Microeconomic Theory Solved
Exam Questions
Course Introduction
Microeconomic Theory explores the foundational principles and models that explain how individual agents such as consumers and firms make decisions about the allocation of scarce resources. The course examines concepts including utility maximization, consumer and producer behavior, market structures, price determination, and the efficiency of markets. Students will learn how to analyze supply and demand dynamics, understand pricing mechanisms, and study the effects of government interventions. Emphasis is placed on mathematical modeling and real-world applications to provide a deeper understanding of how microeconomic theories inform decision-making in various contexts.
Recommended Textbook
Microeconomics An Intuitive Approach with Calculus 2nd Edition by Thomas Nechyba
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2
Chapter 1: Introduction
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Sample Questions
Q1) Positive economics can tell us which policies are efficient and which are not.
A)True
B)False Answer: True
Q2) To say that one policy is better than another because it is more efficient is a normative, not a positive, statement.
A)True
B)False Answer: True
Q3) If two individuals voluntarily agree to a transaction that only affects them (and no one else), it must be that the transaction is efficient.
A)True
B)False Answer: True
Q4) A spontaneous order emerges from individual decisions that cause something to "work" without anyone planning for it to "work".
A)True
B)False Answer: True
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Chapter 2: A Consumers Economic Circumstances
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Sample Questions
Q1) When the good on the vertical axis is a composite good, the slope of the budget line is equal to minus the price of the good on the horizontal axis.
A)True
B)False
Answer: True
Q2) The following changes in a consumer's economic circumstances result in a steeper budget line with the vertical intercept unchanged.(Denote the good on the horizontal as good 1 and the good on the vertical as good 2.)
A)A k percent decrease in the price of good 2 combined with a k percent decrease in income
B)A k percent increase in the price of good 2 combined with a k percent decrease in income
C)A k percent decrease in the price of good 2 combined with a k percent increase in income
D)A k percent increase in the price of good 2 combined with a k percent increase in income.
E)None of the above
Answer: A
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4
Chapter 3: Economic Circumstances in Labor and Financial Markets
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Sample Questions
Q1) An "endowment" is something whose value is unknown. A)True
B)False Answer: False
Q2) A decrease in a wage taxes causes the opportunity cost of leisure to increase. A)True
B)False
Answer: True
Q3) Write down the budget constraint equation as well as the choice set for a worker who has 100 possible hours of leisure per week and can earn a wage of $25 per hour.
Answer: Equation: 11ea67b0_0517_9d87_8b3b_8fd11fa1ef66_TB5129_11 Choice Set: 11ea67b0_0517_9d88_8b3b_fd7001be6fe5_TB5129_11
Q4) Changes in interest rates cause the same rotations of intertemporal budget lines regardless of whether you are a borrower or a saver.
A)True
B)False Answer: False
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Chapter 4: Tastes and Indifference Curves
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Sample Questions
Q1) Explain the following statement: For the same individual, tastes over goods may vary at the margin as we move from one bundle to another.
Q2) Economists define "rational" tastes as those which are objective and transitive.
A)True
B)False
Q3) When the price of beer goes up, our model of tastes would typically require tastes to change.
A)True
B)False
Q4) Complete tastes are tastes that make people desire at least some of every good.
A)True
B)False
Q5) You like bundle A better than bundle B, and bundle C is an average of bundles A and B.Which of the following is correct if your tastes satisfy our usual assumptions?
A)Bundle C is at least as good as bundle B.
B)Bundle A is at least as good as bundle C.
C)Both (a) and (b).
D)None of the above.
E)There is not enough information to tell.
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Chapter 5: Different Types of Tastes
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Q1) When two goods are perfect substitutes, averages are better than extremes, resulting a diminishing marginal rate of substitution.
A)True
B)False
Q2) All homogeneous functions (of any degree) are homothetic but not all homothetic functions are homogeneous (of some degree).
A)True
B)False
Q3) Suppose our tastes are homothetic.It is often observed that people become more rigid --- more set in their ways --- as they get older.Can you translate this observation into "economics-speak" by discussing which feature of our tastes is likely the be changing as we get older?
Q4) Tastes for perfect substitutes are both homothetic and quasilinear.
A)True
B)False
Q5) Tastes for perfect complements are both homothetic and quasilinear.
A)True
B)False
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Chapter 6: Doing the Best We Can
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Q1) If all goods are essential, a consumer will optimize at an interior solution.
A)True
B)False
Q2) If not all goods are essential, a consumer will end up optimizing at a corner solution.
A)True
B)False
Q3) Explain how we can estimate the shape of a person's indifference map by observing choices under different economic circumstances.Explain also why we will not be able to identify any non-convexities in tastes from our observations.
Q4) Suppose that choice sets are convex.State assumptions about tastes that are necessary and sufficient to guarantee that the first order conditions are necessary and sufficient for identifying a true optimum.
Q5) Kinks in budget constraints always produce non-convexities in choice sets.
A)True
B)False
Q6) Essential goods give rise to corner solutions.
A)True
B)False
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Chapter 7: Income and Substitution Effects in Consumer
Goods Markets
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Sample Questions
Q1) Homothetic goods are neither necessities nor luxuries, but rather lie on the borderline between them.
A)True
B)False
Q2) All quasilinear goods are necessities.
A)True
B)False
Q3) The price of peaches goes up and I observe you buying more strawberries.This implies strawberries must be a normal good.
A)True
B)False
Q4) The price of peaches goes up and I observe you buying more strawberries.This implies that strawberries must be an inferior good.
A)True
B)False
Q5) Every luxury good is a normal good but not every normal good is a luxury.
A)True
B)False
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Chapter 8: Wealth and Substitution Effects in Labor and Capital Markets
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Sample Questions
Q1) Because workers tend to work more when their after-tax wage increases, the government can increase tax revenue by cutting taxes.
A)True
B)False
Q2) For decreases in wage taxes, substitution effects put negative pressure on tax revenues while wealth effects put positive pressure on tax revenues.
A)True
B)False
Q3) In a model of consumption and leisure, a drop in the wage will cause workers to work less if tastes are quasilinear in leisure.
A)True
B)False
Q4) As long as both current and future consumption are normal goods, a decrease in the interest rate will result in a drop in savings.
A)True
B)False
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Page 10
Chapter 9: Demand for Goods and Supply of Labor and Capital
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Sample Questions
Q1) For the same sized substitution effect, own-price demand curves for inferior goods are steeper than own price demand curves for normal goods.
A)True
B)False
Q2) If future consumption is a normal good, the interest rate/borrowing relationship cannot be upward sloping.
A)True
B)False
Q3) The empirically observed backward-bending labor supply curve cannot arise from homothetic tastes.
A)True
B)False
Q4) Leisure being an inferior good is necessary but not sufficient for labor supply to slope up.
A)True
B)False
Q5) The cross-price demand curve for Cobb-Douglas tastes is perfectly vertical. A)True B)False
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Chapter 10: Consumer Surplus and Deadweight Loss
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Q1) When a taxed good is normal, using the (uncompensated) demand curve to estimate deadweight loss will over-state the actual deadweight loss.
A)True
B)False
Q2) Suppose x is an inferior good.Then we will overestimate the deadweight loss from taxes on consumption good x if we use the uncompensated demand curve rather than the marginal willingness to pay (or compensated demand) curve.
A)True
B)False
Q3) For perfect complements, the (uncompensated) demand curve slopes down and the compensated demand (or MWTP) curve is perfectly vertical.
A)True
B)False
Q4) A policy which gains the winners more than the losers lose, in principle, could never result in unanimous approval of the policy.
A)True
B)False
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12
Chapter 11: One Input and One Output: a Short-Run
Producer Model
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Sample Questions
Q1) Output supply curves always slope up in the one-input model.
A)True
B)False
Q2) Since the marginal product of labor can increase initially as I hire more workers, demand for labor is also upward sloping for the initial workers I hire.
A)True
B)False
Q3) Calvin buys newspapers and delivers them (by bike) to his customers' houses while Hobbes sells lemonade at his lemonade stand.One day they compare notes and find that Calvin, after paying for the newspapers and the maintenance on his bike, clears $5 per hour while Hobbes, after paying for the lemonade ingredients and upkeep of his lemonade stand, clears $4.50 per hour.The newspaper and lemonade businesses are the only possible trades for Calvin and Hobbes.
a.If Calvin and Hobbes are identical, how much economic profit (per hour) is each making?
b.Suppose Hobbes is slower on his bike than Calvin -- and he could only deliver half as many newspapers per hour.What's his economic profit in the lemonade business?
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Page 13
Chapter 12: Production With Multiple Inputs
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Sample Questions
Q1) Profit functions are homogeneous of degree zero.
A)True
B)False
Q2) Just as indifference maps represent consumer tastes, so isoquant maps represent a producer tastes.
A)True
B)False
Q3) A price taking firm employs each of its inputs into production until its marginal product is equal to 1.
A)True
B)False
Q4) It is not sufficient for profit maximization that a production plan has all marginal revenue products equal to input prices -- because it must also be the case that the (marginal) technical rate of substitution is equal to the ratio of input prices (in absolute value).
A)True
B)False
Q5) Profit is constant along an isoquant.
A)True
B)False
14
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Chapter 13: Production Decisions in the Short and Long Run
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Q1) When output price rises, the long run increase in labor input will be larger than the short run increase in labor input.
A)True
B)False
Q2) The cross-price demand for capital (relative to the wage) may slope up or down.
A)True
B)False
Q3) After a firm makes both short and long run adjustments in its production plan following a reduction in the wage,
A)the marginal product of labor will be higher.
B)the marginal product of labor will be lower.
C)the marginal product of capital will be unchanged.
D)the marginal product of capital may be higher or lower depending on the degree of substitutability between capital and labor.
E)(a) and C
F)(a) and (d)
G)(b) and (c)
H)(b) and (d)
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15
Chapter 14: Competitive Market Equilibrium
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Sample Questions
Q1) Short run market supply curves are formed by adding up individual firm supply curves in the industry.
A)True
B)False
Q2) If all firms are identical, output prices will never change.
A)True
B)False
Q3) A drop in output demand accompanied by a simultaneous drop in output supply will cause the output price to fall.
A)True
B)False
Q4) An increase in labor demand accompanied by a decline in labor supply cannot result in a decline in wages.
A)True
B)False
Q5) Suppose Congress passes a one-time tax refund of all taxes paid by firms in an industry last year.This will lead to a drop in output price in the industry.
A)True
B)False
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Chapter 15: The Invisible Hand and the First Welfare
Theorem
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Q1) Absent any violations of the first welfare theorem, the competitive market production level of a good will be the same as that chosen by a social planner whose goal includes (but is not necessarily limited to) efficiency.
A)True
B)False
Q2) Worker surplus can be measured as an area on the market labor supply curve if worker tastes are quasilinear in leisure.
A)True
B)False
Q3) Suppose the conditions of the first welfare theorem hold.If the government redistributes income prior to production and trade occurring, the market outcome (resulting from production and trade) will be the same as it would have been had the government not redistributed income (so long as redistribution does not produce deadweight losses).
A)True
B)False
Q4) Explain how prices in a competitive market form --- and how they take the place of almost limitless information that a social planner would need if he tried to mimic the market outcome.
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Chapter 16: General Equilibrium
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Sample Questions
Q1) In and Edgeworth Box economy, no one strictly prefers the endowment allocation to the competitive equilibrium allocation.
A)True B)False
Q2) If the production technology in a Robinson Crusoe economy has increasing returns to scale, there is no production/consumption plan that is efficient.
A)True B)False
Q3) In the Edgeworth Box, we can set one price to 1 and only need to solve for the other price because only relative prices matter for individual choice when income is drawn from endowments.
A)True
B)False
Q4) Comment on the following: "The second welfare theorem says that we can get any efficient allocation to be an equilibrium allocation.If endowments are inequitably distributed in an economy, we can therefore redistribute among people and still get an efficient outcome.As a result, there is no policy trade-off between equity and efficiency."
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18
Chapter 17: Choice and Markets in the Presence of Risk
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Sample Questions
Q1) The certainty equivalent of a gamble is negative when tastes are risk loving.
A)True
B)False
Q2) Expected utility theory assumes that individuals have utility functions over a composite consumption good.
A)True
B)False
Q3) Risk averse individuals will fully insure to avoid risk.
A)True
B)False
Q4) Suppose that individuals with state-independent and risk-averse tastes insure each other through state-contingent trades.If there is no aggregate risk, the competitive equilibrium price will then result in actuarily fair insurance terms.
A)True
B)False
Q5) The certainty equivalent is less than the expected value of a gamble when tastes are risk averse.
A)True
B)False
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Chapter 18: Elasticities, Price-Distorting Policies, and Non-Price Rationing
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Q1) In a perfectly competitive market with identical firms, all surplus will be consumer surplus in long run equilibrium.
A)True
B)False
Q2) Deadweight loss from the imposition of a price floor increases as consumer demand becomes more price elastic.
A)True
B)False
Q3) The wage elasticity of labor demand is always negative.
A)True
B)False
Q4) The concept of "non-price rationing" means that, in general, we can deal with scarcity just as well without prices as with prices.
A)True
B)False
Q5) When leisure is an inferior good, the wage elasticity of labor supply is always positive.
A)True B)False
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Chapter 19: Distortionary Taxes and Subsidies
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Q1) Which of the following is definitely true for a per-unit tax in the goods market where neither demand nor supply is perfectly inelastic:
A)The more price inelastic demand is, the lower deadweight loss will be.
B)The more price inelastic supply is, the higher deadweight loss will be.
C)A demand become more price inelastic, the after tax price for consumers rises.
D)Both (a) and (b)
E)Both (b) and c
F)Both (a) and (c)
G)All of the above
H)None of the above
Q2) Suppose tastes for consumption now and consumption in the future have constant elasticity of substitution.It may then be the case that a tax on interest income is efficient even if savings (defined as current income not consumed) fall in response to the tax.
A)True
B)False
Q3) In most cases, the fact that one of the market curves is perfectly inelastic is not sufficient to conclude that a per-unit tax in that market is efficient.A tax on land rents is an exception.Can you explain why?
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Chapter 20: Prices and Distortions Across Markets
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Q1) Because trade across markets creates winners and losers,the overall surplus in the loser's market is diminished.
A)True
B)False
Q2) Even when earning zero profit, exporters (nearly) equalize prices across markets.
A)True
B)False
Q3) If country A is importing good x from country B where x is produced along a perfectly inelastic supply curve, then country B will suffer the entire deadweight loss from any tariff imposed on imports to country A.
A)True
B)False
Q4) The smaller a country is, the less of an ability it has to export a portion of the burden of an import tariff to other countries.
A)True
B)False
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Chapter 21: Externalities in Competitive Markets
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Q1) Explain why many fishermen on a commonly owned lake continue to fish until the revenue from the average catch is equal to the marginal cost of fishing -- and why the same is not true for a firm that employs fishermen to fish on a privately owned lake.
Q2) The Coase Theorem implies that the reason people sue each other in court is that property rights have not been sufficiently well specified.
A)True
B)False
Q3) In order for a cap-and-trade system to work, it must be that pollution permits are bought by producing firms -- and not given to them as part of an attempt to prevent them to lobby against the cap-and-trade system
A)True
B)False
Q4) To implement an efficient Pigouvian tax in a competitive market that has negative production externalities, the government would need to know the shape of the entire social marginal cost curve.
A)True
B)False
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Chapter 22: Asymmetric Information in Competitive Markets
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Q1) Whether or not a pooling equilibrium exists in a competitive market with adverse selection depends on what fraction of consumers is of the high cost type and what fraction is of the low cost type.
A)True
B)False
Q2) Firms that employ statistical discrimination in the labor market will earn higher profits in expectation than firms that do not discriminate (and have no effective screens).
A)True
B)False
Q3) A pooling equilibrium in insurance markets is inefficient because everyone buys too little insurance (relative to the efficient amount).
A)True
B)False
Q4) Universal health insurance policies fall into three categories: single payer/single provider systems, single payer systems, and regulated insurance markets.The United States has elements of two of these.
A)True
B)False
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Chapter 23: Monopoly
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Q1) Depending on the shape of the marginal cost curve, a monopolist might produce an output level on the elastic or the inelastic part of demand.
A)True
B)False
Q2) If a monopolist has downward sloping average costs, he will not produce if he cannot price discriminate.
A)True B)False
Q3) Consumers prefer inefficient third degree price discrimination to efficient first degree price discrimination.
A)True
B)False
Q4) If the market demand curve has constant price elasticity of -1, the monopolist's price should approach infinity.
A)True B)False
Q5) What are some obstacles to price discrimination that a monopolist who is protected by high barriers to entry might face?
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Chapter 24: Strategic Thinking and Game Theory
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Q1) If a separating equilibrium is played in a signaling game, the receiver will "update" his beliefs during the game.
A)True
B)False
Q2) In simultaneous move Bayesian games, a player's beliefs are fully given by the probability distribution used by "Nature" to assign types.
A)True
B)False
Q3) Any non-credible threat that is part of a Nash equilibrium in a sequential game cannot be played along the Nash equilibrium path.
A)True
B)False
Q4) Suppose a player in a sequential game has 5 potential decision nodes, with 2 possible actions at each node.Then he has 25 possible pure strategies.
A)True
B)False
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Chapter 25: Oligopoly
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Q1) Firms in a cartel have an incentive to cheat on the cartel agreement because they suspect the other firms are cheating as well.
A)True
B)False
Q2) Two firms in an oligopoly can always do better if one firm buys the other.
A)True
B)False
Q3) Suppose a market is currently served by an incumbent firm.If a potential entrant can enter prior to the incumbent firm announcing its output (or price), the entrant will enter the market and force the incumbent to compete.
A)True
B)False
Q4) So long as production in the oligopoly still occurs, recurring fixed costs have no impact on output under Cournot competition but do have an impact under Bertrand competition.
A)True
B)False
Q5) Explain why firms in a cartel might lobby for government regulation.
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Chapter 26: Product Differentiation and Innovation in Markets
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Q1) Under monopolistic competition, the number of firms increases as fixed entry costs fall and as demand for the type of good produced in the market increases.
A)True
B)False
Q2) In a monopolistically competitive equilibrium, firms outside the industry could make at most zero profit by entering the industry.
A)True
B)False
Q3) Bertrand price competitors can recover some market power when they differentiate their products.
A)True
B)False
Q4) Since firms within a monopolistically competitive industry set output where marginal revenue is equal to marginal cost, the size of the fixed entry cost does not impact the equilibrium price.
A)True
B)False
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Chapter 27: Public Goods
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Q1) Communities may form competitive markets for providing certain types of non-pure public goods.
A)True
B)False
Q2) Tiebout local public good provision is more easily implemented than a Lindahl equilibrium -- because people know each other's tastes locally and can more easily come up with the right way to divide the cost for public goods.
A)True
B)False
Q3) If private giving to public goods involves externalities, what is a Pigouvian solution to the public goods problem?
Q4) Any efficient allocation of public goods will be such that the sum of the marginal benefits is equal to the marginal cost -- but the level of the public good may differ depending on how income is distributed in the population.
A)True
B)False
Q5) What problem are mechanism designers attempting to overcome when they "design mechanisms" to provide public goods?
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Chapter 28: Governments and Politics
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Q1) It is possible to come up with a democratic social choice process that satisfies Arrow's axioms as long as we are willing to let go of the No Dictatorship axiom.
A)True
B)False
Q2) The Pareto Unanimity axiom in Arrow's theorem implies that Arrow believes social choice processes should choose only pareto efficient outcomes.
A)True
B)False
Q3) Voting in large elections is irrational unless people get something like a "warm glow" from having voted.
A)True
B)False
Q4) If a coalition D is decisive over a pair of social outcomes (x,y) under a social choice process that satisfies Arrow's axioms, then another coalition C (that differs from D) cannot be decisive over a different pair (a,b) of social outcomes.
A)True
B)False
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Chapter 29: What Is Good Challenges From Psychology and Philosophy
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Q1) What do you think of the following statement: To the extent to which individuals are aware of their self-control problems, markets can address the issue successfully.
Q2) Normative economics often takes a consequentialist philosophical approach to determine whether a policy is good.
A)True
B)False
Q3) What's the Easterlin Paradox -- and in what sense does it suggest reference-dependent preferences?
Q4) Social preferences chosen from behind the veil of ignorance are likely to value efficient outcomes and are likely to treat individuals symmetrically.
A)True
B)False
Q5) Comment on the following: "Present-biased people are impatient, but impatient people don't necessarily have to be present-biased."
Q6) In the presence of compensating wage differentials, explain why the consumption possibility frontier is not a good approximation of the utility possibility frontier.
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