Microeconomic Theory
Midterm Exam
Course Introduction
Microeconomic Theory examines the behavior of individual consumers, firms, and markets, exploring how these agents make decisions regarding the allocation of limited resources. The course delves into foundational concepts such as supply and demand, elasticity, utility maximization, production and cost analysis, and market structures including perfect competition, monopoly, and oligopoly. Emphasis is placed on the mathematical modeling of economic activity and the application of theoretical frameworks to analyze real-world economic issues, policy implications, and the efficiency of different market outcomes.
Recommended Textbook
Microeconomics 10th Edition by William Boyes
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Page 2
Chapter 1: The Wealth of Nations: Ownership and Economic
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Sample Questions
Q1) A positive (non-zero) price for a good means there is a surplus of that good.
A)True
B)False
Answer: False
Q2) An example of opportunity cost:
A)is the Chinese food that you gave up when you chose to eat Italian food.
B)is the tuition that you pay to attend college.
C)for a professor of economics is the pleasure that he or she derives from teaching economics.
D)is sweets given up by a person who would never eat them even if he or she could.
E)is the amount spent on buying movie tickets.
Answer: A
Q3) If you must make a choice about consuming two apples, three oranges, or one candy bar, the opportunity cost of the two apples is the candy bar plus the three oranges.
A)True
B)False
Answer: False
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Chapter 2: Scarcity and Opportunity Costs
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Sample Questions
Q1) People (and all resources):
A)tend to specialize in those activities in which their opportunity costs are minimized.
B)tend to specialize in those activities in which their opportunity costs are maximized.
C)never consider opportunity costs before specializing in a particular activity.
D)consider only direct costs while choosing to specialize in a particular activity.
E)do not act in their own self-interest but specialize in those activities which benefit others.
Answer: A
Q2) Refer to Figure 2.2. If there is an increase in the education level of the population, graph(s) _____ best illustrate(s) what will happen to the production possibilities curve [PPC].
A)A
B)B
C)C
D)A and C
E)A and B
Answer: C
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Chapter 3: Markets and the Price System
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Sample Questions
Q1) The demand for luxurious goods are usually unaffected by an increase in income.
A)True
B)False
Answer: False
Q2) Other things remaining the same, when a fall in the price of one good is followed by an increase in the demand for another good, both goods are said to be:
A)inferior goods.
B)substitute goods.
C)Giffen goods.
D)public goods.
E)complementary goods.
Answer: E
Q3) Barter can best be defined as:
A)the direct exchange of one good for money.
B)the direct exchange of money for a good.
C)the direct exchange of goods and services without the use of money.
D)the direct exchange of labor services for wages.
E)the payment of interest on a savings account.
Answer: C
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Page 5
Chapter 4: The Aggregate Economy
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Sample Questions
Q1) Which of the following institutions form the private sector in an economy?
A)Only households
B)Households and the government
C)Households, businesses, and foreign firms
D)Households and businesses only
E)Foreign investors and foreign governments
Q2) According to Scenario 4-1, country C has net exports of:
A)zero.
B)$13 million.
C)$6 million.
D) $13 million.
E) $6 million.
Q3) According to Scenario 4-1, country B is running a:
A)trade deficit with country A and a trade surplus with country C.
B)trade surplus with both countries A and C.
C)trade surplus with country A and a trade deficit with country C.
D)trade deficit with both countries A and C.
E)balanced trade with country A and a trade deficit with country C.
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Chapter 5: Using Economics to Understand the World
Around You
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Sample Questions
Q1) Refer to figure 5.3. Suppose the government imposes a minimum wage of $8. Which of the following is a possible outcome of the imposition of a minimum wage above the equilibrium wage rate?
A)There will be a rightward shift in the labor supply curve.
B)There will be a rightward shift in the labor demand curve.
C)There will be an increase in the quantity of jobs offered, from Q to Q<sub>II,</sub> and a fall in the quantity of labor supplied, from Q to Q<sub>I</sub>.
D)There will be a fall in the quantity of jobs offered, from Q to Q<sub>I,</sub> and an increase in the quantity of labor supplied, from Q to Q<sub>II</sub>.
E)There will be an increase in the producer surplus, at the minimum wage rate.
Q2) To say that "there is a scarcity of gold" means that:
A)gold prices will plummet.
B)there is not enough gold to satisfy people's demand.
C)there are a very few substitutes for gold.
D)gold is relatively less expensive than other metals.
E)the demand for gold is changing.
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Chapter 6: Elasticity: Demand and Supply
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Sample Questions
Q1) A fall in the average income of a consumer, say during a recession, is represented by:
A)an upward movement along the demand curve for a good consumed by the consumer.
B)a downward movement along the demand curve for a good consumed by the consumer.
C)a shift of the demand curve for a good consumed by the consumer.
D)a rotation of the demand curve for a good consumed by the consumer.
E)an inward shift of the demand curve for an inferior good consumed by the consumer.
Q2) In the long run, the quantity of capital available to a firm is fixed.
A)True
B)False
Q3) The coefficient of the price elasticity of demand is always negative.
A)True
B)False
Q4) If firms have to change their production techniques in order to change the quantities they supply, their response to a price change will be less in a period of a year as compared to what they can do in a month.
A)True
B)False
Page 8
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Chapter 7: Demand: Consumer Choice
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Sample Questions
Q1) In utility analysis, it is assumed that marginal utility diminishes as consumption of a product decreases.
A)True
B)False
Q2) As the price of a good declines, a utility-maximizing consumer will respond by purchasing more of that good.
A)True
B)False
Q3) If total utility increases by smaller and smaller amounts as more units of a product are consumed, then marginal utility is:
A)decreasing and is a negative amount.
B)decreasing and is a positive amount.
C)zero.
D)increasing and is a negative amount.
E)increasing and is a positive amount.
Q4) A consumer is in equilibrium when the slope of his or her indifference curve is equal to his or her budget constraint.
A)True B)False
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Chapter 8: Supply: the Costs of Doing Business
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Sample Questions
Q1) The phrase "to spread the overhead" refers to reducing the costs that are not directly attributable to the production process.
A)True
B)False
Q2) Refer to Figure 8.2. At an output level of G:
A)both average total cost and average variable cost are falling.
B)average fixed cost is equal to the distance JK.
C)average variable cost exceeds marginal cost by the amount LJ.
D)average total cost exceeds marginal cost by the amount KJ.
E)total cost is equal to the area 0AJG.
Q3) Refer to Table 8.5. At what level of production will the average total cost curve intersect the marginal cost curve?
A)3 units
B)2 units
C)1 unit
D)5 units
E)4 units
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Chapter 9: Profit Maximization
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Sample Questions
Q1) Assume that a firm's marginal revenue curve intersects the rising portion of the marginal cost curve at 100 units of output. At this output level, a profit-maximizing firm's total cost is $1,000. If the price of the product is $10 per unit, the firm will earn an economic profit of:
A)zero.
B)$400.
C)more than zero but less than $100.
D)$100.
E)more than $100.
Q2) Under imperfect competition, a firm's:
A)demand curve lies below its marginal revenue curve.
B)demand curve lies above its marginal revenue curve.
C)demand curve coincides with its marginal revenue curve.
D)demand curve coincides with its marginal cost curve.
E)demand curve coincides with its average cost curve.
Q3) The primary goal of any business firm is to maximize social welfare.
A)True
B)False
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Chapter 10: Perfect Competition
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Sample Questions
Q1) Refer to Figure 10.2. If the marginal-revenue curve would have intersected the average-total-cost curve at its lowest point and the firm maximized profit, then total revenue would have been equal to:
A)$500.
B)$550.
C)$600.
D)$450.
E)$400.
Q2) Assume the price facing the firm in Figure 10.5 is P<sub>1.</sub>Which of the following statements is true?
A)Total revenue for the firm is area 0BDQ<sub>1</sub>.
B)The firm should produce Q<sub>2</sub>.
C)Total cost for the firm is area 0P<sub>1</sub>EQ<sub>1</sub>.
D)The firm's total revenue is more than sufficient to cover its variable costs, so it should remain in operation.
E)The firm should shut down because price per unit received is less than average total cost.
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Page 12
Chapter 11: Monopoly
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Sample Questions
Q1) In Figure 11.6, assume that marginal costs are constant at $2,500 and fixed costs are 0. What would be the amount of consumer surplus if the market was perfectly competitive?
A)$1,000,000
B)$500,000
C)$300,000
D)$250,000
E)$350,000
Q2) If a firm has a perfectly elastic demand curve, then:
A)it must be a monopoly firm.
B)it can charge any price it desires.
C)the firm has significant market power.
D)the firm has no market power.
E)the firm should shut down.
Q3) Price discrimination is best described as a monopolist:
A)selling a product at the fixed market determined price.
B)charging buyers an excessive price for the product.
C)charging different customers different prices when the costs are equal.
D)selling a product for different prices during two different periods of time.
E)charging same prices to different customers when the costs are different.
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Chapter 12: Monopolistic Competition and Oligopoly
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Sample Questions
Q1) A Nash equilibrium occurs when:
A)a unilateral move by a participant makes him better off.
B)one can deviate from the equilibrium and improve the outcome.
C)no one can move from the equilibrium and improve the outcome.
D)participants have an incentive to deviate from the equilibrium.
E)no one is better off.
Q2) A strategy that produces the best result, no matter what strategy the opposing player follows, is known as the dominated strategy.
A)True
B)False
Q3) A deadweight loss arises in a perfectly competitive market as each firm is a price taker.
A)True
B)False
Q4) Collusion of firms is legal in the United States.
A)True
B)False
Q5) By forming a cartel the member firms can actually raise their profits.
A)True
B)False
14
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Chapter 13: Markets and Government
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Sample Questions
Q1) A person who takes less care of his health after obtaining a health insurance is creating a negative externality.
A)True
B)False
Q2) According to Figure 13.1, the outcome of an unregulated, unsubsidized market would be:
A) point a.
B) point b.
C) point c.
D) point d.
E) point e.
Q3) The government should subsidize the production of goods which generate a positive externality.
A)True
B)False
Q4) Consumers in used car markets can very easily differentiate between high-quality and low-quality cars.
A)True
B)False
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Chapter 14: Antitrust and Regulation
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Sample Questions
Q1) In a natural monopoly, government regulation is often used to ensure more beneficial price and output combinations for consumers in the market than would exist in the absence of regulation.
A)True
B)False
Q2) Which of the following is a possible reason for governments to regulate business operations?
A)To increase monopoly profits
B)To reduce the amount of information consumers have about a product
C)To increase negative externalities
D)To promote competitive behavior
E)To decrease positive externalities
Q3) International regulation occurs at two levels, one in which a specific government regulates the activities of individual firms operating within the country, and another in which several nations are involved.
A)True
B)False
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Chapter 15: Resource Markets
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Sample Questions
Q1) If the ratio of marginal revenue product to marginal factor cost for labor is greater than that for capital, then:
A)the producer can maximize profit by hiring more units of capital.
B)the producer suffers losses by hiring more units of labor.
C)the producer does not alter the resource allocation.
D)the producer can maximize profit by hiring more units of labor.
E)the producer will earn above normal profit by hiring less units of labor.
Q2) A monopsonist firm pays a price to a factor that is:
A)equal to the marginal revenue product of the factor.
B)greater than the marginal revenue product of the factor.
C)equal to the marginal factor cost.
D)greater than the marginal factor cost.
E)less than the marginal revenue product of the factor.
Q3) According to Figure 14.6, what is the wage and quantity of labor hired by a competitive firm?
A)$12 and 75 laborers
B)$20 and 75 laborers
C)$15 and 125 laborers
D)$10 and 250 laborers
E)$23 and 50 laborers
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Chapter 16: The Labor Market
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Sample Questions
Q1) The ratio of the median income of college-to high school-educated workers is called the _____.
A)college income premium
B)college income differential
C)college income benefit
D)college income compensation
E)education income gap
Q2) Which of the following is not a reason for the wage differential between females and males?
A)The choice of major in college by females tends to be different than the choice by males.
B)The existence of employer prejudice leads to wage differential between males and females.
C)The number of males is usually greater than the number of females in the labor force.
D)Females bear the primary responsibility of childbearing.
E)Women accept lower wages for flexible and shorter working hours.
Q3) An example of human capital is the purchase of a computer to help accountants.
A)True
B)False
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Page 18
Chapter 17: The Capital Market
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Sample Questions
Q1) A pervasive tradeoff in financial markets relates risk to expected returns. Which of the following statements reflects this relationship?
A)The higher the risk of an asset, the lower the expected return on the asset.
B)There is usually no relationship between risk and return.
C)The higher the risk of an asset, the higher the expected return on the asset.
D)The return on an asset is normally positively related to the risk of comparable assets.
E)The return on a risky asset cannot be compared with the return on a risk free asset.
Q2) In Figure 17.1, if the initial demand curve is D<sub>1</sub>, the equilibrium quantity of capital demanded is:
A)Q<sub>1</sub>.
B)Q<sub>3</sub>.
C)0.
D)Q<sub>4</sub>.
E)Q<sub>2</sub>.
Q3) The S&P 500 index includes the stocks of 500 largest companies in the U.S.
A)True
B)False
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Chapter 18: The Land Market and Natural Resources
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Sample Questions
Q1) The supply of hydro electric power:
A)can be varied infinitely in the short run.
B)remains fixed in the long run.
C)decreases with an increase in price in the short run.
D)reduces in the future due to continuous consumption today.
E)increases with an increase in price in the long run.
Q2) If the owner of a nonrenewable resource expects his profits to be high in future, he will abstain from resource extraction in the present period.
A)True
B)False
Q3) For any particular period of time, say a year, the supply of exhaustible resources:
A)decreases infinitely with an increase in price.
B)remains unaffected by any change in price.
C)increases infinitely with an increase in price.
D)increases to a certain extent with an increase in price.
E)decreases to a certain extent with an increase in price.
Q4) Privatization of common property leads to overexploitation of natural resources.
A)True
B)False
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Chapter 19: Current Issues: Income, Income Distribution,
Poverty, and Government Policy
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Sample Questions
Q1) Income inequality has risen in recent years due to a rise in labor's share of national income as a result of globalization.
A)True
B)False
Q2) If a Lorenz curve is drawn using the data in Table 19.1, it will:
A)coincide with the line of perfect equality.
B)be an L-shaped curve.
C)bow above the line of perfect equality.
D)bow down below the line of perfect equality.
E)be a rectangular-shaped curve.
Q3) In Figure 19.1, which of the following could occur in the short run given the introduction of a regressive income tax?
A)The Lorenz curve OZB would shift to OYB.
B)The Lorenz curve OYB would coincide with the line OXB.
C)The Lorenz curve OZB would coincide with the line OXB.
D)The Lorenz curve OYB would coincide with the horizontal axis.
E)The Lorenz curve would shift from OYB to OZB.
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Page 21
Chapter 20: World Trade Equilibrium
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Sample Questions
Q1) "Most textiles worn by American consumers are produced in Asian and South American countries where the opportunity costs of production are lower." This observation refers to the:
A)law of supply.
B)income elasticity of demand.
C)principle of beneficial tariffs.
D)principle of comparative advantage.
E)law of decreasing returns to scale.
Q2) A country can benefit by indulging in international trade when:
A)it produces a good in which it has an absolute disadvantage.
B)it produces a good in which its trading partner has an absolute advantage.
C)it produces a good in which it has a comparative advantage.
D)it produces all the goods which are supported by its resources.
E)it produces nothing and merely depends on foreign imports.
Q3) Any terms of trade within the limits set by domestic opportunity costs will be mutually harmful, because each country tries to push the other as close to the limits of the terms of trade as possible.
A)True
B)False
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Page 22
Chapter 21: International Trade Restrictions
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Sample Questions
Q1) Which of the following statements is true of the impact of trade restrictions on domestic employment?
A)Domestic firms will produce the goods that otherwise would have been produced abroad, thus employing foreign workers instead of domestic workers.
B)Beside the protected industry, other industries will also benefit in terms of employment.
C)Workers in the protected industry migrate to other industries.
D)Restrictions imposed on trade redistribute jobs by creating employment in the protected industry and reducing employment elsewhere.
E)Minimum wages for skilled and unskilled labor increase in the domestic country.
Q2) When barriers to trade are imposed, we should expect some groups to be harmed at the expense of other groups.
A)True
B)False
Q3) Every country imposes tariffs on at least some imports.
A)True
B)False
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Chapter 22: Exchange Rates and Financial Links Between Countries
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Q1) Assume that a British investor buys a one-year U.S. Treasury bill that pays 6 percent annual interest. Given a yield of 4 percent on a comparable British Treasury bill, the U.S. dollar must depreciate 2 percent against the British pound during the year for interest rate parity to hold.
A)True
B)False
Q2) Appreciation of the dollar means that now it takes more dollars to buy one unit of foreign currency.
A)True
B)False
Q3) A commodity money standard exists when exchange rates are:
A)artificially pegged to the price of oil.
B)fixed in terms of gold, thus creating flexible exchange rates between countries.
C)fixed in terms of gold, thus creating fixed exchange rates between countries.
D)allowed to fluctuate based on the values of different currencies.
E)fixed, based on the values of different currencies, in terms of some commodity.
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