Microeconomic Theory
Exam Materials
Course Introduction
Microeconomic Theory explores the fundamental principles governing the behavior of individual consumers, firms, and markets. The course covers topics such as demand and supply analysis, consumer choice, production and cost functions, market structures (including perfect competition, monopoly, and oligopoly), and the role of government intervention. Students will develop analytical skills to understand how economic agents make decisions and how these decisions allocate resources efficiently. Emphasis is placed on both theoretical models and real-world applications, equipping students with tools to analyze market outcomes and policy implications.
Recommended Textbook
Microeconomics 1st Canadian Edition by B. Douglas Bernheim
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Page 2
Chapter 1: Introduction
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Sample Questions
Q1) In a communist economy,
A) The state controls the means of production
B) Individuals decide what to produce, how to produce it and who gets it
C) Economic decisions are decentralized
D) The market system is used to allocate resources
Answer: A
Q2) In most countries,decisions that affect medical expenditures are
A) Centralized
B) Decentralized
C) Determined by government policy
D) Both centralized and decentralized
Answer: D
Q3) The accumulation of scientific evidence
A) Can resolve normative disputes
B) Can resolve positive disagreements
C) Can determine whether one person's gain is more important than another person's loss
D) Can always settle disputes over public policy
Answer: B
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Page 3
Chapter 2: Supply and Demand3
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Sample Questions
Q1) If the demand for a good increases a the same time the supply of the good decreases,what happens to equilibrium price and quantity?
A) Equilibrium quantity increases, but the effect on equilibrium price is ambiguous
B) Equilibrium quantity decreases, but the effect on equilibrium price is ambiguous
C) Equilibrium price increases, but the effect on equilibrium quantity is ambiguous
D) Equilibrium price decreases, but the effect on equilibrium quantity is ambiguous change "a" to "and at"
Answer: C
Q2) 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
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4
Chapter 3: Balancing Benefits and Costs
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Sample Questions
Q1) The cost associated with foregoing the opportunity to employ a resource in its best alternative use is called
A) A sunk cost
B) An opportunity cost
C) A fixed cost
D) Total cost
Answer: B
Q2) A sunk cost
A) Causes a decision maker to choose to pursue less of an activity
B) Causes a decision maker to choose to pursue more of an activity
C) Increases the marginal cost of an activity
D) Has no effect on a decision maker's best choice
Answer: D
Q3) The marginal cost of action choice X
A) Measures the additional cost of a small change in X
B) Tends to decrease as X increases
C) Measures the cost that a decision maker has already incurred by pursuing activity X
D) Is minimized at the best level of activity X
Answer: A
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Page 5
Chapter 4: Principles and Preferences
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Sample Questions
Q1) Using a carefully-labeled graph,explain the concept of declining marginal rate of substitution.Why would we expect indifference curves to exhibit this characteristic?
Q2) According to Figure 4.1,which of the following statements is true?
A) Bundle A would be preferred to bundle C
B) Bundle A would be preferred to bundle B
C) Bundle C would be preferred to bundle D
D) Bundle B would be preferred to bundle A
Q3) The marginal rate of substitution between two goods is given by
A) The inverse of the slope of an indifference curve
B) The slope of a line tangent to an indifference curve
C) Negative one times the inverse of the slope of an indifference curve
D) Negative one times the slope of a line tangent to an indifference curve
Q4) Suppose that Frank is considering giving Mike eight paper back books in exchange for 2 CDs.Explain the conditions under which this trade would be mutually beneficial.Also explain the conditions under which Frank and Mike won't make the trade.
Q5) Compare and contrast cardinal utility and ordinal utility.Which concept is sufficient for ranking consumers' preferences? Why?
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Page 6
Chapter 5: Constraints, Choices, and Demand
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Sample Questions
Q1) The curve that shows how the best affordable consumption bundle changes as the price of a good changes (holding the consumer's income,preferences and all other prices fixed)is called
A) A price-consumption curve
B) An individual demand curve
C) An income-consumption curve
D) A budget line
Q2) Refer to Figure 5.3.Which of the following statements is false?
A) Points a, b and c all represent best choices for the consumer
B) Point a violates the No Overlap Rule
C) Point b satisfies the tangency requirement
D) Point c violates the No Overlap Rule
Q3) Suppose a consumer purchases pizza and soft drinks.If pizza is measured on the vertical axis and soft drinks are measured on the horizontal axis,then the slope of the budget line is equal to
A) The price of pizza divided by the price of soft drinks
B) The price of soft drinks divided by the price of pizza
C) The price of pizza divided by the price of soft drinks times negative one
D) The price of soft drinks divided by the price of pizza times negative one
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Page 7
Chapter 6: Rom Demand to Welfare
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Sample Questions
Q1) The amount of compensation associated with the income effect of a price change is called
A) A compensating variation
B) An income effect
C) Consumer surplus
D) A subsidy
Q2) Suppose an individual consumes just pizza and soda.Using a graph,explain how the substitution bias causes the Laspeyres price index to overstate the true change in the cost of living resulting from an increase in the price of pizza.
Q3) The effect of a compensated price change is known as:
A) The price effect of a price change
B) The income effect of a price change
C) The substitution effect of a price change
D) The replacement effect of a price change
Q4) Constructing an accurate cost-of-living index is difficult because
A) Consumers have different tastes
B) Prices of different goods change by different proportions
C) Prices of different goods change by the same proportions
D) Real and nominal income tend to move together
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Chapter 7: Technology and Production
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Sample Questions
Q1) Suppose a firm uses both labour (L)and capital (K)and its long-run production function is given by the expression Q = F(L,K)= 2LÖ(L + K).The firm currently uses 10 units of capital.Complete the following table:
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) Which of the following formulas represents the marginal rate of technical substitution of labour for capital?
A) MP<sub>/k</sub>/MP<sub>L</sub>
B) - K/ L
C) K/ L
D) MP<sub>L</sub>/MP<sub>K</sub>
Q4) Refer to Table 7.1.What is the marginal product of the 3<sup>rd</sup> worker?
A) 4 units of output
B) 3 units of output
C) 15 units of output
D) 5 units of output
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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) If Q represents a firm's level of output,W represents the wage paid to labour (L)and R is the cost of capital (K),then which of the following represents the firm's isocost line?
A) C(Q) = FC + VC(Q)
B) C(Q) = FC(Q) + VC(Q)
C) C(Q) = WL + RK
D) C(Q) = (W + R)Q
Q3) Diseconomies of scope occur when
A) A firm's input prices rise as it increases output
B) A firm's average cost of production rises as it increases production
C) Producing two products in a single firm is more expensive than producing them in separate firms
D) A firm's average cost of production falls as it increases production
Q4) 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) What type of cost has NO impact on determining the profit-maximizing sales quantity?
A) Avoidable fixed costs
B) Sunk fixed costs
C) Variable costs
D) Average variable costs
Q2) The simplified profit maximization equation is
A) Profit = Revenue - Cost
B) Profit = Revenue + Cost
C) Profit = Revenue/Cost
D) Profit + Revenue x Cost
Q3) Refer to Figure 9.5.Which area represents avoidable cost?
A) ABCDE
B) EDGF
C) EDCHF
D) CHGD
Q4) Suppose that a price-taking firm charges $12 for its product and has a cost function given by C(Q)= 2Q + (Q<sup>2</sup>/60).The corresponding marginal cost is given by C(Q)= 2 + (Q/30).How much output should the firm produce? What if the firm has $2,000 of avoidable fixed costs?
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Chapter 10: Choices Involving Time
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Sample Questions
Q1) Refer to Scenario 10.1.Given this information,what should Jennifer do upon graduating from high school?
A) Take the job
B) Go to college
C) Take the job until the interest rate goes down and then go to college
D) Cannot determine from the information given
Q2) Durable,marketable skills that generate higher income are also known as
A) Physical capital
B) Investment capital
C) Human capital
D) Education capital
Q3) 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.
Q4) The current worth of a claim on future resources is called
A) Net present value
B) Future value
C) Present discounted value
D) Internal rate of return
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Page 12
Chapter 11: Choices Involving Risk
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Sample Questions
Q1) What is the certainty equivalent of the bundle described in problem 18?
A) 3
B) 5
C) 25
D) 49
Q2) Refer to Figure g.Lily's benefit function (dashed)is more concave than Millie's (dotted)in Figure g.Millie
A) Is more risk averse than Lily
B) Is less risk averse than Lily
C) Has a larger risk premium than Lily
D) Has a lower certainty equivalent than Lily
Q3) 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
Q4) Explain the relationship between the correlation of payoffs and the risk reducing effects of diversification and hedging.
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13
Chapter 12: Choices Involving Strategy
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Sample Questions
Q1) Refer to Figures b and c.Assume instead of the rules described in problem 13,the girls' mother shows favoritism towards Kate because she is the younger of the two girls.If both girls deny watching TV,Kate will not be punished,but Alice will still be grounded for 3 weeks because she is older and should be setting a good example for her younger sister.The altered game is shown in the following payoff matrix.What is Kate's best response?
A) Squeal
B) Deny
C) She does not have one
D) It depends upon what Alice does
Q2) Refer to Figure d.In the game described in problem 21,for Travis,north is
A) The best response
B) The dominant strategy
C) Is weakly dominated
D) Dominated
Q3) Refer to Figure a.What is the Nash equilibrium in problem 9?
A) Charlie rock, Joe rock
B) Charlie rock, Joe paper
C) Charlie paper, Joe scissors
D) There is not one
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Chapter 13: Behavioral Economics
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Sample Questions
Q1) Motivations for behavioral economics include
A) People sometimes make choices that are consistent with standard economic theory
B) All choices made by individuals are consistent with standard economic theory
C) Standard economic theory can lead to unreasonable conclusions about consumer welfare
D) People always make choices that are inconsistent with standard economic theory
Q2) Evidence that people do not always make choices that reflect sensible preferences include
A) Choice reversals
B) Conformance to the principle of revealed preference
C) Conformance to the Ranking Principle
D) All of these
Q3) Advantages of experiments include
A) It is easier to determine whether people's choices are consistent with standard economic theory
B) It is often harder to establish causality
C) Cost saving
D) None of these
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15
Chapter 14: Equilibrium and Efficiency
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Sample Questions
Q1) Aggregate surplus
A) Equals consumers' total willingness to pay for a good less firms' total avoidable cost of production
B) Equals consumers' total willingness to pay for a good plus firms' total avoidable cost of production
C) Captures the net benefit created by the production and consumption of the good
D) A and C
Q2) Aggregate surplus
A) Is minimized under perfect competition
B) Is the difference between consumer and producer surpluses
C) Is the sum of consumer and producer surpluses
D) A and B
Q3) With free entry
A) The long run market supply curve is horizontal at the market price
B) The long run market supply curve is vertical at the market price
C) The short and long run market supply curves are the same
D) The short run market supply curve is horizontal at the market price
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16
Chapter 15: Market Intervention
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Sample Questions
Q1) A production quota program
A) Imposes limits on the quantity that individual firms can produce
B) Is a way to raise prices without causing the overproduction that occurs under a price support program
C) Places limitations on supply
D) All of these
Q2) A production quota program
A) Imposes limits on the price that individual firms can charge
B) Is a way to raise prices without causing the overproduction that occurs under a price support program
C) Places limitations on demand
D) Is a way to lower prices without causing the overproduction that occurs under a price support program
Q3) With a price floor
A) Consumer surplus falls and producer surplus falls
B) Consumer surplus increases and producer surplus falls
C) Consumer surplus falls and producer can increase or decrease
D) Consumer surplus increases and producer surplus increases
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17
Chapter 16: General Equilibrium, Efficiency, and Equity
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Q1) Partial equilibrium analysis
A) Concerns competitive equilibrium only in the factor markets
B) Concerns competitive equilibrium only in the product markets
C) Concerns competitive equilibrium in a single market, considered in isolation
D) Is the study of competitive equilibrium in many markets at the same time
Q2) An endowment
A) Is the bundle of goods an individual starts out with before trading
B) Is the bundle of goods an individual ends up with after trading
C) Is the bundle of goods an individual inherits
D) Is the bundle of goods and individual donates
Q3) A point inside the utility possibility frontier is
A) Inefficient
B) Impossible
C) Efficient
D) Inefficient and Impossible
Q4) 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) If a firm's pass-through rate is greater than one
A) It could be behaving either competitively or as a monopolist
B) It must be a considered competitive
C) It is not behaving like a price taker
D) It is not behaving like a monopolist
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) Explain the difference between a monopoly and a monophony.
Q4) A monopoly market is
A) A market with many sellers
B) A market with a single seller
C) A market with a few sellers
D) A market with a few buyers
Q5) 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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Sample Questions
Q1) Explain bundling and mixed bundling and the benefits to a multi product monopolist of such packaging schemes.
Q2) Firms bundle their products because
A) It is technologically efficient to do so
B) It can increase a firm's ability to extract consumer surplus
C) It can increase a firm's profits
D) All of these
Q3) Discuss the differences between perfect and imperfect price discrimination and the benefits of each to a monopolist.
Q4) 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
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Chapter 19: Oligopoly
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Sample Questions
Q1) In a market for homogenous goods
A) Firms sell identical products
B) Firms sell different products
C) Firms sell identical products for identical prices
D) Firms sell different goods for identical prices
Q2) As products become less differentiated
A) Consumers are less willing to switch in response to price changes
B) Consumers are not willing to switch in response to price changes
C) Competition becomes less intense
D) Consumers are more willing to switch in response to price changes
Q3) When consumers do not view similar products as perfect substitutes,those products are called
A) Homogenous
B) Complements
C) Differentiated
D) Normal
Q4) 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) The economist that devised a method for setting the level of a public good efficiently is
A) John Nash
B) Arthur Cecil Pigou
C) Ronald Coase
D) Theodore Groves
Q2) Common property resources include
A) University courses
B) Fast food
C) Oceans
D) Lakes and Movies
Q3) A common property resource is
A) A resource that only one person can use
B) A resource that anyone can use for a fixed fee
C) A resource that more than one person is free to use without payment
D) A resource that only one person can use free of charge
Q4) Why might bargaining break down when parties negotiate to remedy a market failure and its associated externality?
Q5) Explain ways in which the government can remedy an externality.
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