Workbook for Principles of Microeconomics

Frontmatter

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.

 

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.

 

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.

 

Martin Kolmar, Magnus Hoffmann

4. Supply and Demand

Abstract

When income increases, the demand of an ordinary good decreases.

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.

 

Martin Kolmar, Magnus Hoffmann

6. Externalities and the Limits of Markets

Abstract

A local government is thinking of prohibiting smoking in restaurants. Assume that there is a negative interdependency between smokers and nonsmokers.

1.

A general smoking prohibition would lead to efficiency, because it internalizes the externality of smoking.

 

2.

Air is a public good, because neither the principle of rivalry nor the principle of excludability applies.

 

Martin Kolmar, Magnus Hoffmann

7. Decisions and Consumer Behavior

Abstract

Let u(x₁, x₂) = x₁ + x₂ be a utility function. There exists no preference relation which is represented by this utility function.

Martin Kolmar, Magnus Hoffmann

8. Decisions Under Uncertainty and Risk

Abstract

Factors that are beyond the control of a decision-maker but have an impact on the outcome of a chosen strategy are called states of the environment.

Martin Kolmar, Magnus Hoffmann

9. Principles of Game Theory

Abstract

Consider the sequential game represented in Fig. 9.2.

Martin Kolmar, Magnus Hoffmann

10. Behavioral Economics

Abstract

1.

Libertarian paternalism is a position holding that government restrictions on individual behavior are justified if citizens voluntarily consent to them.

 

2.

A nudge is a policy measure that changes human behavior in a particular way without coercion by the state.

 

3.

Auxiliary assumptions should be avoided because they are not empirically testable.

 

4.

Bounded rationality refers to behaviors that violate transitivity as the central assumption of rationality.

 

Martin Kolmar, Magnus Hoffmann

11. Foundations of Perception and Decision-Making

Abstract

1.

The multilevel model of adaptation distinguishes between genetic, epigenetic, effective, cognitive, and metacognitive levels of adaptation.

 

2.

Operant conditioning is an associative learning mechanism.

 

3.

Formation of habits always leads to better adaptation to the environment.

 

4.

Positive psychology distinguishes four factors that are important for a good life.

 

Martin Kolmar, Magnus Hoffmann

12. Costs

Abstract

A firm has a cost function C(y) = y³ + 50:

1.

The marginal costs are MC(y) = 2 ⋅ y².

 

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→∞.

 

Martin Kolmar, Magnus Hoffmann

13. A Second Look at Firm Behavior Under Perfect Competition

Abstract

1.

Assume that a profit-maximizing firm offers a strictly positive and finite quantity. The firm determines its output according to the “price-equals-marginal-costs” rule.

 

2.

A firm under perfect competition always applies the “price-equals-marginal-costs” rule if revenues cover at least average variable costs.

 

3.

A profit-maximizing firm will never incur losses, since it can avoid them by closing down.

 

4.

In the long-run equilibrium with free entry and exit, the producer surplus of a firm is always zero.

 

Martin Kolmar, Magnus Hoffmann

14. Firm Behavior in Monopolistic Markets

Abstract

The optimality condition “marginal-revenue-equals-marginal-costs” is applicable in monopolistic but not in perfectly competitive markets.

Martin Kolmar, Magnus Hoffmann

15. Firm Behavior in Oligopolistic Markets

Abstract

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

Martin Kolmar, Magnus Hoffmann

16. Elasticities

Abstract

This chapter refers to Chapter 17.5 in the textbook.

Martin Kolmar, Magnus Hoffmann