Microeconomic Theory
Exam Materials
Course Introduction
Microeconomic Theory examines the fundamental principles that govern individual and firm decision-making in a market economy. The course explores topics such as consumer behavior, production and cost analysis, the structure and implications of various market forms (perfect competition, monopoly, oligopoly, and monopolistic competition), and the concept of market failure. Through the use of mathematical and graphical tools, students learn how prices and resource allocation are determined, and analyze the impact of government policies and externalities on market outcomes. This course provides a rigorous framework for understanding economic interactions at the micro level, laying the groundwork for advanced economic analysis and applications.
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) In order to predict behavior, economic models must be realistic.
A)True
B)False Answer: False
Q2) 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
Q3) A spontaneous order emerges from individual decisions that cause something to "work" without anyone planning for it to "work".
A)True
B)False
Answer: True
Q4) When economists say that policy A is more efficient than policy B, they mean policy A is better than policy B.
A)True
B)False Answer: False
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Chapter 2: A Consumers Economic Circumstances
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Sample Questions
Q1) Regardless of which consumption bundle in her choice set a consumer chooses, she will spend all of her available income.
A)True
B)False
Answer: False
Q2) If all consumers are price-takers facing the same prices, then their budget lines will all have the same slope.
A)True
B)False
Answer: True
Q3) While the endowment bundle must lie on the original budget line, it need not lie on the budget line when prices change.
A)True
B)False
Answer: False
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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Q1) 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
Q2) 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
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
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Chapter 4: Tastes and Indifference Curves
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Q1) Prove formally that the rationality axioms alone rule out the possibility of indifference curves crossing.
Q2) If you observe me choosing bundle A over bundle B on Monday, bundle B over bundle C on Tuesday and bundle C over bundle A on Wednesday, it must be that my tastes violate transitivity.
A)True
B)False
Q3) 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
Q4) Suppose bundle A is better than bundle B for a consumer, and bundle C is an average of bundles A and B.
a.Use the continuity, convexity and monotonicity assumptions to formally prove that this implies that bundle C is better than bundle B.
b.Did you also -- implicitly or explicitly -- use the rationality axioms?
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Chapter 5: Different Types of Tastes
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Q1) In the case of perfect complements, more is not necessarily better.
A)True
B)False
Q2) Homothetic tastes are always tastes over essential goods.
A)True
B)False
Q3) 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
Q4) Suppose our tastes are homothetic.It is often observed that people become more rigid --- more set in their ways --- as they get older.Can you translate this observation into "economics-speak" by discussing which feature of our tastes is likely the be changing as we get older?
Q5) There is no elasticity of substitution that is inconsistent with tastes being homothetic. A)True
B)False
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Chapter 6: Doing the Best We Can
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Q1) 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
Q2) Essential goods give rise to corner solutions.
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) If not all goods are essential, a consumer will end up optimizing at a corner solution.
A)True
B)False
Q5) Suppose that choice sets are convex.State assumptions about tastes that are necessary and sufficient to guarantee that the first order conditions are necessary and sufficient for identifying a true optimum.
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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 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.
Q2) All homothetic goods are normal goods.
A)True
B)False
Q3) All quasilinear goods are necessities.
A)True
B)False
Q4) Every luxury good is a normal good but not every normal good is a luxury.
A)True
B)False
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Chapter 8: Wealth and Substitution Effects in Labor and Capital Markets
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Q1) The more substitutable current consumption is with future consumption, the more likely it is that an increase in the interest rate will cause an increase in savings.
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) 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
Q4) 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
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Chapter 9: Demand for Goods and Supply of Labor and Capital
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Q1) If future consumption is a normal good, the interest rate/borrowing relationship cannot be upward sloping.
A)True
B)False
Q2) In order for someone to switch from borrowing to saving when the interest rate falls, it must be that current consumption is an inferior good.
A)True
B)False
Q3) 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
Q4) The empirically observed backward-bending labor supply curve cannot arise from homothetic tastes.
A)True
B)False
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Chapter 10: Consumer Surplus and Deadweight Loss
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Q1) As we move to higher indifference curves, compensated demand (or MWTP) curves shift to the right.
A)True
B)False
Q2) Suppose x is an inferior good.Then we will overestimate the deadweight loss from taxes on consumption good x if we use the uncompensated demand curve rather than the marginal willingness to pay (or compensated demand) curve.
A)True
B)False
Q3) A policy which gains the winners more than the losers lose, in principle, could never result in unanimous approval of the policy.
A)True
B)False
Q4) Why is the following statement incorrect: "A tax on all consumption goods is efficient because it equally taxes all goods and therefore does not distort their prices."
Q5) Explain the following statement: "People hate taxes primarily because of income effects while economists hate taxes primarily because of substitution effects."
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Chapter 11: One Input and One Output: a Short-Run
Producer Model
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Sample Questions
Q1) Calvin buys newspapers and delivers them (by bike) to his customers' houses while Hobbes sells lemonade at his lemonade stand.One day they compare notes and find that Calvin, after paying for the newspapers and the maintenance on his bike, clears $5 per hour while Hobbes, after paying for the lemonade ingredients and upkeep of his lemonade stand, clears $4.50 per hour.The newspaper and lemonade businesses are the only possible trades for Calvin and Hobbes.
a.If Calvin and Hobbes are identical, how much economic profit (per hour) is each making?
b.Suppose Hobbes is slower on his bike than Calvin -- and he could only deliver half as many newspapers per hour.What's his economic profit in the lemonade business?
Q2) In the one-input model, a decrease in output price will always cause labor demand to shift in.
A)True
B)False
Q3) Whenever average cost is increasing, marginal cost must also be increasing.
A)True
B)False
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Chapter 12: Production With Multiple Inputs
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Q1) In considering "returns to scale" we assume that production processes are homothetic.
A)True
B)False
Q2) In one-input models, all technologically efficient production plans are economically efficient and vice versa.
A)True
B)False
Q3) 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
Q4) A price taking firm employs each of its inputs into production until its marginal product is equal to 1.
A)True B)False
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Chapter 13: Production Decisions in the Short and Long Run
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Q1) 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
Q2) If the production technology has increasing returns to scale, short run marginal cost curves must be downward sloping.
A)True
B)False
Q3) If a firm's labor input response to a decrease in the wage differs between the short and the long run, we know that more workers will be hired after the initial short run adjustment.
A)True
B)False
Q4) (Long run) average cost curves are U-shaped when the production technology has decreasing returns to scale and the firm faces recurring fixed costs.
A)True
B)False
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Chapter 14: Competitive Market Equilibrium
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Q1) If all firms are identical, output demand shifts cannot cause changes in output price in the long run.
A)True B)False
Q2) 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
Q3) 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
Q4) If all firms are identical, output prices will never change. A)True B)False
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Chapter 15: The Invisible Hand and the First Welfare
Theorem
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Q1) A "social planner" is a fictional societal planner who would always choose the same outcome as the competitive market.
A)True
B)False
Q2) How would you contrast the interactions within a small family to those in the market place? In what way could you argue that the ways in which interactions are governed in the family can never work in a larger market setting -- just as the ways in which interactions are structured in market settings can never work well in families?
Q3) 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.
Q4) 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
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Chapter 16: General Equilibrium
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Sample Questions
Q1) If good 1 is essential for one person but not for the other, the first person will end up with all of good 1 in a competitive equilibrium within the Edgeworth Box.
A)True
B)False
Q2) 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.
Q3) If the two goods in an Edgeworth Box are perfect complements for one person and perfect substitutes for the other, then all efficient allocations are such that the first person has the same amount of good 1 as of good 2.
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) The certainty equivalent of a gamble is negative when tastes are risk loving.
A)True
B)False
Q2) The certainty equivalent is less than the expected value of a gamble when tastes are risk averse.
A)True
B)False
Q3) When tastes are risk averse, an individual will always choose less risk over more risk.
A)True
B)False
Q4) The risk premium is negative when tastes are risk averse.
A)True
B)False
Q5) Actuarily fair insurance reduces risk without changing the expected value of a gamble.
A)True
B)False
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Chapter 18: Elasticities, Price-Distorting Policies, and Non-Price Rationing
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Q1) An equilibrium in the presence of price floors can be restored by increased consumer effort to obtain scarce goods.
A)True
B)False
Q2) The reduction in the market output resulting from the imposition of a price floor depends on both the price elasticity of demand and the price elasticity of supply.
A)True
B)False
Q3) Unless goods are Giffen goods, own-price elasticities of demand are always negative.
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) The wage elasticity of labor demand is always negative. A)True
B)False
20
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Chapter 19: Distortionary Taxes and Subsidies
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Q1) Regardless of how price elastic labor demand curves are, employers are unaffected by wage taxes if labor supply is perfectly inelastic.
A)True
B)False
Q2) A wage tax in a labor market with a perfectly inelastic labor supply curve is efficient.
A)True
B)False
Q3) 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
Q4) Suppose tastes for consumption now and consumption in the future have constant elasticity of substitution.It may then be the case that a tax on interest income is efficient even if savings (defined as current income not consumed) fall in response to the tax.
A)True
B)False
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Chapter 20: Prices and Distortions Across Markets
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Q1) Because trade across markets creates winners and losers,the overall surplus in the loser's market is diminished.
A)True
B)False
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) If worker productivity is the same in each country, outsourcing and labor migration will both result in an equalization of wages across the two countries.
A)True
B)False
Q4) When tariffs on imports are eliminated, everyone benefits. A)True
B)False
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Chapter 21: Externalities in Competitive Markets
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Q1) In order for a Pigouvian tax to be efficient, the amount of revenue raised plus the economic value of the reduction in pollution must together be larger than the loss in consumer and producer surplus.
A)True
B)False
Q2) Explain how the introduction of an additional competitive market can always solve the efficiency problem that emerges from a positive externality.
Q3) When set correctly, a Pigouvian tax is efficient because it is equivalent to a lump sum tax.
A)True
B)False
Q4) The Coase Theorem implies that the reason people sue each other in court is that property rights have not been sufficiently well specified.
A)True
B)False
Q5) Many externalities arise from poorly defined property rights.
A)True
B)False
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Chapter 22: Asymmetric Information in Competitive Markets
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Q1) If all consumers are willing to buy insurance at the zero-profit pooling price, there cannot be a separating equilibrium.
A)True
B)False
Q2) Suppose a competitive market with adverse selection has settled into a pooling equilibrium where everyone is offered the same price.If firms then screen consumers, the outcome may and may not be more efficient.
A)True
B)False
Q3) 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
Q4) A pooling equilibrium in insurance markets is inefficient because everyone buys too little insurance (relative to the efficient amount).
A)True
B)False
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Chapter 23: Monopoly
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Q1) Because of the monopoly power that comes with being the only firm to produce a product, it is always more efficient to have multiple firms in an industry.
A)True B)False
Q2) One way to deal with the efficiency problem of monopolies is to tax the profits of monopolists.
A)True B)False
Q3) Unlike perfectly competitive firms, monopolists produce where marginal revenue intersects marginal cost.
A)True
B)False
Q4) In the absence of recurring fixed costs, a monopolist will always produce a positive output quantity.
A)True B)False
Q5) Explain what the Saudi oil minister meant when he warned OPEC of using its market power too much by saying "Remember, the Stone Age did not end because we ran out of stones."
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Chapter 24: Strategic Thinking and Game Theory
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Q1) Consider player n in a sequential game.
a.If the player can play 2 actions from a single node, how many pure strategies does he have?
b.Suppose he can play 2 actions at each of two different nodes.How many pure strategies does he have now?
c.Suppose he can play 2 actions at each of three different nodes.How many pure strategies does he have now?
d.Suppose he can play 2 actions at each of four different nodes.How many pure strategies does he have now?
e.Suppose he can play 2 actions at each of k different nodes.How many pure strategies does he have now?
Q2) In mixed strategy Nash equilibria, players play each of two pure strategies with probability 0.5. A)True B)False
Q3) If everyone has a dominant strategy, there can be no mixed strategy equilibrium. A)True B)False
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Chapter 25: Oligopoly
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Q1) If two simultaneous move Bertrand price competitors have different constant marginal costs, then any price between their marginal costs could be a Nash equilibrium price.
A)True
B)False
Q2) If Bertrand price competitors incur recurring fixed costs, it will still be a Nash equilibrium for price to equal marginal cost.
A)True
B)False
Q3) Explain why firms in a cartel might lobby for government regulation.
Q4) Recurring fixed costs may lead to only one firm producing in a Cournot oligopoly model.
A)True
B)False
Q5) 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?
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Chapter 26: Product Differentiation and Innovation in Markets
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Q1) 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."
Q2) Bertrand price competitors can recover some market power when they differentiate their products.
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) If price is regulated in a 2-firm oligopoly modeled along the Hotelling line, firms will compete by differentiating their products.
A)True
B)False
Q5) Describe the tradeoffs involved when thinking about setting the time over which a patent grants an innovator exclusive monopoly rights.
Page 28
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Chapter 27: Public Goods
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Q1) Our free-rider model of voluntary giving suggests that, when the government subsidizes private giving to charity, it's contribution will simply "crowd out" the private contributions so long as no one is at a corner solution.
A)True
B)False
Q2) 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
Q3) If the formation of Lindahl prices to support an efficient level of public goods is derived from individuals' reporting their marginal willingness to pay, people will under-report their true willingness to pay.
A)True
B)False
Q4) Public goods arise because of externalities.
A)True
B)False
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Chapter 28: Governments and Politics
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Q1) Suppose voter preferences over a public good funded through a proportional income tax are single peaked.If everyone has the same tastes and the public good is a normal good, then ideal points for higher income individuals will lie to the right of ideal points of lower income individuals.
A)True
B)False
Q2) Arrow suggests that any social choice process should be applicable to any set of preferences for individuals -- because we can't be sure individual preferences are always rational.
A)True
B)False
Q3) If oil executives control the governmental agency which regulates oil companies, regulatory capture has occurred.
A)True
B)False
Q4) Median voters in settings where the policy space is single dimensional and everyone has single peaked preferences are Arrow Dictators.
A)True B)False
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Chapter 29: What Is Good Challenges From Psychology and Philosophy
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Q1) What's the Easterlin Paradox -- and in what sense does it suggest reference-dependent preferences?
Q2) 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
Q3) Because wealth is more concentrated than income, the Gini coefficient for the wealth distribution is greater than the Gini coefficient for the income distribution.
A)True
B)False
Q4) Suppose an individual has to make a decision at time t without having all the information relevant for making the decision.At time (t+1), the relevant information is revealed.We will say that the individual made a mistake if his decision in time t would have been different had he known what he knows at time (t+1).True or False: Without behavioral economics, we would not be able to explain mistakes. A)True B)False
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