Microeconomics

Practical Exercises: Topic 1 - 4

Section 1: Multiple choice questions

Topic 1

1. Economics is the study of

a. how society manages its scarce resources.
b. the government’s role in society.
c. how a market system functions.
d. how to increase production.
2. The concept of ______ is central to the discipline of economics.
a. need
b. absolute advantage
c. scarcity
d. comparative advantage
3. A good is considered scarce in a society when
a. more output of the good is possible.
b. everyone in that society cannot have all they want of the good.
c. the government restricts production of the good.
d. only the richest people in the economy can buy all they want of the good.
4. Opportunity cost is
a. that which we forgo, or give up, when we make a choice or a decision
b. a cost that cannot be avoided, regardless of what is done in the future
c. the additional cost of producing an additional unit of output
d. the additional cost of buying an additional unit of a product
5. ______ focuses on the prices of individual goods and services and ______ focuses on the rate of
inflation
a. Microeconomics; macroeconomics
b. Macroeconomics; microeconomics
c. Microeconomics; microeconomics
d. Macroeconomics; macroeconomics
6. Positive economics is an approach to economics that
a. seeks to understand behavior and the operation of systems while making judgments about
their usefulness to society
b. analyzes outcomes of economic behavior, evaluates them as good or bad, and may prescribe
preferred courses of action
c. describes the economy and how it works
d. prescribes roles for government in an economy
7. Which of the following is a normative question?
a. Why do gasoline prices increase before holiday weekends?
b. What will happen to gasoline consumption if excise taxes on gasoline are increased?
c. To reduce the regressive nature of the gasoline excise tax, should a portion of the gasoline
excise tax paid by low-income individuals be refunded to them?
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 d. How will oil exploration be affected if the government imposes price controls on gasoline?
8. "If the price of a product falls the quantity demanded for that product will rise" is best described
as a ______ statement
a. positive
b. Marxist ideology
c. normative
d. descriptive economics
9. A(n) ______ is an input into the production process while a(n) ______ is a useable product.
a. resource; input
b. factor of production; resource
c. output; factor of production
d. factor of production; good or service
10. Decisions at the margin imply that
a. when a person makes a decision, he/she must compare between marginal benefit and
marginal cost.
b. if marginal benefit is greater than marginal cost, the action will be taken.
c. if marginal benefit is less than marginal cost, the action will not be taken.
d. All of the above are correct.

Topic 2

1. The production possibilities frontier is a

a. map which shows the frontier beyond which agriculture is unprofitable.
b. map which shows areas of the world in which capitalist production is now possible.
c. graph which shows the various combinations of resources that can be used to produce a
given level of output.
d. graph which shows the maximum combinations of output the economy can possibly produce
given the available resources and technology.
2. Which of the following is the most accurate statement about production possibilities?
a. An economy can produce only on the production possibilities frontier.
b. An economy can produce at any point inside or outside a production possibilities frontier.
c. An economy can produce at any point on or inside the production possibilities frontier, but
not outside the frontier.
d. An economy can produce at any point inside the production possibilities frontier, but not on
or outside the frontier.
3. On a production possibilities frontier, production is efficient if the production point is
a. on the frontier.
b. outside the frontier.
c. on or inside the frontier.
d. inside the frontier.
4. Suppose a nation is currently producing at a point inside its production possibilities frontier. We
know that
a. the nation is producing beyond its capacity, and inflation will occur.
b. the nation is not using all available resources or has inefficiencies.
c. the nation is producing an efficient combination of goods.
d. there will be a large opportunity cost if the nation tries to increase production.
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5. When a production possibilities frontier shifts outward, it is demonstrating the concept of
a. tradeoffs.
b. efficiency.
c. economic growth.
d. opportunity cost.
6. With trade a
a. country is worse off because it becomes dependent on other countries.
b. country will produce a greater variety of goods and services to trade.
c. country’s consumption possibilities can be outside its production possibilities frontier.
d. country will experience a lower unemployment rate.
7. Comparative advantage is based on
a. capital costs.
b. labor costs.
c. dollar price.
d. opportunity costs.
8. Trade is based on
a. absolute advantage.
b. comparative advantage.
c. production costs.
d. relative dollar prices.
9. The country that has a comparative advantage in a product
a. should import that product.
b. should export that product.
c. would be better off keeping the product for domestic use since it is relatively inexpensive to
produce.
d. None of the above are correct.
10. When countries specialize according to their comparative advantage,
a. it is possible to increase world output of all goods.
b. it is possible to increase world output of some goods only by reducing the output of others.
c. one country is likely to gain from trade while others lose.
d. all countries will lose from trade.

Topic 3

1. A market is
a. group of demanders and suppliers of a particular good or service.
b. group of people with common desires.
c. place where only sellers meet.
d. place where only buyers come together.
2. The demand schedule is a table that shows the relationship between
a. price and quantity supplied.
b. price and quantity demanded.
c. demand and quantity.
d. profit and price.

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3. Which of the following would NOT be a determinant of demand?
a. the price of related goods
b. consumer income
c. tastes and preferences
d. technology
4. If the demand for milk increases as income increases, milk is a(n) ______ good.
a. normal
b. inferior
c. substitute
d. complementary
5. A change in consumer tastes and preferences leads to a change in ______ that causes a ______
the demand curve.
a. demand; movement along
b. quantity demanded; movement along
c. demand; shift of
d. quantity demanded, shift of
6. Coca-Cola and Pepsi are substitute goods. An increase in the price of Pepsi would cause
a. the demand curve for Coca-Cola to shift up to the right.
b. the demand curve for Coca-Cola to shift down to the left.
c. the demand curve for Pepsi to shift up to the right.
d. the demand curve for Pepsi to shift down to the left.
7. The Law of Supply says that when price
a. rises, quantity demanded falls.
b. rises, quantity demanded rises also.
c. falls, quantity supplied rises.
d. falls, quantity supplied falls also.
8. A market supply curve is determined by
a. vertically summing individual supply curves.
b. horizontally summing individual supply curves.
c. finding the average quantity supplied of the market’s individual supply curves.
d. Unlike market demand, there is no such thing as a market supply curve.
9. A movement along the supply curve might be caused by a change in
a. technology.
b. input prices.
c. expectations about future prices.
d. the price of the good or service.
10. Suppose there is an increase in input prices. We would expect supply
a. to decrease.
b. to increase.
c. could increase or decrease.
d. to remain unchanged.
11. Advance in technology leads to a change in ______ that causes a ______ the supply curve.
a. supply; movement along
b. quantity supplied; movement along
c. supply; shift of
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 d. quantity supplied, shift of
12. Equilibrium is the condition that exists when
a. there is no government intervention in the market.
b. the demand curve intersects the price axis.
c. quantity demanded equals quantity supplied.
d. the demand curve intersects the quantity axis.
13. Suppose that the demand for apples increased more than the supply of apples increased. The net
effect of these two changes would be a(n)
a. increase in the equilibrium price and a decrease in the equilibrium quantity.
b. increase in the equilibrium price and an increase in the equilibrium quantity.
c. decrease in the equilibrium price and an increase in the equilibrium quantity.
d. decrease in the equilibrium price and a decrease in the equilibrium quantity.
14. Temporary shortages in a market are eliminated by
a. decreases in the price, which cause quantity supplied to fall and quantity demanded to rise.
b. decreases in the price, which cause quantity supplied to rise and quantity demanded to fall.
c. increases in the price, which cause quantity supplied to fall and quantity demanded to rise.
d. increases in the price, which cause quantity supplied to rise and quantity demanded to fall.
15 The discovery of new gold in South America will ______ the price of gold and ______ the
quantity of gold traded.
a. raise; raise
b. lower; raise
c. raise; lower
d. lower; lower

Topic 4

1. The price elasticity of demand measures

a. a buyer’s responsiveness to a change in the price of a good.
b. the increase in demand as additional buyers enter the market.
c. how much more of a good consumers will demand when incomes rise.
d. the increase in demand that will occur from a change in one of the nonprice determinants of
demand.
2. When the price of potatoes increases 5%, quantity demanded decreases 8%. The price elasticity of
demand for potatoes is
a. perfectly elastic.
b. elastic.
c. inelastic.
d. unitary elastic.
3. If the demand for oranges is unitary elastic, the price elasticity of demand for oranges is
a. 0
b. -0.1
c. -1
d. -100
4. A ______ demand curve is perfectly price elastic.
a. horizontal

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 b. vertical
c. positively sloped
d. negatively sloped
5. The less substitutes there are for a product, the
a. less price elastic the demand for the product is.
b. more price elastic the demand for the product is.
c. greater the income elasticity for the product.
d. smaller the income elasticity for the product.
6. The price elasticity of demand for bottled water in Texas is – 2, and the price elasticity of demand
for bottled water in Missouri is -0.8. In other words, demand in Texas is______ and demand in
Missouri is _____.
a. elastic; inelastic
b. inelastic; elastic
c. elastic; unitary elastic
d. inelastic; unitary inelastic
7. If price ______ and demand is ______, total revenue will decrease.
a. falls; inelastic.
b. falls; elastic.
c. rises; elastic.
d. rises; inelastic.
8. Price and total revenue are inversely related when demand is
a. elastic
b. inelastic
c. unitary elastic
d. perfectly inelastic
9. If the price of a hamburger increased from $6 to $8, the number of hamburger demanded falls
from 3 to 2. The price elasticity of demand equals
a. -0.72
b. -71
c. -1.4
d. -2
10. Cross-price elasticity of demand measures the response in the
a. price of a good to a change in the quantity of another good demanded.
b. income of consumers to the change in the price of goods.
c. quantity of one good demanded when the quantity demanded of another good changes.
d. quantity of one good demanded to a change in the price of another good.
11. If the cross-price elasticity of demand between fish and chicken is 2, then a 2% increase in the
price of fish will result in a ______ in the quantity of chicken demanded.
a. 1% increase
b. 4% increase
c. 10% increase
d. 20% decrease
12. Assume that a 10% increase in income results in a 6% decrease in the quantity demanded of a
good. The income elasticity of demand for the good is

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 a. negative and therefore the good is an inferior good.
b. negative and therefore the good is a normal good.
c. positive and therefore the good is an inferior good.
d. positive and therefore the good is a normal good.
13. Assume that a 4% increase in income results in a 6% decrease in the quantity demanded of a
good. The income elasticity of demand for the good is
a. negative and therefore the good is an inferior good.
b. negative and therefore the good is a normal good.
c. positive and therefore the good is an inferior good.
d. positive and therefore the good is a normal good.

Section 2: Exercises

Topic 2

Question 1.
Suppose an economy has 10 workers. Each worker can produce either 5 cars or 50
bushels of rice in a year.
a. Complete the production possibility table.

Possibility Cars Rice

Number of Quantity of Number of Quantity of
workers cars workers rice
A 10
B 9
C 8
D 7
E 6
F 5
G 4
I 3
J 2
K 1
H 0

b. From the production possibility table, draw the economy’s production possibility
frontier.
c. What is the opportunity cost of producing a car? What is the opportunity cost of
producing a bushel of rice?

Question 2.
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 Suppose an economy can produce any of the following combinations of rice and
wheat.
Possibility Rice Wheat
A 0 100
B 10 90
C 20 70
D 30 40
E 40 0
a. Draw the PPF for the economy with rice on the vertical axis and wheat on the
horizontal axis.
b. Calculate the opportunity cost for rice as the economy moves from A to B; B to C; C
to D and D to E.
c. Calculate the opportunity cost for wheat as the economy moves from E to D; D to C;
C to B and B to A.

Question 3.
Suppose that Japan and Canada both produce meat and potatoes. In one period, a
Japanese worker can produce 3 units of meat or 15 units of potatoes, whereas a Canadian
worker can produce 4 units of meat or 10 units of potatoes. Each country has 100 workers.
a. Draw the production possibilities frontier PPF for each country.
b. What is the opportunity cost of meat in Japan? In Canada? Which country has the
comparative advantage in the production of meat? Why?
c. What is the opportunity cost of potatoes in Japan? In Canada? Which country has the
comparative advantage in the production of potatoes? Why?
d. Without trade, each country allocates half of its workers to produce meat and half
produce potatoes. How much meat and potatoes does each country produce? How
much are the total quantity of meat and potatoes for the two countries?
e. Now the two countries specialize with Japan allocates all of its workers to produce
potatoes and Canada allocates all of its workers to produce meat. How much meat
and potatoes does each country produce? How much are the total quantity of meat
and potatoes for the two countries?
f. Compare the total quantity of meat and potatoes for the two countries between the
without trade and specialization situation.

Question 4.
Suppose that France and England both produce cheese and wine with their production
possibilities frontiers as followed:
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PPF for France:
Possibility Cheese Wine
A 0 100
B 30 50
C 60 0
PPF for England:
Possibility Cheese Wine
A 0 80
B 45 40
C 90 0

a. Draw the production possibilities frontier PPF for each country.

b. What is the opportunity cost of cheese in France? In England? Which country has the
comparative advantage in the production of cheese? Why?
c. What is the opportunity cost of wine in France? In England? Which country has the
comparative advantage in the production of wine? Why?
g. Without trade, each country chooses to produce at point B. How much cheese and
wine does each country produce?
d. Now France specializes to produce at point A and England specializes to produce at
point C. France then sells 40 wine to England and get 40 cheese in return. How much
cheese and wine does each country consume? Is each country better off than without
trade? Explain.

Topic 3

Question 1.
Consider the market for minivans. For each of the following events, explain what
happen to the equilibrium price and equilibrium quantity for minivans.
a. People decide to have more children.
b. A strike by steelworkers raises steel price.
c. Engineers invented advanced technology for the production of minivans.
d. Price of gasoline decreases.
e. A stock market crash lowers people’s wealth.

Question 2.
The following table describes the market demand and supply for pizza

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 Price per pizza Quantity demanded Quantity supplied
($) (thousands) (thousands)
1 100 0
2 80 30
3 60 60
4 40 90
5 20 120
6 0 150

a. Draw the supply and demand curves on the same diagram.

b. What are the equilibrium price and the equilibrium quantity?
c. How much are the consumer surplus and producer surplus at the equilibrium?
d. If price is $2, the market has a shortage or surplus? How much?
e. If price is $6, the market has a shortage or surplus? How much?

Question 3.
Consider the following demand and supply for a certain product
QD =50 , 000−10 , 000 P
QS =15 , 000 P
a. Draw the demand and supply curve on the same diagram.
b. What are the equilibrium price and the equilibrium quantity?
c. How much are the consumer surplus and producer surplus at the equilibrium?

Topic 4

Question 1.
Suppose that business travelers and vacationers have the following demand for airline
tickets from New York to Boson

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 Price Quantity demanded Quantity demanded
(Business travelers) (Vacationers)
$150 2,100 1,000
200 2,000 800
250 1,900 600
300 1,800 400
a. As the price of tickets rises from $200 to $250, what is the price elasticity for (i)
business travelers and (ii) vacationers?
b. In each case, identify whether demand is price elastic, inelastic or unit elastic.
c. Why might vacationers have a different elasticity from business travelers?

Question 2.
Fill in the table.

P Q TR Price elasticity Elastic. Inelastic

of demand or Unit elastic
0 240
1 210
2 180
3 150
4 120
5 90
6 60
7 30
8 0

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Question 3.
Suppose the demand for 3 goods as follow:
Income Quantity demanded Quantity demanded Quantity demanded
(Good A) (Good B) (Good C)
$10,000 200 100 50
$12,000 210 150 40
a. Calculate the income elasticity of each good.
b. Identify whether each good is normal, inferior, luxury or necessity.

Question 4.
The following information describes how quantity demanded for good B (good C)
responds to a change in price of good A.
Price Quantity demanded Quantity demanded
(Good A) (Good B) (Good C)
$10 30 20
$12 35 15
a. Calculate the cross price elasticity of demand for good B. Are goods A and B
substitutes or complements?
b. Calculate the cross price elasticity of demand for good C. Are goods A and C
substitutes or complements?

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