Microeconomic Theory
Test Preparation
Course Introduction
Microeconomic Theory explores the fundamental principles that govern individual and firm behavior in various market structures. The course examines the concepts of scarcity, opportunity cost, and optimization, focusing on how consumers and producers make decisions regarding the allocation of limited resources. Topics include demand and supply analysis, consumer choice theory, production and cost functions, market equilibrium, and the effects of government intervention. By utilizing mathematical models and graphical analysis, students gain insight into price determination, market efficiency, and the welfare implications of economic activity, laying the groundwork for advanced study and practical application in economics.
Recommended Textbook
Microeconomics Principles and Policy 12th Edition by William
J. Baumol
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22 Chapters
4555 Verified Questions
4555 Flashcards
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Chapter 1: What Is Economics
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227 Verified Questions
227 Flashcards
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Sample Questions
Q1) Probably the most important factor affecting material well-being is
A)inflation rates.
B)unemployment rates.
C)budget deficits.
D)growth in productivity.
E)monopoly power.
Answer: D
Q2) The United States produces both automobiles and computers more efficiently than Mexico.Nevertheless,it is possible that both nations would benefit from trade in these items.The reason for this is
A)the law of comparative advantage.
B)the inflation-unemployment trade-off.
C)externalities.
D)the cost disease of personal services.
E)attempts to repeal the law of supply and demand.
Answer: A
Q3) Economists probably agree more often than they disagree.
A)True
B)False
Answer: True
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Chapter 2: The Economy: Myth and Reality
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150 Verified Questions
150 Flashcards
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Sample Questions
Q1) According to Robert Reich,secretary of Labor in the Clinton administration,
A)the identity of American companies is clear, and laws should be written accordingly.
B)foreign companies are clearly different from American companies.
C)multinational companies have clear bases of operations, which form their identity.
D)it is almost impossible to define the nationality of a multinational company.
E)identifying the country of origin of a product is almost impossible, but essential for proper regulation.
Answer: D
Q2) According to the data on real U.S.GDP,
A)economic growth has been irregular, with periodic downturns.
B)economic growth has been consistent, with few downturns.
C)economic growth has been extremely rapid, but with major collapses.
D)economic growth has been elusive, but downturns have been eliminated.
Answer: A
Q3) The federal government employs more civilians than state and local governments.
A)True
B)False
Answer: False
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4
Chapter 3: The Fundamental Economic Problem: Scarcity and Choice
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250 Verified Questions
250 Flashcards
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Sample Questions
Q1) All of the points inside a production possibilities frontier are ____; all of the points outside the production possibilities frontier are ____.
A)efficient, inefficient
B)optimal, irrational
C)attainable, unattainable
D)rational, zero-cost
E)unattainable, efficient
Answer: C
Q2) If the PPF for guns and butter is bowed outward from the origin,this indicates constant opportunity cost between the two goods.
A)True
B)False
Answer: False
Q3) If a society uses the market system,it must rely solely on markets to solve all of its problems.
A)True
B)False
Answer: False
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Chapter 4: Supply and Demand: An Initial Look
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308 Verified Questions
308 Flashcards
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Sample Questions
Q1) "Moonshine" is illegal home brew made by adding sugar to accelerate corn fermentation.Ten pounds of sugar are necessary to make a gallon of moonshine.In the mid-1970s,the price of sugar tripled and the price of moonshine skyrocketed from $6 to $15 a gallon.Which graph in Figure 4-9 best illustrates this?
A)1
B)2
C)3
D)4
Q2) If the government puts price controls on medical care,this will increase the supply of affordable care in the United States.
A)True
B)False
Q3) A cold winter will increase the quantity of heating fuel demanded at every price. A)True
B)False
Q4) Give an example of a price ceiling.Draw a corresponding diagram and explain why there is a continuing shortage.
Q5) Distinguish between scarcity and shortage.
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Chapter 5: Consumer Choice: Individual and Market Demand
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202 Verified Questions
202 Flashcards
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Sample Questions
Q1) If I use 1,000 gallons of water a month at a price of $.01 a gallon,is my consumer surplus likely to be large or small? Explain.
Q2) Since price tends to equal total utility,the price of water is low and the price of diamonds is high.
A)True B)False
Q3) An inferior good is one that consumers buy in smaller quantities when incomes rise. A)True B)False
Q4) If the slope of an indifference curve between two goods decreases as we move from left to right (dropping all minus signs),we infer that the consumer
A)is less willing to trade away a good when he has a lot of it.
B)is more willing to trade away a good when he has a lot of it.
C)always tries to keep the percentage of his budget spent on each good constant. D)views one of the goods as inferior.
Q5) A consumer will go to a point on the highest attainable indifference curve. A)True B)False
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Chapter 6: Demand and Elasticity
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207 Flashcards
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Sample Questions
Q1) The ratio of the percentage change in quantity demanded to the percentage change in income is known as the cross elasticity of demand.
A)True
B)False
Q2) The demand for French Roast coffee is likely to be
A)elastic.
B)inelastic.
C)unit elastic.
D)perfectly inelastic.
Q3) Demand curves often do not remain stationary; they shift because of changes in other variables.
A)True
B)False
Q4) Income elasticity of demand describes how change in income affects the quantity demanded of a good.
A)True
B)False
Q5) Using the general concept of elasticity,would you expect the elasticity of demand for advertising to be positive or negative? Explain.
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Chapter 7: Production,Inputs,and Cost: Building Blocks for Supply Analysis
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215 Verified Questions
215 Flashcards
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Sample Questions
Q1) For most industries,average costs decrease indefinitely as output expands.
A)True
B)False
Q2) If in some production range average cost is rising,the firm is experiencing
A)increasing returns to scale.
B)decreasing returns to scale.
C)constant returns to scale.
D)increasing costs per unit of output.
Q3) Economies of scale lead to declining long-run average cost curves.
A)True
B)False
Q4) An airline industry study recently reported,"Evidence is abundant that larger firms are not more efficient or less costly simply because they are larger.In fact,other things equal,the largest carriers tend to have a higher level of unit costs,possibly caused by the difficulties of managing an airline of large size." This means that
A)there are increasing returns to scale in the airline industry.
B)the airline industry has constant returns to scale.
C)the larger airlines are not profitable.
D)airlines are experiencing decreasing returns to scale.
Page 9
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Chapter 8: Output,Price,and Profit: The Importance of Marginal Analysis
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189 Verified Questions
189 Flashcards
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Sample Questions
Q1) Average cost equals
A)change in total cost/change in quantity.
B)total cost/quantity.
C)total cost - total variable cost.
D)total cost - total fixed cost.
Q2) For a number of years,General Motors used a pricing strategy designed to maintain at least 40 percent of the American car market.Does this strategy suggest that GM was maximizing profits or pursuing an alternative strategy?
Q3) Average cost equals total cost multiplied by the number of units of output.
A)True
B)False
Q4) Once a firm has selected a price for its product,quantity is decided by consumers and their demand curves.
A)True
B)False
Q5) Accounting profit is usually smaller than economic profit.
A)True
B)False
Q6) Do firms really seek to maximize profits?
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Chapter 9: Securities: Business Finance,and the Economy:
The Tail That Wags the Dog
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198 Verified Questions
198 Flashcards
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Sample Questions
Q1) A corporate bond sold in 2000 with a face value of $10,000,a $100 coupon,and a maturity date in 2010
A)will pay the bondholder $100 a year every year from 2000 to 2010 and will also pay him $9,000 in 2010.
B)will pay the bondholder $100 a year every year from 2000 to 2010 and will also pay him $10,000 in 2010.
C)requires the bondholder to pay $100 a year every year from 2000 to 2010 and will pay him $10,000 in 2010.
D)requires the bondholder to pay $100 in 2000 only and will pay him $10,000 in 2010.
Q2) Which of the following was designed to head off panics among market participants and forestall crashes like the ones in October 1929 and October 1987?
A)Program trading
B)Circuit breakers
C)Derivatives
D)Volatility index
Q3) Explain how a diversified portfolio can reduce fluctuations in returns even when the economy as a whole is experiencing contractions and expansions.
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Page 11
Chapter 10: The Firm and the Industry Under Perfect Competition
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206 Verified Questions
206 Flashcards
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Sample Questions
Q1) Economists study perfect competition
A)because many markets are perfectly competitive.
B)for its descriptive realism.
C)to establish a benchmark by which to measure the performance of the economy.
D)All of the above are correct.
Q2) For a perfectly competitive firm,marginal revenue equals average revenue because the
A)firm's supply curve is horizontal.
B)industry's demand curve is horizontal.
C)firm's demand curve is horizontal.
D)industry's supply curve is horizontal.
Q3) The strength of the competition faced by a company can profoundly affect its A)pricing.
B)output decisions.
C)input decisions.
D)All of the above are correct.
Q4) Why doesn't a competitive firm reduce its price below the industry price to increase sales?
Page 12
Q5) Show what happens to the industry equilibrium when new firms enter a perfectly competitive market in the long run.
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Chapter 11: Monopoly
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204 Verified Questions
204 Flashcards
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Sample Questions
Q1) Owning a patent can provide a firm with monopolistic power.
A)True
B)False
Q2) Which of the following is not a barrier to entry?
A)Legal restrictions
B)Patents
C)Large sunk costs
D)Survivor rights
Q3) One of the conclusions of the model of monopoly is that the firm earns economic profits above the required opportunity cost of the factors of production.Are these profits lost to society? Do they take spending power from the economy,and act as a brake on economic growth?
Q4) A monopolist will maximize profits by producing a quantity specified by setting marginal revenue equal to marginal cost.
A)True
B)False
Q5) Pure monopoly markets are very common in the real world.
A)True
B)False
Q6) Explain why a monopolist does not have a supply curve.
Page 13
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Chapter 12: Between Competition and Monopoly
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225 Verified Questions
225 Flashcards
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Sample Questions
Q1) Monopolistic competition is characterized by
A)one firm selling several products.
B)many firms selling the same product.
C)many firms selling slightly different products.
D)one firm selling one product.
Q2) A perfectly contestable market is one in which there are excessive costs to entry and exit.
A)True
B)False
Q3) Which of the following best expresses the attitude toward competition of a firm engaged in tacit collusion with its rivals?
A)A rolling stone gathers no moss.
B)Waste not, want not.
C)Do unto others as you would have them do unto you.
D)Ask, and ye shall receive.
Q4) The entry of new firms into a monopolistically competitive industry will cause the long-run equilibrium price to rise.
A)True
B)False
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Chapter 13: Limiting Market Power: Regulation and Antitrust
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152 Verified Questions
152 Flashcards
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Sample Questions
Q1) Changes in the rate charged by electric power companies are subject to government control because
A)the electric power companies are government enterprises.
B)consumer ignorance makes it impossible to know what rates are fair.
C)the electric power companies are monopolies of a service that is important to buyers.
D)cutthroat competition would probably occur if the government did not intervene.
Q2) A policy of marginal-cost pricing will ensure that many regulated industries will lose money.
A)True
B)False
Q3) List appropriate criteria for deciding whether a merger of two firms producing similar products should be permitted.
Q4) Over the course of the twentieth century there has been no pronounced tendency for concentration in the United States to increase.
A)True
B)False
Q5) Distinguish between predatory pricing strategy and bundling strategy.
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Chapter 14: The Case for Free Markets I: the Price System
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219 Verified Questions
219 Flashcards
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Sample Questions
Q1) Politicians always agree with economists about the most efficient way of doing things.
A)True
B)False
Q2) Under perfect competition,the lure of profits makes producers try to equate marginal cost and price.
A)True
B)False
Q3) Jupiter likes moons more than rings and gets marginal utility worth $5 from the last moon,and $2 from the last ring.Saturn prefers rings,getting MU = $3 from the last ring and $1 from moons.Describe a trade that would increase efficiency.
Q4) Many persons object to the results of the competitive market system because A)it takes too much energy to coordinate activities.
B)efficient outcomes may not be compatible with their ideas of a fair distribution.
C)a few people can control all economic activity.
D)it fosters high rents and low beef prices.
Q5) How does a laissez-faire economy decide which consumer gets each of the goods that has been produced?
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Chapter 15: The Shortcomings of Free Markets
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214 Verified Questions
214 Flashcards
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Sample Questions
Q1) Figure 15-1 portrays conditions in the monopolized weezil industry.From the diagram,the production of weezils
A)must cause a detrimental externality.
B)must cause a beneficial externality.
C)must cause either a detrimental or a beneficial externality, more information is needed to determine which one.
D)may or may not cause an externality.
Q2) Briefly and concisely define the following concepts and terms.
a.marginal social cost
b.detrimental externalities
c.free-rider problem
d.cost disease
e."defective telescopic faculty"
Q3) Markets will always create more efficient outcomes without government intervention.
A)True B)False
Q4) Private goods are not excludable.
A)True B)False
Page 17
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Chapter 16: The Markets Prime Achievement: Innovation and Growth
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110 Verified Questions
110 Flashcards
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Sample Questions
Q1) Invention alone does not explain why free market societies have experienced such rapid rates of economic growth.
A)True
B)False
Q2) Distinguish between invention and innovation.
Q3) Applied research is research
A)whose goal is to invent or improve products or processes.
B)that rarely has any commercial objective attached.
C)that deals with general principles.
D)that seeks to provide scientific knowledge.
Q4) Price competition among firms has proved to be more important than the introduction of new products.
A)True
B)False
Q5) A firm will equate the marginal cost of research and development with the marginal revenue it generates,to determine how much money it will allocate to research and development.
A)True B)False
Q6) Explain the three growth-creating properties of innovation. Page 18
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Page 19
Chapter 17: Externalities, the Environment, and Natural Resources
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217 Verified Questions
217 Flashcards
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Sample Questions
Q1) Under EPA regulations,a factory
A)must pay for the right to pollute.
B)can increase air pollution from its grinding process if it decreases air pollution from its smelting process.
C)cannot under any circumstances build a polluting factory in an area where pollution standards are not being met by existing firms.
D)None of the above is correct.
Q2) Basic supply and demand analysis can be used to explain how externalities lead to environmental problems.
A)True
B)False
Q3) Serious environmental problems are
A)unique to industrial economies.
B)unique to Western economies.
C)unique to civilized economies (i.e., those in which people live mainly in cities).
D)None of the above is correct.
Q4) Explain why environmentally minded firms in a competitive industry will find it difficult to take environmental action.
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Chapter 18: Taxation and Resource Allocation
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219 Flashcards
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Sample Questions
Q1) The concept of vertical equity is that A)income should be taxed instead of property.
B)property should be taxed instead of income.
C)there should be little movement up or down the social scale.
D)persons who are unequal should be treated unequally.
Q2) Explain whether or not the ability-to-pay principle of tax equity is consistent with the benefits received principle of taxation.
Q3) The notion that equally situated individuals should be taxed equally is referred to as A)horizontal equity.
B)vertical equity.
C)the benefits principle.
D)the Gini principle.
Q4) Since the early 1970s,state and local taxes have remained relatively constant as a percentage of GDP.
A)True B)False
Q5) The federal government of the United States relies heavily on value-added taxes. A)True
B)False
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Chapter 19: Pricing the Factors of Production
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228 Verified Questions
228 Flashcards
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Sample Questions
Q1) If the credit market is close to being a competitive market,an interest rate ceiling imposed by usury laws will bring misallocations of resources.
A)True
B)False
Q2) The nation's stock of capital can increase only when net new investment takes place.
A)True B)False
Q3) A lottery promises a $250,000 prize.But the prize money is paid out in $50,000 annual installments with the first installment received today..The winner is offered the option of an immediate lump-sum payment.If the interest rate remains at 10 percent for the entire period,what is the smallest amount the winner should accept?
A)$189,540
B)$192,970
C)$208,494
D)$225,000
Q4) Marginal land can be defined as land that earns neither profits nor losses.
A)True
B)False
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Chapter 20: Labor and Entrepreneurship: The Human Inputs
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222 Verified Questions
222 Flashcards
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Sample Questions
Q1) Most collective bargaining situations lead to strikes.
A)True
B)False
Q2) Wage negotiations in baseball can fit the bilateral monopoly situation when a star player negotiates with an owner.Explain how collective bargaining would be used in wage negotiations and the role of player strikes.
Q3) According to the process of creative destruction,at first the entrepreneur will be able to sell her product for
A)a low price because it is not well known.
B)a high price because there is no competition.
C)a fair price because these are contestable markets.
D)at a price of zero until the market is created.
Q4) Union membership in the United States has fallen compared to what it was in the 1950s.
A)True B)False
Q5) The income effect of higher wages leads workers to want to work more. A)True
B)False
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Chapter 21: Poverty, Inequality, and Discrimination
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167 Verified Questions
167 Flashcards
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Sample Questions
Q1) Although economists generally favor a negative income tax,there is little political support for it.
A)True
B)False
Q2) If two individuals have identical schooling,their incomes will be equal.
A)True
B)False
Q3) A tax is more likely to promote economic equality if it is
A)regressive.
B)proportional.
C)indirect.
D)progressive.
Q4) Discrimination can come from many groups of people,including employers and fellow employees.
A)True
B)False
Q5) The highest-income fifth of the U.S.population ordinarily earns more than 40 percent of all income.
A)True
B)False
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Chapter 22: International Trade and Comparative Advantage
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226 Verified Questions
226 Flashcards
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Sample Questions
Q1) The economic effects of a quota are identical to those of a tariff.
A)True
B)False
Q2) How does the imposition of a tariff reduce the price of imports?
A)At the lower quantity supplied, the price to the importer is lower than if there were free trade.
B)At the lower quantity demanded, the price to the importer is lower than if there were free trade.
C)Supply of the product is increased from domestic production, reducing the price of the imports.
D)Demand for the product is decreased, so that price must fall.
Q3) Foreign competition will always put a domestic industry at a disadvantage.This leads to massive trade adjustment assistance on the part of each country.
A)True
B)False
Q4) "Dumping" means destroying goods to prevent driving down the price.
A)True
B)False
Q5) What is mercantilism? What are the draw backs of this doctrine?
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