Microeconomic Theory Review Questions
Course Introduction
Microeconomic Theory explores the fundamental principles governing individual and firm decision-making in various market environments. The course examines the behavior of consumers and producers, the formation of prices through supply and demand, and the allocation of scarce resources. Key topics include utility maximization, cost analysis, market structures (perfect competition, monopoly, and oligopoly), and the welfare implications of market outcomes. Emphasis is placed on developing analytical skills using mathematical models and evaluating the efficiency and equity of different market mechanisms.
Recommended Textbook
Microeconomics 5th Edition by Glenn Hubbard
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18 Chapters
4688 Verified Questions
4688 Flashcards
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Page 2
Chapter 1: Economics: Foundations and Models
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233 Verified Questions
233 Flashcards
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Sample Questions
Q1) Which of the following statements is true?
A) Anytime you have to decide which action to take you are experiencing economic equity.
B) Trade-offs do not apply when the consumers purchase a product for which there is excess supply, such as a stock clearance sale.
C) Every individual, no matter how rich or poor, is faced with making trade-offs.
D) Economics is a social science that studies the trade-offs we are forced to make because resources are unlimited.
Answer: C
Q2) Suppose the extra cost for a doctor to keep his office open for one extra hour is $200.Then,the doctor should stay open for the extra hour even if he can generate additional revenue of $200 for that hour.
A)True
B)False
Answer: True
Q3) What is a marginal cost?
Answer: Marginal cost is the additional cost associated with continuing with an activity.
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3
Chapter 2: Trade-Offs, comparative Advantage, and the Market System
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Sample Questions
Q1) Pierre can produce either a combination of 20 bow ties and 30 neckties or a combination of 35 bow ties and 15 neckties.If he now produces 35 bow ties and 15 neckties,what is the opportunity cost of producing an additional 15 neckties?
A) 2 bow ties
B) 15 bow ties
C) 20 bow ties
D) 35 bow ties
Answer: B
Q2) If a commercial dairy farm wants to raise funds to purchase feeding troughs,it does so in the
A) output market.
B) product market.
C) factor market.
D) dairy products market.
Answer: C
Q3) What is economic growth?
Answer: Economic growth refers to the ability of the economy to increase the production of goods and services.
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Chapter 3: Where Prices Come From: the Interaction of
Demand and Supply
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Sample Questions
Q1) Refer to Figure 3-1.An increase in population would be represented by a movement from
A) A to B.
B) B to A.
C) D<sub>1</sub> to D<sub>2</sub>.
D) D<sub>2 </sub>to D<sub>1</sub>.
Answer: C
Q2) A decrease in the demand for soft drinks due to changes in consumer tastes,accompanied by an increase in the supply of soft drinks as a result of reductions in input prices,will result in
A) a decrease in the equilibrium quantity of soft drinks and no change in the equilibrium price.
B) a decrease in the equilibrium price of soft drinks and no change in the equilibrium quantity.
C) a decrease in the equilibrium price of soft drinks; the equilibrium quantity may increase or decrease.
D) an increase in the equilibrium quantity of soft drinks; the equilibrium price may increase or decrease.
Answer: C
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Chapter 4: Economic Efficiency, government Price Setting, and Taxes
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Sample Questions
Q1) A ________ curve shows the marginal cost of producing one more unit of a good or service.
A) demand
B) supply
C) production possibilities
D) marginal benefit
Q2) A tax is efficient if it imposes a large excess burden relative to the tax revenue it raises.
A)True
B)False
Q3) Marginal cost is
A) the total cost of producing one unit of a good or service.
B) the average cost of producing a good or service.
C) the difference between the lowest price a firm would have been willing to accept and the price it actually receives.
D) the additional cost to a firm of producing one more unit of a good or service.
Q4) What area on a supply and demand graph represents consumer surplus?
Q5) What is "tax incidence"? What determines tax incidence in a competitive market?
Q6) What is economic surplus? When is economic surplus at a maximum?
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Chapter 5: Externalities, environmental Policy, and Public Goods
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Sample Questions
Q1) "When it comes to public goods,individuals do not reveal their true preferences because it is not in their self interest to do so." Evaluate this statement.
Q2) Refer to Figure 5-6.What is the deadweight loss resulting from producing at the market equilibrium?
A) B + C
B) E + C
C) F
D) C
Q3) Refer to the Article Summary.People who do not use public transportation can still benefit from it,as is shown by the higher home values.As a result,the marginal social benefit from public transportation is ________ the marginal private benefit to those who use public transportation.
A) equal to B) greater than C) less than
D) unrelated to
Q4) What are some of the limitations of the Coase theorem in practice?
Q5) What is a Pigovian tax? What happens to deadweight loss when a Pigovian tax is implemented?
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Chapter 6: Elasticity: The Responsiveness of Demand and Supply
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Sample Questions
Q1) The price elasticity of supply of hot dog buns is estimated to be 1.5.Holding everything else constant,this means that a 10 percent decrease in the price of hot dog buns will cause the quantity of hot dog buns supplied to decrease by
A) 1.5 percent.
B) 15 percent.
C) approximately 25 percent.
D) approximately 5 percent.
Q2) Consider the following pairs of items:
a.shampoo and conditioner
b.iPhones and earbuds
c.a laptop computer and a desktop computer
d.beef and pork
e.air-travel and weed killer
Which of the pairs listed will have a positive cross-price elasticity?
A) a and b only
B) c and d only
C) e only
D) a, b, and c only
Q3) Explain the relationship between price elasticity of demand and total revenue.
Q4) Briefly explain the economic concept of elasticity.
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Chapter 7: The Economics of Health Care
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Sample Questions
Q1) What is moral hazard?
Q2) Why might a young,healthy person choose not to buy health insurance?
Q3) Basic supply and demand analysis indicates that having firms rather than the government provide health insurance to workers
A) changes both the composition of the compensation that firms pay and its level.
B) changes the composition of the compensation that firms pay, but does not change its level.
C) does not change the composition of the compensation that firms pay, but does change its level.
D) changes neither the composition of the compensation that firms pay nor its level.
Q4) In the United States in 2012,of those companies employing more than 200 workers that offer health care to those workers,about ________ percent of employees accept the coverage.
A) 10
B) 36
C) 62
D) 98
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Chapter 8: Firms, the Stock Market, and Corporate Governance
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Sample Questions
Q1) If you own a bond with a seven percent coupon rate and new bonds are paying five percent,what will happen to your bond's market price?
Q2) How much is a bond that pays $50 in coupon payments for 3 years and $1,000 at the end of the third year worth if the interest rate is 10%?
A) $876
B) $952
C) $1,045
D) $1,150
Q3) What is the central role of financial intermediaries in a market economy?
A) the creation and printing of money
B) keeping the price level stable
C) bringing together savers and borrowers
D) providing safe deposit boxes for people and businesses
Q4) If you purchase a share of stock from your friend who initially purchased the stock three years ago,your purchase of the stock represents a transaction in the secondary financial market
A)True
B)False
Q5) How is accounting profit found?
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Chapter 9: Comparative Advantage and the Gains From International Trade
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Sample Questions
Q1) Anti-globalization and protectionism are both arguments against free trade.How do these two arguments differ?
Q2) What does it mean for a country to have an absolute advantage in producing a product?
Q3) Which of the following statements is true?
A) Exports benefit trading countries because exports create jobs. Imports do not benefit trading countries because they result in a loss of jobs.
B) Each year China exports about 50 percent of its wheat crop and 40 percent of its rice crop.
C) Most of the leading exporting countries are large, high-income countries.
D) All sectors of the U.S. economy are affected equally by international trade.
Q4) The ratio at which a country can trade its exports for imports from other countries is called
A) a trade barrier.
B) the terms of trade.
C) autarky.
D) a free trade agreement.
Q5) What are the four main sources of comparative advantage? Briefly explain each source and provide examples.
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Chapter 10: Consumer Choice and Behavioral Economics
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302 Flashcards
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Sample Questions
Q1) The demand curve for canned peas is downward sloping.If the price of canned peas,an inferior good,rises
A) the income effect which causes you to reduce your canned peas purchases is smaller than the substitution effect which causes you to increase your purchases, resulting in a net increase in quantity demanded.
B) the income effect which causes you to increase your canned peas purchases is smaller than the substitution effect which causes you to reduce your purchases, resulting in a net decrease in quantity demanded.
C) both the income and substitution effects reinforce each other to decrease the quantity demanded.
D) the income and substitution effects offset each other but the price effect of an inferior good leads you to buy more canned peas.
Q2) Which of the following is an experiment which tests whether fairness is important in consumer decision making?
A) the fair trade principle
B) the ultimatum game
C) the preferential treatment game
D) the behavioral experiment
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12
Chapter 11: Technology, production, and Costs
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Sample Questions
Q1) In the short run,why does a production function eventually display diminishing returns to labor?
A) As the number of workers increases it becomes difficult to monitor them.
B) As a firm hires more workers the skills and the work ethic of the additional workers will eventually decline.
C) As the number of workers increases eventually the gains from the division of labor and specialization are used up.
D) The opportunity cost of hiring additional workers must eventually rise.
Q2) A firm's short-run average total cost curve is parallel to its short-run average variable cost curve.
A)True
B)False
Q3) Refer to Figure 11-15.What is the combination of inputs that produces 200 gooseberry pies at the lowest cost?
A) combination e: 10 hours of labor and 48 units of capital
B) combination f: 40 hours of labor and 24 units of capital
C) combination g: 60 hours of labor and 14 units of capital
D) combination h: 60 hours of labor and 9 units of capital
Q4) 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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Sample Questions
Q1) Refer to Figure 12-15.Assume that the medical screening industry is perfectly competitive and that some firms are making short-run losses.Suppose the medical screening industry runs an effective advertising campaign which convinces a large number of people that yearly CT scans are critical for good health.Which of the diagrams in the figure best describes what happens in the industry?
A) Panel A
B) Panel B
C) Panel C
D) Panel D
Q2) Under what conditions should a competitive firm shut down in the short run?
Q3) Refer to Figure 12-9.At price P<sub>2</sub>,the firm would
A) lose an amount equal to its fixed cost.
B) lose an amount more than fixed cost.
C) lose an amount less than fixed cost.
D) break even.
Q4) A perfectly competitive firm's supply curve is its A) marginal cost curve.
B) marginal cost curve above its minimum average total cost.
C) marginal cost curve above its minimum average variable cost.
D) marginal cost curve above its minimum average fixed cost.
Page 14
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Chapter 13: Monopolistic Competition: the Competitive
Model in a More Realistic Setting
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Sample Questions
Q1) Which of the following is true of trademarks?
A) A successful trademark is one that becomes a generic name for a product, for example, "Xerox" has become a generic term for making photocopies.
B) A successful trademark is one that allows consumers to immediately identify the source or producer of the product.
C) If a firm is granted a trademark, then no other firms can legally produce similar products for a given period of time.
D) If a firm is granted a trademark, then no other firms can legally sell in the same geographic area for a given period of time.
Q2) The entry and exit of firms in a monopolistically competitive market guarantee that A) marginal revenue equals marginal cost and average total cost is minimized.
B) firms can earn economic profits in the long run.
C) price equals average total cost in the long run.
D) firms can earn economic profits in the short run.
Q3) What are the most important differences between perfectly competitive markets and monopolistically competitive markets?
Q4) Why are many companies concerned about brand management?
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Chapter 14: Oligopoly: Firms in Less Competitive Markets
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Sample Questions
Q1) Refer to Figure 14-8 Use the decision tree to determine whether Microsoft should deter Toshiba from entering the market for electronic book readers (e-readers).Assume that each firm must earn a 20% return on investment to break even.Explain Microsoft's decision process.
Q2) Refer to Table 14-8.If the firms cooperate,what prices will they select?
A) Both firms will select a low price.
B) Brawny Juice will select a high price, Power Fuel a low price.
C) Both firms will select a high price.
D) Brawny Juice will select a low price, Power Fuel a high price.
Q3) Refer to Table 14-7.Which of the following statements is true?
A) Given that Florabunda offers same-day delivery, Perfect's best strategy is to not offer same-day delivery.
B) Given that Perfect offers same-day delivery, Florabunda's best strategy is to offer same-day delivery.
C) Perfect and Florabunda will agree to collude in order to maximize their profits.
D) Neither Perfect nor Florabunda will offer same-day delivery; this decision will decrease their costs and allow each firm to earn more than $1,800 million in profits.
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16
Chapter 15: Monopoly and Antitrust Policy
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Sample Questions
Q1) A profit maximizing monopoly's price is
A) the same as the price that would prevail if the industry was perfectly competitive. B) less than the price that would prevail if the industry was perfectly competitive. C) greater than the price that would prevail if the industry was perfectly competitive. D) not consistently related to price that would prevail if the market was perfectly competitive.
Q2) What happens to a monopoly's revenue when it sells more units of its product?
Q3) Refer to Table 15-3.If Comcast maximizes its profits how much profit will it earn?
A) $84
B) $40
C) $4
D) Comcast will break even.
Q4) Refer to Figure 15-13.From the monopoly graph above,identify the area representing the deadweight loss.
Would the deadweight loss be larger if the demand curve was more elastic or less elastic?
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Chapter 16: Pricing Strategy
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Sample Questions
Q1) If price discrimination occurs in a market
A) the law of one price does not hold.
B) the firm earns arbitrage profits.
C) consumers whose demand for the product sold is more elastic pay higher prices than consumers whose demand is less elastic.
D) the marginal cost of production is constant.
Q2) All of the following are disadvantages of cost-plus pricing except A) It ignores the price elasticity of demand: for example, it may be possible to increase profits by raising or lowering price.
B) If the industry comprises identical firms (with identical costs), markups could be consistent among firms leading to no one firm having a competitive edge in terms of price.
C) Allocating and apportioning business overheads to individual products could be somewhat arbitrary.
D) The business has less incentive to cut or control costs: if costs increase, then selling prices increase. Consequently, this might further erode a firm's competitiveness.
Q3) Are restaurant coupons a form of price discrimination? Why or why not?
Q4) Are sellers who practice arbitrage taking advantage of buyers?
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Page 18
Chapter 17: The Markets for Labor and Other Factors of Production
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Sample Questions
Q1) The market demand curve for labor
A) is determined by adding up the quantity of labor demanded by each firm at each wage, holding constant the other variables that affect the willingness of firms to hire workers.
B) is the same as the market demand curve for the product labor produces because it is a derived demand.
C) is determined by adding up the demand for labor by each firm at each wage, holding constant the other variables that affect the willingness of firms to hire workers.
D) is perfectly inelastic because there is a finite number of workers in the market for labor.
Q2) Zach Greinke and other star baseball players earn millions of dollars annually.These salaries are due to
A) the greed of players and their agents.
B) the demand and supply of labor in the market for baseball players.
C) the elastic demand for jobs in Major League Baseball.
D) the irrational behavior of team owners.
Q3) What are the three most important variables that cause the market supply curve of labor to shift?
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Chapter 18: Public Choice,taxes,and the Distribution of Income
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Sample Questions
Q1) If you pay $2,000 in taxes on an income of $20,000,and a tax of $3,500 on an income of $30,000,then over this range of income the tax is
A) regressive.
B) proportional.
C) progressive.
D) There is insufficient information to answer the question.
Q2) Vertical-equity is most closely associated with which of the following goals or principles?
A) the horizontal-equity principle
B) the goal of economic efficiency
C) the goal of attaining social objectives
D) the ability-to-pay principle
Q3) The public choice model asserts that the self-interest of policymakers is likely to cause them to take actions that are inconsistent with the preferences of voters,even where those preferences are clear.
A)True
B)False
Q4) What is the difference between the poverty line and the poverty rate?
Q5) Explain the effect of price elasticities of supply and demand on tax incidence.
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