Microeconomic Theory Practice Exam
Course Introduction
Microeconomic Theory provides an in-depth analysis of how individuals and firms make decisions regarding the allocation of scarce resources, the formation of prices in markets, and the impact of various market structures on economic outcomes. The course covers fundamental concepts such as supply and demand, consumer and producer behavior, utility maximization, profit maximization, competition, monopoly, and game theory. Students develop analytical tools to understand real-world market interactions, evaluate policy implications, and predict the responses of economic agents to changes in incentives and constraints.
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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Sample Questions
Q1) 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
Q2) 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
Q3) For this utility function,the MRS
A)depends on the values of x and y.
B)is always 0.
C)is always 2.
D)is always 4.
Answer: C
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Page 3
Chapter 2: Utility Maximization and Choice
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Sample Questions
Q1) 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)\(E = \left( p _ { x } + p _ { y } \right) U / 3\) .
Q2) Suppose that at current consumption levels an individual's marginal utility of consuming an extra hot dog is 10 whereas the marginal utility of consuming an extra soft drink is 2.Then the MRS (of soft drinks for hot dogs)-- that is,the number of hot dogs the individual is willing to give up to get one more soft drink-is
A)5.
B)2.
C)1/2.
D)1/5.
Q3) The slope of the budget constraint line is
A)the ratio of the prices (p<sub>x</sub>/p<sub>y</sub>).
B)the negative of the ratio of the prices (p<sub>x</sub>/p<sub>y</sub>).
C)the ratio of income divided by price of y (I/p<sub>y</sub>).
D)none of these is correct.
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Page 4
Chapter 3: Income and Substitution Effects
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Sample Questions
Q1) If an individual buys only two goods and these must be used in a fixed relationship with one another (e.g.,coffee and cream for a coffee drinker who never varies the amount of cream used in each cup),then
A)there is no substitution effect from a change in the price of coffee.
B)there is no income effect from a change in the price of coffee.
C)Giffen's Paradox must occur if both coffee and cream are inferior goods.
D)an increase in income will not affect cream purchases.
Q2) Which of the following demand functions is not homogenous of degree zero in p<sub>x </sub>,p<sub>y </sub>,and I?
A)x = I / (p<sub>x</sub>,+ p<sub>y </sub>).
B)\(x = I ^ { .5 } p _ { x } ^ { - 03 } p _ { y } ^ { - 0.2 }\) .
C)\(x = I p _ { y } / p _ { x } ^ { 2 }\) .
D)\(x = I p _ { y } / p _ { x }\) .
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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Chapter 4: Demand Relationships Among Goods
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Sample Questions
Q1) A generalization of Engel's Law is given by
A)\(e _ {
B)\(s _
C)\(e _
D)\(s _ { x } + s _ { y } = l\) .
Q2) With only two goods,x and y,if x and y are gross substitutes,a rise in p<sub>x</sub> must necessarily
A)increase spending in x.
B)reduce spending in x.
C)increase spending in y.
D)reduce spending in y.
Q3) "Hicks' Second Law of Demand" states that "most" goods must be
A)gross substitutes.
B)gross complements.
C)net substitutes.
D)net complements.
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Chapter 5: Uncertainty and Information
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Sample Questions
Q1) An individual whose utility function is given by \(U \left( W _ { 1 } , W _ { 2 } \right) = min\left( W _ { 1 } , W _ { 2 } \right)\) (where W<sub>i</sub> is wealth in state i)will
A)never gamble no matter how favorable the odds.
B)only gamble if the expected value of the bet is positive.
C)gamble if the bet is not too unfair.
D)always gamble,no matter how unfavorable the odds.
Q2) If a fair game is played many times the monetary losses or gains will
A)approach zero.
B)be negative.
C)be positive.
D)result in an outcome that cannot be determined without more information.
Q3) An individual will never buy complete insurance if
A)he or she is risk averse.
B)insurance premiums are unfair.
C)he or she is a risk taker.
D)insurance premiums are fair.
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Chapter 6: Strategy and Game Theory
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Sample Questions
Q1) The difference between a Nash equilibrium strategy and a dominant strategy is A)nothing; they are synonymous.
B)the former is stable but the latter is unstable.
C)the former must be a best response to all others' strategy profiles,whereas the latter need only be a best response to others' Nash equilibrium strategies.
D)the former need only be a best response to others' Nash equilibrium strategies,whereas the latter must be a best response to all others' strategy profiles.
Q2) The difference between a Nash equilibrium and a subgame-perfect equilibrium is
A)the former requires rational play both on and off the equilibrium path but the latter requires rational play only on the equilibrium path.
B)the former requires rational play only on the equilibrium path but the latter requires rational play both on and off the equilibrium path.
C)Nash equilibria are a subset of the subgame-perfect equilibria.
D)nothing; they are synonyms.
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Chapter 7: Production Functions
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Sample Questions
Q1) A firm's isoquant shows
A)the amount of labor needed to produce a given level of output with capital held constant.
B)the amount of capital needed to produce a given level of output with labor held constant.
C)the various combinations of capital and labor that will produce a given amount of output.
D)none of these answers is correct.
Q2) Which of the following production functions exhibits a constant elasticity of substitution?
A)q = 3k + 2l.
B) \(q = k ^ { 0~5 } l ^ { 0~5 }\) .
C) \(q = l - \frac { l } { k } - \frac { l } { l }\) .
D)All of these production functions have a constant elasticity of substitution.
Q3) The <u>average</u> productivity of labor reaches its maximum
A)at the point of inflection of the total product curve.
B)where the slope of the total product curve is steepest.
C)where the slope of the total product curve is zero.
D)where marginal and average productivity are equal.
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Page 9
Chapter 8: Cost Functions
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Sample Questions
Q1) A linear total cost curve which passes through the origin implies that
A)average cost is constant and marginal cost is variable.
B)average cost is variable and marginal cost is constant.
C)average and marginal costs are constant and equal.
D)We need more information to answer question.
Q2) For a constant returns to scale production function
A)marginal costs are constant but the average cost curve has a U-shape.
B)both average and marginal costs are constant.
C)marginal cost has a U-shape; average costs are constant.
D)both average and marginal cost curves are U-shaped.
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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Sample Questions
Q1) If the firms in perfectly competitive industries each have a production function given by \(q = k ^ { 1 / 4 } l ^ { 3 / 4 }\) and the price elasticity of demand for the industry's output is -1,the wage elasticity of demand for labor by the industry will be A)0.
B) \(- \infty\)
C)-1.
D)-2.
Q2) Short-run producer surplus can be caluculated by integration as (where q* is the firm's profit maximizing output level and MC(q)is its marginal cost function)
A) \(\int _ { 0 } ^ { q ^ { * } } M C ( q ) d q - p\) .
B) \(\int _ { 0 } ^ { q ^ { * } } [ M C ( q ) - p q ] d q\) .
C) \(\int _ { 0 } ^ { q ^ { * } } p q - M C ( q ) d q\) .
D) \(\int _ { 0 } ^ { q ^ { * } } [ p - M C ( q ) ] d q\) .
Q3) A firm's demand for labor is known as a "derived demand" because A)the firm gains utility from hiring more labor.
B)the amount of labor hired depends upon how much output the firm can sell.
C)the wage rate paid to workers is derived from the market for labor.
D)it is derived from the demand for capital.
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11
Chapter 10: The Partial Equilibrium Competitive Model
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Sample Questions
Q1) In the short run,a sales tax is
A)wholly absorbed by the producer.
B)shared between the consumer and the producer.
C)deferred until the market is able to re-establish an equilibrium price.
D)wholly absorbed by the consumer.
Q2) The market demand curve for any good is
A)independent of individuals' demand curves for the good.
B)the vertical summation of individuals' demand curves.
C)the horizontal summation of individuals' demand curves.
D)derived from the firm's marginal cost of production.
Q3) A demand curve will shift out for any of the following reasons except A)preference for a good increases.
B)price of a substitute falls.
C)income rises.
D)price of a complement falls.
Q4) 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.
Page 12
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Chapter 11: General Equilibrium and Welfare
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Sample Questions
Q1) Each of the following factors might interfere with the efficiency of perfect competition except:
A)increasing returns to scale.
B)imperfect price information.
C)externalities.
D)diminishing returns to scale.
Q2) In volatile markets,"speculators" would be expected to provide some stability because
A)they will be required to do so by the government.
B)they will use current price moves to predict future moves.
C)they will buy when price is below equilibrium and sell when it is above equilibrium.
D)they will buy when price is above equilibrium and sell when it is below equilibrium.
Q3) If markets are perfect,a rational actor may reasonably conclude from the high price of a good that the good
A)is produced by a monopoly.
B)is of better quality.
C)has a greater demand for it.
D)is not known about by other consumers.
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Chapter 12: Monopoly
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Sample Questions
Q1) The principal difference between economic profits for a monopolist and for a competitive firm is that
A)monopoly profits create major problems of equity whereas competitive profits do not.
B)competitive profits exist only in the short run whereas monopoly profits may exist in the long run as well.
C)monopoly profits represent a transfer out of consumer surplus whereas competitive profits do not.
D)monopoly profits are usually larger than competitive profits.
Q2) A natural monopoly
A)is a monopoly in the production of raw materials.
B)occurs when one firm can supply the entire market more cheaply than can a number of firms.
C)is one result of a patent.
D)necessarily involves inefficient pricing.
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Chapter 13: Imperfect Competition
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Sample Questions
Q1) A profit-maximizing firm should spend an additional dollar on advertising so long as this expenditure results in more than one dollar of:
A)additional sales.
B)reduced costs.
C)increased profits.
D)demand.
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) In a Cournot equilibrium each firm chooses an output level which
A)maximizes joint profits.
B)maximizes the price received.
C)maximizes profits given what the other firms produce.
D)maximizes revenue given what the other firms produce.
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Page 15
Chapter 14: Labor Markets
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Sample Questions
Q1) If an individual's supply of labor curve is "backward bending," then
A)the substitution effect always dominates the income effect.
B)the income effect always dominates the substitution effect.
C)the substitution effect dominates at low real wage levels and the income effect dominates at high real wage levels.
D)the income effect dominates at low real wage levels and the substitution effect dominates at high real wage levels.
Q2) Consider two situations: In situation A the production of widgets is monopolized by a single firm.In situation B the production of widgets is perfectly competitive.In both situations the supply of labor to widget makers is infinitely elastic at a wage of w.In this case,the product \(p \cdot M _ { l }\)
A)will be the same in the two cases.
B)will be higher in case B than in case A.
C)will be higher in case A than in case B.
D)From the information given it is not possible to make a definite statement about the marginal value product of labor.
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Chapter 15: Capital and Time
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Sample Questions
Q1) An inner tube company which is maximizing its own profits will keep renting machines up to the point where
A)the marginal productivity of a capital is maximized.
B)the marginal value product of machines is maximized.
C)the marginal value product of machines is equal to the market rental rate for machines.
D)the machine's market rental rate is minimized.
Q2) Accelerated depreciation laws may increase firms' investment in equipment because
A)machines will wear out more rapidly.
B)profits will be increased.
C)the rental rate on capital will be reduced.
D)the price of machines will fall.
Q3) The present value of $1 payable in two years is A)$1.
B)$1/(1 + 2r).
C)$1/(1 - 2r).
D)$1/(1 + r)<sup>2</sup>.
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17
Chapter 16: Asymmetric Information
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Sample Questions
Q1) Unlike an owner,a manager may be more concerned with than with .Which pair of words best completes this sentence?
A)profits; personal benefits.
B)personal benefits; profits.
C)profits; working conditions.
D)cost; revenue.
Q2) Which of the following is not a straightforward example of a (principal \(\rightarrow\) agent)relationship?
A)Homeowner \(\rightarrow\) real estate agent.
B)Shareholder \(\rightarrow\) manager.
C)Manager \(\rightarrow\) line employee.
D)Doctor \(\rightarrow\) patient.
Q3) Which contracting party gains from the use of a more sophisticated contract?
A)The principal,who offers the contract.
B)The agent,who accepts the contract.
C)Both parties may lose.
D)Both parties gain equally.
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18
Chapter 17: Externalities and Public Goods
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Sample Questions
Q1) Each of the following provides incentives to reduce a negative externality except A)merger with affected firms.
B)subsidizing consumption of the good being produced.
C)bargaining among firms.
D)taxation of the externality.
Q2) A non-rival good is a good which
A)is produced by a monopoly.
B)is produced by a cartel.
C)can provide benefits to additional users at a zero marginal cost.
D)is sold in a single market.
Q3) A perfectly competitive steel mill that produces large amounts of a pollution (a negative externality)will,from a social point of view,produce
A)too little steel.
B)the socially optimal quantity of steel.
C)too much steel.
D)too much steel only if it installs pollution control equipment.
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