Microeconomic Theory
Final Test Solutions
Course Introduction
Microeconomic Theory explores the fundamental principles governing the behavior of individuals and firms in making decisions regarding the allocation of scarce resources. The course covers topics such as consumer choice, production and cost theory, market structures (including perfect competition, monopoly, and oligopoly), and the role of government intervention in markets. Students will develop analytical skills through the use of mathematical models to understand how prices and quantities are determined in various types of markets, how firms reach equilibrium, and how market failures can occur. Through case studies and problem-solving exercises, the course prepares students to apply microeconomic concepts to real-world economic issues and policy debates.
Recommended Textbook
Microeconomics 3rd Edition by R. Glenn Hubbard
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Chapter 1: Economics Foundations and Models
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Sample Questions
Q1) Define productive efficiency. Does productive efficiency imply allocative efficiency? Explain.
Answer: Productive efficiency is an efficiency criterion that describes a situation in which goods and services are produced at the lowest possible cost. It does not imply allocative efficiency which is a criterion associated with producing goods and services that consumers value most. For example, a manufacturer may be able to produce typewriters at the lowest possible cost of say, $200 but this does not necessarily mean that consumers are willing to pay $200 for a typewriter.
Q2) Even if the population declines, scarcity will still exist.
A)True
B)False
Answer: True
Q3) The branch of economics which studies how households and firms interact in markets is called
A) macroeconomics.
B) microeconomics.
C) positive economics.
D) normative economics.
Answer: B
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Page 3
Chapter 2: Choices and Trade - Offs in the Market
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Sample Questions
Q1) An increase in the labour force shifts the production possibility frontier inwards over time.
A)True
B)False
Answer: False
Q2) Refer to Table 2-7. What is Tammi's opportunity cost of bathing a cat?
A) half a groomed dog
B) two groomed dogs
C) two-thirds of a groomed dog
D) one and a half groomed dogs
Answer: B
Q3) The basis for trade is comparative advantage, not absolute advantage.
A)True
B)False
Answer: True
Q4) Any output combination along a production possibility frontier is associated with fully utilised resources.
A)True
B)False
Answer: True
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Chapter 3: Where Prices Come Frome : The Interaction of
Demand and Supply
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Sample Questions
Q1) Last year, the Pottery Palace supplied 8000 ceramic pots at $40 each. This year, the company supplied the same quantity of ceramic pots at $55 each. Based on this evidence, The Pottery Palace has experienced
A) a decrease in supply.
B) an increase in supply.
C) an increase in the quantity supplied.
D) a decrease in the quantity supplied.
Answer: A
Q2) The market for smart phones has grown rapidly over the past few years, due in part to the overwhelming success of the Apple iPhone. Following the successful launch of the iPhone in 2007, companies such as Samsung, HTC, and LG have all introduced products to compete with the iPhone. The smart phones introduced to compete with the iPhone would be considered
A) complements to the iPhone.
B) substitutes for the iPhone.
C) inferior goods compared to the iPhone.
D) normal goods compared to the iPhone.
Answer: B
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Chapter 4: Elasticity: The Responsiveness of Demand and Supply
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Sample Questions
Q1) Jill Borts believes that the price elasticity of demand for her economics textbook is relatively inelastic. She argues 'I was told I had to purchase a book written by Hubbard and O'Brien that is required by my instructor. If I wanted to buy a mystery novel I would have many authors to choose from. Therefore, the demand for mystery novels is more elastic than the demand for my textbook.' Is Jill correct?
A) The demand for the textbook is more inelastic, but Jill's reasoning is incorrect. The reason the textbook has an inelastic demand is that it is more expensive than any novel. B) She is correct.
C) She is confused. She should have concluded that the textbook has a more elastic demand than a novel.
D) She is correct that the textbook has a more inelastic demand, but that is because most students pay for their textbooks with credit or debit cards. Most people pay for novels and other books with cash or by check.
Q2) If a firm's goal is to maximise revenue, it will price its product to correspond to the unit-elastic segment of its demand curve.
A)True
B)False
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Chapter 5: Economic Efficiency , Government Price Setting and Taxes
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Sample Questions
Q1) Refer to Figure 5-3. What is the value of consumer surplus at a price of $18?
A) $60
B) $120
C) $180
D) $240
Q2) Refer to Figure 5-5. Suppose that instead of a rent ceiling, the government imposed a price floor of $2000 per month for apartments. What is the value of producer surplus after the imposition of the price floor?
A) $40 000
B) $240 000
C) $270 000
D) $290 000
Q3) Consumer surplus is the difference between the highest price someone is willing to pay for a product and the price he actually pays for the product.
A)True
B)False
Q4) One result of a tax is an increase in economic efficiency.
A)True
B)False
7
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Chapter 6: Concumer Choice and Behavioural Economics
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Sample Questions
Q1) Many economists do not believe that network externalities lock consumers into the use of products that have technology inferior to other, similar products. These economists believe that
A) consumers are always rational.
B) in practice, the gains from using a superior technology exceed the losses consumers incur from switching costs.
C) there is no good evidence that switching costs exist.
D) the government will prevent products with inferior technology from being sold to consumers.
Q2) Behavioural economics refers to the study of situations
A) where consumers and firms appear to make choices that are appropriate to reach their goals.
B) where consumers and firms appear to value fairness when they make choices.
C) where consumers and firms disobey the laws of demand and supply.
D) where consumers and firms do not appear to be making choices that are economically rational.
Q3) A Giffen good could be either a normal good or an inferior good.
A)True
B)False
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Page 8
Chapter 7: Technology , Production and Costs
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Sample Questions
Q1) What is the marginal product of labour and what is the average product of labour.
Q2) Suppose a chain of convenience stores reorganised its system of supplying its stores with food. This led to a sharp reduction in the number of trucks that the company had to use and increased the amount of fresh food on store shelves. Which of the following statements best describes the chain stores' actions?
A) The change implemented is not an example of technological change because it did not require the use of new machinery or equipment.
B) Technological change refers only to the introduction of new products or improvements to existing products. As such, the scenario described in the question is not technological change.
C) The firm is able to produce more output (increase its sales) using fewer inputs (less trucks). Therefore, the chain of convenience stores has implemented a positive technological change.
D) The scenario described is an example of management efficiency and not technological change. Essentially, the chain changes its way of operating its business.
Q3) Describe the relationship between marginal cost and average total cost.
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Chapter 8: Firms in Perfectly Compitive Markets
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Sample Questions
Q1) To maximise profit, a firm will produce the level of output where MR = MC. If a firm actually makes a profit depends on the relationship of price to average total cost. What are the three possible relationships between price and average total cost that determine if a firm will make a profit, experience a loss, or break even?
Q2) Assume that firms in a perfectly competitive market are earning economic profits. Which of the following statements describes the change in market price and output as a result of the entry of new firms into this market?
A) The market demand curve shifts to the right, causing price to rise and market output to increase.
B) The market demand curve shifts to the left, causing price to fall and market output to decrease.
C) The short-run market supply curve shifts to the right, causing price to fall and total market output to increase.
D) The short-run market supply curve shifts to the left, causing price to rise and total market output to decrease.
Q3) What is meant by allocative efficiency? How does a perfectly competitive firm achieve allocative efficiency?
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Page 10
Chapter 9: Monopoly Markets
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Sample Questions
Q1) A profit-maximising monopoly produces a lower output level than would be produced if the industry was perfectly competitive.
A)True
B)False
Q2) Refer to Figure 9-13. Which of the following would be true if government regulators require the natural monopoly to produce at the economically efficient output level?
A) This results in a misallocation of resources.
B) The marginal cost of producing the last unit sold exceeds the marginal benefit.
C) The firm will sustain persistent losses and will not continue in business in the long run.
D) The firm will break even.
Q3) Most pharmaceutical firms selling prescription drugs continue to earn economic profits long after the patents on the prescription drugs expire because they have established a strong foothold in the market.
A)True
B)False
Q4) Explain why the monopolist has no supply curve?
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Chapter 10: Monopolistic Competition : The Competitive Model
in More Realistic Setting
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Sample Questions
Q1) Explain the differences between total revenue, average revenue, and marginal revenue.
Q2) In contrast with perfect competition, excess capacity characterises monopolistic competition. Excess capacity is due to which of the following?
A) Monopolistically competitive firms produce at the minimum point on their average total cost curves.
B) Monopolistically competitive firms face downward-sloping demand curves. In the long run, firms produce where their demand curves are tangent to their long-run average total cost curves.
C) Monopolistically competitive firms produce where marginal revenue is equal to marginal cost.
D) Monopolistically competitive markets have low barriers to entry.
Q3) What is the profit-maximising rule for a monopolistically competitive firm?
A) to produce a quantity that maximises market share
B) to produce a quantity that maximises total revenue
C) to produce a quantity such that marginal revenue equals marginal cost
D) to produce a quantity such that price equals marginal cost
Q4) What is the difference between zero accounting profit and zero economic profit?
Q5) Why are many companies concerned about brand management?
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Chapter 11: Oligopoly : Firms in Less Competitve Markets
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Sample Questions
Q1) A reason why there is more competition among restaurants than among large discount department stores is that restaurants
A) have to cater to a variety of consumer tastes while department stores do not.
B) unlike department stores, have to abide by government sanitation rules.
C) unlike department stores, do not have significant economies of scale.
D) have more elastic demand for their product compared to department stores.
Q2) If economies of scale are relatively important in an industry, the typical firm's A) marginal cost curve will decline continuously until it reaches minimum efficient scale. B) long-run average cost curve will begin rising before it reaches minimum efficient scale.
C) long-run average cost curve will reach a minimum at a level of output that leaves room for a large number of firms to enter the industry.
D) long-run average cost curve will reach a minimum at a level of output that is a relatively large fraction of total industry sales.
Q3) How does the demand curve for an oligopoly firm differ from the demand curves for firms in competitive market structures?
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Chapter 12: The Market for Labour and Other Factors of Production
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Sample Questions
Q1) Which of the following is a reason why some firms do not use commission pay?
A) It gives workers incentive to produce more.
B) It increases firm profits.
C) It is difficult to measure the output and attribute output to a particular worker.
D) The best workers stay and less productive workers leave.
Q2) What is the present value of $575 in a one year if the current rate of interest is 4 per cent?
A) $410.71
B) $552.88
C) $598
D) $805
Q3) Suppose a competitive firm is paying a wage of $12 an hour and sells its product at $3 per unit. Assume that labour is the only input. If the last worker hired produces four units of output per hour, then to maximise profits the firm should
A) not change the number of workers it currently hires.
B) lay off some workers.
C) hire another worker.
D) There is not enough information to answer the question.
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Chapter 13: International Trade
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Sample Questions
Q1) Domestically produced goods and services sold to other countries are referred to as
A) capital outflow.
B) exports.
C) imports.
D) transfer payments.
Q2) Refer to Table 13-2. Select the statement that accurately interprets the data in the table.
A) Sarita has an absolute advantage in baking cakes and Gabriel has an absolute advantage in baking pies.
B) Sarita has an absolute advantage in baking pies and Gabriel has an absolute advantage in baking cakes.
C) Sarita has an absolute advantage in baking pies and cakes.
D) Gabriel has an absolute advantage in baking pies and cakes.
Q3) Which of the following is not a source of comparative advantage?
A) relative abundance of labour and capital
B) technology
C) climate and natural resources
D) a strong foreign currency exchange rate
Q4) What is the difference between imports and exports?
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Chapter 14: Government Intervention in the Market
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Sample Questions
Q1) Most pharmaceutical firms selling prescription drugs continue to earn economic profits long after the patents on the prescription drugs expire because they have established a strong foothold in the market.
A)True
B)False
Q2) Consider a used car market in which half the cars are good and half are bad (lemons). If buyers are rational, the prices being offered for used cars will result in
A) an equal proportion of a good cars and lemons being sold in an efficient market.
B) a larger proportion of good cars being sold and consequently, consumer surplus is increased.
C) a larger proportion of lemons being sold and consequently, producer surplus is increased.
D) an equal proportion of good cars and lemons being sold in an inefficient market.
Q3) Will equilibrium in a market always result in an outcome that is economically efficient? Explain.
Q4) What is adverse selection?
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Chapter 15: Externalities , Environmental Policy and Public Goods
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Sample Questions
Q1) Refer to Figure 15-8. Suppose the emissions reduction target is currently established at 8 million tons. What is the area that represents the cost of eliminating an additional 1 million tons?
A) A
B) B + C
C) A + B
D) A + B + C
Q2) Which of the following is an example of a product that is non-excludable and rival?
A) free concert (with limited seating) in a park
B) national defense
C) automobiles
D) flu vaccinations
Q3) If there is pollution in producing a product, then the market equilibrium price
A) is too high and equilibrium quantity is too low.
B) and equilibrium quantity are too low.
C) and equilibrium quantity are too high.
D) is too low and equilibrium quantity is too high.
Q4) How does a positive externality in consumption reduce economic efficiency?
Q5) State the Coase theorem.
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Chapter 16: The Distribution of Income and Social Policy
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Sample Questions
Q1) Horizontal equity means that two people in identical economic situations should pay the same amount of taxes.
A)True
B)False
Q2) Refer to Figure 16-6. If area X = 2060, area Y = 240, and area Z= 2700, calculate the Gini coefficient for Syldavia.
A) 0.05
B) 0.12
C) 0.46
D) 0.85
Q3) If grocery stores were legally required to charge a 10-cent fee for disposable grocery bags, who would bear the largest burden of this fee?
Q4) A marginal tax rate is
A) the fraction of income that must be paid in taxes.
B) the fraction of each additional dollar of income that must be paid in taxes.
C) the incremental income one must earn to offset each additional dollar of tax.
D) the ratio of a change in income to a change in taxes paid.
Q5) What is the difference between the poverty line and the poverty rate?
Q6) Describe the main factors economists believe cause inequality of income.
Page 18
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