Foundations of Microeconomics Practice Exam
Course Introduction
Foundations of Microeconomics introduces students to the core principles that govern individual and firm decision-making in markets. Topics include the basic concepts of supply and demand, market equilibrium, consumer and producer behavior, price elasticity, and the role of government in promoting efficiency and equity. The course also examines how resources are allocated in different market structures, such as perfect competition, monopoly, and oligopoly, providing a solid analytical framework for understanding real-world economic issues and policy debates.
Recommended Textbook
Microeconomics Principles Applications and Tools 9th Edition by Arthur OSullivan
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Page 2
Chapter 1: Introduction: What Is Economics
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Sample Questions
Q1) According to the Application,which of the following increased the incentive to buy hybrid vehicles?
A) Purchases of hybrid vehicles qualified for a $3,400 subsidy from the federal government.
B) Oil prices decreased.
C) Hybrid vehicles were more expensive than regular vehicles.
D) Hybrid vehicles had similar emissions as the non-hybrid vehicles.
Answer: A
Q2) According to the book,the general consensus is that our policymakers do not know what they are doing and are managing our economy ineffectively.
A)True
B)False
Answer: False
Q3) Adam Smith is
A) considered the founder of economics.
B) responsible for a branch of economics bearing his name.
C) responsible for refining the model of supply and demand.
D) the author of this text.
Answer: A
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Page 3
Chapter 2: The Key Principles of Economics
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Sample Questions
Q1) What do economists mean when they say that there is "no such thing as a free lunch"?
Answer: Everything has a cost,even when you do not pay money for it.Suppose that somebody bought you lunch.The opportunity cost of that lunch is the lost opportunity to spend your time otherwise.
Q2) Economists argue that individuals should continue to consume until total benefit equals total cost.
A)True
B)False
Answer: False
Q3) Suppose it costs a firm $200 million to produce and promote a sequel.If the firm follows the marginal principle and decides not to produce the movie,which of the following must be true?
A) The firm believes that the marginal benefit is less than $200 million.
B) The firm believes that the marginal cost is larger than $200 million.
C) The firm believes that the marginal benefit is larger than $200 million.
D) The firm believes that the marginal cost is less than $200 million.
Answer: A
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Chapter 3: Exchange and Markets
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Sample Questions
Q1) According to the Application,Latvia has absolute advantage in the production of which good?
A) saw timber
B) grain
C) milk
D) none of the above
Answer: D
Q2) Can an individual with no absolute advantage find himself with a comparative in producing a good or a service?
Answer: Yes.An individual with no absolute advantage can have a comparative advantage.In the example provided in the book,Kate had the comparative advantage in gathering coconuts even though Fred had the absolute advantage over Kate in both gathering coconuts and catching fish.
Q3) A role of government is to ensure firms bear the full costs of their production.
A)True
B)False
Answer: True
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Chapter 4: Demand,supply,and Market Equilibrium
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Sample Questions
Q1) Two goods are complements if
A) the supply of one good decreases when the price of the other increases.
B) the supply of one good decreases when the price of the other decreases.
C) the demand for one good decreases when the price of the other increases.
D) the demand for one good decreases when the price of the other decreases.
Q2) Lettuce and spinach are substitute goods.All else equal,if a spinach beetle destroys half of the nation's spinach crop,we predict that the equilibrium price of lettuce will ________ and the equilibrium quantity of spinach will ________.
A) rise; rise
B) rise; fall
C) fall; rise
D) fall; fall
Q3) When the price of peanuts falls,
A) the demand for peanuts decreases.
B) the demand for peanuts increases.
C) the quantity of peanuts demanded decreases.
D) the quantity of peanuts demanded increases.
Q4) Explain how an excess supply would lead to a decrease in prices in an unregulated market.
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Chapter 5: Elasticity: a Measure of Responsiveness
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Sample Questions
Q1) Suppose that the price elasticity of demand for museum tickets is equal to 1.8.If the price of a museum ticket rises by 30 percent,what will happen to quantity demanded?
Q2) The price elasticity of demand for shirts is 0.75 and the price elasticity of supply for shirts is 2.5.If the supply of shirts rises by 10%,what will happen to the price of shirts?
Q3) Which of the following is NOT likely to be an example of a product with an inelastic demand?
A) water
B) cars
C) cigarettes
D) eggs
Q4) The price elasticity of demand is measured by dividing the percentage change in quantity demanded by the percentage change in price.
A)True
B)False
Q5) When the price of toothpaste increases by 15 percent,the quantity of toothpaste demanded falls by 30 percent.Calculate the price elasticity of demand.Is the demand for toothpaste elastic,inelastic,or unit elastic?
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Chapter 6: Market Efficiency and Government Intervention
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Sample Questions
Q1) All else equal,the more elastic the demand for a good,the larger the burden of a tax borne by consumers.
A)True
B)False
Q2) Rent controls are always efficient in helping the poor but they negatively impact the wealthy.
A)True B)False
Q3) Jerry has a guitar that he is willing to sell for $150.If someone offers him $175,his producer surplus is $25.
A)True
B)False
Q4) Figure 6.5 shows the market for bananas.Shade in the area of consumer surplus.Use the information provided to calculate consumer surplus.
Q5) A seller's willingness to accept is the minimum amount he is willing to accept as payment for a product,and is equal to the marginal cost of production.
A)True B)False
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Chapter 7: Consumer Choice: Utility Theory and Insights
From Neuroscience
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Sample Questions
Q1) With respect to the equimarginal rule,a person will maximize utility when the
A) total utility per dollar spent is equalized across products.
B) marginal utility is equalized across products.
C) total utility is equalized across products.
D) marginal utility per dollar spent is equalized across products.
Q2) Refer to Table 7.8.Jessy spends no more than $75 per month on movies and eating out.The price of a movie is $8 and the price of a meal out is $15.If Jessy watches two movies per month,what is her marginal utility per dollar?
A) 80
B) 12
C) 10
D) 9
Q3) Which of the following have economists and psychologists identified as types of puzzling consumer behavior?
A) Spending choices sometimes depend on the source of income.
B) The willingness to pay for a product sometimes is affected by irrelevant information.
C) Product choices are sometimes influenced by irrelevant alternatives.
D) all of the above
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Chapter 8: Production Technology and Cost
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Sample Questions
Q1) Refer to Table 8.5.If Sherry produces three pair of earrings,her total variable costs are
A) $26.67.
B) $140.00.
C) $175.00.
D) $225.00.
Q2) Your friend Harry has quit his $20,000-a-year job to start a business that rents fishing boats.He asks you to lend him $50,000 and agrees to pay you a 10% return on your $50,000 if he earns a profit.During the first year Harry's total revenue is $120,000 and his total cost for equipment and supplies are $100,000.Harry tells you that he cannot pay you any interest this year because he did not earn a profit.Is your friend Harry trying to cheat you?
Q3) If a firm is operating in the long run,the firm has flexibility in
A) altering all inputs.
B) building a new production facility.
C) modifying an existing facility.
D) all of the above
Q4) Explain why a firm's short-run marginal cost curve initially decreases and then increases in most cases.
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Page 10
Chapter 9: Perfect Competition
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Sample Questions
Q1) Assume that Bright Lights,Inc.is part of a perfectly competitive market.If Bright Lights,Inc.decides to raise their prices for vanity light fixtures by 20%,which of the following is most likely to result?
A) Bright Lights, Inc.'s supply curve will shift to the left and they will produce less output. B) Bright Lights, Inc. will increase the price of their output to compensate for the rise in their rent.
C) Bright Lights, Inc. will earn less profit but will produce the same amount of output. D) Bright Lights, Inc. will shut down immediately.
Q2) Recall the Application.If the quantity of blueberries demanded decreases,prices ________ in the short run and ________ as supply drops to meet demand. A) rise; stabilize B) fall; stabilize C) rise; fall D) fall; rise
Q3) Explain when a firm will shut down to minimize losses.Draw a graph to illustrate this situation.
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11
Chapter 10: Monopoly and Price Discrimination
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Sample Questions
Q1) How does the demand curve facing a monopoly firm compare with the demand curve facing a perfectly competitive firm?
Q2) Relative to a perfectly competitive market,a monopoly produces A) more output, charges higher prices, and earns economic profits.
B) more output, charges higher prices, and incurs economic losses. C) less output, charges higher prices, and earns only a normal profit. D) less output, charges higher prices, and earns economic profits.
Q3) A monopoly firm cannot affect the price,and is therefore a price taker.
A)True
B)False
Q4) Refer to Figure 10.5.The profit-maximizing price for the Memory Company's high school yearbook is
A) $0.
B) $9.
C) $16.
D) $20.
Q5) A monopoly is a market that consists of one buyer and many sellers.
A)True
B)False
Q6) How does rent-seeking behavior result in additional deadweight loss?
Page 12
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Chapter 11: Market Entry and Monopolistic Competition
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Sample Questions
Q1) Firms in monopolistically competitive markets sell identical products.
A)True
B)False
Q2) What encourages firms to enter markets?
A) The diversity of products offered must be small.
B) Firms believe they can violate patent protection with impunity.
C) No firms in the industry can experience losses.
D) Some existing firms in the market must be earning economic profits.
Q3) The cost of paying celebrities to advertise a product is always less than the increase in profits.
A)True
B)False
Q4) With respect to output production,a monopolistically competitive firm produces
A) a larger amount of output than a perfectly competitive firm.
B) an identical amount of output as a perfectly competitive firm.
C) a smaller amount of output than a perfectly competitive firm.
D) none of the above
Q5) As new firms enter an industry,the existing firms will decrease their output.
A)True
B)False
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Chapter 12: Oligopoly and Strategic Behavior
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Sample Questions
Q1) Consider the decision tree depicted in Figure 12.4 concerning a collusive agreement between firms owned by Bob and Donna.Each participant has the option of following the terms of the agreement or cheating on the terms of the agreement,but neither knows what the other will do.What is the dominant strategy for Bob? For Donna? Which strategy should each player choose to maximize potential gain? What do you think the outcome of this game will be? Carefully explain your answers.
Q2) Low-price guarantees mean lower prices for consumers.
A)True
B)False
Q3) An arrangement in which firms conspire to fix prices is called A) a cartel.
B) price ceiling.
C) price fixing. D) a duopoly.
Q4) Oligopoly is a market structure where many firms are competing by selling an identical product.
A)True
B)False
Q5) What is a cartel?
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Chapter 13: Controlling Market Power: Antitrust and Regulation
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Sample Questions
Q1) Which of the following mergers was successfully blocked by the United States government?
A) Interstate Bakeries and Continental Bakery
B) Microsoft and Intuit
C) Standard Oil and Mobil
D) American Tobacco Company and Reynolds
Q2) Which of the following is NOT an antitrust policy used by the government?
A) regulating business practices
B) blocking mergers
C) arranging a group of trustees
D) breaking up monopolies
Q3) A trust is
A) a cartel.
B) legal under the Sherman Act.
C) an arrangement in which the owners of several companies transfer their decision-making powers to a group of trustees.
D) all of the above
Q4) Describe the Office Depot/Staples case.
Page 15
Q5) Name three industries in which the government has broken up a monopoly.
Q6) What is a trust?
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Page 16
Chapter 14: Imperfect Information: Adverse Selection and Moral Hazard
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Sample Questions
Q1) What is adverse selection?
Q2) Suppose air bags make people feel safer and hence they drive more recklessly.This is an example of A) moral hazard.
B) adverse selection.
C) asymmetric information.
D) a lemon market.
Q3) Explain why the insurance market suffers from the adverse-selection problem.
Q4) How does the Internet auction site,eBay,address the asymmetric information problem?
Q5) Adverse selection describes the situation that occurs when A) people have perfect information.
B) high-quality products are driven from the market by low-quality products due to imperfect information.
C) actions that were expected to happen do not occur.
D) low-quality products are driven from the market by high-quality products because of imperfect information.
Q6) One method of responding to the lemons effect is to invest in information.
A)True
B)False Page 17
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Page 18
Chapter 15: Public Goods and Public Choice
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Sample Questions
Q1) Which of the following contains most of the characteristics of a public good?
A) education
B) trash collection
C) public transportation
D) fireworks shows
Q2) Give an example of an external benefit and explain why the outcome is inefficient.
Q3) If there are external benefits associated with education,then
A) the social benefit exceeds the private benefit.
B) the private benefit exceeds the social benefit.
C) the social benefit equals the private benefit.
D) None of the above are true.
Q4) Which of the following situations contains most of the characteristics of a private good?
A) free bread handed out by the government
B) an apartment in a public housing project
C) a hamburger
D) all of the above
Q5) Explain the difference between private and public goods.
Q6) List three ways in which an organization can overcome the free-rider problem.
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Chapter 16: External Costs and Environmental Policy
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Sample Questions
Q1) Reductions in pollution from a specific starting level of existing pollution is called A) abatement.
B) the EPA.
C) command and control.
D) usage tax.
Q2) Comment on the following statement: "When an external cost is present and a firm does not factor this cost into its decisions,the firm is likely to produce a level of output that is lower than the efficient level."
Q3) Producers X and Y dump waste into a local river.Table 16.1 shows the production costs each firm faces at different levels of waste.For Producer X,the marginal cost of reducing waste from 500 gallons to 400 gallons is
A) $1,400.
B) $300.
C) $240.
D) $200.
Q4) List two reasons why command-and-control policies may be inefficient.
Q5) How does the outcome of a command-and-control policy compare with the outcome of a pollution tax?
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Chapter 17: The Labor Market and the Distribution of Income
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Sample Questions
Q1) If the wage rate is below the equilibrium,then
A) the supply of labor will decrease to adjust to the lower wage.
B) the wage will be bid up by employers.
C) many workers will be unemployed.
D) Both A and C are correct.
Q2) Economists say that labor demand is a derived demand because
A) it does not come from competitive markets.
B) it depends on the demand for products that workers produce.
C) it is derived from nature.
D) it is derived from production.
Q3) The income earned by the top one percent in the United States has decreased in recent years.
A)True
B)False
Q4) Refer to Figure 17.2.If the hourly wage increases from $9 to $12,then
A) quantity demanded for labor will rise.
B) demand for labor will decrease.
C) quantity supplied of labor will increase.
D) supply of labor will fall.
Q5) What is the signaling effect of a college education?
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Chapter 18: International Trade and Public Policy
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Sample Questions
Q1) Refer to Figure 18.2.In autarky,the maximum amount of cheese that Pizzaland can produce is
A) 150.
B) 120.
C) 90.
D) 80.
Q2) An import quota
A) limits the amount of a good that can be imported, thus decreasing prices.
B) limits the amount of a good that can be imported, thus increasing prices.
C) increases the amount of a good imported, thus decreasing prices.
D) increases the amount of a good imported, thus increasing prices.
Q3) Which of the following situations will arise in the domestic market following the imposition of an import ban?
A) Domestic production decreases and prices increase.
B) Domestic production decreases and prices decrease.
C) Domestic production increases and prices increase.
D) Domestic production increases and prices decrease.
Q4) Free trade will affect a country's employment in different industries.
A)True
B)False
Page 22
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