(JHU) AS.180.301 Microeconomic Theory Final Assessment Review Q & S 2024, Exams of Microeconomics

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AS.180. 301

Microeconomic Theory

Final Assessment Review

Q & S

1. Multiple Choice: If the price elasticity of demand for a product is less than one, we say the demand is: a) Elastic b) Inelastic c) Unitary d) Perfectly elastic Answer : b) Inelastic Rationale: Price elasticity of demand less than one indicates that the percentage change in quantity demanded is less than the percentage change in price, hence, demand is inelastic.
2. True/False: A Giffen good is a product that people consume more of as the price rises, violating the basic laws of demand. Answer : True Rationale: A Giffen good is an inferior good with an upward-sloping demand curve, which means as the price increases, the quantity demanded also increases.
3. Fill-in-the-Blank: In a monopolistically competitive market, firms have _______ over the price of their product. Answer : Some control Rationale: Firms in monopolistic competition face a downward-sloping demand curve, which gives them some power to set prices above marginal cost.

7. Multiple Choice: If a firm is operating at a point where marginal cost equals marginal revenue, it is: a) Maximizing profit b) Minimizing loss c) Operating at a break-even point d) Likely to shut down Answer : a) Maximizing profit Rationale: When marginal cost equals marginal revenue, the firm cannot increase profit by producing more or less and is thus maximizing profit.
8. True/False: A Nash equilibrium is a situation where each player's strategy is optimal given the strategies of all other players in the game. Answer : True Rationale: A Nash equilibrium occurs when no player has an incentive to deviate from their strategy, given the strategies of the others.
9. Fill-in-the-Blank: The _______ effect describes how a consumer's demand for a good increases as their income increases, assuming the good is normal. Answer : Income Rationale: The income effect reflects the change in demand for a good resulting from a change in the consumer's income, with normal goods being more demanded as income rises.

10. Multiple Choice: Which of the following is a key assumption of the Coase theorem? a) There are significant transaction costs b) Property rights are not well-defined c) Parties can bargain without cost d) Externalities cannot be internalized Answer : c) Parties can bargain without cost Rationale: The Coase theorem states that if parties can bargain without cost and property rights are well-defined, they can solve the problem of externalities on their own.
11. True/False: Marginal utility can become negative if a consumer consumes too much of a good. Answer : True Rationale: If consumption continues beyond the point of maximum utility, additional units can lead to disutility, making marginal utility negative.
12. Fill-in-the-Blank: A _______ is a market structure characterized by a single seller, selling a unique product in the market. Answer : Monopoly Rationale: A monopoly exists when a single firm is the sole producer of a product for which there are no close substitutes.

Multiple Choice: Which of the following is an assumption of perfect competition in microeconomics? A) Homogeneous products B) High barriers to entry C) Oligopolistic market structure D) Price discrimination Answer : A) Homogeneous products Rationale: Perfect competition assumes that all firms produce identical or homogenous products, allowing consumers to view them as perfect substitutes. Fill-in-the-Blank: In microeconomics, the price elasticity of demand is calculated as the percentage change in quantity demanded divided by the percentage change in _. Answer : Price

Rationale: Price elasticity of demand measures how sensitive consumers are to changes in the price of a good or service. True/False: In a perfectly competitive market, individual firms have no control over the market price. Answer : True Rationale: In perfect competition, each firm is a price taker and must accept the market price set by supply and demand forces. Multiple Choice: Which of the following is a characteristic of a monopolistic market structure? A) Identical products B) No barriers to entry C) Many small firms D) Product differentiation Answer : D) Product differentiation

Which market structure is characterized by a small number of interdependent firms? A) Monopoly B) Oligopoly C) Perfect competition D) Monopolistic competition Answer : B) Oligopoly Rationale: Oligopoly consists of a small number of large firms whose actions affect each other's profits. Fill-in-the-Blank: In microeconomics, the concept of utility refers to the satisfaction or _ that a consumer derives from consuming a good or service. Answer : Happiness Rationale: Utility represents the level of satisfaction or happiness a consumer receives from consuming a particular good or service. True/False:

In a monopoly, the demand curve faced by the firm is the same as the market demand curve. Answer : False Rationale: In a monopoly, the firm faces the market demand curve, but its own demand curve is downward-sloping due to its market power. Multiple Choice: Which of the following is an example of a public good? A) Private healthcare B) National defense C) Fast food D) Luxury cars Answer : B) National defense Rationale: Public goods are non-excludable and non-rivalrous, such as national defense, making it difficult for private markets to provide them efficiently. Fill-in-the-Blank:

D) Collusion among firms Answer : C) Homogeneous products Rationale: Perfectly competitive markets involve identical or homogenous products with many buyers and sellers. Fill-in-the-Blank: The price elasticity of demand for a perfectly inelastic good is equal to _. Answer : 0 Rationale: Perfectly inelastic demand means quantity demanded does not change with price, resulting in a price elasticity of 0. True/False: In monopolistic competition, firms engage in non-price competition through advertising and product differentiation. Answer : True

Rationale: Firms in monopolistic competition differentiate their products through branding, advertising, and other non-price strategies to attract customers.

1. Which of the following best describes the concept of Pareto Efficiency? a. A situation where no one can be made better off without making someone else worse off. b. Allocating resources to maximize total utility. c. The process of maximizing total production. d. Achieving the highest profit margin. ** Answer :** a Rationale: Pareto Efficiency is a state of resource allocation where it is impossible to make anyone better off without making someone else worse off.
2. In the context of consumer choice theory, the substitution effect describes: a. How consumers switch from inferior goods to normal goods. b. How a change in the price of a good affects the quantity demanded, holding utility constant. c. How income changes affect the quantity demanded of a good. d. The difference between income and substitution effects.

Rationale: Perfect competition is characterized by many small firms, homogeneous products, and free entry and exit from the market, meaning no single firm can influence the market price.

5. The deadweight loss of taxation is: a. The loss in social surplus due to taxes. b. The net loss in tax revenue due to transfers. c. The decrease in consumer surplus due to price rise. d. The reduction in producer surplus due to subsidy removal. ** Answer :** a Rationale: Deadweight loss of taxation is the reduction in total social welfare resulting from the market distortion created by the imposition of a tax.

Fill-in-the-Blank Questions

6. If the price elasticity of demand is greater than one, the demand is considered ________. ** Answer :** elastic Rationale: Demand is elastic when the percentage change in quantity demanded exceeds the percentage change in price.
7. In a monopoly, the firm faces a ________ demand curve.

** Answer :** downward sloping Rationale: A monopoly faces the market demand curve, which slopes downward, indicating that the firm must lower the price to sell more units.

8. The long-run average cost curve is typically ________ at first and then ________. ** Answer :** decreasing; increasing Rationale: Economies of scale lead to a decreasing average cost initially, followed by diseconomies of scale resulting in increasing average cost.
9. In the theory of the firm, the point where marginal cost equals marginal revenue is the point of ________ maximization. ** Answer :** profit Rationale: Profit maximization occurs where the additional cost of producing one more unit (MC) equals the additional revenue from selling that unit (MR).
10. The Cournot model assumes that firms make their decisions on ________, holding the output of competitors constant. ** Answer :** quantity Rationale: In the Cournot model, firms compete by choosing quantities, assuming the quantity produced by competitors is fixed.

15. True/False: Product differentiation is a characteristic feature of oligopolistic markets. ** Answer :** True Rationale: Oligopolistic markets often have few firms that may sell differentiated products.
16. True/False: Subgame perfect Nash equilibrium is a refinement of Nash equilibrium used in dynamic games. ** Answer :** True Rationale: Subgame perfect Nash equilibrium refines Nash equilibrium concepts to ensure consistent strategies in every subgame of the original game.
17. True/False: In the context of externalities, government intervention is always the most efficient solution to achieve social welfare optimization. ** Answer :** False Rationale: Government intervention can help correct externalities, but the most efficient solution depends on transaction costs and other factors; private solutions may sometimes be more efficient.
18. True/False: Firms in monopolistic competition have zero market power. ** Answer :** False

Rationale: Firms in monopolistic competition have some degree of market power due to product differentiation.

19. True/False: The Lerner Index measures a firm's price-setting power in a monopoly. ** Answer :** True Rationale: The Lerner Index is used to gauge the degree of monopoly power, calculated as (Price - Marginal Cost)/Price.
20. True/False: Marginal cost intersects average total cost at its lowest point. ** Answer :** True Rationale: Marginal cost intersects average total cost at the minimum point of average total cost, signifying optimal cost efficiency.

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More Multiple Choice Questions

21. Which of the following is an example of a positive externality? a. Pollution b. Public smoking c. Innovation spillovers