Introduction to Microeconomics Exam Preparation Guide
Course Introduction
Introduction to Microeconomics provides students with a foundational understanding of the principles and concepts that govern individual decision-making processes within an economy. The course explores how consumers, firms, and governments allocate scarce resources, examines the functioning of supply and demand in different market structures, and discusses the impact of market intervention. Real-world examples and basic mathematical tools are used to illustrate concepts such as elasticity, marginal analysis, consumer surplus, production costs, and price determination. By the end of the course, students will be able to analyze and interpret economic phenomena at the micro level and apply economic reasoning to everyday decision-making.
Recommended Textbook Microeconomics 7th Edition by Jeffrey M. Perloff
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2248 Verified Questions
2248 Flashcards
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Chapter 1: Introduction
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Sample Questions
Q1) Normative statements are easily debated whereas positive statements are simply rhetorical.
A)True
B)False
Answer: False
Q2) The testing of economic models facilitates
A) proving a model is false.
B) proving a model is true.
C) proving that one person's opinion is morally incorrect.
D) proving that one society's legal structure is better than another country's.
Answer: A
Q3) Economists will use a model such as the law of demand
A) forever, ignoring all criticism.
B) until it is refuted by someone.
C) until the model produces the same results with added complexity.
D) until every microeconomic courses uses the model.
Answer: B
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Chapter 2: Supply and Demand
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Sample Questions
Q1) If the price of automobiles were to decrease substantially,the demand curve for public transportation would most likely
A) shift right.
B) shift left.
C) remain unchanged.
D) remain unchanged while quantity demanded would change.
Answer: B
Q2) Lionfish is an aquatic invasive species in the southeastern U.S.and the Caribbean.Current removal policies focus on harvesting the lionfish for human consumption.However,a fishing license is required to fish in most southern states.Assume the supply of fishing licenses is Qs = 50 + 0.05L + 40P,where L = lionfish population and P = price of a fishing license,and the demand for fishing licenses is Qd = 1400 - 60P.What is the equilibrium price and quantity of fishing licenses when L = 1,000?
A) P = $8.5, Q = 890
B) P = $13, Q = 620
C) P = $13.5, Q = 590
D) P = $13.5, Q = 591
Answer: B
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Page 4
Chapter 3: Applying the Supply and Demand Model
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Sample Questions
Q1) The percentage change in the quantity supplied in response to a percentage change in the price is known as the A) slope of the supply curve.
B) excess supply.
C) price elasticity of supply.
D) All of the above.
Answer: C
Q2) If a government wants to maximize revenues from a tax it should A) impose it on sellers.
B) impose it on consumers.
C) choose a good with a relatively elastic demand.
D) choose a good with a relatively inelastic demand.
Answer: D
Q3) Which good would you expect to have a greater price elasticity: a gallon of gasoline sold at a specific gasoline station on Main Street in Phoenix,a gallon of gasoline sold in Phoenix,or a gallon of gasoline sold in Arizona? Why?
Answer: A gallon of gasoline sold at a specific station on Main Street in Phoenix,because there are more substitutes for that good than the others.
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Chapter 4: Consumer Choice
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Sample Questions
Q1) Bounded rationality suggests that
A) individuals might make "incorrect" decisions because they are unable to consider all possible options.
B) individuals would rather have less choice to more choice.
C) rational decisions can only be made when choices are restricted.
D) individuals are happier when their choices are restricted or "bounded."
Q2) Explain why most indifference curves are convex.
Q3) The absolute value of the slope of an indifference curve equals the ratio of the marginal utilities of the two goods involved.
A)True
B)False
Q4) Draw the indifference curves for rock concerts and food for each of the following: (a)a typical 17-year-old (b)a typical 75-year-old
Q5) Lisa consumes only pizzas (P)and burritos (B).Her utility function is U = P<sup>0.5</sup><sup> </sup>B<sup>0.5</sup>.The price of per pizza is $10 and the price per burrito is $5.In equilibrium,Lisa consumes 4 pizzas.Using Lisa's utility function,calculate how many burritos she consumes.
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Chapter 5: Applying Consumer Theory
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Sample Questions
Q1) Ten individuals have $100 and identical preferences for picnics,p,and kayak trips,k,where U(p,k)= k<sup>0.5</sup>p<sup>0.5</sup>.The price of picnics is $5 and the price per kayak trip is $ 10.What is the shortage/surplus in the market when the supply of picnics totals 120?
A) There is a surplus of 20.
B) There is a shortage of 20.
C) The market is in equilibrium. Therefore, there is no surplus/shortage.
D) There is not enough information to answer this question.
Q2) Suppose Lisa spends all of her money on books and coffee.When the price of coffee decreases,the
A) substitution effect on coffee is positive, and the income effect on coffee is positive.
B) substitution effect on coffee is ambiguous, and the income effect on coffee is ambiguous.
C) substitution effect on coffee is positive, and the income effect on coffee is ambiguous.
D) substitution effect on coffee is ambiguous, and the income effect on coffee is positive.
Q3) Why can't all goods be inferior?
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Chapter 6: Firms and Production
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Sample Questions
Q1) Lectures in microeconomics can be delivered either by an instructor (labor)or a movie (capital)or any combination of both.Yet,it gets harder and harder to substitute more movies for an instructor the more movies are already used.Which graph in the above figure best represents the isoquants for lectures in microeconomics when capital per day is on the vertical axis and labor per day is on the horizontal axis?
A) Graph A
B) Graph B
C) Graph C
D) Graph D
Q2) Suppose the production of mp3 players can be represented by the following production function: q = L<sup>0.4</sup>K<sup>0.4</sup>.<sup> </sup>Which of the following statements is TRUE?
A) The production function has decreasing returns to scale.
B) The production function has increasing returns to scale.
C) The production function has constant returns to scale.
D) Returns to scale vary with the level of output.
Q3) A firm operating with diminishing total returns cannot be profit maximizing.
A)True
B)False
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Page 8
Chapter 7: Costs
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Sample Questions
Q1) Assuming that w and r are both positive,if the long-run expansion path is horizontal,then
A) MP<sub>K</sub> = 0.
B) MRTS is a function of capital only.
C) w = r.
D) All of the above.
Q2) Assume Congress decides that Social Security taxes must increase in order to fund the system.This would
A) shift up the marginal cost curve for any firms that hire labor.
B) guarantee a decrease in profits.
C) shift up the average fixed cost curve for any firms that hire labor.
D) guarantee an increase in tax revenues.
Q3) A windfall profit tax imposed on oil companies would shift the firms'
A) marginal tax rate.
B) marginal cost curve.
C) average cost curve.
D) production function.
Q4) What are the functions for MC and AC if TC = 100q + 100q<sup>2</sup>? Are the returns to scale increasing,decreasing,or constant?
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Chapter 8: Competitive Firms and Markets
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Sample Questions
Q1) If a firm makes zero economic profit,then the firm
A) has total revenues greater than its economic costs.
B) must shut down.
C) can be earning positive business profit.
D) must have no fixed costs.
Q2) Even if two products have different characteristics,such as color,the products are only considered heterogeneous if consumers
A) consider the two products as perfect complements.
B) consider the two products as perfect substitutes.
C) consider the two products as imperfect substitutes.
D) consider the two products as imperfect complements.
Q3) A market is perfectly competitive even if firms have the ability to set their own price as long as the price difference reflects differences in the product.
A)True
B)False
Q4) Explain why shutting down and going out-of-business are different concepts.
Q5) If the shutdown rule,p < AVC,is the same in the short run and the long run,explain why the shutdown prices may be different.
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Page 10
Chapter 9: Applying the Competitive Model
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Sample Questions
Q1) Mister Jones was selling his house.The asking price was $220,000,and Jones decided he would take no less than $200,000.After some negotiation,Mister Smith purchased the house for $205,000.Jones' producer surplus is
A) $5,000.
B) $15,000.
C) $20,000.
D) not able to be calculated from the information given.
Q2) Advocates of steel tariffs to protect U.S.steel firms realize that when imposing such tariffs,the gains of firms are outweighed by the losses to consumers..This implies that
A) such advocates value producer surplus more than consumer surplus.
B) such advocates want to help consumers.
C) such advocates value consumer surplus more than producer surplus.
D) such advocates value producer surplus and consumer surplus equally.
Q3) Which of the following characterizes long-run equilibrium in perfect competition?
A) P = MC = ATC
B) P = MC < ATC
C) P > MC = ATC
D) P = MC > ATC
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11
Chapter 10: General Equilibrium and Economic Welfare
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Sample Questions
Q1) There are two closely related crops,X and Y,with the following demand functions Q<sub>X</sub><sub> </sub>= 180 - 2P<sub>X</sub> + P<sub>Y</sub> and Q<sub>Y</sub> = 150 + P<sub>X</sub> - P<sub>Y</sub> where Q<sub>X</sub> is the quantity of X,P<sub>X</sub> is the price of X,Q<sub>Y</sub> is the quantity of Y,and P<sub>Y</sub> is the price of Y.These two crops are grown in two widely separated countries so there is no interrelationship between the supply curves.The short-run perfectly inelastic supply for X is 150 while the short-run perfectly inelastic supply for Y is 100.In equilibrium,the prices are
A) P<sub>X</sub> = 80, P<sub>Y</sub> = 130
B) P<sub>X</sub> = 40, P<sub>Y</sub> = 65
C) P<sub>X</sub> = 60, P<sub>Y</sub> = 120
D) P<sub>X</sub> = 30, P<sub>Y</sub> = 80
Q2) Every point on the joint production possibilities frontier represents A) an initial endowment.
B) inefficient production.
C) the marginal rate of substitution of goods for each producer.
D) at least one producer specializing in production.
Q3) Explain why having different marginal rates of substitution is necessary for trade to occur.
Q4) Explain the logic behind the First Theorem of Welfare Economics.
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Chapter 11: Monopoly
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Sample Questions
Q1) Why does a patent stimulate research?
A) Patents give firms time to do research.
B) Patents give firms the opportunity to recover research costs and thus serve as a profit motive.
C) Without patents firms would not research as much.
D) They don't.
Q2) Explain why a monopolist has no supply curve.
Q3) If the demand for a monopoly's output shifts rightward,the change in quantity produced is not predictable because
A) the monopoly is a profit maximizer.
B) the monopoly is a price taker.
C) the monopoly has no supply curve.
D) the monopoly's marginal cost curve might not be upward sloping.
Q4) Which of the following DOES NOT contribute to the market power of a firm?
A) number of available substitutes
B) the color of the product
C) legal protections
D) the number of firms in the market
Q5) For profit-maximizing monopolies,explain why the boundaries on the Lerner Index are 0 and 1.
Page 13
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Chapter 12: Pricing and Advertising
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Sample Questions
Q1) A perfect-price-discriminating monopoly's marginal revenue curve
A) lies below the demand curve.
B) is the demand curve.
C) varies for each consumer.
D) is the same as the monopolist's marginal revenue curve.
Q2) If both Ben and Catherine value good X more than good Y,a firm can increase profits by bundling the two products.
A)True
B)False
Q3) Price discrimination reveals
A) the inherent greed of Western culture.
B) the inability for regulators to stop unethical practices.
C) that individuals have different willingness to pay.
D) that individuals have the same willingness to pay.
Q4) A firm will increase its spending on advertising until
A) it has monopolized the market.
B) it has deterred all future entry.
C) the marginal benefit of advertising is zero.
D) the marginal benefit of advertising equals the marginal cost of advertising.
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Chapter 13: Oligopoly and Monopolistic Competition
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Sample Questions
Q1) In a Bertrand model with differentiated products,
A) firms can set price above marginal cost.
B) firms set price at marginal cost.
C) price is independent of marginal cost.
D) firms set price independently of one another.
Q2) In the short run,a monopolistic competitor
A) produces at minimum efficient scale.
B) produces where P = AC.
C) sets P = MC.
D) sets MR = MC.
Q3) Monopolistic competition and monopoly have all of the following in common EXCEPT A) P > MC.
B) firms are price setters.
C) barriers to entry.
D) MR = MC.
Q4) Explain how long-run economic profits are linked to entry in monopolistic competition and perfect competition.
Q5) Explain why gasoline stations across the street from each other with large signs displaying their prices may "legally" jointly set monopoly prices.
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Chapter 14: Game Theory
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Sample Questions
Q1) Incumbents are unaffected by fixed costs of entry while potential entrants are affected by them because
A) for potential entrants the cost is avoidable, while for the incumbent, it is not.
B) fixed costs will be greater for the potential entrant than for the incumbent.
C) fixed costs are zero for the incumbent.
D) incumbents will act to prevent entry at all costs.
Q2) The above figure shows the payoff matrix facing an incumbent firm and a potential entrant.The potential entrant cannot earn a profit if the incumbent
A) chooses the Cournot level of output.
B) chooses the Stackelberg leader level of output.
C) shuts down.
D) deters entry.
Q3) One way to ensure cooperation in an infinitely repeated simultaneous game is
A) to always play the dominant strategy.
B) to punish the player that reneges on agreements.
C) to never punish any player.
D) to always punish all players.
Q4) Why is collusion more likely in a repeated game?
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Chapter 15: Factor Markets
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Sample Questions
Q1) The demand for a monopoly's output is p = 50 - Q.The monopoly's marginal cost is $4 and the market wage is $2.How many units of labor are demanded by the monopoly?
A) L = 46
B) L = 23
C) L = 0
D) L = 10
Q2) The increase in total revenue due to increasing the amount of labor employed by one unit is called the
A) Marginal Product.
B) Marginal Revenue Product.
C) Average Revenue Product.
D) Total Revenue Product.
Q3) The marginal expenditure of a monopsonist is $4.The wage it currently pays is $3.The labor supply curve has a constant elasticity.What is the elasticity of the labor supply?
A) 0.33
B) 0.66
C) 1
D) 3
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Chapter 16: Interest Rates, Investments, and Capital Markets
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Sample Questions
Q1) As in all other competitive markets price equals marginal cost in a market for a scarce,non-renewable resource that is traded in a competitive market.
A)True
B)False
Q2) If an exhaustible resource is priced at marginal cost that remains constant over time,then
A) all owners of that resource earn rent.
B) the price will stay constant over time.
C) the percent price increase each year equals the rate of interest.
D) the good is relatively scarce.
Q3) A financial services company offers to pay you $1,000 a year for life in exchange for $20,000 today.What factors affect your decision to take this offer?
Q4) When a government turns a deficit into a surplus we would expect
A) interest rates to rise.
B) interest rates to decrease.
C) the demand curve for loanable funds to shift rightward.
D) that more investment is crowded out.
Q5) In an economy with no inflation,explain why interest rates are positive.
Page 18
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Chapter 17: Uncertainty
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Sample Questions
Q1) Bob invests $25 in an investment that has a 50% chance of being worth $100 and a 50% chance of being worth $0.From this information we can conclude that Bob is
A) risk loving.
B) risk neutral.
C) risk averse.
D) Any one of the three above.
Q2) In terms of the stock market,systematic risk refers to the fact that
A) some stocks have higher returns than others.
B) some stocks' returns have a higher variance than others.
C) all stock prices are correlated with the health of the economy.
D) most stock prices are perfectly negatively correlated.
Q3) A stock mutual fund's primary advantage is to allow
A) investors to diversify away systematic risk.
B) investors to diversify away all risk.
C) investors to diversify away idiosyncratic risk.
D) the rich to avoid taxes.
Q4) A fair game is a game in which the chances are 50-50 that you win or lose.
A)True
B)False
Q5) Explain why insurance companies usually do not offer earthquake insurance.
Page 19
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Chapter 18: Externalities, Open-Access, and Public Goods
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Sample Questions
Q1) Because a monopoly will produce less of a good than a competitive market will,welfare is always greater under monopoly than under competition in the presence of a negative externality.
A)True
B)False
Q2) The above figure shows the marginal benefit to a firm of polluting in the local river while producing its output,and the marginal cost to the firm's neighbor.The marginal cost of production is zero for the firm.If there is just one neighbor who owns the river,how much pollution is likely to occur?
A) 0 units
B) 500 units
C) 1000 units
D) more than 1000 units.
Q3) In terms of cost-benefit analysis,explain why a competitive market with an externality produces too much pollution.
Q4) Changing the price of a good will usually result in a negative externality.
A)True
B)False
Q5) Explain why the optimal amount of pollution is often not zero.
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Chapter 19: Asymmetric Information
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Sample Questions
Q1) A firm is more likely to adopt multiple brand names for the same product when the good is a non-durable.
A)True
B)False
Q2) The above figure shows the payoff to two firms in an industry deciding to make an investment in worker safety.The Nash equilibrium
A) is for just one of the firms to make the investment.
B) is for both firms to make the investment.
C) is for neither firm to make the investment.
D) does not exist.
Q3) The market for used cars is shown in the above figure.Ten percent (10%)of all cars are lemons.A mechanic is offering to inspect a car for sale and certify that a car is not a lemon.If car sellers are risk neutral,what is the highest price that a car seller would pay for such a service? Who would buy this service?
Q4) Firms under-invest in safety because
A) firms are not concerned with safety.
B) firms do not want their plants to be safe.
C) firms are risk averse.
D) firms do not enjoy all of the benefits from investments in safety.
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Chapter 20: Contracts and Moral Hazards
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Sample Questions
Q1) Which of the following would not be used by firms to deter shirking?
A) requiring employees to post a bond
B) offering a bonus after five years of service
C) paying more than the market wage
D) paying less than the market wage
Q2) Monitoring is often used by firms in an attempt to decrease A) shirking.
B) piece rates.
C) adverse selection.
D) signaling.
Q3) One way to prevent workers from shirking is to
A) hire only workers who are predisposed toward shirking.
B) hire only workers who are predisposed toward not shirking.
C) reduce monitoring to zero.
D) pay workers a fixed fee.
Q4) In the presence of asymmetric information,a hire contract
A) achieves production efficiency.
B) can lead to opportunistic behavior on the part of the agent.
C) is impossible to write.
D) will result in the principal earning all of the profit.
Page 22
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