Intermediate Microeconomics Practice
Exam
Course Introduction
Intermediate Microeconomics explores the foundational theories and analytical tools used to understand the behavior of consumers, firms, and markets. Building on basic microeconomic principles, this course delves into topics such as consumer choice, production and cost analysis, market structures (perfect competition, monopoly, oligopoly), game theory, and the welfare implications of market outcomes. Students will learn to use graphical and mathematical models to analyze real-world economic situations, sharpening their critical thinking and problem-solving skills to better comprehend how individual decisions and market forces interact to allocate scarce resources efficiently.
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) Governments do not respond to prices.
A)True
B)False
Answer: False
Q2) Billy developed an economic model to describe the behavior of a stock market index.His model predicts that the index increases on Mondays and declines on the other days of the week.What can be said about Billy's model?
A) The model's predictions are ambiguous and cannot be tested.
B) The model's predictions are not ambiguous and cannot be tested.
C) The model's predictions are ambiguous and can be tested.
D) The model's predictions are not ambiguous and can be tested.
Answer: D
Q3) Economic modeling requires
A) mathematics.
B) logic.
C) calculus.
D) trigonometry.
Answer: B
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Chapter 2: Supply and Demand
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Sample Questions
Q1) Suppose the market for a good is expressed as follows:
Inverse demand: P = 200 - 2Q
Inverse supply: P = 2Q
What is the equilibrium if the government imposes a supply quota of 75 units? What is the equilibrium if the government imposes a supply quota of 25 units?
Answer: The market equilibrium with no quota is P = $100 and Q = 50 units.A supply quota of 75 units is not binding so the equilibrium is unchanged.A supply quota of 25 units will change the supply curve.The new supply curve will be the same as the no quota supply curve until 25 units and then it will be vertical.The new equilibrium is P = $150 and Q = 25 units.
Q2) During a mild winter,the price of home heating oil is expected to be less than it would be during a normal winter.
A)True
B)False
Answer: True
Q3) If a good is not produced,then there is no demand for it.
A)True
B)False
Answer: False
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Page 4
Chapter 3: Applying the Supply-And-Demand Model
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Sample Questions
Q1) Suppose that a specific tax of $3 is imposed on producers of bread.The bread market supply is Qs = 10 + 0.5P and the bread market demand is Qd = 100-P.What is the change in the equilibrium quantity of bread induced by the tax incidence?
A) Equilibrium quantity decreased by three units.
B) Equilibrium quantity increased by two units.
C) Equilibrium quantity decreased by one unit.
D) Equilibrium quantity increased by one unit.
Answer: C
Q2) If the cross price elasticity of two goods is -3.5,then
A) these two products are relatively elastic substitutes.
B) these two products are relatively inelastic substitutes.
C) these two products are relatively elastic complements.
D) these two products are relatively inelastic complements.
Answer: C
Q3) Which of the following is an example of an ad valorem tax?
A) 5% of price
B) 5% of quantity sold
C) $0.50 per unit sold
D) Government regulation
Answer: A
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Chapter 4: Consumer Choice
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Sample Questions
Q1) Keith is indifferent between canned soup and fresh soup.In the figure above,Keith's indifference curves are represented by I1,I2,I3,and I4 curves.What is Keith's utility maximization choice?
A) 4 canned soups and 4 fresh soups
B) 4 canned soups and 2 fresh soups
C) only 4 canned soups
D) only 2 fresh soups
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.
Q3) If the utility function (U)between bananas (B)and jam (J)can be represented as U(B,J)= 3ln(B)+4ln(J),what is the marginal rate of substitution (MRS)between bananas and jam?
A) 4B.
B) -3J/(4B).
C) 4/(3J).
D) 3B/J.
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Chapter 5: Applying Consumer Theory
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Q1) Suppose that the interest rate paid to savers increases.As a result,Tom wishes to save more.This suggests that,for Tom,
A) the substitution effect is greater than the income effect.
B) the income effect is greater than the substitution effect.
C) utility maximization is not occurring.
D) future consumption is a luxury.
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) Using a Laspeyres index to calculate the Consumer Price Index (CPI)
A) weights quantities with current prices.
B) weights prices with base-year quantities.
C) weights quantities with base-year prices.
D) weights prices with current year quantities.
Q4) Why can't all goods be inferior?
Q5) Explain what the slope of the income consumption curve shows about the income elasticity of demand.
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Chapter 6: Firms and Production
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Sample Questions
Q1) Limited liability is a benefit to
A) sole proprietorships.
B) partnerships.
C) corporations.
D) All of the above.
Q2) Which of the following statements best describes a production function?
A) the maximum profit generated from given levels of inputs
B) the maximum level of output generated from given levels of inputs
C) all levels of output that can be generated from given levels of inputs
D) all levels of inputs that could produce a given level of output
Q3) The slope of an isoquant tells us
A) how much output increases when both inputs are increased.
B) the increase in MP<sub>L</sub> when capital increases.
C) the decrease in capital necessary to keep output constant when labor increases by one unit.
D) the decrease in capital necessary to keep MP<sub>L</sub> constant when labor increases by one unit.
Q4) Describe the relationship between marginal productivity and average productivity.Use calculus or a graph to support your answer.
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Chapter 7: Costs
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Q1) Assuming that w and r are both positive,if the long-run expansion path is horizontal,then
A) MP<sub>K</sub> = 0.
B) MRTS is a function of capital only.
C) w = r.
D) All of the above.
Q2) The "Law of Diminishing Marginal Returns" could also be termed the "Law of Increasing Marginal Costs."
A)True
B)False
Q3) Suppose that each worker must use only one shovel to dig a trench,and shovels are useless by themselves.In the long run,the firm's cost function is
A) TC = (w/r) q.
B) TC = (w + r)/q.
C) TC = (w + r).
D) TC = (w + r) q.
Q4) Suppose the production function is q = 12 L<sup>0.25</sup>K<sup>0.75</sup>.Determine the long-run capital-to-labor ratio (K/L)if the cost a unit of capital (r)is three times the cost of a unit of labor (w).
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Chapter 8: Competitive Firms and Markets
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Sample Questions
Q1) If a firm goes out of business because of negative economic profits,its books
A) might indicate a positive accounting profit.
B) might indicate that opportunity costs were zero.
C) might indicate that taxes are too high.
D) might suggest a mistaken value of explicit costs.
Q2) Many car owners and car dealers describe their different cars for sale in the local newspapers and list their asking price.Many people shopping for a used car consider the different choices listed in the paper.The absence of which condition prohibits this market from being described as perfectly competitive?
A) Buyers and sellers know the prices.
B) Firms freely enter and exit.
C) Transaction costs are low.
D) Consumers believe all firms sell identical products.
Q3) The above figure shows the cost curves for a typical firm in a competitive market.Note that if p = 10,then MC = p at both q = 5 and q = 60.Can they both yield maximum profit? Explain.
Q4) The above figure shows the long-run cost curves for a typical firm in a competitive market.If the number of firms is unrestricted and input costs are constant,derive the long-run market supply curve.
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Chapter 9: Applying the Competitive Model
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Sample Questions
Q1) A minimum wage is an example of a
A) price floor.
B) price ceiling.
C) quantity quota.
D) free market equilibrium.
Q2) What is one reason activists might lobby the government to force firms to produce more output than they normally would in a perfectly competitive market?
A) They value consumer surplus more than producer surplus.
B) They value producer surplus more than consumer surplus.
C) They seek to avoid future regulation.
D) They seek to minimize total surplus.
Q3) If a market produces a level of output below the competitive equilibrium,then
A) social welfare is not maximized.
B) consumer surplus might still be maximized.
C) the actual price will be below the equilibrium price.
D) social welfare might still be enhanced if a price ceiling keeps price below the competitive price.
Q4) When is the profit a firm earns equal to the producer surplus? Explain.
Q5) Explain why the competitive output maximizes welfare.
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Chapter 10: General Equilibrium and Economic Welfare
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Sample Questions
Q1) If society were to maximize the utility of its worst-off member,the final allocation would most likely be
A) relatively egalitarian.
B) on the contract curve.
C) Pareto efficient.
D) one in which one person gets everything.
Q2) Suppose the production possibilities for two countries,producing either food or clothing,are shown in the above figure.They can each produce any linear combination as well.Measuring food on the horizontal axis,the joint production possibility frontier
A) will have a slope of -3/4 over the entire frontier.
B) will have a slope of -2 when less than 20 units of food are produced.
C) will have a slope of -1 when less than 20 units of food are produced.
D) will have a slope of -1/2 when less than 20 units of food are produced.
Q3) Any point on the contract curve is Pareto efficient regardless of the initial endowment.
A)True
B)False
Q4) How does competition ensure that the efficient product mix is attained?
Q5) Explain why a government may select an inefficient allocation.
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Chapter 11: Monopoly
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Sample Questions
Q1) When the marginal revenue curve cuts the horizontal axis,
A) demand is relatively elastic.
B) demand is relatively inelastic.
C) demand is perfectly elastic.
D) demand is unitary elastic.
Q2) The SSS Co.has a patent on a particular medication.The medication sells for $1 per daily dose and marginal cost is estimated to be a constant at $0.20.Assuming linear demand and marginal cost curves,use this information to estimate the deadweight loss from monopoly pricing if the firm currently sells 1,000 doses per day.Can this loss be justified?
Q3) If the monopoly's demand curve intersects the AVC curve at minimum AVC,the firm will shut down.
A)True B)False
Q4) A monopoly always operates in the inelastic portion of its demand curve. A)True
B)False
Q5) A monopoly does not have a supply curve.
A)True
B)False
Page 13
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Chapter 12: Pricing and Advertising
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Sample Questions
Q1) Coupons represent a form of price discrimination because they offer a low-cost way for firms to
A) identify customers with apparently more elastic demand and offer them a lower price.
B) retain loyal customers who are not price sensitive.
C) offer discounts to consumers who buy larger quantities.
D) perfectly price discriminate.
Q2) Consider a car dealership advertises a three-year lease at $250 per month.When you arrive to apply,you discover that the lease requires a down payment of $3600 dollars.You will undertake the lease if
A) you value the lease at least $350 per month.
B) you value the lease at least $250 per month, the $3600 is a sunk cost.
C) you value the lease less than $350 per month.
D) you value buying a new car at $400 per month.
Q3) What is one reason consumers might demand a discount for quantity purchases?
A) higher storage costs
B) lower marginal cost
C) lower marginal benefit
D) price gouging
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Page 14
Chapter 13: Oligopoly and Monopolistic Competition
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Sample Questions
Q1) Which of the following models results in the highest level of output assuming a fixed number of firms with identical costs and a given demand curve?
A) Cournot
B) Stackelberg
C) Monopoly
D) Cartel
Q2) If two firms playing Cournot are identical with decreasing average costs,how should the firms divide production to maximize joint profits?
Q3) Suppose that market demand can be represented as p = 100 - 2Q.There are 10 identical firms producing an undifferentiated product,each with the total cost function TC = 50 + q<sup>2</sup>.Compare the competitive outcome with the cartel outcome.What is the individual firm's incentive to cheat on the cartel?
Q4) Which of the following market structures have market power?
A) oligopoly
B) monopolistic competition
C) perfect competition
D) Both A and B.
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,what will happen if the government offers a $30 subsidy to airlines that serve this route?
A) Both firms will enter profitably.
B) Firm A will decide not to enter since firm B will.
C) Firm B is still better off not entering.
D) Neither firm will have a dominant strategy.
Q2) Mutually Assured Destruction was a standing policy during the Cold War,in which the United States and the U.S.S.R.maintained and expanded nuclear arsenals beyond practical levels.What could explain such a phenomenon?
A) insane public officials who were bent on world domination
B) a prisoners' dilemma
C) a leader-follower type game
D) tacit collusion
Q3) How can a firm be made better off by limiting its options?
Q4) The above figure shows the payoffs to two firms deciding to open a gasoline station in an isolated town.If firm A decides first,what will happen? If there is a $60 fee to enter this market,what will happen?
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Chapter 15: Factor Markets
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Sample Questions
Q1) A firm faces competitive markets for its inputs and its output.Its marginal revenue product of labor
A) is increasing in the output price.
B) is decreasing in the output price.
C) is independent of the output price.
D) has an inverted U-shape.
Q2) The demand for an input used in a fixed proportions technology
A) is identical to the demand for the other inputs.
B) is greater than the demand for the end product itself.
C) lies below the demand for the end product itself.
D) is the same as the demand for the end product itself.
Q3) 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.
Q4) Why is the short-run demand curve for labor downward sloping?
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Chapter 16: Interest Rates, Investments, and Capital Markets
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Sample Questions
Q1) If you invest $500 today,and the value one year from today is $1000,then the annual interest rate must be
A) 10%.
B) 50%.
C) 100%.
D) 200%.
Q2) Today John says: "I will start working out tomorrow." Yet,as tomorrow arrives he doesn't.This is an example of
A) time inconsistent preferences.
B) time consistent preferences.
C) exponential discounting.
D) future-biased preferences.
Q3) Suppose coal sells for $50 per ton and can be mined at a constant marginal cost of $20 per ton.Forecasters predict that the price of coal next year will be $55.If your marginal cost next year will still be $20 and the interest rate is 10%,do you sell coal today?
Q4) In an economy with no inflation,explain why interest rates are positive.
Q5) Government debt increases the interest rate and private investment.
A)True
B)False
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Chapter 17: Uncertainty
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Sample Questions
Q1) Which of the following helps to reduce risk?
A) Abstain from risk taking.
B) Obtain more information.
C) Diversify.
D) All of the above.
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) Your friend Diana tells you that she thinks that her favorite softball team has a 70% chance of winning the next game because that is exactly the winning rate of her team in the last two seasons.This is an example of a(n)
A) objective probability.
B) subjective probability.
C) risk-averse statement.
D) Friedman-Savage preference.
Q4) 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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Q1) To maximize welfare in a competitive market that has a negative externality in production,government should tax a pollution-generating good at a specific tax equal to the marginal cost of producing the good.
A)True
B)False
Q2) Consider a housing development built near an existing airport.After the houses are occupied,homeowners complain that the airport imposes a negative externality on them and it should be moved or otherwise limited.Is the airport a negative externality?
A) No, the airport was there first.
B) No, if the original property values reflect the costs imposed by the airport.
C) No, airports are government entities and therefore don't impose costs on individuals.
D) Yes, the airport's noise should be curtailed for the well-being of the homeowners.
Q3) The exclusive privilege to use an asset is called a(n)
A) property right.
B) exclusive use agreement.
C) property privilege.
D) right to work privilege.
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Chapter 19: Asymmetric Information
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Q1) The lemons problem is due to
A) asymmetric information.
B) moral hazard.
C) hidden actions.
D) symmetric information.
Q2) Life insurance companies often give applicants a physical examination to prevent A) the person from dying before obtaining the policy.
B) signaling.
C) adverse selection.
D) profit maximization.
Q3) 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.
Q4) The XYZ Co.is hiring salespersons.They will be paid a very attractive hourly rate that is independent of how much they sell.Describe an adverse selection that would take place.Describe a moral hazard that would take place.
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Chapter 20: Contracts and Moral Hazards
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Q1) Socially inefficient outcomes are possible when
A) uninformed parties want to avoid opportunistic behavior by informed parties.
B) informed parties engage in opportunistic behavior against uninformed parties.
C) those in charge are risk neutral.
D) workers do not own the firm.
Q2) Efficiency in risk bearing implies that
A) risk is completely eliminated.
B) the least risk-averse party bears most of the risk.
C) the most risk-averse party bears most of the risk.
D) all of the risk is borne by just one of the parties regardless of the degree of risk aversion.
Q3) If a firm was owned by its employees,
A) there is a higher probability that wage reductions would outweigh layoffs.
B) those in charge would not act any differently than regular owners; there would still be layoffs.
C) those not in charge would remain risk neutral.
D) wage reductions would be lower than if the firm was run for profit.
Q4) Describe the characteristics of an efficient contract between a principal and an agent.
Q5) Explain why checks on principals might be necessary.
Page 22
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