Microeconomics Principles Practice Exam

Question 1 Microeconomics Principles

What is hedonic pricing?

Normal: demand rises with income; Inferior: demand falls. Estimating values by decomposing prices into attribute components. The cost of producing one more unit. Consumers allocate spending so the marginal utility per dollar is equal across goods.

Question 2 Microeconomics Principles

What is inelastic demand?

% change in quantity demanded of A ÷ % change in price of B. Workers balance income (consumption) against leisure. Cost that does not vary with output (e.g., rent). |Ed| < 1; quantity is not very responsive to price.

Question 3 Microeconomics Principles

What is the Coase Theorem (restated)?

When property rights are well-defined and transaction costs are zero, parties bargain to efficient outcomes. When asymmetric information leads to undesirable participants in a market (e.g., sick people buying insurance). Profiting from price differences in different markets. A game where individual rationality leads to a worse collective outcome.

Question 4 Microeconomics Principles

What is rent control?

A good with positive income elasticity (demand rises with income). Simultaneous high inflation and high unemployment. Consumers allocate spending so the marginal utility per dollar is equal across goods. A price ceiling on rents; often leads to shortages and reduced housing quality.

Question 5 Microeconomics Principles

What is the law of diminishing marginal utility?

Each additional unit consumed adds less utility than the previous one. A good with negative income elasticity (demand falls as income rises). A competitive equilibrium with no externalities is Pareto efficient. Any arrangement where buyers and sellers interact to trade goods and services.

Question 6 Microeconomics Principles

What is Austrian economics?

A school emphasizing aggregate demand and government's role in stabilizing the economy. The current worth of a future sum, discounted by the interest rate. The minimum a seller would accept to part with a good. A school emphasizing methodological individualism and free markets.

Question 7 Microeconomics Principles

What enables a monopoly?

A threshold income below which households are considered poor. Quantity supplied exceeds quantity demanded; prices tend to fall. Barriers to entry like patents, control of resources, government grants. When an uninformed party induces the informed party to reveal information.

Question 8 Microeconomics Principles

What is elasticity?

|Ed| < 1; quantity is not very responsive to price. Zero economic profit, but produced at excess capacity. A measure of responsiveness of one variable to changes in another. Substitutes, necessity vs. luxury, share of income, time horizon.

Question 9 Microeconomics Principles

What is regulatory capture?

A measure of responsiveness of one variable to changes in another. A cost imposed on others (e.g., pollution). When regulators come to serve industry interests rather than the public. Consumers maximize utility subject to a budget constraint.

Question 10 Microeconomics Principles

What is a public good?

A good that is non-rivalrous and non-excludable (e.g., national defense). The fraction of additional income spent on consumption. Preferring smaller immediate rewards over larger delayed ones. A threshold income below which households are considered poor.

Question 11 Microeconomics Principles

What is risk aversion?

Each additional unit consumed adds less utility than the previous one. The price at which quantity supplied equals quantity demanded. All else equal, as price rises, quantity supplied rises. Preferring a sure outcome over a gamble with equal expected value.

Question 12 Microeconomics Principles

What is the consumption-leisure tradeoff?

Workers balance income (consumption) against leisure. A luxury good whose demand rises as its price rises due to status. A relationship between unemployment and inflation. The additional revenue from employing one more unit of an input.

Question 13 Microeconomics Principles

What does a point outside the PPF mean?

Unattainable with current resources. A school emphasizing aggregate demand and government's role in stabilizing the economy. The branch studying economy-wide phenomena like GDP, inflation, and unemployment. % change in quantity demanded of A ÷ % change in price of B.

Question 14 Microeconomics Principles

What is risk seeking?

The difference between what consumers are willing to pay and what they actually pay. Firms earn zero economic profit. Preferring a gamble over a sure outcome of equal expected value. Unattainable with current resources.

Question 15 Microeconomics Principles

What is a wage premium?

Obstacles preventing new firms from entering a market. A rare inferior good whose demand rises as its price rises. The extra wage attributable to a characteristic like education. A change that makes someone better off without harming anyone.

Question 16 Microeconomics Principles

What is stagflation?

Simultaneous high inflation and high unemployment. Selling exports below cost to gain market share. A threshold income below which households are considered poor. Rising average costs as output grows beyond a certain point.

Question 17 Microeconomics Principles

What is economics?

The study of how individuals and societies allocate scarce resources to satisfy unlimited wants. The process by which innovation destroys old industries and creates new ones. Zero economic profit, but produced at excess capacity. A tax to correct a negative externality by internalizing its cost.

Question 18 Microeconomics Principles

What is monetarism?

A market with a single seller of a product without close substitutes. Payment to a factor in excess of its opportunity cost. A school emphasizing the money supply's role in inflation and growth (Friedman). A school emphasizing aggregate demand and government's role in stabilizing the economy.

Question 19 Microeconomics Principles

What does positive cross-price elasticity indicate?

A factual claim about what is. The change in quantity demanded due to a change in purchasing power. The goods are substitutes. Shared resources are overused when individuals act in self-interest.

Question 20 Microeconomics Principles

What is cyclical unemployment?

% change in quantity demanded of A ÷ % change in price of B. Unemployment from downturns in the business cycle. Many firms selling differentiated products with relatively easy entry. The change in quantity demanded due to relative price changes, holding utility constant.

Question 21 Microeconomics Principles

What is the substitution effect?

The current worth of a future sum, discounted by the interest rate. The quantity of a good producers are willing to sell at various prices. The lost surplus because monopoly restricts output below the competitive level. The change in quantity demanded due to relative price changes, holding utility constant.

Question 22 Microeconomics Principles

What is accounting profit?

Higher wages may reduce hours worked as workers can afford more leisure. Identical goods should sell for the same price in different markets, absent transaction costs. The combinations of goods a consumer can afford given income and prices. Total revenue minus explicit costs.

Question 23 Microeconomics Principles

What is total cost?

The locus of Pareto-efficient allocations in an Edgeworth box. At high wages, additional income may reduce labor supply as workers value leisure more. The sum of fixed and variable costs. The difference between what consumers are willing to pay and what they actually pay.

Question 24 Microeconomics Principles

What is a market failure?

A situation where free markets allocate resources inefficiently. A period in which at least one input is fixed. If property rights are clear and transaction costs low, parties can negotiate to efficient outcomes. Workers who can't find a job at the prevailing wage.

Question 25 Microeconomics Principles

What is utility maximization with corners?

Analysis of a single market in isolation. People deviate systematically from purely rational behavior due to cognitive biases. When optimum lies at a budget boundary (e.g., one good consumed in zero quantity). Preferring a gamble over a sure outcome of equal expected value.

Question 26 Microeconomics Principles

What is unemployment in microeconomics?

Workers who can't find a job at the prevailing wage. Markets that fully reflect available information in prices. Insured behavior becomes riskier because losses are covered. % change in quantity demanded ÷ % change in price.

Question 27 Microeconomics Principles

What is an oligopoly?

A good with negative income elasticity (demand falls as income rises). Many firms selling differentiated products with relatively easy entry. A graph of income (or wealth) distribution: cumulative share of households vs cumulative income. A market dominated by a few firms.

Question 28 Microeconomics Principles

What is third-degree price discrimination?

People feel losses more than equivalent gains. Charging different groups different prices (e.g., student discounts). Horizontal at minimum average total cost, after entry/exit adjusts. Lobbying for advantageous policy without creating economic value.

Question 29 Microeconomics Principles

What is a normal good?

A competitive equilibrium with no externalities is Pareto efficient. The extra wage attributable to a characteristic like education. A good with positive income elasticity (demand rises with income). The study of how individuals and societies allocate scarce resources to satisfy unlimited wants.

Question 30 Microeconomics Principles

What is microfinance?

The maximum a consumer would pay for a good. Simultaneous high inflation and high unemployment. Small loans to poor entrepreneurs lacking access to traditional banking. Substitutes, necessity vs. luxury, share of income, time horizon.

Question 31 Microeconomics Principles

What is a market?

A tax to correct a negative externality by internalizing its cost. Any arrangement where buyers and sellers interact to trade goods and services. Any Pareto-efficient allocation can be achieved through a competitive equilibrium with appropriate lump-sum transfers. A tax on imports.

Question 32 Microeconomics Principles

What are causes of market failure?

Externalities, public goods, market power, asymmetric information. When a party takes more risk because the costs fall on others (e.g., insurance). A downward-sloping curve showing wage and quantity of labor demanded. A field combining psychology with economics to explain real-world behavior.

Question 33 Microeconomics Principles

What is the backward-bending labor supply curve?

Substitutes, necessity vs. luxury, share of income, time horizon. A strategy yielding better outcomes regardless of opponents' actions. Paying above market wages to increase productivity and reduce turnover. At high wages, additional income may reduce labor supply as workers value leisure more.

Question 34 Microeconomics Principles

What is the free-rider problem?

Individuals benefit from a public good without paying. Higher wages make working more attractive than leisure. A market with a single seller of a product without close substitutes. Small loans to poor entrepreneurs lacking access to traditional banking.

Question 35 Microeconomics Principles

What is the natural rate of unemployment?

Cost advantages from increased production scale. Decisions involving outcomes across different times. The unemployment rate consistent with stable inflation, including frictional and structural. A government-set maximum price (e.g., rent control) below equilibrium; causes shortages.

Question 36 Microeconomics Principles

What is price discrimination?

A measure of responsiveness of one variable to changes in another. Selling exports below cost to gain market share. Charging different prices to different buyers for the same product. Lower wages and employment than in competitive labor markets.

Question 37 Microeconomics Principles

What is dynamic programming?

Cost advantages from increased production scale. Markets that fully reflect available information in prices. A market dominated by a few firms. A method to solve optimization problems over time.

Question 38 Microeconomics Principles

What is equilibrium price?

Preferring a sure outcome over a gamble with equal expected value. The study of how auctions allocate resources and reveal value. Workers balance income (consumption) against leisure. The price at which quantity supplied equals quantity demanded.

Question 39 Microeconomics Principles

What is barriers to entry?

Letting past unrecoverable costs influence current decisions. Obstacles preventing new firms from entering a market. Rising average costs as output grows beyond a certain point. Inefficient use of resources.

Question 40 Microeconomics Principles

What is specialization?

Increasing opportunity costs. Focusing on producing what one is best at, then trading. The sum of fixed and variable costs. Selling exports below cost to gain market share.

Question 41 Microeconomics Principles

What is a Pareto improvement?

A change that makes someone better off without harming anyone. Focusing on producing what one is best at, then trading. The price of borrowing money, expressed as a percentage. A luxury good whose demand rises as its price rises due to status.

Question 42 Microeconomics Principles

What is the endowment effect?

Preferring smaller immediate rewards over larger delayed ones. The goods are complements. A market dominated by a few firms. Valuing things more once owned.

Question 43 Microeconomics Principles

What is Keynesian economics?

Higher wages may reduce hours worked as workers can afford more leisure. A school emphasizing aggregate demand and government's role in stabilizing the economy. Any arrangement where buyers and sellers interact to trade goods and services. David Ricardo.

Question 44 Microeconomics Principles

What is a budget constraint?

The change in quantity demanded due to relative price changes, holding utility constant. The combinations of goods a consumer can afford given income and prices. Externalities, public goods, market power, asymmetric information. A market with a single seller of a product without close substitutes.

Question 45 Microeconomics Principles

What is the principal-agent problem?

A market with many small firms, identical products, free entry/exit, perfect information. Conflicts when an agent acts on behalf of a principal with different incentives. When a party takes more risk because the costs fall on others (e.g., insurance). When an uninformed party induces the informed party to reveal information.

Question 46 Microeconomics Principles

What is bounded rationality?

The idea that people make rational decisions within cognitive limits. The difference between what consumers are willing to pay and what they actually pay. The locus of Pareto-efficient allocations in an Edgeworth box. A relationship between unemployment and inflation.

Question 47 Microeconomics Principles

What are diseconomies of scale?

Individuals benefit from a public good without paying. Rising average costs as output grows beyond a certain point. The condition of having limited resources to meet unlimited wants. Inefficient use of resources.

Question 48 Microeconomics Principles

What is the Sherman Act?

The fraction of additional income spent on consumption. A situation where free markets allocate resources inefficiently. Focusing on producing what one is best at, then trading. A 1890 US law prohibiting anti-competitive agreements and monopolization.

Question 49 Microeconomics Principles

What is comparative statics?

A market where a single firm can serve demand at lower cost than multiple firms (e.g., utilities). A school emphasizing methodological individualism and free markets. Paying different wages for equal work based on characteristics like race or gender. Comparing equilibria before and after a change in a parameter.

Question 50 Microeconomics Principles

What is risk neutrality?

A survey method to estimate willingness to pay for non-market goods. Insured behavior becomes riskier because losses are covered. High-risk individuals are more likely to buy insurance. Indifference between a certain and uncertain outcome of equal expected value.