Microeconomic Analysis
Question Bank
Course Introduction
Microeconomic Analysis explores the decision-making processes of individuals, households, and firms as they allocate limited resources among competing uses. The course covers core concepts such as consumer behavior, production and cost theories, market structures (perfect competition, monopoly, monopolistic competition, and oligopoly), and the role of government in addressing market failures and promoting efficiency. Emphasizing analytical tools and graphical methods, students learn to model economic choices, understand pricing mechanisms, and assess the impact of public policy on market outcomes. This foundational course equips students with the theoretical background necessary for advanced studies in economics and related fields.
Recommended Textbook
Microeconomics 7th Edition by Jeffrey M. Perloff
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2248 Verified Questions
2248 Flashcards
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Chapter 1: Introduction
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Sample Questions
Q1) Economists will use a model such as the law of demand
A) forever, ignoring all criticism.
B) until it is refuted by someone.
C) until the model produces the same results with added complexity.
D) until every microeconomic courses uses the model.
Answer: B
Q2) Most microeconomic models assume that decision makers wish to
A) make themselves as well off as possible.
B) act selfishly.
C) make others as well off as possible.
D) None of the above.
Answer: A
Q3) Governments do not respond to prices.
A)True
B)False
Answer: False
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Chapter 2: Supply and Demand
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Sample Questions
Q1) Repealing a tariff will likely
A) increase the quantity produced domestically, increase the quantity purchased domestically, and reduce the price charged domestically.
B) reduce the quantity produced domestically, increase the quantity purchased domestically, and reduce the price charged domestically.
C) reduce the amount produced abroad, reduce the price domestically, and reduce the quantity purchased domestically.
D) increase the amount produced abroad, increase the price domestically, and reduce the quantity purchased domestically.
Answer: B
Q2) Suppose the market for potatoes can be expressed as follows:
Supply: Q<sup>S</sup> = -20 + 10p
Demand: Q<sup>D</sup> = 400 - 20p
Solve for the equilibrium price and quantity.
Answer: Equate the RHS of the supply equation to the RHS of the demand equation: -20 + 10p = 400 - 20p.
Rearrange: 30p = 420 or p = 14.Plug this into either S or D to get Q: Q = 400 - 20(14)= 120.
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Chapter 3: Applying the Supply and Demand Model
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Sample Questions
Q1) If the supply curve is perfectly inelastic and the demand curve is a downward sloping straight line,what is the effect of a consumer ad valorem tax on equilibrium price and quantity?
A) Price remains unchanged and quantity increases.
B) Price decreases and quantity increases.
C) Price decreases and quantity remains unchanged.
D) Price and quantity decrease.
Answer: C
Q2) The above figure shows the supply and demand curves for rice in the U.S.and in Japan.Assume there is no trade between the two countries.If bad weather causes the supply curves in each country to shift leftward by the same amount,then
A) the price will increase the same amount in both countries.
B) the price will decrease the same amount in both countries.
C) the price will increase more in Japan than in the U.S.
D) the price will decrease more in Japan than in the U.S.
Answer: C
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Chapter 4: Consumer Choice
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Sample Questions
Q1) Joe's income is $500,the price of food (F)is $2 per unit,and the price of shelter (S)is $100.Which of the following represents his budget constraint?
A) 500 = 100F + 2S
B) 500 = 2F + 100S
C) S = 500 - 2F
D) All of the above.
Q2) If both prices decreases by 50%,
A) budget constraint will be unchanged.
B) slope of the budget constraint will increase.
C) slope of the budget constraint will decrease.
D) budget constraint will shift outward in a parallel fashion.
Q3) If two indifference curves were to intersect at a point,this would violate the assumption of A) transitivity.
B) completeness.
C) Both A and B above.
D) None of the above.
Q4) Explain the difference between the marginal rate of substitution and the marginal rate of transformation.
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Chapter 5: Applying Consumer Theory
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Sample Questions
Q1) Suppose the quantity of x is measured on the horizontal axis.If the price consumption curve is vertical when the price of x changes,then the demand for x is
A) perfectly elastic.
B) perfectly inelastic.
C) unit elastic.
D) There is not enough information to determine the price elasticity of demand for x.
Q2) A tax cut will unambiguously lower income-tax revenue.
A)True
B)False
Q3) Using the CPI to compensate workers for inflation is appropriate because,in the face of a change in relative prices,people should be allowed to purchase the same bundle as they did before the price changes.
A)True
B)False
Q4) Many manufacturers sell products labeled as having imperfections at a discount at their factory outlets but do not ship these imperfect goods to regular retail outlets.Why?
Q5) Why can't all goods be inferior?
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Chapter 6: Firms and Production
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Sample Questions
Q1) Technological efficiency is
A) a necessary and sufficient condition for profit maximization.
B) a sufficient but not necessary condition for profit maximization.
C) a necessary but not sufficient condition for profit maximization.
D) a theoretical construct with little connection to the real world.
Q2) Which situation is most likely to exhibit diminishing marginal returns to labor?
A) a factory that obtains a new machine for every new worker hired
B) a factory that hires more workers and never increases the amount of machinery
C) a factory that increases the amount of machinery and holds the number of worker constant
D) None of these situations will result in diminishing marginal returns to labor.
Q3) Which graph in the above figure represents the isoquants where,as the amount of labor used increases and the amount of capital used decreases,the marginal product of labor rises when capital per day is on the vertical axis and labor per day is on the horizontal axis?
A) Graph A
B) Graph B
C) Graph C
D) Graph D
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Chapter 7: Costs
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Sample Questions
Q1) Long-run average cost is never greater than short-run average cost because in the long run,
A) capital costs equal zero.
B) the firm can move to the lowest possible isocost curve.
C) wages always increase over time.
D) wages always decrease over time.
Q2) Explain why the marginal cost curve intersects a U-shaped average cost curve at its minimum point.
Q3) In the long run,fixed costs are
A) sunk.
B) avoidable.
C) larger than in the short run.
D) not included in production decisions.
Q4) If Option A costs $40 and yields 20 units of output and Option B costs $50 and yields 20 units of output,
A) Option B and Option A are equally economically efficient.
B) Option B is economically efficient relative to Option A.
C) Option A is economically efficient relative to Option B.
D) It is not possible to determine which option is more economically efficient.
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Chapter 8: Competitive Firms and Markets
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Sample Questions
Q1) If a competitive firm maximizes short-run profits by producing some quantity of output,which of the following must be true at that level of output?
A) p > MC
B) MR > MC
C) p AVC
D) All of the above
Q2) If a firm cannot earn profits in the short run,it will shut down.
A)True
B)False
Q3) If the shutdown rule,p < AVC,is the same in the short run and the long run,explain why the shutdown prices may be different.
Q4) Suppose market demand is Q = 1000 - 4p.If all firms have LRAC = 50 - 5q + q<sup>2</sup>,how many identical firms will there be when this industry is in long-run equilibrium?
Q5) The above figure shows the cost curves for a typical firm in a competitive market.If there are 200 identical firms,estimate the market quantity supplied when p = 4,8,and 10.
Q6) Draw a graph that shows how the short-run shutdown price changes when an input price increases.
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Chapter 9: Applying the Competitive Model
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Sample Questions
Q1) Assume the price of tomatoes increases.Which of the following causes would correspond to greater producer surplus?
A) an increase in supply
B) an increase in costs
C) a decrease in supply
D) an increase in demand
Q2) In economics,welfare analysis is useful to
A) gauge the validity of "mend it, don't end it."
B) determine who should receive income transfers.
C) determine who gains and who loses in a particular policy option.
D) prove which policy option is "best."
Q3) The above figure shows the market for rice in Japan where price is expressed in dollars.S represents the domestic supply curve,and the horizontal line at P = 1 represents the world supply curve.A $1 per unit tariff has the same effect on producer and consumer surplus as a quota of
A) Q<sub>1</sub> units.
B) Q<sub>2</sub> units.
C) Q<sub>2</sub> - Q<sub>1 </sub>units.
D) Q<sub>1 </sub>- Q<sub>2</sub> units.
Q4) Explain why the competitive output maximizes welfare.
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Chapter 10: General Equilibrium and Economic Welfare
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Sample Questions
Q1) A competitive equilibrium is Pareto-efficient because at the competitive equilibrium, A) prices have been allowed to adjust.
B) there are no further gains from trade.
C) the final outcome is different from the original inefficient endowment.
D) all members of society can be made better off.
Q2) If society were to maximize the utility of its best-off member,the final allocation would be
A) perfect equity.
B) on the contract curve.
C) Pareto-efficient.
D) one in which one person gets everything.
Q3) Suppose the production possibilities for two countries,producing either food or clothing,are shown in the above figure.They can each produce any linear combination as well.Measuring food on the horizontal axis,the joint production possibility frontier
A) will have a slope of -3/4 over the entire frontier.
B) will have a slope of -2 when less than 20 units of food are produced.
C) will have a slope of -1 when less than 20 units of food are produced.
D) will have a slope of -1/2 when less than 20 units of food are produced.
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Chapter 11: Monopoly
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Sample Questions
Q1) Which is an ironic solution to the government protected monopoly?
A) The government might try to "force" less competition in the market.
B) The government might "do more" by "doing less," i.e., by removing the monopoly's protection.
C) The dead weight loss goes to the government.
D) The inherent unfairness of monopoly can only be solved by dictatorship.
Q2) If the demand for a monopoly's output shifts rightward,the change in quantity produced is not predictable because
A) the monopoly is a profit maximizer.
B) the monopoly is a price taker.
C) the monopoly has no supply curve.
D) the monopoly's marginal cost curve might not be upward sloping.
Q3) When attempting price regulation,a government faces what problem(s)?
A) limited information
B) bribes
C) uncooperative firms
D) All of the above.
Q4) Forcing a natural monopoly to charge P = MC will not work.
A)True
B)False
Page 13
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Chapter 12: Pricing and Advertising
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Sample Questions
Q1) Which of the following sellers is most able to perfectly price discriminate?
A) a college or university
B) the post office
C) a clothing store
D) a grocery supermarket
Q2) Advertising that has the fine print "professional driver on a closed course,"
A) is likely engaged in persuasive advertising.
B) is likely engaged in informative advertising.
C) is likely engaged in strategic advertising.
D) is likely engaged in false advertising.
Q3) Suppose all individuals are identical,and their monthly demand for Internet access from a certain leading provider can be represented as p = 5 - (1/2)q where p is price in $ per hour and q is hours per month.The firm faces a constant marginal cost of $1.Profit maximizing two-part pricing results in the firm selling
A) 4.5 hours.
B) 10 hours.
C) 5 hours.
D) 8 hours.
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Chapter 13: Oligopoly and Monopolistic Competition
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Sample Questions
Q1) Minimum efficient scale refers to the lowest level of output at which
A) the firm can earn a profit.
B) average cost is minimized.
C) the firm will operate.
D) the average cost curve is downward sloping.
Q2) Which of the following market models results in the highest price assuming a fixed number of firms with identical costs and a given demand curve?
A) Cournot
B) Stackelberg
C) Monopoly
D) Price is the same in all three markets.
Q3) If two firms playing Cournot are identical with decreasing average costs,how should the firms divide production to maximize joint profits?
Q4) In a sense,a cartel is self-destructive because
A) it reduces consumer surplus.
B) it sets price above marginal cost.
C) each cartel member has the incentive to cheat on the cartel.
D) each cartel member earns economic profit.
Q5) What happens in a duopoly if both firms try to act as the Stackelberg leader?
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Chapter 14: Game Theory
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Sample Questions
Q1) The above figure shows the payoff to two airlines,A and B,of serving a particular route.If the two airlines must decide simultaneously,how many pure Nash equilibria are there?
A) 0
B) 1
C) 2
D) It cannot be determined.
Q2) In a simultaneous game where both players prefer doing the opposite of what the opponent does,a Nash equilibrium does not exist.
A)True
B)False
Q3) The above figure shows the payoffs to two firms deciding to open a gasoline station in an isolated town.If firm A decides first,what will happen? If there is a $60 fee to enter this market,what will happen?
Q4) What is the counter-intuitive solution to a mixed strategy?
A) Player A makes Player B indifferent between its strategy choices.
B) Player A makes itself indifferent between its strategy choices.
C) Player A changes the rules of the game.
D) There are no mixed strategies in most games.
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Chapter 15: Factor Markets
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Sample Questions
Q1) The difference between the marginal expenditure and the wage is greater when the supply curve of labor is
A) less elastic at the monopsony optimum.
B) more elastic at the monopsony optimum.
C) more elastic than the demand curve.
D) The difference does not depend on any elasticity.
Q2) If a firm pays its workers $10 per hour,the marginal product of labor is 5 units per hour,and the price of the firm's product is $15 per unit,what is the price elasticity of demand facing the firm?
A) -1.15
B) -2.15
C) -1.0
D) -3.56
Q3) In a perfectly competitive resource market the labor supply curve facing the single firm is
A) vertical.
B) horizontal.
C) downward-sloping.
D) upward-sloping.
Q4) Why is the short-run demand curve for labor downward sloping?
Page 17
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Chapter 16: Interest Rates, Investments, and Capital Markets
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Sample Questions
Q1) Alchemy was the attempt to discover a process by which base metals,such as lead,could be turned into gold.If an alchemist had been successful,
A) all the lead in the world would have been added to the world's gold supply.
B) all the lead in the world would have replaced the world's gold supply.
C) all the lead in the world would only have been added to the world's gold supply when it was converted to gold.
D) the alchemist would likely have been killed by the owners of real gold.
Q2) In developed industries,the interest rate tends to be lower than in newer industries.What could explain this?
A) greater demand for loans in the developed industry
B) greater supply for loans in the new industry
C) greater demand for loans in the new industry
D) lower supply for loans in the developed industry
Q3) Why do economists predict that investment increases when the real rate of interest falls?
Q4) You grow poplar trees.The lumber yard purchases cut trees from you.The trees grow 1 foot per year.Assuming a constant real price per foot for poplar and a real interest rate of 3%,would you sell a 20-foot tree today?
Page 18
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Chapter 17: Uncertainty
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Sample Questions
Q1) Usury laws result in banks making less credit available to lower-income households because
A) higher-income households will pay a higher interest rate than lower-income households.
B) loans made to higher-income households have no risk.
C) loans to lower-income households are riskier than loans to higher-income households.
D) the regulated interest rate does not adequately compensate the bank for the risk of the loan to a lower-income household.
Q2) The above figure shows Bob's utility function.He currently has $100 of wealth,but there is a 50% chance that it could all be stolen.Bob is risk averse because
A) his utility function is concave.
B) he has diminishing marginal utility of wealth.
C) he is willing to pay a premium to avoid a risky situation.
D) All of the above.
Q3) On any given day,a salesman can earn $0 with a 20% probability,$100 with a 40% probability,or $300 with a 20% probability.Calculate the expected value and variance of his earnings,and interpret.
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Chapter 18: Externalities, Open-Access, and Public Goods
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Sample Questions
Q1) A monopoly might produce less than the socially optimal amount of pollution because
A) it likes to be a good citizen.
B) it sets price above marginal cost.
C) it earns economic profit.
D) it internalizes the external costs.
Q2) What is one reason drunk driving is held in such disrepute?
A) Drunk driving imposes high potential costs on non-drunk drivers.
B) Drunk driving destroys cars and telephone poles, causing disruption in essential services.
C) Only drunk drivers cause automobile fatalities.
D) Drunk drivers impose high potential costs on other drunk drivers.
Q3) Explain why the social demand curve for a public good is the vertical sum of the demand curves of each individual.
Q4) Which of the following is not a common property?
A) a city park
B) a main street
C) a public beach
D) a movie screening
Q5) Explain why the optimal amount of pollution is often not zero.
Page 20
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Chapter 19: Asymmetric Information
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Sample Questions
Q1) Firms are not allowed to ask certain questions during job interviews,including marital status or how many children you have.Why is this the case?
A) People with children are more productive, thus it is unfair if the firm knows this information.
B) Firms might use the answers to these questions as a means of statistical discrimination.
C) People with children are less productive, thus the firm has no right to this information.
D) Such questions violate the privacy clause of the U.S. Constitution.
Q2) Screening and signaling in the labor market are inefficient
A) unless college costs are relatively low.
B) unless they result in a better job match.
C) because the benefits are spread out over many firms.
D) because they raise the wage paid to all workers.
Q3) If consumers have limited information about price and search costs exist,then
A) the result must be that all firms will charge the same price.
B) the monopoly price must result.
C) the full-information, competitive price is not an equilibrium.
D) the difference in prices between firms will be greater than the search cost.
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Chapter 20: Contracts and Moral Hazards
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Sample Questions
Q1) The outcome of the state of nature effects the payoff to the agent under a A) fixed-fee contract.
B) hire contract.
C) contingent contract.
D) All of the above.
Q2) Many professional sports athletes have incentive clauses in their contracts.These indicate that
A) the team owner has asymmetric information.
B) the athlete might engage in moral hazard, which the team owner wishes to avoid.
C) the athlete might engage in adverse selection, which the team owner wishes to avoid.
D) the athlete has stronger negotiators.
Q3) In the presence of asymmetric information,
A) all contracts are efficient.
B) efficiency in risk bearing cannot be achieved.
C) a trade-off exists between risk-bearing efficiency and production efficiency.
D) no contracting will take place.
Q4) Explain how more than one possible state of nature affects contract choices.
Q5) Explain why checks on principals might be necessary.
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