Microeconomic Analysis Exam Review
Course Introduction
Microeconomic Analysis provides an in-depth exploration of the behavior of individual economic agents, including consumers, firms, and markets. The course covers fundamental concepts such as demand and supply, consumer choice theory, production and cost analysis, market structures (perfect competition, monopoly, oligopoly), and the role of government in market outcomes. Emphasis is placed on the use of analytical tools and mathematical models to understand and predict economic decision-making, resource allocation, and the impacts of market interventions. This course equips students with the critical thinking skills and quantitative methods necessary to analyze real-world economic problems at the micro level.
Recommended Textbook
Microeconomics 1st Canadian Edition by B. Douglas Bernheim
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Chapter 1: Introduction
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Q1) Scarcity forces society to confront three critical issues.List those issues and explain how they are related to the problem of scarcity.
Answer: What to Produce: When we produce more of one good,we use up scarce resources.This reduces our ability to produce other goods. How to produce goods: Society must determine a production method for each good that minimizes the use of the scarce resources used to produce the good. Who gets what: A society can produce only a limited amount of goods and services.Each society must therefore develop procedures for allocating those goods among consumers.
Q2) According to the text,which of the following best describes the process the FCC used to allocate spectrum licenses to telecommunications providers?
A) Licenses were auctioned one at a time, to the highest bidder
B) Licenses were sold to telecommunications providers that already had contracts with the government
C) All licenses were auctioned of at the same time
D) The government charged the same price for each license
Answer: C
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Page 3
Chapter 2: Supply and Demand3
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Sample Questions
Q1) In general,supply curves with an elasticity of supply between 0 and 1 are referred to as
A) Inelastic
B) Elastic
C) Perfectly elastic
D) Perfectly inelastic
Answer: A
Q2) What is the difference between a change in demand and a change in the quantity demanded of a good? Illustrate you answer using carefully labeled graphs.
Answer: 11ea8a01_e3bb_3ac4_8b44_670bea601b80_TB1639_00 A change in demand is caused by a change in any factor other than price that affects demand.A change in demand is shown by a shift in a demand curve.A change in quantity demanded results from a change in price and is represented by a movement along the demand curve.
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4
Chapter 3: Balancing Benefits and Costs
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Sample Questions
Q1) Refer to Table 3.2,which shows some costs and benefits of having your car repaired.Suppose you use your car to deliver pizzas,for which you earn $10 per hour.If your mechanic lowers the amount she charges by $50,what happens to your best choice of hours to spend on car repairs?
A) It increases by 1 hour
B) It decreases by 1 hour
C) It doesn't change
D) It decreases by 2 hours
Answer: C
Q2) "If the cost of college tuition goes up,then fewer people should go to college." This statement
A) Is always true
B) Is true only for students for whom the cost of college would exceed the benefits of attending college
C) Would never be true
D) Ignores the opportunity costs of attending college
Answer: B
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Page 5
Chapter 4: Principles and Preferences
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Sample Questions
Q1) In modern microeconomic theory,utility functions summarize
A) Cardinal information about preferences
B) Ordinal information about preferences
C) Absolute information about preferences
D) Both cardinal and ordinal information about preferences
Q2) Frieda enjoys cooking and baking.Her utility function is U(C,B)= 6C + 3B,where C is the number of hours she spends cooking and B is the hours she spends baking.What is Frieda's MU of cooking?
A) 1/6
B) 2
C) 6
D) Cannot be determined from the given information
Q3) A curve that shows all of the alternative consumption bundles that the consumer likes equally well is called
A) A budget constraint
B) An indifference curve
C) An individual demand curve
D) A consumption bundle curve
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6
Chapter 5: Constraints, Choices, and Demand
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Q1) Refer to Figure 5.7.Which diagram best represents an Engle curve where soup is a normal good?
A) A
B) B
C) C
D) D
Q2) When a good is normal,
A) An increase in income raises consumption at each price, so the demand curve shifts to the left
B) An increase in income raises consumption at each price, so the demand curve shifts to the right
C) A decrease in income lowers consumption at each price, so the demand curve shifts to the right
D) An increase in income lowers consumption at each price, so the demand curve shifts to the left
Q3) Using a carefully-labeled diagram,explain an Engel curve for a good that is initially a normal good,but eventually becomes an inferior good.
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Chapter 6: Rom Demand to Welfare
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Q1) When prices are rising,
A) The Laspeyres index tends to overstate the increase in the cost of living because of the substitution bias
B) The Laspeyres index tends to understate the increase in the cost of living because of the substitution bias
C) The Laspeyres index tends to overstate the increase in the cost of living because of the compensating variation bias
D) The Laspeyres index tends to understate the increase in the cost of living because of the consumer preference bias
Q2) A consumer's ______ determines the location of their uncompensated demand curve,while the level of their ______ determines the location of their compensated demand curve.
A) Income; well-being
B) Well-being; income
C) Indifference curves; income
D) Preferences; well-being
Q3) Define consumer surplus.Using a graph,explain the change in consumer surplus that would result from a decrease in the price of a gasoline.
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Chapter 7: Technology and Production
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Q1) 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
Q2) Consider the production function Q = F(L,K)= 5L<sup>2</sup>K<sup>2</sup>.Does this technology have increasing,decreasing or constant returns to scale? Explain your answer in two different ways.
Q3) When the marginal product of an input is ______ than the average product,the marginal units of the input _____ the average product.
A) Larger; lower
B) Smaller; raise
C) Smaller; do not affect
D) Larger; raise
Q4) The rate at which one input can be substituted for another is shown by
A) The slope of a firm's production function
B) The slope of a firm's efficient production frontier
C) The shape of a firm's isoquants
D) The shape of a firm's production function
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Chapter 8: Cost
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Q1) ______ occurs when a single firm can produce two or more products more cheaply than two separate firms.
A) Economies of scale
B) Economies of scope
C) Diseconomies of scale
D) Increasing returns to scale
Q2) If labour is measured along the horizontal axis and capital is measured along the vertical axis,an increase in the wage rate will cause the isocost line to
A) Rotate to the left along the labour axis, causing the firm to use less labour and more capital
B) Rotate to the right along the labour axis, causing the firm to use less labour and more capital
C) Rotate to the left along the labour axis, causing the firm to use less capital and more labour
D) Rotate to the right along the labour axis, causing the firm to use less capital and more labour
Q3) Using a graph,explain the relationship between average cost and marginal cost.
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Chapter 9: Rofit Maximization
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Sample Questions
Q1) At any price below ______ a firm has no incentive to produce anything.
A) AC
B) MR
C) AC<sub>min</sub>
D) MC<sub>min</sub>
Q2) Suppose you own a store that sells top of the line MP3 players.You have determined that the demand function for your MP3 players is D(P)= 1200 - 4P.At what price would you sell the MP3 players if you wanted to sell 120 of them?
A) $250
B) $270
C) $280
D) $300
Q3) What is an inverse demand function? If the demand for a firm's product is given by the expression Q = 600 - 3P,what is the firm's inverse demand function? By how much would the firm have to change its price in order to increase sales from 300 units to 450 units?
Q4) Graphically illustrate the quantity rule and the shut down rule for a price-taking firm.
Q5) Using a graph,explain why the law of supply holds for a competitive firm.
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Chapter 10: Choices Involving Time
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Sample Questions
Q1) At an interest rate of 8.25% compounded annually,what is the present discounted value of $2000 to be received 2 years from now?
A) $1670.00
B) $1706.78
C) $1716.74
D) $1835.00
Q2) Suppose you are looking to add more capacity to your current manufacturing plant.The new project will cost $6 million up front and is projected to increase revenue $1.5 million a year for each of the next 5 years.If the interest rate is 8%,what is this project's NPV and is it a profitable investment?
A) -$10,934.94, Yes it is profitable
B) -$10,934.94, No it is not profitable
C) $944,444.44, Yes it is profitable
D) $944,444.44, No it is not profitable
Q3) 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
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Page 12
Chapter 11: Choices Involving Risk
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Q1) A person is risk neutral if
A) Her indifference curve is concave to the origin
B) Her indifference curve is convex to the origin
C) Her indifference curve coincides with the expected consumption line
D) Her indifference curve coincides with guaranteed consumption line
Q2) 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
Q3) Risk
A) Is inherent in every action or decision
B) Exists whenever the consequences of a decision are uncertain
C) Exists when outcomes are certain
D) Is a good that can be purchased
Q4) Explain the relationship between the correlation of payoffs and the risk reducing effects of diversification and hedging.
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Chapter 12: Choices Involving Strategy
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Q1) In a multiple-stage game
A) At least one participant observes a choice by another participant before making some decision
B) Each participant makes all of his choices before observing any choice by any other participant
C) At least one participant makes his choice before observing the choices made by other participants
D) One participant has full information of the other players choices before making his choice
Q2) Refer to Figure d.In the game described in problem 21,Darren's dominant strategy is
A) East
B) West
C) Neither east nor west because east is only weakly dominated
D) Both east and west
Q3) John Nash shared the Nobel Prize in Economics with
A) John Harsanyi and Reinhard Selton
B) Reinhard Selton
C) Robert Auman and Reinhard Selton
D) Milton Friedman
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Page 14
Chapter 13: Behavioral Economics
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Sample Questions
Q1) Disadvantages of experiments include
A) Decisions made in the laboratory replicate those made in the real world
B) Laboratory experiments introduce influences on decision making that are difficult to measure or control
C) The number of subjects is typically so large, that it is difficult to apply the results to economic behavior in the population
D) Costly
Q2) Gabby flips a fair coin and it comes up heads.Gabby suffers from the gambler's fallacy if
A) She thinks the coin will come up heads on the next flip because it came up heads on the previous flip
B) She is more willing to bet on the outcome of the next flip
C) She thinks the coin is less likely to come up heads because it came up heads on the previous flip
D) She thinks the coin is equally likely to come up heads or tails on the next flip
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Chapter 14: Equilibrium and Efficiency
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Q1) In a perfectly competitive market
A) Firms are price setters
B) Firms produce the quantity for which marginal cost equals price
C) Firms can increase profits by charging a price higher than the market price
D) Firms are quantity setters
Q2) Discuss some of the changes in the organization of the economic systems of countries transitioning from communism to capitalism.How does this type of market reform increase economic efficiency?
Q3) 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.
Q4) Characteristics of a perfectly competitive market include
A) The presence of transaction costs
B) Homogenous products
C) Few sellers, each with a large market share
D) All of these
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Page 16
Chapter 15: Market Intervention
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Sample Questions
Q1) A sales tax is an example of
A) A specific tax
B) An ad valorem tax
C) A lump sum tax
D) An income tax
Q2) A price support program
A) Lowers the market price by making purchases of a good, thereby increasing demand
B) Lowers the market price by making purchases of a good, thereby reducing demand
C) Raises the market price by making purchases of a good, thereby increasing demand
D) Raises the market price by making purchases of a good, thereby reducing demand
Q3) With a price floor
A) Producer surplus will fall if profits fall
B) Producer surplus will fall if profits rise
C) Producer surplus will increases if profits fall
D) Producer surplus always increases
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Chapter 16: General Equilibrium, Efficiency, and Equity
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Q1) The Edgeworth box
A) Is a diagram that shows two consumers' opportunities and choices in a single figure
B) Can be used to illustrate equilibrium in a simple exchange economy
C) Was first introduced by Francis Ysidro Edgeworth
D) All of these
Q2) Input efficiency
A) Means that holding constant the total amount of each input used in the economy, there is no way to increase any firm's output without decreasing the output of another firm
B) Is a requirement of Pareto efficiency in a consumption economy
C) Exists when it is possible to produce more of one good and at least as much of every other good using the same inputs
D) Is a requirement of inefficiency in a production economy
Q3) The market-clearing curve for substitutes is
A) Horizontal
B) Downward sloping
C) Vertical
D) Upward sloping
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Chapter 17: Monopoly
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Q1) 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.
Q2) The more elastic is the demand for a product
A) The greater the difference between marginal revenue and price
B) The closer is marginal revenue to the price
C) The more a firm must reduce its price to increase its sales
D) The more a firm must reduce its cost to increase its sales
Q3) A firm's price-cost margin
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
Q4) Significant market power exists in
A) All markets
B) Perfectly competitive markets
C) Unregulated markets
D) Monopoly markets and Oligopoly markets
Q5) Explain the difference between a monopoly and a monophony.
Page 19
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Chapter 18: Pricing Policies
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Q1) Discuss the differences between perfect and imperfect price discrimination and the benefits of each to a monopolist.
Q2) When a supermarket charges more per ounce for a small bottle of ketchup than a larger one,it is engaging in
A) Price discrimination based on observable customer characteristics
B) Perfect price discrimination
C) Quantity-dependent pricing
D) Quality-dependent pricing
Q3) A monopolist can perfectly price discriminate
A) When it can distinguish consumers with a high versus low willingness to pay
B) When it offers a menu of alternatives, designed so that different customers will make different choices based on their willingness to pay
C) If it knows perfectly the customer's willingness to pay for each unit its sells and can charge a different price for each unit
D) When it cannot distinguish consumers with a high versus low willingness to pay
Q4) Explain bundling and mixed bundling and the benefits to a multi product monopolist of such packaging schemes.
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Chapter 19: Oligopoly
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Q1) Business stealing arises when
A) Some of a new entrant's sales are due to new buyers in the market
B) Some of a new entrant's sales are due to stolen ideas
C) Some a new entrant's sales come at the expense of existing firms, whose sales contract after the new firm enters the market
D) A and B
Q2) In a setting of repeated competition
A) The cooperative outcome is the repetition in each period of the Nash equilibrium outcome that would arise were the firms to compete just once
B) The noncooperative outcome is the repetition in each period of the Nash equilibrium outcome that would arise were the firms to compete just once
C) The noncooperative outcome is the Nash equilibrium that arises only after firms compete many times
D) The cooperative outcome is the Nash equilibrium that arises after firms compete many times
Q3) Compare and contrast the Bertrand and Cournot models of oligopoly.Your discussion should include assumptions made,goals of the firms and the resulting outcomes.
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Chapter 20: Externalities and Public Goods
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Q1) A good is nonrival if
A) There is no way to prevent a person from consuming or using it
B) More than one person can consume it at the same time without affecting its value to others
C) Consumption of it involves perfect rivalry
D) Consumption is completely excludable
Q2) The economist who won the Nobel Prize in Economics for his path-breaking analysis of the ways in which property rights,transaction costs and institutions affect the allocation of economic resources is
A) John Nash
B) Arthur Cecil Pigou
C) Ronald Coase
D) Theodore Groves
Q3) Common property resources include
A) Movies
B) Fast food
C) Oceans
D) Professional baseball games
Q4) Explain ways in which the government can remedy an externality.
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