Principles of Microeconomics
Midterm Exam
Course Introduction
Principles of Microeconomics introduces the fundamental concepts and analytical tools used to understand how individuals, households, and firms make decisions within various markets. The course examines key topics such as supply and demand, elasticity, consumer and producer behavior, market structures (perfect competition, monopoly, monopolistic competition, and oligopoly), market failures, and the role of government in the economy. Through real-world examples, students learn to apply economic reasoning to everyday issues, evaluate market outcomes, and understand how resources are allocated in an economy.
Recommended Textbook
Microeconomics 10th Edition by William Boyes
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Page 2
Chapter 1: The Wealth of Nations: Ownership and Economic Freedom
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Sample Questions
Q1) Which economic concept is the closest to the saying, "There's no such thing as a free lunch"?
A)Specialization
B)Unlimited wants
C)Underutilization of resources
D)Opportunity costs
E)Overutilization of resources
Answer: D
Q2) Oil found underground in Texas is an example of: A)labor.
B)land or a natural resource.
C)an entrepreneur.
D)human capital.
E)capital resource.
Answer: B
Q3) The primary goal of economics is to help people make money.
A)True
B)False
Answer: False
Page 3
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Chapter 2: Scarcity and Opportunity Costs
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Sample Questions
Q1) Refer to Figure 2.1. Identify the correct statement.
A)If the country is at point A and is using all of its resources, point D is unattainable.
B)If the country is at point A and is using all of its resources, Point C is unattainable.
C)If the country is at point B and is using all of its resources, there will be an underutilization of resources at point C.
D)If the country is at point C, point B is unattainable.
E)If the country is at point B, it will not move.
Answer: C
Q2) The city of Austin can buy roads or light rail. If 10 miles of roads cost $1 million and 2 miles of light rail cost $10 million, what is the city's opportunity cost of 1000 miles of roads?
A)$100 million
B)2 miles of light rail
C)200 miles of light rail
D)$50 million
E)$1,000 million
Answer: A
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Page 4
Chapter 3: Markets and the Price System
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Sample Questions
Q1) Which of the following is true of the law of supply?
A)The law of supply is the sole determinant of market prices.
B)The law of supply states that as the price of a good rises, the quantity supplied rises.
C)The law of supply holds good only in the long-run.
D)The law of supply is valid only in a market system of allocation.
E)The law of supply asserts that as the cost of producing a good rises, the quantity supplied rises.
Answer: B
Q2) Refer to Figure 3.1. If demand shifts from D<sub>1</sub> to D<sub>2</sub> and supply shifts from S<sub>1</sub> to S<sub>2</sub>:
A)equilibrium price will rise to F, but equilibrium quantity will remain at B.
B)equilibrium price will move to C and equilibrium quantity to G.
C)demand will decrease and supply will increase.
D)equilibrium price will rise to G, and equilibrium quantity will remain at B.
E)both equilibrium price and equilibrium quantity will decrease.
Answer: D
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Chapter 4: The Aggregate Economy
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Sample Questions
Q1) Financial intermediaries are best described as:
A)informal institutions that provide funds to the government to manage budget deficits.
B)institutions that accept deposits and make loans.
C)institutions that control the money supply in the economy.
D)institutions that provide financial aid to foreign countries.
E)individuals who manage other's investment portfolios.
Q2) Spending on goods and services by all levels of government in the U.S. combined is smaller than investment spending but larger than consumption.
A)True
B)False
Q3) Annual expenditures by the federal government exhibited an upward trend, rising from $3 billion in 1930 to more than $1 trillion in 2010.
A)True
B)False
Q4) According to the World Bank, developing countries greatly outnumber industrial countries.
A)True
B)False
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6
Chapter 5: Using Economics to Understand the World
Around You
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Sample Questions
Q1) The imposition of a minimum wage in the unskilled labor market creates labor surplus or unemployment.
A)True
B)False
Q2) Refer to figure 5.3. Suppose the government imposes a minimum wage of $8. Which of the following is a possible outcome of the imposition of a minimum wage above the equilibrium wage rate?
A)There will be a rightward shift in the labor supply curve.
B)There will be a rightward shift in the labor demand curve.
C)There will be an increase in the quantity of jobs offered, from Q to Q<sub>II,</sub> and a fall in the quantity of labor supplied, from Q to Q<sub>I</sub>.
D)There will be a fall in the quantity of jobs offered, from Q to Q<sub>I,</sub> and an increase in the quantity of labor supplied, from Q to Q<sub>II</sub>.
E)There will be an increase in the producer surplus, at the minimum wage rate.
Q3) One of the drawbacks of horizontal fracking is that it drew workers from other industries to the fracking industry.
A)True B)False
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Chapter 6: Elasticity: Demand and Supply
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Q1) Suppose the price of a product is reduced from $10 to $6 and the quantity demanded increases from 40 to 60 units. From this we can conclude that the price elasticity of demand over this price range is equal to _____.
A)1.2
Q2) As income levels rose moderately last year in the San Jose area, it was observed by local realtors that housing sales increased substantially. It is clear from this information that, everything else held constant, the income elasticity of demand for houses is
A)negative and relatively low
B)negative and relatively high
C)positive and relatively low
D)positive and relatively high
E)neither positive nor negative
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Chapter 7: Demand: Consumer Choice
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Q1) In order to have a meaningful measure of marginal utility, we must define the time period during which consumption is occurring.
A)True
B)False
Q2) In effect, people feel that driving is safer than flying and also prefer to do so because of _____.
A)anchoring
B)overconfidence
C)status quo
D)loss aversion
E)familiarity
Q3) If a dinner guest was serious when she said that she could never get enough of your cooking, you would conclude that the marginal utility of your cooking for her was _____.
A)negative
B)zero
C)increasing at an increasing rate
D)positive
E)more than total utility
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Chapter 8: Supply: the Costs of Doing Business
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Sample Questions
Q1) The minimum efficient scale is same across all industries irrespective of the types of goods they produce.
A)True
B)False
Q2) "As I add more workers to the factory line, the additional output produced by each additional worker seems to decline. Eventually, the workers just get in each others' way." This statement by a factory supervisor refers to the law of:
A)comparative advantage.
B)demand.
C)supply.
D)increasing returns to scale.
E)diminishing marginal returns.
Q3) If the total cost of producing 2 pounds of cheese is $6 and the total cost of producing 4 pounds of cheese is $8, then:
A)marginal cost of producing cheese declines as output increases.
B)average total cost of producing cheese declines as output increases.
C)average total cost of producing cheese increases as output increases.
D)average total cost remains constant irrespective of the change in output.
E)marginal cost remains constant irrespective of the change in output.
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Page 10
Chapter 9: Profit Maximization
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Sample Questions
Q1) A producer can raise profit by expanding output if his:
A)marginal revenue is equal to marginal cost.
B)marginal revenue is less than marginal cost.
C)marginal revenue is negative.
D)marginal cost is negative.
E)marginal revenue is greater than marginal cost.
Q2) When economic profit is zero, producers do not have any incentive to deviate from the current line of production.
A)True
B)False
Q3) According to Figure 9.1, what is the firm's profit when it sells quantity Q<sub>1</sub> at price P<sub>1</sub>?
A)Rectangle ABCD
B)Rectangle DCEF
C)Rectangle ABEF
D)Distance AB
E)Distance FD
Q4) The daily vegetable market is an example of an oligopoly market structure. A)True B)False
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Chapter 10: Perfect Competition
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Sample Questions
Q1) In the short-run, a competitive firm is said to break-even if at equilibrium the:
A)price is equal to marginal revenue.
B)price is equal to average revenue.
C)price is equal to average variable cost.
D)price is equal to the average total cost.
E)price is equal to marginal cost.
Q2) In long-run equilibrium in perfect competition, the entry and exit of firms will drive economic profits to zero.
A)True
B)False
Q3) In Figure 10.3, at equilibrium, the firm enjoys a profit of:
A)$69.
B)$42.
C)$60.
D)$27.
E)$48.
Q4) A perfectly competitive firm faces a downward sloping market demand curve.
A)True
B)False
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Chapter 11: Monopoly
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Sample Questions
Q1) A deadweight loss arises under perfect competition.
A)True
B)False
Q2) Which of the following is an industry without significant barriers to entry?
A)Electricity generation
B)Natural gas distribution
C)Cable television provision
D)Corn farming
E)Postal services
Q3) If at an output of 10 units a monopolist is earning a positive profit, marginal revenue is $6, and marginal cost is $4, then the monopolist:
A)is in equilibrium.
B)should increase output.
C)should reduce output.
D)should lower the price at the current output level.
E)should raise the price at the current output level.
Q4) A monopolist always produces on the elastic portion of the demand curve.
A)True
B)False
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Chapter 12: Monopolistic Competition and Oligopoly
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Sample Questions
Q1) One reason that monopolistically competitive firms often use celebrity endorsements is that:
A)the firm owners like to be around celebrities so they can feel important.
B)they can link their product's reputation with the celebrity's reputation.
C)celebrity endorsements are comparatively inexpensive.
D)they can have the celebrity as their potential customer.
E)firms like to spend a lot on advertisements.
Q2) An efficient way to move toward the Nash equilibrium is called:
A)an agreement.
B)a convention.
C)a principle.
D)a resolution.
E)a convergence.
Q3) According to Figure 12.1, the firm:
A)will shut down temporarily at any price below A.
B)will operate at a price below A, as long as it is greater than marginal cost.
C)will shut down at a price below A only in the long run.
D)will break-even at the price level C.
E)will shut down if the price falls below E.
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Page 14
Chapter 13: Markets and Government
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Sample Questions
Q1) A pollution tax has the effect of reducing the costs of production for a firm, leading to a rightward shift of the supply curve.
A)True
B)False
Q2) One of the reasons that communism failed in the Soviet Union is that, under communism:
A)no one had property rights, so there was little incentive to use resources efficiently. B)there were high rates of unemployment and homelessness accompanied by a high rate of inflation.
C)planners did not have all the information necessary to make efficient decisions.
D)there was a high degree of political freedom.
E)there was a high degree of economic freedom.
Q3) Consumers in used car markets can very easily differentiate between high-quality and low-quality cars.
A)True
B)False
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Page 15
Chapter 14: Antitrust and Regulation
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Sample Questions
Q1) Delegates from different countries of the world met at Geneva in April 1947 which resulted in the formation of the first global trade agreement. Its main objective was:
A)to create multiple trade barriers in the member countries.
B)to enable the member countries to maintain their autarkic conditions.
C)to provide security to the domestic producers of the member countries by prohibiting international trade.
D)to create an atmosphere of economic rivalry in the international sphere.
E)to liberalize trade for mutual prosperity of the members.
Q2) In the United States, monopoly regulation began primarily because:
A)there were no natural monopolies in the real world.
B)the government wanted to promote other forms of business practices.
C)monopolies did not typically follow occupational and safety rules.
D)monopolies tended to restrict output and raise prices.
E)most economists believed that the majority of industries were following the purely competitive model.
Q3) Regulation of enterprises by the government has always been found to make the market more efficient.
A)True
B)False
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Page 16
Chapter 15: Resource Markets
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Sample Questions
Q1) A monopsonist firm faces a negatively sloped marginal factor cost curve.
A)True
B)False
Q2) The price of a resource declines when:
A)both the demand for and the supply of the resource declines in the same proportion.
B)demand remaining constant, supply of the resource declines.
C)supply remaining constant, the demand for the resource declines.
D)both the demand for and the supply of the resource increases in the same proportion.
E)both the demand for and the supply of the resource declines, but supply falls by a greater proportion than demand.
Q3) According to Table 14.4, how many laborers should be hired if the wage rate is $18? (Marginal revenue product = MPP X MR)
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Chapter 16: The Labor Market
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Sample Questions
Q1) When white males resist to share responsibilities with members of a minority group, it is termed as:
A)employer prejudice.
B)consumer prejudice
C)worker prejudice.
D)statistical discrimination.
E)occupational segregation.
Q2) It has been proved empirically that marriage and children lowers a woman's ability to earn as much as a man.
A)True
B)False
Q3) The principal argument against comparable worth is that the demand and supply of labor in the labor market allocates workers to where they are needed the most.
A)True
B)False
Q4) Because of illegal immigrants, the equilibrium wage rate of unskilled labor falls.
A)True
B)False
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Page 18
Chapter 17: The Capital Market
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Sample Questions
Q1) Why is it unlikely for even a very successful investor to continuously outperform the market?
A)Different investors have different risk appetites.
B)Individual investors have independent strategies.
C)The stock market is not subject to sufficient government regulations.
D)Investors often mimic the strategies of the successful investor.
E)The market is always inefficient.
Q2) Stocks that offer a guaranteed fixed periodic payment or dividend are known as: A)common stock.
B)restricted stock.
C)close-ended stock.
D)preferred stock.
E)open-ended stock.
Q3) If a mutual fund with a back-end-load is not sold within the stipulated time period, the investor is not required to pay any fee to the fund manager.
A)True
B)False
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Chapter 18: The Land Market and Natural Resources
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Q1) Unlike nonrenewable resources, the timing of extraction of renewable resources are independent of the market rate of interest.
A)True
B)False
Q2) Common ownership may fail to ensure that harvesting of renewable resources does not exceed the maximum sustainable yield.
A)True
B)False
Q3) As extraction of a nonrenewable resource increases, the supply curve shifts up because:
A)more substitutes become available.
B)competition among the existing suppliers intensifies.
C)the marginal cost of extracting any given amount increases.
D)the resource finds alternative usage.
E)the resource becomes less productive.
Q4) An increase in demand for housing will reduce the availability of land for cultivation. A)True
B)False
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Chapter 19: Current Issues: Income, Income Distribution,
Poverty, and Government Policy
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Q1) Individuals have a tradeoff between leisure and work. When income from working is taxed, the cost of leisure is reduced in relative terms.
A)True
B)False
Q2) Which of the following tax structures creates a disincentive to earn more?
A)Proportional tax structure
B)Regressive tax structure
C)Digressive tax structure
D)Progressive tax structure
E)A combination of proportional and regressive tax structure
Q3) Refer to Table 19.1. What percentage of income is received by the bottom 20% of the households?
A)10.3%
B)43.9%
C)24.7%
D)4.3%
E)16.9%
Q4) A proportional tax is a tax whose rate increases as the tax base widens.
A)True
B)False
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Chapter 20: World Trade Equilibrium
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Sample Questions
Q1) The principle of comparative advantage states that a country should specialize in the production of those goods that have the highest opportunity costs.
A)True
B)False
Q2) Which of the following countries receives the largest share of U.S. exports?
A)Mexico
B)Germany
C)Japan
D)Canada
E)United Kingdom
Q3) Refer to Figure 20.1. If the price of coffee in the international market is $14:
A)there will be an excess demand of 10 pounds in Columbia's domestic market.
B)Columbia's domestic market for coffee will be in equilibrium.
C)there will be an excess demand for Columbian coffee in the international market.
D)the international market for coffee will be in equilibrium.
E)Columbia will export 4 pounds of coffee.
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22
Chapter 21: International Trade Restrictions
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Q1) Suppose, in the United States, each farmer is given a federal agricultural subsidy worth $30,000. What will be the effect of such subsidy?
A)It discourages domestic agricultural production.
B)It allows U.S. farmers to sell their products for lower prices in foreign markets.
C)It gives foreign producers an unfair cost advantage.
D)It increases the amount of agricultural imports into the United States.
E)It reduces the prices of the primary products in the U.S. market.
Q2) Which of the following would result from a tariff?
A)An increase in government budget deficit
B)An increase in domestic production
C)A greater volume of international trade
D)Increased domestic consumption
E)Decrease in prices of the imported goods
Q3) In the United States, a "buy American" act was passed in 1933 to create larger markets for domestic goods.
A)True
B)False
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23
Chapter 22: Exchange Rates and Financial Links Between Countries
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Q1) If prices rise within a country, then, other things equal, the value of a unit of domestic currency will:
A)rise in both the domestic and the foreign exchange markets.
B)fall in both the domestic and the foreign exchange markets.
C)rise in the domestic market and fall in the foreign exchange market.
D)fall in the domestic market and rise in the foreign exchange market.
E)fluctuate unpredictably in both domestic and foreign exchange markets.
Q2) Suppose a hefty rise in the demand for Mexican pesos creates a chronic shortage of this currency in the foreign exchange market. Which of the following steps should be adopted by the Mexican government to eliminate this shortage?
A)The government should impose a ban on Mexican exports.
B)The government should devalue the peso.
C)The government should print more pesos to increase its supply.
D)The government should allow the peso to appreciate.
E)The government should allow the peso to depreciate.
Q3) Purchasing power parity holds when the exchange rate is equal to the product of the foreign price level and the domestic price level.
A)True
B)False
Page 24
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