Econ 323 Microeconomic Theory Practice Exam 1 with Solutions
Econ 323 Microeconomic Theory
Practice Exam 1 with Solutions
Chapter 2, Question 1
The equilibrium price in a market is the price where:
a. supply equals demand
b. no surpluses or shortages result
c. no pressures cause price or quantity to change
d. all of the above
e. none of the above
Chapter 2, Question 2
When price supports are binding, the quantity exchanged is determined by the quantity:
a. supplied
b. demanded
c. demanded, if it is larger than supply
d. supplied, if it is larger than demand
e. None of the above
Chapter 2, Question 3
When population grows, the demand curve for a good will:
a. shift out
b. shift in
c. remain unaffected
d. shift in or out depending on what kind of good
e. none of the above
Chapter 2, Question 4
Hardware and software for computers are complements. If the price of computer hardware falls, the market for computer software will see equilibrium:a. price and quantity riseb. price rise but quantity fallc. price fall but quantity rised. price and quantity falle. no change in price or quantity
Chapter 2, Question 5
If there is an increase in the price of cocoa (an input), the market for premium chocolate will see equilibrium:
a. price and quantity rise
b. price rise but quantity fall
c. price fall but quantity rise
d. price and quantity fall
e. no change in price or quantity
Chapter 2, Question 6
The supply curve is and demand is perfectly elastic at . Before any tax is imposed, the equilibrium quantity is:a. 4b. 5c. 16d. 20e. none of the above
6b Solve to find that the equilibrium quantity is .
Chapter 2, Question 7
If sellers must pay a tax of $4 per unit, what quantity is exchanged?a. 4b. 5c. 16d. 20e. none of the above
7a With the tax, the supply curve shifts up by T=4 to ; buyers pay only so ,
, units transacted (one less than before).
Chapter 2, Question 8
And what price will buyers pay?a. 4b. 5c. 16d. 20e. none of the above
8d $20 because demand is perfectly elastic at that price.
Chapter 2, Question 9
And what price will the sellers keep (net of paying the tax)?a. 4b. 5c. 16d. 20e. none of the above
9c Sellers receive what the buyers pay minus the tax .
Chapter 2, Question 10
How is the tax burden distributed across buyers and sellers?a. buyers pay it allb. buyers pay more of the tax than sellers but not all of itc. buyers and sellers each pay half the taxd. sellers pay more of the tax than buyers but not all of ite. sellers pay it all
10e Sellers pay all the tax, bearing the full tax burden due to demand being perfectly elastic.
Chapter 2, Questions 6‐10
S’
S
4 5
20
40
D
Quantity
Price
Chapter 3, Question 11
An increase in the price of candy will cause the budget constraint to:
a. rotate inward along the axis for candy
b. rotate outward along the axis for candy
c. shift inward in a parallel fashion
d. shift outward in a parallel fashion
e. none of the above
Chapter 3, Question 12
An increase in income will cause the budget constraint to:
a. rotate inward along the axis for only one good
b. rotate outward along the axis for only one good
c. shift inward in a parallel fashion
d. shift outward in a parallel fashion
e. none of the above
Chapter 3, Question 13
A preference for 10 apples and 4 oranges over 9 apples and 3 oranges indicates:
a. completeness
b. transitivity
c. more is better
d. diminishing marginal rate of substitution
e. c and d
Chapter 3, Question 14
Any bundle that lies on a specified indifference curve is ____________ compared to any bundle that lies above the curve.
a. less preferred
b. equally preferred
c. more preferred
d. some more, some equally preferred
e. some less, some equally preferred
Chapter 3, Question 15
When a consumer optimally chooses a consumption bundle, the MRS equals the:a. ratio of the prices of the goodsb. (absolute value of the) slope of the indifference
curvec. opportunity cost of one good in terms of the
otherd. all of the abovee. none of the above
Chapter 3, Question 16
Monster’s budget constraint for milk L and cookies C, when spends $18 and faces prices $3/cup for milk and $6/dozen for cookies is:a. L = 6 ‐ 2Cb. 3C + 6L = $18c. 3L + 6C = $18d. both a. and c.e. none of the above
16d Monster’s budget constraint is so both and are valid.
Chapter 3, Question 17
The maximum milk Monster can consume is _____ cups (with no cookies). The maximum cookies is _____ dozen (with no milk).a. 3, 6b. 6, 3c. 9, 6d. 6, 9e. none of the above
17b The maximum milk is 6 cups (with no cookies).
The maximum cookies is 3 dozen (with no milk).
Chapter 3, Question 18
Every dozen cookies that Monster consumes requires forgoing the consumption of how many cups of milk?a. 1/2b. 3/4c. 1d. 2e. none of the above
18d Every dozen cookies that Monster consumes requires forgoing the consumption of how 2 cups of milk. Looking at the budget constraint in slope‐intercept form, 6 2 , for dozens of cookies C to increase by one, cups of milk L must decrease by 2. A dozen cookies is twice as
expensive as a cup of milk 2.
Chapter 3, Question 19
If milk and cookies are perfect complements, with Monster requiring one dozen cookies per cup of milk, his best affordable bundle is:
a. 6 cups of milk and no cookies
b. 3 dozen cookies and no milk
c. 3 cups of milk and 3 dozen cookies
d. 2 cups of milk and 2 dozen cookies
e. none of the above
19d With Monster requiring one dozen cookies per cup of milk, the optimal consumption bundle must satisfy (cookies are measured by the dozen). Plugging into and 3 6 18 and solving, his best affordable bundle is 2 cups of milk and 2 dozen cookies.
Chapter 3, Question 20
If the price of cookies rises to $9/dozen, how much additional income would be needed to afford the original consumption bundle?a. $0b. $2c. $4d. $6e. none of the above
20d The price of cookies went up by $3/dozen and he consumes 2 dozen cookies so he will need $6 more ($24 in all now compared to $18 when cookies were cheaper).
Chapter 3, Question 16‐20
0
2
4
6
8
0 1 2 3
Milk (cup
s)
Cookies (dozens)
B0
B1
I0
L = C
B2
Chapter 4, Question 21
What is used to construct an individual's Engel curve?
a. a price consumption curve
b. an income consumption curve
c. the substitution effect of a price change
d. the income effect of a price change
e. the individual's demand curve
Chapter 4, Question 22
When moving along a linear demand curve toward lower price and higher quantity demanded, demand :a. becomes more elasticb. becomes less elasticc. maintains a constant elasticityd. initially becomes more elastic and eventually
less elastice. initially becomes less elastic and eventually
more elastic
Chapter 4, Question 23
For perfect complements, the substitution effect is:
a. infinite
b. one
c. zero
d. negative
e. cannot tell
Chapter 4, Question 24
For a linear demand curve, revenue is maximized where the price elasticity of demand is:
a. the lowest
b. zero
c. one
d. the highest
e. cannot tell
Chapter 4, Question 25
The total effect of a price increase is always the same as the:
a. income effect
b. substitution effect
c. income effect plus the substitution effect
d. income effect minus the substitution effect
e. substitution effect minus the income effect
Chapter 4, Question 26
The market demand curve for pumpkins is P = 30 ‐ QD. At P = $10, total revenue is:a. $100b. $200c. $225d. $250e. none of the above
26b Solve for so . Total revenue is price times quantity .
Chapter 4, Question 27
And at P = $10, the price elasticity of demand for pumpkins is:a. ‐1/2 = ‐0.5b. ‐2/3 = ‐0.67c. ‐3/4 = ‐0.75d. ‐1e. none of the above
27a The slope of 30 – is ‐1. At 10, 20. Calculate price elasticity as
ЄΔQ/QΔ /
1 1020
11
12 0.5
Chapter 4, Question 28
And at P = $10, pumpkin demand is price:a. elasticb. unitary elasticc. inelasticd. spastice. none of the above
28c When a price elasticity is less than one in magnitude (in absolute value), demand is price inelastic meaning a one percent change in price generates a less than one percent reduction in quantity demanded.
Chapter 4, Question 29
And if currently charging P = $10, to increase revenues, pumpkin sellers should:a. increase priceb. decrease pricec. leave price unchangedd. cannot tell from the information providede. none of the above
29a When demand is price inelastic, an increase in price will increase total revenue.
Chapter 4, Question 30
At P = $20, pumpkin demand given by P = 30 ‐ QD is price:a. elasticb. unitary elasticc. inelasticd. spastice. none of the above
30a At 20, 10 and price elasticity would be Є
Q/Q/
2Since more than one in magnitude, demand is price elastic.
Chapter 4, Questions 26‐30
0
10
20
30
0 10 20 30
Price
Quantity
e = ‐1/2
1
‐1
e = ‐2
D
Chapter 5, Question 31For demand given by P = 10 ‐ 2Q, how much would consumer surplus decline if the price increased from $2 to $4?a. 6b. 7c. 8d. 9e. none of the above
31b At 1 2, 2 10 2 1 so 2 1 8 and 1 4. At 2 4, 4 10 2 2 so 2 2 6 and 2 3. Lost consumer surplus would be
2 11 2
2 4 24 32 7
Could also calculate the two consumer surpluses and subtract one from the other.
Chapter 5, Question 32
A consumer’s preferences over future and current consumption are represented by:
a. a budget constraint
b. the present value of lifetime income
c. the production possibilities frontier
d. an intertemporal indifference map
e. none of the above
Chapter 5, Question 33
According to the Life‐cycle hypothesis, if someone received an extra payment equal to current income, current consumption would likely:a. increase by more than the increase in incomeb. roughly doublec. increase, but not by as much as the increase in
incomed. stay the samee. decrease
Chapter 5, Question 34If you receive income M in each of two periods and can borrow or loan at interest rate r, what is the most you can consume in the current period?a. (1 + r)Mb. M/(2 + r)c. (2 + r)M/(1 + r)d. (2 + r)Me. none of the above
34c Set 1 2 in the intertemporal budget constraint.
12
1 1Then set future consumption to zero 2 0 to find the maximum current consumption
1 111 1
21
Chapter 5, Question 35
And what is the most you can consume in the future period?a. (1 + r)Mb. M/(2 + r)c. (2 + r)M/(1 + r)d. (2 + r)Me. none of the above
35d This time set current consumption to zero 1 0 to find the maximum future consumption
2
1 12 1 2
Chapter 5, Question 36
George has income of M1 = M2 = $100 in each period and faces an interest rate of r = 10%. The maximum George can consume in the current period, if he consumes nothing in the future period, is:a. $190.9b. $200c. $210d. $220e. none of the above
36a The most George can consume now, if consumes nothing later, would be what he earns today plus borrowing against future income:
1 100.
100 90.9 190.9
Chapter 5, Question 37
The maximum George can consume in the future period, if he consumes nothing in the current period, is:a. $190.9b. $200c. $210d. $220e. none of the above
37c The most George can consume later, if consumes nothing now, would be his current income plus interest added to his future income:
2 1 1.1 100 100 110 100 210.
Chapter 5, Question 38
George's intertemporal budget constraint is:a. C2 = $210 ‐ 1.1C1b. C1 + C2/(1.1) = $190.9c. C1 + C2 = $200d. both a. and b.e. none of the above
38d His the intertemporal budget constraint is
1 . .or
. 1 which is 2 1
Chapter 5, Question 39
If George views current and future consumption as perfect substitutes (at a one‐to‐one ratio), his optimal consumption bundle is:a. $190.9 in current period, nothing in future periodb. $210 in current period, nothing in future periodc. nothing in current period, $210 in future periodd. $100 in current period, $100 in future periode. none of the above
39c George wants to maximize his consumption, regardless of when it occurs. Since he will earn interest by forging consumption in the current period, he does best to save his current income and consume as much as he can ($210) in the future rather than $190.9 now (or anything in between).
Chapter 5, Question 40
And if the interest rate rose to r = 20%, his new optimal consumption bundle would be:a. $181.8 in current period, nothing in future periodb. $220 in current period, nothing in future periodc. nothing in current period, $220 in future periodd. $100 in current period, $100 in future periode. none of the above
40c The most George can consume later $220 is even higher due to the higher interest rate so all the more reason for him to wait:
2 1 1.2 100 100 120 100 220.
Chapter 5, Questions 35‐40
0
210
0 100
100
220
183.3,190.9Current
Future