MICROECONOMICS REVIEW

1. Beef is a normal good. You observe that both the equilibrium price and quantity of beef have
fallen over time. Which of the following explanations would be most consistent with this
observation?
a. Consumers have experienced an increase in income and beef-production
technology has improved.
b. The price of chicken has risen and the price of steak sauce has fallen.
c. New medical evidence has been released that indicates a negative correlation
between a person’s beef consumption and his or her longevity.
d. The demand curve for beef must be positively sloped.
2. During the last few decades in the United States, health officials have argued that eating too
much beef might be harmful to human health. As a result, there has been a significant
decrease in the amount of beef produced. Which of the following best explains the decrease
in production?
a. Beef producers, concerned about the health of their customers, decided to produce
relatively less beef.
b. Government officials, concerned about consumer health, ordered beef producers to
produce relatively less beef.
c. Individual consumers, concerned about their own health, decreased their demand
for beef, which lowered the equilibrium price of beef, making it less attractive to
produce.=> P decreases
d. Anti-beef protesters have made it difficult for both buyers and sellers of beef to
meet in the marketplace.
3. Which of the following events would unambiguously (clear) cause a decrease in the
equilibrium price of cotton shirts?
a. an increase in the price of wool shirts and a decrease in the price of raw cotton
b. a decrease in the price of wool shirts and a decrease in the price of raw cotton
c. an increase in the price of wool shirts and an increase in the price of raw cotton
d. a decrease in the price of wool shirts and an increase in the price of raw cotton
4. Which of the following events would cause the price of oranges to fall?
a. There is a shortage of oranges.
b. An article is published in which it is claimed that tangerines cause a serious
disease, and oranges and tangerines are substitutes.
c. The price of land throughout Florida decreases, and Florida produces a significant
proportion of the nation’s oranges.
d. All of the above are correct.
5. Which of the following events would definitely result in a higher price in the market for
Snickers?
a. Demand for Snickers increases and supply of Snickers decreases.
b. Demand for Snickers and supply of Snickers both decrease.
c. Demand for Snickers decreases and supply of Snickers increases.
d. Demand for Snickers and supply of Snickers both increase
6. Which of the following sets of events would most likely cause an increase in the price of a
new house?
a. higher wages for carpenters, higher wood prices, increases in consumer incomes,
higher apartment rents, increases in population, and expectations of higher house
prices in the future
b. lower wages for carpenters, lower wood prices, increases in consumer incomes,
higher apartment rents, increases in population and expectations of higher house
prices in the future
c. lower wages for carpenters, higher wood prices, decreases in consumer incomes,
higher apartment rents, decreases in population and expectations of higher house
prices in the future
d. higher wages for carpenters, lower wood prices, decreases in consumer incomes,
lower apartment rents, decreases in population and expectations of lower house
prices in the future
Table 5-1
Good Price Elasticity of Factors
Demand
A 1.3 Less elastic Few substitute/ Broadly defined market/
Portions in income to
buy/short-run/necessary
B 2.1 More elastic
9. Refer to Table 5-1. Which of the following is consistent with the elasticities given in Table
5-1?
a. A is a luxury and B is a necessity.
b. A is a good several years after a price increase, and B is that same good several
days after the price increase.
c. A is a Kit Kat bar and B is candy.
d. A has fewer substitutes than B.
10. Refer to Table 5-1. Which of the following is consistent with the elasticities given in Table
5-1?
a. A is grapes and B is fruit.
b. A is T-shirts and B is socks.
c. A is train tickets before cars were invented, and B is train tickets after cars were
invented.
d. A is diamond necklaces and B is beds.
Table 5-2
The following table shows a portion of the demand schedule for a particular good at various
levels of income.

Quantity Quantity Quantity

Price Demanded Demanded Demanded
(Income = $5,000) (Income = $7,500) (Income = $10,000)
$24 2 3 4
$20 4 6 8
$16 6 9 12
$12 8 12 16
$8 10 15 20
$4 12 18 24
11. Refer to Table 5-2. Using the midpoint method, when income equals $7,500, what is the
price elasticity of demand between $16 and $20?
a. 0.56
b. 0.75
c. 1.33
d. 1.80
12. Refer to Table 5-2. Using the midpoint method, when income equals $5,000, what is the
price elasticity of demand between $8 and $12?
a. 0.56
b. 0.75
c. 1.33
d. 1.80
13. Refer to Table 5-2. Using the midpoint method, at a price of $16, what is the income
elasticity of demand when income rises from $5,000 to $10,000?
a. 0.00
b. 0.50
c. 1.00
d. 1.50
14. Refer to Table 5-2. Using the midpoint method, at a price of $8, what is the income
elasticity of demand when income rises from $7,500 to $10,000?
a. 0.00
b. 0.41
c. 1.00
d. 2.45
15. Refer to Table 5-2. Using the midpoint method, at a price of $12, what is the income
elasticity of demand when income rises from $5,000 to $10,000?
a. 0.00
b. 0.41
c. 1.00
d. 2.45
Scenario 12-5
Samantha has been working for a law firm and earning an annual salary of $80,000. She decides
to open her own practice. Her annual expenses will include $15,000 for office rent, $3,000 for
equipment rental, $1,000 for supplies, $1,200 for utilities, and a $35,000 salary for a
secretary/bookkeeper. Samantha will cover her start-up expenses by cashing in a $20,000
certificate of deposit on which she was earning annual interest of $500.

16. Refer to Scenario 12-5. Samantha's annual implicit costs will equal
a. $55,200.
b. $75,200.
c. $80,500.
d. $165,700.
17. Refer to Scenario 12-5. Samantha's annual accounting costs will equal
a. $55,200.
b. $75,200.
c. $80,500.
d. $165,700.
18. Refer to Scenario 12-5. Samantha's annual economic costs will equal (implicit +
accounting costs)
a. $55,200.
b. $75,200.
c. $80,500.
d. $135,700.
19. Refer to Scenario 12-5. According to Samantha’s accountant, which of the following
revenue totals will yield her business $50,000 in profits? Accounting profit= Revenue –
Accounting cost
a. $55,200.
b. $105,200.
c. $132,500.
d. $185,700.
20. Refer to Scenario 12-5. According to an economist, which of the following revenue totals
will yield her business $50,000 in economic profits? Economic profit = Revenue –
Economic cost
a. $55,200.
b. $100,200.
c. $132,500.
d. $185,700.
Figure 12-7
Cost
MC

AT C

AVC

A B C D Quantity

21. Refer to Figure 12-7. The efficient scale of production occurs at which quantity?
a. A
b. B
c. C
d. D
22. Refer to Figure 12-7. Quantity C represents the output level where the firm
a. maximizes profits.
b. minimizes total costs.
c. produces at the efficient scale.
d. minimizes marginal costs.
23. Refer to Figure 12-7. Quantity B represents the output level where the firm
a. maximizes profits.
b. minimizes average variable costs.
c. produces at the efficient scale.
d. minimizes marginal costs.
24. When price is greater than marginal cost for a firm in a competitive market,
a. marginal cost must be falling.
b. the firm must be minimizing its losses.
c. there are opportunities to increase profit by increasing production.
d. the firm should decrease output to maximize profit.
25. The average fixed cost curve
a. always declines with increased levels of output.
b. always rises with increased levels of output.
c. declines as long as it is above marginal cost.
d. declines as long as it is below marginal cost.
26. Average total cost is very high when a small amount of output is produced because
a. average variable cost is high.
b. average fixed cost is high.
c. marginal cost is high.
d. marginal product is high.
27. When marginal cost is less than average total cost,
a. marginal cost must be falling.
b. average variable cost must be falling.
c. average total cost is falling.
d. average total cost is rising.
28. When marginal cost exceeds average total cost,
a. average fixed cost must be rising.
b. average total cost must be rising.
c. average total cost must be falling.
d. marginal cost must be falling.
29. Average total cost is increasing whenever
a. total cost is increasing.
b. marginal cost is increasing.
c. marginal cost is less than average total cost.
d. marginal cost is greater than average total cost.
30. Marginal cost is equal to average total cost when
a. average variable cost is falling.
b. average fixed cost is rising.
c. marginal cost is at its minimum.
d. average total cost is at its minimum.
31. If marginal cost is below average total cost, then average total cost
a. is constant.
b. is falling.
c. is rising.
d. may rise or fall depending on the size of fixed costs.
32. At all levels of production higher than the point where the marginal cost curve crosses the
average variable cost curve, average variable cost
a. rises.
b. remains unaffected.
c. falls.
d. All of the above are possible depending on the shape of the marginal cost curve.
33. Which of the following statements about costs is correct?
a. When marginal cost is less than average total cost, average total cost is rising.
b. The total cost curve is U-shaped.
c. As the quantity of output increases, marginal cost eventually rises.
d. All of the above are correct.
34. Whenever marginal cost is greater than average total cost,
a. average total cost is rising.
b. marginal cost is falling.
c. average total cost is falling.
d. Both b and c are correct.
35. At what level of output will average variable cost equal average total cost?
a. when marginal cost equals average total cost
b. for all levels of output in which average variable cost is falling
c. when marginal cost equals average variable cost
d. There is no level of output where this occurs, as long as fixed costs are positive.
36. Which of the following must always be true as the quantity of output increases?
a. Marginal cost must rise.
b. Average total cost must rise.
c. Average variable cost must rise.
d. Average fixed cost must fall.
37. Which of the following statements is not correct?
a. The marginal cost of the fifth unit of output equals the total cost of five units
minus the total cost of four units.
b. The total variable cost of seven units equals the average variable cost of seven
units times seven.
c. If marginal cost is rising, then average variable cost must be rising.
d. The marginal cost of the fifth unit of output equals the total variable cost of five
units minus the total variable cost of four units.
38. When marginal cost is rising, average variable cost
a. must be rising.
b. must be falling.
c. must be constant.
d. could be rising or falling.
39. When marginal cost is greater than average cost, average cost is
a. rising.
b. falling.
c. constant.
d. either rising or falling depending on the economies of scale.
40. When average cost is greater than marginal cost, marginal cost must be
a. rising.
b. falling.
c. constant.
d. The direction of change in marginal cost cannot be determined from this
information.
41. If marginal cost is greater than average total cost, then
a. profits are increasing.
b. economies of scale are becoming greater.
c. average total cost remains constant.
42. The minimum points of the average variable cost and average total cost curves occur where
a. the marginal cost curve lies below the average variable cost and average total cost
curves.
b. the marginal cost curve intersects those curves.
c. the average variable cost and average total cost curves intersect.
d. the slope of total cost is the smallest.
Figure 14-2
Price Panel A Price
Panel B
Price
Panel C
Price
Panel D
D D
D

D
Quantity Quantity Quantity Quantity

43. Refer to Figure 14-2. Which of the following statements is correct?

a. Panel C represents the typical demand curve for a perfectly competitive firm, and
Panel B represents the typical demand curve for a monopoly.
b. Panel B represents the typical demand curve for a perfectly competitive firm, and
Panel C represents the typical demand curve for a monopoly.
c. Panel A represents the typical demand curve for a perfectly competitive firm, and
Panel B represents the typical demand curve for a monopoly.
d. Panel C represents the typical demand curve for a perfectly competitive firm, and
Panel D represents the typical demand curve for a monopoly.
44. Refer to Figure 14-2. Which of the following statements is correct?
a. Panel C represents the typical demand curve for a perfectly competitive firm.
b. Panel B represents the typical demand curve for a monopoly.
c. Panel B represents the typical demand curve for a perfectly competitive industry.
d. All of the above are correct.
Figure 16-4

45. Refer to Figure 16-4. Which of the graphs depicts a short-run equilibrium that will
encourage the entry of other firms into a monopolistically competitive industry?
a. panel a
b. panel b
c. panel c
d. panel d
46. Refer to Figure 16-4. Which of the graphs depicts a short-run equilibrium that will
encourage the exit of some firms from a monopolistically competitive industry?
a. panel a
b. panel b
c. panel c
d. panel d
47. Refer to Figure 16-4. Which of the graphs depicts a short-run equilibrium that will not
encourage either the entry or exit of firms in a monopolistically competitive industry?
a. panel a
b. panel b
c. panel c
d. panel d
48. Refer to Figure 16-4. Panel a shows a profit-maximizing monopolistically competitive firm
that is
a. earning zero economic profit.
b. likely to exit the market in the long run.
c. producing its efficient scale of output.
d. not maximizing its profit.
49. Refer to Figure 16-4. Which of the panels depicts a firm in a monopolistically competitive
market earning positive economic profits?
a. panel a
b. panel b
c. panel c
d. panel d
50. Refer to Figure 16-4. Panel b is consistent with a firm in a monopolistically competitive
market that is
a. not in long-run equilibrium.
b. in long-run equilibrium.
c. producing its efficient scale of output.
d. earning a positive economic profit.
Figure 14-5

Price
Curve C
Curve D

P5

P4
P3

P2

P1

P0

Curve B Curve A

Q1 Q2 Q3 Q4 Quantity

51. Refer to Figure 14-5. A profit-maximizing monopoly will produce an output level of
a. Q1.
b. Q2.
c. Q3.
d. Q4.
52. Refer to Figure 14-5. A profit-maximizing monopoly will charge a price of
a. P5.
b. P4.
c. P3.
d. P2.
53. Refer to Figure 14-5. A profit-maximizing monopoly's total revenue is equal to
a. P4 x Q3.
b. P5 x Q1.
c. P3 x Q4.
d. (P4-P2) x Q3.
54. Refer to Figure 14-5. A profit-maximizing monopoly's total cost is equal to
a. P4 x Q3.
b. P2 x Q3.
c. P1 x Q3.
d. (P4-P1) x Q3.
55. Refer to Figure 14-5. A profit-maximizing monopoly's profit is equal to
a. P4 x Q3.
b. (P4-P2) x Q3.
c. (P4-P1) x Q3.
d. (P5-P0) x Q1.
56. Refer to Figure 14-5. Profit on a typical unit sold for a profit-maximizing monopoly would
equal
a. P5-P0.
b. P4-P2.
c. P4-P1.
d. P4-P3.
57. Refer to Figure 14-5. At the profit-maximizing level of output,
a. marginal revenue is equal to P3.
b. marginal cost is equal to P3.
c. average revenue is equal to P4.
d. average total cost is equal to P0.
Table 17-5. Imagine a small town in which only two residents, Bill and Ben, own wells that
produce safe drinking water. Each week Bill and Ben work together to decide how many gallons
of water to pump, to bring the water to town, and to sell it at whatever price the market will bear.
Assume Bill and Ben can pump as much water as they want without cost so that the marginal
cost of water equals zero.
The weekly town demand schedule and total revenue schedule for water are shown in the table
below.

Weekly Weekly
Quantity Total Revenue
Price
(in gallons) (and Total Profit)
0 $12 $0
10 11 110
20 10 200
30 9 270
40 8 320
50 7 350
60 6 360
70 5 350
80 4 320
90 3 270
100 2 200
110 1 110
120 0 0
58. Refer to Table 17-5. Since Bill and Ben operate as a profit-maximizing monopoly in the
market for water, what price will they charge for water?
a. $2
b. $4
c. $6
d. $7
59. Refer to Table 17-5. If the market for water were perfectly competitive instead of
monopolistic, how many gallons of water would be produced and sold?
a. 70
b. 90
c. 110
d. 120
60. Refer to Table 17-5. As long as Bill and Ben operate as a profit-maximizing monopoly,
what will their combined weekly revenue amount to?
a. $200
b. $270
c. $350
d. $360
61. Refer to Table 17-5. The socially efficient level of water supplied to the market would be
a. 60 gallons.
b. 80 gallons.
c. 100 gallons.
d. 120 gallons.
Figure 14-7
Price MC

MR D
A B C Quantity

62. Refer to Figure 14-7. What is the socially efficient price and quantity?
a. price = F; quantity = A
b. price = G; quantity = B
c. price = G; quantity = A
d. price = D; quantity = A
63. Refer to Figure 14-7. What is the monopoly price and quantity?
a. price = F; quantity = A
b. price = G; quantity = B
c. price = G; quantity = A
d. price = D; quantity = A
64. Refer to Figure 14-7. What is the area of deadweight loss?
a. the rectangle (F-D)xA
b. the triangle 1/2[(F-D)x(B-A)]
c. the triangle 1/2[(F-G)x(B-A)]
d. the rectangle (F-D)xA plus the triangle 1/2[(F-D)x(B-A)]
65. Refer to Figure 14-7. What area represents the total surplus lost due to monopoly pricing?
a. the rectangle (F-D)xA
b. the triangle 1/2[(F-D)x(B-A)]
c. the triangle 1/2[(F-G)x(B-A)]
d. the rectangle (F-D)xA plus the triangle 1/2[(F-D)x(B-A)]
Figure 13-5
Price
MC

ATC

P5
AVC
P4
P3

P2
P1

Q1 Q2 Q3 Q4 Quantity

66. Refer to Figure 13-5. When market price is P3, a profit-maximizing firm's total revenue
a. can be represented by the area P3 Q3.
b. can be represented by the area P3 Q2.
c. can be represented by the area (P3-P2) Q3.
d. is zero.
67. Refer to Figure 13-5. When market price is P3, a profit-maximizing firm's profit
a. can be represented by the area P3 Q3.
b. can be represented by the area P3 Q2.
c. can be represented by the area (P3-P2) Q3.
d. is zero.
68. Refer to Figure 13-5. When market price is P3, a profit-maximizing firm's total costs
a. can be represented by the area P2 Q2.
b. can be represented by the area P3 Q2.
c. can be represented by the area (P3-P2) Q3.
d. are zero.
69. Refer to Figure 13-5. Firms will be encouraged to enter this market for all prices that
exceed
a. P1.
b. P2.
c. P3.
d. None of the above is correct.
70. Refer to Figure 13-5. Firms will earn positive profits in the short run if the market price
a. is less than P1.
b. is greater than P1 but less than P3.
c. equals P3.
d. exceeds P3.
71. Refer to Figure 13-5. Firms will be earn losses in the short run but will remain in business
if the market price
a. exceeds P3.
b. is less than P1.
c. is greater than P1 but less than P3.
d. exceeds P2.
72. Refer to Figure 13-5. Firms will shut down in the short run if the market price
a. exceeds P3.
b. is less than P1.
c. is greater than P1 but less than P3.
d. exceeds P2.
Table 16-2
The following table shows the total output produced by the top six firms as well as the total
industry output for each industry.

Firm Industry A Industry B Industry C Industry D

1 13,250 8,750 1,750 15,000
2 10,975 7,500 1,725 14,000
3 8,175 6,400 1,700 13,000
4 4,275 5,000 1,675 12,000
5 1,250 4,250 1,650 11,000
6 875 4,000 1,625 10,000
Total 45,350 70,900 30,125 120,000
73. Refer to Table 16-2. What is the concentration ratio for Industry A?
a. about 71%
b. about 81%
c. about 88%
d. 100%
74. Refer to Table 16-2. What is the concentration ratio for Industry B?
a. about 12%
b. about 32%
c. about 39%
d. about 51%
75. Refer to Table 16-2. What is the concentration ratio for Industry C?
a. about 23%
b. about 34%
c. about 43%
d. about 52%
76. Refer to Table 16-2. What is the concentration ratio for Industry D?
a. about 13%
b. about 35%
c. about 45%
d. about 63%
77. Refer to Table 16-2. Which industry has the highest concentration ratio?
a. Industry A
b. Industry B
c. Industry C
d. Industry D
78. Refer to Table 16-2. Which industry is the least competitive?
a. Industry A
b. Industry B
c. Industry C
d. Industry D
79. Refer to Table 16-2. Which industry has the lowest concentration ratio?
a. Industry A
b. Industry B
c. Industry C
d. Industry D
80. Refer to Table 16-2. Which industry is the most competitive?
a. Industry A
b. Industry B
c. Industry C
d. Industry D
Each year the United States considers renewal of Most Favored Nation (MFN) trading status
with Farland (a mythical nation). Historically, legislators have made threats of not renewing
MFN status because of human rights abuses in Farland. The non-renewal of MFN trading status
is likely to involve some retaliatory measures by Farland. The payoff table below shows the
potential economic gains associated with a game in which Farland may impose trade sanctions
against U.S. firms and the United States may not renew MFN status with Farland. The table
contains the dollar value of all trade-flow benefits to the United States and Farland.

Farland
Impose trade sanctions Do not impose trade
against U.S. firms sanctions against U.S.
firms
Don't renew MFN U.S. trade value = $65 b
U.S. trade value = $140 b
status with Farland trade value = $75
Farland trade value = $5 b
United Farland b
States Renew MFN U.S. trade value = $35 b U.S. trade value = $130 b
status Farland trade value = Farland trade value =
with Farland $285 b $275 b
81. Refer to Table 17-10. Pursuing its own best interests, Farland will impose trade sanctions
against U.S. firms
a. only if the U.S. does not renew MFN status with Farland.
b. only if the U.S. renews MFN status with Farland.
c. regardless of whether the U.S. renews MFN status with Farland.
d. None of the above is correct. In pursuing its own best interests, Farland will in no
case impose trade sanctions against U.S. firms.
82. Refer to Table 17-10. Pursuing its own best interests, the U.S. will renew MFN status with
Farland
a. only if Farland does not impose trade sanctions against U.S. firms.
b. only if Farland imposes trade sanctions against U.S. firms.
c. regardless of whether Farland imposes trade sanctions against U.S. firms.
d. None of the above is correct.x In pursuing its own best interests, the United States
will in no case renew MFN status with Farland.
83. Refer to Table 17-10. This particular game
a. features a dominant strategy for the U.S.
b. features a dominant strategy for Farland.
c. is a version of the prisoners' dilemma game.
d. All of the above are correct.
84. Refer to Table 17-10. If both countries follow a dominant strategy, the value of trade flow
benefits for Farland will be
a. $5 b.
b. $75 b.
c. $275 b.
d. $285 b.
85. Refer to Table 17-10. If both countries follow a dominant strategy, the value of trade flow
benefits for the United States will be
a. $35 b.
b. $65 b.
c. $130 b.
d. $140 b.
86. Refer to Table 17-10. When this game reaches a Nash equilibrium, the value of trade flow
benefits will be
a. United States $35 b and Farland $285 b.
b. United States $65 b and Farland $75 b.
c. United States $140 b and Farland $5 b.
d. United States $130 b and Farland $275 b.

87. Refer to Table 17-10. If trade negotiators are able to communicate effectively about the
consequences of various trade policies (i.e., enter into an agreement about the policy they
should adopt), then we would expect the countries to agree to which outcome?
a. United States $35 b and Farland $285 b
b. United States $65 b and Farland $75 b
c. United States $140 b and Farland $5 b
d. United States $130 b and Farland $275 b

Scenario 17-2. Imagine that two oil companies, Lexxon and PB, own adjacent oil fields. Under
the fields is a common pool of oil worth $48 million. Drilling a well to recover oil costs $4
million per well. If each company drills one well, each will get half of the oil and earn a $20
million profit ($24 million in revenue - $4 million in costs). Assume that having X percent of the
total wells means that a company will collect X percent of the total revenue.
88. Refer to Scenario 17-2. If Lexxon were to drill a second well, what would its profit be if
PB did not drill a second well?
a. $22 million
b. $24 million
c. $26 million
d. $28 million

89. Refer to Scenario 17-2. If Lexxon were to drill a second well and PB also drilled a second
well, what would Lexxon's profit be?
a. $14 million
b. $16 million
c. $18 million
d. $22 million

90. Refer to Scenario 17-2. PB's dominant strategy would lead to what sort of well-drilling
behavior?
a. PB will never drill a second well.
b. PB will always drill a second well.x
c. PB will drill a second well only if Lexxon drills a well.
d. PB will drill a second well only if Lexxon does not drill a well.

THE END