Microeconomic Analysis
Final Test Solutions
Course Introduction
Microeconomic Analysis explores the foundational principles governing individual and firm decision-making in markets. The course examines theories of consumer behavior, production and costs, market structures ranging from perfect competition to monopoly, and the role of government regulation. Through quantitative models and analytical tools, students will gain insight into how prices, outputs, and resource allocations are determined, and how various factors such as information asymmetry and externalities can affect market efficiency and welfare. This course equips students with the skills to critically analyze real-world economic problems and inform policy and business decisions.
Recommended Textbook
Microeconomic Theory Basic Principles and Extensions 10th Edition by Walter Nicholson
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17 Chapters
334 Verified Questions
334 Flashcards
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Page 2
Chapter 1: Preferences and Utility
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12 Verified Questions
12 Flashcards
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Sample Questions
Q1) If bundles of goods A and B lie on the same indifference curve,one can assume the individual
A)prefers bundle A to bundle B.
B)prefers bundle B to bundle A.
C)enjoys bundle A and B equally.
D)bundle A contains the same goods as bundle B.
Answer: C
Q2) Which of the following utility functions best represents the idea that two goods,x and y,are perfect complements?
A) \(U ( x , y ) = \sqrt { x y }\)
B)U(x,y)= x + y.
C) \(U ( x , y ) = | x - y |\) .
D)U(x,y)= min (x,y).
Answer: D
Q3) Indifference curves
A)are non-intersecting.
B)are contour lines of a utility function.
C)are negatively sloped.
D)all of these are correct.
Answer: D
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Chapter 2: Utility Maximization and Choice
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13 Verified Questions
13 Flashcards
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Sample Questions
Q1) If an individual's utility function for coffee (x)and cream (y)is given by U(x,y)= min (x,5y),the demand function for coffee is given by
A)X = I/2p<sub>x</sub> .
B)X = I/(p<sub>x</sub> + p<sub>y</sub>).
C)X = I/(p<sub>x</sub> + 0.2p<sub>y</sub>).
D)X = I/(p<sub>x</sub> + p<sub>y</sub>)<sup>2</sup>.
Q2) An individual has a utility function for tennis rackets (x)and tennis balls (y)of the form U(x,y)= min (3x,y).His or her expenditure function is given by
A)\(E = \left( \frac { 1 } { 3 } p _ { x } + p _ { y } \right) U\) .
B)\(E = \left( p _ { x } + 3 p _ { y } \right) U\) .
C)\(E = \left( p _ { x } + \frac { 1 } { 3 } p _ { y } \right) U\) .
D)\(E = \left( p _ { x } + p _ { y } \right) U / 3\) .
Q3) Suppose utility is given by U(x,y)= ln x + ln y and p<sub>x</sub> = 1,I = 10.If y must be purchased in whole units,what is the maximum price this person would pay for that good?
A)1.
B)5.
C)10.
D)20.
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Page 4
Chapter 3: Income and Substitution Effects
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19 Flashcards
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Sample Questions
Q1) If income doubles and the quantity demanded of good x more than doubles,then good x can be described as a A)substitute good.
B)complement good.
C)necessity.
D)luxury.
Q2) If the prices of all goods increase by the same proportion as income,the quantity demanded of good x will A)decrease.
B)increase.
C)remain unchanged.
D)change in a way that cannot be determined from the information given.
Q3) Consider the two following statements:
I.x is an inferior good.
II.x exhibits Giffen's Paradox. Which of the following is true?
A)I implies II,but II does not necessarily imply I.
B)II implies I,but I does not necessarily imply II.
C)I and II are statements of the same phenomenon.
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Page 5
Chapter 4: Demand Relationships Among Goods
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Sample Questions
Q1) A generalization of Engel's Law is given by
A)\(e _ { x , p _ { y } } + e _ { y , x } + e _ { x , 1 } = 1\) .
B)\(s _ { x } e _ { x , I } + s _ { y } e _ { y , I } = l\) .
C)\(e _ {
+
D)\(s _ { x } + s _ { y } = l\) .
Q2) If utility is separable in a three-good utility function \(\left[ U \left( x _ { 1 } , x _
2
, x _ { 3 } \right) = U _ { 1 } \left( x _ { 1 } \right) + U _ { 2 } \left( x _ { 2 } \right) + U _ { 3 } \left( x _ { 3 } \right) , U _ { i } ^ { \prime } > 0 \quad U _ { i } ^ { \prime } < 0 \right]\) then for changes in \(p _ { 1 } , x _ { 2 } \text { and } x _ { 3 } \text { must }\)
A)both be gross substitutes for x<sub>1</sub> .
B)both be gross complements for x<sub>1</sub> .
C)be such that if one is a gross substitute for x<sub>1</sub> ,the other is a gross complement for x<sub>1</sub> .
D)both be gross substitutes or both be gross complements for x.
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Chapter 5: Uncertainty and Information
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Sample Questions
Q1) The option to delay the choice of portfolio allocation is valuable because A)interest costs are positive.
B)volatility of returns is lower.
C)more can be placed into high return,risky assets.
D)the allocation can be based on new information.
Q2) Suppose a person's utility of wealth is given by \(U ( W ) = \sqrt { W }\) and his or her initial wealth is 10,000.What is the maximum amount he or she would pay for insurance against a 50 percent chance of losing 3,600?
A)1,800.
B)1,900.
C)2,000.
D)2,100.
Q3) Risk-averse individuals will diversify their investments because this will A)increase their expected returns.
B)provide them with some much-needed variety.
C)reduce the variability of their returns.
D)reduce their transactions costs.
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Chapter 6: Strategy and Game Theory
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18 Verified Questions
18 Flashcards
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Sample Questions
Q1) Which of the following is a true statement about signaling games?
A)In a separating equilibrium,the second mover's posterior beliefs are the same as his priors.
B)In a separating equilibrium,Bayes' rule cannot be used to compute posterior beliefs (because it produces an undefined answer).
C)In a pooling equilibrium,both the first and second movers choose the same action.
D)In a pooling equilibrium,the second mover learns nothing from the first mover's action.
Q2) The strategy profile in which both players remain silent in the Prisoners' Dilemma can be described as
A)non-Pareto optimal and unstable.
B)Pareto optimal and unstable.
C)non?Pareto optimal and stable.
D)Pareto optimal and stable.
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8
Chapter 7: Production Functions
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Sample Questions
Q1) Consider the production function \(q = \left( k ^ { \alpha } + l ^ { \alpha} \right) ^ { \beta }\) . For this function to have diminishing marginal productivities and increasing returns to scale,it must be the case that
A) > 1 < 1.
B) > 1 > 1.
C) < 1 < 1.
D) < 1 > 1.
Q2) A production function may exhibit
A)constant returns to scale and diminishing marginal productivities to all inputs.
B)constant returns to scale and diminishing marginal productivities to all but one input,but at least one input must have a constant marginal productivity.
C)constant returns to scale and diminishing marginal productivity to at most one input. D)constant returns to scale and diminishing marginal productivities for no inputs.
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9
Chapter 8: Cost Functions
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20 Flashcards
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Sample Questions
Q1) As long as marginal cost is below average cost,average cost will be
A)falling.
B)rising.
C)constant.
D)changing in a direction that cannot be determined without more information.
Q2) The cost function \(C = Q \left[ v ^ { 1 / 2 } + w ^ { 1 / 2 } \right] ^ { 2 }\) arises from
A)a Cobb-Douglas production function.
B)a CES production function.
C)a fixed proportions production function.
D)a Translog production function.
Q3) The input demand functions that can be derived from cost functions are referred to as "contingent" demand functions because the functions:
A)assume input costs are constant.
B)express input demand as a function of output.
C)depend on the assumption of profit maximization.
D)assume constant returns to scale in production.
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Chapter 9: Profit Maximization
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32 Verified Questions
32 Flashcards
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Sample Questions
Q1) A firm's marginal revenue is defined as
A)the ratio of total revenue to total quantity produced.
B)the additional output produced by lowering price.
C)the additional revenue received due to technical innovation.
D)the additional revenue received when selling one more unit of output.
Q2) A firm will hire additional units of any input up to the point where
A)the marginal productivity of the input is maximized.
B)the marginal cost of employing the input is minimized.
C)the expense of employing the last unit is equal to the revenue brought in by the last unit.
D)the revenue brought in by the input is maximized.
Q3) If the demand curve a firm faces shifts to the right,usually
A)it would be impossible to tell whether the marginal revenue curve shifts.
B)the marginal revenue curve would shift to the left.
C)the marginal revenue curve would shift to the right.
D)the marginal revenue curve would not shift.
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11
Chapter 10: The Partial Equilibrium Competitive Model
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31 Verified Questions
31 Flashcards
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Sample Questions
Q1) One way to minimize the excess burden resulting from a specific tax is to
A)tax only wealthy firms and individuals.
B)spread the tax over many goods and services.
C)tax goods for which either supply or demand is inelastic.
D)tax luxury items such as yachts and sports cars.
Q2) Price controls
A)are always popular with consumers because they lower prices.
B)create shortages.
C)increase producer surplus because firms can now sell a greater quantity of a good at a lower price.
D)are necessary to preserve equity.
Q3) If quantity supplied is either greater or less than the equilibrium quantity,then all of the following are true except:
A)total loss of surplus will depend on the shape of the demand and supply curves.
B)the resulting loss of consumer surplus will depend on the price of the good.
C)total loss of surplus will depend on the price of the good.
D)there will be an inefficient allocation of resources.
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Chapter 11: General Equilibrium and Welfare
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24 Verified Questions
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Sample Questions
Q1) In a two-good world every allocation would be efficient only if A)both individuals were identical.
B)both individuals regard the two goods as perfect substitutes.
C)both individuals were identical and regard the two goods as perfect complements. D)both individuals were identical and regard the two goods as perfect substitutes.
Q2) Every allocation of goods in a one good world is efficient because A)MRSs are equalized.
B)there is enough to go around for everyone.
C)no one can be made better off without making someone else worse off.
D)it doesn't matter to whom an extra unit of the good is given.
Q3) Suppose two individuals in an exchange economy have identical utility functions given by \(U ( x , y ) = \sqrt { x y }\) Person A has an endowment of x = 9 y = 8,person B has one of x = 16 y = 2.The price ratio that will prevail in equilibrium is
A)p<sub>x </sub>/ p<sub>y</sub>= 2.5.
B)p<sub>x </sub>/ p<sub>y</sub> = 1.0.
C)p<sub>x </sub>/ p<sub>y </sub>= 0.4.
D)p<sub>x </sub>/ p<sub>y </sub>= 0.125.
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Chapter 12: Monopoly
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18 Flashcards
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Sample Questions
Q1) One possible benefit of a monopoly is
A)a more efficient allocation of resources; only one firm is needed to supply quantity demanded.
B)greater opportunities for research due to long-run positive economic profits.
C)the government is better able to ensure that it follows laws and guidelines because there is only one firm to monitor.
D)goods and services are provided at a lower price than under perfect competition because of a monopoly's decreasing average cost curve.
Q2) A monopoly producer of a durable good
A)can earn even greater profits than a producer of a non-durable.
B)must consider competition from its own output decisions.
C)will have higher marginal costs than most other monopolies.
D)will not set marginal revenue equal to marginal cost.
Q3) Perfect (first degree)price discrimination
A)is a common occurrence in situations with many buyers.
B)occurs fairly often in situations with only a few buyers.
C)is only observed in competitive markets.
D)rarely occurs because firms do not have sufficient power to differentiate among specific buyers.
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Page 14
Chapter 13: Imperfect Competition
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Sample Questions
Q1) Product differentiation complicates the study of oligopolies because such markets may not
A)be efficient.
B)have prices equal to marginal cost.
C)have free entry and exit.
D)obey the law of one price.
Q2) In the Hotelling model,what effect would an increase in the transportation cost t have on,in the first instance,a monopoly firm and,in the second instance,two firms located at the extremes of the line segment who compete over the marginal consumer?
A)The monopolist's profit would decrease but the duopolists' would increase.
B)Both monopolist's and duopolists' profits would increase.
C)Both monopolist's and duopolists' profits would decrease.
D)The monopolist's profit would increase but the duopolists' would decrease.
Q3) A cartel-like collusive solution can be a Nash equilibrium only in price-setting games with
A)infinite replications.
B)finite replications.
C)dominant strategies.
D)more than two players.
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Page 15
Chapter 14: Labor Markets
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Sample Questions
Q1) If an individual is maximizing his or her utility,his or her marginal rate of substitution of leisure hours for consumption will be
A)equal to one divided by his or her wage rate.
B)greater than one divided by his or her wage rate.
C)equal to his or her wage rate.
D)less than his or her wage rate.
Q2) A monopolist union that desired to maximize its total wage bill (w . l)would offer that quantity of labor for which
A)labor's marginal productivity is zero.
B)labor's wage falls to zero.
C)the quantity of labor hired is as great as possible given the firm's demand curve.
D)the marginal revenue from providing one more worker to the market is zero.
Q3) "Compensating wage differentials" arise because
A)workers possess different skills.
B)workers prefer some jobs to others.
C)firms pay higher wages for workers with higher marginal productivities.
D)firms discriminate in hiring.
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Chapter 15: Capital and Time
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Sample Questions
Q1) If a tree's value (v)is growing according to the equation \(v ( t ) = e ^ { . i t - .0025 s t }\) with an interest rate of 5 percent,the tree should be harvested when t =
A)5 years.
B)10 years.
C)25 years.
D)100 years.
Q2) Adding uncertainty to future consumption will tend to increase savings providing:
A) \(U ^ { \prime \prime } > 0\) .
B) \(U ^ { \prime \prime } / U ^ { t } > 0\) .
C) \(U ^ { \prime \prime } / U ^ { t } < 0\) .
D) \(U ^ { \prime\prime\prime} > 0\) .
Q3) An increase in the corporate profits tax will most likely lead to
A)a decrease in the rental rate of capital in the corporate sector.
B)no change in the rental rate of capital in the corporate sector.
C)no change in the rental rate of capital in the non-corporate sector.
D)an increase in the rental rate of capital in the corporate sector.
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Chapter 16: Asymmetric Information
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Sample Questions
Q1) Compared to the case in which a monopoly insurer offers the consumer a contract,if insurance is competitively provided,
A)any moral hazard or adverse-selection problem is alleviated.
B)any moral hazard or adverse-selection problem is worsened.
C)the essence of any moral hazard or adverse-selection problem would not change much.
D)insurers would no longer offer menus of contracts.
Q2) Continue to suppose as in the previous question that the utility function for each of the firm's 5 workers is \(U ( l ) = w l - l ^ { 2 }\) where l is hours worked and w is the wage.Suppose now that the firm can only monitor the total hours worked by the group and pay each worker an equal share of the wage \(w = 20\) times the total number of hours.How many hours will each worker choose to work?
A)2 hours.
B)4 hours.
C)8 hours.
D)10 hours.
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18
Chapter 17: Externalities and Public Goods
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Sample Questions
Q1) If preferences are one-dimensional and preferences are single peaked,majority rule will result in selection of the project most favored by
A)no one.
B)the median voter.
C)the average voter.
D)everyone.
Q2) Consider four possible benefits of a water resources project:
I.Provides employment to construction workers currently building houses.
II.Provides electric power to the market.
III.Provides reduced flood risk to individuals living along the river.
IV.Raises the profits of MacDonald's stands in the area which serves construction workers.
According to the opportunity cost notion of cost?benefit analysis,which of these are true benefits?
A)All of them.
B)I,II,and III,but not IV.
C)I and III,but not II and IV.
D)II and III,but not I and IV.
E)II,but not I,III,and IV.
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