Microeconomic Theory Exam Solutions
Course Introduction
Microeconomic Theory examines the foundational principles governing the behavior of individuals and firms as they make decisions regarding the allocation of scarce resources. The course delves into concepts such as consumer choice, production and cost analysis, market structure, and the role of government in market outcomes. Students will explore both perfectly competitive markets and various forms of market imperfections, using models to analyze the impact of market forces on efficiency, equity, and welfare. Emphasis is placed on developing analytical tools essential for understanding real-world economic issues and policy debates.
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 and .If price must reach a certain level before firms supply anything \(\mathrm { Q } _ { \mathrm { S } } = \mathrm { A } + \mathrm { BP }\) , \(Q _ { D } = D + C P\) ,A must be.
A)positive
B)negative
C)0
Answer: B
Q2) If the production possibilities frontier can be expressed as \(4 X ^ { 2 } + Y ^ { 2 } = 16\) then the point \(\mathrm { X } = 1\) ; \(Y = 4\) is.
A)outside the production possibilities frontier
B)on the production possibilities frontier
C)inside the production possibilities frontier
D)in the wrong quadrant to be on the graph
Answer: A
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3
Chapter 2: Utility and Choice
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Sample Questions
Q1) As an individual moves northwest along an indifference curve substituting more and more Y for X,his or her MRS of X for Y
A)increases.
B)decreases.
C)stays the same.
D)changes in a way that cannot be determined.
Answer: A
Q2) 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
Q3) If people like their goods in fixed proportions,the two goods are
A)perfect substitutes
B)perfect complements
C)complements (but not perfect)
D)substitutes (but not perfect)
Answer: B
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Page 4
Chapter 3: Demand Curves
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Sample Questions
Q1) The relationship between changes in income and purchase of a good indicates
A)whether the good is a luxury or necessity.
B)whether the good is normal or inferior.
C)whether the good is a complement or substitute.
D)Both a and b
Answer: D
Q2) With only two goods,if the income effect is in the opposite direction as the substitution effect but the substitution effect dominates then the good is A)normal
B)inferior but not Giffen
C)Giffen
D)There is not enough information to answer.
Answer: B
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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Page 5
Chapter 4: Uncertainty
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Sample Questions
Q1) Risk averse individuals will diversify their investments because this will A)increase their expected returns.
B)provide them with some much-needed variety.
C)reduce the variability of their returns.
D)reduce their transactions costs.
Q2) Risk aversion is best explained by A)timidity.
B)increasing marginal utility of income.
C)constant marginal utility of income.
D)decreasing marginal utility of income.
Q3) Continuing with the same vacation-insurance company from the preceding question,is there any vacation-day price that would both strictly increase the family's expected utility (compared to no insurance)and strictly increase the profits of the risk-neutral insurance company?
A)No.
B)Yes,3 or 4.
C)Yes,4.
D)Yes,4 or 5.
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6
Chapter 5: Game Theory
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Sample Questions
Q1) 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.
Q2) Consider the game between the teens from the previous question.The pure-strategy Nash equilibrium is (equilibria are)
A)Both Declare.
B)Both Ignore/Rebuff.
C)There are two: in one,both Declare,and in the other,both Rebuff/Ignore.
D)There are two: in both,the teens do the opposite of each other.
Q3) Consider the game between the teens from the previous question. In addition to any pure-strategy Nash equilibrium,there is another one in mixed strategies. In it,each teen chooses to declare with probability
A)0.52
B)0.5
C)0.34
D)0.1
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Chapter 6: Production
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Sample Questions
Q1) The marginal rate of technical substitution of labor for capital measures
A)the amount by which capital input can be reduced while holding quantity produced constant when one more unit of labor is used.
B)the amount by which labor input can be reduced while holding quantity produced constant when one more unit of capital is used.
C)the ratio of total labor to total capital.
D)the ratio of total capital to total labor.
Q2) A firm's isoquant shows
A)the amount of labor needed to produce a given level of output with capital held constant.
B)the amount of capital needed to produce a given level of output with labor held constant.
C)the various combinations of capital and labor that will produce a given amount of output.
D)None of the above.
Q3) If Q = K<sup>1/2</sup>L<sup>1/2</sup> the MP<sub>K</sub> is
A)constant
B)diminishing
C)increasing
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Page 8
Chapter 7: Costs
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Sample Questions
Q1) In the long run
A)all inputs are fixed.
B)all inputs are variable.
C)some inputs are fixed.
D)production levels never change.
Q2) Suppose the production function for coffee (C)is C = min(B,W),where B = beans in pounds and W = water in gallons. Suppose the price of water is $.10 per gallon and the price of beans is $10 per pound.The cost minimizing combination of beans and water for C = 200 is
A)B = 200,W = 2000
B)B = 2000,W = 200
C)B = 100,W = 100
D)B = 200,W = 200
Q3) Suppose a cost function is TC = Aq<sup>3</sup> + bq<sup>2</sup> + cq +d. Then the average total cost is
A)Aq<sup>2</sup> + bq + cq +d/q
B)Aq<sup>2</sup> + bq + c
C)Aq<sup>3</sup> + bq<sup>2</sup>+ cq
D)d
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Page 9
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 profits is
A)10
B)20
C)30
D)-10
Q2) Suppose a farmer is a price taker in soybeans with cost functions given by ?
TC = .1q<sup>2</sup> + 2q + 30
MC = .2q + 2
Suppose the farmer has to purchase a license for $50 per period in order to stay in business. In this case,its new total cost function is
A)still TC = .1q<sup>2</sup> + 2
B)TC = .1q<sup>2</sup> + .2q + 80
C)TC = .1q<sup>2</sup> + 2q + 50
D)TC = 50
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Page 10
Chapter 9: Perfect Competition in a Single Market
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Sample Questions
Q1) Suppose a chemical company is in a perfectly competitive industry and has a short run total cost curve of \(\mathrm { TC } = \frac { 1 } { 3 } \mathrm { q } ^ { 3 } + 5 \mathrm { q } ^ { 2 } + 10 q + 10\) and a short run marginal cost of SMC = q<sup>2</sup> + 10q + 10.At the price of 49,how much will be produced?
A)0
B)3
C)5
D)15
Q2) When prices drop in response to a decline in demand for an increasing cost industry
A)producer surplus will increase but rents may decrease.
B)rent earned by elastically supplied inputs will decline by more than rent earned by inelastically supplied inputs.
C)rent earned by elastically supplied inputs will decline by less than rent earned by inelastically supplied inputs.
D)both producer surplus and rents will increase.
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11
Chapter 10: General Equilibrium and Welfare
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Sample Questions
Q1) Suppose goods X and Y are produced along a production possibilities frontier 4X<sup>2</sup> + Y<sup>2</sup> = 500 and they are perfect substitutes such that U = X + Y.The slope of the production possibilities frontier is \(\frac { - 4 X } { \sqrt { 500 - 4 X ^ { 2 } } }\) .How much X should be produced?
A)0
B)5
C)10
D)20
Q2) 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.
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Page 12
Chapter 11: Monopoly
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Sample Questions
Q1) For the practice of price discrimination to be successful,the monopoly must
A)face an imperfect resale market for its product.
B)face similar demand curves for various markets.
C)have similar costs among markets.
D)have a downward sloping marginal cost curve.
Q2) A monopolist with constant average and marginal cost equal to 8 (AC = MC = 8)faces demand Q = 100 - P,implying that its marginal revenue is MR = 100 - 2Q. Its profit maximizing quantity is A)8
B)46
C)50
D)92
Q3) Which is not an example of price discriminating by separating markets?
A)offering discounts for students with IDs.
B)charging lower prices for airline tickets with a Saturday stay-over.
C)selling 13 bagels (a "baker's dozen") for the price of 12.
D)selling snowblowers at a discount in relatively warmer climates.
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Chapter 12: Imperfect Competition
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Sample Questions
Q1) Suppose there are two firms,Boors and Cudweiser,each selling nonalcoholic beer.Suppose Boors and Cudweiser are not viewed as perfect substitutes but rather demand for Boors is QB = 5000 - 1000PB + 100PC and demand for Cudweiser is QC = 3000 - 1500PC + 100PB.For simplicity,assume zero marginal costs.Which is the more preferred beer?
A)Boor's
B)Cudweiser
C)they are equally preferred
D)neither are preferred
Q2) Consider the same market for nonalcoholic beer as in the previous question. How many "units" of beer will Boors produce in the Nash equilibrium?
A)667
B)1,667
C)2,333
D)3,000
Q3) 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.
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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 net gain to all workers,not just those who keep their jobs,(in producer surplus terms)will be
A)10
B)20
C)30
D)40
Q2) The size of the reduction in quantity of labor hired by a firm due to an increase in the wage rate depends upon all of the following except
A)what percentage of total costs are made up of labor costs.
B)how much quantity demanded in the output market will be reduced by a higher price.
C)the capital to labor ratio before the wage increase.
D)how easily other inputs can be substituted for labor.
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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) The difference in present value between a perpetuity that promised $1 per year starting today and one that promised $1 per year starting next year is A)0.
B)$1.
C)$1/(1 + r).
D)$r/(1 + r).
Q3) A monopolist who owned the entire supply of a scarce resource would set a price A)at about the competitive level.
B)lower than the competitive level.
C)higher than the competitive level but lower than what a monopoly producer of a non-scarce good would.
D)above that which would be chosen by a monopoly producer of a nonscarce good.
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Page 16
Chapter 15: Asymmetric Information
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Sample Questions
Q1) Return to the case of education and the job market from the previous question. Which condition would be consistent with both types' obtaining an education in equilibrium?
A)cH < w < cL.
B)cL < w < cH.
C)cH < cL < w.
D)w < cL < cH.
Q2) A risk-averse manager is hired to run a firm for shareholders. If shareholders cannot observe the manager's effort,which would be the best employment contract?
A)a high-powered incentive contract to elicit maximum effort.
B)a fixed salary.
C)a moderately powered incentive scheme that elicits some effort without exposing the manager to too much risk.
D)an incentive scheme that provides maximum incentives and maximum insurance.
Q3) Adverse selection in competitive insurance markets harms
A)high-risk individuals.
B)low risk individuals.
C)owners of competitive insurance companies.
D)everyone.
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Page 17
Chapter 16: Externalities and Public Goods
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Sample Questions
Q1) Suppose the market for oranges is perfectly competitive and unregulated.Suppose also that the chemicals used to keep the oranges insect-free damage the environment by an estimated $1 per bushel of oranges.Suppose Q<sub>D</sub> = 1000 - 100P and Q<sub>S</sub> = -100 + 100P.The tax that would have to exist to achieve the socially optimal level of production would be
A)$0
B)$.50
C)$1
D)$2
Q2) If bargaining is costless,the assignment of property rights for an externality
A)has no impact on the possibility of an efficient outcome and no distributional impact. B)has no impact on the possibility of an efficient outcome but does have a distributional impact.
C)does have an impact on the possibility of an efficient outcome but has no distributional impact.
D)does have an impact on the possibility of an efficient outcome and does have a distributional impact.
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Page 18
Chapter 17: Behavioral Economics
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Sample Questions
Q1) Jan is a hyperbolic discounter. She puts weight 1 on utility earned in the current period but only weight .5 on utility earned in future periods. In period 1 she comes up with a plan,which involves taking some action that leads to a loss of C utils in period 2 but provides a benefit of B utils in period 3. What values of B and C will lead her to behave inconsistently and not follow through on her plans?
A)C < B < 2C.
B)B < C.
C)B > 2C.
D)B < C < 2B.
Q2) 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.
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