Microeconomics Study Guide
Unit 1
1. Figure 4-1 shows Arnold's demand curve for burritos. If the
market price is $1.00, what is the maximum number of
burritos that Arnold will buy?
a. 1
b. 2
c. 3
d. 4
2. Consider the following items: a. the novel "The Girl On The
Train" by Paula Hawkins, b. the "The Spirited Shipper," an
innovative wine shipping box, c. a Swiss chef's award-winning recipe, d. an original fabric design,
for example, the fabric used for "Coach" bags and luggage. Which of the items listed is an
example of intellectual property?
a. A and B only
b. A, B, and C
c. A and D only
d. All of the items listed
3. Macroeconomics is the study of
a. how households make choices.
b. how firms make choices.
c. how households and firms make choices.
d. the economy as a whole.
4. If, in response to a decrease in the price of grapes, the quantity of grapes demanded increases,
economists would describe this as
a. an increase in demand.
b. an increase in quantity demanded.
c. a change in consumer income.
d. an increase in consumers' taste for grapes.
5. A demand curve shows
a. the willingness of consumers to buy a product at different prices.
b. the willingness of consumers to substitute one product for another product.
c. the relationship between the price of a product and the
demand for the product.
d. the relationship between the price of a product and the
total benefit consumers receive from the product.
6. Refer to Figure 3-1. If the product represented is an inferior good,
an increase in income would be represented by a movement from
a. A to B
b. B to A
c. D1 to D2
d. D2 to D1
7. In a production possibilities frontier model, a point ________ the frontier is productively
inefficient.
a. Along
b. Inside
c. Outside
d. At either intercept of
8. Refer to Figure 4-1. Arnold's marginal benefit from consuming the fourth burrito is
a. $0.00
b. $1.00
c. $2.50
d. $3.00
9. Figure 2-4 shows various points on three different
production possibilities frontiers for a nation. Consider
the following events: A. a decrease in the unemployment
rate, B. general technological advancement, C. an
increase in consumer wealth. Which of the events listed
above could cause a movement from V to W?
a. A only
b. A and B only
c. B and C only
d. A, B, and C
10. An organization of producers that limits the amount of a good produced is known as a
a. free market organization.
b. guild.
c. collective.
d. co-op.
11. Lucinda buys a new GPS system for $250. She receives consumer surplus of $75 from the
purchase. What value does Lucinda place on her GPS system?
a. $75
b. $175
c. $250
d. $325
12. Refer to Figure 4-1. If the market price is $1.50, what is the consumer surplus on the first
burrito?
a. $0.50
b. $1.00
c. $1.50
d. $7.50
13. Refer to Figure 2-6. If the economy is currently producing at
point C, what is the opportunity cost of moving to point B?
a. 10 thousand wrenches
b. 13 thousand hammers
c. 30 thousand wrenches
d. 23 thousand hammers
14. "An Inquiry into the Nature and Causes of the Wealth of Nations"
published in 1776 was written by
a. John Maynard Keynes.
b. Karl Marx.
c. Alfred Marshall.
d. Adam Smith.
15. Refer to Figure 2-14. Which two arrows in the diagram depict the
following transaction: Myrna earns $450 for working at HempHill's
Drug Store.
a. J and M
b. K and G
c. K and M
d. J and G
16. If the price of gasoline decreases, what will be the impact in the market for public
transportation?
a. The demand curve for public transportation shifts to the right.
b. The quantity of public transportation demanded increases.
c. The demand curve for public transportation shifts to the left.
d. The quantity of public transportation demanded decreases.
17. Refer to Figure 2-14. Which two arrows in the diagram depict the following transaction: Dorian
Gray hires "Wild Oscar," a professional portrait artist, to paint his picture.
a. J and M
b. K and G
c. K and M
d. J and G
18. Refer to Figure 4-4. The figure above represents
the market for pecans. Assume that this is a
competitive market. If 4,000 pounds of pecans are
sold
a. the deadweight loss is equal to $12,000.
b. consumer surplus equals zero.
c. the marginal benefit of each of the 4,000
pounds of pecans equals $3.
d. marginal benefit is equal to marginal cost.
19. A change in which variable will change the market demand for a product?
a. the price of the product
b. population
c. technology
d. the prices of substitutes in production
20. An outward shift of a nation's production possibilities frontier represents
a. economic growth.
b. rising prices of the two goods on the production possibilities frontier model.
c. an impossible situation.
d. a situation in which a country produces more of one good and less of another.
21. If the price of automobiles was to increase, then
a. the demand for gasoline would decrease.
b. the demand for gasoline would increase.
c. the supply of gasoline would increase.
d. the quantity of gasoline demanded would decrease.
22. If an increase in income leads to in an increase in the demand for peanut butter, then peanut
butter is
a. a neutral good.
b. a normal good.
c. a necessity.
d. a complement.
23. Refer to Figure 2-6. If the economy is currently producing at point D, what is the opportunity
cost of moving to point B?
a. 8 thousand wrenches
b. 23 thousand hammers
c. 30 thousand wrenches
d. 0 hammers
24. Households ________ final goods and services in the ________ market.
a. purchase; factor
b. purchase; product
c. sell; factor
d. sell; product
25. If the price of refillable butane lighters was to decrease, then
a. the demand for butane would decrease.
b. the demand for butane would increase.
c. the quantity of butane demanded would increase.
d. the quantity of butane demanded would decrease.
Unit 3
1. According to a New York Times article, shoppers from New York City have played a game of
"retail arbitrage" by shopping at malls in Northern New Jersey, a state where there is no tax on
clothing and shoes. Even after accounting for transactions costs, shoppers could still save money
on their clothing and footwear purchases. Is the term "arbitrage" correctly used here?
a. Yes, because shoppers were able to purchase items at lower prices even after deducting
their transactions costs.
b. No, "arbitrage" means buying at a low price and reselling at a higher price but no
resale takes place here.
c. Yes, arbitrage applies even if no resale takes place; in this case the profits are pocketed
by the customers themselves.
d. No, "arbitrage" does not apply to markets that are not in the same geographic area.
2. An example of a barrier to entry is
a. product differentiation.
b. high profits.
c. superior technological knowledge.
d. increasing marginal costs.
3. A constant-cost industry is an industry in which
a. average costs fall as the industry expands output.
b. average costs rise as the industry expands output.
c. average costs remain constant as the industry expands output.
d. input prices rise at a constant rate as firms in the industry use more inputs.
4. A perfectly competitive industry achieves allocative efficiency in the long run. What does
allocative efficiency mean?
a. Each firm produces up to the point where the price of the good equals the marginal
cost of producing the last unit.
b. Each firm produces up to the point where all scale economies are exhausted.
c. Production occurs at the lowest average total cost.
d. Firms use an input combination that minimizes cost and maximizes output.
5. Airlines often engage in last-minute price cutting to fill remaining empty seats on a flight
because this practice will generally
a. prevent rival airlines from competing in that market.
b. increase marginal revenue more than marginal cost.
c. maximize marginal revenue.
d. discourage rivals from matching price cuts.
6. A dominant strategy is
a. an equilibrium where each firm chooses the best strategy, given the strategies of other
firms.
b. a strategy chosen by two firms that decide to charge the same price or otherwise not to
compete.
c. a strategy that is obviously the best for each firm that is a party to a business decision.
d. a strategy that is the best for a firm no matter what strategies other firms use.
7. A possible advantage of a horizontal merger for the economy is that
a. the merging firms could avoid losses.
b. the merged firm might reap economies of scale which could translate into lower
prices.
c. the degree of competition in the industry will be intensified.
d. the government stands to collect more corporate income tax revenue.
8. A cartel is
a. a temporary storage facility for automobiles.
b. a group of firms that enter into an informal agreement to fix prices to maximize joint
profits.
c. a group of firms that enter into a formal agreement to fix prices to maximize joint
profits.
d. an example of a group of firms that collectively regulate a competitive industry.
9. A monopolistically competitive firm that is earning profits will, in the long run, experience all of
the following except
a. new rivals entering the market.
b. a decrease in demand for its product.
c. demand for the firm's product becomes more elastic.
d. a decrease in the number of rival products.
10. A patent or copyright is a barrier to entry based on
a. ownership of a key necessary raw material.
b. large economies of scale as output increases.
c. government action to protect a producer.
d. widespread network externalities.
11. A monopoly is a firm that is the only seller of a good or service that does not have
a. a patent.
b. a close complement.
c. a barrier to entry.
d. a close substitute.
12. A merger between firms at different stages of production of a good
a. is a vertical merger.
b. was made illegal by the Sherman Act.
c. was made legal by the Clayton Act.
d. is a horizontal merger.
13. An example of a government-imposed barrier to entry gives a firm the exclusive right to a new
product for a period of 20 years from the date the product is invented. This entry barrier is
known as
a. a copyright.
b. a patent.
c. an exclusive marketing agreement.
d. a tariff.
14. A perfectly competitive wheat farmer in a constant-cost industry produces 1,000 bushels of
wheat at a total cost of $50,000. The prevailing market price is $48. What will happen to the
market price of wheat in the long run?
a. The price remains constant at $48.
b. The price falls below $48.
c. The price rises above $48.
d. There is insufficient information to answer the question.
15. A perfectly competitive firm earns a profit when price is
a. equal to minimum average total cost.
b. above minimum average total cost.
c. equal to minimum average variable cost.
d. equal to minimum average fixed cost.
16. A perfectly competitive wheat farmer in a constant-cost industry produces 3,000 bushels of
wheat at a total cost of $36,000. The prevailing market price is $15. What will happen to the
market price of wheat in the long run?
a. The price remains constant at $15.
b. The price falls to $12.
c. The price rises above $15.
d. There is insufficient information to answer the question.
17. A very large number of small sellers who sell identical products imply
a. a multitude of vastly different selling prices.
b. a downward sloping demand curve for each seller's product.
c. the inability of one seller to influence price.
d. chaos in the market.
18. A perfectly competitive firm will maximize its profit at the rate of output where the vertical
distance between its total revenue curve and total cost curve is the largest. This is the same rate
of output where
a. average total cost equals marginal revenue.
b. marginal revenue equals marginal profit.
c. marginal revenue equals marginal cost.
d. marginal revenue equals average revenue.
19. A firm's efforts to increase profit by price discrimination can be undermined by
a. arbitrage by buyers.
b. consumer ignorance.
c. differences in elasticity of demand.
d. seller market power.
20. A perfectly competitive firm has to charge the same price as every other firm in the market.
Therefore, the firm
a. faces a perfectly inelastic demand curve.
b. is not able to make a profit in the short run.
c. is a price taker.
d. faces a perfectly elastic supply curve.
21. An article on how prices in South Bend, Indiana rise during Notre Dame home football games
noted: "For the Sept. 16 game against the University of Michigan, the South Bend Marriott is
charging $649 a night for a double room.... The Marriott's regular weekend price is $149 a
night." Which of the following statements is true?
a. The Marriott is practicing first-degree price discrimination by charging what the market
will bear.
b. This is evidence of third-degree price discrimination because hotel accommodation on a
particular day is not a product that can be resold later.
c. There is no evidence of price discrimination; the Marriott is responding to increased
demand for hotel rooms in the face of constant supply.
d. The Marriott has adopted this pricing strategy to capitalize on arbitrage profits.
22. All of the following characteristics are common to both monopolistic competition and perfect
competition except
a. firms act to maximize profit.
b. entry barriers into the industries are low.
c. the market demand curves are downward-sloping.
d. firms take market prices as given.
23. A firm using a two-part tariff can produce the economically efficient outcome by
a. making the fixed-fee portion of the price as low as possible.
b. setting the per-unit portion of the price equal to the marginal cost of production.
c. setting the per-unit portion of the price equal to the average cost of production.
d. setting the fixed-fee portion of the price at some proportion to the fixed cost of
production.
24. A supplier of an input is unlikely to have bargaining power if
a. the input supplied is specialized.
b. many firms can supply the input.
c. it is the sole supplier of the input.
d. it has a patent on the input.
25. A Nash equilibrium is
a. reached when an oligopoly's market demand and supply intersect.
b. reached when each player chooses the best strategy for himself and for the group.
c. reached when each player chooses the best strategy for himself, given the other
strategies chosen by the other players in the group.
d. an equilibrium comprising non-dominant strategies only.
Unit 4
1. A successful compensation scheme
a. must pay workers with comparable skills a comparable wage.
b. must induce effort from workers and ensure that both employer and employees
benefit.
c. must enable workers to enjoy a certain standard of living and must enable employers to
earn a normal rate of return.
d. must allow employees to participate in a firm's profits.
2. An individual's labor supply curve shows
a. the maximum wage rates offered to that individual by various potential employers.
b. the relationship between wages and the quantity of labor that she is willing to supply.
c. the relationship between wages and the quantity of labor that a firm is willing to
employ.
d. the relationship between the quantity of hours worked and total income earned by that
individual.
3. At the state and local levels in the United States, the largest source of tax revenue is
a. individual income taxes.
b. property tax on real estate.
c. sales tax.
d. grants from the federal government.
4. As the value of the Gini coefficient approaches zero
a. income distribution becomes less unequal.
b. income distribution becomes more unequal.
c. the percentage of the population under the poverty line increases.
d. the percentage of the population under the poverty line decreases.
5. Economist Kenneth Arrow has shown mathematically that no system of voting will consistently
represent the underlying preferences of voters. This finding is called
a. the Arrow impossibility theorem.
b. Arrow's median voter model.
c. Arrow's Amendment to the public choice model.
d. Arrow's majority vote paradox.
6. Comparable worth legislation
a. will eliminate the earnings gap between men and women.
b. mandate that employers pay the same wages to workers, regardless of their gender,
for jobs that have comparable worth.
c. mandate that potential employers demonstrate that they are worth the wages they
expect to earn.
d. guide markets toward the economically efficient wage.
7. A statistical tool used to measure inequality is
a. the Lorenz curve.
b. the Gini coefficient.
c. the absolute poverty rate.
d. the relative poverty rate.
8. Compensating differentials are associated most closely with which of the following?
a. hazardous jobs
b. comparable worth
c. economic discrimination
d. differences in education
9. Assume that a comparable worth law is passed that determines that kindergarten teachers and
bricklayers have comparable jobs; therefore, workers in both of these occupations should be
paid the same wages. Assume that prior to the law, bricklayers were paid a higher wage than
kindergarten teachers. Which of the following is the most likely result of the comparable worth
law?
a. The equilibrium wage will be the same for kindergarten teachers and bricklayers.
b. Some former bricklayers will become kindergarten teachers and some former
kindergarten teachers will become bricklayers.
c. There will be a shortage in the market for bricklayers and a surplus in the market for
kindergarten teachers.
d. There will be surplus in the market for bricklayers and a shortage in the market for
kindergarten teachers.
10. Between 1980 and 2014, income inequality in the United States has increased in part due to
rapid technological change. How does technological change contribute to income inequality?
a. Advancements in technology displace skilled and unskilled workers in certain fields,
leading to higher unemployment rates.
b. Technology complements the skills of the well-educated while rendering redundant
the labor services of unskilled and low-skilled workers. This causes a decline in the
wages of low and unskilled workers relative to other workers.
c. The opportunity cost of investing in technology is investments in human capital. The
resulting decrease in labor's marginal productivity has led to lower wages.
d. Technological change favors the owners of capital and since high-income individuals
tend to own capital, income inequality is further exacerbated.
11. A firm chooses its profit-maximizing quantity of capital by
a. comparing the marginal revenue product of capital with the rental price of capital.
b. comparing the price of capital with the price of labor.
c. examining the total cost of capital equipment.
d. determining the rate at which the firm can borrow funds to purchase plant and
equipment.
12. As more output is produced, the marginal product of labor declines
a. because of the law of diminishing returns.
b. if firms reduce the wage paid to labor.
c. if the firm's output supply curve is inelastic.
d. because the firm's marginal revenue declines.
13. Along an upward-sloping labor supply curve, as the wage rate increases, the opportunity cost of
leisure ________, causing individuals to supply a ________ quantity of labor.
a. increases; greater
b. increases; lower
c. decreases; greater
d. remains constant; constant
14. An increase in the supply of capital, which is a complement to labor, will lead to
a. a decrease in the quantity of labor demanded.
b. an increase in the demand for labor.
c. a decrease in the demand for labor.
d. an increase in the quantity of labor demanded.
15. Economic discrimination takes place when an employer
a. pays workers the lowest wage possible.
b. pays workers different wages on the basis of some arbitrary characteristics of workers
that are irrelevant to the job performed.
c. pays lower wages to workers who are not as productive as other workers.
d. pays workers compensating wage differentials.
16. Competitive markets tend to eliminate economic discrimination, but there are many historical
examples of firms that hired few, or no, black or female workers. Which of the following is not a
reason for the persistence of this form of discrimination?
a. In many cases, white workers refused to work with black workers.
b. Some white consumers were unwilling to buy from companies that employed black
workers.
c. If discrimination makes it difficult for a member of a group to be hired in a particular
occupation, there is less incentive for members of the group to be trained to enter that
occupation.
d. Laws passed by the federal government made it more expensive to hire black or
female workers. As a result, it was less expensive for employers to hire mostly white
male workers.
17. A tax is efficient if
a. individuals with the lowest incomes pay proportionately lower taxes than individuals
with the highest incomes.
b. it is based on profits earned and not on wages.
c. it encourages saving and investment.
d. it imposes a small excess burden relative to the revenue it raises.
18. A firm's demand curve for labor slopes downwards because
a. of the law of diminishing marginal returns.
b. firms supply less labor as the wage rate rises.
c. workers supply less labor services as the wage rate falls.
d. of rising marginal product.
19. A study by Price Fishback and Shawn Kantor of the University of Arizona shows that after the
passage of workers' compensation laws, wages received by workers in the coal and lumber
industries fell. Which of the following could explain why passage of workers' compensation laws
led to a fall in wages in some industries?
a. The passage of the workers' compensation laws made it more expensive for firms to
employ workers, thus reducing the demand for workers.
b. The passage of the workers' compensation laws allowed employers in hazardous
industries to reduce compensating differentials which, in turn, reduce wages.
c. Employers reduced wages to partially offset the cost of having to purchase insurance
that would compensate workers for injuries suffered on the job.
d. The supply of labor in these hazardous industries increased following the passage of the
workers' compensation laws because jobs in these industries now pose less risk.
20. A tax imposed by a state or local government on retail sales of most products is
a. an excise tax.
b. a social service tax.
c. a consumption tax.
d. a sales tax.
21. Both presidents Kennedy and Reagan proposed significant cuts in income taxes. Opponents of
these tax cut proposals argued that
a. the tax cuts would benefit high-income taxpayers.
b. cutting state sales taxes, rather than federal income taxes, would result in greater
economic efficiency.
c. while the tax cuts would result in greater economic efficiency, there was too much
opposition to the tax cuts in Congress. As it turned out, Congress ultimately approved
both tax cut proposals.
d. it would be better to cut taxes on corporate profits.
22. A regressive tax is a tax for which people with lower incomes
a. pay a lower percentage of their incomes in tax than do people with higher incomes.
b. pay a higher percentage of their incomes in tax than do people with higher incomes.
c. pay the same percentage of their incomes in tax as do people with higher incomes.
d. do not have to pay unless their incomes exceeds a certain amount.
23. Economists caution that conventional statistics used to estimate the extent of poverty in the
United States fail to account for benefits people receive that, if considered, would reduce the
amount of poverty. Which of the following is an example of these benefits?
a. Individuals can use tax credits and the personal exemption to reduce their taxable
incomes. This reduces what they owe the government and increases their disposable
incomes.
b. The federal income tax system is progressive. As a result, the poor have higher after-tax
incomes than they would have if the income tax system was proportional or regressive.
c. Individuals with low incomes receive non-cash benefits such as free school lunches
and food stamps.
d. The federal minimum wage forces employers to pay workers with low skills an efficiency
wage.
24. Logrolling may result in
a. legislation that yields economy-wide benefits, the funding for which is borne primarily
by a few of the smallest states.
b. a majority of Congress supporting legislation that benefits the economic interests of a
few, while harming the economic interests of a much larger group.
c. members of Congress selling their votes on proposed legislation to the highest bidder.
d. creating limited incentives for policymakers to consider the immediate consequences of
their proposed legislation.
25. According to public choice theory, policymakers
a. place the interests of the public above their own self-interest.
b. are likely to pursue their own self-interest, even if their self-interest conflicts with the
public interest.
c. act in ways to maximize economic efficiency.
d. act in ways to bring about an equitable distribution of society's wealth.