Course Introduction
Microeconomic Analysis Study Guide Questions
Microeconomic Analysis explores the foundational concepts and analytical tools used to understand individual economic actors consumers, firms, and markets. The course examines the principles of supply and demand, consumer choice theory, production and cost functions, and how prices and quantities are determined in various market structures such as perfect competition, monopoly, and oligopoly. Through rigorous analysis and practical applications, students learn how microeconomic theory informs business decisions and policy-making, and how resource allocation and efficiency are attained within an economy.
Recommended Textbook
Modern Principles Microeconomics 3rd Edition by Tyler Cowen
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Page 2
Chapter 1: The Big Ideas
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Sample Questions
Q1) During the period of dramatic inflation in Zimbabwe, if you had one trillion Zimbabwean dollars, you still were not very rich.
A)True
B)False
Answer: True
Q2) Economic booms and busts:
A) can be moderated but cannot be avoided.
B) can be avoided by employing growth-encouraging institutions.
C) do not occur, since the economy always grows at a constant pace.
D) occur only when countries have bad institutions.
Answer: A
Q3) Economists have discovered that economic booms and busts:
A) are needless and can be eliminated.
B) should be encouraged because they help make people better off.
C) can be moderated but not eliminated.
D) cause people to specialize so they become more productive.
Answer: C
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Chapter 2: The Power of Trade and Comparative
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Sample Questions
Q1) Both Maria and Jorge bake cookies and bread, but Maria spends less time baking each batch of cookies and each loaf of bread than Jorge does. Which of the following is TRUE?
A) Maria has an absolute advantage in baking both cookies and bread.
B) Maria has a comparative advantage in baking both cookies and bread.
C) Jorge has an absolute advantage in baking both cookies and bread.
D) Jorge has a comparative advantage in baking both cookies and bread.
Answer: A
Q2) The Dark Ages was a period in which trade:
A) expanded because of rising transportation and communication costs.
B) expanded because of falling transportation and communication costs.
C) decreased because world markets became more isolated.
D) decreased because world markets became less isolated.
Answer: C
Q3) Trade increases productivity when production is carried out by the person/group with the comparative advantage.
A)True
B)False
Answer: True
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Chapter 3: Supply and Demand
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Sample Questions
Q1) The most important concepts in economics, according to the textbook, are supply, demand, and the:
A) idea of equilibrium.
B) opportunity to barter.
C) quantity of sales.
D) the level of prices.
Answer: A
Q2) Suppose it is widely believed that the price of flat-screen, high-definition televisions will be lower next year. What will happen as a result of such beliefs?
A) The demand for flat-screen TVs will increase now.
B) The demand for flat-screen TVs will decrease next year.
C) The demand for flat-screen TVs will decrease now.
D) The demand for flat-screen TVs will not change now.
Answer: C
Q3) Producer surplus can be defined as the revenue producers make from selling goods in a market.
A)True
B)False
Answer: False
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Page 5
Chapter 4: Equilibrium
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Sample Questions
Q1) In Vernon Smith's supply and demand lab experiment:
A) Smith knew the true demand and supply curves, but the subjects did not.
B) the subjects did not know their own willingness to pay or sell.
C) it took a long time to arrive at equilibrium.
D) there were many unrealized gains from trade.
Q2) After adjusting for inflation, a comparison of the price of leg warmers reveals that the price of leg warmers was significantly higher in the 1980s than it is today. Which of the following can explain this?
A) Since the 1980s jeans have become preferable to leg warmers, decreasing the demand for leg warmers.
B) New regulation on the importing of leg warmers made abroad decreased the supply of leg warmers to the United States.
C) An increase in the price of cotton used to make leg warmers has led to a decrease in the price of leg warmers today.
D) The expected increase in the price of yarn has led to a decrease in the price of leg warmers today.
Q3) In the long run, will the market price for a good/service always equals the equilibrium price? Explain why or why not.
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Chapter 5: Elasticity and Its Applications
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Sample Questions
Q1) (Figure: Slave Redemption) Refer to the figure. Assume the graph illustrates the Sudanese slave trade. When slave redeemers enter the market, the total number of freed slaves is ________ and the net number of freed slaves is ________.
A) 1,500; 500
B) 1,000; 400
C) 1,100; 100
D) 500; 1,000
Q2) Economic theory suggests that gun buyback programs:
A) are effective in reducing the number of guns on city streets.
B) do not reduce the number of guns on city streets.
C) are most effective if the supply curve of guns is perfectly elastic.
D) reduce the demand for new and better-functioning guns.
Q3) The demand for Michelin tires is ______ elastic than the demand for tires, and the demand for chocolate is ______ elastic than the demand for Godiva chocolate.
A) more; more
B) less; more
C) less; less
D) more; less
Q4) Summarize the factors that cause goods to have a more inelastic supply.
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Chapter 6: Taxes and Subsidies
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Sample Questions
Q1) If the demand and supply curves have equal slopes in absolute value, the burden of a commodity tax will be split equally regardless of on whom the tax is placed.
A)True
B)False
Q2) Buyers bear a greater share of a tax burden when a tax is imposed in a market where:
A) demand is more elastic than supply.
B) supply is more elastic than demand.
C) the tax is imposed on sellers.
D) the tax is imposed on buyers.
Q3) Not only do both wage subsidies and minimum wages increase wages, but:
A) they also increase employment.
B) they also reduce employment.
C) subsidies increase employment, whereas minimum wages reduce it.
D) subsidies reduce employment, whereas minimum wages increase it.
Q4) Taxes drive a wedge between what buyers pay and sellers receive in a market.
A)True
B)False
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Chapter 7: The Price System
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Sample Questions
Q1) Which economist described the market as being driven by "an invisible hand"?
A) Milton Friedman
B) John Locke
C) Friedrich Hayek
D) Adam Smith
Q2) Higher oil prices made growing flowers too expensive in colder climates, which helped give rise to the Kenyan flower industry.
A)True
B)False
Q3) People use futures contracts to:
A) increase prices.
B) reduce risk.
C) profit from past prices.
D) reduce information in the market.
Q4) In the event of an oil supply disruption, the price system provides incentives to allocate oil away from low-value uses.
A)True
B)False
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Page 9
Chapter 8: Price Ceilings and Floors
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Sample Questions
Q1) Which statement is FALSE?
A) A frost that destroys half the orange crop will create a surplus of oranges.
B) It is possible to have a shortage of a good even if its supplies are abundant.
C) Politicians often blame speculators and profiteers for rising prices rather than changes in supply and demand.
D) To eliminate a shortage, prices must rise.
Q2) If a price floor is below the equilibrium price, a shortage will result.
A)True
B)False
Q3) The price controls of the early 1970s caused:
A) lead to be removed from gasoline.
B) the disappearance of the full-service gas station.
C) gas stations to stay open for more hours.
D) an excess supply of gasoline.
Q4) Price ceilings are always good for consumer welfare. A)True B)False
Q5) Rent controls have five important effects on the market for apartments. Please list and provide an example of each effect.
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Chapter 9: International Trade
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Sample Questions
Q1) Trade makes people better off when preferences are the same.
A)True
B)False
Q2) Briefly describe a few activities that a typical student might do on any given day that reflect the effects of globalization.
Q3) Trade restrictions:
A) help to save jobs in the protected industry, which causes these workers to spend more money in other industries, netting increased output and job opportunities throughout the economy.
B) are a very inexpensive way of saving jobs, cheaper than job retraining programs.
C) may save jobs in one industry but at a cost of less job growth in other industries. D) often have little support by politicians, media, and the public.
Q4) The United States is the only government that engages in protectionist policies.
A)True
B)False
Q5) What are the gains and losses of a trade restriction versus free trade? Explain carefully.
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Chapter
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Sample Questions
Q1) One advantage of regulation as a method for reducing pollution is that the government can determine the maximum quantity of pollution that is legally allowed.
A)True
B)False
Q2) Which of the following statements is TRUE?
I. The EPA's tradable allowances program for sulfur dioxide establishes property rights to pollute and helps reduce transaction costs by distributing allowances, maintaining databases, and monitoring emissions.
II. One criticism of tradable allowances is that they prohibit nonbusinesses and environmental groups from purchasing the allowances.
III. The tradable allowances for sulfur dioxide have performed poorly because electricity output has increased, causing a rise in sulfur dioxide levels.
A) I only
B) II and III only
C) I, II, and III
D) III only
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Chapter 11: Costs and Profit Maximization Under Competition
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Sample Questions
Q1) Which statement about cost is correct?
A) Marginal cost is constant.
B) Marginal cost is always falling.
C) Average total cost is U-shaped.
D) Average total cost always declines.
Q2) In competitive markets, the demand curve faced by the individual firm is:
A) equal to the market demand curve.
B) perfectly elastic.
C) perfectly inelastic.
D) downward sloping.
Q3) Which of the following statements is FALSE?
A) AC = TC/Q
B) A firm that produces 100 units at a total cost of $500 has an average cost of $5 per unit.
C) Firms will earn positive profits if price exceeds average cost.
D) When marginal cost is below average cost, average cost is rising.
Q4) A firm should always shut down if it is earning negative profits.
A)True
B)False
13
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Chapter 12: Competition and the Invisible Hand
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Sample Questions
Q1) When resources move from a low-profit industry into a high profit industry:
A) the value of production falls.
B) the profits of the low-profit industry fall and the profits of the high-profit industry rise.
C) the profits of the low-profit industry rise and the profits of the high-profit industry fall.
D) the Invisible Hand Property 2 is violated.
Q2) If the marginal cost of production at Firm 1 is less than the marginal cost of production at Firm 2 but the overall costs of production are lower on average at Firm 2, then:
A) Firm 2 should produce all of the output.
B) Firm 1 should produce all of the output.
C) Firm 1 should produce output up to the point that its marginal costs of production are equal to the marginal costs of Firm 2.
D) Firm 2 should produce additional output up to the point that its average costs are less than its marginal costs.
Q3) If P > AC in competitive markets, firms enter the market until P = AC.
A)True
B)False
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Page 14
Chapter 13: Monopoly
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Sample Questions
Q1) Which of the following was the result of government deregulation of cable TV in the 1980s?
A) The price of cable television fell.
B) The number of cable television stations increased.
C) The quality of cable television declined dramatically.
D) Consumers were upset as the price of cable television rose dramatically.
Q2) High prices charged by monopolists will cause the monopolists':
A) gains to exceed the lost consumer surplus.
B) gains to be less than the lost consumer surplus.
C) losses to exceed the consumer gain.
D) losses to be less than the consumer gain.
Q3) Patent buyouts could reduce deadweight loss from monopolies, while still protecting the incentive to innovate.
A)True
B)False
Q4) The primary reason that AIDS drugs are priced well above cost is monopoly power. A)True
B)False
Q5) Explain how a profit-maximizing monopolist chooses level of output and the price of goods.
Page 15
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Chapter 14: Price Discrimination
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Sample Questions
Q1) Which of the following statements is TRUE?
A) Successful price discrimination requires that younger people always pay more than older people.
B) Successful price discrimination requires that older people always pay more than younger people.
C) Price discrimination is a common practice.
D) Price discrimination is used by airlines and movie theaters infrequently.
Q2) (Figure: Monopolist) Refer to the figure. Based on the demand curves for a monopolist's product in two different markets-Market A and Market B-through the process of price discrimination, how much profit is the monopolist making in Market A?
A) $270
B) $450
C) $830
D) $627.50
Q3) Arbitrage makes it easier for a firm to set different prices in different markets.
A)True
B)False
Q4) What conditions are necessary for a firm to practice price discrimination?
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Page 16
Chapter 15: Oligopoly and Game Theory
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Sample Questions
Q1) What are some reasons why cartels could fail?
Q2) If most cartel members keep their agreement to cut back production:
A) it's not profitable in the short run for another member to increase production.
B) it's profitable in the short run for another member to increase production.
C) cheating by another member won't be detected.
D) the losses associated with cheating are internalized by the cheater.
Q3) Copper is a natural resource. Why is the copper cartel not successful?
Q4) Most cartels are:
A) illegal in the United States as a result of the Sherman Antitrust Act.
B) illegal everywhere in the world.
C) legal in the United States as long as the government is able to regulate prices in the market.
D) legal in the United States as long as the firms involved are foreign-owned.
Q5) In the 1990s, the FBI and Department of Justice sued:
A) Avomeen.
B) Archer Daniels Midland.
C) Bunge Limited.
D) the Andersons Inc.
Q6) List the four most common "Barriers to Entry" for oligopolies.
Page 17
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Chapter 16: Competing for Monopoly
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Sample Questions
Q1) Microsoft's market power stems from:
A) its control over a scarce resource.
B) economies of scale.
C) its product compatibility with a lot of other products.
D) being a government-created monopoly.
Q2) Firms that operate in contestable markets:
A) still price competitively since they face the threat of competition from new entrants.
B) are pure monopolies that set price equal to consumers' highest willingness to pay.
C) earn zero economic profits.
D) face more competition when fixed costs are high.
Q3) Firms sometimes give away products for free in the hopes of:
A) selling other goods they produce at a higher price.
B) driving the competition out of business.
C) becoming the dominant standard.
D) creating a loyal customer base.
Q4) Explain why network goods are typically sold by either monopolists or oligopolists. In your answer, address how standard wars play a role and whether or not the "best" product always wins.
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Page 18
Chapter 17: Monopolistic Competition and Advertising
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Sample Questions
Q1) As of 2010 it was more common to see advertisements for the iPad in Berlin than in Virginia. Explain.
Q2) In the long run, monopolistically competitive firms end up producing at a price equal to that of competitive markets.
A)True
B)False
Q3) As of 2010, it was more common to see advertisements for the iPad in Silicon Valley than in Berlin.
A)True
B)False
Q4) Products can be differentiated along any dimension that people care about, such as taste, style, features, or location.
A)True
B)False
Q5) Advertising can help finance many useful goods and services.
A)True
B)False
Q6) What is an advantage of monopolistic competitive firms not producing at the minimum of the AC?
Page 19
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Chapter 18: Labor Markets
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Sample Questions
Q1) Which of the following statements is TRUE?
A) The market supply of labor is always upward sloping, but an individual's labor supply may not be upward sloping throughout its entire range.
B) An individual's supply of labor is always upward sloping, but the market supply of labor may not be upward sloping throughout its entire range.
C) Both the market supply of labor and the individual's labor supply will both be upward sloping.
D) Both the market supply of labor and the individual's labor supply may not be upward sloping across their entire range.
Q2) For a career in engineering, getting a Ph.D. in art history adds more human capital than getting a B.S. in mathematics.
A)True
B)False
Q3) The return to human capital can be easily observed in the productivity of workers. A)True
B)False
Q4) With the aid of a graph, explain how unions raise wages in unionized industries.
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Chapter
19: Public Goods and the Tragedy of the Commons
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Sample Questions
Q1) A good is nonexcludable if it is:
A) easy to prevent people from using the good at low cost.
B) easy to make people use the good at low cost.
C) difficult to prevent people from using the good at low cost.
D) difficult to make people use the good at low cost.
Q2) When someone receives the benefits of cable TV service, the benefit others can receive from this service gets reduced.
A)True
B)False
Q3) Which of the following is a list of public goods only?
A) a public beach, soup kitchen meals, public roads
B) online video games, a public beach, national defense, a lighthouse
C) a public beach, a lighthouse, toll highways, public roads
D) national defense, a lighthouse, smog reduction
Q4) Some animals are going extinct because of a lack of property rights over these animals.
A)True
B)False
Q5) Explain what aspect of the tragedy of the commons problem is similar to that of a positive externality.
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Chapter 20: Political Economy and Public Choice
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Sample Questions
Q1) Rational ignorance refers to the:
A) lack of incentive voters have to become well informed about candidates and issues because their vote is unlikely to affect the outcome of an election.
B) problem of not enough information being supplied to voters because politicians are not spending enough on campaign adds to inform voters of their positions on issues.
C) fact that most people choose to become just as well informed when making choices as consumers as they do when making choices as voters.
D) lack of rational analysis on the part of voters when they choose not to become informed about candidates and issues even though this knowledge would produce great personal benefit to them.
Q2) What does the evidence from 60 years of United States data show regarding the growth rate in personal income in each quarter of a President's term in office?
A) The growth rate holds steady at approximately 1.8%.
B) The growth rate increases in the quarters just after election.
C) The growth rate decreases in the quarters just before election.
D) The growth rate increases in the quarters just before election.
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Chapter 21: Economics, Ethics, and Public Policy
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Sample Questions
Q1) The main difference between utilitarians and Rawlsians is that:
A) Rawlsians recognize the power of incentives.
B) utilitarians recognize the power of incentives.
C) Rawlsians recognize the benefit of redistribution.
D) utilitarians recognize the benefit of redistribution.
Q2) The maximin principle is influential among philosophers but less so among economists because economists contend that:
A) a little bit less income for the worst-off might be acceptable if it comes with a big enough gain to others.
B) lower average income might be acceptable if income is more equally divided.
C) higher average income is always better.
D) a larger income inequality may be acceptable if the worst-off are less productive.
Q3) The question of whether selling kidneys is exploitative boils down to the question of whether:
A) we could save more lives by allowing the sale of kidneys.
B) it is wrong to buy things from the poor just because they are poor.
C) it is risky to sell kidneys.
D) the poor would be better off with or without the additional income.
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Chapter 22: Managing Incentives
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Q1) Suppose the economy is in a recession. Which of the following is the best incentive scheme for the manager of a large auto sales center?
A) Threat of termination if one sale is not made each day.
B) Equal salary for all sales agents regardless of sales.
C) Bonuses for the sales agents who meet a fixed sales target.
D) Bonuses for the sales agents with the highest sales relative to other sales agents.
Q2) On American Idol, the winner of the competition gets a recording contract. Suppose an average person is randomly picked as a surprise entrant in the final round. Which of the following risks is most likely to occur in this tournament?
A) environment risk
B) sales risk
C) risk of recession
D) ability risk
Q3) For-profit prisons should be less costly to operate than public prisons, but these cost savings may come at the expense of lower quality.
A)True
B)False
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Chapter 23: Stock Markets and Personal Finance
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Q1) Choose the series that places these financial instruments in order of increasing average return.
A) U.S. T-Bills, corporate bonds, small stocks, S&P 500 Index fund
B) corporate bonds, U.S. T-Bills, small stocks, S&P 500 Index fund
C) U.S. T-Bills, corporate bonds, S&P 500 Index fund, small stocks
D) corporate bonds, U.S. T-Bills, S&P 500 Index fund, small stocks
Q2) To say that a stock price is a signal means that:
A) society can determine the value of a firm.
B) people transfer firm ownership via the signals.
C) lower stock prices imply better value.
D) speculative bubbles can be avoided.
Q3) Which investment strategy is typically more profitable over a long period of time?
A) active
B) passive
C) introversive
D) subversive
Q4) A diversified portfolio reduces risk.
A)True
B)False
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Chapter 24: Price Discrimination
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Q1) A cab driver taking an out-of-town rider on a longer route to her destination is an example of a(n):
A) adverse selection.
B) information asymmetry.
C) mutually profitable exchange.
D) the principle-agent problem.
Q2) Offering to work for a low salary signals that you are:
A) a good candidate who is very interested in the company.
B) willing to work for a less-than-market salary.
C) an excellent candidate.
D) not as qualified as other candidates.
Q3) In the market for used cars, half of the cars are of good quality and would sell for $14,000, while half of the cars are of poor quality and would sell for $10,000. If a buyer possessed no information about the quality of the car she was considering, what would she be willing to pay for it?
A) $14,000
B) $10,000
C) $12,000
D) The buyer would choose not to buy because of the lack of information.
Q4) What signal does an engagement ring send? Why does it have to be expensive?
Page 26
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Chapter 25: Consumer Choice
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Sample Questions
Q1) Which statement best illustrates the concept of diminishing marginal utility?
A) Gladys is hungry and the first piece of pizza she eats tastes wonderful! The second tastes great, the third good, the fourth okay, and the fifth piece of pizza she eats makes her sick.
B) Thomas likes tomatoes more than Janice, and thus gets more utility from tomatoes than Janice does.
C) High Fly is a new low-cost airline. Initially it is very expensive for High Fly to offer flights to customers because of the high start-up costs, but after fixed costs are covered the additional cost of adding one more consumer falls significantly.
D) Sarah likes hamburgers, but the price she is willing to pay for them is low as compared to another good.
Q2) Diminishing marginal utility means that marginal utility ______ as consumption
A) decreases; decreases B) decreases; increases C) increases; decreases D) increases; increases
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