Price Theory Final Exam

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17 Chapters
558 Verified Questions
 Price Theory
Final Exam
Course Introduction
Price Theory explores the fundamental principles underlying how prices are determined

in markets and how they allocate resources in an economy. The course examines the

behavior of consumers and producers, analyzing demand and supply functions, market

equilibrium, and the role of competition. It also addresses issues such as price

discrimination, externalities, and the impact of government interventions in pricing.

Through theoretical models and real-world applications, students develop a solid

understanding of how prices function as signals and incentives, shaping decisions at

both the individual and aggregate levels.

Recommended Textbook
Intermediate Microeconomics and Its Application 12th Edition by Walter Nicholson

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17 Chapters
558 Verified Questions
558 Flashcards
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Page 2
 Chapter 1: Economic Models
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Sample Questions
Q1) If \(Y = X ^ { 2 } + Z ^ { 2 }\) ,the contour lines.
A)are concentric circles.
B)are parabolas.
C)are hyperbolas.
D)intersect whenever either X or Z is zero.
Answer: A

Q2) If society is producing a combination of goods on its production possibilities frontier

A)it must be employing all available resources.
B)it must be growing.
C)it is using all the available natural resources but may not be using all available labor
resources.
D)Both a and b
Answer: A

Q3) The slope of the production possibility frontier shows

A)how inputs must be changed to keep them fully employed.
B)the technically efficient combinations of the two goods.
C)how demanders are willing to trade one good for another.
D)the opportunity cost of one good in terms of the other.
Answer: D

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Page 3
 Chapter 2: Utility and Choice
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Sample Questions
Q1) The point of tangency between a consumer's budget constraint and his or her
indifference curve represents
A)complete satisfaction for the consumer.
B)the equivalence of prices the consumer pays.
C)constrained utility maximization for the consumer.
D)the least he or she can spend.
Answer: C

Q2) If an individual has a constant MRS of shoes for sneakers of 3/4 (that is,he or she is
always willing to give up 3 pairs of sneakers to get 4 pairs of shoes)then,if sneakers and
shoes are equally costly,he or she will
A)buy only sneakers.
B)buy only shoes.
C)spend his or her income equally on sneakers and shoes.
D)wear sneakers only 3/4 of the time.
Answer: A

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Page 4
 Chapter 3: Demand Curves
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Sample Questions
Q1) If goods X and Y are complements,then the cross price elasticity of demand between
them will be
A)positive.
B)negative.
C)zero.
D)infinity.
Answer: B

Q2) If an individual's housing purchases are always a constant fraction of income,then

the income elasticity of demand for housing is
A)greater than one.
B)equal to one.
C)less than one.
D)Cannot be determined from the available information.
Answer: B

Q3) Two goods,X and Y,are called substitutes if

A)an increase in PX causes more Y to be bought.
B)an increase in PX causes less Y to be bought.
C)an increase in PY causes less Y to be bought.
D)an increase in income causes more of both X and Y to be bought.
Answer: A

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Page 5
 Chapter 4: Uncertainty
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Sample Questions
Q1) Suppose a lottery ticket costs $1 and the probability that a holder will win nothing is
99%.What must the jackpot be for this to be a fair bet?
A)10
B)100
C)1,000
D)10,000

Q2) Continuing with the same vacation-insurance company from the preceding
question,what vacation-day price(s)would be acceptable to both the family and the
insurance company?
A)2 only
B)3 only
C)2 or 3
D)4

Q3) Probability is sometimes defined as

A)the expected profit of a fair bet.
B)the most likely outcome of a given experiment.
C)the outcome that will occur on average for a given experiment.
D)the relative frequency with which an event will occur.

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Page 6
 Chapter 5: Game Theory
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Sample Questions
Q1) Consider the same setup with the curved final exam as in the previous question.Now
suppose the students move sequentially.Which best describes the outcome in the
subgame-perfect equilibrium?
A)Brainiacs study and Numbskulls party regardless of who moves first.
B)Brainiacs party and Numbskulls study regardless of who moves first.
C)The party moving first studies.
D)The party moving first parties.

Q2) When a game has multiple equilibria,a useful method to sort out which one would
be the "best" prediction is to
A)find the one (if any) in which both players are better off than in any other equilibrium.
B)find the equilibrium that is symmetric,if any.
C)find the one which seems "focal",if any.
D)all of the above.

Q3) The Prisoners' Dilemma is so named because

A)the Nash equilibrium is one of the worst outcomes for the players.
B)the game has no Nash equilibrium.
C)the game is zero-sum.
D)players end up earning a lighter sentence than the prosecutor would like.

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Page 7
 Chapter 6: Production
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Sample Questions
Q1) The marginal physical product of labor is defined as
A)a firm's total output divided by total labor input.
B)the extra output produced by employing one more unit of labor while allowing other
inputs to vary.
C)the extra output produced by employing one more unit of labor while holding other
inputs constant.
D)the extra output produced by employing one more unit of capital while holding labor
input constant.

Q2) A rise in the average productivity of labor

A)always reflects technical progress.
B)reflects technical progress if other input usage hasn't changed.
C)reflects technical progress only if labor input hasn't changed.
D)reflects technical progress only if the quantity of output is increased.

Q3) If Q = K^1/3L² the MP_K is

A)constant
B)diminishing
C)increasing

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Page 8
 Chapter 7: Costs
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Sample Questions
Q1) Suppose MPL = 20 and MPK = 40 and the rental rate on capital is $10. If the level of
production is currently efficient,the wage rate must be
A)$10
B)$5
C)$20
D)$40

Q2) Short-run total cost is the sum of

A)short-run fixed cost,short-run variable cost,and short-run marginal costs.
B)short-run fixed cost and short-run marginal costs.
C)short-run variable cost and short-run costs.
D)short-run fixed cost and short-run variable cost.

Q3) In the short run,

A)all inputs are fixed.
B)all inputs are variable.
C)some inputs are fixed.
D)no production occurs.

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Page 9
 Chapter 8: Profit Maximization and Supply
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Sample Questions
Q1) If an unregulated electric company is a monopolist,faces demand of Q = 100 -
50P,and has constant total costs,the profit-maximizing level of output is ?
A)50
B)100
C)25
D)12.5

Q2) If a firm wished to maximize total revenues it should produce where

A)marginal cost is zero.
B)marginal revenue is zero.
C)marginal revenue is equal to marginal cost.
D)marginal revenue is equal to price.

Q3) A firm that sought to "maximize market share" would choose to produce an output
level for which marginal revenue was equal to
A)marginal cost
B)average cost.
C)price.
D)zero.

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Page 10
 Chapter 9: Perfect Competition in a Single Market
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Sample Questions
Q1) One example of Ricardian rent is
A)rent paid to landlords under price controls.
B)the difference between the wage of a star baseball player and what he could earn
outside of baseball.
C)the amount paid to a seller above the equilibrium price of tourist class tickets in order
to receive higher quality seats in first class.
D)the price rise of wool from a disease among sheep.

Q2) A deadweight loss of consumer and/or producer surplus occurs when

A)producers fail to maximize profits.
B)mutually beneficial transactions cannot be completed.
C)consumers do not maximize their utility.
D)the price of inputs increases.

Q3) If a 1 percent increase in price leads to a .7 percent increase in quantity supplied in

the short run,the short-run supply curve is
A)elastic.
B)inelastic.
C)unit elastic.
D)perfectly inelastic.

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Page 11
 Chapter 10: General Equilibrium and Welfare
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Sample Questions
Q1) In free exchange among two individuals the position on the contract curve finally
arrived at will,among other things,depend on: Which of these correctly completes the
statement?
I.The bargaining strength of each individual.
II.The initial endowments of the individuals.
III.The individuals' preferences.
A)Only III.
B)Only II.
C)I and III,but not II.
D)II and III,but not I.
E)I,II,and III.

Q2) The reason externalities distort the allocation of resources is that

A)too few goods are usually produced.
B)firms often go out of business because of the externality.
C)a firm's private costs do not reflect the social cost of production.
D)regulating externalities uses scarce resources.

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Page 12
 Chapter 11: Monopoly
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Sample Questions
Q1) Which is not an example of price discriminating by separating markets?
A)offering discounts for students with IDs.
B)charging lower prices for airline tickets with a Saturday stay-over.
C)selling 13 bagels (a "baker's dozen") for the price of 12.
D)selling snowblowers at a discount in relatively warmer climates.

Q2) If a monopoly is maximizing profits,

A)price will always be greater than the elasticity of demand.
B)price will always equal marginal cost.
C)price will always be greater than marginal cost.
D)price will always equal marginal revenue.

Q3) Possible benefits of a monopoly include which of the following (choose all that
apply)?
A)a savings of fixed costs because only one firm supplies quantity demanded.
B)greater opportunities for research due to long-run positive economic profits.
C)government regulation is more effective because the firm is "too big to fail."
D)goods and services are provided at a lower price than under perfect competition
because of a monopoly's decreasing average cost curve.

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Page 13
 Chapter 12: Imperfect Competition
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Sample Questions
Q1) Two firms engage in Bertrand competition in differentiated products. After doing all
the appropriate calculations,you find the best-response functions are PB = 2.5 + .15PC
and PC = 1.5 + .075PB. Without doing any further calculations,can you determine the
relationship between their Nash equilibrium prices?
A)Yes,PB > PC
B)Yes,PC > PB
C)Yes,PB = PC
D)No; it cannot be determined.

Q2) Consider the same market for nonalcoholic beer as in the previous question. How
many "units" of beer will Cudweiser produce?
A)667
B)1,667
C)2,333
D)3,000

Q3) Which factor would facilitate tacit collusion among firms in a market?
A)an increase in the number of firms.
B)a decrease in the probability the market will continue into future periods.
C)a decrease in the interest rate.
D)none of these.

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Page 14
 Chapter 13: Pricing in Input Markets
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Sample Questions
Q1) Suppose a firm is a monopolist in its output market and a perfect competitor in its
input market.The demand for its output is \(Q _ { D } = 1800 - P\) .The firm's production
is given by \(Q = 10 \sqrt { L }\) and the market wage is $50.The profit-maximizing level
of labor input is
A)100
B)1,000
C)3,600
D)5,000

Q2) If a profit-maximizing firm is a price taker in both the input and output markets,its
marginal revenue product of labor is given by
A)the price of its output times labor's marginal physical productivity.
B)the marginal value product of labor.
C)the marginal revenue product of capital times the ratio of the wage rate to the rental
rate on capital.
D)all of the above.

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Page 15
 Chapter 14: Capital and Time
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Sample Questions
Q1) The two-period budget line for incomes Y1 and Y2 and consumption C1 and C2 can
be written as \(C _ { 2 } = Y _ { 1 } ( 1 + r ) + Y _ { 2 } - ( 1 + r ) C _ { 1 }\) ,if the interest rate
were to fall the budget line would
A)shift to the left in a parallel fashion
B)shift to the right in a parallel fashion
C)rotate counter-clockwise pivoting on Y1,Y2
D)rotate clockwise pivoting on Y1,Y2

Q2) Draw a two period budget line where the borrow/lending rate of interest,r,allows
consumers to choose consumption in each of the two periods.C₁ and
C₂ given their anticipated income on two periods,Y₁and
Y₂.The slope is
A)r
B)-r
C)1 + r
D)-(1 + r)

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Page 16
 Chapter 15: Asymmetric Information
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Sample Questions
Q1) Adverse selection arises in insurance markets because
A)insurance buyers have more information than insurance sellers.
B)insurance sellers have more information than insurance buyers.
C)individuals can select which insurance company to patronize.
D)insurance companies can exercise too much control over whom they insure.

Q2) Which are social costs associated with the inability of shareholders to observe an
executive's effort? (You may choose more than one.)
A)Excessive insurance offered.
B)The executive has to be exposed to risk to induce effort,and risk is costly.
C)The executive ends up exerting less than first-best effort.
D)Excessive effort induced.

Q3) Which auction format generates the most revenue for the seller?
A)First price.
B)Second price.
C)They generate the same expected revenue.
D)Depends on the environment.

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Page 17
 Chapter 16: Externalities and Public Goods
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Sample Questions
Q1) Left to their own,private markets tend to
A)under-allocate resources to public goods.
B)allocate the economically efficient amount of resources to public goods.
C)over-allocate resources to public goods.

Q2) Perfectly competitive markets will tend to under-allocate resources to nonexclusive

public goods because
A)these goods are produced under conditions of increasing returns to scale.
B)no single individual can appropriate the total benefits provided by the purchase of
such goods.
C)these goods are best produced under conditions of monopoly.
D)no private producer can provide the capital necessary to produce such goods.

Q3) Bargaining costs are generally high in cases involving environmental externalities
because
A)there are strong incentives to be a free rider.
B)many individuals may be affected by the externalities.
C)it is difficult to measure the costs of the externalities.
D)all of the above.

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Page 18
 Chapter 17: Behavioral Economics
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Sample Questions
Q1) Return to the market for cigarettes from the previous question. What per-unit tax
could the government levy to eliminate the deadweight loss from the behavioral bias?
A)0
B)1
C)50
D)100

Q2) Jan is a hyperbolic discounter. She puts weight 1 on utility earned in the current
period but only weight .5 on utility earned in future periods. In period 1 she comes up with
a plan,which involves taking some action that leads to a loss of C utils in period 2 but
provides a benefit of B utils in period 3. What values of B and C will lead her to behave
inconsistently and not follow through on her plans?
A)C < B < 2C.
B)B < C.
C)B > 2C.
D)B < C < 2B.

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Page 19