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Besanko & Braeutigam – Microeconomics, 6th edition

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Chapter 1: Analyzing Economic Problems Multiple Choice 1. The analytical tools underlying nearly all microeconomic studies are: a) unconstrained optimization and comparative statics. b) comparative statics and game theory. c) opportunity cost and equilibrium analysis. d) constrained optimization, equilibrium analysis, and comparative statics. Ans: D Difficulty: Easy Heading: Why Study Microeconomics?

2. Economics is often described as: a) the science of choice. b) the science of constrained choice. c) the science of supply and demand. d) the science of market forces. Ans: B Difficulty: Easy Heading: Why Study Microeconomics?

3. Microeconomics examines: a) the economic behavior of an entire nation. b) the economic behavior of individual economic decision units. c) topics such as national income and inflation. d) monetary policy. Ans: B Difficulty: Easy Heading: Why Study Microeconomics?

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Besanko & Braeutigam – Microeconomics, 6th edition

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4. An endogenous variable is: a) a variable that an economic agent chooses. b) consumption, investment or government spending. c) a variable determined within the economic system being studied. d) a variable pertaining to the home country economy. Ans: C Difficulty: Easy Heading: Why Study Microeconomics?

5. In general, economics is the study of: a) the allocation of scarce wants to unlimited resources. b) the allocation scarce resources to unlimited wants. c) the allocation of resources between the government and the private sector. d) the allocation of workers between firms. Ans: B Difficulty: Easy Heading: Why Study Microeconomics? 6. Identifying the appropriate way to allocate an economy’s resources is an example ofL a) a constrained optimization problem. b) a comparative statics problem. c) an equilibrium analysis. d) marginal analysis. Ans: A Difficulty: Easy Heading: Why Study Microeconomics?

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Besanko & Braeutigam – Microeconomics, 6th edition

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7. Every society must answer which one of the following questions? a) Which variables are exogenous and which are endogenous? b) Who will receive the goods and services? c) What goods and services will be produced, how much will be produced, who will produce them and who will receive them? d) How centralized should government bureaucracy be? Ans: C Difficulty: Easy Heading: Why Study Microeconomics?

8. Which of the following statements regarding exogenous and endogenous variables is correct? a) The set of exogenous variables in any economic model should take into account the rich detail of the world and so should be limitless. b) Endogenous variables will always be determined within the model. c) Exogenous variables change as a result of changes in endogenous variables. d) The only variables that are relevant to the market equilibrium are the endogenous variables, as they are determined within the model. Ans: B Difficulty: Easy Heading: Why Study Microeconomics?

9. The definition of an exogenous variable is: a) a variable whose value is determined within the model under study. b) a variable whose value is determined outside the model under study. c) a variable whose value is determined through constrained optimization. d) a variable whose value is determined through comparative statics. Ans: B Difficulty: Easy Heading: Why Study Microeconomics?

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Besanko & Braeutigam – Microeconomics, 6th edition

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10. Constrained optimization, equilibrium analysis and comparative statistics are the three essential tools of: a) macroeconomic analysis. b) microeconomic analysis. c) equilibrium analysis. d) industry analysis. Ans: B Difficulty: Easy Heading: Three Key Analytical Tools

11. Constrained optimization occurs when: a) an individual makes choices that are influenced by his/her parents and family. b) an individual makes choices that best suit his/her preferences. c) firms choose the best products to meet their client’s needs. d) an individual is forced to choose between competing alternatives subject to some limitation such as budgetary considerations. Ans: D Difficulty: Easy Heading: Three Key Analytical Tools

12. The three tools used repeatedly in microeconomic analysis are: a) unconstrained optimization, comparative equilibrium, equilibrium statics. b) opportunity cost, scarce resources, shifting equilibrium. c) restricted analysis, constrained equilibrium, optimization. d) constrained optimization, equilibrium analysis, comparative statics. Ans: D Difficulty: Easy Heading: Three Key Analytical Tools

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Besanko & Braeutigam – Microeconomics, 6th edition

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12. Suppose that the supply of apples can be represented by the following equation: Qs = 2P + 500. Further suppose that the demand for apples can be represented by the following equation: Qd = 900 – 3P. Which of the following is the equilibrium price in the market for apples? a) 10 b) 50 c) 80 d) 100 Ans: C Difficulty Level: Medium Heading: Demand, Supply, and Market Equilibrium 13. Suppose demand is given by Qd = 500 – 15P and supply is given by Qs = 5P. If the government imposes a $15 price ceiling, the excess demand will be a) 200 b) 225 c) 250 d) 275 Ans: A Difficulty Level: Hard Heading: Demand, Supply, and Market Equilibrium 14. Suppose demand is given by Qd = 400 – 15P + I, where Qd is quantity demanded, P is price and I is income. Supply is given by Qs = 5P, where Qs is quantity supplied. When I = 200, equilibrium price is a) 15 b) 20 c) 25 d) 30 Ans: D Difficulty Level: Hard Heading: Demand, Supply, and Market Equilibrium

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Besanko & Braeutigam – Microeconomics, 6th edition

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15. Suppose demand is given by Qd = 500 – 15P and supply is given by Qs = 5P. If the government imposes a $30 price floor, the excess supply will be a) 25 b) 50 c) 100 d) 150 Ans: C Difficulty Level: Hard Heading: Demand, Supply, and Market Equilibrium 16. Suppose demand is given by Qd = 400 – 15P + I, where Qd is quantity demanded, P is price and I is income. Supply is given by Qs = 5P, where Qs is quantity supplied. When I = 100, equilibrium price is a) 15 b) 20 c) 25 d) 30 Ans: C Difficulty Level: Hard Heading: Demand, Supply, and Market Equilibrium

17. Which of the following would cause an unambiguous decrease in the equilibrium quantity in a market? a) A rightward shift in supply and a rightward shift in demand. b) A rightward shift in supply and a leftward shift in demand. c) A leftward shift in supply and a rightward shift in demand. d) A leftward shift in supply and a leftward shift in demand. Ans: D Difficulty Level: Medium Heading: Demand, Supply, and Market Equilibrium

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Besanko & Braeutigam – Microeconomics, 6th edition

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18. Factors that could cause a supply curve to shift to the right include all of the following except: a) a drop in the price of inputs to the supply process. b) an increase in the number of firms in the industry. c) an increase in demand for the product. d) a technological innovation that makes it cheaper to produce the product. Ans: C Difficulty Level: Medium Heading: Demand, Supply, and Market Equilibrium

19. Factors that could cause a demand curve to shift to the left include all of the following except: a) a change in preferences away from the product in question. b) an increase in the price of substitute products. c) a growing awareness of a health risk associated with the product. d) a decrease in the general level of income in the country. Ans: B Difficulty Level: Medium Heading: Demand, Supply, and Market Equilibrium

20. Suppose that the market for computers is initially in equilibrium. Further suppose that there is an increase in the price of computer software. Which of the following accurately describes the new equilibrium in the computer market? a) The equilibrium price will rise; the equilibrium quantity will fall. b) The equilibrium price will rise; the equilibrium quantity will rise. c) The equilibrium price will fall; the equilibrium quantity will fall. d) The equilibrium price will fall; the equilibrium quantity will rise. Ans: C Difficulty Level: Medium Heading: Demand, Supply, and Market Equilibrium

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Besanko & Braeutigam – Microeconomics, 6th edition

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21. Suppose that the market for soybeans is initially in equilibrium. Further suppose that there is a decrease in the price of fertilizer. Which of the following accurately describes the new equilibrium? a) The equilibrium price will rise; the equilibrium quantity will fall. b) The equilibrium price will rise; the equilibrium quantity will rise. c) The equilibrium price will fall; the equilibrium quantity will fall. d) The equilibrium price will fall; the equilibrium quantity will rise. Ans: D Difficulty Level: Medium Heading: Demand, Supply, and Market Equilibrium

22. Suppose that the market for newspaper is initially in equilibrium. Further suppose that there is both an increase in the price of ink and a decrease in the price of magazines, which people may read in place of a newspaper. Which of the following accurately describes the new equilibrium? a) The equilibrium price will rise; the equilibrium quantity is ambiguous. b) The equilibrium price is ambiguous; the equilibrium quantity will fall. c) The equilibrium price will fall; the equilibrium quantity is ambiguous. d) The equilibrium price is ambiguous; the equilibrium quantity will rise. Ans: B Difficulty Level: Medium Heading: Demand, Supply, and Market Equilibrium

23. A higher consumer income increases the demand for a particular good. The effect of this income on market demand usually is illustrated by: a) a rightward shift in the demand curve b) a leftward shift in the demand curve c) a rightward movement along the demand curve d) a leftward movement along the demand curve. Ans: A Difficulty Level: Medium Heading: Demand, Supply, and Market Equilibrium

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Besanko & Braeutigam – Microeconomics, 6th edition

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28. Suppose the price of 𝐴 is $20, the price of 𝐵 is $10, and that the consumer is currently spending all available income. At the consumer’s current consumption basket the marginal utility of 𝐴 is 8 and the marginal utility of 𝐵 is 2. a) The consumer is currently maximizing utility. b) The consumer could increase utility by consuming more of good 𝐴 and less of good𝐵. c) The consumer could increase utility by consuming more of good 𝐵 and less of good𝐴. d) Nothing can be said about the consumer’s utility because we do not know the consumer’s income or utility function. Ans: B Difficulty: Medium Heading: Optimal Choice 29. Suppose the price of 𝐴 is $20, the price of 𝐵 is $10, and that the consumer is currently spending all available income. At the consumer’s current consumption basket the marginal utility of 𝐴 is 8 and the marginal utility of 𝐵 is 4. a) The consumer is currently maximizing utility. b) The consumer could increase utility by consuming more of good 𝐴 and less of good𝐵. c) The consumer could increase utility by consuming more of good 𝐵 and less of good𝐴. d) Nothing can be said about the consumer’s utility because we do not know the consumer’s income or utility function. Ans: A Difficulty: Medium Heading: Optimal Choice 30. Suppose the price of good 𝑥 is $5 and the price of good 𝑦 is $7. Also, suppose 𝑀𝑈𝑥 = 𝑦 and𝑀𝑈𝑦 = 𝑥. Which of the following baskets could be an interior optimum? a) x = 5, y = 7 b) x = 4, y = 6 c) x = 7, y = 5 d) x = 6, y = 4 Ans: C Difficulty: Medium Heading: Optimal Choice

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Besanko & Braeutigam – Microeconomics, 6th edition

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31. Suppose that U(x,y) = min(3x,y). Further suppose that Px = $5 per unit and Py = $10 per unit and income is I = $105. For this consumer, the optimal basket to buy would be which of the following? a) (x,y) = (9,3) b) (x,y) = (3,1) c) (x,y) = (1,3) d) (x,y) = (3,9) Ans: D Difficulty: Medium Heading: Optimal Choice 32. Suppose that the ratio of marginal utility to price for good 𝐴 is 10, and the ratio of marginal utility to price for good 𝐵 is 5. Assume that for her current consumption of goods 𝐴 and 𝐵 the consumer is experiencing diminishing marginal utility for each good. In order for this consumer to be at her utility maximizing point, she should: a) consume less 𝐴 and more𝐵. b) consume more 𝐴 and less𝐵. c) consume more 𝐴 and more𝐵. d) do nothing – the consumer is already in equilibrium. Ans: B Difficulty: Medium Heading: Optimal Choice

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Besanko & Braeutigam – Microeconomics, 6th edition

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33. Which of the following statements is true about the consumer’s expenditure minimization problem? a) The consumer’s expenditure minimization problem results in the same optimal basket as the consumer’s utility maximization problem if the required level of utility for the expenditure minimizer is the same as the maximized utility for the utility maximizer. b) The consumer’s expenditure minimization problem has an optimum at an expenditure of zero. c) The consumer’s utility maximization problem results in a tangency between the budget constraint and an indifference curve, whereas the expenditure minimization problem results in a solution where the indifference curve crosses the budget line. d) The consumer always prefers to maximize utility rather than to minimize expenditure. Ans: A Difficulty: Medium Heading: Optimal Choice

34. Economists describe consumer choice as a constrained optimization problem. What is the consumer trying to do? a) Maximize income subject to the budget constraint. b) Maximize the budget constraint. c) Maximize utility subject to the budget constraint. d) Minimize spending. Ans: C Difficulty: Easy Heading: Optimal Choice 35. Suppose that MUx = 10 and MUy = 20. Further suppose that the consumer’s budget constraint can be expressed as 20x + 10y = 400. For this consumer, the optimal amount of good 𝑥 to buy would be: a) 5. b) 0. c) 20. d) 40. Ans: B Difficulty: Hard Heading: Optimal Choice

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Besanko & Braeutigam – Microeconomics, 6th edition

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36. Suppose that a consumer considers coffee and tea to be perfect substitutes, but he requires two cups of tea to give up one cup of coffee. This consumer’s budget constraint can be written as 3C + T = 10. What should the consumer buy? a) 2 cups of tea and no coffee. b) 10 cups of tea and no coffee c) 3 cups of coffee and no tea. d) 4 cups of coffee and no tea. Ans: B Difficulty: Medium Heading: Optimal Choice

37. Suppose John is planning to join a sports club. Membership in the club will allow John to swim at the pool for half price. Normally swimming for an hour would cost $10. If John has an income of $1000, the club membership fee is $100, and we plot the number of visits to the pool on the horizontal axis and a composite “other goods” which have a price of $1 on the vertical axis, the slope of John’s budget line after joining the club will be: a) –10 b) –5 c) –2 d) –1 Ans: B Difficulty: Medium Heading: Consumer Choice with Composite Goods

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Microeconomics 6th Edition Besanko test bank