Microeconomic Theory
Exam Answer Key
Course Introduction
Microeconomic Theory explores the fundamental principles governing individual and firm decision-making in the allocation of scarce resources. The course covers key concepts such as consumer choice, producer behavior, market structures, and the determination of prices in competitive and non-competitive markets. Students will examine theories of demand and supply, game theory, welfare analysis, and the impact of government interventions. By employing mathematical and graphical tools, the course enables a deeper understanding of how microeconomic agents interact and the implications for market efficiency and public policy.
Recommended Textbook
Microeconomics 7th Edition by R. Glenn Hubbard
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18 Chapters
4654 Verified Questions
4654 Flashcards
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Page 2
Chapter 1: Economics: Foundations and Models
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240 Verified Questions
240 Flashcards
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Sample Questions
Q1) Voluntary exchange ________ economic efficiency because neither the buyer nor the seller would agree to a trade unless ________.
A)increases; they both benefit
B)increases; only one party benefits
C)decreases; neither benefit
D)decreases; they both benefit
Answer: A
Q2) Assume that an additional $50,000 in benefits will be received each year if a town hires an additional police officer whose only job would be to catch drivers who drive over the speed limit on its only street.What must the additional cost of this additional police officer be to make this hiring economically rational?
Answer: The additional cost of the additional police officer must be no more than $50,000 for the year to make the hiring economically rational.
Q3) "The distribution of income should be determined by the government" is an example of a positive economic statement.
A)True
B)False
Answer: False
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3
Chapter 2: Trade-Offs, Comparative Advantage, and the Market System
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Sample Questions
Q1) To increase gas mileage, automobile manufacturers make cars small and light.Large cars absorb more of the impact of an accident than small cars but yield lower gas mileage.These facts suggest that a negative relationship exists between safety and gas mileage.
A)True
B)False
Answer: True
Q2) Without an increase in the supply of the factors of production, how can a nation achieve economic growth?
A)by producing more high-value goods and fewer low-value goods
B)through technological advancement which enables more output with the same quantity of resources
C)by lowering the prices of factors of production
D)by increasing the prices of factors of production
Answer: B
Q3) What is economic growth?
Answer: Economic growth refers to the ability of the economy to increase the production of goods and services.
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Chapter 3: Where Prices Come From: the Interaction of
Demand and Supply
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Sample Questions
Q1) Suppose that when the price of hamburgers decreases, the Landry family decreases their purchases of chicken nuggets.To the Landry family
A)hamburgers and chicken nuggets are complements.
B)hamburgers and chicken nuggets are inferior goods.
C)hamburgers and chicken nuggets are normal goods.
D)hamburgers and chicken nuggets are substitutes.
Answer: D
Q2) Holding everything else constant, an increase in the price of MP3 players will result in
A)a decrease in the quantity of MP3 players supplied.
B)a decrease in the demand for MP3 players.
C)an increase in the supply of MP3 players.
D)a decrease in the quantity of MP3 players demanded.
Answer: D
Q3) From a supply perspective, what impact would an increase in the price of motorcycles have on the market for motorcycles?
Answer: An increase in the price of motorcycles would generate an increase in the quantity of motorcycles supplied in the market.
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Page 5
Chapter 4: Economic Efficiency, Government Price Setting, and Taxes
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Sample Questions
Q1) Refer to Figure 4-1.What is the total amount that Arnold is willing to pay for 3 burritos?
A)$1.50
B)$6.00
C)$7.00
D)$10.00
Q2) Refer to Table 4-3.The table above lists the marginal cost of cowboy hats by The Waco Kid, a firm that specializes in producing western wear.If the market price of cowboy hats is $50, how many hats will be produced?
A)0
B)1
C)2
D)4
Q3) Using a supply and demand graph, illustrate the effect of the addition of a $10.00 per-unit unit tax on digital cameras, where the entire tax burden falls on the seller.Assume the equilibrium price before the tax is $125 and the equilibrium quantity is 50,000.What happens to the price and quantity after the tax is implemented?
Q4) What is marginal benefit? Which curve is also referred to as a marginal benefit curve?
Page 6
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Chapter 5: Externalities, Environmental Policy, and Public Goods
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Sample Questions
Q1) Who was the economist who first proposed that governments use taxes and subsidies to correct for externalities?
A)Ronald Coase
B)A. C. Pigou
C)Adam Smith
D)David Hume
Q2) The tragedy of the commons was avoided in the Middle Ages by
A)selling common grounds to individuals.
B)the local police who monitored entry into the commons.
C)social pressure to uphold traditionally accepted limits on family use of the commons.
D)the government which imposed a tax for the use of the commons.
Q3) What is an externality?
Q4) Which of the following displays rivalry and excludability in consumption?
A)public goods
B)private goods
C)quasi-public goods
D)common resources
Q5) How does a positive externality in consumption reduce economic efficiency?
Q6) What are some of the limitations of the Coase theorem in practice?
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Chapter 6: Elasticity: the Responsiveness of Demand and Supply
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Sample Questions
Q1) Refer to Figure 6-8.Identify the two goods which are complements.
A)Good X and Good Y
B)Good Y and Good Z
C)Good X and Good Z
D)It is not possible to distinguish any relationship among the goods.
Q2) Which of the following items is likely to have the highest income elasticity of demand?
A)a bus ride
B)a meal at Taco Bell
C)a vacation home in the Swiss Alps
D)a tank of gasoline
Q3) Explain the concepts of cross-price elasticity of demand and income elasticity of demand.What do positive and negative values indicate for each of these demand elasticities?
Q4) Refer to Table 6-6.Based on the data in the table, between a price of $9.99 and $14.99, the demand for books is
A)elastic.
B)unit elastic.
C)inelastic.
D)perfectly inelastic.
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Chapter 7: The Economics of Health Care
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Sample Questions
Q1) Identify and explain 4 of the difficulties in making cross-country comparisons in health care outcomes.
Q2) Suppose you see a 2006 Scion xB Sport Wagon advertised in the local newspaper for $4,500.If you knew the car was reliable, you would be willing to pay $6,000 for it.If you knew the car was unreliable, you would only be willing to pay $2,500 for it.Under what circumstances should you buy the car at the asking price?
Q3) Consider a used car market in which half the cars are good and half are bad (lemons).If buyers are rational, the prices being offered for used cars will result in
A)an equal proportion of a good cars and lemons being sold in an efficient market.
B)a larger proportion of good cars being sold and consequently, consumer surplus is increased.
C)a larger proportion of lemons being sold and consequently, producer surplus is increased.
D)an equal proportion of good cars and lemons being sold in an inefficient market.
Q4) What is the main difference between a single-payer health care system and socialized medicine?
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Page 9
Chapter 8: Firms, the Stock Market, and Corporate Governance
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Sample Questions
Q1) The person hired by a corporation's board of directors to run the day-to-day operations of the corporation is known as the
A)chairman of the board.
B)chief executive officer.
C)owner-manager.
D)corporate governor.
Q2) Which of the following takes place in the direct finance market?
A)Firms borrow funds from banks.
B)Deposits from savers are accumulated and loans made to borrowers.
C)Ownership in corporations is sold in the form of preferred stock.
D)Banks offer savings accounts to customers.
Q3) A bond's coupon payment divided by the bond's current price is equal to the bond's
A)dividend yield.
B)current yield.
C)price-earnings ratio.
D)maturity value.
Q4) Who is the seller in a primary market and who is the seller in a secondary market?
Q5) How do unlimited and limited liability differ?
Page 10
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Chapter 9: Comparative Advantage and the Gains From International Trade
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Sample Questions
Q1) The U.S.economy would gain from the elimination of tariffs and quotas even if other countries do not reduce their tariffs and quotas.
A)True
B)False
Q2) Refer to Table 9-2.Select the statement that accurately interprets the data in the table.
A)Sarita has a comparative advantage in baking pies.
B)Gabriel has an absolute advantage in baking cakes.
C)Gabriel has a comparative advantage in baking pies.
D)Gabriel has a comparative advantage in baking pies and baking cakes.
Q3) Refer to Figure 9-1.Suppose the government allows imports of leather footwear into the United States.What will be the quantity of imports?
A)5 units
B)10 units
C)15 units
D)20 units
Q4) What is a tariff?
Q5) What are the four main sources of comparative advantage? Briefly explain each source and provide examples.
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Chapter 10: Consumer Choice and Behavioral Economics
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Sample Questions
Q1) Which of the following is not a common mistake made by consumers?
A)the failure to take into account the implicit costs of an activity
B)the failure to ignore sunk costs
C)being overly optimistic about their future behavior
D)being overly pessimistic about their future behavior
Q2) If Paul decides to buy a $60 ticket to a Cirque du Soleil show rather than a $45 ticket for a Blue Man Group performance, we can conclude that
A)the marginal utility per dollar spent on Cirque du Soleil is lower than the marginal utility per dollar spent on Blue Man Group.
B)Paul's demand for a ticket to see Cirque du Soleil is more elastic than his demand for a ticket to see Blue Man Group.
C)Paul is not making a rational choice.
D)the marginal utility per dollar spent on Cirque du Soleil is higher than the marginal utility per dollar spent on Blue Man Group.
Q3) The substitution effect of a price increase causes a decrease in the quantity of an inferior good demanded.
A)True
B)False
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Page 12
Chapter 11: Technology, Production, and Costs
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Sample Questions
Q1) If the long-run average total cost curve is downward-sloping, then the firm is experiencing decreasing returns to scale.
A)True
B)False
Q2) What is an isoquant? What is the slope of an isoquant?
Q3) Refer to Figure 11-15.What is the combination of inputs that produces 200 gooseberry pies at the lowest cost?
A)combination e: 10 hours of labor and 48 units of capital
B)combination f: 40 hours of labor and 24 units of capital
C)combination g: 60 hours of labor and 14 units of capital
D)combination h: 60 hours of labor and 9 units of capital
Q4) The shape of the average total cost curve is determined by the shape of A)the marginal cost curve.
B)the average fixed cost curve.
C)the average product curve.
D)the firm's production function.
Q5) State the law of diminishing returns.How do diminishing returns differ from diseconomies of scale? Be sure to define diseconomies of scale in your answer.
Q6) In economics, what is the difference between the short run and the long run?
Page 13
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Chapter 12: Firms in Perfectly Competitive Markets
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Sample Questions
Q1) For a perfectly competitive firm, which of the following is not true at profit maximization?
A)Market price is greater than marginal cost.
B)Marginal revenue equals marginal cost.
C)Total revenue minus total cost is maximized.
D)Price equals marginal cost.
Q2) If total revenue exceeds fixed cost, a firm
A)should produce in the short run.
B)has covered its variable cost.
C)is making short-run profits.
D)may or may not produce in the short run, depending on whether total revenue covers variable cost.
Q3) Which of the following is a characteristic of a monopoly?
A)It is easy for new firms to enter the market.
B)There is only one seller in the market.
C)The product is not unique.
D)The firm has no control over price.
Q4) What is a long-run supply curve? What does a long-run supply curve look like on a perfectly competitive market graph?
Q5) What is meant by the term "long-run competitive equilibrium"?
Page 14
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Chapter 13: Monopolistic Competition: the Competitive
Model in a
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Sample Questions
Q1) If a firm has excess capacity, then
A)the firm expends too much of its resources on advertising its product without seeing an appreciable increase in sales.
B)the firm is not producing its minimum efficient scale of output.
C)the firm's long-run average cost of producing a given quantity exceeds its short-run cost of producing that same quantity.
D)the firm's quantity supplied exceeds its quantity demanded.
Q2) Refer to Table 13-2.How much additional profit will be made if the firm chooses to produce and sell 5 cases instead of 4 cases?
A)$275
B)$145
C)$35
D)$20
Q3) Refer to Figure 13-11.What is the amount of excess capacity?
A)Q - Q units
B)Q - Q units
C)Q - Q units
D)Q - Q units
Q4) What is the difference between the terms "marketing" and "advertising"?
Page 15
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Chapter 14: Oligopoly: Firms in Less Competitive Markets
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Sample Questions
Q1) Patents, tariffs, and quotas are all examples of
A)government-imposed barriers.
B)economic regulations that increase efficiency.
C)entry barriers that improve a country's standard of living.
D)entry barriers that protect consumers.
Q2) Doctors and lawyers in every state need a license to practice.This is an example of A)consumer protection laws.
B)consumer advocacy.
C)occupational licensing.
D)ownership of a key input.
Q3) A characteristic found only in oligopolies is
A)break-even level of profits.
B)interdependence of firms.
C)independence of firms.
D)products that are slightly different.
Q4) Refer to Figure 14-6 Use the decision tree to determine whether Pizza Hut should deter Domino's from entering the market for pasta salad.Assume that each firm must earn a 25% return on investment to break even.Explain Pizza Hut's decision process.
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Page 16
Chapter 15: Monopoly and Antitrust Policy
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Sample Questions
Q1) Assume a hypothetical case where an industry begins as perfectly competitive and then becomes a monopoly.Which of the following statements regarding economic surplus in each market structure is true?
A)Under perfectly competitive conditions, economic surplus in this industry equals consumer surplus plus producer surplus. Under monopoly conditions, some consumer surplus is transferred to producer surplus, but economic surplus is the same as it was under perfectly competitive conditions.
B)Under perfectly competitive conditions, economic surplus in this industry is maximized. Under monopoly conditions, economic surplus is minimized.
C)Under perfectly competitive conditions, economic surplus is equal to consumer surplus; there is no producer surplus because firms are price takers. Under monopoly conditions, economic surplus is equal to producer surplus.
D)Under perfectly competitive conditions, economic surplus is maximized. Under monopoly conditions, economic surplus is less than under perfect competition and there is a deadweight loss.
Q2) What happens to a monopoly's revenue when it sells more units of its product?
Q3) Identify four reasons for high entry barriers.Briefly explain each reason.
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Page 17
Chapter 16: Pricing Strategy
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Sample Questions
Q1) If a monopolist engages in first-degree price discrimination, it will produce the same output level as a perfectly competitive industry.
A)True
B)False
Q2) Many people sell goods through eBay at prices that are higher than the prices they paid for these goods.Economists consider these transactions as
A)examples of zero-sum games, since the value of the goods sold is exactly equal to the prices paid for them.
B)unproductive since the goods sold have been produced in the past.
C)examples of exploitation of buyers of the goods by the sellers.
D)examples of arbitrage.
Q3) What is cost-plus pricing? Why do some firms use cost-plus pricing even when the firms' managers have the resources to devise a pricing strategy that would result in greater profits?
Q4) Book publishers use price discrimination routinely, but the form of price discrimination they use is different from the form used by airlines and other industries.Explain.
Q5) What three conditions must hold for a firm to successfully price discriminate?
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Chapter 17: The Markets for Labor and Other Factors of Production
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Sample Questions
Q1) If the substitution effect of a wage increase dominates the income effect, the labor supply curve has a positive slope.
A)True
B)False
Q2) Larry and Mike are equally skilled construction workers employed by the Brown and Root Company.Larry's job is riskier because he typically works on a scaffold 1,000 feet above ground.Larry's higher wage rate is the result of
A)economic discrimination.
B)a compensating differential.
C)a negative feedback loop.
D)a higher marginal revenue product.
Q3) What is a factor market?
A)It is a market where financial instruments are traded.
B)It is a market where stocks and bonds are traded.
C)It is a market where producers buy consumption and capital goods.
D)It is a market where resources used to produce final goods are traded.
Q4) Why do professional basketball players earn more than police officers? Illustrate this situation graphically.
Q5) What is the marginal productivity theory of income distribution?
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Chapter 18: Public Choice, Taxes, and the Distribution of Income
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Sample Questions
Q1) Refer to Table 18-2.The table above lists three policy alternatives that the U.S.Senate will vote on, along with the ranking of these alternates.The Senate must decide which of these alternatives should receive an additional $1 billion of funding, and there is enough money in the federal budget for only one of these alternatives.If a series of votes is taken in which each pair of alternatives is considered (homeland security and education; homeland security and medical research; education and medical research)which of the following will result from these votes?
A)When the vote is between homeland security and education, the Senators will vote for education to receive funding.
B)The Senators' votes will demonstrate transitivity.
C)The results will illustrate the voting paradox.
D)The results from the voting will illustrate the median voter theorem.
Q2) Refer to Table 18-9.How much income tax does Sylvia pay if she is a single taxpayer with an income of $70,000?
A)$21,000
B)$15,740
C)$15,400
D)$13,475
Q3) What is the relationship between market failure and government failure?
Page 20
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