Introduction to Microeconomic Theory
Final Test Solutions
Course Introduction
Introduction to Microeconomic Theory provides students with a foundational understanding of how individuals and firms make decisions regarding the allocation of limited resources. The course explores concepts such as supply and demand, consumer behavior, production and costs, market structures, and the role of government in the marketplace. Through the use of models and real-world examples, students learn to analyze economic problems, predict outcomes, and evaluate the effects of various policy interventions. This course equips learners with critical tools to interpret everyday economic events and make informed decisions as consumers and future professionals.
Recommended Textbook Microeconomics and Behavior 8th Edition by
Robert H. Frank
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18 Chapters
901 Verified Questions
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Page 2
Chapter 1: Thinking Like an Economist
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Sample Questions
Q1) Suppose you must live on your own anyway.What is the cost of going to school?
A)$17,200
B)$7,200
C)$15,200
D)$16,200
Answer: C
Q2) Suppose you buy two tickets to the concert; one for you and one for your girlfriend.Nevertheless, the day of the concert your car brakes down preventing both of you from attending it.Assuming both you and your girlfriend had the same preferences, which of the two of you stand to loose the most from not being able to attend the concert?
A)You
B)Your girlfriend
C)Both of you stand to loose the same
D)None of you would stand to loose anything
Answer: C
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3
Chapter 2: Supply and Demand
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Sample Questions
Q1) If the demand curve of a market is P = 14 - Q and the supply curve is P = 2 + 2Q, what is the surplus created if a price support of 12 is imposed in the market?
Answer: The equilibrium price of 10 is now replaced with a price of 12.At 12 the quantity demanded will be 2 and the quantity supplied will be 5 leaving a surplus of 3.
Q2) The real price of a product is
A)Its absolute level on any given day
B)Its absolute level on any given day divided by the relevant price index
C)Its absolute level on any given day minus any external costs of the production of the good
D)Its price relative to the price of other goods and services
Answer: D
Q3) Say the price of MP3 songs increases. Other things equal the:
A) Demand for MP3 songs will decrease.
B) The quantity demanded for MP3 songs will decreases.
C) The supply for MP3 songs will increase.
D) The quantity supply for MP3 songs will decrease.
Answer: B
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Page 4
Chapter 3: Rational Consumer Choice
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Sample Questions
Q1) Suppose your parents are thinking of buying you a brand new car as a graduation present.Economists would argue that it would be better if:
A)They gave you a cash gift equal to the value of the car regardless of how much you need a car right now
B)They gave you a cash gift equal to the value of the car long as you really don't have much use for a car right now
C)You sell the car to someone else right away in exchange for the cash
D)They ask you for what kind of car you want first and then buy it for you
Answer: A
Q2) The "composite good" refers to
A)Large purchases that cannot be incrementally divided
B)An abstraction requiring more than a three dimensional graph
C)Income not spent on good X in a two-dimensional graphical presentation
D)The notion that consumer pleasure cannot be modeled graphically
Answer: C
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Chapter 4: Individual and Market Demand
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Sample Questions
Q1) One of the management groups is arguing for a price reduction as a way to sell more gallons and increase income.Is this a good suggestion?
Q2) Which statement is definitely true about shelter in the graph above.
A)The demand curve is negatively sloped over the price range shown
B)It is clearly a normal good throughout the range shown
C)It is an inferior good throughout the range shown
D)The income and substitution effects must be shown before any of the above statements can be definitely true
Q3) A vertical demand curve is
A)Perfectly elastic
B)Perfectly inelastic
C)Unit elastic
D)Has elasticity of zero
Q4) The point on a linear demand curve where revenue is maximized is
A)Where elasticity equals -1
B)Where elasticity equals 0
C)Where elasticity equals infinity
D)Where the price is the highest
Q5) Based on your sketch, is the good a normal or inferior good?
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Chapter 5: Applications of Rational Choice and Demand
Theories
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Sample Questions
Q1) Suppose your university decides to increase parking fees in order to deal with the shortage of parking spaces.Nevertheless, the president of your student body convinces the university to pay back the amount spent on higher parking fees to students in the form of a rebate at the end of the school year.Therefore, the increase in parking fees will:
A)NOT solve the parking shortage
B)Reduce demand for parking and hence alleviate the parking shortage
C)Will have no effect since it will be offset entirely by the rebate
D)Make the parking shortage even worse
Q2) If the interest rate increases to 4 percent will cause you to
A)Save more of your income
B)Save less of your income
C)Be more time patient
D)Be more time impatient
Q3) In a diagram, consumer surplus is always represented by the area:
A)between the demand curve and the supply curve
B)between the demand curve and the price
C)below the demand curve
D)above the demand curve
Q4) What will happen in the market to bring about equilibrium?
Page 7
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Chapter 6: The Economics of Information and Choice
Under Uncertainty
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Sample Questions
Q1) What is the maximum you will pay for the bike check-in now?
Q2) If the slope of a person's utility function for different money prizes is linear, the person
A)Is risk averse
B)Is a risk lover
C)Is indifferent to risk
D)We can't really say
Q3) When a job applicant discloses information that could be seen as favorable by potential employers, other job candidates:
A)must do the same in order to get hired
B)will be seen as more unfavorable by potential employers
C)will earn less compensation
D)will be seen as more favorable by potential employers
Q4) The extensive sunk costs of heavily advertised products suggest a reason for believing that those products will
A)Turn out to have higher quality than unadvertised products
B)Turn out to have lower quality than unadvertised products
C)Cause consumers to question their intrinsic value
D)Be hard to sell to the consumer without heavy persuasion
Page 8
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Chapter 7: Explaining Tastes: The Importance of Altruism and
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Sample Questions
Q1) Use the following to answer the next three questions:
C.The students with the best grades are the ones who stay on in school.From this information answer the following questions.
Q2) In this chapter, virtue can lead to material gain and therefore is an inevitable part of the social order.Evaluate this view of virtue or moral behavior.Is material gain a sufficient motive for morality? Is moral behavior based on more than the possibility for personal gain?
Q3) In a society consisting of 75% cooperators and 25% defectors, with an 8-unit payoff to a cooperator who interacts with another cooperator and a 0-unit payoff to the cooperator who interacts with a defector, if the cost of scrutiny is 2, the cooperator
A)Should pay the cost of scrutiny even if it were 3
B)Should not interact with either cooperators or defectors
C)Should not pay the cost of scrutiny
D)Will break even by paying the cost of scrutiny
Q4) Describe a situation where you have been a cooperator and explain how the commitment problem was solved.In other words, how did you know your partner would not cheat?
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Chapter 8: Cognitive Limitations and Consumer Behavior
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Sample Questions
Q1) Which of the following is true?
A)People prefer the toll ways where they throw in some change every dozen miles or so to a toll road that has one payment at the end of the trip
B)Budgeting your income will often result in more total spending
C)High prices and rebates on cars simply irritate the consumer and make him feel treated like a fool
D)People tend to enjoy the process of buying a car more when the process involved difficult choices
Q2) One person out of every 1000 is an economist and 90% of them are math oriented.If only 5 % of the population is math oriented and you pick a person at random who happens to be math oriented, it is
A)Likely that the person chosen is an economist rather than an non-economist
B)Likely that the person chosen is not an economist rather than an economist
C)Almost certain the person will be an economist
D)Almost impossible the person will be an economist
Q3) It has be said that people would never build a house if they had to go to the lumberyard and buy the framing lumber and each building material by the piece.Where did such a notion come from? Might it be true?
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10
Chapter 9: Production
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Sample Questions
Q1) In a typical short-run production function, before diminishing returns set in,
A)The slope of the total product curve is decreasing
B)The slope of the total product curve is increasing
C)The slope of the total product curve rises and then falls before diminishing returns sets in
D)The slope of the total product curve falls and then rises before diminishing returns sets in
Q2) In a typical production function the relevant factors of production are land, labor, capital, and
A)Raw materials
B)Technology
C)Entrepreneurship
D)Resources
Q3) (Appendix) Suppose the production function for widgets is Q = (KL)<sup>½</sup>.If capital is fixed at 4 units, what is the marginal product of labor when you produce 10 units of output?
A)0.4
B)1
C)1.5 D)0.2
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Chapter 10: Costs
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Sample Questions
Q1) If at the current level of production the marginal product of labor is 4 while the marginal product of capital is 2 then in order to minimize your costs of production you should use:
A)More capital and less labor
B)More labor and less capital
C)More of both inputs
D)The same amount of both inputs
Q2) Producing an additional unit whose marginal cost exceeds the average total cost incurred thus far has the effect of pulling the
A)Fixed cost up
B)Average cost up
C)Average cost down
D)Total cost down
Q3) Average fixed cost
A)Is a horizontal line
B)Increases steadily as output increases
C)Decreases steadily as output increases
D)Exhibits diminishing returns
Q4) Why does the AVC reach its minimum before the ATC reaches its minimum?
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Chapter 11: Perfect Competition
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Q1) In the long run for a competitive firm,
A)The firm is at the bottom of its short run average cost curve
B)The firm is at the top of its long run average cost curve
C)Marginal cost is greater price
D)The firm is making economic profits
Q2) Say a competitive firm is producing at point where ATC = $10, AVC = $2. If the firm charges $5 for its output, the in the short-run this firm should:
A)Shutdown production
B)Exit the industry
C)Continue to operate
D)Try to reduce its fixed costs
Q3) A firm's total revenue curve is given by 3Q<sup>2</sup>- 7Q.The firm
A)Is perfectly competitive
B)May be perfectly competitive
C)Is not perfectly competitive
D)One cannot tell
Q4) How much profit is each firm making if fixed costs are $375 per firm?
Q5) What is the producer surplus for each firm?
Q6) What is the equilibrium price and quantity produced by the industry as a whole?
Q7) How can a firm stay in business if it makes no economic profit in the long run?
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Chapter 12: Monopoly
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Sample Questions
Q1) The marginal revenue curve of a single price monopolist
A)Lies above the demand curve
B)Lies below the demand curve
C)Lies along the demand curve
D)Is a horizontal line
Q2) In long-run equilibrium for a single-price monopolist
A)The plant size is always the one at the bottom of the long-run ATC curve
B)Output is at the level where short-run and long-run marginal cost are the same
C)Marginal cost equals ATC
D)Marginal revenue equals price
Q3) If the firm facing the demand curve P = 10 - Q still has zero marginal costs and is now a perfect price discriminator instead of a single price monopolist, what will profits be if fixed costs are 12?
A)10
B)12
C)13
D)38
Q4) If the firm in question 44 can perfectly price discriminate and each unit of output is infinitely divisible, what quantity would it produce and what would its profit (loss) situation then be?
Page 14
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Chapter 13: Imperfect Competition: a Game-Theoretic Approach
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Sample Questions
Q1) Which of the following markets can most accurately be described as monopolistically competitive?
A)Toothpaste
B)Milk
C)Electricity
D)Apples
Q2) The unraveling problem in interdependent relationships arises from a situation in which
A)There is a known, finite number of future interactions
B)There is not a known, finite number of future interactions
C)Interactions suddenly and surprisingly cease
D)A recession hits an industry
Q3) If the town was one restaurant below its optimal number when you are brought in as a consultant to help decide some planning issues, and the city fathers want to know how much the town could save overall if it built another restaurant, what would you tell them?
Q4) What is the rate at which transportation costs are falling when the optimal number of restaurants is reached?
Q5) Calculate the optimal number of restaurants without using the graph.Show your work.
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Chapter 14: Labor
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Q1) How many laborers will be hired and what will the wage be if both product and labor markets are perfect and the going wage is $18 per worker? ______
Q2) Why is it difficult to get a cab on a rainy day?
A)Cab drivers have backward bending daily supply curve
B)Cab drivers must drive much slower when it rains
C)The demand for cabs shifts left and the quantity of cabs supplied falls
D)Cabs don't like to work on rainy days
Q3) What is the wage rate paid to the laborer in Question 2 above?
Q4) The upward sloping portion of the supply curve for labor implies that
A)Higher wages lead to an increase in hours of work supplied
B)The law of diminishing returns has settled in
C)Higher wages lead to fewer hours of work supplied
D)A minimum wage law is in effect
Q5) We see a backward-bending labor supply curve whenever
A)Minimum wages are set too low
B)Minimum wages are set too high
C)The income effect dominates the substitution effect over some range of wage rates
D)The substitution effect dominates the income effect over some range of wage rates
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Chapter 15: Capital
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Sample Questions
Q1) Suppose Chase Bank owns a truck that it leases to Ryder Inc.The truck's value is $100,000 and it is expected to deteriorate at a rate of 5 percent per year.If the real interest rate is 2 percent, then Chase's total costs of owning the truck are:
A)$7,000
B)$100
C)$5,000
D)$1,000
Q2) Risk premium is:
A)A payment differential necessary to compensate the investor for having to bear a risk
B)The additional payment paid by bonds issued by the federal government
C)The tendency of some investors to incur in high risk
D)The benefits of buying from a trustworthy institution
Q3) Suppose that a technological breakthrough allow oil producers to extract oil reserves previously unavailable. Use a diagram to show the effect this discovery would have over the long run price path of oil. What would be the effect this would have over the price of alternative sources of energy such as solar and so forth.
Q4) What is the maximum you should be willing to pay for the machine?
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17
Chapter 16: Externalities Property Rights and the Coase
Theorem
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Q1) If grazing land is used by all individuals on a free open range, they will operate until
A)The AP of the land equals the opportunity cost of the input
B)The MP of the land equals the opportunity cost of the input
C)The TP of the land equals the opportunity cost of the input
D)The MP of the land is larger than the opportunity cost of the input
Q2) If there were no controls over fishing how many vessels would be sent out fishing?
A)0
B)6
C)7
D)8
Q3) The diagram above shows the general equilibrium model for a small economy.Fort this economy, the economically efficient allocation of resources occurs at point: A)A
B)B
C)C D)D
Q4) Define in technical terms the tragedy of the commons.
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Chapter 17: Explaining Tastes: The Importance of Altruism and
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Sample Questions
Q1) The market demand curve for a public good is found by
A)Horizontally summing the individual demand curves
B)Vertically summing the individual demand curves
C)Horizontally summing the firm's demand curves
D)Vertically summing the firm's demand curves
Q2) If the city father (Elmer), true statesman that he is, tried to work toward efficiency by structuring a user benefit tax on the July 4 display, and if he were able to assess accurately the benefits received, how would he tax the citizens?
Q3) If voters are rational, they are more likely to vote
A)In large national elections
B)If the issues are complex
C)In small local elections
D)When they are employed
Q4) According to the negative income tax, the breakeven income level for a program whose tax credit is $3,000 and whose tax rate is 30 percent would be:
A)$10,000
B)$6,000
C)$4,500
D)$9,000
Page 19
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Chapter 18: General Equilibrium and Market Efficiency
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Q1) A tax on all goods consumed
A)Would not cause distortions if all consumer goods are taxed at the same rate
B)Would be more efficient than an income tax
C)Would cause distortions between consumer goods and other goods and services
D)Will increase the welfare of all consumers
Q2) The diagram above shows the general equilibrium model for a small economy.Fort this economy, the economically efficient allocation of resources occurs at point:
A)A
B)B
C)C
D)D
Q3) In the Edgeworth box diagram if the initial allocation of consumer goods is off the contract curve then we can be sure that
A)Both parties can be made better off
B)Trade will occur if allowed and transactions costs are high
C)The initial allocation is unfair
D)The initial allocation is irrelevant
Q4) Graph the problem of Question 35 above and show the solution on the graph.
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