Intermediate Microeconomics
Review Questions
Course Introduction
Intermediate Microeconomics delves into the analysis of consumer and producer behavior, market structures, and the mechanisms that determine prices and resource allocation in competitive and non-competitive markets. This course builds upon foundational economic principles, introducing mathematical tools and models to examine utility maximization, production optimization, market equilibrium, and welfare analysis. Topics include demand and supply theory, elasticity, costs of production, market failures, imperfect competition, and the role of government intervention. By blending theory with real-world applications, students will develop critical analytical skills to understand and evaluate the functioning of modern markets.
Recommended Textbook Microeconomics 8th Edition by Jeffrey M. Perloff
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Chapter 1: Introduction
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Sample Questions
Q1) One million automobiles have a defect that could cause the car to explode; however,only one of those cars will actually explode.Nobody knows which one car it is.When the car does explode,the victim's family will sue the automaker for $1 million and win.The defect costs $2 per car to repair.What does economics predict about the automaker's decision to repair the defect?
Answer: Correcting the defect will cost $2 million.Not correcting the defect will only cost $1 million.Economics predicts that the automaker will not correct the defect.
Q2) Firms do NOT use microeconomic models to
A) determine what inputs will be used for production.
B) determine whether they should advertise in the newspaper or on the radio.
C) strategically raise profits over competitors.
D) None of the above.
Answer: D
Q3) Normative analysis offers decision makers the most valuable information when choosing among alternatives.
A)True
B)False
Answer: False
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Chapter 2: Supply and Demand
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Sample Questions
Q1) The above figure shows four different markets with changes in either the supply curve or the demand curve.Which graph best illustrates the market for typewriters after technological advances in computerized word-processing software occur?
A) Graph A
B) Graph B
C) Graph C
D) Graph D
Answer: D
Q2) Assume the price of a movie is $10.Jenna demands 2 movies per week,Sam demands 3 movies per week,and Jordan demands 8 movies per week.From this information we can conclude that
A) the market quantity demanded at a price of $10 is at least 13 movies per week.
B) Jordan is obviously more wealthy than either Sam or Jenna.
C) Sam is irrational compared to Jenna or Jordan.
D) the movie industry is unprofitable.
Answer: A
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Chapter 3: Applying the Supply-And-Demand Model
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Sample Questions
Q1) If a consumer doubles her quantity of ice cream consumed when her income rises by 25%,then her income elasticity of demand for ice cream is
A) 8.0.
B) 4.0.
C) .25.
D) .08.
Answer: B
Q2) Explain why the shape of the demand curve will determine how a shock to the market equilibrium affects price and quantity.
Answer: A flatter demand curve has a smaller slope in absolute value.That means that consumers are more sensitive to price changes.Therefore,a change in price will cause a large reaction in quantity demanded.
Q3) Explain whether you would expect the elasticity of supply to be highly elastic or inelastic for fresh cut flowers and why.
Answer: The elasticity of supply is very inelastic for fresh cut flowers.These flowers are perishable and quickly become worthless.The seller will accept almost any market price.
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Chapter 4: Consumer Choice
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Sample Questions
Q1) An indifference curve represents bundles of goods that a consumer
A) views as equally desirable.
B) ranks from most preferred to least preferred.
C) refers to any other bundle of goods.
D) All of the above.
Q2) Behavioral economics extends traditional economic models by
A) including insights from psychology and human cognition models.
B) modeling behavior rather than prices.
C) admitting that individuals are irrational.
D) admitting that incentives are very important.
Q3) Robinson Crusoe is stranded on an island.He finds that coconuts are freely available (zero harvest cost),but fish are difficult to harvest and require a lot of energy.As a result,harvesting fish has a high price.If coconuts and fish are imperfect substitutes,what is Robinson Crusoe likely to consume?
A) He will consume more coconuts than fish.
B) He will consume more fish than coconuts.
C) He will consume equal amounts of both goods.
D) Not enough information is given.
Q4) Explain why most indifference curves are convex.
Q5) What is the difference between ordinal and cardinal measurement?
Page 6
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Chapter 5: Applying Consumer Theory
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Sample Questions
Q1) The amount of money one would have to give to a consumer to offset the harm from a price increase is called
A) compensating variation.
B) structured settlement.
C) equivalent variation.
D) consumer surplus.
Q2) The substitution effect can be measured holding ________ constant.
A) income
B) utility
C) the price of one good
D) the price of all goods
Q3) A tax cut will unambiguously lower income-tax revenue.
A)True
B)False
Q4) Wealthy people will tend to have vertical labor supply curves
A) only if their income effect just offsets their substitution effect.
B) only if their income effect is greater than their substitution effect.
C) only if their income effect is less than their substitution effect.
D) only if they don't have an income effect.
Q5) Why can't all goods be inferior?
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Chapter 6: Firms and Production
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Sample Questions
Q1) 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>.The firm currently produces q<sub>1</sub> units.If all inputs doubled,the new level of output will equal
A) 2<sup>0.4</sup> q<sub>1</sub>.
B) 2<sup>0.8</sup> q<sub>1</sub>.
C) 0.8 q<sub>1</sub>.
D) 1.6 q<sub>1</sub>.
Q2) Suppose the production function for T-shirts can be represented as q = L<sup>0.25</sup>K<sup>0.75</sup>.Show that the production function has constant returns to scale.
Q3) If the marginal productivity of labor is constant for all levels of output,then the average productivity of labor
A) is constant.
B) equals the marginal productivity of labor.
C) Both A and B above.
D) Either A or B above but not both.
Q4) Unlike indifference curves,isoquants can intersect.
A)True
B)False
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Chapter 7: Costs
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Sample Questions
Q1) When buying a piece of equipment,it is always best for the firm to pay cash instead of borrowing the funds since this renders the equipment less costly.
A)True
B)False
Q2) A firm can minimize cost by
A) picking the bundle of inputs where the lowest isocost line touches the isoquant.
B) picking the bundle of inputs where the isoquant is tangent to the isocost line.
C) picking the bundle of inputs where the last dollar spent on one input gives as much extra output as the last dollar spent on any other input.
D) All of the above.
Q3) If Option A costs $40 and yields 20 units of output,and Option B costs $50 and yields 20 units of output,
A) Option B and Option A are equally economically efficient.
B) Option B is economically efficient relative to Option A.
C) Option A is economically efficient relative to Option B.
D) It is not possible to determine which option is more economically efficient.
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Chapter 8: Competitive Firms and Markets
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Sample Questions
Q1) If a firm operates in a perfectly competitive market,then
A) all firms will advertise.
B) no firms will advertise.
C) the market leader will advertise.
D) new firms will advertise.
Q2) Assuming a horizontal long-run market supply curve,which of the following statements is (are)TRUE about competitive firms in the long run?
A) p = MC
B) p = AC
C) profit = 0
D) All of the above.
Q3) The above figure shows the cost curves for a competitive firm.If the profit-maximizing level of output is 40,price is equal to
A) $0.
B) $15.
C) $10.
D) $11.
Q4) 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 above figure shows supply and demand curves for milk.If the government passes a $2 per gallon specific tax,the tax revenue is
A) $2 Q<sub>1</sub>.
B) $2 Q<sub>2</sub>.
C) $2 (Q<sub>2</sub> - Q<sub>1</sub>).
D) $2.
Q2) The above figure shows the demand and supply curves in the market for milk.If the government imposes a quota at 500 gallons,calculate the change in the consumer surplus.
A) CS = -250
B) CS = -150
C) CS = -500
D) CS = 200
Q3) Which of the following characterizes long-run equilibrium in perfect competition?
A) P = MC = ATC
B) P = MC < ATC
C) P > MC = ATC
D) P = MC > ATC
Q4) 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) A general equilibrium analysis of a price change in the corn chip market would include an investigation of the impacts in
A) the television market.
B) the coffee market.
C) the salsa market.
D) All of the above.
Q2) The above figure depicts the Edgeworth box for two individuals,Al and Bruce.Point c is Pareto efficient because
A) the MRS's are equal.
B) the indifference curves are tangent.
C) no mutual gains from trade exist.
D) All of the above.
Q3) In a competitive marketplace,prices adjust until
A) MRS's are equal to zero.
B) excess supply equals excess demand equals zero in all markets.
C) each consumer has maximized utility subject to his budget constraint.
D) all firms earn zero profit.
Q4) Can consumption efficiency be achieved even if the efficient product mix is not achieved?
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Chapter 11: Monopoly
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Sample Questions
Q1) When would a profit-maximizing monopolist that operates with no government intervention choose to produce the competitive level of output?
Q2) As other firms enter a monopoly's market,the monopoly's market power
A) is unaffected.
B) declines.
C) increases.
D) increases according to the Lerner Index but decreases according to the price/marginal cost ratio.
Q3) A justification for patents is that without patents consumer surplus would be
A) larger than with the patent.
B) zero since the product would not be invented.
C) only slightly smaller than with the patent.
D) zero since the monopoly would be a revenue maximizer.
Q4) The monopolist's marginal revenue curve
A) doesn't exist.
B) lies below the demand curve.
C) is identical to the demand curve.
D) lies above the demand curve.
Q5) Why is the monopoly total welfare lower than the competitive total welfare?
Page 13
Q6) Explain why a monopolist has no supply curve.
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Chapter 12: Pricing and Advertising
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Sample Questions
Q1) At the current price of a good,Al's consumer surplus equals 8,and Ben's consumer surplus equals 15.By using two-part pricing,a monopolist could increase his profit by A) 8.
B) 16.
C) 15.
D) 30.
Q2) A photograph processing machine company requiring customers who buy a processing machine to purchase chemicals and photographic paper from it is an example of
A) bundling.
B) a requirement tie-in sale.
C) nonlinear pricing.
D) two-part pricing.
Q3) An electric utility is going to use a block-pricing schedule.They plan to charge P<sub>1</sub> for the first Q<sub>1</sub> units and P<sub>2</sub> for the subsequent units.The units sold at P<sub>2</sub> are the total units sold,Q<sub>2</sub>,minus the total units sold at P<sub>1</sub>.The inverse demand curve is P = $100 - Q,and the marginal and average cost is $40.Use calculus to solve for P<sub>1</sub>,P<sub>2</sub>,Q<sub>1</sub>,Q<sub>2</sub>.
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Chapter 13: Oligopoly and Monopolistic Competition
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Sample Questions
Q1) 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.
Q2) The number of firms in a monopolistically competitive market will be smaller if A) the market demand curve shifts rightward.
B) the minimum efficient scale is lower.
C) fixed costs are smaller.
D) fixed costs are larger.
Q3) Oligopoly differs from monopolistic competition in that an oligopoly includes A) product differentiation.
B) barriers to entry.
C) no barriers to entry.
D) downward-sloping demand curves facing the firm.
Q4) Compared to a cartel,firms in a Cournot Oligopoly
A) make more joint profit.
B) sell less output.
C) make less joint profit.
D) act independently.
Page 15
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Chapter 14: Game Theory
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Sample Questions
Q1) A game in economics is defined as
A) something that is shown on ESPN.
B) competition in which strategic decision making is integral.
C) competition in general.
D) an actual strategy chosen by one or more economic agents.
Q2) Which of the following is LEAST likely characterized by mixed strategies?
A) the choice of whether to go to war or not
B) the choice of which pitch to throw in baseball
C) the choice of which play to run in football
D) the choice of where to kick a soccer penalty shot
Q3) 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.
Q4) How can a firm be made better off by limiting its options?
Q5) Why is collusion more likely in a repeated game?
Page 16
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Chapter 15: Factor Markets
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Sample Questions
Q1) If a monopolist in the output market purchases its monopoly supplier of labor,consumers benefit.
A)True
B)False
Q2) If a firm pays its workers $10 per hour,the marginal product of labor is 5 units per hour,and the price of the firm's product is $15 per unit,what is the price elasticity of demand facing the firm?
A) -1.15
B) -2.15
C) -1.0
D) -3.56
Q3) In the first years of a professional athlete's career,the athlete is "under reserve," which means that he or she cannot negotiate with other teams.This creates a de facto
A) monopolist.
B) monopsony.
C) duopoly.
D) bilateral monopoly.
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 a bond's coupon adjusts to pay a constant real rate of return,then an increase in inflation would cause
A) the nominal coupon payment to rise.
B) the nominal coupon payment to fall.
C) the nominal coupon payment to remain unchanged.
D) the bond's price to fluctuate wildly.
Q2) If the interest rate is 10%,then $1 received one year from now is worth how much today?
A) $1.10
B) $1.00
C) $0.91
D) $0.90
Q3) Suppose there is no inflation,and the current interest rate is 4% per year.Erin plans to open a savings account and deposit $100 annually for the next 5 years.She plans to leave this money untouched for 10 more years.At the end of the period,the balance of her savings account will be
A) 2500(1.04<sup>5</sup> - 1).
B) 2000(1.04<sup>15</sup>-1).
C) 2000(1.04<sup>5</sup> - 1)(1.04)<sup>10</sup>.
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D) 2500(1.04<sup>5</sup> - 1)(1.04)<sup>10</sup>.
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Chapter 17: Uncertainty
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Sample Questions
Q1) Risk premium is the ________ amount that a ________ person would pay to avoid ________.
A) maximum; risk-averse; taking a risk
B) maximum; risk-neutral; losing everything
C) minimum; risk-averse; taking a risk
D) minimum; risk-loving; losing everything
Q2) Although he is very poor,Al plays the million-dollar lottery every day because he is certain that one day he will win.Al makes this calculation based upon
A) the frequency of past outcomes.
B) subjective probability.
C) knowledge of all possible outcomes.
D) tossing a coin.
Q3) What is one reason a gambler might bet $1,000 that a sixteenth seed team will win the NCAA basketball tournament?
A) irrationality
B) overconfidence
C) exuberance
D) gambler's fallacy
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) Firms that are most likely to buy marketable pollution rights are those that produce the most pollution per unit of output produced.
A)True
B)False
Q2) A commodity or service whose consumption by one person does not preclude others from also consuming it is called a
A) private good.
B) public good.
C) Giffen good.
D) Coase good.
Q3) If a market is subject to a positive externality,
A) the demand curve reflecting social benefit will be to the right of the demand curve representing private benefit.
B) there is only one demand curve.
C) the demand curve reflecting social benefit will be to the left of the demand curve representing private benefit.
D) private benefit will exceed social benefit.
Q4) Explain why the optimal amount of pollution is often not zero.
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Chapter 19: Asymmetric Information
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Sample Questions
Q1) With asymmetric information firms might be reluctant to improve the quality of their products because
A) it costs them more to produce the better quality product.
B) they are not able to completely capture the benefits of the improvement.
C) consumers do not value the better product.
D) consumers are better informed about the product and value the new product less.
Q2) Which of the following reduces the effects of asymmetric information?
A) repeat purchases
B) warranties
C) building a reputation
D) All of the above.
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) Explain why high priced lawyers may support an industry ban on price advertising for lawyers.
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Chapter 20: Contracts and Moral Hazards
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Q1) If a firm has established monitoring devices that have a 50% chance of detecting shirking,and an employee gains $5,000 from shirking,the employer can deter shirking by having employees post a bond equal to A) $2,500.
B) $5,000.
C) $10,000.
D) $50,000.
Q2) Sarah's demand for routine medical visits is q = 10 - 0.2p when she is healthy and q = 20 - 0.2p when she is sick.Medical visits cost $50 each if Sarah has no medical insurance.She is sick 20% of the time.Sarah is considering two different insurance plans.One offers free medical visits; the other plan costs less up front but requires that Sarah pay $5 per medical visit.Compare the two plans in terms of the trade-off between risk and moral hazard.
Q3) Firms that seek to avoid hiring lazy workers that assert they are hardworking are trying to avoid A) adverse selection. B) moral hazard.
C) screening.
D) signaling.
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