Principles of Microeconomics
Textbook Exam Questions
Course Introduction
Principles of Microeconomics introduces students to the fundamental concepts of economic analysis at the level of individual consumers, firms, and markets. The course covers topics such as supply and demand, market equilibrium, elasticity, consumer behavior, production and cost functions, market structures, and the effects of government intervention. Students will learn to apply economic reasoning to real-world issues, understand how markets allocate resources, and analyze the decisions made by households and firms in a competitive environment. This foundational knowledge equips students with analytical skills essential for further study in economics and related disciplines.
Recommended Textbook
Modern Principles Microeconomics 3rd Edition by Tyler Cowen
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Chapter 1: The Big Ideas
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Q1) Inflation can be defined as:
A) the general rise in the level of output in an economy.
B) the boom and bust cycles of an economy.
C) the rise and fall of the general level of prices in an economy.
D) the increase in the general level of prices in an economy.
Answer: D
Q2) While trade has many benefits, the division of knowledge is a negative outcome of trade.
A)True
B)False
Answer: False
Q3) The central bank of the United States is known as the:
A) Federal Reserve.
B) Financier.
C) Central Reserve Union.
D) Freddie Mac.
Answer: A
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Page 3
Chapter 2: The Power of Trade and Comparative
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Q1) Trade creates value because:
A) people get what they want.
B) raw materials are transformed into finished products.
C) people exchange things they do not want for things they do.
D) idle resources are put to use.
Answer: C
Q2) Involuntary trades increase value in the same way voluntary trades do.
A)True
B)False
Answer: False
Q3) The U.S. interstate highway system probably allowed more people in small communities to become full-time interior decorators.
A)True
B)False
Answer: True
Q4) Gains from trade are largest when two parties are similar in terms of opportunity costs of production.
A)True
B)False
Answer: False
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Chapter 3: Supply and Demand
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Q1) If producers form expectations that copper prices will be higher in the future, then this will shift the:
A) demand curve for copper to the left.
B) supply curve of copper to the right.
C) demand curve for copper to the right.
D) supply curve of copper to the left.
Answer: D
Q2) Total producer surplus equals:
A) the supply curve.
B) the area above the supply curve and beneath the market price.
C) the area beneath the supply curve and above the demand curve.
D) the market price.
Answer: B
Q3) For a normal good, higher income results in:
A) an increase in demand.
B) a decrease in demand.
C) a movement up along the demand curve.
D) a movement down along the demand curve.
Answer: A
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Page 5
Chapter 4: Equilibrium
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Q1) In 1980 when Iraq attacked Iran, the price of oil _______ because of a(n) ______.
A) increased; disruption in the supply of oil
B) increased; decrease in the demand for oil
C) fell; increased demand for oil
D) fell; increased quantity of oil supplied
Q2) A market can be described by the equations Q<sub>d</sub> = 200 - 3P and Q<sub>s</sub> = -50 + 2P. At a price of $40, will this market experience a shortage or a surplus and what is the amount of this shortage or surplus?
Q3) The Arab Oil Embargo of 1973, the Iranian Revolution of 1979, and the Gulf War of 1991 all affected oil prices by:
A) increasing the demand for oil.
B) reducing the supply of oil.
C) reducing the demand for oil.
D) increasing the supply of oil.
Q4) The equilibrium price and quantity are the only price and quantity that are stable in a free market.
A)True
B)False
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Page 6
Chapter 5: Elasticity and Its Applications
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Q1) When production of a good can be expanded without significantly increasing the overall demand for its inputs:
A) supply for this good will tend to be more inelastic.
B) supply for this good will tend to be more elastic.
C) price for the good will be constant.
D) the elasticity of supply of the product will equal the elasticity of supply of the inputs.
Q2) The long-run demand for oil ______ the short-run demand for oil.
A) is more elastic than B) is less elastic than C) is equally elastic to D) differs in elasticity in an indeterminate direction compared with
Q3) The supply of guitars in Alabama is more elastic than the supply of guitars in the United States.
A)True
B)False
Q4) The flatter the demand curve, the less is the elasticity of demand.
A)True
B)False
Q5) 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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Q1) Suppose the demand for pizza is inelastic and the supply of pizza is elastic, and the demand for cigarettes is inelastic and the supply of cigarettes is elastic. If a tax were levied on the sellers of both of these commodities, we would expect that the burden of:
A) the pizza tax would fall more heavily on sellers than on buyers, and the burden of the cigarette tax would fall more heavily on buyers than on sellers.
B) the pizza tax would fall more heavily on buyers than on sellers, and the burden of the cigarette tax would fall more heavily on sellers than on buyers.
C) both the pizza and the cigarette taxes would fall more heavily on buyers than on sellers.
D) both the pizza and the cigarette taxes would fall more heavily on sellers than on buyers.
Q2) With a tax on consumers, supply:
A) increases.
B) decreases.
C) remains in the same location.
D) shifts in an indeterminate direction.
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Chapter 7: The Price System
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Sample Questions
Q1) If a central planner had the power to solve the great economic problem:
A) his incentive would be to solve the problem.
B) his incentive would be to use that power to enrich himself, not to solve the problem.
C) his incentive would be to use the price system to solve the problem.
D) he would not be very powerful.
Q2) Coffee growers in Mexico have no interest in the world price of oil since they do not produce oil.
A)True
B)False
Q3) The Strike King Lure Co. ordered $100,000 worth of stainless steel to use in the production of fishing lures. The $100,000 expenditure represents the:
A) value of the stainless steel in its lowest-valued use.
B) profits gained from selling fishing lures.
C) value of the stainless steel in its next highest-valued use.
D) revenues of producing fishing lures minus the costs.
Q4) Goods with uses valued higher than the market price represent satisfied wants.
A)True
B)False
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Page 9
Chapter 8: Price Ceilings and Floors
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Q1) (Figure: Effects of Price Ceilings) Refer to the figure. At a price ceiling of $2 per unit, consumers are willing to pay a maximum of:
A) $2.00.
B) $2.50.
C) $3.00.
D) $4.00.
Q2) Airlines in the United States were subject to ______ regulation from 1938 to 1978.
A) binding price ceiling
B) binding price floor
C) nonbinding price ceiling
D) nonbinding price floor
Q3) When price floors are in effect, goods and services:
A) are still allocated efficiently.
B) are not necessarily supplied by their lowest-cost producer.
C) do not necessarily flow to their highest-valued use.
D) are neither necessarily supplied by their lowest-cost producer nor do they flow to their highest-valued use.
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Chapter 9: International Trade
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Q1) The U.S. government's policies on foreign-made sugar:
A) result in U.S. consumers paying more than double the world price of sugar.
B) result in U.S. consumers paying less than half the world price of sugar.
C) make it difficult for domestic sugar growers to compete with foreign-made sugar.
D) results in U.S. consumers buying inefficiently large quantities of sugar.
Q2) (Figure: International Trade 3) Refer to the figure. If the government in this diagram eliminates all imports with a tariff, the value of the wasted resources will be:
A) $4.50.
B) $81.
C) $27.
D) $36.
Q3) Strategic trade protectionism makes:
A) all countries better off.
B) no one better off.
C) foreign countries better off at the expense of the domestic country.
D) the domestic country better off at the expense of foreign countries.
Q4) What are the three major benefits of trade? Explain briefly.
Q5) Briefly discuss any benefits of "protectionism".
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Chapter 10: Externalities- When the Price Is Not Right
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Q1) The conditions under which the Coase theorem applies are common in cases of externality.
A)True
B)False
Q2) External costs lead markets to produce a smaller quantity of a good than is socially desirable, while external benefits lead markets to produce a larger quantity of a good than is socially desirable.
A)True
B)False
Q3) Suppose the government limits the amount of pollution from cars by capping the amount of pollution they can emit to 30 pounds of carbon dioxide per car per year. If Alex was willing to pay $50 to emit an extra pound of carbon dioxide and Tyler was willing to sell a pound of his allowance for $30, would it be efficient for them to make this trade?
A) No, it would raise the cost of pollution abatement.
B) Yes, it would lower the cost of pollution abatement.
C) It is impossible to say whether this would or would not be an efficient trade.
D) There is no incentive for Alex and Tyler to trade.
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Page 12
Chapter 11: Costs and Profit Maximization Under Competition
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Q1) Marginal revenue is always equal to the price of the product for a competitive firm.
A)True
B)False
Q2) The demand curve for oil from OPEC is:
A) flat.
B) vertical.
C) upward-sloping.
D) downward-sloping.
Q3) Which of the following is an example of an implicit cost of production?
A) cost of raw materials
B) cost of labor
C) opportunity cost
D) fixed costs
Q4) Economists study decreasing cost industries in order to explain:
A) why profits may remain above normal in the long run for some firms.
B) the existence of industry clusters.
C) economies of scale.
D) why supply curves slope upward.
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Chapter 12: Competition and the Invisible Hand
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Sample Questions
Q1) In the long run, firms will exit industries where price is:
A) greater than average cost.
B) equal to average cost.
C) less than average cost.
D) positive.
Q2) (Figure: Marginal Costs 1) This figure shows the production costs of two firms that produce steel beams. If these two firms represent total production in the industry, how should they allocate the production of 300 beams to minimize costs?
A) Firm 2 should produce all 300 beams.
B) Firm 1 should produce all 300 beams.
C) Firm 1 should produce 150 beams, and Firm 2 should produce 150 beams.
D) Firm 1 should produce 100 beams, and Firm 2 should produce 200 beams.
Q3) We can write the Invisible Hand Property 1 as P = AC<sub>1</sub> = AC<sub>2</sub> = . . . = AC<sub>N</sub>.
A)True
B)False
Q4) High profits mean that inputs of high value produce outputs of low value.
A)True
B)False
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Chapter 13: Monopoly
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Q1) One way that has been suggested to eliminate deadweight loss from monopoly power without reducing incentives to innovation is to:
A) have government pay monopolists to reduce their output.
B) have government pay monopolists to acquire the patent rights.
C) have government eliminate the patent system.
D) require that the patent-owners allow competitors to use their innovations.
Q2) Nobel Prize-winning economic historian Douglass North argues that:
A) monopolies have been the leading cause of slow growth in developing nations.
B) economic growth was slow until patent laws were created to protect innovation.
C) economic growth would improve if the government created more natural monopolies.
D) corruption may actually lead to increases in innovation and development of new products.
Q3) Deadweight loss is present in both competitive and monopoly markets.
A)True
B)False
Q4) When any firm charges a higher price, fewer of its goods are sold.
A)True
B)False
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Chapter 14: Price Discrimination
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Q1) Perfect price discrimination is always bad, while imperfect price discrimination can be either good or bad.
A)True
B)False
Q2) The difference between tying and bundling is that tied goods are sold one to one while bundled goods are sold one to many.
A)True
B)False
Q3) Hewlett Packard's pricing scheme is to sell printers at relatively low price and ink cartridges at relatively high price. This practice is known as:
A) leverage.
B) predation.
C) retail maintenance.
D) tying.
Q4) Cable television operators sell ______ access to channels.
A) tied
B) bundled
C) aggregated
D) separated
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Chapter 15: Oligopoly and Game Theory
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Q1) If a television factory wanted to conspire with its competitors to raise the price of televisions, which of the following would help stabilize the long-term viability of such a cartel?
A) prevent co-conspirators from differentiating their product in trivial ways
B) create an advertising campaign that depicts watching TV shows on a computer as a negative experience
C) secure a government subsidy that goes to all TV manufacturers
D) cut everyone's marginal cost of production
Q2) Loyalty programs, such as frequent flyer plans, tend to:
A) increase prices.
B) decrease prices.
C) decrease monopoly power of the firm.
D) make demand more elastic.
Q3) A government-supported cartel usually means:
A) lower prices.
B) higher quality of service.
C) more innovation.
D) higher prices.
Q4) Do oligopolies price at competitive prices, monopoly prices, or at a different price? Explain.
Page 17
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Chapter 16: Competing for Monopoly
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Q1) A network good is a good whose value to one consumer:
A) increases the network of the consumer.
B) increases some, but decreases in value as other consumers use the good.
C) also creates the same value to other consumers as they use the good.
D) increases the more that other consumers use the good.
Q2) Which is the best example of a network good?
A) social media sites
B) laptop computers
C) automobiles
D) cable television
Q3) Nash equilibria always maximize total surplus in society.
A)True
B)False
Q4) Social networking sites are network goods, so the benefits of using them diminish as they become more popular.
A)True
B)False
Q5) Bread is a network good.
A)True
B)False
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Chapter 17: Monopolistic Competition and Advertising
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Q1) Consumers benefit from advertising:
A) only when they gain information.
B) if the advertising is not persuasive.
C) because it leads to lower prices for some products.
D) only when the advertising is being used as a signal.
Q2) Monopolistically competitive firms earn zero profits on average because:
A) they price above marginal cost.
B) new firms cannot enter the market.
C) positive profits cause competitors to enter the market, decreasing demand for each individual firm.
D) they price at marginal cost.
Q3) Consumers benefit from advertising:
I. by gaining product information.
II. by being persuaded to try a new product they might like.
III. when the ad provides a signal of the product's quality.
IV. if the ad leads to a lower price for the product.
A) IV only
B) II and III only
C) I and II only
D) I, II, III and IV
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Chapter 18: Labor Markets
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Q1) Preference based discrimination involves the use of personal biases to judge individuals.
A)True
B)False
Q2) If the marginal product of labor is constant in labor, then a market labor demand curve is:
A) positively sloped.
B) negatively sloped.
C) flat.
D) varied.
Q3) Unions raise wages by:
A) increasing demand for labor in the industry.
B) decreasing supply of labor in the industry.
C) increasing employment in the industry.
D) putting price controls on wages in the industry.
Q4) In a world of perfect information:
A) statistical discrimination would not exist.
B) employers, but not employees, would practice statistical discrimination.
C) employees, but not employers, would practice statistical discrimination
D) statistical discrimination would be even more important.
Page 20
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Chapter 19: Public Goods and the Tragedy of the Commons
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Q1) You can watch the show Spartacus on the premium cable television station Starz for about $10 a month.
A) Spartacus is inefficiently provided because it is a public good.
B) Spartacus is inefficiently provided because some people who don't watch the show are willing to pay more than the marginal cost of broadcasting the show to one more viewer.
C) Spartacus is efficiently provided because it is a private good that is rival and excludable.
D) Spartacus is efficiently provided because it is a nonrival private good.
Q2) The tragedy of the commons problem is a type of negative externality.
A)True
B)False
Q3) Tuna are not public goods since they are nonrival but excludable.
A)True
B)False
Q4) When someone receives the benefits of cable TV service, the benefit others can receive from this service gets reduced.
A)True
B)False
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Chapter 20: Political Economy and Public Choice
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Q1) With respect to the sugar quota, the people who are harmed are _____ and the people who benefit are _____.
A) rationally informed; rationally ignorant
B) rationally informed; irrationally ignorant
C) rationally ignorant; rationally informed
D) rationally ignorant; irrationally informed
Q2) (Figure: Kidney Trade Ban Policy Spectrum) Refer to the figure. If there are only two candidates, A and B, and an open market for kidney trading is the only issue being debated in this election, which one of the voters is the median voter?
A) Mariska
B) Tuppence
C) Tommy
D) Agatha
Q3) Special interest groups have an incentive to be:
A) rationally ignorant.
B) rationally informed.
C) free riders.
D) forced riders.
Q4) How do special interests affect tax policy in the United States?
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Chapter 21: Economics, Ethics, and Public Policy
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Q1) Which is an example of meddlesome preferences?
A) College students volunteer time building homes for the poor.
B) People lobby politicians for laws restricting religious proselytizing.
C) A rich person donates money to a homeless shelter.
D) A poor individual believes the rich should pay more in taxes.
Q2) Positive statements are based on fact while normative statements are based on opinion.
A)True
B)False
Q3) Which distributional theory is most consistent with the principles of individual liberty?
Q4) Rawls's maximin principle is based on:
A) minimizing the income of the wealthiest in society.
B) trade-offs between efficiency and equity.
C) finding the Nash equilibrium for society.
D) maximizing the benefits to the most disadvantaged group in society.
Q5) Rawl's laid out the minamax principle, namely that a government should maximize the benefits going to society's most disadvantaged group.
A)True
B)False
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Chapter 22: Managing Incentives
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Q1) Bjorn is a lazy worker with low productivity who works because he has to, not because he wants to. Amal is a very productive worker, enjoys what he does, and works quickly and accurately. Based on this information, which of the following is TRUE?
A) The piece rate incentive scheme would result in equal productivity for both workers.
B) Bjorn should be offered an hourly wage, whereas Amal should be offered a piece rate.
C) Amal should be offered an hourly wage, whereas Bjorn should be offered a piece rate.
D) An equal hourly wage would be appropriate for both these workers.
Q2) What proportion of U.S. corporations evaluate employees based on relative performance?
A) more than half
B) almost all
C) about one-third
D) less than one-quarter
Q3) Planning where, when, and how choices are made is sometimes called "choice architecture." Give an example of this.
Q4) Explain tournament theory and include an example of the theory in practice.
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Chapter 23: Stock Markets and Personal Finance
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Q1) The risk-return trade-off means that a stock with a high risk tends to have a lower return.
A)True
B)False
Q2) The expected return on different assets, after adjusting for risk, will be equal to zero.
A)True
B)False
Q3) Mutual funds primarily offer the service of diversification of investments.
A)True
B)False
Q4) Stocks typically earn a higher average rate of return than bonds because:
A) stocks are riskier than bonds.
B) bonds are unsecured.
C) stocks are better managed than bonds.
D) there is a higher demand for stocks.
Q5) Paying an expert to help pick stocks will likely yield better returns than most alternative strategies for stock selection.
A)True
B)False
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Chapter 24: Price Discrimination
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Q1) When a mechanic recommends an unnecessary repair, this is an example of:
A) adverse selection.
B) the principal-agent problem.
C) mutually beneficial trades.
D) moral hazard.
Q2) Because sellers of mortgage-backed securities paid ratings agencies for ratings, the ratings accurately predicted the increased foreclosures in the housing market.
A)True
B)False
Q3) Wearing a wedding ring is an example of:
A) adverse selection.
B) moral hazard
C) the principal-agent problem.
D) signaling.
Q4) List and describe features the health insurance market has developed to reduce adverse selection.
Q5) What might a newly married woman be signaling if she chooses to take her spouse's last name? If she chooses not to?
Q6) What are the arguments supporting the Affordable Care Act?
Page 26
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Chapter 25: Consumer Choice
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Q1) As one moves down along an indifference curve, the slope of the indifference curve typically:
A) increases.
B) decreases.
C) remains constant.
D) changes in an indeterminate direction.
Q2) As indifference curves move northeast or away from the origin, bundles of goods along indifference curves yield:
A) lower utility.
B) the same utility.
C) higher utility.
D) utility that is sometimes higher, sometimes the same, and sometimes lower.
Q3) (Figure: Optimal Choice) Refer to the figure. If the dotted line in the figure represents this consumer's budget constraint, then the utility-maximizing bundle for this consumer is:
A) A.
B) B.
C) C.
D) E.
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