Introductory Microeconomics Exam Bank
Course Introduction
Introductory Microeconomics provides students with a foundational understanding of the principles that govern individual and firm decision-making in the allocation of limited resources. The course examines the behavior of consumers and producers, the functioning of markets, and the role of government in correcting market failures. Key topics include supply and demand analysis, elasticity, consumer choice theory, production and costs, market structures (such as perfect competition, monopoly, and oligopoly), and the implications of economic policies. Through real-world examples and analytical tools, students develop the ability to critically evaluate how microeconomic theory applies to everyday economic issues and public policy debates.
Recommended Textbook
Microeconomics 1st Canadian Edition by B. Douglas Bernheim
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Chapter 1: Introduction
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Q1) According to economists,which of the following is the best example of a market?
A) A flea market
B) The trading floor of the New York Stock Exchange
C) The local shopping mall
D) The retail market for winter coats in Nunavut
Answer: D
Q2) In order to explain how societies deal with the problem of scarcity,economists apply simplified representations known as
A) Simplifying assumptions
B) Theories
C) Normative questions
D) Models
Answer: D
Q3) Which of the following statements is false?
A) Recognizing tradeoffs is an essential part of good decision making
B) Most government policies provide people with incentives to take certain actions and avoid others
C) People will pursue an action as long as it is beneficial for them to do so
D) Every choice involves a tradeoff
Answer: C
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Chapter 2: Supply and Demand3
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Q1) Suppose a good has a demand curve given by Q = 20 - 8xP.What is the price elasticity of demand if the price is $2?
A) -4
B) -8
C) 1/2
D) -1/2
Answer: A
Q2) Suppose there is a decrease in both the demand for and supply of a good.What happens to equilibrium price and quantity?
A) Equilibrium quantity increases, but the effect on equilibrium price is ambiguous
B) Equilibrium quantity decreases, but the effect on equilibrium price is ambiguous
C) Equilibrium price increases, but the effect on equilibrium quantity is ambiguous
D) Equilibrium price decreases, but the effect on equilibrium quantity is ambiguous
Answer: B
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Chapter 3: Balancing Benefits and Costs
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Q1) The marginal cost of action choice X
A) Measures the additional cost of a small change in X
B) Tends to decrease as X increases
C) Measures the cost that a decision maker has already incurred by pursuing activity X
D) Is minimized at the best level of activity X
Answer: A
Q2) An action at which it is possible to marginally increase or decrease an activity level is called
A) An interior action
B) A boundary action
C) A marginal improvement action
D) A marginal action
Answer: A
Q3) Refer to Figure 3.1.Which graph best represents the total cost of an activity?
A) A
B) B
C) C
D) D
Answer: D
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Page 5
Chapter 4: Principles and Preferences
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Q1) Higher rates of substitution are indicated by _______ _______ values of the marginal rate of substitution.
A) Small negative
B) Large negative
C) Small positive
D) Large positive
Q2) Stewie enjoys watching DVDs and listening to his iPod.Suppose his utility function is given by U(D,I)= 3D + 4(D x I),where D is the number of hours he spends watching DVDs and I is the number of hours he spends listening to his iPod.Which of the following combination will provide Stewie with the greatest amount of satisfaction?
A) 4 hours of watching DVDs and 8 hours of listening to his iPod
B) 6 hours of watching DVDs and 6 hours of listening to his iPod
C) 2 hours of watching DVDs and 10 hours of listening to his iPod
D) 8 hours of watching DVDs and 6 hours of listening to his iPod
Q3) Two products are perfect complements if
A) A consumer is willing to swap one for another at a fixed rate
B) They are valuable only when used together in fixed proportions
C) Their indifference curves are "straight lines."
D) They lie on the same indifference curve
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Page 6
Chapter 5: Constraints, Choices, and Demand
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Q1) A curve that shows how the best available consumption bundle changes as income changes (holding the consumer's preferences and all other prices fixed)is called
A) A price-consumption curve
B) An individual demand curve
C) An income-consumption curve
D) A budget line
Q2) A consumer's budget constraint is
A) A positively sloped line
B) A negatively sloped line
C) Convex
D) A vertical line at the level of the consumer's income
Q3) Refer to Figure 5.1.Which graph represents an increase in the price of DVDs?
A) A
B) B
C) C
D) D
Q4) Suppose that an individual consumes just hamburgers and soft drinks.Using a carefully-labeled diagram,derive the price-consumption curve that would result from a decrease in the price of hamburgers.
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Chapter 6: Rom Demand to Welfare
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Q1) If a good is normal,then the income effect is _____ for a price increase and _____ for a price decrease.
A) Positive; negative
B) Positive; positive
C) Negative; negative
D) Negative; positive
Q2) The relative cost of achieving a fixed standard of living in different situations is called
A) A cost of living index
B) Compensating variation
C) Real income
D) Consumer surplus
Q3) For what type of good do the substitution and income effects work in opposite directions?
A) Normal goods
B) Inferior goods
C) Giffen goods
D) The substitution and income effects never work in opposite directions
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Chapter 7: Technology and Production
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Q1) Consider the Cobb-Douglas production function F(L,K)= AL<sup>a</sup>K<sup>b</sup>.Suppose that a = 2,b = 3,the firm has 3 units of capital and the firm's general productivity level is 20.
a)What is the firm's long-run production function?
b)What is the firm's short-run production function?
c)If the firm employs 10 workers,what are the marginal products of labour and capital?
d)If the firm employs 10 workers,what is the marginal rate of technical substitution for labour with capital?
e)Does this firm's technology exhibit increasing,decreasing or constant returns to scale?
Q2) Define decreasing returns to scale,illustrating your definition with isoquants.What are some reasons why firms might experience decreasing returns to scale?
Q3) A firm's _______ summarizes all of its possible methods of producing its output.
A) Production technology
B) Efficient production frontier
C) Production function
D) Production possibilities curve
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Chapter 8: Cost
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Q1) If the least-cost input combination doesn't include all inputs,it's called
A) A boundary solution
B) An incomplete solution
C) An interior solution
D) An efficient solution
Q2) Diseconomies of scope occur when
A) A firm's input prices rise as it increases output
B) A firm's average cost of production rises as it increases production
C) Producing two products in a single firm is more expensive than producing them in separate firms
D) A firm's average cost of production falls as it increases production
Q3) Using a graph,explain the relationship between average cost and marginal cost.
Q4) If marginal cost is ______ average cost,then average cost will _____.
A) Equal to; decrease
B) Less than; increase
C) Greater than; decrease
D) Greater than; increase
Q5) Suppose a firm's technology is represented by the function Q = F(L,K)= 5L<sup>.25</sup>K<sup>.75</sup>.Does this firm experience economies of scale,diseconomies of scale or neither?
Page 10
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Chapter 10: Choices Involving Time
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Q1) When the interest rate rises,saving becomes ______ rewarding and borrowing becomes ______ costly.
A) Less, less
B) Less, more
C) More, less
D) More, more
Q2) What happens to saving when interest rates rise?
A) It increases
B) It decreases
C) It can increase or decrease
D) It is impossible to tell
Q3) If a project has an initial investment of $20,000 and consecutive yearly cash inflows of $5,000,$8000,$10,000 and $7,000,respectively,what is its payback period?
A) 2 years
B) 2.5 years
C) 2.7 years
D) 3 years
Q4) Using a carefully-labeled graph,explain the Life Cycle Hypothesis.What are some of the implications of the Life Cycle Hypothesis?
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Chapter 11: Choices Involving Risk
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Q1) Refer to Figure f.A benefit function is plotted in Figure f.Point B represents the
A) Risk premium of the consumption bundle
B) Expected utility of the consumption bundle
C) Certainty equivalent of the consumption bundle
D) Expected consumption
Q2) Two variables are negatively correlated if
A) They move in the same direction
B) They move in the opposite direction
C) Their movements tend to be unrelated
D) One is simply a multiple of the other
Q3) What is Brandon's expected utility given the information in problem 25?
A) 10
B) 17.5
C) 20
D) 30
Q4) Explain why a risk averse individual will purchase full insure if a policy is actually fair,but only partially insure or not insure at all,if it is not.
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Chapter 12: Choices Involving Strategy
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Q1) A strategy is weakly dominated if
A) There are no other strategies that yield higher payoffs, regardless of others' choices
B) There is some other strategy that yields a strictly higher payoff regardless of others' choices
C) There is some other strategy that yields a strictly higher payoff in some circumstances and that never yields a lower payoff regardless of others' choices
D) There is some other strategy that yields a strictly higher payoff in some circumstances and may yield a lower payoff, depending upon other players' choices
Q2) Refer to Figure b.What is the Nash equilibrium in problem 13?
A) Kate squeal, Alice squeal
B) Kate deny, Alice deny
C) Kate squeal, Alice deny
D) Kate deny, Alice squeal
Q3) Use the concepts of reputation and asymmetric information to explain why some faculty members become less productive after gaining tenure.
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Chapter 13: Behavioral Economics
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Q1) In the ultimatum game
A) One player (the proposal) offers to give the second player (the recipient) some share of a fixed prize; the recipient then decides whether to accept or reject the proposal B) Is a single-stage game
C) One player (the proposal) gives the second player (the recipient) some share of a fixed prize; the recipient must keep the amount given
D) Was proposed by John Nash
Q2) Game theory tells us that in the ultimatum game
A) The threat to reject is credible
B) The threat to reject in not credible
C) People are expected to give more under a threat of rejection
D) A and C
Q3) Evidence that people do not always make choices that reflect sensible preferences include
A) Choice reversals
B) Conformance to the principle of revealed preference
C) Conformance to the Ranking Principle
D) All of these
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15
Chapter 14: Equilibrium and Efficiency
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Q1) Products are homogenous when
A) They are identical in the eyes of the purchasers
B) Some purchasers view the products as different
C) Suppliers can charge different prices for the same good
D) They are different in the eyes of the purchasers
Q2) With free entry
A) There is a known and limited number of potential suppliers that can produce a good in the long run
B) There is an unlimited number of firms that can produce a good in the long run
C) The long run market demand curve is horizontal at the market price
D) Firms will always enter the market
Q3) Transactions costs are absent when
A) Sellers can easily communicate their prices
B) Buyers can easily locate suppliers and learn their prices
C) Buyers and sellers can arrange transactions without significant obstacles
D) All of these
Q4) Suppose the wiz-pop market is in long-run equilibrium.Suddenly,fixed costs decrease,although variable costs remain unchanged.Discuss the short-run and long-run changes in market equilibrium.
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Chapter 15: Market Intervention
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Q1) More of a tax is borne by firms
A) The more elastic is demand and the less elastic is supply
B) The less elastic is demand and the less elastic is supply
C) The more elastic is demand and the more elastic is supply
D) The less elastic is demand and the more elastic is supply
Q2) A price floor
A) Establishes a maximum price that sellers can charge
B) Establishes a minimum price that sellers can charge
C) Establishes maximum price that buyers can pay
D) Establishes a minimum price that buyers can pay
Q3) There is no deadweight loss from a tax when
A) Demand is perfectly inelastic
B) Supply is perfectly inelastic
C) Demand is perfectly elastic
D) A and B
Q4) If the import supply curve is horizontal at the world price
A) A tariff will lower domestic aggregate surplus
B) A tariff will increase domestic aggregate surplus
C) A tariff will not change domestic aggregate surplus
D) A quota will increase domestic aggregate surplus
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Chapter 16: General Equilibrium, Efficiency, and Equity
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Q1) A point on the utility possibility frontier is
A) Inefficient
B) Impossible
C) Efficient
D) Inefficient and Impossible
Q2) The contract curve
A) Shows the unique Pareto efficient allocation of a pair of goods in an Edgeworth box
B) Shows every inefficient allocation of consumption goods in an Edgeworth box
C) Does not pass through the tangencies between pairs of indifference curves in an Edgeworth box
D) Shows every efficient allocation of consumption goods in an Edgeworth box
Q3) According to the principle of egalitarianism
A) Society should place equal weight on the well-being of every individual
B) Society should place all weight on the well-being of its worst-off member
C) Society should place all weight on the well-being of its best-off member
D) Equal division of society's resources among all members of the population is the most equitable outcome
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Chapter 17: Monopoly
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Q1) A monopolist's marginal expenditure is
A) The extra benefit from hiring or purchasing the marginal unit of an input, per marginal unit
B) The extra cost incurred to hire or purchase the marginal units of an input, per marginal unit
C) The difference between the marginal cost and benefit from hiring the marginal unit of an input, per marginal unit
D) The total cost incurred to hire or purchase all units of an input in the production process
Q2) A firm's Lerner Index
A) Is the amount by which its price exceeds its marginal cost, expressed as a percentage of its price
B) Is the amount by which its marginal cost exceeds its average cost
C) Is the amount by which its average cost exceeds its marginal cost
D) Is the value of its profit
Q3) Explain the difference between a monopoly and a monophony.
Q4) Discuss the difference between first-best and second-best price regulation.In your answer,you should address why governments regulate markets and the difficulties faced when doing so.
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Chapter 18: Pricing Policies
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Q1) Mixed bundling
A) Is the practice of selling several products together as a package
B) Is the practice of selling the same good to different types of consumers at different prices
C) Is the practice of selling several products together as a package while also offering those products for sale individually
D) Is the practice of selling goods in bulk at a reduced per unit price
Q2) With a two-part tariff
A) Consumers simply pay a fixed fee if they buy anything at all
B) Consumers pay a fixed fee if they buy anything at all, plus a separate per-unit price for each unit they buy
C) Consumers pay a fixed fee if they buy anything at all, plus an annual fee for the right to purchase anything
D) Consumers simply pay a fee for the right to buy anything
Q3) Discuss the differences between perfect and imperfect price discrimination and the benefits of each to a monopolist.
Q4) Explain bundling and mixed bundling and the benefits to a multi product monopolist of such packaging schemes.
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Page 20
Chapter 19: Oligopoly
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Q1) In a Bertrand model of oligopoly
A) Firms produce differentiated products and set their prices simultaneously
B) Firms produce homogenous products and set their prices simultaneously
C) Firms choose how much to produce simultaneously and the price clears the market given the total quantity produced
D) Firms choose how much to produce and the price to charge simultaneously
Q2) In an oligopolistic market
A) The more elastic the demand, the greater the markup
B) The larger the number of firms, the greater the markup
C) The less elastic the demand, the greater the markup
D) B and C
Q3) Firms engage in tacit collusion when
A) They predict what the other will do and attempt to undercut them
B) They collude without communicating, sustaining a price above the noncooperative price that would arise in a single competitive interaction
C) They communicate to reach an agreement about the prices they will charge
D) They communicate what type of good they will produce
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Chapter 20: Externalities and Public Goods
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Q1) The Coase Theorem states that
A) If bargaining is difficult, then regardless of how property rights are assigned, voluntary agreements between parties will remedy the market failures associated with externalities and restore economic efficiency
B) If bargaining is frictionless, then the initial assignment of property rights determines the market failures associated by externalities and voluntary agreements between private parties are useless
C) If bargaining is frictionless, then regardless of how property rights are assigned, voluntary agreements between private parties will remedy the market failures associated with externalities and restore economic efficiency
D) If bargaining is frictionless, market failures must be remedied by government intervention
Q2) A private good
A) Is a good for which consumption involves perfect rivalry
B) Is nonexcludable
C) Is often provided by the government
D) Is often not provided by the government
Q3) Explain ways in which the government can remedy an externality.
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