Honors Microeconomics Final
Test Solutions
Course Introduction
Honors Microeconomics offers an in-depth exploration of fundamental microeconomic principles, including supply and demand, consumer and producer behavior, market structures, and the role of government in market regulation. Designed for highly motivated students, this course emphasizes analytical and quantitative reasoning, integrating real-world applications and current economic issues. Through rigorous coursework, problem-solving exercises, and critical discussions, students develop a strong foundation in economic theory and gain skills essential for advanced study in economics or related fields.
Recommended Textbook
Microeconomics 12th Edition by Michael Parkin
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Page 2
Chapter 1: What Is Economics
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Sample Questions
Q1) In the above figure, tax revenue is at a maximum when the tax rate is
A) 0 percent.
B) 30 percent.
C) 50 percent.
D) 100 percent.
Answer: B
Q2) In the U.S. economy, which of the following statements is TRUE?
A) More goods are produced than services.
B) More services are produced than goods.
C) Production is divided evenly between goods and services.
D) The economy is too complex to determine the proportion of production that is devoted to producing services.
Answer: B
Q3) "As interest rates rise, people save more money." A graph displaying this relationship would show
A) an inverse relationship.
B) a positive relationship.
C) a cross-section graph.
D) a positive then a negative relationship.
Answer: B
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Chapter 2: The Economic Problem
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Sample Questions
Q1) When an economy produces at its allocatively efficient production point
A) scarcity is not a problem.
B) resources are not limited.
C) a society can increase the production of all goods.
D) a society can increase the production of one good only by decreasing the production of some other good that is valued more highly.
Answer: D
Q2) One of the largest categories of exports from the United States is now pop culture: movies, music, TV programming, and videos. A direct conclusion from this information is that, compared to other countries, the United States has
A) lower wages for producers of pop culture.
B) higher wages for producers of pop culture.
C) an absolute advantage in producing pop culture.
D) a comparative advantage in producing pop culture.
Answer: D
Q3) In the United States, the government coordinates most of the economic activity.
A)True
B)False
Answer: False
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Page 4
Chapter 3: Demand and Supply
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Sample Questions
Q1) If the money price of wheat increases and no other prices change, the
A) relative price of wheat falls.
B) opportunity cost of wheat rises.
C) demand for wheat increases.
D) relative price of wheat is unaffected.
Answer: B
Q2) An economist says: "The demand curve has two interpretations." What does the economist mean?
Answer: The first interpretation is that the demand curve shows the quantities of a good or service that consumers are willing and able to buy at each price, other things being equal. The second interpretation is that the demand curve is a willingness-and-ability-to-pay curve, so that for each quantity it shows the highest price that someone is willing and able to pay for one more unit.
Q3) A change in which of the following shifts the demand curve?
A) the number of sellers in the market
B) the price of the resources used to produce the product
C) the technology with which the product is produced
D) the tastes and preferences of consumers
Answer: D
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Page 5
Chapter 4: Elasticity
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Sample Questions
Q1) What are the three cases for the price elasticity of demand? Briefly define each.
Q2) If demand for Farmer John's maple syrup is inelastic, then when Farmer John raises the price of maple syrup, his total revenue will
A) increase.
B) decrease.
C) stay the same.
D) probably change, but more information is needed to determine if the total revenue increases, decreases, or stays the same.
Q3) If the price increases by 20 percent and the quantity supplied increases by 40 percent, what does the elasticity of supply equal?
Q4) The demand for bus rides is a downward-sloping straight line demand curve. The price elasticity of demand for bus rides ________.
A) increases as the price of a bus ride falls
B) decreases as the price of a bus ride falls
C) is the same no matter what the price of a bus ride
D) decreases as the price of a bus ride rises
Q5) What effect does a price increase have on producers' total revenue?
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Page 6
Chapter 5: Efficiency and Equity
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Sample Questions
Q1) When there are external costs of production, such as when electric utilities burn coal, a competitive market will produce an inefficient level of output.
A)True
B)False
Q2) Farmer Jones knows that the marginal cost to produce a bushel of tomatoes is $5 per bushel. He also knows that a consumer is willing to pay a maximum of $9 for the bushel. The price of the bushel is $6 and Farmer Jones sells his bushel for $6. On this bushel, Farmer Jones earns a producer surplus equal to
A) $1.
B) $3.
C) $5.
D) $6.
Q3) The above table gives the market demand and market supply schedules for soda. What is the minimum price that producers are willing to accept for the 400th can of soda?
A) $0.40 per can
B) $0.50 per can
C) $0.60 per can
D) $0.70 per can
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Page 7
Chapter 6: Government Actions in Markets
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Sample Questions
Q1) The figure above shows the demand for and supply of labor of students in Smallville. If the minimum wage is set at $8 per hour, how many hours do students work?
A) 12,000 hours
B) 9,000 hours
C) 6,000 hours
D) None of the above answers is correct.
Q2) The above figure shows the demand and supply curves for housing in City B. What would be the effects of a rent ceiling equal to $1000 per month?
A) a surplus equal to 3000 apartments
B) a surplus equal to 250 apartments
C) a shortage equal to 3000 apartments
D) nothing because the rent ceiling has no effect on the equilibrium price and quantity
Q3) How does the elasticity of demand for labor affect the deadweight loss from an increase in the minimum wage? Why?
Q4) A student wrote: "A subsidy raises marginal social benefit above marginal social cost and eliminates the deadweight loss from underproduction." If you were the instructor, how would you correct this statement?
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8
Chapter 7: Global Markets in Action
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Sample Questions
Q1) A U.S. tariff on textiles would ________ U.S. clothing prices and ________ jobs in the U.S. textile industry.
A) reduce; decrease
B) reduce; increase
C) raise; decrease
D) raise; increase
Q2) Tariffs and import quotas both result in
A) lower levels of domestic production.
B) the domestic government gaining revenue.
C) lower levels of imports.
D) higher levels of domestic consumption.
Q3) Japan was accused of dumping in the steel industry within the United States when it
A) negotiated an illegal agreement to raise prices with U.S. steel industries.
B) prohibited imports of U.S. steel into Japan.
C) sold steel in the United States at a price below its cost of production.
D) negotiated an illegal trade deal with Canada.
Q4) What is "rent seeking?" How does it apply to restricting imports?
Q5) Define comparative advantage and discuss its role in international trade.
Q6) Discuss reasons why we see trade restrictions. Are any of these reasons valid?
Page 9
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Chapter 8: Utility and Demand
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Sample Questions
Q1) The diamond-water paradox of value can be explained by
A) distinguishing between total utility and marginal utility.
B) water's high level of utility relative to diamonds.
C) water's low price relative to diamonds.
D) the fact that utility cannot be measured.
Q2) The table above shows Danielle's utility from ice cream and romance novels.
a) What is Danielle's marginal utility from the 4th novel?
b) The price of ice cream is $5 per gallon and a novel is $10. If Danielle's budget for these two goods is $50 and she buys 2 gallons of ice cream, how many novels can she buy? If she buys 6 gallons of ice cream, what is her marginal utility per dollar spent on novels?
c) Which combination of the two goods is better: 4 gallons of ice cream and 3 novels or 6 gallons of ice cream and 2 novels?
Q3) A consumer maximizes total utility when all available income is spent and the A) marginal utility from each good is equal for all goods.
B) marginal utility per dollar from each good is equal for all goods.
C) dollars spent on the last unit of each good are equal for all goods.
D) total utility from all goods purchased is equal.
Q4) Explain the concept of consumer equilibrium.
Q5) Is "utility" another word for the cost we give up when we consume a good?
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Chapter 9: Possibilities, Preferences, and Choices
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Sample Questions
Q1) If the relative price of pizza in terms of movies is 3, this means that
A) the opportunity cost of a pizza is 3 movies.
B) 3 pizzas can be traded for 9 movies.
C) in terms of the dollars that must be spent to buy the product, pizza is more expensive than movies.
D) All of the above answers are correct.
Q2) The above figure gives your budget line between CDs and magazines. The slope of the budget line is ________ CD per magazine.
A) 1/2
B) -1/2
C) -1
D) -2
Q3) Given the budget line in the above figure, what is the relative price of pizza?
A) 10 gallons of milk per pizza
B) 6 gallons of milk per pizza
C) 4 gallons of milk per pizza
D) 2 gallons of milk per pizza
Q4) What is the meaning of the term "marginal rate of substitution"?
Q5) What does the slope of the budget line equal?
Q6) What is a household's real income?
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Chapter 10: Organizing Production
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Sample Questions
Q1) The above table shows the market shares for all the landscaping services in a suburban area. A merger between firms E and F would
A) raise the four-firm concentration ratio.
B) have no effect on the four-firm concentration ratio.
C) lower the four-firm concentration ratio.
D) create a monopoly.
Q2) A company does not need to know the price of each resource it employs if it wants to determine whether or not it is achieving
A) technological efficiency.
B) economic efficiency.
C) accounting efficiency.
D) managerial efficiency.
Q3) A corporation ________ taxes on its profits and its stockholders ________ taxes on any dividends made to them by the company.
A) pays; pay
B) pays; do not pay
C) does not pay; pay
D) does not pay; do not pay
Q4) What is the principal-agent problem as applied to corporations?
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Chapter 11: Output and Costs
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Sample Questions
Q1) The range of output over which a firm's average variable cost is decreasing is the same as the range over which its
A) marginal cost is increasing.
B) average fixed cost is decreasing.
C) average product is increasing.
D) average product is decreasing.
Q2) Total product is
A) the increase in output that results from a one-unit increase in the quantity of labor employed with all other inputs remaining the same.
B) maximum output that a given quantity of labor can produce.
C) maximum amount of output produced by a given quantity of labor divided by the given quantity of labor employed.
D) maximum amount of amount of output produced by a given quantity of labor divided by price of the output.
Q3) The average product of labor is
A) the inverse of the average product of capital.
B) the slope of the curve showing the marginal product of labor.
C) the slope of the curve showing the total product of labor.
D) total product divided by the total quantity of labor employed.
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Page 13
Chapter 12: Perfect Competition
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Sample Questions
Q1) The figure above shows depicts the marginal revenue and costs of a perfectly competitive firm. When 170 units are produced, the firm
A) would definitely shut down.
B) would incur an economic loss.
C) would increase its price.
D) has total costs less than $2,720.
Q2) In the long run, perfectly competitive firms cannot make an economic profit. Why?
Q3) What is the relationship between the price, P, and the average total cost, ATC, for a firm in perfect competition that makes an economic profit? That makes zero economic profit? That incurs an economic loss?
Q4) A perfectly competitive firm shuts down if the price of its product is
A) greater than its minimum average variable cost.
B) less than its minimum average variable cost.
C) greater than its maximum variable cost.
D) less than its minimum total cost.
Q5) Can a perfectly competitive firm make an economic profit in the short run? Can it incur an economic loss?
Q6) When do new firms enter a perfectly competitive market? When does entry stop?
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Chapter 13: Monopoly
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Sample Questions
Q1) A single-price monopoly's demand curve lies
A) below its marginal revenue curve.
B) on top of its marginal revenue curve.
C) above its marginal revenue curve.
D) on top of its total revenue curve.
Q2) The United States Mint is the only legal entity to produce circulating coinage for the United States. What are the barriers to entry, if any, that protect this firm from competition?
A) The United States Mint is a natural monopoly.
B) The United States Mint has a government license to produce coinage.
C) The United States Mint is a public franchise to produce coinage.
D) The United States Mint has a patent or copyright to produce coinage.
Q3) A natural monopoly that is regulated to set its price according to the marginal cost pricing rule will
A) incur an economic loss.
B) maximize its profit.
C) produce a quantity of output such that price is above average total cost.
D) produce a quantity of output such that marginal cost is above average total cost.
Q4) What is price discrimination? Give examples of price discrimination.
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Chapter 14: Monopolistic Competition
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Sample Questions
Q1) Firms in monopolistic competition make products that are
A) perfect complements.
B) close but not perfect complements.
C) perfect substitutes.
D) close but not perfect substitutes.
Q2) A firm's markup is the amount by which ________ exceeds ________.
A) price; average total cost
B) price; marginal cost
C) average total cost; marginal cost
D) price; average variable cost
Q3) Which of the following statements regarding a profit-maximizing monopolistically competitive firm is NOT true?
A) The MR curve lies below the demand curve.
B) The firm produces the quantity at which the MR curve intersects the MC curve.
C) The MC curve intersects the ATC curve at the ATC curve's lowest point.
D) The firm's price equals the price at which the MR curve intersects the MC curve.
Q4) List four characteristics of monopolistic competition.
Q5) What is a firm's markup? What does it show?
Q6) Why would a firm in a monopolistically competitive industry ever advertise?
Page 16
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Chapter 15: Oligopoly
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Sample Questions
Q1) A cartel is a group of firms that
A) produce differentiated products.
B) produce products that are complements.
C) agree to restrict output to boost their profit.
D) agree to boost output to boost their profit.
Q2) Which of the following is a defining characteristic of oligopoly?
A) barriers to entry
B) selling a homogeneous good
C) selling a differentiated good
D) collusion
Q3) The local banking industry currently has a Herfindahl-Hirschman index (HHI) value of 1945 and two of the competing banks have considered merging. Because the merger would raise the HHI by 155 points, the Federal Trade Commission would likely
A) challenge the merger.
B) not challenge the merger.
C) allow the merger as long as the HHI did not increase by more than 155 points as promised.
D) allow the merger under the condition that the HHI remain at the premerger level of 1875.
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Page 17
Chapter 16: Public Choices, Public Goods, and Healthcare
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Sample Questions
Q1) Which of the following is the BEST example a public good?
A) a parking space
B) a car
C) a stop sign
D) a toll road
Q2) If the consumption of a good or service by one person does not decrease the quantity available for another person, the good or service is
A) nonrival.
B) nonexcludable.
C) pure.
D) free.
Q3) Which of the following would most likely be a public good?
A) Sirius Satellite Radio is accessed through a subscription.
B) iTunes sells songs through their website.
C) a Mariah Carey CD
D) Michigan Radio is the state's most listened-to public radio service.
Q4) Some resources are private and others are common. Define a common resource, explain the definition, and provide an example of a private resource and a common resource.
Q5) Explain why some amount of ignorance can be rational.
Page 18
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Chapter 17: Externalities
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Q1) In the above figure, the efficient level of chemicals produced per week is
A) 0 tons.
B) 4 tons.
C) between 5 and 7 tons.
D) 8 tons.
Q2) In the absence of property rights, factories will dump waste into a waterway up to the point where ________ equals ________.
A) marginal social cost; marginal social benefit
B) marginal social cost; marginal private cost
C) marginal private cost; marginal private benefit
D) marginal private cost; marginal social cost
Q3) "Education in elementary and high schools has external benefits because families who have a lot of children do not pay any more than families without children." Is this statement correct or incorrect? Explain your answer.
Q4) A private subsidy has what effect on the amount of a good or service produced? Is a private subsidy an appropriate policy to offset the inefficiency from an external cost or an external benefit?
Q5) What is the tragedy of the commons?
Q6) Why should people without children pay some tax to support local schools?
Page 19
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Chapter 18: Markets for Factors of Production
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Sample Questions
Q1) If there is a monopsony operating in the labor market illustrated in the figure above and the federal government decides to institute a minimum wage of $8 an hour then the wage paid will ________ and the quantity of labor hired will ________.
A) increase; decrease
B) increase; increase
C) decrease; increase
D) decrease; decrease
Q2) The figure above shows a labor market. If there is a monopsony in this labor market, then increasing the minimum wage from $3 per hour to $5 per hour
A) will increase the quantity of labor employed.
B) will leave unchanged the quantity of labor employed.
C) will decrease the quantity of labor employed.
D) could increase, decrease, or leave unchanged the quantity of labor employed.
Q3) A decrease in the wage rate
A) shifts the firm's demand for labor curve rightward.
B) shifts the firm's demand for labor curve leftward.
C) leads to a movement along the demand for labor curve but does not shift the curve.
D) None of the above answers is correct.
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Page 20
Chapter 19: Economic Inequality
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Q1) In the above figure, the long-run effect of providing university education at no charge to all qualified applicants would be to shift the curve S<sub>H</sub>
A) and the curve S<sub>L</sub> leftward.
B) and the curve S<sub>L</sub> rightward.
C) leftward and the curve S<sub>L</sub> rightward.
D) rightward and the curve S<sub>L</sub> leftward.
Q2) In the figure above, if information technologies are introduced that are complements for high-skilled workers and substitutes for low-skilled workers, the wage rate of high-skilled workers will ________ and the wage rate of low-skilled workers will
A) rise; fall
B) fall; rise
C) fall; fall
D) rise; rise
Q3) In a Lorenz diagram for income, the line of equality shows
A) the most equitable income distribution.
B) how unequally incomes are distributed.
C) how much redistribution occurs.
D) the income distribution if everyone received the same income.
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Page 21
Chapter 20: Uncertainty and Information
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Q1) Andrew has the utility of wealth curve shown in the above figure. He owns an SUV worth $30,000, and that is his only wealth. There is a 10 percent chance that he will have an accident within a year. If he does have an accident, his SUV is worthless. Andrew would have the same expected utility as he currently has if his wealth was ________ and he faced no uncertainty.
A) $30,000
B) $27,000
C) $21,000
D) $18,000
Q2) "People buy insurance do protect themselves from moral hazard." True or false? Explain.
Q3) Life insurance companies often give applicants a physical examination to prevent A) moral hazard.
B) adverse selection.
C) signaling.
D) warranties.
Q4) When would a risk averse individual not insure a risky event?
Q5) How can a warranty at the seller's expense signal that a product is high quality?
Q6) What does it mean to be risk averse?
Page 22
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