Principles of Microeconomics (Advanced)
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Course Introduction
Principles of Microeconomics (Advanced) explores the foundational theories of microeconomics with a deeper analytical approach, emphasizing rigorous models of consumer and producer behavior, market structures, and resource allocation. Students will engage with concepts such as utility maximization, cost minimization, equilibrium analysis, and welfare economics, using advanced mathematical tools and graphical analysis. The course also examines the impact of government policies, externalities, and strategic interactions in oligopolistic markets, preparing students to critically evaluate and apply microeconomic principles in complex real-world scenarios.
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 say that policy A is more efficient than policy B,they mean policy A is better than policy B.
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) 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
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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Q1) When the good on the vertical axis is a composite good,the slope of the budget line is equal to minus the price of the good on the horizontal axis.
A)True
B)False
Answer: True
Q2) While the endowment bundle must lie on the original budget line,it need not lie on the budget line when prices change.
A)True
B)False
Answer: False
Q3) For choice sets generated from endowment bundles,the budget line will shift parallel if both prices change by the same proportion.
A)True
B)False
Answer: False
Q4) Kinks in budget constraints always produce non-convexities in choice sets.
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) 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
Q2) A bond will pay $10,000 to its owner in 5 years.If the relevant annual interest rate is 5%,what is the bond worth today (rounded to the nearest 100)?
a.
$9,500
b.
$7,800
c.
$6,600
d. $1,900
e.
None of the above.
Answer: B \[\frac { \$ 10,000 } { ( 1 + 0.05 ) ^ { 5 } } = \$ 7,835\]
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Chapter 4: Tastes and Indifference Curves
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Sample Questions
Q1) 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
Q2) Explain the following statement: Individuals with different tastes might have the same tastes at the margin at their current consumption bundles.
Q3) Prove formally that the rationality axioms alone rule out the possibility of indifference curves crossing.
Q4) 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
Q5) Complete tastes are tastes that make people desire at least some of every good. A)True B)False
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Chapter 5: Different Types of Tastes
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Q1) Consider the utility function \(u \left( x _ { 1 } , x _ { 2 } \right) = \left( \alpha x _ { 1 } ^ { - \rho } + ( 1 - \alpha ) x _ { 2 } ^ { - \rho } \right) ^ { - 1 / \rho }\) .If \(\rho = 0\) ,the elasticity of substitution is equal to 1. The elasticity of substitution for CES utility functions is \(\frac { 1 } { 1 + \rho }\) .
A)True B)False
Q2) Consider the utility function \(u \left( x _ { 1 } , x _ { 2 } \right) = \left( \alpha x _ { 1 } ^ { - \rho } + ( 1 - \alpha ) x _ { 2 } ^ { - \rho } \right) ^ { - 1 / \rho }\) .If \(\rho = 2\) ,the elasticity of substitution is equal to \(\frac { 1 } { 2 }\) .
A)True B)False
Q3) Suppose our tastes are homothetic.It is often observed that people become more rigid --- more set in their ways --- as they get older.Can you translate this observation into "economics-speak" by discussing which feature of our tastes is likely the be changing as we get older?
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Chapter 6: Doing the Best We Can
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Q1) 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.
Q2) 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.
Q3) Which of the following statements is correct and which is not? Explain why.
a.When we all face the same prices,our tastes become the same.
b.When we all face the same prices,our tastes become the same at the margin.
Q4) Ellie and Jenny both brought grapes and crackers in their school lunches.If they have different marginal rates of substitution of grapes for crackers,their parents have not allocated lunch resources efficiently.
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) All quasilinear goods are necessities.
A)True
B)False
Q2) Suppose the only two goods you care about in the world are French wine (x)and Cuban cigars (y)and your utility function is given by u(x,y)=xy.You have no income,and the only thing in the world you possess is a large box you have just inherited from your rich uncle who passed away last week (of liver and lung cancer.)You open the box,and much to your liking,you find it contains 9 bottles of fine French wine and 3 boxes of exquisite Cuban cigars.Currently,the wine sells for $1 per bottle,and the cigars sell for $9 per box.Just as you receive the inheritance,you read the headline: "President Lifts Embargo - Price of Cuban Cigars Falls to $4 per Box!"
a.Determine the income (or wealth)and substitution effects of a decrease of the price of cigars from 9 to 4.(Assume fractions of bottles and cigars can be bought.)
b.Are cigars a normal or inferior good for you?
c.How much would you have been willing to pay the President in order not to lift the embargo?
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Chapter 8: Wealth and Substitution Effects in Labor and Capital Markets
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Q1) In a model with leisure hours and a composite consumption good,you cannot tell whether workers will work more or less if tastes are quasilinear in the consumption good.
A)True
B)False
Q2) Taxing savings in ways that lower the interest rate received by savers will lower savings.
A)True
B)False
Q3) When the elasticity of substitution in the constant elasticity of substitution utility function lies above 1,an increase in the interest rate will cause a saver to save less.
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) The cross-price demand curve for Cobb-Douglas tastes is perfectly vertical.
A)True B)False
Q3) Leisure being a normal good is neither necessary nor sufficient for labor supply to slope up.
A)True B)False
Q4) In order for someone to switch from borrowing to saving when the interest rate falls,it must be that current consumption is an inferior good.
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 and that gives rise to an expenditure function which is homogeneous of degree 1 in utility.
A)True
B)False
Q2) Suppose Coke and Pepsi are perfect substitutes.
a.Derive the shape of the (uncompensated)demand curve.
b.Derive the shape of the compensated demand (or MWTP)curve.
Q3) For perfect complements,the (uncompensated)demand curve slopes down and the compensated demand (or MWTP)curve is perfectly vertical.
A)True
B)False
Q4) When tastes are not quasilinear,the positive economist will introduce error into the analysis if he uses the uncompensated (rather than the compensated)demand curve to predict behavior.
A)True
B)False
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Chapter 11: One Input and One Output: a Short-Run
Producer Model
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Q1) In the one-input model,profit is always maximized where marginal revenue product is equal to the input price.
A)True
B)False
Q2) Every profit-maximizing producer is cost minimizing.
A)True
B)False
Q3) Whenever average cost is increasing,marginal cost must also be increasing.
A)True
B)False
Q4) If income effects are sufficiently strong,it may be the case that labor demand curves slope up.
A)True
B)False
Q5) Labor demand curves are homogeneous of degree zero.
A)True
B)False
Q6) Labor demand curves always slope down. A)True
B)False Page 13
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Chapter 12: Production With Multiple Inputs
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Q1) Assuming convex producer choice sets,the (marginal)technical rate of substitution is equal (in absolute value)to the ratio of input prices at any profit maximizing production plan.
A)True
B)False
Q2) A price taking firm employs each of its inputs into production until its marginal product is equal to 1.
A)True
B)False
Q3) 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
Q4) In one-input models,all technologically efficient production plans are economically efficient and vice versa.
A)True
B)False
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Chapter 13: Production Decisions in the Short and Long Run
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Q1) Short run economic costs must be lower than long run economic costs because long run economic costs include the cost of inputs that are fixed in the short run (and thus are not part of short run cost).
A)True
B)False
Q2) The production function \(f ( k , \ell ) = A \left( \alpha \ell ^ { - \rho } + ( 1 - \alpha ) k ^ { - \rho } \right) ^ { - \beta / \rho }\) can have increasing returns to scale or decreasing returns to scale -- but it cannot have initially increasing and eventually decreasing returns to scale.
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) If labor and capital are perfect complements in production,short run supply curves are vertical.
A)True
B)False
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Chapter 14: Competitive Market Equilibrium
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Q1) Suppose all firms in a perfectly competitive industry have production processes characterized by the production function \(f ( \ell , k ) = \ell ^ { 1 / 2 } k ^ { 1 / 4 }\)
.Suppose the cost of labor is 20 and the cost of capital is 10.
a.Suppose that the industry is in long run equilibrium and that firms are using 1 unit of capital.What is the short run cost function of each firm?
b.Suppose there are 5,000 firms in long run equilibrium.What is the short run market supply function?
c.Suppose market demand is \(X ^ { d } ( p ) = 10,000 - 125 p\) What is the equilibrium price?
d.Firms in this industry face a recurring fixed cost FC.What must FC be in order for this industry to indeed be in long run equilibrium with its 100 firms?
Q2) Short run market supply curves are formed by adding up individual firm supply curves in the industry.
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) 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
Q2) How would you contrast the interactions within a small family to those in the market place? In what way could you argue that the ways in which interactions are governed in the family can never work in a larger market setting -- just as the ways in which interactions are structured in market settings can never work well in families?
Q3) If the individuals in a group of consumers have identical tastes,then the group can be treated as if it behaved as a singe representative consumer.
A)True
B)False
Q4) If the individuals in a group of consumers all have homothetic tastes,then we can treat the group as a single representative consumer.
A)True
B)False
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Chapter 16: General Equilibrium
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Q1) Suppose we live in an exchange economy with two goods.I own 50 of both goods,and you own 250 of both goods.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 competitive equilibrium price.
b.How much do each of us consume of good 1 in equilibrium?
c.Suppose the government transfers 100 units of your good 1 endowment to me.How is your answer to (a)and (b)affected?
d.Suppose the government instead transfers 100 units of good 2 from you to me.How is your answer to (a)and (b)affected?
e.Do you think your answers to (c)and (d)generally hold for most types of tastes -- or do you think they arise because of some specific feature of these tastes?
Q2) In the Edgeworth Box,we can set one price to 1 and only need to solve for the other price because only relative prices matter for individual choice when income is drawn from endowments.
A)True
B)False
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Chapter 17: Choice and Markets in the Presence of Risk
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Q1) Actuarily fair insurance reduces risk without changing the expected value of a gamble.
A)True
B)False
Q2) When tastes are risk loving,a person will always choose a gamble that is riskier over one that is less risky.
A)True
B)False
Q3) Suppose an individual has state-independent tastes and invests in risky stocks rather than safe bonds.We can infer that he must be risk loving.
A)True
B)False
Q4) 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
Q5) The certainty equivalent of a gamble is negative when tastes are risk loving. A)True
B)False
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Chapter 18: Elasticities, Price-Distorting Policies, and Non-Price Rationing
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Q1) When own-price elasticity lies between 0 and -1,consumer spending decreases when price increases.
A)True B)False
Q2) When leisure is a normal good,the wage elasticity of labor supply is always positive.
A)True
B)False
Q3) The concept of "non-price rationing" means that,in general,we can deal with scarcity just as well without prices as with prices.
A)True
B)False
Q4) When price elasticity is less than -1,consumer spending increases as price falls.
A)True B)False
Q5) When leisure is an inferior 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) A tax on interest income could be efficient even if it leads to a decrease in savings.
A)True
B)False
Q2) 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
Q3) In perfectly competitive markets with identical firms,the burden of a tax is shared by consumers and producers in the short run so long as market demand is not perfectly elastic.
A)True
B)False
Q4) Suppose demand has price elasticity of 1 everywhere and the industry is perfectly competitive with identical firms.In the long run,tax revenue increases as tax rates increase.
A)True
B)False
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22
Chapter 20: Prices and Distortions Across Markets
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Q1) If worker productivity is the same in each country,outsourcing and labor migration will both result in an equalization of wages across the two countries.
A)True
B)False
Q2) Explain the impact of speculators on markets is similar and how it may be different from the impact of exporters and importers.
Q3) When tariffs on imports are eliminated,everyone benefits.
A)True
B)False
Q4) A speculator who takes a long position in a market buys low and sells high,whereas a speculator who taxes a short position in a market buys high and sells low.
A)True
B)False
Q5) The smaller a country is,the less of an ability it has to export a portion of the burden of an import tariff to other countries.
A)True
B)False
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Chapter 21: Externalities in Competitive Markets
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Q1) To implement an efficient Pigouvian tax in a competitive market that has negative production externalities,the government would need to know the shape of the entire social marginal cost curve.
A)True
B)False
Q2) Explain why many fishermen on a commonly owned lake continue to fish until the revenue from the average catch is equal to the marginal cost of fishing -- and why the same is not true for a firm that employs fishermen to fish on a privately owned lake.
Q3) 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
Q4) Regardless of whether a negative externality is emitted by consumers or by producers,a Pigouvian tax can be imposed on consumers only.
A)True
B)False
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Chapter 22: Asymmetric Information in Competitive Markets
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Q1) A pooling equilibrium in insurance markets is inefficient because everyone buys too little insurance (relative to the efficient amount).
A)True
B)False
Q2) Adverse selection in insurance markets results in missing markets because people engage in riskier behavior once they are insured.
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) Expected utility theory predicts that individuals will fully insure in actuarily fair markets so long as their tastes are state-independent.How might adverse selection result in some individuals under-insuring?
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25
Chapter 23: Monopoly
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Q1) In the presence of positive production externalities,a monopolist might produce the efficient output level.
A)True B)False
Q2) Because of the monopoly power that comes with being the only firm to produce a product,it is always more efficient to have multiple firms in an industry.
A)True B)False
Q3) In the absence of recurring fixed costs,a monopolist will always produce a positive output quantity.
A)True
B)False
Q4) 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?
Q5) The more profit a monopolist makes,the more inefficient is the monopoly outcome. A)True B)False
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Chapter 24: Strategic Thinking and Game Theory
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Q1) If a player's strategy in a sequential game is to choose an action that stops the game early on,it is unnecessary to specify that player's plans for moves later on in the game when it would have been his turn to move again.
A)True
B)False
Q2) Consider player n in a sequential game.
a.If the player can play 2 actions from a single node,how many pure strategies does he have?
b.Suppose he can play 2 actions at each of two different nodes.How many pure strategies does he have now?
c.Suppose he can play 2 actions at each of three different nodes.How many pure strategies does he have now?
d.Suppose he can play 2 actions at each of four different nodes.How many pure strategies does he have now?
e.Suppose he can play 2 actions at each of k different nodes.How many pure strategies does he have now?
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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) In the presence of negative pollution externalities,it is more efficient to have Cournot competitors than Bertrand competitors.
A)True
B)False
Q3) Firms in a cartel have an incentive to cheat on the cartel agreement because they suspect the other firms are cheating as well.
A)True
B)False
Q4) Two firms in an oligopoly can always do better if one firm buys the other.
A)True
B)False
Q5) Explain why firms in a cartel might lobby for government regulation.
Q6) Explain how two Bertrand price competitors can price above marginal cost in an infinitely repeated game setting.
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Chapter 26: Product Differentiation and Innovation in Markets
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Q1) 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
Q2) Since firms within a monopolistically competitive industry set output where marginal revenue is equal to marginal cost,the size of the fixed entry cost does not impact the equilibrium price.
A)True
B)False
Q3) Describe the tradeoffs involved when thinking about setting the time over which a patent grants an innovator exclusive monopoly rights.
Q4) Information advertising might provide information about prices in stores,or it might provide information about product characteristics that consumers might not know about.Which one do you think is more likely to be efficient?
Q5) 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."
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Chapter 27: Public Goods
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Q1) The optimal subsidy for private giving to a public good increases as the number of people benefiting from the public good increases.
A)True
B)False
Q2) Any efficient allocation of public goods will be such that the sum of the marginal benefits is equal to the marginal cost -- but the level of the public good may differ depending on how income is distributed in the population.
A)True
B)False
Q3) 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
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) In 2000,three candidates appeared on virtually all ballots in the US Presidential election: George W.Bush,Al Gore and Ralph Nadar.Bush arguably won the election by 537 votes in Florida where Ralph Nadar received nearly 100,000 votes.It is often argued that Al Gore would have won the election had Ralph Nadar not been on the ballot in Florida.Discuss how this suggests that the social choice process the US uses to elect Presidents does not satisfy the Independence of Irrelevant Alternatives (IIA)assumption in Arrow's theorem.
Q2) Discuss how a politicians "policy differentiation" from his opponent in an election softens the competition over how much in political rents the politician will be able to collect.
Q3) Arrow suggests that any social choice process should be applicable to any set of preferences for individuals -- because we can't be sure individual preferences are always rational.
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
Available Study Resources on Quizplus for this Chatper
20 Verified Questions
20 Flashcards
Source URL: https://quizplus.com/quiz/62741
Sample Questions
Q1) Since it lies in 2-dimensions,one of the drawbacks of using Lorenz curves to think about inequality is that we are restricted to thinking about only two types of individuals.
A)True
B)False
Q2) 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.
Q3) In a society in which everyone lives at the subsistence level,the Gini coefficient is 0.
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) In the absence of commitment devices,present-biased individuals are never as patient as they intend to be.
A)True
B)False
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