Microeconomics for Business Solved Exam Questions
Course Introduction
Microeconomics for Business provides students with an understanding of the fundamental principles that govern individual and firm decision-making within markets. The course explores key concepts such as supply and demand, consumer behavior, production and cost analysis, market structures, and the role of government intervention. Through real-world business applications and case studies, students learn how microeconomic tools can be used to analyze market outcomes, evaluate pricing strategies, and make informed managerial decisions in competitive and non-competitive environments.
Recommended Textbook
Microeconomics An Intuitive Approach with Calculus 1st Edition by Thomas Nechyba
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Chapter 1: Introduction
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Sample Questions
Q1) When economists assume that people are rational,they are assuming that people generally agree what is good for human beings.
A)True
B)False
Answer: False
Q2) 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
Q3) If medical patients are rational (in the way economists think of the term),they will do what medical experts believe is best for them.
A)True
B)False
Answer: False
Q4) Positive economics can tell us which policies are efficient and which are not.
A)True
B)False Answer: True
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Chapter 2: A Consumers Economic Circumstances
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Sample Questions
Q1) Kinks in budget constraints always produce non-convexities in choice sets.
A)True
B)False
Answer: False
Q2) A consumer has $1,000 a week to spend on renting square feet of housing x<sub>1</sub> (at a price of $5 per square foot)and eating out meals x<sub>2</sub> (at a price of $20 per meal).Derive the budget line equation and find the opportunity cost of housing in terms of meals in your equation.
Answer: The budget equation x<sub>2</sub>=I/p<sub>2</sub>(p<sub>1</sub>/p<sub>2</sub>)x<sub>1</sub> becomes x<sub>2</sub>=1000/20(5/20)x<sub>1</sub> or x<sub>2</sub>=50 - (1/4)x<sub>1</sub>.The slope of the budget line is equal to the opportunity cost of housing in terms of meals --- and this slope is -1/4 in the equation.
Q3) Regardless of which consumption bundle in her choice set a consumer chooses,she will spend all of her available income.
A)True
B)False
Answer: False
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Chapter 3: Economic Circumstances in Labor and Financial Markets
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Sample Questions
Q1) 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: \(c = 2500 - 25 \ell\) Choice Set: \(C = \left\{ ( c , \ell ) \in R _ { + } ^ { 2 } \mid c = 2500 - 25 \ell \right\}\)
Q2) Progressive wage taxes cause worker leisure/consumption budgets (with leisure on the horizontal axis)to become steeper as leisure increases.
A)True
B)False Answer: False
Q3) Since interest rates for borrowing are usually higher than interest rates for savings,the intertemporal budget constraint has an inward kink for individuals that earn income now and in the future.
A)True
B)False Answer: False
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Chapter 4: Tastes and Indifference Curves
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Sample Questions
Q1) Bundle A is worse than bundle B,and bundle C is an average of bundles A and B.Then our usual assumptions about tastes imply that bundle B is at least as good as bundle C.
A)True
B)False
Q2) Suppose tastes are NOT monotonic anywhere.Then diminishing MRS is not consistent with convexity of tastes.
A)True
B)False
Q3) The number of units of the good on the horizontal axis that we are willing to give up to get one more unit of the good on the vertical axis is equal to the absolute value of the slope of the indifference curve.
A)True
B)False
Q4) Explain the following statement: Individuals with different tastes might have the same tastes at the margin at their current consumption bundles.
Q5) Explain the following statement: For the same individual,tastes over goods may vary at the margin as we move from one bundle to another.
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Chapter 5: Different Types of Tastes
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Sample Questions
Q1) There is no elasticity of substitution that is inconsistent with tastes being homothetic.
A)True
B)False
Q2) Suppose the only characteristic of beer that a consumer cares about is alcohol content.Currently,Bud Light and Miller Lite have the same alcohol content.
a.Using
\(x _ { 1 }\) to denote ounces of Miller Lite and \(x _ { 2 }\) to denote ounces of Bud Light,what's the simplest possible utility function that can describe this consumer's tastes over the two products.
b.Suppose Bud Light lowers its alcohol content by 50%.How would you change the utility function to account for this?
c.Derive the MRS for the functions in (a)and (b)--- and interpret your answer.
Q3) If tastes are Cobb-Douglas,they can be represented by a utility function that is homogeneous of degree k where k can take on any positive value.
A)True
B)False
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Chapter 6: Doing the Best We Can
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Sample Questions
Q1) 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.
Q2) 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.
Q3) When the price of peaches went up,people bought fewer peaches and more strawberries.This is an indication that tastes have changed as a result of the price increase.
A)True
B)False
Q4) If we were the only two people in the world and I like bananas while you hate them,efficiency demands that I get all bananas.
A)True
B)False
Q5) Suppose that choice sets are convex.State assumptions about tastes that are necessary and sufficient to guarantee that the solution to the consumer optimization problem is a unique interior solution.(Explain)
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Chapter 7: Income and Substitution Effects in Consumer
Goods Markets
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Sample Questions
Q1) Every Giffen good is a necessity but not every interior good is a necessity. A)True
B)False
Q2) 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
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) Bottles of Coca-Cola and equally-sized bottles of Pepsi Cola are perfect substitutes for a consumer,but a bottle of Coke costs 10 cents less than bottles of Pepsi.The income effect of a 15 cent increase in the price of Pepsi will be for the consumer to drink less cola. 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) 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
Q2) Assuming no kinks in indifference curves and assuming our usual assumptions about tastes hold,someone who currently neither saves nor borrows will begin to borrow when the interest rate falls.
A)True
B)False
Q3) The more substitutable current consumption is with future consumption,the more likely it is that an increase in the interest rate will cause an increase in savings.
A)True
B)False
Q4) If you earn income now and expect to live off savings in the future,then a raise now will cause you to save more so long as consumption -- now and in the future -- is a normal good.
A)True
B)False
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Chapter 9: Demand for Goods and Supply of Labor and Capital
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Sample Questions
Q1) Suppose your tastes can be represented by the utility function \(u \left( x _ { 1 } , x _ { 2 } \right) = x _ { 1 } ^ { 1 / 2 } + x _ { 2 } ^ { 1 / 2 }\) .Your demand function for \(x _ { 1 }\) is a. \(\frac { I } { 2 p _ { 1 } }\).
c. \(\frac { I } { p _ { 1 } + p _ { 2 } }\).
b. \(\frac { p _ { 2 } I } { p _ { 1 } \left( p _ { 1 } + p _ { 2 } \right) }\)
d. \(\frac { I } { p _ { 1 } }\) if \(p _ { 1 } < p _ { 2 }\) and 0 if \(p _ { 2 } < p _ { 1 }\).
Q2) Unless a good is a Giffen good,the demand curve shifts to the right as income rises.
A)True B)False
Q3) Suppose that utility over consumption and leisure takes the constant elasticity of substitution form \(u ( \ell , c ) = \left( \alpha \ell ^ { - \rho } + ( 1 - \alpha ) c ^ {\rho } \right) ^ { - 1 / \rho }\) .If \(\rho\) falls between 0 and -1,then the labor supply curve is backward bending.
A)True
B)False
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Chapter 10: Consumer Surplus and Deadweight Loss
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Sample Questions
Q1) If tastes are homothetic,there exists a utility function (that represents those tastes)such that the indirect utility function is homogeneous of degree 1 in income.
A)True
B)False
Q2) Consumer surplus is accurately measured along (uncompensated)demand curves when tastes are quasilinear.
A)True
B)False
Q3) As we move to higher indifference curves,compensated demand (or MWTP)curves shift to the right.
A)True
B)False
Q4) Explain the following statement: "People hate taxes primarily because of income effects while economists hate taxes primarily because of substitution effects."
Q5) Indirect utility functions are homogeneous of degree 1 in income.
A)True
B)False
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Chapter 11: One Input and One Output: a Short-Run
Producer Model
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Sample Questions
Q1) For price-taking producers,isoprofit curves are always parallel to one another.
A)True
B)False
Q2) In the one-input model,a convex producer choice set implies an upward sloping marginal cost curve.
A)True
B)False
Q3) Suppose you solve the profit maximization problem for a single-input,price-taking producer whose technology is given by \(f ( \ell )\) The labor demand function is \(\ell ( w , p )\)
a.Suppose
\(\frac { d \ell ( w , p ) } { d w } < 0\) Might
\(\ell ( w , p )\) in fact be the correct labor demand function? Explain.
b.Suppose
\(\frac { d \ell ( w , p ) } { d w } > 0\) Might
\(\ell ( w , p )\) in fact be the correct labor demand function? Explain.
c.Intuitively explain how (b)might arise from the profit maximization problem.
Q4) Whenever average cost is increasing,marginal cost must also be increasing.
A)True
B)False
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Chapter 12: Production With Multiple Inputs
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Sample Questions
Q1) Changing the labels on isoquants without changing the shapes of the isoquants implies no change in the underlying technology so long as the ordering of isoquants is preserved.
A)True
B)False
Q2) Technologically efficient production plans are also economically efficient.
A)True
B)False
Q3) Cobb-Douglas production function have decreasing returns to scale.
A)True
B)False
Q4) Just as indifference maps represent consumer tastes,so isoquant maps represent a producer tastes.
A)True
B)False
Q5) An increasing returns to scale production function could be quasiconcave.
A)True
B)False
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Chapter 13: Production Decisions in the Short and Long Run
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Sample Questions
Q1) If the production technology has increasing returns to scale,short run marginal cost curves must be downward sloping.
A)True
B)False
Q2) (Long run)average cost curves are U-shaped when the production technology has increasing returns to scale and the firm faces recurring fixed costs.
A)True
B)False
Q3) If the rental rate increases,we know for sure that the firm will produce less and will (in the long run)use less capital.
A)True
B)False
Q4) The more substitutable capital and labor are in production,the more likely it is that the cross-price demand curve for capital (relative to the wage)is upward sloping.
A)True
B)False
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Chapter 14: Competitive Market Equilibrium
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Sample Questions
Q1) If all firms are identical,output prices will never change.
A)True
B)False
Q2) A decrease in the rental rate of capital can lead to a long run increase or decrease in the number of firms in the industry.
A)True
B)False
Q3) 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
Q4) If all firms are identical,output demand shifts cannot cause changes in output price in the long run.
A)True
B)False
Q5) Whenever a firm is making positive economic profit,there is nothing it can do to make more profit.
A)True
B)False
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Chapter 15: The Invisible Hand and the First Welfare
Theorem
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Sample Questions
Q1) In a 2-good model,suppose that all individuals have tastes that are quasilinear in either good 1 or in good 2 (with some of each represented in the group.)The quasilinearity of everyone's tastes is then sufficient to insure that we can treat the group as if it were a single representative consumer.
A)True
B)False
Q2) If a group of individual consumers can be treated as a single representative consumer,then the aggregate consumer surplus of the group can be measured along the market demand curve.
A)True
B)False
Q3) 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
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Chapter 16: General Equilibrium
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Sample Questions
Q1) Any efficient allocation has to be such that everyone would agree to switch to that allocation from the endowment allocation -- or at least no one would object to such a switch.
A)True
B)False
Q2) Suppose we live in an exchange economy with two goods.Together,we own 300 of good 1 and 300 of good 2.My tastes are captured by the utility function \(u \left( x _ { 1 } , x _ { 2 } \right) = x _ { 2 } + 50 \ln x _ { 1 }\) and yours are captured by the utility function \(u \left( x _ { 1 } , x _ { 2 } \right) = x _ { 2 } + 100 \ln x _ { 1 }\) .
a.Calculate the portion of the contract curve that lies in the interior of the Edgeworth Box. b.Can you make intuitive sense of your answer?
Q3) A proof by contradiction can only be used to disprove a statement but not to prove a statement to be correct.
A)True
B)False
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Chapter 17: Choice and Markets in the Presence of Risk
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Sample Questions
Q1) When tastes are risk averse,an individual will always choose less risk over more risk.
A)True
B)False
Q2) If the probability of the bad outcome is 0.5,the benefit level of actuarily fair insurance will be half the premium.
A)True
B)False
Q3) Expected utility functions have to be concave if they are to represent risk averse tastes.
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
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Chapter 18: Elasticities, Price-Distorting Policies, and Non-Price Rationing
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Q1) Suppose a consumer's demand function is \(x ( p ) = 100 - 3 p\) .
a.What's the general equation for the own-price elasticity of demand for this consumer?
b.What's the price elasticity of demand when p=25?
c.Suppose instead that the demand function is \(x \left( p _ { x } , p _ { y } \right) = 100 - 3 p _ { x } + p _ { y }\) .How does the equation for own-price elasticity change?
d.Continue with the demand equation in (c).Suppose p=25.What's the cross-price elasticity for x?
e.Continuing with part (d),what's the cross-price elasticity when the price of y is equal to 50?
Q2) When price elasticity is less than -1,consumer spending increases as price falls. A)True B)False
Q3) When leisure is a normal 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) 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 fall in response to the tax.
A)True
B)False
Q2) To identify the burden of a per-unit tax on consumers,we have to use the aggregate marginal willingness to pay curve whenever the underlying good is not quasilinear.
A)True
B)False
Q3) Regardless of how price inelastic the supply curve,tax revenue from a per-unit tax rises the more price inelastic the demand curve is.
A)True
B)False
Q4) When tastes are quasilinear,the sole reason for the deadweight loss from a per-unit tax is that output falls under the tax.
A)True
B)False
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Chapter 20: Prices and Distortions Across Markets
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Q1) Regardless of what types of workers are available in different countries,unrestricted labor outsourcing always results in an equalization of wages across countries.
A)True
B)False
Q2) While some countries might be better off (in terms of social surplus)from the imposition of a tariff,the world overall is always worse off (in terms of social surplus)when import tariffs are imposed.
A)True
B)False
Q3) If country A is importing good x from country B where x is produced in a perfectly competitive industry (composed of identical firms),then,in the long run,country A will suffer the entire deadweight loss from any tariff it might impose on imports of x from country B.
A)True
B)False
Q4) When tariffs on imports are eliminated,everyone benefits.
A)True
B)False
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Chapter 21: Externalities in Competitive Markets
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Q1) In order for a Pigouvian subsidy to be efficient,the amount it costs the government to implement the subsidy must be less than the economic value of the additional externality benefits created by the subsidy.
A)True
B)False
Q2) If a positive externality is caused by producers,a Pigouvian subsidy would have to be given to producers; and if a positive externality is caused by consumers,a Pigouvian subsidy would have to given to consumers.
A)True
B)False
Q3) Whether or not production is accompanied by an externality,a social planner who aims to maximize social surplus will always produce (assuming he does produce)where marginal social cost is equal to marginal social benefit.
A)True
B)False
Q4) Explain how the introduction of an additional competitive market can always solve the efficiency problem that emerges from a positive externality.
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Chapter 22: Asymmetric Information in Competitive Markets
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Q1) If all consumers are willing to buy insurance at the zero-profit pooling price,there cannot be a separating equilibrium.
A)True
B)False
Q2) Whenever there is adverse selection,there will be missing market.
A)True
B)False
Q3) In equilibrium,consumers will incur costs to signal their type (in markets with adverse selection)only if this results in a price that is lower than the pooling equilibrium price.
A)True
B)False
Q4) 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
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Chapter 23: Monopoly
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Q1) The more consumer surplus is generated in a market dominated by a single monopoly,the more efficient the outcome.
A)True
B)False
Q2) The more profit a monopolist makes,the more inefficient is the monopoly outcome.
A)True
B)False
Q3) If a monopolist faced a downward sloping average cost curve that lies fully above market demand,he will not produce if he can only charge a single per-unit price,but it would also be inefficient for him to produce.
A)True
B)False
Q4) Explain why the deadweight loss from monopoly power may be exacerbated if the barrier to entry that creates monopoly power is created through exclusive government granting of a monopoly.For what types of government grants of monopoly power might this not be the case?
Q5) How would a regulator of a monopoly think differently about regulating price discrimination depending on whether the regulator's objective is to maximize efficiency or to maximize consumer surplus?
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Chapter 24: Strategic Thinking and Game Theory
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Q1) In a Bayesian incomplete information game,a "belief" is represented as the probability you place on your opponent playing one strategy versus another.
A)True
B)False
Q2) Suppose a player in a sequential game has 2 potential decision nodes,with 5 possible actions at each node.Then he has 25 possible pure strategies.
A)True
B)False
Q3) If everyone has a dominant strategy in a simultaneous move game,then the action that is played by that strategy is played in all stages of any finitely repeated version of that game in any subgame perfect equilibrium.
A)True
B)False
Q4) Dominant strategy Nash equilibria are efficient.
A)True
B)False
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Chapter 25: Oligopoly
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Q1) 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
Q2) Suppose two Bertrand price competitors have different constant marginal costs.In any simultaneous move Nash equilibrium,only the lower cost firm will produce.
A)True
B)False
Q3) In the presence of negative pollution externalities,it is more efficient to have Cournot competitors than Bertrand competitors.
A)True
B)False
Q4) Suppose that a market is currently served by a single firm protected by high entry costs from any potential competition.Then imagine fixed entry costs gradually falling in a model where any competition will be with quantity as the strategic variable.Describe how you would expect output price to evolve as entry costs fall.
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) If price is regulated in a 2-firm oligopoly modeled along the Hotelling line,firms will compete by differentiating their products.
A)True
B)False
Q2) 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
Q3) Comment on the following statement: "Since product differentiation allows price competitors to establish some market power,it would be more efficient to not permit product differentiation."
Q4) In a monopolistically competitive market with Dixit-Stiglitz preferences,equilibrium price falls as the goods in the differentiated product market become more substitutable. A)True
B)False
Q5) Describe the tradeoffs involved when thinking about setting the time over which a patent grants an innovator exclusive monopoly rights.
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Chapter 27: Public Goods
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Q1) In our study of monopoly,we found that monopolists can increase profit by segmenting the market and price discriminating (under third degree price discrimination).Now suppose a firm is producing an excludable local public good.Can you justify a form of such market segmentation and price discrimination as efficient?
Q2) Suppose some people like national defense and others are offended by it -- i.e.some people derive positive marginal benefit and others derive negative marginal benefit.Efficiency then demands that national defense is produced until the sum of the positive marginal benefits is equal to the (absolute value)of the negative marginal benefits.
A)True B)False
Q3) Suppose a social entrepreneur needs to raise money for a public good.He has to allocate his fund raising package to activities that persuade people of the importance of the public good and to activities that make people feel good about giving.As the population gets large,which of these do you think he will increasingly emphasize?
Q4) 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) Vote trading in legislatures can lead to efficient outcomes that might otherwise not have been reached.
A)True
B)False
Q2) In settings where the policy space is single dimensional,non-single peaked preferences by some implies there is no Condorcet winner.
A)True
B)False
Q3) 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
Q4) A democratic (majority rule)decision over a multi-dimensional issue can be manipulated by an agenda setter only if voter tastes are not single-peaked.
A)True
B)False
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Chapter 29: What Is Good Challenges From Psychology and Philosophy
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20 Verified Questions
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Sample Questions
Q1) Do you agree or disagree with the following statement: "If,in the neoclassical model of decision making,the discount factor changes over time,the predictions of the beta-delta model could be mimicked in the neoclassical model." Explain.
Q2) One way to think of ideas coming out of behavioral economics is to map the ideas into either impacting "tastes" or "constraints".Can you give an example of each?
Q3) Any consequentialist approach to normative economics that uses standard indifference maps as social indifference maps (over utilities or consumption)will choose efficient outcomes in the first-best case.
A)True
B)False
Q4) In the presence of compensating wage differentials,explain why the consumption possibility frontier is not a good approximation of the utility possibility frontier.
Q5) What's the Easterlin Paradox -- and in what sense does it suggest reference-dependent preferences?
Q6) Comment on the following: "Present-biased people are impatient,but impatient people don't necessarily have to be present-biased."
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