Microeconomics for Business Solved Exam Questions
Course Introduction
Microeconomics for Business explores the fundamental principles of microeconomic theory and their practical application within a business context. The course covers topics such as supply and demand analysis, consumer behavior, production and cost functions, market structures, and the role of government in market outcomes. Students will learn how microeconomic concepts inform business decision-making, pricing strategies, resource allocation, and competitive dynamics. The objective is to equip students with analytical tools to better understand market environments and improve organizational strategy and performance.
Recommended Textbook
Microeconomics Theory and Applications with Calculus 4th Edition by Jeffrey M. Perloff(equations)
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Page 2
Chapter 1: Introduction
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Sample Questions
Q1) Economists tend to judge a model based upon
A)the reality of its assumptions.
B)the accuracy of its predictions.
C)its simplicity.
D)its complexity.
Answer: B
Q2) The purpose of making assumptions in economic model building is to
A)force the model to yield the correct answer.
B)minimize the amount of work an economist must do.
C)simplify the model while keeping important details.
D)express the relationship mathematically.
Answer: C
Q3) A market
A)always involves the personal exchange of goods for money.
B)allows interactions between consumers and firms.
C)always takes place at a physical location.
D)has no influence on prices.
Answer: B
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Chapter 2: Supply and Demand
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Sample Questions
Q1) Use supply-and-demand graphs to explain why parking is free at the suburban shopping mall but one typically must pay to park when shopping downtown.
Answer: 11ea6e7c_8257_e5e5_8f54_33c9a9d3c099_TB3096_00 See the above figure.At the suburban shopping mall,the only cars typically on the lot belong to shoppers and employees.Mall lots are usually built to be large enough to handle peak crowds.For the relevant quantities,the supply curve is horizontal at a price of zero.As a result,the quantity demanded never exceeds the amount that is provided freely.Downtown,shoppers compete with a larger quantity and greater variety of drivers for parking spaces.The quantity that is available freely is not enough to accommodate all of those who wish to park downtown.
Q2) During the winter of 1997-1998,the northeastern United States experienced warmer than usual conditions.The price of home heating oil was less than it was during the previous winter,but people bought less home heating oil.This contradicts the Law of Demand.
A)True
B)False
Answer: False
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Page 4
Chapter 3: A Consumers Constrained Choice
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Sample Questions
Q1) If two bundles are on the same indifference curve,then
A)the consumer derives the same level of utility from each.
B)the consumer derives the same level of ordinal utility from each but not the same level of cardinal utility.
C)no comparison can be made between the two bundles since utility cannot really be measured.
D)the MRS between the two bundles equals one.
Answer: A
Q2) Johnny has $100 to spend on books and all other goods.Books cost $20 each and Johnny is at equilibrium consuming 3 books and $40 worth of other goods.Johnny's grandmom wants to give Johnny either a book or $20 for his birthday.Which gift does Johnny prefer? Explain using an indifference map and budget lines.
Answer: 11ea6e7c_8260_2377_8f54_29f454f227e7_TB3096_00 See the above figure.Since Johnny's equilibrium book consumption exceeds the quantity of books in the gift-in-kind,Johnny is indifferent between receiving the book or the cash.Had Johnny been consuming less than one book,he would have preferred the cash.
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Chapter 4: Demand
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Sample Questions
Q1) Jill consumes nothing but soup and cola.If cola is a luxury good for Jill,then soup must be a necessity.
A)True
B)False
Q2) When the price of a good changes,the substitution effect can be found by comparing the equilibrium quantities purchased
A)on the old budget line and the new budget line.
B)on the original indifference curve when faced with the original prices and when faced with the new prices.
C)on the new budget line and a hypothetical budget line that is a shift back to the original indifference curve parallel to the new budget line.
D)on the new indifference curve.
Q3) A consumer purchases housing (H)and spends the remainder of income on the composite good (C).The government is considering one of two policies.Policy A taxes housing by $50 per unit consumed.With the tax in place,the consumer purchases 100 units of housing.Policy B collects a lump-sum tax of $5,000 from the consumer's income.Compare the effects of the policies on the consumer's utility/well-being and the amount of housing and composite goods purchased.
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Page 6
Chapter 5: Consumer Welfare and Policy Analysis
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Sample Questions
Q1) Suppose you work for a government agency that is considering removing certain agricultural subsidies.The removal of these subsidies will increase the price,thus lowering consumers' welfare.Because only aggregate market data is available,you are unable to measure the exact values for the compensated and equivalent variation by consumer.However,you are able to estimate the change in market consumer surplus.Assuming agricultural products are normal goods,how does your estimate of consumer surplus compare to the unknown EV and CV? Explain.Under what conditions will the three measures of welfare be close to one another?
Q2) Ian views playing Wartcraft and drinking soda as perfect complements (one soda with one hour of playing Wartcraft).Currently,sodas are $1 each and Wartcraft costs $1 per hour.Ian has $12 of income.
a.Compute Ian's Compensating Variation if the price of Wartcraft rises to $2.
b.Compute Ian's Equivalent Variation if the price of Wartcraft rises to $2.
c.Compute Ian's change in Consumer Surplus if the price of Wartcraft rises to $2.
Q3) Consumers who are more sensitive to changes in price suffer a greater loss of consumer surplus from any given price increase.
A)True
B)False
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7
Chapter 6: Firms and Production
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Sample Questions
Q1) Changing how production is organized cannot result in changes in productivity.
A)True
B)False
Q2) Lectures in microeconomics can be delivered either by an instructor (labor)or a movie (capital)or any combination of both.Each minute of the instructor's time delivers the same amount of information as a minute of the movie.Which graph in the above figure best represents the isoquants for lectures in microeconomics when Capital per day is on the vertical axis and Labor per day is on the horizontal axis?
A)Graph A
B)Graph B
C)Graph C
D)Graph D
Q3) If marginal productivity is increasing,then total product is
A)increasing at an increasing speed.
B)increasing at a constant speed.
C)increasing at a decreasing speed.
D)decreasing at an increasing speed.
Q4) Describe the relationship between marginal productivity and average productivity.Use calculus or a graph to support your answer.
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Chapter 7: Costs
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Q1) An accountant may amortize the expense of a durable good by dividing the total amount spent on the good by the number of years the good is expected to last.An economist may amortize the expense of a durable and never fully account for the total expense.
A)True
B)False
Q2) Consider a firm with two technologies to choose between when producing output.The cost function when using technology 1 is given by: c<sub>1</sub>(q)= 3600 + 65q + 36q<sup>2</sup>
The cost function when using technology 2 is given by: c<sub>2</sub>(q)= 900 + 900q +q<sup>2</sup>
<sup>Assume that the firm can only implement one of the two technologies at a time.</sup>
a.If the firm wishes to produce output at the lowest per-unit cost,which technology should it choose and how much output should it produce?
b.Which technology should the firm choose if it wishes to produce 15 units of output? What about 25 units of output?
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Page 9
Chapter 8: Competitive Firms and Markets
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Sample Questions
Q1) If a competitive firm maximizes short-run profits by producing some quantity of output,which of the following must be TRUE at that level of output?
A)p > MC.
B)MR > MC.
C)p AVC.
D)All of the above.
Q2) Markets with hit-and-run entry and exit experience
A)barriers to entry.
B)firms entering whenever they can make a profit and exiting when they cannot make a profit.
C)steady long-run economic profit.
D)a very steady number of firms.
Q3) If a firm doesn't make an economic profit,it will shut down.
A)True
B)False
Q4) The demand curve an individual competitive firm faces is known as its
A)excess demand curve.
B)market demand curve.
C)residual demand curve.
D)leftover demand curve.
10
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Chapter 9: Properties and Applications of the Competitive Model
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Sample Questions
Q1) The above figure shows supply and demand curves for milk.If amount Q<sub>2</sub> is produced in the market,
A)producer surplus is maximized.
B)consumer surplus is minimized.
C)a deadweight loss is generated.
D)All of the above.
Q2) The above figure shows the market for rice in Japan.S<sub>Domestic</sub> represents the domestic supply curve,and S<sub>world</sub> represents the world supply curve.If imported rice is banned,the loss in social welfare is
A)a + b + c + d + i + j.
B)a.
C)c + e.
D)a + b + c + d.
Q3) The above figure shows supply and demand curves for apartment units in a large city.The area "c" represents
A)the loss in consumer surplus if a rent ceiling of $350 is imposed.
B)a transfer from producers to consumers if a rent ceiling of $350 is imposed.
C)a transfer from consumers to producers if a rent ceiling of $350 is imposed.
D)the total revenue received by supplying Q<sub>1</sub> units.
Page 11
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Chapter 10: General Equilibrium and Economic Welfare
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Sample Questions
Q1) The above figure depicts the Edgeworth box for two consumers,Al and Bruce.Explain why point "a" cannot be a competitive equilibrium.
Q2) According to the Theory of the Second Best,why might market liberalization through elimination of some market distortions,such as particular trade restrictions,lead to social welfare losses?
Q3) A cake is to be shared by two people.Both desire the largest piece possible.One of the two will cut the cake.Under which of the following situations will the cutter adopt a Rawlsian social welfare function?
A)The person cutting the cake chooses the first piece.
B)The person not cutting the cake chooses the first piece.
C)The two individuals will bid for the right to cut the cake and choose first.
D)The two individuals will toss a coin for the right to cut the cake and choose first.
Q4) When two people trade their initial endowments to a point on the contract curve,only the level of the endowments will determine the new allocation.
A)True
B)False
Q5) Explain why a government may select an inefficient allocation.
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Page 12
Chapter 11: Monopoly and Monopsony
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Sample Questions
Q1) The above figure shows the demand and cost curves facing a monopoly.At the profit-maximizing price,the elasticity of demand equals A)-1.
B)zero.
C)infinity. D)-3.
Q2) Since there are no close substitutes for the monopoly's product,the monopoly can charge any price it wishes.
A)True
B)False
Q3) Which of the following average cost functions suggests the presence of a natural monopoly?
A)AC = 2
B)AC = 100/Q + 2
C)TC = 100/Q + 2Q
D)All of the above
Q4) The optimal patent length is equal to 20 years.
A)True
B)False
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Chapter 12: Pricing and Advertising
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Sample Questions
Q1) A specialized rice grower sells rice in two markets,the United States and Japan,and the marginal cost the same in both markets.The price elasticity of demand in the United States is -2.0,and the price elasticity of demand in Japan is -1.5.If the grower practices multimarket price discrimination,which country's consumers will pay a higher price and by how much?
Q2) If somebody posing as a vacationer were able to purchase large numbers of airline tickets from the airlines and later resell them to business travelers,
A)group price discrimination on the part of airlines would no longer be profitable.
B)group price discrimination on the part of airlines would no longer be profit maximizing.
C)the airlines would respond by raising further the price charged to business flyers.
D)this person would not earn any economic profit.
Q3) Which of the following sellers is most able to perfectly price discriminate?
A)a college or university
B)the post office
C)a clothing store
D)a grocery supermarket
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Chapter 13: Game Theory
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Sample Questions
Q1) Explain why to some game theorists,the idea of mixed strategies is appealing,and to others it is implausible.
Q2) An incumbent's threat to retaliate after a potential competitor enters the market will be taken seriously by potential competitors if
A)the incumbent can still earn a profit after carrying out the threat.
B)the incumbent earns greater profit carrying out the threat than by accommodating entry.
C)the potential entrant cannot earn a profit if the threat is carried out.
D)the potential entrant's profit exceeds the incumbent's if the threat is carried out.
Q3) The above figure shows the payoff matrix for two firms,A and B,selecting an advertising budget.The firms must choose between a high advertising budget and a low advertising budget.A Nash equilibrium is that
A)firm A selects a high advertising budget and firm B selects a low advertising budget.
B)firm A selects a low advertising budget and firm B selects a high advertising budget.
C)both firms select a high advertising budget.
D)both firms select a low advertising budget.
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Page 15
Chapter 14: Oligopoly and Monopolistic Competition
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Sample Questions
Q1) A competitive market structure differs from the monopoly,oligopoly,and monopolistic competition structures in the A)producers' ability to set price.
B)profit maximization condition.
C)amount of long run profit.
D)entry conditions.
Q2) In a Bertrand model,if one firm has a dominant strategy,its best-response function A)does not exist.
B)is identical to its rival.
C)is a constant.
D)is to respond to its rival's price increase with a price decrease.
Q3) Suppose two duopolists operate at zero marginal cost.The market demand is p = abQ.If firm 1 is the Stackelberg leader,what level of output will it choose?
A)q<sub>1</sub> = (a - bq<sub>2</sub>)/2b
B)q<sub>1</sub> = (a - 2bq<sub>2</sub>)/2b
C)q<sub>1</sub> = a/b
D)q<sub>1</sub> = a/2b
Q4) What happens in a duopoly if both firms try to act as the Stackelberg leader?
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Chapter 15: Factor Markets
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Sample Questions
Q1) Interest rates are positive mainly because A)of inflation.
B)people tend to prefer the present to the future.
C)people tend to prefer the future to the present.
D)bankers are greedy.
Q2) If you place $100 in a bank account that pays 6% at the end of each year,and you leave your $100 and all your interest in the bank,how much will you have in the bank at the end of seven years with annual compounding?
A)(106)<sup>7</sup>.
B)7 (106).
C)100 (1.60)<sup>7</sup>.
D)100 (1.06)<sup>7</sup>.
Q3) Suppose the labor market is competitive,the supply curve of labor is upward sloping,and the amount of capital is fixed.If the output market changes from a competitive market to a monopoly,what is the effect on its demand for labor? Explain.
Q4) Suppose n identical Cournot firms purchase labor in a competitive labor market.How is the market demand for labor affected by the number of firms in the market?
Q5) Why is the short-run demand curve for labor downward sloping?
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Chapter 16: Uncertainty
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Sample Questions
Q1) If an individual makes her investment decisions based solely on the Net Present Value criterion,one can conclude that she is
A)risk averse.
B)risk neutral.
C)risk loving.
D)extremely wealthy.
Q2) John derives more utility from having $1,000 than from having $100.From this,we can conclude that John
A)is risk averse.
B)is risk loving.
C)is risk neutral.
D)has a positive marginal utility of wealth.
Q3) On any given day,a salesman can earn $0 with a 40% probability,$100 with a 40% probability,or $300 with a 20% probability.His expected earnings equal
A)$0.
B)$100 because that is the most likely outcome.
C)$100 because that is what he will earn on average.
D)$200 because that is what he will earn on average.
Q4) Explain why insurance companies usually do not offer earthquake insurance.
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Chapter 17: Property Rights, Externalities, Rivalry, and Exclusion
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Sample Questions
Q1) If a production process creates pollution,a competitive market produces excessive pollution because
A)private marginal cost of pollution exceeds its social marginal cost.
B)social marginal cost of pollution exceeds its private marginal cost.
C)the marginal benefit of pollution to the firm is zero.
D)zero pollution is optimal.
Q2) The existence of externalities is due mainly to the fact that
A)monopolies tend to produce too little of a good anyway.
B)the optimal level of pollution is zero.
C)pollution is not a serious problem.
D)property rights are poorly defined.
Q3) Explain the externality generated when a shepherd grazes sheep in a field that is common property that several other shepherds use.
Q4) The above figure shows the market for steel ingots.The optimal quantity of pollution
A)is 0 units.
B)is 50 units.
C)is 100 units.
D)cannot be determined from the information provided.
Q5) Explain why the optimal amount of pollution is often not zero.
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Chapter 18: Asymmetric Information
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Sample Questions
Q1) A person who practices poisonous snake charming and does not reveal this to her health insurance company before purchasing insurance is an example of A)moral hazard.
B)adverse selection.
C)signaling.
D)screening.
Q2) Which of the following reduces the effects of asymmetric information?
A)repeat purchases
B)warranties
C)building a reputation
D)All of the above.
Q3) A consumer is likely to avoid adverse selection and get a high-quality lunch at A)a snack bar at a traveling carnival.
B)a vendor who parks her cart at a different location every noon.
C)a restaurant in the center of a business district.
D)a restaurant located next door to Disneyland.
Q4) In a competitive market with large search costs,many firms,and asymmetric information,why is the monopoly price the only possible single-price equilibrium?
Q5) Explain how product liability laws can reduce adverse selection.
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Chapter 19: Contracts and Moral Hazards
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Q1) Suppose a plaintiff hires a lawyer to represent her in a court case.She agrees to pay the lawyer a wage per hour.She knows precisely what the lawyer should do and how long each activity should take,and she can verify that the lawyer has correctly completed each activity.She can terminate the contract at any time.With this contract,
A)the lawyer bears all the risk.
B)the risk is shared by the lawyer and the plaintiff.
C)production efficiency can be achieved.
D)production efficiency is impossible.
Q2) Suppose a plaintiff hires a lawyer to represent her in a court case.Under which of the following contracts is production efficiency assured?
A)The lawyer is paid by the hour.
B)The lawyer receives a share of the settlement.
C)The lawyer receives a fixed fee.
D)The lawyer pays the client a fee for the right to the entire settlement.
Q3) Which of the following would not be used by firms to deter shirking?
A)requiring employees to post a bond
B)offering a bonus after five years of service
C)paying more than the market wage
D)paying less than the market wage
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