Advanced Microeconomic Analysis Test
Preparation
Course Introduction
Advanced Microeconomic Analysis delves into the rigorous theoretical foundations of microeconomics, expanding upon basic concepts to explore the behavior of individuals, firms, and markets in greater depth. Topics include consumer and producer theory, general equilibrium, welfare economics, the economics of information, and game theory. The course emphasizes mathematical and analytical tools to examine complex market interactions, strategic decision-making, and the impact of various forms of market structure and policy interventions on economic outcomes. Designed for students seeking a deeper understanding of microeconomic theory, this course prepares participants for advanced research or professional application in economics and related fields.
Recommended Textbook
Microeconomics 7th Edition by Jeffrey M. Perloff
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20 Chapters
2248 Verified Questions
2248 Flashcards
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Page 2
Chapter 1: Introduction
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Sample Questions
Q1) Economic models are only useful in analyzing government policy.
A) True, individuals are irrational and therefore economic models are useless.
B) False, economic models can be used to predict individual and firm behavior.
C) True, economists only model those questions for which they are hired.
D) False, economic models are not even useful in analyzing government policy.
Answer: B
Q2) Normative statements are easily debated whereas positive statements are simply rhetorical.
A)True
B)False
Answer: False
Q3) Under most circumstances,the application of taxes on goods will only affect who gets the goods.
A)True
B)False
Answer: False
Q4) Governments do not respond to prices.
A)True
B)False
Answer: False
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Chapter 2: Supply and Demand
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Sample Questions
Q1) A rightward shift of the demand curve will lead to an A) increase in equilibrium price.
B) excess demand at the old equilibrium price.
C) increase in quantity supplied.
D) All of the above.
Answer: D
Q2) Suppose there is a linear downward-sloping demand curve and a linear upward-sloping supply curve for a good.The price of a substitute good increases and the price of an input to production also increases.Graph the original demand and supply curves,and the curves after the substitute good and input prices increase.How will the equilibrium price change after the substitute and input prices increase?
Answer: 11ea6920_9436_06fc_80d0_d3882d990a65_TB5322_00 See the above figure.The new demand curve will be to the right of the original demand curve and the new supply curve will be to the left of the original supply curve.The equilibrium price will increase.The change in equilibrium quantity cannot be determined and will depend on the relative magnitude of the supply and demand shifts.
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Chapter 3: Applying the Supply and Demand Model
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Sample Questions
Q1) If the demand curve for orange juice is expressed as Q = 2000 - 500p,where Q is measured in gallons and p is measured in dollars,then at the price of $3,elasticity equals A) -0.33.
B) -3.
C) -9.
D) -17.
Answer: B
Q2) If the demand function for orange juice is expressed as Q = 2000 - 500p,where Q is quantity in gallons and p is price per gallon measured in dollars,then the demand for orange juice has a unitary elasticity when price equals A) $0.
B) $1.
C) $2.
D) $4.
Answer: C
Q3) Explain why the price elasticity of demand changes along a linear demand curve.
Answer: The price elasticity of demand depends on BOTH the slope of the demand curve and on the term P/Q which changes as you move along the demand curve.
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Chapter 4: Consumer Choice
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Sample Questions
Q1) Max has allocated $100 toward meats for his barbecue.His budget line and an indifference map are shown in the above figure.What happens if Max receives a $100 cash grant to buy either meat or chicken?
A) Max will double his consumption of both meats.
B) Max will spend it all on burger. Because of its lower price, he can buy more of it.
C) Max will take advantage of the gift by buying all chicken because it is the more expensive meat.
D) There is not enough information to answer the question.
Q2) Explain the difference between the marginal rate of substitution and the marginal rate of transformation.
Q3) Max has allocated $100 toward meats for his barbecue.His budget line and an indifference map are shown in the above figure.Which of the following best describes Max's preferences?
A) d > b > e
B) d = b = e
C) a = b > c
D) a = b > e
Q4) Explain why most indifference curves are convex.
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Page 6
Chapter 5: Applying Consumer Theory
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Sample Questions
Q1) An increase in income (all else equal)will ALWAYS lead to a parallel shift of the budget line.
A)True
B)False
Q2) Due to inflation,nominal prices are usually
A) equal to real prices.
B) smaller than real prices.
C) larger than real prices.
D) a constant proportion different from real prices.
Q3) Sandy derives utility from consuming "all other goods," g,and clean air (measured by particulate matter removed per m<sup>3</sup>),a,as measured by the utility function U(g,a)= g<sup>0.6</sup>a<sup>0.4</sup>.The price of "all other goods" is $20 and the price of clean air (abatement)equals $10.Brian is the only other consumer in the market for clean air and demands 10 units of clean air.What is the market demand for clean air?
A) Total market demand is 14 units of clean air.
B) Total market demand is 12 units of clean air.
C) Total market demand is 10 units of clean air.
D) Total market demand is 16 units of clean air.
Q4) Why can't all goods be inferior?
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Chapter 6: Firms and Production
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Sample Questions
Q1) Let the production function be q = AL<sup>a</sup>K<sup>b</sup>.The function exhibits increasing returns to scale if
A) a + b = 1.
B) a + b > 1.
C) a + b < 1.
D) Cannot be determined with the information given.
Q2) Production occurs using the fixed-proportion combination of one worker for every one unit of capital.Draw the isoquants for this production function.After one unit of output is produced,does this production function exhibit constant,increasing,or decreasing returns to scale?
Q3) What do we mean by efficient production?
Q4) The steeper an isoquant is,
A) the greater is the marginal productivity of labor relative to that of capital.
B) the greater is the substitutability between capital and labor.
C) the greater is the need to keep capital and labor in fixed proportions.
D) the greater is the level of output.
Q5) Cobb-Douglas production functions can never possess varying returns to scale. A)True B)False
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Chapter 7: Costs
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Sample Questions
Q1) Economists proclaim that competitive firms make zero economic profit in the long run.This shows how
A) detached economists are from the real world.
B) unrealistic economic theory is.
C) firms cover all their cost, both monetary and non-monetary.
D) firms cover only monetary cost when economic profits are zero.
Q2) If a production function is represented as q = L<sup>a</sup>K<sup>b</sup>,the long-run average cost curve will be horizontal as long as
A) a + b = 0.
B) a + b = 1.
C) q > 0.
D) L = K.
Q3) Your company makes copper pipes.Over the years,you have collected a large inventory of raw copper.The production process involves melting the copper and shaping it into pipes.You also have a large stockpile of pennies.Suppose the price of copper rises so much that the copper in the penny becomes worth more than one cent.Should you melt down your pennies?
Q4) Explain why in the case of economies of scope the production possibility frontier is bowed outward.
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Chapter 8: Competitive Firms and Markets
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Sample Questions
Q1) A special license is required to operate a taxi in many cities.The number of licenses is restricted.More drivers want licenses than are issued.This describes a non-perfectly competitive market because
A) taxi services are very different.
B) firms cannot freely enter and exit the market.
C) transaction costs are high.
D) the government generates revenue from the licenses.
Q2) Suppose there are 20 competitive firms in a market.The supply curve of each firm is q = 2p.The market demand is Q = 200 - 2p.What is the residual demand curve facing a typical firm?
Q3) The reasons why a competitive firm's short-run supply curve is upward sloping are
A) the law of diminishing marginal returns and profit maximization.
B) constant returns to scale and profit maximization.
C) decreasing returns to scale and profit maximization.
D) Both B and C.
Q4) Explain why shutting down and going out-of-business are different concepts.
Q5) The long-run supply curve in a competitive market is upward-sloping.
A)True
B)False
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Chapter 9: Applying the Competitive Model
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Sample Questions
Q1) The above figure shows supply and demand curves for milk.In an effort to help farmers,the government passes a law that establishes a $3 per gallon price support.The loss in social welfare resulting from this price support equals A) k + i.
B) j.
C) [$3 (Q<sub>2</sub> - Q<sub>1</sub>)] - h.
D) $3 k.
Q2) In a perfectly competitive market the long-run demand and supply curves are Q = 12 - P and Q = 5P respectively.Producer surplus in this market equals A) 0.
B) 5.
C) 10.
D) It cannot be determined without more information.
Q3) The above figure shows the demand and supply curves in the market for milk.Currently the market is in equilibrium.If the government establishes a $4 per gallon price support,estimate the change in p,Q,and social welfare.
Q4) Explain why the competitive output maximizes welfare.
Q5) When is the profit a firm earns equal to the producer surplus? Explain.
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Chapter 10: General Equilibrium and Economic Welfare
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Sample Questions
Q1) Joe and Rita each have some cookies and milk.Joe is willing to trade 2 cookies for an additional ounce of milk.Rita is willing to trade 4 cookies for an additional ounce of milk.If trading is possible,which of the following is most likely to occur?
A) Joe will give some milk to Rita in exchange for cookies.
B) Rita will give some milk to Joe in exchange for cookies.
C) No trade will take place since they both prefer to have more milk and fewer cookies.
D) There is not enough information to make any predictions.
Q2) Any competitive equilibrium is Pareto-efficient because,with a competitive equilibrium,
A) the marginal rates of substitution are equal for all consumers.
B) the price line is the contract curve.
C) mutual gains from trade exist.
D) the slope of the price line equals the ratio of the MRS for all consumers.
Q3) Most of the debates in the U.S.Congress center on A) efficiency concerns.
B) equity concerns.
C) both efficiency and equity equally.
D) market inefficiency.
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Page 12
Chapter 11: Monopoly
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Sample Questions
Q1) If a firm in an industry experiences very high fixed costs and constant marginal cost,it is a good candidate for a natural monopoly.
A)True
B)False
Q2) The above figure shows the demand and cost curves facing a monopolist.The monopoly maximizes profit by setting price equal to
A) $100.
B) $200.
C) $300.
D) $400.
Q3) Which is an ironic solution to the government protected monopoly?
A) The government might try to "force" less competition in the market.
B) The government might "do more" by "doing less," i.e., by removing the monopoly's protection.
C) The dead weight loss goes to the government.
D) The inherent unfairness of monopoly can only be solved by dictatorship.
Q4) The optimal patent length is equal to 20 years.
A)True
B)False
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Chapter 12: Pricing and Advertising
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125 Flashcards
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Sample Questions
Q1) Which of the following sellers is most able to perfectly price discriminate?
A) a college or university
B) the post office
C) a clothing store
D) a grocery supermarket
Q2) A perfect price discriminator receives a price equal to marginal revenue for each unit.
A)True
B)False
Q3) What is one reason online prices might be considerably lower than brick-and-mortar prices?
A) Online retailers engage in more price discrimination.
B) Brick-and-mortar retailers engage in more price discrimination.
C) Brick and mortar retailers may have higher costs.
D) Online retailers are more likely to have steep demand curves.
Q4) A firm's advertising can help rivals
A) if it focuses on a general problem that the product addresses.
B) if it focuses on a secret ingredient that only this firm possesses.
C) if rivals do not advertise.
D) if rivals advertise.
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Chapter 13: Oligopoly and Monopolistic Competition
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Sample Questions
Q1) What strategic advantage compared to a Cournot Oligopoly results in the Stackelberg outcome?
A) the ability to move first
B) the ability to set price
C) the ability to set quantity
D) the ability to make independent decisions by the Stackelberg leader
Q2) The above figure shows the reaction functions for two pizza shops in a small isolated town.Firm B producing 100 pizzas and firm A producing 50 pizzas is not a Cournot equilibrium because
A) Cournot duopolists agree to share the market equally.
B) firm B is not on its best-response function.
C) firm A is not on its best-response function.
D) neither firm is on its best-response function.
Q3) Which of the following models results in the greatest total profit,assuming a fixed number of firms with identical costs and a given demand curve?
A) Cournot
B) Stackelberg
C) Monopoly
D) Perfect competition
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Page 15
Chapter 14: Game Theory
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Sample Questions
Q1) An incumbent's threat to retaliate after a potential competitor enters the market will be taken seriously by potential competitors if
A) the incumbent can still earn a profit after carrying out the threat.
B) the incumbent earns greater profit carrying out the threat than by accommodating entry.
C) the potential entrant cannot earn a profit if the threat is carried out.
D) the potential entrant's profit exceeds the incumbent's if the threat is carried out.
Q2) A sub-game perfect Nash equilibrium is defined as
A) a set of strategies that are a Nash equilibrium in every subgame of a static game.
B) a set of strategies that are a Nash equilibrium in every subgame of a dynamic game.
C) a set of strategies that are a Nash equilibrium in a single subgame of a dynamic game.
D) the game within the game.
Q3) The above figure shows the payoff matrix facing an incumbent firm.Assuming a fixed cost of entry,will the incumbent deter entry? Why?
Q4) How can a firm be made better off by limiting its options?
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Page 16
Chapter 15: Factor Markets
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Sample Questions
Q1) Suppose the marginal product of labor equals 1/L.If the firm can sell its output for $10 per unit,and the wage is $1 per unit,how many units of labor will the firm hire?
A) 0
B) 1
C) 10
D) 100
Q2) If a firm is a price taker in both the labor market and the output market,it will A) earn zero economic profit in the short run.
B) hire labor until the marginal product of labor equals zero.
C) hire labor until the marginal revenue product equals the output price.
D) hire labor until the marginal revenue product equals the wage rate.
Q3) Suppose the labor market is competitive,the supply curve of labor is upward sloping,and the amount of capital is fixed.If the output market changes from a competitive market to a monopoly,what is the effect on its demand for labor? Explain.
Q4) Explain why a decrease in an input price causes less of an increase in the quantity demanded of the factor if we assumed that product price remained constant.
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Page 17
Chapter 16: Interest Rates, Investments, and Capital Markets
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Sample Questions
Q1) You place $100 in a bank account that pays 8%.If you remove the interest you receive each year you can turn your stock into a flow of
A) $108 per year.
B) $100 per year.
C) $80 per year.
D) $8 per year.
Q2) If the interest rate is 10%,then $1 received one year from now is worth how much today?
A) $1.10
B) $1.00
C) $0.91
D) $0.90
Q3) An exhaustible resource with a very large known reserve will most likely exhibit A) a highly variable price in the near future.
B) a decreasing price in the near future. C) an increasing price in the near future.
D) a constant price in the near future.
Q4) Why do economists predict that investment increases when the real rate of interest falls?
Q5) In an economy with no inflation,explain why interest rates are positive.
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Chapter 17: Uncertainty
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Sample Questions
Q1) Which of the following is a fair bet based on the toss of an unbiased coin?
A) head: receive $5, tail: lose $5
B) head: receive $2, tail: lose $3
C) head: receive $0.5, tail: lose $1
D) head: lose $3, tail: lose $3
Q2) If a person is entertained by gambling,then
A) she is not risk averse.
B) she does not understand the concept of a fair game.
C) she may gamble even if it is an unfair game.
D) she will definitely not buy automobile insurance.
Q3) If global warming began to cause random world-wide damage to crops,insurance companies
A) would insure against specific crop failures.
B) would not insure against specific crop failures.
C) would be indifferent between insuring or not.
D) would find themselves facing prosecution for ignoring the problem for so long.
Q4) A fair game is a game in which the chances are 50-50 that you win or lose.
A)True
B)False
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Chapter 18: Externalities, Open-Access, and Public Goods
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Sample Questions
Q1) Suppose that in the market for paper,demand is p = 100 - Q.The private marginal cost is MC<sup>p</sup> = 10 + Q.Pollution generated during the production process creates external marginal harm equal to MC<sup>e</sup> = Q.What specific tax would result in a competitive market producing the socially optimal quantity of paper?
Q2) Suppose two neighbors share a park.One neighbor,Al,leaves trash in the park.This bothers the other neighbor,Bert.According to Coase's Theorem,the optimal level of trash in the park can be achieved if
A) Al is fined by the government.
B) Al has the right to leave trash and Bert cannot do anything about it.
C) Al has the right to leave trash and Bert can pay him to limit his dumping.
D) Bert moves.
Q3) Explain how a specific tax equal to the marginal harm of pollution can increase or decrease total welfare in a monopoly market.
Q4) A specific tax in a monopoly market equal to the marginal harm of pollution
A) will increase welfare.
B) will decrease welfare.
C) will leave welfare unchanged.
D) All of the above are possible.
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Page 20
Chapter 19: Asymmetric Information
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Sample Questions
Q1) Competitive firms are able to set price above marginal cost when
A) the markup is less than the cost of going to another store.
B) the markup is greater than the cost of going to another store.
C) all consumers have full information.
D) consumers know what other stores are charging.
Q2) Adverse selection occurs when
A) a person takes more risks that are not known to the life insurance company because he has life insurance.
B) a person buys life insurance because he has a risky lifestyle that is not known to the life insurance company.
C) a person is a risk lover.
D) pregnant women with health insurance make more doctor visits than uninsured pregnant women.
Q3) If you sell your DVD player on eBay,you will be better informed about the quality of the product than any potential buyer.This is called
A) adverse selection.
B) asymmetric information.
C) moral hazard.
D) opportunistic behavior.
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Page 21
Chapter 20: Contracts and Moral Hazards
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Sample Questions
Q1) Workers can reduce the chance of an employer lying by
A) obtaining more information about the firm's performance.
B) having a representative on the board of directors.
C) requiring that employers share the cost of an economic downtown.
D) All of the above.
Q2) If good salespeople are extremely risk averse,then a choice between a fixed-fee contract and a contingent contract
A) avoids a moral hazard.
B) will result in all job candidates choosing the contingent contract.
C) will result in an efficient contract.
D) may not be a good screening device.
Q3) In the presence of asymmetric information,a hire contract
A) achieves production efficiency.
B) can lead to opportunistic behavior on the part of the agent.
C) is impossible to write.
D) will result in the principal earning all of the profit.
Q4) Describe the characteristics of an efficient contract between a principal and an agent.
Q5) Explain why checks on principals might be necessary.
Q6) Explain how more than one possible state of nature affects contract choices.
Page 22
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