Microeconomic Theory Exam Practice Tests
Course Introduction
Microeconomic Theory explores the foundational principles that govern individual economic units such as consumers, firms, and markets. The course examines key concepts including utility maximization, production and cost functions, market structures (perfect competition, monopoly, oligopoly), and the mechanisms of price formation. Students will develop analytical tools to understand resource allocation, market efficiency, and the impact of government policies in various market settings. Through mathematical models and real-world applications, the course equips learners with a deep understanding of how micro-level decisions shape broader economic outcomes.
Recommended Textbook
Intermediate Microeconomics and Its Application 12th Edition by Walter Nicholson
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17 Chapters
558 Verified Questions
558 Flashcards
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Page 2
Chapter 1: Economic Models
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Sample Questions
Q1) Suppose you can write generic supply and demand curves such that \(\mathrm { Q } _ { \mathrm { S } } = \mathrm { A } + \mathrm { BP }\) and \(Q _ { D } = D + C P\) .If consumers demand less as price rises,C must be.
A)positive
B)negative
C)0
Answer: B
Q2) The X-intercept of \(Y = 4 X + 12\) is A)-3.
B)3. C)-1/3
D)12.
Answer: A
Q3) Normative economic analysis
A)involves the study of what comprises a normal firm.
B)involves how resources are actually used in an economy.
C)involves judgments on how resources should be used in an economy.
D)is usually thought to be a waste of time.
Answer: C
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Page 3
Chapter 2: Utility and Choice
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Sample Questions
Q1) The slope of the budget constraint line is
A) the ratio of the prices \(\left( P _ { X } / P _ { Y } \right)\)
B)the negative of the ratio of the prices \(\left( P _ { X } / P _ { Y } \right)\)
C)the ratio of income divided by price of Y \(\left( I / P _ { Y } \right)\)
D)none of the above.
Answer: B
Q2) Suppose a person has $20 and likes both rap music (R) and country music (C) with a set of preferences so that \(\mathrm { U } = \mathrm { C } ^ { 1 / 2 } \mathrm { R } ^ { 1 / 2 }\). Suppose that the iTunes price of a rap music song is \(P _ { R } = 2\) and the price of a country music song is \(P _ { C } = 1\). What is the lowest level of \(\text { utility that }\) is unaffordable?
A)6
B)7
C) \(\sqrt { 50 }\)
D)8
Answer: D
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Chapter 3: Demand Curves
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Sample Questions
Q1) Suppose there are two goods (X and Y).On a traditional graph of a budget line a tripling of all prices and incomes will
A)alter the slope of the budget line only.
B)alter the slope of the budget line as well as the Y-intercept.
C)alter the slope of the budget line as well as the X-intercept.
D)leave the budget line unaltered.
Answer: D
Q2) If income doubles and the quantity demanded of good X more than doubles,then good X can be described as a
A)substitute good.
B)complement good.
C)necessity.
D)luxury.
Answer: D
Q3) The market demand curve for any good is
A)independent of individuals' demand curves for the good.
B)the vertical summation of individuals' demand curves.
C)the horizontal summation of individuals' demand curves.
D)derived from the firm's marginal cost of production.
Answer: C
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Chapter 4: Uncertainty
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Sample Questions
Q1) Suppose a family has saved enough for a 10 day vacation (the only one they will be able to take for 10 years)and has a utility function U = V<sup>1/2 </sup>(where V is the number of healthy vacation days they experience).Suppose they are not a particularly healthy family and the probability that someone will have a vacation-ruining illness (V = 0)is 20%.What is the expected value of V?
A)10
B)8
C)2
D)0
Q2) Continuing with the family from the preceding question,what is their expected utility?
A) \(.8 \sqrt { 10 } + .2 \times \sqrt { 2 }\)
B) \(.8 \times \sqrt { 10 }\)
C) \(\sqrt { 8 }\)
D) \(\sqrt { 2 }\)
Q3) With moral hazard,fair insurance contracts are not viable because
A)individuals' aversion to risk is reduced.
B)insurance company's administrative costs are increased.
C)individuals fear unscrupulous agents.
D)probabilities of loss are increased over what is expected.
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Page 6
Chapter 5: Game Theory
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23 Flashcards
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Sample
Questions
Q1) Consider the same setup with the curved final exam as in the previous question.Now suppose the students move sequentially.Which best describes the outcome in the subgame-perfect equilibrium?
A)Brainiacs study and Numbskulls party regardless of who moves first.
B)Brainiacs party and Numbskulls study regardless of who moves first.
C)The party moving first studies.
D)The party moving first parties.
Q2) If the Prisoners' Dilemma is repeated over and over again with the same two players having an indefinite time horizon,
A)the unique equilibrium is to play the Nash equilibrium of Rat each period.
B)players can cooperate on Silent if they are not too patient.
C)players can cooperate on Silent if they are patient enough.
D)players can only cooperate on Silent in the initial stages of the game.
Q3) The game of Matching Pennies
A)has no Nash equilibrium.
B)has a pure-strategy Nash equilibrium.
C)has a mixed strategy Nash equilibrium.
D)has multiple Nash equilibria.
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Chapter 6: Production
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Sample Questions
Q1) A technical innovation in the production of automobiles by Ford Motor Company's for 1 million cars per year would necessarily
A)shift the "1 million car" isoquant away from the origin.
B)shift the "1 million car" isoquant toward the origin.
C)cause 1 million cars to be produced with more capital and less labor.
D)cause 1 million cars to be produced with more labor and less capital.
Q2) For a fixed proportion production function,at the vertex of any of the (L-shaped)isoquants the marginal productivity of either input is
A)constant
B)zero.
C)negative.
D)a value that cannot be determined.
Q3) When isoquants get progressively further apart there is
A)increasing returns to scale
B)decreasing returns to scale
C)constant returns to scale
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Chapter 7: Costs
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Sample Questions
Q1) Suppose a cost function is TC = Aq<sup>3</sup> + bq<sup>2</sup> + cq +d. Then the total fixed cost is
A)Aq<sup>2</sup>+ bq + cq +d/q
B)Aq<sup>2</sup> + bq + c
C)Aq<sup>3</sup> + bq2 + cq
D)d
Q2) The shape of a firm's expansion path depends upon
A)the price of the labor input.
B)the price of the capital input.
C)the shape of the firm's production function.
D)all of these factors.
Q3) Suppose a production function is q = K<sup>1/2</sup>L<sup>1/3</sup> and in the
short run capital (K)is fixed at 100. If the wage is $10 and the rental rate on capital is $20,the fixed cost is
A)$2,000
B)$200
C)$20,000
D)$0
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Chapter 8: Profit Maximization and Supply
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Sample Questions
Q1) Suppose a farmer is a price taker for soybean sales with cost functions given by ?
TC = .1q<sup>2</sup> + 2q + 30
MC = .2q + 2
If P = 6 ,the profit-maximizing level of output is
A)10
B)20
C)40
D)80
Q2) A firm that sought to "maximize market share" would choose to produce an output level for which marginal revenue was equal to
A)marginal cost
B)average cost.
C)price.
D)zero.
Q3) If price is equal to short-run average variable cost,this price is known as A)the break-even price.
B)the profit-maximizing price.
C)the shutdown price.
D)the revenue-maximizing price.
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Page 10
Chapter 9: Perfect Competition in a Single Market
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Sample Questions
Q1) Suppose domestic beef producers face demand of Q<sub>D</sub> = 1000 - 5P.In the very short run 500 head of beef are produced.Suppose mad cow strikes a portion of the national herd and the amount brought to market falls to 400.The price per head will rise by
A)10
B)30
C)30.
D)50
Q2) "Missing markets" result from
A)high transactions costs of such markets.
B)strict price controls.
C)the inability of producers to gain economies of scale.
D)foreign countries dominating a domestic market for a product.
Q3) Suppose demand for a good is Q<sub>D</sub> = 100 - P and supply is Q<sub>S</sub> = -20 + P.What is the equilibrium price?
A)20
B)40
C)60
D)80
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Chapter 10: General Equilibrium and Welfare
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Sample Questions
Q1) In free exchange among two individuals the position on the contract curve finally arrived at will,among other things,depend on: Which of these correctly completes the statement?
I.The bargaining strength of each individual.
II.The initial endowments of the individuals.
III.The individuals' preferences.
A)Only III.
B)Only II.
C)I and III,but not II.
D)II and III,but not I.
E)I,II,and III.
Q2) Markets can fail to achieve efficiency when
A)there are prices consumers do not think are fair.
B)there are wages workers do not think are fair.
C)trade puts people out of work.
D)there are markets with imperfect competition.
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Chapter 11: Monopoly
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Sample Questions
Q1) A profit-maximizing monopoly will produce that output for which
A)marginal revenue equals price.
B)average cost is minimized.
C)marginal cost is minimized.
D)marginal cost equals marginal revenue.
Q2) A monopoly's economic profits are represented by
A)[price minus marginal cost] times number of units sold.
B)[price minus average cost] times number of units sold.
C)[marginal revenue minus price] times number of units sold.
D)[marginal cost minus price] times number of units sold.
Q3) Perfect price discrimination
A)is a common occurrence in situations with many buyers.
B)occurs fairly often in situations with only a few buyers.
C)is only observed in competitive markets.
D)rarely occurs because firms do not have sufficient power to differentiate among specific buyers.
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13
Chapter 12: Imperfect Competition
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Sample Questions
Q1) Under the cartel model,each firm produces where
A)marginal cost equals marginal revenue.
B)price equals marginal cost.
C)the average cost curve is at a minimum.
D)price exceeds marginal cost by the greatest amount.
Q2) In a Cournot equilibrium,each firm chooses an output level that
A)maximizes joint profits.
B)maximizes the price received.
C)maximizes profits given what the other firm produces.
D)maximizes revenue given what the other firm produces.
Q3) Each firm in a cartel has an incentive to chisel because market price exceeds
A)marginal cost.
B)average cost.
C)average variable cost.
D)average fixed cost.
Q4) Which factor would facilitate tacit collusion among firms in a market?
A)an increase in the number of firms.
B)a decrease in the probability the market will continue into future periods.
C)a decrease in the interest rate.
D)none of these.
Page 14
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Chapter 13: Pricing in Input Markets
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Sample Questions
Q1) Suppose the market for labor is perfectly competitive and the demand for labor is \(L = 100 - 10 w\) and market supply is \(L = - 20 + 10 w\) .If a minimum wage is imposed at w = 8,the total unemployed ( \(L _ { S } - L _ { D }\) )will be
A)20
B)40
C)60
D)80
Q2) If the wage rate rises,labor's share in the total costs of a production process
A)will increase.
B)will decrease.
C)may increase or decrease depending on the elasticity of demand for the product.
D)may increase or decrease depending on the ease of substitution of other inputs for labor.
Q3) When an individual's wage rises,the income effect tends to A)increase hours worked.
B)decrease hours worked.
C)leave hours worked unchanged.
D)it is impossible to predict what will happen to hours worked.
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15
Chapter 14: Capital and Time
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Sample Questions
Q1) A fall in the real interest rate leads to
A)an increase in the rental rate on a machine.
B)a decrease in the rental rate on a machine.
C)no change in the rental rate on a machine.
D)a fall in the marginal productivity of capital.
Q2) Draw a two period budget line where the borrow/lending rate of interest,r,allows consumers to choose consumption in each of the two periods.C1 and C2 given their anticipated income on two periods,Y1 and Y2.The horizontal (C1)intercept is
A) \(Y _ { 1 } + \frac { Y _ { 2 } } { 1 + r }\)
B) \(\frac { Y _ { 1 } } { 1 + r } + Y _ { 2 }\)
C) \(Y _ { 1 } + Y _ { 2 } ( 1 + r )\)
D) \(Y _ { 1 } ( 1 + r ) + Y _ { 2 }\)
Q3) Suppose a person's preferences are to "consumption smooth",which means they wish to get \(C _ { 1 } = C _ { 2 }\) for all incomes and interest rates.For any interest rate and \(Y _ { 1 } < Y _ { 2 }\) ,the person will ____ in the first period.
A)borrow
B)save
C)neither borrow nor save
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Chapter 15: Asymmetric Information
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Sample Questions
Q1) How do participants in an auction respond to the problem of the "winner's curse"?
A)They bid more aggressively to win the auction and avoid the "curse".
B)They exit the auction because winning can only be a bad sign of the object's worth.
C)All bid less aggressively,so that the winner ends up not regretting having won.
D)The winner regrets having won the auction.
Q2) Which are social costs associated with the inability of shareholders to observe an executive's effort? (You may choose more than one.)
A)Excessive insurance offered.
B)The executive has to be exposed to risk to induce effort,and risk is costly.
C)The executive ends up exerting less than first-best effort.
D)Excessive effort induced.
Q3) The "lemons model" predicts quality deterioration in the used-car market because
A)used cars require increasing maintenance.
B)suppliers and demanders have different information about cars' quality.
C)used cars are generally of a lower quality than new cars.
D)people will usually buy new cars if they are available.
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Chapter 16: Externalities and Public Goods
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Sample Questions
Q1) Bargaining costs are generally high in cases involving environmental externalities because
A)there are strong incentives to be a free rider.
B)many individuals may be affected by the externalities.
C)it is difficult to measure the costs of the externalities.
D)all of the above.
Q2) Suppose residents of Toadhop live on the Quabache River,a river prone to flooding.Suppose there are 1000 (type A)people who value flood control more than the 1000 (type B)people. Type A Demand Q<sub>D</sub> = 100 - P
Type B Demand Q<sub>D</sub> = 50 - P
Where Q measures the quality of flood control.If the price of a unit of flood control is $100,000 and the citizens of Toadhop gather for a townhall meeting to find the socially optimal level of flood control,and they are successful,how much will type B individuals contribute per unit of flood control?
A)25
B)50
C)75
D)100
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Chapter 17: Behavioral Economics
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Sample Questions
Q1) People are sometimes seen to give up money to make an allocation more fair. What experiment could be used to determine if this is because people truly care about fairness or because people want to avoid the consequences of others' spite?
A)The Ultimatum Game could be run to see if an even split is proposed.
B)The Dictator Game could be run to see if an even split is proposed.
C)The Battle of the Sexes could be run to see if players choose the rival's preferred outcome.
D)The repeated Prisoners Dilemma could be run to see if players can tacitly collude on Silent.
Q2) Which is not a factor that makes cognitive mistakes more likely?
A)uncertainty.
B)time pressure.
C)repetition.
D)large number of choices.
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