Microeconomic Analysis Practice Questions
Course Introduction
Microeconomic Analysis explores the foundational principles governing the behavior of individual consumers and firms in various market structures. The course delves into concepts such as demand and supply, consumer choice, production and cost, market equilibrium, and the impact of government intervention on markets. Emphasis is placed on analytical tools and mathematical models to evaluate how economic agents make decisions and respond to changes in market conditions. Students will apply these concepts to real-world scenarios, deepening their understanding of resource allocation, pricing strategies, and efficiency within different competitive and non-competitive environments.
Recommended Textbook
Microeconomics An Intuitive Approach with Calculus 2nd Edition by Thomas Nechyba
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713 Verified Questions
713 Flashcards
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Chapter 1: Introduction
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Sample Questions
Q1) Positive economics can tell us which policies are efficient and which are not.
A)True
B)False
Answer: True
Q2) One of the aims of positive economics is to rank policies under consideration from most desirable to least desirable.
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
Q4) Each economic model can be applied to many different real-world problems.
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 vertical axis is a composite good, the slope of the budget line is equal to minus the price of the good on the horizontal axis.
A)True
B)False
Answer: True
Q2) In a graph of choice sets, a price change affects the ratio but does not affect the budget line.
A)True
B)False
Answer: False
Q3) In a graph of choice sets, a price change causes the slope of budget lines to change.
A)True
B)False
Answer: True
Q4) If a consumer's fixed income increases, his opportunity cost also increases.
A)True
B)False Answer: False
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Chapter 3: Economic Circumstances in Labor and Financial Markets
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Sample Questions
Q1) The opportunity cost of current consumption differs for borrowers and savers only if the interest rate for savers differs from the interest rate for borrowers.
A)True
B)False
Answer: True
Q2) 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
Q3) Changes in interest rates cause the same rotations of intertemporal budget lines regardless of whether you are a borrower or a saver.
A)True
B)False
Answer: False
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Chapter 4: Tastes and Indifference Curves
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Sample Questions
Q1) 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
Q2) You like bundle A better than bundle B, and bundle C is an average of bundles A and B.Which of the following is correct if your tastes satisfy our usual assumptions?
A)Bundle C is at least as good as bundle B.
B)Bundle A is at least as good as bundle C.
C)Both (a) and (b).
D)None of the above.
E)There is not enough information to tell.
Q3) The number of units of the good on the horizontal axis that we are willing to give up to get one more unit of the good on the vertical axis is equal to the absolute value of the slope of the indifference curve.
A)True
B)False
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) Suppose the only characteristic of beer that a consumer cares about is alcohol content.Currently, Bud Light and Miller Lite both have the same alcohol content.
a.Illustrate the consumer's indifference curves in a graph with ounces of Miller Lite on the horizontal and ounces of Bud Light on the vertical axis.
b.Suppose that the producers of Bud Light lower the price of Bud Light.How will your answer to (a) change?
c.Suppose that the producers of Bud Light lower the alcohol content of their beer by 50%.How will your answer to (a) change?
d.Since we identify tastes with indifference maps, would you say that the consumer's tastes have changed in (b) or (c)?
e.How could we change the units we use to measure Miller Lite in order to get the indifference map in (c) to again look like the one in (a)?
Q2) There are no quasilinear tastes that have constant elasticity of substitution.
A)True
B)False
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Chapter 6: Doing the Best We Can
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Sample Questions
Q1) Suppose tastes satisfy our usual assumptions.Kinks in budget constraints do not give rise to the possibility of multiple solutions unless the kinds produce a non-convexity in the choice set.
A)True
B)False
Q2) Kinks in budget constraints always produce non-convexities in choice sets.
A)True
B)False
Q3) Suppose that choice sets are convex.State assumptions about tastes that are necessary and sufficient to guarantee that the solution to the consumer optimization problem is a unique interior solution.(Explain)
Q4) The only way a consumer can optimize at a corner of her budget is if at least one of the goods is not essential.
A)True
B)False
Q5) If not all goods are essential, a consumer will end up optimizing at a corner solution.
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) The price of peaches goes up and I observe you buying more strawberries.This implies that strawberries must be an inferior good.
A)True
B)False
Q2) The price of peaches goes up and I observe you buying more strawberries.This implies strawberries must be a normal good.
A)True
B)False
Q3) Homothetic goods are neither necessities nor luxuries, but rather lie on the borderline between them.
A)True
B)False
Q4) Quasilinear goods are borderline goods between the set of normal and the set of inferior goods.
A)True
B)False
Q5) Every necessity is a normal good, but not all normal goods are necessities. A)True
B)False
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Chapter 8: Wealth and Substitution Effects in Labor and Capital Markets
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Sample Questions
Q1) If leisure is an inferior good, then an increase in wages will cause workers to work more.
A)True B)False
Q2) When tastes over current and future consumption are characterized by Cobb-Douglas utility functions, a borrower who has no income now and all income in the future will borrow more when the interest rate falls.
A)True B)False
Q3) In a model of consumption and leisure, a drop in the wage will cause workers to work more if tastes are quasilinear in consumption.
A)True B)False
Q4) The amount of work a person will do as wage increases depends entirely on the size of the wealth effect.
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) Goods like exclusive designer clothes carry with them prestige value linked to their price.As a result, some people demand more of such goods as the price increases.For those people, such goods are Giffen goods.
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) Since income and substitution effects point in the same direction for normal goods, the leisure demand curve will be shallower if leisure is a normal good than if leisure is an inferior good.
A)True B)False
Q4) The cross-price demand curve for Cobb-Douglas tastes is perfectly vertical. A)True B)False
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Chapter 10: Consumer Surplus and Deadweight Loss
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Sample Questions
Q1) An increase in income causes compensated demand curves to shift inward and regular demand curves to shift outward.
A)True
B)False
Q2) Whenever indifference curves have kinks, marginal willingness to pay curves have horizontal "flat spots".
A)True
B)False
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 analyze changes in consumer surplus.
A)True
B)False
Q4) Consumer surplus is accurately measured along (uncompensated) demand curves when tastes are quasilinear.
A)True
B)False
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Chapter 11: One Input and One Output: a Short-Run
Producer Model
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Sample Questions
Q1) Labor demand curves are homogeneous of degree zero.
A)True
B)False
Q2) Labor demand curves always slope down.
A)True
B)False
Q3) If the single-input producer choice set is convex, the marginal product of labor curve must have a negative slope that is getting steeper with increases in labor input.
A)True
B)False
Q4) Output supply curves always slope up in the one-input model.
A)True
B)False
Q5) A competitive (price-taking) firm will produce so long as its economic profit is sufficiently above zero to enable the firm to pay the owners of the firm for their time and effort.
A)True
B)False
13
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Chapter 12: Production With Multiple Inputs
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Sample Questions
Q1) There are two economically meaningful ways of slicing two-input production frontiers.
A)True
B)False
Q2) Conditional input demands are homogeneous of degree zero in input prices.
A)True
B)False
Q3) If a production technology has diminishing marginal product of all inputs throughout, then the producer choice set is convex.
A)True
B)False
Q4) We have worked a lot with homothetic production technologies.Suppose instead that a production process that uses capital and labor is quasilinear in capital and that capital is fixed in the short run.Then, assuming the firm currently profit maximizes at a given wage and rental rate, the short and long run slices of the production frontier are identical.
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) Which of the following are true in a graph of isoquants (with capital on the vertical and labor on the horizontal) assuming a given wage and rental rate.
A)All long-run cost minimizing input bundles lie on a ray from the origin.
B)(a) is true only if the production technology is homothetic.
C)All short-run cost minimizing input bundles lie on a horizontal line.
D)(c) is true only if the production technology is homothetic.
E)(a) and (c) are true.
F)(b) and (c) are true.
G)(a) and (d) are true.
H)None of the above.
Q2) Conditional input demand curves always slope down, but unconditional input demand curves can slope up.
A)True
B)False
Q3) The more substitutable capital and labor are in production, the more likely it is that the cross-price demand curve for capital (relative to the wage) is upward sloping.
A)True
B)False
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Chapter 14: Competitive Market Equilibrium
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Sample Questions
Q1) 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
Q2) Suppose there are no recurring fixed costs and the daily production process for all identical firms in a perfectly competitive industry has decreasing returns to scale throughout.Then each firm will only produce a single good each day when the industry is in long run equilibrium.
A)True
B)False
Q3) 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
Q4) An increase in labor demand accompanied by a decline in labor supply cannot result in a decline in wages.
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) Which of the following is true about competitive equilibria in environments where the conditions of the first welfare theorem are satisfied?
A)We have to be able to represent the demand side of the economy by a representative consumer.
B)Consumer surplus is smaller than what would be estimated if it were measured on the market demand curve when goods are normal.
C)Producer surplus is zero in the long run when all firms share the same technology.
D)(a) and (b) are true.
E)(b) and (c) are true.
F)(a) and (c) are true.
G)All of the above.
H)None of the above.
Q2) Aggregate producer surplus in an industry can be measured along the market supply curve in the short run but not in the long run.
A)True
B)False
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Chapter 16: General Equilibrium
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Sample Questions
Q1) If the two individuals' indifference curves through their endowment bundles are tangent to one another at the endowment bundle (in the Edgeworth Box), then the endowment bundle is a competitive equilibrium allocation.
A)True
B)False
Q2) 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."
Q3) The First Welfare Theorem holds that the allocation of goods resulting from competitive prices is "efficient," which is the equivalent of "equitable."
A)True
B)False
Q4) In and Edgeworth Box economy, no one strictly prefers the endowment allocation to the competitive equilibrium allocation.
A)True
B)False
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Chapter 17: Choice and Markets in the Presence of Risk
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Sample Questions
Q1) Actuarily fair insurance reduces risk without changing the expected value of a gamble.
A)True
B)False
Q2) Expected utility theory assumes that individuals have utility functions over a composite consumption good.
A)True
B)False
Q3) Gamble A results in $10 with probability 0.4 and $30 with probability 0.6.Gamble B results in $20 with probability 1.If an individual prefers Gamble A to Gamble B, the independence axiom implies that he prefers Gamble C that gives $0 with probability 0.5, $10 with probability 0.2 and $30 with probability 0.3 to Gamble D that results in $20 with probability 0.5 and $0 with probability 0.5.
A)True
B)False
Q4) 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
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Chapter 18: Elasticities, Price-Distorting Policies, and Non-Price Rationing
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Sample Questions
Q1) 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
Q2) 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
Q3) Demand curves with constant slopes must have different own-price elasticities as one moves along the demand curve.
A)True
B)False
Q4) Unless goods are Giffen goods, own-price elasticities of demand are always negative.
A)True
B)False
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Chapter 19: Distortionary Taxes and Subsidies
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Sample Questions
Q1) If demand is linear, tax revenue rises at a constant rate as per unit taxes increase.
A)True
B)False
Q2) 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
Q3) As demand and supply become more elastic, taxes reduce market output more and raise less tax revenue.
A)True
B)False
Q4) A tax on interest income could be efficient even if it leads to a decrease in savings. A)True
B)False
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Chapter 20: Prices and Distortions Across Markets
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Q1) 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?
Q2) Suppose the price of good x in country A is lower than the price of good x in country B when no trade is permitted.In the absence of transportation costs, if the supply curve for good x in the two countries is sufficiently elastic, free trade in good x implies that country B will stop producing x.
A)True
B)False
Q3) Explain the impact of speculators on markets is similar and how it may be different from the impact of exporters and importers.
Q4) When tariffs on imports are eliminated, everyone benefits. A)True
B)False
Q5) Quality of life indexes produced in popular magazines often place a heavy emphasis on the cost of housing in different cities -- with a lower housing cost entering the index as a positive feature of the city.Why might such quality of life indeces be misleading?
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Chapter 21: Externalities in Competitive Markets
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Sample Questions
Q1) Explain how the introduction of an additional competitive market can always solve the efficiency problem that emerges from a negative externality.
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) Explain how the introduction of an additional competitive market can always solve the efficiency problem that emerges from a positive externality.
Q4) When set correctly, a Pigouvian tax is efficient because it is equivalent to a lump sum tax.
A)True
B)False
Q5) 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.
Q6) Explain how any cap-and-trade system can be made to be equivalent to a pollution tax and vice versa.
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Chapter 22: Asymmetric Information in Competitive Markets
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Q1) In the presence of asymmetric information, high-cost and low-cost customers are charged asymmetric prices.
A)True
B)False
Q2) A pooling equilibrium in insurance markets is inefficient because everyone buys too little insurance (relative to the efficient amount).
A)True
B)False
Q3) If all consumers are willing to buy insurance at the zero-profit pooling price, there cannot be a separating equilibrium.
A)True
B)False
Q4) Universal health insurance policies fall into three categories: single payer/single provider systems, single payer systems, and regulated insurance markets.The United States has elements of two of these.
A)True
B)False
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Chapter 23: Monopoly
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Sample Questions
Q1) In the presence of positive production externalities, a monopolist might produce the efficient output level.
A)True
B)False
Q2) Under second degree price discrimination, the average price per unit paid by high demand consumers is not equal to marginal willingness to pay for one additional unit.
A)True
B)False
Q3) Suppose a monopolist faces a constant elasticity market demand curve with price elasticity equal to -2.What will be the price charged by this monopolist assuming constant marginal cost of 10.
A)100
B)80
C)50
D)30
E)20
F)10
G)infinity
H)None of the above
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Chapter 24: Strategic Thinking and Game Theory
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Q1) Bayesian updating in a separating equilibrium implies the initially uninformed player will fully know what type he is playing when he has to make his move.
A)True
B)False
Q2) If everyone has a dominant strategy in a simultaneous move game, then the action that is played by that strategy is played in all stages of any finitely repeated version of that game in any subgame perfect equilibrium.
A)True
B)False
Q3) A dominant strategy is one that is prevailing.
A)True
B)False
Q4) 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) Explain why firms in a cartel might lobby for government regulation.
Q2) Cartels tend not to be long-lived because of the Prisoner's Dilemma.
A)True
B)False
Q3) In the presence of negative pollution externalities, it is more efficient to have Cournot competitors than Bertrand competitors.
A)True
B)False
Q4) 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?
Q5) A firm that is the only firm in the industry may not behave like a monopolist in order to deter entry of other firms.
A)True
B)False
Q6) Two firms in an oligopoly can always do better if one firm buys the other.
A)True
B)False
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Chapter 26: Product Differentiation and Innovation in Markets
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Q1) 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
Q2) In a monopolistically competitive market with Dixit-Stiglitz preferences, the number of firms in the differentiated product market falls as goods in that market become less substitutable.
A)True
B)False
Q3) In a monopolistically competitive market with Dixit-Stiglitz preferences, equilibrium price falls as the goods in the differentiated product market become more substitutable. A)True
B)False
Q4) Comment on the following statement: "Since product differentiation allows price competitors to establish some market power, it would be more efficient to not permit product differentiation."
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Chapter 27: Public Goods
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Q1) Suppose some people like national defense and others are offended by it -- i.e.some people derive positive marginal benefit and others derive negative marginal benefit.Efficiency then demands that national defense is produced until the sum of the positive marginal benefits is equal to the (absolute value) of the negative marginal benefits.
A)True
B)False
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) In a game where individuals are asked to contribute to a public good, best response functions slope down because each individual believes the other will not give very much. A)True
B)False
Q4) If private giving to public goods involves externalities, what is a Pigouvian solution to the public goods problem?
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Chapter 28: Governments and Politics
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Q1) Consider voter preferences over a public good y that is being funded by a proportional income tax.
a.Illustrate how this might lead to single peaked voter preferences.
b.Suppose there exists a privately available good x that is substitute for y.How does this introduce non-single peakedness?
c.Now suppose x is relatively complementary to y.What would you expect to happen to voter preferences as this complementarity gets stronger?
Q2) It is possible to come up with a democratic social choice process that satisfies Arrow's axioms as long as we are willing to let go of the No Dictatorship axiom.
A)True
B)False
Q3) Vote trading in legislatures can lead to efficient outcomes that might otherwise not have been reached.
A)True
B)False
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Chapter 29: What Is Good Challenges From Psychology and Philosophy
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Q1) Any consequentialist approach to normative economics that uses standard indifference maps as social indifference maps (over utilities or consumption) will choose efficient outcomes in the first-best case.
A)True
B)False
Q2) Normative economics often takes a consequentialist philosophical approach to determine whether a policy is good.
A)True
B)False
Q3) In a society in which everyone lives at the subsistence level, the Gini coefficient is 0. A)True B)False
Q4) Comment on the following: "Present-biased people are impatient, but impatient people don't necessarily have to be present-biased."
Q5) Prospect theory implies that individuals are risk loving over losses and risk averse over gains.
A)True
B)False
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