Microeconomic Theory Review Questions
Course Introduction
Microeconomic Theory explores the foundational principles that govern individual decision-making and market interactions. The course examines consumer behavior, firm production and cost structures, market equilibrium, and the effects of government intervention. Students learn to apply analytical models to assess how resources are allocated in various market environments, including perfect competition, monopoly, and oligopoly. Through theoretical frameworks, mathematical tools, and real-world applications, Microeconomic Theory equips students with a deep understanding of how micro-level economic agents drive overall economic outcomes.
Recommended Textbook Microeconomics 5th Edition by David Besanko
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17 Chapters
1033 Verified Questions
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Page 2
Chapter 1: Analyzing Economic Problems
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Sample Questions
Q1) An endogenous variable is
A) a variable that an economic agent chooses.
B) consumption, investment or government spending.
C) a variable determined within the economic system being studied.
D) a variable pertaining to the home country economy.
Answer: C
Q2) Which of the following is an example of a constraint?
A) L+W
B) Max LW
C) \(\text { min } A B\)
D) L + W ? 5
Answer: D
Q3) Currently, 100,000 units of a good are traded on the market. The government imposes a tax on producers that raises the unit cost of production of the good. This will:
A) shift the supply curve to the left.
B) shift the supply curve to the right.
C) shift the demand curve to the left.
D) increase the quantity traded.
Answer: A
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Page 3
Chapter 2: Demand and Supply Analysis
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Sample Questions
Q1) A measure of the rate of percentage change of quantity demanded with respect to price, holding all other determinants of demand constant is
A) Price elasticity of market equilibrium
B) Price elasticity of demand
C) Price elasticity of supply
D) Price elasticity equilibrium
Answer: B
Q2) Which of the following statements best describes the relationship between short-run demand elasticity and long-run demand elasticity?
A) For many products, long-run demand is likely to be more price elastic than short-run demand.
B) For durable goods, long-run demand is likely to be more price elastic than short-run demand.
C) For many products, long-run demand is likely to be more price inelastic than short-run demand.
D) For most products, long-run and short-run demand elasticities are the same. Answer: A
Q3) What is the elasticity of the following demand curve? QP<sup>2</sup> = 100 Answer: \(\varepsilon\)<sub>Q,P</sub> = -2.
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Page 4
Chapter 3: Consumer Preferences and the Concept of Utility
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Sample Questions
Q1) Suppose that a consumer has the utility function U = 5A + 7B. If \(A\) is measured on the horizontal axis
A) The indifference curves will be L-shaped.
B) The indifference curves will be horizontal.
C) The indifference curves will be straight lines with slope -5/7.
D) The indifference curves will be straight lines with slope -7/5.
Answer: C
Q2) Economists sometimes represent two goods as having right-angled indifference curves (perfect complements). In reality, this violates:
A) the assumption of transitivity.
B) the assumption of completeness.
C) the law of diminishing returns.
D) the "more is better" assumption.
Answer: D
Q3) Indifference curves have a negative slope when
A) the consumer likes good X but dislikes good Y.
B) the consumer likes good Y but dislikes good X .
C) the consumer likes both good X and good Y .
D) the consumer dislikes both goods.
Answer: C
Page 5
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Chapter 4: Consumer Choice
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Sample Questions
Q1) Suppose that MU<sub>x</sub> = 10 and MU<sub>y</sub> = 20. Further suppose that the consumer's budget constraint can be expressed as 20x + 10y = 400. For this consumer, the optimal amount of good x to buy would be A) 5.
B) 0.
C) 20.
D) 40.
Q2) If the government would like to induce a consumer to consume a specific level of some good
A) a cash subsidy system would likely be cheaper for the government than a voucher system.
B) a voucher system would likely be cheaper for the government than a cash subsidy system.
C) the government should only use a cash subsidy system since this always make consumers better off.
D) the government should only use a voucher system since this always makes consumers better off.
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Chapter 5: The Theory of Demand
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Sample Questions
Q1) The income effect is
A) the change in the amount of the good consumed holding the level of income constant.
B) the change in the amount of the good consumed as the price of the good changes holding income constant.
C) the change in the amount of the good consumed as the price of the good changes holding utility constant.
D) the change in the amount of the good consumed as the consumer's utility changes holding the price of the good constant.
Q2) A curve that represents the consumer's "willingness to pay" is the consumer's
A) Exchange curve
B) Demand curve
C) Supply curve
D) None of the above
Q3) In this chapter, the term negative network externality describes
A) the positive effect of consuming chocolate as income rises.
B) the snob effect.
C) the bandwagon effect.
D) the impact of a polluting firm on its local environment.
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Chapter 6: Inputs and Production Functions
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Sample Questions
Q1) The production set represents
A) the set of all technically feasible combinations of inputs and outputs.
B) the technically efficient combinations of inputs and outputs.
C) the maximum output the firm can produce from a given level of inputs.
D) the minimum amounts of inputs necessary to produce a given level of output.
Q2) For the production function \(Q = a K + b L\) , where the variables are graphed as usual, the equation for a typical isoquant is
A) \(K = \frac { Q - b L } { a }\)
B) \(L = \frac { Q - a K } { b }\)
C) \(K = \frac { Q ^ { 2 } } { L }\)
D) \(K = a Q - b L\)
Q3) For the production function \(Q = 20 \sqrt { K L }\) , the equation for a typical isoquant is
A) \(K = \frac { 20 L } { Q ^ { 2 } }\)
B) \(K = \frac { Q ^ { 2 } } { 20 L }\)
C) \(L = \frac { K } { 20 Q }\)
D) \(K = 20 ( Q L ) ^ { 2 }\)
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Chapter 7: Costs and Cost Minimization
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Sample Questions
Q1) The cost-minimization problem of the firm is to
A) minimize total costs.
B) minimize average costs.
C) minimize total cost of producing a particular amount of output.
D) maximize output subject to a cost constraint.
Q2) Sunk costs do not
A) matter.
B) affect business shutdown decisions.
C) affect business start-up decisions.
D) cost as much as marginal costs.
Q3) Suppose you are a star basketball player at a major university in your sophomore year. You are sought after by several NBA teams. Which of the following choices best characterizes your opportunity cost if you choose to drop out of college and enter the NBA?
A) The value of your college scholarship that you have given up.
B) The skills that two more years of playing at your college would have given you along with their additional value over the rest of your life, in addition to the educational value of the college degree.
C) The total of explicit costs that have been incurred in the past.
D) The total of implicit costs that have been incurred in the past.
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Chapter 8: Cost Curves
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Sample Questions
Q1) A constant elasticity cost function
A) takes a form such as TC = a Q<sup>b</sup> w<sup>c</sup> r<sup>d</sup> and is useful in empirical work because it can be converted into a linear form using logarithms.
B) takes a form such as \(T C = w L + r K\) , where L and K are chosen to minimize cost, and w and r are input prices.
C) takes a form such as TC = a Q<sup>2</sup> + KL.
D) is given by TC = AC x Q.
Q2) Which of the following factors may explain diseconomies of scale?
A) Increasing returns to scale of inputs.
B) Specialization of labor.
C) Indivisible inputs.
D) Managerial diseconomies.
Q3) Economies of scale exist when firms have
A) increasing returns to scale.
B) constant returns to scale.
C) decreasing returns to scale.
D) constant marginal cost.
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Page 10
Chapter 9: Perfectly Competitive Markets
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Sample Questions
Q1) The market for sweet potatoes consists of 1,000 identical firms. Each firm has a short-run total cost curve of STC = 100 + 100 q + 100q<sup>2</sup>, and a short-run marginal cost curve of SMC=100+200q where q is output. All fixed costs are sunk. What is the equation of the short-run market supply curve?
A) Q<sup>s</sup> = 5P-500 for P 100, and Q<sup>s</sup>=0 otherwise.
B) P = 100000+200000q, P 200, and Q<sup>s</sup>=0 otherwise.
C) Q<sup>s</sup> = P/200 - .5 for P 100, and Q<sup>s</sup> = 0 otherwise.
D) Q<sup>s</sup>= 5P-500 for P 200, and Q<sup>s</sup>=0 otherwise.
Q2) The market for sweet potatoes consists of 1,000 identical firms. Each firm has a short-run total cost curve of STC = 100 + 100 q + 100q<sup>2</sup>, and a short-run marginal cost curve of SMC=100+200q where q is output. Suppose that sunk costs are 75 and nonsunk costs are 25. What is the equation of an individual firm's short-run supply curve?
A) \(q = P / 200 - .5\) for P?100, and q=0 otherwise.
B) \(q = P / 100 ^ { - .5 }\) for P?200, and q=0 otherwise.
C) \(P = 100 + 200 q\)
D) \(q = P / 200 ^{- .5}\) for P ?200, and q=0 otherwise.
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Chapter 10: Competitive Markets: Applications
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Sample Questions
Q1) Which of the following statements is not generally true of a production quota?
A) The market will not clear due to the excess supply of that good.
B) Consumer surplus increases when compared to the market before the quota.
C) Producer surplus may increase or decrease.
D) Some of the consumer surplus will be transferred to producers.
Q2) An analysis that determines the equilibrium prices and quantities in more than one market simultaneously is called
A) partial equilibrium analysis
B) general equilibrium analysis
C) externality analysis
D) market equilibrium analysis
Q3) Consider a perfectly competitive market with inverse market supply \(P = 5 + 3 Q ^ { s }\) and inverse market demand \(P = 50 - 2 Q ^ { d }\) . Suppose the government subsidizes this market with a subsidy of $5 per unit. What is the increase in consumer surplus resulting from the subsidy?
A) 17
B) 19
C) 21
D) 23
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Page 12
Chapter 11: Monopoly and Monopsony
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Sample Questions
Q1) The Lerner Index is
A) equal to (P - MR)/P.
B) a measure of product differentiation.
C) equal to P/MC.
D) equal to (P - MC)/P.
Q2) Identify the false statement.
A) A monopolist and a perfectly competitive firm both maximize profits.
B) A monopolist and a perfectly competitive firm both produce an output level where marginal revenue equals marginal cost.
C) A monopolist and a perfectly competitive firm both produce where price equals marginal cost.
D) A monopolist and a perfectly competitive firm both charge a price based on the demand curve facing the firm and the costs borne by the firm.
Q3) The marginal revenue curve for a monopolist
A) will never take a linear form.
B) will always have double the slope of the demand curve, when demand is linear.
C) will always have one-half the slope of the demand curve, when demand is linear.
D) will slope upward when demand is elastic.
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Chapter 12: Capturing Surplus
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Sample Questions
Q1) Which of the following statements is not correct regarding a "damaged goods strategy"?
A) A damaged good strategy is an example of "versioning".
B) A damaged good strategy can be an example of third-degree price discrimination.
C) A damaged good strategy can be an example of "building fences".
D) A damaged good strategy is generally less profitable than a uniform pricing strategy for a high quality product.
Q2) With ________ degree price discrimination, the firm identifies different consumer groups or segments in a market and charges each group a different price.
A) first
B) second
C) third
D) fourth
Q3) With first-degree price discrimination, the marginal revenue curve
A) is below the demand curve, with slope equal to twice the slope of demand.
B) is above the demand curve.
C) is the same as the demand curve.
D) is below the demand curve, with slope equal to one-half the slope of demand.
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Chapter 13: Market Structure and Competition
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Sample Questions
Q1) Identify the truthfulness of the following statements.
I. As the number of firms in an industry exhibiting Cournot competition increases, the greater the Cournot equilibrium diverges from the collusive outcome.
II. As the number of firms in an industry exhibiting Cournot competition increases, the market price increases.
A) Both I and II are true.
B) Both I and II are false.
C) I is true; II is false.
D) I is false; II is true.
Q2) In equilibrium, how many units will the fringe producers supply?
A) 45 units
B) 60 units
C) 90 units
D) 135 units
Q3) Which of the following is not a characteristic of monopolistic competition?
A) The market is fragmented.
B) There is free entry and exit.
C) In the long-run equilibrium, firms earn positive profits.
D) Firms produce horizontally differentiated products.
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Page 15
Chapter 14: Game Theory and Strategic Behavior
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Sample Questions
Q1) Game 8 shows the payoff matrix in terms of profit (in millions of dollars) for two possible strategies: advertise or do not advertise. Suppose that the two companies can legally make a non-binding agreement to not advertise. Based on the payoff matrix shown above, will the two companies honor such an agreement to not advertise?
A) Yes. Both Coke and Pepsi will not advertise.
B) No. Coke will advertise but Pepsi will not.
C) No. Pepsi will advertise but Coke will not.
D) No. Both Coke and Pepsi will advertise.
Q2) In a simultaneous move game with two players,
A) if neither player has a dominant strategy, we successively eliminate each player's subordinate strategy.
B) a player chooses among two or more pure strategies according to pre-specified probabilities.
C) if one player has a dominant strategy and the other doesn't, you can't reach a Nash equilibrium.
D) if both players have a dominant strategy, these constitute their Nash equilibrium strategies.
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Page 16
Chapter 15: Risk and Information
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Sample Questions
Q1) A decision maker has a utility function \(U = \sqrt { I }\) . This decision maker is A) risk-averse.
B) risk-neutral.
C) risk-loving.
D) risk-gaining.
Q2) Large firms that can take on a number of small investment projects whose returns are independent of each other would most likely be characterized as A) risk-averse, because large firms do not like to take any risk.
B) risk-neutral, because each investment project is small relative to the total and firms are incentivized to maximize profits.
C) risk-loving, because there are a lot of benefits to being the biggest and most powerful firm.
D) risk-gaining, because there are a lot of benefits to being the biggest and most powerful firm.
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Chapter 16: General Equilibrium Theory
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Sample Questions
Q1) When a fixed stock of inputs cannot be reallocated among firms in an economy without reducing the output of at least one of the goods that is produced in the economy, the allocation satisfies.
A) exchange efficiency.
B) input efficiency.
C) substitution efficiency.
D) Walras' Law.
Q2) When a fixed stock of inputs cannot be reallocated in such a way to make all consumers better off by producing more of one product and less of another product, the allocation satisfies
A) exchange efficiency.
B) input efficiency.
C) substitution efficiency.
D) Walras' Law.
Q3) In a general equilibrium setting, the demand curves for production inputs are determined by
A) utility maximization by firms.
B) profit maximization by firms.
C) cost minimization by firms.
D) utility maximization by consumers.
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Chapter 17: Externalities and Public Goods
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Sample Questions
Q1) A commonality between externalities and public goods is that
A) in each case, markets are not likely to allocate resources efficiently, even though they might otherwise be competitive.
B) in each case, government agency intervention would create inefficiency compared to the market solution.
C) competitive markets are likely to be efficient in each case.
D) the invisible hand (as discussed by Adam Smith) is likely to lead to efficiency in each case.
Q2) When the market for product Y includes a positive externality,
A) marginal social cost exceeds marginal private cost.
B) marginal private cost exceeds marginal social cost.
C) marginal social benefit exceeds marginal private benefit.
D) marginal private benefit exceeds marginal social benefit.
Q3) An externality arises when
A) an economic good is produced by many firms.
B) the actions of a decision maker affect other decision makers in a way not reflected in the market price.
C) the actions of a decision maker do not affect other decision makers.
D) the market equilibrium is inefficient.
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Page 19