Microeconomic Theory
Pre-Test Questions
Course Introduction
Microeconomic Theory provides a rigorous exploration of the fundamental principles that govern individual and firm behavior within markets. The course examines concepts such as consumer choice, production and cost functions, market structures (including perfect competition, monopoly, and oligopoly), and the role of government in market intervention. Students will analyze how prices and output levels are determined, explore the concept of equilibrium, and utilize mathematical models to assess real-world economic scenarios. Emphasis is placed on critical thinking and analytical skills, equipping students with the tools needed to evaluate economic outcomes and policy impacts at the micro-level.
Recommended Textbook Microeconomics 2nd Edition by B. Douglas Bernheim
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Chapter 1: Introduction
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Q1) Which of the follow is NOT an example of a market?
A) Retail trade of chocolate ice cream in Boston.
B) The buying and selling of homes in Kansas City.
C) The farmer's market in Madison, Wisconsin.
D) The buying and selling of used cars.
Answer: C
Q2) A possible explanation for a natural phenomenon is called
A) the scientific method.
B) a theory.
C) a value judgment.
D) normative economics.
Answer: B
Q3) Positive economic questions
A) involve value judgments.
B) address what ought to happen.
C) are potentially testable.
D) cannot be tested.
Answer: C
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Chapter 2: Supply and Demand
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Q1) A product's ________ describes the amount of the product that is demanded for each possible combination of its price and other factors.
A) demand curve
B) price-consumption curve
C) utility function
D) demand function
Answer: D
Q2) A change in the quantity supplied of a good is represented as a:
A) movement along a supply curve.
B) shift of a supply curve.
C) movement along the supply function.
D) shift of the supply function.
Answer: A
Q3) Which of the following would result from an increase in the demand for a good?
A) Both equilibrium price and quantity would rise.
B) Both equilibrium price and quantity would fall.
C) Equilibrium price would rise, and equilibrium quantity would fall.
D) Equilibrium quantity would rise, and equilibrium price would fall.
Answer: A
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Chapter 3: Balancing Benefits and Costs
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Q1) Suppose that you can hire a worker in one-hour increments.For hours of work up to 4,the total benefit of the worker (in dollars)is B(0)= 0,B(1)= 25,B(2)= 45,B(3)= 60,and B(4)= 70.What is the marginal benefit of the second hour of the worker's time?
A) $10
B) $20
C) $25
D) There is not enough information to answer the question.
Answer: B
Q2) Opportunity cost refers to:
A) the amount of dollars that have to be spent in order to employ a resource.
B) the cost of employing one more unit of a resource.
C) a cost that a decision maker has already incurred.
D) the cost associated with foregoing the opportunity to employ a resource in its best alternative use.
Answer: D
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Chapter 4: Consumer Preferences
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Q1) Suppose a consumer's MRS is given by the formula MRS<sub>PT</sub> = T/P,where P stands for the number of pieces of pizza and T stands for the number of tacos.Starting at 12 tacos and 4 pizzas,the consumer must receive:
A) 3 tacos to compensate them for the loss of one piece of pizza.
B) 3 pieces of pizza to compensate them for the loss of one taco.
C) 1/3 taco to compensate them for the loss of one piece of pizza.
D) 1/3 piece of pizza to compensate them for the loss of one taco.
Q2) According to influential moral philosopher Jeremy Bentham:
A) utility functions should provide cardinal information about preferences.
B) the aim of public policy should maximize an individual's utility.
C) utility functions should provide ordinal information about preferences.
D) public policy decisions should be based on ordinal utility.
Q3) From the modern "ordinalist" perspective,the scale used to measure utility:
A) provides an absolute measure of human well-being.
B) is completely arbitrary.
C) summarizes information about the intensity of preferences.
D) is the same for each consumer.
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) If the income-consumption path slopes down,then:
A) both goods are inferior.
B) both goods are normal.
C) one good is normal and the other good is inferior.
D) we can't tell anything about whether the goods are normal or inferior.
Q2) A utility function is a mathematical function that assigns values to consumption bundles to represent the:
A) consumer's income.
B) consumer's preferences.
C) marginal rate of substitution.
D) prices of the goods in the consumption bundle.
Q3) Suppose a consumer buys pizza (P)and soft drinks (S).The price of pizza is $10,the price of soft drinks is $2 and the consumer's income is $100.If pizza is measured on the vertical axis and soft drinks are measured on the horizontal axis,then the consumer's budget constraint is given by:
A) P = 10 - (1/5)S
B) S = 10 - (1/5)P
C) P = 100 - 5S
D) P = 10 - 5S
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Chapter 6: Demand and Welfare
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Q1) A change in price that is accompanied by a change in income sufficient to leave a consumer's well-being unchanged is called:
A) an uncompensated price change.
B) a compensated price change.
C) an income adjusted price change.
D) the income effect.
Q2) What must occur for a good to violate the Law of Demand?
A) The good must be normal and the income effect must be larger than the substitution effect.
B) The good must be normal and the substitution effect must be larger than the income effect.
C) The good must be inferior and the income effect must be larger than the substitution effect.
D) The good must be inferior and the substitution effect must be larger than the income effect.
Q3) Using a graph,explain both the substitution effect and income effect that result from an increase in the price of a normal good.
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Chapter 7: Technology and Production
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Q1) Suppose that a firm uses both labor (L)and capital (K)as inputs.The firm's long-run production function is Q = F(L,K)= 5 L K.If the firm has 100 units of capital,what is its short-run production function?
A) Q = F(K) = 50 K
B) Q = F(L) = 500 L
C) Q = F(L,K) = 50 L K
D) Q = F(L) = 50 L
Q2) Which of the following is a short-run decision?
A) Because of an increase in enrollment, the economics department hires two new professors.
B) After a new classroom building is built, the economics department hires two new professors.
C) Your college builds a new classroom building.
D) The economics department buys new computers for the professors.
Q3) As long as a firm can freely dispose of any extra inputs it may have:
A) its production function must slope downward.
B) its production function must be concave.
C) its production function must slope upward.
D) its production function must be convex.
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Page 9
Chapter 8: Cost
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Q1) If Q represents a firm's level of output,W represents the wage paid to labor (L)and R is the cost of capital (K),then which of the following represents the firm's isocost line?
A) C = FC + VC(Q)
B) C = FC(Q) + VC(Q)
C) C = WL + RK
D) C = (W + R)Q
Q2) Using a graph,explain the relationship between average cost and marginal cost.
Q3) Isocost lines associated with ______ total cost lie ______ the origin.
A) lower; farther from B) higher; farther from C) higher; closer to D) sunk; closer to
Q4) The strategy whereby a firm makes most of its own inputs is called:
A) economies of scope.
B) horizontal integration.
C) economies of scale.
D) vertical integration.
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Chapter 9: Profit Maximization
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Q1) The output expansion 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) Firms in perfectly competitive markets take the ______ as given when deciding how much to sell.
A) market quantity
B) lowest prices
C) market prices
D) input prices
Q3) Checking to see whether the most profitable positive sales quantity results in a greater profit than not producing at all is the basis of what rule?
A) Interior Action Rule
B) Quantity Rule
C) Shut-down Rule
D) Profit-maximizing Rule
Q4) Using a graph,explain why the law of supply holds for a competitive firm.
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Page 11
Chapter 10: Choices Involving Time
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Q1) At an interest rate of 8.25% compounded annually,what is the present discounted value of $2,000 to be received 2 years from now?
A) $1670.00
B) $1706.77
C) $1716.74
D) $1835.00
Q2) A consumption bundle is affordable as long as:
A) it is a point that is on an indifference curve that is to the right of the budget line.
B) it is a point that falls on the 45 degree line.
C) the present discount value of the consumption stream is less than the present discount value of the income stream.
D) the amount of the good consumed from year to year does not increase.
Q3) The NPV criterion states that an investment project is profitable when its NPV is ______ and unprofitable when its NPV is ______.
A) positive; positive
B) positive; negative
C) negative; positive
D) negative; negative
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Chapter 11: Choices Involving Risk
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Q1) If two investments are uncorrelated:
A) there is no benefit from diversification.
B) there is no benefit to hedging.
C) diversification reduces risk without changing the expected payoff.
D) diversification reduces both risk and the expected payoff.
Q2) Suppose Lily's indifference curves are defined as U = F<sub>S</sub> + F<sub>H</sub>,where F<sub>S</sub> is consumption during sunny weather and F<sub>H</sub> is consumption during a hurricane.Lily receives 64 units of food when it is sunny and 16 units of food when there is a hurricane.What is the certainty equivalent of the expected food consumption bundle if the probability of sunshine is = 0.5?
A) 6
B) 12
C) 25
D) 36
Q3) Explain the relationship between the correlation of payoffs and the risk reducing effects of diversification and hedging.
Q4) Explain why a risk averse individual will purchase full insure if a policy is actuarially fair,but only partially insure or not insure at all,if it is not.Use graphs to support your answer.
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Chapter 12: Choices Involving Strategy
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Q1) In a multiple-stage game:
A) at least one participant observes a choice by another participant before making some decision.
B) each participant makes all of his choices before observing any choice by any other participant.
C) at least one participant makes his choice before observing the choices made by other participants.
D) one participant has full information of the other players choices before making his choice.
Q2) Suppose Dean and Kennedy are playing a single stage game.Each simultaneously chooses either 1 or 2.If they both select 1,Dean pays Kennedy $2.If they both pick 2,Dean pays Kennedy $4.If they select different numbers,Kennedy pays Dean $3.Draw a table showing the two players' strategies and payoffs.Are any strategies dominant? Weakly dominant? Dominated? Solve for a mixed strategy equilibrium.
Q3) A second-price auction:
A) has two Nash equilibriums.
B) does not have a Nash equilibrium.
C) leads to a winner's curse.
D) avoids the winner's curse.
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Page 14
Chapter 13: Behavioral Economics
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Q1) In a voluntary contribution game:
A) each member of a group makes a contribution to a common pool which benefits only the contributor, and this leads to alignment of individual and collective interests.
B) each member of a group makes a contribution to a common pool which benefits everyone, and this leads to alignment of individual and collective interests.
C) each member of a group makes a contribution to a common pool which benefits only the contributor, and this leads to a conflict between individual and collective interests.
D) each member of a group makes a contribution to a common pool which benefits everyone, and this leads to a conflict between individual and collective interests.
Q2) A person is dynamically inconsistent if:
A) lapses in self-control occur.
B) he does not always follow through on his plans and intentions.
C) he changes his ranking of alternatives available at some future date as the date approaches or once it arrives.
D) All of these are sufficient for dynamic inconsistency.
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Chapter 14: Equilibrium and Efficiency
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Q1) Suppose the market demand for milk is Q<sup>d</sup> = 1505P.Additionally,suppose that a dairy's variable costs are VC = 2Q<sup>2</sup> (where Q is the number of gallons of milk produced each day),its marginal cost is MC = 4Q and there is an avoidable fixed cost of $50 per day.In the long run there is free entry into the market.Suppose the demand for milk doubles.If in the short run the number of firms is fixed and their fixed costs are sunk,what is the short run equilibrium price?
A) $20 per unit
B) $24 per unit
C) $10 per unit
D) $40 per unit
Q2) Suppose Julia and Zach are the only consumers of milk.Julia's demand for milk is defined as Q<sup>d</sup><sub>Julia</sub> = 12 - 3P at prices below $4 and zero for prices above $4.Zach's demand for milk is defined as Q<sup>d</sup><sub>Zach</sub> = 10 - 2P at prices below $5 and zero for prices above $5.If the market price for milk is $4.50,market demand is:
A) zero units of milk.
B) 1.5 units of milk.
C) 1 units of milk.
D) 10 units of milk.
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Chapter 15: Market Intervention
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Q1) The market demand function for wheat is Q<sup>d</sup> = 10 - 2P and the market supply function is Q<sup>s</sup> = 4P - 2,both measured in billions of bushels per year.Suppose the government wants to increase the price of wheat to $3/bushel and they impose a price floor to achieve their goal.What is the size of the consumer surplus?
A) $4 billion
B) $8 billion
C) $10 billion
D) $6 billion
Q2) A quota:
A) is a tax on imports.
B) is a tax on exports.
C) directly limits the total quantity of a good that can be imported.
D) directly limits the total quantity of a good that can be exported.
Q3) An ad valorem tax:
A) is a fixed dollar amount that must be paid on each unit bought or sold.
B) is a tax that is stated as a percentage of the good's price.
C) is a tax that is stated as a percentage of the good's price, which increases as quantity bought increases.
D) is a tax that is only paid by producers.
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Page 17
Chapter 16: General Equilibrium, Efficiency, and Equity
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Q1) Suppose milk and cereal are compliments and the demand for milk is Q<sup>d</sup><sub>m</sub> = 40 - 6P<sub>m</sub> - 2P<sub>c</sub>,where Q<sup>d</sup><sub>m</sub> stands for millions of gallons of milk demanded,P<sub>m</sub> stands for the price of milk and P<sub>c</sub> stands for the price of cereal.The supply of milk is Q<sup>s</sup><sub>m</sub> = 6P<sub>m</sub> - 8,where Q<sup>s</sup><sub>m</sub> stands for millions of gallons of milk supplied.The demand and supply of cereal are Q<sup>d</sup><sub>c</sub> = 905P<sub>c</sub> - P<sub>m</sub> and Q<sup>s</sup><sub>c</sub> = 5P<sub>c</sub> - 10,respectively,where Q<sup>d</sup><sub>c</sub> stands for millions of boxes of cereal demanded and Q<sup>s</sup><sub>c</sub> stands for millions of boxes of cereal supplied.Suppose the government imposes a $2.00 per gallon tax on milk.The new general equilibrium price of milk is:
A) $2.37.
B) $4.37.
C) $0.37.
D) $3.39.
Q2) Compare and contrast the principles of utilitarianism,Rawlsianism and egalitarianism.Discuss the assumptions of each and the difficulties societies might face while trying to conform to them.
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Chapter 17: Monopoly
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Q1) Kate's Great Crete (KGC)is a local monopolist of ready-mix concrete.Its annual demand function is Q = 20,000 - 400P,where P is the price,in dollars,of a cubic yard of concrete and Q is the number of cubic yards sold per year.What is the difference between price and marginal revenue when KGC sells 5,000 cubic years of concrete per year?
A) $12.50
B) $25.00
C) $37.50
D) $50.00
Q2) A firm has market power:
A) when it can profitably charge any price of its choosing.
B) when it is characterized as a price taker.
C) when it can profitably charge a price that is above its marginal cost.
D) only when it is the sole firm producing in a market.
Q3) Explain the difference between a monopoly and a monopsony.
Q4) An oligopoly market is:
A) a market with many sellers.
B) a market with a single seller.
C) a market with a few sellers.
D) a market with many buyers.
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Chapter 18: Pricing Policies
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Q1) Always There Wireless is wireless monopolist in a rural area.There are 200 customers,each of whom has a monthly demand curve for wireless minutes of Q<sup>d</sup> = 200 - 100P,where P is the per-minute price in dollars and Q is the number of wireless minutes.The marginal cost of providing the wireless service is $0.25 per minute.If Always There charges $0.25 per minute and the largest fixed fee that it can,what is Always There's profit per customer?
A) $153.13
B) $196.88
C) $200
D) $175
Q2) Bundling always increases a multi-product monopolist's profit:
A) whenever the marginal rate of substitution is decreasing.
B) whenever an increase of a dollar in the willingness to pay for one good implies an increase of a dollar in the willingness to pay for another good and the marginal cost is zero.
C) when doing so does not alter consumers' willingness to pay for the bundle and the monopolist can extract all of aggregate surplus as profit.
D) if and only if the monopolist is also perfectly price discriminating.
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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 an oligopolistic market,:
A) the larger the number of firms and the more elastic the demand, the greater the markup.
B) the larger the number of firms and the less elastic the demand, the greater the markup.
C) the smaller the number of firms and the less elastic the demand, the greater the markup.
D) the smaller the number of firms and the more elastic the demand, the greater the markup.
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Chapter 20: Externalities and Public Goods
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Q1) A good is nonexcludable if:
A) there is no way to prevent a person from consuming or using it.
B) more than one person can consume it at the same time without affecting its value to others.
C) consumption of it involves perfect rivalry.
D) consumption is completely excludable.
Q2) Three hundred paper mills compete in the paper market.The total cost of production (in dollars)for each mill is given by the formula TC = 1,000Q<sub>mill</sub> + (Q<sub>mill</sub>)<sup>2</sup>,where Q<sub>mill</sub> indicates the mills annual production in thousands of tons.The marginal external cost of a mill's production (in dollars)is given by the formula MEC = 200 + 2Q<sub>mill</sub>.Finally,annual market demand (in thousands of tons)is given by the formula Q<sup>d</sup> = 200,000 -
100P.What is the competitive price?
A) $1,400
B) $920
C) $7,000
D) $1995
Q3) Explain ways in which the government can remedy an externality.
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Chapter 21: Asymmetric Information
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Q1) The value of a worker's marginal product is $40 per hour for high-ability workers and $5 per hour for low-ability workers.The preferences of high-ability workers correspond to the utility function U<sub>H</sub>(E,W)= W - 5E,and the preferences of low-ability workers correspond to the utility function U<sub>L</sub>(E,W)= W - 8E.By law,everyone is required to attend at least ten years of school.Three-fourths of the population has low ability,and one-fourth has high ability.What can be said about the educational attainment of each type of worker in a separating equilibrium?
A) E<sub>L</sub> = 10; 10 < E<sub>H</sub> < 14.375
B) E<sub>L</sub> = 10; E<sub>H</sub> < 17
C) E<sub>L</sub> = 10; E<sub>H</sub> > 14.375
D) E<sub>L</sub> = 10; 14.375 < E<sub>H</sub> < 17
Q2) In order to induce desirable behavior,one might employ _______,which is a contract or compensation policy that ties rewards or punishments to performance.
A) signaling
B) an incentive scheme
C) nudges
D) advantageous selection
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