Principles of Microeconomics Exam
Solutions
Course Introduction
Principles of Microeconomics introduces students to the fundamental concepts and analytical tools used to understand how individuals, firms, and governments make choices in markets. The course covers topics such as supply and demand, elasticity, consumer and producer behavior, market structures (including perfect competition, monopoly, and oligopoly), and the role of government in addressing market failures. Through real-world examples and problem-solving, students develop basic economic reasoning skills and learn how microeconomic principles apply to everyday decisions and public policy.
Recommended Textbook
Microeconomics Theory and Applications 12th Edition by Edgar K. Browning
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Page 2
Chapter 1: An Introduction to Microeconomics
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Q1) What would be the impact on the real price of automobiles if the nominal price increases by 60 percent over a ten year period?
A)The real price will increase by 60 percent.
B)The real price will increase,but by less than 60 percent.
C)The real price will decrease.
D)The real price cannot be determined without more information.
Answer: D
Q2) In judging the value of a theory,the most important criteria is:
A)how realistic or valid the assumptions of the theory are as compared to real world circumstances.
B)how well the theory predicts that which it is designed to predict.
C)how well the theory builds upon the theorists' experiences.
D)how simple the theory is for the average people to understand.
Answer: B
Q3) When analyzing events across time,economists measure consumer behavior based on:
A)nominal prices.
B)real prices.
C)complete information about buyer preferences.
D)current income.
Answer: B
Page 3
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Chapter 2: Supply and Demand
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Q1) Which of the following market outcomes can be explained by the supply-demand model?
A)An increase in the demand for cigarettes after an increase in its price
B)A decrease in household consumption following an increase in average monthly income
C)An increase in supply in spite of a decline in input prices
D)An increase in the per capita consumption of medical care in a country due to an epidemic
Answer: D
Q2) Along a linear demand curve,the price elasticity:
A)is constant.
B)increases as price falls.
C)is equal to one at the midpoint.
D)decreases as the price level rises.
Answer: C
Q3) Explain how a change in price affects total expenditure by filling in each cell with the resulting change in total expenditure.
Answer: 11ea857e_d75e_f708_a433_3f52e736fc86_TB1826_00_TB1826_00
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Chapter 3: The Theory of Consumer Choice
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Q1) At any point on an indifference curve,the slope indicates:
A)the relative price ratio of the two goods.
B)the allocation of the consumer's income between the two goods.
C)the marginal rate of substitution between the two goods.
D)how the total satisfaction of the consumer changes with different market baskets.
Answer: C
Q2) A set of indifference curves showing that the consumer is indifferent between market baskets A and B,and market baskets A and C,but that market basket C is preferred to B must be _____.
A)horizontal
B)positively sloped
C)parallel
D)intersecting
Answer: D
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Chapter 4: Individual and Market Demand
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Q1) If the price-consumption curve for X is entirely downward sloping,it implies:
A)the price elasticity of demand for X is greater than one.
B)the price elasticity of demand for X is less than one.
C)X is an inferior good.
D)the price elasticity of demand for X is equal to one.
Q2) U = C<sup>\(\alpha\)</sup>M<sup>\(\alpha\)-1</sup> is an example of a:
A)Cobb-Douglas production function.
B)Cobb-Douglas utility function.
C)quadratic utility function.
D)quadratic production function.
Q3) A demand curve will have a positive slope when:
A)the good is an inferior good.
B)the income effect of a price change outweighs the substitution effect.
C)there are no substitutes for the good.
D)the good can be consumed only with some other good.
Q4) The substitution effect is the change in consumption due to:
A)a change in relative prices.
B)a change in income.
C)a change in utility.
D)a change in the availability of complements.
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Chapter 5: Using Consumer Choice Theory
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Q1) Refer to Figure 5-2.The deadweight loss of an excise subsidy that lowers the price from P<sub>1</sub> to P<sub>2</sub> is area _____.
A)P<sub>1</sub>ACP<sub>2</sub>
B)P<sub>1</sub>BCP<sub>2</sub>
C)ADC
D)ABC
Q2) Which of the following leads to the diversification of risk?
A)Investing in assets that give the highest possible returns
B)Investing in safe assets that may give low returns
C)Investing in multiple assets rather than a single asset
D)Investing in assets that are highly risky but give high returns
Q3) The U.S.government in effect subsidizes health care of workers by:
A)relaxing health care regulations.
B)having lower tax rates on wages and salaries.
C)not taxing health care benefits.
D)reducing taxes on firms and small businesses.
Q4) Describe the relationship among total utility,marginal utility,and preferences toward risk.
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Chapter 6: Exchange, Efficiency, and Prices
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Q1) When the marginal rates of substitution for two consumers differ:
A)the indifference curves of the consumers are tangent.
B)mutually beneficial trade cannot take place.
C)consumers' bargaining skills will determine their position on the contract curve.
D)trade will benefit one of the consumers and harm the other consumer.
Q2) A Pareto optimal distribution of goods is _____.
A)always efficient and equitable
B)efficient but not always equitable
C)not always efficient but equitable
D)neither efficient nor inequitable
Q3) The market equilibrium in a many-person setting is an:
A)efficient allocation even though the terms of exchange are indeterminate.
B)efficient allocation because all traders face the same prices.
C)inefficient allocation.Although each pair of traders may arrive at the contract curve,the marginal rates of substitution for different trading pairs may not be equal.
D)inefficient allocation because not everyone likes the prices the market sets.
Q4) What did the moral philosopher Adam Smith mean by his invisible hand theorem?
Q5) Explain why a competitive equilibrium produces an efficient allocation of goods.
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Chapter 7: Production
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Q1) Consider the following Cobb-Douglas production function,T = aL<sup>b</sup>K<sup>c</sup>E<sup>d</sup>,where T is t-shirts produced,L is labor input,K is capital,and E is energy input.Mathematically show how the returns to scale of the production function depends upon the parameters a,b,c,and d.
Q2) In Figure 7-1,marginal product of labor is positive but lesser than the average product of labor after point _____.
A)A
B)B
C)C
D)D
Q3) The law of diminishing marginal returns _____.
A)is relevant in the short run.
B)assumes all the inputs are fixed
C)is applicable to fixed and variable inputs
D)applies when all inputs are increased
Q4) Answer the following:
a)What are the characteristics of isoquants?
b)How do they differ from indifference curves?
c)Graphically show that isoquants cannot intersect.
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Chapter 8: The Cost of Production
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Q1) Suppose the wage rate is $15 per hour and the rental rate of capital is $10 per hour.If the
Marginal product of labor is 60 and the marginal product of capital 10,the profit maximizing firm should:
A)hire more labor and less capital.
B)utilize more capital and less labor.
C)maintain its current input mix of capital and labor.
D)employ more of both capital and labor.
Q2) Economies of scope exist if:
A)it is cheaper to have only one firm in an industry.
B)it is cheaper for one firm to produce two products jointly than for separate firms to produce them separately.
C)it is more expensive to have one firm in an industry.
D)it is cheaper for two firms to work together to make two products than for one firm to make both by itself.
Q3) Do you think the marginal cost curve of a petroleum refinery will be U-shaped? Explain your answer.
Q4) Explain why the long-run average cost curve is usually U-shaped although all inputs are variable in the long run?
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Chapter 9: Profit Maximization in Perfectly Competitive Markets
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Q1) Refer to Figure 9-1.When the firm is producing the profit-maximizing level of output at a price of $10:
A)total fixed costs are OA.
B)economic profits equal BH.
C)average cost equals DG divided by OG.
D)total cost is minimized at B.
Q2) The slope of the long-run supply curve in a decreasing-cost industry is _____.
A)zero
B)negative
C)positive
D)infinite
Q3) In the long run,if the input procurement prices increase as the output supplied by firms in an industry rises:
A)the firms are operating in an increasing-cost industry.
B)the firms' profit margins will increase.
C)the firms are making positive economic profits.
D)the firms' cost curves shift will downward.
Q4) Derive the first-order and second-order conditions for perfect competition.
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Q5) Explain the difference between diminishing marginal returns to factor and a decreasing-cost industry.
Chapter 10: Using the Competitive Model
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Q1) One of the reasons for the low profitability of U.S.airlines during the era of regulation by the Civil Aeronautics Board (CAB)was _____.
A)the absence of organized labor unions
B)low airline safety
C)the scheduling of airline flights to sparsely populated areas
D)the price ceiling imposed by the CAB
Q2) Presently,the United States produces as well as imports crude oil.Suppose the government imposes a $10 per barrel excise tax on imported oil.What will happen?
A)The price of oil will rise by $10;less oil will be consumed but sales of foreign producers will rise at the expense of domestic producers.
B)The price of oil will rise;less oil will be consumed but sales of domestic producers will rise at the expense of the foreign oil producers.
C)The price of oil will decline and more U.S.-produced oil will be sold in place of the heavily taxed foreign oil.
D)The price of oil will decline and more oil will be consumed but the relative shares of the oil market between the U.S.and foreign oil producers will be unchanged.
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Page 12
Chapter 11: Monopoly
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Q1) Answer the following:
a)Define the market for Coca-Cola,that is,what would you include in the market for Coca-Cola? Considering the market for Coca-Cola,how is the market power of Coca-Cola affected by what is included as a part of the market?
(b)Explain how cross-price elasticity of demand is relevant to a firm being investigated for antitrust violation.If you were the chief economist for this firm,would you want to show a high cross-price elasticity or a low cross price elasticity of demand between your product and a rival product? Why?
Q2) Based on Figure 11-1,the unregulated monopolist will receive producer surplus equal to area:
A)ACF.
B)BCFH.
C)AVFH.
D)AWEH.
Q3) Refer to Figure 11-5.A fall in price will increase total revenue _____.
A)between the points C and F
B)between the points E and A
C)between the points A and F
D)at point G
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Page 13
Chapter 12: Product Pricing With Monopoly Power
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Q1) Which of the following is the closest example of block pricing?
A)An airline providing discounts to its frequent-flyers as they fly more
B)At an auction of antique furniture,each piece of furniture is sold to the highest bidder
C)A golf-club imposing a very high entry fee to reduce membership requests
D)An electric utility charging higher rates to the customers in the summer season than in the winter season
Q2) Refer to Figure 12-1. If the monopolist cannot price discriminate, profit will be equal to:
A)the area P<sub>3</sub>AP<sub>2</sub>.
B)the area P<sub>2</sub>AQ<sub>1</sub>O.
C)the area P<sub>2</sub>ABP<sub>1</sub>.
D)zero.
Q3) Under perfect price discrimination,_____.
A)each customer pays the same price but receives a different quantity
B)each customer pays a different price based on their willingness to pay
C)efficiency loss is maximized
D)price is always above marginal revenue
Q4) What is a two-part tariff? Make up a numerical example to support your definition.
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Chapter 13: Monopolistic Competition and Oligopoly
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Q1) Assume that there are only three sellers in the aluminum industry each producing identical aluminum sheets.Given that these three firms own all the known sources of aluminum,the _____ model of the market is most applicable to the aluminum industry.
A)oligopoly
B)monopoly
C)dominant firm model
D)monopolistic competition
Q2) Which of the following is true of product differentiation?
A)Product differentiation ensures that firms face a horizontal market demand curve. B)Product differentiation allows monopolistically competitive firms to make positive economic profits in the long run.
C)Prices of differentiated products have to vary substantially for product differentiation to be successful.
D)Successful product differentiation can be based on differences that are perceived by consumers.
Q3) What is a cartel and why are cartels considered to be inherently unstable?
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Chapter 14: Game Theory and the Economics of Information
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Q1) Explain how advertising,when undertaken by all competing firms,actually reduces the market power of the firms.
Q2) If X = 15 and Y = 10,then the information in Table 14-3 implies that:
A)the dominant strategy for Firm A would be to produce low output.
B)the dominant strategy for Firm B would be to produce high output.
C)the dominant strategy for both Firm A and Firm B would be to produce high output.
D)neither Firm A nor Firm B has any dominant strategy.
Q3) Group health plans,that offer policies covering all of a firm's employees,can partly address the adverse selection problem by:
A)increasing the incentive to take care of one's health.
B)reducing the likelihood that high-risk people will be overrepresented.
C)limiting the coverage provided to people with existing health problems.
D)increasing the probability of a person falling sick.
Q4) Advertising is profitable for a firm when:
A)it increases search costs for the consumers of the firm's product.
B)it raises the price of the good being advertised.
C)it makes the demand for the firm's product more inelastic.
D)it reduces the barriers to the entry of new firms.
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Q5) What is a prisoner's dilemma? Draw a payoff matrix which illustrates this game.
Chapter 15: Using Noncompetitive Market Models
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Q1) Refer to Table 15-2.Which of the following is true?
A)Company A's dominant strategy is to set a high price.
B)Company A's dominant strategy is to set a medium price.
C)Company A's dominant strategy is to set a low price.
D)Company A does not have a dominant strategy.
Q2) Which of the following is true of monopolies and their incentive to innovate?
A)Monopolies have the incentive to suppress innovation in order to sustain abnormal profits.
B)Monopolies do not have the incentive to innovate,even in the short run,unless they receive patents for their invention.
C)Monopolies do not have the incentive to innovate because they will continue to earn zero economic profits even with innovation.
D)Monopoly firms have the incentive to innovate and introduce new products in order to expand their profit.
Q3) Refer to Table 15-2.Which of the following is true?
A)Company B's dominant strategy is to set a high price.
B)Company B's dominant strategy is to set a medium price.
C)Company B's dominant strategy is to set a low price.
D)Company B does not have a dominant strategy.
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Chapter 16: Employment and Pricing of Inputs
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Q1) Two inputs,labor and capital,are considered complements if:
A)a fall in the price of labor leads to a fall in the price of capital.
B)they can replace each other in the production process.
C)a fall in the price of labor leads to an increase in the price of capital.
D)increasing the quantity of labor increases the marginal product of capital.
Q2) The marginal value product of labor measures:
A)the profit that a firm receives by selling the extra output made by an extra worker.
B)the addition made to total output by an additional worker.
C)the revenue a firm receives by selling the total output made by all workers.
D)the extra revenue earned by a firm selling the extra output made by an extra worker.
Q3) Refer to Figure 16-1.The firm was initially at point A.It will move to point B if:
A)the price of the final product increases.
B)the wage rate increases.
C)the cost of capital rises.
D)the demand for the final product falls.
Q4) Using calculus,show the profit-maximizing employment of inputs for a perfectly competitive firm.
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Chapter 17: Wages, Rent, Interest, and Profit
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Q1) What is meant by human capital?
A)It refers to the quantity of labor input employed in the production process.
B)It refers to the earning capacity of workers which is enhanced by education and experience.
C)It refers to the number of workers that will be required to replace one unit of capital.
D)It refers to the total number of employees working in an organization.
Q2) The aggregate investment demand curve slopes downward because:
A)the cost of the investment falls at lower interest rates.
B)of the law of diminishing marginal returns.
C)the total addition to productivity increases at higher interest rates.
D)an expansion in investment pushes up interest rates.
Q3) In a labor market with an effective union,the marginal revenue curve lies below the demand curve because:
A)workers who are part of the union are not as productive as non-union workers.
B)union workers are paid less than their marginal revenue product.
C)the union must lower wages paid to all workers to hire an extra worker.
D)marginal revenue increases as additional workers are hired.
Q4) Using a graph,explain the welfare effects of an effectively organized union in the labor market.
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Chapter 18: Using Input Market Analysis
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Q1) Suppose in the absence of a tax a firm employs 50 skilled workers at a wage rate of $20 per labor hour.If the supply of labor is perfectly inelastic,what will be the impact of a $2.50 per hour tax on the net wage received by the workers and total employment?
A)The net wage received by workers will be $17.50 per labor hour but total employment will not change.
B)The net wage received by workers will be $15 per labor hour and total employment will reduce to 25 workers.
C)The net wage received by workers will be $1750 per labor hour and total employment will reduce to 45 workers.
D)The net wage received by workers will be $15 per labor hour and total employment will increase to 75 workers.
Q2) In determining who bears the burden of the social security tax,it is important to consider:
A)the number of workers employed.
B)the way it is imposed on employers and employees.
C)the supply elasticity of labor.
D)the total labor hours supplied by each worker.
Q3) Mention some of the factors which hinder input buyer's cartel.
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Chapter 19: General Equilibrium Analysis and Economic Efficiency
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Q1) If an Edgeworth production box for two industries,with land and labor as the inputs,has a contract curve that is same as the diagonal of the box,we can infer that:
A)land is being substituted for labor in production of both the commodities.
B)the production possibility frontier is a 45-degree line from the origin.
C)both industries are increasing cost industries.
D)the proportion of land to labor used in producing the two goods is the same.
Q2) In an Edgeworth production box with isoquants,the contract curve reflects:
A)an efficient distribution of the output among consumers.
B)efficient input allocations across the firms.
C)all the points where competitive input markets could be in equilibrium.
D)all the points where the marginal rates of substitution between consumers are equal.
Q3) Suppose wine production is capital intensive and corn production is labor intensive.An increase in the demand for wine will cause:
A)an increase in the marginal cost of corn relative to the marginal cost of wine.
B)an increase in the price of labor relative to the price of capital.
C)a decrease in the marginal cost of capital.
D)an increase in the price of capital relative to the price of labor.
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Chapter 20: Public Goods and Externalities
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Q1) The good for which the characteristics of exclusion and rivalry in consumption do not apply is referred to as a:
A)public good.
B)common resource.
C)inferior good.
D)normal good.
Q2) According to Figure 20-1,the efficient output is ______ than the equilibrium output by _____ units.
A)more;400
B)less;400
C)more;100
D)less;200
Q3) Identify the correct statement.
A)The marginal cost of producing a public good is zero.
B)Any good that is provided by the government can be considered as a public good.
C)A public good is often under consumed as supply usually exceeds demand.
D)The consumers of a public good tend to underestimate the value of the good.
Q4) Mention some of the situations in which the Coase Theorem will not ensure an efficient outcome?
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