Microeconomics Practice Questions
Course Introduction
Microeconomics is the study of individual economic agents and markets, focusing on how households and firms make decisions regarding the allocation of limited resources. This course covers core concepts such as supply and demand, elasticity, consumer behavior, production and costs, and market structures including perfect competition, monopoly, and oligopoly. By analyzing how prices are determined and how markets function, students gain a deeper understanding of resource distribution, efficiency, and the effects of government intervention on market outcomes.
Recommended Textbook Economics 4th Edition by R. Glenn Hubbard
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2
Chapter 1: Economics: Foundations and Models
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Sample Questions
Q1) Which of the following is a positive economic statement?
A) The standard of living in the United States should be higher.
B) If the price of iPhones falls, a larger quantity of iPhones will be purchased.
C) The government should revamp the health care system.
D) The U.S. government should not have bailed out U.S. auto manufacturers.
Answer: B
Q2) ________ is a problem that occurs when one concludes that a change in variable X caused a change in variable Y when in actual fact,it is a change in variable Y that caused a change in variable X.
A) The omitted variable
B) The positive-to-negative relationship
C) Reverse causality
D) Nonlinear slope
Answer: C
Q3) The government makes all economic decisions in a mixed economy.
A)True
B)False
Answer: False
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3
Chapter 2: Trade-Offs, comparative Advantage, and the Market System
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Sample Questions
Q1) What is meant by the term "free market"?
Answer: A free market is a market with few government restrictions on how a good or service can be produced or sold or on how factors of production can be employed.
Q2) The basis for trade is comparative advantage,not absolute advantage.
A)True
B)False
Answer: True
Q3) The attainable production points on a production possibility curve are
A) the horizontal and vertical intercepts.
B) the points along the production possibilities frontier.
C) the points outside the area enclosed by the production possibilities frontier.
D) the points along and inside the production possibility frontier.
Answer: D
Q4) If Sanjaya can shuck more oysters in one hour than Tatiana,then Sanjaya has a comparative advantage in shucking oysters.
A)True
B)False
Answer: False
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Chapter 3: Where Prices Come From: the Interaction of
Demand and Supply
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Sample Questions
Q1) Ranchers can raise either cattle or sheep on their land.Which of the following would cause the supply of sheep to increase?
A) an increase in the price of sheep
B) a decrease in the price of cattle
C) an increase in the demand for cattle
D) an increase in the price of sheep feed
Answer: B
Q2) Tom Searchinger,a senior attorney at the Environmental Defense Fund,observed that generous farm subsidies have encouraged farmers to produce more corn and more wheat.How does this affect the market for fertilizer?
A) The supply of fertilizer increases.
B) The supply of fertilizer decreases
C) The demand for fertilizer increases.
D) The demand for fertilizer decreases.
Answer: C
Q3) A change in supply is represented by a shift of the supply curve.
A)True
B)False
Answer: True
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Chapter 4: Economic Efficiency, government Price Setting, and Taxes
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Sample Questions
Q1) Refer to Table 4-5.The equations above describe the demand and supply for Chef Ernie's Sushi-on-a-Stick.The equilibrium price and quantity for Chef Ernie's sushi are $60 and 20 thousand units.What is the value of economic surplus in this market?
A) $300 thousand
B) $600 thousand
C) $1,200 thousand
D) $1,600 thousand
Q2) Refer to Figure 4-1.If the market price is $1.00,what is Arnold's consumer surplus?
A) $1.00
B) $2.00
C) $6.00
D) $7.00
Q3) Refer to Figure 4-8.What is the size of the unit tax?
A) $2
B) $5
C) $7
D) $12
Q4) What is producer surplus? What does producer surplus measure?
Page 6
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Chapter 5: Externalities, environmental Policy, and Public Goods
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Sample Questions
Q1) When a negative externality exists,the private market produces
A) more than the economically efficient output level.
B) less than the economically efficient output level.
C) products at a low opportunity cost.
D) products at a high opportunity cost.
Q2) Refer to Figure 5-1.If,because of an externality,the economically efficient output is Q<sub>2</sub> and not the current equilibrium output of Q<sub>1</sub>,what does S<sub>1</sub> represent?
A) the market supply curve reflecting external cost
B) the market supply curve reflecting implicit cost
C) the market supply curve reflecting social cost
D) the market supply curve reflecting private cost
Q3) A market supply curve reflects the
A) external costs of producing a good or service.
B) external benefits of producing a good or service.
C) social costs of producing a good or service.
D) private costs of producing a good or service.
Q4) How does a negative externality in production reduce economic efficiency?
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Q5) What is a Pigovian tax? What happens to deadweight loss when a Pigovian tax is implemented?
Chapter 6: Elasticity: The Responsiveness of Demand and Supply
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Sample Questions
Q1) A demand curve which is ________ represents perfectly inelastic demand,and a demand curve which is ________ represents inelastic demand.
A) downward sloping; vertical
B) horizontal; downward sloping
C) vertical; downward sloping
D) upward sloping; horizontal
Q2) What factors would make you more sensitive or less sensitive to price when purchasing gasoline?
Q3) If the price elasticity of demand for canned soup is estimated at -1.62.What happens to sales revenue if the price of canned soup rises?
A) It falls by 162 percent.
B) It rises by 1.62 percent.
C) It falls.
D) It rises.
Q4) If demand is inelastic,the absolute value of the price elasticity of demand is A) one.
B) less than one.
C) greater than one.
D) greater than the absolute value of the slope of the demand curve.
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Chapter 7: The Economics of Health Care
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Sample Questions
Q1) How can improvements in health increase a country's total income?
Q2) Growth in labor productivity in health care has been ________ labor productivity in the economy as a whole. A) approximately equal to B) slightly faster than C) almost twice as fast as D) less than half as fast as
Q3) In the United States from 1981 to 2009,deaths from diabetes increased largely due to the effects of
A) foreign-produced insulin.
B) stress in the workplace.
C) a larger immigrant population.
D) increasing obesity.
Q4) Health insurance companies impose deductibles on policies and co-payments on claims to reduce the problem of adverse selection.
A)True
B)False
Q5) Briefly describe are the 6 main provisions of the Patient Protection and Affordable Care Act (PPACA)?
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Chapter 8: Firms, the Stock Market, and Corporate Governance
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Sample Questions
Q1) A bond is a financial security that represents
A) ownership in a corporation.
B) the portion of profits paid to shareholders.
C) the interest rate paid on a share of stock.
D) a promise to repay a fixed amount of funds.
Q2) Which is the least common type of business?
A) corporation
B) partnership
C) sole proprietorship
D) impossible to determine without further information
Q3) A firm's net income is also its
A) economic profit.
B) balance sheet.
C) accounting profit.
D) opportunity cost.
Q4) Which type of businesses earns the majority of profits in the United States?
A) corporations
B) partnerships
C) sole proprietorships
D) none of these
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Chapter 9: Comparative Advantage and the Gains From International Trade
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Sample Questions
Q1) China has developed a comparative advantage in the production of clothing.The source of this comparative advantage is
A) a large supply of natural resources.
B) a large supply of unskilled workers and relatively little capital.
C) investment in capital used to produce clothing.
D) superior process technology.
Q2) Which of the following statements is used to justify protectionism?
A) Free trade leads to higher prices for imported goods.
B) Free trade increases employment by protecting domestic firms.
C) A country should not rely on other countries for goods that are critical to its national defense.
D) Trade restrictions are not necessary to protect new firms since they can gain experience and become more productive without protection.
Q3) Refer to Figure 9-3.What is the area of domestic producer surplus after the imposition of a quota?
A) B
B) B + C
C) B + E + I + J + M
D) E + I + J + M
Page 11
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Chapter 10: Consumer Choice and Behavioral Economics
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Sample Questions
Q1) If Ewan is consuming his utility maximizing bundle and the price of one good falls,what happens to the marginal utility per dollar spent on this good (MU/P),and what should Ewan do?
A) MU/P has increased and Ewan should buy more of this good.
B) MU/P has increased and Ewan should buy less of this good.
C) MU/P has decreased and Ewan should buy more of this good.
D) MU/P has decreased and Ewan should buy less of this good.
Q2) A construction project in Congressman Foghorn's district is unfinished.Foghorn has asked that a new appropriations bill include funds to complete the project,despite a report by an independent agency that the project is a waste of taxpayer money.Foghorn's project is a bridge that crosses a river between two cities in his district.The press has criticized Foghorn and dubbed the project "a bridge too far" since another bridge,located closer to the same two cities Foghorn's bridge will connect,already exists and can accommodate all traffic between the two cities.Foghorn argues that if the bridge project is not completed,the $50 million already spent will have been wasted.Is Foghorn's argument economically rational? Explain your answer.
Q3) The demand curve for an inferior good can never be downward-sloping.
A)True
B)False
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Chapter 11: Technology, production, and Costs
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Sample Questions
Q1) If four workers can produce 18 chairs a day and five can produce 20 chairs a day,the marginal product of the fifth worker is
A) 2 chairs.
B) 3 chairs.
C) 4 chairs.
D) 38 chairs.
Q2) The law of diminishing marginal returns
A) explains why the average total cost and marginal cost curves are U-shaped in the short run.
B) explains why the average total cost, average fixed cost and the marginal cost curves are U-shaped in the short run.
C) causes average total costs to rise at a decreasing rate as output increases.
D) causes the difference between average total cost and average variable cost to get smaller as output increases.
Q3) The long-run average cost curve shows
A) the lowest average cost of producing every level of output in the long run.
B) where the most profitable level of output occurs.
C) the average cost of producing where diminishing returns are not present.
D) the plant size or scale that the firm should build.
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Page 13
Chapter 12: Firms in Perfectly Competitive Markets
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Sample Questions
Q1) Refer to Table 12-1.What is the fixed cost of production?
A) $0
B) $500
C) $1,000
D) It cannot be determined.
Q2) Refer to Figure 12-5.What is the amount of the firm's fixed cost of production?
A) $5,400
B) $6,750
C) $8,100
D) It cannot be determined.
Q3) Refer to Figure 12-7.If this is a constant-cost industry,what is the market price in the long-run equilibrium?
A) $5
B) $14
C) $15
D) $20
Q4) In an increasing-cost industry the long-run supply curve is upward sloping.
A)True
B)False
Q5) What is meant by the term "long-run competitive equilibrium?
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 characteristics is common to monopolistic competition and perfect competition?
A) Firms produce identical products.
B) Entry barriers into the industry are low.
C) Each firm faces a downward -sloping demand curve.
D) Firms take market prices as given.
Q2) Refer to Figure 13-3.Should the firm represented in the diagram continue to stay in business despite its losses?
A) No, it should shut down.
B) Yes, its total revenue covers its variable cost.
C) No, it is not able to cover its fixed cost.
D) Yes, it should increase its revenue by raising its price.
Q3) Refer to Table 13-2.What is Eco Energy's profit?
A) $125
B) $140
C) $145
D) $150
Q4) What are the most important differences between perfectly competitive markets and monopolistically competitive markets?
Page 15
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Chapter 14: Oligopoly: Firms in Less Competitive Markets
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Sample Questions
Q1) If economies of scale are significant,the typical firm will not reach the minimum point on its long-run average cost curve until it has produced a large fraction of industry sales.
A)True
B)False
Q2) OPEC periodically meets to agree to restrict the cartel's oil output,and yet almost every member of OPEC produces more than its own output quota.This suggests that OPEC has
A) a cooperative equilibrium.
B) a noncooperative equilibrium.
C) new potential entrants.
D) a threat of substitute goods.
Q3) Occupational licensing is an example of an entry barrier that improves a country's standard of living.
A)True
B)False
Q4) In Michael Porter's five competitive forces model,what do the competitive forces determine?
Q5) Explain why OPEC is caught in a prisoner's dilemma?
Q6) List the competitive forces in the five competitive forces model.
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Chapter 15: Monopoly and Antitrust Policy
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Sample Questions
Q1) Why does a monopoly cause a deadweight loss?
A) because it does not produce some output for which marginal benefit exceeds marginal cost
B) because it appropriates a portion of consumer surplus for itself
C) because it increases producer surplus at the expense of consumer surplus
D) because it does not produce some output for which demand exceeds supply
Q2) The demand curve for the monopoly's product is
A) the market demand for the product.
B) more elastic than the market demand for the product.
C) more inelastic than the market demand for the product.
D) undefined.
Q3) If a per-unit tax on output sold is imposed on a monopoly's product,the monopolist will increase its market price by the full amount of the tax.
A)True
B)False
Q4) Refer to Table 15-1.What is the amount of the firm's profit?
A) $335
B) $350
C) $880
D) $910
Page 17
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Chapter 16: Pricing Strategy
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Sample Questions
Q1) For many products,such as fast foods,a variety of prices can be found,but sellers with higher prices can expect to sell their products because
A) consumers are not sensitive to prices.
B) arbitrage will quickly eliminate price differences.
C) firms differentiate products in many ways, for example, higher priced fast food restaurants may offer better service.
D) their demand is perfectly inelastic.
Q2) The Bay Area subway system,BART,offers senior citizens discounted fares for BART rides.This suggests that BART authorities believe that senior citizens have a ________ demand for subway rides.
A) more income elastic
B) less income elastic
C) more price elastic
D) less price elastic
Q3) If a monopolist engages in first-degree price discrimination,it will produce the same output level as a perfectly competitive industry.
A)True
B)False
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Chapter 17: The Markets for Labor and Other Factors of Production
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Sample Questions
Q1) Refer to Table 17-1.If the output price is $3,what is the marginal revenue product of the fifth unit of labor?
A) $1,050
B) $360
C) $210
D) $150
Q2) Consider the market for blackjack dealers in Las Vegas.In each of the following cases,explain what happens to the equilibrium wage rate and the quantity of blackjack dealers hired.
a.Three new large resort casinos open in Las Vegas.
b.Fewer students are attending classes to learn to become blackjack dealers.
c.Traditionally,blackjack dealing is a field that attracts foreign workers.However,changes in immigration laws have made it more difficult for foreign workers to come to Las Vegas to obtain jobs.The demand for blackjack dealers,however,does not change.
d.Advances in technology have increased the popularity of electronic blackjack machines and decreased the popularity of live table games which require the use of a dealer.
Q3) What is a monopsony?
Q4) What is the marginal productivity theory of income distribution?
Page 19
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Chapter 18: Public Choice, taxes, and the Distribution of Income
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Sample Questions
Q1) One argument advanced in favor of reducing the tax on dividends is that
A) dividends increase the wealth of shareholder's which contribute to increases in GDP.
B) reducing the tax on dividends will improve economic efficiency.
C) dividends accrue mostly to middle-income and low-income investors who are already paying heavy income taxes.
D) the reduction will encourage corporations to plow back retained earning into capital investments.
Q2) The idea that two taxpayers in the same economic circumstances should pay the same level of taxes is known as the
A) ability-to-pay principle.
B) vertical-equity principle.
C) horizontal-equity principle.
D) benefits-received principle.
Q3) Which of the following tax systems would help reduce income inequality the most?
A) a regressive tax system
B) a proportional tax system
C) a progressive tax system
D) a consumption tax system
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Chapter 19: GDP: Measuring Total Production and Income
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Sample Questions
Q1) If an American firm opens a production facility in India,the total value of the production will be included in the
A) gross domestic product of the United States.
B) national income of the United States.
C) gross domestic product of India.
D) national income of India.
Q2) If the GDP deflator is less than 100,which will be higher: nominal GDP or real GDP? Why?
Q3) In 2011,Kendall Ford,an automobile dealership,spent $20,000 on a new car lift for its repair shop,$2,000 on a new copy machine for its sales division,and $600,000 on Ford Motor company stock.Unsold cars and trucks were valued at $400,000 on January 1,2011 and unsold cars and trucks were valued at $900,000 on December 31,2011.What is Kendall Ford's total investment spending in 2011?
A) $22,000
B) $322,000
C) $522,000
D) $1,022,000
Q4) What are the differences between national income,personal income,and disposable personal income?
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Chapter 20: Unemployment and Inflation
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Sample Questions
Q1) The labor force equals the number of people
A) employed.
B) unemployed.
C) employed plus unemployed.
D) in the working-age population.
Q2) Refer to Table 20-8.The percentage change in real average earnings from 1965 to 2010 equals
A) 2.0 percent
B) 19.7 percent.
C) 24.5 percent.
D) 80.3 percent.
Q3) The unemployment rate equals the number of unemployed divided by the ________,all times 100.
A) number of employed
B) labor force
C) working-age population
D) total population
Q4) During the 1990s,Japan experienced periods of deflation and very low nominal interest rates,approaching zero percent.Why would lenders of money agree to a nominal interest rate of almost zero?
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Chapter 21: Economic Growth, the Financial System, and Business Cycles
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Sample Questions
Q1) In a closed economy public saving plus private saving is equal to A) investment.
B) taxes minus transfers.
C) the budget surplus.
D) the budget deficit.
Q2) Since 1950,expansions in the United States have become ________,while recessions have become ________.
A) longer; longer
B) shorter; shorter
C) shorter; longer
D) longer; shorter
Q3) The quantity of goods and services that can be produced by one worker or by one hour of work is referred to as A) technology.
B) labor productivity.
C) real GDP.
D) human capital.
Q4) When potential GDP increases,is it necessarily the case that real GDP increases as well? Explain.
Q5) How are unemployment,inflation,and the business cycle related?
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Chapter 22: Long-Run Economic Growth: Sources and Policies
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Q1) In a small European country,it is estimated that changing the level of capital from $8 million to $10 million will increase real GDP from $2 million to $3 million.What level of GDP would you expect the economy to be able to reach if spending on capital continued to rise to $12 million,assuming no technological change and no change in the hours of work?
A) GDP would increase further, but by less than $1 million.
B) GDP would increase further by exactly $1 million.
C) GDP would increase further by more than $1 million
D) GDP would increase further by exactly $4 million.
Q2) If real GDP per capita in the United States is $8,000 in 2011,and if real GDP per capita is $12,000 in 2021,what is the average annual percent change in the growth rate of GDP per capita between 2011 and 2021?
A) 3.33%
B) 5%
C) 33%
D) 50%
Q3) What features made England in the eighteenth century the place where the Industrial Revolution occurred?
Q4) Describe the process of "creative destruction" using a specific example.
Page 24
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Chapter 23: Aggregate Expenditure and Output in the Short Run
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Q1) If the economy is currently in equilibrium at a level of GDP that is below potential GDP,which of the following would move the economy back to potential GDP?
A) an increase in wealth
B) an increase in interest rates
C) a decrease in business confidence
D) an increase in the value of the dollar relative to other currencies
Q2) An increase in the price level in the United States will shift the aggregate expenditure line upward.
A)True
B)False
Q3) The formula for aggregate expenditure is
A) AE = C + I + G.
B) AE = C + I + G - NX.
C) AE = C + I + G + NX.
D) AE = C + I + depreciation - NX.
Q4) The larger the MPC,the smaller the value of the multiplier.
A)True
B)False
Page 25
Q5) What is the difference between aggregate expenditure and consumption spending?
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Chapter 24: Aggregate Demand and Aggregate Supply Analysis
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Q1) In the dynamic aggregated demand and aggregate supply model,if AD shifts faster than AS
A) inflation occurs.
B) deflation occurs.
C) stagflation occurs.
D) disinflation occurs.
Q2) The long-run aggregate supply curve shows the relationship between the ________ and ________.
A) inflation rate; quantity of real GDP demanded
B) real interest rate; quantity of real GDP supplied
C) nominal interest rate; quantity of real GDP supplied
D) price level; quantity of real GDP supplied
Q3) The ________ shows the relationship between the price level and quantity of real GDP demanded.
A) consumer price index
B) aggregate expenditure line
C) 45-degree line
D) aggregate demand curve
Q4) Using an aggregate demand graph,illustrate the impact of an increase in the price level on aggregate demand.
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Chapter
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Sample Questions
Q1) If households and firms decide to hold less of their money in checking account deposits and more in currency,then the money supply
A) will not change.
B) will increase.
C) will decrease.
D) may increase or decrease.
Q2) If the current penny was made worth five cents rather than its current value of one cent,what would be the effect on M1?
A) It would rise.
B) It would fall.
C) M1 would rise, and M2 would remain constant.
D) It would only affect M2.
Q3) The largest proportion of M1 is made up of
A) currency.
B) checking account deposits.
C) traveler's checks.
D) savings account deposits.
E) time deposits.
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Chapter 26: Monetary Policy
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Q1) The Fed uses a "core" price index,one that excludes food and energy prices to measure inflation.It does so because
A) food and energy are inelastic goods and consumers will buy them regardless of their price.
B) it wants to avoid the blame for high gasoline prices causing inflation.
C) food and energy prices have wide swings that are not related to the causes of general inflation.
D) food and energy prices do not change all that much during the short run, so are irrelevant to the calculation of inflation.
Q2) Inflation rates during the years 1979-1981 were the highest the United States has ever experienced during peacetime.
A)True
B)False
Q3) The Taylor rule links the Federal Reserve's target for the
A) money supply to shifts in money demand.
B) money supply to changes in interest rates.
C) federal funds rate to economic variables.
D) federal funds rate to the money supply.
Q4) List the Fed's four main monetary goals.
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Chapter 27: Fiscal Policy
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Sample Questions
Q1) Which of the following is a reason why we should consider the federal national debt a problem?
A) The federal government is in danger of defaulting on its debt.
B) If the debt drives up interest rates, crowding out will occur.
C) If the debt was incurred to finance improvements in infrastructure, crowding out will occur.
D) If the debt was incurred to finance research and development, crowding out will occur.
Q2) If the federal budget goes from a budget deficit in Year 1 to a budget surplus in Year 2,does it follow that the federal government acted to raise taxes or cut government spending in Year 2?
Q3) The budget deficit increases during wars and recessions.
A)True B)False
Q4) Congress and the president carry out fiscal policy through changes in A) interest rates and the money supply. B) taxes and the interest rate.
C) government purchases and the money supply.
D) government purchases and taxes.
Q5) How can tax simplification be beneficial to the economy?
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Chapter 28: Inflation, unemployment, and Federal Reserve Policy
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Sample Questions
Q1) Refer to Figure 28-1.What should the Federal Reserve do if it wants to move from point A to point B in the short-run Phillips curve depicted in the figure above?
A) buy treasury bills
B) sell treasury bills
C) lower the discount rate
D) increase the money supply
E) lower taxes
Q2) The key to understanding the short-run trade-off behind the Phillips curve is that an increase in inflation will decrease unemployment if the inflation is ________ by both workers and firms.
A) unexpected
B) expected
C) perfectly predicted
D) ignored
Q3) If expectations are adaptive,how will the economy adjust to a new long-run equilibrium in response to contractionary monetary policy? Support your answer with a graph of the Phillips curve.
Q4) How would you expect the Fed to respond to a negative supply shock in the economy?
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Chapter 29: Macroeconomics in an Open Economy
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Sample Questions
Q1) If the Fed does not take into account the additional policy channels available in an open economy,then ________ when conducting contractionary monetary policy,
A) it is likely to decrease GDP too much and cause a recession
B) it is likely to decrease GDP too little and inflation will persist
C) it is likely to increase GDP too much and inflation will persist
D) it is likely to increase GDP too little and cause a recession
Q2) Based on the following information,calculate public saving,net foreign investment,and national income.
Private saving = $83 billion
Exports = $125 billion
Imports = $130 billion
Consumption = $200 billion
Private investment = $56 billion
Government purchases = $38 billion
Q3) An increase in the demand for American-made goods will
A) increase the supply of dollars on the foreign exchange market.
B) decrease the supply of dollars on the foreign exchange market.
C) increase the demand for dollars on the foreign exchange market.
D) decrease the demand for dollars on the foreign exchange market.
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Chapter 30: The International Financial System
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Sample Questions
Q1) What do reports that the dollar is "overvalued" mean? How will foreign exchange markets respond to this information? Support your answer graphically.
Q2) The International Monetary Fund was created to facilitate the borrowing and lending of dollar reserves to central banks of the countries' participating in the Bretton Wood System.
A)True
B)False
Q3) Firms in Thailand that had borrowed dollars while the baht was pegged to the dollar faced interest payments that were ________ than they had planned while the Thai government continued trying to defend the peg,because the baht had been pegged ________ the equilibrium exchange rate for the baht.
A) higher; above
B) higher; below
C) lower; above
D) lower; below
Q4) Why might a country raise interest rates in the face of an exchange rate crisis?
Q5) How were exchange rates determined under the gold standard? How did the Bretton Woods system differ from the gold standard?
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