Microeconomic Theory Final Exam
Course Introduction
Microeconomic Theory explores the fundamental principles that govern individual decision-making, market interactions, and the allocation of resources within an economy. This course delves into concepts such as consumer and producer behavior, utility maximization, demand and supply analysis, market equilibrium, and the role of prices in coordinating economic activity. Students will also study various market structures, including perfect competition, monopoly, and oligopoly, as well as the implications of market failures and government interventions. Through mathematical modeling and real-world applications, the course provides a rigorous foundation for understanding how microeconomic forces shape outcomes in both goods and factor markets.
Recommended Textbook
Microeconomics 2nd Edition by B. Douglas Bernheim
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Page 2
Chapter 1: Introduction
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Q1) Economists use assumptions in order to
A) make models more realistic.
B) simplify complex real-world behavior.
C) make their models fit the data.
D) avoid using mathematics.
Answer: B
Q2) A society's institutions
A) include the laws and customs that influence the allocation of resources.
B) have no effect on people's abilities to make decisions.
C) are irrelevant when studying an economy.
D) are not related to the control of society's resources.
Answer: A
Q3) Economists think of products as being in the same market if they
A) are traded in the same geographic location.
B) cannot be substituted for other goods and services.
C) are highly interchangeable.
D) produced by companies that complete with each other.
Answer: C
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3
Chapter 2: Supply and Demand
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Q1) The effect of an increase in the price of gasoline on the demand for sport utility vehicles would be shown by a:
A) rightward shift of the demand curve for sport utility vehicles.
B) leftward shift of the demand curve for sport utility vehicles.
C) movement up and to the left along the demand curve for sport utility vehicles.
D) movement down and to the right along the demand curve for sport utility vehicles.
Answer: B
Q2) If a firm knows that the demand for its product is inelastic,it could generate more revenue by:
A) lowering the price, because the resulting change in sales would be relatively large.
B) raising the price, because the resulting change in sales would be relatively large.
C) lowering the price, because the resulting change in sales would be relatively small.
D) raising the price, because the resulting change in sales would be relatively small.
Answer: D
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Chapter 3: Balancing Benefits and Costs
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Q1) Consider a consumer choosing between spending her money on food,F,or clothing,C. Assume that a unit of food and a unit of clothing have the same price, and that the consumer can afford a total of 20 units of either food or clothing. The benefit of food is given by B(F) = 100 F, with MB(F) = 50/ F. The benefit of clothing is given by B(C) = 25C, with MB(C) = 25. How many units of clothing should the consumer buy?
A) 0
B) 2
C) 4
D) 6
Answer: D
Q2) If H represents the number of hours spent on an activity,then which of the following could represent a total benefit function?
A) 400H - 30H<sup>2</sup>
B) 400H + 30H<sup>2</sup>
C) -400H - 30H<sup>2</sup>
D) -400H + 30H<sup>2</sup>
Answer: A
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Page 5
Chapter 4: Consumer Preferences
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Q1) Consider two activities: Attending economics class and reading an economics textbook.Zack thinks he can learn economics by either attending class or reading the textbook.Zoe knows she learns best by both attending class and reading the textbook.Use indifference curves to illustrate each person's preferences for attending class and reading the text.
Q2) The rate at which a consumer will exchange one good for another is called:
A) marginal utility.
B) the marginal rate of transformation.
C) the rate of substitutability.
D) the marginal rate of substitution.
Q3) Frieda enjoys cooking and baking.Her utility function is U(C,B)= 6C + 3B,where C is the number of hours she spends cooking and B is the hours she spends baking.What is Frieda's MU of cooking?
A) 1/6
B) 2
C) 6
D) It cannot be determined from the given information.
Q4) Compare and contrast cardinal utility and ordinal utility.Which concept is sufficient for ranking consumers' preferences? Why?
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Chapter 5: Constraints, Choices, and Demand
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Q1) When the price elasticity of demand is small in magnitude,a _____ increase in the price leads to a _____ reduction in the amount purchased and the demand curve is relatively ____.
A) slight; substantial; steep
B) slight; slight; flat
C) large; slight; steep
D) slight; substantial; flat
Q2) Using a carefully-labeled diagram,explain an Engel curve for a good that is initially a normal good,but eventually becomes an inferior good.
Q3) Whenever a consumer purchases good X but not good Y,then:
A) MRS<sub>XY</sub> P<sub>X</sub>/P<sub>Y</sub> at the chosen bundle.
B) MRS<sub>XY</sub> P<sub>X</sub>/P<sub>Y</sub> at the chosen bundle.
C) MRS<sub>XY</sub> = P<sub>X</sub>/P<sub>Y</sub> at the chosen bundle.
D) MRS<sub>XY</sub> = - P<sub>X</sub>/P<sub>Y</sub> at the chosen bundle.
Q4) Nicole's income is $1,000 per month.She spends all of it on shoes (S)and books (B).Shoes cost $50 and books cost $25.Her marginal rate of substitution for shoes with books is MRS<sub>SB</sub> = 2B/3S.Illustrate her utility-maximizing combination of shoes and books and draw her price-consumption curve if the price of books rises to $30.
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Chapter 6: Demand and Welfare
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Q1) Suppose that Amber's demand for gasoline is given by G = 1000200P<sub>G</sub>,where G stands for gallons of gas and P<sub>G</sub> represents the price of gas.
(a)Suppose gas sells for $2 per gallon.What is Amber's consumer surplus? Illustrate your answer graphically.
(b)Suppose the price of gas rises to $3 per gallon.What is the change in Amber's consumer surplus? Illustrate this change in your graph.
Q2) Madison has an income of $50,which she spends on Pizza (P)and soft drinks (S).Her marginal rate of substitution is MRS<sub>PS</sub> = S/P.The price of pizza (P<sub>P</sub>)is $5 and the price of soft drinks (P<sub>S</sub>)is $2.50.Finally,the formula for her indifference curves is given by S = 2U/P
(a)Find Madison's uncompensated demand curve for pizza.
(b)Find Madison's compensated demand curve for pizza.
Q3) The amount of money actually received in a particular period is called:
A) nominal income.
B) real income.
C) a cost-of-living index.
D) consumer surplus.
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Page 8
Chapter 7: Technology and Production
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Q1) For the Cobb-Douglas production function F(L,K)= AL<sup> </sup>K<sup> </sup>,a technical change that increases the productivity of capital would be represented by:
A) an increase in the value of .
B) an increase in the value of .
C) values of and for which > .
D) an increase in the value of A.
Q2) Consider the Cobb-Douglas production function F(L,K)= AL<sup> </sup>K<sup> </sup>.Which of the following statements is true?
A) Increases in increase labor's productivity and raise MRTS<sub>LK</sub>.
B) Decreases in increase labor's productivity and raise MRTS<sub>LK</sub>.
C) Increases in increase labor's productivity and lower MRTS<sub>LK</sub>.
D) Changes in will not affect MRTS<sub>LK</sub>.
Q3) From 1970 to 1984,the productivity of the Lockeed Company increased as the company produced more airplanes.According to the text,Lockeed's experience can best be described as:
A) increasing returns to scale.
B) technological change.
C) learning-by-doing.
D) increasing marginal returns.
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Page 9
Chapter 8: Cost
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Q1) Suppose that MP<sub>L</sub> = 200 and MP<sub>K</sub> = 240.If R = 30,then at which of the following wages would the firm want to hire fewer workers and more capital?
A) W = 23
B) W = 24
C) W = 25
D) W = 26
Q2) Suppose a firm has a weekly cost function of C(Q)= 8Q + (Q<sup>2</sup>/100)and a marginal cost function of MC = 8 + (Q/50).What is the efficient scale of production,and what is the minimum average cost?
A) Q<sup>e</sup> = 0; AC = $0
B) Q<sup>e</sup> = 0; AC = $8
C) Q<sup>e</sup> = 8; AC = $8
D) Q<sup>e</sup> = 8; AC = $64.64
Q3) As any firm with decreasing returns to scale increases its output:
A) its average cost of production must rise.
B) its average cost of production must fall.
C) its total cost of production must fall.
D) its marginal cost of production must rise.
Q4) Using a graph,explain the relationship between average cost and marginal cost.
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Chapter 9: Profit Maximization
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Q1) The price reduction effect of the sale of a firm's last Q units of output is:
A) the additional revenue from selling Q units at price P(Q).
B) the reduced revenue from selling (Q - Q) units at a lower price of P(Q).
C) the additional revenue from selling Q units at price P(Q + Q).
D) the reduced revenue from selling (Q - Q) units at a lower price of P(Q - Q).
Q2) Jessica owns a company that makes pre-packaged sandwiches for convenience stores.The market price for a sandwich is $5 and Jessica is a price-taker.Her daily variable cost for making sandwiches is C(Q)= 2.5Q + (Q<sup>2</sup>/40)and her marginal cost is MC = 2.5 + (Q/20).What is the average cost of a sandwich at the quantity of sandwiches Jessica should be selling each day?
A) $1.25
B) $2.50
C) $3.75
D) $6.25
Q3) The Law of Supply ______ holds for price-taking firms.
A) always
B) usually
C) occasionally
D) never
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Chapter 10: Choices Involving Time
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Q1) Which of following statements about bonds is NOT true?
A) Bonds have a variable term.
B) The face value of a bond is the amount to be paid at maturity.
C) The maturity of a bond refers to the period over which payments are made.
D) When interest rates rise, the present discounted value of a bond falls.
Q2) When the interest rate rises,saving becomes ______ rewarding and borrowing becomes ______ costly.
A) less; less
B) less; more
C) more; less
D) more; more
Q3) Which statement about the Life Cycle Hypothesis is NOT true?
A) It describes the choices of consumers who live for a long time.
B) It separates consumers' earnings into two stages.
C) It assumes that people prefer instability.
D) It assumes that people prefer a higher standard of living to a lower standard of living.
Q4) 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.
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Page 12
Chapter 11: Choices Involving Risk
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Q1) Two variables are uncorrelated if:
A) they move in the same direction.
B) they move in the opposite direction.
C) their movements tend to be unrelated.
D) one is simply a multiple of the other.
Q2) Explain the relationship between the correlation of payoffs and the risk reducing effects of diversification and hedging.
Q3) Suppose Brandon's indifference curves are defined as U = (3/4) F<sub>S</sub> + (1/4) F<sub>H</sub>,where F<sub>S</sub> is consumption during sunny weather and F<sub>H</sub> is consumption during a hurricane.Further suppose Brandon receives 64 units of food when it is sunny and 16 units when there is a hurricane.What is the certainty equivalent of the expected food consumption bundle if the probability of sunshine is = 0.75?
A) 49 units of food
B) 52 units of food
C) 7 units of food
D) 25 units of food
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Chapter 12: Choices Involving Strategy
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Q1) Cooperation:
A) is sustained by the threat of punishment for bad behavior.
B) is sustained by the promise of reward for good behavior.
C) will fail to be established if threats/promises are not credible.
D) All of these are true about cooperation.
Q2) A repeated game:
A) can be finite or infinite.
B) is formed by playing a simpler game many times in succession.
C) is a multiple-stage game.
D) All of these are true about repeated games.
Q3) A player's best response is:
A) a strategy that provides him with a minimum payoff, assuming that other players behave in a specified way.
B) a strategy that provides him with the highest possible payoff, assuming that other players behave in a specified way.
C) a strategy that provides him with some payoff defined by a probability.
D) None of these is correct.
Q4) Use the concepts of reputation and asymmetric information to explain why some faculty members become less productive after gaining tenure.
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Chapter 13: Behavioral Economics
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Q1) Prospect theory was proposed by:
A) John Nash.
B) Milton Friedman and George Stigler.
C) Amos Tversky and Daniel Kahneman.
D) Gary Becker.
Q2) Gabby flips a fair coin and it comes up heads.Gabby suffers from the hot-hand fallacy if:
A) she thinks the coin will come up heads on the next flip because it came up heads on the previous flip.
B) she thinks the coin will come up tails on the next flip because it came up heads on the previous flip.
C) she thinks the coin is less likely to come up heads because it came up heads on the previous flip.
D) she thinks the coin is equally likely to come up heads or tails on the next flip.
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Chapter 14: Equilibrium and Efficiency
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Q1) Properties of long-run competitive equilibrium with free entry include:
A) an equilibrium price equal to the minimum MC.
B) firms earning positive profits.
C) active firms producing at their efficient scales of production.
D) All of these are properties of long-run competitive equilibrium.
Q2) With free entry:
A) there is a known and limited number of potential suppliers that can produce a good in the long run.
B) there is an unlimited number of firms that can produce a good in the long run.
C) the long run market supply curve is vertical at the market quantity.
D) the long run market demand curve is horizontal at the market price.
Q3) Aggregate surplus:
A) is the sum of total willingness to pay and total avoidable costs of production.
B) is minimized under perfect competition.
C) is the sum of consumer and producer surpluses.
D) is equal to zero in the long run.
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Chapter 15: Market Intervention
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Q1) Suppose the domestic market demand function in a certain market where Q is measured in thousands of units is Q<sup>d</sup> = 20 - 2.5P,and the domestic market supply function is Q<sup>s</sup> = 2.5P - 7.5.Suppose further that the world price for the good in question is $3.40 per unit.How much deadweight loss would be caused by a $1.20 tariff on imported units of this good?
A) $3,200
B) $3,600
C) $5,400
D) $3,000
Q2) If the import supply curve is horizontal at the world price:
A) a tariff will lower domestic aggregate surplus.
B) a tariff will increase domestic aggregate surplus.
C) a tariff will not change domestic aggregate surplus.
D) a quota will increase domestic aggregate surplus.
Q3) Discuss why the government would implement a program to lower the price of a good and the welfare effects of such a program.Give an example of good for which such a policy has been implemented and explain the purpose of the policy.
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Page 17
Chapter 16: General Equilibrium, Efficiency, and Equity
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Q1) The input efficiency condition:
A) holds if at least one pair of firms share the same marginal rate of technical substitution between every pair of inputs.
B) holds if at least one pair of consumers share the same marginal rate of substitution between two goods.
C) holds if every pair of firms share the same marginal rate of technical substitution between every pair of inputs.
D) holds if every pair of firms share the same marginal rate of substitution between two goods.
Q2) A point inside the utility possibility frontier is:
A) inefficient.
B) impossible.
C) efficient.
D) desirable.
Q3) The principle of equal opportunity is an example of:
A) an outcome-oriented notion of equity.
B) a process-oriented notion of equity.
C) utilitarianism.
D) Rawlsianism.
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Page 18
Chapter 17: Monopoly
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Q1) Suppose a monopoly firm has an annual demand function of Q<sup>d</sup> = 20,000 - 250P,annual variable costs of VC = 16Q + 0.002Q<sup>2</sup> and marginal cost of MC = 16 + 0.004Q,where Q is the annual quantity of output.In addition,the firm has an avoidable fixed cost of $25,000 per year.If this firm maximizes its profit,what is the value of aggregate surplus?
A) $247,250
B) $272,250
C) $242,000
D) $217,000
Q2) Suppose Kate's Great Crete (KGC)has annual variable costs of VC = 30Q + 0.0025Q<sup>2</sup> and marginal costs of MC = 30 + 0.005Q,where Q is the number of cubic yards of concrete it produces per year.In addition,it has an avoidable fixed cost of $50,000 per year.KGC's demand function is Q<sup>d</sup> = 20,000 - 400P.What is the profit maximizing sales price?
A) $47.70
B) $30.00
C) $45.00
D) $50.00
Q3) Explain the difference between a monopoly and a monopsony.
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Page 19
Chapter 18: Pricing Policies
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Q1) A movie monopolist sells to students and adults.The demand function for students is Q<sup>d</sup><sub>S</sub> = 600 - 100P and the demand function for adults is Q<sup>d</sup><sub>A</sub> = 1,200 - 100P.The marginal cost is $2 per ticket.Suppose the movie theater can price discriminate.What price per ticket does the theater charge students to maximize profits?
A) $4
B) $7
C) $6
D) $12
Q2) Suppose Always There Wireless serves 100 high-demand wireless consumers,who each have a monthly demand curve for wireless minutes of Q<sup>d</sup><sub>H</sub> = 200 - 100P,and 300 low-demand consumers,who each have a monthly demand curve for wireless minutes of Q<sup>d</sup><sub>L</sub> = 100 - 100P,where P is the per-minute price in dollars.The marginal cost is $0.25 per minute.Suppose Always There Wireless charges $0.25 per minute.How many minutes will high-demand consumers purchase?
A) 75
B) 175
C) 200
D) 100
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Page 20
Chapter 19: Oligopoly
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Q1) In a setting of repeated competition:
A) the cooperative outcome is the repetition in each period of the Nash equilibrium outcome that would arise were the firms to compete just once.
B) the non-cooperative outcome is the repetition in each period of the Nash equilibrium outcome that would arise were the firms to compete just once.
C) the non-cooperative outcome is the Nash equilibrium that arises only after firms compete many times.
D) the cooperative outcome is the Nash equilibrium that arises after firms compete many times.
Q2) In the infinitely-repeated Bertrand model:
A) firms play the Bertrand pricing game over and over, with no definite end.
B) firms play the Bertrand pricing game one time.
C) firms play the Bertrand pricing game several times, with a clearly defined endpoint. D) firms play the Bertrand pricing game at least two times, but no more than four.
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Chapter 20: Externalities and Public Goods
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Q1) The economist that originated the idea that government can correct externalities through taxes and subsidization is:
A) John Nash.
B) Arthur Cecil Pigou.
C) Ronald Coase.
D) Theodore Groves.
Q2) Limitations of bargaining include:
A) contracts may not need enforcing.
B) property rights might be assigned in the wrong way.
C) if the parties have too much information, bargaining may be unnecessary.
D) None of these is correct.
Q3) Suppose a paper mill earns $1,000,000 in profits when it pollutes a river,and it can abate pollution at a cost of $A.The effects of the pollution are confined to a single farmer who earns $400,000 if the water he uses from the river is clean and $300,000 if it's polluted.What is the combined profit of both firms without abatement?
A) $1,300,000
B) $900,000
C) $700,000
D) $1,400,000
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Page 22
Chapter 21: Asymmetric Information
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Q1) Which of the following is NOT a potential source of incentives covered in the textbook?
A) Compensation contracts
B) Promotion
C) Reputational considerations
D) Peer pressure
Q2) Explain the differences and similarities between screening and signaling.Is one better than the other?
Q3) Screening is a process that is employed by:
A) a party at an informational advantage.
B) a party at an informational disadvantage.
C) both parties in cases of information asymmetry.
D) both parties in cases of equal and perfect information.
Q4) The problem of adverse selection was first studied by economist ________ who showed how it can undermine the possibilities for trade in the market for _______.
A) Joseph Stiglitz; used cars
B) Joseph Stiglitz; college education
C) George Akerloff; used cars
D) George Akerloff; college education
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