Microeconomic Theory Solved
Exam Questions
Course Introduction
Microeconomic Theory explores the fundamental principles governing individual and firm decision-making in the context of limited resources. The course covers topics such as consumer behavior, production and cost theories, market structures, and the functioning of competitive and non-competitive markets. Analytical tools are introduced to model and predict responses to changes in prices, incomes, and technological advancements. By applying mathematical and graphical analysis, students gain a deeper understanding of how markets allocate resources and how various agents respond to incentives, forming the building blocks for advanced study in economics.
Recommended Textbook Microeconomics and Behavior 9th Edition by
Robert H. Frank
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Page 2
Chapter 1: Thinking Like an Economist
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Q1) We say economists are doing positive economics when they
A)focus on policies and rhetoric that encourage people to be optimistic about the future.
B)look for regularities and principles in economic life that can help show how the economy works.
C)claim that there is no value free social science so articulating one's values is important.
D)try to improve the welfare of all citizens.
Answer: B
Q2) Here are the costs of going to college: tuition $5,000; books $200; housing $1,000; food $1,000; lost income from work $10,000. Studying and work are equally desirable in your mind. Suppose that you could work part-time and make $5,000 at a job you would volunteer to do. You live on campus instead of at home. What is the cost of going to school?
A)$16,200
B)$7,200
C)$5,200
D)$11,200
Answer: D
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Page 3
Chapter 2: Supply and Demand
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Sample Questions
Q1) Let supply be given by P = 5Q and demand by P = 19 - 2Q. Suppose we now place a tax of 5 per unit of output on the seller. The new supply curve is:
A)P = 5Q
B)P = 5 + 5Q
C)P = 5Q - 5
D)P = 5Qt5
Answer: B
Q2) The real price of a product is its
A)absolute level on any given day.
B)absolute level on any given day divided by the relevant price index.
C)absolute level on any given day minus any external costs of the production of the good.
D)price relative to the price of other goods and services.
Answer: D
Q3) Which of the following statements would most economists agree with?
A)Rent controls hurt everyone.
B)Rent controls hurt poor people and help the rich.
C)Rent controls decrease overall societal welfare.
D)Rent control allow for a more equitable distribution of resources.
Answer: C
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Chapter 3: Rational Consumer Choice
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Sample Questions
Q1) Excluding corner solutions, in consumer equilibrium, which of the following is true?
A)The marginal rate of substitution equals the slope of the budget constraint.
B)The indifference curve is steeper than the budget constraint.
C)The consumer is minimizing utility given the constraints.
D)The consumer can improve his/her situation by consuming more of both goods.
Answer: A
Q2) If a corner solution exists,
A)marginal rate of substitution will always be equal to the slope of the budget constraint.
B)marginal rate of substitution will always be less than the slope of the budget constraint.
C)marginal rate of substitution will always be greater than the slope of the budget constraint.
D)none of the answer choices is correct.
Answer: D
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5
Chapter 4: Individual and Market Demand
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Q1) Comparing the income effects between salt and housing, the
A)income effect for salt will be greater.
B)income effect for housing will be greater.
C)two income effects will be about the same.
D)two income effects will be in the opposite direction.
Q2) The income effect
A)moves in the opposite direction from the substitution effect for an inferior good.
B)moves in the same direction as the substitution effect for an inferior good.
C)relates to increases in nominal rather than real income.
D)is always greater than the substitution effect.
Q3) (Appendix) An income compensated demand curve
A)is steeper than an ordinary demand curve for a normal good.
B)is flatter than an ordinary demand curve for an inferior good.
C)of a Giffin good will be negatively sloped.
D)is described accurately by all of these statements.
Q4) If there are no costs in selling mineral water what price should a profit maximizer charge?
Q5) Based on your sketch, is the good a normal or inferior good?
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Chapter 5: Applications of Rational Choice and Demand
Theories
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Q1) Differences in time preferences depend on
A)uncertainty regarding the future.
B)social preference.
C)differences in the relative size of expected future incomes.
D)the time.
Q2) If the demand function for city bus rides is P = 100 - 10Q and the present price of a ride is 50, then
A)raising prices will increase city revenue.
B)raising prices will decrease city revenue.
C)raising prices will not change city revenue.
D)from the information given it is not clear what would happen to city revenue if price is increased.
Q3) Upon what is your current consumption dependent according to Milton Friedman?
A)The income you earn today.
B)The income you expect to earn later in life.
C)The present value of your lifetime income.
D)The future value of your present income.
Q4) Describe in words why the consumer price index overestimates inflation.
Page 7
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Chapter 6: The Economics of Information and Choice
Under Uncertainty
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Q1) Where important decisions involving people we do not know well are involved, A)even weak signals of ability are often decisive.
B)weak signals of ability are never decisive.
C)we are more likely to be risk neutral.
D)we are less likely to self-insure.
Q2) Evaluate computer database dating services in terms of efficiency. Why have many people avoided these services despite their vast amounts of information? Why might these services become more popular in the future?
Q3) For the average person, insurance is
A)a fair gamble.
B)an unfair gamble.
C)not a gamble.
D)useless option.
Q4) Your bike is worth $100 and if you park it outside at school there is a 25% chance that it will be stolen. Your utility function for money is U = (M)<sup>2</sup>. Assume throughout that the bike value and money are interchangeable since you could sell the bike instantly at its value if necessary. What is the maximum you would pay security to check in your bike?
Page 8
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Chapter 7: Departures From Standard Rational Choice
Models With and Without Regret
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Sample Questions
Q1) Say Anna's utility function was given by UA = (MA)(MM), where MA is Anna's wealth and MM is Marie's wealth. Initially, Anna has 160 units of wealth and Marie has 40. When Anna maximizes her utility level is equal to A)5,000.
B)100.
C)10,000.
D)200.
Q2) Kahneman and Tversky are correct about "mental accounts," household budgeting
A)should help families cut back on spending.
B)leads families to spend more than if they did not budget.
C)should have no effect on spending.
D)will encourage families to earn more money than they would if they did not budget.
Q3) According to Kahneman and Tversky's value function, which of the following gifts provide higher total values:
A)4 different gains of $25 each
B)2 different gains of $50 each
C)1 gain of $100 each
D)All provide exactly the same value
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Chapter 8: Production
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Q1) Say you own a Mexican place that produces, among other things, Mexican burritos. The marginal product of your last worker was 5. If the marginal rate of technical substitution between capital and labor is 0.5, then marginal product of capital is A)10.
B)5.
C)1.
D)we can't say with the information given
Q2) The average product of a variable input
A)decreases at an increasing rate.
B)constantly rises over the relevant range of production.
C)is the change in the total product that occurs when the variable input increases one unit.
D)is defined as the total product divided by the quantity of the variable input.
Q3) (Appendix) In the production function Q = 10L<sup>1/2</sup>K<sup>1/2</sup> calculate the marginal product equations of both inputs.
Q4) Sketch graph a standard short-run production function, and identify on it the points where the average product peaks, the marginal product peaks, the marginal product reaches zero, and the average and marginal product intersect.
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Page 10
Chapter 9: Costs
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Q1) Assume fixed costs are 470 and labor costs $20 per unit. The first laborer produces 20 units of output. Subsequent hires add 5 units less to production than the previous worker. Thus the second worker adds 15, the third adds 10 etc. What is the average variable cost of output when one worker is hired?
A)1
B)20
C)24.50
D)None of these is the correct AVC.
Q2) The total cost function is TC = Q<sup>3</sup> - 6Q<sup>2</sup> + 14Q + 75. When does diminishing returns to production set in?
Q3) Let the TC curve be given by the equation TC(Q) = 6Q. The FC curve can be expressed as A)6.
B)6Q.
C)0.
D)It cannot be determined with the information given
Q4) If the total cost function is TC = 10Q<sup>3</sup> - 50Q<sup>2</sup> + 1000Q + 500, what is the equation for AFC?
Q5) Why does the AVC reach its minimum before the ATC reaches its minimum?
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Chapter 10: Perfect Competition
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Q1) If a firm is producing where its LMC = price and the LMC is equal to LAC, then it would do better in the long run by
A)increasing output with its existing plant until LMC equals price.
B)increasing plant size until LMC and SAC are identical and equal to price.
C)decreasing plant size until LAC, SAC and price are equal.
D)changing nothing because it is already at the long run profit maximizing point.
Q2) Joe is self-employed in a store that has a rental value of $500 a month which he pays, but he can vacate the building without giving notice. His other expenses are $100 a month for maintenance. He makes $25,000 a year on net sales (total revenue minus the wholesale cost of the product). If he quit his job and worked the same number of hours elsewhere at a job he liked equally well, he estimates that he could make $20,000 a year. No one else can be hired to work in the store. Suppose that Joe had a long term lease which requires him to pay the rent even if he doesn't operate the store. What should Joe do?
A)Quit immediately.
B)Keep the job permanently.
C)Keep the job until the lease expires.
D)It is impossible to say with the information given in the problem.
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Page 12
Chapter 11: Monopoly
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Q1) In second-degree price discrimination it is true that
A)people who buy a lot pay a lower price.
B)people who buy relatively little pay a lower price.
C)the monopolist cannot earn economic profits.
D)the market need not be segmented.
Q2) The supply curve for a monopolist
A)is upward sloping.
B)is vertical.
C)does not exist.
D)is downward sloping.
Q3) Explain why price discrimination solves the welfare loss problem of monopoly, but then describe the downside of solving the welfare loss problem this way.
Q4) For the output maximizing monopolist
A)average total cost must be falling.
B)marginal revenue equals marginal cost.
C)long-run marginal cost equals demand.
D)price equals average total cost.
Q5) Show graphically why economists refer to single-price monopoly market structure as inefficient.
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Chapter 12: A Game-Theoretic Approach to Strategic Behavior
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Q1) In a battle of Boeing and Airbus, a Nash equilibrium will exist if
A)they both have agreed to a monopoly pricing structure.
B)they are presently operating at a point where neither one would benefit by unilaterally changing strategies.
C)Boeing has the power to drive Airbus out of business with a predatory pricing strategy.
D)both pass up profit opportunities because they fear retaliation.
Q2) For the sake of argument, assume that the rules of the cooperator/defector game are defined in such a way that hawks (competitors) are denied the use of violence or force and that competition is conditioned by the rule of law. This might approximate a highly competitive capitalist society. If everyone is a hawk in this world, describe the conditions necessary for this society to have all hawks permanently.
Q3) In sequential games
A)players move at the same time.
B)the order of moves matter.
C)the order of the moves is irrelevant.
D)there is always two Nash equilibriums.
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Chapter 13: Oligopoly and Monopolistic Competition
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Q1) Which of the following is an application of the Hoteling model of monopolistic competition?
A)Politicians tend toward positions more extreme than what they actually believe
B)Stores of similar types tend to cluster
C)Efficiency requires that stores are spread equidistant from each other in a given space
D)As space increases between firms, each firm produces less
Q2) Cournot duopolists face a market demand curve given by P = 90 - Q where Q is total market demand. Each firm can produce output at a constant marginal cost of 30 per unit. The equilibrium price and quantity for the total market will be
A)Q = 30, P = 60.
B)Q = 60, P = 30.
C)Q = 40, P = 50.
D)Q = 45, P = 45.
Q3) Describe in words how the business department in your college decides how many majors to offer when the range is from one general major to perhaps a half dozen or more possibilities.
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Chapter 14: Labor
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Q1) Say a worker sees work and leisure as perfect complements with a ratio of 5 to 1 (requiring 1 hour of leisure for every $5 in income). If this worker earned a wage of $10 her optimal demand for leisure would be: A)16.
B)20.
C)24.
D)10.
Q2) If the value of your marginal product is 100 and you are being paid 80, which of the following is the most plausible reason that you remain with the firm?
A)You value the high rank and leadership role as well as the salary that your position offers.
B)You have no other options so you stay or go unemployed.
C)You are altruistic and want to contribute to the firm's normal profit.
D)You have no way of knowing the value of your marginal product so you feel OK about the salary of 80.
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16
Chapter 15: Capital
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Q1) The quantity of loanable funds supplied by firms is
A)independent of the interest rate.
B)positively related to the interest rate.
C)inversely related to the interest rate.
D)negatively related to the rate of return.
Q2) Suppose you are deciding how much oil to pump from your oil well in the next two years. Other things equal, you will be more likely to pump more oil this year than next year if you expect
A)a higher price for oil this year than next year.
B)a lower price for oil this year than next year.
C)less demand for oil next year than this year.
D)the same price of oil this year than next year.
Q3) A computer you are considering for your business would add $4,000 per year to your profit. It would cost $400 a year to buy a complete maintenance contract so that you would never have repair and upkeep expense. The obsolescence depreciation is 25% a year. The going market interest rate is 5%. Assume all costs and revenue occur at the end of the year. If the going interest rate went up to 10%, how much would you be willing to pay for the machine?
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17
Chapter 16: Externalities, Property Rights, and the Coase
Theorem
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Q1) According to the text, if diamonds represent a form of conspicuous consumption, then
A)they should be taxed.
B)they should be outlawed.
C)they should be subsidized.
D)they should be given for free.
Q2) The story in your book about Austria and the nuclear power plants is a clear case of which of the following?
A)When externalities exist it is easy to negotiate an agreement between the offender and the offended party.
B)Political differences can sometimes override rationality, raising negotiation costs and making solutions difficult or impossible.
C)The story supports the claim of the Coase Theorem that the liability for actions should be placed on the side that has the lowest cost of correcting the problem.
D)When coal powered plants become offensive countries will switch to nuclear power in order to maintain political stability in a region.
Q3) Define in technical terms the tragedy of the commons.
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Page 18
Chapter 17: General Equilibrium and Market Efficiency
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Q1) Compare Pareto optimality with the utilitarian view that says we are better off when the overall gain in utility exceeds the overall loss in utility by the consumers. What are the effects of the differences for policy? Can this concept be applied to public goods?
Q2) If one is inside the production possibilities frontier,
A)production of one commodity can be produced but not more of both.
B)more resources are needed to move to the frontier.
C)production is not on the production contract curve.
D)All of these are true
Q3) In equilibrium with an Edgeworth production box
A)MPK/MPL = PL/PK.
B)one is on the contract curve.
C)the production of one good could increase without decreasing the production of the other.
D)MPK * MPL = PL * PK.
E)All of these are true
Q4) If Sam and Sally are off their contract curve for dining hall tickets and economics texts and they meet to move to the contract curve, describe the conversation that would likely take place.
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Page 19
Chapter 18: Government
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Q1) Each year around July 4 the town of Flagston has a controversy over how big a fireworks display they should have on the holiday. The three citizens have the demand functions for fireworks that are shown here. The cost per firecracker is $18. Elmer has the demand function P = 20 - Q. Ethel's demand equation is P = 12 - .6Q, and Edith has the demand P = 8 - .4Q. If the citizens got together for a city referendum on the issue, and each voted for an amount of fireworks, knowing that each would pay their share (1/3) of the cost, how would the vote come out in a majority rule situation? Why is this not the socially efficient amount?
Q2) Each year around July 4 the town of Flagston has a controversy over how big a fireworks display they should have on the holiday. The three citizens have the demand functions for fireworks that are shown here. The cost per firecracker is $18. Elmer has the demand function P = 20 - Q. Ethel's demand equation is P = 12 - .6Q, and Edith has the demand P = 8 - .4Q. What is the socially optimal output level?
Q3) The best example of a public good is
A)education.
B)national defense.
C)electricity.
D)automobiles.
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Page 20