Microeconomics Final Exam Review

Question 1

Describe instances in which it’s rational to consider buying something

Answer 1

• if the marginal benefit you get from buying an item equals the marginal cost
• if the marginal benefit you get from buying an item is greater than the marginal cost
• if the total benefit you get from buying an item is greater than the total cost

Question 2

A local restaurant announces that they will now include a 15% surcharge on all bills to support living wages for their servers and staff. Select the statement that correctly describes how the demand-side of the market reacts to this announcement.

Answer 2

the quantity of meals demanded decreases

Question 3

You’re a big Taylor Swift fan, and you’re willing to pay up to $250 to see her concert on April 30th. Sadly you were unable to get tickets. When April 30th comes you buy a non-refundable $15 movie ticket so that you still have something fun to do later that evening. Suddenly, your friend calls and says there a chance to buy a ticket for $240 from someone who can no longer attend the Taylor Swift concert that night. What do you do and why?

Answer 3

Go see Taylor Swift because the benefit ($250) exceeds the relevant costs ($240)

Question 4

Look at question 4 on Quiz 1 and solve for marginal benefit of the extra hour, marginal costs of the extra hour and should Tanisha stay open and extra hour on Saturday.

Answer 4

• Marginal benefit of the extra hour: $315
• marginal costs of the extra hour: $290
• should tanisha stay open an extra hour on Saturday: Yes

Question 5

Is this statement a substitute, compliment or N/A

When the price of coffee tripled because of a bad harvest many consumers turned to tea in their morning beverage routine

Answer 5

substitute

Question 6

Is this statement a substitute, compliment or N/A

An increase in the quantity of smartphones demand led to an increase demand for protective cases

Answer 6

compliments

Question 7

Is this statement a substitute, compliment or N/A

Because it’s winter and the weather is now getting colder, consumers are buying more hot cocca and marshmallows

Answer 7

N/A

Question 8

You just took an Uber from home to campus for the first time and were willing to pay $13 for the trip. It
was so much easier than driving yourself that you are willing to pay $21 for the same trip tomorrow. Determine if
you have violated the law of demand based on your choices and explain why or why not

Answer 8

did not violate the law of demand because your preferance for the product changed after you experienced the good

Question 9

What does not cause a shift in the demand curve for a good

Answer 9

price of the good, and the price of inputs used in the production process

Question 10

The interdependence principle states that your best choice today depends on

Answer 10

expectations about the future, other decisions your currently making, decisions others are currently making

Question 11

Normal, Inferior or N/A

People are buying more pasta because the price of pasta has fallen

Answer 11

N/A

Question 12

Normal, Inferior, N/A

With incomes falling in the recession, people are buying more bread

Answer 12

Inferior

Question 13

Normal, Inferior, N/A

A successful marketing campaign leads people to buy more milk

Answer 13

N/A

Question 14

Normal, Inferior, N/A

People are buying more fruit now that incomes have increased

Answer 14

Normal

Question 15

An investor is franchising a new type of fitness studio and must determine how many locations to open.
For each location, they will hire a manager for a salary of $6,000 per month and three part-time employees who will
each earn $2,500 per month. The investor values their own personal time spent overseeing each location at $8,000
per month. Additional operating costs, including rent and utilities, will be $15,000 per month at each location. The
investor projects that the first location will have 1,500 members. The second location will bring in 1200 members.
The third and fourth locations will bring in 800 and 400 members, respectively. The monthly membership fee will be
$55 per member. The investor has decided to definitely open two locations. Fill out the following information as you
consider whether the investor should open a third location

Answer 15

• Marginal benefit of 3rd location: $44,000
• Marginal cost of the 3rd location: $ 36,500
• Should the investor open the 3rd location: Yes

Question 16

Mateo works eight hours per day. He is deciding whether to work overtime and stay one more
hour in the office, or go back home and spend that hour studying for his economics exam. His
company pays him $112 per day if he works eight hours, and $133 per day if he works
nine hours. If Mateo studies one more hour, his exam score increases from 75 to 80. Mateo
decides to work overtime only if he values

Answer 16

a five point increase on his exam less than $21

Question 17

A flower shop only has enough time and workers to either make bridal bouquet arrangements
or graduation flower arrangements. If the price at which the flower shop can sell graduation
arrangements falls, then this will lead to

Answer 17

an increase in the supply of bridal arrangements

Question 18

Suppose Jia only buys tea and biscuit, and she is currently in consumer equilibrium. Then,
suddenly, the price of biscuits increases. This increase in the price of biscuits will immediately
[ increases decreases ] the marginal utility per dollar for biscuits. Jia adjusts her consumption
of tea and biscuits in response to this price change. As Jia adjusts to her new consumer
equilibrium, her marginal utility per dollar for biscuits [ increases decreases

Answer 18

decreases, increases

Question 19

To maximize utility, a consumer spends their entire allocated budget because

Answer 19

more consumption increases total utility, and thus only combinations that exhaust the budget can maximize total utility

Question 20

Yuna spends her entire allocated grocery budget on strawberries and ice cream. Yuna’s marginal
utility of her last pack of strawberries is 160 and her marginal utility of her last pint of ice cream
is 160. The price of strawberries is $4.00 per pack and the price of ice cream is $3.00 per pint. To
maximize her utility, Yuna should

Answer 20

buy more ice cream and less strawberries

Question 21

New research sheds light on the environmental damage posed by plastic bags from stores like
Target, Walmart, grocery stores etc., causing people to start using reusable bags when shopping
(rather than plastic bags). At the same time, plastic bag production technology improves
dramatically. Finally suppose the demand change is smaller than the supply change. Given this
information which of the following is TRUE

Answer 21

the new equilibrium price of plastic bags will be lower, and the quantity will be higher

Question 22

Consumers consider pasta and rice to be substitutes. All else equal, if the price of pasta rises, we

Answer 22

shift the demand curve for rice to the right

Question 23

What leads to a fall in the equilibrium price?

Answer 23

a decrease in the demand combined with an increase in supply

Question 24

Suppose suppliers expect future prices to increase, and simultaneously consumers’ incomes
increase. If the good under consideration is an inferior good, then what happens in the market
for this good

Answer 24

the equilibrium price adjustment is ambiguous but the quantity will decrease for sur e

Question 25

In response to growing environmental concerns and the need to reduce greenhouse
gas emissions, governments around the world have introduced various incentives to promote
the adoption of electric vehicles (EVs). Once such incentive is that the EV development and
manufacturing processes are subsidized by the government. This government policy directly
impacts the [ demand, quantity demanded, supply, quantity supplied ] of EVs, which results
in a [ shortage, surplus] at the original equilibrium price for EVs. This acts as the catalyst for the
price of EVs to start to [ rise, fall ], and the quantity of EVs bought and sold [ rises, falls ] as the
EV market adjusts to its new equilibrium. Fill in the bubble next to your choices on the answer
sheet.

Answer 25

supply, surplus, fall, rises

Question 26

You estimate a local furniture company’s price elasticity of supply is 0.65. If the price
of furniture increases by 20%, then the quantity of furniture supplied by this company will

Answer 26

increase by 13%

Question 27

Suppose the demand for soda is relatively elastic, and the demand for water is
relatively inelastic. Compare the results of an increase in supply for each:

• The price of soda will change by [ more, less ] than the price of water.
• The quantity of soda will change by [ more, less ] than the quantity of water.

Answer 27

less, more

Question 28

Shelia goes to her favorite coffee shop every morning and always buys one large latte,
no matter whether there’s a special or not (i.e. half-price Mondays). Correctly identify which
category best describes Shelia’s price elasticity of demand for lattes

Answer 28

perfectly elastic

Question 29

Which of the following price elasticity of demand values is the MOST inelastic?

Elasticity values: 0.2, 0.4, 0.5, 1

Answer 29

0.2

Question 30

Suppose that Michelle buys a cappuccino from Paul’s Cafe for $4.25. Michelle was willing to
pay up to $5.75 for the cappuccino, and Paul’s Cafe was willing to accept $2.50 for the
cappuccino. Based on this information, answer the following questions

• Michelle’s consumer surplus is $
• Paul’s Cafe producer surplus is $

Answer 30

$4.25, $2.50

Question 31

Dell and Apple both sell personal computers. Apple lowers the price of their laptops by 20
percent. As a result, the quantity of Dell computers demanded decreases from 30,000 to
24,000 units. What is the cross-price elasticity of demand for Dell computers with respect
to the price of Apple computers?

Answer 31

1.11

Question 32

Consider a market with a binding (i.e. effective) price ceiling. If supply decreases, what will
happen to the price in the market and the quantity exchanged in this market

Answer 32

the price will stay the same and the quantity will decrease

Question 33

Rachel and Maya both want to make use of their vacation days at work. At Rachel’s
company, vacation days do not ‘roll over’ into the next year, and so she needs to use all her
vacation days within the next three months. At Maya’s company, vacation days do ‘roll
over’ into the next year, so Maya has a more flexible timetable. All else equal, the price of
airline tickets rise by 16%, and we observe Rachel decreases the number of planned trips
by 12%.
We can conclude that Maya’s price elasticity of demand for airline tickets (in absolute
value) is likely..

Answer 33

bigger than 0.75

Question 34

The market for apples has an equilibrium price of $1.15. There is also currently a price floor
of $0.95. An increase in the price floor from $0.95 to $1.25 will do what to the price and
quantity of apples exchanged in the market

Answer 34

the price of apples will increase, and fewer apples will be exchanged

Question 35

The market for cars is currently in equilibrium. The local government passes a new law
which prohibits the price of cars from rising above the current price. What will happen in
that market if demand increases after the law is passed?

Answer 35

the quantity exchanged in the market will not change

Question 36

When the price of a concert ticket increases from $15 to $25, the quantity of tickets
demanded decreases from 1,200 to 600. What is the price elasticity of demand for concert
tickets? Write your answer in absolute value, rounded to one decimal place

Answer 36

1.3

Question 37

Assume Aaron and José each own a small ranch, and each produces milk and cheese. One
of them is better than the other at producing both milk and cheese (but we do not
7
know who). Which of the statements cannot be true regarding absolute or comparative advantage?

Answer 37

Aaron could have a comparative advantage in producing both milk and cheese

Question 38

Suppose the demand for internet service is inelastic, and the demand for movie theater
tickets is elastic. Compare the results of an increase in supply for each.
The quantity of internet subscriptions will change by [ more, less ] than the quantity of
movie theater tickets sold.
The price of internet services changes by [ more, less ] than the price of movie theater
tickets.

Answer 38

less, more

Question 39

Economists almost unanimously view international trade as beneficial for an economy.
However, not everyone wins. Suppose your country starts exporting gas and crude oil. Who
are the winners and losers?

Answer 39

domestic consumers lose surplus, domestic producers gain surplus

Question 40

A free rider is someone who

Answer 40

consumes a good without paying for it

Question 41

If there is a positive externality associated with the production of a good, then the
unregulated competitive market produces

Answer 41

less than the socially efficient quantity, since the external benefits are not accounted for in the supply equals demand equilibrium

Question 42

Consider the labor market for helicopter pilots in the U.S.A. Suppose a union is
organized, and it successfully changes job qualification standards which will now require pilots
to acquire additional skills to meet the new, higher standards

Answer 42

decreases, increase, decreases

Question 43

Piracy is a serious problem for the software industry because computer programs are
easily copied and distributed over the Internet. This piracy problem exists because software.

Answer 43

has characteristics very much like a public good

Question 44

Is this statement true of negative externalities:

A negative externality pushes the marginal social benefit of consuming a good below the marginal private benefit

Answer 44

Yes it is true

Question 45

A year ago, you graduated from college and decided to open you own computer
software company. Over the past year, your firm generated $550,000 in revenue. You hired two
software engineers and paid each of them $160,000 over the past year. You also purchased
computer equipment that cost a total of $20,000. To save money, you decided to use the
basement of your house for the business. Previously, you had rented this space to a tenant for
$14,000 per year. Instead of opening your own business, you could have gone to work for
Microsoft and earned $250,000 over the past year

Accounting profits:
economic profits:
should you have launched your own business

Answer 45

$210,000, -$54,000, No

Question 46

These statements describe what kind of competitive market

• The firm will produce the quantity at which marginal revenue = marginal cost
• If there is positive profit in the short run the firm will always choose to stay open

Answer 46

perfectly competitive marker

Question 47

In the short run a perfectly competitive firm will

Answer 47

shut down if P < AVC

Question 48

What is an example that illustrates the concept of diminishing marginal benefit?

Answer 48

A consumer experiences decreasing satisfaction from consuming each additional unit of a good

Question 49

What does marginal cost measure

Answer 49

the cost incurred by producing one additional unit of good

Question 50

If there is a sudden increase in the popularity of electric vehicles, then the equilibrium
price of gasoline-powered cars will.

Answer 50

decreases, and the equilibrium quantity decreases

Question 51

A decrease in consumer income leads to a reduction in the demand for luxury goods. How
will this affect the equilibrium in the market for luxury watches?

Answer 51

equilibrium price and quantity both decrease

Question 52

People love eating smores during the summer! You just need to buy three ingredients
from the grocery store to make smores: marshmallow, graham cracker, and chocolate. If
the price of marshmallows rises, then the equilibrium price of graham crackers will.

Answer 52

decrease and the equilibrium quantity decreases

Question 53

if consumers expect gas prices to be higher next week, then the equilibrium price of gas

Answer 53

increases and the equilibrium quantity increases

Question 54

At your bakery, brownies are a substitute in production for chocolate cupcakes. All else
equal, if the price of brownies increases,

Answer 54

the equilibrium price of chocolate cupcakes increases and the equilibrium quantity decreases

Question 55

Car manufacturers expect the future prices of cars to fall next quarter. All else equal,
which of the following is true?

Answer 55

the equilibrium price of cars decreases and the equilibrium quantity increases

Question 56

A luxury car manufacturer increases the price of its vehicles, and despite the increase,
total revenue from care sales increased. What can be inferred about the elasticity of
demand for luxury cars?

Answer 56

Demand is inelastic

Question 57

All else equal, if a firm decreases the price of its good by 7% and sells 7% more units,
which of the following is true?

Answer 57

firms product has a unit elastic demand, and its revenue does not change

Question 58

Cross-price elasticity of demand measures the responsiveness of.

Answer 58

quantity demanded of one good to changes in the price of another good

Question 59

All else equal, if a firm increases the price of its good by 16% and sells 8% fewer units,
which of the following is true?

Answer 59

firms product has inelastic demand and its revenue increases