Principles of Microeconomics
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Course Introduction
Principles of Microeconomics introduces the foundational concepts of how individual consumers, firms, and governments make decisions regarding the allocation of scarce resources. The course covers topics such as supply and demand, market equilibrium, elasticity, consumer behavior, production costs, and the various structures of markets including perfect competition, monopoly, and oligopoly. Emphasis is placed on the role of price mechanisms in resource allocation and the ways in which market failures can occur, including the significance of government intervention. Through theoretical frameworks and real-world applications, students gain an understanding of how microeconomic principles influence everyday economic interactions and policy choices.
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Microeconomics Theory and Applications 11th Edition by Edgar K. Browning
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Chapter 1: An Introduction to Microeconomics
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Q1) How do inferior goods differ from economic "bads"?
A)The demand for economic "bads" falls at higher levels of income whereas the demand for inferior goods falls at higher prices.
B)Economic "bads" are commodities for which demand falls as price falls whereas for inferior goods,quantity demanded falls as more is consumed.
C)Economic "bads" are commodities for which less is preferred to more under all conditions whereas for inferior goods,demand falls only when income increases.
D)For economic "bads" marginal utility is positive but gradually diminishes whereas for inferior goods,utility is negative from the first unit of consumption.
Answer: C
Q2) Indifference curves cannot intersect because:
A)consumers are indifferent between two consumption bundles.
B)that would violate the assumption of nonsatiation.
C)each person has a different set of indifference curves.
D)indifference curves are two-dimensional.
Answer: B
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Chapter 2: Supply and Demand
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Q1) If price changes from $4.75 to $5.25 and quantity demanded changes from 1,025 to 975 units,then the price elasticity of demand is approximately:
A)4.0.
B)0.5.
C)0.25
D)2.2.
Answer: B
Q2) Refer to Figure 2-1.Assume that a price ceiling of $2 is imposed in this market,what will be the new quantity sold in this market?
A)25,000
B)35,000
C)45,000
D)60,000
Answer: A
Q3) Each row and column heading describes a shock to a market initially in equilibrium.Fill in the table indicating whether the new equilibrium price and quantity will increase,decrease,or not change.
Answer: 11ea77e2_d721_9d90_91bf_f57ae3dcd3c2_TB1825_00
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Chapter 3: The Theory of Consumer Choice
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Q1) After spending $5 million developing a new MP3 player,you discover that a competitor is about to introduce a new model similar to yours at a lower per unit price.The $5 million development cost:
A)should be factored into your decision on whether or not to introduce your new MP3 player.
B)should be ignored in your decision on whether or not to introduce your new MP3 player.
C)should not be included while determining the opportunity cost of this investment. D)should be considered as fixed cost for the firm.
Answer: B
Q2) Refer to the production possibility frontier in Figure 1-1.What will be the opportunity cost of moving from point B to point A to produce 10 more computers?
A)15 apples
B)10 apples
C)5 apples
D)The economy cannot move to point A.
Answer: D
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Chapter 4: Individual and Market Demand
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Q1) A consumer is willing to pay a maximum of $5 for the first pretzel,$4 for the second pretzel,$3 for the third pretzel,$2 for the fourth pretzel,$1 for the fifth pretzel,and nothing for the sixth pretzel.If the price per unit of pretzel is $2,calculate the total benefit of the consumer.
A)$6
B)$14
C)$5
D)$8
Q2) The combination of an excise tax and a tax rebate of equal size:
A)always raises consumer welfare.
B)necessarily harms the consumer.
C)keeps the consumer surplus unchanged.
D)does not lead to any deadweight loss.
Q3) From which of the following can we derive a consumer's demand curve for a commodity?
A)Isoquants
B)Price-consumption curve
C)Production-possibility frontier
D)Contract curve
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Chapter 5: Using Consumer Choice Theory
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Q1) Refer to Figure 5-3.Suppose the government offered public housing that provided exactly B0 units of housing services to a low-income family.The public housing unit:
A)is provided by the government at a cost of $TB.
B)allows the family to reach a higher indifference curve but causes the family to consume more housing than an equal-sized cash transfer.
C)increases the level of housing consumption by the same amount as an equal-sized cash transfer.
D)causes the family to consume less housing than before the fixed-quantity subsidy.
Q2) Which of the following is true of an excise subsidy?
A)An excise subsidy has a positive substitution effect but negative income effect on the consumption of the subsidized good.
B)An excise subsidy increases consumption of the subsidized good more than a cash transfer of equal-cost.
C)An excise subsidy leaves the well-being of the subsidy recipient unchanged.
D)An excise subsidy causes consumption of nonsubsidized goods to increase.
Q3) (
A)How is insurance similar to an individual's diversified portfolio?
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Chapter 6: Exchange, Efficiency, and Prices
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Q1) Exchange is mutually beneficial when it is _____.
A)between poor economies
B)voluntary
C)controlled by the government
D)ethical
Q2) Suppose,given their initial endowments of milk [M] and cookies [C],we know that: Ashley's marginal rate of substitution of cookies for milk [MRS<sub>CM</sub>] = 3M/1C;Bill's MRS<sub>CM</sub> = 8M/8C;and Carol's MRS<sub>CM</sub> = 5M/10C.Given this information we know that a mutually beneficial trade would involve Carol selling _____ to Bill and Ashley selling _____ to Bill.
A)milk;cookies
B)milk;milk
C)cookies;milk
D)cookies;cookies
Q3) From the information in Table 6.1,you can conclude that MRS<sub>PC</sub> is:
A)constant for Jane but not for Bill
B)constant for both Jane and Bill
C)constant for Bill but not for Jane
D)not constant for both Jane and Bill
Q4) Explain why a competitive equilibrium produces an efficient allocation of goods.
Page 8
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Chapter 7: Production
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Q1) In Figure 7-2,a firm would choose to operate _____ on the total product curve.
A)between O and A
B)at point E
C)between B and D
D)between D and E
Q2) A firm that is operating in a technologically inefficient way:
A)is getting the maximum output from its inputs.
B)is making zero economic profits.
C)is not making as much money as it potentially can.
D)should shut down immediately to reduce its losses.
Q3) Estimation of a production function from the linear equation Q = a + bL + cK,assumes that the law of diminishing returns _____.
A)applies to labor only
B)applies to capital only
C)applies to both capital and labor
D)does not apply to either input
Q4) Given a production function \(Q = Q ( K , L )\) show the relationship between marginal and average product mathematically.
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Chapter 8: The Cost of Production
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Q1) Suppose a firm has two plants producing the same good.Each plant is producing 200 units of the good.In plant A,the short run average cost of production is $20 and in plant B it is $30.If the firm wants to produce a total of 400 units at the lowest cost in the long run,it should:
A)switch production from plant B to plant A until the average cost of production at each plant is the same.
B)produce only at plant A and shut down plant B.
C)switch production from plant B to plant A until the average cost is the same at the two plants.
D)continue to use the same input ratio.
Q2) Which of the following most completely describes the cost to a firm associated with the use of its resources in a particular way?
A)Its monetary outlay for inputs
B)Its explicit cost
C)The implicit cost of not renting its own resources
D)The opportunity cost of its resources
Q3) Explain why the long-run average cost curve is usually U-shaped although all inputs are variable in the long run?
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Chapter 9: Profit Maximization in Perfectly Competitive Markets
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Q1) Refer to Figure 9-4.Given that the market price is $P,the firm will be operating at a loss of _____.
A)TBOV
B)RZOA
C)KTVP
D)GKPS
Q2) Assume that coffee shops operate in a perfectly competitive industry.A single coffee shop,Brick & Mortar,decides to charge an entrance fee in addition to charges for its coffee and pastry.Which of the following is most likely to happen?
A)Brick & Mortar can continue to charge the entrance fee in the long-run since there is free entry into the coffee shop industry.
B)As long as the coffee shop industry is perfectly competitive,customers will be willing to pay the extra charges.
C)Brick & Mortar will not be able to sustain the extra charges as customers will move to coffee shops that are cheaper.
D)Brick & Mortar can charge their customers extra because there are a large number of buyers and sellers in the coffee shop industry.
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Chapter 10: Using the Competitive Model
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Q1) Refer to Figure 10-1.The total surplus at the initial point of equilibrium,F,is given by
A)LFP<sub>2</sub>
B)LFGP<sub>1</sub>
C)LFM
D)LFIP<sub>1</sub>
Q2) The equilibrium of a competitive industry is:
A)equitable but not necessarily efficient.
B)efficient.
C)not always efficient.
D)neither efficient nor equitable.
Q3) In Figure 10-3,the total producer surplus after trade is _____.
A)P<sub>3</sub>ELP<sub>2</sub>
B)ELK
C)P<sub>2</sub>LP<sub>0</sub>
D)P<sub>2</sub>LMP<sub>1</sub>
Q4) Is the outcome of a competitive market efficient? Explain with the help of a graph.
Q5) Explain how entry restrictions imposed on taxis by a city affects fares and profits of licensed taxi owners as demand increases over time.
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Chapter 11: Monopoly
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Q1) For the same demand and cost conditions,how do price and output of a monopoly compare to those for a competitive firm and why is the deadweight loss of a monopoly a loss of welfare?
Q2) A monopolist has the following short-run total cost,marginal cost,and demand functions:
Total Cost: \[T C = 32 + 2 Q + \frac { 1 } { 2 } Q ^ { 2 }\] <sup> </sup>
Marginal Cost: \(M C = 2 + Q\) Demand: \(Q = 52 - 2 P\) where P is the price per unit of output,and Q is the quantity of output.
(
A)What price and quantity combination maximizes the monopolist's total revenue?
Q3) Which of the following correctly describes a natural monopoly?
A)A natural monopoly is an industry in which products are differentiated from one another.
B)A natural monopoly exists if one large firm's long-run average cost curve is upward-sloping.
C)A natural monopoly is defined as a firm that operates in an industry that has significant regulatory barriers to entry.
D)A natural monopoly is an industry that exhibits economies of scale.
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Chapter 12: Product Pricing With Monopoly Power
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Q1) Park and Fly,a chain that operates off-terminal parking lots near major airports in several U.S.cities,has a "frequent-parker" program that offers customers a week's free parking after they have paid for 35 days.Which of the following types of price discrimination is the company practicing?
A)Perfect price discrimination
B)Predatory pricing
C)Third-degree price discrimination
D)Block pricing
Q2) Refer to Figure 12-1.If the monopolist cannot price discriminate,profit will be equal to:
A)the area P<sub>3</sub>AP<sub>2</sub>.
B)the area P<sub>2</sub>AQ<sub>1</sub>O.
C)the area P<sub>2</sub>ABP<sub>1</sub>.
D)zero.
Q3) Under peak-load pricing,the price in each period is set:
A)equal to the average cost of production in that period.
B)above the marginal cost of production in that period.
C)where the marginal cost intersects the demand for that period.
D)where the average cost intersects the demand for that period.
Q4) Why is it difficult to implement first-degree price discrimination?
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Chapter 13: Monopolistic Competition and Oligopoly
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Q1) A monopolistically competitive firm is considered to have excess capacity because it:
A)does not operate at the minimum point on its long-run average cost curve.
B)does not operate at the minimum point on its marginal cost curve.
C)operates at the point where average cost is greater than average revenue.
D)operates at the point where marginal cost is above average revenue.
Q2) One of the earliest oligopoly models,as explained by Augustin Cournot,took the example of two firms that produced a homogeneous product: bottled spring water.Both firms faced zero marginal costs and a linear demand curve.Using this information,show that the Cournot equilibrium output is 2/3<sup>rd</sup> of the perfectly competitive equilibrium output.
Q3) In _____,one firm uses its knowledge of the other firms' reaction functions to enhance its own profits.
A)the Cournot duopoly
B)a monopolistically competitive market
C)a perfectly competitive market
D)the Stackelberg model
Q4) What is a cartel and why are cartels considered to be inherently unstable?
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Chapter 14: Game Theory and the Economics of Information
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Q1) Fred was suffering from a nasal tissue blockage that could be corrected either through an operation or with medical treatment for about two months.Fred's doctor clearly told him that the condition was not acute and he did not need surgery.Fred,however,insisted on the surgical removal of the blockage,being aware that his medical insurance would cover the entire cost of this surgery.The situation described here can be associated with which of the following problems?
A)Price dispersion
B)Moral hazard
C)Lemons problem
D)Prisoner's dilemma
Q2) Adverse selection describes a situation in which:
A)the buyers of insurance consistently make the wrong decision and buy too much insurance.
B)insurance companies find most of their customers coming from high risk groups.
C)insurance companies find most of their customers coming from low risk groups.
D)the buyers of insurance can reduce the probability of occurrence of the risky event against which they are insured.
Q3) Explain how advertising,when undertaken by all competing firms,actually reduces the market power of the firms.
Page 16
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Chapter 15: Using Noncompetitive Market Models
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Q1) Why are the estimates of the deadweight loss of monopoly not large?
A)Monopolized sectors of the economy are large relative to the whole economy.
B)Pure monopolies are not pervasive in market economies.
C)Monopolies tend to operate in markets with below average prices.
D)Although consumer surplus falls,total surplus actually increases in a monopoly.
Q2) Which of the following is true of a natural monopoly that is regulated by the average-cost pricing strategy?
A)The natural monopoly will earn positive economic profit.
B)The natural monopoly will produce less output than an unregulated monopoly.
C)The equilibrium price of the natural monopoly is now the same as the competitive price.
D)A part of the deadweight loss from an unregulated monopoly is eliminated.
Q3) Refer to Figure 15-2.Since there is a positive deadweight loss from monopoly,which of the following statements must be true?
A)The gain in producer surplus should not exceed $450.
B)The loss in total surplus should be lesser than or equal to $300.
C)The loss in consumer surplus should not exceed $600.
D)The gain in total surplus should exceed the loss in consumer surplus.
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Chapter 16: Employment and Pricing of Inputs
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Q1) Suppose that a firm that produces widgets employs welders as the labor input for production.The demand for welders is:
A)derived from the total industry output of widgets.
B)represented by the marginal value product curve if the firm is monopolist in the output market.
C)derived from the demand curve for widgets faced by the firm.
D)represented by the marginal revenue product curve if the firm is competitive.
Q2) The input demand curve of an industry is relatively inelastic when:
A)the demand for the final product is relatively elastic.
B)the marginal rate of technical substitution is lower.
C)the supply curves of other inputs is relatively inelastic.
D)price of the input is higher than the price of other inputs.
Q3) Which of the following will lead to an upward shift of a competitive firm's marginal value product curve for labor?
A)A decrease in the price of the final product
B)An increase in the wage rate
C)An increase in the amount of other inputs used
D)A decrease in the demand for the final product
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Chapter 17: Wages, Rent, Interest, and Profit
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Q1) Payment to an input which is in excess of the minimum amount required to retain the input in its present use is called _____.
A)total revenue
B)factor payment
C)economic rent
D)surplus value
Q2) As a result of the income effect of a higher wage,hours of work will:
A)increase due to a lower opportunity cost of leisure time.
B)fall due to a higher real income enabling greater leisure time.
C)increase due to a higher real income eliciting greater leisure time.
D)fall due to a lower opportunity cost of leisure time.
Q3) What is meant by the net marginal productivity of an investment?
A)It is the marginal revenue minus marginal cost from the last unit of capital.
B)It is the total addition to productivity from an extra unit of capital minus the cost of capital.
C)It is the additional revenue generated by selling an extra unit of output.
D)It is the extra output produced by an extra unit of capital minus the marginal cost.
Q4) When might a compensating wage differential go the "wrong way"? Explain with a graph.
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Chapter 18: Using Input Market Analysis
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Q1) The cost of the minimum wage is most likely borne by:
A)consumers who buy goods produced in the covered industry.
B)producers who produce goods in the covered industry.
C)producers in both the covered and uncovered industries.
D)consumers who have a perfectly elastic demand for goods produced by the covered industry.
Q2) A change in the social security system which required employers to pay the full amount of the social security tax rather than the 50 percent they now pay would:
A)force the employers to bear the entire tax burden.
B)reduce the burden of the tax on the employees but not eliminate the burden completely.
C)have no effect on the portion of the tax borne by the employees and the portion borne by the employers.
D)increase the burden of the tax on the employees.
Q3) What is the long run effect of a pay-as-you-go Social Security program on the gross domestic product [GDP] of a country?
Q4) Explain graphically that a payroll tax imposed by the government either on the employers or on the employees will have a similar impact.
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Chapter 19: General Equilibrium Analysis and Economic Efficiency
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Q1) A comparison between the resource allocation at different points on the welfare frontier is difficult because:
A)the shape of the welfare frontier is nonlinear.
B)some of the allocations on the frontier are inefficient,and some are efficient.
C)all the points on the welfare frontier are efficient.
D)interpersonal utility comparisons cannot be made objectively.
Q2) Which of the following is true of contract curves?
A)Every point on the contract curve indicates an inefficient distribution of goods among consumers.
B)At any point on the contract curve,all the consumers have equal marginal rates of substitution.
C)A movement along the contract curve indicates that,any trade that benefits one person will necessarily benefit the other.
D)At every point on the contract curve,the marginal utility derived from the consumption of a good is identical for all the consumers.
Q3) What are the conditions for efficiency in distribution,efficiency in production,and efficiency in output?
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Chapter 20: Public Goods and Externalities
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Q1) Jack benefits from keeping four dogs whose barking bothers his neighbor Jane.If Jane has the legal right to a quiet neighborhood,and mutual bargaining is expensive,which of the following will hold true?
A)Government intervention,in this case,is a necessity for achieving an efficient outcome.
B)If Jack's benefit exceeds Jane's cost,Jane pays Jacks to keep his dogs.
C)If Jack's benefit is less than Jane's cost,Jane pays Jack to keep his dogs.
D)Jack pays Jane to compensate for the external cost generated by him.
Q2) The free-rider problem occurs because:
A)it is easy to exclude others from consuming the good.
B)consumption is rival in nature,and the consumption of a product by one individual diminishes that available for others.
C)exclusion is costly or impossible,so that a consumer or producer can use the good without having to pay for it.
D)the consumption of a good imposes costs on others who not directly involved in the transaction.
Q3) Explain with the help of a suitable real life example how common resources are depleted if property rights are not ensured?
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