Microeconomics for Public Policy Practice Questions
Course Introduction
Microeconomics for Public Policy explores the fundamental principles of microeconomic theory and applies them to the analysis and formulation of public policy. Topics include consumer and producer behavior, market structures, efficiency and equity, externalities, public goods, and information asymmetries. Through real-world case studies and policy applications, students learn how microeconomic tools can be used to assess government interventions, design effective policies, and evaluate their potential impacts on individuals, markets, and society as a whole. The course is designed to equip students with a strong analytical foundation for informed decision-making in the public sector.
Recommended Textbook Microeconomics A Modern Approach 1st Edition by Andrew Schotter
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Chapter 1: Economics and Institutions: a Shift of Emphasis
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Q1) To understand how Sony, Toshiba, and Panasonic use prices to compete in the consumer electronics market, economists might use
A) game theory
B) physics
C) international diplomacy
Answer: A
Q2) When Brenda takes out a mortgage and does not know if her house's price will go up or down, she faces
A) certainty
B) a guaranteed way to get rich
C) uncertainty
Answer: C
Q3) Decisions that are typically made at one pont in time are A) always easy
B) static
C) dynamic
Answer: B
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Chapter 2: Consumers and Their Preferences
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Q1) If you believe that the amount of utility an agent receives from raspberries directly depends on how many units of apples the agent consumes, what type of utility function should you use?
Answer: In a multiplicative utility function, the marginal utility of consumption for any good depends on the amount of other goods consumed.
Q2) Which of the following is not a psychological assumption made about economic agents?
A) continuity
B) selfishness
C) nonsatiation
Answer: A
Q3) The reduced set of consumption bundles, each of which satisfies the budget constraint, is called the economically feasible consumption set.
A)True
B)False
Answer: True
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Chapter 3: Utilities Indifference Curves
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Q1) The optimal allocation of time for studying for final exams is always situated at a tangency point between an indifference curve and the
A) time constraint line
B) origin
C) indifference curve with the maximum value of utility
Answer: A
Q2) A microeconomic method that a student could use to decide how to study for final exams is
A) the selfishness assumption
B) optimal allocation of time
C) the concavity principle
Answer: B
Q3) Refer to Exhibit 3-3. Which point is not within the economically feasible set?
A) (a)
B) (b)
C) (c)
Answer: A
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Chapter 4: Demand and Behavior in Markets
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Q1) Is the typical demand curve used in microeconomics compensated or uncompensated?
Q2) The substitution effect must always be ___________ in direction to the effect of a price change.
A) identical
B) independent C) opposite
Q3) A good for which demand increases as the income of the consumer increases and the relative prices remain constant is called a(n)
A) superior good
B) inferior good C) normal good
Q4) The quantity of a good that people seek to sell at a given price is the quantity demanded.
A)True B)False
Q5) A demand curve represents graphically the relationship between the quantity of a good demanded by a consumer and the price of that good as the price varies.
A)True
B)False
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Chapter 5: Some Applications of Consumer Demand, and Welfare Analysis
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Q1) A characteristic of demand for a good where, at a given price, a 1% change in the price leads to exactly a 1% change in the quantity demanded is called unitary elastic demand.
A)True
B)False
Q2) The paradox of crime prevention is the cost of engaging in any activity or the opportunity forgone by choosing that particular activity.
A)True
B)False
Q3) The elasticity of demand measure the percentage change in the price of a good that results from a given percentage change in its demand.
A)True
B)False
Q4) A curve that represents graphically the relationship between the quantity of a good demanded by a consumer and the price of that good as the price varies is called the market demand curve.
A)True B)False
Q5) List the three properties of demand functions.
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Chapter 6: Uncertainty and the Emergence of Insurance
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Q1) If utility is measured in a way that not only the utility numbers assigned to bundles are meaningful, but also their differences, then we say that we are using
A) cardinal utility
B) ordinal utility
C) expected utility
Q2) Xavier, Yolanda, and Zachary are considering whether to pool their funds to buy into a lottery. There is a 20% chance that they will win big and make $8 million dollars, a 40% chance that they will win second prize and make $2 million, and a 40% chance that they will lose and win nothing. The entrance fee to participate in this lottery is $2 million. The partners decide whether or not to play by majority vote. Assume that Xavier has utility function u(x) = x². The other two partners have utility function u(x) = x, where x is the total amount of money won in the lottery. Will the partners buy in?
A) All three will vote to buy in, so the partnership as a whole will buy in
B) Only Xavier will vote to buy in, so the partnership as a whole will not buy in
C) Yolanda and Zachary will vote to buy in, so the partnership as a whole will buy in
Q3) What are the characteristics of a risk averse agent?
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Chapter 7: Uncertainty Applications and Criticisms
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Q1) Kahneman and Tversky suggest that the way people go about assigning values to utilities of prizes is by
A) defiining for themselves a status quo outcome only
B) judging all outcomes other than the status quo as either gains or losses from the status quo only
C) defiining for themselves a status quo outcome and judging all outcomes other than the status quo as either gains or losses from the status quo
Q2) The Linda Problem is an example of A) violations of the conjunction law
B) ambiguity aversion
C) violation of base rates
Q3) In a survey of university hospital employees, when the insurance causes are broken down to individual cases, people tend to overestimate the probability of each case happening. This is an example of
A) the effect of isolating vivid causes
B) status quo bias
C) the mean-preserving spread proposition
Q4) Describe the difference between linear and nonlinear probability weights.
Q5) Why use the expected utility theory?
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Chapter 8: The Discovery of Production and Its Technology
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Q1) An production indifference curve is the set of bundles that most efficiently produce the same output given a production function.
A)True
B)False
Q2) Refer to Exhibit 8-1. Describe the returns to scale for each graph. Explain your answers.
Q3) A production function is a function the describes the __________ amouint of _________ a producer can produce given a certain level of _________.
A) minimum, output, inputs
B) maximum, input, outputs
C) maximum, output, inputs
Q4) Refer to Exhibit 8-1. Which graph depicts constant returns to scale?
A) (a)
B) (b)
C) (c)
Q5) Describe some similarities between the theory of the producer and the theory of the consumer.
Q6) Refer to Exhibit 8-3. This graph most likely illustrates which type of production function?
10
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Chapter 9: Cost and Choice
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Q1) What is the difference between finding the optimal combination of inputs in the short run versus in the long run?
Q2) State the geometric and algebraic conditions for optimal input combinations.
Q3) Refer to Exhibit 9-3. Which graphs shows a cost function for a Cobb-Douglas production function with constant returns to scale?
A) (a)
B) (b)
C) (c)
Q4) If capital becomes very expensive and labor is cheap, a producer will want to use more units of labor and fewer units of capital if the technology permits this substitution. What measures how freely the producer can vary inputs as their relative prices change, but the amount of output produced remains constant?
A) homothetic production function
B) elasticity of substitution
C) income elasticity of demand
Q5) A cost function associated with the Leontief technology is a
A) straight line
B) concave curve
C) convex curve
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Chapter 10: Cost Curves
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Q1) Refer to Exhibit 10-2. This graph most likely illustrates a short-run
A) total cost function
B) production function
C) average cost function
Q2) For every quantity of output, there is an optimal short-run
A) total cost curve, but not a short-run average cost curve
B) total cost curve and a short-run average cost curve
C) average cost curve, but not a short-run total cost curve
Q3) The _______-run total cost of producing any quantity of output is simply the ___________ possible ________-run total cost of producing that quantity.
A) short, smallest, long
B) long, smallest, short
C) long, greatest, short
Q4) Explain why a long-run production function is three-dimensional and a short-run production function is two-dimensional.
Q5) When SRMC is lower than SRAC, the average cost curve must be A) horizontal B) falling C) rising
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Chapter 11: Game Theory and the Tools of Strategic
Business Analysis
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Q1) A threat in a strategic game that is not believable or would not be carried out if called upon is known as a(n)
A) noncredible threat
B) credible threat
C) incredible threat
Q2) A Nash equilibrium is a set of strategies, one for each player, in which _______________________ to change behavior given the behavior of the opponents.
A) no player wishes
B) all players wish
C) only one player wishes
Q3) Strategies that define probability mixtures over all or some of the pure strategies in the game are called
A) mixed strategies
B) super-pure strategies
C) gambles
Q4) A zero-sum game is a game in which the gain of one player equals the loss of the other player.
A)True B)False
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Chapter 12: Decision Making Over Time
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Q1) The slope of a hyperbolic discount function ________________ as we move through time.
A) stays constant
B) equals -\(\delta\)
C) changes
Q2) Describe the stationarity axiom.
Q3) For Alice Hijr the passage of time does not reverse her decisions. She discounts deferred income streams by a constant fraction per unit of time. Alice is patient. How would a person with hyperbolic preferences differ from Alice?
Q4) A decision maker with hyperbolic preferences is very
A) patient
B) impatient
C) patient or impatient depending on a random distribution
Q5) To obtain X dollars t years from now, you would have to put only X / (1 + r) dollars in the bank today, where r is the interest rate per year.
A)True
B)False
Q6) What type of dynamic intertemporal choice problem is solved using backward induction?
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Chapter 13: The Internal Organization of the Firm
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Q1) Describe what laboratory tests of affirmative action programs found when the amount of historical discrimination is not great, that is, the cost asymmetry of the agents is not too large.
Q2) A moral hazard occurs whenever there are incentives for economic agents who cannot be monitored to behave in a manner contrary to what is expected of them. A)True
B)False
Q3) The person employing the agent is called the A) employee
B) principal
C) big meanie
Q4) In group incentive schemes, the rewards to any individual agent depend not only on his or her actions, but also on the actions of the other agents in the group or tournament. A)True
B)False
Q5) Can a firm prevent the moral hazard problem of workers shirking?
Q6) In a rank-order tournament, what are the two ways that the choice of an effort level influences each player's payoff?
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Chapter 14: Perfectly Competitive Markets: Short-Run Analysis
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Q1) An increase in government drug enforcement targeted at dealers will cause the supply curve to
A) not shift at all
B) shift to the left
C) shift to the right
Q2) Refer to Exhibit 14-4. At which price will there be excess demand?
A) p<sup>1</sup>
B) p<sup>e</sup>
C) p<sup>2</sup>
Q3) When goverment sets a price ceiling in a market, government establishes a __________ price.
A) maximum
B) minimum
C) Neither answer is correct
Q4) In a comparative static analysis, the economist examines the equilibrium of the market before and after a policy change to see the effect of the change on the market price and quantity.
A)True
B)False
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Q5) When is a tougher drug enforcement policy beneficial to society on the whole?
Chapter 15: Competitive Markets in the Long Run
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Q1) What is the difference between how economic planners and a perfectly competitive market would allocate production in an industry?
Q2) In the long run, when demand increases, equilibrium price unambiguously goes A) up
B) down
C) Neither answer is correct
Q3) The return to a factor of production over and above what is needed to secure the services of that factor is known as economic rent.
A)True
B)False
Q4) For a constant-cost industry,
A) the industry must consume a large share of the inputs in the market
B) the entry of one additional firm causes a pecuniary externality
C) inputs must be in abundant supply
Q5) In long-run equilibrium for a perfectly competitive market, no firm earns extra-normal profits. Describe why firms that earn zero extra-normal profits would stay in business.
Q6) What does it mean to say that society experiences a deadweight loss when markets are organized as monopolies?
Page 17
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Chapter 16: Market Institutions and Auctions
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Q1) The Smith experiments demonstrated that the market institution that best approximated efficiency was the
A) one-sided oral auction in which only the sellers are active
B) double oral auction
C) one-sided oral auction in which only the buyers are active
Q2) A Dutch auction is an auction in which the auctioneer starts the bidding at a certain level and people raise that bid until no one wishes to increase her or his bid any further. The last person to bid wins the good at a price equal to that bid.
A)True
B)False
Q3) Under what conditions does the Revenue Equivalence Theorem not hold true?
Q4) An outcome of a common value auction in which the winning bidder bids more than the true expected value of the good he or she wins is called the winner's curse.
A)True
B)False
Q5) Summarize the procedure for beating the winner's curse in a common value auction.
Q6) State the Revenue Equivalence Theorem.
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Chapter 17: The Age of Entrepreneurship: Monopoly
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Q1) The difference between what the consumers would have been willing to pay for a good and the amount the good is actually being sold for is called societal
A) deadweight loss
B) producer surplus
C) consumer surplus
Q2) If an entrepreneur charges a large enough lump-sum fee to make a profit, it may even be possible to set the per-unit price at the
A) segmented market price
B) N-part tariff price
C) socially optimal single price
Q3) The price charged by a profit-maximizing monopolist and the elasticity of demand will be
A) inversely related
B) independent
C) directly related
Q4) A monopolist will choose the profit-maximizing quantity and price. Would society as a whole be better off with some other outcome?
Q5) Does a monopolist always earn extra-normal profits?
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Chapter 18: Natural Monopoly and the Economics of Regulation
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Q1) As a government official, you receive complaints from your constituents about the local broadband Internet access monopoly. How will you respond?
Q2) In the study of monopolies, a franchise is
A) the license a government grants to a company that allows it to set up a monopoly
B) the best player on a football team
C) a form of corporate organization used by fast-food restaurants
Q3) A market outcome that is optimal given existing constraints in the market but worse than the outcome that would result if those constraints were removed is called the
A) subadditive result
B) second-best result
C) extra-normal result
Q4) A contestable market is a market that competitors can easily enter and leave because there are no sunk costs.
A)True
B)False
Q5) Explain why the inertia shopping rule provides a defensive pricing strategy.
Q6) What assumptions must be true for the theory of contestable markets to be valid?
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Chapter 19: The World of Oligopoly: Preliminaries to
Successful Entry
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Q1) A Cournot equilibrium occurs where the reaction functions for the two firms A) intersect B) are farthest apart
C) Neither answer is correct
Q2) Describe a Cournot equilibrium.
Q3) The set of output combinations for two duopolistic firms that has the property of the sum of the outputs being constant is called an A) isocost curve
B) iso-output line C) isoprofit curve
Q4) At a Bertrand equilibrium, the price of the product is driven down to A) average total cost
B) zero C) marginal cost
Q5) The change that a firm expects in its competitor's choice of an output level in response to a change the firm makes in its own output level is called the A) conjectural variation B) expected value C) reaction function
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Chapter 20: Market Entry and the Emergence of Perfect Competition
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Q1) Blockaded entry occurs when the incumbent firm is able to deter entry by simply pursuing a policy that is best for A) itself as a monopolist
B) the potential entrant firm
C) social welfare
Q2) A model of entry prevention where the strategy of the incumbent monopolist is to overinvest in production capacity in order to make entry unprofitable is called the
A) Stackelberg model
B) Dixit-Spence model
C) Bain, Modigliani, Sylos-Labini model
Q3) If the incumbent firm installs sufficient excess capacity, the potential entrant knows that equilibrium will involve a too high level of output by the incumbent firm
A) only hypothetically
B) after entry
C) at no time in the foreseeable future
Q4) List the characteristics of a perfectly competitive market.
Q5) Is the predicted outcome of the Bain, Modigliani, Sylos-Labini model a subgame perfect equilibrium? Why or why not?
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Chapter 21: The Problem of Exchange
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Q1) An individually rational trade offers a trader a higher level of utility than he or she could receive by not trading.
A)True
B)False
Q2) Money is a medium that is widely acceptable in exchange for all goods and services and for the settlement of debts.
A)True
B)False
Q3) A feasible allocation does not allocate more than the total amount of goods available in the economy.
A)True
B)False
Q4) Does the contract curve define the set of equilibrium trades?
Q5) The set of efficient (Pareto-optimal) allocations that cannot be improved upon by any agent acting alone (in an individually rational manner) or by any group of agents acting together is called the
A) contract
B) core
C) indifference region
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Chapter 22: General Equilibrium and the Origins of the Free
Market and Interventionist
Ideologies
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Q1) If there is no other allocation that will allow the economy to produce more of one good without producing less of another good, then a given allocation
A) produces extra-normal profits
B) is Pareto efficient
C) Both answers are correct
Q2) The first fundamental theorem of welfare economics indicates that A) every Pareto-optimal allocation for an economy can be achieved as a competitive equilibrium for an appropriately defined distribution of income
B) an economy should be organized so as to maximize the welfare of the least well-off person in society
C) when a competitive equilibrium exists, the allocations of inputs and outputs in the economy define a Pareto-optimal outcome
Q3) Perfectly competitive markets satisfy the condition for A) efficiency in consumption only
B) efficiency in consumption, efficiency in production, and consistency of production and consumption
C) efficiency in production and consistency of production and consumption only
Q4) List the three beliefs on which the free-market argument rests.
Page 24
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Chapter 23: Moral Hazard and Adverse Selection:
Informational Market Failures
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Q1) If an insurance company selects its risks from the population in an adverse way, the company will probably
A) earn extra-normal profits
B) suffer severe losses C) barely break even
Q2) An equilibrium to a game of incomplete information where players of different types take identical actions so that others are not able to learn their types from observing the actions they take is called a pooling equilibrium.
A)True
B)False
Q3) Co-insurance is an example of how a market failure due to moral hazard can be solved __________ government intervention.
A) with
B) partially by C) without
Q4) Tipping is a(n) ____________ solution.
A) nonmarket
B) immoral hazard
C) market
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Chapter 24: Externalities: the Free Market Interventionist
Battle Continues
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Q1) Externalities consist of
A) both costs and benefits
B) only benefits
C) only costs
Q2) A firm with a high marginal cost of abatement is willing to pay a _______ amount to buy a marketable pollution permit.
A) low
B) high
C) negligible
Q3) If a market has two polluting firms that have different abilities to reduce pollution, then across-the-board cuts in waste are not the most efficient solution.
A)True
B)False
Q4) An externality can lead to
A) market failure
B) an inefficient outcome for society
C) Both answers are correct
Q5) Explain the difference between Pigouvian taxes and a system of standards and charges.
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Chapter 25: Public Goods, the Consequences of Strategic
Voting Behavior, and the Role of Government
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Q1) A demand-revealing mechanism creates the incentive for people to reveal their public goods preferences in a
A) deceptive manner
B) truthful manner
C) probabilistic manner
Q2) A mechanism that creates the incentive for people to reveal their public goods preferences in a truthful manner is called a Lindahl-revealing mechanism.
A)True
B)False
Q3) You like to play loud music at your house. One day you notice your neighbors dancing to your music. What type of good is your music?
Q4) Goods that have the properties of excludability and rival consumption are known as A) public goods
B) competitive goods
C) private goods
Q5) What is the key assumption on which the Lindahl solution depends?
Q6) What is so bad about rent seeking behavior?
Q7) Give some examples that support the Gibbard-Satterthwaite theorem.
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Chapter 26: Input Markets and the Origins of Class Conflict
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Q1) Monopsonistic exploitation occurs in any situation in which a factor of production is paid ______________ the value of its MRP.
A) the same as B) less than C) more than
Q2) A monopsony is a market with a single A) seller
B) buyer
C) firm
Q3) Describe the two ways that an entrepreneur can obtain funds to build capital equipment and how the entrepreneur decides whether or not to invest.
Q4) According to the product exhaustion theorem, when all the factors of production are paid the value of what they produce, then at the long-run equilibrium of a perfectly competitive economy, the sum of their shares of the value of the socially produced pie must equal
A) 100
B) 1/3
C) 1
Q5) Evaluate the alternating offer sequential bargaining institution.
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