Intermediate Microeconomics
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Course Introduction
Intermediate Microeconomics explores the fundamental principles of microeconomic theory, building on introductory concepts to develop a deeper understanding of consumer and producer behavior, market structures, and economic welfare. The course covers topics such as utility maximization, cost minimization, competitive and non-competitive market analysis, game theory, and the impact of government interventions. Emphasis is placed on analytical reasoning and mathematical modeling, equipping students with the tools necessary to tackle real-world economic problems and to pursue advanced study in economics.
Recommended Textbook
Microeconomics An Intuitive Approach with Calculus 2nd Edition by Thomas Nechyba
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Page 2
Chapter 1: Introduction
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Q1) When economists say that policy A is more efficient than policy B, they mean policy A is better than policy B.
A)True
B)False
Answer: False
Q2) To say that one policy is better than another because it is more efficient is a normative, not a positive, statement.
A)True
B)False
Answer: True
Q3) A spontaneous order emerges from individual decisions that cause something to "work" without anyone planning for it to "work".
A)True
B)False
Answer: True
Q4) Positive economics can tell us which policies are efficient and which are not.
A)True
B)False
Answer: True
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Chapter 2: A Consumers Economic Circumstances
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Q1) While the endowment bundle must lie on the original budget line, it need not lie on the budget line when prices change.
A)True
B)False
Answer: False
Q2) Consider a consumer with a choice set that emerges from an exogenous income I.Suppose that, as a result of changes in a consumer's economic circumstances, the budget line rotates outward, with the vertical intercept remaining unchanged but the horizontal intercept shifting to the right.Demonstrate, using the budget line equation, how this could have happened if the price of the good on the horizontal axis did not change?
Answer: The budget equation is x<sub>2</sub>=I/p<sub>2</sub>(p<sub>1</sub>/p<sub>2</sub>)x<sub>12</sub>, with the first term representing the intercept and the term in parenthesis representing the slope. The rotation of the budget that is described implies the intercept remains constant and the slope falls in absolute value. If p<sub>1</sub> does not change, this can happen only if I and p<sub>2</sub> change by the same factor k --- which then cancels in the first term (leaving the intercept unchanged) and causes the second term to fall in absolute value.
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Chapter 3: Economic Circumstances in Labor and Financial Markets
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Sample Questions
Q1) A bond will pay $10,000 to its owner in 5 years.If the relevant annual interest rate is 5%, what is the bond worth today (rounded to the nearest 100)?
A)$9,500
B)$7,800
C)$6,600
D)$1,900
E)None of the above.
Answer: B
Q2) Since interest rates for borrowing are usually higher than interest rates for savings, the intertemporal budget constraint has an inward kink for individuals that earn income now and in the future.
A)True
B)False
Answer: False
Q3) An increase in the interest rate is an increase in the opportunity cost of consuming in the future.
A)True
B)False
Answer: False
Page 5
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Chapter 4: Tastes and Indifference Curves
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Q1) Consider a worker who dislikes working end enjoys consuming a composite good.With labor hours on the horizontal and the composite consumption good on the vertical axis, which of the following statements are true.
A)If the worker's tastes are convex, the slope of indifference curves increases as we move to the right in the graph.
B)The worker becomes better off as we move to the northwest in the graph.
C)A tax on wage income does not change this worker's indifference map.
D)All of the above.
E)None of the above.
Q2) Explain the following statement: For the same individual, tastes over goods may vary at the margin as we move from one bundle to another.
Q3) If the marginal rate of substitution is not diminishing, it must mean that tastes violate convexity (assuming that our other assumptions about tastes hold).
A)True
B)False
Q4) Complete tastes are tastes that make people desire at least some of every good.
A)True
B)False
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Page 6
Chapter 5: Different Types of Tastes
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Q1) Tastes for perfect substitutes are both homothetic and quasilinear.
A)True
B)False
Q2) If tastes are Cobb-Douglas, they can be represented by a utility function that is homogeneous of degree k where k can take on any positive value.
A)True
B)False
Q3) Suppose our tastes are homothetic.It is often observed that people become more rigid --- more set in their ways --- as they get older.Can you translate this observation into "economics-speak" by discussing which feature of our tastes is likely the be changing as we get older?
Q4) When two goods are perfect substitutes, averages are better than extremes, resulting a diminishing marginal rate of substitution.
A)True
B)False
Q5) In the case of perfect complements, more is not necessarily better.
A)True
B)False
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Chapter 6: Doing the Best We Can
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Q1) Essential goods give rise to corner solutions.
A)True
B)False
Q2) When the price of peaches went up, people bought fewer peaches and more strawberries.This is an indication that tastes have changed as a result of the price increase.
A)True
B)False
Q3) If all goods are essential, a consumer will optimize at an interior solution.
A)True
B)False
Q4) If not all goods are essential, a consumer will end up optimizing at a corner solution. A)True
B)False
Q5) If we were the only two people in the world and I like bananas while you hate them, efficiency demands that I get all bananas.
A)True
B)False
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Chapter 7: Income and Substitution Effects in Consumer
Goods Markets
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Sample Questions
Q1) Suppose the government spends the same for a particular consumer under two different policies: One subsidizes the price of good x while the other is a lump sum subsidy.Which of the following is true.
A)Compared to the lump sum subsidy, the consumer will purchase more x under the price subsidy if and only if x is a normal good.
B)Compared to the lump sum subsidy, the consumer will purchase less of x under the price subsidy if x is an inferior good.
C)Compared to the lump sum subsidy, the consumer will purchase less of x under the price subsidy if x is a Giffen good.
D)The consumer will spend the same on x under the two policy if and only if her indifference curves are kinked.
E)Both (a) and (c).
F)Both (b) and (c).
G)All of the above.h.None of the above.
Q2) All quasilinear goods are necessities.
A)True
B)False
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Page 9
Chapter 8: Wealth and Substitution Effects in Labor and Capital Markets
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Q1) If leisure is an inferior good, then an increase in wages will cause workers to work more.
A)True
B)False
Q2) When the elasticity of substitution in the constant elasticity of substitution utility function lies above 1, an increase in the interest rate will cause a saver to save less.
A)True
B)False
Q3) For decreases in wage taxes, substitution effects put negative pressure on tax revenues while wealth effects put positive pressure on tax revenues.
A)True
B)False
Q4) As long as both current and future consumption are normal goods, a decrease in the interest rate will result in a drop in savings.
A)True
B)False
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Page 10
Chapter 9: Demand for Goods and Supply of Labor and Capital
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Q1) When tastes are quasilinear in leisure, the labor supply curve is vertical.
A)True
B)False
Q2) The cross-price demand curve for Cobb-Douglas tastes is perfectly vertical.
A)True
B)False
Q3) Holding all prices fixed, income-demand curves relate changes in exogenous income to changes in the quantity of a good demanded.
A)True
B)False
Q4) If a good is quasilinear, its own-price demand curve is vertical.
A)True
B)False
Q5) For the same sized substitution effect, own-price demand curves for inferior goods are steeper than own price demand curves for normal goods.
A)True
B)False
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Chapter 10: Consumer Surplus and Deadweight Loss
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Q1) Consumer surplus is accurately measured along (uncompensated) demand curves when tastes are quasilinear.
A)True B)False
Q2) There is a compensated demand (or MWTP) curve for every indifference curve just as there is an uncompensated demand curve for every income level.
A)True B)False
Q3) If tastes are homothetic, there exists a utility function (that represents those tastes) such that the indirect utility function is homogeneous of degree 1 in income.
A)True
B)False
Q4) A policy which gains the winners more than the losers lose, in principle, could never result in unanimous approval of the policy.
A)True B)False
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Chapter 11: One Input and One Output: a Short-Run
Producer Model
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Q1) Suppose a single-input production function has initially increasing but eventually decreasing marginal product -- and suppose we know that an interior solution is profit maximizing.In this case, the first order condition for the profit maximization problem
A)is necessary for identifying the profit maximizing production plan.
B)is sufficient for identifying the profit maximizing production plan.
C)is both necessary and sufficient for identifying the profit maximizing production plan.
D)is neither necessary nor sufficient for identifying the profit maximizing production plan.
Q2) In the one-input model of production, increasing marginal product implies non-convexity of the producer choice set.
A)True
B)False
Q3) Price-taking producers have horizontal marginal revenue curves.
A)True
B)False
Q4) For price-taking producers, isoprofit curves are always parallel to one another.
A)True
B)False
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Chapter 12: Production With Multiple Inputs
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Q1) Conditional input demands are homogeneous of degree zero in input prices.
A)True
B)False
Q2) Technologically efficient production plans are also economically efficient.
A)True
B)False
Q3) Profit functions are homogeneous of degree zero.
A)True
B)False
Q4) Decreasing returns to scale production functions must be concave.
A)True
B)False
Q5) An increasing returns to scale production function could be quasiconcave.
A)True
B)False
Q6) A price taking firm employs each of its inputs into production until its marginal product is equal to 1.
A)True
B)False
Page 14
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Chapter 13: Production Decisions in the Short and Long Run
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Q1) Output price changes cause substitution effects and scale effects.
A)True
B)False
Q2) If a firm's labor input response to a decrease in the wage differs between the short and the long run, we know that more workers will be hired after the initial short run adjustment.
A)True
B)False
Q3) If labor and capital are perfect complements in production, short run supply curves are vertical.
A)True
B)False
Q4) When output price rises, the long run increase in labor input will be larger than the short run increase in labor input.
A)True B)False
Q5) The cross-price demand for capital (relative to the wage) may slope up or down. A)True
B)False
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Chapter 14: Competitive Market Equilibrium
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Q1) An increase in labor demand accompanied by a decline in labor supply cannot result in a decline in wages.
A)True
B)False
Q2) Whenever a firm is making positive economic profit, there is nothing it can do to make more profit.
A)True
B)False
Q3) The long run market supply curve is formed by adding up individual firm supply curves in the industry.
A)True
B)False
Q4) Short run market supply curves are formed by adding up individual firm supply curves in the industry.
A)True
B)False
Q5) If all firms are identical, output prices will never change.
A)True
B)False
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Chapter 15: The Invisible Hand and the First Welfare
Theorem
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Q1) Both successful market-processes and central planning rely on self-interested behavior.
A)True
B)False
Q2) Suppose the conditions of the first welfare theorem hold.If the government redistributes income prior to production and trade occurring, the market outcome (resulting from production and trade) will be efficient so long as no deadweight loss is produced in the levying of redistributive taxation.
A)True
B)False
Q3) In a 2-good model, if individuals in a group all have tastes that are quasilinear in good 1, then we can treat the group as if it was a single representative consumer.
A)True
B)False
Q4) If the individuals in a group of consumers have identical tastes, then the group can be treated as if it behaved as a singe representative consumer.
A)True
B)False
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Chapter 16: General Equilibrium
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Q1) Comment on the following: "The second welfare theorem says that we can get any efficient allocation to be an equilibrium allocation.If endowments are inequitably distributed in an economy, we can therefore redistribute among people and still get an efficient outcome.As a result, there is no policy trade-off between equity and efficiency."
Q2) If the two goods in an Edgeworth Box are perfect complements for both people, all efficient allocations will have each person getting the same amount of good 1 as of good 2.
A)True
B)False
Q3) Any allocation resulting from a mutually beneficial trade is efficient. A)True B)False
Q4) If all goods are essential for everyone, efficiency requires that everyone get at least some of each good.
A)True B)False
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Chapter 17: Choice and Markets in the Presence of Risk
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Q1) Risk averse individuals will fully insure to avoid risk.
A)True
B)False
Q2) Suppose that individuals with state-independent and risk-averse tastes insure each other through state-contingent trades.If there is no aggregate risk, the competitive equilibrium price will then result in actuarily fair insurance terms.
A)True
B)False
Q3) Suppose an individual has state-independent tastes and invests in risky stocks rather than safe bonds.We can infer that he must be risk loving.
A)True
B)False
Q4) The certainty equivalent is less than the expected value of a gamble when tastes are risk averse.
A)True
B)False
Q5) The certainty equivalent of a gamble is negative when tastes are risk loving. A)True
B)False
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Chapter 18: Elasticities, Price-Distorting Policies, and Non-Price Rationing
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Q1) If a consumer's demand curve as constant own-price elasticity of -2, the consumer's spending will fall as price increases.
A)True
B)False
Q2) When leisure is an inferior good, the wage elasticity of labor supply is always positive.
A)True
B)False
Q3) The concept of "non-price rationing" means that, in general, we can deal with scarcity just as well without prices as with prices.
A)True
B)False
Q4) The equilibrium increase in marginal costs for firms resulting from the imposition of a price floor will be larger the more inelastic the price elasticity of demand is.
A)True
B)False
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Chapter 19: Distortionary Taxes and Subsidies
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Q1) When a per-unit tax is levied on a goods market in which supply is not perfectly inelastic but such a tax nevertheless does not give rise to any deadweight loss, consumers are made no worse off by the imposition of the tax.
A)True
B)False
Q2) In perfectly competitive industries with identical firms, consumers always end up paying the entire burden of a per-unit tax on output in the long run.
A)True
B)False
Q3) To identify the burden of a per-unit tax on consumers, we have to use the aggregate marginal willingness to pay curve whenever the underlying good is not quasilinear.
A)True
B)False
Q4) If demand is linear, tax revenue rises at a constant rate as per unit taxes increase.
A)True
B)False
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Chapter 20: Prices and Distortions Across Markets
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Q1) If country A is importing good x from country B where x is produced in a perfectly competitive industry (composed of identical firms), then, in the long run, country A will suffer the entire deadweight loss from any tariff it might impose on imports of x from country B.
A)True
B)False
Q2) A speculator who takes a long position in a market buys low and sells high, whereas a speculator who taxes a short position in a market buys high and sells low.
A)True
B)False
Q3) Suppose there is a tradeable goods market (such as products like textiles that can be shipped across markets) and a non-tradable goods market (such as services like hair cuts).Can outsourcing impact wages in the non-tradable market?
Q4) Explain how an import quota might be more inefficient than an import tariff that has the same impact on prices.
Q5) When tariffs on imports are eliminated, everyone benefits.
A)True
B)False
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Chapter 21: Externalities in Competitive Markets
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Q1) Explain how a pollution tax is different from a Pigouvian tax.Discuss how incentives for firms differ under the two types of taxes, and what would be required of the government if it were to structure a Pigouvian tax system to mimic the effects of a pollution tax.
Q2) In the absence of the negative externality from each individual's contribution to road congestion, roads would not be congested (aside from congestion caused by accidents).
A)True B)False
Q3) The more price elastic the demand curve, the more a competitive market will over-produce (relative to the efficient level) in the presence of a negative externality. A)True B)False
Q4) If a tax on gasoline is appropriately set, the congestion externality on roads can be fully internalized -- resulting in the efficient level of congestion on roads.
A)True B)False
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Chapter 22: Asymmetric Information in Competitive Markets
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Q1) Firms that employ statistical discrimination in the labor market will earn higher profits in expectation than firms that do not discriminate (and have no effective screens).
A)True
B)False
Q2) Suppose ordinarily half your class would get an A and half would get a B, with A students having a 25% chance of getting an A and B students having a 25% of getting an
A.It costs $100 to persuade the instructor to raise a B grade to an A.A student is willing to pay $40 to insure she will get her usual grade and $70 to insure she will get a higher grade than usual.
a.If all students buy insurance that guarantees them an A, what is the zero profit price for an insurance company that offers A insurance.
b.Will grade insurance be sold in equilibrium?
c.Who would buy insurance and at what price if the insurance companies could tell what type of student each student is?
d.Is either the result in (b) or (c) efficient?
Q3) Whenever there is adverse selection, there will be missing market.
A)True
B)False
Page 24
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Chapter 23: Monopoly
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Q1) In the absence of recurring fixed costs, a monopolist will always produce a positive output quantity.
A)True
B)False
Q2) What are some obstacles to price discrimination that a monopolist who is protected by high barriers to entry might face?
Q3) If the market demand curve has constant price elasticity of -1, the monopolist's price should approach infinity.
A)True
B)False
Q4) One way to deal with the efficiency problem of monopolies is to tax the profits of monopolists.
A)True
B)False
Q5) If a monopolist has no marginal costs and only recurring fixed costs, then, if he produces, any quantity that he produces is profit maximizing if the price elasticity of market demand is -1.
A)True
B)False
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Chapter 24: Strategic Thinking and Game Theory
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Q1) A dominant strategy is one that is prevailing.
A)True
B)False
Q2) In a simultaneous move game, the number of possible pure strategies a player can play is equal to the number of actions he can choose to take.
A)True
B)False
Q3) The Folk Theorem says that anything can happen in infinitely repeated games.
A)True
B)False
Q4) Cooperation is difficult to achieve in a Prisoners' Dilemma because each player thinks the other player might not cooperate.
A)True
B)False
Q5) If all players in a game have a dominant strategy, then there can only be one pure strategy Nash equilibrium to the game.
A)True
B)False
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Chapter 25: Oligopoly
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Q1) Suppose a market is currently served by an incumbent firm.If a potential entrant can enter prior to the incumbent firm announcing its output (or price), the incumbent cannot deter entry through its actions.
A)True
B)False
Q2) Cartels tend not to be long-lived because of the Prisoner's Dilemma.
A)True
B)False
Q3) Just because a firm can deter entry by a competitor does not mean it will deter entry.
A)True
B)False
Q4) Recurring fixed costs may lead to only one firm producing in a Cournot oligopoly model.
A)True B)False
Q5) Two firms in an oligopoly can always do better if one firm buys the other. A)True
B)False
Q6) Explain why firms in a cartel might lobby for government regulation.
Page 27
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Chapter 26: Product Differentiation and Innovation in Markets
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Q1) If price is regulated in a 2-firm oligopoly modeled along the Hotelling line, firms will compete by differentiating their products.
A)True
B)False
Q2) Without price competition, there is no incentive for product differentiation.
A)True
B)False
Q3) In the circle model with constant marginal cost, each point on the circle will contain a firm in equilibrium if fixed entry costs are zero.
A)True
B)False
Q4) Information advertising might provide information about prices in stores, or it might provide information about product characteristics that consumers might not know about.Which one do you think is more likely to be efficient?
Q5) Bertrand price competitors can recover some market power when they differentiate their products.
A)True
B)False
28
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Chapter 27: Public Goods
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Q1) When the government contributes to a public good, private contributions will fall.
A)True
B)False
Q2) If private giving to public goods involves externalities, what is a Pigouvian solution to the public goods problem?
Q3) If everyone has identical preferences over public goods, Lindahl prices for providing the efficient level of the public good will be the same for everyone.
A)True
B)False
Q4) Our free-rider model of voluntary giving suggests that, when the government subsidizes private giving to charity, it's contribution will simply "crowd out" the private contributions so long as no one is at a corner solution.
A)True
B)False
Q5) What problem are mechanism designers attempting to overcome when they "design mechanisms" to provide public goods?
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Chapter 28: Governments and Politics
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Q1) Arrow suggests that any social choice process should be applicable to any set of preferences for individuals -- because we can't be sure individual preferences are always rational.
A)True
B)False
Q2) In 2000, three candidates appeared on virtually all ballots in the US Presidential election: George W.Bush, Al Gore and Ralph Nadar.Bush arguably won the election by 537 votes in Florida where Ralph Nadar received nearly 100,000 votes.It is often argued that Al Gore would have won the election had Ralph Nadar not been on the ballot in Florida.Discuss how this suggests that the social choice process the US uses to elect Presidents does not satisfy the Independence of Irrelevant Alternatives (IIA) assumption in Arrow's theorem.
Q3) A democratic (majority rule) decision over a multi-dimensional issue can be manipulated by an agenda setter only if voter tastes are not single-peaked.
A)True
B)False
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Chapter 29: What Is Good Challenges From Psychology and Philosophy
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Q1) Positive neoclassical economists are different from positive behavioral economists in that positive behavioral economists place more value on having models accurately represent people's true happiness.
A)True
B)False
Q2) Suppose an individual has to make a decision at time t without having all the information relevant for making the decision.At time (t+1), the relevant information is revealed.We will say that the individual made a mistake if his decision in time t would have been different had he known what he knows at time (t+1).True or False: Without behavioral economics, we would not be able to explain mistakes.
A)True
B)False
Q3) Positive economics does not require us to believe that actual happiness is the same as utility as modeled in economic theory.
A)True
B)False
Q4) What's the Easterlin Paradox -- and in what sense does it suggest reference-dependent preferences?
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