Intermediate Microeconomics
Midterm Exam
Course Introduction
Intermediate Microeconomics delves deeper into the principles that govern individual and firm decision-making in various market structures. The course explores topics such as consumer choice, production and cost analysis, market equilibrium, and the behavior of firms under perfect competition, monopoly, oligopoly, and monopolistic competition. Emphasis is placed on the use of mathematical tools and models to analyze supply and demand, game theory, market failures, and the impact of government policies. By developing analytical and problem-solving skills, students gain a solid foundation for understanding real-world economic issues and preparing for advanced studies in economics.
Recommended Textbook
Microeconomics Theory and Applications with Calculus 4th Edition by Jeffrey M. Perloff(equations)
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Page 2
Chapter 1: Introduction
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Q1) Einstein was quoted saying "Everything should be made as simple as possible,but not simpler." When it comes to economic models this means that
A)models shouldn't be too complex.
B)models shouldn't be too simple.
C)models should have a level of abstraction appropriate to the topic investigated.
D)All of the above.
Answer: D
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) The price of a good is
A)always equal to the cost of producing the good.
B)never affected by the number of buyers and sellers.
C)usually determined in a market.
D)None of the above.
Answer: C
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Chapter 2: Supply and Demand
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Q1) If the demand curve for a good is horizontal and the price is positive,then a leftward shift of the supply curve results in
A)a price of zero.
B)an increase in price.
C)a decrease in price.
D)no change in price.
Answer: D
Q2) Explain why the price elasticity of demand changes along a linear demand curve. Answer: The price elasticity of demand depends on BOTH the slope of the demand curve and on the term P/Q which changes as you move along the demand curve.
Q3) If a good is not produced,then there is no demand for it.
A)True
B)False
Answer: False
Q4) Because demand curves slope downward according to the Law of Demand,the price elasticity of demand is a negative number. A)True
B)False
Answer: True
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Chapter 3: A Consumers Constrained Choice
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Q1) If a consumer's budget line for food (F)and shelter (S)is represented as F = 2505S,and 50 units of food is purchased,how many units of shelter can be purchased at most?
A)0
B)40
C)60
D)80
Answer: B
Q2) If two indifference curves were to intersect at a point,this would violate the assumption of A)transitivity.
B)completeness.
C)Both A and B above.
D)None of the above.
Answer: A
Q3) Lisa has an income of $100.She spends all of her income on pizza and burritos.A pizza costs $10 and a burrito costs $5.However,the store where Lisa buys her burritos has a special deal.After you've bought six burritos,then you can buy each burrito for $2.50.Draw Lisa's opportunity set.
Answer: 11ea6e7c_825e_eaee_8f54_1fc6b29bd75c_TB3096_00
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Chapter 4: Demand
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Q1) Jose consumes wallets (q<sub>1</sub>)and a composite of other goods (q<sub>2</sub>).The price of wallets is p<sub>1</sub> and the price of other goods is p<sub>2 </sub>= 1.Jose's utility from wallets depends also on his income-with a higher income,he values a wallet more because he has more to put inside it! His utility is given by the equation U(q<sub>1</sub>,q<sub>2</sub>)= q<sub>1</sub>Yq<sub>2</sub> Derive Jose's demand for wallets.
Q2) Under which of the following conditions will there be no substitution bias in the CPI?
A)Indifference curves are convex.
B)Indifference curves are L-shaped.
C)Indifference curves are linear.
D)Indifference curves are downward sloping.
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) The above figure shows three different Engel curves.Rank them in terms of income elasticity.
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Chapter 5: Consumer Welfare and Policy Analysis
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Q1) Suppose a victim of an accident brings the injurer to court.You are hired to determine the amount of damages.You are specifically asked to find a measure of the amount of money needed to restore the victim to the position he was in prior to the accident.What welfare measure will provide the most accurate measure of this amount?
A)compensating variation
B)equivalent variation
C)consumer surplus
D)the loss of utility
Q2) Suppose a consumer purchases Food (F)and other goods (X)with their income of $100.For simplicity,suppose that food and other goods are measured in $1 units,so the price of each is $1.Currently,the consumer can purchase unlimited food stamps by paying 10¢ for $1 of food.With this,the consumer purchases 500 food stamps (for 500 units of food)and 50 units of X.As a result,the government must pay 90¢ towards food,for a total cost of $450.Using a graph of budget constraints and indifference curves,show that the consumer prefers to receive a cash gift of $450 over the food stamp option.
Q3) An increase in unearned income always creates a disincentive to work
A)True
B)False
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Chapter 6: Firms and Production
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Q1) The above figure shows the isoquants for producing steel.When producing more than 20,000 tons there are
A)increasing returns to scale.
B)decreasing returns to scale.
C)constant returns to scale.
D)economies of scale.
Q2) Explain why labor might not always be a variable input.
Q3) Suppose the production function for T-shirts can be represented as q = L<sup>0.25</sup> K<sup>0.75</sup>.When
K = 1 and q = 2,what is the slope of the isoquant? If there is insufficient information to answer the question,describe what information is needed.
Q4) Joey cuts grass during the summer.He owns one lawn mower.For him,the short run is equal to
A)the amount of time it takes to acquire more customers.
B)the amount of time it takes to hire an additional employee.
C)the amount of time it takes to hire an additional employee and buy another lawn mower.
D)the amount of time it takes to mow one lawn.
Q5) What do we mean by efficient production?
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Chapter 7: Costs
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Q1) Suppose a firm can only vary the quantity of labor hired in the short run.An increase in the cost of capital will
A)increase the firm's marginal cost.
B)decrease the firm's marginal cost.
C)have no effect on the firm's marginal cost.
D)More information is needed to answer the question.
Q2) The slope of the isocost line tells the firm how much
A)capital must be reduced to keep total cost constant when hiring one more unit of labor.
B)capital must be increased to keep total cost constant when hiring one more unit of labor.
C)more expensive a unit of capital costs relative a unit of labor.
D)the isocost curve will shift outward if the firm wishes to produce more.
Q3) The "Law of Diminishing Marginal Returns" could also be termed the "Law of Increasing Marginal Costs."
A)True B)False
Q4) Short-run costs are never equal or lower than long-run cost.
A)True B)False
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Chapter 8: Competitive Firms and Markets
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Q1) Suppose market demand is Q = 1000 - 4p.If all firms have LRAC = 50 - 5q + q<sup>2</sup>,how many identical firms will there be when this industry is in long-run equilibrium?
Q2) In the long run,profits will equal zero in a competitive market because of A)constant returns to scale.
B)identical products being produced by all firms.
C)the availability of information.
D)free entry and exit.
Q3) If a firm sets marginal revenue equal to marginal cost,it will make an economic profit.
A)True
B)False
Q4) Suppose that for each firm in the competitive market for potatoes,long-run average cost is minimized at 20¢ per pound when 500 pounds are grown.The demand for potatoes is Q = 10,000/p.If the long-run supply curve is horizontal,then how many pounds of potatoes will be consumed in total?
A)0
B)500
C)10,000
D)50,000
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Chapter 9: Properties and Applications of the Competitive Model
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Q1) The above figure shows the demand and supply curves in the market for milk.Currently,the market is in equilibrium.If the government imposes a $2 per gallon tax to be collected from sellers,calculate the dead weight loss associated with the tax,and explain why the dead weight loss occurs.
Q2) Suppose the inverse supply curve in a market is Q = 6p<sup>2</sup>.What is the producer surplus when price is equal to 4?
A)96
B)128
C)28
D)48
Q3) "Supporters of import restrictions and protectionist policies place greater weight on producer welfare than on consumer welfare." Comment.
Q4) Competitive firms earn zero profit in the long run when A)entry is completely free.
B)entry is limited.
C)Both A and B.
D)Neither A nor B.
Q5) Explain why the competitive output maximizes welfare.
Q6) When is the profit a firm earns equal to the producer surplus? Explain.
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Chapter 10: General Equilibrium and Economic Welfare
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Q1) Suppose the U.S.can produce 10 units of food and five units of clothing (or any such linear combination)and Canada can produce six units of food and four units of clothing (or any such linear combination).If trade occurs between these two countries,which should produce more food and which more clothing?
Q2) Can consumption efficiency be achieved even if the efficient product mix is not achieved?
Q3) For most commonly used social welfare functions,an efficient allocation is A)always preferred over any inefficient allocation.
B)not possible.
C)usually preferred.
D)never preferred.
Q4) For a given set of prices,two consumers choose bundles that are off the contract curve.In a competitive market, A)prices will adjust until the consumers choose bundles that are on the contract curve.
B)the indifference curves will shift back to the contract curve.
C)the contract curve will shift to connect these bundles.
D)no adjustments need to be made.
Q5) Explain why a government may select an inefficient allocation.
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Chapter 11: Monopoly and Monopsony
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Q1) The gap between the value a monopsony places on the last worker hired and the wage paid will increase when
A)the supply curve becomes more elastic at the optimum.
B)the supply curve becomes less elastic at the optimum.
C)the supply curve becomes horizontal.
D)the value of the last unit of labor hired is greater than the cost.
Q2) Empirical evidence from electric-power-producing firms suggests that the largest electric-power-producing firms are not natural monopolies because
A)the average cost curve for these firms is U-shaped.
B)no electric-power-producing firms are natural monopolies.
C)the largest firms enjoy economies of scale.
D)the designation of natural monopoly can only be bestowed by the government.
Q3) Empirical evidence from electric-power-producing firms suggests that
A)all electric-power-producing firms are natural monopolies.
B)no electric-power-producing firms are natural monopolies.
C)the largest electric-power-producing firms are natural monopolies.
D)the smallest electric-power-producing firms are natural monopolies.
Q4) Why is the monopoly total welfare lower than the competitive total welfare?
Q5) Explain Microsoft Windows' monopoly positions in terms of network externalities.
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Chapter 12: Pricing and Advertising
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Q1) Can a perfectly competitive firm successfully price discriminate? Hint: What does the demand curve look like for a perfectly competitive firm?
Q2) If two markets have the same price elasticity of demand at every price,a monopoly will not practice multimarket price discrimination.
A)True
B)False
Q3) 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 consumer surplus is A)A.
B)A + B + C.
C)A + B + C + D + E.
D)zero.
Q4) The sales of shoes that include shoelaces is a tie-in sale that most likely
A)greatly increases the shoe producer's profit.
B)increases transactions costs.
C)increases efficiency.
D)None of the above.
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Chapter 13: Game Theory
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Questions
Q1) The above figure shows a payoff matrix for two firms,A and B,that must choose between selling basic computers or advanced computers.How many Nash equilibria are there?
A)0
B)1
C)2
D)4
Q2) The above figure shows the payoff to two airlines,A and B,of serving a particular route.If the two airlines must decide simultaneously,and the government imposes a $20 per firm tax on firms that service this route,which of the following maximizes the firms' joint profits?
A)Neither firm services the route.
B)Firm A offers firm B $20 to not enter.
C)Both firms will service this route.
D)Firm B offers firm A $30 to not enter.
Q3) When neither player has a dominant strategy,
A)game theory will not provide information.
B)no Nash-Equilibrium exists.
C)at least one Nash-Equilibrium exists.
D)the game cannot be analyzed.
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Chapter 14: Oligopoly and Monopolistic Competition
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Q1) A group of firms are selling undifferentiated products if
A)consumers perceive the products identical between the firms.
B)production costs are the same for all firms.
C)the firms are selling goods that are identical,though consumers view them as different.
D)the firms are part of a single cartel.
Q2) Product differentiation
A)may allow firms to price above a competitive level.
B)generates value as consumers value more choices.
C)depends on perceived differences between products.
D)All of the above.
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) Explain how long-run economic profits are linked to entry in monopolistic competition and perfect competition.
Q5) What happens in a duopoly if both firms try to act as the Stackelberg leader?
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Chapter 15: Factor Markets
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Q1) In an economy with no inflation,explain why interest rates are positive.
Q2) The above figure shows a competitive firm's demand for labor assuming that the firm's output sells for $1 per unit.If the wage is $5 per hour,a ten cent specific tax on the good sold by the firm will cause the firm to
A)demand less labor.
B)demand more labor.
C)offer its workers only $4.90 per hour.
D)hire 0 units of labor per hour.
Q3) If an exhaustible resource is priced at marginal cost that remains constant over time,then
A)all owners of that resource earn rent.
B)the price will stay constant over time.
C)the percent price increase each year equals the rate of interest.
D)the good is relatively scarce.
Q4) To derive the labor market demand curve,the labor demand curves for each firm in the output market of interest are summed.
A)True
B)False
Q5) Why is the short-run demand curve for labor downward sloping?
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Chapter 16: Uncertainty
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Q1) Which of the following statements is CORRECT?
A)Compared to stocks,bonds have a higher return.
B)Compared to stocks,bond returns have a higher standard deviation.
C)Compared to bonds,stock returns have a lower standard deviation.
D)Compared to bonds,stock returns have a higher standard deviation.
Q2) If fair insurance is offered to a risk-averse person,she will
A)buy enough insurance to eliminate all risk.
B)not buy any insurance because it is overpriced.
C)not buy any insurance since the marginal utility of the amount of the payment is positive.
D)buy enough insurance to cover about half of the possible loss.
Q3) Steven currently has wealth of $10,000.He is risk averse about losing any of his wealth,but risk loving about adding to his wealth.Draw his utility function.
Q4) Suppose an individual has $100 to invest.Two assets are available.One asset will yield a return of 10%,while the other risky asset will yield 0% with probability .5 and 21% with probability .5.Suppose the investor's utility function is given by U(x)= ln(x)where x is the wealth after investing (assume she is investing for just one period).How much will she invest in the risky asset?
Q5) Explain why insurance companies usually do not offer earthquake insurance.
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Chapter 17: Property Rights, Externalities, Rivalry, and Exclusion
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Q1) The above figure shows the market for steel ingots.An externality can be seen because
A)the social marginal cost exceeds the private marginal cost.
B)the private marginal cost exceeds the social marginal cost.
C)the optimal quantity of steel is zero.
D)not enough steel gets produced by the competitive market.
Q2) Which of the following statements about private and social costs is TRUE?
A)Social costs include externalities.
B)Private cost do not include externalities.
C)Social costs are never smaller than private costs.
D)All of the above.
Q3) Explain why state governments may charge a fee for beach access to address the commons problem.
Q4) Suppose two neighbors share a park.One neighbor,Al,leaves trash in the park.This bothers the other neighbor,Bert.According to Coase's theorem,the optimal level of trash in the park can be achieved if
A)someone is assigned property rights to the park.
B)government limits the use of the park.
C)nobody catches Al leaving the trash.
D)Bert moves.
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Chapter 18: Asymmetric Information
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Q1) The above figure shows the payoff to two firms in an industry deciding to make an investment in worker safety.Neither firm will make the investment because
A)each can benefit from the other firm incurring the costs.
B)there is no benefit to making the investment.
C)each firm pays for the other firm's investment.
D)society does not care about worker safety.
Q2) Joe wants to achieve the highest position possible with the XYZ Co.During the interview,he tells them he is capable of performing many difficult tasks.The company feels there is an 10% chance he is lying.Given the payoff matrix in the above figure,what job level will the company offer to Joe? Why?
Q3) The market for used cars is shown in the above figure.Buyers cannot tell whether any given car is a lemon.Ten percent (10%)of all cars are lemons.Which of the following statements is TRUE?
A)All of the cars will be sold.
B)No cars will be sold.
C)Only lemons will be sold.
D)Only good cars will be sold.
Q4) Explain how product liability laws can reduce adverse selection.
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Chapter 19: Contracts and Moral Hazards
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Q1) Which of the following workers is most likely to be asked to post a bond?
A)construction contractor
B)fast food worker
C)sanitation worker
D)book author
Q2) A profit-maximizing firm that uses an efficiency wage and monitors will increase the wage it pays its workers until
A)the worker requires no monitoring.
B)the worker receives the market wage and requires full-time monitoring.
C)the cost of monitoring the worker equals the efficiency wage.
D)the change in the workers' productivity from being monitored times the per time unit cost of monitoring equals one.
Q3) One reason that lawyers might prefer a contingent contract when representing a plaintiff in a tort case is that
A)lawyers are risk neutral.
B)diversification of many cases allows lawyers to reduce risk.
C)lawyers are typically confident about winning every case.
D)hourly rates for lawyers are usually very low.
Q4) When does it make sense to offer a worker a piece-rate contract?
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