main-content

## Über dieses Buch

This is the companion workbook for the textbook Principles of Microeconomics. Each chapter features a wide variety of exercises, ranging from basic multiple-choice questions to challenging mathematical problems and case study scenarios.
The textbook pursues an integrative approach to modern microeconomics by critically reflecting on the main findings of economics from a philosophical standpoint and comparing them to approaches found in the social sciences. It adopts an institutional perspective to analyze the potential and limitations of different market types, and highlights implications for the design of the legal system and business practices throughout. In addition to traditional rational-choice models, important findings from behavioral economics and psychology are also presented.

## Inhaltsverzeichnis

### 1. First Principles

Abstract
1.
The more aspects of reality are taken into consideration, the more useful an economic model is.

2.
According to Karl Popper, a basic requisite for the quality of scientific theories is that one can refute them.

3.
Concerning logical statements: one can derive a false hypothesis from false assumptions.

4.
Modern microeconomics is macro-founded.

1.
Economics, as a positive science, tries to explain why social phenomena work the way they work. Economics, as a negative science, tries to explain why social phenomena do not work the way they work.

2.
If an economist tries to determine how a country should increase taxes in the best possible way, she or he is practicing normative science.

3.
If an assumption in a scientific theory is incorrect, the theory must be discarded because it cannot contribute to the understanding of reality.

4.
In economics, one investigates the interplay of human behavior on the individual level.

1.
With regards to economics, positive science answers the question as to how humans should cope with the phenomena of scarcity.

2.
Quantities of goods that are not on the production-possibility frontier, cannot be produced.

3.
Modern macroeconomics is not “micro-founded” because it concentrates on economic aggregates.

4.
Opportunity costs are costs of the past that cannot be influenced any longer.

Martin Kolmar, Magnus Hoffmann

### 2. Gains From Trade

Abstract
There are two individuals, A and B, who can produce two goods, 1 and 2. The production-possibility frontiers of both individuals are $$x_{1}^{A}=a-b\,\cdot\,x_{2}^{A}$$ and $$x_{1}^{B}=c-d\,\cdot\,x_{2}^{B}$$, in which a,b,c and d are strictly larger than zero.
1.
If b > d, then A has a comparative advantage in the production of good 1.

2.
If a > c, then A has an absolute advantage in the production of both goods.

3.
If a = c, then no individual has a comparative advantage.

4.
If a = 100 and b = 2, then A can produce 50 units of the second good at maximum.

1.
A situation in which there is no trade between countries is defined as “autarky.”

2.
The theory of comparative advantage is only valid for linear production-possibility frontiers.

3.
If a country has a comparative disadvantage in the production of a good, it should not trade this good with other countries.

4.
All countries always benefit from specialization and trade.

Charlotte and Phil are both bakers. Charlotte can either bake 20 cakes, 15 pizzas or any linear combination of the two in one day. Phil can either bake 10 cakes, 5 pizzas or any linear combination of the two in one day.
1.
Charlotte has a comparative advantage in baking pizza.

2.
Charlotte has an absolute advantage in baking pizza.

3.
Phil’s opportunity costs for a pizza are equivalent to two cakes.

4.
Charlotte’s opportunity costs for cake are lower than Phil’s.

Martin Kolmar, Magnus Hoffmann

### 3. Markets and Institutions -- Introduction

Abstract
1.
A market with few consumers and many suppliers is called a restricted monopsony.

2.
A market with one consumer and one supplier is called a bilateral monopoly.

3.
A market with many suppliers and many consumers is always a polypoly.

4.
A market with few suppliers and one consumer is called a restricted monopoly.

1.
There are more suppliers in an oligopoly than in a restricted monopsony.

2.
There are more suppliers in a bilateral oligopoly than in a monopsony.

3.
The only difference between a oligopsony and an oligopoly is the number of consumers.

4.
The number of suppliers in a bilateral oligopoly is always smaller than in an oligopsony.

1.
The market for airplane travel is an example of an oligopoly.

2.
There is exactly one consumer in a bilateral monopoly, a restricted monopsony, and a monopsony.

3.
The number of the market participants in a monopoly is always at least as large as in a bilateral monopoly.

4.
The car industry is an example of a market with monopolistic competition.

1.
False. A market with few consumers and many suppliers is called an oligopsony. See Chapter 3.

2.
True. This is true by definition. See Chapter 3.

3.
True. This is true by definition. See Chapter 3.

4.
False. Restricted monopolies have one supplier and few consumers. See Chapter 3.

Martin Kolmar, Magnus Hoffmann

### 4. Supply and Demand

Abstract
1.
When income increases, the demanded quantity of an ordinary good decreases.

2.
If the price of an inferior good increases, then the demand decreases.

3.
Two goods are substitutes for each other if the demand for each good decreases when the price of the other good increases.

4.
The demand for a good increases as its price increases. Hence, it is a Giffen good.

Figure 4.1 shows the relevant market for the car firm CarMaker. For the following questions, please take the demand x 1, the supply y 1 and the equilibrium in point a as reference point.
1.
A rival firm, which produces a substitute for the cars by CarMaker, lowers the price of its cars. The new equilibrium is at a point such as i.

2.
Due to a process of innovation, CarMaker can reduce the marginal costs. The new equilibrium is at a point such as h.

3.
The government increases the motorway toll. The new equilibrium is at a point such as d.

4.
The government reduces the mineral oil tax. The new equilibrium is at a point such as f.

Assume that the market for corn is perfectly competitive. Supply is increasing and demand is decreasing in price.
1.
A large amount of the crop is destroyed by storms. The equilibrium price thus increases, ceteris paribus.

2.
All harvesters’ wages decrease. The market supply function shifts, ceteris paribus, to the left.

3.
A new technology allows the production of gasoline from corn. The equilibrium demand for corn decreases and the equilibrium quantity increases, ceteris paribus.

4.
The income of the consumers of corn increases. The equilibrium price for corn thus increases, ceteris paribus.

Martin Kolmar, Magnus Hoffmann

### 5. Normative Economics

Abstract
1.
An allocation of given quantities of goods and services is defined as efficient in consumption if it is not possible to reallocate the resources in such a way as to increase the production of one good without reducing the production of another good.

2.
An allocation of given quantities of resources is defined as efficient in production if it is not possible to increase the well-being of at least one individual without reducing the well-being of another individual.

3.
An allocation is called efficient in production if it is possible to increase the production of at least one good without reducing the production of some other good by reallocating the given quantities of resources.

4.
If it is impossible, by reallocating the given quantities of resources, to improve an individual’s well-being without reducing another individual’s well-being, the allocation is efficient in consumption.

1.
The First Theorem of Welfare Economics states that every equilibrium in a polypoly maximizes consumer surplus.

2.
An equilibrium in a perfectly competitive market is Pareto efficient because it maximizes the sum of consumer and producer surplus.

3.
The Second Theorem of Welfare Economics states that, under specific conditions, every Pareto-efficient allocation can be achieved trough the market mechanisms.

4.
From the First Theorem of Welfare Economics one can deduce that only the equilibirum in a polypoly maximizes the sum of consumer and producer surplus.

Martin Kolmar, Magnus Hoffmann

### 6. Externalities and the Limits of Markets

Abstract
A local government is thinking of prohibiting smoking in restaurants. Check the following arguments for their economic correctness. Assume that, by smoking, smokers have a negative interdependence with non-smokers.Now, assume that smokers and non-smokers negotiate in a restaurant and strike a deal. The smokers receive the right to smoke or the non-smokers receive the right for the smoking to cease.
1.
The originator of the external effect and the originator of the interdependency are one and the same.

2.
Interdependencies are external effects that have not been internalized.

3.
The Coase Irrelevance Theorem states that, in an economy with fully allocated property rights, the market equilibrium is always efficient.

4.
If a group of individuals suffers from air pollution caused by a local chemical factory, this is a negative external effect.

Martin Kolmar, Magnus Hoffmann

### 7. Decisions and Consumer Behavior

Abstract
1.
Let $$u(x_{1},x_{2})=x_{1}+x_{2}$$ be a utility function. There exists no preference relation which is represented by this utility function.

2.
Let $$x_{1}\succ x_{2}$$ and $$x_{2}\succ x_{3}$$. Then, the assumption of transitivity implies that $$x_{1}\succ x_{3}$$.

3.
If $$u(x_{1},x_{2})=x_{1}\cdot(x_{2})^{5}$$ is a utility representation of a preference ordering, then $$v(x_{1},x_{2})=\frac{1}{5}\ln x_{1}+\ln x_{2}$$, too, is a utility representation of the same preference ordering.

4.
Preferences that fulfill the principle of monotonicity are always convex.

Assume an individual has income b > 0 at his disposal, which he can spend on two goods of quantities x 1 and x 2.
1.
A consumer’s preference relation is represented by the utility function $$u(x_{1},x_{2})=x_{1}\cdot x_{2}$$. Let x 1 be marked on the x-axis and x 2 on the y-axis. If so, the price-consumption path for all $$p_{1}> 0,p_{2}> 0$$ is a straight line through the origin with a slope of $$\frac{p_{1}}{p_{2}}$$.

2.
For an individual, two goods are perfect complements. If so, the cross-price elasticity of the Marshallian demand always equals zero.

3.
The individual’s demand will decrease if the price of good 1 decreases, provided that x 1 is an inferior good.

4.
For an individual, two goods are perfect substitutes. In such case, at the optimum, the demand for one good will always be zero.

Martin Kolmar, Magnus Hoffmann

### 8. Costs

Abstract
1.
The marginal costs intersect the average variable costs at their minimum.

2.
The producer surplus is equivalent to profits plus variable costs.

3.
In the short run, a firm will supply a positive amount to the market until the profits at least cover the fixed costs.

4.
The average variable costs of the cost function $$C(y)=y^{3}+2y+10$$ are $$AVC(y)=y^{2}+2$$.

An entrepreneur produces a good by means of capital and his or her own labor.
1.
The economic costs for one unit of his or her own labor equal the wage rate that the entrepreneur could have earned in a different job.

2.
The economic costs for one unit of capital can become negative.

3.
The economic costs for one unit of capital lower the entrepreneur’s profit.

4.
The economic costs for one unit of capital are equal to the market interest rate.

A firm has the cost function $$C(y)=y^{3}+50$$.
1.
The marginal costs are $$MC(y)=2\cdot 2y^{2}$$.

2.
The average costs are $$AC(y)=y^{2}+\frac{50}{y}$$.

3.
The average costs are monotonically increasing in y.

4.
Average costs and average variable costs are identical for $$y\to\infty$$.

1.
The function of technological fixed costs is a continuous function.

2.
The average cost function cannot be identical to the marginal cost function.

3.
The average fixed costs decrease as production increases for all y > 0.

4.
Fixed costs can be divided into technological and technical fixed costs.

Martin Kolmar, Magnus Hoffmann

### 9. A Second Look at Firm Behavior Under Perfect Competition

Abstract
Assume a profit-maximizing firm.
1.
Assume that the firm supplies a strictly positive and finite quantity. Then, the rule “marginal revenues = marginal costs” holds in the optimum.

2.
A firm in perfect competition always supplies according the rule “price = marginal costs” if the resulting revenues at least cover the average variable costs.

3.
The firm will never make losses in its optimum because it can avoid these by leaving the market.

4.
In the long-run market equilibrium with free market entry and exit, a firm’s producer surplus is always equal to zero.

Assume a profit-maximizing firm with a cost function of $$C(y)=y^{2}+49$$ in a market with perfect competition.
1.
The average costs of this firm are equal to the marginal costs at the minimum of the average cost curve.

2.
The average variable costs are $$AVC(y)=2y+\frac{49}{y}$$.

3.
Assume that the firm only produces with one factor (labor), l. The wages are w = 4. That means that the production function of the firm is $$y=4\cdot l^{\frac{1}{2}}$$.

4.
In the long-run market equilibrium with perfect competition and with free market entry and exit, the equilibrium price is p = 14.

Martin Kolmar, Magnus Hoffmann

### 10. Firm Behavior in Monopolistic Markets

Abstract
1.
The optimality condition “marginal costs = marginal revenues” characterizes the optimality condition only in a monopolistic but not in a perfectly competitive market.

2.
Assume a non-price-discriminating monopolist who faces a decreasing demand function. Marginal revenues can be decomposed into a price and a quantity effect, and the price effect is always smaller than the quantity effect.

3.
Assume a non-price-discriminating monopolist. Marginal revenues consist of a price and quantity effect. The price effect is always larger than the price effect under perfect competition.

4.
If a firm owns a patent for a product, it can enforce prices above marginal costs, because the patent leads to a monopoly.

Martin Kolmar, Magnus Hoffmann

### 11. Principles of Game Theory

Abstract
Consider the following sequential game (Fig. 11.1).
Player 1 has the strategies {No entry, Entry}, while player 2 has the strategies {Fight, Concede}.
1.
(No entry, Fight) is a Nash equilibrium.

2.
(No entry, Concede) is a Nash equilibrium.

3.
(Entry, Fight) is a Nash equilibrium.

4.
(Entry, Concede) is a Nash equilibrium.

Consider the following game in normal form (Table 11.1).
1.
Strategy U is dominant for player 1.

2.
$$(D,R)$$ is a Nash equilibrium in this game.

3.
$$(U,L)$$ is a Nash equilibrium in this game.

4.
$$(D,R)$$ is an equilibrium in dominant strategies in this game.

Consider the following game in extensive form (Fig. 11.2).
1.
The strategy sets of the players are $$S_{1}=\{Y,X\}$$ for player 1 and $$S_{2}=\{O,U\}$$ for player 2.

2.
In order to maximize his utility, player 2 will never choose O.

3.
This is a simultaneous-move game.

4.
The following game in normal form (Table 11.2) has the same Nash equilibrium/equilibria as the former extensive-form game.

Martin Kolmar, Magnus Hoffmann

### 12. Firm Behavior in Oligopolistic Markets

Abstract
1.
In a Cournot oligopoly, the firms disregard the influence of their behavior on the price.

2.
In a duopoly, collusive behavior can raise overall profits.

3.
In a duopoly, collusive behavior is the equilibrium strategy.

4.
In a Bertrand oligopoly with symmetric firms and constant marginal costs, the equilibrium price is equal to marginal costs.

In an oligopolistic market, all firms have identical cost functions $$C(y)=c\cdot y$$, with c ≥ 0.
1.
If the firms are in Bertrand price competition, there is no deadweight loss.

2.
Collusive behavior cannot occur, because the firms have constant marginal costs.

3.
In both Bertrand price competition and in Cournot quantity competition, the equilibrium market price is larger than marginal costs.

4.
If the demand curve is linear and falling, the total quantity of the good supplied in Cournot competition will be lower than in Bertrand competition.

Consider a duopoly market in which two firms produce a good with identical constant marginal costs of MC = 0. The demand for the total quantity y in the market is $$P(y)=300-y$$.
1.
In the equilibrium with Bertrand price competition, 300 units of the good are traded.

2.
In the equilibrium with Cournot quantity competition, 200 units of the good are traded.

3.
In equilibrium, the consumer surplus in Bertrand price competition is larger than in Cournot quantity competition.

4.
The marginal costs have to be smaller than 300, in order for a positive quantity to be traded in a Cournot competition.

Martin Kolmar, Magnus Hoffmann

### 13. Elasticities

Abstract
1.
Elasticities are always independent of the unit of measurement.

2.
The point elasticity and the arc elasticity of a linear demand function are always identical.

3.
The value of the price elasticity of a demand function $$x(p)=\frac{10}{p}$$ always equals 10.

4.
The price elasticity of a supply function is influenced by the production functions of the firms supplying in the market.

Market research has measured the following market demand function: $$x(p)=1{,}000-300\,p$$. The market supply function is $$y(p)=\alpha+100\,p$$, with $$-\frac{1{,}000}{3}<\alpha<1{,}000$$.
1.
The price elasticity of demand is constant.

2.
The market demand in equilibrium reacts inelastically to changes in the price

3.
The market supply reacts inelastically to changes in the price if α > 0.

4.
The market supply in equilibrium reacts elastically to changes in the price if α < 0.

Thilo wants to consistently spend half of his income on apparel.
1.
The income elasticity of his demand for apparel is (in absolute terms) 0.5.

2.
The price elasticity of his demand for apparel is 0.

Carl wants to spend a constant percentage of his income on apparel.
3.
The income elasticity of his demand for apparel is (in absolute terms) 0.5.

4.
The price elasticity of his demand for apparel is 0.

Martin Kolmar, Magnus Hoffmann
Weitere Informationen