TRAINING AND EDUCATION MINISTRY

DUY TAN UNIVERSITY

INTERNATIONAL SCHOOL

PSU DIVISION
INSTRCUTOR:
LÊ THỊ KHÁNH LY

EXERCISES

[INTERNAL USED ONLY]

COURSE: PRINCIPLE OF MICROECONOMIC

CODE: PSU-ECO-151

CREDIT: 3

FOR: BBA

FACULTY: INTERNATIONAL SCHOOL

Đà Nẵng, năm 2021

CHAPTER 01: TEN PRINCIPLES OF ECONOMICS

MULTIPLE CHOICE
1. The overriding reason why households and societies face many decisions is that
a. resources are scarce.
b. goods and services are not scarce.
c. incomes fluctuate with business cycles.
d. people, by nature, tend to disagree.
2. Economics is the study of
a. production methods
b. how society manages its scarce resources.
c. how households decide who performs which tasks.
d. the interaction of business and government.
3. Denise decides to spend three hours working overtime rather than watching a video
with her friends. She earns $10 an hour. Her opportunity cost of working is :
a. the $30 she earns working.
b. the $30 minus the enjoyment she would have received from watching the
video.
c. the enjoyment she would have received had she watched the video.
d. nothing, since she would have received less than $30 of enjoyment from the
video.
4. The adage, "There is no such thing as a free lunch," means
a. even people on welfare have to pay for food.
b. the cost of living is always increasing.
c. people face tradeoffs.
d. all costs are included in the price of a product.
5. A rational decision maker takes an action only if the
a. marginal benefit is less than the marginal cost.
b. marginal benefit is greater than the marginal cost.
c. average benefit is greater than the average cost.
d. marginal benefit is greater than both the average cost and the marginal cost.
6. Economists are particularly adept at understanding that people respond to
a. laws.
b. incentives.
c. punishments more than rewards.
d. rewards more than punishments.
7. Which of the following is a principle concerning how people interact?
a. Markets are usually a good way to organize economic activity.
b. Rational people think at the margin.
c. People respond to incentives.
d. All of the above are correct.
8. Which of the following statements about trade is false?
a. Trade increases competition.
b. With trade, one country wins and one country loses.
c. Bulgaria can benefit, potentially, from trade with any other country.
d. Trade allows people to buy a greater variety of goods and services at lower
cost.
9. Trade makes costs
a. higher and reduces the variety of goods and services available.
 b. higher but raises the variety of goods and services available.
c. lower but reduces the variety of goods and services available.
d. lower and raises the variety of goods and services available.
10. The invisible hand refers to
a. how central planners made economic decisions.
b. how the decisions of households and firms lead to desirable market outcomes.
c. the control that large firms have over the economy.
d. government regulations without which the economy would be less efficient.
11. Causes of market failure include
a. externalities and market power.
b. market power and incorrect forecasts of consumer demand.
c. externalities and foreign competition.
d. incorrect forecasts of consumer demand and foreign competition.
12. What is the most important factor that explains differences in living standards across
countries?
a. the quantity of money
b. the level of unemployment
c. productivity
d. equality
13. Productivity is defined as the
a. amount of goods and services produced from each unit of labor input.
b. number of workers required to produce a given amount of goods and services.
c. amount of labor that can be saved by replacing workers with machines.
d. actual amount of effort workers put into an hour of working time.
14. Which of the following is the most correct statement about the relationship between
inflation and unemployment?
a. In the short run, falling inflation is associated with falling unemployment.
b. In the short run, falling inflation is associated with rising unemployment.
c. In the long run, falling inflation is associated with falling unemployment.
d. In the long run, falling inflation is associated with rising unemployment.
15. An increase in the overall level of prices in an economy is referred to as
a. the income effect.
b. inflation.
c. deflation.
d. the substitution effect.

SHORT ANSWERS:
1. List three principles that describe how people make decision.
2. List three principles that describe how people interact.
3. List the three principles that describe how the economy as a whole works.
4. What is the opportunity cost of seeing a movie?
5. Why isn’t trade among countries like a game with some winners and some losers?
CHAPTER 02: THINKING LIKE AN ECONOMIST

MULTIPLE CHOICE
1. Economists, like mathematicians, physicists, and biologists,
a. make use of the scientific method.
b. try to address their subject with a scientist’s objectivity.
c. devise theories, collect data, and then analyze these data in an attempt to
verify or refute their theories.
d. All of the above are correct.
2. The goal of an economist who formulates new theories is to
a. provide an interesting framework of analysis, whether or not the framework
turns out to be of much use in understanding how the world works.
b. provoke stimulating debate in scientific journals.
c. contribute to an understanding of how the world works.
d. demonstrate that economists, like other scientists, can formulate testable
theories.
3. With respect to how economists study the economy, which of the following
statements is most accurate?
a. Economists study the past, but they do not try to predict the future.
b. Economists use “rules of thumb” to predict the future.
c. Economists devise theories, collect data, and analyze the data to test the
theories.
d. Economists use controlled experiments in much the same way that biologists
and physicists do.
4. In conducting their research, economists face an obstacle that not all scientists face;
specifically, in economics, it is often difficult and sometimes impossible to
a. make use of theory and observation.
b. rely upon the scientific method.
c. conduct laboratory experiments.
d. find articles or books that were written before 1900.
5. Instead of conducting laboratory experiments to generate data to test their theories,
economists often
a. ask winners of the Nobel Prize in Economics to evaluate their theories.
b. argue that data is impossible to collect in economics.
c. gather data from historical episodes of economic change.
d. assume that data would support their theories.
6. One thing economists do to help them understand how the real world works is
a. make assumptions.
b. ignore the past.
c. try to capture every aspect of the real world in the models they construct.
d. All of the above are correct.
7. Normative statements are
a. prescriptive, whereas positive statements are descriptive.
b. descriptive, whereas positive statements are prescriptive.
c. backward-looking, whereas positive statements are forward-looking.
d. forward-looking, whereas positive statements are backward-looking.
8. Positive statements are
a. prescriptive.
 b. claims about how the world should be.
c. claims about how the world is.
d. made by economists speaking as policy advisers.
9. Economists sometimes give conflicting advice because
a. graduate students in economics are encouraged to argue with each other.
b. economists have different values and scientific judgment.
c. economists acting as scientists do not like to agree with economists acting as
policy advisers.
d. economics is more of a belief system than a science.
10. Which of the following is one of the basic reasons why economists often appear to
give conflicting advice to policymakers?
a. similar opinions about the validity of economic theories
b. significant differences in education
c. differences in personal values
d. a reliance on normative statement for research theories

SHORT ANSWER
1. Use the following graph, Compute the slope of D1 between points J and L.
price
40

36

32

28
J K
24

20
L M
16

12
N
8

4
D1 D2

10 20 30 40 50 60 70 80 quantity

2. Table 2-1: Production Possibilities for Toyland

Refer to Table 2-1. What is the opportunity cost to Toyland of increasing the production of
dolls from 200 to 300?

Dolls Fire trucks

400 0
300 200
200 350
100 450
0 500
3. Figure 2-3
tractors

tubas

Refer to Figure 2-3. At which point is this economy producing its maximum possible
quantity of tubas?
4. Figure 2-4
toasters
50

45

40

35
C
30

25
A
20

15
D B
10

10 20 30 40 50 60 70 80 tooth-
brushes

Refer to Figure 2-4. If this economy devotes all of its resources to the production of
toothbrushes, then it will produce
5. Which of the following statements are positive?
a. The minimum wage creates unemployment among young and unskilled workers.
b. The minimum wage ought to be abolished.
c. If the price of a product in a market decreases, then, other things equal, quantity
demanded will increase.
d. A little bit of inflation is worse for society than a little bit of unemployment.
CHAPTER 3
MULTIPLE CHOICES
1. The opportunity cost of an item is
a. the number of hours that one must work in order to buy one unit of the item
b. what you give up to get that item
c. always less than the dollar value of the item
d. always greater than the cost of producing the item
2. Suppose a gardener produces both green beans and corn in her garden. If she must
give up 14 bushels of corn to get 5 bushels of green beans, then her opportunity cost
of 1 bushel of green beans is
a. 0.36 bushel of corn
b. 2.8 bushels of corn
c. 14 bushels of corn
d. 70 bushels of corn
3. Mike and Sandy are two woodworkers who both make tables and chairs. In one
month, Mike can make 4 tables or 20 chairs, while Sandy can make 6 tables or 18
chairs. Given this, we know that
a. Mike has an absolute advantage in chairs
b. Mike has a comparative advantage in tables
c. Sandy has an absolute advantage in chairs
d. Sandy has a comparative advantage in chairs
4. If Shawn can produce donuts at a lower opportunity cost than Sue, then
a. Shawn has a comparative advantage in the production of donuts
b. Sue has a comparative advantage in the production of donuts
c. Shawn should not produce donuts
d. Shawn is capable of producing more donuts than Sue in a given amount of
time
5. Comparative advantage is related most closely to which of the following?
a. output per hour
b. opportunity cost
c. efficiency
d. bargaining strength in international trade
6. Specialization and trade are closely linked to
a. absolute advantage
b. comparative advantage
c. gains to some traders that exactly offset losses to other traders
d. shrinkage of the economic pie
 7. Trade can make everybody better off because it
a. increases cooperation among nations
b. allows people to specialize according to comparative advantage
c. requires some workers in an economy to be retrained
d. reduces competition among domestic companies
Table 3-1: Assume that Andia and Zardia can switch between producing wheat and
producing beef at a constant rate.
Minutes Needed to Make 1
Bushel of Pound of
Wheat Beef
Andia 20 12
Zardia 15 10

8. Refer to Table 3-1. What is Andia’s opportunity cost of producing one pound of
beef?
a. 3/5 bushel of wheat
b. 6/5 bushel of wheat
c. 4/3 bushel of wheat
d. 5/3 bushel of wheat
9. Refer to Table 3-1. What is Andia’s opportunity cost of producing one bushel of
wheat?
a. 3/5 pound of beef
b. 6/5 pound of beef
c. 4/3 pound of beef
d. 5/3 pound of beef
10. Refer to Table 3-1. What is Zardia’s opportunity cost of producing one bushel of
wheat?
a. 2/3 pound of beef
b. 3/4 pound of beef
c. 5/6 pound of beef
d. 3/2 pound of beef
11. Refer to Table 3-1. What is Zardia’s opportunity cost of producing one pound of
beef?
a. 2/3 bushel of wheat
b. 3/4 bushel of wheat
c. 5/6 bushel of wheat
d. 3/2 bushel of wheat
12. Refer to Table 3-1. Andia has an absolute advantage in the production of
a. wheat and Zardia has an absolute advantage in the production of beef.
b. beef and Zardia has an absolute advantage in the production of wheat
c. both goods and Zardia has an absolute advantage in the production of neither
good
d. neither good and Zardia has an absolute advantage in the production of both
goods
 13. Refer to Table 3-1. Andia has a comparative advantage in the production of
a. wheat and Zardia has a comparative advantage in the production of beef
b. beef and Zardia has a comparative advantage in the production of wheat
c. both goods and Zardia has a comparative advantage in the production of
neither good
d. neither good and Zardia has a comparative advantage in the production of both
goods
14. Refer to Table 3-1. Andia should specialize in the production of
a. wheat and Zardia should specialize in the production of beef
b. beef and Zardia should specialize in the production of wheat
c. both goods and Zardia should specialize in the production of neither good
d. neither good and Zardia should specialize in the production of both goods
15. Refer to Table 3-1. Assume that Andia and Zardia each has 60 minutes available. If
each person spends all his time producing the good in which he has a comparative
advantage, then total production is
a. 3 bushels of wheat and 6 pounds of beef
b. 3.5 bushels of wheat and 5.5 pounds of beef.
c. 4 bushels of wheat and 5 pounds of beef
d. 7 bushels of wheat and 11 pounds of beef

SHORT ANSWERS
1. What does absolute advantage refer to?
2. What does comparative advantage refer to?
3. Which is more important in determining trade patterns, absolute advantage or comparative
advantage?
4. Julia can fix a meal in 1 hour, and her opportunity cost of one hour is $50. Jacque can fix the
same kind of meal in 2 hours, and his opportunity cost of one hour is $20. Will both Julia and
Jacque be better off if she pays him $45 per meal to fix her meals? Explain.

5. What are exports, imports?

CHAPTER 4

I. MULTIPLE CHOICES
1. The demand for a good or service is determined by
a. those who buy the good or service
b. the government
c. those who sell the good or service
d. both those who buy and those who sell the good or service
2. The supply of a good or service is determined by
a. those who buy the good or service
b. the government
c. those who sell the good or service
d. both those who buy and those who sell the good or service
3. The quantity demanded of a good is the amount that buyers are
a. willing to purchase
b. willing and able to purchase
c. willing, able, and need to purchase
 d. able to purchase
4. A decrease in quantity demanded
a. results in a movement downward and to the right along a demand curve
b. results in a movement upward and to the left along a demand curve
c. shifts the demand curve to the left
d. shifts the demand curve to the right
5. The law of demand states that, other things equal, an increase in
a. price causes quantity demanded to increase.
b. price causes quantity demanded to decrease
c. quantity demanded causes price to increase
d. quantity demanded causes price to decrease
6. If Max experiences a decrease in his income, then we would expect Max’s demand
for
a. each good he purchases to remain unchanged
b. normal goods to decrease
c. luxury goods to increase
d. inferior goods to decrease
7. Soup is an inferior good if the demand
a. for soup falls when the price of a substitute for soup rises
b. for soup rises when the price of soup falls
c. curve for soup slopes upward
d. for soup falls when income rises
8. You wear either shorts or sweatpants every day. You notice that sweatpants have
gone on sale, so your demand for
a. sweatpants will increase
b. sweatpants will decrease
c. shorts will increase
d. shorts will decrease
9. A very hot summer in Atlanta will cause
a. the demand curve for lemonade to shift to the left
b. the demand for air conditioners to decrease
c. the demand for jackets to decrease
d. a movement downward and to the right along the demand curve for tank tops.
10. What will happen in the artichoke market now if buyers expect higher artichoke
prices in the near future?
a. The demand for artichokes will increase
b. The demand for artichokes will decrease
c. The demand for artichokes will be unaffected
d. The supply of artichokes will increase
11. An increase in the price of a good will
a. increase supply
b. decrease supply
c. increase quantity supplied
d. decrease quantity supplied
12. The sum of all the individual supply curves for a product is called
a. total supply
 b. market supply
c. aggregate supply
d. total output
13. Lead is an important input in the production of crystal. If the price of lead decreases,
then we would expect the supply of
a. crystal to be unaffected
b. crystal to decrease
c. crystal to increase
d. lead to increase
14. Ashley bakes bread that she sells at the local farmer’s market. If she purchases a new
convection oven that reduces the costs of baking bread, the
a. supply curve for Ashley’s bread will increase
b. supply curve for Ashley’s bread will decrease
c. demand curve for Ashley’s bread will increase
d. demand curve for Ashley’s bread will decrease
15. The unique point at which the supply and demand curves intersect is called
a. market harmony
b. coincidence
c. equivalence
d. equilibrium
16. Suppose roses are currently selling for $40 per dozen, but the equilibrium price of
roses is $30 per dozen. We would expect a
a. shortage to exist and the market price of roses to increase
b. shortage to exist and the market price of roses to decrease
c. surplus to exist and the market price of roses to increase
d. surplus to exist and the market price of roses to decrease
17. Suppose roses are currently selling for $20 per dozen, but the equilibrium price of
roses is $30 per dozen. We would expect a
a. shortage to exist and the market price of roses to increase
b. shortage to exist and the market price of roses to decrease
c. surplus to exist and the market price of roses to increase
d. surplus to exist and the market price of roses to decrease
18. An early frost in the vineyards of Napa Valley would cause a(n)
a. increase in the demand for wine, increasing price
b. increase in the supply of wine, decreasing price
c. decrease in the demand for wine, decreasing price.
d. decrease in the supply of wine, increasing price
19. If macaroni and cheese is an inferior good, what would happen to the equilibrium
price and quantity of macaroni and cheese if consumers’ incomes rise?
a. Both the equilibrium price and quantity would increase
b. Both the equilibrium price and quantity would decrease
c. The equilibrium price would increase, and the equilibrium quantity would
decrease
d. The equilibrium price would decrease, and the equilibrium quantity would
increase
20. What would happen to the equilibrium price and quantity of lattés if coffee shops
began using a machine that reduced the amount of labor necessary to produce them?
a. Both the equilibrium price and quantity would increase
b. Both the equilibrium price and quantity would decrease
c. The equilibrium price would increase, and the equilibrium quantity would
decrease
d. The equilibrium price would decrease, and the equilibrium quantity would
increase
II. SHORT QUESTIONS
1. What is a characteristic of a perfectly competitive market?
2. What is the quantity demanged?
3. List the variables that cause the demand curve to shift.
4. What is the law of supply?
5. What is the equilibrium quantity?
III. PROBLEMS
1. (P1) Explain each of the following statements using supply-and-demand diagrams.
a. “When a cold snap hits Florida, the price of orange juice rises in supermarkets
throughout the country.”
b. “When the weather turns warm in New England every summer, the price of
hotel rooms in Caribbean resorts plummets.”
c. “When a war breaks out in the Middle East, the price of gasoline rises and the
price of a used Cadillac falls.”
2. (P3) Consider the market for minivans. For each of the events listed here, identify
which of the determinants of demand or supply are affected. Also indicate whether
demand or supply increases or decreases. Then draw a diagram to show the effect on
the price and quantity of minivans.
a. People decide to have more children.
b. A strike by steelworkers raises steel prices.
c. Engineers develop new automated machinery for the production of minivans.
d. The price of sports utility vehicles rises.
e. A stock market crash lowers people’s wealth.
3. (P4) Consider the markets for film streaming services, TV screens, and tickets at
movie theaters.
a. For each pair, identify whether they are complements or substitutes:
i. ^^ Film streaming and TV screens
ii. ^^ Film streaming and movie tickets
iii. ^^ TV screens and movie tickets
b. Suppose a technological advance reduces the cost of manufacturing TV
screens. Draw a diagram to show what happens in the market for TV screens.
c. Draw two more diagrams to show how the change in the market for TV
screens affects the markets for film streaming and movie tickets
4. (P5) Over the past 40 years, technological advances have reduced the cost of
computer chips. How do you think this has affected the market for computers? For
computer software? For typewriters?
5. (P6) Using supply-and-demand diagrams, show the effect of the following events on
the market for sweatshirts.
 a. A hurricane in South Carolina damages the cotton crop.
b. The price of leather jackets falls.
c. All colleges require morning exercise in appropriate attire.
d. New knitting machines are invented
6. (P8) The market for pizza has the following demand and supply schedules:
Price Quantity Demanded Quantity Supplied
$4 135 pizzas 26 pizzas
5 104 53
6 81 81
7 68 98
8 53 110
9 39 121
a. Graph the demand and supply curves. What are the equilibrium price and
quantity in this market?
b. If the actual price in this market were above the equilibrium price, what would
drive the market toward the equilibrium?
c. If the actual price in this market were below the equilibrium price, what would
drive the market toward the equilibrium?
7. (P11) Suppose that the price of basketball tickets at your college is determined by
market forces. Currently, the demand and supply schedules are as follows:
Price Quantity Demanded Quantity Supplied
$4 10,000 tickets 8,000 tickets
8 8,000 8,000
12 6,000 8,000
16 4,000 8,000
20 2,000 8,000
a. Draw the demand and supply curves. What is unusual about this supply curve?
Why might this be true?
b. What are the equilibrium price and quantity of tickets?
Your college plans to increase total enrollment next year by 5,000 students. The
additional students will have the following demand schedule:
Price Quantity Demanded
$4 4,000 tickets
8 3,000
12 2,000
16 1,000
20 0
c. Now add the old demand schedule and the demand schedule for the new students
to calculate the new demand schedule for the entire college. What will be the new
equilibrium price and quantity?
CHAPTER 5 ELASTICITY AND ITS APPLICATION

MULTIPLE CHOICES

1. The price elasticity of demand measures

a. buyers’ responsiveness to a change in the price of a good
b. the extent to which demand increases as additional buyers enter the market
c. how much more of a good consumers will demand when incomes rise.
d. the movement along a supply curve when there is a change in demand.
2. The price elasticity of demand for eggs
a. will be lower if there is a new invention that is a close substitute for eggs
b. is computed as the percentage change in quantity demanded of eggs
divided by the percentage change in price of eggs
c. will be higher if consumers consider eggs to be a necessity.
d. All of the above are correct
3. For a particular good, a 2 percent increase in price causes a 12 percent decrease in
quantity demanded. Which of the following statements is most likely applicable to
this good?
a. There are no close substitutes for this good.
b. The good is a luxury
c. The market for the good is broadly defined
d. The relevant time horizon is short
4. For a particular good, a 5 percent increase in price causes a 15 percent decrease in
quantity demanded. Which of the following statements is most likely applicable to
this good?
a. There are many substitutes for this good
b. The good is a necessity
c. The market for the good is broadly defined
d. The relevant time horizon is short
5. For a particular good, a 10 percent increase in price causes a 5 percent decrease in
quantity demanded. Which of the following statements is most likely applicable to
this good?
a. There are many close substitutes for this good.
b. The good is a necessity
c. The market for the good is narrowly defined
d. The relevant time horizon is long
6. For a particular good, a 10 percent increase in price causes a 15 percent decrease
in quantity demanded. Which of the following statements is most likely applicable
to this good?
a. There are no close substitutes for this good.
b. The good is a necessity
c. The market for the good is broadly defined
d. The relevant time horizon is long
7. For a particular good, a 5 percent increase in price causes a 2 percent decrease in
quantity demanded. Which of the following statements is most likely applicable to
this good?
a. There are many close substitutes for this good.
 b. The good is a luxury
c. The market for the good is broadly defined
d. The relevant time horizon is long
8. For a particular good, a 10 percent increase in price causes a 3 percent decrease in
quantity demanded. Which of the following statements is most likely applicable to
this good?
a. The relevant time horizon is short
b. The good is a luxury.
c. The market for the good is narrowly defined
d. There are many close substitutes for this good
9. Which of the following is likely to have the most price elastic demand?
a. gasoline in the short run
b. dentist’s visits
c. ice cream
d. deodorant
10. Which of the following is likely to have the most price inelastic demand?
a. laptop computers
b. iPod shuffles
c. designer jeans
d. college tuition for a junior or senior
11. Which of the following could be the cross-price elasticity of demand for two
goods that are complements?
a. -1.3
b. 0
c. 0.2
d. 1.4
12. For which of the following goods is the income elasticity of demand likely
lowest?
a. Water
b. sapphire pendant necklaces
c. filet mignon steaks
d. fresh fruit
13. If the cross-price elasticity of two goods is positive, then the two goods are
a. Substitutes
b. complements.
c. normal goods.
d. inferior goods.
14. If a 15% change in price results in a 20% change in quantity supplied, then the
price elasticity of supply is about
a. 1.33, and supply is elastic.
b. 1.33, and supply is inelastic.
c. 0.75, and supply is elastic.
d. 0.75, and supply is inelastic.
15. If the demand for textbooks is inelastic, then a decrease in the price of textbooks
will
a. increase total revenue of textbook sellers
 b. decrease total revenue of textbook sellers.
c. not change total revenue of textbook sellers
d. There is not enough information to answer this question
16. If the demand for apples is elastic, then an increase in the price of apples will
a. increase total revenue of apple sellers.
b. decrease total revenue of apple sellers.
c. not change total revenue of apple sellers
d. There is not enough information to answer this question

SHORT ANSWERS

1. Consider the following pairs of goods. For which of the two goods would you expect
the demand to be more price elastic? Why?
a. water or diamonds
b. insulin or nasal decongestant spray
c. food in general or breakfast cereal
d. gasoline over the course of a week or gasoline over the course of a year
e. personal computers or IBM personal computers

PROBLEMS

1. (P1) For each of the following pairs of goods, which good would you expect to have
more elastic demand and why?
a. required textbooks or mystery novels
b. Beethoven recordings or classical music recordings in general
c. subway rides during the next 6 months or subway rides during the next 5 years
d. root beer or water
2. (P2) Suppose that business travelers and vacationers have the following demand for
airline tickets from New York to Boston:
a. As the price of tickets rises from $200 to $250, what is the price elasticity of
demand for (i) business travelers and (ii) vacationers? (Use the midpoint
method in your calculations.)
b. Why might vacationers have a different elasticity from business travelers?

Price Quantity demanded Quantity demanded

(business travelers) (vacationers)

$150 2100 tickets 1000 tickets

200 2000 800

250 1900 600

300 1800 400

3. (P3) Suppose the price elasticity of demand for heating oil is 0.2 in the short run and
0.7 in the long run. If the price of heating oil rises from $1.80 to $2.20 per gallon,
what happens to the quantity of heating oil demanded in the short run? In the long
run? (Use the midpoint method in your calculations.)
4. (P4) A price change causes the quantity demanded of a good to decrease by 30
percent, while the total revenue of that good increases by 15 percent. Is the demand
curve elastic or inelastic? Explain.
5. (P5) Cups of coffee and donuts are complements. Both have inelastic demand. A
hurricane destroys half the coffee bean crop. Use appropriately labeled diagrams to
answer the following questions.
a. What happens to the price of coffee beans?
b. What happens to the price of a cup of coffee? What happens to total
expenditure on cups of coffee?
c. What happens to the price of donuts? What happens to total expenditure on
donuts?
6. (P7) Suppose that your demand schedule for pizza is as follows:
a. Use the midpoint method to calculate your price elasticity of demand as the
price of pizza increases from $8 to $10 if (i) your income is $20,000 and (ii)
your income is $24,000.
b. Calculate your income elasticity of demand as your income increases from
$20,000 to $24,000 if (i) the price is $12 and (ii) the price is $16

Price Quantity demanded Quantity demanded

(income = $20000) (income = $24000)

$8 40 pizza 50 pizza

10 32 45

12 24 30

14 16 20

16 8 12
7. (P11) You are the curator of a museum. The museum is running short of funds, so you
decide to increase revenue. Should you increase or decrease the price of admission?
Explain.

CHAPTER 06: SUPPLY, DEMAND, AND GOVERNMENT POLICIES

I. MULTIPLE CHOICES
1. A legal maximum on the price at which a good can be sold is called a price
a. floor.
b. subsidy.
c. support.
d. ceiling.
2. A legal minimum on the price at which a good can be sold is called a price
a. subsidy.
b. floor.
c. support.
d. ceiling.
3. A price ceiling is
a. often imposed on markets in which “cutthroat competition” would prevail
without a price ceiling.
b. a legal maximum on the price at which a good can be sold.
c. often imposed when sellers of a good are successful in their attempts to
convince the government that the market outcome is unfair without a price
ceiling.
d. All of the above are correct.
4. A price floor is
a. a legal minimum on the price at which a good can be sold.
b. often imposed when sellers of a good are successful in their attempts to
convince the government that the market outcome is unfair without a price
floor.
c. a source of inefficiency in a market.
d. All of the above are correct.
5. A $2.00 tax levied on the sellers of birdhouses will shift the supply curve
a. upward by exactly $2.00.
 b. upward by less than $2.00.
c. downward by exactly $2.00.
d. downward by less than $2.00.
6. A $0.10 tax levied on the sellers of chocolate bars will cause the
a. supply curve for chocolate bars to shift down by $0.10.
b. supply curve for chocolate bars to shift up by $0.10.
c. demand curve for chocolate bars to shift down by $0.10.
d. demand curve for chocolate bars to shift up by $0.10.
7. A tax on the buyers of sofas
a. increases the size of the sofa market.
b. decreases the size of the sofa market.
c. has no effect on the size of the sofa market.
d. may increase, decrease, or have no effect on the size of the sofa market.
8. When a tax is placed on the buyers of a product, buyers pay
a. more and sellers receive more than they did before the tax.
b. more and sellers receive less than they did before the tax.
c. less and sellers receive more than they did before the tax.
d. less and sellers receive less than they did before the tax.
9. The price received by sellers in a market will decrease if the government
a. imposes a binding price floor in that market.
b. decreases a binding price ceiling in that market.
c. decreases a tax on the good sold in that market.
d. increases a binding price floor in that market.
10. The quantity sold in a market will decrease if the government decreases a
a. binding price floor in that market.
b. binding price ceiling in that market.
c. tax on the good sold in that market.
d. All of the above are correct.

IV. SHORT QUESTIONS

1. What is the price ceiling?
2. What is the price floor?
3. How do the price ceilings affect market outcomes?
4. How do the price floors affect market outcomes?
5. What do the government use taxes?
III. PROBLEMS
1. The government has decided that the free-market price of cheese is too low.

a. Suppose the government imposes a binding price floor in the cheese market. Draw a
supply-anddemand diagram to show the effect of this policy on the price of cheese and
the quantity of cheese sold. Is there a shortage or surplus of cheese?

b. Producers of cheese complain that the price floor has reduced their total revenue. Is
this possible? Explain.
c. In response to cheese producers’ complaints, the government agrees to purchase all the
 surplus cheese at the price floor. Compared to the basic price floor, who benefits from
this new policy? Who loses?

1. A recent study found that the demand-and-supply schedules for Frisbees are as
follows:

Price per Quantity Quantity

Frisbee Demanded Supplied
$11 1 million Frisbees 15 million Frisbees
10 2 12
9 4 9
8 6 6
7 8 3
6 10 1

a. What are the equilibrium price and quantity of Frisbees?

b. Frisbee manufacturers persuade the government that Frisbee production improves
scientists’ understanding of aerodynamics and thus is important for national security.
A concerned Congress votes to impose a price floor $2 above the equilibrium price.
What is the new market price? How many Frisbees are sold?

3. Suppose the federal government requires beer drinkers to pay a $2 tax on each case
of beer purchased. (In fact, both the federal and state governments impose beer taxes
of some sort.)
a. Draw a supply-and-demand diagram of the market for beer without the tax. Show
the price paid by consumers, the price received by producers, and the quantity of beer
sold. What is the difference between the price paid by consumers and the
price received by producers?
b. Now draw a supply-and-demand diagram for the beer market with the tax. Show
the price paid by consumers, the price received by producers, and the quantity of beer
sold. What is the difference between the price paid by consumers and the
price received by producers? Has the quantity of beer sold increased or decreased?

CHAPTER 7: COST OF PRODUCTION

MULTIPLE CHOICE:
1. Economists assume that the typical person who starts her own business does so with the
intention of
a. donating the profits from her business to charity.
b. capturing the highest number of sales in her industry.
c. maximizing profits.
d. minimizing costs.
2. Economists normally assume that the goal of a firm is to
a. maximize its total revenue.
b. maximize its profit.
c. minimize its explicit costs.
d. minimize its total cost.
3. Total revenue equals
a. price x quantity.
b. price/quantity.
c. (price x quantity) - total cost.
d. output - input.
4. Explicit costs
a. require an outlay of money by the firm.
b. include all of the firm's opportunity costs.
c. include the value of the business owner’s time.
d. Both b and c are correct.
7.2. PRODUCTION AND COSTS
5. A production function describes
a. how a firm maximizes profits.
b. how a firm turns inputs into output.
c. the minimal cost of producing a given level of output.
d. the relationship between cost and output.
6. The marginal product of labor can be defined as the change in
a. profit divided by the change in labor.
b. output divided by the change in labor.
c. labor divided by the change in output.
d. labor divided by the change in total cost.
7. When a firm's only variable input is labor, then the slope of the production function
measures the
a. quantity of labor.
b. quantity of output.
c. total cost.
d. marginal product of labor.
8. Let L represent the number of workers hired by a firm, and let Q represent that firm's
quantity of output. Assume two points on the firm's production function are (L = 5, Q =
125) and (L = 6, Q = 162). Then the marginal product of the 6th worker is
a. 25 units of output.
b. 27 units of output.
c. 37 units of output.
d. 162 units of output.
7.3. THE VARIOUS MEASURES OF COST
9. Some costs do not vary with the quantity of output produced. Those costs are called
a. marginal costs.
b. average costs.
c. fixed costs.
d. explicit costs.
10. In the short run, a firm incurs fixed costs
a. only if it incurs variable costs.
b. only if it produces no output.
c. only if it produces a positive quantity of output.
d. whether it produces output or not.
11. Which of the following costs of publishing a book is a fixed cost?
a. author royalties of 5% per book
b. the costs of paper and binding
c. shipping and postage expenses
d. composition, typesetting, and jacket design for the book
12. For a large firm that produces and sells automobiles, which of the following costs would
be a variable cost?
a. the $20 million payment that the firm pays each year for accounting services
b. the cost of the steel that is used in producing automobiles
c. the rent that the firm pays for office space in a suburb of St. Louis
d. All of the above are correct.
13. Suppose that for a particular firm the only variable input into the production process is
labor and that output equals zero when no workers are hired. In addition, suppose that
marginal cost of the third worker hired is $40, and the average total cost when three
workers are hired is $50. What is the total cost of production when three workers are
hired?
a. $50
b. $90
c. $120
d. $150
7.4. COSTS IN THE SHORT RUN AND IN THE LONG RUN
14. When a factory is operating in the short run,
a. it cannot alter variable costs.
b. total cost and variable cost are usually the same.
c. average fixed cost rises as output increases.
d. it cannot adjust the quantity of fixed inputs.
15. One assumption that distinguishes short-run cost analysis from long-run cost analysis
for a profit-maximizing firm is that in the short run,
a. output is not variable.
b. the number of workers used to produce the firm's product is fixed.
c. the size of the factory is fixed.
d. there are no fixed costs.

SHORT ANSWERS:
1. What is the relationship between a firm’s total revenue, profit, and total cost?
2. Definition of marginal product
3. Definition of total cost
4. Definition of marginal cost
5. Definition of efficient scale
PROBLEM
1. Your aunt is thinking about opening a hardware store. She estimates that it would cost
$500,000 per year to rent the location and buy the stock. In addition, she would have to
quit her $50,000 per year job as an accountant.
a. Define opportunity cost.
b. What is your aunt’s opportunity cost of running a hardware store for a year? If your
aunt thought she could sell $510,000 worth of merchandise in a year, should she
open the store? Explain.
2. A commercial fisherman notices the following relationship between hours spent fishing
and the quantity of fish caught:
Hours Quantity of Fish ( in pounds)
0 0
1 10
2 18
3 24
4 28
5 30
a. What is the marginal product of each hour spent fishing?
b. Use these data to graph the fisherman’s production function. Explain its shape.
c. The fisherman has a fixed cost of $10 (his pole). The opportunity cost of his time is
$5 per hour. Graph the fisherman’s total-cost curve. Explain its shape.
3. Nimbus, Inc., makes brooms and then sells them door-to-door. Here is the relationship
between the number of workers and Nimbus’s output in a given day:
Workers Output Marginal Total Cost Average Marginal
product Total cost cost
0 0
1 20
2 50
3 90
4 120
5 140
6 150
7 155
a. Fill in the column of marginal products. What pattern do you see? How might you
explain it?
b. A worker costs $100 a day, and the firm has fixed costs of $200. Use this information
to fill in the column for total cost.
c. Fill in the column for average total cost. (Recall that ATC = TC/Q.) What pattern do
 you see?
d. Now fill in the column for marginal cost. (Recall that MC = ∆TC/∆Q.) What pattern
do you see?
e. Compare the column for marginal product and the column for marginal cost. Explain
the relationship.
f. Compare the column for average total cost and the column for marginal cost. Explain
the relationship.
4. Your cousin Vinnie owns a painting company with fixed costs of $200 and the
following schedule for variable costs:
Quantity of 1 2 3 4 5 6 7
Houses Painted per Month
Variable Costs $10 $20 $40 $80 $160 $320 $640
Calculate average fixed cost, average variable cost, and average total cost for each
quantity. What is the efficient scale of the painting company?
5. Jane’s Juice Bar has the following cost schedules:
Quantity Variable Cost Total Cost
0 vats of juice $0 $30
1 10 40
2 25 55
3 45 75
4 70 100
5 100 130
6 135 165
a. Calculate average variable cost, average total cost, and marginal cost for each
quantity.
b. Graph all three curves. What is the relationship between the marginal-cost curve
and the average-total-cost curve? Between the marginal-cost curve and the average
variable-cost curve? Explain.
6. Consider the following table of long-run total costs for three different firms:
Quantity 1 2 3 4 5 6 7
Firm A $60 $70 $80 $90 $100 $110 $120
Firm B 11 24 39 56 75 96 119
Firm C 21 34 49 66 85 106 129

Does each of these firms experience econ

CHAPTER 8: FIRMS IN COMPETITIVE MARKETS

MULTIPLE CHOICE
1. Table 14-2
The table represents a demand curve faced by a firm in a competitive market.
 Price Quantity
$4 0
$4 1
$4 2
$4 3
$4 4
$4 5
Refer to Table 14-2. For a firm operating in a competitive market, the average revenue
from selling 3 units is
a. $12.
b. $4.
c. $3.
d. $1.25.
2. Table 14-3
Quantity Total Revenue
0 $0
1 $7
2 $14
3 $21
4 $28
Refer to Table 14-3. For a firm operating in a competitive market, the marginal revenue
is
a. $0.
b. $7.
c. $14.
d. $21.
3. Table 14-4
Quantity Total Revenue
0 $0
1 $15
2 $30
3 $45
4 $60
Refer to Table 14-4. For a firm operating in a competitive market, the marginal revenue
is
a. $45.
b. $30.
c. $15.
d. $0.
4. Table 14-7
Suppose that a firm in a competitive market faces the following revenues and costs:
 Quantity Marginal Cost Marginal Revenue
12 $5 $9
13 $6 $9
14 $7 $9
15 $8 $9
16 $9 $9
17 $10 $9
Refer to Table 14-7. If the firm is currently producing 14 units, what would you advise
the owners?
a. decrease quantity to 13 units
b. increase quantity to 17 units
c. continue to operate at 14 units
d. increase quantity to 16 units
5. Table 14-8
Suppose that a firm in a competitive market faces the following revenues and costs:
Quantity Total Revenue Total Cost
0 $0 $3
1 $7 $5
2 $14 $8
3 $21 $12
4 $28 $17
5 $35 $23
6 $42 $30
7 $49 $38
Refer to Table 14-8. The firm will not produce an output level beyond
a. 4 units.
b. 5 units.
c. 6 units.
d. 7 units.
6. Table 14-9
Suppose that a firm in a competitive market faces the following revenues and costs:
 Quantity Total Revenue Total Cost
0 $0 $10
1 $9 $14
2 $18 $19
3 $27 $25
4 $36 $32
5 $45 $40
6 $54 $49
7 $63 $59
8 $72 $70
9 $81 $82
Refer to Table 14-9. At which quantity of output is marginal revenue equal to marginal
cost?
a. 3 units
b. 6 units
c. 8 units
d. 9 units
7. Table 14-9
Suppose that a firm in a competitive market faces the following revenues and costs:
Quantity Total Revenue Total Cost
0 $0 $10
1 $9 $14
2 $18 $19
3 $27 $25
4 $36 $32
5 $45 $40
6 $54 $49
7 $63 $59
8 $72 $70
9 $81 $82
Refer to Table 14-9. In order to maximize profit, the firm will produce a level of output
where marginal revenue is equal to?
a. $6
b. $7
c. $8
d. $9
8. In the short run, a firm operating in a competitive industry will shut down if price is
a. less than average total cost.
b. less than average variable cost.
c. greater than average variable cost but less than average total cost.
d. greater than marginal cost.
9. A competitive firm's short-run supply curve is part of which of the following curves?
a. marginal revenue
 b. average variable cost
c. average total cost
d. marginal cost
10. Which of these curves is the competitive firm's short-run supply curve?
a. the average variable cost curve above marginal cost
b. the average total cost curve above marginal cost
c. the marginal cost curve above average variable cost
d. the average fixed cost curve

SHORT ANSWER
Assume a certain firm is producing Q = 1,000 units of output. At Q = 1,000, the firm's
marginal cost equals $20 and its average total cost equals $25. The firm sells its output for
$30 per unit.
Refer the above inforamtion
1. To maximize its profit, the firm should
2. At Q = 1111, the firm's total cost amounts to
3. At Q = 1,000, the firm's profits equal
4. At Q = 999, the firm's total cost amounts to
5. At Q = 999, the firm's profits equal

PROBLEM
1. Table 14-10
Suppose that a firm in a competitive market faces the following revenues and costs:
Quantity Total Revenue Total Cost
0 $0 $3
1 $7 $5
2 $14 $9
3 $21 $15
4 $28 $23
5 $35 $33
6 $42 $45
7 $49 $59
1. Refer to Table 14-10. The marginal cost of producing the 4th unit is
2. Refer to Table 14-10. At which level of production will the firm maximize profit?
3. Refer to Table 14-10. If the firm produces the profit-maximizing level of production,
how much profit will the firm earn?
4. Refer to Table 14-10. Which level of production in the table has the lowest average
variable cost?
2. Table 14-11
 Suppose that a firm in a competitive market faces the following prices and costs:
Price Quantity Total Cost
$5 0 $3
$5 1 $5
$5 2 $8
$5 3 $12
$5 4 $17
$5 5 $23
1. Refer to Table 14-11. In order to maximize profits, the firm should stop producing after
it makes the
2. Refer to Table 14-11. Marginal revenue equals marginal cost when the firm produces
3. Refer to Table 14-11. The marginal revenue from producing the 3rd unit equals
4. Refer to Table 14-11. The marginal revenue from producing the 4th unit equals
3. Table 14-13
Diana’s Dress Emporium
COSTS REVENUES
Quantity Total Marginal Quantity Price Total Marginal
Produced Cost Cost Demanded Revenue Revenue
0 $100 -- 0 $120 --
1 $150 1 $120
2 $202 2 $120
3 $257 3 $120
4 $317 4 $120
5 $385 5 $120
6 $465 6 $120
7 $562 7 $120
8 $682 8 $120
1. Refer to Table 14-13. What is the marginal cost of the 1st unit?
2. Refer to Table 14-13. What is the marginal cost of the 8th unit?
3. Refer to Table 14-13. In order to maximize profits, how many units should Diana’s Dress
Emporium pro-duce?
4. Refer to Table 14-13. What is Diana’s economic profit at the profit maximizing point?
4. Table 14-14
 The following table presents cost and revenue information for Bob’s bakery production
and sales.
Quantity Total Cost Marginal Cost Price Total Revenue Marginal Revenue
0 $5.00 --- $3.25 ---
1 $5.50 $3.25
2 $6.50 $3.25
3 $8.00 $3.25
4 $10.00 $3.25
5 $12.50 $3.25
6 $15.50 $3.25
7 $19.00 $3.25
8 $23.00 $3.25
1. Refer to Table 14-14. What is Bob’s total fixed cost?
2. Refer to Table 14-14. What is the total revenue from selling 5 units?
3. Refer to Table 14-14. What is the marginal revenue of the 4th unit?
Refer to Table 14-14. At what quantity will Bob maximize his profit?