Principles of Microeconomics Test
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Course Introduction
Principles of Microeconomics introduces students to the fundamentals of economic theory, focusing on the behavior of individual consumers and firms within various market structures. The course explores the concepts of supply and demand, elasticity, consumer choice, production and costs, as well as the determination of prices in competitive and non-competitive markets. Students also analyze the impact of government intervention, externalities, and public goods on market outcomes. Through real-world examples and practical applications, the course aims to develop a foundational understanding of how microeconomic principles influence decision-making and resource allocation in everyday life.
Recommended Textbook
Principles of Microeconomics 7th Edition by N. Gregory Mankiw
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Chapter 1: Ten Principles of Economics
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Q1) Which of the following observations was made famous by Adam Smith in his book The Wealth of Nations?
A) There is no such thing as a free lunch.
B) People buy more when prices are low than when prices are high.
C) No matter how much people earn, they tend to spend more than they earn.
D) Households and firms interacting in markets are guided by an "invisible hand" that leads them to desirable market outcomes.
Answer: D
Q2) The business cycle is the
A) relationship between unemployment and inflation.
B) irregular fluctuations in economic activity.
C) positive relationship between the quantity of money in an economy and inflation.
D) predictable changes in economic activity due to changes in government spending and taxes.
Answer: B
Q3) Invisible hand is a term used by the economist in his 1776 book An Inquiry into the Nature and Causes of the Wealth of Nations.
Answer: Adam Smith
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Chapter 2: Thinking Like an Economist
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Q1) Which two groups of decision makers are included in the simple circular-flow diagram?
A) markets and government
B) households and government
C) firms and government
D) households and firms
Answer: D
Q2) When an economy is operating at a point on its production possibilities frontier, then
A) consumers are content with the mix of goods and services that is being produced.
B) there is no way to produce more of one good without producing less of the other.
C) equal amounts of the two goods are being produced.
D) All of the above are correct.
Answer: B
Q3) Unemployment causes production levels to be inefficient.
A)True
B)False
Answer: True
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Chapter 3: Interdependence and the Gains From Trade
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Q1) Ken and Traci are two woodworkers who both make tables and chairs. In one month, Ken can make 3 tables or 18 chairs, whereas Traci can make 8 tables or 24 chairs. Given this, we know that the opportunity cost of 1 table is
A) 1/6 chair for Ken and 1/3 chair for Traci.
B) 1/6 chair for Ken and 3 chairs for Traci.
C) 6 chairs for Ken and 1/3 chair for Traci.
D) 6 chairs for Ken and 3 chairs for Traci.
Answer: D
Q2) Refer to Table 3-27. The opportunity cost of 1 plate for Huang is
A) 1/3 parasol.
B) 1/2 parasol.
C) 3 parasols.
D) 4 parasols.
Answer: C
Q3) If a person chooses self-sufficiency, then she can only consume what she produces.
A)True
B)False
Answer: True
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Chapter 4: The Market Forces of Supply and Demand
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Q1) If a surplus exists in a market, then we know that the actual price is
A) above the equilibrium price, and quantity supplied is greater than quantity demanded.
B) above the equilibrium price, and quantity demanded is greater than quantity supplied.
C) below the equilibrium price, and quantity demanded is greater than quantity supplied.
D) below the equilibrium price, and quantity supplied is greater than quantity demanded.
Q2) Refer to Figure 4-20. If the price is $25, then there would be an excess
A) supply of 100 units, and price would fall.
B) supply of 300 units, and price would fall.
C) demand of 100 units, and price would fall.
D) demand of 300 units, and price would fall.
Q3) Refer to Figure 4-31. What are the values of the equilibrium price and quantity?
Q4) When quantity supplied exceeds quantity demanded at the current market price, the market has a surplus, and market price will likely rise in the future to eliminate the surplus.
A)True
B)False
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Chapter 5: Elasticity and Its Application
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Q1) Suppose good X has a negative income elasticity of demand. This implies that good X is
A) a normal good.
B) a necessity.
C) an inferior good.
D) a luxury.
Q2) Supply is said to be inelastic if the quantity supplied responds substantially to changes in the price and elastic if the quantity supplied responds only slightly to price.
A)True
B)False
Q3) Skip's Sealcoating Service increased its total monthly revenue from $12,000 to $13,500 when it raised the price of driveway repairs from $600 to $750. The price elasticity of demand for Skip's Sealcoating Service is
A) 0.11.
B) 0.47.
C) 1.12.
D) 2.11.
Q4) Refer to Table 5-12. Between which two quantities listed is demand unit elastic?
Q5) Refer to Table 5-12. Between which two quantities listed is demand most elastic?
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Chapter 6: Supply, Demand, and Government Policies
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Q1) Suppose the equilibrium price of a physical examination ("physical") by a doctor is $200, and the government imposes a price ceiling of $150 per physical. As a result of the price ceiling, the
A) demand curve for physicals shifts to the right.
B) supply curve for physicals shifts to the left.
C) quantity demanded of physicals increases, and the quantity supplied of physicals decreases.
D) number of physicals performed stays the same.
Q2) The United States is the only country in the world with minimum-wage laws.
A)True
B)False
Q3) To say that a price ceiling is binding is to say that the price ceiling
A) results in a shortage.
B) is set below the equilibrium price.
C) causes quantity demanded to exceed quantity supplied.
D) All of the above are correct.
Q4) Refer to Figure 6-33. Suppose a $3 per-unit tax is imposed on the sellers of this good. What is the effective price that sellers will receive for the good after the tax is imposed?
Q5) Will a binding price floor result in a shortage or a surplus in the market?
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Chapter 7: Consumers, Producers, and the Efficiency of Markets
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Q1) Refer to Figure 7-7. What happens to the consumer surplus if the price rises from $100 to $150?
A) The new consumer surplus is half of the original consumer surplus.
B) The new consumer surplus is 25 percent of the original consumer surplus.
C) The new consumer surplus is double the original consumer surplus.
D) The new consumer surplus is triple the original consumer surplus.
Q2) Refer to Figure 7-33. Suppose demand shifts such that consumers wish to purchase 12 fewer units at every price.
How much is total producer surplus in this market at the new equilibrium price?
Q3) Refer to Figure 7-16. If the price of the good is $600, then producer surplus amounts to
A) $650.
B) $800.
C) $900.
D) $1,000.
Q4) Which of the following statements is correct?
A) Buyers always want to pay less and sellers always want to be paid more.
B) Buyers always want to pay less and sellers always want to be paid less.
C) Buyers always want to pay more and sellers always want to be paid more.
D) Buyers always want to pay more and sellers always want to be paid less.
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Chapter 8: Application: The Costs of Taxation
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Q1) Refer to Figure 8-18. Suppose the government imposes a $1 tax in each of the four markets represented by supply curves S1, S2, S3, and S4. The deadweight will be the smallest in the market represented by
A) S1.
B) S2.
C) S3.
D) S4.
Q2) Economist Arthur Laffer made the argument that tax rates in the United States were so high that reducing the rates would increase tax revenue.
A)True
B)False
Q3) The greater the elasticity of demand, the smaller the deadweight loss of a tax.
A)True
B)False
Q4) As the size of a tax rises, the deadweight loss
A) rises, and tax revenue first rises, then falls.
B) rises as does tax revenue.
C) falls, and tax revenue first rises, then falls.
D) falls as does tax revenue.
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Chapter 9: Application: International Trade
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Q1) Suppose the world price of a television is $300. Before Paraguay allowed trade in televisions, the price of a television there was $350. Once Paraguay began allowing trade in televisions with other countries, Paraguay began
A) importing televisions and the price of a television in Paraguay decreased to $300.
B) importing televisions and the price of a television in Paraguay remained at $350.
C) exporting televisions and the price of a television in Paraguay decreased to $300.
D) exporting televisions and the price of a television in Paraguay remained at $350.
Q2) Refer to Figure 9-4. Which of the following statements is accurate?
A) Consumer surplus with trade is $3,200.
B) Producer surplus with trade is $375.
C) The gains from trade amount to $800.
D) The gains from trade are represented on the graph by the area bounded by the points (0, $12), (300, $12), (300, $7) and (0, $7).
Q3) Refer to Scenario 9-3. With no trade allowed, what are the equilibrium price and quantity in this market?
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Chapter 10: Externalities
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Q1) Refer to Figure 10-12. Which of the following is an appropriate label for Line 1?
A) social cost minus social value
B) social value minus private cost
C) demand
D) private cost
Q2) Refer to Scenario 10-3. Suppose there is an external cost of $12 associated with the production of each unit of the good. What are the socially optimal quantity and price?
Q3) Refer to Table 10-3. Taking into account private and external costs, the maximum total surplus that can be achieved in this market is
A) $18.
B) $38.
C) $46.
D) $55.
Q4) Corrective taxes are more efficient than regulations for keeping the environment clean.
A)True
B)False
Q5) At any given quantity, the cost of the marginal seller is the height of the .
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Chapter 11: Public Goods and Common Resources
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Q1) Aristotle writes, "What is common to many is taken least care of, for all men have greater regard for what is their own than for what they possess in common with others." In this statement, Aristotle is referring to the free-rider problem that occurs when a person receives the benefit of a good without paying for it.
A)True
B)False
Q2) Refer to Table 11-4. Suppose the cost to plant each tree is $300. How many trees should be planted to maximize the total surplus of the four homeowners?
A) 1
B) 2
C) 3
D) 4
Q3) All goods that are excludable are also rival in consumption, but not all goods that are rival in consumption are excludable.
A)True
B)False
Q4) Refer to Scenario 11-3. Which of these goods is the best example of a club good? Briefly explain.
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Chapter 12: The Design of the Tax System
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Q1) Refer to Table 12-4. What is the marginal tax rate for a person who makes $50,000?
A) 25%
B) 28%
C) 40%
D) 60%
Q2) In general, Democrats tend to prefer
A) higher marginal tax rates to promote vertical equity, while Republicans tend to prefer lower marginal tax rates to promote incentives to work and save.
B) lower marginal tax rates to promote vertical equity, while Republicans tend to prefer higher marginal tax rates to promote incentives to work and save.
C) higher marginal tax rates to promote incentives to work and save, while Republicans tend to prefer lower marginal tax rates to promote vertical equity.
D) lower marginal tax rates to promote incentives to work and save, while Republicans tend to prefer higher marginal tax rates to promote vertical equity.
Q3) How can a proportional tax achieve vertical equity?
Q4) As a person's or family's income rises, the marginal federal income tax rate .
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Chapter 13: The Costs of Production
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Q1) Refer to Figure 13-9. The firm experiences economies of scale at which output levels?
A) output levels less than M
B) output levels between M and N
C) output levels greater than N
D) All of the above are correct as long as the firm is operating in the long run.
Q2) In the short run, a firm that produces and sells house paint can adjust
A) where to produce along its long-run average-total-cost curve.
B) the size of its factories.
C) how many workers to hire.
D) All of the above are correct.
Q3) Which of the following statements is not correct?
A) In the long run, there are no fixed costs.
B) Marginal cost is independent of fixed costs.
C) Economies of scale is a short-run concept.
D) Diminishing marginal product explains increasing marginal cost.
Q4) The average-total-cost curve is unaffected by diminishing marginal product.
A)True
B)False
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Chapter 14: Firms in Competitive Markets
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Q1) Which of these types of costs can be ignored when an individual or a firm is making decisions?
A) sunk costs
B) marginal costs
C) variable costs
D) opportunity costs
Q2) In the long run, all of a firm's costs are variable. In this case the exit criterion for a profit-maximizing firm is to shut down if
A) price is less than average total cost.
B) price is greater than average total cost.
C) average revenue is greater than average fixed cost.
D) average revenue is greater than marginal cost.
Q3) Refer to Scenario 14-1. At Q = 999, the firm's total costs equal
A) $10,985.
B) $10,990.
C) $10,995.
D) $10,999.
Q4) If identical firms that remain in a competitive market over the long run make zero economic profit, why do these firms choose to remain in the market?
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Chapter 15: Monopoly
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Q1) Antitrust laws may
A) enhance the ability of firms to capture profits from a concentration of market power.
B) enhance the ability of firms to reduce economic losses.
C) restrict the ability of firms to operate at the socially efficient level of production.
D) restrict the ability of firms to merge.
Q2) Declining average total cost with increased production is one of the defining characteristics of a natural monopoly.
A)True
B)False
Q3) Refer to Figure 15-24. Use the letters in the figure to identify the profit area if this firm were able to perfectly price discriminate.
Q4) The laws governing patents and copyrights
A) promote monopolies.
B) are intended to serve private interests, not the public's interest.
C) have costs but not benefits.
D) eliminate the need for firms to engage in research and development.
Q5) What are the three main sources of barriers to entry for monopolies?
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Chapter 16: Monopolistic Competition
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Q1) Refer to Figure 16-9. In order to maximize its profit, the firm will choose to produce
A) less than 100 units of output.
B) 100 units of output.
C) between 100 and 133.33 units of output.
D) more than 133.33 units of output.
Q2) Which of the following conditions is characteristic of a monopolistically competitive firm in both the short-run and the long run?
A) P > MC
B) MC = ATC
C) P < MR
D) All of the above are correct.
Q3) A profit-maximizing firm operating in a monopolistically competitive market that is in a long-run equilibrium has
A) minimized average total cost.
B) chosen to produce where demand is unitary elastic.
C) produced the efficient scale of output.
D) chosen a quantity of output where average revenue equals average total cost.
Q4) Refer to Scenario 16-9. Which friend is a critic of brand names?
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Chapter 17: Oligopoly
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Q1) Refer to Scenario 17-2. If each firm is permitted to drill two wells at most, the firms are in a Nash equilibrium when
A) BQ drills one well and Exxoff drills two wells.
B) BQ drills two wells and Exxoff drills one well.
C) both firms drill one well.
D) both firms drill two wells.
Q2) The theory of oligopoly provides another reason that free trade can benefit all countries because
A) increased competition leads to larger deadweight losses.
B) as the number of firms within a given market increases, the price of the good decreases.
C) as the number of firms within a given market increases, the profit of each firm increases.
D) All of the above are correct.
Q3) OPEC (Organization of Petroleum Exporting Countries) is an example of a cartel in the output market for petroleum. Major League Baseball could be considered a cartel in the market for baseball players.
Q4) Why are the actions of firms interdependent in an oligopoly market but not in a monopolistically competitive market?
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Chapter 18: The Markets for the Factors of Production
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Q1) Refer to Figure 18-3. Suppose that the price of the output is $20. What is the value of the marginal product of the fourth worker?
A) $1
B) $20
C) $280
D) $300
Q2) Suppose the prices of agricultural products such as corn and soybeans increase. What is the effect of these price increases on the marginal product of the 1,000th farm worker? What is the effect on the value of the marginal product of the 1,000th farm worker?
Q3) Refer to Figure 18-3. What is the marginal product of the second worker?
A) 4 units
B) 6 units
C) 8 units
D) 12 units
Q4) The current value of the marginal product of land influences the A) demand for land.
B) equilibrium rental price of land.
C) equilibrium purchase price of land.
D) all of the above.
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Chapter 19: Earnings and Discrimination
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Q1) Two economists created fake resumes with either common African-American names such as Lakisha and Jamal or common white names such as Emily and Greg. After sending them to potential employers with "Help Wanted" ads in Boston and Chicago newspapers, they found that
A) black employees earned 50 percent less than white employees in Chicago but that blacks and whites had similar wages in Boston.
B) black employees earned 50 percent less than white employees in Boston but that blacks and whites had similar wages in Chicago.
C) job applicants with white names received 50 percent more phone calls from interested employers.
D) job applicants with white names received 7 percent more phone calls from interested employers.
Q2) Some economists suggest that increased international trade with countries that have a greater proportion of unskilled workers has led to an expanding wage gap between high-skill and low-skill workers in the United States.
A)True
B)False
Q3) List three reasons why wages could be set above the equilibrium wage.
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Chapter 20: Income Inequality and Poverty
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Q1) Which of the following is not an example of a welfare program?
A) Supplemental Security Income (SSI)
B) Temporary Assistance for Needy Families (TANF)
C) food stamps
D) minimum wage laws
Q2) Refer to Scenario 20-3. Assuming that utility is directly proportional to the cash value of after-tax income, which government policy would an advocate of utilitarianism prefer?
A) Plan A
B) Plan B
C) either Plan A or Plan B
D) neither Plan A nor Plan B because any plan that forcibly redistributes income is against the philosophy
Q3) "The government should choose policies to maximize the total utility of society." This statement is most closely associated with which political philosophy?
A) liberalism
B) utilitarianism
C) libertarianism
D) welfarism
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Chapter 21: The Theory of Consumer Choice
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Q1) A Giffen good is one for which the quantity demanded rises as the price rises because the income effect
A) reinforces the substitution effect.
B) reinforces and is greater than the substitution effect.
C) counteracts but is smaller than the substitution effect.
D) counteracts and is greater than the substitution effect.
Q2) At a consumer's optimal choice, the consumer chooses the combination of goods that equates the marginal rate of substitution and the price ratio.
A)True
B)False
Q3) An inferior good is one in which
A) the average consumer chooses not to consume.
B) the good is not equally valued by all consumers.
C) an increase in income increases consumption of the good.
D) an increase in income decreases consumption of the good.
Q4) The slope of a consumer's budget constraint is unaffected by a change in income.
A)True
B)False
Q5) List and briefly explain each of the four properties of indifference curves.
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Chapter 22: Frontiers of Microeconomics
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Q1) Adverse selection is
A) the tendency of a person who is imperfectly monitored to engage in dishonest or otherwise undesirable behavior.
B) an action taken by an uninformed party to induce an informed party to reveal information.
C) the failure of majority voting to produce transitive preferences for society.
D) the tendency for the mix of unobserved attributes to become undesirable from the standpoint of an uninformed party.
Q2) Which of the following is not correct?
A) Pairwise voting never produces transitive preferences.
B) The order of pairwise voting can affect the result.
C) Majority voting by itself does not tell us what outcome a society really wants.
D) No voting system can satisfy all of the following properties: unanimity, transitivity, independence of irrelevant alternatives, and no dictators.
Q3) State one reason why government intervention may not be a good solution to an asymmetric information problem.
Q4) Refer to Scenario 22-6. What is the term for the type of wage Shana pays Katie?
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