Introduction to Microeconomics Test
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Course Introduction
Introduction to Microeconomics explores the fundamental principles that govern individual and firm decision-making in various market environments. The course covers essential topics such as supply and demand, elasticity, consumer behavior, production costs, market structures, and the role of government in addressing market failures. Emphasis is placed on real-world applications and critical analysis of how scarce resources are allocated in an economy, equipping students with a foundational understanding of microeconomic theory and its relevance to everyday economic issues.
Recommended Textbook Microeconomics 1st Canadian Edition by B. Douglas Bernheim
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Page 2
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Chapter 1: Introduction
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Q1) A society's institutions
A) Include the laws and customs that determine the allocation of resources
B) Have no effect on people's abilities to make decisions
C) Are irrelevant when studying an economy
D) Are not related to the control of society's resources
Answer: A
Q2) The rate at which someone can swap money for a good is called the _____ of the good.
A) Price
B) Opportunity cost
C) Total cost
D) Rate of substitution
Answer: A
Q3) In order to explain how societies deal with the problem of scarcity,economists apply simplified representations known as
A) Simplifying assumptions
B) Theories
C) Normative questions
D) Models
Answer: D
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Chapter 2: Supply and Demand3
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Q1) Complements are characterized by
A) Negative cross-price elasticity of demand
B) Positive cross-price elasticity of demand
C) Cross-price elasticity of demand equal to zero
D) Cross price elasticity of demand equal to -1
Answer: A
Q2) Refer to Figure 2.3.At a price of $13 per CD,there would be
A) Excess supply of 30 thousand CDs
B) Excess demand of 10 thousand CDs
C) Excess supply of 60 thousand CDs
D) Excess demand of 20 thousand CDs
Answer: A
Q3) A product's ______ describes the amount of the product that is supplied for each possible combination of its price and other factors.
A) Production function
B) Supply curve
C) Supply function
D) Production possibilities curve
Answer: C
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Page 4
Chapter 3: Balancing Benefits and Costs
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Q1) According to the No Marginal Improvement Principle,if X* is the best choice,then
A) MB must be greater than MC at X*
B) MB must be equal to MC at X*
C) MB must be less than MC at X*
D) MB must be greater than or equal to MC at X*
Answer: B
Q2) Suppose that you join a gym that charges a $250 membership fee.You also have to pay an additional $5 each time you go the gym.In this case,your sunk cost is
A) $250
B) Dependent upon the number of time you go to the gym
C) $5
D) $250 plus $5 times every visit you make to the gym
Answer: A
Q3) Sunk costs
A) Can be ignored because they have no effect on marginal costs
B) Should be taken into consideration when choosing the best level of an activity
C) Should not be ignored because they lead to higher marginal costs
D) Can be ignored because they don't have to be paid by the decision maker
Answer: A
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Chapter 4: Principles and Preferences
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Q1) Which of the following statements regarding preferences and indifference curves is true?
A) When choosing between two consumption bundles, a consumer will always prefer the consumption bundle on the lower indifference curve
B) A consumer is indifferent between two consumption bundles that are on the same indifference curve
C) When choosing between two consumption bundles, a consumer will always prefer the consumption bundle that is farthest to the right on an indifference curve
D) When choosing between two consumption bundles, a consumer will always prefer the consumption bundle that is farthest to the left on an indifference curve
Q2) Refer to Figure 4.4.Which diagram most likely represents the indifference map for a good and a "bad"?
A) A
B) B
C) C
D) D
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Chapter 5: Constraints, Choices, and Demand
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Q1) A curve that describes the relationship between the price of a good and the amount a particular consumer purchases (holding the consumer's income,preferences and all other prices fixed)is called
A) A price-consumption curve
B) An individual demand curve
C) An income-consumption curve
D) A budget line
Q2) A consumer's budget constraint is
A) A positively sloped line
B) A negatively sloped line
C) Convex
D) A vertical line at the level of the consumer's income
Q3) An affordable consumption bundle is an interior choice if
A) It lies below the budget line
B) For each good, there are affordable bundles containing a little bit more of that good and a little bit less of the other good
C) For each good, there are no other affordable bundles containing a little bit more of that good and a little bit less of the other good
D) It exhausts the consumer's income
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Page 7
Chapter 6: Rom Demand to Welfare
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Q1) ______ measures the percent change in the cost of a fixed consumption bundle.
A) A fixed-weight price index
B) Substitution bias
C) Compensating variation
D) Real income
Q2) The demand curve for leisure will slope upward if leisure is a ______ good and the income effect of a wage change is relatively _______.
A) Normal; large
B) Inferior; large
C) Normal; small
D) Inferior; small
Q3) Refer to Figure 6.1.The substitution effect is shown by the movement
A) From bundle A to bundle C
B) From bundle A to bundle B
C) From bundle B to bundle C
D) From bundle C to bundle B
Q4) Suppose an individual consumes just pizza and soda.Using a graph,explain how the substitution bias causes the Laspeyres price index to overstate the true change in the cost of living resulting from an increase in the price of pizza.
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Chapter 7: Technology and Production
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Q1) A firm's _______ contains all combinations of inputs and outputs that the firm can achieve using efficient production methods.
A) Production possibilities set
B) Efficient production frontier
C) Production function
D) Production possibilities curve
Q2) The average product of labour is defined as
A) The additional output produced by the last L units of labour hired
B) The amount of output divided by the amount of capital used to produce the output
C) The amount of output produced multiplied by the last L units of labour hired
D) The amount of output divided by the number of workers employed
Q3) The marginal product of labour is defined as
A) The additional output produced by the last L units of labour hired
B) The amount of output divided by the amount of capital used to produce the output
C) The amount of output produced multiplied by the last L units of labour hired
D) The amount of output divided by the number of workers employed
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Chapter 8: Cost
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Q1) Suppose that a firm produces both steel and electricity.It is cheaper for this firm to produce both goods than it would be if they were produced by two separate firms.Further,as this firm increases its production levels of both products,the average cost of producing steal rises,while the average cost of producing electricity remains constant.This firm experiences
A) Economies of scope, diseconomies of scale in the production of steal and constant returns to scale in the production of electricity
B) Economies of scope, economies of scale in the production of steal and constant returns to scale in the production of electricity
C) Diseconomies of scope, economies of scale in the production of steal and constant returns to scale in the production of electricity
D) Diseconomies of scope, diseconomies of scale in the production of steal and increasing returns to scale in the production of electricity
Q2) Suppose a firm's short-run production function is given by Q = 3ÖL,where L represents the number of hours of labour employed.The firm has a sunk cost of $500 and the wage rate is $18 per hour.What is the firm's short-run cost function? Solve the production function for L:
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Chapter 9: Rofit Maximization
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Q1) What is an inverse demand function? If the demand for a firm's product is given by the expression Q = 600 - 3P,what is the firm's inverse demand function? By how much would the firm have to change its price in order to increase sales from 300 units to 450 units?
Q2) How would a $10 increase in an input price effect a price-taking firm's supply curve?
A) MC would increase by $10 and AC would decrease by $10
B) AC would increase by $10 and MC would decrease by $10
C) MC and AC would both decrease by $10
D) MC and AC would both increase by $10
Q3) The extra revenue produced by the change in quantity,on a per unit basis,is called
A) Marginal benefit
B) Marginal revenue
C) Inframarginal units
D) Both marginal benefit and marginal revenue
Q4) Suppose that a price-taking firm charges $12 for its product and has a cost function given by C(Q)= 2Q + (Q<sup>2</sup>/60).The corresponding marginal cost is given by C(Q)= 2 + (Q/30).How much output should the firm produce? What if the firm has $2,000 of avoidable fixed costs?
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Chapter 10: Choices Involving Time
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Q1) Suppose you use the rate of inflation as the interest rate for determining the present value of $1.What would the present value of $3,000 received in three equal yearly payments be if the current rate of inflation is 3.5% and increases by 15 basis points each year?
Q2) Table 10.1 shows the cash flows and discounted cash flows for three mutually exclusive projects available to a company.Assume an interest rate of 5%.Which project has the shortest payback period?
A) Project A
B) Project B
C) Project C
D) Cannot be determined
Q3) What is another term for time value of money?
A) Net present value
B) Internal rate of return
C) Opportunity cost of funds
D) Yield to maturity
Q4) Using a carefully-labeled graph,explain the Life Cycle Hypothesis.What are some of the implications of the Life Cycle Hypothesis?
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Chapter 11: Choices Involving Risk
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Q1) Refer to Figure f.A benefit function,W(F),is plotted in Figure f.Point A represents the
A) Risk premium of the consumption bundle
B) Expected utility of the consumption bundle
C) Certainty equivalent of the consumption bundle
D) Expected consumption
Q2) Refer to Figure b.Suppose consumers choose to consume food in two different states,sunny weather,F<sub>S</sub> and during a hurricane,F<sub>H</sub>.As the consumer moves from point A to B along the indifference curve,the variability of consumption
A) Decreases
B) Increases
C) Remains constant
D) Increases for one good, but decreases for the other
Q3) Refer to Figure g.Lily's benefit function (dashed)is more concave than Millie's benefit function (dotted).Lily
A) Is more risk averse than Millie
B) Is less risk averse than Millie
C) Has a smaller risk premium than Millie
D) Has a larger certainty equivalent than Millie
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Chapter 12: Choices Involving Strategy
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Q1) In a mixed strategy equilibrium
A) A players' probabilities are chosen to make sure that he is indifferent
B) Players choose mixed strategies, but the mixed strategy chosen by each is not necessarily a best response to the mixed strategies chosen by the others
C) Players choose mixed strategies and the mixed strategy chosen by each is a best response to the mixed strategies chosen by the others
D) A and C
Q2) A game is
A) A situation in which each member of a group makes at least one decision and cares both about his own choice and about others' choices
B) Describes a situation in which strategy plays a role
C) Provides the foundation for understanding competition in industries with only a few producers
D) All of these
Q3) Use the concepts of reputation and asymmetric information to explain why some faculty members become less productive after gaining tenure.
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14
Chapter 13: Behavioral Economics
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Q1) The faculty of Mistaken University is voting on a curricular reform.Members of the faulty have been working on the proposed curriculum for over four years.Some faculty members are going to vote for the reform because so much time and money has already been invested in it.Explain why these faculty members are mistaken in their reasoning.
Q2) Suppose Dean has season tickets for the University of North Carolina men's basketball games.He paid $2,000 for the season tickets.One February afternoon,Dean is very excited about going to the UNC vs.Duke game because of the traditional rivalry between the two teams.Unfortunately,his wife invited several friends over for an evening dinner party and tells Dean he needs to stay home and help her clean the house in preparation for the guests.Dean very much wants to go to the game,but knows he will have to face the wrath of his wife if he does.In his defense,Dean states "I already paid for the game! I have to go or it will be a waste of money." Explain why Dean's reasoning is incorrect.
Q3) Identified departures from perfect rationality include
A) Incoherent choices
B) Bias towards the status quo
C) Anchoring
D) All of these
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Chapter 14: Equilibrium and Efficiency
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Q1) In a perfectly competitive market
A) Firms take quantities as given
B) Firms produce the quantity for which marginal cost equals price
C) Firms can increase profits by charging a price higher than the market price
D) Firms produce the quantity for which marginal cost equals marginal revenue
Q2) In a perfectly competitive market
A) Firms are price setters
B) Firms produce the quantity for which marginal cost equals price
C) Firms can increase profits by charging a price higher than the market price
D) Firms are quantity setters
Q3) Suppose the wiz-pop market is in long-run equilibrium.Suddenly,fixed costs decrease,although variable costs remain unchanged.Discuss the short-run and long-run changes in market equilibrium.
Q4) With free entry
A) The long run market supply curve is horizontal at the market price
B) The long run market supply curve is vertical at the market price
C) The short and long run market supply curves are the same
D) The short run market supply curve is horizontal at the market price
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Page 16
Chapter 15: Market Intervention
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Q1) A quota
A) Is a tax on imports
B) Is a tax on exports
C) Directly limits the total quantity of a good that can be imported
D) Directly limits the total quantity of a good that can be exported
Q2) The incidence of a tax
A) Falls entirely on consumers if demand is perfectly elastic
B) Falls entirely on consumers if demand is perfectly inelastic
C) Is shared by suppliers and consumers if demand is perfectly elastic
D) Falls entirely on suppliers if demand is perfectly inelastic
Q3) The deadweight loss of taxation
A) Is the lost consumer surplus due to a gain in producer surplus from a tax
B) Is the lost producer surplus due to a gain in consumer surplus from a tax
C) Is the lost aggregate surplus due to a tax
D) Is the difference between consumer and producer surplus after a tax
Q4) A subsidy
A) Is a payment that decreases the amount that buyers pay for a good
B) Is a payment that increases the amount that buyers pay for a good
C) Is a payment that decreases the amount that sellers receive
D) Is a payment that decreases the amount that sellers sell for a good
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Chapter 16: General Equilibrium, Efficiency, and Equity
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Q1) A point inside the utility possibility frontier is
A) Inefficient
B) Impossible
C) Efficient
D) Inefficient and Impossible
Q2) The production contract curve
A) Shows every efficient allocation of inputs between two firms in an Edgeworth box
B) Shows every efficient allocation of consumption goods in an Edgeworth box
C) Passes through the tangencies between pairs of isocosts in an Edgeworth box
D) Shows every inefficient allocation of inputs between two firms in an Edgeworth box
Q3) Outcome-oriented notions of equity
A) Focus on the procedures used to arrive at an allocation rather than on the allocation of resources
B) Focus on whether the process used to allocate resources yields fair results
C) Include those that focus on the distribution of products
D) Focus on the procedures used to arrive at an allocation of resources rather than on the allocation itself
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18
Chapter 17: Monopoly
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Q1) A firm's Lerner Index
A) Is the amount by which its price exceeds its marginal cost, expressed as a percentage of its price
B) Is the amount by which its marginal cost exceeds its average cost
C) Is the amount by which its average cost exceeds its marginal cost
D) Is the value of its profit
Q2) A monophony market
A) Is a market with a single buyer
B) Is a market with a single seller
C) Is a market with a single input
D) Is a market with a single product
Q3) An oligopoly market is
A) A market with many sellers
B) A market with a single seller
C) A market with a few sellers
D) A market with a few buyers
Q4) Discuss the difference between first-best and second-best price regulation.In your answer,you should address why governments regulate markets and the difficulties faced when doing so.
Q5) Explain the difference between a monopoly and a monophony.
Page 19
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Chapter 18: Pricing Policies
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Q1) A telephone company that charges both a monthly fee plus a price per minute used are employing
A) Quality dependent pricing
B) Ordinary price discrimination
C) A two-part tariff
D) Quantity dependent pricing
Q2) Bundling always increases a multi product monopolist's profit
A) Whenever an increase of a dollar in the willingness to pay for one good implies a reduction of a dollar in the willingness to pay for another good and the marginal cost is zero
B) Whenever an increase of a dollar in the willingness to pay for one good implies an increase in the willingness to pay for another good and the marginal cost is zero
C) When doing so does not alter consumers' willingness to pay for the bundle and the monopolist can extract all of aggregate surplus as profit
D) Whenever a decrease of a dollar in the willingness to pay for one good implies an increase in the willingness to pay for another good and the marginal cost is zero
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Chapter 19: Oligopoly
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Q1) As products become less differentiated
A) Consumers are less willing to switch in response to price changes
B) Consumers are more willing to switch in response to price changes
C) Competition becomes less intense
D) Consumers are not willing to switch in response to price changes
Q2) Compare and contrast the Bertrand and Cournot models of oligopoly.Your discussion should include assumptions made,goals of the firms and the resulting outcomes.
Q3) A market with two sellers is called a
A) Monopoly
B) Perfectly competitive market
C) Duopoly
D) Triopoly
Q4) The Cournot model of oligopoly
A) Firms produce differentiated products and set their prices simultaneously
B) Firms produce homogenous products and set their prices simultaneously
C) Firms choose how much to produce simultaneously and the price clears the market given the total quantity produced
D) Firms choose how much to produce and the price to charge simultaneously
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Chapter 20: Externalities and Public Goods
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Q1) A private good
A) Is a good for which consumption involves perfect rivalry
B) Is nonexcludable
C) Is often provided by the government
D) Is often not provided by the government
Q2) The marginal social cost of production is
A) The sum of the total cost to the producer and the total external cost
B) The sum of the marginal cost to the producer and the total external cost
C) The sum of the total cost to the producer and the marginal external cost
D) The sum of the marginal cost to the producer and the marginal external cost
Q3) An external cost is
A) The cost of a warehouse
B) A cost of production in some other market
C) The economic harm that a positive externality imposes on others
D) The economic harm that a negative externality imposes on others
Q4) A negative externality is created if
A) An action harms someone not involved in the market transaction
B) An action benefits someone not involved in the market transaction
C) Neither helps nor hurts someone not involved in the market transaction
D) An action benefits someone involved in the market transaction
Page 22
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