Principles of Microeconomics Solved
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Course Introduction
Principles of Microeconomics introduces students to the fundamental concepts and analytical tools used to understand how individuals, firms, and governments make decisions regarding the allocation of scarce resources. The course explores theories of supply and demand, market equilibrium, consumer and producer behavior, elasticity, market structures ranging from perfect competition to monopoly, and the impact of government intervention through taxation and regulation. Emphasis is placed on real-world applications and the role of microeconomic principles in shaping public policy and everyday economic decisions.
Recommended Textbook
Modern Principles Microeconomics 3rd Edition by Tyler Cowen
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Page 2
Chapter 1: The Big Ideas
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Sample Questions
Q1) Monetary and fiscal policy:
A) can make matters worse if poorly used.
B) are useless.
C) can prevent all recessions.
D) are all-powerful.
Answer: A
Q2) From 2007 to 2009, the inflation rate in Zimbabwe could be characterized as: A) negative.
B) zero.
C) positive but low.
D) positive and high.
Answer: D
Q3) Greater emphasis on self-sufficiency and trading less with foreign countries would increase incomes and living standards in the United States.
A)True
B)False
Answer: False
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Page 3
Chapter 2: The Power of Trade and Comparative
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Sample Questions
Q1) Phil can clean and polish silverware in two hours and change spark plugs in a car in four hours. Betty can clean and polish the same silverware in 1 hour and change spark plugs in a car in 1 hour. Phil does not have a comparative advantage in either activity.
A)True
B)False
Answer: False
Q2) (Figure: PPF Mexico & United States) Use the figure in which both Mexico and the United States each have 24 units of labor. The opportunity costs of producing one computer are:
A) six shirts for Mexico and one shirt for the United States.
B) 1/6 of a shirt for both Mexico and the United States.
C) one shirt for Mexico and 1/6 of a shirt for the United States.
D) six shirts for both Mexico and the United States.
Answer: A
Q3) To benefit from trade, a country must have the absolute advantage in producing its traded good.
A)True
B)False
Answer: False
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Page 4
Chapter 3: Supply and Demand
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Sample Questions
Q1) An increase in income increases the demand for normal goods.
A)True
B)False
Answer: True
Q2) Zoey receives a big raise at work and decides to buy additional porcelain figurines. Which of the following statements is TRUE?
A) Zoey considers porcelain figurines to be a normal good.
B) Zoey considers porcelain figurines to be an inferior good.
C) Zoey's demand for porcelain figurines decreased.
D) Zoey's willingness to pay for porcelain figures has decreased.
Answer: A
Q3) The demand curve has a negative slope.
A)True
B)False
Answer: True
Q4) An increase in the use of labor-saving technologies will shift a product's supply curve to the right.
A)True
B)False
Answer: True
Page 5
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Chapter 4: Equilibrium
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Sample Questions
Q1) In a free market setting where quantity supplied is 50 units and quantity demanded is 50 units, price will:
A) rise.
B) fall.
C) remain the same.
D) move in an indeterminate direction.
Q2) Imagine a free market in which at a price of $10, quantity supplied is 50 units and quantity demanded is 40 units. Equilibrium price in this market:
A) is equal to $10.
B) is less than $10.
C) is greater than $10.
D) differs from $10 in an indeterminate direction.
Q3) The sum of consumer and producer surplus increases when producers sell more than the market equilibrium quantity.
A)True
B)False
Q4) A market can be described by the equations Q<sub>d</sub> = 60 - 6P and Q<sub>s</sub> = 4P. Calculate the equilibrium price and quantity in this market.
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Page 6
Chapter 5: Elasticity and Its Applications
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Sample Questions
Q1) The elasticity of demand for cigarettes is more inelastic in the long run than in the short run because it takes a long time for some people to quit smoking.
A)True
B)False
Q2) All of the following conditions would cause the demand curve for a good to be more elastic EXCEPT:
A) a longer time horizon.
B) the good is considered a luxury good.
C) the price of the good falls.
D) the good has many substitutes.
Q3) Nobel prize-winning economist Gary Becker suggested prohibited drugs should be legalized and then taxed. This would _____ the seller's cost and _____ government revenue.
A) decrease; decrease
B) decrease; increase
C) increase; increase
D) increase; decrease
Q4) Summarize the factors that cause goods to have a more inelastic supply.
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Chapter 6: Taxes and Subsidies
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Sample Questions
Q1) (Figure: Tax Imposed on Sellers) According to the figure, the price that buyers pay AFTER the tax is imposed is:
A) $5.
B) $4.40.
C) $4.
D) $3.40.
Q2) Without taxes, the market price per bag of apples is $5. With a $2 tax per bag of apples, buyers now pay $5.75 per bag. What is the final price per bag of apples received by sellers?
A) $5.00
B) $7.75
C) $3.00
D) $3.75
Q3) (Figure: Commodity Tax on Suppliers) Refer to the figure. If a tax shifts the supply curve from S<sub>1</sub> to S<sub>2</sub>, the value of deadweight loss is:
A) $200.
B) $100.
C) $50.
D) $25.
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Page 8
Chapter 7: The Price System
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Sample Questions
Q1) Suppose speculators expect that the supply of oil will decrease next year and as a result, buy up oil today and put it into storage. This should cause the value of that oil to:
A) increase.
B) decrease.
C) either increase or decrease.
D) remain unchanged.
Q2) In a free market, the price of a good is equal to:
A) whatever a central planner deems the good to be worth.
B) the good's value when employed in its highest-valued use.
C) the good's value if employed in its next highest-valued use.
D) whatever the central planner deems the good to be worth plus a "reasonable markup."
Q3) How is speculation like international trade?
A) Both discourage bubbles by creating the incentive to be correct.
B) Both link nations together.
C) Both smooth prices over time.
D) Both move goods from low-value places/times to high-value places/times
Q4) Explain what Adam Smith meant when he said that the market operates as if "an invisible hand" is guiding the process.
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Chapter 8: Price Ceilings and Floors
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Sample Questions
Q1) Universal price controls in the Soviet Union:
A) led to widespread prosperity.
B) harmed powerful interests in the short run.
C) caused never-ending shortages and misallocations.
D) meant no one ever had to wait in line.
Q2) Which statement about price ceilings is correct?
A) Whether a price ceiling is placed below or above the equilibrium price, it will always cause deadweight loss.
B) A price ceiling will only cause deadweight loss if it is placed above the equilibrium price.
C) A price ceiling will only cause deadweight loss if it is placed below the equilibrium price.
D) Whether a price ceiling is placed below or above the equilibrium price, it will always cause a shortage of the good.
Q3) Deregulation of the airline industry has led to:
A) an increase in the quality and safety of air travel.
B) increases in the costs of production in air travel.
C) more firms providing air travel services.
D) fewer firms providing air travel services.
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Page 10
Chapter 9: International Trade
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Sample Questions
Q1) Trade restrictions:
A) help to save jobs in the protected industry, which causes these workers to spend more money in other industries, netting increased output and job opportunities throughout the economy.
B) are a very inexpensive way of saving jobs, cheaper than job retraining programs.
C) may save jobs in one industry but at a cost of less job growth in other industries.
D) often have little support by politicians, media, and the public.
Q2) ______ have a similar effect upon domestic consumption levels.
A) Subsidies and tariffs
B) Tariffs and quotas
C) Quotas and subsidies
D) Subsidies, tariffs, and quotas
Q3) (Figure: Foreign Trade with a Tariff) Refer to the figure. A $1 tariff results in:
A) an increase in imports of 80 million units.
B) a decrease in imports of 80 million units.
C) an increase in imports of 100 million units.
D) a decrease in imports of 100 million units.
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Chapter 10: Externalities- When the Price Is Not Right
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Sample Questions
Q1) Command and control policies ensure economic efficiency.
A)True
B)False
Q2) If antibiotic users are required to bear all the costs of antibiotic use, the supply curve would:
A) shift left and would be above the social cost curve.
B) shift left and would be the same as the social cost curve.
C) shift left but would still be under the social cost curve.
D) remain unchanged.
Q3) In the presence of an external benefit, a Pigouvian ______ that is set equal to the ______ the market output to its efficient level.
A) subsidy; external benefit can increase
B) tax; external benefit can increase
C) subsidy; private cost can increase
D) subsidy; external benefit can decrease
Q4) If the government subsidizes activities with external benefits, the market price falls and people consume more.
A)True
B)False
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Chapter 11: Costs and Profit Maximization Under Competition
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Sample Questions
Q1) To maximize profit, a firm in a competitive market increases output until:
A) P = TC.
B) P = AR.
C) P = MC.
D) P = AC.
Q2) A firm's profit-maximizing quantity does not depend on its fixed costs.
A)True
B)False
Q3) Why do technology firms cluster in Silicon Valley?
A) Costs are lower near other technology firms, but the cluster need not be located there.
B) Silicon Valley has lots of silicon, which is used in producing computer chips.
C) The government subsidizes technology firms if they are located in Silicon Valley.
D) Electricity is cheaper in Silicon Valley than anywhere else in the world.
Q4) Profit = (P - MC) × Q.
A)True
B)False
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Chapter 12: Competition and the Invisible Hand
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Sample Questions
Q1) When resources move from a low-profit industry into a high profit industry:
A) the value of production falls.
B) the profits of the low-profit industry fall and the profits of the high-profit industry rise.
C) the profits of the low-profit industry rise and the profits of the high-profit industry fall.
D) the Invisible Hand Property 2 is violated.
Q2) Since all competitive firms produce wherever marginal cost equals the market price for the product, we can conclude that:
I. all competitive firms produce at the same marginal cost level.
II. all competitive firms produce the same quantity.
III. all competitive firms make normal profit.
A) I only
B) I and II only
C) II and III only
D) All of the answers are correct.
Q3) High profits mean that inputs of high value produce outputs of low value.
A)True
B)False
Q4) Explain how market entry affects the profit level of a competitive firm.
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Page 14
Chapter 13: Monopoly
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Sample Questions
Q1) Economic theory suggests that a natural monopoly should be:
A) eliminated whenever it arises.
B) regulated to take advantage of economies of scale.
C) left alone to operate with excess capacity.
D) taken over by the government.
Q2) (Figure: Monopoly Profits) Refer to the figure. The monopolist earns a profit of:
A) $630.
B) $420.
C) $540.
D) $480.
Q3) Monopolies will have more market power when one firm owns an input that is difficult to duplicate and the:
A) demand for the product is elastic.
B) demand for the product is inelastic.
C) supply of the product is elastic.
D) supply of the product is inelastic.
Q4) The primary reason that AIDS drugs are priced well above cost is monopoly power.
A)True
B)False
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Chapter 14: Price Discrimination
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Sample Questions
Q1) To maximize profit, a monopolist should charge a lower price in the market with the steeper demand curve.
A)True
B)False
Q2) Which of the following is the main principle of price discrimination?
I. It is more profitable to set different prices in markets with different demand curves than charge the same price in all markets.
II. To maximize profits, firms should charge lower prices in markets with more elastic demands.
III. Arbitrage increases the profit opportunities of price discrimination.
A) I and III only
B) II only
C) I and II only
D) I, II, and III
Q3) What conditions are necessary for a firm to practice price discrimination?
Q4) Tying is a form of price discrimination in which one good called the base good is tied to a second good called the variable good.
A)True
B)False
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Chapter 15: Oligopoly and Game Theory
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Sample Questions
Q1) High prices maintained by a cartel usually make the cartel less successful because high price of the good:
A) leads to more conservation.
B) motivates demand to switch to substitutes of the goods.
C) encourages a search for new supplies.
D) All of the answers are correct.
Q2) The milk industry in the United States:
A) consists of government-controlled cartels that raise the price of milk and punish any seller who violates the cartel.
B) is currently in violation of antitrust laws, according to the President's legal staff.
C) shows how competition from new rivals can reduce the power of cartels.
D) was exposed by the FBI for conspiring to raise prices.
Q3) In the 1990s, the FBI and Department of Justice sued:
A) Avomeen.
B) Archer Daniels Midland.
C) Bunge Limited.
D) the Andersons Inc.
Q4) What are some reasons why cartels could fail?
Q5) List the four most common "Barriers to Entry" for oligopolies.
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Chapter 16: Competing for Monopoly
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Sample Questions
Q1) Multiple products can thrive in a network industry when:
A) the government decides to allow multiple products.
B) consumers don't care about coordination at all.
C) there are multiple niches to fill; each product can dominate one niche.
D) competitors all go after the same niche.
Q2) Which statement is TRUE regarding network goods?
A) Network goods are usually sold by monopolies or oligopolies.
B) Microsoft Word has always been the dominant word processing software
C) Microsoft Excel has always been the dominate spreadsheet software.
D) All of the answers are correct.
Q3) When a high fixed cost of production exists, markets are:
A) less likely to be monopolized.
B) more likely to be monopolized.
C) never monopolized.
D) always monopolized.
Q4) A network good is a good whose value to one consumer increases the more other consumers use the good.
A)True
B)False
Q5) Why is music considered a network good?
Page 18
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Chapter 17: Monopolistic Competition and Advertising
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Sample Questions
Q1) In the 1990s, fast food restaurants refused to make special orders-there was no way to "hold the tomatoes." When Burger King branded itself as the place where you could "have it your way" and allowed special orders, it enjoyed an advantage over other fast food restaurants. Until other firms copied it, what was Burger King's position?
A) monopolistic competitive
B) cartelized
C) perfectly competitive
D) monopoly
Q2) As of 2010 it was more common to see advertisements for the iPad in Berlin than in Virginia. Explain.
Q3) A monopolistically competitive firm operates where:
A) MR < MC.
B) MR = MC.
C) MR > MC.
D) MR + MC = 0.
Q4) When does a monopolistic competitive industry experience other entrants into the market?
Q5) Is persuasion through advertising always a good or a bad thing?
Q6) In what ways is the market for books competitive?
Page 19
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Chapter 18: Labor Markets
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Sample Questions
Q1) A firefighter is likely to earn ________ than a receptionist because ________.
A) more; the job is more fun.
B) more; the job is more prestigious.
C) more; the job is more dangerous.
D) less; the job has unattractive characteristics.
Q2) Assume Xs earn $5 less per hour than Ys and a firm employs 200 workers. There are 8 working hours in the day, 5 working days a week, and 50 working weeks a year. If the firm discriminates and hires only Ys, how much profit will it lose in a year? (Assume Xs have the same work skills as Ys.)
A) $10,000
B) $1,000
C) $400,000
D) $2,000,000
Q3) Unions may ________ the wages of their members but they might ________ the wages of everyone else.
A) increase; also increase
B) increase; decrease
C) decrease; increase
D) decrease; also decrease
Q4) With the aid of a graph, explain how unions raise wages in unionized industries.
Page 20
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Chapter
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Q1) Although the provision of nonrival private goods is ________, we typically consider it ________.
A) efficient; an inefficient allocation due to its nonrival nature
B) inefficient; not that big a deal because we value diversity and creativity
C) inefficient; a big deal because it leads to many forced riders
D) efficient; a big deal because it leads to other types of market inefficiencies
Q2) A good is excludable if:
A) the government can regulate the availability of the good.
B) it is a normal good.
C) several people can enjoy the good simultaneously.
D) people can be prevented from using it.
Q3) A good is excludable if:
A) people who do not pay cannot be easily prevented from using the good.
B) one person's use of the good does not reduce the ability of another person to use the same good.
C) people who do not pay can be easily prevented from using the good.
D) it is Wi-Fi or a similar service.
Q4) Why do large class sizes limit the classification of college courses as nonrival private goods?
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Chapter 20: Political Economy and Public Choice
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Sample Questions
Q1) Rational ignorance can not be seen in which of the following scenarios?
A) A student has a final exam in exactly three hours. He knows from past experience that without at least some sleep he will be useless on the exam. In spite of the fact that he still has four chapters to read for the exam, he decides to sleep for 2.5 hours.
B) You are a worker looking for work in a recessionary environment. You get a phone interview after which you are offered a job and have to start the next day. To secure a paycheck, you accept without doing any further research on the company.
C) You have to fly urgently. You buy the first ticket available and it is expensive, but you pay anyway because you do not have time to research other flights.
D) You have to fly urgently; however, you do extensive research for over an hour to find the best deal.
Q2) The median voter theorem implies that politicians:
A) have a strong incentive to listen to the wishes of special interest groups.
B) only have to satisfy a small number of voters.
C) should never associate too strongly with one party.
D) have the incentive to listen to voters on issues that voters care about.
Q3) Explain the formula for political success. Provide an example.
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Chapter 21: Economics, Ethics, and Public Policy
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Q1) Larry Summers was chief economist of:
A) Google.
B) the IMF.
C) the World Bank.
D) the CBO.
Q2) Under utilitarianism, we try to implement the outcome that:
A) makes equal allocation of utility to society.
B) raises utility of the most productive workers in the society.
C) increases utility to lower-income people in the society.
D) brings the greatest sum of utility to society.
Q3) Preferences over what other people do, even when they don't interfere in any direct way with what anyone else does, are called meddlesome preferences.
A)True
B)False
Q4) The National Horse Protection League does not want anyone eating horses, especially foreigners.
A)True
B)False
Q5) List the six practical problems of economic reasoning that need to be examined.
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Chapter 22: Managing Incentives
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Q1) Economists call a compensation scheme in which pay is based on relative performance a:
A) profit sharing plan.
B) bonus plan.
C) salary.
D) tournament.
Q2) Which of the following risks increases when a bad teacher is grading on a curve?
A) ability risk
B) environmental risk
C) incentive risk
D) study risk
Q3) The establishment of a piece rate system can lead to increased productivity and higher quality work if:
I. the piece rate is considerably higher than existing wages.
II. the workers are held responsible for the jobs that they personally complete.
III. there is a reliable measure of quality control.
A) I only
B) II and III only
C) III only
D) I, II, and III
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Chapter 23: Stock Markets and Personal Finance
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Q1) The efficient markets hypothesis is the idea that:
A) asset prices represent all publicly available information.
B) stock values revert to their historical mean values.
C) the prices of assets are systemically biased, allowing savvy investors to make above-market returns by exploiting the efficiency losses.
D) stock buyers are more likely to assess financial information more efficiently than the sellers of stocks.
Q2) Suppose that someone has decided to follow a buy-and-hold strategy in technology stock purchases and buys these stocks 8 years before retirement. The stocks grow in value and this person's retirement wealth increases. Critically evaluate this investment decision. Was it smart? Could it have been improved?
Q3) The efficient markets hypothesis implies that:
A) it is easy to earn above market rates of return using the appropriate investment strategies at the right time.
B) investors don't make mistakes when determining when to buy and sell stocks.
C) it is not possible to systematically pick stocks that outperform the market.
D) stock prices are never too high or too low; they always accurately reflect the underlying value of the company.
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Chapter 24: Price Discrimination
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Sample Questions
Q1) When one part or another knows more about the exchange, it is called:
A) adverse selection.
B) moral hazard.
C) signaling.
D) information asymmetry.
Q2) When a mechanic suggests a repair that is not necessary, this is an example of the principal-agent problem.
A)True
B)False
Q3) When moral hazard occurs, the economy produces goods that no one wants or needs.
A)True
B)False
Q4) A woman who keeps her maiden name when she marries is signaling:
A) a strong desire to continue to build a career reputation.
B) a decreased commitment to her marriage.
C) an increased desire to divorce in the future.
D) the difficulty of changing one's name.
Q5) What market institutions have developed in used car markets to reduce adverse selection?
Q6) What are the arguments supporting the Affordable Care Act?
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Chapter 25: Consumer Choice
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Sample Questions
Q1) At the consumer's optimal consumption bundle, the MRS<sub>XY</sub> is 4, and the marginal utility of good X is 8. What is the marginal utility of good Y?
A) 1/2
B) 2
C) 24
D) 16
Q2) If there are only two goods in the economy, chocolate and peanut butter, and the price of chocolate falls, the new utility-maximizing bundle for a typical consumer would entail consuming ______ peanut butter and ______ chocolate.
A) less; more
B) more; less
C) more; more
D) less; less
Q3) (Figure: Indifference Curve 2) Refer to the figure. Which statement is true?
A) This consumer prefers Bundle C to Bundle A.
B) This consumer is indifferent between Bundle B and Bundle A.
C) Only Bundles A, C, and D are relevant.
D) Bundle B generates the highest utility out of all the points shown.
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