Intermediate Microeconomics
Pre-Test Questions
Course Introduction
Intermediate Microeconomics delves deeper into the analysis of market behavior and the decision-making processes of individual consumers and firms. The course covers topics such as utility maximization, production and cost theories, market structures (perfect competition, monopoly, and oligopoly), and game theory. Emphasis is placed on mathematical models and analytical tools to understand price formation, resource allocation, and the efficiency of different market outcomes, building a bridge between foundational microeconomic principles and more advanced economic analysis.
Recommended Textbook Microeconomics Theory and Applications with Calculus 4th Edition by Jeffrey M. Perloff(equations)
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Page 2
Chapter 1: Introduction
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Sample Questions
Q1) The price of a good is
A)always equal to the cost of producing the good.
B)never affected by the number of buyers and sellers.
C)usually determined in a market.
D)None of the above.
Answer: C
Q2) Most microeconomic models assume that decision makers wish to
A)make themselves as well off as possible.
B)act selfishly.
C)make others as well off as possible.
D)None of the above.
Answer: A
Q3) Which of the following is an example of a normative statement?
A)Since this good is bad for you,you should not consume it.
B)This good has bad health effects.
C)If you consume this good,you will get sick.
D)People usually get sick after consuming this good.
Answer: A
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3
Chapter 2: Supply and Demand
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Sample Questions
Q1) Which of the following goods probably has the lowest (absolute value)short-run price elasticity of demand?
A)fresh fruit
B)frozen dinners
C)cars
D)refrigerators
Answer: A
Q2) If the price elasticity of demand for a good is less than one in absolute terms,we say consumers of this good
A)are not very sensitive to price.
B)are not very sensitive to the quantity they demand.
C)are very sensitive to price.
D)are elastic.
Answer: A
Q3) Equilibrium is defined as a situation in which
A)neither buyers nor sellers want to change their behavior.
B)no government regulations exist.
C)demand curves are perfectly horizontal.
D)suppliers will supply any amount that buyers wish to buy.
Answer: A
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Chapter 3: A Consumers Constrained Choice
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Sample Questions
Q1) Explain the difference between the marginal rate of substitution and the marginal rate of transformation.
Answer: The marginal rate of substitution is a consumer's willingness to trade one good for another based on utility.The marginal rate of transformation is the consumer's ability to trade one good for another based on prices.
Q2) Max has allocated $100 toward meats for his barbecue.His budget line and indifference map are shown in the above figure.If Max is currently at point d,
A)his MRS is larger than the trade-off offered by the market.
B)he is willing to give up more chicken than he has to,given market prices.
C)he is not maximizing his utility.
D)All of the above.
Answer: D
Q3) An optimum that occurs as a corner solution
A)includes only one good.
B)cannot be an equilibrium.
C)cannot exhaust the budget constraint.
D)includes the exact same amounts of each good.
Answer: A
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Chapter 4: Demand
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Sample Questions
Q1) Many manufacturers sell products labeled as having imperfections at a discount at their factory outlets but do not ship these imperfect goods to regular retail outlets.Why?
Q2) If a consumer is compensated for the income effect that occurs when the price of a good increases,then his demand curves can never slope upward.
A)True
B)False
Q3) When John was in college and his income was low,he drank "Red Ribbon" beer.As his income increased,he purchased better-quality beer and less "Red Ribbon." Which graph in the above figure best represents John's Engel curve for "Red Ribbon" beer?
A)Graph A
B)Graph B
C)Graph C
D)Graph D
Q4) When income increases by 1%,the quantity demanded of a good decreases by 2%.What is the income elasticity of the good? Is the good normal or inferior? Why?
Q5) Why can't all goods be inferior?
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Chapter 5: Consumer Welfare and Policy Analysis
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Sample Questions
Q1) A backward-bending labor supply curve implies that
A)the substitution effect dominates the income effect at higher wage rates but not at lower wage rates.
B)the substitution effect dominates the income effect at lower wage rates but not at higher wage rates.
C)leisure is an inferior good.
D)workers are irrational.
Q2) The price of leisure
A)is the same for everyone.
B)depends on the number of hours worked.
C)is measured as foregone earnings.
D)is immeasurable.
Q3) If a person supplies more hours of labor in response to a wage increase,then
A)the substitution effect is greater than the income effect.
B)the income effect is greater than the substitution effect.
C)the income effect equals the substitution effect.
D)the person is not maximizing utility.
Q4) An increase in unearned income always creates a disincentive to work
A)True
B)False
Page 7
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Chapter 6: Firms and Production
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Sample Questions
Q1) The above figure shows the isoquants for producing steel.Increasing returns to scale are
A)present when producing less than 10,000 tons.
B)present when producing less than 20,000 tons.
C)present when producing less than 30,000 tons.
D)never present.
Q2) The production function Q = 0.8X + 0.6Y exhibits
A)increasing return to scale.
B)decreasing returns to scale.
C)constant returns to scale.
D)economies of scale.
Q3) With capital on the vertical axis and labor on the horizontal axis,vertical isoquants imply that
A)capital and labor are perfect substitutes.
B)capital and labor must be used together in a certain proportion.
C)capital is not productive.
D)labor is not productive.
Q4) A firm operating with diminishing total returns cannot be profit maximizing.
A)True
B)False
Page 8
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Chapter 7: Costs
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Sample Questions
Q1) Which of the following will cause the average fixed cost curve of making cigarettes to shift?
A)a $5 million penalty charged to each cigarette maker
B)a $1 per pack tax on cigarettes
C)a $3 per hour wage increase
D)an increase in the demand for cigarettes
Q2) Which of the following statements best explains why long-run average cost is never greater than short-run average cost?
A)In the long run,tangency of the isocost and isoquant is attainable.This is not necessarily true in the short run.
B)In the long run,diseconomies of scale might not occur,but in the short run diminishing marginal returns do.
C)In the long run,the cost of capital declines because the firm is able to pay down some of its debts.
D)In the long run,the average cost curve need not be U-shaped,but in the short run it is.
Q3) Explain why the marginal cost curve intersects a U-shaped average cost curve at its minimum point.
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Page 9
Chapter 8: Competitive Firms and Markets
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Sample Questions
Q1) As the number of firms in an industry increases,the residual demand curve becomes
A)more elastic.
B)less elastic.
C)larger.
D)vertical.
Q2) If a firm happened to be the only seller of a particular product,it might behave as a price taker as long as
A)buyers have full information about the firm's price.
B)the transaction costs of doing business with this firm are low.
C)there are many buyers.
D)there is free entry and exit.
Q3) If a competitive firm is in short-run equilibrium,then
A)profits equal zero.
B)economic profits will be positive.
C)economic profits will be negative.
D)All of the above are possible in the short run.
Q4) The long-run supply curve in a competitive market is upward sloping.
A)True
B)False
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Chapter 9: Properties and Applications of the Competitive Model
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Sample Questions
Q1) The above figure shows supply and demand curves for apartment units in a large city.If the city government passes a law that establishes $350 per month as the legal maximum rent,producer surplus decreases by A)d.
B)b + f.
C)c + g.
D)i.
Q2) The above figure shows the market for rice in Japan.S<sub>Domestic</sub> represents the domestic supply curve,and S<sub>world</sub> represents the world supply curve.If a $1 per unit tariff is imposed on imported rice,the quantity of imported rice will decrease by A)15 units.
B)25 units.
C)35 units.
D)50 units.
Q3) Producer surplus is the sum of the profits earned by all firms in a market.
A)True
B)False
Q4) When is the profit a firm earns equal to the producer surplus? Explain.
Q5) Explain why the competitive output maximizes welfare.
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Chapter 10: General Equilibrium and Economic Welfare
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Sample Questions
Q1) General-equilibrium analysis is the study of
A)how an equilibrium is determined in all markets simultaneously.
B)how an equilibrium is determined in all closely related markets.
C)the effects of a change in a market,and all spillover effects in all related markets.
D)All of the above.
Q2) Gains from trade will be possible as long as A)levels of utility differ.
B)utility functions differ.
C)marginal rates of substitution differ.
D)endowments differ.
Q3) Gains from trade will be possible as long as A)people have different endowments.
B)people place different values on some goods.
C)marginal rates of substitution are equal across individuals.
D)excess supply equals excess demand.
Q4) At the competitive equilibrium quantity supplied equals quantity demanded in all markets.
A)True B)False
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Chapter 11: Monopoly and Monopsony
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Sample Questions
Q1) A specific tax imposed on a monopolist may increase the price by more than the tax.
A)True
B)False
Q2) Relative to a competitive labor market,monopsony
A)is also efficient.
B)creates a deadweight loss because it pays an excessive wage.
C)creates a deadweight loss because the wage is below the marginal revenue product of labor.
D)creates a deadweight loss because the wage is above the marginal revenue product of labor.
Q3) A monopsonist faces an upward-sloping labor supply curve.This means that his marginal expenditures on labor are
A)greater than the wage.
B)equal to the wage plus the increase in the wage resulting from hiring one more unit of labor hired.
C)greater than the wage because hiring more workers requires to pay all workers more.
D)All of the above.
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13
Chapter 12: Pricing and Advertising
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Sample Questions
Q1) If the demand for air travel were to change so that business travelers and vacationers have the same price elasticity of demand for air travel,
A)airlines would charge the same price to each type of flyer.
B)airlines would still charge business flyers a higher fare since the traveler's employer pays anyway.
C)airlines would be driven out of business.
D)airlines would counter by charging vacationers a higher fare.
Q2) Suppose all individuals are identical,and their monthly demand for Internet access from a certain leading provider can be represented as p = 5 - (1/2)q where p is price in $ per hour and q is hours per month.The firm faces a constant marginal cost of $1.The profit maximizing two-part tariff yields results in the firm selling
A)4.5 hours.
B)10 hours.
C)5 hours.
D)8 hours.
Q3) Explain using welfare measures whether consumers prefer a single price monopoly or a perfectly price discriminating monopoly.
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Page 14
Chapter 13: Game Theory
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Sample Questions
Q1) A mixed strategy may
A)be part of a Nash equilibrium.
B)be a set of probabilities of selecting each possible action.
C)lead identical firms to choose different actions.
D)All of the above.
Q2) Suppose two firms,A and B,are simultaneously considering entry into a new market.If neither enters,both earn zero.If both enter,they both lose 100.If one firm enters,it gains 50 while the other earns zero.Set up the payoff matrix for this game and determine if any Nash equilibria exist.Can you predict the outcome? What if firm A gets to decide first?
Q3) The result that different auction styles in which the good goes to the winner with the highest valuation of the good generate the same amount of revenue is called
A)Revenue Equivalence Theorem.
B)Marginal Revenue Theory.
C)Auction Revenue Theory.
D)First Bid Revenue Theorem.
Q4) Explain why to some game theorists,the idea of mixed strategies is appealing,and to others it is implausible.
Q5) Why is collusion more likely in a repeated game?
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Chapter 14: Oligopoly and Monopolistic Competition
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Sample Questions
Q1) Which of the following will facilitate the enforcement of a cartel?
A)most-favored-customer clauses
B)reports of bids on government contracts
C)meet the competition or price match
D)All of the above
Q2) Compared to a cartel,firms in a Cournot Oligopoly
A)make more joint profit.
B)sell less output.
C)make less joint profit.
D)act independently.
Q3) Consider a market with (inverse)demand p = 100 - 2Q.There are two firms in the market with constant marginal and average costs of $10.
a.Determine the Cournot equilibrium quantities and price
b.What would be the collusive (joint-profit maximizing)price and quantity?
c.Derive the deadweight loss from (i)Cournot Dupoly, (ii)Collusion,and (iii)Perfect competition in this market with the two firms.
Q4) If two firms playing Cournot are identical with decreasing average costs,how should the firms divide production to maximize joint profits?
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Page 16
Chapter 15: Factor Markets
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Sample Questions
Q1) You can put your $100 in Bank A that pays 8% at the end of the year.You can also put your $100 in Bank B that pays 4% at the end of six months and then 4% again at the end of the year.You will keep your $100 and all interest in the bank.At the end of the year
A)the total will be the same at both banks.
B)the total at Bank A will be greater.
C)the total at Bank B will be greater.
D)the total could be larger at either bank.
Q2) To calculate the internal rate of return on a factory that would yield a perpetual future stream of income,one would divide
A)the annual future payment by the cost of the factory.
B)the sum of the future payments by the cost of the factory.
C)the cost of the factory by the rate of interest.
D)the cost of the factory by the annual future payment.
Q3) XYZ Co.operates in a competitive market.Its production function is q = L<sup> </sup>K<sup> </sup>.The exponents, and ,are both less than one.The firm's capital is fixed,and it takes the wage and price as given.Derive the firm's short-run demand for labor as a function of K,w,and p.How does the firm react to an increase in the wage rate?
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Chapter 16: Uncertainty
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Sample Questions
Q1) Steven currently has wealth of $10,000.He is risk averse about losing any of his wealth,but risk loving about adding to his wealth.Draw his utility function.
Q2) People in a certain group have a 0.3% chance of dying this year.If a person in this group buys a life insurance policy for $3,300 that pays $1,000,000 to her family if she dies this year and $0 otherwise,what is the expected value of a policy to the insurance company?
A)$0
B)$300
C)$3,000
D)$3,300
Q3) A risk-neutral individual will make investment decisions purely based on net present value because
A)she doesn't care about utility.
B)utility is a linear function of wealth.
C)she loves to take risk.
D)net present value is always more than expected utility.
Q4) Explain why the variance of an investment is a useful measure of the risk associated with it.
Q5) Explain why insurance companies usually do not offer earthquake insurance.
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Chapter 17: Property Rights, Externalities, Rivalry, and Exclusion
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Sample Questions
Q1) If a production process creates positive externalities,a competitive market produces too few positive externalities because the producer
A)does not pay all the costs of the externalities.
B)does not receive compensation for the externalities.
C)Both A and B.
D)None of the above.
Q2) Suppose that the market for steel is shown in the above figure.Is social welfare greater under monopoly or under competition?
Q3) The above figure shows the marginal benefit from pollution for two firms.If each firm receives a marketable permit to produce 25 units of pollution,which one of the following is most likely to happen?
A)Firm B will sell some pollution rights to firm A.
B)Firm A will sell some pollution rights to firm B.
C)Firm A will produce all 50 units of pollution.
D)Both firms will produce 25 units of pollution.
Q4) Explain the externality generated when a shepherd grazes sheep in a field that is common property that several other shepherds use.
Q5) Explain why the optimal amount of pollution is often not zero.
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Chapter 18: Asymmetric Information
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Sample Questions
Q1) The market for used cars is shown in the above figure.Buyers cannot tell whether any given car is a lemon.For all cars offered for sale to be sold,the percent of all cars that are lemons is .What happens to if car buyers incur a $100 transaction cost when buying a used car?
Q2) Cheap talk works at placing workers in the right job as long as A)the interests of the worker and the firm coincide.
B)all workers want the most demanding jobs regardless of their abilities.
C)workers have different ability levels that are unknown to firms.
D)firms are not profit maximizers.
Q3) Some software firms require that applicants have passed certain standardized certification tests before being hired.This policy is necessary when A)cheap talk does not provide a credible signal.
B)cheap talk does provide a credible signal.
C)the interests of the firm and the applicant converge. D)the applicant is honest about her abilities.
Q4) The XYZ Co.is hiring salespersons.They will be paid a very attractive hourly rate that is independent of how much they sell.Describe an adverse selection that would take place.Describe a moral hazard that would take place.
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Chapter 19: Contracts and Moral Hazards
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Q1) If information is asymmetric,explain why the hire contract is not efficient in production and a moral hazard exists,but the fixed fee to the principal contract is efficient and does not pose a moral hazard problem.
Q2) Suppose a plaintiff hires a lawyer to represent her in a court case.The lawyer will receive a share of the settlement if the plaintiff wins.Under this contract, A)production efficiency cannot be achieved.
B)the client bears all of the risk.
C)the lawyer bears all of the risk.
D)the risk is shared.
Q3) A profit-maximizing firm that uses an efficiency wage and monitors will increase the wage it pays its workers until
A)the worker requires no monitoring.
B)the worker receives the market wage and requires full-time monitoring.
C)the cost of monitoring the worker equals the efficiency wage.
D)the change in the workers' productivity from being monitored times the per time unit cost of monitoring equals one.
Q4) Describe the characteristics of an efficient contract between a principal and an agent.
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Page 21