Introduction to Microeconomics
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Course Introduction
Introduction to Microeconomics provides a foundational understanding of how individual consumers, firms, and markets interact to allocate scarce resources. The course explores key concepts such as supply and demand, elasticity, market equilibrium, production and cost analysis, and the behavior of different market structures including perfect competition, monopoly, and oligopoly. Students will also examine the impacts of government intervention, taxation, and externalities on market outcomes. Through real-world examples and basic analytical tools, this course equips students with the skills needed to analyze everyday economic decisions and public policies.
Recommended Textbook Microeconomics Theory and Applications 11th Edition by Edgar K. Browning
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Chapter 1: An Introduction to Microeconomics
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Sample Questions
Q1) An example of goods which are perfect complements in consumption is:
A)apples and oranges.
B)left and right shoes.
C)tomatoes and apples.
D)nickels and dimes.
Answer: B
Q2) If the prices of two goods,X and Y,increase by 50 percent and the consumer's income rises by 100 percent:
A)the slope of the consumer's budget line will change,becoming flatter to indicate that X and Y are now relatively less expensive.
B)the consumer's budget line will shift out from the origin,with its slope unchanged.
C)the consumer's budget line will shift out from the origin and its slope will also change,reflecting the lower prices for X and Y.
D)the consumer's budget line will remain unchanged as the price and income effects will cancel each other out.
Answer: B
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Chapter 2: Supply and Demand
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Q1) Let the market demand for rye bread be given by Q = 500 + I - 250P<sub>rye</sub> + 400P<sub>wheat</sub>,where Q is monthly demand in number of loaves,I is average monthly income in dollars,P<sub>rye</sub> is the price of a loaf of rye bread,and P<sub>wheat</sub> is the price of a loaf of wheat bread.If I = $1,000,P<sub>rye</sub> = $2,and P<sub>wheat</sub> = $3,calculate the following (based on 10% changes in denominators):
A)the arc price elasticity of demand for rye bread
Answer: Q = 500 + 1,000 - 250 (2)+ 400(3)= 2,200.A 10% increase in income from $1,000 to $1,100 results in Q = 2,300 for \(\Delta\)Q = +100.Note that P<sub>wheat</sub> and P<sub>rye</sub> are held constant in this calculation.Thus, \[\eta _ { Q _ { n e t } , I } = \frac { \Delta Q _ { \text {ne } } / \frac { 1 } { 2 } \left( Q _ { y e 1 } + Q _ { n e 2 } \right) } { \Delta I / \frac { 1 } { 2 } \left( I _ { 1 } + I _ { 2 } \right) } = \frac { 100 / \frac { 1 } { 2 } ( 2,200 + 2,300 ) } { 100 / \frac { 1 } { 2 } ( 1,000 + 1,100 ) } = \frac { .044 } { .095 } = .467\] Rye bread is a normal good because 11ea77e2_d722_12c8_91bf_d98697f3c7e5_TB1825_11 > 0.
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Chapter 4: Individual and Market Demand
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Q1) Assume that as the price of good X rises,the demand for good Z shifts outward.On the basis of this information we can conclude that:
A)good Z is inferior.
B)goods X and Z are complements.
C)goods X and Z are substitutes.
D)good X is an input used in the production of Z.
Q2) Which of the following is true of a market demand curve?
A)It might slope upward if the typical consumer has an upward-sloping individual demand curve.
B)It can never slope upward.
C)It will slope upward if at least one consumer has an upward-sloping individual demand curve.
D)It will slope upward if individual demand curves are inelastic.
Q3) Which of the following is true at any point along a consumer's demand curve?
A)The consumer's preferences for different goods can be ranked.
B)The consumer's optimality condition is satisfied.
C)The consumer's income increases successively as one moves downward along the demand curve.
D)The marginal rate of substitution is constant.
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Chapter 5: Using Consumer Choice Theory
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Q1) In the intertemporal consumer choice model,an increase in _____ will alter the slope of the budget line.
A)saving
B)the interest rate
C)future income
D)borrowing
Q2) Which of the following leads to the diversification of risk?
A)Investing in assets that give the highest possible returns
B)Investing in safe assets that may give low returns
C)Investing in multiple assets rather than a single asset
D)Investing in assets that are highly risky but give high returns
Q3) In Figure 5-1,the effect of substituting an equal-cost lump-sum grant for an excise subsidy is to _____.
A)increase consumption of food by GJ
B)decrease consumption of food by HJ
C)keep food consumption unchanged
D)decrease consumption of other goods by EK
Q4) (
A)How is insurance similar to an individual's diversified portfolio?
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Chapter 6: Exchange, Efficiency, and Prices
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Q1) At point A in Figure 6-1,Monica's endowment of steak and wine is _____,respectively.
A)O<sub>H</sub>Z and O<sub>M</sub>S
B)FG and ZV
C)O<sub>M</sub>S and O<sub>M</sub>V
D)O<sub>H</sub>F and ZV
Q2) When the marginal rates of substitution differ for two consumers:
A)indifference curves are tangent.
B)mutually beneficial trade is possible.
C)multiple prices for goods emerge.
D)the consumer with steeper indifference curves is happier.
Q3) Allowing prices to ration goods among consumers results in an:
A)inefficient distribution of goods because the wealthy get the highest quantity.
B)efficient distribution of goods because goods go to those who value them the most.
C)inefficient distribution of goods because goods go to those who value them the most.
D)efficient distribution of goods because the wealthy consumers are unable to buy the quantity they wish.
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Chapter 7: Production
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Q1) Economists use production functions to _____.
A)define what is technically efficient for different combinations of inputs
B)explain the tradeoff between the use of different inputs in production
C)maximize profits for a firm
D)define the marginal utilities associated with the goods produced
Q2) What factors give rise to increasing returns to scale and decreasing returns to scale?
Q3) A production function identifies the _____.
A)minimum output that a specific combination of inputs can produce
B)maximum number of inputs that can be used to produce output
C)highest possible output for a given combination of inputs
D)least-cost method of producing a given level of output
Q4) Define and then derive the expression for the marginal rate of technical substitution.
Q5) When the quantity of labor employed lies between points C and D in Figure 7-2:
A)marginal product reaches a maximum.
B)average product is rising and reaches a maximum at D.
C)total product declines.
D)marginal product is falling.
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Chapter 8: The Cost of Production
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Sample Questions
Q1) The possibility of learning by doing ensures:
A)equal profits for all firms in an industry.
B)uniform price for a product.
C)lower production costs to a pioneering firm.
D)lower production costs to a market entrant.
Q2) Which of the following statements about marginal cost is correct?
A)When the marginal product of a variable input is rising,the marginal cost will fall.
B)When marginal cost equals average cost,average cost is at its maximum.
C)In the short-run,the marginal cost curve is parallel to the average variable cost curve.
D)When marginal cost is falling,total fixed cost is rising.
Q3) Which of the following determines the shape of the marginal cost curve in the short run?
A)The marginal product of labor is first increasing and then decreasing
B)The wage rate first decreases and then increases throughout the range of output
C)The price of output produced by labor is first decreasing and then increasing
D)The presence of economies of scale in the product market
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Chapter 9: Profit Maximization in Perfectly Competitive Markets
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Sample Questions
Q1) For a perfectly competitive firm,the demand curve:
A)coincides with the marginal revenue curve.
B)is parallel to the vertical axis.
C)is upward sloping.
D)is convex to the origin.
Q2) Suppose the total revenue (TR)and total cost (TC)curves of a perfectly competitive firm are given by the following set of equations: TR = 100Q and TC = Q<sup>2</sup> + 4Q
+ 5,where Q is the output.Derive the firm's profit maximizing output and calculate the total and average profit earned by the firm at this level of output.
Q3) In a constant-cost industry,the slope of the long-run supply curve is _____.
A)zero
B)negative
C)positive
D)infinity
Q4) Which one of the following is not an assumption of the competitive model?
A)Homogenous products
B)Unrestricted mobility of resources
C)Economies of scale
D)Perfect information
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Chapter 10: Using the Competitive Model
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Q1) The total surplus gained by all the participants in a competitive market is the area between the _____ up to the equilibrium level of output.
A)demand curve and the equilibrium price line
B)demand curve and the supply curve
C)demand curve and the horizontal axis
D)equilibrium price line and the horizontal axis
Q2) Given that sale of crack cocaine for a positive price is completely banned in certain parts of the world,why is it that there is a thriving black market for this illegal drug? Explain with the help of demand and supply curves.
Q3) Refer to Figure 10-4.In the absence of trade,the total producer surplus is given by
A)f + g + j
B)f + g + h + j
C)f + g + h + i
D)f + g + h + i + j
Q4) What would be the welfare effect of a per-unit tax in the following markets? (
A)The market for cigarettes
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Chapter 11: Monopoly
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Q1) Acme Baseball Bats is a monopoly firm.If the marginal cost of producing a baseball bat is $30,and the absolute value of price elasticity of demand for Acme Baseball Bat Company is estimated to be 4,at what price should Acme set its price if it wants to maximize profits?
A)$30
B)$40
C)$50
D)$60
Q2) The monopolist's demand curve slopes downward because:
A)the good sold by a monopolist is easily substitutable.
B)the monopolist is a price maker in the market.
C)average revenue decreases with each unit sold.
D)the marginal product of labor is diminishing.
Q3) The markup of price over marginal cost for a monopolist is _____.
A)independent of the price elasticity of demand
B)inversely related to the price elasticity of demand
C)the same as the price elasticity of demand
D)the same as the price elasticity of supply
Q4) Explain why a profit-maximizing monopolist will always sell at a price where demand is elastic.
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Chapter 12: Product Pricing With Monopoly Power
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Q1) Refer to Figure 12-2.A monopolist practicing first-degree price discrimination will sell _____ quantity of output.
A)OL
B)OK
C)OJ
D)KL
Q2) When airlines charge different fares for seats on the same flight depending on how far in advance an airline ticket has been purchased,it is using a(n)_____ strategy.
A)dumping
B)block pricing
C)first-degree price discrimination
D)intertemporal price discrimination
Q3) With block pricing,firms differentiate price according to _____.
A)each consumer's ability to pay
B)the average cost of producing the output
C)the quantity of output purchased
D)the marginal cost of producing a particular unit of output
Q4) What is a two-part tariff? Make up a numerical example to support your definition.
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Chapter 13: Monopolistic Competition and Oligopoly
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Q1) Consider a dominant firm model where the elasticity of market demand is 2,the elasticity of supply of the competitive fringe is 4,and the elasticity of the dominant firm's demand is 10.Calculate the dominant firm's market share.
A)2/3
B)2/5
C)3/5
D)3/7
Q2) A monopolistically competitive firm is similar to a monopoly in that the firm:
A)has no rivals that produce close substitutes.
B)is very large relative to the market.
C)produces on the inelastic portion of its demand curve.
D)faces a downward-sloping demand curve.
Q3) ABC Inc. ,is a leading consumer goods conglomerate.ABC launched a new variant of their existing brand of toothpaste that claimed not only to whiten teeth within 4 weeks but also fight cavities.In other words,ABC was practicing _____.
A)market segmentation
B)product differentiation
C)product customization
D)price skimming
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Chapter 14: Game Theory and the Economics of Information
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Q1) Explain how advertising,when undertaken by all competing firms,actually reduces the market power of the firms.
Q2) An effective and enforceable collusion in a duopoly will result in:
A)a monopoly price and output in the market.
B)a perfectly competitive outcome.
C)an inefficient equilibrium.
D)a large consumer surplus.
Q3) Given the information in Table 14-3,if X = 15 and Y = 10,which firm has a dominant strategy?
A)Firm A
B)Firm B
C)Both Firm A and Firm B
D)Neither Firm A nor Firm B
Q4) A prisoner's dilemma equilibrium is:
A)identical to the monopolistically competitive equilibrium.
B)a Nash equilibrium.
C)not a dominant-strategy equilibrium.
D)the same as the perfectly competitive equilibrium.
Q5) Define adverse selection and moral hazard and give examples of each.
Q6) What is a prisoner's dilemma? Draw a payoff matrix which illustrates this game. Page 16
Chapter 15: Using Noncompetitive Market Models
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Q1) Refer to Figure 15-1.If the regulator sets a maximum price of P<sub>2</sub>,the monopolist's demand curve is _____.
A)P<sub>2</sub>EG
B)FG
C)the marginal cost curve
D)FH
Q2) Which of the following is not likely to be a social loss due to monopoly power?
A)The welfare loss from the suppression of innovative products by monopolists
B)The higher production costs incurred by a monopolist due to the lack of competition
C)The resources spent by monopolists to secure their monopoly privilege
D)The loss incurred due to marginal-cost pricing by the monopolist
Q3) Antitrust laws state that the practice of predatory pricing is illegal as it allows the firm to consolidate monopoly power by driving other firms out of the market.What might be the challenges that a regulator may face while trying to prosecute a firm that is said to practice predatory pricing? (Predatory pricing is a pricing strategy where a firm prices a product below average variable cost (or short-run marginal cost)to drive rival firms out of the market)
Q4) Define and illustrate iterated dominance and commitment strategy.
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Chapter 16: Employment and Pricing of Inputs
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Q1) Two inputs,labor and capital,are considered substitutes if:
A)a fall in the price of labor leads to no change in the price of capital
B)the marginal rate of technical substitution of labor for capital is less than one.
C)a fall in the price of labor leads to an increase in the price of capital
D)increasing the quantity of labor decreases the marginal product of capital
Q2) A monopoly firm faces the output demand curve P = 25 - 0.5Q,where P is the price of the final product and Q is the level of output.The production function is given by Q = 5X,where X is the only input used in production.Each unit of X is bought by the firm at a constant price of $25 per unit.Based on this information,what level of input would the profit-maximizing monopoly employ?
Q3) In Figure 16-1.The move from point A to point B represents the _____ of an input price change.
A)substitution effect
B)output effect
C)income effect
D)effect of diminishing returns
Q4) Using a graph,show the welfare effects of a monopsony input market compared to a perfectly competitive input market.Assume upward sloping cost curves.
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Chapter 17: Wages, Rent, Interest, and Profit
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Q1) Refer to Figure 17-1.If the number of leisure hours is OL<sub>3</sub> after a change in the wage rate,it implies that:
A)the income effect of the wage change is greater than the substitution effect.
B)the income effect of the wage change is less than the substitution effect.
C)the income effect of the wage change exactly offsets the substitution effect.
D)the income and substitution effects of a wage change operate in the same direction.
Q2) How do firms decide if an investment is feasible? In other words,how are investment projects valuated?
Q3) In the income-leisure model of work,leisure is the portion of time when:
A)the worker is employed but not at work.
B)the worker is not receiving compensation from an employer.
C)the worker is not receiving at least the minimum wage.
D)the worker is temporarily employed or working part-time.
Q4) As compared to a labor market without a union,_____ in a labor market with an effective union.
A)the level of employment is lower
B)the wage rate paid to workers is lower
C)there is higher producer surplus
D)the supply curve of labor is horizontal
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Chapter 18: Using Input Market Analysis
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Q1) What determines who bears the burden of the social security tax?
Q2) A cartel agreement between input buyers would try to:
A)make the supply curve of their product more elastic.
B)shift their demand curve for labor to the right.
C)replicate monopsony and reduce input prices.
D)replicate monopoly and increase prices.
Q3) Which of the following defines an efficiency wage?
A)It is the equilibrium wage rate in the labor market where the demand for labor exactly matches the supply of labor.
B)It is an above-market wage which increases the firms' profits by increasing the productivity of all factors of production.
C)It is an above-market wage which increases the firms' profits by lowering the costs of searching for,selecting,and training new workers.
D)It is a below-market wage which increases the employment opportunities in an economy and reduces overall poverty.
Q4) Explain graphically that a payroll tax imposed by the government either on the employers or on the employees will have a similar impact.
Q5) Mention some of the factors which hinder input buyer's cartel.
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Chapter 19: General Equilibrium Analysis and Economic Efficiency
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Q1) When economists say that free trade is beneficial for the nation as a whole,they mean that:
A)everyone in one country consumes more but everyone in the other country consumes less.
B)trade ensures that everyone consumes more.
C)trade makes it possible to consume beyond the production possibility frontier.
D)society consumes on a more preferred point on the same production possibility frontier.
Q2) If there is a monopoly in the capital market,whereas the labor market is competitive then:
A)the rental rate of capital will be greater than the wage rate.
B)the labor market will be in equilibrium,but there will be excess supply in the capital market.
C)the marginal rate of technical substitution must be greater than the input price ratio. D)the capital market will be in equilibrium,but there will be excess demand in the labor market.
Q3) According to Hayek,can there ever be an objectively defined efficient outcome other than what currently exists? Explain.
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Chapter 20: Public Goods and Externalities
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Q1) Which of the following is a point of similarity between public goods and the goods that generate an external benefit?
A)Both are overproduced
B)A free rider problem arises in case of both the goods
C)Both result in inefficient allocation of resources
D)Both can be produced at zero marginal cost
Q2) Refer to Figure 20-1.If the government levies a tax of $28 per unit of output,then:
A)the marginal social benefit will exceed the marginal social cost and the good will be underproduced.
B)marginal social cost will exceed the marginal social benefit and the good will be underproduced.
C)marginal social benefit will exceed the marginal social cost and the good will be overproduced.
D)marginal social cost will exceed the marginal social benefit and the good will be overproduced.
Q3) Explain with the help of a suitable real life example how common resources are depleted if property rights are not ensured?
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