Price Theory
Midterm Exam
Course Introduction
Price Theory explores the fundamental principles governing how prices are determined in markets and how they influence the allocation of resources. The course covers topics such as supply and demand, consumer and producer behavior, market structures, elasticity, and the effects of government intervention. Through a blend of theoretical models and real-world applications, students will develop a solid understanding of how individual choices and market forces interact to shape prices and the distribution of goods and services in the economy.
Recommended Textbook
Microeconomics 3rd Australian Edition by Glenn Hubbard
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Chapter 1: Economics: Foundations and Models
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Sample Questions
Q1) Productive efficiency is achieved when
A)firms add a low profit margin to the goods and services they produce.
B)firms produce the goods and services that consumers value most.
C)firms produce goods and services at the lowest cost.
D)there are no shortages or surpluses in the market.
Answer: C
Q2) 'An increase in the price of petrol will increase the demand for hybrid vehicles.' This statement is an example of a positive economic statement.
A)True
B)False
Answer: True
Q3) When Mr.Peabody decides on the companies to which he will donate his time and money,a ________ issue is being addressed.
A)microeconomic
B)macroeconomic
C)positive economic
D)normative economic
Answer: A
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3
Chapter 2: Choices and Trade-Offs in the Market
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Sample Questions
Q1) If additional units of a good could be produced at an increasing opportunity cost,the production possibility frontier would be linear.
A)True
B)False
Answer: False
Q2) Jane can bake either a combination of 25 cakes and 15 pies or a combination of 10 cakes and 20 pies.If she now bakes 10 cakes and 20 pies,what is the opportunity cost of baking an additional 15 cakes?
A)5 pies
B)10 pies
C)15 pies
D)20 pies
Answer: A
Q3) An increase in the unemployment rate may be represented as a movement from a point on the production possibility frontier to a different point on the frontier.
A)True
B)False
Answer: False
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4
Chapter 3: Where Prices Come From: the Interaction of
Demand and Supply
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Sample Questions
Q1) Refer to Figure 3-5.At a price of $20,
A)there would be a surplus of 8 units.
B)there would be a shortage of 8 units.
C)there would be a surplus of 0 units.
D)there would be a shortage of 4 units.
Answer: A
Q2) If a firm expects that the price of its product will be higher in the future than it is today
A)the firm will go out of business.
B)the firm has an incentive to increase supply now and decrease supply in the future.
C)the firm has an incentive to decrease quantity supplied now and increase quantity supplied in the future.
D)the firm has an incentive to decrease supply now and increase supply in the future.
Answer: D
Q3) A positive technological change will cause the supply of a good to increase.
A)True
B)False
Answer: True
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Chapter 4: Elasticity: the Responsiveness of Demand and Supply
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Sample Questions
Q1) Suppose the cross-price elasticity of demand between grapefruit juice and orange juice is approximately 6.What does this mean?
A)A 1 per cent decrease in the price of grapefruit juice leads to a 6 per cent increase in orange juice consumption.
B)A 6 per cent increase in the price of grapefruit juice leads to a 1 per cent increase in orange juice consumption.
C)If the price of grapefruit juice rises by $1,6 more cartons of orange juice will be purchased.
D)The demand for orange juice is 6 times more than the demand for grapefruit juice.
Q2) With the increased usage of mobile services,what has happened to the price elasticity of demand for land-line telephone services?
A)It has become more price inelastic.
B)It has become more price elastic.
C)It has become more income elastic.
D)The absolute value of the price elasticity coefficient has probably gone down.
Q3) What does price elasticity of demand measure? When is demand elastic? Inelastic? Unit elastic?
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Page 6
Chapter 5: Economic Efficiency, Government Price Setting and Taxes
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Sample Questions
Q1) Refer to Figure 5-1.If the market price is $1.50,what is the consumer surplus on the first burrito?
A)$0.50
B)$1.00
C)$1.50
D)$7.50
Q2) Refer to Figure 5-3.What is the value of producer surplus at a price of $18?
A)$240
B)$300
C)$340
D)$720
Q3) Refer to Figure 5-5.Suppose that instead of a rent ceiling,the government imposed a price floor of $2000 per month for apartments.What is the quantity of apartments demanded at the new price?
A)0
B)200
C)300
D)500
Q4) What do economists mean by an efficient tax?
Q5) What is a black market?
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Chapter 6: Consumer Choice and Behavioural Economics
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Sample Questions
Q1) As a consumer consumes more and more of a product in a particular time period,eventually marginal utility
A)rises.
B)is constant.
C)declines.
D)fluctuates.
Q2) What is a Giffen good?
Q3) Which of the following is not a common mistake made by consumers?
A)the failure to take into account the implicit costs of an activity
B)the failure to ignore sunk costs
C)being overly optimistic about their future behaviour
D)being overly pessimistic about their future behaviour
Q4) If,as a person consumes more and more of a good,each additional unit adds less satisfaction than the previous unit consumed,we are seeing the workings of
A)the law of demand.
B)the law of supply.
C)the law of increasing marginal opportunity cost.
D)the law of diminishing marginal utility.
Q5) Explain the endowment effect.
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Chapter 7: Technology, Production and Costs
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Sample Questions
Q1) Which of the following would be categorised as an opportunity cost?
A.not being able to spend your $10 000 savings if you sink the money into your business
B.the cost of purchasing supplies for your house-cleaning business
C.the cost of purchasing auto insurance for your dry-cleaning delivery business
A)a only
B)a and c only
C)b and c only
D)all of the above
Q2) When a firm experiences a positive technological change
A)the price of a share of the firm's stock rises.
B)the firm is able to produce more output using the same inputs,or the same output using fewer inputs.
C)the value of the firm's assets rises.
D)the firm will hire additional workers in order to increase production.
Q3) Refer to Figure 7-1.Diminishing marginal productivity sets in after
A)the 2nd worker is hired.
B)the 3rd worker is hired.
C)the 4th worker is hired.
D)the 5th worker is hired.
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Page 9
Chapter 8: Firms in Perfectly Competitive Markets
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Sample Questions
Q1) A perfectly competitive firm in a constant-cost industry produces 1000 units of a good at a total cost of $50 000.If the prevailing market price is $48,the number of firms and the industry's output will decrease in the long run.
A)True
B)False
Q2) Refer to Figure 8-9.Suppose the prevailing price is $20 and the firm is currently producing 1350 units.In the long-run equilibrium,the firm represented in the diagram A)will continue to produce the same quantity.
B)will reduce its output to 1100 units.
C)will reduce its output to 750 units.
D)will cease to exist.
Q3) If the market price is $40 in a perfectly competitive market,the marginal revenue from selling the fifth unit is
A)$8.
B)$20.
C)$40.
D)$200.
Q4) Under what conditions should a competitive firm shut down in the short run?
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Page 10
Chapter 9: Monopoly Markets
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Sample Questions
Q1) Which of the following pricing strategies allows a firm to earn economic profit?
A)price discrimination
B)charging a price equal to marginal cost
C)charging a price equal to the average total cost of production
D)charging a price equal to the average variable cost of production
Q2) Refer to Figure 9-2.If the firm's average total cost curve is ATC<sub>1</sub>,the firm will
A)suffer a loss.
B)break even.
C)make a profit.
D)face competition.
Q3) Relative to a perfectly competitive market,a monopoly results in
A)a gain in producer surplus equal to the gain in consumer surplus.
B)a gain in producer surplus equal to the loss in consumer surplus.
C)a gain in producer surplus less than the loss in consumer surplus.
D)greater economic efficiency.
Q4) In reality,because few markets are perfectly competitive,some loss of economic efficiency occurs in the market for nearly every good or service.
A)True
B)False
Page 11
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Chapter 10: Monopolistic Competition
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Sample Questions
Q1) Suppose that if a local McDonald's restaurant reduces the price of a Big Mac from $4.00 to $3.25,the number of Big Macs it sells per day will increase from 4 to 5.Explain the output effect and the price effect resulting from this change.Using a graph,illustrate both the loss in revenue from selling each of the first 4 Big Macs for $0.75 less and the additional revenue from selling 1 more Big Mac.What is the total change in revenue received which results from this price decrease?
Q2) A trademark is
A)a legal instrument which grants a firm the right to differentiate its product.
B)a legal right to position a firm's product in high-traffic public areas such as airports and post offices.
C)a patent on a firm's product.
D)a distinguishing attribute such as a sign or logo that allows a firm to uniquely identify its product.
Q3) A monopolistically competitive firm can convince buyers that its product has value by differentiating its product to suit consumers' preferences.
A)True
B)False
Q4) What is the difference between the terms 'marketing' and 'advertising'?
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Page 12
Chapter 11: Oligopoly: Firms in Less Competitive Markets
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Sample Questions
Q1) An equilibrium in a game in which players pursue their own self-interest is called
A)a Nash equilibrium.
B)a cooperative equilibrium.
C)a noncooperative equilibrium.
D)a prisoner's dilemma.
Q2) Suppose we want to use game theory to analyse how an oligopolist selects its optimal price.The cells of the payoff matrix show
A)the profit that each producer can expect to earn by pursuing a single strategy.
B)the profit that each producer can expect to earn from every combination of strategies by the firms in the market.
C)the strategy that a firm must pursue to earn various levels of profit.
D)the expected profits of rival firms.
Q3) Producing a homogeneous product occurs in which of the following industries?
A)oligopoly,monopolistic competition and perfect competition
B)perfect competition only
C)oligopoly and perfect competition
D)monopolistic competition and perfect competition
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Chapter 12: The Markets for Labour and Other Factors of Production
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Sample Questions
Q1) Some superstar athletes in the sports industry earn very high levels of income relative to other occupations,and over time the wage differential has been increasing.What could have caused this?
A)The supply of star athletes has decreased.
B)The supply of star athletes has increased due to university athletic programs.
C)Technological advances such as cable television has increased the demand for sports entertainment.
D)The market power of athletes' unions has increased.
Q2) The marginal revenue product of labour is defined as
A)the change in the firm's revenue as a result of selling one more unit of output.
B)the change in the firm's output as a result of hiring one more worker.
C)the change in the firm's profit as a result of hiring one more worker.
D)the change in the firm's revenue as a result of hiring one more worker.
Q3) The benefit to the firm from hiring one additional worker is called the
A)marginal revenue product of labour.
B)marginal revenue.
C)marginal profit.
D)total revenue.
Q4) What is a monopsony?
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Chapter 13: International Trade
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Sample Questions
Q1) Free trade ________ living standards by ________ economic efficiency. A)raises;increasing B)lowers;decreasing C)raises;equalising D)lowers;eliminating
Q2) Refer to Table 13-6.Prior to trade,what was the opportunity cost to produce 1 hat in Belize?
A)1/6 of a clock
B)2/3 of a clock
C)1.5 clocks
D)6 clocks
Q3) Refer to Table 13-1.Select the statement that accurately interprets the data in the table.
A)Linda has an absolute advantage in dog bathing and Sandy has an absolute advantage in dog grooming.
B)Sandy has an absolute advantage in dog bathing and Linda has an absolute advantage in dog grooming.
C)Sandy has an absolute advantage in dog bathing and dog grooming.
D)Linda has an absolute advantage in dog bathing and dog grooming.
Q4) What is autarky?
Page 15
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Chapter 14: Government Intervention in the Market
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Sample Questions
Q1) Economic efficiency is a market outcome in which the marginal benefit of consumers is equal to the marginal cost of production,and the sum of consumer surplus and producer surplus is maximised.
A)True
B)False
Q2) Economic efficiency is defined as a market outcome in which the marginal benefit to consumers of the last unit produced is equal to the marginal cost of production,and in which
A)the sum of consumer surplus and producer surplus is at a maximum.
B)economic surplus is minimised.
C)the sum of the benefits to firms is equal to the sum of the benefits to consumers.
D)the sum of consumer surplus and producer surplus is minimised.
Q3) What is the relationship between market failure and government failure?
Q4) The supply curve of a public goods shows
A)the total quantities that all producers are willing and able to supply at each price.
B)the maximum amount suppliers require to produce each quantity of the good.
C)the total cost of producing each unit of the good.
D)the marginal cost of producing each unit of the good.
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Page 16
Chapter 15: Externalities, Environmental Policy and Public Goods
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Sample Questions
Q1) If policymakers use a pollution tax to control pollution,the tax per unit of pollution should be set
A)equal to the marginal external cost at the economically efficient level of pollution. B)equal to the marginal private cost of production at the economically efficient level of pollution.
C)equal to the amount of the deadweight loss created in the absence of a pollution tax. D)at a level low enough so that producers can pass along a portion of the additional cost onto consumers without significantly reducing demand for the product.
Q2) Refer to Figure 15-3.In the absence of any government intervention,the private market
A)underproduces by Q<sub>o</sub><sub> </sub>- Q<sub>m</sub> units.
B)overproduces by Q<sub>o</sub><sub> </sub>- Q<sub>m</sub> units.
C)overproduces by Q<sub>n</sub><sub> </sub>- Q<sub>m</sub> units.
D)underproduces by Q<sub>n</sub><sub> </sub>- Q<sub>m</sub> units.
Q3) What is a private benefit from consumption? What is a social benefit from consumption? When is the private benefit from consumption equal to the social benefit from consumption?
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Chapter 16: The Distribution of Income and Social Policy
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Q1) Refer to Figure 16-2.If the government imposes an excise tax of $1.00 on every unit sold,
A)the deadweight loss is identical under either supply curve.
B)the deadweight loss is greater under the supply curve S<sub>1</sub>.
C)the deadweight loss is greater under the supply curve S<sub>0</sub>.
D)there is no deadweight loss since revenue raised is used to fund government projects.
Q2) Refer to Figure 16-1.The excess burden of the tax is represented by the area
A)B + C.
B)F + G.
C)E + H.
D)B + C + F + G.
Q3) Refer to Figure 16-1.Area B + C + F + G represents
A)the portion of sales tax revenue borne by consumers.
B)the portion of sales tax revenue borne by producers.
C)the excess burden of the sales tax.
D)sales tax revenue collected by the government.
Q4) What is the difference between a marginal tax rate and an average tax rate? Which is more important in determining the impact of the tax system on economic behaviour?
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