Microeconomics Study Guide Questions
Course Introduction
Microeconomics is the branch of economics that analyzes the decision-making behavior of individuals, households, and firms, and how these entities interact within various market structures. The course covers fundamental concepts such as supply and demand, utility maximization, production and costs, market equilibrium, and the role of government intervention. Through theoretical models and real-world applications, students learn how prices are determined, how resources are allocated efficiently, and how consumers and producers respond to changes in the economic environment. Understanding microeconomics provides a foundation for analyzing issues like market failure, pricing strategies, and the impact of policy on individual welfare.
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Microeconomics Theory and Applications 12th Edition by Edgar K. Browning
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Chapter 1: An Introduction to Microeconomics
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Q1) Write down a normative statement and a positive statement with reference to the minimum wage and then explain each.
Answer: 'Higher minimum wages lead to limited employment losses.' This is a positive statement,which has been the subject of much debate in economics.Some researchers have concluded that marginal increases in the minimum wage lead to significant employment losses,while others argue that the effects are statistically insignificant. 'The minimum wage should be higher to help fight poverty.' This is a normative statement since it expresses an opinion,a value judgment of the author.
Q2) Suppose the consumer price index was 100 in 2000 and 300 in 2010.This implies that the average price level:
A)increased by 20 percent during this period.
B)increased by 100 percent during this period.
C)increased by 200 percent during this period.
D)increased by 300 percent during this period.
Answer: C
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3
Chapter 2: Supply and Demand
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Q1) For which one of the following goods is the long-run elasticity of demand greatest?
A)Cigarettes
B)Chevrolet automobiles
C)Beer
D)Water
Answer: B
Q2) At every point on an individual's demand curve,the height to the demand curve measures:
A)the quantity demanded of the good.
B)the marginal benefit of the good to the consumer.
C)the real income of the consumer.
D)the consumer surplus.
Answer: B
Q3) All of the following are common responses to a price ceiling,except:
A)an excess supply.
B)nonprice rationing.
C)quality deterioration.
D)black markets.
Answer: A
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Page 4
Chapter 3: The Theory of Consumer Choice
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Q1) You buy only apples and bananas.Your budget is such that you can purchase 3 apples and 4 bananas or 9 apples and 2 bananas.Write down the equation for the budget line with bananas on the Y-axis.Is that equation unique?
Answer: 11ea857e_d767_f7cb_a433_67d630fafa28_TB1826_11_TB1826_11 or equivalently, 11ea857e_d768_1edc_a433_f7c9fc14b9fb_TB1826_11_TB1826_11
No,this is not unique.As written,it indicates that income is $15,the price of apples is $1,and the price of bananas is $3.However,if income and the prices doubled,the line would not change but the equation would be 11ea857e_d768_1edd_a433_732076b6c436_TB1826_00_TB1826_00 .
Q2) Which of the products described below is mostly likely considered an inferior good?
A)At lower prices people consume higher quantities of shredded wheat.
B)As incomes increase canned meat product consumption falls.
C)The higher the price of jeans the higher the demand for jeans.
D)The lower the price of jeans the more the demand for shirts.
Answer: B
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Chapter 4: Individual and Market Demand
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Q1) Suppose red onions are on the horizontal axis and white onions on the vertical axis.If both are perfect substitutes with two white onions worth one red onion,and the price of red onions falls from four to three times the price of white onions,the consumer:
A)decreases her consumption of white onions and increases her consumption of red onions.
B)increases her consumption of white onions and decreases her consumption of white onions.
C)moves to a higher indifference curve
D)makes no change in his/her consumption of onions and experiences no income effect as a result of the price change.
Q2) The exponents of a Cobb-Douglas utility function,U = C<sup>\(\alpha\)</sup>M<sup>\(\alpha\)-1</sup>,represent:
A)the share of income devoted to that good.
B)the rate at which a consumer can trade one good for the other.
C)the quantity of each good that is demanded.
D)the amount of utility each good provides.
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Chapter 5: Using Consumer Choice Theory
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Q1) An excise subsidy given on each unit of X consumed will:
A)reduce consumption of X and lower total expenditures on X.
B)shift the budget line inward in a parallel manner.
C)place the consumer on a higher indifference curve.
D)cause the consumer to increase consumption of non-subsidized goods.
Q2) A risk-averse individual who owns a $200,000 house and faces the prospect that the house will burn down with the probability 0.05 in any given year will be willing to pay how much of an annual premium to fully insure against such a loss?
A)$5,000
B)More than $10,000
C)No more than $5,000
D)Either more or less than $10,000 depending on whether housing is a normal or inferior good for the individual
Q3) Which of the following leads to the diversification of risk?
A)Investing in assets that give the highest possible returns
B)Investing in safe assets that may give low returns
C)Investing in multiple assets rather than a single asset
D)Investing in assets that are highly risky but give high returns
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Chapter 6: Exchange, Efficiency, and Prices
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Q1) Let the total quantities of two goods,apples and oranges,be 100 and 200 respectively.Jill has an initial allocation of 50 apples and 100 oranges and considers the two goods perfect 1-for-1 substitutes.Jack considers apples and oranges perfect 1-for-1 complements.Using an Edgeworth box,describe the set of allocations which improve economic efficiency.
Q2) If the MRS at an initial market basket between books [B] and Frisbees [F] is 6B/1F for Dave and 3B/1F for Diane,then:
A)mutually beneficial trades are not possible.
B)Diane will accept 4 books from Dave.
C)Diane will accept 2 books from Dave.
D)Dave will accept 2 Frisbees from Diane.
Q3) Which of the following must be true for voluntary exchange to be mutually beneficial?
A)The parties to the exchange do not cheat
B)The presence of a middleman
C)The use of currency for exchange
D)All individuals are risk averse
Q4) How are prices of goods that you buy in an auction,at a garage sale,and at a drugstore determined? Is the price discovery process the same in all these markets?
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Chapter 7: Production
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Q1) An isoquant map,with labor on the horizontal axis and capital on the vertical axis,has horizontal isoquants.This implies that the:
A)marginal product of capital is zero.
B)marginal rate of substitution of capital for labor approaches infinity.
C)marginal product of labor is zero.
D)marginal rate of substitution of capital for labor is positive.
Q2) Which of the following correctly explains increasing returns to scale?
A)With small scale operations,management inefficiencies are avoided.
B)Increasing the number of workers in a factory allows division and specialization of labor.
C)Firms that operate in small industries have higher input procurement costs.
D)Communication channels in large organizations tend to be complex.
Q3) A production function of the form Q = aL<sup>b</sup>K<sup>c</sup>:
A)implies constant marginal products for the inputs.
B)implies constant average products for the inputs.
C)incorporates the assumption of diminishing returns to the inputs.
D)cannot imply diminishing returns to the inputs.
Q4) What factors give rise to increasing returns to scale and decreasing returns to scale?
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Chapter 8: The Cost of Production
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Q1) Which of the following statements is not true?
A)Average variable cost falls,reaches a minimum and begins to rise.
B)Average total cost falls,reaches a minimum and begins to rise.
C)Average fixed cost falls,reaches a minimum,and begins to rise.
D)Marginal cost falls,reaches a minimum and begins to rise.
Q2) If total fixed costs are $1,000,variable costs are constant at $5.00 per unit over the relevant range of output and the average total cost is $6,how many units are being produced?
A)10
B)100
C)1,000
D)1,100
Q3) For the cubic total cost function TC = a + bQ + cQ<sup>2</sup> + dQ<sup>3</sup>,where a = 0,b = 25,c = -10,and d = 1,the firm's average variable cost is minimized at an output of:
A)ten.
B)five.
C)two.
D)one.
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Page 10
Chapter 9: Profit Maximization in Perfectly Competitive Markets
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Q1) In Figure 9-1,if the market price fell to $8 the firm would:
A)decrease production to OJ and would be operating at a loss.
B)decrease production to OJ and would be earning a normal return.
C)decrease production to OF where it would break even.
D)incur losses and shut down.
Q2) The competitive firm's demand curve is:
A)unit elastic over the relevant range of output.
B)perfectly elastic over the relevant range of output.
C)perfectly inelastic over the relevant range of output.
D)elastic above the market price and inelastic below the market price.
Q3) The presence of a relatively large number of firms in an industry does not ensure perfect competition if:
A)they sell products that are standardized.
B)there are also a large number of consumers.
C)they collude to set prices in the market.
D)the industry is an increasing-cost industry.
Q4) Derive the first-order and second-order conditions for perfect competition.
Q5) Explain the difference between diminishing marginal returns to factor and a decreasing-cost industry.
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Chapter 10: Using the Competitive Model
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Q1) Deregulation of the airline industry has resulted in:
A)a reduction in the number of airline passengers.
B)a reduction in the wages and salaries in the airline industry.
C)an increase in airfares.
D)a rapid expansion of airport capacity.
Q2) The equilibrium of a competitive industry is:
A)equitable but not necessarily efficient.
B)efficient.
C)not always efficient.
D)neither efficient nor equitable.
Q3) The long-run supply curve in a constant-cost competitive industry is a(n)_____ line.
A)horizontal
B)vertical
C)downward sloping
D)upward sloping
Q4) Explain how entry restrictions imposed on taxis by a city affects fares and profits of licensed taxi owners as demand increases over time.
Q5) Is the outcome of a competitive market efficient? Explain with the help of a graph.
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Chapter 11: Monopoly
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Q1) The marginal revenue curve of a monopolist lies below the demand curve because:
A)the demand curve is unit elastic.
B)the monopolist must lower price on all units sold in order to sell additional units.
C)the monopolist is a price taker.
D)the marginal revenue curve coincides with the average revenue curve.
Q2) A profit-maximizing monopoly firm will earn excess profits if it is able to produce a level of output where:
A)average revenue is equal to marginal cost.
B)marginal revenue is greater than marginal cost.
C)price is equal to marginal cost.
D)average revenue is greater than average cost.
Q3) Refer to Figure 11-5.Total revenue is highest at point _____ on the demand curve.
Q4) Given the profit function = R - C,derive a monopolist's profit-maximizing price and quantity.
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Chapter 12: Product Pricing With Monopoly Power
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Q1) Economists generally view the practice of perfect price discrimination favorably because it:
A)maximizes consumer surplus.
B)forces rich people to pay higher prices.
C)deters monopoly pricing.
D)eliminates deadweight loss.
Q2) Lewis owns an exclusive fashion accessories store and charges all consumers a uniform price for a particular product.Recently,however,he has realized that some of his customers are actually willing to pay a higher price for the items he sells,while some others feel that his prices are a little too high.Given this information,which of the following will not affect his ability to discriminate prices between these two consumer segments?
A)His level of monopoly power in this market
B)His total investment in this business
C)His ability to segment the market into high demand and low demand users
D)His ability to prevent arbitrage
Q3) Derive the first-order conditions for profit maximization for a monopolist practicing price-discrimination.
Q4) Why is it difficult to implement first-degree price discrimination?
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Chapter 13: Monopolistic Competition and Oligopoly
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Q1) When a firm in a monopolistically competitive market is operating at excess capacity it implies that:
A)it is producing the efficient level of output.
B)it is producing more than the competitive level of output
C)it can produce output at a lower cost
D)it is facing an upward-sloping average cost curve
Q2) Amazon.com®,Starbucks®,and eBay® are all examples of firms that were the first to establish their presence in their respective markets.Would you consider any of these firms to be dominant in that they set the market price and other firms act as perfectly competitive firms using this market price?
Q3) Refer to Figure 13-2.If the market had been perfectly competitive,the equilibrium price and output would be _____ respectively.
A)P<sub>C</sub> and Q<sub>T</sub>
B)P and Q<sub>0</sub>
C)P<sub>C</sub> and Q<sub>F</sub>
D)P and Q<sub>F</sub>
Q4) What is a cartel and why are cartels considered to be inherently unstable?
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Chapter 14: Game Theory and the Economics of Information
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Q1) A representation of how each combination of choices affects the profits of each player is known as a:
A)strategic interaction matrix.
B)Nash equilibrium.
C)payoff matrix.
D)dominant strategy equilibrium.
Q2) _____ is the term used to describe the total amount of the hospital cost that is borne by a patient before insurance coverage becomes effective.
A)Copayment
B)Premium
C)Deductible
D)Coinsurance
Q3) Which of the following product markets is most likely to be characterized by the "lemons" problem?
A)Products that are sold only during a particular season
B)Sophisticated products that are generally resold after use
C)Products whose quality can be easily judged by inspection
D)Products that are advertised heavily
Q4) Compare the benefits and the costs of advertising.
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Chapter 15: Using Noncompetitive Market Models
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Q1) Refco is company that manufactures parts of a car engine for two major car manufacturers.It decides to shut down an assembly line that produces parts that are specially tailored for one of the car manufacturers.The other manufacturer then increases its order for parts made by Refco.In this example,Refco was practicing a
A)loss leader strategy
B)price gouging strategy
C)commitment strategy
D)cost plus pricing strategy
Q2) Which of the following is true of public ownership of a natural monopoly?
A)Most publicly owned natural monopolies run economic losses.
B)In publicly owned monopolies,the incentive to minimize cost is higher.
C)Public ownership of natural monopolies reduces production efficiency in the market.
D)Natural monopolies that are publicly owned tend to innovate and create cost-saving technologies.
Q3) What is a natural monopoly? Draw a diagram to illustrate the profit-maximizing output of a natural monopoly.
Q4) Define and illustrate iterated dominance and commitment strategy.
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Chapter 16: Employment and Pricing of Inputs
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Q1) The monopsonist's marginal input cost is greater than its average input cost because:
A)the firm must increase the price it is willing to pay,to increase employment of an input.
B)the monopsonist does not have discretion over the price of the input.
C)the marginal revenue product of labor increases as the number of workers hired increases.
D)the monopsonist faces a downward-sloping input demand curve.
Q2) Refer to Figure 16-2.When the monopsonist is in equilibrium,the level of labor employed is _____.
A)A
B)B
C)C
D)D
Q3) Which of the following would be a consequence of a fall in the price of the final product in a competitive industry?
A)Each firm's labor demand curve will shift downward.
B)The marginal value product of labor is higher for each firm.
C)The marginal cost curve for each firm will shift outward away from the origin.
D)The employment of labor in the industry will increase.
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Chapter 17: Wages, Rent, Interest, and Profit
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Q1) Which of the following is not likely to have contributed to the stagnating real wage levels experienced in the 1970s in the U.S.?
A)Higher prices for oil,an input in production,led to a decrease in the demand for labor.
B)The working age population increased and increased the supply of labor in the economy.
C)The labor force participation rate of females increased sharply in the 1970s.
D)The imports of consumer goods from Japan led to a decline in domestic production.
Q2) Karen works as an emergency-room nurse at a hospital.Although her regular shifts last 8 hours,she has to work twelve-hour shifts on Saturday and Sunday.For these extra hours that she puts in during the weekends,Karen's hourly wage is doubled.Karen's income during the weekends is an example of:
A)a labor-leisure tradeoff.
B)a compensating wage differential.
C)increasing marginal revenue product.
D)the diminishing marginal product of labor.
Q3) How can the presence of a union in a labor market be beneficial?
Q4) What are the sources of variation in wages across individuals?
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Chapter 18: Using Input Market Analysis
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Q1) Which of the following will result when the pay-as-you-go Social Security program is introduced in a country?
A)The supply curve of saving will shift rightward
B)The market interest rate will decline
C)Gross investment in the economy will decline
D)The investment demand curve will become inelastic
Q2) Consider two groups of workers both facing identical downward-sloping demand curves.The labor supply curve of group A workers is relatively elastic,while that of group B workers is relatively inelastic.Which of the following will result if the government imposes a minimum wage in both these labor market?
A)Group A workers will experience a higher disemployment effect than group B workers.
B)Group B workers will experience a higher disemployment effect than group A workers.
C)The total unemployment experienced by Group A workers will be higher than Group B workers.
D)The total unemployment experienced by Group B workers will be higher than Group A workers.
Q3) Mention some of the factors which hinder input buyer's cartel.
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Chapter 19: General Equilibrium Analysis and Economic Efficiency
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Q1) Refer to Figure 19-1.Which of the following would represent a movement from an inefficient allocation of resources to an efficient allocation of resources?
A)A movement from point E to point A
B)A movement from point C to point B
C)A movement from point B to point D
D)A movement from point A to point B
Q2) Why is efficiency considered to be a reasonable goal for economic performance?
Q3) General equilibrium analysis is the study of:
A)how equilibrium is determined in a monopolistically competitive market.
B)the determination of equilibrium in one factor market.
C)the determination of equilibrium in a product market.
D)how equilibrium is determined in all markets simultaneously.
Q4) If the marginal rates of technical substitution between inputs are not equal among firms,it means that:
A)output is being inefficiently distributed.
B)the ratio of the input prices is greater than the ratio of the product prices.
C)output is not being maximized,given available inputs.
D)input markets are not in equilibrium.
Q5) What is the difference between partial and general equilibrium analysis?
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Chapter 20: Public Goods and Externalities
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Q1) An uncongested,non-toll road is characterized by:
A)nonexclusion and nonrivalry in consumption.
B)nonexclusion and rivalry in consumption.
C)exclusion and nonrivalry in consumption.
D)exclusion and rivalry in consumption.
Q2) Taxes imposed on polluting firms,for internalizing the externalities created by them,may not always lead to an efficient solution because:
A)the taxes lowers the firms' incentives to reduce pollution
B)it is difficult to determine the appropriate level of the tax that will result in an efficient output.
C)firms that cannot earn positive economic profits after the tax is imposed will go out of business.
D)the tax imposed by the government results in an increase in the average price level.
Q3) An uncongested,toll road is characterized by:
A)nonexclusion and nonrivalry in consumption.
B)nonexclusion but rivalry in consumption.
C)exclusion and nonrivalry in consumption.
D)exclusion but rivalry in consumption.
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