Sample Questions : Introductory Microeconomics

SAMPLE QUESTIONS: INTRODUCTORY MICROECONOMICS

1. The properties of indifference curves include the following: a) it is downward sloping b) it exhibits diminishing marginal rate of substitution c) it never crosses each other d) all of the above

2. Suppose espresso is free, then to maximize total utility, a consumer should drink espresso until his/her marginal utility is: a) at a maximum b) zero c) equals the price of tea d) no longer diminishing

3.When demand is elastic, a) A one percent change in price leads to less than one percent change in quantity demanded b) Changes in price have no effect on total revenue c) A one percent change in price leads to less than one percent change in quantity supplied d) A rise in price decreases total revenue

4. Suppose there are two goods, x and y. A consumption bundle A yields the same amount of total utility as consumption bundle B, then a) A and B must have the same amount of x and y b) A is on a higher indifference curve than B c) B is on a higher indifference curve than A d) A and B are on the same indifference curve

5. Suppose we have a production possibility frontier (PPF) that is a straight line. On the y-axis, we have coconuts and on the x-axis, we have pineapples. Which of the following statements best describe this PPF? a) The opportunity costs of producing an additional pineapple is the same at every point b) The opportunity cost of producing an additional pineapple increases as the amount of coconuts produced increases c) The opportunity cost of producing an additional pineapple decreases as the amount of coconuts produced decreases d) The opportunity cost of producing an additional pineapple is zero at every point

6. If goods A and B are substitutes, a decrease in the price of good B will a) increase the demand for good A b) increase the quantity demanded of good B c) decrease the demand for good A d) both b and c

7. Suppose the demand curve for agricultural products is inelastic, then a) the demand curve will be relatively steep b) buyers are relatively unresponsive to changes in price c) total farm income will decrease if the market price falls d) all of the above

8. As the price of apples that the producers can charge rises, the producer surplus in the apple market a) increases b) decreases c) does not change d) may increase, decrease, or stay the same

9. If the price of good B decreased, you would expect the a) demand of good B to increase b) quantity demanded of good B to decrease c) quantity demanded of good B to increase d) demand curve of good B to shift to the left

10. The demand curve shows a) the maximum amount consumers are willing to pay for particular units of a good b) the minimum amount consumers are willing to pay for particular units of a good c) the average amount consumers are willing to pay for particular units of a good d) that consumers want to pay the lowest price SHORT ANSWERS

True or false and explain. Illustrate with a graph where appropriate.

1. a) rent control for apartments creates surplus of rental apartments

False. There is an excess demand for apartments, a shortage of apartment rental.

b) Since demand for agricultural products is inelastic, higher prices mean lower incomes for farmers

False. The % change in price is larger than the % change in quantity. Price and total revenue move in the same direction.

2. State whether each of the following events will result in a movement along the demand curve for Jack in the Box Sourdough Cheeseburger or whether it will cause the curve to shift. If the demand curve shifts, indicate whether it will shift to the left or the right and draw a graph to illustrate the shift. a) The price of McDonald’s Big Mac hamburger increases. The price of substitute goods increases. The demand curve for Jack in the Box Sourdough Cheeseburger shifts upward.

b) Because of a shortage of potatoes, the price of French fries increases. The price of complement goods increases. The demand curve for Jack in the Box Sourdough Cheeseburger shifts downward.

3. Define marginal utility. Provide an argument why to maximize total utility over good x and good y, the consumer should consume until the ratio of marginal utilities over price is the same across both goods.

Marginal Utility is an additional utility gained from consuming an additional unit of good. It is the same as marginal benefit.

If the marginal utility per dollar is not the same for good x and good y, there is a net gain on the original budget allocation. Thus, his total utility is not maximized.

For example, the total spending on good x and y is $400. MU per dollar for good x is 12/1= 12utils/$; MU per dollar for good y is 16/2 = 8utils/$. If he consumes $2 less on good y, he is giving up 1 unit of good y and can consume 2 more units of good x. The marginal utility lost from giving up good y is 16utils. The marginal utility gain from good x is 24utils. Net gained is 8utils. Thus, he is not maximizing his total utility. He should spend more on good x and spend less on good y until the ratio is the same for both goods. Rational Spending Rule is satisfied.