Principles of Microeconomics Study Guide Questions
Course Introduction
Principles of Microeconomics introduces students to the fundamental concepts and analytical tools used to understand how individuals and firms make decisions regarding the allocation of scarce resources. The course explores topics such as supply and demand, market equilibrium, elasticity, consumer and producer behavior, the role of government intervention, and different market structures including perfect competition, monopoly, and oligopoly. By examining real-world applications and policy implications, students gain a deeper understanding of how microeconomic principles affect everyday life, inform business strategies, and shape public policy.
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Principles of Microeconomics 7th Canadian Edition by McKenzie Mankiw
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Page 2
Chapter 1: Ten Principles of Economics
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Sample Questions
Q1) Explain how an attempt by the government to lower inflation could cause unemployment to increase in the short run.
Answer: To lower inflation,the government may choose to reduce the money supply in the economy.When the money supply is reduced,prices do not adjust immediately.Lower spending,combined with prices that are too high,reduces sales and causes workers to be laid off.Hence,the lower price level is associated with higher unemployment.
Q2) Which of the following is most likely to generate an externality
A)Teachers at a local high school purchase a coffee maker for the staffroom.
B)A couple with young children moves next door to the children's grandparents.
C)A newlywed couple buys furniture for their condo.
D)John buys a tractor to mow his newly purchased five-hectare lot.
Answer: B
Q3) How is the self-interest of the participants in an economy guided into promoting general economic self-interest
A)by the invisible hand
B)by market power
C)by government intervention
D)by property rights
Answer: A
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Page 3
Chapter 2: Thinking Like an Economist
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Q1) An economy is being efficient if it is impossible to produce more of one good without producing less of another.
A)True
B)False
Answer: True
Q2) Where do the most common data for testing economic theories come from
A)carefully controlled and conducted laboratory experiments
B)governments and large corporations
C)historical episodes of economic change
D)centrally planned economies
Answer: C
Q3) What is a characteristic of factors of production
A)They are used to produce goods and services.
B)They are owned by firms.
C)They are abundant in most economies.
D)They are provided by both firms and households.
Answer: A
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Page 4
Chapter 3: Interdependence and the Gains From Trade
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Sample Questions
Q1) Refer to Table 3-5.What is the opportunity cost of one car for Japan
A)1/4 airplane
B)1/3 airplane
C)3 airplanes
D)4 airplanes
Answer: A
Q2) What is David Ricardo known for
A)He opposed the Corn Laws as a member of the British Parliament.
B)He disputed Adam Smith's theory of specialization and trade in the early 1800s.
C)He advocated trade based on absolute advantage.
D)He was an early supporter of trade restrictions.
Answer: A
Q3) Refer to Table 3-6.If Denmark and Italy specialize and trade according to their respective comparative advantage,who gains in the short run in Denmark
A)owners of cheese-producing companies
B)owners of milk-producing companies
C)consumers who like cheese
D)consumers who like bread
Answer: C
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Page 5
Chapter 4: The Market Forces of Supply and Demand
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Sample Questions
Q1) The market demand is the average of all of the individual demands for a particular good or service.
A)True
B)False
Q2) What can be said about economists in general
A)They do not try to explain people's tastes, but do try to explain what happens when tastes change.
B)They must be able to explain people's tastes to explain what happens when tastes change.
C)They do not believe that people's tastes determine demand and therefore ignore the subject of tastes.
D)They believe that tastes and demand move in opposite directions.
Q3) Market demand is given as Q<sub>D </sub>= 140 - 5P.Market supply is given as Q<sub>S </sub>= 2P.If price increases from $6 to $8,what is the price elasticity of demand
A)0.3
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Page 6
Chapter 5: Elasticity and Its Application
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Q1) If a 30 percent change in price causes a 10 percent change in quantity supplied,what do we know about the price elasticity of supply
A)It is 1/3 and supply is elastic.
B)It is 1/3 and supply is inelastic.
C)It is 1 and supply is unit elastic.
D)It is 3 and supply is elastic.
Q2) When studying how some event or policy affects a market,on what does elasticity provide information
A)the direction and the efficiency of the effect on the market
B)the direction and the magnitude of the effect on the market
C)the magnitude and the efficiency of the effect on the market
D)the efficiency and the equity of the effect on the market
Q3) What does inelastic demand mean
A)consumers hardly respond to a change in price.
B)consumers respond substantially to a change in price.
C)consumers respond directly to a change in income.
D)change in quantity demanded is equal to the change in price.
Q4) If the price elasticity of demand is equal to 0,demand is unit elastic.
A)True
B)False
Page 7
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Chapter 6: Supply, demand, and Government Policies
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Sample Questions
Q1) In Canada,when minimum wage laws are established,what must employers do
A)pay the going (equilibrium) wage in the market
B)pay a wage equal to or higher than the minimum wage
C)hire a minimum number of employees that is set by the government
D)hire only those workers who will work for the established minimum wage
Q2) Market demand is given as Q<sub>D </sub>= 75 - 2P.Market supply is given as Q<sub>S </sub>= 3P.Which legally imposed price would constitute a binding price floor
A)$0
B)$5
C)$15
D)$40
Q3) Market demand is given as Q<sub>D </sub>= 210 - 5P.Market supply is given as Q<sub>S </sub>= 2P.Which legally imposed price would constitute a binding price ceiling
A)$25
B)$35
C)$45
D)$55
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8
Chapter 7: Consumers, producers, and the Efficiency of Markets
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Q1) Efficiency is related to the size of the economic pie,where equity is related to how the pie gets sliced and distributed.
A)True
B)False
Q2) Refer to Table 7-4.What is the equilibrium or market-clearing price
A)$3
B)$6
C)$9
D)$12
Q3) What is producer surplus
A)the area under the supply curve to the left of the amount sold
B)the amount a seller is paid less the cost of production
C)the amount represented by the area under the supply curve
D)the area under the supply curve to the right of the amount sold
Q4) What is market failure
A)the inability of buyers to interact legally with sellers in the market
B)the inability of a market to establish an equilibrium price
C)the inability of buyers to place a value on the good or service
D)the inability of some unregulated markets to allocate resources efficiently
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Chapter 8: Application: the Costs of Taxation
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Sample Questions
Q1) What happens if a government reduces a high tax rate
A)Reducing a high tax rate is less likely to increase tax revenue than reducing a low tax rate.
B)Reducing a high tax rate is more likely to increase tax revenue than reducing a low tax rate.
C)Reducing a high tax rate will have the same effect on tax revenue as reducing a low tax rate.
D)Reducing a tax rate can never increase tax revenue.
Q2) Refer to Figure 8-5.What would happen to consumer surplus if the tax were imposed on the seller
A)It would fall by $900.
B)It would fall by $1800.
C)It would fall by $2700.
D)It would fall by $3600.
Q3) Refer to Figure 8-6.What would the benefits to the government (total tax revenue) be
A)$80
B)$100
C)$120
D)$150
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Page 10
Chapter 9: Application: International Trade
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Sample Questions
Q1) If Honduras were to subsidize the production of wool blankets and sell them in Sweden at artificially low prices,the Swedish economy would be worse off.
A)True
B)False
Q2) Economists agree that trade ought to be restricted if free trade means that domestic jobs might be lost because of foreign competition.
A)True
B)False
Q3) Refer to Figure 9-9.What is producer surplus plus consumer surplus in this market after trade
A)A + B
B)A + B + C
C)A + B + C + D
D)A + B + D
Q4) Import tariffs cause the quantity of imports to fall.
A)True
B)False
Q5) How is an import quota similar to,and different than,an equivalent tariff
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Chapter 10: Externalities
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Sample Questions
Q1) What will a market that experiences a positive externality also experience
A)a smaller market output and a higher market price than is optimal
B)a greater market output and lower market price than is optimal
C)a greater market output and higher market price than is optimal
D)a smaller market output and lower market price than is optimal
Q2) If a sawmill creates too much noise for local residents,what will result
A)It will be up to the residents to either adapt or move.
B)A sense of social responsibility will cause owners of the mill to reduce noise levels.
C)The government can raise economic well-being through noise-control regulations.
D)The government can raise economic well-being by installing sound barriers around homes closest to the sawmill.
Q3) Private parties may choose to leave an externality problem unsolved if the transaction costs are large enough.
A)True
B)False
Q4) Using a supply and demand diagram, demonstrate how a positive externality leads to market inefficiency. How might the government help to eliminate this inefficiency?
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Page 12
Chapter 11: Public Goods and Common Resources
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Sample Questions
Q1) How are club goods classified
A)excludable but not rival in consumption
B)rival in consumption but not excludable
C)both excludable and rival in consumption
D)neither excludable nor rival in consumption
Q2) What is knowledge an example of
A)a public good
B)a private good
C)a common resource
D)a club good
Q3) How is the appropriate level of government support for expanding general knowledge determined
A)It is determined by demand and supply.
B)It is accurately determined by government.
C)It can be easily measured by determining the amount where benefits equal cost.
D)It is difficult to determine, since benefits are hard to measure.
Q4) Depending on congestion,national parks can be either a common resource or a public good.
A)True
B)False
Page 13
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Chapter 12: The Design of the Tax System
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Sample Questions
Q1) MaKenna earns income of $80,000 per year.Her average tax rate is 30 percent.MaKenna paid 20 percent in taxes on the first $30,000 she earned.What was the marginal tax rate on the rest of her income
A)20 percent
B)24 percent
C)30 percent
D)36 percent
Q2) What is the difference between lump-sum taxes and other types of taxes
A)They are most frequently used to tax real property.
B)They do not distort incentives.
C)They are the most distortional tax.
D)They are used in taxing sales.
Q3) Which country has the largest tax burden
A)Japan
B)United States
C)Germany
D)the United Kingdom
Q4) Lump-sum taxes are considered unfair to low-income taxpayers.
A)True
B)False
Page 14
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Chapter 13: The Costs of Production
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Sample Questions
Q1) What is the cost of producing the typical unit of output
A)the firm's average total cost
B)the firm's opportunity cost
C)the firm's average variable cost
D)the firm's marginal cost
Q2) Fixed costs are those costs that remain fixed no matter how long the time horizon is.
A)True
B)False
Q3) When marginal cost is rising,what must happen to average variable cost
A)It must be rising.
B)It must be falling.
C)It must be constant.
D)It could be rising or falling.
Q4) From the information in Table 13-4,what can we conclude about Beth's marginal cost
A)It increases as output increases from 0 to 14, but declines after that.
B)It declines as output increases from 0 to 14, but increases after that.
C)It declines as output increases from 0 to 40, but increases after that.
D)It continually increases as output rises.
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Chapter 14: Firms in Competitive Markets
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Sample Questions
Q1) Refer to Table 14-1.The price and quantity relationship in the table is most likely faced by a firm in which type of market
A)a monopoly
B)a concentrated market
C)a competitive market
D)a strategic market
Q2) Refer to Table 14-1.What is the marginal revenue
A)$0
B)$9
C)$15
D)$126
Q3) Starting from a situation in which a firm in a competitive market produces and sells 5000 doorknobs for a price of $20 per doorknob,which event would decrease the firm's average revenue
A)The market price of doorknobs falls below $20.
B)The market price of doorknobs rises above $20.
C)The firm decreases its output below 5000 doorknobs.
D)The firm increases its output above 5000 doorknobs.
Q4) List and describe the characteristics of a perfectly competitive market.
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Chapter 15: Monopoly
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Sample Questions
Q1) A monopolist faces market demand given by P = 100 - 3Q.For this market,MR = 1005Q and MC = 25.What quantity of output will the monopolist produce in order to maximize profits
A)15
B)25.0
C)62.5
D)75.0
Q2) When a monopolist decreases the price of its good,what do consumers do
A)They will not buy the good.
B)They will buy more of the good.
C)They buy less of the good.
D)They will buy the same amount of the good.
Q3) Refer to Scenario 15-3.If Black Box Cable TV is able to price discriminate,what would be the maximum amount of profit it could generate
A)$500,000
B)$600,000
C)$950,000
D)$1,100,000
Q4) Explain the benefits and costs of competition law.
Q5) Why does a monopoly firm not have a supply curve?
Page 17
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Chapter 16: Monopolistic Competition
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Q1) If firms in a monopolistically competitive market are earning economic profits,which scenario would best reflect the change facing incumbent firms as the market adjusts to its new equilibrium
A)an increase in demand
B)a decrease in demand
C)a downward shift in their marginal-cost curve
D)an upward shift in their marginal-cost curve
Q2) Which statement describes a characteristic of a monopolistic competitive market
A)It has some features of monopoly and some features of competition.
B)It has one large, dominant firm and many other smaller firms.
C)It has barriers to entry.
D)It sells homogeneous products.
Q3) Which two curves are tangent to one another in a monopolistically competitive market with zero economic profit
A)demand and average variable cost
B)demand and average total cost
C)marginal revenue and average variable cost
D)marginal revenue and average total cost
Q4) Discuss how brand names may enhance the efficiency of markets in a less developed country.
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Chapter 17: Oligopoly
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Q1) Refer to Table 17-2.Assume that there are two wireless Internet companies operating in this market.If they are able to "collude" on price and quantity of subscriptions to sell,what price (P) will they charge,and what quantity (Q) of subscriptions will they collectively sell
A)P = $60, Q = 8000
B)P = $90, Q = 6000
C)P = $120, Q = 4000
D)P = $150, Q = 2000
Q2) Refer to Scenario 17-4.If the bank is able to use tying to price a chequing account and the ATM service,what is the profit-maximizing price to charge for the tied good
A)$6
B)$12
C)$16
D)$20
Q3) In which market is tying becoming increasingly important
A)crude oil
B)long-distance phone calls
C)computer software
D)wheat
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Page 19
Chapter 18: The Markets for the Factors of Production
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Q1) As the rental price of capital decreases,more capital is used in production and the marginal product of capital increases.
A)True
B)False
Q2) Refer to Scenario 18-2.During the winter months,what is George's opportunity cost of taking an hour off work to go skiing
A)less than $15
B)$15
C)between $15 and $18
D)$18
Q3) Refer to Scenario 18-4.As a result of the contamination,what would we expect would happen to the value of the marginal product for Aquaclena's workers
A)It would be offset by a decrease in wages.
B)It would be unaffected by a rise in demand for bottled water.
C)It would rise since the price of bottled water increases.
D)It would fall since the marginal product of labour decreases.
Q4) Labour supply curves are upward sloping.
A)True
B)False
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Chapter 19: Earnings and Discrimination
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Q1) Sophie receives a higher wage than Justin.Which of these instances would be one of labour-market discrimination,given the definition of that term and assuming Sophie and Justin are identical in all other labour-market characteristics
A)Sophie is a university graduate and Justin has only a high-school diploma.
B)Sophie is a woman and Justin is a man.
C)Sophie has 15 years of experience at her job; Justin has only 5 years of experience.
D)Sophie is more productive than Justin.
Q2) Professional underwater divers are known to have high wages and work an average of only 20 hours a week.What is likely a partial explanation
A)The job is likely to be very dull.
B)The job is likely to be fun.
C)The job is likely to be very dangerous.
D)The job is very competitive.
Q3) Which factor would economists argue is narrowing the gender wage gap
A)decreased productivity among male workers
B)increased training among women
C)efficiency wages
D)federal laws that were passed in the 1970s
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Page 21
Chapter 20: Income Inequality and Poverty
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Q1) What is a commonly used gauge of the distribution of income
A)income inequality rate
B)average income rate
C)poverty rate
D)social inequality rate
Q2) What problematic aspect of measuring inequality relates to the statement "Measures of the distribution of income are based on money income"
A)in-kind transfers
B)the economic life cycle
C)transitory versus permanent income
D)economic mobility
Q3) As a general rule,what do antipoverty programs,as a whole,do
A)They encourage saving among recipient groups.
B)They impose a very low marginal tax rate on income.
C)They are only made available to those with no other source of income.
D)They impose disincentives to work.
Q4) Many people have been critical of statistics that are used to characterize income inequality on the grounds that as long as the average income of the poor is increasing,their position relative to the rich should not matter.Evaluate this critique.
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Chapter 21: The Theory of Consumer Choice
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Q1) The slope at any point on an indifference curve equals the absolute price at which one consumer is willing to substitute one good for the other.
A)True B)False
Q2) At the consumer's optimum,the consumer's valuation of the two goods equals the market valuation.
A)True B)False
Q3) A consumer is currently consuming some of good X and some of good Y.If good Y is a normal good for this consumer,what will a rise in consumer income definitely cause
A)an increase in the consumption of X
B)an increase in the consumption of Y
C)a decrease in the consumption of X
D)a decrease in the consumption of Y
Q4) Explain the relationship between the budget constraint and the indifference curve at consumer optimum.
Q5) What would happen to an individual's labour supply schedule if leisure were an inferior good?
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Chapter 22: Frontiers of Microeconomics
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Q1) In view of the possible need for government action in markets where asymmetric information is a problem,which consideration is most valid
A)The government almost always has more information than the private parties.
B)Private markets have no means of dealing with information asymmetries on their own.
C)The government is itself an imperfect institution.
D)Government intervention will exacerbate any market failures.
Q2) Refer to Table 22-1.If Sam,Denise,and Carlos use a Borda count,rather than pairwise majority voting,to decide how to spend their evening,what will they do
A)go to a movie
B)go bowling
C)go out to dinner
D)go their separate ways
Q3) The fact that many people procrastinate is very consistent with which idea
A)People are rational decision-makers.
B)People save large portions of their income.
C)People are inconsistent over time.
D)People don't change their preferences over time.
Q4) Explain the Condorcet paradox.To which type of voting system does it apply?
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