Microeconomic Theory
Exam Answer Key
Course Introduction
Microeconomic Theory explores the fundamental principles governing the behavior of individual economic agents, such as consumers and firms, within markets. The course delves into topics including demand and supply analysis, utility maximization, production and cost functions, market structures such as perfect competition, monopoly, and oligopoly, and the implications of market failures. Mathematical and graphical tools are employed to model and analyze decision-making processes, enabling students to develop a rigorous understanding of how prices are determined, resources are allocated, and welfare is affected within an economy.
Recommended Textbook
Microeconomics Student Value 4th Edition by R.
Glenn Hubbard
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Page 2
Chapter 1: Economics: Foundations and Models
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Sample Questions
Q1) Human capital refers to
A)the money people have.
B)the machines workers have to work with.
C)the accumulated skills and training workers have.
D)the wealth people have.
Answer: C
Q2) Which of the following is a microeconomics question?
A)Why do economies experience periods of recession?
B)Will government intervention lower the unemployment rate?
C)Why has growth in the economy slowed down over the past decade?
D)How will Apple decide on a selling price for the iPad?
Answer: D
Q3) One example of human capital is the amount of savings that you have.
A)True
B)False
Answer: False
Q4) The government makes all economic decisions in a centrally planned economy.
A)True
B)False
Answer: True
Page 3
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Chapter
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Q1) In a two-good,two country world,if one country has an absolute advantage in the production of both goods,it can still benefit by trading with the other country.
A)True
B)False
Answer: True
Q2) Refer to Figure 2-4.A movement from ________ is the result of advancements in plastic production technology.
A)V to X
B)W to X
C)Z to W
D)Y to Z
Answer: D
Q3) Refer to Table 2-4.What is Finland's opportunity cost of producing one board foot of lumber?
A)0.25 cell phones
B)4 cell phones
C)12 cell phones
D)16 cell phones
Answer: A
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Chapter 3: Where Prices Come From: the Interaction of
Demand and Supply
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Q1) Aging baby boomers are expected to have an effect on the housing market because
A)they have retirement money to use to get out of apartments and into large homes.
B)they tend to buy large vacation homes to accompany their primary residences.
C)older people often downsize their housing by moving from larger homes into smaller homes.
D)they have reached the age where the government will subsidize mortgages valued over $500,000.
Answer: C
Q2) If the price of pork rinds falls,the substitution effect due to the price change will cause
A)an increase in the demand for pork rinds.
B)an increase in the demand for corn chips,a substitute for pork rinds.
C)an increase in the quantity of pork rinds demanded.
D)a decrease in the quantity of pork rinds demanded.
Answer: C
Q3) All else equal,as the price of a product falls,the quantity supplied decreases.
A)True
B)False
Answer: True
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Chapter 4: Economic Efficiency, government Price Setting, and Taxes
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Q1) Refer to Table 4-3.What is the equilibrium hourly wage (W*)and the equilibrium quantity of labor (Q*)?
A)W* = $9.00; Q* = 370,000
B)W* = $8.50; Q* = 380,000
C)W* = $8.50; Q* = 360,000
D)W* = $9.00; Q* = 740,000
Q2) The maximum price that a buyer is willing to pay for a good measures his
A)consumer surplus.
B)marginal benefit.
C)willingness to pay.
D)producer surplus.
Q3) Consumer surplus in a market for a product would be equal to the area under the demand curve if
A)producer surplus was equal to zero.
B)marginal cost was equal to the market price.
C)the product was produced in a perfectly competitive market.
D)the market price was zero.
Q4) Is there a difference between the "true burden" of a tax and who is legally required to pay a tax? Briefly explain.
Q5) What is deadweight loss? When is deadweight loss equal to zero?
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Chapter 5: Externalities, environmental Policy, and Public Goods
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Q1) Which of the following would result in a positive externality?
A)A local government establishes a price ceiling on rental apartments.
B)An electric utility burns coal that causes acid rain.
C)Medical research results in a cure for malaria.
D)McDonald's adds new fat-free items to its menu.
Q2) In 2011,the Environmental Protection Agency proposed a plan to enact tougher limits on smog-forming ozone.By implementing new pollution regulations,the government will cause the polluters'
A)marginal private cost curve to shift up.
B)marginal private cost curve to shift down.
C)marginal social cost curve to shift up.
D)marginal social cost curve to shift down.
Q3) Policies that mandate the installation of specific pollution control devices are called A)command and control policies.
B)benefit policies.
C)welfare policies.
D)incentive policies.
Q4) State the Coase theorem.What are some of the limitations of the Coase theorem in practice?
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Chapter 6: Elasticity: the Responsiveness of Demand and Supply
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Q1) Refer to Figure 6-3.Between points a and b on the demand curve,demand is
A)perfectly inelastic.
B)unit-elastic.
C)perfectly elastic.
D)elastic.
Q2) Economist Jerry Hausman estimated the price elasticity of demand for breakfast cereal.He found that
A)the price elasticity for a particular brand of raisin bran was the same as the elasticity of demand for all family cereals.
B)the price elasticity of demand for Post Raisin Bran is less than the price elasticity of demand for Kellogg's Raisin Bran.
C)the price elasticity of all family breakfast cereals is greater than the price elasticity of demand for Post Raisin Bran or Kellogg's Raisin Bran.
D)the price elasticity of demand for a particular brand of raisin bran was larger in absolute value than the elasticity for all family cereals.
Q3) Most food products have low income and price elasticities of demand.
A)True
B)False
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Chapter 7: The Economics of Health Care
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Q1) In the 1973 movie Save the Tiger,Jack Lemmon plays Harry Stoner,the CEO of a clothing manufacturer whose business has fallen on hard times.In one of the key scenes of the movie,Stoner tries to convince his partner that they should hire someone to burn one of their buildings in order to collect on their insurance policy.Harry Stoner's actions are an example of
A)adverse selection.
B)moral hazard.
C)self-interest.
D)asymmetric information.
Q2) How do adverse selection and moral hazard affect the market for insurance?
Q3) ________ account(s)for between 1 and 4 percent of health care costs in the United States.
A)The aging population
B)Uninsured patients receiving treatments at hospital emergency rooms that could have been provided less expensively at doctor's offices
C)The payments to settle malpractice lawsuits and the premiums doctors pay for malpractice insurance
D)Advances in medical technology
Q4) What is asymmetric information?
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Chapter 8: Firms, the Stock Market, and Corporate Governance
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Q1) In the United States,corporate profits are taxed
A)only at the corporate level.
B)only when investors receive dividends.
C)at both the corporate level and when investors receive dividends.
D)neither at the corporate level nor when investors receive dividends.
Q2) With state and multistate lotteries,winners are typically given the choice between a lump sum payment today or a 20 year series of annuities.How should a winner decide which is better?
Q3) What are the advantages of setting up a proprietorship or partnership as opposed to a corporation?
Q4) The coupon rate of a bond is equal to
A)the coupon payment.
B)the interest payment.
C)the interest rate.
D)the face value.
Q5) Stockholders
A)are liable for the debts of a corporation.
B)are the owners of a corporation.
C)control a corporation's day-to-day activities.
D)hire the managers of a corporation.
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Chapter 9: Comparative Advantage and the Gains From International Trade
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Q1) The Smoot-Hawley Tariff
A)lowered U.S.tariffs by 50 percent following World War II.
B)was passed by the U.S.Congress following the Civil War as a means of increasing government revenue.
C)was passed by the U.S.Congress upon a recommendation made by the General Agreement on Tariffs and Trade (GATT)in 1948.
D)raised average tariff rates by over 50 percent in the United States in 1930.
Q2) Refer to Figure 9-3.What is the value of domestic producer surplus without a quota?
A)$5 million
B)$15.75 million
C)$38.5 million
D)$53.5 million
Q3) Jim Owens,Caterpillar's CEO,was encouraged that the "Buy American" provision in the 2009 stimulus bill would generate a large increase in Caterpillar's sales.
A)True
B)False
Q4) What are terms of trade?
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Chapter 10: Consumer Choice and Behavioral Economics
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Q1) The order of the letters along the rows of computer keyboards could be changed to allow users to type faster,but this would inconvenience the vast majority of people who learned to type with the current keyboard layout.The costs of switching to a new layout make this change unlikely.This is an example of A)path dependency.
B)how social influences overwhelm the substitution effect of a price change.
C)how the elasticity of demand for typewriters has been affected by externalities.
D)how consumers sometimes do not behave rationally.
Q2) The word "util" has been used by economists in the past as an objective measure of utility.Today economists believe that A)utility cannot be measured objectively.
B)utility can be measured objectively because people can use prices of different goods to measure utility.
C)all of the important conclusions of the economic model of consumer behavior depend on utility being measured objectively.
D)the util truly is an objective,rather than a subjective,measure of utility.
Q3) Explain the concept of network externalities.
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Page 12
Chapter 11: Technology, production, and Costs
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Q1) In 1955,the chairman of the Sony corporation offered to sell transistor radios through department stores in the United States.Sony based its selling price on its average total cost of production.If a store bought 5,000 radios,Sony would sell them at $29.95 each.For 10,000 there would be a discount,and for more than 10,000 the price would begin to climb.Based on this information,Sony began experiencing diseconomies of scale
A)at a quantity of less than 5,000 radios.
B)at a quantity between 5,000 and 10,000 radios.
C)at a quantity of 10,000 radios.
D)at a quantity just greater than 10,000 radios.
Q2) In the short-run,changes in output can only be brought about by a change in the quantity of variable inputs.
A)True
B)False
Q3) Are the costs of utilities always fixed,always variable,or can they be both? Briefly explain.
Q4) Describe the difference between technology and positive technological change.
Q5) What is the marginal product of labor and what is the average product of labor.
Q6) What is an isocost line? What is the slope of an isocost line?
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Chapter 12: Firms in Perfectly Competitive Markets
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Q1) Of the following industries,which are perfectly competitive? For those that are not perfectly competitive,explain why.
a.Restaurants
b.Corn
c.College education
d.Local radio and television
Q2) Which of the following describes a difference between allocative efficiency and productive efficiency in a perfectly competitive market?
A)Allocative efficiency is achieved only in the long run.Productive efficiency is achieved only in the short run.
B)Allocative efficiency is achieved only in the long run.Productive efficiency is achieved in the short run and the long run.
C)Allocative efficiency is achieved only in the short run.Productive efficiency is achieved only in the long run.
D)Allocative efficiency is achieved in the short run and the long run.Productive efficiency is achieved only in the long run.
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Chapter 13: Monopolistic Competition: the Competitive
Model in a More Realistic Setting
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Q1) Refer to Figure 13-4.Based on the diagram,one can conclude that
A)some existing firms will exit the market.
B)new firms will enter the market.
C)the industry is in long-run equilibrium.
D)firms achieve productive efficiency.
Q2) What are the key factors that determine the profitability of a firm in a monopolistically competitive market?
Q3) The profit-maximizing rule for a monopolistically competitive firm is to select the quantity at which
A)marginal revenue equals marginal cost.
B)average revenue exceeds marginal cost by the greatest amount.
C)price equals marginal cost.
D)average revenue equals average total cost.
Q4) For the monopolistically competitive firm,
A)Price (P)= Marginal Revenue (MR)= Average Revenue (AR).
B)P = MR > AR.
C)P = AR > MR.
D)P > MR = AR.
Q6) Why are many companies concerned about brand management? Page 15
Q5) What is meant by "excess capacity"? How does it relate to consumer utility?
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Page 16
Chapter 14: Oligopoly: Firms in Less Competitive Markets
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Q1) Does the strength of each of the five competitive forces from Michael Porter's model remain constant over time? Briefly explain.
Q2) A subgame-perfect equilibrium is a Nash equilibrium in which no player can make himself better off by changing his decision at any decision node.
A)True
B)False
Q3) Oligopoly differs from perfect competition and monopolistic competition in that A)barriers to entry are lower in oligopoly industries than they are in perfectly competitive and monopolistically competitive industries.
B)demand and marginal revenue curves are more useful for analyzing oligopoly than they are for analyzing perfect competition and monopolistic competition.
C)because oligopoly firms often react when other firms in their industry change their prices,it is difficult to know what the oligopolist's demand curve looks like.
D)the concentration ratios of oligopoly industries are lower than they are for perfectly competitive and monopolistically competitive firms.
Q4) Firms in an oligopoly are said to be interdependent.What does this mean?
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Chapter 15: Monopoly and Antitrust Policy
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Q1) The first important law regulating monopolies in the United States was
A)the Grant Act,which was passed in 1890.
B)the Clayton Act,which was passed in 1890.
C)the Sherman Act,which was passed in 1890.
D)the Federal Trade Commission Act,which was passed in 1914.
Q2) A narrow definition of monopoly is that a firm is a monopoly if it can ignore
A)government antitrust laws.
B)the pricing decisions of its suppliers.
C)the pricing decisions of firms that produce complementary products.
D)the actions of all other firms.
Q3) Refer to Figure 15-7.Suppose the government regulates this industry in order to remove the inefficiency implied by the behavior of the profit maximizing owners.If regulators require that the firm produces the economically efficient output level,what is this level and what price will be charged?
A)Q<sub>4</sub> units; P<sub>4</sub>
B)Q<sub>1</sub> units; P<sub>4</sub>
C)Q<sub>1</sub> units; P<sub>1</sub>
D)Q<sub>3</sub> units; P<sub>3</sub>
Q4) What is a public franchise? Are all public franchises natural monopolies?
Q5) Identify four reasons for high entry barriers? Briefly explain each reason.
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Chapter 16: Pricing Strategy
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Q1) Are restaurant coupons a form of price discrimination? Why or why not?
Q2) Though large firms have the knowledge and resources to utilize a better pricing strategy,many choose to use cost-plus pricing.One reason for this is that
A)large firms do not have to maximize their profits because they face little competition from other firms.
B)there is less risk of violating antitrust laws if a cost-plus pricing strategy is used rather than a profit-maximizing pricing strategy.
C)the additional revenue that would result from a profit-maximizing pricing strategy is an insignificant fraction of the firms' revenues.
D)firms often adjust the markup they charge to reflect current demand.
Q3) Many colleges and universities practice yield management to maximize the revenue they receive from tuition and
A)to maximize the amount of aid they receive from the federal government.
B)to maximize the amount of their student loans.
C)to maximize the size of their endowments.
D)to increase the academic quality of the students who enroll in their schools.
Q4) What conditions are required for a firm to use a price discrimination strategy?
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Page 19
Chapter 17: The Markets for Labor and Other Factors of Production
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Q1) A firm should hire more workers to increase its profits if A)the marginal product of labor is greater than the wage the firm will pay these workers. B)the wage rate is less than the marginal revenue product of labor. C)there is enough capital and other resources for the workers to use. D)the demand for labor is elastic.
Q2) The Equal Pay Act of 1963 requires that men and women be given equal pay for equal work in the same establishment.Most people agree that gender discrimination in the workplace is unfair,but many economists have criticized advocates of comparable worth.Is paying the same wages for jobs that have comparable worth mandated by the Equal Pay Act? Why don't most economists support proposals to force employers to pay their male and female employees based on comparable worth rules?
Q3) Companies often find it to be more profitable to use a commission or piece-rate system of compensation rather than a salary system,yet many firms continue to pay their workers salaries.List three reasons why a firm would choose a salary system of compensation.
Q4) The total amount of copper in the earth is not increasing.Does this mean that in the market for copper,the supply curve is perfectly inelastic? Explain.
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Chapter 18: Public Choice, taxes, and the Distribution of Income
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Q1) Refer to Figure 18-4 to answer the following questions.
a.Did the distribution of income become more equal in 2012 than it was in 2011,or did it become less equal? Explain.
b.If area A = 1,900,area B = 450,and area C = 2,650,calculate the Gini coefficient for 2011 and the Gini coefficient for 2012.
Q2) The Gini coefficient for the United States in 1980 was 0.403.In 2011,the coefficient was equal to 0.468.This means that
A)per capita income in the United States rose from 1980 to 2011.
B)there was a decrease in the amount of government transfer payments from 1980 to 2011.
C)cuts in federal income tax rates in the early 1980s and 2001 helped to reduce income inequality.
D)income inequality increased from 1980 to 2011.
Q3) A Lorenz curve summarizes the information provided by a Gini coefficient.
A)True
B)False
Q4) Explain why it is more difficult to determine the incidence of the corporate income tax than it is to determine the incidence of the tax on gasoline.
Page 21
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