Microeconomic Theory Exam Solutions
Course Introduction
Microeconomic Theory provides an in-depth examination of the foundational principles governing individual and firm behavior in the marketplace. The course covers the theory of consumer choice, production and costs, market structures, and the mechanisms of price determination. Emphasis is placed on the use of mathematical models to analyze how scarcity, incentives, and market interactions shape decision-making processes. Through theoretical models and real-world applications, students develop a critical understanding of resource allocation, welfare analysis, and the impact of government policies on markets.
Recommended Textbook
Microeconomics Theory and Applications with Calculus 3rd Edition by Jeffrey M. Perloff
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Page 2
Chapter 1: Introduction
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Sample Questions
Q1) "If fines for speeding when driving increase,fewer accidents will occur" is an example of a(n)
A) positive statement.
B) normative statement.
C) negative statement.
D) inverse statement.
Answer: A
Q2) Microeconomics is often called
A) price theory.
B) decision science.
C) scarcity.
D) resource theory.
Answer: A
Q3) Economic Policy of the government is often based on A) microeconomic models.
B) educated guessing.
C) intuitive reasoning.
D) hints.
Answer: A
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Page 3
Chapter 2: Supply and Demand
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Sample Questions
Q1) Because demand curves slope downward according to the Law of Demand,the price elasticity of demand is a negative number.
A)True
B)False
Answer: True
Q2) A given supply curve has a zero intercept.At the current equilibrium price the price elasticity of supply equals
A) 1.
B) 0.
C) 2.
D) Not enough information is provided.
Answer: D
Q3) Costs that pertain to finding a trading partner and making a trade are called A) transaction costs.
B) transgression costs.
C) consumption costs.
D) transaction taxes.
Answer: A
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Chapter 3: A Consumers Constrained Choice
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Sample Questions
Q1) If two bundles are on the same indifference curve,then
A) the consumer derives the same level of utility from each.
B) the consumer derives the same level of ordinal utility from each but not the same level of cardinal utility.
C) no comparison can be made between the two bundles since utility cannot really be measured.
D) the MRS between the two bundles equals one.
Answer: A
Q2) Max has allocated $100 toward meats for his barbecue.His budget line and indifference map are shown in the above figure.If Max is currently at point d,
A) his MRS is larger than the trade-off offered by the market.
B) he is willing to give up more chicken than he has to, given market prices.
C) he is not maximizing his utility.
D) All of the above.
Answer: D
Q3) Indifference curves on the same indifference map can have different shapes.
A)True
B)False
Answer: True
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Page 5
Chapter 4: Demand
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Sample Questions
Q1) One characteristic of a Giffen good is that it
A) is a luxury good.
B) is an inferior good.
C) has an upward-sloping Engel curve.
D) All of the above.
Q2) When the price of a good changes,the substitution effect can be found by comparing the equilibrium quantities purchased
A) on the old budget line and the new budget line.
B) on the original indifference curve when faced with the original prices and when faced with the new prices.
C) on the new budget line and a hypothetical budget line that is a shift back to the original indifference curve parallel to the new budget line.
D) on the new indifference curve.
Q3) An increase in the price of a good causes
A) a change in the slope of the budget line.
B) an increase in the consumption of that good.
C) a rightward shift of the demand curve for that good.
D) a parallel rightward shift of the budget line.
Q4) Why can't all goods be inferior?
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Chapter 5: Consumer Welfare and Policy Analysis
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Sample Questions
Q1) Ed's utility from vacations (V)and meals (M)is given by the function U(V,M)= V²M.Last year,the price of vacations was $200 and the price of meals was $50.This year,the price of meals rose to $75,the price of vacations remained the same.Both years,Ed had an income of $1500.
a.Calculate the change in consumer surplus from meals resulting from the change in meal prices.
b.What is the compensating variation for the price change in meals?
c.Calculate the equivalent variation for the price change in meals.
Q2) A quota will reduce consumer welfare when
A) the quota is less than the amount purchased without the quota.
B) the quota is greater than the amount purchased without the quota.
C) the quota is on a good with high income elasticity.
D) Quotas always reduce consumer welfare.
Q3) Ralf's uncompensated demand function for shoes is given by Q = 100/p.What is the change in consumer surplus when the price of shoes rises from p=20 to p=25?
Q4) The above figure shows an indifference map for a person's choices between leisure and consumption.Derive this person's labor supply curve for wage rates of $5,$10,and $15.
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Chapter 6: Firms and Production
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Sample Questions
Q1) The above figure shows the isoquants for producing steel.Constant returns to scale are
A) present when producing less than 10,000 tons.
B) present when producing between 10,000 and 20,000 tons.
C) present when producing more than 20,000 tons.
D) never present.
Q2) In the above figure,Graph D with Capital on the vertical axis and labor on the horizontal axis implies that
A) the marginal product of labor is increasing as more labor is employed.
B) the marginal product of labor is decreasing as more labor is employed.
C) the capital and labor are perfect substitutes.
D) capital and labor have to be employed in fixed proportions.
Q3) At any given point on the curve,the slope of the total product curve always equals
A) the ratio of the marginal product and the average product.
B) the change in input divided by the change in output.
C) the average product of the input.
D) the marginal product of the input.
Q4) When do we mean by efficient production?
Q5) Explain why labor might not always be a variable input.
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Chapter 7: Costs
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Sample Questions
Q1) When a firm produces 1000 widgets with total cost of $2000 and fixed cost of $1000,what is the average variable cost?
A) $2
B) $1
C) $0.5
D) $0.2
Q2) A consumer purchases a book by driving across town to a bookstore,standing in line for five minutes to pay the cashier,and then pays $5.The same book is purchased by another consumer who spends two minutes placing the order over the Internet for $10.The book necessarily cost the first consumer less.
A)True
B)False
Q3) If average cost is positive,
A) marginal cost equals average cost.
B) marginal cost exceeds average cost.
C) marginal cost is less average cost.
D) Not enough information is provided.
Q4) Explain why the marginal cost curve intersects a U-shaped average cost curve at its minimum point.
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Chapter 8: Competitive Firms and Markets
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Sample Questions
Q1) Suppose TC = 10 + (0.1 q²).If there are 100 identical firms in the market,the market supply curve is
A) Q = 1000 p.
B) Q = 500 p.
C) Q = 100 p.
D) Q = 10.
Q2) Suppose that for each firm in the competitive market for potatoes,long-run average cost is minimized at 20¢ per pound when 500 pounds are grown.The demand for potatoes is Q = 10,000/p.If the long-run supply curve is horizontal,then how many firms will this industry sustain in the long run?
A) 0
B) 100
C) 50,000
D) There is not enough information to answer.
Q3) Explain why shutting down and going out-of-business are different concepts.
Q4) The above figure shows the long-run cost curves for a typical firm in a competitive market.If the number of firms is unrestricted and input costs are constant,derive the long-run market supply curve.
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Page 10
Chapter 9: Properties and Applications of the Competitive Model
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Sample Questions
Q1) The tax revenue that is generated by a government tax is counted towards total welfare.
A)True
B)False
Q2) If a city decides to lift restrictions on how many taxi cabs can operate,social welfare will increase.
A)True
B)False
Q3) Suppose the market supply curve is p = 5Q.At a price of 10,producer surplus equals A) 50.
B) 25.
C) 12.50.
D) 10.
Q4) Economists claim that measuring society's welfare as CS + PS
A) is inappropriate since ultimately everyone is a consumer.
B) is valid only when the same person could be either a consumer or a producer. C) treats the gains to consumers and producers equally.
D) is not commonly accepted.
Q5) Explain why the competitive output maximizes welfare.
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Chapter 10: General Equilibrium and Economic Welfare
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Sample Questions
Q1) Explain why a government may select an inefficient allocation.
Q2) Consider a society consisting of just a farmer and a tailor.The farmer has 10 units of food but no clothing.The tailor has 20 units of clothing but no food.Suppose each has the utility function U = F C.The price of clothing is always $1.If the price of food is $3,does a competitive equilibrium exist? If not,what will happen to the price of food?
Q3) The above figure depicts the Edgeworth box for two individuals,Al and Bruce.If the endowment is at point a,and Al has no ability to bargain,the final allocation will be at point
A) a.
B) b.
C) c.
D) d.
Q4) In a competitive marketplace,prices adjust until
A) MRS's are equal to zero.
B) excess supply equals excess demand equals zero in all markets.
C) each consumer has maximized utility subject to his budget constraint.
D) all firms earn zero profit.
Q5) Employing a general-equilibrium approach,describe the effect of a new law that prohibits steel imports.
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Chapter 11: Monopoly and Monopsony
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Sample Questions
Q1) If a monopoly is operating on the demand curve where price elasticity is equal to -3,and MR equals 2,then price is equal to
A) 3.
B) 2.
C) 1.
D) 0.
Q2) For profit-maximizing monopolies,explain why the boundaries on the Lerner Index are 0 and 1.
Q3) Which of the following total cost functions suggests the presence of a natural monopoly?
A) TC = 2Q
B) TC = 100 + 2Q
C) TC = 100 + 2Q²
D) All of the above.
Q4) The above figure shows the demand and cost curves facing a monopoly.Maximum profit equals
A) $0.
B) $100.
C) $1,000.
D) $2,500.
Page 13
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Chapter 12: Pricing and Advertising
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Sample Questions
Q1) Why do firms engage in price discrimination?
A) to decrease cost
B) to increase profits
C) to increase consumer surplus
D) to prohibit the resale of their products
Q2) If two markets have the same price elasticity of demand at every price,a monopoly will not practice multimarket price discrimination.
A)True
B)False
Q3) While price discrimination is possible between two markets it is not possible in more than two.
A)True
B)False
Q4) Which of the following is NOT an example for third-degree price discrimination?
A) discounted coupons for toothpastes in the newspapers
B) discounts for Saturday night stayovers
C) discounts for bulk orders
D) discounts for senior citizens at amusement parks
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Chapter 13: Game Theory
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Sample Questions
Q1) In the ultimatum experiment,what are the usual outcomes?
A) Proposer proposes to give the minimum positive amount to the responder in all the rounds.
B) Proposer and responder are rational all the time.
C) Proposer proposes to give about 30~40% of total amount to the responders.
D) Proposer proposes to give 60~0% of total amount to the responders
Q2) The above figure shows the payoff matrix for two firms,A and B,selecting an advertising budget.The firms must choose between a high advertising budget and a low advertising budget.Firm B's dominant strategy
A) does not exist.
B) is to copy firm A.
C) is to select a high advertising budget.
D) is to select a low advertising budget.
Q3) The above figure shows the payoff to two gasoline stations,A and B,deciding to operate in an isolated town.If firm A chooses its strategy first,then
A) firm A will not enter.
B) firm B's entry is blockaded.
C) both firms will enter.
D) firm A will enter and firm B will not.
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Page 15
Chapter 14: Oligopoly and Monopolistic Competition
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Sample Questions
Q1) Draw a graph that shows the effect on the equilibrium quantities if the government subsidizes one firm in a Cournot duopoly with a per-unit subsidy.Assume that the best-response functions are linear.Explain the new equilibrium quantities.
Q2) Product differentiation allows a firm to charge a higher price because the residual demand curve facing the firm
A) is more elastic than the residual demand curve without product differentiation. B) is less elastic than the residual demand curve without product differentiation. C) is horizontal.
D) shifts to the left.
Q3) The organization of petroleum exporting countries (OPEC)is an example of a(n) A) oil monopoly.
B) cartel.
C) competitive arrangement.
D) prisoner's dilemma.
Q4) Assuming Cournot behavior,what happens to the market output,the price of the output,and each firm's output as the number of firms in a market increases?
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Page 16
Chapter 15: Factor Markets
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Sample Questions
Q1) For a monopoly,the value of the next worker equals
A) MR MPL.
B) p MPL.
C) MPL.
D) w/MPL.
Q2) Suppose the market demand elasticity is constant at -2,and there are three identical firms in the oligopolistic market.A Cournot firm's MPL = 1.2L . ,then the labor demand for a Cournot firm is
A) PL . .
B) 0.6PL . .
C) 0.2PL ².
D) PL ².
Q3) Four banks are offering the same interest rate of 4%.Where do you invest?
A) Bank A compounds interest on a yearly basis.
B) Bank B compounds interest on a monthly basis.
C) Bank C compounds interest on a daily basis.
D) I am indifferent between banks.
Q4) Explain how continuing technical progress may cause the price of scarce,exhaustible resources to fall over time.
Q5) In an economy with no inflation,explain why interest rates are positive.
Page 17
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Chapter 16: Uncertainty
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Sample Questions
Q1) For a given expected value,the smaller the standard deviation of the expected value,the larger the risk.
A)True
B)False
Q2) If an individual makes her investment decisions based solely on the Net Present Value criterion,one can conclude that she is
A) risk averse.
B) risk neutral.
C) risk loving.
D) extremely wealthy.
Q3) The Arrow-Pratt measure of risk aversion is
A) negative if a person is risk averse.
B) greater than one if a person is risk averse.
C) negative if a person is risk loving.
D) None of the above.
Q4) Distinguish between risk that can be reduced through diversification and risk that cannot be reduced through diversification.
Q5) Explain why the rate of return from investing in stocks is higher than from investing in bonds.
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Chapter
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Sample Questions
Q1) The result that,under certain circumstances,no government action is needed to control an externality because it can be eliminated by bargaining between the affected parties is called
A) a Nash equilibrium.
B) Coase Theorem.
C) Bargaining Theorem.
D) English Bargaining.
Q2) Fishermen on the East Coast are using lobster traps out of which most of the lobsters that enter can escape.Why?
A) It will make over-fishing less likely.
B) They can't come up with better traps.
C) They are not educated enough to maximize profit.
D) They catch more lobsters this way.
Q3) The above figure shows the market for steel ingots.What is the change in consumer surplus if the market switches from competitive equilibrium to social optimum?
A) $625
B) $1250
C) $1875
D) $2500
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Chapter 18: Asymmetric Information
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Sample Questions
Q1) Cheap talk works at placing workers in the right job as long as
A) the interests of the worker and the firm coincide.
B) all workers want the most demanding jobs regardless of their abilities.
C) workers have different ability levels that are unknown to firms.
D) firms are not profit maximizers.
Q2) Opportunism may occur when
A) both parties have limited information.
B) both parties have full information.
C) one party has information the other does not.
D) All of the above.
Q3) The market for used cars is shown in the above figure.Buyers cannot tell whether any given car is a lemon.Forty percent (40%)of all cars are lemons.Which of the following statements is true?
A) All of the cars will be sold.
B) No cars will be sold.
C) Only lemons will be sold.
D) Ten percent of the used cars sold will be lemons.
Q4) Explain why high priced lawyers may support an industry ban on price advertising for lawyers.
Q5) Explain how product liability laws can reduce adverse selection.
Page 20
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Chapter 19: Contracts and Moral Hazards
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Sample Questions
Q1) Suppose two owners of a store agree to split the profit equally regardless of the number of hours each spends working at the store.As a result,
A) production efficiency is achieved.
B) each enjoys only half the marginal benefit of an additional hour working in the store.
C) one will work all of the time while the other works zero hours.
D) each will work as many hours as if he or she were the sole owner.
Q2) Suppose a plaintiff hires a lawyer to represent her in a court case.Under which of the following contracts is production efficiency assured?
A) The lawyer is paid by the hour.
B) The lawyer receives a share of the settlement.
C) The lawyer receives a fixed fee.
D) The lawyer pays the client a fee for the right to the entire settlement.
Q3) Workers prefer layoffs to wage reductions during economic downturns because
A) layoffs benefit workers more than the firms.
B) workers try to provide firms with incentives to report true economic conditions.
C) firms will keep workers even during economic downturns to avoid more costs.
D) there is symmetric information.
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