Advanced Microeconomic Analysis
Chapter Exam Questions
Course Introduction
Advanced Microeconomic Analysis delves into the rigorous study of individual economic agents, market mechanisms, and resource allocation, emphasizing mathematical modeling and formal reasoning. The course explores consumer and producer theory, general equilibrium, welfare economics, game theory, and issues related to information asymmetry and market failure. Through analytical tools and theoretical frameworks, students develop a deeper understanding of how microeconomic principles explain complex behaviors and predict outcomes in various market structures, preparing them for advanced research or policy analysis in economics.
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) 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
Q2) One of the aims of positive economics is to rank policies under consideration from most desirable to least desirable.
A)True
B)False
Answer: False
Q3) 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
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Chapter 2: A Consumers Economic Circumstances
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Q1) The following changes in a consumer's economic circumstances result in a steeper budget line with the vertical intercept unchanged.(Denote the good on the horizontal as good 1 and the good on the vertical as good 2.)
A)A k percent decrease in the price of good 2 combined with a k percent decrease in income
B)A k percent increase in the price of good 2 combined with a k percent decrease in income
C)A k percent decrease in the price of good 2 combined with a k percent increase in income
D)A k percent increase in the price of good 2 combined with a k percent increase in income.
E)None of the above
Answer: A
Q2) 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) Changes in interest rates cause the same rotations of intertemporal budget lines regardless of whether you are a borrower or a saver.
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
Q3) In choice sets, intertemporal budget constraints illustrate consumption trade-offs over time.
A)True
B)False
Answer: True
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Chapter 4: Tastes and Indifference Curves
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Q1) 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
Q2) Economists define "rational" tastes as those which are objective and transitive.
A)True
B)False
Q3) The number of units of the good on the horizontal axis that we are willing to give up to get one more unit of the good on the vertical axis is equal to the absolute value of the slope of the indifference curve.
A)True
B)False
Q4) When the price of beer goes up, our model of tastes would typically require tastes to change.
A)True
B)False
Q5) Explain the following statement: Individuals with different tastes might have the same tastes at the margin at their current consumption bundles.
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Chapter 5: Different Types of Tastes
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Q1) 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?
Q2) In the case of perfect complements, more is not necessarily better.
A)True
B)False
Q3) There are no quasilinear tastes that have constant elasticity of substitution.
A)True
B)False
Q4) There is no elasticity of substitution that is inconsistent with tastes being homothetic.
A)True
B)False
Q5) Tastes for perfect complements are both homothetic and quasilinear.
A)True
B)False
Q6) Tastes for perfect substitutes are both homothetic and quasilinear.
A)True
B)False
Page 7
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Chapter 6: Doing the Best We Can
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Q1) 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)
Q2) Which of the following is correct about a consumer's optimization problem:
A)In order for a consumer to not be optimizing at a corner solution, it is necessary for us to assume that all goods are essential.
B)In order for a consumer to not be optimizing at a corner solution, it is sufficient for us to assume that all goods are essential.
C)In order for a consumer to not be optimizing at a corner solution, it is necessary and sufficient for us to assume that all goods are essential.
D)None of the above.
Q3) Suppose tastes satisfy our usual assumptions.Kinks in budget constraints do not give rise to the possibility of multiple solutions unless the kinds produce a non-convexity in the choice set.
A)True
B)False
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Chapter 7: Income and Substitution Effects in Consumer
Goods Markets
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Q1) The price of peaches goes up and I observe you buying more strawberries.This implies strawberries must be a normal good.
A)True
B)False
Q2) Quasilinear goods are borderline goods between the set of normal and the set of inferior goods.
A)True
B)False
Q3) All homothetic goods are normal goods.
A)True
B)False
Q4) The price of peaches goes up and I observe you buying more strawberries.This implies that strawberries must be an inferior good.
A)True
B)False
Q5) All quasilinear goods are necessities.
A)True
B)False
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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) The amount of work a person will do as wage increases depends entirely on the size of the wealth effect.
A)True
B)False
Q3) For decreases in wage taxes, substitution effects put negative pressure on tax revenues while wealth effects put positive pressure on tax revenues.
A)True
B)False
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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Q1) A downward sloping income-demand curve indicates that the good is a necessity. A)True
B)False
Q2) Assuming the same sized substitution effect, normal goods have steeper cross-price demand curves than inferior goods.
A)True
B)False
Q3) Saving is equivalent to withdrawing financial capital from the market. A)True
B)False
Q4) For the same sized substitution effect, own-price demand curves for inferior goods are steeper than own price demand curves for normal goods.
A)True
B)False
Q5) If a good is quasilinear, its own-price demand curve is vertical. A)True B)False
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Chapter 10: Consumer Surplus and Deadweight Loss
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Q1) Indirect utility functions are homogeneous of degree 1 in income.
A)True
B)False
Q2) Consider a worker who consumes a composite consumption good (on the vertical axis) and leisure hours (on the horizontal axis).
a.Suppose the worker has 80 hours of leisure per week and can earn a wage of $50 per hour.Illustrate the worker's weekly budget constraint.
b.In order to close the deficit, the government introduces a broad-based consumption tax on all consumer goods -- raising the price of the consumption good by 20%.Illustrate the new budget constraint faced by our worker.
c.On your graph, indicate the level of tax revenue raised by this broad-based consumption tax.
d.Using your graph, discuss why this tax is inefficient.
e.In this model is there any difference between the consumption tax and a wage tax? What is different about the real world that would change your conclusion about this?
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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, the marginal cost curve is U-shaped.
A)True
B)False
Q2) Output supply curves always slope up in the one-input model.
A)True
B)False
Q3) In the one-input model, the marginal product of labor curve falls below the horizontal axis only if the production frontier slopes down.
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) Technologically efficient production plans are also economically efficient.
A)True
B)False
Q2) Assuming an interior solution, a production plan is profit maximizing if and only if all marginal revenue products are equal to input prices.
A)True
B)False
Q3) Profit is constant along an isoquant.
A)True
B)False
Q4) Decreasing returns to scale production functions must be concave.
A)True
B)False
Q5) If a production technology has increasing returns to scale throughout, then the marginal cost curve lies below the average cost curve throughout.
A)True
B)False
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Chapter 13: Production Decisions in the Short and Long Run
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Q1) Suppose GE produces 1 million light bulbs per month While labor is variable both in the short run and the long run, capital is fixed in the short run.Labor is sold at a rate w and capital is rented at a rate r.
a.On a graph with labor on the horizontal axis, illustrate the current isocost and isoquant for GE.Carefully label the slope of the isocost.
b.For the rest of the problem, suppose a new tax on capital is implemented but GE intends to continue to produce 1 million light bulbs per year.What will GE do differently in the short run and the long run? Explain using your graph from part (a).
c.Using your answer to part (b), explain what happens to the short run cost curve in the short run.What happens to this short run curve in the long run? Do costs rise more or less in the long run than they do in the short run?
d.Do total costs rise more or less in the long run than total expenditures do in the short run? Explain.
Q2) Output supply is more responsive to price in the short run than in the long run. A)True B)False
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Chapter 14: Competitive Market Equilibrium
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Q1) If all firms are identical, output demand shifts cannot cause changes in output price in the long run.
A)True
B)False
Q2) If firms differ in terms of their technologies, a drop in demand will cause a long run decrease in output price.
A)True
B)False
Q3) The reason long run market supply curves are shallower than short run market supply curves is because individual firm supply curves are shallower in the long run than in the short run.
A)True
B)False
Q4) A drop in output demand accompanied by a simultaneous drop in output supply will cause the output price to fall.
A)True
B)False
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Chapter 15: The Invisible Hand and the First Welfare
Theorem
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Q1) Aggregate producer surplus in an industry can be measured along the market supply curve in the short run but not in the long run.
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) Suppose the conditions of the first welfare theorem hold.If the government redistributes income prior to production and trade occurring, the market outcome (resulting from production and trade) will be the same as it would have been had the government not redistributed income (so long as redistribution does not produce deadweight losses).
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.
Page 17
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Chapter 16: General Equilibrium
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Q1) If the two goods in an Edgeworth Box are perfect complements for both people, all efficient allocations will have each person getting the same amount of good 1 as of good 2.
A)True
B)False
Q2) The First Welfare Theorem holds that the allocation of goods resulting from competitive prices is "efficient," which is the equivalent of "equitable."
A)True
B)False
Q3) A "pure exchange economy" is one in which producers and consumers are evenly divided.
A)True
B)False
Q4) A proof by contradiction can only be used to disprove a statement but not to prove a statement to be correct.
A)True
B)False
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Chapter 17: Choice and Markets in the Presence of Risk
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Q1) The certainty equivalent is less than the expected value of a gamble when tastes are risk averse.
A)True
B)False
Q2) Suppose that you face a gamble that has a payoff of $1000 with probability 0.2 and a payoff of $200 with probability 0.8.I approach you to sell you insurance with a premium of p and a benefit of
A)p=8, b=10
B)p=400, b=500
C)p=720, b=900
D)(a) and (b) are actuarily fair
E)(a) and (c) are actuarily fair
F)(b) and (c) are actuarily fair
G)All of the above.
H)None of the above.
Q3) Expected utility functions have to be concave if they are to represent risk averse tastes.
A)True
B)False
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Chapter 18: Elasticities, Price-Distorting Policies, and Non-Price Rationing
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Q1) The price elasticity of output supply is greater in the long run than in the short run.
A)True
B)False
Q2) If a consumer's demand curve as constant own-price elasticity of -2, the consumer's spending will fall as price increases.
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) Demand curves with constant slopes must have different own-price elasticities as one moves along the demand curve.
A)True
B)False
Q5) The wage elasticity of labor demand is always negative.
A)True
B)False
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Chapter 19: Distortionary Taxes and Subsidies
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Q1) The economic benefit of a per-unit subsidy accrues disproportionately to the side of the market that is more price-inelastic.
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) When the leisure demand curve is relatively inelastic, the bulk of the burden of a wage tax falls on workers.
A)True
B)False
Q4) 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
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Chapter 20: Prices and Distortions Across Markets
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Q1) Suppose there is a tradeable goods market (such as products like textiles that can be shipped across markets) and a non-tradable goods market (such as services like hair cuts).Can outsourcing impact wages in the non-tradable market?
Q2) Explain how an import quota might be more inefficient than an import tariff that has the same impact on prices.
Q3) Suppose the price of good x in country A is lower than the price of good x in country B when no trade is permitted.In the absence of transportation costs, if the supply curve for good x in the two countries is sufficiently elastic, free trade in good x implies that country B will stop producing x.
A)True
B)False
Q4) If country A is importing good x from country B where x is produced along a perfectly inelastic supply curve, then country B will suffer the entire deadweight loss from any tariff imposed on imports to country A.
A)True
B)False
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Chapter 21: Externalities in Competitive Markets
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Q1) Explain how a pollution tax is different from a Pigouvian tax.Discuss how incentives for firms differ under the two types of taxes, and what would be required of the government if it were to structure a Pigouvian tax system to mimic the effects of a pollution tax.
Q2) Whether or not production is accompanied by an externality, a social planner who aims to maximize social surplus will always produce (assuming he does produce) where marginal social cost is equal to marginal social benefit.
A)True
B)False
Q3) When set correctly, a Pigouvian tax is efficient because it is equivalent to a lump sum tax.
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) Firms that employ statistical discrimination in the labor market will earn higher profits in expectation than firms that do not discriminate (and have no effective screens).
A)True
B)False
Q2) Whether or not a pooling equilibrium exists in a competitive market with adverse selection depends on what fraction of consumers is of the high cost type and what fraction is of the low cost type.
A)True
B)False
Q3) Whenever there is adverse selection, there will be missing market.
A)True
B)False
Q4) A pooling equilibrium in insurance markets is inefficient because everyone buys too little insurance (relative to the efficient amount).
A)True
B)False
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Chapter 23: Monopoly
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Q1) Since revenue increases with increases in price when demand is relatively inelastic, monopolists produce on the inelastic part of demand.
A)True
B)False
Q2) Consumers prefer inefficient third degree price discrimination to efficient first degree price discrimination.
A)True
B)False
Q3) 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
Q4) A monopolist will not produce at all if the intersection of marginal revenue and marginal cost occurs at a quantity at which average cost lies above the demand curve.
A)True
B)False
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Chapter 24: Strategic Thinking and Game Theory
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Q1) Complete information sequential games can be represented in payoff matrices and complete information simultaneous games can be represented in game trees with information sets.
A)True
B)False
Q2) 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
Q3) In a simultaneous move, incomplete information game in which player 1 is unsure of which of two types player 2 is, player 1's strategy must include an action for each possible type that player 2 might be, but player 2 only needs to pick one action since he knows what type he is.
A)True
B)False
Q4) The Folk Theorem says that anything can happen in infinitely repeated games.
A)True
B)False
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Chapter 25: Oligopoly
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Q1) Suppose that a market is currently served by a single firm protected by high entry costs from any potential competition.Then imagine fixed entry costs gradually falling in a model where any competition will be with quantity as the strategic variable.Describe how you would expect output price to evolve as entry costs fall.
Q2) 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
Q3) 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
Q4) Explain how two Bertrand price competitors can price above marginal cost in an infinitely repeated game setting.
Q5) Cartels tend not to be long-lived because of the Prisoner's Dilemma. A)True
B)False
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Chapter 26: Product Differentiation and Innovation in Markets
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Q1) Bertrand price competitors can recover some market power when they differentiate their products.
A)True
B)False
Q2) In a monopolistically competitive market with Dixit-Stiglitz preferences, equilibrium price falls as the goods in the differentiated product market become more substitutable.
A)True
B)False
Q3) Describe the tradeoffs involved when thinking about setting the time over which a patent grants an innovator exclusive monopoly rights.
Q4) Most firms produce where marginal revenue is equal to marginal cost, but firms in a monopolistically competitive industry instead choose output where average cost is equal to demand.
A)True
B)False
Q5) Without price competition, there is no incentive for product differentiation. A)True
B)False
28
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Chapter 27: Public Goods
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Q1) Consider a game where individuals are asked to contribute to a public good.Then consider the best response function for individual i, with individual i's contribution measured on the vertical axis and "the average contribution by everyone else" on the horizontal.Then as the number of individuals increases, i's best response function shifts in.
A)True
B)False
Q2) What problem are mechanism designers attempting to overcome when they "design mechanisms" to provide public goods?
Q3) We say that individuals get a "warm glow" from giving to a public good if they not only get utility from the public good but also from giving itself.Explain the following: "While warm glow lessens the free rider problem, it cannot eliminate it."
Q4) Public goods arise because of externalities.
A)True
B)False
Q5) When the government contributes to a public good, private contributions will fall. A)True B)False
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Chapter 28: Governments and Politics
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Q1) 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.
Q2) Vote trading in legislatures can lead to efficient outcomes that might otherwise not have been reached.
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) The "Anything-Can-Happen" theorem doesn't really imply "anything can happen" in a democratic process with multiple issues; rather, it implies that political outcomes can be manipulated, and some political institutions are better at constraining the degree to which this can be done than others.Do you agree or disagree with this statement? Why?
Q5) 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.
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Chapter 29: What Is Good Challenges From Psychology and Philosophy
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Q1) 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.
Q2) Positive economics does not require us to believe that actual happiness is the same as utility as modeled in economic theory.
A)True
B)False
Q3) Positive neoclassical economists are different from positive behavioral economists in that positive behavioral economists place more value on having models accurately represent people's true happiness.
A)True
B)False
Q4) 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
Q5) Comment on the following: "Present-biased people are impatient, but impatient people don't necessarily have to be present-biased."
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