Mathematical Economics Exam Practice Tests
Course Introduction
Mathematical Economics explores the application of mathematical methods and models to analyze and solve economic problems. The course covers topics such as optimization, equilibrium analysis, comparative statics, and dynamic systems, using tools from calculus, linear algebra, and differential equations. Students will learn how to construct and interpret mathematical representations of economic theories, analyze the implications of economic models, and apply quantitative techniques to inform decision-making in areas including consumer behavior, production, and market structures. This foundational knowledge equips students to engage rigorously with both theoretical and empirical aspects of economics.
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Microeconomics An Intuitive Approach with Calculus 2nd Edition by Thomas Nechyba
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Chapter 1: Introduction
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Sample Questions
Q1) If medical patients are rational (in the way economists think of the term), they will do what medical experts believe is best for them.
A)True
B)False
Answer: False
Q2) When economists assume that people are rational, they are assuming that people generally agree what is good for human beings.
A)True
B)False
Answer: False
Q3) If two individuals voluntarily agree to a transaction that only affects them (and no one else), it must be that the transaction is efficient.
A)True
B)False
Answer: True
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Chapter 2: A Consumers Economic Circumstances
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Sample Questions
Q1) When the good on the horizontal axis is a composite good, the slope of the budget constraint is minus the price of the good on the vertical axis.
A)True
B)False
Answer: False
Q2) Derive the budget line equation for the case where good 2 is a composite good.What is the vertical intercept and what is the slope?
Answer: Since p<sub>2</sub> = 1, the usual budget line equation x<sub>2</sub>=I/p<sub>2</sub> - (p<sub>1</sub>/p<sub>2</sub>)x<sub>1</sub> becomes x<sub>2</sub>=I - p<sub>1</sub>x<sub>1</sub>, an equation with a vertical intercept of I and a slope of - p<sub>1</sub>.
Q3) If all consumers are price-takers facing the same prices, then all choice sets are the same.
A)True
B)False
Answer: False
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Page 4
Chapter 3: Economic Circumstances in Labor and Financial Markets
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Sample Questions
Q1) An "endowment" is something whose value is unknown. A)True
B)False Answer: False
Q2) A decrease in a wage taxes causes the opportunity cost of leisure to increase. A)True
B)False
Answer: True
Q3) 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
Q4) A bond that promises to pay $X in 10 years must be worth less than $X now. A)True
B)False Answer: True
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Chapter 4: Tastes and Indifference Curves
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Sample Questions
Q1) Economists define "rational" tastes as those which are objective and transitive.
A)True
B)False
Q2) Bundle A is worse than bundle B, and bundle C is an average of bundles A and
B.Then our usual assumptions about tastes imply that bundle B is at least as good as bundle C.
A)True
B)False
Q3) 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.
Q4) Prove formally that the rationality axioms alone rule out the possibility of indifference curves crossing.
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Chapter 5: Different Types of Tastes
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Q1) There are no quasilinear tastes that have elasticity of substitution equal to 1 everywhere.
A)True
B)False
Q2) When two goods are perfect substitutes, averages are better than extremes, resulting a diminishing marginal rate of substitution.
A)True
B)False
Q3) In the case of perfect complements, more is not necessarily better.
A)True
B)False
Q4) 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
Q5) Tastes for perfect substitutes are both homothetic and quasilinear.
A)True B)False
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Chapter 6: Doing the Best We Can
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Sample Questions
Q1) 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
Q2) Kinks in budget constraints always produce non-convexities in choice sets.
A)True
B)False
Q3) Which of the following statements is correct and which is not? Explain why.
a.When we all face the same prices, our tastes become the same.
b.When we all face the same prices, our tastes become the same at the margin.
Q4) Explain how we can estimate the shape of a person's indifference map by observing choices under different economic circumstances.Explain also why we will not be able to identify any non-convexities in tastes from our observations.
Q5) 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
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Page 8
Chapter 7: Income and Substitution Effects in Consumer
Goods Markets
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Sample Questions
Q1) Quasilinear goods are borderline goods between the set of normal and the set of inferior goods.
A)True
B)False
Q2) The price of peaches goes up and I observe you buying fewer strawberries.Which of the following is consistent with this observation:
A)Strawberries are inferior and peaches are normal.
B)Strawberries are normal and peaches are inferior.
C)Both strawberries and peaches are inferior.
D)Both (a) and (b).
E)Both (a) and (c).
F)Both (b) and (c).
G)All of the above.
Q3) All homothetic goods are normal goods.
A)True
B)False
Q4) Every Giffen good is a necessity but not every interior good is a necessity.
A)True
B)False
9
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Chapter 8: Wealth and Substitution Effects in Labor and Capital Markets
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Sample Questions
Q1) 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
Q2) If leisure is an inferior good, then an increase in wages will cause workers to work more.
A)True
B)False
Q3) When tastes over current and future consumption take the Cobb-Douglas form, interest rates have no impact on savings when income is earned in the current period but not in the future.
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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Chapter 9: Demand for Goods and Supply of Labor and Capital
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Sample Questions
Q1) Leisure being an inferior good is necessary but not sufficient for labor supply to slope up.
A)True
B)False
Q2) If future consumption is a normal good, the interest rate/borrowing relationship cannot be upward sloping.
A)True
B)False
Q3) Saving is equivalent to withdrawing financial capital from the market.
A)True
B)False
Q4) 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
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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Sample Questions
Q1) Which of the following must be true about homothetic tastes:
A)Utility functions that represent those tastes are homogeneous of degree 1.
B)There exists a utility function that represents those tastes and is homogeneous of degree 1.
C)There exists a utility function that represents those tastes such that the expenditure function is homogeneous of degree 1.
D)The indirect utility function is homogeneous of degree zero.
E)Both (a) and (c).
F)Both (b) and (c).
G)Both (b) and (d)
H)None of the above.
Q2) Suppose Coke and Pepsi are perfect substitutes.
a.Derive the shape of the (uncompensated) demand curve.
b.Derive the shape of the compensated demand (or MWTP) curve.
Q3) When tastes are not quasilinear, the positive economist will introduce error into the analysis if he uses the uncompensated (rather than the compensated) demand curve to predict behavior.
A)True
B)False
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Page 12
Chapter 11: One Input and One Output: a Short-Run
Producer Model
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Sample Questions
Q1) With all other inputs held fixed, the marginal product of any input must eventually increase as more of that input is hired.
A)True
B)False
Q2) In the one-input model, the cost curve is the inverse of the production frontier if and only if the input price is 1.
A)True
B)False
Q3) Since the marginal product of labor can increase initially as I hire more workers, demand for labor is also upward sloping for the initial workers I hire.
A)True
B)False
Q4) Price-taking producers have horizontal marginal revenue curves.
A)True
B)False
Q5) The output level is constant along any isoprofit line. A)True
B)False
13
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Chapter 12: Production With Multiple Inputs
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Sample Questions
Q1) If producer choice sets are convex and a production plan satisfies the condition that the (marginal) technical rate of substitution is equal (in absolute value) to the ratio of input prices, then the production plan is profit maximizing.
A)True
B)False
Q2) Output prices are irrelevant for a firm as it is calculating its cost curves.
A)True
B)False
Q3) In 2-input production models, constant returns to scale implies horizontal marginal cost curves.
A)True
B)False
Q4) In considering "returns to scale" we assume that production processes are homothetic.
A)True B)False
Q5) Quasiconcave production functions give rise to convex producer choice sets. A)True B)False
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Chapter 13: Production Decisions in the Short and Long Run
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Sample Questions
Q1) Output supply is more responsive to price in the short run than in the long run.
A)True
B)False
Q2) 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
Q3) After a firm makes both short and long run adjustments in its production plan following a reduction in the wage,
A)the marginal product of labor will be higher.
B)the marginal product of labor will be lower.
C)the marginal product of capital will be unchanged.
D)the marginal product of capital may be higher or lower depending on the degree of substitutability between capital and labor.
E)(a) and C
F)(a) and (d)
G)(b) and (c)
H)(b) and (d)
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Chapter 14: Competitive Market Equilibrium
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Sample Questions
Q1) Suppose Congress passes a one-time tax refund of all taxes paid by firms in an industry last year.This will lead to a drop in output price in the industry.
A)True
B)False
Q2) An increase in labor demand accompanied by a decline in labor supply cannot result in a decline in wages.
A)True
B)False
Q3) A decrease in the rental rate of capital can lead to a long run increase or decrease in the number of firms in the industry.
A)True
B)False
Q4) Equilibrium prices coordinate the actions of producers and consumers.
A)True
B)False
Q5) Suppose a firm is making zero long run profit.Then it's short run profit cannot be negative.
A)True
B)False
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Chapter 15: The Invisible Hand and the First Welfare
Theorem
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Sample Questions
Q1) If a group of individual consumers can be treated as a single representative consumer, then the aggregate consumer surplus of the group can be measured along the market demand curve.
A)True
B)False
Q2) Absent any violations of the conditions underlying the first welfare theorem, the competitive market equilibrium is efficient if and only if tastes are quasilinear.
A)True
B)False
Q3) If consumer tastes are quasilinear -- and ignoring the possibility of corner solutions and violations of the conditions of the first welfare theorem, the competitive market production level of the quasilinear good will be the same as that chosen by a social planner whose goal includes (but is not necessarily limited to) efficiency.
A)True
B)False
Q4) Explain how prices in a competitive market form --- and how they take the place of almost limitless information that a social planner would need if he tried to mimic the market outcome.
Page 17
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Chapter 16: General Equilibrium
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Q1) The second welfare theorem says that, regardless of how we redistribute endowments in an economy, we still get the same competitive equilibrium if markets are permitted to operate.
A)True
B)False
Q2) In and Edgeworth Box economy, no one strictly prefers the endowment allocation to the competitive equilibrium allocation.
A)True
B)False
Q3) Which of the following is true within exchange economies:
A)All efficient allocations lie in the set of core allocations.
B)All core allocations are efficient.
C)The set of efficient allocations can be defined without knowing individual endowments.
D)(a) and (b) are true.
E)(a) and (c) are true.
F)(b) and (c) are true.
G)All of the above are true.
H)None of the above are true.
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Page 18
Chapter 17: Choice and Markets in the Presence of Risk
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Sample Questions
Q1) The independence axiom implies that if I prefer a bottle of wine over a six pack of beer I will prefer half a bottle of wine with a bag of pretzels over half a sixpack of beer with a bag of pretzels.
A)True
B)False
Q2) If the probability of the bad outcome is 0.5, the benefit level of actuarily fair insurance will be half the premium.
A)True
B)False
Q3) Which of the following can explain the choice to gamble in casinos?
A)Gamblers have risk loving tastes.
B)Gamblers have risk-averse but state-dependent tastes.
C)The casino is operating at a loss.
D)(a) and (b)
E)(a) and C
F)(b) and (c)
G)All of the above.
H)None of the above.
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19
Chapter
Non-Price Rationing
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Sample Questions
Q1) The wage elasticity of labor demand is always negative. A)True
B)False
Q2) When price elasticity is less than -1, consumer spending increases as price falls.
A)True
B)False
Q3) 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
Q4) The price elasticity of output supply is greater in the long run than in the short run. A)True
B)False
Q5) When tastes over current and future consumption are homothetic, the interest rate elasticity of savings supply is positive. A)True
B)False
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Page 20
Chapter 19: Distortionary Taxes and Subsidies
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Q1) Assuming upward sloping labor supply, wage subsidies are definitely more inefficient
A)the more elastic labor demand is.
B)the more elastic labor supply is.
C)the more substitutable consumption and leisure are.
D)Both (a) and (b)
E)Both (b) and c
F)Both (a) and (c)
G)All of the above
H)None of the above
Q2) Regardless of the size of wealth and substitution effects for workers, the benefit of a wage subsidy will accrue disproportionately to workers if the labor supply curve is relatively more wage-inelastic than the labor demand curve.
A)True
B)False
Q3) In most cases, the fact that one of the market curves is perfectly inelastic is not sufficient to conclude that a per-unit tax in that market is efficient.A tax on land rents is an exception.Can you explain why?
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Chapter 20: Prices and Distortions Across Markets
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Q1) Regardless of what types of workers are available in different countries, unrestricted labor outsourcing always results in an equalization of wages across countries.
A)True
B)False
Q2) Even when earning zero profit, exporters (nearly) equalize prices across markets.
A)True
B)False
Q3) The larger a country is relative to the rest of the world, the less likely it is to be able to produce a net benefit for its citizens by imposing an import tariff.
A)True
B)False
Q4) If country A is importing good x from country B where x is produced along a perfectly inelastic supply curve, then country B will suffer the entire deadweight loss from any tariff imposed on imports to country A.
A)True
B)False
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Chapter 21: Externalities in Competitive Markets
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Q1) To implement an efficient Pigouvian tax in a competitive market that has negative production externalities, the government would need to know the shape of the entire social marginal cost curve.
A)True
B)False
Q2) One condition for the first welfare theorem to hold is that there are no externalities.Can this condition be re-phrased as "all property rights have been established"? And how does this justify a wide range of what we see government doing?
Q3) Regardless of whether a negative externality is emitted by consumers or by producers, a Pigouvian tax can be imposed on consumers only.
A)True
B)False
Q4) It the marginal social benefit from contributions to charities is the same for all individuals who give to charities, then allowing individuals to deduct charitable contributions from their income taxes cannot serve as a Pigouvian subsidy under a progressive income tax system.
A)True
B)False
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Page 23
Chapter 22: Asymmetric Information in Competitive Markets
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Q1) Explain the following statement: "In health insurance markets, moral hazard implies individuals will consume too much health care, whereas adverse selection implies too little health care will be consumed."
Q2) Consider two types of rules that might govern an otherwise unregulated health insurance market: (1) Insurance companies can price-discriminate against the sick and old; (2) insurance companies cannot price discriminate against the sick and old.Explain why, in equilibrium, insurance may be very expensive for the sick and old regardless of which case we find ourselves in.
Q3) Regardless of whether or not screening or signaling occurs in markets with adverse selection, the equilibrium will always be less efficient than an equilibrium in the same competitive market if there were no asymmetric information.
A)True
B)False
Q4) Whenever there is adverse selection without signaling or screening, there will be a missing market.
A)True
B)False
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Chapter 23: Monopoly
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Q1) When perfect price discrimination comes in the form of a two-part tariff, one part of the "tariff" just covers marginal costs.
A)True
B)False
Q2) A (non-price discriminating) monopolist with zero marginal cost but recurring fixed costs may end up not producing even if it would be efficient for him to produce.
A)True
B)False
Q3) Suppose a monopolist produces a positive level of output.If marginal costs are zero, this output level will occur where price elasticity of demand is exactly -1 unless there are recurring fixed costs.
A)True
B)False
Q4) Low demand consumers are indifferent between second degree and first degree price discrimination.
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) If a player's strategy in a sequential game is to choose an action that stops the game early on, it is unnecessary to specify that player's plans for moves later on in the game when it would have been his turn to move again.
A)True
B)False
Q3) 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
Q4) If a pooling equilibrium is played in a signaling game, beliefs about the sender type can take on any form along the branch of the game tree that is not played in equilibrium, but on the branch that is played, beliefs are identical to the probability distribution with which "nature" assigned types to the sender.
A)True
B)False
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Chapter 25: Oligopoly
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Q1) We showed that, when demand is linear and marginal cost is constant, the Stackelberg leader produces the monopoly output while the Stackelberg follower produces half the monopoly output.If the leader and follower now enter a simultaneous quantity setting game, why can't the leader maintain the same equilibrium?
Q2) So long as production in the oligopoly still occurs, recurring fixed costs have no impact on output under Cournot competition but do have an impact under Bertrand competition.
A)True
B)False
Q3) Explain how two Bertrand price competitors can price above marginal cost in an infinitely repeated game setting.
Q4) 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 entrant will enter the market and force the incumbent to compete.
A)True
B)False
Q5) Explain why firms in a cartel might lobby for government regulation.
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Page 27
Chapter 26: Product Differentiation and Innovation in Markets
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Q1) Since firms within a monopolistically competitive industry set output where marginal revenue is equal to marginal cost, the size of the fixed entry cost does not impact the equilibrium price.
A)True
B)False
Q2) Under monopolistic competition, the number of firms increases as fixed entry costs fall and as demand for the type of good produced in the market increases.
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?
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Chapter 27: Public Goods
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Q1) We say that individuals get a "warm glow" from giving to a public good if they not only get utility from the public good but also from giving itself.Explain the following: "While warm glow lessens the free rider problem, it cannot eliminate it."
Q2) Suppose a social entrepreneur needs to raise money for a public good.He has to allocate his fund raising package to activities that persuade people of the importance of the public good and to activities that make people feel good about giving.As the population gets large, which of these do you think he will increasingly emphasize?
Q3) Any efficient allocation of public goods will be such that the sum of the marginal benefits is equal to the marginal cost -- but the level of the public good may differ depending on how income is distributed in the population.
A)True
B)False
Q4) The optimal subsidy for private giving to a public good increases as the number of people benefiting from the public good increases.
A)True
B)False
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Chapter 28: Governments and Politics
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Q1) The "Anything-Can-Happen" theorem doesn't really imply "anything can happen" in a democratic process with multiple issues; rather, it implies that political outcomes can be manipulated, and some political institutions are better at constraining the degree to which this can be done than others.Do you agree or disagree with this statement? Why?
Q2) Discuss how a politicians "policy differentiation" from his opponent in an election softens the competition over how much in political rents the politician will be able to collect.
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
Q4) A presidential candidate once famously said about a particular policy: "I voted for it before I voted against it." How might such a statement make sense in the context of sophisticated voting along agendas.
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Chapter 29: What Is Good Challenges From Psychology and Philosophy
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Q1) Do you agree or disagree with the following statement: "If, in the neoclassical model of decision making, the discount factor changes over time, the predictions of the beta-delta model could be mimicked in the neoclassical model." Explain.
Q2) In the absence of commitment devices, present-biased individuals are never as patient as they intend to be.
A)True
B)False
Q3) 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
Q4) Normative economics often takes a consequentialist philosophical approach to determine whether a policy is good.
A)True
B)False
Q5) What's the Easterlin Paradox -- and in what sense does it suggest reference-dependent preferences?
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