

Q4) A firm has market power:

A) when it can profitably charge any price of its choosing.

B) when it is characterized as a price taker.

C) when it can profitably charge a price that is above its marginal cost.

D) only when it is the sole firm producing in a market.

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Page 19

Chapter 18: Pricing Policies

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Q1) Suppose Always There Wireless serves 100 high-demand wireless consumers,who each have a monthly demand curve for wireless minutes of QdH = 200 - 100P,and 300 low-demand consumers,who each have a monthly demand curve for wireless minutes of QdL = 100 - 100P,where P is the per-minute price in dollars.The marginal cost is $0.25 per minute.Suppose Always There Wireless charges $0.30 per minute.How many minutes will high-demand consumers purchase?

A) 60

B) 30

C) 70

D) 170

Q2) When a firm charges more per ounce for a small bottle of ketchup than for a larger one,it is engaging in:

A) price discrimination based on observable customer characteristics.

B) perfect price discrimination.

C) quantity-dependent pricing.

D) two-part tariff pricing.

Q3) Discuss the differences between perfect and imperfect price discrimination and the benefits of each to a monopolist.

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Page 20

Chapter 19: Oligopoly

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Sample Questions

Q1) One of the most notable features of the main provisions of the Sherman Act is that they are:

A) strict.

B) weak.

C) vague.

D) obsolete.

Q2) When competitors reach an agreement with one another about the quantities they will produce in order to keep profits high,they have engaged in:

A) price fixing.

B) quantity fixing.

C) profit fixing.

D) tacit collusion.

Q3) Compare and contrast the Bertrand and Cournot models of oligopoly.Your discussion should include assumptions made,goals of the firms and the resulting outcomes.

Q4) 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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Chapter 20: Externalities and Public Goods

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Q1) Suppose a paper mill earns $1,000,000 in profits when it pollutes a river,and it can abate pollution at a cost of $A.The effects of the pollution are confined to a single farmer who earns $400,000 if the water he uses from the river is clean and $300,000 if it's polluted.What is the combined profit of both firms without abatement?

A) $1,300,000

B) $900,000

C) $700,000

D) $1,400,000

Q2) A tradable emissions permit:

A) entitles a firm to generate a specified amount of a given pollutant. B) is transferable.

C) can be used to promote least-cost abatement.

D) All of the responses are correct.

Q3) A Groves mechanism is a procedure for setting the level of a public good that: A) induces everyone to report their preferences correctly. B) induces everyone to overstate the benefit they receive from a public good. C) induces everyone to understate the benefit they receive from a public good. D) only works if the public good in question is free of externalities.

Q4) Explain ways in which the government can remedy an externality.

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Chapter 21: Asymmetric Information

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Q1) Moral hazard is ________ in employment settings because _______.

A) common; employee effort is easy to observe

B) common; employee effort is difficult to observe

C) uncommon; employee effort is easy to observe

D) uncommon; employee effort is difficult to observe

Q2) Screening is a process that is employed by:

A) a party at an informational advantage.

B) a party at an informational disadvantage.

C) both parties in cases of information asymmetry.

D) both parties in cases of equal and perfect information.

Q3) Screening mechanisms are designed to ________ the problems of informational asymmetry.

A) reveal

B) help to alleviate

C) completely solve

D) exacerbate

Q4) Explain in your own words how the government can create Pareto efficiency by mandating participation in a social health insurance program.

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