Introduction to Microeconomics Review
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Course Introduction
Introduction to Microeconomics explores the fundamental principles that govern the behavior of individuals and firms in making choices regarding the allocation of scarce resources. The course covers key topics such as supply and demand, market equilibrium, elasticity, consumer and producer behavior, the theory of the firm, market structures (perfect competition, monopoly, oligopoly), and the role of government in the economy. Through real-world examples and theoretical models, students develop an understanding of how microeconomic concepts apply to everyday decisions and public policy, laying the groundwork for more advanced studies in economics.
Recommended Textbook
Principles of Microeconomics 7th Edition by N. Gregory Mankiw
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Chapter 1: Ten Principles of Economics
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Q1) Under what conditions might government intervention in a market economy improve the economy's performance?
Answer: If there is a market failure, such as an externality or monopoly, government regulation might improve the well-being of society by promoting efficiency. If the distribution of income or wealth is considered to be unfair by society, government intervention might achieve a more equal distribution of economic well-being.
Q2) Refer to Scenario 1-4. What is your opportunity cost of going to the movies?
Answer: $16.75 and 15 points on your exam grade
Q3) Refer to Scenario 1-3. What is the minimum price the company will charge for the 701th calculator?
Answer: $70
Q4) What do prices reflect in a market economy?
Answer: The value of a good to society and the cost to society of making the good
Q5) Invisible hand is a term used by the economist in his 1776 book An Inquiry into the Nature and Causes of the Wealth of Nations.
Answer: Adam Smith
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Chapter 2: Thinking Like an Economist
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Q1) In the markets for factors of production in the circular-flow diagram,
A) households provide firms with labor, land, and capital.
B) households provide firms with savings for investment.
C) firms provide households with goods and services.
D) firms provide households with revenue.
Answer: A
Q2) Economists try to address their subject with a scientist's objectivity.
A)True
B)False
Answer: True
Q3) An economic outcome is said to be efficient if the economy is A) using all of the scarce resources it has available.
B) conserving on resources, rather than using all available resources.
C) getting all it can get from the scarce resources it has available.
D) able to produce more than what is currently being produced without additional resources.
Answer: C
Q4) The institution that sets the nation's monetary policy is called the Answer: Federal Reserve.
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Chapter 3: Interdependence and the Gains From Trade
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Q1) Refer to Figure 3-21. Azerbaijan has an absolute advantage in the production of
A) bolts and a comparative advantage in the production of bolts.
B) bolts and a comparative advantage in the production of nails.
C) nails and a comparative advantage in the production of bolts.
D) nails and a comparative advantage in the production of nails.
Answer: D
Q2) Refer to Table 3-15. Which of the following combinations of meat and potatoes could the farmer produce in 40 hours?
A) 1 pound of meat and 7 pounds of potatoes.
B) 2 pounds of meat and 5 pounds of potatoes.
C) 3 pounds of meat and 3 pounds of potatoes.
D) 4 pounds of meat and 2 pounds of potatoes.
Answer: C
Q3) Jake can complete an oil change in 45 minutes and he can write a poem in 90 minutes. Ming-la can complete an oil change in 30 minutes and she can write a poem in 90 minutes. Jake's opportunity cost of writing a poem is lower than Ming-la's opportunity cost of writing a poem.
A)True
B)False
Answer: True
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Chapter 4: The Market Forces of Supply and Demand
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Q1) Refer to Figure 4-21. What is the equilibrium quantity in this market?
A) 2.5 units
B) 5 units
C) 7.5 units
D) 10 units
Q2) Today, people changed their expectations about the future. This change
A) can cause a movement along a demand curve.
B) can affect future demand but not today's demand.
C) can affect today's demand.
D) cannot affect either today's demand or future demand.
Q3) An increase in which of the following would shift the supply curve for gasoline to the right?
A) demand for gasoline
B) price of gasoline
C) number of producers of gasoline
D) price of oil, an input into the production of gasoline
Q4) An increase in supply will cause a decrease in price, which will cause an increase in demand.
A)True
B)False
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Chapter 5: Elasticity and Its Application
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Q1) If a firm is facing elastic demand, then the firm should decrease price to increase revenue.
A)True
B)False
Q2) For a horizontal demand curve,
A) the slope is undefined, and the price elasticity of demand is equal to 0.
B) the slope is equal to 0, and the price elasticity of demand is undefined.
C) both the slope and price elasticity of demand are undefined.
D) both the slope and price elasticity of demand are equal to 0.
Q3) Refer to Figure 5-9. If the price falls from point A to point B, total revenue
A) increases, and demand is price elastic.
B) decreases, and demand is price elastic.
C) increases, and demand is price inelastic.
D) decreases, and demand is price inelastid.
Q4) If we observe that when the price of ice cream rises by 10%, ice cream manufacturers increase the quantity supplied of ice cream by 20%, then the price elasticity of supply is 2.
A)True
B)False
Q5) Refer to Table 5-12. Between which two quantities listed is demand most elastic?
Page 7
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Chapter 6: Supply, Demand, and Government Policies
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Q1) When OPEC raised the price of crude oil in the 1970s, it caused the
A) supply of gasoline to decrease.
B) quantity of gasoline demanded to decrease.
C) equilibrium price of gasoline to increase.
D) All of the above are correct.
Q2) Refer to Figure 6-29. Suppose D1 represents the demand curve for gasoline in both the short run and long run, S1 represents the supply curve for gasoline in the short run, and S2 represents the supply curve for gasoline in the long run. After the imposition of the $2,
A) buyers bear a higher burden of the tax in the short run than in the long run.
B) sellers bear a higher burden of the tax in the short run than in the long run.
C) buyers and sellers bear an equal burden of the tax in both the short run and long run.
D) buyers and sellers bear an equal burden of the tax in the short run, but buyers bear a higher burden of the tax in the long run.
Q3) To be binding, a price floor must be set above the equilibrium price.
A)True
B)False
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Chapter 7: Consumers, Producers, and the Efficiency of Markets
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Q1) Refer to Table 7-11. If the price is $1,000,
A) Bobby is an eager supplier.
B) Dianne is an eager supplier.
C) Evaline's producer surplus is $100.
D) All of the above are correct.
Q2) If Rosa is willing to pay $450 for hockey tickets and has consumer surplus of $175, the price of the tickets is $625.
A)True
B)False
Q3) Refer to Figure 7-31. If the market equilibrium price rises from $25 to $35, how much is the producer surplus for the producers entering the market after the price increase?
Q4) In order to conclude that markets are efficient, we assume that they are perfectly competitive.
A)True
B)False
Q5) Refer to Table 7-18. If the price of the good is $20, how many units will be demanded?
Q6) Refer to Table 7-20. How much is total surplus at the equilibrium price in this market?
Page 9
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Chapter 8: Application: The Costs of Taxation
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Q1) Suppose a tax of $1 per unit is imposed on a good. The more elastic the demand for the good, other things equal,
A) the larger is the decrease in quantity demanded as a result of the tax.
B) the smaller is the tax burden on buyers relative to the tax burden on sellers.
C) the larger is the deadweight loss of the tax.
D) All of the above are correct.
Q2) Refer to Figure 8-1. Suppose the government imposes a tax of P' - P'''. The deadweight loss due to the tax is measured by the area
A) J+K+L+M.
B) J+K+L+M+N.
C) I+Y.
D) I+Y+B.
Q3) In which of the following instances would the deadweight loss of the tax on airline tickets increase by a factor of 9?
A) The tax on airline tickets increases from $20 per ticket to $60 per ticket.
B) The tax on airline tickets increases from $20 per ticket to $90 per ticket.
C) The tax on airline tickets increases from $15 per ticket to $60 per ticket.
D) The tax on airline tickets increases from $15 per ticket to $135 per ticket.
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Chapter 9: Application: International Trade
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Q1) Economists view the fact that Florida grows oranges, Texas pumps oil, and California makes wine as
A) confirmation of the virtues of free trade.
B) confirmation of the infant-industry argument.
C) confirmation that free trade agreements are not necessary.
D) confirmation that specialization in absolute advantage works.
Q2) A tariff on a product makes
A) domestic sellers better off and domestic buyers worse off.
B) domestic sellers worse off and domestic buyers worse off.
C) domestic sellers better off and domestic buyers better off.
D) domestic sellers worse off and domestic buyers better off.
Q3) Refer to Figure 9-5. If this country allows free trade in tricycles,
A) consumers will gain more than producers will lose.
B) producers will gain more than consumers will lose.
C) producers and consumers will both gain equally.
D) producers and consumers will both lose equally.
Q4) Refer to Figure 9-29. With no trade allowed, how much are consumer surplus, producer surplus, and total surplus?
Q5) List four benefits of international trade.
Q6) How does an import quota differ from an equivalent tariff?
Page 11
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Chapter 10: Externalities
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Q1) According to the Coase theorem, if private parties can bargain without cost, then the private market will solve the problem of externalities.
A)True
B)False
Q2) According to the Coase theorem, private parties can solve the problem of externalities if
A) the cost of bargaining is small.
B) the initial distribution of legal rights favors the person being adversely affected by the externality.
C) the number of parties involved is sufficiently large.
D) All of the above are correct.
Q3) Market failure can be caused by
A) too much competition.
B) externalities.
C) low consumer demand.
D) scarcity.
Q4) Refer to Scenario 10-3. Suppose there is an external cost of $12 associated with the production of each unit of the good. What is the social cost of producing 30 units of the good?
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Chapter 11: Public Goods and Common Resources
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Q1) The ocean remains one of the largest unregulated resources for each of the following reasons except
A) many countries have access to the ocean.
B) it is difficult to get international cooperation among countries that hold different values.
C) the oceans are so vast that enforcing any agreements would be difficult.
D) All of the above are reasons the ocean remains one of the largest unregulated resources.
Q2) The Tragedy of the Commons will be evident when a growing number of sheep grazing on the town commons leads to a destruction of the grazing resource. To correct for this problem, the town could
A) allow individual shepherds to choose their own flock sizes.
B) internalize the externality by subsidizing the production of sheep's wool.
C) auction off a limited number of sheep-grazing permits.
D) wait until the market corrects the problem.
Q3) Which two types of goods are rival in consumption?
Q4) "Given that most people like to get 'free stuff,' it follows that goods that are available free of charge are produced and consumed in the proper amounts in a market economy." What is wrong with this statement?
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Chapter 12: The Design of the Tax System
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Q1) Individual Retirement Accounts and 401(k) plans make the current U.S. tax system
A) less like European tax systems than it otherwise would be.
B) more like a payroll tax than it otherwise would be.
C) more like an income tax than it otherwise would be.
D) more like a consumption tax than it otherwise would be.
Q2) Suppose that the government taxes income in the following fashion: 20 percent of the first $50,000, 40 percent of the next $50,000, and 60 percent of all income over $100,000. Marshall earns $200,000, and Lily earns $600,000. Which of the following statements is correct?
A) Marshall's marginal tax rate is higher than Lily's marginal tax rate.
B) Marshall's average tax rate is higher than his marginal tax rate.
C) Lily's average tax rate is higher than her marginal tax rate.
D) Lily's average tax rate is higher than Marshall's average tax rate.
Q3) European countries tend to rely on which type of tax more so than the United States does?
A) an income tax
B) a lump-sum tax
C) a value-added tax
D) a corrective tax
Q4) Define the marginal tax rate.
Page 14
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Chapter 13: The Costs of Production
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Q1) Refer to Table 13-6. The Wooden Chair Factory experiences diminishing marginal product of labor with the addition of which worker?
A) the third worker
B) the fourth worker
C) the fifth worker
D) the sixth worker
Q2) Billy's Bean Bag Emporium produced 300 bean bag chairs but sold only 275 of the units it produced. The average cost of production for each unit of output produced was $100. The price for each of the 275 units sold was $95. Total profit for Billy's Bean Bag Emporium would be
A) -$3,875.
B) $26,125.
C) $28,500.
D) $30,000.
Q3) Refer to Scenario 13-9. Ellie's annual economic costs will equal
A) $55,200.
B) $75,200.
C) $80,500.
D) $135,700.
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Chapter 14: Firms in Competitive Markets
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Q1) Refer to Figure 14-9. Which line segment best reflects the long-run supply curve for this firm?
A) ABCD
B) BC
C) ABC
D) None of the above is correct. We must know the firm's average variable cost.
Q2) A firm that shuts down temporarily has to pay
A) its variable costs but not its fixed costs.
B) its fixed costs but not its variable costs.
C) both its variable costs and its fixed costs.
D) neither its variable costs nor its fixed costs.
Q3) Refer to Scenario 14-3. At Q=499, the firm's total costs equal
A) $5,983.
B) $5,988.
C) $5,995.
D) $5,999.
Q4) Explain how a firm in a competitive market identifies the profit-maximizing level of production. When should the firm raise production, and when should the firm lower production?
Q5) List and describe the characteristics of a perfectly competitive market.
Page 16
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Chapter 15: Monopoly
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Q1) Refer to Table 15-4. If the monopolist produces 5 units, what is its marginal revenue?
A) $100
B) $37.5
C) $15
D) $2.50
Q2) Refer to Table 15-7. What is the total variable cost of production when Sally produces six pairs of shoes?
A) $100
B) $295
C) $600
D) $620
Q3) Sizable economic profits can persist over time under monopoly if the monopolist A) produces that output where average total cost is at a maximum. B) is protected by barriers to entry.
C) operates as a price taker rather than a price maker.
D) earns revenues that exceed variable costs.
Q4) Refer to Figure 15-24. Use the letters in the figure to identify the area of deadweight loss for the single price monopolist.
Q5) Refer to Table 15-22. The average revenue of the 50th unit of output is
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Chapter 16: Monopolistic Competition
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Q1) Piper consumes Ragu spaghetti sauce exclusively. She claims that there is a clear taste difference and that competing brands of spaghetti sauce leave an unsavory taste in her mouth. However, in a blind taste test, Piper is found to prefer generic store-brand spaghetti sauce to Ragu spaghetti sauce eight out of ten times. The results of Piper's taste test would reinforce claims by critics of brand names that A) consumers are always willing to pay more for brand names. B) brand names cause consumers to perceive differences that do not really exist. C) brand names are always preferred to generics. D) consumers are only willing to buy generics if they are less expensive.
Q2) Oligopoly and monopolistic competition are examples of a market structure called imperfect competition.
A)True
B)False
Q3) Monopolistic competition is characterized by many buyers and sellers, product differentiation, and free entry.
A)True
B)False
Q4) Refer to Figure 16-12. What, if any, long run adjustment will take place in this industry?
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Chapter 17: Oligopoly
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Q1) Refer to Table 17-12. Suppose we observe that the price of a gallon of gasoline in Driveaway is $5; we observe as well that a particular seller's profit is $150. Given this observation, which of the following scenarios is most likely?
A) The market for gasoline in Driveaway is a monopoly.
B) There are two identical sellers of gasoline in Driveaway, and the sellers collude.
C) There are two identical sellers of gasoline in Driveaway, and the sellers do not collude.
D) There are three identical sellers of gasoline in Driveaway, and the sellers collude.
Q2) Refer to Scenario 17-2. If BQ and Exxoff are able to successfully collude to maximize their joint profits, BQ will
A) drill one well and Exxoff will drill one well.
B) drill one well and Exxoff will drill two wells.
C) drill two wells and Exxoff will drill one well.
D) drill two wells and Exxoff will drill two wells.
Q3) Refer to Table 17-35. Does Allied have a dominant strategy? If so, describe it.
Q4) Briefly describe the practice of resale price maintenance.
Q5) Refer to Table 17-34. Does Exxon have a dominant strategy? If so, describe it.
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Chapter 18: The Markets for the Factors of Production
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Q1) The distinction between purchase price and rental price applies to which factor(s) of production?
A) land only
B) capital only
C) land and capital only
D) land, capital, and labor
Q2) What happens to labor supply in the pear-picking market when the wage paid to apple pickers increases?
A) The labor supply will stay unchanged until the wages paid to pear pickers change.
B) The labor supply will decrease.
C) The labor supply will increase.
D) The labor supply may fall or rise, depending on the price of pears.
Q3) Land, labor, and capital are examples of factors of production. A)True
B)False
Q4) In 2012, the total income of all U.S. residents was approximately $120 billion.
A)True
B)False
Q5) Refer to Figure 18-12. What is the marginal product of the second mechanic?
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Chapter 19: Earnings and Discrimination
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Q1) Suppose that an employer can hire workers with brown hair and workers with blonde hair. Each type of worker has the same productivity. Which of the following is correct if the employer discriminates by hiring only workers with brown hair?
A) The employer will be just as efficient as a nondiscriminating employer.
B) The employer will face higher costs than firms that focus only on maximizing profits.
C) The employer will immediately go out of business because discrimination is illegal.
D) The employer will face union strikes.
Q2) A consensus view among economists regarding the possibility of labor-market discrimination is that
A) most wage differences among groups are attributable to discrimination.
B) many employers use compensating differentials to hide discriminatory practices.
C) wage differences among groups are not sufficient by themselves to determine how much discrimination there is.
D) all wage differences among groups are attributable to differences in human capital and compensating differentials.
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Chapter 20: Income Inequality and Poverty
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Q1) Which of the following is an example of a welfare program?
A) Temporary Assistance for Needy Families (TANF).
B) Capital Gains Tax (CGT).
C) Life Cycle Transfers (LCT).
D) North American Free Trade Agreement (NAFTA).
Q2) A utilitarian government must
A) calculate the utility of each individual in society.
B) avoid enacting any policies that redistribute income from the rich to the poor.
C) balance the gains from greater equality against the losses from distorted incentives.
D) pursue policies that do not affect the middle class.
Q3) Refer to Table 20-10. Which country has the most unequal income distribution?
A) Latvia
B) Italy
C) France
D) Sweden
Q4) In 2011, the top 20% of US families had more than times as much income as the bottom 20%.
Q5) With a minimum wage law, the workers who remain employed benefit from a .
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Chapter 21: The Theory of Consumer Choice
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Q1) Abby, Bobbi, and Deborah each buy ice cream and paperback novels to enjoy on hot summer days. Ice cream costs $5 per gallon, and paperback novels cost $8 each. Abby has a budget of $80, Bobbi has a budget of $60, and Deborah has a budget of $40 to spend on ice cream and paperback novels. Who can afford to purchase 4 gallons of ice cream and 5 paperback novels?
A) Abby, Bobbi, and Deborah
B) Abby only
C) Abby and Bobbi, but not Deborah
D) None of the women can afford to purchase 4 gallons of ice cream and 5 paperback novels.
Q2) Refer to Figure 21-6. Suppose the price of popcorn is $2, the price of Mt. Dew is $4, the value of A is 30, and the value of B is 15. How much income does the consumer have?
A) $120
B) $80
C) $60
D) $30
Q3) Refer to Figure 21-32. Of the four labeled points, which is (are) affordable to Hannah?
Q4) Is it possible for a normal good to be a Giffen good? Briefly explain.
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Chapter 22: Frontiers of Microeconomics
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Q1) Refer to Table 22-16. Mr. Johnson recommends using a vote by majority rule and proposes first choosing between Opryland and the Grand Canyon, then choosing between the winner of the first vote and Sea World, and finally choosing between the winner of the second vote and Disneyland. If everyone votes according to their preferences,
A) the winner of the first vote will be Opryland, the winner of the second vote will be Sea World, and the winner of the final vote will be Disneyland.
B) the winner of the first vote will be Grand Canyon, the winner of the second vote will be Grand Canyon, and the winner of the final vote will be Disneyland.
C) the winner of the first vote will be Grand Canyon, the winner of the second vote will be Sea World, and the winner of the final vote will be Disneyland.
D) the winner of the first vote will be Grand Canyon, the winner of the second vote will be Grand Canyon, and the winner of the final vote will be Grand Canyon.
Q2) Explain how the presence of asymmetric information in car insurance markets may lead people who are good drivers or even average drivers to choose not to buy car insurance unless the law requires it.
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