Principles of Microeconomics Solved
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Course Introduction
Principles of Microeconomics introduces the fundamental concepts and tools used to understand the behavior of individuals and firms in making decisions about the allocation of limited resources. The course covers topics such as supply and demand, elasticity, market equilibrium, consumer choice, production and costs, and the structure of various market forms including perfect competition, monopoly, and oligopoly.
Students will learn how markets operate, what causes market failures, the role of government intervention, and how economic principles apply to real-world issues and policy decisions.
Recommended Textbook
Microeconomics 8th Edition by Jeffrey M. Perloff
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Page 2
Chapter 1: Introduction
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Sample Questions
Q1) Normative analysis offers decision makers the most valuable information when choosing among alternatives.
A)True
B)False
Answer: False
Q2) Society faces trade-offs because of
A) government regulations.
B) profit motive.
C) faceless bureaucrats.
D) scarcity.
Answer: D
Q3) What links the decisions of consumers and firms in a market?
A) the government
B) prices
C) coordination officials
D) microeconomics
Answer: B
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Page 3
Chapter 2: Supply and Demand
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Sample Questions
Q1) A downward sloping demand curve indicates that
A) individuals all have the same valuation of the same product.
B) individuals have different valuations of the same product.
C) individuals have no valuations of a particular product.
D) certain individuals are uninformed about certain aspects of the product.
Answer: B
Q2) Agricultural price supports are A) floors.
B) ceilings.
C) quantity quotas.
D) taxes.
Answer: A
Q3) Equilibrium is defined as a situation in which
A) neither buyers nor sellers want to change their behavior.
B) no government regulations exist.
C) demand curves are perfectly horizontal.
D) suppliers will supply any amount that buyers wish to buy.
Answer: A
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4
Chapter 3: Applying the Supply-And-Demand Model
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Sample Questions
Q1) Explain why a tax increase on cigarettes in one state might not lead to a substantial price increase for all consumers in that state.
Answer: Smuggling of non-taxed cigarettes and on-line buying where taxes don't apply by some consumers may prevent a price increase for these consumers.
Q2) As the demand for corn increases to provide input for ethanol production,what is expected to happen to the price elasticity of corn supply?
A) It will decrease.
B) It will become zero.
C) It will increase.
D) It will not change.
Answer: A
Q3) If a one percent increase in the population leads to a five percent increase in the quantity sold,an economist would claim
A) the good is elastic with respect to population.
B) the good is inelastic with respect to population.
C) the good is a fad.
D) consumers are misinformed about the quality of the product.
Answer: A
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Chapter 4: Consumer Choice
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Sample Questions
Q1) Robinson Crusoe is stranded on an island.He finds that coconuts are freely available (zero harvest cost),but fish are difficult to harvest and require a lot of energy.As a result,harvesting fish has a high price.If coconuts and fish are imperfect substitutes,what is Robinson Crusoe likely to consume?
A) He will consume more coconuts than fish.
B) He will consume more fish than coconuts.
C) He will consume equal amounts of both goods.
D) Not enough information is given.
Q2) If Fred's marginal utility of pizza equals 10 and his marginal utility of salad equals 2,then
A) he would give up 5 pizzas to get the next salad.
B) he would give up 5 salads to get the next pizza.
C) he will eat five times as much pizza as salad.
D) he will eat five times as much salad as pizza.
Q3) Lisa views pizzas and burritos as goods.If she prefers a bundle of 4 burritos and 4 pizzas to a bundle of 4 burritos and 5 pizzas,which property of consumer preference is violated? What change in the assumptions could lead a rational consumer to prefer the first bundle?
Q4) What is the difference between ordinal and cardinal measurement?
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Chapter 5: Applying Consumer Theory
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Sample Questions
Q1) One characteristic of a Giffen good is that it
A) is a luxury good.
B) is an inferior good.
C) has an upward-sloping Engel curve.
D) All of the above.
Q2) If a good is considered a normal good,the demand curve will shift ________ when income increases because ________.
A) right; the income and substitution effects move in the same direction.
B) right; the income and substitution effects move in the opposite direction.
C) left; the income and substitution effects move in the same direction.
D) left; the income and substitution effects move in the opposite direction.
Q3) Wealthy people will tend to have vertical labor supply curves
A) only if their income effect just offsets their substitution effect.
B) only if their income effect is greater than their substitution effect.
C) only if their income effect is less than their substitution effect.
D) only if they don't have an income effect.
Q4) A tax cut will unambiguously lower income-tax revenue.
A)True
B)False
Q5) Why can't all goods be inferior?
Page 7
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Chapter 6: Firms and Production
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Sample Questions
Q1) Which of the following statements best describes a production function?
A) the maximum profit generated from given levels of inputs
B) the maximum level of output generated from given levels of inputs
C) all levels of output that can be generated from given levels of inputs
D) all levels of inputs that could produce a given level of output
Q2) The above figure shows the isoquants for producing steel.Increasing returns to scale are
A) present when producing less than 10,000 tons.
B) present when producing less than 20,000 tons.
C) present when producing less than 30,000 tons.
D) never present.
Q3) Joey's lawncutting service recently traded in its push mowers for gasoline-powered mowers.Joey still requires one worker per lawnmower; however,more grass is now cut in the same amount of time as before.This is an example of
A) labor-saving technical change.
B) non-neutral technical change.
C) neutral technical change.
D) organizational change.
Q4) Explain why labor might not always be a variable input.
Q5) What do we mean by efficient production?
Page 8
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Chapter 7: Costs
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Sample Questions
Q1) When the isocost line is tangent to the isoquant,then
A) MPL = MPK.
B) the firm is producing that level of output at minimum cost.
C) the firm has achieved the right economies of scale.
D) All of the above.
Q2) Suppose the short-run production function is q = 10 L.If the wage rate is $10 per unit of labor,then AFC equals A) 0.
B) 1.
C) 10/q.
D) It cannot be determined from the information provided.
Q3) Learning by doing is represented by
A) a decrease in the average total cost curve.
B) an increase in the average total cost curve.
C) no change in the average total cost curve.
D) an increase in the average total cost curve and a decrease in the marginal cost curve.
Q4) Explain why the long-run total cost curve,not the short-run total cost curve,shows the lowest cost of producing any level of output.Is there an exception?
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Chapter 8: Competitive Firms and Markets
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Sample Questions
Q1) If a firm makes zero economic profit,then the firm
A) has total revenues greater than its economic costs.
B) must shut down.
C) can be earning positive business profit.
D) must have no fixed costs.
Q2) Economists define a market to be competitive when the firms
A) spend large amounts of money on advertising to lure customers away from the competition.
B) watch each other's behavior closely.
C) are price takers.
D) All of the above.
Q3) Suppose market demand is Q = 1000 - 4p.If all firms have LRAC = 50 - 5q + q<sup>2</sup>,how many identical firms will there be when this industry is in long-run equilibrium?
Q4) The above figure shows the cost curves for a typical firm in a competitive market.Note that if p = 10,then MC = p at both q = 5 and q = 60.Can they both yield maximum profit? Explain.
Q5) The above figure shows the cost curves for a typical firm in a competitive market.If there are 200 identical firms,estimate the market quantity supplied when p = 4,8,and 10.
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Chapter 9: Applying the Competitive Model
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Sample Questions
Q1) Consumers seek to
A) maximize profits.
B) maximize expected consumer surplus.
C) minimize expenditures.
D) maximize choice.
Q2) In the long-run equilibrium in perfect competition,
A) producer surplus is positive.
B) producer surplus is negative.
C) producer surplus is greater than consumer surplus.
D) producer surplus is less than consumer surplus.
Q3) Producer surplus equals total revenue minus the sum of all marginal cost.
A)True
B)False
Q4) Producer surplus is equal to
A) the area under the supply curve.
B) the difference between price and average cost for all units sold.
C) the difference between price and marginal cost for all units sold.
D) the firm's profit when fixed costs exist.
Q5) "Supporters of import restrictions and protectionist policies place greater weight on producer welfare than on consumer welfare." Comment.
Page 11
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Chapter 10: General Equilibrium and Economic Welfare
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Sample Questions
Q1) The general equilibrium analysis of a minimum wage applied to only some sectors of the economy suggests that
A) workers in all sectors will face increased wages.
B) some workers in the covered sectors will lose their jobs and remain unemployed.
C) some workers originally employed in the covered sectors will move to the uncovered sectors, driving down wages in the uncovered sectors.
D) all workers will be worse off.
Q2) Suppose the production possibilities for two countries,producing either food or clothing,are shown in the above figure.They can each produce any linear combination as well.Measuring food on the horizontal axis,the joint production possibility frontier has a vertical intercept of
A) 10.
B) 20.
C) 30.
D) 50.
Q3) Can consumption efficiency be achieved even if the efficient product mix is not achieved?
Q4) Explain why a government may select an inefficient allocation.
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12
Chapter 11: Monopoly
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Sample Questions
Q1) If a monopoly can produce a good at zero marginal cost,then its Lerner Index is
A) zero.
B) one.
C) infinity.
D) undetermined.
Q2) If the government's goal is to generate a certain amount of tax revenue,a specific tax and an ad valorem tax on a monopoly have the same impact on social welfare.
A)True
B)False
Q3) The introduction of satellite television systems would cause the demand curve for cable television to be
A) more elastic.
B) less elastic.
C) perfectly inelastic.
D) unchanged.
Q4) The Lerner Index is derived from the profit-maximizing condition of a firm.
A)True
B)False
Q5) Explain why a monopolist has no supply curve.
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Chapter 12: Pricing and Advertising
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Sample Questions
Q1) Which of the following helps a monopoly perfectly price discriminate?
A) unit demand by each consumer
B) the product is perishable
C) the product is personalizable
D) All of the above.
Q2) Many college football teams require a "donation" in order to purchase season tickets.This is
A) price gouging.
B) a tie-in sale.
C) two-part pricing.
D) anti-competitive behavior.
Q3) Assume a firm organizes all individuals by their willingness to pay (least to most).If the firm starts to perfectly price discriminate,what is likely to happen?
A) Consumers start to arbitrage amongst themselves.
B) The firm's profits will be maximized.
C) The firm's costs will be minimized.
D) The firm starts to arbitrage with consumers.
Q4) Explain why advertising that results in spuriously differentiated products may result in a deadweight loss to total welfare.
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Chapter 13: Oligopoly and Monopolistic Competition
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Sample Questions
Q1) The Cournot Model of Oligopoly assumes that A) firms decide what quantity to produce.
B) firms make their decisions simultaneously.
C) firms do not cooperate.
D) All of the above.
Q2) Strategic trade policy requires ALL of the following EXCEPT
A) subsidies set before output levels.
B) non-retaliation of the trading partner.
C) credible actions on the part of the subsidizing government.
D) incomplete information on the part of the government.
Q3) Explain why a monopoly or a perfectly competitive firm does not consider a rival firm's behavior,but an oligopoly and a monopolistically competitive firm do.
Q4) The number of firms in a monopolistically competitive market will be smaller if A) the market demand curve shifts rightward.
B) the minimum efficient scale is lower.
C) fixed costs are smaller.
D) fixed costs are larger.
Q5) Explain why the intersection of the best-response functions is the Cournot equilibrium.
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Chapter 14: Game Theory
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Sample Questions
Q1) The above figure shows the payoff to two airlines,A and B,of serving a particular route.If the two airlines must decide simultaneously,which one of the following statements is TRUE?
A) Since firm B has no dominant strategy, its decision is unpredictable.
B) Since firm B's decision is unpredictable, firm A's decision is unpredictable.
C) Neither firm entering is a Nash equilibrium.
D) Firm B will not enter because it knows firm A will.
Q2) If a strategy is a best response,then
A) it will never be played.
B) it will never be part of a Nash equilibrium.
C) A and B are correct.
D) it could be part of a Nash equilibrium.
Q3) In the Stackelberg model,the leader has a first-mover advantage because it A) has lower costs than the follower. B) commits to producing a larger quantity.
C) reacts to the follower's decision.
D) differentiates its output.
Q4) Explain why it is unwise to bid more than your valuation of the good in a sealed bid second-price auction.
Q5) Why is collusion more likely in a repeated game?
Page 16
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Chapter 15: Factor Markets
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Sample Questions
Q1) A firm faces competitive markets for its inputs and its output.Its marginal revenue product of labor
A) is increasing in the output price.
B) is decreasing in the output price.
C) is independent of the output price.
D) has an inverted U-shape.
Q2) Company towns are often decried as monopsonists.Why was it unlikely that another employer would move into a company town?
A) The marginal workers available in the company town had low marginal revenue product.
B) The existing monopsonist had a first-mover advantage.
C) The marginal workers available in the company town would demand a wage higher than that obtained at the existing monopsonist.
D) Any of the above.
Q3) The labor supply curve for a monopsony is
A) perfectly horizontal.
B) perfectly vertical.
C) upward sloping but not perfectly vertical.
D) downward sloping.
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Chapter 16: Interest Rates, Investments, and Capital Markets
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Sample Questions
Q1) Which of the following is an example of an exhaustible resource?
A) silver
B) soybeans
C) pork belly
D) pound cake
Q2) A financial services company offers to pay you $1,000 a year for life in exchange for $20,000 today.What factors affect your decision to take this offer?
Q3) Which of the following is most likely to cause interest rates to fall?
A) Government borrows to finance a war.
B) All firms project higher future revenue streams for all of their projects.
C) All firms project lower future revenue streams for all of their projects.
D) Government institutes a high tax on savings.
Q4) Government debt increases the interest rate and private investment.
A)True
B)False
Q5) In an economy with no inflation,explain why interest rates are positive.
Q6) A state lottery has a Million Dollar Lottery game that pays $1,000 a week for life.Assuming a 6% nominal rate of interest and generously assuming an infinite lifetime,can this game be called a "Million Dollar Lottery"?
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Chapter 17: Uncertainty
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Sample Questions
Q1) The Friedman-Savage utility function can explain why
A) people buy automobile insurance.
B) somebody becomes addicted to gambling.
C) people become more risk averse as their wealth increases.
D) people place small bets to have a chance at winning a large amount.
Q2) The above figure shows Bob's utility function.He currently has $100 of wealth,but there is a 50% chance that it could all be stolen.Bob is risk averse because
A) his utility function is convex.
B) he has negative marginal utility of wealth.
C) he is willing to pay a premium to avoid a risky situation.
D) All of the above.
Q3) The above figure shows Bob's utility function.He currently has $100 of wealth,but there is a 50% chance that it could all be stolen.Bob is risk averse because
A) his utility function is concave.
B) he has diminishing marginal utility of wealth.
C) he is willing to pay a premium to avoid a risky situation.
D) All of the above.
Q4) Explain why insurance companies usually do not offer earthquake insurance.
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Page 19
Chapter 18: Externalities, Open-Access, and Public Goods
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Sample Questions
Q1) If a production process generates pollution,then a competitive market will produce more of the good than is socially optimal because
A) firms take all costs into consideration.
B) firms incur all costs of production but ignore some of them.
C) firms ignore the costs of production that they do not incur.
D) firms set price equal to social marginal cost.
Q2) When negative externalities from production exist,the deadweight loss from a competitive market may be larger than with a monopoly.
A)True
B)False
Q3) The above figure shows the marginal benefit to a firm of polluting in the local river while producing its output,and the marginal cost to the surrounding neighbors.The marginal cost of production is zero for the firm.If property rights are not defined,how much pollution will occur?
A) 0 units
B) 500 units
C) 1000 units
D) more than 1000 units
Q4) Explain why the optimal amount of pollution is often not zero.
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Chapter 19: Asymmetric Information
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Sample Questions
Q1) Investment in safety at the firm level poses a prisoners' dilemma because
A) if each firm plays its dominant strategy, joint profits are maximized.
B) if each firm plays its dominant strategy, joint profits are not maximized.
C) neither firm has a dominant strategy.
D) the Nash equilibrium is not achieved.
Q2) With asymmetric information among consumers and positive search costs,a firm may
A) raise its price above the monopoly price.
B) price at the monopoly level.
C) price at the full information competitive level.
D) None of the above.
Q3) In a labor-market separating equilibrium with high-skill and low-skill workers and where a costly educational degree is used solely as a signal device,we can say that A) education is socially inefficient because it is costly and provides no useful skills to the worker.
B) education is socially efficient.
C) education is privately inefficient for high-skill workers.
D) education is privately useful for low-skill workers only.
Q4) Describe how a firm that sells only one brand of bleach may be able to increase its profit if it re-labels some of its bleach.
Page 21
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Chapter 20: Contracts and Moral Hazards
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Sample Questions
Q1) We can say that a contract is able to prevent moral hazard when
A) it eliminates production inefficiencies due to moral hazard without shifting risk to risk-averse people.
B) it eliminates production inefficiencies due to moral hazard without shifting risk to risk-loving people.
C) it shifts risk to risk-loving people.
D) it eliminates production inefficiencies due to moral hazard and shifts risk to risk-averse people.
Q2) Wage reduction policies are less common than layoffs because A) workers never prefer wage reduction policies.
B) workers always trust the firm to tell the truth.
C) of asymmetric information.
D) of adverse selection problems.
Q3) Suppose a plaintiff hires a lawyer to represent her in a court case.Under which of the following contracts is efficiency in risk bearing assured?
A) The lawyer is paid by the hour.
B) The lawyer receives a share of the settlement.
C) The lawyer receives a fixed fee.
D) It is impossible to determine without the degree of risk aversion for each.
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Page 22