Microeconomic Analysis Test Bank
Course Introduction
Microeconomic Analysis delves into the decision-making processes of individuals, households, and firms, and examines how these agents interact within various market structures. The course covers fundamental concepts such as supply and demand, consumer and producer theory, production and cost analysis, market equilibrium, and welfare economics. Through theoretical models and real-world applications, students develop analytical tools to assess resource allocation, market efficiency, and the impacts of government intervention. By the end of the course, learners are equipped to critically evaluate microeconomic phenomena and apply rigorous reasoning to issues in policy and business contexts.
Recommended Textbook
Microeconomics 2nd Edition by B.
Douglas Bernheim
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Page 2
Chapter 1: Introduction
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Sample Questions
Q1) In a situation where a market failure occurs,
A) any government intervention will improve on the market outcome.
B) there is nothing that the government can do to improve on the market outcome.
C) government intervention might improve on the market outcome.
D) it will always be preferable to have the government intervene in the market.
Answer: C
Q2) A _______ is an enforceable claim on a good or service.
A) deed
B) government decree
C) price
D) property right
Answer: D
Q3) In a ______ economy,the allocation of resources is governed by voluntary trading among businesses and consumers.
A) capitalist
B) communist
C) socialist
D) traditional
Answer: A
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Page 3
Chapter 2: Supply and Demand
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Sample Questions
Q1) Suppose there is an increase in the supply of a good.Which of the following statements is true?
A) The closer the demand curve is to being vertical, the larger the decrease in equilibrium price, and the smaller the increase in equilibrium quantity.
B) The closer the demand curve is to being horizontal, the larger the decrease in equilibrium price, and the smaller the increase in equilibrium quantity.
C) The closer the demand curve is to being vertical, the smaller the decrease in equilibrium price, and the larger the increase in equilibrium quantity.
D) The closer the demand curve is to being vertical, the larger the increase in equilibrium price, and the smaller the decrease in equilibrium quantity.
Answer: A
Q2) An inferior good is characterized by:
A) a positive income elasticity of demand.
B) a negative income elasticity of demand.
C) a negative price elasticity of demand.
D) a positive price elasticity of demand.
Answer: B
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Chapter 3: Balancing Benefits and Costs
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Sample Questions
Q1) Consider a consumer choosing between spending her money on food,F,or clothing,C. Assume that a unit of food and a unit of clothing have the same price, and that the consumer can afford a total of 20 units of either food or clothing. If B stands for benefits then "B(F) + B(C)" is the:
A) constraint.
B) objective function.
C) optimization problem.
D) sunk cost.
Answer: B
Q2) Suppose that the slope of a line tangent to the total cost curve at point X is steeper than the slope of a line tangent to the total benefit curve at point X,then:
A) net benefit would be increased by reducing the amount of the activity.
B) net benefit would be decreased by reducing the amount of the activity.
C) net benefit would be increased by increasing the amount of the activity.
D) net benefit is maximized.
Answer: A
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Chapter 4: Consumer Preferences
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Sample Questions
Q1) The decisions consumers make about which goods to consume are interrelated because:
A) the enjoyment of one good often depends on the consumption of other goods.
B) consumers have perfect information regarding all possible consumption bundles.
C) consumers can't always distinguish between goods.
D) consumers are often indifferent between different goods.
Q2) When comparing two alternatives X and Y,a consumer either prefers X to Y,prefers Y to X,or is indifferent between them.This property is called:
A) transitivity.
B) completeness.
C) the ranking principle.
D) the choice principle.
Q3) A "bad" would be associated with:
A) zero marginal utility.
B) a very small amount of marginal utility.
C) negative marginal utility.
D) positive marginal utility.
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Chapter 5: Constraints, Choices, and Demand
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Sample Questions
Q1) If the price of the good measured on the horizontal axis is subject to volume penalties,then:
A) the budget line will get steeper as the consumer moves along it from left to right.
B) the budget line will get flatter as the consumer moves along it from left to right.
C) the indifference curve will get steeper as the consumer moves along it from left to right.
D) the indifference curve will get flatter as the consumer moves along it from left to right.
Q2) Using carefully-labeled graphs,explain how an individual demand curve is derived from the utility-maximizing behavior of a consumer.
Q3) If two goods are substitutes,then an increase in the price of one will cause:
A) a leftward shift of the demand curve for the other good.
B) a rightward shift of the demand curve for the other good.
C) a movement up and to the left along the demand curve for the other good.
D) a movement down and to the right along the demand curve for the other good.
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Chapter 6: Demand and Welfare
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Sample Questions
Q1) If a good is _______,the income effect is negative for a price increase and positive for a price decrease.
A) inferior
B) superior
C) normal
D) Giffen
Q2) When the price of a good decreases:
A) the good becomes less expensive relative to other goods and the consumer's purchasing power increases.
B) the good becomes less expensive relative to other goods and the consumer's purchasing power decreases.
C) the good becomes more expensive relative to other goods and the consumer's purchasing power increases.
D) the good becomes more expensive relative to other goods and the consumer's purchasing power decreases.
Q3) Assume an individual has 14 hours per day for either work or leisure.Using an indifference curve graph,derive an individual's labor supply curve.In your answer,explain what might cause the individual's labor supply curve to eventually bend backwards.
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8
Chapter 7: Technology and Production
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Sample Questions
Q1) Two inputs ______ when they must be combined in a fixed ratio.
A) are perfect substitutes
B) are perfect complements
C) represent Cobb-Douglas technology
D) are fixed inputs
Q2) As long as a firm can freely dispose of any extra inputs it may have:
A) its production function must slope downward.
B) its production function must be concave.
C) its production function must slope upward.
D) its production function must be convex.
Q3) A firm's _______ shows the amount of output a firm can produce from given amounts of inputs using efficient production methods.
A) production possibilities set
B) efficient production frontier
C) production function
D) production possibilities curve
Q4) Define decreasing returns to scale,illustrating your definition with isoquants.What are some reasons why firms might experience decreasing returns to scale?
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Chapter 8: Cost
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Sample Questions
Q1) Suppose a firm's technology is represented by the Cobb-Douglas production function F(L,K)= 5LK.The wage rate is $50 and the rental rate of capital is $10.What is the least-cost combination to produce 100 units of output?
Q2) Suppose that MP<sub>L</sub> = 20 and MP<sub>K</sub> = 21.If W = 10 and R = 11,then a firm:
A) is producing its output at the lowest possible cost.
B) could reduce costs by employing more labor and less capital. C) could reduce costs by employing more capital and less labor. D) could minimize costs by employing more of both inputs.
Q3) Suppose a firm has a weekly cost function of C(Q)= 8Q + (Q<sup>2</sup>/100)and a marginal cost function of MC = 8 + (Q/50).What is the efficient scale of production,and what is the minimum average cost?
A) Q<sup>e</sup> = 0; AC = $0
B) Q<sup>e</sup> = 0; AC = $8
C) Q<sup>e</sup> = 8; AC = $8
D) Q<sup>e</sup> = 8; AC = $64.64
Q4) Suppose a firm's technology is represented by the function Q = F(L,K)= 5L<sup>0.25</sup>K<sup>0.75</sup>.Does this firm experience economies of scale,diseconomies of scale or neither?
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Chapter 9: Profit Maximization
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Sample Questions
Q1) Jessica owns a company that makes pre-packaged sandwiches for convenience stores.The market price for a sandwich is $5 and Jessica is a price-taker.Her daily variable cost for making sandwiches is C(Q)= 2.5Q + (Q<sup>2</sup>/40)and her marginal cost is MC = 2.5 + (Q/20).What is the average cost of a sandwich at the quantity of sandwiches Jessica should be selling each day?
A) $1.25
B) $2.50
C) $3.75
D) $6.25
Q2) When a firm is a price taker,changes in its sales quantity have ______ effect on the price it can charge.
A) a positive
B) a negative
C) no
D) little
Q3) Graphically illustrate the quantity rule and the shutdown rule for a price-taking firm.
Q4) Using a graph,explain why the law of supply holds for a competitive firm.
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11
Chapter 10: Choices Involving Time
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Sample Questions
Q1) A project is profitable when its internal rate of return is ______ the interest rate.
A) greater than
B) less than
C) equal to
D) less variable
Q2) Suppose you have put $5,000 into a project that should generate cash inflows of $1,250 for each of the next 5 years.If the interest rate is 8% is this a good investment?
A) Yes, because you will earn a profit of $1,250 dollars in 5 years
B) Yes, because the internal rate of return is higher than the interest rate
C) No, because the internal rate of return is higher than the interest rate
D) No, because the net present value is negative
Q3) The amount of money borrowed in a transaction is called:
A) interest.
B) principal.
C) internal rate of return.
D) present discounted value.
Q4) What would the interest rate need to be in order to earn $100 on an investment of $1,000 over two years? Assume interest compounds annually.
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Page 12
Chapter 11: Choices Involving Risk
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Sample Questions
Q1) An insurance premium is:
A) the contract that reduces the financial loss associated with some risky event.
B) the amount of money a policy holder pays for the insurance policy.
C) the amount of money a policy holder receives if a specific loss occurs.
D) the probability of loss from a specific event.
Q2) Assume Brandon's benefit function for water is S(W)= W and he consumes water both in droughts,W<sub>D</sub>,or in the rainy season,W<sub>R</sub>.Assume his current consumption bundle is W<sub>D</sub> = 36 and W<sub>R</sub> = 25 and the probability of drought is 0.75.What is Brandon's expected utility?
A) 5.75
B) 33.25
C) 11
D) 30.5
Q3) If two investments are perfectly positively correlated:
A) there is no benefit from diversification.
B) bets are perfectly hedged and risks are canceled out.
C) diversification reduces risk without changing the expected payoff.
D) diversification reduces both risk and the expected payoff.
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Chapter 12: Choices Involving Strategy
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Sample Questions
Q1) In a Nash equilibrium:
A) the strategy played by an individual depends upon the strategy played by other players
B) the strategy played by each individual is a best response to the strategies played by everyone else
C) there is no incentive for any player to deviate
D) All of these are correct.
Q2) 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.
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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14
Chapter 13: Behavioral Economics
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Sample Questions
Q1) A dieter who prefers to eat small portions at his next meal,but chooses a large portion at mealtime when it arrives is:
A) dynamically consistent.
B) dynamically inconsistent.
C) exhibiting self-control.
D) exhibiting a past bias.
Q2) A person who is,all else equal,more willing to throw away a $20 shirt than a $200 shirt,even if both are worn out,is:
A) dynamically inconsistent.
B) dynamically consistent.
C) demonstrating sunk cost fallacy.
D) demonstrating pre-commitment.
Q3) A person is dynamically consistent if:
A) his preferences over the alternatives available at some future date change as the date approaches.
B) his preferences over the alternatives available at some future date do not change as the date approaches.
C) he is also statically consistent.
D) None of these is correct.
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Page 15
Chapter 14: Equilibrium and Efficiency
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Sample Questions
Q1) Suppose the market demand for milk is Q<sup>d</sup> = 1505P.Additionally,suppose that a dairy's variable costs are VC = 2Q<sup>2</sup> (where Q is the number of gallons of milk produced each day),its marginal cost is MC = 4Q and there is an avoidable fixed cost of $50 per day.In the long run there is free entry into the market.Suppose the demand for milk doubles.If in the short run the number of firms is fixed and their fixed costs are sunk,what is each of the active firms' profit per unit in the short run equilibrium?
A) $3.67 per unit
B) $20.33 per unit
C) $24.00 per unit
D) $6.67 per unit
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 supply curve is vertical at the market quantity.
D) the long run market demand curve is horizontal at the market price.
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Chapter 15: Market Intervention
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Sample Questions
Q1) Suppose the market demand function for ice cream is Q<sup>d</sup> = 10 - 2P and the market supply function for ice cream is Q<sup>s</sup> = 4P - 2,both measured in millions of gallons of ice cream per year.Suppose the government imposes a $0.50 tax on each gallon of ice cream.The consumer surplus with the tax is:
A) $166,667.
B) $3.56 million.
C) $7.11 million.
D) $9 million.
Q2) The market demand function for wheat is Q<sup>d</sup> = 10 - 2P and the market supply function is Q<sup>s</sup> = 4P - 2,both measured in billions of bushels per year.Suppose the government wants to increase the price of wheat to $3/bushel and they impose a voluntary production reduction program to achieve their goal.How much would the government have to pay farmers?
A) $1.5 billion
B) $3 billion
C) $4.5 billion
D) $18 billion
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Page 17
Chapter 16: General Equilibrium, Efficiency, and Equity
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Sample Questions
Q1) A point inside the utility possibility frontier is:
A) inefficient.
B) impossible.
C) efficient.
D) desirable.
Q2) A market-clearing curve for a good:
A) shows the quantities supplied and demanded for a particular product.
B) shows the combinations of prices, both for that good and for other related goods, that bring supply and demand for the good into balance.
C) shows the quantities supplied and demanded for all goods.
D) shows equilibrium in a particular market.
Q3) The first welfare theorem:
A) tells us that, in a general equilibrium with perfect competition, the allocation of resources is Pareto efficient.
B) clarifies how the "invisible hand" of the market guides people toward socially undesirable choices.
C) tells us that a general equilibrium with perfect competition is not Pareto efficient.
D) is also the only welfare theorem.
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Chapter 17: Monopoly
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Sample Questions
Q1) The ________ consumers make decisions about whether to purchase that ________ affected by small changes in price or quality,therefore a quality improvement for these consumers is not profitable.
A) inframarginal; are B) inframarginal; are not C) marginal; are D) marginal; are not
Q2) The Solo Coal Mine is the only employer in the small town of Way out there.The market supply of coal miners is Q<sup>s</sup> = 0.02W - 200 and Q<sup>d</sup> = 500
- 0.02W,where W is the annual wage of a coal miner and Q is the number of coal miners.What is the deadweight loss in the market for coal miners due to the monopsony?
A) $250,000
B) $500,000
C) $125,000
D) $750,000
Q3) Explain the difference between a monopoly and a monopsony.
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) Suppose Always There Wireless serves 100 high-demand wireless consumers,who each have a monthly demand curve for wireless minutes of Q<sup>d</sup><sub>H</sub> = 200 - 100P,and 300 low-demand consumers,who each have a monthly demand curve for wireless minutes of Q<sup>d</sup><sub>L</sub> = 100 - 100P,where P is the per-minute price in dollars.The marginal cost is $0.25 per minute.Suppose Always There Wireless charges $0.25 per minute.How many minutes will high-demand consumers purchase?
A) 75
B) 175
C) 200
D) 100
Q2) A movie monopolist sells to students and adults.The demand function for students is Q<sup>d</sup><sub>S</sub> = 600 - 100P and the demand function for adults is Q<sup>d</sup><sub>A</sub> = 1,200 - 100P.The marginal cost is $2 per ticket.Suppose the movie theater can price discriminate.What is the monopolist's profit from students?
A) $400
B) $2400
C) $2500
D) $0
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Page 20
Chapter 19: Oligopoly
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Q1) Suppose the daily demand for Coke and Pepsi in a small city are given by Q<sub>C</sub> = 90 - 100P<sub>C</sub> + 400(P<sub>P</sub> - P<sub>C</sub>)and Q<sub>P</sub> = 90 - 100P<sub>P</sub> + 400(P<sub>C</sub> - P<sub>P</sub>),where Q<sub>C</sub> and Q<sub>P</sub> are the number of cans Coke and Pepsi sell,respectively,in thousands per day.P<sub>C</sub> and P<sub>P</sub> are the prices of a can of Coke and Pepsi,respectively,measured in dollars.The marginal cost is $0.45 per can for both Coke and Pepsi.If P<sub>C</sub> = $0.60,what is Pepsi's demand function?
A) Q<sub>P</sub> = 90 - 500P<sub>P</sub>
B) Q<sub>P</sub> = 330 - 400P<sub>P</sub>
C) Q<sub>P</sub> = 500 - 330P<sub>P</sub>
D) Q<sub>P</sub> = 330 - 500P<sub>P</sub>
Q2) In the Cournot 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.
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Page 21
Chapter 20: Externalities and Public Goods
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Q1) Suppose a paper mill earns $1,000,000 in profits when it pollutes a river,and it can abate pollution at a cost of $120,000.The effects of the pollution are confined to a single farmer who earns $400,000 if the water he uses from the river is clean,and $300,000 if it's polluted.Suppose the law guarantees the farmer access to clean water from the river.Which of the following describes an efficient outcome in this case?
A) The owner of the mill is unable to pay the farmer enough to secure his permission to pollute the river.
B) The farmer is unable to pay the owner of the mill enough to get him to stop polluting.
C) The owner of the mill pays the farmer $110,000 for his permission to pollute the river.
D) The farmer pays the owner of the mill $90,000 to stop polluting.
Q2) 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.
Q3) Explain ways in which the government can remedy an externality.
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Chapter 21: Asymmetric Information
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Q1) When informed parties prefer trading circumstances that are disadvantageous to uninformed trading partners,economists say that ________ has occurred.
A) information disequilibrium
B) moral hazard
C) signaling
D) adverse selection
Q2) In competitive markets,cross-subsidization is:
A) certain to emerge.
B) impossible.
C) one of many possible equilibrium outcomes.
D) a profit-maximizing strategy.
Q3) Adverse selection can cause attractive trading partners to be driven from a market by unattractive trading partners,whose presence alters prices at which attractive trading partners could trade.This unfortunate result is known as:
A) market unraveling.
B) signal confusion.
C) moral hazard.
D) conspicuous consumption.
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