Intermediate Microeconomics
Pre-Test Questions
Course Introduction
Intermediate Microeconomics delves into the rigorous analysis of how individuals, firms, and markets interact to allocate scarce resources. Building upon introductory microeconomic concepts, this course explores consumer and producer theory, market structures such as perfect competition and monopoly, game theory, and the impact of government intervention in markets. Emphasis is placed on using mathematical tools and models to analyze optimization problems, equilibrium outcomes, and economic welfare. Through problem-solving and real-world applications, students develop a deeper understanding of how microeconomic principles inform decision-making and shape economic policies.
Recommended Textbook
Microeconomics A Modern Approach 1st Edition by Andrew Schotter
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Chapter 1: Economics and Institutions: a Shift of Emphasis
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Q1) Economic models are abstract representations of reality that economists use to study economic and social phenomena.
A)True
B)False
Answer: True
Q2) What problems are solved by the institution of a state?
Answer: In a primitive state of nature, people obtain food by hunting and gathering and by stealing from one another. People defend their land by fighting with each other and might makes right. But time spent fighting and defending could be better spent gathering food. If peaceful people restrain from robbery, however, aggressive people will exploit the situation. Protective associations are a solution. The most efficient protective association encompasses the whole society and is called a state.
Q3) Which of the following is not an example of an institution that shapes the life of an executive?
A) expressways
B) happiness
C) insurance companies
Answer: B
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Chapter 2: Consumers and Their Preferences
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Q1) The property of consumption sets that implies that it is possible to combine two bundles to produce a third by consuming fractions of them is called convexity.
A)True
B)False
Answer: True
Q2) In the Dictator game, subjects were most selfish when
A) the experiment is done using a double-blind protocol (no one is looking)
B) the right to be the divider is allocated randomly
C) subjects have to compete for the right to be the divider (excuse to justify selfishness)
Answer: A
Q3) In Experimental Teaser 1, what action can the divider choose?
A) Keep all the $10
B) Give some to the receiver
C) Both options are available
Answer: C
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Chapter 3: Utilities Indifference Curves
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Q1) The rule that indifference curves cannot cross each other follows from A) both the transitivity and nonsatiation assumptions
B) the nonsatiation assumption only
C) both the selfishness and nonsatiation assumptions
Answer: A
Q2) An indifference curve is a curve or locus of bundles in the consumption set for a consumer among which the consumer is indifferent.
A)True
B)False
Answer: True
Q3) The Weak Axiom of Revealed Preference (WARP) states that, if bundle x is ever directly revealed to be preferred to bundle y when the two bundles are not identical, then y can never be directly revealed to be preferred to x.
A)True
B)False
Answer: True
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Chapter 4: Demand and Behavior in Markets
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Q1) Refer to Exhibit 4-4. Which curve represents the uncompensated demand function?
A) (a)
B) (b)
C) There is not enough information to give an answer.
Q2) A normal is a good whose demand curve is downward sloping.
A)True
B)False
Q3) The impact of an income-induced change in demand caused by a change in price is called the income effect.
A)True
B)False
Q4) Markets in which the identity of the traders and their size in the market do not affect the price at which they trade are called
A) monopolistically competitive markets
B) personalized markets
C) impersonal markets
Q5) On the horizontal axis of a demand curve graph, the variable measured is the A) consumer's income
B) quantity demanded of the good C) price of the good
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Chapter 5: Some Applications of Consumer Demand, and Welfare Analysis
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Q1) Caroline Sierra loves to eat raspberry-apple cobblers, but will only do so if the raspberries and apples are used in the ratio of 3 ounces of raspberries to 2 ounces of apples. Assume that each cobbler uses exactly 3 ounces of raspberries and 2 ounces of apples. Each cobbler eaten yields 1 unit of utility, and the utility of cobblers is linear in the number eaten. Say the price of raspberries is $5 per ounce and the price of apples is $2 per ounce. It costs $190 to achieve a utility level of 10. Then a tax is placed on raspberries so that their price increases from $5 to $10 per ounce. What is the price-compensating variation?
A) $340
B) $150
C) $260
Q2) Refer to Exhibit 5-1. Which demand curve is perfectly elastic?
A) (a)
B) (b)
C) (c)
Q3) Consumer surplus is the difference between what a producer receives for the goods it produces and the cost of producing them.
A)True
B)False
Page 7
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Chapter 6: Uncertainty and the Emergence of Insurance
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Q1) Risk preference is a characteristic of an agent who has a convex utility function (increasing marginal utility).
A)True
B)False
Q2) A probability distribution with a finite number of events is called a continuous probability distribution.
A)True
B)False
Q3) The expected monetary return of a lottery, gamble, or investment, determined by taking a weighted average of the monetary prizes offered using the associated probabilities as weights is called
A) expected rate of return
B) expected utility
C) expected monetary value
Q4) A probability distribution is a measure that tries to capture the variability of a random variable by looking at the expected squared deviation of the random variable from its mean.
A)True B)False
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Chapter 7: Uncertainty Applications and Criticisms
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Q1) This is gamble 1: do you prefer a sure win of $5 or a 75% chance to win $8? This is gamble 2: in the first stage, you have an 80% chance to end the game with no prize and a 20% chance to move to the second stage. Before completing the first stage, you must select one of the following second-stage choices: do you prefer a sure win of $5 or a 75% chance to win $8? This is gamble 3: do you prefer a 20% chance to win $5 or a 15% chance to win $8? Because of framing, which two of the gambles do people tend to treat incorrectly as identical?
A) gamble 1 and 2
B) gamble 2 and 3
C) gamble 1 and 3
Q2) Describe the difference between linear and nonlinear probability weights.
Q3) Describe the trading gains to be made in the sale of insurance policies.
Q4) Refer to Exhibit 7-1. Elizabeth is risk preferring; therefore, her utility function most likely looks like Curve (c).
A)True
B)False
Q5) The Linda Problem demonstrates violations of the conjunction law.
A)True
B)False
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Chapter 8: The Discovery of Production and Its Technology
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Q1) The assumption that states that, if we can produce an output of x using one combination of inputs and another level of output of y using another combination of these inputs, then we can feasibly produce the output x + y is known as the
A) additivity assumption
B) divisibility assumption
C) convexity assumption
Q2) A factor of production whose level cannot be adjusted in the time period under investigation is a fixed factor of production.
A)True
B)False
Q3) The increase in the amount of output produced that results when we add one more unit of labor, but hold all other inputs constant is called
A) the marginal product of labor
B) decreasing returns to factor
C) a long-run production function
Q4) Describe some similarities between the theory of the producer and the theory of the consumer.
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Chapter 9: Cost and Choice
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Q1) A cost function associated with the Leontief technology is a A) straight line
B) concave curve
C) convex curve
Q2) The function that associates the cost of the least-cost input combination, when all input levels are variable, with each possible level of output is called the
A) long-run cost function
B) long-run production function
C) increasing returns to scale function
Q3) The assumption is that the goal of an entrepreneur is to
A) drive costs down to zero
B) maximize revenue regardless of cost
C) maximize profit
Q4) Refer to Exhibit 9-3. Which graphs shows a cost function for a Cobb-Douglas production function with decreasing returns to scale?
A) (a)
B) (b)
C) (c)
Q5) How does a producer choose the optimal combination of inputs in the short run?
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Chapter 10: Cost Curves
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Q1) The long-run total cost function describes the total cost of producing units of output when no factor of production is fixed so that each can vary accordingly.
A)True
B)False
Q2) When an entrepreneur produces only a few units of output, much of the cost of each unit must be used to pay fixed costs and, therefore, average cost is
A) high
B) low
C) zero
Q3) The long-run average cost function describes the average cost of producing units of output when no factor of production is fixed so that each can vary accordingly.
A)True
B)False
Q4) The _______ curve is the ________ boundary of a series of _______ curves.
A) SRAC, lower, LRAC
B) LRAC, lower, SRAC
C) LRAC, upper, SRAC
Q5) What can short-run marginal cost tell us about short-run average cost?
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Chapter 11: Game Theory and the Tools of Strategic
Business Analysis
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Q1) A game in which, when any player makes a move, the player knows all the prior choices made by all the other players is called a game of
A) perfect information
B) prior information
C) imperfect information
Q2) If strategy 1 weakly dominates strategy 2, which of the following must be true?
A) Strategy 1 is strictly better than strategy 2 when the opponent chooses strategy 1 and strictly better than strategy 2 when the opponent chooses strategy 2
B) Strategy 1 is just as good as strategy 2 when the opponent chooses strategy 1 and just as good as strategy 2 when the opponent chooses strategy 2
C) Strategy 1 is just as good as strategy 2 when the opponent chooses strategy 1 and strictly better than strategy 2 when the opponent chooses strategy 2
Q3) The remaining portion of the game tree at a given node of the larger game is known as backward induction.
A)True
B)False
Q4) Distinguish between strict and weak domination.
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Chapter 12: Decision Making Over Time
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Q1) Exponential discounting functions imply that a deferred good is discounted in value by a ___________ fraction per unit time.
A) decreasing
B) constant
C) increasing
Q2) Imagine that, if you have preferred receiving a smaller reward today over a larger reward three months from today, then you will always prefer the smaller reward over the larger reward regardless of when the smaller reward is offered as long as the difference between the rewards remains three months. In Kirby and Herrnstein's experiments, you would be exhibiting
A) exponential discounting
B) hyperbolic discounting
C) time-inconsistent discounting
Q3) The slope of a hyperbolic discount function ________________ as we move through time.
A) stays constant
B) equals -\(\delta\)
C) changes
Q4) Explain the important points about discounting.
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Chapter 13: The Internal Organization of the Firm
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Q1) Sometimes the output of a worker results not just from the amount of effort the worker exerts, but also from some random element such as
A) the probability of being caught shirking
B) crime rates
C) luck
Q2) Can a firm prevent the moral hazard problem of workers shirking?
Q3) A system in which workers are compensated not on the basis of their absolute output, but rather on the basis of their output relative to the output of others is known as a rank-order tournament.
A)True
B)False
Q4) In an uneven tournament, the rules of the tournament treat people differently, giving an advantage to one identifiable group.
A)True
B)False
Q5) The person employing the agent is called the
A) employee
B) principal
C) big meanie
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Chapter 14: Perfectly Competitive Markets: Short-Run Analysis
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Q1) The market supply curve is derived by _______________ adding the supply curves of all the firms in the industry.
A) horizontally
B) diagonally
C) vertically
Q2) An analysis in which the economist examines the path that the market will follow in moving from one equilibrium to another is known as dynamic analysis.
A)True
B)False
Q3) Do you favor minimum wage laws or government-subsidized wages? Why?
Q4) Refer to Exhibit 14-1. Which point shows where the firm should produce zero output?
A) a
B) b
C) c
Q5) Refer to Exhibit 14-1. Which point represents an optimal quantity?
A) a
B) b
C) c
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Chapter 15: Competitive Markets in the Long Run
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Q1) At the long-run equilibrium of a perfectly competitive industry, the sum of consumer surplus and producer surplus is
A) minimized
B) maximized C) equal to the deadweight loss
Q2) An industry's long-run supply curve will be flat if inputs are in abundant supply and if the industry consumes only a small share of the inputs in the market. Why?
Q3) When new firms enter an industry, the supply curve
A) does not shift
B) shifts to the right C) shifts to the left
Q4) At the long-run equilibrium of a perfectly competitive industry, price is set so that it is equal to
A) average fixed cost
B) average total cost
C) marginal cost
Q5) In long-run equilibrium for a perfectly competitive market, no firm earns extra-normal profits. Describe why firms that earn zero extra-normal profits would stay in business.
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Chapter 16: Market Institutions and Auctions
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Q1) An outcome of a common value auction in which the winning bidder bids more than the true expected value of the good he or she wins is called the winner's curse.
A)True
B)False
Q2) In a first-price sealed-bid auction, how many bidders would you predict will bid above their private values?
A) zero
B) one third
C) all
Q3) Are the buyers or the sellers the active agents in a one-sided oral auction?
Q4) An auction in which the auctioneer sets the price arbitrarily high and then systematically reduces it until one bidder stops the falling price and buys the good is called a(n)
A) German auction
B) English auction
C) Dutch auction
Q5) Collusion among firms bidding in an auction is called auction distortion.
A)True
B)False
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Chapter 17: The Age of Entrepreneurship: Monopoly
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Q1) Societal consumer surplus is the difference between what a producer receives for the goods it produces and the cost of producing them.
A)True
B)False
Q2) A two-part tariff is a discrimination technique in which the quantity of a product or service is composed of two parts.
A)True
B)False
Q3) Does a monopolist always earn extra-normal profits?
Q4) The monopolist will want to know which of the following?
A) Will my competitors be able to earn extra-normal profits?
B) What is the profit-maximizing amount of output to produce?
C) What is the profit-minimizing price to charge?
Q5) The difference between what the consumers would have been willing to pay for a good and the amount the good is actually being sold for is called societal
A) deadweight loss
B) producer surplus
C) consumer surplus
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Chapter 18: Natural Monopoly and the Economics of Regulation
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Q1) Hit-and-run entry occurs when a
A) runner on base starts running before the batter swings
B) potential entrant monitoring a market sees an opportunity to enter a market and does so, but then exits when the incumbent firm responds
C) competitor monitoring a market sees an opportunity to exit a market and does so
Q2) The amount of capital of a firm upon which its rate of return is calculated is known as the
A) rate base
B) tariff rate
C) interest rate
Q3) A market outcome that is optimal given existing constraints in the market but worse than the outcome that would result if those constraints were removed is called the
A) subadditive result
B) second-best result
C) extra-normal result
Q4) Explain why the inertia shopping rule provides a defensive pricing strategy.
Q5) What assumptions must be true for the theory of contestable markets to be valid?
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Chapter 19: The World of Oligopoly: Preliminaries to
Successful Entry
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Q1) Isoprofit curves are the set of outputs for all firms in a market, which yield a given firm the same profit level.
A)True
B)False
Q2) Under the Edgeworth model, will firms engage in price wars?
Q3) Which welfare outcome falls between the other two?
A) Cournot equilibrium
B) monopoly market
C) perfectly competitive market
Q4) In the Stackelberg model, the Stackelberg follower moves
A) first
B) second
C) Both answers are correct
Q5) At a Bertrand equilibrium, the quantity sold in the market is the
A) same as in a Cournot equilibrium
B) welfare-optimal quantity
C) monopoly quantity
Q6) What is the difference between convergent and divergent Cournot equilibria?
Q7) Describe a Cournot equilibrium.
21
Q8) Describe the difference between a Cournot model and a Bertrand model.
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Chapter 20: Market Entry and the Emergence of Perfect Competition
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Q1) A model of entry prevention where the strategy of the incumbent monopolist is to overinvest in production capacity in order to make entry unprofitable is called the A) Stackelberg model
B) Dixit-Spence model
C) Bain, Modigliani, Sylos-Labini model
Q2) An overinvestment strategy is an entry-prevention strategy for an incumbent firm in which the incumbent monopolist overinvests in production capacity to make a credible threat to increase its output beyond the limit quantity (and thereby sell the goods at a price below the limit price) if any competitor enters the market.
A)True
B)False
Q3) A limit price is the price an incumbent monopolist sets that enables entry into the market.
A)True
B)False
Q4) Explain the difference between blockaded entry and impeded entry.
Q5) Is the predicted outcome of the Bain, Modigliani, Sylos-Labini model a subgame perfect equilibrium? Why or why not?
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Chapter 21: The Problem of Exchange
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Q1) Prices that equate the supply and demand for each good are called
A) competitive prices
B) blocked prices
C) Cournot prices
Q2) The competitive equilibrium allocation is the allocation of goods
A) that does not allocate more than the total amount of goods available in the economy
B) in which agents consume exactly the quantities of the goods that the agents initially possessed
C) determined by a competitive equilibrium
Q3) A competitive equilibrium is a price vector stating ____________ for each good in the economy.
A) at least two prices
B) one price
C) an infinite number of prices
Q4) In a primitive, two-person economy, the two agents can
A) consume exactly what they pick
B) change the mix of fruit they have by trading with each other
C) Both answers are correct
Q5) Does the contract curve define the set of equilibrium trades?
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Chapter 22: General Equilibrium and the Origins of the Free
Market and Interventionist
Ideologies
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Q1) The idea that performances of perfectly competitive economies and other types of economies should be judged not on the basis of the outcomes they determine, but rather on the basis of the process by which those outcomes are determined is called A) Rawlsian justice
B) process justice
C) Cournot justice
Q2) On the contract curve, MRTS¹<sub><sub>K for L </sub></sub>___ MRTS²<sub>K for L.</sub>
A) =
B) >
C) <
Q3) An allocation of inputs (capital and labor) where it is not possible to reallocate these inputs and produce more of at least one good in the economy without decreasing the amount of some other good that is produced is a Pareto-efficient allocation.
A)True
B)False
Q4) Why must the condition for efficiency in production be satisfied?
Q5) Compare efficiency and equity.
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Chapter 23: Moral Hazard and Adverse Selection:
Informational Market Failures
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Q1) Tipping is a(n) ____________ solution.
A) nonmarket
B) immoral hazard
C) market
Q2) Co-insurance is an example of how a market failure due to moral hazard can be solved __________ government intervention.
A) with
B) partially by
C) without
Q3) If a reputation for bad service would ruin a restaurant, the owner of the restaurant cannot afford to hire
A) good workers
B) bad workers
C) any workers
Q4) A separating equilibrium is an equilibrium where different types play differently so their types can be inferred by their actions.
A)True
B)False
Q5) Explain why insurance markets fail.
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Chapter 24: Externalities: the Free Market Interventionist
Battle Continues
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Q1) The only way for a society to solve an externality problem is through some sort of government intervention.
A)True
B)False
Q2) In the presence of externalities, the private competitive market will achieve the socially optimal solution on its own.
A)True
B)False
Q3) In the absence of any intervention, a paper mill ___________ take the external cost created by its wastes into account when making its production decisions.
A) does B) must C) does not
Q4) Marketable pollution permits are a method of government intervention to prevent externalities whereby a government-issued permit allows a firm to pollute the environment up to the firm's private marginal cost.
A)True
B)False
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Chapter 25: Public Goods, the Consequences of Strategic
Voting Behavior, and the Role of Government
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Q1) A relationship between the environment and the set of desired outcomes, which tells us which outcomes will never satisfy our performance criteria is known as
A) rent-seeking behavior
B) the performance correspondence
C) the Borda count method
Q2) In the streetlight example of a demand-revealing mechanism, the "optimal" plan is the one that ____________ the difference between the total amount the members are willing to pay for a plan and its cost.
A) maximizes
B) minimizes
C) equalizes
Q3) The voting paradox holds that, even if all the people in a society have transitive preferences, the preferences of society taken as a whole
A) need not be transitive
B) must be transitive
C) will never be transitive
Q4) What is so bad about rent seeking behavior?
Q5) Give some examples that support the Gibbard-Satterthwaite theorem.
Page 28
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Chapter 26: Input Markets and the Origins of Class Conflict
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Q1) An alternating offer sequential bargaining institution is a structured method of bargaining where each bargainer takes turns making offers. If an offer is accepted, the bargaining stops. If the offer is not accepted, the bargaining proceeds to the next round but, due to the delay, the value of what is being bargained over shrinks.
A)True
B)False
Q2) The return on a factor above the amount necessary to entice that factor into the production process is called rent.
A)True
B)False
Q3) When the total number of periods in the alternating offer sequential bargaining game is finite, there is a unique subgame perfect equilibrium in which the first offer made is accepted. The equilibrium offer is equal to the sum of the decrements in the pie when the first player makes her or his offer. This description is the
A) pie exhaustion theorem
B) alternating offer sequential bargaining equilibrium theorem
C) marginal productivity theorem
Q4) How is the equilibrium labor market wage determined?
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