Public Economics Review
Questions
Course Introduction
Public Economics explores the role of government in the economy, focusing on the rationale for government intervention, the design and impact of taxation and public spending, and the economic consequences of different policy choices. The course analyzes issues such as market failures, public goods, externalities, income redistribution, and social insurance. Students learn to apply economic theory and empirical methods to evaluate and inform public policy debates, fostering a deeper understanding of how government actions affect efficiency, equity, and overall economic welfare.
Recommended Textbook
Microeconomics Theory and Applications 11th Edition by Edgar K. Browning
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20 Chapters
1890 Verified Questions
1890 Flashcards
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Page 2
Chapter 1: An Introduction to Microeconomics
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Sample Questions
Q1) Suppose hamburgers are on the horizontal axis and root beer on the vertical axis.Your budget allowance is $10 and the price of hamburgers is $4 each and root beer $2 each.If at your present consumption of hamburger and root beer your marginal rate of substitution of hamburger for root beer is 4,to maximize utility you should:
A)consume more hamburger and fewer root beers.
B)consume fewer hamburgers and more root beers.
C)continue consuming the same quantity of both hamburgers and root beers.
D)continue consuming the same quantity of hamburgers but consume more root beer.
Answer: A
Q2) Given the indifference curve and the budget line shown in Figure 3-3,which of the following is correct?
A)The slope of the budget line is $5
B)The prices of other goods vary with income
C)The slope of the budget line shows how much the consumer is willing to reduce dollar outlays on other goods to obtain one more unit of clothing
D)The optimal point of consumption is at point E
Answer: A
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Page 3
Chapter 2: Supply and Demand
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Sample Questions
Q1) An excess demand for a product indicates that:
A)the price is below the equilibrium price.
B)there is a rightward shift in the demand curve.
C)there will be a downward movement along the supply curve.
D)the supply curve will shift rightward.
Answer: A
Q2) All of the following are common responses to a price ceiling,except:
A)an excess supply.
B)nonprice rationing.
C)quality deterioration.
D)black markets.
Answer: A
Q3) When there is an excess demand for a good,there is:
A)downward pressure on price because buyers are willing to pay more.
B)downward pressure on price because firms accumulate unwanted inventories.
C)upward pressure on price because buyers are willing to pay more.
D)upward pressure on price because firms accumulate unwanted inventories.
Answer: C
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4
Chapter 3: The Theory of Consumer Choice
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Sample Questions
Q1) A linear production possibility frontier exhibits a(n)_____ opportunity cost of producing either good.
A)increasing
B)decreasing
C)constant
D)variable
Answer: C
Q2) Write down a normative statement and a positive statement with reference to the minimum wage and then explain each.
Answer: 'Higher minimum wages lead to limited employment losses.' This is a positive statement,which has been the subject of much debate in economics.Some researchers have concluded that marginal increases in the minimum wage lead to significant employment losses,while others argue that the effects are statistically insignificant. 'The minimum wage should be higher to help fight poverty.' This is a normative statement since it expresses an opinion,a value judgment of the author.
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5
Chapter 4: Individual and Market Demand
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Sample Questions
Q1) A consumer's demand function for a good Q is of the form P = 20 - 2Q.Derive the consumer's price elasticity of demand for this good when price decreases to $6 from $8.What can be inferred about the shape of the consumer's price consumption curve?
Q2) For the same fall in price,the increase in consumer surplus is greater if:
A)the good is a Giffen good rather than a normal good.
B)the good is normal rather than an inferior good.
C)the good is an inferior good rather than a normal good.
D)the good is a Giffen good rather than an inferior good.
Q3) Which of the following statements provides the best example of consumer surplus?
A)"Drinking that bottle of soda increased my happiness by $10."
B)"John gave me $5 for the watermelon even though it cost me only $2."
C)"I paid $20 for this shirt for which I would have paid up to $40."
D)"I refuse to pay $30 for their steak dinner;it's highly overpriced."
Q4) The income effect of a price change:
A)is always larger than the substitution effect in the inferior good case.
B)produces a backward-bending income-consumption curve.
C)reinforces the substitution effect in the normal good case.
D)is always positive.
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Page 6
Chapter 5: Using Consumer Choice Theory
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Sample Questions
Q1) Show and explain why substituting an unrestricted cash transfer for an excise subsidy of equal cost to the government must lead to less consumption of the subsidized good and more consumption of other goods.
Q2) Refer to Figure 5-5.Suppose the government offers education vouchers of value $B0 instead of a fixed-quantity subsidy.The budget line will become _____.
A)MATN
B)AS
C)MN
D)MAS
Q3) Which of the following statements is true?
A)Consumers are better off with a fixed-quantity subsidy than an equal-cost voucher system.
B)Voucher systems will not increase the quantity consumed of the subsidized good.
C)With a fixed-quantity subsidy consumers will consume more of other goods.
D)Fixed-quantity subsidies and voucher systems can both place the consumer on a higher indifference curve.
Q4) (
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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Sample Questions
Q1) If Frank's and Jan's indifference curves intersect at the endowment point A,then:
A)A is on the contract curve.
B)trade will make one of them better off while making the other one worse off.
C)both indifference curves would cross the contract curve before they intersected again.
D)A can be on either Frank's or Jan's contract curve but not both.
Q2) Refer to the Edgeworth box in Figure 6-2.Which of the following statements is true?
A)Point A is more efficient than point E.
B)Point E is more efficient than point C.
C)Point C is more efficient than point B.
D)Point B is more efficient than point A.
Q3) When the marginal rates of substitution differ,then:
A)mutually beneficial trade is not possible.
B)the only way to make one consumer better off is to make the other worse off.
C)it is impossible to find a point that makes both worse off.
D)indifference curves intersect inside the Edgeworth box.
Q4) (
A)What is meant by Pareto efficiency?
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8
Chapter 7: Production
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Sample Questions
Q1) Convexity of a curve implies that the slope of the curve:
A)is zero.
B)is constant.
C)diminishes along the curve.
D)approaches infinity.
Q2) An isoquant shows _____.
A)the different quantities of output that can be produced with different quantities of inputs
B)the combination of inputs that can be used to produce a fixed quantity of output
C)the different quantities of output that can be produce with fixed quantities of inputs
D)the combination of inputs than can be used to produce different quantities of output
Q3) The slope of a ray from the origin to the total product curve measures _____.
A)the marginal rate of technical substitution
B)the marginal product of the variable factor
C)the average product of the variable factor
D)the maximum output
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9
Chapter 8: The Cost of Production
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Sample Questions
Q1) Talco Inc. ,a manufacturer of steel pipes,uses 500 workers and 100 machines to produce 10,000 pipes,each 28mm thick,every day.Its operations research team reports that the marginal productivity of labor is 40 steel pipes while that of capital is 240 steel pipes.If workers are paid $8 per day and the rental cost of capital is $40 per day,examine whether the company is following the golden rule of cost minimization.
Q2) Suppose a firm that uses labor and capital as the only inputs in production is currently on the long-run expansion path.The marginal product of labor and capital at this least cost combination are 60 units and 80 units respectively and the wage rate of labor is $6.Calculate the rental cost of capital borne by the firm.
A)$10
B)$8
C)$5
D)$12
Q3) Learning by doing:
A)results in higher costs in the long run than in the short run.
B)is a result of technological progress.
C)increases productivity of the inputs.
D)results from the increased use of inputs in production.
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Chapter 9: Profit Maximization in Perfectly Competitive Markets
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Sample Questions
Q1) The competitive firm's demand curve is:
A)unit elastic over the relevant range of output.
B)perfectly elastic over the relevant range of output.
C)perfectly inelastic over the relevant range of output.
D)elastic above the market price and inelastic below the market price.
Q2) The competitive firm maximizes its profit by operating at the point where _____ and price is greater than average variable cost.
A)average cost is at a minimum
B)total revenue is at a maximum
C)profit per unit is at a maximum
D)marginal cost equals price
Q3) Refer to Figure 9-1.At a price of $10,the profit maximizing level of output for the firm is
Q4) Derive the first-order and second-order conditions for perfect competition.
11
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Chapter 10: Using the Competitive Model
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Sample Questions
Q1) Suppose the demand for raspberry frozen yogurt can be represented by the equation Q<sub>D</sub> = 5 - 2P,and the supply is given by the equation Q<sub>S</sub> = 3P.Which of the following is the best estimate of the consumer surplus in this market?
A)$2
B)$1.25
C)$2.25
D)$3.75
Q2) One of the reasons for the low profitability of U.S.airlines during the era of regulation by the Civil Aeronautics Board (CAB)was _____.
A)the absence of organized labor unions
B)low airline safety
C)the scheduling of airline flights to sparsely populated areas
D)the price ceiling imposed by the CAB
Q3) Refer to Figure 10-3.The total producer surplus prior to trade was _____.
A)P<sub>3</sub>EP<sub>0</sub>
B)P<sub>2</sub>LP<sub>0</sub>
C)P<sub>1</sub>MP<sub>0</sub>
D)P<sub>3</sub>EMP<sub>1</sub>
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Page 12
Chapter 11: Monopoly
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Sample Questions
Q1) At an output of 1,000 units,a monopoly firm's average revenue is $40,its marginal revenue is $30,its marginal cost is $30,its average variable cost is $35,and fixed costs are $5,000.Given this information,we can conclude that the monopolist:
A)is earning zero economic profit.
B)is earning an economic profit equal to $5,000.
C)is making an economic loss and should shut down.
D)should increase output to maximize profit.
Q2) Which of the following conditions generally holds when a monopoly firm is producing its profit-maximizing level of output?
A)Marginal cost [MC] = marginal revenue [MR] = average cost [AC] = average revenue [AR]
B)MC = MR > AC
C)MC = MR = price
D)MC = MR < AR
Q3) Refer to Table 11-1.What is the marginal revenue when 3 units are sold?
A)$20
B)$30
C)$50
D)$70
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Page 13
Chapter 12: Product Pricing With Monopoly Power
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Sample Questions
Q1) Which of the following is an advantage of peak-load pricing?
A)It allows a firm to reduce its total cost by reallocating its production.
B)It allows a firm to capture the entire consumer surplus.
C)It allows a firm to clearly identify each consumer's willingness to pay.
D)It reduces monopoly profits and increases consumer surplus.
Q2) Under first-degree price discrimination,the marginal revenue curve:
A)is a horizontal straight line.
B)slopes upward.
C)coincides with the monopoly firm's demand curve.
D)is identical to the marginal revenue curve facing a non-price discriminating monopolist.
Q3) Which of the following price discrimination strategies allows a monopolist to distribute a product/service most efficiently between two periods of time?
A)Predatory pricing
B)Peak-load pricing
C)Block pricing
D)Two-part tariff
Q4) What is a two-part tariff? Make up a numerical example to support your definition.
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Page 14
Chapter 13: Monopolistic Competition and Oligopoly
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Sample Questions
Q1) Which of the following is true of a firm in an oligopoly market?
A)Each firm faces a downward-sloping demand curve with a kink at the current price.
B)Firms in oligopoly markets are very small relative to the market.
C)Products in oligopoly markets could either be differentiated or homogeneous.
D)The profit-maximizing output is determined by equating price and marginal cost.
Q2) Cartels and collusion are more common in oligopolistic industries because:
A)products are differentiated.
B)there are no barriers to entry and exit.
C)there are a smaller number of firms.
D)the market demand curve is horizontal.
Q3) A monopolistically competitive firm that is maximizing profit will choose to produce at the level where:
A)total revenue is maximized.
B)average total cost exceeds average revenue.
C)marginal revenue equals marginal cost.
D)marginal revenue exceeds average revenue.
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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Sample Questions
Q1) Moral hazard describes a situation in which:
A)the buyers of insurance consistently make the wrong decisions and buy too much insurance.
B)insurance companies are unable to sell the amount of insurance they feel is optimal.
C)insurance companies find most of their customers coming from low risk groups.
D)the buyers of insurance behave in ways that raise the probability of the unfavorable outcome.
Q2) Which of the following lowers the marginal benefit from a search related to a product?
A)High price dispersion
B)High price elasticity of demand for a product
C)Long time devoted to search
D)High price of the product
Q3) An analysis of the relationship between advertising and price indicates that advertising:
A)can lower the price of the product.
B)increases price dispersion.
C)has no impact on a product's price.
D)makes the demand for the product highly price elastic.
Page 16
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Chapter 15: Using Noncompetitive Market Models
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Sample Questions
Q1) Assume that Bosch is a company that manufactures printers for home computers.The printers are designed such that they do not work as effectively after a certain number of prints have been taken.Bosch also offers a warranty on the printer equal to the average time it takes to print that many pages.This is an example of _____.
A)iterated dominance
B)planned obsolescence
C)a commitment strategy
D)a natural monopoly
Q2) Which of the following is true of a natural monopoly?
A)The operation of more than one firm reduces the production efficiency of the market.
B)The good that is sold by a natural monopoly is easily substitutable.
C)The firm produces at the point where marginal revenue equals price.
D)The natural monopoly market has no barriers to entry and exit.
Q3) A natural monopoly is defined as an industry in which:
A)regulatory barriers to entry prevent the operation of more than one firm.
B)the marginal cost curve of the dominant firm is upward sloping.
C)the monopoly firm is not regulated by the government.
D)the average cost of the firm declines over the entire range of market demand.
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Chapter 16: Employment and Pricing of Inputs
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Sample Questions
Q1) Refer to Figure 16-1.The move from point B to point C represents the _____ of an input price change.
A)substitution effect
B)output effect
C)income effect
D)effect of diminishing returns
Q2) Which of the following is true of the marginal value product curve (MVP)and the marginal revenue product curve (MRP)for an output market monopolist?
A)The MVP and the MRP are upward sloping curves that are parallel to each other.
B)The MVP lies above the MRP and is downward-sloping.
C)The MRP and the MVP coincide and are parallel to the horizontal axis.
D)The MRP and the MVP intersect at the equilibrium wage rate.
Q3) The supply curve of labor to a competitive firm is:
A)upward-sloping because of the law of diminishing marginal returns.
B)downward-sloping because the supply of labor increases as wages increase.
C)perfectly inelastic because the stock of labor is fixed in the long run.
D)horizontal because the firm can hire as many workers as it wants at the market wage.
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Page 18
Chapter 17: Wages, Rent, Interest, and Profit
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Sample Questions
Q1) Real wages are higher in the United States than in less developed countries for all of the following reasons,except:
A)the large size of the labor force.
B)the skills of the labor force.
C)the amount of capital available per worker.
D)the output produced per worker.
Q2) Management consultants work in pleasant surroundings at low risk of injury,but they generally receive higher pay than sanitation workers who face a health risk by working in unpleasant conditions.Based on this information,which of the following must be true?
A)Management workers receive a higher pay because their wages include a compensating wage differential.
B)Since there is free mobility of labor,sanitation workers must have chosen not to move to a higher-paying job.
C)Wages of management consultants and sanitation workers are not comparable due to differences in the level of human capital investment.
D)Management consultants are paid a higher wage to compensate for the intrinsic attractiveness of their jobs.
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Chapter 18: Using Input Market Analysis
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Sample Questions
Q1) Which of the following is not a predictable result of a refusal by a small number of employers to hire African Americans?
A)The wage rates of African Americans falls below those for whites
B)Non-discriminating firms hire larger proportions of African Americans
C)Segregated employment patterns will emerge
D)Non-discriminating firms hire smaller proportions of whites
Q2) A minimum wage mandated by the government will result in an increase in:
A)the supply of workers to the uncovered sector.
B)the wage rate in the uncovered sector.
C)employment opportunities in the covered sector.
D)the demand for workers in the covered sector.
Q3) Refer to Figure 18-1.The increase in the number of workers looking for work in this market due to the imposition of a $5.15 minimum wage is _____.
A)L<sub>1</sub>L<sub>3</sub>
B)L<sub>2</sub>L<sub>3</sub>
C)OL<sub>1</sub>
D)L<sub>2</sub>L<sub>1</sub>
Q4) What determines who bears the burden of the social security tax?
Q5) Mention some of the factors which hinder input buyer's cartel.
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Chapter 19: General Equilibrium Analysis and Economic Efficiency
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Sample Questions
Q1) Which of the following is true of the general equilibrium analysis?
A)It assumes that a change initiated in a market does not affect prices in other markets.
B)It determines changes in equilibrium price in a market assuming that all other markets are in equilibrium.
C)The ceteris paribus assumption is crucial in determining changes in price and quantity in general equilibrium analysis.
D)It is useful in determining price and quantity of goods and services when the markets mutually interdependent.
Q2) In a competitive equilibrium,each producer produces at a point where:
A)the price of the good equals the marginal cost of producing the good.
B)the price of the good equals the wage rate.
C)the price is greater than the average revenue.
D)the wage rate is equal to the marginal revenue.
Q3) A point off the contract curve in an Edgeworth production box means that:
A)the costs are being minimized.
B)the output is being maximized.
C)the economy is not operating on the production possibility frontier.
D)the firms must be facing the same ratio of input prices.
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Chapter 20: Public Goods and Externalities
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Sample Questions
Q1) In Figure 20-2,the price level when the efficient output is being produced is _____ than the price level when the market equilibrium output is being produced by _____.
A)less;$8
B)more;$4
C)less;$3
D)more;$3
Q2) Refer to Figure 20-1.Which of the following policies can be adopted by the government to increase production from the equilibrium level to the efficient level?
A)Provide a subsidy of $30 per unit
B)Impose a tax of $100 per unit
C)Provide a subsidy of $100 per unit
D)Impose a tax of $20 per unit
Q3) An uncongested,toll road is characterized by:
A)nonexclusion and nonrivalry in consumption.
B)nonexclusion but rivalry in consumption.
C)exclusion and nonrivalry in consumption.
D)exclusion but rivalry in consumption.
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