Microeconomics
Midterm Exam
Course Introduction
Microeconomics is the branch of economics that focuses on the decision-making processes of individual consumers, firms, and industries in allocating scarce resources. This course explores fundamental concepts such as supply and demand, market equilibrium, elasticity, consumer behavior, production and costs, and the various market structures including perfect competition, monopoly, and oligopoly. By analyzing the interactions between buyers and sellers and examining the effects of government policy, students will develop a foundational understanding of how markets operate and how prices are determined in an economy.
Recommended Textbook
Essentials of Economics 3rd Edition by Glenn Hubbard
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Page 2
Chapter 1: Economics: Foundations and Models
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Sample Questions
Q1) Policies based on positive economic ideas tend to decrease economic efficiency and reduce equity.
A)True
B)False
Answer: False
Q2) Microeconomics is the study of
A) how households and firms make choices.
B) the economy as a whole.
C) the global economy.
D) topics such as unemployment, inflation and economic growth.
Answer: A
Q3) Define productive efficiency.Does productive efficiency imply allocative efficiency? Explain.
Answer: Productive efficiency is an efficiency criterion that describes a situation in which goods and services are produced at the lowest possible cost.It does not imply allocative efficiency,which is a criterion associated with producing goods and services that consumers value most.For example,a manufacturer may be able to produce typewriters at the lowest possible cost of,say,$200 but this does not necessarily mean that consumers are willing to pay $200 for a typewriter.
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Page 3
Chapter 2: Trade-Offs, comparative Advantage, and the Market System
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Sample Questions
Q1) Specialising in the production of a good or service in which one has a comparative advantage enables a country to do all of the following except A) engage in mutually beneficial trade with other nations.
B) increase the variety of products that it can consume with no increase in resources. C) consume a combination of goods that lies outside its own production possibility frontier.
D) produce a combination of goods that lies outside its own production possibility frontier.
Answer: D
Q2) An increase in the unemployment rate may be represented as a movement from a point on the production possibility frontier to a different point on the frontier.
A)True
B)False
Answer: False
Q3) What is meant by the term 'opportunity cost'?
Answer: Opportunity cost is the highest-valued alternative that must be given up to engage in an activity.
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Page 4
Chapter 3: Where Prices Come From: the Interaction of
Demand and Supply
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Sample Questions
Q1) Suppose you pre-ordered a non-refundable movie ticket to X-Men: Days of Future Past.On the day of the movie you decide that you would rather not go to the movie.According to economists,what is the rational thing to do?
A) Since the cost of the movie ticket is a sunk cost, it should not influence your decision. Your decision should be based solely on whether you want to see the movie or not.
B) You should not waste resources. Since you have paid for the ticket you should watch the movie.
C) You should go to the movie to minimise your losses.
D) You should go to the movie to maximise your utility.
Answer: A
Q2) Quantity supplied refers to the amount of a good or service that a firm is willing and able to supply at a given price.
A)True
B)False
Answer: True
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Chapter 4: Market Efficiency and Market Failure
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Q1) If an 8 per cent decrease in the price of lobster leads to a 15 per cent decrease in the quantity supplied of lobster,then the supply of lobster is
A) unit-elastic.
B) unitarily elastic.
C) elastic.
D) perfectly inelastic.
Q2) If the demand for a product is elastic,the quantity demanded changes by a smaller percentage than the percentage change in price.
A)True
B)False
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) The current price of canvas messenger bags is $36 each,and sales of the bags equal 400 per week.If the price elasticity of demand is -2.5 and the price changes to $44,how many messenger bags will be sold per week? Use the midpoint formula.
Q5) Explain the relationship between price elasticity of demand and total revenue.
Q6) Briefly explain the economic concept of elasticity.
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Chapter 5: The Economics of Healthcare
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Q1) What is marginal benefit? Which curve is also referred to as a marginal benefit curve?
Q2) Refer to Figure 5-1.Arnold's marginal benefit from consuming the fourth burrito is
A) $0.
B) $1.00.
C) $2.50.
D) $3.00.
Q3) Each point on a ________ curve shows the willingness of consumers to purchase a product at different prices.
A) demand
B) supply
C) production possibilities
D) marginal cost
Q4) Refer to Figure 5-3.What is the value of producer surplus at a price of $18?
A) $240
B) $300
C) $340
D) $720
Q5) What is a black market?
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Chapter 6: Firms,the Stock Market,and Corporate Governance
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Sample Questions
Q1) Bill owns 'Bill's Home of Blues' a store that specialises in selling CDs and DVDs of blues musicians of the 1960s and 1970s.Bill took out a loan from his bank to pay for his store and its initial inventory.Bill pays the bank $900 per week for his loan.The $900 bank payment
A) is a long-run implicit cost.
B) is a fixed cost.
C) is a short-run implicit cost.
D) is a variable cost.
Q2) The short run is the time period during which a firm has at least one input constraint. A)True
B)False
Q3) If a producer is not able to expand its plant capacity immediately,it is A) bankrupt.
B) operating in the long run.
C) operating in the short run.
D) losing money.
Q4) In the long run,the relevant cost is total cost. A)True
B)False
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Chapter 7: Consumer Choice and Elasticity
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Q1) Both buyers and sellers are price takers in a perfectly competitive market because A) the price is determined by government intervention and dictated to buyers and sellers.
B) each buyer and seller knows it is illegal to conspire to affect price.
C) both buyers and sellers in a perfectly competitive market are concerned for the welfare of others.
D) each buyer and seller is too small relative to others to independently affect the market price.
Q2) In the short run,a firm might choose to produce rather than shut down even if its market price is less than its average total cost of production.
A)True
B)False
Q3) If,for a perfectly competitive firm,price exceeds the marginal cost of production,the firm should
A) increase its output.
B) reduce its output.
C) keep output constant and enjoy the above normal profit.
D) lower the price.
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Chapter 8: Technology, production, and Costs
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Q1) Refer to Figure 8-4.What is likely to happen to this monopoly in the long run?
A) New firms will enter the market to eliminate its profits.
B) It will expand its output to take advantage of economies of scale so as to further increase its profit.
C) As long as there are entry barriers, this firm will continue to enjoy economic profits.
D) It will be regulated by the government because of its excess profits.
Q2) Suppose an industry is made up of 25 firms,all with equal market share.The four-firm concentration ratio of this industry
A) is 16%.
B) is 20%.
C) is 25%.
D) cannot be determined from the information given.
Q3) Refer to Table 8-2.What is the profit-maximising quantity and price for the monopolist?
A) Quantity = 8 cases; price = $9
B) Quantity = 7 cases; price = $10
C) Quantity = 9 cases; price = $8
D) Quantity = 10 cases; price = $7
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Chapter 9: Firms in Perfectly Competitive Markets
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Q1) Refer to Table 9-6.Is there a dominant strategy for Godrickporter and,if so,what is it?
A) No, its outcome depends on what Star Connections does.
B) Yes, Godrickporter should increase its advertising spending.
C) Yes, Godrickporter should reduce its advertising spending.
D) Yes, Godrickporter's dominant strategy is to collude with Star Connections.
Q2) Refer to Figure 9-10 to answer the following questions.
a.What is the profit-maximising output level?
b.What is the profit-maximising price?
c.At the profit-maximising output level,how much profit will be realised?
d.Does this graph most likely represent the long run or the short run? Why?
Q3) Refer to Figure 9-4.What is the area that represents the total variable cost of production?
A) 0P<sub>0</sub>aQ<sub>a</sub>
B) 0P<sub>1</sub>bQ<sub>a</sub>
C) P<sub>0</sub>abP<sub>1</sub>
D) P<sub>1</sub>bdP<sub>3</sub>
Q4) The most important barrier to entry is economies of scale.
A)True
B)False
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Chapter 10: Monopoly and Antitrust
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Sample Questions
Q1) How much is a bond that pays $20 in coupon payments for 4 years and $1000 at the end of the fourth year worth if the interest rate is 5 per cent?
A) $822.70
B) $893.62
C) $1070.92
D) $1080
Q2) A firm's demand curve for labour slopes downwards because A) of the law of diminishing marginal returns.
B) firms supply less labour as the wage rate rises.
C) workers supply less labour services as the wage rate falls.
D) of rising marginal product.
Q3) If you want to know the present value of $10 000 received in one year,and the interest rate is 4 per cent,what formula can you use?
A) Present value equals $10 000 times 0.04.
B) Present value equals $10 000 divided by 1.04
C) Present value equals 1.04 divided by $10 000.
D) Present value equals $10 000 times 1.04.
Q4) Why do professional basketball players earn more than police officers? Illustrate this situation graphically.
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Chapter 11: Monopolistic Competition and Oligopoly
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Q1) Ordinarily,governments attempt to promote competition in markets.Why do governments use patents to block entry into some markets when this prohibits competition?
A) Patents encourage firms to spend money on research necessary to create new products.
B) Politicians sometimes succumb to pressure from lobbyists to grant favours to businesses for political reasons.
C) Patents are an important source of government revenue.
D) Patents are justified because they are an important means for creating network externalities.
Q2) The cost borne by a producer in the production of a good or service is called
A) private cost.
B) public cost.
C) social cost.
D) internal cost.
Q3) Adverse selection occurs in the market for used cars because used car buyers
A) have more information than used car sellers.
B) have less information than used car sellers.
C) have less incentive to maintain the value of their cars than new car buyers.
D) tend to have more accidents than new car buyers.
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Chapter 12: GDP: Measuring Total Production and Income
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Q1) Over the past 100 years,economic growth has ________ health,and health has ________ economic growth.
A) improved; worsened
B) improved; improved
C) worsened; improved
D) worsened; worsened
Q2) The 'rule of 70' states that
A) it takes an economy 70 years to double in size.
B) the number of years it takes an economy to double is 70 divided by the growth rate.
C) the number of years it takes an economy to double is the growth rate multiplied by 70.
D) the number of years it takes an economy to double is the growth rate divided by 70.
Q3) If the GDP deflator rises from 185 to 190,what is the percentage increase in the price level between the two years?
A) 270 per cent
B) 50 per cent
C) 5 per cent
D) 2.7 per cent
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14
Chapter 13: Unemployment and Inflation
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Sample Questions
Q1) Eliminating structural unemployment would be good for the economy.
A)True
B)False
Q2) During an economic boom,many employees are asked to work more overtime hours each week.As a result of this
A) the unemployment rate increases.
B) the unemployment rate decreases.
C) the labour force participation rate increases.
D) neither the unemployment rate nor the labour force participation rate changes.
Q3) In Australia between 2003 and 2013
A) the fastest job growth was experienced in the full-time job category.
B) the fastest job growth was experienced in the part-time job category.
C) total net jobs growth fell.
D) the unemployment rate rose.
Q4) Paying efficiency wages is a way for a company to cut costs and become more efficient,and they are therefore lower than market wages.
A)True
B)False
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Chapter 14: Economic Growth, the Financial System and Business Cycles
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Sample Questions
Q1) Explain how the aggregate demand and supply model can be made more dynamic.
Q2) If potential GDP is equal to $1500 billion,what does the long-run aggregate supply curve look like?
A) It is a horizontal line at $1500 billion of GDP.
B) It is a vertical line at a level of GDP below $1500 billion.
C) It is a vertical line at $1500 billion of GDP.
D) It is a vertical line at a level of GDP above $1500 billion.
Q3) In Figure 14.2,given the economy is at point A in year 1 and point B in year 2,what is the rate of increase in the price level (the inflation rate)between those two years?
A) 1.8 per cent
B) 2.7 per cent
C) 3.0 per cent
D) 0.9 per cent
Q4) Explain the three reasons the aggregate demand curve slopes downward.
Q5) An increase in the price level will
A) shift the aggregate demand curve to the left.
B) shift the aggregate demand curve to the right.
C) move the economy up along a stationary aggregate demand curve.
D) move the economy down along a stationary aggregate demand curve.
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Chapter 15: Aggregate Demand and Aggregate Supply Analysis
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Sample Questions
Q1) A bank holds its reserves as ________ and ________.
A) securities; loans
B) securities; deposits at the Reserve Bank of Australia
C) vault cash; deposits at the Reserve Bank of Australia
D) vault cash; loans
Q2) Suppose that your bank's reserve ratio is 0.1 and you withdraw $25 000 from the bank.What is the deposit multiplier? What is the total decrease in deposits in the banking system? What is the change in the money supply?
Q3) In March 2014,the level of credit in Australia was approximately
A) $2237.9 billion.
B) $49.8 billion.
C) $141.8 billion.
D) $445.1 billion.
Q4) Your demand-deposit account balance is included in your bank's assets.
A)True
B)False
Q5) An economy without money would have no exchange of goods and services.
A)True
B)False
Q6) What are the functions of money?
Page 17
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Chapter 16: Money, banks, and the Federal Reserve System
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Sample Questions
Q1) Explain why the money demand curve is downward sloping.
Q2) If the Reserve Bank of Australia pursues expansionary monetary policy,ceteris paribus,aggregate demand will
A) rise by more than it otherwise would have, and the price level will rise by more than it otherwise would have.
B) fall by more than it otherwise would have, and the price level will fall by more than it otherwise would have.
C) rise by less than it otherwise would have, and the price level will rise by less than it otherwise would have.
D) fall by less than it otherwise would have, and the price level will rise by less than it otherwise would have.
Q3) Explain and show graphically how a decrease in government spending,ceteris paribus,affects the equilibrium interest rate and equilibrium quantity of loanable funds in the market for loanable funds.
Q4) Give an example of a monetary policy target.Explain which monetary policy target the Reserve Bank of Australia (RBA)uses and why the RBA uses a policy target.
Q5) What is the function of exchange settlement accounts?
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Page 19
Chapter 17: Monetary Policy
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Q1) Refer to Figure 17.3.Given that the economy has moved from A to B in the graph above,which of the following would be the appropriate fiscal policy to achieve potential GDP?
A) Increase interest rates
B) Increase government spending
C) Decrease interest rates
D) Increase taxes
Q2) Long lags associated with the legislative process in implementing fiscal policy can make it more difficult to use than monetary policy.
A)True
B)False
Q3) Crowding out results in
A) higher interest rates, a lower exchange rate, and lower net exports.
B) higher interest rates, a higher exchange rate, and lower net exports.
C) lower interest rates, a lower exchange rate, and lower net exports.
D) lower interest rates, a higher exchange rate, and lower net exports.
Q4) What is fiscal policy,and who is responsible for fiscal policy?
Q5) Explain why crowding out might still occur even if the increase in government spending is funded by borrowing on global financial markets.
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Chapter 18: Fiscal Policy
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Sample Questions
Q1) Over the past several decades there has been rapid growth in international trade.This growth has been due to all except one of the following factors.Which factor has not contributed to the growth of international trade?
A) A favourable change in government policies
B) The spread of reliable communications
C) A reduction in shipping costs
D) An increase in the tariffs charged on many goods
Q2) A quota
A) makes domestic consumers better off.
B) makes both domestic producers and consumers better off.
C) makes everyone worse off.
D) makes domestic producers better off.
Q3) What are three primary reasons for the growth of international trade over the past 50 years?
Q4) The largest proportion of world trade is in which of the following sectors?
A) Agriculture
B) Manufacturing
C) Mining
D) Services
Q5) Why do domestic firms offshore production processes?
Page 21
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Chapter 19: Comparative Advantage,
Trade, and Exchange Rates
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Sample Questions
Q1) The idea of twin deficits refers to the possibility that a large federal budget deficit will lead to a
A) balance of payments deficit.
B) financial account deficit.
C) trade surplus.
D) current account deficit.
Q2) A rise in the dollar price of the Chinese yuan signals an appreciation of the yuan and a depreciation of the dollar.
A)True
B)False
Q3) A fixed exchange rate system is one in which
A) the currency is backed by a fixed amount of gold.
B) the government defines its currency to be worth a certain amount in terms of another currency, and ensures that the rate remains at that level.
C) foreign exchange traders accept only a fixed price for their goods, regardless of the demand and supply for the currency.
D) demand and supply adjust so that there are no shortages or surpluses of currency in the market.
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