Microeconomic Theory
Textbook Exam Questions
Course Introduction
Microeconomic Theory explores the foundational principles that govern individual and firm behavior in markets. The course focuses on the allocation of scarce resources, consumer choice, production decisions, and market structures such as perfect competition, monopoly, and oligopoly. Students will analyze how prices are determined, how markets reach equilibrium, and the impact of government intervention. Emphasis is placed on mathematical modeling and graphical analysis to understand demand, supply, utility maximization, cost minimization, and the strategic interactions of market participants. This course provides a rigorous framework for understanding economic decision-making at a micro level and prepares students for advanced studies in economics.
Recommended Textbook
Microeconomics Theory and Applications 12th Edition by Edgar K. Browning
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Chapter 1: An Introduction to Microeconomics
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Q1) A linear production possibility frontier exhibits a(n)_____ opportunity cost of producing either good.
A)increasing
B)decreasing
C)constant
D)variable
Answer: C
Q2) Write down a normative statement and a positive statement with reference to the minimum wage and then explain each.
Answer: 'Higher minimum wages lead to limited employment losses.' This is a positive statement,which has been the subject of much debate in economics.Some researchers have concluded that marginal increases in the minimum wage lead to significant employment losses,while others argue that the effects are statistically insignificant. 'The minimum wage should be higher to help fight poverty.' This is a normative statement since it expresses an opinion,a value judgment of the author.
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Chapter 2: Supply and Demand
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Q1) Which of the following market outcomes can be explained by the supply-demand model?
A)An increase in the demand for cigarettes after an increase in its price
B)A decrease in household consumption following an increase in average monthly income
C)An increase in supply in spite of a decline in input prices
D)An increase in the per capita consumption of medical care in a country due to an epidemic
Answer: D
Q2) Which one of the following is held constant along a given demand curve?
A)The consumers' income
B)The price of the good the demand curve represents
C)The cost of producing the good the demand curve represents
D)The quantity of the good the demand curve represents
Answer: A
Q3) Explain how a change in price affects total expenditure by filling in each cell with the change in price that must have occurred.
Answer: 11ea857e_d75f_1e19_a433_572da5c8f312_TB1826_00_TB1826_00
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Chapter 3: The Theory of Consumer Choice
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Q1) Indifference curves consistent with one good being an economic "neuter" are:
A)convex.
B)straight lines with a slope of -1.
C)straight lines with a slope of 0.
D)L-shaped.
Answer: C
Q2) An indifference map shows the optimal consumption bundle of a consumer for two goods A and B.Which of the following factors would lead to a parallel shift of the budget line allowing the consumer to reach a higher indifference curve?
A)A fall in the price of good A
B)A parallel outward shift of the consumer's indifference curve
C)An increase in the consumer's income
D)A fall in the price of good B
Answer: C
Q3) When a consumer's optimal consumption choice is a corner equilibrium it implies:
A)the consumer has highly diversified preferences.
B)the goods are economic "neuters".
C)consumers spend all of their income on one good.
D)the goods are pure complements.
Answer: C
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Chapter 4: Individual and Market Demand
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Q1) For the average consumer,the combination of an excise tax and a tax rebate:
A)increases consumption of the taxed good but lowers welfare.
B)increases consumption of the taxed good and raises welfare.
C)decreases consumption of the taxed good and lowers welfare.
D)decreases consumption of the taxed good but raises welfare.
Q2) The income effect of a price change:
A)is always larger than the substitution effect in the inferior good case.
B)produces a backward-bending income-consumption curve.
C)reinforces the substitution effect in the normal good case.
D)is always positive.
Q3) Assume that the excise tax rate on Good Y,an inferior good,is reduced.What would be the total effect of this tax reduction on an individual's consumption?
A)The individual's consumption will remain fixed.
B)The individual's consumption of good Y can either increase or decrease.
C)The individual's consumption will increase exponentially.
D)The individual's consumption will increase at a constant rate.
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Chapter 5: Using Consumer Choice Theory
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Q1) A risk-averse individual _____.
A)prefers a sure return to an uncertain prospect generating the same expected return
B)is indifferent between a sure return and an uncertain prospect generating the same expected return
C)will forgo a sure return in favor of an uncertain prospect generating the same expected return
D)will avoid all risky investments no matter what the return
Q2) For a risk-loving individual,with return on the X-axis and total utility on the Y-axis,the slope of the total utility curve:
A)increases at an increasing rate.
B)has a constant slope.
C)increases at a decreasing rate.
D)decreases at an increasing rate.
Q3) Unlike an equivalent-sized cash transfer,an excise subsidy on good X:
A)has an income effect.
B)leaves the consumer better off.
C)has a substitution effect.
D)increases consumption of composite goods.
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Chapter 6: Exchange, Efficiency, and Prices
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Q1) Compared to rationing by prices,non-price rationing by queuing:
A)is more efficient in that those who value the good or service most are more likely to get some.
B)is less efficient in that waiting in line imposes a cost on those waiting in line,with no offsetting benefit to the seller.
C)is less efficient in that in order to sell more of the good or service,suppliers will have to increase the quality of their product beyond what the consumer desires.
D)is more efficient in that in order to sell more of the good or service,suppliers will have to increase the quality of their product beyond what the consumer desires.
Q2) At point A in Figure 6-1,Monica's endowment of steak and wine is _____,respectively.
A)O<sub>H</sub>Z and O<sub>M</sub>S
B)FG and ZV
C)O<sub>M</sub>S and O<sub>M</sub>V
D)O<sub>H</sub>F and ZV
Q3) Are non-price allocation mechanisms efficient? Explain.
Q4) What did the moral philosopher Adam Smith mean by his invisible hand theorem?
Q5) Explain why a competitive equilibrium produces an efficient allocation of goods.
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Chapter 7: Production
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Q1) Returns to scale can be evaluated by looking at how output changes along _____.
A)a ray from the origin
B)the points of intersection of two or more isoquants
C)the horizontal axis
D)an isoquant.
Q2) The marginal rate of technical substitution equals the ratio of the _____.
A)total product of capital and labor
B)marginal products of the inputs
C)marginal cost of both inputs
D)amount of capital employed to the amount of labor employed
Q3) The ratio of the change in total product to the change in total quantity of the input being used is _____.
A)equal to marginal product
B)constant as employment levels of the input vary
C)equal to average product
D)equal to the marginal rate of technical substitution
Q4) Mark is a farmer who faces the production function Q = a + bL + cK,where L is the labor input and K is capital.Show that the law of diminishing returns does not apply to Mark's farm in the short-run.
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Chapter 8: The Cost of Production
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Q1) Which of the following is true of the total variable cost curve in the short run?
A)It depicts the law of decreasing returns to scale.
B)It is a straight line parallel to the horizontal axis.
C)It is independent of the production function.
D)It lies below the short-run total cost curve.
Q2) When average costs fall as output increases,it is due to _____;when they fall at a given level of output it is due to _____.
A)economies of scale;learning by doing B)economies of scale;diseconomies of scale
C)learning by doing;economies of scale
D)learning by doing;diseconomies of scale
Q3) If fixed costs are $1,000 and variable costs are constant at $1.00 per unit over the relevant range of output,what will the average total cost be when 2,000 units are produced?
A)$0.50
B)$1.00
C)$1.50
D)$2.00
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Chapter 9: Profit Maximization in Perfectly Competitive Markets
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Q1) The competitive firm is known as a price taker because:
A)it sets the highest price it can charge.
B)it can vary its price based on variations in its cost.
C)it produces output at a level that minimizes its marginal cost.
D)it accepts the market price as a given.
Q2) Which one of the following is not an assumption of the competitive model?
A)Homogenous products
B)Unrestricted mobility of resources
C)Economies of scale
D)Perfect information
Q3) Refer to Figure 9-4.Given that the market price is $P,the firm will be operating at a loss of _____.
A)TBOV
B)RZOA
C)KTVP
D)GKPS
Q4) Derive the first-order and second-order conditions for perfect competition.
Q5) Explain the difference between diminishing marginal returns to factor and a decreasing-cost industry.
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Chapter 10: Using the Competitive Model
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Q1) Refer to Figure 10-2.What is the deadweight loss if a price ceiling is imposed at the price level P<sub>3</sub> in this market?
A)b + f + c + g
B)b + c + d + e
C)c + g
D)d + e
Q2) In the long run,the imposition of an excise tax in a constant-cost competitive industry will cause price to:
A)rise by the amount of the tax.
B)fall by the amount of the tax.
C)rise by less than the amount of the tax.
D)fall by more than the amount of the tax.
Q3) Refer to Figure 10-2.What is the consumer surplus at the equilibrium level of output?
A)a + b + f + g + h
B)a + b + c + d
C)a + b + c + f + g
D)a + b + c
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Chapter 11: Monopoly
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Q1) If the monopolist is operating in the elastic portion of its demand curve,then an increase in price will:
A)increase total revenue.
B)decrease total revenue.
C)increase marginal revenue.
D)leave total revenue unchanged.
Q2) Which of the following is true of a firm in a monopoly market?
A)The price charged by the monopolist is less than the marginal cost of production.
B)The equilibrium output in a monopoly market is smaller compared to a competitive market.
C)There is a deadweight loss in a monopoly market.
D)In a monopoly market long-run economic profits are zero.
Q3) Assume that a monopoly firm's price is $4,marginal cost is $3 and the absolute value of price elasticity of demand is 4.Based on this information we can conclude that the firm:
A)is maximizing profit.
B)should increase output.
C)should reduce output.
D)should increase price but keep output constant.
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Chapter 12: Product Pricing With Monopoly Power
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Q1) Which of the following is the best example of intertemporal price discrimination?
A)Awarding financial aid to offset college tuition fees
B)Releasing movies on DVD six months after they are released in a theater
C)Charging less for a second pizza after the consumer has paid the full price for the first pizza
D)Charging people with health care insurance more for medical care relative to those without insurance
Q2) Comparing a price-discriminating monopoly firm with a single-price monopoly,one tends to find that price discrimination:
A)increases the inefficiency of the market.
B)reduces economic profits.
C)typically increases total output.
D)results in lower input prices.
Q3) Derive the first-order conditions for profit maximization for a monopolist practicing price-discrimination.
Q4) Within the context of price discrimination,explain why airlines charge higher fares to their customers during Christmas but offer significant discounts at other times of the year.
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Chapter 13: Monopolistic Competition and Oligopoly
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Q1) Consider a dominant firm model where the elasticity of market demand is 2,the elasticity of supply of the competitive fringe is 4,and the elasticity of the dominant firm's demand is 10.Calculate the dominant firm's market share.
A)2/3
B)2/5
C)3/5
D)3/7
Q2) How is total output determined in the dominant firm model?
A)The dominant firm produces the highest level of output given its production function.
B)All firms in the market produce at the level where marginal cost equals marginal revenue.
C)The dominant firm produces at the level where marginal cost equals marginal revenue.
D)The fringe firms produce at the point where marginal revenue equals marginal cost.
Q3) What is a cartel and why are cartels considered to be inherently unstable?
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Chapter 14: Game Theory and the Economics of Information
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Q1) A buildup of nuclear weapons between two or more nations appears both counterproductive and counterintuitive.But one theory,Mutually Assured Destruction,argues that it is to a nation's benefit to amass an arsenal of weapons so vast that their use could destroy the whole world.Using a prisoner's dilemma matrix with a Nash equilibrium,show how that Country A choosing a strategy of spending vast amounts on nuclear weaponry (call it "High"),enough to destroy all of society,rather than a smaller amount (call it "Low),sufficient for self-defense only,is a dominant strategy and a deterrent over Country B.
Q2) A Nash equilibrium occurs when:
A)a unilateral move by a participant makes him better off.
B)participants have an incentive to deviate from the equilibrium.
C)no can move from the equilibrium and improve the outcome.
D)cheating by participants ensures better payoffs.
Q3) Consider a duopoly market where the players agree to collude.The single-period prisoner's dilemma game applied to this market generally predicts that:
A)the firms will maintain the collusion agreement.
B)one firm will cheat on the agreement while the other will not.
C)both firms will cheat and the collusion agreement will break down.
D)the firms will be worse off from collusion than cheating.
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Chapter 15: Using Noncompetitive Market Models
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Q1) A monopolist might find it profitable to suppress an innovative new product if:
A)the firm would lose its monopoly status by introducing the invention.
B)it owns all the sources of supply of the inputs used in the production process.
C)it could prevent other firms from copying the invention.
D)the projected demand for the product is inelastic.
Q2) Refer to Figure 15-2.Since there is a positive deadweight loss from monopoly,which of the following statements must be true?
A)The gain in producer surplus should not exceed $450.
B)The loss in total surplus should be lesser than or equal to $300.
C)The loss in consumer surplus should not exceed $600.
D)The gain in total surplus should exceed the loss in consumer surplus.
Q3) Refer to Table 15-3.What is the highest payoff from Abbott's dominated strategy?
A)$100
B)$115
C)$107
D)$60
Q4) What is a natural monopoly? Draw a diagram to illustrate the profit-maximizing output of a natural monopoly.
Q5) Define and illustrate iterated dominance and commitment strategy.
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Chapter 16: Employment and Pricing of Inputs
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Q1) When all inputs are variable,a competitive firm's labor demand curve is:
A)more inelastic than the short-run input demand curve.
B)a vertical line with a zero slope.
C)derived keeping the prices of other inputs constant.
D)the same as the marginal value product curve.
Q2) Refer to Table 16-1.Marginal product becomes negative from the _____ worker. A)third B)fourth C)sixth
D)seventh
Q3) Assume that the marginal product of labor employed by a competitive firm is 2 units and that the wage rate is $10.To maximize profits,the firm will hire an extra unit of labor to the point where the product price is equal to _____.
A)$10
B)$3
C)$4
D)$5
Q4) Using calculus,show the profit-maximizing employment of inputs for an output market monopoly.
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Chapter 17: Wages, Rent, Interest, and Profit
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Q1) Illustrate graphically and explain the income and substitution effects of a wage decrease on hours of labor supply for the case in which the individual's labor supply curve is backward bending.Graphically derive the individual's labor supply curve.
Q2) Refer to Figure 17-1.If the number of leisure hours is OL<sub>2</sub> after a change in the wage rate,it implies that:
A)the income effect of the wage change is greater than the substitution effect.
B)the income effect of the wage change is less than the substitution effect.
C)the income effect of the wage change exactly offsets the substitution effect.
D)the income and substitution effects of a wage change operate in the same direction.
Q3) When investment is financed through borrowing,an increase in the interest rate will lead to:
A)a fall in investment as the supply of funds declines at higher interest rates.
B)a fall in investment as the rate of return on certain projects will be below the interest rate.
C)an increase in investment as the value of present spending will be higher.
D)an increase in investment as the net marginal productivity will increase.
Q4) How can the presence of a union in a labor market be beneficial?
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Chapter 18: Using Input Market Analysis
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Q1) Suppose the market wage of nurses is raised from $14 an hour to $18 an hour because of a comparable-worth program,which aims to equalize the wages earned by men and women for similar jobs.Which of the following would result from this policy?
A)There would be a surplus of nurses only if the demand for nurses is inelastic.
B)There would be a shortage of nurses.
C)There would be a surplus of nurses.
D)There would be a shortage of nurses only if the demand for nurses is inelastic.
Q2) Identify some of the reasons due to which wage rates may differ among individuals even in the absence of gender or racial discrimination.
Q3) According to Figure 18-2,the proportion of the per-unit tax paid by the employers is:
A)OA/OB.
B)AB/AC.
C)BC/AC.
D)BC/AB.
Q4) Using a graph,explain the employment effects of a binding minimum wage.Who benefits,who loses,and how large are these effects?
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Chapter 19: General Equilibrium Analysis and Economic Efficiency
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Q1) When the allocation of two goods between two individuals is efficient:
A)the utilities of both the individuals from the consumption of these two goods are equal.
B)both individuals will derive the maximum utility from the consumption of these two goods.
C)the marginal rates of substitution between two goods for both the consumers are the same.
D)the market demand curves in all markets are identical.
Q2) If an Edgeworth production box for two industries,with land and labor as the inputs,has a contract curve that is same as the diagonal of the box,we can infer that:
A)land is being substituted for labor in production of both the commodities.
B)the production possibility frontier is a 45-degree line from the origin.
C)both industries are increasing cost industries.
D)the proportion of land to labor used in producing the two goods is the same.
Q3) The three conditions for an efficient allocation of resources are fulfilled:
A)when the distribution of income is equal.
B)whenever all consumers have the same willingness to pay for a good.
C)if the product and input markets are competitive.
D)only at the midpoint of the welfare frontier.
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Chapter 20: Public Goods and Externalities
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Q1) Explain with the help of a suitable figure,why the government needs to subsidize inoculation against a viral infection.
Q2) Assume that the current price of a marketable permit to emit one ton of sulfur dioxide is $60.For firm A,the marginal cost of reducing one ton of sulfur dioxide is $50.For firm B,the marginal cost of reducing one ton of sulfur dioxide is $70.Under a tradable-permit scheme:
A)both firms will buy a permit and emit one more ton of sulfur dioxide.
B)firm A will buy a permit and emit one more ton of sulfur dioxide,whereas firm B will reduce its emissions of the gas by one ton.
C)firm B will buy a permit and emit one more ton of sulfur dioxide,whereas firm A will reduce its emissions of the gas by one ton.
D)both firms will reduce their emissions of sulfur dioxide by one ton.
Q3) Tradable pollution permits achieve a given emission target efficiently because:
A)firms can bargain over the price of the permits.
B)permits will be purchased by the firms that incur the least abatement cost.
C)permits will be purchased by the firms that incur high abatement costs.
D)the polluting firms will eventually go out of business.
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