Microeconomic Theory
Exam Materials
Course Introduction
Microeconomic Theory explores the fundamental principles that govern individual decision-making and interactions within markets. The course delves into the behavior of consumers and firms, market structures, and the mechanisms that determine prices and resource allocation. It covers concepts such as utility maximization, production and cost functions, competitive and non-competitive market equilibrium, welfare analysis, and the role of government intervention. Through rigorous analytical tools and mathematical models, students gain a comprehensive understanding of how microeconomic forces shape real-world economic outcomes.
Recommended Textbook
Foundations of Microeconomics 7th Edition by Robin Bade
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Page 2
Chapter 1: Getting Started
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Sample Questions
Q1) Define economics and describe its branches of study.
Answer: Economics is the social science that studies the choices made by individuals,businesses,government,and entire societies as they cope with scarcity.It has two branches,microeconomics and macroeconomics.Microeconomics is the study of the choices made by individuals and businesses,the way they interact,and the influence that governments exert on these choices.Macroeconomics is the study of the aggregate (total)effects on the national economy and the global economy of the choices that individuals,businesses,and governments make.
Q2) What does the slope of the curved line at point A shown in the above figure equal?
Answer: The slope of a curved line equals the slope of a straight line that touches the curved line at only that point.And,the slope of a straight line equals the change in variable on the y-axis divided by the change in the variable on the x-axis.Measure the slope of the straight line from point A to where the line crosses the x-axis,at 15.Thus the straight line has a slope of (30 - 0)/(10 - 15)= -6.Therefore the curve line at point A also has a slope equal to -6.
Q3) In the figure above,what can you deduce about the slope of the curve?
Answer: The slope is positive and increasing in size as we move rightward along the curve.
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3
Chapter 2: The USand Global Economies
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Sample Questions
Q1) In the figure above,which of the following is true?
i.Governments coordinate economic activities of households and firms.
ii.Governments buy goods and services in goods markets.
iii.Households pay taxes directly to firms.
A) only ii
B) only i
C) only iii
D) i and ii
E) ii and iii
Answer: A
Q2) Of the following,the federal government obtains most revenue from A) excise taxes.
B) sales taxes.
C) corporate income taxes.
D) Social Security taxes.
E) property taxes.
Answer: D
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Page 4
Chapter 3: The Economic Problem
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Sample Questions
Q1) The above figure shows the production possibility frontier for an economy.The point or points that are attainable are
A) points B and C.
B) points A, B, and C.
C) point E.
D) points A, B, C, and D.
E) points A and D.
Answer: D
Q2) As an economy increasingly specializes in producing one good,the opportunity cost of that good increases.The opportunity cost increases because
A) resources are not equally productive in all activities.
B) what must be paid to resources increases.
C) human wants are virtually unlimited.
D) not all goods are equally valuable.
E) as more of a good is produced, the profit from its production must rise.
Answer: A
Q3) A production point beyond the production possibilities frontier represents what?
Answer: A production point beyond the production possibilities frontier is an unattainable combination of products.
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Chapter 4: Demand and Supply
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Sample Questions
Q1) If the demand curve for desktop computers shifts rightward and at the same time the supply curve shifts leftward,then
A) the equilibrium quantity definitely increases.
B) the equilibrium quantity definitely decreases.
C) the equilibrium quantity definitely remains the same.
D) More information is needed to determine the effect on the equilibrium quantity.
E) the equilibrium price definitely falls.
Q2) The graph illustrates the demand for peanuts.Peanuts are a normal good because the
A) demand curve for peanuts slopes downward.
B) demand for peanuts increases when income increases.
C) demand for peanuts increases when the price of one of its substitutes rises.
D) peanuts have both substitutes and complements.
E) demand curve shows that if the price of peanuts rises, there is a movement along the demand curve to a lower quantity demanded.
Q3) What is the effect on the price and quantity of a product if the demand decreases and the supply simultaneously increases?
Q4) When the demand for blue jeans increases,what happens next?
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Page 6
Chapter 5: Elasticities of Demand and Supply
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Sample Questions
Q1) Supply is unit elastic when the
A) supply curve is upward sloping.
B) price elasticity of supply is positive.
C) percentage change in the quantity supplied equals the percentage change in price.
D) supply curve is horizontal.
E) supply curve is vertical.
Q2) The demand curve shown in the figure above is ________ over the price range from $95 to $105 per unit.
A) perfectly elastic
B) perfectly inelastic
C) unit elastic
D) elastic but not perfectly elastic
E) inelastic but not perfectly inelastic
Q3) The total revenue test says that if a price decrease leads to
A) an increase in total revenue, demand is income elastic.
B) a decrease in total revenue, demand is income inelastic.
C) a decrease in total revenue, demand is price inelastic.
D) a decrease in total revenue, supply is price inelastic.
E) a decrease in total revenue, supply is price elastic.
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Page 7
Chapter 6: Efficiency and Fairness of Markets
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Sample Questions
Q1) Marginal benefit
A) increases as more of a good is consumed.
B) decreases as more of a good is consumed.
C) is the total benefit from all units consumed.
D) is constant as more of a good is consumed.
E) is the gain to the producer of producing and selling one more unit of a good.
Q2) A good or service can be consumed by a person even if he or she didn't pay for it is called ________ good.
A) a private
B) a public
C) a normal
D) an inferior
E) an external
Q3) In general,the marginal cost curve
A) has a positive slope.
B) has a negative slope.
C) is horizontal.
D) is vertical.
E) is U-shaped.
Q4) Explain the difference between the words "value," "price," and "cost."
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Chapter 7: Government Actions in Markets
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Sample Questions
Q1) A rent ceiling creates a deadweight loss
A) if it is set below the equilibrium rent.
B) if it is set equal to the equilibrium rent.
C) if it set above the equilibrium rent.
D) if it decreases the taxes the government collects in the housing market.
E) never, because if it did create a deadweight loss, the government would not impose it.
Q2) Suppose the equilibrium price of a gallon of milk is $4.If the government imposes a price floor of $5 per gallon of milk,
A) the quantity supplied of milk exceeds the quantity demanded.
B) the quantity supplied of milk falls short of the quantity demanded.
C) the supply increases.
D) the market will not be affected.
E) there will be a shortage of milk.
Q3) Why would an increase in the minimum wage to $15 per hour lead to more unemployment for teenage and low-skilled workers?
Q4) Explain why in cities such as New York City that have rent ceiling laws,so many people who work in the city commute from outside the city.
Q5) Why do rent ceilings lead to shortages and black markets?
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Chapter 8: Taxes
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Sample Questions
Q1) In the figure above,suppose that the government imposes a tax of $4 per pizza.Then,the tax revenue collected by the government equals
A) $240.
B) $320.
C) $160.
D) $120.
E) $4.
Q2) A tax on labor income ________ the wage rate paid by employers,________ the wage rate received by employees,and ________ a deadweight loss.
A) rise; fall; creates B) rise; rise; creates C) rise; rise; does not create D) fall; fall; does not create E) fall; fall; creates
Q3) "For the U.S.personal income tax,the average tax rate is greater than the marginal tax rate." Is the previous statement correct or incorrect?
Q4) Explain under what conditions a sales tax on a specific good would be paid entirely by buyers.
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Chapter 9: Global Markets in Action
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Sample Questions
Q1) The above figure shows the U.S.market for replacement cell phone batteries.Area E is the
A) producer surplus when there is free trade.
B) deadweight loss from tariff.
C) tariff revenue.
D) increase in producer surplus due to the tariff.
E) gain in total surplus due to the tariff.
Q2) What is rent seeking with respect to restricting international trade?
A) The rent on factory buildings increases if trade is restricted.
B) The government avoids paying rent on buildings when importers pay the tariff.
C) An attempt to capture the gains from trade by imposing a tariff.
D) The government's efforts to capture tariff rents.
E) The attempt by importers to avoid paying a tariff.
Q3) When a nation exports a good,its ________ surplus increases,and when it imports a good,its ________ surplus increases.
A) consumer; producer
B) consumer; consumer
C) producer; producer
D) producer; consumer
E) total; consumer
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Chapter 10: Externalities
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Sample Questions
Q1) Which of the following is NOT an example of a good with an external cost?
A) electricity generation producing carbon dioxide emissions that contribute toward global warming
B) logging that pollutes a nearby river
C) Jess smoking near her non-smoking roommate
D) Ahmed working at a bank and getting a flu shot each fall
E) noise pollution from aircraft
Q2) If a polluting producer is forced to pay a pollution charge,what is the effect on the supply and demand curves for the product?
A) The quantity supplied along the firm's supply curve increases.
B) The firm's demand curve shifts leftward.
C) The firm's supply curve shifts rightward.
D) The firm's supply curve shifts leftward.
E) Both the supply curve and the demand curve shift leftward.
Q3) How has air quality changed in the United States since 1980?
Q4) What is marginal external cost? Give an example.
Q5) "External benefits lead to overproduction so that more than the efficient quantity is produced." Is the previous statement true or false?
Q6) Why does an external cost lead to inefficient overproduction?
Page 12
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Chapter 11: Public Goods and Common Resources
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Sample Questions
Q1) It is rational for a voter to be ignorant about an issue unless the A) voter is maximizing his or her well-being.
B) voter is a member of a political party.
C) issue is on the ballot.
D) issue has a perceptible effect on the voter's well-being.
E) voter worries about the tragedy of the free rider.
Q2) In the figure above,a private market will most likely produce
A) no satellites because of the free-rider problem.
B) 200 satellites because at this point marginal benefit equals marginal cost.
C) less than 200 satellites because over this output range marginal benefit exceeds marginal cost.
D) more than 200 satellites because over this output range marginal benefit is below marginal cost.
E) 200 satellites because at this point the market will be in equilibrium.
Q3) When use of a good decreases the quantity available for someone else,the good is A) rival.
B) nonrival.
C) excludable.
D) nonexcludable.
E) a public good.
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Chapter 12: Markets with Private Information
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Sample Questions
Q1) In the used car market with no warranties,the equilibrium is a ________ and there is ________.
A) pooling equilibrium; inefficiency, partly because of oversupply of good cars
B) pooling equilibrium; inefficiency, partly because of oversupply of lemons
C) separating equilibrium; no inefficiency
D) separating equilibrium; inefficiency, partly because of oversupply of lemons
E) pooling equilibrium; no inefficiency
Q2) ________ occurs when an informed person takes an action to send information to an uninformed person,and ________ occurs when an uninformed person creates an incentive for an informed person to reveal private information.
A) Moral hazard; adverse selection
B) Adverse selection; moral hazard
C) Signaling; screening
D) Screening; signaling
E) Pooling; separating
Q3) Explain the concept of adverse selection.Give an example.
Q4) Most college professors are granted tenure after six years of employment.Tenure implies a lifetime appointment.What problem does this situation create,and how can colleges minimize the problem?
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Chapter 13: Consumer Choice and Demand
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Sample Questions
Q1) A consumption point inside the budget line
A) is unaffordable.
B) is possible to afford but has some unspent income.
C) shows that the consumer has chosen to spend all of his or her income on both products.
D) shows that the consumer spends income on only one of the goods.
E) is affordable and, because it is inside the budget line, means that all the person's budget has been spent.
Q2) "As Rob consumes more dates over the course of a day,it is likely that his marginal utility from date consumption will rise." Is the previous statement likely correct or incorrect?
Q3) Given the data in the above table,what is the marginal utility of the second quart of ice cream?
A) 80
B) 70
C) 60
D) 75
E) 150
Q4) What is the "principle of diminishing marginal utility"?
Q5) What is the utility-maximizing rule?
Page 15
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Chapter 14: Production and Cost
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Sample Questions
Q1) The table above gives costs at Jan's Bike Shop.Unfortunately,Jan's record keeping has been spotty.Each worker is paid $100 a day.Labor costs are the only variable costs of production.What is the total fixed cost of producing 64 bikes?
A) $200
B) $300
C) $400
D) $500
E) $600
Q2) From a firm's viewpoint,opportunity cost is the
A) best alternative use customers can find for the firm's output.
B) cost the firm must pay for the factors of production it employs to attract them from their best alternative use.
C) accounting cost of resources.
D) price a firm can charge for its output.
E) cost of acquiring the opportunity to sell to its customers.
Q3) Explain how new technologies,which increase productivity,affect the average variable cost,average total cost,and marginal cost curves.
Q4) What are economies of scale? What is the main source of economies of scale?
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Page 16
Chapter 15: Perfect Competition
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Sample Questions
Q1) For a perfectly competitive firm,marginal revenue is
A) less than the price.
B) greater than the price.
C) equal to the price.
D) equal to the change in profit from selling one more unit.
E) undefined because the firm's demand curve is horizontal.
Q2) Consider a perfectly competitive market experiencing good times.In the short run,the equilibrium price will ________ and firms will earn a(n)________.
A) increase; economic profit as the new price exceeds average total cost
B) increase; normal profit as the new price exceeds average total cost
C) decrease; economic loss as new firms enter the industry
D) decrease; economic profit as firms exit the industry
E) may increase or decrease; normal profit depending on their costs
Q3) Is the number of sellers in the market the only thing that is different in each of the four market types economists study?
Q4) If the price received by a perfectly competitive firm is less than its average variable cost,what will the firm do in the short run? Why?
Q5) What is a perfectly competitive firm's short-run supply curve?
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Chapter 16: Monopoly
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Sample Questions
Q1) Which of the following is <u>NOT</u> correct about a single-price monopoly?
A) Maximum profit is found where demand is the most inelastic.
B) Marginal revenue is negative when demand is inelastic.
C) Marginal revenue is positive when demand is elastic.
D) To sell more output, the firm must lower its price.
E) To maximize its profit, the firm produces so that marginal revenue equals marginal cost.
Q2) Today,you might be buying from a regulated natural monopoly when you purchase
A) a car, a truck, or a bicycle.
B) a computer, a phone, or a camera.
C) natural gas or electricity.
D) a house, a condominium, or a plot of land.
E) food in a grocery store or in a restaurant.
Q3) How does marginal revenue compare to price for a single-price monopoly?
Q4) The theory that regulation seeks an efficient use of resources is the
A) social interest theory.
B) producer surplus theory.
C) consumer surplus theory.
D) capture theory.
E) deadweight loss theory.
Page 18
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Chapter 17: Monopolistic Competition
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Sample Questions
Q1) The firm illustrated above is
A) making an economic profit of $400,000 per month.
B) making an economic profit of $2,000,000 per month.
C) making an economic profit of $1,600,000 per month.
D) incurring an economic loss of $400,000 per month.
E) incurring an economic loss of $1,600,000 per month.
Q2) In a market in which firms operate in monopolistic competition,
A) the HHI for a single firm exceeds 2500.
B) firms compete on price, quality and marketing.
C) in the long run, firms produce at their efficient scale.
D) in the long run, firms are not able to charge a markup.
E) advertising is nonexistent.
Q3) Why does a firm in monopolistic competition make zero economic profit rather than an economic profit in the long run?
Q4) Draw an example of a firm in monopolistic competition that is earning an economic profit.Be sure to label all the curves.Indicate the area that equals the firm's economic profit.
Q5) How do the characteristics of perfect competition and monopolistic competition differ?
Q6) Why would a firm in a monopolistically competitive industry advertise?
Page 19
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Chapter 18: Oligopoly
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Sample Questions
Q1) Explain what a cartel is and the difficulties faced in maintaining a cartel.
Q2) "Duopoly" is
A) another name for monopoly.
B) a special type of monopolistic competition.
C) a two-firm oligopoly.
D) a game with three players.
E) the situation when a firm sets a duo (two) of different prices for its customers.
Q3) In the case against Microsoft,it was claimed that combining Internet Explorer and Windows was
A) predatory pricing.
B) an illegal tying agreement.
C) creating one product that is convenient for the consumers.
D) illegal territorial confinement.
E) an inefficient resale maintenance agreement.
Q4) In the Boeing/Airbus oligopoly example discussed in the text,why did Boeing and Airbus have an incentive to produce more planes than the monopoly outcome?
Q5) What three characteristics do all games have in common?
Q6) What is the legal status of a cartel among firms in the United States?
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Chapter 19: Markets for Factors of Production
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Sample Questions
Q1) If the quantity of capital supplied exceeds the quantity of capital demanded,what takes place?
Q2) Why do baseball players make so much money,while kindergarten teachers in private schools make so much less? In your answer,discuss the value of marginal product and the actions of profit-maximizing firms.
Q3) Robotic technology is a substitute for labor in many manufacturing processes.If the price of robotic technology decreases and the scale of the firm's production does not change,there is
A) a decrease in the demand for labor.
B) an increase in the demand for labor.
C) no change in the demand for labor.
D) an increase in the supply of labor.
E) a decrease in the supply of labor.
Q4) Unions ________ free trade and ________ a higher minimum wage.
A) favor; favor
B) are neutral toward; oppose
C) favor; oppose
D) oppose; favor
E) oppose; oppose
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Chapter 20: Economic Inequality
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Sample Questions
Q1) Discrimination
A) can be corrected by imposing a negative income tax.
B) cannot explain economic inequality.
C) immediately results in an unequal ownership of capital.
D) is more likely to occur in a business where customers come into contact with minority employees.
E) means that the costs paid by people who discriminate are lower than otherwise.
Q2) Which of the following is (are)an example of an income maintenance program?
i.unemployment compensation
ii.welfare programs
iii.Social Security programs
A) i and iii
B) ii and iii
C) iii only
D) i and ii
E) i, ii, and iii
Q3) Of age,marital status,family size,education,and race,which is the single biggest factor affecting the household income distribution?
Q4) Describe the effect education and training have on outcomes in the labor market.
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