Principles of Microeconomics (Calculus-based)
Midterm Exam
Course Introduction
Principles of Microeconomics (Calculus-based) provides a foundational understanding of how individual consumers and firms make decisions in markets, emphasizing analytical models that use calculus to explain concepts such as utility maximization, cost minimization, and market equilibrium. Topics include demand and supply analysis, elasticity, consumer and producer theory, competitive and non-competitive markets, welfare economics, and the effects of government policies. By applying calculus techniques, students gain deeper insight into marginal analysis and economic optimization, equipping them with quantitative skills essential for advanced economic study and practical problem-solving.
Recommended Textbook
Microeconomics An Intuitive Approach with Calculus 2nd Edition by Thomas Nechyba
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Chapter 1: Introduction
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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) Positive economics can tell us which policies are efficient and which are not.
A)True
B)False
Answer: True
Q3) Suppose two economic models give the same predictions --- but one is simplistic and unrealistic in its assumptions while the other is rich in detail and resembles the real world more closely.If the sole goal of the economist is to predict, then the economist should use the simple and unrealistic model.
A)True
B)False
Answer: True
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Chapter 2: A Consumers Economic Circumstances
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Q1) Suppose that the price of a TV is $200 and he price of an MP3 player is $50.What is the opportunity cost of a TV (in terms of MP3 players), and what is the opportunity cost of an MP3 player (in terms of TVs)?
Answer: The opportunity cost of a TV is 4 MP3 players, and the opportunity cost of an MP3 player is one fourth of a TV.
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) The budget line on a graph represents choices which exhaust all resources.
A)True
B)False
Answer: True
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Chapter 3: Economic Circumstances in Labor and Financial Markets
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Q1) A bond that promises to pay $X in 10 years must be worth less than $X now.
A)True
B)False Answer: True
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) In choice sets, intertemporal budget constraints illustrate consumption trade-offs over time.
A)True
B)False Answer: True
Q4) 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: 11ea67b0_0517_9d87_8b3b_8fd11fa1ef66_TB5129_11 Choice Set: 11ea67b0_0517_9d88_8b3b_fd7001be6fe5_TB5129_11
Page 5
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Chapter 4: Tastes and Indifference Curves
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Q1) When the price of beer goes up, our model of tastes would typically require tastes to change.
A)True
B)False
Q2) Explain the following statement: For the same individual, tastes over goods may vary at the margin as we move from one bundle to another.
Q3) Prove formally that the rationality axioms alone rule out the possibility of indifference curves crossing.
Q4) If you observe me choosing bundle A over bundle B on Monday, bundle B over bundle C on Tuesday and bundle C over bundle A on Wednesday, it must be that my tastes violate transitivity.
A)True
B)False
Q5) Suppose tastes are NOT monotonic anywhere.Then diminishing MRS is not consistent with convexity of tastes.
A)True
B)False
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Chapter 5: Different Types of Tastes
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Q1) Tastes for perfect substitutes are both homothetic and quasilinear.
A)True
B)False
Q2) Tastes for perfect complements are both homothetic and quasilinear.
A)True
B)False
Q3) All homogeneous functions (of any degree) are homothetic but not all homothetic functions are homogeneous (of some degree).
A)True
B)False
Q4) 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?
Q5) When two goods are perfect substitutes, averages are better than extremes, resulting a diminishing marginal rate of substitution.
A)True
B)False
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Chapter
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Q1) Suppose you solve a consumer's constrained 2-good optimization problem for a given economic environment --- and your answer contains a negative consumption level of good 2.Which of the following is a valid conclusion on your part:
A)The true optimum has the consumer consume none of good 1.
B)The true optimum has the consumer consume none of good 2.
C)There are multiple "true" optimal consumption bundles.
D)The consumer will sell good 2.
E)None of the above.
Q2) Suppose that choice sets are convex but we tastes may or may not be convex.(Assume all our other usual assumptions about tastes hold.) The first order conditions of the constrained utility maximization problem are then
A)necessary conditions for a true optimum.
B)sufficient conditions for a true optimum.
C)necessary and sufficient conditions for a true optimum.
D)none of the above.
Q3) 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.
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Chapter 7: Income and Substitution Effects in Consumer
Goods Markets
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Q1) Every Giffen good is a necessity but not every interior good is a necessity.
A)True
B)False
Q2) A change in the price of one good cannot leave utility unchanged unless the price change is accompanies by a change in income.
A)True
B)False
Q3) All homothetic goods are normal goods.
A)True
B)False
Q4) All quasilinear goods are necessities.
A)True
B)False
Q5) 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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Q1) A friend is currently earning income but does not expect to earn income in the future.When the interest rate rose, I observed him saving less.From this, I can conclude that current consumption is an inferior good for my friend.
A)True
B)False
Q2) In a model of consumption and leisure, a drop in the wage will cause workers to work less if tastes are quasilinear in leisure.
A)True B)False
Q3) In a model of consumption and leisure, a drop in the wage will cause workers to work more if tastes are quasilinear in consumption.
A)True B)False
Q4) When tastes over current and future consumption are characterized by Cobb-Douglas utility functions, a borrower who has no income now and all income in the future will borrow more when the interest rate falls.
A)True B)False
10
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Chapter 9: Demand for Goods and Supply of Labor and Capital
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Q1) A downward sloping income-demand curve indicates that the good is a necessity.
A)True
B)False
Q2) If tastes are homothetic in leisure and consumption, labor supply curves slope up.
A)True
B)False
Q3) When tastes are quasilinear in leisure, the labor supply curve is vertical.
A)True
B)False
Q4) Leisure being a normal good is neither necessary nor sufficient for labor supply to slope up.
A)True
B)False
Q5) Saving is equivalent to withdrawing financial capital from the market.
A)True
B)False
Q6) The cross-price demand curve for Cobb-Douglas tastes is perfectly vertical.
A)True
B)False
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Chapter 10: Consumer Surplus and Deadweight Loss
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Q1) An increase in income causes compensated demand curves to shift inward and regular demand curves to shift outward.
A)True
B)False
Q2) Which of the following have to be true about functions in the duality picture:
A)The expenditure function is homogeneous of degree 1 in prices.
B)The compensated demand functions are homogeneous of degree 1 in prices.
C)The uncompensated demand functions are homogeneous of degree 1 in prices.
D)Both (a) and (b).
E)Both (b) and (c).
F)Both (a) and (c).
G)All of the above.
H)None of the above.
Q3) Why is the following statement incorrect: "A tax on all consumption goods is efficient because it equally taxes all goods and therefore does not distort their prices."
Q4) As we move to higher indifference curves, compensated demand (or MWTP) curves shift to the right.
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) If profit from producing would be negative, producers will shut down.
A)True
B)False
Q2) In the one-input model, the cost curve is the inverse of the production frontier if and only if the input price is 1.
A)True
B)False
Q3) In the one-input model, the marginal cost curve is U-shaped.
A)True
B)False
Q4) Price taking producers make zero economic profit when price falls
A)at the lowest point of the average cost curve
B)at the point where marginal cost crosses average cost
C)at the lowest point of the marginal cost curve
D)both (a) and (b)
E)both (a) and C
F)both (b) and (c)
G)All of the above
H)None of the above
Chapter 12: Production With Multiple Inputs
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Q1) Output prices are irrelevant for a firm as it is calculating its cost curves.
A)True
B)False
Q2) Conditional input demands are homogeneous of degree zero in input prices.
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) We have worked a lot with homothetic production technologies.Suppose instead that a production process that uses capital and labor is quasilinear in capital and that capital is fixed in the short run.Then, assuming the firm currently profit maximizes at a given wage and rental rate, the short and long run slices of the production frontier are identical.
A)True
B)False
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Chapter 13: Production Decisions in the Short and Long Run
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Q1) (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
Q2) If the rental rate increases, we know that output and labor input will fall in the long run.
A)True
B)False
Q3) 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
Q4) Except for the output level for which short-run fixed capital is long run cost-minimizing, short-run average expenses incurred by the firm are higher than long run average costs.
A)True
B)False
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Chapter 14: Competitive Market Equilibrium
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Q1) The long run market supply curve is formed by adding up individual firm supply curves in the industry.
A)True
B)False
Q2) Equilibrium prices coordinate the actions of producers and consumers.
A)True
B)False
Q3) Suppose a firm is making zero long run profit.Then it's short run profit cannot be negative.
A)True
B)False
Q4) An increase in labor demand accompanied by a decline in labor supply cannot result in a decline in wages.
A)True
B)False
Q5) If all firms are identical, output demand shifts cannot cause changes in output price in the long run.
A)True
B)False
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Chapter 15: The Invisible Hand and the First Welfare
Theorem
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Q1) Worker surplus can be measured as an area on the market labor supply curve if worker tastes are quasilinear in leisure.
A)True
B)False
Q2) If consumer tastes are quasilinear -- and ignoring the possibility of corner solutions and violations of the conditions of the first welfare theorem, the competitive market production level of the quasilinear 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
Q3) Suppose all individuals in a group have homothetic tastes.Then we can be sure that the group can be treated as a single representative consumer is if the group members also have identical tastes.
A)True
B)False
Q4) Explain how prices in a competitive market form --- and how they take the place of almost limitless information that a social planner would need if he tried to mimic the market outcome.
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Chapter 16: General Equilibrium
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Q1) Consider an Edgeworth Box economy with two individuals and two goods and suppose that the tastes of both individuals are quasilinear in good 1.
a.Suppose initially that individual 1 has relatively little endowment of both good but the competitive equilibrium allocation has him consuming some of each.Illustrate such a competitive equilibrium.
b.Now suppose the government is able to redistribute the endowment in this economy (prior to any trade occurring).In order to achieve a more equitable outcome, the government redistributes some of good 1 from individual 2 to individual 1.Show such a redistribution in your Edgeworth Box.
c.Assume that both individuals continue to consume at an interior solution in the new equilibrium.How will the two individuals' consumption of good 1 change from what it would have been without the redistribution?
d.Would your answer to (c) differ in any way if the government had instead redistributed good 2 from individual 2 to individual 1?
e.How would a sufficiently large redistribution alter your answer?
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Chapter 17: Choice and Markets in the Presence of Risk
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Q1) 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
Q2) The certainty equivalent of a gamble is negative when tastes are risk loving.
A)True
B)False
Q3) 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
Q4) Expected utility theory assumes that individuals have utility functions over a composite consumption good.
A)True
B)False
Q5) 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
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Chapter 18: Elasticities, Price-Distorting Policies, and Non-Price Rationing
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Q1) The reduction in the market output resulting from the imposition of a price floor depends on both the price elasticity of demand and the price elasticity of supply.
A)True
B)False
Q2) An equilibrium in the presence of price floors can be restored by increased consumer effort to obtain scarce goods.
A)True
B)False
Q3) Unless goods are Giffen goods, own-price elasticities of demand are always negative.
A)True
B)False
Q4) The wage elasticity of labor demand is always negative.
A)True
B)False
Q5) Deadweight loss from the imposition of a price floor increases as consumer demand becomes more price elastic.
A)True
B)False
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Chapter 19: Distortionary Taxes and Subsidies
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Q1) The larger the wealth effect, the less likely it is that a wage tax will give rise to a Laffer curve that has a downward sloping portion.
A)True
B)False
Q2) The burden of a per-unit tax will fall disproportionately on consumers when the supply curve is relatively more elastic than the demand curve.
A)True
B)False
Q3) A tax on interest income could be efficient even if it leads to a decrease in savings.
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) 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
Q2) Quality of life indexes produced in popular magazines often place a heavy emphasis on the cost of housing in different cities -- with a lower housing cost entering the index as a positive feature of the city.Why might such quality of life indeces be misleading?
Q3) When speculators buy gasoline during the low demand spring in order to sell it during the high demand summer, they cause an increase in dead weight loss in the spring that is more than made up for by an increase in social surplus in the summer.
A)True
B)False
Q4) Explain how an import quota might be more inefficient than an import tariff that has the same impact on prices.
Q5) 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) Explain how the introduction of an additional competitive market can always solve the efficiency problem that emerges from a positive externality.
Q2) 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
Q3) One condition for the first welfare theorem to hold is that there are no externalities.Can this condition be re-phrased as "all property rights have been established"? And how does this justify a wide range of what we see government doing?
Q4) 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.
Q5) The more price elastic the demand curve, the more a competitive market will over-produce (relative to the efficient level) in the presence of a negative externality.
A)True
B)False
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Chapter 22: Asymmetric Information in Competitive Markets
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Q1) Suppose a competitive market with adverse selection has settled into a pooling equilibrium where everyone is offered the same price.If firms then screen consumers, the outcome may and may not be more efficient.
A)True
B)False
Q2) 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?
Q3) Universal health insurance policies fall into three categories: single payer/single provider systems, single payer systems, and regulated insurance markets.The United States has elements of two of these.
A)True
B)False
Q4) If firms successfully gather information about consumers before offering them insurance, and if this leads to a separating equilibrium, efficiency is restored.
A)True
B)False
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Chapter 23: Monopoly
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Q1) When perfect price discrimination comes in the form of a two-part tariff, one part of the "tariff" just covers marginal costs.
A)True
B)False
Q2) Under second degree price discrimination, the average price per unit paid by high demand consumers is not equal to marginal willingness to pay for one additional unit.
A)True
B)False
Q3) Consider a commonly owned fishery in a market with no other fisheries.Given the Tragedy of the Commons, it is more efficient to let a single firm take over the fishery even if that gives the firm monopoly power.
A)True
B)False
Q4) What are some obstacles to price discrimination that a monopolist who is protected by high barriers to entry might face?
Q5) Explain what the Saudi oil minister meant when he warned OPEC of using its market power too much by saying "Remember, the Stone Age did not end because we ran out of stones."
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Chapter 24: Strategic Thinking and Game Theory
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Q1) Non-credible threats that are made in a Nash equilibrium (that is not subgame perfect) of a sequential game cannot be made in the first stage by the player who begins the game.
A)True
B)False
Q2) Dominant strategy Nash equilibria are efficient.
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) Bayesian updating in a separating equilibrium implies the initially uninformed player will fully know what type he is playing when he has to make his move.
A)True
B)False
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Chapter 25: Oligopoly
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Q1) If Bertrand price competitors incur recurring fixed costs, it will still be a Nash equilibrium for price to equal marginal cost.
A)True
B)False
Q2) The more firms there are in an oligopoly in which the strategic firm variable is quantity, the more price converges to marginal cost.
A)True
B)False
Q3) Recurring fixed costs may lead to only one firm producing in a Cournot oligopoly model.
A)True
B)False
Q4) In a 2-firm oligopoly, if you can choose to either be a simultaneous move Cournot competitor or a Stackelberg leader, you will always choose to be a Stackelberg leader.
A)True
B)False
Q5) 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) In the circle model with constant marginal cost, each point on the circle will contain a firm in equilibrium if fixed entry costs are zero.
A)True
B)False
Q2) 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."
Q3) 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
Q4) In a monopolistically competitive equilibrium, firms outside the industry could make at most zero profit by entering the industry.
A)True
B)False
Q5) Without price competition, there is no incentive for product differentiation. A)True
B)False
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Chapter 27: Public Goods
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Q1) Firms are much more likely to provide non-excludable public goods than excludable public goods.
A)True
B)False
Q2) Suppose you run a charity that raises money for a worthy public good.Your donors may be concerned about how much of each dollar that is raised is put back into more fund-raising.
a.Suppose the marginal product of a dollar put into fundraising is initially increasing but eventually diminishing.How much will the last dollar spend on fundraising raise?
b.If everyone considers their own contribution to this charity as the marginal contribution, what will be their impression of how much they are really helping the public good?
c.Would you expect your answer to (b) to make it harder for you to raise money for your charity?
d.How might your answer to (c) explain why some charities make a point of informing people that they have placed a cap on their fund raising budget -- or that they have placed a cap on how many people will be approached during the fund raising campaign?
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Chapter 28: Governments and Politics
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Q1) A presidential candidate once famously said about a particular policy: "I voted for it before I voted against it." How might such a statement make sense in the context of sophisticated voting along agendas.
Q2) Suppose voter preferences over a public good funded through a head tax are single peaked.If everyone has the same tastes and the public good is a normal good, then ideal points for higher income individuals will lie to the right of ideal points of lower income individuals.
A)True
B)False
Q3) Voting in large elections is irrational unless people get something like a "warm glow" from having voted.
A)True
B)False
Q4) It is possible to come up with a democratic social choice process that satisfies Arrow's axioms as long as we are willing to let go of the No Dictatorship axiom.
A)True
B)False
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Chapter 29: What Is Good Challenges From Psychology and Philosophy
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Sample Questions
Q1) Suppose an individual has to make a decision at time t without having all the information relevant for making the decision.At time (t+1), the relevant information is revealed.We will say that the individual made a mistake if his decision in time t would have been different had he known what he knows at time (t+1).True or False: Without behavioral economics, we would not be able to explain mistakes.
A)True
B)False
Q2) In the presence of compensating wage differentials, explain why the consumption possibility frontier is not a good approximation of the utility possibility frontier.
Q3) Because wealth is more concentrated than income, the Gini coefficient for the wealth distribution is greater than the Gini coefficient for the income distribution. A)True
B)False
Q4) What do you think of the following statement: To the extent to which individuals are aware of their self-control problems, markets can address the issue successfully.
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