Microeconomics Exam 1 Study Guidance: Marginal Analysis, PPF, Supply & Demand

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Q1. What is marginal cost?

Background

Topic: Marginal Analysis

This question tests your understanding of the concept of marginal cost, which is central to decision-making in microeconomics.

Key Terms:

Marginal Cost: The cost of producing one additional unit of a good or service.
Average Cost: The total cost divided by the number of units produced.
Total Cost: The sum of all costs incurred in production.

Final Answer: c. The additional cost incurred from producing one more unit of a good.

Marginal cost is the increase in total cost that arises from producing an additional unit. This is a key concept for firms when making production decisions.

Q2. Which of the following best describes the focus of microeconomics?

Background

Topic: Microeconomics vs. Macroeconomics

This question tests your ability to distinguish between microeconomics and macroeconomics.

Key Terms:

Microeconomics: The study of individual and business decision-making.
Macroeconomics: The study of national and global economic trends.

Final Answer: c. The study of individual and business decision-making.

Microeconomics analyzes how individuals and firms make choices and interact in markets.

Q3. What is the likely effect of a new sales tax on the equilibrium price and quantity of a good?

Background

Topic: Introduction to Economics – Market Equilibrium

This question tests your understanding of how taxes affect supply and demand, and thus equilibrium price and quantity.

Key Terms:

Equilibrium Price: The price at which quantity demanded equals quantity supplied.
Equilibrium Quantity: The quantity at which supply and demand are balanced.
Sales Tax: A tax imposed on the sale of goods and services, typically shifting the supply curve.

Final Answer: a. Equilibrium price increases and equilibrium quantity decreases.

A sales tax raises costs, leading to higher prices and lower quantities sold at equilibrium.

Q4. If a point lies outside the production possibilities curve, what does it signify?

Background

Topic: Productive and Allocative Efficiency – Production Possibilities Curve (PPC/PPF)

This question tests your understanding of the meaning of points relative to the PPF.

Key Terms:

Production Possibilities Curve (PPC/PPF): Shows the maximum possible output combinations of two goods given resources and technology.
Efficient Point: On the curve.
Inefficient Point: Inside the curve.
Unattainable Point: Outside the curve.

Final Answer: c. The production level is unattainable with current resources.

Points outside the PPF represent combinations that cannot be achieved given current resources and technology.

Q5. A sudden increase in the cost of raw materials for wheat production is likely to have what effect on the supply curve in a perfectly competitive market?

Background

Topic: Introduction to Supply and Demand

This question tests your understanding of how input costs affect the supply curve.

Key Terms:

Supply Curve: Shows the relationship between price and quantity supplied.
Input Costs: Costs of raw materials, labor, etc., used in production.
Perfectly Competitive Market: Many sellers, identical products.

Final Answer: b. Shift the supply curve to the left.

Higher input costs reduce supply, shifting the supply curve to the left.

Q6. If two countries specialize based on comparative advantage and trade, what happens to their consumption possibilities?

Background

Topic: PPF – Comparative Advantage and Trade

This question tests your understanding of the gains from trade and comparative advantage.

Key Terms:

Comparative Advantage: The ability to produce a good at a lower opportunity cost than another producer.
Consumption Possibilities: The combinations of goods a country can consume.
PPF: Production Possibilities Frontier.

Final Answer: c. Their consumption possibilities expand beyond their individual PPFs.

Trade based on comparative advantage allows both countries to consume more than they could produce alone.

Q7. If moving from 2 to 3 units of good A results in a decrease from 10 to 7 units of good B, what is the marginal opportunity cost of the third unit of good A?

Background

Topic: PPF – Marginal Opportunity Costs

This question tests your ability to calculate marginal opportunity cost using the PPF.

Key Terms and Formula:

Marginal Opportunity Cost: The amount of one good that must be given up to produce one more unit of another good.

Key formula:

Try solving on your own before revealing the answer!

Final Answer: c. 3 units of good B

To produce the third unit of good A, you must give up 3 units of good B.

Q8. How does a technological advance in the pizza industry affect the PPF for pizza and robots?

Background

Topic: PPF – Outward Shifts

This question tests your understanding of how technological advances affect production possibilities.

Key Terms:

Technological Advance: Improvement in production methods.
PPF: Production Possibilities Frontier.

Final Answer: c. The PPF shifts outward only for pizza, while the maximum production of robots remains unchanged.

Technological advances in pizza production increase the maximum possible output of pizza, but do not affect robots.

Q9. A company builds a wind farm on a previously unused piece of land. Which factor of production does this scenario primarily illustrate?

Background

Topic: Factors of Production

This question tests your understanding of the four factors of production: land, labor, capital, and entrepreneurship.

Key Terms:

Physical Capital: Machinery, equipment, buildings.
Human Capital: Skills and knowledge of workers.
Entrepreneurship: Organizing resources and taking risks.
Labor: Human effort.

Final Answer: a. Physical capital

The wind farm (turbines, infrastructure) is an example of physical capital.

Q10. What is the primary assumption of the Production Possibilities Frontier (PPF)?

Background

Topic: PPF – Assumptions

This question tests your understanding of the basic assumptions underlying the PPF model.

Key Terms:

PPF: Shows maximum possible output combinations given resources and technology.
Assumptions: Fixed resources and technology.

Final Answer: c. Resources and technology are fixed.

The PPF assumes no changes in resources or technology during the period analyzed.

Q11. Which of the following is an assumption made when constructing a PPF?

Background

Topic: PPF – Introduction and Productive Efficiency

This question tests your understanding of the assumptions behind the PPF model.

Key Terms:

PPF: Production Possibilities Frontier.
Assumptions: Fixed resources and technology.

Step-by-Step Guidance

Recall the main assumptions: resources and technology are fixed, only two goods are produced.
Review the answer choices and identify which one matches these assumptions.

Try solving on your own before revealing the answer!

Final Answer: a. Resources and technology are fixed.

This is a fundamental assumption when constructing a PPF.

Q12. Given the following supply and demand schedule, what is the equilibrium price and quantity?

Background

Topic: Supply and Demand – Equilibrium

This question tests your ability to find equilibrium price and quantity from a table.

Key Terms:

Equilibrium: Where quantity demanded equals quantity supplied.
Supply Schedule: Table showing quantity supplied at different prices.
Demand Schedule: Table showing quantity demanded at different prices.

Final Answer: a. Equilibrium price is $6 and equilibrium quantity is 40

At $6, quantity demanded equals quantity supplied, so this is the equilibrium.

Q13. What does a rightward shift in the supply curve indicate?

Background

Topic: Shifting Supply

This question tests your understanding of supply curve shifts.

Key Terms:

Supply Curve: Relationship between price and quantity supplied.
Rightward Shift: Increase in supply at every price.

Step-by-Step Guidance

Recall that a rightward shift means more is supplied at every price.
Review the answer choices and identify which one matches this definition.

Try solving on your own before revealing the answer!

Final Answer: b. An increase in supply

A rightward shift means suppliers are willing to supply more at every price.

Q14. According to the law of demand, what happens to the quantity demanded of a good when its price increases?

Background

Topic: The Basics of Demand

This question tests your understanding of the law of demand.

Key Terms:

Law of Demand: As price increases, quantity demanded decreases (ceteris paribus).

Step-by-Step Guidance

Recall the law of demand: price and quantity demanded are inversely related.
Review the answer choices and identify which one matches this relationship.

Try solving on your own before revealing the answer!

Final Answer: c. The quantity demanded decreases.

As price rises, consumers buy less of the good.

Q15. According to the principle of ceteris paribus, what happens to the quantity demanded when the price of a good increases?

Background

Topic: Individual Demand and Market Demand

This question tests your understanding of ceteris paribus and its application to demand.

Key Terms:

Ceteris Paribus: "All else equal" – holding other factors constant.
Law of Demand: As price increases, quantity demanded decreases.

Final Answer: c. The quantity demanded decreases.

With all else held constant, an increase in price leads to a decrease in quantity demanded.

Q16. Why does willingness to sell vary among different suppliers?

Background

Topic: Willingness to Sell and Producer Surplus

This question tests your understanding of why suppliers have different minimum prices at which they are willing to sell.

Key Terms:

Willingness to Sell: The minimum price a supplier will accept.
Producer Surplus: The difference between the price received and the minimum price a supplier is willing to accept.

Final Answer: a. Because each supplier has different costs and personal valuations of their goods.

Suppliers' willingness to sell depends on their individual costs and how they value their goods.

Q17. Under what condition is total surplus maximized in a market?

Background

Topic: Economic Surplus and Efficiency

This question tests your understanding of market equilibrium and efficiency.

Key Terms:

Total Surplus: The sum of consumer and producer surplus.
Market Equilibrium: Where supply equals demand.
Efficiency: Maximizing total surplus.

Step-by-Step Guidance

Recall that total surplus is maximized when the market is in equilibrium.
Consider how price ceilings, price floors, and monopolies affect total surplus.
Review the answer choices and identify which one matches the condition for maximum total surplus.

Try solving on your own before revealing the answer!

Final Answer: b. When the market is in equilibrium.

Market equilibrium ensures that total surplus is maximized, leading to efficient allocation of resources.