Intermediate Microeconomics
Mock Exam
Course Introduction
Intermediate Microeconomics builds upon foundational economic principles to examine the behavior of individuals and firms in various market settings. The course delves into concepts such as consumer and producer theory, market equilibrium, the impact of government intervention, and the analysis of competitive and non-competitive markets. Students explore topics including utility maximization, cost minimization, and strategic decision-making using game theory. Emphasis is placed on using mathematical tools and graphical analysis to evaluate real-world economic scenarios, preparing students for advanced study in economics and related fields.
Recommended Textbook Microeconomics 8th Edition by Jeffrey M. Perloff
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Page 2
Chapter 1: Introduction
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Sample Questions
Q1) Which of the following can be analyzed using microeconomic models?
A) economic growth
B) a country's international trade pattern
C) a firm's output level decision
D) determinants of money supply
Answer: C
Q2) The maximizing behavior of individuals and firms determines society's three main allocation decisions:
A) which goods are produced, how they are sold, and who gets them.
B) which goods are produced, how they are produced, and who finances them.
C) which goods are imported, how they are stored, and who gets them.
D) which goods are produced, how they are produced, and who gets them.
Answer: D
Q3) Which of the following is an example of a normative statement?
A) Since this good is bad for you, you should not consume it.
B) This good has bad health effects.
C) If you consume this good, you will get sick.
D) People usually get sick after consuming this good.
Answer: A
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Page 3
Chapter 2: Supply and Demand
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Sample Questions
Q1) The power of the supply and demand model lies in its ability
A) to generally predict how price and quantity will change with supply and demand shocks.
B) to precisely predict the impact of government regulations on quantity and price.
C) to precisely determine the difference between price ceilings and price floors.
D) to generally predict how profit motive impacts the distribution of goods and services.
Answer: A
Q2) Suppose the market demand curve for pizza can be expressed as Q<sup>D</sup> = 100 - 2P + 3Pb,where Q<sup>D</sup> is the quantity of pizza demanded,P is the price of a pizza,and Pb is the price of a burrito.What is the slope of this demand function,and what information does the slope provide?
Answer: The slope is -2.The slope tells us how a change in the price of pizzas affects the quantity of pizzas demanded.An increase in the price of pizzas by $1 will result in a decrease of the quantity demanded by 2 pizzas.
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Chapter 3: Applying the Supply-And-Demand Model
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Sample Questions
Q1) Suppose that an ad valorem tax of 10% is imposed on producers of butter.The bread market supply is Qs = 10 + P and the bread market demand is Qd = 220-P.What is the producers' tax burden?
A) Producers' tax burden is $8.
B) Producers' tax burden is $10
C) Producers' tax burden is $4.
D) Producers' tax burden is $5.
Answer: D
Q2) Suppose the demand function for a good is expressed as Q = 100 - 4p.If the good currently sells for $10,then the price elasticity of demand equals A) -1.5.
B) -0.67.
C) -4.
D) -2.5.
Answer: B
Q3) 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.
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5
Chapter 4: Consumer Choice
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Sample Questions
Q1) Indifference curves on the same indifference map can have different shapes.
A)True
B)False
Q2) Joe's budget constraint equals 500 = 2F + 100S,where $500 is Joe's income,$2 is the price of food (F)and $100 is the price of shelter (S).How much food can Joe buy if he buys one unit of shelter?
A) 2 units
B) 200 units
C) 250 units
D) 400 units
Q3) An optimal choice in which a consumer does not consume all types of goods
A) is a corner solution.
B) cannot be an equilibrium.
C) cannot exhaust the budget constraint.
D) is an interior solution.
Q4) If both prices increases by 50%,
A) budget constraint will be unchanged.
B) slope of the budget constraint stay the same.
C) slope of the budget constraint will decrease.
D) budget constraint will shift outward in a parallel fashion.
Page 6
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Chapter 5: Applying Consumer Theory
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Sample Questions
Q1) A tax cut will unambiguously lower income-tax revenue.
A)True
B)False
Q2) For an inferior good,if the income effect more than offsets the substitution effect,we call that good
A) a Giffen good.
B) a normal good.
C) an inferior good.
D) a neutral good.
Q3) Draw two graphs,one directly above the other.On the upper graph,label the vertical axis Good X and label the horizontal axis Good Y.On the lower graph,label the vertical axis the Price of good Y and label the horizontal axis Good Y.In the upper graph,show the income and substitution effects of a decrease in the Price of good Y when Y is a Giffen good.Draw the corresponding demand curve for Good Y in the lower graph.
Q4) Which of the following is the geometric mean of 4 and 9?
A) 6.5
B) 6
C) 36
D) 3.6
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Chapter 6: Firms and Production
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Sample Questions
Q1) 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.
Q2) Explain how firms that each produce as efficiently as they can may not be equally productive.
Q3) Suppose the production of mp3 players can be represented by the following production function: q = L<sup>0.4</sup>K<sup>0.4</sup>.Which of the following statements is TRUE?
A) The production function has decreasing returns to scale.
B) The production function has increasing returns to scale.
C) The production function has constant returns to scale.
D) Returns to scale vary with the level of output.
Q4) What is the MRTS for a firm with the following production function ,q = 200L<sup>0.5</sup>K<sup>0.5 </sup>with L = 4 and K = 16?
A) MRTS = -4
B) MRTS = -2
C) MRTS = -1
D) MRTS = -8
Page 8
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Chapter 7: Costs
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Sample Questions
Q1) Joey's Lawncutting Service rents office space from Joey's dad for $300 per month.A similar office space in the same building rents for $545 per month.What is the economic profit earned by Joey's dad?
A) Profit of $245
B) Profit of $100
C) Loss of $100
D) Loss of $245
Q2) Sarah earns $40,000 per year working for a large corporation.She is thinking of quitting this job to work full time in her own business.She will invest her savings of $50,000 (which currently has an annual 10% rate of return)into the business.Her annual opportunity cost of this new business is
A) $0.
B) $40,000.
C) $45,000.
D) $90,000.
Q3) Explain why the long-run total cost curve,not the short-run total cost curve,shows the lowest cost of producing any level of output.Is there an exception?
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Chapter 8: Competitive Firms and Markets
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Sample Questions
Q1) If a competitive firm is in short-run equilibrium,then
A) economic profits equal zero.
B) economic profits will be positive.
C) economic profits will be negative.
D) All of the above are possible in the short run.
Q2) The "Got Milk?" advertising campaign is a good example of A) advertising in a competitive market.
B) how advertising in a competitive market does not pay off for a single firm.
C) interest groups financed by the industry advertise for the whole industry.
D) All of the above.
Q3) If a firm operates at a loss,the loss is equal to TC - TR.If the firm shuts down instead,its loss is equal to FC.Given this,show that price must exceed AVC for the firm to operate at a loss and not shut down.
Q4) Even though fixed costs do not affect the output decision,an increase in fixed costs results in a wider range of prices for which the firm operates at a loss.
A)True
B)False
Q5) Suppose there are 1000 identical wheat farmers.For each,TC = 10 + q<sup>2</sup> Derive the market supply curve.
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Chapter 9: Applying the Competitive Model
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Sample Questions
Q1) The difference between producer surplus and profit is always the associated with A) opportunity costs.
B) total costs.
C) variable costs.
D) fixed costs.
Q2) Consumer surplus from a given purchase is the difference between what one was willing to pay for that purchase and what was actually paid.
A)True
B)False
Q3) Suppose a consumer advocacy group has convinced legislators that vitamin pills should be free to consumers.Such a policy would enhance the health of the citizenry,they argue.Assuming a downward-sloping linear demand curve and a horizontal long-run supply curve,determine the resulting output and social welfare from such a policy.Compare this result to the competitive equilibrium.
Q4) In the long run,firms in a competitive market make zero economic profit.This induces most firms to leave the industry.
A)True
B)False
Q5) 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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Sample Questions
Q1) The Arrow impossibility theorem suggests
A) democracies are doomed to fail in the long run.
B) dictatorships are impossible in the long run.
C) there is no universally applicable decision rule in a majority-rule democracy.
D) there is no way to make democracy better than a dictatorship.
Q2) Can consumption efficiency be achieved even if the efficient product mix is not achieved?
Q3) Reparations for slavery in the United States would
A) be consistent with the Pareto principle.
B) be inconsistent with the Pareto principle.
C) have nothing to do with the Pareto principle.
D) be unconstitutional.
Q4) A social welfare function (SWF)
A) depicts the preferences of the president of the country.
B) combines various consumers' utilities to provide a collective ranking of allocations.
C) indicates the choices that are acceptable by most consumers.
D) is the outcome of a majority voting decision rule.
Q5) Explain why a government may select an inefficient allocation.
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Chapter 11: Monopoly
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Sample Questions
Q1) Which of the following DOES NOT contribute to the market power of a firm?
A) number of available substitutes
B) the color of the product
C) legal protections
D) the number of firms in the market
Q2) If the demand for a monopoly's output shifts rightward,the change in quantity produced is NOT predictable because
A) the monopoly is a profit maximizer.
B) the monopoly is a price taker.
C) the monopoly has no supply curve.
D) the monopoly's marginal cost curve might not be upward sloping.
Q3) If the government sets a specific tax and an ad valorem tax so that they raise the same amount of tax revenue,why does the ad valorem tax reduce output less than the specific tax?
Q4) For a monopoly,marginal revenue is less than price because A) the firm is a price taker.
B) the firm must lower price if it wishes to sell more output.
C) the firm can sell all of its output at any price.
D) the demand for the firm's output is perfectly elastic.
Q5) Explain why a monopolist has no supply curve.
Page 13
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Chapter 12: Pricing and Advertising
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Sample Questions
Q1) A specialized rice grower sells rice in two markets,the United States and Japan,and the marginal cost the same in both markets.The price elasticity of demand in the United States is -2.0,and the price elasticity of demand in Japan is -1.5.If the grower practices multimarket price discrimination,which country's consumers will pay a higher price and by how much?
Q2) If a market is controlled by a perfect-price-discriminating monopoly,then
A) a deadweight loss is generated.
B) there is no consumer surplus.
C) consumer surplus is the same as under perfect competition.
D) output is less than that of a single-price monopoly.
Q3) What is a primary difference between rebates and coupons?
A) Coupons allow individuals to sort themselves into the high-elasticity group after the sale.
B) Neither coupons nor rebates are redeemed in high numbers.
C) Rebates allow individuals to sort themselves into the high-elasticity group after the sale.
D) Coupons are legal and rebates are illegal.
Q4) Explain using welfare measures whether consumers prefer a single price monopoly or a perfect-price-discriminating monopoly.
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Chapter 13: Oligopoly and Monopolistic Competition
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Sample Questions
Q1) Firms in all types of market structures pay attention to current rival firms' behavior.
A)True
B)False
Q2) The above figure shows the reaction functions for two pizza shops in a small isolated town.Firm B producing 100 pizzas and firm A producing 50 pizzas is not a Cournot equilibrium because
A) Cournot duopolists agree to share the market equally.
B) firm B is not on its best-response function.
C) firm A is not on its best-response function.
D) neither firm is on its best-response function.
Q3) In a monopolistically competitive market,the lower the firms' fixed costs,
A) the higher the deadweight loss.
B) the less firms are active in equilibrium.
C) the more firms are active in the equilibrium.
D) the higher the prices charged.
Q4) Suppose the demand for pizza in a small isolated town is p = 10 - Q.There are only two firms,A and B,and each has a cost function TC = 2 + q.Determine the Cournot equilibrium.
Q5) What happens in a duopoly if both firms try to act as the Stackelberg leader?
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Chapter 14: Game Theory
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Sample Questions
Q1) The above figure shows the payoff to two airlines,A and B,of serving a particular route.If the two airlines must decide simultaneously,which one of the following statements is TRUE?
A) Firm A has a dominant strategy.
B) Firm B has a dominant strategy.
C) Neither firm entering is a Nash equilibrium.
D) The outcome of the game is unpredictable.
Q2) Suppose two firms,A and B,are simultaneously considering entry into a new market.If neither enters,both earn zero.If both enter,they both lose 100.If one firm enters,it gains 50 while the other earns zero.Set up the payoff matrix for this game and determine if any Nash equilibria exist.Can you predict the outcome? What if firm A gets to decide first?
Q3) The above figure shows the payoff to two gasoline stations,A and B,deciding to operate in an isolated town.If firm A chooses its strategy first,then
A) firm A will not enter.
B) firm B's entry is blockaded.
C) both firms will enter.
D) firm A will enter and firm B will not.
Q4) Why is collusion more likely in a repeated game?
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Page 16
Chapter 15: Factor Markets
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Sample Questions
Q1) For a competitive firm the marginal revenue product of labor is usually downward sloping.
A)True
B)False
Q2) Monopolies in successive markets result in
A) a double markup for consumers.
B) more output than if the input market is competitive.
C) a lower output price than if the input market is competitive.
D) All of the above.
Q3) If a firm buys its labor in a competitive market,then a short-run increase in the price of the firm's output will cause the firm to
A) offer a higher wage.
B) hire fewer workers.
C) hire more workers.
D) offer a lower wage.
Q4) If the competitive firm maximizes profit by selecting labor rather than output,it will earn greater economic profit.
A)True
B)False
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Chapter 16: Interest Rates, Investments, and Capital Markets
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Q1) Using the Internal Rate of Return approach to investment,one would undertake an investment if the internal rate of return
A) equals zero.
B) equals the interest rate.
C) exceeds the interest rate.
D) is less than the interest rate.
Q2) Which of the following is most likely to cause the demand curve in the capital market to shift leftward?
A) Government borrows to finance a war.
B) All firms project higher future revenue streams for all of their projects.
C) All firms project lower future revenue streams for all of their projects.
D) Government institutes a high tax on savings.
Q3) Explain how continuing technical progress may cause the price of scarce,exhaustible resources to fall over time.
Q4) If inflation turns out to be higher than was anticipated,
A) debtors are helped.
B) debtors are hurt.
C) debtors are neither helped nor hurt.
D) The effect on debtors cannot be predicted.
Page 18
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Chapter 17: Uncertainty
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Sample Questions
Q1) Alvin's utility function is U = W.Barry's utility function is U = W<sup>2</sup>.Carl's utility function is U = W<sup>0.5</sup>.Each has wealth of only $100.An investment of that $100 has a 10% chance of netting $1,000 and a 90% chance of netting a loss of that $100.Who among the three will make the investment?
Q2) Catherine is risk averse.When faced with a choice between a gamble and a certain level of wealth she will
A) always prefer the gamble.
B) always prefer the certain level of wealth.
C) prefer the gamble if the expected utility from it is higher than the utility from the certain level of wealth.
D) prefer the certain level of wealth if the expected utility from the gamble is higher than the utility of the certain level of wealth.
Q3) Explain why the rate of return from investing in stocks is higher than from investing in bonds.
Q4) On any given day,a salesman can earn $0 with a 20% probability,$100 with a 40% probability,or $300 with a 20% probability.Calculate the expected value and variance of his earnings,and interpret.
Q5) Explain why insurance companies usually do not offer earthquake insurance.
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Chapter 18: Externalities, Open-Access, and Public Goods
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Sample Questions
Q1) 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
Q2) Suppose 100 citizens each derive marginal benefit from submarines according to the function MB = 10 - Q.If subs cost $100 each to produce,what is the efficient quantity of submarines?
Q3) Your new neighbor does not mow his lawn or prune the trees in his front yard.As a result,your house value decreases.Your neighbor generated
A) a negative externality.
B) a positive externality.
C) no externality.
D) a non-rival good.
Q4) Explain why the optimal amount of pollution is often not zero.
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Page 20
Chapter 19: Asymmetric Information
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Sample Questions
Q1) The minor league system in professional baseball can be thought of as
A) a screening tool.
B) a signaling tool.
C) a form of statistical discrimination.
D) being used for the wrong reasons.
Q2) Signals may prevent adverse selection if
A) sending a false signal is cheap for the agent.
B) sending a false signal is costly for the agent.
C) agents as rational.
D) signals are as good as cheap talk.
Q3) If a college degree is used to signal high ability,but the cost of a college degree is relatively high,
A) a separating equilibrium is achieved.
B) a pooling equilibrium is achieved.
C) even low-ability workers will attend college.
D) the share of high-ability workers must be 1.
Q4) Explain how product liability laws can reduce adverse selection.
Q5) Explain why some people who are applying for a job at a bank dress up,arrive early,and have their paperwork neatly completed for the job interview.
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Chapter 20: Contracts and Moral Hazards
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Q1) Under deferred compensation packages,
A) a moral hazard occurs if a firms fires a good worker before the worker receives her deferred compensation.
B) a moral hazard occurs if workers decide not to shirk so as to receive the deferred compensation.
C) moral hazards are avoided.
D) workers' wages are below their marginal revenue product as they near retirement.
Q2) Author A accepts a $5,000 advance and a 10% royalty after 5,000 books are sold.Author B foregoes the advance and negotiates for a 15% royalty on all books sold.Author C decides to self publish his book and keep 50% of all sales revenue.In what order of risk aversion (from most to least)would you rank these authors?
A) Author A, Author B, Author C
B) Author A, Author C, Author B
C) Author B, Author A, Author C
D) Author C, Author B, Author A
Q3) Explain why checks on principals might be necessary.
Q4) Explain how more than one possible state of nature affects contract choices.
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Page 22